20-F 1 f20f2020_bancodechile.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the transition period from          to

 

Commission file number 001-15266

 

Banco de Chile

(Exact name of Registrant as specified in its charter)
 

Bank of Chile

(Translation of Registrant’s name into English)
 

Republic of Chile

(Jurisdiction of incorporation or organization)
 
Banco de Chile
Paseo Ahumada 251

Santiago, Chile

(Address of principal executive offices)
 

Rolando Arias Sánchez (rarias@bancochile.cl) (562)-2653-3535

Paseo Ahumada 251

Santiago, Chile

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing 200 shares of common stock, without nominal (par) value (“ADSs”)

  BCH   New York Stock Exchange
Shares of common stock, without nominal (par) value      

New York Stock Exchange

(for listing purposes only)

 

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

 

None

 

(Title of Class)

 

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

 

None

 

(Title of Class)

 

 

 

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

 

Shares of common stock:  101,017,081,114  

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No

 

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

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒

Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

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

 

U.S. GAAP ☐

International Financial Reporting Standards as issued by
the International Accounting Standards Board ☒
Other ☐

 

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

 

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

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I   1
Item 1 Identity of Directors, Senior Management and Advisors   1
Item 2 Offer Statistics and Expected Timetable   1
Item 3 Key Information   1
Item 4 Information on the Company   28
Item 4A Unresolved Staff Comments   133
Item 5 Operating and Financial Review and Prospects   134
Item 6 Directors, Senior Management and Employees   187
Item 7 Major Shareholders and Related Party Transactions   207
Item 8   Financial Information   214
Item 9 The Offer and Listing   217
Item 10 Additional Information   220
Item 11 Quantitative and Qualitative Disclosures About Market Risk   242
Item 12 Description of Securities Other Than Equity Securities   242
Item 12A Debt Securities   242
Item 12B Warrants and Rights   242
Item 12C Other Securities   242
Item 12D American Depositary Shares   242
       
PART II   244
Item 13 Defaults, Dividend Arrearages and Delinquencies   244
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds   244
Item 15 Controls and Procedures   244
Item 16A Audit Committee Financial Expert   245
Item 16B Code of Ethics   245
Item 16C Principal Accountant Fees and Services   246
Item 16D Exemptions from the Listing Standards for Audit Committees   246
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers   246
Item 16F Change in Registrant’s Certifying Accountant   247
Item 16G Corporate Governance   247
Item 16H Mine Safety Disclosure   248
       
PART III   249
Item 17 Financial Statements   249
Item 18 Financial Statements   249
Item 19 Exhibits   250
       
LIST OF EXHIBITS   250

 

i 

 

 

SUMMARY OF RISK FACTORS

 

An investment in our ADSs is subject to a number of risks, including risks relating to the nature of our business as a financial institution in Chile. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

 

Risks Relating to our Operations and the Chilean Banking Industry

 

The growth of our loan portfolio in riskier segments may expose us to increased loan losses and require us to establish higher levels of allowances for loan losses in the future.

 

Our loan portfolio may not continue to grow at the same or similar rates as it has in the past as a result of changes in macroeconomic trends and reforms to banking and non-banking rules, including those in response to the COVID-19 pandemic, which have threatened both the industry’s growth and banking penetration rate, leading to a slowdown in investment spending (capital expenditures) and deteriorated consumer confidence and business sentiment.

 

Restrictions imposed by regulations, particularly with regards to capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation may constrain our operations and thereby adversely affect our financial condition and results.

 

The Chilean market for financial services is highly competitive. We compete with Chilean and foreign banks, and with other providers of financial services that are not part of the banking industry. Accordingly, competition within this market is increasing as banks and other non-banking competitors are continuously incorporating new and tailored products and services, while striving to improve service quality and to accelerate digital transformation. These dynamics may adversely impact our results of operations as they may translate into higher interest rates paid on deposits and lower interest rates earned on loans, resulting in decreased net interest margins.

 

Our results of our operations depend greatly on our net interest income. As a result, our results of our operations are affected by interest rate volatility and inflation. Changes in nominal interest rates and inflation could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in net income reduction. Inflation and interest rates are sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, local and international economic developments and political conditions, among other factors.

 

The preparation of our financial statements requires management to make judgments and estimates that affect the amounts of assets, liabilities, income and expenses reported in our financial statements. Estimates and assumptions are based on historical experience, expert judgment and other factors, including expectations of future developments under certain alternative scenarios. Although assumptions and estimates are evaluated and revised on a continuous basis, we cannot rule out that projected scenarios could dramatically change in the short term, causing a severe impact on fundamentals and estimates, which could have a material impact on our results of operations and financial position.

 

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

 

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

 

Our current credit ratings determine the cost and the terms upon which we are able to obtain funding in the ordinary course of business. Rating agencies regularly evaluate us by taking into account diverse factors, including our financial strength, the business environment and the economic backdrop in which we operate. Thus, any downgrade in Chile’s or our credit rating could increase our cost of funding, affecting our interest margins, results of operations and profitability.

 

ii 

 

 

Risks Relating to our American Depositary Shares (“ADSs”)

 

Our principal shareholders are in a position to elect a majority of the members of our board of directors and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions. Therefore, they may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.

 

There may be a lack of liquidity and a limited market for our shares and ADSs, which could increase the volatility of the price of our ADSs.

 

ADS holders may exercise voting rights associated with common stock only in accordance with the deposit agreement governing our ADSs. Accordingly, ADS holders will face practical limitations when exercising their voting rights because ADS holders must first receive a notice of a shareholders’ meeting from the Depositary and may then exercise their voting rights by instructing the Depositary, on a timely basis, on how they wish to vote. In addition, although Chilean law requires that we grant preemptive rights to all of our shareholders (including holders of ADSs) whenever we issue new shares, such an offering may not be possible unless a registration statement under the Securities Act is effective with respect to such rights and shares, or an exemption from the registration requirements thereunder were available. As a result, ADS holders may be unable to exercise voting rights at shareholders’ meetings and preemptive rights.

 

COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.

 

Risks Relating to Chile

 

Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and investment. If the Chilean economy stagnates or falls into recession, such an occurrence could have an adverse effect on our business growth and the business growth of the Chilean banking industry in general.

 

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

 

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

 

Chilean law may provide shareholders with fewer and less well-defined rights.

 

Our operations are highly dependent on the Chilean political and social environment, as most of our customers and borrowers do business in Chile. Thus, our results of operations, including asset quality and profitability, could be negatively impacted by unfavorable political and diplomatic developments, social instability or unrest, as well as dramatic changes in public policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policy.

 

We are a party to collective bargaining agreements with various labor unions to which most of our employees belong. Disputes regarding the terms of these agreements, our potential inability to negotiate acceptable contracts with these unions, could result in strikes, work stoppages, or other slowdowns by the affected workers, among other things. In addition, recent and pending changes to Chilean labor and pension laws may increase costs. Therefore, reforms to labor and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations.

 

iii 

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

statements of assumptions underlying such statements.

 

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

 

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

 

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

 

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

 

increased costs;

 

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

 

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

 

natural disasters or pandemics, such as the novel coronavirus known as COVID-19 (“COVID-19”);

 

the effect of tax laws on our business; and

 

the factors discussed under “Item 3. Key Information—Risk Factors.”

 

iv 

 

 

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

 

PRESENTATION OF FINANCIAL INFORMATION

 

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

 

Unless otherwise indicated, the financial information included in this annual report with respect to 2018, 2019 and 2020 has been derived from financial statements that have been prepared in accordance with IFRS. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 2020 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean Generally Accepted Accounting Principles (the “Chilean GAAP”) as issued by the Superintendencia de Bancos e Instituciones Financieras de Chile (the “Superintendency of Banks and Financial Institutions” or “SBIF”). As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.

 

In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos (see Note 2(f)) to our audited consolidated financial statements as of and for the year ended December 31, 2020 appearing elsewhere in this annual report), and references to “UF” are to “Unidades de Fomento.” The UF is an inflation indexed Chilean monetary unit of account with a value in Chilean pesos that is linked to and adjusted daily to reflect changes in the Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the “Chilean National Statistics Institute”). As of December 31, 2020 and April 23, 2021, one UF equaled Ch$29,070.33 and Ch$29,466.67, respectively.

 

This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in our audited consolidated financial statements as of and for the year ended December 31, 2020 or could be converted into U.S. dollars at the rate indicated. Banco de Chile utilizes the exchange rate of accounting representation, or spot exchange rate, for such matters. This is also described in “Item 3. Key Information—Selected Financial Data—Exchange Rates.” Thus, unless otherwise indicated, the U.S. dollar amounts have been translated from Chilean pesos based on the exchange rate of accounting representation as of December 30, 2020 as determined by our Treasury on a daily basis, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. As of December 30, 2020 (the latest practicable date, as December 31, 2020 was a banking holiday in Chile) and April 23, 2021, the exchange rates of accounting representation were Ch$711.90 = U.S. $1.00 and Ch$712.05 = U.S.$1.00, respectively. As of the same dates, the observed exchange rates, as published by Banco Central de Chile (the “Central Bank”), were Ch$711.24 = U.S.$1.00 and Ch$705.41 = U.S.$1.00, respectively.

 

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

 

Unless otherwise specified, all references in this annual report to total loans are to loans to customers before deducting allowances for loan losses, and they do not include loans to banks or contingent loans. In addition, all market share data and financial indicators for the Chilean banking system as compared to Banco de Chile’s financial information presented in this annual report are based on information published periodically by the CMF which is published under Chilean GAAP and prepared on a consolidated basis, unless otherwise indicated. For more information see “Item 4. Information on the Company—Business Overview—Competition.”

 

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

 

v 

 

 

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

 

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

 

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

 

Given the phase-in period for the implementation of Basel III in Chile, the above definitions are still in effect and they will be applicable until November 30, 2021. From December 1, 2021 onwards, new definitions for Regulatory Capital, including Common Equity Tier 1, Additional Tier 1, and Tier 2 Capital, will go into effect. For more information, see “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results” and “Item 4. Information on the Company—Regulation and Supervision— Modifications to the General Banking Act.”

 

Certain figures included in this annual report and in our audited consolidated financial statements as of and for the year ended December 31, 2020 have been rounded for ease of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary slightly from those obtained by performing the same calculations using the figures in our audited consolidated financial statements as of and for the year ended December 31, 2020. Certain other amounts that appear in this annual report may similarly not sum due to rounding.

 

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

 

MACRO-ECONOMIC AND MARKET DATA

 

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

 

vi 

 

 

Part I

 

Item 1Identity of Directors, Senior Management and Advisors

 

Not Applicable.

 

Item 2Offer Statistics and Expected Timetable

 

Not Applicable.

 

Item 3Key Information

 

SELECTED FINANCIAL DATA

 

The following tables present historical financial information about us as of the dates and for each of the periods indicated. The following tables should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements as of and for the year ended December 31, 2020 appearing elsewhere in this annual report. The financial information for the years ended December 31, 2018, 2019 and 2020 is presented under IFRS. For financial information for the years ended December 31, 2016 and 2017, respectively, please refer to “Item 3—Selected Financial Data” in our annual report on Form 20-F for the year ended December 31, 2019 filed with the SEC on April 29, 2020, which is hereby incorporated by reference solely for the purpose of the financial information for the years ended December 31, 2016 and 2017.

 

Our audited consolidated financial statements have been prepared in accordance with IFRS for the years ended December 31, 2018, 2019 and 2020.

 

   For the Year Ended December 31, 
   2018   2019   2020   2020 
   (in millions of Ch$, except share
and per share data)
   (in thousands of U.S.$) 
IFRS:                
CONSOLIDATED STATEMENT OF INCOME DATA                
Interest revenue  Ch$ 2,000,617   Ch$ 2,113,548   Ch$ 1,876,795   US$ 2,636,318 
Interest expense   (679,640)   (742,270)   (560,007)   (786,637)
Net interest income   1,320,977    1,371,278    1,316,788    1,849,681 
Net fees and commissions income   359,955    457,302    445,968    626,448 
Net financial operating income   117,142    113,437    (11,279)   (15,844)
Foreign exchange transactions, net   2,701    30,886    156,662    220,062 
Other operating income   45,295    32,315    26,671    37,465 
Provisions for loan losses   (249,771)   (331,601)   (547,106)   (768,515)
Total operating expenses   (839,708)   (902,250)   (877,752)   (1,232,971)
Income attributable to associates   6,811    6,039    (5,099)   (7,163)
Income before income taxes   763,402    777,406    504,853    709,163 
Income taxes   (159,768)   (173,661)   (103,223)   (144,997)
Net income from continued operations, net of taxes  Ch$603,634   Ch$603,745   Ch$401,630   US$564,166 
Net income from discontinued operations, net of taxes   

    

    

    

 
Net income for the year  Ch$603,634   Ch$603,745   Ch$401,630   US$564,166 
Attributable to:                    
Equity holders of the parent   603,633    603,744    401,629    564,165 
Non-controlling interest   1    1    1    1 
Earnings per share(2)   5.98    5.98    3.98    0.01 
Earnings per ADS   1,195.11    1,195.33    795.17    1,116,97 
Dividends per share(3)   3.76    3.53    3.47    0.00 
Weighted average number of shares (in millions)   101,017.08    101,017.08    101,017.08      

 

1

 

 

   For the Year Ended December 31, 
  

2019

   2020   2020 
   (in millions of Ch$, except share
and per share data)
   (in thousands of U.S.$) 
IFRS:            
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA            
Cash and due from banks  Ch$ 2,392,166   Ch$ 2,560,216   US$ 3,596,314 
Transactions in the course of collection   331,420    163,252    229,319 
Financial assets held-for-trading   1,872,355    4,666,156    6,554,510 
Cash collateral on securities borrowed and reverse repurchase agreements   142,329    76,407    107,328 
Derivative instruments   2,786,215    2,618,004    3,677,488 
Loans and advances to banks   1,140,081    2,939,198    4,128,667 
Loans to customers, net   29,384,039    30,101,583    42,283,443 
Financial assets available-for-sale   1,366,343    1,068,153    1,500,426 
Investments in other companies   48,442    42,338    59,472 
Intangible assets   91,717    94,111    132,197 
Property and equipment   220,262    217,928    306,122 
Leased assets   150,665    118,829    166,918 
Investment properties   13,190    12,833    18,026 
Current tax assets   357    22,949    32,236 
Deferred tax assets, net   231,293    292,517    410,896 
Other assets   843,000    556,486    781,691 
Total assets   41,013,874    45,550,960    63,985,053 
Current accounts and other demand deposits   11,326,133    15,167,229    21,305,280 
Transactions in the course of payment   98,869    882,944    1,240,264 
Cash collateral on securities lent and repurchase agreements   308,734    288,917    405,839 
Saving accounts and time deposits   10,856,618    8,899,541    12,501,111 
Derivative instruments   2,818,421    2,841,653    3,991,646 
Borrowings from financial institutions   1,563,277    3,669,753    5,154,872 
Debt issued   8,813,414    8,593,595    12,071,351 
Other financial obligations   156,229    191,713    269,298 
Lease liabilities   146,013    115,017    161,563 
Currents tax liabilities   76,289    311    437 
Deferred tax liabilities, net            
Provisions   203,374    237,620    333,783 
Employee benefits   109,075    111,243    156,262 
Other liabilities   631,667    554,343    778,681 
Total liabilities  Ch$37,108,113   Ch$41,553,879   US$58,370,387 
Total equity   3,905,761    3,997,081    5,614,666 
Total liabilities and equity  Ch$41,013,874   Ch$45,550,960   US$63,985,053 

 

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   As of December 31, 
   2018   2019   2020 
IFRS:            
CONSOLIDATED RATIOS            
Profitability and Performance            
Net interest margin(4)   4.35%   4.13%   3.50%
Return on average total assets(5)   1.76    1.59    0.90 
Return on average equity(6)   16.78    15.15    10.10 
Capital               
Average equity as a percentage of average total assets   10.51    10.48    8.93 
Bank regulatory capital as a percentage of minimum regulatory capital   287.45    268.37    263.11 
Ratio of liabilities to regulatory capital(7)   10.40    11.24    11.56 
Credit Quality               
Substandard loans as a percentage of total loans(8)   2.96    2.98    3.79 
Allowances for loan losses as a percentage of substandard loans(8)   70.84    72.58    71.23 
Provision for loan losses as a percentage of average loans   0.95    1.15    1.78 
Allowances for loan losses as a percentage of total loans   2.10    2.16    2.70 
Operating Ratios               
Operating expenses/operating revenue   45.49    45.00    45.37 
Operating expenses/average total assets   2.45    2.37    1.97 

 

 

(1)Translations of Chilean peso amounts into U.S. dollars are based on the exchange rate of accounting representation, or the spot exchange rate, which is determined on a daily basis by our Treasury, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. Thus, amounts stated in U.S. dollars as of and for the fiscal year ended December 31, 2020 have been translated from Chilean pesos based on the spot exchange rate of Ch$711.90 to U.S. $1.00 as of December 31, 2020.
(2)Earnings per share data have been calculated by dividing net income by the weighted average number of shares outstanding during the year.
(3)Dividends per share data are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding.
(4)Annualized net interest income divided by average interest earning assets. The average balances for interest earning assets, including interest and readjustments, have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. Net interest margin includes the interest earned on trading securities, which is accounted for under Other Income (Loss), Net.
(5)Net income for the year divided by average total assets based on daily balances.
(6)Net income for the year divided by average equity based on daily balances.
(7)Total liabilities divided by bank regulatory capital.
(8)See “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past Due Loans.”

 

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Exchange Rates

 

The Central Bank Act empowers the Central Bank to determine that certain purchases and sales of foreign currency specified by law must be carried out in the Mercado Cambiario Formal (the “Formal Exchange Market”). The Formal Exchange Market is composed of banks and other entities so authorized by the Central Bank. The observed exchange rate for any given day equals the average exchange rate of the transactions conducted in the Formal Exchange Market on the immediately preceding banking day, as certified by the Central Bank. Even though the Central Bank is authorized to carry out its transactions at the rates it sets, it generally uses the spot rate for its transactions. Authorized transactions by other banks are generally carried out at the spot rate.

 

Purchases and sales of foreign exchange are not required to be conducted in the Formal Exchange Market and therefore may be carried out in the Mercado Cambiario Informal (the “Informal Exchange Market”). There are no price limits imposed on transactions carried out in the Informal Exchange Market.

 

Banco de Chile utilizes the exchange rate of accounting representation, or spot exchange rate, for such matters. The exchange rate of accounting representation is determined on a daily basis by our Treasury based on the average of the daily closing bid and offer rates reported by Bloomberg, for the Santiago Stock Exchange.

 

The observed exchange rate on April 23, 2021 was Ch$705.41 = U.S.$1.00. As of the same date, the exchange rate of accounting representation, or spot exchange rate, was Ch$712.05 = U.S.$1.00.

 

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

 

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RISK FACTORS

 

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

 

We are also subject to market risks that are presented both in this subsection and in Note 42 to our audited consolidated financial statements as of and for the year ended December 31, 2020 appearing elsewhere in this annual report.

 

Risks Relating to our Operations and the Chilean Banking Industry

 

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

 

During the last five years, our total loan portfolio has grown at a compounded average growth rate (“CAGR”) of 4.7% per year. This expansion has been primarily fostered by growth in both residential mortgage (7.9% per year on average) and commercial loans (4.1% per year on average), and, to a lesser extent, by an expansion in consumer loans (1.1% per year on average). The growth in our loan book has been aligned with our mid-term strategic goals, which aim to diversify our business model by optimizing our risk-return relationship in order to maintain profitable growth. In 2020, however, as a result of the prevailing macroeconomic conditions due to the spread of COVID-19, loan growth was severely affected by lower demand for loans, higher unemployment and significant uncertainties regarding the economic outlook in Chile, resulting in a significant decrease in consumer loans granted to individuals and constrained growth in commercial loans for companies. Notwithstanding these recent trends, we recognize that the expansion experienced by our retail banking segment over the last years may expose us to higher levels of charge-offs and may require us to establish higher levels of allowances for loan losses in the future. This is due to the fact that the average retail customer is riskier than large companies and corporations, since they are more exposed to the economic cycle than wholesale customers as evidenced during the downturn caused by the COVID-19 pandemic. For example, individuals are impacted by economic factors such as employment and SMEs are impacted by economic conditions affecting domestic demand. For this reason, we are constantly striving to develop and utilize improved scoring and approval models, while strengthening our collection procedures in order to mitigate the risks associated with this business growth. For the year ended December 31, 2020, our loan portfolio was Ch$30,937,690 million, which represented a 3.0% annual increase as compared to the Ch$30,033,272 million we recorded as of December 31, 2019. Our allowances for loans losses increased 28.8% from Ch$649,233 million in 2019 to Ch$836,107 million in 2020, mainly attributable to a surge in expected credit losses associated with the economic contraction caused by the COVID-19 pandemic during 2020, which deteriorated the risk profiles of individuals, SMEs, middle market companies and, to a lesser extent, large companies and corporations. From the individuals’ point of view, the COVID-19 pandemic significantly reduced disposable income, based on a sudden surge of unemployment, mobility restrictions for self-employed people and longstanding lockdowns that restricted the possibility to apply for new jobs, all of which undermined payment capacity. In the case of companies, the sharp decrease in commercial activity, lockdowns and additional costs associated with sanitary measures, reduced cash flows in the short-term, which consequently deteriorated their short-term financial condition. This trend also translated into high probabilities of default and higher credit risk allowances. As a result, our risk-index ratio (allowances for loan losses to total loans) increased from 2.16% in 2019 to 2.70% in 2020.

 

Our loan portfolio may not continue to grow at the same or similar rates as it has in the past.

 

Double-digit loan growth during the decade ending in 2013, particularly fostered by increased banking penetration of (i) lower and middle income segments and (ii) small and medium-sized companies resulted in a marked expansion in consumer, mortgage and commercial loans in the Chilean banking industry. However, the deceleration of the local economy from 2013 to 2017 and the introduction of diverse reforms on general matters, including both banking and non-banking rules, have threatened both the industry’s pace of growth and banking penetration rate, leading to a slowdown in investment spending (capital expenditures) and deteriorated consumer confidence and business sentiment, as evidenced by the indices (Indice de Percepción Económica de los Consumidores (“IPEC”) and Indice Mensual de Confianza Empresarial (“IMCE”)) used by the Central Bank. This trend seemed to shift by the end of 2018, reflected by an economic recovery produced by a rebound in investment spending and GDP growth of 3.9%. This supported a stronger demand for commercial loans and an 11.9% annual growth of total loan balances managed by the Chilean banking industry as a whole. In 2019, however, GDP recorded a moderate annual expansion of 1.1%, highly influenced by the effect of the social unrest in Chile on October 18, 2019. Despite this subdued performance, the loan portfolio managed by the banking industry increased by 10.0% in nominal terms in 2019, mainly explained by a decoupled behavior of mortgage loans, evidenced by sustained growth of 11.2% over the course of the year.

 

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During 2020, the global health emergency derived from the COVID-19 pandemic resulted in a deteriorated macroeconomic scenario in Chile, as depicted by a 5.8% GDP contraction and a surge in unemployment rate from 7.3% in December 2019 to 10.3% in December 2020. These figures were undoubtedly influenced by long-lasting lockdowns and other measures taken by the Chilean health authority in order to reduce mobility and social interaction across the country, which eventually led to many economic sectors (such as tourism, construction, retail and restaurants, among others) to cease or reduce their operations for months. In this environment, the loan portfolio managed by the banking industry grew at a moderate annual rate of 2.4% in nominal terms (excluding operations of subsidiaries abroad). This figure was primarily influenced by residential mortgage loans, which continued to be decoupled from economic dynamics backed by unprecedented low interest rates. To a lesser extent, the governmental support program aimed at promoting lending for companies by guaranteeing working capital loans for SMEs and middle market companies, translated into a boost in commercial loans balances during the period. Still, consumer loans were substantially affected by the deteriorated macroeconomic scenario during the first three quarters of the year, as evidenced by the drop in household spending and lower payment capacity until an improvement in individuals’ financial stability was seen by the end of the third quarter, as a result of a fiscal aid package that translated into direct money transfers, the monetary actions taken by the Central Bank in order to ensure liquidity in the local market, and also the two consecutive withdrawals from pension funds approved by the Chilean Congress.

 

Despite the recovery in the second half of the year, as shown by the year-end 2020 figures, many factors could adversely affect the growth rate of the industry and, therefore, the expansion of our loan portfolio including, but not limited to: (i) a slowdown or negative GDP growth, (ii) changes in household or investment spending, (iii) changes in banking customers’ behavior, and (iv) any effect related to social trends, social unrest, pandemics or any event affecting the growth potential of the Chilean economy. Similarly, this could affect our credit quality indicators causing us to establish higher allowances for loan losses. For more information, see “Item 4. Information on the Company—Regulation and Supervision” and “Item 4. Information on the Company—Selected Statistical Information.”

 

Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results.

 

We are subject to regulation by the Financial Market Commission (“CMF”). In addition, we are subject to regulation by the Central Bank with respect to certain matters, including liquidity management, among others. See “Item 4. Information on the Company—Regulation and Supervision.”

 

The CMF was established in January 2018 pursuant to Law No. 21,000 and replaced the Superintendency of Securities and Insurance (“SVS”). Following Law No. 21,130 (Modernization of Banking Legislation) in June 2019, the former banking supervisor (the “Superintendency of Banks and Financial Institutions” or “SBIF”) merged into the CMF, and all the powers previously vested in the SBIF were transferred to the CMF. Accordingly, the CMF currently oversees the Chilean Financial Market (comprised of publicly traded companies, insurance companies, insurance brokers, mutual funds and investment funds) as well as the Chilean banking industry as a whole and some non-bank lenders.

 

Pursuant to the Ley General de Bancos (the “General Banking Act”) all Chilean banks may, subject to the approval of the CMF, engage in certain non-banking businesses approved by the law. The CMF’s approval will depend on the risk of the activity and the strength of the bank. Furthermore, the General Banking Act currently imposes on the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices (the “Basel Committee”) and limits the discretion of the CMF to deny new banking licenses.

 

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On October 3, 2018, the Chilean Congress passed modifications to the General Banking Act in diverse topics, including the adoption of Basel III guidelines for the Chilean banking industry. These modifications were enacted in Law No. 21,130 on December 27, 2018 and subsequently published on January 12, 2019. This law addresses four main topics aimed at modernizing the Chilean banking framework by means of:

 

(i)Adopting the Basel III Guidelines, considering a phased-in transition from Basel I to be completed four years after the new specific banking framework is issued by the regulator. In light of the COVID-19 outbreak in Chile, on March 30, 2020 the CMF announced the introduction of certain modifications to the Basel III initial implementation schedule. In summary, the CMF decided to postpone the beginning of Basel III requirements associated with risk-weighted assets from December 2020 to December 2021. Similarly, the phase-in periods for systemic and conservation buffers, were delayed by one year, now starting in December 2021. However, the systemic buffer will start at zero in December 2021, which could gradually increase overtime. Also, regulatory capital adjustments were postponed one year, now starting in December 2022. Given the changes made to the original schedule, no additional capital requirements will be imposed on local banks before December 2021. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Impacts of COVID-19 in 2020.”

