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 January, 2020

 

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 þ 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 þ

 

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 December 31, 2019.

 

1

 

 

SIGNATURE 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: January 30, 2020

 

  Banco de Chile
   
  By: /S/ Eduardo Ebensperger O.
     

Eduardo Ebensperger O.

CEO

 

 

2

 

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 Consolidated Financial Statements

As of December 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  

BANCO DE CHILE AND SUBSIDIARIES

 

(Free translation of Consolidated Financial Statements originally issued in Spanish)

  

INDEX

  

I.Consolidated Statements of Financial Position
II.Consolidated Statements of Income
III.Consolidated Statements of Other Comprehensive Income
IV.Consolidated Statements of Changes in Equity
V.Consolidated Statements of Cash Flows
VI.Notes to the 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
PEN = Peruvian sol
AUD = Australian dollar
     
NOK = Norwegian krone
     
IFRS = International Financial Reporting Standards
     
IAS = International Accounting Standards
     
RAN = Actualized Standards Compilation of the Chilean Commission for Financial Market (“CMF”)
     
IFRIC = International Financial Reporting Interpretations Committee
     
SIC = Standards Interpretation Committee

  

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

  

INDEX

 

  Page
   
Consolidated Statement of Financial Position 1
Consolidated Statements of Income 2
Consolidated Statements of Other Comprehensive Income 3
Consolidated Statement of Changes in Equity 4
Consolidated Statements of Cash Flows 5
1. Company information: 6
2. Summary of Significant Accounting Principles: 7
3. New Accounting Pronouncements: 46
4. Changes in Accounting policies and Disclosures: 52
5. Relevant Events: 53
6. Business Segments: 55
7. Cash and Cash Equivalents: 58
8. Financial Assets Held-for-trading: 59
9.   Investments under resale agreements and obligations under repurchase agreements: 60
10. Derivative Instruments and Accounting Hedges: 62
11. Loans and advances to Banks: 68
12. Loans to Customers, net: 69
13. Investment Securities: 76
14. Investments in Other Companies: 78
15. Intangible Assets: 81
16. Fixed assets, leased assets and lease liabilities: 83
17. Current Taxes and Deferred Taxes: 87
18. Other Assets: 92
19. Current accounts and Other Demand Deposits: 93
20. Savings accounts and Time Deposits: 93
21. Borrowings from Financial Institutions: 94
22. Debt Issued: 95
23. Other Financial Obligations: 99
24. Provisions: 99
25. Other Liabilities: 103
26. Contingencies and Commitments: 104
27. Equity: 110
28. Interest Revenue and Expenses: 115
29. Income and Expenses from Fees and Commissions: 117
30. Net Financial Operating Income: 118
31. Foreign Exchange Transactions, Net: 118
32. Provisions for Loan Losses: 119
33. Personnel Expenses: 120
34. Administrative Expenses: 121
35. Depreciation, Amortization and Impairment: 122
36. Other Operating Income: 123
37. Other Operating Expenses: 124
38. Related Party Transactions: 125
39. Fair Value of Financial Assets and Liabilities: 130
40. Maturity of Assets and Liabilities: 143
41. Risk Management: 145
42. Subsequent Events: 176

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements

BANCO DE CHILE AND SUBSIDIARIES

As of December 31, 2019 and 2018

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2019 and 2018

(Free translation of Consolidated Financial Statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

     2019   2018 
   Notes  MCh$   MCh$ 
ASSETS           
Cash and due from banks  7   2,392,166    880,081 
Transactions in the course of collection  7   584,672    580,333 
Financial assets held-for-trading  8   1,872,355    1,745,366 
Investment under resale agreements  9   142,329    97,289 
Derivative instruments  10   2,786,215    1,513,947 
Loans and advances to banks  11   1,139,433    1,494,307 
Loans to customers, net  12   29,334,052    27,307,223 
Financial assets available-for-sale  13   1,357,846    1,043,440 
Financial assets held-to-maturity  13        
Investments in other companies  14   50,758    44,561 
Intangible assets  15   58,307    52,061 
Property and equipment  16   220,262    215,872 
Leased assets  16   150,665     
Current tax assets  17   357    677 
Deferred tax assets  17   320,948    277,922 
Other assets  18   862,968    673,380 
TOTAL ASSETS      41,273,333    35,926,459 
              
LIABILITIES             
Current accounts and other demand deposits  19   11,326,133    9,584,488 
Transactions in the course of payment  7   352,121    335,575 
Obligations under repurchase agreements  9   308,734    303,820 
Savings accounts and time deposits  20   10,856,618    10,656,174 
Derivative instruments  10   2,818,121    1,528,357 
Borrowings from financial institutions  21   1,563,277    1,516,759 
Debt issued  22   8,813,414    7,475,552 
Other financial obligations  23   156,229    118,014 
Lease liabilities  16   146,013     
Current tax liabilities  17   76,289    20,924 
Deferred tax liabilities  17        
Provisions  24   684,663    670,119 
Other liabilities  25   643,498    412,524 
TOTAL LIABILITIES      37,745,110    32,622,306 
              
EQUITY  27          
Attributable to Bank’s Owners:             
Capital      2,418,833    2,418,833 
Reserves      703,272    617,597 
Other comprehensive income      (56,601)   (39,222)
Retained earnings:             
Retained earnings from previous years      170,171    17,481 
Income for the year      593,008    594,872 
Less:             
Provision for minimum dividends      (300,461)   (305,409)
Subtotal      3,528,222    3,304,152 
Non-controlling interests      1    1 
TOTAL EQUITY      3,528,223    3,304,153 
TOTAL LIABILITIES AND EQUITY      41,273,333    35,926,459 

  

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

1

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2019 and 2018

(Free translation of Consolidated Financial Statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

   

      2019   2018 
   Notes  MCh$   MCh$ 
            
Interest revenue  28   2,111,645    1,999,551 
Interest expense  28   (742,270)   (679,640)
Net interest income      1,369,375    1,319,911 
              
Income from fees and commissions  29   589,172    505,114 
Expenses from fees and commissions  29   (131,870)   (145,159)
Net fees and commission income      457,302    359,955 
              
Net financial operating income  30   116,409    139,856 
Foreign exchange transactions, net  31   30,886    2,701 
Other operating income  36   40,548    50,860 
Total operating revenues      2,014,520    1,873,283 
              
Provisions for loan losses  32   (347,274)   (281,410)
              
OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES      1,667,246    1,591,873 
              
Personnel expenses  33   (475,599)   (442,577)
Administrative expenses  34   (329,705)   (331,477)
Depreciation and amortization  35   (70,541)   (37,681)
Impairment  35   (2,555)   (334)
Other operating expenses  37   (32,604)   (35,655)
              
TOTAL OPERATING EXPENSES      (911,004)   (847,724)
              
NET OPERATING INCOME      756,242    744,149 
              
Income attributable to associates  14   6,450    7,255 
Income before income tax      762,692    751,404 
              
Income tax  17   (169,683)   (156,531)
              
NET INCOME FOR THE YEAR      593,009    594,873 
Attributable to:             
Bank’s Owners  27   593,008    594.872 
Non-controlling interests      1    1 
              
Net income per share attributable to Bank’s Owners:      Ch$    Ch$ 
Basic net income per share  27   5.87    5.89 
Diluted net income per share  27   5.87    5.89 

  

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

2

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF

OTHER COMPREHENSIVE INCOME

For the years ended December 31, 2019 and 2018

(Free translation of Consolidated Financial Statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

  

      2019   2018 
   Notes  MCh$   MCh$ 
            
NET INCOME FOR THE YEAR      593,009    594,873 
              
OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Net gains (losses) on available-for-sale instruments valuation  13   13,763    (11,787)
Net gains (losses) on derivatives held as cash flow hedges  10   (37,546)   (30,943)
Subtotal Other comprehensive income before income taxes      (23,783)   (42,730)
              
Income tax relating to the components of other comprehensive income that are reclassified in income for the year      6,404    11,548 
              
Total other comprehensive income items that will be reclassified subsequently to profit or loss      (17,379)   (31,182)
              
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Adjustment for defined benefit plans  24   (247)   (127)
              
Subtotal other comprehensive income before income taxes      (247)   (127)
              
Income tax relating to the components of other comprehensive income that will not be reclassified to income for the year  17   66    35 
              
Total other comprehensive income items that will not be reclassified subsequently to profit or loss      (181)   (92)
              
CONSOLIDATED COMPREHENSIVE INCOME FOR THE YEAR      575,449    563,599 
              
Attributable to:             
Bank’s Owners      575,448    563,598 
Non-controlling interests      1    1 

   

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

3

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2019 and 2018

(Free translation of Consolidated Financial Statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

 

          Reserves   Other comprehensive income   Retained earnings     
   Notes  Paid-in
Capital
   Other
reserves
   Reserves
from
earnings
   Unrealized
gains (losses) on
available-for-sale
   Derivatives
cash flow
hedge
   Income
Tax
   Retained
earnings from
previous years
   Income (losses) for
the year
   Provision for
minimum
dividends
   Attributable
to equity
holders of
the parent
   Non-
controlling
interest
   Total equity 
      MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   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)   (1)   (61,173)
Equity effect change in accounting policy                              1,421            1,421        1,421 
Other comprehensive income:  27                                                            
Defined benefit plans adjustment, net          (92)                               (92)       (92)
Derivatives cash flow hedge                      (30,943)   8,354                (22,589)       (22,589)
Valuation adjustment on available-for-sale instruments                  (11,787)       3,194                (8,593)       (8,593)
Income for the year 2018  27                               594,872        594,872    1    594,873 
Provision for minimum dividends  27                                   (305,409)   (305,409)       (305,409)
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  27                           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)   (1)   (50,903)
Equity effect change in accounting policy                              (15)           (15)       (15)
Other comprehensive income:  27                                                            
Defined benefit plans adjustment, net          (181)                               (181)       (181)
Derivatives cash flow hedge                      (37,546)   10,138                (27,408)       (27,408)
Valuation adjustment on available-for-sale instruments  13               13,763        (3,734)               10,029        10,029 
Income for the year 2019  27                               593,008        593,008    1    593,009 
Provision for minimum dividends  27                                   (300,461)   (300,461)       (300,461)
Balances as of December 31, 2019      2,418,833    31,780    671,492    3,827    (81,040)   20,612    170,171    593,008    (300,461)   3,528,222    1    3,528,223 

