English - Banco de Chile
Transcription
English - Banco de Chile
2012 ANNUAL REPORT 2012 I POSITIONING BANCO DE CHILE AS: THE MOST PROFITABLE AND SECURE BANK IN THE CHILEAN FINANCIAL SYSTEM Banco de Chile has been characterized by a business model that is based on an appropriate balance of risks and returns in each of the segments it operates. During 2012, the Bank obtained excellent results which permitted it to become the industry leader in net income and profitability, with an average return on capital of 26.2%. In addition, we obtained an A+ rating from Standard & Poor’s, the highest among all private banks in Latin America. Table of Contents Introduction 06 Letter from the Chairman Strategic Priorities Competitive Advantages Financial Performance History 10 Major Achievements in 2012 Recognitions 2012 1 Corporate Governance 20 Board of Directors Senior Management Corporate Governance Practices Ownership of Banco de Chile Shares of Banco de Chile 2 Economic and Financial Environment The Global Economy The Local Economy Chilean Banking System 3 Strategy 56 Vision Mission Strategic Pillars 44 4 Consolidated Performance 2012 44 Management’s Discussion and Analysis 2012 Results and Balance Sheet Analysis Key Financial Indicators 5 Business Areas Retail Market Wholesale Market Treasury Subsidiaries 6 Risk Management Credit Risk Financial Risk Operational Risk 84 104 126 7 Corporate Social Responsibility Associates Community Customers The Environment Transparency 8 Consolidated Financial Statements Consolidated Financial Statements Notes to the Financial Statements 140 Pablo Granifo Lavín Chairman Letter from the Chairman Dear Shareholders: It is my pleasure to present to you our annual report and financial statements for the year ended December 31, 2012, which was very favorable for our institution. On a macroeconomic level, the year was very positive because the Chilean economy —contrary to all forecasts— has been practically immune to the weak international conditions lingering after the 2008-2009 financial crisis. In this context, the Chilean economy’s performance has been based on sound fundamentals and prudent fiscal and monetary policies, leading to GDP growth of around 5.6% for the year, which is well above expectations and growth trends. Similarly, the local economy boasts historically low unemployment rates while internal demand, especially consumption, has been driven by increases in wages of nearly 5% real. The stability of our economy over the last three years and the strength of consumption and investment have translated into important growth in the banking industry, reporting a nominal increase of 12% in loan volumes in 2012 with attractive growth rates across all segments. Banco de Chile has been no exception, capturing a considerable part of this increase. As a result, during 2012 Banco de Chile consolidated its leadership in diverse areas of the financial services industry. First, we completed the year as the industry leader in net income and profitability, with net income of $466 billion, representing an annual increase of 9%, which translated into a return on average capital and reserves of 26%. These figures place us well above the industry, with net income falling 5% in 2012, and also surpass our main competitors. In commercial matters, loans expanded 8% in 2012, reaching close to $19 trillion, which gives us a privileged position within the industry with 19% market share. As we have stated time and again, Banco de Chile’s objective is to achieve growth with a solid foundation of a healthy portfolio and an adequate risk-return ratio. In 2012, we made numerous commercial decisions in line with this goal. In keeping with our strategic priorities, during 2012 we continue to focus our commercial initiatives on areas with greater returns, mainly in the retail and SME segments. In these particular segments, I would like to highlight our achievements in mortgage loans, which grew 12% in number of customers and 16% in volume in 2012 alone. We also completed ambitious projects to help expand access to banking services, implementing “Caja Chile” and the “Microenterprises Segment”, both through Banco CrediChile. These projects will benefit a broad segment of the population that until now has not been properly covered by the financial system. In 2012 we also became one of the largest industry players in government-backed loans for SMEs. At the same time, we continue to consolidate our wholesale business, strengthening value propositions through new segmented non-loan products and services such as collections and payment services and treasury products, all of which enable us to expand cross sales and maintain leadership in commercial loans with a market share of 19%. We are also pleased to report that we are the industry leader in commercial loans and factoring. Banco de Chile’s growth in business volumes has always been accompanied Such performance deserves special recognition since it was obtained despite regulatory changes and other matters under discussion that affected default rates in the Retail Segment and negatively impacted the penetration of banking products. In addition, these results were obtained with inflation levels well below market expectations and medium-term values. In this scenario, we believe that regulations should not materially affect our operations because our results have been stable and consistent, confirming that they are the product of a solid business strategy built on competitive advantages and prudent risk policies across all business lines. by conservative management of credit and market risks. The emphasis we place on risk management gives us outstanding loan quality indicators for the industry in terms of loan loss provisions, past-due portfolio and deteriorated portfolio, clearly standing out among our peers. The above, together with our revenue generating capacity, brand positioning, competitive funding structure and adequate capitalization, led to another of the year’s major achievements: Standard & Poor’s upgrading of our international long-term risk rating. In June 2012, this agency awarded us an ‘A+’ rating, making us the lowest risk private bank in Latin America. This development is especially relevant given the successive downward corrections in ratings seen recently in international banking. Letter from the Chairman 7 Letter from the Chairman This exceptional credit rating contributed positively to our plan to diversify financing sources. We were able to capitalize on market conditions, placing long-term bonds for almost US$1.3 billion in Chile, together with private and public issuances in new markets (Hong Kong and Peru) for close to US$200 million. In 2012, we also became the first commercial bank in Latin America to register a Commercial Paper Program in the United States (for US$1 billion). These funds, together with our sustained leadership in demand deposits—with 22% market share—has made us the bank with the lowest cost of funding in the local financial system. Amidst all of these achievements, in 2012 we suffered some unfortunate setbacks primarily in the IT and operational areas when new platforms for managing current accounts experienced problems that temporarily affected customer service levels. Service quality is a strategic pillar for Banco de Chile and, therefore, we took responsibility for this situation and responded directly to customers. We delivered real solutions and provided compensation where warranted. We also reinforced protocols for maintaining proper control over our services and invested important resources in technology to ensure that this type of incident never happens again. The commitment of Banco de Chile’s team has been fundamental to our achievements in 2012 and in overcoming the challenges we have faced. I am deeply grateful for their efforts, which are manifested on a daily basis in the quality of our external and internal customer service. We are committed to a better Chile for our associates. In 2012, we continued to strengthen their potential and contributed to improving their personal and work conditions. Among other initiatives, I would like to highlight our organization’s internal mobility programs. We know that our corporation is an endless source of development and highly qualified talent. Along these lines, we also offered training programs 8 MemoriaAnual2012 totaling more than 800,000 training hours, with attendance by 97% of our team members at specialized courses and workshops. This training, in addition to ongoing skill and performance evaluations, enable us to provide our associates with concrete development tools. This positive assessment of our performance is not only based on internal evaluations, but also on regular feedback from external agents, including several national and international awards in 2012. Among the most important distinctions, I would like to mention our recognition as the Private Bank with the Best Corporate Reputation in Chile, given by Merco; the award Best Private Banking Service in Chile and Best Bank in Chile, from the magazine Euromoney; recognition as the Best Sub-Custodian Bank in Chile and the Safest Private Bank in Latin America from the World’s Safest Banks ranking by Global Finance. Such acknowledgment fills us with pride and motivates us to continue building a better Chile for not only our shareholders but also our customers, associates and especially for those that need it most. As a result of this commitment, during 2012 we continued our work with the Teletón and Astoreca Foundations. We also reinforced our commitment to contribute to society by partnering with “Desafío Levantemos Chile” in its program “50 Challenges for Chile”, where we are helping to carry out social, educational and environmental development projects in 50 communities throughout Chile. of Directors has proposed an equity offering of $250 billion, intended primarily to finance the Bank’s organic growth. This strengthening of our capital base, which will in turn increase liquidity and share depth, will enable us to meet our positive growth forecasts —which should at least be in line with industry growth over the next three years— and carry out strategic projects across all business lines. Although the equity offering is still in progress, until now this capital increase has been as successful as others we have conducted in the past, reflecting the considerable interest in the Bank’s stock and its positive outlook, as well as the trust that the market places in our corporation. Ultimately, I would like to close by reiterating my appreciation to our shareholders and the continued trust that has been placed in the board I represent, in the Bank’s management and in our commitment to build a better Chile with more opportunities for everyone. Best regards, Pablo Granifo Lavín Chairman Banco de Chile Our continual focus on creating value forces us to go the extra mile. As a result, we believe that the next three years will provide us with important challenges to our growth. We think that the Chilean economy will continue down a prosperous path, which should be reflected in GDP growth rates of close to 5% and an increase in total loans for the banking system of close to 10% real per year. In this context, the Board Letter from the Chairman 9 Strategic Priorities Strategic Priorities Lead the Retail Business 10 AnnualReport2012 Strengthen the Wholesale Business Improve Operating Efficiency Strengthen Service Quality Exceptional Human Resources Competitive Advantages Competitive Advantages Sound Brand Positioning Large Business Scale and Market Leadership Broad Customer Base and Distribution Network Comprehensive Financial Products and Services Excellent Funding Structure Exceptional Investment Grade Rating Strategic Strengths 11 Financial Performance BANCO DE CHILE BANKING SYSTEM tBanco de Chile recorded annual growth in total loans of 8%, closing the year with a portfolio valued at Ch$18,762 billion. t5IFCBOLJOHTZTUFNQPTUFEBOOVBMHSPXUIPGJO total loans in 2012, with a portfolio worth Ch$98,880 billion as of December 31, 2012. TOTAL LOANS(*) (Billions of Ch$) tIn line with its business strategy, the Bank’s growth in retail loans exceeded system growth, while the system surpassed the Bank in companies loans. 2012 19.0% 18,762 2011 19.8% 17,378 tAs a result of lower growth in commercial loans, the Bank’s market share in total loans decreased by 79 basis points in 2012. 2010 19.2% 14,366 2009 19.1% 13,185 t As of December 2012, Banco de Chile’s market share in total loans was 19.0%. Loans t(SPXUIEFDFMFSBUFEJOXJUISFTQFDUUPEVF to lower consumption and investment figures. t"UBQSPEVDUMFWFMUIFJODSFBTFXBTMFECZUIFDPNNFSDJBM portfolio (+13%), followed by consumer (+12%) and mortgage (+11%) loans. Market Share PAST-DUE PORTFOLIO t As of December 31, 2012, Banco de Chile’s past-due portfolio amounted to Ch$89 billion, representing 0.5% of total loans (0.5% in 2011). (Billions of Ch$) 2012 4.8 x 89 t As of December 31, 2012, the provisions ratio was 4.8 times the past-due portfolio, reflecting the portfolio’s quality and the Bank’s conservative risk management. 2011 4.7 x 82 2010 5.2 x 73 tThe Bank’s ratio significantly surpasses both the system and its main competitors. 2009 3.6 x 90 Past-due loans t During 2012, gross demand deposits expanded 12%, finishing the year with a market share of 22% (23% as of December 31, 2011). tAs a percentage of total loans, demand deposits reached 29%, which compares favorably with the industry and key competitors. tThis gives Banco de Chile the lowest cost of funds in the industry, which is an important competitive advantage over its peers. t This figure includes the capitalization of Ch$74 billion in retained earnings (30% of distributable net income for 2011), the capitalization of Ch$58 billion from the price-level restatement of paid-in capital and Ch$119 billion in preferential rights exercised in the first stage of the capital increase initiated in late 2012. tAs of December 31, 2012, Banco de Chile recorded a Basel Index of 13.2%, or 3.2% over its regulatory minimum. (*) Market share does not include foreign subsidiaries. 12 AnnualReport2012 t"TPG%FDFNCFSUIFJOEVTUSZTQSPWJTJPOT ratio was equivalent to 2.3 times the past-due portfolio. t5IJTJTBSFGMFDUJPOPGHPPEEFCUPSQBZNFOUCFIBWJPSBOE an adequate level of provisions in the banking industry. Coverage Ratio (times) GROSS DEMAND DEPOSITS (Billions of Ch$) 2012 29.2% 5,471 2011 28.2% 4,895 2010 30.9% 4,446 2009 28.2% 3,718 t5IFCBOLJOHTZTUFNQPTUFEBOOVBMHSPXUIPGJO demand deposits, driven primarily by growth in current accounts and other demand deposits. t%FNBOEEFQPTJUTSFQSFTFOUPGUPUBMTZTUFNMPBOT which is similar to the ratio obtained in 2011. % of Total Loans Gross Demand Deposits t During 2012, the Bank’s equity was Ch$2,007 billion, equivalent to nominal annual growth of 15%. t5IFTZTUFNTQBTUEVFQPSUGPMJPSFQSFTFOUFEPGUPUBM loans in 2012 (1.1% in 2011), reaching Ch$1,004 billion. EQUITY SISTEMA BANCARIO t %VSJOHTZTUFNFRVJUZUPUBMFE$ICJMMJPO 15% higher than in 2011. (Billions of Ch$) 2012 13.2% 2,007 2011 12.9% 1,739 2010 13.4% 1,404 2009 12.7% 1,393 Tier 1 Capital Total Capital Ratio t 5IFJODSFBTFXBTESJWFOCZHSPXUIPGJODBQJUBM and reserves from capital increases carried out by some banks and capitalization of a portion of 2011 net income. t 5IFTZTUFNT#BTFM*OEFYGFMMTMJHIUMZGSPNJO December 2011 to 13.2% in October 2012(1). (1) Most recent information published by the Superintendency of Banks and Financial Institutions. BANKING SYSTEM BANCO DE CHILE tBanco de Chile reported net income of Ch$466 billion, representing annual growth of 9% over 2011. tThis figure represented 29% of total system net income, making Banco de Chile the industry leader. t This increase in net income was due to the Bank’s outstanding commercial performance, which prioritized growth in segments with greater returns, together with a high-quality portfolio and improvements in efficiency. tBanco de Chile attained a return on average capital and reserves (ROAC) of 26% in 2012, leading the industry in profitability for the second consecutive year. NET INCOME t4ZTUFNOFUJODPNFUPUBMFE$ICJMMJPOJO falling 5% for the year. (Billions of Ch$) 2012 26.2% 466 2011 27.4% 429 2010 28.8% 379 2009 19.2% 258 Utilidad t5IJTEFDSFBTFDBOCFFYQMBJOFECZUIFJODSFBTFTJOMPBO loss provisions and operating expenses, which expanded comparatively more than revenue as a result of low inflation and limited growth in net fees. t5IFCBOLJOHTZTUFNQPTUFEBSFUVSOPOBWFSBHFDBQJUBMBOE reserves of 16.2% in 2012, which is less than in 2011. ROAC OPERATING REVENUE t During 2012, Banco de Chile reported annual growth of 9.7% in operating revenue. t This rise is explained by greater business volumes, a large base of demand deposits in a scenario of higher nominal interest rates and better returns on investment portfolios, which were partially offset by lower net fee revenue. t The ratio of operating revenue to average interest earning assets was 6.5%, which is slightly below the 2011 figure as a result of low inflation. However, it remains above the banking system and key competitors. (Billions of Ch$) t4ZTUFNPQFSBUJOHSFWFOVFHSFXPWFS 2012 6.5% 1,342 2011 6.9% 1,224 2010 7.2% 1,169 2009 6.8% 1,026 Operating Income t%VSJOHUIFZFBSSFWFOVFXBTESJWFOCZHSPXUIJOCVTJOFTT volumes, increased revenue from trading and foreign exchange activities and, to a lesser extent, increased net fee revenue. t5IFSBUJPPGPQFSBUJOHSFWFOVFUPBWFSBHFJOUFSFTUFBSOJOH assets was 5.5% in 2012, which is 32 basis points lower than in 2011. Op. Income/RWA OPERATING EXPENSES tThe Bank’s operating expenses rose slightly by 3% in 2012. tThese higher expenses can be explained by increased commercial activity, improvements to IT systems and increased marketing expenses that resulted in more administrative expenses, which were offset by lower payroll expenses. tThe Bank’s ongoing focus on efficiency was reflected in an improvement of 300 basis points in the efficiency ratio, which was 47.2% in 2012 (50.2% in 2011). (Billions of Ch$) 2012 47.2% 634 2011 50.2% 614 2010 46.6% 545 2009 49.3% 506 Operating Expenses tDuring 2012, the Bank’s net credit risk expense was Ch$188 billion, which represents an increase of 51% over 2011. tThis increase can be explained by greater growth in business volumes in the retail segments, increased delinquency rates in the consumer portfolio and nearly Ch$45 billion in provisions released in 2011 from the sale of an impaired corporate portfolio. These aspects were partially offset by fewer additional provisions. tAs a result, in 2012 the ratio of loan loss provisions to average loans resumed previous trends, increasing 20 basis points over 2011, which compares favorably to competitors. t4ZTUFNPQFSBUJOHFYQFOTFTQPTUFEBOOVBMHSPXUIPG 11.0% in 2012. t5IJTSJTFJTFYQMBJOFECZJODSFBTFEQBZSPMMBENJOJTUSBUJWF and other operating expenses. t5IFJOEVTUSZTFGGJDJFODZSBUJPXFBLFOFETMJHIUMZGSPN 50% in 2011 to 51% in 2012. Eficciency Ratio LOAN LOSS PROVISIONS (Billions of Ch$) t 5IFCBOLJOHTZTUFNQPTUFEMPBOMPTTQSPWJTJPOTPG Ch$1,217 billion in 2012, giving an annual increase of 27%. 2012 1.0% 188 2011 0.8% 125 2010 1.5% 209 2009 1.8% 223 Loan Loss Provision LLP / Avg. Loans t5IJTJODSFBTFDBOCFFYQMBJOFECZBNPSFQSVEFOUPVUMPPL on risk matters given international tensions, an increase in delinquency rates in the consumer portfolio and larger one-time charge-offs by an important local bank. t5IFSBUJPPGMPBOMPTTQSPWJTJPOTUPBWFSBHFMPBOTXBT 1.3% as of December 31, 2012, which is 11 basis points higher than in 2011. Financial Performance 13 14 AnnualReport2012 Thanks to its solid capital base, the Bank survives the crisis that began in 1929 and continues to develop, sustaining itself as the country’s main bank and one of the most respected and solvent corporations. Banco de Chile contributes to the reconstruction of the areas most devastated by the Valdivia earthquake with special credit resources. Following a government process to nationalize the banking industry, the Chilean State Development Corporation (CORFO) becomes Banco de Chile’s largest shareholder, with the right to appoint the Chairman of the Board. Banco de Chile is reprivatized in 1975. Two years later, it creates Leasing Andino in partnership with Banco de Vizcaya of Spain and Orient Leasing of Japan. . 1982 - 1983 1940 Consolidation of Banco de Chile: It incorporates liabilities of other financial entities undergoing liquidation and purchases shares of important commercial and service companies. The Bank begins the internationalization process, opening a branch in New York in 1982. 1987 - 1990 Banco de Chile’s head offices are relocated from the former offices of Banco Nacional de Chile at Huérfanos 930 to a brand-new building at Ahumada 251—its present headquarters. 1960 The Bank establishes an agency in London, which is key in securing financing from foreign banks and fostering foreign trade to and from Chile. 1973 Banco de Chile is a banking corporation established in 1893 that began to operate under this name in 1894 with the merger of Banco de Valparaíso, Banco Nacional de Chile and Banco Agrícola de Chile. 1975-1977 1930 1926 1907 1893 - 1894 History After a capitalization process, ownership and control of the Bank are transferred to private investors in 1987, incorporating more than 30,000 new shareholders through “popular capitalism”. The following year, authorities intervene and determine that Banco de Chile’s loan portfolio had deteriorated, compromising its capital base. Banco de Chile acquires the assets and liabilities of Banco Continental and absorbs the operations of Banco Morgan Finansa. In 1990, it closed its representation office in London and moved it to Frankfurt, which would later be closed in 2000. In the 1990s, Banco de Chile established representation offices in Miami, Buenos Aires, Sao Paulo and Mexico City. Banco de Chile takes over the assets and liabilities of Citibank Chile, the Chilean subsidiary of Citigroup Inc. Concurrently, Citigroup partners with Quiñenco, entering the ownership structure of LQ Inversiones Financieras S.A. Banco de Chile and Citigroup also signed the Cooperation Agreement and the Global Connectivity Agreement, providing for mutual support in executing diverse transactions and limited use of the Citi brand. 2012 2010 2000-2003 Following the February earthquake in Chile, Banco de Chile joined forces with the Teletón Foundation on the campaign “Chile Helping Chile”, which worked to raise record levels of donations in benefit of those affected by this disaster. Citigroup exercises its option to purchase shares of LQIF, raising its ownership to 50%, while Quiñenco holds the remaining 50%. 2011 In order to release Banco de Chile from the financial burden of repaying its debt to the Central Bank, as a result of the 1982-1983 economic crisis, Banco de Chile becomes SM-Chile S.A., a publicly-held corporation established to resolve the Bank’s subordinated obligation. A new company is formed (the current Banco de Chile), a subsidiary of SM-Chile S.A., which assumes all assets and liabilities of the former Banco de Chile, with the exception of the Central Bank debt, which is transferred to SAOS S.A., a whollyowned subsidiary of SM-Chile S.A. Banco de Chile agrees to merge with Banco de A. Edwards. Following the merger, Quiñenco S.A., a company linked to the Luksic family and the main shareholder in both banks, acquires the majority shareholding in Banco de Chile. Under an American Depositary Shares (ADS) program, the Bank’s shares are traded on the New York Stock Exchange (NYSE) and one year later on the London Stock Exchange (LSE) and the Latibex. 2008 1993 1996 The Bank creates Banco CrediChile, a division with its own branch network, specialized in consumer loans for middle and low-income individuals. In 2002, it absorbs Finandes, the consumer division of Banco de A. Edwards, and in 2008, it absorbs Financiera Atlas, the consumer division of Citibank Chile. Standard & Poor’s gives the Bank an ‘A+’ international credit rating, making it the private bank with the best risk rating in Latin America. In addition to having the highest profitability, the Bank also leads in net income, generating close to US$1 billion during the year, equivalent to 29% of total banking system net income. It also became the industry leader in market capitalization with nearly US$14.5 billion. Banco de Chile expands its business scale, boasting important increases in market share across all loan products, especially mortgage loans. This growth was accompanied by a successful capital increase that raised Ch$210.1 billion. As a result, Banco de Chile’s stock increased its depth in financial markets and was included on the MSCI stock index. As part of these agreements, Banco de Chile sells its banking operations in New York and Miami to Citigroup Inc. History 15 10 Major Achievements in 2012 1 2 Undisputed Leadership in Net Income and Returns The successful business model implemented by the Bank in recent years, together with proper management of risks inherent to the business, enabled Banco de Chile to position itself in 2012 as the banking system leader in net income, reporting after-tax income of Ch$466 billion, which represented 29% of the banking system’s net income. This achievement also enabled it to continue to lead the industry in terms of return on average assets (2.1%) and return on average capital and reserves (26.2%), both of which are well above industry averages and our main competitors. Best Risk Rating for a Private Bank in Latin America During the year, Banco de Chile’s international credit rating was upgraded from ‘A’ to ‘A+’ by Standard & Poor’s, making it the private bank with the best risk rating in the region. This achievement is particularly noteworthy in light of the complex international conditions and multiple downgrades of prestigious global institutions occurring this year. This rating, along with attractive returns, consolidates Banco de Chile as the private bank with the best risk-return ratio in Latin America. Pioneers in Debt Issuance in International Markets 3 Following our strategy to diversify sources of financing, Banco de Chile continued to explore new markets. During 2012, the Bank was the first institution in Latin America to issue short-term commercial paper in the U.S., opening a line for US$1 billion. It was also a pioneer in placing longterm bonds in Hong Kong and Peru. Thanks to the Bank’s upgraded risk rating, these placements were well received by local and foreign investors, obtaining excellent financial conditions. By year end 2012, the Bank had placed almost US$600 million in these markets. Caja Chile Project: Boosting Bank Penetration Banco de Chile’s commitment to being a global institution with presence across all industries throughout Chile was the fundamental reason behind 4 its development of a new customer service channel known as Caja Chile. Under the CrediChile brand, this initiative aims to provide financial services in towns throughout the country without an established bank branch using a remote banking platform located in small stores. Through Caja Chile, customers and non-customers alike can carry out basic banking services such as paying bills, making deposits and withdrawals, checking balances and making payments on consumer loans, all without having to travel to other towns, thus improving their quality of life. As of December 2012, Caja Chile has enlisted more than 1,000 small stores in 220 districts throughout Chile. Strengthening Ties with Small and Medium Enterprises 5 Banco de Chile’s desire to be a reference point for entrepreneurs in Chile continues to be one of our strategic priorities. As a result, this segment reported considerable growth during the year. Through a comprehensive, segmented product offering that includes financial consulting, and customer service known for its proximity and flexibility, Banco de Chile has positioned itself as a leader in this segment. Along these same lines, in order to continue strengthening ties with entrepreneurs, during the year the Microenterprises Bank was created. This specialized business area works through the CrediChile branch network to provide financial services and consulting to small businesses. By the end of 2012, this Project already boasted 40 customer service platforms in Chile, strengthening the Bank’s position among entrepreneurs of all sizes. 16 AnnualReport2012 6 7 8 9 10 Consolidating Regional Business In 2012, the Bank concentrated efforts on consolidating its Comprehensive Regional Plan for both the Large Companies segment and its Commercial Division. This initiative, which began three years ago in order to increase the Bank’s market share throughout Chile, set a three-year goal of attaining market share of 19%, which would require considerable growth in all products. This goal involved strengthening the Bank’s network of offices, as well as making important enhancements and changes to customer service models. Important Growth in the Mortgage Business Banco de Chile continued to expand its presence in the mortgage business, attaining 16% growth in housing loans, gaining 82 basis points in market share in 2012 and 283 basis points over the last three years. The growth of the mortgage market is a fundamental part of the Bank’s strategy of forging long-term relationships with customers and increasing cross sales. Innovation and Improvement of Digital Channels Mindful of the Bank’s commitment with its customers, during the year important technological investments were made, improving online services for current accounts and enhancing the mobile platform. The third version of this mobile application is considered the best in the country and among the best in Latin America with over 145,000 users. Considerable resources were also allocated to improving the security of online transactions, providing customers with cutting edge technology for online banking security. Capital Increase for US$530 Million The better-than-expected economic expansion and growth in business volumes seen in 2012, in which Banco de Chile has played an important role, motivated it to begin a new capital increase for US$530 million, which will be used to fund the Bank’s organic growth over the next few years, to strengthen its future capital requirements and to increase its free float to more than 17%. Leader in Market Capitalization in Local Banking Industry Banco de Chile’s excellent financial performance in 2012, the confidence of investors and analysts in its business strategy and the company’s positive future outlook translated into an exceptional year for the Bank’s shares. In effect, during 2012 Banco de Chile’s stock posted a 16% total return on its value, which compares quite favorably to the 3% return obtained by the IPSA in the same period. As a result, as of December 2012, the Bank had positioned itself as the bank with the largest market capitalization in Chile, equivalent to US$14.5 billion. 10 Major Achievements in 2012 17 Recognitions 2012 Best Bank in Chile, LatinFinance As part of the LatinFinance Awards 2012, Banco de Chile was distinguished as the best bank in Chile for the second consecutive year. This award considers the Bank’s merit in the retail, commercial and investment areas. The Bank’s results in these areas led to its recognition as the best bank in Chile. Best Bank in Chile, Euromoney Awards for Excellence For the second straight year, Banco de Chile was recognized in the category Best Bank in Chile at the annual award ceremony held by British magazine Euromoney. The Bank’s excellent earnings and strong market position stand out among the factors considered for the award. 18 AnnualReport2012 Best Local Bank in Chile, Euromoney Best Private Banking Awards Safest Private Bank in Latin America, Global Finance World’s Safest Banks The prestigious British magazine, Euromoney, which recognizes the best private banks in each region, awarded Banco de Chile first place in the category Best Local Bank in Chile in the 9th version of the annual survey on private banking. Banco de Chile was distinguished as the safest private bank in Latin America according to the ranking published by the prestigious U.S. magazine Global Finance. Banks were selected by comparing longterm credit ratings and total assets from among the largest banks. Ratings from Moody’s, Standard & Poor’s and Fitch were used. Bank with Best Corporate Reputation in Chile, MERCO Merco’s 2012 ranking of corporate reputation recognized the Bank for the third year in a row as the number one financial institution in Chile. The same study placed it third in the general ranking, which includes companies from all industries. Best Corporate Social Responsibility in 5th Region, ASIVA At the 59th Annual Meeting of the Association of Companies from the 5th Region (ASIVA), the Bank was recognized for its contributions in matters of corporate social responsibility. “More for Chile” Seal for work with Teletón and Desafío Levantemos Chile Foundations, Ministry of Social Development In recognition of its corporate social responsibility work, the Bank received the “More for Chile” seal granted for the first time by the Ministry of Social Development to projects that contributed to providing more and better opportunities for the country’s most vulnerable individuals to overcome hardship. The award was given because of its alliance with Desafío Levantemos Chile and the 34 years it has worked with the Teletón Foundation. Among the 10 Most Responsible Companies in Chile, Hill & Knowlton For the tenth consecutive year, Hill & Knowlton Captiva and La Tercera, together with Collect GFK, conducted this study to measure consumer perception in Chile. Best Subcustodian Bank in Chile, Global Finance Banco de Chile was named Best Sub Custodian Bank in Chile for the fourth straight year by U.S. magazine Global Finance. This recognition is given for providing local and international share custody services for shares, money market and fixedincome investments services, and offering products like certificates of deposit, outsourcing, representation and trusts. Best Investment Bank in Chile (Banchile Citi Global Markets), LatinFinance Local Investment Bank – Chile Category Best Bond Placement Agent (Banchile Citi Global Markets), Diario Financiero Financial Leader Awards and Deloitte As part of the LatinFinance Awards 2012, Banco de Chile was distinguished as the best bank in Chile while Banchile Citi Global Markets was named the best investment bank in the country. Deloitte and Diario Financiero highlighted the work of Banchile Citi Global Markets in the category Best Bond Placement Agent 2011, for both its local and international placements. On the local market, it led placements with 26.2% of market share thanks to seven placements totaling US$1,202 million. It also was engaged in five international transactions totaling US$1,243 million. Best Chilean Trade Bank, Trade Finance The Bank was selected as the Best Chilean Trade Bank 2012 as part of the awards for excellence given for more than a decade by the magazine Trade Finance to financial institutions throughout the world. This award is unique in that the winners of each category and country are selected by their own peers and by customers of financial institutions. Recognitions 2012 19 1 CORPORATE GOVERNANCE Board of Directors Pablo Granifo Lavín Andrónico Luksic Craig Francisco Aristeguieta Silva CHAIRMAN VICE CHAIRMAN VICE CHAIRMAN Mr. Granifo was reelected as the chairman of our board of directors in 2011, a position he has held since 2007. He was our chief executive officer from 2001 to 2007, was the chief executive officer of Banco A. Edwards from 2000 to 2001, corporate manager at Banco Santiago from 1999 to 2000 and commercial manager at Banco Santiago from 1995 to 1999. Mr. Granifo is also chairman of the board of directors of Banchile Administradora General de Fondos S.A., Banchile Asesoría Financiera S.A., Socofin S.A., Banchile Securitizadora S.A., and Banchile Factoring S.A., chairman of the executive committee of Banchile Corredores de Seguros Limitada and a member of the board of the Santiago Stock Exchange. He holds a degree in business administration from Pontificia Universidad Católica de Chile. Mr. Luksic was reelected as a director and vice chairman of our board of directors in 2011, a position he has held every year since 2002. Mr. Luksic is also chairman of LQ Inversiones Financieras S.A., vice chairman of Quiñenco S.A., and a member of the boards of Compañía Cervecerías Unidas S.A., Manufacturas de Cobre Madeco S.A. and the Federation of Chilean Industry (SOFOFA). Mr. Luksic is a member of the APEC Business Advisory Council (ABAC), Vice chairman of the International Business Leaders’ Advisory Council for the Mayor of Shanghai, and is also a member of Barrick Gold’s International Advisory Council, the Brookings Institution’s International Advisory Council, the Nature Conservancy’s Latin American Conservation Council, the Panama Canal Authority, and the Chairman’s Advisory Council of the Council of the Americas. Mr. Luksic is a member of the board of trustees at Babson College; the Dean’s Council at Harvard’s Kennedy School of Government; the International Advisory Committee at Harvard Business School; the Advisory Committee at Harvard’s David Rockefeller Center for Latin American Studies; the Advisory Council at Tsinghua University School of Economics and Management; the Latin American Executive Council at MIT Sloan School of Management and the International Advisory Council at Oxford’s Blavatnik School of Government. Mr. Aristeguieta was elected as a member of our board and vice chairman in April 2012. Mr. Aristeguieta joined Citi in Venezuela in 1994. He is currently the CEO of Citigroup Latin America, overseeing the 23 countries where Citi operates in the region. Prior to this position, he was responsible for Transactional Services for Latin America and Mexico at Citi, a member of the Executive Committee at Banco Nacional de México (Banamex), a member of the Executive Committee at GTS Global, director for the Andean Region, CEO of Colombia and chairman of Citigroup Venezuela and Ecuador. Mr. Aristeguieta is a member of Citigroup’s Global Operating Committee and of Young Presidents’ Organization (YPO) since 2003. He has also served on the boards of directors of several organizations, including Junior Achievement Americas; the Banking Association of Ecuador, Colombia and Venezuela; the American Chambers of Commerce of Ecuador, Colombia and Venezuela; and the Colombian Council of American Companies. He was also chairman of the board of directors of Colfondos. Mr. Aristeguieta holds an MBA from Brunel University in London, and holds a postgraduate degree in banking and finance and a degree in business administration with a master’s in management from Universidad Metropolitana in Caracas, Venezuela. 22 AnnualReport2012 Raúl Anaya Elizalde Jorge Awad Mehech Fernando Concha Ureta Jorge Ergas Heymann DIRECTOR DIRECTOR DIRECTOR DIRECTOR Jaime Estévez Valencia Guillermo Luksic Craig Gonzalo Menéndez Duque Francisco Pérez Mackenna DIRECTOR DIRECTOR DIRECTOR DIRECTOR Thomas Fürst Freiwirth Rodrigo Manubens Moltedo Hernán Büchi Buc Francisco Garcés Garrido Jacob Ergas Ergas ALTERNATE DIRECTOR ALTERNATE DIRECTOR ADVISOR TO THE BOARD ADVISOR TO THE BOARD ADVISOR TO THE BOARD Corporate Governance 23 Board of Directors DIRECTORS Raúl Anaya Elizalde Fernando Concha Ureta Mr. Anaya was reelected as a member of our board of directors in March 2011. Currently, Mr. Anaya is the Chief Executive Officer for Citi’s Consumer and Commercial Banking Division in Latin America. Prior to this, from August 2008 to April 2012, Mr. Anaya served as Global Retail Banking Head for Citigroup, COO of the Global Consumer Banking Council and as CEO of Citigroup Inc.’s businesses in Central America and the Caribbean. From December 2005 to July 2008, Mr. Anaya was CEO of Latin America’s Consumer Group for Citigroup (except Brazil). From February 2005 to December 2005, he was Director of Retail Banking for Citigroup Inc. in Central and South America. From August 2003 to January 2005, he was Executive Director of Consumer Assets at Banamex in Mexico, responsible for mortgages, personal loans and car financing. Prior to this position, Mr. Anaya served as Division Director for the Central Metropolitan Retail Banking Division at Banamex. From May 1999 to January 2002, he was Chairman and Chief Executive Officer of Banco Bansud S.A. (formerly a subsidiary of Banamex) in Argentina. Mr. Anaya joined Citibank at Banamex’s New York Agency in October 1987 and later became General Manager of the Banamex Agency in Los Angeles, Executive Vice President of the Corporate Banking and International Division at California Commerce Bank, General Manager of the Banamex Agency in Houston and General Manager of the Banamex Agency in New York in charge of its offices in the United States and Canada. He is a member of the board of directors at LQ Inversiones Financieras S.A. and was a member of the board of directors at California Commerce Bank from 1996 to 2001. He was chairman of the board of directors of Citigroup’s subsidiaries in Central America from 2008 to 2010. He holds a degree in business administration from Universidad La Salle in Mexico. Mr. Concha was appointed as a member of our board of directors in March 2011. Currently, Mr. Concha is Managing Director of Citigroup Chile and a member of the executive committee of Casa de Bolsa Accival and Wealth Management in Mexico. Prior to this position, he was the General Director for the Andean, Central American and Caribbean Cluster, excluding Brazil. From January to July 2008, he worked for Banco de Chile as Corporate and Investment Banking Head after the merger with Citibank Chile. In addition, Mr. Concha was the Citigroup Country Officer for Chile from April 2006 to December 2007 after working in Banamex-Citigroup, Mexico City, for over eight years in different capacities. His last position was Mexico Regional Treasurer. Throughout his professional career, Mr. Concha has occupied positions of leadership, serving as Country Treasurer and Capital Markets Head with Citibank in Mexico and Divisional Treasurer with Citibank Latin America North Division in Miami, USA. Prior to his international assignments, Mr. Concha was the Investment Bank Head with Citibank Chile. From 1986 to 1992, he worked as Senior Investment Officer for AFP Provida. He was also appointed as a member of the board of directors of the Mexican Derivatives Market (Mex-Der) and served as President of the Brokerage House at Citibank Mexico and vice chairman of the Chilean Electronic Stock Exchange. He is currently a member of the board of directors of the American Chamber of Commerce in Chile. Mr. Concha has a degree in business administration from Pontificia Universidad Católica de Chile and has completed several executive training programs in the United States, Europe and Latin America. Jorge Awad Mehech Mr. Ergas was named to our board of directors in March 2011. Formerly, he had been an advisor to the board of directors since 2007 and from 2002-2005. From 2005 to 2007, he was an alternate director. Currently, he is vice chairman of Banchile Compañía de Seguros de Vida S.A., vice chairman of Orion Seguros Generales S.A., chairman of the automotive center Movicenter and a director of the real estate company Inersa S.A., Nido de Águilas Educational Foundation and Ever I BAE. He was previously a director of the Plaza San Francisco Hotel, Casa Piedra Convention Center, Banco HNS and the real estate company Inmobiliaria Paidahue. Mr. Awad has been a member of our Board of Directors since 1996. From 1989 to 1996 he was a member of the board of directors at Banco de Santiago. Mr. Awad has served as the president of the Chilean Association of Banks and Financial Institutions since 2011. He is also a member of the board of directors of ICARE, Universidad de Talca and Universidad Católica de Valparaíso TV. Previously, Mr. Awad was chairman of LAN Airlines S.A. for 18 years until September 2012. He has also served as a director at Codelco Chile, Televisión Nacional de Chile, Laboratorio Chile S.A. and other Chilean corporations. He is a professor of management at Universidad de Chile’s School of Economics, from which he holds a degree in business administration. 24 AnnualReport2012 Jorge Ergas Heymann ALTERNATE DIRECTORS Jaime Estévez Valencia Thomas Fürst Freiwirth Mr. Estévez has been a member of our board of directors since 2007. Presently, he is also chairman of the board of directors of Cruzados SADP. Before that, Mr. Estévez was chairman of the board of directors at Banco del Estado and was a member of the board of directors of Endesa Chile S.A. He has also served as a director at AFP Provida and AFP Protección, two Chilean private investment pension funds. He was simultaneously Minister of Public Works and Minister of Transportation and Telecommunications from January 2005 to March 2006. He was also a congressman from March 1990 to March 1998 and president of the Lower Chamber of Congress from March 1995 to November 1996. Mr. Estévez holds a degree in economics from Universidad de Chile. Mr. Fürst has been a member of our board of directors since 2004. Previously, Mr. Fürst was vice chairman of Compañía Cervecerías Unidas and a member of the board of directors of several other companies, including Embotelladoras Chilenas Unidas S.A., Viña Dassault-San Pedro S.A., Southern Breweries Establishment, CCU Argentina S.A. and Compañía Industrial Cervecería S.A. (CICSA). He was a founder and member of the board of directors of Parque Arauco. He is also a founder, partner and member of the board of directors of Plaza S.A. and Nuevos Desarrollos S.A., the owners of 12 shopping centers in Chile and three under construction, four shopping centers in Peru and three under construction and one shopping center in Colombia and three under construction. Grupo Plaza is the second largest chain in Latin America. He holds a degree in civil construction from Pontificia Universidad Católica de Chile. Guillermo Luksic Craig Mr. Luksic has been a member of our board of directors since 2001 and was previously the vice chairman of our board of directors from March 2001 to March 2002. Mr. Luksic is also chairman of Quiñenco S.A., Compañía Cervecerías Unidas S.A. (CCU), Viña San Pedro Tarapacá S.A., Madeco S.A. and Compañía Sudamericana de Vapores S.A. and a member of the board of directors of LQ Inversiones Financieras S.A., Antofagasta PLC, Antofagasta Minerals, Nexans and Empresa Nacional de Energía Enex S.A. Mr. Luksic is an active member of Centro de Estudios Públicos (CEP), a Chilean think tank, and a member of the board of directors at Universidad Finis Terrae. Mr. Guillermo Luksic and Mr. Andrónico Luksic are brothers. Gonzalo Menéndez Duque Mr. Menéndez has been a member of our board of directors since 2001. He is also the chairman of Inversiones Vita S.A., and a member of the board of directors of several other companies, including Banchile Asesoría Financiera S.A., Banchile Factoring S.A., Banchile Seguros de Vida S.A., Quiñenco S.A., Compañía Sudamericana de Vapores S.A., Sudamericana Agencias Aéreas y Marítimas S.A., Sociedad Matriz SAAM S.A., Antofagasta PLC, Mining Group Antofagasta Minerals S.A., Antofagasta Railway, Aguas de Antofagasta S.A., Andsberg Investment Ltd. and Andsberg Limited. He is also vice chairman of Fundación Andrónico Luksic A. and Fundación Pascual Baburizza. Previously, Mr. Menéndez served as chief executive officer of the Antofagasta Railway to Bolivia, Banco O’Higgins and Empresas Lucchetti. Since 1990, he has been a director and is now the chairman of the board of directors of Banco Latinoamericano de Comercio Exterior S.A., Bladex. Mr. Menéndez was a member of the board of directors and the executive committee at Banco Santiago and a member of the board of directors at Banco de A. Edwards. He was a professor of finance, economics and business policy at Universidad de Chile. He holds a degree in business administration and accounting from Universidad de Chile. Francisco Pérez Mackenna Mr. Perez has been a member of our board of directors since 2001. Since 1998, Mr. Pérez has also served as the chief executive officer of Quiñenco S.A. He was formerly the chief executive officer at Compañía Cervecerías Unidas S.A., of which he is still a director. Prior to 1991, Mr. Pérez was chief executive officer of Citicorp Chile and also was vice president of Bankers Trust in Chile. He holds a degree in business administration from Pontificia Universidad Católica and a master’s degree in business administration from the University of Chicago. Rodrigo Manubens Moltedo Mr. Manubens has been a member of our board of directors since 2001. Mr. Manubens was a member of the board of directors of Banco A. Edwards from 1999 to 2001. From 1985 to 1999, Mr. Manubens was a member of the board of directors of Banco O’Higgins and retained this position following its merger with Banco Santiago. From 1995 to 1999, he was chairman of Banco Tornquist in Argentina and a member of the board of directors at Banco Sur in Peru and Banco Asunción in Paraguay. Mr. Manubens also served for a ten-year period as a director and chairman of Endesa Chile S.A. He is chairman of Banchile Compañía de Seguros de Vida S.A. and a director and chairman of the Directors’ Committee of Aguas Andinas S.A. Mr. Manubens holds a degree in business administration from Universidad Adolfo Ibáñez and a master’s degree from the London School of Economics and Political Science. ADVISORS TO THE BOARD Hernán Büchi Buc Mr. Büchi has served as an advisor to the board since 2008. In 2007, he was a member of our board of directors. He is the founder of and an advisor to Instituto Libertad y Desarrollo and is currently the chairman of the managing council at Universidad del Desarrollo. He is also a director of several Chilean corporations like Quiñenco S.A., Consorcio Nacional de Seguros and Falabella S.A. Previously, he held multiple public positions such as Minister of Finance (1985 – 1989), Superintendent of Banks, Minister of Planning and Undersecretary for Health. He holds a degree in civil mining engineer from Universidad de Chile and a master’s degree from Columbia University. Jacob Ergas Ergas Mr. Ergas has been an advisor to the board since 2011. From 2002 to 2011, he was a member of the board of directors. He is also a director at Banchile Administradora General de Fondos S.A., chairman of J. Ergas Inversiones y Rentas Limitada, Ever I BAE S.A., Ever II, Inmobiliaria Paidahue S.A. and INERSA S.A. From 1986 to 2001, he was a member of the board of directors and vice chairman of Banco de A. Edwards and a director of the Chilean Association of Banks and Financial Institutions. Francisco Garcés Garrido Mr. Garcés has been an advisor to the board of directors since 2002. He is an advisor to the vice chairman. He is also an alternate member of the Private Sector Advisory Council for APEC Leaders, a member of the board of directors of Fundación Chilena del Pacífico, the Director of the Center for International Economics at Instituto Libertad y Desarrollo, the chairman of Banchile Corredores de Bolsa, the chairman of the Asian-Pacific Chamber of Commerce and a member of the Maritime Boundary Advisory Committee of the Ministry of Foreign Affairs. Prior to this, he was an advisor and member of the board of directors of Banco O’Higgins and Banco Santiago, a professor at the School of Economics of Universidad de Chile, Executive Director of the IMF in Washington D.C., and International Director of the Chilean Central Bank. He holds a degree in business administration from Pontificia Universidad Católica de Chile and has conducted post-graduate research at the PhD level at Columbia University. Corporate Governance 25 Senior Management Arturo Tagle Quiroz Jorge Tagle Ovalle Chief Executive Officer Commercial Banking Division Manager since 2010 since 2012 Formerly, he held diverse positions at Banco de Chile since 1995 such as Strategic Development Division Manager, Research and Administration Division Manager and Controller. Before that, he worked as chief executive officer of the Chilean Association of Banks and Financial Institutions and as research director for the Superintendency of Banks and Financial Institutions. He holds a degree in business administration from Universidad Católica de Chile and an MBA from the University of Chicago. Previously, he was the Deputy CEO of Banco de Chile and before that held numerous executive positions mainly within the Luksic Group such as Executive Vice President of Nexans S.A., Corporate CEO of Alusa S.A., Corporate CFO of Madeco S.A. and New Product Manager at Quiñenco S.A. Mr. Tagle holds a degree in industrial engineering from Pontificia Universidad Católica de Chile and has an MBA from the Wharton School of the University of Pennsylvania. Oscar Mehech Castellón Pedro Samhan Escandar Controller Chief Financial Officer since 2008 since 2008 Prior to this position, he was the Regulatory Policy and Compliance Division Manager and before that the senior lawyer for Banco de Chile and Banco de A. Edwards. He is the chairman of the audit committee of the Association of Banks and Financial Institutions. He holds a law degree from Universidad de Chile and an MBA from Pontificia Universidad Católica de Chile. since 2008. Before that, he was Chief Financial Officer of Citigroup Chile until it merged with Banco de Chile. He held several positions at Citibank both in Chile and other Central American and Caribbean countries, including Chief Executive Officer of Citicorp Chile between 1988 and 1990. He was also a member of the board of directors of AFP Habitat between 1996 and 2006, of Cruz Blanca Seguros de Vida between 1994 and 1997 and of Minera Las Luces between 1994 and 1996. Currently, he is a member of the board of directors of Banchile Trade Services Limited. Mr. Samhan holds a degree in industrial engineering from Universidad de Chile. Patricio Melo Guerrero Cristián Lagos Contardo Operations and Technology Division Manager since 2008 since 2012 Before this position, he worked as chief executive officer and operations and technology division manager in diverse companies within the Santander Group in Chile, Peru and Brazil. Mr. Melo has a degree in electronic engineering from Universidad Federico Santa María. Previously, he was the Planning and Human Resources Division Manager at Banco Sudamericano and, later, at Scotiabank, following the merger of these banks. Before that, he was the Corporate Human Resources Manager at Chilesat S.A., which later merged with Telmex S.A. From 2008 to March 2012, he was Corporate Manager of People and Reputation at Compañía General de Electricidad S.A. Mr. Lagos holds a degree in psychology from Universidad Diego Portales and completed the management development program from Universidad de los Andes ESE Business School. Alain Rochette García Nelson Rojas Preter Advisor to the Chief Executive Officer for the Corporate and Investment Banking Division and General Coordinator for the Treasury, Investment Banking, and Corporate Divisions since 2011 Previously, since 2006, Mr. Rochette was Citibank’s Managing Director of Markets and Treasury for Latin America, based in the U.S. His 26-year career at Citi included positions such as Markets Head and Country Treasurer of Citibank Chile and 15 years in diverse international positions in Japan and the United States. Mr. Rochette holds a degree in Civil Industrial engineering from Universidad de Chile. 