 

(ii)Introducing changes to the local regulator’s corporate governance, such that all the powers currently vested in the former regulator (SBIF) were transferred to the CMF. The former SBIF merged into the CMF in June 2019.

 

(iii)Reforming the resolution regime for Chilean banks in the case of insolvency.

 

(iv)Introducing changes in relation to confidential information of banks’ customers, among others topics.

 

Following the phase-in period set by the law, the former SBIF merged into the CMF in June 2019.

 

Since May 2019, the CMF began the publication for comment in respect of their rule-making on a diverse and wide array of topics associated with Basel III. By December 2020, 11 out of 12 final rules had been issued by the CMF. There is only one piece of regulation pending of issuance, which is the specific ruling associated with limits to large or single exposures (Article N°83 of General Banking Act). The Chilean regulator has not informed us as to when it would be available for banks. Also, the methodology to activate or deactivate the countercyclical buffer, to be defined by the Central Bank and monitored by the CMF, is still pending of issuance.

 

The rules already in place are: (i) the guidelines for calculation and composition of regulatory capital, (ii) conditions for the issuance of financial instruments representing additional Tier 1 capital, (iii) conditions for the issuance of financial instruments representing Tier 2 capital, (iv) a framework for determination of credit risk-weighted assets for banks under both a standardized methodology and internal models, (v) a standardized framework for determining market risk-weighted assets for the trading book, (vi) a standardized methodology for determining operational risk-weighted assets, (vii) additional common equity Tier 1 capital requirements, including both a conservation buffer and a countercyclical buffer, (viii) a methodology for determining systemically important banks or groups of banks and additional requirements for these types of banks, (ix) a framework for the calculation of leverage ratio, (x) the Pillar 2 framework for the regulatory review process, and (xi) Pillar 3 disclosure requirements.

 

Regarding capital requirements, the new regulatory thresholds banks will have to comply with were defined, as follows:

 

ØCommon Equity Tier 1 (“CET1”) above 4.5% of risk-weighted assets;

 

ØTier 1 = Common Equity Tier 1 + Additional Tier 1 (“AT1”) above 6.0% of risk-weighted assets;

 

ØTier 1 + Tier 2 above 8.0% of risk-weighted assets;

 

ØConservation Buffer of 2.5% of risk-weighted assets;

 

ØPotential Countercyclical Buffer of up to 2.5% of risk-weighted assets;

 

ØPotential Systemically-Important Banks (D-SIB) Buffer in the range of 1.0% to 3.5% of risk-weighted assets;

 

  Ø Potential Pillar 2 Buffer of up to 4.0% of risk-weighted assets.

 

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For more detailed information on each specific regulation and capital thresholds, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”

 

Our capital adequacy ratios under the previous and new regulatory frameworks, as of December 2020, are as follows:

 

Ratio

  Basel I   Basel III 
Leverage Ratio   7.64%   7.80%
CET1 Ratio   12.19   12.32
Tier 1 Ratio   12.19   13.82
Total Capital Ratio   15.96%   16.16%

 

On March 31, 2021 the CMF announced that based on the information provided by local banks for the year ended December 31, 2020, there are six domestic systemically important banks, including us, which will be subject to systemic buffers. However, as of the date of this annual report we have not received any notice regarding the buffer that will apply to us. As a result, since we have no absolute certainty regarding the limits that will be finally imposed by the CMF to the banking industry, and on us in particular in terms of potential capital buffers, we cannot assure you that our profitability will not be impacted by actions we may take in order to fulfill new regulatory thresholds. For more information, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”

 

Since 2016, banks have been required to report and monitor liquidity ratios, such as Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”), for information purposes only. On May 4, 2018 the Central Bank published for comment an amendment to Chapter III.B.2.1 of Compendio de Normas Financieras (the Compendium of Financial Norms), focused on proposing a minimum requirement for the LCR, considering a phase-in period of five years, starting at 60% in 2019 and reaching the final limit of 100% in 2023 (with annual increments of 10% between 2019 and 2023). Given the phase-in period established for the LCR limit, we do not see any significant impact on our financial condition, results of operation or profitability in the medium term. Nevertheless, we cannot assure whether any other new liquidity requirements, if any, will have a material adverse effect on us. It is important to note that in light of the situation caused by the COVID-19 outbreak, the Central Bank announced the possibility of temporarily easing certain liquidity requirements, particularly associated with 30-day and 90-day cash flows mismatches, while stating that LCR limits could also be temporarily softened during the duration of the pandemic. However, none of these measures have been necessary in the case of Banco de Chile in 2020 or 2021, periods in which we have maintained significant liquidity surplus. For more information on liquidity matters, see “Item 4. Information on the Company—Regulation and Supervision—Liquidity Risk Regulations” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Impacts of COVID-19 in 2020.”

 

As for credit risk allowances, on July 6, 2018 the former SBIF published the final amendments to the provisioning rules for commercial loans evaluated on a group basis, which established standardized models for leasing loans, student loans and other commercial loans (not included in the former categories). In addition, the new set of rules also addressed other topics related to loan provisioning. The new provisioning criteria went into effect in July 2019 and had no material impact on our results of operations under both Chilean GAAP and IFRS. Nevertheless, we cannot rule out that future changes in the provisioning rules for other types of loans or related definitions will not affect our results under IFRS or Chilean GAAP, as applicable.

 

Additionally, the Chilean Government has focused on matters related to consumer protection in recent years. Since 2010, several legal and administrative regulations have been amended and revoked in order to strengthen consumer protection and the relationship between financial institutions and their customers.

 

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In May 2020, the Chilean Congress passed a law that modifies the current framework regarding liabilities for payment service providers (such as banks) in cases of fraudulent transactions in credit and debit cards, and in electronic funds transfers. Among other matters, these new regulations demand that funds charged, which are later unrecognized by the customer, must be returned by the payment service provider when the transaction does not exceed UF 35 (equivalent to Ch$1.0 million as of March 31, 2021), and if greater, the payment service provider must return such amount, enabling the financial entity to retain the excess to the extent it judicially proves wrongdoing from the customer. As expected, this new legislation signified an important increase in our liabilities towards customers due to digital fraud during 2020 compared to previous years, since we are now legally obliged to assume certain losses suffered by our customers. Although we have implemented an array of measures and campaigns with our customers, which signified that we have been able to adequately mitigate the impact of this legislation, we cannot assure you that we will not continue to see an increase in our liabilities as a result of this new legislation. For further information on the obligations and liabilities imposed by, and characteristics of, this new legislation, see “Item 4. Information on the Company—Regulation and Supervision—Consumer-Oriented Regulation.”

 

On April 20, 2021, new legislation that modifies consumer protection laws, prohibiting and limiting certain extrajudicial, or out-of-court, debt collection actions towards individuals and SMEs was enacted. Regarding banks, among other matters, this new law (i) limits the number and type of out-of-court collection measures, (ii) requires keeping detailed records of such actions up to two years after they have been initiated, and (iii) prohibits continuing with out-of-court collection actions once a collection has been initiated in court. We believe that this legislation could reduce our ability to recover delinquencies in our individuals’ and SMEs’ portfolios and could have an impact in our net portfolio expenses and collection costs. This could also signify that we may have to modify strategies in our collection processes to ensure rigorous compliance with the applicable regulation and our internal policies. Consequently, we cannot rule out that this could have an adverse effect on Banco de Chile and the financial industry.

 

As of mid-April 2021, a bill addressing a broad range of financial regulation and services was approved by the Chilean Congress and enacted by the Chilean Government. With respect to loan products, this law sets new rules on the application of interests and fees. The main modifications introduced by this new law are: (i) it states that no interests may be charged on the portion of credits that is already paid; (ii) it forbids charging simultaneously and jointly default interests with other kinds of interest over the same amount; and (iii) it establishes that, during the 12 months following the publication of this law, the CMF will dictate specific regulation addressing the extent by which fees or and/or commissions may be charged on credit transactions. These ancillary regulations pending to be issued by the CMF could limit our ability to charge and earn fees or commissions on certain credits and loan products. Therefore, as of the date of this annual report, we cannot yet determine or rule out whether this new law will negatively affect our results of operations in the future.

 

In addition, there are several bills modifying matters related to loans and credit products, such as interest rate ceilings, prepayment fees and the possibility of capitalizing interests, most of which were introduced by members of the Chilean Congress during the October 2019 aftermath and the COVID-19 pandemic, and include an array of amendments from different perspectives. Some of them also aim to ease the financial burden of certain banking borrowers, such as SMEs and individuals. One of these bills proposes to suspend six credit-related installments for consumer and mortgage loans by postponing these payments to the end of the liability, bearing no additional interests. Since most of these bills are currently at early stages in the Chilean Congress, there is no certainty whether any or all of them will be further discussed or not, and as to when or how these bills could change the current regulatory framework. Therefore, we cannot determine or assure you whether they will materially affect our results of operations in the future.

 

From the taxation perspective, on August 23, 2018 the Chilean Government sent a bill to the Chilean Congress, which was intended to modernize the Chilean tax system. The Congress, in conjunction with the Government, introduced certain modifications to the original bill, which was passed by the Congress in January 2020 and enacted on February 24, 2020 (Law No. 21,210). Further measures were introduced as part of emergency plans to reactivate the economy following the COVID-19 pandemic. In addition, at the beginning of April 2021, members of the Chilean Congress proposed legislation aiming to raise the corporate tax rate for large companies from 27% to 30%, which would be applicable for two fiscal years (2021 and 2022) to the extent their average pre-tax income in the previous three years exceeds UF 1,000,000 (equivalent to US$41 million as of March 31, 2021), which is the case for Banco de Chile. However, a reform to the Chilean Constitution would be necessary for such purposes. At this point, there is no certainty whether this legislation will pass or if the proposed draft will be modified, therefore we cannot yet determine or rule out whether this legislation, if passed, could have a material impact on our results of operations in the future or not. For more information on current tax regulation (Law No. 21,210), please see “Item 4—Information on the Company—Regulation and Supervision—Amendments to the Reform that Modified the Chilean Tax System” and “Item 10—Additional information—Taxation—Chilean Tax Considerations.”

 

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Lastly, we cannot assure you that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect. Any such change in terms of capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation, among other matters, could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance. For more information, see “Item 4. Information on the Company—Regulation and Supervision.”

 

Modifications to reserve requirements may affect our growth capacity and margins.

 

According to the local banking regulation, demand deposits and time deposits are subject to reserve requirements of 9.0% and 3.6% (with terms of less than one year), respectively. However, the Central Bank is entitled to require banks to maintain reserves of up to 40.0% for demand deposits and up to 20.0% for time deposits, to the extent needed for monetary policy purposes. In addition, if the aggregate balance of demand deposits and other demand accounts (e.g., deposits in current accounts, other demand deposits or obligations payable on demand and incurred in the ordinary course of business, saving deposits that allow unconditional withdrawals that bear a stated maturity, and other deposits payable immediately unconditionally) held by a bank exceeds 2.5 times its regulatory capital, that bank is required to set a technical reserve equivalent to the full amount of the excess. In this regard, as part of the implementation of Basel III, the new regulation establishes that systemically important banks could be subject to stricter technical reserve requirements, since the threshold of 2.5 times the regulatory capital could be reduced to 1.5 times. Conditions to set this additional requirement are part of the faculties of the CMF, although the decision to impose such additional requirement must be agreed with the Central Bank. We cannot assure you that we will not be subject to such requirement in the future, which in turn could impact our capacity to afford balance sheet growth and could have a material adverse effect on our net interest margin.

 

Changes in accounting standards could impact our results.

 

The IASB, or other regulatory bodies, periodically introduce modifications to financial accounting and reporting standards under which we prepare our consolidated financial statements. These changes can materially impact the means by which we report financial information, affecting our results of operations. Also, we could be required to apply new or revised standards retroactively.

 

Currently, we cannot assure you that future changes in financial accounting and reporting standards will not substantially affect our results of operations or performance indicators, as we do not know the extent of future standards.

 

Increased competition and industry consolidation may adversely affect our operations.

 

The Chilean market for financial services is highly competitive. We compete with Chilean and foreign banks, with Banco del Estado de Chile, which is state-owned, and with other providers of financial services that are not part of the banking industry. In addition, the retail segment (which encompasses individuals and small and medium-sized companies) has become the target market of several banks, since banking penetration is still in progress in Chile, particularly in this segment. Accordingly, competition within this market is increasing as banks are continuously incorporating new and tailored products and services, while striving to improve service quality and to accelerate digital transformation. Further, following the new rules issued in the last years by the Chilean regulator, the processing and merchant acquiring services for payment cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, as done in some developed economies. This model facilitates the entry of new players. As of the date of this annual report, most merchant acquiring services are provided in Chile by Transbank S.A. (of which we held a 26.16% direct ownership as of December 31, 2020), whereas some competitors have already begun to implement this new four-party model for their own business. As a result, net interest margins (once deducted provisions for loan losses) or fee-based income in these sub-segments could decline over time.

 

10

 

 

In relation to the abovementioned four-party mechanism for processing and merchant acquiring services for payment cards, since July 2020 there is a bill under discussion in the Chilean Congress which seeks to regulate limits to rates or fees (“Interchange Rates”) charged by payment card issuers (such as banks) to the operating companies (acquirers) in this four-party model. This bill creates a technical committee that will periodically determine limits applicable to Interchange Rates. The first set of limits would be established by the committee within 15 months once the legislation is passed. Currently, a non-contentious proceeding is being carried out in the Chilean Antitrust Court (Tribunal de Defensa de la Libre Competencia), with the purpose of establishing temporary rules setting forth limits on Interchange Rates, applicable until these matters are addressed by legislation. Notwithstanding the progress of both the bill and the proceeding before the Chilean Antitrust Court, and given the uncertainty regarding the limits on Interchange Rates that could be determined by the technical committee, as of the date of this annual report we are unable to assess the impacts this regulation could have on the banking industry and our results of operations.

 

We also face increasingly significant competition from non-banking competitors in some of our credit products, especially credit cards and installment loans, including large department stores and private compensation funds, as well as saving and credit cooperatives. In addition, we face competition from other types of lenders, such as non-banking leasing, crowdfunding, factoring and automobile financing companies, especially in credit products, mutual funds, pension funds and insurance companies within the market for savings products and insurance companies in the market for mortgage loans. Likewise, other non-traditional providers of financial services have emerged over the last years, such as e-commerce, fintech companies, Telecom companies, like internet and mobile phone providers, that may set and provide offerings, in the form of temporary financing, directly to their customers. Some of these companies may have more resources than us, including larger customer bases, stronger brand recognition and more effective marketing tools. They may also adopt more aggressive pricing, while devoting significant resources to technology, infrastructure and marketing as it is part of their core business. Some of these non-banking competitors are not regulated by the CMF for purposes of banking supervision. Therefore, they are not subject to the same specific solvency or liquidity requirements, among other requisites, as banks are. Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual fund management, directly or indirectly through subsidiaries, while growing quickly in insurance brokerage services. However, we cannot assure you that this trend will continue in the future.

 

Likewise, we are aware that new competitors may enter the market, or existing competitors may innovate their services and strategies to improve the quality of services rendered to their customers. If we fail to effectively anticipate or adapt to new trends in the financial services industry, including changes in the way of delivering financial products and services, introduction of emerging technologies, changes in customer behavior or adaption of the kinds of services offered to or needed by them, our business may be adversely affected. In addition, new technologies, including cryptocurrencies and payment systems, may result in substantial expenditures to adapt and update our existing products and services as we continue to grow our internet and mobile banking capabilities.

 

Also, in the past, increasing competition within the Chilean banking industry has been accompanied by a consolidation wave and the entry of international players in to the system through multiple mergers and acquisitions. These trends have continued and resulted in the creation of larger and stronger banking conglomerates, offering a wide range of products and services and targeting most of the segments in the Chilean banking market. These dynamics may adversely impact our results of operations as they may translate into higher interest rates paid on deposits and lower interest rates earned on loans, resulting in decreased net interest margins.

 

For more information regarding past and recent changes in the Chilean banking industry see “Item 4. Information on the Company—Business Overview—Competition.”

 

Our exposure to certain segments of the retail market could lead to higher levels of total past due loans and subsequent charge-offs.

 

Although we have historically been focused on wholesale banking, over the last years we have continued to reorient our commercial strategy to increase penetration of the retail banking segment. In fact, according to our management information systems, the share of the retail banking segment in our total loan book has increased from 53.6% in 2014 to 64.2% in 2020. Although this trend has been associated with expansion in middle and higher income personal banking, our retail banking segment is also composed of small and medium-sized companies (approximately 16.1% of our total loan book as of December 31, 2020, which consists of companies with annual sales of up to ~Ch$2,000 million) and, to a lesser extent, of lower-income individuals (approximately 1.9% of our total loan book as of December 31, 2020, which consists of individuals with monthly incomes ranging from Ch$180,000 to Ch$500,000). Since these customers are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and higher-income individuals, such as those in 2020 as a result of the COVID-19 pandemic, we may be exposed to higher levels of past due loans and subsequent write-offs in the future, which could result in materially higher allowances for loan losses that could adversely affect our results of operations.

 

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As of December 31, 2020, our past due loans (loans 90-days or more past due) amounted to Ch$299,408 million, which represented a 28.5% annual decrease when compared to the Ch$418,768 million recorded in 2019. These figures translated into past due ratios (loans 90-days or more past due over total loans) of 1.39% in 2019 and 0.97% in 2020. According to our management information systems, as of December 31, 2020 our past due loans (loans 90-days or more past due) were composed of 80.4% retail banking 90-days or more past due loans (consumer and residential mortgage loans to individuals, as well as commercial loans to small and medium sized companies) and 19.6% wholesale banking 90 days or more past due loans (commercial loans to large companies and corporations). During the prior fiscal year, our past due loans (90 days or more) portfolio was composed of 86.5% retail banking past due loans (90 days or more) and 13.5% wholesale banking past due loans (90 days or more).

 

A combination of various market dynamics impacting our segments affected our past due loans (loans 90-days or more past due) ratio in the year ended December 31, 2020. We experienced an annual decrease of approximately Ch$121,751 million in past due loans in the retail segment, whereas past due loans (loans 90- days or more past due) in the wholesale banking segment increased by Ch$2,391 million, both as compared to 2019. Although this trend in the retail segment could seem to be contradictory in the context of the COVID-19 pandemic, it was primarily explained by a high comparison base effect, as the social unrest and the subsequent protests and upheavals in the fourth quarter of 2019 weakened some of our customers’ payment capacity while not permitting others to meet their obligations as many banks and stores had temporary changes in working hours, all of which led to a sharp increase in past-due loans (loans 90- days or more past due) in 2019. In addition, past-due loans (loans 90- days or more past due) in 2020 decreased as a consequence of measures taken by local authorities and the banking system in order to relieve debt pressures faced by individuals and companies, particularly as a result of the effect of the COVID-19 pandemic. These measures included: (i) refinancing installments of mortgage and consumer loans offered by banks to their customers, (ii) direct money transfers made by the government as part of a significant fiscal aid package, (iii) two consecutive withdrawals from individual pension funds in July and December 2020 as approved by the Chilean Congress, and (iv) a special government-guaranteed loan program for SMEs and middle market companies with the aim of improving their liquidity. The trend for the retail banking past due loans (90 days or more) was primarily associated with consumer loans granted to individuals, explaining 53.8% of the total decrease in the retail banking segment, aligned with the aforementioned drivers. To a lesser extent, residential mortgage loans granted to individuals explained 23.3% of this annual drop. In the wholesale banking segment, the growth in past-due loans (90- days or more) was explained by liquidity difficulties due to the aftermath effects of the pandemic in Chile during 2020. As a result, past-due ratios (90 days or more past-due loans over total loans) decreased from 1.89% in 2019 to 1.21% in 2020, and increased from 0.53% in 2019 to 0.84% in 2020, in the retail banking and the wholesale banking segment, respectively.

 

Since the unpredictability of certain social developments, international events such as the COVID-19 pandemic, market fluctuations and changes to macroeconomic indicators, and delayed effects of these developments, may affect our diverse customer segments, we cannot assure you that we will be able to maintain a balanced risk-return equation if global or local economic conditions deteriorate in the future. In this regard, economic recessions, social turmoil or market volatility could adversely affect the financial condition of our borrowers, which could translate into an increase in our non-performing loans, impair our loan portfolio and result in lower demand for our loans. Any of these trends could have a material adverse effect on our business, financial condition and results of operations.

 

For more information on past due loans, see “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past due Loans.”

 

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

 

Our results of our operations depend greatly on our net interest income, which represented 68.1% of our total operating revenues in 2020. Changes in nominal interest rates and inflation could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in net income reduction. Inflation and interest rates are sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, local and international economic developments and political conditions, among other factors. In addition, changes in interest rates affect securities and other investments or assets that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Any volatility in interest rates could have a material adverse effect on our financial condition and results of operations. Also, real negative interest rates could negatively impact our ability to raise funding for our operations, particularly for short-term maturities, which could result in higher funding costs and lower net interest margin.

 

The average annual short-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 2.97% in 2018, 2.72% in 2019 and 0.86% in 2020. The average long-term nominal interest rate based on the interest rate of the five-year bonds traded in the secondary market, issued by both the Central Bank and the Chilean Government, was 4.07% in 2018, 3.31% in 2019 and 1.94% in 2020. As of March 31, 2021, rates paid by Chilean banks in Chilean pesos on 90 to 360 day deposits averaged 0.38% on a year-to-date basis. As of the same date, rates of the Central Bank’s five-year Chilean peso denominated bonds averaged 1.63%.

 

Inflation in Chile has been moderate in recent years, especially in comparison with periods of high inflation experienced in the 1980s and 1990s. High levels of inflation in Chile could adversely affect the Chilean economy, consumer purchasing power, household consumption and investment in machinery and equipment and, therefore, the demand for financing and our business. The annual inflation rate (as measured by annual changes in the CPI and as reported by the Chilean National Institute of Statistics) during the last five years and the first three months of 2020 was:

 

Year  Inflation
(CPI Variation)
 
2016   2.7%
2017   2.3 
2018   2.6 
2019   3.0 
2020   3.0 
2021 (through March 31)   1.3%

 

Source: Chilean National Institute of Statistics

 

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

 

For more information, see “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition,” “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Interest Rates.”

 

Part of the information included in our financial statements considers assumptions, estimates and modeling which, if inaccurate, could have a material impact on our results of operations and financial position.

 

The preparation of our financial statements requires management to make judgments and estimates that affect the amounts of assets, liabilities, income and expenses reported in our financial statements. Estimates and assumptions are based on historical experience, expert judgment and other factors, including expectations of future developments under certain alternative scenarios. Although assumptions and estimates are evaluated and revised on a continuous basis, we cannot rule out that projected scenarios could dramatically change in the short term, causing a severe impact on fundamentals and estimates.

 

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We are also subject to model risk since the valuation of financial instruments relies on models (such as cash flows valuation models for fixed-income securities, valuation models for derivatives including technical approximations, value adjustments models for derivatives, and IFRS 9 forward-looking provisioning models, among others) and inputs, which, in some cases, are not observable. Accordingly, computed values for securities and financial instruments may be inaccurate or subject to change, since the inputs used for specific models may be unavailable, particularly for illiquid assets or under scenarios of financial turmoil. In these cases, we will make assumptions and judgments in order to establish the fair value of certain instruments, which involves uncertainty and may translate into inaccurate estimates of actual results.

 

In this regard, the cessation or replacement of certain rates, market indices or benchmarks extensively used by financial markets and practitioners for valuation purposes, such as interest rates or foreign exchange rates indices, could also impact the accuracy of the estimates we include in our financial statements. On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA), which regulates the entity that oversees the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. Moreover, on March 5, 2021 the FCA made an announcement confirming that 35 LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021 for all GBP, EUR, CHF and JPY LIBOR settings, and the one-week and two-month USD LIBOR, and after June 30, 2023 for the Overnight and one-month, three-month, six-month and 12-month USD LIBOR. This announcement not only indicates that LIBOR will cease to be calculated, but this could also produce changes in the LIBOR rate as we currently know it, affecting its precision or comprehensiveness when representing the worldwide fixed-income market. This reform and other similar changes may result in various risks for the financial and banking business, including but not limited to: (i) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (ii) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (iii) communication risks arising from misunderstandings with customers or counterparties; (iv) the possibility that a limited number of transactions do not contemplate a LIBOR fallback provision; and (v) the necessity of adapting current IT systems, trading platforms, financial reporting infrastructure and clearing processes, among others. The implementation of alternative benchmark rates is still in progress, although most banks are set to move from LIBOR to the Secured Overnight Funding Rate (or “SOFR”), which is the secured overnight financing rate published by the Federal Reserve Bank of New York on the Federal Reserve Bank of New York’s website and is intended to be an appropriate replacement for LIBOR. This could have an adverse effect on our business, results of operations or financial condition if we are unable to agree on an alternative benchmark, like SOFR, with our customers and financial counterparties in advance. Furthermore, we may face a risk of litigation, disputes or other actions from clients, counterparties, customers, investors or others regarding the interpretation or enforcement of related provisions or if we fail to appropriately communicate the effect that the transition to alternative benchmark rates will have on existing and future products. Although we expect to adapt our valuation processes, IT infrastructure and pricing systems as new information arises, we can neither assure you nor calculate the impact this could have on our business and results of operations, if any.

 

As of December 31, 2020, we had on-balance and off-balance contracts that used LIBOR as a benchmark. Most of them have interests paid in LIBOR or are valued by using LIBOR as the prevailing discount rate, including derivatives, loans and master agreements, such as ISDA contracts. As of December 31, 2020, our on-balance assets based on LIBOR amounted to approximately U.S.$936 million and our liabilities based on LIBOR amounted to U.S.$908 million. In the case of assets, approximately 9% was due to expire in 2021, 25% is due to expire before June 2023 and 66% is expiring after June 2023. As for liabilities, 100% is expiring before June 2023. Most of these assets and liabilities are associated with trade finance loans, although there are also some commercial credits linked to LIBOR. On the other hand, off-balance sheet arrangements based on LIBOR represented a net liability exposure of approximately U.S.$2,019 million as of December 31, 2020, of which approximately U.S.$1,470 million are due to expire before June 2023. Although most of our counterparties, particularly those associated with derivative contracts under ISDA agreements, are already set to move from LIBOR to SOFR as contracts consider fallback clauses that allow rate switching, we have deployed an action plan that includes: (i) identification of our main exposures and risks related to the LIBOR transition, (ii) development of new products linked to the new reference rate, and (iii) revision of current contracts and renegotiation with some of our customers. As of the date of this annual report, according to our estimates, switching from LIBOR to SOFR is not expected to have a material impact on our results of operations. However, we cannot assure you that any other reforms and changes, any establishment of alternative reference rates or any other reforms to these reference rates that may be enacted will not have a material impact on our results of operations in the future.

