BancoEstado

FINAL PROJECT FOR WSBI, IEB, AND LSE
MASTER IN RESPONSIBLE BANKING PROGRAM
BancoEstado:
Measurement of its Social Dividend and
Contribution to Financial Inclusion
Fernando Ochoa Castillo
June 2014
1
Introduction
PART I: Public policies and the role of state-owned banks in the promotion
of financial Inclusion in Latin America .
Section 1. Characterization of and Recent Trends in Latin American
Financial Markets
Section 2. Public Banks and their Contribution to Financial Inclusion
and Development (Maya Declaration)
Section 3. The Countercyclical Role of Public Banks in Latin America
PART II: Public Policies for Financial Inclusion in Chile
Section 1. Public policies to promote financial inclusion in Chile
Section 2. Comparative progress in financial inclusion and prevailing
gaps
PART III: BancoEstado´s Contribution to Financial Inclusion, Economic Value
Added (EVA) and Social Dividend
Section 1. Overview of BancoEstado´s strategies and activities for
financial inclusion.
Section 2: BancoEstado´s contribution to economic and financial
stability
2
Section 3. The Composite Index to measure BancoEstado´s
contribution to financial inclusion.
Section 4. The measurement of the Economic Value Added (EVA)
generated by BancoEstado
Section 5. The Measurement of BancoEstado´s Social Dividend
PART IV: Conclusions
Annex 1: State-owned banks´ share in banking industry´s total assets
Annex 2: BancoEstados´s commercial segments
3
Introduction
BancoEstado is one of the oldest financial institutions and the only state-owned
commercial bank in Chile. Its mission is specifically defined as “We exist so that every
Chilean, anywhere, can initiate and develop new activities”. Therefore, its main objective
is to provide financial services across all social segments of the population and in remote
territories of the country to promote social and economic development in Chile.
This public bank is actually the third largest financial institution in Chile in terms of
aggregate loans and the largest one in terms of number of customers and geographic
coverage. It is also a market leader in residential mortgages for low-income families,
higher-education loans, passbook savings, debit cards, and micro-enterprise loans.
Regarding credit risk, it is the highest rated bank in Latin America and one of the highestrated banks globally.
Accordingly, BancoEstado has basically pursued a permanent strategy of financial
inclusion and implemented a countercyclical strategy of credit provision during the last
global financial crisis to also contribute to the country´s economic and financial stability as
well as to mitigate the adverse impact of recurrent economic cycles on social welfare.
Given this leading role played by BancoEstado in the promotion of financial inclusion in
Chile, the main objectives of this project are: firstly, the design and computation of an
statistical composite index that would allow BancoEstado to assess the evolution or trend
of its aggregate contribution to financial inclusion in Chile derived from its different
activities focused in the promotion of this objective, which is proposed to be periodically
reported to its Board and Executive Committee.
And, secondly, as a complement of that composite index, to estimate the economic value
added (EVA) and social dividend generated by BancoEstado –replicating to a large extent a
similar study carried out by the World Savings Banking Institute and the ESBG in 20091given that this public bank is actually the unique provider of financial services in 84 out of
346 counties or municipalities in Chile, particularly in the poorer ones. The EVA and the
social dividend, particularly that generated by the cluster of the set of this bank´s
branches facing no competition, are proposed to be also reported to its Board and
Executive Committee at least once a year.
1
WSBI and ESBG, “Measuring the Scoail Dividend in WSBI´s Members´ Activities: Revealing the Hidden
Elements”, N° 57, February 2009.
4
The content of this work is organized in four parts. The first part of it is dedicated to assess
Latin America´s financial development compared to other regions of the world and in
particular to evaluate public policies and the role of state-owned banks for promoting
financial Inclusion and stability in Latin America.
The second part is devoted to provide a contextualization for this work basically implying a
description and analysis of public policies applied to promote financial inclusion in Chile as
well as to assess, in comparison to other middle- and high-income countries, the recent
progress achieved and the prevailing gaps in this area.
The third and core part of this project is divided into five main complementary sections. In
the first section, an overview of BancoEstado´s strategies and activities linked to financial
inclusion is provided. In the second section, the countercyclical strategy implemented by
this public bank to reactivate the credit channel transmission of the Chilean economy
during the global financial crisis is analyzed evidencing its success not only in terms of its
contribution to the country´s macroeconomic and financial stability, but also in terms of
its microeconomic trade-off between its market share gains and profitability.
In the third section of this part, a composite index is developed to assess the evolution of
the contribution of BancoEstado to financial inclusion in a full economic cycle for the
Chilean Economy (period 2005-2013) under different criteria and applying different
weights to the relevant variables included in this indicator. It is verified firstly a steady
positive trend in the evolution of this index under any configuration even during the years
of the global financial crisis, and secondly there is a great correlation between Chile´s
progress in the financial inclusion field and the contribution made by BancoEstado
through the provision of massive and preferential access to its basic products and services
particularly to relatively lower-income families and micro and small firms in the last years,
whatever the composite index is used to measure this progress.
In the fourth section, BancoEstado´s economic value added (EVA) is assessed by using a
relatively standardized methodology for banks and it is clearly shown that this bank has
generated a significant positive economic value for its owner –the Chilean State-, aside
from its important contribution to the country´s financial inclusion and economic stability,
which demonstate that it is a real “dual-bottom-line” financial institution.
Finally, in the fifth section, the estimation of BancoEstado´s social dividend is performed
by using the methodology of the Oxford Policy Management (OPM). It is determined that
the cluster of BancoEstado´s branches facing no competition, and mostly located in
5
relatively poor municipalities or marginal areas, have been more financially sustainable
than expected, by any of the judgement criteria postulated by OPM.2 In particular, small
rural branches in this cluster are able to cover its own direct and indirect operating costs
and still make a positive contribution to finance fixed head-office overheads.
At the same time, in competitive markets, this bank´s small-scale urban branch located in
a relatively poorer municipality had a much better performance than its large-scale peer
operating in a richer municipality in the same region in terms of the average lending and
deposits per employee achieved as well as in terms of its profitability and operational
efficiency, which was primarily due to differing external or market conditions and internal
factors or capacity to dynamically match the bank´s allocation of productive resources and
supply to effective demand (level and composition) for the services provided by each
branch.
2
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, op. cit. p.27.
6
PART I: PUBLIC POLICIES AND THE ROLE OF STATE-OWNED BANKS IN THE
PROMOTION OF FINANCIAL INCLUSION IN LATIN
1. Characterization of and Recent Trends in Latin American Financial
Markets
The financial systems in Latin American economies have improved significantly over the
past two decades, progressively transitioning from a mostly bank-based model to a more
complex and interconnected model in which nonbank institutions play a growing role.
However, financial systems in this region remain underdeveloped and they are still lagging
far behind compared to industrial and other emerging economies, most notably those in
Asia. This observation is valid for all markets of the financial industry: banks, bond markets
and equity markets.
The assessment of the stage of development and performance achieved by the regional
financial system in general, and the the banking system in particular, is usually carried out
by analyzing the absolute and relative level of its main relevant variables: depth, access
and use of financial products and services, operating efficiency, and stability.3
Accordingly, the average depth of the banking system in Latin America, measured through
the ratio of private credit by deposit money banks to GDP, increased from 26.5% in 2001
to 30.9% in 2011.4 In the same period, this ratio went up from 29.8% to 41.4% in the
economies of East Asia and the Pacific and from 71.4% to 92.5% in high income countries.
Consequently, the gap in the relative size of the banking system in Latin America increased
from 3.3 percentage points of GDP in 2001 to 10.5 percentage points of GDP in 2011
compared to the former region and from 40.5 percentagel points of GDP to 61.6
percentage points of GDP with respect to the latter group of countries. In other words,
there seems to be no convergence of this region´s indicators of banking development with
those of more developed regions as it is usually expected as per capita income grows.
Even more, the latter income variable is not in this case positively correlated with banking
development given that the average per capita GDP in East Asia and the Pacific countries
(US$ 4,693) was just about a half of the average per capita GDP in Latin America (US$
9,352) in 2011. It is relevant to mention at this point that banking development is also
influenced by non-economic variables, such as institutional, behavioral, and cultural
factors.
3
4
The World Bank, Global Financial Development Report 2013, Rethinking the Role of the State in Finance.
The World Bank, The Little Data Book on Financial Development 2014.
7
The comparative trend in financial markets has evidenced a similar pattern. Thus, the
average depth in the Latin American equity markets, quantified by the ratio of stock
market capitalization to GDP, increased from 20.2% in 2001 to 21.3 % in 2011 while in East
Asian and the Pacific countries that ratio went up from 27.4% to 58.7% in the same years.
Likewise, bond markets in Latin America remain relatively small despite of their rapid
growth lately. In average, the depth of the private and public segments of this regional
financial market, measured by the ratios of the corresponding outstanding domestic
stocks of debt securities to GDP, was 3.3% and 22.1% in 2011, respectively. Those ratios
reached 12.7% and 29.1% of GDP for East Asian and the Pacific economies while the same
average ratios for the world as a whole were 21.7% and 32.6% in the same year.
Moreover, within Latin America, there is a high variance or heterogeneity in the level of
banking development achieved by different countries, as well as in the relative
importance of public banks in the domestic banking industry. In Graph N° 1, four groups of
economies can be distinguished by simultaneously considering banking depth, measured
by the ratio deposit money banks´assets to GDP, and per capita GDP in 2011. In the first
group are Brazil and Chile, with relatively high banking depth and per capita income. A
second group is conformed by Uruguay, Argentina, Venezuela y Mexico with low banking
depth and relatively high per capita GDP. A third group is constituted by countries with
medium GDP per capita in the region (in the range of US$ 5,000 to US$ 9,500) and a wide
dispersion in their banking depth, with Panama as an outlier for being an offshore center.
And, a final group of countries with a per capita GDP below US$ 5,000 and banking depth
ranging from 4.7% to 50.8%, with a very low share of public bank´s assets in the total
assets of their local banking industries.
8
GRAPH N° 1.
LATIN AMERICA & THE CARIBBEAN. YEAR 2011
BANKING SYSTEM DEPTH AND PER CAPITA GDP
100
BRZ
90
B
a
n
k
i
n
g
PAN
80
D
e
p
t
h
70
CHI
DOM
60
50
HON
CRICA
40
PAR
NICA
30
BOL
20
COL
MEX
ECU
GUAT
PERU
DOMR
VEN
URU
ARG
10
ESALV
0
0
5
10
GDP Per Capita (US$´000)
15
Another significant variable to assess in the characterization of the Latin American banking
system, complementing the relevance of its depth, is the one related to the access by the
region´s population and firms to financial services and products, as well as their use. An
important progress in the provision of access to financial services to the population and
SMEs has taken place in this region during the last two decades. In this process of financial
inclusion, public banks have played a leading role by implementing several programs with
that objective, which are going be described in a forward section. Nevertheless, there still
exist a significant gap in access to these services between Latin America and the high
income economies, particularly for individuals and SMEs, as it can be observed in Table 1.
TABLE 1. COMPARATIVE ACCESS TO FINANCIAL SERVICES. YEAR 2011
LATIN
EAST ASIA
HIGH-
GAP
AMERICA
& PACIFIC
INCOME
LA vs HI
ACCESS - INDIVIDUALS
Bank Accounts per 1,000 adults (age 15+)
610
969
1168
558
Bank branches per 100,000 adults (age 15+)
17,1
10,7
27,7
10,6
Account at a formal financial institution (%, age 15+)
27,7
26,8
90,1
62,4
Debit card (%, age 15+)
15,6
14,6
68,8
53,2
Firms with a checking/savings account (%)
96,5
96,0
97,9
1,4
Firms with bank loan/line of credit (%)
49,0
43,0
49,3
0,3
Small firms with bank loan/line of credit (%)
38,9
29,5
48,5
9,6
ACCESS - FIRMS
9
Regarding the use of financial products and services by individuals, this region is even still
behind East Asian & the Pacific economies in the average use of traditional banking
products (savings and loans), while a relatively larger share of its adult population (aged
15 years and older) is already using modern and less expensive electronic means of
payments (see Table 2). Moreover, firms in Latin America show in average a larger use of
banking loans than its counterparts in the East Asia region for financing real investments
and working capital. However, a large gap prevails in the use of all these financial services
in Latin America if it is compared with their average use in high income countries.
TABLE 2. COMPARATIVE USE OF FINANCIAL SERVICES. YEAR 2011
LATIN
EAST ASIA
HIGH-
GAP
AMERICA
& PACIFIC
INCOME
LA vs HI
Saved at a financial institution in the past year (%, age 15+)
11,4
19,4
38,6
27,2
Loan from a financial institution in the past year (%, age 15+)
9,0
16,2
11,6
2,6
USE - INDIVIDUALS
Electronic payments used to make payments (%, age 15+)
4,2
3,1
44,8
40,6
Depositing/withdrawing at least once in a typical month (%, age 15+)
25,1
24,9
88,0
62,9
Firms using banks to finance investments (%)
34,5
21,9
49,3
14,8
Firms using banks to finance working capital (%)
44,5
19,3
46,3
1,8
USE - FIRMS
A third variable to evaluate in the characterization of the LA banking system is operational
efficiency. In Table 3, it can be viewed that the Latin American banks are in average
relatively inefficient financial intermediaries considering any of the relevant indicators,
such as net interest margin, lending-deposit spread, and/or overhead costs. In addition,
the banks in this region earned in average a relatively higher ROA and ROE after taxes.
Then, both factors, higher operating inefficiency and profitability, may have had a
negative incidence in the lagged process of financial inclusion in Latin America.
TABLE 3. COMPARATIVE OPERATING EFFICIENCY OF FINANCIAL INTERMEDIARIES. 2011
LATIN
EAST ASIA
HIGH-
GAP
AMERICA
& PACIFIC
INCOME
LA vs HI
Bank net interest margin (%)
5,9
4,3
2,3
-3,6
Bank lending-deposit spread
7,7
5,5
4,8
-2,9
Bank overhead costs to total assets (%)
4,3
2,5
1,6
-2,7
Bank return on assets (%, after tax)
1,8
1,7
0,8
-1,0
Bank return on equity (%, after tax)
16,6
16,2
8,7
-7,9
EFFICIENCY
10
A fourth variable to evaluate in the characterization of the Latin American banking system
is its stability, as well as its degree of concentration which it is a basic indicator of the level
of its systemic risk (too-big-to-fail institutions). In Table 4, it can be observed a negative
correlation between financial stability and bank concentration, even though there is a
growing body of evidence from empirical cross-country studies suggesting that the
relationships between banking concentration and bank size on the one hand, and financial
stability, competition, bank efficiency and performance on the other, are complex and
depend upon multi-faceted aspects of regulatory policy and institutional arrangements.5
Regarding its stability measured through the bank Z-score6, the level of this indicator is
lower (higher) for Latin America than the average for East Asian (high income) economies
while its banking system concentration7 is comparatively higher (lower) than the
equivalent ratio for these relevant group of countries (see Table 4).
TABLE 4. COMPARATIVE STABILITY AND CONCENTRATION OF BANKING SYSTEMS. 2011
LATIN
EAST ASIA
HIGH-
GAP
AMERICA
& PACIFIC
INCOME
LA vs HI
Bank Z-score
14,2
16,9
13,6
-0,6
Bank nonperforming loans to gross loans (%)
2,1
2,7
4,0
1,9
Bank regulatory capital to risk-weighted assets (%)
15,5
16,1
14,5
-1,0
BANK CONCENTRATION (%)
60,4
51,8
75,9
15,5
STABILITY
5
Kevin
Davis,
“Banking
Concentration,
Financial
Stability
and
Public
Policy”
available
at
www.rba.gov.au/publications/confs/2007/davis.html. Beck, Demirgüç-Kunt and Levine (‘Bank Concentration and Crises’, NBER Working
Paper No 9921/2003) point out that the systemic importance of large banks may induce a too-big-to-fail attitude in governments, with
the implied guarantee of survival leading to excessive risk-taking. Market power may also enable banks to charge higher interest rates
on loans, possibly inducing greater risk-taking by their borrowers. Big banks may be more opaque, and internal control systems may
become less effective with large scale.
There have been many empirical and theoretical studies examining one or more of these aspects. Allen and Gale (‘Competition and
Financial Stability’, Journal of Money, Credit and Banking, 36(3), Part 2, pp 453–480, 2004; and Understanding Financial Crises,
Clarendon Lecture Series in Finance, Oxford University Press, Oxford, 2007) review (and develop) various models of banking markets
which focus upon theimplications of inherent characteristics such as imperfect information, incomplete markets and incomplete
contracts for the optimal characteristics and structure of the fi nancial sector. Given the limitations imposed by those inherent
characteristics, ‘constrained effi cient’ outcomes can involve financial sectors characterised by some degree of concentration and
probability of financial instability.
6
This indicator is a risk measure that captures the probability of default of a country´s banking system and compares its buffer
(capitalization and returns) with the volatility of those returns. The Z-score is then defined as ( car+roa/dsroa) > 0, with car the bankís
capital-asset ratio, roa its return on assets, and dsroa the standar deviation of its roa. See Frank Strobel, ´Bank Insolvency Risk and ZScore Measures: A Refinement´, SSRN Working Paper, May 21, 2013.
7
Bank concentration is the percentage of assets of the three largest commercial banks to total commercial banking assets. Total assets
include total earning assets, cash and due from banks, fixed assets, goodwill, other intangibles, current tax assets, deferred tax, and
other assets.
11
In sum, based upon the previous characterization and evaluation of the recent trends of
the Latin American banking system, it can be stated that this progress on the banking and
financial development of the region in the last decade has been achieved in the context of
improved macroeconomic performance, reduced inflation, sounder public finances, more
effective prudential policies, enhanced financial regulation, and stricter oversight and
enforcement of the rules of the game in the banking sector. However, huge gaps and
challenges remain for this region particularly in terms of improving access to and use of
financial products and services, as well as enhancing its operating efficiency and stability,
being these two last factors, among other relevant variables, critical in determining the
past evolution and future trajectory of the process of financial inclusion. Then, financial
development in general, and financial inclusion in particular, remain pending tasks in
Latin America, notwithstanding the progress achieved so far, particularly in view of the
prevailing gaps not only compared to the level of financial depth and inclusion reached in
high income countries, but also compared to other regions transiting in a lower stage of
economic development.
2. Public Banks and their contribution to financial inclusion and
development (Maya Declaration)
This section focuses on the evaluation of the relative size or importance of public banks in
the financial markets of Latin America, measured by their share on total assets in the
national banking systems, and most importantly considering their contribution to financial
inclusion, primarily describing their main and most successful activities and programs
focused in the promotion of this objective implemented in this region during the last two
decades.
Different countries in Latin America have granted different priorities to this financial policy
objective, being the most outstanding ones those that have already designed and
launched explicit financial inclusion strategies and committed to formal targets for
financial inclusion. These strategies generally involve a mix of quantitative targets and