26 AnnualReport2012 Human Resources Manager General Counsel and Secretary to the Board since 2004 In 2002, he joined us as Deputy General Counsel and from 1997 to 2001 he was General Counsel and Secretary to the Board of Directors of Banco de A. Edwards. Mr. Rojas is the chairman of the legal affairs committee of the Association of Banks and Financial Institutions. He holds a law degree from Universidad de Chile. Juan Carlos Cavallini Richani Juan Cooper Álvarez Corporate Banking Division Manager Consumer Banking Division Manager since 2009 since 2003 Prior to this position, he was the Investment Banking and Capital Markets Division Manager. Before that, he was the Head of Corporate Banking at Citibank-Chile until its merger with Banco de Chile and he held several positions at Citibank N.A., including four years in the International Corporate Finance Division in New York. Mr. Cavallini holds a degree in industrial engineering from Pontificia Universidad Católica de Chile. Prior to that position, he was the chief executive officer of the consumer banking division at Banco de Santiago and previously worked at Altavida insurance company. He holds a degree in business administration and an MBA from Pontificia Universidad Católica de Chile. Felipe Echaiz Bornemann Eduardo Ebensperger Orrego Compliance Division Manager Wholesale, Large Companies and Real Estate Division Manager. since 2005 desde 2008 Prior to this position, he held numerous positions at Citibank and Citigroup Chile. In 2003, Mr. Echaiz was Deputy Director of the Anti-Money Laundering and Organized Crime Unit of Chile’s Ministry of Public Affairs. He has a law degree from Universidad Católica de Chile and a master’s in finance and economics from Universidad de Chile. From 2002 to 2005, he was the chief executive officer of Banchile Factoring S.A. and prior to that held diverse managerial positions in the commercial areas of Banco de Chile and Banco de A. Edwards. Mr. Ebensperger holds a degree in business administration from Universidad de Chile. Mauricio Baeza Letelier Sergio Karlezi Aboitiz Corporate Risk Division Manager Treasury Division Manager since 2011 since 2011 He was appointed to this position following the merger of the Companies Credit Risk Division, the Market Risk Division and the Retail Credit Risk Division. Between 2005 and 2011, he served as the Companies Credit Risk and Market Risk Division Manager and before that in the credit risk divisions at Banco de Chile, Banco de A. Edwards and Banco Santiago. Mr. Baeza holds a degree in civil engineering from Pontificia Universidad Católica de Chile. Prior to that, he was the Treasury Manager at Banco de Chile. Previously, he was the Head Trader at Banco de Chile, Citibank, Banco Santander New York (Latin America) and JPM Chase Chile. Mr. Karlezi holds a degree in industrial engineering from Universidad de Santiago. Andrés Bucher Cepeda Esteban Torrent López Chief Executive Officer of Banchile Corredores de Bolsa S.A. Gerente Desarrollo y Calidad since 2012 Development and Quality Division Manager since 2012. Formerly, from 2005 to mid-2012, he was the Commercial Banking Central Regional Manager for Banco de Chile and prior to that he held several positions in the commercial and credit risk areas at Banco de Chile and Banco de A. Edwards. Mr. Torrent holds a degree in agricultural engineering and an MBA from Pontificia Universidad Católica de Chile. Corporate Governance Practices Formerly, he was the Investment Banking and Capital Markets Division Manager and Chief Executive Officer of Banchile Asesoría Financiera S.A. since 2008. Prior to that, he was Investment Banking Manager at Citigroup Chile, where he worked for close to 20 years until Citibank Chile merged with Banco de Chile. He holds a degree in industrial engineering from Universidad Católica de Chile and has an MBA from the Wharton School of the University of Pennsylvania. since 2012 Corporate Governance 27 Corporate Governance Practices Principles Our corporate governance practices are governed through by-laws, the General Banking Law, the Corporations Law, the Securities Market Law and the applicable regulations of the Chilean Superintendency of Banks and Financial Institutions (SBIF) and the Superintendency of Securities and Insurance (SVS). In order to formalize these practices, in 2011 the Board of Directors approved a document entitled “General Corporate Governance Principles”, which summarizes and serves as the basis for a set of policies and procedures that the Bank has approved over time. Our corporate governance principles aim to improve internal self-regulation mechanisms, ensuring full compliance with current regulations, creating value for the Bank and all customers, associates, the community and the market in general, and working to safeguard adherence to the corporation’s values. Management Committees Directors’ and Audit Committee Boards of Subsidiaries Global Connectivity Committees Upper Management Committee Business Area Committees Other Committees Banco CrediChile Committee Retail Business Committee Companies Committee Leasing Committee Finance, International and Financial Risk Committee Ethics Committee Disclosure Committee Risk Committees Portfolio Risk Committee Loan Committee Asset Laundering Prevention Committee Operational Risk Executive Committee Internal Modeling Technical Oversight Committee 28 AnnualReport2012 Structure Our Board, consisting of eleven directors and two alternate directors, is the entity that defines our organization’s strategic guidelines and plays a key role in corporate governance. Our complete Board of Directors is elected every three years. The last elections took place at the shareholders’ meeting in March 2011. Currently, the Board is comprised of six directors chosen by Quiñenco, three by Citigroup and two independent directors. The Chief Executive Officer is appointed by the Board and holds his position until the Board decides otherwise. According to the law and our by-laws, ordinary Board meetings must be held at least once a month. In practice, the Board meets twice a month, except in February. Extraordinary meetings may be called by the Chairman of the Board or at the request of one or more directors. The Board delegates certain functions and activities to the Directors’ Committees. This allows for in-depth analysis of specific matters and provides the Board with the information necessary to discuss and debate general policies and guidelines governing our businesses. Management Committees Directors’ and Audit Committee The Directors’ and Audit Committee is responsible for examining external auditor reports, balance sheets and other financial statements; proposing external auditors and risk-rating agencies; examining the details of related party transactions; and analyzing the remuneration systems and compensation plans for senior executives. The committee’s operating budget is approved annually at the Ordinary Shareholders’ Meeting. Under Chilean law, the Directors’ and Audit Committee should have three members, the majority of whom should be independent. The members of the committee remain in their positions for a maximum of three years or until the end of the Board’s term, if earlier. As of December 2012, the Committee members were Jorge Awad Mehech (Chairman and the expert member on financial affairs), Jaime Estévez Valencia and Fernando Concha Ureta. As stated in the committee’s by-laws, our Chief Executive Officer, General Counsel and Controller, or their respective replacements, shall attend the meetings as well. The committee may also invite certain people to take part in one or more meetings. The committee’s organization, objectives, responsibilities and the scope of its work are contained in the by-laws whose amended and complemented text was approved at a meeting held on July 27, 2005. Corporate Governance 29 Corporate Governance Practices The committee’s objectives are to ensure the efficiency, maintenance, application and functioning of internal control systems; supervise compliance of standards and procedures governing the banking business and identify business risks for the Bank and its subsidiaries; supervise the functions of the Controller’s Office, guaranteeing its independence from management; supervise the functions of the Compliance Division, serving as a link and coordinator between internal and external auditors, as well as between these areas and the Bank’s Board; and perform the functions and responsibilities set out in the Corporations Law and SBIF Standards. The committee held 28 meetings during 2012 and addressed the following matters, among others: Review of customer claims filed with the SBIF and the Customer Defense Division of the Chilean Association of Banks and Financial Institutions. Banco de Chile – Citigroup Global Connectivity Committees In order permanently monitor the strategic alliance initiatives between Banco de Chile and Citigroup, in addition to the Global Connectivity Agreement Executive Committee, the following committees were created: (i) The Global Transactional Services Committee (GTS); (ii) the International Personal Banking Committee (IPB); (iii) the Investment Banking Committee; (iv) the Retail Initiatives Committee and (v) the Financial Control Committee. Examination of fee proposals from external auditors and risk-rating agencies. Analysis of reports, content, procedures and scope of reviews by external auditors and risk-rating agencies. Information on and analysis of the annual internal audit program and the results of internal audits and reviews. Analysis of the interim and annual financial statements. Analysis of the Bank’s financial statements included in the form 20F, to be filed with the Securities and Exchange Commission – SEC The Global Connectivity Agreement Executive Committee and the committees mentioned above, excluding the Financial Control Committee meet on a quarterly basis and consist of the Chairman of the Bank, the chief executive officer and the two members of the board representing Citigroup. The division managers and/or the managers of the areas directly responsible for the respective businesses also participate in meetings of the Global Transactional Services Committee (GTS), the International Personal Banking Committee (IPB), the Investment Banking Committee, the Retail Initiatives Committee and the Financial Control Committee. (USA). Information on accounting changes occurring during the year and their effects. Review of special cases affecting internal control systems. Analysis of the remuneration systems and compensation plans for The main objective of the Global Connectivity Agreement Executive Committee is to act as a communication channel and escalation mechanism between Banco de Chile and Citigroup regarding the agreements signed between these parties. The objectives of the four committees mentioned above are: managers and senior executives. Analysis of the 2012 performance self-evaluation process carried (i) Global Transactional Services Committee (GTS) out by the Bank. The main objective of the GTS Committee is to monitor the performance of the Transactional Services Area and, in particular, the functioning of local and international cash management services as well as custody services for foreign investors. Analysis of related-party transactions as referred to in Title XVI of the Corporations Law No. 18,046. Analysis of operational risk policies and development of risk-management and SOX self-assessment processes. Information on and analysis of matters related to the Compliance Division, primarily regarding the revision and enforcement of policies for detecting and sanctioning money-laundering transactions. 30 AnnualReport2012 (ii) International Personal Banking Committee (IPB) The primary purpose of the IPB Committee is to monitor services provided by Banco de Chile to Citibank related to its financial products and services offered abroad to residents of Chile. (iii) Investment Banking Committee The main objective of the Investment Banking Committee is to favor the development of cross-border merger and acquisition transactions, debt issuances and acquisitions, and capital markets transactions for the Bank’s customers and customers of Citigroup that do business in Chile. This committee is responsible for monitoring transactions performed under the Global Connectivity Agreement between Banco de Chile and Citigroup, and for helping explore investment banking business opportunities and ensuring compliance of agreements related to these matters. and evaluating the CrediChile Division based on the evolution of its loans, monthly sales, results and its main financial ratios, ii) assessing progress in opening branches, strategies for addressing new customer segments and the development of products and support systems, and iii) proposing measures to strengthen commercial management and maximize earnings. The members of this committee are: The Chairman of the Board of Directors, three directors appointed by the Bank’s Board, the Chief (iv) Retail Initiatives Committee Executive Officer and the managers of the Commercial Banking and Banco CrediChile Divisions. The primary purpose of the Retail Initiatives Committee is to share best practices and business alternatives between both institutions. Retail Business Committee Upper Management Committee This committee meets on a monthly basis to review all commercial initiatives from major competitors and decide how to confront them, and to review the market shares of the Bank’s diverse products and services to define the necessary actions to attain growth levels established in business plans. This committee is also used to coordinate and make decisions regarding important matters for the Bank that involve coordinating divisions, and to present progress reports on the Bank’s most important commercial and regulatory projects as well as on new product development. This committee is chaired by the Chief Executive Officer and is the highest coordinating body of our upper management. It analyzes the market and the banking industry, discusses our principal strategic guidelines, resolves issues relating to internal policies and analyses our performance. In addition, numerous divisions come together to exchange their points of view and prioritize and coordinate joint initiatives. The members of this committee are: the Chief Executive Officer and the managers of the following divisions and areas: Commercial Banking Division; Banco CrediChile Division; Payment Media Division; Development and Quality Division; Financial Control and Management Division; Marketing Area; Operations Area; Retail Credit Risk Area; Mortgage Area and the Products Area within the Commercial Banking Division. Each year, the Upper Management Committee outlines the foundations for our annual plan. After the individual annual plan for each business area is agreed upon by the Chief Executive Officer and each division manager, under the coordination of the Chief Financial Officer, the overall plan is submitted to the Board for approval. This committee reviews plan progress on a monthly basis and defines corrective actions when necessary. Companies Committee (v) Financial Control Committee The main goal of the Financial Control Committee is to closely monitor the operating and financial execution of the agreements signed with Citigroup. At its monthly meetings, this committee receives a report from the Chief Financial Officer regarding the income statement for the strategic alliance. Business Area Committees The objective of this committee is to evaluate the commercial performance of the Corporate Division and the Wholesale, Large Companies and Real Estate Division with respect to the market; it also reviews projects and sales campaigns for each of the segments managed by these divisions. It is also responsible for assessing the wholesale business from a segment and product-perspective with special emphasis on revenue, business volumes and identifying room for growth, generating action plans with periodic reviews. Banco CrediChile Committee The objective of this committee is to review consumer banking activity on a monthly basis. Its specific functions consist of: i) learning about Corporate Governance 31 Corporate Governance Practices The members of this committee are: the Chief Executive Officer, the Advisor to the CEO, and the managers of the following divisions and areas: Wholesale, Large Companies and Real Estate Division; Financial Control and Management Division; Corporate Banking Division; Wholesale and Large Companies Commercial Area; Development and Quality Division; Marketing, Administration and Market Intelligence Area. financial exposure of its liabilities and major credit exposures generated by derivative transactions. It is responsible for designing our policies and procedures for setting, measuring, controlling and reporting financial position limits and warning levels. Policies and procedures are then submitted to our Board of Directors for approval. Leasing Committee The objective of this committee is to review lease activity within the Bank on a monthly basis. To accomplish this, it reviews a monthly management and compliance report that consolidates the Bank’s diverse commercial divisions. The committee analyzes business opportunities and identifies the steps necessary to achieve growth figures from the business plan for the product. The committee is composed of the Chairman of the Board, one director, the Chief Executive Officer, the Wholesale, Large Companies and Real Estate Division Manager, the Commercial Banking Division Manager, branch managers and the managers of the Companies Products and Lease Areas. Finance, International and Financial Risk Committee The main function of the Finance, International and Financial Risk Committee is to analyze the evolution of our financial positions and market risks—price and liquidity—both those generated in the past and those that could potentially arise in the future, particularly the control of risks related to internal and regulatory limits and/or warning levels. Knowledge of the current status of market risks allows us to estimate potential future losses, with a certain defined level of confidence, in the event of adverse movements in key market variables (exchange rates, interest rates and options volatility) or illiquidity. The committee is composed of the Chairman of the Board, four Directors, the Chief Executive Officer, and the managers of the following divisions and areas: Corporate Risk Division, the Corporate and Investment Banking Division, the Financial Control and Management Division, the Corporate Treasury and the Commercial Banking Division and the Financial Risk Area. The committee meets once a month. Additional, extraordinary meetings may be called by the Chairman, two directors or the Chief Executive Officer. Risk Committees Banco de Chile has corporate governance policies for managing risk, which are regulated by laws or by-laws that establish, among other matters, the objectives, members and duties of the committees. Portfolio Risk Committee The main function of this committee is to monitor changes in the composition of our loan portfolio from an overall perspective, as well as by industry, business segment, product, maturity and all other aspects that provide a broad vision of counterparty risk. This committee reviews in detail the Bank’s main risk exposure per economic group, debtor and payment behavior parameters such as default rates, past-due loan and impairment indicators, charge-offs and allowances for the loan portfolio for each segment. This committee also reviews the estimated results that these financial positions generate in isolation in order to measure the risk-return ratio of the treasury business related to managing financial positions, as well as changes in the use of capital and estimates of credit and market risk that we will face in the future. The committee also analyzes the international 32 AnnualReport2012 This committee is responsible for approving and proposing segmented risk management strategies to the Board of Directors. This includes loan approval policies, portfolio evaluation methodologies and calculations of allowances to cover expected losses. The committee is also charged with analyzing the adequacy of our provisions, authorizing extraordinary loan charge-offs when recovery efforts have been exhausted, and controlling the liquidation of assets received in lieu of payment. It also reviews guidelines for developing credit risk models, which are evaluated by the Internal Modeling Technical Oversight Committee. maintain strict compliance with current laws and regulations, promptly reporting suspicious operations and cash transactions over UF 450 that are detected by diverse control systems. It also allows us to properly protect our image and reputation, as well as keep operational, regulatory or legal risks under control. The Portfolio Risk Committee meets monthly and is composed of the Chairman of the Board, two directors, the Chief Executive Officer, the Corporate Risk Division Manager, the Retail Credit Risk Division Manager and the Risk Architecture Area Manager. Additional, extraordinary meetings This committee is comprised of the Chairman of the Board, two Directors, the Chief Executive Officer, the General Counsel, the Operations and Technology Division Manager and the Chief Executive Officer of Banchile Administradora General de Fondos. The Controller and the managers of the Compliance Division and Asset Laundering Prevention and Terrorism Finance Area attend meetings and have the right to speak. may be called by the Chairman, two directors or the Chief Executive Officer. Loan Committee Our corporate governance structure calls for various credit committees responsible for credit decisions in our diverse commercial segments based on the type of risk involved. The highest of these committees is the Board Loan Committee, which is comprised of the Chief Executive Officer, the Corporate Risk Division Manager and at least three directors, who review all operations exceeding UF750,000 on a weekly basis. Each credit committee is responsible for defining the terms and conditions for accepting the counterparty risks considered in the loan evaluation, and is comprised of individuals with sufficient authority to make such decisions. The Corporate Risk Division participates in each committee independently and autonomously from our business areas. Operational Risk Executive Committee The Operational Risk Committee is commissioned with identifying, prioritizing and establishing strategies to mitigate key operating risks; ensuring implementation of management models; establishing risk tolerance and appetite levels; and ensuring compliance with programs, policies and procedures regarding privacy and information security, business continuity and operational risk. This year the committee began to meet more frequently, changing from a monthly committee that reported to upper management to the guiding body for the Operations and Technological Risk Division. Risk management also involves the Bank’s directors through quarterly presentations on such matters to the Directors’ and Audit Committee. Asset Laundering Prevention Committee Banco de Chile has an Asset Laundering and Terrorism Finance Prevention Committee whose main objectives include supervising the Bank’s Asset Laundering and Terrorism Finance Prevention System and periodically reviewing and approving corporate policies on the matter. It is also involved in managing potential risks in a timely manner. This committee consists of the Chief Executive Officer and the managers of the following divisions and areas: Corporate Risk Division; Financial Control and Management Division; Operations and Technology Division; Commercial Banking Division; Development and Quality Division; Operations and Technology Area, and the Controller (the latter attends meetings and has the right to speak). Policies and procedures related to the Asset Laundering and Terrorism Finance Prevention System are intended to prevent the Bank from being used to legitimize assets from illicit activities and/or as a vehicle to finance acts of terrorism. From a legal perspective, this system enables us to Corporate Governance 33 Corporate Governance Practices The Committee meets monthly and its functions involve Approving corporate policies concerning prevention of asset laundering and terrorism financing, including information gathering on customers and their activities, and acceptance and monitoring of their accounts, products and operations. Approving policies and special matters concerning detection systems for unusual transactions, formal channels for reporting to senior levels and monitoring, analysis and reporting mechanisms. Appointing persons to perform specific functions in accordance with current regulations on the prevention of asset laundering and terrorism financing. Analyzing the results of independent reviews conducted by both internal auditors and regulatory authorities to identify opportunities for improvement and verify compliance with current policies and procedures. Approving the training program and being informed of staff training activities. Being informed of and approving modifications to relevant risk procedures proposed by the Compliance Division in order to strengthen the internal control environment. Reporting any related regulatory changes to the Board of Directors. 34 AnnualReport2012 Internal Modeling Technical Oversight Committee The main function of this committee is to provide methodological guidelines for developing, monitoring and documenting the diverse mathematical models used by the Bank to manage credit risk in large-scale segments where automated models are used. It ensures coherence among the models and compliance with minimum required standards of satisfaction. In order to fulfill its mission, the committee reviews model development, verifies compliance with bank guidelines, defines monitoring standards and outlines action plans for continuous improvement. All models that need to be approved by the Portfolio Risk Committee or the Board of Directors must have prior endorsement from this committee. This committee meets monthly and is comprised of the managers of the Corporate Risk Division, Retail Risk, Risk Architecture Area and Studies and Planning Area. Other Committes Ethics Committee The Ethics Committee is responsible for defining, promoting and regulating professional and personal conduct of excellence by all associates, in line with our philosophy and values, in response to the trust our customers place in us. To comply with these objectives and foster a culture of ethical behavior, the committee develops a series of activities related to rules, training and communications. The committee is also the decision making authority for different situations in which there is a conflict between a certain conduct and the values promoted by the Bank. The members of this committee are: the Human Resources Division Manager, the General Counsel, the Controller and the managers of the Compliance, Commercial Banking, Operations and Technology, and Wholesale and Large Companies and Real Estate divisions. Corporate Governance 35 Corporate Governance Practices Disclosure Committee the merger between Banco de Chile and Citibank. This Division, which is responsible for these matters throughout all areas of the Bank and all Established in 2003, the Disclosure Committee is responsible for ensuring accurate market disclosure of consolidated financial information for the Bank and our subsidiaries. subsidiaries, operates independently and reports directly to the Directors’ and Audit Committee. Led by the Chief Financial Officer, this committee is comprised of the Chief Accountant, the senior lawyer for international matters, the Research and Planning Area Manager and the Controller (the latter attends meetings and has the right to speak). Other Corporate Governance Matters Compliance One of the most important tasks of the Compliance Division is to define internal regulations in conjunction with the General Counsel’s Office and the business, operations and financial control and management areas. It is also responsible for ensuring compliance with regulatory requirements established to prevent asset laundering and terrorism financing and for implementing and controlling the policies and procedures defined after 36 AnnualReport2012 We have defined an asset laundering and terrorism financing prevention policy, approved by the Board of Directors, which details roles and responsibilities, committee structures and processes to be used for making decisions, gathering client information, monitoring transactions and reporting to the Financial Analysis Unit. All of these procedures ensure compliance with regulations on this matter, in both the Bank and its subsidiaries. This year, the Compliance Division has focused efforts on continuously strengthening existing automated monitoring processes and incorporating new warning scenarios and new transactions. It has also continued with comprehensive training programs for all employees. In compliance with regulatory requirements on client information and with our current policies, this division conducts an annual campaign to update client information. The business and operational areas participate actively in this task Policies and Procedures The continuous development of the banking industry and the ongoing creation of new standards impacting it require the Bank to become a part of these changes and adjust its structure accordingly. In this sense, Banco de Chile has implemented a series of policies and control procedures to comply not only with the laws and regulations governing it, but also to attain the highest standards in ethics, corporate governance and quality. In 2012, the Compliance Division spearheaded efforts to implement and revise policies on personal investments, insider information, the code of ethics, fiduciary relationships, prohibitions on conditional credit products, mandatory absence, operational risk, prevention of dishonest practices and the crime prevention model contained in Chilean criminal liability law, etc. Both Banco de Chile and its subsidiaries are certified in accordance with Law 20,393. As a result of the merger between Banco de Chile and Citibank Chile and in compliance with the agreements signed as part of that merger, Citigroup’s Internal Audit Unit was authorized to review the degree of completion of instrumentation and compliance of Banco de Chile’s Approved Policies and Procedures. The Audit Unit reviewed implementation of the following three policies approved by the Bank’s Board of Directors between June 2011 and May 2012: The Managing Investments Abroad Policy, the Market Risk Policy and the Accounting Close Policy. In general, the review concluded that the implementation and the practices, processes and control procedures related to these policies function properly. Directors’ Expenses and Compensation The total amount paid as director remuneration for the year ended December 31, 2012 amounted to Ch$2,061 billion, as compensation for their services and attendance at meetings. No provision has been established for pensions, retirement or other similar benefits for Board members or other senior executives. Chilean law does not require a Compensation Committee to be formed, but the Directors’ Committee should approve the remuneration and compensation plans of managers and senior executives. Further details are provided in Note 38 to our financial statements as of December 31, 2012. Corporate Governance 37 Ownership of Banco de Chile Shareholders As of December 31, 2012, Banco de Chile has 13,211 shareholders. LQ Inversiones Financieras S.A. and Inversiones LQ-SM Ltda., subsidiaries of Quiñenco S.A., and Citigroup Inc., directly control 33.3% of the shares of Banco de Chile and indirectly control 26.6% through Sociedad Matriz Banco de Chile S.A., or SM-Chile S.A. (hereinafter “SM-Chile”). In all, LQ Inversiones Financieras S.A. controls 59.9% of the Bank’s shares and its voting rights. Under the strategic partnership agreement between Quiñenco and Citigroup Inc. for the merger by incorporation of Citibank Chile into Banco de Chile, Citigroup Inc. took a shareholding in LQIF, with an initial holding of 32.96%, which it later increased to 50% of LQIF. An essential feature of this partnership is the agreement that Quiñenco will at all times continue to be the controller of LQIF and the companies that LQIF directly or indirectly controls. Formed in 1996, Sociedad Matriz del Banco de Chile S.A. (SM-Chile S.A.) is a publicly-held corporation that was established to resolve the subordinated obligation that Banco de Chile had with the Chilean Central Bank as a result of the 1982-1983 economic crisis. SM-Chile S.A., which is the entity originally formed as Banco de Chile in 1893, created a new wholly-owned subsidiary called Banco de Chile to which it transferred its name, its assets and its liabilities, except for the subordinated obligation with the Chilean Central Bank. SM-Chile S.A. trades its shares on local stock markets and is governed by the provisions of Law 19,396 and regulated by the Superintendency of Banks and Financial Institutions. As of December 31, 2012, SM-Chile S.A. has a total of 18,525 shareholders who directly exercise their voting rights in the shares of Banco de Chile held by S.M.-Chile S.A. and its subsidiary Sociedad Administradora de la Obligación Subordinada S.A. (SAOS S.A.). 38 AnnualReport2012 SAOS S.A. is a privately-held corporation and wholly-owned subsidiary of SM-Chile S.A. Its shares are pledged in favor of the Chilean Central Bank to guarantee payment of its subordinated obligation, pursuant to the agreement entered into in 1996 between this company and the Central Bank. The restructuring agreement considers that the subordinated obligation with the Central Bank is the exclusive responsibility of SAOS S.A., establishing a 40-year repayment term in equal annual installments with annual interest of 5%, denominated in Unidades de Fomento. Dividends received on these shares are the sole source of income for SAOS S.A. and are applied each year to repaying this obligation. The shares pledged in favor of the Chilean Central Bank are equivalent to 32.5% of the shares of Banco de Chile excluding the Chile-T shares, which do not have rights to dividends and/or stock dividends payable from distributable net income for the year, plus 0.6% of the dividends received by shareholders of Series A shares of SM-Chile S.A., which, as committed, must be transferred each year to SAOS S.A. In short, as of December 31, 2012, 33.1% of the dividends distributed by Banco de Chile will be used to pay the annual installment on the obligation of SAOS S.A. As established in article 31 of Law No. 19,396, the Central Bank has the right to request that 100% of the distributable net income owed to SAOS S.A. be paid in cash rather than in stock dividends used to capitalize a portion of net income. Should the corresponding dividends be insufficient to cover the established annual installment, SAOS S.A. may maintain an accumulated deficit balance with the Central Bank that it commits to repay with future dividends. Should the deficit balance exceed 20% of the Bank’s capital and reserves, the Central Bank may require SAOS S.A. to sell a number of shares sufficient to repay the whole accumulated deficit. As of December 31, 2012, SAOS S.A. has an accumulated surplus with the Central Bank of Ch$272.1 billion. This surplus is denominated in UF and generates annual interest of 5%. Direct and Indirect Ownership Minority Shareholders (Voting Rights – “Chile” and “Chile T” Series Shares) Ergas Group 5.8% As of December 31, 2012, the shareholders of Banco de Chile that do not belong to the LQIF Group, the Ergas Group, or SM-Chile directly control 15.7% of the Bank’s shares. The shareholders of SM-Chile that do not belong to the LQIF Group or the Ergas Group control an additional 18.6% of voting rights in the Bank’s shares, thus giving minority shareholders a total of 34.3% of the voting rights. This group includes the Chilean Pension Fund Administrators (AFPs), with 1.4% of the voting rights, and 0.8% held in the form of American Depositary Shares (ADS). Main shareholders as of december 31, 2012 Shareholders Other Direct Shareholders(2) 15.7% Other Indirect Shareholders(3) 18.6% LQIF(1) 59.9% Participation LQ Inversiones Financieras S.A. 33.10% Economic Rights to 2012 Net Income Sociedad Administradora de la Obligación Subordinada SAOS S.A. 31.81% (Only “Chile” Series Shares) (5) Sociedad Matriz del Banco de Chile S.A. 13.50% Ever 1 BAE S. P. A. 2.14% Ever Chile S. P. A. 2.14% Banco de Chile (on behalf of third parties Chap. XIV Res. 5412 and 43) 2.13% Banchile Corredores de Bolsa S.A. 1.88% Banco Itaú Chile (on behalf of foreign investors) 1.50% Inversiones Aspen Ltda. 1.48% J. P. Morgan Chase Bank 0.83% Banco Santander por cuenta de inversionistas extranjeros 0.79% Inversiones Avenida Borgoño Limitada 0.59% Celfin Capital S.A. Corredores de Bolsa 0.57% Larraín Vial S.A. Corredora de Bolsa 0.38% Santander S.A. Corredores de Bolsa 0.37% BCI Corredor de Bolsa S.A. AFP Provida S.A. (for pension fund) Valores Security S.A. Corredores de Bolsa 0.16% Inversiones y Asesorías Fabiola S.A. 0.16% TOTAL LQIF(4) 39.8% SAOS(6) 33.1% 0.33% 0.17% Other shareholders Other Indirect Shareholders(3) 5.5% 0.32% BICE Inversiones Corredores de Bolsa S.A. Subtotal Ergas Group 5.9% Other Direct Shareholders(2) 15.7% 94.35% 5.65% 100.00% (1) Includes direct interest of 33.3% and indirect interest via SM Chile S.A. of 26.6%. (2) Corresponds to direct shareholders of Banco de Chile other than LQIF. (3) Corresponds to shareholders other than LQIF that, through their interest in SM-Chile S.A., have rights in Banco de Chile. (4) Includes direct interest of 32.2% and indirect interest via SM-Chile S.A. of 7.6%. (5) Calculation excludes Chile-T shares that do not have rights to dividends and/or stock dividends charged to net income for 2012. Likewise, shareholders with an indirect interest in Banco de Chile via SM-Chile S.A. have different voting and economic rights based on the series of shares they have in SM-Chile. (6) Includes 0.6% of the dividends received by shareholders of Series A shares of SM-Chile S.A., which, as committed, must be transferred each year to SAOS S.A. Corporate Governance 39 Shares of Banco de Chile Shares of Banco de Chile Banco de Chile shares are traded on local stock markets as well as the New York, London and Madrid (Latibex platform) Stock Exchanges. On the New York and London Stock Exchanges, the shares are traded in the form of American Depositary Shares (ADS), each equivalent to 600 shares of Banco de Chile. date of approximately US$ 14.5 billion and making Banco de Chile the financial institution with the greatest market capitalization in the country. Despite complex international conditions and poor local market performance in 2012, the share price increased by 16.1%, adjusted for capital events, over the closing value in 2011. This figure compares favorably with the IPSA, which grew by 3.0% during the same period. This good performance is the result of the Bank’s successful commercial and financial management as well as its conservative risk policy. As of December 31, 2012, there are 88,037,813,511 shares of Banco de Chile, which are identified with the ticker “Chile”, and 1,861,179,156 shares of Banco de Chile T series (2,078,310,286 T series shares are still in the process of being placed). The “Chile-T” shares are common shares and have the same rights as other Banco de Chile shares except for the right to receive dividends and/or stock dividends, whichever the case may be, for distributable net income for the year 2012. Once these dividends and/or stock dividends have been distributed and paid, the “Chile-T” shares will automatically become “Chile” shares. Nominal Values (unadjusted) Acción ADS Closing value 2011 $70.59 US$81.75 Closing value 2012 $77.39 US$96.50 High for the year 2012 $79.49 US$99.11 Low for the year 2012 $64.45 US$80.33 Source: Bloomberg. Banco de Chile’s Share Price vs. IPSA Index (Base 100) 120 125 Chilean Stock Exchanges New York Stock Exchange London Stock Exchange Madrid Stock ExchangeLatibex 110 105 Instrument Traded Shares ADS ADS Shares 100 Ticker Chile Chile-T BCH BODD XBCH 95 JP Morgan Chase Bank JP Morgan Chase Bank Santander Central Hispano Investment Link Entity - Performance of Banco de Chile’s Shares As of December 31, 2012, Banco de Chile’s share price on the Santiago Stock Exchange was $77.39, giving a market capitalization as of that 40 AnnualReport2012 116 103 90 Dic-11 Mar-12 Jun-12 Banco de Chile Sep-12 Dic-12 IPSA It is also important to mention that in 2012, as in recent years, the Bank made an effort to increase the share’s liquidity and visibility in the market. The Bank participated in several local and international conferences and met individually with numerous investors. These efforts, together with the increase in the share’s free float and the Bank’s stable and outstanding financial results, have increased interest in the share and traded volumes. Share Trends Average Daily Traded Volume (Trailing 90 days) Banco de Chile: Bank with Best Credit Rating in Latin America (International Risk Rating – Long-term) (In millions of US$) 16 14 In 2012, Banco de Chile positioned itself as the private bank with the best 12 risk rating in Latin America, receiving an ‘A+’ rating from international risk rating agency Standard & Poor’s. This achievement is the result of a strong market position, outstanding performance in risk matters, stable returns and adequate capitalization and liquidity. It is particularly noteworthy in light of the complex international conditions and multiple downgrades of other international banks occurring this year. 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 Since January 2002, Banco de Chile’s market capitalization has increased sevenfold, reaching US$14.5 billion and positioning it as the fourth largest bank in Latin America, excluding Brazil. These achievements can be attributed to appropriate growth strategies, limited credit risk and attractive returns for shareholders. Also during this period, through successful mergers with Banco Edwards in 2002 and Citibank Chile in 2008, Banco de Chile has strengthened core competitive advantages such as its strong brand image, sustained market leadership in a wide range of products, one of the best distribution networks in the country and a competitive funding structure, all of which have enabled the Bank to differentiate itself within the banking industry. Local Rating Banco de Chile Fitch Feller-Rate Short-term N 1+ Nivel 1+ Long-term AAA AAA Letters of credit AAA AAA Bonds AAA AAA Subordinated bonds AA AA+ Shares 1st Class Nivel 1 1st Class Nivel 1 Outlook Stable Stable Market Capitalization of Banco de Chile (In millions of US$) International Rating 16,000 Banco de Chile and Banco Edwards merger Banco de Chile 14,000 Banco de Chile and Citibank Chile merger 12,000 10,000 8,000 2002 2004 2006 2008 2010 Moody’s Foreign Currency Short-term Long-term A-1 P-1 A+ Aa3 Chilean pesos 6,000 2000 S&P 4,000 Short-term A-1 P-1 2,000 Long-term A+ Aa3 0 Outlook Stable Stable 2012 Corporate Governance 41 Shares of Banco de Chile Dividends and Shareholder Return prior to the balance sheet date. The difference between net income and distributable net income shall be recorded in a special reserve account and may not be distributed or capitalized. This transitory article shall be in effect until the obligation referred to in Law 19,396, which SM-Chile S.A. holds directly or through its subsidiary SAOS S.A., is extinguished. In the ordinary shareholders’ meeting held in March 2010, shareholders agreed to introduce a transitory article into our by-laws establishing that—for the purposes of Law No. 19,396 and the agreement signed November 8, 1996 between the Chilean Central Bank and Banco de Chile, currently SM-Chile S.A.—the Bank’s distributable net income will be calculated by first subtracting or adding the effect of inflation on paid-in capital and reserves for the year and their corresponding variations. For the purposes of determining price-level restatement, paid-in capital and reserves shall be adjusted based on the percent variation in the consumer price index for the period between the last day of the second month prior to the beginning of the fiscal year and the last day of the month In the ordinary and extraordinary shareholders’ meetings held in March 2012, shareholders agreed to distribute 70% of 2011 distributable net income, equivalent to $2.984740 per share, and to capitalize the remaining 30% by issuing stock dividends, with no par value, distributed to shareholders in a ratio of 0.018956 stock dividends per original share. In the financial statements for the year ended December 31, 2012, the Bank recognizes a liability for 70% of distributable net income. Ratios per Share(*) Nominal Values 2009 2010 2011 2012 Total Operating Revenue (Ch$) 12.3 14.2 14.1 15.2 Income before Taxes (Ch$) 3.6 5.1 5.6 5.9 Net Income (Ch$) 3.1 4.6 4.9 5.3 Distributable Net Income (Ch$) 3.5 4.2 4.3 4.9 Price-Earnings (times) 14.4 15.0 14.3 14.6 Price-to-Book (times) 2.9 4.1 3.5 3.6 82,551,699,423 82,551,699,423 86,942,514,973 88,037,813,511 (*) Total Number of Shares as of December 31 of each year (*) Does not include the T series equivalent to 1,861,179,256 shares and capital of Ch$119.1 billion as of December 31, 2012. 42 AnnualReport2012 Capital Increase 2012 | 2013 The Bank’s important growth in recent years and the positive economic outlook for our country and the banking industry led the Bank to begin a new capital increase process for Ch$250 billion by issuing 3,939,489,442 shares known as Chile-T, equivalent to 4.28% of shares after the placement. The “Chile-T” shares have the same rights as other Banco de Chile shares except for the right to receive dividends and/or stock dividends charged to distributable net income for the year 2012. Afterwards, the T series shares will automatically become common Banco de Chile shares. The main objectives of this share issuance were: (i) to take advantage of positive projections for the economy and the industry, (ii) to sustain the Bank’s medium-term growth, (iii) to strengthen its capital base and (iv) to increase the share’s free-float in order to increase its depth in financial markets and make it more attractive to local and international investors. The main stages of the 2012/2013 capital increase process are: Beginning End Event 05/12/2012 03/01/2013 Preferential Offer Period (POP) 04/1/2013 18/01/2013 Central Bank sets prices for SAOS options 19/01/2013 17/02/2013 Special Preferential Offer Period (SPOP) This process, which began at the extraordinary shareholders’ meeting held October 17, 2012, was well received during the preferential offer period (POP), which concluded January 3, 2013 with 94% of the shares offered during this period being subscribed at a price of Ch$64 per share. Afterwards, during the special preferential offer period (SPOP), which began January 19, 2013, a share block was successfully sold. The Bank’s controller, LQIF, decided to cede and transfer its rights to acquire options to purchase these shares. As of the date of print, the share issuance is still in progress. However, over 80% of all shares for the capital increase have already been subscribed and paid. Corporate Governance 43 2 ECONOMIC AND FINANCIAL ENVIRONMENT The Global Economy Global economic growth continued to decelerate during 2012 because of heightened fiscal and financial concerns in developed countries, which translated into a new recession in Europe and moderate growth in the United States. Contraction intensified in emerging countries, a downward trend that began in 2011, due to decreased growth in the developed world and less energetic internal demand resulting from more restrictive monetary policy and drops in confidence indicators. Throughout 2012, markets continued to keep a close watch on Europe given the lack of concrete measures by authorities to moderate fiscal and financial problems. The loss of confidence stemming from major discrepancies and disjointed political viewpoints among European countries and the severe fiscal adjustment measures implemented by some countries adversely impacted economic growth, driving figures into the red and increasing debt levels in the Eurozone. As a result, the risk profiles of the most vulnerable economies drastically deteriorated. This weakening, in addition to increasing stock market volatility, was reflected Global Growth For 2013, the IMF forecasts global growth of 3.5%, slightly greater than in 2012, primarily because of an upturn in emerging economies. (Real Variation in 12 months,%) Year 2008 World Developed Economies Economía Internacional The major fiscal and financial imbalances resulting from the most recent international crisis became more significant during 2012 and deteriorated global growth. According to the latest IMF estimates, global GDP increased 3.2% in 2012, which compares unfavorably to 5.1% and 3.9% in 2010 and 2011, respectively. During the year, growth of developed countries was affected by declined economic activity in the Eurozone and, to a lesser extent, by worse-than-expected outcomes in the United States. Emerging countries were impacted by the slowdown in developed economies, which, coupled with reduced prices in some commodities, affected exporters. In addition, internal spending in these economies was restricted because of increased uncertainty and less expansionary monetary policy. 46 AnnualReport2012 United States Eurozone 2.8 2009 -0.6 2010 5.1 2011 3.9 2012(e) 3.2 0.1 -3.5 3.0 1.6 1.3 -0.3 -3.1 2.4 1.8 2.2 0.4 -4.4 2.0 1.4 -0.4 Japan -1.0 -5.5 4.5 -0.6 2.0 Other 0.9 -2.0 4.4 2.5 1.3 6.1 2.7 7.4 6.3 5.1 China 9.6 9.2 10.4 9.3 7.8 India 6.9 5.9 10.1 7.9 4.5 Brazil 5.2 -0.3 7.5 2.7 1.0 4.5 -0.8 5.3 4.7 4.1 4.3 -1.7 6.2 4.5 3.0 Mexico 1.2 -6.0 5.6 3.9 3.8 Chile 3.3 -1.0 6.1 6.0 5.6 Peru 9.8 0.9 8.8 6.9 6.0 Other 5.2 -0.4 6.2 4.5 2.3 Emerging Economies Other Latin America (e) Estimation. Source: FMI. Fiscal Deficit 5.4 4.5 3.9 2.7 10.2 9.8 4.4 5.0 11.2 9.7 9.4 7.0 13.3 11.2 10.1 8.7 (% GDP) 15.6 10.5 9.1 7.5 in the spreads of sovereign bonds and credit default swaps in Spain and Italy, reaching historical highs during the first half of the year. The swift spread of global economic tensions forced the European Central Bank to announce a series of measures in the third quarter to prevent the crisis from worsening. These announcements, despite not providing a definitive solution, managed to considerably decrease market uncertainty, triggering upgrades in risk measurements and lower interest rates for sovereign bonds. Nonetheless, the difficulty of Eurozone economies to sustain their budget deficits along with requests by some to delay adjustment measures keeps uncertainty high. This trend should continue during 2013 given low growth expectations, high unemployment rates, growing social tensions and tight financing conditions. For these reasons, general consensus predicts that the Eurozone will undergo a moderate recession during 2013, once again affecting global economic growth. 09 10 11 12(e) 09 10 11 12(e) 09 10 11 12(e) 09 10 11 12(e) 09 10 11 12(e) Greece U.S. Spain Portugal Italy (e) Estimation. Source: FMI y EUROSTAT. Credit Default Swap (5 years) (Basis Points) Among developed countries, the United States continued to report stable growth, albeit below expectations from the first of the year. According to the latest information available, GDP grew 2.2% for the year in 2012, driven by household consumption of goods and services. However, unemployment levels remained high, at slightly below 8%. These levels, together with a weak credit market, have not made room for a major recovery in consumption in the context of monetary policy that has stayed extremely expansionary in recent years. Despite weak U.S. households, the domestic real estate market showed signs of recovery in 2012 following several years of contraction. This is a positive sign since this sector is expected to drive expansion over the next few years. 700 600 500 400 300 200 100 0 Dec-11 Spain Mar-12 Italy Jun-12 Brasil Sep-12 Chile Dec-12 Germany Source: Bloomberg. Economic and Financial Environment 47 The Global Economy During the year, risk in the United States was linked to the sustainability of public debt and the so-called fiscal cliff. The fiscal cliff entailed the automatic end of tax benefits and government spending if new laws were not passed, which would have negatively impacted economic performance in 2013. This was President Obama’s first challenge after being reelected last November. As of year-end, and following intense negotiations, U.S. politicians managed to reach agreement on a large part of the spending measures, also incorporating capital gains and income tax hikes for the wealthiest households. Despite this agreement, fiscal negotiations will continue in 2013, including debate on a new debt ceiling and guidelines for sustaining the budget deficit in upcoming years. In 2013, the United States will face slightly more favorable external prospects, but will not be free of risk. Moderation of public spending and the slow pace at which unemployment rates have dropped will not allow growth beyond that seen in the last two years. In fact, the latest consensus of estimates predicting GDP growth of around 2.0% in 2013 forced the Federal Reserve Board to announce that monetary policy will remain expansionary for a prolonged period of time and will not be modified until lasting improvements are seen in the labor market. Emerging economies, led by China, India and Brazil, have been the main source of growth in the last two years. After this group resumed medium-term trends in 2011, some countries experienced greater-thanexpected deceleration. During the year, the Chinese economy reported the lowest activity indicators in over a decade, while Brazil sharply decelerated, posting negative industrial production figures for the year. 48 AnnualReport2012 In China, weakened demand from Europe and a new macroeconomic approach that is less infrastructure intensive detracted momentum from this major emerging economy, leaving growth figures at 7.8% for the year in 2012. Investment and exports sharply diminished in Brazil, with economic activity decelerating to 1.0% for the year. This led authorities to return to anti-cyclical monetary and fiscal policies in both these countries and an important number of other economies throughout the world. During 2013, the external scenario for developing countries will not change significantly. Developed nations will continue to show adjusted growth and Europe will be a focal point of volatility and uncertainty. The behavior of internal demand in those countries will be crucial to the evolution of the global economy, which will depend, in part, on the stability of commodities prices (e.g. oil and food) and the effects of recently implemented macroeconomic policies. Even though there are risks in both developed and emerging countries, expectations are generally optimistic. According to the IMF, emerging economies will grow around 5.5% in 2013 and China will return to expansion rates slightly above 8%. It also predicts that developed countries will expand at around 1.4%. Global GDP should increase at a rate of 3.5% in 2013. Although this figure is still below average global growth for the last decade, it leads us to believe that the global economy will advance toward a more stable recovery with more limited risks. The Local Economy The Chilean economy surprised the world in 2012, positioning itself among the countries in the region with the most growth, expanding 5.6% for the year. 12 Month Inflation and Monetary Policy Rate (12 month variation, %) 8.3% 5.3% Low unemployment and gains in real salaries kept consumer expectations at optimal levels, driving growth of around 6.0% in annual aggregate demand. 7.1% 0.5% Appropriate macroeconomic policies and strong internal demand will allow the country to maintain growth in line with long-term trends in 2013. 4.4% 3.0% 1.5% -1.4% 2008 The CPI rose 1.5% during 2012 while the Monetary Policy Rate remained unchanged since January 2012, closing the year at 5.0% per annum. 5.0% 3.3% 2010 2009 12 Month CPI Variation 2011 2012 Year-end MPR Source: Banco Central de Chile. Unemployment Rate (Annual Average) 10.8% 8.2% 7.8% 2008 2009 7.2% 2010 2011 6.4% 2012 Source: INE. The Chilean economy grew 5.6% for the year in 2012 in the midst of a complex international scenario. Despite being a small, open economy, our country successfully confronted the fall in global demand for commodities and the deceleration of important commercial partners like Europe and China. The nation’s economic growth was based on solid internal demand, which grew 6.0% during the year, more than compensating for the deterioration in net exports. In fact, internal demand growth exceeded estimates for a large part of the year. Low unemployment and gains in real salaries kept consumer expectations at optimal levels, laying a foundation for the expansion of private consumption, which would reach 5.5% for the year. GDP and Internal Demand (12 month variation, %) 14.8% 8.3% 3.3% 6.1% 9.4% 6.0% -1.0% 6.0% 5.6% -5.7% 2008 2009 GDP 2010 2011 2012(e) Internal Demand (e) Estimation. Source: Banco Central de Chile. Economic and Financial Environment 49 The Local Economy Investment also marveled onlookers in 2012, with estimated annual real growth of 10%. Despite the complex international scenario and the increased sensitivity of this component of demand to economic cycles, investment in both construction and fixed assets stayed resilient throughout the year. Construction investment evolved steadily from one quarter to the next, achieving an estimated annual rise of 11% (in real terms), aligned with the performance of the construction industry. Investments in machinery and equipment posted adjusted figures during the first half of the year and showed solid recovery in the second half, projecting a real growth rate of around 9%. Industry-level GDPs reflected the strength of internal demand and a weak external scenario. Sectors linked to consumption and internal investment such as services, commerce and construction drove growth, while the manufacturing, agriculture and fishing industries performed below average and showed more volatility. These industries were also affected by a decline in exchange terms and the continuing appreciation of real exchange rates, making these sectors less competitive. Exports of goods totaled US$78.8 billion, dropping 3% over 2011. In contrast, imports totaled US$74.6 billion, recording an annual rise of 6% and reflecting the strength of internal spending. These figures gave a trade balance of US$4.2 billion, resulting in a larger current account deficit equivalent to 4% of GDP. Although this trade deficit exceeds 2011 figures, it is considered sustainable and does not impact our country’s international positioning in the short term. In terms of prices, the CPI increased 1.5% in 2012, well below initial expectations and in the Central Bank’s medium-term target range. During 50 AnnualReport2012 the year, seven of the twelve components of the market basket rose in price, with the greatest increase in food. Transportation, which reflects variations in fuel prices, recorded a negative variation as a result of the fall in oil prices in international markets. In addition, annual decreases were seen in clothing, basic services and recreation and cultural activities. Analytical indices like the CPIX (CPI excluding fresh fruits and vegetables, and fuel) and the CPIX1 (CPIX excluding fresh meat and fish, regulated rates and financial services) experienced rises of 1.3% and 1.8%, respectively. Inflation measured by type of good contracted 0.5% annually in tradable goods and 3.9% in non-tradable goods, the latter of which is linked to internal demand. In line with the evolution of prices and of the local and global economies, the Central Bank maintained a neutral monetary policy during the year, fixing the Monetary Policy Rate (MPR) at 5.0% per annum from its January meeting until year-end. In 2012, it expressed concern for the financial tensions and deceleration occurring globally while it indicated that the domestic economy was expanding in line with trends, with inflation below target and a lively labor market. Despite decreased inflationary pressure and a complex external scenario, the Central Bank aptly decided to leave the Monetary Policy Rate untouched given the greater-than-expected strength of the local economy. In 2013, monetary policy will once again face a weakened external scenario and a local economy that, despite decelerating growth, will remain strong in aggregate demand. The evolution of the Monetary Policy Rate will depend on how these factors influence inflation and on medium-term expectations, which at the time of print are still anchored to the target value. In fiscal matters, public spending expanded 4.7% (real terms) and income grew 1.3%, leaving a budget surplus of 0.6% of GDP. This increase in government revenue was due, among other factors, to more taxes collected as a consequence of economic growth over 5% and, to a lesser extent, to a tax reform implemented during the year. As a result of the budget surplus, sovereign funds grew by US$3.15 billion, reaching US$31.3 billion as of December 2012, which is undoubtedly a good sign of fiscal responsibility for two reasons: (1) it is the second consecutive year of surplus and (2) it entails a reduction of the structural deficit. the world. This achievement is a reflection of our country’s appropriate macroeconomic policies and sound institutions. These factors, together with a competitive, solvent financial system, managed to preserve the trust of companies and consumers alike in a scenario of significant uncertainty. For 2013, our economy should report more moderate growth, both because of the continued complex international scenario and due to normalizing patterns in personal and corporate spending. As a result, we expect GDP to grow around 4.5% in 2013 in a scenario of normalized inflation and unemployment levels slightly about current figures. In summary, the Chilean economy surprised the world with its vitality in 2012, positioning itself among the countries with the most growth in Gross Public Debt and Sovereign Funds(*) / GDP Trade Balance and Current Account (% of GDP) (US$ Millions) 15.4 5.8 4.9 6.8 8.6 11.2 10.3 11.3 10.2 13.4 13.5 3.5 2.0% 3.3 1.5% 8.4 4.9 7.0 4.2 -1.3% -3.2 -3.6% -5.8 2008 2009 Gross Public Debt / GDP 2010 2011 2012 Sovereign Funds(*) / GDP 2008 Current Account 2009 2010 Trade Balance 2011 -4.0% -8.4 2012(e) Current Account / GDP (*) Includes stabilization fund and other public treasury reserves. Does not include Central Bank reserves. Source: DIPRES. Source: Banco Central. Economic and Financial Environment 51 Chilean Banking System Consistent with economic growth, total loans for the Chilean banking system reported a nominal increase of 12.4%(1) over 2011. On a product level, overall system performance was driven by a rise of 13% in commercial loans, 12% in consumer loans and 11% in mortgage loans. In terms of earnings, system net income totaled Ch$1,629 billion, a 4.8% reduction over the prior year, as a result of increased risk provisions and operating expenses. System returns, measured as net income over average capital and reserves, reached 16%, which is less than the 20% figure from the previous year. The banking industry experienced a year of contrasts. In early 2012, growing financial tensions in international markets caused significant concern and forced measures to be taken to prepare for a year of less growth and greater risks. However, the strength of the local economy, which gained force throughout 2012, sustained internal demand and household and business expectations, positively impacting the banking industry’s performance, both in volumes and returns. Furthermore, many important regulations and initiatives were implemented in 2012, and debate on several future regulatory projects also began. (1) Total loan and per-product growth figures exclude foreign subsidiaries. 