 

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The main accounting items subject to risk of incorrect valuation include impairment of loans to customers and advances to banks, valuation of fixed-income securities and financial derivatives held for trading, valuation and impairment of financial assets measured at fair value through other comprehensive income, and deferred tax assets and provisions for liabilities, among others. If our judgment, assumptions or models used in valuing these items are inaccurate, there could be a material effect on our results, funding requirements and capital ratios.

 

Market turmoil could result in material negative adjustments to the fair value of our financial assets, which could translate into a material effect on our results or financial condition.

 

Over the last decade worldwide financial markets have been subject to stress that has resulted in sharp temporary changes in interest rates and credit spreads. We have material exposures to debt securities issued by the local government and the Central Bank and other fixed-income investments in securities issued by local and foreign issuers. All of these are booked at fair value with direct impact on our profit and loss statement or in other comprehensive income. Therefore, these positions expose us to potential negative fair value adjustments in the short or medium term and to impairments in the long term, due to dramatic and unexpected changes in short- or long-term local and foreign interest rates and credit spreads. Any of these factors could have a material adverse effect on our results of operations and financial condition.

 

See also “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares” and “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.”

 

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

 

As all large financial institutions, we are exposed to many operational risks, including the risk of fraud by employees and outsiders, failure to obtain suitable internal authorizations, failure to properly document in-person and online transactions, equipment failures, mistakes made by employees and natural disasters, such as earthquakes, tsunamis, wildfires and floods. We could also be affected by operational disruptions associated with intentional or unintentional mass employee absence due to social unrest, demonstrations, street riots (such as the one witnessed since October 2019), transportation services interruptions and massive epidemic or pandemic outbreaks, such as COVID-19, among others.

 

Furthermore, we may be exposed to criminal events, terrorist attacks or rioting that could result in physical damage to our buildings (including our headquarters, offices, branches and ATMs) and/or injury to customers, employees and others. In addition, since activating certain aspects of our business continuity plan in response to the COVID-19 pandemic to allow many of our associates to work remotely, our associates’ ability to relocate to a secondary location in the event of any operational disruptions may be limited due to the pandemic. Although we maintain a system of operational controls composed of both trained staff and world-class technological resources that have been enhanced over the last years, as well as comprehensive contingency plans and security procedures, there can be no assurances that operational problems, errors, criminal events or terrorist attacks will not occur and that their occurrence will not have a material adverse impact on our results of operations, financial condition and the value of our shares and ADSs.

 

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

 

We have access to large amounts of confidential financial information and hold substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous online access to their accounts. Customers have the ability to transfer substantial financial assets in Chile and abroad through electronic means, while purchasing goods or withdrawing funds with credit and debit cards issued by us. Among the most significant cyber-attack risks that we are constantly facing are internet fraud and loss of sensitive information, both from our customers and ourselves. In particular, loss from internet fraud occurs when cyber criminals extract funds directly from clients’ or our accounts using fraudulent schemes that may include internet-based fund transfers. We are also exposed to cyber-attacks, hacking and other cybersecurity incidents in the normal course of business. Thus, as a financial institution, we are under a constant threat of suffering losses due to these reasons. In addition, our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide and enhance our internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Accordingly, cybersecurity is a material risk for us.

 

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There has recently been an increased level of attention focused on cyber-attacks against large corporations that include, but are not limited to, obtaining unauthorized access to digital systems for purposes of misappropriating cash, other assets or sensitive information, corrupting data or causing operational disruptions. Cybersecurity incidents, such as computer break-ins, phishing, identity theft and other disruptions, could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure. Subsequently, this may result in significant liability to us in excess of insurance coverage, which may carry low coverage limits, and may cause existing and potential customers to refrain from doing business with us. Additionally, cyber-attacks on our network or other systems could have a material adverse effect on our business and results of operations due to financial losses, losses of sensitive information, interruption or delays in our business and operations, regulatory fines, reimbursement or other compensation costs, compliance costs and reputational damage, among other things.

 

On May 24, 2018, we suffered a cybersecurity incident by international cybercriminals involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million (or U.S.$9.9 million). The incident also caused temporary interruptions to some of our operations, which during a short period of time affected the quality of certain services provided to our customers. Following the incident, we took immediate action to effectively contain and eradicate any disruption in our operations. At the same time, we took appropriate measures to recover the stolen funds. In spite of this incident and the temporary damage to our IT infrastructure, we were able to deploy a contingency plan, which allowed us: (i) to maintain the continuity of our operations and customer assistance in branches and through remote channels, (ii) to take immediate measures in order to assure that our customers’ funds were absolutely secured, and (iii) to comply with our short-term financial commitments with third parties and customers based on liquidity management. For more information on the incident, see “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Other Income (Loss), Net”, “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Operating Expenses” and “Item 4. Information about the Company—Our Business Strategy—Operating Efficiency and Productivity” in our annual report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.

 

Furthermore, in line with the enhancements in our cybersecurity standards that were performed during the last years, and to further improve our protections against events such as the one that occurred in May 2018, we have made significant efforts and taken steps to enhance our data security and IT infrastructure, including the purchase of protection systems and world-class infrastructure, among others. We reinforced our organizational structure and replaced our former Technological Security Area with our Cybersecurity Division in June 2018, whose main role is to be the first line of defense and be in charge of mitigating and managing cybersecurity threats, while at the same time improving cybersecurity policies, spreading related knowledge among our bank and customers and developing competences that all our employees must possess on this regard.

 

In 2019, we continued to enhance our cybersecurity protocols and infrastructure by improving security in our networks, servers, workstations and digital applications. Similarly, we put significant efforts in enhancing access-control to our networks by using technological solutions and specialized software, while simultaneously improving our capabilities on detection and management of high-risk threats. Also, based on our efforts to change our staff’s culture on cybersecurity matters, we were able to timely detect and block phishing attempts targeting clients and non-clients. In 2020, given the effects of COVID-19 on our operations, most of our staff has been operating remotely, which has accelerated our digital transformation while imposing a challenge for us in terms of cybersecurity, since our collaborators are accessing our network and servers from home. As such, we reinforced cybersecurity measures by implementing new protocols and tools. For more information, see “Item 4. Information on the Company— History and Development of the Bank—History—Technological Projects”. However, notwithstanding every measure taken to address cybersecurity matters, and although we have not experienced any material losses in this matter and are currently performing our best efforts to prevent them, we cannot assure you that we will not suffer additional losses in the future related to these kinds of events.

 

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The occurrence of any cyber-attack or information security breach could result in material adverse consequences to us, including damage to our reputation and the loss of customers. We could also face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by this security breach. As mentioned above, although we did not suffer any material adverse effects as a result of the May 2018 cyber-attack, successful attacks or systems failures at our bank or at other financial institutions could lead to a general loss of customer confidence in financial institutions, including us.

 

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

 

Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, the increasing sophistication of malicious actors, and our remote work environment in response to the COVID-19 pandemic, a cyber-attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber-attack would take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. Although we have substantially increased measures to address cybersecurity during the last years and, with the help of service providers, intend to continuously implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that these security measures will be successful.

 

Any downgrade in Chile’s or our credit rating could increase our cost of funding, affecting our interest margins, results of operations and profitability.

 

Our current credit ratings determine the cost and the terms upon which we are able to obtain funding in the ordinary course of business. Rating agencies regularly evaluate us by taking into account diverse factors, including our financial strength, the business environment and the economic backdrop in which we operate. Thus, methodologies used by rating agencies evaluate Chile’s sovereign debt ratings when determining our ratings. During 2020, Standard & Poor’s Ratings Service (“S&P”) and Moody’s Investors Service (“Moody’s”) did not change Chile’s sovereign credit rating by keeping it at A+ and A1, respectively. However, Fitch Ratings Service (“Fitch”) changed Chile’s sovereign credit rating from A to A-. Also, S&P maintained its outlook on Chile’s sovereign credit rating as negative, whereas in August 2020 and October 2020 Moody’s and Fitch, respectively, revised the outlook for Chile’s sovereign credit rating from stable to negative and from negative to stable, respectively. Following these actions, on March 24, 2021 S&P downgraded Chile’s sovereign credit rating from A+ to A, while modifying the credit outlook from negative to stable. The credit action taken by S&P was founded in the expected negative effects due to the COVID-19 pandemic and the effects of increasing social pressures that may lead the government to incur further social expenses and increase Chile’s structural fiscal balance in the long-run. Given the recent credit action taken by S&P for Chile’s sovereign credit rating, this rating agency also downgraded four local banks (excluding us) by one notch, while maintaining the negative outlook for the whole banking industry (including us), with the exception of Banco Estado (a state-owned bank) that received a stable outlook. As of the date of this annual report, S&P and Moody’s maintained our credit rating for unsecured long-term debt at levels of A and A1, respectively, both with a negative credit outlook (downgraded from the stable outlook in April 2020) due to the effects of COVID-19 on the Chilean economy and the banking activity, in conjunction with the slowdown evidenced by the Chilean economy since the social turmoil in October 2019. While Chile’s current long-term debt credit ratings remain investment grade, these credit ratings may deteriorate further and adversely affect our credit rating.

 

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Any downgrade in our debt credit ratings could result in higher borrowing costs for us, while requiring us to post additional collateral or limiting our access to capital markets. All of these factors could adversely impact our commercial business by affecting our ability to: (i) sell or market our products, (ii) obtain long-term debt and engage in derivatives transactions, (iii) retain customers who need minimum ratings thresholds to operate with us, (iv) maintain derivative contracts that require us to have a minimum credit rating and (v) enter into new derivative contracts, which could impact our market risk profile, among other effects. Any of these factors could have an adverse effect on our liquidity, results of operations and financial condition.

 

Due to the volatility in the financial markets and concerns about the soundness of developed and emerging economies, as well as the still unpredictable effects of COVID-19 on the global and the local economies, we cannot assure you that rating agencies will maintain our and Chile’s sovereign debt current ratings and outlooks.

 

As a financial institution, we are subject to reputational risk that could materially affect our results of operations or financial condition.

 

Corporate reputation is a crucial competitive advantage for us, as it allows us to attract and retain customers, appeal to investors and avoid employee attrition. Also, reputation is a key element in banking since access to funding is driven by the confidence of depositors and the opinion of ratings agencies on the value of our franchise. Therefore, any disreputable event, including employee misconduct, legal proceedings, regulatory sanctions, failure to deliver minimum standards of service quality, failure to comply with regulatory requirements, unethical behavior by our staff or involvement in political issues or public scandals (or gossip related thereto), complaints filed by customers or non-customers and fake news or alleged issues about us or our operations in social media could damage our reputation and produce significant harm to our results of operations or financial condition. Furthermore, our reputation is highly aligned with the reputation of the banking industry in which we participate and, therefore, actions by other providers of financial services or the banking industry as a whole could also harm our own reputation.

 

Similarly, the ability to manage potential conflicts of interest has become an increasingly important factor for our business given our widespread operations in many economic sectors with diverse third parties. Accordingly, the failure to address –or even the perceived failure to address– conflicts of interest could affect the willingness of customers and investors to work with us, or could lead to legal actions against us. In order to address and avoid these potential events, we are continuously improving our corporate governance standards by detecting potential failures and adopting world-class principles and procedures. Nevertheless, we cannot assure you that we will not face reputational events in the future that could harm our prospects or the value of our franchise. For more information on corporate governance, see “Item 6. Directors, Senior Management and Employees—Board Practices”.

 

Risks Relating to our American Depositary Shares (“ADSs”)

 

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

 

As of April 23, 2021, LQ Inversiones Financieras S.A. (“LQIF”), a holding company beneficially owned by Quiñenco S.A. and Citigroup Chile S.A., holds directly and indirectly approximately 51.15% of the voting rights of our shares. Subject to our bylaws and applicable law, these principal shareholders are in a position to elect a majority of the members of our board of directors and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions.

 

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

 

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

 

While our ADSs have been listed on the New York Stock Exchange (the “NYSE”) since the first quarter of 2002, there can be no assurance that an active trading market for our ADSs will be sustained. During 2020, a daily average volume of approximately 147,464 of our American Depositary Receipts (“ADRs”) were traded on the NYSE, according to data provided by Bloomberg. Although our shares are traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange, the Chilean market for our shares in Chile is small and somewhat illiquid. As of April 23, 2021, approximately 48.85% of our outstanding shares were held by shareholders other than our principal shareholders, LQIF.

 

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

 

ADS holders may be unable to exercise voting rights at shareholders’ meetings and preemptive rights.

 

ADS holders may exercise voting rights associated with common stock only in accordance with the deposit agreement governing our ADSs. Accordingly, ADS holders will face practical limitations when exercising their voting rights because ADS holders must first receive a notice of a shareholders’ meeting from the Depositary and may then exercise their voting rights by instructing the Depositary, on a timely basis, on how they wish to vote. This voting process necessarily will take longer for ADS holders than for direct common stockholders, who are able to exercise their vote by attending our shareholders’ meetings. Therefore, if the Depositary fails to receive timely voting instructions from some or all ADS holders, the Depositary will assume that ADS holders agree to give a discretionary proxy to a person designated by us to vote their ADSs on their behalf. Furthermore, ADS holders may not receive voting materials in time to instruct the Depositary to vote. Accordingly, ADS holders may not be able to properly exercise their voting rights.

 

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

 

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

 

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

 

The market price of our ADSs and shares may be adversely affected by volatility in international financial markets and unfavorable developments in global economic conditions. The market for Chilean securities and the Chilean economy as a whole are influenced by (i) economic and market conditions in Chile’s main commercial partners such as the United States, Europe and certain emerging economies, especially Asian countries, and (ii) economic as well as political developments in Latin American countries. Although economic conditions are different in each country, investors’ reactions to specific issues in one country may affect the financial markets in others, including Chile.

 

The year ended December 31, 2020 was marked by the economic effects of COVID-19 in both developed economies and emerging markets. Mobility restrictions and massive lockdowns significantly affected economic growth globally, and although more than a year has passed since the first case of COVID-19 in China, countries across the globe have experienced two or three waves of contagion that have led health and political authorities to re-introduce mobility restrictions, while deploying massive fiscal and monetary aid packages intended to mitigate the economic effects of the pandemic. According to Bloomberg estimates, global GDP would have contracted 3.5% in 2020, whereas GDP of developed and emerging economies would have decreased 4.9% and 2.4%, respectively. These trends also translated into a new boost of commodities, since productive capacity and stocks were also affected by massive and longstanding lockdowns. These trends show a significant change when compared to the performance seen in 2019, when the global economy appeared to have overcome a long period of turbulence and volatility, which began in 2007 with the subprime mortgage crisis, when many U.S. banks and financial institutions disclosed significant write-downs related to their exposure to mortgage-backed securities and other similar financial instruments. This situation led to significant government intervention for important banks worldwide, bankruptcy for others and active M&A activity to rescue failing banks, maintain investors’ and customers’ confidence and to prevent bank runs. These government actions became less frequent as the U.S. economy started to show signs of recovery. Thus, in December 2015, the U.S. Federal Reserve began to taper its quantitative easing programs undertaken after the subprime crisis and began to gradually increase the marginal standing facility rate from 0.50% in January 2016 to 2.5% in June 2019. However, given the evolution of certain economic indicators, the effects of the United States-China trade war on the U.S. economy, and particularly due to the effect of the COVID-19 pandemic on actual economic growth, the U.S. Federal Reserve decided to apply subsequent reductions to the federal fund rate starting in July 2019 from 2.5% to 1.75% in December 2020. Subsequently, based on the aftermath of the COVID-19 pandemic, the U.S. Federal Reserve carried out sharp cuts to the reference rate in March and April 2020, by leading the monetary interest rate to 0.25%, a level at which it remained until December 2020. Investor sentiment regarding the outlook of the U.S. economy has fluctuated and we cannot assure you that past developments will not occur again in the future or that recent volatility in the international markets will not affect us, including our results of operations and, consequently, the market price of our ADSs and shares.

 

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Additionally, the fiscal condition of many European countries remains weak and doubts about the financial condition of certain European banks arise from time to time. We cannot assure you that volatility in global financial markets due to the uncertainty regarding the fiscal condition of some European countries will not continue and affect the Chilean economy, and consequently, the financial condition and results of operations of the entire Chilean banking system, including us. Accordingly, the price of our ADS could be adversely affected by a new financial turmoil in the Eurozone, political issues, armed conflicts, uncertainty due to terrorism, a slower than expected recovery, or a deterioration in healthier economies.

 

Furthermore, uncertainty regarding the future of emerging and developed economies continues to be a source of instability worldwide. For example, although the “trade war” between the United States and China, by which both countries seek to revise tariffs on the others’ imported goods, seemed to improve with the first phase of the trade agreement reached between both countries, it continues to be a source of volatility for financial markets from time to time. Also, political and social instability in some Latin American countries like Colombia, Venezuela, Ecuador, Argentina and even Chile produced migration issues in more stable countries within the region. Moreover, the materialization of Brexit, armed conflicts in the Middle East and Asia, ongoing negotiations between the U.S. and North Korea, the developing conflict between the U.S. and Iran, terrorism, the global migration crisis and waves of populism looming in different countries, illustrate volatile social and political environments that could harm foreign trade and economic growth for both developed and developing countries. These changes may also generate significant volatility in international markets and commodity prices.

 

Additionally, the slowdown of the Chinese economy has led to increasing volatility in the financial markets in the past, affecting international commodity prices, including copper, which is Chile’s main export. For example, during the first months of the COVID-19 pandemic, there was a slowdown in the Chinese economy due to the quarantine ordered by Chinese authorities in the most affected regions of the country. While the effects of COVID-19 on the Chinese economy have mostly subsided, due to the importance of copper exports and overall mining activity to Chilean economic growth, a prolonged slowdown in the Chinese economy, a Chinese-U.S. trade war or other developments may drive copper prices down and adversely affect the Chilean economy. Although copper prices were impacted in early 2020 by the global economic slowdown and fears of the COVID-19 evolution, our exposure to the Chilean mining sector represented only 1.7% as of December 31, 2020 in terms of total loans.

 

The effect of all these trends on market volatility and the economic outlook of developed countries, emerging economies and Chile’s commercial partners could adversely impact the local economy, the local banking industry and, ultimately, our results of operations, financial condition and the price of our shares and ADS.

 

COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.

 

Pandemic disease and health events, such as the outbreak of COVID-19, have the potential to negatively impact economic activities in many countries, including Chile, with subsequent adverse effects on our results of operations or financial condition.

 

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The outbreak of COVID-19 was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China, as well as other countries, including Chile and the United States, growing into a global pandemic, as declared by the World Health Organization. Since the outbreak began, countries have responded by taking various measures including imposing mass quarantines, shelter-in-place orders, medical screenings, restricting or banning travel, limiting public gatherings, closing businesses and schools and suspending certain other economic activities.

 

In addition, concerns related to COVID-19 lowered equity market valuations, decreased liquidity in fixed income markets and created significant volatility and disruption in global financial markets, particularly in the early months of the pandemic, resulting in the fall of stock prices (including the price of our stock). Also, there continue to be concerns related to the effects of COVID-19 on international trade (including supply chain disruptions and export levels), travel, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities that may continue to have a destabilizing effect on financial markets and economic activity, particularly for companies in the financial sector. Furthermore, any actions taken by governmental authorities and other third parties in response to the pandemic may negatively impact our business, results of operations and financial condition.

 

Although in certain countries some of the activity restrictions listed above have been relaxed with progressive success, particularly in the spring and summer seasons, most of these countries had to re-introduce massive lockdowns as a result of a second and –in some cases– a third wave took place. Further, variant strains of the COVID-19 virus have appeared, further complicating efforts of the medical community and governmental authorities in response to the pandemic. At this point, multiple COVID-19 vaccines have received regulatory approval and currently are being distributed in many countries to the broader population. Nonetheless, mobility restrictions remain in several countries and, therefore, the adverse social and economic effects of the pandemic continue to be a threat for economic growth.

 

Since the first cases of COVID-19 were detected in Chile during March 2020, the Chilean Government has taken various measures in order to prepare for and safeguard the country from a mass contagion and to contain and control the spread of COVID-19. For example, on March 18, 2020, a state of catastrophe was declared in the entire country, which, under the Chilean Constitution, enabled the President to restrict freedom of movement and gathering, to seize goods (subject to compensation by the State) and limit property rights for the purposes of reestablishing normality and ensuring supply of basic needs. Other measures taken during the state of catastrophe included partial or total lockdowns with varying levels of severity and length for some neighborhoods and regions during the months of high rates of contagion, particularly during the second and part of the third quarters of 2020. In the peak of the pandemic, approximately 60% of the Chilean population was subject to some type of mobility restriction. By the end of the third quarter of 2020, the level of contagion decreased significantly and lockdowns started to be lifted. Likewise, vaccination started by the end of 2020, and as of the date of this annual report, Chile has been internationally distinguished by deploying a massive vaccination process that has reached approximately eight million people, representing approximately 50% of the target population. However, a second wave of contagion appeared at the beginning of the fall season. Therefore, by mid-March, the Chilean Government established total lockdowns for some neighborhoods, and operating restrictions to some economic activities (restaurants, gyms, cinema, among others), in light of a spike in the rate of contagion. Although, the Chilean health authority expects to see an overall improvement as long as a greater portion of the population receives the vaccine, widened mobility restrictions may not be ruled out. Therefore, eventual partial or total lockdowns may still occur until COVID-19 is fully under control and/or herd immunity is reached. As a result of a potential partial or total lockdown, any material or extended disruption of our ability to meet our responsibilities to our customers and/or a decrease in demand or use of services from our customers is likely to result in a loss of revenue. Also, many economic sectors have closed or decided to reduce their working hours. Many others continue to operate remotely, utilizing a home office. Only certain businesses necessary to maintain basic supplies, such as pharmacies, banks and supermarkets, remain open during lockdowns.

 

Further, government measures in order to avoid mass contagion are constantly evolving and future measures are uncertain and cannot be predicted. Consequently, the effectiveness and sustainability of our work from home arrangements, contingency sites and the potential inability to maintain critical staffing in our physical banking facilities may also negatively impact our business and results of operations. Also, the unavailability of personnel and the changes in normal operating procedures could adversely compromise our ability to conduct business generally, operating performance, financial reporting and internal controls. Consequently, the uncertain economic conditions and various activity restrictions due to the COVID-19 pandemic have thus resulted in an extremely challenging operating environment for many businesses, the complete shutdown of others, as well as record levels of unemployment. The national unemployment rate was 10.3% as of December 2020 while reaching a peak of approximately 13.1% in July 2020. For more information about the current status of COVID-19 in Chile, see “Item 5. Operating and Financial Review and Prospects—Trend Information.”

 

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From a macroeconomic point of view, COVID-19 negatively impacted the Chilean economy with GDP contracting by 5.8% in 2020 as compared to 2019. Economic stagnation, contraction and increased unemployment levels led to a peak in past-due loans in the second quarter of 2020, given the deteriorated financial condition of certain of our customers and, therefore, a significant increase in provisions for loans losses or credit losses, which coupled with lower commercial activity, a sharp decrease in loan origination –particularly in terms of consumer loans– resulting in lower net income for the whole industry by approximately 52.9% in 2020, when compared to 2019 (although the figure also includes a significant impairment accounted by a local bank). Similarly, in the case of additional country lockdowns or a shutdown involving the Bank, any of our subsidiaries or our customers, we may be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our results of operations by reducing revenues, decreasing our collection capabilities.

 

As the COVID-19 pandemic continues to cause a historic economic downturn, financial institutions face increased credit risk, strategic risk, operational risk, and compliance risk. The COVID-19 outbreak resulted, and continues to result, in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses associated with our trading portfolio or financial assets measured at fair value through other comprehensive income, which could then cause deterioration of our financial condition or limitations to meet our liabilities. Furthermore, market fears could translate into liquidity constraints and reduced access to funding in both the local and the international markets, negatively affecting our net interest margin and net income. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. In order to prepare for the impacts of this environment, the Chilean financial authorities made various decisions in order to ensure liquidity within the Chilean financial system, the Central Bank carried out consecutive reductions to the monetary policy rate by leading the reference rate to 0.5% for a few months. This interest rate cut had a direct effect on yield curves. The average nominal interest rate for 90 to 360 day deposits decreased from 2.72% in 2019 to 0.86% in 2020, while the average nominal interest rate of the five-year bonds issued by both the Central Bank and the Chilean Government decreased from 3.31% in 2019 and to 1.93% in 2020. Any additional decisions towards accomplishing this end are also expected to affect our results of operations, which could be amplified by flat yield curves in case of an economic downturn. Lastly, contingency plans in order to address the emergency, including home offices, implementation of alternative offsite locations and so on, increased in our operating expenses and lowered net income, and may continue to do so as the circumstances develop.

 

In terms of the direct effect on our results of operations and financial condition in 2020, we reflected the dynamics of the whole local banking system. Given the effect of mobility restrictions on overall economic activity, our loan portfolio recorded a moderate annual increase of only 3.0%, although average balances posted a higher expansion. However, most of our loan growth was associated with low-margin products, such as commercial loans, growing 8.0% on an annual basis, particularly fostered by the government-guaranteed loan program and, to a lesser extent, due to an expansion of 2.0% in residential mortgage loans. On the other hand, year-end balances of consumer loans, a high-margin product, decreased by approximately 12.9% in 2020, as compared to 2019, mainly due to lowered household consumption and increased unemployment. As of December 31, 2020, we had granted approximately Ch$1,889,000 in FOGAPE-COVID loans to companies, while rescheduling approximately Ch$414,155 million in installments of consumer, mortgage and commercial loans. From the funding point of view, the sharp decrease in nominal interest rates dramatically impacted the contribution of our demand deposits (increasing 33.9% on an annual basis) to our cost of funds. We partially offset this effect by raising approximately Ch$3,100,000 million from the Central Bank bearing an interest rate of 0.5% (equivalent to the reference rate). These trends significantly affected our net interest income, which decreased by approximately 4.0%. Similarly, the plunge in disposable income of individuals and constrained on-site economic activities had a negative impact on the number of transactions processed, which resulted in a 2.5% decline in fee-based income. These factors, coupled with a significant increase of approximately 65.0% in provisions for loan losses, which in turn mainly resulted from the negative effect of the macroeconomic environment (including higher unemployment, decreased private consumption, stagnation of investment spending (capital expenditures), lower disposable income of individuals and constrained liquidity position of companies, among other effects) on provisioning. All of these factors, partly mitigated by higher results associated with treasury activities and lower income tax, resulted in an annual decrease of approximately 33.4% in net income. From the capital adequacy perspective, however, we maintained a solid trend during the year. Although our balance sheet increased by approximately 11.1% in 2020, most of the increase was focused on low-risk financial assets (Central Bank’s notes) in order to face recurrent reserve requirements in a context of increasing demand deposit balances, while riskier assets, such as loans, posted a moderate decrease. In addition, as in recent years, in March 2020 we capitalized 30% of our net distributable income while retaining the effect of inflation on our shareholders equity (jointly amounting to Ch$242,470 million), all of which allowed us to end 2020 with a capital adequacy (BIS) ratio of 16.0%, as compared to the 14.1% recorded in 2019.

