As filed with the Securities and Exchange Commission on April 26, 201327, 2015

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year endedDecember 31, 20122014

Commission file number001-15266

 

 

BANCO DE CHILE

(Exact name of Registrant as specified in its charter)

 

 

BANK OF CHILE

(Translation of Registrant’s name into English)

REPUBLIC OF CHILE

(Jurisdiction of incorporation or organization)

Banco de Chile

Paseo Ahumada 251

Santiago, Chile

(562) 2637-1111

(Address of principal executive offices)

Pedro Samhan E.Rolando Arias Sánchez

Banco de Chile

Paseo Ahumada 251

Santiago, Chile

Telephone:(562) 653-51502653-3535

Facsimile:(562) 653-51562653-2952

(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, each representing 600 shares of common stock, without nominal (par) value (“ADSs”) New York Stock Exchange
Shares of common stock, without nominal (par) value 

New York Stock Exchange

(for listing purposes only)

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

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Shares of common stock: 91,977,302,95394,655,367,544

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x¨

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

Large accelerated filer    x                Accelerated filer  ¨                Non-accelerated filer¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  IFRS  x  Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ¨  Item 17    ¨  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


TABLE OF CONTENTS

 

Page

PART I

   41  

Item 1

 

Identity of Directors, Senior Management and Advisors

   41  

Item 2

 

Offer Statistics and Expected Timetable

   41  

Item 3

 

Key Information

   41  

Item 4

 

Information on the Company

   1614

Item 4B

Unresolved Staff Comments

102  

Item 5

 

Operating and Financial Review and Prospects

   91103  

Item 6

 

Directors, Senior Management and Employees

   128142  

Item 7

 

Major Shareholders and Related Party Transactions

   144157  

Item 8

 

Financial Information

   151164  

Item 9

 

The Offer and Listing

   154168  

Item 10

 

Additional Information

   158170  

Item 11

 

Quantitative and Qualitative Disclosures About Market Risk

   178192  

Item 12

 

Description of Securities Other Than Equity Securities

   178192

Item 12A

Debt Securities

192

Item 12B

Warrants and Rights

192

Item 12C

Other Securities

192

Item 12D

American Depositary Shares

192  

PART II

   179193  

Item 13

 

Defaults, Dividend Arrearages and Delinquencies

   179193  

Item 14

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

   179193  

Item 15

 

Controls and Procedures

   179193  

Item 16A

 

Audit Committee Financial Expert

   180194  

Item 16B

 

Code of Ethics

   180194  

Item 16C

 

Principal Accountant Fees and Services

   180194  

Item 16D

 

Exemptions from the Listing Standards for Audit Committees

   181195  

Item 16E

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   181195  

Item 16F

 

Change in Registrant’s Certifying Accountant

   181195  

Item 16G

 

Corporate Governance

   181195  

i


PART III

   184198  

Item 17

 

Financial Statements

   184198  

Item 18

 

Financial Statements

   184198  

Item 19

 

Exhibits

   185198  

 

iii


FORWARD-LOOKING STATEMENTS

This annual report onForm 20-F contains “forward-looking“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we have based theseforward-looking statements on our expectations and projections about future events, it is possible that actual results may differ materially from our expectations. In many cases, we include a discussion of the factors that are most likely to causeforward-looking statements to differ from actual results together with theforward-looking statements themselves. These statements appear throughout this annual report, including, without limitation, under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Examples of suchforward-looking statements include:

 

projections of operating revenues, net income (loss), net income (loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

statements of our plans, objectives or goals, including those related to anticipated trends, competition and regulation;

 

statements about market risks, including interest rate risk and foreign exchange risk;

 

statements about our future economic performance or that of Chile or other countries in which we operate; and

 

statements of assumptions underlying such statements.

Words such as “believe,” “anticipate,” “plan,” “aims,” “seeks,” “expect,” “intend,” “target,” “objective,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “could,” “may,” “will,” “should” and similar expressions are intended to identifyforward-looking statements but are not the exclusive means of identifying such statements. These statements may relate to (i) our asset growth and financing plans, (ii) trends affecting our financial condition or results of operations and (iii) the impact of competition and regulations, but are not limited to such topics.Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in suchforward-looking statements included in this annual report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors not currently expected by us could significantly alter the results set forth in these statements.

Factors that could cause actual results to differ materially and adversely include, but are not limited to:

 

changes in general economic, business, political or other conditions in Chile, or changes in general economic or business conditions in Latin America, or the United States;States, Europe or Asia;

 

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

 

increased costs;

 

increased competition and changes in competition or pricing environments, including the effect of new technological developments;

 

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

 

natural disasters;

 

the effect of tax laws on our business; and

 

the factors discussed under “—Risk Factors.”

iii


You should not place undue reliance onforward-looking statements, which speak only as of the date that they were made. This cautionary statement should be considered in connection with any written or oralforward-looking statements that we may issue in the future. We do not undertake any obligation to publicly release any revisions to suchforward-looking statements after the filing of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

THE MERGER

On January 1, 2008, Banco de Chile (the “Bank”) merged with Citibank Chile in a transaction in which Banco de Chile was the surviving corporate entity. As used in this annual report, unless the context otherwise requires, references to “Banco de Chile” relating to any date or period prior to January 1, 2008 (the effective date of the merger) are to Banco de Chile as it existed prior to the consummation of the merger, and such references relating to any date or period on or after January 1, 2008 are to Banco de Chile after the consummation of the merger.

PRESENTATION OF FINANCIAL INFORMATION

We prepare our audited consolidated financial statements in Chilean pesos and in accordance with International Financial Reporting Standards (“IFRS”)in effect from time to time as issued by the International Accounting Standards Board (“IASB”IFRS”). References in this annual report to IFRS mean IFRS as issued by the IASB.

Until and including our consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2008, we prepared our audited consolidated financial statements in accordance with generally accepted accounting principles in Chile as supplemented by the applicable rules of theSuperintendencia de Bancos e Instituciones Financieras de Chile (the “Superintendency of Banks”) (“Chilean GAAP”), with reconciliations to generally accepted accounting principles in the United States (“U.S. GAAP”). As required by IFRS 1—First Time Adoption of International Financial Reporting Standards, our financial position as of December 31, 2008 and our results of operations for the year ended December 31, 2008 were restated in accordance with IFRS 1 for comparative purposes. Reconciliations and a description of the transition to IFRS, and the effects on our assets, liabilities, equity, net income and cash flows are presented in Note 5 to our audited consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2010. Unless otherwise indicated, the financial information included in this annual report with respect to 2009, 2010, 2011, 2012, 2013 and 20122014 has been derived from financial statements that have been prepared in accordance with IFRS. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean GAAP. As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.

Since adopting IFRS, we are no longer requiredFor comparison purposes and as a result of changes in certain accounting policies, some line items in our consolidated statement of income and balance sheet have been reclassified for the years ended December 31, 2011 and 2012. For more information, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—New Standards Adopted in 2014”, as well as Notes 3 and 4 to reconcile our audited consolidated financial statements to U.S. GAAP.as of and for the year ended December 31, 2014 appearing elsewhere in this annual report.

In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos (see Note 2(u)2(t) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report), and references to “UF” are to “Unidades de Fomento.” The UF is an inflation indexed Chilean monetary unit of account with a value in Chilean pesos that is linked to and adjusted daily to reflect changes in the Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the “Chilean National Statistics Institute”). As of December 31, 2012,2014 and April 17, 2015, one UF equaled Ch$22,840.75.24,627.10 and Ch$24,690.69, respectively.

This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in preparing our audited consolidated financial statements as of and for the year ended December 31, 20122014 or could be converted into U.S. dollars at the rate indicated. Until November 30, 2011, Banco de Chile applied the observed exchange rate reported by theBanco Central de Chile (the “Central Bank”) in order to translate its financial statements from Chilean pesos to U.S. dollars. However, beginning December 1, 2011, Banco de Chile adopted the

exchange rate of accounting representation, or spot exchange rate, for such matters. This is also described in “Item 3. Key Information—Selected Financial Data—Exchange Rates.” Thus, unless otherwise indicated, the U.S. dollar amounts have been translated from Chilean pesos based on the exchange rate of accounting representation as of December 31, 20122014 as determined by our Treasury on a daily basis, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. The exchange rate of accounting representation on April 15, 201317, 2015 was Ch$472.10612.79 = U.S.$1.00. $1.00. As of the same date, the observed exchange rate was Ch$469.24612.30 = U.S.$1.00.

The observed exchange rate reported by the Central Bank is based on the rate for the prior business day in Chile and was the exchange rate specified by the Superintendency of Banks to be used by Chilean banks in the preparation of their financial statements until December 31, 2010.

The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

Unless otherwise specified, all references in this annual report to total loans are to loans to customers before deducting allowances for loan losses, and they do not include loans to banks or contingent loans. In addition, all market share data and financial indicators for the Chilean banking system as compared to Banco de Chile’s financial information presented in this annual report are based on information releasedpublished periodically by the Superintendency of Banks,SBIF which is published under Chilean GAAP and prepared on a consolidated basis.

iv


In this annual report, “total past-due“past-due loans” refersare any loans for which the counterparty has failed to themake a payment when contractually due, including installments that are 90 or more days overdue, andplus the remaining outstanding balance of principal and interest on such loan (principal and interest) overdue. Seeloans. In order to distinguish between different overdue time periods, the corresponding time period is included after the term “Past-due Loans” (for example, “Past-due Loans—90 days or more”). For more information, please see “Item 4. Information on the Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

According to Chilean regulations and for the purposes of this annual report, regulatory capital (“Regulatory Capital”) consists of:

 

basic capital, which is composed of ourpaid-in capital, reserves and retained earnings, excluding capital attributable to subsidiaries and foreign branches (“Basic Capital”); and

 

supplementary capital, which is composed of the following: (i) our subordinated bonds, considered at issue price (reduced by 20% for each year during the period commencing six years prior to maturity), but not exceeding 50% of our Basic Capital; plus (ii) our voluntary allowances for loan losses (up to 1.25% ofrisk-weighted assets to the extent voluntary allowances exceed those that banks are required to maintain by law or regulation); minus (iii) our goodwill and unconsolidated investments in companies (“Supplementary Capital”).

Certain figures included in this annual report and in our audited consolidated financial statements as of and for the year ended December 31, 20122014 have been rounded for ease of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary slightly from those obtained by performing the same calculations using the figures in our audited consolidated financial statements as of and for the year ended December 31, 2012.2014. Certain other amounts that appear in this annual report may similarly not sum due to rounding.

Inflation figures are those reported by the Chilean National Statistics Institute, unless otherwise stated herein or required by the context.

MACRO-ECONOMIC AND MARKET DATA

In this annual report, allmacro-economic data relating to the Chilean economy is based on information published by the Chilean Central Bank. All market share data, financial indicators and other data relating to the Chilean financial system are based on information published periodically by the Superintendency of Banks,SBIF, which is published under Chilean GAAP and prepared on a consolidated basis.

v


PART I

 

Item 1Identity of Directors, Senior Management and Advisors

Not Applicable.

 

Item 2Offer Statistics and Expected Timetable

Not Applicable.

 

Item 3Key Information

SELECTED FINANCIAL DATA

The following tables present historical financial information about us as of the dates and for each of the periods indicated. The following tables should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report. The financial information for the years ended December 31, 2009, 2010, 2011, 2012, 2013 and 20122014 is presented under IFRS.

Our audited consolidated financial statements have been prepared in accordance with IFRS for the years ended December 31, 2009, 2010, 2011, 2012, 2013 and 2012.2014.

 

  For the Year Ended December 31,  For the Year Ended December 31, 
  2009 2010 2011 2012 2012  2010 2011 2012 2013 2014 2014 
  (in millions of Ch$, except share and per share data) (in thousands of
U.S.$)(1)
  (in millions of Ch$, except share and per share data) (in thousands of
U.S.$)
 

IFRS:

            

CONSOLIDATED STATEMENT OF INCOME DATA

            

Interest revenue

  Ch$900,407   Ch$1,092,003   Ch$1,501,684   Ch$1,672,766   U.S$3,488,781   Ch$1,092,003   Ch$1,501,684   Ch$1,672,766   Ch$1,765,942   Ch$2,045,604   U.S.$3,375,083  

Interest expense

   (222,883  (324,377  (624,209  (708,629  (1,477,942  (324,377  (624,209  (708,629  (704,371  (788,788  (1,301,437
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net interest income

   677,524    767,626    877,475    964,137    2,010,839    767,626    877,475    964,137    1,061,571    1,256,816    2,073,646  

Net fees and commissions income

   251,855    292,262    308,773    307,257    640,826    277,566    290,108    287,272    287,093    272,188    449,089  

Net financial operating income

   (138,179  17,163    58,101    16,199    33,785    17,163    58,101    16,199    32,672    35,204    58,084  

Foreign exchange transactions, net

   220,999    63,762    (7,973  35,136    73,281    63,762    (7,973  35,136    71,457    70,225    115,866  

Other operating income

   22,190    23,584    24,735    20,887    43,563    23,584    24,735    20,887    25,884    27,211    44,896  

Provisions for loan losses

   (241,345  (157,651  (146,925  (166,420  (347,091  (157,651  (146,925  (166,420  (221,653  (261,566  (431,563

Total operating expenses

   (491,749  (544,227  (613,611  (635,119  (1,324,627  (529,969  (595,000  (612,934  (619,530  (727,360  (1,200,086

Income attributable to associates

   840    1,609    3,054    (468  (976  1,609    3,054    (468  1,780    2,486    4,102  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Income before income taxes

   302,135    464,128    503,629    541,609    1,129,600    463,690 ��  503,575    543,809    639,274    675,204    1,114,034  

Income taxes

   (40,389  (46,513  (65,442  (63,488  (132,414  (46,425  (65,431  (63,928  (89,085  (79,685  (131,474
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income from continued operations, net of taxes

   261,746    417,615    438,187    478,121    997,186   Ch$417,265   Ch$438,144   Ch$479,881   Ch$550,189   Ch$595,519   U.S.$982,560  

Net income from discontinued operations, net of taxes

            
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net income for the year

  Ch$261,746   Ch$417,615   Ch$438,187   Ch$478,121   Ch$997,186   Ch$417,265   Ch$438,144   Ch$479,881   Ch$550,189   Ch$595,519   U.S.$982,560  

Attributable to:

            

Equity holders of the parent

   261,744    417,614    438,186    478,120    997,184    417,264    438,143    479,880    550,188    595,518    982,558  

Non-controlling interest

   2    1    1    1    2    1    1    1    1    1    2  

Earnings per share(2)

   3.11    4.93    5.04    5.42    0.011    4.78    4.83    5.28    5.82    6.29    0.010  

Earnings per ADS

   1,863.26    2,959.96    3,025.81    3,254.37    6.79    2,866.79    2,896.33    3,170.05    3,494.31    3,774.87    6.23  

Dividends per share(3)

   2.72    3.50    3.38    3.41    0.007    3.50    3.38    3.41    3.90    3.98    0.006  

Weighted average number of shares (in millions)

   84,286.34    84,652.76    86,889.65    88,149.82     87,330.83    90,765.46    90,827.88    94,471.77    94,655.37   

  For the Year Ended December 31, 
  2010  2011  2012  2013  2014  2014 
  (in millions of Ch$, except share and per share data)  (in thousands of
U.S.$)
 

IFRS:

      

CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA

      

Cash and due from banks

 Ch$772,329   Ch$881,146   Ch$684,925   Ch$873,308   Ch$915,133   U.S.$1,509,896  

Transactions in the course of collection

  429,756    373,639    310,077    300,026    356,185    587,677  

Financial assetsheld-for-trading

  279,765    269,861    159,682    326,921    293,458    484,182  

Cash collateral on securities borrowed and reverse repurchase agreements

  82,787    47,981    35,100    82,422    27,661    45,638  

Derivative instruments

  488,354    381,055    326,083    374,687    832,267    1,373,174  

Loans and advances to banks

  349,588    648,425    1,343,322    1,062,056    1,155,365    1,906,260  

Loans to customers, net

  14,029,968    17,023,756    18,383,958    20,441,472    21,400,775    35,309,566  

Financial assetsavailable-for-sale

  1,157,105    1,471,120    1,272,316    1,681,883    1,608,796    2,654,385  

Investments in other companies

  11,072    13,196    11,674    14,407    23,043    38,019  

Intangible assets

  88,463    81,026    75,610    72,223    66,859    110,312  

Property and equipment

  204,352    207,888    205,189    197,578    205,403    338,899  

Investment properties

  17,459    17,079    16,698    16,317    15,936    26,293  

Current tax assets

  3,363    —      —      —      —      —    

Deferred tax assets, net

  57,678    60,025    55,801    56,421    94,240    155,488  

Other assets

  304,425    279,804    317,765    373,987    586,555    967,769  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

 Ch$18,276,464   Ch$21,756,001   Ch$23,198,200   Ch$25,873,708   Ch$27,581,676   U.S.$45,507,558  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Current accounts and other demand deposits

  4,446,181    4,895,426    5,470,971    5,984,332    6,934,373    11,441,161  

Transactions in the course of payment

  208,750    155,424    72,684    51,898    53,049    87,527  

Cash collateral on securities lent and repurchase agreements

  81,755    223,202    226,396    256,766    249,482    411,625  

Saving accounts and time deposits

  7,697,968    9,282,324    9,612,950    10,402,725    9,721,246    16,039,278  

Derivative instruments

  528,445    429,913    380,322    426,110    827,123    1,364,687  

Borrowings from financial institutions

  1,281,372    1,690,939    1,108,681    989,465    1,098,716    1,812,793  

Debt issued

  1,764,165    2,388,341    3,273,933    4,366,960    5,057,956    8,345,223  

Other financial obligations

  179,160    184,785    162,123    210,926    186,573    307,831  

Currents tax liabilities

  —      3,095    23,189    7,131    19,030    31,398  

Deferred tax liabilities, net

  —      —      —      —      —      —    

Provisions

  114,685    131,344 ��  141,839    154,650    185,643    306,296  

Employee benefits

  55,433    60,634    64,545    67,944    81,515    134,493  

Other liabilities

  224,225    269,905    305,105    275,762    255,995    422,369  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

 Ch$16,582,139   Ch$19,715,332   Ch$20,842,738   Ch$23,194,669   Ch$24,670,701   U.S.$40,704,681  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

  1,694,325    2,040,669    2,355,462    2,679,039    2,910,975    4,802,877  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

 Ch$18,276,464   Ch$21,756,001   Ch$23,198,200   Ch$25,873,708   Ch$27,581,676   U.S.$45,507,558  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(See footnotes below)

   As of December 31, 
   2009   2010   2011   2012   2012 
   (in millions of Ch$, except share and per share data)   (in thousands of
U.S.$)(1)
 

IFRS:

          

CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA

          

Cash and due from banks

  Ch$727,553    Ch$772,329    Ch$881,146    Ch$684,925    U.S.$1,428,504  

Transactions in the course of collection

   526,051     429,756     373,639     310,077     646,708  

Financial assets held-for-trading

   351,590     279,765     269,861     159,682     333,039  

Cash collateral on securities borrowed and reverse repurchase agreements

   79,401     82,787     47,981     35,100     73,206  

Derivative instruments

   565,986     488,354     381,055     326,083     680,091  

Loans and advances to banks

   448,981     349,588     648,425     1,343,322     2,801,681  

Loans to customers, net

   12,879,155     14,029,968     17,023,756     18,383,958     38,342,249  

Financial assets available-for-sale

   1,267,774     1,157,105     1,471,120     1,272,316     2,653,588  

Investments in other companies

   10,494     11,072     13,196     11,674     24,348  

Intangible assets

   88,182     88,463     81,026     75,610     157,695  

Property and equipment

   205,847     204,352     207,888     205,189     
427,950
  

Investment properties

   17,840     17,459     17,079     16,698     34,826  

Current tax assets

   —       3,363     —       —      

Deferred tax assets, net

   49,733     57,678     60,025     55,801     116,381  

Other assets

   282,872     304,425     279,804     317,765     662,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  Ch$17,501,459    Ch$18,276,464    Ch$21,756,001    Ch$23,198,200    U.S.$48,383,008  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current accounts and other demand deposits

   3,718,076     4,446,181     4,895,426     5,470,971     11,410,455  

Transactions in the course of payment

   325,056     208,750     155,424     72,684     151,592  

Cash collateral on securities lent and repurchase agreements

   308,028     81,755     223,202     226,396     472,180  

Saving accounts and time deposits

   7,427,481     7,697,968     9,282,324     9,612,950     20,049,117  

Derivative instruments

   538,240     528,445     429,913     380,322     793,213  

Borrowings from financial institutions

   1,368,226     1,281,372     1,690,939     1,108,681     2,312,305  

Debt issued

   1,587,998     1,764,165     2,388,341     3,273,933     6,828,233  

Other financial obligations

   176,150     179,160     184,785     162,123     338,130  

Currents tax liabilities

   39,018     —       3,095     23,189     48,364  

Deferred tax liabilities, net

   —       —       —       —       —    

Provisions

   88,607     114,685     131,344     141,839     295,825  

Employee benefits

   43,202     55,433     60,634     64,545     134,617  

Other liabilities

   280,392     224,225     269,905     305,105     636,340  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  Ch$15,900,474    Ch$16,582,139    Ch$19,715,332    Ch$20,842,738    U.S.$43,470,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

   1,600,985     1,694,325     2,040,669     2,355,462     4,912,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  Ch$17,501,459    Ch$18,276,464    Ch$21,756,001    Ch$23,198,200    U.S.$48,383,008  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(See footnotes below)

  As of December 31,   As of December 31, 
  2009 2010 2011 2012   2010 2011 2012 2013 2014 

IFRS:

           

CONSOLIDATED RATIOS

           

Profitability and Performance

           

Net interest margin(4)

   4.48  4.70  4.80  4.68   4.87  4.80  4.68  4.67  5.12

Return on average total assets(5)

   1.51    2.38    2.16    2.13     2.37    2.16    2.14    2.25    2.24  

Return on average equity(6)

   24.45    16.85    22.61    21.63     24.98    22.61    21.71    20.67    20.98  

Capital

           

Average equity as a percentage of average total assets

   8.99    9.50    9.53    9.85     9.50    9.53    9.85    10.90    10.67  

Bank regulatory capital as a percentage of minimum regulatory capital

   234.93    232.85    245.52    269.75     232.92    245.53    269.50    274.26    279.83  

Ratio of liabilities to regulatory capital(7)

   11.87    12.99    12.30    11.10     12.98    12.30    11.11    10.90    10.65  

Credit Quality

           

Substandard loans as a percentage of total loans(8)

   5.81    5.46    2.87    3.31     5.46    2.87    3.31    3.48    3.79  

Allowances for loan losses as a percentage of substandard loans(8)

   40.71    44.33    72.58    62.42     44.33    72.58    62.42    60.52    59.17  

Provision for loan losses as a percentage of average loans

   1.89    1.16    0.92    0.92     1.16    0.92    0.92    1.12    1.21  

Allowances for loan losses as a percentage of total loans

   2.37    2.42    2.09    2.07     2.42    2.09    2.07    2.10    2.24  

Operating Ratios

           

Operating expenses/operating revenue

   47.54    46.74    48.66    47.27     46.10    47.89    46.31    41.90    43.77  

Operating expenses/average total assets

   2.85  3.10  3.02  2.83   3.01  2.93  2.73  2.54  2.73

 

(1)Translations of Chilean peso amounts into U.S. dollars are based on the exchange rate of accounting representation, or the spot exchange rate, which is determined on a daily basis by our Treasury, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. Thus, amounts stated in U.S. dollars as of and for the fiscal year ended December 31, 20122014 have been translated from Chilean pesos based on an exchange rate of accounting representation orthe spot exchange rate of Ch$479.47606.09 to U.S.$1.00, $1.00 as of December 30, 2012.31, 2014.
(2)Earnings per share data have been calculated by dividing net income by the weighted average number of shares outstanding during the year.
(3)Dividends per share data are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding.
(4)Annualized net interest income divided by average interest earning assets. The average balances for interest earning assets, including interest and readjustments, have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. Net interest margin does not include the interest earned on trading securities, which is accounted for under Other Income (Loss), Net.
(5)Annualized net income (loss) divided by average total assets. The average balances for total assets have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries.
(6)Annualized net income (loss) divided by average equity. The average balances for equity have been calculated on the basis of our daily balances.
(7)Total liabilities divided by bank regulatory capital.
(8)See “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard Loans and Total Past Due.Past-Due Loans.

Exchange Rates

As a general matter, prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in those cases explicitly authorized by the Central Bank. TheLey Orgánica Constitucional del Banco Central de Chile 18,840 (the “Central Bank Act”) liberalized the rules governing the purchase and sale of foreign currency. The Central Bank Act empowers the Central Bank to determine that certain purchases and sales of foreign currency specified by law must be carried out in theMercado Cambiario Formal (the “Formal Exchange Market”). The Formal Exchange Market is composed of banks and other entities so authorized by the Central Bank. The observed exchange rate for any given day equals the average exchange rate of the transactions conducted in the Formal Exchange Market on the immediately preceding banking day, as certified by the Central Bank. Even though the Central Bank is authorized to carry out its transactions at the rates it sets, it generally uses the spot rate for its transactions. Authorized transactions by other banks are generally carried out at the spot rate.

Purchases and sales of foreign exchange are not required to be conducted in the Formal Exchange Market and therefore may be carried out in theMercado Cambiario Informal (the “Informal Exchange Market”). There are no price limits imposed on transactions executedcarried out in the Informal Exchange Market. On December 28, 2012 (the last trading date of the year),March 31, 2015, the average exchange rate in the Informal Exchange Market was Ch$479.9626.9 per U.S.$1.00, or 0.3%0.005% higher than the observed exchange rate of Ch$478.6626.87 per U.S.$1.00 reported by the Central Bank on the same date. The observed exchange rate for any given day equals the average exchange rate of the transactions conducteddate in the Formal Exchange Market on the immediately preceding banking day, as certified by the Central Bank.2014.

The following table sets forth the annual low, high, average andperiod-end observed exchange rate for U.S. dollars for each year beginning in 2008,referenced period, as reported by the Central Bank:

 

   Daily Observed Exchange Rate Ch$ per U.S.$(1) 
   Low(2)   High(2)   Average(3)   Period  End(4) 

Year

  (in Ch$) 

2008

   431.22     676.75     522.46     629.11  

2009

   491.09     643.87     559.61     506.43  

2010

   468.37     549.17     510.25     468.37  

2011

   455.91     533.74     483.67     521.46  

2012

   469.65     519.69     486.49     478.60  

October 2012

   471.54     481.98     475.36     480.03  

November 2012

   476.20     484.48     480.57     479.42  

December 2012

   474.36     481.28     477.13     478.60  

2013 (through April 15)

   466.50     479.96     471.87     469.24  

January 2013

   470.67     479.96     472.67     471.40  

February 2013

   470.67     473.60     472.34     473.30  

March 2013

   471.10     474.82     472.48     472.54  

April 2013 (through April 15)

   466.50     472.55     470.00     469.24  
   Daily Observed Exchange Rate Ch$ per U.S.$(1) 

Year

  Low(2)   High(2)   Average(3)   Period  End(4) 
    (in Ch$) 

2010

   468.37     549.17     510.25     468.37  

2011

   455.91     533.74     483.67     521.46  

2012

   469.65     519.69     486.49     478.60  

2013

   466.50     533.95     495.35     523.76  

2014

   524.61     621.41     570.37     607.38  

October 2014

   576.65     599.22     589.98     576.65  

November 2014

   576.50     600.37     592.46     598.94  

December 2014

   605.46     621.41     612.92     607.38  

2015 (through April 17)

   606.75     642.18     622.21     612.30  

January 2015

   606.75     629.09     620.91     626.48  

February 2015

   616.86     632.19     623.62     617.67  

March 2015

   617.38     642.18     628.50     626.87  

April 2015 (through April 17)

   610.74     626.58     615.82     612.30  

 

Source: Central Bank.

 

(1)Nominal amounts.Figures are expressed in nominal terms.
(2)Exchange rates are the actual low and high, ona day-by-day basis for each period.
(3)For full years, the average of monthly average rates during the year. For full months, the daily average during the month.
(4)As reported by the Central Bank on the first business day of the following period.

The observed exchange rate on April 15, 201317, 2015 was Ch$469.24612.30 = U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

Until November 30, 2011, Banco de Chile applied the observed exchange rate as reported by the Central Bank in order to translate its financial statements from Chilean pesos to U.S. dollars. However, beginning December 1, 2011, Banco de Chile adopted the exchange rate of accounting representation, or spot exchange rate, for such matters. The exchange rate of accounting representation is determined on a daily basis by our Treasury based on the average of the daily closing bid and offer rates reported by Bloomberg, for the Santiago Stock Exchange.

RISK FACTORS

The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we do not know about or that we currently think are immaterial may also impair our business operations.operations in the future. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, prospects and financial condition.

We are also subject to market risks that are presented both in this subsection and in Note 4142 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

Risks Relating to our Operations and the Chilean Banking Industry

The growth of our loan portfolio may expose us to increased loan losses.

During the last five years, our total loan portfolio has shown double-digitgrown at a compounded average growth rates,rate of 10.7% per year. The expansion in our loan portfolio has been primarily as a result of the expansionfostered by growth in both residential mortgage and consumer loans, and, to a lesser extent, due toby an increaseexpansion in commercial loans. The growth ofin our loan portfoliobook is in linealigned with ourmid-term strategic priorities, althoughgoals, which seek to diversify our business model and optimize ourrisk-return relationship. In this regard, we recognize that our focus on the retail marketbanking segment may expose us to higher levels of loan losses and may require us to establish higher levels of allowances for loan losses.losses in the future. For this reason, we are constantly striving to develop and utilize improved risk models and procedures in order to mitigate the risks associated with business growth. For the year ended December 31, 2012,2014, our loan portfolio amounted towas Ch$18,771,76121,891,333 million, which representsrepresented a 8.0%4.8% annual increase as compared to the amount of Ch$17,386,49720,880,770 million that we recorded as of December 31, 2011.2013. Similarly, our allowances for loans losses increased 6.9%11.7% from Ch$362,741439,298 million in 20112013 to Ch$387,803490,558 million in 2012. Accordingly,2014. As a result, our ratio of allowances for loan losses to total loans was 2.09%slightly increased over that period, from 2.10% in 2011 and 2.07%2013 to 2.24% in 2012.2014.

Our loan portfolio may not continue to grow at the same or similar rate.

We cannot assure you that our loan portfolio will continue to grow at the same rates as it has in the past. The Chilean financial system’s loan portfolio of the Chilean banking industry has grown significantlyat a compounded average growth rate of 11.8% over the last five years which growth(excluding the operations of subsidiaries abroad). This expansion has been fostered by a generalan overall effort of all market participants in the financial industry to broaden their value offerings and increase banking penetration inof lower and middle income segments.segments, as well as small andmedium-sized companies. As a result, loan growth has been mainly prompted by the expansion in consumer and mortgage loans, and—to a lesser extent—by growth in commercial loans. These efforts have also been also supported by the robustness ofpositive cycle observed in the Chilean economy over the last decade.samefive-year period. However, a slowdown or negative GDP growth, rate of the Chilean economy, as well as a change in the behavior of banking customers, could adversely affect the growth rate of the industry and, therefore, the expansion of our loan portfolio andwhile affecting our credit quality indicators and, accordingly, causeleading us to increase our requiredthe allowances for loan losses. For more information, see “Item 4. Information on the Company—Regulation and Supervision” and “Item 4. Information on the Company—Selected Statistical Information.”

Restrictions imposed by banking regulations may restrictconstrain our operations and thereby adversely affect our financial condition and results of operations.results.

We are subject to regulation by the Superintendency of Banks.SBIF. In addition, we are subject to regulation by the Central Bank with respect to certain matters, including interest rates and foreign exchange transactions. See “Item 4. Information on the Company—Regulation and Supervision.”

Pursuant to theLey General de Bancos (the “General Banking Law”) all Chilean banks may, subject to the approval of the Superintendency of Banks,SBIF, engage in certainnon-banking businesses approved by the law. The Superintendency of Banks’SBIF’s approval will depend on the risk of the activity and the strength of the bank. Further,Furthermore, the General Banking Law applies toimposes on the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices (the “Basel Committee”) and limits the discretion of the Superintendency of BanksSBIF to deny new banking licenses.

In addition, during 2011recent years the Chilean Congress debated bills regulating insurance commissions relatedgovernment has focused on consumer protection. Thus, between 2010 and 2014, a number of legal and administrative regulations have been enacted, amended and revoked in order to mortgage loans and maximum legal interest rates for smallreinforce consumer loans. The bill regulating insurance commissions was published on December 17, 2011, effective as of July 1, 2012. This new law imposed restrictions and obligations on lenders such as a mandatory bid process for insurance related to mortgage loans and a general prohibition on commissions benefiting the lender. Although this law became effective on July 1, 2012, it did not

have any impact on our business activity due to the characteristicsprotection in all relevant aspects of the insurance contracts associated with residential mortgage loans, which consist of collective insurance policies that are renewed every January 1st. The new law will apply to our results of operations beginning in 2013, although we do not expectfinancial relationship between consumers and financial institutions. In this regard, and for any material effects.

Additionally, there is a bill currently under consideration in Congress related to maximum legal interest rates. This bill states that applicable maximum interest rates may not exceed the higher of: (i) 1.5 times the average interest rate for loans applicable at the time of the agreement, and (ii) the average interest rate for loans applicable at the time of the agreement plus two annual percentage points. In addition, the bill states that the interest rate for local currency loans not indexed to inflation with terms longer than 90 days may not exceed the average interest rate applicable to the same type of loans for amounts between 200 and 5.000 UF (approximately U.S.$9,527 and U.S.$238,187) plus: (i) 14 annual percentage points if the loan is higher than 50 UF (approximately U.S.$2,382) or (ii) 21 annual percentage points if the loan is equal or lower than 50 UF. Accordingly, the proposed law—if enacted—will mainly affect consumer loans, namely, installment, credit card and credit line loans, as well as overdue loans. We estimate that under the terms considered in this bill, as of December 31, 2012, no more than 2.5% of our total loans had an interest rate above the proposed new limit or had an overdue portion subject to penalty charges and, therefore, were potentially affected by the new maximum interest rate. We believe that if the bill is enacted, it would affect the volume of installment loans to be granted from the date the law goes into effect, as well as the outstanding and new loans related to credit cards and credit lines, whereas the outstanding balance of installment loans would not be affected. In addition, the proposed law—if enacted—may result in lower net interest income together with a reduction in our loan growth. Since the bill is currently under discussion in Congressother general matters, we cannot ascertain the final outcome of the law or its actual impact on interest rates. Nevertheless, based on preliminary estimations, we believe the proposed law—if enacted—would not have any material effects on our results of operations for 2013.

It is also important to note that the Chilean regulator has suggested that Basel III guidelines may be implemented in Chile which could impose new requirements for Chilean banks in terms of capital adequacy and liquidity standards. We do not expect the potential implementation of Basel III to affect our profitability and results of operations in 2013 as the Chilean regulator has not given any indication as to when and how these guidelines will be implemented. Nevertheless, we cannot assure that these guidelines will not affect our financial performance in the future if adopted.

There can be no assurance that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect or proposed.effect. Any such change could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance. See “Item 4. Information on the Company—Regulation and Supervision.”

Regarding Basel III, the SBIF has suggested these guidelines may be implemented in Chile in the future, which could impose new requirements for all Chilean banks, including us. In fact, the Chilean Ministry of Finance has announced that the implementation of Basel III is a priority for the current administration and, therefore, a set of amendments to the General Banking Law will be presented for approval to the Chilean congress. In addition to Basel III, the Finance Ministry has announced that these amendments will also include changes in the corporate governance of the SBIF, reinforcing the independence of the local regulator and establishing a dispute resolution system for Chilean banks. However, it is not clear yet as to when and how Basel III will finally be implemented in Chile, since the SBIF has also recognized the possibility of adapting these rules to the local market. Similarly, there is no certainty as to when the changes to the General Banking Law could go into effect. Despite this, we do not expect this regulatory body will affect our profitability or results of operations in 2015. Nevertheless, we cannot ensure that these new rules will not affect our financial performance in the future, if adopted.

In regards to liquidity, during 2014, the Chilean Central Bank released a proposal of new liquidity standards for local banks, which is based on Basel III guidelines. After receiving comments for the proposed set of rules, the Central Bank published a final version in January of 2015. In addition, the SBIF is the institution empowered to put these guidelines into practice and monitor them on an ongoing basis. Accordingly, in February of 2015, the SBIF introduced a draft of these rules for comment and discussion. The first stage of these new liquidity requirements is intended to improve the information—in quantity and quality—about the situation of banks without imposing specific limits. Nevertheless, regulatory thresholds are expected to be defined and implemented by 2016. Although this new regulatory body will not affect our operations and results for the year ended December 31, 2015, we cannot be sure that the new liquidity requirements will not have a material impact on our financial condition or results of operations.

As for credit risk allowances, on December 30, 2014 the SBIF published a set of amendments to the regulations on allowances for potential loan losses. These new rules establish a standardized method for calculating provisions for loan losses for residential mortgage loans, based on past-due behavior and loan-to-value ratios, while supplementing and defining provisioning rules for the impaired loan portfolio. In addition, this set of rules also addressed the possibility of putting into practice standardized credit risk provisioning models for consumer and commercial loan portfolios evaluated on a grouped basis. Lastly, the new guidelines also introduced changes to the treatment of provisions related to factoring loans. This new set of rules will go into effect on January 1, 2016. It is important to mention that the implementation of standardized credit risk provisioning models would only have an effect—if any—on our results of operations or financial condition prepared under Chilean GAAP, which differ to some extent from IFRS as issued by the IASB. The adoption of these guidelines will not have any impact on our results of operations or financial condition under IFRS.

Increased competition and industry consolidation may adversely affect our operations.

The Chilean market for financial services is highly competitive. We compete with other Chilean and foreign banks, with Banco del Estado de Chile, a which isgovernment-owned, bank, and with large department stores that are allowed to grant consumer loans to a large portion of the Chilean population, especially in the low andmiddle-income segments. segments, through credit card financing. In addition, the retail marketsegment (which comprisesencompasses individuals and small andmedium-sized companies) has become the target market of several banks, andsince banking penetration is still in progress in Chile. Accordingly, competition within this market is increasing as banks are continuously incorporating new and tailored products and services, while they strivestriving to improve service quality. As a result, net interest margins (after(once deducted provisions for loan losses) in thesesub-segments are likely to decline over time.

We also face competition from non-banknon-banking competitors with respect toin some of our credit products, such asespecially credit cards and consumer loans. In these markets, competition fromnon-banking companies like large department stores, private compensation funds and saving and credit cooperatives has become increasingly significant. In addition, we face competition from other types of competitors,lenders, such as leasing, factoring and automobile financing companies (especially in credit products), as well as mutual funds, pension funds and insurance companies within the market for savings products and mortgage loans. Currently,Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual funds, and thefund management, while growing quickly in insurance sales business is experiencing fast growth, butbrokerage services. However, we cannot assure you that this trend will continue in the future. See “Item 4. Information on

Lastly, in the Company—Business Overview—Competition.”

Increasingpast, increasing competition within the Chilean banking industry has been accompanied by a consolidation trend inwave and the industry in recent years.entry of international players to the system through multiple mergers and acquisitions. We expect that both of these trends will continue and result in the creation of larger and stronger financial groups.banking conglomerates offering a wide range of products and services while targeting most of the segments in the Chilean banking market. These trends may adversely affect us becauseimpact our results of operations as they may increase thetranslate into higher interest rates we pay to attract depositorspaid on deposits and decrease thelower interest rates we charge our customers forearned on loans, resulting in a decrease of thedecreased net interest margins we are able to generate.

margins.

See “Item 4. Information on the Company—Business Overview—Competition.”

Our exposure to certain segments of the retail market could lead to higher levels of totalpast-due loans and subsequentcharge-offs.

Although we have historically been focused on wholesale banking, forover the last five years we have reoriented our commercial strategy to increase our focus on the retail and the wholesale marketbanking segments. Accordingly, the share of the retail banking segment in our total loan book has increased from 45.7% in 2009 to 53.6% in 2014. Although this trend has been associated with expansion in middle and high-income individuals, an increasing portion ofhigher income personal banking, our retail market consistsbanking segment is also composed of small andmedium-sized companies (approximately 7.6%11.4% of our total loan book as of December 31, 2012, including2014, which consists of companies with annual sales of up to Ch$1,600 million) and, to a lesser extent, oflower-income individuals (approximately 4.1%3.7% of our total loan book as of December 31, 2012, including2014, which consists of individuals with monthly incomes that rangeranging from Ch$170,000 to Ch$500,000). Our strategy aims to increase lending and banking penetration by providing multiple value propositions to attract additional retail customers. These customers are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and high-incomehigher-income individuals. Consequently, in the future, we may experiencebe exposed to higher levels of total past-due loans and subsequentwrite-offs, which could result in materially higher allowances for loan losses.

The levels of total past-due loans and subsequent write-offs may be materially higher in the future, whichlosses that could adversely affect us. our results of operations.

As of December 31, 20122014 our total past-due loans (loans overdue 90 days or more)more past-due) reached Ch$181,863272,983 million, which represented a 1.7%15.3% annual increase as compared to the figureCh$236,730 million recorded a year earlier. In addition,in 2013. Also, as of December 31, 20122014 our total past-due loans (loans 90 days or more past-due) were composed of 77.3% of80.6% retail banking 90 days or morepast-due loans (consumer and residential mortgage loans to individuals, as well as commercial loans to small and medium sized companies) and 22.7% of19.4% wholesale banking 90 days or morepast-due loans (commercial loans to large companies and corporations). During the prior fiscal year, ourpast-due loans (90 days or more) portfolio comprised 81.9%was composed of 79.1% retail banking past due loans (90 days or more) and 20.9% wholesale banking past due loans (90 days or more).

The annual increase of Ch$36,253 million in the amount ofpast-due loans (90 days or more) was mainly attributable to the retail banking segment, including both SME and personal banking. In fact, 78.3% of the annual variance was attributable to past-due loans (90 days or more) in retail banking and 18.1%the remaining 21.7% of the annual variance was attributable to past-due loans (90 days or more) in the wholesale banking segment past-due credits.loans. This is in line with the growth displayed by both segments within our total loan book. Additionally, the higher delinquency in retail banking loans was generally aligned with a less robust economic environment, which worsened with the economic slowdown of 2014. Although certain indicators that directly affect the retail banking segment—such as unemployment—remained at positive levels during 2014, there was a counterbalance between the employed andself-employed work force. Moreover, diverse surveys have reflected the negative outlook held by individuals with respect to the local economy. In light of these trends, we have tightened the entire credit process, from assessment to collection, while introducing stricter requirements related to collateral, financial burden,loan-to-value, etc. Nonetheless, we cannot assure you the trend inpast-due loans (90 days or more) will not continue if global or local economic conditions deteriorate in the future.

For more information, see “Item 4. Information on the Company—Business Overview—Principal Business Activities.”

One of our affiliates may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends.

As of December 31, 2012,2014,Sociedad Administradora de la Obligación Subordinada S.A. (“SAOS”), our affiliate, held 32.5%30.21% of our shares as a consequence of our 1996 reorganization. This reorganization was due in part to the 1989 repurchase by the Central Bank of certainnon-performing loans that we had previously sold to the Central Bank and later exchanged for subordinated debt without a fixed term. For more information, see “Item 4. Information on the Company—History and Development of the Bank—History—The1982-1983 Economic Crisis and the Central Bank Subordinated Debt.”

In exchange for assuming the Central Bank debt, SAOS received fromSM-Chile S.A.(“SM-Chile”), the a holding company that controls us and SAOS, a stake of 63.6% of our shares as collateral for this debt. Dividends received from us are the sole source of SAOS’s revenues, which—in turn—must be used to repay this debt. However, under SAOS’s agreement with the Central Bank, we have no obligation to distribute dividends to our shareholders. To the extent distributed dividends arewere not sufficient to pay the amount due on this debt, SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If this cumulative deficit balance exceeds 20% of ourpaid-in capital and reserves, the Central Bank may require SAOS to sell a sufficient number of our shares to pay the entire amount of the accumulated deficit. As of March 31, 2013,2015, SAOS maintained a surplus with the Central Bank of Ch$275,702484,560 million, equivalent to a 13.4%19.2% of our paid-in capital and reserves as of the same date.

Furthermore, if our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth and to distribute stock dividends, the Central Bank may require us to pay in cash to SAOS the portion of net income corresponding to its economic stake in our shares. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months.SM-Chile shareholders will have a right of first refusal with respect to that sale.

If SAOS is required to sell shares of our stock for any of the aforementioned circumstances in the public market, that sale could adversely affect the prevailing market price of our stock.

The results of our operations are affected by inflation and interest rate volatility.volatility and inflation.

The results of our operations depend to a great extent on our net interest income, which represented 71.8%75.5% of our total operating revenues in 2012.2014. Changes in inflation and nominal interest rates and inflation could affect the interest rates earned on ourinterest-earning assets differently from the interest rates paid on ourinterest-bearing liabilities, resulting in a reduction in our net income.income reduction. Inflation and interest rates are highly sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, domestic and international economic and political conditions, among other factors. Any volatility in interest rates could have a material adverse effect on our financial condition and results of operations. The inflation rate—measured as the annual variation in the Consumer Price Index (“CPI”) as published by the National Statistics Institute—was 2.96% in 2010, 4.44% in 2011 and 1.49% in 2012.

The average annualshort-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 2.73% in 2010, 5.61% in 2011 and 5.90% in 2012.2012, 5.20% in 2013, and 3.91% in 2014. The averagelong-term nominal interest rate based on the interest rate of the Central Bank’sfive-year bonds traded in the secondary market was 5.54%5.34% in 2010, 5.67%2012, 5.20% in 20112013 and 5.26%4.43% in 2012. 2014.

Inflation in Chile has been moderate in recent years, especially in comparison with periods of high inflation experienced in the 1980s and 1990s. High levels of inflation in Chile could adversely affect the Chilean economy, consumer purchasing power, household consumption and investment in machinery and equipment and, therefore, the demand for financing and our business. The annual inflation rate (as measured by annual changes in the CPI and as reported by the Chilean National Institute of Statistics) during the last five years and the first three months of 2015 was:

Year

  Inflation
(CPI Variation)
 

2010

   3.0  

2011

   4.4  

2012

   1.5  

2013

   3.0  

2014

   4.6  

2015 (through March 31)

   1.1

Source: Chilean National Institute of Statistics

Although we benefit from a higher than expected inflation rate in Chile due to the structure of our assets and liabilities (we have a significant net asset position indexed to the inflation rate), significant changes in inflation with respect to current levels could adversely affect our results of operations and, therefore, the value of both our shares and ADSs.

For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Interest Rates.”

Operational problems, errors, criminal events or errors canterrorism may have a material adverse impact on our business, financial condition and results of operations.

As all large financial institutions, we are exposed to many operational risks, including the risk of fraud by employees and outsiders, failure to obtain propersuitable internal authorizations, failure to properly document transactions, equipment failures, errors made by employees and natural disasters, such as earthquakes, tsunamis and floods. Furthermore, we are exposed to criminal events or tsunamis.terrorist attacks 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 a system of operational controls composed ofworld-class human and technological resources, as well as comprehensive contingency plans and security procedures, there can be no assuranceassurances that operational problems, errors, criminal events or errorsterrorist attacks will not occur and that their occurrence will not have a material adverse impact on us.our results of operations, financial condition and the value of our shares and ADSs.

Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.

We have access to large amounts of confidential financial information and controlhold substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous remote access to their accounts and the possibility of transferring substantial financial assets by electronic means. Accordingly, cybersecurity is a material risk for us.

We depend on a variety of internet-basedInternet-based data processing, communication, and information exchange platforms and networks. Thus, weWe cannot assure you that all of our systems are entirely free from vulnerability. Additionally, we enter into contracts with several third-partiesthird parties to provide the business,our customers with data and communication services we offer to our customers. Ifservices. Therefore, if information security is breached, or if one of our employees breaches compliance procedures, information could be lost or misappropriated, which may affect our results of operations, damage others or result in potential litigation.

We are also exposed to the risk ofcyber-attacks and other cybersecurity incidents in the normal course of business. There has been an increased level of attention focused recently oncyber-attacks against large corporations that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating cash, other assets or sensitive information, corrupting data or causing operational disruption. Cybersecurity incidents such as computerbreak-ins, phishing, identity theft and other disruptions could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us in excess of insurance coverage, and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of service providers, intend to continue tocontinuously implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that these security measures will be successful.

Request from Spanish Court to Chilean Judicial Authorities

On April 29, 2010, the Supreme Court of Chile denied the requests contained in a rogatory letter issued on October 26, 2009 by the Central Court of Instruction Number 5 of the National Court of Spain (Juzgado Central de Instrucción No. 5 de la Audiencia Nacional de Madrid) in Madrid, Spain (the “Spanish Court”) to have certain actions taken (as described below) with respect to a lawsuit before the Spanish Court. The Supreme Court of Chile established that the subject matter of the investigation by the Spanish Court was currently pending before a Chilean tribunal that has jurisdiction and competence over these matters.

The rogatory letter referred to above notified the Chilean judicial authorities that a lawsuit pending before the Spanish Court had been amended to add causes of action concerning concealment of assets and money laundering against Mr. Pablo Granifo Lavin (the chairman of our board of directors) and Mr. Hernán Donoso Lira (former manager of our New York branch) and against us, Banchile Corredores de Bolsa S.A. and Banchile Administradora General de Fondos S.A., the latter three of which face only subsidiary civil liability. The rogatory letter, among other items, requested a joint guarantee (fianza solidaria) from the defendants in the amount of U.S.$77,348,374 and, if the aforementioned parties were not to grant such a joint guarantee, requested the attachment of assets of up to U.S.$103,131,165.

On April 30, 2012, the Spanish Court decided the provisional dismissal (sobreseimiento provisional) of the aforementioned lawsuit on the grounds that the Chilean judicial authorities have investigated and prosecuted the same facts as those pending before the courts in Spain, and there is an existing legal proceeding underway in Chile, which should have priority. The complainant filed an appeal (recursos de apelación y reforma), which was dismissed on July 27, 2012 and June 19, 2012 by the Spanish judicial authorities.

In Chile, a judicial investigation is currently underway and at the time of filing of this annual report no indictments for criminal participation of persons affiliated with us have been issued. Consequently, it is not possible to predict the outcome of these proceedings, or what impact, if any, they might have on us.

Exposure to European sovereign debt or related instruments and future turmoil and destabilization related thereto could negatively affect our business.

Although emerging markets were less impacted by the global financial crisis of 2008 and showed a quick recovery, there are still concerns about the possibility of a recession in developed countries, especially due to the fiscal condition of certain European economies (such as Greece, Italy, Ireland, Portugal and Spain, also called PIIGS economies). The debt levels and fiscal unreliability of these countries have resulted in uncertainty regarding the outlook for the global economy and a potential contagion to other economies linked to these countries.

Similarly,We may lose revenue if we are unable to determine and predictrenew our global connectivity agreement with Citigroup Inc.

On December 27, 2007, we entered into a global connectivity agreement with Citigroup Inc. (as amended, the effects this situation will have on the world’s“Global Connectivity Agreement”). The Global Connectivity Agreement enables us and our commercial partners’ GDP growthclients to become part of Citigroup’s global network and overall financial stability. Also, these factors could translate intoprovides a local economy’s slowdown that would affectframework for us, Citigroup and our respective affiliates to direct certain types of business to our companies. The Global Connectivity Agreement sets forth the decision making process of individuals and companies regarding consumption and investment, which—in turn—could adversely affect the demand for credits. Accordingly, we cannot assure you that these developments will not occur or that they will not affect us.

As of December 31, 2012 we had a total exposure to PIIGS economies of Ch$38,785 million (U.S.$80.9 million), which represents 0.17%terms of our total assetsrelationship with respect to investment banking services and other services such as international personal banking, cash management and treasury operations, among others. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”

The Global Connectivity Agreement expires on January 1, 2016. We cannot predict if this agreement will be renewed, or if it is renewed, what the renewal terms would be. Although we would continue to provide the services governed by the Global Connectivity Agreement even if it is not renewed, any loss of the same date. This exposure was concentratedexclusivity or referral provisions in only two economies, Italythe Global Connectivity Agreement could result in significantly less revenues from the services listed above and Spain, and it wasany profits we would generate from these services. Our preliminary estimates suggest that the potentially lost revenues (net of direct costs associated with services provided to customers) directly related to contingent credits, suchthese services could be as standby letter of credits in favor of usmuch as well as third parties. As of the same date, we had no additional exposure to PIIGS countries, in any type of instrument, such as financial assets available-for-sale, assets held for trading, derivatives, commercial loans, credit lines, confirming export letters of credits, etc.U.S.$12.5 million per year.

Risks Relating to our ADSs

Our principal shareholders may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.

As of April 15, 2013,17, 2015, LQ Inversiones Financieras S.A. (“LQIF”), a holding company beneficially owned by Quiñenco S.A. and Citigroup Chile S.A., holds directly and indirectly approximately 58.40%51.2% of the voting rights of our shares. These principal shareholders are in a position to elect a majority of the members of our board of directors, direct our management and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions.

Actions by our principal shareholders with respect to the disposition of the shares or ADSs they beneficially own, or the perception that such actions may occur, may adversely affect the trading price of our shares on the various stock exchanges on which they are listed and, consequently, the market price of the ADSs.

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

While our ADSs have been listed on the New York Stock Exchange (the “NYSE”) since the first quarter of 2002, there can be no assurance that an active trading market for our ADSs will be sustained. During 2012,2014, a daily average volume of 22,92467,287 of our American Depositary Receipts (“ADRs”) waswere traded on the NYSE, according to data provided by Bloomberg. Although our shares are traded on the Santiago Stock Exchange, the Valparaiso Stock Exchange and the Chilean Electronic Stock Exchange, the Chilean market for our shares in Chile is small and somewhat illiquid. As of December 31, 2012,April 17, 2015 approximately 15.7%25.1% of our outstanding shares were held by shareholders other than our principal shareholders, including LQIF,SM-Chile, SAOS and Ergas Group.

If an ADS holder withdraws the underlying shares from the ADR facility, the small size of the market, its limited liquidity, as well as our concentrated ownership, may impair the ability of the ADS holder to sell the shares in the Chilean market in the amount and at the price and time such holder desires, and could increase the volatility of the price of our ADSs.

You may be unable to exercise preemptive rights.

TheLey Sobre Sociedades Anónimas No. 18,046 (the(the “Chilean Corporations Law”) and theReglamento de Sociedades Anónimas (the “Chilean Corporations Regulations”) require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs) to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible unless a registration statement under the Securities Act were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.

We may elect not to make a registration statement available with respect to the preemptive rights and the common stock, in which case you may not be able to exercise your preemptive rights. If a registration statement is not filed, the depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of any such sale.

Developments in international financial markets may adversely affect the market price of the ADSs and shares.

The market price of our ADSs and shares may be adversely affected by volatility in international financial markets and adverse worldglobal economic conditions. The market for Chilean securities and the Chilean economy as a whole are, to varying degrees,diverse extents, influenced by economic and market conditions in the United States, Europe and certain emerging market economies, especially Asian countries, including someand also economic as well as political developments in Latin America and Asia.American countries. Although economic conditions are different in each country, investors’ reactions to developmentsspecific issues in one country canmay affect the financial markets in other countries,others, including Chile. Therefore, unfavorable developments in other countries countries—especially in developed economies and Chile’s main commercial partners—may adversely affect the market price of our ADSs and shares.

In particular, since August 2007, there has been significant volatility in worldwide financial markets due to consequences from the announcement, by several U.S. banks and financial institutions, of significantwrite-downs related to their exposure tomortgage-backed securities and other financial instruments. This situation, also known as the subprime crisis, translated into several and significant governmentbail-outs for important banks worldwide, bankruptcy for some others and an active M&A market in the financial industry.industry intended to maintain the confidence of investors and customers, as well as avoiding bank runs. Although the Chilean economy iswas not directly exposed to the U.S. housing credit market and and—historically—we dohave not directly holdheld any assets related to such financial instruments, the subprime crisis impacted the Chilean economic activity towardseconomy by the end of 2008, with additionalincluding banking activity. Currently, the U.S. economy seems to be overcoming the effects onof the banking industrysubprime crisis, as evidenced by recoveringmid-term growth rates and our commercial activity. Weimproving employment and consumption indicators, while the Federal Reserve is tapering the quantitative easing monetary policy it has used for the past several years. However, we cannot assure you that these past developments will not continue to affect us, noroccur again in the future or that any future developments in international markets couldwill not affect us, including our results of operations and, consequently, the market price of our ADSs and shares.

Similarly, although ourFinancial deterioration in certain European countries was another indirect effect of the subprime crisis that occurred in the United States. Our exposure to European sovereign debt is not significant, amounting to U.S.$80.9 million as of December 31, 2012,significant; however, we cannot assure you that volatility in global financial markets due to the uncertainty regarding the Eurozone fiscal condition of certain European countries will not continue and affect the Chilean economy and consequently ourthe financial condition and results of operations.operations of the entire Chilean banking system, including us. Accordingly, the price of our ADS could be adversely affected by a new financial turmoil in the Eurozone, political issues, armed conflicts, a slower than expected recovery, or a deterioration in healthier economies, such as Germany, and France, that could translate into increasing volatility and uncertainty all over the world.

In the past, Chile has imposed controls on foreign investment and repatriation of investments that affected investments in, and earnings from, our ADSs.

Equity investments held in Chile by persons who are not Chileannon-Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of the investments and earnings therefrom.from Chile. In April 2001, the Central Bank eliminated most of the regulations that affectedaffecting foreign investors, although foreign investorsthey still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them, the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we cannotcan neither determine in advance nor advise you as to the durationwhen or how those restrictions could impact of such restrictionsyou if imposed.

If for any reason, including changes in Chilean law, the depositary for our ADSs were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.

We are required to withhold 35% from any dividends we pay to you.

ADSs owners are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by ADSs owners will be paid net of foreign currency exchange fees and expenses of the depositary and will be subject to Chilean withholding tax of 35% of the dividend, which we will withhold and pay to the Chilean tax authorities. Any dividend distributions made in property (other than common stock) will be subject to the same Chilean tax rules as cash dividends. For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”

Risks Relating to Chile

Our growth and profitability depend on the level of economic activity in Chile.

Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to increasegrow our business scalevolumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamism of the Chilean economy and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and investment. The global financial crisis of 2008 that significantlydramatically affected the economic growth in developed economiescountries also affected the Chilean economy by the end of 2008 and during the first three quarters of 2009, which immediately2009. This translated into a subsequent slowdown in the local banking industry due to lower levels of consumption and deteriorated credit quality in loan portfolios prompted by increasing unemployment.unemployment and financial stress experienced by certain economic sectors. Conversely, duringbetween 2010 and 20112012 the local economy and financial system experiencedthe banking industry evidenced a significant upturn, fostered by real GDP growth of around 6%that averaged 5.7% per year, mainly as a result of the recovery in consumption and investment. Toinvestment, as well as higher fiscal spending associated with the reconstruction process after a great extent, this trend continuedsignificant earthquake in 20122010. During 2013, the Chilean economy entered into a moderate slowdown by supportingrecording a 4.2% GDP expansion, which deepened throughout 2014 as both corporate and individual confidence continued to deteriorate. The slowdown was explained in part by both slower growth of 5.6% forChile’s main commercial partners, especially China, and uncertainty associated with diverse reforms presented by the local economy.recently appointed administration that affected investment and consumption. Accordingly, over the last three years the Chilean banking industry, including us, returnedeconomy grew by only 1.9% in 2014, which was influenced by a 6.1% contraction in investment that was offset by a 2.2% expansion in private consumption. Although Chilean economic growth continues to historical average figures of loan growth and profitability. Nevertheless,be positive, we cannot assure you that the Chileanlocal economy will continue to growexpanding in the future or that developments in, or affecting the Chilean economy and the local banking industry will not materially and adversely affect us, our business, financial condition or results of operations. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview”.

Currency fluctuations could adversely affect the value of our ADSs and any distributions on the ADSs.

The Chilean Government’s economic policies and any future changes in the value of the Chilean peso with respect to the U.S. dollar could affect the dollar value of our common stock and our ADSs. TheGiven the floating exchange rate regime that exists in Chile, the Chilean peso has been subject to large fluctuations in the past and could continue this trend in the future. BetweenAccording to information published by the Chilean Central Bank, between December 31, 20112013 and December 31, 2012,2014, the value of the U.S. dollar relative to the Chilean peso decreasedincreased by approximately 8.2%16.0%, as compared to the increase of 11.3%9.4% recorded in the period from December 31, 20102012 to December 31, 2011.2013. See “Item 3. Key Information—Exchange rates.”

Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. Cash distributionsdividends associated with respect to our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at thethen-prevailing exchange rate for the purpose of making payments in respect of our ADSs. If the value of the U.S. dollar increases relative to the Chilean peso, the dollar value of our ADSs and any distributions to be received from the depositary will decrease. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. For more information, see “Item 10. Additional Information—Exchange Controls.”

Our results of operations may be affected by fluctuations in the exchange rates between the Chilean peso and the U.S. dollar despite our policy and Chilean regulations related to the general avoidance of material exchange rate mismatches. In order to reduce the effect of exchange rate mismatches we enter into foreign exchange derivative transactions in order to hedge—partially or totally—that hedge our exposure. As of December 31, 2012,2014, our foreigncurrency-denominated assets and Chileanpeso-denominated assets, which contain repayment terms linked to changes in foreign currency exchange rates, exceeded our foreigncurrency-denominated liabilities and Chileanpeso-denominated liabilities, which contain repayment terms linked to changes in foreign currency exchange rates, by an amount of Ch$1,097.29,979 million, or 0.06%0.42% of ourpaid-in capital and reserves.

We may decide to change our policy regarding exchange rate mismatches. Regulations that limit such mismatches may also be amended or eliminated.eliminated by regulatory institutions. Higher exchange rate mismatches will increase our exposure to the devaluation of the Chilean peso, and any such devaluation may impair our capacity to serviceforeign-currency obligations and may, therefore, materially and adversely affect us, our financial condition and results of operations. Additionally, the economic policies of the Chilean Government and any future fluctuations of the Chilean peso againstwith respect to the U.S. dollar could adversely affect our financial condition and results of operations.

Inflation could adversely affect the value of our ADSs and financial condition and results of operations.

Inflation has been moderate in recent years, especially in comparison to the periods of high inflation in the 1980s and 1990s. High levels of inflation in Chile could adversely affect the Chilean economy and, indirectly, our results of operations and the value of our ADSs. The annual rate of inflation (as measured by changes in the CPI and as reported by the Chilean National Institute of Statistics) during the last five years and the first three months of 2013 was:

Year

  Inflation
(CPI  Variation)
 

2008

   7.1

2009

   (1.4

2010

   3.0  

2011

   4.4  

2012

   1.5  

2013 (through March 31)

   0.7

Source: Chilean National Institute of Statistics

Although we benefit from a positive inflation rate in Chile due to the structure of our assets and liabilities (we have a significant net asset position indexed to the inflation rate), our operating results and the value of our ADSs in the future may be adversely affected by changing levels of inflation, and Chilean inflation could change significantly from current levels. For more information, see “Item 5. Operating and Financial review and Prospects—Inflation.”

Chile has corporate disclosure standards different from those you may be familiar with in the United States.

Chilean disclosure requirements for publicly listed companies differ from those in the United States in some significant aspects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities markets are not as highly regulated and closely supervised as the U.S. securities markets. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company. For more information, see “Item 16G. Corporate Governance.”

Chilean law provides forshareholders with fewer and lesswell-defined shareholders’ rights.

Our corporate affairs are governed by ourestatutos (bylaws) and the laws of Chile. Under such laws, our shareholders may have fewer or lesswell-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.

Recent changes in the Chilean tax system could impact the profitability of investments held by foreign and local investors.

In September 2014, the Chilean congress approved a law reforming the Chilean tax system. This tax reform (Law N° 20,780, defined terms in this risk factor are used as defined therein) gradually increases the first category tax or corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated Regime and (ii) the Attribution Regime. The tax reform increases the statutory corporate tax rate from 20.0% in 2013 to 21.0% in 2014, 22.5% in 2015 and 24.0% in 2016. From 2017 onwards, the statutory corporate tax rate will depend on the tax regime chosen by the owners of the taxpayer (the company). If the Semi-Integrated regime is selected, the company will be subject to a statutory corporate tax rate of 25.5% in 2017 and 27.0% from 2018 onwards. If, instead, the Attribution regime is selected, the company will be subject to a statutory corporate tax rate of 25.0% from 2017 onwards. At this time, we cannot anticipate which regime we will select in the future.

The tax reform will also affect the taxes levied on dividends received by investors that hold shares of common stock or ADS from 2017 onwards. Under the Semi-Integrated Regime, holders of shares or ADS will pay taxes on the dividends effectively received from the company (withholding tax of 35% for foreign investors and a general regime tax for local investors). Foreign investors from DTAT (Double Taxation Avoidance Treaty) countries will be able to use 100% of the corporate tax paid by the company as a tax credit. However, local investors and holders from non-DTAT countries will be permitted to use 65% of the corporate tax paid by the company as a tax credit. Accordingly, the effective tax rate paid by local (individual) investors or foreign holders could increase up to 44.5%. Under the Attribution Regime, holders of shares or ADS will pay taxes (withholding tax of 35.0% for foreign investors and personal taxes for individual local holders) on their proportional participation in the earnings before taxes generated by the company, regardless of whether cash dividends are distributed or not. Holders of shares or ADS will be permitted to use 100% of the corporate tax paid by the company as a tax credit.

Lastly, stock dividends (distributions on fully paid-in shares) are currently tax exempt when distributed. Under the new tax law, regardless of the regime that the owners of the company ultimately chooses, stock dividends will be subject to taxation. Furthermore, the new tax income law introduces certain changes to the treatment of capital gains associated with the sale of shares received as stock dividends.

For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”

Labor strikes or slowdowns could adversely affect our operations because the majority of our employees belong to labor unions.

We are a party to collective bargaining agreements with various labor unions. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions could result in, among other things, strikes,

work stoppages, or other slowdowns by the affected workers. If unionized workers were to engage in a strike, work stoppage, or other slowdown, or other employees were to become unionized, we could experience disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our results of operations. See “Item 6. Directors, Senior Management and Employees—Employees.”

On December 29, 2014 the government sent a labor reform bill to the Chilean congress for discussion and approval. The government stated that this bill was intended to strengthen and give more power to Chilean unions while prohibiting the replacement of workers during strikes. As a result, unions would enhance their negotiation position in collective bargaining processes. In addition, the reform involved some changes to the current labor framework by introducing certain flexibility in the contractual relationship between workers and companies. There is currently no certainty as to when and how this bill, if passed by the congress, will go into effect and, therefore, we cannot assure you that this bill will not have a material effect on our business.

Item 4Information on the Company

History and Development of the BANKBank

Overview

We were founded in 1893, and we have been, for much of our history, among the largest and most profitable Chilean banks in terms of return on average assets and average equity in Chile. Our core business is commercial banking in Chile, providing traditional banking products and specialized financial services to our diversified customer base of individuals and companies.

Our legal name is Banco de Chile and we are organized as a banking corporation under the laws of Chile and were licensed by the Superintendency of BanksSBIF to operate as a commercial bank on September 17, 1996. Our main executive offices are located at Paseo Ahumada 251, Santiago, Chile, our telephone number is +56+56 (2) 2637-1111 and our website iswww.bancochile.cl. Our representative in the United States is Puglisi & Associates, with offices at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

We are a full-servicefull service financial institution that provides, directly and indirectly through our subsidiaries, and affiliates, a wide variety of lending andnon-lending products and services to all segments of the Chilean financial market, providing our customers with powerful, differentiated and differentiatedcomprehensive value offerings to our customers.offerings. Our business is not materially affected by seasonality.

We organize our operations and deliver our services to our customers through the following four principal business segments:

 

 (i)retail banking;

 

 (ii)wholesale banking;

 

 (iii)treasury and money markets; and

 

 (iv)subsidiaries.

WeIn Retail Banking, we provide our retailindividual customers with credit cards, residential mortgage loans and consumer loans, as well as traditional deposit services, such as current accounts, demand deposits, savings accounts and time deposits. Our retail customers are composed ofalso include micro, small and medium sized companies that we serve by providing them with short and long term loans, as well as diverse deposit solution, in order to satisfy their needs. Our banking services for wholesale customers include commercial loans (which include factoring and leasing), foreign trade, capital markets services, cash management andnon-lending services, such as payroll, payment and paymentcollection services, as well as a wide range of treasury, financial advisory and risk management products.

In 2008, we supplemented our products and services and enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile.

As of December 31, 2012,2014, we also offered international banking services through our Trade Services subsidiary in Hong Kong, our representative officesoffice in São Paulo and Beijing, and a worldwide network of correspondent banks. However, we have begun a voluntary dissolution process for our Trade Services subsidiary in Hong Kong that we expect to complete before the end of 2015.

In addition to our traditional banking operations, our subsidiaries and affiliates permit us to offer a variety ofnon-banking but specialized financial services including securities brokerage, mutual funds management, investment banking, factoring, insurance brokerage, securitization, collection and creditpre-evaluation services.

According to the Superintendency of Banks,SBIF, as of December 31, 20122014 and excluding the operations of subsidiaries abroad, we were the largest bank in terms of net income with a market share of 29.0%, the second largest bank in Chile in terms of total loans with a market share of 19.0%18.1%, the largest provider of commercial loans with a market share of 19.0%, the largest bank in terms of current account balances held by individuals with a market share of 31.0%18.0%, the second largest provider of consumer loans with a market share of 22.0%20.9% and the second largest privately owned bank in terms of residential mortgage loans with a market share of 17.2%17.1%. Also, as reported by the SBIF, we were the largest bank in terms of net income with a market share of 23.8% and the first bank in terms of current account balances held by individuals with a market share of 28.9%, both as of December 31, 2014. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 20122014 we were the largest provider of mutual funds management with a market share of 23.2%22.5%.

As of December 31, 20122014 we had:

 

total assets of Ch$23,198,20027,581,676 million (approximately U.S.$48,38345,507.6 million);

 

total loans of Ch$18,771,76121,891,333 million (approximately U.S.$39,15136,118.9 million), before deducting allowances for loan losses;

 

total deposits of Ch$15,083,92116,655,619 million (approximately U.S.$31,46027,480.4 million), of which Ch$5,470,9716,934,373 million (approximately U.S.$11,41011,441.2 million) correspond to current account and demand deposits;

 

equity (including net income,non-controlling interest and provisions for minimum dividends) of Ch$2,355,4622,910,975 million (approximately U.S.$4,9134,802.9 million);

 

net income of Ch$478,121595,519 million (approximately U.S.$997982.6 million); and

 

market capitalization of approximately Ch$6,944,9626,702,547 million (approximately U.S.$14,48511,058.67 million).

As of December 31, 2012,2014, we had 14,58114,803 employees and delivered financial products and services through a nationwide distribution network of 434429 branches, and 1,915 ATMs1,460 Automatic Teller Machines (ATMs) that are part of a larger ATM network operated by Redbanc S.A. (a company owned by us and 11 other privately owned banks) that comprises 6,765consists of 8,029 ATMs.

History

We were founded in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, which created the largest privately heldowned bank in Chile. We have played an important role in the economic history of Chile. Before the creation of the Central Bank in 1926 and prior to the enactment of the General Banking Law, we were the main stabilization agent of the Chilean banking system, a role that is now performed by the Chilean Central Bank. Beginning in the early 1970s, the Chilean Government assumed control of a majority of Chilean banks, and all but one of the foreign banks that were operating at that time closed their branches and offices within the country. Throughout this era, we remained as aprivately-owned bank, with the exception of a portion of our shares owned by the Chilean Government that were sold to private investors in 1975. Throughout our history we have developed awell-recognized brand name in Chile and expanded our operations in foreign markets, where we developed an extensive network of correspondent banks. In the early twentieth century, we established a representative office in London, which we maintained until 1985, when our operations in Europe were moved to Frankfurt. The office in Frankfurt was closed in 2000, when our foreign operations were centralized at the New York branch. In 1987 and 1988, we established four subsidiaries to provide a full range of specialized financial products and services as permitted by the General Banking Law. In 1999, we widened our scope of specialized financial services by creating our insurance brokerage and factoring subsidiaries. According to our estimates, we remained the largest private bank in Chile until 1996. During the early 2000s, the Chilean banking

industry witnessed intense merger and acquisition activity. In 2002, we merged with Banco de A. Edwards, which allowed us to expand our business to new customer segments. In 2008, we sold our U.S. branchesbranch to Citigroup in connection with our merger with Citibank Chile that was carried out during the same year. As a result of these consolidations, we currently operate a distribution network that is composed of three brand names, namely, “Banco de Chile” (which operates throughout Chile), “BancoEdwards-Citi” (which is primarily oriented to higher income segments) and “Banco CrediChile” (which is focused on consumer loans and sightdemand accounts for lower and middle income segments). In 2012, we became the market leader in net income and the most profitable bank (the highest return on average equity and average capital and reserves) within the Chilean banking industry, according to information released by the Superintendency of Banks.SBIF. Similarly, among our peers we were the bank with the best credit quality indicators in terms ofpast-due loans (90 days or more), provisions for loan losses over average loans and coverage of past-due loans coverage. In terms of business,(loans 90 days or more past-due). Also, during 2012 we endorsedmaintained our leadership in mutual funds management and current accounts for individuals, while our investment banking subsidiary maintained the market leading position in corporate bond placements within the local market, according to information available at the Chilean Association of

Mutual Funds, the Superintendency of BanksSBIF and the Superintendency of Securities and Insurance,SVS, respectively. In terms of funding diversification, in 2012 we accessed newimproved our access to foreign debt markets by placing senior bonds in Hong Kong and Peru for a total aggregate amount of approximately U.S.$193 million. Similarly, we established a commercial paper program in the U.S. market of U.S.$1,000 million.

In addition, during 20122013, we undertookcontinued to enhance our competitive advantages. As a capital increase of approximately Ch$250 billion (approximately U.S.$521 million) backedresult, we completed a very successful year by leading the industry in operating revenues—for the first time in our recent history—and net income, according to information published by the issuanceSBIF. These achievements enabled us to remain the most profitable bank in Chile in terms of approximately 3.9 million new seriesreturn on average equity and average assets. Our leading position in net income was also a consequence of shares, labeled Banco de Chile-T series. This series hasour market leading performance in expenses, which allowed us to reach the same rights as any Banco de Chile shares, withlowest efficiency ratio in the exception that it will not allow its holderslocal industry, according to receive dividendsinformation published by the SBIF. Also, in order to maintain a convenient and fully paid-in shares, with chargewell diversified liability structure, we have continued to our net distributable earnings,seek alternative financing opportunities, especially overseas. In this regard, during 2013 we carried out four placements in Switzerland for the fiscal year 2012. Nevertheless, once those dividends and fully paid-in shares are distributed and paid, all of the Banco de Chile-T shares will automatically convert into Banco de Chile shares. We have successfully completed this equity offering by placing thea total amount of sharesapproximately U.S.$785 million. Also, we established a U.S.$2,000 million medium term notes program (the “MTN Program”) in Luxembourg. Under this program we issued medium term notes in Hong Kong and Japan for approximately U.S.$168 million and U.S.$167 million, respectively.

In 2014, growth in the Chilean economy decreased, which in turn affected investment and the growth of commercial loans during the first two quarters of the year and private consumption by the end of the year. Amid this slowdown, we took advantage of our competitive strengths and continued to optimize ourrisk-return relationship by keeping our credit risk under control and developing innovative commercial strategies. As a result, we remained at the top of the industry in terms of net income generation and return on average equity, according to information published by the SBIF as of December 31, 2014. In order to achieve these goals, we improved customer experience by launchingcutting-edge mobile banking solutions and applyingworld-class business intelligence methodologies. Furthermore, we continued to diversify our funding structure by issuing long term bonds in Switzerland, Japan and Hong Kong, while taking advantage of our U.S.$ Commercial Paper program to raiseshort-term funds. Lastly, we recorded a 15.9% annual expansion in current accounts and demand deposit(year-end balances) that enabled us to rank first in these liabilities within the local banking industry, according to information released by the SBIF as of December 31, 2014. These figures were initially offered.reflected by the interest of investors in Banco de Chile’s stock, which recorded an 86.5% annual increase in trading volumes (excluding the effect of the LQIF secondary offering), the highest increase among all publicly listed Chilean banks.

Merger with Banco de A. Edwards

On December 6, 2001, our shareholders approved our merger with Banco de A. Edwards, which became effective on January 1, 2002. Banco de A. Edwards had been listed on the NYSE since 1995, and in January 2002, we were listed on the NYSE under the symbol BCH. Since 2002, our shares have also been traded on the Latin American Stock Exchange of the Madrid Stock Exchange (“Latibex”), and the London Stock Exchange (“LSE”). We concluded the merger process with the consolidation of a new corporate structure and the integration of our technological platforms. As for Latibex, on October 18, 2013, we voluntarily delisted our trading units from that market.

Merger with Citibank Chile

On December 27, 2007, our shareholders approved our merger with Citibank Chile, which became effective on January 1, 2008. During 2008, we integrated Citibank Chile’s technological platforms with ours and established a new organizational structure in order to satisfy the needs of our customers and to achieve important synergies. We concluded the merger process with the integration of Corporación Financiera Atlas S.A. (Citibank Chile’s consumer division) into our consumer division (CrediChile), which allowed us to nearly double our customer base and market share in consumer finance.

Our partnership with Citigroup Inc., an internationallywell-known brand name, enabled us to broaden the scope of financial services that we offer to our customers through the addition of global financial services and other benefits. As a result of this partnership, we entered into a global connectivity agreement (the “Globalthe Global Connectivity Agreement”),Agreement, which has supported the creation of (i) an international personal banking unit, responsible for optimizing access to financial services outside Chile to our local retail customers, (ii) a global transactional services unit, responsible for executing local and international cash management services, as well as custody and foreign trade assistance, to our wholesale customers, and (iii) an enhanced investment banking unit, responsible for providing financial advisory services and access to global capital markets to our Chilean corporate customers.

Technological Projects

During 2010, our efforts were focused on upgrading internal processes and services, implementing new information technology systems and starting to develop new mid-term strategic IT programs. By December 31, 2010, we had optimized and reduced the response time of different operating processes and achieved important improvements in our internal processes and services, such as: (i) availability of electronic distribution channels; (ii) availability of additional services through the Internet; and (iii) reduction of our operating systems’ starting time. In addition, during 2010 we also implemented several IT projects, including: (i) a new telephone-based service system for our Large Companies and Real Estate Division intended to reduce the rate of unanswered calls; (ii) a system that integrated current accounts from Citibank Chile into our system; and (iii) a number of online systems that allow a credit risk pre-evaluation and online credit simulation through our website. During 2010 we also prioritized the start-up of our data processing center and the upgrade of our contingency site.

In 2011, our technological projects aimed to support the development of new products and services, improve the efficiency and productivity of our internal systems and processes, reinforce our technological infrastructure and minimize our operational risks. Thus, the main projects developed throughout 2011 were: (i) the implementation of new websites and a phone-based sales platform, in addition to the launch of “Banca Móvil”

(mobile solutions for tablets and smartphones) for our retail banking segment; (ii) the development of operational and technological processes required to release the “Banco de Chile | Entel” credit card; (iii) the release of a new platform for options trading; (iv) a new system of financial evaluation for companies that supports the tasks carried out by our Corporate Risk Management Division; and (v) the setup of a new data center.

Throughout 2012, our IT priorities were focused on improving operating efficiency through diverse projects intended to enhance internal processes in quality and timing, as well as reinforcing security in transactional services. Our main IT projects in 2012 included: (i) the automation of product application forms for small and medium sized companies, (ii) implementation of a new online platform for current accounts, (iii) approval of individuals’ and SMEs’ operations through scanned documentation,(iv) time-improving procedures for foreign exchange operations, (v) new systems for managing and trading derivatives, and (vi) the implementation of a new platform for financial planning. For security matters, we implementedworld-class security software that is intended to avoid fraud in electronic money transfers. Similarly, we implemented improved ATMs shield procedures.

Therefore,During 2013, we focused on ensuring the stability of our IT systems and implementing improvements to key processes in order to provide our customers with better service quality. Accordingly, the main IT projects undertaken in 2013 had to do with: (i) upgrading ourInternet-based array of services, in order to significantly improve the availability of our Internet platforms for personal and corporate banking, (ii) setting up a security device (chip) in credit cards that should enable us to reduce the rate of fraud in this business and maintain ourindustry-leading position in these matters, (iii) improving the uptime of ATMs, (iv) enhancingproduct-related platforms for factoring, insurance, time and demand deposits, and (v) strengtheningcredit-assessment and granting by implementing the final stages of a new system of financial evaluation for companies and optimizing required documentation for lending.

In 2014, we devoted our efforts to developing technological solutions to provide our customers with better services while improving the performance of our primary systems and operating processes. In relation to IT innovations for customers, during 2014 we developed and released a bundle of mobile applications for smartphones called MiBanco|MiPago|MiBeneficio. These applications enable our customers to carry out diverse banking and payment transactions directly from their mobile phones. As for the performance of IT systems, throughout 2014 we improved our operating systems that support credit card transactions and electronic money transfers. We also completed the first stage of our accounting control system and replaced some of our existing credit cards with new ones that include a microchip for enhanced security. In addition, in relation to the optimization of our main operating processes, we focused on reducing the potential for manualdata-entry mistakes, which represents an important source of our operational risk.

Through these efforts we have maintained our commitment ofto anticipating and minimizing cybersecurity risks, as mentioned in “Item 3. Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry” and “Item 3. Risk Factors—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.”

The1982-1983 Economic Crisis and the Central Bank Subordinated Debt

During the1982-1983 economic crisis, the Chilean banking system experienced significant instability that required the Central Bank and the Chilean Government to provide assistance to most Chilean private sector banks, including us. During this period, we experienced significant financial difficulties. In 1985 and 1986, we increased our capital and sold shares representing 88% of our capital to more than 30,000 new shareholders. As a result, no single shareholder held a controlling stake in the Bank. In 1987, the Superintendency of BanksSBIF returned complete control and administration of the Bank to our shareholders and our Board of Directors by ending our provisional administration based on our successful capital increases as required by Law 18,401.

Subsequent to the crisis, like most major Chilean banks, we sold certain of ournon-performing loans to the Central Bank at face value on terms that included a repurchase obligation. The repurchase obligation was later exchanged for subordinated debt of each participating bank issued in favor of the Central Bank. In 1989, pursuant to Law No. 18,818, banks were permitted to repurchase the portfolio ofnon-performing loans for a price equal to the economic value of such loans, provided that the bankbanks assume a subordinated obligation equal to the difference between the face and economic value of such loans. In November 1989, we repurchased our portfolio ofnon-performing loans from the Central Bank and assumed the Central Bank’s subordinated debt related to ournon-performing loans.

The original repayment terms of our Central Bank subordinated debt, which at December 31, 1989 equaled approximately Ch$1,427,8451,531,390 million (in real terms)terms as of December 31, 2014), required that a certain percentage of our income before provisions for the subordinated debt be applied to repay this obligation. The Central Bank subordinated debt did not have a fixed maturity, and payments were made only to the extent that we earned income before provisions for the subordinated debt. In 1993 we applied 72.9% of our income before provisions to repay the Central Bank subordinated debt. In 1994 we applied 67.6%, and in 1995 we applied 65.8% of our income before provisions to repay the Central Bank subordinated debt.

In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which we were converted into a holding company namedSM-Chile. In turn,SM-Chile organized a newwholly-owned banking subsidiary named Banco de Chile, to which the former contributed all of its assets and liabilities, other than the Central Bank subordinated debt, to the latter. In addition,SM-Chile created SAOS, a secondwholly-owned subsidiary that, pursuant to a prior agreement with the Central Bank, assumed a new repayment obligation in favor of the Central Bank that replaced the Central Bank subordinated debt in its entirety.

This Central Bank debt, for which SAOS is solely responsible and for which there is no recourse to us orSM-Chile, was equal to the unpaid principal of the Central Bank subordinated debt that it replaced but had terms that differed in some aspects, such as the rescheduling of the debt for a term of 40 years providing for equal annual installments and a pledge of our shares as collateral for such debt. The Central Bank debt bears interest at a rate of 5.0% per year and isUF-denominated.

In exchange for assuming the Central Bank debt, SAOS received fromSM-Chile 63.6% of our shares as collateral. Although shares held by SAOS as collateral have economic rights that belong to the Chilean Central Bank, their voting rights are exercised bySM-Chile’s shareholders. As a result of our merger with Banco de A. Edwards, the percentage of our shares held by SAOS decreased to 42.0%. Subsequently, as of December 31, 2014 the percentage of our shares held by SAOS declined to 30.21%, as a result of theof: (i) capital increases agreed upon in theto an Extraordinary Shareholders’ Meetings held in May 2007.2007, January 2011 and October 2012, the share(ii) stock dividends paid in May 2006, May 2007, June 2009, MarchApril 2011, MarchJune 2012, May 2013, and March 2013, as well as theJuly 2014, and (iii) our merger with Citibank Chile in January 2008, the percentage of our shares held by SAOS further decreased to 32.5%. 2008.

Dividends received from us are the sole source of SAOS’s revenues, to be applied by legal mandate to repay its debt to the Central Bank of Chile. SAOS does not have any other material debt, as it is a special purpose legal entity created by Law 19,396 whose only business is to own Banco de Chile shares and repay the obligation to the Central Bank of Chile. However, under SAOS’s agreement with the Central Bank, we have no obligation to distribute dividends to our shareholders. To the extent distributed dividends are not sufficient to pay the amount due on its debt;debt, SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If the cumulative deficit balance exceeds an amount equal to 20% of our paid-inpaid in capital and reserves, the Central Bank may require SAOS to sell a sufficient number of shares of our stock to pay the entire accumulated deficit amount. As of March 31, 2013,2015, SAOS maintained a surplus with the Central Bank of

Ch$275,702484,560 million, equivalent to 13.4%19.2% of our paid-inpaid in capital and reserves as of the same date. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Banking Industry—Our affiliate may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends”.

As of December 31, 2012,2014, the outstanding subordinated debt balance held by SAOS amounted towas Ch$754,322565,552 million (including accrued interests)interest). SAOS paid to the Central Bank a total of Ch$97,973 million during 2009, Ch$101,972 million during 2010, Ch$131,530 million during 2011 and Ch$124,342 million in 2012, Ch$151,560 million in 2013 and Ch$145,123 million in 2014, exceeding in each of thesethose years the required minimum annual payment.

As of December 31, 2012,2014, the major shareholder ofSM-Chile was LQ Inversiones Financieras S.A. (a subsidiary of Quiñenco S.A.), which owned, directly and indirectly, 58.2% ofSM-Chile’s total shares. As of the same date, our major shareholders were SAOS LQ Inversiones Financieras S.A., SAOS andSM-Chile, each having a direct participation of 33.1%30.2%, 31.8%25.7% and 13.5%12.8% in our total common stock, respectively. On January 31, 2014, LQ Inversiones Financieras S.A. (our major shareholder) closed the sale of 6,700,000,000 shares of Banco de Chile through a public secondary offering, which resulted in a 7.20% decrease of their ownership interest in Banco de Chile. Accordingly, as of April 17, 2015, LQ Inversiones Financieras S.A. directly owned 25.71% of our shares and held, directly and indirectly, 51.17% of the voting rights in Banco de Chile.

If from time to time in the future our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth and to distribute stock dividends, the Central Bank may require us to pay the portion of the net income corresponding to shares owned by SAOS in cash to SAOS. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months. The shareholders ofSM-Chile will have a right of first refusal with respect to that sale.

Capital Expenditures

The following table sets forth our capital expenditures in each of the three years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

   For the Year Ended December 31, 
   2010   2011   2012 
   (in millions of Ch$) 

Computer equipment

  Ch$7,922    Ch$8,797    Ch$7,750  

Furniture, machinery and installations

   8,658     9,425     8,949  

Real estate

   5,387     3,481     337  

Vehicles

   362     370     945  
  

 

 

   

 

 

   

 

 

 

Subtotal

   22,329     22,073     17,981  

Software

   15,326     9,597     9,116  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$37,655    Ch$31,670    Ch$27,097  
  

 

 

   

 

 

   

 

 

 

  For the Year Ended December 31, 
  2012  2013  2014 
  (in millions of Ch$) 

BANK’S INTERNAL REPORTING POLICIES:

   

Computer equipment

 Ch$7,750   Ch$7,509   Ch$22,776  

Furniture, machinery and installations

  8,949    4,303    8,292  

Real estate

  337    62    —    

Vehicles

  945    375    445  
 

 

 

  

 

 

  

 

 

 

Subtotal

  17,981    12,249    31,513  

Software

  9,116    5,511    5,382  
 

 

 

  

 

 

  

 

 

 

Total

 Ch$ 27,097   Ch$ 17,760   Ch$ 36,895  
 

 

 

  

 

 

  

 

 

 

Our budget for capital expenditures for 20132015 is Ch$46,203 million, 64.8% of which is related to57,729 million. Of this amount, expenditures in information technology expenditures and 35.2% of which is associated withinvestments represent 63.7%, while infrastructure projects.projects represent the remaining 36.3%. The budget for capital expenditures is in line with our strategic priorities of improving our efficiency and reinforcing our proximity to our customers, particularly in our retail banking segment, through physical as well as non-physicalremote contact channels. These capital expenditures arewill be principally financed by our capitalcash on hand andlong-term debt financing.

Among the budgeted expenditures for information technology, 33.8%36.6% corresponds to new and ongoing IT projects under development intended to provide us with business solutions as well as productivity improvements, 30.8%15.2% is related to maintenancecritical projects involved in ourmid-term IT plan, while the remaining 48.2% consists of investment in technological equipment and upgrades to our main infrastructure, 26.7% is for projects related to the expansion and security reinforcementimprovements or renewal of our ATM network, and the remaining amount relates to technological renewal and the development of diverse projects for supporting commercial and back office activities.ATMs nationwide network.

Our 20122015 budget for infrastructure expenditures includes disbursements associated with new branches, as well as the renovation and restoration of our main building, implementation and relocation of some of our existing commercial branches and general maintenance and renewal investments.

BUSINESS OVERVIEW

Our Competitive Strengths

Building on our knowledge of the Chilean financial market, we have historically been able to develop significant competitive advantages based on our strong brand recognition, our widespread branch network, the diversity and relative size of our customer base, our highly competitive funding structure, the superior asset quality of our loan portfolio as compared to our peers in Chile, an attractiverisk-return relationship and our market leadership in a diverse range of financial products and services.

Our main competitive advantagesstrengths are:

Brand Recognition and Strong Corporate Image

We have been operatingoperated in the Chilean financial industry for 119121 years under the “Banco de Chile” brand name. In order to provide our customers with differentiatedspecialized value offerings and a wider range of financial products and services, we have also developed the “Banco Edwards|Citi”, “Banco CrediChile” and “Banchile” brand names. We believe our long-standinglong standing history in the Chilean market is recognized by our customers and the general public, who associate us with quality, reliability and social responsibility within the Chilean financial industry, as demonstrated in various polls conducted bywell-known market research companies. According to market research conducted by Adimark GFK (part of the GFK Group), during 20122014 we remained the most recognized brand among financial institutions operating in Chile. Also, in 2012,2014, Merco (a corporate reputation monitor headquartered in Spain) ranked Banco de Chile as the market leader in corporate reputation within the Chilean banking industry and the third-ranked companyfor all companies operating in Chile. We believe that our long history in the Chilean banking industry is a key element that differentiates us from our competitors.

Additionally, we believe that our merger with Citibank Chile reinforced our corporate image as a leading financial institution within Chile and allowed us to gain recognition among customers and investors all over the world.

We also believe that our strong corporate image is further strengthened by our commitment to social responsibility, which includes supporting the Teleton Foundation (anon-governmental organization dedicated to assisting and treating disabled Chilean disabled children), our partnership with institutions dedicated to improving the quality of Chilean education, our participation in campaigns intended to improve the quality of life of needy people, our commitment to the development of sports in Chile by supporting the national soccer team and disabled athletes, and our environmental pledge that has led us to implement policies to conserve energy and forestry resources, saving policies, as well as other initiatives intended to strengthen our role in, and contribution to Chilean society.

Business Scale and Leading Market Position

We are one of the largest financial institutions in Chile and have becomea market leadersleader in a broad range of financial products and services within the Chilean financial system, as depictedlisted in the following table:

 

   As of December 31, 20122014 
   Market Share  Market Position 

Commercial Loans(1)

   19.018.0  1st  

Individuals’Average Balances of Total Demand Deposits and Current Accounts BalancesAccount(1)

   31.023.51st

Current Accounts Balances held by Individuals

28.9  1st  

Mutual Funds (Assets under management)Under Management)

   23.222.5  1st  

Net Fees and Commissions Income

   24.219.5  1st  

Net Income for the Period(1)

   29.023.8  1st  

 

Source: Superintendency of BanksSBIF and Chilean Association of Mutual Funds.

 

(1)Excluding operations of subsidiaries abroad.

We have traditionally been recognized as a financial institution withhad a strong presence in the wholesale segment able to establish by maintaininglong-term relationships with the major local and multinational companies that operate in Chile. We have been able to maintain this leading position by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to further successfully serve

our customers’ needs. We have also added value to our service offerings by including treasury products for hedging purposes, which is also supplemented bytogether with investment banking, insurance brokerage and other specialized financial services.services provided by our subsidiaries.

In addition, in the recent years we have been focused on further penetrating the retail banking segmentbusiness through diverse value offerings intended to cover all of the populationspopulation and enterprise segmentsenterprises we target. Therefore, over the last fivein recent years we have prioritized expanding our loan growth in residential mortgage loansportfolio and payment channels,our presence in transactional services such as credit cards, current accounts and demand accounts, as we believe they are appropriate vehicleseffective means to buildlong-term relationships and customer loyalty, while increasingcross-selling opportunities. As a result, through our Commercial Division (Individual and SME Banking)Banking Unit), we lead the market in services offered to high-incomehigh income individuals for whom we have developed an attractive and complete portfolio of financial services, including a full range of wealth management services through someone of our subsidiaries. Also, our Consumer Finance Division (Banco CrediChile) has become one of the largest providers of consumer loans among the Chilean banks’ consumer divisions, based on comprehensive service offerings for low-low and middle-incomemiddle income individuals. This has been recently supplemented by the implementation of business solutions for low-scalelow scale entrepreneurs and individual customers in periphery districts. This broad variety of services has also enabled us to lead the Chilean market in terms of income from fees and commissions.

We believe our financial strength, prestige and brand recognition among Chilean customers have allowed us to become the market leader in terms of current account balances within the Chilean financial system, especially among individuals, who have demonstrated their preference for our services. Our position was further consolidated in the financial downturn that started in 2009,2008, when we benefited from a “flight-to-quality”“flight-to-quality” effect as investors were seeking a reliable institution in which to keep their funds.

RobustBroad Customer Base and Nationwide Distribution Network

We believe that we have one of the largest customer bases among financial institutions in Chile. We have been able to expand our customer base by implementing attractive and tailored value offerings based on continuously improving segmentation. As of December 31, 2012,2014, we had approximately 1,807,0002,858,000 customers, including:including approximately 1,121,0001,164,000 borrowers, nearly 670,000roughly 721,000 current accounts customers,holders, nearly 124,000 time deposit holders, approximately 181,000 time deposits, about 409,000377,000 saving accountsaccount holders and approximately 1,530,000 issued1,496,000 credit cards. Over the last three years,card holders. In 2014, we introduced modifications to our definition of “customer.” Thus, our customer base has expanded at a compound average growth rate (“CAGR”) of 5.9%. In line with our strategic priorities and the characteristicsis composed of the target segments we serve, our retail banking customer base (individualssum of individuals and SMEs) has expanded by 6.0% (3-year CAGR) that compares tocompanies holding at least one or a combination of the 3.9% (3-year CAGR) recorded in our wholesale banking segment.following products: a loan, a current account, a credit card or a demand account.

We believe that our robustbroad customer base is both an essential driver of our business and a valuable asset that enables us tocross-sell our products and services.

In order to better serve our customers, we are present in all regions of Chile and strive to be accessible to every Chilean customer through our broadlarge branch network as well asnon-physical contact channels. As of December 31, 2012,2014, we had a nationwide branch network of 434429 branches, one of the largest within the Chilean banking industry,second-largest in Chile amongnon-governmental banks, according to information published by the Superintendency of Banks.SBIF. This network comprised 239is composed of 254 branches under our “Banco de Chile” brand name, 39 branches under our “Banco Edwards|Citi” brand name and 156136 branches under our “Banco CrediChile” brand name. We believe that our broad branch network enables us to develop close relationships with our customers and therefore we are constantly assessing new branch locations throughout Chile.

In addition, to improve our customer service, we are constantly reviewing the appearance and layout of our branches. OurWe aim is to turn each of our branches into a business generating unit. As a result, we have redesignedrevised andre-designed our service models in most of ourcredit-lending units in order to maximize branch profitability and enable ouron-site account executives to focus on serving customers and developing new businesses rather than focusing on administrative tasks, which have been mostly transferred to centralizedback-office staff.

We have also supplementedenhanced our branch network withnon-physical remote channels, such as ATMs,Internet-based online platforms and internet-based online platforms.mobile banking applications. As of December 31, 20122014, we had 1,9151,460 ATMs throughout Chile and our Mobile Banking application for tablets and smartphones was the highest ranked in our local industry, according to a survey conducted by TBI Unit (a business intelligence company headquartered in Argentina) and was downloaded more than 165,000 times during 2012.Chile.

Diversified Value Offering of Financial Products and Services

In response to the diverse needs of our customers, we have become afull-service financial groupcompany that operates under amulti-brand approach, offering a wide range of traditional banking products and services to our customers that are supplemented by the specialized financial services provided by our subsidiaries, including:

 

securities brokerage,

 

mutual funds management,

 

securitization,

 

factoring,

financial advisory,

 

insurance brokerage,

 

collection services,

credit pre-evaluation services, and

 

credit-assessmenttrade services.

In addition, our strategic alliance, with Citigroup Inc. and ourbacked by a Global Connectivity Agreement havewith Citigroup Inc., has allowed us to broaden our service offerings by adding a comprehensive portfolio of international financial services that previously we could only partially provide.

All of the above is supplemented by tailored service models that aim to be as tailored as possible, based on continuously improving segmentation methodologies that look for differentiated customersthe needs of consumers across all of our segments and sub-segments.markets.

Competitive Funding Structure

We believe that we have a cost-effectivecost effective and highly competitive funding structure based on our leading market position in current accounts and demand deposits, especially among individuals. According to the Superintendency of Banks,SBIF, as of December 31, 2012,2014, we held 31.0%a market share of 28.9% in individuals’ current account balances, which placed us at the top ofranking first within the Chilean financial industry in this regard.banking industry. As of that same date and according to information published by the SBIF, the total balance of ournon-interest bearing current accounts and demand deposits represented 24.7%25.1% of our total funding structure, as compared to the 16.7%17.5% reported by the Chilean financial system as a whole, (excludingexcluding Banco de Chile).Chile.

Accordingly, we believe that ourOur funding structure provides us with a funding cost advantage over many of our competitors (which use a higher proportion of interest bearing liabilities), as current accounts and demand deposits are the cheapest funding source available in Chile, since they arenon-interest bearing. Also, due to our high international credit rating we have one of the lowest costs of funding from liabilities associated with interest bearing liabilities.deposits and long-term debt, among the seven largest banks in Chile.

We are also constantly striving to diversify our funding. In that effort, during 2012liability structure in order to maintain a competitive cost of funding and improve our liquidity. During 2014 we successfully placed approximately U.S.$1,300completedtwo long-term debt placements in Switzerland for a total amount of Ch$174,530 million in senior (approximately U.S.$1,250288 million). Under a medium term notes program that we registered with the Luxembourg Stock Exchange in 2013, we issued approximately Ch$66,742 million (around U.S.$110 million) of medium term notes in Japan and subordinated bondsCh$43,044 million (around U.S.$71 million) of medium term notes in Hong Kong. Also, we continued to use our Commercial Paper Program in the United States by issuing approximately Ch$1,090,340 million (nearly U.S.$1,799 million). As of December 31, 2014 we had a balance of roughly Ch$378,806 million (approximately U.S.$50625 million) withinof outstanding commercial paper. Lastly, during 2014, we were very active in the local market. We were able to access new foreign debt markets like Peru (U.S.$.29 million)market and Hong Kong (U.S.issuedlong-term bonds for a total amount of Ch$451,966 million (approximately U.S.$164746 million). Similarly, we established a commercial paper program in the U.S. market of U.S.$1,000 million.

Superior Asset Quality

We believe we are one of the Chilean financial institutions with the highest credit quality and the healthiest loan portfolio in Chile. We believe this asset quality is the result of our well-knownwell known prudent risk management approach and our accurate credit risk models that are constantly improvingcontinuously being updated and have enabled us to maintain relatively low levels of total past-due loans (90 days or more) and high coverage indicators over the last few years.

According to the Superintendency of Banks,SBIF, as of December 31, 2012,2014, we had a delinquency ratio (total past-due(past-due loans (90 days or more) as a percentage of total loans) of 1.0%1.25%, which iswas well below the delinquency ratio of 2.4%2.32% reported by

the Chilean financial systembanking industry (excluding Banco de Chile and operations of subsidiaries abroad)Chile) as of the same date. Additionally, we maintain one of the highest coverage ratioratios (allowances for loan losses to totalover past-due loans)loans (90 days or more)) in the Chilean financial system,banking industry, which as of December 31, 20122014 was equal to 2.4 times as compared to 0.9 times for the Chilean financial system (excluding Banco de Chile and operations of subsidiaries abroad).1.9 times.

Our Business Strategy

VisionPurpose

We aspire to be the best bank for our customers, the best place to work, the best investment for our shareholders and the bank with the strongest commitmentare a company that contributes to the community.”

Throughout our history, we have aspired to be the leading bank in the Chilean financial system. This vision involves alleconomic development of the diverse stakeholders related to our businesscountry by generating favorable conditions for the development of individuals and is shared and internalized by all areas across our organization, senior management and the board of directors.

Among the main stakeholdersenterprises, providing them with financial solutions that we strive to satisfy are:

Our customersfit their needs.’

Our aim is to gain substantial knowledge of our customers in order to align our value offerings to their needs, requirements and aspirations in order to build long-term relationships.

In addition, our brand recognition, corporate reputation and market leadership within the local financial industry represent important competitive advantages that we must capitalize on, preserve and improve by providing our customers with innovative and tailored value offerings.

Our employees

We are convinced that our human resources are one of our core competitive advantages, given our team’s commitment, dedication and distinctive identity within the financial system.

We also believe that promoting a better work environment is key to providing exceptional customer service. For this reason, we focus on creating effective communication channels and developing a meritocratic culture by rewarding our staff’s talents and achievements.

Our shareholders

We maintain our shareholders’ trust by engaging in projects and businesses intended to maximize the company’s long-term value, while being prudent with regards to business-related risks.

Also, through commercial strategies that combine enhanced service quality and higher returns, we have been able to add significant value for our shareholders. This approach—which we expect to maintain—distinguishes us within the Chilean financial system.

Our community

We believe that our business actions and financial performance depend on our community involvement. As a result, we strive to continuously reinforce our commitment to the community by carrying out diverse social impact initiatives.

Thus, we are committed to entrepreneurship, the integration of disabled people, high-quality education and environmental protection.

Mission

To beWe are a leading financial institution across all segments, providing first-classandglobally-connected corporation with a prestigious business tradition. We provide excellent financial services with innovativeto each type of customer by offering creative, fast and effective solutions for each segment, and ensuring that fitwe add value for our customers’ needs’.customers, shareholders, employees and community as a whole.’

To accomplish this mission, we believe it is essential to attain industry leadership in all businesses and financial areas in which we operate, namely, profitability, efficiency, business scale, customer base, human resources development and corporate social responsibility.

Also, thisThis mission also requires initiatives intended to achieve comprehensive excellence in management, with customer satisfaction as our major goal. This requires relying on the bestWe use high industry standards in information technology, business models and quality, standards within the industry, all of which is summarized by the value creation cycle below:

 

LOGOLOGO

Vision

‘We aspire to be, in all things we do, the best bank for our customers, the best place to work and the best investment for our shareholders. In order to accomplish this vision, we are committed to the development of our employees and the community as a whole.’

Throughout our history, we have aspired to be a leading bank in the Chilean financial system. This vision involves and commits us to all of the diverse stakeholders related to our business, namely, customers, employees, investors and the community. Our vision is shared and internalized by all areas across the corporation, senior management and the board of directors and constitutes the basis for our strategic objectives.

Commitments

We aim to satisfy the expectations of diverse stakeholders by:

Our Customers

Offering innovative andtop-quality banking products and financial services.

Providing customers with excellent service based on customized relationships and a proactive attitude.

Ensuring the availability and stability of physical andnon-physical service channels.

Maintaining trusted relationships in order to be our customers’ main bank.

Our Employees

Providing employees with career opportunities based on merit.

Promoting a respectful and friendly work environment.

Offering competitive compensation and economic benefits.

Supplying adequate technological tools and infrastructure.

Our Community

Improving quality of life and managing adversity.

Strengthening the quality of education in Chile.

Promoting entrepreneurship.

Protecting the environment.

Building strong relationships with suppliers.

Our Shareholders

Leading the industry in net income generation and profitability.

Maintaining a strong market position in terms of business volume.

Fostering operating efficiency and productivity.

Developing a prudent approach to risk management.

Strategic FocusesPriorities

Ourlong-term strategy is to maintain and enhanceprofitable growth by enhancing our market-leading position as a leadingwithin the Chilean financial institution in Chileindustry by providing a broad range of financial products and services to corporations and individuals nationwide. As part of this strategy, we have developed amulti-brand approach to target different market segments. We intend to leverage our strongly positioned brand names “Banco de Chile”, “Banco Edwards|Citi” and “Banco CrediChile” in traditional banking, which are supplemented by specialized financial services (such as securities brokerage services, mutual funds management, securitization services, factoring services, financial advisory services and insurance brokerage services) provided by our subsidiaries that operate under the “Banchile” brand name.

Since the performance of our business depends on many factors, we cannot assure you that we will be able to implement our strategies successfully or that we will be able to reach our strategic goals. For a discussion of certain risks applicable to our operations, industry and country we operate in, see “Item 3. Key Information—Risk Factors.”

Our long-term strategy is based on the following key goals:“Risk Factors”.

Maintain Profitable Growth

Our business model is focused on those lines of business that add significant economic value to our shareholders, have appropriate levels of risk and allow us to strengthenlong-term relationships with our customers. We seek sustained growth, particularly inhigher-margin segments and business areas that show strong growth potential. Accordingly, in recent years we have reoriented our business focus towards the retail, large companies and treasury segments, in which we aim to achieve the same prominent position that we have obtained in the corporate segment. Thus, we strive to:

 

Lead the Retail Banking Business

Lead the Retail Banking Segment

In our retail banking segment, our aim is to lead the market by creatingproviding differentiated and comprehensive value offerings based on a deep and continuously improving segmentation that permits us to engage in profitable andhigh-growth potential business opportunities. Thus, we expect to expand our business and customer base by developing tailored service models, enlarging our branch network, enhancing our presence in the Smallsmall and Medium Companies segmentmedium companies market and reinforcing certain lending products that should enable us to consolidatelong-term relationships with our upper andmiddle-income individual customers, especially through payment channels usage (such as credit cards), installment loans and residential mortgage loans.

Similarly, we aspire to targetlower-income individuals and microbusinesses by promotingpayroll-deduction lending and attracting customers previously unattached to any bank through a basic array of services, as well as providing commercial credit.

To supplementFollowing the trend of the past several years, in 2014 we prioritized growth in middle and upper income segments in personal banking because we recognized potential risks for low income individuals due to the slowdown observed in the local economy over the last two years. For this strategy, in 2011reason, we launched our new “Banca Móvil”, a mobile banking solution for our retail banking customers available for tablets and smartphones. During 2012, the application was downloaded more than 165,000 times and was the highest ranked in Chile, as reported by TBI unit (aimplemented diverse business intelligence monitor company). Also, we continue to reinforce strategic lending products such us our residential mortgage business, where we gained 82 bp market share during 2012,tools and our credit card business, by increasing the penetrationcommercial methodologies in targeted segments by adding 28 bp market share in credit card purchases.

During 2012 we expanded our financial services2014 in order to achieve a more accurate segmentation of our customer base and develop tailored offers to meet the needs of middle and higher income individuals. Thus, among less risky individuals, we promoted growth in transactional services, especially credit cards, which enabled us to increase bankingloan related balances by 13.8% on an annual basis. Similarly, installment loans increased by 10.3% for middle and upper income individuals while mortgage loans recorded an overall 14.7% increase among these customers.

Notwithstanding the above, we continued to expand the array of financial services in the populationthat we provide to lower income individuals and enterprisesmicrobusinesses, segments that have not been fully penetrated. As part of these efforts, we implementedpenetrated by banks yet. In this regard, the ‘Caja Chile’ project that‘CajaChile’ network—which provides lower income customers with a suite of basic financial services through a transactional platform located in local convenience stores that enter into commercial agreementsstores— finished 2014 with us. As of December 31, 2012, we had a network of more than 1,0002,600 convenience stores that were added toparticipating in its network. Similarly, our unit of ‘Microbusinesses Banking’ strengthened during 2014 and ended the project. Similarly,year with an annual expansion of approximately 18.0% in order to offer more specialized solutions to a wide range of micro businesses in Chile, we created ‘Microentreprises Banking’ that operates within our Consumer Division. As of December 31, 2012 we had implemented 40 platforms of this banking segment and had added more than 7,500 customers.total loans.

This strategy intendsThese initiatives are intended to take advantage of the retail banking segment’s growth potential. Even though Chile’s per capita GDP has tripled over the last 2025 years, banking penetration in the Chilean economy is still below comparable countries, particularly within the low-low and middle-incomemiddle income population segments and with respect to certain banking products such as residential mortgage loans. Thus, weWe believe we can grow further growin this segment since, according to the Superintendency of Banks,SBIF, as of December 31, 2012,2014, we had a 22.0% market share in consumer loans and a 17.2%17.1% market share in residential mortgage loans which are 2.2% and 4.4%a 20.9% market share in consumer loans, both below the market leader, respectively. Duestake held by the market leader. As for consumer loans, due to our effective commercial strategies during 2012 we were ablefocusing on middle and upper income segments, the gap

between us and the market leader decreased from 3.7% as of December 31, 2013 to substantially reduce3.6% as of December 31, 2014 . With respect to residential mortgage loans, however, the gap between us and the market leader increased from 3.6% as of December 31, 2013 to 3.8% as of December 31, 2014. This increase is aligned with our prudent approach torisk-taking. Given the boost observed in both products. Priorthe housing market over the last five years, during 2014 we tightened the entire credit process, from admission to 2012,collection, and imposed stricter conditions to granting mortgage loans in order to maintain a balanced risk return relationship.

Despite our efforts to increase market penetration of Retail Banking, especially in lending products, we believe that the gap was 3.3%fierce competition in consumer loansthe banking industry compels us to innovate in terms of new products and 6.9%services to diversify our revenue sources. Accordingly, we have strived to build comprehensive value offerings for our retail segment, prioritizing fee based income. As a result, our consolidated income from fees and other services has become an important source of revenue for us, reaching Ch$287,093 million (or 19.4% of our total operating revenues) in residential mortgage loans.2013 and Ch$272,188 million (or 16.4% of our total operating revenues) for the year ended December 31, 2014. We aim to generate increasing amounts of fees and commission revenue by developing innovative products and services and reinforcingcross-selling, in spite of a complex regulatory environment.

 

Lead the Wholesale Banking Business

Enhance the Wholesale Banking Segment

In our wholesale banking segment (large(which targets companies and corporations)with annual sales over Ch$1,600 million), we aim to maintain our leading market position in terms of loans, and focus on achievingas well as achieve higher profitability in a market that is characterized by improvinglow margins. We intend to accomplish these goals by increasing our value offerings in order to increase cross-sell. Thus, wecross-selling ofnon-lending products and services through various initiatives. We are focused on:on improving our offering of cash management services, enhancing ourinternet-based services, increasing the penetration of products designed by our Treasury,treasury and money market operations segment, enhancing our presence in certain lending products such as leasing and factoring and promoting international businesses by taking advantage of the commercial synergies related to both our merger with Citibank Chile (such as the Global Connectivity Agreement with Citigroup) and the specialized financial services offered by our subsidiaries, such as securities brokerage, mutual funds management and financial advisory.advisory in order to appropriately meet the needs of certain niches within this business segment.

We believe that we have already achieved significant improvements in these matters. AccordingAs a result, according to our management information system, we have increased our cross-sellcross selling indicator ofnon-lending revenues to lending revenues from 1.331.3 times in 2009 to 1.961.7 times in 2012. As a resultas of the previously mentioned initiatives, weDecember 31, 2014. We expect to keepcontinue enhancing ourcross-sell strategy and the wholesale segment’s profitability.

In addition to our traditional lending activities, we have developed supplemental financial services indicators in order to diversifyoptimize the profitability of the wholesale banking segment. This achievement took place together with the growth managed in our revenue sourcesLarge Companies and continueReal Estate Division (annual turnover between Ch$1,600 and Ch$70,000 million), with average balance of total loans increasing by 8.1% on an annual basis. This was the result of an aggressive plan intended to grow profitably, such as foreign exchange derivative transactionsenhance the closeness with the customer through a dual model of service that includes severalon-site visits by account officers and fee-based products and services. As a result, our consolidated income from fees and other services has become an important and stable source of revenue, reaching Ch$308,773 million (or 24.5% of our total operating revenues) in 2011 and Ch$307,257 million (or 22.9% of our total operating revenues) in 2012. credit risk analysts.

We aim to continue increasing our net fees and commissions income by developing new products and services and by reinforcing cross-sell in the retail and wholesale segments.

During 2012 we promotedalso promote diverse services such as leasing, factoring and cash management. As formanagement in this segment. Based on this view, we remained one of the leaders in these markets in 2014, ranked second in both factoring and leasing based on specific commercial initiatives we added 1,200 customers, which represented a 13.7% annual increaseservices with market shares of 20.7% and translated into a year-end balance20.6%, respectively (including operations of Ch$1,275 billion. Similarly, our factoring services continue to gain market presence by innovating wider value propositions for our customers, while we are constantly strengthening our Global Transactional Services by enhancing our offer ofsubsidiaries abroad). Regarding cash management services. This translated into an 8.0% annual rise inservices, during 2014 we increased volumes related to collection and payment servicesagreements by approximately 14.4% and approximately 103,0002.3%, respectively.

Also, in our effort to offertailor-made solutions and recognize the needs of different customer segments, during 2013 we defined a new sight accounts. group of customers called “Family Office”. This group includes companies that manage investments and trusts for a single family that we aim to target through a comprehensive model of service, including the interaction between our Wholesale Banking Segment and our subsidiary Banchile Inversiones. During 2014, we focused on penetrating thissub-segment. Accordingly, we developed and implementedrelationship-building strategies for customers andnon-customers belonging to this segment, which involvedon-site visits and new means to stay in contact with these individuals. As a result, we were able to significantly increase our presence in this market during 2014 by expanding average balances of loans and deposits granted to and received from this segment by 40% and 15%, respectively.

In our treasury and money market operations segment, we intend to take advantage of our specialized knowledge in order to increase the penetration of widely-used products in our current customer base while offering innovative products to potential clients.

Also, we continuously seek newer and more convenient funding choices, locally and internationally, in order to support our long term business strategy by promoting an adequate diversification of our funding structure.

Improve Service Quality

We are also constantly looking for profitable business opportunities with potential partners,convinced that in a highly competitive industry such as the Chilean banking system, acustomer-centric focus is critical to generating loyalty and creatinglong-term, profitable relationships. We believe that our mergerhigh service quality is a competitive strength that differentiates us from competitors and supports our long term strategy by responding to the preferences of our current and potential customers. Accordingly, we strive to continuously improve our relationships with Citibank Chile. Incustomers by developing commercial strategies aligned with their needs, as well as improving our response time and customer satisfaction indicators.

Consistent with this regard,view, during 2014 we sought to design and develop a project intended to significantly improve our customers’ experiences. This project encompasses a renewed strategy to approach the Global Connectivity Agreementcustomer, based on an internationally-renowned methodology that seeks to enhance our commitment to service quality. Although this project involves several stages, the main aspects we tackled in 2014 were associated with: (i) defining the involvement of the front and back-office units that mainly impact the customer experience, (ii) carrying out workshops of collective creation with Citigroup enabled uscustomers in order to assistevaluate their needs, (iii) understanding the emotional response of customers to our brand names ‘Banco de Chile’, ‘Banco Edwards|Citi’ and ‘Banco Credichile’, (iv) identifying the most important moments for customers in their relationship with the Bank, and (v) prioritizing a bundle of initiatives intended to improve customer experience in significant off-shore transactions during 2012, especiallythe mid-term.

Also, this project involves diverse communications activities across the Bank in international bond placements.order to promote a corporate culture focused on service quality and customer experience optimization while enhancing the commitment of our employees to customer satisfaction.

ImprovePromote Operating Efficiency

We believe that operating efficiency is a key competitive advantage within a highly competitive market such asthat we have to maintain in order to grow profitably. Accordingly, our strategy for efficiency intends to achieve the Chilean financial system. As a result, we strive to increase our efficiency levels by increasinghighest productivity and reducing costs.the tightest cost control. We believe these elements will be increasingly important in our efforts to maintain high profitability ratios in a changing business environment that is under increasing regulatory focus. To achieve this goal,accomplish these goals, we have invested in information technology and the development of simpler, more manageable, secure and modern business processes and platforms to attain faster response times and higher productivity. We also continue to enhance our strategic development capabilities, increase our business scale, develop economies of scope by incorporating new financially related businesses, reinforce the productivity of our branch network, enhance our remote transactional channels, improve our credit processes, develop a higher level of automation in our internal processes and consolidate our cost control policy and monitoring procedures.

In the last three years,2012, 2013 and 2014, we have invested a total of approximately Ch$58,30058,100 million (approximately Ch$23,20016,900 million, Ch$18,40013,000 million and Ch$16,70028,200 million in 2010, 20112012, 2013 and 2012,2014, respectively) in information technology, mainly in software and hardware, as we believe this is one of the best ways to improve our service quality and operating efficiency.efficiency while properly fitting customers’ needs, which are increasingly linked to IT services. Similarly, we are continuously developing and optimizing internal processes intendedin order to reduce and keep our expenses under control.

In 2012, we focusedWe continue to focus on improving operating efficiency through diverse projects intended to enhanceimprove the quality and responsiveness of internal operating processes, in quality and timing,such as well as reinforcing security in transactional services. Whereas the former was executed through increasingincreased automation ofback-office matters and the implementation of new IT platforms for financial planning, controlling and commercial tasks, the latter will enable ustasks. We also seek to improve security in transactional services to reduce operational risks, in the future, based on the setup of usinganti-fraud security softwaressoftware for electronic transfers and other security measures for avoidingto avoid attacks toon our ATMs network.network of ATMs.

As a result of these initiatives, our efficiency ratio, measured as consolidated operating expenses over consolidated operating revenues, has maintained suitable levels over the last three years. During 2010, 20112012, 2013 and 2012,2014, our consolidated operating expenses represented respectively 46.7%efficiency ratio was 46.3%, 48.7%41.9% and 47.3%43.8%, respectively. Based on information published by the SBIF, under Chilean GAAP, as of our consolidated operating revenues, which favorably compare toDecember 31, 2014 we had the industry average.

We believe that we still have room to improve oursecond lowest efficiency ratio in the coming years by enhancinglocal banking industry.

Enhance our Social Reputation

We believe that improving our social reputation is crucial to meet our strategic development capabilities, increasing our business scale (generating economiesgoals in the midst of scale), developing economies of scope by incorporating new financially related businesses, reinforcing the productivity of our branch network, enhancing our remote transactional channels, improving our credit processes, developing a higher level of automationsocietal changes in our internal processesChile and reinforcing our cost controls and monitoring procedures.

Achieve Superior Service Quality

We are convinced that in a highly competitive industry, such as the Chilean banking system, a key element of competition is a customer-based focus,worldwide, so we aim to create improved mechanisms in order to generate loyalty and long-term relationships. To achieve this goal, we strive to continuously improve our relationshipbuild positive connections with our customerscommunities. Therefore, we have undertaken a wide range of initiatives intended to encourage active participation in different areas of society. This view is shared by developing commercial strategies aligned with their needs,the Bank and its employees, who support the development of Chile through diverse methods such as wellpromoting social progress, contributing to environmental protection, decreasing extreme poverty, providinghigh-quality education to needy people, assisting disabled young people, fostering cultural development and embracing campaigns intended to overcome the effects of specific adverse events such as improving our time response and customer satisfaction indicators.natural disasters.

ConsistentIn line with this view, in 2009during 2014 we created a new area responsiblecontinued to support different social endeavors by collaborating with “Desafío Levantemos Chile”, which is an initiative intended to promote entrepreneurship throughout Chile and especially within lower income segments. In 2014, we maintained our support for assessing andthe School of Entrepreneurs network that has permitted the training of severalmicro-entrepreneurs, thereby improving the quality of life for their families. In addition, we have maintained our services.commitment to disabled people by supporting Teleton Foundation, assisting disabled children and disabled athletes and artists. During 2014 our country faced dramatic natural disasters, such as an earthquake in the northern region and devastating fire in Valparaiso. Aligned with our social commitment to face adversity, we participated, along with “Desafío Levantemos Chile”, in fundraising campaigns while directly assisting affected people by providing working tools and equipment to restore their productive capacity and income sources. Similarly, we continued to support needy people by contributing to improve quality of education across lower income segments through Astoreca Foundation. In this regard, a new school managed by this foundation was opened in 2014. This area has set new policies and projects to achieve the highest service quality standards within the Chilean banking industry. The area is composed of work teams of employees from different areas of the Bank, whoeducational center will be attended by 1,200 children. Finally, we are also committed to develop and promotecancer patients through a high-quality culture in the Bank.

During 2012 our attention was focused on: (i) ensuring the operational performance and availability of contact channels, services and systems, (ii) automating operational procedurespartnership with a focus on minimizing errors

public hospital and a local university, in order to improve the quality and quantity of treatments received by these patients.

and hand-made tasks, (iii) redesigning critical processes that have an impact on customer satisfaction by improving availability, training, homogeneity and time response for each segment or contact channel, (iv) redesigning the requirement and complaint attention process by applying a customer-oriented vision (timing and quality), (v) expediting credit–approval processes and (vi) developing specialized solutions and enhancing the use of remote attention platforms for wholesale banking customers.

We expect to continue benchmarking our competitors’ service performance and incorporate best practices from other markets, industries and countries.

Promote Excellence inAlignment of Human Resources Managementand Culture

We believe human resources are a key element to achieveof ourlong-term goals. In order to consolidate profitable growth, achieve high standards of service quality, attain operating efficiency and achieve high service quality standardsbuild an excellent corporate reputation over the long term,run, we believe it is essential tomust have a motivated and highly-qualifiedhighly qualified workforce that is aligned withcommitted to our corporate goals.values, including ethical conduct, responsibility, integrity, prudence, justice, loyalty and respect.

Accordingly, we strive to develop a staff committed to both excellence and our corporate values by establishing a distinctive culture among our employees andby promoting: (i) a clear focus on the customer, (ii) confidence and responsibility, (iii) leadership (iii) meritocracy and high performance,empowerment, (iv) collaboration and teamwork (v) accountability and empowerment and (vi)(v) innovation and continuous improvement.

We also seek to remain as one of the most respected employers in Chile. For this reason, in the past we carried out a comprehensive talent inventory review in order to suitably identify our staff’s skills and define the correct policies in order to optimize the management of our human resources. During 2012 we undertookhave recently undertaken diverse projects and initiatives intended to reinforce these topics by emphasizing the excellence in selectionemphasize our commitment to recruiting and recruitment processes, which translated intoretaining excellent employees, including a new platform that manages the internal mobility of our talents.employees. Also, we have improved theour competence evaluation methodology intended to detectidentify remarkable performanceemployees and enhance thetheir career development of our staff.development. As for training activities, we have continued to focus on generating leadership capabilities through diverse programs. We believe these initiatives are aligned with our strategy and the professional development that our team aspires to achieve.

During 2014, we continued strengthening the connection with our employees in order to align corporate values and goals with their career development and personal goals. In line with this view, our Human Resources Division worked on three main pillars: (i) Being the Best Bank, (ii) Performance Excellence, and (iii) Banco de Chile’s Way. In relation to “Being the Best Bank”, we focused on enhancing the recruitment and selection processes while improving the experience of new and current employees in the use of benefits. Similarly, the division was focused on reinforcing performance excellence across the corporation by putting several training programs into practice, while determining and promoting the potential of current collaborators to lead the Bank in the future. Finally, concerning the third pillar, “Banco de Chile’s Way”, the divisions strived to spread and foster the commitment of employees to our corporate values in order to make them part ofthe day-to-day processes and activities of the bank’s employees.

Ownership Structure(1)

The following diagram shows our ownership structure as of April 15, 2013:17, 2015:

 

LOGOLOGO

 

(1)The ownership structure diagram only reflects share ownership and it does not represent voting rights. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders”Shareholders.”

Principal Business Activities

We are afull-service financial institution that provides, directly and indirectly through our subsidiaries and affiliates, a wide variety of lending andnon-lending products and services to all segments of the Chilean financial market. Accordingly, for management purposes we organize our operations in the following four business segments:

 

LOGOLOGO

The information related to our business segments presented in this section has been prepared in accordance with our internal reporting policies. See “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2010, 20112012, 2013 and 2012—2014—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2010, 20112012, 2013 and 2012—2014—Summary of Differences between Internal Reporting Policies and IFRS” for a description of the most significant differences between our internal reporting policies and IFRS.

The following table sets forth information on the composition of our loan portfolio and our consolidated income before income tax in accordance with our internal reporting policies for the year ended December 31, 2012,2014, allocated among our principal business segments:

 

  Total Loans Income before
Income Tax(1)
   Total Loans Income before
Income Tax(1)
 
  For the Year Ended December 31, 2012   For the Year Ended December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Retail market

  Ch$9,457,468     50.4 Ch$254,209    Ch$11,722,981     53.6 Ch$284,379  

Wholesale market

   8,812,726     47.0    196,660     10,142,486     46.4    289,752  

Treasury and money market operations

   —       —      22,387     —       —      42,441  

Operations through subsidiaries

   491,571     2.6    46,545     11,181     —      34,036  

Other (Adjustments and Eliminations)

   —       —      —       —       —      —    
  

 

   

 

  

 

   

 

   

 

  

 

 

Total

  Ch$18,761,765     100.0 Ch$519,801    Ch$21,876,648     100.0 Ch$650,608  
  

 

   

 

  

 

   

 

   

 

  

 

 

 

(1)This net income breakdown is used for internal reporting and planning purposes and it is based on, among other things, our estimated funding cost and direct and indirect cost allocations. This breakdown may differ in some extents from breakdowns of our operating income for financial reporting and regulatory purposes. Separate information on the operations, assets and income of our financial services subsidiaries and affiliates is provided below under “—Operations through Subsidiaries.”

The following table sets forth our consolidated operating revenues in accordance with our internal reporting policies, allocated among our principal business segments:segments, for the years indicated:

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2010 2011 2012   2012   2013   2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$)   (in millions of Ch$) 

Retail market

  Ch$672,527   Ch$773,814   Ch$860,058    Ch$842,088    Ch$923,222    Ch$1,002,133  

Wholesale market

   281,058    281,994    321,004     338,406     403,063     480,051  

Treasury and money market operations

   77,723    31,432    32,590     32,735     16,307     47,051  

Operations through subsidiaries

��  150,312    148,670    142,524     122,698     126,576     134,964  

Other (adjustments and eliminations)

   (12,838  (12,128  (14,137   (13,873)   (13,143   (17,797
  

 

  

 

  

 

   

 

   

 

   

 

 

Total Operating Revenues

  Ch$1,168,782   Ch$1,223,782   Ch$1,342,039    Ch$1,322,054    Ch$1,456,025    Ch$1,646,402  
  

 

  

 

  

 

   

 

   

 

   

 

 

The following table sets forth a geographic market breakdown of our operating revenues in accordance with our internal reporting policies for the years indicated:

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2010 2011 2012   2012   2013   2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$)   (in millions of Ch$) 

Chile

  Ch$1,181,530   Ch$1,235,817   Ch$1,356,111    Ch$1,335,862    Ch$1,469,110   Ch$1,664,185  

Banking operations

   1,031,308    1,087,240    1,213,652     1,213,229     1,342,592     1,529,235  

Operations through subsidiaries

   150,222    148,577    142,459     122,633     126,518     134,950  

Foreign operations

   90    93    65     65     58     14  

Operations through subsidiaries

   90    93    65     65     58     14  

Other (adjustments and eliminations)

   (12,838  (12,128  (14,137   (13,873   (13,143   (17,797
  

 

  

 

  

 

   

 

   

 

   

 

 

Total Operating Revenues

  Ch$1,168,782   Ch$1,223,782   Ch$1,342,039    Ch$1,322,054    Ch$1,456,025    Ch$1,646,402  
  

 

  

 

  

 

   

 

   

 

   

 

 

Retail MarketBanking Segment

Our retail banking segment serves the financial needs of individuals and small and medium-sizedmedium sized companies through our branch network. As of December 31, 2012,30, 2014, we had a total of 434293 branches of which 278 operatedthat operate under our “Banco de Chile” and “Banco Edwards Edwards|Citi” brand names while 156 operated under ourand 136 branches that operate within the “Banco CrediChile” brand name.

network. As of December 31, 2012,2014, loans granted by our retail banking segment amounted to Ch$11,722,981 million and represented 50.4%53.6% of our total loans and accounted for Ch$254,209 millionas of our income before income tax for the year ended December 31, 2012.same date.

In terms of composition, as set forth in the following table, as of December 31, 20122014 our retail banking segment’s loan portfolio was principally focused on residential mortgage loans, which represented 44.3%46.2% of the segment’s loan book. The remaining loans were distributed between consumer (29.8%(28.5%) and commercial loans (25.9%(25.3%).

 

  As of December 31, 2012   As of December 31, 2014 
  (in millions of Ch$, except
percentages)
   (in millions of Ch$, except
percentages)
 
BANK’S INTERNAL REPORTING POLICIES:                

Commercial loans

  Ch$2,449,136     25.9  Ch$2,969,933     25.3

Residential mortgage loans

   4,190,210     44.3     5,410,778     46.2  

Consumer loans

   2,818,122     29.8     3,342,270     28.5  
  

 

   

 

   

 

   

 

 

Total

  Ch$9,457,468     100.0  Ch$11,722,981     100.0
  

 

   

 

   

 

   

 

 

We serve the retail market through two different and specialized divisions: (i) the Commercial Division (Individual(particularly the Individual and SME Banking)Banking Unit) and (ii) the Consumer Finance Division (or Banco CrediChile).

Commercial Division (IndividualIndividual and SME Banking)Banking Unit—Commercial Division

The Commercial Division (IndividualIndividual and SME Banking)Banking Unit is responsible for offering financial services to individuals with monthly incomes over Ch$500,000 (or Ch$6.0 million per year) and to small and medium-sized

medium sized companies with annual sales of up to approximately Ch$1,600 million. This division manages the portion of our branch network that operates under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 278293 branches as of December 31, 2012.2014.

The strategy followed by the Commercial Division (IndividualIndividual and SME Banking)Banking Unit is mainly focused on sub-segmentation, multi-brandsub segmentation, multi brand positioning, cross-sellcross sell of lending andnon-lending products and service quality based on customized service models for specific customer needs. LoyaltyAlso, loyalty programs have been increasingly incorporated into our commercial targets for each sub-segmentsub segment and they have enabled us to increase the use of our credit cards and our commission–basedfee-based income. In addition, the division’s operations count on the support of specialized call centers, mobile and internetInternet banking services, along with a wide range of management tools that allow us to measure returns, the performance of cross-soldcross sold products and the effectiveness of marketing campaigns.

During 2012, we continued2014, the Individual and SME Banking Unit was focused on developing new commercial strategies and marketing tools to promote the use of non-physical or remote channels by consolidating our “Banca Móvil” (mobile banking) application, an internet-based solution that allowsprovide our customers with better service while improving productivity and profitability. In this regard, the unit carried out a comprehensive revision of pricing procedures by implementingworld-class business intelligence tools. This initiative permitted us to makerecord historical levels of Internet loan sales of approximately Ch$270,000 million, which represents a twofold increase over the amount recorded in 2013. Furthermore, this business unit was in charge of launching a new mobile banking solution named MiBanco|MiPago|MiBeneficio. These mobile applicators permit our retail customers to execute banking transactions such as electronic money transfers, access account balances and make cash advances from their tablets and smartphones. In 2012, this application was ranked highest in Chile by a study conducted by TBI Unit. As of December 31, 2012 the application was downloaded approximately 165,000 times and was used by roughly 145,000 customers.credit cards to current accounts, among other services.

As of December 31, 2012,2014, the Commercial Division (IndividualIndividual and SME Banking)Banking Unit served 833,6591,097,113 individual customers (hereafter “customer” should be understood as the sum of individuals orand companies that holdholding at least one or a combination of the following products: a loan, a current account, a credit card or a sightdemand account) and 69,930110,574 small and medium-sizedmedium sized Chilean companies. This customer base resulted jointly in total loans granted to 662,104738,110 borrowers, which includes 91,548included 104,268 residential mortgage loans debtors, 86,36592,411 commercial loan debtors, 362,306377,763 utilized lines of credit 318,444and 335,433 installment loans and 1,037,467 credit card accounts.loans. As of the same date, the division held 668,739719,527 current accounts, 153,238144,565 savings accounts and 160,031223,558 time deposits.

As of December 31, 2012,2014, loans granted by our Commercial Division (Individualthe Individual and SME Banking)Banking Unit were Ch$10,904,496 million, which represented 46.3%49.8% and 93.0% of our total loans and 91.8% of loans granted by our retail market segment.segment, respectively, as a whole. The following table sets forth the composition of the division’sunit’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2012:2014:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except
percentages)
   

(in millions of Ch$, except

percentages)

 

Commercial Loans

    

Commercial loans

    

Commercial credits

  Ch$2,070,091     23.8  Ch$2,401,689    22.0

Leasing contracts

   249,916     2.9     324,520    3.0  

Other loans

   118,354     1.4     215,576     2.0  

Total Commercial Loans

   2,438,361     28.1     2,941,785     27.0  

Residential Mortgage Loans

   4,128,128     47.5     5,334,500     48.9  

Consumer Loans

        

Installment loans

   1,275,712     14.7     1,554,617     14.2  

Credit cards

   600,153     6.9     802,385     7.4  

Lines of credit and other loans

   243,524     2.8     271,209     2.5  

Total Consumer Loans

   2,119,389     24.4     2,628,211     24.1  
  

 

   

 

   

 

   

 

 

Total

  Ch$8,685,878     100.0  Ch$10,904,496     100.0
  

 

   

 

   

 

   

 

 

We offer a variety of financial services to individuals and small andmedium-sized companies, directly through the division or indirectly through our subsidiaries, such as current accounts, automatic bill payment, debit cards, credit cards, revolving credit lines, residential mortgage loans, consumer loans, commercial loans, mortgage loans for general purposes, leasing agreements, factoring services, mutual funds management and stock brokerage, support in foreign trade transactions, collection services, payments and collections, insurance brokerage (which includes life and casualty insurance), savings instruments and foreign currency services.

Installment Loans

Our consumer installment loans are generally incurred, up to a customer’s approved credit limit, to afford the goods or services purchases, such as cars, travels and household furnishings. Consumer loans may be denominated in both pesos and UF, bear fixed or variable interest rates and are generally repayable in installments over a period of up to 36 months.

As of December 31, 2012,2014, we had Ch$1,275,7121,554,617 million in installment loans granted by our Commercial Division (IndividualIndividual and SME Banking),Banking Unit, which accounted for 45.3%46.5% of the retail market business segment’s consumer loans. Most of these installment loans are denominated in Chilean pesos and are payable monthly.

Residential Mortgage Loans

As of December 31, 2012,2014, we had outstanding residential mortgage loans of Ch$4,198,6675,418,623 million, which represented 22.4%24.8% of our total loans. According to information published by the Superintendency of Banks,SBIF, as of December 31, 2012,2014, we were Chile’s second largest privately owned bank in terms of mortgage loans, accounting for approximately 21.6%17.1% of mortgage loans granted by the Chilean privately owned banks,banking industry, excluding loans granted by Banco del Estado, a government-owned bank, andoperations of banks’ subsidiaries that operate abroad.

Our residential mortgage loans are generally denominated in UF and have maturities that range betweenranging from five andto thirty years. As of December 31, 2012,2014, the average residual maturity of our residential mortgage loan portfolio was 17.217.1 years. Originally, we funded our residential mortgage loans through the issuance of mortgage finance bonds, which are recourse obligations only to us with payment terms that are matched to the residential loans. Also, the mortgage finance bonds bear real market interest rates plus a fixed spread over the variable rate of the UF, which permits us to reduce our exposure to interest rate fluctuations and inflation. Chilean banking regulations allow us to finance up to 100% of a residential mortgage loan with mortgage finance bonds, based on the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after-taxafter tax monthly income, when the customer belongs to the low-incomelow income population segment. However, that limit may be adjusted for the middle and high-incomehigh income population segments.

Over the last decade, we have also promoted the expansion ofMutuos Hipotecarios, a mortgage-lendingmortgage lending product, which is not financed by mortgage finance bonds, but instead through our general funds.Mutuos Hipotecarios allow customers to finance up to 100% of the purchase price or the appraised value of the property, whichever is lower, instead of the 75% that a standard mortgage would allow. As of December 31, 2012,2014, our residential mortgage loan portfolio was principally composed ofMutuos Hipotecarios, as customers have preferred them due to their flexibility and simplicity (for instance the interest rate is known in advance by the customer)customer, which is not the case of mortgage finance bonds that are traded in the secondary market and, therefore, subject to discounts), as they permit financing of up to 100% of the property’sproperties purchase price and are easier to prepay.

The following table sets forth the composition of our residential mortgage loan portfolio by product type:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except
percentages)
   (in millions of Ch$, except
percentages)
 

Secured Residential Mortgage Loans(1)

        

Loans financed with Mortgage Bonds

  Ch$109,215     2.6  Ch$70,104     1.3

Mutuos Hipotecarios

   4,089,452     97.4     5,348,519     98.7  
  

 

   

 

   

 

   

 

 

Total Secured Residential Mortgage Loans

  Ch$4,198,667     100.0  Ch$5,418,623     100.0
  

 

   

 

   

 

   

 

 

 

(1)CorrespondCorresponds to the Bank’s total secured residential mortgage loans and not only those associated with the Commercial Division (IndividualIndividual and SME Banking).Banking Unit of the Commercial Division.

As shown above, as of December 31, 20122014 residential mortgage loans financed with Mortgage Bondsrelated toMutuos Hipotecarios represented 2.6%98.7% of our total residential mortgage loan portfolio, while the remaining 97.4%1.3% corresponded to mortgage loans financed withMutuos HipotecariosMortgage

Bonds. As of the same date, loans financed with Mortgage Bonds had an average origination period of 12 years (the period from the date when the loans were granted) and 28.4% of these loans were granted by CrediChile. Conversely, as of December 31, 2012 theMutuos Hipotecarios portfolio had an average origination period of 3.54.2 years (the period from the date when the loans were granted to the specified date) and just 0.9%1.1% of these loans were granted by CrediChile. Conversely, as of December 31, 2014 loans financed withMortgage Bonds had an average origination period of 13.9 years (the period from the date when the loans were granted) and 26.0% of these loans were granted by CrediChile. In terms of credit risk, in 2012,2014, loans related toMutuos Hipotecarios, as well as those financed withMortgage Bonds, as well asMutuos Hipotecarios,had low gross (before recoveries) credit risk ratios of 0.62%0.17% and 0.10%0.26%, respectively. The difference between both ratios is explained by the previously mentioned factors and also by the Bank’s stricter requirements to grantMutuos Hipotecarios that may finance up to 100% of the property’s purchase price.. It is important to mention

that the residential mortgage loan portfolio financed withMortgage Bonds is annually decreasing in amount and as a proportion of the total residential mortgage loan portfolio, since currently customers preferMutuos Hipotecarios. Accordingly, the portfolio of residential mortgage loans financed withMortgage Bonds is expected to have increasing gross credit risk ratios over time until its expiration, because the proportionportion ofnon-performing loans becomes higher as long as responsible borrowers terminate their liability with the bank.

RegardingMortgage Bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of the Mortgage Bond obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, in the ordinary course of business, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

For those loans that finance a higher portion of the property appraised value, we demand that customers comply with stricter requirements, which are verified during the credit assessment stage. These requirements are related to: (i) the history of the relationship between the Bank and the customer (new or current client), (ii) credit risk scores, (iii) monthly income, (iv) type of job (employed orself-employed), and (v) years employed. In order to illustrate the above mentioned, the table below sets forth an example of requirements for residential mortgage loans that finance up to 90% and more than 90% of the property value, with a common term and granted to employed as well asself-employed new customers.

 

Credit–granting requirementsRequirements

(in millions of Ch$, except percentages)

New Clients

  Requirements
(in millions of Ch$, except  percentages)

Loan / Property value

  £ 90%  > 90%

Employed

    

• Years employed

  ³> 1 year  ³> 2 years

• Monthly Income

  ³> Ch$0.40.5  ³> Ch$0.851.0

Self-Employed

    

• Years Employed(1)

  ³> 2 years  ³> 3 years

• Monthly Income

  ³> Ch$0.5  ³> Ch$1.2

 

(1)In the case ofself-employed clients, years employed refers to the minimum period of time in which the customer has been filing annual tax declarations with the Chilean Internal Revenue Service.

During 2012, 46.8%2014, 27.8% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2012,2014, loans financing between 75% and 90% of the property appraised value represented 27.3%41.5% of these loans, loans financing between 50% and 75% of the property value represented 17.3%24.1% of these loans, and loans financing less than 50% of the property value represented 8.6%6.7% of these loans. It is important to mention that during 2014 we continued tightening our credit granting policy for residential mortgage loans by restricting the loan financing limit as a percentage of the property’s value. This explains the decrease in the share of residential mortgage loans that financed between 90% and 100% of the property value from 46.8% in 2012 to 33.4% in 2013 and 27.8% in 2014.

An additional feature of our mortgage loans is that mortgaged property typically secures all of the mortgagor’s credit with us, including installment loans and due balances associated with credit cards and credit lines. Our total amount of loans secured by real estate guarantees, their loan-to-valueloan to value (LTV) ratio and their relative share in our total loan portfolio, as of December 31, 2012,2014, are depicted in the table below:

 

  As of December 31, 2012   As of December 31, 2014 
  Outstanding
Balance
   LTV(2)(3) % of Bank’s
Total Loans
   Outstanding
Balance
   LTV(2)(3) % of Bank’s
Total Loans
 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Secured Loans(1)

          

Residential Mortgage Loans

  Ch$4,198,667     63.6  22.4  Ch$5,418,623     70.5  24.8

Other than mortgage loans

   491,422     20.5    2.6     642,597     28.3    2.9  
  

 

   

 

  

 

   

 

   

 

  

 

 

Total Secured Loans

  Ch$4,690,089     71.1  25.0  Ch$6,061,220     78.8  27.7
  

 

   

 

  

 

   

 

   

 

  

 

 

 

(1)CorrespondCorresponds to the Bank’s total secured loans and not only those associated with the Commercial Division (IndividualIndividual and SME Banking).Banking Unit of the Commercial Division
(2)Unless otherwise indicated, LTV ratio is computed as the amount of secured loans divided by the value of their associated collateral.
(3)Forother-than-mortgage loans, the LTV ratio is computed as the amount of the excess guarantee (after deductions) of the balance of the associated residential mortgage loans, as those guarantees are initially established in order to secure the residential mortgage loan.

The LTV ratios provided above are based on estimated property values that we update monthly with the collateral valuation models managed by our Corporate Risk Division. These models determine a rate of depreciation that provides an updated collateral value, based on variables such as geographic location, last appraisal date, type of property and type of customer. Accordingly, the LTV ratios set forth above take into account the most recent available data regarding collateral values.

In addition, the following table sets forth the composition of theother-than-mortgage loans secured by real estate guarantees:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  

(in millions of Ch$,

except percentages)

   (in millions of Ch$,
except percentages)
 

Secured Other-than-Mortgage Loans(1)

        

Consumer Loans

  Ch$327,953     66.7  Ch$415,698     64.7

Credit Lines

   47,366     9.7     57,619     9.0  

Credit Cards

   116,103     23.6     169,280     26.3  
  

 

   

 

   

 

   

 

 

Total Secured Other-than-Mortgage Loans

  Ch$491,422     100.0  Ch$642,597     100.0
  

 

   

 

   

 

   

 

 

 

(1)CorrespondCorresponds to the Bank’s total securedOther-than-Mortgage Loans and not only those associated with the Commercial Division (Individual and SME Banking).

Unlike in other countries, in addition to the specific legal rights afforded by the mortgage loan (including foreclosure rights), the Bank may collect the pending balance of the mortgage loan over other assets of the mortgage debtor based on certain legal liens provided by law (derecho de prenda general). Regarding the foreclosure processes, as permitted by Chilean regulations we maywrite-off secured loans (such as residential mortgage loans) the earlier of 48 months from the date the loans become overdue and once we have made all efforts for recovering the past due loanpast-due loans without success. This applies to residential mortgage loans financed with mortgage finance bonds as well as forMutuos Hipotecarios. Our foreclosure processes comply with the procedures specified by Chilean regulation. However, as we strive to continuously improve our collection processes, we have achieved average terms of 30 months for foreclosures associated with residential mortgage loans.

As for our historical loss rates, we periodically review our collateral pricing models by adjusting the parameters that support them, such as appreciation and depreciation rates, as well as updated recovery and loss rates, based on historical and empirical data. Thus, we normally revise our collateral pricing models by incorporating updated information fromre-appraised assets or foreclosure processes that have been completed by the Bank in the past.

In addition, the valuation of guarantees is based on a prudent approach, which aims to anticipate and cover unexpected reductions in their market price as a result of changes in market variables, such as an unforeseen slowdown in the global or local economy, lack of liquidity of real estate assets or decrease in real salaries. Accordingly, our collateral pricing models depreciate the value of the guarantee regarding the market value determined by an independent appraiser. This approach has allowed us to minimize the loss rates, as the value obtained from auctions (if foreclosure applies) generally exceeds the value assigned to the asset as guarantee.

Credit Cards

As of December 31, 2012,2014, we issued both individual and corporate Visa, MasterCard and Diners Club credit cards. In addition to traditional credit cards, our portfolio also includesco-branded cards. As of December 31, 2014 we had four cobranding agreements for our credit cards, (e.g.namely “Travel Club”, “Travel Club,“Global Pass”, “Advantage” and “Entel.“Global Pass,”Credit cards issued under these cobranding agreements supplemented the credit cards that we issued under the brand names Banco de Chile, Banco Edwards|Citi and “Advantage,” among others), and 61Banco CrediChile. As of the same date, we had 32 affinity card groups, most of which were associated with ourco-branded programs.

Two of our affiliates, Transbank S.A. and Nexus S.A., provide us with merchant acquisition and credit card processing services. As of December 31, 2012,2014, Transbank S.A. had twelve shareholders and Nexus S.A. had seven shareholders, all of which were banks. As of the same date, our equity ownership in Transbank S.A. was 26.226.2% and our equity ownership in Nexus S.A. was 25.8%.

As of December 31, 2012, the division2014, we had 1,037,4671,496,301 valid credit card accounts, with 1,203,2261,674,690 credit cards issued to individuals and small and medium-sizedmedium sized companies. Total charges on our credit cards during 20122014 amounted to Ch$2,121,6742,987,114 million, with Ch$1,768,9922,455,734 million corresponding to purchases and service payments in Chile and abroad and Ch$352,682531,380 million corresponding to cash advanceswithdrawals both within Chile and abroad. These amounts of purchases and withdrawals (which do not include charges associated with credit cards issued by CrediChile) accounted for 26.5%25.4% of the total charge volume of banks’ credit cards issued in Chile in 2012,2014, according to statistics provided by Transbank S.A.

As of December 31, 2012,2014, our credit card loans to individuals and small and medium-sizedmedium sized companies amounted to Ch$600,153802,385 million and represented 21.3%24.0% of our retail market business segment’s consumer loans.

We believe that the Chilean market for credit cards has a high growth potential, especially among lower-lower and middle-incomemiddle income customer segments, as the average merchant fees should continue to decline due to increasing competition from other banks that operate in Chile, as well as large department stores and othernon-banking competitors that are involved in the issuance of credit cards. As a result, in 2010 we created a new Credit and Debit Card Area, which is responsible for developingstrive to develop customized commercial strategies to reinforce this payment channel by supportingapplying business intelligence tools that enable us to satisfy the activities carried out byneeds of our Commercial Division (Individual and SME Banking).diverse customer base. Based on this strategy, the mentioned business unitour stock of issued roughly 178,748 new credit cards in 2012 and consolidatedincreased by approximately 40,359 credit cards for the strategic alliance settled in 2011 with a mobile phone provider that resulted in the new “Banco de Chile | Entel” credit card.year ended December 31, 2014.

Commercial Credits

Commercial loans granted by our Commercial Division (IndividualIndividual and SME Banking)Banking Unit mainly consist of project financing and working capital loans granted to small and medium-sizedmedium sized companies, which are denominated in Chilean pesos, UF and U.S. dollars and may bear fixed or variable rates of interest and generally mature between one and three months. As of December 31, 2012,2014, our Commercial Division (IndividualIndividual and SME Banking)Banking Unit had outstanding commercial loans of Ch$2,070,0912,401,689 million, representing 21.9%20.5% of the retail market business segment’s total loans and 11.0% of our total loans as of the same date.

Leasing Contracts

Leasing contracts are financingfinancial leases for capital equipment and property. Leasing contracts may bear fixed or variable interest rates and they generally have terms that range from one to five years for equipment and from five to twenty years for properties. Most of these contracts are denominated in UF. As of December 31, 2012,2014, our Commercial Division (IndividualIndividual and SME Banking)Banking Unit had outstanding leasing contracts of Ch$249,916324,520 million, representing 2.6%2.8% of the retail market business segment’s total loans and 1.3%1.5% of our total loans as of the same date.

Non-Residential Mortgage Loans

Non-residentialNonresidential mortgage loans granted to individuals and small-small and medium-sizedmedium sized companies are loans intended to finance the acquisition of offices, land, facilities and other real estate assets. Non-residentialNonresidential mortgage loans are denominated in UF and generally have maturities between eight and twelve years. As of December 31, 2012,2014, our Commercial Division (IndividualIndividual and SME Banking)Banking Unit had non-residentialnonresidential mortgage loans of approximately Ch$60,12531,633 million, representing 0.6%0.3% of the retail market business segment’s total loans and 0.3%0.1% of our total loans as of the same date.

Debit Cards

We offer different types of debit cards to our customers. Depending on their specifications, these cards can be used for banking transactions at ATMs that operate on the local network, such as Redbanc, the Visa International PLUS network, the local network of merchants participating in the local Redcompra debit program or the international network of merchants associated with the Electron program. We have given different names to these debit cards depending on the card’s specific functions and the link between the brand and target market which they serve. During 2012,2014, we offered the following cards:Chilecard Electron, Chilecard Plus, Chilecard Normal, Banjoven, Multiedwards and Citicard.Citicard. As of December 31, 2012,2014, according to monthly statistics provided by Transbank S.A., the division hadIndividual and SME Banking Unit achieved a 18.2%17.6% market share of debit card purchase transactions (not including debit cards issued by Banco CrediChile, as those are reported under our Consumer Finance Division), which corresponds to approximately 58.575.6 million transactions throughout the year.

Lines of Credit

The Commercial DivisionAs of December 31, 2014 the Individual and SME Banking Unit had approximately 571,479620,314 approved lines of credit to individual customers and small and medium-sized companies as of December 31, 2012, andmedium sized companies. Also, the unit had outstanding advances to 362,306377,763 individual customers and small and medium-sizedmedium sized companies that totaled Ch$243,505270,693 million, or 2.6%2.3% of the retail market business segment’s total loans and 0.3%1.2% of our total loans.

Our lines of credit for individual customers are generally available on a revolving basis, up to an approved credit limit, and may be used for any purpose. Advances under lines of credit are denominated in Chilean pesos and bear an interest rate that is set monthly.

Deposit Products

We strategically offer deposit products to increase ourdeposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relativelylow-cost, stable source of funding, as well as an opportunity tocross-market our other products and services. In this regard, we offer current accounts, time deposits and savings accounts to our individual customers. Current accounts are Chileanpeso-denominated and the majority bear no interest (approximately 0.1% of our total current accounts areinterest-bearing), and savings accounts are denominated in UF and bear afixed-interest rate. Time deposits may be denominated in Chilean pesos, UF and U.S. dollars and most bear interest at a fixed rate with terms that range between thirty to 360 days.

While historically demand has been mainly for focused onUF-denominated deposits during periods of high inflation, demand for Chileanpeso-denominated deposits has increased in recent years as a consequence of lower and more stable inflation rates in Chile. This trend was also observed during the financial crisis of 2008 and 2009, when we benefited from aflight-to-quality effect. Due toIn fact, amid the high volatility and low interest rates observed in the financial markets throughout 2008 and low interest rates2009 (in line with monetary stimulus prompted by central banks worldwide) customers andnon-customers increasingly deposited their funds in our current accounts, particularly those denominated in Chilean pesos, as inflation was negative.they preferred liquidity. A similar phenomenon took place in 2014.