policy areas of commitment such as improving consumer protection, financial literacy,
expansion of mobile financial services and microfinance and then reflect a growing
recognition of the role of financial inclusion in reducing poverty and boosting shared
prosperity.
12
In this region, several countries have made formal commitments under the Alliance for
Financial Inclusion’s Maya Declaration8 or have been identified by the Financial Inclusion
Strategy Peer Learning Group as having significant national strategies. In particular, Brazil
launched its Action Plan for the National Partnership for Financial Inclusion while Mexico
created the National Council for Financial Inclusion (CONAIF) and issued a draft of the
National Policy for Financial Inclusion in 2012. Moreover, the Superintendencia de Banca,
Seguros y AFP (SBS) del Perú had set as part of its Maya commitments a target of 15,000
banking agents, which was largely exceeded by reaching a total of 18,956 as of December
2012.9 In Mexico, the Comisión Nacional Bancaria y de Valores (CNBV) CNBV’s actual goal
is to have a banking agent or banking branch in every municipality by 2014. Nearly three
quarters (73%) of municipalities are currently covered and there are fresh plans to extend
coverage at the locality level as well. In Chile, the Ministerio de Desarrollo Social de Chile
has made a commitment to adopt an electronic payment system by September 2014
focusing in the country’s most vulnerable population. It will promote the system to
educate end users who will receive their fiscal subsdies or benefits via electronic
payments.
Regarding the institutional framework for financial inclusion in Latin America, it can be
seen in Table 5 that the leading agency in this process generally involve different
institutions such as, for instance, the Central Banks of Brazil, Ecuador and Paraguay, the
Superintendencies of Banks and Financial Institutions in El Salvador, Guatemala, Mexico,
and Perú, the Ministries of Finance and Social Development in Chile, and the Ministry of
Finance and Public Credit in Colombia.
8
The Maya Declaration is a statement of common principles regarding the development of financial inclusion policy made by a group of
developing nation regulatory institutions during the Alliance for Financial Inclusion´s (AFI) 2011 Global Policy Forum held in Mexico.
Institutions that sign this Declaration agree to make measurable commitments in four broad areas that have been proven to increase
financial inclusion. These four areas, which are aligned with the G20 Principles for Innovative Financial Inclusion, include:
• Create an enabling environment to harness new technology that increases access and lowers costs of financial services;
• Implement a proportional framework that advances synergies in financial inclusion, integrity, and stability;
• Integrate consumer protection and empowerment as a key pillar of financial inclusion; and
• Utilize data for informed policymaking and tracking results.
9
The Alliance for Financial Inclusion´s (AFI), “Putting Financial Inclusion on the Global Map: The 2013 Maya Declaration Progress
Report”, September 2013.
13
TABLE 5. PROGRESS ON NATIONAL FINANCIAL INCLUSION STRATEGIES
Source: Alliance for Financial Inclusion (AFI), “A Time Line for Achievement: Progress on National Financial Inclusion Strategies”,
Financial Inclusion Strategy Peer Learning Group 2013
In this regional context, public banks, as the “financial arms” of the Latin American states,
have historically played a critical role in the promotion of financial inclusion throughout a
variety of activities and programs whose economic and social impact has been primarily
depending on their commitment with this policy objective and on their relative size or
share in their corresponding financial market.
In general, it can be said that state-owned banks do not lead the supply side in the
banking markets of Latin America but still play an important role, even after the
liberalization of financial markets and many unsuccessful attempts for their full
privatization carried out by conservative governments in the past decades. For instance, in
Brazil and Chile, countries with relatively higher banking depth and per capita income,
state-owned banks have kept a relevant size with shares of 41.0% and 16.1 % respectively,
in their domestic banking industry´s total assets as of December 2013. Likewise, in
14
countries with relatively lower banking depth and high per capita income -such as
Argentina, Mexico, Uruguay, and Venezuela-, the public banks´ share on their banking
system´s total assets ranged from an average of 16.0% to 48.0% in 2008-10.10 Even more,
the state-owned banks´ share on banking system assets in Costa Rica has been the highest
in the whole region with an average of 51.0% in the years 2008-10.
Accordingly, it can be observed that there is a significant positive correlation between
Latin American countries with a relatively higher importance or size of state-owned banks
in their banking markets and the access to financial services of their own population and
firms. For instance, in Table 6, it is shown that 55.9% and 50.4% of the adult citizens of
Brazil and Costa Rica respectively, had an account at a formal financial institution in 2011
while 41.2% and 43.8% of them in the same countries owned a debit card, being these
countries the regional leaders in both the provision of access to banking services to their
adult population and those with the highest share of public banks in their banking
system´s total assets. Likewise, Brazil, Chile, and Costa Rica have been historical leaders in
the access of firms to traditional banking products, such as checking/savings accounts and
loans/lines of credit. Colombia has also lately become a leader in providing loans to small
firms.
TABLE 6. LEADERS IN THE PROVISION OF ACCESS TO FINANCIAL SERVICES. YEAR 2011
ARGENTINA BRAZIL CHILE COLOMBIA
COSTA
RICA
MEXICO VENEZUELA
ACCESS - INDIVIDUALS
Account at a formal financial institution (%, age
15+)
33.1
55.9
42.2
30.4
50.4
27.4
44.1
Debit card (%, age 15+)
29.8
41.2
25.8
22.7
43.8
22.3
35.1
Firms with a checking/savings account (%)
96.2
99.4
97.9
95.8
97.5
61.8
96.5
Firms with bank loan/line of credit (%)
49.3
65.3
79.6
57.2
56.8
32.0
35.4
Small firms with bank loan/line of credit (%)
38.0
42.8
72.5
50.6
41.2
26.8
25.6
ACCESS - FIRMS
Source: The World Bank, The Little Data Book on Financial Development 2014.
10
Jesús González-García and Francesco Grigoli, “State-Owned Banks and Fiscal Discipline”, IMF Working
Paper (WP/13/206), October 2013.
15
A similar significantly positive correlation has prevailed between Latin American countries
with a relatively higher importance or size of state-owned banks in their banking markets like Brazil, Chile, Costa Rica, and Venezuela- and the use of financial services by their own
population and firms, as it can be verified in Table 7. Compared to high-income countries,
Brazil and Chile still keep a large gap in the use of financial services only at the level of
individuals, but not at the firms´ level.
TABLE 7 . LEADERS IN THE USE OF FINANCIAL SERVICES. YEAR 2011
ARGENTINA BRAZIL CHILE
COLOMBIA COSTA RICA MEXICO VENEZUELA
USE - INDIVIDUALS
Saved at a financial institution in the past year (%, age 15+)
3.8
10.3
12.4
9.2
19.9
6.7
Loan from a financial institution in the past year (%, age 15+)
6.6
6.3
7.8
11.9
10.0
7.6
13.6
1.7
Electronic payments used to make payments (%, age 15+)
5.7
16.6
11.1
6.8
14.5
8.3
15.0
Depositing/w ithdraw ing at least once in a typical month (%, age 15+)
32.4
53.4
38.7
28.2
47.6
24.6
43.5
Firms using banks to finance investments (%)
30.3
48.4
44.8
35.0
22.2
16.2
35.3
Firms using banks to finance w orking capital (%)
33.3
60.0
55.1
49.2
30.1
26.9
27.1
USE - FIRMS
Source: The World Bank, The Little Data Book on Financial Development 2014
In these cases, these positive correlations may be explained to a large extent by the
historical, comprehensive and sustainable activities and programs designed and
implemented by state-owned financial institutions to promte the financial inclusion of
families, individuals and SMEs in this region, which the main ones are briefly described in
the next section.
2.1 Main activities and programs for financial inclusion implemented by state-owned
financial institutions in Latin America
The analysis of the regional public banks´ activities and programs in the promotion of
financial inclusion is mainly focused in those carried out by Brazilian banks given their
larger scale, the wide variety of financial products and services offered to lower-income
families and MSMEs, the partnerships with private sector agents set to provide these
services, and to the fact that these programs were inserted in the context of a national
strategy fostering this critical public policy objective.
16
Accordingly, playing their roles as main public policies agents, four state-owned Brazilian
banks have historically been the main source for financial products and services targeting
low-income individuals and families as well as SMEs: Banco do Brasil (BB)11, Caixa
Economica Federal (CEF)12, Banco Nordeste do Brasil (BNB)13, and the Brazilian
Development Bank (BNDES)14. The first two banks, BB and Caixa, have specific mandates
related to financial inclusion and have managed a broad and growing customer base of
middle- and low-income customers. Moreover, both banks rank among the four largest
banks by assets, with BB leading Brazilian banks not only in assets but also deposits,
number of branches and employees. Specifically, BB, BNDES and CEF are amongst the 10
largest banks in the country. In terms of total assets, BB, BNDES and CEF rank first,
fourth, and fifth, respectively. Furthermore, state-owned banks accounted for 42.4% of
the banking sector´s total assets, 45.6% of its total credit, 46.3% of total deposits, 45.8% of
its labor force, and 41.5% of the branches operating in the banking sector as of
September 2011.
These public banks, as well as other state-owned institutions in Latin America, offer a wide
menu of financial products and services to lower-income customers and SMEs such as:
 Payroll loans (credito consignado)
Offered to employees and retirees through salary and pension deductions, which
minimize credit risk for lenders and then allow to charge lower effective interest
rates to borrowers. These loans are limited to up to 30% of a customer´s income or
pension and their maturity can not exceed 5 years. The BB´s share in this segment
11
According to The Banker (“The Top Five Banks in Brazil”, Editorial published November 06, 2013), Banco do Brasil S.A. ( Bank of
Brazil) is the largest Brazilian and Latin American bank by assets, and the third by market value. It was founded in 1808 and is the oldest
active bank in Brazil, and one of the oldest financial institutions in the world. This bank is controlled by the Brazilian government but its
stock is traded at the São Paulo Stock Exchange and its management follows standard international banking practices. Since 2000 it is
one of the four most-profitable Brazilian banks, with ROE and ROA of 20.55% and 1.34% respectively, as of December 2012, and holds a
strong leadership position in retail banking.
12
CEF is the second largest government-owned financial institution in Latin America, after Banco do Brasil, and the fourth largest bank
in Brazil by assets and one of the largest in this region. It was founded in 1861. See The Banker, op. cit.
13
It is a regional development bank organized as a mixed capital company, publicly traded, with over 90% of its capital under the
control of the Federal Government and is the largest institution in Latin America focused on regional development. It was founded in
1952 and owned US$16.0 billion assets as of December 2013.
14
The BNDES is actually the main financing agent for development in Brazil and has played a fundamental role in stimulating the
expansion of industry and infrastructure in the country. This bank offers several financial support mechanisms to Brazilian companies of
all sizes as well as public administration entities, enabling investments in all economic sectors. The BNDES emphasizes three factors it
considers strategic: innovation, local development and socio-environmental development.
17
of the retail market stood at 31.2% and these loans represented a 14.4% and
38.6% of its total and personal loan portfolio respectively, as of December 2012.15
 Housing Loans
CEF has focused on housing finance and it is the institution supporting the “My
House, My Life” (Minha Casa Minha Vida) program targeting low income people16.
Under this program, Caixa engaged R$ 49.0 billion in 2013, totaling 692.9 thousand
housing units. Of this amount, 48.8% were allocated to families with a maximum
income of R$ 1.6 thousand fully subsidized by the program.17 Caixa is also the
leader in the real estate loan market with a share of 68.5% as of December 2013,
excluding mortgage-backed securities.18 Further, in June 2013, Brazil’s President
Dilma Rousseff announced a special credit program for low-income families, run by
Caixa, called the Minha Casa Melhor (My Home, Improved) program that will
distribute credit cards with a 5,000 Brazilian reais (US$2,344) credit-limit,
specifically to buy furniture and appliances for homes bought under the
government’s affordable-housing program, Minha Casa, Minha Vida (My Home,
My Life)19.
 Rural and Agribusiness Loans
These resources have been allocated mainly to agricultural and cattle breeding
activities, investments in machinery and equipment, animal acquisition and rural
infraestructure projects. BB is the absolute leader in rural loans with a 62.5%
market share in the National Rural Credit System as of December 201420 and those
were accounting for 18.6% of its total loan portfolio, of which a 69.2% were
granted to individuals and the rest to companies.
15
Bank of Brazil, Annual Report 2012, Economic and Financial Performance.
This program was launched five years ago as a bid to tackle decades of mediocre attempts to eliminate a shortage of 5.24m homes.
Its aim was to get millions of Brazil’s poorest citizens out of poor living conditions in the country’s favelas and slums.
17
Caixa Economica Federal, Management Report 2013, March 2014.
18
Caixa Economica Federal, op. cit., page 7.
19
Rogerio Jelmayer, “Moody’s sees risks in Brazil’s Caixa new lending program”, The Wall Street Journal, 06/17/2013, June 17, 2013.
This article was also published by the Wilson Center, Brazil Institute, in its web page.
16
20
Bank of Brazil, op. cit.
18
In Uruguay, the Banco República (BROU), a state-owned institution, is actually the
largest bank in this country and has been the leader in the provision of specialized
loans and a large menu of financial services to the agricultural sector for more than
100 years, whose terms have been adapted to the particular types of businesses in
this sector.21
 Loans to Micro and SMEs
BNB is the main supplier of these loans through the CrediAmigo program with a
market share over 70%, mostly in the North and NorthEast regions of Brazil, and
active borrowers reached close to 1.6 million as of September 2013. These credit
resources are provided for productive purposes and required to be invested in a
revenue generating activity. Their average amount is R$ 1.000 and their range
fluctuate from R$ 100 to R$ 15,000 and its maximum maturity is 36 months while
these loans are charged interest rates below market rates.22
There are five different credit lines available at Crediamigo for working capital or
fixed asset investment. Moreover, it is possible to open current accounts at BNB
and buy life insurance. Even though these loans are provided also to individuals, a
full 94% of operations are made through group lending (grupos solidarios). For
groups of three to ten members, working capital loans range from R$100 (US$50)
to R$10.000 (US$5000), with monthly interest rates between 1.2% and 3% percent.
For fixed asset investments, groups are larger (15-30 members) and interest rates
charged of 1% per month.23
In Costa Rica, a system of development banking (“Sistema de Banca para el
Desarrollo”)24 was set in 2008 to increase the access to finance by micro, small,
and medium-sized firms (MSMEs) and some targeted population groups –women,
ethnic minorities, disable people, young entrepreneurs, and cooperativesparticularly located in areas of lower economic development. Thus, this system
operating via four separate Funds -of which three of them provide financial
support through loans and guarantees- increased the share of MSMEs in the total
21
The market share of public banks in Uruguay´s bank loan market was 42% at the end of 2012. These banks are the Banco República
(BROU) and Banco Hipotecario de la República (BHU). The former operates as commercial bank and the latter is specialized in housing
loans. See, República Oriental del Uruguay, “Sistema Financiero en Uruguay”, Uruguay XXI, Mayo 2013.
22
http://www.accion.org/our-impact/crediamigo
23
Mettenheim, K., Diniz, E., and Gonzalez, L., “New Perspectives on Banking and Agendas for Financial Inclusion”, paper presented at
the Financial Research Conference, 2013, Harvard Kennedy School, Cambridge, MA.
24
Banco Central de Costa Rica, “Acceso de las Mipymes a los Servicios Financieros a partir de la Implementación de la Ley 8634 del
Sistema de Banca de Desarrollo” Informe Abril 2013.
19
number of debtors of the national public banks from 72% in 2008 to 78% in 2011,
and in their total number of operations from 56% to 65% in the same period.25
In general, as it can be seen in Graph 2, the most important financial products
offered by banks to MSMEs in Latin America and the Caribbean have been loans
for working capital, leasing, discount on financial instruments, mortgage backed
loans, financial credit, and factoring.
GRAPH 2. Types of loans offered by banks to MSMEs in Latin America and
Caribbean (% of banks providing a product)
Source: InterAmerican Development Bank
 Students Loans
In Brazil, a nationwide student loans program (FIES-Financiamento Estudantil),
implemented by the Ministry of Education (MEC), was instituted in 200126 for
undergraduate students enrolled in private institutions, who cannot afford student
25
Banco Central de Costa Rica, op., cit. , p. 12
Law 10,260. The program finances 100% of students’ monthly payments during their entire schooling. Students from low-income
families are eligible for the program. Fies is only valid for registered courses and good grades on MEC’s evaluations. If students fail, they
can have their benefit revoked. The Fies debt only has to be repaid after students get their diploma. They are made up of monthly
payments plus 5% interest per year.
26
20
fees. Although Caixa Económica Federal absolutely dominated this market for
almost a decade, Banco do Brasil became its unique and fierce competitor in the
last years by grabbing up 49.5% of this market. Thus, Caixa financed 184,000
students in 2012 and its market share fell from 97% two years ago to its current
50.5%.27
 Credit and Debit Cards
These means of payments have been increasingly used in Brazil by consumers.
Both types of cards may be issued by banks or through/in association with major
retailers. The two main brands are Visa and Mastercard with relatively recent
entrants such as Hipercard and Elo. This latter banner was created to specifically
promote financial inclusion via access to electronic means of payments. In 2013,
credit cards reached 11.5 million in Elo, Mastercard and Visa banners with close to
276 million of transactions performed this year. Debit cards issued totaled 79.9
million in the referred banners with more than 799.5 million of transactions. Only
Elo debit and credit cards reached more than 13.3 million of issued units. The
holders of Caixa´s credit and debit cards transacted a financial volume of R$ 81.1
billion in 2013, implying a 34.3% annual increase28.
 Insurance and Pension Funds
The alliance between Banco do Brasil and Mapfre created the largest insurance
group on the Brazilian market -with approximately 25,000 points of sale (including
brokers and bank branches) and 25 million customers- mainly to boost the popular
insurance segment and to develop new business and improve operational
efficiency. In its first year of operations, the BB and Mapfre Group recorded more
than R$5 billion in premiums issued. It is leader in personal insurance, with a
market share of 19.2% and R$2.0 billion in premiums.
Crediamigo has also pioneered microinsurance in Brazil. Crediamigo has offered
life insurance (for clients and non-clients) since 2010 with 82.000 contracts.
Average premiums of R$25 cover insured values of R$3000 (US$1500) plus R$840
(US$420) of funeral assistance. In addition, monthly lotteries of R$1500 (US$750)
attracts attention in line with the popularity of lotteries among the poor.29
27
Valor International, “Banco do Brasil and Caixa fight for leadership in Student Loans”, article by Luciano Máximo, December 26, 2012.
Caixa Economica Federal, op. cit., page 9
29
Mettenheim, K., Diniz, E., and Gonzalez, L., op., cit.. p.7
28
21
In 2012, Banco do Brasil maintained its strategy of expanding and strengthening its
insurance, open pension fund and savings bonds business by launching increasingly
personalized modalities for different customer segments. In this respect, it
launched solutions such as BB Forestry Insurance, BB Coffee Farming Insurance and
BB Protected Inventory Credit Insurance.
Banco do Brasil is also the market leader in asset management for public employee
pension funds (RPPS), with a total of R$24.4 billion in assets under management in
December 2012. In the open supplementary pension plan segment Brasilprev
reached a balance of R$67.6 billion in managed portfolios, ending the year with a
market share of 26.0% in funds raised. In the case of closed supplementary pension
plans BB Previdência ended 2012 with assets of R$2.2 billion, 41 corporate plans,
54 sponsor plans, 2 plans instituted by class and sectorial entities with 77,000
participants. Also worthy of note was the increase of R$3.3 billion in the stock of
private pension funds under the private business model, with a current volume of
R$10.8 billion.30
