FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

 

For the month of July, 2019

 

Commission File Number 001-15266

 

BANK OF CHILE
(Translation of registrant’s name into English)

 

Ahumada 251
Santiago, Chile

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F ☒ Form 40-F ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(1): ____

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(7): ____

 

Indicate by check mark whether by furnishing the information contained in this Form, the
registrant is also thereby furnishing the information to the Commission pursuant to Rule
12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes ☐ No ☒

 

If “Yes” is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ________

 

 

 

 

 

 

BANCO DE CHILE
REPORT ON FORM 6-K

 

Attached Banco de Chile’s Consolidated Financial Statements with notes as of June 30, 2019.

 

 

 

 

 

 

 

    

BANCO DE CHILE AND SUBSIDIARIES

 

(Free translation of consolidated financial statements originally issued in Spanish)

   

INDEX

  

I.Interim Consolidated Statements of Financial Position
II.Interim Consolidated Statements of Income
III.Interim Consolidated Statements of Other Comprehensive Income
IV.Interim Consolidated Statements of Changes in Equity
V.Interim Consolidated Statements of Cash Flows
VI.Notes to the Interim Consolidated Financial Statements

      

MCh$ = Millions of Chilean pesos
ThUS$ = Thousands of U.S. dollars
UF or CLF = Unidad de Fomento
    (The UF is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate).
Ch$ or CLP = Chilean pesos
US$ or USD = U.S. dollar
JPY = Japanese yen
EUR = Euro
HKD = Hong Kong dollar
CHF = Swiss Franc
     
IFRS = International Financial Reporting Standards
IAS = International Accounting Standards
RAN = Compilation of Standards of the Chilean
    Commission for the Financial Market (“CMF”)
IFRIC = International Financial Reporting Interpretations Committee
SIC = Standards Interpretation Committee

   

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

  

INDEX

 

    Page
Interim Consolidated Statement of Financial Position 1
Interim Consolidated Statements of Income 2
Interim Consolidated Statements of Other Comprehensive Income 3
Interim Consolidated Statement of Changes in Equity 4
Interim Consolidated Statements of Cash Flows 5
1. Company information: 6
2. Legal regulations, basis of preparation and other information: 7
3. New Accounting Pronouncements: 10
4. Changes in Accounting policies and Disclosures: 15
5. Relevant Events: 16
5. Relevant Events, continued: 18
6. Business Segments: 21
7. Cash and Cash Equivalents: 22
8. Financial Assets Held-for-trading: 23
9. Cash collateral on securities borrowed and reverse repurchase agreements: 25
10. Derivative Instruments and Accounting Hedges: 31
11. Loans and advances to Banks: 32
12. Loans to Customers, net: 38
13. Investment Securities: 40
14. Investments in Other Companies: 41
15. Intangible Assets: 42
16. Fixed assets, leased assets and lease liabilities: 44
17. Current Taxes and Deferred Taxes: 48
18. Other Assets: 49
19. Current accounts and Other Demand Deposits: 52
20. Savings accounts and Time Deposits: 53
21. Borrowings from Financial Institutions: 53
22. Debt Issued: 54
23. Other Financial Obligations: 55
24. Provisions: 58
25. Other Liabilities: 58
26. Contingencies and Commitments: 62
27. Equity: 68
28. Interest Revenue and Expenses: 71
29. Income and Expenses from Fees and Commissions: 73
30. Net Financial Operating Income: 74
31. Foreign Exchange Transactions, Net: 74
32. Provisions for Loan Losses: 75
33. Personnel Expenses: 76
34. Administrative Expenses: 77
35. Depreciation, Amortization and Impairment: 78
36. Other Operating Income: 79
37. Other Operating Expenses: 80
38. Related Party Transactions: 81
39. Fair Value of Financial Assets and Liabilities: 86
40. Maturity of Assets and Liabilities: 99
41. Subsequent Events: 101

 

i

 

  

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the periods ended June 30, 2019 and December 31, 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      June   December 
      2019   2018 
   Notes  MCh$   MCh$ 
ASSETS           
Cash and due from banks  7   1,150,682    880,081 
Transactions in the course of collection  7   1,023,491    580,333 
Financial assets held-for-trading  8   1,550,158    1,745,366 
Cash collateral on securities borrowed and reverse repurchase agreements  9   93,982    97,289 
Derivative instruments  10   1,435,764    1,513,947 
Loans and advances to banks  11   1,191,846    1,494,307 
Loans to customers, net  12   28,205,600    27,307,223 
Financial assets available-for-sale  13   1,243,177    1,043,440 
Financial assets held-to-maturity  13        
Investments in other companies  14   47,694    44,561 
Intangible assets  15   54,423    52,061 
Property and equipment  16   218,525    215,872 
Leased assets  16   156,671     
Current tax assets  17   388    677 
Deferred tax assets  17   319,922    277,922 
Other assets  18   562,342    673,380 
TOTAL ASSETS      37,254,665    35,926,459 
              
LIABILITIES             
Current accounts and other demand deposits  19   9,600,788    9,584,488 
Transactions in the course of payment  7   727,547    335,575 
Cash collateral on securities lent and repurchase agreements  9   261,120    303,820 
Savings accounts and time deposits  20   10,798,909    10,656,174 
Derivative instruments  10   1,572,621    1,528,357 
Borrowings from financial institutions  21   1,596,655    1,516,759 
Debt issued  22   7,863,807    7,475,552 
Other financial obligations  23   171,284    118,014 
Lease liabilities  16   155,373     
Current tax liabilities  17   74,389    20,924 
Deferred tax liabilities  17        
Provisions  24   506,928    670,119 
Other liabilities  25   532,593    412,524 
TOTAL LIABILITIES      33,862,014    32,622,306 
              
EQUITY  27          
Attributable to Bank’s Owners:             
Capital      2,418,833    2,418,833 
Reserves      703,317    617,597 
Other comprehensive income      (44,824)   (39,222)
Retained earnings:             
Retained earnings from previous years      170,171    17,481 
Income for the period      293,663    594,872 
Less:             
Provision for minimum dividends      (148,510)   (305,409)
Subtotal      3,392,650    3,304,152 
Non-controlling interests      1    1 
TOTAL EQUITY      3,392,651    3,304,153 
TOTAL LIABILITIES AND EQUITY      37,254,665    35,926,459 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

1

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

For the six-month ended June 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

   

      June   June 
      2019   2018 
   Notes  MCh$   MCh$ 
            
Interest revenue  28   1,031,683    965,831 
Interest expense  28   (364,583)   (318,301)
Net interest income      667,100    647,530 
              
Income from fees and commissions  29   279,671    249,198 
Expenses from fees and commissions  29   (64,027)   (69,974)
Net fees and commission income      215,644    179,224 
              
Net financial operating income  30   43,431    52,141 
Foreign exchange transactions, net  31   32,391    7,273 
Other operating income  36   24,346    16,064 
Total operating revenues      982,912    902,232 
              
Provisions for loan losses  32   (157,115)   (124,755)
              
OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES      825,797    777,477 
              
Personnel expenses  33   (228,927)   (209,898)
Administrative expenses  34   (166,323)   (162,173)
Depreciation and amortization  35   (34,665)   (18,471)
Impairment  35   (822)   (11)
Other operating expenses  37   (21,786)   (25,326)
              
TOTAL OPERATING EXPENSES      (452,523)   (415,879)
              
NET OPERATING INCOME      373,274    361,598 
              
Income attributable to associates  14   3,973    4,148 
Income before income tax      377,247    365,746 
              
Income tax  17   (83,584)   (60,532)
              
NET INCOME FOR THE PERIOD      293,663    305,214 
Attributable to:             
Bank’s Owners  27   293,663    305,214 
Non-controlling interests           
              
Net income per share attributable to Bank’s Owners:     Ch$   Ch$ 
Basic net income per share  27   2.91    3.02 
Diluted net income per share  27   2.91    3.02 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

2

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF

OTHER COMPREHENSIVE INCOME

For the six-month ended June 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

  

      June   June 
      2019   2018 
   Notes  MCh$   MCh$ 
            
NET INCOME FOR THE PERIOD      293,663    305,214 
              
OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Net gains (losses) on available-for-sale instruments valuation  13   17,677    (6,182)
Net gains (losses) on derivatives held as cash flow hedges  10   (25,344)   (30,342)
Subtotal Other comprehensive income before income taxes      (7,667)   (36,524)
              
Income tax relating to the components of other comprehensive income that are reclassified in income for the period      2,065    9,859 
              
Total other comprehensive income items that will be reclassified subsequently to profit or loss      (5,602)   (26,665)
              
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Adjustment for defined benefit plans  24   (186)    
              
Subtotal other comprehensive income before income taxes      (186)    
              
Income tax relating to the components of other comprehensive income that will not be reclassified to income for the period      50     
              
Total other comprehensive income items that will not be reclassified subsequently to profit or loss      (136)    
              
CONSOLIDATED COMPREHENSIVE INCOME FOR THE PERIOD      287,925    278,549 
              
Attributable to:             
Bank’s Owners      287,925    278,549 
Non-controlling interests           

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

  

3

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six-month ended June 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

  

          Reserves   Other comprehensive income   Retained earnings     
      Paid-in Capital   Other reserves   Reserves from earnings   Unrealized gains (losses) on available-for-sale   Derivatives cash flow hedge   Income   Retained earnings from previous periods   Income (losses) for the period   Provision for minimum dividends   Attributable to equity holders of the parent   Non-controlling interest   Total equity 
   Notes  MCh$   MCh$   MCh$   MCh$   MCh$   Tax   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Balances as of December 31, 2017      2,271,401    32,053    531,135    1,851    (12,551)   2,660    16,060    576,012    (312,907)   3,105,714    1    3,105,715 
Capitalization of retained earnings      147,432                            (147,432)                
Retention (release) of profits according to bylaws  27           54,501                    (54,501)                
Dividends distributions and paid  27                               (374,079)   312,907    (61,172)       (61,172)
Other comprehensive income:                                                               
Derivatives cash flow hedge, net  27
                   (30,342)   8,192                (22,150)       (22,150)
Valuation adjustment on available-for-sale instruments (net)  27               (6,182)       1,667                (4,515)       (4,515)
Income for the period 2018  27                               305,214        305,214        305,214 
Provision for minimum dividends                                      (155,398)   (155,398)       (155,398)
Balances as of June 30, 2018      2,418,833    32,053    585,636    (4,331)   (42,893)   12,519    16,060    305,214    (155,398)   3,167,693    1    3,167,694 
Defined benefit plans adjustment, net          (92)                               (92)       (92)
Equity effect change in accounting policy                              1,421            1,421        1,421 
Other comprehensive income:                                                               
Derivatives cash flow hedge, net                      (601)   162                (439)       (439)
Valuation adjustment on available-for-sale instruments                  (5,605)       1,527                (4,078)       (4,078)
Income for the period 2018                                  289,658        289,658        289,658 
Provision for minimum dividends                                      (150,011)   (150,011)       (150,011)
Balances as of December 31, 2018      2,418,833    31,961    585,636    (9,936)   (43,494)   14,208    17,481    594,872    (305,409)   3,304,152    1    3,304,153 
Retention of profits                               152,705    (152,705)                
Retention (release) of profits according to bylaws  27           85,856                    (85,856)                
Dividends distributions and paid  27                               (356,311)   305,409    (50,902)       (50,902)
Defined benefit plans adjustment, net          (136)                               (136)       (136)
Other comprehensive income:                                                               
Derivatives cash flow hedge, net  27
                   (25,344)   6,843                (18,501)       (18,501)
Valuation adjustment on available-for-sale instruments  27               17,677        (4,778)               12,899        12,899 
Equity effect change in accounting policy                              (15)           (15)       (15)
Income for the period 2019  27                               293,663        293,663        293,663 
Provision for minimum dividends  27                                   (148,510)   (148,510)       (148,510)
Balances as of June 30,  2019      2,418,833    31,825    671,492    7,741    (68,838)   16,273    170,171    293,663    (148,510)   3,392,650    1    3,392,651 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

  

4

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six-month ended June 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

   

      June   June 
      2019   2018 
   Notes  MCh$   MCh$ 
CASH FLOWS FROM OPERATING ACTIVITIES:             
Net income for the period      293,663    305,214 
Charges (credits) to income  that do not represent cash flows:             
Depreciation and amortization  35   34,665    18,471 
Impairment  35   822    11 
Provision for loans and accounts receivable from customers and owed by banks  32   178,820    147,747 
Provision of contingent loans  32   2,670    3,159 
Fair value adjustment of financial assets held-for-trading      (2,305)   (1,039)
Changes in assets and liabilities by deferred taxes  17   (46,728)   8,711 
(Gain) loss attributable to investments in companies with significant influence, net  14   (3,655)   (3,816)
(Gain) loss from sales of assets received in lieu of payment,net  36   (6,358)   (2,723)
(Gain) loss on sales of property and equipment, net  36   (43)   (3,580)
Charge-offs of assets received in lieu of payment  37   3,769    1,842 
Other charges (credits) to income that do not represent cash flows      6,401    (1,297)
Change in the exchange rate of assets and liabilities      (3,817)   (59,409)
Net interest variation, readjustment and accrued fees on assets and liabilities      (393)   79,252 
              
Changes in assets and liabilities that affect operating cash flows:             
(Increase) decrease in loans and advances to banks, net      302,522    (542,754)
(Increase) decrease in loans to customers      (1,034,377)   (1,186,313)
(Increase) decrease in financial assets held-for-trading, net      90,824    343,151 
(Increase) decrease in other assets and liabilities      375,546    (114,419)
Increase (decrease) in current account and other demand deposits      15,215    374,646 
Increase (decrease) in payables from repurchase agreements and security lending      (30,948)   108,121 
Increase (decrease) in savings accounts and time deposits      130,378    411,375 
Sale of assets received in lieu of payment or adjudicated      16,407    11,927 
Total cash flows from operating activities      323,078    (101,723)
              