 

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By the beginning of 2021, notwithstanding the positive view of market analysts and global institutions, such as the World Bank and the International Monetary Fund, there were some doubts regarding the expected recovery for the Chilean economy by mid-March 2021 due to the previously mentioned increase in COVID-19 cases and measures taken by the Chilean health authorities. Accordingly, our financial performance could see a slowdown in the coming quarters, as compared to the first quarter of 2021, as long as mobility restrictions remain or last longer than expected.

 

Aligned with this view, because there have been no comparable recent global pandemics that resulted in a similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our remote working arrangements, third party providers’ ability to support our operations, and any further action taken by governmental authorities and other third parties in response to the pandemic. As the economic impact due to the COVID-19 pandemic continues we cannot provide any assurances as to how long it will be before the COVID-19 pandemic abates and economic activity can begin to resume to pre-COVID-19 pandemic levels.

 

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

 

Equity investments held in Chile by non-Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of investments and earnings from Chile. In April 2001, the Central Bank eliminated most of the regulations affecting foreign investors. However, foreign investors still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them, the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we can neither determine in advance nor advise you as to when or how those restrictions could impact you, if imposed.

 

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

 

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Risks Relating to Chile

 

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

 

Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and investment. The global financial crisis of 2008 not only dramatically affected the economic growth in developed countries, but also affected the Chilean economy by the end of 2008 and during the first three quarters of 2009. This translated into a subsequent slowdown in the local banking industry due to lower levels of consumption and deteriorated credit quality in loan portfolios prompted by unemployment and financial stress experienced by certain economic sectors. Conversely, between 2010 and 2012, the local economy and the banking industry took a significant upturn, fostered by real GDP growth that averaged 5.7% per year, mainly as a result of the recovery in consumption and investment, as well as higher fiscal spending associated with the reconstruction process after a significant earthquake in 2010. During 2013, the Chilean economy entered into a moderate slowdown, recording only a 4.0% GDP growth, which deepened throughout the following years with GDP annual expansions of just 1.8%, 2.3%, 1.7% and 1.2% in 2014, 2015, 2016 and 2017, respectively. This trend in GDP deceleration was the result of low levels of both corporate and individual confidence, as evidenced by the indices (IPEC and IMCE) used by the Central Bank, due to factors such as slower growth of Chile’s main commercial partners, especially China, and uncertainty associated with various reforms presented by the Chilean administration appointed in 2014. This trend reversed in 2018, when the Chilean economy managed to grow 3.9% on an annual basis. The GDP growth was mainly fostered by a strong recovery in investment spending, which increased 4.8% in 2018 and, to a lesser degree, a 3.7% growth in private consumption. In 2019, the local economy grew by only 1.1%, mainly as a result of the social turmoil that took place in Chile on October 18, 2019, which temporarily damaged the productive capacity, income-generating capacity and distribution networks of many economic sectors, resulting in decreased commercial activity and constrained working hours. These local events, coupled with the initial effects of the COVID-19 pandemic on our main trade partners’ economies, particularly China, Europe and the United States, battered the dynamics of some of our key export products. During 2020, the local economy was severely impacted by the aftermaths of COVID-19 on overall activity, primarily as a result of the long-lasting lockdowns imposed by the government in order to control the spread of the virus across the country, which translated into: (i) a spike in unemployment from 7.1% at the end of 2019 to a peak of 12.3% in the third quarter of 2020, converging to 10.3% at the end of the year, (ii) a 7.5% decline in private consumption, caused by the sharp decrease in disposable income and mobility restrictions, and (iii) an annual contraction of 11.5% in investment spending (gross fixed capital formation), since many investment projects were postponed in light of both uncertainty on the economic outlook, social distancing measures and lockdowns that impacted diverse economic sectors. These trends were mainly present in the second and third quarters of 2020, when GDP recorded an annual decline of 11.8% on average. However, by the end of the third quarter, economic activity began to recover as quarantines continued to be lifted and certain industries, like construction, restaurants and manufacturing, returned to more normal activity. Likewise, household spending experienced some recovery based on the fiscal aid package implemented by the Ministry of Finance that resulted in direct money transfers for individuals and the two pension fund withdrawals approved by the Chilean Congress. Accordingly, in the fourth quarter of 2020, the local economy posted an annual decrease of only 0.4%, which resulted in an annual GDP contraction of 5.8% in 2020. Although the effects of the COVID-19 pandemic on the local economy and most relevant economies worldwide, such as China, the United States and main European countries, have mostly subsided or significantly improved and the worldwide vaccination process is in progress, we cannot assure you that the dynamics of our economy and the economic growth of our key international partners will improve or return to pre-COVID-19 levels. Given the social developments described previously and the impacts of the COVID-19 outbreak in Chile, we cannot rule out that the Chilean economy could stagnate or even fall into recession during 2021, which could have a subsequent adverse effect on our business growth and the business growth of the Chilean banking industry in general.

 

Therefore, we cannot assure you that the local economy will grow in the coming years, as it has in the past, or that developments affecting the Chilean economy and the local banking industry will not materially affect our business, financial condition or results of operations. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Impact of COVID-19 in 2020,” “Item 3. Key Information—Risk Factors—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 5. Operating and Financial Review and Prospects—Trend Information—Impact of COVID-19.”

 

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

 

The Chilean Government’s economic policies and any future changes in the value of the Chilean peso with respect to the U.S. dollar could affect the dollar value of our common stock and our ADSs. Given the floating exchange rate regime that exists in Chile, the Chilean peso has been subject to large fluctuations in the past and this trend could occur again in the future. According to information published by the Central Bank (“Dólar Observado”, which differs from exchange rate of accounting representation or market exchange rate), between December 31, 2019 and December 31, 2020, the value of the U.S. dollar relative to the Chilean peso decreased by approximately 5.3%, as compared to the increase of 8.4% recorded in the period from December 31, 2018 to December 31, 2019. Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. Cash dividends associated with our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at the then-prevailing exchange rate for making payments in respect of our ADSs. If the value of the U.S. dollar increases relative to the Chilean peso, the dollar value of our ADSs, and any distributions to be received from the depositary, will decrease. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. For more information, see “Item 10. Additional Information—Exchange Controls.”

 

Since we manage assets and liabilities denominated in foreign currency, our results of operations may be affected by fluctuations in the exchange rates between the Chilean peso and the U.S. dollar, or the Chilean peso in relation to other currencies, despite our policy and Chilean regulations related to the general avoidance of material exchange rate mismatches. In order to reduce the effect of exchange rate mismatches, we enter into foreign exchange derivative transactions, including both hedge accounting derivatives and trading derivatives, that hedge most of our exposure to foreign currency. As of December 31, 2020, our foreign currency-denominated assets and Chilean peso-denominated assets, which contain repayment terms linked to changes in foreign currency exchange rates, exceeded our foreign currency-denominated liabilities and Chilean peso-denominated liabilities, which contain repayment terms linked to changes in foreign currency exchange rates, by an amount of Ch$2,649 million, or 0.08% of our paid-in capital and reserves.

 

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

 

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

 

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

 

Chilean law may provide shareholders with fewer and less well-defined rights.

 

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

 

Our business growth, asset quality and profitability may be affected by political, legal and economic uncertainty, as well as social developments and the drafting of a new constitution in Chile.

 

Our operations are highly dependent on the Chilean political and social environment, as most of our customers and borrowers do business in Chile. Thus, our results of operations could be negatively impacted by unfavorable political and diplomatic developments, social instability or unrest, as well as dramatic changes in public policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policy.

 

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In October 2019, a series of disruptive protests over a variety of social matters were initially sparked by the announcement of a subway fare increase in Santiago. Among these protests, some violent groups vandalized and looted public and private infrastructure in Santiago and other major cities. The protests and related violence have disrupted various economic activities throughout the country. In addition, many banks and other financial institutions experienced physical damages at their branches and ATMs. Although most of our damages were insured, 239 of the Bank’s branches and approximately 170 of our ATMs suffered varying levels of damage during this period, with nine of our branches and 109 ATMs being severely damaged.

 

The social unrest also led to increased volatility in the Chilean stock market, with a significant correction of stock prices and a sharp depreciation of the Chilean peso against the U.S. dollar. Furthermore, share prices of local banks, including ours, suffered significant declines in the market, while bond spreads of local banks increased.

 

In response to the protests, the Government announced a social agenda intended to increase basic pensions, expand social health coverage, and reduce and stabilize tariffs for some public services, such as public transportation and electricity. To fund these initiatives, the Government and the opposition reached an agreement regarding a new tax reform that was passed by the Chilean Congress and enacted on January 29, 2020. Through various measures the reform aimed to levy higher taxes on high-income individuals, while alleviating the tax burden for lower-income segments. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Income Tax and Item 10. Additional Information—Taxation—Chilean Tax Considerations”. Further, on November 15, 2019, the majority of the local political parties agreed on a process to draft a new constitution that will replace the current one dating from 1980. According to amendments approved by the Chilean Congress to the 1980 Constitution, this process was initiated by the referendum held in October 2020, in which two matters were voted on: (i) whether a new constitution should be drafted and if so, (ii) whether the convention for drafting the new constitution will be comprised of 50% Congress members and 50% non-Congress member elected citizens, or entirely comprised of non-Congress member elected citizens for this specific purpose. In the referendum, the choice for a new constitution obtained 78% of the votes and 79% of voters determined that a convention entirely comprised of non-Congress member elected citizens will draft the new constitution. The election for determining the composition of the convention body was scheduled to be held on April 11, 2021, however, since COVID-19 cases significantly increased during late February and March 2021, lockdowns and other measures had to be reinstated by the Chilean authorities, causing the election to be postponed to mid-May 2021. These elections will also appoint mayors, local councils and governors, and to avoid crowds due to COVID-19 restrictions, will be exceptionally held during two days. As for the procedure under which the new constitution will be written by the convention body, each new article must be approved by two thirds of the convention. This convention will be exclusively authorized to discuss and draft the provisions of a new constitution. The process to draft the constitution is expected to commence in July 2021, and may last up to one year from the date it is legally installed. The draft delivered by the convention must be ratified or rejected in a new referendum.

 

As mentioned, the referendum to vote for a new constitution was carried out in October 2020, in which the choice for a new constitution obtained 78% of the votes and 79% of voters determined that a convention entirely comprised of citizens will draft the new constitution. As a consequence of the recent developments relating to an uptick of COVID-19 cases, the April 2021 elections for mayors, local councils and governors and members of the convention were exceptionally postponed for May 15 and 16, 2021.

 

Based on the announcement of the social agenda, and subsequently due to the mobility restrictions implemented due to the COVID-19 pandemic, protests and riots declined during 2020 and were later resumed, to a lesser extent, by the end of 2020 and beginning of 2021. However, the social crisis produced by the COVID-19 pandemic also translated in isolated demonstrations. Accordingly, we cannot rule out an increase in past-due levels during 2021, or beyond, to the extent that the quality of salaried jobs decreases and that the economic outlook deteriorates in light of uncertainty around the new constitution or changes to the political and economic model. Amid this environment, our risk expenses could increase in the short-term, while our results of operations, and the results of the industry as a whole could be affected. Furthermore, economic activity could slow down, affecting loan growth across the industry and for us.

 

The long-term effects of this social unrest are difficult to predict, but could include slower economic growth and higher unemployment rates, which could adversely affect our profitability and prospects. For example, an increase in the unemployment rate beyond what we predicted, or for a longer period than predicted, could diminish demand for loans and decrease our customers’ payment capacity to repay loans, increasing expected credit losses. Overall, we cannot assure you that the social unrest will decrease in Chile in the near future, and therefore, we can offer no assurance that it will not have a negative impact on economic growth, the overall Chilean business environment and our results of operations and financial condition.

 

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Reforms to labor and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations.

 

We are a party to collective bargaining agreements with various labor unions to which most of our employees belong. Therefore, disputes regarding the terms of these agreements, or our potential inability to negotiate acceptable contracts with these unions, could result in strikes, work stoppages, or other slowdowns by the affected workers, among other things. If unionized workers were to engage in a strike, work stoppage, or other slowdown, or other employees were to become unionized, we could experience disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our results of operations. See “Item 6. Directors, Senior Management and Employees—Employees.”

 

Since 2017, a bill has been under consideration in the Chilean Congress aimed at reducing the maximum working hours from 45 to 40 hours per week, applicable to employees. If this bill is approved and enacted, we could experience higher ongoing labor costs, which could have an adverse effect on our results of operations.

 

Current labor legislation defines a company’s minimum services and emergency teams by the applicable labor regulator after negotiations between a company and each labor union prior to the commencement of a collective bargaining process. As such, minimum services refer to those functions of a company which must continue to be provided during a strike because they have been determined to be essential to protect assets and facilities, to prevent accidents, guarantee public utility services, meet the basic needs of the population and prevent environmental damage or harm to health. A company’s emergency teams are made up of workers assigned by each union to fulfill such minimum services. As further explained in “Item 8 – Financial Information – Legal Proceedings – Setting of Minimum Services and Emergency Teams in Case of a Strike”, we challenged the minimum services and emergency teams that have been assigned to us, but our claims were not upheld, both by the labor authority and the labor courts. Therefore, in the event of futures strikes, we could face operational disruptions due to an inadequate number of minimum services and an insufficient staff for the emergency teams.

 

Since late 2018, the Chilean Government has presented three bills with the purpose of improving the Chilean pension system. These projects, which initially sought to improve the private pension funds system by increasing individual capitalization and enhancing the solidarity fund financed by common taxation, have extensively changed during the last two years, especially after the October 2019 social turmoil aftermath and the COVID-19 pandemic. The last bill was presented by the Chilean Government in March 2021, and, among other matters, (i) seeks to increase the number of people benefited by the solidarity fund; (ii) increases from 10% to 16% the compulsory individual contribution which must be paid by the employer (where 3% would be destined to individual capitalization and the other 3% to solidarity (despite discussions with the Chilean Government’s opposition which seeks to apply the full extra 6% to solidarity); (iii) increases the pensions of certain groups of low income pensioners by offering several benefits to them; (iv) creates new pension fund managers as non-profit seeking organizations; (v) mandates fund managers to return up to 20% of the fees charged to the contributors to the extent they suffer losses; and (vi) eliminates fees for the management of Chilean mutual funds.

 

Further, during the discussions between the Chilean Government and the Chilean Congress to reach an agreement on a feasible pension reform, as a result of the COVID-19 pandemic, two extraordinary withdrawals from the pension funds were permitted to anyone who had contributed to the pension fund system, each one up to 10% of the aggregated individual account available, but not exceeding UF 150 (equivalent to Ch$4.4 million as of March 31, 2021). As of the date of this annual report, a third withdrawal was passed by the Chilean Congress and enacted. This third withdrawal allows withdrawals from the pension funds in similar terms as the previous two, and is expected to be implemented during the following weeks.

 

With the information we have as of today, we are unable to predict the final content of the pension reform and therefore any potential adverse effects of this bill in our financial condition and results of operations cannot yet be ascertained. Should this bill come into effect, it may cause an increase in labor costs, including ours, and therefore, have an adverse effect on our financial and operational results. Since the pension fund managers usually invest a portion of the funds in certain banking debt instruments (for instance, bonds, time deposits), if the amount of funds available in the pension funds system decreases significantly, we may need to seek alternative funding sources, which could be more expensive and, as a consequence, may have an adverse effect on our financial condition and results of operations.

 

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Item 4Information on the Company

 

History and Development of the Bank

 

Overview

 

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

 

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

 

We are a full service financial institution that provides, directly and indirectly through our subsidiaries, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market, providing our customers with powerful, differentiated and comprehensive value offerings. In addition to our traditional banking operations, our subsidiaries and affiliates permit us to offer a variety of non-banking but specialized financial services including securities brokerage, mutual funds management, investment banking, insurance brokerage, securitization and collection services.

 

Our business is not materially affected by seasonality.

 

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

 

(i)retail banking;

 

(ii)wholesale banking;

 

(iii)treasury and money markets; and

 

(iv)operations through subsidiaries.

 

Through our retail banking segment, we provide our individual customers with credit cards, installment loans and residential mortgage loans, as well as traditional deposit services, such as current accounts, demand deposits, demand accounts, savings accounts and time deposits. We and our subsidiaries also offer financial solutions such as insurance brokerage, securities brokerage, mutual funds management, among others. In addition to personal banking, our retail segment comprises micro, small and medium sized companies that we serve by providing them with short and long term financing, deposit and cash management solutions, in addition to an array of financial services, such as insurance brokerage. In addition, our banking services for wholesale customers include commercial loans (including factoring and leasing), trade finance, capital markets services, cash management and non-lending services, such as payroll, payment and collection services, as well as a wide range of treasury, financial advisory and risk management products.

 

In 2008, we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile. We also offer international banking services through our representative office in Beijing and a worldwide network of correspondent banks.

 

According to the CMF, under Chilean GAAP, as of December 31, 2020, we ranked second in the Chilean banking industry in terms of net income attributable to equity holders with a market share of 39.3%. As of the same date and excluding operations of subsidiaries abroad, we were the second largest bank in Chile in terms of total loans with a market share of 16.6%, the largest provider of commercial loans with a market share of 16.7%, the second largest provider of consumer loans with a market share of 17.3% and the third largest private sector bank in terms of residential mortgage loans with a market share of 16.3%. As for liabilities, excluding operations of subsidiaries abroad, we were the largest private bank in Chile in terms of current accounts and demand deposit balances (net of clearance) with a market share of 20.8% and, more importantly, we ranked first in current account balances held by individuals with a market share of 27.1%, both as reported by the CMF and as of December 31, 2020. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 2020, we were the largest provider of mutual funds management services in Chile with a market share of 24.2%.

 

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As of December 31, 2020, we had:

 

total assets of Ch$45,550,960 million (approximately U.S.$ 63,985.1 million);

 

total loans of Ch$30,937,690 million (approximately U.S.$43,457.9 million), before deducting allowances for loan losses;

 

total deposits of Ch$24,066,770 million (approximately U.S.$33,806.4 million), of which Ch$15,167,229 million (approximately U.S.$21,305.3 million) correspond to current account and demand deposits;

 

equity (including net income, non-controlling interest and provisions for minimum dividends) of Ch$3,997,081 million (approximately U.S.$ 5,614.7 million);

 

net income attributable to equity holders of Ch$401,629 million (approximately U.S.$564.2 million); and

 

market capitalization of approximately Ch$7,333,840 million (approximately U.S.$10,302 million).

 

As of December 31, 2020, we had 13,134 employees and delivered financial products and services through a nationwide distribution network of 334 branches and 1,766 automatic teller machines (“ATMs”). Our ATMs are part of a larger network of 7,449 ATMs operating in Chile, of which 4,757 ATMs operate under a network managed by Redbanc S.A., a company we partly own along with eight other private sector banks.

 

History

 

We were founded in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, which created the largest private sector bank in Chile. We have played an important role in the economic history of Chile. Before the creation of the Central Bank in 1926 and prior to the enactment of the General Banking Act, we were the main stabilization agent of the Chilean banking system, a role that is now performed by the Central Bank. Beginning in the early 1970s, the Chilean Government assumed control of a majority of Chilean banks, and all but one of the foreign banks that were operating at that time closed their branches and offices within the country. Throughout this era, we remained as a private sector bank, with the exception of a portion of our shares owned by the Chilean Government that were sold to private investors in 1975. Throughout our history we have developed a well-recognized brand name in Chile and expanded our operations in foreign markets, where we developed an extensive network of correspondent banks. In the early twentieth century, we established a representative office in London, which we maintained until 1985, when our operations in Europe were moved to Frankfurt. The office in Frankfurt was closed in 2000, when our foreign operations were centralized at the New York branch. In 1987 and 1988, we established four subsidiaries to provide a full range of specialized financial products and services as permitted by the General Banking Act. In 1999, we widened our scope of specialized financial services by creating our insurance brokerage and factoring subsidiaries. During the early 2000s, the Chilean banking industry witnessed intense merger and acquisition activity. In 2002, we merged with Banco de A. Edwards, which allowed us to expand our business to new customer segments. In 2008, we sold our U.S. branch to Citigroup in connection with our merger with Citibank Chile that was carried out during the same year. As a result of these consolidations, we currently operate a distribution network that is composed of three brand names, namely, “Banco de Chile” (which operates throughout Chile), “Banco Edwards-Citi” (which is primarily oriented to higher income segments) and “Banco CrediChile” (which is focused on consumer loans and demand accounts for lower and middle income segments).

 

During 2014, the Chilean economy entered into a slowdown cycle, which affected investment and the growth of commercial loans. Amid this slowdown, we took advantage of our competitive strengths and continued to optimize our risk-return relationship by keeping our credit risk under control and developing innovative commercial strategies. As a result, we remained at the top of the industry in terms of net income generation and return on average equity, according to information published by the SBIF as of December 31, 2014. In order to achieve these goals, we improved customer experience by launching cutting-edge mobile banking solutions and applying world-class business intelligence methodologies. Furthermore, we continued to diversify our funding structure by issuing long term bonds in Switzerland, Japan and Hong Kong, while taking advantage of our U.S.$1,000 million commercial paper program, which was established in 2010 (‘the Commercial Paper Program”) to raise short-term funds. Lastly, we recorded a 15.9% annual expansion in current accounts and demand deposit (year-end balances) that enabled us to rank first in these liabilities within the local banking industry, according to information released by the SBIF as of December 31, 2014. These figures were reflected by the interest of investors in Banco de Chile’s stock, which recorded an 86.5% annual increase in trading volumes (excluding the effect of the LQIF secondary offering), the highest increase among all publicly listed Chilean banks.

 

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During 2015, the economic backdrop remained a leading challenge for the banking industry. However, we remained the most profitable bank in Chile (in terms of return of return on average capital and reserves and return of average assets for banks with market share in loans above 3.0%) and the first bank in net income attributable to equity holders. These accomplishments were due to diverse initiatives implemented during the year, including innovation in IT solutions for our customers, which has become one of our main goals. Due to these initiatives, we were recognized as the Best Consumer Digital Bank in Chile by GlobalFinance and as the Best Internet and Mobile Bank in Chile by Global Banking & Finance Review in 2015. In addition, we entered into two strategic partnerships with both a local and an international airline, which will benefit our 1.5 million credit card holders. We also acquired a commercial loan portfolio from a local bank amounting to approximately Ch$564 billion. Moreover, 2015 was a record year for Banco de Chile in terms of bond placements amounting to approximately Ch$1,342 billion, of which Ch$156 billion were placed abroad under the U.S.$3 billion MTN Program we maintain in Luxembourg.

 

Throughout 2016 we continued to face economic headwinds as the local economy’s growth continued to slowdown. Amid this environment, we focused on growing profitably by concentrating on those segments with a more balanced risk-return relationship. Thus, in spite of recording a moderate annual expansion of 3.4% in total loans, we managed to remain first in terms of net income attributable to equity holders and profitability (for banks with market share above 3.0% in total loans) within the local banking industry, with a market share of 28.4% and a ROAE of 19.6%, both under our internal reporting policies. Our customer-centric approach has been crucial to these achievements and we believe our service quality makes a difference when compared to our competition. During 2016 we accomplished significant advances on this matter such as attaining the highest net promotion score among the main Chilean banks for first time in our recent history while also reducing our attrition rate. We believe these achievements were the result of diverse projects and strategies intended to enhance customer proximity. Thus, during 2016 we launched a new personal banking website, with improved functionalities and enhanced our mobile banking solutions by adding new applications for smartphones. In terms of service quality, we revised and updated our portfolio of high income customers, opened new specifically-oriented branches for preferential customers and set up a new service model for premium customers called “Private Wealth Management.” Lastly, we continued to strengthen the benefits associated with our loyalty program for credit card users by adding new alliances to the package of already existing services and providers. Based on all of these initiatives, during 2016 we were recognized by various specialized publications covering multiple areas of banking activity including “Most Valuable Banking Brand” in Chile by The Banker, “Most Innovative Banking Solutions” in Chile by Global Business Outlook, “Best Consumer Digital Bank” in Chile by Global Finance and “Best Bank” in Chile by World Finance.

 

During 2017, we were first in terms of net income and profitability within the local banking industry, with a market share of 26.1% and a ROAE of 19.3%, both under our internal reporting policies. These achievements were attained during a difficult economic landscape, which resulted in a significant slowdown of the corporate lending business that impacted certain macroeconomic indicators such as unemployment, which adversely affected the credit quality of our personal banking business. Amid this environment, we maintained our customer-centric approach and focused on developing new ways to enhance the customer experience by expanding our service offerings, business platforms and benefits to our loyalty program. For example, we launched a new website for companies, aimed at serving corporates, other large companies and SME customers. Similarly, we created a new mobile application and upgraded existing ones. We released “MiInversion” which serves as a portfolio management platform for retail customers and developed new functionalities for the MiBanco application. We believe remote channels are the future of banking and are continuously promoting their use among customers while seeking new solutions to offer banking products through mobile or internet technologies. This strategy boosted demand for mobile and internet services that during 2017 reflected increases of 78% and 11% in monetary transactions using these means, respectively. In addition, our enhanced loyalty program added new alliances with two airlines and negotiated access to a VIP lounge for customers at the Santiago airport. These initiatives continue to demonstrate our commitment to superior customer service and have allowed us to obtain a 73.3 % average net promoter score in 2017, as measured by a syndicated study conducted by Consultores Asociados de Marketing Cadem S.A., or “CADEM,” the highest among our relevant peers. We also undertook transformational changes by assessing relevant processes in terms of efficiency, cost control and operational risk. We believe these actions are necessary to maintain our market leading position in an increasingly competitive banking industry. Lastly, we received recognition for our business performance and digital strategy including being recognized as the Best Bank in Chile, Best Digital Bank for Companies in Chile and Best Sub-Custodian Bank in Chile by Global Finance and being named the Best Mobile and Digital Bank in Chile and the Best Investment Bank in Chile by Global Banking & Finance Review.

 

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Throughout 2018, we continued to show outstanding performance when compared to our main competitors. We led the market in terms of net income attributable to equity holders with a 25.3% market share, which translated into an above-average ROAE of 19% (both figures under Chilean GAAP). Thanks to this performance, we were able to earn sufficient income to fully repay the subordinated debt held by SAOS with the Central Bank in April 2019. This is a significant milestone in our history, since we were able to pay off this debt 17 years before the original maturity date. In 2018, the Chilean economy maintained the trend shown by the end of 2017. Thus, GDP grew solidly at 4.0%, primarily due to the rebound of private investment. Amid this scenario, our loan book increased 9.7%, thanks to record sales in installment and mortgage loans while also adding a record amount of new current account holders. Moreover, the wholesale segment achieved a significant recovery by the end of the year, after two consecutive years of contraction.