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

4

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2019 and 2018

(Free translation of Consolidated Financial Statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      2019   2018 
   Notes  MCh$   MCh$ 
CASH FLOWS FROM OPERATING ACTIVITIES:           
Net income for the year      593,009    594,873 
Charges (credits) to income that do not represent cash flows:             
Depreciation and amortization  35   70,541    37,681 
Impairment  35   2,555    334 
Provision for loans and accounts receivable from customers and owed by banks  32   393,737    344,490 
Provision of contingent loans  32   1,512    (2,501)
Fair value adjustment of financial assets held-for-trading      294    (663)
Changes in assets and liabilities by deferred taxes  17   (46,694)   (7,819)
(Gain) loss attributable to investments in companies with significant influence, net  14   (6,039)   (6,811)
(Gain) loss from sales of assets received in lieu of payment,net  36   (10,793)   (8,779)
(Gain) loss on sales of property and equipment, net  36 – 37   (90)   (3,632)
Charge-offs of assets received in lieu of payment  37   8,778    6,638 
Other charges (credits) to income that do not represent cash flows      8,882    (3,901)
Net change in exchange rate, interest variation and fees accrued on assets and liabilities      146,774    45,048 
              
Changes in assets and liabilities that affect operating cash flows:             
(Increase) decrease in loans and advances to banks, net      354,308    (734,330)
(Increase) decrease in loans to customers      (2,343,162)   (2,687,964)
(Increase) decrease in financial assets held-for-trading, net      2,801    211,059 
(Increase) decrease in other assets and liabilities      103,135    (162,604)
Increase (decrease) in current account and other demand deposits      1,738,840    668,521 
Increase (decrease) in transactions from reverse repurchase agreements      1,711    98,570 
Increase (decrease) in savings accounts and time deposits      184,946    579,827 
Sale of assets received in lieu of payment or adjudicated      30,795    31,403 
Total cash flows from operating activities      1,235,840    (1,000,560)
              
CASH FLOWS FROM INVESTING ACTIVITIES:             
(Increase) decrease in financial assets available-for-sale, net      (302,427)   463,558 
Payments for lease agreements  16   (29,374)    
Net changes in leased assets  16   (1,725)    
Purchases of property and equipment  16   (43,512)   (28,065)
Sales of property and equipment      92    3,640 
Acquisition of intangible assets  15   (20,928)   (23,512)
Acquisition of investments in companies  14   (671)   (30)
Dividends received from investments in companies      963    855 
Total cash flows from investing activities      (397,582)   416,446 
              
CASH FLOWS FROM FINANCING ACTIVITIES:             
Redemption of letters of credit      (3,268)   (4,388)
Issuance of bonds  22   2,625,176    2,157,587 
Redemption of bonds      (1,546,572)   (1,436,232)
Dividends paid  27   (356,311)   (374,079)
Increase (decrease) in borrowings from foreign financial institutions      44,755    320,635 
Increase (decrease) in other financial obligations      42,664    (8,753)
Increase (decrease) in other obligations with Central Bank of Chile          (1)
Other long-term borrowings          15 
Payment of other long-term borrowings      (4,005)   (9,814)
Total cash flows from financing activities      802,439    644,970 
              
TOTAL NET  POSITIVE CASH FLOWS FOR THE YEAR      1,640,697    60,856 
              
Effect of exchange rate changes      34,299    116,121 
              
Cash and cash equivalents at beginning of year      2,256,375    2,079,398 
              
Cash and cash equivalents at end of year  7   3,931,371    2,256,375 

 

   2019   2018 
   MCh$   MCh$ 
Operational Cash flow interest:        
Interest received   2,010,563    1,881,766 
Interest paid   (460,115)   (400,686)

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

5

 

 

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Free translation of 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. 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 Consolidated Financial Statements of Banco de Chile, for the year ended December 31, 2019 were approved by the Directors on January 30, 2020.

 

6

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles:

 

(a)Basis of preparation:

 

Legal dispositions

 

Decree Law No. 3,538 of 1980, according to the text replaced by the first article of Law No. 21,000 that “Creates the Commission for the Financial Market”, provides in numeral 6 of its article 5 that the Commission for the Market Financial (“CMF”) may “set the standards for the preparation and presentation of reports, balance sheets, statements of situation and other financial statements of the audited entities and determine the principles under which they must keep their accounting”.

 

In accordance with the current legal framework, banks must use the accounting principles provided by the Commission and in everything that is not dealt with by it or in contravention of its instructions, they must adhere to the generally accepted accounting principles, which correspond to the technical standards issued by the College of Accountants of Chile AG, coinciding with the International Financial Reporting Standards (“IFRS”) agreed by the International Accounting Standards Board (“IASB”). If there are discrepancies between these accounting principles of general acceptance and the accounting criteria issued by the Commission, the latter shall prevail.

 

(b)Basis of consolidation:

 

The financial statements of Banco de Chile as of December 31, 2019 and 2018 have been consolidated with its Chilean subsidiaries and foreign subsidiary using the global integration method (line-by-line). They include preparation of individual financial statements of the Bank and companies that participate in the consolidation and it include adjustments and reclassifications necessary to homologue accounting policies and valuation criteria applied by the Bank. The Consolidated Financial Statements have been prepared using the same accounting policies for similar transactions and other events in equivalent circumstances.

 

Significant intercompany transactions and balances (assets and liabilities, equity, income, expenses and cash flows) originated in operations performed between the Bank and its subsidiaries and between subsidiaries have been eliminated in the consolidation process. The non-controlling interest corresponding to the participation percentage of third parties in subsidiaries, which the Bank does not own directly or indirectly, has been recognized and is shown separately in the consolidated shareholders’ equity of Banco de Chile.

 

7

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

  

 

 

2.Summary of Significant Accounting Principles, continued:

 

(b)Basis of consolidation, continued:

 

(i)Subsidiaries

 

Consolidated financial statements as of December 31, 2019 and 2018 incorporate financial statements of the Bank and its subsidiaries. According IFRS 10 – “Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically the Bank have power over the investee when has existing rights that give it the ability to direct the relevant activities of the investee.

 

When the Bank has less than a majority of the voting rights of an investee, but these voting rights are enough to have the ability to direct the relevant activities unilaterally, then conclude the Bank has control. The Bank considers all factors and relevant circumstances to evaluate if their voting rights are enough to obtain the control, which it includes:

 

The amount of voting rights that the Bank has, related to the amount of voting rights of the others stakeholders;

 

Potential voting rights maintained by the Bank, other holders of voting rights or other parties;

 

Rights emanated from other contractual arrangements;

 

Any additional circumstance that indicate that the Bank have or have not the ability to manage the relevant activities when that decisions need to be taken, including behavior patterns of vote in previous shareholders meetings.

 

8

 

  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(b)Basis of consolidation, continued:

 

(i)Subsidiaries, continued:

 

The Bank reevaluates if it has or has not the control over an investee when the circumstances indicates that exists changes in one or more elements of control listed above.

 

The entities controlled by the Bank and which form parts of the consolidation are detailed as follows:

 

         Functional  Interest Owned 
Rut  Subsidiaries  Country  Currency  Direct   Indirect   Total 
            2019   2018   2019   2018   2019   2018 
            %   %   %   %   %   % 
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 

 

(ii)Associates and Joint Ventures

 

Associates

 

An associate is an entity over whose operating and financial management policy decisions the Bank has significant influence, without to have the control over the associate. Significant influence is generally presumed when the Bank holds between 20% and 50% of the voting rights. Other considered factors when determining whether the Bank has significant influence over another entity are the representation on the board of directors and the existence of material intercompany transactions. The existence of these factors could determine the existence of significant influence over an entity even though the Bank had participation less than 20% of the voting rights.

 

Investments in associates where exists significant influence, are accounted for using the equity method. In accordance with the equity method, the Bank’s investments are initially recorded at cost, and subsequently increased or decreased to reflect the proportional participation of the Bank in the net income or loss of the associate and other movements recognized in its shareholders’ equity. Goodwill arising from the acquisition of an associate is included in the net book value, net of any accumulated impairment loss.

 

9

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(b)Basis of consolidation, continued:

 

(ii)Associates and Joint Ventures, continued:

 

Joint Ventures

 

Joint Ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

 

According to IFRS 11 “Joint Arrangements”, an entity will determine the type of joint arrangement in which it is involved, and may classify the agreement as a “Joint operation” or a “Joint venture”.

 

For investments defined like “Joint Operation”, their assets, liabilities, income and expenses are recognised by their participation in joint operation.

 

For investments defined like “Joint Venture”, they will be registered according equity method.

 

Investments in other companies that, for their characteristics, are defined like “Joint Ventures” are the following:

 

Artikos S.A.
Servipag Ltda.

 

(iii)Shares or rights in other companies

 

These are entities in which the Bank does not have significant influence. They are presented at acquisition value (historical cost).

 

(iv)Special purpose entities

 

According to current regulation, the Bank must be analyzing periodically its consolidation area, considering that the principal criteria are the control that the Bank has in an entity and not its percentage of equity participation.

 

As of December 31, 2019 and 2018 the Bank does not control and has not created any SPEs.

  

10

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(b)Basis of consolidation, continued:

 

(v)Fund management

 

The Bank and its subsidiaries manage and administer assets held in mutual funds and other investment products on behalf of investors, perceiving a paid according to the service provided and according to market conditions. Managed resources are owned by third parties and therefore not included in the Statement of Financial Position.

 

According to established in IFRS 10, for consolidation purposes is necessary to assess the role of the Bank and its subsidiaries with respect to the funds they manage, must determine whether that role is Agent or Principal. This assessment should consider the following:

 

- The scope of their authority to make decisions about the investee.

- The rights held by third parties.

- The remuneration to which he is entitled under remuneration arrangements.

- Exposure, decision maker, the variability of returns from other interests that keeps the investee.

 

The Bank and its subsidiaries manage on behalf and for the benefit of investors, acting in that relationship only as Agent. Under this category, and as provided in the aforementioned rule, do not control these funds when they exercise their authority to make decisions. Therefore, as of December 31, 2019 and 2018 act as agent, and therefore do not consolidate any fund, no funds are part of the consolidation.