CASH FLOWS FROM INVESTING ACTIVITIES:             
(Increase) decrease in financial assets available-for-sale, net      (187,415)   76,061 
Payments for lease agreements  16   (14,332)    
Purchases of property and equipment  16   (18,621)   (10,959)
Sales of property and equipment      43    3,581 
Acquisition of intangible assets  15   (8,469)   (11,518)
Dividends received from investments in companies      871    743 
Total cash flows from investing activities      (227,923)   57,908 
              
CASH FLOWS FROM FINANCING ACTIVITIES:             
Redemption of letters of credit      (1,714)   (2,334)
Issuance of bonds  22   867,072    888,585 
Redemption of bonds      (514,893)   (538,225)
Dividends paid  27   (356,311)   (374,079)
Increase (decrease) in borrowings from foreign financial institutions      78,486    (17,833)
Increase (decrease) in other financial obligations      54,417    8,545 
Increase (decrease) in other obligations with Central Bank of Chile          (1)
Other long-term borrowings          15 
Payment of other long-term borrowings      (908)   (1,301)
Total cash flows from financing activities      126,149    (36,628)
              
TOTAL NET  POSITIVE (NEGATIVE) CASH FLOWS FOR THE PERIOD      221,304    (80,443)
              
Effect of exchange rate changes      3,817    59,409 
              
Cash and cash equivalents at beginning of period      2,256,375    2,079,398 
              
Cash and cash equivalents at end of period  7   2,481,496    2,058,364 
              
      June   June 
      2019   2018 
      MCh$   MCh$ 
Operational Cash flow interest:             
Interest received      978,878    915,615 
Interest paid      (312,171)   (188,833)

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

5

 

 

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Free translation of interim consolidated financial statements originally issued in Spanish)

______________

 

1.Company information:

 

Banco de Chile is authorized to operate as a commercial bank since September 17, 1996, being, in conformity with the stipulations of article 25 of Law No. 19,396, the legal continuation of Banco de Chile resulting from the merger of the Banco Nacional de Chile, Banco Agrícola and Banco de Valparaiso, which was constituted by public deed dated October 28, 1893, granted before the Notary Public of Santiago, Mr. Eduardo Reyes Lavalle, authorized by Supreme Decree of November 28, 1893.

 

Banco de Chile (or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Chilean Commission for the Financial Market (“CMF”), in accordance with the established in the Law 21,130 dated January 12, 2019, which ordered the integration of the Superintendency of Banks and Financial Institutions (“SBIF”) with the Commission for the Financial Market as of June 1, 2019. Since 2001, it is subject to the supervision of the Securities and Exchange Commission of the United States of America (“SEC”), in consideration of the fact that the Bank is registered on the New York Stock Exchange (“NYSE”), through a program of American Depositary Receipt (“ADR”).

 

Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. The services are managed in the areas of corporations and large companies, medium and small companies and personal and consumer banking. Additionally, the Bank offers international as well as treasury banking services, in addition to those offered by subsidiaries that include securities brokerage, mutual fund and investment management, insurance brokerage, financial advisory services and securitization.

 

Banco de Chile’s legal address is Ahumada 251, Santiago, Chile and its website is www.bancochile.cl.

 

The Interim Consolidated Financial Statements of Banco de Chile, for the period ended June 30, 2019 were approved by the Directors on July 25, 2019.

  

6

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

  

2.Legal regulations, basis of preparation and other information:

 

(a)Legal regulations:

 

The Law 21,000 that creates the CMF, in its article 5, empowers it to issue accounting standards of general application for entities it supervises. The Corporations Law, in turn, requires following the generally accepted accounting principles.

 

Based on the aforementioned laws, banks should use the criteria provided by the Compendium of Accounting Standards (“Compendium”), and any matter not addressed therein, as long as it does not contradict its instructions, should adhere to generally accepted accounting principles in technical standards issued by the Chilean Association of Accountants, that coincide with international accounting standards and international financial reporting standards agreed upon by the International Accounting Standards Board (“IASB”). Should there be discrepancies between these generally accepted accounting principles and the accounting criteria issued by the CMF, the latter shall prevail.

 

(b)Basis of preparation:

 

(b.1)These Interim Consolidated Financial Statements are presented according to Chapter C-2 of the Compendium of Accounting Standards, issued by the Chilean Commission for the Financial Market (CMF).

 

(b.2)The following table details the entities in which the Bank has control and are part of this consolidated financial statements:

   

            Interest Owned 
            Direct   Indirect   Total 
            June   December   June   December   June   December 
         Functional  2019   2018   2019   2018   2019   2018 
RUT  Subsidiaries  Country  Currency  %   %   %   %   %   % 
96,767,630-6  Banchile Administradora General de Fondos S.A.  Chile  Ch$   99.98    99.98    0.02    0.02    100.00    100.00 
96,543,250-7  Banchile Asesoría Financiera S.A.  Chile  Ch$   99.96    99.96            99.96    99.96 
77,191,070-K  Banchile Corredores de Seguros Ltda.  Chile  Ch$   99.83    99.83    0.17    0.17    100.00    100.00 
96,571,220-8  Banchile Corredores de Bolsa S.A.  Chile  Ch$   99.70    99.70    0.30    0.30    100.00    100.00 
96,932,010-K  Banchile Securitizadora S.A.  Chile  Ch$   99.01    99.01    0.99    0.99    100.00    100.00 
96,645,790-2  Socofin S.A.  Chile  Ch$   99.00    99.00    1.00    1.00    100.00    100.00 

   

7

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

  

2.Legal regulations, basis of preparation and other information, continued:

 

(c)Use of estimates and judgments:

 

Preparing the Interim Consolidated Financial Statements requires the Bank’s Management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Actual results could differ from these estimated amounts. These estimates refer to:

 

1.Provision for loan losses (Notes No. 11. No. 12 and No. 32);
2.Useful life of intangible and property and equipment (Notes No.15 and No.16);
3.Income taxes and deferred taxes (Note No. 17);
4.Provisions (Note No. 24);
5.Contingencies and Commitments (Note No. 26);
6.Fair value of financial assets and liabilities (Note No. 39).

 

Estimates and relevant assumptions are regularly reviewed by the management of the Bank, according to quantify certain assets, liabilities, gains, loss and commitments. Estimates reviewed are registered in income in the period that the estimate is reviewed.

 

As of June 30, there have been no significant changes in the estimates made.

  

(d)Seasonality or Cyclical Character of the Transactions of the Intermediate Period:

 

Given the activities to which the Bank and its subsidiaries are engaged, the transactions of the Bank do not have a cyclical or seasonal nature. For this reason, specific breakdowns in these notes to the Interim Consolidated Financial Statements for the six-month period ended June 30, 2019 are not included.

 

(e)Relative Importance:

 

In determining the information to be disclosed on the different items of the financial statements or other matters, the relative importance in relation to the Financial Statements of the period has been taken into account.

  

(f)Leases:

 

The Bank acts as a lessor

 

Assets that are leased to clients under contracts that substantially transfer all risks and property recognition, with or without legal title, are classified as a financial lease. When the assets are subject to a financial leasing, the leased assets are no longer recognized as a fixed asset and are recorded in an account receivable, which is equal to the minimum value of the lease payment, discounted at the interest rate of the lease. The initial negotiation expenses in a financial lease are incorporated into the account receivable through the discount rate applied to the lease. Lease income is recognized on lease terms based on a model that consistently reflects a periodic rate of return on the net investment of the lease.