52 AnnualReport2012 In March 2012 a set of standards creating the Financial Consumer Protection Agency (Sernac Financiero) came into force, which entailed new obligations for the banking industry and their relationships with customers. While these measures have some positive elements, they have also introduced added inflexibility, increasing the costs of bank processes. In this context, we hope that these new consumer protection and oversight standards facilitate and drive the process of expanding banking access that has occupied the industry in recent years. Along these same lines, a tax reform was approved during the third quarter of the year to collect permanent additional fiscal revenue to fund education. This reform entailed, among other measures, an increase in corporate income tax and reductions in personal income tax, especially for the middle class. In banking matters, the reform reduced the stamp tax, stimulating demand for loans. Lastly, deliberation on new reforms began during the year, including a reduction to the maximum conventional interest rate and the consolidated debt project (positive credit information), both of which seek to expand consumer protection and increase the amount of information available. Participation from the banking industry focused on supporting the consolidated debt project and highlighting its positive impact on risk assessments. The industry also emphasized the risks of the maximum conventional interest rate project, which would adversely affect the process to increase banking access, particularly in lower-income segments. 12% loan growth in 2012 Business Volumes Total loans reported nominal growth of 12.4% in 2012, a reduction with respect to the 17.3% recorded in the prior year. The positive evolution of the local economy enabled the industry to once again attain double-digit increases in all loan products, led by commercial loans with 13.2% and followed by consumer and mortgage loans with 11.8% and 10.9%, respectively. During the year, consumer loans primarily expanded during the second half of the year, aligned with private consumption figures. Favorable employment figures and an increase in real wages explain the upward trend for this product family. Within consumer loans, worth highlighting are increases in credit card cash advances and revolving credit on credit cards, with annual increases of 15.2% and 11.2%, respectively. Commercial loans began the year well only to lose strength in the second half. Strong investment figures and positive corporate expectations helped sustain double-digit growth over twelve months. On a product level, commercial loans rose 17.3% for the year while foreign trade loans grew a mere 5.2%, partially because of the weakened dollar. Total Loans(*) Demand and Time Deposits(*) (In billions of Chilean pesos) (In billions of Chilean pesos of each period) +17.3% +17.8% +12.4% +10.9% 98,880 84,919 87,947 74,954 19,586 24,381 21,993 12,846 11,488 76,544 64,967 24,753 21,730 19,480 9,739 45,629 54,466 61,653 Dec-10 Dec-11 Dec-12 Commercial (*) Excludes foreign subsidiaries. Consumer Mortgage 45,487 Dec-10 Time Deposits 54,814 Dec-11 60,166 Dec-12 Demand Deposits (*) Excludes foreign subsidiaries. Economic and Financial Environment 53 Chilean Banking System Lastly, mortgage loans performed stably throughout the year, similar to figures observed during the last three years. In real terms, this product stands out because it has maintained an expansion rate of around 8%, driven by a vigorous real estate market, reduced long-term interest rates and low unemployment. the Basle index reached 13.2% as of October 2012, which is 13.9% less than in 2011, reflecting growth in business volumes slightly above the variation in regulatory capital, consisting principally of capital and subordinated bonds. In liabilities, demand and time deposits posted nominal growth of 13.9% and 9.8%, respectively, both decelerating with respect to 2011. As of year-end 2012, total deposits represented 86% of industry loans. The decreased aggregate growth of deposits in comparison to loans was partially offset by increased issuances of debt instruments, giving annual nominal growth of 16.9%. Within the sector, senior bonds increased 29.2% over the 6.6% experienced by subordinated bonds. Banking system net income reported an annual drop of 4.8%, totaling Ch$1,629 billion as of December 2012. These decreased earnings, together with more capital, explain the decline in returns on average capital and reserves of 16.2%, as compared to the 19.6% obtained in the prior year. This decrease in net income stems from greater provisions and operating expenses, which were partially offset by greater operating income. Financial Results Funding Structure Lastly, system capital posted nominal growth of 14.7%, totaling Ch$11,258 billion as of year-end, due principally to capital increases by some banks. Thus, (% of liabilities) Banking System Results (Cifras en millones de pesos) 2010 Operating Revenue 2011 2012 Variation 2012/2011 5,686,799 5,955,746 6,457,885 8.4% Net Interest Income 3,717,405 4,004,070 4,313,480 7.7% Net Fees 1,144,449 1,213,751 1,267,567 4.4% 618,014 588,659 716,796 21.8% 149,266 160,042 7.2% (955,115) (1,217,311) 27.5% Net Foreign Exchange Transactions Other Income Loan Loss Provisions Operating Expenses Income Attributable to Affiliates Income before Income Taxes Taxes Net Profit for the Year 206,931 (910,246) (2,929,308) (2,975,748) (3,303,779) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Time Dep. Sub. Bonds 16,900 8,443 (50.0)% 1,859,485 2,041,783 1,945,238 (4.7)% (275,532) (330,146) (316,520) (4.1)% 1,583,953 1,711,637 1,628,718 (4.8)% Equity Senior Bonds Mort. Bonds Capitalization Ratios 11.0% 12,240 Demand Dep. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 14.3% 14.1% 13.9% 9.6% 10.9% 10.1% 10.1% 9.8% 2008 2009 2010 2011 2012(**) 12.5% 13.2% Main Ratios Return on Average Capital and Reserves 20.24% 19.61% 16.19% (342) pb Efficiency Ratio 51.51% 49.96% 51.16% 119 pb Loan Loss Provisions/Avg. Total Loans Basel Index (*) (*) To october 2012. 54 AnnualReport2012 1.27% 1.18% 1.29% 11 pb 14.14% 13.93% 13.21% (72) pb Tier 1(*) Rest (*) Corresponds to Basic Capital over Credit Risk Weighted Assets, calculated using the Basle I rule. (**) To october 2012. During 2012, operating income posted nominal growth of 8.4%, explained by growing business volumes, higher nominal interest rates that increased returns on time deposits and greater net fees. These effects were partially offset by decreased revenue from the industry’s structural asset position in UF in a scenario of low inflation. In risk matters, net provision expenses reached Ch$1,217 billion, an annual increase of 27.5%, which more than doubles the industry’s growth in business volumes. This evolution is explained mainly by an increase in default rates in the consumer portfolio, especially during the first half of the year and by adjustments in risk models that increased provision expenses for one of the industry’s leading banks. These effects were partially offset by fewer additional provisions. Overall, the ratio of net provision expenses to average total loans recorded an 11 basis point rise over 2011, reaching 1.29% as of year-end 2012. The greater default rates in the consumer portfolio were partially offset by improved payment behavior in the commercial and mortgage portfolios. As a result, the ratio of 90-day past due loans to total loans decreased slightly from 2.4% in December 2011 to 2.2% in 2012. Similarly, the increased provisions meant that the coverage indicator for this portfolio increased slightly from 0.98 as of year-end 2011 to 1.03 in 2012. In terms of operating expenses and efficiency, operating expenses increased 11.0% (nominal), totaling Ch$3,304 billion. The system’s greater expense base arose mainly from increases in administrative expense (13.2% nominal) and, to a lesser extent, in payroll expenses (8.6%). This growth in expenses was consistent with the growth in business volumes, which necessitated disbursements for investments in infrastructure, technology and security. This spending is reflected in the efficiency ratio, which reached 51.2%, slightly above the 50.0% from the prior year. with a deferred asset position. This effect more than compensated for the increase in current taxes for the year. Banking System Challenges and Opportunities The banking system’s positive results in recent years are a notable achievement considering the complex economic scenario of heightened international uncertainty and newly introduced regulations. Vigorous business volumes, expanding banking services and restricted credit risk are signs of progress that have undoubtedly made a significant contribution to the country’s development, positioning Chile as the economy with the highest banking penetration indices in the region and a banking industry that is globally recognized for its solvency and soundness. Nevertheless, the challenges facing the industry are great. The good footing of our economy and the low levels of bank use in comparison to developed countries leave great potential for growth, especially in the retail and SME segments, which are key to economic development and job creation. The banking system has the tools and strength to address these challenges, with increasing competition and adequate capital. However, we hope that the new reforms under debate, including the reduction of the maximum conventional interest rate and the consolidated debt project, are addressed responsibly and in depth, prioritizing measures that strengthen free competition and encourage better information and transparency towards consumers. Without a doubt, Chile is in an excellent position to be categorized as a developed country in the next few years. Along this path, the banking industry will continue to fill a fundamental role, providing confidence and security to economic agents and financing projects and ventures that will make our country a more advanced, recognized and prosperous nation. Lastly, income tax expense dropped 4.1%, giving an effective rate of 16%. This fall was explained by the non-recurring positive effect of the newly implemented corporate tax rate, which increased from 17% to 20% in banks Economic and Financial Environment 55 3 STRATEGY Vision / Mission VISION To be the best bank for our customers, the best place to work, the best investment for our shareholders and the bank with the strongest commitment to the community. of our actions to gain substantial knowledge of their needs and aspirations and align our value offerings accordingly, while building long-term relationships. human resources are one of our core competitive advantages, given our team’s commitment, dedication and distinctive identity within the financial system. We also believe that We maintain our shareholders’ trust by engaging in projects and businesses intended to maximize the company’s long-term value, while being prudent with regards to business-related risks. Through commercial Our Community customers at the core We are convinced that our Our Shareholders We seek to place Our Associates Our Customers Throughout our history, we have aspired to be the leading bank in the Chilean financial system. This vision involves all of the diverse stakeholders related to our business and is shared and internalized by all areas across our organization, senior management and the board of directors. We believe that our business actions and financial performance depend on our community involvement. As a result, we strive to continuously reinforce our commitment to the community by carrying out diverse social impact initiatives. Our brand recognition, promoting a better work strategies that combine corporate reputation and environment is key to enhanced service quality We are committed to market leadership within providing exceptional with greater returns, we entrepreneurship, the the local financial customer service. For have been able to add integration of the elderly system represent important this reason, we focus significant value for our and disabled people, competitive advantages on creating effective shareholders. This approach high-quality education and that we must capitalize on, communication channels – which we expect to environmental protection. preserve and improve by and developing a merit- maintain– distinguishes us providing innovative value based culture by rewarding within the Chilean financial offerings tailored to each our staff’s talents and system. segment. achievements. 58 AnnualReport2012 MISSION T o be a leading financial institution across all segments, providing first-class financial services with innovative solutions that fit our customers’ needs. To accomplish this mission, we believe it is essential to be an industry leader in every segment in which we are engaged and across all aspects of financial activity (i.e. returns, profits, risk management, operating efficiency, business volumes, human capital development and corporate social responsibility). This mission requires initiatives aimed at achieving comprehensive excellence in management, with customer satisfaction as our ultimate goal. This demands of us the best technology, business models and quality standards in the industry. Value Creation Cycle Properly segment the customer base in order to build and maintain long-term relationships. Build exceptional human capital, committed to our corporate values and a culture based on results and customer service. Continuously widen and improve our financial product and service offerings to satisfy diverse segments. customer Prudently manage business risks, supporting customer endeavors with a long-term perspective. Develop efficient processes in terms of quality and delivery times that support superior customer service standards. Strategy 59 Strategic Pillars Strategic Pillars and Business Segments We aspire to be the leader in the retail business by improving segmentation and offering differentiated value propositions. We aim to make the segment more profitable through a broader offering of products and services that enables us to increase cross-selling. We believe that operating efficiency makes the difference in a highly competitive market. We seek to strengthen our strategic development capabilities. We focus on efficiency in expenses and internal processes. Exceptional Human Resources We encourage a distinctive, merit-based, results-oriented and customer-focused culture. We promote comprehensive development of human capital. 60 AnnualReport2012 Maximize Service Quality We believe there is room to continue expanding access to banking products. We are the undisputed leader in the wholesale market , which has low risk and tight margins. In order to concentrate our efforts and realize our medium and long-term goals, we have identified four strategic pillars that we use to define initiatives and areas of action, based on the priorities, challenges and goals for each year: Improve Operating Efficiency Our focus is based on profitable products with significant future growth potential. Strengthen the Wholesale Business Lead the Retail Business Our strategy is based on a business model centered around business initiatives and investment projects that generate significant economic value for shareholders, have appropriate risk levels and enable us to build long-term relationships with customers, based on segmented value propositions. We strive for innovation in customer relations, developing value propositions aligned with their needs and improving response time in order to strengthen long-term relationships. In order to more efficiently monitor our strategic efforts, we have divided our commercial and financial operations into four business segments: Retail Segment Wholesale Segment Treasury Subsidiaries Retail Banking (Individuals and SMEs) Consumer Banking (CrediChile) Wholesale, Large Companies and Real Estate Banking Corporate and Investment Banking Responsible for managing and monitoring our investment portfolio and managing our assets and liabilities. Stock Brokerage | Mutual Funds | Factoring Insurance Brokerage | Financial Advisory Securitization | Promarket | Socofin In keeping with these business segments, we have developed a multibrand focus to position ourselves differently in the diverse segments, strengthening the brands “Banco de Chile”, “Banco Edwards-Citi” and “Banco CrediChile” in the traditional banking business and the brand “Banchile” in specialized financial services. many years in the corporate segment by capitalizing on our competitive advantages. These advantages include the scale of our business and our broad distribution network, a highly competitive funding structure and the potential synergies that arise from collaboration among our different commercial divisions. We strive to achieve sustained growth in market presence within business segments and areas with greater margins and high growth potential, while maintaining a large degree of specialization in the segments where we already lead. Recently, we have strengthened our approach strategies for the retail, SME, large companies and treasury segments, where we hope to attain the same leading position that we have enjoyed for Likewise, in order to enrich the product offerings targeted at each segment, we have developed a wide range of financial services through our subsidiaries such as stock brokerage, mutual fund management, financial consulting, insurance brokerage, factoring and asset securitization. Since most of these services are fee based, they allow us to diversify our sources of operating income and ensure profitable growth. Strategy 61 Strategic Pillars Lead the Retail Business In the Retail Banking Segment, our objective is to grow by continuously developing and improving a global offering of products and services that provide considerable added value to the customer, which includes developing innovative service models tailored to each segment. Also, to increase our presence in this segment, we believe it is important to expand our customer base and distribution network, grow in SME loans and reinforce the offering of credit products that build long-term relationships, such as payment media (e.g. credit and debit cards) and retail mortgage loans. In the Consumer Banking Division, we intend to consolidate the presence of CrediChile in products such as payroll deduction loans and to foster bank use in Chile by promoting access to formal financial services. Along these lines, we have consolidated our leadership in retail current accounts, complemented by a sound strategy in retail mortgage loans, where we have enjoyed the largest increase in market share in recent years in comparison to other market players. Both elements confirm our emphasis on the retail market, as well as our interest in strengthening a business strategy based on long-term customer relationships. In addition, we are the Chilean bank with the most growth in market share in areas outside Santiago, thanks to our extensive distribution network covering a large part of the country. 62 AnnualReport2012 In terms of our contribution to bank penetration (bankarization), we have made consistent progress, increase our presence the SME segment, reflected in both the number of new customers and market share, establishing ourselves as one of the leading banks in volumes of government-backed loans for this segment. In addition, we implemented two projects (the Microenterprises Bank and “Caja Chile”) designed to provide access to segments that normally do not operate in the formal financial system. Strengthen the Wholesale Business In the Wholesale Banking Segment, our goal is to maintain our leading position in loans, but also to improve profitability in this highly competitive segment. As a result, we concentrate efforts on increasing cross-sales of non-loan products and services, focusing on improving cash management services, increasing penetration of treasury products, improving our presence in leasing and factoring products and promoting international dealings by taking advantage of the synergies from our strategic alliance with Citigroup (Global Connectivity Agreement). As a result, our wholesale divisions have remained focused on profitability, which has meant not only developing new service models, but also generating business with adequate risk-return ratios. Worth highlighting are the leadership positions we have maintained in products such as factoring as well as the stake we have attained in leasing, which enable us to build a long-term relationship with customers. In addition, based on a comprehensive product offering in this segment, we have been able to increase cross-sales (non-loan income over loan income), partially due to our growth in business volumes in collections and payment services managed by our Transactional Banking area, which we have worked to strengthen over the last three years. This allows us to better diversify our income sources. We continue to capitalize on our expertise in Treasury related products, increasing our penetration of existing products with traditional customers in this segment (corporations and large companies), as well as to open new market niches, developing financial products (e.g. hedges) tailored to the needs of high potential segments such as SMEs. In addition, this segment continually seeks new, more attractive financing alternatives, both local and international, in order to sustain business over the long term by properly diversifying our funding structure. Improve Operating Efficiency complex environment. This not only allows us to obtain better financial results, but also enables us to more efficiently and effectively cover our customers’ needs using intelligently designed, business-focused processes that should lead to more attractive value propositions for customers and longer relationships. In order to meet this objective, we have invested important resources in information technology as well as simpler, more manageable and more reliable platforms and operating processes that permit us to optimize response times and productivity in customer contact channels. As a result, since 2008 we have managed to significantly improve operating efficiency, thanks to the cost synergies generated by the merger with Citibank Chile, the greater scale we have attained in recent years, and improvements in our internal processes. In 2012, we continued focusing on business continuity and IT security for our customers. Consequently, we have been able to address IT contingencies in a timely manner and continue improving processes and platforms by simulating IT risks and implementing first-generation software for online transactions. We believe that these initiatives, together with a comprehensive distribution network and significant economies of scale, should enable us to attain higher levels of efficiency in upcoming years. CWe believe that controlling expenses and developing more efficient processes are key elements to competing effectively in an increasingly Strategy 63 Strategic Pillars Strengthen Service Quality We are convinced that our reputation is based to a great extent on the quality of our products and services. Quality is a differentiating element that will unquestionably enable us to sustain our business in the long term, consolidating the loyalty of our current customers and developing it in new segments. As a result, we are committed to the continuous improvement of all aspects of our business that impact the customer experience. In line with this vision, our strategic priority to provide exceptional service quality achieved through several concrete initiatives aimed at directly or indirectly impacting customer satisfaction, including: 64 AnnualReport2012 Ensuring availability and operational continuity for channels, services and systems. Automating tasks in order to reduce errors and decrease the number of manual processes. Redesigning critical processes that impact customers, improving availability, training, consistency and the standard response times for each segment and channel. Redesigning the request and complaint service with a customercentered vision (time, quality, opportunity). Streamlining credit approval processes. Developing specialized solutions and optimizing remote customer service channels in the wholesale banking segment. Exceptional Human Resources We are certain that human capital is a key element for any institution to achieve its objectives. In order to consolidate profitable growth, attain operating efficiency and achieve high service quality standards over the long term, we believe it essential to have motivated, highly qualified team members who are aligned with our corporate goals. In this sense, we strive to develop a team of associates committed to both overall excellence and our corporate values by promoting: Clear customer focus Leadership and trust Merit-based and high performance Results-oriented performance evaluations Collaboration and team work Innovation and continuous improvement During 2012, we implemented diverse projects and initiatives to reinforce these concepts, with a special emphasis on recruiting and selection processes, including the newly-launched internal mobility website, which enhances talent management. We also improved our competency evaluation methodology used to identify outstanding behavior and strengthen associate development. In terms of training, we have continued to shape leaders through programs like “Jefes para el Chile” (Managers for Chile) and “Crece en el Chile” (Grow in Chile). We believe that these initiatives are aligned with our strategy and the development goals of our team members. Strategy 65 4 CONSOLIDATED PERFORMANCE 2012 Arturo Tagle Quiroz Chief Executive Officer Consolidated Performance 2012 Management Discussion and Analysis 2012 In 2012, Banco de Chile maintained its leading position within the banking industry, reporting excellent financial results and making important progress in diverse business areas. In regulatory matters, the Bank had to deal with the implementation of important regulatory and legal changes that involved, among other measures, higher tax rates, less historical information for assessing risk and greater obligations and responsibilities towards customers. The Bank For the year, the Bank posted net income of Ch$466 billion, 9% greater than the prior year, positioning itself as the market leader with 29% of total system earnings. It also led the industry in return on capital and return on assets with 26.2% and 2.1%, respectively. has actively participated in the debate on new regulatory requirements, supporting all initiatives that protect consumers but strongly defending the principles of free competition. It has also counseled authorities on the undesired effects that some regulations could have on the process of expanding bank access that has been driven by the financial services industry, and identified situations that could disrupt the cost and return equilibriums that have afforded Chile such a sound banking system. This exceptional performance is the result of a clear and consistent customer-focused strategy characterized by attractive operating margins, conservative risk management and a continual focus on efficiency, service quality and employee development. These results were recognized by both the market and the financial community, reflected in the superior performance by Banco de Chile’s stock, posting total returns of 16% in 2012 and largely exceeding the IPSA index. Other recognition includes being named the best bank in the country, the bank with the best corporate reputation and the safest private bank in Latin America, among other awards. Worth special mention is another of the year’s milestones: At mid-year, the risk rating agency Standard & Poor’s upgraded the Bank’s long-term international rating from ‘A’ to ‘A+’, making Banco de Chile the private financial institution with the highest rating in Latin America. This feat is especially noteworthy given the complex global economic conditions present at the time. Heightened uncertainty because of the international financial crisis required special attention in order to maintain an adequate risk-return ratio in loan portfolios. While the local economy performed well, showing great resilience in the midst of global deceleration, inflation was limited —even below economic trends— adversely impacting the industry’s operating revenue. Regarding business volumes, in 2012 the Bank expanded total loans by 8%, prioritizing growth in areas with greater returns in the retail segment using segmented value offerings and a broad branch network, which included 434 service centers as of December 2012. At the same time, we continued to lead the wholesale loan market in Chile, a position we reinforced by incorporating new products and services and taking concrete steps to strengthen customer relationships. In the retail market, the Commercial Division led loan growth within the Bank, with 15% annual growth, representing 46% of the Bank’s total loan portfolio as of year-end, as compared to 41% three years ago. This expansion is tangible evidence of the successful implementation of the Bank’s strategic plans. On a product level, mortgage loans excelled with annual growth of 16%, increasing market share by 82 basis points to 17.2%. In recent years, Banco de Chile has increased its market share by more than 283 basis points in mortgage products. In consumer loans, the Bank held second place in the industry with 22% market share. Within this product, cash advances on credit cards Consolidated Performance 2012 69 Consolidated Performance 2012 grew 19%, ending the year with market share of 27% or 95 basis points more than in 2011. This positive performance can be attributed to the work of the Payment Media Area, the unit responsible for designing and executing attractive campaigns to promote credit card issuance and use. During 2012, 240,000 new cards were issued, consisting of 185,000 new credit cards and 55,000 new debit cards. As of year-end, 19% of all credit cards in the Chilean market were issued by Banco de Chile, while the Bank’s customers comprised 28% of all purchases and cash advances in the industry. This solid position can also be seen in debit cards with 19% of purchases made. Within retail banking, Banco de Chile continued to expand its presence in the SME segment with initiatives such as increasing loan pre-approval, using a ratings system for loan approval, simplifying customer documentation requirements, optimizing the use of government-backed financing and boosting efforts to incorporate lease and factoring products. As a result, the Bank posted annual growth of 18% in loans in this segment and positioned itself as one of the industry leaders in government-backed loans (Corfo) with over 17,000 loans granted, making the Bank a beacon for entrepreneurs in Chile. The Bank also continued to organize loyalty events, which are highly valued by customers, that included social gatherings, workshops, events and webinars. The Consumer Segment, Banco CrediChile, focused efforts on extending its reach through initiatives such as Caja Chile and the Microenterprise Bank, helping expand banking access in Chile. These projects, which are still in the early stages, will allow the Bank to increase its customer base, expanding its presence in areas outside Santiago and improving quality of life for many. Caja Chile is a remote IT platform used to serve CrediChile customers that live in towns without a local bank branch, enabling them to carry out basic transactions in small local businesses. As of year-end 2012, Caja Chile had enlisted more than 1,000 service centers in 220 districts throughout the country. The Bank expects to expand services to include all basic functions for Banco de Chile current account holders. The Microenterprise Bank is a specialized business area that provides financial and advisory 70 AnnualReport2012 services to small businesses through 40 customer service platforms in Chile, strengthening the Bank’s position among entrepreneurs of all sizes. CrediChile reported annual growth of 3.5% in loans. This growth was particularly strong in the last quarter of the year, consistent with the conservative risk management required for this segment. As of year-end, the Bank continued to lead the industry in this segment with close to 25% market share and over 881,000 customers. In the wholesale market, both the Corporate and the Wholesale, Large Companies and Real Estate Divisions had an extremely competitive year. In this context, they implemented a focalized growth strategy that prioritized an appropriate risk-return ratio for their portfolios, resulting in growth of 1.5% in business volume in this market, which is lower than figures for the retail market but consistent with the business strategy defined. Both business units worked to strengthen ties with customers through segmentation, an exhaustive focus on service quality and a close relationship with account executives. They also continued with their regional expansion plans, developing specific customer service models to provide more efficient, thorough coverage. By increasing collaboration with the Treasury Division, they increased cross sales with a greater offering of currency and interest rate derivatives and specialized advisory services for customers. The Bank also supported its customers in non-traditional businesses such as bond placements and international expansion plans, using its strategic alliance with Citigroup and its international branch network. The Bank established a Colombia Desk to advise customers with expansion plans in that country. Additionally, available credit lines were expanded and financing conditions with correspondent banks were improved, with a positive effect on funding costs for foreign exchange transactions. At a product level in the wholesale market, the lease business grew considerably during the year, reporting 12% annual growth and market share of 22% as of December 2012. Furthermore, in collaboration with Banchile Securitizadora, the Bank placed an infrastructure bond for UF 1.3 million, which is especially noteworthy as it was the only instrument of its type placed in the local market in 2012. In terms of liability management, the Bank’s funding sources were strengthened and diversified during the year. New markets were accessed, with Banco de Chile being the first institution to issue short-term debt in the United States through a line of commercial paper and the first Chilean financial entity to issue long-term bonds on markets in Hong Kong and Peru. As of December 31, 2012, the Bank had placed US$605 million in these markets, representing close to 9% of all debt issued. Along these same lines, over US$1.3 billion in bonds were issued on the local market with the highest risk rating and low spreads just above Central Bank bonds. Banco de Chile also continued to be one of the leaders in demand deposits, representing 29% of the Bank’s total loans as of December, which compares favorably with financial system averages and competitor figures. This is a key competitive advantage as it gives the Bank the lowest cost of funds in the Chilean banking industry. refund percentages in a flexible and simple format. Another high point in 2012 was the record sales of Obligatory Personal Accident Insurance (SOAP), with more than 81,000 policies sold through remote channels. The performance of the Bank’s subsidiaries was recognized by external entities through several awards, including four from “FundPro” for Banchile Administradora General de Fondos. The Great Place to Work Institute also recognized Banchile Corredores de Bolsa as among the 15 best places to work in Chile. Undoubtedly, the Bank’s positive performance in earnings is also based on effective risk management. Its consolidated, conservative vision on risk management helped the Bank attain a ratio of net loan loss provisions to average loans of 1.0%. Although higher than in 2011, this figure is consistent with the Bank’s historic patterns and compares favorably with the banking system and main competitors. The Bank also reported the lowest past-due portfolio and impaired portfolio indicators, along with the highest provision coverage indices among its most relevant competitors. “2012 was a successful year for In contrast, both the brokerage and mutual fund subsidiaries faced a complex year with more risk adverse customers, which impacted local market returns and consequently the trading volumes of shares and variable-income mutual our institution, where we obtained important milestones in our financial and strategic goals” funds. Nevertheless, the Bank attained market share of 10% in share trading volumes and maintained its market leadership in mutual funds with close to US$9.0 billion in managed assets and market share of 23%. In addition, in 2012 the Bank added 14 new mutual funds and created 2 new investment funds, giving an offering of 81 mutual funds and 8 investment funds as of year-end with a customer base exceeding 350,000. The insurance brokerage subsidiary developed new sales platforms, including a system to offer insurance through CrediChile’s customer website and a new telemarketing platform known as “Modular Insurance”, designed to offer customers several options of coverage, assistance and premium In matters of operating efficiency —one of the Bank’s strategic pillars— it doubled expense control efforts, implementing specific projects throughout the organization. The Bank made improvements to internal processes, implemented a modern platform for managing financial derivatives, modernized and consolidated its processing center, acquired software to facilitate electronic fraud detection and executed multiple cost savings initiatives identified as part of its continual efforts to improve productivity. In addition, the Bank increased expense control incentives using uniform goals throughout the Bank in order to secure commitment from the entire institution with its objective to be a flexible, efficient bank. Consolidated Performance 2012 71 Consolidated Performance 2012 The progress made in the efficiency ratio (operating expenses over operating revenue) provides evidence of the benefits of these and many other initiatives implemented by the Bank. In 2012, this ratio had reached 47.2%, which compares favorably to 50.2% in 2011. Another element that continues to gain importance is service quality. Significant investments were made to enhance customer service channels through executive training programs, to modernize IT systems and to improve branch infrastructure. The Service Quality Area organized training sessions in almost 200 branches throughout Chile to implement several measures to improve customer service. It also employed a mystery shopper system to evaluate compliance with service quality and customer response standards. The Bank reinforced its protocols for sending account information through external suppliers and invested important human and financial resources to resolve IT issues that arose while implementing the new current account platform. These issues undeniably had a negative impact on the Bank’s service quality levels during the first half of the year. Banco de Chile has reiterated its commitment to continuously seeking quality standards to position itself among the most trustworthy and distinguished banks in the Chilean financial industry. 72 AnnualReport2012 Another important milestone for the year was the beginning of the new capital increase process. Chile’s sustained economic growth has driven expansion of loan volumes for the banking industry more quickly than expected, which, together with the positive outlook for the local economy and industry, led the Board of Directors to propose a new capital increase of Ch$250 billion to shareholders. The expansion of the capital base will allow the Bank to sustain its medium-term growth strategy, strengthen its capital base and increase the liquidity and depth of its stock. This process, which began in early December 2012, has generated significant interest from the market, demonstrated in the high demand observed during the preferential option period, with Ch$119 billion subscribed and paid as of year-end. On behalf of the Bank’s senior management, I would like to recognize the effort, professionalism and commitment of our associates, who once again demonstrated their capacity to get ahead during a year full of difficulties and challenges when we nevertheless achieved outstanding results. It is the job of the Bank, and especially of its management, to continue to form teams that are committed to the work we do, emphasizing the development of the individuals that make up this team, creating opportunities for professional growth and strengthening leadership and team work to constantly outdo ourselves. Consistent with these objectives, we have placed special emphasis on recruiting and selection processes, implementing a new internal mobility website, promoting internal talent and allowing for greater professional development. We also improved our competency evaluation process used to identify outstanding behavior and strengthen associate development. In addition, we continued to form leaders through the “Jefes para el Chile” and “Crece en el Chile” programs and redesigned our internal communications model to consolidate the Bank’s organizational culture and optimize the timeliness and means of internal communications. In terms of community commitments, the Bank continued to support the San José de Lampa School and the Astoreca Foundation, which provide quality education in highly impoverished areas. Likewise, through Banchile Inversiones we support the Cristo Joven Foundation, an organization that welcomes at-risk children and youth through a network of centers and preschools located in more vulnerable communities. During the year, Banco de Chile once again played an important role in the Teletón campaign, supplying its entire branch and point of sale network, manned voluntarily by its employees, to help give life to this emblematic crusade to rehabilitate disabled children. In the Teletón 2012 campaign, the Bank’s work was highly visible and well recognized, requiring eight months of preparation. In addition, thanks to the Bank’s commitment to entrepreneurship, it was recognized with the “Pro-SME Seal” given by the Ministry of Economy. In environmental matters, recycling and energy savings initiatives were expanded, decreasing the use of paper and electricity. Already immerse in the new challenges that 2013 will bring, Banco de Chile reaffirms its commitment to the country and the projects and needs of each of its customers. With its successful business model, based on sound competitive advantages and a first-rate team of associates, the Bank will continue with its profitable, yet conservative, expansion plans across all business areas, in order to consolidate its leadership position in the industry and strive each day to build the best bank in Chile. Consolidated Performance 2012 73 Results and Balance Sheet Analysis Statement of Income Banco de Chile posted net income of Ch$466 billion and a return on average capital and reserves of 26.2%, positioning itself as the industry leader in earnings and returns. These earnings can be attributed to the growth of the loan portfolio; increased demand deposits, which reported greater returns because of higher nominal interest rates; and ongoing control of operating expenses. (Figures in millions of Chilean pesos) Net interest and adjustment revenues Likewise, the Bank continued to diversify its sources of funds by issuing debt on foreign markets, including placing bonds in Hong Kong and Peru and being the first entity to register a commercial paper program in the United States. 2012 % Variación 871,320 952,838 9.4% Net gains from trading and brokerage activities 26,927 24,747 (8.1)% Net foreign exchange transactions (7,973) 35,136 N/A Net financial income 890,274 1,012,721 13.8% Net fees 308,773 307,257 (0.5)% 24,735 22,061 (10.8)% Operating revenues 1,223,782 1,342,039 9.7% Provisions for loans losses (124,840) (188,190) 50.7% Net operating revenues 1,098,942 1,153,849 5.0% Operating expenses (613,848) (633,819) 3.3% 3,300 (229) N/A Taxes (59,588) (53,950) (9.5)% Consolidated net income 428,806 465,851 8.6% 1 1 0.0% 428,805 465,850 8.6% Other operating income In 2012, Banco de Chile continued focusing its commercial strategy on retail segments, attaining annual growth of 16% in mortgage loans, 10% in consumer loans and 18% in SME loans. 2011 Income attributable to affiliates Minority interest Net income for equity holders of parent Net Income for the Year During 2012, Banco de Chile reported net income of Ch$465.8 billion, which represents an increase of 8.6% over 2011. This increase in net income was the result of a growth strategy focused on the segments with the greatest returns, a highly competitive funding structure with a large base of demand deposits, limited risk expense and improved efficiency. 74 AnnualReport2012 $466 Bil ion in Net Income and 26.2% Return on Capital Net Income for the Year and Return on Average Capital and Reserves (Figures in millions of Chilean pesos and percentages) +8.6% 465,851 428,806 27.4% 7 4% 2011 Net Income 26.2% This growth in net income can be attributed to: Growth of the loan portfolio in retail segments with greater returns, specifically individuals and small and medium-sized businesses, together with proactive management of credit spreads in an increasingly competitive environment across all business segments. A funding structure based on a higher proportion of demand and current account deposits, which, together with higher nominal interest rates, increased returns from assets financed by this type of liability. 2012 Return on Average Capital and Reserves These excellent earnings figures gave the Bank the leading market Greater income in the investment portfolio as a result of appropriate trading strategies and more sales of derivative products because of increased ties with the commercial areas in the companies segments. share in net income for the industry, with 29% of the banking sector’s total net income in 2012. This figure compares favorably with the 25% obtained in 2011. Lower taxes due to the favorable effect on deferred taxes of a higher corporate tax rate, which generated a non-recurring positive effect during the year. Banco de Chile also posted attractive returns. As of December 2012, its return on average capital (ROAC) was 26.2% while its return on average These elements were partially offset by increased risk expenses as a assets (ROAA) was 2.1%, making the Bank the industry leader for these result of a larger loan portfolio and a moderate deterioration in payment ratios. Both figures are well above its key competitor, which posted a behavior in the retail segment. Operating expenses also increased, which ROAC of 19.3% and a ROAA of 1.4% during the same period. is consistent with more commercial activity. Consolidated Performance 2012 75 Results and Balance Sheet Analysis Net Financial Income En términos del ingreso financiero neto, Banco de Chile registró $1.012.721 millones, que significó un incremento anual de 13,8% con respecto al año 2011. Lo anterior se debió a un aumento de 9,4% en el Ingreso Neto por Intereses y Reajustes y a un alza de 215,9% en la Utilidad Neta de Operaciones Financieras y Cambio. This variation was based mainly on: Annual growth of 14.2% in the retail loan portfolio, consisting of (+14%) in retail loans and (+15%) in SME loans, which is in line with private consumption and in response to low unemployment and a rise in real salaries. Increased investment positively impacted loan demand from small and medium-sized businesses. t 5IF#BOLTNBSLFUMFBEFSTIJQJOEFNBOEEFQPTJUTBOEDVSSFOU accounts. In a scenario of higher nominal interest rates, its deposits allowed it to increase the contribution by these noninterest bearing liabilities that finance interest-bearing assets. In effect, during 2012 the Monetary Policy Rate averaged 5.0%, The net income recorded in 2012 is especially noteworthy since inflation was substantially less than in 2011, adversely impacting the Bank’s operating margins because it, like the banking industry as a whole, has an asset position in UF. The net income recorded in 2012 is especially noteworthy since inflation was substantially less than in 2011, adversely impacting the Bank’s operating margins because it, like the banking industry as a whole, has an asset position in UF. Net Fees and Commissions In 2012, net fees and commissions fell 0.5% over 2011, explained mostly by decreased revenue from non-traditional services. In effect, during 2012 securities brokerage and mutual fund services were adversely affected by lower share transaction volumes and adjustments to mutual fund portfolios (both variable and fixed-income funds) as a result of greater uncertainty that made investors more risk averse and limited returns on local and international stock markets. which is greater than the 2011 average of 4.7%. Active management of financial instrument trading to correctly identify market opportunities, and an increase in sales of derivative products strengthened by the Bank’s market leadership in the wholesale segment. A low basis of comparison because of a loss recognized in 2011 for an impaired portfolio of approximately Ch$42.5 billion (a similar amount of loan loss provisions were liberated in compensation). 76 AnnualReport2012 Nevertheless, fees and commissions continued to be an important source of stable revenue for the Bank, representing 23% of operating revenue in 2012. Fees and commissions from the traditional banking business increased 5.7% for the year, almost entirely offsetting the adverse effects in non-traditional business units. Highlights regarding fees and commissions from the traditional banking business include: Net Fees and Commissions per Product (Figures in millions of nominal Chilean pesos) % Variación 67,020 64,181 60,481 59,171 56,043 63,809 Current accounts, debit accounts, lines of credit and ATMs Insurance Mutual funds 4.4% 2.2% (12.2)% Credit cards 43,071 36,948 16.6% Cash management services 42,939 38,812 10.6% 13,038 11,885 10,236 21,246 Letters of credit, guarantees, endorsements and other Securities brokerage 6,005 5,387 4,562 4,476 Foreign trade and currency purchases/sales Loans and factoring Loan pre-approval services 1.9% 24.1% (14.9)% 2,130 2,285 Other 2011 Growth of 17% in fees and commissions from the use of credit cards, consistent with internal demand and the proactive efforts of the Bank’s Payment Media Area. This area implemented successful campaigns to attract new customers and encourage the use of its products. An increase of 4% in fees and commissions from current accounts, demand accounts, lines of credit and ATMs, which is also in keeping with positive consumption figures and the economy’s (51.8)% 11.5% 3,955 3,186 (2,223) (2,613) Financial advisory services 9.7% (6.8)% 2012 The rise of 11% in income from cash management services (which includes collections and payment services, etc.) These good results allowed Banco de Chile to continue leading the industry in net fees and commissions, generating 24% of total system commissions. greater need for liquidity. Consolidated Performance 2012 77 Results and Balance Sheet Analysis affected the basis for comparison. The increase from one year to the next was due primarily to: Loan Loss Provisions In 2012, Banco de Chile continued to stand out because of its prudent risk policy and superior credit quality with respect to its peers in an environment of greater uncertainty and new regulations that adversely impacted the industry’s risk assessment processes. As of year-end 2012, the Bank’s provisions for loan losses totaled Ch$188.2 billion, which represented 15% of system risk expenses and compares favorably with its 19% market share in total loans. The 51% rise in provisions for loan losses was influenced in part by non-recurring effects in 2011 that Provisions for Loan Losses (Figures in millions of Chilean pesos) 2011 2012 % Variation The sale of an impaired portfolio from the Corporate Banking Division, which involved releasing provisions for loan losses of approximately Ch$45.4 billion in December 2011. A 13.8% increase in average total loans, concentrated mainly in the retail and SME segments, consistent with the Bank’s strategy to lead the retail business. An increase in default rates in the consumer portfolio during the first half of the year, which led to greater provisions for loan losses in the retail segment. As a result, the Bank instituted stricter loan approval policies, particularly in lower income segments and also strengthened its procedures and collections teams. Allowances for Loan Losses Initial allowances 376,987 384,490 2.0% (134,010) (182,733) 36.4% Provisions established (net) 141,513 225,678 59.5% Final Allowances 384,490 427,435 11.2% (141,513) (225,678) 59.5% (5,614) (1,204) (78.6)% (24,052) (2,271) (90.6)% Charge-offs Provisions for Loan Losses Gross provisions Gross provisions contingent loans Countercyclical provisions Recoveries Provisions for Loan Losses 46,339 40,963 (11.6)% (124,840) (188,190) 50.7% 0.79% 1.04% Credit Quality Ratios Provisions for Loan Losses / Avg. Loans Allowances for Loan Losses / Total Past-due Total Past-due / Total Loans 78 AnnualReport2012 2.15x 2.35x 1.03% 0.97% These effects were partially offset by: Additional (countercyclical) provisions established in 2011 for Ch$24 billion, compared to Ch$2.27 billion in 2012. The 8% appreciation in the exchange rate, which decreased the value of dollar-denominated provisions (in comparison to 11% depreciation in 2011). Despite increased provisions during the year, the Bank continued to perform well in all risk indicators, achieving a ratio of provisions for loan losses to average loans of 1.04%, and of total past-due loans to total loans of 0.97%, and a coverage ratio of 2.4. These figures all compare favorably to the financial system and the Bank’s key competitors. The main factors leading to this increase in 2012 were: A 5.9% increase in personnel expenses, excluding non-recurring Operating Expenses and Efficiency effects, fundamentally as a result of collective bargaining agreements signed in 2011 and increased hiring for the commercial and In line with the Bank’s ongoing focus on efficiency, its operating expenses grew 3.3% during the year, totaling Ch$633.8 billion as of December 2012. The greatest expenses were related mainly to business volume growth and, to a lesser extent, to improvements in technology, infrastructure and security. collections areas. During 2011, the Bank incurred a non-recurring expense of Ch$28.1 billion as a bonus for concluding union negotiations, which compares to expenses in 2012 of Ch$4.4 billion and Ch$2.1 billion for extraordinary bonuses for the Bank’s performance during the year and for the collective bargaining processes of two subsidiaries, respectively. Operating Expenses (Figures in millions of Chilean pesos) Administrative expenses increased 7.6% during the year due to 2011 2012 % Variation improvements in the distribution network, increased IT expenses Personnel Expenses (316,991) (312,065) (1.6)% (from modernizing data processing centers and electronic platforms) Administrative Expenses (229,919) (247,459) 7.6% and greater marketing expenses to strengthen brand recognition (30,711) (30,957) 0.8% (631) (899) 42.5% Depreciation and Amortization Impairments and launch new products. Other Operating Expenses (35,596) (42,439) 19.2% Total Operating Exenses (613,848) (633,819) 3.3% Other operating expenses, which increased 19% as a result Operating Revenue 1,223,782 1,342,039 9.7% of more charge-offsafter implementing a new current account 50.2% 47.2% Efficiency Ratio platform and increased cobranding expenses. Consolidated Performance 2012 79 Results and Balance Sheet Analysis Loan Portfolio(*) In 2012, Banco de Chile reported annual growth of 8.0% in loans, ending the year with a portfolio of Ch$18.8 trillion and representing 19.0% of industry loans. During the year, in line with its long-term strategy, commercial efforts focused on segments with greater returns in the retail market and on strengthening customer relationships and cross sales with customers from the wholesale segment, maintaining its historic leadership in commercial loans. In effect, during 2012 growth of total loans was led by the retail segment (+14.2%) more so than the wholesale business (+1.5%). This was possible thanks to the Bank’s solid brand positioning, a large customer base (which increased 4.0% in retail and 4.5% in the SME segment), one of the most extensive distribution networks throughout Chile and an ongoing focus on service quality. As in 2011, on a product level mortgage loans performed exceptionally, rising 16.4% in 2012 (23.3% in 2011). This outstanding performance was aligned with the Bank’s decision to expand this product because it helps generate long-term relationships with customers. The aggressive growth over the last three years has been sustained by a competitive funding structure, an attractive and properly segmented value proposition and the synergies that come from collaboration among different business units. As a result, the Bank attained market share of 17.2% as of December 2012, accumulating an increase of 283 basis points over the last three years. In consumer loans, the Bank’s growth was slightly below that of the banking system with a total annual increase of 10.4% (11.8% for the system), explained mostly by the deceleration that occurred during the first half of the year. During the year, growth of this product was focused on the medium and high-income segments, with a more conservative approach for the mass consumer segment given its higher default rates. Within this product, cash advances on credit cards grew 19.4%, ending the year with market share of 26.7% or 95 basis points more than in 2011. This positive performance Loan Portfolio can be explained by favorable household consumption patterns during the (Figures in billions of nominal Chilean pesos) year and appropriate commercial strategies to attract new customers and promote credit card use. Thus, as of year-end, the Bank held second place Mortgage Loans Consumer Loans 4,199 3,607 segment through Banco CrediChile with a market share of 25%. +10.4% +16.4% 2,832 2,566 in consumer loans with 22.0% of the market and led the mass consumer However, given the economy’s positive performance during the year, especially in terms of unemployment, Banco de Chile resumed growth during the fourth quarter, leading the industry with an increase of 5% 2011 2012 2011 2012 Total Loans Commercial Loans In commercial loans, the Bank reported an increase of 4.7% during +8.0% +4.7% 18,762 17,378 11,205 in consumer loans during that period. 2012. This figure, despite being below industry averages, continued to position Banco de Chile as the leader in commercial loans. This smaller 11,731 relative growth was exclusively in response to commercial decisions that prioritized an appropriate risk-return ratio in the loan portfolio and 2011 2012 2011 2012 focused efforts on strengthening the Bank’s positioning in small and medium-sized businesses and in areas outside Santiago. (*) Market share does not consider foreign subsidiaries. 