 

(c)Non-controlling interest:

 

Non-controlling interest represents the share of losses, income and net assets that the Bank does not control, neither directly or indirectly. It is presented as a separate item in the Consolidated Statement of Income and the Consolidated Statement of Financial Position.

 

(d)Use of estimates and judgment:

 

Preparing Consolidated Financial Statements requires management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Real results could differ from these estimated amounts. The estimates made refer to:

 

1.Provision for loan losses (Note No. 11. No. 12 and No. 32);
2.Useful life of intangible, property and equipment and leased assets and lease liabilities (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).

 

11

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(d)Use of estimates and judgments, continued:

 

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 year that the estimate is reviewed.

 

During the year ended December 31, 2019 there have been no significant changes in the estimates made.

 

(e)Financial asset and liability valuation criteria:

 

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Consolidated Statement of Financial Position and the Consolidated Statement of Other Comprehensive Income. This involves selecting the particular basis or method of measurement.

 

In the Consolidated Financial Statements several measuring bases are used with different levels mixed among them. These bases or methods include the following:

 

(i)Initial recognition

 

The Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities and other assets o liabilities on the date of negotiation. Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset.

 

(ii)Classification

 

Assets, liabilities and income accounts have been classified in conformity with standards issued by the CMF.

 

12

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(e)Financial asset and liability valuation criteria, continued:

 

(iii)Derecognition of financial assets and financial liabilities

 

The Bank and its subsidiaries derecognize a financial asset (or where applicable part of a financial asset) from its Consolidated Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred. Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability.

 

When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership. In this case:

 

(a)If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized, and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities.

 

(b)If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it.

 

(c)If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset. In this case:

 

(i)If the Bank has not retained control, the financial asset will be derecognized, and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities.

 

(ii)If the Bank has retained control, it will continue to recognize the financial asset in the Consolidated Financial Statement by an amount equal to its exposure to changes in value that can experience and recognize a financial liability associated to the transferred financial asset.

 

The Bank derecognizes a financial liability (or a portion thereof) from its Consolidated Statement of Financial Position if, and only if, it has extinguished or, in other words, when the obligation specified in the corresponding contract has been paid or settled or has expired.

 

13

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(e)Financial asset and liability valuation criteria, continued:

 

(iv)Offsetting

 

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

 

Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions such as the Bank’s trading activities.

 

(v)Valuation at amortized cost

 

Amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment.

 

(vi)Fair value measurements

 

Fair value of a financial instrument is the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between participants in a main market (or more advantageous) at the measurement date under current market conditions, regardless of whether that price is directly observable or estimated using another valuation technique. The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).

 

When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument. A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

 

If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between knowledgeable, willing parties in an arm’s length transaction, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows and options pricing models.

 

The chosen valuation technique use the maximum observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument. Periodically, the Bank calibrates the valuation techniques and tests it for validity using prices from observable current market transaction in the same instrument or based on any available observable market data.

 

14

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(e)Financial asset and liability valuation criteria, continued:

 

(vi)Fair value measurements, continued:

 

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. However, when transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in incomes.

 

On the other hand, it should be noted that the Bank has financial assets and liabilities offset each other’s market risks, based on which average market prices are used as a basis for determining their fair value.

 

Then, the fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction.

 

The Bank’s fair value disclosures are included in Note No. 39.

 

(f)Functional currency:

 

The items included in the financial statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency). The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s Consolidated Financial Statements, that is the currency of the primary economic environment in which the Bank operates, as well as obeying to the currency that influences in the costs and income structure.

 

(g)Transactions in foreign currency:

 

Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position. All differences are recorded as a debit or credit to income.

 

15

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(g)Transactions in foreign currency, continued:

 

As of December 31, 2019, the Bank applied the exchange rate of accounting representation according to the standards issued by the CMF, where assets expressed in dollars are shown to their equivalent value in Chilean pesos calculated using the following exchange rate of Ch$751.88 US$1 (Ch$693.60 to US$1 in 2018).

 

The gain of Ch$30,886 million for net foreign exchange transactions, net (Ch$2,701 million in 2018) shown in the Consolidated Statements of Income, includes recognition of the effects of exchange rate variations on assets and liabilities in foreign currency or indexed to exchange rates, and the result of foreign exchange transactions conducted by the Bank and its subsidiaries.

 

(h)Business Segments:

 

The Bank’s operating segments are determined based on its different business units, considering the following factors:

 

(i)That it conducts business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity).

 

(ii)That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to decide about resource allocation for the segment and evaluate its performance; and

 

(iii)That separate financial information is available.

 

(i)Cash and cash equivalents:

 

The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents derived from operating activities, investment activities and financing activities during the year. The indirect method has been used in the preparation of this statement of cash flows.

 

16

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(i)Cash and cash equivalents, continued:

 

For the preparation of Consolidated Financial Statements of Cash Flow it is considered the following concepts:

 

(i)Cash and cash equivalents correspond to “Cash and Bank Deposits”, plus (minus) the net balance of transactions in the course of collection that are shown in the Consolidated Statement of Financial Position, plus instruments held-for-trading and available-for-sale that are highly liquid and have an insignificant risk of change in value, maturing in less than three months from the date of acquisition, plus repurchase agreements that are in that situation. Also includes investments in fixed income mutual funds, according to instructions of the CMF, that are presented under “Trading Instruments” in the Consolidated Statement of Financial Position.

 

(ii)Operating activities: corresponds to normal activities of the Bank, as well as other activities that cannot classify like investing or financing activities.

 

(iii)Investing activities: correspond to the acquisition, sale or disposition other forms, of long-term assets and other investments that not include in cash and cash equivalent.

 

(iv)Financing activities: corresponds to the activities that produce changes in the amount and composition of the equity and the liabilities that are not included in the operating or investing activities.

 

(j)Financial assets held-for-trading:

 

Financial assets held-for-trading consist of securities acquired with the intention of generating profits as a result of short-term prices fluctuation or as a result of brokerage activities, or are part of a portfolio on which a short-term profit-generating pattern exists.

 

Financial assets held-for-trading are stated at their fair value. Accrued interest, gains or losses from their fair value adjustments, as well as gains or losses from trading activities, are included in “Net financial operating income” in the Consolidated Statement of Income.

 

17

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(k)Operations under resale and repurchase agreements:

 

The Bank carries out operations under resale agreements as a form of investment. The securities purchased under these agreements are recognized on the Bank’s Consolidated Statement of Financial Position under “Investments under resale agreements”, which is valued in accordance with the agreed-upon interest rate, through of method of amortized cost. According to rules, the Bank not register as own portfolio the instruments bought within resale agreements.

 

The Bank also carries out operations under repurchase agreements as a form of financing. The investments that are sold under repurchase obligation and that serve as collateral for borrowings are classified as “Financial Assets held-for-trading” or “Available-for-sale Instruments”. The obligation to repurchase the investment is classified in the liability as “Obligations under repurchase agreements”, which is valued in accordance with the agreed-upon interest rate.

 

As of December 31, 2019 and 2018 it not exist operations corresponding to securities lending.

 

(l)Derivative instruments:

 

The Bank maintains contracts of Derivative financial instruments, for cover the exposition of risk of foreign currency and interest rate. These contracts are recorded in the Consolidated Statement of Financial Position at their cost (included transactions costs) and subsequently measured at fair value. Derivative instruments are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”.

 

Changes in fair value of derivative contracts held for trading purpose are included under “Profit (loss) net of financial operations”, in the Consolidated Statement of Income.

 

In addition, the Bank includes in the valorization of derivatives the “Credit Valuation Adjustment” (CVA), to reflect the counterparty risk in the determination of fair value and the Bank’s own credit risk, known as “Debit valuation adjustment” (DVA).

 

Certain embedded derivatives in other financial instruments are treated as separate derivatives when their risk and characteristics are not closely related to those of the main contract and if the contract in its entirety is not recorded at its fair value with its unrealized gains and losses included in income.

 

At the moment of subscription of a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes.

 

18

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(l)Derivative instruments, continued:

 

If a derivative instrument is classified as a hedging instrument, it can be:

 

(1)A hedge of the fair value of existing assets or liabilities or firm commitments, or;
(2)A hedge of cash flows related to existing assets or liabilities or forecasted transactions.

 

A hedge relationship for hedge accounting purposes must comply with all of the following conditions:

 

(a)at its inception, the hedge relationship has been formally documented;
(b)it is expected that the hedge will be highly effective;
(c)the effectiveness of the hedge can be measured in a reasonable manner; and
(d)the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship.

 

The Bank presents and measures individual hedges (where there is a specific identification of hedged item and hedged instruments) by classification, according to the following criteria:

 

Fair value hedges: changes in the fair value of a hedged instruments derivative, designed like “fair value hedges”, are recognized in income under the line “Net interest income” and/or “Foreign exchange transactions, net”. Hedged item also is presented to fair value, related to the risk to be hedge. Gains or losses from hedged risk are recognized in income under the line “Net interest income” and adjust the book value of item hedged.

 

19

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(l)Derivative instruments, continued:

 

Cash flow hedge: changes in the fair value of financial instruments derivative designated like “cash flow hedge” are recognised in “Other Comprehensive Income”, to the extent that hedge is effective and hedge is reclassified to income in the item “Net interest income” and/or “Foreign exchange transactions, net”, when hedged item affects the income of the Bank produced for the “interest rate risk” or “foreign exchange risk”, respectively. If the hedge is not effective, changes in fair value are recognised directly in income in the item “Net financial operating income”.

 

If the hedged instruments does not comply with criteria of hedge accounting of cash flow, it expires or is sold, it suspend or executed, this hedge must be discontinued prospectively. Accumulated gains or losses recognised previously in the equity are maintained there until projected transactions occur, in that moment will be registered in Consolidated Statement of Income (in the item “Net interest income” and/or “Foreign exchange transactions, net”, depend of the hedge), lesser than it foresees that the transaction will not execute, in this case it will be registered immediately in Consolidated Statement of Income (in the item “Net interest income” and/or “Foreign exchange transactions, net”, depend of the hedge).

 

(m)Loans to customers:

 

Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.

