BCH Banco de Chile
As filed with the Securities and Exchange Commission on April 29, 2020
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission file number 001-15266
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
(Address of principal executive offices)
Rolando Arias Sánchez
Banco de Chile
Paseo Ahumada 251
Telephone: (562) 2653-3535
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol||Name of each exchange on which registered|
|American Depositary Shares, each representing 200 shares of common stock, without nominal (par) value (“ADSs”)||BCH||New York Stock Exchange|
|Shares of common stock, without nominal (par) value|
New York Stock Exchange
(for listing purposes only)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Shares of common stock: 101,017,081,114
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ 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 þ
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 þ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer þ||Accelerated filer ☐||Non-accelerated filer ☐||Emerging growth company ☐|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
TABLE OF CONTENTS
|Item 17||Financial Statements||242|
|Item 18||Financial Statements||242|
|LIST OF EXHIBITS||243|
This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we have based these forward-looking statements on our expectations and projections about future events, it is possible that actual results may differ materially from our expectations. In many cases, we include a discussion of the factors that are most likely to cause forward-looking statements to differ from actual results together with the forward-looking statements themselves. These statements appear throughout this annual report, including, without limitation, under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Examples of such forward-looking statements include:
|●||projections of operating revenues, net income (loss), net income (loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios;|
|●||statements of our plans, objectives or goals, including those related to anticipated trends, competition and regulation;|
|●||statements about market risks, including interest rate risk and foreign exchange risk;|
|●||statements about our future economic performance or that of Chile or other countries in which we operate; and|
|●||statements of assumptions underlying such statements.|
Words such as “believe,” “anticipate,” “plan,” “aims,” “seeks,” “expect,” “intend,” “target,” “objective,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “could,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These statements may relate to (i) our asset growth and financing plans, (ii) trends affecting our financial condition or results of operations and (iii) the impact of competition and regulations, but are not limited to such topics. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this annual report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors not currently expected by us could significantly alter the results set forth in these statements.
Factors that could cause actual results to differ materially and adversely include, but are not limited to:
|●||changes in general economic, business, political or other conditions in Chile, or changes in general economic or business conditions in Latin America, the United States, Europe or Asia;|
|●||changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Chilean companies;|
|●||increased competition and changes in competition or pricing environments, including the effect of new technological developments;|
|●||unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;|
|●||natural disasters or pandemics;|
|●||the effect of tax laws on our business; and|
|●||the factors discussed under “Item 3. Key Information—Risk Factors.”|
You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. This cautionary statement should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to publicly release any revisions to such forward-looking statements after the filing of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
PRESENTATION OF FINANCIAL INFORMATION
We prepare our audited consolidated financial statements in Chilean pesos and in accordance with International Financial Reporting Standards (“IFRS”) in effect from time to time as issued by the International Accounting Standards Board (“IASB”).
Unless otherwise indicated, the financial information included in this annual report with respect to 2015, 2016, 2017, 2018 and 2019 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, 2019 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean Generally Accepted Accounting Principles (the “Chilean GAAP”) as issued by theSuperintendencia de Bancos e Instituciones Financieras de Chile (the “Superintendency of Banks and Financial Institutions” or “SBIF”). As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.
In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos (see Note 2(f)) to our audited consolidated financial statements as of and for the year ended December 31, 2019 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 theInstituto Nacional de Estadísticas (the “Chilean National Statistics Institute”). As of December 31, 2019 and April 24, 2020, one UF equaled Ch$28,309.94 and Ch$28,673.54, respectively.
This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in our audited consolidated financial statements as of and for the year ended December 31, 2019 or could be converted into U.S. dollars at the rate indicated. Banco de Chile utilizes the exchange rate of accounting representation, or spot exchange rate, for such matters. 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 30, 2019 as determined by our Treasury on a daily basis, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. As of December 30, 2019 (the latest practicable date, as December 31, 2019 was a banking holiday in Chile) and April 24, 2020, the exchange rates of accounting representation were Ch$751.88 = U.S. $1.00 and Ch$858.86 = U.S.$1.00, respectively. As of the same dates, the observed exchange rates, as published by Banco Central de Chile (the “Central Bank”), were Ch$744.62 = U.S.$1.00 and Ch$858.87= U.S.$1.00, respectively.
The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.
Unless otherwise specified, all references in this annual report to total loans are to loans to customers before deducting allowances for loan losses, and they do not include loans to banks or contingent loans. In addition, all market share data and financial indicators for the Chilean banking system as compared to Banco de Chile’s financial information presented in this annual report are based on information published periodically by the CMF which is published under Chilean GAAP and prepared on a consolidated basis, unless otherwise indicated. For more information see “Item 4. Information on the Company—Business Overview—Competition.”
In this annual report, “past due loans” are any loans for which the counterparty has failed to make a payment when contractually due, including installments that are overdue, plus the remaining balance of principal and interest on such loans. In order to distinguish between different overdue time periods, the corresponding time period is included after the term “Past due Loans” (for example, “Past due Loans—90 days or more”). For more information, please see “Item 4. Information on the Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”
According to Chilean regulations, as of the filing date and for the purposes of this annual report, regulatory capital (“Regulatory Capital”) consists of:
|●||basic capital, which is composed of our paid-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% of risk-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, 2019 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, 2019. Certain other amounts that appear in this annual report may similarly not sum due to rounding.
Inflation figures are those reported by the Chilean National Statistics Institute, unless otherwise stated herein or required by the context.
MACRO-ECONOMIC AND MARKET DATA
In this annual report, all macro-economic data relating to the Chilean economy is based on information published by the Central Bank. All market share data, financial indicators and other data relating to the Chilean financial system are based on information published periodically by the CMF, which is published under Chilean GAAP and prepared on a consolidated basis.
|Item 1||Identity of Directors, Senior Management and Advisors|
|Item 2||Offer Statistics and Expected Timetable|
|Item 3||Key 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, 2019 appearing elsewhere in this annual report. The financial information for the years ended December 31, 2015, 2016, 2017, 2018 and 2019 is presented under IFRS.
Our audited consolidated financial statements have been prepared in accordance with IFRS for the years ended December 31, 2015, 2016, 2017, 2018 and 2019.
|For the Year Ended December 31,|
|(in millions of Ch$, except share and per share data)||(in thousands of|
|CONSOLIDATED STATEMENT OF INCOME DATA|
|Net interest income||1,228,288||1,226,733||1,234,695||1,320,977||1,371,278||1,823,799|
|Net fees and commissions income||305,979||321,271||347,674||359,955||457,302||608,211|
|Net financial operating income||44,412||128,575||(29,661||)||117,142||113,437||150,871|
|Foreign exchange transactions, net||57,318||12,405||104,875||2,701||30,886||41,078|
|Other operating income||25,486||28,575||29,959||45,295||32,315||42,979|
|Provisions for loan losses||(246,222||)||(259,263||)||(221,255||)||(249,771||)||(331,601||)||(441,029||)|
|Total operating expenses||(726,278||)||(787,047||)||(784,356||)||(839,708||)||(902,250||)||(1,199,992||)|
|Income attributable to associates||3,243||4,014||5,511||6,811||6,039||8,032|
|Income before income taxes||692,226||675,263||687,442||763,402||777,406||1,033,949|
|Net income from continued operations, net of taxes||Ch$||609,905||Ch$||575,051||Ch$||572,081||Ch$||603,634||Ch$||603,745||US$||802,980|
|Net income from discontinued operations, net of taxes||―||―||―||―||―||―|
|Net income for the year||Ch$||609,905||Ch$||575,051||Ch$||572,081||Ch$||603,634||Ch$||603,745||US$||802,980|
|Equity holders of the parent||609,903||575,051||572,080||603,633||603,744||802,979|
|Earnings per share(2)||6.04||5.69||5.66||5.98||5.98||0.01|
|Earnings per ADS||1,268.93||1,178.09||1,150.56||1,195.11||1,195.33||1,589.79|
|Dividends per share(3)||3.88||3.81||3.50||3.76||3.53||0.00|
|Weighted average number of shares (in millions)||101,017.08||101,017.08||101,017.08||101,017.08||101,017.08|
|(1)||IFRS 9 replaced IAS 39 for financial statements from January 1, 2018 onwards and includes new classification and measurement requirements for financial assets and liabilities, impairment requirements for financial assets and hedge accounting policy. The application of this standard as of January 1, 2018 had an impact on our consolidated financial statements at that date, as appearing in Note 5 “Transition Disclosures” to our audited consolidated financial statements for the year ended December 31, 2018, appearing in our annual report on Form 20-F for the year ended December 31, 2018 filed on April 26, 2019 (the “2018 20-F”).|
|For the Year Ended December 31,|
|(in millions of Ch$, except share and per share data)||(in thousands of|
|CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA(1) (2) (3)|
|Cash and due from banks||Ch$||1,361,222||Ch$||1,408,167||Ch$||1,057,393||Ch$||880,081||Ch$||2,392,166||US$||3,181,580|
|Transactions in the course of collection||319,679||206,972||255,968||289,194||331,420||440,787|
|Financial assets held for trading||843,574||1,379,958||1,538,578||1,745,366||1,872,355||2,490,231|
|Cash collateral on securities borrowed and reverse repurchase agreements||46,164||55,703||91,641||97,289||142,329||189,298|
|Loans and advances to banks||1,395,544||1,173,187||760,021||1,494,384||1,140,081||1,516,307|
|Loans to customers, net||24,022,983||24,843,655||24,955,692||27,341,254||29,384,039||39,080,756|
|Financial assets available-for-sale and Financial Assets at Fair Value through Other Comprehensive Income||1,007,263||374,470||1,526,315||1,053,191||1,366,343||1,817,236|
|Investments in other companies||25,849||30,314||35,771||42,252||48,442||64,428|
|Property and equipment||215,671||219,082||216,259||215,872||220,262||292,948|
|Current tax assets||―||6,657||23,032||677||357||475|
|Deferred tax assets, net||129,192||176,923||161,265||176,823||231,293||307,620|
|Current accounts and other demand deposits||8,327,048||8,321,148||8,915,706||9,584,488||11,326,133||15,063,751|
|Transactions in the course of payment||35,475||25,702||29,871||44,436||98,869||131,496|
|Cash collateral on securities lent and repurchase agreements||184,131||216,817||195,392||303,820||308,734||410,616|
|Saving accounts and time deposits||9,907,692||10,552,901||10,067,778||10,656,174||10,856,618||14,439,296|
|Borrowings from financial institutions||1,529,627||1,040,026||1,195,028||1,516,759||1,563,277||2,079,158|
|Other financial obligations||173,081||186,199||137,163||118,014||156,229||207,785|
|Currents tax liabilities||24,714||―||3,453||4,907||76,289||101,464|
|Deferred tax liabilities, net||―||―||―||―||―||―|
|Total liabilities and equity||Ch$||31,057,596||Ch$||31,357,304||Ch$||32,561,437||Ch$||35,601,430||Ch$||41,013,874||US$||54,548,432|
|(1)||IFRS 9 replaced IAS 39 for financial statements from January 1, 2018 onwards and includes new classification and measurement requirements for financial assets and liabilities, impairment requirements for financial assets and hedge accounting policy. The application of this standard as of January 1, 2018 had an impact on our consolidated financial statements at that date, as appearing in Note 5 “Transition Disclosures” to our audited consolidated financial statements for the year ended December 31, 2018, appearing in the 2018 20-F filed on April 26, 2019.|
|As of December 31,|
|Profitability and Performance|
|Net interest margin(5)||4.68||%||4.41||%||4.30||%||4.35||%||4.13||%|
|Return on average total assets(6)||2.08||1.86||1.79||1.76||1.59|
|Return on average equity(7)||19.60||18.00||16.09||16.78||15.71|
|Average equity as a percentage of average total assets||10.63||10.33||11.11||10.51||10.15|
|Bank regulatory capital as a percentage of minimum regulatory capital||275.34||290.48||304.38||287.45||268.37|
|Ratio of liabilities to regulatory capital(8)||10.87||10.26||9.76||10.40||11.24|
|Substandard loans as a percentage of total loans(9)||3.83||3.42||3.07||2.96||2.98|
|Allowances for loan losses as a percentage of substandard loans(9)||58.51||63.91||63.50||70.84||72.58|
|Provision for loan losses as a percentage of average loans||1.07||1.05||0.87||0.95||1.15|
|Allowances for loan losses as a percentage of total loans||2.24||2.18||1.95||2.10||2.16|
|Operating expenses/operating revenue||43.71||45.82||46.48||45.49||45.00|
|Operating expenses/average total assets||2.48||%||2.55||%||2.45||%||2.45||%||2.38||%|
|(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, 2019 have been translated from Chilean pesos based on the spot exchange rate of Ch$751.88 to U.S. $1.00 as of December 31, 2019.|
|(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)||IFRS 9 replaced IAS 39 for financial statements from January 1, 2018 onwards and includes new classification and measurement requirements for financial assets and liabilities, impairment requirements for financial assets and hedge accounting policy. The application of this standard as of January 1, 2018 had an impact on our consolidated financial statements at that date, as appearing in Note 5 “Transition Disclosures” to our audited consolidated financial statements for the year ended December 31, 2018, appearing in the 2018 20-F filed on April 26, 2019.|
|(5)||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.|
|(6)||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.|
|(7)||Annualized net income (loss) divided by average equity. The average balances for equity have been calculated on the basis of our daily balances.|
|(8)||Total liabilities divided by bank regulatory capital.|
|(9)||See “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past Due Loans.”|
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 carried out in the Informal Exchange Market. On March 31, 2020, the average exchange rate in the Informal Exchange Market was Ch$838.9 per U.S. $1.00, or 0.9% lower than the observed exchange rate of Ch$846.30 per U.S.$1.00 as reported by the Central Bank on the same date.
Banco de Chile utilizes 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.
The observed exchange rate on March 31, 2020 was Ch$846.30 = U.S.$1.00. As of the same date, the exchange rate of accounting representation, or spot exchange rate, was Ch$853.79 = U.S.$1.00.
The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.
The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we do not know about or that we currently think are immaterial may also impair our business operations in the future. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, prospects and financial condition.
We are also subject to market risks that are presented both in this subsection and in Note 42 to our audited consolidated financial statements as of and for the year ended December 31, 2019 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 grown at a compounded average growth rate (“CAGR”) of 6.5% per year. This expansion has been primarily fostered by growth in both residential mortgage (11.2% per year on average) and consumer loans (6.2% per year on average), and, to a lesser extent, by an expansion in commercial loans (4.4% per year on average). The growth in our loan book has been aligned with our mid-term strategic goals, which aim to diversify our business model by optimizing our risk-return relationship in order to maintain profitable growth. In this regard, we recognize that the expansion experienced by our retail banking segment over the last years may expose us to higher levels of charge-offs and may require us to establish higher levels of allowances for loan losses in the future. This is due to the fact that the average retail customer is riskier than large companies and corporations, since they are more exposed to the economic cycle than wholesale customers. For example, individuals are impacted by economic factors such as employment and SMEs are impacted by economic conditions affecting domestic demand. For this reason, we are constantly striving to develop and utilize improved scoring and approval models, while strengthening our collection procedures in order to mitigate the risks associated with this business growth. For the year ended December 31, 2019, our loan portfolio was Ch$30,033,272 million, which represented a 7.5% annual increase as compared to the Ch$27,926,632 million we recorded as of December 31, 2018. Our allowances for loans losses increased 10.9% from Ch$585,378 million in 2018 to Ch$649,233 million in 2019, mainly attributable to the social unrest that took place in Chile during the fourth quarter of 2019, which led to deteriorated risk profiles of both individuals and companies, resulting in increased forward-looking expected credit losses. As a result, our risk-index ratio (allowances for loan losses to total loans) increased from 2.10% in 2018 to 2.16% in 2019.
Our loan portfolio may not continue to grow at the same or similar rates as it has in the past.
Double-digit loan growth during the decade ending in 2013, particularly fostered by increased banking penetration of (i) lower and middle income segments and (ii) small and medium-sized companies resulted in a marked expansion in consumer, mortgage and commercial loans in the Chilean banking industry. However, the deceleration of the local economy from 2013 to 2017 and the introduction of diverse reforms on general matters, including both banking and non-banking rules, have threatened both the industry’s pace of growth and banking penetration rate, leading to an overall decline in private investment (capital expenditures) and deteriorated consumer confidence and business sentiment, as evidenced by the indices (Indice de Percepción Económica de los Consumidores(“IPEC”) andIndice Mensual de Confianza Empresarial (“IMCE”)) used by the Central Bank. This trend seemed to shift by the end of 2018, reflected by an economic recovery led by a rebound in investment spending and GDP growth of 4.0%. This supported a stronger demand for commercial loans and an 11.9% annual growth of total loan balances managed by the Chilean banking industry as a whole. Also, in the five years ended December 31, 2018, the loan portfolio of the Chilean banking industry grew at a CAGR of 8.5%.
In 2019, however, GDP recorded only a moderate annual expansion of 1.1%. During the first three quarters of 2019, the Chilean economy underperformed in comparison with its growth potential, but by the third quarter, it seemed that the economy was retaking a healthy pace of growth. However, that growth pattern was more than offset by the effect of social unrest that started in Chile on October 18, 2019, which resulted in several protests and upheavals causing severe damage to public and private infrastructure, transport disruptions, temporary interruption of certain economic activities and significant deterioration of both consumer confidence and business sentiment. Accordingly, in the fourth quarter of 2019, the local economy recorded a contraction of 2.1%. In spite of this subdued performance, the loan portfolio managed by the banking industry increased by 10.0% in nominal terms in 2019, mainly due to the sustained growth in residential mortgage loans disassociated from economic dynamics and encouraged by both historically low interest rates and strong housing demand. In turn, commercial loan balances also grew, but mainly as a consequence of the effects of the sharp depreciation of the Chilean peso on U.S. dollar denominated loans during the fourth quarter of 2019. Also, consumer loans moderately increased by 1.1%, reflecting the slowdown in private consumption for the economy as a whole. Given the cyclical nature of the banking business, many factors could adversely affect the growth rate of the industry and, therefore, the expansion of our loan portfolio including, but not limited to: (i) a slowdown or negative GDP growth, (ii) changes in household or investment spending, (iii) changes in banking customers’ behavior, and (iv) any effect related to social trends, social unrest, pandemics or any event affecting the growth potential of the Chilean economy. Similarly, this could affect our credit quality indicators causing us to establish higher allowances for loan losses. For more information, see “Item 4. Information on the Company—Regulation and Supervision” and “Item 4. Information on the Company—Selected Statistical Information.”
Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results.
We are subject to regulation by the Financial Market Commission (“CMF”). In addition, we are subject to regulation by the Central Bank with respect to certain matters, including liquidity management, among others. See “Item 4. Information on the Company—Regulation and Supervision.”
The CMF was established in January 2018 pursuant to Law No. 21,000 and replaced the Superintendency of Securities and Insurance (“SVS”). Following Law No. 21,130 (Modernization of Banking Legislation) in June 2019, the former banking supervisor (the “Superintendency of Banks and Financial Institutions” or “SBIF”) merged into the CMF, and all the powers previously vested in the SBIF were transferred to the CMF. Accordingly, the CMF currently oversees the Chilean Financial Market (comprised of publicly traded companies, insurance companies, insurance brokers, mutual funds and investment funds) as well as the Chilean banking industry as a whole and some non-bank lenders.
Pursuant to theLey General de Bancos (the “General Banking Act”) all Chilean banks may, subject to the approval of the CMF, engage in certain non-banking businesses approved by the law. The CMF’s approval will depend on the risk of the activity and the strength of the bank. Furthermore, the General Banking Act currently imposes on the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices (the “Basel Committee”) and limits the discretion of the CMF to deny new banking licenses.
On October 3, 2018, the Chilean Congress passed modifications to the General Banking Act in diverse topics, including the adoption of Basel III guidelines for the Chilean banking industry. These modifications were enacted in Law No. 21,130 on December 27, 2018 and subsequently published on January 12, 2019. This law addresses four main topics aimed at modernizing the Chilean banking framework by means of:
|(i)||Adopting the Basel III Guidelines, considering a phased-in transition from Basel I to be completed four years after the new specific banking framework is issued by the regulator. Specific Basel III ruling was expected to be completely issued by July 2020, after which the new regulatory framework would have become effective in December 2020, when the phase-in period was scheduled to start. Nevertheless, in light of the coronavirus (“COVID-19”) outbreak in Chile, on March 30, 2020 the CMF announced the introduction of certain modifications to the Basel III initial implementation schedule. In summary, the CMF decided to postpone the beginning of Basel III requirements associated with risk-weighted assets from December 2020 to December 2021. Similarly, the phase-in periods for systemic and conservation buffers, were delayed by one year, now starting in December 2021. However, the systemic buffer will start at zero in December 2021, which could gradually increase overtime. Also, regulatory capital adjustments were postponed one year, now starting in December 2022. Nonetheless, the CMF stated that all the specific regulations related to Basel III will be issued no later than December 2020, as originally scheduled, although the period for public comment may be extended. For more information, see “Item 5. Operating and Financial Review and Prospects—Recent Developments.”|
|(ii)||Introducing changes to the local regulator’s corporate governance, such that all the powers currently vested in the former regulator (SBIF) were transferred to the CMF. The former SBIF merged into the CMF in June 2019.|
|(iii)||Reforming the resolution regime for Chilean banks in the case of insolvency.|
|(iv)||Introducing changes in relation to confidential information of banks’ customers, among others topics.|
Following the phase-in period set by the law, the former SBIF merged into the CMF in June 2019. Subsequently, the new regulator has a period of 18 months, until December 2020, to issue the specific regulation for the implementation of Basel III. Prior to that date, no additional capital requirements to those currently in force (Basel I) will be imposed on local banks. Between June 2019 and April 2020, the CMF has published seven specific regulations addressing Basel III matters for public comment, including: (i) a methodology for determining systemically important banks or groups of banks, (ii) a standardized methodology for determining operational risk-weighted assets of banks, (iii) the guidelines for calculation of regulatory capital for banks, (iv) a framework for determination of credit risk-weighted assets for banks under both a standardized methodology and internal models, (v) additional requirements of common equity Tier 1 capital for banks, (vi) a framework for the calculation of leverage ratio, and (vii) conditions for the issuance of financial instruments representing additional Tier I capital or Tier II capital, to be computed as part of total regulatory capital. Final regulations have yet to be published, while some other significant rules are still in the process of being released for public comment. These regulations include: (i) methodologies for calculation of market risk-weighted assets, (ii) a methodology to activate or deactivate countercyclical buffer, which should be defined by the Central Bank and monitored by the CMF, (iii) specifications regarding the imposition of other-than-capital requirements for systemically important banks, such as reserve requirements and interbank loans, among others, and (iv) Pillar II requirements (if any), among other topics. Since we have no certainty regarding the limits that will be finally imposed by the CMF to the banking industry, and on us in particular, either in terms of potential capital buffers or the calculation of risk-weighted assets, we cannot assure you that our profitability will not be impacted by actions we may take in order to fulfill new regulatory thresholds. For more information, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
During 2015, the Central Bank published a final version of new liquidity standards for local banks, based on Basel III guidelines. The CMF is the institution empowered to put these guidelines into practice and monitor them on an ongoing basis. Subsequently, the regulator released a new set of liquidity requirements for banks (Circular No. 3,585) on July 31, 2015, which established reporting requirements for local banks with respect to management and measurement of banks’ liquidity position. As a result, since 2016, banks have been required to report and monitor liquidity ratios, such as Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”), for information purposes only. Nonetheless, on May 4, 2018 the Chilean Central Bank published for comment an amendment to Chapter III.B.2.1 ofCompendio de Normas Financieras (the Compendium of Financial Norms), focused on proposing a minimum requirement for the LCR, considering a phase-in period of five years, starting at 60% in 2019 and reaching the final limit of 100% in 2023 (with annual increments of 10% between 2019 and 2023). Given the phase-in period established for the LCR limit, we do not see any significant impact on our financial condition, results of operation or profitability in the medium term. Nevertheless, we cannot assure whether any other new liquidity requirements, if any, will have a material adverse effect on us. It is important to note that in light of the situation caused by the COVID-19 outbreak, the Central Bank announced the possibility of temporarily easing certain liquidity requirements, particularly associated with 30-day and 90-day cash flows mismatches, while stating that LCR limits could also be temporarily softened during the duration of the pandemic. For more information on liquidity matters, see “Item 4. Information on the Company—Regulation and Supervision—Liquidity Risk Regulations” and “Item 5. Operating and Financial Review and Prospects—Recent Developments.”
As for credit risk allowances, on December 30, 2014, the former SBIF published a set of amendments to the regulations on allowances for potential loan losses. The amendments established a standardized method for calculating loan loss provisions for residential mortgage loans, based on past due behavior and loan-to-value ratios. They also provided new and more precise definitions for impaired loans and new requirements to remove loans from such portfolios. This set of rules also addressed the future possibility of implementing standardized credit risk provisioning models for consumer and commercial loan portfolios, evaluated on a grouped basis. The new amendments also introduced changes to the treatment of provisions related to factoring loans and guarantors. This new set of rules went into effect on January 1, 2016 and had no material impact on our results prepared under both IFRS and Chilean GAAP for the years ended December 31, 2018 and 2019. Notwithstanding the above, it is important to note that in January 2018, the former SBIF published for comment a set of amendments to the provisioning rules for commercial loans evaluated on a grouped basis. Following this announcement, on July 6, 2018 the former SBIF published the final amendments to the provisioning rules for commercial loans evaluated on a group basis, which established standardized models for leasing loans, student loans and other commercial loans (not included in the former categories). In addition, the new set of rules also addressed other topics related to loan provisioning. The new provisioning criteria went into effect in July 2019 and had no material impact on our results of operations under both Chilean GAAP and IFRS. Nevertheless, we cannot rule out that future changes in the provisioning rules for other types of loans or related definitions will not affect our results under IFRS or Chilean GAAP, as applicable.
Additionally, the Chilean Government has focused on matters related to consumer protection in recent years. Since 2010, several legal and administrative regulations have been amended and revoked in order to strengthen consumer protection and the relationship between financial institutions and their customers.
Since January 2017, the Chilean Congress has considered and discussed a bill that modifies the current framework regarding liabilities for payment service providers (such as banks) and for customers of such services, in cases of fraudulent transactions carried out with credit or debit cards, including those by electronic means. This bill establishes that funds charged to credit or debit cards for transactions, that are not recognized by the customer, must be returned to the cardholder’s account. Further, this proposed legislation states that, if such unrecognized charged funds are up to an amount of UF 35 (equivalent to Ch$1.0 million as of April 24, 2020), the payment service provider must mandatorily return these funds to the cardholder’s account within five business days. In case of unrecognized charges for amounts over the limit of UF 35, the payment service provider will have an additional term of seven days to return the amounts in excess of UF 35. However, in this case, the payment service provider may retain such excess if it considers to have sufficient evidence to determine that the customer acted fraudulently or with gross negligence, in which case the payment service provider will be required to prove this to the applicable court. Also, this new legislation does not allow payment service providers to offer fraud insurance for such cards. It further establishes obligations for the payment service provider to take adequate measures to protect the payment services in case of unlawful acts, holding them liable for damages caused by security and protection deficiencies in their technological systems through which such services are provided. Accordingly, the bill establishes that certain fraudulent transactions with credit or debit cards and electronic payments (such as forgery of credit or debit cards, sale of forged or stolen cards and/or its data, impersonation of a card/accountholder, etc.) are constitutive of crimes subject to imprisonment penalties and fines up to threefold the amount of the fraudulent transaction. Further, this proposed legislation grants the Chilean Public Ministry (public prosecutors) broad powers to investigate these crimes when they are suspected to be related to organized crime. Discussions within the Chilean Congress, as of the date of this annual report, have concluded. However, before this bill is enacted, it must be further reviewed by the Constitutional Court, given certain matters addressed by it. If this bill is passed and enacted with the current drafting, the new legislation may increase litigation and related costs, raising thresholds and evidentiary standards to determine the liability of the customer, as banks will bear the burden of proof for fraud and gross negligence from customers in certain cases. Furthermore, we cannot assure that this bill will not have an adverse effect in the banking industry or on Banco de Chile if it is passed, particularly in cases of electronic fraud, where we may have the legal obligation to pay compensation for damages to customers.
In addition, there are several bills modifying matters related to loans and credit products, such as interest rate ceilings, prepayment fees and the possibility of capitalizing interests. These bills have been recently introduced by members of the Chilean Congress during the last months and include an array of amendments from different perspectives. In addition, in the context of the COVID-19 outbreak, the Chilean Congress is currently discussing bills aiming to ease the financial burden of certain banking borrowers, such as SMEs and individuals. One of these bills proposes to suspend six credit-related installments for consumer and mortgage loans by postponing these payments to the end of the liability, bearing no additional interests. Since all of these bills are currently at early stages in the Chilean Congress, there is no certainty whether any or all of them will be further discussed or not, and as to when or how these bills could change the current regulatory framework. Therefore, we cannot determine or assure you whether they will materially affect our results of operations in the future.
Also, since September 2019, the Chilean Congress has been discussing a bill presented by the Chilean Finance Ministry, known as “Financial Portability”, which aims to simplify the bank switching process for individual customers and SMEs of certain products, while also reducing the costs and time associated with the process. In summary, all banking customers holding: (i) a savings account, (ii) a demand account, (iii) electronic checks, (iv) a line of credit, (v) credit or debit cards, (vi) time deposits, (vii) mutual funds, (viii) consumer loans, (ix) auto-finance loans, (x) residential mortgage loans, or (xi) a combination of these products, will be able to transfer such services to other financial service providers in order to improve the financial terms of any banking product or a group of products, such as interest rates, tenors and related benefits. The bank switching process will be managed by the provider receiving the new customer. After certain modifications introduced to the bill, it was passed by the Congress Lower House on October 29, 2019 and is currently being analyzed by the Upper House. The bill could attract new customers for us, but may also cause us to lose current ones. As such, while the commercial and financial effects of the bill are still unknown, it is expected to produce higher administrative expenses in order to address a faster switching process, whereas the financial impact could be associated, but not limited to, (i) a decrease in net interest margin, (ii) lower income from fees and commissions, and (iii) a customer base reduction, among others. Still, at this point it not possible to determine the full future extent of this bill’s impact on our results of operations, if enacted.
From the taxation perspective, on August 23, 2018 the Chilean Government sent a bill to the Chilean Congress, which was intended to modernize the Chilean tax system. The Congress, in conjunction with the Government, introduced certain modifications to the original bill, which was passed by the Congress in January 2020 and enacted on February 24, 2020 (Law No. 21,210). For more information,please see “Item 4—Information on the Company—Regulation and Supervision—Amendments to the Reform that Modified the Chilean Tax System” and “Item 10—Additional information—Taxation—Chilean Tax Considerations.”
Lastly, we cannot assure you that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect. Any such change in terms of capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation, among other matters, could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance. For more information, see “Item 4. Information on the Company—Regulation and Supervision.”
Modifications to reserve requirements may affect our growth capacity and margins.
According to the local banking regulation, demand deposits and time deposits are subject to reserve requirements of 9.0% and 3.6% (with terms of less than one year), respectively. However, the Central Bank is entitled to require banks to maintain reserves of up to 40.0% for demand deposits and up to 20.0% for time deposits, to the extent needed for monetary policy purposes. In addition, if the aggregate balance of demand deposits and other demand accounts (e.g., deposits in current accounts, other demand deposits or obligations payable on demand and incurred in the ordinary course of business, saving deposits that allow unconditional withdrawals that bear a stated maturity, and other deposits payable immediately unconditionally) held by a bank exceeds 2.5 times its regulatory capital, that bank is required to set a technical reserve equivalent to the full amount of the excess. In this regard, as part of the implementation of Basel III, the CMF has proposed that systemically important banks could be subject to additional technical reserve requirements, since the threshold of 2.5 times the regulatory capital could be reduced to 1.5 times, under approval of the Central Bank. Even though the conditions to set this additional requirement have yet to be revealed by the local regulator, we cannot assure you that we will not be subject to such requirement in the future, which in turn could impact our capacity to afford balance sheet growth and could have a material adverse effect on our net interest margin.
Changes in accounting standards could impact our results.
The IASB, or other regulatory bodies, periodically introduce modifications to financial accounting and reporting standards under which we prepare our consolidated financial statements. These changes can materially impact the means by which we report financial information, affecting our results of operations. Also, we could be required to apply new or revised standards retroactively.
In this regard, IFRS 16 “Leases” became effective on January 1, 2019. This standard modifies accounting models associated with an entity’s role as lessee or tenant in terms of the recognition of assets and liabilities for all leases existing on January 1, 2019. The adoption of IFRS 16 had no material impact on our results of operations or financial condition for the year ended December 31, 2019. For more information, see Note 4 to our audited consolidated financial statements as of and for the year ended December 31, 2019 appearing elsewhere in this annual report.
Currently, we cannot assure you that future changes in financial accounting and reporting standards will not substantially affect our results of operations or performance indicators, as we do not know the extent of future standards.
Increased competition and industry consolidation may adversely affect our operations.
The Chilean market for financial services is highly competitive. We compete with Chilean and foreign banks, with Banco del Estado de Chile, which is state-owned, and with other providers of financial services that are not part of the banking industry. In addition, the retail segment (which encompasses individuals and small and medium-sized companies) has become the target market of several banks, since banking penetration is still in progress in Chile, particularly in this segment. Accordingly, competition within this market is increasing as banks are continuously incorporating new and tailored products and services, while striving to improve service quality. Further, following the new rules issued in the last years by our regulator, the processing and merchant acquiring services for credit and debit cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, as done in some developed economies. This model facilitates the entry of new players. As of the date of this annual report, most merchant acquiring services are provided in Chile by Transbank S.A. (of which we held a 26.16% direct ownership as of December 31, 2019), whereas some competitors have already begun to implement this new four-party model for their own business. As a result, net interest margins (once deducted provisions for loan losses) or fee-based income in these sub-segments could decline over time.