 

During 2018, we continued to focus on superior customer service, attaining first place in service quality among our peers by posting an average net promoter score of 71.2%, as measured by a syndicated study conducted by CADEM, and an attrition rate of only 6.2%, according to our management information system. Based on these attributes we received the “National Customer Satisfaction Award” and the “Consumer Loyalty Award” in 2018. Aligned with this view, we continued to develop our digital strategy in order to assure stability and efficiency on our diverse platforms while innovating in new products and services provided online. Thus, we added new functionalities to some of our applications (MiBanco, MiPago and MiInversion), which allow our customers to perform new transactions through their smartphones including time deposits, money exchange and the RedGiro service. Due to these improvements the amount of mobile transactions in our mobile platforms increased to 35.1 million in 2018, which represents an annual increase of 60.8%. Also, thanks to our digital banking strategy we were once again recognized as the “Best Digital and Mobile Bank in Chile” by Global Banking & Finance Review and “Innovative Digital Bank of the year in Chile” by The European Magazine. Cybersecurity was also a central point of attention for us in 2018. After the cyber-attack occurred in May 2018, on which we timely reacted based on solid security protocols, we decided to enhance our organizational structure and IT infrastructure by creating the new Cybersecurity Division. This new division took various actions in order to promote a cybersecurity culture across the company, while spreading the knowledge that all of our employees should have in respect to this important topic.

 

In 2019, we achieved significant accomplishments, all of which were aligned with our long-term strategy, while maintaining a clear focus on our customers’ needs. For example, we began the year signing a long-term, exclusive partnership for life and non-life insurance products with an international insurance company. We expect this partnership to provide our customers with a wide array of insurance solutions, as well as give us the ability to offer products with an excellent price-to-quality ratio. Additionally, we entered a commercial alliance with a local Chilean retailer, allowing us to expand our ATM network by 22.5% on average in Chile during 2019 when compared to 2018. Through these initiatives, we maintained our position as a market leader in fee-based income in 2019, while significantly widening the competitive gap with followers in the industry. During 2019, we also continued our strategic objectives by defining and working to meet specific goals and improving our customer proximity in order to better meet their needs. To this purpose, we continued to deploy our digital transformation strategy by implementing a digital onboarding for customers seeking to remotely open a checking account. We continued developing our new service model to unify customer service under CrediChile and Banco de Chile brands through merging several branches. Through these initiatives, we continued being an industry leader among major banks in service quality, holding a net promoter score of 72.5% as of December 31, 2019 according to a syndicated study performed by ProCalidad.

 

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Further in 2019, we had two milestone bond placements. We placed our first green bond to finance renewable energy projects in Chile for approximately U.S.$48 million. We also took advantage of low interest rates and the phase-in, proposed by the regulation in connection with the Basel III implementation in Chile, for a subordinated bond placement in the local market of approximately Ch$215,397 million. 2019 was also an iconic year for share ownership. SAOS was able to fully repay the Central Bank subordinated debt on April 30, 2019 based on the dividend received from our net distributable earnings for the year ended December 31, 2018. Consequently, SM-Chile and SAOS entered into a liquidation process and their Banco de Chile voting rights were transferred to their respective shareholders. As a result, the free-float of our stock increased from approximately 32.09% to 48.74% (including Ergas group). Finally, as of December 31, 2019 we were the market-leading bank in Chile in net income attributable to equity holders and profitability, with a market share of 23.4% and a ROAE of 17.5% (under Chilean GAAP).

 

In 2020, our main achievements were related to both adapting our operations and processes to the contingencies produced by the COVID-19 pandemic, while being able to successfully overcome the financial challenge posed by the economic crisis caused by the pandemic. In order to continue adapting our operations to the increasing demand for remote settings and faster services from our customers, while still addressing the effects of mobility restrictions and lockdown, during 2020 we emphasized the importance of digital transformation within our organization. First, we enhanced some of our main mobile applications (MiBanco and MiPago) and our online websites for individuals, by optimizing their security protocols while providing better and more organized content to improve the user experience. In addition, one of the most important milestones of the year was the launch of the FAN account, our fully digital onboarding bank account that promotes financial inclusion among all income segments. This initiative should allow us to strengthen our market-leading position in demand deposits, as reflected by a market stake of 27.1% reached in demand deposit account balances held by individuals as of December 31, 2020 (excluding operations of subsidiaries abroad). As a consequence of these efforts on digital transformation, we were rewarded and recognized as the Innovative Digital Bank of the Year in Chile by The European magazine. Also, during 2020 we continued implementing our dual service model for branches, while modernizing them in order to comply with the sanitary restrictions as a result of the COVID-19 pandemic. These actions, coupled with a set of other measures taken in order to guarantee our operational continuity, led us to being recognized as the leading bank in Best Service Quality in 2020 according to Adimark. Moreover, during the course of the year we improved our organizational structure by creating the Productivity and Efficiency Division, which aims to accelerate the implementation of initiatives intended to optimize our operations while identifying new opportunities to improve diverse processes. Likewise, we continued to reinforce our cybersecurity structure by creating three subdivisions in order to better cope with new challenges that digital transformation poses: (i) the Cybersecurity Operations unit, (ii) the Intelligence and Response unit, and (iii) the Detection and Containment unit.

 

Throughout 2020, we also deployed the National Support Plan in order to support our customers that have been affected by the COVID-19 pandemic. This initiative included the possibility of rescheduling up to six installments of consumer, residential mortgage and commercial loans while reprogramming their credit card debt, as well as a special support program that granted government-guaranteed working capital loans to SMEs and Large Companies clients. As of December 31, 2020, we had granted nearly Ch$1,890,000 million in these secured loans, representing a 6.1% of our total loan portfolio. Also, as of the same date, we had rescheduled approximately Ch$414,155 million of installments of consumer, mortgage and commercial loans.

 

In 2020, our results were undoubtedly affected by a deteriorated economic landscape caused by the COVID-19 pandemic. This context translated into downward trends in local and foreign interest rates, lower transactionality, reduced demand for loans and increasing unemployment, that led to a decline in customer income and a spike in risk expenses. However, due to our prudent risk policies, strict cost control and a proactive management of our Treasury and Money Market Operations business segment, we were able to deal with this challenge by posting a year-end net income attributable to equity holders of Ch$401,630, equivalent to a ROAE of 10.1%. Lastly, due to the establishment of additional allowances and the increase in equity during 2020, we had the strongest Capital Adequacy Ratio among major local banks, posting a year-end 16.0% BIS Ratio.

 

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Merger with Banco de A. Edwards

 

On December 6, 2001, our shareholders approved our merger with Banco de A. Edwards, which became effective on January 1, 2002. Banco de A. Edwards had been listed on the NYSE since 1995, and since January 2002, we have been listed on the NYSE under the symbol BCH. We concluded the merger process with the consolidation of a new corporate structure and the integration of our technological platforms.

 

Merger with Citibank Chile

 

On December 27, 2007, our shareholders approved our merger with Citibank Chile, which became effective on January 1, 2008. During 2008, we integrated Citibank Chile’s technological platforms with ours and established a new organizational structure in order to satisfy the needs of our customers and to achieve important synergies. We concluded the merger process with the integration of Corporación Financiera Atlas S.A. (Citibank Chile’s consumer area) into our consumer finance area (CrediChile), which allowed us to nearly double our customer base and market share in consumer finance. As result of this merger and integration process, we entered into the following agreements with Citigroup Inc. to provide a framework for our relationship with Citigroup Inc., its services and trademarks in Chile: (i) the Global Connectivity Agreement, (ii) the Cooperation Agreement, (iii) the Trademark License Agreement and, (iv) the Master Services Agreement. On October 22, 2015, we entered into a new Global Connectivity Agreement, a new Cooperation Agreement and a new Trademark License Agreement with Citigroup Inc. All of these new agreements replaced the original agreements we entered into on December 27, 2008. In addition, on January 26, 2017, we entered into a new Master Services Agreement with Citigroup Inc. On August 24, 2017, we agreed to extend the Cooperation Agreement dated October 22, 2015 for a period of two years beginning on January 1, 2018, pursuant to which the parties may agree, to extend for another two-year term to commence on January 1, 2020. As a result of the extension of the Cooperation Agreement, the new Global Connectivity Agreement, Trademark License Agreement and Master Services Agreement were extended under the same terms as the Cooperation Agreement. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.

 

Technological Projects

 

In 2016 we undertook diverse technological initiatives intended to adequately support our core business and improve our operating efficiency. Our main initiative to support to our core business was the implementation of a new internet-based platform for personal banking with a friendlier design and more efficient architecture that boosted online transactions, increased customer satisfaction and decreased web surfing time. Furthermore, we implemented the first stage of a new commercial platform, called “Business Center,” which includes a new system aimed at integrating the sale and post-sale process. Business Center will also become our CRM system in the future. We also put into practice a modern platform for our leasing business. In addition, we continued to enhance the capabilities of our Treasury by upgrading the Murex system, completing a new phase of the platform that allows us to clear derivatives with other Chilean banks while setting up diverse IT solutions to clear derivatives contracts with European counterparties (EMIR). We also continued to reinforce our mobile offerings by improving the mass-market appeal of MiPass, originally introduced in 2015. In addition, we implemented online notifications of payments, money transfers and credit card charges, which are received by customers on their smartphones at the moment of transaction. In regard to efficiency, during 2016 we completed several projects intended to digitalize documents, reports and forms in order to avoid printing and implemented a new image-based model for controlling operations carried out by tellers and representative officers. Similarly, we automated diverse form filling procedures for operations related to personal banking and SMEs and set up platforms and procedures for pre-approval operations. Finally, we continued to develop the last stages of our ATM replacement schedule by renewing 96% of our total network, in accordance with the requirements imposed by the Chilean regulator.

 

During 2017 we continued to develop the “Business Center” project, which is our new Sales & Customer Relationship Management tool. This system is expected to support significant improvements in the quality and responsiveness of our back-office and front-office operating processes to enhance our customer centric vision. We launched our Pricing 360° tool, which improves pricing through a deeper knowledge of account officers on customers’ needs, enabling us to provide tailored lending solutions to our diversified customer base. Similarly, we upgraded the “Time Deposits and Savings” module, which permits account officers to tailor offerings to personal banking customers. Moreover, we completed the renewal of our ATM network to meet the new security and quality standards required by the SBIF. Additionally, we launched two new platforms for companies. We renewed the website business platform for these customers by adding new functionalities, security standards and the ability to conduct paperless transactions. We implemented a new electronic platform for factoring, which is aimed at improving the interaction with customers by making transactions easier while also upgrading the middle and back-office systems for this business. In personal banking, we maintained our focus on innovation and digital banking by adding new functionalities to existing mobile applications including the authorization of web transactions through MiPass application, access to MiBanco by means of fingerprint scanner, e-commerce payments through MiPago and an On/Off functionality for credit cards in MiBanco.

 

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During 2018, we continued to enhance our diverse IT infrastructure and digital platforms in order to assure stability and efficiency to our processes, attract new potential clients while continuously improving the service provided to our current customers. To this extent, we focused on continued developing new stages of our new CRM system and sales platform by introducing a new pricing tool for individuals that allow our account officers to easily use and access to our customers’ information. The CRM system is a key project for us and we expect to keep on developing new functionalities over the next years. Moreover, we intensified our efforts to expand and improve our remote channels given the massive use of internet and fast adoption of smart phones. In that direction, we added new functionalities to some of our applications, and expanded our RedGiro service to the mobile banking, only available on our website until 2017.

 

In May 2018 we suffered a cyber-attack involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million or U.S.$ 9.9 million (mostly recovered from the redemption of an insurance policy). Even though this incident temporarily affected certain services provided to our customers, we were able to maintain the continuity of our operations. In addition, as of this date, based on our internal analysis we have found no evidence whatsoever that our customers were affected by this incident in terms of misappropriation of funds. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.” This cybersecurity incident, although successfully overcome, posed new challenges for us in terms of cybersecurity infrastructure, controls and procedures. Thus, as part of the efforts to improve our cybersecurity risk management, we created the Cybersecurity Division in June 2018, which replaced our former Technological Security Area. The new division is the first line of defense for us on these matters and is in charge of mitigating and managing cybersecurity threats. The division is focused on managing projects aimed at improving our cybersecurity protocols and procedures. During 2018, the Cybersecurity Division undertook diverse IT projects in order to reinforce our infrastructure and cybersecurity capabilities, acquiring world-class protection software and firewalls while investing in specialized platforms to address this significant topic. During 2018, we invested approximately Ch$9,915 million in cybersecurity equipment and software and incurred approximately Ch$9,847 million in operating expenses related to cybersecurity matters. These disbursements almost doubled the total amount incurred in 2017.

 

In addition to executing our digital transformation strategy to improve customer experience, in 2019 we also developed and implemented various projects aimed at improving cybersecurity infrastructure, efficiency and customer service. We launched our E360° tool, which is a tactical dashboard that enables standardization of offerings, while also improving the management of commercial efforts, customer visits and promises to clients. In SMEs, Middle Market Companies and Corporate Banking, we successfully migrated a majority of the customer base to a new web-based transactional platform, Banconexión 2.0. This platform was developed to address segment needs, delivering an improved customer experience while ensuring high security standards in banking operations. Furthermore, as a result of a commercial partnership with a local retailer, we were able to significantly expand our ATM network by 15%. Additionally, throughout 2019, we carried out various cybersecurity projects aimed at improving in-networks, workstations, servers and digital applications, while enhancing access-control through technological solutions and software. To increase efficiency and productivity, we developed new automated transactional platforms for foreign currency trading to help meet the needs of professional and non-professional counterparties. Lastly, we adopted a world-class module for collateral management, improving the administration of our derivative portfolio and counterparty risk.

 

In 2020, it became clear that the acceleration of our digital transformation was critical to remain competitive in this challenging industry. Since the beginning of the COVID-19 pandemic in our country, we have been continuously identifying upgrades in our models, processes and platforms in a year where our customers are increasingly demanding less physical contact, while still receiving fast, flexible and reliable services. In this context, in September 2020, we officially launched the FAN account, a 100% digital debit account for individuals. Moreover, we continued to migrate our Middle Market Companies to Banconexión 2.0, the online transactional platform for companies. Furthermore, this platform was used to grant government-guaranteed working capital loans to SMEs and Middle Market Companies, related to the Fondos de Garantía para el Pequeño Empresario (“FOGAPE”) program, which coupled with the National Support Plan that provided funding to our customers during the difficult times of the COVID-19 pandemic. In addition, an increased number of employees working at home compelled us to improve our cybersecurity protocols, such as the implementation of the Authentication Enrollment (MFA) platform that allows our collaborators to authorize their login to the Bank’s software through their personal smartphones. Furthermore, we updated our main website and both MiBanco and MiPago mobile apps, by improving their structure, security protocols and graphics, in order to offer an optimized and unified web view within our digital channels. Lastly, we also advanced in the implementation of “Pricing Empresas,” a pricing model for companies that seeks to improve our management and customer segmentation, as well as implementing a new module in the Murex system associated with collateral management for derivatives.

 

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

 

The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt

 

During the 1982-1983 economic crisis, the Chilean banking system experienced significant instability that required the Central Bank and the Chilean Government to provide assistance to most Chilean private sector banks, including us. During this period, we experienced significant financial difficulties. In 1985 and 1986, we increased our capital and sold shares representing 88% of our capital to more than 30,000 new shareholders. As a result, no single shareholder held a controlling stake in the Bank. In 1987, the SBIF returned complete control and administration of the Bank to our shareholders and our board of directors by ending our provisional administration based on our successful capital increases as required by Law No. 18,401.

 

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

 

In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which Banco de Chile was converted into a holding company named SM-Chile S.A. (SM-Chile). In turn, SM-Chile organized a new wholly-owned banking subsidiary named Banco de Chile, to which the former contributed all of its assets and liabilities, other than the Central Bank subordinated debt. In addition, SM-Chile created a second wholly-owned subsidiary named Sociedad Administradora de la Obligación Subordinada SAOS S.A. (SAOS) that, pursuant to a prior agreement with the Central Bank, assumed a new repayment obligation in favor of the Central Bank that replaced the Central Bank subordinated debt in its entirety and received 63.6% of our shares from SM-Chile. Although shares held by SAOS had economic rights that belong to the Central Bank, their voting rights were exercised by SM-Chile’s shareholders. This Central Bank debt, for which SAOS was solely responsible and for which there was no recourse to us or SM-Chile, was equal to the unpaid principal of the Central Bank subordinated debt that it replaced but had terms that differed in some aspects, such as the rescheduling of the debt for a term of 40 years providing for equal annual installments and a pledge of our shares owned by SAOS as collateral for such debt. The Central Bank debt bore interest at a rate of 5.0% per year and is UF-denominated.

 

Pursuant to SM-Chile’s bylaws, that company remains in existence until the Central Bank subordinated debt is completely paid off by SAOS, which occurred on April 30, 2019. As of such date, SM-Chile has been in the process of being liquidated, and the shares of Banco de Chile owned by SM-Chile and by SAOS (which was dissolved as of April 30, 2019) were distributed among SM-Chile’s shareholders as described in “Item 7. Major Shareholders and Related Party Transactions–Ownership Structure.” As a result, SM-Chile’s shareholders became direct shareholders of Banco de Chile.

 

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During the existence of the Central Bank subordinated debt, dividends that SAOS received from us were its sole source of revenues, which by legal mandate were destined to repay its debt to the Central Bank. SAOS did not have any other material debt, as it was a special purpose legal entity created by virtue of Law No. 19,396 whose only business was to own Banco de Chile shares and repay the obligation to the Central Bank. To the extent distributed dividends were not sufficient to pay the amount of each installment of its debt, SAOS was permitted to maintain a cumulative deficit balance with the Central Bank that SAOS committed to pay with future dividends. If the cumulative deficit balance exceeded an amount equal to 20% of our paid in capital and reserves, the Central Bank could have required SAOS to sell a sufficient number of shares of our stock to pay the entire accumulated deficit amount.

 

SAOS fully repaid the Central Bank subordinated debt on April 30, 2019 using the proceeds of the dividend it received from us from our net distributable earnings for the year ended December 31, 2018. As a consequence of such full repayment, SAOS was dissolved, SM-Chile began a liquidation process and Banco de Chile’s shares previously owned by SM-Chile and SAOS were distributed to our shareholders. As a consequence, LQ Inversiones Financieras S.A. and Inversiones LQ SM Ltda, increased their direct ownership in Banco de Chile, from their prior shareholdings of 27.18% and 0.29%, respectively, to 46.34% and 4.81% in each case. Similarly, other shareholders of SM-Chile became our shareholders, which significantly increased the public float of our stock. As of December 31, 2019, only SAOS had been fully dissolved. As of April 23, 2021, the liquidation process of SM-Chile was in progress and is expected to end by 2025. For more information, see “Item 7. Major Shareholders and Related Party Transactions–Ownership Structure.”

 

As a result of the full repayment of the Central Bank subordinated debt, LQ Inversiones Financieras is now the major direct shareholder of Banco de Chile with a shareholding of 51.15%, as of April 23, 2021. See Item 7. Major Shareholders and Related Party Transactions—Ownership Structure and Item 7. Major Shareholders and Related Party Transactions– Major Shareholders.

 

Capital Expenditures

 

The following table sets forth our capital expenditures in each of the three years ended December 31, 2018, 2019 and 2020:

 

   For the Year Ended December 31, 
   2018   2019   2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$) 
Computer equipment  Ch$12,702   Ch$28,117   Ch$20,658 
Furniture, machinery and installations   2,409    2,656    1,510 
Real estate   12,589    12,555    6,303 
Vehicles   365    184    

 
Subtotal   28,065    43,512    28,471 
Software   23,512    20,928    18,631 
Total  Ch$

51,577

   Ch$

64,440

   Ch$

47,102

 

 

Our budget for capital expenditures for 2021 amounts to approximately Ch$84,448 million, of which expenditures in information technology investments represent 63%, while infrastructure projects represent the remaining 37%. The budget for capital expenditures is in line with our mid-term strategic priorities of improving our efficiency and enhancing our customer service capabilities with a firm focus on digitalization. These capital expenditures will be principally financed by cash on hand and long-term debt financing.

 

Among the budgeted expenditures for information technology, 44% corresponds to new and ongoing IT projects undertaken by Banco de Chile, which are intended to provide us with business solutions for customers, technological stability, improvements in productivity, enhancements in our communication network and cloud as well as reinforced cybersecurity infrastructure and systems. Of the remaining 56% budgeted for IT expenditures, 19% relates to the development of applications in order to provide us with digital alternatives to deliver tailored solutions to our customers, 15% is intended for the renewal of our technological infrastructure, which includes further optimization of our nationwide ATM network, 9% is associated with the technological renovation of several of our branches due to the new customer service model, another 6% consists of investments in technological equipment and system improvements to be carried out by certain subsidiaries and the remaining 6% is aimed to help fulfill regulatory requirements.

 

Our 2021 infrastructure expenditures budget includes disbursements associated with the transformation and consolidation of our branch network as a result of a new customer service model we are deploying in some of our locations (60%), renovation and restoration of our corporate buildings (16%), general maintenance investments (14%), reconstitution of infrastructure related to contingency issues (9%) and other initiatives related to subsidiaries and security expenditures (1%).

 

All of the aforementioned investments have been or will be made in Chile.

 

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BUSINESS OVERVIEW

 

Our Competitive Strengths

 

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

 

Our main competitive strengths are:

 

Brand Recognition and Strong Corporate Image

 

We have operated in the Chilean financial industry for over 125 years under the “Banco de Chile” brand name. In order to provide our customers with specialized value offerings and a wider range of financial products and services, we have also developed the “Banco Edwards-Citi”, “Banco CrediChile” and “Banchile” brand names. We believe our long-standing history in the Chilean market is recognized by our customers and the general public, who associate our brands with value, quality, reliability and social responsibility within the Chilean financial industry, as demonstrated in various polls conducted by well-known market research companies. We believe that our long history in the Chilean banking industry is a key element that differentiates us from our competitors.

 

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

 

We also believe that our strong corporate image is further strengthened by our commitment to social responsibility, which includes supporting the Teleton Foundation (a non-governmental organization dedicated to assisting and treating disabled Chilean children), our partnership with institutions dedicated to improving the quality of Chilean education, our participation in campaigns intended to improve the quality of life of needy people, our commitment to supporting and sponsoring diverse monetary and non-monetary campaigns for recovery efforts from natural disasters in Chile, including wildfires, earthquakes, floods and tsunamis, and the development of other initiatives intended to strengthen our role in, and contribution to, Chilean society. Furthermore, over the last years we have devoted efforts to improve our commitment to the environment by carrying out numerous initiatives.

 

In 2020, we received diverse distinctions due to our strong brand recognition within the banking industry. Among these awards, we ranked first among local banking brands in “Most Valuable Brand in Chile”, according to a study conducted by BrandZ, and “Marca Ciudadana 2020”, a poll conducted by CADEM.

 

Business Scale and Leading Market Position

 

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

 

   As of December 31, 2020 
   Market
Share
   Market
Position
 
Total Balances of Demand Deposits and Current Account (1)          20.8%  1st
Current Accounts Balances held by Individuals   27.1%   1st
Mutual Funds (Assets Under Management)   24.2%   1st
Net Fees and Commissions Income   22.5%   1st
Net Income of Securities Brokerage Subsidiary (2)   27.0%   1st

 

 

Source: Chilean Association of Mutual Funds and the Financial Market Commission (“CMF”).

(1)Excluding operations of subsidiaries abroad and net of clearings among private banks.

(2)Including the whole market and not only subsidiaries of local banks.

 

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We have traditionally had a strong presence in the wholesale segment by maintaining long-term relationships with major local and multinational companies that operate in Chile. We have been able to maintain this leading position by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to successfully serve our customers’ needs. We have also added value to our service offerings by including treasury products for hedging purposes, together with investment banking, insurance brokerage and other specialized financial services provided by our subsidiaries.

 

In addition, in recent years we have focused on further penetrating the retail banking market through diverse value offerings intended to cover our target demographics and enterprises. Therefore, in recent years we have prioritized the expansion of our residential mortgage portfolio and our presence in transactional services such as credit cards, current accounts and demand accounts, as we believe they are effective means to build long-term relationships and customer loyalty, while increasing cross-selling opportunities. For this reason, through our Individual and SME Banking Area, we aim to lead the market in services offered to high, medium and low income individuals for whom we have developed an attractive and complete portfolio of financial services, including a full range of wealth management services through one of our subsidiaries. We supplement these value offerings with specific proposals for SMEs, which in recent years has coupled with value offerings satisfying small scale entrepreneurs’ financial needs and individual customers in outlying districts seeking deposit and transactional solutions. This broad variety of services has also enabled us to lead the Chilean market in terms of income from fees and commissions.

 

We believe our financial strength, prestige and brand recognition among Chilean customers have allowed us to become the market leader in terms of current account balances within the Chilean financial system, especially among individuals, who have demonstrated their preference for our services. Our position was further consolidated in the financial downturn that started in 2008 and the local social unrest in late 2019, when we benefited from a “flight-to-quality” effect as investors and depositors were seeking a reliable institution to keep their funds.

 

Broad and Diversified Customer Base

 

We believe that we have one of the largest customer bases among financial institutions in Chile. In recent years, we have been able to expand our customer base by providing attractive and tailored value offerings based on continuously improving segmentation and by applying sophisticated business intelligence tools. As of December 31, 2020, we had approximately 1,325,000 core clients, which had at least a current account or a loan outstanding with us. However, in regards to main banking products, we serve a broader customer base composed of 1,092,000 borrowers, approximately 1,000,000 current accounts holders, approximately 143,900 time deposit holders, approximately 113,000 saving account holders and approximately 1,237,000 credit card account holders.

 

We believe that our broad customer base is both an essential driver of our business and a valuable asset that enables us to cross-sell our traditional lending products and services along with non-lending services provided primarily through our subsidiaries, including our securities brokerage, mutual funds management, securitization, financial advisory, insurance brokerage and collection services.

 

Multichannel Distribution Approach

 

In order to better serve our customers, we offer a distribution approach composed of both physical and non-physical channels.

 

We are present in all regions of Chile and strive to be accessible to every Chilean customer through our large branch network as well as non-physical contact channels. As of December 31, 2020, we had a nationwide branch network of 334 branches, the largest in Chile among private sector banks, according to information published by the CMF. This network is composed of 245 branches under our “Banco de Chile” brand name, 41 branches under our “Banco Edwards Citi” brand name and 48 branches under our “Banco CrediChile” brand name. However, these branches are involved in an integration process, which aims to optimize our branch network by consolidating our “Banco CrediChile” branches under the “Banco de Chile” brand name. We believe that our branch network enables us to develop close relationships with our customers and therefore we are constantly assessing new branch locations throughout Chile.

 

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We have also complemented our branch network with non-physical remote channels, such as ATMs, internet-based online platforms and mobile banking applications. As of December 31, 2020, we had 1,766 ATMs throughout Chile and we provided our customers with specialized internet websites for each of the segments we target, coupled with diverse mobile banking applications, including MiBanco, MiBeneficio, MiCuenta, MiPago, MiPass, MiInversion and MiSeguro. During 2020, 80% of the total transactions (monetary and non-monetary) carried out by customers and non-customers in our distribution channels were performed through non-physical remote channels.