 

8

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

2.Legal regulations, basis of preparation and other information, continued:

  

Assets that are leased to customers under contracts that do not transfer substantially all the risks and benefits of the property are classified as an operating lease and are recognized monthly on an accrual basis.

 

The leased investment properties, under the operating lease modality, are included in “Other assets” in the Statement of Financial position and depreciation is determined on the book value of these assets, applying a proportion of the value in a systematic way on the economic use of the estimated useful life. Lease income is recognized on a straight-line basis over the lease period, on an accrual basis.

 

The Bank acts as a lessee

 

A contract is or contains a lease if it has the right to control the use of an identified asset for a period of time in exchange for a consideration.

 

At the start date of a lease, an asset is determined by right of use of the leased asset at cost, which comprises the amount of the initial measurement of the lease liability plus other disbursements made, except lease payments in the short term and those in which the underlying asset is of low value, which are recognized directly in results.

 

The amount of the lease liability is measured at the present value of future lease payments that have not been paid on that date, which are discounted using the Bank’s incremental financing interest.

 

The right-of-use asset is measured using the cost model less accumulated depreciation and accumulated impairment losses. The depreciation of the right-of-use asset is recognized in the Income Statement based on the straight-line method of depreciation from the start date and until the end of the term of the lease.

 

After the start date, the lease liability is measured by reducing the carrying amount to reflect the lease payments made and the lease contract modifications.

 

(g)Reclassifications:

 

There have not been significant reclassifications at the end of this period 2019.

   

9

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

3.New Accounting Pronouncements:

 

3.1 Standards approved and/or modified by the International Accounting Standards Board (IASB) and by the Chilean Commission for the Financial Market (CMF):

 

3.1.1 Standards and interpretations that have been adopted in these Consolidated Financial Statements.

 

As of the date of issuance of these Interim Consolidated Financial Statements, the new accounting pronouncements issued by both the International Accounting Standards Board and the CMF, which have been adopted by the Bank and its subsidiaries, are detailed below:

  

Accounting standards issued by IASB.

  

IFRS 16 Leases.

 

On January 2016 was issued IFRS 16, which has as purpose to establish principles to the recognition, measurement, presentation and disclosure of lease contracts from the point of view of the lessee and lessor.

 

This new rule does not differ significantly from IAS 17 Leases that precedes it, related to the accounting treatment for the lessor. However, related to the lessee, the new rule requires the recognition of assets and liabilities for most lease contracts.

 

The Bank and its subsidiaries, for purposes of the initial application of the standard, took the option to recognize the cumulative effect on the initial adoption date (January 1, 2019), not expressing comparative information, recording an asset for right of use for an amount equal to the lease liability for an amount of Ch$144,529 million. This amount was determined according to the present value of the remaining lease payments, discounted using the Bank’s incremental financing interest rate.

 

IFRIC 23 Uncertainty over Income Tax Treatments.

 

In June 2017, the IASB published IFRIC 23, which clarifies the application of the recognition and measurement criteria required by IAS 12 Income Taxes when there is uncertainty about tax treatments.

 

This modification had no impact on the Banco de Chile and its subsidiaries.

  

IFRS 9 Financial instruments and IAS 28 Investments in associates and joint ventures.

 

On October 2017, the IASB published the amendments to IFRS 9 Financial Instruments and IAS 28 Investments in Associated Entities and Joint Ventures.

 

The amendments to IFRS 9 allow entities to measure financial assets, prepaid with negative compensation at amortized cost or fair value, through other comprehensive income if a specific condition is met, instead of at fair value with effect on results.

10

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

3.New Accounting Pronouncements, continued:

 

Regarding IAS 28, the amendments clarify that entities must account for long-term results in an associate or joint venture, to which the equity method is not applied, using IFRS 9.

 

The IASB also released an example that illustrates how companies should apply the requirements of IFRS 9 and IAS 28 to long-term interests in an associated entity or joint venture.

 

This modification had no impact for Banco de Chile and its subsidiaries.

  

Annual improvements to IFRS.

 

On December 2017, the IASB issued the Annual Improvements to IFRS Cycle 2015-2017, which includes amendments to the following regulations:

 

- IFRS 3 Business Combinations. Interests previously held in a joint operation.

 

The amendment provides additional guidance for applying the procurement method to particular types of business combinations.

 

The amendment states that when a party to a joint arrangement obtains control of a business, which is a joint arrangement and had rights over the assets and liabilities for the liabilities related to this joint arrangement, immediately before the acquisition date, the transaction it is a business combination achieved in stages.

 

Therefore, the acquirer will apply the requirements for a business combination achieved in stages, including re-measuring its previously held interest in the joint operation. By doing so, the acquirer will re-measure its total value that it previously had in the joint operation.

 

This modification had no impact for Banco de Chile and its subsidiaries.

  

- IFRS 11 Joint Arrangements.

 

The amendment to IFRS 11 relate to the accounting for acquisitions of interests in Joint Agreements.

 

The amendment establishes that a party that participates, but does not have control, in a joint agreement, can obtain control of the joint agreement. Given the above, the activity of the joint agreement would constitute a Business Combination as defined in IFRS 3, in such cases; the interests previously held in the joint agreement are not remeasured.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

11

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

      

3.New Accounting Pronouncements, continued:

  

- IAS 23 Costs for loans. Costs for loans that can be capitalized.

 

The amendment to the standard is intended to clarify that, when an asset is available for use or sale, an entity will treat any outstanding loan taken specifically to obtain said asset, as part of the funds it has taken as current loans, from that moment on the interest will not be included as part of the cost of the asset.

 

This modification had no impact for Banco de Chile and its subsidiaries.

  

- IAS 19 Employee Benefits.

 

On February 2018 the IASB issued amendments to IAS 19 “Employee Benefits”, which relate to:

 

- If there is a modification, reduction or liquidation of a plan, it is now mandatory that the current service cost and net interest for the period after the new measurement be determined using the assumptions used for the new measurement.

 

- In addition, amendments have been included to clarify the effect of a modification, reduction or liquidation of a plan on the requirements with respect to the asset roof.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

Accounting standards issued by the CMF.

 

- Circular No. 3,645.

 

On January 31, 2019, the CMF published this circular, which introduces changes to the Compendium of Accounting Standards in order to apply the criteria defined in IFRS 16.

 

The main changes are for the valuation for the right to use of assets under lease being applied as a measurement after initial recognition, the cost methodology less accumulated depreciation / amortization and accumulated impairment.

 

In the statement of financial position are introduced the items “Leased assets” and “lease liabilities”, which also modify the Notes “Fixed assets” and “Leased assets and lease liabilities”.

 

Additionally, banks and their subsidiaries must record any effect due to the first application of this standard in the equity item “Retained earnings from previous periods”.

 

The application of these amendments was made jointly with the adoption of IFRS 16 Leases.