We also face increasingly significant competition from non-banking competitors in some of our credit products, especially credit cards and installment loans, including large department stores, private compensation funds and saving and credit cooperatives. In addition, we face competition from other types of lenders, such as non-banking leasing, crowdfunding, factoring and automobile financing companies, especially in credit products, mutual funds, pension funds and insurance companies within the market for savings products and mortgage loans. Likewise, other non-traditional providers of financial services have emerged over the last years, such as e-commerce,fintech companies,Telecom companies, like internet and mobile phone providers, that may set and provide offerings, in the form of temporary financing, directly to their customers. Some of these companies may have more resources than us, including larger customer bases, stronger brand recognition and more effective marketing tools. They may also adopt more aggressive pricing, while devoting significant resources to technology, infrastructure and marketing. Some of these non-banking competitors are not regulated by the CMF for purposes of banking supervision. Therefore, they are not subject to the same specific solvency or liquidity requirements, among other requisites, as banks are. Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual fund management, directly or indirectly through subsidiaries, while growing quickly in insurance brokerage services. However, we cannot assure you that this trend will continue in the future.
Likewise, we are aware that new competitors may enter the market, or existing competitors may innovate their services and strategies to improve the quality of services rendered to their customers. If we fail to effectively anticipate or adapt to new trends in the financial services industry trends, including changes in distribution channels, introduction of emerging technologies, changes in customer behavior or adaption of the kinds of services offered to them, our business may be adversely affected. In addition, new technologies, including cryptocurrencies and payment systems, may result in substantial expenditures to adapt and update our existing products and services as we continue to grow our internet and mobile banking capabilities.
Also, in the past, increasing competition within the Chilean banking industry has been accompanied by a consolidation wave and the entry of international players in to the system through multiple mergers and acquisitions. These trends have continued and resulted in the creation of larger and stronger banking conglomerates, offering a wide range of products and services and targeting most of the segments in the Chilean banking market. These dynamics may adversely impact our results of operations as they may translate into higher interest rates paid on deposits and lower interest rates earned on loans, resulting in decreased net interest margins.
For more detail regarding past and recent changes in the Chilean banking industry see “Item 4. Information on the Company—Business Overview—Competition.”
Our exposure to certain segments of the retail market could lead to higher levels of total past due loans and subsequent charge-offs.
Although we have historically been focused on wholesale banking, over the last years we have continued to reorient our commercial strategy to increase penetration of the retail banking segment. In fact, according to our management information systems, the share of the retail banking segment in our total loan book has increased from 53.6% in 2014 to 63.8% in 2019. Although this trend has been associated with expansion in middle and higher income personal banking, our retail banking segment is also composed of small and medium-sized companies (approximately 13.8% of our total loan book as of December 31, 2019, which consists of companies with annual sales of up to ~Ch$2,000 million) and, to a lesser extent, of lower-income individuals (approximately 2.3% of our total loan book as of December 31, 2019, which consists of individuals with monthly incomes ranging from Ch$180,000 to Ch$500,000). Since these customers are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and higher-income individuals, we may be exposed to higher levels of past due loans and subsequent write-offs in the future, which could result in materially higher allowances for loan losses that could adversely affect our results of operations.
As of December 31, 2019, our past due loans (loans 90 days or more past due) amounted to Ch$418,768 million, which represented a 37.1% annual increase when compared to the Ch$305,530 million recorded in 2018. These figures translated into past due ratios (loans 90 days or more past due over total loans) of 1.09% in 2018 and 1.39% in 2019. According to our management information systems, as of December 31, 2019 our past due loans (loans 90 days or more past due) were composed of 86.6% retail banking 90 days or more past due loans (consumer and residential mortgage loans to individuals, as well as commercial loans to small and medium sized companies) and 13.4% wholesale banking 90 days or more past due loans (commercial loans to large companies and corporations). During the prior fiscal year, our past due loans (90 days or more) portfolio was composed of 93.5% retail banking past due loans (90 days or more) and 6.5% wholesale banking past due loans (90 days or more).
A combination of various market dynamics impacting our segments may affect our past due loans (loans 90 days or more past due) ratio year over year. In fact, for the year ended December 31, 2019, we experienced a moderate annual increase of approximately Ch$76,704 million in past due loans in the retail segment, whereas past due loans (loans 90 days or more past due) in the wholesale banking segment increased by Ch$36,534 million, in each case as compared to 2018. These trends were mainly due to the social turmoil that occurred in Chile at the end of 2019, which reduced productive or income-generating capacity, as well as disrupted many economic sectors’ distribution networks because of long-standing protests and upheavals. In light of these dynamics, the economy contracted 1.8% in the fourth quarter of 2019, and shortly after, the quality of jobs decreased significantly, as reflected by the increase of self-employed workers with lower salaries. Consequently, the payment capacity of some borrowers decreased, particularly those belonging to the retail banking segment (personal banking and SMEs). The trend for the retail banking past due loans (90 days or more) was primarily associated with consumer loans granted to individuals and commercial loans rendered to SMEs, jointly explaining 80.7% of the total increase in the retail banking segment. On the other hand, in the wholesale banking segment, some companies, particularly those participating in the middle market segment, such as retailers and some large companies, experienced a deterioration of their financial condition as a result of the social unrest, suffering significant decreases in their turnover causing working capital constraints. As a result, past-due ratios (90 days or more past-due loans over total loans) increased from 1.66% in 2018 to 1.89% in 2019, and from 0.17% in 2018 to 0.53% in 2019, in the retail banking and the wholesale banking segment, respectively.
Although the unpredictability of certain social developments, international events such as the COVID-19 market fluctuations and changes to macroeconomic indicators may affect our diverse customer segments, we cannot assure you that we will be able to maintain a balanced risk-return equation if global or local economic conditions deteriorate in the future. In this regard, economic recessions, social turmoil or market volatility could adversely affect the financial condition of our borrowers, which could translate into an increase in our non-performing loans, impair our loan portfolio and result in lower demand for our loans. Any of these trends could have a material adverse effect on our business, financial condition and results of operations.
For more information on past due loans, see “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past due Loans.”
Our results of our operations are affected by interest rate volatility and inflation.
Our results of our operations depend greatly on our net interest income, which represented 68.4% of our total operating revenues in 2019. Changes in nominal interest rates and inflation could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in net income reduction. Inflation and interest rates are sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, local and international economic developments and political conditions, among other factors. In addition, changes in interest rates affect securities and other investments or assets that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Any volatility in interest rates could have a material adverse effect on our financial condition and results of operations.
The average annual short-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 3.03% in 2017, 2.97% in 2018 and 2.72% in 2019. The average long-term nominal interest rate based on the interest rate of the Central Bank’s five-year bonds traded in the secondary market was 3.73% in 2017, 4.07% in 2018 and 2.95% in 2019. As of March 31, 2020, rates paid by Chilean banks on 90 to 360 day deposits averaged 2.06% on a year-to-date basis. As of the same date, rates of the Central Bank’s five-year Chilean peso denominated bonds averaged 2.90%.
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 2020 was:
|2020 (through March 31)||1.4||%|
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 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition,” “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Interest Rates.”
Part of the information included in our financial statements considers assumptions, estimates and modeling which, if inaccurate, could have a material impact on our results of operations and financial position.
The preparation of our financial statements requires management to make judgments and estimates that affect the amounts of assets, liabilities, income and expenses reported in our financial statements. Estimates and assumptions are based on historical experience, expert judgment and other factors, including expectations of future developments under certain alternative scenarios. Although assumptions and estimates are evaluated and revised on a continuous basis, we cannot rule out that projected scenarios could dramatically change in the short term, causing a severe impact on fundamentals and estimates.
We are also subject to model risk since the valuation of financial instruments relies on models and inputs, which, in some cases, are not observable. Accordingly, computed values for securities and financial instruments may be inaccurate or subject to change, since the inputs used for specific models may be unavailable, particularly for illiquid assets or under scenarios of financial turmoil. In these cases, we will make assumptions and judgments in order to establish the fair value of certain instruments, which involves uncertainty and may translate into inaccurate estimates of actual results.
In this regard, the replacement of certain market indices or benchmarks extensively used by financial markets and practitioners for valuation purposes, such as interest rates or foreign exchange rates indices, could also impact the accuracy of the estimates we include in our financial statements. In fact, on July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA), which regulates the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement not only indicates that LIBOR may cease to be calculated, but this could also produce changes in the LIBOR rate as we currently know it, affecting its precision or comprehensiveness when representing the worldwide fixed-income market. This reform and other similar changes may result in various risks for the financial and banking business, including but not limited to: (i) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (ii) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (iii) communication risks arising from misunderstandings with customers or counterparties; (iv) the possibility that a limited number of transactions do not contemplate a LIBOR fallback provision; and (v) the necessity of adapting current IT systems, trading platforms, financial reporting infrastructure and clearing processes, among others. The implementation of alternative benchmark rates is still in progress and may have an adverse effect on our business, results of operations or financial condition that we are unable to determine in advance. As of December 31, 2019, we had on-balance and off-balance contracts with maturity after 2021 that used LIBOR as a benchmark. Most of them have interests paid in LIBOR or are valued by using LIBOR as the prevailing discount rate, including derivatives, loans and master agreements. Furthermore, we may face a risk of litigation, disputes or other actions from clients, counterparties, customers, investors or others regarding the interpretation or enforcement of related provisions or if we fail to appropriately communicate the effect that the transition to alternative benchmark rates will have on existing and future products. Although we expect to adapt our valuation processes, IT infrastructure and pricing systems as new information arises, we can neither assure you nor calculate the impact this could have on our business and results of operations, if any.
At this time, it is not possible to predict the overall effect (including financial impacts) of any such reforms and changes, any establishment of alternative reference rates or any other reforms to these reference rates that may be enacted, including the potential or actual discontinuance of LIBOR publication, any transition away from LIBOR or ongoing reliance on LIBOR for some legacy products.
The main accounting items subject to risk of incorrect valuation include impairment of loans to customers and advances to banks, valuation of fixed-income securities and financial derivatives held for trading, valuation and impairment of financial assets measured at fair value through other comprehensive income, and deferred tax assets and provisions for liabilities, among others. If our judgment, assumptions or models used in valuing these items are inaccurate, there could be a material effect on our results, funding requirements and capital ratios.
Market turmoil could result in material negative adjustments to the fair value of our financial assets, which could translate into a material effect on our results or financial condition.
Over the last decade worldwide financial markets have been subject to stress that has resulted in sharp temporary changes in interest rates and credit spreads. We have material exposures to debt securities issued by the local government and the Central Bank and other fixed-income investments in securities issued by local and foreign issuers. All of these are booked at fair value with direct impact on our profit and loss statement or in other comprehensive income. Therefore, these positions expose us to potential negative fair value adjustments in the short or medium term and to impairments in the long term, due to dramatic and unexpected changes in short- or long-term local and foreign interest rates and credit spreads. Any of these factors could have a material adverse effect on our results of operations and financial condition.
See also “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares” and “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.”
Operational problems, errors, criminal events or terrorism may have a material adverse impact on our business, financial condition and results of operations.
As all large financial institutions, we are exposed to many operational risks, including the risk of fraud by employees and outsiders, failure to obtain suitable internal authorizations, failure to properly document in-person and online transactions, equipment failures, mistakes made by employees and natural disasters, such as earthquakes, tsunamis, wildfires and floods. We could also be affected by operational disruptions associated with intentional or unintentional mass employee absence due to social unrest, demonstrations, street riots (such as the one witnessed since October 2019), transportation services interruptions and massive epidemic or pandemic outbreaks, such as COVID-19, among others. Furthermore, we may be exposed to criminal events, terrorist attacks or rioting that could result in physical damage to our buildings (including our headquarters, offices, branches and ATMs) and/or injury to customers, employees and others. Although we maintain a system of operational controls composed of both trained staff and world-class technological resources that have been enhanced over the last years, as well as comprehensive contingency plans and security procedures, there can be no assurances that operational problems, errors, criminal events or terrorist attacks will not occur and that their occurrence will not have a material adverse impact on our results of operations, financial condition and the value of our shares and ADSs.
Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.
We have access to large amounts of confidential financial information and hold substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous online access to their accounts. Customers have the ability to transfer substantial financial assets in Chile and abroad through electronic means, while purchasing goods or withdrawing funds with credit and debit cards issued by us. Among the most significant cyber-attack risks that we are constantly facing are internet fraud and loss of sensitive information, both from our customers and ourselves. In particular, loss from internet fraud occurs when cyber criminals extract funds directly from clients’ or our accounts using fraudulent schemes that may include internet-based fund transfers. We are also exposed to cyber-attacks, hacking and other cybersecurity incidents in the normal course of business. Thus, as a financial institution, we are under a constant threat of suffering losses due to these reasons. In addition, our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide and enhance our internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Accordingly, cybersecurity is a material risk for us.
There has recently been an increased level of attention focused on cyber-attacks against large corporations that include, but are not limited to, obtaining unauthorized access to digital systems for purposes of misappropriating cash, other assets or sensitive information, corrupting data or causing operational disruptions. Cybersecurity incidents, such as computer break-ins, phishing, identity theft and other disruptions, could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure. Subsequently, this may result in significant liability to us in excess of insurance coverage, which may carry low coverage limits, and may cause existing and potential customers to refrain from doing business with us. Additionally, cyber-attacks on our network or other systems could have a material adverse effect on our business and results of operations due to financial losses, losses of sensitive information, interruption or delays in our business and operations, regulatory fines, reimbursement or other compensation costs, compliance costs and reputational damage, among other things.
On May 24, 2018, we suffered a cybersecurity incident by international cybercriminals involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million (or U.S.$9.9 million). The incident also caused temporary interruptions to some of our operations, which during a short period of time affected the quality of certain services provided to our customers. Following the incident, we took immediate action to effectively contain and eradicate any disruption in our operations. At the same time, we took appropriate measures to recover the stolen funds. In spite of this incident and the temporary damage to our IT infrastructure, we were able to deploy a contingency plan, which allowed us: (i) to maintain the continuity of our operations and customer assistance in branches and through remote channels, (ii) to take immediate measures in order to assure that our customers’ funds were absolutely secured, and (iii) to comply with our short-term financial commitments with third parties and customers based on liquidity management. For more information on the incident, see “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Other Income (Loss), Net”, “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Operating Expenses” and “Item 4. Information about the Company— Our Business Strategy—Operating Efficiency and Productivity” in our annual report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.
Furthermore, in line with the enhancements in our cybersecurity standards that were performed during the last years, and to further improve our protections against events such as the one that occurred in May 2018, we have made significant efforts and taken steps to enhance our data security and IT infrastructure, including the purchase of protection systems and world-class infrastructure, among others. We reinforced our organizational structure and replaced our former Technological Security Area with our Cybersecurity Division in June 2018, whose main role is to be the first line of defense and be in charge of mitigating and managing cybersecurity threats, while at the same time improving cybersecurity policies, spreading related knowledge among our bank and customers and developing competences that all our employees must possess on this regard.
In 2019, we continued to enhance our cybersecurity protocols and infrastructure by improving security in our networks, servers, workstations and digital applications. Similarly, we put significant efforts in to enhancing access-control to our networks by using technological solutions and specialized software, while simultaneously improving our capabilities on detection and management of high-risk threats. Also, based on our efforts to change our staff’s culture on cybersecurity matters, we were able to timely detect and block phishing attempts targeting clients and non-clients. For more information, see “Item 4. Information on the Company— History and Development of the Bank—History—Technological Projects”. However, notwithstanding every measure taken to address cybersecurity matters, and although we have not experienced any material losses relating to this incident and are currently performing our best efforts to prevent them, we cannot assure you that we will not suffer additional losses in the future related to these kinds of events.
The occurrence of any cyber-attack or information security breach could result in material adverse consequences to us, including damage to our reputation and the loss of customers. We could also face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by this security breach. As mentioned above, although we did not suffer any material adverse effects as a result of the May 2018 cyber-attack, successful attacks or systems failures at our bank or at other financial institutions could lead to a general loss of customer confidence in financial institutions, including us.
In addition, we depend on a variety of internet-based data processing, communication, and information exchange platforms and networks. We cannot assure you that all of our systems are entirely free from vulnerability. Additionally, we enter into contracts with several third parties to provide our customers with data processing and communication services. Therefore, if information security is breached, or if one of our employees or external service providers breaches compliance procedures, information could be lost or misappropriated, which may affect our results of operations, damage others or result in potential litigation.
Although we have substantially increased measures to address cybersecurity during the last year and, with the help of service providers, intend to continuously implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that these security measures will be successful.
Any downgrade in Chile’s or our credit rating could increase our cost of funding, affecting our interest margins, results of operations and profitability.
Our current credit ratings determine the cost and the terms upon which we are able to obtain funding in the ordinary course of business. Rating agencies regularly evaluate us by taking into account diverse factors, including our financial strength, the business environment and the economic backdrop in which we operate. Thus, methodologies used by rating agencies evaluate Chile’s sovereign debt ratings when determining our ratings. During 2019, Standard & Poor’s Ratings Service (“S&P”), Fitch Ratings Service (“Fitch”) and Moody’s Investors Service (“Moody’s”) did not change Chile’s sovereign credit rating by keeping it at A+, A and A1, respectively. Also, Moody’s maintained its outlook on Chile’s sovereign credit rating as stable, whereas in March 2020 and April 2020 Fitch and S&P, respectively, revised the outlook for Chile’s sovereign credit rating from stable to negative. Similarly, as of the date of this annual report, S&P and Moody’s maintained our credit rating for unsecured long-term debt at levels of A and A1, respectively. Nonetheless, given the potential effects of COVID-19 on the Chilean economy and the banking activity, in conjunction with the slowdown evidenced by the Chilean economy since the social turmoil, both S&P and Moody’s changed their outlook on us from stable to negative at the beginning of April 2020. In addition, Moody’s applied a one-notch reduction to our baseline credit assessment, resulting in an equal adjustment to our subordinated debt rating, whereas our unsecured long-term debt rating remained unchanged at A1. It is important to note that both credit rating agencies revised other local banks downwards due to the deterioration suffered by the local economy over the last six months. While Chile’s current long-term debt credit ratings remain investment grade, these credit ratings may deteriorate further and adversely affect our credit rating.
Any downgrade in our debt credit ratings could result in higher borrowing costs for us, while requiring us to post additional collateral or limiting our access to capital markets. All of these factors could adversely impact our commercial business by affecting our ability to: (i) sell or market our products, (ii) obtain long-term debt and engage in derivatives transactions, (iii) retain customers who need minimum ratings thresholds to operate with us, (iv) maintain derivative contracts that require us to have a minimum credit rating and (v) enter into new derivative contracts, which could impact our market risk profile, among other effects. Any of these factors could have an adverse effect on our liquidity, results of operations and financial condition.
Due to the recent volatility in the financial markets and concerns about the soundness of developed and emerging economies, as well as the still unpredictable effects of COVID-19 on the global and the local economies, we cannot assure you that rating agencies will maintain our and Chile’s sovereign debt current ratings and outlooks.
As a financial institution, we are subject to reputational risk that could materially affect our results of operations or financial condition.
Corporate reputation is a crucial competitive advantage for us, as it allows us to attract and retain customers, appeal to investors and avoid employee attrition. Also, reputation is a key element in banking since access to funding is driven by the confidence of depositors and the opinion of ratings agencies on the value of our franchise. Therefore, any disreputable event, including employee misconduct, legal proceedings, regulatory sanctions, failure to deliver minimum standards of service quality, failure to comply with regulatory requirements, unethical behavior by our staff or involvement in political issues or public scandals (or gossip related thereto), complaints filed by customers or non-customers and fake news or alleged issues about us or our operations in social media could damage our reputation and produce significant harm to our results of operations or financial condition. Furthermore, our reputation is highly aligned with the reputation of the banking industry in which we participate and, therefore, actions by other providers of financial services or the banking industry as a whole could also harm our own reputation.
Similarly, the ability to manage potential conflicts of interest has become an increasingly important factor for our business given our widespread operations in many economic sectors with diverse third parties. Accordingly, the failure to address –or even the perceived failure to address– conflicts of interest could affect the willingness of customers and investors to work with us, or could lead to legal actions against us. In order to address and avoid these potential events, we are continuously improving our corporate governance standards by detecting potential failures and adopting world-class principles and procedures. Nevertheless, we cannot assure you that we will not face reputational events in the future that could harm our prospects or the value of our franchise. For more information on corporate governance, see “Item 6. Directors, Senior Management and Employees—Board Practices”.
Risks Relating to our American Depositary Shares (“ADSs”)
Our principal shareholders may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.
As of April 24, 2020, LQ Inversiones Financieras S.A. (“LQIF”), a holding company beneficially owned by Quiñenco S.A. and Citigroup Chile S.A., holds directly and indirectly approximately 51.15% of the voting rights of our shares. Subject to our bylaws and applicable law, these principal shareholders are in a position to elect a majority of the members of our board of directors and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions.
Actions 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 2019, a daily average volume of approximately 89,230 of our American Depositary Receipts (“ADRs”) were traded on the NYSE, according to data provided by Bloomberg. Although our shares are traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange, the Chilean market for our shares in Chile is small and somewhat illiquid. As of April 24, 2020, approximately 48.74% of our outstanding shares were held by shareholders other than our principal shareholders, LQIF.
If an ADS holder withdraws the underlying shares from the ADR facility, the small size of the market, its limited liquidity, as well as our concentrated ownership, may impair the ability of the ADS holder to sell the shares in the Chilean market in the amount and at the price and time such holder desires, and could increase the volatility of the price of our ADSs.
ADS holders may be unable to exercise voting rights at shareholders’ meetings and preemptive rights.
ADS holders may exercise voting rights associated with common stock only in accordance with the deposit agreement governing our ADSs. Accordingly, ADS holders will face practical limitations when exercising their voting rights because ADS holders must first receive a notice of a shareholders’ meeting from the Depositary and may then exercise their voting rights by instructing the Depositary, on a timely basis, on how they wish to vote. This voting process necessarily will take longer for ADS holders than for direct common stock holders, who are able to exercise their vote by attending our shareholders’ meetings. Therefore, if the Depositary fails to receive timely voting instructions from some or all ADS holders, the Depositary will assume that ADS holders agree to give a discretionary proxy to a person designated by us to vote their ADSs on their behalf. Furthermore, ADS holders may not receive voting materials in time to instruct the Depositary to vote. Accordingly, ADS holders may not be able to properly exercise their voting rights.
Furthermore, theLey Sobre Sociedades Anónimas No. 18,046 (the “Chilean Corporations Law”) and theReglamento de Sociedades Anónimas (the “Chilean Corporations Regulation”) require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs) to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible unless a registration statement under the Securities Act were effective with respect to such rights and common stock, or an exemption from the registration requirements thereunder were available.
We may elect not to make a registration statement available with respect to the preemptive rights and the common stock, in which case you may be unable to exercise your preemptive rights. If a registration statement is not filed, the depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of any such sale.
Developments in international financial markets may adversely affect the market price of the ADSs and shares.
The market price of our ADSs and shares may be adversely affected by volatility in international financial markets and adverse global economic conditions. The market for Chilean securities and the Chilean economy as a whole are influenced by (i) economic and market conditions in the United States, Europe and certain emerging economies, especially Asian countries, and (ii) economic as well as political developments in Latin American countries. Although economic conditions are different in each country, investors’ reactions to specific issues in one country may affect the financial markets in others, including Chile. Therefore, unfavorable developments in other countries—especially in developed economies and Chile’s main commercial partners—may adversely affect the market price of our ADSs and shares.
By the end of 2019, the global economy appeared to have overcome a long period of turbulence and volatility, which began in 2007 with the subprime mortgage crisis, when many U.S. banks and financial institutions disclosed significant write-downs related to their exposure to mortgage-backed securities and other similar financial instruments. This situation led to significant government intervention for important banks worldwide, bankruptcy for others and active M&A activity to rescue failing banks, maintain investors’ and customers’ confidence and to prevent bank runs. These government actions became less frequent as the U.S. economy started to show signs of recovery. Thus, in December 2015, the U.S. Federal Reserve began to taper its quantitative easing programs undertaken after the subprime crisis and began to gradually increase the marginal standing facility rate from 0.50% in January 2016 to 2.5% in June 2019. However, given the evolution of certain economic indicators and the effects of the United States-China trade war on the U.S. economy, the U.S. Federal Reserve decided to apply subsequent reductions to the federal fund rate starting in July 2019. As a result, the U.S. federal fund rate reached 1.75% in December 2019. Investor sentiment regarding the outlook of the U.S. economy has fluctuated and we cannot assure you that past developments will not occur again in the future or that recent volatility in the international markets will not affect us, including our results of operations and, consequently, the market price of our ADSs and shares.
Additionally, the fiscal condition of many European countries remains weak and doubts about the financial condition of certain European banks arise from time to time. We cannot assure you that volatility in global financial markets due to the uncertainty regarding the fiscal condition of some European countries will not continue and affect the Chilean economy, and consequently, the financial condition and results of 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, uncertainty due to terrorism, a slower than expected recovery, or a deterioration in healthier economies.
Furthermore, uncertainty regarding the future of emerging and developed economies continues to be a source of instability worldwide. For example, although the “trade war” between the United States and China, by which both countries seek to revise tariffs on the others’ imported goods, seemed to improve with the first phase of the trade agreement reached between both countries, it continues to be a source of volatility for financial markets from time to time. Also, political and social instability in some Latin American countries like Venezuela, Ecuador, Argentina and even Chile produced migration issues in more stable countries within the region. Moreover, the materialization of Brexit, armed conflicts in the Middle East and Asia, ongoing negotiations between the U.S. and North Korea, the developing conflict between the U.S. and Iran, terrorism, the global migration crisis and waves of populism looming in different countries, illustrate volatile social and political environments that could harm foreign trade and economic growth for both developed and developing countries. These changes may also generate significant volatility in international markets and commodity prices.
Additionally, the slowdown of the Chinese economy has led to increasing volatility in the financial markets in the past, affecting international commodity prices, including copper, which is Chile’s main export. This slowdown could be amplified by the effects of COVID-19, given the quarantine ordered by Chinese authorities in the most affected regions of the country. Due to the importance of copper exports and overall mining activity to Chilean economic growth, a prolonged slowdown in the Chinese economy, a Chinese-U.S. trade war or other developments may drive copper prices down and adversely affect the Chilean economy. Although copper prices have been impacted in early 2020 by the global economic slowdown and fears of the COVID-19 evolution, our exposure to the Chilean mining sector represented only 2.01% as of December 31, 2019 in terms of total loans.
The effect of all these trends on market volatility and the economic outlook of developed countries, emerging economies and Chile’s commercial partners could adversely impact the local economy, the local banking industry and, ultimately, our results of operations, financial condition and the price of our shares and ADS.
COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.
Pandemic disease and health events, such as the recent outbreak of the novel strain of COVID-19, have the potential to negatively impact economic activities in many countries, including Chile, with subsequent adverse effects on our results of operations or financial condition.
The outbreak of COVID-19 was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China, as well as other countries, including Chile and the United States, growing into a global pandemic, as declared by the World Health Organization. Since the outbreak began, countries have responded by taking various measures including imposing mass quarantines and medical screenings, restricting travel, limiting public gatherings and suspending certain economic activities. In addition, concerns related to COVID-19 have lowered equity market valuations, decreased liquidity in fixed income markets and created significant volatility and disruption in global financial markets, resulting in the fall of stock prices (including the price of our stock), a trend which may continue. Also, there are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including supply chain disruptions and export levels), travel, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities that may have a destabilizing effect on financial markets and economic activity, particularly for companies in the financial sector. Furthermore, any actions taken by governmental authorities and other third parties in response to the pandemic may negatively impact our business, results of operations and financial condition.
The first case of COVID-19 in Chile was detected on March 3, 2020. As of the date of this annual report, the Chilean Government has taken various measures in order to prepare the country for a mass contagion. However, the peak of contagion is not expected to occur until the end of April 2020. In light of this, various decisions have been made by the Government. On March 18, 2020, a state of catastrophe was declared in the entire country, which, under the Chilean Constitution, enables the President to restrict freedom of movement and gathering, to seize goods (subject to compensation by the State) and limit property rights for the purposes of reestablishing normality and ensuring supply of basic needs. Other measures taken during the state of catastrophe include a partial or total lockdown for some neighborhoods and regions. Likewise, an eventual countrywide lockdown may occur. As a result of a potential partial or total lockdown, any material or extended disruption of our ability to meet our responsibilities to our customers and/or a decrease in demand or use of services from our customers is likely to result in a loss of revenue. Also, many economic sectors have closed or decided to reduce their working hours. Many others continue to operate remotely, utilizing a home office. Only certain businesses necessary to maintain basic supplies, such as pharmacies, banks and supermarkets, remain open during lockdowns.
Further, government measures in order to avoid mass contagion are constantly evolving and future measures are uncertain and cannot be predicted. Consequently, the effectiveness and sustainability of our work from home arrangements and the potential inability to maintain critical staffing in our physical banking facilities may also negatively impact our business and results of operations. Also, the unavailability of personnel and the changes in normal operating procedures could adversely compromise our ability to conduct business generally, operating performance, financial reporting and internal controls. For more information about the current status of COVID-19 in Chile, see “Item 5. Operating and Financial Review and Prospects—Recent Developments”.
From a macroeconomic point of view, the impact of COVID-19 in Chile is uncertain. Initial estimates, revealed in the March Monetary Policy Report authored by the Central Bank, indicate that COVID-19 could result in a Chilean GDP contraction in the range of -2.5% to -1.5% in 2020. Subsequently, the International Monetary Fund forecasted a GDP contraction of up to -4.5% for the Chilean local economy in 2020. However, in the case of a mass lockdown, Chilean GDP is likely to contract in an amount that is not yet possible to estimate. Economic stagnation, contraction and increased unemployment levels are expected to result in higher past-due loans, given the deteriorated financial condition of our customers and, therefore, higher provisions for loans losses or credit losses, resulting in lower net income. Similarly, in the case of a country lockdown and a shutdown involving the Bank, any of our subsidiaries or our customers, we may be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our results of operations by reducing revenues, decreasing our collection capabilities.
The COVID-19 outbreak has also resulted in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses associated with our trading portfolio or financial assets measured at fair value through other comprehensive income, which could then cause deterioration of our financial condition or limitations to meet our liabilities. Furthermore, market fears could translate into liquidity constraints and reduced access to funding in both the local and the international markets, negatively affecting our net interest margin and net income. In order to prepare for the impacts of this environment, the Chilean financial authorities have made various decisions in order to ensure liquidity within the Chilean financial system. Any decision towards accomplishing this end, such as consecutive reductions to the monetary policy affecting interest rates by the Central Bank, are also expected to affect our results of operations, which could be amplified by flat yield curves in case of an economic downturn. Lastly, contingency plans in order to address the emergency, including home offices, implementation of alternative offsite locations and so on, are expected to cause a temporary increase in our operating expenses and lowered net income.
Based on the above, we expect COVID-19 to negatively impact our results of operations during 2020 in an amount that could be significant, although it is not possible to predict yet. For more information about the potential impacts of COVID-19 on our results of operations, see “Item 5. Operating and Financial Review and Prospects—Trend Information—Impact of COVID-19.”
In the past, Chile has imposed controls on foreign investment and repatriation of investments that affected investments in, and earnings from, our ADSs.
Equity investments held in Chile by non-Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of investments and earnings from Chile. In April 2001, the Central Bank eliminated most of the regulations affecting foreign investors. However, foreign investors still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them, the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we can neither determine in advance nor advise you as to when or how those restrictions could impact you, if imposed.
If for any reason, including changes in Chilean law, the depositary for our ADSs were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.
Risks Relating to Chile
Our growth and profitability depend on the level of economic activity in Chile.
Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and investment. The global financial crisis of 2008 not only dramatically affected the economic growth in developed countries, but also affected the Chilean economy by the end of 2008 and during the first three quarters of 2009. 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 unemployment and financial stress experienced by certain economic sectors. Conversely, between 2010 and 2012, the local economy and the banking industry took a significant upturn, fostered by real GDP growth that averaged 5.7% per year, mainly as a result of the recovery in consumption and investment, as well as higher fiscal spending associated with the reconstruction process after a significant earthquake in 2010. During 2013, the Chilean economy entered into a moderate slowdown, recording only a 4.0% GDP growth, which deepened throughout the following years with GDP annual expansions of just 1.8%, 2.3%, 1.7% and 1.2% in 2014, 2015, 2016 and 2017, respectively. This trend in GDP deceleration was the result of low levels of both corporate and individual confidence, as evidenced by the indices (IPEC and IMCE) used by the Central Bank, due to factors such as slower growth of Chile’s main commercial partners, especially China, and uncertainty associated with various reforms presented by the Chilean administration appointed in 2014. This trend reversed in 2018, when the Chilean economy managed to grow 3.9% on an annual basis. The GDP growth was mainly fostered by a strong recovery in investment spending, which increased 4.8% in 2018 and, to a lesser degree, a 3.7% growth in private consumption.