Consumer Finance Division (Banco CrediChile)

The Consumer Finance Division provides loans and other financial services to low and middle-incomemiddle income segments (individuals whose monthly incomes range from Ch$170,000 to Ch$500,000), which historically have only been partially served by financial institutions. Also, our Consumer Finance Division serves micro-businesses.micro businesses. Banco CrediChile represents an alternative delivery channel for our products and services to these segments, maintaining a separate brand supported by a network of 156136 Banco CrediChile branches as of December 31, 2012.2014. Banco CrediChile was established in 2004 from what was formerly our consumer banking division. During 2008, Banco CrediChile was merged with the consumer division of Citibank Chile (Corporación Financiera Atlas S.A.) as a consequence of our merger with Citibank Chile.

Banco CrediChile offers its customers a variety of banking products, such as consumer loans, credit cards, residential mortgage loans and a special demand deposit account (see “—CrediChile SightDemand Accounts”) targeted at low-incomelow income customers. As of December 31, 2012,2014, Banco CrediChile had 880,7591,619,231 customers and total loans outstanding that amounted to Ch$771,590818,485 million, representing 4.1%3.7 % of our total loans outstanding as of the same date.

The following table sets forth the composition of Banco CrediChile’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2012:2014:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  

(in millions of Ch$, except

percentages)

   

(in millions of Ch$, except

percentages)

 

Consumer loans

        

Installment loans

  Ch$620,414     80.4  Ch$635,294     77.6

Credit cards

   78,094     10.1     78,492     9.6

Lines of credit

   225     0.0  

Lines of credit and other consumer loans

   273     0.1
  

 

   

 

 

Total consumer loans

   698,733     90.6     714,059     87.3

Residential mortgage loans

   62,082     8.0     76,278     9.3

Commercial loans

   10,775     1.4     28,148     3.4
  

 

   

 

   

 

   

 

 

Total

  Ch$771,590     100.0  Ch$818,485     100.0
  

 

   

 

   

 

   

 

 

Our Consumer Finance Division focuses on developing and marketing innovative and customized products targeted to satisfy the needs of its customers while introducing them to the banking system. Banco CrediChile complements the services offered by our other business segments, especially our wholesale market segment, by offering services to employers, such as direct deposit capabilities, that stimulate the use of our services by employees.

In order to improve its value offering, during 2012 CrediChile launched two new services, namely, ‘Caja Chile’ and ‘Microenterprises‘Microbusiness Banking’. Whereas theThe former consists of a limited range of basic financial services (such as(e.g. deposits, withdrawals and bill payments) offered to customers andnon-customers (not completely penetrated by the banking industry) through remote IT platforms located in small convenience stores within socially and/or geographically isolated areas of Chile,Chile. On the latterother hand, the ‘Microbusiness Banking’ is a specialized portfolio of financial services designed for MicroenterprisesMicrobusiness (generally personal businesses) that includes financial advisory, lending andnon-lending products and general financial solutions for a segment that has been traditionally uncovered by the banking services.

During 2014, Banco CrediChile continued to enhance these service models as we believe they are a suitable means to penetrate those segments by offering banking solutions. As of December 31, 20122014 Banco CrediChile had implemented the ‘Caja Chile’‘CajaChile’ solution in more than 1,0002,600 convenience stores, within 220 zones.which gives us market presence in 78% of Chilean communities. As of the same date, 7,500 microenterprises customers had been addedloans granted to the division’s customer base, based on 40 implemented platforms throughout themicrobusinesses accounted for approximately Ch$32,000 million, representing an 18.0% annual increase. Among other initiatives, in 2014 Banco CrediChile branch network.

The Superintendencyundertook a complete revision of Banks requiresoperating and commercial technological platforms in order to adopt the quality standards outlined by Banco de Chile. In this regard, the development of a new Internet banking site and the implementation of mobile banking tools translated into higher allowances for loan losses for those banks with low credit classifications. This is the case forservice quality indicators. In addition, throughout 2014, Banco CrediChile whichlaunched “CuentaChile”, a new concept in demand accounts that incorporates the traditional value offering supporting this type of product with an array of additional services and benefits for users.

Banco CrediChile employs a specific credit scoring system, developed by our corporate risk division, as well as other criteria to evaluate and monitor credit risk. Thus, in order to ensure the quality of its loan portfolio, Banco CrediChile adheres to our general loan origination procedures, particularly with regard to the use of our credit scoring system and credit management policies, including the use of credit bureaus and the services of the Superintendency of Banks.SBIF. In addition, Banco CrediChile carries out rigorous procedures for collection ofpast-due loans through Socofin S.A., our specialized collection subsidiary. We believe that we have suitable procedures and infrastructure in place to manage the risk exposure of Banco CrediChile. These procedures allow us to take advantage of the attractive growth and earnings potential of this market segment while helping to manage exposure to higher risk. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—The growth of our loan portfolio may expose us to increased loan losses” and “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Our loan portfolio may not continue to grow at the same or similar rate.”

Consumer Lending

Banco CrediChile provides short to medium-termmedium term consumer loans and credit card services. As of December 31, 2012,2014, Banco CrediChile had approximately 353,357320,612 consumer loan debtors related to credits with outstanding balances of Ch$620,414635,294 million. As of the same date, Banco CrediChile customers had 313,357 validoutstanding loan balances related to credit card accounts, with total outstanding balances ofcards that amounted to Ch$78,09478,492 million.

CrediChile SightCuentaChile Demand Accounts

Banco CrediChile offerslaunched CuentaChile Demand Accounts in 2014, offering its customers CrediChile Sight Accounts, a basic deposit product that is flexible and easy to use. This product allows us to tap into a section of the consumer market that previously wasotherwise would not participatingbe able to access and participate in the banking system.system because of their risk profile. The CrediChile SightCuentaChile Demand Account is anon-interest bearing demand deposit account without checking privileges targeted atthat targets customers who want a secure and comfortable means of managing and accessing their money. Customers holding this account may use an ATM card linked to their SightCuentaChile Demand Account (which may include a revolving line of credit) to make deposits or automatic payments to other Banco CrediChile accounts through a network of 6,7658,029 ATMs available through the Redbanc network as of December 31, 2012.2014. Also, CuentaChile Demand Account holders may execute transactions in all CrediChile branches and carry out basic banking operations in the CajaChile nationwide network, which is present in most of the Chilean regions and communities. Also, CuentaChile Demand Account holders are entitled to make use ofInternet-based banking platforms and mobile applications provided by Banco CrediChile to its customers while receiving electronic money transfers and benefiting from diverse loyalty programs designed by Banco Credichile, which include discounts and special offers in a wide array of stores and services. BancoCrediChile previously offered its customers traditional demand accounts (each known as a CrediChile Demand Account) that entitled their holders to receive payroll deposits, withdraw money from ATMs and perform basic purchasing transactions. The CuentaChile Demand Account replaced and improved the former product offered by CrediChile by adding further benefits to their holders.

As of December 31, 2012,2014, Banco CrediChile had approximately 883,718 Sight Accounts.1,432,327 CuentaChile Demand accounts. Holders of these sight accounts pay an annual fee, a fee related to the number of withdrawals on the sight account line of credit and interest on any outstanding balance under the line of credit. All fees and interest due on a CrediChile SightCuentaChile Demand Account are withdrawn automatically on a monthly basis from funds available in the account. CrediChile SightCuentaChile Demand Account allows us to offer our wholesale customers the ability to pay their employees by direct deposit of funds into the individual employee’s account at Banco CrediChile. We believe this product can lead to stronger long-termlong term relationships with our wholesale customers and their employees.

Wholesale MarketBanking Segment

Our wholesale market business segment serves the needs of corporate customers. In 2012,2014, this business segment recorded annual operating revenues of approximately Ch$ 321,004480,051 million, which represented 23.7%29.2% of our total operating revenues, and annualrevenues. Also, for the year ended December 31, 2014 this segment recorded an income before income tax of Ch$196,660289,752 million, which represented 37.8%44.5% of our consolidated income before income tax. As of December 31, 2012,2014, loans granted by this business segment amounted to Ch$8,812,72610,142,486 million and represented 47.0%46.4% of our total loan portfolio.

The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2012:2014:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except
percentages)
   

(in millions of Ch$, except

percentages)

 

Commercial credits

  Ch$6,447,029     73.2  Ch$7,183,179     70.8

Foreign trade loans

   1,210,979     13.7     1,220,584     12.1  

Leasing loans

   863,243     9.8     1,056,999     10.4  

Factoring loans

   125,866     1.4     420,173     4.1  

Other loans

   165,609     1.9     261,551     2.6  
  

 

   

 

   

 

   

 

 

Total

  Ch$8,812,726     100.0  Ch$10,142,486     100.0
  

 

   

 

   

 

   

 

 

As of December 31, 2012,2014, we had 9,9729,694 debtors out of a total of 22,67824,499 wholesale customers. Our wholesale customers are engaged in a wide range of economic sectors. As of December 31, 2012,2014, this business segment’s loans were mainly related to:

 

commerce and tradefinancial services (approximately 20.8%24.7% of all loans madegranted by this business segment);

 

financial servicescommerce and trade (approximately 18.5%15.9% of all loans madegranted by this business segment);

manufacturing (approximately 14.7% of all loans granted by this business segment);

 

communication and transportation (approximately 12.9%13.0% of all loans madegranted by this business segment);

 

construction (approximately 11.3%12.0% of all loans made by this business segment);

manufacturing (approximately 11.1% of all loans madegranted by this business segment);

 

community, social and personal services (approximately 8.6%5.0% of all loans madegranted by this business segment);

 

agriculture, forestry and fishing (approximately 7.1%4.0% of all loans madegranted by this business segment); and

 

mining (approximately 3.5%1.3% of all loans madegranted by this business segment).

In line with our strategy of identifying and differentiating market segments in order to provide improved value propositions for a diversified customer base, we have defined two of our divisions within theprovide our wholesale market segment based on annual sales:customer base with banking and financial products and services: (i) the Corporate Division and (ii) the Commercial Division, through the Large Companies and Real Estate Division.Unit.

Corporate Division

The Corporate Division provides services to corporations whose annual sales exceed approximately Ch$70,000 million. This division’s customers consist of a large proportion of Chile’spublicly-traded companies, subsidiaries of multinational companies and conglomerates (including those operating in the financial, commercial, manufacturing, industrial and infrastructure sectors), and projects and concessions.

As of December 31, 2012,2014, we had 782815 corporations as debtors out of a total of 4,7605,839 customers in our Corporate Division with total outstanding loans of Ch$3,923,4293,991,561 million, which represented 20.9%18.2% of our total loan book as of the same date.

The following table sets forth the composition of our Corporate Division’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2012:2014:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except
percentages)
   

(in millions of Ch$, except

percentages)

 

Commercial credits

  Ch$3,211,581     81.9  Ch$3,153,925     79.0

Foreign trade loans

   478,944     12.2     398,275     10.0  

Factoring loans

   131,132     3.3  

Leasing loans

   76,121     1.9     122,785     3.1  

Factoring loans

   62,073     1.6  

Other loans

   94,710     2.4     185,444     4.6  
  

 

   

 

   

 

   

 

 

Total

  Ch$3,923,429     100.0  Ch$3,991,561     100.0
  

 

   

 

   

 

   

 

 

We offer a wide range of products to large corporations that includeshort- andlong-term financing, working capital loans, mortgage loans, leasing,long-term syndicated loans and factoring, as well as investment banking services offered by our subsidiary Banchile Asesoría Financiera S.A., which include the underwriting of public and private securities offerings. We also offer payment services (payrolls, suppliers, pensions, dividends, etc.), collection services and connections to international funds transfer networks, as well as traditional deposit products, in particular current accounts.

As of December 31, 2012,2014, we were party to approximately 1,0671,359 payment service contracts and approximately 206252 collection service agreements with corporations. We believe that cash management and payment service contracts provide us with a source of low-costlow cost deposits and the opportunity to cross-sellcross sell our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our corporate customers, providing centralized collection services for their accounts receivable and other similar payments. For the year ended December 31, 2014, volumes associated with collection and payment agreements increased by approximately 14.4% and 2.3%, respectively.

In order to provide highly competitive and differentiated services, our Corporate Division has the direct support of our Treasury and Money Market Operations segment, which directly fulfills our corporate customers’ liquidity,short-term loans and hedging needs. We have also improved our technology to facilitate connections with customers and enhance theirself-service practices. Similarly, we offer derivative products, which we believe have become increasingly important, especially those associated with Chileanpeso-U.S. dollar andUF-U.S. dollar forward contracts and interest rate swaps.

In recent years, the market for loans to corporations in Chile has been characterized by reduced margins partly due to more direct access of such customersincreasing competition. This fierce competition has involved not only local banking players but also, increasingly, overseas lenders who are eager to domestic and international capital and debt markets.lend to Chilean companies that hold high credit ratings. Consequently, we have focused on increasingoptimizing the profitability in this segment through enhancing our cross-sellcross sell fee generating services, such as payroll processing, dividend payments and billing services, as well as computer banking services. This strategy has enabled us to maintain profitable relationships with our corporate customers while preserving the ability to extend credit when appropriate business opportunities arise.

During 2012,2014, the division continued to enrich its value propositions for satisfying customers’ needs. Thus, the Corporate Division, in association with our Financial Advisory subsidiary, was involved and focused on assisting local and foreign customers in some of the most important financial transactions carried out in the local market during 2014, such as a record mergers and acquisitions transaction for the local market amounting to Ch$7,400 million. In addition, the Corporate Division has strived to build tailored solutions for its customers, with financial advisory for internationalincluding debt

issuances. Worth mentioning are restructuring, bridge financing, syndicated and cross border loans. In all of these matters, the synergies that arise from the Global Connectivity Agreement with Citigroup have been important when assisting our corporate customers with off-shoreoff shore transactions. Similarly, based on collaboration between the Division and our Securitization subsidiary, a corporate customer (specifically a Road Concession Company) placed a securitized bond of approximately UF1.3 million in the local market.

Large Companies and Real Estate Banking Unit—Commercial Division

Our Large Companies and Real Estate DivisionBanking Unit provides companies—with annual sales that range from approximately Ch$1,600 million to approximately Ch$70,000 million—with a broad range of financial products and services (such as electronic banking, leasing, foreign trade and financial consultancy) to companies with annual sales that range from approximately Ch$1,600 million to approximately Ch$70,000 million.. Customers served by this divisionbanking unit are those related to the commercial, manufacturing, agricultural, forestry, fishing, infrastructure and real estate sectors.

As of December 31, 2012,2014, we had 9,1908,455 large companies and real estate debtors out of a total of 17,91818,193 customers in this Division.banking unit. Loans granted by the Large Companies and Real Estate DivisionBanking Unit amounted to Ch$4,889,2976,150,925 million as of the same date, which represented 26.1%28.1% of our total loans.

The following table sets forth the loan portfolio composition of the Large Companies and Real Estate Division’s loan portfolioBanking Unit, in accordance with our internal reporting policies, as of December 31, 2012:2014:

 

  As of December 31, 2012   As of December 31, 2014 
BANK’S INTERNAL REPORTING POLICIES:  

(in millions of Ch$,

except percentages)

   (in millions of Ch$,
except percentages)
 

Commercial credits

  Ch$3,235,448     66.2  Ch$4,029,254     65.5

Leasing loans

   787,122     16.1     925,867     15.1  

Foreign trade loans

   732,035     15.0     822,309     13.4  

Factoring loans

   63,793     1.3     297,388     4.8  

Other loans

   70,899     1.4     76,107     1.2  
  

 

   

 

   

 

   

 

 

Total

  Ch$4,889,297     100.0  Ch$6,150,925     100.0
  

 

   

 

   

 

   

 

 

The products and services offered by this divisionbanking unit are mainly related to commercial loans, lines of credit, foreign trade and foreign currency transactions, factoring services, leasing, mortgage loans, syndicated loans, mergers and acquisitions, debt restructuring assistance, payments and collections services, current accounts and related services, corporate credit cards, cash and investment management, forward contracts to hedge against currency fluctuations and insurance brokerage.

This division’s aim isbanking unit aims to deliver exceptional service toprovide its customers with excellent service based on proactive financial support that enhances long-termlong term relationships with customers. Over time, the divisionbanking unit has developed service models intended to take advantage of synergies arising from the interaction of account and specialized support executives responsible for ensuring comprehensive customer service. These models have enabled the divisionthis banking unit to strengthen customer relationships and product offerings.

In 2012 the division2014, this banking unit continued strengthening its presence in commercial credits,credit with a 14.8%an 8.1% annual increase in related balances, while promoting alternative funding sources for itsloan average balances. Part of this increase was explained by the “Family Office” area operating under the Large Companies and Real Estate Banking Unit, which was established in 2013 as a means to meet the financial needs of single families by providingtailor-made financing and wealth management solutions. In 2014, the “Family Office” area had an average balance of loans of Ch$218,486 million, representing a 40.4% annual increase. Also, this area was able to increase deposits (including demand and time deposits) from these customers such as leasing contracts that recorded a 13.5%by approximately 14.6% on an annual rise in outstanding loans. In addition, we continued to widen the service offering by strengthening ourbasis, ending 2014 with an average balance of approximately Ch$162,532 million.

Our leasing and factoring products.

Our leasing segment isbusinesses are part of the Large Companies and Real Estate Division. Similarly, our factoring subsidiary, Banchile Factoring S.A., mainly provides its services through the Large Companies and Real Estate Division.Banking Unit.

Treasury and Money Markets Operations

Our Treasury and Money Market Operations business segment provides a wide range of financial services to our customers, including currency intermediation, forward contracts, interest rate swaps, transactions under repurchase agreements and investment products based on bonds, mortgage finance bonds and deposits.

In addition, our Treasury and Money Market Operations business segment is focused on managing our currency, interest rate and maturity gaps, ensuring adequate liquidity levels, managing our investment portfolio and

performing the intermediation offixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.

The Treasury and Money Market Operations business segment is also responsible for (i) the issuance ofshort- andlong-term senior bonds, as well aslong-term subordinated bonds, in Chile or abroad, (ii) monitoring compliance with regulatory deposit limits, technical reserves and maturity and rate matches,matches/mismatches, (iii) monitoring our adherence to the security margins defined by regulatory limits, and risk limits for interest rate, currency and investment gaps. This segment continually monitors the Bank’s cost of funding costs by benchmarking with the rest of the local financial system.system and financing alternatives in Chile or abroad.

During 2012,Regarding funding functions carried out by our Treasury, and Money Market Operations business segmentduring 2014, we continued to develop a funding diversification strategy by conducting important transactions. For example,transactions in Chile and abroad. These transactions have been intended to not only take advantage of attractive interest rate opportunities but also to improve our liquidity standards by issuing debt of longer maturities, as well as diversify our liability structure in terms of markets. Accordingly, during 2012 the Bank2014 we carried out international bond issuancesdebt placements in Peru (U.S.Switzerland for a total amount of Ch$174,530 million (approximately U.S.$29288 million). Similarly, under our MTN Program we issued approximately Ch$66,742 million (approximately U.S.$110 million) of notes in Japan and Ch$43,044 million (approximately U.S.$71 million) of notes in Hong Kong (U.S.$164 million) and established a commercial paper programKong. Finally, forshort-term financing purposes we continued using our Commercial Paper Program in the United States by placing approximately Ch$1,090,340 million (nearly U.S. market$1,799 million) of U.S.$1,000 million. The latter is a rollover short-term funding source that we used during 2012.commercial paper. As of December 31, 2012 the2014 we had an outstanding balance for this liability amounted toof roughly Ch$197,340378,806 million (approximately U.S.$412625 million) of commercial paper. Also, during 2014 we placedlong-term bonds in the local market for a total amount of Ch$451,966 million (approximately U.S.$745 million). Lastly, we carry out an international bond issuances if and only if the cost (including costs of interest rate swaps and other transactional expenses) is below the cost of raising funds locally and the currency or interest rate exposure is fully hedged via cross currency swaps.

The funding functions carried out by our Treasury division are complemented by our international area, namely International Financial Institutions (“IFI”), which manages relations with correspondent banks worldwide, facilitating international payments and obtaining foreign currency financing for us. As of December 31, 2012,2014, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 180 correspondent banks, from which we maintained 3725 account relationships. IFI played an important role in structuring international transactions aimed at diversifying our funding.

Regarding the management of our securities portfolio, as of December 31, 20122014 it amounted to Ch$1,431,9981,902,254 million and was composed of available-for-saleavailable for sale securities that totaled Ch$1,272,3161,608,796 million and securities held for trading that amountedamounting to Ch$159,682293,458 million. As for the type of instruments included in our securities portfolio, as of December 31, 2012, 59.3%2014, 63.5% consisted of securities issued by local financial institutions, 22.6%22.5% consisted of securities issued by the Central Bank and the Chilean Government, 11.9%10.7% consisted of securities issued bynon-financial Chilean corporate issuers and other securities and 6.2%3.3% consisted of securities fromissued by foreign issuers.companies and central banks. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are goals for us and, therefore, equity instruments only represented 0.5% of our investment portfolio as of December 31, 2014.

Operations through Subsidiaries

We have made several strategiclong-term investments in financial services companies that are engaged in activities complementary to our commercial banking activities. In making these investments our goal is to develop a comprehensive financial group capable of meeting the diverse financial needs of our current and potential clients by offering traditional banking products and specialized financial services through our different subsidiaries.

The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2012:2014:

 

  As of or for the year ended December 31, 2012 
BANK’S INTERNAL REPORTING POLICIES: Assets   Equity   Net Income 
  (in millions of Ch$) 

Banchile Trade Services Limited (Hong Kong)

 Ch$756    Ch$741    Ch$43  

Banchile Administradora General de Fondos S.A.

  60,743     58,014     13,133  

Banchile Asesoría Financiera S.A.

  4,595     3,753     2,011  

Banchile Corredores de Seguros Ltda

  11,389     9,566     2,865  

Banchile Corredores de Bolsa S.A.

  547,182     84,619     10,590  

Banchile Factoring S.A.

  488,525     55,871     9,886  

Banchile Securitizadora S.A.

  516     422     27  

Socofin S.A.

  7,555     702     (243

Promarket S.A.

  2,489     1,266     432  
 

 

 

   

 

 

   

 

 

 

Total

 Ch$1,123,750    Ch$214,954    Ch$38,744  
 

 

 

   

 

 

   

 

 

 

BANK’S INTERNAL REPORTING POLICIES  Assets   Equity   Net Income 
   (in millions of Ch$) 

Banchile Trade Services Limited (Hong Kong)

  Ch$12    Ch$12    Ch$(13

Banchile Administradora General de Fondos S.A.

   64,407     55,467     15,114  

Banchile Asesoría Financiera S.A.

   6,603     5,208     3,467  

Banchile Corredores de Seguros Ltda.

   11,422     6,390     1,498  

Banchile Corredores de Bolsa S.A.

   452,029     82,810     8,781  

Banchile Securitizadora S.A.

   316     254     (297

Socofin S.A.

   7,978     1,176     221  

Promarket S.A.

   2,131     878     44  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$544,898    Ch$152,195    Ch$28,815  
  

 

 

   

 

 

   

 

 

 

The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2012:2014:

 

  Ownership Interest   Ownership Interest 
  Direct (%)   Indirect (%)   Total (%)   Direct (%)   Indirect (%)   Total (%) 

Banchile Trade Services Limited (Hong Kong)

   100.00     —       100.00     100.00     —       100.00  

Banchile Administradora General de Fondos S.A.

   99.98     0.02     100.00     99.98     0.02     100.00  

Banchile Asesoría Financiera S.A.

   99.96     —       99.96     99.96     —       99.96  

Banchile Corredores de Seguros Ltda.

   99.83     0.17     100.00     99.83     0.17     100.00  

Banchile Corredores de Bolsa S.A.

   99.70     0.30     100.00     99.70     0.30     100.00  

Banchile Factoring S.A.

   99.75     0.25     100.00  

Banchile Securitizadora S.A.

   99.00     1.00     100.00     99.00     1.00     100.00  

Socofin S.A.

   99.00     1.00     100.00     99.00     1.00     100.00  

Promarket S.A.

   99.00     1.00     100.00     99.00     1.00     100.00  

Each of these subsidiaries is incorporated in Chile, except for Banchile Trade Services Limited, which is incorporated in Hong Kong.

On June 19, 2013, Banco de Chile acquired all of the shares of Banchile Factoring S.A. owned by Banchile Asesoría Financiera. As a result of this transaction, Banco de Chile fully acquired the assets and liabilities of Banchile Factoring S.A. and on June 30, 2013 this subsidiary was dissolved.

During 2014, we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong. We expect to complete this process before the end of 2015.

Securities Brokerage Services

We provide securities brokerage services through Banchile Corredores de Bolsa S.A. Banchile Corredores de Bolsa S.A. is registered as a securities broker with theSuperintendencia de Valores y Seguros de Chile (the “Chilean Superintendency of Securities and Insurance”), the regulator of Chilean publicly listed companies, and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores de Bolsa S.A. has provided stock brokerage services, fixed-incomefixed income investments and foreign exchange products to individuals and companies through our branch network. During the year ended December 31, 2012,2014, Banchile Corredores de Bolsa S.A. recorded an aggregate stock trading turnover on the Santiago Stock Exchange, the Chilean Electronic Stock Exchange and the Valparaíso Stock Exchange that amounted to approximately Ch$4,927,233 million.7,194,703 million, which represented a 16.4% market share within the Chilean stock market. As of December 31, 2012,2014, Banchile Corredores de Bolsa S.A. had equity of Ch$84,61982,810 million and, for the year ended December 31, 2012,2014, recorded net income of Ch$10,5908,781 million, which represented 2.3%1.5% of our consolidated net income for that period.period (under the bank’s internal reporting policies).

In early 2009, Citibank Agencia de Valores S.A. merged with and into Banchile Corredores de Bolsa S.A.

Mutual and Investment Fund Management

Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2012,2014, according to data preparedpublished by the Chilean Superintendency of Securities and Insurance,Mutual Funds Association, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 23.2%22.5% of all Chilean mutual fundsfunds’ assets. As of December 31, 2012,2014, Banchile Administradora General de Fondos S.A. operated 8186 mutual funds and had Ch$4,230,2816,057,417 million in assets under management owned by approximately 345,889422,309 corporate and individual investors. Also, as of December 31, 2012,2014, Banchile Administradora General de Fondos S.A. operated eight10 public investment funds:funds (Chile Blend, Chile Small Cap, Banchile Inmobiliario IV, Banchile Inmobiliario V, Banchile Inmobiliario VI Latam Small Mid-Cap,and Banchile Inmobiliario VII, Plusvalia Eficiente, Rentas Inmobiliarias I, Latam Small Cap, Latam High Yield) and Chile Blend,one private investment funds (Minero), managing a total amount of Ch$203,813221,550 million in net assets on behalf of 198319 participants.

The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2012:2014:

 

Name of Fund

  

Type of Fund

  Net Asset Value
As of December 31, 20122014
 
      (in millions of Ch$) 

2nd Best Chile Eeuu

Fixed income (medium/long term)Ch$2,236

AhorroAHORRO

  Fixed income (medium/long term)   60,264270,987 

Ahorro Estable IiALIANZA

  Fixed income (medium/long term)   10,758409,563 

Ahorro Estable IiiANDES ACCIONES

Equity492

ASIA FUND

Equity7,885

ASIATICO ACCIONARIO

Equity18,835

BANCHILE-ACCIONES

Equity27,740

BONOS SOBERANOS

  Fixed income (medium/long term)   4,88226,816 

Ahorro Plus IBOOSTER ASIA EMERGEN

  Fixed income (medium/long term)Structured   7822,840 

AlianzaBOOSTER CHINA II

  Fixed income (medium/long term)Structured   76,0282,260 

Andes AccionesBOOSTER EUROPA II

  Debt/EquityStructured   1,1936,118 

Asia FundBOOSTER JAPON

  Debt/EquityStructured   3,9121,353 

Asiatico AccionarioBOOSTER REAL ESTATE

Structured4,564

BRIC ACCIONARIO

  Equity   14,353365 

Balance I

Debt/Equity16,689

Banca Americana Vt

Fixed income (medium/long term)12,012

Banchile-Acciones

Equity62,028

Bonos Soberanos

Fixed income (medium/long term)9,080

Booster Australia

Fixed income (medium/long term)1,907

Booster Balanced

Fixed income (medium/long term)1,325

Booster Chile

Fixed income (medium/long term)5,790

Booster Smal Cap Usa

Fixed income (medium/long term)2,102

Bric Accionario

Debt/Equity835

Capital EfectivoCAPITAL EFECTIVO

  Fixed income (short term)   87,829854,826 

Capital FinancieroCAPITAL EMPRESARIAL

  Fixed income (short term)   93,47545,028 

Capitalisa-Acc.

Equity5,509

CashCAPITAL FINANCIERO

  Fixed income (short term)   358,279348,432 

Ch Bursatil Garant

Fixed income (medium/long term)2,681

Chile 18 QCAPITALISA-ACC.

  Equity   9,9142,256 

Chile Accionario

Equity29,097

Cobertura

Fixed income (medium/long term)1,178

Corporate DollarCASH

  Fixed income (short term)   333,664270,959 

CorporativoCH BURSATIL GARANT

Structured3,412

CHILE 18 Q

Equity15,425

CHILE ACCIONARIO

Equity13,314

CORPORATE DOLLAR

  Fixed income (short term)   274,967477,630 

CrecimientoCORPORATIVO

Fixed income (short term)183,975

CRECIMIENTO

  Fixed income (short/medium term)   86,296103,117 

Decisión EstratégicaDEPOSITO PLUS V

  Debt/EquityStructured   1,2438,309 

Depósito Plus GDEPÓSITO PLUS VI

  Fixed income (medium/long term)Structured   14,682

Deposito Xxi

Fixed income (medium/long term)92,487

Deuda Dolar

Fixed income (medium/long term)8,633

Deuda Estatal

Fixed income (medium/long term)48,737

Deuda Nacional

Fixed income (medium/long term)11,488

Disponible

Fixed income (short term)46,608

Dollar Investment G.

Fixed income (medium/long term)25,476

Emerging Fund

Debt/Equity20,728

Emerging Market

Debt/Equity17,873

Estrategia Commoditi

Fixed income (medium/long term)6,274

Estrategico

Fixed income (medium/long term)288,689

Euro Money Market

Fixed income (short term)19,652

Europa Accionario

Fixed income (medium/long term)2,112

Europa Desarrollada

Debt/Equity1,683

Flexible

Fixed income (short term)56,040

Global Dollar

Debt/Equity1,672

Global Mid Cap

Debt/Equity3,280

Horizonte

Fixed income (medium/long term)122,883

Inversion

Debt/Equity19,354

Inversion Brasil

Debt/Equity7,705

Inversión Chile 30

Debt/Equity930

Inversion China

Debt/Equity7,774

Inversion Dolar 30

Debt/Equity1,516

Inversion Usa

Debt/Equity8,061

Inversionista I

Equity16,139

Latam Mid Cap

Debt/Equity5,616

Latin America Fund

Debt/Equity33,225

Latina Accionario

Debt/Equity11,643

Liquidez 2000

Fixed income (short term)475,907

Liquidez Full

Fixed income (short term)451,386

Mid Cap

Equity47,695

Muralla China Garant

Fixed income (medium/long term)17,821

Oportunidades Sector

Debt/Equity5,278

Patrimonial

Fixed income (short term)291,388

Performance

Fixed income (short/medium term)9,623

Plus Ii Garant

Fixed income (medium/long term)12,542

Renta Futura

Fixed income (medium/long term)258,5664,125 

Name of Fund

  

Type of Fund

  Net Asset Value
As of December 31, 20122014
 
      (in millions of Ch$) 

Retorno DolarDEPOSITO XXI

  Fixed income (medium/long term)   31,913373,724 

Retorno L.P. UfDEUDA CORP.3-5 AÑOS

  Fixed income (medium/long term)   35,74967,034 

Twin Win Europa 103DEUDA DOLAR

  Fixed income (medium/long term)   3,46417,536 

Twin Win UsaDEUDA ESTATAL

  Fixed income (medium/long term)   2,09823,811 

U.S. Dollar FundDEUDA NACIONAL

  Debt/Fixed income (medium/long term)20,014

DEUDA PESOS1-5 AÑOS

Fixed income (medium/long term)80,115

DISPONIBLE

Fixed income (short term)52,743

DOLLAR INVESTMENT G.

Fixed income (medium/long term)11,971

EMERGING FUND

Equity   6,34712,973 

Us Mid CapEMERGING MARKET

  Debt/Equity   19,65310,426 

UtilidadesESTRATEGIA AGRESIVA

Blend10,230

ESTRATEGIA CONS

Blend44,774

ESTRATEGIA MODERADA

Blend37,540

ESTRATEGICO

Fixed income (medium/long term)239,811

EURO MONEY MARKET

Fixed income (short term)13,663

EUROPA ACCIONARIO

Structured1,896

EUROPA DESARROLLADA

Equity27,849

EUROPE EQUITY TAX AD

Equity18,722

FLEXIBLE

Fixed income (short term)64,970

FONDO MUTUO MIX CONSERVADOR

Blend3,473

GLOBAL DOLLAR

Equity8,689

GLOBAL MID CAP

Equity20,320

GLOBAL STOCKS GARANT

Structured3,019

HORIZONTE

Fixed income (medium/long term)224,601

INVERSION BRASIL

Equity2,287

INVERSION CHINA

Equity3,489

INVERSION DOLLAR 30

Blend941

INVERSION USA

Equity46,569

INVERSIONISTA I

Equity12,578

LATAM MID CAP

Equity1,282

LATIN AMERICA FUND

Equity15,684

LIQUIDEZ 2000

Fixed income (short term)316,119

LIQUIDEZ FULL

Fixed income (short term)177,757

MID CAP

Equity12,968

MIX MODERADO

Equity2,330

OPORTUNIDADES SECTOR

Equity5,143

PATRIMONIAL

Fixed income (short term)225,550

PERFORMANCE

  Fixed income (short/medium term)   51,16027,035 

Viejo Continente AccQUANT GLOBAL

  Debt/Blend2,964

RENTA FUTURA

Fixed income (medium/long term)328,912

RETORNO ACCIONARIO

Equity   796768 

Vision Dinamica ARETORNO DOLAR

  Debt/Fixed income (medium/long term)23,003

RETORNO L.P. UF

Fixed income (medium/long term)28,148

SB EUROPA CHINA

Structured1,319

SMALL CAP USA GAR

Structured5,471

TWIN WIN EUROPA 103

Structured3,524

TWIN WIN EUROPE EQUI

Structured5,595

TWIN WIN USA PESOS

Structured9,365

U.S. DOLLAR FUND

Equity   9,42215,656 

Vision Dinamica Acc.U.S. MID CAP

  Debt/Equity   4,13050,312 

Vision Dinamica BUSA EQUITY

  Debt/Equity   4,35535,859 

Vision DinamicaUTILIDADES

Fixed income (short/medium term)150,557

VISION DINAMICA A

Blend11,054

VISION DINAMICA ACC.

Blend3,451

VISION DINAMICA B

Blend4,635

VISION DINAMICA C

  Debt/EquityBlend   7,8398,745 

Vision DinamicaVISION DINAMICA D

  Debt/EquityBlend   2,4854,360 

Vision DinamicaVISION DINAMICA E

  Debt/EquityBlend   9,39613,457 
    

 

 

 

Total

    Ch$4,230,2816,057,417  
    

 

 

 

As of December 31, 2012,2014, Banchile Administradora General de Fondos S.A. recorded equity of Ch$58,01455,467 million and, for the year ended December 31, 2012,2014, net income of Ch$13,13315,114 million, which represented 2.8%2.6% of our 20122014 consolidated net income.income (under the bank’s internal reporting policies).

Factoring Services

We provide factoring services to our customers through Banchile Factoring S.A. Through this service, we purchase our customers’ outstanding debt portfolios, such as bills, notes, promissory notes or contracts, advancing cash and collecting on the related instruments. For the year ended December 31, 2012, Banchile Factoring S.A. had net income of Ch$9,887 million, which represented 2.1% of our 2012 consolidated net income. As of December 31, 2012, this subsidiary had equity of Ch$55,871 million and a 20.7% market share in Chile’s factoring industry, according to information provided by the Chilean Factoring Association.

Financial Advisory Services

We provide financial advisory and other investment banking services to our customers through Banchile Asesoría Financiera S.A. The services offered by Banchile Asesoría Financiera S.A. are primarily targeted to our corporate customers and include advisory services concerning mergers and acquisitions, restructuring, project finance and strategic alliances. As of December 31, 2012,2014, Banchile Asesoría Financiera S.A. had equity of Ch$3,7535,208 million and, for the year ended December 31, 2012,2014, recorded net income of Ch$2,0113,467 million, which represented 0.4%0.6% of our 20122014 consolidated net income.income (under the bank’s internal reporting policies).

Insurance Brokerage

We provide insurance brokerage services to our customers through Banchile Corredores de Seguros Limitada. In 2000, we began to offer life insurance policies associated with consumer loans andnon-credit related insurance to our individual customers and the general public. As of December 31, 2012,2014, Banchile Corredores de Seguros Limitada had equity of Ch$9,5666,390 million and, for the year ended December 31, 20122014 it recorded net income of Ch$2,8651,498 million, which represented 0.6%0.3% of our 20122014 consolidated net income.income (under the bank’s internal reporting policies). According to the ChileanSuperintendency of Securities and Insurance Companies Association, during 2011 (the latest year for which information is available)“SVS”), as of December 31, 2014, Banchile Corredores de Seguros Limitada had a 5.0%4.8% market share in the total amount of life and casualty insurance policies (in Chilean pesos) sold by insurance brokerage companies in Chile, excluding life annuities.

Securitization Services

We offer investment products to meet the needs of institutional investors, such as private pension funds and insurance companies, through Banchile Securitizadora S.A. This subsidiary securitizes financial assets, and issues debt instruments with credit ratings that can be traded in the Chilean marketplace, backed by a bundle of revenue-producingrevenue producing assets of the client company. As of December 31, 2012,2014, Banchile Securitizadora S.A. had equity of Ch$4222.54 million and, for the year ended December 31, 2012, it2014, the subsidiary reported a net incomeloss of Ch$27 million.297 million (under bank’s internal reporting policies). Also as of December 31, 2012,2014, Banchile Securitizadora S.A. had a 16.5%15.6% market share in the total volume of assets securitized in Chile. This market share refers to the percentage of existing stock of securitized assets as of the mentioned date.

Creditspre-evaluation services

Promarket S.A. provides credit pre-evaluationpre evaluation services to the Bank and its subsidiaries, including researching potential customers. As of December 31, 2012,2014, Promarket S.A. had equity of Ch$1,266878 million and, for the year ended December 31, 2012,2014, it recorded net income of Ch$432 million.44 million (under the bank’s internal reporting policies).

Collection Services

We provideSocofin S.A. provides judicial and extra-judicialextra judicial loan collection services on our behalf and on behalf of third parties through our subsidiary Socofin S.A.to the Bank. As of December 31, 2012,2014, Socofin S.A. had equity of Ch$7021,176 million and, for the year ended December 31, 2012,2014, net lossincome of Ch$243 million.221 million (under the bank’s internal reporting policies).

Trade Services

In November 2004, we began offering direct trade services to our customers through Banchile Trade Services Limited, which acts as our trade finance entity in markets such as China, Hong Kong, Taiwan and South Korea. As of December 31, 2012,2014, Banchile Trade Services Limited had equity of Ch$74112 million and, for the year ended December 31, 2012,2014, it recorded a net incomeloss of Ch$43 million.13 million (under the bank’s internal reporting policies).

As of April 17, 2015, our Trade Services subsidiary in Hong Kong is in the process of voluntary dissolution, which we expect to complete by December 31, 2015.

Distribution Channels and Electronic Banking

Our distribution network provides integrated financial services and products to our customers through a wide range of channels. The network includes ATMs, branches,on-line banking andphone-banking devices. As of December 31, 2012,2014, we had 1,9151,460 ATMs (that form part of Redbanc’s 6,765 ATMs system)network of 8,029 ATMs) which allowed our customers to conductself-service banking transactions during banking andnon-banking hours.

As of December 31, 2012,2014, we had a network of 434429 retail branches throughout Chile. Our branch system serves as a distribution network for all of the products and services offered to our customers. Ourfull-service branches accept deposits, cash withdrawals, offer the full range of our retail banking products, such as consumer loans, credit cards, mortgage loans and current accounts, and provide financial andnon-financialinformation to current and potential customers.

We offer electronic banking services to our customers 24 hours a day through our internetInternet website,www.bancochile.cl,, which has tailored homepages for the different marketssegments we serve. OurThus, by accessing our website, our individual customers may execute electronic money transfers, access their account balances, pay utilities bills, apply for loans, purchase insurance premiums, and so on. On the other hand, our corporate homepage offers a broad range of services, including the payment of bills, electronic fund transfers,non-charge orders, as well as a wide variety of account inquiries. These services include our office banking service,Banconexion Web, for Enterprises, which enables our corporate customers to perform all of their banking transactions from their offices. Our homepage also offers products with exclusive benefits provided by our customer loyalty marketing programs, which enhance our relationships with customers. WeThrough the jointly administered website of Banchile Administration General de Fondos and Banchile Corredora de Bolsa, our mutual funds and securities brokerage subsidiaries, respectively, we also have a homepage designed for our investorprovide customers throughinterested in investing and saving their funds with anInternet-based platform on which they can trade stocks takeand currencies, make time deposits and open savings accounts.take positions in mutual funds, foreign stock markets, investments funds and derivatives. Our foreign trade customers can rely on our international business homepage,www.bancochile.com,, which enables them to inquire about the status of their foreign trade transactions and perform transactions, such as opening letters of credit, recording import collection and hedging on instructions and letters of credit. On an average monthly basis, during 20122014 approximately 574,000644,000 individual and corporate customers performed nearly 24.638.8 million transactions per month on our website, of which approximately 5.57.0 million were monetary transactions.

In addition,Also, we provide our customers with access to a 24-hour phone-banking call center24-hourphone-bank through which they can access account information transfer funds and makeexecute certain payments.transactions. This service, through which we receive approximately 535,000405,000 calls per month on average, has enabled us to develop customer loyalty campaigns, sell financial products and services, answer specialized inquiries about our remote services and receive and resolve complaints by customers andnon-customers.

Lastly, during 2014 we enhanced our mobile banking platforms by developing and launching a new bundle of applications titled MiBanco|MiPago|MiBeneficio. MiBanco is a mobile banking platform that enables our customers to perform most of the operations they can execute on our website, such as accessing their account balances, making bill payments and electronic money transfers, carrying out cash advances from credit cards to checking accounts. MiPago is a specialized mobile application that permits our customers to request reimbursements from other Banco de Chile’s customers and perform the transaction by generating and scanning a QR code, which reinforces the security standards for these kinds of operations. As of December 31, 2014 approximately 2.4 million electronic money transfers had been performed through MiBanco.

Involvement with the Transantiago Plan

Since June 2005, we have been a shareholder inAdministrador Financiero del Transantiago (“AFT”), the company responsible for the financial management of the overhaul of Santiago’s public transit system (the

“Transantiago “Transantiago Plan”). Other majority shareholders of the company include three other major Chilean banks, a financial services company and a technology services company. We own 20% of AFT’s capital stock, which represented an original capitalization of approximately U.S.$13.4 million as of June 8, 2005.

The Transantiago Plan has faced operational deficits that are being funded by means of permanent and temporary fiscal subsidies in accordance with the provisions of Law 20,378, enacted in September 2009.

In 2007, as shareholders of AFT, we made extraordinary contributions for a total amount of U.S.$4.1 million with the purpose of financing AFT’s expenses, which were capitalized as of December 31, 2007. Between January and April 2008, we made additional funds available to AFT in the amount of U.S.$358,000 to pay AFT’s expenses arising from the Transantiago Plan.Plan, funds which were reimbursed to us in 2013. We have made no additional funds available after April 2008. However, if2008 and we are requiredestimate that, as shareholders, it will not be necessary to incur additional payments, we do not expect that any such payments will materially affect our business.make extraordinary contributions for financing AFT’s operations.

On December 2012, AFT and the Chilean Ministry of Transports and Telecommunications entered into a new agreement that limits the services to be provided by AFT to the financial management of the Transantiago System’s resources. This new agreement significantly reduces the AFT’s incomes and operational expenses, while materially reducing the AFT’s risk. The new agreement is subjectrisk for us.

As of December 2014, AFT’s equity amounted to approval by the General Comptroller of Chile (Contraloría General de la República de Chile), which is currently pending.U.S.$18.4 million.

Competition

Overview

The Chilean market for banking and other financial services is highly and increasingly competitive and consists of a number of different market sectors. The most important sector is commercial banking that—as of December 31, 2012—2014—consisted of 23 privately-owned banks, 22 of them privately owned and one government-ownedgovernment owned bank, namely, Banco del Estado. As of December 31, 2012,2014, the four largest Chilean banks accounted for 65.3%64.0% of all outstanding loans granted by Chilean financial institutions (excluding subsidiaries abroad): Banco Santander—Chile (19.1%(19.0%), Banco de Chile (19.0%(18.1%), Banco del Estado (14.1%(13.8%) and Banco de Crédito e Inversiones (13.2%(13.1%).

We face significant and increasing competition in all market segments in which we operate. As a comprehensive commercial bank that offers a wide range of services to all types of businessesenterprises and individual customers, we facedeal with a variety of competitors, ranging from other large privately-ownedprivately owned commercial banks to more specialized entities, such as “niche” banks. We also increasingly face competition, fromnon-banking companies like large department stores, private compensation funds, and saving and credit cooperatives with respect to some of our credit products, such as credit cards and consumer loans. Furthermore, in recent years and given the outstanding credit rating held by the country, as well as the liquidity observed in overseas markets, local middle market, corporations and multinational branches in Chile have increasingly replaced loans rendered by local banks withoff-shorelong-term debt. In addition, we face competition from other types of competitors, such as leasing, factoring and automobile financing companies (especially in creditlending products), as well as mutual funds, pension funds and insurance companies, within the market for savings products and mortgage loans. Currently,Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual funds, andwhile the insurance salesbrokerage business is experiencing fast growth, but we cannot assure you that this trend will continue inhas become an important component of the futurevalue offerings provided by banks.

Within the local banking industry, our primary competitors are the principalmain commercial banks in Chile, namely, Banco Santander—Chile, Banco de Crédito e Inversiones, Corpbanca, Banco Bilbao Vizcaya Argentaria Chile (BBVA), and Corpbanca.Banco Itaú Chile. Nevertheless, we also face competition from Banco del Estado, a government-ownedgovernment owned bank, which has a larger customer base than we do. Banco del Estado, which operates under the same regulatory regime as Chilean privately-ownedprivately owned banks, was the third largest bank in Chile as of December 31, 2012,2014, with outstanding total loans of Ch$13,894,80916,614,586 million, representing a 14.1%13.8% market share (excluding operations of subsidiaries abroad), according to data published by the SuperintendencySBIF.

In the retail market, we compete with otherprivately-owned Chilean banks, as well as with Banco del Estado. We believe our strongest privately owned competitors in this market are Banco Santander—Chile and Banco de Crédito e Inversiones, as these banks have developed diversified business strategies focused on both small and medium sized companies and lower to middle income segments of Banks.the Chilean population. In addition, we believe our strongest competitors in the high income individual segment are Banco Santander—Chile and Banco Itaú Chile, as these banks provide their customers with wealth management services and traditional banking solutions, as we do. We also compete with companies that offernon-lending specialized financial services in the high income individuals segment such as Larrain Vial and BTG Pactual, whose core businesses are stock brokerage, financial advisory, mutual funds management and wealth management services.

Historically, commercial banks in Chile have competed in the retail market against each other, and finance companies and department stores, with the latter two having traditionally been focused on consumer loans to low and middle income segments. However, finance companies gradually disappeared between the 1990s and 2000s, as most of them merged into the largest commercial banks that dominate the Chilean banking industry today. Also, by the end of 1990s, the Chilean financial industry

witnessed the rise ofnon-traditional banking competitors, such as large department stores. During the 2000s, these players gained increasing significance in the consumer lending sector, as they were permitted to issue financial products such as credit cards. This trend resulted in the creation of three consumer oriented banks affiliated with Chile’s largest department stores; namely, Banco Falabella, Banco Ripley and Banco Paris. Although these banks had a combined market share (excluding operations of subsidiaries abroad) of only 1.9% as of December 31, 2014, according to the SBIF, the presence of these banks is likely to make consumer banking more competitive over the next few years, especially within the lower income segment.

In the wholesale market, we believe our strongest competitors are also Banco Santander—Chile, Banco de Crédito e Inversiones, Corpbanca and Banco Bilbao Vizcaya Argentaria Chile (BBVA). Similarly, we believe these banks are our most significant competitors in the small and medium-sizedmedium sized companies’ business segment.

In the retail market,this segment we compete with other privately-owned Chilean banks, as well as with Banco del Estado, which has a large customer base of individuals. Among privately-owned banks, we believe our strongest competitors in this market are Banco Santander—Chile and Banco de Crédito e Inversiones, as these banks have developed diversified business strategies focused on both small and medium-sized companies and lower to middle income segments of the Chilean population. In addition, we believe our strongest competitors in the high-income individual segment are Banco Santander—Chile and Banco Itaú Chile, as these banks rely on specialized business units that provide wealth management and traditional banking services, as we do as well. We also compete with companies that offer non-banking specialized financial services in the high-income individuals segmententities such as Larrain Vial and Celfin Capital (owned by BTG Pactual, a financial services company headquartered in Brazil), whose core businesses are stock brokerage,which provide their corporate customers with, among others, financial advisory, andinvestment banking, wealth management, debt restructuring and securities placements services.

The Chilean banking industry has experienced increased levels of competition in recent years from domestic as well as foreign banks, whichbanks. This phenomenon has triggered a consolidation wave within the industry.industry and the creation of more comprehensive banking entities that participate in most of our markets. Consequently, banks’ strategies have been increasingly focused on reducing costs and improving efficiency standards in order to compete effectively with the larger banks. Although we are making our best efforts in order to operate within this competitive environment, we acknowledge that our income may decrease as a result of increasing competition.

Regarding mergers and acquisitions events in the local banking industry, most of these transactions have involved international players seeking to participate in the local market by acquiring local banks and their banking licenses. Thus, inmid-1996, Banco Santander of Spain took control of Banco Osorno and merged it into its Chilean operations, changing its name to Banco Santander Chile. In January 1997, Banco O’ Higgins and Banco de Santiago merged, forming Banco Santiago and in 1999 Banco Santander of Spain acquired Banco Santiago. During 2001, Banco de Chile merged with Banco de A. Edwards, which was effective on January 1, 2002. In August 2002, Banco Santiago and Banco Santander–Chile, then the second and fourth largest banks in Chile, respectively, merged and became Chile’s largest bank under the Banco Santander Chile brand name. In 2003, Banco del Desarrollo merged with Banco Sudamericano, while Dresdner Banque Nationale de Paris merged with Banco Security in 2004, maintaining the Banco Security brand name. Subsequently, in 2005, Banco de Crédito e Inversiones merged with Banco Conosur. In 2007, Banco Itaú acquired Bank Boston unit in Chile, while Rabobank and Scotiabank acquired HNS Bank and Banco del Desarrollo, respectively. In the first quarter of 2008, we merged with Citibank Chile, and afterwards the Superintendency of Banks authorized the opening of a branch of the Norwegian bank DnB NOR and the acquisition of ABN Amro Bank by The Royal Bank of Scotland. In early 2009, the merger agreement between Scotiabank Sudamericano and Banco del Desarrollo was completed, through which the former became Scotiabank Chile and the latter ceased to exist. During 2009, Banco Monex was acquired by Consorcio Group, which absorbed the operations of the former and its subsidiaries, becoming Banco Consorcio. Furthermore, by the end of 2013 Corpbanca’s controlling shareholders announced its intention to sell part of its stake to a local or international player. On January 29, 2014, Corpgroup (the controlling shareholder of Corpbanca) accepted the bid of Brazil’s Itau Unibanco, through which Itau merges its own Chilean and Colombian subsidiaries with Corpbanca. The merged bank, on a pro forma basis, would have had a 12.6% market share as of December 31, 2014, excluding operations of subsidiaries abroad. In addition, according to publicly available information, the merged bank should start its operations by the end of 2015.

In addition, consolidation and overseas expansion has emerged as a means of inorganic growth for local banks. Actually, during 2012 Corpbanca, fourth ranked among Chilean privately owned banks in terms of total loans as of December 31, 2011, acquired a former Santander Group’s subsidiary in Colombia and consolidated its balance sheet and results of operations beginning May 31, 2012. In addition, by the end of 2012, Corpbanca made a bid for acquiring Helm Bank in Colombia. The bid process was completed and fully authorized by the SBIF in July 2013 and Corpbanca started to consolidate the balance sheet of this new subsidiary beginning August 31, 2013. As of December 31, 2014 loans associated with Corpbanca’s operations in Colombia amounted to Ch$5,241,507 million and represented 4.2% of the industry’ total loans.

Similarly, by the end of May 2013, Banco de Crédito e Inversiones (BCI)—the third largest privately owned bank in Chile in terms of total loans as of December 31, 2013 with a 13.2% market share (excluding operations of subsidiaries abroad)—announced

the acquisition of City National Bank, headquartered in Florida, U.S. According to public information published by the SBIF as of February 28, 2015 (the latest available data), BCI had not consolidated the operations of City National Bank.

Furthermore, during 2014 the Chilean banking industry witnessed the entry of new market players and changes in the ownership structure of certain competitors. By the end of August, 2014 Banco International announced the intention of “Inversiones la Construcción (ILC)” to take control of the bank by acquiring a 50.1% stake from the controlling shareholder, “Baninter”. Banco Internacional is a small bank within the Chilean banking industry and is mostly focused on the wholesale banking segment. As of December 31, 2014 Banco Internacional’s loan book represented 0.6% of the total outstanding loans of the industry (excluding operations of subsidiaries abroad). On the other hand, on May 30, 2014 the SBIF authorized the existence and approved the bylaws of “Banco BTG Pactual Chile.” This bank, a Chilean subsidiary ofBrazil-based bank BTG Pactual, was already operating in the Chilean financial industry since 2012 by providing stock brokerage, mutual funds management and investment banking services. Banco BTG Pactual Chile received the final authorization to operate as a bank by December 31, 2014 and officially started its operations on January 23, 2015.

We expect these trends of increasedincreasing competition and consolidation to continue, particularly in connection with the formation of new large financial groups and the creation of new niche banks. Although we believe that we are currently large enough to compete effectively in all of our target markets, any further consolidation in the Chilean financial services industry may adversely affect our competitive position. We are working on developing and enhancing our competitive strengths to ensure our sustainability.

Historically, commercial banks in Chile have competed in the retail market against each other, and finance companies and department stores, with the latter two having traditionally been focused on consumer loans to low and middle-income segments. However, finance companies have gradually disappeared as most of them have been merged into the largest commercial banks.

In recent years, the Chilean financial system has witnessed a new phenomenon: the rise of non-traditional banking competitors, such as large department stores. These players have become increasingly significant in the consumer-lending sector, as they are permitted to issue financial products such as credit cards. Currently, there are three consumer-oriented banks affiliated with Chile’s largest department stores: Banco Falabella, Banco Ripley and Banco Paris. Although these banks had a combined market share (excluding subsidiaries abroad) of only 1.5% as of December 31, 2012, according to the Superintendency of Banks, the presence of these banks is likely to make consumer banking more competitive over the next years.

In addition, during 2012 Corpbanca, fourth-ranked among Chilean privately-owned banks in terms of total loans as of December 31, 2011, acquired a former Santander Group’s subsidiary in Colombia and consolidated its balance sheet and results of operations beginning May 31, 2012. As of December 31, 2012 loans associated with this subsidiary amounted to Ch$1,883,434 million and represented 1.9% of the industry’ total loans.

Below there is a set of tables and figures for the years ended December 31, 2010, 20112012, 2013 and 20122014 that shows our position within the Chilean financial industry. The market information is set forth under Chilean GAAP as published by the Superintendency of BanksSBIF and—unless otherwise indicated—excludes data related to operations of subsidiaries abroad.

The following table sets forth certain statistical information on the Chilean financial system as of December 31, 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

 As of December 31, 2012 
 (in millions of Ch$, except percentages)  As of December 31, 2014 
 Assets Loans(1)(2) Deposits(2) Equity(3)  (in millions of Ch$, except percentages) 
 Amount Share Amount Share Amount Share Amount Share  Assets Loans(1)(2) Deposits(2) Equity(3) 
CHILEAN GAAP: (in millions of Ch$, except percentages)  Amount Share Amount Share Amount Share Amount Share 

Private sector banks

 Ch$117,372,056 ��  83.5 Ch$84,984,942    85.9 Ch$68,980,841    81.2 Ch$10,110,009    89.8 Ch$152,764,835    84.5 Ch$104,012,138    86.2 Ch$81,087,677    80.8 Ch$13,172,923    91.4

Banco del Estado

  23,226,824    16.5    13,894,809    14.1    15,937,708    18.8    1,147,666    10.2    28,116,204    15.5    16,614,586    13.8    19,295,095    19.2    1,242,499    8.6  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total banking system

 Ch$140,598,880    100.0 Ch$98,879,751    100.0 Ch$84,918,549    100.0 Ch$11,257,675    100.0 Ch$180,881,039    100.0 Ch$120,626,724    100.0 Ch$100,382,772    100.0 Ch$14,415,422    100.0
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Loans to customers, net of interbank loans.
(2)Excludes operations of subsidiaries abroad.
(3)For purposes of this table, equity includes capital and reserves, net income for the period and provisions for minimum dividends.

Loans

We had total loans of Ch$18,761,76521,876,648 million as of December 31, 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP. The following table sets forth our market share and the market share of our principal privately-ownedprivately owned competitors in terms of total loans, as of the dates indicated, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Total Loans(1)(2)   Total Loans(1)(2) 
CHILEAN GAAP:  As of December 31,   As of December 31, 
          2010                 2011                 2012                   2012                 2013                 2014         

Banco Santander—Chile

   20.9  19.7  19.1   19.1  19.2  19.0

Banco de Chile

   19.2    19.8    19.0     19.0    19.1    18.1  

Banco de Crédito e Inversiones

   12.7    12.9    13.2     13.2    13.2    13.1  

Banco Corpbanca

   7.3    7.7    8.4     8.4    7.3    7.4  

BBVA Bilbao Vizcaya

   7.3    7.0    7.1     7.1    6.9    6.9  
  

 

  

 

  

 

   

 

  

 

  

 

 

Accumulated market share

   67.4  67.1  66.8   66.8  65.7  64.5
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Provisions for loan losses not deducted.
(2)Excludes operations of subsidiaries abroad.

Credit Quality

The following table sets forth the ratio of allowances to total loans of the largest private banks in Chile and that of the Chilean financial system as a whole (including such banks) as of December 31, 2010, 20112012, 2013 and 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Allowances to Total  Loans(1)   Allowances to Total  Loans(1) 
CHILEAN GAAP:  As of December 31,   As of December 31, 
          2010                 2011                 2012                   2012                 2013                 2014         

Banco Santander—Chile

   2.82  3.02  2.91   2.91  2.91  3.06

Banco de Crédito e Inversiones

   2.52    2.44    2.29     2.29    2.32    2.17  

Banco de Chile

   2.48    2.21    2.28     2.28    2.30    2.42  

BBVA Bilbao Vizcaya

   1.75    2.02    1.80     1.80    1.72    1.64  

Banco Corpbanca

   1.95    1.54    1.27     1.27    1.55    1.36  
  

 

  

 

  

 

   

 

  

 

  

 

 

Financial system

   2.52  2.36  2.27   2.27  2.36  2.65
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Excludes operations of subsidiaries abroad.

The following table sets forth the ratio of total past-due loans to(90 days or more) over total loans for the largest private banks in Chile as of December 31, 2010, 20112012, 2013 and 20122014 on a consolidatedan individual basis, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Total Past-Due Loans to Total Loans(1)   Past-Due Loans to Total Loans(1)(2) 
CHILEAN GAAP:  As of December 31,   As of December 31, 
          2010                   2011                    2012                   2012                 2013                 2014         

Banco de Chile

   1.20  1.03  0.97   0.97  1.13  1.25

Banco Corpbanca

   1.30    1.21    1.48  

BBVA Bilbao Vizcaya

   2.18    1.90    1.22     1.22    1.50    1.59  

Banco Corpbanca

   2.04    1.58    1.25  

Banco de Crédito e Inversiones

   2.16    2.16    1.91     2.07    2.39    2.29  

Banco Santander—Chile

   2.66    2.95    3.17     3.17    2.93    2.81  
  

 

  

 

  

 

   

 

  

 

  

 

 

Financial system

   2.70  2.35  2.17   2.22  2.15  2.12
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Chilean Superintendency of BanksSBIF

 

(1)Excludes operationsThe Superintendency of subsidiaries abroad.Banks only releases information about past-due loans (90 days or more) on an individual basis for Chilean banks.
(2)Past-Due loans refer to loans 90 days or more past-due, including installments that are overdue and the remaining amount of principal and interest.

Deposits

We had total deposits (including demand deposits and time deposits) of Ch$15,083,92116,655,619 million as of December 31, 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP. The following table sets forth the market shares in terms of total deposits for private banks as of December 31, 2010, 20112012, 2013 and 20122014 on a consolidated basis, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Total Deposits(1)   Total Deposits(1) 
CHILEAN GAAP:  As of December 31,   As of December 31, 
          2010                   2011                    2012                   2012                 2013                 2014         

Banco de Chile

   18.7  18.5  17.8   17.8  17.8  16.6

Banco Santander—Chile

   17.7    17.4    16.6     16.6    16.6    16.8  

Banco de Crédito e Inversiones

   12.8    13.0    12.8     12.8    12.6    12.8  

BBVA Bilbao Vizcaya

   6.3    6.4    6.3  

Banco Corpbanca

   6.6    7.2    8.2     8.2    6.3    6.2  

BBVA Bilbao Vizcaya

   6.4    6.5    6.3  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total market share

   62.2  62.6  61.7   61.7  59.7  58.7
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Excludes operations of subsidiaries abroad.

Capital and Reserves

The following table sets forth the level of capital and reserves for the largest private banks in Chile as of December 31, 2010, 20112012, 2013 and 20122014 according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Capital and Reserves(1)   Capital and Reserves 
CHILEAN GAAP:  As of December 31,   As of December 31, 
  2010   2011   2012   2012   2013   2014 

Banco de Chile

  Ch$1,841,968    Ch$2,095,296    Ch$2,268,664  

Banco Santander—Chile

  Ch$1,529,599    Ch$1,730,464    Ch$1,898,348     1,898,348     2,044,834     2,257,747  

Banco de Chile

   1,268,101     1,569,871     1,841,968  

Banco Corpbanca

   936,275     1,639,493     1,654,610  

Banco de Crédito e Inversiones

   883,714     1,039,161     1,230,078     1,230,078     1,371,894     1,560,883  

Banco Corpbanca

   475,839     643,218     936,275  

BBVA Bilbao Vizcaya

  Ch$464,814    Ch$490,608    Ch$592,336     592,336     631,434     664,224  

 

Source: Superintendency of BanksSBIF

(1)Includes operations of subsidiaries abroad.

Return on Capital and Reserves

The following table sets forth our return on capital and reserves and the returns on capital and reserves of our principal privately owned competitors and the Chilean banking industry as a whole, in each case as of December 31, 2010, 20112012, 2013 and 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Return on Capital and Reserves(1)(2)   Return on Capital and Reserves(1)(2) 
CHILEAN GAAP:  Year Ended December 31,   Year Ended December 31, 
           2010                    2011                    2012                     2012                 2013                 2014         

Banco de Chile

   29.9  27.3  25.3   25.3  24.5  26.1

Banco de Crédito e Inversiones

   22.1    21.9    22.0  

Banco Santander—Chile

   31.2    25.1    20.4     20.4    21.6    24.4  

Banco de Crédito e Inversiones

   25.1    25.1    22.1  

BBVA Bilbao Vizcaya

   10.4    15.2    11.0     11.0    8.0    11.0  

Banco Corpbanca

   25.0    19.1    10.2     12.8    9.5    13.7  
  

 

  

 

  

 

   

 

  

 

  

 

 

Financial system average

   16.7  15.7  13.2

Financial System average

   15.6  15.9  18.6
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Corresponds to net income attributable to equity holders divided bythe year endyear-end balance of Capital and Reserves.
(2)ExcludesIncludes operations of subsidiaries abroad.

Efficiency

The following table sets forth the efficiency ratios of the largest private Chilean banks as of December 31, 2010, 20112012, 2013 and 2012,2014, according to information published by the Superintendency of BanksSBIF under Chilean GAAP:

 

  Efficiency Ratio(1)(2)   Efficiency Ratio(1)(2) 
CHILEAN GAAP:  As of December 31,   As of December 31, 
           2010                    2011                    2012                      2012                    2013                    2014           

Banco de Chile

   47.2  42.8  43.4

Banco Santander—Chile

   40.1  41.4  42.8   42.8    43.0    42.0  

Banco de Chile

   50.3    50.2    47.2  

Banco de Crédito e Inversiones

   50.5    47.2    49.6     49.6    48.2    46.1  

Banco Corpbanca

   42.3    44.6    56.7     56.7    52.9    52.1  

BBVA Bilbao Vizcaya

   62.9    55.7    59.5     59.5    58.4    65.4  
  

 

  

 

  

 

   

 

  

 

  

 

 

Financial system average

   51.5  50.0  51.2

Financial System average

   51.2  49.9  49.5
  

 

  

 

  

 

   

 

  

 

  

 

 

 

Source: Superintendency of BanksSBIF

 

(1)Calculated by dividing operating expenseOperating expenses divided by operating revenue.
(2)Includes operations of subsidiaries abroad.

REGULATION AND SUPERVISION

General

In Chile, only banks may maintain current accounts for their customers conduct foreign trade operations and, together withnon-banking financial institutions, accept time deposits. The principal authorities that regulate financial institutions in Chile are the Superintendency of BanksSBIF and the Central Bank. Chilean banks are primarily subject to the General Banking Law and secondarily, to the extent not inconsistent with that law, the provisions of the Chilean Corporations Law governing public corporations, except for certain provisions that are expressly excluded.

The Chilean banking system dates back to 1925 and has been characterized by periods of substantial regulation and government intervention, as well as periods of deregulation. The most recent period of deregulation commenced in 1975 and culminated in the adoption of a series of amendments to the General Banking Law. In 2004, amendments to the General Banking Law granted additional powers to banks, including general underwriting powers for new issuances of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, investment fund management, factoring, securitization products and financial leasing services. Prior to 2006, banks had the option of distributing less than 30% of their earnings as dividends in any given year, subject to approval of the holders of at leasttwo-thirds of the bank’s common stock. In 2006, however, the General Banking Law was amended to eliminate this alternative.

Following the Chilean banking crisis of 1982 and 1983, the Superintendency of BanksSBIF assumed control of banks representing approximately 51% of the total loans in the banking system. As part of the assistance that the Chilean Government provided to Chilean banks, the Central Bank permitted banks to sell to it a certain portion of theirnon-performing loan portfolios at book value. Each bank then repurchased such loans at their economic value (which, in most cases, was substantially lower than the book value at which the Central Bank had acquired them), with the difference to be repaid to the Central Bank out of future income. Pursuant to Law No. 18,818, which was passed in 1989, this difference was converted into subordinated debt.

Lastly, by the end of 2014, the Chilean Finance Ministry announced an overall review and various modifications to the Chilean Banking Law. As proposed, these changes are aimed at modernizing the Chilean banking framework by adopting the Basel III Guidelines, while appropriately regulating the complexity of the Chilean banking industry, improving corporate governance requirements and reinforcing the independency of the SBIF, and establishing a resolution system for banks. This proposal will likely be sent to the Chilean congress for discussion and approval. See “Item 3. Risk Factors—Restrictions imposed by banking regulations may constrain our operations and thereby adversely affect our financial condition and results.”

The Central Bank

The Central Bank is an autonomous legal entity created under the framework of the Chilean Constitution. It is subject to itsLey Orgánica Constitucional (the “Organic Constitutional Law”) and the Chilean Constitution. To the extent not inconsistent with its Organic Constitutional Law or the Chilean Constitution, the Central Bank is also subject to general laws applicable to the private sector, but is not subject to the laws applicable to the public sector. The Central Bank is directed and administered by a board of directors composed of five members designated by the President of Chile, subject to Senate approval.

The legal purpose of the Central Bank is to maintain the stability of the Chilean peso and the orderly functioning of Chile’s internal and external payment systems. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, and establishing regulations and guidelines regarding financial companies, foreign exchange (including the Formal Exchange Market) and bankdeposit-taking activities.

The Superintendency of Banks

Banks are supervised and controlled by the Superintendency of Banks,SBIF, a Chilean governmental agency. The Superintendency of BanksSBIF authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial institutions. Furthermore, in cases of noncompliance with its legal and regulatory requirements, the Superintendency of BanksSBIF has the ability to impose sanctions.

In extreme cases, it can appoint, with the prior approval of the board of directors of the Central Bank, a provisional administrator to manage a bank. It also has the mandate to approve any amendment to a bank’s bylaws or any increase in its capital.

The Superintendency of BanksSBIF examines all banks from time to time, usually at least once a year. Banks are required to submit unconsolidated unaudited financial statements to the Superintendency of BanksSBIF on a monthly

basis and to publish their unaudited financial statements at least four times a year in a newspaper of national circulation. A bank’s financial statements as of December 31 of each year must be audited and submitted to the Superintendency of BanksSBIF together with the opinion of its independent auditors. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the Superintendency of Banks.SBIF.

Any person wishing to acquire, directly or indirectly, 10% or more of the share capital of a bank must obtain prior approval from the Superintendency of Banks.SBIF. Without such approval, the holder will not have the right to vote such shares. The Superintendency of BanksSBIF may only refuse to grant its approval based on specific grounds set forth in the General Banking Law.

According to Article 35 bis of the General Banking Law, the prior authorization of the Superintendency of BanksSBIF is required for each of the following:

 

the merger of two or more banks;

 

the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank;

 

the control by the same person, or controlling group, of two or more banks; or

 

a substantial increase in the share ownership of a bank by a controlling shareholder of that bank.

Such prior authorization is required only when the acquiring bank or the resulting group of banks would own a market share in loans determined by the Superintendency of BanksSBIF to be more than 15% of the Chilean banking system loans. The intended purchase, merger or expansion may be denied by the Superintendency of Banks,SBIF, or, if the acquiring bank or resulting group would own a market share in loans determined to be more than 20% of the Chilean banking system loans, the purchase, merger, or expansion may be conditioned on one or more of the following:

 

that the bank or banks maintain Regulatory Capital above 8% and up to 14% of theirrisk-weighted assets;

 

that the technical reserve established in article 65 of the General Banking Law be applicable when deposits exceed 1.5 times the resulting bank’spaid-in capital and reserves; or

 

that the amount of interbanking loans be reduced to 20% of the resulting bank’s Regulatory Capital.

If the acquiring bank or resulting group would own a market share in loans determined by the Superintendency of BanksSBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining Regulatory Capital not below 10% of theirrisk-weighted assets for a period set by the Superintendency of Banks,SBIF, which may not be less than one year. The calculation ofrisk-weighted assets is based on afive-category risk classification system applied to a bank’s assets that is based on the Basel Committee recommendations.

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

 

banks must disclose to the Superintendency of BanksSBIF the identity of any person owning, directly or indirectly, 5% or more of its shares;

 

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

 

the depositary must disclose to the bank the identity of beneficial owners of ADSs which the depositary has registered, and the bank, in turn, must disclose to the Superintendency of BanksSBIF the identity of the beneficial owners of the ADSs representing 5% or more of such bank’s shares; and

 

bank shareholders who individually hold 10% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the Superintendency of BanksSBIF of their financial condition.

The Superintendency of Securities and Insurance

Our subsidiaries Banchile Corredores de Bolsa S.A., Banchile Administradora General de Fondos S.A., Banchile Securitizadora S.A. and Banchile Corredores de Seguros Ltda. are supervised by the Superintendency of Securities and Insurance (Superintendencia de Valores y Seguros or “SVS”). The SVS is a Chilean governmental agency that is empowered to interpret and enforce legal and regulatory requirements applicable to entities that are subject to securities and insurance regulation. The SVS also has the ability to impose sanctions over the supervised entities.

Limitations on Types of Activities

Chilean banks can only conduct those activities allowed by the General Banking Law, including loan placements, factoring and leasing activities, accepting deposits and, subject to certain limitations, making investments and performing financial services. Investments are restricted to real estate for the bank’s own use, gold, foreign exchange and debt securities. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, mutual fund management, investment fund management, foreign capital fund management, financial advisory, securitization and factoring activities. Subject to specific limitations and the prior approval of the Superintendency of BanksSBIF and the Central Bank, Chilean banks may own majority ornon-controlling interests in foreign banks.

In March 2002, the Central Bank authorized banks to pay interest on current accounts and the Superintendency of BanksSBIF published guidelines permitting banks to offer and charge fees for the use of a current account product that pays interest. Under these guidelines, these accounts may be subject to a minimum balance and different interest rates depending on average balances held in the account. The Central Bank has imposed additional caps on the interest rate that can be charged by banks with a solvency score of less than A.

In June 2007, the Chilean Government passed Law No. 20,190, which amended various aspects of Chile’s capital markets regulatory framework, such as the General Banking Law, Securities, Insurance, Venture Capital and Tax law. Law No. 20,190 is aimed at improving the access to financing forstart-up companies and small businesses in order to strengthen confidence in the stock market and to stimulate the development of the financial market in general. The General Banking Law was amended to achieve these goals by, among other things, revising regulations concerning demand deposits, increasing certain credit limits, and redefining the calculations to determine the proper amount for a bank’s reserves. In addition, the General Banking Law was amended to allow local banks to engage in derivatives such as options, swaps and forward contracts, thereby eliminating prior existing legal impediments to those practices.

As a consequence of Chile’s accession to the Organization for EconomicCo-operation and Development, the Chilean Congresscongress introduced new corporate governance regulations in 2009. The Chilean Corporations Law and the Chilean Securities Markets Law were amended such that public companies with capital above 1,500,000 UF that have at least 12.5% of their voting shares owned by shareholders representing less than 10% of the voting shares are required to have at least one independent director in their board of directors. In order to assure the independence of this director, certain requirements were established to protect minority shareholders’ decisions. In addition, regulation was passed to expand the disclosure requirements ofpublicly-held companies and to hold members of boards of directors liable for not complying with such disclosure obligations.

Deposit Insurance

According to the General Banking Law, local or foreign currency denominated deposits at banks or financial companies are insured as described below.

The Chilean Government guarantees up to 100% of the principal amount of the following deposits:

 

deposits in current accounts;

deposits in savings accounts of demand deposits;

 

other demand deposits; and

 

deposits in savings accounts with unlimited withdrawals.

In addition, the Chilean Government guarantees up to 90% of the principal amount of time deposits held by individuals in the Chilean banking system. This guarantee covers obligations with a maximum value of UF 108 per person (Ch$2,466,8012,659,727 or U.S.$5,144.854,388.3 as of December 31, 2012)2014).

Reserve Requirements

Deposits are subject to a reserve requirement of 9%9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to increase these percentages to as much as 40% for demand deposits and as much as 20% for time deposits, to implement monetary policy.

In addition, Chilean banks must hold a certain amount of assets in cash or highly liquid instruments. This reserve requirement is equal to the amount by which the daily balance of deposits payable on demand, net of clearing, exceeds 2.5 times the amount of the bank’s Regulatory Capital. Deposits payable on demand include the following:

 

deposits in current accounts;

 

other demand deposits or obligations payable on demand and incurred in the ordinary course of business;

 

saving deposits that allow unconditional withdrawals that bear a stated maturity; and

 

other deposits unconditionally payable immediately.

Chilean regulations also require that (i) gaps between assets and liabilities maturing within less than 30 days do not exceed a bank’s Basic Capital and (ii) gaps between assets and liabilities maturing within less than 90 days do not exceed twice a bank’s Basic Capital. Behavioral assumptions of assets and liabilities maturities are accepted if approved by the SuperintendencySBIF.

As of Banks.December 31, 2014 Banco de Chile fully complied these reserve requirements.

Minimum Capital

Under the General Banking Law, a bank must have a minimum paid in capital and reserves of UF 800,000 (Ch$18,27319,702 million or U.S.$38.132.5 million as of December 31, 2012)2014). However, a bank may begin its operations with 50% of such amount, provided that it has a Regulatory Capital ratio (defined as Regulatory Capital as a percentage of risk weighted assets) of not less than 12%. When such a bank’s paid in capital reaches UF 600,000 (Ch$13,70414,776 million or U.S.$ 28.624.4 million as of December 31, 2012)2014), the Regulatory Capital ratio requirement is reduced to 10%.

As of December 31, 2014 Banco de Chile fully complied with such minimum capital requirements.

Capital Adequacy Requirements

According to the General Banking Law, each bank should have Regulatory Capital of at least 8% of itsrisk-weighted assets, net of required allowances. This percentage may be increased by the regulators according to what has been stated above.

Banks should also have a Basic Capital of at least 3% of their total assets, net of required allowances.

The terms Regulatory Capital and Basic Capital are defined under “Presentation of Financial Information” at the beginning of this annual report.

As of December 31, 2014 Banco de Chile fully complied with such capital adequacy requirements.

Market Risk Regulations

In September 2005, the Superintendency of BanksSBIF introduced new regulations for measuring market risks (e.g., price and liquidity risks). This entity introduced standardized methodologies based on Basel Market Risk Measurement models for measuring and reporting price risks. These methodologies allow local banks to determine interest rate, foreign exchange (“FX”) and options risks (for FX and interest rate transactions) taken in both their trading and accrual books. Additionally, this entity provided funding liquidity risk measurements standards which included the alternative to model the maturity tenor of some balance sheet items following behavioral assumptions.

The trading book is composed of portfolios of debt and equity instruments that have a liquid secondary market and therefore their valuation at market prices and the corresponding profit and losses impact is representative of market conditions. In addition, all derivative transactions and the FX mismatches are also part of the trading book. The accrual book comprises all of the asset and liability balance sheet items that are not part of the trading book.

The regulation provides that 8% of the sum of therisk-weighted assets and the price risk of the trading book plus 8%may not be higher than Regulatory Capital. In light of the risk-weighted assets (in light of our merger with Citibankbetween Banco de Chile and Banco A. Edwards in 2002, the Superintendency of Banks hasSBIF raised the applicable percentage for us from 8% to 10%) may not be higher than Regulatory Capital.. As of December 31, 2012,2014, the price risk of our trading book totaled Ch$40,86480,579 million.

The following table shows our regulatory risk availability, computed as the difference between the total risk (10% of the risk-weighted assets plus the trading book risk) and our Regulatory Capital, as of December 31, 2012:2014:

 

   As of December 31, 20122014 
   

(in millions of Ch$, except
percentage)

percentage)

 

(a) 10%risk-weighted assets

  Ch$2,070,9522,439,925  

(b) Trading price risk

   40,86480,579  

(c = a + b) Total risk

   2,111,8162,520,504  

(d) Regulatory Capital

   2,738,8293,249,903  

(e = d – c) Risk Availability

  Ch$627,013729,399  

(f = c/d) Risk used as a Percentage of Regulatory Capital

   77.1177.6

Interest rate risk generated by the accrual book is measured against aself-imposed limit equal to the lesser of12-month rolling net revenues and our Basic Capital.

The guidelines for measuring liquidity risk are mainly focused on constructing an expected cash flow analysis for the following 30 and 90 days, broken down by currency. Net outflows may not exceed the amount of our Basic Capital for the following 30 days or two times that amount for the following 90 days. Subject to approval of the Superintendency of Banks,SBIF, the cash flow analysis may include behavioralrun-off assumptions for some specific liability balance sheets items (demand deposits, time deposits, etc.) and behavioralroll-over assumptions for some asset items of the consolidated statement of financial position data (loans, etc.).

In June 2006, the Superintendency of BanksSBIF introduced new regulations relating to (i) the valuation process of debt instruments and (ii) the measurement and reporting of credit risk generated by derivative transactions.

Prior to June 2006, the Superintendency of BanksSBIF allowed banks to classify debt instruments for accounting and business purposes as either “Trading” or “Held-to-Maturity”“Held-to-Maturity” only. Starting in June 2006, a new alternative classification was added (“(“Available-for-Sale”). No changes to the classification system have occurred since June 2006.

Credit risk for derivative transactions, for regulatory purposes, must be measured and reported as:

Derivatives Credit risk = CurrentMark-to-Market (if positive) + Credit Risk Factor (%) * Notional Amount

The CurrentMark-to-Market (“CMTM”) of the transaction, if positive, reflects the amount of money owed by the customercounterparty today, e.g. corresponding to the amount the customercounterparty would pay us if the transaction were unwound today. As we are interested in measuring the maximum amount of money that the customer would owe us within the life of the transaction, the

maximum potential future value of the transaction is added to the CMTM. This potential value is measured as the Credit Risk Factor multiplied by the Notional Amount. Hence, the Credit Risk Factor reflects the potential value that the transaction may take in favor of the bank (under some confidence level) within its remaining tenor. The regulator determines the Credit Risk Factor by considering market factors (three categories: interest rates, FX rates or equity prices) involved in the respective transactions and the remaining tenor. In addition, banks usually develop their own Credit Risk Factors models to assess credit risk not only under regulatory guidelines. Netting and credit mitigants,mitigation schemes, such as recouponing, early termination, margins, etc. have been acceptedallowed by the regulators in order to optimize theso that banks can better manage their credit risk utilization.risk.

Lending Limits

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

 

A bank may not extend to any entity or individual, directly or indirectly, unsecured credit in an amount that exceeds 10% of the bank’s Regulatory Capital, or in an amount that exceeds 30% of its Regulatory Capital if the excess over 10% is secured by certain assets with a value equal to or higher than such excess.

 

In the case of financing infrastructure projects built through the concession mechanism, the 10% ceiling for unsecured credits is raised to 15% if secured by a pledge over the concession, or if granted by two or more banks or financial companies which have executed a credit agreement with the builder or holder of the concession.

 

A bank may not extend loans to another financial institution subject to the General Banking Law in an aggregate amount exceeding 30% of its Regulatory Capital.

 

A bank may not extend to any individual or entity that is, directly or indirectly, related to the ownership or management of the bank, credit under more favorable terms with respect to repayment conditions, interest rates or collateral than those granted to third parties in similar transactions. The aggregate amount of such credits granted to related persons may not exceed 5% of the bank’s Regulatory Capital. The 5% unsecured ceiling is raised to 25% of the bank’s Regulatory Capital if the excess over 5% is secured by certain assets with a value equal to or higher than such excess. In any case, the aggregate amount of these credits granted by the bank may not exceed the bank’s Regulatory Capital.

 

A bank may not directly or indirectly grant a loan, the purpose of which is to allow an individual or entity to acquire shares of the lender bank.

 

A bank may not lend, directly or indirectly, to a director or any other person who has the power to act on behalf of the bank.

 

A bank may not grant loans to related parties (including holders of more than 1% of its shares) on more favorable terms than those generally offered tonon-related parties. Loans granted to related parties are subject to the limitations described in the first bullet point above. The aggregate amount of loans to related parties may not exceed a bank’s Regulatory Capital.

In addition, the General Banking Law limits the aggregate amount of loans that a bank may grant to its employees to 1.5% of its Regulatory Capital and provides that no individual employee may receive loans in excess of 10% of this 1.5% limit. Notwithstanding these limitations, a bank may grant to each of its employees a single residential mortgage loan for personal use during such employee’s term of employment.

As of December 31, 2014 Banco de Chile fully complied the lending limits established by the General Banking Law.

Classification of Banks

The Superintendency of BanksSBIF regularly examines and evaluates each bank’s solvency and credit management process, including its compliance with loan classification guidelines. On the basis of this evaluation, it classifies banks into various categories.

Solvency and Management

In accordance with amended regulations of the Superintendency of BanksSBIF effective as of January 1, 2004, banks are classified into categories “I” through “V” based upon their solvency and management ratings. This classification is confidential.

 

Category I:

  This category is reserved for financial institutions that have been rated level A in terms of solvency and management.

Category II:

  This category is reserved for financial institutions that have been rated (i) level A in terms of solvency and level B in terms of management, (ii) level B in terms of solvency and level A in terms of management, or (iii) level B in terms of solvency and level B in terms of management.

Category III:

  This category is reserved for financial institutions that have been rated (i) level B in terms of solvency and level B in terms of management for two or more consecutive review periods, (ii) level A in terms of solvency and level C in terms of management, or (iii) level B in terms of solvency and level C in terms of management.

Category IV:

  This category is reserved for financial institutions that are rated level A or B in terms of solvency and have been rated level C in terms of management for two or more consecutive review periods.

Category V:

  This category is reserved for financial institutions that have been rated level C in terms of solvency, irrespective of their rating level of management.

A bank’s solvency rating is determined by its Regulatory Capital (after deducting accumulated losses during the financial year) torisk-weighted assets ratio. This ratio is equal to or greater than 10% for level A banks, equal to or greater than 8% and less than 10% for level B banks and less than 8% for level C banks.

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 internal controls, information systems, response to risk, private risk rating or ability to manage contingency scenarios. Level C banks display significant deficiencies in internal controls, information systems, response to risk, private risk rating or ability to manage contingency scenarios.

Obligations Denominated in Foreign Currencies

Foreigncurrency-denominated obligations of Chilean banks are subject to two requirements:

 

a reserve requirement of 9% for demand deposits and 3.6% for time deposits. Seedeposits (see “—Reserve Requirements”); and

 

net foreign currency outflows may not exceed the amount of the Basic Capital for the following 30 days or two times that amount for the following 90 days.

Capital Markets

Under the General Banking Law, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as mutual fund and investment fund administration, factoring, investment advisory services and merger and acquisition services. The Superintendency of BanksSBIF generally regulates these subsidiaries. However, the Chilean Superintendency of Securities and Insurance regulates some of these subsidiaries. The Chilean Superintendency of Securities and Insurance is the regulator of the Chilean securities market andpublicly-held corporations.

Legal Provisions Regarding Banking Institutions with Economic Difficulties

The General Banking Law provides that if specified adverse circumstances exist at any bank, its board of directors must correct the situation within 30 days from the date of receipt of the relevant financial statements. If the board of directors is unable to do so, it must call an extraordinary shareholders’ meeting to increase the capital of the bank by the amount necessary to return the bank to financial stability. If the shareholders reject the capital increase, or if it is not effected within the30-day period and in the manner agreed to at the meeting, or if the Superintendency of BanksSBIF does not approve the board of directors’ proposal, the bank will be barred from increasing its loan portfolio beyond that stated in the financial statements presented to the board of directors and from making any further investments in any instrument other than instruments issued by the Central Bank. In such a case, or in the event that a bank is unable to make timely payment in respect of its obligations, or if a bank is under provisional administration

of the Superintendency of Banks,SBIF, the General Banking Law provides that the bank may receive atwo-year term loan from another bank. The terms and conditions of such a loan must be approved by the board of directors of both banks, as well as by the Superintendency of Banks,SBIF, but need not be submitted to the borrowing bank’s shareholders for their approval. A creditor bank may not grant such interbank loans to an insolvent bank in an amount exceeding 25% of the creditor bank’s Regulatory Capital. The board of directors of a bank that is unable to make timely payment of its obligations must present a reorganization plan to its creditors in order to capitalize the credits, extend their respective terms, forgive debts or take other measures for the payment of the debts. If the board of directors of a bank submits a reorganization plan to its creditors and such arrangement is approved, all subordinated debt issued by the bank, whether or not matured, will be converted by operation of law into common stock in the amount required for the ratio of Regulatory Capital torisk-weighted assets to be no lower than 12%. If a bank fails to pay an obligation, it must notify the Superintendency of Banks,SBIF, which shall determine if the bank is solvent.

Dissolution and Liquidation of Banks

The Superintendency of BanksSBIF may establish that a bank should be liquidated for the benefit of its depositors or other creditors when the bank does not have the necessary solvency to continue its operations. In which case, the Superintendency of BanksSBIF must revoke the bank’s authorization to exist and order its mandatory liquidation, subject to the agreement of the Central Bank. The Superintendency of BanksSBIF must also revoke the bank’s authorization if the reorganization plan of the bank has been rejected twice. The resolution by the Superintendency of BanksSBIF must state the reason for ordering the liquidation and must name a liquidator, unless the Superintendency of BanksSBIF assumes this responsibility. When a liquidation is declared, all current accounts, other demand deposits received in the ordinary course of business, other deposits unconditionally payable immediately or that have a maturity of no more than 30 days, and any other deposits and receipts payable within 10 days of its maturity date, are required to be paid by using the bank’s existing funds, its deposits with the Central Bank, or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the bank’s remaining assets, as needed. If necessary, and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.

Investments in Foreign Securities

Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain foreign currency securities. Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would support the bank’s business if such companies were incorporated in Chile. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities shall qualify as (i) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (ii) bonds issued by foreign companies. Such foreign currency securities must have a minimum rating as indicated in the table below and, if the investments in these securities and the loans referred to above exceed 70% of the Regulatory Capital of the bank, an allowance for 100% of the excess shall be established:

 

Rating Agency

  Short Term  Long Term

Moody’s Investor Service (Moody’s)

  P2  Baa3

Standard and Poor’s (S&P)

  A2  BBB–

Fitch IBCARating Service (Fitch)

  F2  BBB–

Dominion Bond Rating Service (DBRS)

R2BBB (low)

A Chilean bank may invest in securities having a minimum rating as follows, provided that if the total amount of these investments and the loans referred to above exceed 20% (or 30% in certain cases) of the Regulatory Capital of the bank, an allowance of 100% of the excess shall be established by the bank:

 

Rating Agency

  Short Term  Long Term

Moody’s Investor Service (Moody’s)

  P2  Ba3

Standard and Poor’s (S&P)

  A2  BB–

Fitch IBCARating Service (Fitch)

  F2  BB–

Dominion Bond Rating Service (DBRS)

R2BBB (low)

However, a Chilean bank may invest in securities up to an additional amount of 70% of the bank’s Regulatory Capital without having to establish an additional allowance, if such securities have a minimum rating of:

 

Rating Agency

  Short Term  Long Term

Moody’s Investor Service (Moody’s)

  P1P2  Aa3Ba3

Standard and Poor’s (S&P)

  A–1+A2  AA–BB–

Fitch IBCARating Service (Fitch)

  F1+F2  AA–BB–

Dominion Bond Rating Service (DBRS)

R2BB (low)

Subject to specific conditions, a bank may grant loans in U.S. dollars to subsidiaries or branches of Chilean companies located abroad, to companies listed on foreign stock exchanges located in countries with an international risk rating no less thanBB- or its equivalent and, in general, to individuals and entities residing or domiciled abroad.

Procedures for the Management of Information of Interest to the Market

In order to ensure compliance with the provisions of the Chilean Securities Market Law and regulations, issued by the Chilean Superintendency of Securities and Insurance and the Superintendency of Banks,SBIF, our board of directors approved, on January 29, 2010, the Manual for the Management of Information of Interest to the Market (the “Manual”).

The Manual’s main objective is to provide timely disclosure of our policies and internal regulations in connection with the disclosure of information to the public and the systems that have been implemented by us.

In addition, these policies and internal regulations establish codes of conduct that our employees and other persons with access to certain information must comply with in order to protect information related to us.

The Manual is available to the general public on our web page atwww.bancochile.cl.

Prevention of Money Laundering and the Financing of Terrorism

On December, 18, 2003 Law 19.913 created the Financial Analysis Unit and enacted new rules regarding money laundering. On March 6, 2006, the Superintendency of BanksSBIF issued regulations governing the requirements applicable to banks with respect to prevention of money laundering and terrorism financing. The regulations, as amended, are aimed at incorporating internationalanti-money laundering (“AML”) and terrorism financing laws to the Chilean banking industry. Pursuant to these regulations, the Superintendency of BanksSBIF requires that banks implement anAnti-Money Laundering and Terrorism Financing system based mainly on the “know your customer” concept. Moreover, these policies and procedures must be approved by the board of directors of each bank and must take into account the volume and complexity of its operations and other related parties.

Based on these requirements, a Customer Identification Program (as part of theAnti-Money Laundering and Terrorism Financing system) is needed to enable a bank to reestablish the reasonable belief that it knows the true identity of its customers. In general, the program includes:

 

properly identifying customers, including their background, source and amount of funds, country of origin and other risk factors;

 

identifying what the Superintendency of BanksSBIF has defined as “persons politically exposed” (“PEPs”) both within Chile and abroad; and

 

establishing procedures to open accounts and products, with different documentation requirements needed for different types of accounts and products.

TheAnti-Money Laundering and Terrorism Financing system required by local regulations must also include the following components:

 

AML policies and procedures aimed at preventing a bank from being used as an intermediary to carry out money laundering operations;

appointment of a compliance officer on a senior management level who is responsible for coordinating andmonitoring day-to-day AML compliance;

 

establishment of an AML Committee for the purposes of planning and coordinating compliance with AML policies and procedures;

 

use of software tools to detect, monitor and report unusual operations related to transactions made by customers on different products;

 

implementation of personnel selection policies and a training program, in order to prevent money laundering;

 

establishment of a Code of Conduct in order to, among other things, guide employee behavior and prevent possible conflicts of interest; and

 

independent testing by the compliance department, which must be conducted by a bank’s internal audit department.

Consumer-Oriented Regulation

On September 22, 2010, the Superintendency of Banks issued Circular No. 3,505 and Circular No. 3,506 with the purpose of promoting good practices and more transparency in the terms and conditions of financial services rendered by Chilean banks and financial institutions. On November 15, 2010, the Superintendency of Banks amended Circular No. 3,505 and Circular No. 3,506 by issuing Circular No. 3,513 and Circular No. 3,514. The most significant changes enacted by Circular No. 3,505 and Circular No. 3,506, as amended, are:

any interest rate modification in credit lines offered in connection with a current account may only follow a variable rate and be based on a rate published by the Central Bank or any other entity or publisher of financial information widely recognized, previously agreed upon with the customer;

any change to fees agreed with a customer may only be modified with the expressed or implied consent of such customer, thereby altering previous regulations regarding current accounts and credit cards;

no interest rate or fee may be conditioned on customers obtaining or maintaining other hired services or products;

no mortgage loan may be conditioned on the grant by the customer of a general security interest securing other financial services that the customer may have;

mortgage loans may not have as security a mortgage on property other than the property being financed by the mortgage loan;

no bank may claim an exemption from liability resulting from errors or flaws in the bank’s processes and systems or defaults under insurance agreements; and

any contractual provision that conflicts with Circular No. 3,505 and Circular No. 3,506 is unenforceable by a bank against its counterparty, even if it predates these regulations.

On December 5, 2011, Law 20.555 was published in theDiario Oficial,, amending the Chilean Consumer Protection Law. The most significant changes enacted by Law 20.555 were:

 

new agreements entered into by banks and consumer must fully disclose the costs that the consumer assumes, as well as the periodicity, and the mechanisms to modify them. In addition, new agreements must fully disclose all terms, events of default, events of early termination, and automatic payments;

banks must inform consumers periodically as to the complete, detailed cost of the banking product, as well as of the cost of the services rendered. The information must include the cost that the consumer will assume if he terminates the agreement before the end of its term;

 

before rendering a service or delivering a product, banks must give the consumer a quote, which must include costs, rates, and conditions;

 

if the consumer so wishes banks must terminate the rendering of a service;

 

banks must inform guarantors as to their rights and obligations before they assume the role of guarantor;

 

irrevocable mandates and mandates in blank are prohibited by the law;

 

when consumers execute standard form contracts, banks must explain, in writing, the main provisions of the agreement; and

 

banks may only modify fees and costs of services and banking products if the mechanisms to modify them are based on objective and verifiable factors previously agreed to in the agreement. In addition, the cost of banking services and products may not be modified without the consent of the consumer.

This amendment became effective on March 5, 2012,2012; however, with regards to the banking product agreements entered into before saidsuch date, the amendment does not affect the substantive rights acquired by the parties in those agreements. This amendment

created a new legal framework, “Sernac Financiero”, whose purpose is to monitor and oversee the relationship between customers and financial institutions, with a particular focus on lending activities and contracts.

OnIn July 2012, the government enacted the regulations that implement Law 20,555, which address mortgage loans, consumer loans, credit cards, the “Sernac Seal” (Sello Sernac), and other financial products and services. The new regulations govern, among other matters, the form and content of communications that financial institutions must periodically provide to their customers. Likewise, the new regulations implement theso-called “Summary Sheet” (Hoja Resumen)(Hoja Resumen), which must precede the contracts that consumers enter into with financial institutions. The Summary Sheet is intended to provide a clear and understandable summary of the terms and conditions that govern financial products and services.

The Sernac Seal is a new concept introduced by Law 20,555 and consists of anon-mandatory certification granted by the Chilean government agency in charge of consumer protection (Servicio Nacional del Consumidor,“Sernac”), by which that agency confirms that the contracts used by a financial institution when providing products and services comply with the Consumer Protection Act. In this regard, the new regulation establishes the specific requirements for financial institutions to obtain such certification as well as the events that may lead to its termination. Among the requirements to obtain the certification, financial institutions must provide a consumer service and adopt a dispute resolution procedure as defined by Law 20,555 and its regulation.

All of these regulations are already implemented by Banco de Chile, except Sernac Seal, which is not mandatory. We do

On April 30, 2013, the SBIF revoked several regulations that governed in general terms the collection of fees and expenses, the possibility of collecting them in certain cases, changing the fees to be charged to customers, and their exclusion from the calculation of the effective interest rate. The SBIF said that this revocation occurred because, based on the amendments incorporated by law No 20,555, it lacks authority to continue regulating these matters.

On December 19, 2013, the Ministry of Economy published a regulation for the manner and conditions under which consumers validly express their consent to financial contracts. Additionally, this regulation established the effects of a customer’s rejection ornon-acceptance of an amendment proposed by the bank or other supplier. However, this regulation was revoked on March 26, 2014.

On March 17, 2015 the SBIF released Circular Nº 3,578, which provides a new set of minimum standards for the availability of banks’ ATM networks. These rules impose minimum levels of uptime for ATMs belonging to each institution in order to ensure desired levels of performance and service quality. Also, the SBIF has urged local banks to include the management of their ATM networks within their service policies and has required that they report relevant information periodically.

New Insurance Brokerage Regulations

On December 1, 2013, a new regulation affecting all insurance brokerage businesses in Chile became effective. This regulation is a result of Law No. 20,667 that was enacted on May 9, 2013 and Circular No. 2114 issued by the SVS on July 26, 2013. The new regulation establishes that, in the case of early termination of an insurance policy paid for in advance (for example, because of the early repayment of the related loan), all unearned premiums must be refunded to the customer by the company that issued the policy. This refund obligation includes both the unearned premiums and commissions relating to the remaining policy period, such as brokerage fees (e.g., the fees of our subsidiary Banchile Corredores de Seguros Limitada) and any other commissions. The premiums and commissions subject to refund will be calculated in proportion to the unelapsed period. This refund obligation applies with respect to insurance policies issued after this new regulation became effective. Prior to this new regulation, unearned premiums were refunded only if the early termination took place within the later offorty-five days after the issuance of the insurance policy, orone-tenth of the total term of the insurance policy (from the date of issuance). These refund obligations did not expect these new regulations to have an adversea material effect on our business,results of operations in 2014. Similarly, no material effects are expected due to this regulation on our results of operations in 2015.

New Maximum Legal Interest Rates

On December 13, 2013, a new law—Law 20,715—regulating maximum interest rates became effective upon publication in the Chilean Official Gazette. This legislation affects all Chilean businesses that charge interests (including all banks, department stores and any other commerce or financial provider) on loans up to UF 200 (approximately U.S.$8,900), including installment loans, credit cards and credit lines related loans, as well as overdue loans. This regulation establishes among other things, a new methodology for calculating the maximum legal interest rate for loans—not indexed to inflation—longer than a90-day term, which results in a reduction of the maximum legal interest rate applicable to such debtors. This law did not have a material effect on our results of operations for the fiscal year ended December 31, 2014. Similarly, no material effects are expected for 2015.

Bankruptcy Law

On October 10, 2014, a new Bankruptcy Law that aims to promote agreements and avoid liquidations became effective. Among the main changes introduced by this law is Article 57, which is intended to protect debtors and provides that, during a30-day term beginning on the date of the appointment of observers:

(i)the creditors of a debtor may not request its liquidation;

(ii)no proceeding seeking the issuance of a warrant of attachment, execution or similar process may be initiated against a debtor;

(iii)no proceeding seeking the restitution of leased assets may be initiated against a debtor;

(iv)all proceedings referred to in (ii) and (iii) directly above will be suspended, as well as the term of the statute of limitations;

(v)all the agreements entered into by a debtor will remain valid and effective and its payments terms and conditions will remain in force. Consequently, these agreements may not be early terminated without the consent of the debtor nor be enforced, even if the commencement of a reorganization proceeding under the Bankruptcy Law constitutes an event of default under such agreement. Thus, any guarantees granted to secure the obligations of the debtor may not be enforced; and

(vi)if a debtor forms part of a public registry as a contractor or service provider, and it is in compliance with its obligations with the relevant principal, it cannot be excluded from such public registry and may not be prohibited from participating in any relevant bidding process.

Credit Risk Provisioning

On December 18, 2013 the SBIF published for comments a set of amendments to the regulations on allowances for loan losses and credit risk matters. A revised and final version of these guidelines was published on December 30, 2014 by the SBIF (Circular Nº 3,573).

The final version of the guidelines established a standardized method for calculating provisions for loan losses for residential mortgage loans, including the effects of past-due behavior and loan-to-value ratios, while supplementing and defining the treatment of provisions and credits composing the impaired loan portfolio. This set of rules also established standardized credit risk provisioning models for loan portfolios evaluated on a grouped basis. However, the circular clarified that standardized methods for evaluating commercial and consumer loans on a group basis, as well as the requirements for banks’ internally developed models, will be discussed and analyzed in 2015.

Lastly, the new guidelines also introduced changes for the treatment of factoring loans from a provisioning point of view, by taking into account the credit risk associated with the billed company. This new set of rules will go into effect on January 1, 2016.

It is important to mention that the implementation of standardized credit risk provisioning models would only have an effect, if any, on our results of operations or financial condition orprepared under Chilean GAAP, which differ to some extent from IFRS as issued by the IASB. The adoption of these guidelines will not have any impact on our results of operation.operations or financial condition under IFRS.

Reporting of Operational Incidents

On March 23, 2015 the SBIF issued a new regulation on the reporting of operational incidents (Circular N° 3,579). According to this regulation, banks must report immediately to the SBIF certain types of significant operational incidents in order to keep the regulator properly informed. For purposes of the regulation, an operational incident is deemed significant if the event affects the business continuity, information security or reputation of the bank.

ORGANIZATIONAL STRUCTURE

The following diagram presents our current corporate structure, including our subsidiaries and their respective direct ownership interests, as of December 31, 2012:April 17, 2015:

 

LOGOLOGO

With the exception of Banchile Trade Services Limited, which was incorporated in Hong Kong, all of the subsidiaries presented above have their jurisdiction of incorporation in the Republic of Chile. See “—Business Overview—Principal Business Activities—Operations through Subsidiaries” for more information on our subsidiaries.

During 2014, we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong. We expect to complete this process before the end of 2015.

PROPERTY, PLANTSPLANT AND EQUIPMENT

We are domiciled in Chile and own the building located at Paseo Ahumada 251, Santiago, Chile, that is approximately 77,500 square meters and serves as the headquarters for the Bank and its subsidiaries. In addition, we own three buildings located at Huerfanos 740, Agustinas 733 and Andrés Bello 2687, Santiago, Chile where the remainder of our executive offices are located. The total area we own in these buildings is equivalent to approximately 46,300 square meters.

As of December 31, 2012,2014, we owned the properties on which 176181 of ourfull-service branches and other points of sale are located (approximately 112,350117,000 square meters of office space). Also, as of December 31, 2012,2014, we had leased office space for 253239 of ourfull-service branches with office space of approximately 71,60066,000 square meters, while ourthe remaining 5 branches and other points of sale were managed thorughthrough special partnership agreements between the property’s owner and us. We also own properties throughout Chile for back office and administrative operations, as well as for storage of documents and other purposes. We believe that our facilities are adequate for our present needs and suitable for their intended purposes.

As of December 31, 2012,2014, we also owned approximately 133,500134,250 square meters in mainly recreational physical facilities in Chile, which we use to assist our employees in maintaining a healthy work and life balance and which we use for incentive and integration activities.

SELECTED STATISTICAL INFORMATION

The following information is included for analytical purposes and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.”

Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities

The average balances forinterest-earning assets andinterest-bearing liabilities, including interest and readjustments received and paid, were calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. These average balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies (principally the U.S. dollar). The UF is aninflation-indexed Chilean monetary unit of account with a value in Chilean pesos which is linked to, and which is adjusted daily to reflect changes in, the CPI of the Chilean National Institute of Statistics.

The nominal interest rate has been calculated by dividing the amount of interest and principal readjustment gain or loss during the period by the related average balance, both amounts expressed in constantChilean pesos.

Foreign exchange gains or losses on foreigncurrency-denominated assets and liabilities have not been included in interest revenue or expense. Interest received on past duepast-due loans includes interest on such loans from the original maturity date. For our impaired portfolio and high risk loans, we apply a conservative approach of discontinuingaccrual-basis recognition of interest revenue in the income statement and they are only recorded once received.

Included in cash and due from banks are current accounts maintained in the Central Bank and overseas banks. Such assets have a distorting effect on the average interest rate earned on total interest earning assets because of balances maintained in:

 

the Central Bank, only the portion that is legally required to be held for liquidity purposes earns interest; and

 

overseas banks earn interest on certain accounts in certain countries.

Consequently, the average interest earned on such assets is comparatively low. These deposits are maintained by us in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.

The following tables set forth, by currency of denomination, average balances and, where applicable, interest amounts and nominal rate for our assets and liabilities under IFRS for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

 For the Year Ended December 31,  For the Year Ended December 31, 
 2010 2011 2012  2012 2013 2014 
IFRS: Average
balance
 Interest
earned(1)
 Average
nominal
rate
 Average
balance
 Interest
earned(1)
 Average
nominal
rate
 Average
balance
 Interest
earned(1)
 Average
nominal
rate
  Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 
 (in millions of Ch$, except percentages)  (in millions of Ch$, except percentages) 

Assets

                  

Interest earning assets

                  

Deposits in Central Bank

                  

Ch$

 Ch$189,029   Ch$274    0.14 Ch$226,531   Ch$2,472    1.09 Ch$279,627   Ch$1,569    0.56    279,627    1,569    0.56  294,427    1,386    0.47  298,688    3,401    1.14

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Foreign currency

  94,812    93    0.01    108,460    189    0.17    90,671    143    0.16    90,671    143    0.16    101,845    265    0.26    96,598    497    0.51  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  283,841    367    0.13    334,991    2,661    0.79    370,298    1,712    0.46    370,298    1,712    0.46    396,272    1,651    0.42    395,286    3,898    0.99  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Financial investments

         

Financial Investments

         

Ch$

  608,266    19,777    3.25    630,882    32,721    5.19    703,721    51,727    7.35    703,721    51,727    7.35    797,743    26,424    3.31    1,102,713    52,006    4.72  

UF

  725,734    32,351    4.46    669,778    41,375    6.18    788,630    38,889    4.93    788,630    38,889    4.93    930,818    50,314    5.41    647,066    51,175    7.91  

Foreign currency

  185,808    2,609    1.40    261,591    7,673    2.93    255,998    3,229    1.26    255,998    3,229    1.26    218,414    4,723    2.16    219,291    9,417    4.29  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  1,519,808    54,737    3.60    1,562,251    81,769    5.23    1,748,349    93,845    5.37    1,748,349    93,845    5.37    1,946,975    81,461    4.18    1,969,070    112,598    5.72  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Loans in advance to banks

         

Loans in advance to Banks

         

Ch$

  339,844    7,205    2.12    393,579    10,322    2.62    381,578    12,993    3.41    381,578    12,993    3.41    496,870    15,728    3.17    602,968    18,938    3.14  

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  339,844    7,205    2.12    393,579    10,322    2.62    381,578    12,993    3.41    381,578    12,993    3.41    496,870    15,728    3.17    602,968    18,938    3.14  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Commercial loans

                  

Ch$

  4,076,224    226,117    5.55    4,556,598    356,534    7.82    5,440,874    441,789    8.12    5,440,874    441,789    8.12    5,906,716    467,912    7.92    6,296,574    433,759    6.89  

UF

  3,231,121    218,776    6.77    3,723,781    307,310    8.25    3,983,001    285,516    7.17    3,983,001    285,516    7.17    4,464,635    308,227    6.90    4,834,705    372,748    7.71  

Foreign currency

  1,555,737    41,379    2.66    2,051,804    51,564    2.51    2,053,071    63,391    3.09    2,053,071    63,391    3.09    2,106,159    57,023    2.71    2,185,315    51,069    2.34  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  8,863,082    486,272    5.49    10,332,183    715,408    6.92    11,476,946    790,696    6.89    11,476,946    790,696    6.89    12,477,510    833,162    6.68    13,316,594    857,576    6.44  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Consumer loans

         

Consumer Loans

         

Ch$

  1,950,497    373,264    19.14    2,282,824    431,475    18.90    2,597,069    518,787    19.98    2,597,069    518,787    19.98    2,834,958    562,721    19.85    3,068,810    564,660    18.40  

UF

  46,903    3,685    7.86    52,090    4,503    8.64    44,836    4,120    9.19    44,836    4,120    9.19    59,135    5,260    8.89    77,674    9,242    11.90  

Foreign currency

  —      —      —      —      —      —      12,329    —      —      12,329    —      —      15,739    6    0.04    20,395    —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  1,997,400    376,949    18.87    2,334,914    435,978    18,67    2,654,234    522,907    19.70    2,654,234    522,907    19.70    2,909,832    567,987    19.52    3,166,879    573,902    18.12  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage loans

                  

Ch$

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

UF

  2,698,384    187,363    6.94    3,233,830    266,914    8.25    3,924,080    266,625    6.79    3,924,080    266,625    6.79    4,455,850    288,888    6.48    5,082,293    497,258    9.78  

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  2,698,384    187,363    6.94    3,233,830    266,914    8.25    3,924,080    266,625    6.79    3,924,080    266,625    6.79    4,455,850    288,888    6.48    5,082,293    497,258    9.78  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Repurchase agreement

         

Repurchase agreements

         

Ch$

  74,471    5,387    7.23    85,087    5,234    6.15    42,109    2,786    6.62    42,109    2,786    6.62    27,382    1,649    6.02    27,704    1,355    4.89  

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  74,471    5,387    7.23    85,087    5,234    6.15    42,109    2,786    6.62    42,109    2,786    6.62    27,382    1,649    6.02    27,704    1,355    4.89  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total interest earnings assets

         

Total interest earning assets

         

Ch$

  7,238,331    632,024    8.73    8,175,501    838,758    10.26    9,444,978    1,029,651    10.90    9,444,978    1,029,651    10.90    10,358,096    1,075,820    10.39    11,397,457    1,074,119    9.42  

UF

  6,702,142    442,175    6.60    7,679,479    620,102    8.07    8,740,547    595,150    6.81    8,740,547    595,150    6.81    9,910,438    652,689    6.59    10,641,738    930,423    8.74  

Foreign currency

  1,836,357    44,081    2.40    2,421,855    59,426    2.45    2,412,069    66,763    2.77    2,412,069    66,763    2.77    2,442,157    62,017    2.54    2,521,599    60,983    2.42  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 Ch$15,776,830   Ch$1,118,280    7.09 Ch$18,276,835   Ch$1,518,286    8.31 Ch$20,597,594   Ch$1,691,564    8.21 Ch$ 20,597,594   Ch$ 1,691,564    8.21 Ch$ 22,710,691   Ch$ 1,790,526    7.88 Ch$ 24,560,794   Ch$ 2,065,525    8.41
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Interest earned includes interest accrued on trading securities.

  For the Year Ended December 31, 
  2010  2011  2012 
IFRS: Average
balance
  Interest
earned(1)
  Average
nominal
rate
  Average
balance
  Interest
earned(1)
  Average
nominal
rate
  Average
balance
  Interest
earned(1)
  Average
nominal
rate
 
  (in millions of Ch$, except percentages) 

Assets

         

Non-interest earning assets

         

Cash and due from banks

         

Ch$

 Ch$370,010   Ch$—      —     Ch$445,938   Ch$—      —     Ch$392,220   Ch$—      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  194,562    —      —      247,685    —      —      238,241    —      —    
 

 

 

    

 

 

    

 

 

   

Total

  564,572    —      —      693,623    —      —      630,461    —      —    

Transaction in the course of collection

         

Ch$

  263,263    —      —      305,521    —      —      266,559    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  152,592    —      —      227,171    —      —      184,865    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  415,855    —      —      532,692    —      —      451,424    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Allowances for loan losses

         

Ch$

  (341,313  —      —      (389,578  —      —      (352,064  

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —       —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (341,313  —      —      (389,578  —      —      (352,064  —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives

         

Ch$

  481,674    —      —      414,682    —      —      329,513    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  44,635    —      —      41,616    —      —      50,698    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  526,309    —      —      456,298    —      —      380,211    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment in other companies

         

Ch$

  11,057    —      —      14,074    —      —      15,686    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  2    —      —      65    —      —      15    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  11,059    —      —      14,139    —      —      15,701    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Intangible assets

         

Ch$

  82,151    —      —      81,524    —      —      70,335    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  82,151    —      —      81,524    —      —      70,335    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fixed assets

         

Ch$

  207,267    —      —      207,132    —      —      208,650    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  207,267    —      —      207,132    —      —      208,650    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Current tax assets

         

Ch$

  2,520    —      —      6,173    —      —      1,922    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  2,520    —      —      6,173    —      —      1,922    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

         

Ch$

  63,935    —      —      91,397    —      —      116,737    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  63,935    —      —      91,397    —      —      116,737    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other assets

         

Ch$

  216,432    —      —      276,392    —      —      224,076    —      —    

UF

  40,135    —      —      66,255    —      —      55,582    —      —    

Foreign currency

  12,502    —      —      12,048    —      —      37,359    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  269,069    —      —      354,695    —      —      317,017    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-interest earning assets

         

Ch$

  986,986    —      —      1,007,317    —      —      1,273,635    —      —    

UF

  40,135    —      —      66,255    —      —      55,582    —      —    

Foreign currency

  209,731    —      —      280,900    —      —      511,177    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  1,236,852    —      —      1,354,472    —      —      1,840,394    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

         

Ch$

  8,595,327    632,024    —      9,628,756    838,758    —      10,718,613    1,029,651    —    

UF

  6,742,277    442,175    —      7,745,734    620,102    —      8,796,129    595,150    —    

Foreign currency

  2,240,650    44,081    —      2,950,440    59,426    —      2,923,246    66,763    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$17,578,254   Ch$1,118,280    —     Ch$20,324,930   Ch$1,518,286    —     Ch$22,437,988   Ch1,691,564    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Interest earned includes interest accrued on trading securities.
  For the Year Ended December 31, 
  2012  2013  2014 
IFRS: Average
Balance
  Interest
Earned(1)
  Average
Nominal
Rate
  Average
Balance
  Interest
Earned(1)
  Average
Nominal
Rate
  Average
Balance
  Interest
Earned(1)
  Average
Nominal
Rate
 
  (in millions of Ch$, except percentages) 

Assets

         

Non-interest earning assets

         

Cash and due from banks

         

Ch$

  392,220    —      —      434,620    —      —      403,354    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  238,241    —      —      301,156    —      —      367,273    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  630,461    —      —      735,776    —      —      770,627    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Transactions in the course of collection

         

Ch$

  266,559    —      —      225,309    —      —      246,658    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  184,865    —      —      178,101    —      —      167,715    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  451,424    —      —      403,410    —      —      414,373    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Allowances for loan losses

         

Ch$

  (352,064  —      —      (409,921  —      —      (477,991  —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      (6  —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  (352,064  —      —      (409,927  —      —      (477,991  —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives

         

Ch$

  329,513    —      —      295,460    —      —      603,412    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  50,698    —      —      52,395    —      —      48,324    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  380,211    —      —      347,855    —      —      651,736    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investments in Other Companies

         

Ch$

  15,686    —      —      15,525    —      —      20,245    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  15    —      —      41    —      —      47    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  15,701    —      —      15,566    —      —      20,292    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Intangible assets

         

Ch$

  70,335    —      —      74,709    —      —      68,359    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  70,335    —      —      74,709    —      —      68,359    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fixed assets

         

Ch$

  208,650    —      —      201,991    —      —      202,385    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  208,650    —      —      201,991    —      —      202,385    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Current tax assets

         

Ch$

  1,922    —      —      —      —      —      —      —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  1,922    —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

         

Ch$

  116,737    —      —      44,785    —      —      62,783    —      —    

UF

  —      —      —      —      —      —      —      —      —    

Foreign currency

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  116,737    —      —      44,785    —      —      62,783    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other assets

         

Ch$

  224,076    —      —      205,980    —      —      173,425    —      —    

UF

  55,582    —      —      61,560    —      —      55,948    —      —    

Foreign currency

  37,359    —      —      30,868    —      —      100,899    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  317,017    —      —      298,408    —      —      330,272    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-interest earning assets

         

Ch$

  1,273,634    —      —      1,088,458    —      —      1,302,630    —      —    

UF

  55,582    —      —      61,560    —      —      55,948    —      —    

Foreign currency

  511,177    —      —      562,555    —      —      684,258    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  1,840,393    —      —      1,712,573    —      —      2,042,836    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Assets

         

Ch$

  10,718,612    1,029,651    —      11,446,554    1,075,820    —      12,700,087    1,074,119    —    

UF

  8,796,129    595,150    —      9,971,998    652,689    —      10,697,686    930,423    —    

Foreign currency

  2,923,246    66,763    —      3,004,712    62,017    —      3,205,857    60,983    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$ 22,437,987   Ch$ 1,691,564    —     Ch$ 24,423,264   Ch$ 1,790,526    —     Ch$ 26,603,630   Ch$ 2,065,525    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 For the Year Ended December 31,  For the Year Ended December 31, 
 2010 2011 2012  2012 2013 2014 
IFRS: Average
balance
 Interest
paid
 Average
nominal
rate
 Average
balance
 Interest
paid
 Average
nominal
rate
 Average
balance
 Interest
paid
 Average
nominal
rate
  Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 
 (in millions of Ch$, except percentages)  (in millions of Ch$, except percentages) 

Liabilities

                  

Interest bearing liabilities

                  

Savings accounts

                  

Ch$

 Ch$4,172,738   Ch$86,691    2.08 Ch$5,339,224   Ch$282,511    5.29  Ch 6,212,712   Ch$356,191    5.73  6,212,712    356,191    5.73  6,836,894    354,636    5.19  6,970,983    271,883    3.90

UF

  2,087,299    89,517    4.29    2,246,187    140,879    6.27    2,349,836    134,947    5.74    2,349,836    134,947    5.74    2,248,767    117,241    5.21    1,960,666    148,381    7.57  

Foreign currency

  1,122,089    14,441    1.29    864,820    8,512    0.98    817,575    6,790    0.83    817,575    6,790    0.83    756,822    3,312    0.44    792,571    2,435    0.31  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  7,382,126    190,649    2.58    8,450,231    431,902    5.10    9,380,123    497,928    5.31    9,380,123    497,928    5.31    9,842,483    475,189    4.83    9,724,220    422,699    4.35  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Repurchase agreements

                  

Ch$

  167,032    1,640    0.98    216,102    10,846    5.02    278,456    14,975    5.38    278,456    14,975    5.38    285,107    13,148    4.61    257,477    9,479    3.68  

UF

  14,665    367    2.50    16    —      —      3,036    10    0.33    3,036    10    0.33    128    —      —      1,741    102    5.86  

Foreign currency

  1,259    1    0.08    2,729    3    0.11    5,452    1    0.02    2,452    1    0.02    3,872    —      —      3,083    —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  182,956    2,008    1.10    218,847    10,849    4.96    286,944    14,986    5.22    286,944    14,986    5.22    289,107    13,148    4.55    262,301    9,581    3.65  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Borrowings from financial institutions

                  

Ch$

  82,313    2,138    2.60    200,026    6,072    3.04    35,705    3,050    8.54    35,705    3,050    8.54    140,055    3,307    2.36    277,597    1,054    0.38  

UF

  8,255    21    0.25    15,485    (1  —      36    —      —      36    —      —      13    —      —      9    1    11.11  

Foreign currency

  1,275,267    16,663    1.31    1,499,906    17,709    1.18    1,399,621    19,258    1.38    1,399,621    19,258    1.38    1,061,798    10,484    0.99    859,593    6,111    0.71  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  1,365,835    18,822    1.38    1,715,417    23,780    1.39    1,435,362    22,308    1.55    1,435,362    22,308    1.55    1,201,866    13,791    1.15    1,137,199    7,166    0.63  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Debt issued

                  

Ch$

  78,957    805    1.02    54,019    1,612    2.98    36,866    1,048    2.84    36,866    1,048    2.84    22,731    1,132    4.98    12,179    2,123    17.43  

UF

  1,463,769    104,512    7.14    1,827,406    148,090    8.10    2,516,157    160,071    6.36    2,516,157    160,071    6.36    3,075,889    182,824    5.94    3,401,241    316,902    9.32  

Foreign currency

  117,714    4,306    3.66    113,254    4,194    3.70    285,147    9,103    3.19    285,147    9,103    3.19    672,589    15,374    2.29    1,483,580    25,301    1.71  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  1,660,440    109,623    6.60    1,994,679    153,896    7.72    2,838,170    170,222    6.00    2,838,170    170,222    6.00    3,771,209    199,330    5.29    4,897,000    344,326    7.03  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Other financial obligations

                  

Ch$

  60,144    1,146    1.91    82,470    1,325    1.61    95,187    1,525    1.60    95,187    1,525    1.60    101,782    1,473    1.45    108,487    1,356    1.25  

UF

  29,200    1,767    6.05    29,411    2,217    7.54    26,078    1,501    5.76    26,078    1,501    5.76    21,757    1,398    6.43    16,690    3,640    21.81  

Foreign currency

  42,856    362    0.84    56,977    240    0.42    49,712    159    0.32    49,712    159    0.32    50,329    42    0.08    64,982    20    0.03  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  132,200    3,275    2.48    168,858    3,782    2.24    170,977    3,185    1.86    170,977    3,185    1.86    173,868    2,913    1.68    190,159    5,016    2.64  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total interest bearing liabilities

                  

Ch$

  4,561,184    92,420    2.03    5,891,841    302,366    5.31    6,658,926    376,789    5.66    6,658,926    376,789    5.66    7,386,569    373,696    5.06    7,626,723    285,895    3.75  

UF

  3,603,188    196,184    5.45    4,118,505    291,185    7.07    4,895,143    296,529    6.06    4,895,143    296,529    6.06    5,346,554    301,463    5.64    5,380,347    469,026    8.72  

Foreign currency

  2,559,185    35,773    1.40    2,537,686    30,658    1.21    2,557,507    35,311    1.38    2,557,507    35,311    1.38    2,545,410    29,212    1.15    3,203,809    33,867    1.06  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 Ch$10,723,557   Ch$324,377    3.03 Ch$12,548,032   Ch$624,209    4.97 Ch$14,111,576   Ch$708,629    5.02 Ch$14,111,576   Ch$708,629    5.02 Ch$15,278,533   Ch$704,371    4.61 Ch$16,210,879   Ch$788,788    4.87
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 Year Ended December 31,  For the Year Ended December 31, 
 2010 2011 2012  2012 2013 2014 
IFRS: Average
balance
 Interest
paid
 Average
nominal
rate
 Average
balance
 Interest
paid
 Average
nominal
rate
 Average
balance
 Interest
paid
 Average
nominal
rate
  Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
 Average
Nominal
Rate
 Average
Balance
 Interest
Earned(1)
   Average
Nominal
Rate
 
 (in millions of Ch$, except percentages)  (in millions of Ch$, except percentages) 

Liabilities

                 

Non–interest bearing liabilities

         

Current account and demand deposit

         

Non-interest bearing liabilities

        

Current account and demand deposits

        

Ch$

 Ch$3,452,445   Ch$—      —     Ch$3,751,441   Ch$—      —     Ch$4,093,133   Ch$—      —      4,093,133    —      —      4,576,645    —      —      5,109,950    —       —    

UF

  107,937    —      —      167,004    —      —      159,501    —      —      159,501    —      —      164,012    —      —      185,098    —       —    

Foreign currency

  525,418    —      —      621,890    —      —      673,841    —      —      673,841    —      —      714,685    —      —      929,007    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  4,085,800    —      —      4,540,335    —      —      4,926,475    —      —      4,926,475    —      —      5,455,342    —      —      6,224,055    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Transaction in the course of payment

         

Transactions in the course of payment

        

Ch$

  139,131    —      —      141,285    —      —      127,303    —      —      127,303    —      —      84,307    —      —      108,117    —       —    

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  142,429    —      —      240,505    —      —      175,972    —      —      175,972    —      —      148,098    —      —      138,669    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  281,560    —      —      381,790    —      —      303,275    —      —      303,275    —      —      232,405    —      —      246,786    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Derivatives

                 

Ch$

  434,521    —      —      401,759    —      —      338,598    —      —      338,598    —      —      313,315    —      —      588,001    —       —    

UF

  —      —      —      80    —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  77,072    —      —      77,111    —      —      92,303    —      —      92,303    —      —      78,467    —      —      68,076    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  511,593    —      —      478,950    —      —      430,901    —      —      430,901    —      —      391,782    —      —      656,077    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Current liabilities

         

Current tax liabilities

        

Ch$

  14,143    —      —      3,851    —      —      12,470    —      —      12,470    —      —      5,401    —      —      3,864    —       —    

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  14,143    —      —      3,851    —      —      12,470    —      —      12,470    —      —      5,401    —      —      3,864    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Deferred tax liabilities

                 

Ch$

  19,052    —      —      32,262    —      —      56,830    —      —      56,830    —      —      —      —      —      —      —       —    

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  19,052    —      —      32,262    —      —      56,830    —      —      56,830    —      —      —      —      —      —      —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Provisions

                 

Ch$

  49,109    —      —      91,622    —      —      98,794    —      —      98,794    —      —      110,187    —      —      183,730    —       —    

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  49,109    —      —      91,622    —      —      98,794    —      —      98,794    —      —      110,187    —      —      183,730    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Other liabilities

                 

Ch$

  206,557    —      —      280,892    —      —      237,218    —      —      237,218    —      —      243,424    —      —      193,974    —       —    

UF

  10,247    —      —      12,916    —      —      15,891    —      —      15,891    —      —      17,266    —      —      17,654    —       —    

Foreign currency

  6,223    —      —      16,320    —      —      33,788    —      —      33,788    —      —      27,758    —      —      27,810    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  223,027    —      —      310,128    —      —      286,897    —      —      286,897    —      —      288,448    —      —      239,438    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Equity

                 

Ch$

  1,670,413    —      —      1,937,960    —      —      2,210,769    —      —      2,210,769    —      —      2,661,166    —      —      2,838,801    —       —    

UF

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    

Foreign currency

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  1,670,413    —      —      1,937,960    —      —      2,210,769    —      —      2,210,769    —      —      2,661,166    —      —      2,838,801    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total non-interest bearing liabilities and equity

                 

Ch$

  5,985,371    —      —      6,641,072    —      —      7,175,115    —      —      7,175,115    —      —      7,994,445    —      —      9,026,437    —       —    

UF

  118,184    —      —      180,000    —      —      175,392    —      —      175,392    —      —      181,278    —      —      202,752    —       —    

Foreign currency

  751,142    —      —      955,826    —      —      975,904    —      —      975,904    —      —      969,008    —      —      1,163,562    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

  6,854,697    —      —      7,776,898    —      —      8,326,411    —      —      8,326,411    —      —      9,144,731    —      —      10,392,751    —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total liabilities and equity

                 

Ch$

  10,546,555    92,420    —      12,532,913    302,366    —      13,834,041    376,774    —      13,834,041    376,774    —      15,381,014    373,696    —      16,653,160    285,895     —    

UF

  3,721,372    196,184    —      4,298,505    291,185    —      5,070,535    296,437    —      5,070,535    296,437    —      5,527,832    301,463    —      5,583,099    469,026     —    

Foreign currency

  3,310,327    35,773    —      3,493,512    30,658    —      3,533,411    42,260    —      3,533,411    42,260    —      3,514,418    29,212    —      4,367,371    33,867     —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total

 Ch$17,578,254   Ch$324,377    —     Ch$20,324,930   Ch$624,209    —     Ch$22,437,987   Ch$715,471    —     Ch$22,437,987   Ch$715,471    —     Ch$24,423,264   Ch$704,371    —     Ch$26,603,630   Ch$788,788     —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Interest Earning Assets and Net Interest Margin

The following table sets forth, by currency of denomination, the levels of our average interest earning assets and net interest, and illustrates the comparative margins obtained, for the years ended December 31, 20112012, 2013 and 2012:2014:

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2010 2011 2012   2012 2013 2014 
IFRS:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Total average interest earning assets

        

Ch$

  Ch$7,238,331   Ch$8,175,501   Ch$9,444,978    Ch$9,444,978   Ch$10,358,096   Ch$11,397,457  

UF

   6,702,142    7,679,479    8,740,547     8,740,547    9,910,438    10,641,738  

Foreign currency

   1,836,357    2,421,855    2,412,069     2,412,069    2,442,157    2,521,599  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total

   15,776,830    18,276,835    20,597,594     20,597,594    22,710,691    24,560,794  
  

 

  

 

  

 

   

 

  

 

  

 

 

Net interest earned (including interest earned on trading securities)(1)

        

Ch$

   539,604    536,392    652,862     652,862    702,124    788,224  

UF

   245,991    328,917    298,621     298,621    351,226    461,397  

Foreign currency

   8,308    28,768    31,452     31,452    32,805    27,116  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total

  Ch$793,903   Ch$894,077   Ch$982,935    Ch$982,935   Ch$1,086,155   Ch$1,276,737  
  

 

  

 

  

 

   

 

  

 

  

 

 

Net interest margin, nominal basis(2)

        

Ch$

   7.45  6.56  6.91   6.91  6.78  6.92

UF

   3.67    4.28    3.42     3.42    3.54    4.34  

Foreign currency

   0.45    1.19    1.30     1.30    1.34    1.08  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total

   5.03  4.89  4.77   4.77  4.78  5.20
  

 

  

 

  

 

   

 

  

 

  

 

 

 

(1)Net interest earned is defined as interest revenue earned less interest expense incurred.
(2)Net interest margin, nominal basis is defined as net interest earned divided by average interest earning assets.

Changes in Net Interest Income—Volume and Rate Analysis

The following tables compare, by currency of denomination, changes in our net interest revenue between 20112012 and 20122013, as well as 2013 and 2014, caused by (i) changes in the average volume of interest earning assets and interest bearing liabilities and (ii) changes in their respective nominal interest rates. Volume and rate variances were calculated based on movements in average balances over the period and changes in nominal interest rate, average interest earning assets and average interest bearing liabilities. The net change attributable to changes in both volume and rate has been allocated proportionately to the change in volume and the change in rate.

 

  Increase (Decrease) from
2010 to 2011 due to changes  in
 Net change
from 2010 to
2011
  Increase (Decrease) from
2011 to 2012 due to changes  in
 Net change
from 2011 to
2012
   Increase (Decrease) from
2012 to 2013 due to changes in
 Net Change
from 2012 to

2013
  Increase (Decrease) from
2013 to 2014 due to changes in
 Net Change
from 2013 to

2014
 
IFRS:  Volume Rate Volume Rate   Volume Rate Volume Rate 
  (in millions of Ch$)   (in millions of Ch$) 

Assets

              

Interest earning assets

              

Deposits in Central Bank

              

Ch$

  Ch$65   Ch$2,133   Ch$2,198   Ch$488   Ch$(1,391 Ch$(903  Ch$80   Ch$(263 Ch$(183 Ch$20   Ch$1,995   Ch$2,015  

UF

   —      —      —      —      —      —       —      —      —      —      —      —    

Foreign currency

   15    81    96    (29  (17  (46   19    103    122    (14  246    232  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   80    2,214    2,294    459    (1,408  (949   99    (160  (61  6    2,241    2,247  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Financial investments

              

Ch$

   761    12,183    12,944    4,119    14,887    19,006     6,168    (31,471  (25,303  12,132    13,450    25,282  

UF

   (2,655  11,679    9,024    6,649    (9,135  (2,486   7,451    3,974    11,425    (18,157  19,018    861  

Foreign currency

   1,380    3,684    5,064    (160  (4,284  (4,444   (532  2,026    1,494    19    4,675    4,694  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   (514  27,546    27,032    10,608    1,468    12,076     13,087    (25,471  (12,384  (6,006  37,143    31,137  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Loans in advance to banks

       

Loans in advance to bank

       

Ch$

   1,247    1,870    3,117    (323  2,994    2,671     3,702    (967  2,735    3,333    (123  3,210  

UF

   —      —      —      —      —      —       —      —      —      —      —      —    

Foreign currency

   —      —      —      —      —      —       —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   1,247    1,870    3,117    (323  2,994    2,671     3,702    (967  2,735    3,333    (123  3,210  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Commercial loans

              

Ch$

   29,087    101,330    130,417    71,377    13,878    85,255     37,107    (10,984  26,123    29,530    (63,683  (34,153

UF

   36,355    52,179    88,534    20,413    (42,207  (21,794   33,549    (10,838  22,711    26,787    37,734    64,521  

Foreign currency

   12,574    (2,389  10,185    32    11,795    11,827     1,604    (7,972  (6,368  2,080    (8,034  (5,954
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   78,016    151,120    229,136    91,822    (16,534  75,288     72,260    (29,794  42,466    58,397    (33,983  24,414  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Consumer loans

              

Ch$

   62,866    (4,655  58,211    61,786    25,526    87,312     47,239    (3,305  43,934    44,620    (42,681  1,939  

UF

   429    389    818    (654  271    (383   1,276    (136  1,140    1,917    2,065    3,982  

Foreign currency

   —      —      —      —      —      —       —      6    6    1    (7  (6
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   63,295    (4,266  59,029    61,132    25,797    86,929     48,515    (3,435  45,080    46,538    (40,623  5,915  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage loans

              

Ch$

   —      —      —      —      —      —       —      —      —      —      —      —    

UF

   40,775    38,776    79,551    51,463    (51,752  (289   34,895    (12,632  22,263    45,089    163,281    208,370  

Foreign currency

   —      —      —      —      —      —       —       —      —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   40,775    38,776    79,551    51,463    (51,752  (289   34,895    (12,632  22,263    45,089    163,281    208,370  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Repurchase agreement

              

Ch$

   712    (865  (153  (2,817  369    (2,448   (905  (232  (1,137  19    (313  (294

UF

   —      —      —      —      —      —       —      —      —      —      —      —    

Foreign currency

   —      —      —      —      —      —       —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   712    (865  (153  (2,817  369    (2,448   (905  (232  (1,137  19    (313  (294
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total interest earning assets

              

Ch$

   94,738    111,996    206,734    134,630    56,263    190,893     93,391    (47,222  46,169    89,654    (91,355  (1,701

UF

   74,904    103,023    177,927    77,871    (102,823  (24,952   77,171    (19,632  57,539    55,636    222,098    277,734  

Foreign currency

   13,969    1,376    15,345    (157  7,494    7,337     1,091    (5,837  (4,746  2,086    (3,120  (1,034
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

  Ch$183,611   Ch$216,395   Ch$400,006   Ch$212,344   Ch$(39,066 Ch$173,278    Ch$171,653   Ch$(72,691 Ch$98,962   Ch$147,376   Ch$127,623   Ch$274,999  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

  Increase (Decrease) from
2010 to 2011 due to changes  in
 Net change
from 2010 to
2011
  Increase (Decrease) from
2011 to 2012 due to changes  in
 Net change
from 2011 to
2012
   Increase (Decrease) from
2012 to 2013 due to changes in
 Net Change
from 2012 to

2013
  Increase (Decrease) from
2013 to 2014 due to changes in
 Net Change
from 2013 to

2014
 
IFRS:  Volume Rate Volume Rate   Volume Rate Volume Rate 
  (in millions of Ch$)   (in millions of Ch$) 

Liabilities

              

Interest bearing liabilities

              

Savings accounts and time deposits

              

Ch$

  Ch$29,972   Ch$165,848   Ch$195,820   Ch$48,774   Ch$24,906   Ch$73,680    Ch$34,036   Ch$(35,591 Ch$(1,555 Ch$6,829   Ch$(89,582 Ch$(82,753

UF

   7,260    44,102    51,362    6,305    (12,237  (5,932   (5,634  (12,072  (17,706  (16,519  47,659    31,140  

Foreign currency

   (2,927  (3,002  (5,929  (446  (1,276  (1,722   (472  (3,006  (3,478  150    (1,027  (877
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   34,305    206,948    241,253    54,633    11,393    66,026     27,930    (50,669  (22,739  (9,540  (42,950  (52,490
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Repurchase agreements

              

Ch$

   614    8,592    9,206    3,309    820    4,129     350    (2,177  (1,827  (1,191  (2,478  (3,669

UF

   (183  (184  (367  —      10    10     (5  (5  (10  —      102    102  

Foreign currency

   2    —      2    2    (4  (2   —      (1  (1  —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   433    8,408    8,841    3,311    826    4,137     345    (2,183  (1,838  (1,191  (2,376  (3,567
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Borrowing from financial institutions

              

Ch$

   3,519    415    3,934    (7,809  4,787    (3,022   3,744    (3,487  257    1,778    (4,031  (2,253

UF

   10    (32  (22  —      1    1     —      —      —      —      1    1  

Foreign currency

   2,752    (1,706  1,046    (1,240  2,789    1,549     (4,043  (4,731  (8,774  (1,770  (2,603  (4,373
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   6,281    (1,323  4,958    (9,049  7,577    (1,472   (299  (8,218  (8,517  8    (6,633  (6,625
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Debt issued

              

Ch$

   (323  1,130    807    (491  (73  (564   (504  588    84    (731  1,722    991  

UF

   28,229    15,349    43,578    48,160    (36,179  11,981     33,803    (11,050  22,753    21,062    113,016    134,078  

Foreign currency

   (165  53    (112  5,561    (652  4,909     9,463    (3,192  6,271    14,649    (4,722  9,927  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   27,741    16,532    44,273    53,230    (36,904  16,326     42,762    (13,654  29,108    34,980    110,016    144,996  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Other financial obligation

              

Ch$

   379    (200  179    204    (4  200     101    (153  (52  93    (210  (117

UF

   13    437    450    (16  (700  (716   (266  163    (103  (395  2,637    2,242  

Foreign currency

   96    (218  (122  (28  (53  (81   2    (119  (117  10    (32  (22
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

   488    19    507    160    (757  (597   (163  (109  (272  (292  2,395    2,103  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total interest bearing liabilities

              

Ch$

   34,161    175,785    209,946    43,987    30,436    74,423     37,727    (40,820  (3,093  6,778    (94,579  (87,801

UF

   35,335    59,666    95,001    54,449    (49,105  5,344     27,898    (22,964  4,934    4,148    163,415    167,563  

Foreign currency

   (242  (4,873  (5,115  3,849    804    4,653     4,950    (11,049  (6,099  13,039    (8,384  4,655  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

  Ch$69,254   Ch$230,578   Ch$299,832   Ch$102,285   Ch$ (17,865 Ch$84,420    Ch$70,575   Ch$(74,833 Ch$(4,258 Ch$23,965   Ch$60,452   Ch$84,417  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Financial Investments

Financial assets held-for-trading:held for trading:

The detailfollowing table sets forth a breakdown of instruments classified as financial assetsheld-for-trading, is as follows: included in our investment portfolio:

 

  As of December 31,   Weighted
Average Nominal
Rate as of
December 31,
   As of December 31,   Weighted
Average Nominal
Rate as of
December 31,
 
IFRS:  2010   2011   2012   2012   2012   2013   2014   2014 
  (in millions of Ch$)   %   (in millions of Ch$)   % 

Instruments issued by the Chilean Government and the Central Bank:

                

Central Bank bonds

  Ch$44,624    Ch$66,243    Ch$25,585     2.70  Ch$25,585    Ch$34,407    Ch$13,906     2.95

Central Bank promissory notes

   3,266     4,657     3,068     4.50     3,068     2,995     2,996     2.76  

Other instruments issued by the Chilean Government and the Central Bank

   109,302     6,942     43,726     2.59     43,726     27,535     71,968     3.07  

Other instruments issued in Chile:

        

Other securities issued in Chile:

        

Mortgage bonds from domestic banks

   196     61     22     5.40     22     14     9     3.75  

Bonds from domestic banks

   1,740     585     —       —       —       1,926     3,197     4.93  

Deposits in domestic banks

   119,002     191,003     87,093     6.56     87,093     255,582     199,665     3.77  

Bonds from other Chilean companies

   —       —       —       —       —       3,427     1,351     12.01  

Other instruments issued in Chile

   1,635     370     188     —       188     1,035     366     —    

Instruments issued by foreign institutions:

        

Instruments issued by foreign institutions:

        

Instruments from foreign governments or central banks

   —       —       —       —       —       —       —       —    

Other instruments issued abroad

   —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  Ch$279,765    Ch$269,861    Ch$159,682     2.31  Ch$159,682    Ch$326,921    Ch$293,458     3.60
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

“Other securities issued in Chile” includes instruments sold under repurchase agreements with customers and financial instruments, amounting to Ch$86,863 million as of December 31, 2012, Ch$227,453 million as of December 31, 2013 and Ch$194,074 million as of December 31, 2014. Instruments issued by the Chilean Government and the Central Bank include instruments sold under agreements to repurchase to customers and financial institutions, amounting to Ch$10,792 millioninstitutions. For these instruments, there were no balances as of December 31, 2010, Ch$29,811 million as of December 31, 2011 and no balance as of December 31, 2012. Under “Other instruments issued in Chile” are included instruments sold under agreements to repurchase to customers and financial instruments, amounting to Ch$56,743 million as of December 31, 2010, Ch$152,431 million as of December 31, 2011 and Ch$86,863 million as of December 31, 2012.2012, 2013 or 2014.

Investment Portfolio:

The detail of instruments classified as financial assetsavailable-for-sale and as financial assetsheld-to-maturity is as follows:

Financial assetsavailable-for-sale

 

  As of December 31,   Weighted
average nominal
rate as of
December 31,
   As of December 31,   Weighted
average nominal
rate as of
December 31,
 
IFRS:  2010   2011   2012   2012   2012   2013   2014   2014 
  (in millions of Ch$)   %   (in millions of Ch$)   % 

Instruments issued by the Chilean Government and the Central Bank:

        

Instruments issued by the Chilean Government and the Central Bank:

        

Bonds issued by the Chilean Government and the Central Bank

  Ch$67,822    Ch$158,865    Ch$110,569     3.99  Ch$110,569    Ch$333,035    Ch$28,795     3.28

Promissory notes issued by the Chilean Government and the Central Bank

   212,816     58,564     969     3.25     969     50,415     149,755     2.81  

Other instruments

   90,849     194,965     140,246     3.29     140,246     202,958     160,774     3.95  

Other instruments issued in Chile:

        

Other instruments issued in Chile:

        

Equity instruments valued at cost

   2,222     2,222     613     —       613     352     358     —    

Equity instruments valued at fair value

   —       —       7,263     —       7,263     7,827     8,249     —    

Mortgage bonds from domestic banks

   70,055     87,966     85,688     3.82     85,688     96,933     96,294     4.04  

Bonds from domestic banks

   73,331     124,203     116,100     4.07     116,100     128,500     251,231     3.08  

Deposits from domestic banks

   398,789     521,881     560,390     6.88     560,390     617,816     657,467     4.03  

Bonds from other Chilean companies

   40,467     54,449     32,281     5.29     32,281     13,558     29,519     4.46  

Other instruments

   116,682     139,602     129,693     6.17     129,693     154,267     162,829     6.04  

Instruments issued by Foreign Institutions:

        

Instruments issued by Foreign Institutions:

        

Instruments from foreign governments or central banks

   —       —       —       —       —       —       —       —    

Other instruments issued abroad

   84,072     128,403     88,504     5.39     88,504     76,222     63,525     5.05  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  Ch$1,157,105    Ch$1,471,120    Ch$1,272,316     4.90  Ch$1,272,316    Ch$1,681,883    Ch$1,608,796     4.00
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The portfolio of financial assets available for sale included net unrealized gains of Ch$696 24,829 million, Ch$36,443 million and Ch$24,82940,929 million as of December 31, 20112012, 2013, and December 31, 2012,2014, respectively, in each case recorded in other comprehensive income within equity.

Financial assets held-to-maturityheld to maturity

There are no securities reported under this category as of December 31, 2010, December 31, 2011 or December 31, 2012.2012, 2013 and 2014.

Maturity of Financial Investments:

The maturities of financial assetsheld-for-trading and financial assetsavailable-for-sale as of December 31, 2012, 2013 and 2014 were as follows:

 

   As of December 31, 2012 
   Due within
1 year
   Due after 1 year
but within 3
years
   Due after 3 years
but within
5 years
   Due after 5 years   Total 
IFRS:  (in millions of Ch$) 

Financial assets held-for-trading

   159,682     —       —       —       159,682  

Financial assets available-for-sale

   787,053     152,075     132,382     200,806     1,272,316  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   946,735     152,075     132,382     200,806     1,431,998  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  As of December 31, 2012 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year but
within 5
years
  Weighted
Average
Nominal
Rate
  Due after
5 year but
within 10
years
  Weighted
Average
Nominal
Rate
  Due after
10 years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assets held for trading:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Central Bank bonds

 Ch$25,585    2.70 Ch$—      —   Ch$—      —   Ch$—      —   Ch$25,585  

Central Bank promissory notes

  3,068    4.50    —      —      —      —        3,068  

Other instruments issued by the Chilean Government and the Central Bank

  43,726    2.59    —      —      —      —      —      —      43,726  

Other securities issued in Chile:

         

Mortgage bonds from domestic banks

  22    5.40    —      —      —      —      —      —      22  

Bonds from domestic banks

  —      —      —      —      —      —      —      —      —    

Deposits in domestic banks

  87,093    6.98    —      —      —      —      —      —      87,093  

Bonds from other Chilean companies

  —      —      —      —      —      —      —      —      —    

Other instruments issued in Chile

  188    —      —      —      —      —      —      —      188  

Instruments issued by foreign institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$159,682    5.04 Ch$—      —   Ch$—      —   Ch$—      —   Ch$159,682  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  As of December 31, 2013 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year but
within 5
years
  Weighted
Average
Nominal
Rate
  Due after
5 year but
within 10
years
  Weighted
Average
Nominal
Rate
  Due after
10 years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assets held for trading:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Central Bank bonds

 Ch$34,407    2.32 Ch$—      —   Ch$—      —   Ch$—      —   Ch$34,407  

Central Bank promissory notes

  2,995    3.84    —      —      —      —      —      —      2,995  

Other instruments issued by the Chilean Government and the Central Bank

  27,535    2.26    —      —      —      —      —      —      27,535  

Other securities issued in Chile:

         

Mortgage bonds from domestic banks

  14    3.88    —      —      —      —      —      —      14  

Bonds from domestic banks

  1,926    4.00    —      —      —      —      —      —      1,926  

Deposits in domestic banks

  255,582    4.44    —      —      —      —      —      —      255,582  

Bonds from other Chilean companies

  3,427    10.94    —      —      —      —      —      —      3,427  

Other instruments issued in Chile

  1,035    —      —      —      —      —      —      —      1,035  

Instruments issued by foreign institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$326,921    4.10 Ch$      —     Ch$      —   Ch$         Ch$326,921  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  As of December 31, 2014 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year but
within 5
years
  Weighted
Average
Nominal
Rate
  Due after
5 year but
within 10
years
  Weighted
Average
Nominal
Rate
  Due after
10 years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assets held for trading:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Central Bank bonds

 Ch$13,906    2.95 Ch$—      —   Ch$—      —   Ch$—      —   Ch$13,906  

Central Bank promissory notes

  2,996    2.76    —      —      —      —      —      —      2,996  

Other instruments issued by the Chilean Government and the Central Bank

  71,968    3.07    —      —      —      —      —      —      71,968  

Other securities issued in Chile:

         

Mortgage bonds from domestic banks

  9    3.75    —      —      —      —      —      —      9  

Bonds from domestic banks

  3,197    4.93    —      —      —      —      —      —      3,197  

Deposits in domestic banks

  199,665    3.77    —      —      —      —      —      —      199,665  

Bonds from other Chilean companies

  1,351    12.01    —      —      —      —      —      —      1,351  

Other instruments issued in Chile

  366    —      —      —      —      —      —      —      366  

Instruments issued by foreign institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$293,458    3.60 Ch$—      —     Ch$—      —   Ch$—      —   Ch$293,458  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  As of December 31, 2012 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year but
within 5

years
  Weighted
Average
Nominal
Rate
  Due after
5 year but
within 10

years
  Weighted
Average
Nominal
Rate
  Due after
10  years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assetsavailable-for-sale:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Bonds issued by the Chilean Government and the Central Bank

 Ch$36,773    4.73 Ch$73,796    3.62 Ch$—      —   Ch$—      —   Ch$110,569  

Promissory notes issued by the Chilean Government and the Central Bank

  231    3.46    369    3.18    369    3.18    —      —      969  

Other instruments

  38,466    3.06    96,008    3.35    5,772    3.89    —      —      140,246  

Other instruments issued in Chile:

         

Equity instruments valued at cost

  —      —      —      —      —      —      613    —      613  

Equity instruments valued at fair value

  —      —      —      —      —      —      7,263    —      7,263  

Mortgage bonds from domestic banks

  7,275    3.84    28,446    3.83    29,420    3.84    20,547    3.79    85,688  

Bonds from domestic banks

  29,800    4.55    68,111    3.94    16,144    3.81    2,045    3.80    116,100  

Deposits from domestic banks

  549,390    6.91    11,000    5.23    —      —      —      —      560,390  

Bonds from other Chilean companies

  4,687    6.13    9,464    5.56    9,845    5.77    8,285    3.95    32,281  

Other instruments

  2,567    6.23    48,940    6.70    73,089    5.82    5,097    5.92    129,693  

Instruments issued by Foreign Institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      —      —      57,966    5.39    30,538    —      88,504  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$669,189    6.42 Ch$336,134    4.18 Ch$192,605    5.15 Ch$74,388    4.13 Ch$1,272,316  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  As of December 31, 2013 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year but
within 5

years
  Weighted
Average
Nominal
Rate
  Due after
5 year but
within 10

years
  Weighted
Average
Nominal
Rate
  Due after
10  years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assetsavailable-for-sale:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Bonds issued by the Chilean Government and the Central Bank

 Ch$71,411    2.51 Ch$254,295    2.49 Ch$7,329    4.93 Ch$—      —   Ch$333,035  

Promissory notes issued by the Chilean Government and the Central Bank

  50,415    3.84    —      —      —      —      —      —      50,415  

Other instruments

  28,817    3.14    112,112    3.13    61,954    4.41    75    3.66    202,958  

Other instruments issued in Chile:

         

Equity instruments valued at cost

  —      —      —      —      —      —      352    —      352  

Equity instruments valued at fair value

  —      —      —      —      —      —      7,827    —      7,827  

Mortgage bonds from domestic banks

  8,927    3.97    35,103    3.97    35,018    4.02    17,885    4.02    96,933  

Bonds from domestic banks

  30,116    3.55    86,357    3.59    11,266    4.74    761    3.87    128,500  

Deposits from domestic banks

  601,393    3.57    16,423    3.30    —      —      —      —      617,816  

Bonds from other Chilean companies

  599    4.90    6,510    6.28    2,432    5.11    4,017    5.14    13,558  

Other instruments

  13,715    7.23    39,280    6.53    99,008    5.83    2,264    7.17    154,267  

Instruments issued by Foreign Institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      —      —      33,985    5.27    42,237    —      76,222  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$805,393    3.54 Ch$550,080    3.25 Ch$250,992    5.07 Ch$75,418    4.48 Ch$1,681,883  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  As of December 31, 2014 
  Due
within 1
year
  Weighted
Average
Nominal
Rate
  Due after
1 year  but
within
5 years
  Weighted
Average
Nominal
Rate
  Due after
5 year  but
within 10
years
  Weighted
Average
Nominal
Rate
  Due after
10  years
  Weighted
Average
Nominal
Rate
  Total 
  (millions of Ch$, except percentages) 

Financial assetsavailable-for-sale:

         

Instruments issued by the Chilean Government and the Central Bank:

         

Bonds issued by the Chilean Government and the Central Bank

 Ch$8,137    3.27 Ch$20,501    3.28 Ch$157    4.04 Ch$—      —   Ch$28,795  

Promissory notes issued by the Chilean Government and the Central Bank

  149,755    2.81    —      —      —      —      —      —      149,755  

Other instruments

  19,341    3.42    64,457    3.48    52,937    4.67    24,039    4.06    160,774  

Other instruments issued in Chile:

         

Equity instruments valued at cost

  —      —      —      —      —      —      358    —      358  

Equity instruments valued at fair value

  —      —      —      —      —      —      8,249    —      8,249  

Mortgage bonds from domestic banks

  9,468    4.04    36,374    4.04    34,374    4.07    16,078    3.96    96,294  

Bonds from domestic banks

  31,034    3.07    124,048    3.07    91,239    3.07    4,910    3.33    251,231  

Deposits from domestic banks

  612,883    4.07    44,584    3.41    —      —      —      —      657,467  

Bonds from other Chilean companies

  1,576    4.28    10,829    5.49    5,260    3.97    11,854    3.75    29,519  

Other instruments

  17,389    6.36    92,670    6.00    49,845    5.92    2,925    7.17    162,829  

Instruments issued by Foreign Institutions:

         

Instruments from foreign governments or central banks

  —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      —      3,211    5.09    1,938    5.00    58,376    —      63,525  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 Ch$849,583    3.84 Ch$396,674    4.04 Ch$235,750    4.21 Ch$126,789    4.06 Ch$1,608,796  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loan Portfolio

The following table sets forth our loans by type of loan and risk classification. All loan amounts stated below are before deduction of allowances for loan losses.