80 AnnualReport2012 The composition of loan growth during 2012 reflected the consistency of the Bank’s strategy, which has allowed it to continue to successfully improve the mix of the loan portfolio, where the retail segment has increased its participation in total loans from 49% in 2009 to 52% as of year-end 2012. This represents a considerable achievement for Banco In 2012, Banco de Chile reported important achievements in its funding structure, despite an environment that still has a certain degree of uncertainty and risk aversion. Accordingly, the Bank increased its external sources of funding and, at the same time, expanded its demand deposits and issued debt with excellent financing conditions. de Chile as this segment offers more growth potential, greater stability As of December 2012, the Bank has liabilities for Ch$21.3 trillion, representing an increase of 6.3% over 2011. During the year, the increase in liabilities was explained primarily by: in income and deposits and greater returns. Funding In 2012, Banco de Chile reported important achievements in its funding structure, despite an environment that still has a certain degree of uncertainty and risk aversion. Accordingly, the Bank increased its external sources of funding and, at the same time, expanded its demand deposits and issued debt with excellent financing conditions. As of December 2012, the Bank has liabilities for Ch$21.3 trillion, representing an increase of 6.3% over 2011. During the year, the increase in liabilities was explained primarily by: An increase of 11.8% in current accounts and demand deposits due in part to a greater appetite for liquidity given the moderate variation in interest rates and the vitality of consumption and investment. Liability Structure (Figures in millions of Chilean pesos) 2011 2012 Non-interest Bearing Liabilities 6,232,181 6,869,924 Current Accounts and Other 4,895,426 5,470,971 % Variation 10.2% 11.8% Demand Deposits 429,913 380,322 Derivative Instruments 155,424 159,218 2.4% Transactions in the Course of Payment 751,418 859,413 14.4% 13,769,591 14,384,083 4.5% 9,282,324 9,612,950 3.6% Interest Bearing Liabilities (11.5)% Savings Accounts and Time Deposits Payables from Repurchase Agreements and Security Lending Borrowings from Financial Institutions 226,396 1.4% 1,690,939 1,108,681 (34.4)% Debt Issued 2,388,341 3,273,933 Other Financial Obligations Total Liabilities 223,202 184,785 The rise of 37% in debt issued, including: (i) placement of Ch$625 billion in long-term bonds on the local market, of which Ch$599 billion were senior bonds and Ch$26 billion were subordinated bonds, capitalizing on the low spreads to which the Bank had access, (ii) issuance of debt for more than US$605 million on markets in the United States, Peru and Hong Kong through commercial paper and bonds, taking advantage of the Bank’s outstanding international risk rating. 37.1% 162,123 (12.3)% 20,001,772 21,254,007 6.3% The rise of 3.6% in time deposits and savings accounts, which was fully explained by an increase of 15.5% in retail deposits that more than compensated for the 2.8% contraction in wholesale deposits. A greater relative proportion of retail deposits makes the Bank’s sources of funds more stable and more diverse. The above points reflect a successful funding strategy that aims to diversify fund suppliers and to access better interest rates. This, together with a large base of demand deposits representing 22% of the banking system and 29% of the Bank’s total loans as of December 2012 (25% of the system and its key competitors), allow Banco de Chile to maintain one of the lowest cost of funds figures in the banking system. Consolidated Performance 2012 81 Results and Balance Sheet Analysis Equity Specifically, the rise in equity in 2012 was the result of: As of December 2012, Banco de Chile has equity of Ch$2.0 trillion, which is 15.4% greater than year-end 2011. This growth, which was greater than the increase in assets, is in response to a capital strengthening strategy that included more retained earnings and a new capital increase that began in October 2012. Equity The capital increase initiated in early 2012 that has increased paid-in capital by Ch$119 billion by issuing Banco de Chile T series shares on the local market (still in progress as of the date of print). The capitalization of Ch$74 billion, which is 30% of distributable net income from 2011, as approved by shareholders. Ch$58 billion in retained earnings, which is equivalent to the pricelevel restatement of capital as stipulated in the Bank’s by-laws. (Figures in millions Chilean pesos) As of December 31, 2012 1,629,078 177,574 18,935 16,379 165,091 2 Total Equity (Millions of Ch$) 2,007,059 Capital Retained Earnings Reserves Net Income(*) Other Comprehensive Minority Interest (*) Net income includes provision for minimum dividends. 82 AnnualReport2012 As a result, the increased capital base enabled the Bank to increase its solvency ratios, attaining a Basle Index of 13.2% as of December 2012 (12.9% in December 2011) and positioning the Bank as the institution with the greatest market capitalization within the banking system, exceeding US$14.5 billion as of December 31, 2012. Key Financial Indicators Key Financial Indicators 2010 2011 2012 Earnings per Share Net Income per Share CHILE (Ch$)(1) Net Income per ADS (Ch$)(1)(2) Net Income per ADS (US$)(1)(3) 4.59 4.93 5.29 2,751.21 2,959.23 3,174.89 5.87 5.69 6.62 82,552 86,943 88,038 - - 1,938 Net Interest Margin 4.75% 4.88% 4.62% Net Financial Margin 5.26% 4.98% 4.91% Fees / Avg. Interest Earning Assets 1.80% 1.73% 1.49% Operating Revenues / Avg. Interest Earning Assets 7.21% 6.85% 6.51% Return on Average Total Assets 2.16% 2.12% 2.08% 28.83% 27.44% 26.24% Shares Outstanding CHILE (millions) Shares Outstanding CHILE-T (millions) Profitability Ratios(4) Return on Average Capital and Reserves Capital Ratios Equity / Total Assets 7.70% 8.00% 8.63% Basic Capital / Total Assets 6.60% 6.85% 7.33% Basic Capital / Risk-Weighted Assets Regulatory Capital / Risk-Weighted Assets 8.54% 8.88% 9.69% 13.39% 12.91% 13.22% Credit Quality Ratios Past-Due Loans / Total Loans 1.20% 1.03% 0.97% 219.08% 214.91% 235.03% Allowances for Loan Losses / Total Loans 2.62% 2.21% 2.28% Provisions for Loan Losses / Avg. Total Loans(4) 1.54% 0.79% 1.04% Operating Expenses / Operating Revenue 46.64% 50.16% 47.23% Operating Expenses / Avg. Total Assets(4) 3.11% 3.03% 2.84% Average Interest Earning Assets (Ch$ millions)(4) 16,219,299 17,867,129 20,627,817 Average Assets (Ch$ millions)(4) 17,529,404 20,267,708 22,343,333 Allowances for Loan Losses / Past-Due Loans Operating and Productivity Ratios Balance Sheet Averages (4) Average Capital and Reserves (Ch$ millions) Average Loans (Ch$ millions)(4) 1,312,860 1,562,469 1,775,665 13,538,600 15,870,478 18,052,920 Average Interest Bearing Liabilities (Ch$ millions)(4) 10,723,557 12,548,034 14,013,935 Risk-Weighted Assets (Ch$ millions) 16,445,695 19,584,871 20,709,524 Exchange Rate (Ch$) 468.37 519.80 479.47 Employees 14,016 14,129 14,581 422 441 434 Other Information Branches (1) Excludes Banco de Chile T series shares. (2) Values expressed in Chilean pesos. (3) Values calculated using net income, outstanding shares and exchange rates as of each year end. (4) Ratios calculated as an average of daily balances. Consolidated Performance 2012 83 5 BUSINESS AREAS Retail Market Mission t 5PMFBEUIFSFUBJMBOE4.&NBSLFUTFHNFOUTXJUIBQSPmUBCMFBTTFU portfolio and efficient processes, attracting customers that prefer our bank through motivated and committed teams in a quality work environment. Commercial Division Share of Loans 2012 46% Target Market t .JEEMFUPIJHIJODPNFJOEJWJEVBMT t 4NBMMBOENFEJVNTJ[FEDPNQBOJFT4.&T XJUIBOOVBMTBMFTPGVQ to Ch$1.6 billion. 54% Lines of Business and Products t 3FUBJM4FHNFOU Product and service offerings include: current accounts, credit cards, credit lines, mortgage loans, consumer loans, life and general insurance, savings instruments, mutual funds, time deposits, stock brokerage, foreign currency and automatic bill payment services. t 4NBMMBOE.FEJVNTJ[FE$PNQBOZ4FHNFOU The product offering for this segment includes a wide range of financing alternatives, assistance with import and export operations, payment and collections services, factoring services, lease agreements, current-account related services, international funds transfers, investment management, insurance brokerage, currency trading and government-backed loans. Share of Income Before Taxes 2012 42% 58% Commercial Division Other Commercial Banking Division Loans (BCh$) Commercial Mortgage Consumer Total Summarized Income Statement (BCh$) Total Operating Revenues Loan Loss Provisions Operating Expenses Income Before Taxes (IBT) Ratios Operating Income / Total Loans Efficiency Ratio LLP / Total Loans IBT / Total Loans Relevant Information Number of retail customers (thousands) Number of SME customers (thousands) ATMs** Branches 86 AnnualReport2012 2011 2.120.8 3.546.0 1.868.5 7.535.3 2011 624.5 (70.6) (327.9) 227.7 2011 8.3% 52.5% 0.9% 3.0% 2011 803.3 66.9 1,998 271 2012 2.438.4 4.128.1 2.119.4 8.685.9 2012 693.2 (115.7) (358.1) 219.2 2012 8.0% 51.7% 1.3% 2.5% 2012 834.0 69.9 1,915 278 Δ$ 317.6 582.1 250.9 1.150.6 Δ$ 68.7 (45.1) (30.2) (8.5) Δ (0.3)% (0.8)% 0.4% (0.5)% Δ 31 3 (83) 7 Δ% 15.0% 16.4% 13.4% 15.3% Δ% 11.0% 63.9% 9.2% (3.7)% Δ% 3.8% 4.5% (4.2)% 2.6% Competitive Strengths t #SBOEQPTJUJPOJOH t $PNQSFIFOTJWFQSPEVDUBOETFSWJDFPGGFSJOH t #VTJOFTTTDBMFBOEDVTUPNFSCBTF t &YUFOTJWFEJTUSJCVUJPOOFUXPSL Objectives and Strategic Initiatives 2013 t $POTPMJEBUF SFUVSOT UISPVHI DPNNFSDJBM NBOBHFNFOU BOE JO distribution network. t *NQSPWFFGmDJFODZJOCSBODINBOBHFNFOUBOETBMFTDIBOOFMT t 4USFOHUIFOTFSWJDFRVBMJUZ t 4USFOHUIFOMFBEFSTIJQJOBMMSFHJPOTUISPVHIPVU$IJMF Strengthening Customer Relationships The Commercial Banking Division, which serves individuals and SMEs, reported positive growth this year despite a complex environment. The year 2012 was marked by strong growth in the retail and SME segments both in loans, which expanded 15.3%, and in average demand deposits, which grew 10.9% over 2011. These achievements are significant given the complex business scenario plagued with operational, regulatory and commercial challenges. On a product level, the segment posted growth of 13.4% in consumer loans, 16.4% in mortgage loans and 15.0% in commercial loans, thanks to its segmented value offerings, which are reinforced by the Bank’s branch network and remote channels, that seek the most appropriate service model for each type of customer. Retail Segment Two elements stand out in 2012: the regional expansion project and growth in mortgage loans. The Regional Expansion Project, which entailed strengthening the Bank’s presence outside Santiago, was designed three years ago when regional market share was 16.8%. While the project hoped to reach 19% by December 2012, it exceeded this goal. Given the strategic importance of mortgage loans, the division initiated a plan to increase our market share of this product three years ago, which has been fully achieved with a 17.2% stake in 2012. Growth in consumer loans was another great achievement in 2012, stemming primarily from increased penetration in credit cards and all-purpose loans. During 2012 efforts were made to strengthen customer service channels, leading to a considerable increase in sales of revolving credit on credit cards and new dual cards through the telemarketing channel. Other developments include opening seven new offices throughout the country, adding new services to remote channels, implementing requirements set forth by the new Financial Consumer Protection Agency (Sernac Financiero) and launching a new version of the Bank’s mobile application for smartphones with an updated design and revamped services, which was recognized as one of the best in the region. Other contributing factors include the increased productivity of sales forces in acquiring new customers and the high percentage of issues solved by the Contact Center. This segment also had to deal with several challenges, such as the creation of the new Financial Consumer Protection Agency, which required considerable internal planning. The Bank responded by working vigorously, with a renewed focus on the quality of the information being provided. As Jorge Tagle, the Commercial Banking Division Manager, explains, “we were working against the clock and could not allow there to be any reservations about the trust placed in the Bank, a key attribute in the relationship with our customers and society in general.” SME Segment In commercial loans, we sought to develop and enhance our offering of financial products and services for small and medium-sized businesses, increasing pre-approved loans, optimizing the use of government-backed financing (Corfo) and enthusiastically incorporating lease and factoring products. In fact, we estimate that our SME loans rose 40% more than the market in general, expanding the Bank’s market share from 19.6% in 2011 to 20.1% in November 2012, with important growth in margins. Tagle explains that this has been possible because “we have been able to strongly differentiate ourselves by providing enhanced financial advisory services and building close relationships with our customers through a series of meetings, seminars, workshops and Webinars held throughout Chile, reaching over 10,000 customers during the year.” Security In 2012, we also made progress in customer security matters. For example, we launched a new online configuration service for debit cards that allows users to restrict use to only Chilean ATMs or to international ATMs. We also provided them with Trusteer Rapport, a leading online banking software that detects fraud during banking transactions. Security measures were also adopted for ATMs, implementing an anti-skimming system known as Jitter that prevents cards from being cloned in Banco de Chile ATMs. We also put into operation a network of ATMs that reads cards with chips. This project is in the final development stage. Strategy 2013 In the coming year, the division expects to expand its retail banking area with a greater focus on using appropriate business intelligence and segmentation to enhance its value offering. This strategy will be complemented by improving sales productivity, increasing returns and enhancing products and services. The goal is to create the best offer for each customer while strengthening the client relationship and maximizing long-term returns. The general strategy for the SME segment is to continue expanding loan volumes and improving ties with customers. Our specific approach for customers with lower product penetration will be to provide them with financial advising in the hopes of gaining their loyalty and becoming their main bank. Business Areas 87 Retail Market Mission t5PCFUIFMFBEJOHJOTUJUVUJPOXJUIJOJUTTFHNFOUBOEBNPOHUIFCFTU companies to work for in Chile Banco CrediChile Division Share of Loans 2012 Target Market t &NQMPZFFT SFUJSFFT BOE NJDSPFOUSFQSFOFVST JO UIF $ BOE % socioeconomic segments. 4% Lines of Business and Products t #BODP $SFEJ$IJMF PGGFST B XJEF SBOHF PG mOBODJBM QSPEVDUT BOE services, including: consumer loans, credit cards, life and general insurance, mortgage loans, microenterprise loans, automatic payroll deposits and savings accounts. 96% Share of Income Before Taxes 2012 Competitive Strengths t 8JEFDVTUPNFSCBTF t -BSHFTUNBSLFUTIBSF t )JHIFGmDJFODZ t 4FSWJDFRVBMJUZ t &YUFOTJWFCSBODIOFUXPSL 7% 93% Objectives and Strategic Initiatives 2013 t 'JOBMJ[FOFXWBMVFQSPQPTJUJPO t 4USFOHUIFODPPQFSBUJWFBHSFFNFOUTXJUIDPNQBOJFTBOEBMMJBODFT t %FWFMPQNJDSPFOUFSQSJTFTFHNFOUBOEi$BKB$IJMFwDIBOOFM t 4USFOHUIFODVTUPNFSTFSWJDFQMBUGPSNTBOEQSPUPDPMT t *ODSFBTFQSPEVDUJWJUZPGEJTUSJCVUJPODIBOOFMT Banco CrediChile Other Banco CrediChile Division Loans (BCh$) Commercial Mortgage Consumer Total Summarized Income Statement (BCh$) Total Operating Revenues Loan Loss Provisions Operating Expenses Income Before Taxes (IBT) Ratios Operating Income / Total Loans Efficiency Ratio Loan Loss Provisions / Total Loans IBT / Total Loans Relevant Information Number of Customers (thousands) Branches 88 AnnualReport2012 2011 4.2 52.6 688.7 745.5 2011 149.3 (40.7) (70.4) 38.8 2011 20.0% 47.2% 5.5% 5.2% 845.8 170 2012 10.8 62.1 698.7 771.6 2012 166.9 (63.8) (68.0) 35.0 2012 21.6% 40.7% 8.3% 4.5% 880.8 156 Δ$ 6.6 9.5 10 26.1 Δ$ 17.6 (23.1) 2.4 (3.8) Δ 1.6% (6.5)% 2.8% (0.7)% Δ 35 (14) Δ% 157.1% 18.1% 1.5% 3.5% Δ% 11.8% 56.8% (3.4)% (9.8)% Δ% 4.1% (8.2)% From One Chilean to Another Banco CrediChile is a leader in financial services for the middle and working class. Its medium-term goal is to secure its market position and expand its coverage. The year 2012 was marked with significant achievements for Banco CrediChile, concluding strategic projects that laid a foundation for addressing its medium-term challenges of market positioning, penetration of financial products in its target segments and an adequate risk-return ratio. The goal of Banco CrediChile is to serve Chile’s middle class and microentrepreneurs, which makes economies of scale a critical variable in a company’s ability to compete. As of year-end 2012, the division represented almost 50% (881,000) of all customers and one third of Banco de Chile’s consumer loans. For Juan Cooper, Division Manager of Banco CrediChile, “the keys to success lie in the commitment and professionalism of our team members and a strategy that places strong emphasis on—in addition to consumer loans—collaborative agreements with companies, payroll deduction loans and other services for the large number of individuals that receive payroll direct deposits into CrediChile demand accounts.” Banking Access During 2012, Banco CrediChile took significant steps to increase access to financial products and services for its target segment. On a retail level, 2012 witnessed the final implementation of the Caja Chile project, which enables the Bank to offer primary banking services in areas with little or no banking coverage. Through POS terminals installed in small stores, users can carry out basic financial transactions such as checking balances, making withdrawals and deposits and paying bills during flexible hours, at low cost and without having to travel to the closest bank branch. As of year-end 2012, Caja Chile had enlisted more than 1,000 service centers in 220 districts throughout Chile. The Caja Chile model is aligned with Banco CrediChile’s way of doing business, which is based on a close customer relationship and a broad distribution network that affords greater private banking coverage in its segment. “People feel dignified because we are providing quality financial services in their own town,” remarked Cooper. This is an important value attribute for the division since close to 70% of its customer portfolio resides outside Santiago. During 2012 the division also focused on consolidating new business segments, generating an offering of financial services for microenterprises— companies with annual sales of less than 2,300 UF. Beginning this year, this segment is covered by a specialized bank with a business model based on low-cost services and signing cooperative agreements and commercial alliances with trade unions in key sectors such as commerce, transportation and services. Over the past year, this business area implemented 40 specialized customer service platforms throughout Chile with executives that conduct on-site assessments. Thanks to these new platforms, Banco CrediChile hopes to become a relevant market player in this segment. Culture Banco CrediChile’s associates, 70% of which are women, and its merit-based culture are the core pillars on which its successful strategy is founded. It also has a clear internal promotion policy to foster its employees’ professional and personal development. These elements are complemented by ongoing training processes through AulaChile, an internal training platform (including both e-learning and classroom learning) that is certified by a prominent Chilean technical school. AulaChile, implemented in 2007, has enabled 70% of the division’s associates to become certified in diverse skills, which enhances their employability and professional development. The goal is to certify 80% by 2013. CrediChile’s business model, based on mass consumer services, requires a structure that more closely resembles a retail store than a traditional bank, with branches open until 6 p.m. To accomplish this, it needs committed and motivated associates. For this reason, it conducts ongoing assessments of employee satisfaction using work climate committees and close communication, in order to foster an exceptional work environment. Cooper comments that through these initiatives “we try to create a unique culture as we believe that productivity and professional, as well as personal, development, are fully compatible with each other and ultimately translate into a greater commitment from our associates with the organization’s strategy.” Business Areas 89 Wholesale Market Wholesale, Large Companies and Real Estate Division Mission t 5P DSFBUF WBMVF GPS TIBSFIPMEFST UISPVHI FGGFDUJWF TPMVUJPOT BOE differentiated value propositions for each customer segment with high service quality standards that enable it to maintain its leadership in terms of deposits, market penetration and cross-sales. Share of Loans 2012 Target Market t $IJMFBODPNQBOJFTBOEGPSFJHODPNQBOJFTXJUIPQFSBUJPOTJO$IJMF with annual sales between Ch$1.6 billion and Ch$70.0 billion. 26% 74% Lines of Business and Products The division has four specialized areas that serve different customer segments, offering a complete range of products, including: t 1BZNFOUQSPEVDUTQBZSPMMTVQQMJFSTUBYFTFUD t 'PSFJHOUSBEF t -FBTFT t 'BDUPSFESFDFJWBCMFT t 5SFBTVSZQSPEVDUTTQPUTGPSXBSETTUSVDUVSFEQSPEVDUT t *OWFTUNFOUBOEmOBODJBMBEWJTPSZTFSWJDFT Share of Income Before Taxes 2012 17% 83% Competitive Strengths t %JTUSJCVUJPOOFUXPSL t $PNQSFIFOTJWFQSPEVDUBOETFSWJDFPGGFSJOH t 1PTJUJPOJOHBOETFHNFOUMFBEFSTIJQ t 4FSWJDFRVBMJUZ t $VTUPNFSTFSWJDFNPEFM Wholesale, Large Companies and Real Estate Division Other Large Companies and Real Estate Division Loans (BCh$) Commercial and other Foreign Trade Factoring Leasing Total Summarized Income Statement (BCh$) Total Operating Revenues Loan Loss Provisions Operating Expenses Income Before Taxes (IBT) Ratios Operating Income / Total Loans Efficiency Ratio Loan Loss Provisions / Total Loans IBT / Total Loans Relevant Information Number of Customers (thousands) 90 AnnualReport2012 2011 2,925.6 894.7 58.9 693.3 4,572.5 2011 181.1 (29.5) (76.3) 75.7 2011 4.0% 42.1% 0.6% 1.7% 2011 17.8 2012 3,306.4 732.0 63.8 787.1 4,889.3 2012 171.5 (12.5) (72.4) 86.5 2012 3.5% 42.2% 0.3% 1.8% 2012 17.9 Δ$ 380.8 (162.7) 4.9 93.8 316.8 Δ$ (9.6) 17.0 3.9 10.8 Δ (0.5)% 0.1% (0.3)% 0.1% Δ 0.1 Δ% 13.0% (18.2)% 8.3% 13.5% 6.9% Δ% 5.3)% (57.6)% (5.1)% 14.3% Δ% 0.6% Objectives and Strategic Initiatives 2013 t *NQSPWFFGmDJFODZBOEDPNNFSDJBMQSPEVDUJWJUZ t &OIBODFUSFBTVSZTFSWJDFNPEFMGPSUIFMBSHFDPNQBOJFTTFHNFOU t $POTPMJEBUFOFXTFSWJDFNPEFMJOXIPMFTBMFBSFB t "TTJTU DVTUPNFST XJUI UIFJS SFHJPOBM HSPXUI QMBOT HFOFSBUJOH greater synergies with the Citi network. t %FWFMPQTQFDJBMJ[FETPMVUJPOTBOEPQUJNJ[FSFNPUFDVTUPNFSTFSWJDF channels. t &OIBODF TFHNFOUBUJPO TP UIBU FBDI DVTUPNFS JT PGGFSFE UIF CFTU value proposition and standard of service. We are the Best Business Partner for Our Customers If 2011 was marked by strong expansion of our business scale, 2012 will be remembered by the greater ties we made with customers, providing comprehensive advisory services to build a closer business relationship. Following the solid expansion of loan volumes in 2011, the main task in 2012 for the Wholesale, Large Companies and Real Estate Division was to strengthen customer relationships, fully understanding their financial needs in order to position ourselves as their “main bank” based on a tailored product offering. This strengthening is reflected in the average number of products per customer, which increased from 3 in 2011 to 3.5 in 2012. Closer to Our Customers The trusting relationship we have with our customers was strengthened through comprehensive consulting and specific customer loyalty activities, from social gatherings to conferences on economic topics that lead to a better understanding of the business environment and more efficient decision making. Another important element was assistance with specialized financial services provided to customers on matters such as bond placements and international transactions as part of their regional expansion plans. Worth special mention were several new ventures in Colombia. To accomplish this, the Bank capitalized on the international platform available through its strategic partnership with Citigroup and the synergies that could potentially arise from this alliance. These achievements would not have been possible without a motivated and skilled team of associates. After all, according to Eduardo Ebensperger, Wholesale, Large Companies and Real Estate Division Manager, “in these segments the customer is looking for an advisor, so the executive must be fully trained and knowledgeable on both the financial solutions offered by the Bank and the market trends affecting their customer portfolio.” As part of the Bank’s ongoing focus on human resources management, it organizes periodic meetings with prominent economists to consistently inform all team members. During 2012, these activities were complemented by a graduate certificate at Pontificia Universidad Católica that included more general finance-related topics as well as specific banking topics, with the understanding that a trained, professionally realized team is fundamental to maintaining exceptional performance. A Path of Growth Greater proximity to the customer is key to obtaining optimum results, which has been the theme in recent years, including 2012, for this division. Ebensperger noted that “2012 stands out because of the division’s positive commercial and financial performance, upholding its market leading position in factoring and foreign trade with respective market shares of 20.7% and 19.5%, and gaps of more than 1% over the closest competitor in both cases. In leases we have also grown considerably, gaining 65 basis points to finish 2012 with a market share of 22.8%. Also worth emphasizing is the progress made in the plan to increase business volumes outside Santiago, which was possible thanks to new product specialists assigned to regions with critical customer mass, as well as expert executives dedicated to serving customers in the real estate industry. Objectives for 2013 The closer customer relationship forged in 2012 will be the basis from which the division will work to improve returns, consolidating defined value propositions that will be enhanced through specialized solutions and reinforced remote customer service channels. Another focus will be on improving segmentation, ensuring that customers are attended by specialists that can offer business solutions in line with their requirements. The division will also take steps to develop a comprehensive vision of our business, acting as a link between retail banking and assisting customers with their international growth plans. Business Areas 91 Wholesale Market Mission t 5P MFBE UIF mOBODJBM QSPEVDUT BOE TFSWJDFT NBSLFU JO UIF MBSHF corporations segment by providing exceptional, comprehensive universal banking services and assisting Chilean companies with their international business ventures. Corporate and Investment Banking Division Share of Loans 2012 21% Target Market t $IJMFBO BOE NVMUJOBUJPOBM DPNQBOJFT XJUI BOOVBM TBMFT PWFS Ch$70.0 billion. 79% Lines of Business and Products t 5IF EJWJTJPO PGGFST JUT DVTUPNFST QSPEVDUT TVDI BT WBSJBCMF UFSN financing; transactional banking services such as current account management, payments, collections, representation and asset custody both in Chile and abroad; investment banking and capital markets products as well as advisory services for initial public offerings, capital increases, sales and purchases of blocks of shares, private capital placements, public share tenders, mergers and acquisitions, company valuations, bond issuances and syndicated loans. Share of Income Before Taxes 2012 21% 79% Corporate Others Corporate Division Loans (BCh$) Commercial and other Foreign Trade Factoring Leasing Total Summarized Income Statement (BCh$) Total Operating Revenues Loan Loss Provisions Operating Expenses Income Before Taxes (IBT) Ratios Operating Income / Total Loans Efficiency Ratio Loan Loss Provisions / Total Loans IBT / Total Loans Relevant Information Number of Customers (thousands) 92 AnnualReport2012 2011 3,307.0 583.3 124.9 94.9 4,110.1 2011 100.9 18.9 (53.4) 66.8 2011 2.5% 52.9% (0.5)% 1.6% 2011 4.3 2012 3,306.3 478.9 62.1 76.1 3,923.4 2012 149.5 5.8 (45.0) 110.2 2012 3.8% 30.1% (0.1)% 2.8% 2012 4.8 Δ$ Δ% (0.7) 0.0% (104.4) (17.9)% (62.8) (50.3)% (18.8) (19.8)% (186.7) (4.5)% Δ$ Δ% 48.6 48.2% (13.1) (69.3)% 8.4 (15.7)% 43.4 65.0% Δ 1.3% (22.8)% 0.4% 1.2% Δ Δ% 0.5 11.6% Competitive Strengths t -BSHFDVTUPNFSCBTF t #SPBEQSPEVDUPGGFSJOHXJUIBOFUXPSLPGHMPCBMCBOLJOHTFSWJDFT t $PNQSFIFOTJWFTPMVUJPOTCBTFEPOMPOHUFSNSFMBUJPOTIJQT t *OUFHSBUJPOXJUIUIF$JUJHMPCBMOFUXPSLBOE#BODIJMF t 4FSWJDFRVBMJUZ t #SBOEQPTJUJPOJOH Objectives and Strategic Initiatives 2013 t .BJOUBJONBSLFUMFBEFSTIJQ t 'PDVTPOTBMFTPGUSBOTBDUJPOBMBOEJOWFTUNFOUCBOLJOHQSPEVDUT t 4USFOHUIFOQSPEVDUDSPTTTBMFT t 4VQQPSUDVTUPNFSTXJUISFHJPOBMCVTJOFTTWFOUVSFT The Best Team for the Best Results to international markets for customers expanding their operations to countries like Colombia, Peru or Brazil as well as those issuing securities Professionals with vast experience in the local and international financial services industry and thorough knowledge of our customers’ needs enable us to provide tailored solutions that create value and form strategic longterm partnerships. This has made it possible for Banco de Chile to preserve its leading position in corporate and investment banking. not only in Chile but also in the United States and Mexico. The same occurs with multinational companies that invest in Chile. They have Banco de Chile’s national coverage at their disposal. During 2012, several transactions were considered milestones in domestic and international markets, including the capital increases by Thorough Knowledge of Customer Needs Sigdo Koppers S.A. and Quiñenco S.A. for US$458 million and US$500 The Corporate Banking Division has a team of dedicated experts that million, respectively, as well as the local corporate bond placements by are always attentive to the needs of their customers, which consist of Empresa de Ferrocarriles del Estado (UF 7.8 million) and Viña Concha Chile’s largest economic groups, large corporations and subsidiaries y Toro S.A. (UF 1.5 million), and the fourth bond placement in Mexico of multinationals. The Bank offers a broad range of financial products by Molymet. and services, from traditional to innovative, local to international. The division’s value lies in “offering the best advisory services with the best These achievements have been possible thanks to collaboration between team and a broad portfolio of products and services, enabling us to find the Investment Banking Division (Banchile Citi Global Markets), the Treasury the perfect solution for each of our customers,” explains Juan Carlos Division and Transactional Banking. They are even more remarkable given Cavallini, Corporate Banking Division Manager. the volatile economic conditions with markets that closed or experienced sharp price hikes over short periods of time. As a result, a much closer Corporate banking executives “are regularly visiting customers with relationship with customers was needed because “the volatility opened a team well versed in transactional banking, derivative instruments windows that could be taken advantage of, but only with a high-level and investment banking, with local and international expertise, which team with expertise across all products,” commented Cavallini. distinguishes the Bank from its competitors and allows us to grow continuously. In fact, these close ties with customers enabled the Bank Objectives for 2013 to maintain its leadership in loans for the segment, create a product mix For 2013, Cavallini indicates that the focus will be on “constantly maintaining that strengthened customer relations, improve returns on equity and a close relationship with the customer to satisfy its needs—both in increase the average balances of demand deposits by 11.7%. Chile and in the region—enabling us to add value to our services and preserve our undisputed leadership in the corporate banking segment.” Regional Platform Along the same lines, the division served as a regional customer service platform to assist its local customers with their international expansion plans. In these cases, the alliance with Citi gave the Bank an important advantage by generating a unique value proposition that provided access Business Areas 93 Treasury Mission t 5PTUSFOHUIFOOFUSFWFOVFHFOFSBUFECZPGGFSJOHJOOPWBUJWFmOBODJBM products and services, and implementing best practices in asset and liability management. t 5PFOTVSFDPNQMJBODFXJUIUIF#BOLTMJRVJEJUZBOENBSLFUSJTLQPMJDJFT and provide the best support for the rest of the Bank’s business units and their customers. Investments as Share of Total Assets 2012 6% Target Market t *OTUJUVUJPOBMJOWFTUPST t .VMUJOBUJPOBM FOUJUJFT DPSQPSBUJPOT XIPMFTBMF DVTUPNFST BOE MBSHF companies. t 1SJWBUFCBOLJOHBOEQSFGFSFOUJBMDVTUPNFST 94% Share of Income Before Taxes 2012 Lines of Business and Products t %FSJWBUJWFQSPEVDUTUPIFEHFNBSLFUSJTLDVSSFODZJOnBUJPOJOUFSFTU rates). t $VSSFODZUSBEJOH t 3FQVSDIBTFBHSFFNFOUTBOEUJNFEFQPTJUT t #SPLFSBHFPGmOBODJBMJOTUSVNFOUT t %JTUSJCVUJPO BOE QMBDFNFOU PG CPOET GPS DPSQPSBUJPOT BOE MBSHF companies. 4% 96% Competitive Strengths t $PNQSFIFOTJWFPGGFSJOHPGUSFBTVSZQSPEVDUT t "DDFTTUPHMPCBMQMBUGPSNUISPVHI$JUJ t 4QFDJBMJ[BUJPOBOELOPXIPX t 1SFTUJHFBOECSBOE t $VTUPNFSCBTF Treasury Other Treasury Instrumentos Financieros (MMM$) 2011 Trading Instruments 336.8 Instruments Available for Sale 1,468.9 Instruments Held to Maturity Total 1,805.7 Summarized Income Statement (BCh$) 2011 Total Operating Revenues 31.4 Loan Loss Provisions (1) Operating Expenses (10.2) Income Before Taxes (IBT) 20.3 Ratios 2011 Operating Revenue / Total Financial Instruments 1.7% Efficiency Ratio 32.5% IBT / Total Financial Instruments 1.1% 94 AnnualReport2012 2012 192.7 1,264.4 1,457.1 2012 32.6 (10.2) 22.4 2012 2.2% 31.3% 1.5% Δ$ (144.1) (204.5) (348.6) Δ$ 1.2 1 0 2.1 Δ 0.5% (1.2)% 0.4% Δ% (42.8)% (13.9)% (19.3)% Δ% 3.8% N/A 0.0% 10.3% Objectives and Strategic Initiatives 2013 t 'PDVTPOHFOFSBUJOHTPMVUJPOTGPSDVTUPNFSTVTJOHTUSVDUVSFEQSPEVDUT and options. t *ODSFBTFDPWFSBHFPGDVSSFODZUSBEJOHQMBUGPSN t &YQBOEEJTUSJCVUJPODBQBDJUZPG4BMFTBOE4USVDUVSFE1SPEVDUT"SFB t $POUJOVFEJWFSTJGZJOHTPVSDFTPGGVOEJOH We have more diversified sources of funding than any other bank in Chile Rooted in an exceptional team of associates, world-class IT support and a clear strategy to diversify sources of funding, the division has reaffirmed its significant contribution to the Bank’s success. Funding In 2012, Banco de Chile successfully placed bonds in foreign markets and consolidated itself as the bank with the lowest cost of funds in the Chilean banking industry. These are two powerful signs of the Treasury Division’s phenomenal year and its significant contribution to the Bank’s strategy. These results are even more remarkable if one considers that 2012 was a year of major challenges in a market with lingering effects of the U.S. banking and European sovereign debt crises. However, given its exceptional risk rating, the Bank was able to go abroad and diversify its sources of funding, becoming the first Latin American commercial bank to open a line of commercial paper for up to US$1.0 billion in the U.S. market and also the first to place debt in Peru (US$29 million) and Hong Kong (US$165 million), in addition to issuances of close to Ch$625 billion in bonds on the domestic market with excellent rate conditions. This is a clear sign that the Bank’s solvency and brand are recognized in local and international markets, which has also translated into the lowest cost of funds in Chilean private banking, furthering the Bank’s commercial strategy. In addition to diversifying sources of funding, at levels unprecedented in Chile, the Bank also expanded maturities, with long-term obligations representing 10% of its liability structure in 2010 and 15% in 2012. Trading, Sales and Structuring From the perspective of the Bank’s investment portfolio, the division achieved historic results in trading, as a result of “capitalizing on the opportunities that presented themselves during a very difficult year, with flat interest rate curves, low inflation and little room to move,” comments Sergio Karlezi, Treasury Division Manager, who adds that “in this scenario, success was due to a great extent on the commitment and professionalism of the team we have formed over the past few years.” In sales and structuring, outcomes were also good thanks in part to decisions made a few years ago to act conservatively and not develop and/or sell products that we consider to be illiquid or hard to value. We have improved our protocol for selling treasury products to diverse customers and began efforts to select customers from the large companies division. As part of this initiative, we will increase the number of division executives outside Santiago and continue to further collaboration between the Corporate and Large Companies Divisions through training, integration and incentives for their executives, while developing a pilot plan for addressing the SME segment. This project is expected to obtain positive results in the next two to three years, although it is proposed more as a complement to the Bank’s value offering than as an area with high income generating potential. Penetration of treasury products in the different commercial divisions increased, translating into greater income from cross sales in 2012, in line with the Bank’s strategy to reinforce and increase returns in the wholesale business. Murex Platform This year’s results were complemented by the implementation of the second stage of the Murex IT project for options and swap transactions. This is an integrated front/end system that allows executives to focus on transactions and customer relationships by automating a large part of the administrative work and improving monitoring of risk and valuations of instruments. The third stage, which will be concluded during the first half of 2013, covers products like forwards and spots, which will enable penetration of these products to increase in all segments. “Know Your Customer” As treasury products are to a certain extent “commoditized”, the executive’s ability to manage the account and a lower cost of funds become key differentiating elements. As a result, the business focus adheres increasingly to the concept ‘Know Your Customer’, since one of the lessons learned from the U.S. banking crisis taught us that selling excessively complicated products that are hard for the buyer to understand can damage both the customer and the bank. Thus, the importance of knowing their needs and offering solutions, not problems,” Karlezi explains. Global Platform Lastly, Sergio Karlezi points out that access to Citibank’s global platform also contributed to a positive year. This enabled the division to expand product offerings and market access for customers, proprietary transactions and also provided an excellent training tool and incentive for associates who have the option to pursue career opportunities abroad. Business Areas 95 Subsidiaries Banchile Corredores de Bolsa S.A. Always in the Lead Quick and secure management of all transactions, together with the best combination of returns, flexibility and liquidity for the customer, ensured good results for the brokerage subsidiary. Banchile Corredores de Bolsa ended 2012 once again among the industry leaders, thanks to its quick and secure management of all transactions, together with the best combination of returns, flexibility and liquidity for the customer, in order to ensure successful results. Its market share of share volumes traded was 9.5% while net income for the year was Ch$10.6 billion. “In a year with economic ups and downs, we managed to hold our leading position in the industry, reporting good results across all business lines. This would not have been possible without a first-rate team of exceptional professionals with clear leadership abilities, which has allowed us to be recognized as one of the best places to work in Chile,” commented Andrés Bucher, Chief Executive Officer of Banchile Corredores de Bolsa. The Bank’s brokerage subsidiary provides comprehensive share and bond brokerage services, as well as foreign currency transactions. It operates in the Santiago Stock Exchange and the Chilean Electronic 96 AnnualReport2012 Stock Exchange. It also engages in securities sales under repurchase agreements, international investments and other specialized services. complete, sophisticated solutions encompassing all investment and savings products available on domestic and international markets. Bucher highlights that “2012 was a satisfactory year especially in terms of the product offering for our customers.” Banchile Corredores de Bolsa was the placement agent in important local debt transactions such as bond issuances by Aguas Andinas, Carozzi, Viña Concha y Toro and EFE, among others. It also has cutting-edge technology, broad coverage, clear guidelines on loyalty and a differentiated proposal for its diverse customer segments, enabling it to serve over 160,000 customers. It had considerable activity in simultaneous operations during 2012, making it the industry leader in this sophisticated product line with attractive margins. Specialized Advisory Services Highlights for 2012 include selecting Fidessa, a leading English company that provides IT solutions for the financial sector, to supply IT support platforms. With this important operational step, the subsidiary is now connected to Fidessa’s extensive global community, providing support for its businesses in Latin America. This move undoubtedly places Banchile Corredores de Bolsa S.A. at the forefront of technology with advantages such as automatic confirmation and global connectivity for its customers. The brokerage subsidiary has specialized advisory teams for its diverse segments: Banchile Wealth Management, Banchile Private Investment and Banchile Executive Investment. This structure enables it to provide Business Areas 97 Subsidiaries Banchile Administradora General de Fondos A Great Team for Great Results This subsidiary is the industry leader in mutual funds. Along with its positive and consistent operating results, it stands out because of its excellent work climate. Banchile Administradora General de Fondos (AGF), a subsidiary of Banco de Chile, has been in this business since 1981 and is currently the industry leader in asset volume managed. It offers a wide range of investment alternatives and comprehensive advisory services in asset management for each customer segment. For Banchile Administradora General de Fondos, 2012 was characterized by new products with innovative investment opportunities for customers. It launched 11 new mutual funds, focusing on developing structured mutual funds and broadening its offering of investment funds with two new products that allow customers to access the best opportunities in the real estate development and rental sectors. It currently manages 81 mutual funds and eight investment funds, enabling customers to diversify their portfolios with different financial instruments, thus taking advantage of the best investment and savings opportunities in Chile and the world. 98 AnnualReport2012 As of December 31, 2012, the subsidiary has over 350,000 investors and managed funds over Ch$4.2 billion, giving it a 23.3% share in the mutual fund industry. These excellent results are a reflection of considerable efforts to provide customers with sophisticated products and the highest service quality standards in a motivating work environment with a great team of professionals. “In 2012 we were once again recognized as one of the best companies to work for in Chile by the Great Place to Work Institute, placing 13th. The superior work climate and professionalism of our associates have allowed us to consolidate a leading position in the mutual fund industry and continue to offer attractive investment alternatives to our customers like the structured mutual funds offered this year,” commented Andrés Lagos, Chief Executive Officer of Banchile Administradora General de Fondos. Recognition The subsidiary received four awards from Fund Pro and was recognized as the Best Fund Manager of the Year in the Medium to Long-term Debt” category, evaluated based on the risk-adjusted return of its funds. The subsidiary was once again honored at the Salmon Awards, given annually by newspaper Diario Financiero and the Mutual Funds Association to the mutual funds with the best risk-return ratio in the Chilean market. This recognition highlights the subsidiary’s commitment to providing exceptional service and delivering high quality products to all customers. Banchile I Citi Global Markets Leading the Chilean Market Banco de Chile’s Investment Banking and Capital Markets Area had an excellent year in 2012, maintaining its leading position in the local market, obtaining important recognition and positioning itself as a comprehensive supplier of investment banking products. Companies seeking financing or planning initial public offerings and capital increases turn to the expert advice of Banco de Chile’s Investment Banking and Capital Markets Area, which also provides support and guidance on strategic decisions, such as mergers and acquisitions and valuations of companies or business lines, offering solutions on both local and international financial markets. It also provides exceptional service for bond issuances, syndicated loans and project financing. The subsidiary provides these services through Banchile Citi Global Markets as part of a commercial agreement with Citi that allows it to serve customers with the local and global capabilities of both institutions. In the domestic market, it also works in coordination with Banchile Corredores de Bolsa to distribute publicly offered securities such as stocks and bonds. Value Offering The subsidiary once again positioned itself as the leader in local corporate bond placements by participating in the market’s most important transactions during the year: Empresa de Ferrocarriles del Estado issued bonds for UF 7.8 million, while Viña Concha y Toro S.A. placed bonds for UF 1.5 million. Other milestones for the year included advising PreUnic on its association with the parent company of SalcoBrand S.A.; teaming with Citi to assist Enagas with the purchase of a share of GNL Quintero S.A. from British Gas; advising Duke Energy International on its acquisition of IBENER and counseling Molymet on its fourth bond placement (5 year bonds) in Mexico for nearly US$130 million. “Banchile Citi Global Markets fortifies Banco de Chile’s value offering for its customers, with ongoing effort and commitment to provide exceptional service on par with international standards,” says Jorge Muñoz, Investing Banking Manager. Also, the leadership displayed by Banchile Citi Global Markets in the different investment banking and capital markets products was honored by the prestigious magazine LatinFinance, naming it the Best Investment Bank in Chile for 2012, and by Diario Financiero/Deloitte, who recognized it as the Best Bond Placement Agent. Banchile Citi Global Markets posted excellent results in 2012, thanks to important deals such as capital increases by Sigdo Koppers S.A. and Quiñenco S.A. for US$458 million and US$500 million, respectively. Business Areas 99 Subsidiaries Banchile Corredores de Seguros S.A. the customer to quote and choose a policy from among several different insurance companies. Secure Innovation Positioned throughout the Bank’s different sales channels, this subsidiary provides a comprehensive value offering to each customer. With its customers’ peace of mind and security as its objective, Banchile Corredores de Seguros launched new, innovative products and secured its leading position in the banking-insurance market, contributing significant revenue to the Bank. The subsidiary primarily uses the different sales channels of Banco de Chile and Banco CrediChile to sell life and general insurance policies, offering its products through account executives, service area executives, investment executives, sales forces and telemarketing and internet associates, among others. Its multi-channel presence provides a comprehensive value offering for each banking customer. “Our mission is to strengthen the Bank’s business, creating value for our customers with an innovative product offering and first-rate service,” comments Jorge Yoma, Interim Chief Executive Officer of Banchile Corredores de Seguros. 2012 Milestones During the first half of 2012, the insurance brokerage subsidiary launched its “Full Car” product using a “multi-company” concept, which enables 100 AnnualReport2012 In addition, it developed a new telemarketing sales platform known as “Modular Insurance”, designed to offer customers several options of coverage, assistance and premium refund percentages in a flexible and simple format. During the second half of the year, the subsidiary implemented its Insurance Web Platform at Banco CrediChile and launched 13 new products and plans for customers with life, health, accident and automobile coverage. In order to provide better service and strengthen sales through remote channels or the Bank’s web page, the subsidiary began selling its “Total Insurance” fraud policies on line, enhanced its “Total Travel” travel insurance plans and in December implemented a system for online quotes and purchasing of its multi-company car insurance product. Another high point in 2012 was the record sales of Obligatory Personal Accident Insurance (SOAP), with more than 81,000 policies sold on line. The subsidiary was also very active in the companies segment, where it implemented a new insurance platform. This new platform further automates the insurance sales process, from quoting to purchasing or renewing policies, achieving greater overall efficiency. This platform will help enhance after-sales customer service. Banchile Factoring S.A. importers, factoring provides an alternative to traditional letters of credit, simplifying collections. Anticipating Needs and Service Quality Knowing our customer has proved essential to anticipating their needs and providing a broad product offering with high standards of service. The emphasis on anticipating customer needs with a broad product offering yielded fruits for Banchile Factoring. In 2012, the subsidiary concentrated efforts on developing the SME, large companies, wholesale, real estate and corporate segments, closing the year with a volume of Ch$606 billion. Since its creation in 1999, the subsidiary has held an industry leading position. As of December 2012, the subsidiary and the Bank had market share of 20.7% in factoring—first place in the industry. According to Claudio Martínez, Chief Executive Officer of Banchile Factoring, “our market leadership is based on anticipating our customers’ needs using specific commercial strategies for each market segment.” Banchile Factoring was created as a way to expand financing alternatives for companies. With this in mind, its main product lines include traditional factoring of invoices, notes and contracts, a service that also includes debtor risk analysis and collections management. It also offers specially designed products for large companies with considerable volumes of supplier payments. These companies, through an agreement with Banchile Factoring, give advances on invoices to their suppliers, improving their purchasing position by providing suppliers with immediate liquidity. For foreign trade transactions, international factoring gives exporters returns in advance and eliminates the risk of debtor insolvency. For For small businesses, this subsidiary offers government-backed factoring so they can engage in traditional factoring transactions backed by FOGAPE, a government guarantee. This product offering is complemented by “first class service and excellent coordination with the Bank’s other areas,” added Martínez. Main Initiatives As part of this subsidiary’s work during the course of the year, it organized a series of training courses and promotional activities in different bank branches to explain and highlight the benefits of financing through factoring, confirming and international factoring. The subsidiary also participated in numerous meetings and seminars coordinated by the Commercial Banking Division for its SME customers, providing information on factoring products to current and potential clients. To strengthen customer service, Banchile Factoring broadened its presence in branch offices, incorporating personnel in the cities of Punta Arenas, Osorno and Melipilla, as well as in the Santiago branches in Vitacura and Ñuñoa. Regarding the Large Companies, Wholesale and Real Estate Division, the subsidiary continued to physically integrate with the Bank’s commercial platforms, strengthening training for Bank executives and obtaining a considerable increase in loans of 8% in those segments. Banchile Factoring attained positive results in confirming and international factoring thanks to efforts to diversify its target market (wholesale, corporate and multinational customers) and improve the process for signing new agreements. As a result, for the subsidiary’s confirming product, the number of concentrators increased by 32% and suppliers that trade invoices by 16%. Business Areas 101 Subsidiaries Banchile Securitizadora S.A. Promarket S.A. Proposing Unconventional Solutions Closer to Our Customers In a year plagued with complexities, Banchile Securitizadora was the only entity to place securitized bonds on the local market. The international financial crisis and local events in the retail industry have led to a strong drop in transaction volumes for the securitization industry in recent years. However, the crisis in the retail industry showed that securitized bonds outperformed corporate bonds with equivalent ratings in scenarios of stress, fully meeting their payment calendars. As a result, relative improvements are expected in the sales price of securitized bonds, reactivating interest in this type of instrument for both asset originators and institutional investors. As of December 31, 2012, Banchile Securitizadora managed securitized assets valued at Ch$144 billion. Unique Experience Banchile Securitizadora provides the Bank’s customers with unique expertise and knowledge in structuring and placing securitized bonds, responding to companies’ needs to back payment of their obligations with cash flows from mortgage notes, credit cards, auto loans, accounts receivable or future cash flows, among others. “We propose non-traditional solutions using structured financing, seeking low-liquidity assets that can become the right investment instruments for institutional investors,” indicated José Vial, Chief Executive Officer of Banchile Securitizadora S.A. In 2012, Banchile Securitizadora placed one bond on an asset originated by the Bank, related to an infrastructure project—the only transaction of this type during the year. This positive market reception opens up the possibility of financing large infrastructure projects with direct financing that can then be securitized and syndicated among institutional investors. Highly motivated associates helped the subsidiary meet its goals and built a foundation from which to improve productivity and results. Promarket is the Bank’s subsidiary that evaluates prospective customers. In 2012, it had excellent results and significantly increased returns over the prior year. “The year 2012 was once again a great year for Promarket with net income of over Ch$400 million and a large number of successful customer evaluations that enabled us to exceed expectations and improve productivity,” commented Guillermo Nicolossi, Chief Executive Officer of Promarket. Also in 2012, this subsidiary improved successful pre-approval evaluations of middle and high-income customers, performing better than forecasts and the prior year. It also managed to increase individual productivity by 4% over 2011. Personalized Offerings Promarket collaborates mainly with the Commercial Division and contributes a considerable percentage of the division’s new customers. Its main strengths include its geographic coverage (from Iquique to Puerto Montt), increased productivity thanks to specialization and efficient database management. In its ongoing search for prospective customers, Promarket comes across competitors in the field and stands out because of its personalized service and product offerings for each case. Motivation and a good work climate are constant concerns for the subsidiary, as they permit associates to maintain their focus on the search for potential customers. These good relations allowed the subsidiary to sign the 2012 Collective Bargaining Agreement with the Promarket union. In 2013, this subsidiary’s focus will be to continue improving the quality of pre-approved segments in order to set the foundation for long-term relationships. 102 AnnualReport2012 Socofin S.A. Banchile Trade Services Limited Optimal Processes Banchile Trade Services Limited is a subsidiary constituted in Hong Kong to facilitate foreign trade operations in Asia —especially China— for Chilean customers. In 2012, this subsidiary reported net income of Ch$43 million. The capacity to adapt to regulatory changes enabled the subsidiary to attain good results in a complex environment. The new modification to the “Dicom Law (February 2012)”, which prohibits publication of certain debt and restricts the use of an individual’s financial and commercial data in evaluating credit risk led to adverse changes in the payment behavior of some customers, altering their willingness to comply with financial commitments. However, Socofin, the subsidiary that provides collections and normalization of credit portfolios for the Bank, was able to develop complementary strategies that offset the effects of this law, attaining productivity levels in line with the objectives set by the diverse business segments. As a result, the subsidiary reversed charge-offs for the Consumer and Commercial Banking Divisions of nearly Ch$38 billion and signed customer payment agreements totaling more than Ch$31 billion. “The capacity to adapt to regulatory changes was a key factor in maintaining recovery levels,” assessed Mario Sandoval, Chief Executive Officer of Socofin. This, together with improvements in segmentation and coverage, especially in the Metropolitan Region, enabled it to meet its targets for 2012. In terms of coverage, the subsidiary expanded its remote points in the Consumer Segment in the Metropolitan Region and staffed a new branch in Viña del Mar. Operational Efficiency In matters of operational efficiency, it continued to integrate its systems with those of the Bank and to optimize its internal processes by implementing new collections management tools. Since its creation over 12 years ago, Socofin has sought to provide efficient support and quality collections services and normalization of loan and credit portfolios for its internal customers (the Bank’s commercial divisions). Collections services are also offered to other institutions in order to more efficiently use the resources invested in it. Business Areas 103 6 RISK MANAGEMENT 2012 Risk Management 2012 I. INTRODUCTION A strong, deeply-rooted risk culture is a core aspect of the Bank’s efforts to manage the diverse risks particular to its business. This factor, albeit abstract and difficult to measure, is fundamental to building a business that is sustainable over the long term. Developing such a culture involves aligning the entire organization behind appropriate risk management. Banco de Chile’s team has broad experience and knowledge of each aspect of credit, market, operational and technology risk. This team works to ensure comprehensive, consolidated risk management at both the Bank and its subsidiaries by identifying and evaluating the risks generated by customers, within its own operations and by its suppliers. The focus is on the future, using different tools and techniques to identify the potential changes that may affect Banco de Chile’s solvency, liquidity, correct operations or reputation. The mission of the Corporate Risk Division is to answer the central question of how to decide how much risk the Bank is willing to accept for each business segment, product and service in order to maximize value creation for the Bank. This occurs by providing effective governance over the organization’s key risks, aiming to optimize the risk-return ratio and, at the same time, striving to ensure high levels of solvency. 