 

(i)Valuation method

 

Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method minus any impairment, except when the Bank defined some loans as hedged items, which are measured at fair value, changes are recorded in the Consolidated Statement of Income, as described in letter (l) of this note.

 

20

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(ii)Lease contracts

 

Accounts receivable for leasing contracts, included under the caption “Loans to customers” correspond to periodic rent installments of contracts which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end.

 

(iii)Factoring transactions

 

They are valued for the amounts disbursed by the Bank in exchange for invoices or other commercial instruments representative of credit, with or without responsibility of the grantor, received in discount. Price differences between the amounts disbursed and the nominal value of the credits are recorded in the result as interest income, through the effective interest method, during the financing period.

 

In those cases where the transfer of these instruments it was made without responsibility of the grantor, it is the Bank who assumes the insolvency risks of those required to pay.

 

(iv)Impairment of loans

 

The impaired loans include the following assets, according to Chapter B-1 of Banking Accounting Standards Compendium of the CMF:

 

a)In case of debtors subject to individual assessment, are considered in impaired portfolio “Non-complying loans” and the categories B3 y B4 of “Substandar loans” defined in letter m) v.i).
b)Debtors subject to assessment group evaluation, the impaired portfolio includes all credits of the “Non-complying loans” defined in letter m) v. v).

 

(v)Allowance for loan losses

 

Allowances are required to cover the risk of loan losses have been established in accordance with the instructions issued by the CMF. The loans are presented net of those allowances and, in the case of loans and in the case of contingent loans, they are shown in liabilities under “Provisions”.

 

In accordance with what is stipulated by the CMF, models or methods are used based on an individual and group analysis of debtors, to establish allowance for loan losses.

 

21

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.i)Allowance for individual evaluations:

 

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the bank, that they must be analyzed in detail.

 

Likewise, the analysis of borrowers should focus on its credit quality related to the ability to payment, to have sufficient and reliable information, and to analyze in regard to guarantees, terms, interest rates, currency and revaluation, etc.

 

For purposes of establish the allowances, the banks must be asses the credit quality, then classify to one of three categories of loans portfolio: Normal, Substandard and Non-complying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply.

 

v.i.1Normal Loans and Substandard Loans:

 

Normal loans: correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality. Loans classified in categories A1 through A6.

 

Substandard loans: includes all borrowers with insufficient payment capacity or significant deterioration of payment capacity that may be reasonably expected not to comply with all principal and interest payments obligations set forth in the credit agreement.

 

This category also includes all loans that have been non-performing for more than 30 days. Loans classified in this category are B1 through B4.

 

As a result of individual analysis of the debtors, the banks must classify them in the following categories, assigning, subsequently, the percentage of probability of default and loss given default resulting in the following percentage of expected loss:

 

Classification Category of
the debtors
Probability of
default (%)
Loss given
default (%)
Expected
loss (%)

 

 

Normal Loans

A1 0.04 90.0 0.03600
A2 0.10 82.5 0.08250
A3 0.25 87.5 0.21875
A4 2.00 87.5 1.75000
A5 4.75 90.0 4.27500
A6 10.00 90.0 9.00000

 

Substandard Loans

B1 15.00 92.5 13.87500
B2 22.00 92.5 20.35000
B3 33.00 97.5 32.17500
B4 45.00 97.5 43.87500

 

22

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.i)Allowance for individual evaluations, continued:

 

v.i.1Normal Loans and Substandard Loans, continued:

 

Allowances for Normal and Substandard Loans:

 

To determine the amount of allowances to be constitute for normal and substandard portfolio, previously should be estimated the exposure to subject to the allowances, which will be applied to respective expected loss (expressed in decimals), which consist of probability of default (PD) and loss given default (LGD) established for the category in which the debtor and/or guarantor belong, as appropriate.

 

The exposure affects to allowances applicable to loans plus contingent loans minus the amounts to be recovered by way of the foreclosure of financial or real guarantees of the operations. Also, in some cases, the credit risk of direct debtor can be replaced by credit quality from guarantor or surety. Loans mean the book value of credit of the respective debtor, while for contingent loans, the value resulting from to apply the indicated in No.3 of Chapter B-3 of Banking Accounting Standards Compendium.

 

The banks must use the following equation:

 

Provision debtor = (ESA-GE) x (PD debtor /100)x(LGD debtor /100)+GE x(PD guarantor/100)x(LGD guarantor/100)

 

Where:

 

ESA = Exposure subject to allowances

GE   = Guaranteed exposure

ESA = (Loans + Contingent Loans) – Financial Guarantees

 

However, the Bank must maintain a minimum provision level of 0.50% over normal portfolio and contingents loans.

 

v.i.2Non-complying Loans

 

The non-complying portfolio includes the debtors and their credits for which their recovery is considered remote, as they show an impaired or no payment capacity. This category comprises all debtors who have stopped paying their creditors or with visible evidence that they will stop doing so, as well as debtors who are granted a loan to leave as normal debt an operation with more than 60 days overdue in their payment, those in which a forced restructuring of debts is necessary to avoid default and, in addition, any debtor debtors that has 90 days overdue or more in the payment of interest or principal of any credit.

 

This portfolio is composed of the debtors belonging to categories C1 to C6 of the rating scale and all credits, including 100% of the amount of contingent loans, held by those same debtors.

 

23

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.i)Allowance for individual evaluations, continued:

 

v.i.2Non-complying Loans, continued:

 

For purposes to establish the allowances on the non-complying loans, the Bank disposes the use of percentage of allowances to be applied on the amount of exposure, which corresponds to the amount of loans and contingent loans that maintain the same debtor. To apply that percentage, must be estimated a expected loss rate, less the amount of the exposure the recoveries by way of foreclosure of financial or real guarantees that to support the operation and, if there are available specific background, also must be deducting present value of recoveries obtainable exerting collection actions, net of expenses associated with them. This loss percentage must be categorized in one of the six levels defined by the range of expected actual losses by the Bank for all transactions of the same debtor.

 

These categories, their range of loss as estimated by the Bank and the percentages of allowance that definitive must be applied on the amount of exposures, are listed in the following table:

 

Type of Loan Classification Expected loss Allowance (%)

 

 

Non-complying loans

 

C1 Up to 3 % 2
C2 More than 3% up to 20% 10
C3 More than 20% up to 30% 25
C4 More than 30 % up to 50% 40
C5 More than 50% up to 80% 65
C6 More than 80% 90

 

For these loans, the expected loss must be calculated in the following manner:

 

Expected loss = (TE – R) / TE

Allowance = TE x (AP/100)

 

Where:

TE    = total exposure

R      = recoverable amount based on estimates of collateral value and collection efforts

AP    = allowance percentage (based on the category in which the expected loss should be classified).

 

All credits of the debtor must be kept in the Default Portfolio until there is a normalization of their ability or payment behavior, without prejudice to punishment of each particular credit that meets the condition indicated in point (vi) of this letter in order to remove a debtor from the Default Portfolio, once the circumstances that lead to classification in this portfolio according to the present rules have been overcome, at least the following copulative conditions must be met:

 

-No obligation of the debtor with the bank with more than 30 calendar days overdue.
-No new refinances granted to pay its obligations.
-At least one of the payments includes amortization of capital.
-If the debtor has a credit with partial payment periods less than six months, has already made two payments.
-If the debtor must pay monthly fees for one or more credits, has paid four consecutive dues.
-The debtor does not have direct debts unpaid in the CMF recast information, except in the case of insignificant amounts.

 

24

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.ii)Allowances for group evaluations

 

Group evaluations are relevant to address a large number of operations whose individual amounts are low or small companies. Such assessments, and the criteria for application, must be consistent with the transaction of give the credit.

 

In the case of consumer loans, collateral are not considered for the purpose of estimating the expected loss.

 

The Bank must discriminate between provisions on the normal portfolio and on the portfolio in default, and those that protect the risks of contingent credits associated with those portfolios.

 

Group evaluations requires the formation of groups of loans with similar characteristics in terms of type of debtors and conditions agreed, to establish technically based estimates by prudential criteria and following both the payment behavior of the group that concerned as recoveries of defaulted loans and consequently provide the necessary provisions to cover the risk of the portfolio.

 

Banks may use two alternative methods for determining provisions for retail loans that are evaluated as a group.

 

Under first method, it will be used the experience to explain the payment behavior of each homogeneous group of debtors and recoveries through collateral and of collection process, when it correspond, with objective of to estimate directly a percentage of expected losses that will be apply to the amount of the loans of respective group.

 

Under second method, the banks will segment to debtors in homogeneous groups, according described above, associating to each group a determined probability of default and a percentage of recovery based in a historic analysis. The amount of provisions to register it will be obtained multiplied the total loans of respective group by the percentages of estimated default and of loss given the default.

 

In both methods, estimated loss must be related with type of portfolio and terms of operations.

 

The Bank to determine its provisions has opted for using second method.

 

 

25

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.iii)Standard method of provisions for Mortgage Loans

 

According to the established by the CMF, the provision factor applicable, represented by expected loss over the mortgage loans, it will depend to the past due of each credit and the relation, at the end of month, between outstanding capital and the value of the mortgage guarantees (CMG), according the following table:

 

Provision factor applicable according past due and CMG
CMG Concept Past due days at the end-month
0 1-29 30-59 60-89 Non – Complying Loans
CMG ≤ 40% PD (%) 1.0916 21.3407 46.0536 75.1614 100.0000
LGD (%) 0.0225 0.0441 0.0482 0.0482 0.0537
EAD (%) 0.0002 0.0094 0.0222 0.0362 0.0537
40% < CMG ≤ 80% PD (%) 1.9158 27.4332 52.0824 78.9511 100.0000
LGD (%) 2.1955 2.8233 2.9192 2.9192 3.0413
EAD (%) 0.0421 0.7745 1.5204 2.3047 3.0413
80% < CMG ≤ 90% PD (%) 2.5150 27.9300 52.5800 79.6952 100.0000
LGD (%) 21.5527 21.6600 21.9200 22.1331 22.2310
EAD (%) 0.5421 6.0496 11.5255 17.6390 22.2310
CMG > 90% PD (%) 2.7400 28.4300 53.0800 80.3677 100.0000
LGD (%) 27.2000 29.0300 29.5900 30.1558 30.2436
EAD (%) 0.7453 8.2532 15.7064 24.2355 30.2436

 

Where:
PD: Probability of default
LGD: Loss given default
EAD: Exposure at default
CMG: Outstanding loan capital Mortgage Guarantee value

 

In the event that a single debtor maintains more than one home mortgage loan with the bank and one of them is 90 days or more behind, all such loans will be assigned to the defaulted portfolio, calculating the provisions for each one of them. They agree with their respective percentages of CMG.