During the first half of 2019, however, the Chilean economy experienced a significant slowdown by expanding only 1.4% and 1.8% in the first and the second quarters, respectively. In the third quarter, however, the economy showed signs of recovery by growing 3.4% on an annual basis, primarily steered by an important rebound in investment associated with construction and infrastructure. Nonetheless, the social turmoil that took place in Chile on October 18, 2019 dramatically damaged the productive capacity, income-generating capacity and distribution networks of many economic sectors, which resulted in decreased commercial activity and constrained working hours. These local events, coupled with the initial effects of COVID-19 on the economic environment of our main trade partners, particularly China, Europe and the United States, battered the dynamics of some of our key export products. As a consequence, the Chilean GDP contracted 2.1% in the fourth quarter of 2019. Overall, the Chilean economy expanded 1.1% during 2019, below the expected growth of 2.5%. Given the social unrest described below and the potential impacts of the COVID-19 outbreak in Chile, particularly a possible countrywide spread of the virus and decisions related to partial or total lockdowns, we cannot rule out that the Chilean economy could stagnate or even fall into recession during 2020, which could have a subsequent adverse effect on our business growth and the business growth of the Chilean banking industry in general.
Therefore, we cannot assure you that the local economy will grow in the coming years, as it has in the past, or that developments affecting the Chilean economy and the local banking industry will not materially affect our business, financial condition or results of operations. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview”, “Item 3. Key Information—Risk Factors—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 5. Operating and Financial Review and Prospects—Trend Information—Impact of COVID-19.”
Currency fluctuations could adversely affect our results of operations, the value of our ADSs and any distributions on the ADSs.
The Chilean Government’s economic policies and any future changes in the value of the Chilean peso with respect to the U.S. dollar could affect the dollar value of our common stock and our ADSs. Given the floating exchange rate regime that exists in Chile, the Chilean peso has been subject to large fluctuations in the past and this trend could occur again in the future. According to information published by the Central Bank (“Dólar Observado”, which differs from exchange rate of accounting representation or market exchange rate), between December 31, 2018 and December 31, 2019, the value of the U.S. dollar relative to the Chilean peso increased by approximately 7.0%, as compared to the increase of 13.1% recorded in the period from December 31, 2017 to December 31, 2018. Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. Cash dividends associated with our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at the then-prevailing exchange rate for making payments in respect of our ADSs. If the value of the U.S. dollar increases relative to the Chilean peso, the dollar value of our ADSs, and any distributions to be received from the depositary, will decrease. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. For more information, see “Item 10. Additional Information—Exchange Controls.”
Since we manage assets and liabilities denominated in foreign currency, our results of operations may be affected by fluctuations in the exchange rates between the Chilean peso and the U.S. dollar, or the Chilean peso in relation to other currencies, despite our policy and Chilean regulations related to the general avoidance of material exchange rate mismatches. In order to reduce the effect of exchange rate mismatches, we enter into foreign exchange derivative transactions, including both hedge accounting derivatives and trading derivatives, that hedge most of our exposure. As of December 31, 2019, our foreign currency-denominated assets and Chilean peso-denominated assets, which contain repayment terms linked to changes in foreign currency exchange rates, exceeded our foreign currency-denominated liabilities and Chilean peso-denominated liabilities, which contain repayment terms linked to changes in foreign currency exchange rates, by an amount of Ch$3,564 million, or 0.11% of our paid-in capital and reserves.
We may decide to change our policy regarding exchange rate mismatches. Regulations that limit such mismatches may also be amended or eliminated by regulatory institutions. Higher exchange rate mismatches will increase our exposure to the depreciation of the Chilean peso, and any such depreciation may impair our capacity to service foreign-currency obligations and may, therefore, materially and adversely affect us, our financial condition and results of operations. Additionally, the economic policies of the Chilean Government and any future fluctuations of the Chilean peso, with respect to the U.S. dollar, could adversely affect our financial condition and results of operations.
Chile has corporate disclosure standards different from those you may be familiar with in the United States.
Chilean disclosure requirements for publicly listed companies differ from those in the United States in some significant 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 available to you regarding our corporation will not be the same as the information available to shareholders of a U.S. company. For more information, see “Item 16G. Corporate Governance.”
Chilean law may provide shareholders with fewer and less well-defined rights.
Our corporate affairs are governed by ourestatutos (bylaws) and the laws of Chile. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.
Our business growth, asset quality and profitability may be affected by political, legal and economic uncertainty arising from and social unrest in Chile in the long run.
Our operations are highly dependent on the Chilean political and social environment, as most of our customers and borrowers do business in Chile. Thus our results of operations could be negatively impacted by unfavorable political and diplomatic developments, social instability or unrest, as well as dramatic changes in public policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policy.
In October 2019, a series of disruptive protests over a variety of social matters were initially sparked by the announcement of a subway fare increase in Santiago. Among these protests, some violent groups vandalized and looted public and private infrastructure in Santiago and other major cities. The protests and related violence have disrupted various economic activities throughout the country. In addition, many banks and other financial institutions experienced physical damages at their branches and ATMs. Although most of our damages were insured, 239 of the Bank’s branches and approximately 170 of our ATMs suffered varying levels of damage during this period, with nine of our branches and 109 ATMs being severely damaged.
In response to these protests, the Government announced a social agenda intended to increase basic pensions, expand social health coverage, and reduce and stabilize tariffs for some public services, such as public transportation and electricity. To fund these initiatives, the Government and the opposition reached an agreement regarding a new tax reform that was passed by the Chilean Congress and enacted on January 29, 2020. Through various measures the reform aimed to levy higher taxes on high-income individuals, while alleviating the tax burden for lower-income segments. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Income Tax and Item 10. Additional Information—Taxation—Chilean Tax Considerations”. Further, on November 15, 2019, the majority of the local political parties agreed on a process to draft a new constitution that will replace the current one drafted in 1980. This process will be initiated by a referendum to vote on two matters: (i) whether a new constitution should be drafted and if so, (ii) whether the convention for drafting the new constitution will be comprised of 50% Congress members and 50% elected citizen, or entirely comprised of elected citizens for this specific purpose. As stated in the original amendment to the current Constitution, which enables this process, this referendum was going to take place in April 2020, and elections for the members that will compose the convention, if that is decided, were expected to be held in October 2020. However, due to the current COVID-19 pandemic and urgent health measures taken by our Government, the referendum was postponed for October 2020, and the elections for the composition of the convention body, for April 2021. Each new article of the constitution will have to be approved by two thirds of the convention. This convention will be exclusively authorized to discuss and draft the provisions of a new constitution. The process to draft the constitution may last up to one year from the date it is legally installed. The draft delivered by the convention must be ratified or rejected in a new referendum.
The social unrest has also led to increased volatility in the Chilean stock market and a sharp depreciation of the Chilean peso against the U.S. dollar. Furthermore, share prices of local banks, including ours, suffered significant declines in the market, while bond spreads of local banks increased.
We cannot rule out an increase in past-due levels during 2020 or beyond to the extent that the quality of salaried jobs decreases and the economic outlook deteriorates in light of doubts around the new constitution or changes to the economic model. Amid this environment, our risk expenses could increase in the short-term, while our results of operations, and the results of the industry as a whole could be affected. Furthermore, economic activity could slow down, affecting loan growth across the industry and for us.
The long-term effects of this social unrest are difficult to predict, but could include slower economic growth and higher unemployment rates, which could adversely affect our profitability and prospects. For example, an increase in the unemployment rate beyond what we predicted, or for a longer period than predicted, could diminish demand for loans and decrease our customers’ payment capacity to repay loans, increasing expected credit losses. Overall, we cannot assure you that the social unrest will decrease in Chile in the near future, and therefore, we can offer no assurance that it will not have a negative impact on economic growth, the overall Chilean business environment and our results of operations and financial condition.
Reforms to labor and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations.
We are a party to collective bargaining agreements with various labor unions to which most of our employees belong. Therefore, disputes regarding the terms of these agreements, or our potential inability to negotiate acceptable contracts with these unions, could result in strikes, work stoppages, or other slowdowns by the affected workers, among other things. If unionized workers were to engage in a strike, work stoppage, or other slowdown, or other employees were to become unionized, we could experience disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our results of operations. See “Item 6. Directors, Senior Management and Employees—Employees.”
Since 2017, a bill has been under consideration in the Chilean Congress aimed at reducing the maximum working hours from 45 to 40 hours per week, applicable to employees. If this bill is approved and enacted, we could experience higher ongoing labor costs, which could have an adverse effect on our results of operations.
Current labor legislation defines a company’s minimum services and emergency teams by the applicable labor regulator after negotiations between a company and each labor union prior to the commencement of a collective bargaining process. As such, minimum services refer to those functions of a company which must continue to be provided during a strike because they have been determined to be essential to protect assets and facilities, to prevent accidents, guarantee public utility services, meet the basic needs of the population and prevent environmental damage or harm to health. A company’s emergency teams are made up of workers assigned by each union to fulfill such minimum services. As further explained in “Item 8 – Financial Information – Legal Proceedings – Setting of Minimum Services and Emergency Teams in Case of a Strike”, we are currently in the process of challenging the minimum services and emergency teams that have been assigned to us. As of the date of this annual report, we cannot offer any assurance as to the final outcome of these legal proceedings. To the extent we are not able to prevail, in the event of futures strikes, we could face operational disruptions due to an inadequate number of minimum services and an insufficient staff for the emergency teams.
Since November 6, 2018, a bill introduced by the Government with the purpose of improving the existing Chilean pension funds system, mainly by increasing the contributions to individual capitalization and enhancing the solidarity fund granted by the Chilean State, has been under discussion in the Chilean Congress. However, as a result of the social unrest in Chile, this bill has suffered broad modifications and indications from the Government, which are set forth in the indications publicly announced by the Government and sent to the Congress in January 2020. The bill proposes a gradual 6% increase of employees’ gross salaries that should be set aside for pension savings, i.e. of the current 10% to 16%. This additional 6%, which would be gradually introduced over a period of 12 years, is to be paid by the employer. Half of this increase is meant to finance individual capitalizations while the other 3% would be allocated to solidarity pensions. This additional 6% would not be managed by the current pension fund managers, but by a public entity to be created by this new law. As of the date of this annual report, we are unable to predict the final content of the law and therefore any potential adverse effects of this bill in our financial condition and results of operations cannot yet be ascertained. Should this bill come into effect, it may cause an increase in labor costs, including ours, and therefore, have an adverse effect on our financial and operational results.
|Item 4||Information on the Company|
History and Development of the Bank
We were founded in 1893, and we have been, for much of our history, among the largest and most profitable Chilean banks in terms of return on average assets and average equity in Chile. Our core business is commercial banking in Chile, providing traditional banking products and specialized financial services to our large and diversified customer base of individuals and companies.
Our legal name is Banco de Chile and we are organized as a banking corporation under the laws of Chile and were licensed by the CMF to operate as a commercial bank on September 17, 1996. Our main executive offices are located at Paseo Ahumada 251, Santiago, Chile, our telephone number is +56 (2) 2637-1111 and our website 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 service financial institution that provides, directly and indirectly through our subsidiaries, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market, providing our customers with powerful, differentiated and comprehensive value offerings. In addition to our traditional banking operations, our subsidiaries and affiliates permit us to offer a variety of non-banking but specialized financial services including securities brokerage, mutual funds management, investment banking, insurance brokerage, securitization and collection services.
Our business is not materially affected by seasonality.
We organize our operations and deliver our services to our customers through the following four principal business segments:
|(iii)||treasury and money markets; and|
|(iv)||operations through subsidiaries.|
Through our retail banking segment, we provide our individual customers with credit cards, installment loans and residential mortgage loans, as well as traditional deposit services, such as current accounts, demand deposits, demand accounts, savings accounts and time deposits. We and our subsidiaries also offer financial solutions such as insurance brokerage, securities brokerage, mutual funds management, among others. In addition to personal banking, our retail segment comprises micro, small and medium sized companies that we serve by providing them with short and long term financing, deposit and cash management solutions, in addition to an array of financial services, such as insurance brokerage. In addition, our banking services for wholesale customers include commercial loans (including factoring and leasing), trade finance, capital markets services, cash management and non-lending services, such as payroll, payment and collection services, as well as a wide range of treasury, financial advisory and risk management products.
In 2008, we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile. We also offer international banking services through our representative office in Beijing and a worldwide network of correspondent banks.
According to the CMF, under Chilean GAAP, as of December 31, 2019, we ranked first in the Chilean banking industry in terms of net income attributable to equity holders with a market share of 23.4%. As of the same date and excluding operations of subsidiaries abroad, we were the second largest bank in Chile in terms of total loans with a market share of 16.5%, the largest provider of commercial loans with a market share of 16.0%, the second largest provider of consumer loans with a market share of 17.0% and the second largest private sector bank in terms of residential mortgage loans with a market share of 17.2%. As for liabilities, excluding operations of subsidiaries abroad, we were the largest bank in Chile in terms of current accounts and demand deposit balances (net of clearance) with a market share of 22.5% and, more importantly, we ranked first in current account balances held by individuals with a market share of 26.5%, both as reported by the CMF and as of December 31, 2019. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 2019, we were the largest provider of mutual funds management services in Chile with a market share of 23.6%.
As of December 31, 2019, we had:
|●||total assets of Ch$41,013,874 million (approximately U.S.$ 54,548.4 million);|
|●||total loans of Ch$30,033,272 million (approximately U.S.$ 39,944.2 million), before deducting allowances for loan losses;|
|●||total deposits of Ch$22,182,751 million (approximately U.S.$ 29,503.0 million), of which Ch$11,326,133 million (approximately U.S.$ 15,063,8 million) correspond to current account and demand deposits;|
|●||equity (including net income, non-controlling interest and provisions for minimum dividends) of Ch$3,905,761 million (approximately U.S.$ 5,194.7 million);|
|●||net income attributable to equity holders of Ch$603,744 million (approximately U.S.$ 803.0 million); and|
|●||market capitalization of approximately Ch$8,051,061 million (approximately U.S.$10,707.9 million).|
As of December 31, 2019, we had 13,555 employees and delivered financial products and services through a nationwide distribution network of 359 branches and 1,744 automatic teller machines (“ATMs”). Our ATMs are part of a larger network of 7,361 ATMs operating in Chile, of which 4,652 ATMs operate under a network managed by Redbanc S.A., a company we partly own along with nine other private sector banks.
We were founded in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, which created the largest private sector bank in Chile. We have played an important role in the economic history of Chile. Before the creation of the Central Bank in 1926 and prior to the enactment of the General Banking Act, we were the main stabilization agent of the Chilean banking system, a role that is now performed by the Central Bank. Beginning in the early 1970s, the Chilean Government assumed control of a majority of Chilean banks, and all but one of the foreign banks that were operating at that time closed their branches and offices within the country. Throughout this era, we remained as a private sector bank, with the exception of a portion of our shares owned by the Chilean Government that were sold to private investors in 1975. Throughout our history we have developed a well-recognized brand name in Chile and expanded our operations in foreign markets, where we developed an extensive network of correspondent banks. In 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 Act. In 1999, we widened our scope of specialized financial services by creating our insurance brokerage and factoring subsidiaries. During the early 2000s, the Chilean banking industry witnessed intense merger and acquisition activity. In 2002, we merged with Banco de A. Edwards, which allowed us to expand our business to new customer segments. In 2008, we sold our U.S. branch 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), “Banco Edwards-Citi” (which is primarily oriented to higher income segments) and “Banco CrediChile” (which is focused on consumer loans and demand accounts for lower and middle income segments).
During 2014, the Chilean economy entered into a slowdown cycle, which affected investment and the growth of commercial loans. Amid this slowdown, we took advantage of our competitive strengths and continued to optimize our risk-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 launching cutting-edge mobile banking solutions and applying world-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.$1,000 million commercial paper program, which was established in 2010 (‘the Commercial Paper Program”) to raise short-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 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.
During 2015, the economic backdrop remained a leading challenge for the banking industry. However, we remained the most profitable bank in Chile (in terms of return of return on average capital and reserves and return of average assets for banks with market share in loans above 3.0%) and the first bank in net income attributable to equity holders. These accomplishments were due to diverse initiatives implemented during the year, including innovation in IT solutions for our customers, which has become one of our main goals. Due to these initiatives, we were recognized as theBest Consumer Digital Bank in Chile byGlobalFinance and as theBest Internet and Mobile Bank in Chile byGlobal Banking & Finance Reviewin 2015. In addition, we entered into two strategic partnerships with both a local and an international airline, which will benefit our 1.5 million credit card holders. We also acquired a commercial loan portfolio from a local bank amounting to approximately Ch$564 billion. Moreover, 2015 was a record year for Banco de Chile in terms of bond placements amounting to approximately Ch$1,342 billion, of which Ch$156 billion were placed abroad under the U.S.$3 billion MTN Program we maintain in Luxembourg.
Throughout 2016 we continued to face economic headwinds as the local economy’s growth continued to slowdown. Amid this environment, we focused on growing profitably by concentrating on those segments with a more balanced risk-return relationship. Thus, in spite of recording a moderate annual expansion of 3.4% in total loans, we managed to remain first in terms of net income attributable to equity holders and profitability (for banks with market share above 3.0% in total loans) within the local banking industry, with a market share of 28.4% and a ROAE of 19.6%, both under our internal reporting policies. Our customer-centric approach has been crucial to these achievements and we believe our service quality makes a difference when compared to our competition. During 2016 we accomplished significant advances on this matter such as attaining the highest net promotion score among the main Chilean banks for first time in our recent history while also reducing our attrition rate. We believe these achievements were the result of diverse projects and strategies intended to enhance customer proximity. Thus, during 2016 we launched a new personal banking website, with improved functionalities and enhanced our mobile banking solutions by adding new applications for smartphones. In terms of service quality, we revised and updated our portfolio of high income customers, opened new specifically-oriented branches for preferential customers and set up a new service model for premium customers called “Private Wealth Management.” Lastly, we continued to strengthen the benefits associated with our loyalty program for credit card users by adding new alliances to the package of already existing services and providers. Based on all of these initiatives, during 2016 we were recognized by various specialized publications covering multiple areas of banking activity including “Most Valuable Banking Brand” in Chile by The Banker, “Most Innovative Banking Solutions” in Chile by Global Business Outlook, “Best Consumer Digital Bank” in Chile by Global Finance and “Best Bank” in Chile by World Finance.
During 2017, we were first in terms of net income and profitability within the local banking industry, with a market share of 26.1% and a ROAE of 19.3%, both under our internal reporting policies. These achievements were attained during a difficult economic landscape, which resulted in a significant slowdown of the corporate lending business that impacted certain macroeconomic indicators such as unemployment, which adversely affected the credit quality of our personal banking business. Amid this environment, we maintained our customer-centric approach and focused on developing new ways to enhance the customer experience by expanding our service offerings, business platforms and benefits to our loyalty program. For example, we launched a new website for companies, aimed at serving corporates, other large companies and SME customers. Similarly, we created a new mobile application and upgraded existing ones. We released “MiInversion” which serves as a portfolio management platform for retail customers and developed new functionalities for the MiBanco application. We believe remote channels are the future of banking and are continuously promoting their use among customers while seeking new solutions to offer banking products through mobile or internet technologies. This strategy boosted demand for mobile and internet services that during 2017 reflected increases of 78% and 11% in monetary transactions using these means, respectively. In addition, our enhanced loyalty program added new alliances with two airlines and negotiated access to a VIP lounge for customers at the Santiago airport. These initiatives continue to demonstrate our commitment to superior customer service and have allowed us to obtain a 73.3 % average net promoter score in 2017, as measured by a syndicated study conducted by Consultores Asociados de Marketing Cadem S.A., or CADEM, the highest among our relevant peers. We also undertook transformational changes by assessing relevant processes in terms of efficiency, cost control and operational risk. We believe these actions are necessary to maintain our market leading position in an increasingly competitive banking industry. Lastly, we received recognition for our business performance and digital strategy including being recognized as the Best Bank in Chile, Best Digital Bank for Companies in Chile and Best Sub-Custodian Bank in Chile by Global Finance and being named the Best Mobile and Digital Bank in Chile and the Best Investment Bank in Chile by Global Banking & Finance Review.
Throughout 2018, we continued to show outstanding performance when compared to our main competitors. We led the market in terms of net income attributable to equity holders with a 25.3% market share, which translated into an above-average ROAE of 19% (both figures under Chilean GAAP). Thanks to this performance, we were able to earn sufficient income to fully repay the subordinated debt held by SAOS with the Central Bank in April 2019. This is a significant milestone in our history, since we were able to pay off this debt 17 years before the original maturity date. In 2018, the Chilean economy maintained the trend shown by the end of 2017. Thus, GDP grew solidly at 4.0%, primarily due to the rebound of private investment. Amid this scenario, our loan book increased 9.7%, thanks to record sales in installment and mortgage loans while also adding a record amount of new current account holders. Moreover, the wholesale segment achieved a significant recovery by the end of the year, after two consecutive years of contraction.
During 2018, we continued to focus on superior customer service, attaining first place in service quality among our peers by posting an average net promoter score of 71.2%, as measured by a syndicated study conducted by CADEM, and an attrition rate of only 6.2%, according to our management information system. Based on these attributes we received the “National Customer Satisfaction Award” and the “Consumer Loyalty Award” in 2018. Aligned with this view, we continued to develop our digital strategy in order to assure stability and efficiency on our diverse platforms while innovating in new products and services provided online. Thus, we added new functionalities to some of our applications (MiBanco, MiPago and MiInversion), which allow our customers to perform new transactions through their smartphones including time deposits, money exchange and the RedGiro service. Due to these improvements the amount of mobile transactions in our mobile platforms increased to 35.1 million in 2018, which represents an annual increase of 60.8%. Also, thanks to our digital banking strategy we were once again recognized as the “Best Digital and Mobile Bank in Chile” by Global Banking & Finance Review and “Innovative Digital Bank of the year in Chile” by The European Magazine. Cybersecurity was also a central point of attention for us in 2018. After the cyber-attack occurred in May 2018, on which we timely reacted based on solid security protocols, we decided to enhance our organizational structure and IT infrastructure by creating the new Cybersecurity Division. This new division took various actions in order to promote a cybersecurity culture across the company, while spreading the knowledge that all of our employees should have in respect to this important topic.
In 2019, we achieved significant accomplishments, all of which were aligned with our long-term strategy, while maintaining a clear focus on our customers’ needs. For example, we began the year signing a long-term, exclusive partnership for life and non-life insurance products with an international insurance company. We expect this partnership to provide our customers with a wide array of insurance solutions, as well as give us the ability to offer products with an excellent price-to-quality ratio. Additionally, we entered a commercial alliance with a local Chilean retailer, allowing us to expand our ATM network by 22.5% on average in Chile during 2019 when compared to 2018. Through these initiatives, we maintained our position as a market leader in fee-based income in 2019, while significantly widening the competitive gap with followers in the industry.
During 2019, we also continued our strategic objectives by defining and working to meet specific goals and improving our customer proximity in order to better meet their needs. To this purpose, we continued to deploy our digital transformation strategy by implementing a digital onboarding for customers seeking to remotely open a checking account. We continued developing our new service model to unify customer service under CrediChile and Banco de Chile brands through merging several branches. Through these initiatives, we continue being an industry leader among major banks in service quality, holding a net promoter score of 72.5% as of December 31, 2019 according to a syndicated study performed by ProCalidad.
Further in 2019, we had two milestone bond placements. We placed our first green bond to finance renewable energy projects in Chile for approximately U.S.$48 million. We also took advantage of low interest rates and the phase-in, proposed by the regulation in connection with the Basel III implementation in Chile, for a subordinated bond placement in the local market of approximately Ch$215,397 million. 2019 was also an iconic year for share ownership. SAOS was able to fully repay the Central Bank subordinated debt on April 30, 2019 based on the dividend received from our net distributable earnings for the year ended December 31, 2018. Consequently, SM-Chile and SAOS entered into a liquidation process and their Banco de Chile voting rights were transferred to their respective shareholders. As a result, the free-float of our stock increased from approximately 32.09% to 48.74% (including Ergas group). Finally, as of December 31, 2019 we were the market-leading bank in Chile in net income attributable to equity holders and profitability, with a market share of 23.4% and a ROAE of 17.5% (under Chilean GAAP).
Merger with Banco de A. Edwards
On December 6, 2001, our shareholders approved our merger with Banco de A. Edwards, which became effective on January 1, 2002. Banco de A. Edwards had been listed on the NYSE since 1995, and since January 2002, we have been listed on the NYSE under the symbol BCH. We concluded the merger process with the consolidation of a new corporate structure and the integration of our technological platforms.
Merger with Citibank Chile
On December 27, 2007, our shareholders approved our merger with Citibank Chile, which became effective on January 1, 2008. During 2008, we integrated Citibank Chile’s technological platforms with ours and established a new organizational structure in order to satisfy the needs of our customers and to achieve important synergies. We concluded the merger process with the integration of Corporación Financiera Atlas S.A. (Citibank Chile’s consumer area) into our consumer finance area (CrediChile), which allowed us to nearly double our customer base and market share in consumer finance. As result of this merger and integration process, we entered into the following agreements with Citigroup Inc. to provide a framework for our relationship with Citigroup Inc., its services and trademarks in Chile: (i) the Global Connectivity Agreement, (ii) the Cooperation Agreement, (iii) the Trademark License Agreement and, (iv) the Master Services Agreement. On October 22, 2015, we entered into a new Global Connectivity Agreement, a new Cooperation Agreement and a new Trademark License Agreement with Citigroup Inc. All of these new agreements replaced the original agreements we entered into on December 27, 2008. In addition, on January 26, 2017, we entered into a new Master Services Agreement with Citigroup Inc. On August 24, 2017, we agreed to extend the Cooperation Agreement dated October 22, 2015 for a period of two years beginning on January 1, 2018, pursuant to which the parties may agree, to extend for another two-year term to commence on January 1, 2020. As a result of the extension of the Cooperation Agreement, the new Global Connectivity Agreement, Trademark License Agreement and Master Services Agreement were extended under the same terms as the Cooperation Agreement. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.
In 2016 we undertook diverse technological initiatives intended to adequately support our core business and improve our operating efficiency. Our main initiative to support to our core business was the implementation of a new internet-based platform for personal banking with a friendlier design and more efficient architecture that boosted online transactions, increased customer satisfaction and decreased web surfing time. Furthermore, we implemented the first stage of a new commercial platform, called “Business Center,” which includes a new system aimed at integrating the sale and post-sale process. Business Center will also become our CRM system in the future. We also put into practice a modern platform for our leasing business. In addition, we continued to enhance the capabilities of our Treasury by upgrading the Murex system, completing a new phase of the platform that allows us to clear derivatives with other Chilean banks while setting up diverse IT solutions to clear derivatives contracts with European counterparties (EMIR). We also continued to reinforce our mobile offerings by improving the mass-market appeal of MiPass, originally introduced in 2015. In addition, we implemented online notifications of payments, money transfers and credit card charges, which are received by customers on their smartphones at the moment of transaction. In regard to efficiency, during 2016 we completed several projects intended to digitalize documents, reports and forms in order to avoid printing and implemented a new image-based model for controlling operations carried out by tellers and representative officers. Similarly, we automated diverse form filling procedures for operations related to personal banking and SMEs and set up platforms and procedures for pre-approval operations. Finally, we continued to develop the last stages of our ATM replacement schedule by renewing 96% of our total network, in accordance with the requirements imposed by the Chilean regulator.
During 2017 we continued to develop the “Business Center” project, which is our new Sales & Customer Relationship Management tool. This system is expected to support significant improvements in the quality and responsiveness of our back-office and front-office operating processes to enhance our customer centric vision. We launched our Pricing 360° tool, which improves pricing through a deeper knowledge of account officers on customers’ needs, enabling us to provide tailored lending solutions to our diversified customer base. Similarly, we upgraded the “Time Deposits and Savings” module, which permits account officers to tailor offerings to personal banking customers. Moreover, we completed the renewal of our ATM network to meet the new security and quality standards required by the SBIF. Additionally, we launched two new platforms for companies. We renewed the website business platform for these customers by adding new functionalities, security standards and the ability to conduct paperless transactions. We implemented a new electronic platform for factoring, which is aimed at improving the interaction with customers by making transactions easier while also upgrading the middle and back-office systems for this business. In personal banking, we maintained our focus on innovation and digital banking by adding new functionalities to existing mobile applications including the authorization of web transactions through MiPass application, access to MiBanco by means of fingerprint scanner, e-commerce payments through MiPago and an On/Off functionality for credit cards in MiBanco.
During 2018, we continued to enhance our diverse IT infrastructure and digital platforms in order to assure stability and efficiency to our processes, attract new potential clients while continuously improving the service provided to our current customers. To this extent, we focused on continued developing new stages of our new CRM system and sales platform by introducing a new pricing tool for individuals that allow our account officers to easily use and access to our customers’ information. The CRM system is a key project for us and we expect to keep on developing new functionalities over the next years. Moreover, we intensified our efforts to expand and improve our remote channels given the massive use of internet and fast adoption of smart phones. In that direction, we added new functionalities to some of our applications, and expanded our RedGiro service to the mobile banking, only available on our website until 2017.
In May 2018 we suffered a cyber-attack involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million or U.S.$ 9.9 million (mostly recovered from the redemption of an insurance policy). Even though this incident temporarily affected certain services provided to our customers, we were able to maintain the continuity of our operations. In addition, as of this date, based on our internal analysis we have found no evidence whatsoever that our customers were affected by this incident in terms of misappropriation of funds. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.” This cybersecurity incident, although successfully overcome, posed new challenges for us in terms of cybersecurity infrastructure, controls and procedures. Thus, as part of the efforts to improve our cybersecurity risk management, we created the Cybersecurity Division in June 2018, which replaced our former Technological Security Area. The new division is the first line of defense for us on these matters and is in charge of mitigating and managing cybersecurity threats. The division is focused on managing projects aimed at improving our cybersecurity protocols and procedures. During 2018, the Cybersecurity Division undertook diverse IT projects in order to reinforce our infrastructure and cybersecurity capabilities, acquiring world-class protection software and firewalls while investing in specialized platforms to address this significant topic. During 2018, we invested approximately Ch$9,915 million in cybersecurity equipment and software and incurred approximately Ch$9,847 million in operating expenses related to cybersecurity matters. These disbursements almost doubled the total amount incurred in 2017.
In addition to executing our digital transformation strategy to improve customer experience, in 2019 we also developed and implemented various projects aimed at improving cybersecurity infrastructure, efficiency and customer service. We launched our E360° tool, which is a tactical dashboard that enables standardization of offerings, while also improving the management of commercial efforts, customer visits and promises to clients. In SMEs, Middle Market Companies and Corporate Banking, we successfully migrated a majority of the customer base to a new web-based transactional platform, Banconexión 2.0. This platform was developed to address segment needs, delivering an improved customer experience while ensuring high security standards in banking operations. Furthermore, as a result of a commercial partnership with a local retailer, we were able to significantly expand our ATM network by 15%. Additionally, throughout 2019, we carried out various cybersecurity projects aimed at improving in-networks, workstations, servers and digital applications, while enhancing access-control through technological solutions and software. To increase efficiency and productivity, we developed new automated transactional platforms for foreign currency trading to help meet the needs of professional and non-professional counterparties. Lastly, we adopted a world-class module for collateral management, improving the administration of our derivative portfolio and counterparty risk.
Through these efforts we have maintained our commitment to anticipating changes and minimizing risks related to technological advances, including cybersecurity risks, as mentioned in “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry” and “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.”
The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt
During the 1982-1983 economic crisis, the Chilean banking system experienced significant instability that required the Central Bank and the Chilean Government to provide assistance to most Chilean private sector banks, including us. 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 SBIF 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 No. 18,401.
Subsequent to the crisis, like most major Chilean banks, we sold certain of our non-performing loans to the Central Bank at face value on terms that included a repurchase obligation. 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 of non-performing loans for a price equal to the economic value of such loans, provided that the banks assume a subordinated obligation equal to the difference between the face and economic value of such loans. In November 1989, we repurchased our portfolio of non-performing loans from the Central Bank and assumed the Central Bank’s subordinated debt related to our non-performing loans.
In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which Banco de Chile was converted into a holding company named SM-Chile S.A. (SM-Chile). In turn, SM-Chile organized a new wholly-owned banking subsidiary named Banco de Chile, to which the former contributed all of its assets and liabilities, other than the Central Bank subordinated debt. In addition, SM-Chile created a second wholly-owned subsidiary namedSociedad Administradora de la Obligación Subordinada SAOS S.A. (SAOS) 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 and received 63.6% of our shares from SM-Chile. Although shares held by SAOS had economic rights that belong to the Central Bank, their voting rights were exercised by SM-Chile’s shareholders. This Central Bank debt, for which SAOS was solely responsible and for which there was no recourse to us or SM-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 owned by SAOS as collateral for such debt. The Central Bank debt bore interest at a rate of 5.0% per year and is UF-denominated.
Pursuant to SM-Chile’s bylaws, that company remains in existence until the Central Bank subordinated debt is completely paid off by SAOS, which occurred on April 30, 2019. As of such date, SM-Chile has been in the process of being liquidated, and the shares of Banco de Chile owned by SM-Chile and by SAOS (which was dissolved as of April 30, 2019) were distributed among SM-Chile’s shareholders as described in “Item 7. Major Shareholders and Related Party Transactions–Ownership Structure.” As a result, SM-Chile’s shareholders became direct shareholders of Banco de Chile.
During the existence of the Central Bank subordinated debt, dividends that SAOS received from us were its sole source of revenues, which by legal mandate were destined to repay its debt to the Central Bank. SAOS did not have any other material debt, as it was a special purpose legal entity created by virtue of Law No. 19,396 whose only business was to own Banco de Chile shares and repay the obligation to the Central Bank. To the extent distributed dividends were not sufficient to pay the amount of each installment of its debt, SAOS was permitted to maintain a cumulative deficit balance with the Central Bank that SAOS committed to pay with future dividends. If the cumulative deficit balance exceeded an amount equal to 20% of our paid in capital and reserves, the Central Bank could have required SAOS to sell a sufficient number of shares of our stock to pay the entire accumulated deficit amount.