106 AnnualReport2012 As a result, it is faced with the challenge of proposing policies and processes that allow risks to be managed in accordance with the risk appetite framework defined by the Board of Directors. The division has a detailed management system with different metrics that help verify that risk management falls within this design and allows the Bank to measure, control and mitigate any deviations that could arise, whether potential or real. In managing credit risk, the Bank continuously monitors the main risk factors that can impair its portfolio. These factors include industry, segment or product concentration levels; economic and market conditions; regulatory and payment behavior changes; variations in key economic variables (exchange rate, inflation, interest rates) and asset valuation criteria and their evolution over time. In terms of market risk, in order to ensure adequate liquidity at all times, the Bank monitors a broad set of financial ratios and economic and financial market variables. These elements are analyzed to detect structural movements in the composition of the balance sheet as well as the Bank’s funding capacity and concentration of funding, either by maturity or customer segment. This monitoring also focuses on early identification of illiquidity, whether global or specific to the Bank. Another dimension of market risk that the Bank and its subsidiaries protect themselves against is the price risk of their own positions. These positions are generated in many cases as a result of serving the needs of customers that cannot be covered perfectly as they are in different markets; likewise, on other occasions, a price risk is assumed in the Bank’s own positions because of specific structural visions of the evolution of certain market variables. The potential loss from the unfavorable evolution of the value of these positions is monitored using different tools, including Value at Risk (VaR) for the Trading Book, Earnings at Risk (EaR) for the Accrual Book, stress exercises for both books and, lastly, recording of actual outcomes. Throughout 2012, the Corporate Risk Division placed special emphasis on controlling and managing operational risk, generating action plans intended to anticipate stress events that could cause problems with the Bank’s normal operations. As a result, operational risk management has centered around analyzing more than 200 processes, determining (using occurrence scenarios for the Bank) potential expected losses and maximum annual losses in order to prioritize and estimate future impact, which represents the first steps in complying with the Basle III Accord. that is cognizant of operational risk within the Bank and its subsidiaries, a broad communications plan has been developed to increase awareness and spread knowledge of the topic throughout the entire organization in order to adequately and proactively manage risks. Representatives from all of the Bank’s divisions have been appointed to fulfill the role of Operational Risk Coordinators and Advisors. These individuals are responsible for identifying risks within their areas of competence and establishing measures to mitigate them using a pre-defined methodology. One important point to analyze is how to control suppliers so that they comply with standards similar to those the Bank defines for its internal processes. The Bank has also used testing scenarios that threaten business continuity to identify a set of key activities that it needs to maintain proper service and operating levels. In short, the Bank views risks prospectively, in order to ensure high levels of solvency, liquidity and operations for doing business. Likewise, because responsibility for managing operational risk does not fall only on the Corporate Risk Division, and in order to internalize a culture Risk Management 2012 107 Credit Risk II. CREDIT RISK The main objectives of credit risk management are: Proposing effective credit risk policies to the Board. Banco de Chile’s credit risk is managed through a global strategy focused on the economic environment and target markets. The Bank has defined credit policies and processes that recognize the singularities of the different markets and segments, and grant the pertinent credit treatment to each which, in general terms, translates into mass processes for individuals, parameters for small and medium-sized businesses and case-by-case analysis for large companies and corporations. Establishing the rules and procedures to be followed by each business segment for loan approval, monitoring and collections. Having sufficient provisions based on the credit quality of the portfolio. Managing limits and warning levels established by the Board for credit attribution levels. For the Bank, a basic principle of its credit risk management is its constant presence throughout the entire credit cycle, including approval, monitoring and recovery of loans granted. Consistent with this principle, the Corporate Risk Division is responsible for the quality of the Bank’s portfolio and for optimizing the risk-return ratio for all Retail and Companies segments, managing all phases of the credit cycle. It also works to ensure integral compliance with the risk management criteria set forth by the Board of Directors, which participates actively in credit risk management, providing guidance for management on handling credit risk and receiving periodic briefings on portfolio behavior. Bearing in mind the ongoing nature of credit risk management efforts enables the Bank to conduct a rigorous credit assessment before approving loans to assure customers fall within the predefined target market; guarantees exhaustive controls to ensure application of credit policies; and allows for meticulous monitoring of changes in portfolio risk and the normalization and collections processes used with delinquent customers. It also enables us to act early should signs of deterioration arise, mitigating risk and reducing exposure in order to diminish potential portfolio loss. 108 AnnualReport2012 Identifying, quantifying and controlling risks arising from loan transactions. Evaluating, approving and ensuring correct structuring for loan transactions, based on the customer’s credit quality. Resolving exceptions to credit policies. Constantly supervising operations in order to anticipate events and react to risk warnings. Managing groups of customers with above-normal potential risk and collections from customers with signs of impairment. Managing recovery of impaired assets. Ensuring our organization has the knowledge we need for our different products and segments, and developing a credit culture that favors high-quality assets. Generating statistical models for automatic approval processes, more focused monitoring procedures and provisioning models based on estimated loss. II.1 Approval Process Loan analysis and approval is conducted using a differentiated approach for each market segment. Each approval process involves: Policies and procedures Levels of specialization of the process participants The type and depth of IT systems required The type of predictive models/indicators for each segment (scoring or rating). Based on these elements, three risk models are used for approving loans: Automated Model: This model focuses on large-scale markets of individuals that are not business owners. These models ensure compliance with three important aspects of approval processes: - Minimum credit profile (scoring). Indebtedness limits (exposure). Target market policies. A customer’s credit profile is rated using statistical credit scoring models segmented for the different types of customers within the retail segment’s numerous commercial areas. The predictive capacity of our models has been fundamental in successfully addressing portfolio risk during crisis scenarios. The Retail Risk Division centralizes its data entry processes to ensure high quality data. Regarding target market policies and indebtedness limits, the Bank identifies market sub-segments based on its objectives, business strategies and opportunities, establishing definitions to identify acceptable credit profiles for customers, the products they will be offered, individual exposure limits and expected returns. Parametric Model: For the SME segment, the Bank has developed special evaluation and approval methods based on the segment’s particular characteristics. A parametric model has been defined that can take into account the large-scale aspects of the segment but also provides the opportunity for a case-by-case analysis if needed. It involves evaluating customers based on three fundamental pillars: Internal and external payment behavior, an analysis of financial information and an assessment of the customer’s business. This parametric evaluation process condenses the customer’s credit quality into a rating, which is directly linked to the credit attributions required for each transaction. Internal audits are regularly performed to ensure the quality of the information used. In addition, the Corporate Risk Division provides considerable assistance to commercial areas by pre-approving customers for loans, aiming to optimize the risk-return ratio for these segments. As a result, both the retail and the SME markets have specialized units that generate loan offers using strategies previously defined for these segments. Case-by-case Model: This model is used for large companies and corporations. It entails an expert, individual assessment, based on the level of risk, the amount of the transaction and the complexity of the business, among other variables. This approval process is also supported by a rating model that makes the evaluation more homogenous and determines the required credit attributions. For this, it has a strong process and team with considerable experience in the loan approval process for the diverse segments and industries in which we do business. Furthermore, in order to make the approval process more effective, data gathering, analysis and discussion of the credit proposal are supported by the credit risk areas in order to ensure a higher quality evaluation and respond more promptly to customer requests. Risk Management 2012 109 Credit Risk II.2 Management and Monitoring Provisions / Past-Due Loans(*) The Bank continuously monitors our customers’ overdue payments, financial situation and various risk indicators so that risk measurements fit within the margins approved by management. On-going management and monitoring of credit risk is the basis for proactive portfolio management, which enables potential impairment to be recognized in a timely manner. Different tools (sensibility, performance or others) are used for each market, segment or product in order to adequately control our customer portfolio. The results obtained from these tools help detect both threats and opportunities in advance, by contrasting them with the strategies defined for the portfolio. 280% 262% 303% 198% Dec-09 (*) Dec-10 Dec-11 Dec-12 Includes additional provisions. The Bank has increased its coverage of provisions for the 90-day pastdue portfolio in recent years, reaching 303%, which compares favorably with the industry average. Evolution of Provisions for Loan Losses (Figures in millions of Ch$) 223 Distribution of Company Loans by Industry (% of loans) 209 188 3% Commercial 3% Loans to Utilities Individuals 2% Fishing 3% Mining 125 1.8% 1.5% 0.8% 2009 2010 Loan Loss Provisions 2011 1.0% 2012 7% Agriculture & Forestry 19% Commerce, Restaurants & Hotels LLP Ratio 10% Manufacturing 19% Financial Services 11% Social and Personal Services 11% Transport & Communications 110 AnnualReport2012 12% Construction II.2.1 Companies Market In the companies market, management and monitoring are based on a set of reviews. The most important of these reviews include: Structured portfolio reviews to identify customers that could potentially be affected by variations in macroeconomic variables in specific sectors. Management of delinquent customers, enriched with predictive risk level indicators, monitoring and action plans for more important customers and differentiated strategies for early collections. Monitoring programs for credit behavior variables and companies’ financial figures, as well as loan-specific conditions and restrictions. Management of portfolios with special monitoring using committees that meet periodically to establish action and monitoring plans for medium-sized businesses that present warning signs of risk. Risk segmentation strategies for collections processes and policies, promptly collecting on the Bank’s receivables. Delinquency Indices 0.69% 0.56% 0.55% 0.44% 0.36% 0.43% 0.36% 0.30% 0.19% 0.14% 0.13% 0.08% Dec-09 Dec-10 Dec-11 Dec-12 Past-due 30-89 Total In 2012, the Bank posted low delinquency levels throughout all segments, which allowed it to maintain stable default and past due ratios in the companies market. Loans vs. Risk Indicators (BCh$) (Figures in millions of Ch$) 10,739 1.95% 13,581 14,277 1.87% 1.89% 11,325 2.08% 0.55% 0.30% 0.36% Dec-09 Total Loans Dec-10 Dec-11 Risk Index 0.36% Dec-12 NPL Ratio Loans in the companies market have continued to grow, preserving healthy risk indicators such as the LLR Ratio (0.36%) and the risk index (1.89%). Risk Management 2012 111 Credit Risk for the product, this provision ratio has stayed below the aforementioned figure, closing the year at 5.8%. As with delinquency indices, the Bank’s expected losses in both segments are lower than financial system figures. II.2.2 Retail Market Consumer Loans Consumer delinquency indices within the Bank’s retail segment remained stable during the year, characterized by negative seasonality during the first quarter and more favorable conditions during the second half of the year explained by positive economic conditions and a decrease in unemployment figures. Loan Loss Provisions / Average Loans (%) 7.0 6.5 6.0 The Bank’s consumer loans reported delinquency indices below industry levels in both segments: Retail Banking and Banco CrediChile. 5.5 5.0 4.5 4.0 Dec-09 Dec-10 Dec-11 Banco BancodedeChile Chile Dec-12 System Sistema 90 Days Past-due Loans (%) As of year-end 2012, coverage of provisions for the past-due portfolio (>90 days) reached 3.7 times, while the financial system average was only 2.7 times. These figures are in line with the institution’s conservative provision management strategy. 3.0 2.5 2.0 1.5 1.0 0.5 0 Dec-09 Coverage Ratio (Times) Dec-10 Banco de Chile Dec-11 Dec-12 System Expected losses on this portfolio, represented by the ratio of provisions to loans, rose during the first quarter of the year, in line with greater delinquency figures, and peaked at 6.1% in April 2012. Beginning on that date, with seasonality particular to the productivity figures attained 112 AnnualReport2012 6.0 5.0 4.0 3.0 2.0 1.0 0 Dec-09 Dec-10 Banco de Chile Dec-11 System Dec-12 Mortgage Loans As a result of better economic conditions than in prior years, the Bank’s mortgage loan portfolio in the retail segment reported a slight, yet consistent, drop in delinquency indices, stabilizing at an over 90 day default rate of 0.7%. 90 days Past-Due Loans During 2012, estimated losses on the retail portfolio, represented by the ratio of provisions to loans, posted continuous decreases, stabilizing at around 0.4%. As with delinquency indices, the Bank’s estimated losses are below system figures. Like with consumer loans, the provisions maintained by the Bank for mortgage loans, as a percentage of total loans over 90 days past due (53%) is well above the average figure for the financial system (21%). (%) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0 Coverage Ratio (Times) 60 50 Dec-09 Dec-10 Dec-11 Dec-12 40 30 Banco de Chile System 20 10 Banking system delinquency also posted decreases in loans more than 90 days past due, reaching 3.9%. As with consumer loans, our delinquency indices for retail mortgage loans are clearly below financial system averages. 0 Dec-09 Dec-10 Banco de Chile Dec-11 Dec-12 System Net portfolio expenses for retail mortgage loans, which include provisions, charge-offs and amounts recovered from previously charged-off loans, decreased with respect to prior years, finalizing at 0.06% for the year. Loan Loss Provisions / Average Loans (%) 1.2 1.0 0.8 0.6 0.4 0.2 0 Dec-09 Dec-10 Banco de Chile Dec-11 Dec-12 System Risk Management 2012 113 Credit Risk II.3 Quality of Collections Process The objectives of the collections process are: To retain and manage customers with temporary cash flow problems using debt restructuring plans for customers with payment capacity so the Bank can maintain relationships with them once their situation has returned to normal. Maximize recovery of assets at risk. Necessary collections steps are taken to ensure maximum recovery of debts or to decrease potential losses. Debtors with payment problems, reflected in significant delays and/ or evident deterioration of payment sources, are assigned to special collections units depending on their individual and/or group indebtedness. Our subsidiary Socofin S.A., which for all practical purposes reports to the Corporate Risk Division, manages collections from delinquent customers from the retail and SME segments. The collections strategies applied by Socofin vary based on customer segment, delinquency status and exposure level. Larger debtors from the companies segment are assigned to a specialized area that reports to the Bank’s Corporate Risk Division and works to restore normal payment behavior on a case-by-case basis. The procedures are intended to optimize the amounts recovered by the Bank as timely and efficiently as possible. Within this context, renegotiations must be approved by the corresponding committee with sufficient authority based on the debtor’s and/or the group’s total indebtedness and the assigned risk rating. As the goal of renegotiations is to recover debt, customers must have a real intention to pay and be able to generate future cash flows that make their compliance with the restructured loan highly probable. This should allow the Bank to create a new payment plan based on the customer’s capacity, collateral and/or co-signers, among other factors. 114 AnnualReport2012 In cases where the customer proves to be viable and shows willingness to pay, loans are restructured based on expected cash flows, formulating a proposed solution together with the customer, which is ultimately evaluated and approved by the Bank’s Corporate Risk Division, applying the policies and guidelines defined for that purpose. II.4.2 Group Assessment II.4 Provisions and Estimated Losses Group assessments start by grouping loans with similar characteristics such as type of debt and agreed-upon conditions in order to establish both the group’s payment behavior and the recovery of delinquent loans using technically-backed estimates and conservative criteria and, consequently, to establish the provisions necessary to cover portfolio risk. Banco de Chile is constantly assessing its entire portfolio of loans and contingent loans in order to opportunely establish necessary and sufficient provisions to cover losses that it expects to be unable to recover. To do so, it has policies and procedures that comprehensively assess the credit risk of its loan portfolio with assessment models based on the size, nature and complexity of its loan deals. Provisions are determined for the retail and companies markets using two models: (i) the Individual Assessment Model and (ii) the Group Assessment Model. II.4.1 Individual Assessment An individual debtor assessment is used when the Bank needs to understand and analyze a customer in detail because of its size, complexity or exposure level. The analysis of such debtors focuses on their ability and willingness to meet their credit obligations based on sufficient and reliable information. For the purposes of establishing provisions, each individually assessed debtor is scored in one of 16 categories provided by the SBIF. We constantly update each debtor’s risk rating based on changes to its financial situation and environment. We also review companies within particular industries that are affected by macroeconomic or sectorspecific variables. The SBIF permits group assessments to deal with a large number of transactions with small individual amounts loaned to individuals or small companies. As a result, provisions for the consumer, mortgage and commercial loan portfolios for individuals and small businesses, given their large scale, are established using group assessments. These provisions are intended to cover estimated losses over the next twelve months. For the retail market, this is done using automated statistical models based on debtor payment behavior—including default with other financial system players—in addition to the degree of delinquency, indebtedness level and other variables that make up a debtor’s profile. In particular, consumer models take into consideration the expected unemployment rate as a variable that reflects the economic context. For the SME segment, a model was developed that determines the provision for each customer using an automated process involving two sub-models, one to estimate probability of default (PD) and another to estimate loss given default (LGD). We use periodic backtesting, by which real losses are contrasted with model-estimated losses, to validate the consistency of our models. Risk Management 2012 115 Credit Risk II.5 Adequacy of Provisions Each year, we test the adequacy of our provisions to verify our risk assessment processes and estimated loss approximations for each segment’s portfolio. To do so, we use migratory analyses, random sampling, case-history evaluations and back-testing for group models that allow us to confirm, with a high degree of confidence, that our provisions are sufficient to cover estimated losses in the different segments. The results of this analysis are presented to the Board, which then issues a formal opinion on the adequacy of our provisions for each year. II.6 Country Risk Country risk is defined as the inability of a counterparty that is a legal resident of a foreign country to honor its payment commitment with the Bank for one or more of the following reasons: An issue with sovereign risk in the respective country; nationalization or expropriation of the counterparty’s operations by authorities of the country in question; or because authorities prevent local currency from being converted to any convertible currency or they prevent funds in convertible currencies from being transferred out of the country in question. The International Risk Unit within the Corporate Risk Division controls country risk generated by transactions between the Bank and foreign counterparties. This unit is also responsible for controlling credit risk from deals with different foreign financial entities. Furthermore, it establishes 116 AnnualReport2012 guidelines for measuring, limiting and reporting exposure maintained abroad through the Country Risk Management Policy. Towards the end of 2011, a new version of the Country Risk Management Policy was approved. This new policy includes some elements from the previous version but also introduces several additional concepts for measuring country status, including economic and financial variables such as the premium for insuring a country’s default risk (also known as credit default swap or CDS) and trends in the exchange rate, stock indices and interest rates, etc. This policy also contains an internal rating model for countries, which is presented, together with a risk limit for each particular country, to the Board of Directors for its approval. It is common to also have aggregate limits based on other dimensions such as types of products, geographic location, etc. The model in place has demonstrated a considerable capacity to predict trends in country status; it even anticipated the downgrading of some ratings by respected international risk rating agencies in 2012. During 2012, the Bank continued its monthly monitoring efforts, analyzing exposure levels, market variables, financial and macroeconomic fundamentals in key countries throughout the world as well as countries where most of the Bank’s foreign transactions take place. All of these efforts have enabled the Bank to stay informed of developments in international markets and to take the measures necessary to manage an international portfolio with adequate and healthy risk-return ratios. II.7 Regulatory Changes During 2012, two laws took effect: Law 20,555, which modifies Law 19,496 on Protecting Consumer Rights and Law 20,575, which establishes the Principle of Finality for the Use of Personal Data, statutes that have an impact on the financial business, primarily in the retail segment. Other regulatory initiatives, which are expected to take effect in 2013, are currently being debated, including: The maximum conventional interest rate, the consolidated debt system (SOE) and the Personal Bankruptcy Law. Law N° 20,555 (Sernac Financiero) On March 5, 2012, the new Financial Consumer Protection Agency (Sernac Financiero) began operating and was later complemented with regulations published in July. The provisions of Law 20,555 addressed a variety of topics such as: the effective period of contracts; mechanisms for adjusting charges, fees, expenses or rates; the irrevocability of powers of attorney and the obligation to provide account information; and particular obligations involving the risk evaluation process and communication of decisions made: t Information regarding reasons for denial when contracting a financial service. In accordance with the new provisions of the law and the respective regulations, the consumer has the right to be informed, at his request, of the reasons he was denied access to a certain financial product, and these reasons may not be arbitrarily discriminatory. t The obligation to establish, publicly and in advance, the objective conditions for accessing loans and other financial transactions. The consumer has the right to know the objective conditions that the supplier establishes, publicly and in advance, for accessing loans and other financial transactions, which involves the obligation to publish the considerations, elements and requirements that a bank generally establishes for granting financial products. Law N° 20,575 (Finality for Use of Personal Data) On February 17, 2012, Law 20,575 was published, which refers to the treatment of personal data of an economic, financial, banking or commercial nature. This law sets forth that the principle of finality should be respected when dealing with these data, which shall exclusively be used for commercial risk evaluation and loan processes, regulating the use of commercial reports for these purposes only. This law particularly considers a transitory provision that prohibited unpaid obligations due before December 31, 2011 from being reported, as long as the total of the obligations on an individual’s record were less than Ch$2,500,000 in principal as of the date of publication of the law. Records for approximately three million debtors were eliminated from databases. This measure restricted an important amount of information previously used to adequately evaluate risk, mainly affecting applicants with less banking penetration. Other industries such as the retail sector were also affected by these measurements, restricting access to credit and/or limiting exposure (credit limits) of new customers. Risk Management 2012 117 Financial Risk III. FINANCIAL RISK III.1 Liquidity Risk Financial or market risk is defined as the risk of potential loss to the Bank from not having perfectly matched financial positions in the event of adverse changes in market variables or scarce liquidity. The potential losses generated by the first factor are known as price risk, while the Scarce liquidity can occur either due to a reduction in available funds (for a variety of reasons) that affects the Bank’s funding capacity or a reduction in the traded volumes of the assets (loans, bonds, other bank deposits, etc.) or derivative instruments entered into by the institution. Accordingly, liquidity risk is classified into the following categories: second factor produces liquidity risk. For analysis and management purposes, the Bank separates market risk into these two components. 1. Funding liquidity risk The Corporate Risk Division, through the Market Risk Division, is in charge of managing this risk within the Bank and its subsidiaries in order to ensure a healthy risk-return ratio in deals that generate these types of risks. Market risk management is divided into four tasks: measuring, limiting, controlling and reporting. The Reporting and Financial Risk Control Unit within the Financial Control and Management Division also participates in market risk management. The Bank’s Treasury Division is responsible for managing financial positions within the limits and parameters proposed by the Market Risk Division and approved by the Board of Directors. This division manages these positions through two areas: Trading Management, which is responsible for handling the financial positions of the Trading Book. Variations in the value of these positions are reflected in the income statement. Risk Treasury Management, which manages the financial positions of the Banking Book and the liquidity of the entire Bank. Interest on these positions is reflected in the income statement; also, in the case of investments available for sale, the variation in value impacts equity as long as they have not been sold. 118 AnnualReport2012 2. Trading liquidity risk Liquidity Risk Limits and Warning Levels In accordance with the Liquidity Risk Management Policy, each year the Bank’s Board must approve internal limits and warning levels for ratios based on internal methodologies that complement regulatory liquidity limits. The limits and internal warning levels are intended to control structural liquidity variables that are not covered by regulations, such as: liquidity ratios; funding of assets in Chilean pesos by liabilities in foreign currency; the status of market variables that can forecast illiquidity, etc. Measuring Liquidity Risk Funding liquidity is controlled and limited using several reports. The most basic is the C08 regulatory report, which simulates forecasted cash flows over the next 30 and 90 days in Chilean pesos and for total amounts in foreign currencies. In addition, the Bank is authorized by the SBIF to report cash flows based on behavior assumptions other than contractual provisions, which results in an adjusted C08 regulatory report. In the 30-day analysis, the regulatory limit establishes that during the next 30 days the net cash outflows denominated in foreign currency and, likewise, the sum of net cash outflows denominated in all currencies (including Chilean peso-denominated cash flows) should not exceed the Bank’s Basic Capital. In the 90-day analysis, the regulatory limit establishes that during the next 90 days the net cash outflows denominated in all currencies should not exceed twice the Bank’s Basic Capital. Índice C08 ajustado 1 - 30 días 1.0 0.8 0.6 0.4 0.2 0.0 The chart Adjusted 1-30 day C08 Index shows the Bank’s conservative management of liquidity during 2012. The index, which includes all currencies, peaks at the beginning of the third quarter and is reduced drastically after that date, mainly generating greater liquidity in items denominated in Chilean pesos. This reduction was due to the perception of illiquidity towards the end of the year, which was not as severe as expected particularly because of the measures adopted by monetary authorities.. -0.2 Mar-12 Jun-12 Adjust. Index FX Sept-12 Dec-12 Adjusted Index Local Currency + FX The 1-90 day C08 index evolves more stably throughout the year, but still indicates that the Bank had greater liquidity towards the end of 2012. C08 Adjusted Index 1 - 90 DAYS 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mar-12 Jun-12 Sept-12 Dec-12 Adjusted Index Local Currency + FX Risk Management 2012 119 Financial Risk Trading liquidity is strengthened with highly-liquid debt instruments in the Bank’s Trading Book such as Central Bank and Chilean government bonds and short-term time deposits. The trading liquidity of derivative instruments is limited via DV01 limits for certain specific terms for each swap curve traded. The trading liquidity of debt instruments in the Accrual Book does not need to be explicitly limited, as in this case the Bank seeks to obtain purchase yield until maturity or in the medium term since in the majority of cases they are purchased to hedge stable balance sheet items, such as current account balances. During 2012, the Bank approved its Debt Instrument Investment Policy, which formally governs positions held in such instruments. In addition, the Bank established an internal limit that aims to protect the amount of liabilities in foreign currency that fund assets in Chilean pesos. The maximum use of this limit during 2012 was 57%, which is considerably less than the prior year. This is due primarily to the absence of an arbitrage opportunity during the year between the interest rate curves denominated in USD for the cash market and the equivalent in the derivatives market. Lastly, in accordance with the Liquidity Management Policy, the Bank performs quarterly liquidity stress exercises in order to quantify its cash needs in the event of material adverse scenarios. III.2 Price Risk The Bank separates price risk into three categories: 1. Spot price risks 2. Interest rate risks 3. Options volatility risks Price Risk Limits and Warning Levels In accordance with the Market Risk Management Policy, in addition to regulatory limits, each year the Bank’s Board must approve internal limits and warning levels for financial positions and/or price risks generated by them. The approval process for internal limits on price risk is carried out in order to set maximum levels for our position on a certain market factor and, therefore, to limit estimated losses that could occur in the event of adverse variations in market variables. The approval process for warning levels on price risk is designed to define a tolerance level over which upper management wishes to be informed of either potential losses in any business unit or the status of actual losses accumulated during a period of time by any one unit. Measuring Price Risk Price risk is measured using various reports and is assessed separately for the Trading(2) and Currency Book and the Banking Book (as well as the Accrual Book(3)). For the Trading and Currency Book, price risk is measured using standardized regulatory reports (SBIF reports C41 and C43) and also (1) DV01 is the change in value of a financial instrument as a result of an increase in its valuation interest rate by 0.01%. 120 AnnualReport2012 (2) The Trading Book includes those transactions whose variation in value instantly impacts the Bank’s income statement, such as financial instruments recorded in these accounts and the majority of derivative instruments. (3) The Accrual Book consists of all line items from the Bank’s balance sheet, including those that are excluded from the definition of the Banking Book such as capital, property and equipment, etc. Transactions in the Trading Book are represented at a maturity of one day in the Accrual Book, therefore not generating interest rate risk. using the parametric Value at Risk (VaR) report with 99% confidence and a year of daily variations in market variables for calculating volatility and corrections; this value is scaled by the square root of a 22 day period in order to reflect estimates that the positions may be effective and totally closed within a calendar month. Interest rate positions most contributed to the VaR during 2012. Next in line were exchange rate positions and then, to a much lesser extent, small positions in exchange rate options. The following graph shows the evolution of the historical VaR generated by all Trading Book positions during 2012 (line entitled TOTAL; it also shows the VaR generated during that period by positions in that book that are managed by the Trading Unit separately from the positions managed by the Risk Treasury Unit. Risk was used decreasingly over the year. It was employed on two specific occasions during the year due to a greater use of financial positions since the volatilities of variations in market values have remained stable during the period. VaR Historical Trading Book (Scaled to 22 days) (In millions of USD) 18 16 14 12 10 8 6 4 2 Mar-12 Total Jun-12 Trading Sep-12 Dic-12 Risk Treasury Risk Management 2012 121 Financial Risk Also, internal policies call for daily stress tests of Trading and Currency Book positions, including a comparison of expected potential losses with regards to defined warning levels (“look forward analysis”) and, separately, a comparison of actual income during a calendar month with regards to loss warning levels (“look back analysis”). Price risk in the Accrual Book is measured using a standardized regulatory report (SBIF C40 report) and internal metrics. The metrics in the C40 report are calculated using methodologies provided by the SBIF, which are taken from the Basel Accords on standardized measurement of these risks. The values of short and long-term risk throughout 2012 are well below the limits established by the Bank for these metrics and demonstrate a high degree of stability. The Bank has also established internal metrics for price risk management in the Accrual Book, defining limits and warning levels for interest rate exposure. In effect, the Bank measures interest rate positions using the IRE metric (Interest Rate Exposure), defined as the potential impact of 122 AnnualReport2012 a standardized parallel movement (100 basis points for interest rates and 0.1% for monthly inflation) in the forward yield curve of a particular currency on net profit before taxes. The Bank calculates and reports interest rate risk for the Accrual Book using the EaR 12 M (Earnings at Risk 12M), which enables it to estimate the potential drop in earnings that the Bank may experience over the next 12 months, based on interest rate positions in effect as of each reporting date, and as the result of a movement in expected forward interest rates during the last three years with 97.7% confidence. The attached graph follows the evolution of this metric during 2012. The historical volatilities of forward interest rates are in an extremely stable cycle and, therefore, coupled with the fact that structural financial positions remained relatively stable, they have resulted in little change in the use of risk, totaling around Ch$50 billion for 2012. As in previous cases, the use of risk decreases slightly towards the end of the year as a result of the closing of some positions related to Chilean inflation. In any event, the maximum risk taken does not exceed 15% of the Bank’s annual earnings. Lastly, the Bank’s internal policies call for stress tests to be conducted each month on the Accrual Book and for the results of these tests to be compared to warning levels approved by upper management. EaR 12M Accrual Book (In millons of Pesos) IV. OPERATIONAL RISK Banco de Chile has defined controlling risks as one of the key factors in its business strategy. To accomplish this, it has established diverse risk management models that are periodically adjusted to adhere to applicable national and international regulations. Operational risk is defined as the risk of incurring losses from deficiencies or failures in internal processes, human resources or systems, or resulting from external circumstances. 60,000 50,000 40,000 30,000 20,000 10,000 Mar-12 Jun-12 Sept-12 EaR 12M - Shock Expected Rates Dec-12 The Bank’s objective for operational risk management is to identify, value, mitigate and monitor this risk. The greatest demand lies in identifying and eliminating focal points of risk, regardless of whether they have resulted in losses. Measurement also helps manage this risk by allowing priorities to be set and decisions to be made based on the Bank’s established hierarchy. In this sense, the Bank adheres to local and international regulations and has established comprehensive plans for operational risk, business continuity and information security, which has enabled it to strengthen its current Risk Management System, as approved by upper management and the Board of Directors. Risk Management 2012 123 Operational Risk These plans contribute a global vision of risk as well as integral measurement systems, quality analysis and mitigation methodologies for different risk exposures, adequate control of processes and a reduction in the possible impact on the Bank’s net worth. Important progress was made in 2012 in operational risk, business continuity and information security that is in line with national and international best practices, including: IV. 1 Operational Risk: The organizational structure for managing operational risk is based on the following principles: The Corporate Risk Division is responsible for controlling and assessing the value of this type of risk. Within the division, the Operational Risk and Technology Division is the core unit that oversees operational risk efforts and is in charge of the Bank’s overall risk program. The effective structure for managing operational risk is based on the knowledge and experience of the executives and professionals from different areas/units within the Bank, making the role of the Operational Risk Coordinators and Advisors very important within the organization. Thus, the Bank has established a sound structure for managing operational risk, which includes the Board of Directors, the Directors’ and Audit Committee, senior management and the Operational Risk Committee, led by the Chief Executive Officer, as well as diverse operating committees comprised of personnel from the commercial and business support areas. 124 AnnualReport2012 Defining the framework for comprehensively managing operational risk that establishes the general guidelines, tools and processes used to measure, value and mitigate operational risks. Establishing loss limits for operational risk by defining tolerance and risk appetite levels for this type of risk. Approved by upper management and the Board of Directors. Carrying out self-assessment processes to evaluate operational risk at a process level, including identifying and determining the economic value of residual risk for critical processes, generating action plans and operational risk indicators to mitigate risks in critical processes. Reformulating the functional structure used to address operational risk and fomenting active management by Operational Risk Committees. Each entity has specific work plans aimed at controlling and mitigating the respective risks and monitoring plans and commitments made by different areas within the Bank. Periodically assessing suppliers of critical services, which enables the Bank to ensure fulfillment of agreements and business requirements, while creating a formal process for communicating deviations in service levels, alternative solutions and strategic needs for the Bank’s products and services. Continuously improving the main tools used for operational risk: - Awareness of operational risk events. Identification and analysis of the most significant and most frequent events, with subsequent adoption of mitigation measures. - Operational risk indicators, which are defined and periodically updated by the main responsible units. - Definition and maintenance of process map for entire Bank. Testing phone trees throughout the entire organization that ensure communications channels remain open in the event of a catastrophe. IV.3 Information Security Developing an Information Security Policy, standards and procedures, which establish the general framework for this topic. Implementing information security programs to maintain an adequate level of protection for customer and bank information. Carrying out monitoring program for behavior indices that safeguard information security. Training all bank staff on programs and plans involving different areas of operational risk and strengthening these training initiatives. IV.2 Business Continuity: Developing a Business Continuity Policy, which establishes the general framework for this topic. Selecting an alternate contingency site to ensure business continuity for Banco de Chile’s Money Desk. Perform business continuity tests under different scenarios. Generating documentation and tests for IT Disaster Recovery Plan based on alternate sites. Risk Management 2012 125 7 CORPORATE SOCIAL RESPONSIBILITY Committed to a Better Chile for our Associates In keeping with its strategy of forming employees who are committed Internal Mobility to their work, Human Resources undertook a variety of projects and initiatives, after reorganizing itself in order to be closer to the organization’s units and individuals. In order to promote individual growth and development, the Bank has made a new Internal Mobility Site available to employees. Resumes can be uploaded to the site, where they are continuously available for editing. The site also lists vacancies and allows employees whose skills and experience match the vacancy’s requirements to apply. Team Members This initiative seeks to motivate employees to take charge of their career Banco de Chile owes its success to the daily work of its more than 14,000 development and take on new challenges, encouraging them to be top performers employees. That is why the Bank has strived to create a pleasant, yet challenging, and enhance their skills. The new site is also meant to allow bank leadership to work environment that fosters the professional and personal development of fill vacancies with the Bank’s most talented current employees. its employees, allowing them to standout in a culture that emphasizes respect, meritocracy and pride in belonging to the organization. In 2012, the Bank conducted Corporate Competency Evaluation a new work climate survey, enhanced the competency evaluation system, and launched an internal mobility platform to further refine the recruitment process. In order to enhance employee performance, the Bank conducted a new evaluation process based on the following corporate competencies: adaptability, business In its relentless quest to provide the best service to Banco de Chile’s team focus, teamwork and effective execution. In order to gain a more complete members, Human Resources reorganized itself into five sub-divisions. The cross-section of each employee’s performance, two new evaluation factors—(1) more horizontal structure allows human resources staff members to be closer service quality and (2) commitment and responsibility—were incorporated. to employees and improves response times. The measurement tool is differentiated by position type and business area. It also As of December 2012, Banco de Chile had 14,567 employees, 10,700 of whom establishes commitments with each team member in the form of action plans. work for the Bank itself, while 3,867 work for its subsidiaries. Average tenure All these enhancements resulted in a more expeditious evaluation process, the is 8.7 years and 50% of the employees are women. main focus of which was the supervisor-employee feedback meeting. 128 AnnualReport2012 The results of the evaluation will be used as data to support employee development and learning processes and to foster a culture of continuous improvement. Training The Bank continued its customary intensive training program, which seeks to provide each team member the knowledge and skills necessary to achieve excellent performance and professional growth. In 2012, 822,590 training hours were logged—52% were “e-learning” courses while 48% were classroom based. These training initiatives reached 97% of Banco de Chile employees. Highlights among the classroom-based courses included the graduate certificate in Business Management for Large Companies offered by Pontificia Universidad Católica (PUC), in which 43 employees participated; and the graduate certificate in Business Management and Marketing, in which 44 bank employees participated. The 2012 highlight among the e-learning courses was the graduate certificate in Business offered by Universidad Adolfo Ibáñez, in which 67 employees participated. The Bank also continued to promote its professional development program (“Crece en el Chile”), which began in 2011 and focuses on identifying, aligning and empowering future business leaders from the Banco de Chile, Edwards Citi and Credichile networks. In 2012, a total of 48 employees were invited to participate in the program, representing twice the previous year’s openings. Corporate Social Responsibility 129 Committed to a Better Chile for our Associates Better Communication At a global level, three dimensions were evaluated: organizational structure, In order to continue consolidating the Bank’s organizational culture, optimize clarity of role and identity were among the most emphasized factors. the timeliness and means of communication and reinforce strategic alignment using timely, clear and accurate messages and channels, a new communication career development potential and interpersonal relationships. Flexibility, ethics, Effective Organization model was established. The model has three focuses: i) Planning the corporate communication strategy, ii) Designing and planning a communication strategy In 2012, the compensation area established a methodology for analyzing, for the divisions, iii) Advising on specific division management needs or projects maintaining, consulting and implementing structural modifications in response that impact one or multiple divisions. to the Corporation’s needs. The process began in August and proposes collaborative and coordinated work between Human Resources and the Bank’s Work Environment various divisions. The main objective is to achieve an organizational structure Banco de Chile has always focused on strengthening its employees’ commitment Corporation, and facilitates professional development. This year, the system in order to enhance bank culture and cultivate a good work environment. These was implemented in the Technology, Risk and Development and Quality areas. efforts are reflected each year in the work climate survey. In 2012, 80% of employees participated in the survey and the results were positive. 130 AnnualReport2012 that is aligned with the strategic focus of each business, is efficient for the Quality of Life The Bank is concerned with its employees’ quality of life. Consequently, it offers a series of programs and activities meant to promote physical and psychological health, as well as to encourage recreation and overall well-being for all Bank associates. Some of the 2012 highlights in this area were: The Bank’s counseling program (“Programa Orienta”) for office employees in the Metropolitan and Fifth Regions, which benefited nearly 1,377 bank associates. Implementation of a Human Resources Intervention Plan for branch robberies, establishing specific duties and a phone tree. An increase (10% nationally) in the number of calls to the medical advice phone service, providing coverage to 3,226 users. A voluntary cardiovascular risk screening pilot program offered to employees under age 30. In 2012, 349 employees in the Metropolitan Region were screened. The program granted that age group a chance for early intervention. A work group which designed, produced, and proposed a methodology for incorporating quality of life programs with a preventive focus on managing people and conflicts into the annual training program. The aforementioned initiatives have earned Banco de Chile recognition by the Chilean Chamber of Construction (“Cámara Chilena de la Construcción”) for its support of the quality of life of its employees and the community. This was the first year that the entity had granted this type of award, which recognized companies that are at the forefront on such issues. Corporate Social Responsibility 131 Committed to a Better Chile for our Community Banco de Chile believes in a better Chile with more opportunities for meals and giving them the opportunity to participate in workshops and activities everyone. Consequently, it has forged a tradition of corporate social that reinforce autonomy. responsibility over its more than 100 years of history. Over time, the Bank has implemented various initiatives that enhance the quality of life of The Bank’s subsidiary, Socofin, also participates in the corporate matching program, providing funding for a Hogar de Cristo women’s shelter in Santiago. the various groups that interact with the Bank, particularly those that are most vulnerable. Similarly, it supports the country’s major causes, making concrete contributions to the development of Chile and of all Chileans. Committed to a Better Chile for our Community Committed to a Chile that Overcomes Adversity t"T"MXBZTUIF0GmDJBM#BOLPGUIF5FMFUØO In keeping with its commitment to continue building a better Chile with more opportunities for everyone, Banco de Chile supported the 11 Teletón Foundation t$PNQSFIFOTJWF4VQQPSUGPS'BNJMJFT (“Fundación Teletón”) centers, just as it has for the past 34 years. The centers, located throughout the country, serve more than 30,000 children and youth The standard of service at Corporación Educacional y de Beneficencia Cristo each year. The Bank actively participated in the foundation’s efforts, supporting Joven, which BanChile Inversiones has supported for 17 years, has positioned the various activities that took place throughout the year, especially the Teletón it as a leader among Chilean non-profit organizations. It focuses on prevention fundraising campaign. and protection of socially at-risk children. During each Teletón fundraising campaign, Banco de Chile places its infrastructure The foundation currently has seven centers and preschools in the municipalities and technology at the disposal of the foundation and of all Chileans. The technology of Peñalolén, La Cisterna and La Pintana, where it cares for more than 1,500 is specially designed to safely and efficiently collect and process donations, low-income children and youth. It also offers nurseries, preschools, day care providing a running, online count of the total received. centers, community prevention initiatives and psychosocial support for families. For the twenty-fifth Teletón, more than 9,000 bank employees volunteered to help all t4FOJPS$JUJ[FO$FOUFST Chileans, by collecting donations across the country with their usual generosity and enthusiasm. To do so, more than 600 points of service between Arica and Puerto In order to enhance the quality of life of senior citizens, Banco de Chile and its Williams were set up in addition to on-line donation channels, both in Chile and abroad. employees make annual donations through Hogar de Cristo’s corporate matching program. The contributions total 48% of the annual budget for the Hogar de Cristo Thanks to the effort and solidarity demonstrated by all Chileans, the Teletón was senior citizen centers (“CEAM” program). The centers offer shelter to individuals once again a complete success, exceeding the goal and ultimately collecting in extreme poverty who do not have a suitable place to spend the day, providing Ch$ 31,255,222,196. 132 AnnualReport2012 t4VQFS"SUi4VQFS"SUFw BU#BODPEF$IJMF#SBODIFT t6TJOH4QPSUTUP*OUFHSBUFBOE0WFSDPNF"EWFSTJUZ The Teletón and Banco de Chile joined forces once again to organize SuperArt, Since Banco de Chile began supporting her, Macarena Cabrillana, a disabled an artistic exhibit in which children and youth from the Teletón share their talents tennis player, has made considerable accomplishments. In early 2011, she was and creativity with the public through a colorful urban intervention. 135th in the women’s world ranking. At the end of 2012, she ranked 36th, a career best. During the year, she participated in 14 international tournaments and This time the young Teletón artists turned Paseo Ahumada, in front of Banco 2 national tournaments. She is currently ranked third in Chile. Without a doubt, de Chile’s headquarters, into a farm using sculptures of native Chilean fauna, she has made a great contribution and has been an example of perseverance, like pudús, sea lions and llamas; and real animals, including rabbits, puppies effort and overcoming adversity. and alpacas. Likewise, in the Bank’s constant endeavor to support and encourage activities that Similar exhibits were displayed simultaneously at Banco de Chile offices in promote rehabilitation and integration of children and youth with disabilities, Banco Santiago and nine other cities throughout the country: Arica, Iquique, Antofagasta, de Chile has organized a wheelchair tennis match (“Tenis en Sillas de Ruedas”) Coquimbo, Valparaíso, Talca, Temuco, Concepción and Puerto Montt. for 15 consecutive years. In 2012, fifty disabled tennis players from countries like Argentina, Peru, Ecuador, Brazil, Colombia, Australia and Spain participated. t$PMPSUIF5FMFUØO$POUFTU Through the tournament, the Bank provides Chilean tennis players with an The Color the Teletón (“Pinta el Teletón”) contest was held in mid-2012. The opportunity to earn points toward the world ranking without the economic and contest was organized by the Teletón Foundation and encouraged students from physical sacrifice involved in traveling to tournaments abroad, while reaffirming across the country to be aware of and respect the rights of disabled children. its commitment to and encouraging activities that promote the rehabilitation and Students from pre-school to eighth grade were invited to submit a drawing integration of the country’s disabled children and youth. about those rights. In keeping with its commitment to a country that overcomes adversity, Banco de Chile outfitted its entire network of branches, between Arica and Puerto Williams, with boxes specially designed to collect drawings. More than 60,000 drawings were submitted throughout Chile; a demonstration of the students’ tremendous motivation and talent. The colorful and cheerful national prize ceremony was held at Santiago’s interactive children’s museum (“Museo Interactivo Mirador” (MIM)). Corporate Social Responsibility 133 Committed to a Better Chile for our Community t%FTBGÓP-FWBOUFNPT$IJMFBOE#BODPEF$IJMF#VJMEB#FUUFS Chile Together Led by one of its most iconic founders, Felipe Cubillos, Desafío Levantemos Chile, a non-profit organization, was founded in 2010 in the wake of the earthquake and tsunami that struck the country on February 27th. The organization’s work initially focused on reconstruction—rebuilding devastated schools and fishing coves. Today, the group takes on social challenges, transforming initiatives from fields like entrepreneurship, education, health, culture, sports, renewable energy and volunteer work into reality. The group puts their skills and resources at the service of the people, making themselves a true bridge between those in need and those who can give, whether they are individuals, large or small companies. On that basis, Desafío Levantemos Chile has been able to respond efficiently and quickly to the needs of the people, making contributions in various sectors of society and collaborating with those who want to succeed, enhancing quality of life in their communities. A trip to Robinson Crusoe Island was the first joint Banco de Chile-Desafío Levantemos Chile event, following the signing of a partnership agreement in which the Bank committed to funding a large portion of the foundation’s operations. The partnership will allow all donations made to Desafío Levantemos Chile to fund projects that directly help people throughout the country, primarily small entrepreneurs who need an opportunity to thrive. In response to the disaster that struck the city of Punta Arenas, which left stores, schools and utilities under mud, the Bank and Desafío Levantemos Chile joined forces to create a system for channeling support from individuals from anywhere in the country. t$IBMMFOHFTGPS$IJMF “Levantemos Chile” (Let’s Lift Up Chile), which refers to changing attitudes, joining forces and doing something great via the sum of small challenges. Consequently, Banco de Chile and Desafío Levantemos Chile issued an open invitation for submissions of a “challenge” that would contribute to community development. Desafío Levantemos Chile selected the 50 best submissions and will work with Banco de Chile to make them reality. 