 

26

 

  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.iv)Commercial portfolio

 

To determine the allowances of the commercial portfolio, the Bank must consider the standard methods presented below, as applicable to commercial leasing operations or other types of commercial loans. Then, the applicable provision factor will be assigned considering the parameters defined for each method.

 

a)Commercial Leasing Operations

 

The provision factor must be applied to the current value of commercial leasing operations (including the purchase option) and will depend on the default of each operation, the type of leased asset and the relationship between the current value of each operation and the leased asset value (PVB) at each month-end, as indicated in the following tables:

 

Probability of default (PD) applicable according to default and type of asset (%)
Days of default of the operation at the month-end Type of asset
Real estate Non-real estate
0 0.79 1.61
1-29 7.94 12.02
30-59 28.76 40.88
60-89 58.76 69.38
Portfolio in default 100.00 100.00

 

Loss given the default (LGD) applicable according to PVB section and type of asset (%)
PVB = Current value of the operation / Value of the leased asset
PVB section Real estate Non-real estate
PVB ≤ 40% 0.05 18.2
40% < PVB ≤ 50% 0.05 57.00
50% < PVB ≤ 80% 5.10 68.40
80% < PVB ≤ 90% 23.20 75.10
PVB > 90% 36.20 78.90

 

The determination of the PVB relationship will be made considering the appraisal value expressed in UF for real estate and in Chilean pesos for non-real estate, recorded at the time of the respective loan granting, taking into account possible situations that may be causing temporary increases in the assets prices at that time.

 

27

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.iv)Commercial portfolio, continued:

 

b)Generic commercial placements and factoring

 

In the case of factoring operations and other commercial placements, other than those indicated above, the provision factor, applicable to the amount of the placement and the exposure of the contingent loan risk (as indicated in paragraph 3 of Chapter B-3 ), will depend on the default of each operation and the relationship that exists at the end of each month, between the obligations that the debtor has with the bank and the value of the collateral that protect them (PTVG), as indicated in the following tables:

 

Probability of default (PD) applicable according to default and PTVG section (%)
Days of default at the month-end With collateral Without collateral
PTVG≤100% PTVG>100%
0 1.86 2.68 4.91
1-29 11.60 13.45 22.93
30-59 25.33 26.92 45.30
60-89 41.31 41.31 61.63
Portfolio in default 100.00 100.00 100.00

 

Loss given the default (LGD) applicable according to PTVG section (%)
Collateral (with / without) PTVG section Generic commercial operations or factoring without the responsibility of the transferor Factoring with the responsibility of the transferor
With collateral PTVG ≤ 60% 5.0 3.2
60% < PTVG≤ 75% 20.3 12.8
75% < PTVG ≤ 90% 32.2 20.3
90% < PTVG 43.0 27.1
Without collateral 56.9 35.9

 

28

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.iv)Commercial portfolio, continued:

 

The collaterals used for the purposes of calculating the PTVG relationship of this method may be specific or general, including those that are simultaneously specific and general. Collateral can only be considered if, according to the respective coverage clauses, it was constituted in the first degree of preference in favor of the bank and only guarantees the debtor's credits with respect to which it is imputed (not shared with other debtors).

 

For the purposes of calculating the PTVG, the assigned invoices in factoring operations nor the collaterals associated with the mortgage loans will not be considered, regardless of the conditions of its coverage clauses.

 

For the calculation of the PTVG ratio, the following considerations must be taken:

 

i. Transactions with specific collaterals: when the debtor granted specific collateral for generic commercial loans and factoring, the PTVG ratio is calculated independently for each covered transaction, such as the division between the amount of the loans and the contingent loans exposure and the collateral's value of the covered product.

 

ii. Transactions with general collaterals: when the debtor granted general or general and specific collaterals, the Bank calculates the respective PTVG, jointly for all generic commercial loans and factoring and not contemplated in the preceding paragraph i), as the division between the sum of the amounts of the loans and exposures of contingent loans and the general, or general and specific collateral that, according to the scope of the remaining coverage clauses, safeguard the loans considered in the numerator aforementioned coverage ratio.

 

The amounts of the collaterals used in the PTVG ratio of numbers i) and ii) must be determined according to:

 

- The last valuation of the collateral, be it appraisal or fair value, according to the type of real guarantee in question. For the determination of fair value, the criteria indicated in Chapter 7-12 of the Updated Collection of Standards should be considered.

 

- Possible situations that could be causing temporary increases in the values of the collaterals.

 

- Limitations on the amount of coverage established in their respective clauses.

 

29

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(v)Allowance for loan losses, continued:

 

(v.v)Portfolio in default

 

The portfolio in default includes all placements and 100% of the amount of the contingent loans, of the debtors that the closing of a month presents a delay equal to or greater than 90 days in the payment of the interest of the capital of any credit. It will also include debtors who are granted a credit to leave an operation that has more than 60 days of delay in their payment, as well as those debtors who were subject to forced restructuring or partial forgiveness of a debt.

 

They may exclude from the portfolio in default: a) mortgage loans for housing, which delinquent less than 90 days, unless the debtor has another loan of the same type with greater delinquency; and, b) credits for financing higher studies of Law No. 20,027, which do not yet present the non-compliance conditions indicated in Circular No. 3,454 of December 10, 2008.

 

All credits of the debtor must be kept in the Default Portfolio until there is a normalization of their ability or payment behavior, without prejudice to punishment of each particular credit that meets the condition indicated in point (vi) of this letter in order to remove a debtor from the Default Portfolio, once the circumstances that lead to classification in this portfolio according to the present rules have been overcome, at least the following copulative conditions must be met:

 

-No obligation of the debtor with the bank with more than 30 calendar days overdue.
-No new refinances granted to pay its obligations.
-At least one of the payments includes amortization of capital. This condition does not apply in the case of debtors who only have credits for financing higher education in accordance with Law No. 20,027.
-If the debtor has a credit with partial payment periods less than six months, has already made two payments.
-If the debtor must pay monthly fees for one or more credits, has paid four consecutive dues.
-The debtor does not appear with unpaid debts direct according to the information recast by CMF, except for insignificant amounts.

 

(vi)Charge-offs

 

Generally, the charge-offs are produced when the contractual rights on cash flows end. In case of loans, even if the above does not happen, it will proceed to charge-offs the respective asset balances.

 

The charge-off refers to derecognition of the assets in the Statement of Financial Position, related to the respective transaction and, therefore, the part that could not be past-due if a loan is payable in installments, or a lease.

 

The charge-off must be to make using credit risk provisions constituted, whatever the cause for which the charge-off was produced.

 

30

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(vi)Charge-offs, continued:

 

(vi.i)Charge-offs of loans to customers

 

Charge-off loans to customers, other than leasing operations, shall be made in accordance to the following circumstances occurs:

 

a)The Bank, based on all available information, concludes that will not obtain any cash flow of the credit recorded as an asset.
b)When the debt without executive title expires 90 days after it was recorded in asset.
c)At the time the term set by the statute of limitations runs out and as result legal actions are precluded in order to request payment through executive trial or upon rejection or abandonment of title execution issued by judicial and non-recourse resolution.
d)When past-due term of a transaction complies with the following:

 

Type of Loan   Term
Consumer loans - secured and unsecured   6 months
Other transactions - unsecured   24 months
Commercial loans - secured   36 months
Residential mortgage loans   48 months

 

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

 

31

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(m)Loans to customers, continued:

 

(vi)Charge-offs, continued:

 

(vi.ii)Charge-offs of lease operations

 

Assets for leasing operations must be charge-offs against the following circumstances, whichever occurs first:

 

a)The bank concludes that there is no possibility of the rent recoveries and the value of the property cannot be considered for purposes of recovery of the contract, either because the lessee have not the asset, for the property’s conditions, for expenses that involve its recovery, transfer and maintenance, due to technological obsolescence or absence of a history of your location and current situation.

 

b)When it complies the prescription term of actions to demand the payment through executory or upon rejection or abandonment of executory by court.

 

c)When past-due term of a transaction complies with the following:

 

Type of Loan   Term
Consumer leases   6 months
Other non-real estate lease transactions   12 months
Real estate leases (commercial or residential)   36 months

 

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

 

(vii)Loan loss recoveries

 

Cash recoveries on charge-off loans including loans that were reacquired from the Central Bank of Chile are recorded directly in income in the Consolidated Statement of Income, as a reduction of the “Provisions for Loan Losses” item.

 

In the event that there are recovery in assets, is recognized in income the revenues for the amount they are incorporated in the asset. The same criteria will be followed if the leased assets are recovered after the charge-off of a lease operation, to incorporate those to the asset.

 

(viii)Renegotiations of charge-off transactions

 

Any renegotiation of a credit already written off does not give rise to income, as long as the operation remains to have an impaired quality; the actual payments received must be treated as recoveries of credits written off, as indicated above.

 

Therefore, renegotiated credit can be recorded as an asset only if it has not deteriorated quality; also recognizing revenue from activation must be recorded like recovery of loans.

 

The same criteria should apply in the case that was give credit to pay a charge-off loan.

 

32

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(n)Investment instruments:

 

Investment instruments are classified into two categories: Investments to maturity and Instruments available for sale. The category of Investments to maturity includes only those instruments in which it have the capacity and intention to hold them until their expiration date. The other investment instruments are considered as available-for-sale.

 

Financial assets held-to-maturity are recorded at their cost plus accrued interest and indexations less impairment provisions made when the carrying amount exceeds the estimated recoverable amount.

 

A financial asset classified as available-for-sale is initially recognized at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset, subsequently measured at their fair value based on market prices or valuation models. Unrealized gains or losses as a result of fair value adjustments are recorded in “Other comprehensive income” within Equity. When these investments are sold, the cumulative fair value adjustment existing within equity is recorded directly in income under “Net financial operating income”.

 

Interest and indexations of financial assets held-to-maturity and available-for-sale are included in the line item “Interest revenue”.