 

Competitive Funding Structure

 

We believe that we have a cost effective and highly competitive funding structure based on our leading market position in current accounts and demand deposits, especially among individuals. According to the CMF, as of December 31, 2020, with a 27.1% market share, we ranked first within the Chilean banking industry in current account and demand deposits held by individuals. Similarly, as of that same date and excluding operations of subsidiaries abroad, we were the second bank in Chile in terms of total balances of non-interest bearing current accounts and demand deposits representing 20.8% of the industry (net of clearing), as reported by the CMF. Also, our total balances of current accounts and demand deposits represented 32.9% of our funding structure as of December 31, 2020 (under Chilean GAAP), as compared to the 25.2% reported by the Chilean financial industry as a whole, excluding Banco de Chile. In addition, we have a solid base of funding from retail customers, who held demand deposits and time deposits that jointly represented 42% of our total funding as of December 31, 2020. This characteristic provides us with a stable source of funding that is reflected by a 30-day moving average renewal rate of retail time deposits which reached around 80% as of December 31, 2020.

 

We are constantly striving to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. In this context, in 2020 we were less active than previous years (particularly in the second half of the year) in terms of long-term debt placement in both local and overseas markets. This decrease in debt issuances was a result of lower funding needs due to a moderate loan growth, a strong surge in current accounts and demand deposits and borrowing from the Central Bank associated with the liquidity program implemented to ensure liquidity in the local market while promoting lending during the COVID-19 pandemic, which allowed us to finance commercial loans to SMEs and Middle Market companies while funding needs from individuals. As a result, in 2020 we carried out the debt placements amounting to approximately: (i) U.S.$ 280 million (denominated in UF) within the local market, with maturities ranging from seven to eight years, (ii) U.S.$ 46 million in Australia with a tenor of 15 years, and (iii) U.S.$ 781 million in commercial paper Trade Finance transactions (outstanding balance of approximately U.S.$ 141 million as of December 31, 2020).

 

In summary, our funding structure provides us with a cost advantage over many of our competitors (which use a higher proportion of interest bearing liabilities), as current accounts and demand deposits are non-interest bearing in Chile. Our solid market position in demand deposits, together with our high international credit ratings, translated into one of the lowest costs of funding from liabilities associated with interest bearing deposits and long-term debt, among the five largest banks in Chile.

 

Superior Asset Quality

 

We are one of the Chilean financial institutions with the highest credit quality and the healthiest loan portfolio in Chile. We believe this asset quality is the result of our well known prudent risk management approach and accurate credit risk models that are continuously being updated and have enabled us to maintain relatively low levels of past due loans (loans 90 days or more past due) and high coverage indicators over the last few years. According to the CMF, and under our internal reporting policies, as of December 31, 2020, we had a delinquency ratio (loans 90 days or more past due as a percentage of total loans) of 0.97% which was well below the industry average delinquency ratio of 1.70% posted by the Chilean banking industry (excluding Banco de Chile) as of the same date. Additionally, according to data published by the CMF, as of December 31, 2020, we had a coverage ratio (allowances for loan losses over loans 90 days or more past due) of 249.5%, which was well above the industry average coverage ratio of 163.2% as of the same date (excluding Banco de Chile).

 

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Over the last years, the utilization of business intelligence tools has also contributed to an improvement in our credit risk management. In this regard, during 2018 we successfully re-launched our pre-approved loan program through which we target a select group of retail customers to help them meet their borrowing needs depending on their life cycle stage and credit profile. During 2019, we successfully added SMEs to the pre-approved loan program, which enabled us to maintain solid growth rates in this segment with contained credit risk. In 2020, we also adjusted and implemented new admission protocols for the credit granting process considering an economic landscape of higher uncertainty, increased unemployment and lower disposable income of our customers. In addition, we continued to implement “Pricing Empresas,” our pricing model for companies.

 

International Coverage

 

In 2008, we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile, effective on January 1, 2008. As result of the merger and integration process, we entered into various agreements with Citigroup Inc. to establish a framework for our relationship with Citigroup Inc., including the services to be rendered by each party and the use of trademarks in Chile. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.

 

This strategic alliance, backed by a Global Connectivity Agreement with Citigroup Inc., has allowed us to broaden our service offerings by adding a comprehensive portfolio of international financial services that previously we could only partially provide. Based on this relationship, we are able to provide our local customers with world-class financial services and participate with them in their international ventures. Furthermore, we provide a reliable business platform for Citibank’s customers who aim to operate in Chile.

 

Our Business Strategy

 

Mission

 

‘We are a leading and globally-connected corporation with a prestigious business tradition. We provide excellent financial services to all of our customer segments by offering creative and effective solutions while at the same time ensuring that we add value for our shareholders, employees and community as a whole.’

 

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

 

Vision

 

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

 

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Our mission and vision commit us to all of the diverse stakeholders related to our business, including customers, employees, investors and the community. Thus, our vision is shared and internalized by all areas across the corporation, senior management and the board of directors while also constituting the basis for our strategic objectives. This vision requires initiatives to achieve comprehensive excellence in management, with customer satisfaction as our major goal. For this reason, we apply high industry standards in information technology, business models and service quality, all of which are summarized by the value creation cycle below:

 

 

 

Corporate Values

 

Our way of thinking is reflected by a set of values that are shared by our employees and shareholders, which are aimed at providing our customers with world-class financial solutions and quality standards.

 

Integrity

 

Commitment

 

Respect

 

Loyalty

 

Prudence

 

Responsibility

 

Justice

 

Purpose

 

‘We are a company that contributes to the economic development of the country by generating favorable conditions for the development of individuals and enterprises, providing them with financial solutions that fit their needs at every stage of their lifetime.’

 

In order to accomplish this, we have made commitments to all of our stakeholders, since we are convinced that we will achieve excellence in all of our businesses and projects as long as we are able to satisfy stakeholders in their interactions with us.

 

Commitments

 

We aim to satisfy the expectations of the following stakeholders by:

 

Our Customers

 

Offering innovative and top-quality banking products and financial services.

 

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

 

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

 

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

 

Our Employees

 

Providing employees with career opportunities based on merit.

 

Promoting a respectful and friendly work environment.

 

Offering competitive compensation and economic benefits.

 

Supplying adequate technological tools and infrastructure.

 

Our Community

 

Improving quality of life and managing adversity.

 

Strengthening the quality of education in Chile.

 

Promoting entrepreneurship.

 

Protecting the environment.

 

Building strong relationships with suppliers.

 

Our Shareholders

 

Leading the industry in net income generation and profitability.

 

Maintaining a strong market position in terms of business volume.

 

Fostering operating efficiency and productivity.

 

Developing a prudent approach to risk management.

 

Strategic Priorities

 

Our long-term strategy is intended to maintain profitable growth by placing the customer at the center of all of our decisions and continuously improving efficiency and productivity in all of our processes and procedures while maintaining a strong commitment to the country. These are our strategic priorities and we aspire to attain them through collaboration and teamwork.

 

 

 

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Customer Centric Decision Making

 

We aim to support our customers and meet their needs throughout their lives. In order to achieve this goal we strive to promote customer proximity and reliability, while providing our customers with the best service quality within the local market.

 

In our retail banking segment, our aim is to lead the market by providing differentiated and comprehensive value offerings based on a deep and continuously improving segmentation that permits us to engage in profitable and high-growth potential business opportunities. Thus, we expect to expand our business and customer base by developing tailored service models, optimizing our branch network, enhancing our presence in the small and medium-size company market and reinforcing certain lending products that should enable us to consolidate long-term relationships with the upper and middle-income individual customers, particularly through payment channel usage (such as credit cards), digital banking, installment loans and residential mortgage loans. Similarly, we aspire to target lower-income individuals and microbusinesses by promoting payroll-deduction lending and attracting customers previously unattached to any bank through a basic array of services.

 

We firmly believe that there is room to grow in retail banking. Although Chile’s per capita GDP has increased fourfold over the last 30 years, banking penetration is still below that in developed countries, particularly in relation to residential mortgage and consumer loans. In fact, as of December 31, 2020, the loan book of the Chilean banking industry (excluding operations of subsidiaries abroad) represented 93% of Chilean GDP. As of the same date, mortgage and consumer loans represented 29% and 11%, respectively. On the other hand, according to the CMF, as of December 31, 2020, we had market shares of 16.3% and 17.3% in residential mortgage loans and consumer loans, respectively, both behind the market leader by 5.23% and 4.30% in each case. Given the fierce competition in the Chilean banking industry, in order to take advantage of these opportunities, we are continuously developing innovative products and services to diversify our revenue sources. Accordingly, we have strived to build comprehensive value offerings for our retail segment in order to continue enhancing our fee-based income by promoting digitalization of products and services provided to these customers while improving benefits related to our customer loyalty programs.

 

Similarly, in our wholesale banking segment (which targets companies with annual sales over Ch$2,000 million), we aim to maintain a market-leading position in loans while growing profitably in a market that is characterized by low margins and fierce competition. We intend to accomplish these goals by increasing our cross-selling of non-lending products and services. For this reason, we are focused on improving our cash management services, enhancing our internet-based services, increasing the penetration of products designed by our treasury and money market operations segment, strengthening our presence in certain lending products such as leasing and factoring and promoting international businesses by taking advantage of the Global Connectivity Agreement we maintain with Citigroup and the specialized array of financial services offered by our subsidiaries, such as securities brokerage, mutual funds management and financial advisory in order to meet the needs of certain niches within this business segment. The success of our wholesale banking segment is critical to our ability to maintain sustainable growth in revenues, particularly in fee-based income. Thus, cross-selling is one of our main priorities in this segment.

 

In our treasury and money market operations segment, we intend to take advantage of our specialized knowledge in order to increase the penetration of widely-used products in our current customer base while offering innovative products to potential clients. Also, we continuously seek newer and more convenient funding choices, locally and internationally, in order to support our long term business strategy by promoting an adequate diversification of our funding structure.

 

Main Achievements in 2020

 

(1)Leading Position in Demand Deposits

 

Our funding structure is one of our most important competitive advantages. In 2020, we continued to lead the industry among private banks in current accounts and demand deposit accounts by recruiting approximately 76,000 new current account holders. This recruitment led to a 3.4% customer base growth. Further, we achieved solid growth in the premium account holders base, which are accounts that have the highest average balance per current account in the local banking industry. We also benefited from a flight-to-quality effect during the year, amid the uncertainty produced by the COVID-19 pandemic among our customers, which is supported by our superior credit rating and reputation, based on a strong soundness image.

 

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Accordingly, we reached Ch$15,167 million in year–end demand deposit account balances in 2020, which denoted a significant increase of 33.9% as compared to 2019. As of December 31, 2020, we held a market share of 20.8% in total demand deposit account balances within the industry, excluding the operations of subsidiaries abroad, which places us as the second largest bank in Chile. More importantly, we held a market share of 27.1% in personal banking based on account balances, ranking first in the industry.

 

(2)Launching of FAN Account

 

Over the last years, digital transformation has been steadily increasing its importance within the Chilean banking industry, a trend that was undoubtedly accelerated during 2020 because of the health and social contingencies derived from the COVID-19 pandemic. In order to be aligned with our customers’ needs in these challenging times, we have made several cultural changes within our organization, which includes the introduction of new financial products, services and technologies. By doing so, we expect to achieve sustainable growth in the coming years and to improve both our processes’ efficiency and the consumer experience with the Bank.

 

In this context, in the second half of 2020, we launched the FAN account, our full digital debit account for all individuals. This account may be digitally opened by the individual without having to visit one of our branches, with no paperwork but still subject to our strict account approval processes. Additionally, the FAN account permits holders to perform local and international purchases with no entrance or maintenance fees, which pursues to promote financial inclusion. Also, the FAN account holders have access to all discounts, benefits and platforms offered by the Bank to its customers. Based on these advantages, we have been able to attract new customers through FAN account. As of December 31, 2020, a few months after its launch, the FAN account had more than 150,000 users, strengthening our leadership in Demand Deposit Accounts (“DDAs”) among our peers. More importantly, 87% of these new clients are 50 years old or younger, which is aligned with our strategy of expanding our brand and reaching the younger segment.

 

(3)Advances in Digital Banking

 

In 2020, we have increased the use and development of new digital and remote channels in order to offer our customers tailored and timely services in order to meet their needs and also to preserve a long-term relationship with them.

 

Thus, during 2020 we continued to enhance our digital and mobile banking services, offering a set of mobile applications: MiBanco, MiCuenta, MiPago, MiPass, MiSeguro, MiInversion and MiBeneficio. Particularly, we made upgrades in MiBanco and MiPago, most of them related to enhanced security protocols and updated graphics, in order to offer an optimized and unified view between our digital channels. We also updated our main internet platform by bringing more functionalities, integrating analytics tools and making our website’s interface more intuitive to allow clients to more easily navigate it. These improvements, coupled with the current social context, where we had to temporarily close some of our branches due to longstanding lockdowns and restrictions in social interaction imposed by local authorities to combat the spread of COVID-19, led to an increase in the use of our digital banking services. As a result, during 2020 our customers conducted 61.5 million monetary transactions using our mobile banking applications and 56.5 million transactions using our online website, reflecting 26% and 14% annual increases when compared to 2019, respectively.

 

In 2020, we also provided 100% digital solutions in the context of our Customer Support Plan. Nearly 320,000 consumer and mortgage loan debtors were benefited by rescheduling installments of loans, an initiative that was implemented entirely through our website and digital channels. Similarly, we granted government-guaranteed COVID-19 loans to SMEs and Middle Market units using the same channels. We believe that carrying out these critical initiatives in tough times for our customers strengthened our leadership in digital banking by providing updated and secured online platforms.

 

Additionally, in 2020 we continued to migrate our SMEs, large companies and corporate customer base to Banconexion 2.0, our new website for companies that aims to improve the customer experience by providing the highest cybersecurity standards within the banking industry. We expect to fully migrate our customer base to Banconexion 2.0 by the end of 2021.

 

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As a result of these efforts, we were recognized as the Innovative Digital Bank of the Year in Chile by The European magazine.

 

(4)Improvements in Service Quality

 

We are convinced that in a highly competitive industry such as the Chilean banking system, a customer-centric focus is critical to generating loyalty and creating long-term profitable relationships. We believe that our high service quality is a competitive strength that differentiates us from competitors and supports our long term strategy by responding to the preferences of our current and potential customers. Accordingly, we strive to continuously improve our relationships with customers by developing commercial strategies and value offerings aligned with their needs, as well as improving our response time and customer satisfaction indicators. Consistent with this view, during 2020 we continued to improve customer satisfaction by enhancing our commitment to service quality, improving existing and developing new online channels, such as our internet-based platforms and mobile applications, while promoting organizational changes intended to provide our customers with a more comprehensive approach.

 

These actions, coupled with an organizational culture oriented to customer satisfaction, allowed us to be the best bank among our peers in terms of service quality perception, by receiving 37% of positive mentions as compared to the 30% received by the second place bank, according to a study conducted by GFK Adimark.

 

During 2020, we emphasized our efforts to implement a complete digital package, by providing our customers efficient solutions and outstanding customer experience while simultaneously ensuring our business continuity in the context of social distancing measures and new regulations, such as the new financial portability law that facilitates customers to switch between banks. Based on these efforts, our customer attrition rate was only 2.1% in 2020, considerably lower than previous years. Further, our market–leading customer service contributed not only to a 7% decline in customer complaints when compared to 2019, but also to diverse distinctions including the “National Customer Satisfaction Award” provided by ProCalidad for the third year in a row, the “Best Place to Work” by a poll of Chilean college students conducted by MERCO, the “Best Bank in Dealing with COVID-19 crisis” by IPSOS, “Outstanding Crisis Leadership” by Global Finance and the “Most Valuable Banking Brand” in Chile by Brand Finance.

 

Operating Efficiency and Productivity

 

We believe that efficiency and productivity are key competitive strengths that we have to maintain in order to sustain profitable growth. Accordingly, we aim to become a productive and efficiency-oriented organization in all business aspects by developing simple, effective, secure and low-cost processes while maintaining the tightest cost control in the industry. We believe these elements will be increasingly important in our efforts to maintain high profitability ratios in a changing business environment that is under increasing regulatory focus. To accomplish these goals, we have invested in information technology and the development of simpler, more manageable, secure and modern business processes and platforms to attain faster response times and higher productivity. We also continue to enhance our strategic development capabilities, increase our business scale, develop economies of scope by incorporating new financially related products and services, optimize our branch network, enhance our remote transactional channels, improve our credit processes, develop a higher level of automation in our internal processes and consolidate our cost control policy and monitoring procedures.

 

We are continuously developing and optimizing internal processes in order to reduce and manage our expenses. During 2020 we continued to enhance our IT infrastructure in order to increase stability and efficiency for all of our customers. Over the last three years we invested a total of approximately Ch$124,548 million in information technology, mainly related to the acquisition of software and hardware, as well as internal developments to enhance current platforms or building new systems. Particularly, in 2020, we continued to disburse important financial resources in order to reinforce our IT infrastructure in respect of cybersecurity matters, which included the purchase of systems and equipment. We firmly believe that investment in IT and cybersecurity tools are the best way to improve our operating efficiency and enhance security standards while properly meeting our customers’ needs, which are increasingly linked to digital channels. For more information see “Item 4. Information on the Company–Capital Expenditures.”

 

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In terms of cost control, during 2020 our cost base posted a 2.7% annual decrease when compared to 2019, mainly as a result of: (i) a comparison base effect due to higher expenses in 2019 related to organizational restructuring and special bonuses granted to the Bank’s staff for their customer commitment during the social turmoil in October 2019, (ii) non-recurring fixed-asset maintenance expenses during 2019 explained by infrastructure damage due to the social protests in Chile, (iii) the internalization of core developments in order to improve efficiency, which translated in lower outsourced services and external advisory, (iv) decreased personnel expenses associated with the effects of the COVID-19 pandemic, which caused decreased variable compensation and other benefits, and (v) cost effective marketing campaigns deployed during the year in line with our efficiency initiatives. As a result, our cost base is aligned with our strict cost control policy that has been deployed across our corporate structure. With respect to operating efficiency, our cost-to-income ratio slightly increased from 45.0% in 2019 to 45.4% in 2020, explained by lower operating revenues. For more information, see “Item 5. Operating and Financial Review and Prospects–Results of Operations for the Years Ended December 31, 2018, 2019 and 2020–Operating Expenses.”

 

Main Achievements in 2020

 

(1)Business & Risk Intelligence

 

Over the last years we have focused on developing diverse business intelligence tools in order to better serve current customers while attracting new potential clients. During 2020, we continued to develop this strategic pillar by deploying new and enhancing existing analytic tools, which have permitted us to optimize and make our commercial processes and campaigns more efficient while providing our customers with tailored and timely value service and product offerings.

 

Throughout 2020, we continued to enhance our CRM system and sales platform, as well as the Pricing 360° model, which aims to improve our pricing management according to our customers’ risk profiles. In our branches, we continued upgrading our service model by implementing self-service platforms, optimizing the process to offer timely service and re-adapting our branch network in compliance with the sanitary restrictions imposed by the Chilean health authority. Following these actions, we began to see the positive impact of the new E360° platform, a commercial tool that allows our account officers to effectively standardize all commercial processes, efficiently manage marketing campaigns and tracking their promises made to clients.

 

In 2020, the implementation of financial portability regulations posed as a great challenge to the Bank. In order to increase customer retention and to remain competitive in an industry that is being progressively disrupted by new technologies, we designed an internal model and a new platform that will allow us to implement differentiated strategies depending on consumer segmentation.

 

(2) Branch Network Optimization

 

We firmly believe that remote channels are the future of banking, particularly amid new regulatory requirements, intensified competition, the entry of new banking players and higher reputational exposure, all of which translates into higher costs. Similarly, customers are increasingly demanding new and innovative distribution channels and visiting branches less, given lack of time, but mostly due to the massive use of internet and the fast adoption of smartphones. In 2018, these trends led us to undertake financial and strategic analyses aimed at revising our entire branch network in terms of profitability, location, layout and services offered through these channels. In 2020 we continued to deploy this analysis by considering demographic change, physical coverage, and customers’ profiles, among other topics. In this regard, our dual service model strategy includes the integration of the CrediChile network and nearby offices, which are in new locations where Banco de Chile did not previously have a presence. Through these means, we are able to provide superior and tailored local solutions, as well as reduce operational costs.

 

As a result, we reduced our branch network from 353 locations in 2019 to 334 locations in 2020. Most of this decrease was related to our efficiency and branch optimization program. We expect to continue revising and optimizing our nationwide branch network during 2021.

 

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(3) Enhancement of Cybersecurity Capabilities

 

In 2020, approximately 80% of our customers’ transactions were carried out through our digital platforms (including smartphones and website). This imposes new challenges related to cybersecurity. As part of the efforts to improve our cybersecurity risk management, we created the Cybersecurity Division in June 2018, which replaces our former Technological Security Area. The new division is the first line of defense and is in charge of mitigating and managing cybersecurity threats. The new division’s mission is to build the new Banco de Chile Cybersecurity Center, which is expected to enable the division to undertake actions and develop projects that were formerly outsourced. The division is composed of two areas, the Cybersecurity Engineering Area and the Cyber defense Area, in addition to diverse units that are focused on managing projects aimed at improving our cybersecurity protocols and procedures.

 

Safeguarding our customers’ information will continue being a considerable challenge for the years to come, especially given the fluctuating background that involves cybersecurity and the acceleration of our digital transformation process due to the COVID-19 pandemic. In order to meet our clients’ needs, during 2020 we reinforced the structure of our Cybersecurity Division by creating three subdivisions: (i) the Cybersecurity Operations unit, (ii) the Intelligence and Response unit, and (iii) the Detection and Containment unit. The purposes of these units include the monitoring, detection, response and containment of cyber threats that could affect our processes, services and critical products. Additionally, we formed the Cyber Risk unit, tasked to strengthen the comprehensive management of cybersecurity risks. We also integrated the Technological Risk Area into the Cybersecurity Division, formerly part of the Global Risk Control Division.

 

Moreover, in 2020 we took other actions, such as the reinforcement of the telecommuting model that allowed our entire organization to work from home securely by following the cybersecurity protocols and standards defined by the Bank, including the incorporation of authentication processes mentioned previously. Also, we continued to implement new technological platforms while updating cybersecurity processes and protocols. Also, we maintain an active talent attraction strategy in order to promote a cybersecurity culture across the company and spread knowledge and developing competences that all of our employees should have with respect to cybersecurity. Through our digital channels, the division also conducted diverse awareness campaigns and e-learning security standards for managing sensitive information and training activities in order to prevent information leakage. The division also enhanced the authentication process, while reducing internal incident response times.

 

During 2020, the Bank did not receive any complaints related to cybersecurity breaches.

 

(4)Operational Continuity Plan

 

During 2020, we re-adapted our main employee-related strategies in order to deal better with the impacts of COVID-19 on our daily operations. First, we implemented the Operational Continuity Plan, which aims to ensure the stability of our services and to provide a safe environment to both our customers and employees. We began by creating a prevention plan for the higher risk employees that required them to work from home due to the pandemic, a plan that was eventually replicated for our entire staff. To address this transition, we focused on the safety of our employees, the emotional support that we had to carry out, when necessary, and the maintenance of a close relationship between the Bank and its employees despite the physical distance. In line with this, we constantly encouraged our clients to utilize remote channels to reduce the number of people in our branches.

 

However, we are aware that this plan implicates new risks in terms of cybersecurity, and therefore have in parallel been reinforcing our platforms and other cybersecurity measures in order to ensure the highest standard in our operations. For instance, we implemented a set of remote trainings that clarified the Bank’s cybersecurity protocols, practices as well as pandemic-related initiatives, such as the explanation of signs placed in offices and branches in regards to sanitary measures.

 

Commitment to Chile

 

Banco de Chile is devoted to the progress of its customers by means of providing them with a wide array of services while supporting their funding needs. As an extension of this view, Banco de Chile is committed to the development of Chile and its individuals and companies by providing innovative tools that contribute to improve their quality of life. In this regard, we firmly believe that modern companies need to create effective mechanisms to build positive connections with all of their stakeholders and the society in which they carry out their business activities. This has become increasingly important in the midst of societal changes in Chile and worldwide.

 

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This view is shared by the Bank and its employees, who support the development of Chile through diverse methods such as promoting social progress, contributing to environmental protection, decreasing extreme poverty, providing high-quality education to needy people, assisting disabled young people, fostering cultural development and embracing campaigns intended to overcome the effects of specific adverse events such as natural disasters.

 

Main Achievements in 2020

 

(1)COVID-19 Support Plan

 

2020 was certainly a challenging year. Due to the longstanding quarantines and the social distancing imposed by health authorities because of COVID-19, both individuals and companies were significantly affected by a difficult social and economic scenario that stressed their financial condition. In this environment, we implemented the National Support Plan, a nationwide initiative that included a set of measures in order to relieve debt pressures for our clients by rescheduling their loan installments while providing interest-free financing in nominal terms. These initiatives may be summarized as: (i) the rescheduling of up to six installments of consumer and residential mortgage loans for individuals while reprogramming their credit card debt, which is to be paid after their last payment date, and (ii) the special government support program, FOGAPE, for companies that granted government-guaranteed working capital loans, particularly focused on SMEs clients.

 

The National Support Program also included a set of social measures to support the Chilean community, such as: (i) the acquisition of personal and healthcare items from local SMEs and microbusinesses that were distributed to eleven low-income nursing homes placed throughout Chile, (ii) the donation of 9,000 food boxes benefiting disabled, vulnerable and elderly people, (iii) the delivery of medicine kits to 42,000 houses in Santiago, (iv) a 100% digital fair in support of our community that congregated more than 200 SMEs and entrepreneurs that offered their services through this initiative, (v) sanitary protection to 250 “Cajas Chile” locations, which included face masks and disinfectants in order to create a safe environment for customers when they have face-to-face interactions, and (vi) the donation of 20 medical equipment packages to the Regional Health Service in La Araucanía Region. Lastly, we were part of “Vamos Chilenos,” a nationwide solidarity campaign launched by Fundación Teletón in September 2020, with a main purpose to support vulnerable people that were affected by the pandemic.

 

(2)Entrepreneurship Support and Financial Literacy

 

During 2020, in the normal course of business, we continued to support diverse social endeavors by collaborating with “Desafío Levantemos Chile”, which is a non-profit organization that aims to promote entrepreneurship throughout Chile and especially within lower income segments. Based on this partnership, we assist people and microbusiness affected by natural disasters occurred in Chile by donating both monetary and non-monetary resources to help re-establish entrepreneurs’ and families’ working capacity.