 

12

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

      

3.New Accounting Pronouncements, continued:

  

3.1.2 New standards and interpretations that have been issued but its date of application have not yet come into force:

 

The following is a summary of new standards, interpretations and improvements to the International Financial Reporting Standards issued by the International Accounting Standards Board and the CMF that are not yet effective as of June 30, 2019, are detailed below:

 

Accounting standards issued by IASB.

 

IAS 28 Investments in Associates and Join Venture and IFRS 10 - Consolidated Financial Statements.

 

In September 2014, the IASB issued this amendment, which clarifies the scope of recognized gains and losses in a transaction involving an associate or joint venture, and this depends on whether the asset sold or contribution is a business. Therefore, IASB concluded that all of the profit or loss should be recognized against loss of control of a business. Likewise, gains or losses resulting from the sale or contribution of a subsidiary that is not a business (definition of IFRS 3) to an associate or joint venture should be recognized only to the extent of unrelated interests in the associate or joint venture.

 

During December 2015 the IASB agreed that the amendments should apply in the future, allowing its immediate application.

 

This amendment will not impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

Conceptual Framework.

 

On March 29, 2018, the IASB issued a “Reviewed” Conceptual Framework. Changes to the Conceptual Framework may affect the application of IFRS when no rule applies to a particular transaction or event.

 

The Conceptual Framework introduces mainly the following improvements:

 

-It incorporates some new concepts of measurement, presentation and disclosure and derecognition of assets and liabilities in the Financial Statements.

 

-Provides updated definitions of assets, liabilities and includes criteria for the recognition of assets and liabilities in the financial statements.

 

-Clarifies some important concepts such as background on form, prudential criteria and measurement of uncertainty.

 

The Conceptual Framework enters into force for periods beginning on January 1, 2020. Early adoption is permitted.

13

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

3.New Accounting Pronouncements, continued:

 

- IFRS 3 Business Combinations. Definition of a Business.

 

The amendments clarify the definition of business, with the objective of helping entities determine whether a transaction should be accounted for as a business combination or as the acquisition of an asset.

 

(a)clarify that, to be considered a business, an acquired set of activities and assets must include, as a minimum, an input and a substantive process that together contribute significantly to the ability to produce outputs;
(b)eliminate the assessment of whether market participants can substitute missing processes or inputs and continue to produce outputs;
(c)add guides and illustrative examples to help entities assess whether a substantial process has been acquired;
(d)restrict definitions of a business or products by focusing on goods and services provided to clients and eliminate reference to the ability of reducing costs; and
(e)add an optional concentration test that allows a simplified assessment of whether an acquired set of activities and businesses acquired are not business.

 

Companies are required to apply the modified definition of a business to acquisitions made from January 1, 2020. Early application is allowed.

 

This amendment has no impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

- IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Definition of Materiality or relative importance.

 

The IASB issued changes to IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of materiality and align these standards with the Revised Conceptual Framework issued in March 2018, to facilitate companies to make materiality judgments.

 

Under the old definition omissions or misrepresentations of elements are important if they could, individually or collectively, influence the economic decisions that users make on the basis of financial statements (IAS 1 Presentation of Financial Statements).

 

The new definition states that information is material if the omission, distortion or concealment of the information can reasonably be expected to influence decisions that primary users of financial statements of general purpose make on the basis of those financial statements, which provide financial information about a specific reporting entity.

 

The date of application of these amendments is January 1, 2020. Early application is allowed.

 

This amendment has no impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

14

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

3.New Accounting Pronouncements, continued:

 

Accounting standards issued by the CMF.

 

- Circular N°3,638.

 

On July 6, 2018, the CMF published amendments to the standards contained in Chapter B-1 “Provisions for Credit Risk” of the Compendium of Accounting Standards, which incorporates a standard model for the estimation of provisions for credit risk of the commercial portfolio of group analysis.

 

The proposed methods and risk factors considered are the following:

 

-Commercial Leasing Portfolio: considers default, the type of asset in leasing (real estate or non-real estate) and the current value over value of the asset of the operation.
-Student Portfolio: considers the type of loan granted, the enforceability of the payment and the default that it presents, in case the loan is required.
-Generic Commercial Portfolio: considers default and the existence of real guarantees that guarantee the placement. In the case of guarantees, the relationship between the placement and the value of the security right that covers it is considered.

 

According to the CMF, the three standardized methods included in the model will constitute a prudential floor for internal methods currently used by the industry.

 

On January 31, 2019, the CMF supplemented said instructions with the publication of Circular No. 3,647, with the purpose of recognizing the mitigating effect of the credit risk represented by the assignor’s responsibility in the factoring operations, a particular factor is introduced for the component “Loss Given Default” (hereinafter “LGD”) of the standard method for the commercial portfolio of group analysis, for factoring provisions.

 

The new standards will come into force in July 2019.

 

The adoption of this standard will not have material impacts on the Consolidated Financial Statements of Banco de Chile and its subsidiaries.

  

4.Changes in Accounting policies and Disclosures:

   

The accounting policies adopted in the preparation of this Consolidated Interim Financial Statements are consistent with those used in the preparation of the annual Consolidated Financial Statements for the year ended December 31, 2018, except for the adoption of new regulations in force at 1 January 2019. See Note No. 3 “Recent Accounting Pronouncements”.

15

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

5.Relevant Events:

 

(a)On January 18, 2019, the subsidiary Banchile Corredores de Bolsa S.A. informed that in the Ordinary Session held that day, the Board became aware and accepted the resignation presented by Mr. Roberto Serwaczak Slowinski to his position as Director of the company.

 

(b)On January 24, 2019 in the Ordinary Session No. BCH 2,895, the Board of Directors of Banco de Chile agreed to convene an Ordinary Meeting of Shareholders for March 28, 2019, with the purpose of proposing, among other matters, the distribution of the dividend No. 207 of $ 3.52723589646 for each share, corresponding to 70% of the distributable liquid profit, retaining the remaining 30%.

 

(c)On January 28, 2019, Banco de Chile and its subsidiary Banchile Corredores de Seguros Ltda. informed that they have entered into a strategic alliance with the insurance companies Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A. The framework of the strategic alliance establishes the general terms and conditions pursuant to which the Bank will grant, for a period of 15 years, exclusive access to the Companies to provide insurances to clients via face-to-face and digital channels of the Bank, through Banchile, subject to the exceptions agreed upon by the parties.

 

The aforementioned Agreement includes a payment to the Bank of UF 5,367,057 on the date of the signing of the contracts, in accordance with the terms and conditions thereof, and annual payments subject to compliance with insurance sales objectives during the agreement lifetime.

 

The subscription of the contracts referred in the Agreement was subject to the condition that the National Economic Prosecutor’s Office approve the execution of all of them, for which purpose the parties have proceeded to notify the operation in accordance with Chapter IV of the Decree Law No. 211.

 

(d)On March 14, 2019 in the Ordinary session No. 2,897, the Board of Directors of Banco de Chile agreed to establish a provision for minimum dividends of 60% of the net distributable profit that will be generated during the course of the year. For these purposes, the net distributable profit is defined as net income for the corresponding period minus the value effect of the monetary unit of paid capital and reserves, as a result of any change in the Consumer Price Index (CPI) between to the month prior to the current month and the month of November of the previous year.