 

Investment securities, which are subject to hedge accounting, are adjusted according to the rules for hedge accounting as described in Note No. 2 (l).

 

As of December 31, 2019 and 2018, the Bank does not held to maturity instruments.

 

33

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(o)Intangible:

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of a legal transaction or are developed internally by the consolidated entities. They are assets whose cost can be estimated reliably and from which the consolidated entities have control and consider it probable that future economic benefits will be generated. Intangible assets are recorded initially at acquisition cost and are subsequently measured at cost less any accumulated amortization or any accumulated impairment losses.

 

Software or computer programs purchased by the Bank and its subsidiaries are accounted for at cost less accumulated amortization and impairment losses.

 

The subsequent expense in software assets is capitalized only when it increases the future economic benefit for the specific asset. All other expenses are recorded as an expense as incurred.

 

Amortization is recorded in income using the straight-line amortization method based on the estimated useful life of the software, from the date on which it is available for use. The estimated useful life of software is a maximum of 6 years.

 

(p)Property and equipment:

 

Property and equipment includes the amount of land, real estate, furniture, computer equipment and other installations owned by the consolidated entities and which are for own use. These assets are stated at historical cost less depreciation and accumulated impairment. This cost includes expenses than have been directly attributed to the asset’s acquisition.

 

Depreciation is recognized in the Consolidated Statements of Income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.

 

Estimated useful lives for 2019 and 2018 are as follows:

 

- Buildings 50 years
- Installations 10 years
- Equipment 5 years
- Supplies and accessories 5 years

 

Maintenance expenses relating to those assets held for own uses are recorded as expenses in the year in which they are incurred.

 

34

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(q)Deferred taxes and income taxes:

 

The income tax provision of the Bank and its subsidiaries has been determined in conformity with current legal provisions.

 

The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to temporary differences between the book and tax values of assets and liabilities. Deferred tax assets and liabilities are measured based on the tax rate expected to be applied, in accordance with current tax law, in the year that deferred tax assets are realized or liabilities are settled. The effects of future changes in tax legislation or tax rates are recognized in deferred taxes starting on the date of publication of the law approving such changes.

 

Deferred tax assets are recognized only when it is likely that future tax profits will be sufficient to recover deductions for temporary differences. According to instructions from the CMF, deferred taxes are presented in the Statement of Financial Position according to IAS 12 "Income Tax".

 

(r)Assets received in lieu of payment:

 

Assets received or awarded in lieu of payment of loans and accounts receivable from customers are recorded, in the case of assets received in lieu of payment, at the price agreed by the parties, or otherwise, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction.

 

Assets received in lieu of payment are classified under “Other Assets” and they are recorded at the lower of its carrying amount or net realizable value, less charge-off and presented net of a portfolio valuation allowance. The CMF requires regulatory charge-offs if the asset is not sold within a one year of foreclosure.

 

(s)Investment properties:

 

Investments properties are real estate assets held to earn rental income or for capital appreciation or both, but are not held-for-sale in the ordinary course of business or used for administrative purposes. Investment properties are measured at cost, less accumulated depreciation and impairment and are presented under “Other Assets”.

 

(t)Debt issued:

 

Financial instruments issued by the Bank are classified in the Statement of Financial Position under “Debt issued” items, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder or to satisfy the obligation other than by the exchange of a fixed amount of cash.

 

Debt issued is subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

 

35

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(u)Provisions and contingent liabilities:

 

Provisions are liabilities involving uncertainty about their amount or maturity. They are recorded in the Statement of Financial Position when the following requirements are jointly met:

 

i)a present obligation has arisen from a past event and,

 

ii)as of the date of the financial statements it is probable that the Bank or its subsidiaries have to disburse resources to settle the obligation and the amount can be reliably measured.

 

A contingent asset or liability is any right or obligation arising from past events whose existence will be confirmed by one or more uncertain future events which are not within the control of the Bank.

 

The following are classified as contingent loans in the complementary information:

 

i.Guarantees and sureties: Comprises guarantees, sureties and standby letters of credit. In addition it includes payment guarantees for purchases in factoring transactions.

 

ii.Confirmed foreign letters of credit: Corresponds to letters of credit confirmed by the Bank.

 

iii.Documentary letters of credit: Includes documentary letters of credit issued by the Bank which have not yet been negotiated.

 

iv.Documented guarantee with promissory notes.

 

v.Undrawn credit lines: The unused amount of credit lines that allow customers to draw without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts).

 

vi.Other credit commitments: Amounts not yet lent under committed loans, which must be disbursed at an agreed future date when events contractually agreed upon with the customer occur, such as in the case of lines of credit linked to the progress of a construction or similar projects.

 

36

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(u)Provisions and contingent liabilities, continued:

 

vii.Other contingent loans: Includes any other kind of commitment by the Bank which may exist and give rise to lending when certain future events occur. In general, this includes unusual transactions such as pledges made to secure the payment of loans among third parties or derivative contracts made by third parties that may result in a payment obligation and are not covered by deposits.

 

Exposure to credit risk on contingent loans:

 

In order to calculate provisions on contingent loans, as indicated in Chapter B-3 of the Banking Accounting Standards Compendium of the CMF, the amount of exposure that must be considered shall be equivalent to the percentage of the amounts of contingent loans indicated below:

 

Type of contingent loan  Exposure 
a)  Guarantors and pledges   100%
b)  Confirmed foreign letters of credit   20%
c)  Documentary letters of credit issued   20%
d)  Guarantee deposits   50%
e)  Undrawn credit lines   35%
f)  Other loan commitments:     
- College education loans Law No. 20,027   15%
- Others   100%
g)  Other contingent loans   100%

 

Notwithstanding the above, when dealing with transactions performed with customers with overdue loans as indicated in Chapter B-1 of the Accounting Standards Compendium of the CMF, that exposure shall be equivalent to 100% of its contingent loans.

 

37

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(v)Provisions for minimum dividends:

 

According with the Accounting Standards Compendium of the CMF, the Bank records within liabilities the portion of net income for the year that should be distributed to comply with the Corporations Law or its dividend policy. For these purposes, the Bank establishes a provision in a complementary equity account within retained earnings.

 

Distributable net income is considered for the purpose of calculating a minimum dividends provision, which is defined as that which results from reducing or adding to net income the value of price-level restatement for the concept of restatement or adjustment of paid-in capital and reserves for the year.

 

(w)Employee benefits:

 

(i)Staff accrued vacations

 

The annual costs of vacations and staff benefits are recognized on an accrual basis.

 

(ii)Short-term benefits

 

The Bank has a yearly bonus plan for its employees based on their ability to meet objectives and their individual contribution to the company’s results, consisting of a given number or portion of monthly salaries. It is provisioned for based on the estimated amount to be distributed.

 

(iii)Staff severance indemnities

 

Banco de Chile has recorded a liability for long-term severance indemnities in accordance with employment contracts it has with certain employees. The liability, which is payable to specified retiring employees with 30 or 35 years of service, is recorded at the present value of the accrued benefits, which are calculated by applying a real discount rate to the benefit accrued as of year-end over the estimated average remaining service year.

 

38

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(w)Employee benefits, continued:

 

(iii)Staff severance indemnities, continued:

 

Obligations for this defined benefits plan are valued according to the projected unit credit actuarial valuation method, using inputs such as staff turnover rates, expected salary growth in wages and probability that this benefit will be used, discounted at current long-term rates (3.17% as of December 31, 2019 and 4.25% as of December 31, 2018).

 

The discount rate used corresponds to the rate of 10-year Chilean Central Bank Bonds in pesos (BCP).

 

Losses and gains caused by changes in actuarial variables are recognized in Other Comprehensive Income. There are no other additional costs that must be recognized by the Bank.

 

(x)Earnings per share:

 

Basic earnings per share is determined by dividing net income for the year attributable to the Bank by the average weighted number of shares in circulation during that period.

 

Diluted earnings per share are determined similarly to basic earnings, but the weighted average number of outstanding shares is adjusted to take into account the potential dilutive effect of the options on shares, warrants and convertible debt. As of December 31, 2019 and 2018 there are no concepts to adjust.

 

(y)Interest revenue and expense:

 

Interest income and expenses are recognized in the income statement using the effective interest rate method. The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or a shorter period) where appropriate, to the carrying amount of the financial asset or financial liability. To calculate the effective interest rate, the Bank determines cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses.

 

The effective interest rate calculation includes all fees and other amounts paid or received that form part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the purchase or issuance of a financial asset or liability.

 

For its impaired portfolio and high risk loans and accounts receivables from clients, the Bank has applied a conservative position of discontinuing accrual-basis recognition of interest revenue in the income statement; they are only recorded once received. In accordance with the above, suspension occurs in the following cases:

 

39

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(y)Interest revenue and expense, continued:

 

Loans with individual evaluation:

 

·Loans classified in categories C5 and C6: Accrual is suspended by the sole fact of being in the impaired portfolio.
·Loans classified in categories C3 and C4: The accrual is suspended after have fulfilled three months in the impaired portfolio.

 

Group evaluation loans:

 

·Any credit, with the exception of those that have real guarantees that reach at least 80%: The accrual is suspended when the credit or one of its installments has reached six months of delay in its payment.

 

Notwithstanding the above, in the case of loans subject to individual evaluation, recognition of income from accrual of interest and readjustments can be maintained for loans that are being paid normally and which correspond to obligations whose cash flows are independent, as can occur in the case of project financing.

 

The suspension of recognition of revenue on an accrual basis means that, while the credits are kept in the impaired portfolio, the related assets included in the Consolidated Statement of Financial Position will increase with no interest, or fees and adjustments in the Consolidated Statements of Income, and income will not be recognized for these items, unless they are actually received.

 

(z)Fees and commissions:

 

Revenue and expenses from fees are recognized in the Consolidated Income Statement using the criteria established in IFRS 15 "Revenue from contracts with customers".

 

Under IFRS 15, revenues are recognized considering the terms of the contract with customers. Revenue is recognized when or as the performance obligation is satisfied by transferring the goods or services committed to the customer.