134 AnnualReport2012 Excellent Education Available to Everyone university entrance exam (PSU). This scholarship covers full tuition and fees t'VOEBDJØO"TUPSFDB allowance for other expenses. Banco de Chile is committed to a better Chile and making excellent education Based on the 2012 PSU results, the scholarship was awarded to María available to everyone. Consequently, it has been working with Fundación Astoreca, Magdalena Martin Kommer, from Orchard College in Curicó and Matías Alvo a non-profit educational foundation, since 2004. Fundación Astoreca provides Gómez, from Santiago College in Santiago. Magdalena and Matías have chosen excellent education to underprivileged children and youth through its schools: to study business administration and civil engineering, respectively, at Pontificia San Joaquín de Renca and San José de Lampa. The municipalities of Renca Universidad Católica de Chile. for the duration of the student’s chosen degree program, as well as a monthly and Lampa have some of the highest poverty rates in the Metropolitan Region. The eight current Banco de Chile scholarship recipients are pursuing degrees In 2012, both schools achieved standardized test (SIMCE) results that were in medicine, civil engineering, business administration and law at Pontificia far-above municipality averages and also above public and subsidized school Universidad Católica de Chile and Universidad de Chile. averages. In fact, the schools’ 2012 scores approximated the average scores earned at private schools. t*OUFSOBUJPOBM$PNNJUNFOU Fundación Astoreca supports the Educating Together (“Educando Juntos”) web Each year, 17 students and two professors from the Universidad Católica MBA site initiative, which publishes success stories of underprivileged primary and program travel to China to learn about Chinese culture and business as part of secondary schools that have attained outstanding results. The site makes the stories the Conducting Business in Chile/China program. The Banco de Chile supported and their best practices available at no cost to schools throughout the country. initiative, which has been underway for six years, also allows 17 students and two professors from the MBA program at University of Tsinghua in Beijing to Another initiative, Astoreca Training (“Astoreca Capacitaciones”), provides teaching faculty with training on first-rate educational methods. In 2012, 634 visit Chile. In total, 214 persons have participated in the exchange program. teachers received training. For a Chile with more Entrepreneurship Furthermore, as a way of rewarding effort, Banco CrediChile awarded the Academic tSupporting Internationalization of SMEs Excellence Award (“Premio de Excelencia Académica”). In 2012, 5 students from the San José de Lampa School were recognized and awarded academic In keeping with its commitment to continue contributing to the development scholarships. Moreover, thanks to the solidarity shown by Banco CrediChile’s of the country and the progress of all Chileans—especially entrepreneurs and employees, nearly 900 children from those schools enjoyed a day of joy and small and medium enterprises (SMEs)—and as part of the Banco de Chile- happiness, including presents, as part of the Division’s annual Christmas drive Endeavor Foundation (“Fundación Endeavor”) partnership in place since 2010, (“Navidad con sentido”), an internationalization program for SMEs was created this year. The objective of the program is to increase the number of companies engaging in foreign t1464DIPMBSTIJQ trade and to make better use of the free trade agreements in force. Only 3% of SMEs currently conduct business outside Chile. The Bank’s objective is to help To reward effort and academic excellence among the country’s youth, Banco 350 new companies begin engaging in foreign trade in 2013. This new project de Chile has, for the last 27 years, awarded the PSU Scholarship to the student aims to take a momentous step toward increasing SME competitiveness, which who earns the nation’s best average score (language and mathematics) on the is certainly one of the greatest challenges facing the country. Corporate Social Responsibility 135 Committed to a Better Chile for our Customers Customers are the primary focus at Banco de Chile. In 2012, the Bank continued providing excellent service and developing a service qualityoriented culture. That culture is a key factor that will allow the Bank to The Call Center was also added to the Development and Quality Division in order to refocus its mission: processing the majority of customer problems and complaints. This change was an effort to provide timely responses and satisfy customer needs, thereby boosting confidence levels. achieve its objective of contributing to the growth of the Organization. Our Commitment Banco de Chile is highly committed to service quality. Our customers are our most valuable asset. It is thanks to their trust and loyalty that the Bank has achieved its leadership position over the last 119 years. The Bank’s work has ranked it first in its target segment in market studies, which Promotion of a service quality-centered culture also facilitated a significant number of process enhancements benefiting the customer. Those enhancements were the fruits of the labor of various commercial and support areas. 2012 accomplishments include, among others: Improvement in average retail and SME loan disbursement time. Early release of funds from checks from other banks. indicate that the Bank is perceived as an admirable, trustworthy corporation that Reduced customer response times by up to 50% for transactional provides good service. Non-customers also indicate that Banco de Chile would banking and leasing products. be their first choice if they were to change banks. In that context, the challenge for coming years is to innovate and continuously improve models, processes and skills; aiming for excellence, prioritizing long-term Reduced the critical error rate in the information submitted by account executives providing on-line service to transactional banking customers. customer relationships, and holding firm to the conviction that today’s customer Simplification of the required documentation for SME and consumer expects first-quality service. banking segments (Banco CrediChile). 2012 Achievements Improved response protocols with implementation of a specialized customer service call center. The Bank currently has a Development and Quality Division. In 2012, its role Improved customer satisfaction indicators for in-branch teller was enhanced to encourage concrete, corrective and preventive measures service. throughout the organization. Additional training on in-branch service protocols and dissemination The division continued strengthening a customer-centered organizational culture of best practices was achieved through direct consulting offered with systematic monitoring and improvement plans for critical quality indicators to 382 branch leaders. The impact of the program is evident in with an impact on customer service perception. the latest customer satisfaction indicators. 136 AnnualReport2012 Strategic Plans for Customer Service Quality of service is a strategic pillar at Banco de Chile and is strongly endorsed in the 2013 plan. The following objectives, which directly impact the customer experience, are among those emphasized in the plan: Ensure defined availability and operational continuity for channels, services and systems. Automate tasks in order to reduce errors and decrease the number of manual processes. Redesign critical processes that impact customers, improving availability, training, consistency and the standard response times for each segment and channel. Redesign the request and complaint service with a customercentered vision (time, quality, opportunity). Streamline credit approval processes. Develop specialized solutions and optimize remote customer service channels in the wholesale banking segment. Corporate Social Responsibility 137 Committed to a Better Chile for our Environment Energy Efficiency and Recycling Conservation Volunteerism Reaffirming its commitment to a better Chile and considering the impact a As part of Banco de Chile’s CSR program and in order to contribute to environmental company can have on the environment, this year significant changes to data conservation, the Bank conducted its second volunteer conservation project: storage regulations were made in order to increase the percentage of paper that More than 100 Banco de Chile volunteers reforested 3,000 m2 on the slope of is recycled. Thus, a record 1,432 tons of paper were saved; conserving 24,344 the Laura Vicuña Sanctuary on Cerro Colorado in the municipality of Renca. The trees, 143,200 liters of water and 10,883,200 kWh of electricity. new trees will help mitigate the environmental damage caused by high levels of contamination in the area. The document storage implementation policy was also modified, resulting in improvements to the management process and reduced consumption of natural The trees are maintained by Corporación RPA Cultiva. Banco de Chile funds resources in years to come. maintenance costs for the trees as well as other operational costs incurred by the organization, allowing children from subsidized and public schools to participate Through efficient use of its resources, Banco de Chile has reduced consumption by 6,639,344 kWh of electricity—the equivalent of the monthly electrical consumption of 18,970 homes. 138 AnnualReport2012 in RPA Cultiva’s educational programs on reforestation. Committed to a Transparent Chile The country’s sustained growth has facilitated development of the Transparency as a Value financial market, allowing a growing number of people to access banking services. Banking customers are more informed and more demanding, which has sparked changes in the industry. Banco de Chile was a pioneer in adopting a transparency and information disclosure policy, even before the new regulations were in force. In 2012, the customer advocate’s role in the organization was enhanced. The customer advocate’s mission is to create policies that avoid any asymmetry in the Bank-customer relationship, proactively seeking to implement best practices in customer service protocols and ensuring customer access to transparent information. The advocate works primarily with mass banking products and those products that use funds from outside companies. Transparency Policy The advocate is a corporate position, reporting directly to the Development and Quality Division. In 2012, Banco de Chile intensified its efforts to ensure transparency of information about policies, products and services, formalizing a new transparency policy Transparency with the Financial Community across the entire Corporation. Just as in years prior, the Bank continued working toward transparency with the Mini-websites were one of the channels used to disclose information to financial community. Special attention was paid to: customers and the general public. The mini-websites (“Un Chile Abierto” and “Una Relación Clara”) are available on the Banco de Chile and Banco Edwards Citi public websites, respectively. t Providing relevant information, both in English and Spanish, for shareholders, investors and the general public in a specific section of the website (www.bancochile.cl). The sites emphasize financial education and use interactive visual aids to explain the products’ main characteristics, for example, the contracting requirements, rates and channels of communication. In the SME Banking segment, the initiative was successfully complemented with webinars (interactive online conferences) by experts on various relevant topics. As has always been characteristic of Banco de Chile, relevant regulatory changes were adopted with special timeliness. Thus, in 2012, significant steps were made to fully and opportunely comply with modifications to the Consumer Law (“Ley del Consumidor”), making the Corporation one of the first financial institutions to do so. Also in the consumer banking segment, Banco CrediChile has adopted a series t Publishing monthly consolidated financial statements, which are made available within the first nine days of every month. t Producing a trimester financial report and holding a teleconference for investors and the general public. t Early issuance of the Annual Financial Statements, generally one month before the regulatory deadline. t Publishing the Annual Report in English and Spanish each year as well as the 20F Form, required by the US Securities and Exchange Commission. of measures to ensure transparency, improving sales protocols, and ensuring proper implementation through extensive training, audits and monitoring with “mystery shoppers”. Corporate Social Responsibility 139 8 CONSOLIDATED FINANCIAL STATEMENTS Table of Contents BANCO DE CHILE AND SUBSIDIARIES I. Consolidated Statements of Financial Position 144 II. Consolidated Statements of Comprehensive Income 146 III. Consolidated Statements of Changes in Equity 148 IV. Consolidated Statements of Cash Flows 150 V. Notes to the Consolidated Financial Statements 152 1. Company Information 152 23. Other Financial Obligations 216 2. Summary of Significant Accounting Principles 152 24. Provisions 216 3. New Accounting Pronouncements 175 25. Other Liabilities 219 4. Changes in Accounting Policies and Disclosures 179 26. Contingencies and Commitments 220 5. Relevant Events 179 27. Equity 223 6. Segment Reporting 182 28. Interest Revenue and Expenses 227 7. Cash and Cash Equivalents 184 29. Income and Expenses from Fees and Commissions 229 8. Financial Assets Held-for-trading 185 30. Net Financial Operating Income 230 31. Foreign Exchange Transactions, net 230 186 32. Provisions for Loan Losses 231 9. Repurchase Agreements and Security Lending and Borrowing 188 33. Personnel Expenses 232 11. Loans and advances to Banks 193 34. Administrative Expenses 233 12. Loans to Customers, net 10. Derivative Instruments and Accounting Hedges 194 35. Depreciation, Amortization and Impairment 234 13. Investment Securities 199 36. Other Operating Income 235 14. Investments in Other Companies 201 37. Other Operating Expenses 236 15. Intangible Assets 203 38. Related Party Transactions 237 16. Property and equipment 205 39. Fair Value of Financial Assets and Liabilities 241 17. Current and Deferred Taxes: 206 40. Maturity of Assets and Liabilities 248 18. Other Assets: 210 41. Risk Management 250 19. Current accounts and Other Demand Deposits: 211 42. Own assets securitizations 277 20. Savings accounts and Time Deposits: 211 43. Subsequent Events 278 21. Borrowings from Financial Institutions: 212 22. Debt Issued 213 Ch$ or CLP = Chilean pesos MCh$ = Millions of Chilean pesos US$ or USD = U.S. dollars IFRS = International Financial Reporting Standards IAS = International Accounting Standards RAN = Compilation of Standards of the Chilean Superintendency of Banks ThUS$ = Thousands of U.S. dollars JPY = Japanese yen IFRIC = International Financial Reporting Interpretations Committee EUR = Euro SIC = Standards Interpretation Committee MXN = Mexican pesos HKD = Hong Kong dollars PEN = Peruvian nuevo sol U.F. or CLF = Unidad de fomento (The unidad de fomento is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate). Consolidated Financial Statements 143 Consolidated Statements of Financial Position Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Notes 2012 MCh$ 2011 MCh$ ASSETS Cash and due from banks 7 684,925 881,146 Transactions in the course of collection 7 396,611 373,639 Financial assets held-for-trading 8 192,724 301,771 Receivables from Repurchase agreements and Security Borrowing 9 35,100 47,981 Derivative instruments 10 329,497 385,688 Loans and advances to banks 11 1,343,322 648,425 Loans to customers, net 12 18,334,330 16,993,303 Financial assets available-for-sale 13 1,264,440 1,468,898 Financial assets held-to-maturity 13 — — Investments in other companies 14 13,933 15,418 Intangible assets 15 34,290 35,517 Property and equipment 16 205,189 207,888 Current tax assets 17 2,684 1,407 Deferred tax assets 17 127,143 116,282 Other assets 18 296,878 263,584 23,261,066 21,740,947 TOTAL ASSETS The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 144 AnnualReport2012 Notes 2012 MCh$ 2011 MCh$ LIABILITIES 19 5,470,971 4,895,426 Transactions in the course of payment Current accounts and other demand deposits 7 159,218 155,424 Payables from Repurchase Agreements and Security Lending 9 226,396 223,202 20 9,612,950 9,282,324 Derivative instruments 10 380,322 429,913 Borrowings from financial institutions 21 1,108,681 1,690,939 Debt issued 22 3,273,933 2,388,341 Other financial obligations 23 162,123 184,785 Current tax liabilities 17 25,880 4,502 Deferred tax liabilities 17 27,630 23,213 Provisions 24 504,837 457,938 Other liabilities 25 301,066 265,765 21,254,007 20,001,772 Savings accounts and time deposits TOTAL LIABILITIES EQUITY 27 Attributable to Bank’s Owners: Capital 1,629,078 1,436,083 Reserves 177,574 119,482 Other comprehensive income 18,935 (2,075) Retained earnings: Retained earnings from previous periods Income for the year 16,379 16,379 465,850 428,805 (300,759) (259,501) 2,007,057 1,739,173 Less: Provision for minimum dividends SUBTOTAL Non-controlling interests TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 2 2 2,007,059 1,739,175 23,261,066 21,740,947 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements Consolidated Financial Statements 145 Consolidated Statements of Comprehensive Income Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Notes 2012 MCh$ 2011 MCh$ A. CONSOLIDATED STATEMENT OF INCOME Interest revenue 28 1,661,467 1,495,529 Interest expense 28 (708,629) (624,209) 952,838 871,320 Net interest income Income from fees and commissions 29 372,767 367,966 Expenses from fees and commissions 29 (65,510) (59,193) 307,257 308,773 Net fees and commission income Net financial operating income 30 24,747 26,927 Foreign exchange transactions, net 31 35,136 (7,973) Other operating income 36 22,061 24,735 1,342,039 1,223,782 (188,190) (124,840) 1,153,849 1,098,942 Total operating revenues Provisions for loan losses 32 OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES Personnel expenses 33 (312,065) (316,991) Administrative expenses 34 (247,459) (229,919) Depreciation and amortization 35 (30,957) (30,711) Impairment 35 (899) (631) Other operating expenses 37 (42,439) (35,596) (633,819) (613,848) 520,030 485,094 (229) 3,300 519,801 488,394 (53,950) (59,588) 465,851 428,806 465,850 428,805 1 1 TOTAL OPERATING EXPENSES NET OPERATING INCOME Income attributable to associates 14 Income before income tax Income tax 17 NET INCOME FOR THE YEAR Attributable to: Bank’s Owners Non-controlling interests Net income per share attributable to Bank’s Owners: $ $ Basic net income per share 27 5.28 5.01 Diluted net income per share 27 5.28 5.01 146 AnnualReport2012 Notes 2012 MCh$ 2011 MCh$ 465,851 428,806 24,510 (9,484) 1,777 (485) (58) 68 26,229 (9,901) (5,220) 1,956 21,009 (7,945) 486,860 420,861 486,859 420,860 1 1 B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NET INCOME FOR THE YEAR OTHER COMPREHENSIVE INCOME Net unrealized gains (losses): Net change in unrealized gains (losses) on available for sale instruments 13 Gains and losses on derivatives held as cash flow hedges Cumulative translation adjustment Other comprehensive income before income taxes Income tax related to other comprehensive income Total other comprehensive income TOTAL CONSOLIDATED COMPREHENSIVE INCOME 17 Attributable to: Bank’s owners Non-controlling interest Comprehensive net income per share attributable to Bank’s owners: $ $ Basic net income per share 5.52 4.92 Diluted net income per share 5.52 4.92 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements Consolidated Financial Statements 147 Consolidated Statements of Changes In Equity Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Reserves Notes Balances as of December 31, 2010 Capitalization of retained earnings 27 Income retention (released) according to law Paid-in Capital MCh$ Other reserves MCh$ Reserves from earnings MCh$ 1,158,752 32,256 55,130 67,217 — — — — 32,096 Paid and distributed dividends 27 — — — Subscription and payment of shares 27 210,114 — — Other comprehensive income: 27 Cumulative translation adjustment — — — Derivatives cash flow hedge, net — — — Valuation adjustment on available-for-sale instruments (net) — — — Equity adjustment in subsidiary — — — Income for the period 2011 — — — 27 — — — 1,436,083 32,256 87,226 73,911 — — — — 58,092 — — — Cumulative translation adjustment — — — Derivatives cash flow hedge, net — — — Valuation adjustment on available-for-sale instruments (net) — — — Provision for minimum dividends BALANCES AS OF DECEMBER 31, 2011 Capitalization of retained earnings 27 Income retention (released) according to law Paid and distributed dividends 27 Other comprehensive income: 27 Subscription and payment of shares 27 Income for the period 2012 27 Provision for minimum dividends BALANCES AS OF DECEMBER 31, 2012 119,084 — — — — — — — — 1,629,078 32,256 145,318 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 148 AnnualReport2012 Other comprehensive income Unrealized gains (losses) on availablefor- sale MCh$ Derivatives cash flow hedge MCh$ Retained earnings Cumulative translation adjustment MCh$ Retained earnings from previous periods MCh$ Income for the year MCh$ Provision for minimum dividends MCh$ Attributable to equity holders of the parent MCh$ Noncontrolling interest MCh$ Total equity MCh$ 5,974 — (104) 16,091 378,529 (242,503) 1,404,125 2 1,404,127 — — — — (67,217) — — — — — — — — (32,096) — — — — — — — — (279,216) 242,503 (36,713) (1) (36,714) — — — — — — 210,114 — 210,114 — — 68 — — — 68 — 68 — (395) — — — — (395) — (395) (7,618) — — — — — (7,618) — (7,618) — — — 288 — — 288 — 288 — — — — 428,805 — 428,805 1 428,806 — — — — — (259,501) (259,501) — (259,501) (1,644) (395) (36) 16,379 428,805 (259,501) 1,739,173 2 1,739,175 — — — — (73,911) — — — — — — — — (58,092) — — — — — — — — (296,802) 259,501 (37,301) (1) (37,302) — — (58) — — — (58) — (58) — 1,429 — — — — 1,429 — 1,429 19,639 — — — — — 19,639 — 19,639 — — — — — — 119,084 — 119,084 — — — — 465,850 — 465,850 1 465,851 — — — — — (300,759) (300,759) — (300,759) 17,995 1,034 (94) 16,379 465,850 (300,759) 2,007,057 2 2,007,059 Consolidated Financial Statements 149 Consolidated Statements of Cash Flows Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Notas 2012 MM$ 2011 MM$ 465,851 428,806 OPERATING ACTIVITIES: Net income for the year Items that do not represent cash flows: Depreciation and amortization 35 30,957 30,711 Impairment of intangibles assets and property and equipment 35 899 631 Provision for loan losses, net of recoveries 32 225,631 141,910 Provision of contingent loans 32 1,251 5,219 931 (1,242) (Income) loss attributable to investments in other companies 14 468 (3,054) (Income) loss sales of assets received in lieu of payment 36 (5,674) (5,918) Fair value adjustment of financial assets held-for-trading (Income) loss on sales of property and equipment (Increase) decrease in other assets and liabilities Charge-offs of assets received in lieu of payment (318) (1,311) 34,555 131,430 37 Other credits (debits) that do not represent cash flows 2,600 3,495 1,721 (8,143) (Gain) loss from foreign exchange transactions of other assets and other liabilities 37,133 17,296 Net changes in interest and fee accruals 4,049 (60,589) (695,376) (298,023) (1,529,338) (3,024,978) 52,892 9,203 (6,444) (8,201) Changes in assets and liabilities that affect operating cash flows: (Increase) decrease in loans and advances to banks, net (Increase) decrease in loans to customers, net (Increase) decrease in financial assets held-for-trading, net (Increase) decrease in deferred taxes, net 17 Increase (decrease)in current account and other demand deposits 576,301 447,990 Increase (decrease) in payables from repurchase agreements and security lending (15,277) 196,821 Increase (decrease) in savings accounts and time deposits 327,980 1,540,523 9,510 10,221 (479,698) (447,203) 295,572 (460,773) (17,981) (22,073) 400 1,711 Proceeds from sale of assets received in lieu of payment TOTAL CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES: (Increase) decrease in financial assets available-for-sale Purchases of property and equipment 16 Proceeds from sales of property and equipment Purchases of intangible assets 15 (9,116) (9,597) Investments in other companies 14 (71) — Dividends received from investments in other companies 14 TOTAL CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 943 761 269,747 (489,971) The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 150 AnnualReport2012 Notas 2012 MM$ 2011 MM$ FINANCING ACTIVITIES: Increase in mortgage finance bonds Repayment of mortgage finance bonds Proceeds from bond issuances 22 Redemption of bond issuances — — (27,529) (38,433) 1,233,985 749,586 (389,382) (109,624) Proceeds from subscription and payment of shares 27 119,084 210,114 Dividends paid 27 (296,802) (279,216) Increase (decrease) in borrowings from financial institutions 142,573 (7,916) Increase (decrease) in other financial obligations (16,512) 11,491 Increase (decrease) in Borrowings from Central Bank (22,793) 22,759 Proceeds from borrowings with Central Bank of Chile (long-term) Payment of borrowings from Central Bank (long-term) Proceeds from foreign borrowings Payment of foreign borrowings 20 91 (56) (106) 325,247 805,594 (1,013,911) (446,448) Proceeds from other long-term borrowings 1,526 3,894 Payment of other long-term borrowings (7,363) (9,811) TOTAL CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 48,087 911,975 (161,864) (25,199) (31,720) 7,412 1,429,908 1,447,695 1,236,324 1,429,908 2012 MM$ 2011 MM$ Interest received 1,614,122 1,356,265 Interest paid (657,235) (545,534) TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR 7 OPERATING CASH FLOW OF INTEREST: The accompanying notes 1 to 43 form an integral part of these consolidated financial statements Consolidated Financial Statements 151 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 1. Company Information: Banco de Chile is authorized to operate as a commercial bank from September 17, 1996, and according to the Article 25 of the Law 19.396 is the legal continuer of the Banco de Chile, which in turn resulted from the merger between Banco Nacional of Chile, Banco Agricola y Banco de Valparaiso. Banco de Chile was formed on October 28, 1893, granted in front of the Public Notary of Santiago Mr. Eduardo Reyes Lavalle, authorized by Supreme Decree of November 28, 1893. Banco de Chile (“Banco de Chile” or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Superintendency of Banks and Financial Institutions (“SBIF”). Since 2001, - when the bank was first listed on the New York Stock Exchange (“NYSE”), in the course of its American Depository Receipt (ADR) program, which is also registered at the London Stock Exchange – Banco de Chile additionally follows the regulations published by the United States Securities and Exchange Commission (“SEC”), Banco de Chile’s shares are also listed on the Latin American securities market of the Madrid Stock Exchange (“LATIBEX”). Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. The services are managed in large corporate banking, middle and small corporate banking, personal banking services and retail. Additionally, the Bank offers international as well as treasury banking services. The Bank’s subsidiaries provide other services including securities brokerage, mutual fund and investment management, factoring, insurance brokerage, financial advisory and securitization. Banco de Chile’s legal domicile is Ahumada 251, Santiago, Chile and its Web site is www.bancochile.cl. The consolidated financial statements of the Bank for the year ended December 31, 2012 were authorized for issuance in accordance with the directors’ resolution on January 24, 2013. For the convenience of the reader, these financial statements and their accompanying notes have been translated from Spanish to English. Certain accounting practices applied by the Bank that conform to rules issued by the Chilean Superintendency of Banks (SBIF) may not conform to generally accepted accounting principles in the United States (“US GAAP”) or to International Financial Reporting Standards. 2. Summary of Significant Accounting Principles: (a) Basis of preparation: Legal provisions The General Banking Law in its Article No. 15 authorizes the Chilean Superintendency of Banks (SBIF) to issue generally applicable accounting standards for entities it supervises. The Corporations Law, in turn, requires generally accepted accounting principles to be followed. Based on the aforementioned laws, banks should use the criteria provided by the Superintendency in accordance with the Compendium of Accounting Standards, and any matter not addressed therein, as long as it does not contradict its instructions, should adhere to generally accepted accounting principles in technical standards issued by the Chilean Association of Accountants, that coincide with International Accounting Standards and International Financial Reporting Standards agreed upon by the International Accounting Standards Board (IASB). Should there be discrepancies between these generally accepted accounting principles and the accounting criteria issued by the SBIF, the latter shall prevail. 152 AnnualReport2012 (b) Basis of consolidation: The financial statements of Banco de Chile as of December 31, 2012 and 2011 have been consolidated with its Chilean subsidiaries and foreign subsidiary using the global integration method (line-by-line). They comprise the preparation of the individual financial statements of the Bank and of the companies that participate in the consolidation, and include the adjustments and reclassifications necessary to homologue the accounting policies and valuation criteria applied by the Bank, in accordance with the established standards. The Consolidated Financial Statements have been prepared using the same accounting policies for similar transactions and other events in equivalent circumstances. Significant intercompany transactions and balances originated by operations performed between the Bank and its subsidiaries and between the latter have been eliminated in the consolidation process. The non-controlling interest corresponding to the participation percentage of third parties in subsidiaries, which the Bank does not own directly or indirectly, has been recognized and is shown separately in the consolidated shareholders’ equity of Banco de Chile. (i) Subsidiaries Subsidiaries are entities controlled by the Bank. Control exists when the Bank has the power to govern the financial and operating policies of the entity for the purpose of obtaining benefits from its activities. When evaluating control, one considers the potential voting rights that are currently executable. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control begins and until control is last. The entities controlled by the Bank and which form parts of the consolidation are detailed as follows: Interest Owned Rut Subsidiaries Country Functional Currency Direct Indirect Total 2012 2011 2012 2011 2012 2011 % % % % % % 44.000.213-7 Banchile Trade Services Limited Hong Kong US$ 100.00 100.00 — — 100.00 100.00 96.767.630-6 Banchile Administradora General de Fondos S.A. Chile Ch$ 99.98 99.98 0.02 0.02 100.00 100.00 96.543.250-7 Banchile Asesoría Financiera S.A. Chile Ch$ 99.96 99.96 — — 99.96 99.96 77.191.070-K Banchile Corredores de Seguros Ltda. Chile Ch$ 99.83 99.83 0.17 0.17 100.00 100.00 96.894.740-0 Banchile Factoring S.A. Chile Ch$ 99.75 99.75 0.25 0.25 100.00 100.00 96.571.220-8 Banchile Corredores de Bolsa S.A. Chile Ch$ 99.70 99.70 0.30 0.30 100.00 100.00 96.932.010-K Banchile Securitizadora S.A. Chile Ch$ 99.00 99.00 1.00 1.00 100.00 100.00 96.645.790-2 Socofin S.A. Chile Ch$ 99.00 99.00 1.00 1.00 100.00 100.00 96.510.950-1 Promarket S.A. Chile Ch$ 99.00 99.00 1.00 1.00 100.00 100.00 (ii) Associates: An associate is an entity over whose operating and financial management policy decisions the Bank has significant influence, but in which it does not hold a controlling interest. Significant influence is generally presumed when the Bank holds between 20% and 50% of the voting rights. The existences of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Bank has significant influence. Investments in associates are accounted for using the equity method. Other factors considered when determining whether the Bank has significant influence over another entity are the representation on the board of directors and the existence of material intercompany transactions. The existence of these factors could require the application of the equity method for a particular investment even though the Bank’s holdings are for less than 20% of the voting stock. Consolidated Financial Statements 153 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 In accordance with the equity method, the Bank’s investments are initially recorded at cost, and subsequently increased or decreased to reflect the proportional participation of the Bank in the net income or loss of the associate and other movements recognized in its shareholders’ equity. Goodwill arising from the acquisition of an associate is included in the net book value, net of any accumulated impairment loss. (iii) Shares or rights in other companies These are entities in which the Bank does not have significant influence. They are presented at acquisition value (historical cost). (iv) Special purpose entities According to current regulation, the Bank must be analyzing continuously its consolidation area, considering that the principal criteria are the control that the Bank has in a entity and not its percentage of equity participation. Special purpose entities (SPEs) are generally created to comply with a specific and well-defined objective, such as securitizing specific assets or carrying out a specific loan transaction. A SPE is consolidated if, based on an assessment of its relationship with the Bank and the risks and benefits of the SPE, the Bank concludes that it has control. As of December 31, 2012 and 2011, the Bank does not control any SPEs. (v) Fund management The Bank manages assets maintained in common investment funds and other investment products on behalf of investors. Different entities which conform consolidation group of Banco de Chile (Banchile Administradora General de Fondos S.A. and Banchile Securitizador S.A) and owned by third parties are not included in Consolidated Statements of Financial Position, unless the Bank has the control. As of December 31, 2012 and 2011, the Bank does not control or consolidate any of these funds. Fees generates by this activity are included in the item “Income from fees and commissions” of Consolidates Statements of Comprehensive Income. (c) Non-controlling interest Non-controlling interest represents the share of losses, income and net assets that the Bank does not control neither directly or indirectly. It is presented as a separate item in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position. (d) Use of estimates and judgment The Consolidated Financial Statements include estimates made by the Senior Management of the Bank and of the consolidated entities to quantify certain of the assets, liabilities, income, expenses and commitments that are recorded in them. Basically, these estimates are made in function of the best information available, and refer to: 1. Goodwill valuation (Note 15); 2. Useful lives of property and equipment and intangible assets (Note 15 and 16); 3. Income taxes and deferred taxes (Note 17); 4. Provisions (Note 24); 5. Commitments and contingencies (Note 26); 6. Provision for loan losses (Note 32); 7. Impairment of other financial assets (Note 35); 8. Fair value of financial assets and liabilities (Note 39) During the year ended December 31, 2012, there have been no significant changes in the estimates made as of 2011 year-end, other than those indicated in these Consolidated Financial Statements. 154 AnnualReport2012 (e) Financial asset and liability valuation criteria: Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Statement of Financial Position and the Comprehensive Income. This involves selecting the particular basis or method of measurement. In the Consolidated Financial Statements several measuring bases are used with different levels mixed among them. These bases or methods include the following: (i) Recognition Initially, the Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities on the date they originated. Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset. All other assets and liabilities (including assets and liabilities at fair value through profit and loss) are initially recognized as of the trade date on which the Bank becomes a party to the contractual provisions of the instrument. (ii) Classification Assets, liabilities and income accounts have been classified in conformity with standards issued by the Superintendency of Banks. (iii) Derecognition The Bank and its subsidiaries derecognize a financial asset (or where applicable part of a financial asset) from its Consolidated Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred. Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability. The Bank derecognizes a financial liability (or a portion thereof) from its Consolidated Statement of Financial Position if, and only if, it has extinguished or, in other words, when the obligation specified in the corresponding contract has been paid or settled or has expired. When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership. In this case: (a) If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized, and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities. (b) If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it. (c) If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset. In this case: (i) If it has not retained control, the financial asset will be derecognized, and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities. (ii) If the entity has retained control, it will continue to recognize the financial asset in the Consolidated Financial Statement by an amount equal to its exposure to changes in value that can experience and recognize a financial liability associated to the transferred financial asset. Consolidated Financial Statements 155 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (iv) Offsetting Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously. Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions such as the Bank’s trading activities. (v) Valuation at amortized cost Amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment. (vi) Fair value measurements Fair value of a financial instrument in determinated date is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The most objective and common fair value of a financial instrument is the price you paid for it on an active, transparent and deep market (“quoted price” or “market price”). When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument. A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between knowledgeable, willing parties in an arm’s length transaction, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows and options pricing models. The chosen valuation technique use the maximum observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument. Periodically, the Bank calibrates the valuation technique and tests it for validity using prices from observable current market transaction in the same instrument or based on any available observable market data. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in income depending on the individual facts and circumstances of the transaction but not later than the valuation is supported wholly by observable market data or the transaction is closed out. Generally, the Bank has assets and liabilities that offset each other’s market risks. In these cases, average market prices are used as a basis for establishing these values. In the case of open positions, the Bank applies the current offer or buyer price, as appropriate, for the net open position. 156 AnnualReport2012 Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction. The available-for-sale instruments market valuation process consists in changing the rate from an average rate of sale (mid-rate) at the rate of sale of these instruments (offer-rate). When the transaction price is different from the fair value derived from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a “Day 1” profit or loss) in “Net financial operating income”. In cases where fair value is determined using data that is not observable, the difference between the transaction price and model value is only recognized in the Consolidated Statement of Comprehensive Income when the inputs become observable, or when the document is derecognized. The Bank’s fair value disclosures are included in Note 39. (f) Presentation and functional currency The items included in the financial statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency). The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s consolidated financial statements, that is the currency of the primary economic environment in which the Bank operates, as well as obeying to the currency that influences in the costs and income structure. (g) Transactions in foreign currency Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position. All differences are recorded as a debit or credit to income. As of December 31, 2012, the Bank applied the exchange rate of accounting representation according to the standards issued by the Superintendency of Banks, where assets expressed in dollars are shown to their equivalent value in Chilean pesos calculated using the following exchange rate of Ch$479.47 to US$1. As of December 31, 2011, the Bank used the observed exchange rate equivalent to Ch$519.80 to US$1. The gain of MCh$35,136 for net foreign exchange income (income of MCh$7,973 in 2011) shown in the Consolidated Statement of Comprehensive Income, includes recognition of the effects of exchange rate variations on assets and liabilities in foreign currency or indexed to exchange rates, and the result of foreign exchange transactions conducted by the Bank and its subsidiaries. (h) Segment reporting: The Bank’s operating segments are determined based on its different business units, considering the following factors: (i) That it conducts business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity). Consolidated Financial Statements 157 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (ii) That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to decide about resource allocation for the segment and evaluate its performance; and (iii) That separate financial information is available. (i) Cash and cash equivalents: The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents derived from operating activities, investment activities and financing activities during the year. The indirect method has been used in the preparation of this statement. For the preparation of Consolidated Financial Statements of Cash Flow it is considered the following concepts: (i) Cash and cash equivalents correspond to “Cash and Bank Deposits”, plus (minus) the net balance of transactions in the course of collection that are shown in the Consolidated Statement of Financial Position, plus instruments held-for-trading and available-for-sale that are highly liquid and have an insignificant risk of change in value, maturing in less than three months from the date of acquisition, plus repurchase agreements that are in that situation. Also includes investments in fixed income mutual funds that are presented under “Trading Instruments” in the Consolidated Statement of Financial Position. (ii) Operating activities: corresponds to normal activities of banks, as well as other activities that cannot classified like investing or financing activities. (iii) Investing activities: correspond to the acquisition, sale or disposition other forms, of long-term assets and other investments that not include in cash and cash equivalent. (iv) Financing activities: corresponds to the activities that produce changes in the amount and composition of the equity and the liabilities that are not included in the operating or investing activities. (j) Financial assets held-for-trading: Financial assets held-for-trading consist of securities acquired with the intention of generating profits as a result of short-term prices fluctuation or as a result of brokerage activities, or are part of a portfolio on which a short-term profit-generating pattern exists. Financial assets held-for-trading are stated at their fair market value as of the Consolidated Statement of Financial Position date. Gains or losses from their fair market value adjustments, as well as gains or losses from trading activities, are included in “Gains (losses) from trading and brokerage activities” in the Consolidated Statement of Comprehensive Income. Accrued interest and revaluations are reported as “Gains (losses) from trading and brokerage activities”. All purchases and sales of financial assets held-for-trading that must be delivered within the period established by market regulations or conventions are recorded using the trade date, which is the date on which the purchase or sale of the asset is committed. Any other purchase or sale is treated as a derivative (forward) until settlement occurs. 158 AnnualReport2012 (k) Repurchase agreements and security lending and borrowing transactions: The Bank engages in transactions with repurchase agreements as a form of investment. The securities purchased under these agreements are recognized on the Bank’s Consolidated Statement of Financial Position under “Receivables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate. The Bank also enters into security repurchase agreements as a form of financing. Investments that are sold subject to a repurchase obligation and serve as collateral for borrowings are reclassified as “Financial Assets held-for-trading” or “Available-for-sale Instruments”. The liability to repurchase the investment is classified as “Payables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate. (l) Derivative instruments: Derivative instruments, which include foreign currency and U.F. forwards, interest rate forwards, currency and interest rate swaps, currency and interest rate options and other financial derivative instruments, are recorded in the Consolidated Statement of Financial Position at their cost (included transactions costs) and subsequently measured at fair value. Derivative instruments are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”. Changes in fair value of derivative contracts held for trading purpose are included under “Profit (loss) net of financial operations”, in the Consolidated Statement of Comprehensive Income. Certain embedded derivatives in other financial instruments are treated as separate derivatives when their risk and characteristics are not closely related to those of the main contract and if the contract in its entirety is not recorded at its fair value with its unrealized gains and losses included in income. At inception, a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes. If a derivative instrument is classified as a hedging instrument, it can be: (1) (2) A hedge of the fair value of existing assets or liabilities or firm commitments, or A hedge of cash flows related to existing assets or liabilities or forecasted transactions. A hedge relationship for hedge accounting purposes must comply with all of the following conditions: (a) at its inception, the hedge relationship has been formally documented; (b) it is expected that the hedge will be highly effective; (c) the effectiveness of the hedge can be measured in a reasonable manner; and (d) t h e h e d g e i s h i g h l y e f f e c t i v e w i t h r e s p e c t t o t h e h e d g e d r i s k o n a n o n g o i n g b a s i s a n d t h r o u g h o u t the entire hedge relationship. Certain derivatives transactions that do not qualify for hedge accounting are treated and reported as derivatives for trading purposes even though they provide an effective hedge on the risk of net positions. Consolidated Financial Statements 159 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 When a derivative instrument hedges the risk of changes in the fair value of an existing asset or liability, the asset or liability is recorded at its fair value with respect to the specific hedged risk. Gains or losses from fair value adjustments, both the hedged item and the derivative instrument, are recognized in income. Should the hedged item in a fair value hedge be a firm commitment, changes in the fair value of the commitment with respect to the hedged risk are recorded as an asset or liability against net income for the year. Gains or losses from fair value adjustments of the hedging derivative are recorded in income. When an asset or liability is acquired as a result of the commitment, the initial recognition of the asset or liability acquired is adjusted to incorporate the accumulated effect of the valuation at fair value of the firm commitment, which was previously recorded in the Consolidated Statement of Financial Position. When a derivative hedges the risk of changes in the cash flows of existing assets or liabilities or forecasted transactions, the effective portion of changes in the fair value related to the hedged risk is recorded in equity net of income taxes. Any ineffective portion is directly recorded in income. The accumulated amounts recorded in equity are transferred to income at the moment that the hedge item affects income. When an interest rate fair value hedge is performed on a portfolio basis and the hedged item is an amount instead of individualized assets or liabilities, or gains or losses from fair value adjustments, both the hedged portfolio and the derivative instrument are recorded in income, but the fair value adjustment of the hedged portfolio is reported in the Consolidated Statement of Financial Position under “Other assets” or “Other liabilities”, according to the position of the portfolio hedged at this moment. (m) Loans to customers: Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term. (i) Valuation method Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method, except when the Bank defined some loans as hedged items, which are measured at fair value, changes are recorded in the Consolidated Statement of Income, as described in letter (l) of this note. (ii) Lease contracts: Accounts receivable for leasing contracts, included under the caption “Loans to customers” are recorded MCh$1,113,272 as of December 31, 2012 (MCh$996,566 in 2011), correspond to periodic rent installments of contracts which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end. (iii) Factoring transactions: The Bank and its subsidiary Banchile Factoring S.A. carry out factoring transactions, where they receive invoices and other commercial instruments representative of credit, with or without recourse, and they advance to the assignor a percentage of the total amounts to be collected from the original debtor. As of December 31, 2012, the item “Loans to customers” includes MCh$606,137 (MCh$589,098 in 2011), corresponding to the amount advanced to the assignor, plus accrued interest net of payments received. 160 AnnualReport2012 (iv) Impairment of loans The impaired portfolio includes loans of debtors for which there is evidence that they will not fulfill some of their obligations on the agreed upon payment conditions without the possibility of recovering what is owed, having to recur to the guarantees, through exercising judicial payment actions or agreeing upon other conditions. The following are certain situations that constitute evidence that the debtors will not fulfill their obligations with the Bank in accordance with what has been agreed upon, and that their loans are impaired: t Evident financial difficulties of the debtor or significant worsening of their credit quality. t Notorious indicators that the debtor will go into bankruptcy or into a forced restructuring of debts or that effectively bankruptcy or a similar measure has been filed in relation to their payment obligations, including delaying or non-payment of obligations. t Forced restructuring of a loan due to economic or legal factors related to the debtor, whether by decreasing the payment obligation or delaying the principal, interest or commissions. t The obligations of the debtor are negotiated with a significant loss due to the vulnerability of the debtor’s payment capacity. t Adverse changes produced in the technological, market, economic or legal area in which the debtor operates, which potentially compromise the debtor’s payment capacity. In any case, when dealing with debtors subject to individual assessment, are considered in impaired portfolio all credits of debtors classified in some the “Non-complying Loans “ categories, as well as in categories B3 and B4 of “Substandard Portfolio.” Also, being subject to assessment debtors group, the impaired portfolio includes all credits of the Non-complying loans. The Bank incorporates the loans to impaired portfolio and keeps them in that portfolio, until it is not observed a normalization of the capacity or conduct of payment. (v) Allowance for loan losses Allowances are required to cover the risk of loan losses have been established in accordance with the instructions issued by the Superitendency of Banks. The loans are presented net of those allowances or showing the reduction, in the case of loans and in the case of contingent loans, they are shown in liabilities under “Provisions”. In accordance with what is stipulated by the Superintendency of Banks, models or methods are used based on an individual and group analysis of debtors, to establish allowance for loan losses. (v.i) Allowance for individual evaluations An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the bank, that they must be analyzed in detail. Likewise, the analysis of borrowers should focus on its ability to payment, to have sufficient and reliable information, and to analyze in regard to guarantees, terms, interest rates, currency and revaluation, etc. For purposes of establish the allowances and before the assignment to one of three categories of loans portfolio: Normal, Substandard and Noncomplying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply. Consolidated Financial Statements 161 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 vi.1 Normal Loans and Substandard Loans: Normal loans correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality. Loans classified in categories A1 through A6. Substandard loans includes all borrowers with insufficient payment capacity or significant deterioration of payment capacity that may be reasonably expected not to comply with all principal and interest payments obligations set forth in the credit agreement. This category also includes all loans that have been non-performing for more than 30 days. Loans classified in this category are B1 through B4. As a result of individual analysis of the debtors, the banks must classify them in the following categories, assigning, subsequently, the percentage of probability of default and loss given default resulting in the corresponding percentage of expected loss: Classification Probability of default (%) Loss given default (%) Expected loss (%) 0.04 90.0 0.03600 A2 0.10 82.5 0.08250 A3 0.25 87.5 0.21875 Category A1 Normal Loans Substandard Loans A4 2.00 87.5 1.75000 A5 4.75 90.0 4.27500 A6 10.00 90.0 9.00000 B1 15.00 92.5 13.87500 B2 22.00 92.5 20.35000 B3 33.00 97.5 32.17500 B4 45.00 97.5 43.87500 Allowances for Normal and Substandard Loans To determine the amount of allowances to be constitute for normal and substandard portfolio, previously should be estimated the exposure to subject to the allowances, which will be applied to respective expected loss (expressed in decimals), which consist of probability of default (PD) and loss given default (LGD) established for the category in which the debtor and/or guarantor belong, as appropriate. The exposure affects to allowances applicable to loans plus contingent loans minus the amounts to be recovered by way of the foreclosure of guarantees. Loans means the book value of credit of the respective debtor, while for contingent loans, the value resulting from to apply the indicated in No.3 of Chapter B-3 of Compilation of Standards of the Chilean Superintendency of Banks (RAN). The banks must use the following equation: Provision = (ESA-GE) x (PD debtor /100)x(LGD debtor/100)+GE x(PD guarantor/100)x(LGD guarantor /100) Where: ESA GE 162 AnnualReport2012 = Exposure subject to allowances = Guaranteed exposure EAP = (Loans + Contingent Loans) – Financial Guarantees EAP = (Colocaciones + Créditos Contingentes) – Garantías financieras o reales However, independent of the results obtained from the equation above, the bank must be assigned a minimum provision level of 0.5% of the Normal Loans (including contingent loans). vi.2 Non-complying Loans The non-complying loans corresponds to borrowers and its credits whose payment capacity is seriously at risk and who have a high likelihood of filing for bankruptcy or are renegotiating credit terms to avoid bankruptcy. This category comprises all loans and contingent loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more. This group is composed of debtors belonging to categories C1 through C6 of the classification level and all loans, inclusive contingent loans, which maintain the same debtors. For purposes to establish the allowances on the non-complying loans, the Bank dispose the use of percentage of allowances to be applied on the amount of exposure, which corresponds to the amount of loans and contingent loans that maintain the same debtor. To apply that percentage, must be estimated a expected loss rate, less the amount of the exposure the recoveries by way of foreclosure of guarantees and, if there are available specific background, also must be deducting present value of recoveries obtainable exerting collection actions, net of expenses associated with them. This loss percentage must be categorized in one of the six levels defined by the range of expected actual losses by the Bank for all transactions of the same debtor. These categories, their range of loss as estimated by the Bank and the percentages of allowance that definitive must be applied on the amount of exposures, are listed in the following table: Type of Loan Non-complying loans Classification Expected loss Allowance (%) C1 Up to 3 % C2 More than 3% up to 20% 2 C3 More than 20% up to 30% 25 C4 More than 30 % up to 50% 40 10 C5 More than 50% up to 80% 65 C6 More than 80% 90 For these loans, the expected loss must be calculated in the following manner: Expected loss = (TE – R) / TE Allowance = TE x (AP/100) Where: TE R AP = total exposure = recoverable amount based on estimates of collateral value and collection efforts = allowance percentage (based on the category in which the expected loss should be classified). Consolidated Financial Statements 163 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (v.ii) Allowances for group evaluations Group evaluations are relevant to address a large number of operations whose individual amounts are low or small companies. Such assessments, and the criteria for application, must be consistent with the transaction of give the credit. Group evaluations requires the formation of groups of loans with similar characteristics in terms of type of debtors and conditions agreed, to establish technically based estimates by prudential criteria and following both the payment behavior of the group that concerned as recoveries of defaulted loans and consequently provide the necessary provisions to cover the risk of the portfolio. The estimated losses should be related to the type of portfolio and the operations terms. In the case of consumer loans are not considered collateral for purposes of estimating the expected loss. The group analysis is used to analyze a large number of operations whose individual amounts are not significant. For this analysis, the Bank uses models based on attributes of the debtors and their loans, and on the behavior of a group of loans. In the group evaluations, the allowances are always constituted in accordance with the estimated loss using the aforementioned models. Allowances are establish according with the results of the application of the methods used by the Bank, distinguishing between allowances over normal portfolio and over the non-complying loans, and those that protect the contingent credit risks associated with these portfolios. The non-complying loans includes loans and contingent credits linked to debtors that have delay more than 90 days in the payment of interest or principal, including all their credits, even 100% of the amount of contingent credit, related to the same debtor has it . (vi) Charge-offs Generally, the charge-offs are produced when the contractual rights on cash flows end. In case of loans, even if the above does not happen, it will proceed to charge-offs the respective asset balances. The charge-off refers to derecognition of the assets in the Statement of Financial Position, related to the respective transaction and, therefore, the part that could not be past-due if a loan is payable in installments, or a lease. The charge-off must be to make using credit risk provisions constituted, whatever the cause for which the charge-off was produced. (vi.i) Charge-offs of loans to customers Charge-off loans to customers, other than leasing operations, shall be made in accordance to the following circumstances occurs: a) The Bank, based on all available information, concludes that will not obtain any cash flow of the credit recorded as an asset. b) When the debt (without “executive title”, a collectability category pursuant to local law) meets 90 days since it was recorded as an asset. c) At the time the term set by the statute of limitations runs out and as result legal actions are precluded in order to request payment through executive trial or upon rejection or abandonment of title execution issued by judicial and non-recourse resolution. 