 Factoring
This is a particularly important market for MSME financing since these firms are
typically more opaque and riskier and they ussually do not have adequate
collateral. Consequently, their access to financing is more restricted. Factoring
helps them overcome a number of constraints, allowing them access to short-term
financing, mostly for working capital.
Chile and Mexico are notable examples in Latin America where factoring services
have developed significantly in recent years where invoices can actually be traded
on organized exchanges or online markets. Public banks also play an important role
in this market. For instance, since 2001, the Mexican development bank NAFINSA
had run an online market for factoring services, called Productive Chains (Cadenas
Productivas). This bank provides reverse factoring services to SMEs through the
creation of chains between large buyers and their suppliers.31 This is currently a
relative large and growing program and it represents a significant share of the
factoring market in this country.
30
BB, Annual Report 2013, p. 33
Once a supplier delivers goods to the buyer and issues n invoice, the buyer posts an online negotiable document equal to the amount
that will be factores on its NAFINSA webpage. Participant financial institutions that are willing to factor this specific receivable post
their interest rate quotes for this transaction. Then, the supplier can access this informationand choose the best quote. Once the factor
is chosen, the discounted amount is transferred to the supplier´s bank account. The factor is paid directly by the buyer when the invoice
is due.
31
22
 Savings Accounts
These accounts have traditionally been a popular invetment vehicle in Latin
America in general an in Brazil in particular, because they usually have paid a
guaranteed, tax-free rate of return even during periods of economic instability.
Caixa´s savings accounts reached a balance of R$ 209.6 billion and it remained the
market leader with a market share of 35.1% while the number of its issued
accounts totaling 51.9 million as of December 2013.32
 Simplified Bank Accounts
Simplified current and savings accounts were authorized by the Central Bank of
Brazil in 200433 with the objective of improving the population´s access to financial
services at low cost. In practice, only state-owned banks –mainly through Banco do
Brazil (Conta Popular) and Caixa Economica Federal (Conta Caixa Fácil)- offer these
accounts even though private banks are also allowed to issue them.
These accounts can only be opened by individuals, should be the only account
owned by the individual in the financial system, can not have a balance above R$
2,000 or sum of deposits within a month exceeding this value, and should have
their funds withdrawn only through electronic cards. The required documentation
for the account opening -official ID proof plus the registration number at the
national tax agency- is simpler than the one needed for the opening of standard
bank account in this country. Alternatively, a registration number from the social
benefit programs is accepted in place of the required documentation and no proof
for income or residence is demanded.
Banks only charge for transactions exceeding certain limits34 and no maintenance
fees can be charged. The account is blocked any time its balance exceeds R$ 5,000.
According to the Brazilian Central Bank, simplified current accounts increased from
3.9 million in 2004 to 10.8 million in 2011 with an annual average growth rate of
15.7% and represented 7% of total current accounts in this country. In October
2011, the share of active accounts in the total stock of simplified current accounts
32
Caixa Management Report 2013, page 10
Resolution 3,211 of June 2004.
34
These monthly limits are: execution of four withdrawals; provisions of four bank account statements; and execution of four deposits.
33
23
reached 61.4%. In 2013, just Caixa administered 10.4 million of its Easy Accounts
(Caixa Fácil). This success has been primarily attributable to two factors: (i) the
government´s strategy to encourage the beneficiaries of income or social cash
transfers, such as those favored by the Bolsa de Familia35 program, to open these
accounts; and (ii) the significant growth in corresponding banking.
 Payments of Government Benefits
Some large and middle-income countries in Latin America –i.e. Brazil, Colombia,
and Mexico- have been pursuing the twin objectives of promoting financial
inclusion and electronic government payments (“G2P Payments”). In tandem, their
national regulators have also implemented some regulations to permit branchless
banking through nonbank agents and also facilitate the opening of low-value bank
accounts, by using tiers for the requirements of know your customer (KYC)
procedures36. In those countries, the payment providers have been exclusively
state-owned financial institutions: Caixa Economica Federal in Brazil, Banco Agrario
en Colombia y Bansefi en Mexico. Their mainstream financial instruments used for
this purpose have been Caixa Fácil accounts, debit cards, and savings, prepaid, or
passbook accounts, respectively, whose use imply differentiated charges, ranging
between 1.2% and 11.3%, of the average grant or individual transfer processed and
received.37
In particular, it is relevant to underscore that income transfer programs in Brazil
favoring people in a vulnerable social condition distributed about R$ 26.5 billion in
2013, totaling 181.2 million of paid benefits through Caixa. In addition, in the
context of programs favoring workers, Caixa paid 169.0 million of benefits, of
which 62.3 million were paid to retired employees and pensioners of the National
Institute of Social Security (INSS); 69.3 million distributed to Unemployment
Insurance (Seguro Desemprego), Salary Allowance (Abono Salarial), and Social
Integration Program (PIS); and 37.4 million associated to withdrawals from the
Severance Indemnity Fund for Employees (FGTS).
35
Bolsa Familia is briefly a government program of direct income transfer (with conditionalities) for families in poverty.
KYC refers to a set of due diligence measures undertaken by a financial institution, including policies and procedures, to identify a
customer and the motivations behind his or her financial activity. It is a key component of anti-money laundering and combating the
financing of terrorism regimes.
37
CGAP, “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries”, Focus Note 77, February 2012
36
24
 Bank correspondents
Several of the basic banking products and services previously described have been
progressively provided to people living in underserved urban areas, small towns,
and remote places via bank correspondents. In 2003, the Central Bank of Brazil
allowed nonfinancial or financial firms such as supermarkets, lottery shops
(correspondents for Caixa Económica Federal), post offices (initially being
correspondents for Bradesco and currently for Banco do Brasil), and pharmacies
act as bank correspondents38, which have been a critical factor in the supply of
banking services particularly to the poorer, less educated, and more likely to be
women, clearly suggesting that these agents are improving financial inclusion by
reaching underserved population.39 Moreover, these correspondents are actually
providing these financial services in every municipality of this country. This
successful model have been replicated by other countries of the region such as
Chile, Colombia, and Ecuador, among others.
The state-owned Caixa currently runs the largest network of correspondents in
Brazil and started its operations with them when it was chosen by the federal
government to be the agent to distribute social benefits. CEF then started a
partnership with lottery houses in 2000. Later in 2003, CEF started to set up
correspondents with commercial establishments in a program called Caixa Aqui.
As of December 2013, Caixa reached a network with more than 67.5 thousand
service points composed by 34.1 thousand correspondents Caixa Aqui and lottery
outlets, 29.4 thousand ATMs, and 4.0 thousand branches and banking service
points.40
Likewise, Banco do Brasil currently manages the third largest network of bank
correspondents in this country, after Bradesco. BB ended 2013 with 67,600 points
of service, comprising its own and shared network, as well as correspondents,
covering 99.9% of Brazilian cities. Its agents´ network, identified by the MaisBB
38
According to Central Bank Resolution 3,954 (February 2011), bank correspondents are allowed to perform the following services:
(i) - receiving and forwarding deposit account (demand, time, and savings) opening applications;
(ii) - receipts, payments and electronic transfers related to deposit accounts;
(iii) - receipts, payments and other activities related to agreements for the rendering of services by the contractor;
(iv) - execution of payment orders;
(v) - receiving and forwarding loan and leasing requests;
(vi) - receipts and payments linked to bills of exchange;
(vii) - receiving and forwarding credit card applications;
(viii) -exchange related transactions. If such operations involve purchase/selling of foreign currency, correspondents should be
financial institutions, tourism services providers, post offices or lottery houses.
39
Sanford, C. and Cojocaru, L., “Do Banking Correspondents improve Financial Inclusion? Evidence from a National Survey in Brazil”,
Bankable Frontier Associates, November, 2013.
40
Caixa Management Report 2013, p.4
25
trademark, counted on 10,251 points of services and establishments under
agreement, plus 6,189 points of the Banco Postal (Postal Bank)41
 Government guarantees42
The process of financial inclusion of credit-constrained for micro, small and
medium enterprises (MSMEs)43 in Latin America has also been strongly supported
by credit guarantee schemes mostly financed or capitalized by governments (90%
of them) and managed by state-owned development and commercial banks or
agencies. The public participation in these schemes has increased in recent years
particularly with the objectives of generating significant additionality and
becoming a critical supporting role particularly in the countercyclical stance
adopted by the regional state-owned banks during the last global financial crisis.
In Table 8,44 it can be viewed that there were eigthy three guarantee entities
operating in different countries of the region. Most of these entities (87%) that
manage guarantee systems are financial or assimilated institutions and then
subjected to financial regulation and supervision. The guarantees provided are
qualified and weighted for the 90% of the systems, so that it allows them to reduce
the capital and provision requirements for the lending banks.45
41
Banco do Brasil, Management Report 2013, p. 4
It is relevant to mention that a credit guarantee is not a product for MSMEs; it is a product for financial institutions to facilitate credit
to entrepreneurs in the best financial possible conditions given the coverage provided by the national guarantee system.
43
Some of these programs also offer guarantees to large companies such CORFO-PROGAIN and COBEX, both run in Chile.
44
The source of this table is Pombo P., Molina H., and Ramirez J., “A Guarantee Systems Classification: The Latin American Experience”,
Inter-American Development Bank 2013.
45
Pombo P., Molina H., and Ramirez J., op., cit, p. 11.
42
26
TABLE 8. Guarantee Systems and Entities in Latin America in 2010
The mechanism has been predominantly of portfolio guarantee, mostly ensuring
just the principal involved, and the evaluation usually delegated to financial
institutions. In 2010, The average for the maximum coverage stood 79.3%, the
mean for the maximum guarantee period was 106 months, the average guarantee
amount was US$ 40,344, the mean for the guarantee fee was 2.51% on the
amount covered per year and some entities charged no costs to MSMEs users, like
IMAS BANCREDITO from Costa Rica and SAGARPA-FONAGA from Mexico.46
Moreover, the guarantee payment has been often conditioned.
The positive contribution of these credit guarantee systems to financial access and
economic development in the region has been mainly reflected in the evolution of
their activities, the growing number of MSMEs asisted, and in their additionality
effect. Thus, the activity of the regional credit guarantee systems has grown
tenfold in the last decade and the average annual additionality47 reached 9.2% in
46
47
Pombo P., Molina H., and Ramirez J., op., cit, p. 23.
It is measured as the mobilized credit per year over permanent resources supplied by the public sector.
27
the period 2007-2010, showing a stable trend in the context of a turbulent world
economy and financial markets. Moreover, that additionality has been also
reflected in their contribution to gradually improve credit conditions and in the
reduction of the MSME´s financing costs.48
3. The Countercyclical Role of Public Banks in Latin America
State-owned banks in Latin America were usually instituted to promote economic,
social and financial development in general, and to overcome market failures and
gaps in the provision of access for underserved segments of the population and
MSMEs to financial products and services and in the financing of agricultural,
infraestructure, human capital investments, innovation, and long-term real
investments in strategic sectors in particular.
In addition, the recent global financial crisis evidenced the critical role assumed by
state-owned banks of this region in both offsetting the severe contraction in the
supply of loans from private banks in the assets side of their balance sheets and in
playing the role as a safe heaven, in their liability side, to receive and administer
massive retail and interbank deposits “flying to security”, thus creating a fire break
to mitigate contagion, and allowing them to have more stable lending activity
during crisis.49 These banks have also kept contributing to their countries´ financial
inclusion processes even during hard times, particularly reinforcing their related
programs and activities and by softening their financial conditions in terms of
interest rates and fees charged and maturities of the products offered.
In Graph 3, it can be observed that public financial institutions in the most
important economies of Latin America aggressively expanded their supply of loans
with the objective of compensating the “sudden stop” in the provision of credit by
private banks in their local markets in the first nine months of 2009. Among these
public institutions, the loan portfolio of the Development Banks in this region grew
70% between the end of 2007 and 2009 and the highest growth rates were
recorded by the Corporacion Financiera Nacional of Ecuador (174%), Agencia
48
49
Pombo P., Molina H., and Ramirez J., op., cit, p. 37.
Micco, A. and Panizza, (2006), “
“
28
Financiera de Desarrollo of Paraguay (128%) and Banco del Estado of Ecuador
(122%).50
GRAPH 3. Change in total loan supply: Public vs. Private Banks (in %)
Alternatively, the comparative dynamics of the real private-sector and publicsector bank lending in the years of the global financial crisis (2008-2010) can be
observed in Graph 4.
GRAPH 4 . Real-term private-sector and public-sector bank lending
(Index: first semester of 2008=100)
50
Luna-Martínez J., and Vicente C., “Global Survey of Development Banks”, The World Bank, Policy Research Working Paper 5969,
February 2012
29
To perform this countercyclical role, governments injected capital into their stateowned banks to roll over existing loans and provided new loans to MSMEs and to
exporters. Even more, in Brazil and Chile –through BNDES and BancoEstado,
respectively- a significant share of the increase in their loan supplies were
allocated to large nonfinancial enterprises to ensure a relatively stable operation
for the “chain of payments” within their economies and to provide them with a
required liquidity buffer given the great deal of uncertainty prevailing during the
peak of this global crisis. Loans from BNDES increased from R$160 billion (at 2005
prices) in September 2008 to R$277 billion in December 2010.51
Also, in Brazil, new liquidity lines were implemented by the Central Bank to allow
the state commercial banks –Banco do Brasil and Caixa Económica Federal- to
acquire ownership interest in private and public financial institutions with or
without the acquisition of their capital stock control.52
In Colombia, Bancoldex, the publicly owned second-tier bank53, focused its
countercyclical actions by increasing access to credit to MSMEs via supervised
financial intermediaries and then offering a variety of specific credit lines with
different terms of rediscount, interest rates, term, and uses for the funds.54 The
number of beneficiaries of Bancoldex´s lines of credit increased from 19,549 firms
in 2007 to 90,944 firms in 2009 with new 71,033 microenterpises accessing to
these resources via these formal intermediaries in that period.55 In addition, a
study carried out by the Inter-American Development Bank determined that credit
relationships involving Bancoldex funding were characterized by lower interest
rates, larger-sized loans, and loans with higher durations. These characteristics
translated into lower average interest rates, longer terms, and larger average
loans for firms that used Bancoldex credit. 56
In Mexico, national development banks provided short-term loans to wellestablished private sector firms and nonbank financial institutions with problems,
51
The World Bank, “Global Financial Development Report 2013”, p.106
The World Bank, op.cit., p. 106
53
Bancoldex started operating in 1992, initially to foster exports. In 2003, it merged with Instituto de Fomento Industrial (IFI), a
government agency with the broader mandate to promoteindustrial development. Bancoldex’ operations include second-tier banking,
as well as training and advising (these latter restricted to micro enterprises).
54
A full description of them is provided in Eslava, Meléndez and Maffioli (2012), “Second-tier Government Banks and Firm
Performance: Micro-Evidence from Colombia.” IDB Working Paper No.294. Inter-American Development Bank, Washington, DC.
55
Eslava, Meléndez and Maffioli (2012), “Second-tier Government Banks and Access to Credit: Micro-Evidence from Colombia”, InterAmerican Development Bank, p. 12
56
Eslava, Meléndez and Maffioli (2012), “Second-tier Government Banks and Access to Credit: Micro-Evidence from Colombia”, InterAmerican Development Bank.
52
30
both to refinance their debt and to mitigate the severe deceleration in private
bank lending. For instance, NAFIN granted a loan in the amount of $400 million
dollars to support Chrysler´s operations, a multinational auto-maker in this
country, in early 2010.57 Moreover, these public banks were also credited with
restoring operations in key markets such as commercial paper through special
guarantee programs extending Mex$71 billion (close to US$6.1 billion) in
guarantees as of June 2011 –about 20% of the total loan portfolio balance- and
each guaranteed peso induced Mex$2.8 in loans.58
In Costa Rica, public banks played a similar role during the crisis by keeping its real
loan growth stable for almost a year, while it was rapidly reduced by private banks.
This expansionary credit stance by public banks contributed to smooth this
country´s economic cycle given that these institutions managed at that time about
25% of GDP in credit to the private sector, about half the total credit to firms and
households.59 In addition, the three State banks agreed in May 2009 to provide
more flexible terms on loans to micro and small companies. In particular, they
postponed amortization payments for 24 months and increased loan maturities by
2 years.60
In Ecuador, the public banking sector started channeling a government´s stimlus
package providing major funding for housing and construction in 2009.61
Finally, it is relevant to underscore that public commercial banks also played a
countercyclical role through their liabilities side of their balance sheets by receiving
an important flow of demand and term deposits from the public and non-financial
corporations which were experiencing a “herd behavior” and flying to security,
away from private banks. This process was based on the public perception that
there was an “implicit full insurance” for their deposits provided by the
government via these public banks, which avoided a “deposit run” from the
banking system as a whole.62
57
58
Luna-Martínez J., and Vicente C., op. cit., p. 8
The World Bank, op.cit., p. 108.
59
IMF, “Heating Up in the South, Cooler in the North”, Regional Economic Outlook. Western Hemisphere. October 2010
Economic Commission for Latin america (ECLAC), “The Reactions of the Governments of the Americas to the International Crisis:
Follow up to policy measures adoptes up to 31 December 2011”, Santiago, April 2012.
61
ECLAC, op. cit., p. 49
62
See The World Bank, Financial Development Report 2013, pp. 101-128
60
31
PART II: PUBLIC POLICIES FOR FINANCIAL INCLUSION IN CHILE
1. Public Policies to promote financial inclusion in Chile
There is neither a national strategy or explicit public policies focusing in the promotion of
financial inclusion in this country up to now, which clearly differentiate Chile from other
countries such as Brazil and Mexico that have already designed and implemented those
strategies and policies already for some years. However, progress has been made lately in
terms of designing such national strategy and institutionalizing this process led by the
Ministerio de Desarrollo Social (“Ministry of Social Development”)63.
In fact, this process was formally initiated at the governmental level with the presidential
commitment declared in the G-20 Summit that took place in Los Cabos, Mexico, in June
2012, primarily in terms of establishing a high-level institutional coordinator to define and
manage a national agenda for financial inclusion and to develop an strategy for the
promotion of this public policy objective. Specifically, that would imply the performance
of several actions and activities such as64:




The development of a proposal for financial inclusion via a governmental
commission formed by representatives from the Ministries of Finance, Social
Development, Education, Labor, Economics, and the Central Bank.
The design of an strategic plan with specific targets to reach in the promotion of
access to and use of financial services;
The selection of instruments to regularly assess the impact of relevant public
policies; and
The engagment of public and private agents in this endeavor.
In particular, the strategic design and the National Agenda for Financial Inclusion would be
focused in the promotion of:65
(a) Access to financial services mainly via bank agents (´corresponsalías bancarias´);
(b) Use of these services primarily through electronic payments of fiscal subsidies via
´Chile Cuenta´. A subsidy of about US$ 1.5 could be granted to those beneficiaries
63
Gobierno de Chile, Ministerio de Desarrollo Social, “Inclusión Financiera en Chile: El Desafío de Diseñar una Política para Incluir a los
Grupos más Vulnerables”, 2014
64
Gobierno de Chile, Ministerio de Desarrollo Social (2014), op. cit., p. 10
65
Gobierno de Chile, Ministerio de Desarrollo Social (2014), op. cit., p. 16
32
opting for the electronic payment of their social benefits. This program is expected
to cover 1.6 million people mainly favoring those receiving Ingreso Etico Familiar
(´Family Ethic Income´), Subsidio Unico Familiar (´Family Unique Subsidy´), and
Pension Básica Solidaria (´Solidarity Basic Pension´);
(c) Financial Education primarily by including some specific courses at the elementary
and high-school levels; providing basic financial skills to diverse audiences via
programs offered by the Fondo de Solidaridad e Inversión Social (FOSIS),
Superintendencias de Bancos e Instituciones Financieras (SBIF) y de Valores (SVS),
and through partnerships with private agents like the Chilean Bankers´ Association
(ABIF) and mass media; and
(d) Financial Consumer Protection by improving the relevant regulation, enhancing the
capacities of the National Agency for Financial Consumer (´Sernac Financiero´), and
reinforcing the oversight of banking and non-banking institutions offering financial
services.
In a more schematic way, the strategic design for financial inclusion in Chile could be
visualized in the following graph:
GRAPH 5. The Chilean strategy for financial inclusion
Source: Gobierno de Chile, Ministerio de Desarrollo Social, 2014.
33
In the last two years, some progress has been achieved in this process of defining a
national strategy and implementing several activities for financial inclusion. To start with,
a specific definition of financial inclusion has been adopted in the following terms:
´We define Financial Inclusion as a process that allows all Chileans, especially the ones that
are more excluded, to access quality financial services that are adequate to their needs,
providing protection to families and opportunities in order to improve their life
conditions´66
In addition, the main actions carried out in this process have been:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
The establishment of a pilot program known as ´Chile Cuenta´ to promote the
electronic payment of fiscal subsidies for relatively poor people (June 2012);
The implementation of the First Seminar on Financial Education (December
2012);
The institutionalization of a Technical Secretariat to lead the design of a
National Agenda for Financial Inclusion (February 2013);
The implementation of the program ´Chile Cuenta´ (June 2013);
The realization of the Seminar ´Financial Inclusion: New Tools to Overcome
Poverty´ (July 2013);
The enactment of a decree setting a National Council for Financial Inclusion
(October 2013);
The issuance of a timetable for the definition of an Agenda for Financial
Inclusion (November 2013); and
The release of a First National Report on Financial Inclusion (December 2013).
Moreover, some important regulatory changes have been implemented in the last years
to directly and indirectly (via improving competition in the financial industry) promote
both financial inclusion and consumer protection. Firstly, all loan suppliers –banks,
insurance companies, cooperatives, cards issuers, and others- in Chile have been required
since 2010 to offer “universal standardized loans” in the retail segment of this market,
comprising housing and consumer loans, as well as credit cards, in order to both enhance
competition and allow customers to be able to compare and select the best option
available in the market.67 That standardization comprise the main financial conditions
embedded in these products such as amount, term, interest rates (fixed for the full term
66
67
Gobierno de Chile, Ministerio de Desarrollo Social, ´Financial Inclusion Strategy in Chile, 2013, p.2
Law 20,448 (August 13, 2010) and Decree Law 1,532 (April 27, 2011)
34
in the case of mortgages), obligation to publish the relevant “all-in-cost” linked to the
specific transactions, and the absolute freedom for the borrower to hire the required
insurances linked to these operations with the most convenient provider in the market. 68
Secondly, in December 2011, the Ley de Derechos de los Consumidores (Consumer
Protection Act) was amended to include provisions applicable to financial products and
services. Pursuant to this amendment, any agreement for financial products or services
between a bank and a customer must expressly provide for certain customer rights and
protections, including but not limited to (i) a detailed breakdown of all direct and indirect
charges, fees, costs and tariffs that form part of the price of the relevant product or
service, including any such charges, fees, costs and tariffs that are part of other products
or services simultaneously contracted; (ii) the events of default that may trigger a bank’s
right of early termination, a reasonable cure period and the manner by which consumers
are to be informed of any such early termination; and (iii) the customer’s right of early
termination in its sole and absolute discretion (subject to such customer’s payment in full
all of its obligations under the agreement, including any costs arising from such early
termination). In addition, the amendment sets forth certain additional customer rights
and protections, including, but not limited to the right to (1) receive information about the
total cost of any financial product or service, (2) be informed of the bank’s reasons for
rejecting a customer application for a financial product or service; and (3) be informed of
any non-discretionary conditions to which a customer’s access to a particular financial
product or services are subject. This amendment, also established a new dispute
resolution mechanism, which provides for both mediation and arbitration.
Thirdly, in February 2012, Law No. 20,575 (also known as Ley DICOM) was enacted in
order to restrict the use of private and personal economic, financial, banking and
commercial information of customers set forth in Law No. 19,628 on Protection of Privacy,
which is supplemented by Ley DICOM. This new law (i) provides that this information can
only be shared with established businesses and companies that engage in business and
credit risk assessment for use in connection with such risk assessments; (ii) prohibits the
request of this information in connection with recruitment for employment, admission to
preschool, grade school or higher education, medical attention or nomination for a public
position; (iii) requires distributors of personal information, if requested by the owners of
such information, for purposes other than credit process review, to certify solely overdue
obligations of such person; (iv) prohibits the sharing or reporting of information related to
any obligations that have been renegotiated, novated or remain outstanding in certain
forms as well as debts owed to toll road operators; (v) requires the distributors of
economic, financial, banking and business information maintain a registry of persons who
request such information, including the reason, date and time of the request; (vi) allows
the owners of any such requested information to access the registry, free of charge, every
four months, to verify such information for the last 12 months; (vii) imposes on the
distributor or other responsible party of such information the obligation to demonstrate
68
Servicio Nacional del Consumidor (SERNAC), “Guía de Alcance Juridicos Ley 19,496 Referente a Créditos Universales”, Ministerio de
Economía, Fomento y Turismo. 2012
35
compliance with Ley DICOM and (viii) prohibits disclosure by distributors of economic,
financial, banking and business information of unpaid obligations reported through
December 31, 2011, provided that the total debt registered by such debtor is for an
amount less than Ch$2,500,000, for capital, excluding interest, adjustments or any other
item.
Fourthly, in November 20, 2013, the Chilean Congress approved new legislation to reduce
the maximum rates that can be charged on loans. This new regulation is aimed at loans of
less than UF 200 (US$8,900) and with a term of more than 90 days, and thus includes
consumer loans in installments, lines of credit and credit card lines. Previously, the
maximum interest rate for these loans was calculated as the average rate of all
transactions undertaken within the banking industry over the previous month of loans of
less than UF 200 and with a term of more than 90 days, multiplied by a factor of 1.5.
Fifthly, in December 13, 2013, the Chilean Superintendency of Banks published the new
maximum rates for loans between UF 0 and UF 50 (US$2,220). The maximum rate was 6%
lower than the previous maximum rate, resulting in a new maximum rate of 47.91%,
compared to 53.85% as of September 30, 2013. Further reductions of 2% will be
implemented gradually every 12 weeks until the maximum rate equals the average
interest rate for loans between UF 200 to UF 5,000 (US$212,485) plus 21%, unless the
flow of new loans in the industry decreases by 10%-20%, in which case the reduction will
be partially or completely suspended until the next period.
Finally, a new bill is actually being debated in Congress to improve the protection of
financial consumers via both imposing the prohibition of the prevailing practice on the
capitalization of interests charged on past-due loans (or “charging interest over
accumulated interests”) in general, and setting specific limits on the amount of interests
and fees to be charged to past-due loans embedding acceleration clauses.69 However, it is
not clear that this bill, if enacted, may increase further the dynamics of the process of
financial inclusion in this country given its potential negative impact, at least in the short
term, on the supply of loans.
2. Progress in Financial Inclusion and Prevailing Gaps
Although no specific strategy or public policies for financial inclusion have been
implemented, Chile has achieved important progress in this area in the last decades
69
Marshall, E. “Presentación del Banco Central de Chile respecto del Proyecto de Ley que Modifica la Ley N° 18,010, Prohibiendo el
Cobro de Intereses sobre Intereses”, 20 de mayo de 2014.
36
becoming one of the regional leaders in the provision of access to and use of financial
services. Public and private financial institutions have played a key role in this positive
development, even though many challenges remain to be dealt with in the coming years
to keep reducing the prevailing gaps in terms of financial inclusion compared to the levels
actually reached by high-income countries, particularly for low-income families and
individuals.
Regarding access to and use of financial products and services, it is relevant to underscore
the sustained positive trend in the penetration of traditional banking products. In
particular, savings accounts, held for general and specific motives, have had an historically
leading role in the process of financial inclusion in Chile, whose total stock increased from
3.7 million at the end of 1985, to 14.6 million as of December 2013. Thus, an average of
71% of the adult population (15-years and older people) held a saving account in the first
quarter of 2013 while an average of 23% and 47% of the same demographic group held
savings accounts for housing and other motives, respectively. Moreover, the number of
savings accounts held by 10,000 adults increased from 13,211 in 2010 to 13,695 in 2012
and the average amount saved per account increased from US$ 1,212 to US$ 1,918.70
Nevertheless, there are significant differences in terms of access to these financial
products by income groups and between urban and rural population in this emerging
economy. According to the National Socioeconomic Characterization Survey (CASEN)71
carried out in 2011, just 13% of the first quintile or bottom fifth of the Chilean population
held savings compared to the 35% of the top fifth (see Graph 6).
70
Alarcón, C., Flores, C., Ormazabal, F., Vera, M., and Yáñez, A., “Indicadores de Acceso y Uso a Servicios Financieros: Situación en Chile
2013”, Serie Técnica de Estudios N° 013, Superintendencia de Bancos e Instituciones Financieras (SBIF), November 2013.
71
This survey was applied to 87,000 households in October 2011-January 2012 is implemented by the Ministry of Social Development
with the partaicipation and technical support from the Chilean National Statistics Bureau (INE), the University of Chile (Department of
Microdata) and UN-ECLAC. It includes a section on Financial Inclusion and Insurance and the relevant indicators are constructed by
considering the 18-year old population and older, which differ from the adult population considered by the Superintendency of Banks´
indicators. Further information may be obtained in Casen (2011), ´Manual del Investigador: Módulos aRegistro, Residentes, Trabajo e
Ingresos, Observatorio Social, Junio 2013.
37
GRAPH 6.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011.
The same survey clearly shows that urban population have relatively more access than rural
population to different savings products in the Chilean market, as it is usually the case in the rest
of Latin America. For instance, bank savings were kept by 9.6% of the urban population compared
to 6.5% of the rural population in Chile (See Graph 7)
GRAPH 7.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011.
38
With respect to bank loans, the total number of clients acceding to and using these
products increased from 1.2 million in 1985, to 5.1 million at the end of 2013.72
Accordingly, an average of 43% of the Chilean adult population held a bank loan in the
first quarter of 2013 while an average of 22%, 19%, and 13% of the same demographic
group held a credit card, a consumer loan in installments, and a line of credit linked to a
current account, respectively, in the same period.73 Moreover, mortgages and
government-guaranteed loans for higher education were held by 6% and 3%, respectively,
of the Chilean adult population in the first semester of 2013.
These results indicate a relatively lower degree of financial inclusion or penetration via
loans compared to savings accounts which mainly may be accounted for some restrictions
faced by and “risk aversion” from banks. This “loanable space” left by banks have been to
a large extent covered by the massive issuance of credit cards by nonbank and retail
suppliers, known as “casas comerciales”, which can be used in businesses directly related
or affiliated with the card issuers. More than 15 million of these cards have been issued by
casas comerciales as of October, 2013 and 4.9 million of them were used in transactions in
that month.74
In addition, there are other nonbank suppliers of financial services in the Chilean market
such as the loan & savings cooperatives and caisses de compensation. As of December 31,
2013, the total loan exposure by the former reached Ch$ 1,320 billion (US$ 2.5 billion)
while the number of loans held by the latter reached about 1.4 million and their aggregate
exposure was close to Ch$ 1,300 billion (US$ 2.5 billion). Other non-regulated suppliers of
microcredit, mainly NGOs, also participate in the Chilean financial, but their main
objectives are noncommercial.
In sum, the total share of nonbank providers on the households´ total indebtness reached
22.6% in the second semester of 2013. Mortgages and consumption loans represented
6.0% and 10.3%, respectively, of that total while the share of other debts was 6.3%,
including car loans and those provided by insurance companies. 75 Total loans provided by
these companies amounted Ch$ 75.8 billion with 90% and 7.1% of those being
consumption and commercial loans, respectively.76
72
Superintendencia de Bancos e Instituciones Financieras, “Información Financiera Mensual”, December 2013.
Superintendencia de Bancos e Instituciones Financieras, op. cit., p. 27
74
Superintendencia de Bancos, Información Financiera, www.sbif.cl
75
Banco Central de Chile, Informe de Estabilidad Financiera: Segundo Semestre 2013, Marzo 2014.
73
76
Superintendencia de Valores y Seguros, Estadísticas, web page.
39
Notwithstanding, there are also significant differences in terms of access to loans by
income groups and between urban and rural population in Chile. According to the
National Socioeconomic Characterization Survey (CASEN), there is a clear positive
correlation between average household income and access to loans from different
sources. In Graph 8, it can be observed, for example, that almost 74% of the Chilean
population in the top fifth quintile had access to credit if needed in 2011 compared to the
33% of the bottom fifth.
GRAPH 8.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011
Likewise, this survey also shows that urban population have had usually more access than rural
population to credit from different sources in the Chilean market. For instance, bank loans were
accessible to about 24% of the urban population compared to almost 16% of the rural population
in Chile , as it can be viewed in the graph below.
GRAPH 9.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011
40
Regarding means of payments, an average of 8 of every 10 adults in this country held one
of these financial products in the first semester of 2013. In particular, debit cards have
became a massive product, given their much lower relative cost and the specific activitites
and partnertships with bank agents (“Cajas Vecinas”) set by BancoEstado in the promotion
of financial inclusion, and thus rapidly increased their relative importance in the last years
to reach a coverage of 58% of that population while current accounts, the most traditional
bank product, were just held by 13% of them.77
In dynamic terms, debit cards increased from 1.8 million in 2000 to 16.5 million in 2013,
while current accounts grew from 1.3 million to about 3.4 million in the same period. The
number of active debit cards issued by BancoEstado, known as CuentasRUT, grew from 19
thousand in 2006 to 6.4 million in 2013, reaching a 44% share in the total number of debit
cards issued by the banking system, with its customers performing about 46% of their
transactions in the system’s ATMs, in 2013.78
Nevertheless, there are significant differences in terms of access to these financial
products by income groups and between urban and rural population. Based on the CASEN
Survey for 2011, it can be seen in Graph 10 that only 24% of the population in the bottom
quintile had access to payment means compared to the almost 71% of the top fifth.
GRAPH 10.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011
77
78
Alarcón, C., Flores, C., Ormazabal, F., Vera, M., and Yáñez, A. op.cit., p. 27
See BancoEstado´s 2013 Annual Report.
41
Similarly, this survey also evidences that urban population have had usually more access than rural
population to any of these means of payments available in the local market. For instance, as it is
shown in graph 11, debit cards were accessible to about 27% of the urban population compared to
12% of the rural population in Chile. This gap in access to credit cards issued by banks is even
larger measured in percentage points.
GRAPH 11.
Access to Payment means in rural vs urban places
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 201
Finally, access to both life and general insurance products have also increased significantly
in Chile particularly in the last decade, which it is reflected in the increase in the ratio of
insurance premiums collected over GDP, among a wide range of financial and activity
indicators. However, as it is viewed in Graphs 12 and 13, important gaps remain in the
relative access to these financial products by different income groups and between urban
and rural population.
42
GRAPH 12.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011
GRAPH 13.
Source: Gobierno de Chile, Ministerio de Desarrollo Social, Encuesta CASEN 2011
43
PART III:
BANCOESTADO´S CONTRIBUTION TO FINANCIAL INCLUSION, ECONOMIC
VALUE ADDED AND SOCIAL DIVIDEND
Corporate profile
BancoEstado is one of the oldest financial institutions in Chile, with its predecessor
starting operations in 1855, and is wholly owned by the Republic of Chile. Pursuant to its
Organic Law, this public bank operates as an autonomous entity and, like privately-owned
commercial banks in Chile, it is then subject to the oversight of the Superintendency of
Banks and must fully comply with the regulations of the Central Bank.
This bank´s vision is:
“a bank of excellence: commercial management with great social impact”
Its mission has been defined as:
“We exist so that every Chilean, anywhere, can develop and start new
initiatives”
Regarding its corporate governance, the Board of Directors oversees the Bank’s policies
and operations and it is composed of seven members: six members (including a chairman
and vice chairman) are appointed by the President of Chile by a supreme decree of the
Ministry of Finance. The seventh member, the Labor Director, is an employee
representative, chosen by fellow employees.
There are also some committees facilitating sound management and the main ones are:
the Executive Committe and the Assets & Liabilities, Audit, Operational Risk, and the AntiMoney Laundering & Anti-Terrorist Financing Committees. In particular, the Executive
Committee serves as the bank´s senior management and it is composed of the chairman,
vice chairman and CEO, as well as the General Counsel who participates without a right to
vote. The CEO is also appointed by the President of the Republic and responsible for
BancoEstado´s daily management.
44
According to the bank´s Organic Law, the powers of the Executive Committee extend to all
matters concerning its management & operation, adjusting its actions to the legal and
regulatory provisions and to policies and standards issued by Chilean monetary
authorities, its Board of Directors, and the Superintendency of Banks and Financial
Institutions.
With different degree of relative institutional importance assigned and success achieved
overtime, as well as coinciding with several of the principles defined in this Master
Program for a responsible banking institution79, BancoEstado´s main management
principles and objectives have been:
Universal, offer all of the mainstream banking services
Inclusive, target all population segments providing nationwide coverage
High Social Impact, give priority to activities and business initatives promoting access to
financial seravices and entrepreneurship
Customer-focused, provide top quality service
Promote competition, present in all segments, offering a broad range of products and
services, with competitive and convenient terms and prices for all its customers,
Profitable, achieve the averge return of the local banking industry
Efficient, control its expenses and improve efficiency ratio
Relevant, aspire to maintain its importance in the industry, particularly its market share
Modern, have first-class management, process and technology
Innovative, open new markets and look for new financial solutions to social problems
Social Responsibility, trnasmit values promoting savings and responsible spending and
borrowing
Ethical Management, apply meritocracy, as an employer who ensures equal opportunities
and non-discrimination on the basis of political, religious or gender preferences. Prohibit
nepotism and favoritism, promote job development and participatory management based
on technical conditions, and respect the role of unions
79
Laurie Dufays, “Financial Institution Roles and Responsibilities: Key Points for Responsible Banking”, World Savings Banks Institute and
Instituto de Estudios Bursátiles, 2013.
45
Respond to State Policies, contribute exclusively to government social spending by
capitalizing earnings, therefore not making donations, granting subsidies nor having
resources at its disposal for activities beyond its scope of business.
In terms of the scope of its businesses, BancoEstado is a leading full financial service
platform in Chile, actively involved in the main following activities:
 Traditional Commercial Banking
 Brokerage
 Asset Management
 Insurance Brokerage
 Micro-enterprise Financial Advisory
It offers then a wide menu of financial products and services, serves an extensive and
properly segmented customer base, and faces hard competition particularly from largescale foreign and local retail banks, which are briefly described in the next table.
TABLE 9. BancoEstado´s service menu, customer base and main competitors
46
Regarding its scale of activity and market positioning, BancoEstado is the third largest
financial institution in Chile in terms of aggregate loans, with a market share of 13.6%, and
the largest in terms of the number of customers and geographic coverage (in terms of
number of Chilean cities with a branch). As of December 31, 2013, this bank had total