 

Under IFRS 15, revenues are recognized using different criteria depending on their nature. The most significant are:

 

Those that correspond to a singular act, when the act that originates them takes place.
Those that originate in transactions or services that are extended over time, during the life of such transactions or services.
Commissions on loan commitments and other fees related to credit operations are deferred (together with the incremental costs directly related to the placement) and recognized as an adjustment to the effective interest rate of the placement. In the case of loan commitments, when there is no certainty of the date of effective placement, the commissions are recognized in the period of the commitment that originates it on a linear basis.

 

40

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(z)Fees and commissions, continued:

 

The fees registered by the Bank correspond mainly to:

 

Commissions for lines of credit and overdrafts: they are accrued in the period related to the granting of lines of credit and overdrafts in current account.
Commissions for guarantees and letters of credit: they are accrued in the period related to the granting of payment guarantees for real or contingent obligations of third parties.
Commissions for card services: correspond to commissions earned and accrued during the period, related to the use of credit, debit and other cards.
Commissions for account management: includes commissions for the maintenance of current accounts and other deposit accounts.
Commissions for collections, collections and payments: correspond to collection, collection and payments services provided by the Bank.
Commissions for intermediation and management of securities: correspond to income from brokerage service, placements, administration and custody of securities.
Remuneration for insurance commercialization: Income generated by the sale of insurance is included.
Commissions for investments in mutual funds and others: corresponds to commissions originated in the administration of mutual funds.
Other commissions earned: Income generated by currency changes, financial advice, use of distribution channels, use of trademark agreement and placement of financial products and cash transfers and recognition of payments associated with strategic alliances, among others, are included.

 

Fees for commissions include:

 

Remuneration for card operations: commissions paid for the operation of credit and debit cards are included.
Inter-bank transactions: Corresponds to commissions paid to the automatic clearing house for transactions carried out.
Commissions for operations with securities: commissions for deposit and custody of securities and brokerage of securities are included.
Other commissions: commissions for collection, payments and other online services are included.

 

(aa)Identifying and measuring impairment:

 

Financial assets, different to loans to customers

 

Financial assets are reviewed throughout each year, and especially at each reporting date, to determine whether there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and the loss event had an impact on the estimated future cash flows of the financial asset that can be reliably calculated.

 

An impairment loss for financial assets (different to loans to customers) recorded at amortized cost is calculated as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted using the effective interest rate original.

 

41

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(aa)Identifying and measuring impairment, continued:

 

An impairment loss on a financial asset available-for-sale is calculated based on its fair value. In this case, the objective evidence includes a significant and prolonged decline, under the original investment cost in the fair value of the investment.

 

If there is evidence of impairment, any amount previously recognized in equity, net gains (losses) not recognized in the income statement, are removed from equity and recognized in the income statement for the year, presenting as net gains (losses) related to financial assets available-for-sale. This amount is determined as the difference between the acquisition cost (net of any repayment and amortization) and the current fair value of the asset, less any impairment loss on that investment that has been previously recognized in the income statement.

 

When the fair value of the available-for-sale debt security recovers to, at least, amortized cost, it is no longer considered impaired and subsequent changes in fair value are reported in equity.

 

All impairment losses are recognized in the incomes statement. Any cumulative loss related to available-for-sale financial assets recognized previously in equity is transferred to the incomes statement.

 

An impairment loss can only be reversed if it can be related objectively to an event occurring after the impairment loss was recognized. The amount of the reversal is recognized in profit or loss up to the amount previously recognized as impairment. An impairment loss is reversed if, in a subsequent period, the fair value of the debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.

 

42

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(aa)Identifying and measuring impairment, continued:

 

Non-financial assets

 

The carrying amounts of the non-financial assets of the Bank and its subsidiaries, excluding investment properties and deferred tax assets, are reviewed throughout the year and especially at each reporting date, to determine if any indication of impairment exists. If such indication exists, the recoverable amount of the asset is then estimated.

 

Impairment losses recognized in prior years are assessed at each reporting date in search of any indication that the loss has decreased or disappeared. An impairment loss is reversed if there has been a change in the estimations used to determine the recoverable amount. An impairment loss is reverted only to the extent that the book value of the asset does not exceed the carrying.

 

The Bank assesses at each reporting date and on an ongoing basis whether there is an indication that an asset may be impaired. If any indication exists, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the major value between fair value (less costs to sell) and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, share prices and other available fair value indicators.

 

Impairment losses related to goodwill cannot be reversed in future years.

 

43

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(ab)Lease transactions:

 

(i) The Bank acting as lessor

 

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets held are subject to a finance lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments, discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating, and arranging a finance lease are incorporated into the receivable through the discount rate applied to the lease. Finance lease income is recognized over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease.

 

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases.

 

The leased investment properties, under the operating lease modality, are included in the statement of financial position as "Other assets" 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 term.

 

(ii) The Bank acting as lessee

 

A contract is, or contains a lease, if one party has the right to control the use of an identified asset for a period of time in exchange for a regular payment.

 

On the start date of a lease, a right-to-use assets leased is determined at cost, which includes the amount of the initial measurement of the lease liability plus other disbursements made.

 

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 rate.

 

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

 

In accordance with the establish in the Circular No. 3,649 of the CMF, the monthly variation of the UF for the contracts established in said monetary unit should be treated as a new measurement, therefore the UF readjustment modifies the value of the lease liability, and in parallel, the amount of the right-of-use asset must be adjusted by this effect.

 

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

 

According to IFRS 16 "Leases" the bank does not apply this rule to contracts whose duration is 12 months or less and those that contain an underlying asset of low value. In these cases, payments are recognized as a lease expense.

 

44

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

2.Summary of Significant Accounting Principles, continued:

 

(ac)Fiduciary activities:

 

The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of the clients. Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank. Contingencies and commitments arising from this activity are disclosed in Note No. 26 (a).

 

(ad)Customer loyalty program:

 

The Bank maintains a loyalty program to provide incentives to its customers, which allows to acquire goods and/or services, based on the exchange of prize points ("Dolares-Premio"), which are granted based on the purchases made with Bank's credit cards and the compliance of certain conditions established in said program. The consideration for the prizes is made by a third party. In accordance with IFRS 15, these associated benefit plans have the necessary provisions to meet the delivery of committed future performance obligations.

 

(ae)Additional provisions:

 

In accordance to the CMF regulations, the banks have recorded additional allowances for its individually evaluated loan portfolio, taking into consideration the expected impairment of this portfolio. The calculation of this allowance is performed based on the Bank’s historical experience and considering possible future adverse macroeconomic conditions or circumstances that could affect a specific sector.

 

The provisions made in order to forestall the risk of macroeconomic fluctuations should anticipate situations reversal of expansionary economic cycles in the future, could translate into a worsening in the conditions of the economic environment and thus, function as a countercyclical mechanism accumulation of additional provisions when the scenario is favorable and release or assignment to specific provisions when environmental conditions deteriorate.

 

According to the above, additional provisions must always correspond to general provisions on commercial, consumer or mortgage loans, or segments identified, and in no case may be used to offset weaknesses of the models used by the Bank.

 

As of December 31, 2019 and 2018 the additional provisions amounted Ch$213,252 million, which are presents in the item “Provisions” of the liability in the Consolidated Statement of Financial Position.

 

(af)Reclassifications:

 

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

 

45

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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 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, this standard replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease. The standard establishes the principles for the recognition, measurement, presentation and disclosure of leases and requires that lessor take into account most leases in a single balance model.

 

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.

 

This standard is applicable as of January 1, 2019. The Bank carried out an implementation process during the year 2018, which culminated with the application as of January 1, 2019, using the modified retrospective method, this means that a the initial application date of the right-of-use asset is equal to the financial liability, and additionally it was decided not to restate the balances of the previous year. (For additional information see notes Accounting Principles and Changes in Accounting Policies and Disclosures).

 

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 interpretation is effective for annual periods beginning on January 1, 2019.

 

The Administration has assessed that the implementation of this interpretation had no impact on the Banco de Chile and its subsidiaries.

 

46

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

  

Accounting standards issued by the CMF.

 

Circular No. 3,645.

 

On January 11, 2019, the CMF introduced 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, for the purposes of the first application of this standard, banks and their subsidiaries recorded the effect due to the first application of this standard in the equity item "Retained earnings from previous years".

 

On May 6, 2019, the CMF issued Circular No. 3,649, which defined the treatment of the lease agreements expressed in UF, establishing that the variation in the UF should be treated as a new measurement, and therefore the readjustments resulting in changes in lease payments must be recognized as a modification of the amount of the obligation and in parallel, the amount of the asset must be adjusted for the right to use leased assets for this purpose.

 

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

 

47

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

  

Circular No. 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 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 present value of benefits (PVB) 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 enforceable.

 

-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 collateral 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 complemented these instructions with the publication of Circular No. 3,647, with the purpose of recognizing the mitigating effect of the credit risk represented by the transferor's responsibility in 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 adoption of this standard in July 2019 did not have a material impact on the Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

48

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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 IASB that are not yet effective as of December 31, 2019, are detailed below:

 

Accounting standards issued by IASB.

  

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.

  

- 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 Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

49

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

IFRS 9 Financial Instruments, IFRS 7 Financial Instruments: Disclosures and IAS 39 Financial Instruments: Recognition and Measurement. Interest rate benchmark reform.

 

In September 2019, the IASB issued amendments to IFRS 9, IFRS 7 and IAS 39, as a result of the IBOR (Interbank Offered Rate) reform, which results in the replacement of existing reference interest rates, by alternative interest rates.

 

The amendments provide temporary application exceptions that allow hedge accounting to continue during the uncertainty period, prior to the replacement of existing reference interest rates.

 

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

 

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

 

Accounting Standards issued by the CMF.

 

Circular No. 2,243.

 

On December 20, 2019, the CMF published Circular No. 2,243, which updates the instructions of the Banking Accounting Standards Compendium (“CNCB”) for banks.

 

The changes seek to achieve greater convergence with IFRS, as well as an improvement in the quality of financial information, to contribute to the financial stability and transparency of the banking system.

 

The main changes introduced to the CNCB correspond to:

 

1) Incorporation of IFRS 9 with the exception of the chapter on impairment of loans classified as “financial assets at amortized cost”. This exception is mainly due to prudential criteria set by the CMF. These criteria have given rise, over time, to the establishment of standard models that the banking institutions must apply to determine the impairment of the loan portfolio.