164 AnnualReport2012 b) When past-due term of a transaction complies with the following: Type of Loan Term Consumer loans - secured and unsecured 6 months Other transactions - unsecured 24 months Commercial loans - secured 36 months Residential mortgage loans 48 months The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due. (vi.ii) Charge-offs of lease operations Assets for leasing operations must be charge-offs against the following circumstances, whichever occurs first: a) The bank concludes that there is no possibility of the rent recoveries and the value of the property can not be considered for purposes of recovery of the contract, either because the lessee have not the asset, for the property’s conditions, for expenses that involve its recovery, transfer and maintenance, due to technological obsolescence or absence of a history of your location and current situation. b) When it complies the prescription term of actions to demand the payment through executory or upon rejection or abandonment of executory by court. c) When past-due term of a transaction complies with the following: Type of Loan Consumer leases Term 6 months Other non-real estate lease transactions 12 months Real estate leases (commercial or residential) 36 months The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due. (vii) Loan loss recoveries Cash recoveries on charge-off loans including loans that were reacquired from the Central Bank of Chile are recorded directly in income in the Consolidated Statement of Comprehensive Income, as a reduction of the “Provisions for Loan Losses” item. In the event that there are recovery in assets, is recognized in income the revenues for the amount they are incorporated in the asset. The same criteria will be followed if the leased assets are recovered after the charge-off of a lease operation, to incorporate those to the asset. (viii) Renegotiations of charge-off transactions Any renegotiation of a charge-off loan it not recognize in income, while the operation continues to have deteriorated quality. Payments must be recognized as loan recoveries, as indicated in No. 3 above. Consolidated Financial Statements 165 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Therefore, renegotiated credit can be recorded as an asset only if it has not deteriorated quality, also recognizing revenue from activation must be recorded like recovery of loans. The same criteria should apply in the case that was give credit to pay a charge-off loan. (n) Financial assets held-to-maturity and available-for-sale: Financial assets held-to-maturity includes only those securities for which the Bank has the ability and intention of keeping until maturity. The remaining investments are considered as financial assets available-for-sale. On an ongoing basis the Bank reassesses whether the ability and intention to sell available-for-sale instruments remains to be given. A financial asset classified as available-for-sale is initially recognized at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Financial assets available for sale are subsequently measured at their fair value based on market prices or valuation models. Unrealized gains or losses as a result of fair value adjustments are recorded in “Other comprehensive income” within Equity. When these investments are sold, the cumulative fair value adjustment existing within equity is recorded directly in income under “Net financial operating income”. Financial assets held-to-maturity are recorded at their cost plus accrued interest and indexations less impairment provisions made when the carrying amount exceeds the estimated recoverable amount. Interest and indexations of financial assets held-to-maturity and available-for-sale are included in the line item “Interest revenue”. Investment securities, which are subject to hedge accounting, are adjusted according to the rules for hedge accounting as described in Note No. 2 (l). Purchases and sales of investment securities that must be delivered within the period established by market regulations or conventions are recorded using the trade date that is the date on which the purchase or sale of the asset is committed. Any other purchase or sale is treated as a derivative (forward) until liquidation occurs. As of December 31, 2012 and 2011, the Bank and its subsidiaries do not hold held to maturity instruments. (o) Debt issued and other financial liabilities: Financial instruments issued by the Bank are classified in the Statement of Financial Position under “Debt issued” items, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash. After initial measurement, debt issued is subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate. 166 AnnualReport2012 (p) Intangible assets: Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of a legal transaction or are developed internally by the consolidated entities. They are assets whose cost can be estimated reliably and from which the consolidated entities have control and consider it probable that future economic benefits will be generated. Intangible assets are recorded initially at acquisition cost and are subsequently measured at cost less any accumulated amortization or any accumulated impairment losses. (i) Goodwill Goodwill arises on the acquisition of subsidiaries and associates representing the excess of the fair value of the purchase consideration and cost directly attributable to the acquisition over the net fair value of the Bank’s share of the identifiable assets acquired and the liabilities and contingent liabilities assumed on the date of the acquisition. For the purpose of calculating goodwill, fair values of acquired assets, liabilities and contingent liabilities are determined by reference to market values or by discounting expected future cash flows to present value. This discounting is either performed using market rates or by using risk-free rates and risk-adjusted expected future cash flows. Goodwill held as of December 31, 2012 and 2011 is presented at cost, less accumulated amortization in accordance with its remaining useful life. (ii) Software or computer programs Computer software purchased by the Bank and its subsidiaries is accounted for at cost less accumulated amortization and impairment losses. The subsequent expense in software assets is capitalized only when it increases the future economic benefit for the specific asset. All other expenses are recorded as an expense as incurred. Amortization is recorded in income using the straight-line amortization method based on the estimated useful life of the software, from the date on which it is available for use. The estimated useful life of software is a maximum of 6 years. (iii) Other identifiable intangible assets This item applies to identifiable intangible assets for which the cost can be reliably measured and which are likely to generate future economic benefits for the Bank. (q) Property and equipment: Property and equipment includes the amount of land, real estate, furniture, computer equipment and other installations owned by the consolidated entities and which are for own use. These assets are stated at historical cost or fair value as attributed cost less accumulated depreciation and accumulated impairment, with price-level restatement applied up to December 31, 2007. This cost includes expenses than have been directly attributed to the asset’s acquisition. Depreciation is recognized in income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Consolidated Financial Statements 167 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Estimated useful lives for 2012 and 2011 are as follows: Buildings 50 years Installations 10 años Equipment 10 years 3 years 5 años Supplies and accessories 5 years Maintenance expenses relating to those assets held for own uses are recorded as expenses in the period in which they are incurred. (r) Deferred taxes and income taxes: The income tax provision of the Bank and its subsidiaries has been determined in conformity with current legal provisions. The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to temporary differences between the book and tax values of assets and liabilities. Deferred tax assets and liabilities are measured based on the tax rate expected to be applied, in accordance with current tax law, in the year that deferred tax assets are realized or liabilities are settled. The effects of future changes in tax legislation or tax rates are recognized in deferred taxes starting on the date of publication of the law approving such changes. Deferred tax assets and liabilities are recorded at their book value as of the date the deferred taxes are measured. Deferred tax assets are recognized only when it is likely that future tax profits will be sufficient to recover deductions for temporary differences. Deferred taxes are classified in conformity with established by Superintendency of Banks. (s) Assets received in lieu of payment: Assets received or awarded in lieu of payment of loans and accounts receivable from customers are recorded, in the case of assets received in lieu of payment, at the price agreed by the parties, or otherwise, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction. Assets received in lieu of payment are classified under “Other Assets” and they are recorded at the lower of its carrying amount or net realizable value, less charge-off and presented net of a portfolio valuation allowance. The Superitendency of Banks requires regulatory charge-offs if the asset is not sold within a one year of foreclosure. (t) Investment properties: Investments properties are real estate assets held to earn rental income or for capital appreciation or both, but are not held-for-sale in the ordinary course of business or used for administrative purposes. Investment properties are measured at fair value as attributed cost calculated as of January 1, 2008, less accumulated depreciation and impairment and are presented under “Other Assets”. 168 AnnualReport2012 (u) Provisions and contingent liabilities: Provisions are liabilities involving uncertainty about their amount or maturity. They are recorded in the Statement of Financial Position when the following requirements are jointly met: i) ii) a present obligation has arisen from a past event and, as of the date of the financial statements it is probable that the Bank or its subsidiaries have to disburse resources to settle the obligation and the amount can be reliably measured. A contingent asset or liability is any right or obligation arising from past events whose existence will be confirmed by one or more uncertain future events which are not within the control of the Bank. The following are classified as contingent in the complementary information: i. Guarantors and pledges: Comprises guarantors, pledges and standby letters of credit. In addition it includes payment guarantees for purchases in factoring transactions, as indicated in Chapters 8-38 of that Compilation. ii. Confirmed foreign letters of credit: Corresponds to letters of credit confirmed by the Bank. iii. Documentary letters of credit: Includes documentary letters of credit issued by the Bank which have not yet been negotiated. iv. Documented guarantee: Guarantee with promissory notes. v. Interbank guarantee: Correspond to letters of guarantee issued as foreseen in Title II of Chapters 8-12 of the Updated Compilation of Standards. vi. Free disposal lines of credit: The unused amount of credit lines that allow customers to draw without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts). vii. Other credit commitments: Amounts not yet lent under committed loans, which must be disbursed at an agreed future date when events contractually agreed upon with the customer occur, such as in the case of lines of credit linked to the progress of a construction or similar projects. viii. Other contingent loans: Includes any other kind of commitment by the Bank which may exist and give rise to lending when certain future events occur. In general, this includes unusual transactions such as pledges made to secure the payment of loans among third parties or derivative contracts made by third parties that may result in a payment obligation and are not covered by deposits. Consolidated Financial Statements 169 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Exposure to credit risk on contingent loans: In order to calculate provisions on contingent loans, as indicated in Chapter B-1 of the Compendium of Accounting Standards of the Superintendency of Banks, the amount of exposure that must be considered shall be equivalent to the percentage of the amounts of contingent loans indicated below: Type of contingent loan a) Guarantors and pledges b) Confirmed foreign letters of credit Exposure 100% 20% c) Documentary letters of credit issued 20% d) Guarantee deposits 50% e) Interbank letters of guarantee f) Free disposal lines of credit 100% 50% g) Other loan commitments - College education loans Law No. 20,027 - Others h) Other contingent loans 15% 100% 100% Notwithstanding the above, when dealing with transactions performed with customers with overdue loans as indicated in Chapter B-1 of the Compendium of Accounting Standards of the SBIF: Impaired and/or Written-down Loans, that exposure shall be equivalent to 100% of its contingent loans. Additional provisions: In accordance to Superintendency of Banks regulations, the Bank has recorded additional allowances for its individually evaluated loan portfolio, taking into consideration the expected impairment of this portfolio. The calculation of this allowance is performed based on the Bank’s historical experience and considering possible future adverse macroeconomic conditions or circumstances that could affect a specific sector, industry, groups of debtors or projects. The provisions made in order to forestall the risk of macroeconomic fluctuations should anticipate situations reversal of expansionary economic cycles in the future, could translate into a worsening in the conditions of the economic environment and, thus, function as a countercyclical mechanism accumulation of additional provisions when the scenario is favorable and release or assignment to specific provisions when environmental conditions deteriorate. According to the above, additional provisions must always correspond to general provisions on commercial, consumer or mortgage loans, or segments identified, and in no case may be used to offset weaknesses of the models used by the bank. During the current year, the Bank recorded additional provisions with a charge to income of MCh$2,271 (MCh$24,052 in 2011). As of December 31, 2012 the additional provisions amounted Ch$97,757 million (Ch$95,486 million), which are presents in the item “Provisions” of the liability in the Consolidated Statement of Financial Position. (v) Provision for minimum dividends: According with the Compendium of Accounting Standards of the SBIF, the Bank records within liabilities the portion of net income for the year that should be distributed to comply with the Corporations Law or its dividend policy. For these purposes, the Bank establishes a provision in a complementary equity account within retained earnings. 170 AnnualReport2012 Distributable net income is considered for the purpose of calculating a minimum dividends provision, which in accordance with the Bank’s bylaws is defined as that which results from reducing or adding to net income the value of price-level restatement for the concept of restatement or adjustment of paid-in capital and reserves for the year and their corresponding variations. (w) Employee benefits: (i) Staff vacations: The annual costs of vacations and staff benefits are recognized on an accrual basis. (ii) Short-term benefits The Bank has a yearly bonus plan for its employees based on their ability to meet objectives and their individual contribution to the company’s results, consisting of a given number or portion of monthly salaries. It is provisioned for based on the estimated amount to be distributed. (iii) Staff severance indemnities: Banco de Chile has recorded a liability for long-term severance indemnities in accordance with employment contracts it has with certain employees. The liability, which is payable to specified retiring employees with 30 or 35 years of service, is recorded at the present value of the accrued benefits, which are calculated by applying a real discount rate to the benefit accrued as of year-end over the estimated average remaining service period. Obligations for this defined benefits plan are valued according to the projected unit credit actuarial valuation method, using inputs such as staff turnover rates, expected salary growth in wages and probability that this benefit will be used, discounted at current long-term rates (5.50% as of December 31, 2012 and 6.04% as of December 31, 2011). The discount rate used corresponds to the return on bonds of the Central Bank with maturity in 10 years (BCP). Actuarial gains and losses are recognized as income or expense at the end of each reporting period. There is no past service costs that would have to be recognized by the Bank. (x) Earnings per share: Basic earnings per share is determined by dividing net income for the year attributable to the Bank by the average weighted number of shares in circulation during that year. Diluted earnings per share is determined in a similar manner as basic earnings per share, but the average weighted number of shares in circulation is adjusted to account for the dilutive effect of stock options, warrants and convertible debt, as of December 31, 2012 and 2011, the Bank does not have any instruments or contracts that could cause dilutions. Therefore, no adjustments have been made. (y) Interest revenue and expense: Interest income and expenses are recognized in the income statement using the effective interest rate method. The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or a shorter period) where appropriate, to the carrying amount of the financial asset or financial liability. To calculate the effective interest rate, the Bank determines cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses. Consolidated Financial Statements 171 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The effective interest rate calculation includes all fees and other amounts paid or received that form part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the purchase or issuance of a financial asset or liability. For its impaired portfolio and high risk loans and accounts receivables from clients, the Bank has applied a conservative position of discontinuing accrualbasis recognition of interest revenue in the income statement; they are only recorded once received. In accordance with the above, suspension occurs in the following cases: Loans with individual evaluation: t-PBOTDMBTTJGJFEJODBUFHPSJFT$BOE$"DDSVBMJTTVTQFOEFECZUIFTPMFGBDUPGCFJOHJOUIFJNQBJSFEQPSUGPMJP t-PBOTDMBTTJGJFEJODBUFHPSJFT$BOE$"DDSVBMJTTVTQFOEFEEVFUPIBWJOHCFFOUISFFNPOUITJOUIFJNQBJSFEQPSUGPMJP Group evaluation loans: t-PBOTXJUIMFTTUIBOSFBMHVBSBOUFFT"DDSVBMJTTVTQFOEFEXIFOQBZNFOUPGUIFMPBOPSPOFPGJUTJOTUBMMNFOUTIBTCFFOPWFSEVFGPSTJYNPOUIT Notwithstanding the above, in the case of loans subject to individual evaluation, recognition of income from accrual of interest and readjustments can be maintained for loans that are being paid normally and which correspond to obligations whose cash flows are independent, as can occur in the case of project financing. The suspension of recognition of revenue on an accrual basis means that, while the credits are kept in the impaired portfolio, the related assets included in the Consolidated Statement of Financial Position will increase with no interest, or fees and adjustments in the Consolidated Statement of Comprehensive Income, and income will not be recognized for these items, unless they are actually received. (z) Fees and commissions: Income and expenses from fees and commissions are recognized in income using different criteria based on the nature of the income or expense: The most significant criteria include: - Fees earned from an single act are recognized once the act has taken place. Fees earned from transactions or services provided over a longer period of time are recognized over the life of the transactions or services. Loan commitment fees for loans that are likely to be drawn down and other credit-related fees are deferred (together with incremental costs) and recognized as an adjustment to the effective interest rate of the loan. When it is unlikely that a loan is drawn down, the fees are recognized over the commitment period on a straight-line basis. (aa) Identifying and measuring impairment: Financial assets Financial assets are reviewed throughout each year, and especially at each reporting date, to determine whether there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and the loss event had an impact on the estimated future cash flows of the financial asset that can be reliably calculated. An impairment loss for financial assets recorded at amortized cost is calculated as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted using the effective interest rate. 172 AnnualReport2012 An impairment loss for available-for-sale financial assets is calculated using its fair value, considering fair value changes already recognized in other comprehensive income. In the case of equity investments classified as available-for-sale financial assets, objective evidence includes a significant or prolonged decline in the fair value of the investment below cost. In the case of debt securities classified as available-for-sale financial assets, the Bank assesses whether there exists objective evidence for impairment based on the same criteria as for loans. If there is evidence of impairment, any amounts previously recognized in equity, in net gains (losses) not recognized in the income statement, is removed from equity and recognized in the income statement for the period, reported in net gains (losses) on financial assets available for sale. This amount is determined as the difference between the acquisition cost (net of any principal repayments and amortization) and current fair value of the asset less any impairment loss on that investment previously recognized in the income statement. When the fair value of the available-for-sale debt security recovers to at least amortized cost, it is no longer considered impaired and subsequent changes in fair value are reported in equity. Individually significant financial assets are individually examined to determine impairment. Remaining financial assets are collectively evaluated in groups that share similar credit risk characteristics. All impairment losses are recognized in the income statement. Any cumulative loss related to available-for-sale financial assets recognized previously in equity is transferred to the income statement. An impairment loss can only be reversed if it can be related objectively to an event occurring after the impairment loss was recognized. Reversal of financial assets recorded at amortized cost and those classified as available-for-sale that are sales instruments is recorded in the income statement. Reversal of financial assets that are variable income instruments is recognized directly in equity. An impairment loss is reversed if, in a subsequent period, the fair value of the debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss. The amount of the reversal is recognized in profit or loss up to the amount previously recognized as impairment. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not reversed through profit or loss. Non-financial assets The carrying amounts of the non-financial assets of the Bank and its subsidiaries, excluding investment properties and deferred tax assets, are reviewed throughout the year and especially at each reporting date, to determine if any indication of impairment exists. If such indication exists, the recoverable amount of the asset is then estimated. Impairment losses recognized in prior years are assessed at each reporting date in search of any indication that the loss has decreased or disappeared. An impairment loss is reversed if there has been a change in the estimations used to determine the recoverable amount. An impairment loss is reverted only to the extent that the book value of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. The Bank assesses at each reporting date and on an ongoing basis whether there is an indication that an asset may be impaired. If any indication exists, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the fair value less costs to sell and its value in use. Where the carrying Consolidated Financial Statements 173 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, share prices and other available fair value indicators. For assets, excluding goodwill, impairment losses recognized in prior years are assessed at each reporting date, in search of any indication that the loss has decreased or disappeared. A previously recognized impairment is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment was recognized. An impairment loss is reversed only to the extent that the book value of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in the income statement. Impairment losses related to goodwill cannot be reversed in future periods. (ab) Lease transactions: (i) The Bank acting as lessor Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets held are subject to a finance lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments, discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating and arranging a finance lease are incorporated into the receivable through the discount rate applied to the lease. Finance lease income is recognized over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease. Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. The leased assets are include within “Other Assets” on the Group’s balance sheet and depreciation is provided on the depreciable amount of these assets on a systematic basis over their estimated useful economic lives. Rental income is recognized on a straight-line basis over the period of the lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense on a straight-line basis over the lease term. (ii) The Bank acting as lessee Assets held under finance leases are initially recognized on the balance sheet at an amount equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. As of December 31, 2012 and 2011, the Bank and its subsidiaries have not signed contracts of this nature. Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls the physical use of the property. Lease incentives are treated as a reduction of rental expense and are also recognized over the lease term on a straight-line basis. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. 174 AnnualReport2012 (ac) Fiduciary activities: The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of the clients. Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank. Contingencies and commitments arising from this activity are disclosed in Note No. 26 (a). (ad) Customer loyalty program: The Bank maintains a customer loyalty programs as an incentive to its clients. The scheme grants its customers certain points depending on the value of credit card purchases they make. The so-collected points can be used to obtain services from a third party. In accordance with IFRIC 13 the costs which the Bank incurs providing this incentive are recognized at fair value when the corresponding revenue is recognized, considering the probabilities of being used by the customers to obtain the third party’s service. The points collected cannot be used to obtain services directly from the Bank. (ae) Reclassifications Certain reclassifications have been made on some items of the Consolidated Statement of Financial Position and Consolidated Statement of Comprehensive Income as of December 31, 2011 in order to maintain an adequate comparability of these states. 3. New Accounting Pronouncements: The following is a summary of new standards, interpretations and improvements to the international accounting standards issued by the International Accounting Standards Board (IASB) but which have not come into effect as of December 31, 2012, as per the following detail: IAS 1 Presentation of Financial Statements Amendment issued in June 2011. The main change for this is the requirement that the items of “Other Comprehensive Income” are classified and grouped, evaluating whether potentially be reclassified to earnings in future periods. The amendment is applicable for annual periods beginning on or after July 1, 2012. The annual improvements to IFRS, issued in May 2012, provide amendments to IAS 1 in order to clarify the requirements to provide comparative information for: a) The requirements comparative of the opening statement of financial position when an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification, according to IAS 8 “Accounting policies, changes in accounting estimates and errors”, and b) The requirement to provide comparative information when an entity provides additional comparative information beyond the minimum comparative information requirements. The amendment is applicable for annual periods beginning January 1, 2013 and earlier application is permitted. The amendment is applied retrospectively for any change accordance with the description in a) and b). The management estimates that this change has not significant impacts in the consolidated financial statements of Banco de Chile and its subsidiaries. Consolidated Financial Statements 175 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 IAS 19 Employee Benefits The amendments to IAS 19 (1,998) remove the option to defer the recognition of actuarial gains and losses (the “corridor method”), streamline the presentation of changes in assets and liabilities arising from defined benefit plans and enhance the disclosure requirements for defined benefit plans. Entities are required to apply amendments in the annual periods beginning on or after January 1, 2013, or earlier. According to the assessment made, this change has not significant impacts in the consolidated financial statements of Banco de Chile and its subsidiaries. IAS 27 Separate Financial Statements This standard amended in May 2011, and supersedes IAS 27 (2008). The scope of this standard is restricted only for separate financial statements, as the concept related to the definition of control and consolidation were removed and included in IFRS 10. Entities are required to apply amendments in the annual periods beginning on or after January 1, 2013, and early adoption is permitted in conjunction with IFRS 10, IFRS 11 and IFRS 12 and the amendment to IAS 28. Banco de Chile has not separate financial statements, so this regulatory change has not impact in the Consolidated Financial Statements. IAS 28 Investments in Associates and Joint Venture This standard was reissued in May 2011, regulates the accounting treatment of application of the equity method to investments in joint ventures. Entities are required to apply amendments in the annual periods beginning on or after January 1, 2013, and early adoption is permitted in conjunction with IFRS 10, IFRS 11 and IFRS 12 and the amendment to IAS 27. Banco de Chile has not investments in associates and joint ventures, so this regulatory change has not impact in the Consolidated Financial Statements. IAS 32 Financial Instruments: Presentation The amendments issued in December 2011, clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The standard is effective for annual periods beginning on or after January 1, 2014 and early adoption is permitted. In May 2012, the amendments removes a perceived inconsistency between IAS 32 and IAS 12 and indicating that the income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction should be accounted for in accordance with IAS 12 “Income Taxes”. This amendment shall apply retroactively for annual periods beginning on or after January 1, 2013. Earlier application is permitted. According to current rules about netting force in Chile, this rule has no impact on the consolidated financial statements of Banco de Chile and its subsidiaries. 176 AnnualReport2012 IAS 34 Interim Financial Reporting The annual improvements to IFRS, issued in May 2012, incorporates amendments to IAS 34, in which it is established that requires disclosure of assets and total liabilities for a particular segment, if: a) It report in a regular form the total assets and liabilities to the operation’s responsible. b) There has been a material change from the amounts disclosed in the last annual financial statements for that reportable segment. This amendment shall apply retroactively for annual periods beginning on or after January 1, 2013. Earlier application is permitted. According to the assessment carried out this policy change has no impact on the consolidated financial statements of Banco de Chile and its subsidiaries. IFRS 7 Financial Instruments: Disclosures In December 2011, amended the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognized financial assets and recognized financial liabilities, on the entity’s financial position. An entity shall apply those amendments for annual periods beginning on or after January 1, 2013. According to the assessment made, this regulatory change has not impacts in the financial statements of Banco de Chile and its subsidiaries. It will be required additional disclosures, which it is in process to design, for the next quarterly financial statements. IFRS 9 Financial Instruments: Financial liabilities In October, 2010, the IASB published the requirements for classifying and measuring financial liabilities were added to IFRS 9. Most of the added requirements were carried forward unchanged from IAS 39. However, the requirements related to the fair value option for financial liabilities were changed to address the issue of own credit risk in response to consistent feedback from users of financial statements and others that the effects of changes in a liability’s credit risk ought not to affect profit or loss unless the liability is held for trading. The mandatory effective date to annual periods beginning on or after January 1, 2015. IFRS 9 Financial Instruments: Recognition and Measurement In November 2009, the IASB issued IFRS 9, “Financial Instruments,” the first step in its project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 introduces new requirements for classifying and measuring financial assets that are in the scope of the application of IAS 39. This new regulation requires that all financial assets be classified in function of the entity’s business model for the management of financial assets and of the characteristics of the contractual cash flows of financial assets. A financial asset shall be measured at amortized cost if two criteria are fulfilled: (a) the objective of the business model is to maintain a financial asset to receive contractual cash flows, and (b) contractual cash flows represent principal and interest Consolidated Financial Statements 177 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 payments. Should a financial asset not comply with the aforementioned conditions, it will be measured at fair value. In addition, this standard allows a financial asset that fulfills the criteria to be valued at amortized cost to be designated at fair value with changes in income under the fair value option, as long as this significantly reduces or eliminates an accounting asymmetry. Likewise, IFRS 9 eliminates the requirement of separating embedded derivatives from the host financial assets. Therefore, it requires that a hybrid contract be classified entirely in amortized cost or fair value. IFRS 9 is effective for annual periods commencing as of January 1, 2015, and allows adoption prior to that date. IFRS 9 must be applied retroactively, however if it is adopted before January 1, 2012, there is no need to reformulate comparative periods. Banco de Chile and its subsidiaries are assessing the possible impact of adoption of these changes on the consolidated financial statements, however, that impact will depend on the assets maintained by the institution as of the adoption date. It is not practicable to quantify the effect on the issuance of these consolidated financial statements. To date, neither of these standards has been approved by the Superintendency of Banks, event that is required for their application. IFRS 10 Consolidated Financial Statement In May 2011 the IASB issued IFRS 10 establishes a new definition of control applies to all entities including “special purpose entities” or “structured entities” as they are now referred to in the new standards. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent. To date, Banco de Chile and its subsidiaries are evaluating the possible impact that the adoption of this standard will have on its consolidated financial statements. However, it will be required additional disclosures, which it is in process to design, for the next quarterly financial statements. IFRS 11 Joint Arrangements In May 2011, the IASB issued IFRS 11 which replaces IAS 31 “Interest in Joint Ventures” and SIC-13 “Jointly-Controlled Entities- Non-monetary Contributions by Ventures”. IFRS 11 eliminated the option to record the value of investment in a joint venture using proportionate consolidation or recognize its assets and liabilities its relative shares of those items, if any. The new standards require using the equity method. These new standard is effective for annual periods beginning on or after January 1, 2013. According to assessment made this regulatory change has not significant impact in the financial statements of Banco de Chile. IFRS 12 Disclosure of Interests in Other Entities In May 2011, the IASB issued IFRS 12 which replaces the disclosure requirements previously included in IAS 27, IAS 31 and IAS 28. This new standard is aimed at concentrating on a single regulatory body disclosure of subsidiaries, joint agreements, associates and structured entities. One of the most significant changes introduced by IFRS 12 is required for the parent to disclose the judgment that management has made to determine that it has control to consolidate or not different entities. The new disclosures will help users of its financial statement evaluate the nature and risks associated with interests in other entities and the effects of those interests on its financial statements. 178 AnnualReport2012 These new standard is effective for annual periods beginning on or after January 1, 2013. According to the assessment made, this regulatory change has not impacts in the financial statements of Banco de Chile and its subsidiaries. It will be required additional disclosures, which it is in process to design, for the next quarterly financial statements. IFRS 13 Fair Value Measurement In May 2011, the IASB issued IFRS 13 Fair Value Measurement. This new standard establishes a new definition of Fair Value (this definition converges with generally accepted accounting principles in United State). This new standard does not change when an entity must or may use fair value, but changes the way how to measure the fair value of financial assets and liabilities and non-financial. These new standard is effective for annual periods beginning on or after January 1, 2013. According the assessment, this policy change has no impact on the consolidated financial statements of Banco de Chile and its subsidiaries, however the Bank is working in its disclosures for comply with the further information requests of this rule. This rule will be applicable if Superintendency of Banks and Financial Institutions allow its adoption. 4. Changes in Accounting Policies and Disclosures: During the period ended December 31, 2012, have not occurred significant accounting changes that affect the presentation of Consolidated Financial Statements. 5. Relevant Events: (a) In an ordinary meeting held on January 26, 2012, the Bank’s Board of directors decided to call an ordinary shareholders meeting to be held on March 22, 2012 with the objective of proposing, among other matters, the increase the Banks capital through the capitalization of 30% of the Bank’s net income for the fiscal year 2011, by means of the issuance of shares without nominal value, set at the value of Ch$67.48 per share and distributed among shareholders, without charge, at the rate of 0.018956 new shares per each paid for and subscribed share and to adopt all necessary resolutions subject to the options contemplated in Article 31 of Law N°19,396. In an ordinary meeting held on March 22, 2012, its shareholders’ approved the distribution and payment of dividend No.200, in the amount of Ch$2.984740 per Banco de Chile common share, which represents 70% of the Bank’s net income for year 2011. (b) On February 16, 2012 and pursuant to Article 116 of Law No. 18,045, Banco de Chile in his capacity as representative of the bondholders Series A, issued by Compañía Sud Americana de Vapores S.A., Banco de Chile informed, as an essential information, that because this has occurred the configuration of the disability cause contemplated in the first paragraph of Article 116 of Law No. 18,045, that is, being the representative of the bondholders related to the issuer. The said bond issue is in the public deed dated August 29, 2001, executed in Santiago on behalf of the Public Notary Mr. René Benavente Cash, together with all the amendments and entered in the Registry of Securities of the Chilean Superintendency of Securities and Insurance under No. 274. Consolidated Financial Statements 179 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (c) On March 27, 2012, the Central Bank of Chile communicated to Banco de Chile that in the Extraordinary Session, No. 1666E, held on the same date, the Board of the Central Bank of Chile resolved to request its corresponding surplus, from the fiscal year ended December 31, 2011, including the proportional part of the agreed upon capitalization profits, be paid in cash. (d) In the Ordinary Meeting held on April 26, 2012, the Board of Directors of Banco de Chile accepted the resignation presented by the Director, Mr. Fernando Quiroz Robles. Likewise, the Board of Directors appointed, until the next Ordinary Shareholders Meeting, Mr. Francisco Aristeguieta Silva as Director. Additionally, in the same session, Mr. Francisco Aristeguieta Silva was appointed as Vice Chairman of the Board of Directors of Banco de Chile. (e) On June 5, 2012 Banco de Chile informed the capitalization of 30% of the distributable net income obtained during the fiscal year ending the December 31, 2011, through the issuance of fully paid-in shares, of no par value, agreed in the Extraordinary Shareholders Meeting held on March 22, 2012, the Bank informed the following: (i) In the said Extraordinary Shareholders Meeting, it was agreed to increase the Bank´s capital in the amount of Ch$73,910,745,344 through the issuance of 1,095,298,538 fully paid-in shares, of no par value, payable under the distributable net income for the year ended December 31, 2011 that was not distributed as dividends as agreed at the Ordinary Shareholders Meeting held on the same day. The Chilean Superintendency of Banks and Financial Institutions approved the amendment of the bylaws, through resolution N°118 dated May 17, 2012, which was registered on page 33,050, No. 23,246 on the Chamber of Commerce of Santiago, on May 18, 2012 and was published at “Diario Oficial” No. 40,267 on May 22, 2012. The issuance of fully in paid shares was registered in the Securities Register of the Superintendence of Banks and Financial Institutions with No. 4/2012, on June 4, 2012. (ii) The Board of Directors of Banco de Chile, at the meeting No. 2,754, dated May 24, 2012, set June 28, 2012, as the date for issuance and distribution of the fully paid in shares. (iii) The shareholders that will be entitled to receive the new shares, at a ratio of 0.018956 fully in paid shares for each Banco de Chile share, shall be those registered in the Registry of Shareholders on June 22, 2012. (iv) The titles will be duly assigned to each shareholder. The Bank will only print the titles for those shareholders who request it in writing at the Shareholders Department of Banco de Chile. (v) As a consequence of the issuance of the fully in paid shares, the capital of the Bank will be divided in 88,037,813,511 nominative shares, without par value. (f) On July 9, 2012, according to Article 19 of Chilean General Banking Act, the Superintendency of Banks and Financial Institutions imposed a fine of Ch$40,000,000 (Chilean pesos) to Banco de Chile, in connection with the forwarding and delivering service by electronic mail, of current account statements corresponding to June 2012. 180 AnnualReport2012 (g) In the Ordinary Session No. 2,761 held on September 13, 2012, the Board of Directors o Banco de Chile resolve to schedule an Extraordinary Shareholders Meeting to be held on October 17, 2012, with the purpose of proposing a capital increase in the amount of Ch$250,000,000,000 by means for the issuance of cash shares that must be subscribed and paid at the price, term and other conditions agreed by the Shareholders Meeting as well as to modify the Bank’s by-laws by adopting the other necessary agreements so as to make effective the agreed by-laws reform. Cash shares to be issued will be ordinary Banco de Chile shares having the same rights as all Banco de Chile’s shares, with the exception that they will not allow its shareholders to receive dividends and/or fully paid-in shares, as the case may be, with respect to the earnings of fiscal year 2012. (h) On October 17, 2012 pursuant to Articles 9 and 10 of Law No. 18,045 and Chapter 18-10 of the Regulations of the Superintendency of Banks and Financial Institutions in the Extraordinary Shareholders Meeting held it was agreed to increase the Bank’s capital in the amount of Ch$ 250,000,000,000 by means of the issuance of 3,939,489,442 cash shares, “Banco de Chile-T” series, with same rights as all Banco de Chile’s shares, with the exception that they will not allow its shareholders to receive dividends and/or fully paid-in shares, with respect to our net distributable earnings for fiscal year 2012. Once said dividends and/or fully paid-in shares are distributed and paid shares “Banco de Chile-T” will be automatically converted into “Banco de Chile” shares. The price of the issuance of the shares will be set by the Board of Directors within a period of 180 days following the aforementioned Shareholders Meeting according to the terms and conditions agreed upon on therein, having in consideration the market price for the Bank’s shares, and in that case, such price shall not be more nor less than 8% of the average closing stock market price for Banco de Chile shares in a period of 30 market business days prior to the determination, minus the net distributable earnings per share accumulated until the last day of the month preceding to the determination date. Likewise, it was agreed that the shares will be offered to the shareholders in accordance to the law while remaining shares to be offered in the stock markets of the country, and potentially abroad, at the opportunities determined by the Board of Directors. On the other hand, in the aforementioned Meeting it was informed that the principal shareholder LQ Inversiones Financieras S.A., has announced by means of a letter dated October 16, 2012 its intention to underwrite and to pay the aggregate amount of shares corresponding to the Ordinary Preemptive Rights Period, and to assign and transfer its right to purchase options corresponding to it during the Special Preemptive Rights Period in the aforementioned capital increase. (i) On November 22, 2012 in the Ordinary Meeting No. 2,766 held on this date, the Board of Directors of Banco de Chile resolved the issuance of 3,939,489,442 cash shares, without par value, Series “Banco de Chile-T”, in accordance with the agreements adopted by the Extraordinary Shareholders Meeting held on October 17, 2012. Likewise, it was agreed that the placement price of the mentioned cash shares will be Ch$64. (j) On December 20, 2012 by way of a public deed dated December 19, 2012 issued before the Public Notary of Mr. René Benavente Cash, Banco de Chile together with its affiliate Banchile Corredores de Seguros Limitada entered into an agreement with Banchile Seguros de Vida S.A. called Collective Debtor’s Life Insurance Agreement (“Contrato de Seguro Colectivo de Desgravamen”) for loan mortgages. Said agreement was entered pursuant article 40 of DFL N° 251 of 1931, General Regulation N° 330 of the Superintendency of Securities and Insurance and Circular N° 3,530 of the Superintendency of Banks and Financial Institutions, both dated March 21, 2012, upon which the public bid for the collective policy for life insurance covering loan mortgages was adjudicated to Banchile Seguros de Vida S.A., who offered the lowest rate of 0.0119800% monthly, including a 14.00% commission fee for the insurance broker Banchile Corredores de Seguros Limitada, who will act as intermediary of the policy. Consolidated Financial Statements 181 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 6. Segment Reporting: For management purposes, the Bank has organized its operations and commercial strategies into four business segments, which are defined in accordance with the type of products and services offered to target customers. These business segments are currently defined as follows: Retail: This segment focuses on individuals and small and medium-sized companies with annual sales up to 70,000 UF, where the product offering focuses primarily on consumer loans, commercial loans, checking accounts, credit cards, credit lines and mortgage loans. Wholesale: This segment focused on corporate clients and large companies, whose annual revenue exceed 70,000 UF, where the product offering focuses primarily on commercial loans, checking accounts and liquidity management services, debt instruments, foreign trade, derivative contracts and leases. Treasury and money market operations: This segment includes revenue associated with managing the Bank’s balance sheet (currencies, maturities and interest rates) and liquidity, including financial instrument and currency trading on behalf of the Bank itself. Transactions on behalf of customers carried out by the Treasury are reflected in the respective aforementioned segments. These products are highly transactionfocused and include foreign exchange transactions, derivatives and financial instruments in general. Subsidiaries: Corresponds to companies and corporations controlled by the Bank, where income is obtained individually by the respective subsidiary. The companies that comprise this segment are: Entity - Banchile Trade Services Limited - Banchile Administradora General de Fondos S.A. - Banchile Asesoría Financiera S.A. - Banchile Corredores de Seguros Ltda. - Banchile Factoring S.A. - Banchile Corredores de Bolsa S.A. - Banchile Securitizadora S.A. - Socofin S.A. - Promarket S.A. The financial information used to measure the performance of the Bank’s business segments is not necessarily comparable with similar information from other financial institutions because it is based on internal reporting policies. The accounting policies used to prepare the Bank’s operating segment information are similar as those described in Note 2 “Summary of Significant Accounting Principles”. The Bank obtains the majority of its income from: interest, revaluations and fees, discounted the credit cost and expenses. Management is mainly based on these concepts in its evaluation of segment performance and decision-making regarding goals, allocation of resources for each unit individually. Although the results of the segments reconcile with those of the Bank at total level, it is not thus necessarily concerning the different concepts, since the management is measured and controls in individual form and additionally applies the following criteria: 182 AnnualReport2012 t The net interest margin of loans and deposits is measured on an individual transaction and individual client basis, stemming from the difference between the effective customer rate and the related Bank’s fund transfer price in terms of maturity, re-pricing and currency. t The internal performance profitability system considers capital allocation in each segment in accordance to the Basel guidelines. t Operating expenses are distributed at each area level. The Bank allocates all of its indirect operating costs to each business segment by utilizing a different cost driver in order to allocate such costs to the specific segment. The Bank did not enter into transactions with a particular customer or third party that exceed 10% of its total income in 2012 and 2011. Transfer pricing between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. Taxes are managed at a corporate level and are not allocated to business segments. The following table presents the income for 2012 and 2011 for each of the segments defined above: Retail MCh$ Net interest income 664,861 Net fees and commissions income 178,569 16,628 860,058 (179,524) Other operating income TOTAL OPERATING REVENUE Provisions for loan losses Depreciation and amortization Other operating expenses Income attributable to associates INCOME BEFORE INCOME TAXES Wholesale MCh$ 252,009 Treasury MCh$ December 31, 2012 Subsidiaries Subtotal MCh$ MCh$ Adjustments(*) MCh$ Total MCh$ 18,356 6,177 941,403 11,435 952,838 36,130 (512) 104,490 318,677 (11,420) 307,257 32,865 14,746 31,857 96,096 (14,152) 81,944 321,004 32,590 142,524 1,356,176 (14,137) 1,342,039 (6,751) (21) (1,894) (188,190) — (188,190) (20,883) (7,284) (1,204) (1,586) (30,957) — (30,957) (405,154) (110,081) (8,960) (92,804) (616,999) 14,137 (602,862) (288) (228) (18) 305 (229) — (229) 254,209 196,660 22,387 46,545 519,801 — 519,801 Income taxes (53,950) INCOME AFTER INCOME TAXES 465,851 Assets 9,666,888 9,325,032 3,746,908 1,123,750 23,862,578 (731,339) TOTAL ASSETS Liabilities 23,131,239 129,827 Current and deferred taxes 23,261,066 7,548,472 8,978,963 4,495,605 908,796 21,931,836 (731,339) 21,200,497 53,510 Current and deferred taxes TOTAL LIABILITIES 21,254,007 (*) This column corresponds to the elimination adjustment to conform to the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position. Consolidated Financial Statements 183 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Retail MCh$ Wholesale MCh$ Treasury MCh$ December 31, 2011 Subsidiaries Subtotal MCh$ MCh$ Adjustments(*) MCh$ Total MCh$ Net interest income 589,040 247,471 20,460 4,204 861,175 10,145 871,320 Net fees and commissions income 169,296 33,342 (536) 116,955 319,057 (10,284) 308,773 15,478 1,181 11,508 27,511 55,678 (11,989) 43,689 TOTAL OPERATING REVENUE Other operating income 773,814 281,994 31,432 148,670 1,235,910 (12,128) 1,223,782 Provisions for loan losses (111,242) (10,541) (964) (2,093) (124,840) — (124,840) Depreciation and amortization Other operating expenses (21,174) (6,299) (1,718) (1,520) (30,711) — (30,711) (377,165) (123,355) (8,486) (86,259) (595,265) 12,128 (583,137) Income attributable to associates INCOME BEFORE INCOME TAXES 2,252 710 — 338 3,300 — 3,300 266,485 142,509 20,264 59,136 488,394 — 488,394 Income taxes (59,588) INCOME AFTER INCOME TAXES 428,806 Assets 8,416,826 9,268,380 3,415,922 1,069,135 22,170,263 (547,005) 21,623,258 Current and deferred taxes 117,689 TOTAL ASSETS Liabilities 21,740,947 6,468,025 8,983,599 4,214,432 855,006 20,521,062 (547,005) 19,974,057 Current and deferred taxes 27,715 TOTAL LIABILITIES 20,001,772 (*) This column corresponds to the elimination adjustment to conform to the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position. 7. Cash and Cash Equivalents: (a) Cash and cash equivalents and their reconciliation to the statement of cash flows at each year-end are detailed as follows: 2012 MCh$ 2011 MCh$ Cash and due from banks: Cash (*) 400,249 346,169 Current account with the Chilean Central Bank (*) 67,833 139,328 Deposits in other domestic banks 15,295 106,656 Deposits abroad 201,548 288,993 SUBTOTAL - CASH AND DUE FROM BANKS 684,925 881,146 Net transactions in the course of collection 237,393 218,215 Highly liquid financial instruments 304,886 290,069 Repurchase agreements TOTAL CASH AND CASH EQUIVALENTS (*) Amounts in cash and Central Bank deposits are regulatory reserve deposits for which the Bank must maintain a certain monthly average. 