 

Due to the COVID-19 pandemic, the final stages of the fourth “Entrepreneur Challenge Contest,” which was a joint venture between Banco de Chile and “Desafío Levantemos Chile”, were carried out remotely for nearly 57,000 entrepreneurs, which was a record figure. Furthermore, in August 2020 we launched the fifth “Entrepreneur Challenge Contest”. This nationwide contest aims to promote those initiatives that incorporate social factors as drivers of entrepreneurship rather than only maximizing earnings. Accordingly, we convened micro entrepreneurs who incorporate a social and sustainable vision as part of their business activities through creativity and innovation. In 2020, more than 56,000 entrepreneurs participated in the contest, of which the six most innovative business concepts were rewarded in December 2020.

 

Also, with the aim of improving the quality of life of people and supporting micro entrepreneurs in their ventures, we held several workshops on Financial Literacy across the country, gathering over 4,600 participants during 2020. Further, in alliance with “Fundación País Digital,” we facilitated a free online platform (“Digital Finance Literacy”) for school teachers and students that congregated more than 3,400 users and 38 educational establishments as of December 31, 2020. The main objective of this program is to motivate people to change their consumption behavior, when necessary. Thus, we provide them with specific information and knowledge intended to improve their economic situation by promoting savings and avoiding over-borrowing.

 

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(3)Disability Inclusion

 

Our commitment to disabled people is permanent. During 2020 we worked once again alongside Teleton for its annual fund-raising campaign by putting our nationwide distribution network, which includes internet-based platforms and mobile applications for smartphones, in addition to other technological resources, at Teleton’s disposal. Unlike previous years, in 2020 we did not have physical locations in branches to receive donations due to the COVID-19 pandemic, which translated into a 100% digital fund-raising. We have been supporting the Teleton Foundation since its establishment 42 years ago, supporting disabled athletes and artists, and we continued to make important monetary donations to the Foundation.

 

During 2020 we continued to promote our Inclusion Policy across the corporation. This policy is intended to improve our knowledge of physical disability and develop higher sensitivity with respect to the treatment of disabled people. We believe this is the first step to improve the service we render to customers who experience this reality while providing our disabled employees with supportive workplace conditions and benefits. Under this approach, we continued to improve many branches for our disabled customers in order to make them fully accessible, while also setting up 464 self–service accessible devices with inclusive access and our entire ATM network in compliance with the Americans with Disabilities Act.

 

Additionally, we held the third season of Expo Inclusión, an inclusive recruitment fair through which we aim to strengthen our commitment to the disabled community, that was attended 100% digital via streaming this year. As a result, in 2020 over 1.4% of our staff had been identified as disabled, which is above the minimum required by the Chilean law. Moreover, we have continued to advance our plan of special benefits for our current disabled employees while implementing inclusive recruitment processes.

 

Unfortunately, due to the pandemic, we postponed the 28th annual wheelchair Banco de Chile Cup, which usually congregates more than 50 wheelchair tennis players from Argentina, Perú, Brazil and Chile, among other countries. However, we managed to implement other initiatives that benefited disabled people in a wide range of activities, such as: (i) our collaboration and sponsorship to recognized disabled athletes that represent Chile in various tournaments across the globe, (ii) the distribution of nearly 200 tablets to disabled students in Chile by means of the joint venture of our Insurance Brokerage subsidiary and Fundación Coanil, and (iii) a free online medical consultation for nearly 8,000 disabled people through a collaboration with “Red de Salud UC Christus”.

 

(4)Corporate Volunteer Program

 

We continued to promote the participation of our staff in assisting people and organizations during emergencies through our Corporate Volunteer Program. Together with Desafío Levantemos Chile, we provide assistance to people and non-governmental organizations in the event of an emergency or natural disaster in our country by arranging fundraising campaigns, donating both monetary and non-monetary resources to help re-establish entrepreneurs’ and families’ working capacity or establishing working plans to aid affected areas. Our volunteers received basic training in various first aid techniques, were instructed in rescue procedures, protection and guidance for citizens, mitigation of losses in the emergency and providing support in reconstruction activities. However, because of the COVID-19 pandemic, we restricted the on-site aid of our collaborators and streamlined our sponsorship initiatives.

 

In 2020, our corporate volunteer team participated in a national campaign aimed at protecting and supporting homeless people during the coldest nights of the winter by providing them roughly 3,500 first-aid kits, which included jackets, gloves and winter caps. Also, our collaborators promoted “Navidad con Sentido,” a Christmas initiative that benefited over 6,800 disabled people, elderly adults and migrants. Lastly, in 2020 we participated for the second time in the Breast Cancer Awareness Campaign, in order to promote the awareness of this disease around the world, which translated into numerous activities that we carried out in October 2020 focused on our customers and collaborators.

 

Overall, during 2020 our corporate volunteer team participated in a wide range of volunteer services that aided more than 439,000 beneficiaries.

 

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(5)Environmental Sustainability

 

Environmental sustainability has become a crucial goal for us. Since 2015 we have deployed various programs and initiatives to mitigate the impact of our daily operations on the environment, including efficiently using energy, paper and water, reducing our Greenhouse Gasses (“GHG”) footprint, and utilizing sustainable transportation of our employees.

 

To advance these efforts, we launched the Carpooling program in the fourth quarter of 2019. Through a collaborative mobile application used by our staff, this program used carpooling to mitigate the impact of our employees’ daily commute on the environment. The Carpooling program helps to reduce both fuel consumption and GHG emissions. In 2020, however, due to the COVID-19 pandemic we suspended this initiative.

 

During 2020, we accomplished several goals planned for this year. In terms of total energy consumption, nearly 60% comes from air conditioning and heating equipment, 25% derives from lighting and computer equipment, while the remaining 15% is mainly due to office supplies. In order to improve our environmental sustainability in each category, in 2020 we managed to reduce our energy consumption by 12% (kWh/m2) when compared to 2019 (with sanitary restrictions playing a major role in this reduction).We also replaced 25% of our branches’ fluorescent lamps with LCD-based lights. Further, we cut our GHG footprint by 20,139 tCO2e, by approximately 28% on an annual basis, which was influenced by increased remote working due to the pandemic.

 

Additionally, we reduced our paper consumption by approximately 205 tons, which represents a 42% decrease from 2019. In this context, in 2020 we began the renewal of our multi-function printer network, where we expect to decrease the amount we print by approximately 50%, which should allow us to further reduce paper consumption within our organization in the coming years.

 

As a result of these initiatives, we were included in the Dow Jones Sustainability Indices due to our efforts and improvements made in social and environmental sustainability and corporate governance.

 

Teamwork

 

One of the main goals of any corporation is to align employees’ perspectives with the company’s culture. In Banco de Chile, every worker has a crucial role in allowing us to achieve our strategic goals. In exchange for that, we believe all of our staff receives fair compensation and have access to benefits and policies that enable them to expand their professional capabilities in a work environment is committed to remain free of accidents, professional illnesses, work harassment, mobbing and discrimination.

 

In order to consolidate profitable growth, achieve high standards of service quality, attain operating efficiency and maintain a commitment to the country over the long run, we must have a motivated and highly qualified workforce committed to our corporate values. Accordingly, we strive to develop a distinctive culture among our employees by promoting: (i) a clear focus on the customer, (ii) confidence and responsibility, (iii) leadership and empowerment, (iv) collaboration and teamwork and (v) innovation and continuous improvement.

 

Main Achievements in 2020

 

(1) Talent Attraction

 

We firmly believe that talent attraction is crucial in order to achieve our medium-term goals. Consequently, we have devoted efforts over the last years in order to improve our participation in university fairs while strengthening our presence on social networks and reinforcing IT tools in order to expand our reach to prospective candidates. In 2020, we ranked first in the general ranking of “Merco Talento Chile 2020,” which awarded us as the best organization in the country in terms of talent attraction and retention. As of December 2020, our digital platform for talent attraction (www.quieroserdelchile.cl) gained more than 166,000 users.

 

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(2) Other initiatives

 

We also seek to remain one of the most respected employers in Chile. We continue to strengthen our connection to our employees in order to align corporate values and goals with their career development and personal goals. In this regard, we have continued to focus on developing leadership capabilities and overall technical skills through approximately 913 training activities (760 of which were implemented through digital channels) that were attended by approximately 136,300 attendees. We believe these initiatives are aligned with our strategy and the professional development that our team aspires to achieve.

 

Ownership Structure

 

The following diagram shows our share ownership structure as of April 23, 2021:

 

 

 

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Principal Business Activities

 

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

 

 

The information related to our business segments presented in this section has been prepared in accordance with our internal reporting policies. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2018, 2019 and 2020—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2018, 2019 and 2020—Summary of Differences between Internal Reporting Policies and IFRS” for a description of the most significant differences between our internal reporting policies and IFRS.

 

The following table sets forth information on the composition of our loan portfolio and our consolidated income before income tax in accordance with our internal reporting policies for the year ended December 31, 2020, allocated among our principal business segments:

 

   For the Year Ended December 31, 2020 
   Total Loans   % Participation
in Total Loans
  

Income before
Income Tax
(1)

 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages) 
Retail market   Ch$19,845,104    64.1%  Ch$271,384 
Wholesale market    11,063,716    35.8    187,318 
Treasury and money market operations            64,936 
Operations through subsidiaries    28,148    0.1    65,434 
Other (adjustments and eliminations)             
Total   Ch$

30,936,968

    100.0%  Ch$

589,072

 

 

 

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

 

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

 

   For the Year Ended December 31, 
   2018   2019   2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$) 
Retail market  Ch$ 1,203,682   Ch$1,325,916   Ch$ 1,231,554 
Wholesale market    464,045    478,283    482,191 
Treasury and money market operations    50,495    25,659    68,547 
Operations through subsidiaries    170,051    199,611    177,931 
Other (adjustments and eliminations)    (14,990)   (14,949)   (21,480)
Total Operating Revenues   Ch$

1,873,283

   Ch$

2,014,520

   Ch$

1,938,743

 

 

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

 

   For the Year Ended December 31, 
   2018   2019   2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$) 
Chile   Ch$ 1,888,273   Ch$2,029,469   Ch$ 1,960,223 
Banking operations    1,718,222    1,829,858    1,782,292 
Operations through subsidiaries    170,051    199,611    177,931 
Foreign operations             
Operations through subsidiaries             
Other (adjustments and eliminations)    (14,990)   (14,949)   (21,480)
Total Operating Revenues   Ch$

1,873,283

   Ch$

2,014,520

   Ch$

1,938,743

 

 

Retail Banking Segment

 

Our retail banking segment serves the financial needs of individuals and small and medium sized companies through our branch network. As of December 30, 2020, our retail banking segment managed 286 branches operating under our “Banco de Chile” and “Banco Edwards-Citi” brand names and 48 branches within the “Banco CrediChile” network. As of December 31, 2020, loans granted by our retail banking segment amounted to Ch$19,845,104 million and represented 64.1% of our total loans as of the same date.

 

In terms of composition, as set forth in the following table, as of December 31, 2020 our retail segment’s loan portfolio was principally focused on residential mortgage loans, which represented 47.2% of the segment’s loan book. The remaining loans were distributed between commercial loans (32.8%) and consumer (19.9%). 

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages) 
Commercial loans   Ch$ 6,158,794    32.8%
Residential mortgage loans    9,375,259    47.2 
Consumer loans    3,951,051    19.9 
Total   Ch$

19,845,104

    100.0%

 

We serve the retail market through two different and specialized areas: (i) the Individual and SME Area and (ii) the Consumer Finance Area (or Banco CrediChile).

 

Individual and SME Area

 

The Individual and SME Area is responsible for offering financial services to individuals with monthly incomes over Ch$500,000 (or Ch$6.0 million per year) and to small and medium sized companies with annual sales of up to approximately Ch$2,000 million. This area manages the portion of our branch network operating under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 286 branches as of December 31, 2020.

 

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The strategy followed by the Individual and SME Area is mainly focused on sub segmentation, multi brand positioning, cross sell of lending and non-lending products and service quality based on customized service models for specific customer needs. Also, loyalty programs have been increasingly incorporated into our commercial targets for each sub segment and they have enabled us to increase the use of our credit cards and our fee-based income. In addition, the area’s operations count on the support of specialized call centers, mobile and internet banking services, along with a wide range of management tools that allow us to measure returns, the performance of cross sold products and the effectiveness of marketing campaigns. Similarly, over the last years the area has strengthened value offering for SMEs by promoting a close relationship, while accompanying entrepreneurs in the diverse stages of their life cycle.

 

During 2020, the Individual and SME Area focused on targeted growth opportunities while developing new business solutions and benefits for its clients in order to improve our customers’ experience. Additionally, because of the COVID-19 outbreak, we witnessed an unprecedented scenario where digital banking played a major role, which encouraged us to continue providing enhanced digital solutions in order to meet our customers’ needs, particularly in the context of the COVID-19 pandemic. For instance, in 2020 we provided the possibility to reschedule installments of consumer and residential mortgage loans for individuals while postponing their credit card debt at preferential rates. Similarly, we implemented our FOGAPE loan program focused on our SME segment, based on which we provided government-guaranteed working capital loans of approximately Ch$1,889,000 as of December 31, 2020, a figure that primarily explained the 26.7% annual advance in SMEs’ loan balances. These actions were a part of our National Support Plan, and our customers were allowed to apply for them completely through digital channels.

 

Moreover, as mentioned earlier, during 2020 we launched the FAN account, our new online onboarding bank account, which reinforced our leadership in both digital banking and demand deposit accounts. We believe that this new product will provide us new cross-selling opportunities because it focuses on attracting young customers in the whole range of income. Also, in regards to the new financial portability regulations, we designed new technologies allowing us to implement differentiated strategies depending on customer segmentation, which should allow us to attract new clients and to retain current customers by offering distinctive and tailored solutions. Further, in accordance with regulatory requirements, we created an additional and temporary account to allow our customers to receive their withdrawals from pension funds as approved by the Chilean Congress. Lastly, we continued the implementation of our pricing model for companies, which aims to improve our pricing management according to our customers’ risk profiles.

 

In 2020, the Individual and SME Area also achieved significant increases in lending and saving products. In this regard, throughout the year the segment’s customer base grew by approximately 76,000 new current account holders and attained record sales of new installment and residential mortgage loans granted to its customers.

 

As of December 31, 2020, the Individual and SME Area served approximately 1,059,370 core customers (those holding a current account or a loan outstanding) of which 928,604 were individuals and 130,766 were small and medium sized Chilean companies. This customer base resulted jointly in total loans granted to 848,639 borrowers, which included 133,676 residential mortgage loans debtors, 117,706 commercial loan debtors, 327,883 utilized lines of credit and 260,019 installment loans. As of the same date, the Individual and SME Area held 947,510 current accounts, 108,052 savings accounts and 301,026 time deposits.

 

As of December 31, 2020, loans granted by the Individual and SME Area amounted to Ch$19,263,683 million, which represented 62.3% and 97.1% of our total loans and loans granted by our retail market segment, respectively, as a whole. The following table sets forth a breakdown of the unit’s loan portfolio by lending product in accordance with our internal reporting policies, as of December 31, 2020:

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages) 
Commercial loans        
Commercial credits   Ch$ 5,703,545    29.6%
Leasing contracts    515,209    2.7 
Other loans    262,594    1.4 
Total Commercial Loans    6,481,348    33.6 
Residential Mortgage Loans    9,282,415    48.2 
Consumer Loans          
Installment loans    2,325,794    12.1 
Credit cards    1,017,685    5.3 
Lines of credit and other loans    156,441    0.8 
Total Consumer Loans    3,499,920    18.2 
Total   Ch$

  19,263,683

    100.0%

 

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

 

Installment Loans

 

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

 

As of December 31, 2020, we had Ch$2,325,794 million in installment loans granted by our Individual and SME Area, which accounted for 58.9% of the retail market business segment’s consumer loans. Most of these installment loans are denominated in Chilean pesos and are payable on a monthly basis.

 

Residential Mortgage Loans

 

As of December 31, 2020, we had outstanding residential mortgage loans of Ch$9,375,259 million (under internal reporting policies considering the Bank as a whole), which represented 30.3% of our total loan book as of the same date. According to information published by the CMF, as of December 31, 2020, we were Chile’s third largest private sector bank in terms of year-end mortgage loans balances, accounting for approximately 16.3% of mortgage loans granted by the Chilean banking industry, excluding operations of banks’ subsidiaries operating abroad.

 

Our residential mortgage loans are generally denominated in UF and have maturities ranging from five to 30 years. As of December 31, 2020, the average residual maturity of our residential mortgage loan portfolio was 20.3 years. Originally, we funded our residential mortgage loans through the issuance of mortgage finance bonds, which are recourse obligations only to us with payment terms that are matched to the residential loans. Also, the mortgage finance bonds bear real market interest rates plus a fixed spread over the variable rate of the UF, which permits us to partially reduce our exposure to interest rate fluctuations and inflation. Chilean banking regulations allow us to finance up to 100% of a residential mortgage loan with mortgage finance bonds, based on the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after tax monthly income, when the customer belongs to the low income population segment. However, that limit may be adjusted for the middle and high income population segments.

 

Over the last decade, we have also promoted the expansion of Mutuos Hipotecarios, a mortgage lending product, which is not financed by mortgage finance bonds, but instead through our general funds. As of December 31, 2020, our residential mortgage loan portfolio was principally composed of Mutuos Hipotecarios, as customers have preferred them due to their flexibility and simplicity (for instance the interest rate is known in advance by the customer, which is not the case for mortgage finance bonds that are traded in the secondary market and, therefore, subject to discounts), as they are easier to prepay and permit financing of up to 100% of the purchase price (as stated by the applicable local regulation), although banks limit such maximum financing portion based on internal credit policies and economic cycles, among others.

 

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

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages) 
Secured Residential Mortgage Loans(1)        
Loans financed with Mortgage Bonds   Ch$   9,352    0.1%
Mutuos Hipotecarios    9,379,301    99.9 
Total Secured Residential Mortgage Loans   Ch$

9,388,654

    100.0%

 

 

(1)Corresponds to the Bank’s total secured residential mortgage loans and not only those associated with the Individual and SME Area.

 

As shown above, as of December 31, 2020 residential mortgage loans related to Mutuos Hipotecarios represented 99.9% of our total residential mortgage loan portfolio, while the remaining 0.1% corresponded to mortgage loans financed with Mortgage Bonds. As of the same date, the Mutuos Hipotecarios portfolio had an average origination period of 6 years (the period from the date when the loans were granted to the specified date) . Conversely, as of December 31, 2020, loans financed with Mortgage Bonds had an average origination period of 19 years (the period from the date when the loans were granted). In terms of credit risk, in 2020, loans related to Mutuos Hipotecarios, as well as those financed with Mortgage Bonds, had low gross (before recoveries) credit risk ratios of 0.15% and 0.06%, respectively. It is important to mention that the residential mortgage loan portfolio financed with Mortgage Bonds is annually decreasing in an amount, and as a proportion of, the total residential mortgage loan portfolio because it is composed of old loans and the instrument is no longer offered by the Bank.

 

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

 

For those loans that finance a higher portion of the property appraised value, we demand that customers comply with stricter requirements, which are verified during the credit assessment stage. These requirements are related to: (i) the history of the relationship between the Bank and the customer (new or current client), (ii) credit risk scores, (iii) monthly income, (iv) type of job (employed or self-employed) and (v) years employed. In order to illustrate the above mentioned, the table below sets forth an example of requirements for residential mortgage loans that finance up to 80% and more than 80% of the property value, with a common term and granted to employed as well as self-employed new customers.

  

Credit–granting Requirements

(in millions of Ch$, except percentages)

 

   Requirements
(in millions of Ch$, except percentages)
Loan–to–Value Ratio  ≤ 80%  > 80%
New Customers (1)      
Employed      
Years employed   ≥ 1 year  ≥ 1 year
Monthly Income   ≥ Ch$0.5  ≥ Ch$2.1
Self-Employed      
Years Employed (2)   ≥ 2 years  ≥ 2 years
Monthly Income   ≥ Ch$0.5  ≥ Ch$2.1
New Customers with a University degree (3)      
Employed      
Years employed   ≥ 1 year  ≥ 1 year
Monthly Income   ≥ Ch$0.5  ≥ Ch$0.9
Self-Employed      
Years Employed(2)   ≥ 2 years  ≥ 2 years
Monthly Income   ≥ Ch$0.5  ≥ Ch$0.9

 

 

(1)Refers to customers with or without university degree, who do not supplement income with a guarantor’s income.

(2)In the case of self-employed customers, years employed refers to the minimum period of time in which the customer has filed annual tax bills with the Chilean Internal Revenue Service.

(3)Refers to customers with university degree awarded by a group of universities according to our internal credit approval process.

 

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During 2020, only 0.5% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2020, loans financing between 75% and 90% of the property appraised value represented 49.2% of these loans, loans financing between 50% and 75% of the property value represented 41.8% of these loans, and loans financing less than 50% of the property value represented 8.5% of these loans. According to our prudent risk approach, we have been tightening our credit granting policy for residential mortgage loans by restricting the loan financing limit as a percentage of the property’s value, although higher financing may be granted to longstanding customers within specific segments. This explains the decrease in the share of residential mortgage loans that financed between 90% and 100% of the property value over the last years, from 14.9% in 2015 to 0.5% in 2020.

 

An additional feature of our mortgage loans is that mortgaged property sometimes, and under certain conditions, secures some of the mortgagor’s other credits with us, including installment loans and due balances associated with credit cards and credit lines. Our total amount of loans secured by real estate guarantees, their loan–to–value (LTV) ratio and their relative share in our total loan portfolio, as of December 31, 2020, are depicted in the table below:

 

   As of December 31, 2020 
   Outstanding
Balance
  

LTV(2)(3)

   % of Bank’s Total Loans 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, except percentages) 
Secured Loans(1)               
Residential Mortgage Loans   Ch$9,388,654    61.3%   30.3%
Other than mortgage loans    1,023,990    17.3    3.3 
Total Secured Loans   Ch$10,412,644    68.0%   33.7%

 

 

(1)Corresponds to the Bank’s total secured loans and not only those associated with the Individual and SME Area.

(2)LTV ratio is computed as the amount of secured loans divided by the value of their associated collateral.

(3)For other-than-mortgage loans, the LTV ratio is computed as the amount of the excess guarantee (after deductions) of the balance of the associated residential mortgage loans, as those guarantees are initially established in order to secure the residential mortgage loan.

 

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

 

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

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$, 
except percentages)
 
Secured Other-than-Mortgage Loans(1)                         
Consumer Loans   Ch$   760,323    74.3%
Credit Cards        228,976    22.4 
Credit Lines        34,691    3.4 
Total Secured Other-than-Mortgage Loans   Ch$

 1,023,990

    100.0%

 

 

(1)Corresponds to the Bank’s total secured Other-than-Mortgage Loans and not only those associated with the Individual and SME Area.

 

Unlike in other countries, in addition to the specific legal rights afforded by the mortgage loan (including foreclosure rights), the Bank may collect the pending balance of the mortgage loan over other assets of the mortgage debtor based on certain legal liens provided by law (derecho de prenda general). Regarding the foreclosure processes, as permitted by Chilean regulations we may write-off secured loans (such as residential mortgage loans) the earlier of 48 months from the date the loans become overdue and once we have made all efforts for recovering the past due loans without success. This applies to residential mortgage loans financed with mortgage finance bonds as well as for Mutuos Hipotecarios. Our foreclosure processes comply with the procedures specified by Chilean regulation. However, as we strive to continuously improve our collection processes, we have achieved average terms of 11 months for foreclosures associated with residential mortgage loans.

 

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

 

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

 

Credit Cards

 

As of December 31, 2020, we issued both individual and corporate Visa and MasterCard credit cards. In addition to traditional credit cards, our portfolio also includes co-branded cards. As of December 31, 2020, we had two loyalty programs or cobranding agreements, namely “Travel Club” and “Entel Visa”. Credit cards issued under these cobranding agreements supplemented the credit cards that we issued under the brand names Banco de Chile, Banco Edwards-Citi and Banco CrediChile. In addition, as of December 31, 2020, we offered 18 types of credit cards, targeting diverse types of segments and encompassing different benefits, including: Visa Corporate, Visa Corporate Signature, Visa Dorada, Visa Infinite, Visa Infinite Plus, Visa Internacional, Visa Platinum, Visa Platinum Pyme, Visa Pyme/Empresarial, Visa Signature, Visa Signature Entel, MasterCard Black, MasterCard Dorada, MasterCard Internacional, MasterCard Platinum, MasterCard Corporate and MasterCard Corporate Executive.

 

Two of our affiliates, Transbank S.A. and Nexus S.A., provide us with merchant acquisition and credit card processing services. As of December 31, 2020, Transbank S.A. had 11 shareholders (including us) and Nexus S.A. had five shareholders (including us), all of which were banks. As of the same date, our equity ownership in Transbank S.A. was 26.16% and our equity ownership in Nexus S.A. was 29.64%.

 

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As of December 31, 2020, we had 1,237,430 valid credit card accounts, with 1,355,000 credit cards issued to individuals and small and medium sized companies, held by 1,040,502 customers (including credit cards issued by CrediChile). Total charges on our credit cards during 2020 amounted to approximately Ch$4,203,375 million, with Ch$3,780,340 million corresponding to purchases in Chile and abroad and Ch$423,036 million corresponding to cash withdrawals both within Chile and abroad. The amount of purchases made by our customers accounted for 15.9% of the total purchase volume of banks’ credit cards in 2020, according to statistics provided by the CMF. Similarly, our market share in terms of cash withdrawals and automatic bill charges were 18.3% and 16.0% as of the same date, according to the CMF.

 

As of December 31, 2020, our credit card loans to individuals and small and medium sized companies amounted to Ch$1,017,685 million and represented 25.8% of our retail market business segment’s consumer loans.

 

We believe that the Chilean market for credit cards has a high growth potential, especially among lower and middle income customer segments, as the average merchant fees should continue to decline due to increasing competition from other banks that operate in Chile, as well as large department stores and other non-banking competitors that are involved in the issuance of credit cards. As a result, we strive to develop customized commercial strategies to reinforce this payment channel by applying business intelligence tools that enable us to satisfy the needs of our diverse customer base. It is important to note that following the new rules issued in the last years by our regulator, the processing and merchant acquiring services for credit and debit cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, in order to facilitate the entry of new players. As of the date of this annual report, most merchant acquiring services are provided in Chile by Transbank S.A., but some competitors have already begun to implement this new four-party pricing model for their own business, which is expected to change the market dynamics.

 

Commercial Credits

 

Commercial credits granted by our Individual and SME Area mainly consist of project financing, long-term financing and working capital loans granted to small and medium sized companies, which are denominated in Chilean pesos, UF and U.S. dollars and may bear fixed or variable rates of interest with average maturities of approximately four years (excluding non-residential mortgage loans). As of December 31, 2020, our Individual and SME Area had outstanding commercial loans of Ch$5,703,545 million, representing 28.7% of the retail banking segment’s total loans and 18.4% of our total loans as of the same date.