 

(e)On March 28, 2019 at the Ordinary Shareholder’s Meeting, our shareholders approved the distribution of the dividend No. 207 of $3.52723589646 per share, to be charged to the net distributable income obtained during the fiscal year 2018. Also, the shareholders agreed to withhold of 30% of the distributable net profit for the year 2018.

 

Additionally, the shareholders approved the definite appointment of Mr. Julio Santiago Figueroa as Director of Banco de Chile, a position which he will hold until the next renewal of the Board of Directors.

16

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

5.Relevant Events, continued:

  

(f)On May 20, 2019, the subsidiary Banchile Corredores de Bolsa S.A. reported that in Ordinary Session held on May 17, 2019, the Board of Banchile Corredores de Bolsa S.A. appointed Mr. Fuad Jorge Muvdi Arenas as titular director.

 

(g)On June 4, 2019, Banco de Chile reported that the condition established in of the Strategic Alliance Framework Agreement subscribed by Banco de Chile, its subsidiary Banchile Corredores de Seguros Limitada and the insurance companies Chubb Seguros Chile SA and Chubb Seguros de Vida Chile SA, had been met on January 28, 2019, and in order to comply with said agreement, the following contracts had been signed:

 

-Contract of Exclusive Access to Distribution Channels between the Bank and the Companies;
-Supply, Intermediation and Distribution of Insurance Contracts between Banchile and each of the Companies;
-Trademark Use Agreement between the Bank and each of the Companies; and
-Collection Contracts between the Bank and each of the Companies.

  

(h)On June 10, 2019, Banco de Chile informed that on that date Mr. Rodrigo Manubens Moltedo submitted his resignation to the position of Deputy Director of Banco de Chile.

 

(i)On June 27, 2019, Banco de Chile informed that in ordinary session, the Board of Directors appointed Mrs. Sandra Guazzotti as first substitute director, until the next Ordinary Shareholders’ Meeting, replacing Mr. Rodrigo Manubens Moltedo.

      

17

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

6.Business Segments:

  

For management purposes, the Bank is organized into four segments, which are defined based on the types of products and services offered, and the type of client in which focuses as described below:

 

  Retail: This segment focuses on individuals and small and medium-sized companies (SMEs) with annual sales up to UF 70,000, where the product offering focuses primarily on consumer loans, commercial loans, checking accounts, credit cards, credit lines and mortgage loans.
     
  Wholesale: This segment focused on corporate clients and large companies, whose annual revenue exceed UF 70,000, where the product offering focuses primarily on commercial loans, checking accounts and liquidity management services, debt instruments, foreign trade, derivative contracts and leases.
     
  Treasury: This segment includes the associated revenues to the management of the investment portfolio and the business of financial transactions and currency trading.
     
    Transactions with customers carried out by the Treasury are reflected in the respective aforementioned segments. These products are highly transaction-focused and include foreign exchange transactions, derivatives and financial instruments in general, among others.
     
  Subsidiaries: Corresponds to the businesses generated by the companies controlled by the Bank, which carry out activities complementary to the bank business. The companies that comprise this segment are:

  

Entity

 

-Banchile Administradora General de Fondos S.A.
-Banchile Asesoría Financiera S.A.
-Banchile Corredores de Seguros Ltda.
-Banchile Corredores de Bolsa S.A.
-Banchile Securitizadora S.A.
-Socofin S.A.

 

18

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

6.Business Segments, continued:

 

The financial information used to measure the performance of the Bank’s business segments is not comparable with similar information from other financial institutions because each institution relies on its own definitions. The accounting policies applied to the segments is the same as those described in the summary of accounting principles. The Bank obtains the majority of the results for: interest, indexation and commissions and financial operations and changes, discounting provisions for credit risk and operating expenses. Management is mainly based on these concepts to evaluate the performance of the segments and make decisions about the goals and allocations of resources of each unit. Although the results of the segments reconcile with those of the Bank at the total level, this is not necessarily the case in terms of the different concepts, given that management is measured and controlled individually and not on a consolidated basis, applying the following criteria:

 

·The net interest margin of loans and deposits is obtained aggregating the net financial margins of each individual operation of credit and uptake made by the bank. For these purposes, the volume of each operation and its contribution margin are considered, which in turn corresponds to the difference between the effective rate of the customer and the internal transfer price established according to the term and currency of each operation. Additionally, the net margin includes the result of interest and indexation from the accounting hedges.

 

·The capital and its financial impacts on outcome have been assigned to each segment based on the risk-weighted assets.

 

·Operational expenses are reflected at the level of the different functional areas of the Bank. The allocation of expenses from functional areas to business segments is done using different allocation criteria, at the level of the different concepts and expense items.

 

Taxes are managed at a corporate level and are not allocated to business segments.

 

For the periods ended June 30, 2019 and 2018, there was no income from transactions with a customer or counterparty that accounted for 10% or more of the Bank’s total revenues.

 

19

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

6.Business Segments, continued:

 

The following table presents the income by segment for the periods ended June, 2019 and 2018 for each of the segments defined above:

 

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal  

Consolidation

adjustment

   Total 
   June   June   June   June   June   June   June   June   June   June   June   June   June   June 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                         
Net interest income   512,190    477,250    171,707    173,158    (15,050)   (1,057)   (3,771)   (3,287)   665,076    646,064    2,024    1,466    667,100    647,530 
Net commissions income (loss)   122,308    92,859    24,968    22,576    (1,616)   (2,087)   74,785    71,947    220,445    185,295    (4,801)   (6,071)   215,644    179,224 
Other operating income   16,566    14,296    28,057    27,533    31,328    20,724    27,574    15,775    103,525    78,328    (3,357)   (2,850)   100,168    75,478 
Total operating revenue   651,064    584,405    224,732    223,267    14,662    17,580    98,588    84,435    989,046    909,687    (6,134)   (7,455)   982,912    902,232 
Provision for loan losses   (150,506)   (122,530)   (6,567)   (2,337)           (42)   112    (157,115)   (124,755)           (157,115)   (124,755)
Depreciation and amortization   (28,614)   (14,542)   (3,039)   (2,439)   (53)   (46)   (2,959)   (1,444)   (34,665)   (18,471)           (34,665)   (18,471)
Other operating expenses   (292,382)   (272,777)   (77,095)   (77,464)   (2,622)   (3,064)   (51,893)   (51,558)   (423,992)   (404,863)   6,134    7,455    (417,858)   (397,408)
Income attributable to associates   3,085    3,196    490    545    47    60    351    347    3,973    4,148            3,973    4,148 
Income before income taxes   182,647    177,752    138,521    141,572    12,034    14,530    44,045    31,892    377,247    365,746            377,247    365,746 
Income taxes                                                               (83,584)   (60,532)
Income after income taxes                                                               293,663    305,214 

   

The following table presents assets and liabilities of the periods ended June 30, 2019 and December 31, 2018 by each segment defined above:

 

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal  

Consolidation

adjustment

   Total 
   June   December   June   December   June   December   June   December   June   December   June   December   June   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                         
Assets   17,141,384    16,425,068    10,771,497    10,592,117    8,284,530    8,093,850    1,081,351    925,440    37,278,762    36,036,475    (344,407)   (388,615)   36,934,355    35,647,860 
Current and deferred taxes                                                               320,310    278,599 
Total assets                                                               37,254,665    35,926,459 
                                                                       