SAOS fully repaid the Central Bank subordinated debt on April 30, 2019 using the proceeds of the dividend it received from us from our net distributable earnings for the year ended December 31, 2018. As a consequence of such full repayment, SAOS was dissolved, SM-Chile began a liquidation process and Banco de Chile’s shares previously owned by SM-Chile and SAOS were distributed to our shareholders. As a consequence, LQ Inversiones Financieras S.A. and Inversiones LQ SM Ltda, increased their direct ownership in Banco de Chile, from their prior shareholdings of 27.18% and 0.29%, respectively, to 46.34% and 4.81% in each case. Similarly, other shareholders of SM-Chile became our shareholders, which significantly increased the public float of our stock. As of December 31, 2019 only SAOS had been fully dissolved. As of April 24, 2020, the liquidation process of SM-Chile was in progress. For more information, see “Item 7. Major Shareholders and Related Party Transactions–Ownership Structure.”
As a result of the full repayment of the Central Bank subordinated debt, LQ Inversiones Financieras is now the major direct shareholder of Banco de Chile with a shareholding of 46.34%, as of April 24, 2020. See Item 7. Major Shareholders and Related Party Transactions—Ownership Structure and Item 7. Major Shareholders and Related Party Transactions– Major Shareholders.
The following table sets forth our capital expenditures in each of the three years ended December 31, 2017, 2018 and 2019:
|For the Year Ended December 31,|
|(in millions of Ch$)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Furniture, machinery and installations||2,963||2,409||2,656|
Our budget for capital expenditures for 2020 amounts to approximately Ch$93,339 million, of which expenditures in information technology investments represent 64%, while infrastructure projects represent the remaining 36%. The budget for capital expenditures is in line with our mid-term strategic priorities of improving our efficiency and enhancing our customer service capabilities with a firm focus on digitalization. These capital expenditures will be principally financed by cash on hand and long-term debt financing.
Among the budgeted expenditures for information technology, 62% corresponds to new and ongoing IT projects undertaken by Banco de Chile, which are intended to provide us with business solutions for customers, technological stability and improvements in productivity. Of the remaining 38% budgeted for IT expenditures, 11% is associated with the technological renovation of several of our branches due to the new customer service model, 7% is expected to be deployed to further optimize our nationwide ATM network, another 7% consists of investments in technological equipment and system improvements to be carried out by certain subsidiaries, 7% is intended to reinforce our cybersecurity infrastructure and systems and the remaining 6% is aimed to help fulfill regulatory requirements.
Our 2020 infrastructure expenditures budget includes disbursements associated with the renovation of some of our branches particularly as a result of a new customer service model we are deploying in some of our locations (50%), renovation and restoration of our corporate buildings (20%), general maintenance investments (12%), security-related expenditures (8%) and other initiatives related to our efficiency program and social commitment (2%).
All of the aforementioned investments have been or will be made in Chile.
Our Competitive Strengths
Building on our knowledge of the Chilean financial market, we have historically been able to develop significant competitive advantages based on our strong brand recognition, our widespread branch network, the diversity and relative size of our customer base, our highly competitive funding structure, the superior asset quality of our loan portfolio as compared to our peers in Chile, an attractive risk-return relationship and our market leadership in a diverse range of financial products and services.
Our main competitive strengths are:
Brand Recognition and Strong Corporate Image
We have operated in the Chilean financial industry for over 125 years under the “Banco de Chile” brand name. In order to provide our customers with specialized value offerings and a wider range of financial products and services, we have also developed the “Banco Edwards-Citi”, “Banco CrediChile” and “Banchile” brand names. We believe our long standing history in the Chilean market is recognized by our customers and the general public, who associate our brands with value, quality, reliability and social responsibility within the Chilean financial industry, as demonstrated in various polls conducted by well-known market research companies. We believe that our long history in the Chilean banking industry is a key element that differentiates us from our competitors.
Additionally, we believe that our merger with Citibank Chile reinforced our corporate image as a leading financial institution within Chile and allowed us to gain recognition among customers and investors all over the world.
We also believe that our strong corporate image is further strengthened by our commitment to social responsibility, which includes supporting the Teleton Foundation (a non-governmental organization dedicated to assisting and treating disabled Chilean children), our partnership with institutions dedicated to improving the quality of Chilean education, our participation in campaigns intended to improve the quality of life of needy people, our commitment to supporting and sponsoring diverse monetary and non-monetary campaigns for recovery efforts from natural disasters in Chile, including wildfires, earthquakes, floods and tsunamis, and the development of other initiatives intended to strengthen our role in, and contribution to, Chilean society. Furthermore, over the last years we have devoted efforts to improve our commitment to the environment by carrying out numerous initiatives.
Business Scale and Leading Market Position
We are one of the largest financial institutions in Chile and a market leader in a broad range of financial products and services within the Chilean financial system, as listed in the following table:
|As of December 31, 2019|
|Market Share||Market Position|
|Net Income Attributable to Equity Holders||23.4||%||1st|
|Total Balances of Demand Deposits and Current Account(1)||22.5||%||1st|
|Current Accounts Balances held by Individuals||26.5||%||1st|
|Mutual Funds (Assets Under Management)||23.6||%||1st|
|Net Fees and Commissions Income||21.6||%||1st|
|Net Income of Securities Brokerage Subsidiary(2)||39.0||%||1st|
Source: Chilean Association of Mutual Funds and the Financial Market Commission (“CMF”).
|(1)||Excluding operations of subsidiaries abroad and net of clearings.|
|(2)||Including the whole market and not only subsidiaries of local banks.|
We have traditionally had a strong presence in the wholesale segment by maintaining long-term relationships with major local and multinational companies that operate in Chile. We have been able to maintain this leading position by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to successfully serve our customers’ needs. We have also added value to our service offerings by including treasury products for hedging purposes, together with investment banking, insurance brokerage and other specialized financial services provided by our subsidiaries.
In addition, in recent years we have focused on further penetrating the retail banking market through diverse value offerings intended to cover our target demographics and enterprises. Therefore, in recent years we have prioritized the expansion of our residential mortgage portfolio and our presence in transactional services such as credit cards, current accounts and demand accounts, as we believe they are effective means to build long-term relationships and customer loyalty, while increasing cross-selling opportunities. For this reason, through our Individual and SME Banking Area, we aim to lead the market in services offered to high income individuals for whom we have developed an attractive and complete portfolio of financial services, including a full range of wealth management services through one of our subsidiaries. Also, our Consumer Finance Area (Banco CrediChile) is one of the largest banking providers of consumer loans among the Chilean banks’ consumer areas, based on comprehensive service offerings for low income individuals. This has been recently supplemented by the implementation of value offerings satisfying small scale entrepreneurs’ financial needs and individual customers in outlying districts seeking deposit and transactional solutions. This broad variety of services has also enabled us to lead the Chilean market in terms of income from fees and commissions.
We believe our financial strength, prestige and brand recognition among Chilean customers have allowed us to become the market leader in terms of current account balances within the Chilean financial system, especially among individuals, who have demonstrated their preference for our services. Our position was further consolidated in the financial downturn that started in 2008 and the local social unrest in late 2019, when we benefited from a “flight-to-quality” effect as investors and depositors were seeking a reliable institution to keep their funds.
Broad and Diversified Customer Base
We believe that we have one of the largest customer bases among financial institutions in Chile. In recent years, we have been able to expand our customer base by providing attractive and tailored value offerings based on continuously improving segmentation and by applying sophisticated business intelligence tools. As of December 31, 2019, we had approximately 1,390,000 core clients, which had at least a current account or a loan outstanding with us. However, in regards to main banking products, we serve a broader customer base composed of 1,200,000 borrowers, approximately 970,000 current accounts holders, approximately 145,000 time deposit holders, approximately 115,000 saving account holders and approximately 1,100,000 credit card account holders.
We believe that our broad customer base is both an essential driver of our business and a valuable asset that enables us to cross-sell our traditional lending products and services along with non-lending services provided primarily through our subsidiaries, including our securities brokerage, mutual funds management, securitization, financial advisory, insurance brokerage and collection services.
Multichannel Distribution Approach
In order to better serve our customers, we offer a distribution approach composed of both physical and non-physical channels.
We are present in all regions of Chile and strive to be accessible to every Chilean customer through our large branch network as well as non-physical contact channels. As of December 31, 2019, we had a nationwide branch network of 359 branches, the largest in Chile among private sector banks, according to information published by the CMF. This network is composed of 242 branches under our “Banco de Chile” brand name, 41 branches under our “Banco Edwards Citi” brand name and 76 branches under our “Banco CrediChile” brand name. We believe that our branch network enables us to develop close relationships with our customers and therefore we are constantly assessing new branch locations throughout Chile.
We have also complemented our branch network with non-physical remote channels, such as ATMs, internet-based online platforms and mobile banking applications. As of December 31, 2019, we had 1,712 ATMs throughout Chile and we provided our customers with specialized internet websites for each of the segments we target, coupled with diverse mobile banking applications, including MiBanco, MiBeneficio, MiCuenta, MiPago, MiPass, MiInversion and MiSeguro. During 2019, 70% of the total transactions (monetary and non-monetary) carried out by customers and non-customers in our distribution channels were performed through non-physical remote channels.
Competitive Funding Structure
We believe that we have a cost effective and highly competitive funding structure based on our leading market position in current accounts and demand deposits, especially among individuals. According to the CMF, as of December 31, 2019, with a 26.5% market share, we ranked first within the Chilean banking industry in current account and demand deposits held by individuals. Similarly, as of that same date and excluding operations of subsidiaries abroad, we were the principal bank in Chile in terms of total balances of non-interest bearing current accounts and demand deposits representing 22.5% of the industry (net of clearing), as reported by the CMF. Also, our total balances of current accounts and demand deposits represented 27.4% of our funding structure as of December 31, 2019 (under Chilean GAAP), as compared to the 15.9% reported by the Chilean financial industry as a whole, excluding Banco de Chile. In addition, we have a solid base of funding from retail customers, who held demand deposits and time deposits that jointly represented 36% of our total funding as of December 31, 2019. This characteristic provides us with a stable source of funding that is reflected by a 30-day moving average renewal rate of retail time deposits which reached around 75% as of December 31, 2019.
We are constantly striving to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. Thus, in 2019 we benefited from downward trends in local interest rates to place long-term bonds at attractive spreads throughout the year. Furthermore, we also took advantage of our superior credit rating within Chile and the Latin American region and benefited from specific windows of opportunity to place bonds abroad. As a result, in 2019 we carried out the following debt placements:
|●||Approximately U.S.$1,519 million (denominated in UF) within the local market. These debt placements had maturities ranging from two to 22 years (eight years on average).|
|●||Approximately U.S.$430 million in overseas markets with tenors ranging from 10 to 20 years, most of them accompanied by cross currency swap hedge arrangements in order to neutralize any effects associated with changes in foreign exchange that could impact our cost of funding.|
|●||In addition, we took advantage of the prevailing interest rate scenario to issue UF-denominated subordinated bonds for approximately U.S.$286 million. This funding had the double purpose of financing loan growth, while bolstering our capital adequacy in the transition to Basel III.|
|●||Furthermore, we continued to utilize short-term funding associated with our commercial paper program, which provides us with premium funding for Trade Finance transactions, and during 2019, we issued a total amount of approximately U.S.$1,256 million. As of December 31, 2019 we had an outstanding balance of approximately U.S.$390 million.|
In summary, our funding structure provides us with a cost advantage over many of our competitors (which use a higher proportion of interest bearing liabilities), as current accounts and demand deposits are non-interest bearing in Chile. Our solid market position in demand deposits, together with our high international credit ratings, translated into one of the lowest costs of funding from liabilities associated with interest bearing deposits and long-term debt, among the five largest banks in Chile.
Superior Asset Quality
We are one of the Chilean financial institutions with the highest credit quality and the healthiest loan portfolio in Chile. We believe this asset quality is the result of our well known prudent risk management approach and accurate credit risk models that are continuously being updated and have enabled us to maintain relatively low levels of past due loans (loans 90 days or more past due) and high coverage indicators over the last few years. According to the CMF, and under our internal reporting policies, as of December 31, 2019, we had a delinquency ratio (loans 90 days or more past due as a percentage of total loans) of 1.4% which was well below the industry average delinquency ratio of 2.2% posted by the Chilean banking industry (excluding Banco de Chile) as of the same date. Additionally, according to data published by the CMF, as of December 31, 2019, we had a coverage ratio (allowances for loan losses over loans 90 days or more past due) of 163.7%, which was well above the industry average coverage ratio of 119.1% as of the same date (excluding Banco de Chile).
Over the last years, the utilization of business intelligence tools has also contributed to an improvement in our credit risk management. In this regard, during 2018 we successfully re-launched our pre-approved loan program through which we target a select group of retail customers to help them meet their borrowing needs depending on their life cycle stage and credit profile. During 2019, we successfully added SMEs to the pre-approved loan program, which enabled us to maintain solid growth rates in this segment with contained credit risk.
In 2008 we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile, effective on January 1, 2008. As result of the merger and integration process, we entered into various agreements with Citigroup Inc. to establish a framework for our relationship with Citigroup Inc., including the services to be rendered by each party and the use of trademarks in Chile. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.
This strategic alliance, backed by a Global Connectivity Agreement with Citigroup Inc., has allowed us to broaden our service offerings by adding a comprehensive portfolio of international financial services that previously we could only partially provide. Based on this relationship, we are able to provide our local customers with world-class financial services and participate with them in their international ventures. Furthermore, we provide a reliable business platform for Citibank’s customers who aim to operate in Chile.
Our Business Strategy
‘We are a leading and globally-connected corporation with a prestigious business tradition. We provide excellent financial services to all of our customer segments by offering creative and effective solutions while at the same time ensuring that we add value for our shareholders, employees and community as a whole.’
To accomplish this mission, we believe it is essential to attain industry leadership in all businesses and financial areas in which we operate, namely, profitability, efficiency, business scale, customer base, human resources development and corporate social responsibility.
‘We aspire to be, in all things we do, the best bank for our customers, the best place to work and the best investment for our shareholders. In order to accomplish this vision, we are committed to the development of our employees and the community as a whole.’
Our mission and vision commits us to all of the diverse stakeholders related to our business, including customers, employees, investors and the community. Thus, our vision is shared and internalized by all areas across the corporation, senior management and the board of directors while also constituting the basis for our strategic objectives. This vision requires initiatives to achieve comprehensive excellence in management, with customer satisfaction as our major goal. For this reason, we apply high industry standards in information technology, business models and service quality, all of which are summarized by the value creation cycle below:
Our way of thinking is reflected by a set of values that are shared by our employees and shareholders, which are aimed at providing our customers with world-class financial solutions and quality standards.
‘We are a company that contributes to the economic development of the country by generating favorable conditions for the development of individuals and enterprises, providing them with financial solutions that fit their needs at every stage of their lifetime.’
In order to accomplish this, we have made commitments to all of our stakeholders, since we are convinced that we will achieve excellence in all of our businesses and projects as long as we are able to satisfy stakeholders in their interactions with us.
We aim to satisfy the expectations of the following stakeholders by:
|●||Offering innovative and top-quality banking products and financial services.|
|●||Providing customers with excellent service based on customized relationships and a proactive attitude.|
|●||Ensuring the availability and stability of physical and non-physical service channels.|
|●||Maintaining trusted relationships in order to be our customers’ main bank.|
|●||Providing employees with career opportunities based on merit.|
|●||Promoting a respectful and friendly work environment.|
|●||Offering competitive compensation and economic benefits.|
|●||Supplying adequate technological tools and infrastructure.|
|●||Improving quality of life and managing adversity.|
|●||Strengthening the quality of education in Chile.|
|●||Protecting the environment.|
|●||Building strong relationships with suppliers.|
|●||Leading the industry in net income generation and profitability.|
|●||Maintaining a strong market position in terms of business volume.|
|●||Fostering operating efficiency and productivity.|
|●||Developing a prudent approach to risk management.|
Our long-term strategy is intended to maintain profitable growth by placing the customer at the center of all of our decisions and continuously improving efficiency and productivity in all of our processes and procedures while maintaining a strong commitment to the country. These are our strategic priorities and we aspire to attain them through collaboration and teamwork.
|●||Customer Centric Decision Making|
We aim to support our customers and meet their needs throughout their lives. In order to achieve this goal we strive to promote customer proximity and reliability, while providing our customers with the best service quality within the local market.
In our retail banking segment, our aim is to lead the market by providing differentiated and comprehensive value offerings based on a deep and continuously improving segmentation that permits us to engage in profitable and high-growth potential business opportunities. Thus, we expect to expand our business and customer base by developing tailored service models, optimizing our branch network, enhancing our presence in the small and medium-size company market and reinforcing certain lending products that should enable us to consolidate long-term relationships with the upper and middle-income individual customers, particularly through payment channel usage (such as credit cards), digital banking, installment loans and residential mortgage loans. Similarly, we aspire to target lower-income individuals and microbusinesses by promoting payroll-deduction lending and attracting customers previously unattached to any bank through a basic array of services.
We firmly believe that there is room to grow in retail banking. Although Chile’s per capita GDP has increased fourfold over the last 30 years, banking penetration is still below that in developed countries, particularly in relation to residential mortgage and consumer loans. In fact, as of December 31, 2019, the loan book of the Chilean banking industry (excluding operations of subsidiaries abroad) represented 92% of Chilean GDP. As of the same date, mortgage and consumer loans represented 27% and 13%, respectively. On the other hand, according to the CMF, as of December 31, 2019, we had market shares of 17.2% and 17.0% in residential mortgage loans and consumer loans, respectively, both behind the market leader by 3.9% and 3.8% in each case. Given the fierce competition in the Chilean banking industry, in order to take advantage of these opportunities, we are continuously developing innovative products and services to diversify our revenue sources. Accordingly, we have strived to build comprehensive value offerings for our retail segment in order to continue enhancing our fee-based income by promoting digitalization of products and services provided to these customers while improving benefits related to our customer loyalty programs.
Similarly, in our wholesale banking segment (which targets companies with annual sales over Ch$2,000 million), we aim to maintain a market-leading position in loans while growing profitably in a market that is characterized by low margins and fierce competition. We intend to accomplish these goals by increasing our cross-selling of non-lending products and services. For this reason, we are focused on improving our cash management services, enhancing our internet-based services, increasing the penetration of products designed by our treasury and money market operations segment, strengthening our presence in certain lending products such as leasing and factoring and promoting international businesses by taking advantage of the Global Connectivity Agreement we maintain with Citigroup and the specialized array of financial services offered by our subsidiaries, such as securities brokerage, mutual funds management and financial advisory in order to meet the needs of certain niches within this business segment. The success of our wholesale banking segment is critical to our ability to maintain sustainable growth in revenues, particularly in fee-based income. Thus, cross-selling is one of our main priorities in this segment.
In our treasury and money market operations segment, we intend to take advantage of our specialized knowledge in order to increase the penetration of widely-used products in our current customer base while offering innovative products to potential clients. Also, we continuously seek newer and more convenient funding choices, locally and internationally, in order to support our long term business strategy by promoting an adequate diversification of our funding structure.
|●||Main Achievements in 2019|
|(1)||Leading Position in Demand Deposits|
Our funding structure is unparalleled among other financial institutions in Chile, and this continues to be one of our most important competitive advantages. In 2019, we continued to lead the industry in current accounts and demand deposit accounts by recruiting approximately 110,000 new current account holders. This recruitment led to a 5.7% customer base growth, with 9.4% growth in youth banking (ages 18 to 30). Further, we realized growth in the premium account holders base, which are accounts that have the highest average balance per current account in the local banking industry. We also benefited from a flight-to-quality effect by the end of the year, despite the uncertainty that Chile’s social turmoil produced among our customers. This effect is the result of our superior credit rating and reputation, based on a strong soundness image.
Accordingly, we reached Ch$11,326 million in year–end demand deposit account balances in 2019, translating into a significant increase of 18.2% compared to 2018. As of December 31, 2019, we held a market share of 22.5% in total demand deposit account balances within the industry, excluding the operations of subsidiaries abroad. More importantly, we held a market share of 26.5% in personal banking based on account balances, ranking first in the industry.
|(2)||Advances in Digital Banking|
Over the last year we have increased access to new digital and remote channels in order to offer our customers tailored and timely services in order to meet their needs and also to preserve a long-term relationship with them.
Thus, during 2019 we continued to enhance our digital and mobile banking services, offering a set of mobile applications: MiBanco, MiCuenta, MiPago, MiPass, MiSeguro, MiInversion and MiBeneficio. These mobile applications introduce new functionalities, while adding improved benefits to our customers to promote their use. As a result, during 2019 our customers conducted 48.7 million of monetary transactions using our mobile banking applications, a 38.7% annual increase when compared to 2018.
Additionally, in 2019 we migrated approximately 95% of our SMEs, large companies and corporate customer base to Banconexion 2.0, our new website for companies that aims to improve the customer experience by providing the highest cybersecurity standards within the banking industry. Also, in order to have full alignment in all the products and services we offer to our customers, including digital channels, in 2019 we merged the Innovation and Digital Banking Area into the Marketing and Customer Division, creating the Digital Banking and Marketing Division. This division will lead our digital transformation strategy in the coming years.
As a result of these efforts in 2019, we were recognized as the Best Digital and Mobile Bank in Chile by Global Banking & Finance Review, as well as the Best Latin-American website in the Corporate Area and the Best Digital Bank for Individuals and Companies in Chile by Global Finance.
|(3)||Loyalty Program Enhancements|
Transactional services, especially credit cards, are a crucial element of our value offerings particularly for individual customers. We strongly believe that transactional services are an effective means to improve cross-selling and further penetrate current customers, which are two key elements to growing profitably in a highly competitive industry. During 2019, we focused on improving benefits to our 1.1 million credit card account holders by widening strategic partnerships and adding more alliances with local stores and several other products and service providers.
In 2019, we continued strengthening our loyalty program, which involves more than 290,000 customers, by entering into new partnerships in order to widen the array of benefits to our customers. These efforts included offering discounts and other benefits for music shows, festivals and two large cinema chains in Chile.
Furthermore, we continually strive to improve benefits for our credit card account holders and other customers by widening strategic partnership and alliances with airlines or local stores in order to offer several product and service discounts related to airline tickets or miles, among other benefits. In 2019, approximately 165,000 customers made use of their benefits by exchanging their Dolares-Premio (a credit card points system) for airline tickets, discounts or other benefits.
|(4)||Improvements in Service Quality|
We are convinced that in a highly competitive industry such as the Chilean banking system, a customer-centric focus is critical to generating loyalty and creating long-term profitable relationships. We believe that our high service quality is a competitive strength that differentiates us from competitors and supports our long term strategy by responding to the preferences of our current and potential customers. Accordingly, we strive to continuously improve our relationships with customers by developing commercial strategies and value offerings aligned with their needs, as well as improving our response time and customer satisfaction indicators. Consistent with this view, during 2019 we continued to improve customer satisfaction by enhancing our commitment to service quality, improving existing and developing new online channels, such as our internet-based platforms and mobile applications, while promoting organizational changes intended to provide our customers with a more comprehensive approach.
These actions, coupled with an organizational culture oriented to customer satisfaction, allowed us to rank first in recommendations among customers in the banking industry and service quality among our main banking peers in 2019, by posting an average net promoter score of 72.5% according to a syndicated study performed by an independent provider at the request of the largest Chilean banks. Although this figure is slightly lower than the previous year, we remained the leading bank in Chile for service quality because the downward trend customer satisfaction indicators affected the entire Chilean banking industry, an aftermath effect of the social unrest Chile experienced at the end of 2019.
Still, our customer attrition rate was 6.5% in 2019, which is in line with previous years. This low attrition rate and superior customer service contributed to not only a 7.2% decline in customer complaints compared to 2018, but also to diverse distinctions including the “National Customer Satisfaction Award” provided by ProCalidad for the second year in a row, the “Best Place to Work” by a poll of Chilean college students conducted by MERCO, and the “Most Valuable Banking Brand” in Chile by Brand Finance and The Banker.
|●||Operating Efficiency and Productivity|
We believe that efficiency and productivity are key competitive strengths that we have to maintain in order to sustain profitable growth. Accordingly, we aim to become a productive and efficiency-oriented organization in all business aspects by developing simple, effective, secure and low-cost processes while maintaining the tightest cost control in the industry. 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 accomplish these goals, we have invested in information technology and the development of simpler, more manageable, secure and modern business processes and platforms to attain faster response times and higher productivity. We also continue to enhance our strategic development capabilities, increase our business scale, develop economies of scope by incorporating new financially related products and services, optimize our branch network, enhance our remote transactional channels, improve our credit processes, develop a higher level of automation in our internal processes and consolidate our cost control policy and monitoring procedures.
We are continuously developing and optimizing internal processes in order to reduce and manage our expenses. During 2019 we continued to enhance our IT infrastructure in order to increase stability and efficiency for all of our customers. Over the last three years we invested a total of approximately Ch$112,936 million in information technology, mainly related to the acquisition of software and hardware, as well as internal developments to enhance current platforms or building new systems. Particularly, in 2019, we disbursed important financial resources in order to reinforce our IT infrastructure in respect of cybersecurity matters, which included the purchase of systems and equipment. We firmly believe that investment in IT and cybersecurity tools are the best way to improve our operating efficiency and enhance security standards while properly meeting our customers’ needs, which are increasingly linked to digital channels. For more information see “Item 4. Information on the Company–Capital Expenditures.”
In terms of cost control, during 2019 our cost base posted a 8.1% annual increase when compared to 2018, mainly as a result of non-recurring expenses, including: (i) a special bonus granted to part of the staff due to their commitment to the Bank’s customers during Chile’s social turmoil in October 2019, (ii) higher fixed-assets maintenance expenses due to the impact of protests on part of our infrastructure, (iii) an increase in severance payments related to organizational restructuring we undertook in order to adapt our structure to new challenges associated with our digital transformation, and (iv) the development of internal projects related to risk modeling, enhancement of our cybersecurity standards and process automation through robotics, among others. When isolating those effects, our cost base is aligned with our strict cost control policy that has been deployed across our corporate structure. With respect to operating efficiency, our cost-to-income ratio slightly improved from 45.5% in 2018 to 45.0% in 2019. For more information, see “Item 5. Operating and Financial Review and Prospects–Results of Operations for the Years Ended December 31, 2016, 2017 and 2018–Operating Expenses.”
|●||Main Achievements in 2019|
(1)Business & Risk Intelligence
Over the last years we have focused on developing diverse business intelligence tools in order to better serve current customers while attracting new potential clients. During 2019, we continued to develop this strategic pillar by deploying new and enhancing existing analytic tools, which have permitted us to optimize and make our commercial processes and campaigns more efficient while providing our customers with tailored and timely value service and product offerings.
Throughout 2019, we continued to enhance our CRM system and sales platform, as well as Pricing 360°. In our branches, we upgraded our service model by implementing self-service platforms and optimizing the process to offer timely service. Following these actions, we implemented the E360° platform, a commercial tool that allows our account officers to effectively standardize all commercial processes, efficiently manage marketing campaigns and track their promises made to clients.
In 2019, we also continued to implement our pre-approved consumer loan program pursuant to which we target a selected group of retail customers in order to meet their borrowing needs based on their risk profile, financial condition and spending patterns. During 2019, the origination of pre-approved loans increased 10% compared to 2018 (excluding Consumer Banking), while 41.2% of our total consumer loan origination (including the upper, middle and lower income segment) was associated with pre-approved loans. Also, during 2019 we added SMEs to the pre-approved loan program, which permitted us to meet their needs properly and timely. The SMEs pre-approved loan program is a key factor for this segment’s performance achievements for year-end loan balances. We expect to spread this model to other lending products and clusters of customers as we believe it can continue to have a positive impact on productivity.
(2)Branch Network Optimization
We firmly believe that remote channels are the future of banking, particularly amid new regulatory requirements, intensified competition, the entry of new banking players and higher reputational exposure, all of which translates into higher costs. Similarly, customers are increasingly demanding new and innovative distribution channels and visiting branches less, given lack of time, but mostly due to the massive use of internet and the fast adoption of smartphones. In 2018, these trends led us to undertake financial and strategic analyses aimed at revising our entire branch network in terms of profitability, location, layout and services offered through these channels. In 2019 we continued to deploy this analysis by considering demographic change, physical coverage, and customers’ profiles, among other topics. As a result, we reduced our branch network from 390 locations in 2018 to 353 locations in 2019. Most of this decrease was related to the closure of 15 Banco de Chile and 41 CrediChile branches. We expect to continue revising and optimizing our nationwide branch network during 2020.
(3)Enhancement of Cybersecurity Capabilities
In 2019, approximately 70% of our customers’ transactions were carried out through our digital platforms (including smartphones and website). This imposes new challenges related to cybersecurity. As part of the efforts to improve our cybersecurity risk management, we created the Cybersecurity Division in June 2018, which replaces our former Technological Security Area. The new division is the first line of defense and is in charge of mitigating and managing cybersecurity threats. The new division’s mission is to build the new Banco de Chile Cybersecurity Center, which is expected to enable the division to undertake actions and develop projects that were formerly outsourced. The division is composed of two areas, the Cybersecurity Engineering Area and the Cyber defense Area, in addition to diverse units that are focused on managing projects aimed at improving our cybersecurity protocols and procedures.
During 2019, the Cybersecurity Division took various actions, including implementing new technological platforms, updating cybersecurity processes and protocols, utilizing an active talent attraction strategy in order to promote a cybersecurity culture across the company and spread knowledge and developing competences that all of our employees should have with respect to cybersecurity. The division also conducted diverse awareness campaigns and e-learning security standards for managing sensitive information and training activities in order to prevent information leakage. The division also enhanced the authentication process, while reducing internal incident response times. During 2019, the Bank did not receive any complaints related to cybersecurity breaches.
|●||Commitment to Chile|
Banco de Chile is devoted to the progress of its customers by means of providing them with a wide array of services while supporting their funding needs. As an extension of this view, Banco de Chile is committed to the development of Chile and its individuals and companies by providing innovative tools that contribute to improve their quality of life. In this regard, we firmly believe that modern companies need to create effective mechanisms to build positive connections with all of their stakeholders and the society in which they carry out their business activities. This has become increasingly important in the midst of societal changes in Chile and worldwide.
This view is shared by the Bank and its employees, who support the development of Chile through diverse methods such as promoting social progress, contributing to environmental protection, decreasing extreme poverty, providing high-quality education to needy people, assisting disabled young people, fostering cultural development and embracing campaigns intended to overcome the effects of specific adverse events such as natural disasters.
|●||Main Achievements in 2019|
|(1)||Entrepreneurship Support and Financial Literacy|
During 2019, in the normal course of business, we continued to support diverse social endeavors by collaborating with “Desafío Levantemos Chile”, which is a non-profit organization that aims to promote entrepreneurship throughout Chile and especially within lower income segments. Based on this partnership, we assist people and microbusiness affected by natural disasters occurred in Chile by donating both monetary and non-monetary resources to help re-establish entrepreneurs’ and families’ working capacity.
Furthermore, during 2019 we held the fourth “Entrepreneur Challenge Contest”, which was a joint venture between Banco de Chile and “Desafío Levantemos Chile”. This nationwide contest aims to promote those initiatives that incorporate social factors as drivers of entrepreneurship rather than only maximizing earnings. Accordingly, we convened micro entrepreneurs who incorporate a social and sustainable vision as part of their business activities through creativity and innovation. In 2019, more than 56,500 entrepreneurs participated in the contest, of which the five most innovative business concepts were rewarded.
Also, with the aim of improving the quality of life of people and supporting micro entrepreneurs in their ventures, we held several workshops on Financial Literacy across the country, gathering over 7,000 participants during 2019. The main objective of this program is to motivate people to change their consumption behavior, when necessary. Thus, we provide them with specific information and knowledge intended to improve their economic situation by promoting savings and avoiding over-borrowing. Through CrediChile, during 2019 we held 42 on-site workshops that were attended by roughly 1,600 micro-entrepreneurs and general people throughout Chile.
Also, as a result of Chile’s social unrest during the fourth quarter of 2019, many economic sectors, particularly in the SME segment, were forced to operate only partially as a consequence of the aftermath of the protests and demonstrations that seriously damaged public and private infrastructure, ultimately reducing the productive capacity of many Chilean companies and deteriorating their financial condition. In order to support customers who had been affected by these events, we conducted various initiatives focused on assisting SMEs and microbusinesses impacted by infrastructure damage and working capital constraints due to a drop in sales. One of these efforts was the implementation of the “Supportive Plan for SMEs and Entrepreneurs” (Plan Nacional de Apoyo a Pymes y Emprendedores), a commercial initiative that consisted of: (i) emergency financing at preference interest rates for a total amount of Ch$23,000 million (approximately U.S.$30 million) and (ii) rescheduling loan installments and expiring dates for those companies that were unable to comply with their commitment at the appointed date. Moreover, since October 2019, we participated in fundraising campaigns and donation activities in partnership with “Desafío Levantemos Chile”. Also, we anticipated and reduced the invoice payment period to our SME suppliers from 21 to 10 days on average, in order to alleviate their cash flows requirements. Additionally, we maintained active communication with government institutions regarding public initiatives focused on the financial and productive recovery for our customers.
Our commitment to disabled people is permanent. During 2019 we worked once again alongside Teleton for its annual fund-raising campaign by putting our nationwide distribution network including branches, ATMs, internet-based platforms and mobile applications for smartphones, in addition to other technological resources at Teleton’s disposal. However, due to Chile’s social turmoil during the fourth quarter of 2019, the fundraising campaign was postponed from November 2019 to April 2020. Despite the postponement, we made an important monetary donation to Teleton in advance. We have been supporting the Teleton Foundation since its establishment 41 years ago, supporting disabled athletes and artists.