assets, net of allowances for loan losses, of Ch$25,560 billion (US$48.7 billion), effective
net equity (which includes basic capital, subordinated bonds and voluntary reserves) of
Ch$1,082 billion (US$2.1 billion), demand and time deposits and other related liabilities of
Ch$18,370 billion (US$35.0 billion) and loans outstanding (net of allowances for loan
losses) of Ch$14,786 billion (US$28.2 billion).
This public financial institution is the market leader in Chile in residential mortgages (in
terms of the number of loans made), higher-education loans, consumer savings accounts
(in terms of the total amount of deposits), debit/ATM cards (in terms of transactions and
number of cards) and micro-enterprise banking (in terms of number of clients). In
addition, our brokerage subsidiary is the largest broker of securities currently traded on
the Santiago Stock Market in terms of volume traded, and our insurance brokerage
subsidiary is the third largest bank broker of insurance policies in Chile in terms of
commissions collected.
This bank is also used by a large number of Chilean public sector institutions for depositary
services, and it maintains the Chilean Treasury’s main operating accounts. However, it is
forbidden by the Chilean Constitution from lending to the Chilean government, any of its
instrumentalities or any state-owned enterprises. It is only permitted to lend to
employees of such instrumentalities or enterprises.
It is headquartered in Santiago, the capital of Chile, and have the most extensive network
of any bank in Chile with 359 branches, 100 special service points, 11,461 remote service
points (CajaVecina) and 2,347 ATMs located throughout the country as of DEcember 31,
2013. In addition, it had 1,886,970 internet banking users and a branch in New York to
serve corporate and public sector institution clients.
In terms of performance, this bank has historically been financially sustainable, solvent,
and relatively risk averse, with a significant share of its loan portfolio backed by
government guarantees. In 2013, BancoEstado had net income of Ch$115 billion (US$220
million), a before-tax return on equity (ROE) of 18.3%, a cost-income ratio of 58.7%, a
past-due loans/total loans ratio of 0.7%, and a Basel index of 11.1%.
Its before-tax profitability has been superior than the average ROE obtained by the local
private banks in several years (period 2004-2008 for instance, as it is shown in the graph
below). Nevertheless, this bank received a capital injection of US$500 million in 2009 to
play a countercyclical role during the global financial crisis, with both factors affecting the
level of its ROE in the following years, which has converged to the banking industry´s
average ROE in the last two years.
47
GRAPH 14. Comparative Pre-tax Return on Equity (ROE), in %
30%
BancoEstado
Sistema
20%
10%
18,3%
0%
02
03
04
05
06
07
08
09
10
11
12
13
This positive financial performance has allowed BancoEstado to pay dividends and income
taxes to the Chilean State for more than US$ 2 billion in the last decade, which has been
subject to a 40% Additional Tax rate on its accrued profits compared to private banks that
bear just an income tax rate of 20% and their shareholders pay personal income taxes only
on dividends received, so being granted an ilimited tax deferral and receiving a full tax
credit for taxes paid at corporate level.
In terms of credit risk borne by BancoEstado, it is relevant to underscore that this institution kept
in 2013 the best credit risk rating in Latin America granted by international rating agencies,
reinforced by its stable perspectives and in line with the rating allocated to the Chilean sovereign
debt and the performance of the domestic economy.
TABLE 10. BancoEstado´s international credit risk ratings
Rating Agency
(3)
Moody's
Fitch Ratings
(4)
Standard & Poor's
(5)
Short term
P-1
(1)
Long term
Aa3
(2)
Perspectives
Stable
F1
A+
Stable
AA-1
A-1+
Stable
(1) Debt in foreign currency, with a maturity equal or lower than a year
(2) Debt in foreign currency, with a maturity superior to a year.
(3) In November 2013, Moody's confirmed the bank´s short- and long-term ratings and its perspectives
(4) In May 2013, Fitch Ratings confirmed the bank´s short- and long-term ratings and its perspectives
(5) In August 2013, S&P confirmed the bank´s short- and long-term ratings and its perspectives
Source: Moody's, Fitch Ratings, Standard & Poor's.
Finally, with respect to its solvency, this bank has always maintained its Basel index –
measured as the ratio of effective net equity over risk-weighted assets- above the
minimum required (10%) in Chile for a bank of a similar scale or/and with affiliates abroad
and reached 11.25% as of November 2013, level relatively lower than the average kept by
the local banking industry. To a large extent, BancoEstado´s core capital has been
accumulated overtime mainly through retained earnings, which has allowed this bank to
48
allocate a growing and sustainable amount of these and other complementary resources
to its financial inclusion activities.
TABLE 11. Basel Index: BancoEstado vs Banking Industry
(in %)
15%
14%
BancoEstado
Sistema
13%
12%
11,25%
11%
10%
9%
8%
05
06
07
08
09
10
11
12
13*
Section 1. Overview of BancoEstado´s strategy and activities for financial
inclusion.
BancoEstado´s statutory mandate is to provide banking and financial services to the
Chilean population and firms with the aim of contributing to the country´s economic
growth and improving social welfare. Accordingly, this public bank has designed and
historically implemented, with different emphasis at different political times, a permanent
strategy for financial inclusion, being widely recognized in Chile for its leading role in the
promotion of this economic and social objective.
In particular, in order to encourage access to traditional financial services –mainly savings
and loans-, it has operated branches and service points in many remote locations that
have not been served by our private competitors. Thus, BancoEstado was the only
supplier of financial services via branches in 84 (out of a total of 346) municipalities,
mostly the poorest ones, in Chile in 2013.80 It has also developed a series of modern and
relatively cheaper products, offered through electronic channels of distribution, such as
the CuentaRut card (a debit card easily accessible by Chilean customers and with relatively
80
Superintendencia de Bancos, data as of August 2013.
49
few requirements), the CajaVecina (remote service points run by its agents or
corespondents which serve some of the most underserved and remote locations in Chile)
and several other banking services progressively extending the reach of banking services
to underserved populations. This bank also have a subsidiary designed to serve the
business needs of micro-enterprises.
This strategy has yielded a significant and growing contribution to the process of financial
inclusion in Chile and has been primarily focused in the following activities:
Firstly, this bank has historically lead the mobilization of financial resources for
development in general, and the promotion of family savings in particular. BancoEstado is
the absolute leader in term savings accounts with a market share of 86% in the total stock
of these savings managed by the banking industry and with more than 7.8 millions of
active clients as of December 2013. A 72% of these customers kept a balance of less than
Ch$10,000 (US$ 190).
GRAPH 15. BancoEstado´s market share in term savings accounts
(in billion of Ch$ and %, as of December 2013)
Resto
0,5
14%
BancoEstado
2,9
86%
Source: Superintendency of Banks
Moreover, this bank promoted savings habits among high-school students under its
program of financial literacy. ‘Ahorra tu sueño’ (´Save Your Dream´) is a program focused
in the promotion of savings among youth through the provision of basic financial training
at an early stage in life.
Secondly, BancoEstado has been the market leader in Chile in residential mortgages (in
terms of the number of loans made) and the main supplier of complementary financing to
low-income families, who receive a direct subsidy from the government, for the purchase
of their housing. Accordingly, as of October 2013, this bank´s market share in the debt
50
tranche up to UF 400 (US$18,228) was 99% while its participation in the debt range over
UF 3,000 (US$136,712) was just 2%.
GRAPH 16. BancoEstado´s share in the residential mortgages market
(% in total number of debtors, as of December 2013)
Resto
203
20%
BancoEstado
459
46%
Banco 4
84
8%
Banco 3
107
11%
Banco 2
151
15%
Thirdly, BancoEstado has also promoted the investment in human capital by lending the
necessary resources to those families who can not finance by themselves the college or
technical education of their young members, a critical factor in the endogeneous
economic growth dynamics of the Chilean or any economy according to Romer´s model81.
Thus, this bank held 30% of the total stock of these loans provided by the Chilean banking
system and one of every three loans granted for this purpose has been offered by
BancoEstado, as of September 2013.
GRAPH 17. BancoEstado´s share in the market for higher-education loans
(in thousands and % in total number of loans)
Resto
94
15%
Banco 4
61
10%
BancoEstado
195
32%
Banco 3
95
15%
Banco 2
172
28%
81
Romer, P. M. (1994). "The Origins of Endogenous Growth". The Journal of Economic Perspectives 8 (1): 3–22.
51
Fourthly, the development of microenterprises and SMEs have also been promoted by this
public bank. As of December 2013, it served 463,000 microenterprises, of which 70% were
active clients holding a loan or executing a financial transaction with this bank. BancoEstado´s total
exposure in this segment have been growing steadily in the last decade to reach Ch$666 billion
(US$1.3 billion) and a market share of 62% at the end of that year.
GRAPH 18. BancoEstado´s loans to microenterprises
(Ch$ billion of December 2013)
700
666
600
500
400
300
200
100
0
02
03
04
05
06
07
08
09
10
11
12
13
Likewise, this bank´s total loans to small and medium-sized firms amounted Ch$636 billion
(US$1.2 billion)and Ch$610 billion (US$1.1 billion)respectively, covering more than 13,000
and 2,300 active clients, as of December 2013.
Fifthly, BancoEstado has focused its strategy of financial inclusion in the massive provision
of electronic means of payments in the last years primarily to reduce transactions costs,
gradually create personal financial history for low-income people, and diminish
information asymmetries. Its leading instrument in this process has been the CuentaRut82
whose total number increased from 19,000 in 2006, when it was launched to the market,
to 6.4 million in 2013. Moreover, this bank provides 863,000 electronic check accounts
and then a total of more than 7 million debit cards reaching a share of 44% in the total of
these cards issued by banks . At the same, the average use of the Cuenta Rut increased
from 38% in 2009 to 73% in 2013 with a monthly average of 6 transactions per card.
82
It is a debit card allowing its holder to perform deposits, withdrawals, receive payments of wages, pensions and subsidies, pay utilities
and other services, and use ATMs. It is mainly intended for people with monthly income lower than Ch$200,000 (US$380) as of
December 2013.
52
GRAPH 19. BancoEstado´s active CuentasRut
(in thousands and % of use)
7.000
73%
6.000
63%
5.000
48%
4.000
50%
38%
6.426
3.000
5.309
4.204
2.000
2.262
1.000
0
19
612
06
07
2.881
1.236
08
09
10
11
12
13
The profile of these customers clearly reflect the contribution this mean of payment has
rendered for financial inclusion. The main socio-economic characteristics of them are:
–
–
–
–
-
54% of CuentaRUT holders have monthly income lower than Ch$200,000 (US$380)
26% live in rural zones or in farther places from urban zones.
73% do not have access to other financial product (or only has a savings account)
52% are women
59% do not have debt in the banking system
The transactions carried out by using CuentasRut are mainly managed through bank
correspondents known as ´Caja Vecina´ -small stores located in any rural or urban
neighborhood operating via a point of sale (POS) conduit- reaching a total of 11,461
associates as of December 2014.
53
GRAPH 20. Number of Bank Correspondents (´Cajas Vecina´)
12.000
11.461
10.000
8.000
6.000
4.000
2.000
0
05
06
07
08
09
10
11
12
13
Finally, this public bank has facilitated large-scale risk transferences mainly from low and
middle-income families to insurance companies through the intermediation of its affilliate
BancoEstado Corredora de Seguros S.A. that offer a wide range of policies and charge very
competitive fees in order to promote massive access to these financial products. This
affiliate company had intermediated 5.6 million of insurance policies for 2.6 million
customers and then providing access to this product to one for every 6 Chileans, as of
December 2013. Approximately 23% of these policies are linked to housing loans mainly to
hedge against the risks related to the debtor´s death, earthquakes, and fire. It had a
market share of 12% in the total premiums traded by these domestic banking and retail
brokers.
GRAPH 21. BancoEstado´s: Total insurance policies
(in millions as of December 2013)
6
5
Asociados a créditos de vivienda
Otros
1,3
4
3
4,3
2
1
0
2002 03
04
05
06
07
08
09
10
11
12
13
54
Complementing this strategy of promoting financial inclusion through extending access to
traditional and modern financial products and services, BancoEstado has also provided
basic financial literacy programs since 2011 to high-school students, customers, and
leaders of neighbors living in extremely poor conditions (´campamentos´)83. In particular,
this bank has promoted savings habits among high-school students under its program of
financial literacy named ‘Ahorra tu sueño’ (´Save Your Dream´). The focus in the
educational program for its customers has been to train them in responsible indebtedness
practices, budgeting, the importance of their savings, and the usefulness of different types
of insurances. Moreover, in a partnership with a private sector institution84, this stateowned bank has also implemented financial education programs to leaders of those
´campamentos´, representing 21,000 families distributed along the country´s 15 regions,
focused in means of payments, promotion of savings, budgeting, and other relevant
topics.
To end this section, it is relevant to underscore that the leading role historically played in
Chile by BancoEstado in the promotion of financial inclusion has been fully sustainable and
it shares to a large extent the three common elements of a ´socially driven bank´: (i) it has
not been an exclusively profit oriented, but instead it has adopted a ´dual bottom line´
business model (or a Stakeholder Value Ethos); (ii) it has kept a sort of ´social mission´,
which is partly product of their historical origin; (iii) ownership stakes cannot be sold in a
secondary market.85 Regarding the sustainability of this public bank in general, and of its
inclusion strategy in particular, it can be said that it has historically been profitable and
then paid dividends and income taxes to the Chilean State for Ch$1,201.0 billion in pesos
of December 2013 (US$2.3 billion) in the last decade, which have likely been allocated to
finance social expenditures.
More important, BancoEstado has served several millions of customers, with a diversified
menu of financial services and products, and provided access to those services to most of
the Chilean households and firms of every level of income and/or scale of production. In
sum, at the end of 2013, this bank served:
 7.8 million of clients with savings accounts
 6.4 million of active customers with CuentasRut (debit cards)
 1.9 million of internet users of services provided by this bank
 2.1 million of wages, pensions, and scholarships paid this institution
 1.0 million of credit cards holders
 2.6 million customers holding insurance policies intermediated by this bank
83
For more details on these programs see ´RSE:BancoEstado y el deafío con la educación financiera en el país”, www.bancoestado.cl
March 14, 2014.
84
The Corporación ´También Somos Chilenos´
85
See Laurie Dufays, op. cit., p. 8
55
 459 thousand customers with housing loans
 463 thousand microentrepeneurs served
 450 thousand customers with consumer or higher education loans
 425 thousand clients holding checking accounts
 863 thousand of customers using our electronic checking accounts
 675 public institutions
Section 2: BancoEstado´s contribution to economic and financial stability
BancoEstado´s commercial strategy has also had a transitory component materialized in
its countercyclical stance or role played during the last global financial crisis primarily
triggered by the ´sudden stop´ in the loan supply of the domestic private banks, as it can
be observed in the graph below, and to reinforce the impact of expansionary monetary
and fiscal policies implemented to stabilize the Chilean real economy and the financial
sector.
GRAPH 22. Net credit flows: Private banks vs BancoEstado (BE)
(US$ millions)
56
To reactivate the country´s credit channel and offset the severe contraction in the supply
of private credit, BancoEstado designed and implemented an innovative and successful
countercyclical strategy whose main characteristics and actions were:
 Focus on loan growth exclusively;
 Offer based on highly competitive effective interest rates, including the
anticipation of monetary policy rate cuts;
 Provide access to these financing facilities to all viable large, medium, and smallscale enterprises and to people from all socio-economic status;
 Set close alliances with real estate companies and some trading/industrial
associations; and
 Use all the loan guarantees offered by the Chilean government.
Accordingly, specific strategic targets were set for 2009 to mainly keep working the ´chain
of payments´ of the Chilean economy, continue its support to SMEs in hard times, provide
a liquidity buffer demanded by some large firms, and to minimize the credit risk derived
from these transactions. These targets were:
 Achieve an aggregate yearly loan growth of 13%, implying an additional supply of
credit for US$2.0 billion;
 Increase BancoEstado´s market share by 1.0 percentual point from13% to 14%
 Keep its level of credit risk under control by maintaining credit allocation standards
and maximizing the use of government guarantees.
 Improve service quality (reduce time for processing credit requests, for instance)
To implement this countercyclical strategy, the Chilean State carried out a US$500 million
capital injection –in four tranches- given that BancoEstado was facing a binding capital
restriction reflected in the fact that its capital adequacy (Basel) index had reached a level
close to the minimum required -10% of its risk-weighed assets)- at the end of 2008.
BancoEstado´s countercyclical strategy was successful in terms of both its positive
contribution to Chiles´s economic and financial stability and to keep performing its
permanent and sustainable strategy for financial inclusion even during severe global crisis
or slumps. Then, as it is shown in Graph 23, its total loans grew almost 22% in real terms
(adjusted for inflation), while private banks contracted their aggregate supply of credit
implying an increase in its market share from 13% in 2008 to 16% at the end of 2009.
Similarly, regarding commercial and industrial loans, the most important segment of the
57
Chilean banking market, this state-owned bank increased its loans 32% while the system
experienced a contraction of 3.5% (see Graph 24). BancoEstado´s growth dynamics in the
consumer loans and residential mortgages was also superior than its peers and the rest of
the commercial banks.
GRAPH 23. Yearly real growth rates in total loans: BancoEstado vs banking
industry (in %)
25%
20%
INDUSTRY
BANCOESTADO
15%
11,1%
10%
5%
4,3%
0%
-5%
Dc07 Jn08 Dc08 Jn09 Dc09 Jn10 Dc10 Jn11 Dc11 Jn12 Dc12 Jn13 Dc13
Graph 24. Yearly real growth rates in commercial and industrial loans:
BancoEstado vs Banking industry (in %)
40%
INDUSTRY
30%
BANCOESTADO
20%
10%
0%
6,8%
2,6%
-10%
Dc07 Jn08 Dc08 Jn09 Dc09 Jn10 Dc10 Jn11 Dc11 Jn12 Dc12 Jn13 Dc13
58
In tandem with BancoEstado´s increased growth dynamics of commercial and industrial
loans, the allocation of its new loans during this crisis had some bias favoring relatively
labor-intensive economic activities or those with higher economic multiplier effect in the
Chilean economy. Thus, in the period October 2008-October 2009, the main changes in
the share of some economic sectors on this bank´s total loans were: construction, from
18.4% to 21.9%; agriculture, from 2.1% to 3.2%; social & commercial services, from 6.0%
to 6.6%; and manufacturing, from 1.3% to 1.6%.
Moreover, a significant share of this bank´s new commercial and industrial loans in this
crisis was granted with the guarantees provided by FOGAPE (´Fondo de Garantías para
Pequeñas Empresas´) or/and CORFO (´Corporación de Fomento´)86 to minimize the credit
risk derived from these transactions. Thus, as of December 2009, BancoEstado´s share in
the total number of loans guaranteed by this Fund, which grew 117% that year, reached
43.3% for SMEs and 45.2% for large-scale firms.
Likewise, the participation of this public bank in the total number of new residential
mortgages supplied by the domestic banking system reached 62% in 2009. This important
increase in its supply of these loans was carried out to primarily keep financing the
investment in housing by low- and medium-income families, and to reactivate the real
estate sector of this emerging economy that had accumulated large inventories. Most of
these loans up to UF2,000 (about US$75,000) were granted under the guarantee from
SERVIU87, which increased its coverage from 80% to 90% of those exposures during this
crisis.
In effect, this widespread use of government guarantees and the preservation of the
bank´s standards for credit allocation allowed it to keep its aggregate credit risk and
related expenses under control. As it can be viewed in Graph 25, the ratio of provision
expense over gross operating income increased transitorily to over 20% in 2009, but it was
kept below the average level for the Chilean banking industry.
86
87
CORFO is a second-tier development bank operating under the Ministry of Economics.
SERVIU (´Servicio de Vivienda y Urbanismo´) is a public institution dependent of the Ministry of Housing.
59
GRAPH 25. Provision expense/ Gross operating income (%)
28%
23,7%
23%
20,4%
21,2%
18%
16,6%
14,9%
13,7%
15,2%
13%
ESTADO
SISTEMA
10,4%
8%
Jun08
Dic08
Jun09
Dic09
Jun10
Dic10
Jun11
Dic11
The pricing strategy underlying this countercyclical loan supply stance implied an
opportunity cost or sacrifice in terms of this public bank profitability, in addition to the
effect induced by the capital injection of US$500 million over these indicators. Then,
BancoEstado´s before-tax return on equity fell from 28.0% as of December 2008 to 11.2%
as of December 2009, breaking its historical trend of keeping its ROE above the industry´s
average, but has always remained positive and comparable to foreign public and private
peers.
GRAPH 26. Pre-tax Return on equity (ROE) (%)
28,0%
SISTEMA
25%
24,4%
23,2%
20,3%
17,7%
15%
15,9%
14,8%
BANCOESTADO
11,2%
Jun08
Dic09
5%
Dic08
Jun09
Jun10
Dic10
Jun11
Dic11
Moreover, in the liability side of BancoEstado´s balance sheet, it can also be verified a
positive liquidity effect for this bank induced by this crisis –which just replicated the same
60
event that took place under several previous financial or economic turbulences- given
that local depositors execute a ´flight to security´ given their perception or belief that
there is an implicit and full government guarantee for keeping their deposits in this stateowned bank. Accordingly, the balance of total deposits (demand plus term deposits and
savings) in BancoEstado had a yearly increase of 16.7% in the period January 2009January 2010 while those held in private commercial banks were reduced by 5.8%. Even
worse, term deposits and savings in the public bank grew 13.6% versus the 14.3%
contraction in the same resources kept at the private banks.88
In sum, the successful countercyclical strategy implemented by BancoEstado during the
global financial crisis, that also contributed to improve its own reputation or social
perception, evidenced that these public financial institutions in Latin America and
elsewhere may play a critical role in helping policymakers to stabilize both the real and
financial sector primarily by leading the process of ´credit easing´. Nevertheless, to
effectively render a meaningful contribution to stability, that public bank must be solvent
or well capitalized, have a relevant size or market position, be profitable and operate
efficiently, and keep all its more significant risks (credit, market, operational, and
reputational) under control.
The effective contribution of BancoEstado to economic and financial stability has been
recognized internationally. For instance, Franklin Allen, Nippon Life Professor of Finance
and Economics, Wharton School, University of Pennsylvania, argues that“public banks may
enjoy an advantage over private banks in times of crisis and, hence, their merits need to
be reassessed.” He goes on to say that “the real advantage would come when there is a
crisis. Rather than having central banks intervene in commercial credit markets, where
they have little expertise, the state-owned commercial bank can temporarily expand its
role both in terms of assets and loans. This should considerably improve the functioning of
the economy and overcome credit crunch problems.”
“The financial system can be safeguarded during times of crisis through amixed system