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Commercial loans:

      

Commercial loans:

          

Commercial loans

  Ch$6,969,374    Ch$7,872,546    Ch$8,551,170     6,969,374     7,872,546     8,544,960     9,891,258     9,626,704  

Foreign trade loans

   913,658     1,509,147     1,240,955     913,658     1,509,147     1,240,955     1,154,681     1,266,799  

Current account debtors

   122,106     214,479     189,399     122,106     214,479     189,399     259,289     310,135  

Factoring transactions

   477,133     589,098     606,137     477,133     589,098     606,137     524,059     478,735  

Commercial lease transactions

   777,294     996,566     1,113,272     777,294     996,566     1,113,272     1,209,747     1,381,522  

Other loans and accounts receivable

   37,841     31,607     40,647     37,841     31,607     40,647     39,939     46,851  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   9,297,406     11,213,443     11,741,580     9,297,406     11,213,443     11,735,370     13,078,973     13,110,746  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Mortgage loans:

      

Mortgage loans:

          

Mortgage bonds

   164,474     134,377     109,215     164,474     134,377     109,215     87,354     70,104  

Endorsable mortgage loans

   205,260     175,258     151,206     205,260     175,258     151,206     122,905     104,175  

Other residential real estate mortgage loans

   2,556,335     3,297,331     3,937,766     2,556,335     3,297,331     3,937,766     4,516,822     5,237,631  

Residential lease transactions

   —       —       27     —       —       27     24     21  

Other loans and accounts receivable

   552     468     453     552     468     453     5,202     6,692  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   2,926,621     3,607,434     4,198,667     2,926,621     3,607,434     4,198,667     4,732,307     5,418,623  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Consumer loans:

      

Consumer loans:

          

Consumer loans in installments

   1,482,056     1,763,101     1,906,273     1,482,056     1,763,101     1,912,483     2,043,955     2,206,324  

Current account debtors

   230,767     232,972     245,066     230,767     232,972     245,066     240,952     271,820  

Credit card debtors

   440,791     569,290     679,986     440,791     569,290     679,986     783,782     883,010  

Consumer lease transactions

   —       —       —       —       —       —       —       —    

Other loans and accounts receivable

   354     257     189     354     257     189     801     810  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   2,153,968     2,565,620     2,831,514     2,153,968     2,565,620     2,837,724     3,069,490     3,361,964  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  Ch$14,377,995    Ch$17,386,497    Ch$18,771,761     14,377,995     17,386,497     18,771,761     20,880,770     21,891,333  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The loan categories are as follows:

 

“Commercial Loans” are loans and accounts receivable from clients not included within the mortgage or consumer loans categories.

 

“Mortgage Loans” include mortgage loans granted to individuals to acquire, expand, repair or build a home, issued as mortgage bonds, endorsable mortgage loans or by other methods. It also includes supplementary loans for the same purposes and bridge loans granted before the mortgage loan has been settled. This subcategory also includes residential real estate lease transactions and other accounts receivable.

 

“Consumer Loans” are all loans granted to individuals to be used for purchasing goods or services. These include different types of loans (either installments or revolving), as well as balances from credit card transactions or overdrafts on current accounts belonging to individuals. Consumer loans also include consumer lease transactions and other accounts receivable. Consumer loans do not include loans granted to finance business activities that the debtor is developing or that it may develop.

Maturity and Interest Rate Sensitivity of Loans as of December 31, 20122014

The following table sets forth an analysis by type and time remaining to maturity of our loans as of December 31, 2012:2014:

 

  Balance as of
December 30,
2012
   Due within 1
month
   Due after 1
month but
within 6 months
   Due after
6 months but
within
12 months
   Due after 1 year
but within 3
years
   Due after 3
years but within
5 years
   Due after
5 years
  Balances as of
December 31,
2014
 Due within 1
month
 Due after 1
month but
within 6 months
 Due after
6 months but
within
12 months
 Due after 1 year
but within 3
years
 Due after 3
years but within
5 years
 Due after
5 years
 
  (in millions of Ch$)  (in millions of Ch$) 

IFRS:

                     

Commercial loans:

              

Commercial Loans:

       

Commercial loans

  Ch$8,551,170    Ch$736,964    Ch$2,118,721    Ch$903,060    Ch$2,278,452    Ch$1,066,282    Ch$1,447,691   Ch$9,626,704   Ch$1,134,925   Ch$1,896,371   Ch$1,196,508   Ch$2,685,512   Ch$1,214,086   Ch$1,499,302  

Foreign trade loans

   1,240,955     290,547     751,420     121,689     41,603     30,763     4,933    1,266,799    291,303    761,100    149,831    56,353    7,032    1,180  

Current account debtors

   189,399     189,399     —       —       —       —       —      310,135    310,135    —      —      —      —      —    

Factoring loans

   606,137     357,527     172,002     52,100     24,508     —       —      478,735    286,073    159,492    8,978    19,691    4,289    212  

Leasing loans

   1,113,272     35,664     150,502     161,646     423,667     161,143     180,650    1,381,522    44,892    183,669    189,033    482,194    217,624    264,110  

Other loans

   40,647     37,185     1,556     939     833     126     8    46,851    17,668    27,036    1,008    1,003    127    9  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   11,741,580     1,647,286     3,194,201     1,239,434     2,769,063     1,258,314     1,633,282    13,110,746    2,084,996    3,027,668    1,545,358    3,244,753    1,443,158    1,764,813  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Mortgage Loans:

                     

Mortgage bonds

   109,215     2,335     7,143     8,769     31,515     23,389     36,064    70,104    1,986    5,636    6,903    21,914    15,329    18,336  

Endorsable mortgage loans

   151,206     3,764     9,120     8,852     31,404     27,460     70,606    104,175    1,738    5,775    6,842    24,849    20,747    44,224  

Residential mortgage loans

   3,937,793     32,099     80,621     98,404     407,946     421,028     2,897,695    5,237,631    43,183    109,350    133,087    553,863    569,721    3,828,427  

Leasing loans

  21    21    —      —      —      —      —    

Other loans

   453     453     —       —       —       —       —      6,692    2,334    3,540    765    53    —      —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   4,198,667     38,651     96,884     116,025     470,865     471,877     3,004,365    5,418,623    49,262    124,301    147,597    600,679    605,797    3,890,987  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Consumer loans:

              

Consumer Loans:

       

Consumer loans

   1,906,273     108,985     352,931     342,760     870,472     215,393     15,732    2,206,324    141,371    393,679    384,233    985,853    279,655    21,533  

Current account debtors

   245,066     245,066     —       —       —       —       —    

Current accounts debtors

  271,820    271,819    —      —      —      —      1  

Credit card

   679,986     645,963     34,023     —       —       —       —      883,010    129,293    753,717    —      —      —      —    

Other loans

   189     189     —       —       —       —       —      810    810    —      —      —      —      —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   2,831,514     1,000,203     386,954     342,760     870,472     215,393     15,732    3,361,964    543,293    1,147,396    384,233    985,853    279,655    21,534  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total loans

  Ch$18,771,761    Ch$2,686,140    Ch$3,678,039    Ch$1,698,219    Ch$4,110,400    Ch$1,945,584    Ch$4,653,379  

Total Loans

 Ch$21,891,333   Ch$2,677,551   Ch$4,299,365   Ch$2,077,188   Ch$4,831,285   Ch$2,328,610   Ch$5,677,334  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

The following table sets forth the interest rate sensitivity of our outstanding loans due after one year as of December 31, 2012:2014:

 

   As of
December 31,
20122014
 
   (in millions of
Ch$)
 

IFRS:

  

Variable rate

  

Ch$

  Ch$795,774866,025  

UF

   580,917730,778  

Foreign currency

   276,728608,197  
  

 

 

 

Total

   1,653,4192,205,000  
  

 

 

 

Fixed rate

  

Ch$

   2,457,4872,737,301  

UF

   6,388,8327,685,023  

Foreign currency

   209,625209,905  
  

 

 

 

Total

  Ch$9,055,94410,632,229  
  

 

 

 

Total

  Ch$10,709,36312,837,229  
  

 

 

 

Loans by Economic Activity

The following table sets forth under IFRS, at the dates indicated, an analysis of our loan portfolio based on the borrower’s principal economic activity. Loans to individuals for business purposes are allocated to their respective economic activity.

 

  As of December 31,  As of December 31, 
  2010 2011 2012  2010 2011 2012 2013 2014 
IFRS:  Loan
Portfolio
   % of Loan
Portfolio
 Loan
Portfolio
   % of Loan
Portfolio
 Loan
Portfolio
   % of Loan
Portfolio
  Loan
Portfolio
 % of Loan
Portfolio
 Loan
Portfolio
 % of Loan
Portfolio
 Loan
Portfolio
 % of Loan
Portfolio
 Loan
Portfolio
 % of Loan
Portfolio
 Loan
Portfolio
 % of Loan
Portfolio
 
  (in millions of Ch$, except percentages)  (in millions of Ch$, except percentages) 

Agriculture, Livestock, Forestry, Agribusiness, Fishing:

                    

Agriculture and livestock

  Ch$420,384     2.92 Ch$482,392     2.77 Ch$380,239     2.43 Ch$420,384    2.92 Ch$482,392    2.77 Ch$380,239    2.43 Ch$425,905    2.04 Ch$452,077    2.07

Fruit

   275,060     1.91    329,728     1.90    318,241     1.70    275,060    1.91    329,728    1.90    318,241    1.70    365,930    1.75    381,528    1.74  

Forestry and wood extraction

   70,765     0.49    100,799     0.58    125,236     0.67    70,765    0.49    100,799    0.58    125,236    0.67    122,270    0.59    118,034    0.54  

Fishing

   238,835     1.66    271,901     1.56    311,477     1.25    238,835    1.66    271,901    1.56    311,477    1.25    219,173    1.05    261,375    1.19  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   1,005,044     6.98    1,184,820     6.81    1,135,193     6.05    1,005,044    6.98    1,184,820    6.81    1,135,193    6.05    1,133,278    5.43    1,213,014    5.54  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Mining and Petroleum:

                    

Mining and quarries

   177,479     1.23    399,752     2.30    372,437     1.98    177,479    1.23    399,752    2.30    372,437    1.98    340,045    1.63    362,276    1.65  

Natural gas and crude oil extraction

   2,599     0.02    —       —      —       —      2,599    0.02    —      —      —      —      —      —      —      —    
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   180,078     1.25    399,752     2.30    372,437     1.98    180,078    1.25    399,752    2.30    372,437    1.98    340,045    1.63    362,276    1.65  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Manufacturing:

                    

Tobacco, food and beverages

   434,796     3.02    509,613     2.93    499,700     2.66    434,796    3.02    509,613    2.93    499,700    2.66    516,540    2.47    510,127    2.33  

Textiles, clothing and leather goods

   46,946     0.33    51,416     0.30    167,500     0.89    46,946    0.33    51,416    0.30    167,500    0.89    51,379    0.25    56,036    0.26  

Wood and wood products

   29,874     0.21    28,582     0.16    31,055     0.17    29,874    0.21    28,582    0.16    31,055    0.17    26,142    0.13    60,603    0.28  

Paper, printing and publishing

   54,337     0.38    68,534     0.39    60,355     0.32    54,337    0.38    68,534    0.39    60,355    0.32    64,281    0.31    49,948    0.23  

Oil refining, carbon and rubber

   28,214     0.20    93,080     0.54    64,708     0.34    28,214    0.20    93,080    0.54    64,708    0.34    249,481    1.19    338,582    1.55  

Production of basic metal, non-mineral, machine and equipment

   338,057     2.35    375,500     2.16    356,290     1.90    338,057    2.35    375,500    2.16    356,290    1.90    251,842    1.21    363,444    1.66  

Other manufacturing industries

   202,777     1.41    362,094     2.08    201,386     1.08    202,777    1.41    362,094    2.08    201,386    1.08    205,897    0.98    127,852    0.58  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   1,135,001     7.90    1,488,819     8.56    1,380,994     7.36    1,135,001    7.90    1,488,819    8.56    1,380,994    7.36    1,365,562    6.54    1,506,592    6.89  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Electricity, Gas and Water:

                    

Electricity, gas and water

   310,774     2.16    315,338     1.81    328,763     1.75    310,774    2.16    315,338    1.81    328,763    1.75    531,973    2.55    442,068    2.02  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   310,774     2.16    315,338     1.81    328,763     1.75    310,774    2.16    315,338    1.81    328,763    1.75    531,973    2.55    442,068    2.02  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Construction:

                    

Residential buildings

   609,532     4.25    793,842     4.57    1,074,856     5.73    609,532    4.25    793,842    4.57    1,074,856    5.73    1,306,852    6.26    1,365,105    6.24  

Other constructions

   114,745     0.80    151,000     0.86    177,690     0.94    114,745    0.80    151,000    0.86    177,690    0.94    151,229    0.72    69,405    0.32  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   724,277     5.05    944,842     5.43    1,252,546     6.67    724,277    5.05    944,842    5.43    1,252,546    6.67    1,458,081    6.98    1,434,510    6.56  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Commerce:

                    

Wholesale

   746,448     5.19    1,020,572     5.87    921,459     4.91    746,448    5.19    1,020,572    5.87    921,459    4.91    1,087,933    5.21    1,220,832    5.58  

Retail, restaurants and hotels

   1,260,721     8.77    1,266,716     7.29    1,403,210     7.47    1,260,721    8.77    1,266,716    7.29    1,403,210    7.47    1,465,032    7.02    1,194,009    5.45  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   2,007,169     13.96    2,287,288     13.16    2,324,669     12.38    2,007,169    13.96    2,287,288    13.16    2,324,669    12.38    2,552,965    12.23    2,414,841    11.03  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Transport, Storage and Communications:

                    

Transport and storage

   1,079,386     7.51    1,244,499     7.16    1,397,741     7.45    1,079,386    7.51    1,244,499    7.16    1,397,741    7.45    1,493,043    7.15    1,610,818    7.36  

Communications

   99,726     0.69    162,859     0.93    72,617     0.38    99,726    0.69    162,859    0.93    72,617    0.38    109,305    0.52    59,673    0.27  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   1,179,112     8.20    1,407,358     8.09    1,470,358     7.83    1,179,112    8.20    1,407,358    8.09    1,470,358    7.83    1,602,348    7.67    1,670,491    7.63  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Financial Services:

                    

Financial and insurance companies

   1,615,006     11.23    1,937,788     11.15    1,796,921     9.57    1,615,006    11.23    1,937,788    11.15    1,796,921    9.57    2,009,136    9.62    1,811,389    8.27  

Real estate and other financial services

   83,580     0.58    83,723     0.48    57,650     0.31    83,580    0.58    83,723    0.48    57,650    0.31    41,119    0.20    87,727    0.40  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   1,698,586     11.81    2,021,511     11.63    1,854,571     9.88    1,698,586    11.81    2,021,511    11.63    1,854,571    9.88    2,050,255    9.82    1,899,116    8.67  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Community, Social and Personal Services:

                    

Community, social and personal services

   1,050,616     7.31    1,084,380     6.24    1,310,573     6.98    1,050,616    7.31    1,084,380    6.24    1,310,573    6.98    1,631,412    7.81    1,587,473    7.25  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   1,050,616     7.31    1,084,380     6.24    1,310,573     6.98    1,050,616    7.31    1,084,380    6.24    1,310,573    6.98    1,631,412    7.81    1,587,473    7.25  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Others

   325     —      79,335     0.46    311,476     1.67    325    —      79,335    0.46    311,476    1.67    421,848    2.02    580,365    2.65  

Consumer Loans

   2,159,235     15.02    2,565,620     14.76    2,831,514     15.08    2,159,235    15.02    2,565,620    14.76    2,831,514    15.08    3,060,696    14.66    3,361,964    15.36  

Residential Mortgage Loans

   2,927,778     20.36    3,607,434     20.75    4,198,667     22.37    2,927,778    20.36    3,607,434    20.75    4,198,667    22.37    4,732,307    22.66    5,418,623    24.75  
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  Ch$14,377,995     100.00 Ch$17,386,497     100.00 Ch$18,771,761     100.00 Ch$14,377,995    100.00 Ch$17,386,497    100.00 Ch$18,771,761    100.00 Ch$20,880,770    100.00 Ch$21,891,333    100.00
  

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Foreign Country Outstanding Loans

Ourcross-border outstanding loans are principallytrade-related. These loans include loans granted to foreign financial institutions and foreign corporations, some of which are guaranteed by their Chilean parent company. The table below lists under IFRS the total amounts outstanding to borrowers in certain foreign countries as of the dates indicated, and thus does not include foreigntrade-related loans to domestic borrowers.

 

   As of December 31, 
   2010   2011   2012 
IFRS:  (in millions of Ch$) 

Argentina

  Ch$3,307    Ch$4,559    Ch$4,559  

Australia

   —       12,710     11,553  

Austria

   —       180     212  

Belgium

   —       6,254     269  

Bolivia

   —       82     168  

Brazil

   175,453     204,477     200,016  

Canada

   —       1,891     618  

China

   133,784     281,294     223,515  

Colombia

   7,967     29,299     7,019  

Costa Rica

   6,138     —       —    

Denmark

   —       132     31,457  

El Salvador

   4,251     —       —    

Finland

   —       400     69  

France

   7,618     191     627  

Germany

   —       1,643     33,475  

Holland

   —       15,562     16,148  

Hong Kong

   117     1,405     91  

India

   44     116,130     76,788  

Israel

   —       506     1,112  

Italy

   —       433     157  

Japan

   247     53     4,228  

Mexico

   36,309     87,154     94,814  

New Zealand

   —       —       —    

Peru

   11,565     12,384     18,148  

Singapore

   —       9,238     10,089  

South Korea

   14,811     64,041     56,789  

Spain

   —       1,243     425  

Switzerland

   —       46     11,605  

Sweden

   —       3,546     6,446  

Taiwan

   —       383     —    

Turkey

   —       —       975  

United Kingdom

   371     24,490     38,332  

United States

   —       15,138     36,474  

Uruguay

   165     —       —    
  

 

 

   

 

 

   

 

 

 

Total

  Ch$402,147    Ch$894,864    Ch$886,178  
  

 

 

   

 

 

   

 

 

 
   As of December 31, 
   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$) 

Argentina

  Ch$3,307    Ch$5,241    Ch$4,841    Ch$5,300    Ch$—    

Brazil

   21,100     18,231     26,440     13,824     33,295  

China

   —       —       —       —       22,857  

Colombia

   7,967     12,101     4,806     5,270     6,075  

Costa Rico

   6,138     —       —       —       —    

El Salvador

   4,239     —       —       —       —    

India

   —       15,656     14,476     15,855     18,284  

Mexico

   36,273     74,458     57,800     —       61,225  

Netherlands

   —       13,769     3,342     15,666     18,108  

Panama

   —       —       —       1,054     —    

Peru

   2,008     2,515     16,497     26,287     33,233  

Uruguay

   165     —       —       —       —    

Singapore

   —       10,369     9,486     —       —    

United Kingdom

   —       11,345     7,325     —       —    

United States

   —       5,568     17,472     21,971     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  Ch$81,197    Ch$169,253    Ch$162,485    Ch$105,227    Ch$193,077  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the economic and financial uncertainty observed in the Euro zone since the financial turmoil of 2008, the Bank is constantly monitoring the credit risk condition of certain European countries. In this line, as of December 31, 2012,2014, the Bank maintainsonly maintained exposures ofassociated with contingent credits (standby letters of credits and performance bonds) with certain European countries, as follows:

 

   As of
December 31,
20122014
 
   (in millions
of Ch$)
 

Italy

  Ch$11,3201,879  

Spain

   27,4659,576  
  

 

 

 

Total

  Ch$38,78511,455  
  

 

 

 

As of December 31, 2012,2014, the Bank does not have any exposure relating to any other product such as: financial assets available-for-sale,available for sale, financial assets held-for-trading,held for trading, derivatives instruments, working capital, lines of credit, etc. with the countries mentioned in the table above.

We also maintain deposits abroad, as needed to conduct our foreign trade transactions and manage liquidity. The table below lists the largest amounts of foreign deposits by country under IFRS as of the end of the dates indicated:

   As of December 31, 
IFRS:  2010   2011   2012 
   (in millions of Ch$) 

Australia

  Ch$382    Ch$736    Ch$502  

Austria

   —       —       —    

Belgium

   688     90     —    

Brazil

       9  

Canada

   775     1,697     743  

China

   79     128     766  

Denmark

   59     74     99  

Finland

   110     99     74  

France

   1,162     676     339  

Germany

   6,133     3,745     9,199  

Holland

   1,628     301     1,018  

Italy

   1,638     109     —    

Japan

   4,497     5,259     4,325  

Mexico

   —       694     484  

Norway

   —       116     114  

Peru

   —       9     29  

Russia

   —       —       —    

Spain

   1,123     69     —    

Sweden

   138     199     —    

Switzerland

   —       2,092     343  

United Kingdom

   1,323     36,147     13,229  

United States

   22,888     236,753     170,275  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$42,623    Ch$288,993    Ch$201,548  
  

 

 

   

 

 

   

 

 

 

Credit Review Process

Credit risk is the risk that we will incur a loss because our customers or counterparties do not comply with their contractual obligations.

This risk is managed using a global, unified andforward-looking strategy, which recognizes the current and projected economic environment of the markets and segments in which our different businesses are developing and grants appropriate credit treatment to each such market or segment by using risk limits that we are willing to accept from counterparties.

Managing credit risk is, therefore, inherent to our business and must be incorporated into each segment in which we do business. In this way, we may achieve an optimum balance between assumed risks and attained returns and properly allocate capital to each business line while complying with regulations and criteria defined by our board of directors in order to ensure that we have an appropriate capital base for potential losses that may arise from our credit exposure.

Counterparty limits are established by analyzing financial information, risk ratings, the nature of the exposure, documentation, guarantees, market conditions and the pertinent industry sector, among other factors. The process of monitoring credit quality also includes identifying in advance any possible changes in a counterparty’s payment capacity, which enables us to evaluate the potential loss from these risks and take corrective actions.

Approval Process

Loan analysisThe bank analyzes its loan portfolio on a segmented basis and the same approach is used for approval purposes by taking into account the characteristics of each particular targeted group of customers. Given the diversity of the bank’s loan book, we utilize different techniques in order to evaluate the credit quality, payment capacity and financial structure of every type of customer. Based on these elements, we apply three kinds of models when analyzing a loan application:

Automated Model:This methodology is conductedused for loan applications made by individuals in the retail banking segment, including lower, middle and higher income customers. This model relies, among other attributes, on: (i) individual credit profiles, (ii) indebtedness limits or financial burden, and (iii) the characteristics of the target market.

The customer’s credit profile is determined by using statistical credit scoring models, which differ depending on the segment in which the customer is allocated. The predictive accuracy of our statistical models is crucial for successfully determining the potential risk or loss associated with a differentiated approachloan portfolio under different economic conditions. This requires the bank to constantly review the quality and performance of these scoring models under current market conditions and modifying them when necessary.

Indebtedness limits or financial burden is intended to establish the maximum exposure that the bank is willing to accept for each market segment, using three separate credit-risk models:

Automated Model: This model focuses on individuals fromcustomer, considering the mass-market segment (i.e., not business-related) and is based oncurrent amount of debt held by the integral automation of processes, which consist of admission, approval, follow-up and recovery, using scoring and behavior-based approval systems.

We have also developed a broad level of knowledge regarding selection of customers, with a significant capacity to discriminate between customers of different credit bases. Using this model, we have developed separate segmented models for retail banking and Banco CrediChile. In the case of our Consumer Finance Division (Banco CrediChile), therecustomer. The thresholds are further distinctions for employed customers, which are separated into the following five sub-segments: retired persons, employeesdefined in the public sector, employees in the private sector over 40 years of age, employees in the private sector under 40 years of age and self-employed.

In retail banking there are also sub-segments divided by activity and lengthlight of the customer’s relationship with us.risk profile, the segment and the income bracket of each customer. In this regard, it is crucial to accurately determine the indebtedness capacity of each type of customer, especially in less positive economic cycles, which are characterized by higher unemployment and lower income.

The definition of the target market is also a key element to guiding commercial efforts and executing the business strategy. The most efficient product offering allows the bank to optimize the risk-return relationship.

Parametric Model: This model is applied to individuals and small- and medium-sized companies in business. To analyze these segments, we use certain levels of automation and parameterization. Automation currently provides a fundamental pillar for the pre-approval process for small companies and support for potential evaluations of medium-sized companies.

Case-by-Case Model:Model: This model is used for customers served by our wholesale banking segment. This model requires an individual assessment, based on the wholesalerisk, tenor and amount of the transaction, all of which is supplemented by an analysis of the customer’s financial condition, the industry’s complexity and the outlook for the business, segment. Itamong other variables. This process is also supported by a rating model that is based on individualobjective variables and determines the proper credit terms.

In addition, we have devoted efforts to develop and promote world-class procedures while forming a specialized team with considerable experience in loan approval for the diverse segments and industries we serve. The entire loan approval process is jointly carried out by the risk and commercial areas, through different service models, in order to make the process more effective and efficient while improving the quality of evaluation and optimizing response times. Also, we have specialized areas in some segments that require expert evaluation onknowledge, attention, and particular advice, such as real estate, construction, agriculture, mining and financial services. We have designed specialized tools to serve these diverse industries and assess their risks.

Although the bank has dedicated monitoring teams within the loan approval areas, monitoring efforts are also carried out collectively by the credit risk level, operationand commercial areas, which track operations from application to collection, in order to avoid unexpected risks.

Also, we have set approval attributions that are limited by the total customer credit risk. We define total customer credit risk as the sum of the customer’s loans and other financial obligations in which the customer is the indebted party, the loans and other financial obligations from a third party that are guaranteed by the customer, the customer’s contingent loans and any of the customer’s credit facilities. Also, if the customer is part of an economic group, then the total customer credit risk will also include the total amount and business complexity, among other variables.of the items described above corresponding to all the parties that make up the economic group.

Transactions in which the total customer credit risk is more than Ch$16,72118,470 million require approval from a credit committee, composed of three members of the board of directors and our Chief Executive Officer. Transactions in which the total customer credit risk is equal to or less than Ch$16,72118,470 million may be approved by other executives,risk officers, depending on the amount involved, as follows:

 

Approved by

  

Limit in MCh$Ch$

Credit committee, including members of the board of directors

  up to legal limits

Chief executive officer, chairman and senior credit risk officer

  up to MCh$16,721Ch$18,470 million

Chief executive officer, chairman or senior credit risk officer (any two of the three)

  up to MCh$11,147Ch$12,314 million

Chief executive officer and executive credit risk officers

  up to MCh$7,803Ch$9,851 million

Senior credit risk officers and executive vice president of corporate banking

  up to MCh$7,803Ch$9,851 million

Executive credit risk officers and Executive vice president of corporate banking

  up to MCh$3,121Ch$8,619 million

Other credit risk officers

  up to MCh$1,115Ch$2,463 million

Executive vice president of corporate banking

  up to MCh$1,115Ch$1,970 million

Other department heads

  up to MCh$446Ch$1,231 million

Other officers

  up to MCh$223Ch$493 million

In addition to reviewing the credit limit, the business segment extending the credit must review the terms of the loan, the interest rate and any security to be obtained.

Control andFollow-up

The ongoing control andfollow-up of credit risk is the basis for proactive portfolio management and enables risk to be recognized opportunely, thus identifying business opportunities and detecting potential impairment before it occurs.

In the wholesale business segment, control andfollow-up are realized through a combination of reviews. The most relevant are the following:

 

High-level structured portfolio reviews with respect to the impact of specific macroeconomic fluctuations on relevant sectors of activity, definingcase-by-case action plans.

 

Constant monitoring system in order to detect early those customers that show potential risks, agreeing on specific action plans for these customers with the corresponding client servicing team.

 

Payment arrears management, backed by predictive indicators of risk level, withfollow-up and action plans in the case of our most important customers, plus management of differentiated strategies for early recovery.

 

Follow-up on the conditions, restrictions and covenants imposed by the credit committee to all operations requiring it due to their importance or complexity.

Control of the exposure as well as the sufficiency of guarantees granted in the form of shares, monitoring fluctuations and preparing action plans in the event of insufficient coverage.

 

Follow-up schemes of credit behavior variables and borrowers’ financial condition.

 

Risk segmentation strategies for collection processes and policies to better integrate loan approval and monitoring processes based on a single set of credit fundamentals.

Analysis of Our Loan Classification

The following tables provide statistical data under IFRS regarding the classification of our loans as of the dates indicated. As discussed above, our risk analysis system requires that loans to all customers be classified.

 

IFRS:  As of December 31, 2010(*)   As of December 31, 2010(1) 
  Commercial
Loans
 Residential
Mortgage Loans
   Consumer
Loans
   Total Loans Percentage
Loans of
Classified
   Commercial
Loans
 Residential
Mortgage Loans
 Consumer
Loans
 Total Loans Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

A1

  Ch$28,728   Ch$—      Ch$—      Ch$28,728    0.35  Ch$28,728   Ch$—     Ch$—     Ch$28,728    0.35

A2

   2,346,028    —       —       2,346,028    28.19     2,346,028    —      —      2,346,028    28.19  

A3

   2,098,218    —       —       2,098,218    25.21     2,098,218    —      —      2,098,218    25.21  

B

   3,380,009    —       —       3,380,009    40.61     3,380,009    —      —      3,380,009    40.61  

Impaired Portfolio

   469,971    —       —       469,971    5.64     469,971    —      —      469,971    5.64  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total individual classified loans

  Ch$8,322,954   Ch$—      Ch$—      Ch$8,322,954    100.00  Ch$8,322,954   Ch$—     Ch$—     Ch$8,322,954    100.00
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Group non-classified loans

   838,074    2,856,020     2,045,849     5,739,943      838,074    2,856,020    2,045,849    5,739,943   

Group impaired portfolio

   129,954    71,758     113,386     315,098      129,954    71,758    113,386    315,098   
  

 

  

 

   

 

   

 

    

 

  

 

  

 

  

 

  

Total loans

  Ch$9,290,982   Ch$2,927,778    Ch$2,159,235    Ch$14,377,995     Ch$9,290,982   Ch$2,927,778   Ch$2,159,235   Ch$14,377,995   
  

 

  

 

   

 

   

 

    

 

  

 

  

 

  

 

  

Percentage Classified

   89.58  —       —       57.89    89.58  —    —    57.89 

 

(*)(1)On January 1, 2010, the criteria for classification of the impaired portfolio was changed, wherebyconsidering 100% of categories C1 and C2 are considered to be in impairment, unlike in 2009, where customers that were classified in categories C1 and C2 who were not overdue for more than 60 days were not included.taken into consideration.

IFRS:  As of December 31, 2011(*) 
   Commercial
Loans
  Residential
Mortgage Loans
   Consumer
Loans
   Total Loans  Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages) 

A1

  Ch$50,449   Ch$—      Ch$—      Ch$50,449    0.52

A2

   2,393,915    —       —       2,393,915    24.85  

A3

   3,173,274    —       —       3,173,274    32.94  

A4

   1,889,504    —       —       1,889,504    19.62  

A5

   1,299,391    —       —       1,299,391    13.49  

A6

   605,626    —       —       605,626    6.27  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Normal Portfolio

   9,412,159    —       —       9,412,159    97.69  

B1

   39,682    —       —       39,682    0.41  

B2

   8,664    —       —       8,664    0.09  

B3

   6,542    —       —       6,542    0.07  

B4

   1,517    —       —       1,517    0.02  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Substandard Portfolio

   56,405    —       —       56,405    0.59  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

C1

   19,083    —       —       19,083    0.20  

C2

   11,405    —       —       11,405    0.12  

C3

   35,413    —       —       35,413    0.37  

C4

   15,886    —       —       15,886    0.16  

C5

   55,893    —       —       55,893    0.58  

C6

   26,179    —       —       26,179    0.29  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Non-complying Portfolio

   163,859    —       —       163,859    1.72  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total Individual
Classified Loans

  Ch$9,632,423   Ch$—      Ch$—      Ch$9,632,423    100.00
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Normal Portfolio

   1,443,208    3,543,520     2,439,495     7,426,223   
  

 

 

  

 

 

   

 

 

   

 

 

  

Non-complying Portfolio

   137,812    63,914     126,125     327,851   
  

 

 

  

 

 

   

 

 

   

 

 

  

Total Group Classified Loans

  Ch$1,581,020   Ch$3,607,434    Ch$2,565,620    Ch$7,754,074   
  

 

 

  

 

 

   

 

 

   

 

 

  

Total loans

  Ch$11,213,443   Ch$3,607,434    Ch$2,565,620    Ch$17,386,497   
  

 

 

  

 

 

   

 

 

   

 

 

  

Percentage Classified

   85.90  —       —       55.40 

IFRS:  As of December 31, 2012(*)   As of December 31, 2011(1) 
  Commercial
Loans
 Residential
Mortgage Loans
   Consumer
Loans
   Total Loans Percentage
Loans of
Classified
   Commercial
Loans
 Residential
Mortgage Loans
 Consumer
Loans
 Total Loans Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

A1

  Ch$40   Ch$—      Ch$—      Ch$—      —    Ch$50,449   Ch$—     Ch$—     Ch$50,449    0.52

A2

   2,024,110    —       —       2,024,110    20.93     2,393,915    —      —      2,393,915    24.85  

A3

   2,642,389    —       —       2,642,389    27.32     3,173,274    —      —      3,173,274    32.94  

A4

   1,998,263    —       —       1,998,263    20.66     1,889,504    —      —      1,889,504    19.62  

A5

   1,875,478    —       —       1,875,478    19.39     1,299,391    —      —      1,299,391    13.49  

A6

   778,283    —       —       778,283    8.03     610,606    —      —      610,606    6.34  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Normal Portfolio

   9,318,563    —       —       9,318,563    96.33     9,417,139    —      —      9,417,139    97.76  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 
    —      —      

B1

   134,201    —       —       134,201    1.39     37,316    —      —      37,316    0.39  

B2

   21,709    —       —       21,709    0.22     8,664    —      —      8,664    0.09  

B3

   41,155    —       —       41,155    0.43     6,542    —      —      6,542    0.07  

B4

   8,613    —       —       8,613    0.09     1,517    —      —      1,517    0.02  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Substandard Portfolio

   205,678    —       —       205,678    2.13     54,039    —      —      54,039    0.57  
  

 

  

 

  

 

  

 

  

 

 
  

 

  

 

   

 

   

 

  

 

     —      —      

C1

   22,521    —       —       22,521    0.23     19,083    —      —      19,083    0.20  

C2

   13,753    —       —       13,753    0.14     11,405    —      —      11,405    0.12  

C3

   5,636    —       —       5,636    0.06     35,413    —      —      35,413    0.37  

C4

   52,562    —       —       52,562    0.54     15,886    —      —      15,886    0.16  

C5

   17,895    —       —       17,895    0.19     55,893    —      —      55,893    0.58  

C6

   35,323    —       —       35,323    0.38     23,565    —      —      23,565    0.24  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Non-complying Portfolio

   147,690    —       —       147,690    1.54     161,245    —      —      161,245    1.67  
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total Individual Classified Loans

  Ch$9,671,931    —       —      Ch$9,671,931    100.00  Ch$9,632,423   Ch$—     Ch$—     Ch$9,632,423    100.00
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Normal Portfolio

   1,877,452    4,149,265     2,651,347     8,678,064      1,443,208    3,543,520    2,439,495    7,426,223   

Non-complying Portfolio

   192,197    49,402     180,167     421,766      137,812    63,914    126,125    327,851   
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

Total Group Classified Loans

  Ch$2,069,649   Ch$4,198,667    Ch$2,831,514    Ch$9,099,830     Ch$1,581,020   Ch$3,607,434   Ch$2,565,620   Ch$7,754,074   
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

Total loans

  Ch$11,741,580   Ch$4,198,667    Ch$2,831,514    Ch$18,771,761     Ch$11,213,443   Ch$3,607,434   Ch$2,565,620   Ch$17,386,497   
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

  

Percentage Classified

   82.37  —       —       51.52    85.90  —    —    55.40%   

 

(*)(1)On January 1, 2011, the credit ratings for debtors with individual assessment changed, separating the portfolio into Normal (categories A1-A6)A1 A6), substandard (B1—B4) and Non-complying Non complying(C1-C6), as shown in the above table (see note 41(f)42.2(f) of Financial Statements).

IFRS:  As of December 31, 2012 
   Commercial
Loans
  Residential
Mortgage Loans
  Consumer
Loans
  Total Loans  Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages) 

A1

  Ch$40   Ch$—     Ch$—     Ch$40    —  

A2

   2,024,110    —      —      2,024,110    20.90  

A3

   2,642,389    —      —      2,642,389    27.28  

A4

   1,998,263    —      —      1,998,263    20.63  

A5

   1,875,478    —      —      1,875,478    19.37  

A6

   791,133    —      —      791,133    8.15  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   9,331,413    —      —      9,331,413    96.33  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

B1

   134,201    —      —      134,201    1.39  

B2

   21,709    —      —      21,709    0.22  

B3

   41,155    —      —      41,155    0.42  

B4

   7,306    —      —      7,306    0.08  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Substandard Portfolio

   204,371    —      —      204,371    2.11  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

C1

   22,521    —      —      22,521    0.23  

C2

   13,753    —      —      13,753    0.14  

C3

   5,636    —      —      5,636    0.06  

C4

   52,562    —      —      52,562    0.54  

C5

   17,895    —      —      17,895    0.18  

C6

   36,431    —      —      36,431    0.41  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-complying Portfolio

   148,798    —      —      148,798    1.56  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Individual Classified Loans

  Ch$9,684,582               Ch$9,684,582    100.00
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   1,864,800    4,149,264    2,651,351    8,665,415   

Non-complying Portfolio

   185,988    49,403    186,373    421,764   
  

 

 

  

 

 

  

 

 

  

 

 

  

Total Group Classified Loans

  Ch$2,050,788   Ch$4,198,667   Ch$2,837,724   Ch$9,087,179   
  

 

 

  

 

 

  

 

 

  

 

 

  

Total loans

  Ch$11,735,370   Ch$4,198,667   Ch$2,837,724   Ch$18,771,761   
  

 

 

  

 

 

  

 

 

  

 

 

  

Percentage Classified

   82.52  —    —    51.59 

IFRS:  As of December 31, 2013 
   Commercial
Loans
  Residential
Mortgage Loans
  Consumer
Loans
  Total Loans  Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages) 

A1

  Ch$15,640   Ch$—     Ch$—     Ch$15,640    0.14

A2

   1,926,720    —      —      1,926,720    17.74  

A3

   3,086,438    —      —      3,086,438    28.41  

A4

   2,273,914    —      —      2,273,914    20.93  

A5

   2,347,825    —      —      2,347,825    21.61  

A6

   832,340    —      —      832,340    7.66  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   10,482,877    —      —      10,482,877    96.49  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

B1

   123,803    —      —      123,803    1.14  

B2

   17,687    —      —      17,687    0.16  

B3

   12,979    —      —      12,979    0.12  

B4

   69,978    —      —      69,978    0.64  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Substandard Portfolio

   224,447    —      —      224,447    2.06  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

C1

   26,250    —      —      26,250    0.24  

C2

   38,634    —      —      38,634    0.36  

C3

   5,586    —      —      5,586    0.05  

C4

   21,551    —      —      21,551    0.20  

C5

   34,115    —      —      34,115    0.31  

C6

   29,188    —      —      29,188    0.29  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-complying Portfolio

   155,324    —      —      155,324    1.45  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Individual Classified Loans

  Ch$10,862,648    —      —     Ch$10,862,648    100.00
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   2,011,162    4,662,977    2,856,365    9,530,504   

Non-complying Portfolio

   205,163    69,330    213,125    487,618   

Total Group Classified Loans

  Ch$2,216,325   Ch$4,732,307   Ch$3,069,490   Ch$10,018,122   
  

 

 

  

 

 

  

 

 

  

 

 

  

Total loans

  Ch$13,078,973   Ch$4,732,307   Ch$3,069,490   Ch$20,880,770   
  

 

 

  

 

 

  

 

 

  

 

 

  

Percentage Classified

   83.05  —    —    52.02 

IFRS:  As of December 31, 2014 
   Commercial
Loans
  Residential
Mortgage Loans
  Consumer
Loans
  Total Loans  Percentage
Loans of
Classified
 
Bank’s Credit Rating:  (in millions of Ch$, except percentages) 

A1

  Ch$20,405   Ch$—     Ch$—     Ch$20,405    0.19

A2

   2,211,120    —      —      2,211,120    20.19  

A3

   2,389,952    —      —      2,389,952    21.82  

A4

   2,372,714    —      —      2,372,714    21.66  

A5

   2,563,562    —      —      2,563,562    23.40  

A6

   1,018,489    —      —      1,018,489    9.30  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   10,576,242    —      —      10,576,242    96.56  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

B1

   73,569    —      —      73,569    0.67  

B2

   20,126    —      —      20,126    0.18  

B3

   10,372    —      —      10,372    0.09  

B4

   72,815    —      —      72,815    0.66  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Substandard Portfolio

   176,882    —      —      176,882    1.60  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

C1

   40,844    —      —      40,844    0.37  

C2

   36,257    —      —      36,257    0.33  

C3

   9,028    —      —      9,028    0.08  

C4

   21,697    —      —      21,697    0.20  

C5

   71,134    —      —      71,134    0.65  

C6

   21,710    —      —      21,710    0.21  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-complying Portfolio

   200,670    —      —      200,670    1.84  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Individual Classified Loans

  Ch$10,953,794    —      —     Ch$10,953,794    100.00
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Normal Portfolio

   1,942,685    5,325,029    3,124,586    10,392,300   

Non-complying Portfolio

   214,267    93,594    237,378    545,239   

Total Group Classified Loans

  Ch$2,156,952   Ch$5,418,623   Ch$3,361,964   Ch$10,937,539   
  

 

 

  

 

 

  

 

 

  

 

 

  

Total loans

  Ch$13,110,746   Ch$5,418,623   Ch$3,361,964   Ch$21,891,333   
 ��

 

 

  

 

 

  

 

 

  

 

 

  

Percentage Classified

   83.55  —    —    50.04 

Classification of Loan Portfolio

Individual Classified Loans

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the Bank, that they must be analyzed in detail. For purposes of establishing the appropriate allowances, the Bank classifies the debtors and their operations related to loans into one of three categories of loans portfolio: Normal, Substandard andNon-Complying Loans.

Normal Loans

Normal loans correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality.

Substandard Loans

Substandard loans include all borrowers with insufficient payment capacity or significant deterioration of payment capacity that may be reasonably expected not to comply with all principal and interest payments obligations set forth in the credit agreement. This category also includes all loans that have beennon-performing for more than 30 days.

Non-Complying Loans

Thenon-complying loans correspond to borrowers whose payment capacity is seriously at risk and who have a high likelihood of filing for bankruptcy or are renegotiating credit terms to avoid bankruptcy. This category comprises all loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more.

Group Classified Loans

The group analysis is used to analyze a large number of loans whose individual amounts are not significant. For this analysis, the Bank uses models based on attributes of the debtors and their loans, and on the behavior of a group of loans.

Classification of Loan Portfolio Based on the Borrower’s Payment Performance

The following tables set forth under IFRS as of the dates indicated the amounts that are current as to payments of principal and interest and the amounts that are overdue:

 

  Domestic Loans(1)   Domestic Loans(1) 
  As of December 31,   As of December 31, 
  2010   2011   2012   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Current

  Ch$12,724,970    Ch$15,593,412    Ch$17,196,949    Ch$12,680,422    Ch$15,574,502    Ch$17,538,374    Ch$19,717,830    Ch $20,510,141  

Total Overdue 1-29 days

   945,689     1,165,108     949,285  

Total Overdue 30-89 days

   498,612     298,729     135,620  

Total Past Due 90 days or more

   172,075     178,905     181,863  

Past due1-29 days

   945,689     1,165,108     531,778     591,866     567,986  

Past due30-89 days

   498,612     298,729     357,259     229,117     347,146  

Past due 90 days or more

   172,075     178,905     181,865     236,730     272,983  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  Ch$14,341,346    Ch$17,236,154    Ch$18,463,717    Ch$14,296,798    Ch$17,217,244    Ch$18,609,276    Ch$20,775,543    Ch$21,698,256  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  Foreign Loans(1)   Foreign Loans(1) 
  As of December 31,   As of December 31, 
  2010   2011   2012   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Current

  Ch$36,649    Ch$150,343    Ch$308,044    Ch$81,197    Ch$169,253    Ch$162,485    Ch$105,227    Ch$193,077  

Total Overdue 1-29 days

   —       —       —    

Total Overdue 30-89 days

   —       —       —    

Total Past Due 90 days or more

   —       —       —    

Past due1-29 days

   —       —       —       —       —    

Past due30-89 days

   —       —       —       —       —    

Past due 90 days or more

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans

  Ch$36,649    Ch$150,343    Ch$308,044    Ch$81,197    Ch$169,253    Ch$162,485    Ch$105,227    Ch$193,077  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

   Total Loans(1) 
   As of December 31, 
   2010  2011  2012 
IFRS:  (in millions of Ch, except percentages) 

Current

  Ch$12,761,619   Ch$15,743,755   Ch$17,504,993  

Total Overdue 1-29 days

   945,689    1,165,108    949,285  

Total Overdue 30-89 days

   498,612    298,729    135,620  

Total Past Due 90 days or more

   172,075    178,905    181,863  
  

 

 

  

 

 

  

 

 

 

Total loans

  Ch$14,377,995   Ch$17,386,497   Ch$18,771,761  
  

 

 

  

 

 

  

 

 

 

Total Overdue loans expressed as a percentage of total loans

   11.24  9.45  6.75

Total Past-due loans as a percentage of total loans

   1.20  1.03  0.97
   Total Loans(1) 
   As of December 31, 
   2010  2011  2012  2013  2014 
IFRS:  (in millions of Ch$) 

Current

  Ch$12,761,619   Ch$15,743,755   Ch$17,700,859   Ch$19,823,057   Ch$20,703,218  

Past due1-29 days

   945,689    1,165,108    531,778    591,866    567,986  

Past due30-89 days

   498,612    298,729    357,259    229,117    347,146  

Past due 90 days or more

   172,075    178,905    181,865    236,730    272,983  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

  Ch$14,377,995   Ch$17,386,497   Ch$18,771,761   Ch$20,880,770   Ch$21,891,333  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Past due loans (1-89 days) as a percentage of total loans

   11.24  9.45  5.70  5.07  5.43

Past due loans (90 days or more) as a percentage of total loans

   1.20  1.03  0.97  1.13  1.25

 

(1)Total past-due and total overduePast due loans refer to installments that are past-due or overdue and the remaining outstanding balance of such loans (principal(including principal and interest).

Loans included in the previous table, which have been restructured and bear no interest, are as follows:

 

   As of December 31, 
   2010   2011   2012 
IFRS:  (in millions of Ch$) 

Ch$

  Ch$2,550    Ch$2,547    Ch$4,605  

UF

   128     128     128  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$2,678    Ch$2,675    Ch$4,733  
  

 

 

   

 

 

   

 

 

 

   As of December 31, 
   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$) 

Ch$

   2,550     2,547     4,605     4,608     4,616  

UF

   128     128     128     128     142  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   2,678     2,765     4,733     4,736     4,758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of interest we would have recorded on these loans for the year ended December 31, 20122014 had these loans been earning a market interest rate was Ch$205160 million.

In addition, other loans that were restructured, mainly through the extension of their maturities, and that bear interest, are as follows:

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Total other restructured loans

  Ch$328,370    Ch$338,725    Ch$362,862     328,370     338,725     392,906     496,601     534,899  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

During the year ended December 31, 2012,2014, interest recorded in income on these loans amounted to Ch$30,84665,707 million.

Analysis of Substandard Loans and Total Past DuePast-Due Loans

The following table analyzes our substandard loans, totalpast-due loans and allowances for loan losses existing at the dates indicated under IFRS.

 

  Year ended December 31,   Year Ended December 31, 
  2010 2011 2012   2010 2011 2012 2013 2014 
IFRS:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Total loans

  Ch$14,377,995   Ch$17,386,497   Ch$18,771,761  

Total Loans

  Ch$14,377,995   Ch$17,386,497   Ch$18,771,761   Ch$20,880,770   Ch$21,891,333  

Impaired loans(1)

   785,069    499,768    611,281     785,069    499,768    621,268    725,899    829,096  

Impaired loans as a percentage of total loans

   5.46  2.87  3.31   5.46  2.87  3.31  3.48  3.79

Total past due

    

Total past due loans (90 days or more)

      

To the extent secured(2)(1)

   23,781    17,388    19,656     23,781    17,388    19,658    22,804    24,811  

To the extent unsecured

   148,294    161,517    162,207     148,294    161,517    162,207    213,926    248,172  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total past due

   172,075    178,905    181,863  

Total past due loans (90 days or more)

   172,075    178,905    181,865    236,730    272,983  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total past due as a percentage of total loans

   1.20  1.03  0.97

Total past due loans (90 days or more) as a percentage of total loans

   1.20  1.03  0.97  1.13  1.25

To the extent secured

   0.17    0.10    0.10     0.17    0.10    0.10    0.11    0.11  

To the extent unsecured

   1.03    0.93    0.86     1.03    0.93    0.87    1.02    1.14  

Allowances for loans losses as a percentage of:

    

Allowance for loan losses as a percentage of:

      

Total loans

   2.42    2.09    2.07     2.42    2.09    2.07    2.10    2.24  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total past due

   202.25    202.76    213.24  

Past due loans (90 days or more)

   202.25    202.76    213.24    185.57    179.70  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total past due—unsecured

   234.69  224.58  239.08

Unsecured past due loans (90 days or more)

   234.69  224.58  239.08  205.35  197.67
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

 

(1)For periods prior to 2011 individually evaluated loans are considered substandard when they are classified into categories C1 to D2, and group-evaluated loans are considered substandard when they are assigned allowances for loan losses higher than 20%. For periods after 2011, the impaired portfolio is composed of all credits of debtors classified in some category of “Non-complying Loans”, as well as in categories B3 and B4 of “Substandard Portfolio”, all of them subject to individual assessment. This portfolio also includes all group-evaluated debtors who are in the “non-complying loans” category.
(2)Security generally consists of mortgages on real estate, pledges of marketable securities, letters of credit or cash.

Analysis of Allowances for Loan Losses

The following table analyzes our allowances for loan losses and changes in the allowances attributable tocharge-offs, allowances established and allowances released:

 

  As of December 31,   As of December 31, 
  2010 2011 2012   2010 2011 2012 2013 2014 
IFRS:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Allowances for loan losses at beginning of period

  Ch$312,101   Ch$348,027   Ch$362,741    Ch$312,101   Ch$348,027   Ch$362,741   Ch$387,803   Ch$439,298  

Charge-offs

   (149,093  (177,960  (182,733   (149,093  (177,960  (182,733  (196,535  (255,342

Debt Exchange

   —      —      —      (12,556  —    

Allowances established

   185,019    207,189    225,678     185,019    207,189    225,678    262,713    306,602  

Allowances released(1)

   —      (14,515  (17,883   —      (14,515  (17,883  (2,127  —    
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Allowances for loan losses at end of period

  Ch$348,027   Ch$362,741   Ch$387,803    Ch$348,027   Ch$362,741   Ch$387,803   Ch$439,298   Ch$490,558  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Allowances for loan losses at end of period as a percentage of total loans

   2.42  2.09  2.07  2.10  2.24

Ratio of charge-offs to average loans

   1.10  1.12  1.01   1.10  1.12  1.01  0.99  1.18

Allowances for loan losses at end of period as a percentage of total loans

   2.42  2.09  2.07

Provisions for loan losses as a percentage of average loans

   1.16  0.92  0.92  1.12  1.21

 

(1)Represents the aggregate amount of allowances for loan losses released during the year as a result ofcharge-offs, recoveries or a determination by management that the level of risk existing in the loan portfolio has been reduced.

For allowance for loan losses associated with impaired loans and with non-impaired loans, see Note 10 (c) to our audited consolidated financial statements as of and for the year ended December 31, 2012 appearing elsewhere in this annual report.

During 2010, the Chilean economy continued the upward trend that started at the end of 2009, which positively impacted the risk profiles of individuals and companies in Chile. Additionally, certain corporate customers improved their financial performance as a result of specific plans intended to overcome productivefinancial difficulties and an increase in thewhile private consumption in Chile.posted a significant rebound. Our allowances for loan losses grew by 11.5% from December 31, 2009 to December 31, 2010, which is in line with the annual growth posted by our total loan portfolio (particularly in the retail banking segment), and our conservative risk approach. In addition, the annual increase in allowances for loan losses is consistent with lowercharge-offs in 2010 as compared to 2009 and with provisions for loan losses established during 2010 in order to cover potential risks related to certain corporate customers.

The year ended December 31, 2011 was positive for the local economy. GDP recorded 6.0% annual growth, which resulted in improved economic figures, such as afour-year low unemployment rate (7.1%) and an increase in real salaries. These macroeconomic indicators boosted consumption and the commercial activity of companies, all of which resulted in improved risk profiles of both individuals and companies. However, due to a volume effect associated with the significant 21.2% expansion of our loan book, our allowances for loan losses recorded a 4.2% increase, from Ch$348,027 million in 2010 to Ch$362,741 million in 2011.

In 2012, the industry experienced at least two forces affecting allowances for loans losses. On the one hand, the positive economic cycle resulted in lower unemployment and increasing real salaries, which positively impacted customers’ payment capacity. However, in the first half of the year, social and regulatory issues effectively offset the positive economic drivers and caused a moderate deterioration in credit quality, especially associated with consumer loans, with ratios ofpast-due loan indicators loans (90 days or more) peaking in the second quarter of 2012. This phenomenon was observed across the industry and led other banks and us to be more conservative in provisioning loans and focus on collections. Although, credit quality conditions and customers’ payment behavior normalized by the end of the year, the growth in total loans and our higher penetration of the retail banking segment translated into a 6.9% annual increase in allowances for loan losses, from Ch$362,741 million in 2011 to Ch$387,803 million in 2012.

During 2013 the Chilean economy slowed down moderately by recording a 4.1% GDP growth. The lower dynamism in the local economic activity led other banks and us to recognize the risk associated with a potential deterioration in credit quality of both companies and individuals. Also, to a great extent, loan growth contributed to higher provisions for loan losses. Similar to our entire industry, we also increased our allowances for loan losses, from Ch$387,803 million in 2012 to Ch$439,298 million in 2013, which represents a 13.3% increase. As mentioned, this is in line with the annual growth posted by our loan book, as well as other additional topics that translated into higher provisions for loan losses, such as: (i) the effect of a sharp increase in the Ch$/U.S.$ exchange rate on provisions for loan losses indexed to U.S.$, and (ii) specific credit quality deteriorations in the wholesale segment.

For the year ended December 31, 2014 the local economic slowdown deepened, as reflected by GDP growth of only 1.9% for the year. This slower pace was attributable to both a sharp year-over-year reduction of 6.1% in investment and a slowdown in private consumption (reflected by a slight 2.2% annual increase), according to information released by the Chilean Central Bank. These trends directly impacted banking activity. In fact, the first half of 2014 was characterized by slow growth in commercial loans as a result of a delay in diverse investment projects due to both the uncertainty regarding political and economic reforms and volatility in foreign markets. On the other hand, consumption started to decelerate during the second half of the year because downward economic expectations translated into deteriorated consumer confidence. As a result of this scenario, during 2014 we recorded an increase of 11.7% in allowances for loan losses, from Ch$439,298 million in 2013 to Ch$490,558 million in 2014. This increase was primarily based on: (i) loan growth that was focused on retail banking, whose average loan balances increased by 11.3% during the year, and (ii) a negative exchange rate effect on allowances for loan losses denominated in U.S.$, due to a higherCh$-devaluation in 2014 (15.3%) as compared to 2013 (9.6%).

For allowances for loan losses associated with impaired loans and withnon-impaired loans, see Note 11(c) to our audited consolidated financial statements as of and for the year ended December 31, 2014 appearing elsewhere in this annual report.

Loans arewritten-off when the collection efforts have been exhausted but not later than the maximum periods as follows:

 

Type of Loan

  

Term

Consumer loans with or without collateral  6 months
Other transactions without collateral  24 months
Commercial loans with collateral  36 months
Residential mortgage loans  48 months
Consumer leases  6 months
Othernon-real estate lease transactions  12 months
Real estate leases (commercial or residential)  36 months

The following table presents detailed information onwrite-offs and shows thecharge-offs breakdown by loan category:

 

   Year ended December 31, 
   2010   2011   2012 
IFRS:  (in millions of Ch$) 

Commercial loans

  Ch$46,419    Ch$82,086    Ch$43,164  

Mortgage loans

   2,376     2,923     4,253  

Consumer loans

   100,298     92,951     135,316  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$149,093    Ch$177,960    Ch$182,733  
  

 

 

   

 

 

   

 

 

 

   Year ended December 31, 
   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$) 

Commercial loans

  Ch$46,419    Ch$82,086    Ch$43,164    Ch$36,029    Ch$67,717  

Mortgage loans

   2,376     2,923     4,253     3,242     2,978  

Consumer loans

   100,298     92,951     135,316     157,264     184,647  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  Ch$149,093    Ch$177,960    Ch$182,733    Ch$196,535    Ch$255,342  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan recoveries by type of loan are shown in the table below:

 

  Year ended December 31,  Year ended December 31, 
  2010   2011   2012  2010 2011 2012 2013 2014 
IFRS:  (in millions of Ch$)  (in millions of Ch$) 

Commercial loans

  Ch$11,127    Ch$16,014    Ch$14,892   Ch$11,127   Ch$16,014   Ch$14,892   Ch$13,330   Ch$14,272  

Mortgage loans

   1,387     1,106     1,971    1,387    1,106    1,971    1,927    2,152  

Consumer loans

   19,609     28,445     24,099    19,609    28,445    24,099    27,698    29,885  
 

 

  

 

  

 

  

 

  

 

 

Subtotal

   32,123     45,565     40,962    32,123    45,565    40,962    42,955    46,309  
 

 

  

 

  

 

  

 

  

 

 

Recoveries and sales of loans reacquired from the Central Bank

   46     90     —      46    90    —      —      —    
  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

  Ch$32,169    Ch$45,655    Ch$40,962   Ch$32,169   Ch$45,655   Ch$40,962   Ch$42,955   Ch$46,309  
  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total Recoveries as a percentage of average loans

  0.24  0.29  0.23  0.22  0.21

The following tables classify our loan portfolio based on the borrower’s payment performance for each of the last threefive years:

 

   Year ended December 31, 2010 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Total Past due after 90 days but less than 6 months

  Ch$33,889    Ch$29,257    Ch$16,671    Ch$79,817  

Total Past due after 6 months within 12 months

   28,503     —       9,754     38,257  

Total Past due 12 months within 24 months

   33,073     —       8,689     41,762  

Total Past due 24 months within 36 months

   5,920     —       4,435     10,255  

Total Past due 36 months within 48 months

   —       —       1,984     1,984  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

  Ch$101,385    Ch$29,257    Ch$41,433    Ch$172,075  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Year ended December 31, 2010 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Past due loans—90 days to 6 months

  Ch$33,889    Ch$29,257    Ch$16,671    Ch$79,817  

Past due loans—6 months to 12 months

   28,503     —       9,754     38,257  

Past due loans—12 months to 24 months

   33,073     —       8,689     41,762  

Past due loans—24 months to 36 months

   5,920     —       4,335     10,255  

Past due loans—36 months to 48 months

   —       —       1,984     1,984  
  

 

 

   

 

 

   

 

 

   

 

 

 

Past due Loans

  Ch$101,385    Ch$29,257    Ch$41,433    Ch$172,075  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

   Year ended December 31, 2011 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Total Past due after 90 days but less than 6 months

  Ch$41,729    Ch$38,825    Ch$15,367    Ch$95,921  

Total Past due after 6 months within 12 months

   22,837     —       8,588     31,425  

Total Past due 12 months within 24 months

   30,982     —       6,487     37,469  

Total Past due 24 months within 36 months

   6,847     —       4,079     10,926  

Total Past due 36 months within 48 months

   —       —       3,164     3,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

  Ch$102,395    Ch$38,825    Ch$37,685    Ch$178,905  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Year ended December 31, 2011 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Past due loans—90 days to 6 months

  Ch$41,729    Ch$38,825    Ch$15,367    Ch$95,921  

Past due loans—6 months to 12 months

   22,837     —       8,588     31,425  

Past due loans—12 months to 24 months

   30,982     —       6,487     37,469  

Past due loans—24 months to 36 months

   6,847     —       4,079     10,926  

Past due loans—36 months to 48 months

   —       —       3,164     3,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

Past due Loans

  Ch$102,395    Ch$38,825    Ch$37,685    Ch$178,905  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

   Year ended December 31, 2012 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Total Past due after 90 days but less than 6 months

  Ch$34,410    Ch$44,093    Ch$11,934    Ch$90,437  

Total Past due after 6 months within 12 months

   31,497     14     6,017     37,528  

Total Past due 12 months within 24 months

   35,547     2     6,729     42,278  

Total Past due 24 months within 36 months

   5,936     —       3,783     9,719  

Total Past due 36 months within 48 months

   —       —       1,901     1,901  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Past Due

  Ch$107,390    Ch$44,109    Ch$30,364    Ch$181,863  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Year ended December 31, 2012 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Past due loans—90 days to 6 months

  Ch$34,412    Ch$44,093    Ch$11,934    Ch$90,439  

Past due loans—6 months to 12 months

   31,497     14     6,017     37,528  

Past due loans—12 months to 24 months

   35,547     2     6,729     42,278  

Past due loans—24 months to 36 months

   5,936     —       3,783     9,719  

Past due loans—36 months to 48 months

   —       —       1,901     1,901  
  

 

 

   

 

 

   

 

 

   

 

 

 

Past due Loans

  Ch$107,392    Ch$44,109    Ch$30,364    Ch$181,865  
  

 

 

   

 

 

   

 

 

   

 

 

 

   Year ended December 31, 2013 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Past due loans—90 days to 6 months

  Ch$54,232    Ch$51,510    Ch$18,352    Ch$124,094  

Past due loans—6 months to 12 months

   36,520     2     6,786     43,308  

Past due loans—12 months to 24 months

   47,790     2     6,730     54,522  

Past due loans—24 months to 36 months

   9,755     —       2,751     12,506  

Past due loans—36 months to 48 months

   16     —       2,284     2,300  
  

 

 

   

 

 

   

 

 

   

 

 

 

Past due Loans

  Ch$148,313    Ch$51,514    Ch$36,903    Ch$236,730  
  

 

 

   

 

 

   

 

 

   

 

 

 

   Year ended December 31, 2014 
   Commercial
Loans
   Consumer
Loans
   Mortgage
Loans
   Total 
IFRS:  (in millions of Ch$) 

Past due loans—90 days to 6 months

  Ch$42,558    Ch$61,232    Ch$16,641    Ch$120,431  

Past due loans—6 months to 12 months

   52,158     1,704     15,329     69,191  

Past due loans—12 months to 24 months

   57,075     9     11,320     68,404  

Past due loans—24 months to 36 months

   8,031     2     4,822     12,855  

Past due loans—36 months to 48 months

   50     —       2,052     2,102  
  

 

 

   

 

 

   

 

 

   

 

 

 

Past due Loans

  Ch$159,872    Ch$62,947    Ch$50,164    Ch$272,983  
  

 

 

   

 

 

   

 

 

   

 

 

 

Allocation of Allowances for Loan Losses

The following tables set forth the proportions of our required allowances for loan losses attributable to our commercial, consumer and residential mortgage loans under IFRS as of the dates indicated.

 

 As of December 31, 2010 As of December 31, 2011   As of December 31, 2010 
 Allowance
amount
 Allowance
amount as
a
percentage
of loans in
category
 Allowance
amount as
a
percentage
of total
loans
 Loans in
category
as
percentage
of total
loans(1)
 Allowance
amount
 Allowance
amount as
a
percentage
of loans in
category
 Allowance
amount as
a
percentage
of total
loans
 Loans in
category
as
percentage
of total
loans(1)
   Allowance
amount
   Allowance
amount as
a
percentage
of loans in
category
 Allowance
amount as
a
percentage
of total
loans
 Loans in
category
as
percentage
of total
loans(1)
 
IFRS: (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Commercial loans

 Ch$211,558    2.28  1.47  64.66 Ch$208,249    1.85  1.19  64.58  Ch$211,558     2.28  1.47  64.66

Consumer loans

  121,195    5.63    0.84    14.98    138,588    5.40    0.80    14.72     121,195     5.63    0.84    14.98  

Residential mortgage loans

  15,274    0.52    0.11    20.36    15,904    0.44    0.09    20.70     15,274     0.52    0.11    20.36  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

 

Total allocated allowances

 Ch$348,027    2.42  2.42  100.00 Ch$362,741    2.08  2.08  100.00  Ch$348,027     2.42  2.42  100.00
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

 

 

  As of December 31, 2012   As of December 31, 2011 
  Allowance
amount
   Allowance
amount as
a
percentage
of loans in
category
 Allowance
amount as
a
percentage
of total
loans
 Loans in
category
as
percentage
of total
loans(1)
   Allowance
amount
   Allowance
amount as
a
percentage
of loans in
category
 Allowance
amount as
a
percentage
of total
loans
 Loans in
category
as
percentage
of total
loans(1)
 
IFRS:  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 

Commercial loans

  Ch$207,676     1.77  1.11  62.55  Ch$208,249     1.86  1.20  64.50

Consumer loans

   164,047     5.79    0.87    15.08     138,588     5.40    0.80    14.76  

Residential mortgage loans

   16,080     0.38    0.09    22.37     15,904     0.44    0.09    20.74  
  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

 

Total allocated allowances

  Ch$387,803     2.07  2.07  100.00  Ch$362,741     2.09  2.09  100.00
  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

 

   As of December 31, 2012 
   Allowance
amount
   Allowance
amount as

a
percentage
of loans in
category
  Allowance
amount as
a
percentage
of total
loans
  Loans in
category
as
percentage
of total
loans(1)
 
IFRS:  (in millions of Ch$, except percentages) 

Commercial loans

  Ch$207,676     1.77  1.11  62.52

Consumer loans

   164,047     5.78    0.87    15.12  

Residential mortgage loans

   16,080     0.38    0.09    22.36  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total allocated allowances

  Ch$387,803     2.07  2.07  100.00
  

 

 

   

 

 

  

 

 

  

 

 

 

   As of December 31, 2013 
   Allowance
amount
   Allowance
amount as
a
percentage
of loans in
category
  Allowance
amount as
a
percentage
of total
loans
  Loans in
category
as
percentage
of total
loans(1)
 
IFRS:  (in millions of Ch$, except percentages) 

Commercial loans

  Ch$241,442     1.85  1.16  62.64

Consumer loans

   179,354     5.84    0.86    14.70  

Residential mortgage loans

   18,502     0.39    0.09    22.66  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total allocated allowances

  Ch$439,298     2.10  2.10  100.00
  

 

 

   

 

 

  

 

 

  

 

 

 

   As of December 31, 2014 
   Allowance
amount
   Allowance
amount as
a
percentage
of loans in
category
  Allowance
amount as
a
percentage
of total
loans
  Loans in
category
as
percentage
of total
loans(1)
 
IFRS:  (in millions of Ch$, except percentages) 

Commercial loans

  Ch$273,813     2.09  1.25  59.89

Consumer loans

   192,724     5.73    0.88    15.36  

Residential mortgage loans

   24,021     0.44    0.11    24.75  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total allocated allowances

  Ch$490,558     2.24  2.24  100.00
  

 

 

   

 

 

  

 

 

  

 

 

 

 

(1)Based on our loan classification.

The following table sets forth ourcharge-offs for 2010, 2011, 2012, 2013 and 20122014 by major economic sector and provides further detail ofcharge-offs that have already been described in the previous discussion of allowances for loan losses:

 

   Year Ended December 31, 
   2010   2011   2012 
IFRS:  (in millions of Ch$) 

Commercial:

      

Agriculture

  Ch$3,177    Ch$5,208    Ch$2 ,986  

Mining

   461     606     812  

Manufacturing

   7,956     3,807     5,143  

Construction

   6,159     3,330     3,161  

Commerce

   12,960     52,057     9,228  

Transport

   3,786     2,132     2,287  

Financial services

   6,140     9,799     5,637  

Community

   5,780     5,147     13,910  
  

 

 

   

 

 

   

 

 

 

Subtotal:

  Ch$46,419    Ch$82,086    Ch$43,164  
  

 

 

   

 

 

   

 

 

 

Consumer loans

   100,298     92,951     135,316  

Mortgage loans

   2,376     2,923     4,253  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$149,093    Ch$177,960    Ch$182,733  
  

 

 

   

 

 

   

 

 

 

   Year Ended December 31, 
   2010   2011   2012   2013   2014 
IFRS:  (in millions of Ch$) 

Commercial:

          

Agriculture

  Ch$3,177    Ch$5,208    Ch$2,986    Ch$5,615    Ch$7,007  

Mining

   461     606     812     1,605     3,193  

Manufacturing

   7,956     3,807     5,143     2,430     5,389  

Construction

   6,159     3,330     3,161     4,516     10,335  

Commerce

   12,960     52,057     9,228     8,825     14,536  

Transport

   3,786     2,132     2,287     3,309     5,545  

Financial services

   6,140     9,799     5,637     4,774     16,328  

Community

   5,780     5,147     13,910     4,955     5,384  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal:

  Ch$46,419    Ch$82,086    Ch$43,164    Ch$36,029    Ch$67,717  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer loans

   100,298     92,951     135,316     157,264     184,647  

Mortgage loans

   2,376     2,923     4,253     3,242     2,978  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  Ch$149,093    Ch$177,960    Ch$182,733    Ch$196,535    Ch$255,342  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Composition of Deposits and Other Commitments

The following table sets forth under IFRS the composition of our deposits and similar commitments as of the dates indicated. See “—Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities” for the average rate paid on each of the following deposit categories.

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2012   2013   2014 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Current accounts

  Ch$3,611,894    Ch$3,968,504    Ch$4,495,135    Ch$4,495,135    Ch$5,018,155    Ch$5,786,805  

Other demand deposits

   834,287     926,922     975,836     975,836     966,177     1,147,568  

Savings accounts

   173,404     177,900     179,464     179,464     178,012     188,311  

Time deposits

   7,497,073     9,081,336     9,370,063     9,370,063     10,151,612     9,450,224  

Other term balance payables

   27,491     23,088     63,423     63,423     73,101     82,711  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  Ch$12,144,149    Ch$14,177,750    Ch$15,083,921    Ch$15,083,921    Ch$16,387,057    Ch$16,655,619  
  

 

   

 

   

 

   

 

   

 

   

 

 

Maturity of Deposits

The following table sets forth under IFRS information regarding the currency and maturity of our deposits at December 31, 2012,2014, expressed in percentages.UF-denominated deposits are similar to Chileanpeso-denominated deposits in all aspects, except that the principal is readjusted periodically based on the value of the UF.

 

  As of December 31, 2012   As of December 31, 2014 
  Ch$   UF   Foreign
Currency
   Total   Ch$   UF   Foreign
Currency
   Total 
  (in millions of Ch$)   (in millions of Ch$) 

IFRS:

        

IFRS:

        

Demand deposits

  Ch$4.803.858    Ch$28.395    Ch$638,716    Ch$5,470,969    Ch$5,929,629    Ch$28,083    Ch$976,661    Ch$6,934,373  

Savings accounts

   —       179,466     —       179,466     —       188,311     —       188,311  

Time deposits:

                

Maturing within three months

   4,712,220     720,526     756,178     6,188,924     5,164,496     908,486     751,279     6,824,261  

Maturing after three but within six months

   847,921     450,448     59,637     1,358,006     808,135     347,398     85,646     1,241,179  

Maturing after six but within 12 months

   869,965     590,840     27,798     1,488,603     857,373     432,970     28,271     1,318,614  

Maturing after 12 months

   95,716     301,037     1,200     397,953     123,304     23,639     1,938     148,881  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total time deposits

   6,525,822     2,062,851     844,813     9,433,486    Ch$6,953,308    Ch$1,712,493    Ch$867,134    Ch$9,532,935  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total deposits

  Ch$11,329,680    Ch$2,270,712    Ch$1,483,529    Ch$15,083,921    Ch$12,882,937    Ch$1,928,887    Ch$1,843,795    Ch$16,655,619  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

   As of December 31, 2014 
   Ch$  UF  Foreign
Currency
  Total 
   (in millions of Ch$) 

IFRS:

     

Demand deposits

   46.02  1.45  52.96  41.64

Savings accounts

   —      9.76    —      1.13  

Time deposits:

     

Maturing within three months

   40.09    47.10    40.75    40.97  

Maturing after three but within six months

   6.27    18.01    4.65    7.45  

Maturing after six but within 12 months

   6.66    22.45    1.53    7.92  

Maturing after 12 months

   0.96    1.23    0.11    0.89  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total time deposits

   53.98    88.79    47.04    57.23  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total deposits

   100.00  100.00  100.00  100.00
  

 

 

  

 

 

  

 

 

  

 

 

 

The following table sets forth information under IFRS regarding the currency and maturity of deposits in excess of U.S.$100,000 as of December 31, 2012.2014.

   As of December 31, 2012 
   Ch$  UF  Foreign
Currency
  Total 
   (in millions of Ch$) 

IFRS:

     

Demand deposits

   42.40  1.25  43.06  36.27

Savings accounts

   —      7.90    —      1.19  

Time deposits:

     

Maturing within three months

   41.59    31.73    50.97    41.03  

Maturing after three but within six months

   7.48    19.84    4.02    9.00  

Maturing after six but within 12 months

   7.68    26.02    1.87    9.87  

Maturing after 12 months

   0.85    13.26    0.08    2.64  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total time deposits

   57.60    90.85    56.94    62.54  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total deposits

   100.00  100.00  100.00  100.00
  

 

 

  

 

 

  

 

 

  

 

 

 

Minimum Capital RequirementsDeposits in Foreign Countries

We also maintain deposits abroad, as needed to conduct our foreign trade transactions and manage liquidity. The following table sets forth our minimum capital requirements setbelow lists the largest amounts of foreign deposits by the Superintendency of Bankscountry under IFRS as of the dates indicated:

 

   As of December 31, 
   2010  2011  2012 
CHILEAN GAAP:  (in millions of Ch$) 

Banco de Chile’s regulatory capital

  Ch$1,404,125   Ch$1,739,173   Ch$2,007,573  

Minimum regulatory capital required

   (638,684  (761,362  (821,418
  

 

 

  

 

 

  

 

 

 

Excess over minimum regulatory capital required

  Ch$765,441   Ch$977,811   Ch$1,186,155  
  

 

 

  

 

 

  

 

 

 
   As of December 31, 
IFRS:  2012   2013   2014 
   (in millions of Ch$) 

Australia

  Ch$502    Ch$453    Ch$438  

Brazil

   9     —       —    

Canada

   743     1,464     1,058  

China

   766     20     88  

Denmark

   99     173     249  

Finland

   74     81     10  

France

   339     102     54  

Germany

   9,199     12,565     7,309  

Italy

   —       22     29  

Japan

   4,325     1,614     1,764  

Mexico

   484     1,111     297  

Netherlands

   1,018     1,200     840  

Norway

   114     81     139  

Peru

   29     358     805  

Singapore

   —       13,270     15  

Sweden

   —       354     351  

Switzerland

   343     —       649  

United Kingdom

   13,229     2,802     6,418  

United States

   170,275     264,726     258,198  
  

 

 

   

 

 

   

 

 

 

Total

  Ch$201,548    Ch$300,396    Ch$278,711  
  

 

 

   

 

 

   

 

 

 

Short-Term Borrowings

The principal categories of ourshort-term borrowings are amounts borrowed under foreign trade lines of credit, domesticinter-bank loans and repurchase agreements. The table below presents under IFRS the amounts outstanding and the weighted average nominal interest rate for each period indicated by type ofshort-term borrowing.

 

  For the year ended December 31, 
  For the year ended December 31,   2012 2013 2014 
  2010 2011 2012   Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
 Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
 Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
 
IFRS:  Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
 Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
 Year-End
Balance
   Weighted
Average
Nominal
Interest Rate
   (in millions of Ch$, except interest rate data) 
  (in millions of Ch$, except rate data) 

Payables from repurchase agreements and security lending

  Ch$81,755     2.46 Ch$223,202     4.86 Ch$226,396     6.62   226,396     6.62  256,766     5.12  249,482     3.84

Borrowings from domestic financial institutions

   —       —      —       —      —       —       —       —      —       —      —       —    

Foreign borrowings

   1,281,292     1.37    1,668,084     1.29    1,108,662     1.90     1,108,662     1.90    989,455     1.25    1,098,707     0.60  

Other obligations

   111,558     —      123,051     —      106,538     —       106,538     —      160,612     —      141,729     —    
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total short-term borrowings

  Ch$1,474,605     1.33 Ch$2,014,337     1.61 Ch$1,441,596     2.50   1,441,596     2.50  1,406,833     1.81  1,489,918     1.09
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

The following table shows the average balance and the weighted average nominal rate for eachshort-term borrowing category during the periods indicated:

 

   For the year ended December 31, 
   2010  2011  2012 
IFRS:  Average
Balance
   Weighted
Average
Nominal
Interest Rate
  Average
Balance
   Weighted
Average
Nominal
Interest Rate
  Average
Balance
   Weighted
Average
Nominal
Interest Rate
 
   (in millions of Ch$, except rate data) 

Payables from repurchase agreements and security lending

  Ch$182,956     1.10 Ch$218,847     4.96 Ch$286,944     5.22

Central Bank borrowings

   77     1.34    69     —      36     —    

Borrowings from domestic financial institutions

   61,109     1.98    73,590     3.06    34,702     3.52  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Sub-total

  Ch$244,142     1.32 Ch$292,506     4.48  321,682     5.04  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Foreign borrowings

   1,240,088     1.42    1,600,479     1.35    1,388,253     1.52  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total short-term borrowings

  Ch$1,484,230     1.40 Ch$1,892,985     1.83 Ch$1,709,935     2.18
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

   For the year ended December 31, 
   2012  2013  2014 
   Average
Balance
   Weighted
Average
Nominal
Interest Rate
  Average
Balance
   Weighted
Average
Nominal
Interest Rate
  Average
Balance
   Weighted
Average
Nominal
Interest Rate
 
IFRS:  (in millions of Ch$, except interest rate data) 

Payables from repurchase agreements and security lending

   286,944     5.22  289,107     4.55  262,301     .365

Central Bank borrowings

   36     —      13     —      9     —    

Borrowings from domestic financial institutions

   34,702     3.52    35,928     3.94    13,059     4.01  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Sub-total

   321,682     5.04    325,048     4.48    275,369     3.67  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Foreign borrowings

   1,388,253     1.52    925,685     1.34    735,017     0.90  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Totalshort-term borrowings

   1,709,935     2.18  1,250,733     2.15  1,010,386     1.66
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

The following table presents themaximum month-end balances of our principal sources ofshort-term borrowings during the periods indicated:

 

  Maximum 2010
month-end
balance
   Maximum 2011
month-end
balance
   Maximum 2012
month-end
balance
   Maximum 2012
month-end
balance
   Maximum 2013
month-end
balance
   Maximum 2014
month-end
balance
 
IFRS:  (in millions of Ch$)   (in millions of Ch$) 

Investments sold under agreements to repurchase

  Ch$320,613    Ch$321,956    Ch$310,616     310,616     330,407     372,333  

Central Bank borrowings

   125,268     98,865     60     60     17     10  

Borrowings from domestic financial institutions

   250,215     126,055     5,000     5,000     210,058     59,507  

Foreign borrowings

  Ch$ 1,528,988    Ch$ 1,914,290    Ch$ 1,735,573     1,735,573     1,180,252     1,283,611  

Minimum Capital Requirements

Pursuant to the general Banking Law, local banks must comply with minimum capital requirements in relation to both total assets andrisk-weighted assets. Basic Capital should be at least equal to 3.0% of their total assets, while banks’ Total Regulatory Capital, should be at least 8.0% of their risk weighted assets. Nevertheless, based on Banco de Chile’s systemic relevance the SBIF requires us to maintain a ratio of Regulatory Capital to CreditRisk-Weighted Assets above 10.0%. For more information see “Item 3. Key Information—Presentation of Financial Information” and “Item 4. Information on the Company—Regulation and Supervision—Capital Adequacy Requirements”.

The following table sets forth our minimum capital requirements (and availability) with respect to total assets as set by the SBIF:

   As of December 31, 
   2012   2013   2014 
CHILEAN GAAP:  (in millions of Ch$) 

Banco de Chile’s basic capital

   2,007,057     2,284,314     2,535,153  

Basic capital required (with respect to total assets)

   (821,418   (905,644   (963,418
  

 

 

   

 

 

   

 

 

 

Excess over minimum basic capital required

   1,185,639     1,378,670     1,571,735  
  

 

 

   

 

 

   

 

 

 

Similarly, the following table sets forth our minimum capital requirements (and availability) with respect torisk-weighted assets, as set by the SBIF:

   As of December 31, 
   2012   2013   2014 
CHILEAN GAAP:  (in millions of Ch$) 

Banco de Chile’s Total Regulatory Capital

   2,738,829    2,999,061    3,249,903  

Total Regulatory Capital required (with respect torisk-weighted assets)

   (2,070,952   (2,298,110   (2,439,925
  

 

 

   

 

 

   

 

 

 

Excess over minimum Total Regulatory Capital required

   667,877    700,951    809,978  
  

 

 

   

 

 

   

 

 

 

 

Item 4BUnresolved Staff Comments

None.

Item 5Operating and Financial Review and Prospects

OPERATING RESULTS

Introduction

The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report and “Item 4. Information on the Company—Selected Statistical Information.” Certain amounts (including percentage amounts) that appear in this annual report may not total due to rounding.

We prepare our audited consolidated financial statements in accordance with IFRS as issued by the IASB.

Until and including our consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2008, we prepared our audited consolidated financial statements in accordance with Chilean GAAP, with reconciliations to U.S. GAAP. As required by IFRS 1—First Time Adoption of International Financial Reporting Standards, our financial position as of December 31, 2008 and our results of operations for the year ended December 31, 2008 were restated in accordance with IFRS 1 for comparative purposes. Reconciliations and description of the transition to IFRS, and the effects on assets, liabilities, equity, net income and cash flows are presented in Note 5 to our audited consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2009 filed with the SEC on June 29, 2010. Unless otherwise indicated, the financial information included in this annual report with respect to 2010, 2011, 2012, 2013 and 20122014 has been derived from financial statements that werehave been prepared in accordance with IFRS.IFRS as issued by the IASB. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean GAAP. As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.

Overview

We are a leading bank within the Chilean financial system, providing a broad range of financial products and services to individual and corporate customers who are primarily located in Chile. Accordingly, our financial condition, results of operations and our ability to achieve our strategic business goals could be adversely affected by changes in Chile’s economic conditions and the resulting effects on macroeconomic indicators (such as interest rates, inflation and GDP growth, among others), modifications ofnon-economic policies implemented by the Chilean government that can affect private sector activities, or other political and economic developments in Chile, as well as regulatory changes or administrative practices of Chilean authorities. Future changes in the Chilean economy may impair our ability to proceed with our strategic business plan. Our financial condition and results of operations could also be adversely affected by changes in economic or other policies of the Chilean government, which has exercised and continues to exercise substantial influence over many aspects of the private sector, or other political and economic developments in Chile, as well as regulatory changes or administrative practices of Chilean authorities over which we have no control. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Inflation could adversely affect the value of our ADSs and financial condition and results of operations” and “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Our growth and profitability depend on the level of economic activity in Chile.”

AfterAccording to information published by the SBIF, as of December 31, 2014, excluding operations of subsidiaries abroad, we were the second largest bank in Chile in terms of total loans with a market share of 18.1%, the largest provider of commercial loans with a market share of 18.0%, the largest bank in Chile in terms of average balances of current accounts and demand deposits with a 22.5% market share, the second largest provider of consumer loans in Chile with a market share of 20.9% and the second largest privately owned bank in Chile in terms of residential mortgage loans with a market share of 17.1%. Also according to the SBIF, as of December 31, 2014, we were the largest bank in Chile in terms of net income with a market share of 23.8% and the largest bank in Chile in terms of current account balances held by individuals with a market share of 28.9%. According to the Chilean Association of Mutual Funds, as of December 31, 2014, we were the largest provider of mutual funds management services in Chile with a market share of 22.5%.

As for the economy, after a period of accelerated growth between 1985 and 1997, when Chile’s gross domestic product grew at an average annual rate of 6.8%7.0%, Chile’s economic growth slowed to an average rate of 4.7% between 2000 and 2008. Since 2008 the Chilean economy has faced difficult and volatile circumstances, ranging from a global economic slowdown caused by the United States’ subprime mortgage crisis in United States to the worst earthquake reported in over 50 years in Chile. However, the country has beenwas able to successfully cope with this challenging environment and maintainmaintained sustained growth with annualby achieving an average GDP expansion ratesrate of 5.8% for5.7% between 2010 and 5.9% for 2011. Thus, based on its2012. The GDP growth was supported by Chile’s stable financial condition that, is supported byin turn, relied on an independently managed Central Bank, accumulateda floating exchange rate regime, a state’s policy intended to accumulate international reserves and maintain low external debt levels, awell-diversified international trade and ana fiscal policy internationally recognized responsible fiscal policy, the country has been able to overcome these challengesfor its responsibility and achieve outstanding economic growth amid a global economy that is still coping with recession and high unemployment, especially in developed countries.long term vision.

During 2012,2013, the Chilean economy maintained an expansionfollowed the trend observed among most emerging market countries. Local economic activity displayed some signs of slowdown by recording a 4.1% GDP expansion. This trend continued in 2014, resulting in a GDP growth rate of approximately 5.6%, whichonly 1.9% as of December 31, 2014. As a consequence, the Chilean economy underperformed the average GDP growth recorded by Latin American countries in 2014.

The economic slowdown that Chile experienced in 2014 was consistent with 5.8%largely explained by a large reduction of investment activity across the market caused by both structural and 5.9% fortemporary factors. On the one hand, the Chilean economy is facing the end of a profitable mining cycle, the last stages of a reconstruction process from the earthquake that occurred in 2010 and 2011, respectively. Economic growth in Chile was also reflected in the 7.1%a sharp increase in aggregate demand dueenergy prices caused by an expansive drought and delayed projects across the energy sector. On the other hand, in 2014 temporary factors affected the overall state of the economy, such as the decline in copper prices (Chile’s main export product). These temporary factors were accompanied by a weak business environment that resulted from the uncertainty produced by the diverse social and economic reforms pledged by the government. These reforms have included overhauls to strongthe tax and educational systems in Chile. Similarly, by the end of the year the government sent to the congress a labor reform bill for discussion. All of these reforms, along with the announcement of a constitutional reform, affected business sentiment and, accordingly, investments. On the whole, investment activity showed a significant reduction in 2014 by posting a 6.1% contraction, which negatively compared to the increases of 2.1% and 11.6% posted in 2013 and 2012, respectively.

Conversely, private consumption continued to be the main driver of economic growth despite signs of a slowdown by the end of 2013. This slowdown persisted throughout 2014. On average, consumption represents more than 60% of Chilean GDP and, investment.

Private consumptiontherefore, it has become the main engine for GDP expansion over the last several years. In this regard, positive figures in Chile also recorded a 6.1% annual growth that was supported by positive predictions for the economy’s outlook related to indicators linked to the labor market such ashave been an historical lowimportant factor for sustaining private consumption. In fact, the unemployment rate that averagedhas remained at historically low levels, recording averages of 5.9% in 2013 and 6.4% in 20122014. Additionally, real wages have continued to steadily grow by expanding 2.4% in 2014, the same increase seen in 2013. On the other hand, credit conditions have gradually tightened for individuals and a 4.7% annual increase in real wages.

Similarly, investment posted an unexpectedly high growth rate of 12.3% in 2012. This expansion is especially remarkable, since investment is sensitive to global instabilities and reflects entrepreneurs’ business sentiment. Conversely,companies, reflecting the main fundamentals that upheld this annual growth were investment in construction, as well as in machinery and equipment, all of which showed significant resilience. Whereasbanking industry’s sentiment about the former posted an annual increase of 9.0% and was mainlypotential risks associated with the dynamism observedimpact of a slowdown on delinquency. Similarly, demand for credits has decreased, especially from individuals, which denotes a gradual decline in consumer expectations regarding the localeconomic outlook. Altogether, private consumption posted real estate sector, the latter recorded 17.4% annual growth that was supported by positive business sentiment of companies and increasing investment projects2.2% in the mining and energy sectors.

Despite the important expansion in aggregate demand, inflation remained under control by recording a 1.5% annual increase,2014, which was below preliminary market expectationsthe increases of 5.9% and also under the Central Bank’s mid-term goal range. It also represented the lowest figure since the deflation observed6.1% posted in 2009. This unexpected moderate increase2013 and 2012, respectively.

In regards to inflation, local prices failed to link up with trends in prices took placeaggregate demand. Hence, in spite of the positive variationslowdown in seven outprivate consumption and economic activity as a whole, the local CPI index recorded a 4.6% annual increase in 2014, which is above the 3.0% annual rise observed last year. This level of inflation was caused mainly by a sharp Chilean peso depreciation of 15.2% against the U.S. dollar in 2014, which is aligned with a global trend followed by diverse currencies and the easing monetary policy conducted by the Chilean Central Bank. This resulted in higher prices of tradable goods for which Chile is a net importer. Also, the recently passed tax reform affected the price of diverse products, such as sugared and alcoholic beverages. In light of the twelve categories that composetrends followed by the CPI basket, especiallyeconomy, the annual change in food.inflation was above market expectations and the Central Bank’s estimates. Nevertheless, prices associated with transportation declined, mainly due toin the decrease in international oil prices. The latter was supplemented by decreases in clothing, utilities, and entertainment and culture prices.

As a result, based on tempered inflation and a weak external environment,view of the Chilean Central Bank, prices should converge in the long run to meet the targets set for the Chilean economy in 2015 and in the upcoming years.

As mentioned above, given controlledmid-term expectations on inflation and the slowdown evidenced in the local economy during 2014, the Central Bank maintained an easing monetary policy by successively cutting the marginal standing facility rate, totaling a neutral bias in policy actions during 2012 by keeping150 basis point reduction within the year. As a result of this, the monetary policy interest rate unchanged at 5.0% throughout the whole year. The Central Bank’s assessment about the Chilean economy was positive,declined from 4.5% in general, though it recognized some concerns regarding financial instabilitiesDecember 2013 to 3.0% in December 2014. These actions were undertaken in order to promote higher consumption and the economic slowdown globally. Also,investment, as GDP growth expectations were subsequently revised downward by the Central Bank stated that, despite low inflation,and market analysts throughout the local economy evolved according to mid-term trends and a dynamic labor market.year. As of April 15, 201317, 2015 the monetary policy interestmarginal standing facility rate was 5.0%remained at 3.0%.

As forRegarding the stock market, 2012 was notduring 2014 the Santiago Stock Exchange IPSA Index (IPSA index), composed of the 40 most traded Chilean stocks, recovered slightly from the poor performance observed in 2013. As a very positive year. In fact, based on persistent global instabilities and low returns that led investors to seek alternative investments, such as the real estate sector, the IPSA index only advanced by 3.0% annually and closed 2012 slightly above 4,300 points. As of April 15, 2013result, the IPSA index was at 4,2303,850.96 points as of December 31, 2014, which represented a tempered 4.1% advance as compared to the 3,699.19 points recorded as of December 31, 2013. This moderate rebound had to do with both the easing policy undertaken by the Central Bank during 2014 and signs of recovery seen among developed economies, particularly the United States. By early 2015, the IPSA index reflected better expectations in terms of outlook for the local economy. As a result, during February 2015 the IPSA index surpassed the barrier of 4,000 points. According to data published by the Santiago Stock Exchange, as of April 17, 2015 the IPSA index was at 4,018.06 points, which represented a 4.3% year to date increase.

Inflation

Historically,In the past, Chile has experienced high levels of inflation that have significantly affected ourthe financial condition and results of operations.operations of most industries. Nevertheless, since the 1990s, inflation has been maintained under control through responsible monetary policy carried out by an independent Central Bank. Over the last threefive years, inflation has been conditioned on local economic dynamics.dynamics, as well as external factors. In fact, due to the slowdown in the global and local economy, during 2009 inflation turned negative and closed the year with a deflation of 1.4%. Conversely, throughout 2010, inflation returned to more normal levels and was within the long-termlong term range of 2.0% to 4.0% per year targeted by the Central Bank, ending the year at 3.0%. After that, stimulative economic activity—led by private consumption—activity and high international prices offor oil and food fostered inflationcaused a CPI annual increase of 4.4% in 2011. During the year ended December 31, 2012, inflation was 1.5%, as measured by the CPI published by the Chilean National Statistics Institute. This figure was below initial expectations and itwhich was mainly explained by a decrease in international oil prices that translated into lower local prices for transportation and utilities. Decreasing prices in these sectors more thanutilities, partly offset by higher food prices. In 2013, inflation was once again within thelong-run range targeted by the Central Bank by posting an annual increase of 3.0%. This figure was influenced by higher food, transportation and energy prices prompted by a sharp increase in the Ch$/U.S.$ exchange rate. Unlike in 2013, inflation showed a sharp increase in 2014, as reflected by a CPI annual variation of 4.6%. This figure was the caused by a sharp Chilean peso devaluation (against U.S.$) that translated into a higher cost of imported tradable goods, affecting most economic sectors. Also, the government’s tax reform prompted a cost increase in specific products such as beverages and cigarettes.

An increase in inflation rates could adversely affect the Chilean economy and have an adverse effect on our business, financial condition and results of operations. Our results of operations reflect the effect of inflation in the following ways:

 

a substantial portion of our assets and liabilities are denominated in UFs, a unit that is indexed daily to reflect inflation recorded in the previous month, with the net gain or loss resulting from such indexation reflected in income; and

 

the interest rates earned and paid onpeso-denominated assets and liabilities to some degree reflect inflation and expectations regarding inflation.

UF-DenominatedUF Denominated Assets and LiabilitiesLiabilities.. The UF is revalued in monthly cycles. On each day in the period beginning the tenth day of the current month through the ninth day of the next month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect each day a pro rata amount of the prior calendar month’s change in the CPI as published by the Chilean National Statistics Institute. One UF was equal to Ch$22,294.0323,309.56 as of December 31, 20112013 and Ch$22,840.7524,627.10 as of December 31, 2012.2014. The effect of any changes in the nominal peso value of our UF-denominatedUF denominated assets and liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest revenue and expense. Our net interest income will be positively affected by inflation (and negatively affected by deflation) to the extent that our average UF-denominatedUF denominated assets exceed our average UF-denominatedUF denominated liabilities, while our net interest income will be negatively affected by inflation (and positively affected by deflation) when average UF-denominatedUF denominated liabilities exceed our average UF-denominatedUF denominated assets. Our average UF-denominatedUF denominated assets exceeded our average UF-denominatedUF denominated liabilities by Ch$3,447,2294,625,444 million (U.S.$6,634.84 million) during the year ended December 31, 2011 and Ch$3,900,986 million (U.S.$8,136.048,798.30 million) as of December 31, 2012.2013 and Ch$5,317,339 million (U.S.$8,773.18 million) as of December 31, 2014. These figures exclude capital, reserves and derivatives. See “Item 4. Information on the Company—Selected Statistical Information.”

Peso-Denominated Assets and Liabilities. Interest rates in Chile tend to reflect the rate of inflation during the relevant period and expectations regarding future inflation. The sensitivity of our peso-denominatedpeso denominated interest earning assets and interest bearing liabilities to the inflation rate varies. See “—Interest Rates.” We maintain a substantial amount ofnon-interest bearing, peso-denominatedpeso denominated current accounts and other demand deposits. The ratio of such deposits to average interest bearing peso-denominatedpeso denominated liabilities was 64% during the year ended December 31, 2011 and 62% during the year ended December 31, 2012.2013 and 67% during the year ended December 31, 2014. Since a large part of such deposits are not indexed to inflation, even a slight decline in the rate of inflation may adversely affect our net interest margin on assets funded with such deposits and even a slight increase in the rate of inflation may increase the net interest margin on such assets. See “Item 4. Information on the Company—Selected Statistical Information—Interest Earning Assets and Net Interest Margin.”

Interest Rates

Interest rates earned and paid on our assets and liabilities reflect in part, inflation and expectations regarding future inflation, shifts inshort-term interest rates related to the Central Bank’s monetary policies and movements inlong-term real rates. The Central Bank managesshort-term interest rates based onin order to achieve its objectives of balancing lowlong-term inflation target and economic growth.provide the economy with financial stability. As a consequence of strong recovery signs for the economic activity and the more normalized inflationary environment observed after the financial turmoil of 2008, the Central Bank began to withdraw the monetary stimulus in June 2010 when it increasedby increasing the monetary policy annual interest rate to 1.00% from the 0.5% maintained during the first half of that year. Since June 2010, the Central Bank has repeatedly raised the monetary policy interestmarginal standing facility rate, ending 2011 at 5.25% from, above the level of 3.25% recorded in December 2010. Nevertheless, as a consequence of the tempered global slowdown during the last quarter of 2011 and the uncertainty regarding the fiscal condition of some developed countries, particularly in the ChileanEuro Zone, the Central Bank decided to lower the reference interest rate by 0.25% on January 12, 2012.

Similarly, based on low inflation,After that, the Central Bank maintained the marginal standing facility rate at 5.0% during 22 months, until October 2013. This neutral bias was supported by local economic growth that resulted in a GDP increase over 5.0% per year, which prompted a virtuous cycle including increasing real wages, and low unemployment that resultedand growing private consumption. These trends were also accompanied by low inflation. Nevertheless, in higher than expected economic activity,light of the signs of slowdown evidenced by the Chilean economy, the Central Bank decidedcommenced an easing monetary policy by the end of 2013, which involved successive cuts to maintainthe marginal standing facility rate. For this reason, the monetary policy interest rate steady at 5.00% during allthe end of 2012.2013 was 4.5% and at the end of 2014 was 3.0%. As of April 15, 201317, 2015 the monetary policy interest rate was 5.0%remained at 3.0%.

Since our liabilities generallyre-price faster than our assets, changes in the rate of inflation orshort-term interest rates are reflected in the nominal interest rates we pay on our liabilities before they are reflected in the nominal interest rates we earn on our assets. Accordingly, our net interest margin on assets and liabilities is usually adversely affected in theshort-term by increases in inflation or short-term nominal interest rates and benefits in theshort-term from decreases in inflation or short-term nominal interest rates, although the existence ofnon-interest bearingpeso-denominated demand deposits tends to mitigate both effects. See “—“—Inflation—Peso-Denominated Assets and Liabilities.” In addition, because ourpeso-denominated liabilities have relatively shortre-pricing periods, those liabilities generally are more sensitive to changes in inflation orshort-term interest rates than ourUF-denominated liabilities. As a result, during periods when current inflation exceeds the previous month’s inflation, customers often switch funds frompeso-denominated deposits to more expensiveUF-denominated deposits, thereby adversely affecting our net interest margin.

According to information published by the Central Bank, the average annual short-termshort term nominal interest rate, based on the rate paid by Chilean financial institutions for 90 to 360-day360 day Chilean peso-denominatedpeso denominated deposits, was 5.61% in 2011 and 5.90% in 2012.2012, 5.20% in 2013 and 3.91% in 2014. The average annual long-termlong term nominal interest rate, based on the interest rate of the Central Bank’s five-yearfive year Chilean peso-denominatedpeso denominated bonds in the secondary market, was 5.67%5.34% in 20112012, 5.20% in 2013 and 5.26%4.43% in 2012.2014.

Foreign Currency Exchange Rates

A significant portion of our assets and liabilities are denominated in foreign currencies, principally U.S. dollars, anddollars. In the past, we have historically maintained and may continue to maintain gaps between the balances of such assets and liabilities. This gap includes assets and liabilities denominated in foreign currencies and assets and liabilities denominated in Chilean pesos that contain repayment terms linked to changes in foreign currency exchange rates. However, we generally offset this gap by taking hedging derivative positions. Because foreign currency denominated assets and liabilities, as well as interest earned or paid on such assets and liabilities and gains (losses) realized upon the sale of such assets, are translated into pesos in preparing our audited consolidated financial statements, our reported income is affected by changes in the value of the peso with respect to foreign currencies, primarily the U.S. dollar. Adjustments toU.S. dollar-indexed assets are reflected as adjustments in net interest earnings and offset results in our foreign exchange position. See “Item 3. Key Information—Exchange Rates and Item 3. Key Information Risk Factors—Currency fluctuations could adversely affect the value of our ADSs and any distributions on the ADSs.”

Critical Accounting Policies

We prepare our audited consolidated financial statements in accordance with IFRS as issued by the IASB. The notes to our audited consolidated financial statements as of and for the year ended December 31, 2012,2014, which are included in this annual report, contain a summary of our significant accounting policies.

The preparation of financial statements under IFRS requires management to make certain estimates and assumptions, as some of the amounts reported in the financial statements are related to matters that are inherently uncertain. These estimates could change from period to period, which may have a material impact on our financial condition or results of operations. Actual results may differ if conditions or underlying circumstances were to change.

The following discussion describes those areas that require considerable management judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial situation and results of operations.

Allowances for Loan Losses

Determining accounting estimates and judgments related to the impairment of loans and provision for off-balanceoff balance sheet positions is a critical process for us because the underlying assumptions used for both the individually and collectively assessed impairment can change from period to period and may significantly affect our results of operations.

As part of this process, we first assess whether objective evidence of impairment exists for loans that are individually significant. The decision as to whether loans are individually significant or not is based on fixed criteria specified by management. The determination of these criteria involves management’s judgment and is regularly reviewed for adequacy. After this assessment, we assess collectively for loans that are not individually significant and loans which are significant but for which there is no objective evidence of impairment under the individual assessment.

The determination of the impairment allowance required for loans that are deemed to be individually significant often requires the use of considerable judgment by management on economic conditions, the financial performance of the customer and the value of collateral, for which there may not be a readily accessible market. To allow management to determine if a loss event has occurred on an individual basis, all significant counterparty relationships are reviewed periodically. This evaluation considers current information and events related to the counterparty, such as if the counterparty is experiencing significant financial difficulty or a breach of contract, for example, default or delinquency in interest or principal payments.

From the information gathered in the process described above, we estimate the future cash flows expected to flow to the entity considering the losses already incurred. The actual amount and timing of future cash flows may differ from the estimates used by management and consequently may cause actual losses to differ from the reported allowances. We utilize back testing techniques in order to optimize our models and minimize such adjustments.

The collective impairment allowance is calculated on a portfolio basis using statistical models which incorporate various estimates and judgments. In order to constantly monitor and increase the quality of such estimations of future cash flows, we regularly review our statistical models and the underlying data and assumptions. Among other factors, the probability of defaults and loss recovery rates are taken into account during this review.

The collective impairment allowance has two components.

The first component is an allowance amount representing the incurred losses on the portfolio of smaller balance homogeneous loans, which are loans to individuals and small business customers of the retail business segment. The loans are grouped according to similar credit risk characteristics and the allowance for each group is determined using statistical models based on historical experience.

The second component represents an estimate of incurred losses inherent in the group of loans that have not yet been individually identified as impaired or measured as part of thesmaller-balance homogeneous loans. We use historical loss experience for these estimates. This historical loss experience is adjusted on the basis of actual observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from period to period (e.g., changes in unemployment rates, property prices, payment status or other factors that are indicative of incurred losses in the group and their magnitude).

For a further description of our policy regarding allowances for loan losses, see note 2(h) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

Impairment of Other Financial Instruments

Equity method investments and financial assets classified as available for sale are evaluated for impairment throughout the year and at each reporting date in order to assess whether events or changes in circumstances indicate that these assets are impaired. If there is objective evidence of an impairment of an asset, an impairment test is performed by comparing the investments’ recoverable amount, which is the higher of its value in use and fair value less costs to sell, with its carrying amount.

In the case of equity investments classified as available for sale, objective evidence of impairment would include a significant or prolonged decline in fair value of the investment below cost. It could also include specific conditions in an industry or geographical area or specific information regarding the financial condition of the company, such as a credit rating downgrade. In the case of debt securities classified as available for sale, impairment is assessed based on the same criteria as for loans.

If information becomes available after we make our evaluation, we may be required to recognize impairment in the future. Because the estimate for impairment could change from period to period based upon future events that may or may not occur, we consider this to be a critical accounting estimate.

Fair Value Estimates for Financial Assets and Liabilities

International AccountingFinancial Reporting Standard (“IAS”IFRS”) 39.913 defines “fair value” as the amount for whichprice that would be received to sell an asset could be exchanged, or paid to transfer a liability settled, between knowledgeable, willing parties in an arm’s length transaction. We use valuation techniquesorderly transaction between market participants at the measurement date. IFRS 13 seeks to establish theincrease consistency and comparability in fair value of instruments in cases where prices quoted in active markets are not available.measurements and related disclosures through a ‘fair value hierarchy’. The chosen valuation technique makes maximum use of observable market data, relies as little as possible on estimates performed by us, incorporates factors that market participants would consider in setting a price and is consistent with accepted methodologies for pricing financial instruments. Where possible, parameterhierarchy categorizes the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The Bank uses valuation techniques appropriate in the circumstances and for which sufficient data are based on observable data derived from pricesavailable to measure fair value, maximizing the use of relevant instruments traded inobservable inputs and minimizing the use of unobservable inputs.

The objective of using a valuation technique is to estimate the price at which an active market.

Inputsorderly transaction to sell the asset or to transfer the liability would take place between market participants and the measurement date under current market conditions. Three widely used in valuation techniques represent reasonableare:

Market approach—uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business).

Cost approach—reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost).

Income approach—converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations and include risk and return factors that are inherent to the financial instrument. Periodically, we calibrate ourabout those future amounts.

In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation techniques and test them for validity using prices from observablewill be appropriate. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market transactions over the same instrument or based on any available observable market data.

In reaching estimates ofconditions. A fair value significant management judgment may be required. The levelmeasurement requires an entity to determine all of management judgment requiredthe following:

the particular asset or liability that is the subject of the measurement (consistently with its unit of account).

the principal (or most advantageous) market for the asset or liability.

the valuation technique(s) appropriate for the measurement, considering the availability of data with which to establish fair value of financial instruments for which there is a quoted price in an activedevelop inputs that represent the assumptions that market is minimal. Similarly, there is little subjectivityparticipants would use when pricing the asset or judgment required for instruments valued using valuation models that are standard across the industryliability and where all parameter inputs are quoted in active markets. However, the level of subjectivity and, therefore, the degree of management judgment required, is more significant for those instruments valued using specialized models and those where some or all of the parameter inputs are not observable. In our fair value hierarchy these financial instrumentswithin which the inputs are classified as level 3. These instruments are valued based on quoted prices for similar instruments, which require adjustments or significant unobservable assumptions to reflect the differences between such similar instruments and the ones valued.categorized. For a further description of our internal fair value classification, see note 3940 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

Management judgment is required in the selection and application of appropriate parameters, assumptions and modeling techniques. In cases where different valuation techniques indicate a range of possible fair values for an instrument, management must determine what point within the range of estimates best represents fair value. Furthermore, some valuation adjustments may require the exercise of management judgment to ensure fair value is reached.

Revenue Recognition

Interest revenue and expenses are recognized in the income statement using the effective interest rate method set forth in IAS 39. To calculate the effective interest rate, we estimate future cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses. The estimation of such future cash flows requires management judgment to some degree. In addition, the analysis of contractual conditions and other components (such as transaction costs) for purposes of determining the effective interest rate involves making estimates of possibly incurred but not recognized credit losses. See “—Allowances for loan losses.”

Income and expenses from fees and commissions are recognized in the consolidated income using different criteria based on the nature of the income or expense in accordance with IAS 18 and IAS 39. Fees earned from transactions or services provided over a longer period of time are recognized over the life of the transactions or services. The revenue recognition of fees from such transactions requires management judgment to some degree. Due to the nature of business from which we derive fees and commissions (e.g., asset management, custody of assets), the required degree of estimation is small.

Deferred Tax Assets

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the financial statements. Deferred income tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be recognized. This assessment requires significant management judgments and assumptions. In order to estimate the recoverability of deferred tax assets, we consider historical tax capacity and profitability information, as well as forecasted operating results and other relevant considerations.

Legal and Regulatory Contingencies and Tax Risks

Legal claims, regulatory proceedings and income tax provisions for uncertain tax positions may occur. The use of estimates is important in determining provisions for potential losses that may arise from such events. We estimate and provide for potential losses that may arise from litigation, regulatory proceedings and uncertain income tax positions to the extent that such losses are possible and can be estimated, in accordance with IAS 37

(“ (“Provisions, Contingent Liabilities and Contingent Assets”) and IAS 12 (“Income Taxes”). Significant judgment is required in making these estimates and our actual liabilities may ultimately be materially different. Contingencies in respect of legal matters are subject to many uncertainties and the outcome of individual matters is not predictable with assurance.

Our total liability with respect to litigation, arbitration and regulatory proceedings is determined on acase-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case, our experience and the experience of others in similar cases, and the opinions and views of legal counsel. Predicting the outcome of our litigation matters is inherently difficult, particularly in cases in which claimants seek substantial or indeterminate damages.

Amendments to Financial Reporting Standards in 2014

IAS 32 Offsetting Financial Assets and Financial Liabilities—This amendment clarifies the meaning of‘currently has a legally enforceable right to set-off’ and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and is applied retrospectively. The Bank has disclosed the impact of master netting agreements. None of these netting arrangements qualify for netting under the requirements of IAS 32; therefore, financial instruments subject to netting arrangements are presented on a gross basis in the balance sheet.

IFRS 10, IFRS 12 and IAS 27—Investment Entities—These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements and must be applied retrospectively, subject to certain transition relief. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments have no impact on the Bank, since none of the entities in the Group qualifies to be an investment entity under IFRS 10.

IAS 36 Impairment of Assets—Recoverable Amount Disclosures for Non-Financial Assets—This Amendment reduces the circumstances in which the recoverable amount of assets or cash-generating units is required to be disclosed, clarifies the disclosures required and introduces an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where the recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. These amendments have no impact on the Bank.

IAS 19 Defined Benefit Plans: Employee Contributions—IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognize such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. These amendments have no impact on the Bank, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties.

IAS 39 Financial Instruments—Recognition and Measurement—The amendments to IAS 39 relate to continuing hedge accounting after novation. This amendment provides an exception to the requirement to discontinue hedge accounting when over-the-counter (OTC) derivatives designated for hedging are, directly or indirectly, novated to a central counterparty (CCP) as a consequence of laws or regulations, or the introduction of laws or regulations. Hedges will not be interrupted for this novation, so there is no impact in financial statements.

Results of Operations for the YearYears Ended December 31, 2010, 20112012, 2013 and 20122014

The consolidated financial information presented in this section for the years ended December 31, 2010, 20112012, 2013 and 20122014 has been audited and prepared in accordance with IFRS. In addition, to the extent that it is available and because we believe it is useful in analyzing our results, we have included information broken downclassified by the business segments that we use for internal reporting purposes. As mentioned earlier, information about our business segments is reported under our internal reporting policies, thatwhich differ in some extentsignificant respects from IFRS.

Net Income

The following table sets forth the principal components of our net income, as detailed in our audited consolidated financial statements for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  For the Year Ended December 31, % Increase (Decrease)   For the Year Ended December 31, % Increase (Decrease) 
IFRS:  2010 2011 2012 2010/2011 2011/2012   2012 2013 2014 2012/2013 2013/2014 
  (in millions of Ch$, except percentages)     (in millions of Ch$, except percentages) % 

Net interest income

   767,626    877,475    964,137    14.3  9.9   964,137    1,061,571    1,256,816    10.1  18.4

Net fees and commissions income

   292,262    308,773    307,257  �� 5.6    (0.5   287,272    287,093    272,188    (0.1  (5.2

Other income (loss), net

   104,509    74,863    72,222    (28.4  (3.5   72,222    130,013    132,640    80.0    2.0  

Provisions for loan losses

   (157,651  (146,925  (166,420  (6.8  13.3     (166,420  (221,653  (261,566  33.2    18.0  

Operating expenses

   (544,227  (613,611  (635,119  12.7    3.5     (612,934  (619,530  (727,360  1.1    17.4  

Income attributable to associates

   1,609    3,054    (468  89.8    —       (468  1,780    2,486    —      39.7  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Income before income taxes

   464,128    503,629    541,609    8.5    7.5     543,809    639,274    675,204    17.6    5.6  

Income taxes

   (46,513  (65,442  (63,488  40.7    (3.0   (63,928  (89,085  (79,685  39.4    (10.6
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net income

   417,615    438,187    478,121    4.9  9.1   479,881    550,189    595,519    14.7  8.2
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

20112013 and 20122014. OurFor the year ended December 31, 2014 our net income was Ch$478,121 million in 2012, which represents595,519 million. This represented an 9.1%annual increase of 8.2% over the figureCh$550,189 million recorded a year earlier. Ourin 2013. The annual variance in our net income for 2012 represents a historical record for us, which is especially notable in lightwas primarily attributable to:

Significantly higher contribution of the low inflationary environment observed in 2012 and its effect on our net asset position indexedexposure to inflation.UF, which is aninflation-indexed currency. During the year ended December 31, 2014 inflation (measured as UF variation) was 5.65%, as compared to the 2.05% recorded in 2013. The main drivers that influenced the net income increase were, as follows:

Strong3.6% annual growth in our loan book, especially in the more profitable segments, such as individual (personal) and SME banking. Overall, the average balance of total loans increased 13.5% in 2012, which was composed of 17.1% and 10.5% increases in the average balances of total loans in our retail (individuals and SMEs) and wholesale (large companies and corporations) banking segments, respectively. The annual expansion in the average balance of total loans was also accompanied by a slight increase in lending spreads.UF variation translated into higher revenues from our net asset exposure to the UF (inflation). Also, this effect was amplified by lower nominal interest rates associated with Chilean peso-denominated liabilities funding this asset position.

 

Our leading market positionDownward shifts in non-interest bearing current accountsinterest rates. Given the economic backdrop observed locally in 2014, the Chilean Central Bank undertook successive cuts to the marginal standing facility rate. This rate ranged from 4.5% at the end of 2013 to 3.0% as of December 2014. The change in monetary policy caused similar shifts in nominalshort-term interest rates, positively impacting our results due to both a repricing effect as liabilities reprice faster than assets and demand deposits, reflected inhigher revenues from term gapping, based on the yield curve steepening.

Higher income from loans as a 10.5%result of both loan book expansion and non-recurring effects. On the one hand, our loan portfolio recorded an 8.6% annual increase in average balances which was supplementedprompted by nominalan annual increase of 11.3% in retail banking loans and an annual expansion of 4.2% in wholesale banking loans (all based on average balances). The increase in retail banking balances was aligned with our strategic priority of increasingly penetrating that segment, while the moderate growth posted in the wholesale banking segment had to do with both tightened market conditions and aggressive competition within the corporate segment. On the other hand, we benefited from the early settlement of a corporate loan, which translated into non-recurring net interest rates that were slightly above 2011 figures due to a monetary policy interest rate that averaged 5.0% in 2012 as compared to an average of 4.7% in 2011. All in all, income attributable to this funding source increased in 2012 when compared to 2011.income.

 

A decrease in income taxes due to the tax benefitspositive non-recurring effect associated with our asset position in deferred taxes that were caused bytaxes. As a result of the tax reform passedapproved in 2012. This reform increasedChile during 2014, we recognized a positive effect related to the Chileanincrease in the statutory corporate tax rate that was originally set at 18.5% for 2012 (and 17.0% from 2013) to 20.0% for 2012 and thereafter. This resulted in a one-time positive effect of approximately Ch$9,029 million in deferred taxes.the coming years.

Higher revenues from tradingThe previously mentioned factors enabled us to effectively cope with: (i) a 5.2% decrease in fixed-incomenet fees and derivative securities, which allowed as to offsetcommissions income, primarily explained by regulations affecting the insurance brokerage business, lower fee income from credit cards as a result of commercial decisions we made in order to promote this means of payment and lower stock brokerage fees, which is in line with the managementmoderate growth observed in the local equity market; (ii) an annual increase of our available-for-sale portfolio.

The drivers behind the increase in net income also effectively offset some of the negative forces that affected our business operations in 2012, including: (i) inflation that remained below market expectations and CPI variation in 2011, which negatively impacted the contribution to our UF net asset position, (ii) a flattened yield curve that reduced the possibilities of term spread arbitrage (term gapping), (iii) a 13.3% increase18.0% in provisions for loan losses, due to the loan book expansion, particularlyexplained by both higher growth in the retail banking segment and a moderate deteriorationnegative exchange rate effect (offset by higher revenues from an asset position in credit quality acrossU.S.$ that hedges our liability exposure to U.S.$-denominated provisions for loan losses); (iii) a 17.4% annual increase in operating expenses, primarily associated withfour-year collective bargaining agreements settled in 2014 with most of our unions; and (iv) lower contribution from our demand deposits, given the industry, especially during the first half of decrease in nominal short term interest rates.

2012 and (iv) a 0.5% drop in fees and commissions, which nevertheless continued to be a stable source of revenues, primarily based on fee income from core business items that allowed us to offset a decrease in fees from specialized services during 2012.

2010 and 20112013. OurDuring 2013 our net income increased 4.9%was Ch$550,189 million, increasing by 14.7% as compared to the Ch$479,881 million recorded in 2012. The annual increase whichin net income was primarily the result of:

 

OurSustained loan growth and stable lending spreads in all of our targeted segments. During 2013 we selectively expanded our loan book by prioritizing those segments with a favorablerisk-return relationship. On the whole, our average balances of total loans increased by 9.9% in 2013. This annual increase was primarily associated with a 12.2% annual increase in average loans managed by our Retail Banking segment while average loans handled by our Wholesale Banking segment recorded a 5.5% annual increase in 2013. These expansions were aligned with our strategic priorities but also with market leading positionconditions, such as strong competition within the corporate segment. Together with these trends in loans and given our selective growth, we were also able to slightly increase our average lending spreads.

Higher contribution fromnon-interest bearing liabilities such as a result of increasing balances and despite recent cuts in the Central Bank’s marginal standing facility rate, which affected market rates as well. As for the former, our average balances of current accounts and demand deposits that, along with higher nominal interest ratesincreased by 10.7% in 2013 as compared to 2010, translated into a contribution from2012. This annual growth innon-interest bearing liabilities increased the profitability of interest earning assets funded with these kinds of liabilities.

An outstanding commercial performance that is reflected by our average balance of total loans that amounted to Ch$15,901 billion in 2011, which represents a yearly growth of 17.3%. This significant increase enabled us toand also more than offset the lower lending spreads witnessedinterest rate reductions set by the banking industry, which isCentral Bank in line with a local economy that showed a consistent growth—especially during the first halfmarginal standing facility rate (a decrease of 2011—and lower credit risk levels.50 bp in 2013).

 

Net feesHigher revenues from our UF net asset position. Although inflation (measured as UF variation) was lower in 2013 than 2012, we benefited from our UF net asset position through increasing our exposure to inflation, and, commissions that grew by 5.6% onto a yearly basis. Despite the moderate annual increase, this line item remains a significant revenue source,lesser extent, due to a positive repricing effect on interest bearingpeso-denominated liabilities as a result of two consecutive cuts in monetary policy interest rates carried out by the significant contributions from our subsidiaries that provide our customers with specialized financial services, as well as our efforts intended to offer value-added financial products and services.Central Bank by the end of 2013.

 

ProvisionsHigher revenues from the management of our Treasury. Given favorable shifts in market factors, especially by the end of 2013, our Treasury was able to profit from term gapping, liabilities repricing and the management of our investment portfolio.

The factors mentioned above were partly offset by a 33.2% annual increase in provisions for loan losses that recordedwas prompted by: (i) the previously mentioned loan growth, (ii) the devaluation of the Chilean peso that negatively impacted ourU.S.$.-denominated provisions for loan losses (although this effect was mostly offset by a hedging asset position whose revenues are recognized under other income (loss) net), and (iii) credit deterioration linked to specific wholesale customers and—to a lesser extent—the SME business. The increase in provisions for loan losses was accompanied by an annual decreaseincrease of 6.8%. This improvement39.4% in credit quality was spurred by better conditionsincome taxes, owing to both the 17.6% annual increase in the local economy that positively impacted unemploymentincome before income tax in 2013 as compared to 2012 and real salary figures, all of which resulteda low basis for comparison, since in higher customer payment capacity. This macroeconomic scenario was supplemented by continuously improving credit processes, including better evaluation, approval, supervision and collection. It is important to mention that this annual decrease took place in spite of the significant growth recorded in total loans.

All of these factors were partly offset by higher operating expenses that were the result of increased personnel and administrative expenses. Whereas the former increased2012 we recognizednon-recurring tax benefits associated with our deferred taxes as a result of an increase in the collective bargaining process carried out by us and our unions, our administrative expenses increased as a consequence of higher outsourced sales force expenses, expenses associated with an enlarged and improved distribution network, additional IT and communication expenses and marketing initiatives put into practice in order to reinforce our market position and promote the launch of new products and services. In addition, the previously mentioned positive factors enabled us to offset a 28.4% annual decrease in other operating income, mostly associated with lower results from derivative contracts and reduced gains associated with our investment portfolio.statutory corporate tax rate.

Net Interest Income

The tables included under the headings “—Interest Revenue” and “—Interest Expense” set forth information regarding our consolidated interest revenue and expenses, and average interest earning assets and average interest bearing liabilities for the years ended December 31, 2010, 20112012, 2013 and 2012.2014. This information is derived from tables included elsewhere in this annual report under “Item 4. Information on the Company—Selected Statistical Information” and is qualified in its entirety by reference to such information.

  For the Year Ended December 31, % Increase (Decrease)   For the Year Ended December 31, % Increase (Decrease) 
IFRS:  2010 2011 2012 2010/2011 2011/2012   2012 2013 2014 2012/2013 2013/2014 
  (in millions of Ch$, except percentages) %   (in millions of Ch$, except percentages) % 

Interest revenue

  Ch$1,092,003   Ch$1,501,684   Ch$1,672,766    37.5  11.4  Ch$1,672,766   Ch$1,765,942   Ch$2,045,604   Ch$5.6 Ch$15.8

Interest expense

   (324,377  (624,209  (708,629  92.4    13.5     (708,629  (704,371  (788,788  (0.6  12.0  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net interest income

  Ch$767,626   Ch$877,475   Ch$964,137    14.3  9.9  Ch$964,137   Ch$1,061,571   Ch$1,256,816    10.1  18.4
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net interest margin(1)(2)

   4.87  4.80  4.68  —      —       4.68  4.67  5.12  —      —    

 

(1)Net interest income divided by averageinterest-earning assets. The average balances forinterest-earning assets, including interest readjustments, were calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiariessubsidiaries.
(2)Net interest margin does not include the interest earned on trading securities, which is accounted for under Other Income (Loss) Net.

20112013 and 20122014.. In 2012 our Our net interest income totaledwas Ch$964,137 million, which represented a 9.9% increase from Ch$877,4751,256,816 million in 2011.2014, which was 18.4% above the Ch$1,061,571 million recorded in 2013. This annual incrementincrease was largely supported by:mainly related to favorable changes in market factors, such as inflation and interest rates, as well as an expansion in loan balances. The primary drivers explaining the increase in net interest income were as follows:

 

Average balance of our total loans that grew by 13.5% on an annual basis. This increase was primarily caused by average balances of retail banking segment loans that recorded a 17.1% annual expansion and, to a lesser extent, loans grantedHigher net income attributable to our wholesale banking segment whose average balances went up by 10.5% in annual terms. This greater business scale, together with slightly higher lending spreads, translated into an increase in revenues from loans of approximately Ch$78,360 million in 2012 as compared to 2011.

Current accounts and demand deposits that continue to be an important and attractive funding source for our operations, based on average balances that increased 10.5% in 2012 and a monetary policy interest rate that remained at 5.0% in 2012 as compared to an average of 4.7% in 2011. These factors resulted in higher revenues from current accounts and demand deposits of approximately Ch$31,650 million in 2012 as compared to 2011.

The above-mentioned factors were strongly linked to our core business activities and allowed us to effectively offset the negative impact of lower inflation on the UF net asset position. In 2012,Inflation (measured as UF variation) was higher than expected, reaching 5.65% in 2014. This annual increase was well above the 2.05% recorded in 2013. However, in addition to higher inflation, our UF net asset position benefited from lower short term nominal interest rates on the Ch$ denominated liabilities that fund this position. On the whole, the contribution of our UF net asset position decreasedexposure increased by approximately Ch$34,960156,000 million in 2014 as compared to 2011, due 2013.

Higher income from loans of approximately Ch$37,900 million. This was the result of an 8.7% annual increase in our loan book (based on average balances), prompted by an increase of 11.3% in retail banking average loans and—to a combination of: (i) inflation that (measured as UF variation) increased 2.5%lesser extent—by an expansion of 4.2% in comparison with 3.9% a year earlier, (ii) higher nominal interest rateswholesale banking average loans. In spite of the moderate growth in 2012 that translated into an increased funding cost forwholesale banking average loans, we benefited from the portion of such assets that is financed with Chilean peso liabilities, and (iii) a positivenon-recurring effect associated with the prepayment of a reinforced capital base causedcommercial loan producing additional net interest income of approximately Ch$9,400 million. It is important to note that our loan expansion in retail banking was conducted selectively by targeting higher income individual customers with both consumer and residential mortgage loans. Thus, whereas our Individuals and SM Banking Unit recorded a 12.2% annual increase in average loans by catering tohigher-income individuals and SMEs, our Consumer Finance Division only managed a 1.4% annual increase in average loans. On the other hand, the growth in wholesale banking was associated with higher net incomeexpansion in our Large Companies and Real Estate Banking Unit (Middle Market), with average loans increasing 8.1% annually. Conversely, our Corporate Division posted an annual decrease of 0.7% in average loan balances. The trends followed by our loan book reflected the capital increase we undertookChilean economic backdrop. The low growth rate managed by the wholesale banking segment had to do with postponed macro investment projects and a lack of confidence in the economic outlook by decision makers. The economic environment also translated into a decline in loan growth in the retail banking segment by the end of the year. In addition, flattened yield curves also contributed to a lower2014.

Higher net interest income by reducingrevenues of approximately Ch$20,748 million as a result of favorable shifts in both short- and long-term interest rates. In fact, the downward trends in short-term interest rates produced a positive repricing effect (since liabilities reprice faster than assets). Also, we benefited from a steepening in the yield curve, which caused higher revenues from term gapping possibilities.gapping.

The 9.9%18.4% annual increase in net interest income together withprompted a proportionally higher annualsignificant increase of 12.7% in average interest earning assets, resulted in a slight annual decrease in our net interest margin, (on averagefrom 4.67% in 2013 to 5.12% in 2014. This was mostly the result of the UF increase, as well as a more convenient backdrop for funding and term gapping, given that interest earning assets) from 4.80% in 2011 to 4.68% in 2012.assets grew by 8.1% on an annual basis.

20102012 and 20112013. Our net interest income recordedwas Ch$1,061,571 million in 2013, which represented a 14.3%10.1% annual increase from the Ch$767,626964,137 million in 2010 to Ch$877,475 million in 2011. The main factors that supported this rise were:recorded a year earlier. This annual increase was principally the result of:

 

The previously mentioned expansion in our loan book. Our leading market positionaverage balances of total loans increased by 9.9% in 2013 as compared to 2012. This expansion was focused on those segments where we still have room to grow and —more importantly— in which therisk-return equation is favorable. Accordingly, our loan growth was largely fostered by a 12.2% growth in average loans of our Retail Banking segment, especially linked to a 13.1% annual expansion in middle and upper income personal banking, in conjunction with a 12.6% annual increase in average loans to SMEs. In the Wholesale Banking segment, the overall growth of 5.5% in average loans was principally prompted by a 14.2% increase in average loans associated with our Large Companies and Real Estate Division (Middle Market). These drivers enabled us to more than offset an annual slight decrease in loans granted to Corporations and a slowdown in average loans to our lower income individual segment. Altogether, we increased our revenues from loans by approximately Ch$59,700 million in 2013 as compared to 2012.

Higher contribution from ournon-interest bearing liabilities. Based on a 10.7% annual increase in average balances of current accounts and demand deposits, within a scenariowe were able to completely offset the effect of higherlower nominal interest rates. The combinationrates following two consecutive cuts of 25 basis points in the marginal standing facility rate by the end of 2013. Accordingly, greater balances of these factors enabled us to obtain aliabilities resulted in higher contribution—profitability for our balance sheet, which translated into higher benefits by approximately Ch$50,80023,400 million in 2013 as compared to 2010—from these non-interest bearing demand deposits that fund a significant portion of our interest-earning assets.2012.

 

Higher inflation—fostered by higher local aggregate demand and higher international commodity prices—that resultedA more favorable scenario for our UF net asset position. Despite the UF increase of 2.05% in a 3.9% UF variation in 20112013 as compared to an increase of 2.45% in 2012, we benefited from an enlarged exposure to UF and more convenient funding for the 2.4% recordedportion of these assets funded withCh$-denominated liabilities given the decrease in 2010. This issue, along withnominal interest rates towards the proactive managementend of 2013. Higher revenues from our UF net asset position resultedamounted to approximately Ch$17,600 million in roughly Ch$24,800 million2013 as compared to 2012.

As mentioned, an important part of additional income.the increase in net interest income was fostered by more accessible funding based on: (i) our leading market position innon-interest bearing liabilities, (ii) our high credit ratings that

Higher demandtranslated into low risk premiums for credit, prompted byour international debt placements and (iii) a positive economic cycle. The high GDP growth recorded byrepricing effect given the local economy, especially during the first half of 2011, translated into lower unemployment and growing real salaries. Under this scenario and also due to still attractivedecrease inshort-term interest rates individualstowards the end of 2013. This allowed us to more than offset lower revenues from our time deposits and saving accounts by approximately Ch$1,100 million and a yield curve that remained almost flat in 2013, despite the steepening observed towards the end of 2013.

On the whole, despite the 10.1% annual increase in net interest income, our net interest margin experienced a slight annual decrease of one basis point, from 4.68% in 2012 to 4.67% in 2013. This was principally the result of a proportionally higher increase in interest earning assets (10.3% on an annual basis), especially average balances of total loans that grew by 9.9% in 2013 as compared to 2012, and average balances of financial investments (includingAvailable-for-Sale andHeld-for-Trading securities) that increased their consumption, while companies undertook investment projectsby 11.4% on a yearly basis. As for the latter, it is important to mention that had been postponedinterest accrued on trading securities is not recognized as a consequence of the economic crisis. As a result, we achieved outstanding double-digit growth rates in commercial,interest revenue.

residential mortgage, and consumer loans, which enabled us to more than offset the downward trend in lending spreads, in line with a highly competitive business environment and lower credit risk. The net effect of these factors translated into approximately an increase in income of Ch$17,800 million compared to 2010.

Interest Revenue

The following table sets forth information regarding our interest revenue and average interest earning assets for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  For the Year Ended December 31, % Increase (Decrease)   For the Year Ended December 31, % Increase (Decrease) 
  2010 2011 2012 2010/2011 2011/2012   2012 2013 2014 2012/2013 2013/2014 
IFRS:  (in millions of Ch$, except percentages) %   (in millions of Ch$, except percentages) % 

Interest revenue

  Ch$1,092,003   Ch$1,501,684   Ch$1,672,766    37.5  11.4  Ch$1,672,766   Ch$1,765,942   Ch$2,045,604    5.6  15.8

Average interest earning assets:

            

Commercial loans

   8,863,082    10,332,183    11,476,946    16.6    11.1     11,476,946    12,477,510    13,316,594    8.7    6.7  

Residential mortgage loans

   2,698,384    3,233,830    3,924,080    19.8    21.3     3,924,080    4,455,850    5,082,293    13.6    14.1  

Consumer loans

   1,997,400    2,334,914    2,654,234    16.9    13.7     2,654,234    2,909,832    3,166,879    9.6    8.8  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total loans

   13,558,866    15,900,927    18,055,260    17.3  13.5   18,055,260    19,843,192    21,565,766    9.9    8.7  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Cash and due from banks

   283,841    334,991    370,298    18.0    10.5  

Deposits in Central Bank

   370,298    396,272    395,286    7.0    (0.2

Repurchase agreements

   74,471    85,087    42,109    14.3    (50.5   42,109    27,382    27,704    (35.0  1.2  

Financial investments

   1,519,808    1,562,251    1,748,349    2.8    11.9     1,748,349    1,946,975    1,969,070    11.4    1.1  

Loans and advance to banks

   339,844    393,579    381,578    15.8    (3.0   381,578    496,870    602,968    30.2    21.4  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total

  Ch$15,776,830   Ch$18,276,835   Ch$20,597,594    15.8  12.7  Ch$20,597,594   Ch$22,710,691   Ch$24,560,794    10.3  8.1
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Average rates earned on total interest earning assets(1)(2):

            

Average nominal rates

   7.09  8.31  8.21  —      —       8.12  7.78  8.33  —      —    

 

(1)See “Item 4. Information on the Company—Selected Statistical Information—Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities.”
(2)Average rates earned on interest earning assets do not include the interest earned on trading securities, which is accounted for under Other Income (Loss) Net.

20112013 and 20122014.. The 11.4% For the year ended December 31, 2014, our interest income was Ch$2,045,604 million, representing a 15.8% annual increase when compared to 2013. This increase was primarily attributable to: (i) higher than expected inflation, with the UF increasing by 5.65% on an annual basis in 2014, as compared to the increase of 2.05% in 2013, which positively impacted the interest earned on our UF asset exposure; (ii) loan book growth of 8.7% (based on average balances) in 2014 as compared to 2013, focused on retail banking (11.3% annual growth in average balances) and—to a lesser extent—on wholesale banking (4.2% annual growth in average balances); and (iii) the one-time effect associated with the early payment of a wholesale commercial loan. These positive effects allowed us to effectively cope with the effect of lower nominal interest revenue was mainly fostered by a 12.7% annual increaserates on the return of interest earning assets denominated in Chilean pesos. Lastly, the average gross return on average interest earning assets that,increased from 7.78% in turn,2013 to 8.33% in 2014.

2012 and 2013. Our interest revenues recorded a 5.6% annual increase in 2013 as compared to 2012. This annual increase was primarily prompted bydue to loan expansion (9.9% in average balances), especially focused on middle and upper income personal banking, SMEs and Middle Market Companies, with average loans to these segments increasing 13.1%, 12.6% and 14.2%, respectively. Despite the positive effect associated with loan growth, we recorded a 13.5% annual growthdecrease in the average balanceyield of total loans, especially thoseour interest earning assets, from 8.12% in 2012 to 7.78% in 2013. This annual decrease was mainly associated with our retail banking segment (e.g. residential mortgage and consumer loans grantedwith: (i) lower UF variation (2.05% in 2013 as compared to individuals, as well as commercial loans granted to SMEs). These positive factors allowed us to effectively offset the negative effect of a 1.4% drop in the UF (from 3.9% in 2011 to 2.5%2.45% in 2012) that negatively impacted the contribution of our UF-denominated assets. On the whole, the yield of our average interest earningearned onUF-denominated assets decreased 10 bp, from 8.31% in 2011 to 8.21% in 2012.

2010 and 2011. Our interest revenue recorded a significant 37.5% increase in 2011, which was principally due to: (i) higher(ii) reduced mid andlong-term nominal interest rates, which impacted the interest earned onCh$-denominated assets. Lastly, increasing balances of assetsAvailable-for-Sale andHeld-for-Trading also contributed to a lower yield, as a result of a higher reference interest rate that increased from 3.25% as of December 31, 2010 to 5.25% as of December 31, 2011accrued on trading securities is not fully allocated in this line with the Central Bank’s efforts to maintain inflation in the target range and (ii) a 15.8% yearly growth in our average interest earning assets, mainly fostered by the significant 17.3% annual rise posted by our average balance of total loans. These two factors allowed us to maintain an upward trend in the yield of our average interest earning assets, increasing from 7.09% in 2010 to 8.31% in 2011.item.

Interest Expense

The following table sets forth information regarding our interest expense and average interest bearing liabilities for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  For the Year Ended December 31, % Increase (Decrease)   For the Year Ended December 31, % Increase (Decrease) 
  2010 2011 2012 2010/2011 2011/2012   2012 2013 2014 2012/2013 2013/2014 
IFRS:  (in millions of Ch$, except percentages) %   (in millions of Ch$, except percentages) % 

Interest expense

  Ch$324,377   Ch$624,209   Ch$708,629    92.4  13.5  Ch$708,629   Ch$704,371   Ch$788,788    (0.6)%   12.0
  

 

  

 

  

 

  

 

  

 

 

Average interest-bearing liabilities:

            

Saving accounts and time deposits(1)

   7,382,126    8,450,231    9,380,123    14.5    11.0     9,380,123    9,842,483    9,724,220    4.9    (1.2

Securities under agreements to repurchase

   182,956    218,847    286,944    19.6    31.1     286,944    289,107    262,301    0.8    (9.3

Borrowings from financial institutions

   1,365,835    1,715,417    1,435,362    25.6    (16.3   1,435,362    1,201,866    1,137,199    (16.3  (5.4

Debt issued

   1,660,440    1,994,679    2,838,170    20.1    42.3     2,838,170    3,771,209    4,897,000    32.9    29.9  

Other financial obligations

   132,200    168,858    170,977    27.7    1.3     170,977    173,868    190,159    1.7    9.4  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total

  Ch$10,723,557   Ch$12,548,032   Ch$14,111,576    17.0  12.5  Ch$14,111,576   Ch$15,278,533   Ch$16,210,879    8.3  6.1
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Average rates paid on total interest bearing liabilities(2):

            

Average nominal rates

   3.03  4.97  5.02  —        5.02  4.61  4.87  

Average (Chilean peso-denominated) non-interest bearing current account and demand deposits

   4,085,800    4,540,335    4,926,475    11.1  8.5   4,926,475    5,455,342    6,224,055    10.7  14.1

 

(1)Includesinterest-earning demand deposits.
(2)See “Item 4. Information on the Company—Selected Statistical Information—Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities.”

20112013 and 20122014. Our net interest expense recorded a 13.5%increased by approximately 12.0% on an annual basis, from Ch$704,371 million in 2013 to Ch$788,788 million in 2014. This annual increase was mainly caused by the effect of higher inflation (UF increased 5.65% in 2014 versus 2.05% in 2013) on our interest bearing liabilities denominated in UF. This effect was partly offset by: (i) the impact of successive cuts to the marginal standing facility rate by the Central Bank from Ch$624,209 million4.5% as of December 31, 2013 to 3.0% as of December 31, 2014, which reduced the cost of funding related to liabilities denominated in 2011Chilean pesos; and (ii) a change in the funding mix reflected by the expansion in cheaper funding sources such as debt issued andnon-interest bearing liabilities (current accounts and demand deposits) increasing by 29.9% and 14.1% on an annual basis, respectively. For these reasons, the average nominal rates paid on the average balance of interest bearing liabilities increased from 4.61% in 2013 to 4.87% in 2014.

2012 and 2013. Our interest expense decreased by 0.6% on an annual basis, from Ch$708,629 million in 2012 to Ch$704,371 million in 2013. This annual decrease was driven by effective management of our funding structure, brand recognition and also favorable shifts in market factors. As for the former, since 2011 we have increasingly diversified our liability structure by issuing debt internationally in various markets. Under this strategy, our overseas debt placements amounted to approximately U.S.$1,120 million in 2013 and bore low risk premiums given our high credit rating. In addition, based on our brand recognition and reliability among customers andnon-customers, we recorded a 10.7% annual increase in average balances of current accounts and demand deposits, which was higher thanprovides us with a convenient source of funding. In this regard, an enlarged capital base in 2013 also contributed to reduce the increase experienced bycost of funding for our interest revenue. The increase inearning assets. Lastly, the lower interest expense was mainly prompted by: (i) higher nominalalso the result of a positive repricing effect on ourshort-term interest bearingpeso-denominated liabilities due to the drop inshort-term interest rates paid by banks on short-term depositstowards the end of 2013. All of these factors collectively resulted in 2012 as compared to 2011 that were supplemented by an 11.0% annual increasea decrease in the average balances of savings accounts and time deposits, and (ii) a funding structure that has increasingly incorporated long-term funding sources, especially funds associated with international and local debt placements. As for the latter,nominal interest rate paid on our balance of debt issued went up 42.3% in 2012 as compared to 2011. All of the previously mentioned factors resulted in a 5 bp increase in cost of funding from interest bearing liabilities from 4.97% in 2011 to 5.02% in 2012.

2010 and 2011. Our interest expense recorded a 92.4% increase2012 to 4.61% in 2011 as compared to 2010. This increase was the result of higher nominal interest rates in 2011 as compared to 2010, as well as an inflation that surpassed last year’s figure, due to the improved aggregate demand that encouraged the Central Bank to gradually withdraw the monetary stimulus during the first half of 2011. These effects increased our cost of funding from interest bearing liabilities and were amplified by average interest bearing liabilities that recorded a 17.0% increase.2013.

Net Fees and Commissions Income

The following table sets forth certain components of our fees and commissions income (net of fees paid to third parties that provide support for those services) for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  Year Ended December 31, % Increase (Decrease)   Year Ended December 31, % Increase (Decrease) 
IFRS:  2010 2011 2012 2010/2011 2011/2012   2012 2013 2014 2012/2013 2013/2014 
  (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) % 

Mutual funds

  Ch$61,476   Ch$63,809   Ch$56,043    3.8  (12.2)%   Ch$56,043   Ch$54,833   Ch$65,198    (2.2)%   18.9

Insurance

   49,170    59,171    60,481    20.3    2.2     60,481    62,378    54,345    3.1    (12.9

Current accounts, overdrafts, credit lines and credit cards

   72,392    76,121    81,427    5.2    7.0     61,442    55,824    37,531    (9.1  (32.8

Sight accounts and ATMs

   21,225    26,028    28,521    22.6    9.6  

Demand accounts and ATMs

   28,521    28,896    30,283    1.3    4.8  

Stock brokerage

   23,752    21,246    10,236    (10.6  (51.8   10,236    10,067    7,873    (1.7  (21.8

Collection of over-due loans

   17,870    18,144    20,670    1.5    13.9     20,670    22,998    22,012    11.3    (4.3

Cash management services

   13,715    13,746    14,443    0.2    5.1     14,443    14,570    14,707    0.9    0.9  

Letters of credit, guarantees, collateral and other contingent loans

   14,290    11,885    13,038    (16.8  9.7     13,038    15,703    17,651    20.4    12.4  

Custody and trust services

   4,838    5,695    6,671    17.7    17.1     6,671    7,070    7,730    6.0    9.3  

Foreign trade and currency exchange

   4,971    5,387    6,005    8.4    11.5     6,005    7,234    7,762    20.5    7.3  

Financial advisory services

   4,800    3,186    3,955    (33.6  24.1     3,955    4,054    6,081    2.5    50.0  

Credits and factoring

   5,932    4,476    4,562    (24.5  1.9     4,562    2,203    2,514    (51.7  14.1  

Collection services

   1,303    1,227    1,155    (5.8  (5.9   1,155    779    601    (32.6  (22.8

Teller services expenses

   (2,054  (1,020  143    (50.3  (114.0   143    731    2,146    411.2    193.6  

Credit pre-evaluation services

   (1,821  (2,613  (2,223  43.5    (14.9   (2,223  (2,251  (2,146  1.3    (4.7

Other

   403    2,285    2,130    467.0    (6.8   2,130    2,004    (2,100  (5.9  —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total

  Ch$292,262   Ch$308,773   Ch$307,257    5.6  (0.5)%   Ch$287,272   Ch$287,093   Ch$272,188    (0.1)%   (5.2)% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

20112013 and 2014. During 2014 our income from fees and commissions was affected by various regulations that directly impacted ourfee-based businesses, as well as unfavorable market and economic forces that translated into lower commercial activity for some of our subsidiaries. On the whole, our income from net fees and commissions decreased from Ch$287,093 million in 2013 to Ch$272,188 million in 2014, representing a 5.2% annual decrease. This annual decrease was mainly caused by:

Mixed trends in net fees and commissions from transactional services. On the one hand, net fees and commissions from credit lines, overdrafts, credit lines and credit cards decreased by approximately 32.8% or Ch$18,293 million on an annual basis. This downward shift was mainly caused by the effect of regulations affecting transactional services, as well as commercial decisions, including price adjustments to certain products, made by our management in order to promote the use of transactional services among our customers, especially credit cards. These effects were amplified by a negative exchange rate effect on U.S.$- denominated expenses related to credit card loyalty programs, produced by a higher Ch$ depreciation in 2014 as compared to 2013. The decrease in net fees and commissions associated with credit cards was partially offset by: (i) higher fees and commissions income from demand accounts/ATMs increasing by 4.8% (or Ch$1,387 million) and fees associated with reimbursement of teller services expenses increasing by 193.6% (or Ch$1,415 million) in 2014 as compared to 2013, in line with increases in ATM transactional volumes; and (ii) fees and commissions from credits and factoring increasing by 14.1% or Ch$311 million on an annual basis, mainly fostered by the expansion recorded by our retail banking loans, with average balances increasing 11.3% year on year.

The above mentioned factors were partially offset by an aggregate positive performance of net fees and commissions from specialized financial services provided by some of our subsidiaries. In this regard, fees and commissions associated with mutual funds management posted an annual increase of 18.9%, or Ch$10,365 million, in 2014. This increase is explained by the annual increase of 21.9% in average volumes of assets under management, which in turn supported an annual increase in market share from 21.3% in 2013 to 22.5% as of December 31, 2014. This performance was supplemented by a yearly increase of 50.0%, or Ch$2,027 million, in fees and commissions related to our financial advisory services. This advance was caused by the execution of diverse and important transactions in 2014. Nevertheless, this positive trend was partly offset by lower fees and commission income in both insurance and stock brokerage services. In insurance services, fees and commissions decreased by 12.9% or Ch$8,033 million on an annual basis. This decrease was caused by regulations affecting the insurance brokerage business, in particular, new guidelines for reimbursement of unused insurance policies in the case of early termination. On the other hand,

fees and commissions related to stock brokerage dropped by 21.8% or Ch$2,914 million on an annual basis. Despite the annual increase of 38.6% in stock trading turnover managed by our stock brokerage subsidiary in 2014, fees and commissions decreased as a result of specific deals carried out throughout the year involving lower variable margins and—to a lesser extent—because of changes in the pricing scheme caused by modifications in customer segmentation.

A 12.4% (or Ch$1,948 million) increase in net fees and commissions income related to contingent credits (letters of credit, guarantees, collateral and other contingent loans), which in turn was supported by an 11.2% annual expansion in the average balances of contingent loans.

2012 and 2013.. Our net fees and commissions experiencedincome remained almost flat on an annual basis, amounting to Ch$287,093 million in 2013 as compared to Ch$287,272 million in 2012, which represents a slight 0.5%0.1% annual decrease, from Ch$308,773 million in 2011 to Ch$307,257 million in 2012. This line item has proven to be a stable source of operating revenue primarily based on fee income from our core and traditional business, which has enabled us to offset lower fee income from specialized financial services.decrease. The slight annual decrease in net fees and commissions is explained by:was primarily the consequence of:

 

A decrease in fees and commissions from activities related to specialized financial services, such as securities brokerage and mutual funds, caused by investors that sought havens in fixed-income securities amid still uncertain stock markets and reduced opportunities for obtaining short-term profits. Accordingly, stock brokerage fees suffered a 51.8% (or Ch$11,010 million) annual decrease due to a 40.8% annual contraction in stock trading turnover for transactions handled by our securities brokerage subsidiary. Similarly, fees and commissions from mutual funds management decreased 12.2% (or Ch$7,766 million), mainly due to portfolios that were rebalanced towards fixed-income securities by their holders.

Higher fees and commissions associated with traditional or core banking business, which almost completely offset the decrease in net fees and commissions from specialized services, as mentioned above. In this regard, we experienced an increase in commissions income from transactional services and payment channels, such as the increase of 7.0% (or Ch$5,306 million) in fee income from current accounts, overdrafts, credit lines and credit cards, as well as a 9.6% (or Ch$2,493) increase in fee income from sight accounts and ATMs in 2012 as compared to 2011. These factors are consistent with the economic cycle that was characterized by low unemployment, rising real salaries and higher household spending, as well as a higher penetration of our banking services (specifically payment channels) in the lower and middle income segments.

Our expansion in transactional services and loans that resulted in higher fees and commissions income from collection of overdue loans and insurance brokerage services. Whereas fee income from collection of overdue loans increased 13.9% (or Ch$2,526 million) on an annual basis, fees and commissions related to our insurance brokerage activities increased by 2.2% (or Ch$1,310 million) in 2012 as compared to 2011.

2010 and 2011. During 2011 our net fees and commissions accounted to Ch$308,773 million, which is 5.6% above the figure posted a year earlier. This annual increment was the result of:

A 20.3% increase (or Ch$10,001 million) in fees and commissions associated with our insurance brokerage business, mainly as a result of the more dynamic commercial activity, prompted by higher aggregate consumption.

Annual growth of 22.6% (or Ch$4,803 million) in net fees and commissions related to sight accounts and ATM usage, explained by increased consumption. Also, worth noting are our efforts to launch new products that promotetraditional lending activities. In this regard, we recognized mixed forces affecting the use of sight accounts and our ATM network, such as RedGiro and Cuenta Móvil.

Net fees and commissions associated with current accounts, credit lines, overdrafts and credit cards that increased by 5.2% (or Ch$3,729 million). This increase was mainly fostered bybusiness. On the positive side, we experienced an annual increase of 25.3%20.4% (or Ch$2,665 million) in net fees and commissions income from contingent loans (letters of credit, cardsguarantees, collateral and other contingent loans), an increase of 11.3% (or Ch$2,328 million) in income from the collection of past-due loans and an increase of 20.5% (or Ch$1,229 million) in net fees from foreign trade and currency exchange. All of these positive trends were the result of our significant growth in our Large Companies and Real Estate Unit (companies with annual turnover between Ch$1,600 and Ch$70,000 million), as well as SMEs, since a significant portion of these companies are engaged in foreign trade transactions and working capital borrowings that reflectsnormally involve letters of credit and guarantees. As for collection services, during 2013 we witnessed some signs of economic slowdown that led us to tighten the commercial initiatives we have implementedentire credit process (from assessment to collection), especially in orderthose segments that are more exposed to reinforce the use of this payment channel.macroeconomic fluctuations.

 

A 3.8%On the negative side, we experienced an annual growthdecreases of 9.1% (or Ch$2,3335,618 million) in fees and commissions from transactional services (current accounts, overdrafts, credit lines and credit cards) and a yearly decline of 51.7% (or Ch$2,359 million) in fees from credits and factoring. In this regard, lower fees and commissions from transactional services are mainly explained by a negative exchange rate effect on net fees from credit cards (as expenses of customer loyalty programs are denominated in U.S.$) due to theChilean-peso devaluation of 9.6% in 2013 and the appreciation of 7.8% in 2012. As for fees and commissions from credits and factoring, the decrease is explained by a similar trendin year-end balances for factoring loans due to strong competition from other banking players. As a result of the regulation introduced towards the end of 2013, fees associated with our mutual funds business due to a higher average yieldtransactional services (including current accounts, credit lines, credit cards, etc.) remained almost flat in 2013. See “Item 4. Information on the Company—Regulation and despiteSupervision—Consumer-oriented Regulation”.

Fees and commissions associated with specialized financial services were also affected by mixed forces. Firstly, we experienced a 3.1% (or Ch$1,897 million) annual decrease recordedincrease in assets under management.

The abovefees and commissions from insurance brokerage. This was partlymainly attributable to an annual increase of 4.0% in written premiums and improved value offerings intended to offset bythe recent regulatory changes affecting the margin of the business. Conversely, net fees and commissions from stock brokerage and financial advisory services thatour mutual funds business decreased by 10.6%2.2% (or Ch$2,5061,210 million) and 33.6% (or Ch$1,614 million), respectively. Whereas we witnessed lower activity in financial advisory services, mostly in debt restructuring, our stock brokerage businesson an annual basis. This was affected by lower stock trading turnover duringprincipally the second half of 2011, as a result of unfavorable customer preferences, given the volatilitylocal and uncertaintyglobal macro scenario, rather than growth in assets under management (“AUM”). In fact, we continued to lead the globalmarket in terms of AUM by posting a 3.8% annual increase in balances and localreaching a market share of 21.3% as of Dec. 31, 2013. However, since 2010 we have seen market trends associated with volatile stock markets that have encouraged investors to seek refugelook for havens infixed-income securities, which offered high yieldsinvolve lower commissions than mutual funds invested in the local market.stocks.

Other Income (Loss), Net

Other income (loss), net, consists of net gains and losses from financial operating income, net gains and losses from foreign exchange transactions and other operating income. Financial operating income results include gains and losses realized on the sale of securities, gains and losses from the markmarking to market of securities and interest rate and currency derivatives at the end of the period. Net gains and losses from foreign exchange transactions include gains and losses realized upon the sale of foreign currency

and foreign exchange derivatives and gains and losses arising from theperiod-end translation of foreign currency denominated assets and liabilities into pesos. Foreign exchange results also include net adjustments onU.S. dollar-indexed domestic currency transactions and existing interest rate differences in currency derivatives.