 

2) Changes in the presentation formats of the Statement of Financial Position and Income Statement, when adopting IFRS 9 in replacement of IAS 39.

 

3) Incorporation of new presentation formats for the Statement of Other Comprehensive Income and the Statement of Changes in Equity and guidelines on financing and investment activities for the Statement of Cash Flows.

 

4) Incorporation of a financial report “Management Comments” (according to the IASB Practice Document No. 1), which will complement the information provided by the interim and annual financial statements.

 

5) Modifications of some notes of the financial statements, among which are: Financial assets at amortized cost and Risk management, in order to better comply with the disclosure criteria contained in the IFRS 7. In addition, disclosures about related parties are aligned according to IAS 24.

 

50

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

6) Changes in the accounting plan of Chapter C-3 of the CNCB, both in the accounts coding as well as in their description. The foregoing corresponds to the detailed information of the formats for the Statement of Financial Position, the Income Statement and the Statement of Other Comprehensive Income.

 

7) Modification of the criteria for the suspension of the recognition of interest income on an accrual basis, when any credit or one of its payments presents a default greater than 3 months (Chapter B-2 of the CNCB).

 

8) Adaptation of the limitations and precisions to the use of IFRS contained in Chapter A-2 of the CNCB.

 

The new standards will be applicable from January 1, 2021, with a transition date on January 1, 2020, for the comparative financial statements purposes that must be published as of March 2021. Notwithstanding the above, the change of criteria for the suspension of the recognition of interest income on an accrual basis as provided in Chapter B-2, must be adopted no later than January 1, 2021. The effects of the application of the suspension rule of Interest and readjustments when any credit or one of its payments presents a default greater than 3 months will not have a significant impact on the Bank's results.

 

The Bank and its subsidiaries have prepared a work plan and allocated the necessary resources to address implementation of the modifications to the CNCB. The foregoing was with the purpose of complying with the new standards required for the preparation and presentation of the Financial Statements.

 

51

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

4.Changes in Accounting policies and Disclosures:

 

The accounting policies adopted in the preparation of this Consolidated 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.

 

As of January 1, 2019, the Bank first adopted IFRS 16 Leases, for the purposes of the initial application, it was decided to recognize the cumulative effect on the date of initial adoption (January 1, 2019), not restating comparative information, accounting for a right-of-use asset for an amount equal to the lease liability for an amount of Ch$144,497 million (See Note No. 16 letter d)). This amount was determined according to the present value of the remaining lease payments, discounted using the Bank's incremental financing interest rate.

 

During the year ended December 31, 2019, no other significant accounting changes have occurred that affect the presentation of these Consolidated Financial Statements.

 

52

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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. 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 included an initial payment 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.

 

53

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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.

 

(j)On July 1, 2019, Banco de Chile reported the deceased of the Director of Banco de Chile, Mr. Gonzalo Menéndez Duque.

 

(k)On July 8, 2019, the subsidiary Banchile Administradora General de Fondos S.A. informed that on July 5, 2019 Mr. Nicolás Luksic Puga submitted his resignation to the position of director of the Company.

 

(l)On August 8, 2019, Banco de Chile informed that in ordinary session the Board of Directors appointed to Mr. Hernán Büchi Buc as Regular Director of the Board in replacement of Mr. Gonzalo Menéndez Duque until the next Ordinary Shareholders Meeting.

 

(m)On November 28, 2019 and in Ordinary session, the Board of Directors appointedto Mr. Paul Fürst Gwinner as the second alternate director, replacing until the next Ordinary Meeting of Shareholders, to Mr. Thomas Fürst Freiwirth, who presented his resignation as director alternate.

 

(n)On November 29, 2019, Banco de Chile reported that together with Citigroup Inc. they have agreed to extend the validity of the Cooperation Agreement and the Global Connectivity Contract, both entered into on October 22, 2015. In accordance with the aforementioned extension, the validity of said contracts extends from January 1, 2020 and until January 1, 2022, and the parties may agree before August 31, 2021, an extension for two years from January 1, 2022. In the event that this does not occur, the contracts will be extended only once for a period of one year from January 1, 2022 and until January 1, 2023. The same renewal procedure may be used in the future as many times as agreed by the parties.

 

54

 

  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

5.Relevant Events, continued:

 

Together with the above and on the same date, Banco de Chile and Citigroup Inc. signed an Amended and Restated Trademark License Agreement and an Amended and Restated Master Services Agreement, agreeing that their periods of validity will be the same as those established in the Contract of Cooperation referred to in the previous paragraph.

 

The Board of Directors of Banco de Chile, in session No. 2,912 of November 28, 2019, approved the extension and subscription of the aforementioned contracts, in the terms established in articles 146 and following of the Corporations Law.

 

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.

 

55

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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 years ended December 31, 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.

 

56

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

6.Business Segments, continued:

 

The following table presents the income by segment for the years ended December 31, 2019 and 2018 for each of the segments defined above:

 

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal  

Consolidation

adjustment

   Total 
   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   1,033,646    972,172    359,074    355,451    (19,246)   (2,415)   (7,651)   (8,994)   1,365,823    1,316,214    3,552    3,697    1,369,375    1,319,911 
Net commissions income (loss)   270,064    184,545    48,097    45,905    (3,241)   (4,031)   153,330    145,704    468,250    372,123    (10,948)   (12,168)   457,302    359,955 
Other operating income   34,854    43,288    61,505    59,376    45,105    63,931    53,931    33,341    195,395    199,936    (7,552)   (6,519)   187,843    193,417 
Total operating revenue   1,338,564    1,200,005    468,676    460,732    22,618    57,485    199,610    170,051    2,029,468    1,888,273    (14,948)   (14,990)   2,014,520    1,873,283 
Provision for loan losses   (333,156)   (287,569)   (14,052)   6,041            (66)   118    (347,274)   (281,410)           (347,274)   (281,410)
Depreciation and amortization   (58,725)   (29,571)   (5,885)   (5,008)   (85)   (91)   (5,846)   (3,011)   (70,541)   (37,681)           (70,541)   (37,681)
Other operating expenses   (587,212)   (561,513)   (151,660)   (152,921)   (5,040)   (4,693)   (111,499)   (105,906)   (855,411)   (825,033)   14,948    14,990    (840,463)   (810,043)
Income attributable to associates   3,957    4,220    1,669    2,173    331    400    493    462    6,450    7,255            6,450    7,255 
Income before income taxes   363,428    325,572    298,748    311,017    17,824    53,101    82,692    61,714    762,692    751,404            762,692    751,404 
Income taxes                                                               (169,683)   (156,531)
Income after income taxes                                                               593,009    594,873 

 

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

 

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal  

Consolidation

adjustment

   Total 
   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   18,139,505    16,425,483    10,766,374    10,591,702    11,426,849    8,093,850    964,695    925,440    41,297,423    36,036,475    (345,395)   (388,615)   40,952,028    35,647,860 
Current and deferred taxes                                                               321,305    278,599 
Total assets                                                               41,273,333    35,926,459 
                                                                       
Liabilities   11,407,066    10,399,587    10,750,446    9,873,018    15,075,652    11,952,656    781,052    764,736    38,014,216    32,989,997    (345,395)   (388,615)   37,668,821    32,601,382 
Current and deferred taxes                                                               76,289    20,924 
Total liabilities                                                               37,745,110    32,622,306 
                                                                       

 

57

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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 year-end are detailed as follows:

 

   2019   2018 
   MCh$   MCh$ 
         
Cash and due from banks:        
Cash (*)   889,911    624,862 
Deposit in Chilean Central Bank (*)   178,429    121,807 
Deposits in other domestic banks   75,651    26,698 
Deposits abroad   1,248,175    106,714 
Subtotal - Cash and due from banks   2,392,166    880,081 
           
Net transactions in the course of collection   232,551    244,758 
Highly liquid financial instruments (**)   1,192,188    1,058,904 
Repurchase agreements (**)   114,466    72,632 
Total cash and cash equivalents   3,931,371    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:

 

   2019   2018 
   MCh$   MCh$ 
Assets        
Documents drawn on other banks (clearing)   222,261    210,743 
Funds receivable   362,411    369,590 
Subtotal - assets   584,672    580,333 
           
Liabilities          
Funds payable   (352,121)   (335,575)
Subtotal - liabilities   (352,121)   (335,575)
Net transactions in the course of settlement   232,551    244,758 

 

58

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of 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:

 

   2019   2018 
   MCh$   MCh$ 
Instruments issued by the Chilean Government and Central Bank of Chile        
Central Bank of Chile bonds   16,490    24,906 
Central Bank of Chile promissory notes   1,008,035    1,410,080 
Other instruments issued by the Chilean Government and Central Bank   99,164    88,486 
           
Other instruments issued in Chile          
Bonds from other domestic companies   1,556    7,532 
Bonds from domestic banks   55,094    20,186 
Deposits in domestic banks   315,415    100,225 
Other instruments issued in Chile   3,272    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   373,329    87,841 
Funds managed by third-party        
Total   1,872,355    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$15,243 million as of December 31, 2019 (Ch$115,749 million as of December 31, 2018). Repurchase agreements had a 3 day average expiration at the end of year 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$57,639 as of December 31, 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$251,158 million as of December 31, 2019 (Ch$99,268 million as of December 31, 2018). The repurchase agreements have an average expiration of 7 days at the end of the year 2019 (10 days in December 2018).

 

Additionally, the Bank holds financial investments in mortgage finance bonds issued by itself in the amount of Ch$8,029 million as of December 31, 2019 (Ch$11,397 million as of December 31, 2018), which are presented as a reduction of the liability line item “Debt issued”.

 

59

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of Consolidated Financial Statements originally issued in Spanish)

 

 

 

9.Investments under resale agreements and obligations under repurchase agreements:

 

(a)Rights arising from resale repurchase agreements: The Bank provides financing to its customers through repurchase agreements and securities lending, in which the financial instrument serves as collateral. As of December 31, 2019 and 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  
   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   11,184                                                11,184   
Central Bank promissory notes       742                                              742  
Other instruments issued by the Chilean Government and Central Bank   18,459                                                18,459   
Subtotal   29,643    742                                            29,643  742  
Other Instruments issued in Chile                                                                  
Deposit promissory notes from domestic banks                                                      
Mortgage bonds from domestic banks                                                      
Bonds from domestic banks