with mostly private banks but one or two are state-owned commercial banks. They would
compete with private banks in normal times to ensure a competitive cost structure and
prevent corruption, and they would provide useful information to regulators by signaling
excess risk-taking or exercise of monopoly power by private banks. However, their real
advantage would become evident during a financial crisis. State-owned commercial banks
would be a safe haven for retail and interbank deposits, act as a fire break in the process
of contagion, and provide loans to businesses—particularly small and medium size
88
Superintendency of Banks, Información Financiera, www.sbif.cl.
61
enterprises—through the crisis. They could expand and take up the slack in the banking
business left by private banks. Listing such banks will ensure full information on them is
available and their stock prices will indicate how well they are performing.”
“Public banks can play another important role in increasing access to financial services. If
the government wishes it to pursue this agenda then it may be helpful to subsidize this
kind of activity. In many European countries in the nineteenth and twentieth centuries,
the post office provided access to savings accounts and other kinds of financial services
that many customers would not otherwise have had. A good example of a public bank that
plays these roles is Chile’s BancoEstado, which is entirely owned by the Chilean
Government. It is the country’s third largest lender and operates in all major segments of
the banking market. The fact that it has to compete with private banks ensures it is well
run. BancoEstado also has a long history of promoting access in all parts of the country
and to all people. Many other countries might benefit from this type of bank”. 89
Section 3. The Single Composite Index of BancoEstado´s contribution to
financial inclusion.
Composite indexes at a macro and micro level are being widely defined and used by
multilateral institutions –i.e. the International Monetary Fund (IMF), The World Bank, and
United Nations-, academicians, regulators and policymakers around the world for
different multidimensional measures –for instance, the well-known development
indexes90 – in general, and for measuring financial inclusion, in particular.
Regarding financial inclusion, several multilateral organizations91, universities, and
academicians have been lately computing composite indexes to compare the extent of
this process across different economies and to monitor their absolute and relative
89
The World Bank, Rethinking the Role of the state in Finance, in Global Financial Development Report 2013 (Chapter 3: Direct State
Interventions, page 116).
90
The most well-known composite indexes used are the Human Development Index (HDI), Human Poverty Index (HPI), Gender-related
Development Index (GDI), and Gender Empowerment Index (GEM). There are many other composite indexes used by several
organizations such as the Composite Indexes of Leading Indicators computed by U.S. Conference Borad and OECD, the Global
Dynamism Index, the Composite of the State of the Economy Index run in Israel, and the WEF´s Composite of Competitiveness
Indicators just to name a few of them.
91
SeeAmidzic, G., Massara, A., and Mialou, A., “Assessing Countries´ Financial Inclusion Standing: A New Composite Index”, IMF
Working Paper WP/14/36, February 2014; and Demiguc-Kant, A. and Klapper, L., (2012), “Measuring Financial Inclusion: The Global
Findex Database”, World Bank Working Paper 6025, Washington D.C.
62
evolution and progress rendered over time by the policy inititatives undertaken to
promote this policy objective. In particular, these composite indexes are being used to
measure financial inclusion at different time points and at different levels of economic
aggregation (village, municipality, province, state, nation and so on).
There have been attempts in the literature to measure the extent of financial inclusion
that can be used for making cross country comparison92. For example, Honohan93 used an
econometric approach to estimate the proportion of households having access to formal
financial services for many countries. More recent attempts have employed this
econometric approach to come up with a measure of financial inclusion 94. Policy makers,
on the other hand, use a variety of indicators of banking sector outreach to take stock of
the status of financial inclusion95. Both these approaches – the econometric approach and
the use of a variety of financial sector outreach indicators – provide valuable information
on particular aspects of financial inclusion; however both approaches suffer from certain
shortcomings that have been discussed by different authors.96
As an alternative measure of financial inclusion, devoid of those shortcomings, has been
proposed and computed a multidimensional index based on macroeconomic data on
banking sector outreach –mainly extracted from the IMF´s Financial Access Survey (FAS)
database- incorporating information on three basic dimensions of an inclusive financial
system such as: banking penetration (accessibility), availability of the banking services,
and usage of the banking services.97 The weight assigned to the first dimension in the
construction of this composite index is twice the one allocated to each of the other two
dimensions, as it is considered that banking penetration is the primary indicator of
financial inclusion.
This financial inclusion index (IFI) was computed for 94 countries for the years 2004-2010
and classified them into three categories –high, medium, and low-IFIs countries- according
to the values of their own indexes indicating that these economies around the world have
reached different stages of financial inclusion and evidencing a general improvement
92
One of the first efforts at measuting financial sector outreach across countries was done by Beck, T., Demigurc-Kunt, A. and MartinezPeria, M., “REaching Out: Access to and use of bancking services across countries” Journal of Financial Economics, Elsevier, Vol. 85, pp.
234.266
93
Honohan, P. (2008) Cross-Country Variation in Household Access to Financial Services. Journal of Banking and Finance 32: 2493-2500
94
Ardic, O. P., Heinmann, M. and Mylenko, N. (2011), Access to financial services and the financial inclusion agenda around the world.
Policy Research Working Paper 5537, The World Bank.
95
See yearly report on the trend and progress of banking in India by Reserve Bank of India, and also the Financial Inclusion indicators
developed by Superintendency of Banking, Insurance Companies and AFPs (SBS) of Peru cited in Reyes, G., Cañote, L. D. A. and Mazer,
R. (2010), Financial Inclusion indicators for developing countries: The Peruvian Case. Working Paper of SBS, Peru and CGAP.
96
See Sarma M. (2010) Index of Financial Inclusion. CITD Discussion Paper 10-05, among other authors
97
Sarma, M., ( 2012) , Index of Financial Inclusion – A measure of financial sector inclusiveness, Centre for International Trade and
Development, School of International Studies, Jawaharlal Nehru University
63
towards more inclusive national financial systems over time. Thus, the average IFI
improved from 0.373 in 2004 to 0.478 in 201098 and it could then be expected these IFI
values to improve further for all countries over the years.
While low and lower middle income countries dominate the low-IFI countries, the
medium-IFI countries are dominated by upper middle and high income countries. Most of
the high IFI countries are also high income countries. Thus, financial inclusion and income
levels tend to move in the same direction, although there are some exceptions. One of
those exceptions is Chile that had significant improvements in its IFI values, among other
emerging economies, given it belonged to the medium IFI category in 2004 and over the
next four to five year has moved to the high IFI category, leading the process of financial
inclusion in Latin America. However, policymakers and financial institutions in this region
will have to grant a higher priority and allocate a significantly growing level of economic
resources to the promotion of financial inclusion, particularly given the close relationship
between financial development and economic growth and also to progressively close the
huge gap in this area kept with industialized countries.
TABLE 12. IFI VALUES FOR LATIN AMERICAN ECONOMIES
-------------------------------------------------------------------------------------------------------------------Country
2004
2005
2006
2007
2008
2009
2010
Argentina
0.183 0.195 0.207 0.226 0.229 0.238 0.252
Brazil
0.309 0.291 0.299 0.315 0.331 0.341 0.354
Chile
0.477
0.485 0.542 0.583 0.637 0.660 0.688
Colombia
0.322
0.349 0.375 0.380 0.398 0.415 0.397
Mexico
0.380 0.430
Peru
0.190 0.167 0.201 0.221 0.268 0.299 0.362
Ururguay
0.214 0.237
----------------------------------------------------------------------------------------------------------------------Spain
0.856 0.898 0.914 0.935 0.945 0.952 0.951
United Kingdom
0.957 0.949 0.988 0.983 0.964 0.953 0.949
Source: Sarma, M., ( 2012) , Index of Financial Inclusion – A measure of financial sector inclusiveness, Centre for International Trade
and Development, School of International Studies, Jawaharlal Nehru University
A significant share of Chile´s progress achieved in terms of financial inclusion in the last
decade –evidenced to a large extent in the trajectory or trend of the composite IFI
98
Sarma, M., ( 2012), op. cit., p. 32.
64
analyzed previously - may be explained for or attributed primarily to the strategy and
activities historically carried out by BancoEstado focused in the provision of access to
financial products and services to relatively lower-income families and micro and small
firms, being widely recognized as the leading institution in the promotion of this objective
in this country.
To quantify BancoEstado´s global or aggregate contribution to financial inclusion in Chile,
this work proposes and computes just a one-dimension composite index to particularly
assess the evolution of its penetration or the size of its ´banked´population in the period
2005-2013, given the data and time constraints to fully replicate the three-dimensional
composite index analyzed before. However, the author is well aware that a measure of
financial inclusion based on the proportion of “banked” adults, only gauges one aspect of
financial inclusion - access to financial system- and ignores other important aspects, such
as availability and usage of financial system. While access to financial institutions is the
primary dimension of financial inclusion, an inclusive financial system is also the one in
which financial services are adequately available and are adequately utilized.
Based on the methodology set in the OECD´s Manual99 for the construction of composite
indicators, this one-dimension index for financial inclusion is built by using a distancebased approach100 which requires a-priori fixing the value for its upper limit (Xi) and a
lower limit for the relevant dimension –in this case, the population acceding to
BancoEstado´s financial services- so that this index is normalized to have values between 0
and Xi. While one can safely choose 0 as the lower bound for this dimension, it is not so
easy to fix the upper bound for it, since theoretically it is not realistically possible to arrive
at a ‘maximum’ or even an ‘optimum’ level of achievement for a dimension of financial
inclusion in the particular case of a public bank. Analytically, and using an objective and
straightforward methodology, the empirically observed highest value of a dimension can
be considered as the upper limit for it.
Nevertheless, this index for BancoEstado´s assumes an upper limit in terms of achieving a
financial inclusion target in its provision of effective access to four basic banking products
–a saving account, loan, mean of payment, and insurance- equivalent to either 50% or
75% of the Chilean adult population (15 years and older) and of the universe of formal –
excluding informal- micro and small firms in the period 2005-2013. These targets seem
mainly justified given the large share private banks keep in the domestic financial markets
99
OECD/JRC (2008), Handbook on constructing composite indicators. Methodology and user guide. OECD Publisher, Paris.
This index satisfies the required mathematical properties of boundedness, unit free measure, homogeneity, and monotonicity. For
further details see Sarma (2012), op. cit., p. 14
100
65
and by the fact that this public bank should primarily focus its resources and financial
inclusion activities in both the less well-off families and low-scale enterprises.
Regarding the weigths allocated to the variables included in this composite index –i.e.
number of customers effectively acceding to those basic products in BancoEstado during
the referred period-, there are several criteria that may be used for the assignment of
these weights to them which define a wide range of levels for this index, although its
trend is clearly upwards by any of these weighting alternatives.101
Nevertheless, it has been decided to calculate the composite index for this public bank
assigning equal weights to the variables included, so replicating the case for most of the
UNDP´s indeces and also for the composite indices actually used and proposed for
financial inclusion measurement by several authors.102 The main argument supporting this
approach is that assigning equal weights to all variables and dimensions leads to the
consideration that all individual variables contribute equally to the index. As a result, each
normalized variable is implicitly considered as constituting a specific dimension103.
The next tables show the evolution of this composite index for BancoEstado evidencing its
increased contribution to the access of the Chilean adult population to basic banking
products and services. Under the first scenario, assuming that its global target for financial
inclusion is to provide those services to half of the Chilean adult population, the value of
this index increased from 0.370 in 2005 to 0.651 in 2013 evidencing both that access to
savings accounts reached the bank´s target and the remarkable and rapid expansion in its
provision of electronic means of payments through CuentasRut particularly to lowerincome families. The correlation coefficient between this one-dimension index for
BancoEstado and the three-dimension IFI index computed for Chile reached 0.92 for the
relevant period, confirming the highly positive contribution of this public bank to the
process of financial inclusion in this country, although this is not a proof of the existance
of a causal relationship.
101
It is relevant to underscore that a higher weight is usually allocated to banking penetration or access In three-dimensional financial
inclusion indexes. See Sarma (2010, 2012).
102
For instance, Sarma (2008), “Index of financial Inclusion”, ICRIER Working Paper 215; and Chakravarty, S. and Rupayan, P. (2010),
“Measuring Financial Inclusion: An Axiomatic Approach”, Indira Gandhi Institute of Development Research, Working Paper N° WP
2010/003.
103
SeeAmidzic, G., Massara, A., and Mialou, A., op. cit., p. 15.
66
TABLE 13.
ESCENARIO 1: HALF OF THE CHILEAN ADULT POPULATION SHOULD BE SERVED BY
BANCOESTADO
2005
2006
2007
2008
2009
2010
2011
2012
2013
0,370
0,382
0,415
0,459
0,517
0,550
0,610
0,647
0,651
In an alternative scenario, assuming a higher financial inclusion target for BancoEstado,
the value of its composite index increased from 0.298 in 2005 to 0.499 in 2013 reflecting
the relatively greater distance between its provision of effective access to their basic
products and its more challenging target in terms of outreach, even though the trend of
this index remains unchanged. Nevertheless, the correlation coefficient between this onedimension index for BancoEstado and the three-dimension IFI index computed for Chile
stayed at a high level (0.82) for the relevant period.
TABLE 14.
ESCENARIO 2: 75% OF THE CHILEAN ADULT POPULATION SHOULD BE SERVED BY
BANCOESTADO
2005
2006
2007
2008
2009
2010
2011
2012
2013
0,298
0,306
0,300
0,331
0,372
0,389
0,429
0,470
0,499
These positive results and the important contribution of BancoEstado to the country´s
financial inclusion process were ratified by using an alternative and more basic approach –
i.e. without neither considering OECD´s methodology or setting specific targets for this
bank in this regard- throughout the computation of a single composite index –including
its main sub-indices grouped by similar types of products- by allocating different weights,
based on different criteria and fixed for the period 2007-2013, to the number of
customers with effective access to a wide menu of its products and services over time.104
104
The main products considered were: passbook savings, current accounts, electronic cheking accounts,
CuentasRut (debit cards), credit cards, residential mortgages, consumer and educational loans, loans to
micro and small firms, and insurance policies.
67
All of these single indices evidenced a clear upward trend in that period, although with
significant variances in their absolute and relative levels depending on the different
weights assigned to the same variables included in each index. In the table below, it can
be observed that the largest difference in level is between Index 1 -whose weights are
allocated based on the share of the specific activity linked to each product in the bank´s
total assets dedicated to financial inclusion activities- and Index 4, in which the weights
are assigned as a function of the relative importance of those activities on total operating
income generated by the cluster of products related to financial inclusion. In between, the
indices 2 and 3 are quite similar in the evolution of their levels, applying equal weights
under the former -like UNDP´s indices- while the weightage distribution utilized in the
latter was defined by an international panel of experts in the field of banking,
academicians and researchers.105
TABLE 15.
Comparative composite indices (Base 2007=100): Different weights to same variables
2007
2008
2009
2010
2011
2012
2013
index 1
100,00
104,00
109,26
110,73
113,83
115,84
119,79
Index 2
100,00
107,67
115,50
118,42
124,72
133,19
138,29
Index 3
100,00
106,94
115,19
118,40
125,53
132,77
139,18
Index 4
100,00
110,21
123,24
129,79
142,64
155,84
162,62
To conclude this section, it is important to emphasize that there is a great correlation
between Chile´s progress in the financial inclusion field and the contribution made by
BancoEstado through the provision of massive and preferential access to its basic products
and services particularly to relatively lower-income families and micro and small firms in
the last years, whatever the composite index is used to measure this progress.
105
CUSAT Department of Applied Economics, (2010), “Financial Inclusion of fisher households and role of
microfinance”, p. 170
68
Section 4. The measurement of the Economic Value added (EVA) generated
by BancoEstado
Aside from its direct contribution to financial inclusion –i.e. social dividend or value added
for its stakeholders-, this public bank has regularly generated an economic profit or value
added for its owner –the Chilean State- also supplementing its regular payments of high
income taxes106 and annual dividends, resources that could have been allocated to a large
extent to finance government´s expenditures in the social sector.
In recent years banks increasingly have adopted innovative performance metrics such as
risk-adjusted return on capital (RAROC) and economic value added (EVA).107 These
innovative measures all share as a basis the concept of economic profit, rather than
accounting earnings. By forcing line managers to include the opportunity cost of equity
when making investment and operating decisions, banks expect to elicit better decisionmaking by managers. By implementing performance measurement and incentive systems
driven by economic profit and allocated equity capital, senior managers also hope to align
managerial behavior more closely with the interests of shareholders.
Economists and accountants differ on the proper definition of profit. To the accountant,
profit is the excess of revenues over expenses and taxes and is best measured by earnings.
To the economist, earnings fails to include an important expense item, the opportunity
cost of the equity capital contributed by the shareholders of the firm. A firm earns
economic profits only to the extent that its earnings exceed the returns it might earn on
other investments. Thus, earnings will always exceed economic profits, and a firm can be
profitable in an accounting sense yet unprofitable in an economic sense.
This conceptual difference has important practical implications. If managers attempt to
maximize earnings (or growth of earnings) rather than economic profit, they will invest
additional units of equity capital so long as the marginal contribution to earnings is
positive. But if they do so, the marginal contribution of the last unit of equity capital will
106
This public public bank in Chile is subject to an additional income tax rate of 40%, which it is not applied to private banks. Then,
caeteris paribus, there is a tax discrimination that significantly affect the potential capacity to growth and competitiveness of this public
bank.
107
For instance, these EVA computations have been practiced for large Chinese and Indian public banks. See
Xin, Z, Tin, W. and Yuan Z, “Economic Value Added for Performance Evaluation: a Financial Engineering”,
Systems Engineering Procedia 5(2012), pp. 379-387; Chartered Global Management Accountant (CGMA),
“Economic Value Added Adoption in China´s State-Owned Enterprises: A case of evolutionary change” 2013;
and Raiyani, J. and Joshi, N. “EVA Based Performance Measurement: A case study of SBI and HDFC Banks”,
Management Insight, Vol. VII, N° 1, June 2011, pp. 31-43
69
be zero and less than its opportunity cost, and the average return to equity capital may be
greater or less than its opportunity cost depending upon how much equity is used. In
contrast, a manager who maximizes economic profits will add units of equity capital only
until the marginal contribution of capital is equal to its opportunity cost, and the average
return to equity capital will equal or exceed its opportunity cost. As a result, firms that
make business decisions without explicitly incorporating the opportunity cost of equity
will be inefficient users of equity capital, engaging in investment projects that generate
low returns to shareholders.
Alternatively, Including a cost for the use of equity capital sets EVA apart from more
popular measures of bank performance, such as return on assets (ROA), return on equity
(ROE) and the efficiency ratio, which do not consider the cost of equity capital employed.
As a result, these measures may suggest a bank is performing well, when in fact it may be
diminishing its value to its shareholders.
Consequently, banks and nonfinancial companies have addressed this issue by
incorporating an explicit opportunity cost of equity into their decision processes. In
particular, a number of banks have incorporated a measure of economic profit in three
key areas: strategic decision-making, product pricing, and performance evaluation and
incentive compensation.
Accordingly, the EVA system108 is built on the concept of economic value added, defined
as the excess of adjusted earnings or return over the opportunity cost of capital involved.
In practice, it is calculated as a firm’s “net operating profit after taxes” (NOPAT)109 minus
a dollar cost for the equity capital employed by the firm. The dollar cost of equity capital
employed by a firm is equal to the firm’s equity capital (reported on its balance sheet)
multiplied by a percentage return that the firm’s shareholders require on their
investment. Expressed as a formula:
EVA = “Net Operating Profit After Taxes” – (Equity Capital x % Cost of Equity Capital)
108
EVA is a registered trademark of Stern Stewart & Co., a global consulting firm, that launched it in 1989. Stern Stewart identified
over 160 potential adjustments to the GAAP definition of net income that it believed result in a better reflection of economic earnings.
For banks, there are four major adjustments: using actual net charge-offs rather than the loan provision, using cash taxes rather than
the tax provision, excluding unrealized securities gains and losses, and considering nonrecurring events as an adjustment either to
earnings or capital, on a case-by-case basis. See Uyemura, Kantor, and Pettit (1996), “EVA For Banks: Value Creation, Risk Management,
and Profitability Measurement.”Journal of Applied Corporate Finance, Summer, vol. 9, no. 2. pp. 94 –113.
109
Stern Stewart & Co.’s use of the word “net” refers to adjustments needed to make a firm’s after tax net income more representative
of the current economic realities of that firm.
70
A positive EVA reflects that the firm is increasing its value to its shareholders, whereas a
negative EVA reflects that it is diminishing its value to its shareholders.
Regarding the methodology for calculating EVA, the first step is to make adjustments to a
firm’s net income in order to compute its NOPAT. For banks, there are four major
adjustments: using actual net charge-offs rather than the loan loss provision, using cash
taxes (effectively paid) rather than the tax provision, excluding unrealized securities gains
and losses, and considering nonrecurring events as an adjustment either to earnings or
capital, on a case-by-case basis110.
The second step consists in computing the dollar cost of equity capital employed by a
bank which is equal to its equity capital –oftenly quantified by its core or Tier 1 capital,