The following table sets forth certain components of our other income (loss), net, for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

   For the Year Ended December 31,  % Increase (Decrease) 
IFRS:  2010  2011  2012  2010/2011  2011/2012 
   (in millions of Ch$, except percentages)  % 

Net financial operating income

      

Interest accrued on trading securities

  Ch$9,119   Ch$10,366    10,683    13.7  3.1

Gains on sales and mark to market

   31,536    6,353    8,497    (79.9  33.7  

Gains (losses) on derivatives contracts

   (23,342  40,024    (3,001  —      —    

Gains (losses) from sales of loans

   (150  1,358    20    —      (98.5
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net financial operating (loss) income

   17,163    58,101    16,199    —      (72.1

Foreign exchange transactions, net

   63,762    (7,973  35,136    —      —    

Other operating income

   23,584    24,735    20,887    4.9    (15.6
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  Ch$104,509   Ch$74,863    72,222    (28.4)%   (3.5)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   For the Year Ended December 31,  % Increase (Decrease) 
IFRS:  2012  2013  2014  2012/2013  2013/2014 
   (in millions of Ch$, except percentages)  % 

Interest accrued on trading securities

  Ch$8,467   Ch$17,668   Ch$16,500    108.7  (6.6)% 

Gains (losses) from mark to market and sales

   564    6,916    3,420    —      (50.5
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets Held for Trading

   9,031    24,584    19,920    172.2    (19.0

Sales of Available for Sale Instruments

   8,088    14,881    18,102    84.0    21.6  

Net Gain (Loss) from other transactions

   2,567    (1,089  (38  —      (96.5

Derivative Instruments

   (3,633  (6,018  (3,773  65.6    (37.3

Sales of Loan Portfolios

   146    314    993    115.1    216.2  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net financial operating (loss) income

   16,199    32,672    35,204    101.7    7.7  

Foreign exchange transactions, net

   35,136    71,457    70,225    103.4    (1.7

Other operating income, net

   20,887    25,884    27,211    23.9    5.1  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other income (loss), net

  Ch$72,222   Ch$130,013   Ch$132,640    80.0  2.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

20112013 and 20122014. Our other income (loss) net recordedwas Ch$132,640 million in 2014, representing a 3.7%2.0% annual increase as compared to the Ch$130,013 million recorded in 2013. This annual increase was the result of a combination of diverse factors, including:

A decrease in losses from the management of derivative instruments and other transactions. During 2014, we recorded losses from derivatives contracts of approximately Ch$3,773 million, as compared to the net loss of Ch$6,018 million recorded for the year ended December 31, 2013. Furthermore, we reduced losses associated with other transactions from Ch$74,8631,089 million in 20112013 to Ch$77,65038 million in 2012. This increase2014. The reduced amount of losses from derivatives contracts was mainly caused by resultsa positive FX impact of approximately Ch$12,187 million. This positive FX impact was prompted by a decrease in our liability position throughout 2014, which allowed us to offset the 15.3% Chilean peso devaluation in 2014. This positive effect was partly counterbalanced by: (i) a net negative variance of Counterparty Value Adjustment for derivatives by approximately Ch$6,751 million in 2014 as compared to 2013; and (ii) higher ineffectiveness of fair value hedging positions by approximately Ch$2,045 million in 2014 as compared to 2013.

The previously mentioned positive impact associated with a decrease in losses from derivatives was partially offset by lower revenues from the management of theour investment portfolio, including both financial assetsheld-for-trading andavailable-for-sale instruments. This decrease was mainly the result of gains from financial assetsheld-for-trading, which decreased by Ch$4,664 million on an annual basis, from Ch$24,584 million in 2013 to Ch$19,920 million in 2014, prompted by lower sales of these kinds of instruments during 2014. In fact, the impact of lower rates on the interest accrued on these instruments was mostly offset by increasing positions. The lower results from trading securities was partly offset by approximately Ch$3,221 million of greater sales ofavailable-for-sale instruments, given the cumulativemarking-to-market caused by lower interest rates.

A slight decrease of 1.7%, or Ch$1,232 million, in foreign exchange transactions net, from Ch$71,457 million in 2013 to Ch$70,225 million in 2014. This decrease was primarily produced by losses of approximately Ch$14,166 million related to the effect of a higher Chilean peso depreciation in 2014 (15.3%) as compared to 2013 (9.6%) on our net liability positions in FX derivatives. This negative result was partly counterbalanced by: (ii) higher income of roughly Ch$7,600 million associated with the asset FX position that hedges our exposure toU.S.$-denominated provisions for loan losses and fee expenses, given the previously mentioned shifts in the Ch$/U.S.$ exchange rate; and (ii) higher gains from cash flow hedge accounting of approximately Ch$2,674 million due to the same reason.

2012 and 2013. In 2013, our other income (loss), net was Ch$130,013 million, which was 80.0% above the Ch$72,222 million recorded a 6.2%in 2012. This annual increase was principally associated with:

Higher revenues from Ch$18,077 in 2011 (including interest earned onthe management of our investment portfolio, which is composed of financial assets held for trading and available for sale instruments. In this regard, gains from the management of trading securities increased from Ch$9,031 million in 2012 (including accrued interest of Ch$10,366 million, gains on sales and mark-to-market of Ch$6,3538,467 million and gains from salesmark-to-market of loans of Ch$1,358564 million) to Ch$19,20024,584 million in 20122013 (including accrued interest earned on trading securities of Ch$10,683 million, gains on sales and mark-to-market of Ch$8,49717,668 million and gains from salesmark-to-market of loans of Ch$206,916 million). This increase was primarilythe result of favorable shifts in market factors, especially those associated with lower international interest rates due to reduced risk premiums worldwide, which enabled our Treasury’s effortsTreasury to take advantage of significantmark-to-market gains. This effect was amplified by year end balances offinancial-assets-held-for-trading that increased from Ch$159,082 million in 2012 to Ch$326,921 million in 2013. Regarding available for sale assets, we benefited from an increase in sales proceeds, from Ch$8,088 million in 2012 to Ch$14,881 million in 2013, partly explained by proceeds from the sale of Master Card shares amounting to approximately Ch$4,850 million.

Losses on derivative contracts that increased from Ch$3,633 million in 2012 to Ch$6,018 million in 2013. This was the result of: (i) a negative FX impact of approximately Ch$26,500 million associated with a decrease of 7.6% and an increase of 9.8% in the Ch$/U.S.$ exchange rate in 2012 and 2013, respectively, together with an average FX position in trading opportunitiesderivatives that changed from net assets of approximately U.S.$450 million in fixed2012 to net liabilities of approximately U.S.$490 million in 2013; and (ii) the ineffectiveness of fair value hedging positions by approximately Ch$1,800 million. These negative factors were partly offset by: (i) favorable shifts in nominal interest rates, which along with changes in our net positions translated into higher revenues associated withmark-to-market and accrual by approximately Ch$19,500 million; and (ii) net positive impact of Counterparty Value Adjustment for derivatives of approximately Ch$6,000 million in 2013 as compared to 2012.

Higher income from foreign exchange transactions, net, which enabledincreased from Ch$35,136 million in 2012 to Ch$71,457 million in 2013. The increase in this line item was mainly attributable to: (i) a positive exchange rate effect associated with a 9.6% increase in the Ch$/U.S.$ exchange rate in 2013 as compared to the decrease of 7.8% in 2012, which translated into higher revenues of approximately Ch$17,600 million related to the asset position that hedges our exposure to provisions for loan losses and fee expenses denominated in U.S.$; and (ii) net gains from cash flow hedge accounting that increased by approximately Ch$66,000 million in 2013 as compared to 2012, also related to the exchange rate behavior mentioned above. These factors allowed us to effectively offset lower revenues from our available-for-sale portfolio as a result of reduced sales and the negative impact of low inflation on interest earned. Similarly, income from derivative contracts,by approximately Ch$46,500 million associated with net of foreign exchange transactions, recorded a slight 0.3% annual increase from Ch$32,051 million in 2011 (including gains on derivatives contracts of Ch$40,024 million and lossesliability positions in foreign exchange transactions of Ch$7,973 million) to Ch$32,135 million (including losses on derivatives contracts of Ch$3,001 million and gains in foreign exchange transactions of Ch$35,136 million), mainly due to favorable market conditions at the close of certain positions that enabled us to efficiently offset a negativepreviously mentioned exchange rate effect on the hedge of our provisions for loan losses denominated in U.S.$, due to a 9.0% appreciation of the Chilean peso in relation to the US dollartrends in 2012 as compared to a 10.2% depreciation of the Chilean peso in 2011.2013.

2010 and 2011. Our other income (loss) net recorded a 28.4% decrease, from Ch$104,509 million to Ch$74,863 million. This decrease was the result of a 55.4% decline, from Ch$40,505 million in 2010 (including interest earned on trading securities of Ch$9,119 million, gains on sales and mark-to-market of Ch$31,536 million and losses from sales of loans of Ch$150 million) to Ch$18,077 in 2011 (including interest earned on trading securities of Ch$10,366 million, gains on sales and mark-to-market of Ch$6,353 million and gains from sales of loans of Ch$1,358 million) million, in the income associated with our investment portfolio, mainly as a result of the sharp increase in interest rates in 2011 compared to 2010. In effect, due to the low interest rates in 2010 (and expectations of future increases) we sold a significant amount of fixed-income securities that translated into significant gains, which could not be repeated in 2011 due to the higher interest rates. These factors were supplemented by a decrease in gains from derivative contracts, net of foreign exchange transactions, from Ch$40,420 million in 2010 (including losses on derivatives contracts of Ch$23,342 million and gains in foreign exchange transactions of Ch$63,762 million) to Ch$32,051 million in 2011 (including gains on derivatives contracts of Ch$40,024 million and losses in foreign exchange transactions of Ch$7,973 million), mainly as a result of the decrease in the spread between local and foreign interest rates that constrained the possibility of arbitrage between local and foreign currency funding.

Provisions for Loan Losses

We recognize allowances to cover possible credit losses in accordance with IFRS as issued by the IASB. For statistical information with respect to our substandard loans and allowances for loan losses, see “Item 4. Information on the Company—Selected Statistical Information” and Note 10(b)11(b) to our audited consolidated financial statements as of and for the year ended December 31, 2012.2014. According to regulations applicable to such periods, the amount of provisions charged to income in any period consists of net provisions for possible loan losses.

The following table sets forth information with respect to our provisions and allowances for loan losses andcharge-offs for each of the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

   For the Year Ended December 31,  % Increase (Decrease) 
IFRS:  2012  2013  2014  2012/2013  2013/2014 
   (in millions of Ch$, except percentages)  % 

Provisions:

      

Gross provisions for loan losses

  Ch$207,382   Ch$264,608   Ch$307,875    27.6  16.4

Total loan loss recoveries

   40,962    42,955    46,309    4.9    7.8  

Net provisions for loan losses

   166,420    221,653    261,566    33.2    18.0  

Charge-offs:

      

Totalcharge-offs

   182,733    196,535    255,342    7.6    29.9  

Netcharge-offs

   141,771    153,580    209,033    8.3    36.1  

Other asset quality data:

      

Total loans

  Ch$18,771,761   Ch$20,880,770   Ch$21,891,333    11.2    4.8  

Average Loans

   18,055,260    19,843,192    21,565,766    9.9    8.7  

Allowances for loan losses

   387,803    439,298    490,558    13.3  11.7

Allowances for loan losses as a percentage of total loans

   2.07  2.10  2.24  —      —    

Provisions for loan losses as a percentage of average loans

   0.92  1.12  1.21  —      —    

2013 and 2014. Our provisions for loans losses increased by 18.0% in 2014, from Ch$221,653 million in 2013 to Ch$261,566 million in 2014. Similar to the previous year, the change in provisions for loan losses was explained by business factors and changes in specific market variables rather than by deterioration in asset quality. The main forces explaining the annual increase in risk provisioning were as follows:

 

   For the Year Ended December 31,  % Increase (Decrease) 
IFRS:  2010  2011  2012  2010/2011  2011/2012 
   (in millions of Ch$, except percentages)  % 

Provisions:

      

Net provisions for loan losses

  Ch$157,651   Ch$146,925   Ch$166,420    (6.8)%   13.3

Gross provisions for loan losses

   189,820    192,580    207,382    1.5    7.7  

Total loan loss recoveries

   32,169    45,655    40,962    41.9    (10.3

Charge-offs:

      

Total charge-offs

   149,093    177,960    182,733    19.4    2.7  

Net charge-offs

   116,924    132,305    141,771    13.2    7.2  

Other asset quality data:

      

Total loans

  Ch$14,377,995   Ch$17,386,497   Ch$18,771,761    20.9    8.0  

Allowances for loan losses

   348,027    362,741    387,803    4.2    6.9  

Allowances for loan losses as a percentage of total loans

   2.42  2.09  2.07  —      —    

Provisions for loan losses as a percentage of average loans

   1.16  0.92  0.92  —      —    

Loan growth and changes in the portfolio mix. As displayed by the table above, our average total loans recorded an 8.6% annual increase in 2014 as compared to 2013. This expansion in loan volumes primarily explained approximately Ch$11,800 million of the total increase in loan loss provisions occurring between 2014 and 2013. Also, this increase was supported by growth in retail banking, which posted an annual expansion of 11.3% in average loans as compared to the increase of 4.2% in average loans recorded by our wholesale banking segment.

A negative exchange rate effect on U.S.$-denominated allowances for loans losses. This was produced by a higher Chilean peso devaluation in 2014 (15.3%) as compared to 2013 (9.6%), which affected our net liability position in provisions for loan losses associated withU.S.$-denominated loans, particularly concentrated in the wholesale banking segment. This effected translated into a higher exchange rate effect of approximately Ch$7,600 million in 2014 as compared to 2013.

A net deterioration of approximately Ch$10,412 million. This deterioration was caused by a low basis for comparison, which is explained by an allowance release of approximately Ch$9,000 million in 2013, due to the improved financial condition of a specific wholesale customer. Similarly, we experienced a moderate increase in overall past-due loans in 2014 as compared to 2013, although the increase was concentrated in retail banking (78.3%) rather than wholesale banking (21.7%).

As a result of the above, our indicator of provisions for loan losses over average loans recorded an annual increase of 9 bp from 1.12% in 2013 to 1.21% in 2014. Most of this increase was explained by the previously mentioned FX effect onU.S.$-denominated provisions. In addition, our risk index (allowances for loan losses over total loans) increased from 2.10% in 2013 to 2.24% in 2014.

In regards to delinquency, ourpast-due loans ratio (loans 90 days or more past due) recorded an increase from 1.13% in 2013 to 1.25% in 2014. This increase was associated with retail as well as wholesale banking and we believe it is aligned with the economic backdrop, which has been characterized by deceleration in both private consumption and investment. Accordingly, the risk profile of individuals and companies deteriorated slightly throughout the year. Based on this evidence, during 2014 we continued to strengthen our entire credit process (from assessment to rendering) while bolstering our collection procedures. We believe these measures have permitted us to deal with environmental conditions while maintaining our low delinquency ratio (compared to the ratios reported by our main competitors). See “Item 4. Information on the Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance”.

20112012 and 20122013. Our provisions for loan losses recorded a 13.3%33.2% annual increase, from Ch$146,925 million in 2011 to Ch$166,420 million in 2012. On the one hand,2012 to Ch$221,653 million in 2013. Although this annual increase is consistent with the expansion ofwas almost three times our loan book and our strategic priorities intended to focus on the retail banking segment. On the other hand, the rise in provisions for loan losses is alsogrowth, it can be largely explained by specificbusiness drivers and changes in market variables rather than credit qualitydeterioration. The main factors that loomed inexplaining the first half of 2012. Therefore, the main forces influencing ourannual increase in provisions for loan losses were:

 

ALoan book expansion focused on retail banking, which produced an important volume effect associated with a 13.5% annual growth in theeffect. Our average balancebalances of total loans thatgrew by 9.9% in 2013 as compared to 2012. This increase was primarily focused on expanding our presence in the retail bankings segment and, to a lesser extent, maintaining our leading position in the wholesale banking segment, all of which is in line with our strategic priorities.

A portfolio-mix effect, causedmainly supported by a 17.1% annual increase in the average balance of retail banking loans compared to a 10.5%12.2% annual increase in average balances of wholesale banking loans which—on average—should result in a moderately higher credit risk for our loan book

Moderate credit quality deterioration during the first half of 2012 that was caused by social and regulatory issues rather than economic forces and had industry-wide effects. This deterioration particularly affected loans grantedmanaged by our retail banking and—to a lesser extent—average loans handled by our wholesale banking segment and asthat increased by 5.5% on an annual basis. This loan growth resulted in a result, we were even more cautious in managing our growth by tightening our credit–assessment procedures and enhancing our collection duties. This enabled us to temper the effectsvolume effect on provisions for loan losses of the credit quality deterioration and return to mid-term past-due indicators as from the second quarter of 2012.approximately Ch$22,500 million.

The above-mentioned factors were partially offset by a positive

It is worth mentioning that this volume effect encompasses a mix effect of approximately Ch$6,000 million due to a proportionally higher expansion in retail than wholesale banking loans.

A negative exchange rate effect on our provisions for loan losses linked toU.S. dollar-denominated credits, as$-denominated loans that are mainly focused on middle market companies. On an annual basis, the negative impact was caused by both a resultdecrease of 7.8% in the 9.0% annual appreciation of the Chilean peso in relation to the Ch$/U.S. dollar$ exchange rate in 2012 as compared to a 9.6% increase in the 10.2% depreciationCh$/U.S.$ exchange rate in 2013. Exchange rate shifts explained approximately Ch$12,800 million of the Chilean pesohigher provisions for loan losses.

Approximately Ch$10,400 million associated with greater provisions for loan losses that we set aside in 2011.order to recognize the deteriorated financial condition of one specific corporate customer in 2013, and—to a lesser extent—a gradual deterioration in the credit condition of the SME segment that we witnessed in 2013, in line with an economic cycle that slowed down moderately.

As forBased on the above, our credit quality indicators,ratios recorded a slight deterioration in 20122013 as compared to 2012. In fact, our ratio of provisions for loans losses as a percentage of average loans remained unchangedrose by 20 bps on an annual basis, from 0.92% in 0.92%2012 to 1.12% in 2013. By adjusting the other than loan related factors, the indicator would have slightly increased on an annual basis.

As for delinquency, in 2013 we witnessed a 30.2% annual increase in the level ofpast-due loans (90 days or more), which demonstratesreached a total of Ch$236,730 million as of December 31, 2013. This annual increase was principally fostered by higher delinquency in our retail banking segment, in connection with greater balances ofpast-due loans (90 days or more) associated with SMEs and, to a lesser extent, individual banking. This trend was the result of an economic cycle that showed certain signs of slowdown in 2013, especially in investment rates, after three years of sustained growth, with annual GDP expansion rates above 5.0%. However, given our focus on maintaining healthy asset quality, we have tightened the growth inentire credit risk charges was consistent with the expansion of our loan book and remained under control.

2010 and 2011. Our provisions for loan losses recorded a 6.8% annual decrease, from Ch$157,651 million in 2010 to Ch$146,925 million in 2011. This variation corresponds to the improved economic scenario that benefited certain key macroeconomic indicators, such as unemployment and real salaries, all of which positively impacted our individual customers’ payment capacity. Similarly, the increasing aggregate demand caused an upturn in the commercial activity of Chilean companies, which translated into improved results of operations and a healthier financial condition. Worth mentioning is that the reduction in provisions for loan losses took place within a scenario of a growing loan portfolio, demonstrating the effectiveness of our credit processes,process, from assessment to collecting.

As mentioned,collection, in order to control the decrease in provisions for loan losses was spurred by improved risk profilesoverall level of both, individuals and companies, which is reflected by:

An annual decrease of 15.5% in recurrent provisions for loan losses related to our Retail Banking segment, as a result of macroeconomic indicators, which benefited individuals and SMEs, since they are evaluated by applying grouped credit risk models.

An annual decline of 8.7% in provisions for loan losses associated with our Wholesale Banking segment, as a result of the higher commercial activity evidenced in 2011 as compared to 2010 that improved the cash flow generating capacity of large companies and corporations.

As a result we saw an improving trenddelinquency in our credit quality indicators. This is reflected bytotal loan book. All in all, our delinquency ratio (loans 90 days or morepast-due over total loans) increased from 0.97% in 2012 to 1.13% in 2013, though continued to compare very favorably with that of provisions for loan losses to average total loans that amounted to 0.92% in 2011, which is belowour peers. See “Item 4. Information on the 1.16% recorded a year earlier.Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance”.

Operating Expenses

The following table sets forth information regarding our operating expenses for the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  For the Year Ended December 31,   % Increase (Decrease)   For the Year Ended December 31,   % Increase (Decrease) 
  2010   2011   2012   2010/2011 2011/2012   2012   2013   2014   2012/2013 2013/2014 
IFRS:  (in millions of Ch$, except percentages)   %   (in millions of Ch$, except percentages)   % 

Personnel expenses

  Ch$272,737    Ch$316,991    Ch$312,065     16.2  (1.6)%   Ch$309,865    Ch$323,236    Ch$384,512     4.3  19.0

Administrative expenses:

                  

Advertising

   22,804     26,515     30,572     16.3    15.3     30,572     29,053     29,431     (5.0  1.3  

Building maintenance

   25,647     28,486     29,332     11.1    3.0     29,332     28,067     30,368     (4.3  8.2  

Rentals and insurance

   18,419     20,595     22,486     11.8    9.2     22,486     23,297     24,861     3.6    6.7  

Office supplies

   5,735     6,556     6,346     14.3    (3.2   6,346     8,375     8,350     32.0    (0.3

Other expenses

   125,064     147,767     158,723     18.2    7.4     158,723     163,710     177,527     3.1    8.4  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total administrative expenses

  Ch$197,669    Ch$229,919     247,459     16.3    7.6     247,459     252,502     270,537     2.0    7.1  

Depreciation and amortization

   35,146     27,677     32,787     (21.3  18.5  

Impairments

   1,044     631     899     (39.6  42.5     899     2,247     2,085     149.9    (7.2

Depreciation and amortization

   34,964     35,131     35,146     0.5    0.0  

Other operating expenses

   37,813     30,939     39,550     18.2    27.8     19,565     13,868     37,439     (29.1  170.0  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total

  Ch$544,227    Ch$613,611    Ch$635,119     12.7  3.5  Ch$612,934    Ch$619,530    Ch$727,360     1.1  17.4
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

20112013 and 20122014. Our operating expenses accounted forwere Ch$635,119727,360 million in 2012, which is 3.5% above2014, a 17.4% annual increase as compared to the Ch$613,611619,530 million recorded in 2011. In line with our efforts to improve operating efficiency, ourthe previous year. This annual increase involved diversenon-recurring effects, including the impact of shifts in market factors as well as recurrent business operations. Accordingly, the annual increase in operating expenses remained stable during 2012 and were aligned with our business growth by rising slightly above inflation. The primary factors that caused this increase include:was mainly attributable to:

 

AdministrativeNon-recurring personnel expenses that increased 7.6% fromof approximately Ch$229,91945,105 million in 20112014 as compared to Ch$247,459 million in 2012. The main reasons for this increase were: (i) approximately Ch$6,022 million in additional IT expenses associated with diverse developments undertaken in 2012 (improvements2013. This amount was related to special bonuses granted to our datacenters andstaff as a result of the collective bargaining agreements reached with most of our unions during 2014. These negotiations concluded withfour-year collective bargaining agreements that reflect the positive relationships with our workforce.

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new online services), (ii) roughlyRecurring personnel expenses that increased from Ch$4,057323,236 million in additional marketing expenses for enhancing brand recognition and supporting product-launch campaigns, and (iii) about2013 to Ch$3,045339,407 million in additional2014 (total amount of Ch$384,512 million less non-recurring personnel expenses associatedof Ch$45,105 million as mentioned above), representing a 5.0% annual increase. The growth in recurring personnel expenses was aligned with our distribution network (rentals, maintenance, etc.).inflation, which (measured as CPI variation) recorded an increase of 4.6% in 2014 and prompted salary adjustments.

 

PersonnelAdministrative expenses that decreased 1.6%grew by 7.1% on an annual basis, from Ch$316,991252,502 million in 20112013 to Ch$312,065270,537 million in 2012. The decrease2014. This annual increase of Ch$18,035 million was mainly caused by: (i) higher IT and communications expenses of approximately Ch$5,520 million, as a result of internal developments and licenses; (ii) an annual increase of roughly Ch$3,104 million in personnel expenses reflects recurring and extraordinary effects. The recurring effects includerelated to outsourced workforce, primarily associated with internal IT projects; (iii) building maintenance expenses that increased by approximately 8.2% (or Ch$2,301 million) for the salary increase following the 2011 collective bargaining process and the expansionyear, as a result of our workforce, especially for collection duties. Regarding extraordinary effects, in 2011 we distributed a Ch$28,100 million special bonuspermanent maintenance to our staff also followingbranch network and headquarter buildings, as well as opening and closing of branches throughout the completion of the 2011 collective bargaining process. This bonus represents a high basis for comparison with respect to the extraordinary bonuses of Ch$3,970 millioncountry; (iv) otherbranch-related expenses (rentals, insurance and Ch$2,127 million granted in 2012 in order to recognize our outstanding performance during the year and the completion of collective bargaining agreements carried outservices) that increased by two of our subsidiaries, respectively. As a result, our recurring personnel cost base, once adjusted by extraordinary effects, increased 6.9% from approximately Ch$288,8912,306 million in 20112014 as compared to 2013; and (v) general administrative expenses that increased by nearly Ch$305,9684,060 million in 2012.2014 as compared to 2013.

 

Other operating expenses amounted tothat increased by approximately Ch$39,55023,571 million in 20122014 as compared to 2013. This was the consequence of the recognition of higher charges associated with write-offs of assets received in lieu of payment and the establishment of contingency allowances that are not related to lending matters.

2012 and 2013. In 2013 our total operating expenses were Ch$30,939619,530 million. This represented a moderate annual increase of 1.1% when compared to the Ch$612,934 million reported in 2011, which represents a 27.8% increase.2012. This increase was principally caused by higher operational charge-offs associated with the implementation of a new online current account platform and other general expenses.

2010 and 2011. Our operating expenses were Ch$613,611 million in 2011, which represented a 12.7% increase over last year’s amount. This annual increment is explained by core business activities and projects, as well as non-recurring effects including:by:

 

The collective bargaining processesAn annual increase of 4.3% (or Ch$13,371 million) in personnel expenses, which was mainly related to the recognition of inflation in salaries and the expansion of 1.0% in headcount. Furthermore, we recorded higher other personnel expenses associated with training activities and general benefits to our staff.

Administrative expenses that increased by 2.0% (or Ch$5,043 million) on an annual basis, principally as a consequence of: (i) office supplies expenses that increased by 32.0% (or Ch$2,026 million) on a yearly basis, mainly related to the purchase ofpassword-generating devices for electronic money transfers carried out by the Bank with its unions during 2011. These negotiations ledcustomers, (ii) IT expenses that rose by 3.7% (or Ch$1,795 million) due to three and four-year collective agreements and a special bonus granted to our staff at the end of negotiations. This non-recurrent bonus amounted to Ch$28,100 million and accounted for 60% of the 16.2% increase posted by our personnelhigher expenses in 2011 as comparedon-going projects and internal developments, and (iii) rentals and insurance expenses that increased by 3.6% (or Ch$811 million) on an annual basis, mainly due to 2010. Excludingmarket trends in real estate across the bonus, personnel costs increased 5.6%.country.

 

Our recurrent cost base recordedThe above factors were partly offset by a 16.3% increasedecrease of 29.1% (or Ch$5,697 million) in administrativeother operating expenses, from Ch$197,669 million in 2010 to Ch$229,919 million in 2011. This increase was caused by: (i) approximately Ch$11,000 million in additional outsourced sale force expenses, in line with the higher commercial activity in our retail banking segment, (ii) approximately Ch$9,000 million of additional expenses related to new branches (25 in 2011) and improvements to our distribution network, (iii) nearly Ch$7,000 million in increased IT and communication expenses,mainly explained by transactional processing, software licenses and the implementation of different projects associated with our mid-term IT strategic plan, and (iv) an increasehigher operationalwrite-offs recognized in marketing expenses of approximately Ch$4,000 million related to advertising campaigns intended to reinforce our corporate reputation and support the launch of new products and services.2012.

Income Tax

Under Law No. 19,396 we are permitted to deduct dividend payments made to SAOS from our taxable income. Consequently, our effective tax rate is lower than the statutory corporate income tax rate because of the deduction of saidthese dividend payments from our taxable income. Additionally, but to a lesser extent, differences in the tax treatment for monetary correction, as well as provisions on individual loans and forcharge-offs related topast-due loans, have an impact on our effective tax rate.rate through deferred taxes. Finally, until 2014 all real estate taxes paid on properties that are leased to customers arewere deductible from our taxable income as a tax credit. However, in light of the tax reform approved in 2014, for the year ended December 31, 2015 only 50% of these kinds of taxes can be deducted from our taxable income. From 2016 onwards, no tax credits will allowed from taxes paid on leased properties. For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations—Tax Reform Law N° 20,780.”

On July 31, 2010, the Chilean Congresscongress enacted Law No. 20,455 in response to the February 27, 2010 earthquake, which temporarily increased the statutory corporate income tax rates from 17.0% to 20.0% for the year ending December 31, 2011 and 18.5% for the year ending December 31, 2012, returning to 17.0% for the year ended December 31, 2013. Nevertheless, in 2012 the government submitted a tax reform bill to the Congress,congress, which was finally passed on September 27, 2012 (Law No. 20,633), establishing a new statutory corporate income tax rate of 20.0% from 2012 onwards.

On April 1, 2014 the recently assembled government sent to the Chilean congress a tax reform bill. Among other matters, the bill contemplated a gradual increase in the statutory corporate tax rate over a four year period. The bill was finally passed in September 2014, including changes to the statutory corporate tax rate and modifications for personal taxation purposes, particularly associated with dividends related taxes affecting both local and foreign investors. In summary, the tax reform gradually increases the statutory corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated regime and (ii) the Attribution regime. The tax reform increases the statutory corporate tax rate from 20.0% in 2013 to 21.0% in 2014, 22.5% in 2015 and 24.0% in 2016. From 2017 onwards, the statutory corporate tax rate will depend on the tax regime selected by the company’s owners. If theSemi-Integrated regime is selected, the company will be subject to a statutory corporate tax rate of 25.5% in 2017 and 27.0% from 2018 onwards. If, instead, the Attribution regime is selected, the company will be subject to a corporate tax rate of 25.0% from 2017 onwards. The regime chosen by owners or shareholders of the company will have an effect on the taxes paid by both local and foreign holders of shares or ADS. For more information, see “Item 3. Key Information—Risk Factors—Risks relating to Chile—Recent changes in the Chilean Tax System could impact the profitability of investments held by foreign and local investors.” and “Item 10. Additional Information—Taxation—Chilean Tax Considerations—Tax Reform Law N° 20,780.”

20112013 and 20122014. Our income tax expense decreased 3.0% towas Ch$63,48879,685 million in 2012. This2014, which represented a 10.6% annual decrease from the Ch$89,085 million recorded in combination with an2013. In spite of the increase in the statutory corporate tax rate, prompted by the recently approved tax reform, from 20.0% in 2013 to 21.5% in 2014, as well as the annual increase of 7.5%5.6% in our income before income tax causedwithin the same period, we benefited from the tax reform as a decreaseresult of our deferred taxes. In fact, the incremental tax rate for the upcoming years positively affected our deferred taxes, since future expenses (such as loancharge-offs) may be deducted from our taxable income base at a higher tax rate. This effect amounted to approximately Ch$$12,284 million and—together with inflation—explained the reduction in the effective tax rate from 13.0%13.9% in 20112013 to 11.7%11.8% in 2012.2014. The recently enacted tax reform establishes the cash basis regime as the default scheme; however, it allows shareholders at a shareholders’ meeting to vote for the implementation of the accrued earning system in 2016. Accordingly, the effect on deferred taxes was calculated by assuming the default scenario.

The decrease2012 and 2013. Our income tax expense was Ch$89,085 in 2013, representing a 39.4% annual increase from the Ch$63,928 million recorded in 2012. This annual increase resulted in a higher effective tax rate of 13.9% in 20122013 as compared to 2011 is mostly11.8% in 2012. This was primarily the consequenceresult of a changelow basis for comparison in 2012, since we obtainednon-recurring tax benefits associated with our deferred taxes due to the increase in the statutory corporate tax rate from 2012 onwards by the the previously mentioned Law No. 20,630,as enacted on September 27, 2012. This modification prompted tax benefits for us associated with our deferred tax asset position, as a result of an increase in the tax rate from 18.5% in 2012, and 17.0% as from 2013 (as formerly established by Law No 20,455) to 20.0% from 2012 onwards (as determined by Law No 20,630 later).

2010 and 2011. In 2011 we incurred an income tax expense of Ch$65,442 million, which represented a 40.7% increase as compared to 2010. This annual increase is proportionally higher than the increase of 8.5% recorded by our income before income tax resulting in an effective tax rate of 13.0% in 2011 as compared to the 10.0% posted in 2010.

The increase in the effective tax rate in 2011 as compared to 2010 is mainly explained by a higher statutory corporate tax rate that increased from 17.0% in 2010 to 20.0% in 2011, primarily as a result of the previously mentioned Law No. 20,455 that was enacted in order to support the post-earthquake reconstruction process.above.

Business Segments

To the extent that it is available and because we believe it is useful in analyzing our results, we have included information on a consolidated basis by business segments, disclosed under our Internal Reporting Policies. A summary of differences between IFRS and our Internal Reporting Policies is presented under “—Summary of Differences between Internal Reporting Policies and IFRS.”

For management purposes, we have organized our operations and commercial strategies into four business segments, which are defined according to the type of products and services offered to target customers. These business segments are:

Retail Banking: This segment is focused on individuals and small andmedium-sized companies whose annual sales do not exceed Ch$1,600 million. The segment’s value proposition is primarily focused on consumer loans, commercial loans, current accounts, credit cards, credit lines and mortgage loans.

Wholesale Banking: This segment is focused on corporate clients and large companies whose annual sales that exceed Ch$1,600 million. This segment offers products and services focused on commercial loans, current accounts, liquiditycash management services, debt instruments, foreign trade, derivative contracts and leases, as well as corporate finance transactions.

Treasury and Money Market: The revenue generated by this segment relates to the management of our liquidity and net positions subject to market risks. This segment also includes the results of our securities portfolio, our derivatives positions and currency trading.

Operations through subsidiaries: This segment includes all companies controlled by us whose results are obtained individually by the respective company. As of December 31, 2012,2014, this business segment consisted of:

 

Banchile Trade Services Limited;

 

Banchile Administradora General de Fondos S.A.;

 

Banchile Asesoría Financiera S.A.;

 

Banchile Corredores de Seguros Ltda.;

 

Banchile Factoring S.A.;

Banchile Corredores de Bolsa S.A.;

Banchile Securitizadora S.A.;

 

Socofin S.A.; and

 

Promarket S.A.

On June 19, 2013, Banco de Chile acquired all of the shares of Banchile Factoring S.A. owned by Banchile Asesoría Financiera. As a result of this transaction, Banco de Chile fully acquired the assets and liabilities of Banchile Factoring S.A. and on June 30, 2013 this subsidiary was dissolved.

During 2014, we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong. We expect to complete this process before the end of 2015.

The accounting policies described in the summary of accounting principles in “—Critical Accounting Policies” apply to all business segments. Matters such as the evaluation of segment performance anddecision-making processes regarding goals and allocation of resources for each segment are based on acost-benefit analysis and are aligned with our overall strategic goals.

In order to measure each segment’s financial performance, we use a businesssegment-based profitability system, which allows us to obtain information for each business segment relative to income, balances, revenues and expenses, among other indicators. This system has been internally developed in order to serve our specific requirements and we continuously work to improve it. In addition, business segment information is subject to general internal auditing procedures to ensure its integrity and usefulness for managementdecision-making.

The financial information used to measure the performance of our business segments is not necessarily comparable with similar information from other financial institutions because it is based on our internal reporting policies. The accounting policies used to prepare our operating segment information are similar to those described in Note 2(ah)2(af) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report, except as noted below:

 

The net interest margin of loans and deposits is measured on an individual transaction and individual client basis, due to the difference between the effective individual transaction rate and our related fund transfer price in terms of maturity,re-pricing and currency.

The results associated with gap management (interest rate and currency mismatches) are allocated to the business segments in proportion ofto the loans and demand deposits managed by each segment.

 

For purposes of allocating the effect of funding through capital and reserves, the internal performance profitability system considers capital allocation in each segment in accordance with Basel guidelines.

 

In addition to direct costs (consisting mainly of labor and administrative expenses of the business segments), we allocate all of our direct and indirect operating costs of back office and support units to each business segment by utilizing the most relevant business driver to assign such costs to a specific segment.

 

We apply Chilean GAAP, as required by the Superintendency of Banks,SBIF, when measuring and recording allowances for loan losses, assets received in lieu of payments, minimum dividend allowances and other minor items for internal reporting purposes. These accounting principles significantly differ in certain respects from IFRS. A description of these differences is presented below under “—Summary of Differences between Internal Reporting Policies and IFRS.”

Net Income by Business Segment

The following table sets forth income before income tax by business segment in accordance with our internal reporting policies for each of the years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

   For the Year Ended December 31,   % Increase (Decrease) 
BANK’S INTERNAL REPORTING POLICIES:  2010   2011   2012   2010/2011  2011/2012 
   (in millions of Ch$, except percentages)   % 

Retail banking

  Ch$182,114    Ch$266,485    Ch$254,209     46.3  (4.6)% 

Wholesale banking

   107,826     142,509     196,660     32.2    38.0  

Treasury and Money Market

   64,862     20,264     22,387     (68.8  10.5  

Subsidiaries

   62,237     59,136     46,545     (5.0  21.3  

Other

   —       —       —       —      —    
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Income before Income tax

  Ch$417,039    Ch$488,394    Ch$519,801     17.1  6.4
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

   For the Year Ended December 31,   % Increase (Decrease) 
BANK’S INTERNAL REPORTING POLICIES:  2012   2013   2014   2012/2013  2013/2014 
   (in millions of Ch$, except percentages)   % 

Retail banking

  Ch$250,283    Ch$303,235    Ch$284,379     21.2  (6.2)% 

Wholesale banking

   214,151     247,406     289,752     15.5  17.1

Treasury and Money Market

   22,819     10,096     42,441     (55.8)%   320.4

Subsidiaries

   34,748     32,802     34,036     (5.6)%   3.8

Other

   —       —       —       —      —    
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Income before Income tax

  Ch$522,001    Ch$593,539    Ch$650,608     13.7  9.6
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Retail Banking

20112013 and 20122014. Our retail bankingRetail Banking segment recorded a 4.6% annual decrease in income before income tax fromof Ch$266,485284,379 million in 20112014, which represented a 6.2% annual decrease when compared to the Ch$254,209303,235 million recorded in 2012. This decrease occurred in spite of the strong growth shown by the segment in its main business drivers during 2012. In fact, the2013. The annual decrease in income before income tax was principallymainly caused by higher provisions for loan losses that were mostly establishedcredit risk and operating expenses increasing more than the expansion in the first half of 2012. Therefore,operating revenues. Hence, the performance of our retail banking segment principally relied on:

Operating expenses that increased 16.6%, mainly as a result of non-recurring charges. As mentioned earlier, during 2014 we renegotiated most of our collective bargaining agreements. As a result, a significant portion of this non-recurring item (Ch$45,105 million for the Bank as a whole) was charged in this segment, since it is the largest unit by number of employees. In addition, personnel expenses, as well as some other items associated withthird-party providers, internal developments and other line items, are indexed to inflation. Accordingly, part of the increase in operating expenses reflected the impact of higher inflation in 2014 (CPI variation of 4.6%).

An annual increase of 14.4% in provisions for loans losses. This increase was in line with both environmental and non-recurring factors, such as: (i) the loan book expansion displayed by the segment with average loans growing by 11.3% on an annual basis, particularly focused onhigher-income individuals; (ii) the slowdown evidenced by the Chilean economy together with downward expectations on the economic outlook, all of which led the Bank to be more cautious in credit risk matters; and (iii) higher additional provisions allocated to this segment in comparison with the amount allocated last year, due to the establishment of additional allowances.

The factors mentioned above were partially offset by a 8.5% annual increase in operating revenues. This increase was explained by mixed forces, as follows:

The positive effect of higher inflation that (measured as UF variation) increased by 5.65% in 2014 as compared to 2.05% in 2013, which increased the contribution of the UF net asset exposure allocated to the segment. This effect, together with a favorable repricing effect on Ch$ interest bearing liabilities, prompted a 13.5% rise in the net interest income of the segment.

An annual decrease of 10.4% in net fees and commissions. This was explained by both commercial decisions and the effect of regulations impacting certain businesses related to this segment. As for the former, the segment made certain decisions in order to promote the usage of credit cards, which resulted in lower fees associated with this product. Regarding the latter, insurance brokerage fees, which are an important source of revenues for this segment (in both life and casualty), were impacted by regulations requiring the reimbursement of unused premium policies, due to early termination.

2012 and 2013. The income before income tax of our Retail Banking segment was mostly affectedCh$303,235 million in 2013, which was 21.2% over the Ch$250,283 million recorded in 2012. The annual performance of this segment took place amid new regulations that put pressure on the individual banking business by cutting interest rate ceilings, reducing margins in insurance brokerage and empowering banking customers. Nevertheless, we believe that our Retail Banking segment could overcome these trends by improving segmentation, enhancing transactional services and –more importantly– growing selectively. The main reason behind the increase in the segment’s income before income tax was the 9.6% annual increase in operating revenues, principally fostered by:

 

A 61.4%loan book that maintained a growth trend by increasingyear-end and average loans balances by 10.9% and 12.2%, respectively, on an annual increasebasis. These volume trends corresponded to lending spreads that slightly dropped in provisions for loans losses largely due to:

A low basis for comparison. In 2011 the banking industry overall recorded historically low levels of credit risk, mainly influenced by the positive economic cycle that enhanced customer payment capacity, especially in personal banking. Similarly, Banco de Chile recorded2013 as compared to 2012. The segment’s loan loss provisions below historical levels, as a percentage of average total loans.

A moderate deterioration in credit quality across the industry that peaked in the second quarter of 2012 but returned to historical average figures by the end of the year. This deteriorationgrowth was mainly associated with socialthe expansion in the middle and regulatory forces rather than economic factorsupper income segments of Individual Banking (annual increase of 13.1% in average loans) and primarily affectedSMEs (annual increase of 12.6% in average loans). Conversely, based on our less positive and riskier outlook for the consumer loans. As corrective measures,finance business, we were more conservativetightened the entire credit process, thereby causing a slowdown in establishingloans managed by our provision for loan losses, made our credit-assessment processes tighter and enhanced our collection duties. As a result,Consumer Division, as shown by the end of 2012 our credit quality indicators had returned to average levels.loans increasing 3.9% on an annual basis.

 

Our increasing penetration of the consumer lending market, especiallyA sustained upward trend in credit cards (annual expansion of 19.6% in related loans) and installment loans (7.9% annual growth in balances).

A 7.0% increase in the segment’s operating expenses in 2012 which was mainly caused by higher personnel expenses due to both a rise in headcount and a salary increase as a result of the collective bargaining agreement reached in 2011.

The previous factors were partially offset by an 11.1% increase in operating revenues, as a consequence of: (i) a 17.1% annual growth in the average balance of total loans for the segment, (ii) a 10.8% annual expansion innon-interest bearing liabilities. In this regard, the average balances of current accounts and demand deposits that was supplementedhandled by slightly higher nominal interest rates, and (iii) fees and commissions that increased 5.5% in 2012 asthis segment recorded a result of higher activity in transactional services (current accounts and payment channels) tied to12.2% annual increase, which had a growing private consumption. These positive factors enabled the segment to effectively offset the negative impact of lower inflation on the segment’s UF net asset position.

2010 and 2011.profitability of interest earning assets funded with these kinds of deposits. The segment’s income before income tax amounted to Ch$266,485 million, a 46.3% annual increase as compared to 2010. This significant increase was caused by higher operating revenues and lower provisions for loan losses. Asexpansion in volumes compensated for the former, the segment’s operating revenues posted a 15.1% annual increase, due to:

A higher contribution from the segment’s non-interest bearing liabilities, due to higher nominal interest rates—prompted by the increasecuts in the monetary policy interest rate—as well as a 21.3% rise in the average balances of demand deposits.rate.

 

Double-digit growth ratesHigher contribution from the UF net asset position allocated to the segment, due to a greater exposure toUF-indexed assets and more convenient funding associated withCh$-denominated liabilities, rather than higher UF variation.

These factors more than offset a 2.1% decrease in fees and commissions that was largely explained by lower fee income from insurance brokerage and a negative exchange rate effect in expenses related to the customer loyalty program for credit products that averaged 21.1% on a yearly basis. This increase is relatedcards due to an increase in year-end balances of residential mortgage (23.3%) and commercial loans (20.0%), and,the Ch$/U.S.$ exchange rate.

The increase in operating revenues enabled us to more than offset a lesser extent, in consumer loans (19.2%).

The positive effect of higher inflation on the segment’s UF net asset position.

A 16.5%12.8% annual increase in the segment’s fees and commissions. This annual increase was the result of our efforts to boost the use of our payment channels which resulted in higher commissions from credit cards, ATMs, current accounts and sight accounts. According to our management information system, during 2011 this segment added approximately 350,000 new credit cards and achieved a 28% market share in purchases and cash withdrawals with credit cards, nearly 94,000 new checking account customers and approximately 42,000 new borrowers of consumer loans up to UF 200 (approximately U.S.$8,500).

In addition, the segment’s provisions for loan losses decreasedlosses. The increase in credit risk charges was largely explained by 16.9% due to: (i) improved macroeconomic indicators, such as lower unemployment and higher real salaries that increased customers’ payment capacities and (ii) improved credit modelsthe increase of 12.2% in average loans managed by the segment, in conjunction with greater countercyclical provisions that were supplemented by effective collection.

The above was partly offset by an increase of 11.3%allocated to this segment in operating expenses associated with higher expenses related2013 as compared to our branch network expansion and higher personnel expenses due to the special bonus and the increase in salaries as a result of the collective bargaining agreements.2012.

Wholesale Banking

20112013 and 20122014. Our wholesale bankingWholesale Banking segment recorded a 38.0%17.1% annual increase in income before income tax, from Ch$142,509247,406 million in 20112013 to Ch$196,660289,752 million in 2012.2014. In spite of the moderate loan book expansion, this segment benefited from exogenous factors as well as non-recurring events that boosted operating revenues by 19.1% on an annual basis. This performance in revenues was mainly steered by:

An annual increase occurred despiteof 25.2% in net interest income. This increase was primarily attributable to: (i) a positive inflation effect associated with the negative effect of lower inflation on the segment’s UF net asset position allocated to this segment and can be explainedthe previously mentioned behavior of the UF (measure of inflation) over the last two years; (ii) a favorable repricing effect on the Ch$ interest bearing liabilities given the easing policy undertaken by the following recurrentCentral Bank, which reduced the monetary policy interest rate from 4.5% to 3.0% between 2013 and extraordinary factors:

Operating2014; (iii) non-recurring revenues that grew 13.8% annually, from Ch$281,994 million in 2011 to Ch$321,004 million in 2012. This increaseassociated with the early settlement of approximately Ch$39,010 million was mainly due to:

the recognition of a realized loss of Ch$42,462 million in 2011 due to the sale of a non-performingone commercial loan; and (iv) loan portfolio (with a similar positive impact on the segment’s provisions for loan losses),

a 10.5% and 10.2% increase in thegrowth reflected by average balances of total loans and demand deposits (including current accounts), respectively,that increased 4.2% annually.

an 8.4% increaseThe factors mentioned above permitted the segment to effectively deal with a 5.4% annual decrease in net fees and commissions, income, primarily duemainly attributable to higher feelower fee-based income from credit restructuring,credits and factoring. This was aligned with the tempered expansion in the segment’s loan book.

The solid trend followed by revenues permitted the negative effect of lower inflation that was effectively offset by the previously mentioned factors.

A 36.0% decrease insegment to successfully cope with provisions for loan losses includingclimbing by 30.5% and operating expenses increasing by 17.8%, both on an annual basis. Regarding credit risk charges, the following extraordinary effects:annual increase was primarily explained by: (i) the release of Ch$43,950 million in allowances in 2011 related to the aforementioned sale of a non-performing loan portfolio and (ii) countercyclical allowances established in 2011 that translated into approximately Ch$17,564 million fornegative exchange rate effect on the segment in that period. Once these extraordinary effects are isolated, the segment’sU.S.$-denominated provisions for loan losses for 2012 decreased approximately(mostly linked to this segment) associated with a higher Ch$30,176 million depreciation in 2014 (15.3%) as compared to 2011, 30%2013 (9.6%); (ii) the allocation of which isthe higher additional allowances set during 2014 in order to face a complex business environment; and (iii) a low basis for comparison related to a significant allowance release in 2013, associated with the improvement in the financial condition of one customer. Regarding operating expenses, the annual increase was mostly explained by the deterioration of a specific customer’s risk profile in 2011.

An annual decrease of approximately 9.5%same drivers mentioned in the segment’s operating expenses, which was mainly attributable to lower personnel expenses due tocase of the Retail Banking segment, such as the special bonus granted to our staff in 2011 once we completedworkforce, as a consequence of the collective bargaining process,agreements signed this year, and the impact of inflation onUF-indexed expenses.

Finally, for the year ended December 31, 2014 there were no material effects associated with sales of loan portfolios.

2012 and 2013. Our Wholesale Banking segment recorded income before income tax of Ch$247,406 million in 2013, an annual increase of 15.5% as wellcompared to the Ch$214,151 million recorded a year earlier. In 2013 this segment faced intense competition from local banking players, but also from international debt markets where Chilean companies increasingly raised funds by taking advantage of low international interest rates and the country’s credit rating. Despite this competitive environment, our Wholesale Banking segment was able to achieve this significant increase in income before income tax by prioritizing growth in those businesses with favorable fairrisk-return relationship and in which we had room to increase penetration.

The significant increase in the segment’s income before income tax was mainly attributable to an annual expansion of 19.1% in operating revenues, primarily caused by:

Loans that expanded 11.6%in year-end balances and 5.5% in average balances, both on an annual basis. As mentioned earlier, loan growth was largely fostered by higher penetration of Large Companies and Real Estate, for which average loans increased by 14.2% on a yearly basis, somewhat due toshort-term financing loans granted in the fourth quarter of 2013. Conversely, average loans managed by our Corporate Banking (annual turnover above Ch$70,000 million) decreased 4.0% on an annual basis. It is important to mention that loan growth in our Wholesale Banking segment encompassed the acquisition of a portfolio of commercial loans amounting to approximately Ch$500,000 million.

A positive impact on revenues from the funding withnon-interest bearing liabilities. Similar to the Retail Banking segment, average balances of current account and demand deposits held by the Wholesale Banking segment posted a 7.4% annual increase. Once again, this increase in volumes enabled us to more than offset the negative effect of a monetary policy interest rate that was cut twice (by 25 bp each time) in 2013, which affected the contribution of these liabilities as lower overhead expensessources of funding.

A higher contribution from our UF net asset position. This was prompted by an enlarged UF asset exposure and better funding conditions withCh$-denominated interest bearing liabilities, rather than an increase in inflation in 2013 as compared to 2012 (UF variation was 2.45% in 2012 when comparedand 2.05% in 2013).

The above factors enabled the Wholesale Banking segment to 2011.offset an annual increase of approximately Ch$30,400 million in provisions for loan losses. This increase was composed of: (i) a negative exchange rate effect of approximately Ch$13,400 million, due to a decrease of 7.8% in the exchange rate (Ch$/U.S.$) in 2012 and an increase of 9.6% in 2013, (ii) nearly Ch$12,700 million related to the deteriorated credit condition of a specific corporate customer in 2013 and (iii) the allocation of higher countercyclical allowances set in 2013.

For the year ended December 31, 20122013 there were no material effects related to loan portfolio sales.

2010 and 2011. Our wholesale banking segment recorded a yearly increase of 32.2% in income before income tax from Ch$107,826 million in 2010 to Ch$142,509 million in 2011. This annual variation was fueled by a decrease of 85.9% in provisions for loan losses and a slight increase in operating revenues, as follows:

The significant decline in provisions for loan losses was due to: (i) the release of allowances for loan losses of approximately Ch$43,950 million in 2011, related to the sale of a non-performing corporate customer’s loan portfolio, and (ii) the recognition of approximately Ch$12,000 million of further contingency and countercyclical provisions in 2010 as compared to 2011, mainly due to the regulation for provisioning individually evaluated loans that was anticipated in 2010. If credit risk charges are adjusted by these non-recurrent items, the recurrent provisions also posted a decrease of 8.7%, despite the growth in loans and higher provisions of U.S. dollar-denominated loans due to an 11% rise in the Chilean peso/U.S. dollar exchange.

In operating revenues, the segment recorded a slight 0.3% increase due to: (i) the positive effect of higher nominal interest rates on the segment’s demand deposits average balances which grew by 18.2%, (ii) a 21.0% increase in the segment’s loan portfolio (mostly due to the expansion by 21.0% in commercial loans) and (iii) the positive effect of higher inflation on the segment’s UF net asset position.

The above was partly offset by the recognition (in Other Operating Income) of a realized loss that amounted to approximately Ch$42,462 million, associated with the sale of the previously mentioned non-performing loan portfolio and a 27.1% annual rise in the segment’s operating expenses due to the collective bargaining bonus, a rise in salaries to reflect inflation and productivity, as well as higher administrative expenses.

With respect to the previously mentioned loan portfolio sale carried out in 2011, as of the transaction date, the outstanding balance, related allowances for loan losses and sale price for this portfolio were:

Loan Portfolio DetailsMillions of Ch$

Gross Outstanding Balance (excluding allowances)

Ch$(48,926

Sale Price

6,464

Realized Loss

(42,462

Release of Related Allowances

43,950

Net Gain

Ch$1,488

For purposes of internal reporting (under our internal reporting policies for business segment reporting) and as required by the Chilean regulator, we accounted for a realized loss of Ch$42,462 million within ‘Other Operating Income’, while recognizing an allowance release of Ch$43,950 million within ‘Provisions for Loan Losses’. These allocations resulted in a net gain (although presented separately) of Ch$1,488 million. Under IFRS, this net gain was recognized under other operating income, within the ‘gains (losses) from sales of loans’ sub line item, as disclosed earlier.loan portfolios.

Treasury and Money Market

20112013 and 2014. Our Treasury and Money Market segment posted income before income tax of Ch$42,441 million in 2014, which compared favorably to the Ch$10,096 million recorded in 2013. This performance was mainly associated with operating revenues increasing from Ch$16,307 million in 2013 to Ch$47,051 million in 2014. Therefore, this annual increase was mainly related to:

A positive effect of inflation on the accrual ofUF-indexed financial instruments held in our investment portfolio. As mentioned earlier, this was the result of a 5.65% annual increase in the value of the UF, as compared to the 2.05% recorded a year earlier.

Sales of available for sale instruments that amounted to Ch$18,102 million in 2014 as compared to Ch$14,881 million in 2013. In this regard, we took advantage of cumulative mark-to-market of AFS securities generated over the year, as a result of lower interest rates.

Lower losses from derivative contracts held for trading, as a result of a positive FX impact, primarily associated with decreasing liability exposures amid a scenario of increasing Ch$ depreciation. This effect permitted us to offset the impact of higher losses related to counterparty value adjustment in 2014 as compared to 2013, as well as the ineffectiveness of hedging.

The above factors were complemented by better performance in operating expenses, which declined from Ch$6,353 million in 2013 to Ch$4,660 million in 2014.

2012 and 2013. In 20122013, the income before income tax of our Treasury posted a 55.8% annual decrease from Ch$22,819 million in 2012 to Ch$10,096 million earned in 2013. The main reason for a reduced income before income tax was a similar annual decline of 50.2% in operating revenues, principally due to:

A decrease in other operating revenues by approximately Ch$20,400 million in 2013 as compared to 2012. This was principally the consequence of the previously mentionedone-off effect associated with the first time adoption of the credit value adjustment on derivatives.

Revenues from positions in assets held for trading that decreased by approximately Ch$5,900 million on a yearly basis. This lower performance had mainly to do with downward shifts in the CLP/CLF yield curve that affected our net positions in derivatives. Furthermore, upward changes in the CLP/USD yield curve contributed to lower results from our neton-shore/off-shore positions.

The above factors were partly offset by higher revenues from the management of ourAvailable-for-Sale portfolio, as a result of net revenues from sales that amounted to approximately Ch$8,100 million in 2012 as compared to Ch$14,900 in 2013.

Operations through Subsidiaries

2013 and 2014. Our subsidiaries recorded income before income tax of Ch$22,38734,036 for the year ended December 31, 2014, which was 3.8% above the Ch$32,802 million reported in 2013. The main drivers supporting this performance were:

An annual increase of approximately 28.2% (or Ch$4,040 million) in income before income tax generated by our Mutual Funds subsidiary. This increase was caused by a 21.0% annual increase in AUM, which permitted the subsidiary to achieve a market share of 22.5% as of December 31, 2014. Also, the expansion in business volumes enabled the subsidiary to offset lower margins associated with portfolio rebalancing that representedincreased the share offixed-income securities.

A Ch$1,798 million increase in income before income tax in our Financial Advisory subsidiary. This performance was related to important transactions conducted by our subsidiary in diverse aspects of the business, ranging from debt restructuring to mergers and acquisitions. As a 10.5%result, the subsidiary’s operating revenues increased by Ch$2,195 million in 2014 as compared to 2013, which explained most of the change in income before income tax.

These positive factors were partially offset by the following factors:

An annual decrease of nearly Ch$3,158 million in the income before income tax generated by our Insurance Brokerage subsidiary in 2014 as compared to 2013. As mentioned before, the insurance brokerage business has been under pressure over the last few years due to various regulations that have impacted operating margins. In particular, during 2014 the operating revenues of our Insurance Brokerage Subsidiary were hit by a regulation that compels insurance brokers to reimburse thenon-used portion of an insurance policy in case of early termination of the contract (whether linked to loans or not), for all of those policies paid upfront by the customer. Furthermore, our Insurance Brokerage Subsidiary posted an annual increase of roughly Ch$1,754 in operating expenses.

A yearly decrease of approximately 12.0% (or Ch$1,325 million) in the income before income tax of our Securities Brokerage subsidiary. The annual increase recorded in stock trading turnover (38.6% on an annual basis) and higher income from currency trading could not offset the increase in the cost base. This was mainly explained by personnel expenses rising by 5.6% on an annual basis, which is aligned with the inflation observed throughout the year.

Finally, it is worth mentioning that in 2014 we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong. We expect to complete this process before the end of 2015.

2012 and 2013. Our subsidiaries reported income before income tax of Ch$32,802 million in 2013 as compared to the Ch$20,26434,748 million recorded a year earlier.in 2012. This variation was mainly caused by a 3.7% increase in the segment’s operating revenues that can be explained by:

Improved results from trading of fixed-income and derivative securities as a result of our Treasury’s proactive management of our investment portfolio, as well as taking advantage of specific market opportunities to make profits.

The higher results from trading activities were partly offset by lower income generated by the management of our available-for-sale portfolio due to the negative impact of lower inflation on the interests accrued by fixed-income securities, most of them denominated in UF, and lower amount of sales as compared to 2011.

2010 and 2011. Our Treasury postedrepresented an annual decrease of 68.8%5.6%, which was primarily the consequence of:

An annual decline of 11.4% (or Ch$1,841 million) in income before income tax from Ch$64,862 millionour Mutual Funds subsidiary. This decline was explained by unfavorable customer preferences rather than growth in 2010AUM. In fact, this subsidiary continued to Ch$20,264 millionlead the market in 2011.terms of AUM in 2013 by attaining a 21.3% market share as of December 31, 2013. This significant drop in resultsmarket position was primarily causedsupported by a 59.6% decline3.8% annual increase in average balances of AUM. However, the company was not been able to completely overcome the evolution of market trends, especially those associated with higher volatility in stock markets that encouraged investors to seek havens infixed-income, which bear lower commissions than mutual funds invested in stocks. Also, organizational restructuring contributed to a temporary increase in the segment’s operating revenues as a consequence of:company’s cost base.

The sharp increase in spreads of foreign currency instruments during the second half of 2011 that was fostered by the slowdown observed in the global economy.

 

The significant rise in interest rates in 2011 as compared to 2010. During 2010 the low interest rates (and expectation of future increases) led us to sell fixed-income securities that enabled us to obtain significant gains. Conversely, in 2011 and due to the higher interest rates, we could not take profits from our available-for-sale positions.

The decrease of the gap between local and foreign interest rates that has constrained the possibility of arbitrage between local and foreign currency funding.

All of the above was partially offset by operating expenses that posted a 20.7%A 9.9% (or Ch$1,211 million) annual decrease principally due to lower technology expenses and decreasing allocated costs from support areas.

Operations through Subsidiaries

2011 and 2012. Our subsidiaries recorded a 21.3% decrease in incomeearnings before income tax from Ch$59,136 million in 2011 to Ch$46,545 million in 2012. This decline was primarily explainedrecorded by a 4.1%our Stock Brokerage subsidiary. In 2013, this company recorded an annual drop in the segment’s operating revenues, as well a 7.5% increase in operating expenses. Thus, our subsidiaries’ annual performance is primarily explained by:

A 10.7% decrease in net fees and commissions income in 2012 as compared to 2011, mainly as a result of reduced commercial activity in securities brokerage and mutual funds management caused by investors that withdrew their savings from stock markets and invested in fixed-income securities. As a consequence, in 2012, our fees from securities brokerage and commissions from mutual funds decreased Ch$11,010 million and Ch$7,766 million, respectively. As for securities brokerage, lower fees and commissions were caused by a 40.8% annual decrease in stock trading turnover handled by the subsidiary. Regarding mutual funds, lower fee income was a consequence of portfolios managed by our mutual funds subsidiary that were rebalanced by their holders towards fixed-income. These effects were partially offset by higher commissions from insurance brokerage services, financial advisory services and collection services (approximately Ch$4,572 million in additional income collectively).

The decrease in net fees and commissions was partially offset by higher net interest income in our factoring subsidiary, mainly dueapproximately 5.3%, which enabled it to the positive effect of a lower inflation rate on the company’s UF net liability position.

On the other hand, the annual increase of 7.5%rank second in the segment’s operating expenseslocal market with a 10.0% market share. This promoted higher revenues from stock andfixed-income trading in 2013. However, performance in these businesses was duenot high enough to collective bargaining processes carried out by two of our subsidiariesoffset lower results from currency trading and a headcount increase intended to reinforce our collection activities.

2010 and 2011. Our subsidiaries posted a 5.0% annual decline in their income before income tax from Ch$62,237 million in 2010 to Ch$59,136 million in 2011. The annual change reflected the impact of the higher volatility in local and global financial markets on the activity of some of our subsidiaries, as follows:other line items.

Our Securities Brokerage subsidiary posted a Ch$2,590 million decrease in net income, based on a 3.1% decline in stock trading turnover, which is explained by the higher uncertainty evidenced in the financial markets and investors that sought haven in fixed-income securities.

A decrease of Ch$2,310 million in the net income of our Insurance Brokerage, subsidiary mainly as a result of a 10.6% reduction in operating revenues due to lower brokerage margins, partly offset by higher volumes of written premiums.

Our Financial Advisory subsidiary posted a decrease of Ch$1,101 million in net income, based on lower equity and bond issuance activity, as well as lower debt restructuring advisory engagements in 2011.

The factors mentioned above factors were partly offset by better performance inof our FactoringInsurance Brokerage subsidiary, whose net income increased bywhich recorded a 37.0% (or Ch$3,088 million as a result of higher commercial volumes that translated into a 28.2%1,313 million) annual rise in the average volume of factoring loans. The greater business scale enabled the subsidiary to overcome aincome before income tax. These higher cost of fundingresults were associated with the impact of a higher inflation4.0% annual increase in written premiums, based on the company’s UF net liability position.positive market trends in consumption, demand for credits and traveling.

Summary of differencesDifferences between internal reporting policiesInternal Reporting Policies and IFRS

We prepare our business segments’ financial information in accordance with our internal reporting policies, which differ in certain significant aspects from IFRS. The following table sets forth net income and equity for the years ended December 31, 2010, 20112012, 2013 and 20122014 in accordance with our internal reporting policies and under IFRS:

 

  Year Ended December 31,   Year Ended December 31, 
  2010   2011   2012   2012   2013   2014 
  (in millions of Ch$)   (in millions of Ch$) 

Income before income tax (Internal Reporting Policies)

  Ch$417,039    Ch$488,394    Ch$519,801    Ch$522,001   Ch$593,539   Ch$650,608  

Reconciliation to IFRS

   47,089     15,235     21,808     21,808    45,735     24,596  
  

 

   

 

   

 

   

 

   

 

   

 

 

Income before income tax (IFRS)

   464,128     503,629     541,609     543,809    639,274    675,204  

Net income (Internal Reporting Policies)

   378,530     428,806     465,851     467,611    513,603    591,081  

Reconciliation to IFRS

   39,085     9,381     12,270     12,270    36,586     4,438  
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income (IFRS)

   417,615     438,187     478,121     479,881    550,189     595,519  

Equity (Internal Reporting Policies)

   1,404,127     1,739,173     2,007,059     2,007,059    2,284,316    2,535,156  

Reconciliation to IFRS

   290,198     301,496     348,403     348,403    394,723     375,819  
  

 

   

 

   

 

   

 

   

 

   

 

 

Equity (IFRS)

  Ch$1,694,325    Ch$2,040,669    Ch$2,355,462    Ch$2,355,462   Ch$2,679,039   Ch$2,910,975  
  

 

   

 

   

 

   

 

   

 

   

 

 

Some differences exist between our net income and equity as determined in accordance with our internal reporting policies, which are used for management reporting purposes, as presented in the segment information, and our net income and equity as determined under IFRS, as presented in our consolidated financial statements.

The most significant differences are as follows:

Under internal reporting policies, our merger with Citibank Chile was accounted for under the pooling-of-interestpooling of interest method, while under IFRS, and for external financial reporting purposes, the merger of the two banks was accounted for as a business combination in which we were the acquirer as required by IFRS 3 “Business Combinations.” Under IFRS 3, we recognized all acquired net assets at fair value as determined at the acquisition date, as well as the goodwill resulting from the purchase price consideration in excess of net assets recognized. As a result of these accounting policy differences, the impact on our net income under IFRS is Ch$6,4503,848 million, Ch$7,4381,828 million and Ch$3,8481,308 million lower than our internally reported net income in 2010, 20112012, 2013 and 2014, respectively. The equity impact was Ch$40,699 million, Ch$38,414 million and Ch$36,128 million in 2012, respectively.2013 and 2014.

For internal reporting purposes, allowances for loan losses are calculated based on specific guidelines set by the Superintendency of BanksSBIF based on an expected losses approach. Under IFRS, IAS 39 “Financial instruments: Recognition and Measurement,” allowances for loan losses should be adequate to cover losses in the loan portfolio at the respective balance sheet dates based on an analysis of estimated future cash flows. According to internal reporting policies, we record additional allowances related to expected losses not yet incurred, whereas under IFRS these expected losses may not be recognized. As a result of these accounting policy differences, the impact on our net income under IFRS is Ch$49,00321,081 million, Ch$21,75419,882 million and Ch$21,08127,045 million higher than our net income internally reported in 2010, 20112012, 2013 and 2014, respectively. The equity impact was Ch$169,209 million, Ch$193,626 million and Ch$220,671 million in 2012, 2013 and 2014, respectively.

For internal reporting purposes, assets received in lieu of payments are measured at historical cost or fair value, less cost to sell, if lower, on a portfolio basis and written-offwritten off if not sold after a certain period in accordance with specific guidelines set by the Superintendency of Banks.SBIF. Under IFRS, these assets are deemednon-current assets held-for-saleheld for sale and their accounting treatment is set by IFRS“Non-Current“on-Current Assets Held for Sale and Discontinued Operations.” In accordance with IFRS 5 these assets are measured at historical cost or fair value, less cost to sell, if lower. Accordingly, under IFRS these assets are not written off unless impaired. As a result of this accounting policy difference, the impact on our net income under IFRS is Ch$4,099 million, Ch$3,8722,889 million and Ch$2,8892,185 million higher than our net income internally reported in 2010, 2011,2012 and 2013, respectively. In 2014 the impact on our net income is Ch$13,867 million lower than our net income internally reported. The equity impact was Ch$13,835 million, Ch$16,020 million and Ch$2,153 million in 2012, 2013 and 2014, respectively.

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted.

The application of IFRS 13 has impacted fair value measurements related to derivatives by including the Bank’s own credit risk (commonly referred as to “Debit Value Adjustment”). During this period this impact was Ch$14,012 million, and is the extent to which our net income under IFRS is higher than our net income internally reported. Nevertheless, the final impact on equity due to this recognition was Ch$33,101 million in 2014, since Ch$19,089 million had already been recorded in previous periods.

The differences described above had an impact on deferred taxes of Ch$9,538 million, Ch$9,626 million and Ch$20,158 million in 2012, 2013 and 2014, respectively, each lower than our net income internally reported. The equity impact was Ch$42,582 million, Ch$52,207 million and Ch$71,889 million in 2012, 2013 and 2014, respectively.

Chilean banks are required to distribute at least 30% of their net income to shareholders unless the shareholders unanimously approve the retention of profits. A bank may, however, be prohibited from distributing to shareholders even this 30% of its net income if such distribution would cause the bank to violate certain statutory capital requirements. In accordance with internal reporting policies, we record a minimum dividend allowance based on our distribution policy, which requires distribution of at least 70% of the period’s net income, as permitted

by the Superintendency of Banks.SBIF. During 2010, 2011,2012, 2013, and 2012,2014, the Bank recorded allowances of Ch$242,503300,759 million, Ch$259,501324,582 million and Ch$300,759324,588 million, respectively. Under IFRS, only the portion of dividends that is required to be distributed by Chilean Law must be recorded, i.e., 30% as required by Chilean Corporations Law. This accounting difference does not lead to differences in net income.

LIQUIDITY AND CAPITAL RESOURCES

Overview

A sound liquidity strategy must be focused on ensuring that funds are available to honor our financial commitments when they are due and also to take advantage of attractive business opportunities. To accomplish this, we monitor funding liquidity (i.e., the ability to raise funds when they are needed without incurring abnormal costs) and trading liquidity (i.e., the ability to easily decrease debt and equity instruments held in our portfolios and/or offset price risk positions generated by derivative transactions).

Liquidity risk can be technically broken down into two types of risks: trading liquidity risk and funding liquidity risk. Trading liquidity risk deals with the inability to decrease cash positions (bonds, loans, etc.) and/or offset price risks generated by derivatives transactions and funding liquidity risk is related to the our inability to raise funds. Both risks can lead to potentially adverse scenarios that might make the bank unable to meet its payment obligations and/or potential payment obligations when they become due.

These two risks are jointly managed but by utilizing different tools, as detailed below.

Trading Liquidity Risk Management

Holding a stake of debt instruments with deep secondary markets ensures trading liquidity. Central Bank and government instruments andshort-term banks’ time deposits show these characteristics. These kinds of instruments are held in our trading portfolio and comprise some portion of theAvailable-for-Sale (“FAS”AFS”) portfolio. In addition, mortgage bonds issued by banks resident in Chile and corporate bonds are also part of the FASAFS portfolio.

Even though mortgage and corporate bonds show much less trading liquidity than Central Bank and government instruments, the former may be sold to the Central Bank under repurchase agreements. Government instruments andshort-term banks’ time deposits can also be sold to the Central Bank under repurchase agreements.

Funding Liquidity Risk Management

Diversifying funding sources and avoiding a concentration of large fund providers or funding maturity dates are means to ensure funding liquidity. We diversify through the establishment of triggers that monitor concentrations of funding sources, maturities, currencies, etc. The aggregation of significant fund providers by currency is monitored as a percentage of our current liabilities.

In particular, our funding strategy aims to satisfy our customers’ needs and to enhance our product base offering while maintaining a prudent product diversification profile, currencies and maturities. We are focused on broadening the current core and diversified funding obtained through the retail banking business. In addition, we are continuously issuing either senior or subordinated bonds in order to match both the liquidity and the interest rate risk generated by ourlong-term loans.

In addition to our own metrics in place to monitor liquidity, the Central Bank and the Superintendency of BanksSBIF have established regulations regarding liquidity, which include: minimum reserve requirements for deposits, minimum “technical” reserve requirements and maximum expected outflows for the following 30 and 90 days.

The Central Bank has established a minimum reserve of 9.0% for demand deposits and 3.6% for time deposits. The reserve requirement must be complied with separately by currency (Chilean Peso and foreign currencies).

In addition, we are subject to a “technical” reserve requirement applicable to all banks that operate in Chile. The daily balance of deposits and obligations payable on demand, except for obligations with other banks, may not exceed 2.5 times the amount of the bank’s Regulatory Capital. Deposits and obligations payable on demand include:

 

deposits in current accounts;

other demand deposits or obligations payable on demand and incurred in the ordinary course of business;

 

savings deposits that allow unconditional withdrawals that bear a stated maturity; and

 

other deposits unconditionally payable immediately.

Chilean banks are not required, however, to maintain the minimum reserves referred to above for deposits and obligations subject to this “technical” reserve.

Chilean regulations also require that the expected outflows within the following 30 days not exceed the amount of a bank’s Basic Capital and the expected outflows within the following 90 days not exceed twice the amount of a bank’s Basic Capital. Expected outflows may include behavioral assumptions. Measurements must be made separately, by currency.

Mandatory metrics requested by the Superintendency of BanksSBIF and other metrics developed by us utilizing internal models are prepared daily by independent units within the Corporate/Market Risk Management. These reports are submitted daily to the corresponding Treasury areas, which are in charge of overseeing and managing our liquidity. The Country Asset Liability Committee also monitors these metrics on a monthly basis.

Given our internal metrics and policies, we believe that our working capital is sufficient to meet our present needs.

Cash Flows

The tables below set forth our principal sources of cash. Our subsidiaries are not an important source of cash for us and therefore do not significantly affect our ability to meet our cash obligations. No legal, contractual or economic restrictions exist on the ability of our subsidiaries to transfer funds to us in the form of loans or cash dividends as long as they abide by the regulations in the Chilean Corporations Law regarding loans to related parties and minimum dividend payments.

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2010 2011 2012   2012   2013   2014 
  (in millions of Ch$)   (in millions of Ch$) 

IFRS:

      

Net cash provided by operating activities

  Ch$(95,574 Ch$(454,886 Ch$(415,987

Net cash provided by (used in) operating activities

  Ch$(415,987  Ch$(139,809  Ch$(229,543

20112013 and 20122014.. In 2012 net Net cash provided byused in operating activities increased by approximately Ch$38,89989,734 million as comparedon an annual basis, from a net outflow of Ch$139,809 million in 2013 to 2011. This increasea net outflow of Ch$229,543 million in 2014. The higher amount used in operating activities was mainly caused by:the result of: (i) a net decrease of Ch$1,087,0551,447,159 million in the inflow from savings accounts and time deposits, given the change in the interest rates that encouraged customers to opt for liquidity, and (ii) a net increase of Ch$375,710 million in the outflow associated with loans granted to customers and financial institutions, and (ii) a net annual increase of Ch$128,311 million in 2012 as compared to 2011 in the inflow that comes from increasing balances of current accounts and other demand deposits.institutions. These factors were partlypartially offset byby: (i) a net annual decrease of Ch$1,212,543 million in the inflow that comes from taking saving accounts and time deposits.

2010 and 2011. The net cash provided by operating activities recorded an annual decrease of Ch$359,312 million between 2010 and 2011. This decline was primarily caused by: (i) an increase of Ch$2,191,9971,257,728 million in the outflow related to loans granted to our customers, and other banks,in line with a lower loan book expansion in 2014 as compared to 2013, and (ii) a lowernet increase of Ch$435,718 in the inflow from current accounts and demand deposits, that amounted to Ch$279,623 on an annual basis. These factors were mostly offsetfostered by a downward trend in interest rates and a higher increasepreference for liquidity by customers.

2012 and 2013. Net cash used in saving accounts and demand deposits that translated into an additional inflow of approximatelyoperating activities decreased by Ch$1,246,506 that276,178 million in 2013 as compared to 2012. This net decrease was supplementedmainly caused by ana net increase of Ch$418,566306,939 million in the inflow from higher balances of saving accounts and time deposits and a net decrease of Ch$297,091 million in the outflow associated with payablesloans granted by the Bank, to customers but especially to financial institutions. These factors were partly offset by (i) an annual net increase of Ch$275,365 million in the outflow associated with higher investment in assetsheld-for-trading, (ii) an annual higher net outflow of Ch$113,488 million associated with other operating assets and liabilities, (iii) lower inflow linked to a decrease of Ch$89,904 million in net income (adjusted by items that do not represent cash flows) and (iv) an annual decrease of Ch$63,426 million related to lower inflows coming from repurchase agreementsbalances of current accounts and security lending.demand deposits.

  For the Year Ended December 31,   For the Year Ended December 31, 
  2010   2011 2012   2012   2013   2014 
  (in millions of Ch$)   (in millions of Ch$) 

IFRS:

       

Net cash used in investing activities

  Ch$128,449    Ch$(334,776 Ch$192,351  

Net cash provided by (used in) investing activities

  Ch$192,351    Ch$(409,235  Ch$49,226  

20112013 and 2014. Net cash provided by investing activities increased from a net outflow of Ch$409,235 million in 2013 to a net inflow of Ch$49,226 million in 2014. This net increase of Ch$458,461 million was primarily explained by an annual net decrease of Ch$464,387 million in the balance of financial assets available for sale, given by a net outflow (balance increase) of Ch$387,578 million in 2013 as compared to a net inflow (balance decrease) of Ch$76,809 million in 2014. This change was mainly caused by purchases that exceeded sales of available for sale instruments in 2013, as compared to sales surpassing purchases in 2014.

2012 and 2013. The net cash used in investing activities increasedchanged from a net outflow of Ch$334,776 million in 2011 to a net inflow of Ch$192,351 million in 2012.2012 to a net outflow of Ch$409,235 million in 2013. The annual risechange of Ch$527,127601,586 million was primarily caused by an annual net decreaseincrease in the balance of financial assets available for sale that resulted in a net inflow of Ch$219,403 in 2012 as compared to the outflow of Ch$316,083387,578 million in 2011, due to higher sales in 2012 as compared to 2011.

2010 and 2011. The net cash used in investing activities increased from a net inflow of Ch$128,449 million in 2010 to a net outflow of Ch$334,776 million in 2011. This change was mainly prompted by a net increase in the balance of financial assets available for sale, which resulted in an outflow of Ch$316,083 million in 20112013 as compared to the inflow of Ch$222,706219,403 million recorded in 2010 as2012, due to sales that exceeded purchases in that year.

   For the Year Ended December 31, 
   2012   2013   2014 
   (in millions of Ch$) 

IFRS:

  

Net cash provided by financing activities

  Ch$48,087    Ch$770,865    Ch$377,531  

2013 and 2014. The net cash provided by financing activities decreased from Ch$770,865 million in 2013 to Ch$377,531 million in 2014. This net annual decrease of Ch$393,334 million was mainly prompted by: (i) a consequencenet outflow of salesCh$973,584 million associated with lower proceeds fromlong-term bond issuances, given a decrease in bond placements in 2014 as compared to 2013, and higher redemptions oflong-term bonds within the same portfolio.period, (ii) a net outflow of Ch$172,126 million owing to higher payments oflong-term bonds in 2014vis-à-vis 2013, and (iii) a net outflow of Ch$134,071 million explained by the subscription and payment of shares for the same amount in 2013 as compared to no inflows or outflows related to this item in 2014. All of these factors were partly offset by a net inflow of Ch$580,420 related to higher proceeds from commercial paper issuances in 2014 as compared to 2013.

   For the Year Ended December 31, 
   2010  2011   2012 
   (in millions of Ch$) 

IFRS:

     

Net cash provided by (used in) financing activities

  Ch$(67,346 Ch$911,975    Ch$48,087  

20112012 and 20122013. The net cash provided by our financing activities decreasedincreased from Ch$911,975 million in 2011 to Ch$48,087 million in 2012.2012 to Ch$770,865 million in 2013. The annual decreaseincrease of Ch$863,888722,778 million was mainly due to: (i) a net annual decreaseincrease of Ch$1,047,810893,869 million associated withrelated to higher payments and lower inflows coming from newlong-term foreign borrowings and lower payments for the same kinds of obligations and (ii) an outflowa net higher inflow of Ch$279,258379,788 million related to an increase in the redemption ofproceeds from bond issuances. These factors were partly offset by a higher inflow of approximately Ch$484,399 million related to proceeds from new bond issuances.

2010 and 2011. The net cash provided by (or used in) financing activities varied from a net outflow ofassociated with borrowings from financial institutions that decreased by Ch$67,346465,628 million in 20102013 as compared to a net inflow of Ch$911,975 million in 2011. This variation was mainly associated with: (i) bond redemptions that decreased Ch$213,162 million, (ii) a capital increase of Ch$210,114 million carried out in 2011, (iii) lower payments on foreign borrowings in an amount of Ch$187,387 million, (iv) a net increase of Ch$177,849 million in borrowings from the Central Bank, and (v) higher proceeds from bond issuances that translated into an additional inflow of Ch$157,215 million.2012.

Borrowings

Borrowings are described asshort-term when they have original maturities of less than one year or are due on demand. All other borrowings are described aslong-term, including theshort-term portion of anylong-term borrowings.

 

 As of December 31, 2010 As of December 31, 2011 As of December 31, 2012  As of December 31, 2012 As of December 31, 2013 As of December 31, 2014 
IFRS: Long-term Short-term Total Long-term Short-term Total Long-term Short-term Total  Long-term Short-term Total Long-term Short-term Total Long-term Short-term Total 
 (in millions of Ch$)  (in millions of Ch$) 

Borrowings from financial institutions:

                  

Central Bank credit lines for renegotiation of loans

 Ch$80   Ch$—     Ch$80   Ch$63   Ch$—     Ch$63   Ch$18    —     Ch$18   Ch$18    —     Ch$18   Ch$10    —     Ch$10   Ch$9   Ch$—     Ch$9  

Other borrowings from the Central Bank

  —      —      —      22,792    —      22,792    —      —      —      —      —      —      —      —      —      —      —      —    

Borrowings from domestic financial institutions

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Borrowings from foreign institutions

  117,299    1,163,993    1,281,292    194,886    1,473,198    1,668,084    168,450    940,213    1,108,663    168,450    940,213    1,108,663    131,649    857,806    989,455    15,165    1,083,542    1,098,707  

Debt issued:

                  

Bonds

  820,331    —      820,331    1,488,369    —      1,488,369    2,214,893    —      2,214,893    2,214,893    —      2,214,893    3,323,413    —      3,323,413    3,844,987    —      3,844,987  

Commercial papers (short-term bonds)

  —      —      —      —      —      —      —      197,340    197,340    —      197,340    197,340    —      210,049    210,049    —      378,060    378,060  

Subordinated bonds

  744,966    —      744,966    747,874    —      747,874    746,504     746,504    746,504    —      746,504    747,007    —      747,007    770,595    —      770,595  

Mortgage finance bonds

  198,868    —      198,868    152,098    —      152,098    115,196     115,196    115,196    —      115,196    86,491    —      86,491    64,314    —      64,314  

Other financial obligations

  67,602    111,558    179,160    61,734    123,051    184,785    55,585    106,538    162,123    55,585    106,538    162,123    50,314    160,612    210,926    44,844    141,729    186,573  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total other interest bearing liabilities

 Ch$1,949,146   Ch$1,275,551   Ch$3,224,697   Ch$2,667,816   Ch$1,596,249   Ch$4,264,065   Ch$3,300,646   Ch$1,244,091   Ch$4,544,737   Ch$3,300,646   Ch$1,244,091   Ch$4,544,737   Ch$4,338,884   Ch$1,228,467   Ch$5,567,351   Ch$4,739,914   Ch$1,603,331   Ch$6,343,245  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

The Bank has not had breacheswas in material compliance with all of capital and interest with respect to its debtsdebt instruments during year 20112012, 2013 and 2012.2014.

Central Bank Borrowings

Central Bank borrowings include credit lines for the renegotiation of loans and other borrowings. The Central Bank provided credit lines for the renegotiation of mortgage loans due to the need to refinance debts as a result of the economic recession and crisis of the Chilean banking system from 1982 to 1985. These credit lines are linked to the UF index and carry an average real annual interest rate of 0.72%0.86% as of December 31, 2012. The2014. As of the same date, the maturities of the outstanding amounts arebalances were, as follows:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  9

Due after 1 year but within 2 years

  Ch$18—    

Due after 2 years but within 3 years

   —    

Due after 3 years but within 4 years

   —    

Due after 4 years but within 5 years

   —    

Due after 5 years

   —    
  

 

 

 

Totallong-term (Credit lines for renegotiation of loans)

   —    

Totalshort-term (Other Central Bank borrowings)

   18—    
  

 

 

 

Total Central Bank borrowings

  Ch$189  
  

 

 

 

Borrowings from Domestic Financial Institutions

Borrowings from domestic financial institutions are generally used to fund our general operations. We currently doAs of December 31, 2014 we did not have any outstanding borrowings from domestic financial institutions.

Borrowings from Foreign Financial Institutions

We haveshort- andlong-term borrowings from foreign banks. These loans are denominated in foreign currency and are used to fund our foreign trade loans and carried an average nominal interest rate of 1.23%0.66% in the year ended December 31, 2012.2014. The outstanding maturities of these borrowings as of December 31, 20122014 were, as follows:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  Ch$36,08415,165  

Due after 1 year but within 2 years

   96,370—    

Due after 2 years but within 3 years

   35,996—    

Due after 3 years but within 4 years

   —    

Due after 4 years but within 5 years

   —    

Due after 5 years

   —    

Totallong-term

   168,45015,165  

Totalshort-term(1)

   940,2131,083,542  
  

 

 

 

Total foreign borrowings

  Ch$1,108,6631,098,707  
  

 

 

 

 

(1)Includes borrowings with maturities that were originally more than one year but which as of December 31, 20122014 had remaining maturities of less than one year.

Bonds

Our bonds are linked to the UF index and carried an average real annual interest rate of 3.36%2.74% as of December 31, 20122014 with interest and principal payments duesemi-annually. The bonds were intended to finance loans that had a maturity of more than one year.

The maturities of bonds as of December 31, 20122014 were:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  Ch$237,322650,903  

Due after 1 year but within 2 years

   164,200404,547  

Due after 2 years but within 3 years

   292,134298,520  

Due after 3 years but within 4 years

   110,060418,991  

Due after 4 years but within 5 years

   248,037553,638  

Due after 5 years

   1,360,4801,896,448  
  

 

 

 

Total bonds

  Ch$2,412,2334,223,047  
  

 

 

 

During 2012 Banco de Chile2014 we issued bonds in an amount of MCh$1,207,808,Ch$1,826,552 million, of which MCh$691,380 correspondsCh$1,090,340 million corresponded to Commercial Papers.commercial paper. As of December 31, 2014 the outstanding balance of commercial paper was Ch$378,806 million.

Subordinated Bonds

Our outstanding subordinated bonds are linked to the UF index with interest and principal payments duesemi-annually. The discount on the issuance of the outstanding subordinated bonds is amortized over the life of the bond. As of December 31, 2012,2014, the effective real interest rate was 4.73%4.60% taking into consideration the discount on issuance.

The bonds are intended to finance loans having a maturity of more than one year. As of December 31, 2012,2014, the maturities of subordinated bonds, which are consideredlong-term, were:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  Ch$38,17241,372  

Due after 1 year but within 2 years

   23,621151,758  

Due after 2 years but within 3 years

   24,75725,486  

Due after 3 years but within 4 years

   127,96925,189  

Due after 4 years but within 5 years

   23,64225,245  

Due after 5 years

   508,343501,545  
  

 

 

 

Total subordinated bonds

  Ch$746,504770,595  
  

 

 

 

During 2012 Banco de Chile issued bonds in an amount of MCh$26,177, with a maturity of 25 years and an interest rate of 3.75%.2014 we did not issue subordinated bonds.

Mortgage Finance Bonds

Mortgage finance bonds are used to finance the granting of mortgage loans. The outstanding principal amounts of the bonds are amortized on a quarterly basis. The range of maturities of these bonds is between five and thirty years. The bonds are linked to the UF index and carried a weighted average annual interest rate of 3.96%3.82% as of December 31, 2012.2014.

The maturities of mortgage finance bonds as of December 31, 20122014 were:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  Ch$27,06418,287  

Due after 1 year but within 2 years

   19,63312,009  

Due after 2 years but within 3 years

   15,8688,478  

Due after 3 years but within 4 years

   12,2996,765  

Due after 4 years but within 5 years

   9,5445,642  

Due after 5 years

   30,78813,133  
  

 

 

 

Total mortgage finance bonds

  Ch$115,19664,314  
  

 

 

 

Other Financial Obligations

The maturities of other financial obligations as of December 31, 20112012, 2013 and 20122014 were as follows:

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2012   2013   2014 
  (in millions of Ch$)   (in millions of Ch$) 

IFRS:

        

Other long-term obligations:

            

Obligations with Chilean Government

  Ch$67,602    Ch$61,734    Ch$55,585    Ch$55,585    Ch$50,314    Ch$44,844  
  

 

   

 

   

 

 

Total other long-term obligations

   67,602     61,734     55,585     55,585     50,314     44,844  

Other short-term obligations

   111,558     123,051     106,538     106,538     160,612     141,729  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total other obligations

  Ch$179,160    Ch$184,785    Ch$162,123    Ch$162,123    Ch$210,926    Ch$186,573  
  

 

   

 

   

 

   

 

   

 

   

 

 

As of December 31, 2012,2014, other financial obligations had the following maturities:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

IFRS:

  

Due within 1 year

  Ch$6,5795,035  

Due after 1 year but within 2 years

   5,9674,184  

Due after 2 years but within 3 years

   4,5673,812  

Due after 3 years but within 4 years

   3,7819,831  

Due after 4 years but within 5 years

   3,4204,520  

Due after 5 years

   31,27117,462  
  

 

 

 

Totallong-term

   55,58544,844  

Total short-term(1)short-term(1)

   106,538141,729  
  

 

 

 

Total other obligations

  Ch$162,123186,573  
  

 

 

 

 

(1)Includes borrowings with maturities that were originally more than one year but which as of December 31, 20122014 had remaining maturities of less than one year

Asset and Liability Management

Our asset and liability management policy is to maximize net interest income, return on assets and average equity in light of interest rate, liquidity and foreign exchange risks, within the limits of Chilean banking regulations and our internal risk management policies. Subject to these constraints, we may from time to time take mismatched positions as to interest rates or, in certain limited circumstances, foreign currencies when justified, in our view, by market conditions and prospects, and subject to our asset and liability management policies. Our board of directors determines our asset and liability policies. See Note 4042 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

Funding

The following table sets forth our average daily balance of liabilities for the years ended December 31, 2010, 20112012, 2013 and 2012,2014, in each case together with the related average nominal interest rates paid thereon:

 

 Year Ended December 31,  Year Ended December 31, 

IFRS:

 2010 2011 2012 
 2012 2013 2014 

IFRS:

Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
 Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
 Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
  Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
 Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
 Average
Balance
 % of Total
Liabilities
 Average
Nominal Rate
 
 (in millions of Ch$, except percentages)  (in millions of Ch$, except percentages) 

Current accounts and demand deposits

 Ch$4,085,800    25.7  —   Ch$4,540,335    24.7  —   Ch$4,926,475    24.4  —   Ch$4,926,475    24.4  —   Ch$5,455,342    25.1  —   Ch$6,224,055   26.2  —  

Savings accounts and time deposits

  7,382,126    46.4    2.58    8,450,231    46.0    5.11    9,380,123    46.4    5.31    9,380,123    46.4    5.31    9,842,483    45.2    4.83    9,724,220   40.9    4.35  

Borrowings from financial institutions

  1,365,835    8.6    1.38    1,715,417    9.3    1.39    1,435,362    7.1    1.55    1,435,362    7.1    1.55    1,201,866    5.5    1.15    1,137,199   4.8    0.63  

Debt issued

  1,660,440    10.4    6.61    1,994,679    10.8    7.72    2,838,170    14.0    6.00    2,838,170    14.0    6.00    3,771,209    17.3    5.29    4,897,000   20.6    7.03  

Other financial obligations

  132,200    0.8    2.48    168,858    0.9    2.26    170,977    0.8    1.86    170,977    0.8    1.86    173,868    0.8    1.68    190,159   0.8    2.64  

Other interest bearing liabilities

  182,956    1.2    1.10    218,847    1.2    4.96    286,944    1.4    5.22    286,944    1.4    5.22    289,107    1.3    4.55    262,301   1.1    3.65  

Other non-interest bearing liabilities

  1,098,484    6.9    —      1,298,603    7.1    —      1,187,619    5.9    —      1,189,169    5.9    —      1,028,223    4.8    —      1,329,895   5.6    —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

 Ch$15,907,841    100.0  —   Ch$18,386,970    100.0  —   Ch$20,225,670    100.0  —   Ch$20,227,220    100.0  —     Ch$21,762,098    100.0  —     Ch$23,764,829   100.0  —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Our most important sourcesources of funding are customer deposits, which primarily consist primarily ofpeso-denominated,non-interest bearing current accounts and demand deposits and both Chilean pesoPeso andUF-denominated interest bearing time deposits and savings accounts. Current accounts and demand deposits represented 24.4%, 25.1% and 26.2% of our average total liabilities in 2012, 2013 and 2014, respectively. These kinds of liabilities are our least expensiveleast-cost source of funding. SavingsOn the other hand, savings accounts, time deposit and debt issuancesissued represented 56.8%60.4%, 56.8%62.5% and 60.4%60.5% of our average liabilities in 2010, 20112012, 2013 and 2012,2014, respectively.

Capital Expenditures

For information on our capital expenditures, see Item 4. Information on the Company—History and Development of the Bank—Capital Expenditures.”

RECENT DEVELOPMENTS

New Consumer-Oriented Regulation

On DecemberApril 22, 2015, Mr. Jaime Estévez was appointed chairman of our directors/audit committee. He has been a member of our directors/audit committee since April 2007. Mr. Estévez satisfies the independence requirements of both Chilean law and Rule 10A-3 under the Exchange Act and is a full voting member of our directors/audit committee. He possesses vast financial experience evidenced by the fact that for 5 2011, Law 20.555years he was published inchairman of theDiario Oficial, amending the board of directors of Banco del Estado de Chile, a Chilean Consumer Protection Law. The most significant changes enacted by Law 20.555 are:

new agreements entered into by banksgovernment-owned bank, served as a director of AFP Provida and consumer must fully disclose the costs that the consumer assumes,AFP Protección, two Chilean private investment pension funds, and from 2006 until 2012 was a director of Endesa Chile S.A. as well as the periodicity,a member of its directors/audit committee and the mechanismsa financial expert. Prior to modify them. In addition, new agreements must fully disclose all terms , events of default, events of early termination, and automatic payments;

banks must inform consumers periodicallysuch service, Mr. Estévez served as to the complete, detailed costa Congressman for 8 years, a period in which he was a member of the banking product, as well asFinance and Budget Committee of the costChilean Congress. Mr. Estévez holds a degree in economics from the Universidad de Chile.

Mr. Jorge Awad, the former chairman of the services rendered. The information must include the cost that the consumer will assume if he terminates the agreement before the endour directors/audit committee, remains as a member of its term;

before rendering a service or delivering a product, banks must give the consumer a quote, which must include costs, rates, and conditions;

banks must terminate the rendering of a service if the consumer so wishes;

banks must inform guarantors as to their rights and obligations before they assume the role of guarantor;

irrevocable mandates and mandates in blank are prohibited by the law;

when consumers execute standard form contracts, banks must explain, in writing, the main provisions of the agreement; and

banks may only modify fees and costs of services and banking products if the mechanisms to modify them are based on objective and verifiable factors previously agreed to in the agreement. In addition, the cost of banking services and products may not be modified without the consent of the consumer.

This amendment became effective on March 5, 2012, however,our our directors/audit committee, together with regards to the banking product agreements entered into before said date, the regulation does not affect the substantive rights acquired by the parties in those agreements.

On July 2012 the government enacted the regulations that implement Law 20,555, which address mortgage loans, consumer loans, credit cards, the “Sernac Seal” (Sello Sernac), and other financial products and services. The new regulations govern, among other matters, the form and content of communications that financial institutions must periodically provide to their customers. Likewise, the new regulations implement the so-called “Summary Sheet” (Hoja Resumen), which must precede the contracts that consumers enter into with financial institutions. The Summary Sheet is intended to provide a clear and understandable summary of the terms and conditions that govern financial products and services.

The Sernac Seal is a new concept introduced by Law 20,555 and consists of a non-mandatory certification granted by the Chilean government agency in charge of consumer protection (Servicio Nacional del Consumidor,“Sernac”), by which that agency confirms that the contracts used by a financial institution when providing products and services comply with the Consumer Protection Act. In this regard, the new regulation establishes the specific requirements for financial institutions to obtain such certification as well as the events that may lead to its termination. Among the requirements to obtain the certification, financial institutions must provide a consumer service and adopt a dispute resolution procedure as defined by Law 20,555 and its regulation.

All of these regulations are already implemented by Banco de Chile, except Sernac Seal, which is not mandatory. We do not expect these new regulations will have an adverse effect on our business, financial condition and results of operation.Mr. Juan Enrique Pino.

TREND INFORMATION

We believe we have developed strong competitive advantages that will allow us to remain a relevant player within the Chilean banking industry. We are continuously seeking additional improvements in matters such as operating efficiency, productivity, profitability and service quality by developing new customer oriented service models, launching new financial products and services and implementing high quality information technologies. Our business environment is increasingly competitive and an active market for mergers and acquisitions tends to encourage large financial groups. In addition, competition fromnon-banking companies, mainly those involved in the retail industry, has encouraged us to develop improved value propositions to satisfy our customers’ needs.

The following trends may also have an impact on the Chilean economy and the economic growth of its trade partners, and could therefore affect our business, operating results or financial condition:

 

The fragile recovery of the global economy. Unforeseeable financial events, such as the current uncertainty about the financial condition of some European countries and the slowdown observed in the Chinese economy, affect financial markets.

 

The impact on worldwide consumption and foreign trade caused by the elimination of monetary and fiscal stimulus in both developed and developing economies.

We believe that Chile and its financial industry have proved to be successful in facing worldwide financial contingencies because of its strict fiscal policy,forward-looking and independent monetary policy, as well as strong regulation and supervision related to the financial industry.

In addition, the recent international trend of improved protection of consumers’ financial rights has become increasingly significant in Chile. If this trend leads to changes by Chilean financial regulators, these changes could affect our future operating results.

For more information regarding potential economic or regulatory factors that could affect our result of operations or financial condition, see Item 3. Key Information—Risk Factors.”

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, we are party to a number ofoff-balance sheet arrangements that present credit, market and operational risks that are not reflected in our consolidated financial statements. These activities include commitments to extend credit not otherwise accounted for as contingent loans, such as overdrafts and credit card lines of credit, andlong-term contractual obligations under operating leases or service contracts.

We provide customers with off-balanceoff balance sheet credit support through loan commitments. Such commitments are agreements to lend to a customer at a future date, subject to compliance with contractual terms. Since substantial portions of these commitments are expected to expire without us having to make any loans, total commitment amounts do not necessarily represent our actual future cash requirements. The amounts of these loan commitments were Ch$4,881,2205,436,938 million as of December 31, 20112013 and Ch$5,481,2356,084,098 million as of December 31, 2012.2014. See Note 2627 to our audited consolidated financial statements as of and for the year

ended December 31, 20122014 appearing elsewhere in this annual report. The amounts of subscribed leasing contracts were Ch$209,398238,082 million as of December 31, 20112013 and Ch$246,296197,454 million as of December 31, 2012.2014.

Interest rate andcross-currency swaps, which are entered into in order to hedge our foreign investment portfolio, are recorded at their estimated fair market values. See Note 89 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

The credit risk of both on andoff-balance sheet financial instruments varies based on many factors, including the value of collateral held and other security arrangements. To mitigate credit risk, we generally determine the need for specific covenant, guarantee and collateral requirements on acase-by-case basis, depending on the nature of the financial instrument and the customer’s creditworthiness. The amount and type of collateral held to reduce credit risk varies, but may include real estate, machinery, equipment, inventory and accounts

receivable, as well as cash on deposit, stocks, bonds and other marketable securities that are generally held in our possession or at another appropriate custodian or depository. This collateral is valued and inspected on a regular basis to ensure both its existence and adequacy. Additional collateral is requested when appropriate. For further information, see Note 2627 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

Financial Guarantees

The following is a summary of the nominal value of instruments that are considered financial guarantees and which are accounted for inoff-balance sheet accounts:

 

   As of December 31, 20122014 
   (in millions of Ch$) 

Performance bonds

  Ch$1,437,3121,576,763  

Foreign office guarantees and standby letters of credit

   323,924412,474  
  

 

 

 

Total

  Ch$1,761,2361,989,237  
  

 

 

 

Guarantees in the form of performance bonds, standby letters of credit and foreign office guarantees are issued in connection with agreements made by customers to counterparties. If the customer fails to comply with the agreement, the counterparty may enforce the performance bonds, standby letters of credit or foreign office guarantees as a remedy. Credit risk arises from the possibility that the customer may not be able to repay us for these guarantees.

TheAs of December 31, 2014, the expiration of guarantees per period is as follows:

 

  Due within 1
year
   Due after 1 year
but within 3

Years
   Due after 3 years
but within 5

years
   Due after  5
years
   Total   Due within 1
year
   Due after 1 year
but within 3
years
   Due after 3 years
but within 5
years
   Due after 5
years
   Total 
  (in millions of Ch$)   (in millions of Ch$) 

Performance bonds

  Ch$1,032,982     340,060     57,316     6,954    Ch$1,437,312     1,138,865     368,884     63,307     5,707     1,576,763  

Foreign office guarantees and standby letters of credit

   178,157     136,002     9,069     696     323,924     281,162     126,170     3,123     2,019     412,474  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  Ch$1,211,139     476,062     66,385     7,650    Ch$1,761,236     1,420,027     495,054     66,430     7,726     1,989,237  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

As of December 31, 2012,2014, the Bank did not have significant concentrations by country.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following tables set forth our contractual obligations and commercial commitments by time remaining to maturity. As of December 31, 2012,2014, the scheduled maturities of our contractual obligations, including accrued interest, were as follows:

 

IFRS: Due within 1 year Due after
1 year but
within 3 Years
 Due after
3 years but
within 5 years
 Due after
5 years
 Total Estimated
Interest
Payment
   Due within 1 year Due after
1 year but
within 3 years
 Due after
3 years but
within 5 years
 Due after
5 years
 Total Estimated
Interest
Payment
 
 (in millions of Ch$)   (in millions of constant Ch$ as of December 31, 2014) 

Contractual Obligations

             

Current accounts and other demand deposits

 Ch$5,470,971    —      —      —     Ch$5,470,971    —    

Transactions in the course of payments

  159,218    —      —      —      159,218    —    

Savings accounts and time deposits

  9,214,998    397,643    279    30    9,612,950    374,694  

Currents accounts and other demand deposits

   6,934,373    —      —      —      6,934,373   

Transaction in the course of payment

   53,049    —      —      —      53,049   

Saving accounts and time deposits

   9,384,054    336,838    166    188    9,721,246   

Bonds issued

             

Mortgage finance bonds

  27,064    35,501    21,843    30,788    115,196    32,922     18,287    20,487    12,407    13,133    64,314    16,793  

Subordinated bonds

  38,172    48,378    151,611    508,343    746,504    456,597  

Bonds

  39,982    456,334    358,097    1,360,480    2,214,893    499,328     272,843    703,067    972,629    1,896,448    3,844,987    645,011  

Commercial papers (Short-term bonds)

  197,340    —      —      —      197,340    44,489  

Hedge(*)

      

Commercial Bonds

   378,060    —      —      —      378,060    63,421  

Subordinated Bonds

   41,372    177,244    50,434    501,545    770,595    418,198  

Hedged Instrument

       

Inflows

             

Corporate bond MXN

  (3,053  (58,199  —      —      (61,252  —    

Corporate bond HKD

  (3,149  (6,309  (6,332  (110,408  (126,198  —    

Corporate bond PEN

  (1,138  (2,276  (16,358  —      (19,772  —    

Corporate Bond MXN

   —      —      —      —      —     

Corporate Bond HKD

   (9,508  (19,070  (66,617  (268,771  (363,966 

Corporate Bond PEN

   (622  (16,442  —      —      (17,064 

Corporate Bond CHF

   (6,767  (317,811  (344,146  —      (668,724 

Obligation USD

   (156,926  (61,751  —      —      (218,677 

Corporate Bond JPY

   (1,239  (58,445  (41,062  (51,563  (152,309 

Outflows

             

Cross currency swap MXN

  3,053    58,199    —      —      61,252    —       —      —      —      —      —     

Cross currency swap HKD

  3,149    6,309    6,332    110,408    126,198    —       9,508    19,070    66,617    268,771    363,966   

Cross currency swap PEN

  1,138    2,276    16,358    —      19,772    —       622    16,442    —      —      17,064   

Corporate Bond CHF

   6,767    317,811    344,146    —      668,724   

Obligation USD

   156,926    61,751    —      —      218,677   

Corporate Bond JPY

   1,239    58,445    41,062    51,563    152,309   

Borrowings from financial institutions

  976,315    132,366    —      —      1,108,681    —       1,098,716    —      —      —      1,098,716   

Other obligations

  113,117    10,534    7,201    31,271    162,123    —       146,764    7,996    14,351    17,462    186,573   

Lease contracts

  26,054    37,094    27,066    49,523    139,737    —       28,776    40,375    29,612    46,479    145,242   

Services contracts

  6,676    4,242    —      —      10,918    —       10,276    3,410    —      —      13,686   

Payables from repurchase agreements and security lending

  224,793    1,603    —      —      226,396    —    

Investments sold under agreements to repurchase

   249,482    —      —      —      249,482   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

 Ch$16,494,700   Ch$1,123,695   Ch$566,097   Ch$1,980,435   Ch$20,164,927   Ch$1,408,030     18,616,052    1,289,417    1,079,599    2,475,255    23,460,323    1,143,423  
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(*)See note 8(c) of the Consolidated Financial Statements

For more information, see note 9(c) to our Consolidated Financial Statements.

Item 6Directors, Senior Management and Employees

DIRECTORS AND SENIOR MANAGEMENT

Directors

Our administration is conducted by our board of directors, which, in accordance with ourestatutos (bylaws), consists of eleven directors and two alternate directors. The entire board of directors is elected every three years. Our current board of directors was elected in March 20112014 and its term expires in March 2014.2017.

Cumulative voting is permitted for the election of directors. Our chairman and our chief executive officer are appointed by our board of directors and hold their offices at its discretion. Scheduled meetings of our board of directors are held at least twice a month. Extraordinary board of directors meetings may be called by the chairman, when requested by a majority of the directors, or, in limited circumstances, when requested by a single director.

Our current directors are as follows:

 

Director

  

Position

  

Committee Memberships

  Age  

Position

  

Committee Memberships

  Age

Pablo Granifo L.

  Chairman  11  54  Chairman  9  56

Andronico Luksic C.

  Vice Chairman  1  59

Andrónico Luksic C.

  Vice Chairman  1  61

Francisco A. Aristeguieta

  Vice Chairman  1  57  Vice Chairman  2  49

Jorge Awad M.

  Director  3  67  Director  3  69

Jorge Ergas H.

  Director  3  44  Director  2  46

Jean Paul Luksic F.

  Director  1  48  Director  1  50

Raúl Anaya E.

  Director  8  59

Samuel Libnic

  Director  1  49

Gonzalo Menendez D.

  Director  4  64  Director  5  66

Fernando Concha U

  Director  3  54

Juan Enrique Pino V.

  Director  4  53

Francisco Perez M.

  Director  2  55  Director  4  57

Jaime Estévez V.

  Director  4  66  Director  4  68

Rodrigo Manubens M.

  Alternate Director  1  54  Alternate Director  1  56

Thomas Fürst F.

  Alternate Director  1  82  Alternate Director  1  84

Pablo Granifo L. was reelectedre-elected as the chairman of our board of directors in 2011,2014, a position which he has held since 2007. He was our chief executive officer from 2001 to 2007, chief executive officer of Banco de A. Edwards from 2000 to 2001, commercial manager at Banco Santiago from 1995 to 1999 and corporate manager at Banco Santiago from 1999 to 2000. Mr. Granifo is also chairman of the board of directors of Banchile Asesoría Financiera S.A., Socofin S.A., Banchile Securitizadora S.A., Banchile Factoring S.A., Banchile Administradora General de Fondos S.A., chairman and a member of the executive committee of Banchile Corredores de Seguros Limitada,Limitada. He is also chairman of Viña San PedroTarapacá S.A., and a member of the board of directors of Compañía Cervecerías Unidas S.A., Viña San Pedro Tarapacá S.A.,and Empresa Nacional de Energía Enex S.A., and the Santiago Stock Exchange. He holds a degree in business administration from the Pontificia Universidad Católica de Chile.

Andrónico Luksic C.has been a director and the vice chairman of our board of directors since 2002.2002 and was re-elected in 2014. Mr. Luksic is also chairman of LQIF, Quiñenco S.A. and Compañía Cervecerías Unidas S.A., vice chairman of Compañía Sud Americana de Vapores S.A. and a member of the board of directors of MadecoTech Pack S.A., and Sociedad de Fomento Fabril (SOFOFA). Mr. Luksic is a member of the APEC Business Advisory Council (ABAC) and Vice Presidentvice chairman of the International Business Leaders’ Advisory Council for the Mayor of Shanghai. He is also a member of the International Advisory CouncilBoard of Barrick Gold, the International Advisory Council of the Brookings Institution, the Advisory Board of the Panama Canal Authority, and the Chairman’s International Council of the Council of the Americas. In addition, Mr. Luksic is a member of the board of trustees ofTrustee Emeritus at Babson College, and a member the Harvard Global Advisory Council, the International Advisory Board of the Blavatnik School of Government at Oxford University, the International Advisory Boards of both the Tsinghua University School of Economics and Management and the Fudan University School of Management, the Harvard Business School Latin America Advisory Board, the Dean’s Council at the Harvard Kennedy School, the Advisory Committee at Harvard Business School, the Advisory Committee of the David Rockefeller Center ofat Harvard University, the Advisory Council of the School of Economics and Management of Tsinghua University, and a member of the Latin American Executive Board of the MIT Sloan School of Management. Mr. Andrónico Luksic and Mr. Jean Paul Luksic are brothers.

Francisco A. Aristeguietahas been a member and vice chairman of our board of directors since April 2012. As2012 and was re-elected in 2014. Mr. Aristeguieta is the Chief Executive OfficerCEO of Citigroup Latin America since January 2012, Mr. Aristeguieta has been responsible for all businesses and products in the 23 countries where Citigroup has a presence. Mr. Aristeguieta was previously Citigroup’s Region Head of Global2012. Before this role he served as Citi Transaction Services (GTS)(CTS) Head for Latin America and& Mexico, a member of the Comité Ejecutivo of Banco Nacional de México (Banamex), a member of the GTS’CTS Global Executive Committee, and Citigroup’s CEO of Colombia andfor the Andean Region Cluster which then consisted of Venezuela, Peru, Ecuadorcountries and Bolivia. Prior to this role, Mr. Aristeguieta was the Chief Country Officer (CCO) inColombia, CEO for Citigroup Venezuela and before that, in Ecuador. Mr. Aristeguieta is a member of Citi’sthe Citigroup Global OperatingExecutive Committee, the board of Citigroup Foundation, the Association of American Chambers of Commerce of Latin America, The Americas Society and Council of the Americas. He has been a member of theThe Young PresidentPresidents Organization (IPO)(YPO) since 2003. In addition, he servesserved on the Boardboard of Directors of Junior Achievement Americas and has served on several other Boards, including theboards among them: Banking Associations and American Chambers of CommerceAssociation of Ecuador, Colombia and Venezuela, and the Consejo de Empresas Americanas de Colombia (CEA).of Colombia. He was also Chairman of the board of Colfondos in Colombia. Mr. Aristeguieta holds an MBA from Brunel University in London, England, and both a graduate degree in FinanceBanking and BankingFinance and an undergraduate degree in Business Administration with a major in Management both from the Universidad Metropolitana in Caracas, Venezuela.

Jorge Awad M.has been a member of our board of directors since 1996.1996 and was re-elected in 2014. From 1989 to 1996 he was a member of the board of directors of Banco de Santiago. Since 2011, Mr. Awad has been the chairmanis president of the Chilean Bankers Association.Association of Banks of Chile since 2011. He is also a member of the board of directorsthe University of Icare, Talca, the Catholic University of Valparaíso TV and UCV TV.Inacap. Previously, Mr. Awad was president of LAN Airlines S. A. for 18 years until September 2012. He has also been a directorDirector of Codelco Chile, National Television Nacional deof Chile, Laboratorio Chile S.A.Laboratory, ICARE, and other Chilean companies. Previously, Mr. Awad was the chairman of Lan Airlines S.A. for eighteen years until 2012. He is also a professor of managementManagement and Entrepreneurship at Universidad de Chilethe School of Economics School from which he obtainedat the University of Chile. Mr. Awad has a degree in commercial engineering.Business Administration from the University of Chile. The University of Chile gave Mr. Awad the award for most prominent Business Administration graduate for 1998. In November 2014, he received another award for being one of the most prominent Business Administration graduates in the 80 years’ history of the school.

Jorge Ergas H. was appointed member of our board of directors onin March 2011 and was re-elected in 2014 after having served as an advisor to the board of directors since 2007 and from 2002 to 2005. From 2005 to 2007, Mr. Ergas was an Alternate Director.alternate director. Mr. Ergas is currently theVice-Chairman of Banchile Compañía de Seguros de Vida S.A., Vice-Chairmanvice chairman of Orion Seguros Generales S.A., President of Movicenter and a director of Inersa S.A., Nido de Águilas Educational Foundation,Limitada, Ever and Ever I BAE. Mr. Ergas was previously a director of the Plaza San Francisco Hotel, CasaPiedra Convention Center, HNS Bank and Inmobiliaria Paidahue.

Jean Paul Luksic FF.. was appointed member of our board of directors onin April 2013.2013 and was re-elected in 2014. Mr. Luksic is vice chairman of Quiñenco S.A. and Sociedad Matriz SAAM S.A. Mr. Luksic has beenis also chairman of the board of directors of Antofagasta plc, a position he has held since 2004, after having served as director for2004. Mr. Luksic was appointed to the company sinceboard of directors of Antofagasta plc in 1990 and Deputy Chairman since 2000. Mr. Luksic was the Chief Executive Officer of Antofagasta Minerals until his appointment as Chairman of Antofagasta plc.plc in 2004. He is also chairmanDirector of the board of Antofagasta Minerals, Ferrocarril de Antofagasta a Bolivia, and Aguas Antofagasta, as well as chairmanChairman of the Mining Council.Consejo Minero, the industry body representing the largest mining companies in Chile. Mr. Luksic holds a B.Sc. degree in management and science and political Science from the London School of Economics. Jean Paul Luksic is the brother of Adrónico Luksic.

Raúl Anaya E.Samuel Libnicwas appointed member of our board of directors in April 2014. He has been the General Counsel for Citigroup Inc.’s operations in Latin America since 2007. In April 2010, he became a member of Citigroup Inc.’s Legal Management Committee and in January 2012 was appointed to the Office of Vice President by the board of directors of Citibank, N.A. In September 2013 the legal department of Banamex, Citigroup Inc.’s Mexican banking subsidiary, also began reporting to Mr. Libnic. Mr. Libnic’s current responsibilities include overseeing legal coverage for all products and businesses throughout Latin America and Mexico. Prior to becoming General Counsel for the Latin America region, Mr. Libnic held a number of positions of increasing responsibility since joining the company in 1996 as General Counsel of the Global Corporate and Investment Bank for Citibank Mexico, Grupo Financiero Citibank. In 2001, he was named Deputy General Counsel for Latin America, a position he held until he assumed his current role. From November 2010 until June 2013, Mr. Libnic also acted as Head of the Legal Department for Citi Brazil (in additional to his regional role). Before joining Citigroup Inc., Mr. Libnic worked at Shearman & Sterling LLP in New York and with Basham, Ringe and Correa, one of the most prestigious law firms in Mexico. He holds a Juris Doctor with honors from the Anahuac University in Mexico, as well as an LLM from Georgetown Law School, and is licensed to practice law in both Mexico and New York.

Gonzalo Menendez D.has been a member of our board of directors since January 2008. He has been with Citigroup for 25 years2001 and currently serves as the Latin American chief executive officer for the Consumer and Commercial Banking division. Mr. Anaya has previously served as head of global retail banking and chief executive officer of Citigroup’s Global Consumer Banking Council. He has also served as CEO of Citigroup Inc.’s businesseswas re-elected in Central America and the Caribbean, covering corporate, investment and consumer banking. From December 2005 to July 2008, Mr. Anaya was the CEO of Latin America’s (except Brazil and Mexico) Consumer Group. Mr. Anaya was named to his position after serving as Retail Head for Latin America since February 2005. From August 2003 to January 2005, he was Executive Director of Consumer Assets at Banamex in Mexico and responsible for mortgages, personal loans and car financing. Prior to this position, Mr. Anaya served as Division Director for the Central Metropolitan Retail Banking Division at Banamex. From May 1999 to January 2002, he was Chairman and CEO of Banco Bansud S.A. (formerly a subsidiary of Banamex) in Argentina. Mr. Anaya joined Citibank at Banamex’s New York Agency in October 1987 and later became General Manager of the Banamex Agency in Los Angeles, Executive Vice-President of the Corporate Banking and International Division at California Commerce Bank, General Manager of the Banamex Agency in Houston and General Manager of the Banamex Agency in New York.

Gonzalo Menendez D. has been a member of our board of directors since 2001.2014. He is also the chairman of the board of directors of Inversiones Vita S.A., and a member of the boardsboard of directors of several other companies, including Banchile Asesoría Financiera S.A., Banchile Factoring S.A., Banchile Seguros de Vida S.A., Quiñenco

S.A., Compañía Sudamericana de Vapores S.A., Sudamericana Agencias Aéreas y Marítimas S.A., Sociedad Matriz SAAM S.A., Antofagasta PLC,plc, Mining Group Antofagasta Minerals S.A., Antofagasta Railway, Aguas de Antofagasta S.A., Andsberg Investment Ltd., SAAMAndsberg Limited, Inmobiliaria e Inversiones Río Claro S.A., and Andsberg Limited.Empresa Nacional de Energía ENEX S.A. He is also vice chairman of Fundación AndronicoAndrónico Luksic A. and Fundación Pascual Baburizza.Educacional Luksic. Previously, Mr. MenendezMenéndez served as chief executive officer of the Antofagasta Railway to Bolivia, Banco O’Higgins and Empresas Lucchetti. Since 1990, he has been a director and is now the chairman of the board of directors of the Banco Latinoamericano de Comercio Exterior S.A., Bladex. Mr. MenendezMenéndez was a member of the board of directors and the executive committee ofat Banco Santiago and a member of the board of directors ofat Banco de A. Edwards. Mr. MenendezHe was a professor of finance, and Chilean economiceconomics and business policy at the Universidad de Chile. He holds a degree in business administration and accounting from the Universidad de Chile.

Fernando Concha U.Juan Enrique Pino V. was appointedhas been a member of our board of directors since August 2013 and was re-elected in March 2011.2014. Currently, Mr. ConchaPino is managing director of Citigroup Chile and a member of the Accival Brokerage House Executive Committee and Wealth Management in Mexico. Prior to this position, Mr. Concha was the chief executive officer of Citigroup for the Andean, Central America & Caribbean Region and the South America Region, excluding Brazil. From January to July 2008, he worked for Banco de Chile as head of corporate and investment banking after the merger with Citibank Chile. In addition, Mr. Concha was the Citigroup CountryChief Risk Officer for Chile from April 2006 to December 2007, after working in Banamex-Citigroup, Mexico City, for over eight years in different capacities. His last position was as Mexico Regional Treasurer. Throughout his professional career, Mr. ConchaCitigroup Latin America, a role that he has occupied positions of leadership, serving as country treasurer and head of capital markets Citibankheld since January 2010, initially based in Mexico, and Divisional Treasurer with Citibank Latin America North Divisionfrom February 2015 onwards based in Miami, FL. Prior to his international assignment, Mr. Concha was the head of investment banking with Citibank Chile. From 1986 to 1992, he worked as a Senior Investment Officer for AFP Provida.United States. He was also appointed member of the board of the Mexican Derivatives Market, Mex-Der, President of the Brokerage House for Citibank Mexico and Vice Chairman of the Bolsa Electrónica de Chile, Bolsa de Valores. Currently he is a member of the Techo Business Council.Global Risk Management Executive Committee of Citigroup, and of the Executive Committees of Citigroup Latin America. Juan Enrique first joined Citi in 1985, serving since then in several business and risk management roles, first in Chile and then in other countries in Latin America. He was General Manager for Citigroup Chile and Citi Accival Corredores de Bolsa in 2008 and part of 2009, and has been also a board member of several companies in which Citigroup has been a shareholder. Mr. Concha hasPino is a Commercial Engineer and graduated from Universidad Adolfo Ibañez (Chile) in 1983 with a degree in Business Administration from the Pontificia Universidad Católica de Chile and has received training in different Executive Programs in the U.S., Europe and Latin America.Administration.

Francisco Perez M.has been a member of our board of directors since 2001.2001 and was re-elected in 2014. Since 1998, Mr. Perez has also served as the chief executive officer of Quiñenco S.A. Mr. Pérez is also chairman of the board of directors of Compañía Sud Americana de Vapores S.A. and, Empresa Nacional de Energía Enex S.A., Indalum S.A. and Madeco Mills S.A.. Mr. Perez is vice chairman of Madeco S.A..Invexans S.A. and Tech Pack S.A. He was formerly the chief executive officer of Compañía CerveceríCervecerías Unidas S.A., of which he is still a director. Mr. Perez is a member of the board of directors of Banchile Corredores de Seguros S.A., LQ Inversiones Financieras S.A., Embotelladoras Chilenas Unidas S.A., Foods Cía. Alimentos CCU S.A., Cía. Cervecerías Unidas Argentina S.A., Cía. Pisquera de Chile S.A., Cervecera CCU Chile Ltda., Inversiones y Rentas S.A., Nexans, Sociedad Matriz SAAM S.A. Sudamericana, Agencias Aéreas y Marítimas S.A., and director of Hapag-Lloyd. He is also an advisor of the board of directors of Viña San Pedro Tarapacá S.A. Prior to 1991, Mr. Perez was chief executive officer of Citicorp Chile and also was vice president of Bankers Trust in Chile. Mr. Perez holds a degree in business administration from the Pontificia Universidad Católica de Chile and a master’s degree in business administration from the University of Chicago.

Jaime Estévez V.has been a member of our board of directors since 2007 and was re-elected in 2014, and is currently the chairmana member of the board of directors of Cruzados SADP. Previously, Mr. Estévez was chairman of the board of directors of Banco Estado, a Chileangovernment-owned bank. Additionally, he has served as a director AFP Provida and AFP Protección, two Chilean private investment pension funds, and as director of Endesa Chile S.A. Mr. Estévez was Minister of Public Works from January 2005 to March 2006, and simultaneously, as Minister of Transportation and Telecommunications. He was also a congressman from March 1990 to March 1998 and president of the Lower Chamber of Congress from March 1995 to November 1996. Mr. Estévez holds a degree in economics from the Universidad de Chile.

Rodrigo Manubens MM.. has been a member of our board of directors since 2001.2001 and was re-elected in 2014. He is the chairman of Banchile Compañía de Seguros de Vida S.A. and a, director and chairman of the Director Committee of Aguas Andinas S.A. and a director of the Bolsa de Comercio de Santiago (the Santiago Stock Exchange). Mr. Manubens was a member of the board of directors of Banco de A. Edwards from 1999 until 2001. From 1985 to 1999, Mr. Manubens was a member of the board of directors of Banco O’Higgins and retained such position following the merger between Banco O’Higgings and Banco Santiago. From 1995 to 1999, he was chairman of Banco Tornquist in Argentina and a member of the board of directors of Banco Sur in PeruPerú and Banco Asunción in Paraguay. Mr. Manubens also served as a director and chairman of the board of directors of Endesa Chile S.A for ten years. Mr. Manubens holds a degree in business administration from Universidad Federico Santa María and Universidad Adolfo Ibañez and a master’s degree from the London School of Economics and Political Science.

Thomas G. Fürsthas been a member of our board of directors since 2004.2004 and was re-elected in 2014. Previously, Mr. Fürst was the vice chairman of the board of directors of Compañía CerveceríCervecerías Unidas S.A. and a member of the board of

directors of several other companies, including Embotelladoras Chilenas Unidas S.A., ViñaDassault-San Pedro S.A, Southern Breweries Establishment, CCU Argentina S.A. and Compañía Industrial Cerveceria S.A. (CICSA). Mr. Fürst was a founder and member of the board of directors of Parque Arauco. In addition, he is a partner and member of the boardBoard of directorsDirectors of Plaza S.A. and Nuevos Desarrollos S.A., owners of 15 shopping centers and two shopping centers under construction in Chile, five shopping centers in Perú and one shopping center and two shopping centers under construction in Colombia. At present, Grupo Plaza is considered the second most prominent chain of malls in South America. Mr. Fürst holds a degree in civil construction from Pontificia Universidad Católica de Chile.

Former director

On March 27, 2013 Mr. Guillermo Luksic, a distinguished member of our board of directors since 2001 and a member of the controlling group of our bank, passed away.

Senior Management

Our current executive officers are as follows:

 

Executive Officers

  

Position

  Age

Arturo Tagle Quiroz

  Chief Executive Officer  5456

Pedro Samhan ERolando Arias

  Chief Financial Officer  6250

Nelson Rojas P.

  General Legal Counsel  5961

Mauricio Baeza L.

  Manager—Corporate Credit Risk Division  5052

Jorge Tagle O.

Manager—Commercial Division (Individual and SME Banking)43

Patricio Melo G.Ignacio Vera A.

  Manager—Operations and Technology Division  5356

Cristián Lagos C.

  Manager—Human ResourcesPeople and Organization Division  4749

Eduardo Ebensperger O.

  Manager—Wholesale, Large Corporations and Real EstateCommercial Division  4749

Juan Cooper A.

  Manager—Consumer Finance Division  5154

Felipe Echaiz B.

  Manager—Global Compliance Division  4647

VacantAlain Rochette G.

  Manager—Corporate and Investment Banking Division  54

Oscar Mehech C.

  Manager—Risk Control Division  4850

Armando Ariño J.

Manager—Normatives and Procedures Division49

Arturo Tagle Q. was appointed our Chief Executive Officer in May 2010. From November 2009 to April 2010, he was the Managing Director of our Institutional and Investors Relations Division, and from 2008 to November 2009 he was the Managing Director of our Strategic Development Division. From 2002 to 2007, Mr. Tagle was our Chief Financial Officer and from 1998 to 2001 he was head of our Internal Audit and Control Division. He is also a member of the board of directors of Banchile Asesoría Financiera S.A., Socofin S.A., Banchile Securitizadora S.A., and Banchile Administradora General de Fondos S.A., and a member of the executive committee of Banchile Corredores de Seguros Limitada. Mr. Tagle joined us in 1995. From 1990 to 1994, he was General Manager of the Chilean Bankers Association, and from 1984 to 1989 he was Director of Research at the Superintendency of Banks.SBIF. Mr. Tagle ishas also been the Chief Executive Officer of Sociedad Matriz del Banco de Chile S.A. and SAOS since 1996. He holds a degree in Business Administration from the Pontificia Universidad Católica de Chile and a master’s degree in Business Administration from the University of Chicago.

Pedro Samhan E.Rolando Arias S.was appointed our chief financial officerChief Financial Officer in January 2008. In August 2008, he was appointed as director of Banchile Trade Services Limited.June 2014. Prior to his currentthis position, Mr. SamhanArias was Manager of the chief financial officer of Citigroup Chile for several years.Research and Planning Area since 2006. He served as a memberManager of the boardFinancial Control Area of directorsBanco de Chile after its merger with Banco de A. Edwards from 2002 to 2006. Before this merger, Mr. Arias was in charge of Cruz Blanca Segurosthe Planning Area of Banco de VidaA. Edwards from 19941997 to 2001. Mr. Arias joined Banco de A. Edwards in 1987 and until 1997 AFP Habitat from 1996he held various positions related to 2006controlling and Compañía Minera Las Luces from 1994 to 1996.planning. Mr. Samhan was chief financial officer of Citicorp for Caribbean and Central America from 1990 to 1993 and investment banking head of Citicorp Chile from 1988 to 1990. Mr. SamhanArias holds a degree in civil industrial engineeringBusiness Administration from the Pontificia Universidad Católica de Chile.

.Nelson Rojas P.has been our general counsel and secretary of our board of directors since 2004. In 2002, he joined us as deputy general counsel. Mr. Rojas joined Banco de A. Edwards in 1987 and was the general counsel and secretary of the board of directors of Banco de A. Edwards from 1997 to 2002. He is also vice president of the legal affairs committee of the Chilean Bank Association. Mr. Rojas holds a degree in law from the Universidad de Chile.

Mauricio Baeza L. has been the manager of our CreditCorporate Risk Division since December 2005. Mr. Baeza joined us in 1997 and was manager of the risk division of Banco de A. Edwards during 2001. He was risk manager at Banco Santiago from 1993 to 1997.1999. Mr. Baeza is a member of the Board of Socofin S.A. He is thealso secretary of our director’s loan committee, SOCOFIN S.A. Committee Advisor,and

participates in the Finance, International and FinancialMarket Risk Committee, Advisor, and participates of the Portfolio Risk Committee and the Operational Risk Committee. Currently he is Chairman of the Risk ComitteCommittee of the Chilean Banking Association. Mr. Baeza is also a member of the Investment committee of Banchile Fondo Inmobiliario and he is a director of the Foundation Villa Padre Hurtado a charity organization. Mr. Baeza holds a degree in civil engineering from the Pontificia Universidad Católica de Chile.

Jorge Tagle O. leads our Commercial Division (Individual and SME Banking), including Marketing, Individual and Small and Medium-Sized Companies and Branches since September 2012, and before that he was our Vice-Chief Executive Officer since October 2011. Previously, Mr. Tagle served in different executive positions mainly within the Luksic Group. From September 2008 to August 2011, he was Executive Vice-President of Nexans S.A.. Between 2005 and 2008, he was Corporate General Manager of Alusa S.A. From 2002 to 2005, he was Chief Financial Officer of industrial conglomerate Madeco S.A. From 1999 to 2002, he was the Manager for New Projects at Quiñenco S.A. the holding company of the Luksic Group. Mr. Tagle holds a degree in civil industrial engineering from the Pontificia Universidad Católica de Chile and a master’s degree in Business Administration from Wharton School, University of Pennsylvania.

Cristián Lagos C. joined us as manager of our Human ResourcesPeople and Organization Division in May 2012. From 2008 to March 2012 he was the Corporate PeopleHuman Resources and Reputational Manager of Compañía General de Electricidad S.A. Before that, he was the Manager of the Planification and Human Resources Division of Banco Sudaméricano, and after the merger between this Bank and Scotiabank, he occupied the same position in the latter. Additionally, he was the Human Resources manager of Chilesat S.A., and Corporate Manager of Telmex S.A after the merger of Chilesat S.A. with said company. Mr. Lagos is a psychologist of the Diego Portales University, and he participated in the PDD Program of ESE.

Patricio MeloIgnacio Vera A.was appointed managerhead of our Operations and Technology Division on July 1, 2008. Hein February 2014. Previously, Mr. Vera was chief executive officerfrom 2009 to 2013 the Head of Internet, Mobile and Offshore Technology Centers for Altec Brasil SA from 2006Barclays Bank. From 2007 to June 2008,2009 he was the Chief Technology Service Officer of HSBC Mexico. Prior to this position he worked for HSBC in the Canada Development Centre and was responsible for technological management of Banco Santander in Brazil. He was chief executive officer for Altec Chile from 2001 to 2005. From 1992 to 2000, he joined Banco Santander in Chile and Perú as an operations and technology manager. Mr. Melo is the chairmancharge of the Operationscorporate and Technology Committeetrade Internet solution (HSBCnet). Mr. Vera was also CIO of HSBC Group in Argentina and from 1982 to 1991 he worked at the Chilean Banking Association. HeStock Exchange Argentina Bank where he held various IT positions. Mr. Vera has also been a member of various boards of directors such as that of Redbanc S.A., ALTEC México and ALTEC Chile. Mr. Melo holds aBachelor in Computer Science degree in electronic engineering from the Universidad Federico Santa María.University of Buenos Aires and has taken courses at Wharton School University of Pennsylvania (USA), INSEAD Business School in Fontainebleau (France), and the University of Chicago Booth School of Business (USA).

Eduardo Ebensperger O. has been the Managing Directorour Commercial Division Manager since December 1, 2014. He was Manager of the Wholesale Division, including Large Companies and Real Estate, Division since January 2008; beforefor 6 years prior to his current position. From 2005 to 2007 he was Manager of Large Companies and between 2002 and 2005 he was General Manager of the Middle Market Companies Division from 2005 to 2007, and was previously the Chief Executive Officer ofsubsidiary Banchile Factoring S.A. from 2002 to 2005. HeMr. Ebensperger joined Banco de A. Edwards in 1989. Mr. EbenspergerHe was appointed as Regional Branch Manager in 1997 and later was appointed as the Division Manager of the Medium Size Companies Division and Manager of the regional branches of Banco de A. Edwards from 1997 to 2001. Presently, Mr. EbenspergerCompanies. He is thecurrently Chairman of the Board of Directors of Artikos S.A. He is also currentlyS.A, a member of the BoardBoards of Banchile Citi Global Markets (Banchile Asesoría Financiera S.A.), Banchile Factoring S.A. and Banchile Securitizadora S.A., Banchile Administradora General de Fondos S.A., and he is a member of the executive committee of Banchile Corredores de Seguros Limitada. He also participates in the following Committees: Banchile Leasing, CommitteeGTS, Factoring, and GTS Committee.Operational Risk Management. Mr. Ebensperger holds a degree in Business and Economic Science from the Universidad de Chile.

Juan Cooper A.has been the manager of our Consumer Finance Division Banco CrediChile since 2003. He was the chief executive officer of Altavida Santander Compañía de Seguros de Vida S.A. from 2001 to 2002 and the manager of Santiago Express, the consumer division of Banco Santiago, from 1997 to 2000. He is also currently a member of the board of directors of Socofin S.A., and a member of the executive committee of Banchile Corredores Seguros Limitada. Mr. Cooper has a degree in business administration from the Universidad de Chile and a master’s degree in business administration from the Pontificia Universidad Católica de Chile.

Felipe Echaiz B.has been the manager of our Global Compliance Division since January 2008. He joined us as a result of our merger with Citibank Chile. Mr. Echaiz worked at Citibank for ten years and was Citigroup Inc.’sChile country compliance officer from 2006 to 2007. In 2003, he was the deputy director to theAnti-Money Laundering and Organized Crime Unit at the Public Prosecutor’s Office. Mr. Echaiz is a member of the executive committee forAnti-Money Laundering of the Chilean Banks Association and holds a degree in law from the Pontificia Universidad Católica de Chile and a master’s degree in finance and economics from the Universidad de Chile.

Alain Rochette G.has been the manager of our Corporate and Investment Banking Division Manager since 2013. Prior to that, he was advisor to the CEO for the Corporate and Investment Banking Division and General Coordinator for the Treasury, Investment and Corporate Divisions. Previously, he held diverse positions in Citibank including Executive Director of Markets and Treasury for Latin America based in the U.S., CFO of Citibank Chile and 15 years in diverse regional positions in Japan and the United States. Mr. Rochette holds a degree in industrial engineering from Universidad de Chile.

Oscar Mehech C.was appointed head of our Risk Control Division in July 2008 after holding various positions with us, which include being head of our Regulatory Policies Division, head of our Global Compliance Division and deputy general counsel. Prior to joining us in 2002, he was deputy general counsel at Banco de A. Edwards. Mr. Mehech is the chairman of the internal audit committee of the Chilean Banking Association and a memberthe vice chairman of the surveillance committee of Depósito Central de Valores S.A. He holds a law degree from Universidad de Chile and a master’s degree in business administration from the Pontificia Universidad Católica de Chile.

Armando Ariño J.joined Banco de Chile in March 2015 as Manager of our Division of Procedures and Rules. Mr. Ariño was the manager of IT Division in Corpbanca since November 2000, and from 2005 to 2011 was responsible for all Corpbanca’s Backoffice Services. He was the leader executive for design of Operational Model and IT transformation plan execution and in 2009 he was Vice President of the Operational Committee of the Chilean Bank Association. From 2011 to 2014 he was a member of the Strategic Project Office responsible for the acquisition and merger of Santander Colombia and Helm Bank. Mr. Ariño holds a degree in Systems Engineering from the Universidad INCCA de Colombia.

COMPENSATION

The table below presents the amount of compensation, as established by our shareholders, to the members of our board of directors for the year ended December 31, 2012.2014. These amounts include remuneration for services, fees for attendance at meetings of our board of directors, meetings of committees of our board of directors and meetings of board of directors of our subsidiaries, consulting services and travel expenses.

 

Name of Director

  Remuneration   Fees for
Attending
Meetings of
our Board of
Directors
   Fees for Attending Meetings
of Committees of our Board
of Directors and Meetings
of the Board of Directors of
our Subsidiaries
   Total   Remuneration Fees for
Attending
Meetings of
our Board of
Directors
   Fees for Attending  Meetings
of Committees of our Board
of Directors and Meetings
of the Board of Directors of
our Subsidiaries
(1)
   Consulting   Total 
  (in millions of Ch$)     (in millions of Ch$) 

Pablo Granifo Lavín

  Ch$358    Ch$45    Ch$294    Ch$697     383(2)   52     365     —       800  

Andrónico Luksic Craig

   147     8     —       155     155    10     —       —       165  

Jorge Awad Mehech

   49     23     110     182     52    24     130     —       206  

Gonzalo Menéndez Duque

   52    23     115     26     216  

Jaime Estévez Valencia

   52    26     106     —       184  

Rodrigo Manubens Moltedo

   52    24     51     —       127  

Jorge Ergas Heymann

   49     17     47     113     52    19     60     —       131  

Jaime Estévez Valencia

   49     23     92     164  

Guillermo Luksic Craig

   49     4     —       53  

Rodrigo Manubens Moltedo

   49     23     49     121  

Gonzalo Menéndez Duque

   49     21     112     182  

Francisco Pérez Mackenna

   49     17     50     116     52    22     55     —       129  

Thomas Fürst Freiwirth

   49     18     37     104     52    19     40     —       111  

Jacob Ergas Ergas

   —       —       9     9  

Jean-Paul Luksic Fontbona

   52    9     —       —       61  

Francisco Aristeguieta Silva

   —      —       —       —       —    

Juan Enrique Pino Visinteiner

   —      —       —       —       —    

Juan José Bruchou

   —      —       —       —       —    

Other subsidiary directors

   —       —       165     165     —      —       147     80     227  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 

Total

  Ch$897    Ch$199    Ch$965    Ch$2,061     954    228     1,069     106     2,357  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 

(1)Includes fees paid to members of the Advisory Committee of Banchile Corredores de Seguros Ltda. of Ch$16 million.
(2)Includes an incentive payment of Ch$226 million for achieving the Bank’s forecasted earnings.

For the year ended December 31, 2014 fees paid for advisory services to the Board of Directors were Ch$179 million, while travel and other related expenses amounted to Ch$226 million.

Consistent with Chilean law, we do not disclose to our shareholders, or otherwise make public, information regarding the compensation of our executive officers. For the year ended December 31, 2012,2014, the aggregate amount of compensation paid to our executive officers, including the executive officers of our subsidiaries, was Ch$8,3599,126 million. Pursuant to the Chilean Corporations Law, our directors/audit committee must approve compensation plans, but we are not required to have a compensation committee. For the year ended December 31, 2012,2014, no amounts were set aside or accrued by us to provide pension, retirement or similar benefits for our directors and officers. None of our directors is a party to any agreement with us or any of our subsidiaries that provides for benefits upon termination of his appointment as a director.

Indebtedness of Directors and Executive Officers

As disclosed in Note 38(c) to our audited consolidated financial statements as of and for the year ended December 31, 2012 appearing elsewhere in this annual report, we incurred an aggregate of Ch$119,768 million in expenses and Ch$112,391 million in income from transactions other than loans with related parties in 2012.

As authorized by the General Banking Law, and within applicable regulatory limits, we also hold several outstanding loans owed by different affiliated corporations. All such loans:

were made in the ordinary course of business;

were made on substantially the same terms, including interest rate 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.

We held an aggregate of Ch$333,192 million in net loans (provisions for loan losses not deducted) to related parties, including Ch$66,586 million in collateral pledged by related parties, as of December 31, 2012. See Note 38(a) to our audited consolidated financial statements as of and for the year ended December 31, 2012 appearing elsewhere in this annual report for details concerning these transactions.

For a further description of transactions with related parties, including directors, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”

BOARD PRACTICES

Governance Practices

The board of directors delegates certain functions and activities to our committees to research, evaluate and report to the board of directors regarding specific matters which may affect our businesses.

The Directors/Audit Committee

Prior to March 24, 2005, our directors committee and audit committee were separate committees performing independent functions for the board of directors. On March 24, 2005, the board of directors approved the merger of our directors committee with our audit committee, forming the directors/audit committee. The directors/audit committee’s primary objectives are to seek the efficiency, maintenance, application and functioning of our internal control systems and compliance with applicable rules and procedures governing our business; to identify our business risks; to supervise the activities of both the Risk Control Division and the Global Compliance Division,Internal Audit, ensuring their independence from management; to serve as an mediator and coordinator of tasks between the internal audit work and our independent auditors; and to act as a communication channel between our internal audit team, our independent auditors and our board of directors.directors; and to perform the duties established by article 50 bis of the Chilean Law of Corporations (Ley 18.046 sobre Sociedades Anónimas).

Our directors/audit committee is composed of three members appointed by the board of directors. The directors/audit committee is currently composed of the following individuals:

 

Jorge Awad M. (chairman and financial expert);

 

Jaime Estevez V.; and

 

Fernando Concha U.Juan Enrique Pino V.

Mr. Awad and Mr. Estevez were appointed as members of the directors/audit committee by our board of directors at the meeting held on April 12, 2007. Mr. ConchaPino was appointed to the directors/audit committee by our board of directors at the meeting held on OctoberAugust 25, 2012.2013.

Messrs. Awad and Estevez satisfy the independence requirements of both Chilean law andRule 10A-3 under the Exchange Act and are full voting members of our directors/audit committee.

Mr. Fernando ConchaJuan Enrique Pino is exempt from the independence requirements ofRule 10A-3 of the Exchange Act pursuant to the exemption underRule 10A-3(b)(1)(iv)(D). Pursuant to that exemption, Mr. ConchaPino is anon-voting member of our directors/audit committee with respect to all matters required to be addressed by our directors/audit committee under U.S. federal securities laws.

The directors/audit committee met 2819 times during 2012.2014. The budget of the directors/audit committee is approved annually at the ordinary annual shareholders’ meeting. The directors/audit committee satisfies the applicable requirements of the Superintendency of BanksSBIF and operates pursuant to a charter document. The Superintendency of BanksSBIF recommends that at least one of the members of the directors/audit committee be experienced with respect to the accounting procedures and financial aspects of banking operations. The directors/audit committee submits a report regarding its activities to our board of directors after each directors/audit committee meeting and presents an annual report at our ordinary annual shareholder’s meeting. As established in the directors/audit committee’s charter, the chief executive officer, the general counsel and the manager of our Risk Control Division, or their respective deputies, shall also attend the directors/audit committee meetings. The directors/audit committee may also invite other persons to attend meetings.

The directors/audit committee may appoint independent personnel to carry out specific duties. The directors/audit committee’s specific objectives include:

 

Seeking efficiency, maintenance, application and functioning of our internal control systems, and compliance with rules and procedures;

Supervising compliance with rules and procedures governing the banking business and identifying the business risks of our and our subsidiaries’ activities;

 

Supervising the activities of our Corporate Credit Risk Control Division and Individual Credit Risk Division, ensuring theirits independence from management;

 

Supervising the activities of the Global Compliance Division, servingServing as an intermediator and coordinator of tasks between our internal audit work and our independent auditors, and acting as a communication channel between these teams and our board of directors;

 

ExaminingProposing to the fees budget for ourboard of directors the independent auditors and the credit rating agencies;agencies to be proposed at the shareholders meeting;

 

Analyzing the reports, content, procedures and scope of the revisions by our independent auditors and credit rating agencies;

 

Analyzing and generating information on the annual internal audit program and the resultsreports of internal audits and revisions;revisions and analyzing and reviewing the annual audit program;

 

Analyzing the interim and annual financial statements;

 

Analyzing our financial statements included in theForm 20-F, for presentation to the SEC;20-F;

 

Gathering information on accounting changes occurring during the year and their effects;

 

Reviewing issues affecting the internal control systems;

 

Analyzing the remuneration systems and compensation plans for managers and executive officers;

 

Analyzing the 20122014 annual performanceself-evaluation process;

 

Analyzing related party transactions in referencepursuant to Title XVI of the Chilean Corporations Law;

 

Analyzing policies relating to operational risk and progress in therisk-management process and SOX self-evaluation, in the context of Basel II;self-evaluation;

 

Analyzing and informing on matters related to the Global Compliance Division, principally regarding the revision of policies for detecting and sanctioning money laundering transactions; and

 

Reviewing customer claims filed with the Superintendency of BanksSBIF and the Customer defense Division of the Chilean Association of Banks and Financial Institutions.

Portfolio Risk Committee

The main function of the portfolio risk committee is to inform our board of directors of changes in the composition and risk of our loan portfolio, and our corresponding global exposure,sector-specific exposure orbusiness-specific exposure. The portfolio risk committee closely reviews the performance of our principal debtors, overduepast-due loan ratios,past-due loan indicators,write-offs and allowances for loan losses.

The portfolio risk committee prepares proposals for discussion with, and approval by, our board of directors with respect to credit policies, portfolio evaluation methods and the calculation of allowances for expected loan losses. The portfolio risk committee also performs analysis of the adequacy of allowances, authorizes extraordinarycharge-offs of loans once recovery attempts have been exhausted and controls the liquidation of assets acquired in lieu of payment.

The portfolio risk committee meets on a monthly basis and is composed of the chairman of our board of directors, our chief executive officer, onetwo additional director,members or advisors of our board of directors, the manager of our Corporate Credit Risk Division, the manager of our Individual Credit Risk Division, and the deputy manager of ourIntelligence and Information Risk Control Division.Area.

Credit Committees

Our governance structure relating to the evaluation process of commercial loans is based on the segments and risks involved. Each credit decision should be made with the participation of committee members with sufficient authority over a particular type of loan.

A member of the Corporate Credit Risk Division is required to approve most credit decisions exceeding UF 6,000. Such decisions are made by different loan committees, the highest of which, in terms of hierarchy, is the board loan committee, composed of our chief executive officer, the manager of our Corporate Credit Risk Division and at least three members of our board of directors, all of whom review all transactions exceeding UF 750,000 on a weekly basis. Any member of the board of directors may participate in the board loan committee.

The Corporate Credit Risk Division participates independently and autonomously in each committee from our business areas.

For retail banking, we have loan committees that in exceptional cases review individual customers when they do not meet our customer profile policies, payment behavior requirements or maximum financing amounts.

Finance, International and Market Risk Committee

The main function of the finance, international and market risk committee is to analyze the evolution of our financial positions and the market risks (price and liquidity) that these financial positions generated, particularly the control of risks related to internal and regulatory limits and/or warnings. This committee also analyzes international financial exposure and major credit exposures generated by derivative transactions.

The finance, international and market risk committee meets monthly and is composed of the chairman of our board of directors, four other members or advisors of our board of directors, our chief executive officer, the manager of our Corporate Credit Risk Division, the manager of our Corporate and Investment Banking Division, our chief financial officer, our corporate treasurer and the manager of our financial risk area. Committee members conduct analyses and make presentations to the committee regarding certain matters, including:

 

Knowledge of the current statusmarket risks, which allows forecasting of market risk, which permits forecasting potential future losses;

 

Review of estimated results of certain financial positions generated in isolation in order to measure therisk-return ratio of the treasury businesses, as well as changes in and forecasts of the use of capital based on best estimates of future credit and market risks;

 

Analysis of the liabilities of the international financial exposure and major credit exposures generated by derivative transactions; and

 

The design of policies and procedures for setting, controlling and reporting financial position limits and warnings.

Asset Laundering and Financing of Terrorism Prevention Committee

The asset laundering and financing of terrorism prevention committee was set up in April 2006 with the purpose of defining the policies and procedures that would comprise the asset laundering and financing of terrorism prevention system, as well as evaluating compliance and deciding on all matters related to these subjects.

This committee includes the chairman of our board of directors, two members of our board of directors, our chief executive officer, our general counsel, the manager of our Operations and Technology Division and the chief executive officer of Banchile Administradora General de Fondos S.A. The manager of our Risk Control Division, the manager of our Global Compliance Division, our general counsel, the manager of our Operations and Technology Division, and the manager of our asset laundering prevention area may also attend and participate in the meetings.

The asset laundering and financing of terrorism prevention committee meets monthly and has the following functions:

 

To approve the policies and procedures concerning the gathering of information on customers and their activities and the acceptance and monitoring of their accounts, products and operations;

To approve policies and procedures concerning unusual transaction detection systems; formal channels of information to senior management; and monitoring, analysis and reporting mechanisms;

 

To approve policies and procedures concerning surveillance methods and relations with correspondent banks;

 

To approve policies and procedures concerning staff selection, training programs and codes of conduct;

 

To approve the policies and procedures concerning asset laundering and terrorism financing prevention;

 

To appoint persons to perform specific functions in accordance with current regulations on the prevention of asset laundering and terrorism financing;

 

To analyze the results of the reviews conducted to verify compliance with current policies and procedures;

 

To consider the transactions analyzed and decisions made by the transactions analysis committee;

 

To consider activities developed to train staff in asset laundering and terrorism financing prevention;

 

To consider and approve modifications to procedures proposed by our Global Compliance Division that improve existing controls for the prevention of asset laundering and terrorism financing; and

 

To inform our board of directors of regulatory changes related to the prevention of asset laundering and financing of terrorism.

Upper Operational Risk Committee

Created in April 2014, the Upper Operational Risk Committee is responsible for (i) identifying the Bank and its subsidiaries’ exposure to operational risk at both an entity and business level; (ii) evaluating our corporate strategy for managing operational risk, information security management system, business continuity and reputational risk; (iii) approving strategies as defined by the Operational Risk Executive Committee in accordance with the Bank’s operational risk policy; (iv) encouraging the establishment of guidelines and directing efforts to properly manage and mitigate operational risk; (v) reporting to the board on the management model and the level of operational risk exposure of the Bank and its subsidiaries and additional mitigation and/or prevention efforts adopted by the Bank; (vi) ensuring compliance with the current regulatory framework and optimizing capital use; (vii) ensuring compliance with the Bank’s operational risk policy; and (viii) ensuring that our strategy and defined plans ensure the solvency of the Bank and its subsidiaries in the long run by avoiding risk contingencies that could jeopardize the continuity of the Bank.

This committee is composed of three members of our board of directors, our chief executive officer, the manager of our Corporate Risk Division, the manager of our Operations and Technology Division, and the manager of our Operational Risk Area.

Leasing Committee

The main function of the Leasing Committee is to review the monthly evolution and results of our Leasing Area by means of a report that consolidates the management of the business divisions of the Bank.

This committee includes the chairman of our board of directors, one member or advisor of our board of directors, our chief executive officer, the manager of our Commercial Division, the manager of branches of our Commercial Division, the manager of Products for Corporations and the manager of the Leasing Area.

Factoring Committee

The Factoring Committee was set up in 2013, after the merger of Banchile Factoring S.A. with us. Its purpose is to analyze the evolution and results of our Factoring Area in terms of volume, prices, margins, provisions and expenses and analyze the factoring product for each business area of the Bank.

This committee is chaired by the chairman of our board of directors, one member or advisor of our board of directors, our chief executive officer, the manager of our Commercial Division and the manager of the Marketing and Products Area of the Commercial Division.

Consumer Finance Division Committee

The main purpose of the Consumer Finance Division Committee is to analyze on a monthly basis the evolution and results of our Consumer Finance Division, its growth, and its strategies to gain new customer segments and maximize the results of the division.

This committee includes the chairman of our board of directors, three members of our board of directors, our chief executive officer, the manager of our Commercial Division and the manager of our Consumer Finance Division.

Banchile Corredores de Seguros Committee

The main purpose of the Banchile Corredores de Seguros Committee is to analyze the growth and results of our insurance brokerage subsidiary.

This committee is composed of the chairman and one member of our board of directors, our chief executive officer, the manager of our Commercial Division, the manager of our Consumer Finance Division and the chief executive officer of Banchile Corredores de Seguros Ltda.

Committees composed of Banco de Chile’s senior management

The main committees composed of Banco de Chile’s senior management executives are:

Disclosure Committee

In May 2003, we established the disclosure committee to ensure accurate market disclosure of our and our subsidiaries’ consolidated financial information. The members of the disclosure committee include our Chief Financial Officer, our chief accountant, our senior lawyer for international matters, and the manager of our researchResearch and planning area, together with the manager of our Institutional and Investor Relations Division, our chief financial officerPlanning Area, and the manager of our Risk Arquitecture Area. The manager of our Risk Control Division.Division may participate in the Committee as well.

The members of the disclosure committee are involved in reviewing quarterly reports and in general all financial information disclosed by us prior to each disclosure.

Ethics Committee

The ethics committee was established in 2005 to define, promote and regulate behavior of professional and personal excellence consistent with our philosophy and values to be followed by all our staff in order to meet the expectations of our customers.

To meet these goals and promote a culture of ethical behavior, the ethics committee sets policies on ethics and ensures their compliance, develops training plans related to ethics in our business, and reinforces positive behavior among our staff. The ethics committee also acts as a forum to address, discuss and resolve any conduct by our staff that is inconsistent with our values. This committee is chaired by the manager of our Human ResourcesPeople and Organization Division and includes our general counsel, the manager of our Risk Control Division, the manager of our Global Compliance Division, the manager of our Commercial Division (Individual and SME Banking), the manager of our Operations and TechnologyConsumer Finance Division, and the manager of our Wholesale, Large Corporations and Real EstateCommercial Division.