Liabilities   10,793,601    10,369,534    9,627,692    9,873,018    12,793,034    11,982,709    917,705    764,736    34,132,032    32,989,997    (344,407)   (388,615)   33,787,625    32,601,382 
Current and deferred taxes                                                               74,389    20,924 
Total liabilities                                                               33,862,014    32,622,306 

20

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

7.Cash and Cash Equivalents:

 

(a)The detail of the balances included under cash and cash equivalents and their reconciliation with the Statement of Cash Flows at the end of each period are detailed as follows:

  

   June   December 
   2019   2018 
   MCh$   MCh$ 
         
Cash and due from banks:          
Cash (*)   700,677    624,862 
Deposit in Chilean Central Bank (*)   244,486    121,807 
Deposits in other domestic banks   5,812    26,698 
Deposits abroad   199,707    106,714 
Subtotal - Cash and due from banks   1,150,682    880,081 
           
Net transactions in the course of collection   295,944    244,758 
Highly liquid financial instruments (**)   953,793    1,058,904 
Repurchase agreements (**)   81,077    72,632 
Total cash and cash equivalents   2,481,496    2,256,375 

 

(*)Amounts in cash funds and in Central Bank are regulatory reserve deposits that the Bank must maintain as a monthly average.

 

(**)It corresponds to negotiation instruments and repurchase contracts that meet the definition of cash and cash equivalents.

  

(b)Transactions in course of settlement:

 

Transactions in course of settlement are transactions for which the only remaining step is settlement, which will increase or decrease the funds in the Central Bank or in foreign banks, normally occurring within 24 to 48 business hours, and are detailed as follows:

 

   June   December 
   2019   2018 
   MCh$   MCh$ 
Assets        
Documents drawn on other banks (clearing)   180,539    210,743 
Funds receivable   842,952    369,590 
Subtotal transactions in the course of collection   1,023,491    580,333 
           
Liabilities          
Funds payable   (727,547)   (335,575)
Subtotal transactions in the course of payment   (727,547)   (335,575)
Net transactions in the course of settlement   295,944    244,758 

 

21

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

8.Financial Assets Held-for-trading:

 

The detail of financial instruments classified as held-for-trading is as follows:

 

   June   December 
   2019   2018 
   MCh$   MCh$ 
Instruments issued by the Chilean Government and Central Bank of Chile        
Central Bank of Chile bonds   69,292    24,906 
Central Bank of Chile promissory notes   1,013,357    1,410,080 
Other instruments issued by the Chilean Government and Central Bank   255,513    88,486 
           
Other instruments issued in Chile          
Bonds from other domestic companies       7,532 
Bonds from domestic banks   25,252    20,186 
Deposits in domestic banks   133,360    100,225 
Other instruments issued in Chile   2,709    1,664 
           
Instruments issued Abroad          
Instruments from foreign governments or central banks        
Other instruments issued abroad       4,446 
           
Mutual fund investments          
Funds managed by related companies   50,675    87,841 
Funds managed by third-party        
Total   1,550,158    1,745,366 

  

Under “Instruments issued by the Chilean Government and Central Bank of Chile” are classified instruments sold under repurchase agreements to customers and financial instruments, by an amount of Ch$73,529 million as of June 30, 2019 (Ch$115,749 million as of December 31, 2018). Repurchase agreements had a 1 day average expiration as of period-end 2019 (2 days in December 2018).

 

Moreover, under this same item, other financial instruments are maintained as collateral guaranteeing the derivative transactions executed through Comder Contraparte Central S.A. for an amount of Ch$52,758 as of June 30, 2019 (Ch$34,456 million as of December 31, 2018).

 

“Other instruments issued in Chile” include instruments sold under repurchase agreements with customers and financial instruments amounting to Ch$120,543 million as of June 30, 2019 (Ch$99,268 million as of December 31, 2018). The repurchase agreements have an average expiration of 11 days as of period-end 2019 (10 days in December 2018).

 

Additionally, the Bank holds financial investments in mortgage finance bonds issued by itself in the amount of Ch$9,892 million as of June 30, 2019 (Ch$11,397 million as of December 31, 2018), which are presented as a reduction of the liability line item “Debt issued”.

22

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

9.Cash collateral on securities borrowed and reverse repurchase agreements:

 

(a)Receivables for repurchase agreements: The Bank provides financing to its customers through repurchase agreements and security borrowings, in which the financial instrument serves as collateral. As of June 30, 2019 and December 31, 2018, the detail is as follows:

 

   Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 years and up to 5 years   Over 5 years   Total 
   June   December   June   December   June   December   June   December   June   December   June   December   June   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Instruments issued by the Chilean Governments and Central Bank of Chile                                                        
Central Bank bonds                                                        
Central Bank promissory notes       742                                                742 
Other instruments issued by the Chilean Government and Central Bank                                                        
Subtotal       742                                                742 
Other Instruments issued in Chile                                                                      
Deposit promissory notes from domestic banks                                                        
Mortgage bonds from domestic banks                                                        
Bonds from domestic banks       367                                                367 
Deposits in domestic banks       2,053                                                 2,053 
Bonds from other Chilean companies                                                        
Other instruments issued in Chile   66,612    70,334    14,466    16,918    12,904    6,875                            93,982    94,127 
Subtotal   66,612    72,754    14,466    16,918    12,904    6,875                            93,982    96,547 
Instruments issued by foreign institutions                                                                      
Instruments from foreign governments or Central Bank                                                        
Other instruments                                                        
Subtotal                                                        
Mutual fund investments                                                                      
Funds managed by related companies                                                        
Funds managed by third-party                                                        
Subtotal                                                        
Total   66,612    73,496    14,466    16,918    12,904    6,875                            93,982    97,289 

 

Securities received:

 

The Bank and its subsidiaries have received financial instruments that they can sell or give as collateral in case the owner of these instruments enters into default or in bankruptcy. As of June 30, 2019, the fair value of the instruments received amounts to Ch$93,612 million (Ch$95,316 million as of December, 2018).