During 2019 we continued to promote our Inclusion Policy across the corporation. This policy is intended to improve our knowledge of physical disability and develop higher sensitivity concerning the treatment of disabled people. We believe this is the first step to improve the service we render to customers who experience this reality while providing our disabled employees with supportive workplace conditions and benefits. Under this approach, we continued to improve many branches for our disabled customers in order to make them fully accessible, while also setting up 364 self–service accessible devices with inclusive access and 423 ATMs in compliance with theAmericans with Disabilities Act.
Additionally, we held the second season ofExpo Inclusión, a recruitment fair through which we aim to strengthen our commitment to the disabled community. As a result, in 2019 over 1.2% of our staff identified as disabled, which is above the minimum required by the Chilean law. More so, we have continued to advance our plan of special benefits for our current disabled employees while implementing inclusive recruitment processes.
Lastly, we also implemented other initiatives benefiting disabled people in a wide range of activities, such as: (i) the 26th annual wheelchair Banco de Chile Cup that brings together more than 50 wheelchair tennis players from Argentina, Perú, Brazil and Chile, among others countries, and (ii) our collaboration and sponsorship to outstanding disabled athletes that represent Chile in various tournaments across the globe.
|(3)||Corporate Volunteer Program|
We continued to promote the participation of our staff in assisting people and organizations during emergencies through our Corporate Volunteer Program. Together withDesafío Levantemos Chile, we provide assistance to people and non-governmental organizations in the event of an emergency or natural disaster in our country by arranging fundraising campaigns, donating both monetary and non-monetary resources to help re-establish entrepreneurs’ and families’ working capacity or establishing working plans to aid affected areas. Our volunteers received basic training in various first aid techniques, were instructed in rescue procedures, protection and guidance for citizens, mitigation of losses in the emergency and providing support in reconstruction activities.
In 2019, our corporate volunteer team participated in a national campaign aimed at protecting and supporting homeless people during the coldest nights of the winter by providing them roughly 3,500 first-aid kits, which included jackets, gloves and winter caps. Also, after the severe wildfires in the La Araucanía region, our volunteers rebuilt houses and implemented inclusive accesses, to improve the quality of life for families.
Overall, during 2019 our corporate volunteer team, made up of 3,900 volunteers, participated in 238 volunteer services ranging from Teleton to environmental conservation, which aimed to aid more than 335,000 beneficiaries.
Environmental sustainability has become a crucial goal for us. Since 2015 we have deployed various programs and initiatives to mitigate the impact of our daily operations on the environment, including efficiently using energy, paper and water, reducing our Greenhouse Gasses (“GHG”) footprint, and utilizing sustainable transportation of our employees.
To advance these efforts, we launched the Carpooling program in the fourth quarter of 2019. Through a collaborative mobile application used by our staff, this program used carpooling to mitigate the impact of our employees’ daily commute on the environment. The Carpooling program helps to reduce both fuel consumption and GHG emissions. In the last quarter of 2019, almost 100 rides were shared under this initiative and the mobile application reached more than 410 active users by the end of the year.
Additionally, we continued to improve our energy consumption during 2019. We replaced 25% of our headquarter’s fluorescent lamps with LCD-based lights, and will continue making this change across our offices and branches. We managed to reduce our paper consumption by approximately 31 tons, which is a 6% increase from 2018.
Last, our environmental commitment was not only reflected in our internal efforts, but also in our core business. In August 2019, we issued our first green bond for approximately U.S.$48 million, placed in Hong Kong with a tenor of 12 years. This funding is aimed at refinancing renewable energy projects in many Chilean regions.
We continued to make charitable contributions to improve the quality of education across lower income segments through the Astoreca Foundation, which was founded 16 years ago. During 2019 we supported more than 2,400 students through this initiative.
One of the main goals of any corporation is to align employees’ perspectives with the company’s culture. In Banco de Chile, every worker has a crucial role in allowing us to achieve our strategic goals. In exchange for that, we believe all of our staff receives fair compensation and have access to benefits and policies that enable them to expand their professional capabilities in a work environment is committed to remain free of accidents, professional illnesses, work harassment, mobbing and discrimination.
In order to consolidate profitable growth, achieve high standards of service quality, attain operating efficiency and maintain a commitment to the country over the long run, we must have a motivated and highly qualified workforce committed to our corporate values. Accordingly, we strive to develop a distinctive culture among our employees by promoting: (i) a clear focus on the customer, (ii) confidence and responsibility, (iii) leadership and empowerment, (iv) collaboration and teamwork and (v) innovation and continuous improvement.
|●||Main Achievements in 2019|
During 2019 we carried out an internal campaign to recognize those employees who significantly contribute to our collaboration efforts. As a result, approximately 1,100 employees were acknowledged by their colleagues, and approximately 200 employees a month received public congratulations from their colleagues.
We also seek to remain one of the most respected employers in Chile. We continue to strengthen our connection to our employees in order to align corporate values and goals with their career development and personal goals. In this regard, we have continued to focus on developing leadership capabilities and overall technical skills through approximately 976 training activities that were attended by approximately 76,009 attendees. We believe these initiatives are aligned with our strategy and the professional development that our team aspires to achieve.
The following diagram shows our share ownership structure as of April 24, 2020:
Principal Business Activities
We are a full-service financial institution that provides, directly and indirectly through our subsidiaries and affiliates, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market. Accordingly, for management purposes we organize our operations in the following four business segments:
The information related to our business segments presented in this section has been prepared in accordance with our internal reporting policies. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2017, 2018 and 2019—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2017, 2018 and 2019—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, 2019, allocated among our principal business segments:
|For the Year Ended December 31, 2019|
|Total Loans||% Participation in Total Loans|
Income before Income Tax(1)
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$, except percentages)|
|Treasury and money market operations||–||–||17,824|
|Operations through subsidiaries||24,823||0.1||82,692|
|Other (adjustments and eliminations)||–||–||–|
|(1)||This net income breakdown is used for internal reporting and planning purposes and it is based on, among other things, our estimated funding cost and direct and indirect cost allocations. This breakdown may differ in some extents from breakdowns of our operating income for financial reporting and regulatory purposes. Separate information on the operations, assets and income of our financial services subsidiaries and affiliates is provided below under “—Operations through Subsidiaries.”|
The following table sets forth our consolidated operating revenues in accordance with our internal reporting policies, allocated among our principal business segments, for the years indicated:
|For the Year Ended December 31,|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$)|
|Treasury and money market operations||30,853||57,485||22,618|
|Operations through subsidiaries||158,535||170,051||199,610|
|Other (adjustments and eliminations)||(14,387||)||(14,990||)||(14,948||)|
|Total Operating Revenues||Ch$|
The following table sets forth a geographic market breakdown of our operating revenues in accordance with our internal reporting policies, for the years indicated:
|For the Year Ended December 31,|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$)|
|Operations through subsidiaries||158,535||170,051||199,610|
|Operations through subsidiaries||―||―||―|
|Other (adjustments and eliminations)||(14,387||)||(14,990||)||(14,948||)|
|Total Operating Revenues||Ch$|
Retail Banking Segment
Our retail banking segment serves the financial needs of individuals and small and medium sized companies through our branch network. As of December 30, 2019, our retail banking segment managed 283 branches operating under our “Banco de Chile” and “Banco Edwards-Citi” brand names and 76 branches within the “Banco CrediChile” network. As of December 31, 2019, loans granted by our retail banking segment amounted to Ch$19,158,183 million and represented 63.8% of our total loans as of the same date.
In terms of composition, as set forth in the following table, as of December 31, 2019 our retail segment’s loan portfolio was principally focused on residential mortgage loans, which represented 48.0% of the segment’s loan book. The remaining loans were distributed between commercial loans (28.4%) and consumer (23.6%).
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Residential mortgage loans||9,191,536||48.0|
We serve the retail market through two different and specialized areas: (i) the Individual and SME Area and (ii) the Consumer Finance Area (or Banco CrediChile).
Individual and SME Area
The Individual and SME Area 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 companies with annual sales of up to approximately Ch$2,000 million. This area manages the portion of our branch network operating under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 283 branches as of December 31, 2019.
The strategy followed by the Individual and SME Area is mainly focused on sub segmentation, multi brand positioning, cross sell of lending and non-lending products and service quality based on customized service models for specific customer needs. Also, loyalty programs have been increasingly incorporated into our commercial targets for each sub segment and they have enabled us to increase the use of our credit cards and our fee-based income. In addition, the area’s operations count on the support of specialized call centers, mobile and internet banking services, along with a wide range of management tools that allow us to measure returns, the performance of cross sold products and the effectiveness of marketing campaigns.
During 2019, the Individual and SME Area focused on targeted growth opportunities while developing new business solutions and benefits for its clients in order to improve our customers’ experience. For instance, we implemented the E360° platform, a commercial tool that allows us to standardize our commercial processes in order to achieve an efficient approach to customers in order to manage the ongoing relationship and marketing campaigns. Moreover, during 2019 we added our SME clients to the pre-approved loan program, allowing us to properly and timely meet their needs, explaining the improved performance of this segment in terms of year-end loan balances. In addition, we migrated our SME customer base to Banconexion 2.0, our new website that aims to improve the customer experience. As for our loyalty program, we added new alliances with entertainment service providers, allowing our customers to make use of discounts and receive other benefits at various music shows, festivals, restaurants and cinema theaters. We believe that comprehensive value offerings are crucial to both improving customer experience and attracting new customers.
In 2019, the Individual and SME Area achieved significant sales goals in terms of lending and saving products. In this regard, throughout the year it increased its customer base by approximately 110,000 new current account holders and attained record sales of new installment and residential mortgage loans granted to its customers.
As of December 31, 2019, the Individual and SME Area served approximately 1,066,493 core customers (those holding a current account or a loan outstanding) of which 936,937 were individuals and 129,556 were small and medium sized Chilean companies. This customer base resulted jointly in total loans granted to 892,529 borrowers, which included 134,125 residential mortgage loans debtors, 118,786 commercial loan debtors, 458,775 utilized lines of credit and 370,265 installment loans. As of the same date, the Individual and SME Area held 954,790 current accounts, 109,695 savings accounts and 279,993 time deposits.
As of December 31, 2019, loans granted by the Individual and SME Area amounted to Ch$18,468,455 million, which represented 61.5% and 96.4% of our total loans and loans granted by our retail market segment, respectively, as a whole. The following table sets forth a breakdown of the unit’s loan portfolio by lending product in accordance with our internal reporting policies, as of December 31, 2019:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Total Commercial Loans||5,398,746||29.2|
|Residential Mortgage Loans||9,126,400||49.4|
|Lines of credit and other loans||293,713||1.6|
|Total Consumer Loans||3,943,309||21.4|
We offer a variety of financial services to individuals and small and medium-sized companies, directly through the Individual and SME Area or indirectly through our subsidiaries, such as current accounts, automatic bill payment, debit cards, credit cards, revolving credit lines, residential mortgage loans, consumer loans, commercial loans, mortgage loans for general purposes, leasing agreements, factoring services, mutual funds management and stock brokerage, trade finance, payments and collections, insurance brokerage (which includes life and casualty insurance), savings instruments and foreign currency services.
Our consumer installment loans are generally incurred, up to a customer’s approved credit limit, to afford purchases of goods and/or services, such as cars, travels, household furnishings and education, among others. Consumer loans may be denominated in both pesos and UF, bear fixed or variable interest rates and are generally repayable in installments over a period of up to 36 months.
As of December 31, 2019, we had Ch$2,534,377 million in installment loans granted by our Individual and SME Area, which accounted for 64.3% of the retail market business segment’s consumer loans. Most of these installment loans are denominated in Chilean pesos and are payable on a monthly basis.
Residential Mortgage Loans
As of December 31, 2019, we had outstanding residential mortgage loans of Ch$9,191,536 million (under internal reporting policies considering the Bank as a whole), which represented 30.6% of our total loan book as of the same date. According to information published by the CMF, as of December 31, 2019, we were Chile’s second largest private sector bank in terms of year-end mortgage loans balances, accounting for approximately 17.2% of mortgage loans granted by the Chilean banking industry, excluding operations of banks’ subsidiaries operating abroad.
Our residential mortgage loans are generally denominated in UF and have maturities ranging from five to 30 years. As of December 31, 2019, the average residual maturity of our residential mortgage loan portfolio was 19.5 years. Originally, we funded our residential mortgage loans through the issuance of mortgage finance bonds, which are recourse obligations only to us with payment terms that are matched to the residential loans. Also, the mortgage finance bonds bear real market interest rates plus a fixed spread over the variable rate of the UF, which permits us to partially reduce our exposure to interest rate fluctuations and inflation. Chilean banking regulations allow us to finance up to 100% of a residential mortgage loan with mortgage finance bonds, based on the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after tax monthly income, when the customer belongs to the low income population segment. However, that limit may be adjusted for the middle and high income population segments.
Over the last decade, we have also promoted the expansion ofMutuos Hipotecarios, a mortgage lending product, which is not financed by mortgage finance bonds, but instead through our general funds. As of December 31, 2019, 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, which is not the case for mortgage finance bonds that are traded in the secondary market and, therefore, subject to discounts), as they are easier to prepay and permit financing of up to 100% of the purchase price (as stated by the applicable local regulation), although banks limit such maximum financing portion based on internal credit policies and economic cycles, among others.
The following table sets forth the composition of our residential mortgage loan portfolio by product type:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Secured Residential Mortgage Loans(1)|
|Loans financed withMortgage Bonds||Ch$||14,774||0.2||%|
|Total Secured Residential Mortgage Loans||Ch$|
|(1)||Corresponds to the Bank’s total secured residential mortgage loans and not only those associated with the Individual and SME Area.|
As shown above, as of December 31, 2019 residential mortgage loans related toMutuos Hipotecarios represented 99.8% of our total residential mortgage loan portfolio, while the remaining 0.2% corresponded to mortgage loans financed withMortgage Bonds. As of the same date, theMutuos Hipotecarios portfolio had an average origination period of 5 years (the period from the date when the loans were granted to the specified date) and 6.2% of these loans had been granted by CrediChile. Conversely, as of December 31, 2019, loans financed withMortgage Bonds had an average origination period of 18 years (the period from the date when the loans were granted) and 5.1% of these loans had been granted by CrediChile. In terms of credit risk, in 2019, loans related toMutuos Hipotecarios, as well as those financed withMortgage Bonds, had low gross (before recoveries) credit risk ratios of 0.02% and 0.00%, respectively. It is important to mention that the residential mortgage loan portfolio financed withMortgage Bonds is annually decreasing in an amount, and as a proportion of, the total residential mortgage loan portfolio because it is composed of old loans and the instrument is no longer offered by the Bank.
RegardingMortgage Bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of theMortgage Bond obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, in the ordinary course of business, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.
For those loans that finance a higher portion of the property appraised value, we demand that customers comply with stricter requirements, which are verified during the credit assessment stage. These requirements are related to: (i) the history of the relationship between the Bank and the customer (new or current client), (ii) credit risk scores, (iii) monthly income, (iv) type of job (employed or self-employed) and (v) years employed. In order to illustrate the above mentioned, the table below sets forth an example of requirements for residential mortgage loans that finance up to 80% and more than 80% of the property value, with a common term and granted to employed as well as self-employed new customers.
(in millions of Ch$, except percentages)
(in millions of Ch$,
|Years employed||> 1 year||> 1 year|
|Monthly Income||> Ch$0.5||> Ch$2.2|
|Years Employed(2)||> 2 years||> 2 years|
|Monthly Income||> Ch$0.5||> Ch$2.2|
|New Customers with a University degree(3)|
|Years employed||> 1 year||> 1 year|
|Monthly Income||> Ch$0.5||> Ch$1.8|
|Years Employed(2)||> 2 years||> 2 years|
|Monthly Income||> Ch$0.5||> Ch$1.8|
|(1)||Refers to customers with or without university degree, who do not supplement income with a guarantor’s income.|
|(2)||In the case of self-employed customers, years employed refers to the minimum period of time in which the customer has filed annual tax bills with the Chilean Internal Revenue Service.|
|(3)||Refers to customers with university degree awarded by a group of universities according to our internal credit approval process.|
During 2019, only 0.1% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2019, loans financing between 75% and 90% of the property appraised value represented 45.8% of these loans, loans financing between 50% and 75% of the property value represented 42.1% of these loans, and loans financing less than 50% of the property value represented 12.0% of these loans. According to our prudent risk approach, we have been tightening our credit granting policy for residential mortgage loans by restricting the loan financing limit as a percentage of the property’s value, although higher financing may be granted to longstanding customers within specific segments. This explains the decrease in the share of residential mortgage loans that financed between 90% and 100% of the property value over the last years, from 14.9% in 2015 to 0.1% in 2019.
An additional feature of our mortgage loans is that mortgaged property sometimes, and under certain conditions, secures some of the mortgagor’s other credits with us, including installment loans and due balances associated with credit cards and credit lines. Our total amount of loans secured by real estate guarantees, their loan–to–value (LTV) ratio and their relative share in our total loan portfolio, as of December 31, 2019, are depicted in the table below:
|As of December 31, 2019|
|% of Bank’s Total Loans|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$, except percentages)|
|Residential Mortgage Loans||Ch$||9,203,060||68.6||%||30.7||%|
|Other than mortgage loans||1,087,138||25.9||3.6|
|Total Secured Loans||Ch$||10,290,199||76.7||%||34.3||%|
|(1)||Corresponds to the Bank’s total secured loans and not only those associated with the Individual and SME Area.|
|(2)||LTV ratio is computed as the amount of secured loans divided by the value of their associated collateral.|
|(3)||For other-than-mortgage loans, the LTV ratio is computed as the amount of the excess guarantee (after deductions) of the balance of the associated residential mortgage loans, as those guarantees are initially established in order to secure the residential mortgage loan.|
The LTV ratios provided above are based on estimated property values that we update monthly with the collateral valuation models managed by our Retail Credit Risk Division. These models determine a rate of depreciation that provides an updated collateral value, based on variables such as geographic location, last appraisal date, type of property and type of customer. Accordingly, the LTV ratios set forth above take into account the most recent available data regarding collateral values.
In addition, the following table sets forth the composition of the other-than-mortgage loans secured by real estate guarantees:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Secured Other-than-Mortgage Loans(1)|
|Total Secured Other-than-Mortgage Loans||Ch$|
|(1)||Corresponds to the Bank’s total secured Other-than-Mortgage Loans and not only those associated with the Individual and SME Area.|
Unlike in other countries, in addition to the specific legal rights afforded by the mortgage loan (including foreclosure rights), the Bank may collect the pending balance of the mortgage loan over other assets of the mortgage debtor based on certain legal liens provided by law (derecho de prenda general). Regarding the foreclosure processes, as permitted by Chilean regulations we may write-off secured loans (such as residential mortgage loans) the earlier of 48 months from the date the loans become overdue and once we have made all efforts for recovering the past due loans without success. This applies to residential mortgage loans financed with mortgage finance bonds as well as 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 11 months for foreclosures associated with residential mortgage loans.
As for our historical loss rates, we periodically review our collateral pricing models by adjusting the parameters that support them, such as appreciation and depreciation rates, as well as updated recovery and loss rates, based on historical and empirical data. Thus, we normally revise our collateral pricing models by incorporating updated information from re-appraised assets or foreclosure processes that have been completed by the Bank in the past.
In addition, the valuation of guarantees is based on a prudent approach, which aims to anticipate and cover unexpected reductions in their market price as a result of changes in market variables, such as an unforeseen slowdown in the global or local economy, lack of liquidity of real estate assets or decrease in real salaries. Accordingly, our collateral pricing models depreciate the value of the guarantee regarding the market value determined by an independent appraiser. This approach has allowed us to minimize the loss rates, as the value obtained from auctions (if foreclosure applies) generally exceeds the value assigned to the asset as guarantee.
As of December 31, 2019, we issued both individual and corporate Visa and MasterCard credit cards. In addition to traditional credit cards, our portfolio also includes co-branded cards. As of December 31, 2019, we had two loyalty programs or cobranding agreements, namely “Travel Club” and “Entel Visa”. Credit cards issued under these cobranding agreements supplemented the credit cards that we issued under the brand names Banco de Chile, Banco Edwards-Citi and Banco CrediChile. In addition, as of December 31, 2019, we offered 17 types of credit cards, targeting diverse types of segments and encompassing different benefits, including: Visa Corporate, Visa Corporate Signature, Visa Dorada, Visa Infinite, Visa Internacional, Visa Platinum, Visa Platinum Pyme, Visa Pyme/Empresarial, Visa Signature, Visa Signature Entel, MasterCard Black, MasterCard Dorada, MasterCard Internacional, MasterCard Platinum, MasterCard Corporate and MasterCard Corporate Executive.
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, 2019, Transbank S.A. had 11 shareholders (including us) and Nexus S.A. had six shareholders (including us), all of which were banks. As of the same date, our equity ownership in Transbank S.A. was 26.16% and our equity ownership in Nexus S.A. was 29.64%.
As of December 31, 2019, we had 1,402,283 valid credit card accounts, with 1,571,691 credit cards issued to individuals and small and medium sized companies, held by 1,122,794 customers (including credit cards issued by CrediChile). Total charges on our credit cards during 2019 amounted to approximately Ch$4,623,674 million, with Ch$4,154,105 million corresponding to purchases in Chile and abroad and Ch$469,569 million corresponding to cash withdrawals both within Chile and abroad. The amount of purchases made by our customers in Chile (which include charges associated with credit cards issued by CrediChile) accounted for 18.7% of the total purchase volume of banks’ credit cards in Chile in 2019, according to statistics provided by Transbank S.A.
As of December 31, 2019, our credit card loans to individuals and small and medium sized companies amounted to Ch$1,115,219 million and represented 24.6% of our retail market business segment’s consumer loans.
We believe that the Chilean market for credit cards has a high growth potential, especially among lower and middle income customer segments, as 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 other non-banking competitors that are involved in the issuance of credit cards. As a result, we strive to develop customized commercial strategies to reinforce this payment channel by applying business intelligence tools that enable us to satisfy the needs of our diverse customer base. It is important to note that following the new rules issued in the last years by our regulator, the processing and merchant acquiring services for credit and debit cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, in order to facilitate the entry of new players. As of the date of this annual report, most merchant acquiring services are provided in Chile by Transbank S.A., but some competitors have already begun to implement this new four-party pricing model for their own business, which is expected to change the market dynamics.
Commercial credits granted by our Individual and SME Area mainly consist of project financing, long-term financing and working capital loans granted to small and medium sized companies, which are denominated in Chilean pesos, UF and U.S. dollars and may bear fixed or variable rates of interest with average maturities of approximately six years. As of December 31, 2019, our Individual and SME Area had outstanding commercial loans of Ch$4,551,211 million, representing 23.8% of the retail banking segment’s total loans and 15.2% of our total loans as of the same date.
Leasing contracts are financial leases for capital equipment and property. Leasing contracts may bear fixed or variable interest rates and they generally have terms that range from one to five years for equipment and from five to 20 years for properties. Most of these contracts are denominated in UF. As of December 31, 2019, our Individual and SME Area had outstanding leasing contracts of Ch$540,481 million, representing 2.8% of the retail banking segment’s total loans and 1.8% of our total loans as of the same date.
Lines of Credit
As of December 31, 2019 the Individual and SME Area had approximately 818,806 approved lines of credit to individual customers and small and medium sized companies. Also, the unit had outstanding advances to 458,775 individual customers and small and medium sized companies that totaled Ch$293,146 million, or 1.5% of the retail banking segment’s total loans and 1.0% of our total loans.
Our lines of credit for individual customers are generally available on a revolving basis, up to an approved credit limit, and may be used for any purpose. Advances under lines of credit are denominated in Chilean pesos and bear an interest rate that is set monthly.
We offer different types of debit cards to our customers. Depending on their specifications, these cards can be used for banking transactions at ATMs that operate on the local network provided by Redbanc and the local network of merchants participating in the local Redcompra debit program. Also, our debit cards can be used internationally through the Visa International PLUS network or the international network of merchants associated with the Electron program. We name these debit cards depending on the card’s specific features and the link between the brand and target market which they serve. During 2019, we offered the following debit cards: Visa Infinite, Visa Estándar, Visa Signature, Visa Platinum, Chilecard and debit cards for companies. As of December 31, 2019, according to monthly statistics provided by Transbank S.A., the Individual and SME Area held a 12.6% market share of debit card transactions (not including debit cards issued by Banco CrediChile, as those are reported under our Consumer Finance Area), which corresponds to approximately 184 million transactions throughout the year.
We strategically offer deposit products to increase our deposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relatively low-cost, stable source of funding, as well as an opportunity to cross-market our other products and services. In this regard, we offer current accounts, time deposits and savings accounts to our individual customers. Current accounts are Chilean peso-denominated and the majority bear no interest (approximately 0.06% or 612 of our total current accounts are interest-bearing), and savings accounts are denominated in UF and bear a fixed-interest rate. Time deposits may be denominated in Chilean pesos, UF and U.S. dollars and most of them bear interest at a fixed rate with terms that range between seven to 360 days.
While demand has historically been focused on UF-denominated deposits during periods of high inflation, demand for Chilean peso-denominated deposits has increased in recent years as a consequence of lower and more stable inflation rates in Chile.
In the last years, we have seen an important increase in demand deposits. In fact, amid the high volatility and low interest rates observed in the financial markets throughout 2008 and 2009 (in line with monetary stimulus undertaken by central banks worldwide to overcome the financial crisis), we benefited from a flight-to-quality effect, since customers increasingly deposited their funds in their current accounts managed by us, particularly those denominated in Chilean pesos, as they preferred liquidity to investing in products with low profitability. A similar phenomenon has taken place over the last few years as a result of the Central Bank’s monetary stimulus plan in response to (i) Chile’s economic slowdown towards the end of 2013 and (ii) inflation below the Central Bank’s target. Hence, as low interest rates have prevailed in Chile since 2014 interest rates paid on Chilean peso-denominated saving accounts and time deposits have remained low. The same flight-to-quality effect mentioned earlier took place in the last quarter of 2019, as a consequence of the social unrest in Chile, translating into increased uncertainty motivating depositors to seek safer products and financial institutions, while maintaining enough liquidity in case of additional trouble. This trend has encouraged investors to opt for current accounts over interest-bearing deposits. As a result, according to our management information system, annual average balances of current accounts and demand deposits managed by our Individual and SME Area increased by 7.2% and 10.2% in 2018 and 2019, respectively.
Consumer Finance Area (Banco CrediChile)
The Consumer Finance Area provides loans and other financial services to low and middle income segments (individuals whose monthly incomes range from Ch$180,000 to Ch$500,000), which historically have only been partially served by financial institutions. Also, our Consumer Finance Area serves 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 76 Banco CrediChile branches as of December 31, 2019. Banco CrediChile was established in 2004 from what was formerly our consumer banking area. During 2008, Banco CrediChile was merged with the consumer area 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 demand deposit account (see “—CuentaChile Demand Accounts”) targeted at lower income customers. As of December 31, 2019, Banco CrediChile had approximately 295,851 core customers (those holding either a current account or a loan with us) and 365,601 active demand accounts. As of the same date, total loans outstanding managed by CrediChile amounted to Ch$689,728 million, representing 2.3% of our total loans outstanding as of the same date.
The following table sets forth the composition of Banco CrediChile’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2019:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Lines of credit and other consumer loans||2,536||0.4|
|Total consumer loans||584,033||84.7|
|Residential mortgage loans||65,136||9.4|
Our Consumer Finance Area 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 for payroll payment purposes, which in turn enable employees to use our deposit services.
In recent years, CrediChile has strived to improve its value offering services by designing and implementing two new financial services, ‘Caja Chile’ and ‘Microbusiness Banking’. The former consists of a limited range of basic financial services (e.g. deposits, withdrawals and bill payments) offered to customers and non-customers through remote IT platforms located in small convenience stores within socially and/or geographically isolated areas of Chile. On the other hand, the ‘Microbusiness Banking’ is a specialized portfolio of financial services designed for Microbusiness (generally personal businesses) that includes financial advisory, lending and non-lending products and general financial solutions for a segment that has been traditionally uncovered by the banking services.
During 2019, Banco CrediChile continued to enhance these service models in order to penetrate those segments by offering innovative banking solutions. As of December 31, 2019, Banco CrediChile had 766 ‘CajaChile’ locations at various convenience stores located throughout geographically and/or socially isolated areas. Through these networks, CrediChile provides its customers with a basic array of financial services including bill payments, deposits, installments loan payments and cash withdrawals. As of the same date, commercial loans granted to microbusinesses accounted for approximately Ch$47,737 million, associated with 14,030 borrowers. From the business perspective, CrediChile’s loan balances decreased by approximately 8% when compared to 2018, which was the consequence of both the deceleration in private consumption evidenced across the whole economy and also a reduced risk appetite for this sub-segment in light of various regulations. This element compelled Banco CrediChile to focus on operational efficiency, productivity and cost control, and also to extend some of Banco de Chile’s products and services to this sub-segment, such as accounts, investment and savings services and international debit cards. Also during 2019, CrediChile continued to strengthen its relationship with customers by promoting the usage internet-based services and mobile banking applications in order to improve productivity and efficiency. At the same time, we have continued to promote a dual service model by merging branches in certain locations for Banco de Chile and CrediChile customers, which in turn allows us to benefit from economies of scale by optimizing the use of spaces. Lastly, our Consumer Finance Area launched two financial literacy programs to promote customers’ economic wealth-being by holding various workshops that benefited approximately 7,000 people in Chile.
Banco CrediChile employs a specific credit scoring system, developed by our retail credit 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 CMF. In addition, Banco CrediChile carries out rigorous procedures for the collection of past 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 at the same time managing our exposure to a higher risk segment. 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.”
Banco CrediChile provides short to medium term consumer loans and credit card services. As of December 31, 2019, Banco CrediChile had approximately 193,138 consumer loan debtors related to installment loans amounting to Ch$504,367 million. As of the same date, Banco CrediChile had outstanding loan balances related to credit cards of Ch$77,130 million.
CuentaChile Demand Accounts
Banco CrediChile launched CuentaChile Demand Accounts in 2014, offering its customers a deposit product that is flexible and easy to use. This product allows us to tap into a section of the consumer market that otherwise would not be able to access and participate in the banking system because of its risk profile. The CuentaChile Demand Account is a non-interest bearing demand deposit account without checking privileges that 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 CuentaChile Demand Account to make deposits or automatic payments to other Banco CrediChile accounts through a network of 7,361 ATMs available throughout Chile as of December 31, 2019. CuentaChile Demand Account holders may execute transactions in all CrediChile branches and carry out basic banking operations in the CajaChile’s nationwide network, which is present in most Chilean regions and communities. CuentaChile Demand Account holders are entitled to make use of internet-based banking platforms and mobile applications provided by Banco CrediChile while also receiving electronic money transfers and benefiting from diverse loyalty programs designed by Banco CrediChile, under the Cuenta Chile Club, which include discounts and special offers for a wide array of stores and services. Banco CrediChile previously offered its customers traditional demand accounts (each known as a CrediChile Demand Account) that entitled its 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 increasing benefits to its holders.
As of December 31, 2019, Banco CrediChile had approximately 365,601 active CuentaChile Demand accounts. Holders of these accounts pay an annual fee, based on the number of withdrawals on the account line of credit and interest on any outstanding balance under the line of credit. All fees and interest due on a CuentaChile Demand Account are withdrawn automatically on a monthly basis from funds available in the account. In addition, CuentaChile Demand Accounts allow us to offer our wholesale customers the ability to pay their employees by direct deposit of funds sent to the individual employee’s account at Banco CrediChile, thereby increasing the potential for stronger long term relationships with our wholesale customers and their employees.
Wholesale Banking Segment
Our wholesale banking segment serves the needs of corporate customers. In 2019, this business segment recorded annual operating revenues of approximately Ch$468,676 million, which represented 23.1% of our total operating revenues. Also, for the year ended December 31, 2019 this segment recorded an income before income tax of Ch$298,748 million, which represented 39.2% of our consolidated income before income tax. As of December 31, 2019, loans granted by this business segment amounted to Ch$10,836,462 million and represented 36.1% of our total loan portfolio.
The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2019:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Foreign trade loans||1,310,493||12.1|
As of December 31, 2019, we had 10,166 debtors out of a total of 27,828 core customers (those holding either a loan or a current account with us). Our wholesale customers are engaged in a wide range of economic sectors. As of December 31, 2019, loans granted by our wholesale banking segment were mainly related to:
|●||financial services (approximately 22.2% of all loans granted by this business segment);|
|●||manufacturing (approximately 11.1% of all loans granted by this business segment);|
|●||construction (approximately 11.0% of all loans granted by this business segment);|
|●||commerce and trade (approximately 9.3% of all loans granted by this business segment);|
|●||communication and transportation (approximately 6.6% of all loans granted by this business segment);|
|●||agriculture, forestry and fishing (approximately 6.5% of all loans granted by this business segment);|
|●||community, social and personal services (approximately 2.7% of all loans granted by this business segment);|
|●||utilities (approximately 2.3% of all loans granted by this business segment); and|
|●||mining (approximately 2.2% of all loans granted by this business segment).|
In line with our strategy of identifying and differentiating market segments in order to provide improved value propositions for a diversified customer base, two of our areas provide our wholesale customer base with banking and financial products and services: (i) the Corporate Area and (ii) the Large Companies Area.
The Corporate Area provides banking products and services to corporations with annual sales exceeding approximately Ch$10,000 million. This area’s customers consist of a large proportion of Chile’s publicly-traded and non-listed companies, subsidiaries of multinational companies and conglomerates operating in Chile (including those operating in the financial, commercial, manufacturing, industrial, infrastructure and real estate sectors), projects and concessions, as well as family offices (wealth management). Thus, in addition to traditional lending products, this area offers a wide range of non-lending services related to project finance, deal structuring associated with business acquisitions, cash management, deposits and funds administration, financial advisory, among others. Also, this area is in charge of coordinating and overseeing both our Leasing Business and our International Private Banking Unit.