Citigroup and Banco de Chile Cooperation Agreements Committees

In order to control and review the evolution of the joint initiatives resulting from our strategic association with Citigroup Inc., additionally to the Global Connectivity Agreement Steering Committee, the following committees have been set up: (i) Global Transaction Services Committee; (ii) International Personal Banking Committee; (iii) Investment Banking Committee; (iv) Retail Initiatives Committee; and (v) Financial Control Committee of the Cooperation Agreement. The committees mentioned above are composed of the chairman of our board of directors, our chief executive officer and two members of our board of directors that have been appointed by Citigroup Inc. Also taking part in these meetings, except in the Global Connectivity Agreement Steering Committee, are division managers for each particular business line and the managers of the areas directly responsible for the respective business.

The main purpose of the Global Connectivity Agreement Steering Committee is to act as a communication link between Banco de Chile and Citigroup in connection with the agreements entered into between them. The purposes of the other committees are:

(i) Global Transaction Services Committee (GTS)

The global transaction services committee was set up with the purpose of monitoring the overall performance of the transactional services areas in accordance with the Global Connectivity and Cooperation Agreements and, in particular, the functions of local and international cash management and custody for foreign investors.

(ii) International Personal Banking Committee (IPB)

The main goal of the international personal banking committee is to monitor the performance of the IPB unit in Banco de Chile in relation to the services provided by us to Citibank with respect to certain financial products and services offered abroad to residents of Chile. This committee seeks to strengthen Citibank’s commercial activities with individuals that are not residents of the United States.

(iii) Investment Banking Committee

The objective of the investment banking committee is to foster the development of cross-border merger and acquisition transactions, debt issuances and acquisitions, and capital markets for our customers and customers of Citigroup Inc. doing business in Chile. This committee is responsible for monitoring the execution of transactions performed under the Global Connectivity Agreement and collaborating in investment banking business opportunities.

(iv) Retail Initiatives Committee

The main purpose of this committee is to share best practices and business opportunities between both institutions.

(v) Financial Control Committee of the Cooperation Agreement

The most important purpose of the financial control committee of the Cooperation Agreement is to monitor in detail the operative and financial performance of the Global Connectivity and Cooperation Agreements.

Approval of Policies and Procedures under the Merger Agreement

The Merger Agreement between us and Citibank Chile provided that as a general rule our board of directors would approve and implement certain policies relating to the operation of the joint entity. At the time of filing of this annual report, policies regarding the following issues were approved and implemented:

Anti-Money Laundering;

Foreign Corrupt Practices Act;

Office of Foreign Assets Control;

Insider Trading;

Regulation K—Debts Previously Contracted;

Regulation K—Equity Activity;

Regulation W (23 A/B);

Code of Conduct;

Fair Lending;

Personal Trading Policy;

Loans to Directors;

Independent Research;

Charitable Contributions;

Chinese Walls;

Anti-Tying;

Mandatory Absence Policy;

Compliance Policy/Program;

Administration of Subsidiaries;

Fraud Management;

Anti-Boycott;

Issue Tracking, Management and Escalation Process;

Operational Risk;

Credit Risk;

Vendor Selection and Management Process;

Web Site Standards;

Capital Expenditure Policy;

Expense Management Policy;

Accounting Policies and Procedures;

New Products and Services Policy;

Tax Standards for Tax Sensitive Transactions;

Tax Policy and Procedures; and

Fiduciary Policy.

In addition to the policies mentioned above, we are in the process of supplementing other policies currently in force that are material to our business, such as prevention of asset-laundering, credit risk and market risk.

Upper Management Committee

The upper management committee, the highest coordinating body of our upper management, is chaired by our chief executive officer, and its principal function is to discuss main strategic guidelines and to analyze the market and the banking industry.

This committee resolves issues relating to our internal policies and analyzes our performance. In this committee, numerous divisions exchange their points of view as to our business and prioritize joint initiatives. Each year, this committee outlines the foundations for our annual plan. After the individual annual plan for each business area is agreed upon by our chief executive officer and each division manager, under the coordination of our chief financial officer, the overall plan is submitted to our board of directors for approval. This committee also reviews progress and budgets for approved plans on a monthly basis.

Operational Risk Executive Committee

Created in 2009, the operational risk executive committee is responsible for identifying, prioritizing and establishing strategies to mitigate key operational risk events relating to internal and external fraud; risks associated with customer, product and business practices; damage to tangible assets; and disturbance of normal activity resulting from system malfunctions or failures in executing, delivering and processing products/services. This committee is also responsible for defining and evaluating our corporate strategy for managing operational risk, establishing guidelines and directing efforts to create controls and improve internal processes in order to reduce operational losses.

To comply with these objectives and foster an awareness of operational risk, this committee promotes a series of training activities and communicates to our staff important information relating to operating risks.

This committee is chaired by our chief executive officer and includes our chief financial officer, the head of the security and risk prevention area, the manager of our Corporate Risk Control Division, our chief financial officer, the manager of our Operations and Technology Division, and the manager of our operational risk area.Operational Risk Area. The manager of our Risk Control Division, our general counsel, the manager of Clients Area of the Commercial Division, and the head of the Security and Risk Prevention Area may participate in this committee as well.

Internal CommunicationsQuality Committee

This main objective of this committee is to generate strategic guidelines fordecision-making on issues related to the attention of customers, through all channels available at the bank, by means of the analysis of customer perception and relevant competition. In addition, this committee supervises projects and initiatives aimed at increasing the permanence and referrals of our clients.

This committee is chaired by our chief executive officer, the manager of our Commercial Division, the manager of our Consumer Finance Division, the manager of our Operations and Technology Division, the manager of the Marketing and Products Area of the Commercial Division, the manager of Clients Area of the Commercial Division and the manager of the Quality Area of the Commercial Division.

Citigroup and Banco de Chile Cooperation Agreements Committees

In order to control and review the evolution of the joint initiatives resulting from our strategic association with Citigroup Inc., additionally to the Global Connectivity Agreement Steering Committee, the following operating committees have been set up: (i) Global Transaction Services Committee; (ii) International Personal Banking Committee; (iii) Investment Banking Committee; (iv) Retail Initiatives Committee; and (v) Financial Control Committee of the Cooperation Agreement. The committees mentioned above are composed of the chairman of our board of directors, our chief executive officer and two members of our board of directors that have been appointed by Citigroup Inc. Also taking part in these meetings, except in the Global Connectivity Agreement Steering Committee, are division managers for each particular business line and the managers of the areas directly responsible for the respective business.

The main purpose of the Global Connectivity Agreement Steering Committee is to act as a communication link between Banco de Chile and Citigroup in connection with the agreements entered into between them. The purposes of the other committees are:

(i) Global Transaction Services Committee (GTS)

The global transaction services committee was set up with the purpose of monitoring the overall performance of the transactional services areas in accordance with the Global Connectivity and Cooperation Agreements and, in particular, the functions of local and international cash management and custody for foreign investors.

(ii) International Personal Banking Committee (IPB)

The main goal of the international personal banking committee is to monitor the performance of the IPB unit in Banco de Chile in relation to the services provided by us to Citibank with respect to certain financial products and services offered abroad to residents of Chile. This committee seeks to strengthen Citibank’s commercial activities with individuals that are not residents of the United States.

(iii) Investment Banking Committee

The objective of the investment banking committee is to foster the development ofcross-border merger and acquisition transactions, debt issuances and acquisitions, and capital markets for our customers and customers of Citigroup Inc. doing business in Chile. This committee is responsible for monitoring the execution of transactions performed under the Global Connectivity Agreement and collaborating in investment banking business opportunities.

(iv) Retail Initiatives Committee

The internal communications committee defines policies and designs our action plan to ensure that appropriate information reaches allmain purpose of our employees. This committee ensures that information sent to our employees is adequate to allow them to correctly perform their functions, communicates the organization’s fundamental strategies and policies and its performance, promotes collaboration and team work, fosters personal development, encourages first-rate performance and cultivates a pleasant work environment. The internal communicationsthis committee is led byto share best practices and business opportunities between both institutions.

(v) Financial Control Committee of the managerCooperation Agreement

The most important purpose of the financial control committee of the Cooperation Agreement is to monitor in detail the operative and financial performance of the Global Connectivity and Cooperation Agreements.

Approval of Policies and Procedures under the Merger Agreement

The Merger Agreement between us and Citibank Chile provided that as a general rule our Human Resources Division,board of directors would approve and includes managers fromimplement certain policies relating to the operation of the joint entity. At the time of filing of this annual report, policies regarding the following divisions:issues were approved and implemented:

 

Chief Financial Officer;Anti-Money Laundering;

 

Operations and Technology Division;

Institutional and Investor Relations Division;Foreign Corrupt Practices Act;

 

Commercial Division (Individual and SME Banking)Office of Foreign Assets Control;

Insider Trading;

Regulation K—Debts Previously Contracted;

Regulation K—Equity Activity;

Regulation W (23 A/B);

 

Corporate and Investment Banking Division;Code of Conduct;

Fair Lending;

 

Wholesale, Large Corporation and Real Estate Division;Personal Trading Policy;

 

Consumer Finance Division;Loans to Directors;

Independent Research;

Charitable Contributions;

Chinese Walls;

Anti-Tying;

Mandatory Absence Policy;

Compliance Policy/Program;

Administration of Subsidiaries;

Fraud Management;

Anti-Boycott;

Issue Tracking, Management and Escalation Process;

Operational Risk;

Credit Risk;

Vendor Selection and Management Process;

Web Site Standards;

Capital Expenditure Policy;

Expense Management Policy;

Accounting Policies and Procedures;

New Products and Services Policy;

Tax Standards for Tax Sensitive Transactions;

Tax Policy and Procedures; and

 

DevelopmentFiduciary Policy.

In addition to the policies mentioned above, we are in the process of supplementing other policies currently in force that are material to our business, such as prevention ofasset-laundering, credit risk and Quality Manager.market risk.

EMPLOYEES

The following table shows a breakdown of ourfull-time, permanent employees at the dates indicated:

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2012   2013   2014 

Banco de Chile

   10,341     10,482     10,737     10,737     11,023     11,190  

Subsidiaries

   3,675     3,647     3,844     3,844     3,700     3,613  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   14,016     14,129     14,581     14,581     14,723     14,803  
  

 

   

 

   

 

   

 

   

 

   

 

 

As of December 31, 2012,2014, we had 14,58114,803 employees (on a consolidated basis). 8,297 of our employees were unionized, which 6,371 or 43.7% were unionized.represented 56.0% of the total employees of the Bank and its subsidiaries. As of the same date, all management positions were held bynon-unionized employees.

In 2011 we renegotiated three out of the four existing collective agreements that were due to expire in 2012 and signed four-year agreements with all of them. Also, we renegotiated the collective bargaining arrangement related to an agreement that expired in 2011 with “Citibank union” that, as of that date, comprised 1,016 employees, representing 15.0% of our total unionized workforce.

Similarly, duringDuring 2012 we renegotiated the existing collective agreements of two of our subsidiaries, Socofin and Promarket, which jointly represented 17.3% of our total workforce as of December 31, 2012. Both of these agreements were due to expire in 2012. For one of the agreements we reached atwo-year accord, agreement, whereas for the other collective agreementothers we signed a four-year accord, which are due to expire in 2014 and 2016, respectively. agreements.

These collective bargaining processes have allowed us to equalizestandardize benefits among all of our employees, since we formerlypreviously had differentiated agreementsmultiple benefits programs due to our successive merger transactions.

In 2014, we renegotiated the existing collective bargaining agreements with five of the Bank’s unions and one of our subsidiaries’ (Promarket) unions. Although some of the collective bargaining agreements associated with our unions were due to expire in 2015, we decided to renegotiate them in advance. We reachedfour-year agreements expiring in 2018 for all of the collective bargaining agreements renegotiated with the Bank’s unions. In the negotiation of Promarket’s union, we agreed to athree-year agreement that expires in 2017. We believe all of these new agreements will improve relations withreflect the satisfactory relationships between the Bank and its employees, while reinforcing our employees, which we believe are satisfactory, and simplify the compensation systemcommitment to employees across the corporation.their career development.

We have comprehensive personnel training and development programs that include internal courses on operational, technical and commercial matters, as well as participation in external seminars and conferences. In 2012,2014, the total cost of training programs was approximately 0.54%0.7 % of the Bank’sour consolidated personnel salaries and expenses. These expenses were related to 1,069associated with 790 training courses that were attended by 65,53511,394 people. According to our human resources division,management information systems, every trained person attended—on average—approximately 3.3 training courses during 2012 97.1% of2014. In addition, for the Bank’s total personnel attended at least one training course.year ended December 31, 2014 the Bank granted 465 scholarships to staff members for specialization purposes.

We do not maintain any pension or retirement programs for the vast majority of our employees. We do, however, pay certainlong-serving key employees a severance payment upon retirement. Although we have provided productivity bonuses to individual employees on a discretionary basis, we do not maintain a formalprofit-sharing plan.

SHARE OWNERSHIP

Mr. Andronico Luksic and Mr. Jean Paul Luksic, members of our board of directors since March 2002 and April 2013, respectively, together with members of their family, control Quiñenco S.A. As of April 15, 2013,17, 2015, Quiñenco directly and indirectly owns 50% of LQIF, which in turns owns directly 32.25%25.71% of our outstanding shares and 0.14%0.19% through InversionesLQ-SM Ltda. Quiñenco S.A also directly holds 0.11% of our total common stock. Additionally, Quiñenco S.A. holds 58.51%51.17% of the voting rights in Banco de Chile (directly and indirectly through shares ofSM-Chile S.A. that are owned by LQIF and InversionesLQ-SM S.A Ltda.(“LQ-SM”). See Item 7—Major Shareholders, footnote (3)).

LQIF andLQ-SM are investment vehicles incorporated under Chilean law through which Quiñenco S.A. and Citigroup hold their ownership interests in Banco de Chile. As part of the strategic partnership between Citigroup and Quiñenco, they entered into a framework agreement which was included in our6-K filed on July 20, 2007. Pursuant to this agreement and following the merger of Citibank Chile into Banco de Chile, Quiñenco S.A. and Citigroup became the shareholders of LQIF, the parent corporation of Sociedad Matriz del Banco de Chile S.A.(“SM-Chile”) and Banco de Chile, among other companies.LQ-SM is an investment vehicle whose major shareholder LQIF owns 99.99% of its shares.

As of April 15, 2013,17, 2015, Citigroup is the owner of 50% of LQIF and Quiñenco, directly and indirectly, owns 50% of LQIF. Regardless of any increase in participation by Citigroup, however, the framework agreement provides that Quiñenco will remain in control of LQIF and the corporations that are directly or indirectly controlled by LQIF. Accordingly, Quiñenco will maintain the power to elect the majority of the directors of LQIF,SM-Chile and Banco de Chile.

Mr. Jacob Ergas controls Ever I Bae S.p.A., Ever Chile S.p.A. and Inversiones Aspen Limitada. As of April 15, 2013,17, 2015, these holding companies own 2.19%2.22%, 2.19%2.22% and 1.51%1.54% of our outstanding shares, respectively. Mr. Ergas holds 5.89%5.98% of the voting rights in Banco de Chile through these holding companies. Mr. Jacob Ergas has not been a member of the board since March 2011, when Mr. Jorge Ergas was appointed to the board of directors. Mr. Jacob Ergas and Mr. Jorge Ergas are father and son.

None of our directors or senior management (other than Mr. Andronico Luksic and Mr. Jean Paul Luksic)directly owns 1% or more of our outstanding common stock. Further, none of our directors (including Mr. Andronico Luksic and Mr. Jean Paul Luksic) or senior management have different or preferential voting rights with respect to the shares they own.

We do not have any arrangements for involving employees in our capital, including any arrangements that involve the issue or grant of options of our shares or securities.

Item 7Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Ownership Structure

As described in “Item 4. Information on the Company—History and Development of the Bank—History—The 1982–1983 Economic Crisis and the Central Bank Subordinated Debt,” the Chilean banking system, including us, experienced significant instability during that time that required the Central Bank and the Chilean Government to provide financial assistance to most Chilean private sector banks which resulted, pursuant to Law No. 18,818 enacted in 1989, in the repurchase by us of our portfolio ofnon-performing loans from the Central Bank and the assumption of the Central Bank’s subordinated debt relating to ournon-performing loans.

In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which we were converted into a holding company namedSM-CHILE S.A. In turn, SM- CHILE S.A.SM-CHILE organized a new wholly owned banking subsidiary named Banco de Chile, to which it contributed all of its assets and liabilities other than the Central Bank subordinated debt. In addition, SM- CHILE S.A.SM-CHILE incorporated SAOS S.A. (“SAOS”), a special purpose legal vehicle created by Law 19,396, whose only business purpose is to repay the Central Bank indebtedness. In exchange for assuming the Central Bank indebtedness, SAOS received from SM- CHILE S.A.SM-CHILE a certain portion of our shares pledged as collateral in favor of the Central Bank of Chile to secure payment to the Central Bank. Pursuant to applicable laws and the bylaws of both SAOS andSM-CHILE, S.A., the economic rights of our shares held by SAOS belong to the Chilean Central Bank; however, their voting rights are exercised by the shareholders of SM- CHILE S.A.SM-CHILE at Banco de Chile’s shareholders’ meetings.

Currently, our major shareholder LQIF holds 58.40%51.17% (together withLQ-SM, as further explained below) of the voting rights of our shares. LQIF and InversionesLQ-SM Ltda. are vehicles incorporated under Chilean law through which Quiñenco S.A. and Citigroup hold their ownership interests in Banco de Chile. Additionally, Quiñenco S.A. has a direct participation of 0.11% in our total common stock. The voting rights of LQIF andLQ-SM is the result of the right of LQIF andLQ-SM, pursuant to applicable law and bylaws, to vote (i) our shares owned by LQIF andLQ-SM; (ii) our shares owned by SM- CHILE S.A.,SM-CHILE, based on the ownership percentage of LQIF andLQ-SM in SM-CHILE S.A.;SM-CHILE; and, (iii) our shares owned by SAOS, as a shareholder of SM- CHILE S.A.,SM-CHILE, based on the ownership percentage of LQIF andLQ-SM inSM-CHILE, S.A., at our shareholders’ meetings. According to the bylaws of SM- CHILE S.A.,SM-CHILE, the voting rights of SM- CHILE S.A., shares—SeriesSM-CHILE, shares (Series A, B and D—D) which in turn possess voting rights over Banco de Chile shares, are exercised in accordance with the following rule: each share of SM- CHILE S.A.,SM-CHILE, exercises the voting rights of one of our shares plus 2.38337827 of our shares owned by SAOS. The latter factor is the result of dividing the number of our shares owned by SAOS (28,593,701,789)

by the number of total outstanding shares ofSM-CHILE, S.A., Series A, B and D (11,997,131,195). Consequently, eachSM-CHILE S.A. share (Series A, B and D) with voting rights over our shares may vote 3.38337827 shares of Banco de Chile. SM-CHILE S.A.’sSM-CHILE’s Series E exercises voting rights of Banco de Chile shares in aone-to-one ratio.

Major Shareholders

The following table sets forth certain information regarding the ownership of outstanding shares (including Banco de Chile-T series shares) as of April 15, 201317, 2015 for the following:

 

each person or entity who is known by us to own beneficially more than 5% of our outstanding shares capital or voting rights; and SAOS, LQIF and SM-Chile S.A.SM-Chile.

 

our directors and members of our executive management group, as a group.

Ownership in Banco de Chile(1)

(As of April 15, 2013)17, 2015)

 

Name

  Amount Owned   Percentage   Amount Owned   Percentage 

SAOS(2)

   28,593,701,789     31.09   28,593,701,789     30.21

SM- CHILE S.A.

   12,138,537,826     13.20

SM-CHILE

   12,138,549,725     12.82

LQIF and LQ-SM(3)

   29,795,295,881     32.39   24,512,659,593     25.90

Jacob Ergas(4)

   5,418,034,824     5.89   5,651,242,095     5.98

Directors and executive officers as a group(5)

   25,325,145     0.03   1,173,961,591     1.24

Voting Rights in Banco de Chile

(As of April 15, 2013)17, 2015)

 

Name

  Amount Owned   Percentage   Amount Owed   Percentage 

LQIF and LQ-SM(5)

   53,713,237,424     58.40

LQIF andLQ-SM

   48,430,601,136     51.17

Jacob Ergas

   5,418,034,824     5.89   5,651,242,095     5.98

Directors and executive officers as a group(6)

   56,127,992     0.06   1,448,896,259     1.53

 

(1)Percentages are based on 91,977,302,95394,655,367,544 shares outstanding as of April 15, 2013, including Banco de Chile-T series shares. Currently we have Banco de Chile´shares and Banco de Chile-T series shares outstanding.17, 2015. Each share has one vote and all shares have identical voting rights, with the exception that Banco de Chile-T series shares will not receive dividends or fully paid-in shares in respect of our net distributable earnings for fiscal year 2012. Once any dividends and/or fully paid-in shares are distributed, the Banco de Chile-T shares will automatically convert into Banco de Chile shares.rights. We have no shares outstanding with special voting rights.
(2)SM-CHILE S.A. beneficially owns 100% of SAOS. Our shares owned by SAOS (which are all pledged as collateral in favor of the Chilean Central Bank to secure repayment of the Central Bank indebtedness) possess economic rights that belong to the Chilean Central Bank, although the voting rights, pursuant to theby-laws of both SAOS andSM-CHILE, S.A., are exercised by the shareholders ofSM-CHILE, S.A., at the Bank’s shareholders’ meetings. In terms of economic rights, all classes of shares ofSM-Chile have the right to receive dividends, with the exception of class A shares, which aredo not afforded withhave this right (classes B, D and E are entitled to dividends from the income generated bySM-Chile when we decide to distribute dividends).
(3)LQIF andLQ-SM hold 47.13% and 11.11%, respectively, ofSM-Chile’s total shares. The total percentage ownership of LQIF andLQ-SM inSM-CHILE S.A., was calculated by adding the total number of shares of LQIF andLQ-SM, as shareholders of record, divided by the total number of shares issued by SM-Chile S.A.SM-Chile. LQIF andLQ-SM do not beneficially own all of our shares owned bySM-CHILE S.A. becauseSM-CHILE S.A. has, as of April 15, 2013,17, 2015, a total of 18,28217,276 shareholders.LQ-SM is an investment vehicle whose major shareholder LQIF owns 99.99% of its shares. As of its incorporation date (August 26, 2002), we were informed thatLQ-SM’s total capital was CLP$73,175,029,140. In connection with the framework agreement executed between Citigroup, Inc. and Quiñenco S.A. in July 2007 and following the merger of Citibank Chile into Banco de Chile, Citigroup became a shareholder of LQIF. As of April 15, 2013,17, 2015, Citigroup is the owner of 50% of LQIF, and Quiñenco directly and indirectly owns 50% of LQIF. Regardless of any increase in participation by Citigroup, however, the agreement provides that Quiñenco will remain in control of LQIF and the corporations that are directly or indirectly controlled by LQIF. Accordingly, Quiñenco will maintain the right to elect the majority of the directors of LQIF,SM-CHILE S.A. and Banco de Chile. As of December 31, 2012,2014, members of the Luksic family or their affiliates beneficially owned 81.3%81.4% of the common shares of Quiñenco S.A. Mr. Andrónico Luksic and Mr. Jean Paul Luksic are members of our board of directors.
(4)Mr. Jacob Ergas holds his shares through Ever 1 Bae S.p.A., Ever Chile S.p.A. and Inversiones Aspen Ltda., which are holding companies under his control. Mr. Jacob Ergas has not been a member of the board since March 2011 when Mr. Jorge Ergas was appointed director of the board. Mr. Jacob Ergas and Mr. Jorge Ergas are father and son.son, respectively.

(5)Percentage reflects direct and indirect share ownership, excluding the share ownership of Mr. Andronico Luksic, Mr. Jean Paul Luksic and Mr. Jorge Ergas, members of our board of directors, whose direct and indirect ownership is reflected and discussed under the share ownership of LQIF, LQ-SM and Jacob Ergas above.
(6)Percentage reflects direct and indirect share ownership, excluding the share ownership of Mr. Andronico Luksic, Mr. Jean Paul Luksic and Mr. Jorge Ergas, members of our board of directors, whose direct and indirect ownership is reflected and discussed under the share ownership of LQIF, LQ-SM and Jacob Ergas above.

The following charts provide additional information on the voting rights held by LQIF andLQ-SM as of April 15, 2013:17, 2015:

Voting rights of LQIF in Banco de Chile

 

Ownership

  Shares owned by
LQIF
   Voting Ratio   LQIF Voting Shares
as a result of the
application of Voting
Ratio in BCH
   Voting Rights
of LQIF
(as % )
in BCH
 

Direct ownership in BCH

   29,662,197,006     1.00000000     29,662,197,006     32.25  

Shares SM-A

   —       3.38337827     —       —    

Shares SM-B

   5,497,274,771     3.38337827     18,599,360,004     20.22  

Shares SM-D

   223,364,308     3.38337827     755,725,946     0.82  

Shares SM-E

   —       1.00000000     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total LQ-SM in BCH

       49,017,282,956     53.29  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ownership

  Shares owned by
LQIF
   Voting Ratio   LQIF Voting Shares
as a result of the
application of Voting
Ratio in BCH
   Voting Rights
of LQIF

(as %)
in BCH
 

Direct ownership in BCH

   24,332,365,224     1.00000000     24,332,365,224     25.71

SharesSM-A

   —       3.38337827     —       —    

SharesSM-B

   5,497,274,771     3.38337827     18,599,360,004     19.65  

SharesSM-D

   223,364,308     3.38337827     755,725,945     0.80  

SharesSM-E

   —       1.00000000     —       —    
  

 

 

     

 

 

   

 

 

 

TotalLQ-SM in BCH

   30,053,004,303       43,687,451,173     46.16
  

 

 

     

 

 

   

Voting rights ofLQ-SM in Banco de Chile

 

Ownership

  Shares owned  by
LQ-SM
   Voting Ratio as set
in SM-CHILE By
-laws
   LQ-SM Voting
Shares as a result of
the application of
Voting Ratio in BCH
   Voting Rights
of LQ-SM
(as % ) in
BCH
 

Direct ownership in BCH

   133,098,875     1.00000000     133,098,875     0.14  

Shares SM-A

   377,528,973     3.38337827     1,277,323,323     1.39  

Shares SM-B

   971,080,384     3.38337827     3,285,532,270     3.57  

Shares SM-D

   —       3.38337827     —       —    

Shares SM-E

   —       1.00000000     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total LQ-SM in BCH

       4,695,954,468     5.11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ownership

  Shares owned by
LQ-SM
   Voting Ratio as set
inSM-CHILE By
laws
   LQ-SM Voting
Shares as a result of
the application of
Voting Ratio in BCH
   Voting Rights
ofLQ-SM

(as % ) in
BCH
 

Direct ownership in BCH

   180,294,369     1.00000000     180,294,369     0.19

SharesSM-A

   377,528,973     3.38337827     1,277,323,323     1.35  

SharesSM-B

   971,080,384     3.38337827     3,285,532,269     3.47  

SharesSM-D

   —       3.38337827     —       —    

SharesSM-E

   —       1.00000000     —       —    
  

 

 

     

 

 

   

 

 

 

TotalLQ-SM in BCH

   1,528,903,726       4,743,149,961     5.01
  

 

 

     

 

 

   

 

 

 

RELATED PARTY TRANSACTIONS

In the ordinary course of our business, we engage in a variety of transactions with certain of our affiliates and related parties. Financial information concerning these transactions is set forth in Note 3739 to our audited consolidated financial statements as of and for the year ended December 31, 2012,2014, appearing elsewhere in this annual report. The Chilean Corporations Law was amended in October 2009 by Law No. 20,382, which also introduced changes to several others laws to improve Chilean corporate governance. As part of these changes, the concept of related party transactions in the Chilean Corporations Law was amended. The new regulation established different treatment for closely held corporations and for publicly held corporations.

In accordance with the Chilean Corporations Law, related party transactions in publicly held corporations are defined as every negotiation, act, contract or operation in which the corporation deals with any of the following persons: (i) one or more persons related to the corporation, in accordance with the Chilean Securities Law No. 18,045; (ii) a director, manager, administrator, main executive or liquidator of the corporation, acting on its own behalf or on behalf of third parties, or their respective husband or wife or any other person to which such director, manager, administrator, main executive or liquidator, or their husband or wife has a second degree relationship with (either by consanguinity or affinity); (iii) companies or corporations in which the persons mentioned in the previous item are owners, directly or through other juridical or natural persons, of 10% or more of its capital, directors, managers, administrators or main executives; (iv) those established in the bylaws of the corporation or those reasonably agreed by the board of directors; or (v) persons who acted as a director, manager, administrator, main executive or liquidator of the corporation within eighteen months of the relevant transaction.

We may only enter into transactions with related parties if (i) the purpose of the transaction is in our best interest, (ii) the transaction reflects prevailing market prices, terms, and conditions and (iii) the transaction complies with the requirements and procedures specified in the Chilean Corporations Law, which requires our board of directors to approve the relevant transaction based upon the criteria mentioned in items (i) and (ii) of this paragraph. In order for our board of directors to approve any such transactions, the related party involved in or negotiating the transaction must give prior notice to our board of directors.

A violation of these provisions shall not affect the transaction’s validity, but shall grant us, our shareholders or third parties an indemnification right to claim damages for the benefit of the company. The amount of damages claimed shall be equal to the sum of the benefits improperly obtained by the related party as a result of the relevant transaction. All board resolutions approving such related party transactions must be reported to our shareholders at the following ordinary annual shareholders’ meeting. Violations of this provision may result in administrative or criminal sanctions and civil liability to shareholders or third parties who suffer losses as a result of such violation.

The following transactions with related parties may be executed without complying with the requirements previously mentioned, subject to the prior approval of our board of directors: (i) transactions that are not considered material (for this purpose, an act or contract is deemed material if (1) it exceeds 1% of ourpaid-in capital and reserves and it also exceeds UF 2,000 or (2) it exceeds UF 20,000; and there is a presumption that all contracts celebrated within a period of 12 months constitute one single transaction, irrespective of whether they are executed in one or more separate transactions during such period of time); (ii) transactions that, according to a general policy of customary transactions adopted by the board of directors of the corporation, are considered customary in connection with our corporate purpose; and (iii) transactions among corporations in which we own, directly or indirectly, at least 95% of the stake of the counterparty.

In connection with number (ii) above, on December 29, 2009, our board of directors established the following general policy which permits us to carry out certain transactions with related parties without the requirements and procedures set forth in the Chilean Corporations Law. The general policy adopted by our board of directors permits, among other things, transactions in the ordinary course of our business, such as opening current accounts, making deposits, extending loans or credit lines with or without collateral, factoring transactions, the sale and transfer of commercial paper, collections, payments and funds transfers, foreign exchange transactions and issuing letters of credit. This general policy has also been extended to our affiliates.

We believe that we have complied with the applicable requirements of the Chilean Corporations Law in all transactions with related parties and affirm that we will continue to comply with such requirements. See Note 3739 to our audited consolidated financial statements as of and for the year ended December 31, 2012,2014, appearing elsewhere in this annual report for a more detailed accounting of our transactions with related parties.

On July 19, 2007, Quiñenco S.A., Citigroup Inc. and Citibank Overseas Investment Corporation entered into a Master Joint Venture Agreement (the “Framework Agreement”) that set forth the parameters of a partnership between Quiñenco S.A. and Citigroup Inc., including the eventual merger of Citibank Chile into us. The Framework Agreement provided that Citigroup Inc. would initially acquire a 32.96% equity interest in LQIF, our controlling shareholder, and would be entitled to increase its stake in LQIF to either 41.4778% or 50% through the exercise of several options. Citigroup Inc. could also be required to increase its stake in LQIF to 50% if Quiñenco S.A. exercised a put option under the Framework Agreement. The acquisition by Citigroup Inc. of its initial interest in LQIF occurred, with effect on January 1, 2008, under the terms of the Framework Agreement and the corresponding Merger Agreement between us and Citibank Chile. For purposes of the Merger Agreement, the operations and businesses of Citibank Chile that were effectively contributed to us were deemed to represent 10.497% of thepost-merger entity and, together with other assets and businesses contributed by Citigroup Inc. to LQIF, were the basis for the issuance by LQIF of the 32.96% equity interest in LQIF transferred to Citigroup Inc. As consideration for the merger, we issued and conveyed to LQIF (and indirectly, the holders of Citibank Chile shares)8,443,861,140 no-par value “Banco deChile-S” series shares (which, as of the date hereof, were converted into ordinary shares, by means of the amendment of the Bank’s Bylaws).

Under the Framework Agreement, Quiñenco S.A. remains as the controlling shareholder of LQIF and therefore of us, while Citigroup Inc. is granted certain governance and other shareholder rights in LQIF. With respect to the governance rights in us, Citigroup Inc. has the right to name two directors to our11-member board of directors, while Quiñenco would maintain the right to appoint a majority of our board of directors. Citigroup Inc.

also has the power to propose the appointment of certain of our executive officers (including our chief financial officer) and at least one representative on our directors/audit committees. Under this agreement, Citigroup Inc. was also granted certain veto rights over certain “fundamental strategic decisions” (as defined in the Framework Agreement), such as the delisting of our ADSs from the New York Stock Exchange or the delisting of our shares from the Santiago Stock Exchange, the Bolsa Electrónica de Chile and the Valparaiso Stock Exchange, entry into new lines of business or large acquisitions, approval of related party transactions and changes to our bylaws or organizational documents. Furthermore, Citigroup Inc. agreed to purchase substantially all of the assets of our North American (i.e., Miami and New York) branches for U.S.$130 million. Because Citigroup beneficially owns 50% of LQIF, it may name up to five of the 11 members of our board of directors (such number to be reduced by the number of directors appointed by minority shareholders, provided that Citigroup Inc. always shall have the right to appoint at least one director), including the vice chairman, pursuant to the terms of the Framework Agreement. However, even in this circumstance, Quiñenco S.A. would still be entitled to appoint a majority of our board of directors. The Framework Agreement also sets forth a series of ancillary agreements proposed to be entered into by the parties to the Framework Agreement and some of their affiliates.

On December 19, 2008, Quiñenco S.A., Citigroup Inc. and Citibank Overseas Investment Corporation amended the Framework Agreement (the “Amendment”), and through it the Shareholders’ Agreement mentioned below. The Amendment provided that if Citigroup Inc. did not acquire 8.52% of LQIF’s shares (to hold at least a 41.4778% ownership interest in LQIF) as a consequence of the actions and decisions of any relevant authority in the United States, Quiñenco S.A. shall have the right to compensation as provided in the Amendment, and Citigroup Inc. shall have the option of acquiring either a 41.4778% or a 50% interest in LQIF. Furthermore, the Amendment provided that if for any reason Citigroup Inc. did not exercise any of the call options mentioned in the previous sentence, Quiñenco S.A. or its affiliates, as applicable, shall be entitled to require Citigroup Inc. to sell to them an amount of shares of LQIF such that, after such sale, Quiñenco S.A. shall directly or through its affiliates own an 80.1% ownership interest in LQIF. If this had occurred, Citigroup Inc.’s governance and other shareholder rights mentioned in the preceding paragraph should have been those provided in Clause Six of the Shareholders’ Agreement referred to below. Notwithstanding these provisions, on January 29, 2010, Citigroup Inc. exercised a call option to acquire 8.52% of LQIF’s shares and, on March 15, 2010, Citigroup Inc. exercised another call option to acquire an additional 8.52% of LQIF’s shares. Consequently, since April 30, 2010 Citigroup Inc. and Citigroup Overseas Investment Corporation indirectly ownsown 50% of LQIF. As a result, since April 30, 2010, Citigroup Inc. has been granted certain corporate governance rights over us, as described above.

Effective January 9, 2014, Quiñenco S.A., Citigroup Inc. and Citibank Overseas Investment Corporation entered into an amendment to the “Framework Agreement, and additionally Quiñenco S.A., Citigroup Chile S.A. and other shareholders of LQIF entered into an amendment to the Shareholders’ Agreement (as defined below) (collectively, the “2014 Amendments”), to, among other things, reduce LQ Inversiones Financieras S.A.’s minimum shareholding in Banco de Chile (direct and indirect) from 58.33% to 51%. Prior to the 2014 Amendments, Citigroup had the right to appoint five of the permanent members of our board of directors, provided that the number of directors Citigroup had the right to appoint was reduced by the number of directors appointed by minority shareholders (subject to a minimum of one permanent director appointed by Citigroup). Pursuant to the 2014 Amendments, Citigroup maintains its right to appoint five of the permanent members of our board of directors, except that in the event our minority shareholders appoint five permanent directors and thus no person proposed by Citigroup can be appointed as a permanent director, then Citigroup shall have the right to appoint two alternate directors.

On December 27, 2007, Quiñenco S.A., Citigroup Chile S.A. and the minority shareholders of LQIF entered into a shareholders’ agreement (the “Shareholders’ Agreement”) that formalized the rights of Citigroup Inc. with respect to the governance rights in us as set forth in the Framework Agreement (and as discussed in the preceding paragraph). The Shareholders Agreement became effective on January 1, 2008.

On December 27, 2007, we entered into athe Global Connectivity Agreement with Citigroup Inc. The purpose of this agreement is to enableGlobal Connectivity Agreement enables us and our clients to become part of Citigroup’s Global Networkglobal network and to provideprovides a framework for us and Citigroup Inc. to direct new business to the partnership in order to generate wealth creation for both companies. The agreement sets forth the terms upon which we, Citigroup Inc. and our and its respective affiliates will develop a relationship with respect tocross-border business and certain related services being rendered (such as corporate and investment banking services, international personal banking services and global transactions services, among others). The parties agreed on the following principles with respect to implementing the terms of the agreement: (i) the promotion of global connectivity

products among Chilean customers, (ii) the setup of a technology platform, (iii) the training of employees and officers, and (iv) the construction of international support networks to carry out the transactions contemplated by the agreement. On February 27, 2009, we and Citigroup amended the Global Connectivity Agreement. The purpose of the amendment was to clarify and supplement the terms of the original agreement with respect to the banking services to be provided in Chile and abroad.

On December 27, 2007, we also entered into a Trademark License Agreement with Citigroup Inc. (the “Trademark License Agreement”) in which Citigroup Inc. granted us a non-exclusive paid-upnon-exclusivepaid-up androyalty-free license to use certain of Citigroup Inc.’s trademarks in Chilean territory. In addition, Citigroup Inc. granted us a license to use its domain name solely in connection with marketing and promoting authorized services in Chilean territory. On February 27, 2009, we and Citigroup Inc. amended the Trademark License Agreement. The amendment requires us to deliver a certificate at least once a year confirming that we are in compliance with the standards set forth in the Trademark License Agreement. In addition, we must comply with certain additional quality control standards approved periodically by Citigroup Inc. relating to certain products, and Citigroup Inc. has the right to review and inspect all materials relating to the offer and sale of certain products. On September 5, 2014 we entered into a new amendment to the Trademark License Agreement with Citigroup Inc. whereby both parties agreed that the authorization to use the licensed marks of Citigroup will include new product lines. On November 18, 2014 we agreed with Citigroup Inc. that, as part of the quality control measures set forth in the Trademark License Agreement, we are required to obtain authorization from other entities whose brands are included in marketing material that incorporates licensed trademarks of Citigroup Inc.; and we agreed that in case of violation of applicable law or economic or reputational harm to Citigroup, the indemnity provisions under the Trademark License Agreement may apply.

On December 27, 2007, we entered into a Cooperation Agreement with Citigroup Inc. (the “Cooperation Agreement”) with the purpose of providing a framework for the integration of Citibank Chile with us following the merger and ensuring a successful relationship between us and Citigroup Inc. In particular, the Cooperation Agreement establishes a communication mechanism between us and Citigroup Inc. to enhance the exchange of ideas and information related to the integration of our business with that of Citibank Chile and provides for certain specific areas of collaboration going forward (such as with respect to our hedging and derivatives strategies). On February 27, 2009, we and Citigroup Inc. amended the Cooperation Agreement to require each company to establish specific formal processes for sharing information about regulatory changes in the United States and Chile that may have an impact on us. This Cooperation Agreement together with the Operating Agreements (for this purposes the Global Connectivity Agreement and the Licensing Agreement) are valid for six (6) years from January 1, 2008 through January 1, 2014. Those agreements provide that we and Citigroup may agree on an extension for another six years from January 1, 2014 through January 1, 2020, which extension must be agreed to in writing by January 1, 2013; otherwise, the effective agreements will be extended—once—for two (2) years, from January 1, 2014 through January 1, 2016, when they will expire without any further proceeding. Since the parties did not reach an agreement before January 1, 2013 in order to extend the term of such agreements for an additional6-year period, the agreements were automatically extended until January 1, 2016. During this extension the parties may agree on an additional extension of the agreements.

On December 31, 2007, we entered into an Asset Purchase Agreement with Citibank, N.A. (the “Asset Purchase Agreement”), whereby we sold substantially all of the assets and operations of our banking businesses in Miami and New York to Citibank, N.A. and Citibank, N.A. agreed to offer employment to substantially all of the employees in those branches and to assume substantially all of the liabilities related to such assets and operations. In consideration for this sale, we were paid an aggregate purchase price of U.S.$130 million, in addition to the assumption of liabilities. Following the completion of the sale, the Miami and New York branches were placed in voluntary liquidation in January 2008. In March 2008, the banking licenses for both branches were surrendered to the appropriate banking regulator.

On September 25, 2009, we entered into a Master Services Agreement with Citigroup Inc. This agreement regulates and supplements certain reciprocal services that, before the merger between us and Citibank Chile, had

been provided pursuant to the terms of certain service agreements then in effect between Citigroup Inc. (and certain of its affiliates) and Citibank Chile, which were assumed, after the merger, by us as legal successor to Citibank Chile. Furthermore, this Agreement seeks to foster global connectivity with respect to the banking and financial services referred to in the Global Connectivity Agreement and in the other agreements executed with Citigroup Inc. mentioned above. This agreement has the same term of validity as the Cooperation Agreement aforementioned.

On December 19, 2012, by means of a public deed signed before the Public Notary of Mr. René Benavente Cash, Banco de Chile together with its affiliate Banchile Corredores de Seguros Limitada entered into an agreement with Banchile Seguros de Vida S.A. called Collective Debtor’s Life Insurance Agreement (“Contrato de Seguro Colectivo de Desgravamen”) for loan mortgages. Said agreement was entered pursuant to article 40 of DFL N° 251 of 1931, General Regulation N° 330 of the Superintendency of Securities and Insurance and Circular N° 3,530 of the Superintendency of BanksSBIF and Financial Institutions, both dated March 21, 2012, upon which the public bid for the collective policy for life insurance covering loan mortgages was adjudicated to Banchile Seguros de Vida S.A., who offered the lowest rate of 0.0119800% monthly, including a 14.00% commission fee for the insurance broker Banchile Corredores de Seguros Limitada, who will act as intermediary of the policy.

Additionally, on December 28, 2012, we and our affiliated companies Banchile Corredores de Seguros Limitada, and Banchile Seguros de Vida S.A., extended until December 31, 2015, the following existent insurance agreements, excluding those insurance agreements related to loan mortgages that are subject to a public bid in accordance with article 40 of DFL N° 251 of 193 mentioned above:

 

1.Brokerage Agreement entered into by the affiliate Banchile Corredores de Seguros Limitada and the related company Banchile Seguros de Vida S.A.

 

2.Agreements entered into by Banco de Chile and Banchile Seguros de Vida S.A.:

 

 a)Collection and Data Administration Agreement.

 

 b)Use Agreement for Distribution Channels.

 

 c)Banchile’s Trademark License Agreement.

 

 d)Credit Life Insurance Agreement

 

3.Framework agreement for Insurance Banking, entered into by Banco de Chile, Banchile Corredores de Seguros Limitada and Banchile Seguros de Vida S.A.

AllOn June 19, 2013, by means of a public deed signed before the termsPublic Notary Mr. Raúl Perry Pefaur, Banco de Chile acquired all of the shares of Banchile Factoring S.A. (a Bank’s subsidiary) held by our subsidiary Banchile Asesoría Financiera S.A. Pursuant to the Ley de Sociedades Anónimas (Chilean Corporation Law) article 103 N° 2, after a period of ten days starting from the date of acquisition, Banchile Factoring S.A. was dissolved and conditions containedBanco de Chile became its legal successor on June 30, 2013.

On December 9, 2013, by means of a public deed signed before the Public Notary Mr. René Benavente Cash, we and our affiliate Banchile Corredores de Seguros Limitada entered into an agreement with Banchile Seguros de Vida S.A., namely the “Collective Debtor’s Life Insurance Agreement” (“Contrato de Seguro Colectivo de Desgravamen”) and the “Collective Debtor’s Life, Total and Permanent Disability 2/3 Insurance Agreement (“Contrato de Seguro Colectivo de Desgravamen e Invalidez Total y Permanente 2/3”) (portfolio inpesos and housing subsidies D.S. N°1 de 2011), both for loan mortgages. The aforementioned agreements were entered pursuant article 40 of DFL N° 251 of 1931, General Regulation N° 330 of the Superintendency of Securities and Insurance and Circular N° 3,530 of the SBIF and Financial Institutions, both dated March 21, 2012, upon which the public bid for the Debtor’s Life Insurance and Debtor’s Life and Total and Permanent Disability 2/3 Insurance agreements (portfolio in pesos and housing subsidies D.S. N°1 de 2011) the agreements were awarded to Banchile Seguros de Vida S.A. who offered in both cases the lowest rates of 0.0103% monthly and of 0.0109% monthly, respectively, including a 14.00% fee for the insurance broker Banchile Corredores de Seguros Limitada.

On December 26, 2013, we and Banchile Seguros de Vida S.A. entered into an amendment to the Use of Distribution Channels Agreement (“Convenio Uso de Canales de Distribución”), dated December 28th, 2012, adjusting the percentage of the fee associated to certain insurances and the base calculation formula of the fee agreed in the agreement mentioned aboveAgreement. This amendment is effective from December 1st, 2013, to December 31st, 2015.

On December 10, 2014, by means of a public deed signed before a Public Notary, we and our affiliate Banchile Corredores de Seguros Limitada entered into two agreements with Banchile Seguros de Vida S.A.; specifically, the Collective Debtor’s Life Insurance Agreement (“Contrato de Seguro Colectivo de Desgravamen”) and the Collective Debtor’s Life Total and Permanent Disability 2/3 Insurance Agreement (“Contrato de Seguro Colectivo de Desgravamen e Invalidez Total y Permanente 2/3”) (portfolio in pesos and housing subsidies D.S. N° 1 of 2011), both relating to loan mortgages. The aforementioned agreements were previously reviewedentered into pursuant to Article 40 of DFL N° 251 of 1931, General Regulation N° 330 of the Superintendency of Securities and approved by our boardInsurances and Order N° 3,530 of directors.the Superintendency of Banks and Financial Institutions, both dated March 21, 2012, upon which the public bid for the Collective Policy for Life Insurances and Total and Permanent Disability 2/3 Insurance Agreement (portfolio in pesos and housing subsidies D.S. N° 1 of 2011) were awarded to Banchile Seguros de Vida S.A., who offered in both cases the lowest rates. The rates offered were 0.0101% monthly and 0.0103% monthly for theContrato de Seguro Colectivo de Desgravamen andContrato de Seguro Colectivo de Desgravamen e Invalidez Total y Permanente 2/3, respectively, including a 14.00% fee for the insurance broker Banchile Corredores de Seguros Limitada.

Loans to Related Parties

As disclosed in Note 39(c) to our audited consolidated financial statements as of and for the year ended December 31, 2014 appearing elsewhere in this annual report, we incurred an aggregate of Ch$304,066 million in expenses and Ch$211,405 million in income from transactions with related parties in 2014, other than loans. As authorized by the General Banking Law, and within the regulatory limits, we hold several outstanding loans owed to us by different corporations related to us.affiliated corporations. All such loans (i) were made in the ordinary course of business, (ii) were made on terms, including interest rates and collateral, substantially the same as those prevailing at the time for comparable transactions with other persons and (iii) loans:

(i)were made in the ordinary course of business;
(ii)were made on terms, including interest rates and collateral, substantially the same as those prevailing at the time for comparable transactions with other persons; and

(iii)did not involve more than the normal risk of collectability or present other unfavorable features.

We held an aggregate of Ch$349,295 million in loans (allowances for loan losses not deducted) to related parties, including Ch$62,203 million in collateral pledged by related parties, as of December 31, 2014. See Note 37(a)39(c) to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report for more informationdetails concerning on these loans.

transactions.

Item 8Financial Information

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Audited Consolidated Financial Statements

Please refer to “Item 18. Financial Statements.”

Legal Proceedings

We and our subsidiaries are subject to claims and are parties to legal proceedings in the normal course of business. A summary of certain current legal proceedings is below.

Request from Spanish Court to Chilean Judicial Authorities

On April 29, 2010, the Supreme Court of Chile denied the requests contained in a rogatory letter issued on October 26, 2009, by the Central Court of Instruction Number 5 of the National Court of Spain (Juzgado Central de Instrucción No. 5 de la Audiencia Nacional de Madrid) in Madrid, Spain (the “Spanish Court”) to have certain actions taken (as described below) with respect to a lawsuit before the Spanish Court. The Supreme Court of Chile established that the subject matter of the investigation by the Spanish Court was currently pending before a Chilean tribunal that has jurisdiction and competency over these matters.

The rogatory letter referred to above notified the Chilean judicial authorities that a lawsuit pending before the Spanish Court had been amended to add causes of action concerning concealment of assets and money laundering against Mr. Pablo Granifo Lavin (the chairman of our board of directors) and Mr. Hernán Donoso Lira (former manager of our New York branch) and against us, Banchile Corredores de Bolsa S.A. and Banchile Administradora General de Fondos S.A., the latter three of which face only subsidiary civil liability. The rogatory letter, among other items, requested a joint guarantee (fianza solidaria) from the defendants in the amount of U.S.$77,348,374 and, if the aforementioned parties were not to grant such a joint guarantee, requested the attachment of assets of up to U.S.$103,131,165.

On April 30, 2012, the Spanish Court decided the provisional dismissal (sobreseimiento provisional) of the aforementioned lawsuit on the grounds that the Chilean judicial authorities have investigated and prosecuted the same facts as those pending before the courts in Spain, and there is an existing legal proceeding underway in Chile, which should have priority. The complainant filed an appeal (recursos de apelación y reforma), which was dismissed on July 27, 2012 and June 19, 2012 by the Spanish judicial authorities.

In Chile, a judicial investigation is currently underway and at the time of filing of this annual report no indictments for criminal participation of persons affiliated with us have been issued. Consequently, it is not possible to predict the outcome of these proceedings, or what impact, if any, they might have on us.

Labor Discrimination Claim

A Chilean court with jurisdiction over labor claims issued a judgment against us in a legal proceeding for wrongful termination of employment based on a labor discrimination claim. As a result of this judgment, we were prevented from entering into certain service agreements with the Chilean government until September 7, 2012. Despite the judgment, we were still permitted to enter into service agreements with government-owned companies created by statute, agreements in connection with the purchase and sale of securities or other financial instruments, agreements in connection with the execution and concessions of public projects, and agreements in connection with the lending of credit on a fixed term basis. The impact on our results of operations for the year ending December 31, 2012 was approximately U.S.$1.3 million.

Erroneous Electronic Forwarding of Bank Statements Claim

On August, 2012Corporación Nacional de Consumidores y Usuarios de Chile (a Chilean consumer association) filed a class action against Banco de Chile pursuant to Law N ° 19,496, whereby the plaintiff demanded that we compensate 52,770 of our current account holders who were affected by erroneous electronic forwarding of bank statements that occurred in July 2012. The plaintiff seeks total compensation of CLP$ 80,000 (approx. US$U.S.$ 170) for each account holder as well as the reimbursement of maintenance fees charged on current accounts. On September 17, 2014 a judgment was rendered rejecting the action. The demandjudgment was appealed by the plaintiff and allegations are currently the claim is under judicial review.review by the Court of Appeals of Santiago (Corte de Apelaciones de Santiago).

It is not possible to predict the outcome of this proceeding; however, in any case it will not have a material impact on us.

Charges brought under Securities Market Law

On January 30, 2014 the Superintendency of Securities and Insurance (“SVS”) (“Superintendencia de Valores y Seguros”) brought charges against Banchile Corredores de Bolsa S.A. (“Banchile Corredores”) for the alleged infringement of Article 53 second paragraph of Law 18,045 (“Ley de Mercado de Valores”), for certain specific transactions performed during the years 2009, 2010 and 2011 related to Sociedad Química y Minera de Chile S.A.’s shares(SQM-B ySQM-A). In this regard, Article 53 second paragraph of Law 18,045 provides that “…no person may engage in transactions or induce or attempt to induce the purchase or sale of securities, whether or not governed by this Act, by means of any misleading or deceptive act, practice, mechanism or artifice… .”

On October 30, 2014, the SVS imposed a fine of UF 50.000 (approximately U.S.$2.0 million as of December 31, 2014) on Banchile Corredores, based on alleged infringement of Article 53 second paragraph of Law 18,045 for a specific transaction ofSQM-A’s shares intermediated by Banchile in 2011. Banchile has filed a claim against that resolution before the 11th Santiago Civil Court requesting to void such fine. The process is currently ongoing. According to Banchile Corredores’ attorney in charge of the claim, there are valid grounds to obtain a favorable judgement in favor of Banchile Corredores.

Consumer Protection Claims

On February 21, 2014, Banco de Chile was notified of a complaint filed by the National Consumer Service (Servicio Nacional del Consumidor, or “SERNAC”) in the Twelfth Civil Court of Santiago as a collective action pursuant to Law No. 19,496. The legal action challenges certain clauses that exists in the Person Products Unified Agreement (“Contrato Unificado de Productos de Personas”) regarding fees on lines of credit for overdrafts and the validity of tacit consent to changes in fees, charges and other conditions in consumer contracts. The Bank has answered the complaint and asked the court to dismiss all charges. With regard to the same matter, on January 16, 2015 Banco de Chile was notified of a complaint submitted by the National Corporation of Consumers and Users of Chile (“Corporación Nacional de Consumidores y Usuarios de Chile”or “CONADECUS”) in the Twenty-Third Civil Court of Santiago as a collective action pursuant to Law No. 19,496. The claims under this action are basically the same as those alleged by SERNAC before the Twelfth Civil Court of Santiago, mentioned above, along with a claim for the outsourcing of certain services related to our clients’ current account data.

On December 10, 2014, Banco de Chile was notified of a collective action submitted by the National Organization of Consumers and Users of Chile (“Organización de Consumidores y Usuarios de Chile”or “ODECU”) in the Fifth Civil Court of Santiago requiring the Court to declare the invalidity of certain provisions of the Person Products Unified Agreement which are alleged to be abusive. These provisions refer to the use of banking cards, ID numbers and passwords in order to execute certain services with us. The plaintiff alleges that, in case of phishing or pharming, the bank and not the client should be responsible for proving the client’s diligence in the use of self-service channel services.

At this stage, the potential effects of a judgment in the claims mentioned above cannot be quantified.

In the ordinary course of business, we have other lawsuits and legal proceedings that will not have an adverse effect on us. According to our policies, we have established contingency allowances that may arise from lawsuits and legal proceedings. See Note 27 (c) to our the Consolidated Financial Statements for the years ended December 31, 2013 and 2014, appearing elsewhere in this report.

Dividends

General

We currently have a single series of common shares (except Banco de Chile Series-T series, as explained below), and the dividends on our shares are proposed by our board of directors and are approved by our shareholders at the ordinary annual shareholders’ meeting following the year with respect to which the dividends are proposed. Our ordinary annual shareholders’ meeting is required to be held in the first fourthree months of each year. Following shareholder approval, the dividends are declared and paid. Dividends are paid to shareholders of record on the fifth business day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of our ADSs are, to the extent practicable, the same. Under the Chilean Corporations Law and regulations issued thereunder, Chilean public corporations are generally required to distribute at least 30% of their consolidated annual earnings as dividends, except to the extent they have accumulated losses. Under the General Banking Law, a Chilean bank may pay dividends upon approval of its shareholders from (i) net earnings of previous fiscal years (i.e., interim dividends are not permitted), (ii) the reserve kept for that purpose or (iii) other funds permitted under Chilean law.

Our dividend policy is affected to some extent by the rights of SAOS, our affiliate, pursuant to its assumption of the Central Bank indebtedness discussed in “Item 4. Information on the Company—History and Development of the Bank—History—The 1982–1983 Economic Crisis and the Central Bank Subordinated Debt.”

At the Extraordinary Shareholders Meeting held on October 17, 2012,Cash Dividends

In March 2011, our shareholders at the ordinary annual shareholders’ meeting agreed to increase our capitalthe distribution and payment of dividend No. 199 in the amount of CLP$250,000,000,000 (approximately U.S.$521 million) by means of the issuance of 3,939,489,442 cash shares, “Banco de Chile-T series”. These shares have the same rights as all of Banco de Chile’s shares, except that the holders of Banco de Chile T-series shares will not receive dividends or fully paid-in shares in respectCh$2.937587 per ordinary share, with a corresponding charge to our 2010 net distributable earnings for fiscal year 2012. Once any dividends and/or fully paid-in shares are distributed, the Banco de Chile-T shares will automatically convert to Banco de Chile shares. As of the date of this filing, all these shares are fully paid.

Cash Dividendsincome.

In March 2012, our shareholders at the ordinary annual shareholders’ meeting agreed to the distribution and payment of dividend No. 200, in the amount of Ch$2.984740 per ordinary share, with a corresponding charge to our 2011 net distributable income.

In March 2013, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend No. 201 in the amount of Ch$3.41625263165 per ordinary share, with a corresponding charge to our 2012 net distributable income. As mentioned in our previous20-F report, “Banco deChile-T series” shares did not have right to receive dividends and fullypaid-in shares in respect of our net distributable earnings for fiscal year 2012. Once such dividends and fullypaid-in shares were distributed, the Banco deChile-T shares were automatically converted into Banco de Chile shares.

In March 2014, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend N° 202 in the amount of Ch$3.48356970828 per ordinary share, with a corresponding charge to our 2013 net distributable income.

In March 2015, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend N° 203 in the amount of Ch$3.42915880220 per ordinary share, with a corresponding charge to our 2014 net distributable income.

The following table sets forth the cash dividends declared per common share during the years ended December 2010, 20112012, 2013 and 2012:2014:

 

  As of and for the Year Ended December 31,   As of and for the Year Ended December 31, 
  2010 2011 2012   2012 2013 2014 
  (in Ch$, except percentages) (in U.S.$)   (in Ch$, except percentages) (in U.S.$) 

Chile GAAP:

     

Chile GAAP:

     

Dividend payout ratio(1)

   111.94  73.76  69.22  —       69.22  73.45  71.67  —    

Dividend per common share(2)

   3.50    3.38(*)   3.41    0.007  

Dividend per Common Share(2)—for shares not pledged to the Central Bank

   2.98    3.42    3.48    0.008  

Dividend per Common Share(2)—for shares pledged to the Central
Bank
(3)

   4.26    4.88    4.98    0.006  

Average Dividend per Common Share

   3.41    3.90    3.95    0.007  

 

(1)Dividend payout ratio is calculated by dividing the amount of dividends paid by the earnings per share of the prior year.

(2)Dividends per share are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding.
(*)(3)Includes an additional paymentpayments to the Central Bank by an amountamounts of MCh$36,713 in 2011 and MCh$Ch$37,301 million in 2012, Ch$42,696 million in accordance with2013 and Ch$43,537 million in 2014, pursuant to Law No. 19,396.

Whether future dividends will be paid will depend upon our earnings, financial condition, capital requirements, governmental regulations and policies and other factors. Accordingly, there can be no assurance that dividends in future years will be paid at a rate similar to dividends paid in past years.

As mentioned under “Dividends—General”, our shares “Banco de Chile-T series” have the same rights as all of Banco de Chile’s shares, except that the holders of Banco de Chile T-series shares will not receive dividends or fully paid-in shares in respect of our net distributable earnings for fiscal year 2012. Once any dividends and/or fully paid-in shares are distributed, the Banco de Chile-T shares will automatically convert to Banco de Chile shares.

Stock Dividends

At the extraordinary shareholders’ meeting held on March 22, 2012, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2011 by means of the issuance of fully paid-in shares, without par value, with a value of Ch$67.48 per share, which was distributed among the shareholders in the proportion of 0.018956 fully paid-in shares for each share held, subject to the exercise of the options established in article 31 of Law 19,396.

At the extraordinary shareholders’ meeting held on March 21, 2013, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2012, through the issuance of fullypaid-in shares, of no par value, with a value of Ch$71.97 per share, which will be distributed to the shareholders at the fixed rate of 0.02034331347 fullypaid-in shares per share currently held, subject to the exercise of the options established in article 31 of Law 19,396.

As mentioned under “Dividends—General”,in our sharesprevious20-F report, “Banco deChile-T series” shares did not have the same rights as all of Banco de Chile’s shares, except that the holders of Banco de Chile T-series shares will notto receive dividends orand fullypaid-in shares in respect of our net distributable earnings for fiscal year 2012. Once anysuch dividends and/orand fullypaid-in shares are were distributed on May 30, 2013 the Banco deChile-T shares will were automatically convert toconverted into Banco de Chile shares.

At the extraordinary shareholders’ meeting held on March 27, 2014, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2013, through the issuance of fullypaid-in shares, of no par value, with a value of Ch$64.56 per share, which will be distributed to the shareholders at the fixed rate of 0.02312513083 fullypaid-in shares per share currently held, subject to the exercise of the options established in article 31 of Law 19,396.

At the extraordinary shareholders’ meeting held on March 26, 2015, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net income for the fiscal year ended December 31, 2014 through the issuance of fullypaid-in shares, of no par value, with a value of Ch$65.31 per share. The stock dividend will be distributed to the shareholders at the fixed rate of 0.02250251855 fullypaid-in shares per share currently held, subject to the exercise of the options established in article 31 of Law 19,396. This capitalization is currently subject to the SBIF’s approval.

Capital Increases

At the Extraordinary Shareholders Meetingextraordinary shareholders’ meeting held on October 17, 2012March 21, 2013, our shareholders agreed to increasea stock dividend in connection with the capitalization of 30% of our capital indistributable net income obtained during the amount of CLP$250,000,000,000 (approximately U.S.$521 million) by means offiscal year 2012, through the issuance of 3,939,489,442 cash shares “Banco de Chile-T series”. These shares have the same rights as all of Banco de Chile’s shares, except that the holders of Banco de Chile T-series shares will not receive dividends or fullypaid-in shares, of no par value, with a value of Ch$71.97 per share, which was distributed to the shareholders at the fixed rate of 0.02034331347 fullypaid-in shares per share, subject to the exercise of the options established in respectarticle 31 of Law 19,396.

As mentioned under “Stock Dividends”, at the extraordinary shareholders’ meeting held on March 27, 2014, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net distributable earnings forincome obtained during the fiscal year 2012. Once any dividends and/or2013, through the issuance of fullypaid-in shares, are of no par value, with a value of Ch$64.56 per share, which will be distributed to the Banco de Chile-Tshareholders at the fixed rate of 0.02312513083 fullypaid-in shares will automatically convert per share currently held, subject to Banco de Chile shares. Asthe exercise of the dateoptions established in article 31 of filing, all theseLaw 19,396. As a result, the Bank’s capital after this capitalization is Ch$1,944,920,279,413.

As mentioned under “Stock Dividends”, at the extraordinary shareholders’ meeting held on March 26, 2015, our shareholders agreed to a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2014, through the issuance of fullypaid-in shares, are of no par value, with a value of Ch$65.31 per share. This stock dividend will be distributed to the shareholders at the fixed rate of 0.02250251855 fully paid.paid-in shares per share currently held, subject to the exercise of the options established under article 31 of Law 19,396. After this capitalization, the Bank’s paid-in capital will amount to Ch$2,041,172,778,777. As mentioned before, this capitalization is currently subject to the SBIF’s approval.

ADR Holders

Dividends payable to holders of our ADSs are net of conversion expenses of the depositary and are subject to Chilean withholding tax currently at the rate of 35%, subject to certain credits. Owners of our ADSs are not charged any fees with respect to cash or stock dividends.

Pursuant to current Chilean foreign exchange regulations, a shareholder who is not a resident of Chile does not need to be authorized as a foreign investor in order to receive dividends, sale proceeds or other amounts with respect to its shares remitted outside Chile, but the investor must inform the Central Bank about any such transactions and must remit foreign currency through the Formal Exchange Market. See “Item 10. Additional Information—Exchange Controls” for additional information on how ADS holders may remit currency outside Chile.

SIGNIFICANT CHANGES

No significant changes in our financial condition have occurred since the date of the most recent audited consolidated financial statements included in this annual report.

Item 9The Offer and Listing

Nature of Trading Market

Shares of our common stock are traded on all Chilean stock exchanges. Our shares have been listed on the Santiago Stock Exchange and the Valparaiso Stock Exchange since 1894 and on the Electronic Stock Exchange since 1989. The Santiago Stock Exchange is the main trading market for our shares.

The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Santiago Stock Exchange, which is Chile’s main exchange, had a market capitalization of approximately U.S.$313234 billion as of December 31, 2012 and an2014. As of the same date, the total annual trading turnover was approximately U.S.$31,837 million while the average monthly trading volume ofturnover was approximately U.S.$3,874 million for the year ended as of the same date.2,653 million. The Santiago Stock Exchange was established in 1893 and is a private company whose equity consists of 48 shares owned by 4544 shareholders. As of December 31, 2012, 2522014, 230 companies and 251 series of shares were listed on the Santiago Stock Exchange.

According to information publishedprovided by the Chilean SuperintendencySVS, as of Securities and Insurance, during 2012,September 30, 2014 (the latest available data) the Santiago Stock Exchange accounted for approximately 88.1%93.1% of the equity trading in Chile. Also, asAs of December 31, 2012,the same date, approximately 11.4%6.9% of equity trading in Chile was conducted on the Chilean Electronic Stock Exchange. The remaining 0.5%amount of equities was traded on the Valparaiso Stock Exchange.

In addition, as reported by the Santiago Stock Exchange, the ten largest companies in terms of market capitalization represented, as of December 31, 2012,2014, approximately 43.8%45.1% of the Santiago Stock Exchange’s aggregate market capitalization and during 2011 accounted for approximately 45.0%47.6% of its equity trading. During 2012,2014 approximately 31.0%30.3% of the companies listed on the Santiago Stock Exchange had their shares traded on an average of 70% or more of the exchange’s trading days.

Our ADSs, each representing 600 shares of common stock, without nominal (par) value, have been listed on the NYSE since January 2, 2002 under the symbol “BCH.” JPMorgan Chase Bank is our depositary for purposes of the ADSs. As of December 31, 2012,2014, a maximum of 1,244,3003,633,353 ADSs were outstanding (equivalent to 746,580,3942,180,011,800 shares of common stock or 0.8%2.3% of the total number of issued shares of common stock as of the same date). Since certain of our ADSs are held by brokers or other nominees, the number of record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or of where the beneficial owners of such shares are resident.

WeIn January of 2014, 1,809,000,000 ADSs were offered and sold by LQIF in the United States and elsewhere outside Chile.

In 2002 we listed our shares of common stock on Latibex, and tradingLatibex. Trading of these shares started on October 8, 2002 under the code “XBCH,” grouped in trading units of 600 shares. Effective October 18, 2013, we voluntarily delisted our trading units from Latibex.

In addition, since December 20, 2002, our trading units are listed on the LSE.

The table below shows, for the periods indicated, the annual, quarterly and monthly high and low closing prices (in nominal Chilean pesos) of the traded shares of our securities, labelled “Chile” series, on the Santiago Stock Exchange, the Electronic Stock Exchange and the Valparaiso Stock Exchange:

   Santiago Stock Exchange   Electronic Stock Exchange   Valparaiso Stock Exchange 
   Common Stock   Common Stock   Common Stock 
   High   Low   High   Low   High   Low 
   (Ch$ per share )(1) 

Annual Price History

            

2008

  Ch$43.6    Ch$26.1    Ch$43.4    Ch$25.5    Ch$42.8    Ch$27.0  

2009

   45.0     33.4     44.8     33.5     72.8     33.4  

2010

   72.6     45.1     73.2     44.7     72.7     44.7  

2011

   74.0     57.2     74.7     57.0     74.4     58.4  

2012

   79.5     64.5     79.5     64.1     77.7     64.5  

2013 (through April 15)

   80.3     70.5     80.3     71.0     80.0     71.6  

Quarterly Price History

            

2009

            

1st Quarter

   37.4     34.0     37.5     33.5     37.5     34.0  

2nd Quarter

   39.0     33.4     39.0     33.5     38.9     33.4  

3rd Quarter

   43.7     37.0     43.6     37.0     42.5     37.2  

4th Quarter

   45.0     40.8     44.8     39.5     72.8     41.5  

2010

            

1st Quarter

   55.9     45.1     56.4     44.7     55.5     44.7  

2nd Quarter

   57.8     51.3     57.8     51.2     57.0     51.4  

3rd Quarter

   72.6     54.9     73.2     54.9     72.7     54.9  

4th Quarter

   72.6     68.6     72.8     68.0     72.6     68.5  

2011

            

1st Quarter

   74.0     63.0     74.7     62.1     74.4     63.1  

2nd Quarter

   69.7     65.1     69.9     62.0     69.0     65.7  

3rd Quarter

   69.3     57.2     70.0     57.0     68.5     58.4  

4th Quarter

   73.2     59.0     73.6     58.4     73.2     59.0  

2012

            

1st Quarter

   79.5     71.0     79.5     70.5     77.7     71.1  

2nd Quarter

   76.6     68.7     78.5     68.8     75.6     68.8  

3rd Quarter

   70.9     64.5     70.9     64.1     69.6     64.5  

4th Quarter

   77.4     66.0     76.9     65.7     76.9     66.0  

2013

            

1st Quarter

   80.3     72.2     80.3     71.8     80.0     73.6  

Monthly Price History

            

November 2012

   71.9     69.8     71.8     69.0     72.0     68.6  

December 2012

   77.4     71.3     76.9     71.1     76.9     71.0  

January 2013

   78.6     77.0     78.5     77.0     78.0     76.5  

February 2013

   80.3     77.8     80.3     77.6     80.0     78.0  

March 2013

   79.7     72.2     79.7     71.8     79.3     73.6  

April 2013 (through April 15)

   74.6     70.5     74.0     71.0     73.3     71.6  

Sources: Santiago Stock Exchange, Electronic Stock Exchange and Valparaiso Stock Exchange—Official Quotation Bulletins and Bloomberg.

(1)Pesos per share reflect nominal price at trade date.

As previously mentioned in an extraordinary shareholders’ meeting held on October 17, 2012, a capital increase of approximately Ch$250,000 million was approved by our shareholders through the issuance of 3,939,489,442 common shares, labeled “Chile-T” series.

The table below shows, for the periods indicated, the annual, quarterly and monthly high and low closing prices (in nominal Chilean pesos) of the traded shares of our securities, labeled “Chile-T”“Chile” series, on the Santiago Stock Exchange, the Electronic Stock Exchange and the Valparaiso Stock Exchange:

 

   Santiago Stock Exchange   Electronic Stock Exchange   Valparaiso Stock Exchange 
   Common Stock   Common Stock   Common Stock 
   High   Low   High   Low   High   Low 
   (Ch$ per share )(1) 

Annual Price History

            

2012

   70.9     67.5     70.5     64.0     —       —    

2013 (through April 15)

   73.9     68.5     74.0     69.2     73.7     70.9  

Quarterly Price History

            

2012

            

4th Quarter

   70.9     67.5     70.5     64.0     —       —    

2013

            

1st Quarter

   73.9     70.0     74.0     70.0     73.7     70.9  

Monthly Price History

            

December 2012

   70.9     67.5     70.5     64.0     —       —    

January 2013

   73.0     70.0     73.0     70.0     71.6     70.9  

February 2013

   73.9     72.0     80.3     77.6     73.7     73.7  

March 2013

   73.5     70.6     73.5     70.5     —       —    

April 2013 (through April 15)

   71.3     68.5     71.4     69.2     —       —    
   Santiago Stock Exchange   Electronic Stock Exchange   Valparaiso Stock Exchange 

Period

  High   Low   High   Low   High   Low 
   (Ch$ per share of our common stock)(1) 

Annual Price History

            

2010

   72.6     45.1     73.2     44.7     72.7     44.7  

2011

   74.0     57.2     74.7     57.0     74.4     58.4  

2012

   79.5     64.5     79.5     64.1     77.7     64.5  

2013

   80.3     69.0     80.3     68.3     80.0     68.5  

2014

   75.3     66.3     75.8     66.3     73.5     69.5  

2015 (through April 17th)

   73.0     68.9     73.0     68.9     72.3     70.7  

Quarterly Price History

            

2010

            

1st Quarter 2010

   55.9     45.1     56.4     44.7     55.5     44.7  

2nd Quarter 2010

   57.8     51.3     57.8     51.2     57.0     51.4  

3rd Quarter 2010

   72.6     54.9     73.2     54.9     72.7     54.9  

4th Quarter 2010

   72.6     68.6     72.8     68.0     72.6     68.5  

2011

            

1st Quarter 2011

   74.0     63.0   �� 74.7     62.1     74.4     63.1  

2nd Quarter 2011

   69.7     65.1     69.9     62.0     69.0     65.7  

3rd Quarter 2011

   69.3     57.2     70.0     57.0     68.5     58.4  

4th Quarter 2011

   73.2     59.0     73.6     58.4     73.2     59.0  

2012

            

1st Quarter 2012

   79.5     71.0     79.5     70.5     77.7     71.1  

2nd Quarter 2012

   76.6     68.7     78.5     68.8     75.6     68.8  

3rd Quarter 2012

   70.9     64.5     70.9     64.1     69.6     64.5  

4th Quarter 2012

   77.4     66.0     76.9     65.7     76.9     66.0  

2013

            

1st Quarter 2013

   80.3     72.2     80.3     71.8     80.0     73.6  

2nd Quarter 2013

   74.7     69.0     74.9     68.3     74.5     68.5  

3rd Quarter 2013

   79.8     69.1     79.9     69.1     78.2     70.0  

4th Quarter 2013

   78.4     73.4     78.5     73.3     —       —    

2014

            

1st Quarter 2014

   75.2     66.3     75.8     66.3     70.6     70.4  

2nd Quarter 2014

   75.3     69.8     75.5     68.0     —       —    

3rd Quarter 2014

   74.5     70.9     74.4     70.9     73.5     73.5  

4th Quarter 2014

   75.3     69.0     75.5     69.0     69.5     69.5  

2015

            

1st Quarter 2015

   73.0     68.9     73.0     68.9     72.3     72.3  

Monthly Price History

            

November 2014

   75.3     71.7     75.5     70.4     —       —    

December 2014

   73.3     69.8     73.4     69.2     69.5     69.5  

January 2015

   72.3     68.9     72.0     68.9     —       —    

February 2015

   72.6     70.4     72.7     69.9     72.3     72.3  

March 2015

   73.0     69.4     73.0     68.9     —       —    

April 2015 (through April 17th)

   72.0     70.2     72.4     70.3     70.7     70.7  

 

Sources: Santiago Stock Exchange, Electronic Stock Exchange and Valparaiso Stock Exchange—Official Quotation Bulletins and Bloomberg.

 

(1)Pesos per share reflect nominal price at trade date.

The table below shows the annual, quarterly and monthly high and low closing prices, as reported by the NYSE and Latibex:

 

   New York Stock Exchange   Latibex 
Period  High   Low   High   Low 
   (U.S.$ per ADS)(1)   (Euros per Trading Unit)(2) 

Annual Price History

        

2008

  U.S.$58.43    U.S.$23.50    37.67    18.61  

2009

   53.90     31.85     37.45     22.81  

2010

   92.50     53.72     68.65     37.33  

2011

   90.35     66.63     72.60     52.80  

2012

   99.11     80.33     72.60     58.20  

2013 (through April 15)

   102.00     89.58     85.80     64.80  

Quarterly Price History

        

2009

        

1st Quarter

   38.05     31.85     29.98     22.81  

2nd Quarter

   43.50     34.13     30.38     26.05  

3rd Quarter

   48.39     40.51     32.93     28.90  

4th Quarter

   53.90     46.07     37.45     31.32  

2010

        

1st Quarter

   64.41     53.72     46.93     37.33  

2nd Quarter

   65.63     56.25     51.60     42.50  

3rd Quarter

   90.20     61.00     66.30     48.29  

4th Quarter

   92.50     85.16     68.65     61.00  

2011

        

1st Quarter

   90.35     78.37     68.90     55.85  

2nd Quarter

   89.81     83.00     61.30     54.00  

3rd Quarter

   90.23     69.85     62.40     53.40  

4th Quarter

   85.84     66.63     72.60     52.80  

2012

        

1st Quarter

   99.11     83.98     72.00     59.40  

2nd Quarter

   95.27     81.07     71.40     60.00  

3rd Quarter

   86.55     80.33     72.60     59.40  

4th Quarter

   97.32     83.50     69.60     58.20  

2013

        

1st Quarter

   102.00     89.58     85.80     64.80  

Monthly Price History

        

October 2012

   89.25     83.50     67.20     62.40  

November 2012

   90.22     86.40     64.80     58.20  

December 2012

   97.32     88.42     69.60     63.00  

January 2013

   101.00     97.71     85.80     64.80  

February 2013

   102.00     97.55     78.00     70.20  

March 2013

   101.19     92.94     76.80     70.20  

April 2013 (through April 15)

   95.10     89.58     72.60     68.40  
   New York Stock Exchange   Latibex 
Period  High   Low   High   Low 
   (U.S.$ per ADS)(1)   (Euros per Trading Unit)(2) 

Annual Price History

        

2009

   53.90     31.85     37.45     22.81  

2010

   92.50     53.72     68.65     37.33  

2011

   90.35     66.63     72.60     52.80  

2012

   99.11     80.33     72.60     58.20  

2013

   102.00    81.00    85.80     56.40 

2014

   84.91     67.38     —       —    

2015 (through April 17th)

   70.98     64.30     —       —    

Quarterly Price History

        

2010

        

1st Quarter 2010

   64.41     53.72     46.93     37.33  

2nd Quarter 2010

   65.63     56.25     51.60     42.50  

3rd Quarter 2010

   90.20     61.00     66.30     48.29  

4th Quarter 2010

   92.50     85.16     68.65     61.00  

2011

        

1st Quarter 2011

   90.35     78.37     68.90     55.85  

2nd Quarter 2011

   89.81     83.00     61.30     54.00  

3rd Quarter 2011

   90.23     69.85     62.40     53.40  

4th Quarter 2011

   85.84     66.63     72.60     52.80  

2012

        

1st Quarter 2012

   99.11     83.98     72.00     59.40  

2nd Quarter 2012

   95.27     81.07     71.40     60.00  

3rd Quarter 2012

   86.55     80.33     72.60     59.40  

4th Quarter 2012

   97.32     83.50     69.60     58.20  

2013

        

1st Quarter 2013

   102.00    92.94    85.80    64.80 

2nd Quarter 2013

   95.27    81.00    84.00    56.40 

3rd Quarter 2013

   95.20    82.56    68.40    57.60 

4th Quarter 2013

   94.00    84.44    69.00    65.40 

2014

        

1st Quarter 2014

   84.91     70.43     —       —    

2nd Quarter 2014

   82.10     75.39     —       —    

3rd Quarter 2014

   80.65     72.88     —       —    

4th Quarter 2014

   75.94     67.38     —       —    

2015

        

1st Quarter 2015

   70.22     64.30     —       —    

Monthly Price History

        

November 2014

   75.94     72.55     —       —    

December 2014

   72.68     67.38     —       —    

January 2015

   69.30     65.74     —       —    

February 2015

   70.22     67.20     —       —    

March 2015

   69.87     64.30     —       —    

April 2015 (through April 17th)

   70.98     68.44     —       —    

 

Source: Bloomberg.

 

(1)One ADS represents 600 shares of common stock.
(2)One Trading Unit represents 600 shares of common stock.

As mentioned earlier, on October 18, 2013 we voluntarily delisted our trading units from the Latibex.

Item 10Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Set forth below is a brief summary of the significant provisions of ourestatutos (bylaws) and Chilean law. This description contains all material information concerning our shares, but does not purport to be complete and is qualified in its entirety by reference to ourestatutos (a copy of which is filed as Exhibit 1.1 to this annual report), the General Banking Law, the Chilean Corporations Law and the Securities Market Law.

We are an open stock (public) corporation and are registered with the Chilean Public Registry of Commerce of Santiago under Page 23,859 Number 18,638 of the year 1996, and authorized to operate as a bank by the Superintendency of Bank and

Financial Institutions. The Chilean Corporations Laws, the Securities Market Law and the General Banking Law set forth the rules and requirements for establishing, and operating banks in Chile, as well as shareholder rights in a Chilean bank. Additionally, the operation and the shareholder’s rights are also governed by the bank’sestatutos, which effectively serve as both the articles of incorporation and the bylaws of a company incorporated in the United States. Legal provisions in Chile take precedence over any contrary provision set forth in a corporationestatutos. Both the Chilean Corporations Law and ourestatutos provide that legal actions by shareholders against us (or our officers or directors) to enforce their rights as shareholders or by one shareholder against another in their capacity as such are to be brought in Chile in arbitration proceedings.

The Chilean securities markets are principally regulated by the Chilean Superintendency of Securities and Insurance under the Securities Market Law and the Chilean Corporations Law. In the case of banks, compliance with these laws is supervised by the Superintendency of Banks.SBIF. These two laws provide for disclosure requirements, restrictions on insider trading and price manipulation and protection of minority investors. The Securities Market Law sets forth requirements relating to public offerings, stock exchanges and brokers, and outlines disclosure requirements for companies that issue publicly offered securities.

Purpose

Our corporate purpose is to undertake all acts, contracts, business and transactions as the General Banking Law allows banking institutions to undertake, without prejudice to expanding or restricting our scope of action consistent with current legal precepts or such as may be established in the future.

Capitalization

As of April 15, 2013,17, 2015, there are 88,037,813,51194,655,367,544 Banco de Chile shares and 3,939,489,442 Banco de Chile-T series shares outstanding of our capital stock. All of such shares are fully paid.

Our shares are no par value and full voting rights. There are no legal restrictions on the payment of dividends from our net income, except that we may only pay a single dividend per year (i.e., interim dividends are not permitted). Under the Chilean Corporations Law and regulations issued thereunder, Chilean public corporations are generally required to distribute at least 30% of their consolidated annual earnings as dividends, except to the extent they have accumulated losses. Previously, a bank was permitted to distribute less than such minimum amount in any given year with approval of the holders of at leasttwo-thirds of the bank’s outstanding stock. In 2006, however, this possibility was eliminated by law. Under the General Banking Law, a Chilean bank may pay dividends upon approval of its shareholders from (i) net earnings of previous fiscal years (i.e., interim dividends are not permitted), (ii) the reserve kept for that purpose or (iii) other funds permitted under Chilean law.

Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in the company’s capital. When an investor subscribes for issued shares, the shares are registered in such investor’s name, even if not paid for, and the investor is treated as a shareholder for all purposes, except with regard to receipt of dividends and the return of capital. The investor becomes eligible to receive dividends or the return of capital once it has paid for the shares; if it has paid for only a portion of such shares, it is entitled to reserve a corresponding pro rata portion of the dividends declared with respect to such shares unless the company’s bylaws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on a stock exchange and collect the difference, if any, between the subscription price and the auction proceeds.

However, until such shares are sold, the subscriber continues to exercise all the rights of a shareholder (except the right to receive dividends or the return of capital). In the case of banks, authorized shares and issued shares that have not been paid for within the period fixed for their payment by the Superintendency of BanksSBIF are cancelled and are no longer available for issuance by the company.

The Chilean Corporations Law provides that the purchaser of shares of a company implicitly accepts its bylaws and any agreements adopted at shareholders’ meetings.

Directors

For a description of the provisions of ourestatutos relating to our board of directors and our directors/audit committee, see “Item 6. Directors, Senior Management and Employees.”

Ownership Restrictions

Under the Securities Market Law and the regulations of the Superintendency of Banks,SBIF, shareholders of open stock corporations are required to report the following to the Chilean Superintendency of Securities and Insurance and the Chilean stock exchanges:

 

any direct or indirect acquisition or sale of shares that results in the holder’s acquiring or disposing of, directly or indirectly, 10% or more of an open stock corporation’s share capital; and

 

any direct or indirect acquisition or sale of shares or options to buy or sell shares, in any amount, if made by a holder of 10% or more of an open stock corporation’s capital or if made by a director, liquidator, main officer, general manager or manager of such corporation.

The foregoing requirements also apply to the acquisition or sale of securities or agreements which price or return depends or is conditioned (all or in a significant part) upon changes or movements in the price of such shares. The report shall be made the day following the execution of the transaction.

In addition, any person who acquires 10% or more of our shares must include in the report whether the purpose of the acquisition is to acquire control of the company or if the acquisition is just a financial investment. A beneficial owner of ADSs representing 10% or more of our share capital will be subject to these reporting requirements under Chilean law.

According to the regulations of the Superintendency of Banks,SBIF, Chilean banks that issue ADSs are required to inform the Superintendency of BanksSBIF if any person, directly or beneficially, acquires ADSs representing 5% or more of the total amount of shares of capital stock issued by such bank.

Under the Securities Market Law and the regulations of the Chilean Superintendency of Securities and Insurance, persons or entities intending to acquire control, directly or indirectly, of an open stock corporation, regardless of the acquisition vehicle or procedure, and including acquisitions made through direct subscriptions or private transactions, are also required to inform the public of such intention at least 10 business days before the date on which the transaction is to be completed, but, in any case, as soon as negotiations regarding the change of control begin or as soon as confidential information and documents concerning the target are delivered to the potential acquirer such delivery can occur through a filing with the Chilean Superintendency of Securities and Insurance, the stock exchanges where its securities are traded, companies controlled by and that control the target and through a notice published in two Chilean newspapers, which notice must disclose, among other information, the person or entity purchasing or selling, the price and the material conditions of any negotiations.

Prior to such publication, a written communication to such effect must be sent to the target corporation, to the controlling corporation, to the corporations controlled by the target corporation, to the Chilean Superintendency of Securities and Insurance and to the Chilean stock exchanges. Title XV of the Securities Market Law provides the definition of a controlling power, direct holding and related party.

In addition to the foregoing, Article 54A of the Chilean Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs, as well as posted on their websites, if any.

The provisions of the aforementioned articles do not apply when the acquisition is being made through a tender or exchange offer.

Title XXV of the Chilean Securities Market Law on tender offers and the regulations of the Chilean Superintendency of Securities and Insurance provide that the following transactions must be carried out through a tender offer:

 

an offer which allows a person to take control of a publicly traded company, unless (i) the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange and (ii) those shares are acquired (a) through a capital increase, (b) as a consequence of a merger, (c) by inheritance or (d) through a forced sale;

 

an offer for a controlling percentage of the shares of a listed company if such person intends to take control of the parent company (whether listed or not) of such listed company, to the extent that the listed company represents 75% or more of the consolidated net worth of the parent company; and

 

whenever a controlling shareholder acquirestwo-thirds of the voting shares of a listed company, such controlling shareholder must offer to purchase the remaining shares from the minority shareholders in a tender offer, unless (i) the controlling shareholder has reached two thirds of the voting shares through a tender offer for all of the shares of the company, or (ii) it reaches such percentage as a result of a reduction of the capital of the company by operation of law.

Article 200 of the Chilean Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of 12 months from the date of the transaction in which it gained control of the publicly traded company, a number of shares equal to or greater than 3% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.

Title XV of the Chilean Securities Market Law sets forth the basis to determine what constitutes a controlling power, a direct holding and a related party. The Chilean Securities Market Law defines control as the power of a person or group of persons acting (either directly or through other entities or persons) pursuant to a joint action agreement to direct the majority of the votes at the shareholders’ meetings of the corporation and to elect the majority of members of its board of directors, or to influence the management of the corporation significantly. Significant influence is deemed to exist in respect of the person or group of persons with an agreement to act jointly that holds, directly or indirectly, at least 25% of the voting share capital, unless:

 

another person or group of persons acting pursuant to joint action agreement, directly or indirectly, controls a stake equal to or greater than the percentage controlled by such person;

 

the person or group does not control, directly or indirectly, more than 40.0% of the voting share capital and the percentage controlled is lower than the sum of the shares held by other shareholders holding more than 5% of the share capital (either directly or pursuant to a joint action agreement); or

 

in cases where the Chilean Superintendency of Securities and Insurance has ruled otherwise, based on the distribution or atomization of the overall shareholding.

According to the Chilean Securities Market Law, a joint action agreement is an agreement among two or more parties which, directly or indirectly, own shares in a corporation at the same time and whereby they agree to participate with the same interest in the management of the corporation or in taking control of the same. The law presumes that such an agreement exists between:

 

a principal and its agents;

 

spouses and relatives within certain degrees of kinship;

 

entities within the same business group; and

 

an entity and its controller or any of the members of the controller.

Likewise, the Chilean Superintendency of Securities and Insurance may determine that a joint action agreement exists between two or more entities considering, among other things, the number of companies in which they participate and the frequency with which they vote identically in the election of directors, appointment of managers and other resolutions passed at extraordinary shareholders’ meetings.

According to Article 96 of the Chilean Securities Market Law, a business group is a group of entities with such ties in their ownership, management or credit liabilities that it may be assumed that the economic and financial action of such members is directed by, or subordinated to, the joint interests of the group, or that there are common credit risks in the credits granted to, or in the acquisition of securities issued by, them. According to the Chilean Securities Market Law, the following entities are part of the same business group:

 

a company and its controller;

 

all the companies with a common controller together with that controller; and

 

all the entities that the Chilean Superintendency of Securities and Insurance declares to be part of the business group due to one or more of the following reasons:

 

a substantial part of the assets of the company is involved in the business group, whether as investments in securities, equity rights, loans or guaranties;

 

the company has a significant level of indebtedness and the business group has a material participation as a lender or guarantor of such indebtedness;

 

the company is a member of a controlling group of any company of those mentioned in the first two bullets above and there are reasons grounded in ties in the ownership, management or credit liabilities to include it in the business group; or

 

the company is controlled by a member of the controller of any of the entities of the business group if the latter is formed by more than one entity and if there is more than one group of controlling entities and there are reasons grounded in ties in the ownership, management or credit liabilities to include it in the business group.

The General Banking Law provides that, as a matter of public policy, no person or company may acquire, directly or indirectly, more than 10% of the shares of a bank without the prior authorization of the Superintendency of Banks,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 Superintendency of BanksSBIF considers a number of factors enumerated in the General Banking Law, including the financial stability of the purchasing party.

The General Banking Law also requires the prior authorization of the Superintendency of BanksSBIF for the following transactions:

 

the merger of two or more banks;

the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank;

 

the control by the same person or controlling group of two or more banks; or

 

a substantial increase in the share ownership by a controlling shareholder of a bank.

This prior authorization is only required when the acquiring bank or the resulting group of banks would own a significant market share in loans, defined by the Superintendency of BanksSBIF to be more than 15% of all loans in the Chilean banking system. The intended purchase, merger or expansion may be denied by the Superintendency of Banks;SBIF; or, if the acquiring bank or resulting group would own a market share in loans determined to be more than 20% of all loans in the Chilean banking system, the purchase, merger or expansion may be conditioned on one or more of the following:

 

the bank or banks maintaining regulatory capital higher than 8% and up to 14% ofrisk-weighted assets;

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

 

the margin for interbank loans being reduced to 20% of the resulting bank’s regulatory capital.

If the acquiring bank or resulting group would own a market share in loans determined by the Superintendency of BanksSBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining a regulatory capital not lower than 10% of theirrisk-weighted assets for the period specified by the Superintendency of Banks,SBIF, which may not be less than one year. The calculation of therisk-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 General Banking Law, a bank may not grant loans to related parties on terms more favorable than those generally offered tonon-related parties. Article 84 No. 2 of the General Banking Law and the regulations issued by the Superintendency of BanksSBIF creates the presumption that natural persons who are holders of shares and who beneficially own more than 1% of the shares 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.

Article 16bis16 of the General Banking Law provides that the individuals or legal entities that, individually or with other people, directly control a bank and who individually own more than 10% of its shares must send to the Superintendency of BanksSBIF reliable information on their financial situation in the form and in the opportunity set forth in Resolution No. 3,156 of the Superintendency of Banks.SBIF.

There are no limitations fornon-resident or foreign shareholders to hold or exercise voting rights on the securities of a bank.

Preemptive Rights and Increases of Share Capital

The Chilean Corporations Law provides that whenever a Chilean company issues new shares for cash, it must offer its existing shareholders the right to purchase a number of shares sufficient to maintain their existing ownership percentages in the company. Pursuant to this requirement, preemptive rights in connection with any future issue of shares will be offered by us to the depositary as the registered owner of the shares underlying the ADSs. However, the depositary will not be able to make such preemptive rights available to holders of ADSs unless a registration statement under the Securities Act is effective with respect to the underlying shares or an exemption from the registration requirements thereunder is available.

We intend to evaluate, at the time of any preemptive rights offering, the practicality under Chilean law and Central Bank regulations in effect at the time of making such rights available to our ADS holders, as well as the costs and potential liabilities associated with registration of such rights and the related shares of common stock under the Securities Act, and the indirect benefits to us of thereby enabling the exercise by all or certain holders of ADSs of their preemptive rights and any other factors we consider appropriate at the time, and then to make a

decision as to whether to file such registration statement. There can be no assurance that any registration statement would be filed. If we do not file a registration statement and no exemption from the registration requirements under the Securities Act is available, the depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of such sale. In the event that the depositary is not able, or determines that it is not feasible, to sell such rights at a premium over the cost of any such sale, all or certain holders of ADSs may receive no value for such rights.Non-U.S. holders of ADSs may be able to exercise their preemptive rights regardless of whether a registration statement is filed. The inability of all or certain holders of ADSs to exercise preemptive rights in respect of shares of common stock underlying such ADSs could result in such holders not maintaining their percentage ownership of the common stock following such preemptive rights offering unless such holder made additional market purchases of ADSs or shares of common stock.

Under Chilean law, preemptive rights are exercisable or freely transferable by shareholders during a period that cannot be less than 30 days following the grant of such rights. During such period, and for an additional30-day period thereafter, a Chilean corporation is not permitted to offer any unsubscribed shares for sale to third parties on terms which are more favorable than those offered to its shareholders. At the end of such additional30-day period, a Chilean open stock corporation is authorized to sell unsubscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange. Unsubscribed shares that are not sold on a Chilean stock exchange can be sold to third parties only on terms no more favorable for the purchaser than those offered to shareholders.

Shareholders’ Meetings and Voting Rights

An ordinary annual shareholders’ meeting is held within the first four months of each year. The ordinary annual shareholders’ meeting is the corporate body that approves the annual financial statements, approves all dividends in accordance with the dividend policy determined by our board of directors, elects the members of our board of directors and approves any other matter that does not require an extraordinary shareholders’ meeting. Extraordinary meetings may be called by our board of directors when deemed appropriate, and ordinary or extraordinary meetings must be called by our board of directors when requested by shareholders representing at least 10% of the issued voting shares or by the Superintendency of Banks.SBIF.

Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago, Chile) previously determined by our shareholders at the ordinary annual meeting or, in the event an agreement is not reached in the previous ordinary annual meeting or the newspaper ceases to exist or has its distribution suspended for whatever reason, in theOfficial Gazette in a prescribed manner, and the first notice must be published not less than 15 calendar days nor more than 20 calendar days in advance of the scheduled meeting. Notice must also be given to the Superintendency of Banks,SBIF, the Santiago Stock Exchange, the Valparaiso Stock Exchange and the Chilean Electronic Stock Exchange. Currently, we publish our official notices in theEl Mercurionewspaper of Santiago.

In the case of an ordinary annual shareholders’ meeting, shareholders holding a prescribed minimum ownership interest in us must be sent an annual report of our activities that includes audited consolidated financial statements. Shareholders who do not fall into this category but who request it must also be sent a copy of our annual report. In addition to these requirements, we regularly provide, and management currently intends to continue to provide, together with the notice of ordinary annual shareholders’ meeting, a proposal for the final annual dividend.

The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing at least an absolute majority of the issued shares. If a quorum is not present at the first meeting on first call, the meeting can be reconvened (in accordance with the procedures described in the previous paragraphs) and, upon the meeting being reconvened, shareholders present at the reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares represented.

The shareholders’ meetings pass resolutions by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. Approval by atwo-thirds majority of the issued shares, however, is required at any shareholders’ meeting to approve any of the following actions:

 

a change in corporate form, merger orspin-off;

 

an amendment to our term of existence, if any, or our early dissolution;

a change in corporate domicile;

 

a decrease of corporate capital previously approved by the Superintendency of Banks,SBIF, provided it is not reduced below the minimum legal capital;

 

the approval of capital contributions and appraisal of properties other than cash, in those cases where it is permitted by the General Banking Act;

 

a modification of the powers of shareholders or limitations on the powers of our board of directors;

a reduction in the number of members of our board of directors;

 

the transfer of 50% or more of the corporate assets or the implementation or amendment of any business plan that contemplates the transfer of more than 50% of our corporate assets or the transfer of 50% or more of the assets of a subsidiary if such subsidiary represents at least 20% of our total corporate assets, as well as transfer of shares of such subsidiary which would make it lose such status;

 

anynon-cash distribution in respect of the shares;

 

a change in the manner of distribution of profits established in our bylaws;

 

the granting of guarantees to securethird-party obligations in excess of 50% of our corporate assets, unless granted to a subsidiary;

 

the repurchase of our shares under the conditions set forth in Articles 27A and 27B of the Chilean Corporations Law;

 

the correction of nullity caused by formal defects of any amendments to our bylaws;

 

approval or confirmation of transactions with related parties, as set forth in Articles 44 and 147 of the Chilean Corporations Law; or

 

certain other matters set forth in our bylaws.

Shareholders may accumulate their votes for the election of directors and cast all of their votes in favor of one person.

In general, Chilean law does not require a Chilean open stock corporation to provide the level and type of information that U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of a company and its subsidiaries within the15-day period before any ordinary annual shareholders’ meeting.

The Chilean Corporations Law provides that a Chilean company’s annual report must include, in addition to the materials provided by the board of directors to shareholders, the comments and proposals made by the directors’ committee, and, whenever shareholders representing 10% or more of the issued voting shares so request, such shareholders’ comments and proposals in relation to the company’s affairs. Similarly, the Chilean Corporations Law provides that whenever the board of directors of an open stock corporation convenes an ordinary annual shareholders’ meeting and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by the directors’ committee and shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be so included.

Only shareholders registered as such with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his proxy to attend and vote on his behalf. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed, as we do not have special classes of shares with different voting rights.

Our shareholders’ meetings held in 2012 are:2013 were:

 

At theThe ordinary annual shareholders’ meeting held on March 22, 201221, 2013, where our shareholders’shareholders agreed to the distribution and payment of dividend N° 200,201, in the amount of CLP$2.9847403.41625263165 per Banco de Chile common share, with a charge to 20112012 net distributable income of Banco de Chile. As mentioned in our previous20-F report, “Banco deChile-T series” shares did not have the right to receive dividends and fullypaid-in shares in respect of our net distributable earnings for fiscal year 2012. Once such dividends and fullypaid-in shares were distributed, the Banco deChile-T shares were automatically converted to Banco de Chile shares.

At theThe extraordinary shareholders’ meeting held on March 22, 2012,21, 2013, where our shareholders agreed to issue a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 20112012 by means of the issuance of fullypaid-in shares, without par value, with a value of Ch$67.4871.97 per share, which was distributed among the shareholders in the proportion of 0.0189560.02034331347 fullypaid-in shares for each share held, subject to the exercise of the options established in article 31 of Law 19,396. As mentioned in our previous20-F report, “Banco deChile-T series” shares did not have the right to receive dividends and fullypaid-in shares in respect of our net distributable earnings for fiscal year 2012. Once such dividends and fullypaid-in shares were distributed, the Banco deChile-T shares were automatically converted to Banco de Chile shares.

Our shareholders’ meetings held in 2014 were:

The ordinary annual shareholders’ meeting held on March 27, 2014, where our shareholders agreed to the distribution and payment of dividend N° 202, in the amount of Ch$3.48356970828 per Banco de Chile common share, with a charge to 2013 net distributable income of Banco de Chile.

The extraordinary shareholders’ meeting held on March 27, 2014, where our shareholders agreed to issue a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2013 by means of the issuance of fullypaid-in shares, without par value, with a value of Ch$64.56 per share, which was distributed among the shareholders in the proportion of 0.02312513083 fullypaid-in shares for each share held, subject to the exercise of the options established in article 31 of Law 19,396.

As of April 17, 2015, the following shareholders’ meetings had been held:

The ordinary annual shareholders’ meeting held on March 26, 2015, where our shareholders agreed to the distribution and payment of dividend N° 203, in the amount of Ch$3.42915880220 per Banco de Chile common share, with a charge to 2014 net distributable income of Banco de Chile.

The extraordinary shareholders’ meeting held on March 26, 2015, where our shareholders agreed to issue a stock dividend in connection with the capitalization of 30% of our distributable net income obtained during the fiscal year 2014 by means of the issuance of fully paid in shares, without par value, with a value of Ch$65.31 per share, which was distributed among the shareholders in the proportion of 0.02250251855 fully paid in shares for each share held, subject to the exercise of the options established in article 31 of Law 19,396.

At This capitalization is currently subject to the Extraordinary Shareholders Meeting held on October 17, 2012 our shareholders agreed to increase our capital in the amount of CLP$250,000,000,000 (approximately U.S.$521 million) by means of the issuance of 3,939,489,442 cash shares “Banco de Chile-T series”. These shares have the same rights as all of Banco de Chile’s shares, except that the holders of Banco de Chile T-series shares will not receive dividends or fully paid-in shares in respect of our net distributable earnings for fiscal year 2012. Once any dividends and/or fully paid-in shares are distributed, the Banco de Chile-T shares will automatically convert to Banco de Chile shares. As of the date of filing, all these shares are fully paid.SBIF’s approval.

Dividend, Liquidation and Appraisal Rights

For a description of the provisions of ourestatutos related to our dividends, see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends.”

Under the Chilean Corporations Law, Chilean companies are generally required to distribute at least 30% of their earnings as dividends. Previously, the General Banking Law stated that banks were permitted to distribute less than such minimum amount in any given year with the approval of holders of at leasttwo-thirds of the bank’s common stock. In 2006, however, this possibility was eliminated by law. In the event of any loss of capital, no dividends can be distributed so long as such loss is not recovered. Also, a bank cannot distribute dividends above the legal minimum if doing so would result in the bank exceeding its ratio ofrisk-weighted assets to regulatory capital or total assets. See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends.”

Dividends that are declared but not paid by the date set for payment at the time of declaration are adjusted from the date set for payment to the date such dividends are actually paid, and interest is accrued thereon. The right to receive a dividend lapses if it is not claimed within five years from the date the dividend is payable and the funds may be claimed by the Chilean treasury.

We may declare a dividend in cash or in shares. When a share dividend is declared above the legal minimum (which minimum must be paid in cash), our shareholders must be given the option to elect to receive cash. A holder of our ADSs may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “—Preemptive Rights and Increases of Share Capital.”

In the event of our liquidation, the holders of our fully paid shares would participate equally and ratably, in proportion to the number ofpaid-in shares held by them, in our assets available after payment of all our creditors. The holders of fully paid shares would not be required to contribute additional capital to us in the event of our liquidation.

In accordance with the General Banking Law, our shareholders do not have appraisal rights in the event of a business combination or otherwise.

Approval of Financial Statements

Our board of directors is required to submit our audited consolidated financial statements to the shareholders annually for their approval. The approval or rejection of the financial statements is entirely within our shareholders’ discretion. If our shareholders reject our consolidated financial statements, our board of directors must submit new consolidated financial statements not later than 60 calendar days from the date of the rejection. If our shareholders reject our new consolidated financial statements, our entire board of directors is deemed removed from office and a new board of directors shall be elected at the same meeting. Directors who individually approved our consolidated financial statements are disqualified from running forre-election for the ensuing period.

Registrations and Transfers

We act as our own registrar and transfer agent, as is customary among Chilean companies. In the case of jointly owned shares, anattorney-in-fact must be appointed to represent the joint owners in dealings with usus.

MATERIAL CONTRACTS

See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”

EXCHANGE CONTROLS

The Central Bank is responsible for maintaining the stability of the Chilean peso and the normal functioning of internal and external payments. The authority of the Central Bank for these purposes includes regulation of the amount of currency and credit in circulation, the performance of credit transactions and foreign exchange operations and the issuance of regulatory provisions regarding monetary, credit, financing and foreign exchange matters.

Under the Basic Constitutional Act of the Central Bank, Law 18,840, foreign exchange operations can be carried out in Chile by any person, subject to the limitations and restrictions established by the Central Bank. Foreign exchange transactions include buying and selling foreign currency and, in general, any act or agreement that may have the effect of creating, amending, or extinguishing an obligation payable in such currency, even if no transfer of funds or drafts to or from Chile is actually involved. Foreign exchange transactions also include transfers of or transactions with respect to gold or instruments representing gold.

The Central Bank can impose the following limitations on foreign exchange transactions:

 

The Central Bank can require that the transaction of specified foreign exchange operations, such as foreign investments and foreign credits, be reported to it; and

 

The Central Bank can require that the execution of certain foreign exchange operations, such as money transfers to and from Chile, be made only in the Formal Exchange Market. The Formal Exchange Market consists of banks and other entities authorized by the Central Bank.

Also, the Central Bank has the authority to establish certain restrictions on foreign exchange transactions with respect to the Formal Exchange Market. These restrictions may include the following: the obligation to return to Chile in Chilean pesos the value obtained in the export of goods, services, and other payments to foreign persons or entities that have a right of residency in Chile; that a reserve be maintained for credits, deposits and investments in foreign currency from or to a foreign country; and the obligation to obtain approval for payment or remittance of foreign exchange transactions, among others.

These restrictions may only be imposed by resolution adopted by the majority of board members of the Central Bank if required for the stability of the currency or the financing of the balance of payments of the country. Additionally, these restrictions may only be imposed for a predetermined period, which, at the most, may extend to a year. The resolution may be subject to veto by the Minister of Finance, in which case the restriction may only be adopted pursuant to a favorable vote of all the board members. The restriction, once the predetermined period has expired, may be renewed subject to the preceding rules.

On April 16, 2001, the Central Bank eliminated the prior foreign exchange restrictions, replaced the former Compendium of Foreign Exchange Regulations (“Compendium”) by a new one, and eliminated Chapter XXVI of the old Compendium, which regulated the establishment of an ADR facility by a Chilean company. Notwithstanding such replacement, the special regime of Chapter XXVI continued in force for Banco de Chile’s ADS program until March 7, 2011, when the Central Bank of Chile, JPMorgan Chase Bank N.A., as depositary bank, and Banco de Chile executed an agreement that terminated the Exchange Convention (“Convención Cambiaria”). As a consequence of such termination, the special exchange regime established in the Exchange Convention is no longer applicable. Thus, the Deposit Agreement, as amended, and Banco de Chile’s ADS program are subject to the exchange regulations of general applicability of Chapter XIV of the Compendium or such new regulations that may be issued in the future. A copy of the amendment to the deposit agreement, dated February 1, 2011, can be found as an Exhibit to this annual report.

The ADS facility is governed by Chapter XIV of the Compendium on “Regulations applicable to Credits, Deposits, Investments and Capital Contributions from Abroad”.Abroad.” According to Chapter XIV, the establishment of an ADS facility is regarded as an ordinary foreign investment, subject to the above mentioned limitations, and it is not necessary to seek the Central Bank’s prior approval in order to establish an ADS facility. The establishment of an ADS facility only requires that the Central Bank be informed of the transaction, and that the transaction be conducted through the Formal Exchange Market.

In Chile, foreign investments can also be made through the Foreign Investment Committee under Decree Law No. 600 of 1974,Foreign Investment Statute, which is an optional mechanism to invest capital in Chile that requires, among other items, a foreign investment contract with the State of Chile. However, on September 29, 2014 Law 20,780 was published which revoked Decree 600 effective January 1, 2016 subject to the condition that a new institutional framework for foreign investment be submitted to the National Congress on or before January 31, 2015 and passed on or before January 1, 2016. If such new framework is not passed on or before such date, revocation will be postponed until such condition is fulfilled. Even if the revocation of Decree Law 600 becomes effective, foreign investment agreements entered into under Decree Law 600 will continue to be governed by Decree Law 600.

Investment in Our Shares and ADSs

Investments made in shares of our common stock are subject to the following requirements:

 

any foreign investor acquiring shares of our common stock who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;

 

any foreign investor acquiring shares of our common stock to be converted into ADSs or deposited into an ADR facility who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;

 

in both cases, the entity of the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank;

 

all remittances of funds from Chile to the foreign investor upon the sale of the acquired shares of our common stock or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market;

all remittances of funds from Chile to the foreign investor upon the sale of shares underlying ADSs or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and

 

all remittances of funds made to the foreign investor must be reported to the Central Bank by the intervening entity of the Formal Exchange Market.

When funds are brought into Chile for a purpose other than to acquire shares to convert them into ADSs or deposit them into an ADR facility and subsequently such funds are used to acquire shares to be converted into ADSs or deposited into an ADR facility, such investment must be reported to the Central Bank by the custodian within ten days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank.

When funds to acquire shares of our common stock or to acquire shares to convert them into ADSs or deposit them into an ADR facility are received by us abroad (i.e., outside of Chile), such investment must be reported to the Central Bank directly by the foreign investor or by an entity participating in the Formal Exchange Market within ten days following the end of the month in which the investment was made.

All payments in foreign currency in connection with our shares of common stock or ADSs made from Chile through the Formal Exchange Market must be reported to the Central Bank by the entity participating in the transaction. In the event there are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.

There can be no assurance that additional Chilean restrictions applicable to the holders of ADSs, the disposition of shares of our common shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restrictions if imposed.

This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank Foreign Exchange Regulations, a copy of which is available in Spanish and English versions at the Central Bank’s website atwww.bcentral.cl.

TAXATION

Chilean Tax Considerations

The following discussion is based on certain Chilean income tax laws presently in force,effect, including Ruling No. 324 of January 29, 1990,applicable rulings of theServicio de Impuestos Internos, or the Chilean Internal Revenue Service, and other applicable regulations and rulings.rulings, including the tax reform Law N° 20.780, officially published in September 2014 (the “Tax Reform Law”). The discussion summarizes the principal Chilean income tax consequences of an investment in ADSs or shares of common stock held 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 tax 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 in two consecutive tax years. The Chilean Internal Revenue Service has interpreted that the six months period must be uninterrupted. An individual holder is domiciled in Chile if he or she resides in Chile with the purpose of staying in Chile. Also, according to the Chilean Internal Revenue Service, an individual that has no residence in Chile may be nonetheless considered as domiciled in Chile if he or she intends to stay in Chile commencing on the day of entry into the country and such intention is evidenced by circumstances such as the acceptance of employment within Chile or the relocation of his or her family to Chile. 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 and

interpret the provisions of Chilean tax 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 rulings and regulations prospectively. Chile and the United States have executed an income and capital tax treaty for the avoidance of double taxation and the prevention of fiscal evasion, but this treaty is not in effect, and its effectiveness is contingent upon ratification in the United States Senate and by the Chilean Congress.congress. At this time it is not clear when the United States Senate and the Chilean Congresscongress will consider ratification, and therefore the effective date of the treaty is uncertain.

Cash Dividends and Other Distributions

Cash dividends paid by us with respect to ADSs or shares of common stock held by a foreign holder are subject to a 35.0% Chilean withholding tax, which is withheld and paid over by us, which we refer to as the Chilean withholding tax.tax (see new effects of the Tax Reform Law below). A credit against the Chilean withholding tax is available based on the corporate income tax, or the first category tax, actually paid 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. 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 since said income is not subject to the first category tax at the corporate level. Finally, the distribution ofnon-taxable incomes income or incomesincome subject to the first category tax applied as a sole tax (sole tax rate hereafter) are both not subject to Chilean withholding tax. Under Chilean income tax law, for purposes of determining the level of the first category tax paid, dividends generally are assumed to have been paid out of oldest retained taxable profits. The effective rate of withholding tax to be imposed on dividends paid by us will vary depending upon the amount of the first category tax paid by us on the earnings to which the dividends are attributed. In case such provisional credit is determined to be totally or partially not applicable at the end of the year, due to the fact that retained taxable or exempted profits were not enough to cover the distribution made, foreign holders shall reimburse the Company for the provisional credit that was totally or partially granted overnon-taxable or exempted profits. In our case, the amount paid as the first category tax is lower than it would be based on our income because the dividends paid to SAOS are considered tax deductible. For reconstruction purposes arising from

With respect to the earthquake of February 2010,Tax Reform Law, it provides a new corporate income tax system whereby taxpayers may elect between the Attribution Regime or the Semi-integrated Regime, which is effective January 1, 2017.

In addition, the Tax Reform Law will gradually increase the first category tax rate was increased tofrom 20% for year 2011in 2013 to:

21% in 2014:

22.5% in 2015;

24.0% in 2016;

25.0% under the Attribution Regime and to 18.5% for year 2012, returning on 2013 to its normal tax-rate of 17%. However, for educational improvement purposes,25.5% under the law 20,630 permanently increasedSemi-Integrated Regime in 2017;

25.0% under the first category tax rate to 20% since 2012. Independently ofAttribution Regime and 27.0% under the first category tax rate applicable at the corporate level, the effective overall combined rate of Chilean taxes imposed with respect to our distributed profits is 35.0%.Semi-Integrated Regime from 2018 onwards.

The foregoing tax consequences apply to cash dividends paid and dividend distributions made in property, other than shares of common stock. Share dividends are not subject to Chilean taxation.

Capital Gains

Gain realized on the sale, exchange or other disposition by a foreign holder of ADSs (or ADRs evidencing ADSs) will not be subject to Chilean taxation, provided that such disposition occurs outside Chile or that it is performed under the rules of Title XXIV of the Chilean Securities Market Law. The deposit and withdrawal of shares of common stock in exchange for ADRs will not be subject to any Chilean taxes.

Gain recognized on the sale or exchange of shares of common stock (as distinguished from sales or exchanges of ADSs representing such shares of common stock) by a foreign holder will be subject to both the first category tax and the Chilean withholding tax (the first category tax being creditable against the latter) if:

(1) the foreign holder has held such shares of common stock for less than one year from the exchange of ADSs for the shares of common stock, or

(2) the foreign holder acquired and disposed of the shares of common stock in the ordinary course of its business or as a regular trader of stock, or

(3) the sale is made to a company in which the foreign holder holds an interest (10.0% or more of the shares in the case of open stock corporations).

In this case, as was mentioned, if

If at least one of these conditions is met, the capital gain recognized is subject to general taxation, thatthis is, both the first category tax and the Chilean withholding tax (theof 35.0% for foreign investors. This also applies in event that the capital gain cannot be determined.

If the transaction does not meet the three conditions mentioned above, capital gains will be taxed at the sole tax rate (this special regime for capital gains will be repealed in 2017) and a provisional withholding tax equal to the first category tax being creditable againstrate would be applied on the latter),capital gain by the buyer. If the capital gain cannot be determined, the buyer will apply a 20.0%5.0% provisional withholding tax would be imposed on the total amount (the sale price without any deduction) paid to, credited to, accounted for, put atdeductions, as a provisional payment of the disposal of, or corresponding to the foreign holder. In this case, thetotal tax due.

The foreign holder would be entitled to request a tax refund for any amounts withheld in excess of the taxes actually due, in April of the following year upon filing of its corresponding tax return.

In caseCapital gains will be free of transactions sincetax as long as the stock complies with the requirements established by Article N° 107 of January 1, 2013, the above mentioned law (20.630) changed the rule about the provisional withholding tax, applying a 35% of withholding tax rate over the amount remitted abroad (maintaining the credit against the Chilean withholding tax based on the corporate income tax available).

If the transaction does not meet the above 3 conditions mentioned above, the tax to be applied would be equal to the corporate tax rate on the profit as a sole tax and, according to the tax law, a provisional withholding tax equal to the first category tax rate would be applied (18.5% until 08.31.2012 and 20% since September 1, 2012). If the profit subject to taxation cannot be determined, the disposition of shares of common stock will be subject to 5.0% withholding tax on the total amount to be remitted abroad, without any deductions, as a provisional paymentIncome Tax Law. Some of the total tax due.main requirements are, as follows:

The company must be publicly listed in Chile while the stock must have a high frequency of trading over a determined period of time on Chilean stock exchanges.

The stock must be acquired on a Chilean stock exchange or during an initial public offering.

The stock must be sold on a Chilean stock exchange or in a public stock offering.

The acquisition value of the shares of common stock received in exchange for ADSs will represent the tax basis of such shares. The acquisition value is determined by the parties in the relevant deposit agreement, and generally corresponds to the highest price at which they are traded on the Santiago Stock ExchangeChilean stock exchanges on the date when the exchange takes place. Consequently, the conversion of ADSs into shares of common stock and sale of such shares of common stock for the value established under the deposit agreement will not generate a capital gain subject to taxation in Chile.

However, as the exchange is generally registered two days after the transaction is made, in caseit took place, if the price of the shares goes down, a gain would arise. To remedyIn order to overcome this situation, on October 1, 1999, the Chilean Internal Revenue Service issued Ruling No. 3,708, allowing Chilean issuers of ADSs to amend the deposit agreements to which they are parties in order to includeby including a clause stating that states that, in the case that thewhen exchanged shares are sold by the ADSs’ holders inon a Chilean stock exchange, either on the same day in which the exchange is recorded in the shareholders’ registry of the issuer or within the two prior business days prior to such date, the acquisition price of saidthose exchanged shares shallwill be the price registeredrecorded in the invoice issued by the stock broker that participated in the sale. Consequently, if this clause were included in the deposit agreement, the capital gain that may be generatedarise if the exchange date is different from the date in which the shares received in exchange for ADSs were sold it will not be subject to taxation.

The distribution and exercise of preemptive rights relating to the shares of common stock will not be subject to Chilean taxation. Amounts received in exchange for the shares or assignment of preemptive rights relating to the shares will be subject to both the first category tax and the Chilean withholding tax (the former being creditable against the latter to the extent described above).

CapitalStock dividends

Stock dividends (distributions of fully paid-in shares) are free of tax; however, according to the Tax Reform Law they will be subject to the 35% Chilean withholding tax for foreign investors from 2017 onwards. Similar to cash dividends, investors will be permited to use the corporate tax paid by the company as a tax credit.

On the other hand, under the Tax Reform Law, from 2017 on the corporate tax will not be available, as a sole tax and, therefore, capital gains obtained by foreign institutional investors such as mutual funds, pension funds and others, fromassociated with the sale of shares obtained as stock dividends will be subject to the general tax regime. Therefore, foreign investors will pay 35.0% Chilean withholding tax on capital gains as a consequence of publicly traded corporations, which are actively tradedthe sale of shares received as stock dividends. However, if the stock complies with the requirements established by Article 107 of Chilean Income Tax Law (see “Capital Gains”), capital gains will be free of tax.

Mutual Funds and Investment Funds

Law N° 20,712 effective on May 1, 2014, also known as the “Funds Unified Law”, regulates the Administration ofthird-party funds and individual portfolio management. This law eliminates and unified the previous legislation contained in a stock exchange, carried out through a Chilean stock exchange authorizedLaw N° 18.657 (Foreign Investment Capital Funds Law), Law N° 18.815 (Investment Funds Law), and Decree Law N° 1.328 (Mutual Funds Administration) and modifies other regulatory bodies. Law N° 20.712 was amended by the Chilean Superintendency of Securities and InsuranceTax Reform Law with respect to foreign investors, among other amendments.

The main aspects affecting foreign investment, including amendments made by the Tax Reform Law are as follows:

I.According to the Unified Funds Law, funds that are composed of 80% or more foreign assets are taxed as follows:

a)Capital Gains Tax (“CGT”): the sale of shares of these funds is exempt.

b)Dividends: the 80% composed of foreign assets is exempt from Chilean withholding tax; the 20% composed of Chilean assets is taxed with a 10% Chilean withholding tax (exception: there will be no taxation on the portion of dividends originated in non-taxable income).

c)Interests: the 80% composed of foreign assets is exempt from Chilean withholding tax; the 20% composed of Chilean assets is taxed with a 4% Chilean withholding tax.

d)In other cases (non-80/20 funds), there will be a 10% CGT and a 10% Chilean withholding tax on dividends and interests.

II.In the case of foreign investors that are not individual or institutional investors, general rules apply if they directly or indirectly own 5.0% or more of a company that is domiciled or resident in Chile; that is, they are subject to 35.0% Chilean withholding tax.

The modifications mentioned above are already fully in a tender offer are exempt of income tax in Chile.place.

A foreign institutional investor is an entity that is:Fixed Income (in force according to the Unified Funds Law)

 

a fund that makes public offers of its sharesThere are special tax regulations for bonds issued in Chile in a country with investment grade public debt, according to a classification performed by an international risk classification entity registered withoffering which interest rate fulfills specific conditions established in the Chilean Superintendency of Securities and Insurance;law (“104 Bonds”).

 

The Chilean withholding tax of 4% shall be withheld by the local custodian that is acting as a fund registered with a regulatory entityTax Agent of a country with investment grade public debt, according to a classification performed by an international risk classification entity registered with the Chilean Superintendency of Securities and Insurance, provided that its investments in Chile, including securities issued abroad representing Chilean securities, represent less than 30.0% of its portfolio;foreign investor.

 

The 104 Bonds shall be effective for a fund whose investmentsCGT exemption provided that:

i.They are traded in a continuous auction system; or

ii.They are held for at least one hour.

The governmental bonds included in a list made by the Treasury Department qualify as 104 Bonds (even if some of the requirements mentioned above are not met) and are suitable for a CGT exemption, regardless of its trading system, by virtue of DS N° 471 of March 25, 2014.

The Tax Reform Law introduced as well the “sourcing rule” for debt instruments: bonds and other debt instruments issued in Chile includingby Chilean companies will be deemed to be located in Chile. Therefore the capital gain arising from the sale will be subject to taxes, even if the seller is a non- resident. Also, interests arising from debt securities issued abroad representingthrough offshore permanent establishment are deemed to be sourced in Chile.

Capital Gains Tax for shares and Foreign Institutional Investors

The special CGT exemption regime for foreign institutional investors contemplated under article 106 of the Chilean securities, represent less than 30.0%Income Tax Law was revoked by the Tax Reform Law.

Under the provisory regime, the CGT exemption shall be applicable for assets purchased before the entry in force of its portfolio,Funds Unified Law (May 1, 2014), provided that no more than 10.0% of the equity or right to the profits of the fund is directly or indirectly owned by Chilean residents;

a pension fund that is exclusively organized by individuals that receive their pensions out of an accumulated capital in the fund, which is subject in its home country to regulation or supervision by the regulatory authorities;

a Foreign Capital Investment Fund, as defined in Chilean Law No. 18,657, in which case all quota holders must be non-Chilean residents or Chilean institutional investors; or

any other foreign institutional investor thatseller complies with the regulatory requirements set forth in general regulations for each category of investor, prior information from the SVS and the Chilean IRS.

In order to be entitled to the exemption under analysis, foreign institutional investors, during the time in which they operate in Chile, must meet the following requirements:

be organized abroad and not be domiciled in Chile;

not participate either directly or indirectlylisted in the control of the issuers of the securities in which they invest or directly or indirectly hold or participate in, 10.0% or more of the capital or the profits of such corporations.;

execute a written agreement with a Chilean bank or stock broker incorporated in Chile, in which the bank or stock broker undertakes to execute purchase and sale orders, verify the applicability of the tax exemption or the applicability of taxes, and in this last case verify that the applicable withholdings have been made by the payor of the rent; and

register with the Chilean Internal Revenue Service by means of a sworn statement issued by the bank or stock broker mentioned above.

repealed article 106.

Also, according to article 107 of the Chilean Income Tax Law, gains derived from the sale or transfer of shares of publicly-tradedpublicly traded companies organized in Chile that are actively traded inon a stock exchange, as defined in the relevant regulation,1 are exempt offrom taxes in Chile, provided that the following requirements are met:

 

The seller must have acquired the shares: (i) in
(a)The seller must have acquired the shares: (i) on a Chilean stock exchange authorized by the Chilean Superintendency of Securities and Insurance; or (ii) pursuant to a regulated tender offer carried out according to Title XXV of the Chilean Securities Market Law; or (iii) at the time of incorporation of the corporation or pursuant to a capital increase, or (iv) pursuant to the exchange of public traded securities convertible in shares (in this case the acquisition cost of the shares corresponds to the exchange price), or (v) in a redemption of securities from mutual funds;

In regards to shares acquired in a capital increase (iv) pursuant toprocess (as mentioned in (iii) above) before the exchange of public traded securities convertible in shares (in this casecompany was publicly listed, only the acquisition costportion which exceeds the price of the shares corresponds tooffering on the exchange price), or (v) in a redemption of securities from mutual funds;

The shares must be sold: (i) in a stock exchange authorized by(closing price on the Chilean Superintendencyfirst day of Securities and Insurance; (ii) pursuant to a regulated tender offer;transactions for the IRS) or (iii) in a contribution of securitiesthe book value on mutual funds.

The exemption under analysis also applies if the sale or transfer of sharesprior day, whichever is executed within 90 days following the day on which they were no longer considered as actively traded. In such case, the profit exempted from Chilean taxesgreater, will be up to the average price of shares within the last 90 days on which they were actively traded. Any profit above the average price will be subject to the general tax regime applicable to the transfer of shares.exempt.

(b)The shares must be sold: (i) on a stock exchange authorized by the Chilean Superintendency of Securities and Insurance; (ii) pursuant to a regulated tender offer; or (iii) in a contribution of securities on mutual funds; and

(c)The exemption under analysis also applies if the sale or transfer of shares is executed within 90 days following the day on which they were no longer considered as actively traded. In such case, the profit exempted from Chilean taxes will be up to the average price of shares within the last 90 days on which they were actively traded. Any profit above the average price will be subject to the general tax regime applicable to the transfer of shares.

Other Chilean Taxes

There are no Chilean inheritance, gift or succession taxes applicable to the transfer or disposition of the ADSs by a foreign holder,holder; however, according to the Chilean Internal Revenue Services’ criteria;Service’s criteria, such taxes generally will apply to the transfer at death or by a gift of shares of common stock by a foreign holder. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADSs or shares of common stock.

Tax Reform Law N° 20.780

The Tax Reform Law could impact local and foreign investors. The main amendments introduced by the reform are as follows:

1)Personal taxes:

The tax rate of the Chilean withholding tax does not change with the Tax Reform Law and, therefore, it remains at 35.0%. However, personal taxes (Global Complementario) for local investors will be reduced in the higher-income bracket from 40% to 35%, from 2017 onwards.

2)Tax system:

Up to now, earnings that are not distributed by companies as cash dividends are retained under the Fund or Taxable Retained Earnings (the “FUT”). As a result, retained earnings are only taxed at the corporate tax rate, while they are not subject to the 35% Chilean withholding tax (cash basis system). Under the Tax Reform Law, this mechanism will remain until 2016, so retained earnings will continue to increase the FUT. From 2017 onwards, if companies distribute cash dividends exceeding their annual net income, net amount in excess will be charged to the FUT.

The Tax Reform Law introduces two new alternative regimes for local companies impacting the amount of taxes levied on dividends distribution and the corporate tax rate differently. The regime must be chosen by voting of at least two thirds of shareholders at a shareholders’ meeting to be held in 2016. The company must in turn maintain that regime for at least five years. If a quorum of two thirds of voting rights is not reached or no option is elected and/or communicated to the Tax Authority, the Semi-Integrated Regime shall apply by default for listed companies. The elected regime will go into effect in 2017.

The alternative regimes are as follows:

a.The Semi-Integrated Regime:

Description: It is very similar to the current system. It levies taxes on effectively paid dividends (cash dividends). The corporate tax to be paid by the company will be 27% from 2018 onwards.

Local shareholders will be permitted to use only 65% of the paid corporate tax as a credit.

Foreign investors will only pay taxes over effectively paid dividends. They will be permitted to use the corporate tax (27%) as a credit against the Chilean withholding tax (35%). Investors from DTAT countries will be permitted to use 100% of the tax credit while investors from non-DTAT countries will be permitted to use 65% of the tax credit.

b.The Attribution Regime:

Description: It will be an alternative tax regime to be applied to local companies who chose it. The corporate tax rate will be 25% from 2017 onwards.

Local shareholders will levy personal taxes on their proportional participation in the total income before income tax that is attributed to or generated by the company, regardless of whether cash dividends are distributed or not. Also, shareholders will be permitted to use 100% of the paid Corporate Tax as a credit.

Foreign holders will pay taxes on their proportional participation in the total income before income tax generated by the company, regardless of whether cash dividends are distributed or not. It is important to mention that cash dividends will not be taxed again once received, regardless of whether they are received from direct investment or from investment made through mutual or investment funds (80/20 funds). Investors will be permitted to use 100% of the corporate tax (25.0%) as a credit against the Chilean withholding tax (35.0%). This new rule will have a direct impact on ADS holders.

3)Capital gains, no longer sole.

Capital gains on the disposition of shares in Chilean companies may currently qualify for a sole capital-gains tax of 22.5% for 2015 and 24% for 2016, if those shares are not benefiting from the exemption of Article 107 (see “Capital Gains”).

The Tax Reform Law eliminates this reduced taxation and, therefore, capital gains associated with the sale of shares will be subject to the general tax regime, this is, first category tax and both 35.0% Chilean withholding tax for foreign holders or personal taxes for local investors. However, if the stock complies with the requirements established by Article 107 of the Chilean Income Tax Law capital gains will be free of tax for both foreign and local holders (see “Capital Gains”).

4)Stock dividends:

The Tax Reform Law will levy taxes on stock dividends (distribution of fully paid-in shares) received by investors from 2017 onwards. This rule will apply for both local and foreign holders of shares and ADS.

In addition, capital gains associated with the sale of shares obtained as stock dividends will be treated in the same way described above (see “Capital gains, no longer sole.”).

5)The Stamp Tax:

The Stamp Tax will increase from 0.4% to 0.8% (this tax mainly affects loans and financing). This will be a one-time increase going effective on January 1, 2016.

6)Other Effects:

The increase in the corporate tax rate in both regimes had a one-time impact on the Deferred Taxes outstanding, which was recognized in our financial statements as of and for the year ended December 31, 2014.

United States Federal Income Tax Considerations

The following discussion is a summary of certain U.S. federal income tax considerations that may be relevant to the acquisition, ownership and disposition of shares of our common stock, as well as the ownership and disposition of ADSs received pursuant to a deposit into the ADR facility of shares of our common stock, by a beneficial owner that is: (i) an individual who is a citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust (or otherwise if the trust has a valid election in effect under current U.S. Treasury regulations to be treated as a U.S. person). For purposes of this discussion, we refer to these owners of ADSs or shares of our common stock as “U.S. Holders.” If a partnership holds ADSs or shares of our common stock, the tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership. A prospective investor whothat is a partnership or a partner ofin a partnership holding ADSs or shares of our common stock should consult its own tax advisors.

This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to a U.S. Holder’s decision to acquire ADSADSs or shares of our common stock. In particular, this discussion is directed only to U.S. Holders that will hold ADSs or shares of our common stock as capital assets (generally, property held for investment) and it does not address the Medicare tax on net investment income or any special U.S. federal income tax consequences that may be applicable to U.S. Holders that are subject to special treatment under the Internal Revenue Code of 1986, as amended (“U.S. Code”), such as banks, brokers or dealers in securities or currencies, traders in securities electing themark-to-market method of accounting, financial institutions, life insurance companies,tax-exempt entities, regulated investment companies,

1A share is actively traded if (i) at least 25% of the days within the last 180 trading days preceding the day of transaction reaches a minimum for the equivalent in pesos to 1000 UF (MUS$ 46 approximately), or (ii) it has a market maker as defined by the Superintendency of Securities and Insurance.

real estate investment trusts, partnerships, holders that own or are treated as owning 10% or more of our voting shares of our common stock, persons holding ADSs or shares of our common stock as part of a hedging, conversion or other integrated transaction or a straddle, persons subject to the alternative minimum tax or personsU.S. Holders whose functional currency is not the U.S. dollar. Prospective investors are advised to satisfy themselves as to the overall U.S. federal, state and local tax consequences of their ownership of ADSs or shares of our common stock by consulting their own tax advisors.

Except where specifically described below, this discussion assumes that we are not a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes. Please see the discussion under “—Passive Foreign Investment Companies” below.

The statements of U.S. federal income tax laws set out below are based on the laws in force as of the date hereof and may be subject to changes in U.S. federal income tax law occurring after that date, including changes that may have retroactive effect.

ADRs

A U.S. Holder who deposits shares of our common stock into the ADR facility, receiving ADSs in return, will be treated for U.S. federal income tax purposes as the beneficial owner of the underlying shares of our common stock represented by those ADSs and evidenced by ADRs. Deposits and withdrawals of shares of our common stock by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

Taxation of Dividends

Subject to the discussion below under “—Passive Foreign Investment Companies,” distributions of cash or property (other than shares of our common stock, if any, distributed pro rata to all of our shareholders, including holders of ADSs) paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) with respect to ADSs or shares of our common stock, including the net amount of the Chilean income tax withheld on the distribution (after taking into account the credit for the first category tax), will be includible in gross income as ordinary income on the date on which the U.S. Holder receives the dividends, in the case of shares of our common stock, or the date the depositary receives the dividends, in the case of ADSs. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits as determined for U.S. federal income tax purposes, such excess amounts will be treated first as a nontaxablenon-taxable return of capital to the extent of such U.S. Holder’s tax basis in the shares of our common stock and, thereafter, as capital gain. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes. Dividends paid in Chilean pesos generally will be includible in gross income in a U.S. dollar amount calculated by reference to the spot market exchange rate in effect on the date the U.S. Holder receives the dividends, in the case of shares of our common stock, or the date the depositary receives the dividends, in the case of ADSs.ADSs, regardless of whether the payment is in fact converted into U.S. dollars. U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any Chilean pesos received which are converted into U.S. dollars after they are received.

Dividends paid to corporate U.S. Holders with respect to ADSs or shares of our common stock will not be eligible for the dividends received deduction allowed to corporations under the U.S. Code. Under current law, dividends received by certainnon-corporate U.S. Holders with respect to ADSs will be subject to U.S. federal income tax at preferential rates if the dividends constitute “qualified dividend income” for U.S. federal income tax purposes. Dividends paid on the ADSs will be treated as qualified dividend income if:

 

the ADSs are readily tradable on an established securities market in the United States; and

 

we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC.

The ADSs are listed on the NYSE, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Moreover, as discussed below under “—Passive Foreign Investment Companies,” we believe that we will not be treated as a PFIC for U.S. federal income tax purposes with respect to our 20122014 and current taxable year, and based on our current expectations regarding the value and nature of

our assets, the sources and nature of our income, relevant market and shareholder data and our current business plans, we do not anticipate becoming a PFIC in the future. However, there can be no assurance in this regard because the PFIC determination is made annually and is based on the portion of our assets (including goodwill) and income that is characterized as passive under the PFIC rules and our continued qualification for an exception to the PFIC rules for certain foreign banks.

Based on existing guidance, we do not expect that dividends paid on shares of our common stock will be qualified as dividends because shares of our common stock are not readily tradable on an established securities market in the United States and, although a comprehensive income tax treaty between Chile and the United States has been signed, such treaty is not currently in force.

Subject to generally applicable limitations and conditions under the U.S. Code (including a minimum holding period requirement), Chilean income tax withheld from dividends (after taking into account the credit for the first category tax, when it is available) willmay be treated as a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability. If the amount of Chilean income tax initially withheld from a dividend is determined to be in excess of a U.S. Holder’s Chilean tax liability, thereby permitting a U.S. Holder to obtain a refund in respect of such excess tax, such excess tax may not be creditable. Dividends paid on the ADSs or shares of our common stock generally will constitute foreign source income, and for purposes of calculating the foreign tax credit, as “passive category income,” for most U.S. Holders. U.S. Holders are not allowed foreign tax credits for income taxes withheld in respect of certainshort-term or hedged positions in securities and may not be allowed foreign tax credits in respect of arrangements in which their expected economic profit is insubstantial. Alternatively, a U.S. Holder may be able to deduct Chilean income taxes paid with respect to dividends on our shares of common stock against its taxable income, assuming such U.S. Holder does not take a credit for any foreign income taxes paid or accrued during the taxable year and certain other conditions are met. U.S. Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.

Taxation of Capital Gains or Losses

Subject to the discussion below under “—Passive Foreign Investment Companies,” gain or loss realized by a U.S. Holder on the sale, exchange or other taxable disposition of ADSs or shares of our common stock generally will be capital gain or loss and generally will belong-term capital gain or loss if the shares of our common stock have been held for more than one year. The amount of gain or loss realized will be the difference between (i) the amount realized on the sale, exchange or other taxable disposition of ADSs or shares of our common stock over (ii) the U.S. Holder’s adjusted tax basis in such ADSs or shares of our common stock.Long-term capital gain realized by certain U.S. Holders (including individuals) generally is eligible for favorable rates of U.S. federal income tax. The deductibility of capital losses is subject to significant limitations under the U.S. Code.

The initial tax basis of shares of our common stock purchased by a U.S. Holder generally will be the U.S. dollar value of the Chilean pesos denominated purchase price determined on the date of purchase. If shares of our common stock are treated as being traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. dollar value of the cost of such shares by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the U.S. Internal Revenue Service (the “U.S. IRS”). If a U.S. Holder converts U.S. dollars to Chilean pesos and immediately uses the currency to purchase shares of our common stock, such conversion generally will not result in taxable gain or loss to the U.S. Holder.

With respect to the sale, exchange or other taxable disposition of shares of our common stock, the amount realized by a U.S. Holder generally will be the U.S. dollar value of the payment received determined on (1) the date of receipt of payment in the case of a cash basis U.S. Holder or (2) the date of disposition in the case of an accrual basis U.S. Holder. If shares of our common stock are treated as being traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.

Any gain or loss realized by a U.S. Holder on such a sale, exchange or other taxable disposition of shares of our common stock generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. If Chilean income tax is withheld on such sale, exchange or other taxable disposition (see “Taxation—Chilean Tax Considerations—Capital Gains”), a U.S. Holder generally would not be able to utilize foreign tax credits in respect of such Chilean income tax unless the U.S. Holder has other income from foreign sources, for purposes of the

foreign tax credit limitation rules. Alternatively, a U.S. Holder may be able to deduct Chilean income taxes paid with respect to a disposition of shares of our common stock against its taxable income, assuming such U.S. Holder does not take a credit for any foreign income taxes paid or accrued during the taxable year and certain other conditions are met. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit limitation rules to their investment in, and disposition of, the shares of our common stock.

Passive Foreign Investment Companies

Special U.S. federal income tax rules apply to U.S. persons owning ADSs or common shares of a PFIC. A foreign corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look through rules with respect to the income and assets of subsidiaries, either:

 

at least 75% of its gross income is “passive income”; or

 

on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income.

For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets and gains from commodities and securities transactions. In determining whether a foreign corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least 25% interest (by value) is taken into account.

Banks generally derive a substantial part of their income from assets that are interest bearing or that otherwise could be considered passive under the PFIC rules. An exception, however, is provided for income derived in the active conduct of a banking business (the “Active Bank Exception”). The application of the Active Bank Exception to banks is unclear under present U.S. federal income tax law. The U.S. Internal Revenue Service (“U.S. IRS”)IRS has issued a notice and has proposed U.S. Treasury regulations which have different requirements for qualifying as a foreign bank and for determining the banking income that may be excluded from passive income under the Active Bank Exception. Based on our current estimates of our gross income and gross assets, the nature of our business and our interpretation of the proposed U.S. Treasury regulations and notice relating to the Active Bank Exception, we do not expect to be classified as a PFIC for our current taxable year (although the determination cannot be made until the end of such taxable year), and we intend to continue our operations in such a manner that we do not expect to be classified as a PFIC in the foreseeable future. There can be no assurances in this regard, however, because the application of the relevant rules is complex and involves some uncertainty. The PFIC determination is made annually and is based on the portion of our assets (including goodwill) and income that is characterized as passive under the PFIC rules. In addition, the relevant U.S. Treasury regulations addressing the Active Bank Exception may not be finalized in their current form, and our PFIC status may be impacted if and when these U.S. Treasury regulations are finalized. Moreover, our business plans may change, which may affect the PFIC determination in future years.

If we are treated as a PFIC for any year, U.S. Holders may be subject to adverse tax consequences upon a sale, exchange or other disposition of ADSs or shares of our common stock, or upon the receipt of certain “excess distributions” (generally distributions in excess of 125% of the average distribution over the shorter of athree-year period or the U.S. Holder’s holding period for shares of our common stock) from us. In this event, unless a U.S. Holder elects to be taxed annually on amark-to-market basis with respect to ADSs or shares of our common stock, as described below, any gain realized on a sale or other taxable disposition of ADSs or shares of our common stock or excess distributions would be treated as realized ratably over the U.S. Holder’s holding period for such ADSs or shares of our common stock, and amounts allocated to prior years during which we were a PFIC would be taxed at the highest tax rate in effect for each such year. An additional interest charge may apply to the portion of the U.S. federal income tax liability on such gain or distribution treated under the PFIC rules as having been deferred by the U.S. Holder. Amounts allocated to the taxable year in which the sale or excess distribution occurs and to any year before we became a PFIC would be taxed as ordinary income in the taxable year in which the sale or excess distribution occurs. If we were a PFIC, certain subsidiaries and other entities in which we have a direct or indirect interest may also be PFICs (“(“Lower-tier PFICs”). Under attribution rules, U.S. Holders would be deemed to own their proportionate shares ofLower-tier PFICs and would be subject to U.S. federal income tax according to the rules described above on (i) certain distributions by aLower-tier PFIC and (ii) a disposition of shares of aLower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though such U.S. Holder had not received the proceeds of those distributions or dispositions.

If we are treated as a PFIC, the rules described in the foregoing paragraph can be avoided by a U.S. Holder that makes a “mark-to-market”“mark-to-market” election. A U.S. Holder may make amark-to-market election for ADSs or shares of our common stock (but not for the shares of anyLower-tier PFIC) if such ADSs or shares of our common stock constitute “marketable stock” as defined in the U.S. Treasury regulations. ADSs and shares of our common stock will be marketable stock if they are regularly traded on a “qualified

exchange or other market” within the meaning of the U.S. Treasury regulations. The ADSs are listed on the NYSE, and will qualify as regularly traded on an established securities market so long as they are so listed. No assurance can be given, however, that our common stock will be considered regularly traded on an established securities market. In particular, it is unclear whether the Santiago Stock Exchange, theBolsa Electrónica de Chile and the Valparaiso Stock Exchange would meet the requirements for a “qualified exchange or other market.” A U.S. Holder electing themark-to-market regime generally would compute gain or loss at the end of each taxable year as if the ADSs or shares of our common stock had been sold at fair market value. Any gain recognized by the U.S. Holder undermark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of its ADSs or shares of our common stock as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously includedmark-to-market income not offset by previously deducted decreases in value. Any loss on an actual sale of ADSs or shares of our common stock would be a capital loss to the extent in excess of previously includedmark-to-market income not offset by previously deducted decreases in value. A U.S. Holder’s adjusted tax basis in its ADSs or shares of our common stock will be increased by the amount of income inclusion and decreased by the amount of deductions under themark-to-market rules. U.S. Holders should be aware, however, that if we are determined to be a PFIC, the interest charge regime described above could be applied to indirect distributions or gains deemed to be attributable to U.S. Holders in respect of any of ourLower-tier PFICs, and themark-to-market election generally would not be effective for suchLower-tier PFICs.

The rules described in the second preceding paragraph can also be avoided by a U.S. Holder that elects to treat us as a “qualified electing fund.” However, this option generally will generally not be available to U.S. Holders because we do not intend to provide the information necessary for U.S. Holders to make such election.

A U.S. Holder that owns ADSs or shares of our common stock during any taxable year that we are treated as a PFIC generally would be required to file U.S. IRS Form 8621. U.S. Holders should consult their own tax advisors regarding the application of the PFIC rules to ADSs or shares of our common stock, the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should we be considered a PFIC for any taxable year and the application of the reporting requirements on U.S. IRS Form 8621 to their particular situation.

Backup Withholding and Information Reporting

Dividends paid on, and proceeds from the sale or other disposition of, ADSs or shares of our common stock to a U.S. Holder generally will be subject to the information reporting requirements of the U.S. Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is timely furnished to the U.S. IRS.

In addition, U.S. Holders shouldmay be aware that legislation enacted in 2010 imposes newrequired to comply with certain reporting requirements, including filing a U.S. IRS Form 8938, Statement of Foreign Financial Assets, with respect to the holding of certain foreign financial assets, including stock of foreign issuers, either directly or through certain foreign financial institutions, if the aggregate value of all such assets exceeds U.S.$50,000. U.S. Holders should consult their own tax advisors regarding the application of the information reporting rules to ADSs or shares of our common stock and the application of these reporting requirements to their particular situations.

HOLDERS OF ADSs OR SHARES OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE CHILEAN, U.S. FEDERAL INCOME AND OTHER TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF OUR COMMON STOCK, INCLUDING, IN PARTICULAR, THE EFFECT OF ANYNON-U.S., STATE OR LOCAL TAX LAWS.

WHERE TO FIND ADDITIONAL INFORMATION

The materials included in this annual report onForm 20-F, and exhibits thereto, may be inspected and copied at the SEC’s public reference room in Washington, D.C. Please call the SEC at1-800-SEC-0330 for further information on the public reference

rooms. The SEC also maintains a website at http://www.sec.gov that contains the same reports and information about us. The reports and information about us can be downloaded from the SEC’s website.

Item 11Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative information related to market risk, see Note 4142 to our audited consolidated financial statements as of and for the year ended December 31, 20122014 appearing elsewhere in this annual report.

 

Item 12Description of Securities Other Than Equity Securities

 

Item 12ADebt Securities

Not Applicable.

 

Item 12BWarrants and Rights

Not Applicable.

 

Item 12COther Securities

Not Applicable.

 

Item 12DAmerican Depositary Shares

JPMorgan Chase Bank, N.A. (the “Depositary”) serves as the depositary for our ADSs. ADS holders are required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.

ADS holders are required to pay the Depositary amounts in respect of expenses incurred by the Depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, facsimile transmission or conversion of foreign currency into U.S. dollars.

ADS holders are also required to pay additional fees for certain services provided by the Depositary, as set forth in the table below.

 

Depositary service

  

Fee payable by ADS holders

(a) Issuance and delivery of ADRs against deposits of shares, including deposits in respect of share distributions, rights and other distributions  Up to U.S.$5.00 per 100 ADSs (or portion thereof)
(b) Distribution of dividends  U.S.$0.02 or less per ADS
(c) Withdrawal of shares underlying ADSs  Up to U.S.$5.00 per 100 ADSs (or portion thereof)
(d) Transfer, combination andsplit-up of ADRs  U.S.$1.50 per ADS

The Depositary may sell (by public or private sale) sufficient securities and property received in respect of share distributions, rights and other distributions prior to the deposit of shares to pay the charges described in (a) and (c) of the table above. In addition, the Depositary may deduct from any distributions on or in respect of deposited securities, or may sell by public or private sale for the account of a holder, any part or all of such deposited securities (after attempting by reasonable means to notify the holder prior to such sale), and may apply such deduction or the proceeds of any such sale in payment of any tax or other governmental charge that may become payable by or on behalf of a custodian or the Depositary with respect to any ADR, any deposited securities represented by ADSs or any distribution thereon.

Payments by the Depositary

The Depositary has agreed to reimburse us for certain reasonable expenses related to the ADS program, subject to a cap agreed between the Depositary and us. These reimbursable expenses currently include, but are not limited to, legal fees, NYSE listing

fees, investor relations servicing, investor related presentations,ADR-related advertising and public relations in those jurisdictions in which the ADRs may be listed or otherwise quoted for trading, and accountants’ fees in relation to our regulatory filings. During the year ended December 31, 2012, such2014, we did not receive any reimbursements totaledfrom the depositary, but the Depositary paid approximately U.S.$12,625.08.252 of broker expenses on our behalf.

PART II

 

Item 13Defaults, Dividend Arrearages and Delinquencies

None.

 

Item 14Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

 

Item 15Controls and Procedures

(a) Disclosure Controls and Procedures

We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2012.2014.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f)and15d-15(f) under the Exchange Act. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2012.2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(COSO – 1992 framework) in InternalControl-Integrated Framework.

Based on our assessment and those criteria, management believes that the company maintained effective internal control over financial reporting as of December 31, 2012.2014.

(c) Report of Independent Registered Public Accounting Firm on Internal Controls

Ernst & Young Limitada, the independent registered public accounting firm that has audited our financial statements, has issued an attestation report on our internal control over financial reporting as of December 31, 2011.2014. This attestation report appears onpage F-3 of our audited consolidated financial statements as of and for the year ended December 31, 2012.2014.

(d) Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during 20112014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16AAudit Committee Financial Expert

Our board of directors has determined that Mr. Jorge Awad M., a member of our directors/audit committee who satisfies the independence requirements of both Chilean law andRule 10A-3 under the Exchange Act, qualifies as an “audit committee financial expert” pursuant to the Instruction to paragraph (a) of Item 16A. Mr. Awad possesses the relevant financial experience because of his oversight of the preparation of financial statements of various companies through his experience detailed in “Item 6. Directors, Senior Management and Employees—Jorge Awad M.”, in particular with LATAM Airlines Group S.A. (an SEC registrant) as a memberformer chairman of the board and chairman of their board of director’s committee, where his main duties included the examination of reports of external auditors, balance sheets and other financial statements required by applicable regulations, and also as chairman of the Chilean Bankers Association and his academic background.

 

Item 16BCode of Ethics

In 2008, we adopted a new Code of Ethics, as defined in Item 16B ofForm 20-F under the Exchange Act. The Code of Ethics applies to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions, and to all other employees without exception. Since 2011, the Code of Ethics additionally applies to our Directors and Consultants of our Board. A current copy of the Code of Ethics is filed as Exhibit 11.16.1 to this annual report.

 

Item 16CPrincipal Accountant Fees and Services

Audit andNon-Audit Fees

The following table sets forth the fees billed to us by our independent auditors, Ernst & YoungEY Limitada, during the fiscal years ended December 31, 2010, 20112012, 2013 and 2012:2014:

 

  Year ended December 31, 
  2010   2011   2012   Year ended December 31, 
  (in millions of Ch$)   2012   2013   2014 
  (in millions of Ch$) 

Audit fees

  Ch$549    Ch$554    Ch$616    Ch$840    Ch$803    Ch$776  

Audit-related fees

   123     181     224     —       —       —    

Tax fees

   —       —       —       —       3     22  

Other fees

   30     —       —       —       —       460  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total fees

  Ch$702    Ch$735    Ch$840    Ch$840    Ch$806    Ch$1,258  
  

 

   

 

   

 

   

 

   

 

   

 

 

“Audit fees” in the above table are the aggregate fees billed by Ernst & YoungEY Limitada in connection with the audit of our annual financial statements. This line item includes: (i) theaudit of our statutory audit required by local regulations, (ii) annual reviews related to filings with the SEC,accounts, and (iii) the audit of the consolidated financial statements

required by Item 18 of Form 20-F.

20-F and limited reviews of financial statements, (ii) reviews of forms and comment letters filed with the SEC and the issuance of comfort letters, and (iii) other local attestation reports required by local regulators.

“Audit-related fees” in the above table are the aggregate fees billed by Ernst & YoungEY Limitada mainly for assurance and related services that are reasonably related to the performance of the audit andor review of filings our filings to regulators, the SEC (USA),Bank’s financial statements and the CNBV (Mexico)are not reported under “audit fees”. Additionally, weServices such as (i) attestation reports not required by statute or regulations and (ii) merger and acquisition due diligence are included on this line item. During 2012, 2013 and 2014, there were billed for other specific reviews of certain branches in Chile and Treasury Division.no such services rendered.

“Tax fees”—No services for tax compliance, tax advice, or tax planning was engaged or rendered by Ernst & Young Limitada during these periods.

“Other fees” in the above table are the aggregate fees billed by Ernst & YoungEY Limitada for permitted tax advisory and tax compliance services.

“All Other fees” incurred in 2014 were related to compensation for research studies during 2010,certain consulting services rendered in connection with the merger of the subsidiaries Banchile Corredores de Bolsa S.A.such as: (i) operational risk assessment, and Citibank Agencia de Valores S.A.,(ii) foreign regulations compliance. During 2012 and IFRS training and2013, there were no other services that were specifically required by the Superintendency of Banks during 2010. Other fees were billed neither in 2011 nor in 2012.rendered.

Directors/Audit CommitteePre-Approval Policies and Procedures

Auditors arepre-approved by our directors/audit committee, whose main duties are disclosed in “Item 6. Directors, Senior Management and Employees—Board Practices.” Furthermore, the selection of external auditors is subject to approval by our shareholders at the ordinary annual shareholders’ meeting. All proposed services carried out by our external auditors as well as corresponding fees related to audit andnon-audit services, have been presented to our directors/audit committee, which has determined they are reasonable and consistent with our policies.

 

Item 16DExemptions from the Listing Standards for Audit Committees

Mr. ConchaPino serves on our directors/audit committee in reliance upon the exemption from the independence requirements contained inRule 10A-3(b)(1)(iv)(D). We do not believe that such reliance would materially adversely affect the ability of the directors/audit committee to act independently and to satisfy the other requirements ofRule 10A-3.

 

Item 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not make any purchases of our previously issued shares during the fiscal year ended December 31, 2012.2014.

 

Item 16FChange in Registrant’s Certifying Accountant

Not Applicable.