 

23

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

9.Cash collateral on securities lent and repurchase agreements, continued:

 

(b)Liabilities for repurchase contracts: The Bank obtains financing by selling financial instruments and committing to purchase them at future dates, plus interest at a prefixed rate. As of June 30, 2019 and December 31, 2018, the repurchase agreements are the following:

 

   Up to 1 month   Over 1 month and
up to 3 months
   Over 3 months and
up to 12 months
   Over 1 year and
up to 3 years
   Over 3 years and
up to 5 years
   Over 5 years   Total 
   June   December   June   December   June   December   June   December   June   December   June   December   June   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Instruments issued by the Chilean Governments and Central Bank of Chile                                                        
Central Bank bonds           130,197                                                —                —                            130,197 
Central Bank promissory notes   25,452                                                25,452     
Other instruments issued by the Chilean Government and Central Bank   47,923                                                47,923     
Subtotal   73,375    130,197                                            73,375    130,197 
Other Instruments issued in Chile                                                                      
Deposit promissory notes from domestic banks                                                        
Mortgage bonds from domestic banks                                                        
Bonds from domestic banks                                                        
Deposits in domestic banks       162,167        1,448        5,210                                168,825 
Bonds from other Chilean companies                                                        
Other instruments issued in Chile   185,906    4,798    693        1,146                                187,745    4,798 
Subtotal   185,906    166,965    693    1,448    1,146    5,210                            187,745    173,623 
Instruments issued by foreign institutions                                                                      
Instruments from foreign governments or central bank                                                        
Other instruments issued by foreing                                                        
Subtotal                                                        
Mutual fund investments                                                                      
Funds managed by related companies                                                        
Funds managed by third-party                                                        
Subtotal                                                        
Total   259,281    297,162    693    1,448    1,146    5,210                            261,120    303,820 

 

Securities sold:

 

The fair value of the financial instruments delivered as collateral by the Bank and its subsidiaries, in sales transactions with repurchase agreement and securities loans as of June 30, 2019 amounts to Ch$259,532 million (Ch$298,708 million in December 2018). In the event that the Bank and its subsidiaries enter into default or bankruptcy, the counterparty is authorized to sell or deliver these investments as collateral.

24

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

10.Derivative Instruments and Accounting Hedges:

 

(a)As of June 30, 2019 and December 31, 2018, the Bank’s portfolio of derivative instruments is detailed as follows:

  

   Notional amount of contract with final expiration date in   Fair Value 
  

 

Up to 1 month

   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 year and up to 5 years   Over 5 years   Total   Assets   Liabilities 
As of June 30, 2019  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Derivatives held for hedging purposes                                             
Interest rate swap and cross currency swap               9,659            9,659        2,838 
Interest rate swap           10,329    10,790    3,394    71,776    96,289    46    6,179 
Total derivatives held for hedging purposes           10,329    20,449    3,394    71,776    105,948    46    9,017 
                                              
Derivatives held as cash flow hedges                                             
Interest rate swap and cross currency swap           248,839    137,970    132,876    551,649    1,071,334    14,476    60,286 
Total derivatives held as cash flow hedges           248,839    137,970    132,876    551,649    1,071,334    14,476    60,286 
                                              
Trading derivatives                                             
Currency forward   11,035,266    5,865,696    14,521,276    3,909,421    140,697    34,615    35,506,971    322,472    278,839 
Interest rate swap   2,059,967    6,043,461    15,881,126    17,937,298    6,873,410    9,722,926    58,518,188    664,162    670,095 
Interest rate swap and cross currency swap   286,254    487,684    3,279,522    5,238,796    3,252,845    4,089,393    16,634,494    432,344    551,297 
Call currency options   14,257    57,466    89,820    9,213            170,756    1,907    948 
Put currency options   12,763    52,503    81,135    7,177            153,578    357    2,139 
Total trading derivatives   13,408,507    12,506,810    33,852,879    27,101,905    10,266,952    13,846,934    110,983,987    1,421,242    1,503,318 
                                              
Total   13,408,507    12,506,810    34,112,047    27,260,324    10,403,222    14,470,359    112,161,269    1,435,764    1,572,621 

 

25

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

10.Derivative Instruments and Accounting Hedges, continued:

 

(a)Portfolio of derivative instruments, continued:

  

   Notional amount of contract with final expiration date in   Fair Value 
   Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months  

Over 1 year and up to 3 years

  

Over 3 year and up to 5 years

  

 

Over 5 years

   Total  

Assets

  

Liabilities

 
As of December 31, 2018  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Derivatives held for hedging purposes                                             
Interest rate swap and cross currency swap                   11,132        11,132        3,012 
Interest rate swap           10,555        16,078    200,321    226,954    1,116    3,152 
Total derivatives held for hedging purposes           10,555        27,210    200,321    238,086    1,116    6,164 
                                              
Derivatives held as cash flow hedges                                             
Interest rate swap and cross currency swap       142,045    213,518    136,852    163,027    482,015    1,137,457    34,298    31,818 
Total derivatives held as cash flow hedges       142,045    213,518    136,852    163,027    482,015    1,137,457    34,298    31,818 
                                              
Trading derivatives                                             
Currency forward   8,414,296    9,941,108    13,350,051    3,843,703    92,395    35,374    35,676,927    735,444    631,047 
Interest rate swap   3,977,068    9,065,335    25,723,239    17,216,272    7,219,269    9,129,644    72,330,827    287,611    284,840 
Interest rate swap and cross currency swap   227,185    369,509    1,983,836    4,366,801    3,339,946    3,695,613    13,982,890    450,519    570,033 
Call currency options   16,988    71,243    131,175    9,769            229,175    4,839    2,921 
Put currency options   16,141    62,809    103,834    9,769            192,553    120    1,534 
Total trading derivatives   12,651,678    19,510,004    41,292,135    25,446,314    10,651,610    12,860,631    122,412,372    1,478,533    1,490,375 
                                              
Total   12,651,678    19,652,049    41,516,208    25,583,166    10,841,847    13,542,967    123,787,915    1,513,947    1,528,357 

 

26

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

  

10.Derivative Instruments and Accounting Hedges, continued:

 

(b)Fair value Hedges:

 

The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates in financial instruments. The aforementioned hedge instruments change the effective cost of long-term assets from a fixed interest rate to a floating rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve.

 

Below is a detail of the hedged elements and instruments under fair value hedges as of June 30, 2019 and December 31, 2018:

  

   June   December 
   2019   2018 
   MCh$   MCh$ 
Hedge element        
Commercial loans   9,659    11,132 
Corporate bonds   96,289    226,954 
           
Hedge instrument          
Cross currency swap   9,659    11,132 
Interest rate swap   96,289    226,954 

  

(c)Cash flow Hedges:

 

(c.1)The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates and foreign exchange of foreign banks obligations and bonds issued abroad in US Dollars, Hong Kong dollars, Swiss Franc, Japanese Yens and Euros. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate.

 

Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (“CLF”) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily impact the item “Interest Revenue” of the Income Financial Statements.

 

27

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

_____________

 

10.Derivative Instruments and Accounting Hedges, continued:

 

(c)Cash flow Hedges, continued:

 

(c.2)Below are the cash flows from bonds issued abroad objects of this hedge and the cash flows of the asset part of the derivative instrument:

 

   Up to 1 month   Over 1 month and
up to 3 months
   Over 3 months and
up to 12 months
   Over 1 year and
up to 3 years
   Over 3 years and
up to 5 years
   Over 5 years   Total 
   June   December   June   December   June   December   June   December   June   December   June   December   June   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                         
Hedge element                                                                      
Outflows:                                                                      
Corporate Bond EUR                   (1,300)   (1,338)   (2,600)   (2,675)   (2,600)   (2,675)   (83,959)   (87,097)   (90,459)   (93,785)
Corporate Bond HKD           (4,423)       (59,100)   (66,378)   (21,186)   (21,601)   (80,059)   (83,608)   (258,216)   (263,206)   (422,984)   (434,793)
Corporate Bond CHF               (89,256)   (124,290)   (125,993)   (1,431)   (1,450)