As of December 31, 2019, the Corporate Area had approximately 2,840 debtors out of a total of approximately 13,905 core customers (those holding either a current account or a loan with us). Also, this area managed total outstanding loans of Ch$7,775,520 million, which represented 25.9% of our total loan book as of the same date.
The following table sets forth the composition of our Corporate Area’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2019:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Foreign trade loans||809,240||10.4|
We offer a wide range of products to large corporations that include short- and long-term financing, working capital loans, mortgage loans, leasing, long-term syndicated loans and factoring, as well as investment banking services offered by our subsidiary Banchile Asesoría Financiera S.A. We also offer cash management, including payment services (payrolls, suppliers, pensions, dividends, etc.), collection services and connections to international funds transfer networks, as well as traditional deposit products, in particular current accounts.
In cash management, as of December 31, 2019, we were party to approximately 8,532 payment service contracts and approximately 949 collection service agreements with corporations. We believe that cash management and payment service contracts, in particular, provide us with a source of low cost deposits and the opportunity to cross sell our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our corporate customers, providing centralized collection services for their accounts receivable and other similar payments. For the year ended December 31, 2019, joint volumes associated with collection and payment agreements increased by approximately 11.8%.
In order to provide highly competitive and differentiated services, our Corporate Area has the direct support of our Treasury and Money Market Operations segment, which directly fulfills our corporate customers’ liquidity, short-term loans and hedging needs. We have also improved our technology to facilitate connections with customers and enhance their self-service practices. Similarly, we offer derivative products, which we believe have become increasingly important, especially those associated with Chilean peso-U.S. dollar and UF-U.S. dollar forward contracts, cross currency swaps, interest rate swaps and options, among other derivative products.
In recent years, the market for loans to corporations in Chile has been characterized by reduced margins due to increasing competition and moderate expansion in terms of borrowing. This fierce competition has involved not only local banking players but also, increasingly, overseas lenders who are eager to lend to Chilean companies that hold high credit ratings supported by a high sovereign credit rating. For this reason, we have focused on optimizing the profitability in this segment by enhancing our cross selling through the generation and enhancement of fee-based services, such as payroll processing, dividend payments and billing services, as well as computer banking services. This strategy has enabled us to maintain profitable and long-term relationships with our corporate customers while preserving the ability to grant loans when appropriate business opportunities arise.
Accordingly, during 2019, our Corporate Area continued to focus on: (i) maximizing cross-selling and profitability at the business relationship level, (ii) improving the customer experience with the bank’s distribution channels and (iii) promoting and motivating the area’s team to encourage “innovation” in all the business aspects managed by account officers. These initiatives are intended to optimize the risk-return relationship of this segment through non-lending revenues and customer proximity. In all of these areas, but particularly in cross-selling, the synergies that arise from the Global Connectivity Agreement with Citigroup have been important when assisting our corporate customers with off shore transactions, derivatives structuring and financial advisory services.
The slowdown evidenced in the local economy over the last years and, in particular, the decrease in overall investment spending across the country, affected the corporate lending business. This trend continued in 2019 with the aftermath of the social unrest that affected the Chilean economy in the last quarter of the year, resulting in a 0.7% decrease in loan balances as of December 31, 2019. However, our Corporate Area was able to cope with this backdrop by taking advantage of specific business opportunities in Cash Management services, illustrated by growth in demand deposits and a positive year for revenue coming from treasury products offered to corporate customers, particularly those related to spot and derivatives to hedge financial risks. Moreover, we managed to migrate roughly 90% of the entire corporate customer base to Banconexion 2.0, the enhanced version of our former website platform for companies.
In addition, the Corporate Area was able to deal with the effect of increased competition on lending margins by focusing on cross-selling, such as investment banking services offered through our investment banking subsidiary. During 2019, revenue from this subsidiary increased when compared to 2018, despite carrying out approximately 25 transactions. Also, once again, the subsidiary ranked first in terms of equity debt placement deals in the local market, while also being distinguished by LatinFinance as (i) the Best Investment Bank of the Year in Chile and (ii) the 2019 Deal of the Year in the Initial Public Offering category.
The foreign trade business is also managed by our Corporate Area, although balances and results are allocated to different business areas depending on the customer who performs the transaction. It is worth mentioning that during 2019, the foreign trade business recorded a 9.1% increase in loan balances for the Bank as a whole and a 8.0% expansion in the Corporate Area in particular.
Large Companies Area
Our Large Companies Area provides companies – with annual sales that range from approximately Ch$2,000 million to approximately Ch$10,000 million – with a broad range of financial products and services. Customers served by this area are those related to the commercial, manufacturing, agricultural, forestry, fishing and infrastructure sectors, among others.
As of December 31, 2019, we had 7,312 large companies debtors out of a total of 13,905 core customers (those holding either a current account or a loan with us). Loans granted by the Large Companies Area amounted to Ch$3,060,942 million as of the same date, which represented 10.2% of our total loans.
The following table sets forth the loan portfolio composition of the Large Companies Area, in accordance with our internal reporting policies, as of December 31, 2019:
|As of December 31, 2019|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$,|
|Foreign trade loans||501,253||16.4|
Products and services offered by this area are mainly related to commercial loans, lines of credit, trade finance and foreign currency transactions, factoring services, leasing, non-residential mortgage loans, syndicated loans, investment banking and financial advisory services for mergers and acquisitions, debt restructuring assistance, payments and collections services, current accounts and related saving services, corporate credit cards, cash and investment management, derivative contracts to hedge against currency or interest rate fluctuations, insurance brokerage, among other traditional and tailored services.
The Large Companies Area aims to provide its customers with excellent service based on proactive financial support that enhances long term relationships with customers. Over time, the area has developed service models intended to take advantage of synergies arising from the interaction of account and specialized support executives responsible for ensuring comprehensive customer service. These models have enabled the Large Companies Area to strengthen customer relationships and product offerings.
In 2019, the Large Companies Area continued to prioritize a customer centric approach in order to maintain a market-leading position in commercial banking. Notwithstanding the slowdown that affected the local economic landscape in 2019, the Large Companies Area was not disrupted by the decrease in local investment spending and posted an increase of 8.5%, or Ch$240,663 million, in year-end loan balances. Nonetheless, this increase was lower than the 12.0% increase in 2018, primarily due to the improvement in business sentiment and consumer confidence throughout that year in comparison with 2019.
A solid strategy aimed at finding new business opportunities while maintaining a high level of customer satisfaction also contributed to loan growth achieved by the Large Companies Area, with an increase of 9.9% in foreign trade loans balances on an annual basis and an increase of 20.2% in commercial credits.
Our factoring business is part of the Large Companies Area. During 2019, we posted an annual decrease of 1.8% in year-end balances of factoring loans on a consolidated basis. The Trade Finance Unit is also managed by the Large Companies Area. In 2019 our trade finance loans amounted to Ch$1,431,205 million on a consolidated basis, which represents a 9.1% annual increase in year-end balances.
Treasury and Money Market Operations
Our Treasury and Money Market Operations business segment provides a wide range of financial services to our customers, including currency intermediation, forward contracts, interest rate swaps, transactions under repurchase agreements and investment products based on bonds, mortgage finance bonds and deposits.
In addition, our Treasury and Money Market Operations business segment is focused on managing our currency, interest rate and maturity gaps, ensuring adequate liquidity levels, managing our investment portfolio and performing the intermediation of fixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.
The Treasury and Money Market Operations business segment is also responsible for: (i) the issuance of short- and long-term senior bonds, as well as long-term subordinated bonds, in Chile or abroad, (ii) monitoring compliance with regulatory deposit limits, technical reserves and maturity and rate matches/mismatches, (iii) monitoring our adherence to the security margins defined by regulatory limits, and risk limits for interest rate, currency and investment gaps. This segment continually monitors the Bank’s cost of funding by benchmarking with the rest of the local financial system and financing alternatives in Chile or abroad.
Regarding funding functions, during 2019, we continued to develop a funding diversification strategy by conducting important transactions in Chile and abroad. This strategy is aimed at maintaining a competitive cost of funding that supports the value offerings we provide to our wide customer base and improving our liquidity by issuing debt of longer maturities that match long-term assets. For that reason, we are continually seeking alternative sources, types of instruments and markets. We generally conduct international bond issuances only if the cost (including costs of interest rate swaps and other transactional expenses) is below the cost of raising funds locally and the currency or interest rate exposure is fully hedged via cross currency swaps.
We are constantly striving to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. Thus, in 2019 we exploited downward trends in local interest rates to place long-term bonds at attractive spreads throughout the year. Furthermore, we also took advantage of specific windows of opportunity abroad. As a result, in 2019 we carried out the following debt placements:
|●||Approximately U.S.$1,519 million (denominated in UF) within the local market. These debt placements had maturities ranging from two to 22 years (eight years on average) while bearing premium spreads over the relevant benchmark (Central Bank UF-denominated bonds or BCU rates) as illustrated by a weighted average real annual interest rate of 0.82%.|
|●||We also carried out various debt placements in the international capital markets by taking advantage of our superior credit rating within Chile and the Latin American region, which enabled us to benefit from liquidity and low interest rates in major capital markets. During 2019, we issued unsecured bonds totaling approximately U.S.$430 million, with tenors ranging between 10 and 20 years, in countries like Japan, Hong Kong, Australia, Peru and Norway.|
|●||In addition, we took advantage of the prevailing interest rate scenario at unseen low levels to issue UF-denominated subordinated bonds for approximately U.S.$286 million, bearing a weighted average real interest rate of approximate 1.02%. This funding had the double purpose of financing loan growth while bolstering our capital adequacy in the transition to Basel III.|
|●||Furthermore, we continued to utilize short-term funding associated with our commercial paper program, which provides us with funding for Trade Finance transactions, and during 2019, we issued a total amount of approximately U.S.$1,256 million. As of December 31, 2019 we had an outstanding balance of approximately U.S.$ 390 million.|
The funding functions carried out by our Treasury area are complemented by our international area, namely International Financial Institutions (“IFI”), which manages relations with correspondent banks worldwide, facilitating international payments and obtaining foreign currency financing for us. As of December 31, 2019, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 140 correspondent banks, from which we maintained 21 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, 2019, the portfolio amounted to Ch$3,238,698 million and was composed of financial instruments measured at fair value through other comprehensive income that totaled Ch$1,366,343 million and securities held for trading amounting to Ch$1,872,355 million. As for the type of instruments included in our securities portfolio, as of December 31, 2019, 38.1% consisted of securities issued by the Central Bank and the Chilean Government, 47.2% consisted of securities issued by local financial institutions, and 14.7% consisted of securities issued by non-financial Chilean corporate issuers, foreign issuers and other securities. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are business goals for us and, therefore, equity instruments only represented 0.3% of our investment portfolio as of December 31, 2019.
Operations through Subsidiaries
We have made several strategic long-term investments in financial services companies that are engaged in activities complementary to our commercial banking activities. In making these investments our goal is to develop a comprehensive financial group capable of meeting the diverse financial needs of our current and potential clients by offering traditional banking products and specialized financial services through our different subsidiaries.
The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2019:
|BANK’S INTERNAL REPORTING POLICIES||(in millions of Ch$)|
|Banchile Corredores de Bolsa S.A.||Ch$||857,015||Ch$||116,935||Ch$||38,045|
|Banchile Administradora General de Fondos S.A.||77,435||61,499||23,710|
|Banchile Corredores de Seguros Ltda.||19,582||5,568||4,350|
|Banchile Asesoria Financiera S.A||3,284||2,512||1,333|
|Banchile Securitizadora S.A||425||360||(79||)|
The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2019:
|Direct (%)||Indirect (%)||Total (%)|
|Banchile Administradora General de Fondos S.A.||99.98||%||0.02||%||100.00||%|
|Banchile Asesoría Financiera S.A.||99.96||–||99.96|
|Banchile Corredores de Seguros Ltda.||99.83||0.17||100.00|
|Banchile Corredores de Bolsa S.A.||99.70||0.30||100.00|
|Banchile Securitizadora S.A.||99.01||0.99||100.00|
During 2014, we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong, which was formally declared dissolved on July 5, 2016.
On December 19, 2016, Banco de Chile acquired all of the shares of Promarket S.A. and that subsidiary was dissolved.
Securities Brokerage Services
We provide securities brokerage services through Banchile Corredores de Bolsa S.A. is registered as a securities broker with the CMF, the regulator of Chilean publicly listed companies, and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores de Bolsa S.A. has provided stock brokerage services, fixed income investments and foreign exchange products to individuals and companies through our branch network. In early 2009, Citibank Agencia de Valores S.A. merged with Banchile Corredores de Bolsa S.A.
During the year ended December 31, 2019, Banchile Corredores de Bolsa S.A. recorded an aggregate stock trading turnover on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange that amounted to approximately Ch$9,097,852 million, which represented a 13.3% market share within the Chilean stock market.
Also, as of December 31, 2019, Banchile Corredores de Bolsa S.A. had equity amounting to Ch$116,935 million and, for the year ended December 31, 2019, recorded net income of Ch$38,045 million, which represented 6.4% of our consolidated net income for that period (under the bank’s internal reporting policies).
Mutual and Investment Fund Management
Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2019, according to data published by the Chilean Mutual Funds Association, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 23.6% of all Chilean mutual funds’ assets. Also, as of December 31, 2019, Banchile Administradora General de Fondos S.A. operated 57 mutual funds and had Ch$8,915,446 million in assets under management owned by 357,380 corporate and individual investors. As of the same date, Banchile Administradora General de Fondos S.A. operated 32 public investment funds. Banchile managed Ch$1,365,518 million in net assets associated with these public investment funds on behalf of 1,376 participants. As of December 31, 2019, Banchile managed three private investment funds of Ch$27,964 million in net assets associated with these public investment funds on behalf of 85 participants. During 2019, Banchile Administradora General de Fondos S.A. created three new mutual funds, five new public investment funds and one private investment fund.
The mutual and investment funds mentioned above are managed by Banchile Administradora General de Fondos S.A., but neither the Bank nor Banchile Administradora General de Fondos S.A. have ownership of these funds and, accordingly, they are not booked in our consolidated financial statements.
The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2019:
|As of December 31, 2019|
|Name of Fund||Type of Fund||Net Asset Value|
(in millions of Ch$)
|Number of Investors|
|Ahorro||Fixed Income (Medium/Long Term)||Ch$||64,599||9,834|
|Alianza||Fixed Income (Medium/Long Term)||27,904||7,450|
|Booster Acciones Europa Iii||Structured||2,288||66|
|Capital Efectivo||Fixed Income (Short Term)||417,848||7,585|
|Capital Empresarial||Fixed Income (Short Term)||2,033,883||24,860|
|Capital Financiero||Fixed Income (Short Term)||1,502,838||16,025|
|Corporate Dollar||Fixed Income (Short Term)||947,152||22,980|
|Crecimiento||Fixed Income (Medium/Long Term)||53,053||15,391|
|Deposito Xxi||Fixed Income (Medium/Long Term)||162,399||12,845|
|Deuda Dolar||Fixed Income (Medium/Long Term)||38,214||929|
|Deuda Estatal Uf 3-5||Fixed Income (Medium/Long Term)||2,513||2,977|
|Disponible||Fixed Income (Short Term)||85,858||35,351|
|Estrategico||Fixed Income (Medium/Long Term)||797,193||30,092|
|Fondo Mutuo Booster Acciones Brasil||Structured||5,004||176|
|Fondo Mutuo Booster Acciones Emergentes||Structured||3,846||137|
|Fondo Mutuo Chile Blue Chip Index Fund||Equity||14,501||1,493|
|Fondo Mutuo Cobertura Deuda Global||Fixed Income (Medium/Long Term)||2,093||1,260|
|Fondo Mutuo Depósito Plus Viii||Structured||7,294||387|
|Global Mid Cap||Equity||11,280||1,122|
|Horizonte||Fixed Income (Medium/Long Term)||80,230||7,684|
|Latam Corporate Investment Grade||Fixed Income (Medium/Long Term)||37,780||1,482|
|Latam Mid Cap||Equity||11,798||3,688|
|Liquidez 2000||Fixed Income (Short Term)||401,375||45,870|
|Port Act Agresivo||Blend||44,826||2,197|
|Port Act Controlado||Blend||752,511||23,666|
|Port Act Equilibrado||Blend||203,691||7,097|
|Port Act Moderado||Blend||567,588||15,245|
|Port Act Potenciado||Blend||69,474||3,140|
|Renta Futura||Fixed Income (Medium/Long Term)||160,936||8,693|
|Retorno L.P. Uf||Fixed Income (Medium/Long Term)||47,416||5,068|
|Us Mid Cap||Equity||17,133||1,321|
|Utilidades||Fixed Income (Medium/Long Term)||59,221||7,149|
|Estructurado Bonos Uf Plus Iii||Structured||8,428||363|
|Fondo Mutuo Booster Acciones Brasil Ii||Structured||6,630||292|
|Fondo Mutuo Booster Acciones Brasil Iii||Structured||5,753||166|
The following table sets forth information regarding the investment funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2019:
|As of December 31, 2019|
|Name of Fund||Type of Fund||Net Asset Value|
(in millions of Ch$)
|Number of Investors|
|Rem. F.I. Small Cap||Public||Ch$||126,769||20|
|Rem. F.I.($) Latam Small Mid Cap||Public||13,686||3|
|Rem. F.I. Banchile Rentas Inmobiliarias I||Public||66,775||97|
|Rem. F.I. Inmobiliario Vi||Public||415||4|
|Remu F.I. Inmobiliario Vii||Public||143||16|
|Rem. F.I. Latam Corp.High Yield||Public||12,258||140|
|Rem. F.I. (Us$) Minero Asset Chile||Public||88||29|
|Rem F.I. ($) Renta Habitacionales||Public||3,424||55|
|Remu F.I. ($) Deuda Chilena||Public||463,609||267|
|Rem. F.I. Deuda Global||Public||22,894||7|
|Rem Fi Inmobiliario Viii||Public||13,513||2|
|Rem F.I. Market Plus Global||Public||80,776||6|
|Rem F.I. Market Plus Eeuu||Public||24,484||6|
|Remu F.I. Usa Equity||Public||34,608||6|
|Remu F.I. Europe Equity||Public||11,233||6|
|Remu F.I. Deuda Corp. 3-5 Años||Public||36,835||26|
|Remu F.I. Emerging Equity||Public||7,912||3|
|Remu F.I. Estrategias Alternativas||Public||1,419||2|
|Remu F.I. Deuda Alto Rendimiento||Public||219,951||24|
|Remu Fi Desarr.Y Rtas.Resid.||Public||6,594||285|
|Remu F.I Inver.Inmobiliario Ix||Public||15,431||299|
|Remu F.I Marketplus Europa||Public||4,369||2|
|Remu F.I United States Property Fund Vi||Public||3,108||13|
|Remu Fi Marketplus Emergente||Public||10,535||3|
|Remu Fi ($) Desarrollo Inmobiliario Peru-Colombia||Public||11,104||11|
|Remu Fi European Value Partners Ii||Public||1,796||4|
|Remu Fi Infraestructura Chile I||Public||66,823||5|
|Remu Fi ($) Inmobiliario X||Public||6,526||2|
|Remu Fi ($) Edr Fund Emerging Credit||Public||332||1|
|Remu Fi (Us$) Cs||Public||6,385||1|
|Remu Fi (Us$) Privado F2||Private||753||6|
|Rem.($) F.I. Chile Blend||Public||80,047||11|
|Rem. (Us$) F.I.P. Rentas Inmob. Jda 700 Peru||Private||9,955||50|
As of December 31, 2019, Banchile Administradora General de Fondos S.A. had equity of Ch$61,499 million and, for the year ended December 31, 2019, net income of Ch$23,710 million, which represented 4.0% of our 2019 consolidated net income (under the bank’s internal reporting policies).
We provide insurance brokerage services to our customers through Banchile Corredores de Seguros Limitada (Banchile Corredores de Seguros LTDA.). In 2000, we began to offer life insurance policies associated with consumer loans and non-credit related insurance to our individual customers and the general public. As of December 31, 2019, Banchile Corredores de Seguros Limitada had equity of Ch$5,568 million and, for the year ended December 31, 2019 it recorded net income of Ch$4,350 million, which represented 0.7% of our 2019 consolidated net income (under the bank’s internal reporting policies). According to data published by the CMF, as of December 31, 2019, Banchile Corredores de Seguros Limitada had a 5.5% market share in the total amount of life and casualty insurance policies (in Chilean pesos) sold by insurance brokerage companies in Chile, excluding life annuities.
Additionally, in January 2019 we signed a long-term partnership with Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A., local subsidiaries of Chubb Limited, by which Chubb became our exclusive provider of life and non-life insurances to be distributed by our Insurance Brokerage subsidiary. For non-life products, the partnership became effective in June 2019, and for life products, it became effective in January 2020. The partnership does not include life and non-life insurance products that in accordance to local regulation must be publicly auctioned.
Financial Advisory Services
We provide financial advisory and other investment banking services to our customers through Banchile Asesoría Financiera S.A. The services offered by Banchile Asesoría Financiera S.A. are primarily targeted to our corporate customers and include advisory services concerning mergers and acquisitions, restructuring, project finance and strategic alliances. As of December 31, 2019, Banchile Asesoría Financiera S.A. had equity of Ch$2,512 million and, for the year ended December 31, 2019, recorded net income of Ch$1,333 million, which represented 0.2% of our 2019 consolidated net income (under the bank’s internal reporting policies).
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 producing assets of the client company. As of December 31, 2019, Banchile Securitizadora S.A. had equity of Ch$360 million and, for the year ended December 31, 2019, the subsidiary reported a net loss of Ch$79 million (under bank’s internal reporting policies). Also as of December 31, 2019, Banchile Securitizadora S.A. had a 6.2% 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.
Socofin S.A. provides judicial and extra judicial loan collection services to the Bank. As of December 31, 2019, Socofin S.A. had equity of Ch$1,939 million and, for the year ended December 31, 2019, net income of Ch$416 million (under the bank’s internal reporting policies).
Distribution Channels and Electronic Banking
Our distribution network provides integrated financial services and products to our customers through a wide range of channels. The network includes ATMs, branches, internet-based banking platforms, mobile banking applications and call centers.
As of December 31, 2019, we had a network of 359 retail branches throughout Chile. Our branch system serves as a distribution network for all of the products and services offered to our customers. Our full-service branches accept deposits, cash withdrawals, offer the full range of our retail banking products, such as consumer loans, credit cards, mortgage loans and current accounts, and provide financial and non-financial information to current and potential customers. As of December 31, 2019, we had 1,712 ATMs that were part of a larger network of 7,361 ATMs operating in Chile, of which 4,652 ATMs operate under a network managed by Redbanc S.A.
We also offer electronic banking services to our customers 24 hours a day through our website, www.bancochile.cl, which has tailored homepages for the different segments we serve. Thus, by accessing our website, our individual customers may execute electronic money transfers, access their account balances, pay utilities bills, apply for loans, make time deposits, purchase insurance premiums, invest in mutual funds, and so on. On the other hand, our corporate homepage offers a broad range of services, including the payment of bills, electronic fund transfers, non-charge orders, as well as a wide variety of account inquiries. These services include our office banking service, Banconexion Web for Enterprises, which enables our corporate customers to perform all of their banking transactions from their offices. Our homepage also offers products with exclusive benefits provided by our customer loyalty marketing programs, which enhance our relationships with customers. Through the jointly administered website of Banchile Administration General de Fondos and Banchile Corredora de Bolsa, our mutual funds and securities brokerage subsidiaries, respectively, we also provide customers interested in investing and saving their funds with an internet-based platform on which they can trade stocks and currencies, make time deposits and take positions in mutual funds, foreign stock markets, investments funds and derivatives. Our foreign trade customers can rely on our international business homepage, www.bancochile.com, which enables them to inquire about the status of their foreign trade transactions and perform transactions, such as opening letters of credit, recording import collection and hedging on instructions and letters of credit.
Also, we provide our customers with access to a 24-hour phone-bank through which they can access account information and execute certain transactions. This service, through which we receive over 454,497 calls per month on average, has enabled us to develop customer loyalty campaigns, sell financial products and services, answer specialized inquiries and receive and resolve complaints by customers and non-customers.
Lastly, over the last years we have devoted efforts to enhance our mobile banking platforms by developing and launching diverse applications. Over the last five years we have released the mobile applications MiBanco, MiPago, and MiBeneficio. Similarly, we launched MiCuenta, MiPass, and MiSeguro. MiBanco is a mobile banking platform that enables our customers to perform most of the operations they can execute on our website, such as accessing their account balances, making bill payments and electronic money transfers, carrying out cash advances from credit cards to checking accounts. MiPago is a specialized mobile application that permits requests for reimbursements from other Banco de Chile’s customers and performs the transaction by generating and scanning a QR code, which reinforces the security standards for these types of operations. MiCuenta is a mobile application that enables users to make monthly payments associated with utility bills and other types of services. MiPass is a password-generating application that, among other features, allows users to set a list of money transfer recipients to make transfers without requiring another password-generating device. Also, we continued to expand our digital banking offerings by launching the new mobile application called MiInversion. This application serves as a portfolio management mobile platform for retail customers by enabling them to manage their investments in equity, fixed-income and mutual funds. Furthermore, we added new functionalities to these mobile applications by incorporating an On/Off service for credit and debit cards in case of theft, misplacement or other security issues detected by the user, authorization of web transactions with MiPass, biometric access to MiBanco through fingerprint, onsite payment in shops and commerce through MiPago, among other features. Likewise, we also added new functionalities by expanding our RedGiro service to permit our clients to perform transactions through their smartphones and added new functionalities to MiInversion, through which our customers are able to invest in time deposits while exchanging foreign currency. As of 2019, we have continued enhancing our mobile applications by improving existing functionalities.
The following table sets forth information regarding the evolution of the amount of transactions carried out by customers and non-customers in our diverse distribution channels, as of December 31, 2017, 2018 and 2019:
|For the Year Ended December 31,||% Increase (Decrease)|
|BANK’S MANAGEMENT INFORMATION SYSTEM||(in millions of transactions)|
The Chilean market for banking and other financial services is highly and increasingly competitive and consists of various market sectors. The most important sector is commercial banking with total loans (excluding operations of subsidiaries abroad) representing 91.5% of the Chilean GDP as of December 31, 2019. As of the same date, the Chilean banking industry consisted of 18 banks, 17 of which were private sector banks and one state-owned bank, namely, Banco del Estado. As of December 31, 2019, the six largest Chilean banks accounted for approximately 86.8% of all outstanding loans granted by Chilean financial institutions (excluding operations of subsidiaries abroad): Banco Santander—Chile (18.0%), Banco de Chile (16.5%), Banco del Estado (14.2%), Banco de Crédito e Inversiones (“BCI”) (14.0%), Scotiabank (14.0%) and Banco Itaú-Corpbanca (10.1%).
We face significant and increasing competition in all market segments in which we operate. As a comprehensive commercial bank that offers a wide range of services to all types of enterprises and individual customers, we deal with a variety of competitors, ranging from large private sector commercial banks to more specialized entities, such as “niche” banks. We also increasingly face competition, from non-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 with off-shore long-term debt. In addition, we face competition from other types of competitors, such as leasing, factoring and automobile financing companies (especially in lending products), as well as mutual funds, pension funds and insurance companies, within the market for savings and mortgage loans. Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual funds, while the insurance brokerage business has become an important component of the value offerings provided by banks.
Within the local banking industry, our primary competitors are the main private sector commercial banks in Chile, namely, Banco Santander—Chile, BCI, Scotiabank, and Itaú-Corpbanca. Nevertheless, we also face competition from Banco del Estado, a state-owned bank, which has a larger customer base than we do. Banco del Estado, which operates under the same regulatory regime as Chilean private sector banks, was the third largest bank in Chile as of December 31, 2019, with outstanding total loans of Ch$25,812,815 million, representing a 14.2% market share (excluding operations of subsidiaries abroad), according to data published by the CMF.
In the retail market, we compete with other private sector Chilean banks, as well as with Banco del Estado, which has a large individual customer base. Among private sector banks, we believe our strongest competitors in this market are Banco Santander—Chile, Scotiabank and BCI, as these banks have developed diversified business strategies focused on both small and medium-sized companies and lower to middle income segments of the Chilean population. In addition, we believe our strongest competitors in the high income individual segment are Banco Santander—Chile, Banco Bice and Banco Security, as these banks rely on specialized business models that provide wealth management and traditional banking services, as we do.
Historically, commercial banks in Chile have competed in the retail market against each other, and finance companies and department stores, with the latter two having traditionally been focused on consumer loans to low and middle-income segments. However, finance companies gradually disappeared between the 1990s and 2000s, as most of them merged into the largest commercial banks that dominate the Chilean banking industry today. Also, by the end of 1990s, the Chilean financial industry witnessed the rise of non-traditional banking competitors, such as large department stores. During the 2000s, these players gained increasing significance in the consumer lending sector, as they were permitted to issue financial products such as credit cards. Currently, there are two consumer oriented banks affiliated with Chile’s largest department stores: Banco Falabella and Banco Ripley. Although these banks had a combined market share (excluding operations of subsidiaries abroad) of only 2.6% as of December 31, 2019, according to the CMF, the presence of these banks is likely to make consumer banking more competitive over the next few years, especially within the lower income segment. As of December 31, 2019, the consumer loans granted jointly by these banks represented a 15.8% of the total consumer loans rendered by the industry (excluding operations of subsidiaries abroad).
In the wholesale market, we believe our strongest competitors are also Banco Santander—Chile, BCI, Itaú-Corpbanca and Scotiabank. Similarly, we believe these banks are our most significant competitors in the small and medium sized companies’ business segment.
We also compete, mainly through our subsidiaries, with companies that offer non-banking specialized financial services in the high-income individuals segment and the middle market and corporate segment such as Larrain Vial, BTG Pactual, Moneda Asset and CrediCorp (formerly IM Trust), whose core businesses are stock brokerage, financial advisory and wealth management services. Other Chilean commercial banks also compete in these markets of specialized financial services, but they are less focused on such businesses.
The Chilean banking industry has experienced increased levels of competition in recent years from domestic as well as foreign banks. This phenomenon has triggered a consolidation wave within the industry and the creation of more comprehensive banking entities that participate in most of our markets. Consequently, banks’ strategies have been increasingly focused on reducing costs and improving efficiency standards in order to compete effectively with the larger banks. Although we are making our best efforts in order to operate within this competitive environment, we acknowledge that our income may decrease as a result of increasing competition.
Mergers and Acquisitions
Regarding mergers and acquisitions events in the local banking industry, most of these transactions have involved international players seeking to participate in the local market.
In recent years, for example, in 2013 Corpbanca’s controlling shareholders announced their intention to sell part of their stake to a local or international player. On January 29, 2014, Corpgroup (the controlling shareholder of Corpbanca) accepted the bid of Brazil’s Itaú Unibanco, through which Itau merged its own Chilean and Colombian subsidiaries with Corpbanca. The merger was approved by the former SBIF in September 2015 and Banco Itaú Chile became Banco Itaú-Corpbanca. The merged company started operations on April 1, 2016. As of December 31, 2019, the merged bank, which finally adopted the brand name Banco Itaú Corpbanca, had a 10.1% market share, excluding operations of subsidiaries abroad.
In addition, consolidation and overseas expansion has emerged as a means of inorganic growth for local banks. For example, in 2012, Corpbanca, ranked fourth among Chilean private sector banks in terms of total loans as of December 31, 2011, acquired a former Santander Group’s subsidiary in Colombia and consolidated its balance sheet and results of operations beginning May 31, 2012. Also, by the end of 2012, Corpbanca made a bid for acquiring Helm Bank in Colombia. According to publicly available information, the bid process was completed and fully authorized by the former SBIF in July 2013 and Corpbanca started to consolidate the balance sheet of this new subsidiary beginning August 31, 2013. Given the merger between Banco Itaú Chile and Corpbanca in 2016, assets held by former Corpbanca subsidiaries in Colombia were integrated into the merged bank. Hence, as of December 31, 2019, loans associated with Banco Itaú-Corpbanca’s operations in Colombia amounted to Ch$4,895,605 million and represented 2.7% of the industry’s total loans.
Similarly, by the end of May 2013, BCI—the third largest private sector bank in Chile in terms of total loans as of December 31, 2019, with a 14.0% market share (excluding operations of subsidiaries abroad)—announced the acquisition of the City National Bank (CNB), headquartered in the United States. According to public information published by the former SBIF, the process was fully authorized and completed in October 2015. BCI started to consolidate the balance sheet on the same date. Furthermore, in December 2017, BCI—through CNB—announced its intention to acquire the 100% of Totalbank (based in the United States) shares from Banco Santander for an amount of approximately U.S.$530 million. This acquisition was formally completed in June 2018, resulting in BCI recording a notable increase in its international presence in terms of total loans. As of December 31, 2019, loans associated with BCI’s operation in the United States amounted to Ch$8,395,615 million and represented 4.6% of the industry’s total loans.
On December 5, 2017, it was publicly announced that BBVA formally accepted Scotiabank Chile’s bid to acquire 68.2% of BBVA Chile shares for an amount of approximately U.S.$2,200 million. In January 2018, Scotiabank requested the former SBIF’s authorization for this transaction, which was granted in March 2018. The merger was completed in September 2018 after receiving SBIF approval at the end of August 2018. As of December 31, 2019, the market share of the merged bank in terms of total loans was 14.0%, excluding foreign subsidiaries.