 

Item 16GCorporate Governance

Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Chilean bank with shares listed on the Santiago Stock Exchange, the Valparaiso Stock Exchange, the Chilean Electronic Stock Exchange, the LSE and the Latibex and ADSs listed on the New York Stock Exchange. Our corporate governance practices are governed by our bylaws, the General Banking Law, the Chilean Corporations Law, theLey de Mercado de ValoresNo. 18,045 (the Securities Market Law), and the regulations issued by the Superintendency of Banks.SBIF. Therefore, you may not have the same protections afforded to shareholders of U.S. companies under the NYSE listing standards.

The table below discloses the significant differences between our corporate governance practices and the NYSE standards.

 

NYSE Standards

  

Our Corporate Governance Practice

Director Independence. Majority of board of directors must be independent. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from this requirement. §303A.01  Pursuant to the General Banking Law, we are not required to make a determination as to the independence of our directors. However, pursuant to the Chilean Corporations Law, under certain circumstances provided in Article 50bis50b is of such law, we are required to appoint at least one independent director.
  The definition of independence applicable to us pursuant to the Chilean Corporations Law differs in certain aspects from the definition applicable to U.S. issuers under the NYSE rules.
  Under the Chilean Corporations Law, as recently amended, there are several factors that must be observed in order to determine whether a director is deemed to be independent. These factors are included in Article 50bis of the Chilean Corporations Law. In addition, under the regulations of the Superintendency of Banks,SBIF, members of the directors/audit committee must satisfy international independence criteria set forth by our board of directors.
Executive Sessions.Non-management directors must meet regularly in executive sessions without management. Independent directors should meet alone in an executive session at least once a year. §303A.03  There is no similar requirement under our bylaws or under applicable Chilean law.
Audit committee. Audit committee must satisfy the independence and other requirements ofRule 10A-3 under the Exchange Act, and the more stringent requirements under the NYSE standards is required. §§303A.06, 303A.07.  We are in compliance withRule 10A-3. The members of our directors/audit committee are not required to satisfy the NYSE independence and other audit committee standards that are not prescribed byRule 10A-3.
Nominating/corporate governance committee. Nominating/corporate governance committee of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from these requirements. §303A.04  We are not required to have, and do not have, a nominating/corporate governance committee.

NYSE Standards

Our Corporate Governance Practice

Compensation committee. Compensation committee of independent directors is required, which must approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from this requirement. §303A.05  We are not required to have a compensation committee. Pursuant to the Chilean Corporations Law, our directors/audit committee must approve compensation plans.

NYSE Standards

Our Corporate Governance Practice

Equity compensation plans. Equity compensation plans require shareholder approval, subject to limited exemptions.  Equity compensation plans require shareholder approval, subject to limited exemptions.

NYSE Standards

Our Corporate Governance Practice

Code of Ethics. Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver for directors or executive officers. §303A.10  We have adopted a code of ethics applicable to all of our executive officers, employees, directors and advisors to our board of directors, a version of which is filed as an exhibit to thisForm 20-F. We are required by Item 16B ofForm 20-F to disclose any waivers granted to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions. Our Code of Ethics sets forth the principles and values that govern personnel conduct as well as other issues such as conflicts of interests, usage of privileged information, internal controls for fraud prevention and labor responsibility.

PART III

 

Item 17Financial Statements

Not applicable.

 

Item 18Financial Statements

Our audited consolidated financial statements are included in this annual report beginning atpage F-1. Our financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Item 19Exhibits

LIST OF EXHIBITS

 

Exhibit
No.

  

Exhibit

  1.1  Estatutos of Banco de Chile, which serve as our articles of incorporation and bylaws (English translation).*
  2.1  Form of Deposit agreement among Banco de Chile, JPMorgan Chase Bank as depositary, and the holders from time to time of ADSs (incorporated by reference to our registration statement onForm F-4 (File No.(FileNo. 333-14020) filed on October 18, 2001).
  2.2  Amendment No. 1, dated February 1, 2011, to the Deposit Agreement among Banco de Chile, JPMorgan Chase Bank, N.A. as depositary and holders from time to time of ADSs (incorporated by reference to our registration statement onForm F-6 (Registration No.(RegistrationNo. 333-171999) filed on February 1, 2011).
  3.1  Master Joint Venture Agreement between Quiñenco S.A., Citigroup, Inc. and Citibank Overseas Investment Corporation, dated July 19, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  3.2  Shareholders Agreement between Quiñenco, S.A., Citigroup Chile S.A. and the minority shareholders of LQIF, dated December 27, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  3.3  Amendment to the Master Joint Venture Agreement between Quiñenco S.A., Citigroup, Inc. and Citibank Overseas Investment Corporation, dated December 19, 2008 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2008, and incorporated herein by reference).
  3.4Amendment to the Master Joint Venture Agreement between Quiñenco S.A., Citigroup, Inc. and Citibank Overseas Investment Corporation, dated December 19, 2008 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2008, and incorporated herein by reference).
  3.5Amendment to the Shareholders Agreement between Quiñenco, S.A., Citigroup Chile S.A. and the minority shareholders of LQIF, dated January 9, 2014 (English translation) (filed as an exhibit to our current report onForm 6-K dated January 14, 2014, and incorporated herein by reference).

Exhibit
No.

Exhibit

  3.6Amendment to the Master Joint Venture Agreement between Quiñenco S.A., Citigroup, Inc. and Citibank Overseas Investment Corporation, dated January 9, 2014 (English translation) (filed as an exhibit to our current report onForm 6-K dated January 14, 2014, and incorporated herein by reference).
  4.1  Merger Agreement between Banco de Chile and Citibank Chile, dated December 26, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  4.2  Cooperation Agreement between Banco de Chile and Citigroup Inc., dated December 27, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  4.3  Global Connectivity Agreement between Banco de Chile and Citigroup Inc., dated December 27, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (File20-F(File No. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  4.4  Asset Purchase Agreement between Banco de Chile and Citibank, N.A., dated December 31, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).

Exhibit
No.

Exhibit

  4.5  Trademark License Agreement between Banco de Chile and Citigroup Inc., dated December 27, 2007 (English translation) (filed as an exhibit to our annual report onForm 20-F (File20-F(File No. 001-15266) for the year ended December 31, 2007, and incorporated herein by reference).
  4.6  First Supplementary Agreement to the Cooperation Agreement between Banco de Chile and Citigroup Inc., dated February 27, 2009 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2008, and incorporated herein by reference).
  4.7  First Supplementary Agreement to the Global Connectivity Agreement between Banco de Chile and Citigroup Inc., dated February 27, 2009 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2008, and incorporated herein by reference).
  4.8  Amendment to the Trademark License Agreement between Banco de Chile and Citigroup Inc., dated February 27, 2009 (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2008, and incorporated herein by reference).
  4.9  Master Services Agreement between Banco de Chile and Citigroup, Inc., dated September 25, 2009.2009 (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266) for the year ended December 31, 2009, and incorporated herein by reference).
  8.15.1  List of subsidiaries.*
11.1  6.1  Code of Professional Ethics (English translation) (filed as an exhibit to our annual report onForm 20-F (FileNo. 001-15266 for the year ended December 21, 2010, and incorporated herein by reference).
12.1  Certification under Section 302 of theSarbanes-Oxley Act of 2002.*

Exhibit
No.

Exhibit

12.2  Certification under Section 302 of theSarbanes-Oxley Act of 2002.*
13.1  Certification under Section 906 of theSarbanes-Oxley Act of 2002.*
15.1Consent of Ernst & Young Limitada.*

 

*Filed herewith.

Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to ourlong-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.

Consolidated Financial Statements

BANCO DE CHILE AND SUBSIDIARIES

December 31, 20112013 and 20122014

 

Ch$ or CLP

    =    

Chilean pesos

MCh$

    =    

Millions of Chilean pesos

US$U.S.$ or USD

    =    

U.S. dollars

ThUS$

ThU.S.$
    =    

Thousands of U.S. dollars

JPY

    =    

Japanese yen

EUR

    =    

Euro

MXN

    =    

Mexican pesos

PEN

HKD
    =    

Peruvian nuevo sol

Hong Kong dollars

U.F. or CLF

PEN
    =    

Peruvian nuevo sol

CHF=Swiss franc
U.F. or CLF=Unidad de foment

fomento
        (The unidad de fomento is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate).


Index

 

Report of Independent Registered Public Accounting Firm

   F-3  

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

   F-4  

Consolidated Statement of Financial Position

   F-6F-5  

Consolidated Statement of Comprehensive Income

   F-7F-6  

Consolidated Statement of Changes in Equity

   F-9F-8  

Consolidated Statement of Cash Flows

   F-10F-9  

Notes to the Consolidated Financial Statements

   F-12F-10  

LOGO


LOGO

EY Chile

Avda. Presidente

Riesco 5435, piso 4,

Santiago

Tel: +56 (2) 2676 1000

www.eychile.cl

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Banco de Chile:

We have audited the accompanying consolidated statements of financial statementsposition of Banco de Chile and its subsidiaries (the “Bank”) which comprise the consolidated statements of financial position as of December 31, 20122014 and 2011,2013, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012.2014. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Banco de Chile and subsidiaries atas of December 31, 20122014 and 20112013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,2014, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated April 16, 2013,23, 2015 expressed an unqualified opinion thereon.

ERNST & YOUNG LIMITADAEY LTDA.

Santiago, Chile

April 16, 201323, 2015

LOGO

LOGO

EY Chile

Avda. Presidente

Riesco 5435, piso 4,

Santiago

Tel: +56 (2) 2676 1000

www.eychile.cl

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

To the Board of Directors and Shareholders of Banco de Chile:

We have audited Banco de Chile and subsidiaries’ internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria)“COSO criteria”). Banco de Chile’sChile and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

LOGO

In our opinion, Banco de Chile and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2012 consolidated statements of financial statementsposition of Banco de Chile and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014, and our report dated April 16, 2013,23, 2015 expressed an unqualified opinion thereon.

ERNST & YOUNG LIMITADAEY LTDA.

Santiago, Chile

April 16, 2013.

A member firm of Ernst & Young Global Limited23, 2015

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 20112013 and 20122014

(Expressed in millions of Chilean pesos unless otherwise specified)

 

  Notes  2011
MCh$
 2012
MCh$
 2012
ThUS$
   Notes  2013
MCh$
 2014
MCh$
 2014
ThU.S.$
 

ASSETS

            

Cash and due from banks

  5   881,146    684,925    1,428,504    6   873,308    915,133    1,509,896  

Transactions in the course of collection

  5   373,639    310,077    646,708    6   300,026    356,185    587,677  

Financial assets held-for-trading

  6   269,861    159,682    333,039    7   326,921    293,458    484,182  

Cash collateral on securities borrowed and reverse repurchase agreements

  7   47,981    35,100    73,206    8   82,422    27,661    45,638  

Derivative instruments

  8   381,055    326,083    680,091    9   374,687    832,267    1,373,174  

Loans and advances to banks

  9   648,425    1,343,322    2,801,681  

Loans and advance to banks

  10   1,062,056    1,155,365    1,906,260  

Loans to customers, net

  10   17,023,756    18,383,958    38,342,249    11   20,441,472    21,400,775    35,309,566  

Financial assets available-for-sale

  11   1,471,120    1,272,316    2,653,588    12   1,681,883    1,608,796    2,654,385  

Investments in other companies

  12   13,196    11,674    24,348    13   14,407    23,043    38,019  

Intangible assets

  13   81,026    75,610    157,695    14   72,223    66,859    110,312  

Property and equipment

  14   207,888    205,189    427,950    15   197,578    205,403    338,899  

Investment properties

  15   17,079    16,698    34,826  

Investments properties

  16   16,317    15,936    26,293  

Current tax assets

  16   —      —      —      17   —      —      —    

Deferred tax assets, net

  16   60,025    55,801    116,381    17   56,421    94,240    155,488  

Other assets

  17   279,804    317,765    662,742    18   373,987    586,555    967,769  
    

 

  

 

  

 

     

 

  

 

  

 

 

TOTAL ASSETS

     21,756,001    23,198,200    48,383,008       25,873,708    27,581,676    45,507,558  
    

 

  

 

  

 

     

 

  

 

  

 

 

LIABILITIES

            

Current accounts and other demand deposits

  18   4,895,426    5,470,971    11,410,455    19   5,984,332    6,934,373    11,441,161  

Transactions in the course of payment

  5   155,424    72,684    151,592  

Transactions in the course of payments

  6   51,898    53,049    87,527  

Cash collateral on securities lent and repurchase agreements

  7   223,202    226,396    472,180    8   256,766    249,482    411,625  

Saving accounts and time deposits

  19   9,282,324    9,612,950    20,049,117    20   10,402,725    9,721,246    16,039,278  

Derivative instruments

  8   429,913    380,322    793,213  

Derivate instruments

  9   426,110    827,123    1,364,687  

Borrowings from financial institutions

  20   1,690,939    1,108,681    2,312,305    21   989,465    1,098,716    1,812,793  

Debt issued

  21   2,388,341    3,273,933    6,828,233    22   4,366,960    5,057,956    8,345,223  

Other financial obligations

  22   184,785    162,123    338,130    23   210,926    186,573    307,831  

Current tax liabilities

  16   3,095    23,189    48,364    17   7,131    19,030    31,398  

Provisions

  23   131,344    141,839    295,825    24   154,650    185,643    306,296  

Employee benefits

  24   60,634    64,545    134,617    25   67,944    81,515    134,493  

Other liabilities

  25   269,905    305,105    636,340    26   275,762    255,995    422,369  
    

 

  

 

  

 

     

 

  

 

  

 

 

TOTAL LIABILITIES

     19,715,332    20,842,738    43,470,371       23,194,669    24,670,701    40,704,681  
    

 

  

 

  

 

     

 

  

 

  

 

 

EQUITY

            

Attributable to equity holders of the parent:

            

Capital

     1,436,083    1,629,078    3,397,664       1,849,351    1,944,920    3,208,962  

Reserves

     229,464    296,937    619,303       345,269    431,476    711,901  

Other comprehensive income

     265    25,769    53,745  

Other Comprehensive income

     22,999    51,072    84,265  

Retained earnings:

            

Retained earnings from previous periods

     65,311    65,311    136,215       65,311    65,311    107,758  

Income for the year

     438,186    478,120    997,184       550,188    595,518    982,558  

Less:

            

Provision for minimum dividends

     (128,642  (139,755  (291,478

Provisions for minimum dividend

     (154,081  (177,324  (292,570

Non-controlling interest

     2    2    4       2    2    3  
    

 

  

 

  

 

     

 

  

 

  

 

 

TOTAL EQUITY

  27   2,040,669    2,355,462    4,912,637    28   2,679,039    2,910,975    4,802,877  
    

 

  

 

  

 

     

 

  

 

  

 

 

TOTAL LIABILITIES AND EQUITY

     21,756,001    23,198,200    48,383,008       25,873,708    27,581,676    45,507,558  
    

 

  

 

  

 

     

 

  

 

  

 

 

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the years endedAs of December 31, 2010, 20112012, 2013 and 20122014

(Expressed in millions of Chilean pesos unless otherwise specified)

 

  Notes   2010
MCh$
 2011
MCh$
 2012
MCh$
 2012
ThUS$
   Notes  2012
MCh$
 2013
MCh$
 2014
MCh$
 2014
ThU.S.$
 

A. STATEMENT OF INCOME

              

Interest revenue

   28     1,092,003    1,501,684    1,672,766    3,488,781    29   1,672,766    1,765,942    2,045,604    3,375,083  

Interest expense

   28     (324,377  (624,209  (708,629  (1,477,942  29   (708,629  (704,371  (788,788  (1,301,437
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Net interest income

     767,626    877,475    964,137    2,010,839       964,137    1,061,571    1,256,816    2,073,646  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Income from fees and commissions

   29     342,219    367,966    372,767    777,456    30   372,767    386,732    387,452    639,265  

Expenses from fees and commissions

   29     (49,957  (59,193  (65,510  (136,630

Expense from fees and commissions

  30   (85,495  (99,639  (115,264  (190,176
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Net fees and commissions income

     292,262    308,773    307,257    640,826       287,272    287,093    272,188    449,089  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Net financial operating income

   30     17,163    58,101    16,199    33,785    31   16,199    32,672    35,204    58,084  

Foreign exchange transactions, net

   31     63,762    (7,973  35,136    73,281    32   35,136    71,457    70,225    115,866  

Other operating income

   36     23,584    24,735    20,887    43,563    37   20,887    25,884    27,211    44,896  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Total operating revenues

     1,164,397    1,261,111    1,343,616    2,802,294       1,323,631    1,478,677    1,661,644    2,741,581  

Provisions for loan losses

   32     (157,651  (146,925  (166,420  (347,091

Provision for loan losses

  33   (166,420  (221,653  (261,566  (431,563
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES

     1,006,746    1,114,186    1,177,196    2,455,203       1,157,211    1,257,024    1,400,078    2,310,018  

Personnel expenses

   33     (272,737  (316,991  (312,065  (650,854  34   (309,865  (323,236  (384,512  (634,414

Administrative expenses

   34     (197,669  (229,919  (247,459  (516,109  35   (247,459  (252,502  (270,537  (446,364

Depreciation and amortization

   35     (34,964  (35,131  (35,146  (73,302  36   (35,146  (27,677  (32,787  (54,096

Impairments

   35     (1,044  (631  (899  (1,875  36   (899  (2,247  (2,085  (3,440

Other operating expenses

   37     (37,813  (30,939  (39,550  (82,487  38   (19,565  (13,868  (37,439  (61,772
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

TOTAL OPERATING EXPENSES

     (544,227  (613,611  (635,119  (1,324,627     (612,934  (619,530  (727,360  (1,200,086
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

NET OPERATING INCOME

     462,519    500,575    542,077    1,130,576       544,277    637,494    672,718    1,109,932  

Income attributable to associates

   12     1,609    3,054    (468  (976  13   (468  1,780    2,486    4,102  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Income before income taxes

     464,128    503,629    541,609    1,129,600       543,809    639,274    675,204    1,114,034  

Income taxes

   16     (46,513  (65,442  (63,488  (132,414  17   (63,928  (89,085  (79,685  (131,474
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

NET INCOME FOR THE YEAR

     417,615    438,187    478,121    997,186       479,881    550,189    595,519    982,560  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Attributable to:

              

Equity holders of the parent

     417,614    438,186    478,120    997,184       479,880    550,188    595,518    982,558  

Non-controlling interest

     1    1    1    2       1    1    1    2  

Net income per share from continued operations attributable to equity holders of the parent:

   27     $             $             $             US$               28   $             $             $             U.S.$             

Basic net income per share

     4.93    5.04    5.42    0.011       5.28    5.82    6.29    0.010  

Diluted net income per share

     4.93    5.04    5.42    0.011       5.28    5.82    6.29    0.010  

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the years endedAs of December 31, 2010, 20112012, 2013 and 20122014

(Expressed in millions of Chilean pesos unless otherwise specified)

 

  Notes  2010 2011 2012 2012   Notes  2012 2013 2014 2014 
     MCh$ MCh$ MCh$ ThUS$      MCh$ MCh$ MCh$ ThU.S.$ 

B. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

              

NET INCOME FOR THE YEAR

     417,615    438,187    478,121    997,186       479,881    550,189    595,519    982,560  

OTHER COMPREHENSIVE INCOME

       

Other comprehensive income that will be reclassified subsequently to profit or loss

       

Net unrealized gains (losses):

              

Net change in unrealized gains (losses) on available for sale instruments

  11   (363  (9,484  30,127    62,834    12   30,127    14,518    7,531    12,426  

Gains and losses on derivatives held as cash flow hedges

  8   —      (485  1,777    3,706    9   1,777    (18,069  29,756    49,095  

Cumulative translation adjustment

     (45  68    (58  (121     (58  71    80    132  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Other comprehensive income before income taxes

     (408  (9,901  31,846    66,419  

Subtotal Other comprehensive income before income taxes

     31,846    (3,480  37,367    61,653  

Income tax related to other comprehensive income

  16   (162  1,956    (6,343  (13,230

Income tax

     (6,343  710    (9,294  (15,334
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Total other comprehensive income items

     (570  (7,945  25,503    53,189  

Total other comprehensive income items that will be reclassified subsequently to profit or loss

     25,503    (2,770  28,073    46,319  
    

 

  

 

  

 

  

 

 

Other comprehensive income that will not be reclassified subsequently to profit or loss

       

Expense in defined benefit plans

     (2,200  (166  (399  (658
    

 

  

 

  

 

  

 

 

Subtotal other comprehensive income before income taxes

     (2,200  (166  (399  (658

Income taxes

     440    33    103    170  
    

 

  

 

  

 

  

 

 

Total other comprehensive income items that will not be reclassified subsequently to profit or loss

     (1,760  (133  (296  (488

Subtotal other comprehensive income

     23,743    (2,903  27,777    45,831  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

TOTAL CONSOLIDATED COMPREHENSIVE INCOME

     417,045    430,242    503,624    1,050,375       503,624    547,286    623,296    1,028,391  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Attributable to:

              

Equity holders of the parent

     417,044    430,241    503,623    1,050,373       503,623    547,285    623,295    1,028,389  

Non-controlling interest

     1    1    1    2       1    1    1    2  

Comprehensive net income per share from continued operations attributable to equity holders of the parent:

     $             $             $             US$                $             $             $             U.S.$           

Basic net income per share

     4.93    4.95    5.71    0.01       5.54    5.79    6.58    0.01  

Diluted net income per share

     4.93    4.95    5.71    0.01       5.54    5.79    6.58    0.01  

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the years ended December 31, 2010, 20112012, 2013 and 20122014

(Expressed in millions of Chilean pesos unless otherwise specified)

 

   Reserves Other comprehensive income* Retained earnings          Reserves Other comprehensive income(*) Retained earnings       
 Notes Paid-in
capital
MCh$
 Other
reserves
MCh$
 Reserves
from
earnings
MCh$
 Unrealized
gains
(losses) on
available-
for- sale
MCh$
 Cumulative
translation
adjustment
MCh$
 Cash flow
hedge
adjustment
MCh$
 Retained
earnings
from
previous
periods
MCh$
 Income
for the
year
MCh$
 Provision
for
minimum
dividends
MCh$
 Attributable
to equity
holders of
the parent
MCh$
 Non-controlling
interest MCh$
 Total
equity
MCh$
  Paid-in
capital
 Other
reserves
 Reserves
from
earnings
 

Unrealized
gains

(losses) on
available-
for-sale

 Cumulative
translation
adjustment
 Cash flow
hedge
adjustment
 Retained
earnings
from
previous
periods
 Income
for the
year
 Provision
for
minimum
dividends
 Attributable
to equity
holders of
the parent
 

Non-

controlling
interest

 Total
equity
 

Balances as of January 1, 2010

   1,158,752    99,293    85,914    8,839    (59  —      65,023    261,744    (78,524  1,600,982    3    1,600,985  
 Notes MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Balances as of January 1, 2012

   1,436,083    99,336    130,171    696    (36  (395  65,311    438,143    (128,642  2,040,667    2    2,040,669  

Capitalization of retained earnings

   —      —      —      —      —      —      —      —      —      —      —      —     28  73,911    —      —      —      —      —      —      (73,911  —      —      —      —    

Retention (release) earnings

   —      —      (26,925  —      —      —      —      26,925    —      —      —      —       —      —      67,473    —      —      —      —      (67,473  —      —      —      —    

Dividends distributions and paid

 27  —      —      —      —      —      —      —      (288,669  78,524    (210,145  (2  (210,147

Cumulative translation adjustment

   —      —      —      —      (45  —      —      —      —      (45  —      (45

Valuation adjustment on available-for- sale instruments (net)

 11  —      —      —      (525  —      —      —      —      —      (525  —      (525

Income for the year

   —      —      —      —      —      —      —      417,615    —      417,615    1    417,616  

Provision for minimum dividends

 27  —      —      —      —      —      —      —      —      (113,559  (113,559  —      (113,559
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2010

   1,158,752    99,293    58,989    8,314    (104  —      65,023    417,615    (113,559  1,694,323    2    1,694,325  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Capitalization of retained earnings

   67,217    —      —      —      —      —      —      (67,217  —      —      —      —    

Retention (release) earnings

 27  —      —      71,182    —      —      —      —      (71,182  —      —      —      —    

Dividends distributions and paid

 27  —      —      —      —      —      —      —      (279,216  113,559    (165,657  (1  (165,658

Capital increase

   210,114    —      —      —      —      —      —      —      —      210,114    —      210,114  

Cumulative translation adjustment

   —      —      —      —      68    —      —      —      —      68    —      68  

Valuation adjustment on available-for-sale instruments (net)

 11  —      —      —      (7,618  —      —      —      —      —      (7,618  —      (7,618

Cash flow hedge adjustment, net

   —      —      —      —      —      (395  —      —      —      (395  —      (395

Equity adjustment in subsidiary

   —      —      —      —      —      —      288    —      —      288    —      288  

Income for the year

   —      —      —      —      —      —      —      438,186    —      438,186    1    438,187  

Provision for minimum dividends

 27  —      —      —      —      —      —      —      —      (128,642  (128,642  —      (128,642
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2011

   1,436,083    99,293    130,171    696    (36  (395  65,311    438,186    (128,642  2,040,667    2    2,040,669  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Capitalization of retained earnings

 27  73,911    —      —      —      —      —      —      (73,911  —      —      —      —    

Retention (release) earnings

 27  —      —      67,473    —      —      —      —      (67,473  —      —      —      —    

Income distribution

   —      (43  —      —      —      —      —      43    —      —      —      —    

Defined benefit plans adjustment

   —      (1,760  —      —      —      —      —      —      —      (1,760  —      (1,760

Dividends distributions and paid

 27  —      —      —      —      —      —      —      (296,802  128,642    (168,160  (1  (168,161   —      —      —      —      —      —      —      (296,802  128,642    (168,160  (1  (168,161

Cumulative translation adjustment

   —      —      —      —      (58  —      —      —      —      (58  —      (58   —      —      —      —      (58  —      —      —      —      (58  —      (58

Valuation adjustment on available-for-sale instruments (net)

 11  —      —      —      24,133    —      —      —      —      —      24,133    —      24,133     —      —      —      24,133    —      —      —      —      —      24,133    —      24,133  

Cash flow hedge adjustment, net

   —      —      —       —      1,429    —      —      —      1,429    —      1,429     —      —      —      —      —      1,429    —      —      —      1,429    —      1,429  

Subscription and payment of shares

 27  119,084    —      —      —      —      —      —      —      —      119,084    —      119,084     119,084    —      —      —      —      —      —      —      —      119,084    —      119,084  

Income for the year

   —      —      —      —      —      —      —      478,120    —      478,120    1    478,121     —      —      —      —      —      —      —      479,880    —      479,880    1    479,881  

Provision for minimum dividends

 27  —      —      —      —      —      —      —      —      (139,755  (139,755  —      (139,755   —      —      —      —      —      —      —      —      (139,755  (139,755  —      (139,755
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2012

   1,629,078    99,293    197,644    24,829    (94  1,034    65,311    478,120    (139,755  2,355,460    2    2,355,462     1,629,078    97,533    197,644    24,829    (94  1,034    65,311    479,880    (139,755  2,355,460    2    2,355,462  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of January 1, 2013

   1,629,078    97,533    197,644    24,829    (94  1,034    65,311    479,880    (139,755  2,355,460    2    2,355,462  

Capitalization of retained earnings

 28  86,202    —      —      —      —      —      —      (86,202  —      —      —      —    

Retention (release) earnings

   —      —      48,463    —      —      —      —      (48,463  —      —      —      —    

Income distribution

   —      1,760    —      —      —      —      —      (1,760  —      —      —      —    

Defined benefit plans adjustment

   —      (133  —      —      —      —      —      —      —      (133  —      (133

Equity adjustment investment in other companies

   —      2    —      —      —      —      —      —      —      2    —      2  

Dividends distributions and paid

   —      —      —      —      —      —      —      (343,455  139,755    (203,700  (1  (203,701

Cumulative translation adjustment

   —      —      —      —      71    —      —      —      —      71    —      71  

Valuation adjustment on available-for-sale instruments (net)

   —      —      —      11,614    —      —      —      —      —      11,614    —      11,614  

Cash flow hedge adjustment, net

   —      —      —      —      —      (14,455  —      —      —      (14,455  —      (14,455

Subscription and payment of shares

 28  134,071    —      —      —      —      —      —      —      —      134,071    —      134,071  

Income for the year

   —      —      —      —      —      —      —      550,188    —      550,188    1    550,189  

Provision for minimum dividends

   —      —      —      —      —      —      —      —      (154,081  (154,081  —      (154,081
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2013

   1,849,351    99,162    246,107    36,443    (23  (13,421  65,311    550,188    (154,081  2,679,037    2    2,679,039  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of January 1, 2014

   1,849,351    99,162    246,107    36,443    (23  (13,421  65,311    550,188    (154,081  2,679,037    2    2,679,039  

Capitalization of retained earnings

 28  95,569    —      —      —      —      —      —      (95,569  —      —      —      —    

Retention (release) earnings

   —      —      86,499    —      —      —      —      (86,499  —      —      —      —    

Defined benefit plans adjustment

   —      (296  —      —      —      —      —      —      —      (296  —      (296

Equity adjustment investment in other companies

   —      4    —      —      —      —      —      —      —      4    —      4  

Dividends distributions and paid

   —      —      —      —      —      —      —      (368,120  154,081    (214,039  (1  (214,040

Cumulative translation adjustment

   —      —      —      —      80    —      —      —      —      80    —      80  

Valuation adjustment on available-for-sale instruments (net)

   —      —      —      4,486    —      —      —      —      —      4,486    —      4,486  

Cash flow hedge adjustment, net

   —      —      —      —      —      23,507    —      —      —      23,507    —      23,507  

Income for the year

   —      —      —      —      —      —      —      595,518    —      595,518    1    595,519  

Provision for minimum dividends

   —      —      —      —      —      —      —      —      (177,324  (177,324  —      (177,324
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2014

   1,944,920    98,870    332,606    40,929    57    10,086    65,311    595,518    (177,324  2,910,973    2    2,910,975  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

*As of December 31, 2010, 20112012, 2013 and 20122014 total other comprehensive income is MCh$8,210,25,769, MCh$26522,999 and MCh$25,769,51,072, respectively.

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

for the years ended December 31, 2010, 20112012, 2013 and 20122014

(Expressed in millions of Chilean pesos unless otherwise specified)

 

      2010  2011  2012  2012 
   Notes  MCh$  MCh$  MCh$  ThUS$ 

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income for the year

     417,615    438,186    478,121    997,186  

Items that do not represent cash flows:

       

Depreciation and amortization

  35   34,964    35,131    35,146    73,302  

Impairment property and equipment

  35   1,044    631    899    1,875  

Provision for loan losses

  32   184,452    193,070    207,748    433,287  

Provision financial guarantees

  32   5,368    (490  (366  (763

Fair value adjustment of financial assets held-for-trading

     (2,433  (1,242  931    1,942  

Income attributable to associates

  12   (1,609  (3,054  468    976  

Net gain on sales of assets received in lieu of payment

  36   (6,440  (5,918  (5,674  (11,834

Net gain loss on sales of property and equipment

     (753  (1,311  (318  (663

Other charges (credits) to income that do not represent cash flows

     10,147    (43,858  1,721    3,589  

(Gain) loss from foreign exchange transactions of other assets and other liabilities

     (83,307  17,296    37,133    77,446  

Net changes in interest and fee accruals

     (171,273  (60,589  40,236    83,918  

Changes in assets and liabilities that affect operating cash flows:

       

(Increase) decrease in loans and advances to banks, net

     99,183    (298,023  (695,376  (1,450,301

(Increase) decrease in loans to customers, net

     (1,218,628  (3,013,422  (1,529,011  (3,188,961

(Increase) decrease in financial assets held-for-trading, net

     (150,791  12,027    109,720    228,836  

Increase in deferred taxes, net

  16   (15,788  (2,347  4,224    8,810  

Increase in current accounts and other demand deposits

     727,613    447,990    576,301    1,201,954  

Increase (decrease) in payables from repurchase agreements and security lending

     (221,745  196,821    (15,277  (31,862

Increase (decrease) in saving accounts and time deposits

     294,017    1,540,523    327,980    684,047  

(Increase) decrease in other operating assets and liabilities

     (6,701  83,472    (103  (215

Proceeds from sale of assets received in lieu of payment

     9,491    10,221    9,510    19,834  
    

 

 

  

 

 

  

 

 

  

 

 

 

Total cash flows from operating activities

     (95,574  (454,886  (415,987  (867,597
    

 

 

  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

       

(Increase) decrease in financial assets available-for-sale

     222,706    (316,083  219,403    457,595  

Purchases of property and equipment

  14   (22,329  (22,073  (17,981  (37,502

Proceeds from sales of property and equipment

     3,130    1,711    400    834  

Purchases of intangible assets

     (15,326  (9,597  (9,116  (19,013

Investments in other companies

     (4  —      (71  (148

(Increase) decrease in other assets and liabilities

     (60,712  10,505    (1,227  (2,559

Dividends received from investments in other companies

  12   984    761    943    1,967  
    

 

 

  

 

 

  

 

 

  

 

 

 

Total cash flows from investing activities

     128,449    (334,776  192,351    401,174  
    

 

 

  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

       

Increase (decrease) in borrowings from financial institutions

     (20,559  (7,916  142,573    297,355  

Increase (decrease) in other financial obligations

     (18,182  11,491    (16,512  (34,438

Increase (decrease) in borrowings from Central Bank

     (155,090  22,759    (22,793  (47,538

Borrowings with Central Bank of Chile (long-term)

     100    91    20    42  

Payment of borrowings from Central Bank (long-term)

     (151  (106  (56  (117

Long-term foreign borrowings

     811,520    805,594    325,247    678,347  

Payment of long-term foreign borrowings

     (633,835  (446,448  (1,013,911  (2,114,650

Other long-term borrowings

     26,797    3,894    1,526    3,183  

Payment of other long-term borrowings

     (5,656  (9,811  (7,363  (15,357

Repayment of mortgage finance bonds

     (53,206  (38,433  (27,529  (57,415

Proceeds from bond issuances

  21   592,371    749,586    717,557    1,496,564  

Proceeds from commercial papers (short-term bonds)

  21   —      —      516,428    1,077,080  

Redemption from bond issuances

     (322,786  (109,624  (389,382  (812,109

Subscription and payment of shares

  27   —      210,114    119,084    248,366  

Dividends paid

  27   (288,669  (279,216  (296,802  (619,021
    

 

 

  

 

 

  

 

 

  

 

 

 

Total cash flows from financing activities

     (67,346  911,975    48,087    100,292  
    

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

for the years ended December 31, 2010, 2011 and 2012

(Expressed in millions of Chilean pesos unless otherwise specified)

     2010 2011 2012 2012      2012 2013 2014 2014 
  Notes  MCh$ MCh$ MCh$ ThU.S.$ 

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income for the year

     479,880    550,188    595,519    982,561  

Items that do not represent cash flows:

       

Depreciation and amortization

  36   35,146    27,677    32,787    54,096  

Impairment property and equipment

  36   899    2,247    2,085    3,440  

Provision for loan losses

  33   207,748    260,919    306,126    505,083  

Provision financial guarantees

  33   (366  (3,689  (1,749  (2,886

Fair value adjustment of financial assets held-for-trading

     931    (1,612  1,764    2,910  

Income attributable to associates

  13   468    (1,780  (2,486  (4,102

Net gain on sales of assets received in lieu of payment

  37   (5,674  (6,126  (1,223  (2,018

Net gain loss on sales of property and equipment

     (318  (219  (156  (257

Other charges (credits) to income that do not represent cash flows

     1,721    (2,670  (2,657  (4,384

(Gain) loss from foreign exchange transactions of other assets and other liabilities

     37,133    (148,118  (246,060  (405,979

Net changes in interest and fee accruals

     38,477    29,324    (128,527  (212,059

Changes in assets and liabilities that affect operating cash flows:

       

(Increase) decrease in loans and advances to banks, net

     (695,376  281,524    (94,186  (155,399

(Increase) decrease in loans to customers, net

     (1,529,011  (2,198,972  (941,244  (1,552,977

(Increase) decrease in financial assets held-for-trading, net

     109,720    (165,645  31,679    52,268  

Increase in deferred taxes, net

  17   4,224    (620  (37,819  (62,398

Increase in current accounts and other demand deposits

     576,301    512,875    948,593    1,565,103  

Increase (decrease) in payables from repurchase agreements and security lending

     (15,277  33,016    5,282    8,715  

Increase (decrease) in saving accounts and time deposits

     327,980    797,009    (650,150  (1,072,695

(Increase) decrease in other operating assets and liabilities

     (103  (113,591  (51,253  (84,563

Proceeds from sale of assets received in lieu of payment

     9,510    8,454    4,132    6,817  
    

 

  

 

  

 

  

 

 

Total cash flows from operating activities

     (415,987  (139,809  (229,543  (378,724
    

 

  

 

  

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

       

(Increase) decrease in financial assets available-for-sale

     219,403    (387,578  76,809    126,729  

Purchases of property and equipment

  15   (17,981  (12,249  (31,513  (51,994

Proceeds from sales of property and equipment

     400    505    200    330  

Purchases of intangible assets

  14   (9,116  (5,511  5,382    8,880  

Investments in other companies

     (71  (1,436  (6,603  (10,894

(Increase) decrease in other assets and liabilities

     (1,227  (3,922  4,756    7,847  

Dividends received from investments in other companies

  13   943    956    195    322  
    

 

  

 

  

 

  

 

 

Total cash flows from investing activities

     192,351    (409,235  49,226    81,220  
    

 

  

 

  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

       

Increase (decrease) in borrowings from financial institutions

     142,573    (323,055  4,584    7,563  

Increase (decrease) in other financial obligations

     (16,512  54,074    (18,883  (31,155

Increase (decrease) in borrowings from Central Bank

     (22,793  —      —      —    

Borrowings with Central Bank of Chile (long-term)

     20    —      18    30  

Payment of borrowings from Central Bank (long-term)

     (56  (7  (20  (33

Long-term foreign borrowings

     325,247    844,776    917,204    1,513,313  

Payment of long-term foreign borrowings

     (1,013,911  (639,571  (811,697  (1,339,235

Other long-term borrowings

     1,526    609    7,091    11,700  

Payment of other long-term borrowings

     (7,363  (6,285  (13,211  (21,797

Repayment of mortgage finance bonds

     (27,529  (20,734  (16,713  (27,575

Proceeds from bond issuances

  22   717,557    1,097,345    736,212    1,214,691  

Proceeds from commercial papers (short-term bonds)

  22   516,428    509,920    1,090,340    1,798,974  

Redemption from bond issuances

     (389,382  (536,823  (1,149,274  (1,896,210

Subscription and payment of shares

     119,084    134,071    —      —    

Dividends paid

     (296,802  (343,455  (368,120  (607,369
    

 

  

 

  

 

  

 

 

Total cash flows from financing activities

     48,087    770,865    377,531    622,897  
     MCh$ MCh$ MCh$ ThUS$     

 

  

 

  

 

  

 

 

TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR

     (34,471  122,313    (175,549  (366,131     (175,549  221,821    197,214    325,393  

Net effect of exchange rate changes on cash and cash equivalents

     (11,691  7,412    (31,720  (66,156     (31,720  60,437    46,222    76,263  

Cash and cash equivalents at beginning of year

     1,088,186    1,042,024    1,171,749    2,443,843       1,171,749    964,480    1,246,738    2,057,018  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Cash and cash equivalents at end of year

  5   1,042,024    1,171,749    964,480    2,011,556    6   964,480    1,246,738    1,490,174    2,458,674  
    

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Supplemental disclosure of cash flow information:

              

Cash paid during the year for:

              

Income taxes paid

     29,622    68,672    53,949    112,518       53,949    19,525    2,091    8,910  

Interest received

     983,750    1,356,265    1,614,122    3,366,471       1,614,122    1,669,559    1,705,103    (10,927

Interest paid

     (379,566  (545,534  (657,235  (1,370,753     (657,235  (581,066  (588,572  1,530,070  

 

The accompanying notes 1 to 44 are an

integral part of these consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.Company Information:

Banco de Chile, resulting from the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, was formed on October 28, 1893 in the city of Santiago, in the presence of the Notary Eduardo Reyes Lavalle.

Banco de Chile (“Banco de Chile” or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Superintendency of Banks and Financial Institutions (“SBIF”). Since 2001 – when the Bank was first listed on the New York Stock Exchange (“NYSE”), in the course of its American Depository Receipt (ADR) program, which is also registered at the London Stock Exchange – Banco de Chile also complies with the regulations published by the United States Securities and Exchange Commission (“SEC”). Banco de Chile’s shares are also listed on the Latinamerican securities market of the Madrid Stock Exchange (“LATIBEX”).

Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. The services are managed in large corporate banking, middle and small corporate banking, personal banking services and retail groups. Additionally, the Bank offers international as well as treasury banking services. The Bank’s subsidiaries provide other services including securities brokerage, mutual fund management, factoring, insurance brokerage, financial advisory and securitization.

Banco de Chile’s legal address is Paseo Ahumada 251, Santiago, Chile and its website iswww.bancochile.cl.

The consolidated financial statements of the GroupBank for the year ended December 31, 20122014 were authorized for issuance in accordance with the directors’ resolution on April 16, 2013.23, 2015.

 

2.Summary of Significant Accounting Principles:

 

 (a)Basis of preparation:

The Bank’s consolidated financial statements for the years 20112012, 2013 and 20122014 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB.International Accounting Standards Board (“IASB”).

The bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non–current) is presented in note 39.41.

The consolidated financial statements comprise the consolidated statement of comprehensive income and the consolidated statements of financial position, changes in equity and cash flows and the related notes. The consolidated financial statements have been prepared under the historical cost convention, except for available-for-sale financial assets, financial assets and financial liabilities designated at fair value through profit or loss and derivative contracts, which have been measured at fair value.

Banco de Chile and its subsidiaries classify itstheir expenses according to the nature of expense method.

The consolidated statement of cash flows shows the changes in cash and cash equivalents arising from operating activities, investing activities and financing activities during the period.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (a)Basis of preparation, continued:

The consolidated statement of cash flows shows the changes in cash and cash equivalents arising from operating activities, investing activities and financing activities during the period.

When compared to the prior year’s IFRS financial statements, minor reclassifications of certain line items have been made in order to ensure comparability of the information presented for 2012.

(b)Basis of consolidation:

The financial statements of Banco de Chile as of and for the years ended December 31, 20112013 and 20122014 have been consolidated with those of its subsidiaries. The financial statements of the bank’s subsidiaries are prepared for the same reporting year as for Banco de Chile, using consistent accounting policies.

 

 (i)Subsidiaries

SubsidiariesConsolidated financial statements as of December 31, 2014 and 2013 incorporate financial statements of the Bank and its subsidiaries. According IFRS 10 –“Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically the Bank has power over the investee when it has existing rights that give it the ability to direct the relevant activities of the investee.

When the Bank has less than a majority of the voting rights of an investee, but these voting rights are entities controlledenough to have the ability to direct the relevant activities unilaterally, then conclude the Bank has control. The Bank considers all factors and relevant circumstances to evaluate if its voting rights are enough to obtain control, which includes:

The amount of voting rights that the Bank has, related to the amount of voting rights of the other stakeholders.

Potential voting rights maintained by the Bank, which is the parentother holders of the group. The Bank controls entities when it has the power to govern the financial and operating policies of the entity, generally accompanying a shareholding, either directly or indirectly, of more than one half of the voting rights. The existence of potential voting rights or other parties.

Rights that are currently exercisable or convertible are considered when assessing whetheremanated from other contractual arrangements.

Any additional circumstance that indicate that the Bank controls an entity.has or does not have the ability to manage the relevant activities when decisions need to be made, including voting behavior patterns in previous shareholders meetings.

The financial statements of the subsidiaries are included in the consolidated financial statements from the date control is obtained until the loss of such control. The financial statements have been prepared using uniform accounting policies for similar transactions and other events under equivalent circumstances.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(b)Basis of consolidation, continued:

(i)Subsidiaries, Continued:

The following table details the entities in which the Bank, directly or indirectly – owns a controlling interest and that are therefore consolidated in these financial statements:

 

Rut

  

Subsidiaries

  Country   Functional
Currency
  Interest Owned 
        Direct   Indirect   Total 
        2011   2012   2011   2012   2011   2012 
        %   %   %   %   %   % 

44,000,213-7

  

Banchile Trade Services Limited

   Hong Kong    US$   100.00     100.00     —       —       100.00     100.00  

96,767,630-6

  

Banchile Administradora General de Fondos S.A.

   Chile    $   99.98     99.98     0.02     0.02     100.00     100.00  

96,543,250-7

  

Banchile Asesoría Financiera S.A.

   Chile    $   99.96     99.96     —       —       99.96     99.96  

77,191,070-K

  

Banchile Corredores de Seguros Ltda.

   Chile    $   99.83     99.83     0.17     0.17     100.00     100.00  

96,894,740-0

  

Banchile Factoring S.A.

   Chile    $   99.75     99.75     0.25     0.25     100.00     100.00  

96,571,220-8

  

Banchile Corredores de Bolsa S.A.

   Chile    $   99.70     99.70     0.30     0.30     100.00     100.00  

96,932,010-K

  

Banchile Securitizadora S.A.

   Chile    $   99.00     99.00     1.00     1.00     100.00     100.00  

96,645,790-2

  

Socofin S.A.

   Chile    $   99.00     99.00     1.00     1.00     100.00     100.00  

96,510,950-1

  

Promarket S.A.

   Chile    $   99.00     99.00     1.00     1.00     100.00     100.00  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(b)Basis of consolidation, continued:

(i)Subsidiaries, continued

RUT

  

Subsidiaries

  Country  Functional
Currency
  Interest Owned 
        Direct   Indirect   Total 
        2014   2013   2014   2013   2014   2013 
        %   %   %   %   %   % 

44,000,213-7

  

Banchile Trade Services Limited

  Hong Kong  U.S.$   100.00     100.00     —       —       100.00     100.00  

96,767,630-6

  

Banchile Administradora General de Fondos S.A.

  Chile  Ch$   99.98     99.98     0.02     0.02     100.00     100.00  

96,543,250-7

  

Banchile Asesoría Financiera S.A.

  Chile  Ch$   99.96     99.96     —       —       99.96     99.96  

77,191,070-K

  

Banchile Corredores de Seguros Ltda.

  Chile  Ch$   99.83     99.83     0.17     0.17     100.00     100.00  

96,571,220-8

  

Banchile Corredores de Bolsa S.A.

  Chile  Ch$   99.70     99.70     0.30     0.30     100.00     100.00  

96,932,010-K

  

Banchile Securitizadora S.A.

  Chile  Ch$   99.00     99.00     1.00     1.00     100.00     100.00  

96,645,790-2

  

Socofin S.A.

  Chile  Ch$   99.00     99.00     1.00     1.00     100.00     100.00  

96,510,950-1

  

Promarket S.A.

  Chile  Ch$   99.00     99.00     1.00     1.00     100.00     100.00  

Significant intercompany transactions and balances between the Bank and its subsidiaries and among its subsidiaries have been eliminated for consolidation purposes. Any non-controlling interest is recognized as a separate item within the Bank’s consolidated equity.

 

 (ii)Investment in Associates and Joint Ventures

Associates

An investment in other companyassociate is an entity forover which the Bank has significant influence overon its operating and financial management policy decisions, butwithout having control over the Bank does not hold a controlling interest.associate. Significant influence is generally presumed when the Bank holds between 20% and 50% of the voting rights. The existence of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Bank has significant influence. Investments in associates are accounted for using the equity method. Other factors considered when determining whether the Bank has significant influence over another entity are the representation on the board of directors and the existence of material intercompany transactions. The existence of these factors could requiredetermine the applicationexistence of the equity method for a particular investment even thoughsignificant influence over an entity despite the Bank holdsholding a participation of less than 20% of the entity’s voting stock.rights.

According to the equity method, the Bank’s investments in associates arean associate is initially recorded at cost, and subsequently increased (or decreased) to reflect both the Bank’s pro rata share of the post-acquisition net income (or loss) of the associate and other movements directly recognized in the associate’s equity. Goodwill arising onfrom the acquisition of an associate is included in the carrying value of the investment (net of any accumulated impairment loss). Since goodwill is not reported separately, associates arean associate is not tested individually for impairment. Rather, the entire investment is tested for impairment as follows.described below.

After the application of the equity method, the Bank determines whether it is necessary to recognize an additional impairment loss on the Bank’s investment in its associates.an associate. The Bank determines at each reporting date whether there is objective evidence that the investment in the associate is impaired. If this is the case, the Bank calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in its income statement.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (b)Basis of consolidation, continued:

 

 (ii)Investment in Associates and Joint Ventures, continued:

Joint Ventures

Joint Ventures are joint arrangements whereby the parties to the agreement that have joint control over the arrangement have rights to the net assets covered by the arrangement. Joint control exists only when decisions about the relevant activities covered by the arrangement require the unanimous consent of the parties sharing control in the agreement.

According IFRS 11, an entity shall determine the type of joint arrangement: “Joint Operation” or “Joint Venture”.

For investments defined as a “Joint Operation”, the assets, liabilities, income and expenses are recognized by the participation in the joint operation.

Investments defined as a “Joint Venture” will be registered according to the equity method.

Investments that, for their characteristics, are defined as “Joint Ventures” include the following:

Artikos S.A.

Servipag Ltda.

(iii)Special purposeStructured entities

Special purpose entities (“SPEs”) are generally created to comply with a specific and well-defined objective, such as securitizing specific assets or carrying out a specific loan transaction. AAn SPE is consolidated if, based on an assessment of its relationship with the Bank and the risks and benefits ofover the SPE, the Bank concludes that it has control of the SPE. The Bank only deems as an unconsolidated SPE the segregated equity No.17 which is currently managed by “Banchile Securitizadora S.A.

As of December 31, 20112013 and 2012,2014, the Bank does not control any SPEs.

 

 (iv)InvestmentsAsset management services investments and mutual funds

The Bank, through its subsidiary Banchile Administradora General de Fondos, manages assets maintained in commonthrough investment and mutual funds and other investment products on behalf of investors.

According to IFRS 10, for consolidation purposes, it is necessary to evaluate the role of the Bank and its subsidiaries in the funds that it manages, determining its role of Agent or Principal. When assessing whether an investor controls an investee, an investor with decision-making rights must determine whether it acts as a Principal or as an Agent for other parties. A number of factors are considered in making this assessment.

This assessment should consider the following:

Scope to make decision over the investee

Rights held by other parties

Remuneration according to compensation arrangements

Exposition, of the decision maker, to the variability of returns from other interests that keeps the investee

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(b)Basis of consolidation, continued:

(iv)Asset management services investments and mutual funds, continued:

The financial statementsBank and its subsidiaries managed on behalf and for the benefit of investors, acting as an Agent only in this relationship. Under this category, and as per the aforementioned rule, these entitiesfunds are not included in these consolidated financial statements except whencontrolled by the Bank controls the entity. The Bank does not control or consolidate any of these funds.its subsidiaries.

 

 (c)Non-controlling interest:

Non-controlling interest represents the share of losses, income and net assets that the Bank does not control, either directly or indirectly. It is presented as a separate item in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position.

 

 (d)Going concern:Concern:

The Bank’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basisbasis.

 

 (e)Use of estimates and judgment:

Preparing financial statements requires management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Real results could differ from these estimated amounts.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(e)Use of estimate and judgment, continued:

Relevant estimates and assumptions are reviewed regularly by senior management in order to quantify certain assets, liabilities, income, expenses and uncertainties. Revisions to accounting estimates are recognized in the year in which the estimate is revised and infor any future period that is affected.

Some accounting matters particularly involve uncertainties and therefore require a considerable degree of estimation and critical judgment when applying accounting policies. Details on the use of estimates and judgment and their effect on the amounts recognized in the financial statements are included in the following notes:

 

Impairment of loans (Note 910, 11 and 10)

Impairment of other financial assets (Note 11)33)

 

Useful lives of property, equipment and intangible assets and property and equipment (Notes 1314 and 14)15)

 

Goodwill valuation (Note 13)14)

 

Deferred taxes and income taxes (Note 16)17)

 

Provisions (Note 23)24)

 

Employee benefits (Note 24)25)

 

Commitments and contingencies (Note 26)

Provisions for loan losses (Note 32)27)

 

Fair value of financial assets and liabilities (Note 39)40)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (f)Financial asset and liability valuation criteria:

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Statement of Financial Position and the Comprehensive Income. This involves selecting the particular basis or method of measurement.

These bases or methods include the following:

 

 (i)Recognition

Initially, the Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities on the date they originated. Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset. All other assets and liabilities (including assets and liabilities at fair value through profit and loss) are initially recognized as of the trade date on which the Bank becomes a party to the contractual provisions of the instrument.

Financial assets or liabilities are initially recognized at fair value plus transaction costs directly attributable to their purchase or issuance, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (f)Financial asset and liability valuation criteria, continued:

 

 (ii)Derecognition of financial assets and liabilities

The Bank and its subsidiaries derecognize a financial asset (or where applicable, part of a financial asset) from its Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred. Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability.

When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership. In this case:

 

 (a)If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities.

 

 (b)If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it.

 

 (c)If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset. In this case:

 

 (i)If it has not retained control, the financial asset will be derecognized and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities.

 

 (ii)If the entity has retained control, it will continue to recognize the financial asset to the extent of its continuing involvement in the financial asset.

A financial liability is derecognized when the obligation under the liability is discharged or cancelledcanceled or expires.

If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (f)Financial asset and liability valuation criteria, continued:

 

 (iii)Offsetting

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions, such as the Bank’s trading activities.

 

 (iv)Valuation at amortized cost

Amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment.

 

 (v)Fair value measurements

Fair value of a financial instrument is the amount for whichprice that would be received to sell an asset could be exchanged, or paid to transfer a liability settled, between knowledgeable, willing parties in an arm’s length transaction.orderly transaction between market participants at the measurement date. The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).

When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument. A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between knowledgeable, willing parties in an arm’s length transaction, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows and options pricing models.

The chosen valuation technique makesuses the maximum use of observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument. Periodically, the Bank calibrates the valuation techniquetechniques and tests itthem for validity using prices from observable current market transactions in the same instrument or based on any available observable market data.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (f)Financial asset and liability valuation criteria, continued:

 

 (v)Fair value measurements, continuedcontinued:

 

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by a comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.

When the transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in income depending on the individual facts and circumstances of the transaction but not later than the valuation is supported wholly by observable market data or the transaction is closed out.

Generally, the Bank has assets and liabilities that offset each other’s market risks which are derivatives and available-for-sale. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Bank has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to account for the credit risk of the issuer, as appropriate.income.

Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction.

When the transaction price is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a “Day 1” profit or loss) in “Net financial operating income”. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement when the inputs become observable, or when the instrument is derecognized.

The Bank’s fair value disclosures are included in Note 39.40.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (g)Loans and advances to banks:

Loans and advances to customers include non–derivative financial assets with fixed or determinable payments, such as domestic banks and foreign banks includedincluding the Chilean Central Bank.

After initial measurement, amounts of Loans and advances to customers are subsequently measured at amortized cost using the EIR (effective interest rate), less allowanceallowances for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in Interest Revenue in the income statement. The losses arising from impairment are recognized in the income statement in Interest Expense.

 

 (h)Loans to customers:

 

 (i)Loan classification

Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.

Individual classified loans

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the Bank that they must be analyzed in detail.

For purposes of establishing the appropriate allowances, the Bank classifies the debtors and their operations related to loans into one of three categories of loansloan portfolio: Normal, Substandard and Non-complying Loans.

 

 (i.1)Normal Loans:

Normal loans correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality.

 

 (i.2)Substandard Loans:

Substandard loans include all borrowers with insufficient payment capacity or significant deterioration of payment capacity that it may be reasonably expected that they will not to comply with all principal and interest payments obligations set forth in the credit agreement.

This category also includes all loans that have been non-performing for more than 30 days.

 

 (i.3)Non-complying Loans:

The non-complying loans correspond to borrowers whose payment capacity is seriously at risk and who have a high likelihood of filing for bankruptcy or are renegotiating credit terms to avoid bankruptcy. This category comprises all loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (h)Loans to customers, continued:

 

Group classified loans

The group analysis is used to analyze a large number of loans whose individual amounts are not significant. For this analysis, the Bank uses models based on attributes of the debtors and their loans, and on the behavior of a group of loans.

Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.

 

 (ii)Valuation method

Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method, except that when the Bank has defined certain loans as hedged items, which are measured at fair value, changes are recorded in the Consolidated Statement of Income.

 

 (iii)Lease contracts

Accounts receivable relating to leasing contracts, included under the caption “Loans to customers”, correspond to periodic rent installments of contracts which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end.

 

 (iv)Factoring transactions

The Bank and its subsidiary Banchile Factoring S.A. carry out factoring transactions, where they receiveThis corresponds to invoices and other commercial instruments representative of credit, with or without recourse, received in factoring operations and they advancewhich are registered to book value plus interest and adjustments until maturity.

In those cases where the assignor a percentagetransfer of these instruments was made without responsibility of the total amounts to be collected fromgrantor, the original debtor.

As of December 31, 2011 and 2012,Bank assumes the caption “Loans to customers” includes MCh$589,098 and MCh$606,137 respectively, corresponding to the amount advanced to the assignor plus accrued interest net of payments received.default risk.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (h)Loans to customers, continued:

 

 (v)Impairment of loans

At each year ended date, Banco de Chile and its subsidiaries assess whether there is objective evidence that a loan asset or a group of loans is impaired. A loan asset or a group of loans is considered impaired and impairment losses are incurred if:

 

 (a)there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and up to the balance sheet date (“a loss event”);

 

 (b)the loss event had an impact on the estimated future cash flows of the financial asset or the group of financial assets and;

 

 (c)a reliable estimate of the loss amount can be made.

Banco de Chile and its subsidiaries first assess whether objective evidence of impairment exists for loans that are individually significant. It then assesses collectively for loans that are not individually significant and loans which are significant but for which no objective evidence of impairment was observed as a result of the individual assessment.

 

 (i)Allowances for individual evaluations:

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the Bank, that they must be analyzed in detail. All corporate customers are evaluated individually and for commercial customers the cut-off amount for the individual evaluation is MCh$456,815.

To allow management to determine whether a loss event has occurred on an individual basis, all significant counterparty relationships are reviewed periodically. This evaluation considers current information and events related to the counterparty, such as whether the counterparty is experiencing significant financial difficulty or in breach of contract as, for example, default or delinquency in interest or principal payments.

The individual evaluation requires assigning a risk category to each debtor and its respective loans. This risk category should consider the following factors: industry or sector, group considerations and management, financial situation, payment behavior and payment capacity.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (h)Loans to customers, continued:

 

 (v)Impairment of Loans, continued:

 

 (i)Allowances for individual evaluations, continued:

 

If there is evidence of impairment leading to an impairment loss for an individual counterparty relationship, then the amount of the loss is determined as the difference between the carrying amount of the loan(s), including accrued interest, and the present value of expected future cash flows discounted at the loan’s original effective interest rate or the effective interest rate established upon reclassification to loans, including cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The carrying amount of the loans is reduced by the use of an allowance account and the amount of the loss is recognized in the income statement as a component of the provision for credit losses.

 

 (ii)Allowances for group evaluations:

The collective assessment of impairment is principally to establish an allowance amount relating to loans that are either individually significant but for which there is no objective evidence of impairment, or are not individually significant but for which there is, on a portfolio basis, a loss amount that is probable of having occurred and is reasonably estimable. The loss amount has two components.

The first component is an allowance amount representing the incurred losses on the portfolio of smaller balance homogeneous loans, which are loans to individuals and small business customers of the private and retail business. The loans are grouped according to similar credit risk characteristics and the allowance for each group is determined using statistical models based on historical experience. The second component represents an estimate of incurred losses inherent in the group of loans that have not yet been individually identified or measured as part of the smaller-balance homogeneous loans. Loans that were found not to be impaired when evaluated on an individual basis are included in the scope of this component of the allowance.

Once a loan is identified as impaired, although the accrual of interest in accordance with the contractual terms of the loan is discontinued, the accretion of the net present value of the written down amount of the loan due to the passage of time is recognized as interest income based on the original effective interest rate of the loan.

At each balance sheet date, all impaired loans are reviewed for changes to the present value of expected future cash flows discounted at the loan’s original effective interest rate. Any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the income statement as a component of the provision for credit losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (h)Loans to customers, continued:

 

 (v)Impairment of Loans, continued:

 

Loans are written-off when collection efforts have been exhausted, but not later than the following maximum periods:

 

Type of Loan  Term
Consumer loans – secured and unsecured  6 months
Other transactions – unsecured  24 months
Commercial loans – secured  36 months
Residential mortgage loans  48 months
Consumer leases  6 months
Other non-real estate lease transactions  12 months
Real estate leases (commercial or residential)  36 months

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

Cash recoveries on written-off loans are recorded directly in income, through the provision for credit losses in the Consolidated Statement of Comprehensive Income.

If in a subsequent period the amount of a previously recognized impairment loss decreases and the decrease is due to an event occurring after the impairment was recognized, the impairment loss is reversed by reducing the allowance account accordingly. Such reversal is recognized in profit or loss.

 

 (vi)Renegotiated loans:

The bank attempts to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. After having renegotiated the terms, any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Renegotiated loans are continuously reviewed by management to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

 

 (vii)Collateral valuation:

The bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as mortgages, pledges, securities, other non-financial assets and credit enhancements. The fair value of collateral is generally assessed, at a minimum, at inception through a certified appraiser. Later, a model updates the collateral value considering factors such as location, collateral type, and observable market value, among others. However, some types of collateral, for example,such as securities, isare valued daily. To the extent possible, the bank uses active market data for valuing financial assets held as collateral. (See note 41Note 42 for further analysis of collateral).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (i)Financial guarantees:

In its ordinary course of business the Bank gives financial guarantees consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the financial statements at fair value being the premium received. Subsequent to initial recognition, the Bank’s liability is measured at the higher of the amount originally recognized less, when appropriate, cumulative amortization recognized in the income statement and the best estimate of expenditure required settling the financial obligation arising as the result of the guarantee. The premium received is recognized in the income statement in “Income from Fees and Commissions” on a straight line basis over the guarantee period.

With respect to the provision for financial guarantees, the process to determine the provision is similar to the methodology used for loans. Any loss amounts are recognized as an allowance in the consolidated balance sheet within other liabilities and charged to the consolidated statement of income as a component of the provision for credit losses. For a further description of the allowances for loan losses, see Note 2 (h) to the Consolidated Financial Statements.

 

 (j)Finance and operating leases:

The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

The Bank acting as lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets held are subject to a finance lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments, discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating and arranging a finance lease are incorporated into the receivable through the discount rate applied to the lease. Finance lease income is recognized over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease.

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. The leased assets are included within premises and equipment on the Group’s balance sheet and depreciation is provided on the depreciable amount of these assets on a systematic basis over their estimated useful economic lives. Rental income is recognized on a straight-line basis over the period of the lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense on a straight-line basis over the lease term.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (k)(j)Lease transactions:Finance and operating leases, continued:

The Bank acting as lessee

Assets held under finance leases are initially recognized on the balance sheet at an amount equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. The discount rate used in calculating the present value of the minimum lease payments is either the interest rate implicit in the lease, if it is practicable to determine, or the incremental borrowing rate. Contingent rentals are recognized as expense in the periods in which they are incurred. As of December 31, 20112013 and 2012,2014, the Bank and its subsidiaries have not signed contracts of this nature.

Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls the physical use of the property. Lease incentives are treated as a reduction of rental expense and are also recognized over the lease term on a straight-line basis. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

 

 (l)(k)Interest revenue and expense:

Interest revenue and expenses are recognized in the income statement using the effective interest rate method. The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. To calculate the effective interest rate, the Bank determines cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses.

The effective interest rate calculation includes all fees and other amounts paid or received that form part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the purchase or issuance of a financial asset or liability.

 

 (m)(l)Fees and commissions:

Income and expenses from fees and commissions are recognized in income using different criteria based on the nature of the income or expense. The most significant criteria include:

 

 (i)Fees earned from an individual act are recognized once the act has taken place.

 

 (ii)Fees earned from transactions or services provided over a longer period of time are recognized over the life of the transactions or services. These fees include commissions and asset management, custody or other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with incremental costs) and recognized as an adjustment to the effective interest rate of the loan. When it is unlikely that a loan is drawn down the fees are recognized over the commitment period on a straight-line basis.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (n)(m)Cash and cash equivalents:

Cash and short-term deposits in the statement of financial position comprise cash at banks and on hand and short-term deposits with original maturity of three months or less, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value.

The Bank has included as cash and cash equivalents to the account “Cash and due from banks”, plus (minus) the net balance of transactions in the course of collection that are shown in the Consolidated Statement Financial Position, plus short-term repurchase agreements. It also includes investments in fixed-income mutual funds that are presented in “Other Assets” in the Consolidated Statement of Financial Position.

 

 (o)(n)Property and equipment:

Property and equipment is stated at cost excluding servicing cost, less accumulated depreciation and accumulated impairment. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.

This cost includes expenses that have been directly attributed to the asset’s acquisition.

Depreciation is recognized in income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.

Estimated useful lives for 20112013 and 20122014 are as follows:

 

Buildings  50 years
Installations (in general)  10 years
EquipmentsEquipment   35 years
Office furniture   5 years

Property and equipment is derecognized on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in “Impairments” in the income statement in the year the asset is derecognized.

 

 (p)(o)Intangible assets:

Intangible assets are identified as non-monetary assets (separated from other assets) without physical substance that arise as the result of a legal transaction or that are developed internally by the consolidated entities. They are assets whose cost can be reliably estimated and for which the consolidated entities consider that it is probable that future economic benefits will be recognized.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (p)(o)Intangible assets, continued:

 

 (i)Goodwill

Goodwill arises on the acquisition of subsidiaries and associates representing the excess of the fair value of the purchase consideration over the net fair value of the Bank’s share of the identifiable assets acquired and the liabilities and contingent liabilities assumed on the date of the acquisition.

For the purpose of calculating goodwill, fair values of acquired assets, liabilities and contingent liabilities are determined by reference to market values or by discounting expected future cash flows to present value. This discounting is either performed using market rates or by using risk-free rates and risk-adjusted expected future cash flows.

Goodwill originating from the acquisition of subsidiaries is capitalized and reviewed for impairment annually or more frequently if there are indications that impairment may have occurred. Impairment is determined by comparing the present value of expected future cash flows from each cash generating unit with the carrying value of its net assets, including attributable goodwill. Goodwill is allocated to cash generating units for the purpose of impairment testing considering the business level at which goodwill is monitored for internal management purposes.

Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

 (ii)Software and computer programs

Computer software purchased by the Bank and its subsidiaries is accounted for at cost less accumulated amortization and impairment losses.

The subsequent expense in software assets is capitalized only when it increases the future economic benefit for the specific asset. All other expenses are capitalized as an expense as incurred.

Amortization is recorded in income using the straight-line amortization method based on the estimated useful life of the software, from the date on which it is available for use. The estimated useful life of software is a maximum of 6 years.

Expense for internally developed software is recorded in income for each year.

 

 (iii)Other identifiable intangible assets

This item applies to identifiable intangible assets for which the cost can be reliably measured and which are likely to generate future economic benefits for the Bank. The estimated useful life of other intangible assets is a maximum of 7 years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (q)(p)Collateral repossessed (assets received in lieu of payment):

Assets received in lieu of payment are classified under “Other Assets” and they are recorded at the lower of carrying amount and fair value, less cost to sell. Assets that are determined better to be sold are immediately transferred to assets held for sale at their fair value at the repossession date in line with the Bank’s policy.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (r)(q)Investment Properties:

Investment properties are real estate assets held to earn rental income or for capital appreciation or both, but are not held-for-sale in the ordinary course of business or used for administrative purposes. Investment properties are initially measured at cost, including transaction costs. Subsequent to initial recognition, they are carried at cost less accumulated depreciation and impairments using the same accounting policies as property and equipment.

 

 (s)(r)Deferred taxes and income taxes:

The income tax provision of the Bank and its subsidiaries has been determined in conformity with current legal provisions.

The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to temporary differences between the book and tax values of assets and liabilities. Deferred tax assets and liabilities are measured based on the tax rate expected to be applied, in accordance with current tax law, in the year that deferred tax assets are realized or liabilities are settled. The effects of future changes in tax legislation or tax rates are recognized in deferred taxes starting on the date of publication of the law approving such changes.

Deferred tax assets and liabilities are recorded at their book value as of the date the deferred taxes are measured. Deferred tax assets are recognized only when it is likely that future tax profits will be sufficient to recover deductions for temporary differences.

 

 (t)(s)Presentation and functional currency:

The items included in the financial statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency). The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s consolidated financial statements.

 

 (u)(t)Transactions in foreign currency:

Transactions and balances

Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position. All differences are recorded as a charge or credit to income.

Assets and liabilities in foreign currencies are shown at their equivalent value in Chilean pesos, calculated using the following exchange rates as of December 31, 20112013 and 2012:2014: Ch$519.80525.72 and Ch$479.47606.09 to US$U.S.$1, Ch$6.755.00 and Ch$5.575.08 per JPY1, Ch$674.96726.12 and Ch$634.05737.43 per EUR1.

The gain of MCh$35,136 (loss70,225 (gain of MCh$7,97371,457 in 2011)2013) for net foreign exchange income shown in the Consolidated Statement of Comprehensive Income includes recognition of the effects of exchange rates variations on assets and liabilities in foreign currency or indexed to exchange rates, and the result of foreign exchange transactions conducted by the Bank and its subsidiaries.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (v)(u)Derivative instruments:

Derivative instruments, which include foreign currency and U.F. forwards, interest rate forwards, currency and interest rate swaps, currency and interest rate options and other financial derivative instruments, are recorded in the Statement of Financial Position at fair value regardless of whether they are held-for-trading or for non-trading purposes.

The fair value is obtained from market quotes, discounted cash flows models and options valuation models, as and where applicable. Derivative contracts are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”.

Certain embedded derivatives in other financial instruments are treated as separate derivatives when their risk and characteristics are not closely related to those of the main contract and if the contract in its entirety is not recorded at its fair value with its unrealized gains and losses included in income.

At inception, a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes.

Changes in the fair value of derivative contracts maintainedheld for trading purposes are includedrecorded in “Net financial operating income”, in the Consolidated Statement of Comprehensive Income.

If a derivative instrument is classified as a hedging instrument, it can be:

 

 (1)A hedge of the fair value of existing assets or liabilities or firm commitments, or

 

 (2)A hedge of cash flows related to existing assets or liabilities or forecasted transactions.

A hedge relationship for hedge accounting purposes must comply with all of the following conditions:

 

 (a)at its inception, the hedge relationship has been formally documented;

 

 (b)it is expected that the hedge will be highly effective;

 

 (c)the effectiveness of the hedge can be measured in a reasonable manner; and

 

 (d)the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship.

Certain derivatives transactions that do not qualify for hedge accounting are treated and reported as derivatives for trading purposes even though they provide an effective hedge on the risk of net positions.

Fair Value Hedges

When a derivative instrument hedges the risk of changes in the fair value of an existing asset or liability, the asset or liability is recorded at its fair value with respect to the specific hedged risk. Gains or losses from fair value adjustments, both the hedged item and the derivative instrument, are recognized in income.

Should the hedged item in a fair value hedge be a firm commitment, changes in the fair value of the commitment with respect to the hedged risk are recorded as an asset or liability against net income for the year. Gains or losses from fair value adjustments of the hedging derivative are recorded in income. When an asset or liability is acquired as a result of the commitment, the initial recognition of the asset or liability acquired is adjusted to incorporate the accumulated effect of the valuation at fair value of the firm commitment, which was previously recorded in the Statement of Financial Position.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (v)(u)Derivative instruments, continued:

 

Cash Flow Hedges

When a derivative hedges the risk of changesChanges in the cash flowsfair value of existing assets or liabilities or forecasted transactions, the effective portionderivative contracts that qualify for Hedge Accounting are recorded, as follows:

If derivative contracts qualify for hedge accounting of changes in the fair value relatedof assets, liabilities or unrecognized firm commitments (Fair Value Hedge), changes in the fair value of both the hedged asset (or liability) and the hedging derivative are recognized in the income statement under “Interest revenue and expenses” and/or “Foreign Exchange Transactions, Net”, depending on the risk being hedged. On the other hand, any ineffective portion of the Fair Value Hedge is recognized in the income statement under “Net Financial Operating Income.”

If derivative contracts qualify for hedge accounting of the variability of future cash flows from highly probable future transactions and/or floating rate assets or liabilities (Cash Flow Hedge), the changes in fair value are recorded in Equity under “Other Comprehensive Income”, to the hedged riskextent that the hedge is recordedeffective. Changes in equity net onthe fair value of the Cash Flow Hedge are subsequently reclassified to the income taxes. Any ineffective portion is directly recorded in income. The accumulated amounts recorded in equity are transferred to income at the moment thatstatement when and where the hedged item affects income.the Bank’s results (e.g. to Interest Revenues and Expenses and/or Foreign Exchange Transactions when the hedged instrument affects the income statement because of interest rate risk, or exchange rate risk, respectively). On the other hand, any ineffective portion of the Cash Flow Hedge is recognized in the comprehensive statement of income under the “Net Financial Operating Income” line item.

Finally, if the hedging instrument does not continue qualifying for hedge accounting and/or it is terminated, sold, suspended or executed, the hedge accounting is discontinued prospectively. In this case, gains/losses already accrued will remain in Equity until the expected transactions occur. In that moment, gains/losses will be recorded in the Income Statement (under “Interest Revenues or Expenses” and/or “Foreign Exchange Transactions” depending on the risk being hedged) as long as transactions occur. Otherwise, if transactions are expected to fail, the changes in fair value are immediately recognized in the Income Statement (under “Interest Revenues or Expenses” and/or “Foreign Exchange Transactions” depending on the risk that was used to be hedged).”

 

 (w)(v)Financial assets held-for-trading:

Financial assets held-for-trading are securities acquired in order to generate profits from short-term price fluctuations or as a result of brokerage activities, or which are part of a portfolio on which a short-term profit-generating pattern exists. In thisThis item are includedincludes mainly Central Bank bonds and deposits from domestic banks.

Financial assets held-for-trading are stated at their fair market value as of the Statement of Financial Position date. Gains or losses from their fair market value adjustments, as well as gains or losses from trading activities, are included in “Net financial operating income” in the Consolidated Statement of Comprehensive Income. Dividends, interest and indexations are reported as “Net financial operating income”.

All purchases and sales of financial assets held-for-trading that must be executed within the period established by market regulations or conventions are recorded using the trade date, which is the date on which the purchase or sale of the asset is committed. Any other purchase or sale is treated as a derivative (forward) until settlement occurs.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (x)(w)Financial assets held to maturity and available-for-sale:

Financial assets held-to-maturity includeincludes only those securities for which the Bank has the ability and intention of keeping until maturity. The remaining investments are considered as financial assets available-for-sale. The Bank reassesses on an ongoing basis whether the ability and intention to sell available-for-sale instruments remains to be given.instruments.

A financial asset classified as available-for-sale is initially recognized at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

Financial assets available-for-sale are subsequently measured at their fair value based on market prices or valuation models. Unrealized gains or losses as result of fair value adjustments are recorded in other comprehensive income within equity. When these investments are sold, the cumulative fair value adjustments existing within equity will be recorded directly in income under “Net financial operating income”.

Financial assets held-to-maturity are recorded at their cost plus accrued interest and indexations, less impairment provisions made when the carrying amount exceeds the estimated recoverable amount.

Interest and indexations of financial assets held to maturity and available-for-sale are included in the line item “Interest revenue”. DividendsThe dividends earned whilstwhile holding available–for–sale financial investments are recognized in the income statement as “Other operating income” when“Interest revenue” once the right to receive the payment has been established.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(x)Financial assets held to maturity and available-for-sale, continued:

Investment securities, which are subject to hedge accounting, are adjusted according to the rules for hedge accounting.

Purchases and sales of investment securities that must be delivered within a period established by market regulations or conventions are recorded using the trade date that is the date on which the purchase or sale of the asset is committed. Any other purchase or sale is treated as a derivative (forward) until liquidation occurs.

As of December 31, 20112013 and 2012,2014, the Bank does not hold held to maturity instruments.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (y)(x)Debt issued and other financial liabilities:

Financial instruments issued by the Bank, which are not designated at fair value through profit and loss, are classified under “Debt issued”, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity shares.

After initial measurement, debt issued is subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

The Bank applies the same accounting policies for its other financial liabilities.

 

 (z)(y)Securities lending and borrowed:

The Bank engages in transactions withinvolving repurchase agreements as a form of investment. The securities purchased under these agreements are not recognized on the Bank’s Statement of Financial Position. The consideration paid is recognized under “Receivables from Repurchase Agreements and Security Lending” reflecting the transaction’s economic substance as a loan granted by the Bank. The difference between the purchase and the resale price is recorded in “Net Interest Income” and is accrued over the duration of the agreement using its effective interest rate. This treatment reflects the economic substance as a loan to the Bank.

The Bank also enters into security repurchase agreements as a form of financing. The securities sold under agreement to repurchase at a specific date in the future are not derecognized from the Statement of Financial Position asbecause the Bank retains all the risks and rewards of ownership.the ownership of the securities. The corresponding cash received is recognized in the balance sheet as an asset, with aand the corresponding obligation to return it,the cash, including any accrued interest, is recognized as a liability withinunder “Payables from Repurchase Agreements and Security Lending”. The difference between the sale and the repurchase price is treated as “Interest Expense” and is accrued over the duration of the agreement using the effective interest rate.

The treatment of security lending and borrowing transactions follows the principles laid out above. Securities borrowed are not recorded onin the Statement of Financial Position and, securities lentloaned are not derecognized from the Statement of Financial Position.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (aa)(z)Customer loyalty programs:

The Bank maintains a customer loyalty program as an incentive tofor its clients.customers. The scheme grants its customers certain points depending on the value of credit card purchases they make. The collected points can be used to obtain services from a third party. In accordance with IFRIC 13 the costs which the Bank incurs providing this incentive plan are recognized at fair value when the corresponding revenue is recognized, considering the probabilities of being used by the customers to obtain the third party’s service. The points collected under the loyalty program cannot be used to obtain services directly from the Bank.

 

 (ab)(aa)Provisions and contingent liabilities:

Provisions are liabilities involvingthat are characterized by uncertainty aboutin either their amount or maturity. TheyProvisions are recorded in the Statement of Financial Position when the following requirements are jointly met:

 

 (i)a present obligation has arisen from a past event and,

 

 (ii)as of the date of the financial statements it is likely that the Bank or its subsidiaries have to disburse resources to settle the obligation and,

 

 (iii)the amount can be reliably measured.

A contingent asset or liability is any right or obligation arisenthat arises from past events whose existence will be confirmed by one or more uncertain future events which are not within the control of the Bank. Contingent assets and liabilities are not recognized in the Statement of Financial Position.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (ac)(ab)Provision for minimum dividends:

The Bank records within liabilities the portion of net income for the year that should be distributed to comply with the Corporations Law. For these purposes, the Bank establishes a provision in a complementary equity account within retained earnings.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (ad)(ac)Employee benefits:

 

 (i)Staff vacations

The annual costs of vacations and staff benefits are recognized on an accrual basis.

 

 (ii)Short-term benefits

The Bank has a yearly bonus plan for its employees based on their ability to meet objectives and their individual contribution to the Bank’s results, consisting of a given number or portion of monthly salaries. It is provisioned for based on the estimated amount to be distributed.

 

 (iii)Staff severance indemnities

Banco de Chile has recorded a liability for long-term severance indemnities in accordance with employment contracts it has with certain employees. The liability, which results from payments to specified employees that are retiring employees with more than 30 years of service, is recorded at the present value of the accrued benefits. It is calculated by applying an equivalent discount rate to the accrued benefits. These benefits accrue over the estimated average remaining service period.

Obligations for this defined benefit plan are valued according to the projected unit credit actuarial valuation method, using inputs such as staff turnover rates, expected growth in wages and the probability that this benefit will be used, discounted at current long-term rates (6.04%(5.19% as of December 31, 20112013 and 5.50%4.38% as of December 31, 2012)2014). The discount rate used corresponds to the return on bonds of the Central Bank with a maturity in 5period of 10 years.

Actuarial gains and losses are recognized as other comprehensive income or expense at the end of each reporting period. There is no past service costs that would have to be recognized by the Bank.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (ae)(ad)Equity reserves:

The equity reserves recorded in the Bank’s Statement of Financial Position include:

Reserves from Earnings:

This item includes all the reserves that were originated from earnings and that by legal or statutory dispositions, or agreements of the shareholders’ meeting, will not be distributed in the form of future dividends.

Other reserves:

This item includes all the reserves that do not come from earnings and that do not correspond to those indicated in previous items.

Unrealized gains (losses) on available-for-sale instruments:

This item comprises changes in the fair value of these instruments.

Cumulative translation adjustment:

This item is used to record exchange differences arising from the translation of the net investment in foreign operations.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (af)(ae)Earnings per share:

Basic earnings per share is determined by dividing net income for the year attributable to the Bank by the average weighted number of shares in circulation during that year.

Diluted earnings per share is determined in a similar manner as basic earnings per share, but the average weighted number of shares in circulation is adjusted to account for the dilutive effect of stock options, warrants and convertible debt. As of December 31, 20112013 and 2012,2014, the Bank does not have any instruments or contracts that could cause dilutions. Therefore, no adjustments have been made.

 

 (ag)(af)Segment reporting:

The Bank’s operating segments are defined based on its different business units, considering the following factors:

 

 (i)That it develops business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity).;

 

 (ii)(vi)That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to decide aboutdetermine resource allocation for the segment and evaluate its performance; and

 

 (iii)(vii)That separate financial information is available.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

 

 (ah)(ag)Identifying and measuring impairment:

Financial assets (other than loans)

Financial assets are reviewed throughout each year, and especially at each reporting date, to determine whether there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset, and to determine whether the loss event had an impact on the estimated future cash flows of the financial asset that can be reliably calculated.

A financial asset or group of financial assets is impaired and impairment losses are incurred if:

there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and up to the balance sheet date (“a loss event”);

the loss event had an impact on the estimated future cash flows of the financial asset or the group of financial assets and;

a reliable estimate of the loss amount can be made.

An impairment loss for financial assets (different to loans to customers) recorded at amortized cost is calculated as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted using the effective interest rate.rate original.

An impairment loss for available-for-sale financial assets is calculated using its fair value, considering fair value changes already recognized in other comprehensive income.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(ah)Identifying and measuring impairment. continued:

Financial assets (other than loans), continued

In the case of equity investments classified as available-for-sale financial assets, objective evidence includes a significant or prolonged decline in the fair value of the investment below cost. The bank considers ‘significant’ generally as 20% and ‘prolonged’ generally as more than 6 months. In the case of debt securities classified as available-for-sale financial assets, the Bank assesses whether there exists objective evidence for impairment based on the same criteria as for loans.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.Summary of Significant Accounting Principles, continued:

(ag)Identifying and measuring impairment, continued:

Financial assets (other than loans), continued:

If there is evidence of impairment, any amountsamount previously recognized in equity, inunder net gains (losses) not recognized in the income statement, is removed from equity and recognized in the income statement for the period, reported inunder net gains (losses) on financial assets available for sale. This amount is determined as the difference between the acquisition cost (net of any principal repayments and amortization) and current fair value of the asset less any impairment loss on that investment previously recognized in the income statement.

When the fair value of the available-for-sale debt security recovers to at least amortized cost it is no longer considered impaired and subsequent changes in fair value are reported in equity.

Individually significant financial assets are individually examined to determine impairment. Remaining financial assets are collectively evaluated in groups that share similar credit risk characteristics. Both criteria are similar as those described in Note 2(h) Loans to customercustomers to determine impairment individually and group.

All impairment losses are recognized in the income statement. Any cumulative loss related to available-for-sale financial assets recognized previously in equity is transferred to the income statement.

An impairment loss is reversed if, in a subsequent period, the fair value of the debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss. The amount of the reversal is recognized in profit or loss up to the amount previously recognized as impairment. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available for sale are not reversed through profit or loss.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

2.Summary of Significant Accounting Principles, continued:

 

 (ah)(ag)Identifying and measuring impairment, continued:

 

Non-financial assets

The Bank assesses at each reporting date and on an ongoing basis whether there is an indication that an asset may be impaired. If any indication exists, or if annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (“CGU”) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, share prices and other available fair value indicators.

For assets, excluding goodwill, impairment losses recognized in prior years are assessed at each reporting date in case there are any indications that the loss has decreased or disappeared. A previously recognized impairment is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment was recognized. An impairment loss is reversed only to the extent that the book value of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in the income statement.

Impairment losses relating to goodwill cannot be reversed in future periods.

 

 (ai)(ah)Fiduciary activities:

The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of the clients. Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

3.New and amended standards and interpretations:

The accounting policies adopted are consistent with those of the previous financial year. Amendments resultingthat resulted from Improvementsimprovements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Bank:

 

IFRS 7 Financial Instruments: Disclosures (amendment) – The amendment provides enhanced disclosures for transferred financial assets that are derecognized in their entirety and transferred assets that are not derecognized in their entirety. The effective date is for annual periods beginning on or after July 1, 2011.

IAS 32Offsetting Financial Assets and Financial Liabilities – Amendment clarifies certain aspects because of the variation in the application of the requirements on offsetting

 

IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets

IFRS 10, IFRS 12 and IAS 27 –Investment Entities – Amendments to provide ‘investment entities’ an exemption from the consolidation of particular subsidiaries

 

IAS 36Impairment of Assets – Recoverable Amount Disclosures for Non-Financial Assets – Amendment to reduce the circumstances in which the recoverable amount of assets or cash-generating units is required to be disclosed.

IFRS1 First – Time Adoption of International Financial Reporting Standards (Amendment) – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopter

IAS 19Defined Benefit Plans: Employee Contributions – Amendment to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service.

IAS 39Novation of Derivatives and Continuation of Hedge Accounting – Amendment to make it clear that there is no need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

4.Changes in Accounting policies and Disclosures:

During the period ended December 31, 2014, there have been no accounting changes that may significantly affect these consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.Segment Reporting:

For management purposes, we havethe Bank has organized ourits operations and commercial strategies into four business segments, which are defined in accordance with the type of products and services offered to target customers. These business segments are currently defined as follows:

 

Retail:

  This segment focuses on individuals and small and medium-sized companies with annual sales up to Ch$1,500 million,UF 70,000, where the product offering focuses primarily on consumer loans, commercial loans, checking accounts, credit cards, credit lines and mortgage loans.

Wholesale:

  This segment focusesfocused on corporate clients and large companies, whose annual revenue exceeds Ch$1,500 million,exceed UF 70,000, where the product offering focuses primarily on commercial loans, checking accounts and liquidity management services, debt instruments, foreign trade, derivative contracts and leases.

Treasury and money market operations:

  

This segment focuses onincludes revenue associated with managing the Bank’s balance sheet (including currencies,(currencies, maturities and interest rates) and liquidity, including financial instrument and currency trading on accountbehalf of the Bank itself.

Transactions on behalf of customers carried out by the Treasury are reflected in the respective aforementioned segments. These products are highly transaction-focused such asand include foreign exchange transactions, derivatives and financial instruments in general.

Subsidiaries:

  Corresponds to companies and corporations controlled by the Bank, whose operations and financial results are managedwhere income is obtained individually by the respective subsidiary. The companies that comprise this segment are:
  

• Banchile Trade Services Limited

•  Banchile Administradora General de Fondos S.A.

 

•  Banchile Asesoría Financiera S.A.

 

•  Banchile Corredores de Seguros Ltda.

 

•  Banchile Factoring S.A.

• Banchile Corredores de Bolsa S.A.

 

•  Banchile Securitizadora S.A.

•  Banchile Trade Services Limited

 

•  Socofin S.A.

 

•  Promarket S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

4.5.Segment Reporting, continued:

 

The financial information used to measure the performance of the Bank’s business segments is not necessarily comparable with similar information from other financial institutions because it is based on internal reporting policies. The accounting policies used to prepare the Bank’s operating segment information are similar to those described in Note 2, “Summary of Significant Accounting Principles”, except as noted below:

 

The net interest margin of loans and deposits is measured on an individual transaction and individual client basis, stemming from the difference between the effective customer rate and the related Bank’s fund transfer price in terms of maturity,re-pricing and currency.

 

The results associated with gap management (interest rate and currency mismatches) are allocated to the business segments by considering the amount of loans and demand deposits managed by each segment.

 

For purposes of allocationallocating the effect of funding through capital and reserves, the internal performance profitability system considers capital allocation in each segmentssegment in accordance with Basel Guidelines.

 

In addition to direct costs (consisting mainly of labor and administrative expenses), the Bank allocates all of its indirect operating costs to each business segment by utilizing different cost drivers to allocate such costs to the specific segment.

 

The Bank applies local banking regulator accounting principles when measuring and recording its allowance for loan losses, assets received in lieu of payments, minimum dividend allowances and some other minor items for internal reporting purposes. These accounting policies differ in some significant aspects from IFRS.

The Bank obtains the majority of its income from interest, indexationsindexation and fees, less the associated credit costs and expenses. Management primarily bases its evaluation of segment performance anddecision-making regarding goals and the allocation of resources for each unit on these concepts. Even though the results of the segments reconcile with those of the Bank at the consolidated level, differences may exist in each segments’segment’s results due to the different measurement concepts indicated above.

The Bank did not enter into transactions with any particular customer or third party that collectively generated more than 10% of the Bank’s total income in 20112013 and 2012.2014.

The Bank carries out its business operations in Chile.

Transfer pricing between operating segments is conducted on an arm’s length basis in a manner similar to transactions with unaffiliated third parties.

Taxes are managed at the consolidated level and are not allocated to business segments.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

4.5.Segment Reporting, continued:

 

 As of December 31, 2010  As of December 31, 2012 
 Retail
MCh$
 Wholesale
MCh$
 Treasury
MCh$
 Subsidiaries
MCh$
 Subtotal
MCh$
 Reclassifications
and adjustments
to conform IFRS
MCh$
 Note Total MCh$  Retail
MCh$
 Wholesale
MCh$
 Treasury
MCh$
 Subsidiaries
MCh$
 Subtotal
MCh$
 Reclassifications
and adjustments
to conform IFRS
MCh$
 Note Total MCh$ 

Net interest income

  517,459    218,348    21,997    10,144    767,948    (322   767,626    671,971    263,108    18,356    (12,296  941,139    22,998     964,137  

Net fees and commissions income

  145,316    40,955    (367  117,561    303,465    (11,203   292,262    153,358    42,229    (367  103,472    298,692    (11,420   287,272  

Other operating income

  9,752    21,755    56,093    22,607    110,207    (5,698   104,509    16,759    33,069    14,746    31,522    96,096    (23,874   72,222  
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Total operating revenue

  672,527    281,058    77,723    150,312    1,181,620    (17,223 (1)  1,164,397    842,088    338,406    32,735    122,698    1,335,927    (12,296 (1)  1,323,631  

Provisions for loan losses

  (133,823  (71,647  —      (3,120  (208,590  50,939   (2)  (157,651  (180,559  (7,622  (22  13    (188,190  21,770   (2)  (166,420

Depreciation and amortization

  (18,625  (6,630  (3,349  (1,940  (30,544  (4,420 (3)  (34,964  (20,903  (7,300  (1,204  (1,550  (30,957  (4,189 (3)  (35,146

Other operating expenses

  (339,197  (95,344  (9,512  (83,320  (527,373  18,110   (4)  (509,263  (390,055  (109,105  (8,672  (86,718  (594,550  16,762   (4)  (577,788

Income attributable to associates

  1,233    388    —      305    1,926    (317   1,609    (288  (228  (18  305    (229  (239   (468
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Income before income taxes

  182,115    107,825    64,862    62,237    417,039    47,089     464,128    250,283    214,151    22,819    34,748    522,001    21,808     543,809  

Income taxes

      (38,509  (8,004 (5)  (46,513      (54,390  (9,538   (63,928
     

 

  

 

   

 

      

 

  

 

   

 

 

Income after income taxes

      378,530    39,085     417,615        467,611    12,270     479,881  
     

 

  

 

   

 

      

 

  

 

   

 

 

Assets

  7,198,879    7,547,025    2,902,332    845,837    18,494,073    (278,650   18,215,423    9,852,430    9,614,329    3,746,908    635,225    23,848,892    (706,493   23,142,399  

Current and deferred taxes

      88,231    (27,190   61,041        99,506    (43,705   55,801  
     

 

  

 

   

 

      

 

  

 

   

 

 

Total assets

      18,582,304    (305,840 (6)  18,276,464        23,948,398    (750,198 (6)  23,198,200  
     

 

  

 

   

 

      

 

  

 

   

 

 

Liabilities

  5,459,085    7,812,367    3,277,059    629,666    17,178,177    (596,038   16,582,139    7,706,834    9,225,881    4,495,605    489,830    21,918,150    (1,098,601   20,819,549  

Current and deferred taxes

      —      —       —          23,189    —       23,189  
     

 

  

 

   

 

      

 

  

 

   

 

 

Total liabilities

      17,178,177    (596,038 (7)  16,582,139        21,941,339    (1,098,601 (7)  20,842,738  
     

 

  

 

   

 

      

 

  

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

4.5.Segment Reporting, continued:

 

Reclassifications and adjustments to conform IFRS

 

 (1)The total effect due to the elimination adjustments to conform the total operating revenue is MCh$(12,275)(13,873). The total effect of IFRS adjustments is MCh$(4,948),1,577, which mainly stems from the reclassification of allowances for loan lossesinterest on repurchase agreements and amortization of fair value loans from Citibank Chile.suspended interest recognition.

 

 (2)The total effect relates to IFRS adjustments of MCh$50,939,21,770, which mainly stemstems from differing allowances for loan losses.

 

 (3)The total effect relates to IFRS adjustments of MCh$(4,420)(4,189), which stemstems from the amortization of intangibles and depreciation of property and equipment from Citibank Chile.

 

 (4)The total effect due to the elimination adjustments to conform other operating expenses is MCh$12,838. The total effect of IFRS adjustments is MCh$5,272, which mainly stems from deviating provision for loan losses.

(5)The total effect relates to IFRS adjustments of MCh$(8,004), which stem from deferred taxes.

(6)The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$(375,552). The total effect of IFRS adjustments in assets is MCh$69,712, which mainly stems from deviating allowances for loan losses, the acquisition of Citibank Chile and deferred taxes effects.

(7)The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$(375,552). The total effect of IFRS adjustments in liabilities is MCh$(220,486), which mainly stems from providing for minimum dividends and differing allowances for loan losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.Segment Reporting, continued:

  As of December 31, 2011 
  Retail
MCh$
  Wholesale
MCh$
  Treasury
MCh$
  Subsidiaries
MCh$
  Subtotal
MCh$
  Reclassifications
and adjustments
to conform IFRS
MCh$
  

Note

 Total
MCh$
 

Net interest income

  589,040    247,471    20,460    4,204    861,175    16,300     877,475  

Net fees and commissions income

  169,296    33,342    (536  116,955    319,057    (10,284   308,773  

Other operating income

  15,478    1,181    11,508    27,511    55,678    19,185     74,863  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total operating revenue

  773,814    281,994    31,432    148,670    1,235,910    25,201   (1)  1,261,111  

Provisions for loan losses

  (111,242  (10,541  (964  (2,093  (124,840  (22,085 (2)  (146,925

Depreciation and amortization

  (21,174  (6,299  (1,718  (1,520  (30,711  (4,420 (3)  (35,131

Other operating expenses

  (377,165  (123,355  (8,486  (86,259  (595,265  16,785   (4)  (578,480

Income attributable to associates

  2,252    710    —      338    3,300    (246   3,054  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Income before income taxes

  266,485    142,509    20,264    59,136    488,394    15,235     503,629  

Income taxes

      (59,588  (5,854 (5)  (65,442
     

 

 

  

 

 

   

 

 

 

Income after income taxes

      428,806    9,381     438,187  
     

 

 

  

 

 

   

 

 

 

Assets

  8,416,826    9,268,380    3,415,922    1,069,135    22,170,263    (474,287   21,695,976  

Current and deferred taxes

      89,974    (29,949   60,025  
     

 

 

  

 

 

   

 

 

 

Total assets

      22,260,237    (504,236 (6)  21,756,001  
     

 

 

  

 

 

   

 

 

 

Liabilities

  6,468,025    8,983,599    4,214,432    855,006    20,521,062    (805,730   19,715,332  

Current and deferred taxes

      —      —       —    
     

 

 

  

 

 

   

 

 

 

Total liabilities

      20,521,062    (805,730 (7)  19,715,332  
     

 

 

  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.Segment Reporting, continued:

Reclassifications and adjustments to conform IFRS

(1)The total effect due to the elimination adjustments to conform the total operating revenue is MCh$31,822. The total effect of IFRS adjustments is MCh$(6,621), which mainly stems from the reclassification of allowances for loan losses and amortization of fair value loans from Citibank Chile.

(2)The total effect relates to IFRS adjustments of MCh$(22,085), which mainly stem from differing allowances for loan losses.

(3)The total effect relates to IFRS adjustments of MCh$(4,420), which stem from the amortization of intangibles and depreciation of property and equipment from Citibank Chile.

(4)The total effect due to the elimination adjustments to conform other operating expenses is MCh$12,128. The total effect of IFRS adjustments is MCh$4,657, which represents reversal of write-offs of assets received in lieu of payments.

(5)The total effect relates to IFRS adjustments of MCh$(5,854), which stem from deferred taxes.

(6)The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$(547,005). The total effect of IFRS adjustments in assets is MCh$42,769, which mainly stems from deviating allowances for loan losses, the acquisition of Citibank Chile and deferred taxes effects.

(7)The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$(547,005). The total effect of IFRS adjustments in liabilities is MCh$(258,725), which mainly stems from providing for minimum dividends and differing allowances for loan losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.Segment Reporting, continued:

  As of December 31, 2012 
  Retail
MCh$
  Wholesale
MCh$
  Treasury
MCh$
  Subsidiaries
MCh$
  Subtotal
MCh$
  Reclassifications
and adjustments
to conform IFRS
MCh$
  

Note

 Total
MCh$
 

Net interest income

  664,861    252,009    18,356    6,177    941,403    22,734     964,137  

Net fees and commissions income

  178,569    36,130    (512  104,490    318,677    (11,420   307,257  

Other operating income

  16,628    32,865    14,746    31,857    96,096    (23,874   72,222  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total operating revenue

  860,058    321,004    32,590    142,524    1,356,176    (12,560 (1)  1,343,616  

Provisions for loan losses

  (179,524  (6,751  (21  (1,894  (188,190  21,770   (2)  (166,420

Depreciation and amortization

  (20,883  (7,284  (1,204  (1,586  (30,957  (4,189 (3)  (35,146

Other operating expenses

  (405,154  (110,081  (8,960  (92,804  (616,999  17,026   (4)  (599,973

Income attributable to associates

  (288  (228  (18  305    (229  (239   (468
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Income before income taxes

  254,209    196,660    22,387    46,545    519,801    21,808     541,609  

Income taxes

      (53,950  (9,538 (5)  (63,488
     

 

 

  

 

 

   

 

 

 

Income after income taxes

      465,851    12,270     478,121  
     

 

 

  

 

 

   

 

 

 

Assets

  9,666,888    9,325,032    3,746,908    1,123,750    23,862,578    (720,179   23,142,399  

Current and deferred taxes

      99,506    (43,705   55,801  
     

 

 

  

 

 

   

 

 

 

Total assets

      23,962,084    (763,884 (6)  23,198,200  
     

 

 

  

 

 

   

 

 

 

Liabilities

  7,548,472    8,978,963    4,495,605    908,796    21,931,836    (1,112,287   20,819,549  

Current and deferred taxes

      23,189    —       23,189  
     

 

 

  

 

 

   

 

 

 

Total liabilities

      21,955,025    (1,112,287 (7)  20,842,738  
     

 

 

  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.Segment Reporting, continued:

Reclassifications and adjustments to conform IFRS

(1)The total effect due to the elimination adjustments to conform the total operating revenue is MCh$(14,137). The total effect of IFRS adjustments is MCh$1,577, which mainly stems from the reclassification of allowances for loan losses, amortization of fair value loans from Citibank Chile and embedded derivatives.

(2)The total effect relates to IFRS adjustments of MCh$21,770, which mainly stem from differing allowances for loan losses.

(3)The total effect relates to IFRS adjustments of MCh$(4,189), which stem from the amortization of intangibles and depreciation of property and equipment from Citibank Chile.

(4)The total effect due to the elimination adjustments to conform other operating expenses is MCh$14,137.13,873. The total effect of IFRS adjustments is MCh$2,889, which represents reversal of write-offs of assets received in lieu of payments.

 

 (5)The total effect relates to IFRS adjustments of MCh$(9,538), which stemstems from deferred taxes.

 

 (6)The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$(731,339)(717,653). The total effect of IFRS adjustments in assets is MCh$(32,545), which mainly stems from deviating allowances for loan losses, the acquisition of Citibank Chile and deferred taxes effects.

 

 (7)The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$(731,339)(717,653). The total effect of IFRS adjustments in liabilities is MCh$(380,943)(380,948), which mainly stems from providing for minimum dividends and differing allowances for loan losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

5.Segment Reporting, continued:

  As of December 31, 2013 
  Retail
MCh$
  Wholesale
MCh$
  Treasury
MCh$
  Subsidiaries
MCh$
  Subtotal
MCh$
  Reclassifications
and adjustments
to conform IFRS
MCh$
  Note Total
MCh$
 

Net interest income

  737,476    303,128    23,269    (12,143  1,051,730    9,841     1,061,571  

Net fees and commissions income

  150,195    42,615    (1,355  106,280    297,735    (10,642   287,093  

Other operating income

  35,551    57,320    (5,607  32,439    119,703    10,310     130,013  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total operating revenue

  923,222    403,063    16,307    126,576    1,469,168    9,509   (1)  1,478,677  

Provisions for loan losses

  (203,586  (38,031  47    (43  (241,613  19,960   (2)  (221,653

Depreciation and amortization

  (20,068  (5,912  (1,182  (1,747  (28,909  1,232   (3)  (27,677

Other operating expenses

  (397,456  (112,528  (5,171  (92,023  (607,178  15,325   (4)  (591,853

Income attributable to associates

  1,123    814    95    39    2,071    (291   1,780  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Income before income taxes

  303,235    247,406    10,096    32,802    593,539    45,735     639,274  

Income taxes

      (79,936  (9,149 (5)  (89,085
     

 

 

  

 

 

   

 

 

 

Income after income taxes

      513,603    36,586     550,189  
     

 

 

  

 

 

   

 

 

 

Assets

  10,635,940    10,385,698    4,319,777    634,466    25,975,881    (158,594   25,817,287  

Current and deferred taxes

      109,335    (52,914   56,421  
     

 

 

  

 

 

   

 

 

 

Total assets

      26,085,216    (211,508 (6)  25,873,708  
     

 

 

  

 

 

   

 

 

 

Liabilities

  8,299,048    9,633,395    5,378,699    482,627    23,793,769    (606,231   23,187,538  

Current and deferred taxes

      7,131    —       7,131  
     

 

 

  

 

 

   

 

 

 

Total liabilities

      23,800,900    (606,231 (7)  23,194,669  
     

 

 

  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.Segment Reporting, continued:

Reclassifications and adjustments to conform IFRS

(1)The total effect due to the elimination adjustments to conform the total operating revenue is MCh$(13,143). The total effect of IFRS adjustments is MCh$22,652, which mainly stems from the reclassification of interest on repurchase agreements and suspended interest recognition.

(2)The total effect relates to IFRS adjustments of MCh$19,960, which mainly stems from differing allowances for loan losses.

(3)The total effect relates to IFRS adjustments of MCh$1,232, which stems from the amortization of intangibles and depreciation of property and equipment from Citibank Chile.

(4)The total effect due to the elimination adjustments to conform other operating expenses is MCh$13,143. The total effect of IFRS adjustments is MCh$2,182, which represents reversal of write-offs of assets received in lieu of payments.

(5)The total effect relates to IFRS adjustments of MCh$(9,149), which stems from deferred taxes.

(6)The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$(191,117). The total effect of IFRS adjustments in assets is MCh$(20,391), which mainly stems from deviating allowances for loan losses, the acquisition of Citibank Chile and deferred taxes effects.

(7)The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$(191,117). The total effect of IFRS adjustments in liabilities is MCh$(415,114), which mainly stems from providing for minimum dividends and differing allowances for loan losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.Segment Reporting, continued:

  As of December 31, 2014 
  Retail
MCh$
  Wholesale
MCh$
  Treasury
MCh$
  Subsidiaries
MCh$
  Subtotal
MCh$
  Reclassifications
and adjustments
to conform IFRS
MCh$
  Note Total
MCh$
 

Net interest income

  836,917    379,456    35,005    (8,834  1,242,544    14,272     1,256,816  

Net fees and commissions income

  134,635    40,316    (1,825  114,246    287,372    (15,184   272,188  

Other operating income

  30,581    60,279    13,871    29,552    134,283    (1,643   132,640  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total operating revenue

  1,002,133    480,051    47,051    134,964    1,664,199    (2,555 (1)  1,661,644  

Provisions for loan losses

  (232,802  (51,348  —      157    (283,993  22,427   (2)  (261,566

Depreciation and amortization

  (22,497  (5,324  (296  (2,384  (30,501  (2,286 (3)  (32,787

Other operating expenses

  (464,323  (134,211  (4,364  (99,060  (701,958  7,385   (4)  (694,573

Income attributable to associates

  1,868    584    50    359    2,861    (375   2,486  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Income before income taxes

  284,379    289,752    42,441    34,036    650,608    24,596     675,204  

Income taxes

      (59,527  (20,158 (5)  (79,685
     

 

 

  

 

 

   

 

 

 

Income after income taxes

      591,081    4,438     595,519  
     

 

 

  

 

 

   

 

 

 

Assets

  11,789,339    10,307,291    4,981,302    538,445    27,616,377    (128,941   27,487,436  

Current and deferred taxes

      167,840    (73,600   94,240  
     

 

 

  

 

 

   

 

 

 

Total assets

      27,784,217    (202,541 (6)  27,581,676  
     

 

 

  

 

 

   

 

 

 

Liabilities

  8,419,469    9,664,423    6,754,592    391,547    25,230,031    (578,360   24,651,671  

Current and deferred taxes

      19,030    —       19,030  
     

 

 

  

 

 

   

 

 

 

Total liabilities

      25,249,061    (578,360 (7)  24,670,701  
     

 

 

  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.Segment Reporting, continued:

Reclassifications and adjustments to conform IFRS

(1)The total effect due to the elimination adjustments to conform the total operating revenue is MCh$(17,797). The total effect of IFRS adjustments is MCh$15,242, which mainly stems from the reclassification of interest on repurchase agreements and suspended interest recognition.

(2)The total effect relates to IFRS adjustments of MCh$22,427, which mainly stems from differing allowances for loan losses.

(3)The total effect relates to IFRS adjustments of MCh$(2,286), which stems from the amortization of intangibles and depreciation of property and equipment from Citibank Chile.

(4)The total effect due to the elimination adjustments to conform other operating expenses is MCh$17,797. The total effect of IFRS adjustments is MCh$(10,412), which represents reversal of write-offs of assets received in lieu of payments.

(5)The total effect relates to IFRS adjustments of MCh$(20,158), which stems from deferred taxes.

(6)The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$(176,886). The total effect of IFRS adjustments in assets is MCh$(25,655), which mainly stems from deviating allowances for loan losses, the acquisition of Citibank Chile and deferred taxes effects.

(7)The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$(176,886). The total effect of IFRS adjustments in liabilities is MCh$(401,474), which mainly stems from providing for minimum dividends and differing allowances for loan losses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

6.Cash and Cash Equivalents:

 

 (a)Details of cash and cash equivalents and its reconciliation to the statement of cash flows at each period are as follows:

 

  2011
MCh$
   2012
MCh$
   2013
MCh$
   2014
MCh$
 

Cash and due from banks:

        

Cash

   346,169     400,249  

Current account with the Central Bank

   139,328     67,833  

Cash (*)

   485,537     476,429  

Current account with the Central Bank (*)

   71,787     147,215  

Deposits in other domestic banks

   106,656     15,295     15,588     12,778  

Deposits abroad

   288,993     201,548     300,396     278,711  
  

 

   

 

   

 

   

 

 

Subtotal – Cash and due from banks

   881,146     684,925     873,308     915,133  

Transactions in the course of collection

   218,215     237,393     248,128     303,136  

Highly liquid financial instruments (shown in other assets)

   31,910     33,042     66,213     255,013  

Repurchase agreements

   40,478     9,120     59,089     16,892  
  

 

   

 

   

 

   

 

 

Total cash and cash equivalents

   1,171,749     964,480     1,246,738     1,490,174  
  

 

   

 

   

 

   

 

 

Amounts in cash and Central Bank deposits are regulatory reserve deposits for which the Bank must maintain a certain monthly average.

(*)Amounts in cash and Central Bank deposits are regulatory reserve deposits for which the Bank must maintain a certain monthly average.

 

 (b)Transactions in the course of collectioncollection:

Transactions in the course of collection are transactions for which the only remaining step is settlement, which will increase or decrease the funds in the Central Bank or in foreign banks, normally occurring within 1224 to 2448 business hours and are detailed as follows:

 

  2011
MCh$
 2012
MCh$
   2013
MCh$
   2014
MCh$
 

Assets

       

Documents drawn on other banks (clearing)

   185,342    249,019     232,698     290,866  

Funds receivable

   188,297    61,058     67,328     65,319  
  

 

  

 

   

 

   

 

 

Total transactions in the course of collection

   373,639    310,077  

Subtotal transactions in the course of collection

   300,026        356,185  
  

 

  

 

   

 

   

 

 

Liabilities

       

Funds payable

   (155,424  (72,684   (51,898   (53,049
  

 

  

 

   

 

   

 

 

Total transactions in the course of payment

   (155,424  (72,684

Subtotal transactions in the course of payment

   (51,898   (53,049
  

 

  

 

   

 

   

 

 

Total transactions in the course of collection

   248,128     303,136  
  

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

6.7.Financial Assets Held-for-Trading:

The details of financial instruments classified as held-for-trading are as follows:

 

   2011
MCh$
   2012
MCh$
 

Instruments issued by the Chilean Government and Central Bank:

    

Central Bank bonds

   66,243     25,585  

Central Bank promissory notes

   4,657     3,068  

Other instruments issued by the Chilean Government and Central Bank

   6,942     43,726  

Other instruments issued in Chile

    

Mortgage bonds from domestic banks

   61     22  

Bonds from domestic banks

   585     —    

Deposits in domestic banks

   191,003     87,093  

Other instruments issued in Chile

   370     188  

Instruments issued by foreign institutions

    

Other instruments issued abroad

   —       —    
  

 

 

   

 

 

 

Total

   269,861     159,682  
  

 

 

   

 

 

 

Instruments issued by the Chilean Government and Central Bank include instruments sold under agreements to repurchase to customers and financial institutions, null in 2012 (MCh$29,811 in 2011).

   2013
MCh$
   2014
MCh$
 

Instruments issued by the Chilean Government and Central Bank:

    

Central Bank bonds

   34,407     13,906  

Central Bank promissory notes

   2,995     2,996  

Other instruments issued by the Chilean Government and Central Bank

   27,535     71,968  

Other instruments issued in Chile

    

Mortgage bonds from domestic banks

   14     9  

Bonds from domestic banks

   1,926     3,197  

Deposits in domestic banks

   255,582     199,665  

Bonds issued by chilean companies

   3,427     1,351  

Other instruments issued in Chile

   1,035     366  

Instruments issued by foreign institutions

    

Other instruments issued abroad

   —       —    
  

 

 

   

 

 

 

Total

   326,921     293,458  
  

 

 

   

 

 

 

“Other instruments issued in Chile” include instruments sold under repurchase agreements with customers and financial instruments amounting to MCh$86,863194,074 as of December 31, 20122014 (MCh$152,431227,453 in 2011)2013).

Repurchase agreements have an average expiration of 1113 days as of December 31, 2012 (72014 (14 days in 2011)2013).

Additionally, the Bank holds financial investments in mortgage finance bonds issued by itself in the amount of MCh$51,15432,956 as of December 31, 20122014 (MCh$64,92941,313 in 2011)2013), which are presented as a reduction of the liability line item “Debt issued.”

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

7.8.Cash collateral on securities and reverse repurchase agreements:

 

 (a)The Bank provides financing to its customers through “Receivables from Repurchase Agreements and Security Borrowing”, in which the financial instrument serves as collateral. As of December 31, 20112013 and 2012,2014, the Bank has the following receivables resulting from such transactions:

 

 Up to 1 month Over 1 month and
up to 3 month
 Over 3 months and
up to 12 months
 Over 1 year and
up to 3 years
 Over 3 years and
up to 5 years
 Over 5 years Total  Up to 1 month Over 1 month and
up to 3 months
 Over 3 months and
up to 12 months
 Over 1 year and
up to 3 years
 Over 3 years and
up to 5 years
 Over 5 years Total 
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
 2011
MCh$
 2012
MCh$
  2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 

Instruments issued by the Chilean Governments and Central Bank

              
 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Instruments issued by the Chilean Government and Central Bank

              

Central Bank bonds

  10,021    —      —      —      —      —      —      —      —      —      —      —      10,021    —      —      820    —      —      —      —      —      —      —      —      —      —      —      820  

Central Bank promissory notes

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other instruments issued by the Chilean Government and Central Bank

  —      582    —      —      —      —      —      —      —      —      —      —      —      582    —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other Instruments Issued in Chile

    —      —      —      —      —      —      —      —      —      —      —      —    

Deposit promissory notes from domestic banks

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Mortgage bonds from domestic banks

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other Instruments Issued in Chile

              

Bonds from domestic banks

  8,443    —      —      —      —      —      —      —      —      —      —      —      8,443    —    

Deposits in domestic banks

  46,084    —      —      —      —      —      —      —      —      —      —      —      46,084    —    

Bonds from other Chilean companies

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other instruments issued in Chile

  30,191    7,756    6,270    855    1,499    25,907    —      —      —      —      —      —      37,960    34,518    3,902    11,043    12,250    6,291    11,743    9,507    —      —      —      —      —      —      27,895    26,841  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  40,212    8,338    6,270    855    1,499    25,907    —      —      —      —      —      —      47,981    35,100    58,429    11,863    12,250    6,291    11,743    9,507    —      —      —      —      —      —      82,422    27,661  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

As part of reverse repurchase and securities borrowing agreements the Bank has received securities that it is allowed to sell or repledge in the absence of default by the owner. At December 31, 2014 the Bank held securities with a fair value of Ch$27,549 million (Ch$81,830 million in 2013) on such terms. The Bank has an obligation to return the securities to its counterparties.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

7.8.Cash collateral on securities and reverse repurchase agreements, continued:

 

 (b)The Bank obtains financing by selling financial instruments and committing to repurchase them at future dates, plus interest at a prefixed rate. As of December 31, 20112013 and 2012,2014, the Bank has the following payables resulting from such transactions:

 

  Up to 1 month  Over 1 month and up
to 3 month
  Over 3 months and
up to 12 months
  Over 1 year and up
to 3 years
  Over 3 years and up
to 5 years
  Over 5 years  Total 
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
 

Instruments issued by the Chilean Governments and Central Bank

              

Central Bank bonds

  49,025    —      —      —      —      —      —      —      —      —      —      —      49,025    —    

Central Bank promissory notes

  1,139    —      —      —      —      —      —      —      —      —      —      —      1,139    —    

Other instruments issued by the Chilean Government and Central Bank

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other Instruments Issued in Chile

              

Deposit promissory notes from domestic banks

  168,414    219,526    4,553    1,603    71    —      —      —      —      —      —      —      173,038    221,129  

Bonds from domestic banks

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other instruments issued abroad

  —      5,267    —      —      —      —      —      —      —      —      —      —      —      5,267  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  218,578    224,793    4,553    1,603    71    —      —      —      —      —      —      —      223,202    226,396  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(c)Securities given (sales):
  Up to 1 month  Over 1 month and up
to 3 months
  Over 3 months and
up to 12 months
  Over 1 year and up
to 3 years
  Over 3 years and up
to 5 years
  Over 5 years  Total 
  2013  2014  2013  2014  2013  2014  2013  2014  2013  2014  2013  2014  2013  2014 
  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Instruments issued by the Chilean Government and Central Bank of Chile

              

Central Bank bonds

  16,831    —      —      —      —      —      —      —      —      —      —      —      16,831    —    

Central Bank promissory notes

  —      25,643    —      —      —      —      —      —      —      —      —      —      —      25,643  

Other instruments issued by the Chilean Government and Central Bank

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other Instruments Issued in Chile

              

Deposit promissory notes from domestic banks

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Mortgage bonds from domestic banks

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Bonds from domestic banks

  —      3,152    —      —      —      —      —      —      —      —      —      —      —      3,152  

Deposits in domestic banks

  232,512    220,528    7,217    159    —      —      —      —      —      —      —      —      239,729    220,687  

Bonds from other Chilean companies

  —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other instruments issued in Chile

  206    —      —      —      —      —      —      —      —      —      —      —      206    —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  249,549    249,323    7,217    159    —      —      —      —      —      —      —      —      256,766    249,482  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The carrying amount of securities lent and of “Payables from Repurchase Agreements and Security Lending” at December 31, 20122014 is Ch$266,395252,465 million (Ch$221,528255,302 million in 2011)2013). The counterparty is allowed to sell or repledge those securities in the absence of default by the Bank.

(d)Securities received (purchases):

As part of reverse repurchase and securities borrowing agreements the Bank has received securities that it is allowed to sell or repledge in the absence of default by the owner. At December 31, 2012 the Bank held securities with a fair value of Ch$34,865 million (Ch$47,022 million in 2011) on such terms. The Bank has an obligation to return the securities to its counterparties.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.9.Derivative Instruments and Accounting Hedges:

 

 (a)As of December 31, 20112013 and 2012,2014, the Bank’s portfolio of derivative instruments is detailed as follows:

 

  As of December 31, 2013 
 As of December 31, 2011
Notional amount of contract with final expiration date in
 Fair value   Notional  amount
contract
MCh$
   Fair value 
 Up to 1
month
MCh$
 Over 1
month and
up to
3 months
MCh$
 Over
3 months
and up to
12 months
MCh$
 Over 1 year
and up to 3
years
MCh$
 Over 3
years and
up to 5
years
MCh$
 Over 5
years
MCh$
 Total Notional
amount contract
MCh$
 Asset
MCh$
 Liability
MCh$
   Asset
MCh$
   Liability
MCh$
 

Derivatives held for hedging of fair value

               

Cross currency swap

  —      —      —      13,376    17,260    125,952    156,588    —      11,148     128,934     —       14,012  

Interest rate swap

  —      —      —      15,750    25,108    184,784    225,642    —      27,273     164,526     714     11,312  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

 

Total derivatives held for hedging purposes

  —      —      —      29,126    42,368    310,736    382,230    —      38,421     293,460     714     25,324  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Derivatives held as cash flow hedges

               

Interest rate swap and cross currency swap

  57,128    —      —      55,940    —      —      113,068    —      1,514     882,844     37,971     6,681  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

 

Total Derivatives held as cash flow hedges

  57,128    —      —      55,940    —      —      113,068    —      1,514     882,844     37,971     6,681  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Derivatives held-for-trading purposes

               

Currency forward

  3,673,409    2,376,646    4,107,029    328,970    28,080    —      10,514,134    121,133    115,797     9,199,390     41,672     46,374  

Cross currency swap

  133,883    145,791    1,065,272    1,497,511    685,216    891,617    4,419,290    181,092    174,984     5,682,018     193,455     243,979  

Interest rate swap

  200,243    506,595    1,473,712    1,620,359    621,418    584,082    5,006,409    77,589    97,992     16,397,220     97,974     99,488  

Call currency options

  11,072    34,671    46,262    —      —      —      92,005    1,239    1,149     196,981     2,301     3,559  

Put currency options

  468    988    3,119    —      —      —      4,575    2    35     113,491     600     705  

Others

  —      —      —      —      —      672,384    672,384    —      21     —       —       —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

 

Total derivatives held-for-trading purposes

  4,019,075    3,064,691    6,695,394    3,446,840    1,334,714    2,148,083    20,708,797    381,055    389,978     31,589,100     336,002     394,105  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

 

Total

  4,076,203    3,064,691    6,695,394    3,531,906    1,377,082    2,458,819    21,204,095    381,055    429,913     32,765,404     374,687     426,110  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

 

   As of December 31, 2014 
   Notional  amount
contract
MCh$
   Fair value 
     Asset   Liability 
     MCh$   MCh$ 

Derivatives held for hedging of fair value

      

Cross currency swap

   48,611     —       8,730  

Interest rate swap

   146,585     101     11,174  
  

 

 

   

 

 

   

 

 

 

Total derivatives held for hedging purposes

   195,196     101     19,904  

Derivatives held as cash flow hedges

      

Interest rate swap and cross currency swap

   1,223,030     78,703     17,596  
  

 

 

   

 

 

   

 

 

 

Total Derivatives held as cash flow hedges

   1,223,030     78,703     17,596  

Derivatives held-for-trading purposes

      

Currency forward

   16,274,084     140,750     95,346  

Cross currency swap

   6,816,954     398,943     485,505  

Interest rate swap

   24,890,736     210,900     206,161  

Call currency options

   158,701     2,583     2,249  

Put currency options

   117,246     287     362  

Others

   —       —       —    
  

 

 

   

 

 

   

 

 

 

Total derivatives held-for-trading purposes

   48,257,721     753,463     789,623  
  

 

 

   

 

 

   

 

 

 

Total

   49,675,947     832,267     827,123  
  

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.Derivative Instruments and Accounting Hedges, continued:

  As of December 31, 2012
Notional amount of contract with final expiration date in
  Fair value 
  Up to 1
month
MCh$
  Over 1
month and
up to
3 months
MCh$
  Over
3 months
and up to
12 months
MCh$
  Over 1
year and
up to 3
years
MCh$
  Over 3
years and
up to 5
years
MCh$
  Over 5
years
MCh$
  Total Notional  amount
contract

MCh$
  Asset
MCh$
  Liability
MCh$
 

Derivatives held for hedging of fair value

         

Cross currency swap

  —      —      —      31,388    41,558    74,626    147,572    —      10,332  

Interest rate swap

  —      —      —      27,570    17,790    116,387    161,747    —      21,311  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives held for hedging purposes

  —      —      —      58,958    59,348    191,013    309,319    —      31,643  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives held as cash flow hedges

         

Interest rate swap and cross currency swap

  151,913    —      —      55,382    14,083    78,861    300,239    22    2,055  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Derivatives held as cash flow hedges

  151,913    —      —      55,382    14,083    78,861    300,239    22    2,055  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives held-for-trading purposes

         

Currency forward

  4,232,707    2,520,175    3,264,669    191,519    2,458    65    10,211,593    66,752    81,790  

Cross currency swap

  69,220    199,338    1,034,040    1,721,408    719,073    1,026,518    4,769,597    177,403    166,182  

Interest rate swap

  353,133    905,870    3,298,276    3,540,462    1,505,936    1,650,103    11,253,780    81,093    97,870  

Call currency options

  30,306    20,938    46,686    4,795    —      —      102,725    472    395  

Put currency options

  26,009    15,288    25,980    —      —      —      67,277    341    387  

Others

  —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives held-for-trading purposes

  4,711,375    3,661,609    7,669,651    5,458,184    2,227,467    2,676,686    26,404,972    326,061    346,624  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  4,863,288    3,661,609    7,669,651    5,572,524    2,300,898    2,946,560    27,014,530    326,083    380,322  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.9.Derivative Instruments and Accounting Hedges, continued:

 

 (b)Fair Value Hedges (notional):

The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates. The aforementioned hedge instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve.

Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 20112013 and 2012:2014:

 

  As of December 31, 
  As of December 31,   2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Notional Amounts

        

Hedged element

        

Commercial loans

   156,588     147,572     128,934     48,611  

Corporate bonds

   225,642     161,747     164,526     146,585  
  

 

   

 

 

Total

   382,230     309,319  
  

 

   

 

 

Hedge instrument

        

Cross currency swap

   156,588     147,572     128,934     48,611  

Interest rate swap

   225,642     161,747     164,526     146,585  
  

 

   

 

 

Total

   382,230     309,319  
  

 

   

 

 

Gains for hedge ineffectiveness are recognized in income statement in an amount of MCh$14615 (see note 30)31) in the item “Net financial operating income”.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.9.Derivative Instruments and Accounting Hedges, continued:

 

 (c)Cash flow Hedges:

 

 (c.1)The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and foreign exchange of bonds issued abroad:abroad in Mexican pesos, to rate TIIE (Interbank Interest Rate Balance) plus 0.6 percentage points, in Hong Kong dollars, Peruvian nuevo sol, Swiss franc, Japanese yen to fix rate and Peruvian Nuevo sol to fixed rate.foreign banks obligations. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate.

Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (“CLF”)(CLF) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily readjustment impactsimpact the item “interest revenue” of the financial statements.

 

 (c.2)Below are the cash flows of bonds issued abroad, the objects of these hedges and the cash flows of the asset part of the derivative:

 

  2013 
  2011   Up to 1
month
 

Over 1
month and
up to

3 months

 

Over

3 months
and up to

12 months

 Over 1 year
and up to 3
years
 Over 3 years
and up to 5
years
 Over 5 years Total 
  Up to 1
month
MCh$
 Over 1
month and
up to
3 months
MCh$
 Over
3 months
and up to
12 months
MCh$
 Over 1 year
and up to 3
years
MCh$
 Over 3 years
and up to 5
years

MCh$
   Over 5 years
MCh$
   Total
MCh$
   MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Hedge item

                  

Outflows:

          

Outflows:

        

Corporate Bond MXN

   (239  (477  (2,385  (62,461  —       —       (65,562   (206  (619  (62,275  —      —      —      (63,100

Corporate Bond HKD

   —      —      (7,011  (14,022  (14,009  (240,224  (275,266

Corporate Bond PEN

   —      —      (578  (1,154  (14,690  —      (16,422

Corporate Bond CHF

   (216  —      (4,720  (143,070  (229,701  (105,325  (483,032

Obligation USD

   (273  (82  (1,064  (135,478  —      —      (136,897

Corporate Bond JPY

   —      (76  (560  (56,964  (598  (29,173  (87,371

Hedge instruments

                  

Inflows:

          

Inflows:

        

Cross Currency Swap MXN

   239    477    2,385    62,461    —       —       65,562     206    619    62,275    —      —      —      63,100  

Cross Currency Swap HKD

   —      —      7,011    14,022    14,009    240,224    275,266  

Cross Currency Swap PEN

   —      —      578    1,154    14,690    —      16,422  

Cross Currency Swap CHF

   216    —      4,720    143,070    229,701    105,325    483,032  

Cross Currency Swap USD

   273    82    1,064    135,478    —      —      136,897  

Cross Currency Swap JPY

   —      76    560    56,964    598    29,173    87,371  
  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash flow

   —      —      —      —      —       —       —       —      —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.9.Derivative Instruments and Accounting Hedges, continued:

 

 (c)Cash flow Hedges, continued:

 

  2014 
  2012   Up to 1 month 

Over 1 month
and up to

3 months

 

Over 3 months
and up to

12 months

 Over 1 year
and up to 3
years
 Over 3 years
and up to 5
years
 Over 5 years Total 
  Up to 1 month
MCh$
 Over 1 month
and up to
3 months
MCh$
 Over 3 months
and up to
12 months
MCh$
 Over 1 year
and up to 3
years
MCh$
 Over 3 years
and up to 5
years

MCh$
 Over 5 years
MCh$
 Total
MCh$
   MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Hedge item

                

Outflows:

        

Outflows:

        

Corporate Bond MXN

   (235  (470  (2,348  (58,199  —      —      (61,252   —      —      —      —      —      —      —    

Corporate Bond HKD

   —      —      (3,149  (6,309  (6,332  (110,408  (126,198   —      —      (9,508  (19,070  (66,617  (268,771  (363,966

Corporate Bond PEN

   —      —      (1,138  (2,276  (16,358  —      (19,772   —      —      (622  (16,442  —      —      (17,064

Corporate Bond CHF

   (219  (1,135  (5,413  (317,811  (344,146  —      (668,724

Obligation USD

   (498  (95  (156,333  (61,751  —      —      (218,677

Corporate Bond JPY

   —      (271  (968  (58,445  (41,062  (51,563  (152,309

Hedge instruments

                

Inflows:

        

Inflows:

        

Cross Currency Swap MXN

   235    470    2,348    58,199    —      —      61,252     —      —      —      —      —      —      —    

Cross Currency Swap HKD

   —      —      3,149    6,309    6,332    110,408    126,198     —      —      9,508    19,070    66,617    268,771    363,966  

Cross Currency Swap PEN

   —      —      1,138    2,276    16,358    —      19,772     —      —      622    16,442    —      —      17,064  

Cross Currency Swap CHF

   219    1,135    5,413    317,811    344,146    —      668,724  

Cross Currency Swap USD

   498    95    156,333    61,751    —      —      218,677  

Cross Currency Swap JPY

   —      271    968    58,445    41,062    51,563    152,309  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash flow

   —      —      —      —      —      —      —       —      —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.9.Derivative Instruments and Accounting Hedges, continued:

 

 (c)Cash flow Hedges, continued:

 

 (c.2)Below are the cash flows of the underlying assets portfolio and the cash flow of the liability part of the derivatives:

 

  2013 
  2011   Up to 1
month
 

Over 1
month and
up to

3 months

 

Over

3 months and
up to

12 months

 Over 1 year
and up to 3
years
 Over 3 years
and up to 5
years
 Over 5 years Total 
  Up to 1
month
MCh$
 Over 1
month and
up to
3 months
MCh$
 Over
3 months and
up to
12 months
MCh$
 Over 1 year
and up to 3
years
MCh$
 Over 3 years
and up to 5
years

MCh$
   Over 5 years
MCh$
   Total
MCh$
   MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Hedge item

                  

Inflows:

          

Inflows:

        

Cash flow in CLF

   235    470    2,349    62,048    —       —       65,102     2,751    233    82,888    359,407    237,627    351,724    1,034,630  

Hedge instrument

          

Outflows:

          

Cross Currency Swap CLF

   (235  (470  (2,349  (62,048  —       —       (65,102

Hedge instruments

        

Outflows:

        

Cross Currency Swap MXN

   —      —      (61,400  —      —      —      (61,400

Cross Currency Swap HKD

   —      —      (5,791  (11,617  (11,562  (217,999  (246,969

Cross Currency Swap PEN

   —      —      (450  (898  (14,673  —      (16,021

Cross Currency Swap JPY

   —      (233  (2,099  (63,679  (1,846  (30,920  (98,777

Cross Currency Swap USD

   —      —      (3,314  (133,094  —      —      (136,408

Cross Currency Swap CHF

   (2,751  —      (9,834  (150,119  (209,546  (102,805  (475,055
  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash flow

   —      —      —      —      —       —       —       —      —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

8.9.Derivative Instruments and Accounting Hedges, continued:

 

 (c)Cash flow Hedges, continued:

 

  2012 
  Up to 1
month
MCh$
  Over 1 month and
up to 3 months
MCh$
  Over 3 months and
up to 12 months
MCh$
  Over 1 year and
up to 3 years
MCh$
  Over 3 years and
up to 5 years
MCh$
  Over 5
years
MCh$
  Total
MCh$
 

Hedge ítem

       

Inflows:

       

Cash flow in CLF

  —      —      4,496    66,537    20,317    106,869    198,219  

Instrumento de cobertura

       

Outflows:

       

Cross Currency Swap CLF

  —      —      (1,644  (60,173  —      —      (61,817

Cross Currency Swap CLF

  —      —      (2,411  (5,482  (5,498  (106,869  (120,260

Cross Currency Swap CLF

  —      —      (441  (882  (14,819  —      (16,142
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash flow

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   2014 
   Up to 1
month
  Over 1 month and
up to 3 months
  Over 3 months and
up to 12 months
  Over 1 year and
up to 3 years
  Over 3 years and
up to 5 years
  Over 5
years
  Total 
   MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Hedge item

        

Inflows:

        

Cash flow in CLF

   2,892    490,949    3,230    165,707    442,808    283,714    1,389,300  

Hedge instruments

        

Outflows:

        

Cross Currency Swap HKD

   —      (14,578  —      (7,273  (59,188  (224,232  (305,271

Cross Currency Swap PEN

   —      (15,978  —      (475  —      —      (16,453

Cross Currency Swap JPY

   —      (69,059  (976  (3,471  (48,703  (59,482  (181,691

Cross Currency Swap USD

   —      (58,945  —      (141,795  —      —      (200,740

Cross Currency Swap CHF

   (2,892  (332,389  (2,254  (12,693  (334,917  —      (685,145
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash flow

   —      —      —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

9.Derivative Instruments and Accounting Hedges, continued:

(c)Cash flow Hedges, continued:

With respect to CLF assets hedged, these are revalued monthly according to the variation of the UF, which is equivalent to monthly reinvestment of the assets until maturity of the relationship hedging.

 

 (c.3)The accumulated amount of unrealized gain for the contract that comprises the hedge instruments in this strategy of cash flow hedge for the period 2012 was a credit to equity for an amount of Ch$1,77729,756 million (a charge to equity offor Ch$48518,069 million in 2011).2013 and a credit to equity for Ch$1,777 million in 2012) generated from hedging instruments, which has been recorded in equity. The net effect of deferred tax was a credit to equity offor Ch$23,507 million in 2014 (a charge to equity for Ch$14,455 million in 2013 and a credit to equity for Ch$1,429 million in 2012 (a charge to equity of Ch$395 million in 2011)2012)

The accumulated balance for this concept net of deferred tax as of December 31, 20122014 corresponds to a credit of equity ofamounted Ch$1,03410,086 million (a charge to equity offor Ch$39513,421 million in 2011)2013 and a credit to equity for Ch$1,034 million in 2012)

 

 (c.4)The net effect in income of derivatives cash flow hedges that compensatewas a charge of Ch$9,659 million in 2014 (a credit to income for theCh$51,795 million in 2013 and a charge to income of hedged instruments, wasfor Ch$2,318 million in 2012 (a charge2012).

(c.5)As of December 31, 2014 and 2013, it not exist inefficiency in cash flow hedge, because both, hedge item and hedge instruments are mirror one of other, it means that all variation of value attributable to incomerate and revaluation components are netted almost totally.

(c.6)As of Ch$1,029 million en 2011) (See note 28).December 31, 2014 and 2013, the Bank has no hedges of net investments in foreign businesses.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

9.10.Loans and Advance to Banks, net:

 

 (a)As of December 31, 20112013 and 2012,2014, these amounts are detailed as follows:

 

  2013   2014 
  2011
MCh$
 2012
MCh$
   MCh$   MCh$ 

Domestic Banks

       

Interbank loans

   15,059    14,309     100,012     170,014  

Other credits with domestic banks

   —      —    

Provisions for loans to domestic banks

   (5  (5   (36   (61
  

 

  

 

   

 

   

 

 

Subtotal

   15,054    14,304     99,976     169,953  
  

 

  

 

   

 

   

 

 

Foreign Banks

       

Loans to foreign banks

   190,838    146,980     252,697     216,632  

Credits with third countries

   15,639    14,509     97,194     93,366  

Chilean export trade banks

   127,076    67,787     12,864     125,061  

Provisions for loans to foreign banks

   (1,001  (954   (1,256   (755
  

 

  

 

   

 

   

 

 

Subtotal

   332,552    228,322     361,499     434,304  
  

 

  

 

   

 

   

 

 

Central Bank of Chile

       

Unavailable Central Bank deposits

   300,000    1,100,000     600,000     550,000  

Other Central Bank credits

   819    696     581     1,108  
  

 

  

 

   

 

   

 

 

Subtotal

   300,819    1,100,696     600,581     551,108  
  

 

  

 

   

 

   

 

 

Total

   648,425    1,343,322     1,062,056     1,155,365  
  

 

  

 

   

 

   

 

 

 

 (b)Provisions for loans to banks are detailed below:

 

  Bank’s Location     Bank’s Location     
Detail  Chile
MCh$
   Abroad
MCh$
 Total
MCh$
   Chile
MCh$
   Abroad
MCh$
   Total
MCh$
 

Balance as of January 1, 2010

   —       1,177    1,177  

Balance as of January 1, 2013

   5     954     959  

Charge-offs

   —       —      —       —       —       —    

Provisions established

   —       —      —       31     302     333  

Provisions released

   —       (567  (567   —       —       —    
  

 

   

 

  

 

   

 

   

 

   

 

 

Balance as of December 31, 2010

   —       610    610  
  

 

   

 

  

 

 

Balance as of December 31, 2013

   36     1,256     1,292  

Charge-offs

   —       —      —       —       —       —    

Provisions established

   5     391    396     25     —       25  

Provisions released

   —       —      —       —       (501   (501

Impairment

   —       —      —    
  

 

   

 

  

 

   

 

   

 

   

 

 

Balance as of December 31, 2011

   5     1,001    1,006  

Balance as of December 31, 2014

   61     755     816  
  

 

   

 

  

 

   

 

   

 

   

 

 

Charge-offs

   —       —      —    

Provisions established

   —       —      —    

Provisions released

   —       (47  (47

Impairment

   —       —      —    
  

 

   

 

  

 

 

Balance as of December 31, 2012

   5     954    959  
  

 

   

 

  

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

10.11.Loans to Customers, net:

 

 (a)Loans to Customers:

As of December 31, 2010, 20112012, 2013 and 2012,2014, the composition of our portfolio of loans is the following:

 

 As of December 31, 2012 
 As of December 31, 2010  Assets before Allowances Allowances established 
 Asset before Allowance Allowances established    Normal Portfolio Substandard
Portfolio
 Non-Complying
Portfolio
 Total Individual
Provision
 Group Provision Total Net assets 
 Normal Porfolio
MCh$
 Impaired Loans
MCh$
 Total
MCh$
 Individual
Provisions
MCh$
 Group Provision
MCh$
 Total
MCh$
 Net Assets
MCh$
  MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Commercial loans

               

Commercial loans

  6,597,336    372,038    6,969,374    (80,002  (48,147  (128,149  6,841,225    8,185,070    112,509    247,381    8,544,960    (53,952  (67,746  (121,698  8,423,262  

Foreign trade loans

  783,422    130,236    913,658    (50,249  (279  (50,528  863,130    1,134,137    58,728    48,090    1,240,955    (55,216  (491  (55,707  1,185,248  

Current account debtors

  109,881    12,225    122,106    (5,342  (1,931  (7,273  114,833    181,709    5,266    2,424    189,399    (2,418  (2,504  (4,922  184,477  

Factoring transactions

  465,750    11,383    477,133    (5,567  (507  (6,074  471,059    596,916    1,291    7,930    606,137    (9,535  (556  (10,091  596,046  

Commercial lease transactions(1)

  706,707    70,587    777,294    (11,958  (5,723  (17,681  759,613    1,061,740    26,317    25,215    1,113,272    (3,528  (9,136  (12,664  1,100,608  

Other loans and accounts receivable

  34,385    3,456    37,841    (363  (1,490  (1,853  35,988    36,641    260    3,746    40,647    (620  (1,974  (2,594  38,053  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

  8,697,481    599,925    9,297,406    (153,481  (58,077  (211,558  9,085,848    11,196,213    204,371    334,786    11,735,370    (125,269  (82,407  (207,676  11,527,694  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Mortgage loans

               

Mortgage bonds(2)

  149,039    15,435    164,474    —      (1,443  (1,443  163,031    103,169    —      6,046    109,215    —      (724  (724  108,491  

Transferable mortgage loans

  197,745    7,515    205,260    —      (1,106  (1,106  204,154    148,216    —      2,990    151,206    —      (527  (527  150,679  

Other residential real estate mortgage loans

  2,507,963    48,372    2,556,335    —      (12,700  (12,700  2,543,635    3,897,399    —      40,367    3,937,766    —      (14,829  (14,829  3,922,937  

Credits from ANAP

  27    —      —      27    —      —      —      27  

Other loans and accounts receivable

  116    436    552    —      (25  (25  527    453    —      —      453    —      —      —      453  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

  2,854,863    71,758    2,926,621    —      (15,274  (15,274  2,911,347    4,149,264    —      49,403    4,198,667    —      (16,080  (16,080  4,182,587  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Consumer loans

               

Consumer loans in installments

  1,389,887    92,169    1,482,056    —      (101,415  (101,415  1,380,641    1,761,070    —      151,413    1,912,483    —      (124,886  (124,886  1,787,597  

Current account debtors

  221,093    9,674    230,767    —      (4,261  (4,261  226,506    235,122    —      9,944    245,066    —      (6,950  (6,950  238,116  

Credit card debtors

  429,266    11,525    440,791    —      (15,485  (15,485  425,306    654,976    —      25,010    679,986    —      (31,996  (31,996  647,990  

Other loans and accounts receivable

  336    18    354    —      (34  (34  320    183    —      6    189    —      (215  (215  (26
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

  2,040,582    113,386    2,153,968    —      (121,195  (121,195  2,032,773    2,651,351    —      186,373    2,837,724    —      (164,047  (164,047  2,673,677  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

  13,592,926    785,069    14,377,995    (153,481  (194,546  (348,027  14,029,968    17,996,828    204,371    570,562    18,771,761    (125,269  (262,534  (387,803  18,383,958  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)In this item, the Bank finances its customers’customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2010,2012, MCh$353,455451,647 corresponds to finance leases for real estate and MCh$423,839661,625 corresponds to finance leases for other assets.
(2)For mortgage bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of that obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

11.Loans to Customers, net, continued:

(a)Loans to Customers, continued:

  As of December 31, 2013 
  Assets before Allowances  Allowances established 
  Normal
Portfolio
  Substandard
Portfolio
  Non-Complying
Portfolio
  Total  Individual
Provision
  Group
Provision
  Total  Net assets 
  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Commercial loans

        

Commercial loans

  9,501,587    117,958    271,713    9,891,258    (49,706  (86,529  (136,235  9,755,023  

Foreign trade loans

  1,027,507    73,090    54,084    1,154,681    (68,272  (642  (68,914  1,085,767  

Current account debtors

  253,198    3,160    2,931    259,289    (3,031  (3,332  (6,363  252,926  

Factoring transactions

  520,776    2,538    745    524,059    (9,570  (822  (10,392  513,667  

Commercial lease transactions(1)

  1,156,350    27,394    26,003    1,209,747    (5,265  (10,224  (15,489  1,194,258  

Other loans and accounts receivable

  34,621    307    5,011    39,939    (762  (3,287  (4,049  35,890  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  12,494,039    224,447    360,487    13,078,973    (136,606  (104,836  (241,442  12,837,531  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mortgage loans

        

Mortgage bonds(2)

  81,704    —      5,650    87,354    —      (220  (220  87,134  

Transferable mortgage loans

  120,584    —      2,321    122,905    —      (285  (285  122,620  

Other residential real estate mortgage loans

  4,455,510    —      61,312    4,516,822    —      (17,997  (17,997  4,498,825  

Credits from ANAP

  24    —      —      24    —      —      —      24  

Other loans and accounts receivable

  5,155    —      47    5,202    —      —      —      5,202  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  4,662,977    —      69,330    4,732,307    —      (18,502  (18,502  4,713,805  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consumer loans

        

Consumer loans in installments

  1,865,945    —      178,010    2,043,955    —      (139,536  (139,536  1,904,419  

Current account debtors

  231,493    —      9,459    240,952    —      (7,844  (7,844  233,108  

Credit card debtors

  758,742    —      25,040    783,782    —      (31,666  (31,666  752,116  

Other loans and accounts receivable

  185    —      616    801    —      (308  (308  493  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  2,856,365    —      213,125    3,069,490    —      (179,354  (179,354  2,890,136  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  20,013,381    224,447    642,942    20,880,770    (136,606  (302,692  (439,298  20,441,472  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)In this item, the Bank finances its customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2013, MCh$503,972 corresponds to finance leases for real estate and MCh$705,775 corresponds to finance leases for other assets.
(2)For mortgage bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of that obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

11.Loans to Customers, net, continued:

(a)Loans to Customers, continued:

  As of December 31, 2014 
  Assets before Allowances  Allowances established 
  Normal
Portfolio
  Substandard
Portfolio
  Non-Complying
Portfolio
  Total  Individual
Provision
  Group
Provision
  Total  Net assets 
  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Commercial loans

        

Commercial loans

  9,239,023    76,365    311,316    9,626,704    (62,563  (89,392  (151,955  9,474,749  

Foreign trade loans

  1,131,926    72,208    62,665    1,266,799    (78,619  (1,480  (80,099  1,186,700  

Current account debtors

  303,906    2,697    3,532    310,135    (3,141  (4,189  (7,330  302,805  

Factoring transactions

  474,046    3,164    1,525    478,735    (9,283  (1,361  (10,644  468,091  

Commercial lease transactions(1)

  1,330,752    22,191    28,579    1,381,522    (6,163  (11,898  (18,061  1,363,461  

Other loans and accounts receivable

  39,274    257    7,320    46,851    (2,298  (3,426  (5,724  41,127  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  12,518,927    176,882    414,937    13,110,746    (162,067  (111,746  (273,813  12,836,933  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mortgage loans

        

Mortgage bonds(2)

  65,211    —      4,893    70,104    —      (58  (58  70,046  

Transferable mortgage loans

  101,957    —      2,218    104,175    —      (72  (72  104,103  

Other residential real estate mortgage loans

  5,151,358    —      86,273    5,237,631    —      (23,857  (23,857  5,213,774  

Credits from ANAP

  21    —      —      21    —      —      —      21  

Other loans and accounts receivable

  6,482    —      210    6,692    —      (34  (34  6,658  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  5,325,029    —      93,594    5,418,623    —      (24,021  (24,021  5,394,602  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consumer loans

        

Consumer loans in installments

  2,003,452    —      202,872    2,206,324    —      (151,337  (151,337  2,054,987  

Current account debtors

  264,473    —      7,347    271,820    —      (7,331  (7,331  264,489  

Credit card debtors

  856,555    —      26,455    883,010    —      (33,713  (33,713  849,297  

Other loans and accounts receivable

  106    —      704    810    —      (343  (343  467  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  3,124,586    —      237,378    3,361,964    —      (192,724  (192,724  3,169,240  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  20,968,542    176,882    745,909    21,891,333    (162,067  (328,491  (490,558  21,400,775  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)In this item, the Bank finances its customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2014, MCh$615,723 corresponds to finance leases for real estate and MCh$765,799 corresponds to finance leases for other assets.
(2)For mortgage bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of that obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

10.Loans to Customers, net, continued:

(a)Loans to Customers, continued:

  As of December 31, 2011 
  Asset before Allowance  Allowances established    
  Normal
Porfolio
MCh$
  Impaired
Portfolio
MCh$
  Total
MCh$
  Individual
Provisions
MCh$
  Group
Provision
MCh$
  Total
MCh$
  Net Assets
MCh$
 

Commercial loans

       

Commercial loans

  7,661,640    210,906    7,872,546    (63,846  (57,420  (121,266  7,751,280  

Foreign trade loans

  1,442,460    66,687    1,509,147    (58,458  (504  (58,962  1,450,185  

Current account debtors

  212,595    1,884    214,479    (2,178  (2,074  (4,252  210,227  

Factoring transactions

  586,576    2,522    589,098    (4,499  (613  (5,112  583,986  

Commercial lease transactions(1)

  973,013    23,553    996,566    (9,275  (7,105  (16,380  980,186  

Other loans and accounts receivable

  27,430    4,177    31,607    (372  (1,905  (2,277  29,330  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  10,903,714    309,729    11,213,443    (138,628  (69,621  (208,249  11,005,194  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mortgage loans

       

Mortgage bonds(2)

  123,797    10,580    134,377    —      (871  (871  133,506  

Transferable mortgage loans

  169,424    5,834    175,258    —      (881  (881  174,377  

Other residential real estate mortgage loans

  3,250,235    47,096    3,297,331    —      (14,151  (14,151  3,283,180  

Other loans and accounts receivable

  64    404    468    —      (1)  (1  467  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  3,543,520    63,914    3,607,434    —      (15,904  (15,904  3,591,530  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consumer loans

       

Consumer loans in installments

  1,661,799    101,302    1,763,101    —      (110,190  (110,190  1,652,911  

Current account debtors

  223,871    9,101    232,972    —      (5,806  (5,806  227,166  

Credit card debtors

  553,574    15,716    569,290    —      (22,570  (22,570  546,720  

Other loans and accounts receivable

  251    6    257    —      (22  (22  235  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  2,439,495    126,125    2,565,620    —      (138,588  (138,588  2,427,032  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  16,886,729    499,768    17,386,497    (138,628  (224,113  (362,741  17,023,756  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)In this item, the Bank finances its customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2011, MCh$395,600 corresponds to finance leases for real estate and MCh$600,966 corresponds to finance leases for other assets.
(2)For mortgage bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of that obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.Loans to Customers, net, continued:

(a)Loans to Customers, continued:

  As of December 31, 2012 
  Asset before Allowance  Allowances established    
  Normal
Porfolio
MCh$
  Impaired
Portfolio
MCh$
  Total
MCh$
  Individual
Provisions
MCh$
  Group
Provision
MCh$
  Total
MCh$
  Net Assets
MCh$
 

Commercial loans

       

Commercial loans

  8,294,828    256,342    8,551,170    (53,952  (67,746  (121,698  8,429,472  

Foreign trade loans

  1,149,923    91,032    1,240,955    (55,216  (491  (55,707  1,185,248  

Current account debtors

  187,246    2,153    189,399    (2,418  (2,504  (4,922  184,477  

Factoring transactions

  597,266    8,871    606,137    (9,535  (556  (10,091  596,046  

Commercial lease transactions(1)

  1,084,877    28,395    1,113,272    (3,528  (9,136  (12,664  1,100,608  

Other loans and accounts receivable

  35,736    4,911    40,647    (620  (1,974  (2,594  38,053  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  11,349,876    391,704    11,741,580    (125,269  (82,407  (207,676  11,533,904  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mortgage loans

       

Mortgage bonds(2)

  103,241    5,974    109,215    —      (724  (724  108,491  

Transferable mortgage loans

  148,243    2,963    151,206    —      (527  (527  150,679  

Other residential real estate mortgage loans

  3,897,642    40,124    3,937,766    —      (14,829  (14,829  3,922,937  

Loans from ANAP

  27    —      27    —      —      —      27  

Other loans and accounts receivable

  113    340    453    —      —      —      453  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  4,149,266    49,401    4,198,667    —      (16,080  (16,080  4,182,587  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consumer loans

       

Consumer loans in installments

  1,761,070    145,203    1,906,273    —      (124,886  (124,886  1,781,387  

Current account debtors

  235,122    9,944    245,066    —      (6,950  (6,950  238,116  

Credit card debtors

  654,976    25,010    679,986    —      (31,996  (31,996  647,990  

Other loans and accounts receivable

  183    6    189    —      (215  (215  (26
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  2,651,351    180,163    2,831,514    —      (164,047  (164,047  2,667,467  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  18,150,493    621,268    18,771,761    (125,269  (262,534  (387,803  18,383,958  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)In this item, the Bank finances its customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2012, MCh$451,647 corresponds to finance leases for real estate and MCh$661,625 corresponds to finance leases for other assets.
(2)For mortgage bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of that obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.11.Loans to Customers, net, continued:

 

 (b)Allowances for loan losseslosses:

Movements in allowances for loan losses during 2010, 20112012, 2013 and 20122014 are as follows:

 

  Allowances     Allowances     
  Individual
MCh$
 Group
MCh$
 Total
MCh$
   Individual   Group   Total 

Balance as of January 1, 2010

   127,954    184,147    312,101  

Charge-offs:

    

Commercial loans

   (13,838  (32,581  (46,419

Mortgage loans

   —      (2,376  (2,376

Consumer loans

   —      (100,298  (100,298
  

 

  

 

  

 

 

Total charge-offs

   (13,838  (135,255  (149,093

Allowances established

   39,365    145,654    185,019  

Allowances released

   —      —      —    
  

 

  

 

  

 

 

Balance as of December 31, 2010

   153,481    194,546    348,027  
  

 

  

 

  

 

 

Balance as of January 1, 2011

   153,481    194,546    348,027  

Charge-offs:

    

Commercial loans

   (51,498  (30,588  (82,086

Mortgage loans

   —      (2,923  (2,923

Consumer loans

   —      (92,951  (92,951
  

 

  

 

  

 

 

Total charge-offs

   (51,498  (126,462  (177,960

Allowances established

   51,160    156,029    207,189  

Allowances released

   (14,515  —      (14,515
  

 

  

 

  

 

 

Balance as of December 31, 2011

   138,628    224,113    362,741  
  

 

  

 

  

 

   MCh$   MCh$   MCh$ 

Balance as of January 1, 2012

   138,628    224,113    362,741     138,628     224,113     362,741  

Charge-offs:

          

Commercial loans

   (9,144  (34,020  (43,164   (9,144   (34,020   (43,164

Mortgage loans

   —      (4,253  (4,253   —       (4,253   (4,253

Consumer loans

   —      (135,316  (135,316   —       (135,316   (135,316
  

 

  

 

  

 

   

 

   

 

   

 

 

Total charge-offs

   (9,144  (173,589  (182,733   (9,144   (173,589   (182,733

Allowances established

   13,668    212,010    225,678     13,668     212,010     225,678  

Allowances released

   (17,883  —      (17,883   (17,883   —       (17,883
  

 

  

 

  

 

   

 

   

 

   

 

 

Balance as of December 31, 2012

   125,269    262,534    387,803     125,269     262,534     387,803  

Balance as of January 1, 2013

   125,269     262,534     387,803  

Charge-offs:

      

Commercial loans

   (8,648   (27,381   (36,029

Mortgage loans

   —       (3,242   (3,242

Consumer loans

   —       (157,264   (157,264
  

 

  

 

  

 

   

 

   

 

   

 

 

Total charge-offs

   (8,648   (187,887   (196,535

Debt exchange

   (12,556   —       (12,556

Allowances established

   34,668     228,045     262,713  

Allowances released

   (2,127   —       (2,127
  

 

   

 

   

 

 

Balance as of December 31, 2013

   136,606     302,692     439,298  

Balance as of January 1, 2014

   136,606     302,692     439,298  

Charge-offs:

      

Commercial loans

   (28,566   (39,151   (67,717

Mortgage loans

   —       (2,978   (2,978

Consumer loans

   —       (184,647   (184,647
  

 

   

 

   

 

 

Total charge-offs

   (28,566   (226,776   (255,342

Allowances established

   54,027     252,575     306,602  

Allowances released

   —       —       —    
  

 

   

 

   

 

 

Balance as of December 31, 2014

   162,067     328,491     490,558  
  

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

10.11.Loans to Customers, net, continued:

 

 (c)During 20112013 and 2012,2014, the Bank and its subsidiaries presented the following allowance for loan losses associated with impaired loans and with non-impaired loans:

 

  As of December 31, 
  As of December 31,   2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Individual impaired

   127,717     76,373     94,806     114,804  

Group impaired

   102,989     134,782     163,688     165,148  
  

 

   

 

   

 

   

 

 

Allowances for impaired loans(*)

   230,706     211,155     258,494     279,952  

Provision for not yet identified but incurred impairment

   132,035     176,648     180,804     210,606  
  

 

   

 

   

 

   

 

 

Total allowances for loan losses

   362,741     387,803     439,298     490,558  
  

 

   

 

   

 

   

 

 

 

(*) 

Includes allowances related to individual and group impaired portfolios. Notes 10(a)11(a) and 10(b)11(b) include total allowance amounts from impaired and non-impaired portfolios

 

 (d)Finance Lease Contracts:

The Bank’s scheduled cash flows to be received from finance leasing contracts have the following maturities:

 

  Total receivable   Unearned income Net lease receivable(*) 
  Total receivable   Unearned income Net lease receivable(*)   2013   2014   2013 2014 2013   2014 
  2011
MCh$
   2012
MCh$
   2011
MCh$
 2012
MCh$
 2011
MCh$
   2012
MCh$
   MCh$   MCh$   MCh$ MCh$ MCh$   MCh$ 

Due within one year

   338,406     394,284     (42,362  (50,643  296,044     343,641     435,789     465,397     (53,920  (55,663  381,869     409,734  

Due after 1 year but within 2 years

   257,239     293,525     (31,668  (36,615  225,571     256,910     314,546     328,815     (39,405  (40,553  275,141     288,262  

Due after 2 years but within 3 years

   176,620     189,111     (20,847  (23,440  155,773     165,671     197,979     220,128     (25,097  (27,233  172,882     192,895  

Due after 3 years but within 4 years

   110,512     112,381     (14,280  (15,766  96,232     96,615     121,241     144,099     (16,987  (19,753  104,254     124,346  

Due after 4 years but within 5 years

   68,860     75,451     (10,089  (11,339  58,771     64,112     78,992     107,651     (12,663  (14,375  66,329     93,276  

Due after 5 years

   183,112     206,025     (22,831  (25,733  160,281     180,292     232,607     296,482     (29,879  (32,370  202,728     264,112  
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

 

Total

   1,134,749     1,270,777     (142,077  (163,536  992,672     1,107,241     1,381,154     1,562,572     (177,951  (189,947  1,203,203     1,372,625  
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

 

 

(*) 

The net balance receivable does not include past-duethe total overdue portfolio totaling MCh$3,8946,544 and MCh$6,0318,897 as of December 31, 20112013 and 2012,2014, respectively. This overdue portfolio only reflects the past due portion without considering the remaining outstanding principal and interest.