although some authors also include the bank´s Tier 2 capital-111 multiplied by the return
required by its shareholders on their investment. This return or cost of equity is usually
derived on the basis of the Capital Assets Pricing Model (CAPM) which is a function of
three factors: (i) a relevant risk-free rate –i.e. in practice the interest rate that can be
obtained by investing in an investment with no risk such as short-term government bonds; (ii) a beta coefficient –i.e. the level of risk inherent in investing in a specific company
relative to investing in the overall stock market; and (iii) a market risk premium –i.e. the
risk associated with investing in the stock market as a whole.112
Alternatively, if it is considered that the capital employed by the Bank comprises both its
Tier 1 and Tier 2 capital, then the opportunity cost of this capital should be computed by
using the bank´s weighted average cost of capital (WACC) and the NOPAT should be
adjusted accordingly deducting interest payments on the balance of subordinated bonds
issued by the bank in the relevant period.113
Based on these two methodological alternatives and using the information of
BancoEstado´s financial statements -published in its annual report in its corporate web
site-, the estimation of this bank´s EVA for 2013 yielded the following results:
110
For further details on the rationality of these adjustments see Uyemura, Kantor, and Pettit (1996), op. cit.
Chile is still applying Basel I Accord and then Tier 2 capital basically comprises subordinated bonds of at least five-year term limited
to 50% of the bank´s core capital plus a low-percentage of allowances for loan losses.
112
For further details on CAPM see Copeland, T. and Weston, F. Financial Theory and Corporate Policy, Addision Wesley, any edition
113
For more details, see Copeland, T. and Weston, F. Financial Theory and Corporate Policy, Addision Wesley, any edition
111
71
Option 1: Considering just BancoEstado´s core capital114
NOPAT
COST OF CAPITAL 116
EVA
In Ch$ billion
(US$ million)115
227,3
433.4
10.52%
69.6
132.7
This computation shows that BancoEstado also generates significant positive value added
for the Chilean State every year, aside from its important contribution to the country´s
financial inclusion and the considerable amount of taxes and dividends transfered to its
owner. This result is also ratified under the option of including in its capital the longduration subordinated bonds issued by this institution for the purpose of computing the
opportunity cost of the equity invested in this public bank.
Option 2: Considering BancoEstado´s core capital plus its subordinated bonds117
In Ch$ billion
(US$ million)118
NOPAT
254.0
484.1
WACC
8.82%
EVA
68.4
130.3
Under this methodological option, the positive EVA generated by this bank is quite similar
to the amount determined under option 1 given that the increase in NOPAT –resulting
114
It comprises mainly its equity, retained earnings, and loan loss allowances.
The (observed) market exchange rate used is Ch$524.61 per US$1.0 as of December 31, 2013.
116
It is computed by using the market value of the relevant parameters in the same date and from own estimation contained in F.
Ochoa, “El Costo de Capital de BancoEstado”, internal memo, marzo 2014.
117
It comprises mainly its equity, retained earnings, and loan loss allowances.
118
The (observed) market exchange rate used is Ch$524.61 per US$1.0 as of December 31, 2013.
115
72
from the addition of the interest paid for the subordinated bonds- almost offset the
increase in the opportunity cost of capital derived from including in it the average balance
of these bonds, which was also valued by using its WACC instead of the cost of its equity.
Section 5. The Measurement of BancoEstado´s Social Dividend.
BancoEstado has had the most extensive distribution network of any bank in Chile for
many years. As it was mentioned before, it runs 359 branches, 100 special service points
(ServiEstados), 11,461 remote service points (CajaVecina) and 2,347 ATMs located
throughout the country as of December 31, 2013. Even more, this public bank is actually
the unique provider of financial products and services through branches in 84
municipalities or counties of Chile comprising a total of about 1.6 million people
(representing near 9.4% of the country´s population), which would otherwise be deprived
of proximity banking services.
Then, this bank has been able to achieve greater outreach without compromising
profitability; so that justifies considering BancoEstado among those ´double bottom-line
institutions´ –i.e. those that balance the twin objectives of providing financial access while
still operating profitably- since it supplies financial services affordable to low-income
groups also in markets that do not guarantee regular or sufficient volumes of demand for
them and simultaneously remain a profitable institution. This business approach yields
BancoEstado a positive reputation and a competitive advantage in the local banking
industry in that it is widely perceived as socially committed to the development of local
communities and the improvement of their residents´ opportunities and welfare.
Accordingly, the objective of this section is to replicate for BancoEstado the estimation
undertaken by the Oxford Policy Management for WSBI119 of the value that is implicitly
created in the operations of savings banks by providing services at a common tariff in
more marginal markets as well as more favored ones. It is relevant to underscore that the
methodology used for this purpose attemps to identify the cost that can be assigned to
the provision of financial services to a market that would otherwise be beyond the range
of what is typically considered bankable by other financial institutions. In particular, that
119
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, Measuring the Social Dividend in WSBI´s Members´Activities:
Revealing the Hidden Elements, published by WSBI & ESBG, Perspectives N° 57, February 2009.
73
study quantified the value of the deployment of resources that support the retail
distribution network in relatively marginal areas.120
This assessment therefore focuses in the calculable but still implicit element that comes
from forgoing profits to keep marginal branches open and marginal customers served. In
other words, the main objective of this estimation is to evaluate the ´opportunity cost´ of
such a social commitment to extend outreach.
Accordingly, the methodology used in the estimation of the social dividend generated by
BancoEstado is very similar to the one employed by the Oxford Policy Management (OPM)
since it is designed to compute, using the data provided by its internal Sistema Integrado
de Gestión (SIG), the cost of providing different services at different commercial segments
(i.e. personal customers (¨Personas´), micro, small, and medium-sized enterprises
(MSMEs), and other) and branches based on the allocation criteria set by this public bank
for direct costs and indirect or distributed expenses and costs (See Annex 2 for a detailed
description) accrued mainly from this bank´s subsidiaries and supporting activities after
and before including or distributing the bank´s head-office overhead and those expenses
linked to strategic or transformational projects.
The results obtained for BancoEstado, whose branches charge centrally-set common
prices or tariffs, are quite surprising and remarkable in aggregate terms for 2013,
particularly given that the Chilean economy grew 4.1% in real terms that year, below its
potential or steady-state real growth rate of 5%. Then, its cluster of branches facing no
competition and mostly located in relatively poor municipalities or marginal areas, in
which this bank is the sole provider of financial products and services, proved to be more
financially sustainable than expected, by any of the judgement criteria postulated by
OPM.121
In fact, as of December 2013, this cluster of BancoEstado´s branches -serving almost 1.0
million of active customers holding either assets or liabilities issued by this bank- yielded a
4.08% before-tax return on net assets (ROA) after deducting all direct (´manageable´) and
indirect expenses –including their share on regional/central overheads- while their return
on minimum required regulatory capital was 50.3%.122 In other words, this cluster of
120
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, op. cit., p. 5
121
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, op. cit. p.27. Under this study, a judgement can be made as to
whether a particular service needs: (a) direct financial support at the semi-variable operating cost level; or (b) some sheltering from the
allocation of any smi-variable control costs; or (c) just sheltering from central executive and business development overheads.
122
Data from an internal non-published minutae by F. Ochoa, “Evaluación del Impacto en la Eficiencia Operacional de BancoEstado
Derivado de la Actividad de las Sucursales Sin Competencia”, February 2014. This particular ROE is computed by using own calculations
74
branches as a whole generated important pre-tax profits for BancoEstado and then had
the capacity to fully cover its direct costs and its corresponding share on total
regional/central overheads. Moreover, this cluster´s ROA for its segment of served
personal customers (´Personas´) was 3.92% and it reached 3.80% in the segment of
MSMEs, while the financial margin123 was 3.86% for the former and 6.96% for the latter
segment.
In a nutshell, aside from extending BancoEstado´s outreach, this cluster of branches fully
covered its own variable (direct and indirect) and fixed costs and was still able to make an
important contribution to this public bank´s total pre-tax profits.
Nevertheless, within this cluster that faced no competition from other banks´ branches,
there were some significant differences in the performance or social dividend generated
by some specific branches managing different scales of activity (smaller versus larger
scale), operating in diverse geographical places (urban versus rural), and located in
municipalities of the same region with lower/higher poverty levels (richer versus poorer).
Coinciding with most of those results obtained by the cited OPM´s study, the main
comparative results from this assessment are:
(a) There are significant differences among BancoEstado´s urban and rural branches
reflected in both their portfolio and income profile. Regarding their balance sheets,
average gross lending, risk-weighted assets, and minimum regulatory capital per
employee are significantly higher in absolute terms in the small-scale and largescale urban branches compared to their rural peers (See Table A). Moreover, the
urban branches seem to be relatively more risk-averse and/or have a better
internal risk management and control rendering lower credit risk in their portfolios
–measured by the relevant credit risk index- than their rural peers.
(b) Some of BancoEstado´s large-scale rural and urban branches have a relatively more
savings-focused balance sheet than their smaller counterparts and those operating
in more favored geographical areas, which is verified by comparing their average
total deposits and average gross lending per employee in Table A. Under those
conditions, the minimum regulatory capital per employee required for their
portfolio of productive assets –excluding fixed assets- is relatively small because
deposits need only be backed with low risk interbank placements and liquid
of the approximate amount of the minimum regulatory capital required to support these branches´lending and financial investments
(fully weighted using the risk weights set by the Chilean regulation still under Basel that require a minimum 10% capital allocation).
123
The financial margin is defined as the ratio of the sum of effective net income from assets and liabilities over the sum of the
balances of assets and laibilities at a givenpoint of time
75
riskless government securities, particularly given that the Chilean regulations
impose a 100% reserve requirement on those demand deposits exceeding 2.5
times the bank´s core capital.
TABLE A. Key business parameters for the selected BancoEstado´s branches
2013- in millions Ch$
unless otherwise stated
URBAN
RURAL
Small
scale
san ramón
Larger
scale
graneros
Average gross lending
per employee
1,141
1,059
548
788
Average total deposits
per employee
597
1,537
295
1,158
Risk-weighted assets
per employee
6,221
778
10,454
747
1,570
393
8,174
583
Credit risk index (%)
(allowances/total loans)
4.70
3.94
7.12
4,33
622
1,045
157
817
78
75
39
58
8
14
4
14
17.9%
63.5
10.3%
24.6
28.3%
1.0
25,8
23.1
Minimum regulatory
capital
(excluding fixed assets)
per employee
Total branch employees
N° clients, asset side
Poverty rate in city/county
Adult population (15+ yrs)
(in 000´s)
Small
scale
putre
Larger
scale
curanilahue
76
(c) With respect to their income profile, this bank´s urban branches achieved higher
productivity per employee in terms of both gross and net operating income than
its corresponding rural peers while their operational expenses, including their
share in regional/central overheads, were relatively similar.
(d) In addition, for some branches, the pre-tax return on minimum regulatory capital
was highly sensitive to the distribution of head-office overheads among them. For
instance, if these expenses were allocated to them, the small-scale rural branch
achieved a negative return while the same ratio turned highly positive, if those
overheads were excluded (see Table B). The same evidence was verified for this
branch´s return on net assets.
This result may be extended to several BancoEstado´s small-scale branches that
are able to cover its own direct and indirect operating costs and still make a
positive contribution to finance fixed head-office overheads. Therefore, it ratifies
the conclusion achieved under the OPM´s study that “the social dividend implicit in
keeping the small rural branch open is probably best characterized as the cost of
keping one more extra employee in post that can strictly be justified by business
volumes provided that these costs can be covered out of local revenue. Closing the
small rural branch because it can not cover its allocated share of fixed head-office
overheads would actually be profit-reducing because the portion of fixed
overheads that it can cover would then have to be borne by more profitable larger
urban branches”124
(e) Small-scale branches´ cost-income ratios were particularly affected somehow by
the constrain imposed by the bank´s own policy in terms of a minimum
employment required to keep them running125, reducing their degree of freedom
to adjust the necessary resources they should deploy to match the dynamics of
their market and income-earning potential. For instance, the small-scale rural
branch selected, subject to this constraint, had a cost-income ratio of 85.3%,
including its share on head-office overheads, while the equivalent ratio for its
urban peer was just 46.3%.
124
125
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, op. cit., p.38.
To operate as a branch, it is required to hire at least four employees: a manager, a cashier, an assistant, and a guard.
77
(f) Assets and deposits margins earned by large and small-scale branches were not
necessarily biased in favor of the former, as expected in light of reaping potential
economies of scale and scope. Then, the asset margin, adjusted by the provision
expense, over risk-weighted assets was higher for the smalll-scale rural branch
mainly given its much lower level of those assets held in its porfolio, while its
deposit margin on total deposits was similar to the equivalent margin earned by its
urban peer (see Table B).
78
TABLE B. Key profitability indicators for the selected BancoEstado´s branches
URBAN
2013- in millions Ch$
RURAL
unless otherwise stated
Small
Larger
Small
Larger
scale
scale
scale
scale
Gross operating income
per employee
90
118
58
102
Operational expenses per EE
including central overheads
40
44
49
42
Net operating income
per employee
54
102
41
76
3.10%
1.46%
3.14%
3.23%
12.8
58.4
(8.8)
34.6
Pre-tax ROE on regulatory
capital
including central overheads
excluding central overheads
16.4%
27.2%
78.1%
88.9%
(22.2%)
31.1%
59.2%
69.5%
Pre-tax ROA on net assets
including central overheads
excluding central overheads
1.18%
1.96%
5.74%
6.52%
(1.71%)
2.40%
4.58%
5.38%
Assets margin -Provision
expense
on risk-weighted assets
2.10%
4.70%
5.19%
3.78%
Deposit margin on total deposits
2.75%
3.01%
2.67%
2.35%
Cost-income ratio
(Op. expenses/Gross Op. income)
including central overheads
excluding central overheads
46.3%
36.9%
49.6%
30.5%
85.3%
49.2%
41.0%
35.1%
Provision expense/Total loans
Pre-tax net income
per employee
If the previous comparative assessment is extended to the portfolio and income profile of
BancoEstado´s branches operating in competitive markets, one small-scale located in a
poorer municipality versus a large-scale placed in a richer municipality of the same
79
Metropolitan region,126 the main somehow surprising results are explained by both
external or market conditions and internal factors primarily related to operational
efficiency. These results can be summarized as follow:
(a) Regarding their balance sheets, the average productivity per employee is much
higher in the small-scale branch operating in a relatively poor municipality,
particularly in terms of average gross lending and total deposits. This productivity
differential may be primarily due to the relatively larger number of customers of
assets and liabilities served by each of this branch´s employees and because this
public bank faces a less fierce competition from its peers in that poorer market,
particularly considering that the number of bank branches per 100,000 inhabitants
is just 3.2 units in that poorer county while the same ratio reached 74 units in the
richer county.
126
This region of Chile keeps the largest regional share in the country´s population and economic activity.
The criteria to define a poorer or richer municipality is based on their relative poverty rates. These branches
were also selected given both are located in municipalities with similar adult population (15 years and older)
sizes.
80
TABLE C. Key business parameters for the selected BancoEstado´s branches
Small-scale in
Poorer county
Larger-scale in
Richer county(*)
Average gross lending
per employee
2,787
721
Average total deposits
per employee
1,182
652
Weighted risk assets
per employee
10,292
1,715
66,529
Credit risk index (%)
(allowances/total loans)
2.87%
3.09%
Minimum regulatory capital
(excluding fixed assets)
per employee
1,029
6,653
172
51
Total branch employees
N° clients, asset side (000´s)
6
3.0
130
2013- in millions Ch$
unless otherwise stated
Municipality:
Poverty rate
Adult population (15+ yrs, 000´s)
Number bank branches
N° branches/100,000 population
10.2%%
217.3
7
3.2
512
13.3
2.6%
243.3
180
74.0
(*) It represents the average for BancoEstado´s eight branches located in that municipality
(b) Accordingly, with respect to their income profile, gross and net operating income
per employee generated in the branch located in the poorer municipality were
about 3 times the average income generated by each employee of the branch in
the richer municipality. Moreover, this branch achieved also a better performance
in terms of operational efficiency than the branch operating in the richer place,
which was clearly reflected in its lower cost-income ratios, including and excluding
their respective share on head-office overheads.
81
TABLE D. Key profitability indicators for the selected BancoEstado´s branches
2013- in millions Ch$
unless otherwise stated
Gross operating income
per employee
Small-scale in
Poorer county
Large-scale in
Richer county(*)
149
51
Operational expenses per
EE
including central overheads
80
34
Net operating income
per employee
106
39
1.53%
1.68%
26.7
5.0
Pre-tax ROE on regulatory
capital
including central overheads
excluding central overheads
15.5%
21.7%
9.8%
21.8%
Pre-tax ROA on net assets
including central overheads
excluding central overheads
0.98%
1.37%
0.72%
1.59%
Assets margin -Provision
expense
on risk-weighted assets
1.30%
2.44%
Deposit margin on total
deposits
2.47%
1.93%
Cost-income ratio
(Op. expenses/Gross Op.
income)
including central overheads
excluding central overheads
53.6%
46.4%
66.3%
54.2%
Provision expense/Total
loans
Pre-tax net income
per employee
(*)It represents the average for BancoEstado´s eight branches located in that municipality
82
To summarize, it is underscored that the cluster of BancoEstado´s branches facing no
competition and mostly located in relatively poor municipalities or marginal areas, in
which this bank is the sole provider of financial products and services, proved to be more
financially sustainable than expected, by any of the judgement criteria postulated by
OPM.127 In particular, small rural branches in this cluster are able to cover its own direct
and indirect operating costs and still make a positive contribution to finance fixed headoffice overheads.
At the same time, in competitive markets, this bank´s small-scale urban branch located in
a relatively poorer municipality had a much better performance than its large-scale peer
operating in a richer municipality in the same region in terms of the average lending and
deposits per employee achieved as well as in terms of its profitability and operational
efficiency, which was primarily due to differing external or market conditions and internal
factors or capacity to dynamically match the bank´s allocation of productive resources and
supply to effective demand (level and composition) for the services provided by each
branch.
ANNEX:
SISTEMA INTEGRADO DE GESTION (´Integrated System for Management)128:
Criteria for Costs/Expenses Allocation applied in 2013
The allocation of operating and non-operating costs and expenses is performed by a
bank´s model that differentiates them between two categories: Managed (´Gestionables´)
and Distributed (´Distribuidos´) expenses. The former mainly include the bank´s (excluding
affiliates) wages and other personnel expenses, administrative expenses, depreciation,
costs directly linked to customers´ transactions and their use of different channels of
dsitributions of our financial services. The latter primarily consist of expenses accrued
from the activities of the bank´s subsidiaries and those from supporting areas or so-called
´internal providers of services´ (i.e. general administration, marketing, logistics, risk, credit
normalization, legal advisory, and electronic channels).
By and large, managed expenses and costs are imputed directly to the corresponding
business units (BUs) or segments while distributed expenses are mostly allocated to these
127
Stephen Peachey, Abigail Carpio, Alan Roe, and Mateo Cabello, op. cit. p.27.
This annex is a summary of the allocation criteria set in BancoEstado, Manual General de Gastos y Costos en Rentabilidad, and
minutae titled “Proceso de Gastos y Costos 2013”.
128
83
units based on their share on total transactions and costs imputed to different managerial
units (´Gerencias´) or commercial segments.
More specifically, the criteria used for the allocation of the main BancoEstado´s expenses
and costs in 2013 were the following:
I.
Managed Expenses and Costs
1. Wages and Other Personnel Expenses
These are directly allocated to BUs. These primarily include wages and salaries, incentives,
training expenses, provision for severance payments, and several other fringe benefits.
2. Administrative Expenses
These expenses are grouped into three separate categories: Own, ´From internal providers
of services´, and Other expenses. The first two categories are directly allocated to BUs
while the remaining administrative expenses are distributed using some criteria.
3. Depreciation Expenses
The depreciation of the bank´s assets is also separated in three categories for this
purpose: Equipment, Central Data Processing Units; and Corporate Depreciation. The
equipment depreciation is firstly allocated to the Real Estate Unit – a supporting or nonbusiness activity- and then distributed to BUs according to their share on the bank´s total
number of employees. The depreciation of central data processors –managing customers´
transactions and the maintenance of products- is firstly allocated to the Operation &
Systems Management (GDOS) and then distributed to different segments and BUs mainly
through transacting activities or costs. The overhead expenses from the depreciation of
corporate assets´ category are not allocated to BU.
4. Real Estate Unit Expenses
These expenses are primarily related to the cost of using a physical space and a working
station or site within the bank, and to the depreciation of the equipments installed in
those sites. These expenses are firstly fully imputed to this central unit and then
reallocated to BUs considering some specific projects and their share on the total number
of bank´s employees plus those hire by its Microenterprises affiliate.
84
5. Transaction Costs
These costs accrued from the use of different channels of distribution (i.e. bank´s cashier,
internet, ATM, CajaVecina, ServiEstado, or else) of our financial services by our customers
in all phases of these products´ cycles (i.e sales, maintenance, post-sale, and cancellation
of their use). The direct allocation of these costs to BUs is based on the volume of specific
transactions executed by their own customers via different channels, which are charged a
uniform unitary cost by type of transaction and channel used.
II.
Distributed Expenses
1. Subsidiaries´ Expenses
These are expenses incurred by the bank´s subsidiaries in serving BUs customers. We have
the following subsidiaries129:

BancoEstado S.A. Administradora General de Fondos, which is our fund
administration business;

BancoEstado Centro de Servicios S.A., which manages our ServiEstado (service
points);

BancoEstado Contacto 24 Horas S.A., which provides e-banking and telephone
banking services to our customers;

BancoEstado S.A. Corredores de Bolsa, which is our brokerage business;

BancoEstado Corredores de Seguros S.A., which is our insurance brokerage
business;

BancoEstado Microempresas S.A. Asesorías Financieras, which is our
micro-enterprise financial advisory business;

BancoEstado Servicios de Cobranzas S.A., which provides collection services for
our delinquent loans;
129
As December 2014, we own 100% of each of our subsidiaries except for BancoEstado S.A. Administradora General de Fondos, in
which we sold a 49.99% stake to BNP Paribas Investment Partners in 2009, and BancoEstado Corredores de Seguros S.A., in which we
sold a 49.9% stake to a Chilean subsidiary of MetLife Inc. in 2004.
85

Sociedad de Promoción de Productos Bancarios S.A., which provides marketing
services; and

Sociedad de Servicios Transaccionales CajaVecina S.A., which manages our
remote service points (CajaVecina).
The allocation of the direct subsidiaries´ expenses (personnel, administrative, and
depreciation), in some cases with adjustments,130 to the relevant bank´s BUs or segments
is based on their share on the total transactions managed by each particular subsidiary or
by a specific percentages on those expenses set by the bank´s planning managers.
2. Expenses from particular Commercial Units
The direct expenses from both the Branches´ Management (´Gerencia´) and Operations
and System Management are allocated to other managerial units or commercial segments
of the bank based on volume differential (pxQ), in the case of the former, and to specific
shares in its main processing activities set by the bank´s planners, in the case of the
latter.131
3. Expenses from Supporting Areas
The direct expenses accrued from the activities of these supporting areas or ´internal
providers of services´ (i.e. general administration, marketing, logistics, risk, credit
normalization, legal advisory, and electronic channels) are firstly allocated to the bank´s
commercial segments based on some specific distribution percentages set by the planners
and then reallocated to relatively minor BUs (including branches). In all these cases, the
major share in these expenses is attributed to the segment of personal customers
(´Personas´), with a participation ranging from 80.1% in the case of electronic channels to
37.4% in the case of Legal Advisory.
130
131
For details in these adjustments, see BancoEstado´s Manual General de Gastos y Costos en Rentabilidad.
For more details in these allocation criteria, see BancoEstado´s minutae titled “Proceso de Gastos y Costos 2013”, p. 29
86
PART V. CONCLUSIONS
The main conclusions to be drawn from this work are the following:
1. Public banks in Latin America in general, and in Chile in particular, have
been the leading institutions in the promotion of financial inclusion
and economic stability and then historically generating both economic
value added and social dividends.
Nevertheless, important challenges remain for them given the
prevailing gaps in the region and in Chile in terms of financial inclusion,
particularly regarding access and use of financial services for relatively
low-income families and small and medium-sized enterprises, financial
education, and financial consumer protection. These banks should also
finance, based on a model of endogeneous economic growth, more
investment in human capital, innovation, environment-friendly
business, infraestructure and long-term investments, exports, and
promote a more balanced regional or community development to
maximize their economic and social impact.
2. BancoEstado´s generation of its estimable social dividend and success
in the promotion of financial inclusion, as it has been shown in this
work, is owed to both external conditions and internal policies and
management. Regarding the former, it is relevant to underscore the
positive incidence on this public bank´s successful performance
emanating from the sound macroeconomic and prudential policies and
strict enforcement of a estable financial regulatory framework applied
in Chile for many years that have allowed both private and public
banks to operate under a “levelled playing field”.
Regarding this public bank´s internal policies and management, it is
relevant to primarily attribute its success to its full independence from
87
political influence in the definition of its commercial policies and credit
allocation, strong corporate governance, its important and growing
allocation overtime of internal resources to activities focused in the
promotion of financial inclusion, its commitment to be financially
sustainable, conservative stance in risk management, and the cohesive
pledge of BancoEstado´s workers to preferently and efficiently serve
the country´s relatively low-income population and small firms.
3. In light of this bank´s important contribution to social objectives, the
owner of this bank has historically allowed it to capitalize a significant
share of the profits generated in the last decade to keep it growing and
thus extending access to financial products and services to the Chilean
population and MSMEs along this country. Moreover, BancoEstado
received a capital injection of US$500 million during the global
financial crisis to play a countercyclical role which was very successful
and productive in both macroeconomic and microeconomic terms
4. Finally, the historically successful experience of BancoEstado, the third
largest commercial bank in Chile, is an important evidence that a
stakeholder value model of “dual bottom line” banks is perfectly viable
even in emerging economies
88
ANNEX 1:
STATE-OWNED BANKS´ SHARE IN BANKING INDUSTRY´S TOTAL ASSETS
89
ANNEX 2: BANCOESTADO´S COMMERCIAL SEGMENTS
We divide our clients into the following segments:
Retail Banking, which includes the following sub-segments:

Individuals —We have approximately 10 million individual clients, of whom
approximately 8.5 million are active clients (i.e., who have an outstanding
balance with us). We are the market leader in the individual banking
sub-segment in terms of number of clients.

Micro-enterprises —Consists of financial services to entrepreneurs with
businesses that have less than UF3,600 (approximately Ch$85.0 million as of
March 31, 2014) in annual revenues. We have approximately 469,000
micro-enterprise clients and as of March 31, 2014, a market share of 62.0% of
the micro-enterprises that use formal financial services in Chile, according to
our estimates. We are the market leader in the micro-enterprise sub-segment
in terms of number of clients.

Small Businesses —Consists of businesses with annual revenues ranging from
UF3,600 to UF40,000 (approximately Ch$85.0 million to Ch$944.3 million as of
March 31, 2014).

Wholesale Banking, which includes the following sub-segments:

Middle Market —Consists of businesses with annual revenues ranging from
UF40,000 to UF1,500,000 (approximately Ch$944.3 million to Ch$35.4 billion as
of March 31, 2014).

Corporations — Consists of businesses with more than UF1,500,000
(approximately Ch$35.4 billion as of March 31, 2014) in annual revenue

Public Sector Institutions —Includes Chilean national, regional and municipal
institutions. We provide banking services to a large number of Chilean
public-sector institutions, ranging from the National Treasury, which keeps its
main operating accounts with us, to the armed forces, to small municipalities.
BancoEstado regards itself as the market leader in the public sector institutions
sub-segment.
90
91