In addition, over the last two years, some of our banking competitors have acquired the lending business of certain non-banking credit card issuers, primarily related to credit cards, as permitted by the Chilean regulator since 2018. For example, on December 19, 2017, BCI agreed to acquire Walmart Chile Servicios Financieros for an amount of approximately U.S.$148 million. Walmart Chile Servicios Financieros managed two types of credit cards and had approximately 1.4 million credit card holders. The former SBIF approved this acquisition in November 2018. Similarly, on May 31, 2018, Promotora CMR Falabella S.A. merged into Banco Falabella. By means of this acquisition, Banco Fallabella added approximately 1.2 million credit account holders. The former SBIF approved this transaction in October 2018 and the integration process was fully completed in December 2018. As a result, as of December 31, 2018, Banco Falabella became the largest bank in Chile in terms of issued credit cards.
On March 27, 2019 Banco Santander Chile announced that it had entered into an agreement with SKBergé Financiera S.A. to acquire a 49% of the ownership of Santander Consumer Chile S.A. for an amount of approximately Ch$59,063.5 million. Furthermore, on August 27, 2019, Banco Santander Chile’s controlling shareholders agreed at an extraordinary meeting to purchase an additional 2% of the ownership of Santander Consumer Chile S.A. for approximately Ch$3,100 million from Banco Santander S.A. (Spain), which is its parent company. Both transactions were approved by the CMF on November 15, 2019. The equity sale was completed on November 28, 2019. As a result of this transaction (51% equity shares of Santander Consumer Chile S.A), Banco Santander Chile entered into the auto-finance business and, since December 2019, has consolidated its balance sheet and results of operations into the bank. According to Banco Santander Chile, Ch$451 billion of consumer loans were added to its loan book as a result of this transaction.
Changes in Banking Players
During 2014 the Chilean banking industry witnessed the entry of new market players and changes in the ownership structure of certain competitors. By the end of August 2014, Banco International announced the intention of Inversiones la Construcción (“ILC”) to take control of the bank by acquiring a 50.1% stake from the controlling shareholder, “Baninter”. Banco Internacional is a small bank within the Chilean banking industry and is mostly focused on the wholesale banking segment. As of December 31, 2019, Banco Internacional’s loan book represented 1.1% of the total outstanding loans of the industry (excluding operations of subsidiaries abroad).
Furthermore, on May 30, 2014, the former SBIF authorized the existence and approved the bylaws of “Banco BTG Pactual Chile.” This bank, a Chilean subsidiary of Brazil-based bank BTG Pactual, was already operating in the Chilean financial industry since 2012, providing stock brokerage, mutual funds management and investment banking services. Banco BTG Pactual Chile received the final authorization to operate as a commercial bank on December 31, 2014 and officially started its commercial operations on January 23, 2015. As of December 31, 2019, the loan book of Banco BTG Pactual Chile represented only 0.5% of the total outstanding loans of the industry (excluding operations of subsidiaries abroad).
In 2016, Deutsche Bank Chile closed its operations in many Latin American countries including Chile. Deustche Bank’s participation in the Chilean Banking industry accounted for 0.5% in terms of total assets as of December 31, 2015. Similarly, in 2018, the former SBIF approved Banco de la Nación Argentina’s request to close its business in Chile.
On the other hand, it is worth noting that since 2014 two Chinese banks have requested SBIF authorizations for starting operations in Chile. In May 2016, the China Construction Bank Corporation received final approval from the former SBIF to open a branch in Chile under the brand name “China Construction Bank, Agencia en Chile”. This was the first branch established by this bank in Latin America. Similarly, in November 2016, the Bank of China received provisional authorization and installation authorization from the former SBIF to open a branch in Chile under the brand name “Bank of China Limited”. Finally, on March 13, 2018 the former SBIF definitively authorized Bank of China to start operations in Chile under the brand name “Bank of China Limited”.
In March 2019, the Bank of Tokyo-Mitsubishi UFJ (“MUFG Bank, Ltd.”) informed the Chilean regulatory authorities that it would be ceasing its banking activities after 38 years of operation in Chile. According to the company, the decision was made for strategic reasons.
We expect these trends of increasing competition and consolidation to continue, particularly in connection with the formation of new large financial groups and the creation of new niche banks. Although we believe that we are currently large enough to compete effectively in all of our target markets, any further consolidation in the Chilean financial services industry may adversely affect our competitive position. We are working on developing and enhancing our competitive strengths to ensure our sustainability.
Below there is a set of tables and figures for the years ended December 31, 2017, 2018 and 2019 that show our position within the Chilean financial industry. The market information is set forth under Chilean GAAP as published by the CMF and—unless otherwise indicated—excludes data related to operations of subsidiaries abroad. Also, as a result of the merger between Banco Itaú Chile and Corbanca, and between Scotiabank Chile and BBVA, figures for years 2017 and 2018, respectively, unless otherwise indicated have been computed on a pro forma basis.
The following table sets forth certain statistical information on the Chilean financial system as of December 31, 2019, according to information published by the CMF under Chilean GAAP:
|As of December 31, 2019|
|(in millions of Ch$, except percentages)|
|Private sector banks||Ch$||246,062,409||85.0||%||Ch$||155,795,802||85.8||%||Ch$||112,231,039||80.6||%||Ch$||20,022,015||91.7||%|
|Banco del Estado||43,354,976||15.0||25,812,815||14.2||27,047,435||19.4||1,811,808||8.3|
|Total banking system||Ch$||289,417,288||100.0||%||Ch$||181,608,617||100.0||%||Ch$||139,278,474||100.0||%||Ch$||21,833,823||100.0||%|
|(1)||Loans to customers. Interbank loans are not included.|
|(2)||Excludes operations of subsidiaries abroad.|
|(3)||For purposes of this table, equity includes capital and reserves, net income for the period and provisions for minimum dividends.|
We had total loans of Ch$30,019,470 million as of December 31, 2019, according to information published by the CMF under Chilean GAAP. The following table sets forth our market share and the market share of our principal private sector competitors in terms of total loans, as of the dates indicated, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||17.2||16.9||16.5|
|Banco de Crédito e Inversiones||13.6||13.9||14.0|
|Total market share||74.0||%||73.1||%||72.6||%|
|(1)||Allowances for loan losses not deducted.|
|(2)||Excludes operations of subsidiaries abroad.|
|(3)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the ratio of allowances to total loans of the largest private banks in Chile and of the Chilean financial system as a whole (including such banks) as of December 31, 2017, 2018 and 2019, according to information published by the CMF under Chilean GAAP:
Allowances to Total Loans(1)(2)
|As of December 31,|
|Banco de Crédito e Inversiones||1.63||%||1.85||%||1.97||%|
|Banco de Chile||2.19||2.17||2.28|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the ratio of past due loans (90 days or more) over total loans for the largest private banks in Chile as of December 31, 2017, 2018 and 2019 on an individual basis, according to information published by the CMF under Chilean GAAP:
Past Due Loans to Total Loans(1)(2)
|As of December 31,|
|Banco de Crédito e Inversiones||1.41||%||1.37||%||1.36||%|
|Banco de Chile||1.19||1.09||1.39|
|(1)||Past Due loans refer to loans 90 days or more past due, including installments that are overdue and the remaining amount of principal and interest.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
We had total deposits (including demand deposits and time deposits) of Ch$22,182,751 million as of December 31, 2019, according to information published by the CMF under Chilean GAAP. The following table sets forth the market shares in terms of total deposits for private banks as of December 31, 2017, 2018 and 2019 on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||16.0||15.9||15.9|
|Banco de Crédito e Inversiones||13.0||13.1||13.4|
|Total market share||66.0||%||66.1||%||66.6||%|
|(1)||Excludes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
Capital and Reserves
The following table sets forth year-end balances of capital and reserves for the largest private banks in Chile as of December 31, 2017, 2018 and 2019 according to information published by the CMF under Chilean GAAP:
Capital and Reserves(1)(2)(3)
|As of December 31,|
|Banco de Crédito e Inversiones||Ch$||2,468,304||Ch$||3,181,307||Ch$||3,510,667|
|Banco de Chile||2,842,610||3,014,690||3,235,676|
|Banco Santander - Chile||2,712,692||2,871,378||3,083,852|
|(1)||Capital and Reserves equals to total equity before provisions for minimum dividends and net income for the period.|
|(2)||Includes operations of subsidiaries abroad.|
|(3)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
Net Income attributable to equity holders
The following table sets forth the market shares in net income attributable to equity holders for private sector banks as of December 31, 2017, 2018 and 2019, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||26.1||%||25.3||%||23.4||%|
|Banco de Crédito e Inversiones||16.9||16.9||15.9|
|Total Market Share||80.7||%||80.2||%||76.1||%|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
Return on Capital and Reserves
The following table sets forth our return attributable to equity holders on capital and reserves and the returns attributable to equity holders on capital and reserves of our principal private sector competitors and the Chilean banking industry as a whole, in each case as of December 31, 2017, 2018 and 2019, according to information published by the CMF under Chilean GAAP:
Return on Capital and Reserves(1)(2)(3)
|Year Ended December 31,|
|Banco de Chile||20.3||%||19.7||%||18.3||%|
|Banco de Crédito e Inversiones||15.0||12.4||11.5|
|Financial System average||12.8||%||12.2||%||12.5||%|
|(1)||Corresponds to net income attributable to equity holders divided by the year-end balance of Capital and Reserves.|
|(2)||Includes operations of subsidiaries abroad.|
|(3)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the market shares in terms of operating revenues for private banks as of December 31, 2017, 2018 and 2019, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||18.0||%||18.3||%||16.9||%|
|Banco de Crédito e Inversiones||14.6||15.5||15.9|
|Total Market Share||69.2||%||72.5||%||70.1||%|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the operating margins for private banks as of December 31, 2017, 2018 and 2019, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||5.9||%||6.1||%||5.7||%|
|Banco de Crédito e Inversiones||4.9||4.8||5.3|
|Financial System average||5.1||%||5.1||%||5.2||%|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the market shares in terms of operating expenses for private sector banks as of December 31, 2017, 2018 and 2019, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||15.6||16.2||15.7|
|Banco de Crédito e Inversiones||14.7||16.5||16.5|
|Total Market Share||66.9||%||70.3||%||69.9||%|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
The following table sets forth the efficiency ratios of the largest private Chilean banks as of December 31, 2017, 2018 and 2019, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||46.2||45.3||45.2|
|Banco de Crédito e Inversiones||53.7||54.5||50.6|
|Financial System average||53.2||%||51.3||%||48.8||%|
|(1)||Operating expenses divided by operating revenue.|
|(2)||Includes operations of subsidiaries abroad.|
|(3)||Scotiabank on pro forma basis for 2017 following the merger with BBVA Chile.|
REGULATION AND SUPERVISION
In Chile, only banks may maintain current accounts for their customers and, together with certain other specific non-banking financial institutions, may accept time deposits. The principal authorities that regulate financial institutions in Chile are the Financial Market Commission (“CMF”) and the Central Bank. Chilean banks are primarily subject to the General Banking Act and secondarily, to the extent not inconsistent with that law, the provisions of the Chilean Corporations Law governing publicly listed corporations, except for certain provisions that are expressly excluded. The Chilean banking 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 Act. In 2004, amendments to the General Banking Act granted additional powers to banks, including general underwriting powers for new issuances of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, investment fund management, factoring, securitization products and financial leasing services. Prior to 2006, banks had the option of distributing less than 30% of their earnings as dividends in any given year, subject to approval of the holders of at least two-thirds of the bank’s common stock. In 2006, however, the General Banking Act was amended to eliminate this alternative.
Following the Chilean banking crisis of 1982 and 1983, the SBIF 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 their non-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.
Due to the integration and replacement of the SBIF into the CMF in June 2019, references herein that formerly applied to the SBIF will be mentioned hereinafter, interchangeably, as the “CMF”, “regulator”, “banking regulator” or “Chilean regulator”. For more information regarding the legal amendments that led to the replacement of the SBIF by the CMF, see both “Item 4. Information on the Company—Regulation and Supervision— The Financial Market Commission (CMF)” and “Item 4. Information on the Company—Regulation and Supervision— Modifications to the General Banking Act”.
The Central Bank
The Central Bank is an autonomous legal entity created under the framework of the Chilean Constitution. It is subject to 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 bank deposit-taking activities.
The Financial Market Commission
In accordance with modifications introduced in January 2019 to the General Banking Law, the CMF assumed all the powers and authorities previously vested on the SBIF and replaced it as the Chilean banking regulator in June 2019. For more information on the timeframe for such replacement and further amendments introduced to the General Banking Act, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act”
The CMF was established in January 2018, pursuant to Law No. 21,000 and replaced the Superintendency of Securities and Insurance (“SVS”) and the SBIF. Specifically, the CMF must regulate, oversee, sanction and administer the operation, stability and development of the Chilean financial market by easing the participation of market agents while keeping public trust. In order to do so, the CMF must have an overall and systemic vision by protecting interests of investors and insured agents. The CMF also has the ability to impose sanctions over the supervised entities.
The CMF is a professional and technical institution, led by a board of five members whose chairman is appointed by the Chilean Government. The CMF framework includes a special financial prosecutor who is responsible for identifying, investigating, and prosecuting potential infringements of the rules that govern the markets and industries regulated by the CMF. In addition to the powers formerly vested on the SBIF and the SVS, the CMF has additional powers that should improve the supervision of the Chilean financial markets while providing due process for regulated companies by incorporating new tools that promote the cooperation of companies purportedly involved with infringements of applicable rules.
The CMF’s powers include the authority to require information of banking transactions of specific persons, even those subject to secrecy or confidentiality provisions; interception of all kind of communications and requesting telecommunication companies any communication transmitted or received by them, and order other public agencies to provide background information, even when such information is confidential or classified. These measures, among others, are subject to control and prior authorization of the Santiago Court of Appeal.
The CMF currently oversees the Chilean Financial Market (comprised of publicly traded companies, bank and financial institutions, insurance companies, insurance brokers, mutual funds and investment funds). As mentioned, based on several modifications to the General Banking Law, the CMF assumed the supervision and regulation of banking activities by replacing and assuming the powers of the SBIF.
Regarding the specific powers of the CMF related to banking regulation, this entity authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial institutions. Furthermore, in cases of noncompliance with its legal and regulatory requirements, the CMF has the ability to impose sanctions. In extreme cases, it can appoint, with the prior approval of the board of directors of the Central Bank, a provisional administrator to manage a bank. It also has the mandate to approve any amendment to a bank’s bylaws or any increase in its capital.
The CMF examines all banks, usually at least once a year or more often if necessary under certain circumstances. Banks are required to submit unaudited financial statements to the CMF on a monthly basis and to publish their unaudited financial statements at least four times a year in a newspaper of national circulation. A bank’s financial statements as of December 31 of each year must be audited and submitted to the CMF together with the opinion of its independent auditors. Also, since 2017, banks are required by their regulator (i.e. until June 2019 by the SBIF and thereafter by the CMF) to include in mid-year financial statements (as of June 30 of every fiscal year) an auditor’s review statement in accordance with Chilean GAAP). In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the CMF.
Any person wishing to acquire, directly or indirectly, 10% or more of the share capital of a bank must obtain prior approval from the CMF. Without such approval, the holder will not have the right to vote such shares. The CMF may only refuse to grant its approval based on specific grounds set forth in the General Banking Act.
According to Article 35 of the General Banking Act, the prior authorization of the CMF is required for each of the following:
|●||the merger of two or more banks;|
|●||the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank;|
|●||the control by the same person, or controlling group, of two or more banks; or|
|●||a substantial increase in the share ownership of a bank by a controlling shareholder of that bank.|
Such prior authorization may be granted or rejected by the CMF, which is further authorized to set rules or specific requirements on that regard.
Pursuant to the regulations of the CMF, the following ownership disclosures are required:
|●||banks must disclose to the CMF the identity of any person owning, directly or indirectly, 5% or more of its shares;|
|●||holders of ADSs must disclose to the depositary the identity of beneficial owners of ADSs registered under such holders’ names;|
|●||the depositary must disclose to the bank the identity of beneficial owners of ADSs which the depositary has registered, and the bank, in turn, must disclose to the CMF the identity of the beneficial owners of the ADSs representing 5% or more of such bank’s shares; and|
|●||bank shareholders who individually hold 10% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the CMF of their financial condition.|
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 also supervised by the CMF.
Many of the amendments to the General Banking Act introduced in January 2019 involve regulation still pending to be issued or pending to be implemented by the CMF and/or the Central Bank. For more information on the timeframe for such issuance and implementation of new banking regulations see “Item 4. Information on the Company—Regulation and Supervision— Modifications to the General Banking Act”.
Limitations on Types of Activities
Chilean banks can only conduct those activities allowed by the General Banking Act, 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 CMF and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks.
In March 2002, the Central Bank authorized banks to pay interest on current accounts and the former SBIF 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 Act, Securities, Insurance, Venture Capital and Tax law. Law No. 20,190 is aimed at improving the access to financing for start-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 Act 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 Act 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 Economic Co-operation and Development, the Chilean Congress 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 (Ch$42,464.9 million or U.S.$56.5 million as of December 31, 2019) that have at least 12.5% of their voting shares owned by shareholders representing less than 10% of the voting shares are required to have at least one independent director in their board of directors. In order to assure the independence of this director, certain requirements were established to protect minority shareholders’ decisions. In addition, regulation was passed to expand the disclosure requirements of publicly-held companies and to hold members of boards of directors liable for not complying with such disclosure obligations.
According to the General Banking Act, local or foreign currency denominated deposits at banks or financial companies are insured as described below.
The Chilean Government guarantees up to 100% of the principal amount of the following deposits:
|●||deposits in current accounts;|
|●||deposits in savings accounts of demand deposits;|
|●||other demand deposits; and|
|●||deposits in savings accounts with unlimited withdrawals.|
The General Banking Act contemplates a current deposit insurance for time deposits such that the principal amount of time deposits would be 100% guaranteed by the Chilean Government with a limit of UF 200 per person (approximately Ch$ 5,661,988 or U.S.$7,530 as of December 31, 2019) in a single bank and UF 400 per person (approximately Ch$11,323,976 or U.S.$15,061 as of December 31, 2019) in the Chilean banking system as a whole.
Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to increase these percentages to as much as 40% for demand deposits and as much as 20% for time deposits, to implement monetary policy.
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 demand deposits, 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.|
As of December 31, 2019, Banco de Chile fully complied with these reserve requirements.
In accordance with modifications introduced in January 2019 to the General Banking Act, if a Chilean bank or a foreign bank operating in Chile is defined to be a domestic-systemically important bank by the new regulator, it may be subject one or a combination of restrictions, including but not limited to, more restrictive reserve requirements. In this regard, the new banking framework establishes that under certain conditions a systemically important bank may be required to hold assets in cash or highly liquid instruments for the amount by which the daily balance of deposits payable on demand, net of clearing, exceeds 1.5 times the amount of the bank’s Regulatory Capital. On August 12, 2019, the CMF issued a notice in which it published a set of proposed regulations related to the methodology for determining systemically important banks in Chile under the Basel III framework. As of this date, however, the final regulation is still in the process of being released and is expected to be published no later than December 2020. Nonetheless, based on the situation caused by the outbreak of COVID-19, on March 30, 2020 the CMF decided to postpone the requirements for systemically important banks until March 2021.
For more information on this regulation and, further, on the timeframe for issuance and implementation of new banking regulation, see “Item 4. Information on the Company—Regulation and Supervision— 2019 Modifications to the General Banking Act”.
Under the General Banking Act, a bank must have a minimum paid in capital and reserves of UF 800,000 (Ch$22,648.0 million or U.S.$30.1 million as of December 31, 2019). 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$16,986.0 million or U.S.$22.6 million as of December 31, 2019), the Regulatory Capital ratio requirement is reduced to 10%.
As of December 31, 2019, Banco de Chile fully complied with such minimum capital requirements.
Capital Adequacy Requirements
According to the General Banking Act, each bank should have Regulatory Capital (or Total Capital) of at least 8% of its risk-weighted assets, net of required allowances. This percentage may be increased by the regulators according to what has been previously stated.
Banks should also comply with a leverage ratio, which means Basic Capital (Common Equity Tier 1) of at least 3% of their total assets, net of required allowances.
Some banks, however, given specific characteristics and based on the judgement of the CMF, may be required to fulfil stricter thresholds in terms of capital adequacy. This is the case of Banco de Chile, which is subject to a Regulatory Capital (or Total Capital) ratio of at least 10% on risk-weighted assets. Nonetheless, in terms of the leverage ratio, Banco de Chile is required to comply with the same limit imposed on the whole banking system.
As of December 31, 2019, Banco de Chile fully complied with such capital adequacy requirements by holding a Regulatory Capital ratio of 14.1% on risk-weighted assets and a leverage ratio of 7.9%.
Capital requirements for Chilean banks and foreign banks operating in Chile will gradually change over the next years in accordance with modifications introduced in January 2019 to the General Banking Act. For further information as to when or how these modifications will go into effect, please see “Item 4. Information on the Company—Regulation and Supervision—2019 Modifications to the General Banking Act”.
The terms Regulatory Capital and Basic Capital are defined under “Presentation of Financial Information” at the beginning of this annual report.
Modifications to the General Banking Act
The Ministry of Finance submitted a bill to the Chilean Congress on June 12, 2017, modifying the General Banking Act in numerous aspects. The bill was passed by the Congress on October 3, 2018 and, following that, Law No. 21,130 (Modernization of Banking Legislation) was enacted on December 27, 2018 and published on January 12, 2019.
The legal framework incorporated by this amendment to the General Banking Act (Decreto con Fuerza de Ley No. 3) addresses four main topics on banking regulation and supervision, as follows:
|●||Adoption of Basel III guidelines on capital adequacy. Under this modification, new minimum capital requirements levels in line with the main standards of Basel III Pillar I which must be fulfilled by Chilean banks, considering a phased-in transition from Basel I lasting four years after the specific regulatory framework is issued by the regulator. Likewise, the new legal framework establishes additional potential capital requirements associated with Pillar II of Basel III for those Banks having objective deficiencies in terms of coverage and management of banking-related risks.|
According to the phase-in period set in the modifications, within the 18 months following the integration of the former SBIF into the CMF, specific regulation for the implementation of Basel III must be issued by the CMF. During the past months, the CMF has published several notices of proposed rulemaking with regulation related to Basel III, which were or currently are subject to public comment. Such proposed regulations are still in the process of being finalized and released by the CMF.
Starting on August 12, 2019 the CMF has published for comment the following proposed rules:
|Ø||Methodology for determining systemically important banks or groups of banks. The proposed methodology takes most of the Basel III guidelines on this matter by considering four systemic factors including Size, Interconnectedness, Substitutability and Complexity. The proposed rule was published on August 12, 2019 and was available for comment until September 25, 2019. Final regulation has not been released yet.|
|Ø||Standardized methodology for determining operational risk-weighted assets of banks. The proposed rule follows main Basel III guidelines regarding operational risk capital charge by adopting most of methodological topics. The proposed rule was published on September 13, 2019 and was available for comment until October 25, 2019. Final regulation has not been published yet.|
|Ø||Calculation of regulatory capital for banks. The proposed rule basically defines all the adjustments to be applied to common equity tier 1 under Basel III while establishing other capital levels, such as additional Tier 1 capital and Tier 2 capital, in order to determine total capital. Also, the rule establishes a floor for the calculation of credit and market risk-weighted assets when using internal methodologies. The regulation was published on November 19, 2019 and was available for comment until January 17, 2020. Final regulation has not been published yet.|
|Ø||Determination of credit risk-weighted assets for banks. The proposed rule includes a standardized methodology for calculating credit risk-weighted assets, which is in certain aspects aligned with Basel III while introducing local conservative adjustments for some other exposures. In addition, the rule introduces the conditions and limitations for the use of internal methodologies for calculating credit risk-weighted assets. The proposed regulation was published on January 27, 2020 and was available for comment until May 29, 2020. Final regulation has not been published yet.|
|Ø||Additional requirements of common equity Tier 1 capital for banks. The proposed regulation outlines the requirements associated with the conservation and countercyclical buffer. The rule also addresses the consequences for banks that do not comply with the imposed requirements. The regulation was published on January 27, 2020 and was available for comment until March 31, 2020. Final regulation has not been published yet.|
|Ø||Calculation of leverage ratio for banks. The proposed regulation defines the framework for computing the leverage ratio by establishing the common equity Tier 1 capital level to be considered for this purpose. The rule also outlines the amount of risk assets to be included in the metric by defining the additions (exposures to contingent loans and derivatives) and deductions (assets deducted from capital and exposures to financial instruments held on behalf of third parties) to be applied to the whole level of assets. The regulation was published on April 3, 2020 and will be available for comment until May 29, 2020. The final regulation has not been published yet.|
|Ø||Conditions for the issuance of hybrid capital instruments to fulfill additional Tier 1 and Tier 2 capital requirements. The proposed rule defines the requirements and conditions for the issuance of hybrid capital instruments by local banking entities in order to compute those instruments as part of total regulatory capital. The regulation considers the possibility of issuing preferred stocks and perpetual convertible bonds as additional Tier 1 capital, whereas subordinated bonds may be issued as Tier 2 capital. The proposed rule also introduces additional requirements for these instruments to comply with in relation to the exemption of dividends, triggers activation, loss absorption mechanisms and buyback conditions, among others. The regulation was published on April 3, 2020 and will be available for comment until May 29, 2020. The final regulation has not been published yet.|
It is expected that final versions of these proposed regulations, and some others still pending publication, will be available on or before July 2020 and will become effective on December 2020, to be gradually implemented during a period ending on December 2024. Nonetheless, given the current circumstances surrounding COVID-19, the CMF has decided to introduce certain changes to the original implementation schedule for Basel III. Thus, although the full regulatory framework is expected to be issued no later than December 2020, the phase-in period for the systemic and conservation buffers will be delayed one year, starting in December 2021 instead of December 2020. In the case of the systemic buffer, however, in December 2021 the capital charge will be set to zero, which could gradually increase over time. Furthermore, adjustments to regulatory capital will begin in 2022, instead of 2021, as previously considered. Basel III requirements in relation to risk-weighted assets were also postponed twelve months, now starting in December 2021 instead of December 2020. For more information, see “Item 5. Operating and Financial Review and Prospects—Recent Developments.”
Prior to the publication and implementation of such regulations, no additional capital requirements to those currently in force will be imposed to local banks. Furthermore, in accordance with the modifications to the General Banking Act, the authorization or report from the Central Bank will be necessary for the implementation of several Basel III capital adequacy guidelines set forth in these modifications.
|●||Regarding capital requirements, the new regulatory thresholds introduced by the proposed rules, are:|
|Ø||Common Equity Tier 1 (“CET1”) above 4.5% of risk-weighted assets;|
|Ø||Tier 1 = Common Equity Tier 1 + Additional Tier 1 (“AT1”) above 6.0% of risk-weighted assets;|
|Ø||Tier 1 + Tier 2 above 8.0% of risk-weighted assets;|
|Ø||Conservation Buffer of 2.5% of risk-weighted assets;|
|Ø||Potential Countercyclical Buffer of up to 2.5% of risk-weighted assets;|
|Ø||Potential Systemically-Important Banks (D-SIB) Buffer in the range of 1.0% to 3.5% of risk-weighted assets;|
|Ø||Potential Pillar II Buffer of up to 4.0% of risk-weighted assets.|
These thresholds, with exception of Pillar II, will be required to be fulfilled with CET1 capital. However, the Pillar II buffer, if any, could be met with CET1 capital, AT1 capital (perpetual bonds or preferred stocks) or Tier 2 Capital (subordinated bonds or disclosed reserves). Also, the adoption of these regulatory thresholds was initially phased-in during a four-year period starting December 1, 2020. However, as a result of the COVID-19 outbreak, the phase-in period was postponed twelve months, now starting December 2021.
|●||Changes to the governance of the banking regulator. According to these modifications and timeframe for implementation, the SBIF was abolished and all of its powers, authority and personnel were transferred to the CMF. The CMF oversees the local banking business since June 2019. This means that the local supervision model changed from a specific regulator to an integrated supervision model where the regulator’s oversight extends to the financial market as a whole, including the securities market, insurance companies and brokers and the banking industry. For further information on the description of this new banking regulator, see “Item 4. Information on the Company—Regulation and Supervision—The Financial Market Commission.”|
|●||Establishment of a new banking resolution regime for the Chilean banks in the case of insolvency. The new banking framework outlines specific actions to be taken under scenarios of insolvency or signs of financial distress. In this regard, the General Banking Act, as modified, establishes the possibility of undertaking an early regularization plan in case of signs of financial weakness, capitalization in the form of loans to be granted by other banks or forced liquidation in case of insolvency. For each scenario, the appointment of a delegated inspector, a provisional administrator or a liquidator, among other elements, are introduced. For further information on the description of this new regime, see “Item 4. Information on the Company—Regulation and Supervision—Legal Provisions Regarding Banking Institutions with Economic Difficulties.”|
|●||The modifications to the General Banking Act also address other matters such as increased deposit insurance for time deposits, stricter requirements for members of banks’ boards of directors, changes in relation to confidential information of bank customers, among others. With regards to confidentiality of customers, certain conditions of access to information subject to banking secrecy are required, upon special request of the Financial Analysis Unit (responsible for watching anti-money laundering activities) in the case of an investigation or prosecution.|
Market Risk Regulations
In September 2005, new regulations for measuring market risks (e.g., price and liquidity risks) were introduced by the banking regulator, establishing 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 the credit risk-weighted assets and the price risk of the trading book may not be higher than Regulatory Capital. In light of the merger between Banco de Chile and Banco A. Edwards in 2002, the SBIF raised the requirement of credit risk-weighted assets for us from 8% to 10%. As of December 31, 2019, the price risk of our trading book totaled Ch$122,134 million. Based on this amount, the following table shows our regulatory risk availability, computed as the difference between the Total Risk, composed of credit risk (or 10% of our risk-weighted assets) and market risk (or trading book price risk) and our Regulatory Capital, as of December 31, 2019:
|As of December 31, 2019|
|(in millions of Ch$,|
|(a) 10% risk-weighted assets||Ch$||3,230,734|
|(b) Trading book price risk||122,134|
|(c = a + b) Total Risk||3,352,868|
|(d) Regulatory Capital||4,569,090|
|(e = d – c) Risk Availability||Ch$||1,216,222|
|(f = c/d) Use of Regulatory Limit (as a % of Regulatory Capital)||73.4||%|
Interest rate risk generated by the accrual book is measured against a self-imposed (internal) limit equal to the lesser of 12-month rolling net revenues and our Basic Capital.
In June 2006, the banking regulator 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 banking regulator allowed banks to classify debt instruments for accounting and business purposes as either “Trading” or “Held-to-Maturity” only. Starting in June 2006, a new alternative classification was added (“Available-for-Sale”). 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 = Current Mark-to-Market (if positive) + Credit Risk Factor (%) * Notional Amount
The Current Mark-to-Market (“CMTM”) of the transaction, if positive, reflects the amount of money owed by the counterparty today, e.g. corresponding to the amount the counterparty 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 mitigation schemes, such as recouping, early termination, margins, etc. have been allowed by regulators so that banks can better manage their credit risk.
In 2018 amendments to Chapters 12-1 and 12-3 ofRecopilación Actualizada de Normas (the Revised Compilation of Norms) were introduced by our regulator in order to set specific guidelines for calculation of risk-weighted assets associated with derivative instruments for capital adequacy purposes, specifically for those derivative contracts cleared and settled through a Central Counterparty Entity (CCP). Likewise, the amendments include general clarifications on the treatment of operations with intermediate settlement and the calculation of guarantees. In brief, the regulatory amendment establishes a risk-weighting of 2% over the amount of Derivatives Credit Risk, as defined above for regulatory purposes, for those derivative contracts cleared through a CCP. Also, due to the original interbank nature of the derivative instruments, exposures to CCPs are considered to be subject to the 30% limit on regulatory capital, as defined above.
Liquidity Risk Regulations
The guidelines for measuring liquidity risk are mainly focused on constructing an expected cash flow analysis for the following 30 and 90 days, broken down by currency. Net outflows may not exceed the amount of our Basic Capital (Common Equity Tier 1 Capital) for the following 30 days or two times that amount for the following 90 days. Subject to approval of the CMF, the cash flow analysis may include behavioral run-off assumptions for some specific liability balance sheet items (demand deposits, time deposits, etc.) and behavioral roll-over assumptions for some asset items of the consolidated statement of financial position (loans, etc.). This guidance is also known as the C46 index, effective since 2015.
In 2014, the Central Bank released a proposal for new liquidity standards for local banks based on Basel III guidelines. After receiving comments, the Central Bank published a final version in January 2015. The CMF is the institution empowered to put these guidelines into practice and monitor them on an ongoing basis. Accordingly, in February 2015, the banking regulator introduced a draft of these rules for comment and discussion, which translated into a new set of liquidity requirements for banks published on July 31, 2015 (Circular No. 3,585) establishing reporting requirements for local banks with respect to management and measurement of each bank’s liquidity position. Thus, in March 2016, the Chilean regulator began to require C47 and C48 reports for informational purposes only (no limits were required at that point). The C47 report focuses on liabilities analysis from the concentration, maturity and renewal perspectives. On the other hand, the C48 report gauges Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”), aligned with the Basel framework for these purposes.
On May 4, 2018 the Central Bank published for comment an amendment to Chapter III.B.2.1 ofCompendio de Normas Financieras (the Compendium of Financial Norms) by which this regulator outlines the main guidelines for banks to follow in order to measure and control their liquidity position. The amendment is primarily focused on proposing a minimum requirement for the LCR, considering a phase-in period of five years, starting at 60% in 2019 and reaching the final limit of 100% in 2023 (with annual increments of 10% between 2019 and 2023).