The leasing contracts are related to real estate, industrial machinery, vehicles and computer equipment. The leasing contracts have an average life of between 3 and 8 years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

10.11.Loans to Customers, net, continued:

 

 (e)Loans by industry sector:

The following table details the Bank’s loan portfolio (before allowances for loans losses) as of December 31, 20112013 and 20122014 by the customer’s industry sector:

 

  Location                 
  Location                   Chile   Abroad   Total 
  Chile   Abroad   Total   2013   2014   2013   2014   2013       2014     
  2011
MCh$
   2012
MCh$
   2011
MCh$
   2012
MCh$
   2011
MCh$
   %   2012
MCh$
   %   MCh$   MCh$   MCh$   MCh$   MCh$   %   MCh$   % 

Commercial loans:

                                

Commerce

   2,284,484     2,296,496     2,804     28,173     2,287,288     13.16     2,324,669     12.38     2,510,335     2,340,903     40,731     36,929     2,551,066     12.22     2,377,832     10.86  

Financial Services

   1,248,729     1,148,094     772,782     706,477     2,021,511     11.63     1,854,571     9.88  

Transportation

   1,407,358     1,470,358     —       —       1,407,358     8.09     1,470,358     7.83     1,622,433     1,654,258     14,729     13,845     1,637,162     7.84     1,668,103     7.62  

Manufacturing

   1,488,819     1,380,994     —       —       1,488,819     8.56     1,380,994     7.36     1,360,115     1,414,821     5,301     84,083     1,365,416     6.54     1,498,904     6.85  

Services

   1,084,380     1,310,573     —       —       1,084,380     6.24     1,310,573     6.98     1,336,674     1,565,233     415     544     1,337,089     6.40     1,565,777     7.15  

Construction

   944,842     1,252,546     —       —       944,842     5.43     1,252,546     6.67     1,425,983     1,423,597     311     —       1,426,294     6.83     1,423,597     6.50  

Financial services

   2,239,495     1,848,774     15,855     24,381     2,255,350     10.80     1,873,155     8.56  

Agriculture and livestock

   912,919     901,300     —       —       912,919     5.25     901,300     4.80     921,055     946,795     —       —       921,055     4.41     946,795     4.32  

Electricity, gas and water

   505,616     438,638     27,885     3,428     533,501     2.55     442,066     2.02  

Mining

   333,776     305,386     65,976     67,051     399,752     2.30     372,437     1.98     339,456     356,363     —       —       339,456     1.63     356,363     1.63  

Electricity, gas and water

   315,338     328,763     —       —       315,338     1.81     328,763     1.75  

Fishing

   271,901     233,893     —       —       271,901     1.56     233,893     1.25     220,815     261,189     —       —       220,815     1.06     261,189     1.19  

Other

   26,033     226,999     53,302     84,477     79,335     0.46     311,476     1.67     491,769     667,098     —       29,867     491,769     2.36     696,965     3.19  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   10,318,579     10,855,402     894,864     886,178     11,213,443     64.49     11,741,580     62.55     12,973,746     12,917,669     105,227     193,077     13,078,973     62.64     13,110,746     59.89  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage loans

   3,607,434     4,198,667     —       —       3,607,434     20.75     4,198,667     22.37     4,732,307     5,418,623     —       —       4,732,307     22.66     5,418,623     24.75  

Consumer loans

   2,565,620     2,831,514     —       —       2,565,620     14.76     2,831,514     15.08     3,069,490     3,361,964     —       —       3,069,490     14.70     3,361,964     15.36  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   16,491,633     17,885,583     894,864     886,178     17,386,497     100.00     18,771,761     100.00     20,775,543     21,698,256     105,227     193,077     20,880,770     100.00     21,891,333     100.00  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

11.12.Financial Assets Available-for-sale:

As of December 31, 20112013 and 2012,2014, investment securities classified as available-for-sale are detailed as follows:

 

  2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Instruments issued by the Chilean Government and Central Bank:

        

Bonds issued by the Chilean Government and Central Bank

   158,865     110,569     333,035     28,795  

Promissory notes issued by the Chilean Government and Central Bank

   58,564     969     50,415     149,755  

Other instruments

   194,965     140,246     202,958     160,774  

Other instruments issued in Chile:

        

Equity instruments valued at cost

   2,222     613     352     358  

Equity instruments valued at fair value

   —       7,263     7,827     8,249  

Mortgage bonds from domestic banks

   87,966     85,688     96,933     96,294  

Bonds from domestic banks

   124,203     116,100     128,500     251,231  

Deposits from domestic banks

   521,881     560,390     617,816     657,467  

Bonds from other Chilean companies

   48,790     32,281     13,558     29,519  

Promissory notes issued by other Chilean companies

   5,659     —              

Other instruments

   139,602     129,693     154,267     162,829  

Instruments issued by foreign institutions:

        

Other instruments issued abroad

   128,403     88,504     76,222     63,525  
  

 

   

 

   

 

   

 

 

Total

   1,471,120     1,272,316     1,681,883     1,608,796  
  

 

   

 

   

 

   

 

 

Instruments issued by the Chilean Government and Central Bank include instruments with agreements to repurchase sold to clients and financial institutions, totaling MCh$26,28825,763 as of December 31, 2011 (there were no changes for this item as of December 31, 2012)2014 (MCh$16,840 in 2013). The repurchase agreements to repurchase have an average maturity of 124 days as of December 31, 20112014 (3 days in December 2013).

Under classification of Other instruments issued in Chile are included securities sold under repurchase agreements to customers and 2012 respectively.financial institutions for an amount of MCh$14 million (MCh$109 million in 2013). The repurchase agreements have an average maturity of 5 days as of December 31, 2014 (3 days in December 2013).

In instruments issued abroad included mainly bank bonds and shares.

As of December 31, 2012,2014, the portfolio of financial assets available-for-sale includes a net unrealized loss of MCh$40,929 (MCh$36,443 in 2013 and MCh$24,829 (a net unrealized loss of MCh$696 in 2011)2012), recorded in other comprehensive income within equity.

The equity investments values at cost represent shares of exchange houses and servicing companies that the Bank is obliged to hold in order to benefit from these services. There is no active market for these shares and their fair value cannot be measured reliably. However, the difference between cost and fair value is not expected to be significant.

During 20112013 and 2012,2014, there was no evidence of impairment of financial assets available-for-sale.

As of December 31, 20112013 and 2012,2014, the Bank and its subsidiaries do not hold financial assets held-to-maturity.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

11.12.Financial Assets Available-for-sale, continued:

 

Realized profits and losses are calculated as the proceeds from sales less the cost (specific identification method) of the investments identified as for sale. In addition, any unrealized profit or loss previously recorded in equityother comprehensive income for these investments is reversedreclassified when recorded in the income statements.

The gross gains (loss) realized in sale of financial assets available-for-sale, as of December 31, 20112013 and 2012,2014, is recorded in the item “Net financial operating income” (Note 30)31).

Gross profits and losses realized and unrealized on the sale of available for sale investments for the periods ended December 31, 2010, 20112012, 2013 and 20122014 are as follows:

 

  2012   2013   2014 
  2010
MCh$
 2011
MCh$
 2012
MCh$
   MCh$   MCh$   MCh$ 

Net gain (loss) on available for sale before income tax(1)

   (363  (9,484  30,127     30,127     14,518     7,531  

Tax (expense) benefit(2)

   (162  1,866    (5,994   (5,994   (2,904   (3,045
  

 

  

 

  

 

   

 

   

 

   

 

 

Net of tax amount(3)

   (525  (7,618  24,133     24,133     11,614     4,486  
  

 

  

 

  

 

   

 

   

 

   

 

 

 

(1)These amounts do not included realized gainAs of December 31, 2012, 2013 and 2014, Realized gains or loss recordedreclassified to the period and which are detailed in Note 30income statement line item “Net financial operating income”. As of December 31, 2010, 2011 and 2012 these amounts are MCh$(10,248), MCh$932 and amounted to MCh$(1,749), respectively.MCh$ (11,751) and MCh$(16,486), respectively .
(2)This amount corresponds to the deferred taxes of the unrealized gain or loss and which are included in Note 16(d)No. 17(d). As of December 31, 2014 this amount includes the tax rate change effect. See note No. 17( c).
(3)This amount corresponds to the unrealized gain or loss, net of deferred tax and which are included in “Consolidated Statement of Changes in Equity”.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

12.13.Investments in Other Companies:

 

 (a)This item includes investments in other companies for an amount of MCh$13,19614,407 and MCh$11,67423,043 as of December 31, 20112013 and 2012,2014, respectively, which is detailed as follows:

 

                Investment 
    Ownership Interest  Equity  Book Value  Income (Loss) 

Company

 

Shareholder

 2011
%
  2012
%
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2010
MCh$
  2011
MCh$
  2012
MCh$
 

Investments value at equity method:

          

Servipag Ltda.(1)

 Banco de Chile  50.00    50.00    7,397    6,756    3,698    3,378    376    611    (321

Redbanc S.A.

 Banco de Chile  38.13    38.13    5,480    4,109    2,090    1,567    78    492    (376

Soc. Operadora de Tarjetas de Crédito Nexus S.A.

 Banco de Chile  25.81    25.81    6,412    6,412    1,655    1,655    227    300    556  

Transbank S.A.

 Banco de Chile  26.16    26.16    6,274    6,306    1,641    1,649    292    313    322  

Artikos Chile S.A.(1)

 Banco de Chile  50.00    50.00    1,984    1,129    992    564    222    72    (428

Administrador Financiero del Transantiago S.A.

 Banco de Chile  20.00    20.00    8,714    6,076    1,743    1,215    193    967    (527

Soc. Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A.(2)

 Banco de Chile  14.17    15.00    3,795    4,337    538    651    59    102    112  

Sociedad Interbancaria de Depósitos de Valores S.A.

 Banco de Chile  26.81    26.81    1,573    1,711    422    459    115    92    79  

Centro de Compensación Automatizado S.A.

 Banco de Chile  33.33    33.33    1,252    1,609    417    536    47    105    115  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

     42,881    38,445    13,196    11,674    1,609    3,054    (468
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Banco de Chile does not possess more than half of the voting rights and there are no other indicators of control. Therefore, Banco de Chile only possesses significant influence over this company.
(2)Banco de Chile has significant influence in Soc. Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. because they have the right to designate one director of the board.
                Investment 
    Ownership Interest  Equity  Book Value  Income (Loss) 
    December  December  December  December  December  December  December  December 
    2013  2014  2013  2014  2013  2014  2013  2014 

Company

 Shareholder %  %  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Associates

         

Transbank S.A.

 Banco de Chile  26.16    26.16    5,232    34,177    1,368    8,939    9    1,070  

Administrador Financiero del Transantiago S.A

 Banco de Chile  20.00    20.00    9,737    11,145    1,948    2,229    733    282  

Soc. Operadora de Tarjetas de Crédito Nexus S.A.

 Banco de Chile  25.81    25.81    7,197    8,253    1,858    2,130    289    389  

Redbanc S.A.

 Banco de Chile  38.13    38.13    4,401    4,969    1,678    1,895    159    241  

Sociedad Imerc OTC S.A.

 Banco de Chile  12.49    11.48    11,411    10,899    1,425    1,252    (18  (177

Centro de Compensación Automatizado S.A.

 Banco de Chile  33.33    33.33    1,982    2,615    661    871    125    220  

Soc. Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A.

 Banco de Chile  15.00    15.00    4,529    4,643    679    696    62    106  

Sociedad Interbancaria de Depósitos de Valores S.A.

 Banco de Chile  26.81    26.81    1,978    2,401    530    644    102    151  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

     46,467    79,102    10,147    18,656    1,461    2,282  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Joint Venture

         

Servipag Ltda.

 Banco de Chile  50.00    50.00    7,180    7,281    3,590    3,641    213    51  

Artikos Chile S.A

 Banco de Chile  50.00    50.00    1,341    1,491    670    746    106    153  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

     8,521    8,772    4,260    4,387    319    204  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
         
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

     54,988    87,874    14,407    23,043    1,780    2,486  
    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

12.13.Investments in Other Companies, continued:

 

 (b)The total carrying amount of the Bank’s associates is explained as follows:

 

  2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Associate’s statement of financial position

        

Current assets

   479,842     421,013     537,515     588,635  

Non-current assets

   62,753     71,580     64,904     74,361  
  

 

   

 

   

 

   

 

 

Total assets

   542,595     492,593     602,419     662,996  

Current liabilities

   493,287     441,916     550,023     578,659  

Non-current liabilities

   6,427     12,232     5,919     5,227  
  

 

   

 

   

 

   

 

 

Total liabilities

   499,714     454,148     555,942     583,886  

Equity

   42,881     38,445     46,467     79,102  

Minority interest

   10     8  
  

 

   

 

   

 

   

 

 

Total liabilities and equity

   542,595     492,593     602,419     662,996  

Associate’s revenue and profit

        

Revenue

   21,043     1,339  

Profit

   10,901     1  

Income before taxes

   7,279     8,759  

Net income for the year

   6,297     7,997  

Carrying amount of the investment

   13,196     11,674     14,407     23,043  

 

 (c)Joint Ventures:

The Bank has a 50% interest in Servipag Ltda. and a 50% interest in Artikos S.A., two jointly controlled entities. The Bank’s interest in both entities is accounted for using the equity method in the consolidated financial statements.

Below it presents summarized financial information of entities controlled jointly:

   Artikos S.A.   Servipag Ltda. 
   2013   2014   2013   2014 
   MCh$   MCh$   MCh$   MCh$ 

Current assets

   920     1,289     42,788     53,077  

Non-current assets

   734     689     16,256     16,227  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   1,654     1,978     59,044     69,304  
  

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   313     487     48,343     59,501  

Non-current liabilities

   —       —       3,521     2,522  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

   313     487     51,864     62,023  

Equity

   1,341     1,491     7,180     7,281  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

   1,654     1,978     59,044     69,304  
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

   2,486     2,660     35,371     37,140  

Operating expenses

   (2,270   (663   (34,042   (36,199

Other income (expenses)

   4     (1,727   (808   (781
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before tax

   220     270     521     160  

Income tax

   (8   36     (97   (59
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the year

   212     306     424     101  
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

13.Investments in Other Companies, continued:

(d)The reconciliation between opening and ending balance of investments in other companies that are not consolidated in 2010, 20112012, 2013 and 20122014 is detailed as follows:

 

  2012   2013   2014 
  2010
MCh$
 2011
MCh$
 2012
MCh$
   MCh$   MCh$   MCh$ 

Balance as of January 1,

   10,494    11,072    13,196     13,196     11,674     14,407  

Acquisitions (sales)

   4    —      71     71     1,440     6,608  

Participation in net income

   1,609    3,054    (468   (468   1,780     2,486  

Dividends received

   (984  (761  (943   (943   (956   (195

Other

   (51  (169  (182   (182   469     (263
  

 

  

 

  

 

   

 

   

 

   

 

 

Balance as of December 31,

   11,072    13,196    11,674     11,674     14,407     23,043  
  

 

  

 

  

 

   

 

   

 

   

 

 

 

 (d)(e)As of December 31, 20112013 and 2012,2014, no impairment has been incurred in these investments.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

13.14.Intangible Assets:

 

 (a)Changes in intangible assets during the 2010, 20112012, 2013 and 20122014 periods are as follows:

 

  Goodwill (1)
MCh$
   Intangible
assets arising
from business
combinations(2)
MCh$
 Software or
computer
programs
MCh$
 Total
MCh$
   Goodwill  (1)
MCh$
   Intangible
assets arising
from business
combinations(2)
MCh$
   Software or
computer
programs
MCh$
   Total
MCh$
 

Gross Balance

              

Balance as of January 1, 2010

   16,714     56,249    69,117    142,080  

Acquisitions

   —       —      15,326    15,326  

Disposals

   —       —      (15  (15
  

 

   

 

  

 

  

 

 

Balance as of December 31, 2010

   16,714     56,249    84,428    157,391  
  

 

   

 

  

 

  

 

 

Acquisitions

   —       —      9,597    9,597  

Disposals

   —       —      (1,903  (1,903
  

 

   

 

  

 

  

 

 

Balance as of December 31, 2011

   16,714     56,249    92,122    165,085  
  

 

   

 

  

 

  

 

 

Balance as of January 1, 2012

   16,714     56,249     92,122     165,085  

Acquisitions

   —       —      9,116    9,116     —       —       9,116     9,116  

Disposals

   —       —      (395  (395   —       —       (395   (395
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Balance as of December 31, 2012

   16,714     56,249    100,843    173,806     16,714     56,249     100,843     173,806  

Acquisitions

   —       —       5,511     5,511  

Disposals

   —       —       (1,344   (1,344
  

 

   

 

   

 

   

 

 

Balance as of December 31, 2013

   16,714     56,249     105,010     177,973  

Acquisitions

   —       —       5,382     5,382  

Disposals

   —       —       (504   (504

Reclasifications

   —       —       (20   (20
  

 

   

 

   

 

   

 

 

Balance as of December 31, 2014

   16,714     56,249     109,868     182,831  
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Accumulated Amortization and Impairment

              

Balance as of January 1, 2010

   —       (12,404  (41,494  (53,898

Amortization for the year

   —       (6,277  (8,753  (15,030

Impairment loss

   —       —      —      —    

Disposals

   —       —      —      —    
  

 

   

 

  

 

  

 

 

Balance as of December 31, 2010

   —       (18,681  (50,247  (68,928
  

 

   

 

  

 

  

 

 

Amortization for the year

   —       (6,274  (9,288  (15,562

Impairment loss

   —       —      (296  (296

Disposals

   —       —      727    727  
  

 

   

 

  

 

  

 

 

Balance as of December 31, 2011

   —       (24,955  (59,104  (84,059
  

 

   

 

  

 

  

 

 

Balance as of January 1, 2012

   —       (24,955   (59,104   (84,059

Amortization for the year

   —       (5,071  (9,461  (14,532   —       (5,071   (9,461   (14,532

Impairment loss

   —       —      —      —       —       —       —       —    

Disposals

   —       —      395    395     —       —       395     395  
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Balance as of December 31, 2012

   —       (30,026  (68,170  (98,196   —       (30,026   (68,170   (98,196

Amortization for the year

   —       (385   (8,012   (8,397

Impairment loss

   —       —       (28   (28

Disposals

   —       —       871     871  
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net balance as of December 31, 2010

   16,714     37,568    34,181    88,463  

Balance as of December 31, 2013

   —       (30,411   (75,339   (105,750

Amortization for the year

   —       (2,286   (8,352   (10,638

Impairment loss

   —       —       (120   (120

Disposals

   —       —       498     498  

Reclasifications

   —       —       38     38  
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net balance as of December 31, 2011

   16,714     31,294    33,018    81,026  

Balance as of December 31, 2014

   —       (32,697   (83,275   (115,972
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net balance as of December 31, 2012

   16,714     26,223    32,673    75,610     16,714     26,223     32,673     75,610  
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net balance as of December 31, 2013

   16,714     25,838     29,671     72,223  
  

 

   

 

   

 

   

 

 

Net balance as of December 31, 2014

   16,714     23,552     26,593     66,859  
  

 

   

 

   

 

   

 

 

 

(1)Goodwill corresponds mainly to business combination with Citibank Chile whose amount is of MCh$12,59512,576 that represents the value of synergies to be generated in the combination process and the acquisition of know-how.
(2)Intangible assets arising from business combinations include assets with indefinite useful lives acquired in the business combination with Citibank Chile (Brands).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

13.14.Intangible Assets, continued:

 

 (b)Impairment testing of Goodwill

For goodwill impairment purposes, testing is carried out at the level of business segments described above and in Note 45 to the financial statements. This methodology is in line with IAS 36, where business segments represent the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Accordingly, for impairment testing purposes, goodwill acquired through business combinations has been allocated to four individual business segments, as follows:

 

Business Segments

  2011
MCh$
   2012
MCh$
   2013
MCh$
   2014
MCh$
 

Retail

   5,928     5,928     5,928     5,928  

Wholesale

   2,135     2,135     2,135     2,135  

Treasury and money market operations

   4,512     4,512     4,512     4,512  

Subsidiaries

   4,139     4,139     4,139     4,139  
  

 

   

 

   

 

   

 

 

Total

   16,714     16,714     16,714     16,714  
  

 

   

 

   

 

   

 

 

Below are the key assumptions used for determining the value in use for impairment testing purposes:

 

The Bank determines the recoverable amount of its business segments on the basis of value in use and employs a discounted cash flows (“DCF”) valuation model. The DCF model reflects the characteristics of the banking business, the bank’s market position, competition and the regulatory environment. The model determines the present value of the estimated future earnings that are distributed to shareholders, once the respective regulatory capital requirements are met.

 

For purposes of the goodwill impairment testing, the DCF model uses earnings projections for a ten-year period that are discounted to their present value. Estimating future earnings requires judgment based on the bank’s past and current performance as well as expected developments in the industry, related markets and main macroeconomic variables.

A ten-year period is utilized as the Bank assumes that over that period it is possible to achieve the goals set in main macro-economic variables. the long-term business strategy.

Earnings projections beyondare derived from business growth, particularly associated with projected expansion rates for the ten-year periodeconomy, the industry’s loan book and the Bank’s strategic goals. Then, based on historical data and a linear regression analysis, the Bank determines a multiplier of loan expansion (real terms) over GDP growth for the local economy. This multiplier is approximately 1.8 times. For GDP growth forecasting, the Bank applies judgement based on publicly available information (Central Bank’ and market analysts’ projections), while limiting the GDP expansion rate at the potential growth rate for the local economy (4.5%) over the long-run. As for the loan growth/GDP multiplier, the Bank assumes a decline over time, since banking penetration is expected to increase in the long-run.

Following the estimation of growth rates for the economy and the banking industry, expansion rates of the Bank’s loan book are captured bydetermined considering the terminal value. Realachievement of the Bank’s strategic goals. Therefore, real growth rates are considered to be slightly higher than the industry rates within the ten-year period, assuming that a market share of 20% is achieved at year ten. Regarding discount rates,This market share is a long-term objective, which according to the Bank assessment should permit it to obtain economies of scale and ensure profitable growth.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

14.Intangible Assets, continued:

(b)Impairment testing of Goodwill, continued:

Earnings projections beyond the ten-year period are involved in the terminal value.

For purposes of business segments valuation, the DCF model used for business segments valuation considered discount rates of 10%, 11% and 12% as of December 31, 2012.2014. These discount rates have been determined by carrying out a regression analysis based on historical data of monthly stock returns for the Bank and the market; this is, by applying an index linear model, which is widely used in finance. After estimating the model parameters, the Bank applies the CAPM model in order to determine the cost of equity or discount rate, by assuming equilibrium scenarios for risk-free rates and inflation. Based on this analsys, the Bank determined a cost of equity of 11%, which is set as a baseline scenario for discount rates used for valuation purposes. In addition to this baseline scenario the Bank also carries out a sensitivity analysis by setting discounts rates of 10% and 12%.

 

The value in use of every business segment is sensitive to earnings projections, discount rates and, intoto a much lesser extent, the long-term growth rate. Discount rates have been determined based on the capital asset pricing model.rates. Variations in market factors may affect the discount rates calculation.

BasedThe annual goodwill impairment tests for the years ended December 31, 2013 and 2014 did not result in an impairment loss on the above,goodwill of the Bank’s business segments as their economic values were higher than their carrying amounts.

As of December 31, 20112013 and 2012,2014, the Bank did not determine that there was any impairment of goodwill.has made the following commitments to purchase intangible assets:

   Amount of Commitment 
   2013
MCh$
   2014
MCh$
 

Software and licences

   9,299     3,508  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

13.Intangible Assets, continued:

(c)As of December 31, 2011 and 2012, the Bank has made the following commitments to purchase intangible assets, which have not been capitalized:

   Amount of Commitment 
   2011
MCh$
   2012
MCh$
 

Software and licences

   6,639     6,681  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

14.15.Property and Equipment:

 

 (a)As of December 31, 20112013 and 2012,2014, this account and its changes are detailed as follows:

 

  Land  and
Buildings

MCh$
 Equipment
MCh$
 Other
MCh$
 Total
MCh$
   Land and
Buildings
MCh$
   Equipment
MCh$
   Other
MCh$
   Total
MCh$
 

(a.1) Cost

             

Balance as of January 1, 2011

   173,732    119,726    128,520    421,978  

Additions

   3,481    8,797    9,795    22,073  

Disposals/write-downs

   (947  (3,893  (846  (5,686

Transfers

   —      5    (5  —    
  

 

  

 

  

 

  

 

 

Accumulated depreciation (see (a.2))

   (32,329  (103,013  (94,800  (230,142

Impairment loss

   —      (3  (332  (335
  

 

  

 

  

 

  

 

 

Balance as of December 31, 2011

   143,937    21,619    42,332    207,888  
  

 

  

 

  

 

  

 

 

Balance as of January 1, 2012

   176,266    124,632    137,132    438,030  

Balance as of January 1, 2013

   176,152     132,026     144,637     452,815  

Additions

   337    7,750    9,894    17,981     62     7,509     4,678     12,249  

Disposals/write-downs

   (451  (1,512  (2,232  (4,195   (365   (1,406   (1,710   (3,481

Transfers

   —      —      —      —       —       (218   218     —    

Accumulated depreciation (see (a.2))

   (34,798  (109,930  (101,723  (246,451   (38,717   (116,081   (108,697   (263,495

Impairment loss

   —      (31  (164  (195

Impairment loss (*) (***)

   —       (84   (426   (510

Reclassifications

   —      —      19    19     —       —       —       —    
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Balance as of December 31, 2012

   141,354    20,909    42,926    205,189  

Balance as of December 31, 2013

   137,132     21,746     38,700     197,578  

Balance as of January 1, 2014

   175,849     137,827     147,397     461,073  

Additions

   —       22,776     8,737     31,513  

Disposals/write-downs

   (516   (7,807   (971   (9,294

Transfers

   —       485     (485   —    

Accumulated depreciation (see (a.2))

   (40,395   (119,842   (115,799   (276,036

Impairment loss (*) (***)

   —       (1,370   (283   (1,653

Reclassifications

   —       —       (200   (200
  

 

   

 

   

 

   

 

 

Balance as of December 31, 2014

   134,938     32,069     38,396     205,403  
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

(a.2) Accumulated Depreciation

             

Balance as of January 1, 2011

   (32,123  (98,464  (87,039  (217,626

Depreciation charges in the period

   (1,986  (8,439  (8,764  (19,189

Sales and disposals in the period

   1,780    3,890    1,003    6,673  

Balance as of January 1, 2013

   (35,972   (109,932   (101,722   (247,626

Transfers

   —      —      —      —       —       (19   19     —    

Depreciation charges in the period (*) (**)

   (2,873   (7,716   (8,310   (18,899

Sales and disposals in the year

   128     1,586     1,316     3,030  

Reclassifications

   —       —       —       —    
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Accumulated Depreciation as of December 31, 2011

   (32,329  (103,013  (94,800  (230,142

Accumulated Depreciation as of December 31, 2013

   (38,717   (116,081   (108,697   (263,495

Transfers

   —       (286   286     —    

Depreciation charges in the period (*) (**)

   (2,195   (11,283   (8,290   (21,768

Sales and disposals in the year

   517     7,808     902     9,227  

Reclassifications

   —       —       —       —    
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Reclassifications

   —      —      (19  (19

Depreciation charges in the period

   (2,920  (8,429  (8,884  (20,233

Sales and disposals in the period

   451    1,512    1,980    3,943  

Transfers

   —      —      —      —    

Accumulated Depreciation as of December 31, 2014

   (40,395   (119,842   (115,799   (276,036
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Accumulated Depreciation as of December 31, 2012

   (34,798  (109,930  (101,723  (246,451
  

 

  

 

  

 

  

 

 

(*)See Note No. 36 about Depreciation, Amortization and Impairment
(**)It does not include depreciation of the year of Investment Properties, which it registers under the item “Other assets” for an amount of MCh$381 (MCh$381 in 2013)
(***)It does not include charge-offs provision of Property and Equipment for an amount of MCh$312 (MCh$247 in 2013)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

14.15.Property and Equipment, continued:

 

 (b)As of December 31, 20112013 and 2012,2014, the Bank has operating lease agreements, in which it acts as lessee, that cannot be terminated unilaterally; Information on the future payments is detailed as follows:

 

  

Expenses for

the year

  Up to 1 month  Over 1 month
and up to
3 months
  Over 3 months
and up to
12 months
  

Over 1 year

and up to 3

years

  

Over 3 years

and up to 5

years

  Over 5 years  Total 
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
  2011
MCh$
  2012
MCh$
 

Lease agreements

  25,924    28,036    2,054    2,274    4,017    4,561    16,964    19,219    32,143    37,094    25,505    27,066    54,931    49,523    135,614    139,737  
  Expenses for
the year
  Up to 1 month  Over 1 month
and up to
3 months
  Over 3 months
and up to
12 months
  Over 1 year
and up to 3
years
  Over 3 years
and up to 5
years
  

Over 5 years
  

Total
 
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
  2013
MCh$
  2014
MCh$
 

Lease agreements

  28,876    29,588    2,320    2,520    4,633    4,992    19,833    21,264    37,497    40,375    26,517    29,612    48,815    46,479    139,615    145,242  

As these lease agreements are operating leases under IAS 17 the leased assets are not presented in the Bank’s statement of financial position.

The Bank has entered into commercial leases of real estate. These leases have an average life of 10 years. There are no restrictions placed upon the lessee by entering into the lease.

 

 (c)As of December 31, 20112013 and 2012,2014, the Bank does not have any finance lease agreements as lessee and, therefore, there are no property and equipment balances to be reported from such transactions as of December 31, 20112013 and 2012.2014.

(d)As of December 31, 2013 and 2014 the gross amount of fully depreciated assets (mainly equipment and facilities) corresponds to MCh$ 177,308 and MCh$186,014, respectively.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

15.16.Investment Properties:

 

  2010
MCh$
 2011
MCh$
 2012
MCh$
   2012
MCh$
   2013
MCh$
   2014
MCh$
 

Net Balance as of January 1,

   17,840    17,459    17,079     17,079     16,698     16,317  

Additions resulting from business combinations

   —      —      —       —       —       —    

Disposals

   —      —      —       —       —       —    

Depreciation charges in the period

   (381  (380  (381   (381   (381   (381

Impairment

   —      —      —       —       —       —    
  

 

  

 

  

 

   

 

   

 

   

 

 

Net Balance as of December 31,

   17,459    17,079    16,698     16,698     16,317     15,936  
  

 

  

 

  

 

   

 

   

 

   

 

 

Estimated useful lives applied by the Bank are presented in Note 2(o) on Property and equipment.

As of December 31, 2012,2014, the fair value of the investment properties held by the Bank is MCh$57,193 million60,457 (MCh$57,193 million57,222 as of December 31, 2011)2013).

In 2012,2014, the Bank earned income of MCh$5,198 million (Ch$5,034 million5,702 (MCh$5,245 in 2011)2013) renting out their investment properties. In the same period the Bank incurred corresponding expenses of MCh$2,5592,205 and MCh$2,4272,233 per year in 20112013 and 2012.2014.

 

16.17.Current Taxes and Deferred Taxes:

 

 (a)Current Tax:

As of each year end, the Bank and its subsidiaries have established a First Category Income Tax Provision of MCh$3,0957,131 and MCh$23,18919,030 as of December 31, 20112013 and 2012,2014, determined in accordance with current tax laws. The net tax to be paid or recovered is detailed as follows:

 

   2011
MCh$
  2012
MCh$
 

Income taxes, 20% rate

   64,590    61,876  

Tax from previous periods

   —      —    

Tax on non-deductible expenses (tax rate 35%)

   1,701    3,860  

Less:

   

Monthly prepaid taxes (PPM)

   (62,225  (41,960

Credit for training expenses

   (742  (1,545

Other

   (229  958  
  

 

 

  

 

 

 

Total(1)

   3,095    23,189  
  

 

 

  

 

 

 

(1)Negative amount represent a tax recovery and a positive amount represent a tax payable.
   2013
MCh$
   2014
MCh$
 

Income taxes

   85,336     106,550  

First category tax

   23     —    

Tax on non-deductible expenses (tax rate 35%)

   1,885     1,802  

Less:

    

Monthly prepaid taxes (PPM)

   (73,694   (83,050

Credit for training expenses

   (1,714   (1,818

Real estate tax

   (1,106   (1,597

Other

   (3,599   (2,857
  

 

 

   

 

 

 

Total

   7,131     19,030  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

16.17.Current Taxes and Deferred Taxes, continued:

 

 (b)Income Tax:

The Bank’s tax expense recorded for the years ended December 31, 2010, 20112012, 2013 and 20122014 is detailed as follows:

 

  2010
MCh$
 2011
MCh$
 2012
MCh$
   2012
MCh$
 2013
MCh$
 2014
MCh$
 

Income tax expense:

        

Current year taxes

   (54,112  (64,590  (61,876   (61,876  (88,714  (100,302

Tax from previous periods

   1,723    1,203    1,147  

Tax from previous period

   1,147    433    (13,596
  

 

  

 

  

 

 

Subtotal

   (52,389  (63,387  (60,729   (60,729  (88,281  (113,898
  

 

  

 

  

 

 

Credit (charge) for deferred taxes:

        

Origin and reversal of temporary differences

   5,443    5,433    (7,034   (7,034  3,231    28,477  

Effect of changes in tax rate

   2,263    (5,042  9,029     9,029    —      12,284  

Change in unrecognized temporary differences

   —      —      —    
  

 

  

 

  

 

   

 

  

 

  

 

 

Subtotal

   7,706    391    (1,995   1,995    3,231    40,761  
  

 

  

 

  

 

   

 

  

 

  

 

 

Non deductible expenses (Art. 21 Income Tax Law)

   (1,835  (1,701  (3,860   (3,860  (1,885  (1,802

Other

   5    (745  (894   (1,334  (2,150  (4,746
  

 

  

 

  

 

   

 

  

 

  

 

 

Net charge to income for income taxes

   (46,513  (65,442  (63,488   (63,928  (89,085  (79,685
  

 

  

 

  

 

   

 

  

 

  

 

 

Tax rate

   17.00  20.00  20.00

Tax Rate

   20.00  20.00  21.00

 

 (c)Reconciliation of effective tax rate:

The following table reconciles the income tax rate to the effective rate applied to determine the Bank’s income tax expense as of December 31, 2010, 20112012, 2013 and 2012:2014:

 

   2011  2011  2012 
   Tax rate
%
  MCh$  Tax rate
%
  MCh$  Tax rate
%
  MCh$ 

Income tax calculated on net income before tax

   17.00    78,902    20.00    100,726    20.00    108,322  

Additions or deductions1

   (5.73  (26,602  (7.33  (36,929  (6.75  (37,056

Non-deductible expenses tax

   0.40    1,835    0.34    1,701    0.70    3,860  

Tax from previous years

   (0.37  (1,723  (0.24  (1,203  (0.21  (1,147

Effect of changes in tax rate (*)

   (0.49  (2,263  1.00    5,042    (1.64  (9,029

Lease deferred tax adjustment

   —      —      —      —      0.54    2,942  

Other(1)

   (0.78  (3,636  (0.77  (3,895  (0.80  (4,404
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effective rate and income tax expense

   10.03    46,513    13.00    65,442    11.84    63,488  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*)According to the Law No. 20,630 issued on September 27th, 2012 the tax rates for the first category are permanently changed to 20.00%.
   2012  2013  2014 
   Tax rate
%
  MCh$  Tax rate
%
  MCh$  Tax rate
%
  MCh$ 

Income tax calculated on net income before tax

   20.00    108,762    20.00    127,856    21.00    141,793  

Additions or deductions(1)

   (6.81  (37,056  (6.36  (40,653  (9.58  (64,673

Non-deductible expenses tax

   0.71    3,860    0.29    1,885    0.27    1,802  

Tax from previous years

   (0.21  (1,147  (0.07  (432  2.01    13,596  

Effect of changes in tax rate

   (1.66  (9,029  —      —      (1.82  (12,284

Other

   (0.28  (1,462  0.07    429    (0.08  (549
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effective rate and income tax expense

   11.75    63,928    13.93    89,085    11.80    79,685  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

1(1) 

The deductions of the tax rate for 2010, 20112012, 2013 and 20122014 mainly relate to specific adjustments from tax-exempt distribution of income to SAOS of 34.64% in 2010, 32.89% in 2011 and 31.81% in 2012, 30.69% in 2013 and 30.21% in 2014 of the Bank’s profits as well as adjustments relating to its subsidiaries.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

16.17.Current Taxes and Deferred Taxes, continued:

(c)Reconciliation of effective tax rate, continued:

On September 29, 2014, Law 20,780 was issued and published in the Diario Oficial amending the Taxation System of Income and introducing various adjustments in the tax system. The third paragraph of Article 14 of the new law indicates that companies that do not exercise the option of regime change that by default corresponds to the semi-integrated, must modify transiently the first category tax rate according to the following intervals:

Year

  Rate 

2014

   21.0

2015

   22.5

2016

   24.0

2017

   25.5

2018

   27.0

The effect on income by deferred taxes produced by the tax rate change was a credit in income for an amount of Ch$12,284 million.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

17.Current Taxes and Deferred Taxes, continued:

 

 (d)Effect of deferred taxes on income and equity:

During 2011, the Bank has recorded the effects of deferred taxes in accordance with IAS 12.

The effects of deferred taxes on assets, liabilities and income accounts are detailed as follows:

 

 Balance as of
December 31,
2009

MCh$
  Effect Unrecognized
temporary
differences

MCh$
  Balance as of
December 31,
2010

MCh$
  Effect Balance as of
December 31,
2011

MCh$
  Effect Unrecognized
temporary
differences

MCh$
  Balance as of
December 31,
2012

MCh$
  Balance as of
December 31,
2011

MCh$
  Effect Balance as of
December 31,
2012

MCh$
  Effect Balance as of
December 31,
2013

MCh$
  Effect Balance as of
December 31,
2014

MCh$
 
 Income
MCh$
  Equity
MCh$
  Income
MCh$
  Equity
MCh$
  Income
MCh$
  Equity
MCh$
   Income
MCh$
  Equity
MCh$
  Income
MCh$
  Equity
MCh$
  Income
MCh$
  Equity
MCh$
  
 Unrecognized
temporary
differences

MCh$
  Balance as of
December 31,
2011

MCh$
  Balance as of
December 31,
2013

MCh$
 

Debit Differences:

       

Debit differences:

       

Allowances for loan losses

  56,568    6,735    —      —      63,303    (2,565  —      60,738    14,581    —      —      75,319    60,738    14,581    —      75,319    5,012    —      80,331    20,403    —      100,734  

Obligations with agreements to repurchase

  (1,093  853    —      —      (240  997    —      757    (1,736  —      —      (979  757    (1,736  —      (979  216    —      (763  (205  —      (968

Leasing equipment

  5,976    2,918    —      —      8,894    3,426    —      12,320    (16,038  —      —      (3,718

Personnel provisions

  3,289    1,392    —      —      4,681    532    —      5,213    1,162    —      —      6,375    5,213    1,162    —      6,375    (345  —      6,030    3,567    —      9,597  

Staff vacations

  2,851    745    —      —      3,596    41    —      3,637    421    —      —      4,058    3,637    421    —      4,058    321    —      4,379    1,110    —      5,489  

Accrued interests and indexation adjustments from past due loans

  1,117    349    —      —      1,466    107    —      1,573    550    —      —      2,123  

Staff severance indemnities provisions

  1,069    49    —      —      1,118    61    —      1,179    665    —      —      1,844  

Accrued interest and indexation adjustments from past due loans

  1,573    550    —      2,123    290    —      2,413    1,325    —      3,738  

Staff severance indemnities provision

  1,179    665    —      1,844    (22  33    1,855    386    103    2,344  

Provisions of credit card expenses

  4,326    368    —      4,694    1,799    —      6,493    4,144    —      10,637  

Provisions of accrued expenses

  4,686    2,696    —      7,382    349    —      7,731    3,735    —      11,466  

Other adjustments

  2,326    6,726    —      53    9,105    (4,447  —      4,658    2,594    —      119    7,371    (4,354  (351  —      (4,705  4,268    —      (437  4,446    —      4,009  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total debit differences

  72,103    19,767    —      53    91,923    (1,848  —      90,075    2,199    —      119    92,393    77,755    18,356    —      96,111    11,888    33    108,032    38,911    103    147,046  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Credit Differences:

            

Investments with agreements to repurchase

  —      872    —      —      872    1,239    —      2,111    (1,986  —      —      125  

Credit differences:

          

Investments with agreement to repurchase

  2,111    (1,986  —      125    —      —      125    —      —      125  

Depreciation of property and equipment and investment properties

  16,220    (590  —      —      15,630    (1,434  —      14,196    1,227    —      —      15,423    14,196    1,227    —      15,423    (987  —      14,436    (132  —      14,304  

Deferred taxes, modification of accounting method in equity

  456    (456  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Adjustment for valuation financial assets available-for-sale

  1,331    —      162    —      1,493    —      (1,866  (373  —      5,994    —      5,621    (373  —      5,994    5,621    —      2,644    8,265    —      3,045    11,310  

Hedged cash adjustment

  —      —      —      —      —      —      (90  (90  —      349    —      259  

Hedge cash adjustment

  (90  —      349    259    —      —      259    —      —      259  

Leasing equipment

  (12,320  16,038    —      3,718    3,688    —      7,406    (5,508  —      1,898  

Transitory assets

  1,835    (166  —      —      1,669    1,011    —      2,680    924    —      —      3,604    2,680    924    —      3,604    290    —      3,894    (261  —      3,633  

Derivative instruments adjustments

  (11,266  12,585    —      —      1,319    (1,614  —      (295  (1,505  —      —      (1,800  (295  (1,505  —      (1,800  4,248    —      2,448    3,535    —      5,983  

Assets received in lieu of payments

  506    697    —      —      1,203    (495  —      708    578    —      —      1,286    708    578    —      1,286    —      —      1,286    (2,720  —      (1,434

Accrued interest effective rate

  —      —      —      —      —      1,058    —      1,058    (17  —      —      1,041  

Accrued interest to effective rate

  1,058    (17  —      1,041    —      —      1,041    1,262    —      2,303  

Intangible assets amortization

  7,433    (917  —      —      6,516    71    —      6,587    (961  —      —      5,626    6,587    (961  —      5,626    248    —      5,874    1,267    —      7,141  

Other adjustments

  5,855    36    —      (348  5,543    (2,075  —      3,468    1,944    —      (5  5,407    3,468    1,939    —      5,407    1,170    —      6,577    707    —      7,284  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total credit differences

  22,370    12,061    162    (348  34,245    (2,239  (1,956  30,050    204    6,343    (5  36,592    17,730    16,237    6,343    40,310    8,657    2,644    51,611    (1,850  3,045    52,806  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Deferred tax assets, net

  49,733    7,706    (162  401    57,678    391    1,956    60,025    1,995    (6,343  124    55,801  

Total Assets (Liabilities) net

  60,025    2,119    (6,343  55,801    3,231    (2,611  56,421    40,761    (2,942  94,240  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

17.18.Other Assets:

As of December 31, 20112013 and 2012,2014, other assets are detailed as follows:

 

  2011
MCh$
 2012
MCh$
   2013
MCh$
   2014
MCh$
 

Mutual funds

   66,213     255,013  

Cash deposit guarantee

   60,309     143,379  

Documents intermediated(*)

   77,613    89,800     74,366     23,049  

Assets held for leasing(**)

   74,185    74,986     74,723     87,100  

Mutual funds

   31,910    33,042  

Cash deposit guarantee

   35,051    25,984  

Other accounts and notes receivable

   9,851    20,001     8,682     13,715  

Assets received or awarded as payment:

   

Assets received or awarded as payment(***):

    

Assets received in lieu of payment

   15,554    16,391     19,032     6,477  

Provisions for assets received in lieu of payment

   (1,118  (40   (46   (583

Transactions in progress(***)

   1,340    8,676  

Commissions receivable

   4,193    6,392  

Recoverable income taxes

   5,373    6,280     6,048     8,356  

Prepaid expenses

   5,445    4,156     6,589     6,240  

Commissions receivable

   7,784     4,931  

Transactions in progress(****)

   1,803     2,733  

Rental guarantees

   1,344    1,386     1,456     1,617  

Accounts receivable for sale of assets received in lieu of payment

   1,286     769  

Recovered leased assets for sale

   203    777     5,463     692  

Accounts receivable for sale of assets received in lieu of payment

   530    423  

Pending transactions(****)

   3,532    114  

Other

   14,798    29,397     40,279     33,067  
  

 

  

 

   

 

   

 

 

Total

   279,804    317,765     373,987     586,555  
  

 

  

 

   

 

   

 

 

 

(*)Documents intermediated refers to securities lending agreements managed by the Bank’s subsidiary Banchile Corredores de Bolsa S.A.
(**)These correspond to property and equipment to be given under a finance lease.
(***)Assets received in lieu of payment are valued at fair value, which is calculated considering the lesser between appraised value and value of award, less cost of sell.
(****)Transactions in progress includes transactions in the normal course of operations of the Bank, which for different reasons could not be input into their final accounts (salary advances for personnel, pending transactions cash, etc.)
(****)Pending transactions refers to current account balances between Bank branches and the head office or among Bank branches.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

18.19.Current Accounts and Other Demand Deposits:

As of December 31, 20112013 and 2012,2014, current accounts and other demand deposits are detailed as follows:

 

  2011
MCh$
   2012
MCh$
   2013
MCh$
   2014
MCh$
 

Current accounts

   3,968,504     4,495,134     5,018,155     5,786,805  

Other demand deposits

   616,395     599,320     593,444     680,791  

Other demand deposits and accounts

   310,527     376,517     372,733     466,777  
  

 

   

 

   

 

   

 

 

Total

   4,895,426     5,470,971     5,984,332     6,934,373  
  

 

   

 

   

 

   

 

 

 

19.20.Saving Accounts and Time Deposits:

As of December 31, 20112013 and 2012,2014, saving accounts and time deposits are detailed as follows:

 

   2011
MCh$
   2012
MCh$
 

Time deposits

   9,081,335     9,370,063  

Term saving accounts

   177,900     179,465  

Other term balances payable

   23,089     63,422  
  

 

 

   

 

 

 

Total

   9,282,324     9,612,950  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

20.Borrowings from Financial Institutions:

As of December 31, 2011 and 2012, borrowings from financial institutions are detailed as follows:

   2011
MCh$
   2012
MCh$
 

Domestic banks

    

Interbank loans

   —       —    

Current account overdrafts

   —       —    
  

 

 

   

 

 

 

Subtotal

   —       —    
  

 

 

   

 

 

 

Foreign banks

    

Foreign trade financing

    

Chilean export financing

   1,444,826     882,920  

Chilean import financing

   23,970     28,906  

Borrowings and other obligations

    

Short-term borrowings

   —       —    

Current account overdrafts

   4,252     28,328  

Long-term borrowings

   195,036     168,509  
  

 

 

   

 

 

 

Subtotal

   1,668,084     1,108,663  
  

 

 

   

 

 

 

Chilean Central Bank

    

Borrowings and other obligations

   —       —    

Debt reprogramming credit lines

   22,855     18  
  

 

 

   

 

 

 

Subtotal

   22,855     18  
  

 

 

   

 

 

 

Total

   1,690,939     1,108,681  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

21.Debt Issued:

As of December 31, 2011 and 2012, Debt issued is detailed as follows:

   2011
MCh$
   2012
MCh$
 

Mortgage bonds

   152,098     115,196  

Bonds

   1,488,369     2,412,233  

Subordinated bonds

   747,874     746,504  
  

 

 

   

 

 

 

Total

   2,388,341     3,273,933  
  

 

 

   

 

 

 
   2013
MCh$
   2014
MCh$
 

Time deposits

   10,151,612     9,450,224  

Term savings accounts

   178,012     188,311  

Other term balances payable

   73,101     82,711  
  

 

 

   

 

 

 

Total

   10,402,725     9,721,246  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

21.Debt Issued, continued:Borrowings from Financial Institutions:

During the period ended asAs of December 31, 2012, Banco de Chile issued bonds in an amount of MCh$1,233,985, including Unsubordinated bonds, commercial papers2013 and Subordinated bonds in amounts of MCh$691,380, MCh$516,428 and MCh$26,177, respectively, according to the following details:

Bonds2014, borrowings from financial institutions are detailed as follows:

 

Series

  MCh$   Term  Interest
rate
   Currency  Issue date  Maturity
date

BCHIUO0911

   89,896    10 years   3.40    UF  02/15/2012  02/15/2022

BCHIUD0510

   14,109    6 years   2.20    UF  02/16/2012  02/16/2018

BCHIUI0611

   1,338    7 years   3.20    UF  03/05/2012  03/05/2019

BCHIUI0611

   3,352    7 years   3.20    UF  03/07/2012  03/07/2019

BCHIUI0611

   1,116    7 years   3.20    UF  03/23/2012  03/23/2019

BCHIUP1211

   88,345    10 years   3.40    UF  04/04/2012  04/04/2022

BCHIUI0611

   2,236    7 years   3.20    UF  04/17/2012  04/17/2019

BCHIUQ1011

   27,343    11 years   3.40    UF  05/08/2012  05/08/2023

BCHIUQ1011

   48,568    11 years   3.40    UF  05/11/2012  05/11/2023

BCHIUQ1011

   12,449    11 years   3.40    UF  06/04/2012  06/04/2023

BCHIUS0212

   46,428    11 years   3.40    UF  06/04/2012  06/04/2023

BCHIUS0212

   20,552    11 years   3.40    UF  06/07/2012  06/07/2023

BCHIUT0112

   66,850    12 years   3.40    UF  06/12/2012  06/12/2024

BCHIUR1011

   33,295    12 years   3.40    UF  06/20/2012  06/20/2024

BCHIUR1011

   4,450    12 years   3.40    UF  07/30/2012  07/30/2024

BCHIUR1011

   13,469    12 years   3.40    UF  09/14/2012  09/14/2024

BCHIUR1011

   1,799    12 years   3.40    UF  09/24/2012  09/24/2024

BCHIUR1011

   5,284    12 years   3.40    UF  09/25/2012  09/25/2024

BCHIUJ0811

   1,334    8 years   3.20    UF  05/10/2012  05/10/2020

BCHIUJ0811

   33,456    8 years   3.20    UF  10/10/2012  10/10/2020

BCHIUV1211

   67,842    13 years   3.50    UF  10/10/2012  10/10/2025

BCHIUJ0811

   1,566    8 years   3.20    UF  10/19/2012  10/19/2020

BCHIUJ0811

   2,241    8 years   3.20    UF  10/22/2012  10/22/2020

BCHIAC1011

   11,118    15 years   3.50    UF  10/22/2012  10/22/2027

BONO HKD (*)

   24,487    15 years   4.00    HKD  09/05/2012  09/05/2027

BONO HKD (*)

   54,374    15 years   4.00    HKD  11/07/2012  09/09/2027

BONO PEN (**)

   14,083    5 years   4.04    PEN  10/30/2012  10/30/2017
  

 

 

           

Total as of December 31, 2012

   691,380            
  

 

 

           

(*)On August 9, 2012, the Bank approved in Board Meeting No. 2,759 a bond issue program in Hong Kong, in accordance with Regulation S of the SEC (Securities and Exchange Commission) for an amount of US$60,000,000 to be placed in international markets, of which on September 5, 2012 an amount of 400,000,000 Hong Kong dollars was issued and placed.

On October 25, 2012, the Bank approved in Board Meeting No. 2,764 a complementary program of bonds in accordance with Regulation S of the SEC for an amount of US$130,000,000 to be placed in international markets, of which on November 7, 2012 an amount of 875,000,000 Hong Kong dollars was issued and placed.

(**)On October 11, 2012, the Bank approved in Board Meeting No. 2,763 a program issue of bonds in accordance with Regulation S of the SEC for up to US$100,000,000, of which PEN 75,000,000, or US$28,000,000, was issued and placed on October 30, 2012.
   2013
MCh$
   2014
MCh$
 

Domestic banks

    

Interbank loans

   —       —    

Current account overdrafts

   —       —    
  

 

 

   

 

 

 

Subtotal

   —       —    
  

 

 

   

 

 

 

Foreign banks

    

Foreign trade financing

    

Chilean export financing

   685,255     996,092  

Chilean import financing

   22,784     24,074  

Obligations for transactions between other countries

   94,327     48,037  

Borrowings and other obligations

    

Short-term borrowings

   —       —    

Current account overdrafts

   55,440     15,339  

Long-term borrowings

   131,649     15,165  
  

 

 

   

 

 

 

Subtotal

   989,455     1,098,707  
  

 

 

   

 

 

 

Chilean Central Bank

    

Borrowings and other obligations

   —       —    

Debt reprogramming credit lines

   10     9  
  

 

 

   

 

 

 

Subtotal

   10     9  
  

 

 

   

 

 

 

Total

   989,465     1,098,716  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

21.22.Debt Issued, continued:Issued:

As of December 31, 2013 and 2014, Debt issued is detailed as follows:

On May 4, 2012,

   2013
MCh$
   2014
MCh$
 

Mortgage bonds

   86,491     64,314  

Bonds

   3,533,462     4,223,047  

Subordinated bonds

   747,007     770,595  
  

 

 

   

 

 

 

Total

   4,366,960     5,057,956  
  

 

 

   

 

 

 

During the Bank began issuingperiod ended as of December 31, 2014, Banco de Chile issued bonds denominated “Commercial Paper”,by an amount of MCh$1,826,552, of which are financial instrumentscorresponds to Unsubordinated bonds, commercial papers by an amount of Money Market that the Bank will issue in the U.S. marketMCh$736,212 and MCh$1,090,340 respectively, according to different maturities, but these terms will be not greater than 365 days. The total issuance was MCh$516,428, accordingly with the following detail:details:

Bonds

 

Counterparty

  MCh$   Interest rate  Currency  Issue date  Maturity date

Citibank

   120    0.67  USD  05/04/2012  05/07/2012

Citibank

   120    0.67  USD  05/04/2012  05/07/2012

Citibank

   19,179    0.67  USD  05/07/2012  08/06/2012

Citibank

   14,384    0.67  USD  05/08/2012  08/06/2012

Goldman Sachs

   23,974    0.67  USD  05/08/2012  08/08/2012

Marryl Lynch

   14,384    0.67  USD  05/08/2012  08/06/2012

Marryl Lynch

   9,589    0.67  USD  05/08/2012  08/06/2012

Marryl Lynch

   4,795    0.67  USD  05/08/2012  08/06/2012

Marryl Lynch

   9,589    0.75  USD  05/24/2012  09/06/2012

Goldman Sachs

   19,179    0.67  USD  05/25/2012  08/23/2012

Merryl Lynch

   9,589    0.68  USD  05/30/2012  08/28/2012

JP morgan

   23,974    0.68  USD  05/30/2012  08/28/2012

Merryl Lynch

   8,630    0.66  USD  06/28/2012  09/25/2012

Wells Fargo

   8,630    0.66  USD  06/28/2012  09/25/2012

Citibank

   8,630    0.66  USD  06/28/2012  09/25/2012

JP morgan

   8,630    0.66  USD  06/28/2012  09/25/2012

Goldman Sachs

   8,630    0.66  USD  06/28/2012  09/25/2012

Wells Fargo

   7,192    1.27  USD  07/17/2012  07/11/2013

Wells Fargo

   9,589    0.57  USD  08/06/2012  10/31/2012

Merryl Lynch

   9,589    0.57  USD  08/06/2012  10/31/2012

Citibank

   9,589    0.57  USD  08/06/2012  10/31/2012

Citibank

   9,589    0.62  USD  08/06/2012  11/27/2012

JPMorgan

   9,589    0.57  USD  08/06/2012  10/31/2012

Morgan Stanley

   9,589    0.57  USD  08/06/2012  10/31/2012

Wells Fargo

   21,576    0.59  USD  08/13/2012  11/27/2012

Wells Fargo

   2,397    0.55  USD  09/26/2012  03/15/2013

Citibank

   16,781    0.41  USD  09/27/2012  01/15/2013

Citibank

   7,624    0.37  USD  10/05/2012  01/15/2013

Merryl Lynch

   14,384    0.33  USD  10/24/2012  01/22/2013

Citibank

   4,795    0.78  USD  10/25/2012  07/25/2013

JP morgan

   9,589    0.27  USD  10/26/2012  12/13/2012

Merryl Lynch

   9,589    0.27  USD  10/26/2012  12/13/2012

Wells Fargo

   9,589    0.27  USD  10/26/2012  12/13/2012

Wells Fargo

   9,589    0.27  USD  10/26/2012  12/13/2012

Goldman Sachs

   9,589    0.27  USD  10/26/2012  12/13/2012

Citibank

   9,589    0.40  USD  10/31/2012  02/14/2013

Goldman Sachs

   9,589    0.40  USD  10/31/2012  02/14/2013

JP morgan

   9,589    0.40  USD  10/31/2012  02/14/2013

Citibank

   2,328    0.25  USD  11/14/2012  01/14/2013

Wells Fargo

   23,974    0.35  USD  11/15/2012  02/14/2013

Goldman Sachs

   4,795    0.35  USD  11/26/2012  02/25/2013

Series

  MCh$   Term
(years)
  Interest
rate %
   Currency  Issued date   Maturity
date
 

BCHIAJ0413

   72,444    7   3.40    UF   01/27/2014     01/27/2021  

BCHIAH0513

   47,861    5   3.40    UF   01/27/2014     01/27/2019  

BCHIAL0213

   96,796    8   3.60    UF   02/10/2014     02/10/2022  

BONO CHF

   95,198    2   3M Libor + 0.75    CHF   02/28/2014     02/28/2016  

BONO CHF

   79,332    5   1.25    CHF   02/28/2014     02/28/2019  

BONO JPY

   11,226    5   0.98    JPY   03/18/2014     03/18/2019  

BCHIUN1011

   7,314    7   3.20    UF   04/16/2014     04/16/2021  

BONO HKD

   43,044    6   3.08    HKD   04/16/2014     04/16/2020  

BCHIUN1011

   12,224    7   3.20    UF   04/22/2014     04/22/2021  

BCHIAA0212

   49,986    14   3.50    UF   04/29/2014     04/29/2028  

BONO JPY

   27,383    8   1.01    JPY   04/29/2014     04/29/2022  

BCHIAA0212

   26,110    14   3.50    UF   07/22/2014     07/22/2028  

BCHIAY0213

   79,979    14   3.60    UF   07/31/2014     07/31/2028  

BONO JPY

   28,133    6   0.55    JPY   08/06/2014     08/06/2020  

BCHIAI0213

   50,481    6   3.40    UF   08/12/2014     08/12/2020  

BCHIAI0213

   2,813    6   3.40    UF   09/15/2014     09/15/2020  

BCHIAI0213

   1,022    6   3.40    UF   09/16/2014     09/16/2020  

BCHIAI0213

   1,664    6   3.40    UF   09/24/2014     09/24/2020  

BCHIAI0213

   3,202    6   3.40    UF   10/02/2014     10/02/2020  
  

 

 

           

Total as of December, 2014

   736,212            
  

 

 

           

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

21.22.Debt Issued, continued:

 

Counterparty  MCh$   Interest rate  Currency  Issue date  Maturity date

Merryl Lynch

   9,589    0.38  USD  11/27/2012  03/07/2013

Citibank

   2,397    0.38  USD  11/27/2012  03/07/2013

Citibank

   24,609    0.35  USD  12/03/2012  02/25/2013

Wells Fargo

   2,397    0.86  USD  12/03/2012  11/25/2013

Goldman Sachs

   28,777    0.42  USD  12/13/2012  03/15/2013

Citibank

   9,350    0.40  USD  12/13/2012  03/15/2013

Wells Fargo

   2,397    0.51  USD  12/17/2012  06/13/2013

Wells Fargo

   2,397    0.60  USD  12/19/2012  08/29/2013

Citibank

   2,397    0.20  USD  12/21/2012  02/20/2013
  

 

 

         

Total as of December 31, 2012

   516,428          

Subordinated BondsCommercial Papers

 

Series

  MCh$   Term  Interest
rate
  Currency  Issue date  Maturity
date

UCHI-G1111

   13,191    25 years  3.75  UF  07/30/2012  07/30/2037

UCHI-G1111

   1,099    25 years  3.75  UF  07/31/2012  07/31/2037

UCHI-G1111

   1,782    25 years  3.75  UF  08/31/2012  08/31/2037

UCHI-G1111

   10,105    25 years  3.75  UF  12/28/2012  12/28/2037
  

 

 

           

Total

   26,177            
  

 

 

           

Counterparty

  MCh$   Interest rate %  Currency  Issued date   Maturity date 

Citibank N.A.

   10,888    0.30  USD   01/21/2014     04/22/2014  

Goldman Sachs

   27,220    0.30  USD   01/21/2014     04/22/2014  

Merrill Lynch

   10,888    0.30  USD   01/21/2014     04/22/2014  

Citibank N.A.

   2,712    0.30  USD   01/22/2014     05/14/2014  

Wells Fargo Bank

   13,558    0.30  USD   01/22/2014     05/14/2014  

Wells Fargo Bank

   27,117    0.30  USD   01/22/2014     05/14/2014  

JP Morgan Chase

   22,384    0.30  USD   02/05/2014     05/06/2014  

Citibank N.A.

   11,192    0.30  USD   02/05/2014     05/06/2014  

Merrill Lynch

   11,192    0.30  USD   02/05/2014     05/06/2014  

Goldman Sachs

   11,192    0.30  USD   02/05/2014     05/06/2014  

Wells Fargo Bank

   3,910    0.50  USD   03/06/2014     03/06/2015  

Wells Fargo Bank

   55,121    0.25  USD   05/14/2014     08/12/2014  

Goldman Sachs

   11,024    0.23  USD   05/28/2014     09/02/2014  

Merrill Lynch

   11,024    0.23  USD   05/28/2014     09/02/2014  

Wells Fargo Bank

   27,453    0.27  USD   05/29/2014     09/03/2014  

JP Morgan Chase

   54,984    0.30  USD   05/30/2014     09/03/2014  

Wells Fargo Bank

   21,994    0.38  USD   05/30/2014     09/26/2014  

JP Morgan Chase

   27,658    0.29  USD   06/04/2014     09/10/2014  

Merrill Lynch

   13,829    0.50  USD   06/04/2014     03/06/2015  

JP Morgan Chase

   27,710    0.31  USD   06/10/2014     09/15/2014  

JP Morgan Chase

   3,329    0.65  USD   06/11/2014     06/10/2015  

Merrill Lynch

   5,526    0.50  USD   06/23/2014     03/20/2015  

Wells Fargo Bank

   11,067    0.30  USD   07/08/2014     10/08/2014  

Goldman Sachs

   27,669    0.30  USD   07/08/2014     10/08/2014  

JP Morgan Chase

   55,337    0.30  USD   07/08/2014     09/26/2014  

JP Morgan Chase

   33,263    0.52  USD   07/11/2014     04/06/2015  

Wells Fargo Bank

   17,284    0.28  USD   08/12/2014     11/12/2014  

Wells Fargo Bank

   15,556    0.64  USD   08/12/2014     08/06/2015  

Wells Fargo Bank

   20,155    0.30  USD   08/13/2014     12/11/2014  

JP Morgan Chase

   58,860    0.31  USD   09/03/2014     12/03/2014  

Wells Fargo Bank

   52,974    0.35  USD   09/03/2014     01/12/2015  

JP Morgan Chase

   29,529    0.31  USD   09/10/2014     12/09/2014  

JP Morgan Chase

   29,812    0.31  USD   09/15/2014     12/15/2014  

JP Morgan Chase

   59,860    0.31  USD   09/26/2014     12/23/2014  

Wells Fargo Bank

   23,944    0.31  USD   09/26/2014     12/29/2014  

Goldman Sachs

   29,650    0.31  USD   10/08/2014     01/09/2015  

Wells Fargo Bank

   11,860    0.31  USD   10/08/2014     01/09/2015  

Wells Fargo Bank

   17,815    0.32  USD   11/12/2014     02/10/2015  

JP Morgan Chase

   47,664    0.35  USD   12/03/2014     03/03/2015  

JP Morgan Chase

   13,366    0.58  USD   12/03/2014     08/28/2015  

JP Morgan Chase

   30,690    0.35  USD   12/09/2014     03/09/2015  

JP Morgan Chase

   35,928    0.35  USD   12/15/2014     03/16/2015  

Wells Fargo Bank

   16,693    0.40  USD   12/15/2014     04/13/2015  

Wells Fargo Bank

   15,177    0.58  USD   12/29/2014     08/26/2016  

Wells Fargo Bank

   24,282    0.33  USD   12/29/2014     03/30/2015  
  

 

 

         

Total as of December, 2014

   1,090,340          
  

 

 

         

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

21.22.Debt Issued, continued:

 

Subordinated Bonds

As of December 31, 2014 the Bank has no issued subordinated bonds.

During the yearperiod ended as of December 31, 2011,2013, Banco de Chile issued bonds byin an amount of Ch$749,586 million,MCh$1,607,265, of which correspondcorresponds to unsubordinated bond.Bonds, Commercial Papers and Subordinated bonds in amounts of MCh$1,093,749, MCh$509,920 and MCh$3,596, respectively, according to the following details:

Bonds

 

Series

  MCh$   

Term

  Interest
rate
   

Currency

  Issue date  Maturity
date

BCHIUE0510

   82,639    6 years   2.20    UF  05/20/2011  05/20/2017

BCHIUG0610

   81,802    11 years   2.70    UF  05/27/2011  05/27/2022

BCHIUC0510

   37,866    5 years   2.20    UF  07/07/2011  07/07/2016

BCHIUF0610

   36,608    10 years   2.70    UF  07/07/2011  07/07/2021

BCHIUI0611

   42,944    7 years   3.20    UF  07/12/2011  07/12/2018

BCHIUI0611

   34,096    7 years   3.20    UF  07/20/2011  07/20/2018

BCHIUK0611

   52,866    11 years   3.50    UF  07/28/2011  07/28/2022

BCHIUD0510

   46,014    6 years   2.20    UF  07/28/2011  07/28/2017

BCHIUK0611

   33,451    11 years   3.50    UF  07/29/2011  07/29/2022

BCHIUI0611

   432    7 years   3.20    UF  08/02/2011  08/02/2018

BCHIUI0611

   756    7 years   3.20    UF  08/03/2011  08/03/2018

BCHIUJ0811

   48,045    8 years   3.20    UF  09/12/2011  09/12/2019

BCHI-B1208

   84,912    7 years   2.20    UF  09/12/2011  09/12/2018

BCHIUD0510

   12,790    6 years   2.20    UF  09/22/2011  09/22/2017

BCHIUH0611

   21,668    6 years   3.00    UF  09/29/2011  09/29/2017

BCHIUI0611

   65,014    7 years   3.20    UF  09/30/2011  09/30/2018

BCHIUD0510

   10,675    6 years   2.20    UF  09/30/2011  09/30/2017

BCHIUD0510

   1,068    6 years   2.20    UF  10/13/2011  10/13/2017

BNCHIL (*)

   55,940    3 years   5.41    MXN  12/08/2011  12/04/2014
  

 

 

           

Total

   749,586            
  

 

 

           

Series

  MCh$   Term
(years)
  Interest
rate %
   Currency  Issued date   Maturity
date
 

BCHIUR1011

   22,114    12   3.40    UF   01/08/2013     01/08/2025  

BCHIUR1011

   8,521    12   3.40    UF   01/09/2013     01/09/2025  

BCHIUJ0811

   1,572    8   3.20    UF   01/29/2013     01/29/2021  

BCHIUZ1011

   89,313    7   3.20    UF   01/31/2013     01/31/2020  

BCHIAC1011

   45,456    15   3.50    UF   02/28/2013     02/28/2028  

BCHIAC1011

   34,185    15   3.50    UF   03/26/2013     03/26/2028  

BCHIUN1011

   72,022    7   3.20    UF   04/08/2013     04/08/2020  

BCHIUU0212

   68,379    12   3.40    UF   08/29/2013     08/29/2025  

BCHIAU0213

   69,746    12   3.60    UF   09/11/2013     09/11/2025  

BCHIAG0213

   46,585    5   3.40    UF   09/13/2013     09/13/2018  

BCHIAV0613

   47,283    12   3.60    UF   10/16/2013     09/13/2025  

BONO HKD

   43,066    10   3.23    HKD   04/22/2013     04/24/2023  

BONO HKD

   45,133    15   4.25    HKD   10/08/2013     10/16/2028  

BONO CHF

   100,371    5   1.13    CHF   04/26/2013     05/23/2018  

BONO CHF

   25,019    5   1.13    CHF   05/07/2013     05/23/2018  

BONO CHF

   122,380    3   0.60    CHF   06/11/2013     07/18/2016  

BONO CHF

   66,164    4   1.13    CHF   06/28/2013     05/23/2017  

BONO CHF

   98,555    6   1.50    CHF   11/07/2013     12/03/2019  

BONO JPY

   57,716    3   0.74    JPY   11/25/2013     11/25/2016  

BONO JPY

   30,169    6   1.03    JPY   12/05/2013     03/18/2019  
  

 

 

           

Total as of December, 2013

   1,093,749            
  

 

 

           

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

(*)22.At the Ordinary Meeting No. BCH 2,738 held on August 11, 2011, the minutes of which were recorded in a public deed drawn up at the office of the Public Notary Mr. René Benavente Cash on August 19, 2011, authorized a program to place certificates in Mexico in an amount of MXN10,000,000,000, of which an amount of MXN1,500,000,000 were issued and placed on December 8, 2011.Debt Issued, continued:

Commercial Papers

Counterparty

  MCh$   Interest rate %  Currency  Issued date   Maturity date 

WELLS FARGO BANK

   18,849    0.38  USD   01/07/2013     04/05/2013  

WELLS FARGO BANK

   4,712    0.38  USD   01/07/2013     04/05/2013  

GOLDMAN SACHS

   4,712    0.36  USD   01/07/2013     04/08/2013  

WELLS FARGO BANK

   9,427    0.38  USD   01/09/2013     04/08/2013  

CITIBANK N.A.

   28,503    0.35  USD   01/15/2013     04/22/2013  

MERRYL LYNCH

   14,130    0.33  USD   01/22/2013     04/22/2013  

WELLS FARGO BANK

   23,543    0.33  USD �� 02/14/2013     05/15/2013  

JP.MORGAN CHASE

   9,417    0.33  USD   02/14/2013     05/15/2013  

CITIBANK N.A.

   9,417    0.33  USD   02/14/2013     05/15/2013  

GOLDMAN SACHS

   9,417    0.32  USD   02/14/2013     05/15/2013  

GOLDMAN SACHS

   28,304    0.32  USD   03/15/2013     06/14/2013  

CITIBANK N.A.

   9,199    0.32  USD   03/15/2013     06/14/2013  

CITIBANK N.A.

   9,444    0.32  USD   04/02/2013     06/28/2013  

GOLDMAN SACHS

   9,444    0.33  USD   04/02/2013     07/02/2013  

JP.MORGAN CHASE

   9,444    0.33  USD   04/02/2013     07/02/2013  

MERRYL LYNCH

   9,444    0.33  USD   04/02/2013     07/02/2013  

WELLS FARGO BANK

   9,444    0.33  USD   04/02/2013     07/02/2013  

CITIBANK N.A.

   23,448    0.31  USD   04/05/2013     06/28/2013  

CITIBANK N.A.

   14,013    0.26  USD   04/09/2013     06/07/2013  

WELLS FARGO BANK

   4,979    0.65  USD   07/17/2013     07/11/2014  

WELLS FARGO BANK

   25,505    0.35  USD   09/03/2013     03/03/2014  

WELLS FARGO BANK

   12,549    0.30  USD   09/17/2013     12/17/2013  

CITIBANK N.A.

   37,646    0.30  USD   09/17/2013     12/17/2013  

CITIBANK N.A.

   15,037    0.33  USD   09/25/2013     01/22/2014  

MERRYL LYNCH

   10,024    0.33  USD   09/25/2013     01/21/2014  

WELLS FARGO BANK

   15,037    0.33  USD   09/25/2013     01/22/2014  

WELLS FARGO BANK

   10,024    0.33  USD   09/25/2013     01/22/2014  

GOLDMAN SACHS

   24,844    0.30  USD   10/18/2013     01/21/2014  

CITIBANK N.A.

   9,937    0.30  USD   10/18/2013     01/21/2014  

WELLS FARGO BANK

   26,633    0.35  USD   12/02/2013     03/03/2014  

CITIBANK N.A.

   10,653    0.30  USD   12/02/2013     03/04/2014  

WELLS FARGO BANK

   13,186    0.30  USD   12/17/2013     03/17/2014  

CITIBANK N.A.

   39,555    0.31  USD   12/17/2013     03/20/2014  
  

 

 

         

Total

   509,920          
  

 

 

         

Subordinated Bonds

Series

  MCh$   Term
(years)
  Interest
rate %
  Currency  Issued date   Maturity
date
 

UCHI-G1111

   3,596    25  3,75  UF   01/25/2013     01/25/2038  
  

 

 

           

Total

   3,596            
  

 

 

           

The Bank has not had breaches of capital and interest with respect to its debts instruments and has complied with its debt covenants and other compromises related to debt issued during year 2011the periods of 2013 and 2012.2014.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

22.23.Other Financial Obligations:

As of December 31, 20112013 and 2012,2014, other financial institutions are detailed as follows:

 

  2011
MCh$
   2012
MCh$
   2013
MCh$
   2014
MCh$
 

Other Chilean obligations

   160,612     141,729  

Public sector obligations

   61,734     106,537     50,314     44,844  

Other Chilean obligations

   123,051     55,586  
  

 

   

 

   

 

   

 

 

Total

   184,785     162,123     210,926     186,573  
  

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

23.24.Provisions:

 

 (a)As of December 31, 20112013 and 2012,2014, provisions are detailed as follows:

 

  2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Provision for minimum dividends

   128,642     139,755     154,081     177,324  

Other provisions for contingencies

   2,702     2,084     569     8,319  
  

 

   

 

   

 

   

 

 

Total

   131,344     141,839     154,650     185,643  
  

 

   

 

   

 

   

 

 

 

 (b)The following table details the changes in provisions during 20112013 and 2012:2014:

 

  Minimum
dividends
MCh$
 Other
contingencies
MCh$
 Total
MCh$
   Minimum
dividends
   Other
contingencies
   Total 

Balances as of January 1, 2010

   78,524    10,083    88,607  

Provisions established

   113,559    690    114,249  

Provisions used

   (78,524  (9,647  (88,171

Provisions released

   —      —      —    

Other movements

   —      —      —    
  

 

  

 

  

 

 

Balances as of December 31, 2010

   113,559    1,126    114,685  
  

 

  

 

  

 

 

Balances as of January 1, 2011

   113,559    1,126    114,685  

Provisions established

   128,642    1,966    130,608  

Provisions used

   (113,559  (215  (113,774

Provisions released

   —      (175  (175

Other movements

   —      —      —    
  

 

  

 

  

 

 

Balances as of December 31, 2011

   128,642    2,702    131,344  
  

 

  

 

  

 

   MCh$   MCh$   MCh$ 

Balances as of January 1, 2012

   128,642    2,702    131,344     128,642     2,702     131,344  

Provisions established

   139,755    229    139,984     139,755     229     139,984  

Provisions used

   (128,642  (223  (128,865   (128,642   (223   (128,865

Provisions released

   —      (624  (624   —       (624   (624

Other movements

   —      —      —       —       —       —    
  

 

  

 

  

 

   

 

   

 

   

 

 

Balances as of December 31, 2012

   139,755    2,084    141,839     139,755     2,084     141,839  
  

 

  

 

  

 

   

 

   

 

   

 

 

Balances as of January 1, 2013

   139,755     2,084     141,839  

Provisions established

   154,081     230     154,311  

Provisions used

   (139,755   (369   (140,124

Provisions released

   —       (1,376   (1,376

Other movements

   —       —       —    
  

 

   

 

   

 

 

Balances as of December 31, 2013

   154,081     569     154,650  
  

 

   

 

   

 

 

Balances as of January 1, 2014

   154,081     569     154,650  

Provisions established

   177,324     7,980     185,304  

Provisions used

   (154,081   (230   (154,311

Provisions released

   —       —       —    

Other movements

   —       —       —    
  

 

   

 

   

 

 

Balances as of December 31, 2014

   177,324     8,319     185,643  
  

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

24.25.Employee Benefits:

 

 (a)Provisions for personnel benefits and payroll:

 

   2011
MCh$
   2012
MCh$
 

Short-term personnel benefits ((c))

   28,827     29,649  

Vacation accrual ((d))

   20,361��    20,842  

Pension plan – defined benefit plan ((b))

   8,511     10,633  

Other benefits

   2,935     3,421  
  

 

 

   

 

 

 

Total

   60,634     64,545  
  

 

 

   

 

 

 
   2013   2014 
   MCh$   MCh$ 

Short-term personnel benefits (c)

   32,000     29,678  

Vacation accrual (d)

   21,895     23,727  

Employee defined benefit plan (b)(*)

   10,696     11,471  

Other Benefits

   3,353     16,639  
  

 

 

   

 

 

 

Total

   67,944     81,515  
  

 

 

   

 

 

 

(*)See note No. 2 (ac) (iii)

 

 (b)Pension plan – Defined benefit plan:

 

  2013   2014 
  2011
MCh$
 2012
MCh$
   MCh$   MCh$ 

Current service cost

   886    808     288     580  

Interest cost on benefit obligation

   482    468     505     440  

Actuarial gains and losses

   (536  1,732     166     399  
  

 

  

 

   

 

   

 

 

Net benefit expense

   832    3,008     959     1,419  
  

 

  

 

   

 

   

 

 

The net benefit expense is recognized under “Personnel Expenses” (Note 33)34).

The principal assumptions used in determining pension obligations for the Bank’s plan are shown below:

 

  December 31,   December 31, 
  2013   2014 
  December 31,
2011
%
   December 31,
2012
%
   %   % 

Discount rate

   6.04     5.50     5.19     4.38  

Annual salary increase

   2.00     5.08     5.19     5.12  

Payment probability

   93.00     99.99     99.99     99.99  

The most recent actuarial valuation of the present value of the benefit plan obligation was carried out at December 31, 2012.2014.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

24.25.Employee Benefits, continued

 

 (b)Pension plan – Defined benefit plan, continued:

Changes in the present value of the defined benefit obligation are as follows:

 

  2013   2014 
  2011
MCh$
 2012
MCh$
   MCh$   MCh$ 

Opening defined benefit obligation, January 1,

   7,980    8,511     10,633     10,696  

Contributions by the employer

   886    808     793     1,020  

Benefits paid

   (281  (864   (896   (644

Prepayments

   (20  (22   —       —    

Actuarial gains and losses

   (54  2,200     166     399  
  

 

  

 

   

 

   

 

 

Closing defined benefit obligation

   8,511    10,633     10,696     11,471  
  

 

  

 

   

 

   

 

 

 

 (c)The following table details the changes in provisions for incentive plans during 20112013 and 2012:2014:

 

  2013   2014 
  2011
MCh$
 2012
MCh$
   MCh$   MCh$ 

Balances as of January 1,

   25,920    28,827     29,649     32,000  

Provisions established

   30,655    28,406     29,420     26,971  

Provisions used

   (27,724  (27,584   (27,069   (29,293

Provisions released

   (24  —       —       —    

Other movements

   —      ��    
  

 

  

 

   

 

   

 

 

Balances as of December 31,

   28,827    29,649     32,000     29,678  
  

 

  

 

   

 

   

 

 

 

 (d)The following table details the changes in provisions for vacation during 20112013 and 2012:2014:

 

  2013   2014 
  2011
MCh$
 2012
MCh$
   MCh$   MCh$ 

Balances as of January 1,

   18,774    20,361     20,842     21,895  

Provisions established

   5,821    5,655     5,234     6,268  

Provisions used

   (4,187  (4,363   (4,181   (4,436

Provisions released

   (47  (811   —       —    
  

 

  

 

   

 

   

 

 

Balances as of December 31,

   20,361    20,842     21,895     23,727  
  

 

  

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

24.25.Employee Benefits, continued

 

 (e)Provisions for share-based employee benefits:

As of December 31, 20112013 and 2012,2014, the Bank and its subsidiaries do not have a stock compensation plan.

 

25.26.Other Liabilities:

As of December 31, 20112013 and 2012,2014, other liabilities are detailed as follows:

 

  2011
MCh$
   2012
MCh$
   2013   2014 
  MCh$   MCh$ 

Accounts and notes payable (*)

   100,081     120,676  

Documents intermediated

   134,820     132,651     108,380     45,580  

Accounts and notes payable (*)

   79,031     111,358  

Financial guarantees

   13,699     13,333     17,613     19,362  

VAT payable

   2,908     2,397  

Leasing deferred gains

   7,039     5,900     4,207     6,003  

Deferred income

   5,379     5,357     4,592     5,946  

VAT payable

   3,200     3,874  

Pending transactions

   1,144     1,391  

Insurance payments

   1,158     5,080     476     284  

Pending transactions

   1,941     135  

Other

   23,930     28,894     36,069     52,879  
  

 

   

 

   

 

   

 

 

Total

   269,905     305,105     275,762     255,995  
  

 

   

 

   

 

   

 

 

 

(*)This item includes obligations that fall outside the Bank’s line of business such as withholding taxes, social security payments, insurance payable, and balances from material purchases and provisions for expenses pending payment.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

26.27.Contingencies and Commitments:

 

 (a)Commitments accounted for in off-balance-sheet accounts:

In order to satisfy its customers’ needs, the Bank entered into several irrevocable commitments and contingent obligations. Although these obligations are not recognized in the Statement of Financial Position, they entail credit risks and, therefore, form part of the Bank’s overall risk.

 

  2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Off-balance-sheet accounts

        

Guarantees and surety bonds

   216,249     323,924  

Guarantees and surety bonds (See letter b)

   491,465     412,474  

Confirmed foreign letters of credit

   137,253     85,272     68,631     136,846  

Issued foreign letters of credit

   131,567     138,714     166,849     152,582  

Bank guarantees

   1,235,031     1,437,312  

Bank guarantees (See letter b)

   1,402,399     1,576,763  

Immediately available credit lines

   4,881,220     5,481,235     5,436,938     6,084,098  

Other commitments

   164,361     122,997     —       14,434  

Transactions on behalf of third parties

        

Collections

   582,090     386,006     357,672     305,384  

Third-party resources managed by the Bank:

        

Financial assets managed on behalf of third parties

   2,766     12,144     1,311     13,153  

Other assets managed on behalf of third parties

   —       —       —       —    

Financial assets acquired on its own behalf

   62,701     22,802     44,839     67,834  

Fiduciary activities

        

Securities held in safe custody in the Bank

   5,613,495     6,237,859     7,342,425     7,488,897  

Securities held in safe custody in other entities

   4,088,670     4,483,567     4,501,555     4,865,570  
  

 

   

 

   

 

   

 

 

Total

   17,115,403     18,731,832     19,814,084     21,118,035  
  

 

   

 

   

 

   

 

 

 

 (b)Financial Guarantees

As of December 31, 2013 and 2014, the expiration of financial guarantees per period is as follows:

   2013 
   Due within
1 year
   Due after
1 year but
within
3 years
   Due after
3 years but
within
5 years
   Due after
5 years
   Total 

Performance bonds

   1,008,922     273,125     108,517     11,835     1,402,399  

Foreign office guarantees and standby letters of credit

   320,385     161,003     8,207     1,870     491,465  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,329,306     434,128     116,724     13,705     1,893,864  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2014 
   Due within
1 year
   Due after
1 year but
within
3 years
   Due after
3 years but
within
5 years
   Due after
5 years
   Total 

Performance bonds

   1,138,865     368,884     63,307     5,707     1,576,763  

Foreign office guarantees and standby letters of credit

   281,162     126,170     3,123     2,019     412,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,420,027     495,054     66,430     7,726     1,989,237  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

27.Contingencies and Commitments, continued:

(c)Lawsuits and legal proceedings:

 

 (b.1)(c.1)Legal contingencies within the ordinary course of business:

InAt the ordinary coursedate of business,issuance of these consolidated financial statements, there are actions filed against the Bank and its subsidiaries related to the ordinary course operations. Among these actions, there is a collective action filed by the National Consumer Service (Servicio Nacional del Consumidor) in accordance with Law No. 19,496. This action seeks to challenge some clauses of the “Person Products Unified Agreement” (Contrato Unificado de Productos de Personas) regarding fees on credit lines for overdraft and validity of the tacit consent to changes in fees, charges and other conditions in consumer contracts. In regards to the same matter, there is a collective action filed by the National Corporation of Consumers and Users of Chile (Corporación Nacional de Consumidores y Usuarios de Chile) that challenge some clauses of the “Person Products Unified Agreement” (Contrato Unificado de Productos de Personas) regarding fees on credit lines for overdraft and validity of the tacit consent to changes in fees, charges and other conditions in consumer contracts, along with the outsourcing of certain services related to our clients’ current account data. In addition, there is a collective action filed by the National Organization of Consumers and Users of Chile (“Organización de Consumidores y Usuarios de Chile”) that requests the Court to declare abusive and void certain provisions of the Person Products Unified Agreement regarding the use of self-service channels (internet, ATMs, telephone banking) and Credit Cards. Such provisions refer to the user’s duty to act with diligence and care with respect to passwords as defendant or co-defendantwell as the responsibility they have in various litigation matters. Although there cancase of disclosure to third parties, and the use by such third parties of them. In this claim, among other considerations the plaintiff argues that in case of phishing, pharming and similar frauds, in which third parties use client password and appropiate client’s funds without consent, banks and not client’s should be no assurances, affected by the fraud.

With respect to these legal contingencies, at the date of these consolidated financial statements, in the opinion of the Bank’s management it is not possible to reasonably quantify any adverse effects of a potential judgment to those recognized in these financial statements.

Except for the above,the Bank’s management believes, based on information currently available, that the ultimate resolution of these legal proceedings are not likely to have a material adverse effect on its results of operations, financial condition,position or liquidity.

As of December 31, 2011 and 2012,2014, the Bank has established provisions for this concept in the amount of MCh$736 and MCh$474,8,073 (MCh$339 in 2013), recorded within “Provisions” in the statement of financial position. The following table presents the estimated date of completion of the respective litigation:

 

   As of December 31, 2012 
   2013
MCh$
   2014
MCh$
   2015
MCh$
   2016
MCh$
   2017
MCh$
   Total
MCh$
 

Legal contingencies

   65     5     16     388     —       474  
   As of December 31, 2014 
   2015   2016   2017   2018   2019   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Legal contingencies

   7,395     433     95     150     —       8,073  

(c.2)Contingencies for significant lawsuits:

As of December 31, 2013 and 2014, the Bank is not party to any significant lawsuits that affects or that may affect these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

26.27.Contingencies and Commitments, continued:

 

 (b.2)Contingencies for significant lawsuits:

As of December 31, 2011 and 2012, the Bank is not party to any significant lawsuits that affect or may affect these consolidated financial statements.

(c)(d)Guarantees granted:

 

 (i)In subsidiary Banchile Administradora General de Fondos S.A.:

In compliance with article 226 and subsequent articles of Law 18,045, Banchile Administradora General de Fondos S.A., has designated Banco de Chile as the representative of the beneficiaries of the guarantees it has established and in that character the Bank has issued bank guarantees totaling UF 2,442,000,2,458,000, maturing January 4, 2013.9, 2015 (UF 2,515,000 maturing January 9, 2014 in December 2013).

In addition to these guarantees for creating mutual funds, there are other guarantees for a guaranteed capital on certain mutual funds, totaling Ch$118,73435,861 million as of December 31, 20122014 (Ch$104,30275,474 million in 2011)2013).

 

2012
FundMCh$

Mutual Fund Banca Americana Voltarget
   2013   2014 
Fund  MCh$   MCh$ 

Mutual Fund Deposito Plus IV

   16,325     —    

Mutual Fund Deposito Plus

   14,241     —    

Mutual Fund Deposito Plus III

   12,937     —    

Mutual Fund Deposito Plus II

   9,308     —    

Mutual Fund Deposito Plus V

   —       9,976  

Mutual Fund Deposito Plus VI

   —       5,429  

Mutual Fund Small Cap USA

   5,197     5,197  

Mutual Fund Chile Bursátil

   5,050     5,050  

Mutual Fund Twin Win Europa 103

   3,537     3,537  

Mutual Fund Global Stocks

   2,964     2,964  

Mutual Fund Second Best Chile USA

   2,207     —    

Mutual Fund Europa Accionario

   2,059     2,059  

Mutual Fund Second Best Europa China

   1,649     1,649  
  

 

 

   

 

 

 

Total

   75,474     35,861  
  

 

 

   

 

 

 

In compliance with the rules established by the Superintendence of Securities and Insurance in letter f) of Circular 1,894 of September 24, 2008, the entity has constituted guarantees, by management portfolio, in benefit of investors. Such guarantee corresponds to a bank guarantee for UF100,000, with a maturity date of January 9, 2015.

11,878

Mutual Fund Estrategia Commodities

6,302

Mutual Fund Muralla China

17,795

Mutual Fund Potencias Consolidadas

30,381

Mutual Fund Ahorro Plus I

730

Mutual Fund Ahorro Estable II

11,270

Mutual Fund Ahorro Estable III

5,051

Mutual Fund Depósito Plus

14,958

Mutual Fund Europa Accionario

2,069

Mutual Fund Twin Win Europa 103

3,541

Mutual Fund Second Best Chile EEUU

2,207

Mutual Fund Depósito Plus II

12.552

Total

118,734

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

26.27.Contingencies and Commitments, continued:

 

(c)(d)Guarantees granted, continued:

 

 (ii)In subsidiary Banchile Corredores de Bolsa S.A.:

For the purposes of ensuring correct and complete compliance with all of its obligations as a broker-dealer entity, in conformity with the provisions of article 30 and subsequent articles of Law 18,045 on Securities Markets, the subsidiaryBanchile Corredores de Bolsa S.A. established a guarantee in an insurance policy for UF 20,000, insured by Cía. deMapfre Seguros de Crédito ContinentalGenerales S.A., that maturesmaturing on April 22, 2014,2016, whereby the Securities Exchange of the Santiago Stock Exchange was appointed as the subsidiary’s creditors to representative.

The Bank has given the following guarantees in relation to this subsidiary’s business activities:

 

  2013   2014 
  2011
MCh$
   2012
MCh$
   MCh$   MCh$ 

Guarantees:

        

Shares to secure short-sale transactions in:

        

Securities Exchange of the Santiago Stock Exchange

   15,980     69     16,946     17,158  

Securities Exchange of the Electronic Stock Exchange of Chile

   21,731     33,693     10,644     8,748  

Fixed income securities to ensure system CCLV, Bolsa de Comercio de Santiago, Bolsa de Valores

   2,987     3,068     2,995     2,996  

Fixed income securities to ensure stock loan, Bolsa Eléctronica de Chile, Bolsa de Valores

   —       47     68     —    
  

 

   

 

   

 

   

 

 

Total

   40,698     36,877     30,653     28,902  
  

 

   

 

   

 

   

 

 

In conformity with the provisions of internal stock market regulations, and for the purpose of securing the broker’s correct performance, the company established a pledge on its share ofshares on the Santiago Stock Exchange in favor of that institution, as recorded in Public Deed on September 13, 1990, signed before Santiago public notary Mr. Raúl Perry Pefaur, and onof its shareshares in the Electronic Stock Exchange of Chile in favor of that institution, as recorded in a contract entered into by both parties on May 16, 1990.

Banchile Corredores de Bolsa S.A. keeps an insurance policy current with AIG Chile – Compañía de Seguros Generales S.A. that expires January 2, 2015, and that covers employee fidelity, physical losses, falsification or adulteration, and currency fraud with a coverage amount equivalent to U.S.$10,000,000.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

27.Contingencies and Commitments, continued:

(d)Guarantees granted, continued:

(ii)In subsidiary Banchile Corredores de Bolsa S.A., continued:

According to the Chilean Central Bank, it provided a bank guarantee of UF10,500 for the purposes of complying with the contract Contract for Service System Open Market Operations (SOMA) of the Chilean Central Bank. This bank guarantee is revaluated in UF to fixed term, is not endorsable and has a maturity date of July 17, 2015.

It also provided a bank guarantee No. 356114-4 in the amount of UF210,000 for the benefits of investors in portfolio management contracts. This bank guarantee is revaluated in UF to fixed term, is not endorsable and has a maturity date of January 9, 2015.

It also provided a cash guarantee in the amount of U.S.$122,494.32 for the purpose of complying with the obligations to Pershing, for any operations conducted through that broker.

(iii)In subsidiary Banchile Corredores de Seguros Ltda.

According to article No. 58, letter D of D.F.L. 251, as of December 31, 2014, the entity maintains two insurance policies that protect it against potential damages caused by infractions of the law, regulations and complementary rules that regulate insurance brokers. These insurance policies relate especially to non-compliance on the basis of acts, mistakes or omissions of brokers, representatives, agents or dependents of Banchile Corredores de Bolsa S.A.

The policies contracted are the following:

Matter insuredAmount Insured (UF)

Responsibility for errors and omissions policy

60,000

Civil responsibility policy

500

(e)In the Eleventh Civil Court of Santiago, Banchile Corredores de Bolsa S.A. filed a reclamation against the Resolución Exenta No. 270 of October 30, 2014 of the Superintendency of Securities and Insurance (“SVS”), whereby that Superintendency imposed a fine to Banchile Corredores de Bolsa S.A. (“Banchile Corredores”) for an amount of UF 50,000 for the alleged infringement of Article 53 second paragraph of Law 18,045 (“Ley de Mercado de Valores”), for certain specific transactions related to Sociedad Química y Minera de Chile S.A.’s shares (SQM-A). Through the claim Banchile Corredores seeks to void the fine. As a requirement to file the claim, Banchile credited (consignó) 25% of the amount of the fine.

According to the current policies, the company has not established provisions because this judicial process has not been ruled yet and also because our legal advisors have estimated that there are grounds to get a favorable judgement for Banchile Corredores.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

28.Equity:

 

 (a)Authorized, subscribed and paid shares:

As of December 31, 2012,2014, the paid-in capital of Banco de Chile is represented by 89,898,992,66794,655,367,544 equal registered shares (86,942,514,973(93,175,043,991 in 2011)2013), with no par value, subscribed and fully paid.

 

 (b)Capital increase:

On January 20, 2011 the Bank decided to increase its capital in the amount of Ch$240,000,000,000 by means of the issuance of 3,385,049,365 cash shares, “Banco de Chile – S” series, which process concluded in July 2011 in which the subscribed and fully paid was of 3,385,049,365 cash shares. With this increase the number of shares subscribed and paid grew to 86,942,514,973.

On October 17, 2012, institutions at the Extraordinary Shareholders Meeting agreed to increase the Bank’s capital in the amount of Ch$250,000,000,000 by means of the issuance of 3,939,489,442 cash shares, designated “Banco de Chile-T” series, with that same rights as all other ordinary Banco de Chile shares, with the exception that they will not allow its shareholders to receive dividends and/or fully paid-in shares with respect to our net distributable earnings for fiscal year 2012. Once these dividends and/or fully paid-in shares are distributed and paid, the “Banco de Chile-T” shares will be automatically converted into “Banco de Chile” shares.

 

 (c)Shares:

 

 (c.1)On June 5, 2012,26, 2014, Banco de Chile disclosedinformed of the capitalization of 30% of the distributable net income obtained during the fiscal year ending December 31, 2011,2013, through the issuance of fully paid-in shares, of no par value, as agreed atin the Extraordinary Shareholders Meeting held on March 22, 2012, which are27, 2014, to increase the Bank´s capital in the amount of Ch$95,569,688,582 through the issuance of 1,480,323,553 fully paid-in shares, of no par value, payable under the distributable net income for the year 2013 that was not distributed as follows:dividends as agreed at the Ordinary Shareholders Meeting held on the same day.

At such Extraordinary Shareholders Meeting, it was agreed to increase the Bank’s capital in the amount of Ch$73,910,745,344 through the issuance of 1,095,298,538 fully paid-in shares, of no par value, payable under the distributable net income for 2011 that was not distributed as dividends as agreed at the Ordinary Shareholders Meeting held on the same day.

The issuance of fully paid inpaid-in shares was registered in the Securities Register of the SuperintendencySuperintendence of Banks and Financial Institutions with No. 4/20123/2014, on June 4, 2012.19, 2014.

The Board of Directors of Banco de Chile, at the meeting No. 2,754, dated May 24, 2012,2,798, held on June 26, 2014, set June 28, 2012July 10, 2014, as the date for issuance and distribution of the fully paid in shares.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

27.28.Equity, continued:

 

 (c)Shares, continuedcontinued:

 

 (c.2)The Bank is in process of issuing and placing shares. The following table shows the share changesmovements from December 31, 20112012 to December 31, 2012:2014:

 

   Ordinary Shares   Ordinary S
Series Shares
  Ordinary T
Series Shares (**)
   Total Shares 

As of December 31, 2010

   73,834,890,472     8,716,808,951    —       82,551,699,423  

Capitalization of retained earnings

   1,005,766,185     —      —       1,005,766,185  

Transformation of the series “Banco de Chile-S” shares into ordinary “Banco de Chile” shares

   8,716,808,951     (8,716,808,951  —       —    

Fully paid the share capital increase (*)

   3,385,049,365     —      —       3,385,049,365  
  

 

 

   

 

 

  

 

 

   

 

 

 

Total shares as of December 31, 2011

   86,942,514,973     —      —       86,942,514,973  

Capitalization of retained earnings

   1,095,298,538     —      —       1,095,298,538  

Shares subscribed and paid

   —       —      1,861,179,156     1,861,179,156  
  

 

 

   

 

 

  

 

 

   

 

 

 

Total shares subscribed and paid as of December 31, 2012

   88,037,813,511     —      1,861,179,156     89,898,992,667  

Shares subscribed and not paid

   —       —      76,940,138     76,940,138  

Shares authorized and not subscribed

   —       —      2,001,370,148     2,001,370,148  
  

 

 

   

 

 

  

 

 

   

 

 

 

Total as of December 31, 2012

   88,037,813,511     —      3,939,489,442     91,977,302,953  
  

 

 

   

 

 

  

 

 

   

 

 

 
       Ordinary T     
   Ordinary shares   Series shares (*)   Total shares 

Total shares as of December 31, 2012

   88,037,813,511     1,861,179,156     89,898,992,667  
  

 

 

   

 

 

   

 

 

 

Shares subscribed and paid period 2013

   —       2,078,310,286     2,078,310,286  

Conversion of “Banco de Chile- T” shares into “Banco de Chile” shares

   3,939,489,442     (3,939,489,442   —    

Capitalization of retained earnings(**)

   1,197,741,038     —       1,197,741,038  
  

 

 

   

 

 

   

 

 

 

Total shares as of December 31, 2013

   93,175,043,991     —       93,175,043,991  

Capitalization of retained earnings(***)

   1,480,323,553     —       1,480,323,553  
  

 

 

   

 

 

   

 

 

 

Total shares as of December 31, 2014

   94,655,367,544     —       94,655,367,544  
  

 

 

   

 

 

   

 

 

 

 

(*)During JulyCapital increase as of 2011, the Bank concluded the capital increase process with an amount of Ch$210,114 million (such amount is net of the costs associated with the issuance).October 17, 2012.
(**)See note 27(b)Capitalization of May 13, 2013
(***)Capitalization of June 26, 2014

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

27.28.Equity, continued:

 

 (d)Shareholders’ composition:

As of December 31, 2011,2013, the shareholder composition was as follows:

 

Corporate Name or Shareholder’s Name

  Shares   % of
Equity
Holding
   Shares   % of
Equity
Holding
 

LQ Inversiones Financieras S.A.

   30,353,093,809     32.58  

Sociedad Administradora de la Obligación Subordinada SAOS S.A.

   28,593,701,789     32.89     28,593,701,789     30.69  

LQ Inversiones Financieras S.A.

   27,609,418,295     31.76  

Sociedad Matriz del Banco de Chile S.A. SM-Chile S.A.

   12,138,525,772     13.96     12,138,543,602     13.03  

Other minority shareholders

   18,600,869,117     21.39     22,089,704,791     23.70  
  

 

   

 

   

 

   

 

 

Total

   86,942,514,973     100.00     93,175,043,991     100.00  
  

 

   

 

   

 

   

 

 

As of December 31, 2012,2014, the shareholder composition was as follows:

 

Corporate Name or Shareholder’s Name

  Shares   % of
Equity
Holding
   Shares   % of
Equity
Holding
 

Sociedad Administradora de la Obligación Subordinada SAOS S.A.

   28,593,701,789     30.21  

LQ Inversiones Financieras S.A.

   29,760,938,681     33.10     24,332,365,224     25.71  

Sociedad Administradora de la Obligación Subordinada SAOS S.A.

   28,593,701,789     31.81  

Sociedad Matriz del Banco de Chile S.A. SM-Chile S.A.

   12,138,537,826     13.50     12,138,549,725     12.82  

Other minority shareholders

   19,405,814,371     21.59     29,590,750,806     31.26  
  

 

   

 

   

 

   

 

 

Total

   89,898,992,667     100.00     94,655,367,544     100.00  
  

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

27.28.Equity, continued:

 

 (e)Approval and payment of dividends:

At the Ordinary Shareholders’ Meeting held on March 22, 2012,21, 2013, the Bank’s shareholders agreed to distribute and pay dividend No. 200201 amounting to Ch$2.9847403.41625263165 per common share of Banco de Chile, with charge to net income for the year ended December 31, 2011.2012. The amount of dividend paid for the period 2013 was Ch$343,455 million.

At the Ordinary Shareholders’ Meeting held on March 17, 2011,27, 2014, the Bank’s shareholders agreed to distributethe distribution and paypayment of the dividend No. 199202 amounting to Ch$2.9375873.48356970828 per common share of Banco de Chile, with charge to net income for the year ended December 31, 2010.2013. The amount of dividend paid for the period 2014 was Ch$368,120 million.

The following dividends were declared and paid by the Bank for the year ended as of December 31, 2010, 20112012, 2013 and 2012:2014:

 

  2012   2013   2014 
  2010
MCh$
   2011
MCh$
   2012
MCh$
   MCh$   MCh$   MCh$ 

Dividends on ordinary shares:

   288,669     279,216     296,802     296,802     343,455     368,120  

Dividends per ordinary share(1):

  Ch$3.50    Ch$3.38    Ch$3.41(*)   Ch$3.41    Ch$3.90    Ch$3.98(*) 

 

(1)Dividends per share are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding.
(*)This dividend per share is composed of the dividend paid to the Central Bank and common shareholders forin the amounts of MCh$124,342145,123 and MCh$172,460,222,997, respectively. The Central Bank has 29,161.4 million shares with a payment of Ch$4.2639144.976528 per common share of Banco de Chile and for common shareholders the number of shares are 57,781.164,013.6 million with a payment of Ch$2.9847403.4835697 per common share of Banco de Chile.

 

 (f)Provision for minimum dividends:

Chilean Corporations Law mandates a minimum distribution of 30% of distributable income. Accordingly, the Bank recorded a liability under the line item “Provisions” for an amount of MCh$139,755177,324 (MCh$128,642154,081 in December 31, 2011)2013) against “Retained earnings”.

 

 (g)Other comprehensive income:

The cumulative translation adjustment is generated from the Bank’s translation of its investments in foreign companies, as it records the effects of foreign currency translation for these items in equity. For the year ended December31, 2014, this recorded a credit to equity in an amount of Ch$80 million (a credit to equity for Ch$71 millions in 2013).

In accordance with Note 2(x), the fair market value adjustment for available-for-sale instruments is generated by fluctuations in the fair value of that portfolio, with a charge or credit to equity, net of deferred taxes (see Note 11)12). For the year ended 2014, there was a net credit to equity in an amount of Ch$4,486 million (a net credit to equity for Ch$11,614 millions in 2013).

Cash flow hedge adjustment consists of the portion of income of hedge instruments registered in equity produced in a cash flow hedge. For the year ended December31, 2014, there was a credit to equity in an amount of Ch$23,507 million (a charge to equity for Ch$14,455 millions for the period 2013).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

27.28.Equity, continued:

 

 (h)Earnings per shareshare:

Earnings per share is calculated by dividing the net profit for the year attributable to the ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the year.

The following table shows the income and share data used in the calculation of EPS:

 

  As of December 31,   As of December 31, 
  2010   2011   2012   2012   2013   2014 

Basic and diluted earnings per share:

            

Net profits attributable to ordinary equity holders of the Bank

   417,615     438,186     478,120     479,880     550,188     595,518  

Weighted average number of ordinary shares(*)

   84,652,764,146     86,889,652,027     88,149,818,378  

Weighted average number of ordinary shares(*)

   90,827,882,969     94,471,771,834     94,655,367,544  

Earnings per share

   4.93     5.04     5.42     5.28     5.82     6.29  

 

(*)

During 20112012, 2013 and 2012 were2014, the Bank capitalized 1,005,766,1851,095,298,538; 1,197,741,038 and 1,095,298,5381,480,323,553 shares respectively, which are considered in the earnings per share calculation as if they had been outstanding during all periods presented.

During the periods presented the Bank did not have any instruments that could lead to a dilution of its ordinary shares.

There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of the completion of these financial statements.

 

28.29.Interest Revenue and Expenses:

 

 (a)As of each year end, interest revenue is detailed as follows:

 

  2010 2011 2012   2012   2013   2014 
  MCh$ MCh$ MCh$   MCh$   MCh$   MCh$ 

Commercial loans

   488,235    711,946    790,696     790,696     833,163     964,070  

Consumer loans

   370,847    435,978    522,907     522,907     567,987     573,902  

Residential mortgage loans

   186,215    266,914    266,625     266,625     288,890     497,258  

Financial investments

   43,608    71,669    76,576     76,576     85,124     84,725  

Repurchase agreements

   8,133    14,605    12,553     12,553     2,496     9,309  

Loans and advances to banks

   7,205    10,322    12,993     12,993     15,728     18,938  

Loss from accounting hedges (see 28(c))

   (12,607  (12,411  (11,296

Loss from accounting hedges

   (11,296   (29,097   (106,496

Other interest revenue

   367    2,661    1,712     1,712     1,651     3,898  
  

 

  

 

  

 

   

 

   

 

   

 

 

Total

   1,092,003    1,501,684    1,672,766     1,672,766     1,765,942     2,045,604  
  

 

  

 

  

 

   

 

   

 

   

 

 

During the year ended December 31, 2014, interest recorded in income from impaired loans amounted to Ch$65,707 million (Ch$58,488 million as of December 31,2013).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

28.29.Interest Revenue and Expenses, continued:

 

 (b)As of each year end, interest expenses are detailed as follows:

 

  2010   2011 2012   2012   2013   2014 
  MCh$   MCh$ MCh$   MCh$   MCh$   MCh$ 

Saving accounts and time deposits

   187,210     425,968    496,985  

Savings accounts and time deposits

   496,985     482,600     434,882  

Debt issued

   109,624     153,896    170,222     170,222     199,330     344,326  

Borrowings from financial institutions

   18,822     23,784    22,308  

Demand deposits

   3,439     5,934    3,946  

Other financial obligations

   2,935     3,823    3,078     3,078     2,814     3,873  

Repurchase agreements

   2,007     10,849    14,986     14,986     13,149     9,581  

Loss from accounting hedges (see 28(c))

   —       (185  (3,003

Borrowings from financial institutions

   22,308     13,791     7,166  

Loss from accounting hedges

   (3,003   (10,565   (20,826

Demand deposits

   3,946     3,153     8,643  

Other interest expenses

   340     140    107     107     99     1,143  
  

 

   

 

  

 

   

 

   

 

   

 

 

Total

   324,377     624,209    708,629     708,629     704,371     788,788  
  

 

   

 

  

 

   

 

   

 

   

 

 

 

 (c)As of each year end, loss from accounting hedge is the following:

 

  2010 2011 2012   2012   2013   2014 
  MCh$ MCh$ MCh$   MCh$   MCh$   MCh$ 

Cash Flow hedge

   —      (1,029  (2,318   (2,318   (51,795   (9,659

Fair value hedge

   (12,607  (11,197  (5,975   (5,975   33,263     (76,011
  

 

  

 

  

 

   

 

   

 

   

 

 

Total

   (12,607  (12,226  (8,293   (8,293   (18,532   (85,670
  

 

  

 

  

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

29.30.Income and Expenses from Fees and Commissions:

The income and expenses for fees and commissions shown in the Consolidated Statement of Comprehensive Income refers to the following items:

 

  2010 2011 2012   2012   2013   2014 
  MCh$ MCh$ MCh$   MCh$   MCh$   MCh$ 

Income from fees and commissions

          

Card services

   76,487    90,758    102,407     104,007     108,851     110,984  

Investments in mutual funds and other

   56,043     54,833     65,199  

Collections and payments

   51,371    49,764    60,341     49,333     51,588     49,374  

Investments in mutual funds and other

   61,476    63,809    56,043  

Portfolio management

   16,401    17,702    27,317     31,446     35,920     37,719  

Lines of credit and overdrafts

   26,124    22,771    22,892     22,892     22,206     20,844  

Use distribution channel

   26,950     27,252     19,931  

Insurance brokerage

   22,909    20,480    17,404     17,404     18,840     19,674  

Guarantees and letter of credit

   14,454     17,611     19,148  

Trading and securities management

   38,724    38,600    16,892     16,892     17,526     15,527  

Use of distribution channel

   8,727    18,430    15,942  

Guarantees and letters of credit

   15,187    12,888    14,454  

Financial advisory services

   4,800    3,186    3,955     3,955     4,054     6,081  

Other fees earned

   20,013    29,578    35,120     29,391     28,051     22,971  
  

 

  

 

  

 

   

 

   

 

   

 

 

Total income from fees and commissions

   342,219    367,966    372,767     372,767     386,732     387,452  
  

 

  

 

  

 

   

 

   

 

   

 

 

Expenses from fees and commissions

          

Credit card transactions

   (29,570  (35,522  (42,035   (62,020   (75,083   (88,480

Sale force fees

   (6,047  (8,312  (10,098

Fees for interbank transactions

   (8,150   (9,808   (11,779

Fees for collections and payments

   (6,729  (6,619  (6,534   (6,534   (6,658   (6,423

Sale of mutual fund units

   (2,488   (2,318   (3,379

Fees for securities transactions

   (3,532  (4,246  (2,994   (2,994   (3,103   (2,851

Sale of mutual fund units

   (3,571  (3,038  (2,488

Sales force fees

   (1,948   (2,007   (1,885

Other fees

   (508  (1,456  (1,361   (1,361   (662   (467
  

 

  

 

  

 

   

 

   

 

   

 

 

Total expenses from fees and commissions

   (49,957  (59,193  (65,510   (85,495   (99,639   (115,264
  

 

  

 

  

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

30.31.Net Financial Operating Income:

The gain (losses) from trading and brokerage activities is detailed as follows:

 

  2010 2011 2012   2012   2013   2014 
  MCh$ MCh$ MCh$   MCh$   MCh$   MCh$ 

Interest accrued on trading securities

   8,467     17,668     16,500  

Gains (losses) from mark to market

   564     6,916     3,420  
  

 

   

 

   

 

 

Financial assets held-for-trading

   21,306    13,386    9,031     9,031     24,584     19,920  

Sale of available-for-sale instruments

   19,178    2,289    8,088     8,088     14,881     18,102  

Net loss of other transactions

   506    (353  2,567(*) 

Net loss of other transactions (*)

   2,567     (1,089   (38

Derivative instruments

   (23,678  41,346    (3,633   (3,633   (6,018   (3,773

Sale of loan portfolios

   (149  1,433    146  

Sale of loan portfolio

   146     314     993  
  

 

  

 

  

 

   

 

   

 

   

 

 

Total

   17,163    58,101    16,199     16,199     32,672     35,204  
  

 

  

 

  

 

   

 

   

 

   

 

 

 

(*)Includes hedge ineffectiveness recognized in income statement for 2012 for an amount of MCh$14615

 

31.32.Foreign Exchange Transaction, net:

The detail of foreign exchange transactions is the following:

   2010  2011  2012 
   MCh$  MCh$  MCh$ 

Translation difference, net

   69,538    (18,495  44,736  

Indexed foreign currency

   (5,776  11,489    (9,404

Loss from accounting hedges(*)

   —      (967  (196
  

 

 

  

 

 

  

 

 

 

Total

   63,762    (7,973  35,136  
  

 

 

  

 

 

  

 

 

 

 

(*)Corresponds to the foreign exchange of the Mexican bond issued in 2011.
   2012   2013   2014 
   MCh$   MCh$   MCh$ 

Loss from accounting hedges

   (196   65,802     68,476  

Indexed foreign currency

   (9,404   7,451     20,493  

Translation difference, net

   44,736     (1,796   (18,744
  

 

 

   

 

 

   

 

 

 

Total

   35,136     71,457     70,225  
  

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

32.33.Provisions for Loan Losses:

The changes during 2010, 20112012, 2013 and 20122014 are the following:

       Loans to customers as of December 31, 2010          
   Loans and
advance to
banks
   Commercial
loans
  Mortgage
loans
  Consumer
loans
  Total  Financial
guarantees
  Total 

Provisions established:

         

Individual provisions

   —       (39,365  —      —      (39,365  (5,217  (44,582

Group provisions

   —       (29,003  (3,750  (112,901  (145,654  (151  (145,805
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions established, net

   —       (68,368  (3,750  (112,901  (185,019  (5,368  (190,387
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released:

         

Individual provisions

   567     —      —      —      —      —      567  

Group provisions

   —       —      —      —      —      —      —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released, net

   567     —      —      —      567    —      567  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recovery of written-off assets

   —       11,173    1,387    19,609    32,169    —      32,169  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions, net allowances for credit risk

   567     (57,195  (2,363  (93,292  (152,850  (5,368  (157,651
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

32.Provisions for Loan Losses:

      Loans to customers as of December 31, 2011          
   Loans and
advance to
banks
  Commercial
loans
  Mortgage
loans
  Consumer
loans
  Total  Financial
Guarantees
  Total 

Provisions established:

        

Individual provisions

   (396  (51,160  —      —      (51,160  (4,412  (55,968

Group provisions

   —      (42,132  (3,553  (110,344  (156,029  —      (156,029
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions established, net

   (396  (93,292  (3,553  (110,344  (207,189  (4,412  (211,997
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released:

        

Individual provisions

   —      14,515    —      —      14,515    —      14,515  

Group provisions

   —      —      —      —      —      4,902    4,902  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released, net

   —      14,515    —      —      14,515    4,902    19,417  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recovery of written-off assets

   —      16,104    1,106    28,445    45,655    —      45,655  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions, net allowances for credit risk

   (396  (62,673  (2,447  (81,899  (147,019  490    (146,925
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

32.Provisions for Loan Losses:

 

       Loans to customers as of December 31, 2012          
   Loans and
advance to
banks
   Commercial
loans
  Mortgage
loans
  Consumer
loans
  Total  Financial
guarantees
  Total 

Provisions established:

         

Individual provisions

   —       (13,668  —      —      (13,668  (1,394  (15,062

Group provisions

   —       (46,807  (4,428  (160,775  (212,010  (222  (212,232
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions established, net

   —       (60,475  (4,428  (160,775  (225,678  (1,616  (227,294
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released:

         

Individual provisions

   47     17,883    —      —      17,883    1,982    19,912  

Group provisions

   —       —      —      —      —      —      —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released, net

   47     17,883    —      —      17,883    1,982    19,912  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recovery of written-off assets

   —       14,892    1,971    24,099    40,962    —      40,962  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions, net allowances for credit risk

   47     (27,700  (2,457  (136,676  (166,833  366    (166,420
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

33.Personnel Expenses:Provisions for Loan Losses, continued:

Personnel expenses in 2010, 2011 and 2012 are detailed as follows:

   2010   2011   2012 
   MCh$   MCh$   MCh$ 

Remuneration

   157,839     169,114     185,479  

Bonuses

   69,203     100,494     71,674  

Lunch and health benefits

   17,817     20,272     21,954  

Staff severance indemnities

   7,140     6,167     12,608  

Training expenses

   1,380     1,493     1,671  

Other personnel expenses

   19,358     19,451     18,679  
  

 

 

   

 

 

   

 

 

 

Total

   272,737     316,991     312,065  
  

 

 

   

 

 

   

 

 

 

34.Administrative Expenses:

As of December 31, 2010, 2011 and 2012, administrative expenses are detailed as follows:

   2010   2011   2012 
   MCh$   MCh$   MCh$ 

General administrative expenses

   136,958     153,191     160,717  

Expenses for outsourced services

   26,870     37,601     42,015  

Board of Director’s expenses

   2,358     2,733     2,656  

Marketing expenses

   22,804     26,515     30,572  

Taxes, payroll taxes and contributions

   8,679     9,879     11,499  
  

 

 

   

 

 

   

 

 

 

Total

   197,669     229,919     247,459  
  

 

 

   

 

 

   

 

 

 
      Loans to customers as of December 31, 2013          
   Loans and
advance to
banks
  Commercial
loans
  Mortgage
loans
  Consumer
loans
  Total  Financial
Guarantees
  Total 
   MCh$  MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Provisions established:

      

Individual provisions

   (333  (39,744  —      —      (39,744  (3,955  (44,032

Group provisions

   —      (49,808  (5,665  (167,496  (222,969  (8,737  (231,706
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions established net

   (333  (89,552  (5,665  (167,496  (262,713  (12,692  (275,738
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released:

      

Individual provisions

   —      2,127    —      —      2,127    9,003    11,130  

Group provisions

   —      —      —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released net

   —      2,127    —      —      2,127    9,003    11,130  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recovery of written-off assets

   —      13,330    1,927    27,698    42,955    —      42,955  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions net allowances for credit risk

   (333  (74,095  (3,738  (139,798  (217,631  (3,689  (221,653
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

33.Provisions for Loan Losses, continued:

       Loans to customers as of December 31, 2014          
   Loans and
advance to
banks
   Commercial
loans
  Mortgage
loans
  Consumer
loans
  Total  Financial
Guarantees
  Total 
   MCh$   MCh$  MCh$  MCh$  MCh$  MCh$  MCh$ 

Provisions established:

         

Individual provisions

   —       (54,027  —      —      (54,027  (1,629  (55,656

Group provisions

   —       (46,061  (8,497  (198,017  (252,575  (120  (252,695
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions established net

   —       (100,088  (8,497  (198,017  (306,602  (1,749  (308,351
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released:

         

Individual provisions

   476     —      —      —      —      —      476  

Group provisions

   —       —      —      —      —      —      —    
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions released net

   476     —      —      —      —      —      476  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recovery of written-off assets

   —       14,272    2,152    29,885    46,309    —      46,309  
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Provisions net allowances for credit risk

   476     (85,816  (6,345  (168,132  (260,293  (1,749  (261,566
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

34.Personnel Expenses:

Personnel expenses in 2012, 2013 and 2014 are detailed as follows:

   2012   2013   2014 
   MCh$   MCh$   MCh$ 

Remuneration

   181,318     188,856     201,411  

Bonuses per collective bargaining*

   —       —       44,437  

Variable Compensation

   22,823     26,751     29,367  

Gratifications

   22,398     22,566     21,604  

Bonuses and incentives

   31,984     32,306     29,569  

Lunch and health benefits

   21,954     22,631     24,263  

Staff severance indemnities

   10,408     10,523     11,895  

Training expenses

   1,671     2,877     2,639  

Other personnel expenses

   17,309     16,726     19,327  
  

 

 

   

 

 

   

 

 

 

Total

   309,865     323,236     384,512  
  

 

 

   

 

 

   

 

 

 

*During 2014, we negotiated and finalized four-year collective bargaining agreements among Banco de Chile, Federación de Sindicatos, Sindicato Nacional y el Sindicato Nacional de Trabajadores Citibank NA. Additionally, our subsidiary Promarket S.A. finalized its collective bargaining process during August 2014, signing a Collective Bargaining Agreement for a period of three years. As result of these agreements, the agreed benefits were extended to non-union employees. In addition, the agreements generated a one-time expense in an amount of Ch$44,437 million.

35.Administrative Expenses:

As of December 31, 2012, 2013 and 2014, administrative expenses are detailed as follows:

   2012   2013   2014 
   MCh$   MCh$   MCh$ 

General administrative expenses

   160,717     164,228     179,412  

Outsources services

   42,015     44,118     47,221  

Board expenses

   2,656     2,589     2,762  

Marketing expenses

   30,572     29,053     29,431  

Taxes, payroll taxes and contributions

   11,499     12,514     11,711  
  

 

 

   

 

 

   

 

 

 

Total

   247,459     252,502     270,537  
  

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

36.Depreciation, Amortization and Impairment:

 

 (a)Amounts charged to income for depreciation and amortization during 2010, 20112012, 2013 and 20122014 are detailed as follows:

 

  2010   2011   2012   2012   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Depreciation and amortization

            

Depreciation of property and equipment (Note 14)

   19,935     20,543     20,614  

Amortization of intangibles assets (Note 13)

   15,029     14,588     14,532  

Depreciation of property and equipment (Note No.15a and Note No. 16)

   20,614     19,280     22,149  

Amortization of intangibles assets (Note No.14a)

   14,532     8,397     10,638  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   34,964     35,131     35,146     35,146     27,677     32,787  
  

 

   

 

   

 

   

 

   

 

   

 

 

 

 (b)As of December 31, 2010, 20112012, 2013 and 2012,2014, the impairment loss is detailed as follows:

 

  2010   2011   2012   2012   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Impairment loss

            

Impairment loss on investment instruments

   —       —       551     551     —       —    

Impairment loss on property and equipment (Note No.14)

   1,044     335     348  

Impairment loss on intangibles assets (Note No.13)

   —       296     —    

Impairment loss on property and equipment (Note No.15a)

   348     757     1,965  

Impairment loss on intangibles assets (Note No.14a)

   —       1,490     120  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   1,044     631     899     899     2,247     2,085  
  

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

36.37.Other Operating Income:

During 2010, 20112012, 2013 and 2012,2014, the Bank and its subsidiaries presented the following under other operating income:

 

  2010   2011   2012   2012   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Rental income

   5,367     5,614     6,007     6,007     7,440     8,083  

Credit card income

   —       —       2,694  

Income for assets received in lieu of payment

   6,440     5,918     5,674     5,674     6,126     1,223  

Expenses recovery

   2,133     1,957     2,895  

Expense recovery

   2,895     3,517     3,840  

Recovery from correspondent banks

   2,656     2,207     2,379     2,379     2,264     2,525  

Release of provisions

   —       —       2,318  

Release of provisions for contingencies

   294     173     624     624     1,376     —    

Refund of Insurance

   —       1,594     19  

Foreign advisory services

   2,130     1,474     —    

Other

   4,564     5,798     3,289     3,308     5,161     6,528  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   23,584     24,735     20,887     20,887     25,884     27,211  
  

 

   

 

   

 

   

 

   

 

   

 

 

 

37.38.Other Operating Expenses:

During 2010, 20112012, 2013 and 2012,2014, the Bank and its subsidiaries incurred the following other operating expenses:

 

  2010   2011   2012   2012   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Cobranding travel club and global pass

   13,302     17,360     18,935  

Write-offs for operating risks

   10,400     3,002     9,526  

Write-offs for operatings risks

   9,526     4,144     5,076  

Provisions for contingencies

   1,109     582     7,750  

Provision for other assets

   1,704     —       3,765     6,333     4,767     4,082  

Card administration

   2,584     2,602     2,163     1,113     1,106     949  

Provisions for contingencies

   689     2,495     1,109  

Operational expenses and writes-off leasing

   2,254     792     780  

Assets received in lieu of payment

   —       ��       12,852  

Other

   6,880     4,688     3,272     1,484     3,269     6,730  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   37,813     30,939     39,550     19,565     13,868     37,439  
  

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

38.39.Related Party Transactions:

The related parties of companies and their subsidiaries include entities of the company’s corporate group; corporations which are the company’s parent company, associated companies, subsidiaries and associates; directors, managers, administrators, main executives or receivers of the company on their own behalf or in representation of persons other than the company, and their respective spouses or family members up to the second degree of consanguinity or affinity, as well as any entity directly or indirectly controlled through any of them, the partnerships or companies in which the aforementioned persons are owners, directly or through other individuals or corporations, of 10% or more of their capital or directors, managers, administrators or main executives; any person that on their own or with others with whom they have a joint action agreement can designate at least one member of the company’s management or controls 10% or more of the capital or of the voting capital, if dealing with a public corporation; those that establish the company’s bylaws, or with a sound basis identify the directors’ committee; and those who have held the position of director, manager, administrator, main executive or receiver within the last eighteen months.

The Law of Corporations, Art.article 147, states that a public corporation can only enter into transactions with related parties when the objective is to contribute to the company’s interests, and when terms ofthe price, terms and conditions are commensurate to those prevailing in the market at the time of their approval and comply with the requirements and procedures stated in the same standard.

Moreover, article 84 of the General Banking Law establishes limits for loans granted to related parties and prohibits the granting of loans to the Bank’s directors, managers and general representatives.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

38.39.Related Party Transactions, continued:

 

 (a)Loans to related parties:

The following table details loans and accounts receivable, contingent loans and assets related to trading and investment securities, corresponding to related entities.

 

  Operating
Companies (*)
 Investment
Companies (**)
 Individuals (***) Total   Operating
Companies (*)
 Investment
Companies (**)
 Individuals (***) Total 
  2012 2011 2012 2011 2012 2011 2012 2011   2013 2014 2013 2014 2013 2014 2013 2014 
  MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$   MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 

Loans and accounts receivable:

                  

Commercial loans

   250,983    209,764    63,576    81,798    704    575    315,263    292,137     287,500    287,943    70,004    36,383    1,199    1,878    358,703    326,204  

Residential mortgage loans

   —      —      —      —      14,974    13,919    14,974    13,919     —      —      —      —      16,911    19,970    16,911    19,970  

Consumer loans

   —      —      —      —      3,920    3,387    3,920    3,387     —      —      —      —      3,790    4,111    3,790    4,111  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Gross loans

   250,983    209,764    63,576    81,798    19,598    17,881    334,157    309,443     287,500    287,943    70,004    36,383    21,900    25,959    379,404    350,285  

Provision for loan losses

   (761  (602  (136  (295  (68  (68  (965  (965   (929  (790  (152  (132  (52  (68  (1,133  (990
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net loans

   250,222    209,162    63,440    81,503    19,530    17,813    333,192    308,478     286,571    287,153    69,852    36,251    21,848    25,891    378,271    349,295  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Off balance sheet accounts:

                  

Guarantees

   1,864    18,670    —      —      —      —      1,864    18,670     1,109    3,238    —      40    —      —      1,109    3,278  

Letters of credits

   280    158    —      —      —      —      280    158     3,390    1,344    —      —      —      —      3,390    1,344  

Banks guarantees

   24,361    21,313    2,374    2,038    —      —      26,735    23,351     23,172    42,195    1,599    387    —      —      24,771    42,582  

Immediately available credit lines

   46,179    32,406    4,532    1,451    9,320    9,393    60,031    43,250     58,023    52,900    9,519    24,686    10,165    10,997    77,707    88,583  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total off balance sheet account

   72,684    72,547    6,906    3,489    9,320    9,393    88,910    85,429     85,694    99,677    11,118    25,113    10,165    10,997    106,977    135,787  

Provision for contingencies loans

   (44  (95  (1  (2  —      —      (45  (97   (34  (89  (1  —      —      —      (35  (89
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Off balance sheet account, net

   72,640    72,452    6,905    3,487    9,320    9,393    88,865    85,332     85,660    99,588    11,117    25,113    10,165    10,997    106,942    135,698  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Amount covered by Collateral:

                  

Mortgage

   31,034    27,958    55    55    15,325    15,431    46,414    43,444     27,122    28,811    55    55    14,476    13,405    41,653    42,271  

Warrant

   —      —      —      —      —      —      —      —       —      —      —      —      —      —      —      —    

Pledge

   13    —      —      —      7    7    20    7     13    13    —      —      7    7    20    20  

Other (****)

   2,842    2,855    17,300    17,300    10    10    20,152    20,165     2,849    2,602    17,300    17,300    10    10    20,159    19,912  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total collateral

   33,889    30,813    17,355    17,355    15,342    15,448    66,586    63,616     29,984    31,426    17,355    17,355    14,493    13,422    61,832    62,203  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
         
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Acquired Instruments

                  

For trading purposes

   —      2,154    —      —      —      —      —      2,154     1,078    —      —      6,015    —      —      1,078    6,015  

For investment purposes

   —      —      —      —      —      —      —      —       —      —      —      —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total acquired instruments

   —      2,154    —      —      —      —      —      2,154     1,078    —      —      6,015    —      —      1,078    6,015  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(*)Operating companies are legal entities which comply with the following conditions:

 

 i)They engage in operating activities and generate a separable flow of income,

 

 ii)Less than 50% of their assets are trading securities or investments.

 

(**)Investment companies include those legal entities that do not comply with the conditions for operating companies and are profit-oriented.
(***)Individuals include key members of the management, who directly or indirectly possespossess the authority and responsibility of planning, administrating and controlling the activities of the organization, including directors. This category also includes their family members who are expected to have an influence or to be influenced by such individuals in their interactions with the organization.
(****)These guarantees correspond mainly to shares and other financial guaranteesguarantees.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

38.39.Related Party Transactions, continued:

 

 (b)Other assets and liabilities with related parties:

 

  2012   2011   2013   2014 
  MCh$   MCh$   MCh$   MCh$ 

Assets

        

Cash and due from banks

   11,174     97,390     12,692     10,478  

Derivative instruments

   107,487     116,010     76,532     85,226  

Other assets

   2,931     2,665     22,047     17,386  
  

 

   

 

   

 

   

 

 

Total

   121,592     216,065     111,271     113,090  
  

 

   

 

   

 

   

 

 

Liabilities

        

Demand deposits

   87,480     69,287     123,223     220,603  

Savings accounts and time deposits

   378,965     531,448     233,172     423,012  

Derivative instruments

   83,582     100,238     85,694     123,569  

Debt issued

   79,821     —    

Borrowings from financial institutions

   134,820     194,059     192,682     154,022  

Other liabilities

   9,044     7,969     23,836     26,205  
  

 

   

 

   

 

   

 

 

Total

   773,712     903,001     658,607     947,411  
  

 

   

 

   

 

   

 

 

 

 (c)Income and expenses from related party transactions:

 

  2012   2011 
  Income   Expense   Income   Expense   2013   2014 
  MCh$   MCh$   MCh$   MCh$   Income
MCh$
   Expense
MCh$
   Income
MCh$
   Expense
MCh$
 

Type of income or expense recognized

                

Interest and revenue expenses

   18,759     21,501     15,522     31,190     21,280     15,917     23,873     18,631  

Fees and commission income

   56,717     33,337     56,979     30,647     70,848     35,897     56,154     40,879  

Net financial operating income

   36,171     —       100,187     —       —       47,348     —       13,797  

Provision for credit risk

   —       677     221     —       81     —       141     —    

Operating expenses

   —       64,213     —       65,718     —       66,313     —       100,070  

Other income and expenses

   744     40     843     53     553     27     631     83  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   112,391     119,768     173,752     127,608     92,762     165,502     80,799     173,460  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

(d)Payments to key management personnel:

   2014   2013 
   MCh$   MCh$ 

Remunerations

   3,752     3,372  

Short-term benefits

   4,123     3,093  

Contract termination indemnity

   1,251     418  

Stock–based benefits

   —       —    
  

 

 

   

 

 

 

Total

   9,126     6,883  
  

 

 

   

 

 

 

Composition of key personnel:

   N° of executives 
   2014   2013 

Position

    

CEO

   1     1  

CEOs of subsidiaries

   7     6  

Division Managers

   11     12  
  

 

 

   

 

 

 

Total

   19     19  
  

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

38.39.Related Party Transactions, continued:

 

 (d)(e)Directors’ expenses and remunerations:

 

  Remunerations Fees for attending
Board meetings
   Fees for attending
Committees and
Subsidiary Board
meetings (1)
   Consulting   Total 
  2012 2011 2012   2011   2012   2011   2012   2011   2012   2011   Remunerations Fees for attending
Board meetings
   Fees for attending
Committees and
Subsidiary Board
meetings  (1)
   Consulting   Total 
  MCh$ MCh$ MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   2013
MCh$
 2014
MCh$
 2013
MCh$
   2014
MCh$
   2013
MCh$
   2014
MCh$
   2013
MCh$
   2014
MCh$
   2013
MCh$
   2014
MCh$
 

Name of Directors

                                    

Pablo Granifo Lavín

   358(*)   347(*)   45     48     294     306     —       —       697     701     363(*)   383(*)   48     52     321     365     —       —       732     800  

Andrónico Luksic Craig

   147    142    8     14     —       —       —       —       155     156     149    155    13     10     —       —       —       —       162     165  

Jorge Awad Mehech

   49    47    23     27     110     107     —       —       182     181     50    52    24     24     113     130     —       —       187     206  

Gonzalo Menéndez Duque

   49    47    21     25     112     111     —       —       182     183     50    52    20     23     110     115     25     26     205     216  

Jaime Estévez Valencia

   49    47    23     26     92     87     —       —       164     160     50    52    23     26     97     106     —       —       170     184  

Rodrigo Manubens Moltedo

   49    47    23     26     49     48     —       —       121     121     50    52    23     24     52     51     —       —       125     127  

Jorge Ergas Heymann

   50    52    19     19     46     60     —       —       115     131  

Francisco Pérez Mackenna

   49    47    17     22     50     46     —       —       116     115     50    52    21     22     60     55     —       —       131     129  

Jorge Ergas Heyman

   49    36    17     16     47     42     —       —       113     94  

Thomas Fürst Freiwirth

   49    47    18     23     37     34     —       —       104     104     50    52    20     19     39     40     —       —       109     111  

Jean-Paul Luksic Fontbona

   34    52    10     9     2     —       —       —       46     61  

Guillermo Luksic Craig

   49    47    4     7     —       —       —       —       53     54     12    —      —       —       —       —       —       —       12     —    

Jacob Ergas Ergas

   —      10    —       4     9     17     —       —       9     31  

Felipe Joannon Vergara

   —      10    —       7     —       12     —       —       —       29  

Other directors’ subsidiaries

   —      —      —       —       165     166     —       86     165     252  

Others

   —      —      —       —       157     147     124     80     281     227  
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   897    874    199     245     965     976     —       86     2,061     2,181     908    954    221     228     997     1,069     149     106     2,275     2,357  
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Includes fees paid to members of the Advisory Committee of Banchile Corredores de Seguros Ltda. of MCh$1916 (MCh$915 in 2011)2013).
(*)Includes a provision of MCh$210226 (MCh$205214 in 2011)2013) for an incentive subject to achieving the Bank’s forecasted earnings.

Fees paid for advisory services to the Board of Directors amount to MCh$266179 (MCh$248124 in 2011)2013).

Travel and other related expenses amount to MCh$329226 (MCh$304190 in 2011)2013).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities:

Banco de Chile and its subsidiaries have defined a corporate framework for the Fair Value measurement and control to accomplish the Fair Value process according to local regulations, market standards and best practices in the industry. This framework is contained in Banco de Chile’s Fair Value Policy.

One of the most important definitiondefinitions in this framework is the Product Control Unit (“PCU”)(PCU) function. This area is independent from both the principal management and the business unit, and reports to the CFO of Banco de Chile. This area is responsible for the independent verification of Profit and Losses, and Fair Value measurement and control for all Treasury transactions; Trading, Funding and gapping and Investments deals.

To accomplish the measurements and controls, Banco de Chile and its subsidiaries, take into account at least the following aspects:

 

 (a)Industry standards of fair value measurements.

In the fair value calculation process, standard methodologies:methodologies are used; closing prices, discounted cash flows and option models, andmodels. In the options case, Black-Scholes model in the options case.is used. The input parameters are rates, prices and volatility levels for each term and market factor that can change the fair value of any instrumenttrade in the portfolio.local and international markets.

 

 (b)Quoted prices in active markets.

The fair value for instruments with quoted prices in active markets is determined using daily quotes from electronic systems information such as Bloomberg, and Bolsa de Comercio de Santiago, LVA and Risk America terminals. This quote represents the price at which the instrument isinstruments are frequently bought and sold in financial markets.

The prices used to determine the fair value of each instrument correspond to the midpoint for a specific market factor, currency and term.

 

 (c)Valuation techniques.techniques

If there are notis no market quotes in active markets for the financial instrument, valuation techniques will be used to determine the fair value.

Due to the fact that fair value models require a set of market parameters as inputs, it is part of the fair value process to maximize the utilization ofbased on observable quoted prices or derived from similar instruments in active markets. Nevertheless there are some cases for which neither quoted prices nor derived prices are available; in these cases external data from specialized providers, such as the broker ICAP, pricesprice for similar transactions and historical information it is used tofor validate the parameters that will be used as inputs.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (d)Fair value adjustments.

Part of the fair value process consistconsists of adjustments, Market Value Adjustments or MVA for short,adjustment, to take into account two different market inputs: bid/offer spreads and market factors liquidity. These adjustments arespreads. This adjustment is calculated and analyzed by the PCU and Risk Market areas.

The bid/offer spread adjustment reflects the expected impact on fair value due to close long or short positions in a specific market factor and term, valuated at their midpoint. For example, long positions in an asset will be impacted in order to reflect the fact that inwhen selling thatthe position pricesit will be quoted at bid instead at midpoint. For the bid/offer spread adjustment, market quotes or indicative prices for each position, instrument, currency and term are used. Bid, mid and offer market quotes are considered.

The liquidity adjustment considers the relative size to the market of each position in the portfolio. This adjustment is intended to reflect the relative size of Banco de Chile and the deepness of the markets. For this adjustment, the size of each position, recent transaction in active markets and recently observed liquidity are taking into account.

 

 (e)Fair value control.

To ensure that the market input parameters that Banco de Chile is using for fair value calculations represent the state of the market and the best estimatesestimate of fair value, the PCU unit runs on a daily basis an independent verification of prices and rates. This process aims to set a preventive control on the official market parameters provided by the respective business area. A comparative control based on mark-to-marketMark-to-Market differences, using one set of inputs prepared by the business area and one set prepared by the PCU, is conducted before fair value calculations. The output of this process is a set of differences in fair value by currency, product and portfolio. These differences are compared with specific ranges by grouping level,level; currency, product and portfolio.

In the event whenthat significant differences wereare detected, these differences are measured and scaled according to the amount of materiality for each grouping level, ranging from a single report to the trader untilto a report presented to the Board. These ranges of materiality control are approved by the Assets and Liabilities Committee (“ALCO”)(ALCO).

Complementary and in parallel, the PCU generates daily reports of P&L and risk market exposure. These two kinds of reports allows for adequate control and consistency ofin the parameters used in the valuationvaluations and post-valuation confirmation.backwards looking revisions.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (f)Judgmental analysis and information to Senior Management.

In particular, in cases where there is no market quotations for the instrument, similar transaction prices, ornor indicative parameters, a reasoned analysis and specific controls should be made to estimate the fair value of the operation or transaction. Within the Banco de Chile’s framework for fair value, described in the Fair Value Policy approved by the Board of Banco de Chile, the approval level required for this kindto operate these kinds of instruments, where there is no market information or available inferencescannot be inferred from prices or rates, is established.

 

 (i)Fair value hierarchy

Banco de Chile and his subsidiaries, takentaking into account the preceding statements, classify all the financial instruments among the following levels:

 

Level 1:    Observable, quoted price in active markets for the same instrument or specific type of transaction to be evaluated.
    In this level, are considered the following instruments:instruments are considered: currency futures, Chilean central bankCentral Bank and treasuryTreasury securities, mutual fundsfund investments and equity.
    For the Chilean central bankCentral Bank and treasuryTreasury securities, all instruments that belong to one of the following benchmark groups will be considered as Level 1: Pesos-02, Pesos-05, Pesos-07, Pesos-10, UF-02, UF-05, UF-07, UF-10, UF-20, UF-30. A benchmark group is composed by a number of instruments that have similar duration and share the same quoted price within the group. This condition allows for a greater depth of the market, assuring daily observable quotes.
    For each and every one of these instruments existthere exists daily observable market valuation parameters; internal rates of return and closing prices, respectively,respectively; therefore no assumptions are needed to calculate the fair value. For currency futures as well as mutual funds and equity, to determine fair value, the multiplication of closing prices timesby the number of instruments is used for fair value calculations.used. For Chilean central bankCentral Bank and treasuryTreasury securities the internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency, CLP or CLF.instrument. For mutual funds and equity, the current price multiplied by the quantity of instruments is used to calculate the fair value.
    The preceding described methodology corresponds to the one utilized for the Bolsa de Comercio de Santiago (Santiago’s main Exchange) and is recognized as the standard in the market.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (i)Fair value hierarchy, continuedcontinued:

 

Level 2:    No market quotesValuation techniques whose inputs are availablethose other than quoted prices included within Level 1 and that are observable for the specific financial instrument,assets or the observable prices are sporadic and therefore the market does not have enough depth.liabilities, either directly or indirectly. For instruments in this level, the valuation is doneperformed based on an inference from observable market parameters; such quoted prices for similar instruments in active markets. In this level the following inputs are included:

a) Quoted prices for similar assets or liabilities in active markets.

b) Quoted prices for identical or similar assets or liabilities in markets that are not active.

c) Inputs other than quoted prices that are observable for the asset or liability.

d) Inputs that are derived principally from or corroborated by observable market data.

    This level is composed mostly of derivatives, currency and rate derivatives, bank’s debt securities, debt of Chilean and foreign companies, mortgage claims, money market instruments and less liquid Chilean central bankCentral Bank and treasuryTreasury securities.
    For derivatives the fair value process dependdepends upon hiswhether this value is impacted by volatility as a relevant market factor; if that is the case, the Black-Scholes-Merton type of formula it is used. For the rest of the derivatives, namely swaps and forwards, net present value through discounted cash flows is used. For securities classified as level 2, the obtained internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency.
    In the event that there is no observable price for an instrument in a specific term, the price will be inferred from the interpolation between periods that do have observable quoted price in active markets. These models incorporate various market variables, including foreign exchange rates and interest rate curves. In some cases external data from specialized providers, brokers such as ICAP and Riskamerica, price for similar transactions and historical information it is used for validate the parameters that will be used as inputs.
The techniques described above are used by the Santiago Stock Exchange in Chile, Bloomberg or the Over-the-Counter, and correspond to the standard methodology used in the local and international markets.
Level 3:The input parameters used in the valuation are not observable through market quotes in active markets neither can be inferred directly from other transaction information in active markets. This category also includes instruments that are valued based on quoted prices for similar instruments where adjustments or assumptions are needed to reflect the differences between them.
Instruments classified as level 3 correspond to Corporate Debt issued mainly Chilean and foreign companies, issued both in Chile and abroad. These instruments are classified, for accounting purposes, as Available for Sale. For this securities classified as level 3, the indicative internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency. In this case only external data from specialized providers, brokers such as ICAP, Riskamerica and Interactive Data, it is used to for validate the parameters that will be used as inputs.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

(i)Fair value hierarchy, continued:

Valorization Techniques and Inputs:

Type of

Financial

Instrument

Valuation

Method

Description: Inputs and Sources

Local Bank and

Corporate Bonds

Discounted cash

flows model

Prices are provided by third party price providers that are widely used in the Chilean market.

Model is based on a Base Yield (Central Bank Bonds) and issuer spread.

The model is based on daily prices and risk/maturity similarities between

Instruments.

Offshore Bank and

Corporate Bonds

Discounted cash

flows model

Prices are provided by third party price providers that are widely used in the Chilean market.

Model is based on daily prices.

Local Central Bank

and Treasury Bonds

Discounted cash

flows model

Prices are provided by third party price providers that are widely used in the Chilean market.

Model is based on daily prices.

Mortgage

Notes

Discounted cash

flows model

Prices are provided by third party price providers that are widely used in the Chilean market.

Model is based on a Base Yield (Central Bank Bonds) and issuer spread.

The model takes into consideration daily prices and risk/maturity similarities between instruments.

Time

Deposits

Discounted cash

flows model

Prices are provided by third party price providers that are widely used in the Chilean market.

Model is based on daily prices and considers risk/maturity similarities between instruments.

Cross Currency Swaps,

Interest Rate Swaps,

FX Forwards, Inflation

Forwards

Discounted cash

flows model

Zero Coupon rates are calculated by using the bootstrapping method over swap rates.

Offshore rates and spreads are obtained from third party price providers that are widely used in the Chilean market.

Forward Points, Inflation forecast and local swap rates are provided by market brokers that are widely used in the Chilean market.

FX Options

Black-Scholes

Option Pricing

Model

Prices for volatility surface estimates are obtained from market brokers that are widely used in the Chilean market.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

40.Fair Value of Financial Assets and Liabilities, continued:

 

 (i)Fair value hierarchy, continued

 

Level 3:    For this level correspondsThese are financial instruments whose fair value is determined using unobservable inputs. An adjustment to an input that is significant to the described technique used by bothentire measurement can result in a fair value measurement classified within Level 3 of the Bolsa de Comercio de Santiago de Chilefair value hierarchy if the adjustment is using significant unobservable data entry.
Instruments classified as Bloomberg, andlevel 3 correspond to the standard methodologyCorporate Debt issued mainly by Chilean and foreign companies, issued both in Chile and abroad.

Valorization Techniques and Inputs:

Type of

Financial

Instrument

Valuation

Method

Description: Inputs and Sources
Local Bank and Corporate BondsDiscounted cash flows modelPrices are provided by third party price providers that are widely used in the localChilean market. (input is not observable by the market)

Model is based on a Base Yield (Central Bank Bonds) and internationalissuer spread.

The model is based on daily prices and risk/maturity similarities between instruments.
Offshore Bank and Corporate BondsDiscounted cash flows modelPrices are provided by third party price providers that are widely used in the Chilean market. (input is not observable by the market)

Model is based on daily prices.

During 2014, the Bank observed a disclosure deviation on a group of financial assets previously reported as level 3. In order to improve disclosure consistency and comparability with current year disclosure presented below, the 2013 disclosure has been re-expressed as follows:

   Level 2   Level 3 
   December
2013

MCh$
   Reclassifi-
cation
MCh$
   Adjusted
2013

MCh$
   December
2013
MCh$
   Reclassifi-
cation
MCh$
  Adjusted
2013
MCh$
 

Financial Assets

           

Financial assets held-for-trading

           

From the Chilean Government and Central Bank

   33,611     —       33,611     —  ��    —      —    

Other instruments issued in Chile

   255,597     2,914     258,511     5,353     (2,914  2,439  

Instruments issued abroad

   —       —       —       —       —      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Subtotal

   289,208     2,914     292,122     5,353     (2,914  2,439  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Financial assets available-for-sale

           

From the Chilean Government and Central Bank

   422,533     —       422,533     —       —      —    

Other instruments issued in Chile

   722,926     219,352     942,278     296,327     (219,352  76,975  

Instruments issued abroad

   —       32,307     32,307     33,986     (32,307  1,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Subtotal

   1,145,459     251,659     1,397,118     330,313     (251,659  78,654  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

   1,434,667     254,573     1,689,240     335,666     (254,573  81,093  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (ii)Level hierarchy classification and figures

The following table shows the figures by hierarchy, for instruments registeredrecorded at fair value.value in the statement of financial position.

 

 Level 1 Level 2 Level 3 Total   Level 1   Level 2 Level 3   Total 
 2011 2012 2011 2012 2011 2012 2011 2012   2013   2014   2013 2014 2013   2014   2013 2014 
 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$   MCh$   MCh$   MCh$ MCh$ MCh$   MCh$   MCh$ MCh$ 

Financial Assets

                     

Financial assets held-for-trading

  —      —      —      —      —      —      —      —                 

From the Chilean Government and Central Bank

  72,971    65,548    4,871    6,831    —      —      77,842    72,379  

From the Chilean government and Central Bank

   31,326     80,374     33,611    8,496    —       —       64,937    88,870  

Other instruments issued in Chile

  371    188    191,063    87,115    585    —      192,019    87,303     1,034     364     258,511    202,823    2,439     1,401     261,984    204,588  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  73,342    65,736    195,934    93,946    585    —      269,861    159,682     32,360     80,738     292,122    211,319    2,439     1,401     326,921    293,458  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Derivative contracts for trading purposes

                     

Forwards

  —      —      121,133    66,752    —      —      121,133    66,752     —       —       58,086    171,902    —       —       58,086    171,902  

Swaps

  —      —      258,681    258,496    —      —      258,681    258,496     —       —       291,429    609,843    —       —       291,429    609,843  

Call Options

  —      —      1,239    472    —      —      1,239    472  

Put Options

  —      —      2    341    —      —      2    341  

Call options

   —       —       2,301    2,583    —       —       2,301    2,583  

Put options

   —       —       600    287    —       —       600    287  

Futures

  —      —      —      —      —      —      —      —       —       —       —      —      —       —       —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  —      —      381,055    326,061    —      —      381,055    326,061     —       —       352,416    784,615    —       —       352,416    784,615  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Hedge derivative contracts

                     

Swaps

  —      —      —      22    —      —      —      22     —       —       714    101        714    101  

Cash flow hedge (Swap)

   —       —       37,970    78,703    —       —       37,970    78,703  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  —      —      —      22    —      —      —      22     —       —       38,684    78,804    ��       —       38,684    78,804  

CVA

   —       —       (16,413  (31,152  —       —       (16,413  (31,152
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Total

  —      —      381,055    326,083    —      —      381,055    326,083     —       —       374,687    832,267    —       —       374,687    832,267  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Financial assets available-for-sale

        

From the Chilean Government and Central Bank

  —      136,554    412,394    115,230    —      —      412,394    251,784  

Financial assets available-for-sale(1)

             

From the Chilean government and Central Bank

   163,875     86,066     422,533    253,258    —       —       586,408    339,324  

Other instruments issued in Chile

  —      —      608,945    653,955    321,378    278,073    930,323    932,028     —       —       942,278    1,026,569    76,975     179,378     1,019,253    1,205,947  

Instruments issued abroad

  —      30,538    —      —      128,403    57,966    128,403    88,504     42,236     58,376     32,307    3,211    1,679     1,938     76,222    63,525  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  —      167,092    1,021,339    769,185    449,781    336,039    1,471,120    1,272,316     206,111     144,442     1,397,118    1,283,038    78,654     181,316     1,681,883    1,608,796  

Other assets

                     

Mutual fund investments

  31,910    33,042    —      —      —      —      31,910    33,042     66,213     255,013     —      —      —       —       66,213    255,013  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  31,910    33,042    —      —      —      —      31,910    33,042     66,213     255,013     —      —      —       —       66,213    255,013  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Total

  105,252    265,870    1,598,328    1,189,214    450,366    336,039    2,153,946    1,791,123     304,684     480,193     2,063,927    2,326,624    81,093     182,717     2,449,704    2,989,534  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Financial Liabilities

        

Financial liabilities

             

Derivative contracts for trading purposes

                     

Forwards

  —      —      115,797    81,790    —      —      115,797    81,790     —       —       65,463    128,447    —       —       65,463    128,447  

Swaps

  —      —      272,976    264,052    —      —      272,976    264,052     —       —       343,467    691,666    —       —       343,467    691,666  

Call Options

  —      —      1,149    395    —      —      1,149    395  

Put Options

  —      —      35    387    —      —      35    387  

Call options

   —       —       3,559    2,249    —       —       3,559    2,249  

Put options

   —       —       705    362    —       —       705    362  

Futures

  —      —      —      —      —      —      —      —       —       —       —      —      —       —       —      —    

Other

  —      —      21    —      —      —      21    —       —       —       —      —      —       —       —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  —      —      389,978    346,624    —      —      389,978    346,624     —       —       413,194    822,724    —       —       413,194    822,724  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Hedge derivative contracts

  —      —                       

Swaps

  —      —      39,935    33,698    —      —      39,935    33,698     —       —       25,324    19,904    —       —       25,324    19,904  

Cash flow hedge (Swap)

   —       —       6,681    17,596    —       —       6,681    17,596  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Subtotal

  —      —      39,935    33,698    —      —      39,935    33,698     —       —       32,005    37,500    —       —       32,005    37,500  

DVA

   —       —       (19,089  (33,101  —       —       (19,089  (33,101
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Total

  —      —      429,913    380,322    —      —      429,913    380,322     —       —       426,110    827,123    —       —       426,110    827,123  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

  

 

 

Since last quarter of the present period, it was established more precisely the classification of the level of financial instruments, according to what observables are their prices in the market. The new definition is described above of this disclosure. It should be noted that this change has no impact on the valuation of financial assets and liabilities measured at fair value.