 

Leasing Contracts

 

Leasing contracts are financial leases for capital equipment and property. Leasing contracts may bear fixed or variable interest rates and they generally have terms that range from one to five years for equipment and from five to 20 years for properties. Most of these contracts are denominated in UF. As of December 31, 2020, our Individual and SME Area had outstanding leasing contracts of Ch$515,209 million, representing 2.6% of the retail banking segment’s total loans and 1.7% of our total loans as of the same date.

 

Lines of Credit

 

As of December 31, 2020 the Individual and SME Area had approximately 834.265 approved lines of credit to individual customers and small and medium sized companies. Also, the unit had outstanding advances to 327,883 individual customers and small and medium sized companies that totaled Ch$227.654 million, or 1.1% of the retail banking segment’s total loans and 0.7% of our total loans.

 

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

 

Debit Cards

 

We offer different types of debit cards to our customers. Depending on their specifications, these cards can be used for banking transactions at ATMs that operate on the local network provided by Redbanc and the local network of merchants participating in the local Redcompra debit program. Also, our debit cards can be used internationally through the Visa International PLUS network or the international network of merchants associated with the Electron program. We name these debit cards depending on the card’s specific features and the link between the brand and target market which they serve. During 2020, we offered the following debit cards: Visa Infinite, Visa Estándar, Visa Signature, Visa Platinum, Visa Debit Business and debit cards for companies. As of December 31, 2020, according to monthly statistics provided by Transbank S.A., the Individual and SME Area held a 11.4% market share of debit card transactions (including debit cards issued by Banco CrediChile), which corresponds to approximately 166 million transactions throughout the year, according to the CMF.

 

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Deposit Products

 

We strategically offer deposit products to increase our deposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relatively low-cost, stable source of funding, as well as an opportunity to cross-market our other products and services. In this regard, we offer current accounts, time deposits and savings accounts to our individual customers. Current accounts are Chilean peso-denominated and the majority bear no interest (approximately 0.06% or 596 of our total current accounts are interest-bearing), and savings accounts are denominated in UF and bear a fixed-interest rate. Time deposits may be denominated in Chilean pesos, UF and U.S. dollars and most of them bear interest at a fixed rate with terms that range between seven to 360 days.

 

While demand has historically been focused on UF-denominated deposits during periods of high inflation, demand for Chilean peso-denominated deposits has increased in recent years as a consequence of lower and more stable inflation rates in Chile.

 

In the last years, we have seen an important increase in demand deposits. In fact, amid the high volatility and low interest rates observed in the financial markets throughout 2008 and 2009 (in line with monetary stimulus undertaken by central banks worldwide to overcome the financial crisis), we benefited from a flight-to-quality effect, since customers increasingly deposited their funds in their current accounts managed by us, particularly those denominated in Chilean pesos, as they preferred liquidity to investing in products with low profitability. A similar phenomenon has taken place over the last few years as a result of the Central Bank’s monetary stimulus plan in response to (i) Chile’s economic slowdown towards the end of 2013 and (ii) inflation below the Central Bank’s target. Hence, as low interest rates have prevailed in Chile since 2014 interest rates paid on Chilean peso-denominated saving accounts and time deposits have remained low. The same flight-to-quality effect mentioned earlier took place in the last quarter of 2019 and, more importantly, during 2020, as a consequence of the social unrest in Chile and the effects of the COVID-19 pandemic, respectively, when both uncertainty regarding the economic outlook and low interest rates motivated depositors to seek safer products and financial institutions, while maintaining enough liquidity in case of contingencies. This trend has encouraged investors to prefer current accounts balances over interest-bearing deposits. As a result, according to our management information system, annual average balances of current accounts and demand deposits managed by our Individual and SME Area increased by 10.2% and 43.2% in 2019 and 2020, respectively.

 

Consumer Finance Area (Banco CrediChile)

 

The Consumer Finance Area provides loans and other financial services to low and middle income segments (individuals whose monthly incomes range from Ch$180,000 to Ch$500,000), which historically have only been partially served by financial institutions. Also, our Consumer Finance Area serves micro businesses. Banco CrediChile represents an alternative delivery channel for our products and services to these segments, maintaining a separate brand supported by a network of 48 Banco CrediChile branches as of December 31, 2020. Banco CrediChile was established in 2004 from what was formerly our consumer banking area. During 2008, Banco CrediChile was merged with the consumer area of Citibank Chile (Corporación Financiera Atlas S.A.) as a consequence of our merger with Citibank Chile.

 

Banco CrediChile offers its customers a variety of banking products, such as consumer loans, credit cards, residential mortgage loans and a demand deposit account (see “—CuentaChile Demand Accounts”) targeted at lower income customers. As of December 31, 2020, Banco CrediChile had approximately 238,281 core customers (those holding either a current account or a loan with us). As of the same date, total loans outstanding managed by CrediChile amounted to Ch$581,421 million, representing 1.9% of our total loans outstanding as of the same date.

 

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The following table sets forth the composition of Banco CrediChile’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2020:

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$,
except percentages)
 
Consumer loans          
Installment loans   Ch$391,775    67.4%
Credit cards    56,673    9.7 
Lines of credit and other consumer loans    2,683    0.5 
Total consumer loans    451,131    77.6 
Residential mortgage loans    92,844    16.0 
Commercial loans    37,446    6.4 
Total   Ch$

581,421

    100.0%

 

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

 

In recent years, CrediChile has strived to improve its value offering services by designing and implementing two new financial services, ‘Caja Chile’ and ‘Microbusiness Banking’. The former consists of a limited range of basic financial services (e.g. deposits, withdrawals and bill payments) offered to customers and non-customers through remote IT platforms located in small convenience stores within socially and/or geographically isolated areas of Chile. On the other hand, the ‘Microbusiness Banking’ is a specialized portfolio of financial services designed for Microbusiness (generally personal businesses) that includes financial advisory, lending and non-lending products and general financial solutions for a segment that has been traditionally uncovered by the banking services.

 

During 2020, Banco CrediChile continued to enhance these service models in order to penetrate those segments by offering innovative banking solutions. As of December 31, 2020, Banco CrediChile had 678 ‘CajaChile’ locations at various convenience stores located throughout geographically and/or socially isolated areas. Through these networks, CrediChile provides its customers with a basic array of financial services including bill payments, deposits, installments loan payments and cash withdrawals. As of the same date, commercial loans granted to microbusinesses accounted for approximately Ch$42,972 million, associated with 9,194 borrowers. From the business perspective, CrediChile’s loan balances decreased by approximately 21% when compared to 2019, which was the consequence of both the deceleration in private consumption evidenced across the whole economy due to the macroeconomic scope and also a reduced risk appetite for this sub-segment in light of various regulations and increased credit risk as a consequence of the COVID-19 pandemic. This element compelled Banco CrediChile to focus on operational efficiency, productivity and cost control, and also to extend some of Banco de Chile’s products and services to this sub-segment, such as accounts, investment and savings services and international debit cards. Also during 2020, CrediChile continued to strengthen its relationship with customers by promoting the usage internet-based services and mobile banking applications in order to improve productivity and efficiency. At the same time, we have continued to promote a dual service model by merging branches in certain locations for Banco de Chile and CrediChile customers, which in turn allows us to benefit from economies of scale by optimizing the use of spaces. Lastly, our Consumer Finance Area has a financial literacy program (“Cuentas con el Chile”) that promotes customers’ economic wealth-being by holding various workshops that benefited approximately 4,600 people in Chile.

 

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

 

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In 2020, we began a process by which the whole commercial activity of CrediChile will be merged into or migrated to our Individuals and SMEs branch network.

 

Consumer Lending

 

Banco CrediChile provides short to medium term consumer loans and credit card services. As of December 31, 2020, Banco CrediChile had approximately 150,006 consumer loan debtors related to installment loans amounting to Ch$391,775 million. As of the same date, Banco CrediChile had outstanding loan balances related to credit cards of Ch$56,673 million.

 

CuentaChile Demand Accounts

 

Banco CrediChile launched CuentaChile Demand Accounts in 2014, offering its customers a deposit product that is flexible and easy to use. This product allows us to tap into a section of the consumer market that otherwise would not be able to access and participate in the banking system because of its risk profile. The CuentaChile Demand Account is a non-interest bearing demand deposit account without checking privileges that targets customers who want a secure and comfortable means of managing and accessing their money. Customers holding this account may use an ATM card linked to their CuentaChile Demand Account to make deposits or automatic payments to other Banco CrediChile accounts through a network of 7,449 ATMs available throughout Chile as of December 31, 2020. CuentaChile Demand Account holders may execute transactions in all CrediChile branches and carry out basic banking operations in the CajaChile’s nationwide network, which is present in most Chilean regions and communities. CuentaChile Demand Account holders are entitled to make use of internet-based banking platforms and mobile applications provided by Banco CrediChile while also receiving electronic money transfers and benefiting from diverse loyalty programs designed by Banco CrediChile, under the Cuenta Chile Club, which include discounts and special offers for a wide array of stores and services. Banco CrediChile previously offered its customers traditional demand accounts (each known as a CrediChile Demand Account) that entitled its holders to receive payroll deposits, withdraw money from ATMs and perform basic purchasing transactions. The CuentaChile Demand Account replaced and improved the former product offered by CrediChile by increasing benefits to its holders.

 

Wholesale Banking Segment

 

Our wholesale banking segment serves the needs of corporate customers. In 2020, this business segment recorded annual operating revenues of approximately Ch$482,191 million, which represented 24.9% of our total operating revenues. Also, for the year ended December 31, 2020 this segment recorded an income before income tax of Ch$185,910 million, which represented 32% of our consolidated income before income tax. As of December 31, 2020, loans granted by this business segment amounted to Ch$11,063,716 million and represented 35.8% of our total loan portfolio.

 

The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2020:

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$,
except percentages)
 
Commercial credits   Ch$8,681,251    78.5%
Foreign trade loans    892,650    8.1 
Leasing loans    1,076,710    9.7 
Factoring loans    298,216    2.7 
Other loans    114,889    1.0 
Total   Ch$

11,063,716

    100.0%

 

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As of December 31, 2020, we had 9,909 debtors out of a total of 28,229 core customers (those holding either a loan or a current account with us). Our wholesale customers are engaged in a wide range of economic sectors. As of December 31, 2020, loans granted by our wholesale banking segment were mainly related to:

 

financial services (approximately 20.3% of all loans granted by this business segment);

 

construction (approximately 11.6% of all loans granted by this business segment);

 

commerce and trade (approximately 9.7% of all loans granted by this business segment);

 

manufacturing (approximately 9.5% of all loans granted by this business segment);

 

communication and transportation (approximately 7.3% of all loans granted by this business segment);

 

agriculture, forestry and fishing (approximately 6.2% of all loans granted by this business segment);

 

community, social and personal services (approximately 3.3% of all loans granted by this business segment);

 

utilities (approximately 2.7% of all loans granted by this business segment); and

 

mining (approximately 1.7% of all loans granted by this business segment).

 

In line with our strategy of identifying and differentiating market segments in order to provide improved value propositions for a diversified customer base, two of our areas provide our wholesale customer base with banking and financial products and services: (i) the Corporate Area and (ii) the Large Companies  Area.

 

Corporate Area

 

The Corporate Area provides banking products and services to corporations with annual sales exceeding approximately Ch$10,000 million. This area’s customers consist of a large proportion of Chile’s publicly-traded and non-listed companies, subsidiaries of multinational companies and conglomerates operating in Chile (including those operating in the financial, commercial, manufacturing, industrial, infrastructure and real estate sectors), projects and concessions, as well as family offices (wealth management). Thus, in addition to traditional lending products, this area offers a wide range of non-lending services related to project finance, deal structuring associated with business acquisitions, cash management, deposits and funds administration, financial advisory, among others. Also, this area is in charge of coordinating and overseeing both our Leasing Business and our International Private Banking Unit.

 

As of December 31, 2020, the Corporate Area had approximately 2,762 debtors out of a total of approximately 14,171 core customers (those holding either a current account or a loan with us). Also, this area managed total outstanding loans of Ch$7,683,004 million, which represented 24.8% of our total loan book as of the same date.

 

The following table sets forth the composition of our Corporate Area’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2020:

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$,
except percentages)
 
Commercial credits   Ch$6,356,306    82.7%
Foreign trade loans    553,064    7.2 
Factoring loans    181,480    2.4 
Leasing loans    511,509    6.7 
Other loans    80,645    1.0 
Total   Ch$7,683,004    100.0%

 

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

 

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In cash management, as of December 31, 2020, we were party to approximately 8,918 payment service contracts and approximately 872 collection service agreements with corporations. We believe that cash management and payment service contracts, in particular, provide us with a source of low cost deposits and the opportunity to cross sell our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our corporate customers, providing centralized collection services for their accounts receivable and other similar payments. For the year ended December 31, 2020, joint volumes associated with collection and payment agreements increased by approximately 28.0% when compared to 2019.

 

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

 

In recent years, the market for loans to corporations in Chile has been characterized by reduced margins due to increasing competition and moderate expansion in terms of borrowing. This fierce competition has involved not only local banking players but also, increasingly, overseas lenders who are eager to lend to Chilean companies that hold high credit ratings supported by a high sovereign credit rating. For this reason, we have focused on optimizing the profitability in this segment by enhancing our cross selling through the generation and enhancement of fee-based services, such as payroll processing, dividend payments and billing services, as well as computer banking services. This strategy has enabled us to maintain profitable and long-term relationships with our corporate customers while preserving the ability to grant loans when appropriate business opportunities arise.

 

Accordingly, during 2020, our Corporate Area continued to focus on: (i) maximizing cross-selling and profitability at the level of each business relationship, (ii) improving the customer experience in their interaction with the bank’s distribution channels and (iii) promoting and motivating the area’s team to encourage “innovation” in all the business aspects managed by account officers. These initiatives are intended to optimize the risk-return relationship of this segment through non-lending revenues and customer proximity. In all of these topics, but particularly in cross-selling, the synergies that arise from the Global Connectivity Agreement with Citigroup have been important when assisting our corporate customers with offshore transactions, derivatives structuring and financial advisory services.

 

Also, the slowdown evidenced in the local economy over the last years and, in particular, the decrease in overall investment spending across the country, affected the corporate lending business. This trend was initially amplified in 2019 by the social unrest that took place in October, and then, in 2020, the COVID-19 outbreak ended up further weakening the economic landscape, reflected in a 5.8% contraction in GDP. This behavior resulted in a 1.3% decrease in loan balances managed by our Corporate Area as of December 31, 2020, mainly influenced by lower factoring loans and trade finance. However, our Corporate Area was able to cope with this backdrop by taking advantage of specific business opportunities in Cash Management services, illustrated by a significant growth in demand deposits and a very positive year for revenues coming from treasury products offered to corporate customers, as we took advantage of interest rate and foreign exchange volatility that largely benefited our securities portfolios by mid-2020. Moreover, we continued to migrate our corporate customer base to Banconexion 2.0, the enhanced version of our former website platform for companies.

 

In addition, the Corporate Area was able to benefit from cross-selling, such as investment banking services offered through our Investment Banking subsidiary (Banchile Asesoría Financiera). During 2020, revenue from this subsidiary increased when compared to 2019, aligned with carrying out approximately 29 transactions. Also, the subsidiary ranked first in terms of M&A deals in the local market, while also being distinguished by Global Finance as the Best Investment Bank in Chile for two consecutive years.

 

The foreign trade business is also managed by our Corporate Area, although balances and results are allocated to different business areas depending on the customer who performs the transaction. It is worth mentioning that during 2020, the foreign trade business recorded a 32.4% decrease in loan balances for the Bank as a whole and a 31.6% contraction in the Corporate Area in particular, mainly associated with Chilean peso trends in 2020 and lower international trade due to the COVID- 19 pandemic.

 

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Large Companies Area

 

Our Large Companies Area provides companies – with annual sales that range from approximately Ch$2,000 million to approximately Ch$10,000 million – with a broad range of financial products and services. Customers served by this area are those related to the commercial, manufacturing, agricultural, forestry, fishing and infrastructure sectors, among others.

 

As of December 31, 2020, we had 7,147 large company debtors out of a total of 14,058 core customers (those holding either a current account or a loan with us). Loans granted by the Large Companies Area amounted to Ch$ 3,380,712 million as of the same date, which represented 10.9% of our total loans.

 

The following table sets forth the loan portfolio composition of the Large Companies  Area, in accordance with our internal reporting policies, as of December 31, 2020:

 

   As of December 31, 2020 
BANK’S INTERNAL REPORTING POLICIES:  (in millions of Ch$,
except percentages)
 
Commercial credits   Ch$2,324,945    68.8%
Leasing loans    565,201    16.7 
Foreign trade loans    339,586    10.0 
Factoring loans    116,736    3.5 
Other loans    34,244    1.0 
Total   Ch$

3,380,712

    100.0%

 

Products and services offered by this area are mainly related to commercial loans, lines of credit, trade finance and foreign currency transactions, factoring services, leasing, non-residential mortgage loans, syndicated loans, investment banking and financial advisory services for mergers and acquisitions, debt restructuring assistance, payments and collections services, current accounts and related saving services, corporate credit cards, cash and investment management, derivative contracts to hedge against currency or interest rate fluctuations, insurance brokerage, among other traditional and tailored services.

 

The Large Companies Area aims to provide its customers with excellent service based on proactive financial support that enhances long term relationships with customers. Over time, the area has developed service models intended to take advantage of synergies arising from the interaction of account and specialized support executives responsible for ensuring comprehensive customer service. These models have enabled the Large Companies Area to strengthen customer relationships and product offerings.

 

In 2020, the Large Companies Area continued to prioritize a customer centric approach in order to maintain a market-leading position in commercial loans. In the context of the economic slowdown prompted by the COVID-19 pandemic, the Large Companies Area deployed the National Support Plan that involved government-guaranteed working capital loans. This support plan largely explained the annual increase of 9.7%, or Ch$298,159 million, in year-end loan balances managed by this area, higher than the 8.5% increment seen in 2019. At the product level, the area posted an increase of 19.9% on an annual basis, or Ch$ 385,366 million in commercial credits. However, Chilean peso trends and lower international trade due to the COVID-19 pandemic led to a 32.4% decrease in trade finance loan balances as of December 2020.

 

Our factoring business is part of the Large Companies Area. During 2020, we posted an annual decrease of 45.7% in year-end balances of factoring loans on a consolidated basis. The Trade Finance Unit is also managed by the Large Companies Area. In 2020 our trade finance loans amounted to Ch$966,963 million on a consolidated basis, which represents a 32.4% annual decrease in year-end balances.

 

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Treasury and Money Market Operations

 

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

 

In addition, our Treasury and Money Market Operations business segment is focused on managing our currency, interest rate and maturity gaps, ensuring adequate liquidity levels, managing our investment portfolio and performing the intermediation of fixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.

 

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

 

Regarding funding functions, during 2020, we continued to develop a funding diversification strategy by conducting important transactions in Chile and abroad. This strategy is aimed at maintaining a competitive cost of funding that supports the value offerings we provide to our wide customer base and improving our liquidity by issuing debt of longer maturities that match long-term assets. For that reason, we are continually seeking alternative sources, types of instruments and markets. We generally conduct international bond issuances only if the cost (including costs of interest rate swaps and other transactional expenses) is below the cost of raising funds locally and the currency or interest rate exposure is fully hedged via cross currency swaps.

 

We are constantly striving to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. In this context, in 2020 we were less active than previous years in terms of long-term debt placements in both local and overseas markets. The decrease in debt issuance was largely a result of lower funding needs due to a moderate loan growth, a strong surge in current accounts and demand deposits, and funding from the Central Bank by approximately Ch$3,100,000 million associated with their liquidity program which we used to replace other types of funding, such as time deposits held by institutional investors and also long-term bonds. Nevertheless, we will continue monitoring market opportunities in order to take advantage of our superior credit rating within Chile and the Latin American region. As a result, in 2020 we carried out the following debt placements:

 

Approximately U.S.$ 280 million (denominated in UF) within the local market. These debt placements had maturities ranging from seven to eight years, while bearing premium spreads over the relevant benchmark.

 

We also carried out a debt placement in an international capital market by taking advantage of our superior credit rating within Chile and the Latin American region, which enabled us to benefit from liquidity and low interest rates in major capital markets. During 2020, we issued approximately U.S.$ 46 million in Australia with a tenor of 15 years. This placement was accompanied by a cross currency swap hedge arrangement in order to offset any effects associated with changes in foreign exchange that could impact our cost of funding.

 

Furthermore, we continued to utilize short-term funding associated with our commercial paper program, which provides us with premium funding for Trade Finance transactions. During 2020, we issued a total amount of approximately U.S.$ 781 million. As of December 31, 2020, we had an outstanding balance of approximately U.S.$ 141 million.

 

The funding functions carried out by our Treasury area are complemented by our international area, namely International Financial Institutions (“IFI”), which manages relations with correspondent banks worldwide, facilitating international payments and obtaining foreign currency financing for us. As of December 31, 2020, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 133 correspondent banks, from which we maintained 20 account relationships. IFI played an important role in structuring international transactions aimed at diversifying our funding.

 

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From the business point of view, our Treasury and Money Market segment had a very positive year in 2020. In fact, the segment benefited from a proactive management to take advantage of the trends followed by the local and foreign interest rates as a consequence of the monetary policies implemented globally to deal with the COVID-19 pandemic. As a result, the segment recorded operating revenues totaling Ch$68,547 in 2020 as compared to Ch$25,659 in 2019, mainly associated with marking-to-market gains in the Investment and Trading portfolios.

 

Regarding the management of our securities portfolio, as of December 31, 2020, the portfolio amounted to Ch$5,734,309 million and was composed of financial instruments measured at fair value through other comprehensive income that totaled Ch$1,068,153 million and securities held for trading amounting to Ch$4,666,156 million. As for the type of instruments included in our securities portfolio, as of December 31, 2020, 75.4% consisted of securities issued by the Central Bank and the Chilean Government, 16.2% consisted of securities issued by local financial institutions, and 8.4% consisted of securities issued by non-financial Chilean corporate issuers, foreign issuers and other securities. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are business goals for us and, therefore, equity instruments only represented 0.1% of our investment portfolio as of December 31, 2020.

 

Operations through Subsidiaries

 

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

 

The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2020:

 

  Assets   Equity   Net Income 
BANK’S INTERNAL REPORTING POLICIES        (in millions of Ch$)          
Banchile Corredores de Bolsa S.A.   Ch$ 751,747   Ch$133,689   Ch$ 28,168 
Banchile Administradora General de Fondos S.A.    46,575    32,981    18,684 
Banchile Corredores de Seguros Ltda.    24,377    6,813    3,845 
Socofin S.A.    12,537    1,604    (335)
Banchile Asesoria Financiera S.A.    3,717    2,950    1,771 
Banchile Securitizadora S.A.    407    143    (217)
Total   Ch$

839,360

   Ch$

178,180

   Ch$

51,916

 

 

The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2020:

 

   Ownership Interest 
    Direct
(%)
    Indirect
(%)
    Total
(%)
 
Banchile Administradora General de Fondos S.A.    99.98%   0.02%   100.00%
Banchile Asesoría Financiera S.A.    99.96        99.96 
Banchile Corredores de Seguros Ltda.    99.83    0.17    100.00 
Banchile Corredores de Bolsa S.A.    99.70    0.30    100.00 
Banchile Securitizadora S.A.    99.01    0.99    100.00 
Socofin S.A.    99.00%   1.00%   100.00%

  

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Securities Brokerage Services

 

We provide securities brokerage services through Banchile Corredores de Bolsa S.A. is registered as a securities broker with the CMF, the regulator of Chilean publicly listed companies, and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores de Bolsa S.A. has provided stock brokerage services, fixed income investments and foreign exchange products to individuals and companies through our branch network. In early 2009, Citibank Agencia de Valores S.A. merged with Banchile Corredores de Bolsa S.A.

 

During the year ended December 31, 2020, Banchile Corredores de Bolsa S.A. recorded an aggregate stock trading turnover on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange that amounted to approximately Ch$8,040,348 million, which represented a 13.0% market share within the Chilean stock market.

 

Also, as of December 31, 2020, Banchile Corredores de Bolsa S.A. had equity amounting to Ch$133,689 million and, for the year ended December 31, 2020, recorded net income of Ch$28,168 million, which represented 6.1% of our consolidated net income for that period (under the bank’s internal reporting policies).

 

Mutual and Investment Fund Management

 

Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2020, according to data published by the Chilean Mutual Funds Association, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 24.2% of all Chilean mutual funds’ assets. Also, as of December 31, 2020, Banchile Administradora General de Fondos S.A. operated 53 mutual funds and had Ch$10,357,446 million in assets under management owned by 357,458 corporate and individual investors. As of the same date, Banchile Administradora General de Fondos S.A. operated 36 public investment funds. Banchile managed Ch$1,257,841 million in net assets associated with these public investment funds on behalf of 1,491 participants. As of December 31, 2020, Banchile managed four private investment funds of Ch$27,465 million in net assets associated with these public investment funds on behalf of 95 participants. During 2020, Banchile Administradora General de Fondos S.A. created six new mutual funds, eight new public investment funds and one private investment fund.

 

The mutual and investment funds mentioned above are managed by Banchile Administradora General de Fondos S.A., but neither the Bank nor Banchile Administradora General de Fondos S.A. have ownership of these funds and, accordingly, they are not booked in our audited consolidated financial statements.

 

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The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2020:

 

      As of December 31, 2020
Name of Fund  Type of Fund   Net Asset Value
(in millions of Ch$)
    Number of
Investors
 
Alianza  Fixed Income (Medium/Long Term)  Ch$19,283    4,246 
Asia  Equity   7,283    1,464 
Asiatico Accionario  Equity   18,556    1,786 
Banchile-Acciones  Equity   20,825    5,599 
Best Coupon Emergente  Structured   2,452    97 
Best Coupon Europe  Structured   2,441    60 
Best Coupon Usa  Structured   7,857    263 
Capital Efectivo  Fixed income (short term)   467,559    7,429 
Capital Empresarial  Fixed income (short term)   2,560,011    28,759 
Capital Financiero  Fixed income (short term)   1,229,739    15,442 
Corporate Dollar  Fixed income (short term)   1,153,966    25,768 
Crecimiento  Fixed income (medium/long term)   283,393    18,868 
Deposito XXI  Fixed income (medium/long term)   204,028    17,131 
Deuda Dolar  Fixed income (medium/long term)   266,062    5,247 
Deuda Estatal Uf 3-5  Fixed income (medium/long term)   3,766    722 
Deuda Internacional  Fixed income (medium/long term)   1,099    17 
Disponible  Fixed income (short term)   125,058    40,590 
Dollar Coupon Usado  Structured   2,303    90 
Emerging  Equity   9,777    1,967 
Emerging Market  Equity   13,144    874 
Estrategia Agresiva  Blend   6,707    855 
Estrategia Cons  Blend   26,004    2,353 
Estrategia Moderada  Blend   31,973    2,317 
Estrategico  Fixed income (medium/long term)   922,068    30,927 
Estructurado Bonos Uf Plus III  Structured   7,675    330