Aligned with this new framework, on October 2, 2018 amendments to Chapter 12-20 ofRecopilación Actualizada de Normas (which addresses the management and measurement of banks’ liquidity position) were published by the banking regulator for comment while establishing a new report on liquidity matters (C49) intended to refine the measurement of the LCR and the NFSR as defined by the current C48 report. Overall, the new framework: (i) introduces some adjustments to the formulae used to compute high-quality-liquid-assets for the LCR, (ii) clarifies the treatment of derivatives on the measurement of a bank’s liquidity position, (iii) widens the extent of some liability concentration metrics and (iv) specifies that only accrued interest, rather than total interest, must be considered for the NSFR calculation, among other topics. On December 28, 2018 Circular No. 3,585 was endorsed by circular No. 3,644 by which the regulator established April 4, 2019 as the date that Chilean banks must start the submission of C49 report and comply with the LCR limit of 60% determined by the Central Bank. Even though the C49 report was expected to replace the C48 report in the short-term, they continued to be submitted jointly, as the regulator is calibrating both reports.
In terms of liquidity regulatory limits, they are, as follows:
|●||For C46 index, mismatches between modeled cash inflows and cash outflows over 30-day and 90-day periods must not exceed one time and two times the amount of Basic Capital (or Common Equity Tier 1 capital) held by any bank, respectively.|
|●||For the C47 report there is no regulatory limit, as it only characterizes the liability structure of banks.|
|●||For C48 and C49 reports, the LCR must exceed a regulatory limit of 60% as of December 31, 2019, which will increase ten percentage points every year to reach 100% in 2023. NSFR, instead, is not subject to any limit.|
As of December 31, 2019, the Bank fully complied with all minimum liquidity requirements.
Further, in view of the COVID-19 outbreak, on March 30, 2020 the Central Bank announced a bundle of measures in order to ensure liquidity within the financial system. Among these measures, the Central Bank proposed to suspend the regulatory thresholds associated with C46 index (cash flows mismatches) for a 90-day timeframe, although report requirements remain for banks during that period. Similarly, the Central Bank also announced that the regulatory limit for C48 (70% for 2020) will be eased if required. For more information, see “Item 5. Operating and Financial Review and Prospects—Recent Developments.”
Under the General Banking Act, Chilean banks are subject to certain lending limits, including the following material limits:
|●||A bank may not extend to any entity or individual, directly or indirectly, unsecured credit in an amount that exceeds 10% of the bank’s 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 Act 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 or 5% of its shares if these are actively traded stocks) on more favorable terms than those generally offered to non-related parties. Loans granted to related parties are subject to the limitations above. The aggregate amount of loans to related parties may not exceed a bank’s Regulatory Capital.|
Among the amendments to the General Banking Act published in January 12, 2019, another limitation states that a bank may not extend loans in an aggregate of 30% of its Regulatory Capital to a group of persons or entities belonging to the same holding group (grupo empresarial) as defined in the Securities Market Act.
As of December 31, 2019, the Bank fully complied with the lending limits established by the General Banking Act.
Classification of Banks
The CMF regularly examines and evaluates each bank’s solvency and credit management process, including its compliance with loan classification guidelines. On the basis of this evaluation, it classifies banks into various categories.
Solvency and Management
Banks are classified into categories “I” through “V” based upon their solvency and management ratings. This classification is confidential.
|Category I:||This category is reserved for financial institutions that have been rated level A in terms of solvency and management.|
|Category II:||This category is reserved for financial institutions that have been rated (i) level A in terms of solvency and level B in terms of management, (ii) level B in terms of solvency and level A in terms of management, or (iii) level B in terms of solvency and level B in terms of management.|
|Category III:||This category is reserved for financial institutions that have been rated (i) level B in terms of solvency and level B in terms of management for two or more consecutive review periods, (ii) level A in terms of solvency and level C in terms of management, or (iii) level B in terms of solvency and level C in terms of management.|
|Category IV:||This category is reserved for financial institutions that are rated level A or B in terms of solvency and have been rated level C in terms of management for two or more consecutive review periods.|
|Category V:||This category is reserved for financial institutions that have been rated level C in terms of solvency, irrespective of their rating level of management.|
A bank’s solvency rating is determined by its Regulatory Capital (after deducting accumulated losses during the financial year) to risk-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. However, this criteria is expected to be revised by the new regulator once new capital requirements set forth in the recent modifications to the General Banking Law are implemented. For more information on these new rules on capital requirements and the timeframe for t implementation, see “Item 4. Information on the Company—Regulation and Supervision— New Modifications to the General Banking Act”.
With respect to a bank’s management rating, level A banks are those that are not rated as level B or C. Level B banks display some weakness in 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.
In November 2016 our regulator issued Circular No. 3,612, which added regulations related to “Business Continuity Management” and established a set of guidelines and good practices to be considered by banks in the management of business continuity risks, taking into account the volume and complexity of their operations. The corresponding adherence to these practices will be considered in the management evaluation “Solvency and Management Classification” carried out by the CMF.
Obligations Denominated in Foreign Currencies
Foreign currency-denominated obligations of Chilean banks are subject to two requirements:
|●||a reserve requirement of 9% for demand deposits and 3.6% for time deposits (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.|
Under the General Banking Act, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as mutual fund and investment fund administration, factoring, investment advisory services and merger and acquisition services. The CMF regulates these subsidiaries.
Legal Provisions Regarding Banking Institutions with Economic Difficulties
The General Banking Act provides that if specified adverse circumstances exist at any bank, it must promptly inform the CMF and must shortly present them an early regularization plan duly approved by its board of directors. If the plan is approved by the CMF, which may also require additional measures, the bank must report periodically to the regulator regarding the implementation of such plan. All the communications between a bank with economic difficulties and the CMF regarding this matter are reserved. If, among the measures addressed by the early regularization plan, a capital increase is required, the board of directors must call for an extraordinary shareholders meeting setting forth the conditions of such capital increase, which must be approved by the banking regulator. Another measure that may be included in the early regularization plan is that the bank may receive a loan of up to three-year term from other bank(s). The terms and conditions of such loan must be approved by the board of directors of both banks, as well as by the banking regulator, but need not be submitted to the borrowing bank’s shareholders for their approval. A creditor bank may not grant such interbank loans to an insolvent bank in an amount exceeding 25% of the creditor bank’s Regulatory Capital. Such loan may only be repaid if the borrowing bank complies with certain capital requirements. If this loan is not repaid timely, the General Banking Law provides the possibility that such loan may be capitalized by the lending banks in the form of equity of the borrowing bank.
The CMF may further impose certain prohibitions to banks with economic difficulties such as prohibitions on granting loans to related parties, renewing any loan in excess of 180 days, releasing guarantees, acquiring or selling certain assets, granting unsecured loans, investing in any securities other than instruments issued by the Central Bank or by the Chilean Treasury, among others. Furthermore, if the bank with economic difficulties does not present an early regularization plan (or if it is unfulfilled or breached by this bank, among other reasons provided by the General Banking Act), the banking regulator may appoint a delegate inspector to oversee the bank’s operations or a provisional administrator (appointment to be approved by the Central Bank as well) who will take over the powers and authority of the bank’s board of director and chief executive officer; however, the provisional administrator authority is limited to the extent provided by the General Banking Act and should always be in line with the interests of depositors, creditors and those of the general public related to financial stability.
Dissolution and Liquidation of Banks
The banking regulator may establish that a bank should be liquidated for the benefit of its depositors or other creditors when the bank does not have the necessary solvency to continue its operations. In which case, the CMF must revoke the bank’s authorization to exist and order its mandatory liquidation, subject to the agreement of the Central Bank. The General Banking Act establishes certain criteria by which it will be deemed that a bank does not have the necessary solvency or that the safety of its depositors may be jeopardized, such as when it does not reach certain minimum or regulatory capital thresholds, upon aggregate and consecutive losses, when urgency credits with the Central Bank are due and when it has suspended the repayment of its obligations. The resolution of the banking regulator must state the reason for ordering the liquidation and must name a liquidator. When a liquidation is declared, all current accounts, other demand deposits received in the ordinary course of business, other deposits unconditionally payable immediately or that have a maturity of no more than 30 days, and any other deposits and receipts payable within 10 days of its maturity date, are required to be paid by using the bank’s existing funds, its deposits with the Central Bank, or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the bank’s remaining assets, as needed. If necessary, and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.
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 Rating Service (Fitch)||F2||BBB–|
|Dominion Bond Rating Service (DBRS)||R2||BBB(low)|
A Chilean bank may invest in securities having a minimum rating as follows, provided that if the total amount of these investments and the loans referred to above exceed 20% (or 30% in certain cases) of the Regulatory Capital of the bank, an allowance of 100% of the excess shall be established by the bank:
|Rating Agency||Short Term||Long Term|
|Moody’s Investor Service (Moody’s)||P2||Ba3|
|Standard and Poor’s (S&P)||A2||BB–|
|Fitch Rating Service (Fitch)||F2||BB–|
|Dominion Bond Rating Service (DBRS)||R2||BB(low)|
However, a Chilean bank may invest in securities up to an additional amount of 70% of the bank’s Regulatory Capital without having to establish an additional allowance, if such securities have a minimum rating of:
|Rating Agency||Short Term||Long Term|
|Moody’s Investor Service (Moody’s)||P1||Aa3|
|Standard and Poor’s (S&P)||A1+||AA–|
|Fitch Rating Service (Fitch)||F1+||AA–|
|Dominion Bond Rating Service (DBRS)||R1(high)||AA(low)|
Subject to specific conditions, a bank may grant loans in U.S. dollars to subsidiaries or branches of Chilean companies located abroad, to companies listed on foreign stock exchanges located in countries with an international risk rating no less than BB- or its equivalent and, in general, to individuals and entities residing or domiciled abroad.
Procedures for the Management of Information of Interest to the Market
In order to ensure compliance with the provisions of theLey de Mercado de ValoresNo. 18,045 (the Chilean “Securities Market Law”) and further specific regulations 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 at www.bancochile.cl.
Prevention of Money Laundering and the Financing of Terrorism
On December, 18, 2003, Law No. 19,913 created the Financial Analysis Unit and enacted new rules regarding money laundering. On March 6, 2006, the banking regulator 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 international anti-money laundering (“AML”) and terrorism financing laws to the Chilean banking industry. Pursuant to these regulations, the CMF requires that banks implement an Anti-Money Laundering and Terrorism Financing system based mainly on the “know your customer” and source of wealth concepts. Moreover, these policies and procedures must be approved by the board of directors of each bank and must 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 the Anti-Money Laundering and Terrorism Financing system) is needed to enable a bank to establish the reasonable belief that it knows the true identity of its customers. In general, the program includes controls and procedures to:
|●||properly identifying customers, including their background, source and amount of funds, country of origin and other risk factors;|
|●||identifying and monitoring what the CMF has defined as politically exposed persons (“PEPs”) both within Chile and abroad; and|
|●||ensuring a safe and suitable account opening process, with different documentation requirements needed for different types of accounts and products.|
The Anti-Money Laundering and Terrorism Financing system required by local regulations must also include the following components:
|●||AML policies and procedures aimed at preventing a bank from being used as an intermediary to carry out money laundering operations;|
|●||appointment of a compliance officer on a senior management level who is responsible for coordinating and monitoring day-to-day AML compliance;|
|●||establishment of an AML Committee for the purposes of planning and coordinating compliance with AML policies and procedures;|
|●||use of software tools to detect, monitor and report unusual operations related to transactions made by customers on different products;|
|●||implementation of personnel selection policies and a training program, in order to prevent money laundering;|
|●||establishment of a Code of Conduct in order to, among other things, guide employee behavior and prevent possible conflicts of interest; and|
|●||independent testing by the compliance department, which must be conducted by a bank’s internal audit department.|
On December 1, 2015, a new set of rules regarding the PEPs were issued by the banking regulator. The new set of rules relate to the bank’s obligation to keep specific PEPs policy and procedures in place to grant certain loans to PEPs, as well as to carry out controls procedures associated with service providers when PEPs are involved therewith.
New Legal Provisions for the Prevention, Detection and Prosecution of Corruption.
Law No. 21,121, which came into force on November 20, 2018, amends the Criminal Code, Law No. 20,393 on Criminal Liability of Legal Entities, and Law No. 19,913 that creates the Financial Analysis Unit and deals with Money Laundering, addresses business-to-business bribery and discretion abuse, increasing prison time and pecuniary penalties and criminalizing corruption and unfair administration affecting private individuals and companies, among other matters. For the first time, our legislation criminalizes the behavior of private businesses with the aim of regulating transparency between them, without the need for a public official to participate in the crime, and with a very wide range of alternatives that could configure the crime. Particularly, with respect to the crime of unfair administration, this law incorporates a penalty for anyone who, being responsible for the management of third party assets, commits abusive acts or omissions that damage the owner of those assets.
On December 5, 2011, Law No. 20,555 was published in the Diario Oficial, amending the Chilean Consumer Protection Law. The most significant changes enacted by Law No. 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; however, with regards to banking product agreements entered into before such 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.
In July 2012, the Government enacted the regulations that implement Law No. 20,555, which address mortgage loans, consumer loans, credit cards, theSello Sernac (“Sernac Seal”), 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-calledHoja Resumen (“Summary Sheet”)), 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 No. 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 No. 20,555 and its regulation.
All of these regulations are already implemented by Banco de Chile, except Sernac Seal, which is not mandatory.
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 or non-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.
Law 21,081, which came into force on March 14, 2019, amended the Consumer Protection Law (Law No. 19,496). This amendment aims to strengthen consumer protection, granting new powers to SERNAC in matters of oversight. Likewise, fines are increased and the authority of SERNAC is reinforced in the scope of collective actions and collective voluntary procedures. The main reforms affecting banks as financial services providers are, among others:
|●||SERNAC inspectors shall be empowered to request the assistance of public force to be granted by local courts, in the event that the provider does not provide access to its facilities to SERNAC.|
|●||SERNAC is granted authority to initiate collective voluntary procedures.|
|●||Fines for adhesion contract infringement and misleading advertising are increased to up to 1,500 UTM (Unidades Tributarias Mensuales) which, as of April 24, 2020, would amount to approximately Ch$75.3 million (approximately U.S.$88,230).|
|●||For the determination of fines, within the framework of collective actions, mitigating and aggravating circumstances and the number of affected consumers will be weighted. In case of full and effective compensation damages for all consumers, a lump sum will be applied as a fine, which may not exceed 30% of the sales of the product or service line made in the period of the infringement, or double the economic benefit obtained as a result of it. In any case, the fine may not exceed 45,000 UTA (Unidades Tributarias Anuales) for each event, which as of April 24, 2020 amounted to approximately Ch$27,119.3 million (approximately U.S.$31.8 million).|
|●||In collective lawsuits, in addition to the material damage, moral damage may be also sought, and the judge may establish a common minimum amount.|
|●||The court is empowered to increase the amount of the compensation granted by 25% in case of aggravating circumstances, established in the Consumer Protection Law.|
For more information, see “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Restrictions imposed by banking regulations may constrain our operations and thereby adversely affect our financial condition and results.”
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 (the predecessor, generally, to the CMF in insurance and capital markets) on July 26, 2013. This 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 regulation became effective. Prior to this regulation, unearned premiums were refunded only if the early termination took place within the later of 45 days after the issuance of the insurance policy, or one-tenth of the total term of the insurance policy (from the date of issuance). These refund obligations did not have a material effect on our results of operations in 2018 and 2019.
Maximum Legal Interest Rates
On December 13, 2013, Law No. 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.$7,530 as of December 31, 2019), including installment loans, credit cards and credit lines related loans, as well as overdue loans. This regulation established among other things, a new methodology for calculating the maximum legal interest rate for loans –not indexed to inflation– longer than a 90-day term, which resulted in a reduction of the maximum legal interest rate applicable to such debtors. This law did not have a material effect on our results of operations during the transition or implementation period (from 2014 to 2015).
We cannot rule out that new limits to the maximum interest rates may be imposed to local banks or foreign banks operating in Chile in the future.
Automatic Payment of Overdraft Lines of Credit
On July 10, 2019 Law No. 21,167, regulating the payment of overdraft lines of credit, was published and entered into force on January 1, 2020. This law modified Chilean legislation regarding banks current accounts and checks, by establishing that debts arising from the use of a line of credit associated with current accounts (“overdraft loans”) will be automatically paid with available outstanding funds in the customer’s current account, to the extent there are not any outstanding balances associated to other loans owed by the customer. However, the customer is also entitled to directly pay-off the overdraft loans by means of deposits or electronic money transfers. Nevertheless, at any time the customer can instruct the bank not to automatically pay-off the overdraft loan with available funds in the current account, in which case the overdraft loan may only be paid by the customer through direct deposit or electronic money transfer. The customer is entitled to change the payment method at any moment, effective in the next month following the instruction.
Law No. 21,167 is not expected to have a material impact on our results of operations, either during the year of implementation (2020) or in the future.
Credit Risk Provisioning
On December 18, 2013, our regulator 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 (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 providing new and more precise definitions for impaired loans and new requirements to remove loans from such portfolio. In addition, this set of rules addressed the possibility of implementing standardized credit risk provisioning models for consumer and commercial loan portfolios, evaluated on a grouped basis, in the future. 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, would be discussed and analyzed afterwards.
Lastly, the new guidelines also introduced changes for the treatment of factoring loans from the provisioning point of view, by taking into account the credit risk associated with the billed company.
On June 22, 2015, our regulator published a set of amendments to existing rules on loan provisioning and treatment of impaired loans to explain and ensure the right application of the rules released on December 30, 2014, which went into effect on January 1, 2016.
On December 24, 2015, new guidelines (Circular No. 3,598) were published by the regulator regarding the use of internally-developed credit risk models by Chilean banks. These guidelines–enclosed in two appendices that complement the existing credit risk provisioning rules–establish a framework and requirements that all Chilean banks must comply to shift from standardized credit risk provisioning models to internally-developed credit risk models. The new framework establishes general and specific requirements. Regarding general requirements, it is stated that banks should: (i) have independent and specialized areas in charge of developing, validating and monitoring internally-developed methodologies, (ii) have adequate control procedures for technological platforms and systems to ensure stability and reliability of processes supporting internally-developed methodologies, (iii) maintain backup of information, variables, validation and monitoring activities associated with modeling internally-developed methodologies to enable counterparties to replicate the developed methodologies, if necessary and (iv) generate detailed technical documentation of analysis and decisions made in the process of building internal methodologies. In addition, the CMF requires specific requirements for setting-up internally-developed methodologies, which will depend on the type of method chosen by each bank, as disclosed in Circular No. 3,598.
On March 29, 2016, an amendment (Circular No. 3,604) to Chapter B-3 ofCompendio de Normas Contables was published by the regulator, modifying the credit conversion or credit exposure factors for certain contingent loans. In particular, the aforesaid circular established a decrease in the conversion factor for fully available lines of credit, from 50% to 35%, when the borrower maintains non-performing loans with the banking institution. This rule did not have a material impact on our results of operations.
On July 6, 2018 the banking regulator published a set of amendments (Circular No. 3,638) to Chapter B-1 ofCompendio de Normas Contables introducing changes to provisioning rules for commercial loans evaluated on a group basis. From the banking regulator’s point of view, these new rules are aimed at supplementing the changes introduced in 2014 (Circular No. 3,573 mentioned above) by establishing a standardized methodology to compute minimum acceptable level of loan loss allowances for commercial loans evaluated on a group basis that banks should recognize on their balance sheet. The new framework is composed of three methods depending on the type of loans, as follows: (i) leasing loan allowances will be set by taking into account delinquency the type of asset underlying the contract and the ratio of present value to book value, (ii) student loan allowances will be based on the type of loan (government-backed or not), if the loan is callable or not and delinquency, and (iii) other commercial loan allowances will be set based on delinquency, guarantees backing the loan and the loan to guarantee ratio. In addition, the new set of rules also addressed other topics related to loan provisioning, including (i) a minimum risk index of 0.5% for other-than-past-due loans that a bank must hold on an individual basis and on a consolidated basis considering both operations in Chile and abroad, (ii) the establishment that allowances for leasing residential loans must be in consistency with residential mortgage loans managed by the same bank, and (iii) that non-performing residential mortgage loans will drag into the same condition other credits owed by the same debtor for provisioning purposes. The new provisioning criteria became effective in July 2019 and had no material impact on our results of operations.
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. The adoption of these guidelines will not have any impact on our results of operations or financial condition under IFRS.
Amendments to the Reform that Modified the Chilean Tax System
In September 2014, the Chilean congress approved a law reforming the Chilean tax system. This tax reform (Law No. 20,780) gradually increases the first category tax or corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated Regime and (ii) the Attribution Regime. The tax reform 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.
Notwithstanding the above, in February 2016, a new tax law was enacted (Law No. 20,899), which simplified the previously mentioned reform by limiting the possibility of choosing between the two alternative tax regimes. In fact, according to this new amendment to the Chilean tax system, publicly-traded companies will only be subject to the Semi-Integrated Regime. Consequently, the statutory corporate tax rate for Banco de Chile will be 25.5% in 2017 and 27.0% from 2018 onwards.
The tax reform also affects the taxes levied on dividends received by investors that hold shares of common stock or ADS from 2017 onwards. Under the Semi-Integrated Regime, holders of shares or ADS 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 Double Taxation Avoidance Treaty (“DTAT”) 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 only 65% of the corporate tax paid by the company as a tax credit.
However, in order to provide evidence of their tax residence, foreign holders of our ADSs or of our shares of common stock must send to Banco de Chile a certificate of residence issued by their local tax authority. This certificate must be legalized or apostilled and valid at the moment of the distribution of dividends, otherwise the Tax credit will be 65%.
In addition, Law No. 20,899 enacted on February 8, 2016, permits investors to use 100% of the corporate tax paid by the company as a tax credit, if investors reside in countries that were part of DTAT before January 1, 2017, even though the DTAT was not in force from 2017 onwards. However, this special treatment will only be applied until December 31, 2019.
Consequently, Law No. 21,047 enacted on November 23, 2017 extended the previously mentioned exemption until December 31, 2021, with regard to double taxations treaties signed through January 1, 2019 and pending to enter into force as of December 31, 2021.
Based on the above, the effective tax rate paid by local (individual) investors or foreign holders from non-DTAT countries would increase up to 44.45%. This would be the effect of adding together both taxes paid by the company on earnings before distributing dividends and taxes paid by this type of investor when receiving those dividends, given the inability to use 100% of the corporate tax expense as tax credit.
Lastly, under these amendments to the Chilean tax system, stock dividends (distributions on fully paid-in shares) are tax exempt when distributed. Furthermore, Law No. 21,047 introduced certain changes to the treatment of capital gains associated with the sale of shares received as stock dividends.
On August 23, 2018 the Chilean Government sent a bill to the Chilean congress, which was intended to modernize the Chilean tax system by introducing a set of technical adjustments in order to simplify the current tax system, while incorporating new regulations related to the integration of the whole tax system and introducing new taxes on digital services, among other topics. The bill, however, was not passed as proposed by the Chilean Government. Moreover, following the social crisis in Chile in the fourth quarter of 2019, the Ministry of Finance reformulated the former bill in order to address social demands, by increasing tax collection, while resigning to certain elements originally proposed by the Chilean Government, with the purpose of reaching an agreement in the Congress. As a result of the latter, Law No. 21,210, which modernizes the local tax system, was enacted on February 24, 2020 and published in the Official Gazette on February 29, 2020. This new law mainly focuses on: (i) entrepreneurship promotion measures by providing SMEs with a special tax regime based on total integration and a statutory tax rate of 25%, as opposed to large companies and corporations, which will continue to be subject to a semi-integrated system while bearing a statutory corporate tax rate of 27%, (ii) initiatives promoting private investment by introducing instantaneous or accelerated depreciation for fixed-assets, reducing the time frame to receive reimbursements of VAT paid on fixed-assets, (iii) reductions or exemptions of property taxes paid by elderly people and low income pensioners; (iv) increasing taxes paid by high-income individuals by means of adding a new tax bracket of 40%, and raising taxes on properties that exceed U.S.$500,000 in assessed value, (v) incorporating a regional green tax of 1% levied on investment projects exceeding U.S.$10 million in capital expenditures that were subject to environmental approval, (vi) lowering tax benefits on capital gains obtained in stock markets, (vii) creating a Taxpayer Protection & Advisory Agency, which aims to be a counterpoint to the Chilean Internal Revenue Service on taxation matters, and (viii) introducing a digital approach, which considers both the compulsory use of electronic bill and invoices, aimed at reducing tax evasion, and the imposition of VAT on digital services.
Based on the above, the effective tax rate paid by Chilean individual investors or foreign holders from non-DTAT countries would continue to be up to 44.45% (calculated by adding together both taxes paid by the company on income before income tax and taxes paid by this type of investor when receiving those dividends, given the inability to use 100% of the corporate tax expense as tax credit).
For more information, see “Item 3. Risk Factors— Risks Relating to our Operations and the Chilean Banking Industry— Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results” and “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”
Law Regulating the Release of Mortgages and Pledges without Conveyance (Law No. 20,855)
Law No. 20,855 was enacted on September 25, 2015 and went into effect on January 23, 2016. This law seeks to regulate the release of mortgages used as collateral for loans granted to individuals or SMEs customers. This regulation supplements the Consumer Protection Act (Law No. 19,496) or the SERNAC Act. In addition, Law No. 20,855 regulates the release ofprendas sin desplazamiento (“pledges without conveyance”) used as collateral for loans granted to individuals, SMEs or any type of company as defined by Law No. 20,190.
For loans paid-off after January 23, 2016, Law No. 20,855 establishes requirements and time limits for banks to release mortgages (within 45 days) and inform customers of such release (within 30 days). On the other hand, for loans paid-off before January 23, 2016, Law No. 20,855 requires banks to release the mortgages within a 3-year period for loans paid-off up to six years before this law becomes effective and to release the pledges without conveyance within an 18-month period for loans paid-off up to four years before this law becomes effective. Notwithstanding the aforementioned, for loans paid-off before January 23, 2016, customers may also require the release of mortgages or pledges without conveyance, which should be executed by the bank within 45 days. Also, the bank should provide the customer with this information within a 30-day period. Costs associated with this process will be incurred by banks.
In addition, for monitoring purposes, the bank must inform the SERNAC, on a semi-annual basis, about: (i) the criteria used to comply with Law No. 20,855, (ii) the progress in implementing the proposed changes, (iii) the efforts taken to release mortgages used as collateral on already paid-off loans and (iv) the advertising used to inform customers about their rights regarding the release of mortgages once the related loan has been paid-off.
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 a 30-day term beginning on the date of the appointment of observers:
|(i)||the creditors of a debtor may not request its liquidation;|
|(ii)||no proceeding seeking the issuance of a warrant of attachment, execution or similar process may be initiated against a debtor;|
|(iii)||no proceeding seeking the restitution of leased assets may be initiated against a debtor;|
|(iv)||all proceedings referred to in (ii) and (iii) directly above will be suspended, as well as the term of the statute of limitations;|
|(v)||all the agreements entered into by a debtor will remain valid and effective and its payments terms and conditions will remain in force. Consequently, these agreements may not be early terminated without the consent of the debtor nor be enforced, even if the commencement of a reorganization proceeding under the Bankruptcy Law constitutes an event of default under such agreement. Thus, any guarantees granted to secure the obligations of the debtor may not be enforced; and|
|(vi)||if a debtor forms part of a public registry as a contractor or service provider, and it is in compliance with its obligations with the relevant principal, it cannot be excluded from such public registry and may not be prohibited from participating in any relevant bidding process.|
Reporting of Operational and Cybersecurity Incidents
On March 23, 2015, the regulator issued a new regulation on the reporting of operational incidents (Circular No. 3,579). According to this regulation, which modified the Chapter 20-8 ofRecopilación Actualizada de Normas, 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.
Throughout 2018, the regulator introduced modifications (Circular No. 3,633 and Circular No. 3,640) to the regulation associated with the management of operational risk by supplementing Chapters 1-13 and 20-8 ofRecopilación Actualizada de Normas with specific guidelines on cybersecurity matters. Under this amendment, the SBIF widens its scope of supervision by incorporating cybersecurity matters through the continuous assessment of banks’ critical technological infrastructure that exposes banks to risks of data integrity, data availability and confidentiality of clients’ information. Also, a dedicated digital platform was created, through which banks should report directly to the regulator within a 30-minute time frame the occurrence of an incident and requires the appointment of the bank’s representative to be in charge of the communication with the CMF for these purposes. Similarly, banks are required to timely inform customers and users about cybersecurity incidents affecting quality and continuity of services, as well as incidents that are publicly known. In addition, under these guidelines, banks are compelled to maintain an alert system at an industry level in order to share information about incidents and measures that should be taken in order to mitigate widespread impact.
The Volcker Rule became effective during 2015 in the United States as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Among other topics, the Volcker Rule limits proprietary trading and positions taken by banks in covered funds by establishing specific conditions for carrying out these activities. Also, this regulation establishes specific corporate governance measures for conducting these businesses to avoid conflict of interest and high-risk trading strategies by banks.
Section No. 619 of the Volcker Rule is applicable to Citigroup. Since we and our subsidiaries are considered as Citigroup’s subsidiaries, during 2015, we comprehensively revised our internal policies and procedures to establish, maintain, enforce, test and modify our Volcker Rule Compliance Program to enable Citigroup to comply with its regulatory requirements. The new requirements and amendments introduced to the Volcker Rule during 2019, which may be applicable to us, will be implemented into our Volcker Rule Compliance Program within the required time periods.
Auditor Review of Interim Financial Statements
On December 12, 2016 the banking regulator published an amendment (Circular No. 3,615) to Chapter C-2 ofCompendio de Normas Contables. Through this document, local banks were required to include in mid-year financial statements (as of June 30 of every fiscal year) an auditor’s review statement in accordance with GAAP. Whereas the financial statements with notes must be sent to the CMF on the same date they are released to the market, the auditor’s report on such financials must be sent to the regulator before August 15.
The following diagram presents our current corporate structure, including our subsidiaries and their respective direct ownership interests, as of April 24, 2020:
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.
In 2014, we began a voluntary dissolution process for Banchile Trade Services Limited in Hong Kong, which was formally declared dissolved as of July 5, 2016
On December 19, 2016, Banco de Chile acquired all of the shares of the Promarket S.A. and that subsidiary was dissolved.
PROPERTY, PLANT AND EQUIPMENT
We are based in Chile and own the building located at Paseo Ahumada 251, Santiago, Chile, that is approximately 77,500 square meters and serves as the headquarters for the Bank and its subsidiaries. In addition, we own both office and parking space in four other buildings located at Huerfanos 740, Agustinas 733, Andrés Bello 2687 and El Bosque 500, Santiago, Chile where the remainder of our executive offices are located. The total area we own in these buildings is equivalent to approximately 46,300 square meters.
As of December 31, 2019, we owned the properties on which 167 of our full-service branches and other points of sale are located (approximately 112,300 square meters of office space). Also, as of December 31, 2019, we had leased office space for 186 of our full-service branches with office space of approximately 56,560 square meters. Lastly, the 13 remaining branches and other points of sale were managed through a combined model by which part of the branch surface is owned and the remaining branch surface is under a leasing contract. Also, in some cases, we entered into special partnership agreements with the property’s owners.
We also own properties throughout Chile for back office and administrative operations, as well as for storage of documents and other purposes. We believe that our facilities are adequate for our present needs and suitable for their intended purposes.
As of December 31, 2019, we also owned approximately 134,250 square meters in mainly recreational physical facilities in Chile, which we use to assist our employees in maintaining a healthy work and life balance and which we use for incentive and integration activities.
Our 2020 budget for infrastructure expenditures amounts to approximately Ch$33,168 million. This is intended to finance disbursements associated with the renovation of some of our branches, particularly as a result of a new customer service model we are deploying in some of our locations (50%), renovation and restoration of our corporate buildings (20%), general maintenance investments (12%), security-related expenditures (8%) and other initiatives related to our efficiency program and social commitment (2%).
SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2019 appearing elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.”
Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities
The average balances for interest-earning assets and interest-bearing liabilities, including interest and readjustments received and paid, were calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. These average balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies (principally the U.S. dollar). The UF is an inflation-indexed Chilean monetary unit of account with a value in Chilean pesos which is linked to, and which is adjusted daily to reflect changes in, the CPI of the Chilean National Institute of Statistics.
The nominal interest rate has been calculated by dividing the amount of interest and inflation adjustment gain or loss during the period by the related average balance, both amounts expressed in Chilean pesos.
Foreign exchange gains or losses on foreign currency-denominated assets and liabilities have not been included in interest revenue or expense. Interest received on past due loans includes interest on such loans from the original maturity date. For our impaired portfolio and high risk loans, we apply a conservative approach of discontinuing accrual-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, 2017, 2018 and 2019:
|For the Year Ended December 31,|
|Average Nominal Rate|
|Average Nominal Rate|
|Average Nominal Rate|
|(In millions of Ch$, except percentages)|
|Interest earning assets|
|Loans in advance to Banks|
|Residential mortgage loans|
|Total interest earning assets|
|(1)||Interest earned includes interest accrued on trading securities.|
|For the Year Ended December 31,|
|(In millions of Ch$, except percentages)|
|Non-interest earning assets|
|Cash and due from banks|
|Transactions in the course of collection|
|Allowances for loan losses|
|Investments in Other Companies|
|Current tax assets|
|Deferred tax assets|
|Total non-interest earning assets|
|For the Year Ended December 31,|
|(In millions of Ch$, except percentages)|
|Interest bearing liabilities|
|Borrowings from financial institutions|
|Other financial obligations|
|Total interest bearing liabilities|
|For the Year Ended December 31,|
|(In millions of Ch$, except percentages)|
|Non-interest bearing liabilities|
|Current account and demand deposits|
|Transactions in the course of payment|
|Current tax liabilities|
|Deferred tax liabilities|
|Total non-interest bearing liabilities and equity|
|Total liabilities and equity|