(1)As of December 31, 2014, 93% of instruments of level 3 have denomination “Investment Grade”. Also, 99% of total of these financial instruments correspond to domestic issuers.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (iii)Level 3 Reconciliation:

The following tables show the reconciliation between the beginning and ending balances of instruments classified as Level 3, whose fair value is reflected in the financial statements.

 

  Balance as of
January 1,
2011
   Gain (loss)
Recognized
in Income
 Gain (loss)
Recognized
in Equity
 Purchases Sales   Agreements Balance as of
December 31,
2011
   

Balance as of
January 1,

2013

   

Gain (loss)
Recognized

in Income

 Gain (loss)
Recognized
in Equity
 Purchases
and Agreements
   Sales Transfer from
Level 1 and 2
   

Transfer to

Level 1 and 2

   

Balance as of
December 31,

2013

 
  MCh$   MCh$ MCh$ MCh$ MCh$   MCh$ MCh$   MCh$   MCh$ MCh$ MCh$   MCh$ MCh$   MCh$   MCh$ 

Financial Assets

                       

Financial assets held-for-trading

                       

Other instruments issued in Chile

   1,740     94    —      (1,249  —       —      585     —       1,038    —      1,401     —      —       —       2,439  

Instruments issued abroad

   —       —      —          —       —      —       —       —      —      —       —      —       —       —    
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Subtotal

   1,740     94    —      (1,249  —       —      585     —       1,038    —      1,401     —      —       —       2,439  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Financial assets available-for-sale

                       

Other instruments issued in Chile

   230,480     11,992    (2,130  81,036    —       —      321,378     79,896     3,198    9    —       (6,128  —       —       76,975  

Instruments issued abroad

   84,072     16,115    (3,897  32,113    —       —      128,403     10,023     50    (77  —       (8,317  —       —       1,679  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Subtotal

   314,552     28,107    (6,027  113,149    —       —      449,781     89,919     3,248    (68  —       (14,445  —       —       78,654  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Total

   316,292     28,201    (6,027  111,900    —       —      450,366     89,919     4,286    (68  1,401     (14,445  —       —       81,093  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 
  Balance as of
January 1,
2012
   Gain (loss)
Recognized
in Income
 Gain (loss)
Recognized
in Equity
 Purchases Sales   Agreements Balance as of
December 31,
2012
   Balance as of
January 1,
2014
   Gain (loss)
Recognized
in Income (1)
 Gain (loss)
Recognized
in Equity(2)
 Purchases
and Agreements
   Sales Transfer from
Level 1 and 2
   Transfer to
Level 1 and 2
   Balance as of
December 31,
2014
 
  MCh$   MCh$ MCh$ MCh$ MCh$   MCh$ MCh$   MCh$   MCh$ MCh$ MCh$   MCh$ MCh$   MCh$   MCh$ 

Financial Assets

                       

Financial assets held-for-trading

                       

Other instruments issued in Chile

   585     183    —      (768  —       —      —       2,439     (1,087  —      49     —      —       —       1,401  

Instruments issued abroad

   —       —      —      —      —       —      —       —       —      —      —       —      —       —       —    
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Subtotal

   585     183    —      (768  —       —      —       2,439     (1,087  —      49     —      —       —       1,401  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Financial assets available-for-sale

                       

Other instruments issued in Chile

   321,378     1,511    (1,410  (43,406  —       —      278,073     76,975     6,230    784    82,909     (18,483  30,963     —       179,378  

Instruments issued abroad

   128,403     (5,713  19,666    (59,432  —       (24,958  57,966     1,679     270    (11  —       —      —       —       1,938  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Subtotal

   449,781     (4,202  18,256    (102,838  —       (24,958  336,039     78,654     6,500    773    82,909     (18,483  30,963     —       181,316  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

Total

   450,366     (4,019  18,256    (103,606  —       (24,958  336,039     81,093     5,413    773    82,958     (18,483  30,963     —       182,717  
  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

 

(1)Recorded in the income statement under “Net financial operating income”
(2)Recorded in Equity under “Other Comprehensive Income”

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (iv)Transfers between levels

The following tables show transfers between levels for financial assets and liabilities whose fair value it is recorded in the consolidated financial statements:

 

Transfers

from level 1

to level 2

2013
MCh$

Financial assets

Financial assets held-for-trading instruments

From the Chilean Government and Central Bank

16

Financial assets available-for-sale instruments

From the Chilean Government and Central Bank

106
Transfers
from level 2
to level 1
2013
MCh$

Financial assets

Financial assets held-for-trading instruments

From the Chilean Government and Central Bank

48

Financial assets available-for-sale instruments

From the Chilean Government and Central Bank

—  
   Transfers
from level 1
to level 2
 
   20122014
MCh$

Financial assets

Financial assets held-for-trading instruments

From the Chilean Government and Central Bank

500

Financial assets Available-for-sale instruments

From the Chilean Government and Central Bank

—  
Transfers
from level 2
to level 1
 
   2014
MCh$
 

Financial assets

  

Financial assets held-for-trading instruments

  

From the Chilean Government and Central Bank

   —    
Transfers
from level 2
to level 1
2012
MCh$

Financial assets

Financial assets Available-for-saleavailable-for-sale instruments

  

From the Chilean Government and Central Bank

   53,592—    

Since last quarter the classification was established according to what observables are their prices in the market. Transfers from level 2 to level 1 represent this situation. It should be noted that this change has no impact on the valuation of financial assets and liabilities measured at fair value.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (v)Sensitivity of level 3 instruments to changes in key assumptions of the input parameters for the valuation model.

The following table shows the impact on the fair value of Level 3 financial instruments using alternative assumptions that are reasonably possible. It is believed that the positive and negative impacts are similar:

 

  As of December 31, 2011   As of December 31, 2012   As of December 31, 2013   As of December 31, 2014 
  Level 3   Sensitivity to
changes in key
assumptions of
models
   Level 3   Sensitivity to
changes in key
assumptions of
models
   Level 3   Sensitivity to
changes in key
assumptions of
models
   Level 3   Sensitivity to
changes in key
assumptions
of models
 
  MCh$   MCh$   MCh$   MCh$  MCh$   MCh$   MCh$   MCh$ 

Financial Assets

                

Financial assets held-for-trading

                

Other instruments issued in Chile

   585     —       —       —       2,439     (273   1,401     (150
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   585     —       —       —       2,439     (273   1,401     (150
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial assets available-for-sale

                

Other instruments issued in Chile

   321,378     5,629     278,073     4,664     76,975     (895   179,378     (3,542

Instruments issued abroad

   128,403     2,911     57,966     612     1,679     (25   1,938     (67
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   449,781     8,540     336,039     5,276     78,654     (920   181,316     (3,609
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

FinancialWith the purpose to determine the sensitivity of the financial investments to changes in significant market factors, the Bank has made alternative calculations at fair value, changing those key parameters for the valuation and which are not directly observable in screens. In the case of financial assets presented in the table above, which corresponds to bank bonds and corporate bonds, input prices, prices based on broker quotes or runs were used, considering that these instruments do not have current prices or observables, was used as inputs prices, prices based on broker quotes or runs.observables. Prices are generally calculated as a base rate plus a spread. For local bonds, this was determined by applying only a 10% impact on the price, while for offshore bonds this was determined by applying only a 10% impact on the spread because the base rate is hedged with instruments on interest rate swaps so-called hedge accounting. The impact of 10% is considered a reasonable move considering the market performance of these instruments and comparing it against the adjustment bid / bid/offer that is provided for by these instruments.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (vi)Other assets and liabilities not measured at fair value

The following table summarizes the fair values of the Bank’s main financial assets and liabilities that are not recorded at fair value in the Statement of Financial Position. The values shown in this note do not attempt to estimate the value of the Bank’s income-generating assets, nor forecast their future behavior. The estimated fair value is as follows:

 

  Book Value   Fair Value   Book Value   Estimated Fair Value 
  2011   2012   2011   2012   2013   2014   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Assets

                

Cash and due from banks

   881,146     684,925     881,146     684,925     873,308     915,133     873,308     915,133  

Transactions in the course of collection

   373,639     310,077     373,639     310,077     300,026     356,185     300,026     356,185  

Cash collateral on securities borrowed and reverse repurchase agreements

   47,981     35,100     47,981     35,100     82,422     27,661     82,422     27,661  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   1,302,766     1,030,102     1,302,766     1,030,102     1,255,756     1,298,979     1,255,756     1,298,979  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans and advances to banks

                

Domestic banks

   315,873     1,115,000     315,873     1,115,000     99,976     169,953     99,976     169,953  

Chilean Central Bank

   600,581     551,108     600,581     551,108  

Foreign banks

   332,552     228,322     332,552     228,322     361,499     434,304     361,499     434,304  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   648,425     1,343,322     648,425     1,343,322     1,062,056     1,155,365     1,062,056     1,155,365  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans to customers, net

                

Commercial loans

   11,005,194     11,533,904     10,973,062     11,473,251     12,837,531     12,836,933     12,695,722     12,707,255  

Residential mortgage loans

   3,591,530     4,182,587     3,557,248     4,201,091     4,713,805     5,394,602     4,760,593     5,657,988  

Consumer loans

   2,427,032     2,667,467     2,426,959     2,683,593     2,890,136     3,169,240     2,914,188     3,170,640  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   17,023,756     18,383,958     16,957,269     18,357,935     20,441,472     21,400,775     20,370,503     21,535,883  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   18,974,947     20,757,382     18,908,460     20,731,359     22,759,284     23,855,119     22,688,315     23,990,227  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities

                

Current accounts and other demand deposits

   4,895,426     5,470,971     4,895,426     5,470,971     5,984,332     6,934,373     5,984,332     6,934,373  

Transactions in the course of payment

   155,424     72,684     155,424     72,684     51,898     53,049     51,898     53,049  

Cash collateral on securities lent and reverse repurchase agreements

   223,202     226,396     223,202     226,396     256,766     249,482     256,766     249,482  

Saving accounts and time deposits

   9,282,324     9,612,950     9,273,010     9,589,643     10,402,725     9,721,246     10,422,095     9,719,397  

Borrowings from financial institutions

   1,690,939     1,108,681     1,689,172     1,103,252     989,465     1,098,716     984,999     1,094,468  

Other financial obligations

   184,785     162,123     184,785     162,123     210,926     186,573     210,926     186,573  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   16,432,100     16,653,805     16,421,019     16,625,069     17,896,112     18,243,439     17,911,016     18,237,342  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Debt issued

                

Letters of credit for residential purposes

   106,965     85,967     115,825     87,088     67,514     52,730     70,351     55,482  

Letters of credit for general purposes

   45,133     29,229     48,871     29,610     18,977     11,584     19,775     12,189  

Bonds

   1,488,369     2,412,233     1,459,145     2,282,014     3,533,462     4,223,047     3,446,571     4,283,006  

Subordinated bonds

   747,874     746,504     728,330     726,369     747,007     770,595     739,184     782,529  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   2,388,341     3,273,933     2,352,171     3,125,081     4,366,960     5,057,956     4,275,881     5,133,206  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   18,820,441     19,927,738     18,773,190     19,750,150     22,263,072     23,301,395     22,186,897     23,370,548  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

39.40.Fair Value of Financial Assets and Liabilities, continued:

 

 (vi)Other assets and liabilities not measured at fair value, continued:

The fair value of assets

Other financial instruments not presentedmeasured at fair value in our statement of financial position, but for which the Statement of Financial Positionfair value is derived from balance sheet stocks and cash flows that Banco de Chile expects to receive, discounted using the relevant market interest rate for each type of transaction.disclosed, are not managed on a fair value basis. These cash flows are obtained from regulatory reports, in particular the C40 report, which is issued by the Bank.

The C40 report contains cash flows, in future value, forinstruments include assets and liabilities such as loans and deposits to customers, bank borrowings, debt issued, and other financial assets and obligations with diverse maturities and features. Fair values of these assets/liabilities are estimated by maturityapplying the traditional Discounted Cash Flows (DCF) model and currency.using diverse valuation inputs such as yield curves, credit risk spreads, etc. Also, since some of these assets/liabilities are not traded in the market, judgmental analysis is required in determining the adequacy of the inputs and fair values.

The table below sets forth the fair value of Financial Assets/Liabilities not measured at fair value on the balance sheet, for the years ended December 31, 2013 and 2014:

   Level 1   Level 2   Level 3   Total 
   Estimated Fair
Value
   Estimated Fair
Value
   Estimated Fair
Value
   Estimated Fair
Value
 
   2013   2014   2013   2014   2013   2014   2013   2014 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Assets

                

Cash and due from banks

   873,308     915,133     —       —       —       —       873,308     915,133  

Transactions in the course of collection

   300,026     356,185     —       —       —       —       300,026     356,185  

Receivables from repurchase agreements and security borrowing

   82,422     27,661     —       —       —       —       82,422     27,661  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   1,255,756     1,298,979     —       —       —       —       1,255,756     1,298,979  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to banks

                

Domestic banks

   99,976     169,953     —       —       —       —       99,976     169,953  

Central bank

   600,581     551,108     —       —       —       —       600,581     551,108  

Foreign banks

   361,499     434,304     —       —       —       —       361,499     434,304  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   1,062,056     1,155,365     —       —       —       —       1,062,056     1,155,365  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans to customers, net

                

Commercial loans

   —       —       —       —       12,695,722     12,707,255     12,695,722     12,707,255  

Residential mortgage loans

   —       —       —       —       4,760,593     5,657,988     4,760,593     5,657,988  

Consumer loans

   —       —       —       —       2,914,188     3,170,640     2,914,188     3,170,640  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   —       —       —       —       20,370,503     21,535,883     20,370,503     21,535,883  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   2,317,812     2,454,344     —       —       20,370,503     21,535,883     22,688,315     23,990,227  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                

Current accounts and other demand deposits

   5,984,332     6,934,373     —       —       —       —       5,984,332     6,934,373  

Transactions in the course of payment

   51,898     53,049     —       —       —       —       51,898     53,049  

Payables from repurchase agreements and security lending

   256,766     249,482     —       —       —       —       256,766     249,482  

Savings accounts and time deposits

   —       —       —       —       10,422,095     9,719,397     10,422,095     9,719,397  

Borrowings from financial institutions

   —       —       —       —       984,999     1,094,468     984,999     1,094,468  

Other financial obligations

   210,926     186,573     —       —       —       —       210,926     186,573  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   6,503,922     7,423,477     —       —       11,407,094     10,813,865     17,911,016     18,237,342  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt Issued

                

Letters of credit for residential purposes

   —       —       70,351     55,482     —       —       70,351     55,482  

Letters of credit for general purposes

   —       —       19,775     12,189     —       —       19,775     12,189  

Bonds

   —       —       3,446,571     4,283,006     —       —       3,446,571     4,283,006  

Subordinate bonds

   —       —       —       —       739,184     782,529     739,184     782,529  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   —       —       3,536,697     4,350,677     739,184     782,529     4,275,881     5,133,206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   6,503,922     7,423,477     3,536,697     4,350,677     12,146,278     11,596,394     22,186,897     23,370,548  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

40.Fair Value of Financial Assets and Liabilities, continued:

(vi)Other assets and liabilities not measured at fair value, continued:

We estimate fair values for these assets/liabilities, as follows:

Short-Term Financial Assets/Liabilities: For long term assets and liabilities contractual cash flowswith no specific maturity (on demand) or terms of less than three months we use the carrying or book values as proxies of their fair value, since their tenors are usednot believed to calculatesignificantly affect their valuation. As a result, these assets/liabilities are categorized in Level 1. This assumption is applied to the fair value. The cash flows are discountedfollowing assets/liabilities:

Cash and due from banksCurrent accounts and other demand deposits
Transactions in the course of collection (asset)Transactions in the course of payments (liability)
Cash collateral on securities borrowed and reverse repurchase agreements (asset)Cash collateral on securities loaned and repurchase agreements (liability)
Loans and advance to banksOther financial obligations

Loans to Customers: Fair value is determined by type of assetusing the DCF model and currency to obtain their present value. Theinternally generated discount rates, used tobased on internal transfer rates derived from our transfer price policy. After we calculate the present value, we deduct the related loan loss allowances in order to incorporate the credit risk associated with each contract or loan. As we use internally generated parameters for each typevaluation purposes, we categorize these instruments in Level 3.

Letters of Credit and Bonds: In order to determine the present value of contractual cash flows, we apply the DCF model by using market interest rates that are available in the market, either for the instruments under valuation or instruments with similar features that fit valuation needs in terms of currency, maturities and liquidity. Market interest rates are obtained from third party price providers widely used by the market. As a result of the valuation technique and the quality of inputs (observable) used for valuation, we categorize these financial liabilities in Level 2.

Saving Accounts, Time Deposits, Borrowings from Financial Institutions and Subordinated Bonds: The DCF model is used to obtain the present value of committed cash flows by applying a bucket approach and average adjusted discount rates that are derived from both market rates for instruments with similar features and our transfer price policy. As we use internally generated parameters and/or apply significant judgmental analysis for valuation purposes, we categorize these financial assets/liabilities in Level 3.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

40.Fair Value of Financial Assets and Liabilities, continued:

(vii)Offsetting of financial assets and liabilities

In accordance with IAS 32 Financial Instruments: Presentation, the Bank should report financial assets and financial liabilities on a net basis on the balance sheet only if there is a legally enforceable right to set off the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability correspondsimultaneously. Because Bank’s netting agreements do not qualify for balance sheet netting, it presents its financial instruments on a gross basis on the balance sheet.

The following table shows the impact of netting arrangements on all derivative financial instruments that are subject to enforceable master netting agreements or similar agreements (including financial collaterals), but do not qualify for balance sheet netting.

The “Net amounts” presented below are not intended to represent the marginal ratesBank’s actual exposure to credit risk, as a variety of each product, considering specific rates by currencycredit mitigation strategies are employed in addition to netting and term to capture both the risk inherent to the term as well as the expected level of each currency.collateral arrangements.

For

   Effect of offsetting on balance sheet   Related amount not offset 

As of December 31, 2013

  Gross amount
MCh$
   Amounts
offset
MCh$
   Net amounts reported on the
balance sheet

MCh$
   Financial
Instruments
MCh$
  Financial
Collateral
MCh$
  Net
amount
MCh$
 

Derivative financial assets

   374,687     —       374,687     (158,410  (31,651  184,626  

Derivative financial liabilities

   426,110     —       426,110     (158,410  (39,102  228,598  
   Effect of offsetting on balance sheet   Related amount not offset 

As of December 31, 2014

  Gross amount
MCh$
   Amounts
offset
MCh$
   Net amounts reported on the
balance sheet

MCh$
   Financial
Instruments
MCh$
  Financial
Collateral
MCh$
  Net
amount
MCh$
 

Derivative financial assets

   832,267     —       832,267     (436,626  (49,804  345,837  

Derivative financial liabilities

   827,123     —       827,123     (436,626  (124,418  266,079  

Derivative assets and liabilities

The “Financial Instruments” column identifies financial assets and liabilities that have a short term maturity (less than three months) it is assumed thatare subject to set off under netting agreements, such as the carrying amounts approximate their fair value. This assumption is alsoISDA Master Agreement of derivative exchange or clearing counterparty agreements, whereby all outstanding transactions with the same counterparty could be offset and close-out netting applied across all outstanding transaction covered by the agreements if an event of default or other predetermined events occur (“early contract termination”).

Financial collateral refers to demand depositscash and savings accounts without specific maturity.

For loans, contractual cash flows and loan loss provisions are usednon-cash collateral obtained, typically daily or weekly, to calculatecover the fair value. The cash flows are discountednet exposure between counterparties by typeenabling the collateral to be realized in an event of asset and currency to obtain their present value. Consecutively, the loan loss provision, by type of asset, is subtracted from the present value to take into account the fact that the Bank has already model the estimate probability that his customers do not fulfill their obligations.

The fair value of liabilities that do not have quoted market prices, it is based on discounted cash flows, using interest rates to similar terms.

The Bank did not incur any “day 1” profitsdefault or losses during the reporting period (difference between mark to market at the end of day and the effective rate of the transactions)if other predetermined events occur (“early contract termination”).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

40.41.Maturity of Assets and Liabilities:

The table below shows the classification of assets and liabilities as current and non-current as the balance sheet is presented in the order of liquidity without indicating this information.

 

  As of December 31, 2011   As of December 31, 2013 
  Less than
12 months
MCh$
   Over 1 year
MCh$
   Total
MCh$
   Less than
12 months

MCh$
   Over 1 year
MCh$
   Total
MCh$
 

Assets

            

Cash and due from banks

   881,146     —       881,146     873,308     —       873,308  

Transactions in the course of collection

   373,639     —       373,639     300,026     —       300,026  

Financial assets held-for-trading

   269,861     —       269,861     326,921     —       326,921  

Cash collateral on securities borrowed and reverse repurchase agreements

   47,981     —       47,981  

Receivables from repurchase agreements and security borrowing

   82,422     —       82,422  

Derivative instruments

   170,352     210,703     381,055     90,042     284,645     374,687  

Loans and advance to banks (*)

   649,431     —       649,431  

Loans in advance to banks (*)

   1,063,348     —       1,063,348  

Loans to customers (*)

   9,128,146     8,258,351     17,386,497     8,976,983     11,903,787     20,880,770  

Financial assets available-for-sale

   635,951     835,169     1,471,120     365,178     1,316,705     1,681,883  

Investment in other companies

   —       13,196     13,196  

Investments in other companies

   —       14,407     14,407  

Property and equipment

   —       207,888     207,888     —       197,578     197,578  

Investment properties

   —       17,079     17,079     —       16,317     16,317  

Intangible assets

   —       81,026     81,026     —       72,223     72,223  

Current tax assets

   —       —       —       —       —       —    

Deferred tax assets, net

   —       60,025     60,025     —       56,421     56,421  

Other assets

   109,523     170,281     279,804     140,579     233,408     373,987  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   12,266,030     9,853,718     22,119,748  

Total Assets

   12,218,807     14,095,491     26,314,298  
  

 

   

 

   

 

   

 

   

 

   

 

 
  As of December 31, 2012   As of December 31, 2014 
  Less than
12 months
MCh$
   Over 1 year
MCh$
   Total
MCh$
   Less than
12 months
MCh$
   Over 1 year
MCh$
   Total
MCh$
 

Assets

            

Cash and due from banks

   684,925     —       684,925     915,133     —       915,133  

Transactions in the course of collection

   310,077     —       310,077     356,185     —       356,185  

Financial assets held-for-trading

   159,682     —       159,682     293,458     —       293,458  

Cash collateral on securities borrowed and reverse repurchase agreements

   35,100     —       35,100  

Receivables from repurchase agreements and security borrowing

   27,661     —       27,661  

Derivative instruments

   127,507     198,576     326,083     290,462     541,805     832,267  

Loans and advance to banks (*)

   1,344,281     —       1,344,281  

Loans in advance to banks (*)

   1,137,988     18,193     1,156,181  

Loans to customers (*)

   8,062,399     10,709,362     18,771,761     9,054,104     12,837,229     21,891,333  

Financial assets available-for-sale

   787,053     485,263     1,272,316     848,458     760,338     1,608,796  

Investment in other companies

   —       11,674     11,674  

Investments in other companies

   —       23,043     23,043  

Property and equipment

   —       205,189     205,189     —       205,403     205,403  

Investment properties

   —       16,698     16,698     —       15,936     15,936  

Intangible assets

   —       75,610     75,610     —       66,859     66,859  

Current tax assets

   —       —       —       —       —       —    

Deferred tax assets, net

   —       55,801     55,801     —       94,240     94,240  

Other assets

   122,842     194,923     317,765     278,062     308,493     586,555  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   11,633,866     11,953,096     23,586,962  

Total Assets

   13,201,511     14,871,539     28,073,050  
  

 

   

 

   

 

   

 

   

 

   

 

 

 

(*)The respective provisions, which amount to MCh$362,741439,298 and MCh$387,803490,558 in 20112013 and 2012,2014, respectively, for loans to customers and MCh$1,0061,292 and MCh$959816 for loans and advances to banks, have not been deducted from these balances.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

40.41.Maturity of Assets and Liabilities, continued:

 

  As of December 31, 2011   As of December 31, 2013 
  Less than
12 months
MCh$
   Over 1 year
MCh$
   Total
MCh$
   Less than
12 months

MCh$
   Over 1  year
MCh$
   Total
MCh$
 

Liabilities

            

Current accounts and other demand deposits

   4,895,426     —       4,895,426     5,984,332     —       5,984,332  

Transactions in the course of payment

   155,424     —       155,424     51,898     —       51,898  

Cash collateral on securities lent and reverse repurchase agreements

   223,202     —       223,202  

Payables from repurchase agreements and security lending

   256,766     —       256,766  

Saving accounts and time deposits

   8,811,613     470,711     9,282,324     10,017,201     385,524     10,402,725  

Derivative instruments

   162,863     267,050     429,913     140,318     285,792     426,110  

Borrowings from financial institutions

   1,418,654     272,285     1,690,939     721,879     267,586     989,465  

Debt issued

   91,414     2,296,927     2,388,341     513,966     3,852,994     4,366,960  

Other financial obligations

   129,892     54,893     184,785     166,902     44,024     210,926  

Current tax liabilities

   —       3,095     3,095     —       7,131     7,131  

Employee benefits

   —       60,634     60,634     —       67,944     67,944  

Provisions

   —       131,344     131,344     —       154,650     154,650  

Other liabilities

   134,820     135,085     269,905     108,380     167,382     275,762  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities

   16,023,308     3,692,024     19,715,332  

Total Liabilities

   17,961,642     5,233,027     23,194,669  
  

 

   

 

   

 

   

 

   

 

   

 

 
  As of December 31, 2012   As of December 31, 2014 
  Less than
12 months
MCh$
   Over 1 year
MCh$
   Total
MCh$
   Less than
12 months

MCh$
   Over 1  year
MCh$
   Total
MCh$
 

Liabilities

            

Current accounts and other demand deposits

   5,470,971     —       5,470,971     6,934,373     —       6,934,373  

Transactions in the course of payment

   72,684     —       72,684     53,049     —       53,049  

Cash collateral on securities lent and reverse repurchase agreements

   226,396     —       226,396  

Payables from repurchase agreements and security lending

   249,482     —       249,482  

Saving accounts and time deposits

   9,035,534     577,416     9,612,950     9,384,054     337,192     9,721,246  

Derivative instruments

   118,734     261,588     380,322     219,166     607,957     827,123  

Borrowings from financial institutions

   966,725     141,956     1,108,681     898,461     200,255     1,098,716  

Debt issued

   302,556     2,971,377     3,273,933     946,746     4,111,210     5,057,956  

Other financial obligations

   113,117     49,006     162,123     146,764     39,809     186,573  

Current tax liabilities

   —       23,189     23,189     —       19,030     19,030  

Employee benefits

   —       64,545     64,545     —       81,515     81,515  

Provisions

   —       141,839     141,839     —       185,643     185,643  

Other liabilities

   132,651     172,454     305,105     45,580     210,415     255,995  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities

   16,439,368     4,403,370     20,842,738  

Total Liabilities

   18,877,675     5,793,026     24,670,701  
  

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management:

 

 (1)Introduction

The Bank’s risk management is based on specialization, knowledge of the business and the experience of its teams, with professionals specifically dedicated to each different type of risk. Our policy is to maintain an integrated, forward looking approach to risk management, taking into account the current and forecasted economic environment and the risk/return ratio of all products for both the Bank and its subsidiaries.

Our credit policies and processes acknowledge the particularities of each market and segment, thus affording specialized treatment to each one of them. The integrated information prepared for risk analysis is key to developing our strategic plan, this objectives include:plan. This objective includes: determining the desired risk level for each business line; aligning all strategies with the established risk level; communicating desired risk levels to Bank’s commercial areas; developing models, processes and tools for evaluating, measuring and controlling risk throughout the different business lines and areas; informing the board of directors about risks and their evolution; proposing action plans to address important deviations in risk indicators and enforcing compliance of applicable standards and regulations.

 

 (a)Risk Management Structure

Credit and Market Risk Management (Liquidity and Price risk), lies at the all levels of the Organization, with a structure that recognizes the relevance of the different risk areas that exist. Current levels are:

 

 (i)Board of Directors

The Board is responsible for the establishment and monitoring of the Bank’s risk management structure. Due to the above, it is permanently informed regarding the evolution of the different risk areas, participating through its Finance Committee, International and Financial Risk Committees,Committee, Credit Committees,Committee, Portfolio Committees and Audit Committee, , which check the status of credit and market risks. In addition, it actively participates in each of them, informed of the status of the portfolio and participating in the strategic definitions that impact the quality of the portfolio.

Risk management policies are established in order to identify and analyze the risks faced by the Bank, to set adequate limits and controls and monitor risks and compliance with limits. The policies and risk management systems are regularly reviewed in order for them to reflect changes in market conditions and the Bank’s activities. It, through its standards and management procedures intends to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (1)Introduction, continuedcontinued:

 

 (a)Risk Management Structure, continuedcontinued:

 

 (ii)Finance, International and Financial Risk CommitteeCommittees

This committee meets monthlyThe main function of the Finance, International and Financial Risk Committees is to review developments and the current status of financial positionsexposures and market, price and liquidity risk. It reviews estimated results from financial positions in orderrisk, particularly the control of exposures and risks relating to measure the risk/return ratio of the Bank’s Treasury business, as well as the evolution oflimits and forecasts regarding use of capital. The/ or internal alerts. Additionally, due to knowledge of the current state of the market risks allow to forecastfinancial exposures, these committees estimate the potential future loss with an important confidence level, in the case of adverse transactions in the main market variables or illiquidity (exchange rate, interest rates and options volatility) or tight liquidity, (either liquidityboth under the conditions observed in the past, with a certain confidence level, as well as when faced with simulations of trading in financial instruments or funding liquidity).severe stress environments.

Additionally,Moreover, the Committee reviews the estimated financial results that these financial exposures generate these positions separately,monthly as well the results reported in the year, in order to measure the risk-return businessesratio involved in handling financial positions of the Treasury, the evolution of the use of capital and the estimated credit riskexposures of Treasury transactions, such as positions in bonds and market that the Bank will face in the future. The Committee also discussed the international financial exposure and liabilities majormain credit exposures generated by derivatives transactions.

The Committee is responsible for the design ofdesigning policies and procedures related tofor the establishment of limits and alerts of financial positions,exposures, as well as to ensure a correct and opportune measurement, control and reporting of the same. Subsequently, policies and procedures are subject to approval by the Bank’s Board.

The Finance, International and Financial Risk Committee comprisesis made up of the Chairman, four Directors, the General Manager, the Manager of Corporate Risk Division, the Manager of the Corporate and Investment Banking Division, the Manager of Financial Control Division, the Manager of Treasury Division and the Manager of Financial Risk Area.

The Committee meets in regular session once a month and may be citedcalled by the extraordinary request of the President, two Directors or the General Manager.

 

 (iii)Credit Committees

The corporate governance structure of the Bank provides various credit committees responsible for credit decisions related to the different business segments and the type of risk involved.

Each credit committee is responsible for defining the terms and conditions of acceptance of counterparty risks considered in the evaluation. The Corporate Risk Division participates independently and autonomously from commercial areas.

These committees have higher expression in the Credit Committee of the Board, consisting of the General Manager, the Manager of Corporate Risk Division, and at least three directors who review weekly all operations weekly that exceed UF750,000.

Each credit committeeUF 750,000. The attendance of the Directors is responsible for definingnot limited to the termsnumber of Directors required; therefore, each and conditionsevery one of acceptance of counterparty risks consideredthe Board members can participate in the evaluation, and are comprised of members with sufficient powers for decision-making. The Corporate Risk Division participates in an independently and autonomouslyfrom commercial areas.Board Credit Committee.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (1)Introduction, continuedcontinued:

 

 (a)Risk Management Structure, continuedcontinued:

 

 (iv)Portfolio Risk Committee

The main function of the Portfolio Risk Committee is to understand, from aan overall perspective, the composition of the Bank’s loan portfolio. This is, according toinvolves economic sectors, business segments, products, terms and everything that would have a broad view ofaffect the counterparty risk is assumed.that the Bank assumes. This Committee reviews, in detail, the main exposures by economic groups, debtors and behavioral parameters such as default indicators, past due loans 90 days or more, impairment, charges-off and provisions for loan losses for each segment.segment, and monitors the sectoral concentrations and its evolution in the framework of Sectoral Policy Limits.

The mission of this Committee is to approve and propose various risk management strategies to the Board. This includes credit policies, portfolio assessment methodologies and the calculation of provisions to cover expectedfor loan losses. It is also responsible for the sufficiency of provisions; authorizing extraordinary charge-offs when recovery attempts have been exhausted; and management control settlement of assets received in lieu of payments. It also reviews the methodological guidelines for the development of credit risk models, which are assessed on the Technical Committee for the Supervision of internal models.

The Portfolio Risk Committee meets monthly and is composed of the Chairman of the Board, two Directors, the General Manager, the Manager of Corporate Risk Division, the Manager of Commercial Division, the Manager of the Individuals Risk Division and the Area Manager Risk Architecture.Architecture and the boss of Information Intelligence Area. The Committee may be summoned to an extraordinary request of the President, two Directors or the General Manager.

(v)Treasury

The Bank’s Treasury Division is responsible for managing price risks (interest rates, exchange rates and options volatility) for its Trading and Accrual Portfolios, based on limits approved by the Board of Directors. In addition, it is the sole body responsible for ensuring that the Bank maintains adequate liquidity levels in line with market conditions and the needs of its different business units.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (1)Introduction, continuedcontinued:

 

 (a)Risk Management Structure, continuedcontinued:

 

 (vi)(v)Corporate Risk Division

Banco de Chile has a team with a vast experience and knowledge in each matter related to risks associated with credit, market, operational and technology, which ensures comprehensive and consolidated management of the same, including the Bank and its subsidiaries, identifying and evaluating the risks generated within customers, in their own operations and their suppliers. The focus is on the future, and determining whichfinding determine with different techniques and tools, may lead to betterthe potential changes that could affect the solvency, liquidity, operationsthe correct operation or reputational value forthe reputation of Banco of Chile.

Regarding the management of Credit Risk, the Corporate Risk Division oversees the quality of the portfolio and improvingoptimizing the risk-return tradeoff forto all segments of people and companies as the Bank managesmanaging the stages of approval, monitoring and recovery of loans granted.

 

 (vii)Operational Risk Committee

The mission of the Operational Risk Committee is to identify, prioritize and set strategies to mitigate key operational risk events, ensure the implementation of the management model, establish tolerances risk, ensure compliance programs, policies and procedures relating to Privacy and Information Security, Business Continuity and Operational Risk for Banco de Chile.

This year the Bank increased the frequency of meetings, creating a monthly Operational Risk Committee, which has become the governing body for Operational Risk Management and Technology Risk management also involves the Directors of the Bank through quarterly presentations to Directors and the Audit Committee on these matters.

The Operational Risk Committee is composed of the General Manager, Division Manager Corporate Risk, Manager of Financial Control Division, Manager of Operations and Technology Division, Manager of Commercial Banking Area and Manager of Operational Risk and Technology.

(b)Internal Audit

Risk management processes throughout the Bank are continually audited by the Internal Audit Area, which analyzes the sufficiency of and compliance with risk management procedures. Internal Audit discusses the results of all evaluations with management and reports its findings and recommendations to the Board of Directors.

(c)Measurement Methodology

In terms of Credit Risk, provision levels and portfolio expenses are the basic measurements used to determine the credit quality of our portfolio.

Risk monitoringMonitoring and controlcontrolling risks are performed primarily based on established limits.limits by the board. These limits reflect the Bank’s business and market strategy as well as the risk level it is willing to accept, with added emphasis on selected industry sectors.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (1)Introduction, continuedcontinued:

 

 (c)(b)Measurement Methodology, continuedcontinued:

 

The Bank’s Chief Executive Officer, on a daily basis, and the Finance, International and Market Risk Committee, on a monthly basis, receive a report detailing the evolution of the Bank’s price and liquidity risk, based on both internal and regulator-imposed metrics.

Each year, the Board of Directors is presented with the results of a sufficiency test for allowances for loan loss. This test shows whether the Bank’s existing level of allowances for loan loss, both for the individual and group portfolios, is sufficient, based on historic losses or impairment experienced by the portfolio. The Board of Directors must issue a formal opinion on its sufficiency. The sufficiency test of the Chilean GAAP allowance and the related review by the Board has not resulted in supplementary provisions for our Chilean GAAP allowance, henceand, consequently, nor for our IFRS allowance. However, we consider similar factors for both our IFRS allowance and our Chilean GAAP allowance. If necessary we would adjust our IFRS allowance based on the results of the sufficiency test and the Board review if the underlying reason for the supplemental provision under Chilean GAAP were also an input or model used in our IFRS allowance methodology.

 

 (2)Credit Risk

Credit risk is the risk that we will incur a loss because a customer or counterparty does not comply with their contractual obligations.obligations, mainly its origin is in account receivable and financial investments, and derivative instruments.

This risk is managed using a global, unified and forward-looking strategy, which recognizes the current and projected economic environment of the markets and segments in which our different businesses are developing and grants appropriate credit treatment to each such market or segment by using risk limits that we are willing to accept from counterparties.

Managing credit risk is, therefore, inherent to our business and must be incorporated into each segment in which we do business: inIn this way, we hope tomay achieve an optimum balance between assumed risks and attained returns and properly allocate capital to each business line while complying with regulations and criteria defined by the Board of Directors, in order to ensure that the Bank has an appropriate capital base for potential losses that may arise from its credit exposure.

Counterparty limits are established by analyzing financial information, risk ratings, the nature of the exposure, documentation, guarantees, market conditions and the pertinent industry sector, among other factors. The process of monitoring credit quality also includes identifying in advance any possible changes in counterparty’s payment capacity, which enables us to evaluate the potential loss from these risks and take corrective actions.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

Individual and SME (Small and Medium Enterprises) Banking

 

 (a)Approval Process

The analysisExamination and credit approval process operatesof Bank loans operating under a differentiated approach, according tobecause there are different nature of the segments, which it characterizes by different basics in its variables of explanation of its financial structure and repayment ability. The general concepts involved in each marketapproval process are:

Politics and procedures

Specialization and experience level of each participant of the decision process

Types and depth of technological platforms used

Type of model/indicators predictives for each segment according to three risk models.(Scoring or Rating)

These models’ evaluation is focused on markets with customers that do not have business activity. These models ensure compliance in three areas relevantAccording to the admissions process:mentioned above, there are three tipes of approval models:

Automated Model: This model is used to evaluate credit applications massive segments of individuals without a commercial business, Commercial Banking and Credichile. The fundamental pillars in this model of admission are the following dimensions:

Minimum credit profile (scoring)

Borrowing Limits (exposure)

Target Market

The credit profile is determined through statisticalevaluated using statistics models of “Credit Scoring”, which are different for Commercial Area and Credichile, and also are segmented and specifics for different types of customers of the commercial areas in the retail market (Individual and SME Banking).clients. The predictive ability of the models has been essentialis fundamental to successfully address thedo successful risk management during different economics cycles, which force to be permanently reviewing the quality and the performance regarding to current market conditions and if these change.

Borrowing limits set the maximum exposure that the Bank is willing to take with each customer in different products, taking into consideration the debt they have with other financial institutions. These parameters are defined according to risk profile and by segment or income level of each client. The correct determination of the portfolio during crisis scenarios. Risk Management centralizes data entry processesborrowing capacity of each type of customers is very important especially in order to ensure high standardsmore restrictive economic cycles, which are characterized by higher unemployment or reduced income from customers.

Definition of data quality.

Regarding the target market is an elemental dimension to guide the commercial efforts and borrowing limits,business strategies. Offer of products more efficient allow to maximize the Bank identifies the market subsegments based on their objectives, business strategies and opportunities, establishing definitions that identify acceptable credit profile of customers, products that will be offered, limits individual exposureexposition and expected returns.

The Bank has also developed a broad level of knowledge regarding selection of customers, with a significant capacity to differentiate between subjects of different credit bases. UsingParametric Model: For this model, we have developed separate segmented models for the retail market and Banco CrediChile. In the case of our Consumer Finance Division (Banco CrediChile), there are further distinctions for customers, which are separated into the following five sub-segments: retired persons, employees in the public sector, employees in the private sector over 40 years of age, employees in the private sector under 40 years of age and self-employed.

In individual segments there are also sub-segments divided by activity and length of the customer’s relationship with the Bank.

Parametric Model:

The SME (Small and Medium Enterprises) segment, is a segment thatit has developed assessment schemes and ad hoc admission parametric methodologies in according to their characteristics.the characteristics of this kind of clients. This model combine features of mass segment has definedthrough a parametric model, that is responsible for mass segment features a segment as well as case by case analysis.analysis which considers characteristics of clients of this segment. This model considers the evaluation of customers based on three pillars. These are payment behaviorpillars:

Behavior, both internal and external, financial reporting analysis and evaluationexternal.

Financial Analysis.

Evaluation of the client’s business. business and experience of the owners and/or management.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

42.Risk Management, continued:

(2)Credit Risk, continued:

(a)Approval Process, continued:

This process yields a parametric evaluation category that summarizes the credit quality of the customer through a rating, which is linked directly to the powers of credit allocations required for each operation.

In those cases which its not possible to evaluate by rating, because there are a lower and poor quality information available, without exception, are reviewed directly by the Risk Area. This area makes a credit assessment, applying their expert criteria. Note that internal audits are performed on an ongoing basis to ensure the quality of the information used.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

41.Risk Management, continued:

(2)Credit Risk, continued

Individual and SME (Small and Medium Enterprises) Banking, continued

(a)Approval Process, continued

used in the preparation of Rating.

Additionally, the Corporate Risk Division supports business significantly through the process ofhas specialized units that generate credit offers pre-approval of loans to customers, to optimize the relation risk-return of these segments. Thus, bothfor the retail market and in the small and medium enterprises has specialized units that generate credit offers,enterprises. These mass assessment processes used statistic models and apply strategies according to predefinedthe different group of clients. These strategies for different segments.

(b)Control and Follow up

In the individual banking, controlare calibrating based in evolution of macroeconomics variables and follow-up focus on constant monitoring of aggregate portfolio’s main indicators and monthly source of new customers.

The most relevant are the following:

Follow-upbehavior of the expected loss ofclients. These processes permanently provide a tool to improve the portfolio through a general model of provisionscommercial management and back-test of losses for the portfolios that have the maturity required.customer care.

Analysis of new customers and decomposition respective of the loss rate in accordingCase to the product, champion / challenger campaigns and segments.

Follow-up arrears indicators portfolio and its spending detailed by product, customer segment, sales process (pre-approved v / s evaluated), areas, etc. Mainly oriented to early detection of potential sources of risk higher than expected in portfolio, regularization of cases and management of credit policy and campaigns pre-approval.

Approval and rejection rates applications submitted in the first instance and through appeal, with openings of approvers, branches, etc.

Follow-up mortgage portfolio in according of policy variables, financing tranches (Loan to Value), deadlines, relation dividend / income customers, segments, income brackets, etc.

Risk segmentation strategies for collection processes and policies to better integrate loan approval and monitoring processes, aligned behind single vision of customer credit fundamentals

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

41.Risk Management, continued:

(2)Credit Risk, continued

Corporate Banking

(a)Approval Process

Case by case model:

model:This type of analysis applies to wholesale market and corporations. It is characterized bymarket. Consist in individual assessment, expert, which providesconsiders the level of risk, terms, transaction amount and complexity and perspective of the business and financial analysis among other variables. This approval process is also supported by a rating model thatwhich gives a more uniform assessment and determines the level of credit.

In this sense there are a process and consolidated team with high level of experience and expertise in approving appropriations for the various segments and sectors in which the Bank operates.participates, with a perspective of medium and long term respect different industries and clients. Additionally, to make more effective the admission process, improving quality of assessment and optimizing times of responses to clients, the process of data collection, analysis and discussion of the proposed credit are supportedprepared jointly by the risk and commercial areas through different models of credit risk,attention of commercial lines.

It also has specialized areas in some segments which by their nature require expert knowledge (finance real estate, construction, agricultural, and others with advice ad hoc when they are very specific), which also support from the objectivegestation of providing top qualityoperations, counting with tools designed especially depending on the particular characteristics of business and their respective risks.

It should also be noted, that although it has areas dedicated to monitoring, into the admission areas, they develop permanently monitoring activities that allow monitoring jointly the develop of operations from the inception to the assessment and achieve better response timesrecovery to customer requirements.

(b)Control and Follow up

The ongoing control and follow-up of credit risk is the basis for proactiveensure that portfolio management and enables risk to be recognized on a timely basis, thus identifying business opportunities and detecting potential impairment before it occurs.

In the wholesale business segment, control and follow-uprisks are realized through a combination of reviews. The most relevant are the following:

High-level structured portfolio reviews with respect to the impact of specific macroeconomic fluctuations in relevant sectors of activity, defining case-by-case actions plans.

Constant monitoring system in order to detect early on those customers that show potential risks, agreeing on specific action plans for these customers with the corresponding client servicing team.

Payment arrears management, backed by predictive indicators of risk level, with follow-up and action plans in the case of our most important customers, plus management of differentiated strategies for early recovery.

Follow-up of the conditions, restrictions and covenants imposed by the credit committee to all operations requiring it due to their importance or complexity.

Control of the exposure as well as the sufficiency of guarantees granted in the form of shares, monitoring fluctuations and preparing action plans in the event of insufficient coverage.

Follow-up schemes of credit behavior variables and borrowers’ financial condition.

Risk segmentation strategies for collections processes and policies to a better integration of loan approval and monitoring processes, aligned behind a single vision of customer credit fundamentals.appropriately recognized.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 (b)Control and Follow up

 

(b.i)Corporations

In the enterprise market, management and monitoring are performed by a set of systematic processes, based on parametric indicators for small and medium companies and setting particular controls for large companies, for verifying the normal development in their business in time. As an example, are the following:

Delinquencies management, supported by the information of predictive indicators of risk level, with follow up and action plans in the case of more important clients, also manage of different strategies of early collection.

Structured controls of clients with credit covenants.

Systematic follow up of financial ratios, variables of credit behavior and financial figures of the corporations.

Control of particular conditions and restrictions of credits.

Management portfolio classification, which determines risk and required rate of provision, according to general rules established by the Superintendency of Banks and Financial Institutions, and specific criteria set out in the Bank, allowing correct application over clients who need a case to case revision.

Management portfolio in special follow up, through a periodic committee and permanent monitoring, allowing establish action plans for entities that presents risk alerts. Quick revision of the portfolio, determining clients potentially affected by the impact generated by a change in some relevant macroeconomical variables in aspecific sector or activity.

(b.ii)Individuals

In individual markets, control and follow up focus in the permanent monitoring of principal indicator of risk and quality of the portfolio, Principal index are:

Follow up of the expected loss of the portfolio, through measurements of back-test performance of the group provision models.

Analysis of new clients and respective decomposition of default rate by type of product, segments and admission strategy.

Follow up delinquency rates for early and late phases for various dimensions, primarily aimed at the early detection of potential sources of risk higher than expected in the portfolio.

Rate of approval and rejection for request presented in first instance and through appeal, with details of information by different explicative attributes.

Follow up of mortgage portfolio according to variables of politics, tranches (loan to value), terms, relation dividend/income clients, segments, etc.

Additionally are defined Strategies of Risk Segmentation for processes of collection, which are compatibles with a appropriate structure, protocol and intensity to maximize the recovery in different phases of delinquency of clients.

Corporate Banking, continuedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

42.Risk Management, continued:

(2)Credit Risk, continued:

 

 (c)Derivative Instruments

Counterparty credit exposures generated by derivative transactions are determined utilizing SBIF and internal models.

Credit exposures under the SBIF framework are computed as follows:

Credit Exposure = Maximum (CMTM, 0) + Factor*Notional

CMTM: Current Mark-to-Market of the transaction

Notional: Transaction notional amount

Factor: Factors suggested by the BIS (Bank for International Settlements) in 1996

The exposures computed following SBIF models are measured daily, controlled and reportedthey are used for reporting regulatory ratios and controlling legal limits, by counterparty, against specific credit lines approved for each of them during the entire life of the transactions.

Additionally, we generate another metric which is the pre-settlement exposure (PSE at 95% confidence level) under internal models, as follows:

PSE =Maximum (CMTM + CEF*Notional, 0)

CMTM: Current Mark-to-Market of the transaction

Notional: Transaction notional amount

CEF: Credit Exposure Factor, which reflects the peak exposure of the transaction under 95% of confidence level

The portfolio approach is taken into account when computing exposures under internal models.

This metric for each counterparty, is currently compared against the credit line at inception only. However, it will be computed on a daily basis from October 2012 onward.

We will have soon two metrics for measuring and reporting credit exposures for derivative transactions: the regulatory one and that calculated under internal models. The former will be used for computing regulatory ratios and the latter will bemodels is used for measuring, limiting, controlling and reporting credit exposures generated by these transactions.counterparty.

Credit mitigating conditions for derivative transactions, such as thresholds, margin calls, etc. have become popular in the local financial markets. Collateral agreements have been demanded by certain banks for inter-banking transactions but the effective application of netting in the case of bank’s default in Chile is doubtful; in fact, Chilean BankBanking Law allows the intervention of bank under stress by regulatory entities previous to the execution of the default. Therefore, we are not considering credit mitigations for transactions with banks domiciled in Chile. Conversely, netting credit is possible with non-bankingnonbanking corporations and there are a few corporate customers that have accepted netting credit mitigations conditions. In any case, all transactions are documented under a regular Master Agreement, which has been reviewed by the local regulatory entities.

Derivatives transactions closed with counterparts residing abroad (mostly global banks) are documented utilizing ISDA and CSA. Netting and cash collateral above a certain threshold level are the typical credit mitigations in place for this kind of transactions.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

 (d)Portfolio Concentration

Maximum credit risk exposure per counterparty without considering collateral or other credit enhancements as of December 31, 20112013 and 20122014 does not exceed 10% of the Bank’s Tier 2 capital,Regulatory Capital, which corresponds to Capital plus some adjustments like subordinated bonds, provisions, goodwill, among others. This credit limit has been set forth in accordance with the Chilean Banking Law.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2011:2013:

 

  Chile   

United

States

   Brazil   Other   Total   Chile   United
States
   Brazil   Other   Total 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Financial Assets

                    

Cash and Due from Banks

   622,082     228,796     —       30,268     881,146     582,022     268,217     —       23,069     873,308  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial Assets held-for-trading

                    

from the Chilean Government and Central Bank of Chile

   77,842           77,842  

From the Chilean Government and Central Bank of Chile

   64,937     —       —       —       64,937  

Other instruments issued in Chile

   191,857     —       —       162     192,019     261,984     —       —       —       261,984  

Instruments issued abroad

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   269,699     —       —       162     269,861     326,921     —       —       —       326,921  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash collateral on securities borrowed and reverse repurchase agreements

   47,945     —       —       36     47,981     82,422     —       —       —       82,422  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivative Contracts for Trading Purposes

                    

Forwards

   96,723     10,490     —       13,920     121,133     28,701     1,833     —       11,139     41,673  

Swaps

   110,203     117,592     —       30,886     258,681     158,810     88,495     —       44,124     291,429  

Call Options

   1,239     —       —       —       1,239     2,241     —       —       60     2,301  

Put Options

   2     —       —       —       2     525     —       —       75     600  

Futures

   —       —       —       —       —       —       —       —       —       —    

Other

   —       —       —       —       —    

Others

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   208,167     128,082          44,806     381,055     190,277     90,328     —       55,398     336,003  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Hedge Derivative Contracts

                    

Forwards

   —       —       —       —       —       —       —       —       —       —    

Swaps

   —       —       —       —       —       2,992     3,971     —       31,721     38,684  

Call Options

   —       —       —       —       —       —       —       —       —       —    

Put Options

   —       —       —       —       —       —       —       —       —       —    

Futures

   —       —       —       —       —       —       — ��     —       —       —    

Other

   —       —       —       —       —    

Others

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   —       —       —       —       —       2,992     3,971     —       31,721     38,684  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans and advances to Banks

          

Loans and advances to Banks (before allowances)

          

Central Bank of Chile

   300,819     —       —       —       300,819     600,581     —       —       —       600,581  

Domestic banks

   15,054     —       —       —       15,054     100,012     —       —       —       100,012  

Foreign banks

   181,428     —       91,530     59,594     332,552     —       —       254,977     107,778     362,755  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   497,301     —       91,530     59,594     648,425     700,593     —       254,977     107,778     1,063,348  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans to Customers (before allowances for loans losses)

                    

Commercial loans

   11,020,637     8,952     18,400     165,454     11,213,443     12,973,746     21,971     13,824     69,432     13,078,973  

Residential mortgage loans

   3,508,169     3,984     3,135     92,146     3,607,434     4,732,307     —       —       —       4,732,307  

Consumer loans

   2,528,655     1,960     1,243     33,762     2,565,620     3,069,490     —       —       —       3,069,490  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   17,057,461     14,896     22,778     291,362     17,386,497     20,775,543     21,971     13,824     69,432     20,880,770  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial Assets Available-for-Sale

                    

from the Chilean Government and Central Bank of Chile

   412,394     —       —       —       412,394  

From the Chilean Government and Central Bank of Chile

   586,408     —       —       —       586,408  

Other instruments issued in Chile

   930,323     —       —       —       930,323     1,019,253     —       —       —       1,019,253  

Instruments issued abroad

   21,870     71,740     4,712     30,081     128,403     —       71,533     4,689     —       76,222  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   1,364,587     71,740     4,712     30,081     1,471,120     1,605,661     71,533     4,689     —       1,681,883  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial assets held-to-Maturity

   —       —       —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

  Financial
Services
MCh$
  Government
MCh$
  Retail
(Individuals)
MCh$
  Trade
MCh$
  Manufacturing
MCh$
  Mining
MCh$
  Electricity,
Gas and
Water
MCh$
  Agriculture
and
Livestock
MCh$
  Forestry
MCh$
  Fishing
MCh$
  Transportation
and Telecom
MCh$
  Construction
MCh$
  Services
MCh$
  Other
MCh$
  Total
MCh$
 

Financial Assets

               

Cash and Due from Banks

  328,933    —      —      —      —      —      —      —      —      —      —      —      72,759    479,454    881,146  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets held-for-trading

               

from the Chilean Government and Central Bank

  —      —      —      —      —      —      —      —      —      —      —      —      —      77,842    77,842  

Other instruments issued in Chile

  191,999    —      —      —      —      —      —      —      —      —      —      —      —      20    192,019  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  191,999    —      —      —      —      —      —      —      —      —      —      —      —      77,862    269,861  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash collateral on securities borrowed and reverse repurchase agreements

  13,619    —      —      2,780    92    512    21,045    —      57    118    5,959    76    156    3,567    47,981  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative Contracts for Trading Purposes

               

Forwards

  60,037    —      9    2,006    5,787    1,457    160    5,337    151    326    148    313    101    45,301    121,133  

Swaps

  185,892    672    —      3,933    4,333    59    8,394    18,241    34    906    2,136    909    230    32,942    258,681  

Call Options

  1,167    —      —      68    —      —      —      —      —      —      —      —      —      4    1,239  

Put Options

  —      —      —      2    —      —      —      —      —      —      —      —      —      —      2  

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  247,096    672    9    6,009    10,120    1,516    8,554    23,578    185    1,232    2,284    1,222    331    78,247    381,055  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Hedge Derivative Contracts

               

Forwards

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Swaps

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Call Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Put Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans and advances to Banks

               

Central Bank of Chile

  300,819    —      —      —      —      —      —      —      —      —      —      —      —      —      300,819  

Domestic banks

  15,054    —      —      —      —      —      —      —      —      —      —      —      —      —      15,054  

Foreign banks

  332,403    —      —      —      —      —      —      —      —      —      —      —      —      149    332,552  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  648,276    —      —      —      —      —      —      —      —      —      —      —      —      149    648,425  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans to Customers, Net

               

Commercial loans (*)

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Residential mortgage loans

  5,175    —      3,101,327    71,639    14,687    2,506    —      21,524    2,819    1,442    22,073    15,208    95,712    253,322    3,607,434  

Consumer loans

  3,250    —      1,957,143    40,137    8,599    1,573    9    28,208    1,557    728    16,433    8,022    40,244    459,717    2,565,620  

Financial Assets Available-for-Sale

               

from the Chilean Government and Central Bank

  217,429    —      —      —      —      —      —      —      —      —      —      —      —      194,965    412,394  

Other instruments issued in Chile

  892,287    —      —      2,393    —      67    6,097    —      3,247    —      15,009    2,307    —      8,916    930,323  

Instruments issued abroad

  113,497    —      —      —      —      —      —      14,906    —      —      —      —      —      —      128,403  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  1,223,213    —      —      2,393    —      67    6,097    14,906    3,247    —      15,009    2,307    —      203,881    1,471,120  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets held-to-Maturity

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(*)See commercial loans by industry sector in Note 10(e).
  Financial
Services
MCh$
  Government
MCh$
  Retail
(Individuals)
MCh$
  Trade
MCh$
  Manufacturing
MCh$
  Mining
MCh$
  Electricity,
Gas and
Water
MCh$
  Agriculture
and
Livestock
MCh$
  Forestry
MCh$
  Fishing
MCh$
  Transportation
and Telecom
MCh$
  Construction
MCh$
  Services
MCh$
  Other
MCh$
  Total
MCh$
 

Financial Assets

               

Cash and Due from Banks

  801,521    71,787    —      —      —      —      —      —      —      —      —      —      —      —      873,308  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets held-for-trading

               

From the Chilean Government and Central Bank of Chile

  —      64,937    —      —      —      —      —      —      —      —      —      —      —      —      64,937  

Other instruments issued in Chile

  257,523    —      —      —      —      —      —      —      —      —      —      —      —      4,461    261,984  

Instruments issued abroad

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  257,523    64,937    —      —      —      —      —      —      —      —      —      —      —      4,461    326,921  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash collateral on securities borrowed and reverse repurchase agreements Payables

  82,422    —      —      —      —      —      —      —      —      —      —      —      —      —      82,422  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative Contracts for Trading Purposes

               

Forwards

  34,384    —      13    1,024    2,885    1,050    25    694    —      546    450    11    105    486    41,673  

Swaps

  233,083    —      —      7,470    6,613    249    11,660    26,420    —      182    2,353    2,050    1,224    125    291,429  

Call Options

  446    —      —      647    1,017    —      —      48    —      —      60    8    75    —      2,301  

Put Options

  322    —      —      231    42    —      —      —      —      —      —      4    —      1    600  

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  268,235    —      13    9,372    10,557    1,299    11,685    27,162    —      728    2,863    2,073    1,404    612    336,003  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Hedge Derivative Contracts

               

Forwards

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Swaps

  38,684    —      —      —      —      —      —      —      —      —      —      —      —      —      38,684  

Call Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Put Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

��

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  38,684    —      —      —      —      —      —      —      —      —      —      —      —      —      38,684  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans and advances to Banks

               

Central Bank of Chile

  —      600,581    —      —      —      —      —      —      —      —      —      —      —      —      600,581  

Domestic banks

  100,012    —      —      —      —      —      —      —      —      —      —      —      —      —      100,012  

Foreign banks

  362,755    —      —      —      —      —      —      —      —      —      —      —      —      —      362,755  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  462,767    600,581    —      —      —      —      —      —      —      —      —      —      —      —      1,063,348  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans to Customers, Net

               

Commercial loans

  2,045,654    —      —      2,552,964    1,365,562    340,045    531,973    914,105    —      219,173    1,602,348    1,458,081    1,240,028    809,040    13,078,973  

Residential mortgage loans

  —      —      4,732,307    —      —      —      —      —      —      —      —      —      —      —      4,732,307  

Consumer loans

  —      —      3,069,490    —      —      —      —      —      —      —      —      —      —      —      3,069,490  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  2,045,654    —      7,801,797    2,552,964    1,365,562    340,045    531,973    914,105    —      219,173    1,602,348    1,458,081    1,240,028    809,040    20,880,770  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets Available-for-Sale

               

From the Chilean Government and Central Bank of Chile

  —      586,408    —      —      —      —      —      —      —      —      —      —      —      —      586,408  

Other instruments issued in Chile

  856,120    —      —      15,826    —      13,750    36,861    49    72,804    —      —      1,671    —      22,172    1,019,253  

Instruments issued abroad

  76,222    —      —      —      —      —      —      —      —      —      —      —      —      —      76,222  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  932,342    586,408    —      15,826    —      13,750    36,861    49    72,804    —      —      1,671    —      22,172    1,681,883  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets held-to-Maturity

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2012:2014:

 

  Chile   United
States
   Brazil   Other   Total   Chile   United
States
   Brazil   Other   Total 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Financial Assets

                    

Cash and Due from Banks

   499,473     167,186     —       18,266     684,925     636,423     257,476     —       21,234     915,133  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial Assets held-for-trading

   —       —       —       —       —              

From the Chilean Government and Central Bank of Chile

   72,379     —       —       —       72,379     88,870     —       —       —       88,870  

Other instruments issued in Chile

   87,303     —       —       —       87,303     204,588     —       —       —       204,588  

Instruments issued abroad

   —       —       —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   159,682     —       —       —       159,682     293,458     —       —       —       293,458  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash collateral on securities borrowed and reverse repurchase agreements

   35,100     —       —       —       35,100     27,360     —       —       301     27,661  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivative Contracts for Trading Purposes

                    

Forwards

   54,438     2,652     —       9,662     66,752     120,793     3,065     —       16,892     140,750  

Swaps

   99,245     123,676     —       35,575     258,496     399,087     138,894     —       71,862     609,843  

Call Options

   439     —       —       33     472     2,263     —       —       320     2,583  

Put Options

   341     —       —       —       341     286     —       —       1     287  

Futures

   —       —       —       —       —       —       —       —       —       —    

Other

   —       —       —       —       —    

Others

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   154,463     126,328     —       45,270     326,061     522,429     141,959     —       89,075     753,463  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Hedge Derivative Contracts

                    

Forwards

   —       —       —       —       —       —       —       —       —       —    

Swaps

   22     —       —       —       22     17,848     23,389     —       37,567     78,804  

Call Options

   —       —       —       —       —       —       —       —       —       —    

Put Options

   —       —       —       —       —       —       —       —       —       —    

Futures

   —       —       —       —       —       —       —       —       —       —    

Other

   —       —       —       —       —    

Others

   —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   22     —       —       —       22     17,848     23,389     —       37,567     78,804  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans and advances to Banks

          

Loans and advances to Banks (before allowances)

          

Central Bank of Chile

   1,100,696     —       —       —       1,100,696     551,108     —       —       —       551,108  

Domestic banks

   14,309     —       —       —       14,309     170,014     —       —       —       170,014  

Foreign banks

   80,458     —       109,505     39,313     229,276     —       —       268,141     166,918     435,059  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   1,195,463     —       109,505     39,313     1,344,281     721,122     —       268,141     166,918     1,156,181  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans to Customers (before allowances for loans losses)

                    

Commercial loans

   11,580,495     17,534     15,507     128,044     11,741,580     12,917,669     —       33,295     159,782     13,110,746  

Residential mortgage loans

   4,090,683     4,277     4,107     99,600     4,198,667     5,418,623     —       —       —       5,418,623  

Consumer loans

   2,792,539     1,922     1,522     35,531     2,831,514     3,361,964     —       —       —       3,361,964  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   18,463,717     23,733     21,136     263,175     18,771,761     21,698,256     —       33,295     159,782     21,891,333  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial Assets Available-for-Sale

                    

from the Chilean Government and Central Bank of Chile

   251,784     —       —       —       251,784  

From the Chilean Government and Central Bank of Chile

   339,324     —       —       —       339,324  

Other instruments issued in Chile

   932,028     —       —       —       932,028     1,205,947     —       —       —       1,205,947  

Instruments issued abroad

   —       58,376     5,149     —       63,525  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Instruments issued abroad

   —       83,759     4,745     —       88,504  

Subtotal

   1,183,812     83,759     4,745     —       1,272,316     1,545,271     58,376     5,149     —       1,608,796  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Financial assets held-to-Maturity

   —       —       —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

  Financial
Services
MCh$
  Government
MCh$
  Retail
(Individuals)
MCh$
  Trade
MCh$
  Manufacturing
MCh$
  Mining
MCh$
  Electricity,
Gas and
Water
MCh$
  Agriculture
and
Livestock
MCh$
  Forestry
MCh$
  Fishing
MCh$
  Transportation
and Telecom
MCh$
  Construction
MCh$
  Services
MCh$
  Other  Total 

Financial Assets

               

Cash and Due from Banks

  216,843    —      —      —      —      —      —      —      —      —      —      —      —      468,082    684,925  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets held-for-trading

               72,379    72,379  

from the Chilean Government and Central Bank of Chile

  87,115    —      —      —      —      —      —      —      —      —      —      —      —      188    87,303  

Other instruments issued in Chile

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Instruments issued abroad

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  87,115    —      —      —      —      —      —      —      —      —      —      —      —      72,567    159,682  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash collateral on securities borrowed and reverse repurchase agreements Payables

  25,979    —      2,280    3,212    —      —      —      160    —      —      —      1,854    1,615    —      35,100  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative Contracts for Trading Purposes

               

Forwards

  61,699    —      1    3,092    1,084    53    75    321    —      114    207    13    93    —      66,752  

Swaps

  232,459    —      —      6,039    5,447    725    4,986    1,819    —      279    5,569    963    210    —      258,496  

Call Options

  354    —      —      92    26    —      —      —      —      —      —      —      —      —      472  

Put Options

  85    —      —      215    27    —      —      —      9    5    —      —      —      —      341  

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  294,597    —      1    9,438    6,584    778    5,061    2,140    9    398    5,776    976    303    —      326,061  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Hedge Derivative Contracts

               

Forwards

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Swaps

  22    —      —      —      —      —      —      —      —      —      —      —      —      —      22  

Call Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Put Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Futures

  —    �� —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Other

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  22    —      —      —      —      —      —      —      —      —      —      —      —      —      22  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans and advances to Banks

               

Central Bank of Chile

  —      —      —      —      —      —      —      —      —      —      —      —      —      1,100,696    1,100,696  

Domestic banks

  14,309    —      —      —      —      —      —      —      —      —      —      —      —       14,309  

Foreign banks

  229,276    —      —      —      —      —      —      —      —      —      —      —      —       229,276  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  243,585    —      —      —      —      —      —      —      —      —      —      —      —      1,100,696    1,344,281  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans to Customers, Net

               

Commercial loans (*)

               

Residential mortgage loans

  6,609     3,503,474    80,676    15,970    2,702    —      27,697    —      1,840    23,934    17,322    105,181    413,262    4,198,667  

Consumer loans

  3,131     2,557,411    40,109    9,400    1,532    5    33,664    —      840    16,280    9,870    38,440    120,832    2,831,514  

Financial Assets Available-for-Sale

               

from the Chilean Government and Central Bank of Chile

  —      —      —      —      —      —      —      —       —      —      —      —      251,784    251,784  

Other instruments issued in Chile

  809,035    —      —      18,262    —      5,024    41,309    —      44,303    —      7,640    —      2,164    4,291    932,028  

Instruments issued abroad

  88,504    —      —      —      —      —      —      —      —      —      —      —      —      —      88,504  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  897,539    —      —      18,262    —      5,024    41,309    —      44,303    —      7,640    —      2,164    256,075    1,272,316  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets held-to-Maturity

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(*)See commercial loans by industry sector in Note 10(e).
  Financial
Services
MCh$
  Government
MCh$
  Retail
(Individuals)
MCh$
  Trade
MCh$
  Manufacturing
MCh$
  Mining
MCh$
  Electricity,
Gas and
Water
MCh$
  Agriculture
and
Livestock
MCh$
  Forestry
MCh$
  Fishing
MCh$
  Transportation
and Telecom
MCh$
  Construction
MCh$
  Services
MCh$
  Other
MCh$
  Total
MCh$
 

Financial Assets

               

Cash and Due from Banks

  767,918    147,215    —      —      —      —      —      —      —      —      —      —      —      —      915,133  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets held-for-trading

               

from the Chilean Government and Central Bank of Chile

  —      88,870    —      —      —      —      —      —      —      —      —      —      —      —      88,870  

Other instruments issued in Chile

  203,237    —      —      1,351    —      —      —      —      —      —      —      —      —      —      204,588  

Instruments issued abroad

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  203,237    88,870    —      1,351    —      —      —      —      —      —      —      —      —      —      293,458  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash collateral on securities borrowed and reverse repurchase agreements Payables

  19,610    —      —      —      —      —      —      80    —      —      —      29    287    7,655    27,661  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative Contracts for Trading Purposes

               

Forwards

  133,237    —      —      1,475    3,514    1,144    48    615    —      50    443    2    185    37    140,750  

Swaps

  550,858    —      —      9,273    12,514    7,335    20,139    6,108    —      185    1,708    1,050    673    —      609,843  

Call Options

  819    —      —      177    1,180    190    —      137    —      —      25    21    34    —      2,583  

Put Options

  121    —      —      88    42    —      —      7    —      —      —      29    —      —      287  

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  685,035    —      —      11,013    17,250    8,669    20,187    6,867    —      235    2,176    1,102    892    37    753,463  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Hedge Derivative Contracts

               

Forwards

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Swaps

  78,804    —      —      —      —      —      —      —      —      —      —      —      —      —      78,804  

Call Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Put Options

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    

Futures

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  78,804    —      —      —      —      —      —      —      —      —      —      —      —      —      78,804  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans and advances to Banks

               

Central Bank of Chile

  —      551,108    —      —      —      —      —      —      —      —      —      —      —      —      551,108  

Domestic banks

  170,014    —      —      —      —      —      —      —      —      —      —      —      —      —      170,014  

Foreign banks

  435,059    —      —      —      —      —      —      —      —      —      —      —      —      —      435,059  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  605,073    551,108    —      —      —      —      —      —      —      —      —      —      —      —      1,156,181  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans to Customers, Net

               

Commercial loans

  1,875,665    —      —      2,375,322    1,498,904    356,363    442,066    946,795    —      261,189    1,668,103    1,423,597    1,565,777    696,965    13,110,746  

Residential mortgage loans

  —      —      5,418,623    —      —      —      —      —      —      —      —      —      —      —      5,418,623  

Consumer loans

  —      —      3,361,964    —      —      —  ��   —      —      —      —      —      —      —      —      3,361,964  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  1,875,665    —      8,780,587    2,375,322    1,498,904    356,363    442,066    946,795    —      261,189    1,668,103    1,423,597    1,565,777    696,965    21,891,333  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial Assets Available-for-Sale

               

from the Chilean Government and Central Bank of Chile

  —      339,324    —      —      —      —      —      —      —      —      —      —      —      —      339,324  

Other instruments issued in Chile

  1,067,650    18,675    —      19,025    —      7,288    34,546    51,191    —      —      5,859    1,713    —      —      1,205,947  

Instruments issued abroad

  58,376    —      —      5,149    —      —      —      —      —      —      —      —      —      —      63,525  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

  1,126,026    357,999    —      24,174    —      7,288    34,546    51,191    —      —      5,859    1,713    —      —      1,608,796  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Financial assets held-to-Maturity

  —      —      —      —      —      —      —      —      —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

 (e)CollateralsCollateral and Other Credit Enhancements

The following table contains a detail of the type of collateral that are maintained forheld to mitigate the exposure to credit risk:

 

      Value of collateral and credit enhancements held as of
December 31, 2012
               Fair value of collateral and credit enhancements held as of
December 31, 2013
         

Loans to customers:

  Maximum
exposure

to credit
risk
MCh$
   Mortgages
MCh$
   Pledge(*)
MCh$
   Securities
MCh$
   Warrants
MCh$
   Others
MCh$
   Net
collateral

MCh$
   Net
exposure

MCh$
   Maximum
exposure
to credit
risk
MCh$
   Mortgages
MCh$
   Pledge(*)
MCh$
   Securities
MCh$
   Warrants
MCh$
   Others
MCh$
   Net
collateral
MCh$
   Net
exposure
MCh$
 

Corporate lending

   9,282,374     2,469,231     301,956     855,479     2,665     297,317     3,926,648     5,355,726     9,739,552     2,584,481     295,387     927,826     2,292     468,023     4,278,009     5,461,543  

Small business lending

   2,459,206     1,638,485     63,593     42,642     —       50,497     1,795,217     663,989     3,339,421     1,793,299     71,596     313,326     —       42,350     2,220,571     1,118,850  

Consumer lending

   2,831,514     228,946     8,331     3,569     —       15,983     256,829     2,574,685     3,069,490     248,625     8,404     4,357     —       18,262     279,648     2,789,842  

Mortgage lending

   4,198,667     3,965,927     388     957     —       —       3,967,272     231,395     4,732,307     4,365,861     242     1,054     —       —       4,367,157     365,150  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   18,771,761     8,302,589     374,268     902,647     2,665     363,797     9,945,966     8,825,795     20,880,770     8,992,266     375,629     1,246,563     2,292     528,635     11,145,385     9,735,385  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
      Fair value of collateral and credit enhancements held as of
December 31, 2014
         

Loans to customers:

  Maximum
exposure

to credit
risk
MCh$
   Mortgages
MCh$
   Pledge(*)
MCh$
   Securities
MCh$
   Warrants
MCh$
   Others
MCh$
   Net
collateral
MCh$
   Net
exposure
MCh$
 

Corporate lending

   10,152,759     1,869,995     92,097     509,345     1,979     348,439     2,821,855     7,330,904  

Small business lending

   2,957,987     1,712,185     27,989     33,762     85     47,569     1,821,590     1,136,397  

Consumer lending

   3,361,964     222,985     1,639     2,450     —       17,854     244,928     3,117,036  

Mortgage lending

   5,418,623     4,851,400     78     657     —       —       4,852,135     566,488  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   21,891,333     8,656,565     121,803     546,214     2,064     413,862     9,740,508     12,150,825  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(*)Includes agricultural and industrial pledges and pledges without conveyance

The above table presents the value of collateral that the Bank uses for mitigate the exposure risk. These value corresponds to a value that is generally assessed, at a minimum, at inception by a certified appraiser and later, this amount is adjusted by a financial model that considers several different factors (see note 2 (h)).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

 (e)CollateralsCollateral and Other Credit Enhancements, continuedcontinued:

 

The amount and type of collateral required depends on the counterparty’s credit risk assessment.

The Bank has guidelines regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are:

 

For commercial loans: Residential and non-residential real estate, liens and inventory.

 

For retail loans: Mortgages on residential property.

The Bank also obtains collateral from parent companies for loans granted to their subsidiaries.

Management makes sure its collateral is acceptable according to both external standards and internal policy guidelines and parameters. The Bank has approximately 182,387200,623 collateral assets, the majority of which consist of real estate.

The Bank also uses the following mitigating tactics for credit risk on derivative transactions:

 

Accelerating transactions and net payment using market values at the date of default of one of the parties.

 

Option for both parties to terminate early any transactions with a counterparty at a given date, using market values as of the respective date.

 

Margins established with time deposits by customers that close FX forwards with subsidiary Banchile Corredores de Bolsa S.A.

 

 (f)Credit Quality by Asset Class

The Bank determines the credit quality of financial assets using internal credit ratings. The rating process is linked to the Bank’s approval and monitoring processes and is carried out in accordance with risk categories established by current standards. Credit quality is continuously updated based on any favorable or unfavorable developments to customers or their environments, considering aspects such as commercial and payment behavior as well as financial information.

The Bank also conducts reviews of companies in certain industry sectors that are affected by macroeconomic or sector-specific variables. Such reviews allow the Bank to timely establish any necessary allowance loan losses that are sufficient to cover losses for potentially uncollectable loans.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

 (f)Credit Quality by Asset Class, continued:

 

The following table shows credit quality by asset class for balance sheet items, based on the Bank’s credit rating system.

 

  As of December 31, 2011   As of December 31, 2013 
  Individual Portfolio   Group Portfolio       Individual Portfolio   Group Portfolio 
  Normal
MCh$
   Substandard
MCh$
   Non-complying
MCh$
   Normal
MCh$
   Non-complying
MCh$
   Total
MCh$
   Normal   Substandard   Non-complying   Normal   Non-complying   Total 

Financial Assets (*)

            
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Financial Assets

            

Loans and advances to banks

                        

Central Bank of Chile

   300,819     —       —       —       —       300,819     600,581     —       —       —       —       600,581  

Domestic banks

   15,059     —       —       —       —       15,059     100,012     —       —       —       —       100,012  

Foreign banks

   333,553     —       —       —       —       333,553     362,755     —       —       —       —       362,755  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   649,431     —       —       —       —       649,431     1,063,348     —       —       —       —       1,063,348  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans to customers (before allowances for loan losses)

                        

Commercial loans

��  9,412,159     56,405     163,859     1,443,208     137,812     11,213,443     10,482,877     224,447     155,324     2,011,162     205,163     13,078,973  

Residential mortgage loans

   —       —       —       3,543,520     63,914     3,607,434     —       —       —       4,662,977     69,330     4,732,307  

Consumer loans

   —       —       —       2,439,495     126,125     2,565,620     —       —       —       2,856,365     213,125     3,069,490  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   9,412,159     56,405     163,859     7,426,223     327,851     17,386,497     10,482,877     224,447     155,324       9,530,504     487,618     20,880,770  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  As of December 31, 2014 
  As of December 31, 2012   Individual Portfolio   Group Portfolio 
  Individual Portfolio   Group Portfolio       Normal   Substandard   Non-complying   Normal   Non-complying   Total 
  Normal
MCh$
   Substandard
MCh$
   Non-complying
MCh$
   Normal
MCh$
   Non-complying
MCh$
   Total
MCh$
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Financial Assets

                        

Loans and advances to banks

                        

Central Bank of Chile

   1,100,696     —       —       —       —       1,100,696     551,108     —       —       —       —       551,108  

Domestic banks

   14,309     —       —       —       —       14,309     170,014     —       —       —       —       170,014  

Foreign banks

   229,276     —       —       —       —       229,276     435,059     —       —       —       —       435,059  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   1,344,281     —       —       —       —       1,344,281     1,156,181     —       —       —       —       1,156,181  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans to customers (before allowances for loan losses)

                        

Commercial loans

   9,341,403     204,369     145,022     1,864,798     185,988     11,741,580     10,576,242     176,882     200,670     1,942,685     214,267     13,110,746  

Residential mortgage loans

   —       —       —       4,148,374     50,293     4,198,667     —       —       —       5,325,029     93,594     5,418,623  

Consumer loans

   —       —       —       2,649,995     181,519     2,831,514     —       —       —       3,124,586     237,378     3,361,964  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   9,341,403     204,369     145,022     8,663,167     417,800     18,771,761     10,576,242     176,882     200,670     10,392,300     545,239     21,891,333  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (2)Credit Risk, continuedcontinued:

 

 (f)Credit Quality by Asset Class, continued:

 

Substandard and Non-Complying loans

The following table shows the conciliation between Normal and Impaired Portfolio and classification criteria of impaired loans, which includes some categories of substandard loans:

 

  December December 
  2011 2012   December   December 
  MCh$ MCh$   2013
MCh$
   2014
MCh$
 

Individual Portfolio

       

Substandard (categories B1 – B4)

   56,405    204,369     224,447     176,882  

Non-complying (categories C1 – C6)

   163,859    145,022     155,324     200,670  

Group Portfolio

       

Non-complying

   327,851    417,800     487,618     545,239  
  

 

  

 

   

 

   

 

 

Total substandard and non-complying categories (from B1 to C6)

   548,115    767,191     867,389     922,791  

Total impaired loans (categories B3 – C6) (see Note 10)

   (499,768  (611,281

Total impaired loans (categories B3 – C6)

   725,899     829,096  
  

 

  

 

   

 

   

 

 

Normal portfolio (categories B1 – B2)

   48,347    155,910     141,490     93,695  
  

 

  

 

   

 

   

 

 

Categories B3 to C6 present objective evidence of impairment, as a result of the occurrence of one or more conditions or events described below, according to paragraph 59 of IAS 39.

Related to categories B1 and B2 correspond to debtors who have sufficient credit quality, so these categories are not considered impaired.

The classification criteria are the following:

 

Categories

 

Criteria

    
B1 – Normal   Vulnerable ability to make payments, with some difficult in some of them, but debtor regularized payments on a timely basis  
B2 – Normal   Debtor with low but sufficient credit quality  
B3 – Impaired   Debtor with a very low credit quality  
   Weak ability to make payments, and it has shown delinquency in its payments, may need a financial restructuring  
B4 – Impaired   Debtor with minimum credit quality  
   This debtor type presents a history of negative behaviors in the past 12 months  
C1-C6 Impaired   These categories include debtors and their credits, the recovery of which is considered remote, as they present a deteriorating or no ability to pay  
   Debtors with obvious signs of possible bankruptcy, as well as those debtors where a forced restructuring of debt is necessary to avoid default  
   These categories comprise all loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

(2)Credit Risk, continued:

 

 (f)Credit Quality by Asset Class, continued:

 

AnalysisThe following tables below provide details of age offinancial assets past due portfolio loansas of December 31, 2013 and 2014, listed by typetheir first past-due date.

The detailed amounts include installments that are overdue, plus the remaining balance of credit of default:principal and interest on such loans.

Terms:

Default 1: 1 to 29 days

Default 2: 30 to 59 days

Default 3: 60 to 89 days

As of December 31, 2011:2013:

 

   Default 1   Default 2   Default 3   Total 
   MCh$   MCh$   MCh$   MCh$ 

Loans and advances to banks

   19,694     —       —       19,694  

Commercial loans

   16,797     6,206     6,718     29,721  

Import-export financing

   15,802     962     406     17,170  

Factoring transactions

   32,623     4,701     532     37,856  

Commercial lease transactions

   2,201     594     292     3,087  

Other loans and receivables

   1,213     1,115     929     3,257  

Residential mortgage loans

   205     400     379     984  

Consumer loans

   13,732     6,815     5,575     26,122  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   102,267     20,793     14,831     137,891  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2012:

  Default 1   Default 2   Default 3   Total 
  MCh$   MCh$   MCh$   MCh$   Default 1
MCh$
   Default 2
MCh$
   Default 3
MCh$
 

Loans and advances to banks

   52     —       —       52     1,515     —       —    
  

 

   

 

   

 

 

Subtotal past-due loans and advances to banks

   1,515     —       —    
  

 

   

 

   

 

 

Commercial loans

   23,049     20,677     3,774     47,500     160,935     40,721     17,540  

Import-export financing

   22,717     102     193     23,012     35,735     397     431  

Factoring transactions

   38,976     6,289     1,061     46,326     30,187     5,426     1,542  

Commercial lease transactions

   2,551     750     366     3,667     49,049     7,047     3,553  

Other loans and receivables

   1,269     1,050     920     3,239     1,104     554     225  

Residential mortgage loans

   1,111     647     457     2,215     90,615     35,270     15,846  

Consumer loans

   16,010     6,775     6,873     29,658     224,241     73,041     27,524  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   105,735     36,290     13,644     155,669  

Subtotal past-due loans to customers

   591,866     162,456     66,661  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total past due

   593,381     162,456     66,661  
  

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

(2)Credit Risk, continued:

(f)Credit Quality by Asset Class, continued:

As of December 31, 2014:

   Default 1
MCh$
   Default 2
MCh$
   Default 3
MCh$
 

Loans and advances to banks

   23,176     35,197     —    
  

 

 

   

 

 

   

 

 

 

Subtotal past-due loans and advances to banks

   23,176     35,197     —    
  

 

 

   

 

 

   

 

 

 

Commercial loans

   140,430     106,844     25,513  

Import-export financing

   11,939     2,895     563  

Factoring transactions

   28,210     4,554     1,170  

Commercial lease transactions

   54,605     10,958     2,747  

Other loans and receivables

   1,598     483     311  

Residential mortgage loans

   112,031     49,711     19,030  

Consumer loans

   219,173     87,774     34,593  
  

 

 

   

 

 

   

 

 

 

Subtotal past-due loans to customers

   567,986     263,219     83,927  
  

 

 

   

 

 

   

 

 

 

Total past due

   591,162     298,416     83,927  
  

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

42.Risk Management, continued:

(2)Credit Risk, continued:

 

 (f)Credit Quality by Asset Class, continued:

 

As of December 31, the aging analysis of loans is as follows:

 

   Past due but not impaired 

As of December 31,

  Neither
past
due nor
impaired
MCh$
   Up to
30 days
MCh$
   Over
30 days
and up to
60 days
MCh$
   Over
60 days
and up to
90 days
MCh$
   Over
90 days
and up to
120 days
MCh$
   Over
120  days

MCh$
   Total
MCh$
 

2012

   17,976,445     69,796     30,146     12,597     8,816     62,680     18,160,480  

2011

   16,819,212     90,079     10,618     3,372     871     6,527     16,930,679  
       Past due but not impaired (*)     

As of December 31,

  Neither
past
due or
impaired
MCh$
   Up to
30 days
MCh$
   Over
30 days
and up to
60 days
MCh$
   Over
60 days
and up to
90 days
MCh$
   Over
90 days
MCh$
   Total
MCh$
 

2014

   20,354,370     482,154     189,117     34,748     1,848     21,062,237  

2013

   19,504,487     513,193     105,977     30,153     1,061     20,154,871  

(*)These amounts include installments that are overdue, plus the remaining balance of principal and interest on such loans.

 

 (g)Collateral

The value of collateral maintained by the Bank for loans individually classified as impaired as of December 31, 20112013 and 20122014 is MCh$35,18691,105 and MCh$29,952,116,445, respectively.

The value of collateral maintained by the Bank for loans over-dueoverdue but non-impaired as of December 31, 20112013 and 20122014 is MCh$104,543249,058 and MCh$214,093,271,899, respectively.

 

 (h)Assets Received in Lieu of Payment

The Bank has received assets in lieu of payment totaling MCh$4,60819,032 and MCh$2,5566,477 as of December 31, 20112013 and 2012,2014, respectively, the majority of which are properties. All of these assets are managed for sale.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (g)(2)Credit Risk, continued:

(i)Renegotiated Assets

The impaired loans are considered to be renegotiated when the corresponding financial commitments are restructured and the Bank assesses the probability of recovery as sufficiently high.

The following table details the book value of loans with renegotiated terms per financial asset class:

 

  2011   2012 
  MCh$   MCh$   2013
MCh$
   2014
MCh$
 

Financial assets

        

Loans and advances to banks

        

Domestic banks

   —       —       —       —    

Foreign banks

   —       —       —       —    
  

 

   

 

   

 

   

 

 

Subtotal

   —       —       —       —    
  

 

   

 

   

 

   

 

 

Loans to customers, net

        

Commercial loans

   119,637     96,445     163,827     190,692  

Residential mortgage loans

   26,286     23,132     21,411     19,585  

Consumer loans

   192,802     220,451     311,363     324,622  
  

 

   

 

   

 

   

 

 

Subtotal

   338,725     340,028     496,601     534,899  
  

 

   

 

   

 

   

 

 

Total renegotiated financial assets

   338,725     340,028     496,601     534,899  
  

 

   

 

   

 

   

 

 

The Bank evaluates allowances loan losses in two segments: individually assessed allowances loan losses and group assessed allowances loan losses, which are described in more detail in Note 2(h).

Complementary Information

The renegotiated portfolio of Banco de Chile represents 1.81%2.44% of the total loans and the redefault rate of these loans for retail segment is 27.40%28.04% as of December 31, 20122013 (the Bank does not have this information for other segments for internal purposes).

The most common type of modification is to extend the term of the loan. For payment extensions, depending on the characteristics of each credit, the Bank may change the initial conditions in terms of interest rate and initial grace period for the first payment. With respect to forgiveness of principal, the Bank typically does not give this benefit. The Board of Directors might on rare occasions approve a portion of principal forgiveness on certain credit-operations that have been impaired and provisioned previously. Based on this knowledge, the Bank estimates that about 80% of renegotiated loans extend the maturity date, including a new amortization schedule. Only those borrowers which are considered viable are renegotiated, and that the average term of the commercial credit renegotiated is 38 months, demonstrating the relatively short payment extensions given. If the debtor is not considered to be financially viable, the Bank proceeds to the legal collection of debts.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (g)(2)Credit Risk, continued:

(i)Renegotiated Assets, continuedcontinued:

 

The Bank does not have information related to the balance of loans modified by type of concession because is not required to record this information by the local banking regulator and this information is much used by our peers. However, the Bank continually monitors its deteriorated portfolio as defined in Note 2(l)(iv)2(h)( v). Also, for internal purposes the renegotiated loan portfolio is analyzed and reviewed as part of the impaired portfolio. Therefore, for management and regulatory (local and IFRS) reporting purposes the bank does not frequently use information on loans modified by types of concession.

The Bank determines the appropriate amount of allowance for loan losses as follows:

The commercial loan renegotiations are always evaluated and approved individually by the credit committee with all the background and history of previous approvals, including financial records, delinquencies or other previous renegotiations of the debtor. Since almost the entire commercial portfolio is individually provisioned, it is in this approval step of the renegotiation where the level of provision for each debtor is determined.

Among the variables that are considered by the credit committee to establish the level of provisions is payment capacity and the collateral coverage. The condition of a new default of a renegotiated credit is considered when the credit committee is establishing the new level of provisions, which in general as a consequence of this higher risk, could increase up to 65% of the loan.

On the other hand, for the portfolio evaluated for provisioning purposes as a group, the models contain past behavior variables, incorporating delinquencies and default prior to renegotiation for six months, recognizing the increased risk and generating a higher level of provisions. The provision can only be decreased if the renegotiated client has good payment behavior (an overdue period of less than 30 days), in a period of over seven months.

Moreover, an operation identified as renegotiation never leaves this classification for purposes of monitoring and provisioning.

 

 (h)(j)Impairment Testing

The main tools used to test loan impairment include an analysis of whether principal or interest payments are more than 90 days past due or if the counterparty is experiencing any known cash flow problems, reductions in credit ratings or default of the original contractual terms.

 

 (i)(k)Off balance sheet accounts

In order to meet our customers’ financial needs, the Bank has extended several irrevocable commitments and contingent obligations. Even though these obligations are not recognized in the balance sheet, they involve credit risk and thus form part of the Bank’s general risk exposure.

Credit risk exposure generated by contingent obligations is disclosed in Note 26.27.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk

Market Risk is referred as to the potential loss the Bank may incur due to the scarcity of liquidity (Liquidity risk) or due to an adverse change of market factors values suchlevels (such as FX rates, equity prices, interest rates, options volatility, etc (Price risk).

We implementetc.) or due to the Market Risk Management task by measuring, limiting, controlling and reporting exposures and risks linked to Liquidity and Price risk.absence of liquidity.

 

 (a)(a)Liquidity Risk:Risk

Liquidity risk refers as to the inability of the bank to generate liquidity to honor its financial commitments. The bank may generate liquidity by selling assets or borrowing money through the issuance of time deposits and/or bonds (demand deposits contribute to the funding base as well). Equity issuance is not included as an alternative to get liquidity since this is a more structural decision which also takes longer time to be implemented.

The risk of not having liquid secondary markets for liquidating assets (in this case mainly debt instruments since loans are in most cases held up to maturity) is referred as to Trading Liquidity risk; on the other hand, the risk of not having access to funding markets (for any reason, either systemic or due to specific Banco de Chile’s poor perception) is referred as to Funding Liquidity risk.Risk Measurement and Limits

The Bank measuresmeasure and monitorscontrol the trading liquidity of derivative and debt instruments only. Loans trading activity in Chile is very low and therefore we do not consider selling loans as a source of liquidity. Derivatives trading liquidity is monitoredTrading Liquidity risk for Trading portfolios by establishing DV01 limits forto certain specific tenors for each yield curve;curve, limits to spot positions for FX or Equity portfolios. Trading Liquidity for debt instruments liquiditythat are part of the Accrual Book is monitored through DV01 limits and yield curves and notional limits including segregation by issuer class.not limited explicitly, taking into account that in this case the positions are expected to be held until medium term or even until maturity.

Funding Liquidity is controlled and limited using the regulatory C08 Index report. report, which estimates expected net cash flows whithin a period of time.

The C08 Index is computed as the ratio of expected outflows divided by the Tier-1 Capital. Additionally, the Superintendence of Banks and Financial Institutions (hereafter “SBIF”) allows banks, subjectSBIF authorized Banco de Chile to their review of the quality of the models, to reportutilize the C08 Adjusted Index consideringreport, which includes, in addition to the regular report, behavioral instead of contractual maturity assumptions for some specific balance sheet items, (as loans, demand deposits, etc.). In such a case,as roll-over or evergreen patterns for some portion of the loan portfolio cashflows are modeled as evergreen, i.e. some stake of the loans’ cashflows are rolled-over;portfolios; some portion of the demand deposits isare considered stablecore and therefore modeled as a non-maturing liability whereas the remaining portionno withdrawal is reported, as an outflow, etc. Whenever the inclusion of behavioral assumptions is permitted, this is referred as to the C08 Adjusted Index report. Banco de Chile was granted by the

The SBIF in 2006 to report the regulatory funding liquidity utilizing the C08 Adjusted Index.

Moreover, the SBIF establishedsets the following limits for the C08 index (or for the C08 Adjusted Index, in the case that the bank is authorized by the SBIF to utilize behavioral assumptions) that banks must comply for the net outflows maturing during the next 30 and 90 days:Index:

 

Net foreign currency outflows maturing between 1 and 30 days:Foreign Currency balance sheet items: 1-30 days C08 index < 1 x Basic Capital  
Net outflows (all currencies) maturing between 1 and 30 days:All Currencies balance sheet items: 1-30 days C08 index < 1 x Basic Capital  
Net outflows (all currencies) maturing between 1 and 90 days:All Currencies balance sheet items: 1-90 days C08 index < 2 x Basic Capital  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

41.Risk Management, continued:

(3)Market Risk

(a)Liquidity Risk:

As of December 31, 2012,30, 2014, the 1-30 days Adjusted C08 Index for theof foreign currency balance sheet items was reported slightly above than 0.1.is 0.072. The 1-30 days Adjusted C08 Index forof all currencies balance sheet items on that date is reported as -0.13;0.267; the value of the same index for the period 1 to 90 days is 0.38.0.452.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (a)Liquidity Risk, continuedcontinued:

 

The maturity profile of the consolidated financial liabilities of Banco de Chile and its subsidiaries, as of 20112013 and 20122014 end-of-year, is detailed below:

 

  Up to 1
month
MCh$
   

Between

1 and

3 months
MCh$

   

Between 3

and

12 months

MCh$

   

Between

1 and 3

years
MCh$

   

Between

3 and 5

years
MCh$

   

More

than

5 years
MCh$

   

Total

MCh$

   Up to 1
month
MCh$
   Between
1 and
3 months
MCh$
   Between 3
and
12 months
MCh$
   Between
1 and 3
years
MCh$
   Between
3 and 5
years
MCh$
   More
than
5 years
MCh$
   Total
MCh$
 

Liabilities as of December 31, 2011

              

Liabilities as of December 31, 2013

              

Current accounts and other demand deposits

   4,895,426     —       —       —       —       —       4,895,426     5,984,332     —       —       —       —       —       5,984,332  

Transactions in the course of payment

   155,424     —       —       —       —       —       155,424     51,898     —       —       —       —       —       51,898  

Payables from repurchase agreements and security lending

   222,756     446     —       —       —       —       223,202  

Accounts Payable from repurchase agreements and security lending

   259,688     —       —       —       —       —       259,688  

Savings accounts and time deposits

   4,441,786     1,951,047     2,607,906     290,481     355     30     9,291,605     5,009,358     2,351,121     3,005,112     213,203     145     31     10,578,970  

Derivative instruments

   515,787     439,237     244,021     48,804     —       —       1,247,849     301,981     159,374     293,688     236,384     244,998     377,838     1,614,263  

Borrowings from financial institutions

   483,189     800,101     407,649     —       —       —       1,690,939     95,776     361,825     262,142     —       —       —       719,743  

Other financial obligations

   89,141     13,738     149,234     423,070     603,744     1,559,965     2,838,892     267,881     144,898     259,689     826,803     803,737     2,500,987     4,803,995  

Debt issued in foreign currency different USD

   437     770     70,215     204,925     248,714     345,363     870,424  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total undiscounted financial liabilities (excluding derivatives with offsetting agreements)

   10,803,509     3,204,569     3,408,810     762,355     604,099     1,559,995     20,343,337     11,971,351     3,017,988     3,890,846     1,481,315     1,297,594     3,224,219     24,883,313  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivatives with offsetting agreements

   671,072     1,066,890     3,637,260     4,068,859     2,616,022     944,230     13,004,333     45,775     188,282     513,583     688,081     519,512     899,830     2,855,063  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  

Up to 1

month
MCh$

   

Between

1 and

3 months
MCh$

   

Between 3

and
12 months
MCh$

   

Between

1 and 3

years
MCh$

   Between
3 and 5
years
MCh$
   

More

than

5 years
MCh$

   

Total

MCh$

   Up to 1
month
MCh$
   Between
1 and
3 months
MCh$
   Between 3
and

12  months
MCh$
   Between
1 and 3
years
MCh$
   Between
3 and 5
years
MCh$
   More
than
5 years
MCh$
   Total
MCh$
 

Liabilities as of December 31, 2012

              

Liabilities as of December 31, 2014

              

Current accounts and other demand deposits

   5,470,971     —       —       —       —       —       5,470,971     6,934,373     —       —       —       —       —       6,934,373  

Transactions in the course of payment

   159,218     —       —       —       —       —       159,218     53,049     —       —       —       —       —       53,049  

Accounts Payable from repurchase agreements and security lending

   226,396     —       —       —       —       —       226,396     249,198     92     —       —       —       —       249,290  

Savings accounts and time deposits

   4,271,345     2,508,688     2,814,055     393,247     279     30     9,987,644     4,956,782     2,162,419     2,596,404     154,505     172     188     9,870,470  

Derivative instruments

   231,117     134,729     321,148     244,826     132,688     236,071     1,300,579     269,665     278,329     286,634     409,966     296,234     486,087     2,026,915  

Borrowings from financial institutions

   135,353     176,467     630,745     141,444     —       —       1,084,009     59,589     158,480     677,611     200,010     —       —       1,095,690  

Other financial obligations

   876,101     606,477     505,718     898,318     713,053     2,377,962     5,977,629     756     1,140     5,939     12,713     17,685     18,585     56,818  

Debt issued in foreign currency different USD

   114,339     222,257     566,735     1,134,570     1,219,836     2,882,249     6,139,986  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total undiscounted financial liabilities (excluding derivatives with offsetting agreements)

   11,370,501     3,426,361     4,271,666     1,677,835     846,020     2,614,063     24,206,446     12,637,751     2,822,717     4,133,323     1,911,764     1,533,927     3,387,109     26,426,591  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivatives with offsetting agreements

   154,600     79,406     256,717     425,612     229,070     434,677     1,580,082     178,635     110,298     727,089     1,208,217     638,045     895,239     3,757,523  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Loans-to-deposit ratio for 20112013 and 20122014 is detailed below:

Loans-to-Deposit Ratio

 

  

December 31,

2011

   

December 31,

2012

   

December 31,

2013

  

December 31,

2014

Maximum

   2.05     2.05    2.47  2.74

Minimum

   1.93     1.93    2.28  2.43

Average

   1.98     1.98    2.38  2.61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued

 

 (a)Liquidity Risk, continued:

 

Banco de Chile has established internal liquidity triggers,metrics, in addition to those required by the regulatory entities, in order to cover various aspects not explicitly covered bywith the regulatory framework,objective of covering other dimensions of liquidity risk, such as follows: large funds providers ratios that helps the funding sources diversification; maturity concentration triggers, which avoids large amounts of liabilities maturing in one single day,triggers; etc. These and other financial ratios are monthly monitored in order to early detect structural changes of the balance sheet profile.

Additionally, the bank is closely monitoring market triggers, such as interest rates levels, intervention of the FX marketmarkets made by the Central Bank, the 5-year Chile CDS spread, etc. These allow the bank to early prevent systemic crisis due to market conditions.

 

 (b)Price Risk:Risk

Price Risk Measurement and Limits

The Price Risk measurement process isand management processes are implemented thorough several reports, both regulatoryutilizing various internal metrics and internal,reports. These are built for the Trading portfolio and also separately for the Trading BookBank book (also referred as to the Accrual book). In addition to this, and just on supplementary basis, the Bank Book.bank submits regulatory reports to the corresponding regulatory entities.

For the Trading Book, theThe regulatory risk measurement for the Trading portfolio (SBIF C41 report) is obtainedmade by using standardized methodologies (referred as toprovided by the SBIF C41 report) that estimatesregulatory entities (Central Bank of Chile and SBIF), which are adopted from BIS 1993 standardized methodologies for the risk measurement of such portfolios. The referred methodologies estimate the potential loss that the Bank may faceincur considering standardized fluctuations of the market factors (FX rates, interest rates, etc,) relevant market factors that may adversely impact the value of interest rate positions, reported according to its repricing tenorsFX spot positions and fluctuationsvega positions generated by either FX or interest rate options portfolios. The interest rate shifts are provided by the regulatory entity (these fluctuationsentity; in addition, very conservative correlation and tenors factors are taken from Basel Agreement 1993 standardized tables for the Trading Book risk measurement).included in order to include non-parallel yield curve shifts reflecting steepening/flattering behaviors. The impact due to FX open positions is obtained by using huge fluctuations (8% for liquid FX rates and 30% for the illiquid ones). The SBIF does not establish a separate limit for this particular risk but a global one that includes this risk (also called Market Risk Equivalent or MRE)ERM) and 10% of the Risk Weighted Assets (also called RAAP assets). The sum of MREERM and the 10% of the RAAP assets cannot exceed the 100% of the bank’s Tier-1Regulatory Capital. In the future, the Operational Risk will be addedincluded to the above sum.

Additionally, the Bank has established internal limits for the Trading Book. In fact, there are limits for the FX net open positions (FX Delta)delta), for the interest rate sensitivities generated by the derivatives and debt securities portfolios (DV01 or also called Rho)referred as to rho) and for the FX volatility sensitivity (Vega)(vega). Limits are established on an aggregate basis but also for some specific repricing tenor points. The use of these limits are monitored, controlled and reported on a daily basis by independent parties to the senior management of the bank.Bank. The internal governance framework also establishes that these limits are approved by the board and must be reviewed at least annually.

From January 2011, theThe Bank utilizes the parametric VaR (Value-at-Risk or VaR) as athe risk measurement tool for the trading portfolios.portfolio exposures. The model includes 99% confidence level; overnight volatility of market factors fluctuations and correlations between them are obtained from historical observed closing rates forobserved the most recent one-year period. This VaR number is escalated by 22 days.days (a calendar month) for reporting purposes.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued

 

 (b)Price Risk, continued:

 

In addition to the parametricThe regulatory risk measurement from December 2011, the Bank started reporting the historical VaR (99% confidence level and one-year period for market fluctuations), which is also escalated by 22 days.

The interest rate risk generated by the Bank Book (SBIF C40 report) due to interest rate fluctuations is measuredmade by using standardstandardized methodologies provided by the regulatory tools (referred as to the SBIF C40 report)entities (Central Bank of Chile and internal built-in methodologies.SBIF). The latter are based on gap analysis of assets/liabilities repricing tenors.

The SBIF C40 report includes models for reporting interest rate gaps and standardized adverse interest rate fluctuations. TheIn addition to this, the regulatory entity has requested from banks to establish internal limits for this regulatory risk measurement. Limits must be established separately for short termshort-term and long termlong-term portfolios. The short termshort-term risk limit must be expressed as a percentage of the NIM and the long term risk limit as a percentage of the Tier-1Regulatory Capital. The bank is currently using 25% for both limits. The use of these limits during 20122014 is illustrated below:

 

  

Banking Risk Book

Short term

 

Banking Risk Book

Long Term

   

Banking Risk Book

Short term

 

Banking Risk Book

Long Term

 

Maximum Use

   10.9  19.4   9.3  18.5

Average Use

   9.7  18.7   7.3  17.4

Minimum Use

   7.7  18.1   6.1  16.6

Additionally, the Bank during 2011 and 2012 finished the implementation of the internalutilizes build-in models for measuring, limiting, controlling and reporting interest rate exposures (IRE) and interest rate risks (also called Earnings at Risk or EaR) for the Accrual Book (theBook. The Accrual Bookbook includes all balance sheet items i.e. even(even some items that are excluded by the regulators in the analysis of the Bank Book, such as Capital and Fixed Assets, for example). The IRE is computed, for each yield curve (Pesos, US Dollars, etc.), as the net impact in the revenues generation afterinternal models consider a standardized forwardmore comprehensive and detailed analysis of interest rates fluctuations, (100 bps for interestexchange rates and 0.1% monthly for inflation). The EaR is computed as worst adverse net impact ininflation than the revenues generation considering a 95% of confidence and a three-year period historical interest rate fluctuations.SBIF C40 report required by regulators.

Finally,In addition to the above, the Market Risk Policy of Banco de Chile enforces to perform daily stress tests for trading portfolios and on a monthly basis for accrual portfolios. The output of the stress testing process is compared to corresponding trigger levels: in the case that triggers are breached, the senior management is notified in order to implement further actions, if necessary. Moreover, intra-month actual P&L for trading activities is compared to some trigger levels: escalation to senior levels is also implementeddone when breaches occur.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (b)Price Risk, continuedcontinued:

 

The following table illustrates the interest rate positions of the Bank Book (repricing tenors) as of December 31, 20112013 and 2012:2014:

Accrual Book Interest Rate Exposure by Maturity

 

  Up to 1
month
MCh$
   

Between

1 and

3 months
MCh$

   

Between 3

and
12 months
MCh$

   

Between

1 and 3

years
MCh$

   

Between

3 and 5

years
MCh$

   

More

than 5

years
MCh$

   

Total

MCh$

   Up to 1
month
MCh$
   Between
1 and
3 months
MCh$
   Between 3
and
12 months
MCh$
   Between
1 and 3
years
MCh$
   Between
3 and 5
years
MCh$
   More
than 5
years
MCh$
   Total
MCh$
 

Assets as of December 31, 2011

              

Assets as of December 31, 2013

              

Cash and due from banks

   827,381     —       —       —       —       —       827,381     848,757     —       —       —       —       —       848,757  

Transactions in the course of collection

   295,420     —       —       —       —       —       295,420     360,806     —       —       —       —       —       360,806  

Receivables from repurchase agreements and security borrowing

   10,023     —       —       —       —       —       10,023  

Accounts receivable from repurchase agreements and security borrowing

   54,591     —       —       —       —       —       54,591  

Derivative instruments

   173,624     64,468     195,555     —       —       —       433,647     361,734     86,268     176,636     80,287     258,915     374,745     1,338,585  

Loans and advances to banks

   390,315     58,436     172,557     31,678     —       —       652,986     791,728     117,220     156,297     —       —       —       1,065,245  

Loans to customers, net

   3,019,622     2,342,355     4,343,456     4,091,996     1,920,759     4,537,489     20,255,677     3,457,101     2,743,019     5,681,608     4,582,528     2,293,838     5,890,051     24,648,145  

Financial assets available-for-sale

   121,318     235,860     301,013     194,846     281,719     530,203     1,664,959     85,500     187,044     455,332     174,413     517,638     388,187     1,808,114  

Financial assets held-to-maturity

   —       —       —       —       —       —       —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   4,837,703     2,701,119     5,012,581     4,318,520     2,202,478     5,067,692     24,140,093     5,960,217     3,133,551     6,469,873     4,837,228     3,070,391     6,652,983     30,124,243  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  

Up to 1

month
MCh$

   

Between

1 and

3 months
MCh$

   

Between 3

and
12 months
MCh$

   

Between

1 and 3

years
MCh$

   

Between

3 and 5

years
MCh$

   

More

than 5

years
MCh$

   

Total

MCh$

   Up to 1
month
MCh$
   Between
1 and  3
months
MCh$
   Between 3
and

12  months
MCh$
   Between
1 and 3
years
MCh$
   Between
3 and 5
years
MCh$
   More
than 5
years

MCh$
   Total
MCh$
 

Assets as of December 31, 2012

              

Assets as of December 31, 2014

              

Cash and due from banks

   653,511     —       —       —       —       —       653,511     889,489     —       —       —       —       —       889,489  

Transactions in the course of collection

   366,036     —       —       —       —       —       366,036     387,434     —       —       —       —       —       387,434  

Accounts receivable from repurchase agreements and security borrowing

   582     —       —       —       —       —       582     820     —       —       —       —       —       820  

Derivative instruments

   128,964     81,085     150,971     7,463     21,564     110,414     500,461     382,138     155,483     113,921     180,892     451,807     320,352     1,604,593  

Loans and advances to banks

   1,152,648     14,731     178,761     —       —       —       1,346,140     810,826     80,057     249,764     18,501     —       —       1,159,148  

Loans to customers, net

   3,172,424     2,390,933     4,769,542     4,329,131     2,083,220     5,314,078     22,059,328     3,431,877     3,244,400     5,446,614     4,789,951     2,420,640     6,575,962     25,909,444  

Financial assets available-for-sale

   57,370     178,055     381,448     235,786     192,490     323,967     1,369,116     166,115     166,562     509,046     153,964     171,256     574,193     1,741,136  

Financial assets held-to-maturity

   —       —       —       —       —       —       —       —       —       —       —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   5,531,535     2,664,804     5,480,722     4,572,380     2,297,274     5,748,459     26,295,174     6,068,699     3,646,502     6,319,345     5,143,308     3,043,703     7,470,507     31,692,064  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.Risk Management, continued:

(3)Market Risk, continued

(b)Price Risk, continued

The tables below included projected contractual interest, as of December 31, 2011 and 2012:

   

Up to 1

month
MCh$

   

Between

1 and

3 months
MCh$

   

Between 3

and
12 months
MCh$

   

Between 1

and 3 years

MCh$

   Between
3 and 5
years
MCh$
   

More

than 5

years
MCh$

   

Total

MCh$

 

Liabilities as of December 31, 2011

              

Current accounts and demand deposits

   4,906,774     —       —       —       —       —       4,906,774  

Transactions in the course of payment

   87,821     —       —       —       —       —       87,821  

Accounts payable from repurchase agreements and security lending

   48,578     —       —       —       —       —       48,578  

Savings accounts and time deposits

   4,451,516     1,952,826     2,639,046     343,867     82,220     30     9,469,505  

Derivative instruments

   1,739     3,119     20,276     167,445     78,059     246,035     516,673  

Borrowings from financial institutions

   498,777     788,018     401,493     —       —         1,688,288  

Debt issued

   20,262     24,436     142,005     521,265     700,642     1,759,365     3,167,975  

Other financial obligations

   111,134     1,368     7,457     17,548     12,650     39,466     189,623  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   10,126,601     2,769,767     3,210,277     1,050,125     873,571     2,044,896     20,075,237  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Up to 1
month
MCh$
   

Between

1 and

3 months
MCh$

   Between 3
and
12 months
MCh$
   

Between 1

and 3 years
MCh$

   

Between

3 and 5
years
MCh$

   

More

than 5

years
MCh$

   

Total

MCh$

 

Liabilities as of December 31, 2012

              

Current accounts and demand deposits

   5,531,827     —       —       —       —       —       5,531,827  

Transactions in the course of payment

   127,611     —       —       —       —       —       127,611  

Accounts payable from repurchase agreements and security lending

   5,268     —       —       —       —       —       5,268  

Savings accounts and time deposits

   4,223,812     2,371,455     2,908,748     417,885     279     30     9,922,209  

Derivative instruments

   3,903     3,477     26,924     175,376     83,186     260,272     553,138  

Borrowings from financial institutions

   304,070     450,332     348,390     —       —       —       1,102,792  

Debt issued

   119,449     162,656     253,617     683,676     689,980     2,337,558     4,246,936  

Other financial obligations

   96,108     1,373     7,246     15,543     11,432     34,754     166,456  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   10,412,048     2,989,293     3,544,925     1,292,480     784,877     2,632,614     21,656,237  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (b)Price Risk, continuedcontinued:

 

Price Risk Sensitivity AnalysisThe tables below included projected contractual interest, as of December 31, 2013 and 2014:

   Up to 1
month
MCh$
   Between
1 and
3 months
MCh$
   Between 3
and

12  months
MCh$
   Between 1
and 3 years
MCh$
   Between
3 and  5
years
MCh$
   More
than  5
years
MCh$
   Total
MCh$
 

Liabilities as of December 31, 2013

              

Current accounts and demand deposits

   6,012,841     —       —       —       —       —       6,012,841  

Transactions in the course of payment

   114,589     —       —       —       —       —       114,589  

Accounts payable from repurchase agreements and security lending

   16,964     —       —       —       —       —       16,964  

Savings accounts and time deposits

   5,141,774     2,211,623     3,005,229     213,224     135     31     10,572,016  

Derivative instruments

   12,396     3,372     142,660     435,245     279,419     492,682     1,365,774  

Borrowings from financial institutions

   279,063     513,096     194,863     —       —       —       987,022  

Debt issued

   300,614     143,669     259,129     881,605     1,033,552     2,819,652     5,438,221  

Other financial obligations

   161,134     1,258     7,013     13,604     17,438     23,840     224,287  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   12,039,375     2,873,018     3,608,894     1,543,678     1,330,544     3,336,205     24,731,714  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Up to 1
month
MCh$
   Between
1 and
3 months
MCh$
   Between 3
and

12  months
MCh$
   Between 1
and 3 years
MCh$
   Between
3 and  5
years
MCh$
   More
than 5
years
MCh$
   Total
MCh$
 

Liabilities as of December 31, 2014

              

Current accounts and demand deposits

   6,950,301     —       —       —       —       —       6,950,301  

Transactions in the course of payment

   82,932     —       —       —       —       —       82,932  

Accounts payable from repurchase agreements and security lending

   25,662     —       —       —       —       —       25,662  

Savings accounts and time deposits

   5,141,552     1,977,615     2,596,404     154,511     166     188     9,870,436  

Derivative instruments

   3,911     3,808     199,533     542,556     522,765     339,547     1,612,120  

Borrowings from financial institutions

   534,341     435,417     125,985     —       —       —       1,095,743  

Debt issued

   251,953     314,199     565,036     902,456     1,218,631     2,880,053     6,132,328  

Other financial obligations

   142,484     1,140     5,939     12,713     17,685     18,585     198,546  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   13,133,136     2,732,179     3,492,897     1,612,236     1,759,247     3,238,373     25,968,068  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

42.Risk Management, continued:

(3)Market Risk, continued:

(b)Price Risk, continued:

The Bank has focused on stress tests as the main measurement tool for analyzing price risk sensitivity. The analysis is implemented for the Trading Book and the AccrualBank Book separately. After the financial crisis occurred in 2008-10started during 2008 and based on the various studies and analyses made on this specific matter, the Bank adopted this tool, for sensitivity analysis, when it notices that stress testing it is more reliable than normal distribution instruments such as parametric VaR for trading portfolios or EaR for accrual portfolios, since:

 

 (a)The recent financial crisis shows fluctuations that are materially higher than those used throughin the VaR with 99% of confidence level.

 

 (b)The recent financial crisis shows also that correlations between these fluctuations that are materially different to those used throughin the VaR, since crisis precisely indicate severe disconnections between the behaviorsbehavior of market factors respect to the patterns normally observed.

 

 (c)Trading liquidity dramatically decreased in emerging markets during the financial crisis (in the case of Chile too) and therefore, the escalation of the daily VaR is a very gross approximation of the expected loss.

Stress tests are produced observing historical events and collecting market factors data.

The former allow the Bank to gauge actual distress events in terms of magnitude but mainly focused on detecting unusual fluctuations.

The latter gives the Bank the technical background for implementing statistical analysis. An updated database is maintained including historical data of foreign exchange rates, debt instruments yields to maturity, derivatives swap yields, foreign exchange volatilities, etc. that enable the Bank to maintain updatedup-to-date records of historical volatility of market factors fluctuations and correlations between these ones.

Given the above, the stress tests may be implemented modeling directional fluctuations but also knowing the magnitude of the modeled fluctuations relative to statistical data and also how frequent the fluctuation modeled occurred in the past.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (b)Price Risk, continued:

 

In order to comply with IFRS 7.40, we include the following exercise illustrating an estimation of the impact of feasible but reasonable fluctuations of interest rates, swaps yield, foreign exchange rates and foreign exchange volatilities embedded in the Trading and Accrual portfolios. Given that the Bank’s portfolio includes positions denominated in nominal and real interest rates, these fluctuations must be aligned with realistic inflation changes forecast. The exercise is implemented in a very simplistic way: trading portfolios impacts are estimated by multiplying DV01s by expected interest rates shifts; accrual portfolios impacts are computed by multiplying cumulative gaps by forward interest rates modeled fluctuations. However,It is relevant to note, this methodology includes the limitation that the interest rates convexity is not properly captured when material fluctuations are modeled; additionally, neither convexity nor prepayments behaviors are captured for the accrual portfolio analysis. In any case, given the magnitude of the shifts, the methodology may be accurate enough for the purposes and scope of the analysis.

The following table illustrates the fluctuations modeled and used in the stress testing process. Bonds yields, derivatives yields, FX rates, FX CLP/USD volatility and inflation fluctuations are shown for each tenor point. Equity prices fluctuations are not included given that the positions held in the stockbrokerage house (Banchile Corredores de Bolsa SA) are negligible. In fact, equity positions are typically very small given that this legal vehicle is mostly focused on customer-drivencustomer driven transactions (brokerage service or equity swaps transactions closed with customers).

The directions of these fluctuations were chosen between four scenarios (two positive economic scenarios and two negative economic scenarios) in order to generate the worst impact for Trading Book within the four above mentioned:

 

Market Factor Fluctuations: most adverse scenario

 
   CLP
Derivatives
(bps)
  CLP
Bonds
(bps)
  CLF
Derivatives
(bps)
  CLF
Bonds
(bps)
  USD
Offshore 3m
Derivatives
(bps)
  Spread
USD
On/Off
Derivatives
(bps)
   Vol FX
CLP/USD

(%)
  Inflation’s
Change
Period n-1 to n
(Monthly Basis)
(%)
 

3 m

   (110  (101  410    395    (4  335     8.0  (0.47)% 

6 m

   (142  (114  49    41    (5  258     6.6  0.02

9 m

   (157  (121  (37  (34  (6  246     5.9  (0.08)% 

1 yr

   (171  (123  (30  (12  (7  224     5.4  (0.27)% 

2 yrs

   (166  (111  (10  10    (24  163     5.4  (0.06)% 

4 yrs

   (225  (128  (48  (31  (38  78     —      (0.02)% 

6 yrs

   (205  (125  (67  (58  (45  76     —      —    

10 yrs

   (157  (131  (97  (99  (54  83     —      0.02

16 yrs

   (147  (129  (98  (99  (62  83     —      (0.02)% 

20 yrs

   (148  (131  (101  (101  (65  83     —      (0.02)% 

Market Factor Fluctuations: adverse scenario

 
   CLP
Derivatives
(bps)
   CLP
Bonds
(bps)
   CLF
Derivatives
(bps)
  CLF
Bonds
(bps)
  USD
Offshore 3m
Derivatives
(bps)
   Spread
USD

On/Off
Derivatives
(bps)
  Vol FX
CLP/USD
(%)
  Inflation’s
Change
Period n-1 to  n
(Monthly Basis)
(%)
 

3 months

   20     24     (129  (184  1     (68  (3.9%)   0.16

6 months

   23     26     (51  (63  5     (52  (3.4%)   (0.02%) 

9 months

   26     27     (23  (27  6     (26  (3.0%)   (0.01%) 

1 year

   29     27     (9  (11  8     (23  (2.8%)   0.00

2 years

   33     32     (3  (4  15     (8  (2.8%)   0.03

4 years

   30     52     6    27    28     (9  —      0.01

6 years

   30     63     8    41    34     (10  —      0.01

10 years

   29     67     6    42    37     (18  —      0.02

16 years

   29     67     5    41    37     (4  —      0.02

20 years

   29     67     5    41    37     (19  —      0.02

Bps = Basis points

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (b)Price Risk, continuedcontinued:

 

The impact on the Trading Book as the result of the interest rate fluctuations illustrated above,30 December 2014 is the following as of December 31st 2012:following:

POTENTIAL P&L IMPACT

TRADING BOOK

MOST ADVERSE SCENARIO

 

   MCh$ 

CLP Interest Rate

   (3,1702,748

Derivatives

   (3,1971,291

Securities

   27(1,456) 
  

 

 

 

CLF Interest Rate

   (3,1571,052

Derivatives

   (1,867320

Securities

   (1,290733
  

 

 

 

USD, EUR, JPY Offshore Interest Rate

   (175812)  

USD, EUR, JPY On/Off Spread

   (1071,067
  

 

 

 

Total Interest Rate

   (6,6094,055
  

 

 

 

Total FX

   171(700
  

 

 

 

Total FX OPTION Vega FX

   451(97
  

 

 

 

Potential P&L Impact: Interest Rate + FX + Vega

   (5,9874,852
  

 

 

 

Banco de Chile Expected P&L (12 Months)

490,000

Banco de Chile Tier1Basic Capital

   2,007,5732,535,154

Potential P&L Impact / (Tier1 Capital + Expected P&L next 12 months)

(0.2)% 

Potential P&L Impact / (expected 12 months annual)

(1.2)%  
  

 

 

 

The scenario modeled would generate losses in the Trading Book up to Ch$ 6,000 MMMCh$ 4,852 or slightly above USD 128 MM. In any case, these huge fluctuations would not result in material losses compared to the expected P&L for the next twelve months or the Tier 1Basic Capital.

The impact of such fluctuations in the Accrual portfolio, which is not necessarily a gain/loss but greater/lower net revenue from funds (NRFF) generation, is illustrated below:

POTENTIAL MARGINAL NRFFNRFF(*) ACCRUAL

BOOK (next 12 months)

   MCh$ 

Higher/(LowerHigher / (Lower NRFF)

   (62,925118,438
  

 

 

 

CLP BookImpact due to Inter-Banking yield curve (Swap yield) shock

   (61,00797,647

CLF BookImpact due to spreads shock

   (3,28920,791

FCY Book

(*)
1,371Net revenues from funds

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (3)Market Risk, continued:

 

 (b)Price Risk, continuedcontinued:

 

The mainadverse impact would occur in the CLPAccrual book aswould be the result of two events: a severe drop in the local inflation levels.and the increase of our funding spread. The lower net revenues from funds in the following 12 months would reach CH$ 63,000 MM,Ch$ 118 billion, which is equivalent to 3.14%still much lower of the Tier 1 Capital.current annual 12-month rolling P&L generation.

Finally, the nextThe following table illustrates the shadow mark-to-market impact (the impact on our Capital base butchanges in fair value of Available-for-Sale securities as the result of stress test modeled above. These changes are recorded in Other Comprehensive Income, a component of shareholder’s Equity, and not on income) in the AFS portfolio due to the referred interest rate fluctuations:current earnings:

AVAILABLE FOR SALE PORTFOLIO IMPACT

ADVERSE SCENARIO

 

Instrument  

DV01(+1 bps)

(USD)

 

Impact
due to
interest
rate
change

(USD)

 

Impact due to
interest rate change

(MCh$)

   

DV01(+1 bps)

(USD)

   Impact
due to
interest
rate
change
(USD)
   Impact due to
interest rate change
(MCh$)
 

CLP

   (86,798  (3.4  (1,645   (220,434   (9.52   (5,770

CLF

   (362,128  (26.6  (12,732   (435,314   (48.76   (29,556

USD

   (187,511  (16.0  (7,670   (103,699   (9.28   (5,622
   

 

  

 

     

 

   

 

 

Total

    (46.0  (22,047

Total impact

     (67.56   (40,948
   

 

  

 

     

 

   

 

 

 

 (4)Capital Requirements and Capital Management:

The main objectives of the Bank’s capital managementCapital Management process are to ensure the compliance with regulatory requirements, maintainto keep a strong credit rating and healthy capital ratios. During 2012,Within 2014, the Bank fullyhas complied with demanded capital requirements.all these tasks.

As a part of itsthe Capital Management Policy, the Bankit has been established capital adequacy alerts, values more stringentsufficiency triggers in order to prevent capital ratios usage close to the limits. The triggers are established at levels much lower than those required by the regulator, which arelimits and the usage is monitored on an ongoing basis. A date has not been activated any alerts on defined internal Capital Management Policy.monthly. Within 2014, there were no triggers’ breaches.

The Bank manages capital by making adjustments considering changes inamount is managed according to the risk environment, the economic conditionsperformance of Chile and the risk characteristics of their business.main economies and the business cycle. For implementing this, the Bankboard may adjustchange the amount of dividend payment to shareholderspolicy or issue capital instruments.

The Bank actively manages and core capital to cover the risks inherent in their business. The Bank’s capital adequacy is monitored using, among other measures, rates and rules established by the SBIF.authorize equity issuance or stocks repurchase programs.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (4)Capital Requirements and Capital Management, continued:

 

Regulatory Capital

In accordance withAccording to the Chilean General Banking Law, banks must comply with a minimum Regulatory Capital ratio of 8%. Therefore, the Bankbank must maintain a minimum ratioRegulatory Capital that cannot be lower than 8% of Effective Equity to Consolidated Risk-Weighted Assets of 8%, net of required provisions, andthe RAAP assets. Additionally, the Bank must comply with a minimum ratio ofcapital to total assets ratio: the law establishes that banks must maintain a minimum Basic Capital to Total Consolidated Assetsthat cannot be lower than the 3% of 3%, net of required provisions. However,total assets. The authorities have requested Banco de Chile, due to the 2008 mergermerge with the operation of Banco deCitibank, N.A. in Chile and Citibank Chile,that maintains the Superintendencyfirst percentage as a minimum of Banks (SBIF), in Resolution N° 20910%.

Both ratios are computed according the international standards; assets are risk weighted, for reporting purposes, according to SBIF instructions which are adopted from December 26, 2007, increasedBIS guidelines. For derivatives, the limit onrisk weighting process is applied over the Bank’s ratio“loan equivalent” of effective equity to risk-weighted assets to 10%. In this context,each derivative transaction. The loan equivalent is the SBIF ratified the usesum of the 10% as minimum fixed in December 2001 when authorizing merge by absorption of Banco Edwards in Banco de Chile.

For this purpose, Effective Equity is determined based on Capital and Reserves or Basic Capital, adjusted by: (a) adding subordinated bonds up to 50% of Basic Capital, (b) adding additional loan provisions, and (c) subtracting the asset balance of goodwill or overpayments and (d) adding unconsolidated investments in companies.

Assets are weighted using risk categories, which are assigned a risk percentage based on the capital needed to back each asset. There are 5 risk categories (0%, 10%, 20%, 60% and 100%). For example, cash, due from banks and financial instruments issued by the Chilean Central Bank have 0% risk, which means, in accordance with current standards, no capital is required to back these assets. Property and equipment have 100% risk, which means that minimum capital equivalent to 8% of the value of these assets is needed (10% in the case of Banco de Chile).

All derivative instruments traded off-market are taken into account to determine risk assets using conversion factors over notional values, thus calculating the value of the credit risktransaction, if positive, and the maximum exposure (or “credit equivalent”). For weighting purposes, “credit equivalent” also considers off-balance sheet contingent loans.the Bank may face in the future, along the life of the transaction, considering the increase in value of it due to market factor fluctuations including some confidence level. The loan equivalent is expressed as a percentage of the notional amount of the transaction, being these percentages much larger for FX transactions than for interest rate swaps or for longer tenors than for shorter ones.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

41.42.Risk Management, continued:

 

 (4)Capital Requirements and Capital Management, continued:

 

Levels of Tier 1 (Capital Básico)The risk weighted assets and Tier 2 (Patrimonio Efectivo)Basic Capital ratio and Regulatory Capital ratio, as of December 31, 2011the end of year 2013 and 2012 are as follows:2014, were:

 

  Consolidated assets   Risk-weighted assets   Consolidated assets   Risk-weighted assets 
  2011   2012   2011   2012   2013   2014   2013   2014 
  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 

Balance sheet assets (net of provisions)

                

Cash and due from banks

   881,146     684,925     16,472     832     873,308     915,133     20,654     3,100  

Transactions in the course of collection

   373,639     310,077     100,236     53,978     300,026     356,185     39,728     34,741  

Financial Assets held-for-trading

   269,861     159,682     78,314     55,025     326,921     293,458     124,932     304,501  

Cash collateral on securities borrowed and reverse repurchase agreements

   47,981     35,100     47,981     35,100     82,422     27,661     82,422     27,661  

Derivative instruments

   381,055     326,083     378,788     328,642     374,687     832,267     460,537     694,632  

Loans and advances to banks

   648,425     1,343,322     335,562     231,182     1,062,056     1,155,365     381,494     468,293  

Loans to customers, net

   17,023,756     18,383,958     15,555,760     16,658,476     20,441,472     21,400,775     18,505,593     19,192,870  

Financial assets available-for-sale

   1,471,120     1,272,316     488,760     416,938     1,681,883     1,608,796     432,995     472,949  

Financial assets held-to-maturity

   —       —       —       —       —       —       —       —    

Investments in other companies

   13,196     11,674     15,418     13,933     14,407     23,043     16,670     25,312  

Intangible assets

   81,026     75,610     33,757     33,151     72,223     66,859     29,671     26,593  

Property and equipment

   207,888     205,189     207,887     205,189     197,578     205,403     197,578     205,403  

Investment properties

   17,079     16,698         16,317     15,936     —       —    

Current tax assets

   —       —       141     268     —       —       320     347  

Deferred tax assets

   60,025     55,801     11,628     12,714     56,421     94,240     14,590     20,287  

Other assets

   279,804     317,765     229,650     296,879     373,987     586,555     318,029     355,057  
      

 

   

 

       

 

   

 

 

Subtotal

       17,500,354     18,342,307         20,625,213     21,831,746  

Off-balance-sheet assets

                
      

 

   

 

 

Contingent loans

   3,484,007     3,945,940     2,084,517     2,367,215     3,927,627     4,280,451     2,355,879     2,567,508  
      

 

   

 

       

 

   

 

 

Total risk-weighted assets

       19,584,871     20,709,522         22,981,092     24,399,254  
      

 

   

 

       

 

   

 

 

 

   As of December 31, 2011   As of December 31, 2012 
   MCh$   %   MCh$   % 

Tier 1 (*)

   1,739,173     6.85     2,007,057     7.33  

Tier 2

   2,529,135     12.91     2,738,311     13.22  
   As of December 31, 2013   As of December 31, 2014 
   MCh$   %   MCh$   % 

Basic Capital ratio(*)

   2,284,314     7.57     2,535,154     7.89  

Regulatory Capital ratio

   2,999,061     13.05     3,249,903     13.32  

 

(*)Tier 1Basic Capital corresponds to equity attributable to equity holders in the Statement of Consolidated Financial Position

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

42.Own assets securitizations:

During 2012, the Bank entered into a non-recourse securitization issuance and assignment agreement with the subsidiary Banchile Securitizadora S.A., whereby two fixed rate commercial loans were transferred. Then Banchile Securitizadora S.A. created the Segregated Equity (“Patrimonio Separado”) according to the title XVIII of the law No. 18,045. The securitized assets finally became part of the separated equity in order to support the series A bond issuance, which was fully transferred to third parties.

As of the transaction date, the book value of the credits assigned was MCh$30,276 and the effective amount received in the transference was MCh$30,407, which generated income of MCh$131 and also a credit provisions release for MCh$24. Furthermore, the subsidiary Banchile Securitizadora S.A. charged a commission of MCh$160 to the bank for debt structured process services.

The bank acquired the subordinated bond (serie C) issued by Segregated Equity in Ch$22,485 equivalent to UF 1 (Unidad de Fomento), which represented less than 0.001% of the total amount of the Bond issued by Segregated Equity, which amounted MCh$30,407 (par value amounted MCh$30,196). This bond was registered in available-for-sale and as of December 31, 2012 its fair value is Ch$22,841, this amount represents the maximum exposure of the bank will have in this transaction.

The Segregated Equity will pay to the Bank an annual fee equivalent to UF430 for collection concept. The bank analyzed all the relevant aspects of the transaction, according to the NIC 39 and the SIC 12, related to assets derecognized and consolidation rules. In this regard the bank concludes that it (i) has substantially transferred all benefits and risks of assets assigned to the Segregated Equity; (ii) does not manage directly or indirectly the activities of the segregated equity; (iii) does not have decision rights which allow it to obtain substantial benefits from the assets assigned; and (iv) does not maintain any control over assets assigned or the Segregate Equity. As a consequence, the bank proceeded to derecognized the credits involved in the transaction and have not consolidated them with the Segregated Equity.

Additional information regarding the transaction

Securitized asset value as of December 31, 2012

MCh$24,795

Securitized bond value as of December 31, 2012

MCh$24,644

Securitized assets - remaining term

5 years

Securitized bond - remaining term

5 years

Rate securitized assets

UF + 4.83

Rate securitized bond

UF + 4.54

During 2012 and 2011, the bank did not executed any other securitization transaction involving its own assets.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

43.New Accounting Pronouncements:

The following is a summary of new standards, interpretations and improvements to the international accounting standardsInternational Financial Reporting Standards issued by the International Accounting Standards Board (IASB) which havethat it is not yet come into effecteffective as of December 31, 2012, as per the following detail:

IAS 1 Presentation of Financial Statements

This improvement clarifies the differences between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period.

Management estimates that this change will not have significant impacts on the Consolidated Financial Statements.

IAS 19 Employee Benefits

The amendments to IAS 19 (1,998) remove the option to defer the recognition of actuarial gains and losses (the “corridor method”), streamline the presentation of changes in assets and liabilities arising from defined benefit plans and enhance the disclosure requirements for defined benefit plans. Entities are required to apply amendments in the annual periods beginning on or afterJanuary 1, 2013, or earlier.

According to the assessment made, this change will not have significant impacts on the Consolidated Financial Statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

43.New Accounting Pronouncements, continued:

IAS 27 Separate Financial Statements

This standard amended in May 2011, and supersedes IAS 27 (2008). The scope of this standard is restricted only for separate financial statements, as the concept related to the definition of control and consolidation were removed and included in IFRS 10.

Entities are required to apply amendments in the annual periods beginning on or afterJanuary 1, 2013, and early adoption is permitted in conjunction with IFRS 10, IFRS 11 and IFRS 12 and the amendment to IAS 28.

Banco de Chile does not have separate financial statements, so this regulatory change will not significantly impact the Consolidated Financial Statements.

IAS 28 Investments in Associates and Joint Venture

This standard was reissued in May 2011, regulates the accounting treatment of application of the equity method to investments in joint ventures. Entities are required to apply amendments in the annual periods beginning on or afterJanuary 1, 2013, and early adoption is permitted in conjunction with IFRS 10, IFRS 11 and IFRS 12 and the amendment to IAS 27.

Banco de Chile does not have investments in associates or joint ventures, so this regulatory change will not significantly impact the Consolidated Financial Statements.

IAS 32 Financial Instruments: Presentation

The amendments issued in December 2011 clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The standard is effective for annual periods beginning on or afterJanuary 1, 2014 and early adoption is permitted.

In May 2012, the amendments remove a perceived inconsistency between IAS 32 and IAS 12 and indicate that the income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction should be accounted for in accordance with IAS 12 “Income Taxes”.

This amendment shall apply retroactively for annual periods beginning on or afterJanuary 1, 2013. Earlier application is permitted.

According to current rules about netting in force in Chile, this rule will not significantly impact the Consolidated Financial Statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

43.New Accounting Pronouncements, continued:

IAS 34 Interim Financial Reporting

The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures.

According to the assessment carried out, this policy change will not significantly impact the Consolidated Financial Statements.

IFRS 7 Financial Instruments: Disclosures

In December 2011, the required disclosures were amended to include information that will enable users of an entity’s financial statements evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognized financial assets and recognized financial liabilities, on the entity’s financial position. The new disclosures are required for all recognized financial instruments that are set off in accordance with IAS 32 – Financial instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangements or similar agreement, irrespective of whether they are set off in accordance with IAS 32. An entity shall apply those amendments for annual periods beginning on or afterJanuary 1, 2013.

According to the assessment made, this regulatory change will not significantly impact the Consolidated Financial Statements. It will require additional disclosures, which we are in the process of preparing, for the next quarterly financial statements.2014:

IFRS 9 Financial Instruments:Instruments

The July 24, 2014, IASB completed its upgrade project about accounting for financial instruments with the publication of IFRS 9 Financial liabilitiesInstruments.

This standard includes new requirements based on new principles for the classification and measurement; it introduces a “prospective” model of expected credit losses on impairment accounting and changes in hedge accounting.

Classification and measurement

In October, 2010, the IASB added requirements for classifyingThe classification determines how financial assets and measuring financial liabilities to IFRS 9. Most of the added requirements were carried forward unchanged from IAS 39. However, the requirements relating to the fair value option of financial liabilities were changed to address the issue of credit riskare accounted in response to consistent feedback from users of financial statements and, others thatin particular, how they are measured. IFRS 9 introduces a new approach for classification of financial assets, based in the effectsbusiness model of changesthe entity for the management of financial assets and the characteristic of its contractual flows. The new model also results in a liability’ssingle impairment model being applied to all financial instruments, removing a source of complexity associated with previous accounting requirements.

Impairment

The IASB has introduced a new impairment model that will require a timely recognition of expected credit losses.

Hedge Accounting

IFRS 9 introduces a new model for hedge accounting with enhanced disclosures about risk ought notmanagement activity. The new model represents a substantial overhaul of hedge accounting that aligns the accounting treatment with risk management activities, enabling entities to affectbetter reflect these activities in their financial statements. In addition, as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements

Entity’s Own Credit Risk

IFRS 9 removes the volatility in profit or loss unlessoriginated by changes in the liabilitycredit risk of designated liabilities at fair value. This change means that the profit produced by the quality decline of own credit risk of the entity in this kind of obligation, is held for trading.

The mandatory effective date on annual periods begins onnot recognized in profit or afterJanuary 1, 2015.loss of the period, but in other comprehensive income. IFRS 9 permits early application of this improvement, before any other requirement of IFRS 9.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

43.New Accounting Pronouncements, continued:

 

IFRS 9 Financial Instruments: Recognition and MeasurementInstruments, continued:

In November 2009, the IASB issued IFRS 9, “Financial Instruments,” the first step in its project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 introduces new requirements for classifying and measuring financial assets that are in the scope of the application of IAS 39. This new regulation requires that all financial assets be classified by function of the entity’s business model for the management of financial assets and of the characteristics of the contractual cash flows of financial assets. A financial asset shall be measured at amortized cost if two criteria are satisfied: (a) the objective of the business model is to maintain a financial asset to receive contractual cash flows and (b) contractual cash flows represent principal and interest payments. Should a financial asset not comply with the aforementioned conditions, it will be measured at fair value. In addition, this standard allows a financial asset that fulfills the criteria to be valued at amortized cost to be designated at fair value with changes in income under the fair value option, as long as this significantly reduces or eliminates an accounting asymmetry. Likewise, IFRS 9 eliminates the requirement of separating embedded derivatives from the underlying financial assets. Therefore, it requires that a hybrid contract be classified entirely in amortized cost or fair value.

IFRS 9 is effective for annual periods beginning as ofAdoption date mandatory January 1, 2015, and allows adoption prior to that date. IFRS 9 must be applied retroactively, however if it2018. Early application is adopted before January 1, 2012, there is no need to reformulate comparative periods.permitted.

Banco de Chile and its subsidiaries are assessing the possible impact of adoption of these changes on the Consolidated Financial Statements; however, that impact will dependconsolidated financial statements.

IFRS 11 – Joint Arrangements

In May of 2014 the IASB modified IFRS 11, providing guides about the accounting of acquisitions of participations in joint operations, whose activity constitute a business. This standard requires the acquirer of a participation in a joint operation, whose activities constitute a business, to apply all the principles on the assets maintained by the institution asaccounting for business combinations of the adoption date. ItIFRS 3.

The effective date is beginning on January 1, 2016 and its early application is permitted.

Banco de Chile and its subsidiaries are assessing the impact of this rule in its consolidated financial statements.

IAS 16 – Property, plant and equipment and IAS 38 – Intangible assets

In May of 2014 the IASB modified IAS 16 and 38 with purpose of clarifying accepted methods of depreciation and amortization.

The amendment of IAS 16 prohibits property, plant and equipment, depreciation based on ordinary income.

The amendment of IAS 38 introduces the presumption that ordinary income is not practicable to quantifyan appropriate base for the effectamortization of intangible assets. This presumption only is refuted in two circumstances: (a) intangible asset is expressed like a unit of ordinary income; and (b) ordinary income and consumption of intangible assets are highly correlated.

The effective date is beginning on January 1, 2016 and its early application is permitted.

This modification does not impact the issuanceconsolidated financial statements of the Consolidated Financial Statements. To date, neitherBanco de Chile and its subsidiaries, because it is not used as a basis of these standards has been approved by the Superintendency of Banks, which approval is required for their application.depreciation and amortization.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

43.New Accounting Pronouncements, continued:

 

IFRS 10 Consolidated Financial Statement15 – Revenue from Contracts with Customers

InIFRS 15 was issued in May 2011 the IASB issued IFRS 10 establishing a new definition of control that2014. It applies to all entities including “special purpose entities” or “structured entities” as they are now referredcontracts with customers except leases, financial instruments and insurance contracts. This project was jointly conducted with the Financial Accounting Standards Board (FASB) to eliminate differences in revenue recognition between IFRS and USGAAP. This new standard pretends to improve inconsistencies and weaknesses of IAS 18 and to provide a single revenue recognition model which will improve comparability over a range of industries, companies and geographical boundaries. It provides a new model of earnings recognition and more detailed requirements for contracts with multiple elements.

Application of the new standards. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore which are required to be consolidated by a parent.standard is mandatory for annual reporting periods starting from January 1, 2017 onward, early application is permitted.

Banco de Chile and its subsidiaries are evaluatingassessing the possible impact that the adoption of this standard will haverule on the Consolidated Financial Statements. However, it will require additional disclosures, which we are in the process of preparing, for the next quarterlyits consolidated financial statements.

IFRS 11 Joint ArrangementsIAS 27 – Consolidated and Separated Financial Statements

In May 2011,August 2014, the IASB published the amendment that will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

The effective date is beginning on January 1, 2016 and its early application is permitted.

This amendment does not impact the consolidated financial statements of Banco de Chile and its subsidiaries.

IAS 28 – Investments in Associates and Join Venture and IFRS 10 - Consolidated Financial Statements

In September 2014, the IASB issued IFRS 11this amendment, which replaces IAS 31 “Interest in Joint Ventures”clarifies the scope of recognized gains and SIC-13 “Jointly-Controlled Entities- Non-monetary Contributions by Ventures”.

IFRS 11 eliminated the option to record the value of investmentslosses in a transaction involving an associate or joint venture, using proportionate consolidationand this depends on whether the asset sold or recognize its assets and liabilities as its relative shares of those items, if any. The new standards require usecontribution is a business. Therefore, IASB concluded that all of the equity method.profit or loss should be recognized against loss of control of a business. Likewise, gains or losses resulting from the sale or contribution of a subsidiary that is not a business (definition of IFRS 3) to an associate or joint venture should be recognized only to the extent of unrelated interests in the associate or joint venture.

This new standardThe effective date is effective for annual periods beginning on or afterJanuary 1, 2013.2016 and its early application is permitted.

According to assessments made, this regulatory change willThis amendment does not significantly impact the Consolidated Financial Statements.

IFRS 12 Disclosure of Interests in Other Entities

In May 2011, the IASB issued IFRS 12 which replaces the disclosure requirements previously included in IAS 27, IAS 31 and IAS 28. This new standard is aimed at concentrating by a single regulatory body disclosure of subsidiaries, joint agreements, associates and structured entities. One of the most significant changes introduced by IFRS 12 is the requirement that the parent disclose the judgment that management has made to determine that it has control to consolidate or not consolidate different entities. The new disclosures will help users ofconsolidated financial statements evaluate the natureof Banco de Chile and risks associated with interests in other entities and the effects of those interests on the financial statements.

This new standard is effective for annual periods beginning on or afterJanuary 1, 2013.

According to the assessments made, this regulatory change will not significantly impact the Consolidated Financial Statements. It will require additional disclosures, which we are in the process of preparing, for the next quarterly financial statements.its subsidiaries.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

43.New Accounting Pronouncements, continued:

 

Annual improvements IFRS 13 Fair Value Measurement

In May 2011,September 2014, the IASB issued IFRS 13 Fair Value Measurement. This new standard establishes a new definition of Fair Value (this definition converges with generally acceptedAnnual improvements to IFRS: 2012 – 2014 Cycle, which include changes to the following standards.

-

IFRS 5 Non-current assets held for sale and discontinued operations.

Add specific guidelines in cases in which an entity reclassifies an asset from held for sale to held for distribution, or vice versa and cases in which assets held for distribution are accounting principles in United State). This new standardlike discontinued operations. The effective date is beginning on January 1, 2016 and its early application is permitted.

Banco de Chile and its subsidiaries do not register non-current assets held for sale and discontinued operations. Therefore, this modification does not change whenimpact the consolidated financial statements of Banco de Chile and its subsidiaries.

-

IFRS 7 Financial Instruments: Disclosures.

Add guidelines to clarify if a service contract corresponds to a continuing involvement in an entity must or may use fair value, but changes howasset transfer with the purpose to measuredetermine the fair value of financial and non-financial assets and liabilities.

These new standardrequired disclosures. The effective date is effective for annual periods beginning on or afterJanuary 1, 2013.2016 and its early application is permitted.

According to the assessments made, this policy change willThis amendment does not significantly impact the Consolidated Financial Statements; howeverconsolidated financial statements of Banco de Chile and its subsidiaries.

-

IAS 19 Employee Benefits. Discount rate: topic of the regional market.

Clarifies that corporate bonds with high quality credit used in the Bankestimation of the discount rate for post-employment benefits must be denominated in the same currency as the benefit paid. The effective date is preparingbeginning on January 1, 2016 and its disclosures to comply withearly application is permitted.

This amendment does not impact the furtherconsolidated financial statements of Banco de Chile and its subsidiaries.

-

IAS 34 Interim Financial Reporting.

Clarifies the meaning of disclose information requests“in some other part of this rule. interim financial information” and the need for a cross-reference. The effective date is beginning on January 1, 2016 and its early application is permitted

This rule will be applicable only ifamendment does not impact the Superintendencyconsolidated financial statements of BanksBanco de Chile and Financial Institutions allows its adoption.subsidiaries.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

 

43.New Accounting Pronouncements, continued:

Annual improvements IFRS, continued:

-

IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interest in Other Entities and IAS 28 Investments in Associates and Join Venture.

In December 2014, the IASB has modified IFRS 10, IFRS 12 and IAS 28 related with the application of the exceptions in the consolidation in investment entities.

The amendments clarify the requirement for the accounting of investment entities. In addition, these amendments in certain circumstances reduce the cost in the application of these standards.

The effective date is mandatory on January 1, 2016 and its early application is permitted.

Banco de Chile and its subsidiaries are assessing the impact of this rule in its consolidated financial statements.

-

IAS 1 Presentation of Financial Statements

In December, 2014, the IASB published “Disclosure Initiative (Amendments to IAS 1)”. The amendments aim at clarifying IAS 1 to improve the presentation and disclosure of information in the financial reports.

These amendments answer requests about presentation and disclosure and have been designed with the finality to allow the entities to apply their professional opinion to determine what information must be disclosed in the financial statements.

They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

Banco de Chile and its subsidiaries are assessing the impact of this rule in its consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued

44.Subsequent Events:

 

 (a)a)AccordingOn January 9, 2015 through Resolución Exenta No. 7 the Superintendency of Securities and Insurance approved the reform to Note 27 (b)the by-laws of EquityBanchile Securitizadora S.A. related to a capital increase of Ch$240,000,000 by means of the issuance of 1,550 shares, as agreed in the forth Extraordinary Shareholders Meeting of March 31, 2013, the Chile-T shares have been fully subscribed and paid. Consequently the totalcompany held on December 1, 2014. The capital increases for an amount of MCh$253,244 (net proceeds).increase was carried out on January 20, 2015.

 

 (b)InOn January 26, 2015 the Board of Banchile Administradora General de Fondos S.A. accepted the resignation of the Director of the company Mr. Jorge Tagle Ovalle.

The board also agreed to appoint Mr. Eduardo Ebensperguer Orrego as a new Director of the company, effective from January 26, 2015 until the next annual meeting.

(c)On January 29, 2015, in the Ordinary Meeting No. 2,769 held on the January 24, 2013,BCH 2811, the Board of Directors of Banco de Chile resolved to call an Ordinary Shareholders Meeting to be held on the March 21, 201326, 2015, with the objective of proposing, among other matters, the distribution of the Dividend number 201No. 203 of Ch$3.41625263165$3.42915880220 per every oneeach of the 88.037.813.51194,655,367,544 “Banco de Chile” shares, which will be payable at the expense of the distributable net income obtained during the fiscal year endedending on December 31, 2012,2014, corresponding to 70% of such income.

AtLikewise, the extraordinary shareholders’ meetingBoard of Directors resolved to call an Extraordinary Shareholders Meeting to be held on March 21, 2013, our shareholders agreedthe same date in order to a stock dividend in connection withpropose, among other matters, the capitalization of the 30% of ourthe distributable net income of the Bank obtained during the fiscal year 2012,ending on December 31, 2014, through the issuance of fully paid-in shares, ofwith no par value, with a value of Ch$71.97$65.31 per “Banco de Chile” share, which willto be distributed toamong the shareholders atin the fixed rateproportion of 0.02034331347 fully paid-in0.02250251855 shares perfor each “Banco de Chile” share currently held,and to adopt the necessary agreements subject to the exercise of the options established in article 31 of Law 19,396.

 

 (c)(d)InOn March 23, 2015 the Ordinary Shareholder Meeting,subsidiary Banchile Securitizadora S.A. announced that in its ordinary meeting held on March 21,23, 2015 the distribution and paymentBoard of dividend No.201, was approved inDirectors of the amountcompany accepted the resignation of CLP$3,41625263165 per Banco de Chile common share, with a charge to the 2012 net distributable income of Banco de Chile.its Director José Vial Cruz.

 

 (d)(e)On March 26, 201324, 2015 the subsidiary Banchile Securitizadora S.A. announced as Essential Information that in the Tenth Ordinary Shareholder meeting the total renovation of the Board of Directors of the company was agreed by the shareholders.

Accordingly, Mr. Pablo Granifo Lavin, Mr. Arturo Tagle Quiroz, Mr. Eduardo Ebeusperger Orrego, Mr. Alain Rochette Garcia and Mr. Jose Miguel Quintana Malfauti were elected as Directors for a three-year period.

(f)On March 30, 2015 the Bank made as Essential Information that, as of that date, the Central Bank of Chile has communicated to Banco de Chile that the Board of such institution (Consejo), in the Extraordinary Session No 1742E,1894E, held today, considering the Boardresolutions adopted by the shareholders’ meetings of Banco de Chile of March 26, 2015, regarding distribution of dividends and the increase of capital through the issuance of fully paid-in shares corresponding to the 30% of the net income obtained during the fiscal year ending on December 31, 2014, resolved to take the option that the entirety of its corresponding surplus, including the part of the profits proportional to the agreed capitalization, be paid to the Central Bank of Chile resolvedin cash currency, according to request that its surplus from the fiscal year ended December 31, 2012, including its proportional percentageletter b) of the profits agreed upon capitalization, be paid in cash.article 31 of the law No 19,396, regarding a modification of the payment method for the subordinated obligation and other applicable legislation.

(g)On April 9, 2015, the Board of Directors of Banco de Chile accepted the resignation of the Director Mr. Juan José Bruchou.

Also, the Board of Directors appointed Mr. Samuel Libnic as a new Director until the next Ordinary Shareholder Meeting.

In Management’s opinion, there are no other significant subsequent events that affect or could affect the Consolidated Financial Statementsconsolidated financial statements of the Bank and its subsidiaries between December 31, 20122014 and the date of issuance of the Consolidated Financial Statements.these consolidated financial statements.

 

 

SIGNATURE

The registrant, Banco de Chile, 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.

 

BANCO DE CHILE

By 

/s/ Arturo Tagle Q.

 Name: Arturo Tagle Q.
 Title: Chief Executive Officer

Date: April 26, 201327, 2015