184 AnnualReport2012 9,120 40,478 1,236,324 1,429,908 (b) Transactions in the course of collection: Transactions in the course of settlement are transactions for which the only remaining step is settlement, which will increase or decrease the funds in the Central Bank or in foreign banks, normally occurring within 12 to 24 business hours, and are detailed as follows: 2012 MCh$ 2011 MCh$ Assets Documents drawn on other banks (clearing) 249,019 185,342 Funds receivable 147,592 188,297 SUBTOTAL - ASSETS 396,611 373,639 Liabilities Funds payable (159,218) (155,424) SUBTOTAL - LIABILITIES (159,218) (155,424) 237,393 218,215 2012 MCh$ 2011 MCh$ NET TRANSACTIONS IN THE COURSE OF COLLECTION 8. Financial Assets Held-for-trading: The detail of financial instruments classified as held-for-trading is as follows: Instruments issued by the Chilean Government and Central Bank of Chile: Central Bank bonds Central Bank promissory notes 25,585 66,243 3,068 4,657 43,726 6,942 Deposit promissory notes from domestic banks — — Mortgage bonds from domestic banks 22 61 Bonds from domestic banks — 585 Deposits in domestic banks 87,093 191,003 — — 188 370 Instruments from foreign governments or central banks — — Other instruments issued abroad — — 33,042 31,910 Other instruments issued by the Chilean Government and Central Bank Other instruments issued in Chile Bonds from other Chilean companies Other instruments issued in Chile Instruments issued by foreign institutions Mutual fund investments: Funds managed by related companies Funds managed by third parties TOTAL — — 192,724 301,771 Consolidated Financial Statements 185 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Instruments issued by the Chilean Government and Central Bank include instruments sold under agreements to repurchase to customers and financial institutions, for the period 2012 there was not balance for this concept (MCh$29,811 in 2011). “Other instruments issued in Chile” include instruments sold under agreements to repurchase to customers and financial instruments, amounting to MCh$86,863 as of December 31, 2012 (MCh$152,431 in 2011). Agreements to repurchase have an average expiration of 11 days as of year-end (7 days in 2011). Additionally, the Bank holds financial investments in mortgage finance bonds issued by itself in the amount of MCh$51,154 as of December 31, 2012 (MCh$64,929 in 2011), which are presented as a reduction of the liability line item “Debt issued”. 9. Repurchase Agreements and Security Lending and Borrowing: (a) The Bank provides financing to its customers through “Receivables from Repurchase Agreements and Security Borrowing”, in which the financial instrument serves as collateral. As of December 31, 2012 and 2011, the Bank has the following receivables resulting from such transactions: Over 1 month Over 3 months Over 1 year Over 3 years and up to 3 and up to 12 and up to 3 and up to 5 Up to 1 month month months years years Over 5 years Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ Instruments issued by the Chilean Governments and Central Bank of Chile Central Bank bonds — 10,021 — — — — — — — — — — — 10,021 Central Bank promissory notes — — — — — — — — — — — — — — 582 — — — — — — — — — — — 582 — — — — — — — — — — — — — — — Other instruments issued by the Chilean Government and Central Bank Other Instruments Issued in Chile Deposit promissory notes from domestic banks Mortgage bonds from domestic banks — — — — — — — — — — — — — — Bonds from domestic banks — — — — — — — — — — — — — — Deposits in domestic banks — — — — — — — — — — — — — — Bonds from other Chilean companies — — — — — — — — — — — — — — 7,756 30,191 855 6,270 25,907 1,499 — — — — — — 34,518 37,960 Instruments from foreign governments or central bank — — — — — — — — — — — — — — Other instruments — — — — — — — — — — — — — — 8,338 40,212 855 6,270 25,907 1,499 — — — — — — 35,100 47,981 Other instruments issued in Chile Instruments issued by foreign institutions TOTAL 186 AnnualReport2012 (b) The Bank obtains financing by selling financial instruments and committing to purchase them at future dates, plus interest at a prefixed rate, as of December 31, 2012 and 2011, the Bank has the following payables resulting from such transactions: Over 1 month Over 3 months Over 1 year Over 3 years and up to 3 and up to 12 and up to 3 and up to 5 Up to 1 month month months years years Over 5 years Total 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ Instruments issued by the Chilean Governments and Central Bank of Chile Central Bank bonds — 49,025 Central Bank promissory notes — 1,139 Other instruments issued by the Chilean Government and Central Bank — — — — — — — — — — — 49,025 — — — — — — — — — — — 1,139 — — — — — — — — — — — — — 219,526 168,414 1,603 4,553 — 71 — — — — — — 221,129 173,038 Other Instruments Issued in Chile Deposit promissory notes from domestic banks Mortgage bonds from domestic banks — — — — — — — — — — — — — — Bonds from domestic banks — — — — — — — — — — — — — — Deposits in domestic banks — — — — — — — — — — — — — — Bonds from other Chilean companies — — — — — — — — — — — — — — 5,267 — — — — — — — — — — — 5,267 — Instruments from foreign governments or central bank — — — — — — — — — — — — — — Other instruments — — — — — — — — — — — — — — 224,793 218,578 1,603 4,553 — 71 — — — — — — 226,396 223,202 Other instruments issued in Chile Instruments issued by foreign institutions TOTAL (c) Securities received: As part of reverse repurchase and securities borrowing agreements the Bank has received securities that it is allowed to sell or repledge in the absence of default by the owner. At December 31, 2012 the Bank held securities with a fair value of Ch$34,865 million (Ch$47,022 million in 2011) on such terms. The Bank has an obligation to return the securities to its counterparties. (d) Securities given: The carrying amount of securities lent and of “Payables from Repurchase Agreements and Security Lending” at December 31, 2012 is Ch$266,395 million (Ch$221,528 million in 2011). The counterparty is allowed to sell or repledge those securities in the absence of default by the Bank. Consolidated Financial Statements 187 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 10. Derivative Instruments and Accounting Hedges: (a) As of December 31, 2012 and 2011, the Bank’s portfolio of derivative instruments is detailed as follows: Notional amount of contract with final expiration date in Over 1 month and up to 3 months Up to 1 month 2012 MCh$ 2011 MCh$ 2012 MCh$ 2011 MCh$ Over 3 months and up to 12 months 2012 MCh$ 2011 MCh$ Derivatives held for hedging purposes Cross currency swap — — — — — — Interest rate swap — — — — — — TOTAL DERIVATIVES HELD FOR HEDGING PURPOSES — — — — — — Derivatives held as cash flow hedges Interest rate swap and cross currency swap 151,913 57,128 — — — — TOTAL DERIVATIVES HELD AS CASH FLOW HEDGES 151,913 57,128 — — — — 4,231,746 3,672,500 2,519,046 2,375,832 3,260,326 4,102,695 69,220 133,883 199,338 145,791 1,034,040 1,065,272 Derivatives held-for-trading purposes Currency forward Cross currency swap Interest rate swap 353,133 200,243 905,870 506,595 3,298,276 1,473,712 Call currency options 30,306 11,072 20,938 34,671 46,686 46,262 Put currency options 26,009 468 15,288 988 25,980 3,119 — — — — — — TOTAL DERIVATIVES OF NEGOTIATION Others 4,710,414 4,018,166 3,660,480 3,063,877 7,665,308 6,691,060 TOTAL 4,862,327 4,075,294 3,660,480 3,063,877 7,665,308 6,691,060 188 AnnualReport2012 Notional amount of contract with final expiration date in Over 1 year and up to 3 years Over 3 year and up to 5 years 2012 MCh$ 2012 MCh$ 2011 MCh$ 31,388 13,376 41,558 2011 MCh$ Fair value Over 5 years 2012 MCh$ Asset 2011 MCh$ 2012 MCh$ Liability 2011 MCh$ 2012 MCh$ 17,260 74,626 125,952 — — 10,332 2011 MCh$ 11,148 27,570 15,750 17,790 25,108 116,387 184,784 — — 21,311 27,273 58,958 29,126 59,348 42,368 191,013 310,736 — — 31,643 38,421 55,382 55,940 14,083 — 78,861 — 22 — 2,055 1,514 55,382 55,940 14,083 — 78,861 — 22 — 2,055 1,514 191,364 325,204 2,458 27,809 65 — 70,166 125,766 81,790 115,797 1,721,408 1,497,511 719,073 685,216 1,026,518 891,617 177,403 181,092 166,182 174,984 3,540,462 1,620,359 1,505,936 621,418 1,650,103 584,082 81,093 77,589 97,870 97,992 4,795 — — — — — 472 1,239 395 1,149 — — — — — — 341 2 387 35 — — — — — 672,384 — — — 21 5,458,029 3,443,074 2,227,467 1,334,443 2,676,686 2,148,083 329,475 385,688 346,624 389,978 5,572,369 3,528,140 2,300,898 1,376,811 2,946,560 2,458,819 329,497 385,688 380,322 429,913 Consolidated Financial Statements 189 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) Fair value Hedges: The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates. The aforementioned hedge instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve. Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 2012 and 2011: 2012 MCh$ 2011 MCh$ 147,572 156,588 Hedged element Commercial loans Corporate bonds 161,747 225,642 TOTAL 309,319 382,230 Hedge instrument (c) Cross currency swap 147,572 156,588 Interest rate swap 161,747 225,642 TOTAL 309,319 382,230 Cash flow Hedges: (c.1) The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and foreign exchange of bonds issued abroad in Mexican pesos to rate TIIE (Interbank Interest Rate Balance) plus 0.6 percentage points and Hong Kong dollars to fix rate. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate. Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (CLF) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily impact the item “interest revenue” of the financial statements. 190 AnnualReport2012 (c.2) Below are the cash flows of bonds issued abroad objects of this hedge and cash flows of the active part of the derivative: Up to1 month MCh$ Over 1 month Over 3 months and up to 3 and up to 12 months months MCh$ MCh$ 2012 Over 1 year and up to 3 years MCh$ Over 3 years and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ Hedge item Outflows: Corporate Bond MXN (235) (470) (2,348) (58,199) — — (61,252) Corporate Bond HKD — — (3,149) Corporate Bond PEN — — (1,138) (6,309) (6,332) (110,408) (126,198) (2,276) (16,358) — (19,772) Cross Currency Swap MXN 235 470 2,348 58,199 — — 61,252 Cross Currency Swap HKD — Cross Currency Swap PEN — — 3,149 6,309 6,332 110,408 126,198 — 1,138 2,276 16,358 — 19,772 NET CASH FLOW — — — — — — — Hedge instruments Inflows: Up to1 month MCh$ Over 1 month Over 3 months and up to 12 and up to 3 months months MCh$ MCh$ 2011 Over 1 year and up to 3 years MCh$ Over 3 years and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ Hedge item Outflows: Corporate Bond MXN (239) (477) (2,385) (62,461) — — (65,562) 239 477 2,385 62,461 — — 65,562 — — — — — — — Hedge instrument Inflows: Cross Currency Swap MXN NET CASH FLOW Consolidated Financial Statements 191 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (c.2) Bellow are cash flow of underlying assets portfolio and cash flow of pasive part of derivative: Up to1 month MCh$ Over 1 month Over 3 months and up to 3 and up to 12 months months MCh$ MCh$ 2012 Over 1 year and up to 3 years MCh$ Over 3 years and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ 20,317 106,869 198,219 Hedge ítem Inflows: Cash flow in CLF — — 4,496 66,537 Cross Currency Swap CLF — — (1,644) (60,173) — — (61,817) Cross Currency Swap CLF — — (2,411) (5,482) (5,498) (106,869) (120,260) Hedge instrument Outflows: Cross Currency Swap CLF — — (441) (882) (14,819) — (16,142) NET CASH FLOW — — — — — — — Over 5 years MCh$ Total MCh$ Up to1 month MCh$ Over 1 month Over 3 months and up to 12 and up to 3 months months MCh$ MCh$ 2011 Over 1 year and up to 3 years MCh$ Over 3 years and up to 5 years MCh$ Hedge ítem Inflows: Cash flow in CLF 235 470 2,349 62,048 — — 65,102 (235) (470) (2,349) (62,048) — — (65,102) — — — — — — — Hedge instrument Outflows: Cross Currency Swap CLF NET CASH FLOW Respect to assets hedged, these are revalued monthly according to the variation of the UF, which is equivalent to realize monthly reinvestment of the assets until maturity of the relationship hedging. (c.3) The accumulated amount of unrealized gain was an credit to equity for an amount of Ch$1,777 million (charge to equity for Ch$485 million in 2011) generated from hedging instruments, which has been recorded in equity. The net effect of deferred tax was a credit of equity for Ch$1,429 millions in 2012 (charge to equity for Ch$395 millions in 2011) The accumulated balance for this concept net of deferred tax as of December 31, 2012 corresponds to a credit of equity amounted Ch$1,034 million (charge to equity amounted Ch$395 million in 2011) (c.4) The net effect in income of derivatives cash flow hedges amount to Ch$2,318 million in 2012 (charge to income for Ch$1,029 millions en 2011). 192 AnnualReport2012 11. Loans and advances to Banks: (a) As of December 31, 2012 and 2011, amounts are detailed as follows: 2012 MCh$ 2011 MCh$ Domestic Banks Interbank loans Other credits with domestic banks Provisions for loans to domestic banks SUBTOTAL 14,309 15,059 — — (5) (5) 14,304 15,054 Foreign Banks Loans to foreign banks 146,980 190,838 Chilean exports trade loans 67,787 127,076 Credits with third countries 14,509 15,639 (954) (1,001) 228,322 332,552 1,100,000 300,000 Provisions for loans to foreign banks SUBTOTAL Central Bank of Chile Non-available Central Bank deposits 696 819 SUBTOTAL 1,100,696 300,819 TOTAL 1,343,322 648,425 Other Central Bank credits (b) Provisions for loans to banks are detailed below: Detail Bank’s Location Chile Abroad MCh$ MCh$ Total MCh$ Balance as of January 1, 2011 — 610 610 Charge-offs — — — 5 391 396 Provisions released Provisions established — — — Impairment — — — 5 1,001 1,006 Charge-offs — — — Provisions established — — — Provisions released — (47) (47) Impairment — — — 5 954 959 BALANCE AS OF DECEMBER 31, 2011 BALANCE AS OF DECEMBER 31, 2012 Consolidated Financial Statements 193 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 12. Loans to Customers, net: (a) Loans to Customers: As of December 31, 2012 and 2011, the composition of the portfolio of loans is the following: As of December 31, 2012 Assets before allowance Normal Portfolio MCh$ Impaired Portfolio MCh$ Allowances established Total MCh$ Individual Provisions MCh$ Group Provisions MCh$ Total MCh$ Net assets MCh$ (67,746) (161,329) 8,379,845 Commercial loans Commercial loans 8,294,819 246,355 8,541,174 (93,583) Foreign trade loans 1,149,923 91,032 1,240,955 (55,216) (491) (55,707) 1,185,248 187,246 2,153 189,399 (2,418) (2,504) (4,922) 184,477 Current account debtors Factoring transactions Commercial lease transactions (1) Other loans and accounts receivable SUBTOTAL 597,266 8,871 606,137 (9,535) (556) (10,091) 596,046 1,084,877 28,395 1,113,272 (3,528) (9,136) (12,664) 1,100,608 35,736 4,911 40,647 (621) (1,974) (2,595) 38,052 11,349,867 381,717 11,731,584 (164,901) (82,407) (247,308) 11,484,276 Mortgage loans Mortgage bonds 103,241 5,974 109,215 — (724) (724) 108,491 Transferable mortgage loans 148,243 2,963 151,206 — (527) (527) 150,679 3,897,642 40,124 3,937,766 — (14,829) (14,829) 3,922,937 Credits from ANAP 27 — 27 — — — 27 Residential lease transactions — — — — — — — Other residential real estate mortgage loans Other loans and accounts receivable SUBTOTAL 113 340 453 — — — 453 4,149,266 49,401 4,198,667 — (16,080) (16,080) 4,182,587 Consumer loans Consumer loans in installments 1,761,070 145,203 1,906,273 — (124,886) (124,886) 1,781,387 Current account debtors 235,122 9,944 245,066 — (6,950) (6,950) 238,116 Credit card debtors 654,976 25,010 679,986 — (31,996) (31,996) 647,990 — — — — — — — Consumer lease transactions Other loans and accounts receivable SUBTOTAL TOTAL 194 AnnualReport2012 183 6 189 — (215) (215) (26) 2,651,351 180,163 2,831,514 — (164,047) (164,047) 2,667,467 18,150,484 611,281 18,761,765 (164,901) (262,534) (427,435) 18,334,330 As of December 31, 2011 Assets before allowance Normal Portfolio MCh$ Impaired Portfolio MCh$ Allowances established Total MCh$ Individual Provisions MCh$ Group Provisions MCh$ Total MCh$ Net assets MCh$ Commercial loans Commercial loans 7,652,936 210,906 7,863,842 (82,266) (57,420) (139,686) 7,724,156 Foreign trade loans 1,442,460 66,687 1,509,147 (58,458) (504) (58,962) 1,450,185 Current account debtors 212,595 1,884 214,479 (2,178) (2,074) (4,252) 210,227 Factoring transactions 586,576 2,522 589,098 (7,828) (613) (8,441) 580,657 Commercial lease transactions (1) 973,013 23,553 996,566 (9,275) (7,105) (16,380) 980,186 27,430 4,177 31,607 (372) (1,905) (2,277) 29,330 10,895,010 309,729 11,204,739 (160,377) (69,621) (229,998) 10,974,741 123,797 10,580 134,377 — (871) (871) 133,506 Other loans and accounts receivable SUBTOTAL Mortgage loans Mortgage bonds Transferable mortgage loans 169,424 5,834 175,258 — (881) (881) 174,377 3,250,181 47,096 3,297,277 — (14,130) (14,130) 3,283,147 Credits from ANAP 54 — 54 — (21) (21) 33 Residential lease transactions — — — — — — — Other loans and accounts receivable 64 404 468 — (1) (1) 467 3,543,520 63,914 3,607,434 — (15,904) (15,904) 3,591,530 1,661,799 101,302 1,763,101 — (110,190) (110,190) 1,652,911 Other residential real estate mortgage loans SUBTOTAL Consumer loans Consumer loans in installments Current account debtors 223,871 9,101 232,972 — (5,806) (5,806) 227,166 Credit card debtors 553,574 15,716 569,290 — (22,570) (22,570) 546,720 Consumer lease transactions Other loans and accounts receivable SUBTOTAL TOTAL — — — — — — — 251 6 257 — (22) (22) 235 2,439,495 126,125 2,565,620 — (138,588) (138,588) 2,427,032 16,878,025 499,768 17,377,793 (160,377) (224,113) (384,490) 16,993,303 (1) In this item, the Bank finances its customers purchases of assets, including real estate and other personal property, through finance lease agreements. As of December 31, 2012, MCh$451,647 (MCh$395,600 in 2011) correspond to finance leases for real estate and MCh$661,625 (MCh$600,966 in 2011), correspond to finance leases for other assets. Consolidated Financial Statements 195 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) Allowances for loan losses: Movements in allowances for loan losses during the 2012 and 2011 periods are as follows: Allowances Balance as of January 1, 2011 Individual MCh$ Group MCh$ Total MCh$ 182,440 194,546 376,986 (7,548) (30,588) (38,136) — (2,923) (2,923) Charge-offs: Commercial loans Mortgage loans — (92,951) (92,951) TOTAL CHARGE-OFFS (7,548) (126,462) (134,010) Allowances established — 156,029 156,029 Consumer loans Allowances released (*) (14,515) — (14,515) BALANCE AS OF DECEMBER 31, 2011 160,377 224,113 384,490 Balance as of January 1, 2012 160,377 224,113 384,490 (9,144) (34,020) (43,164) — (4,253) (4,253) Charge-offs: Commercial loans Mortgage loans — (135,316) (135,316) TOTAL CHARGE-OFFS (9,144) (173,589) (182,733) Allowances established 13,668 212,010 225,678 Consumer loans Allowances released (*) BALANCE AS OF DECEMBER 31, 2012 — — — 164,901 262,534 427,435 (*) See note No. 12 (e) - Sale or transfer of credits from the loans to customers. In addition to these allowances for loan losses, the Bank also establishes country risk provisions to hedge foreign transactions as well as additional provisions agreed upon by the Board of Directors, which are presented within liabilities in “Provisions” (Note No. 24). Other Disclosures: 1. As of December 31, 2012 and 2011, the Bank and its subsidiaries accomplished buy and sell of loan portfolios. The effect in income is no more than 5% of net income before taxes, as detailed in Note No. 12 (e). 2. As of December 31, 2012 and 2011, the Bank and its subsidiaries derecognized 100% of its sold loan portfolio. 196 AnnualReport2012 (c) Finance lease contracts: The Bank’s scheduled cash flows to be received from finance leasing contracts have the following maturities: Total receivable 2012 2011 MCh$ MCh$ Unearned income 2012 2011 MCh$ MCh$ Net lease receivable (*) 2012 2011 MCh$ MCh$ Due within one year 394,284 338,406 (50,643) (42,362) 343,641 296,044 Due after 1 year but within 2 years 293,525 257,239 (36,615) (31,668) 256,910 225,571 Due after 2 years but within 3 years 189,111 176,620 (23,440) (20,847) 165,671 155,773 Due after 3 years but within 4 years 112,381 110,512 (15,766) (14,280) 96,615 96,232 Due after 4 years but within 5 years 75,451 68,860 (11,339) (10,089) 64,112 58,771 206,025 183,112 1,134,749 (25,733) (22,831) (142,077) 180,292 160,281 992,672 Due after 5 years TOTAL 1,270,777 (163,536) 1,107,241 (*) The net balance receivable does not include past-due portfolio totaling MCh$6,031 as of December 31, 2012 (MCh$3,894 in 2011). The bank has entered into commercial leases of real estate, industrial machinery, vehicles and computer equipment. These leases have an average useful life of between 3 and 8 years. (d) Loans by industry sector: The following table details the Bank’s loan portfolio (before allowances for loans losses) as of December 31, 2012 and 2011 by the customer’s industry sector: Location Chile Abroad 2012 2011 MCh$ MCh$ Total 2012 MCh$ 2011 MCh$ 2012 MCh$ 2011 MCh$ Commerce 2,286,500 2,275,780 28,173 2,804 2,314,673 12.34 2,278,584 13.11 Transportation 1,470,358 1,407,358 — — 1,470,358 7.84 1,407,358 8.10 Manufacturing 1,380,994 1,488,819 — — 1,380,994 7.36 1,488,819 8.57 Services 1,310,573 1,084,380 — — 1,310,573 6.99 1,084,380 6.24 Construction 1,252,546 944,842 — — 1,252,546 6.68 944,842 5.44 Financial Services % % Commercial loans: 1,148,094 1,248,729 706,477 772,782 1,854,571 9.88 2,021,511 11.63 Agriculture and livestock 901,300 912,919 — — 901,300 4.80 912,919 5.25 Electricity, gas and water 328,763 315,338 — — 328,763 1.75 315,338 1.81 Mining 305,386 333,776 67,051 65,976 372,437 1.99 399,752 2.30 Fishing 233,893 271,901 — — 233,893 1.25 271,901 1.56 Other 226,999 26,033 84,477 53,302 311,476 1.65 79,335 0.47 10,845,406 10,309,875 886,178 SUBTOTAL Residential mortgage loans Consumer loans TOTAL 4,198,667 3,607,434 — 2,831,514 2,565,620 — 17,875,587 16,482,929 886,178 894,864 11,731,584 — 4,198,667 — 2,831,514 894,864 18,761,765 62.53 11,204,739 64.48 22.38 3,607,434 20.76 15.09 2,565,620 14.76 100.00 17,377,793 100.00 Consolidated Financial Statements 197 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (e) Sale or transfer of credits from the loans to customers: During 2012 and 2011 Banco de Chile has carried out transactions of sale or transfer of the loan portfolio according to the following: As of December 31, 2012 Carrying amount MCh$ Allowances released (*) MCh$ Sale price MCh$ Effect on income (loss) gain MCh$ 118,347 (199) 118,347 199 Carrying amount MCh$ Allowances released (*) MCh$ Sale price MCh$ Effect on income (loss) gain MCh$ 51,890 (44,012) As of December 31, 2011 9,373 1,495 (*) This result is included in the release of provisions disclosure in Note No. 32. During 2012 the Bank carried out a securitization of assets (loans and accounts receivable), which is disclosed in Note 42 Assests Securitization. 198 AnnualReport2012 13. Investment Securities: As of December 31, 2012 and 2011, investment securities classified as available-for-sale and held-to-maturity are detailed as follows: 2012 Available for sale MCh$ 2011 Held to maturity MCh$ Available for sale MCh$ Total MCh$ Held to maturity MCh$ Total MCh$ Instruments issued by the Chilean Government and Central Bank of Chile: Bonds issued by the Chilean Government and Central Bank Promissory notes issued by the Chilean Government and Central Bank Other instruments 110,569 — 110,569 158,865 — 158,865 969 — 969 58,564 — 58,564 140,246 — 140,246 194,965 — 194,965 — — — — — — 85,688 — 85,688 87,966 — 87,966 Other instruments issued in Chile Deposit promissory notes from domestic banks Mortgage bonds from domestic banks Bonds from domestic banks 116,100 — 116,100 124,203 — 124,203 Deposits from domestic banks 560,390 — 560,390 521,881 — 521,881 32,281 — 32,281 48,790 — 48,790 Bonds from other Chilean companies Promissory notes issued by other Chilean companies Other instruments — — — 5,659 — 5,659 129,693 — 129,693 139,602 — 139,602 Instruments issued abroad Instruments from foreign governments or central banks Other instruments TOTAL — — — — — — 88,504 — 88,504 128,403 — 128,403 1,264,440 — 1,264,440 1,468,898 — 1,468,898 Instruments issued by the Chilean Government and Central Bank include instruments with agreements to repurchase sold to clients and financial institutions, for December 31, 2012 there are no movements for this item (MCh$26,288 in 2011). The agreements to repurchase have an average maturity of 12 days in 2011. Under classification of Other instruments issued in Chile are included securities sold under repurchase agreements to customers and financial institutions for an amount of MCh$5,266 million (no balance for this item in 2011). In instruments issued abroad are include mainly bonds banks and shares. Consolidated Financial Statements 199 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 As of December 31, 2012, the portfolio of financial assets available-for-sale includes a net unrealized loss of MCh$17,995 (net unrealized loss of MCh$1,644 in 2011), recorded in other comprehensive income within equity. As of December 31, 2012 there is impairment of financial assets available-for-sale for an amount of Ch$551 millions, in 2011there is no evidence of impairment. Realized profits and losses are calculated as the proceeds from sales less the cost (specific identification method) of the investments identified as for sale. In addition, any unrealized profit or loss previously recorded in equity for these investments is reversed when recorded in the income statements. Gross profits and losses realized on the sale of available-for-sale investments as of December 31, 2012 and 2011 are shown in Note 30 “Net Financial Operating Income”. Gross profits and losses realized and unrealized on the sale of available for sale investments for the years-ended December 31, 2012 and 2011 are as follows: Unrealized (losses)/profits during the period 2012 MCh$ 2011 MCh$ 26,259 (10,416) Realized losses/(profits) (reclassified) (1,749) 932 TOTAL UNREALIZED DURING THE PERIOD 24,510 (9,484) 200 AnnualReport2012 14. (a) Investments in Other Companies: This item includes investments in other companies for an amount of MCh$13,933 (MCh$15,418 in 2011), which is detailed as follows: Company Shareholder Ownership Interest Equity Investment 2012 % 2011 % 2012 MCh$ 2011 MCh$ Book Value 2012 2011 MCh$ MCh$ Income (Loss) 2012 2011 MCh$ MCh$ 6,756 7,397 3,378 3,698 (321) 611 Investments valued at equity method: Servipag Ltda. Banco de Chile 50.00 50.00 Soc. Operadora de Tarjetas de Crédito Nexus S.A. Banco de Chile 25.81 25.81 6,412 6,412 1,655 1,655 556 300 Transbank S.A. Banco de Chile 26.16 26.16 6,306 6,274 1,649 1,641 322 313 Redbanc S.A. Banco de Chile 38.13 38.13 4,109 5,480 1,567 2,090 (376) 492 Administrador Financiero del Transantiago S.A. Banco de Chile 20.00 20.00 6,076 8,714 1,215 1,743 (527) 967 Soc. Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. Banco de Chile 15.00 14.17 4,337 3,795 651 538 112 102 Artikos Chile S.A. Banco de Chile 50.00 50.00 1,129 1,984 564 992 (428) 72 Centro de Compensación Automatizado S.A. Banco de Chile 33.33 33.33 1,609 1,252 536 417 115 105 Sociedad Interbancaria de Depósitos de Valores S.A. Banco de Chile 26.81 26.81 SUBTOTAL 1,711 1,573 459 422 79 92 38,445 42,881 11,674 13,196 (468) 3,054 Investments valued at cost (1): 1,646 1,646 239 246 Banco Latinoamericano de Comercio Exterior S.A. (Bladex) Bolsa de Comercio de Santiago S.A. 309 309 — — Bolsa Electrónica de Chile S.A. 257 257 — — 8 8 — — 39 2 — — 2,259 2,222 239 246 13,933 15,418 (229) 3,300 Cámara de Compensación Sociedad de Telecomunicaciones Financieras Interbancarias Mundiales (Swift) SUBTOTAL TOTAL (*) On September 13, 2012 it was made a purchase of 80 shares for an amount of Ch$34 million of the company Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. (**) On August 27, 2012 18 shares it was purchase 18 shares of Investment Swift which totaled Ch$37 million (1) Income from investments at cost, revenues are recognized on a cash basis (dividends). Consolidated Financial Statements 201 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) The financial information of companies valued using the equity method is summarized as follows: 2012 MCh$ 2011 MCh$ 421,013 479,842 71,580 62,753 TOTAL ASSETS 492,593 542,595 Current liabilities Share of the associate’s statement of financial position Current assets Non-current assets 441,916 493,287 Non-current liabilities 12,232 6,427 TOTAL LIABILITIES 454,148 499,714 Equity TOTAL LIABILITIES AND EQUITY 38,445 42,881 492,593 542,595 1,339 21,043 1 10,901 11,674 13,196 Share of the associate’s revenue and profit Revenue Profit Carrying amount of the investment (c) The reconciliation between opening and ending balance of investments in other companies that are not consolidated in 2012 and 2011 is detailed as follows: 2011 MCh$ 15,418 13,294 Sale of investments — — Acquisition of investments 71 — Participation in income with significant influence (468) 3,054 Dividends receivable (653) (508) Dividends received (943) (761) Beginning book value Payment of reserved dividends TOTAL (d) 2012 MCh$ As of December 31, 2012 and 2011 no impairment has incurred in these investments. 202 AnnualReport2012 508 339 13,933 15,418 15. Intangible Assets: (a) As of December 31, 2012 and 2011, Intangible assets are detailed as follows: Years Useful Life 2012 2011 Remaining amortization 2012 2011 Gross balance 2012 2011 MCh$ MCh$ Accumulated Amortization and Impairment 2012 2011 MCh$ MCh$ Net balance 2012 2011 MCh$ MCh$ Type of intangible asset: Goodwill: Investments in other companies 7 7 2 3 4,138 Software or computer programs 6 6 3 4 82,736 Intangible assets arising from business combinations 7 7 2 3 1,740 — — — — 4,138 (3,000) (2,379) 1,138 1,759 74,525 (50,641) (41,538) 32,095 32,987 479 740 Other Intangible Assets: Other intangible assets TOTAL 612 89,226 1,740 (1,261) (1,000) 102 (34) (71) 578 31 80,505 (54,936) (44,988) 34,290 35,517 Consolidated Financial Statements 203 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) El movimiento del rubro intangibles durante los ejercicios 2012 y 2011, es el siguiente: Investments in other companies MCh$ Software or computer programs MCh$ Intangible assets arising from business combinations MCh$ Other intangible assets MCh$ Total MCh$ Gross Balance Balance as of January 1, 2011 4,138 65,664 1,740 82 71,624 Acquisitions — 9,577 — 20 9,597 Disposals — (716) — — (716) 4,138 74,525 1,740 102 80,505 Acquisitions — 8,544 — 572 9,116 Disposals — (333) — (62) (395) 4,138 82,736 1,740 612 89,226 (1,759) (32,688) (740) (64) (35,251) (620) (9,281) (260) (7) (10,168) Impairment loss (*) — (296) — — (296) Disposal — 156 — — 156 BALANCE AS OF DECEMBER 31, 2011 BALANCE AS OF DECEMBER 31, 2012 Accumulated Amortization and Impairment Balance as of January 1, 2011 Amortization for the year (*) — 571 — — 571 (2,379) (41,538) (1,000) (71) (44,988) (621) (9,436) (261) (25) (10,343) Other BALANCE AS OF DECEMBER 31, 2011 Amortization for the year (*) Impairment loss (*) — — — — — Disposals — 333 — 62 395 — — — — — (3,000) (50,641) (1,261) (34) (54,936) 1,138 32,095 479 578 34,290 Other BALANCE AS OF DECEMBER 31, 2012 NET BALANCE AS OF DECEMBER 31, 2012 (*) See note No. 35 “Depreciation, amortization and impairment”. (c) As of December 31, 2012 and 2011, the Bank has made the following commitments to purchase intangible assets, which have not been capitalized: Detail Amount of Commitment 2012 2011 MCh$ MCh$ Software and licenses 6,681 204 AnnualReport2012 6,639 16. Activo Fijo: (a) As of December 31, 2012 and 2011, this account and its movements are detailed as follows: Terrenos y Construcciones MCh$ Equipos MCh$ Others MCh$ Total MCh$ 173,732 120,913 128,509 423,154 Cost Balance as of January 1, 2011 Additions 3,481 8,797 9,795 22,073 Disposals/write-downs (947) (3,893) (847) (5,687) Transfers — 5 (5) — Reclassifications — — — — TOTAL 176,266 125,822 137,452 439,540 Accumulated depreciation (33,503) (103,015) (94,799) (231,317) — (3) (332) (335) BALANCE AS OF DECEMBER 31, 2011 142,763 22,804 42,321 207,888 Balance as of January 1, 2012 176,266 125,819 137,120 439,205 337 7,750 9,894 17,981 Impairment loss (*) Additions Disposals/write-downs (451) (1,512) (2,232) (4,195) Transfers — — — — Reclassifications — — 19 19 TOTAL 176,152 132,057 144,801 453,010 Accumulated depreciation (35,972) (109,932) (101,722) (247,626) — (31) (164) (195) 140,180 22,094 42,915 205,189 Balance as of January 1, 2011 (31,136) (98,466) (87,039) (216,641) Depreciation charges in the period (*) (**) (2,960) (8,439) (8,763) (20,162) Impairment loss (*) (***) BALANCE AS OF DECEMBER 31, 2012 Accumulated Depreciation Sales and disposals in the period BALANCE AS OF DECEMBER 31, 2012 Reclassifications Depreciation charges in the period (*) (**) Sales and disposals in the period BALANCE AS OF DECEMBER 31, 2012 593 3,890 1,003 5,486 (33,503) (103,015) (94,799) (231,317) — — (19) (19) (2,920) (8,429) (8,884) (20,233) 451 1,512 1,980 3,943 (35,972) (109,932) (101,722) (247,626) (*) See Note No. 35 “Depreciation, Amortization and Impairment”. (**) This amount not includes depreciation charges in the period for investments properties. This amount is include in item “Other Assets” for MCh$381 (MCh$381 in 2011) (***) Not include provision related to write-offs of property and equipment for an amount of Ch$153 millions Consolidated Financial Statements 205 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) Movements in intangible assets during the 2012 and 2011 periods are as follows: 2012 Expense for the year Lease Agreements Over 1 month and up to 3 months MCh$ MCh$ Up to 1 month MCh$ 28,036 2,274 4,561 MCh$ Up to 1 month MCh$ Over 1 month and up to 3 months MCh$ 25.924 2.054 Over 3 months and Over 1 year up to 12 and up to 3 months years MCh$ MCh$ 19,219 37,094 Over 3 years and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ 27,066 49,523 139,737 Over 3 years and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ 25.505 54.931 135.614 2011 Expense for the year Lease Agreements 4.017 Over 3 months and Over 1 year up to 12 and up to 3 months years MCh$ MCh$ 16.964 32.143 As these lease agreements are operating leases under IAS 17 the leased assets are not presented in the Bank’s statement of financial position. The Bank has entered into commercial leases of real estate. These leases have an average life of 10 years. There are no restrictions placed upon the lessee by entering into the lease. (c) As of December 31, 2012 and 2011, the Bank does not have any finance lease agreements as lessee and, therefore, there are no property and equipment balances to be reported from such transactions as of December 31, 2012 and 2011. 17. Current and Deferred Taxes: (a) Current Taxes: As of each year end, the Bank and its subsidiaries have established a First Category Income Tax Provision determined in accordance with current tax laws. This provision is presented net of recoverable taxes, detailed as follows: Income taxes Tax on non-deductible expenses (35%) Less: Monthly prepaid taxes (PPM) Credit for training expenses Other TOTAL CURRENT TAXES Tax rate 206 AnnualReport2012 2012 MCh$ 2011 MCh$ 61,876 3,860 64,590 1,701 (41,960) (1,545) 965 23,196 20% (62,225) (742) (229) 3,095 20% 2012 MCh$ Current tax assets (b) 2011 MCh$ 2,684 1,407 Current tax liabilities (25,880) (4,502) TOTAL CURRENT TAXES (23,196) (3,095) 2012 MCh$ 2011 MCh$ 61,876 64,590 Income Tax: The Bank’s tax expense recorded for the years ended December 31, 2012 and 2011 is detailed as follows: Income tax expense: Current year taxes Tax from previous periods (1,147) (1,203) SUBTOTAL 60,729 63,387 Credit (charge) for deferred taxes: Origin and reversal of temporary differences 2,673 (8,479) Effect of changes in tax rate (14,206) 2,234 SUBTOTAL (11,533) (6,245) 3,860 1,701 894 745 53,950 59,588 Non deducible expenses (Art. 21 “Ley de la Renta”) Other NET CHARGE TO INCOME FOR INCOME TAXES (c) Reconciliation of effective tax rate: The following is reconciliation between income tax rate and effective rate applied to determine the Bank’s income tax expense as of December 31, 2012 and 2011: 2012 Tax rate % 2011 MCh$ Tax rate % MCh$ Income tax calculated on net income before tax 20.00 103,960 20.00 97,679 Additions or deductions (7.13) (37,056) (7.56) (36,929) Non-deductible expenses 0.74 3,860 0.35 1,701 Tax from previous year (0.22) (1,147) (0.25) (1,203) Effect of changes in tax rate (*) (2.73) (14,206) 0.46 2,234 Lease deferred tax adjustment 0.57 2,942 — — Others (0.85) (4,403) (0.80) (3,894) EFFECTIVE RATE AND INCOME TAX EXPENSE 10.38 53,950 12.20 59,588 Consolidated Financial Statements 207 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The effective rate for income tax for 2012 is 10.38% (12.20% in 2011). (*) According to the Law No. 20,630 issued on September 27, 2011 is permanently changed the tax rates of the first category to 20.00% (d) Effect of deferred taxes on income and equity: During the year 2012, the Bank has recorded the effects of deferred taxes in accordance with Note No. 2 (r). The effects of deferred taxes on assets, liabilities and income accounts are detailed as follows: Reconocido en Balances as of December 31, 2011 MCh$ Unrecognized temporary differences MCh$ Income MCh$ Equity MCh$ 76,910 — 22,203 — Balances as of December 31, 2012 MCh$ Debit Differences: Allowances for loan losses Obligations with agreements to repurchase 99,113 1,850 — (1,736) — 114 Leasing equipment 12,320 — (16,038) — (3,718) Personnel provisions 4,930 — 1,162 — 6,092 Staff vacation 3,637 — 421 — 4,058 Accrued interests and indexation adjustments from past due loans 1,573 — 550 — 2,123 Staff severance indemnities provisions Other adjustments TOTAL DEBIT DIFFERENCES 1,462 — 665 — 2,127 13,600 119 3,515 — 17,234 116,282 119 10,742 — 127,143 Credit Differences: Investments with agreements to repurchase 2,111 — (1,986) — 125 11,609 — 1,318 — 12,927 (373) — — 4,872 4,499 (90) — — 348 258 Transitory assets 1,525 — 924 — 2,449 Derivative instrument adjustment 2,057 — (1,679) — 378 Other adjustments 6,374 (5) 632 (7) 6,994 Depreciation and price-level restatement of property and equipment Adjustment for valuation of financial assets available-for-sale Adjustment for cash flow hedge TOTAL CREDIT DIFFERENCES 23,213 (5) (791) 5,213 27,630 DEFERRED TAX ASSETS (LIABILITIES), NET 93,069 124 11,533 (5,213) 99,513 208 AnnualReport2012 (e) For the purpose of complying with the Circular No. 47 issued by the Chilean Internal Revenue Service (SII) and No. 3,478 issued by the Superintendency of Banks, dated August 18, 2009 the movements and effects generated by the application of Article 31, No. 4 of the Income Tax Law are detailed as follows: As the circular requires, the information corresponds only to the Bank’s credit operations and does not consider operations of subsidiary entities that are consolidated in these consolidated financial statements. (e.1) Loans to customers as of December 31, 2012 Loans and advance to banks Commercial loans Consumer loans Residential mortgage loans TOTAL Past-due loans with guarantees MCh$ Tax value assets Past-due loans without guarantees MCh$ Total Past-due loans MCh$ Book value assets (*) MCh$ Tax value assets MCh$ 1,343,322 1,344,281 — — — 10,080,225 10,536,629 16,168 33,163 49,331 2,667,467 2,977,357 312 17,131 17,443 4,182,587 4,196,560 3,189 151 3,340 18,273,601 19,054,827 19,669 50,445 70,114 (*) In accordance with the mentioned Circular and instructions from the SII, the value of financial statement assets, are presented on an individual basis net of allowance for loan losses and do not include lease and factoring operations. (e.2) Provisions on past-due loans Saldo al 01.01.2012 MCh$ Castigos contra provisiones MCh$ Commercial loans 30,947 (22,135) 44,898 (20,547) 33,163 Consumer loans 11,652 (133,561) 156,933 (17,893) 17,131 390 (3,151) 3,310 (398) 151 42,989 (158,847) 205,141 (38,838) 50,445 Residential mortgage loans TOTAL Provisiones constituidas MCh$ Provisiones liberadas MCh$ Saldo al 31.12.2012 MCh$ (e.3) Charge-offs and recoveries MCh$ Charge-offs Art. 31 No. 4 second subparagraph Condoning resulting in provisions released Recovery or renegotiation of written-off loans 29,174 27 39,303 (e.4) Application of Art. 31 No. 4 first & third subsections. MCh$ Charge-offs in accordance with first subsection — Condoning in accordance with third subsection 834 Consolidated Financial Statements 209 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 18. Other Assets: (a) Item detail: As of December 31, 2012 and 2011, other assets are detailed as follows: 2012 MCh$ Assets held for leasing (*) 2011 MCh$ 74,986 74,185 81 1,863 Assets received or awarded as payment Assets received in lieu of payment Assets awarded in judicial sale 2,475 2,745 (40) (1,118) 2,516 3,490 Documents intermediated (***) 89,800 77,613 Guaranteed cash deposits 25,984 35,051 Other accounts and notes receivable 20,001 9,851 Investment properties (Note N° 2 letter t) 16,698 17,079 9,292 9,557 Pending transactions 8,676 1,340 Commissions receivable 6,392 4,193 Recoverable income taxes 6,280 5,373 Prepaid expenses 4,156 5,445 Rental guarantees 1,386 1,344 Provision for assets received in lieu of payment (**) SUBTOTAL Other Assets VAT receivable Recovered leased assets for sale 777 203 Materials and supplies 610 654 Accounts receivable for sale of assets received in lieu of payment 423 530 Transaction in progress 114 3,532 Other 28,787 14,144 SUBTOTAL 219,376 185,909 TOTAL 296,878 263,584 (*) These correspond to property and equipment to be given under a finance lease. (**) Assets received in lieu of payment are assets received as payment of customers’ past-due debts. The assets acquired must at no time exceed, in the aggregate, 20% of the Bank’s effective equity. These assets represent 0.0032% (0.0737% in 2011) of the Bank’s effective equity. The assets awarded at judicial sale are assets that have been acquired as payment of debts previously owed towards the Bank. The assets awarded at judicial sales are not subject to the aforementioned requirement. These properties are assets available for sale. For most assets, the sale is expected to be completed within one year from the date on which the asset was received or acquired. If the asset in question is not sold within the year, it must be written off. The provision for assets received in lieu of payment is recorded as indicated in the Compendium of Accounting Standards, Chapter B-5 No. 3, which indicate to recognize a provision for the difference between the initial value plus any additions and its realizable value when the former is greater (***) This item mainly includes simultaneous operations carried out by the subsidiary Banchile Corredores de Bolsa S.A. 210 AnnualReport2012 (b) Movements in the provision for assets received in lieu of payment during the 2012 and 2011 periods are detailed as follows: MCh$ Balance as of January 1, 2011 Provisions used Provisions established Provisions released BALANCE AS OF DECEMBER 31, 2011 Provisions used Provisions established 15 (21) 1,138 (14) 1,118 (1,178) 100 Provisions released — BALANCE AS OF DECEMBER 31, 2012 40 19. Current accounts and Other Demand Deposits: As of December 31, 2012 and 2011, current accounts and other demand deposits are detailed as follows: Cuentas corrientes Otras obligaciones a la vista Otros depósitos y cuentas a la vista TOTAL 2012 MCh$ 2011 MCh$ 4,495,134 3,968,504 599,320 616,395 376,517 310,527 5,470,971 4,895,426 2012 MCh$ 2011 MCh$ 9,370,063 9,081,335 179,465 177,900 63,422 23,089 9,612,950 9,282,324 20. Savings accounts and Time Deposits: As of December 31, 2012 and 2011, savings accounts and time deposits are detailed as follows: Time deposits Term savings accounts Other term balances payable TOTAL Consolidated Financial Statements 211 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 21. Borrowings from Financial Institutions: (a) As of December 31, 2012 and 2011, borrowings from financial institutions are detailed as follows: 2012 MCh$ Domestic banks Foreign banks Foreign trade financing Bank of America N.T. & S.A. Commerzbank A.G. Wells Fargo Bank Standard Chartered Bank Citibank N.A. The Bank of New York Mellon Toronto Dominion Bank JP Morgan Chase Bank Mercantil Commercebank N.A. Sumitomo Banking Zuercher Kantonalbank Deutsche Bank AG Bank of China Banco de Sabadell Bank of Montreal Banca Nazionale del Lavoro Royal Bank of Scotland ING Bank Branch Banking and Trust Company Bank of Nova Banco Espiritu Santo Others Domestic banks Wells Fargo Bank Standard Chartered Bank China Development Bank Citibank N.A. Otros SUBTOTAL Chilean Central Bank TOTAL (b) Borrowings from domestic banks As of December 31, 2012 and 2011, the bank has not borrowings from domestic banks. 212 AnnualReport2012 2011 MCh$ — — 189,501 182,926 131,763 117,218 107,249 57,161 38,402 24,003 19,184 16,828 14,401 12,003 828 337 — — — — — — — 22 169,482 156,138 197,067 124,412 193,049 36,412 67,682 122,699 — 36,456 41,038 — 1,206 — 125,053 78,198 64,584 39,108 10,413 3,119 2,605 74 96,370 36,084 35,996 27,571 816 1,108,663 104,175 39,591 52,032 1,010 2,481 1,668,084 18 22,855 1,108,681 1,690,939 (c) Borrowings from foreign banks These obligations’ maturities are as follows: 2012 MCh$ Up to 1 month 181,954 115,696 Over 1 month and up to 3 months 153,702 200,786 Over 3 months and up to 12 months 631,051 1,079,317 Over 1 year and up to 3 years 141,956 220,368 Over 3 years and up to 5 years — 51,917 Over 5 years — — 1,108,663 1,668,084 TOTAL (d) 2011 MCh$ Chilean Central Bank Debts to the Central Bank of Chile include credit lines for the renegotiation of loans and other Central Bank borrowings. The outstanding amounts owed to the Central Bank of Chile under these credit lines are as follows: 2012 MCh$ 2011 MCh$ Borrowings and other obligations — 22,793 Credit lines for the renegotiation of loans 18 62 TOTAL 18 22,855 22. Debt Issued: As of December 31, 2012 and 2011, debt issued is detailed as follows: 2012 MCh$ Mortgage bonds Bonds Subordinated bonds TOTAL 2011 MCh$ 115,196 152,098 2,412,233 1,488,369 746,504 747,874 3,273,933 2,388,341 Consolidated Financial Statements 213 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 During the period ended as of December 31, 2012, Banco de Chile issued bonds by an amount of MCh$1,233,985, of which corresponds to Unsubordinated bonds and Subordinated bonds by an amount of MCh$1,207,808 and MCh$26,177 respectively, according to the following details: Bonds Series BCHIUO0911 BCHIUD0510 BCHIUI0611 BCHIUI0611 BCHIUI0611 BCHIUP1211 BCHIUI0611 BCHIUQ1011 BCHIUQ1011 BCHIUQ1011 BCHIUS0212 BCHIUS0212 BCHIUT0112 BCHIUR1011 BCHIUR1011 BCHIUR1011 BCHIUR1011 BCHIUR1011 BCHIUJ0811 BCHIUJ0811 BCHIUV1211 BCHIUJ0811 BCHIUJ0811 BCHIAC1011 BONO HKD (*) BONO HKD (*) BONO PEN (**) SUBTOTAL AS OF DECEMBER 31, 2012 Short-term as of Bonds (***) TOTAL AS OF DECEMBER 31, 2012 MCh$ 89,896 14,109 1,338 3,352 1,116 88,345 2,236 27,343 48,568 12,449 46,428 20,552 66,850 33,295 4,450 13,469 1,799 5,284 1,334 33,456 67,842 1,566 2,241 11,118 24,487 54,374 14,083 691,380 516,428 1,207,808 Term 10 years 6 years 7 years 7 years 7 years 10 years 7 years 11 years 11 years 11 years 11 years 11 years 12 years 12 years 12 years 12 years 12 years 12 years 8 years 8 years 13 years 8 years 8 years 15 years 15 years 15 years 5 years Interest rate 3.40 2.20 3.20 3.20 3.20 3.40 3.20 3.40 3.40 3.40 3.40 3.40 3.40 3.40 3.40 3.40 3.40 3.40 3.20 3.20 3.50 3.20 3.20 3.50 4.00 4.00 4.04 Currency UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF HKD HKD PEN Issue date 02/15/2012 02/16/2012 03/05/2012 03/07/2012 03/23/2012 04/04/2012 04/17/2012 05/08/2012 05/11/2012 06/04/2012 06/04/2012 06/07/2012 06/12/2012 06/20/2012 07/30/2012 09/14/2012 09/24/2012 09/25/2012 05/10/2012 10/10/2012 10/10/2012 10/19/2012 10/22/2012 10/22/2012 09/05/2012 11/07/2012 10/30/2012 Maturity date 02/15/2022 02/16/2018 03/05/2019 03/07/2019 03/23/2019 04/04/2022 04/17/2019 05/08/2023 05/11/2023 06/04/2023 06/04/2023 06/07/2023 06/12/2024 06/20/2024 07/30/2024 09/14/2024 09/24/2024 09/25/2024 05/10/2020 10/10/2020 10/10/2025 10/19/2020 10/22/2020 10/22/2027 09/05/2027 09/09/2027 10/30/2017 (*) On August 9, 2012 it approved in Board Meeting No. 2,759 a bond issue program in Hong Kong, according the Regulation – S of SEC (Securities and Exchange Commission) for an amount of US$60,000,000 for to be placed in international market, of which on September 5, 2012 it were issued and placed an amount of 400,000,000 Hong Kong dollars. Later, on October 25, 2012 it was approved in Board Meeting No. 2,764 a complementary program of issue of bonds according to Regulation – S of SEC (Securities and Exchange Commission) for an amount of US$130.000.000 for to be placed in international market, of which on November 7, 2012 it were issued and placed an amount of 875,000,000 Hong Kong dollars. (**) On October 11, 2012 it was approved in Board Meeting No. 2,763 a program issue of bonds according to Regulation – S of SEC (Securities and Exchange Commission) for an amount not greater than US$100,000,000, of which the October 30, 2012 were issued and placed PEN 75,000,000 or US$28,000,000. (***) On May 4, 2012 Banco de Chile gradually began issuing bonds denominated “Short-term Bonds (Commercial Papers), which have maturity, date of January 15, 2013. The total issuance was US$1,077,080. 214 AnnualReport2012 Subordinated Bonds Term Interest rate Currency Issue date Maturity date UCHI-G1111 Series MCh$ 13,191 25 years 3.75 UF 07/30/2012 07/30/2037 UCHI-G1111 1,099 25 years 3.75 UF 07/31/2012 07/31/2037 UCHI-G1111 1,782 25 years 3.75 UF 08/31/2012 08/31/2037 UCHI-G1111 10,105 25 years 3.75 UF 12/28/2012 12/28/2037 TOTAL 26,177 During the year ended December 31, 2011, Banco de Chile issued bonds by an amount of Ch$749,586 million, of which correspond to unsubordinated bond. Bonds Series MCh$ Term Interest rate Currency Issue date Maturity date BCHIUE0510 82,639 6 years 2.20 UF 05/20/2011 05/20/2017 BCHIUG0610 81,802 11 years 2.70 UF 05/27/2011 05/27/2022 BCHIUC0510 37,866 5 years 2.20 UF 07/07/2011 07/07/2016 BCHIUF0610 36,608 10 years 2.70 UF 07/07/2011 07/07/2021 BCHIUI0611 42,944 7 years 3.20 UF 07/12/2011 07/12/2018 BCHIUI0611 34,096 7 years 3.20 UF 07/20/2011 07/20/2018 BCHIUK0611 52,866 11 years 3.50 UF 07/28/2011 07/28/2022 BCHIUD0510 46,014 6 years 2.20 UF 07/28/2011 07/28/2017 BCHIUK0611 33,451 11 years 3.50 UF 07/29/2011 07/29/2022 BCHIUI0611 432 7 years 3.20 UF 08/02/2011 08/02/2018 BCHIUI0611 756 7 years 3.20 UF 08/03/2011 08/03/2018 BCHIUJ0811 48,045 8 years 3.20 UF 09/12/2011 09/12/2019 BCHI-B1208 84,912 7 years 2.20 UF 09/12/2011 09/12/2018 BCHIUD0510 12,790 6 years 2.20 UF 09/22/2011 09/22/2017 BCHIUH0611 21,668 6 years 3.00 UF 09/29/2011 09/29/2017 BCHIUI0611 65,014 7 years 3.20 UF 09/30/2011 09/30/2018 BCHIUD0510 10,675 6 years 2.20 UF 09/30/2011 09/30/2017 BCHIUD0510 1,068 6 years 2.20 UF 10/13/2011 10/13/2017 55,940 3 years 5.41 MXN 12/08/2011 12/04/2014 BNCHIL (*) TOTAL 749,586 (*) At the Ordinary Meeting No. BCH 2,738 held on August 11, 2011, the minutes of which were recorded in a public deed drawn up at the office of the Public Notary Mr. René Benavente Cash on August 19, 2011, authorized a program to place certificates in Mexico in an amount of MXN10,000,000,000, of which an amount of MXN1,500,000,000 were issued and placed on December 8, 2011. The Bank has not had breaches of capital and interest with respect to its debts instruments during year 2012 and 2011. Consolidated Financial Statements 215 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 23. Other Financial Obligations: As of December 31, 2012 and 2011, other financial obligations are detailed as follows: 2012 MCh$ 2011 MCh$ Other Chilean obligations 106,537 123,051 Public sector obligations 55,586 61,734 Other foreign obligations — — 162,123 184,785 2012 MCh$ 2011 MCh$ 300,759 259,501 Provisions for Personnel benefits and payroll expenses 64,546 60,634 Provisions for contingent loan risks 36,585 35,334 97,757 95,486 3,107 4,281 TOTAL 24. Provisions: (a) As of December 31, 2012 and 2011, provisions and accrued expenses are detailed as follows: Provision for minimum dividends Provisions for contingencies: Additional loan provisions (*) Other provisions for contingencies Country risk provisions TOTAL (*) In 2012, the Bank established an amount of Ch$2,271 million (Ch$24,052 million in 2011) for countercyclical provisions. 216 AnnualReport2012 2,083 2,702 504,837 457,938 (b) The following table details the movements in provisions and accrued expenses during the 2012 and 2011 periods: Balances as of January 1, 2011 Provisions established Provisions used Provisions released Minimum dividends MCh$ Contingent loan Risks MCh$ Additional loan provisions MCh$ 242,503 55,434 30,115 71,434 4,617 259,501 47,933 5,368 24,052 2,751 339,605 (242,503) (41,893) — — (215) (284,611) 404,103 — (840) (149) — (170) (1,159) 259,501 60,634 35,334 95,486 6,983 457,938 Balances as of January 1, 2012 259,501 60,634 35,334 95,486 6,983 457,938 Provisions used Provisions released BALANCES AS OF DECEMBER 31, 2012 300,759 50,799 1,251 2,271 228 355,308 (259,501) (46,813) — — (223) (306,537) — (74) — — (1,798) (1,872) 300,759 64,546 36,585 97,757 5,190 504,837 Provisions for personnel benefits and payroll: 2012 MCh$ 2011 MCh$ Short-term personnel benefits 29,649 28,827 Vacation accrual 20,842 20,361 Pension plan- defined benefit plan 10,633 8,511 3,422 2,935 64,546 60,634 2012 MCh$ 2011 MCh$ 8,511 7,981 Other benefits TOTAL (d) Total MCh$ BALANCES AS OF DECEMBER 31, 2011 Provisions established (c) Country risk provisions and other contingencies MCh$ Personnel benefits and payroll MCh$ Pension plan – Defined benefit plan: (i) Movement in the defined benefit obligations are as follow: Opening defined benefit obligation, Increase in provisions Benefit paid Prepayments Effect of change in factors CLOSING DEFINED BENEFIT OBLIGATION 808 886 (864) (282) (22) (20) 2,200 (54) 10,633 8,511 Consolidated Financial Statements 217 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (ii) Net benefits expenses: 2012 MCh$ 2011 MCh$ Current service cost 808 886 Interest cost of benefits obligations 468 482 Actuarial gains (losses) 1,732 (536) NET BENEFIT EXPENSES 3,008 832 December 31, 2012 % December 31, 2011 % (iii) Assumptions used to determine pension obligations: The principal assumptions used in determining pension obligations for the Bank’s plan are shown below: Discount rate 5.50 6.04 Annual salary increase 5.08 2.00 99.99 93.00 Payment probability The most recent actuarial valuation of the present value of the benefit plan obligation was carried out at December 31, 2012. (e) Movements in provisions for incentive plans: Balances as of January 1, Provisions established Provisions used Provisions release TOTAL (f) 2012 MCh$ 2011 MCh$ 28,827 25,920 28,406 30,655 (27,584) (27,724) — (24) 29,649 28,827 2012 MCh$ 2011 MCh$ 20,361 18,774 Movements in provisions for vacations: Balances as of January 1, Provisions established Provisions used Provisions release TOTAL 218 AnnualReport2012 5,655 5,821 (4,363) (4,187) (811) (47) 20,842 20,361 (g) Employee share-based benefits provision: As of December 31, 2012 and 2011, the Bank and its subsidiaries do not have a stock compensation plan. (h) Contingent loan provisions: As of December 31, 2012 and 2011, the Bank and its subsidiaries maintain contingent loan provisions by an amount of Ch$36,585 million (Ch$35,334 million in 2011). See note No. 26 (d). 25. Other Liabilities: As of December 31, 2012 and 2011, other liabilities are detailed as follows: 2012 MCh$ 2011 MCh$ 111,358 79,031 Unearned income 5,357 5,379 Dividends payable 883 786 Accounts and notes payable (*) Other liabilities Documents intermediated (**) 132,651 134,820 Cobranding 23,066 20,894 VAT debit 11,689 12,465 Leasing deferred gains 5,900 7,039 Pending transactions 5,080 1,941 135 1,158 Others 4,947 2,252 TOTAL 301,066 265,765 Insurance payments (*) nclude obligations that do not correspond to transactions in the line of business, such as withholding tax, pension and healthcare contributions, insurance payable, balances of prices for the purchase of materials and provisions for expenses pending payment. (**) This item mainly includes financing of simultaneous operations performed by subsidiary Banchile Corredores de Bolsa S.A. Consolidated Financial Statements 219 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 26. Contingencies and Commitments: (a) Commitments and responsibilities accounted for in off-balance-sheet accounts: In order to satisfy its customers’ needs, the Bank entered into several irrevocable commitments and contingent obligations. Although these obligations are not recognized in the Statement of Financial Position, they entail credit risks and, therefore, form part of the Bank’s overall risk. The Bank and its subsidiaries record the following balances related to such commitments and responsibilities, which fall within its line of business, in off-balance-sheet accounts: 2012 MCh$ 2011 MCh$ Contingent loans Guarantees and surety bonds Confirmed foreign letters of credit Issued foreign letters of credit 323,924 216,249 85,272 137,253 138,714 131,567 Bank guarantees 1,437,312 1,235,031 Immediately available credit lines 5,481,235 4,881,220 122,997 164,361 386,006 582,090 12,144 2,766 — — 22,802 62,701 — — 6,237,859 5,613,495 Other commitments Transactions on behalf of third parties Collections Third-party resources managed by the Bank: Financial assets managed on behalf of third parties Other assets managed on behalf of third parties Financial assets acquired on its own behalf Other assets acquired on its own behalf Fiduciary activities Securities held in safe custody in the Bank Securities held in safe custody in other entities TOTAL 4,483,567 4,088,670 18,731,832 17,115,403 Above information only includes the most significant balances. (b) Lawsuits and legal proceedings: (b.1) Legal contingencies within the ordinary course of business: In the ordinary course of business, the Bank and its subsidiaries act as defendant or co-defendant in various litigation matters. Although there can be no assurances, the Bank’s management believes, based on information currently available, that the ultimate resolution of these legal proceedings are not likely to have a material adverse effect on its results of operations, financial position, or liquidity. As of December 31, 2012, the Bank has established provisions for this concept in the amount of MCh$474 (MCh$736 in 2011), recorded within “Provisions” in the statement of financial position. The following table presents estimated date of completion of the respective litigation: 220 AnnualReport2012 Contingencias judiciales 2013 MCh$ 2014 MCh$ 65 5 As of December 31, 2012 2015 2016 MCh$ MCh$ 16 388 2017 MCh$ Total MCh$ — 474 (b.2 Contingencies for significant lawsuits: As of December 31, 2012 and 2011, it does not exist any significant demands in courts that they affect or could affect the current consolidated financial statements. (c) Guarantees granted: i. In subsidiary Banchile Administradora General de Fondos S.A.: In compliance with article 226 and subsequent articles of Law 18,045, Banchile Administradora General de Fondos S.A., has designated Banco de Chile as the representative of the beneficiaries of the guarantees it has established and in that character the Bank has issued bank guarantees totaling UF 2,442,000, maturing January 4, 2013. In addition to these guarantees for creating mutual funds, there are other guarantees for a guaranteed return on certain mutual funds, totaling Ch$118,734 million as of December 31, 2012 (Ch$104,302 million in 2011). Fund 2012 MCh$ Guarantees Number Mutual Fund Banca Americana Voltarget - Guaranted 11,878 336723-1 Mutual Fund Estrategia Commodities - Guaranted 6,302 336721-5 Mutual Fund Muralla China - Guaranted 17,795 336716-8 Mutual Fund Potencias Consolidadas - Guaranted 30,381 336718-4 Mutual Fund Ahorro Plus I - Guaranted 730 336720-7 Mutual Fund Ahorro Estable II - Guaranted 11,270 336722-3 Mutual Fund Ahorro Estable III - Guaranted 5,051 336717-6 14,958 004713-3 2,069 004716-7 Mutual Fund Depósito Plus - Guaranted Mutual Fund Europa Accionario - Guaranted Mutual Fund Twin Win Europa 103 - Guaranted 3,541 004712-5 Mutual Fund Second Best Chile EEUU - Guaranted 2,207 004820-2 12,552 005272-2 Mutual Fund Depósito Plus II - Guaranted TOTAL 118,734 ii. In subsidiary Banchile Corredores de Bolsa S.A.: For the purposes of ensuring correct and complete compliance with all of its obligations as broker-dealer entity, in conformity with the provisions of article 30 and subsequent articles of Law 18,045 on Securities Markets, the subsidiary established a guarantee in an insurance policy for UF 20,000, insured by Cía. de Seguros de Crédito Continental S.A., that matures April 22, 2014, whereby the Securities Exchange of the Santiago Stock Exchange was appointed as the subsidiary’s creditor representative. Consolidated Financial Statements 221 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 2012 MCh$ 2011 MCh$ Guarantees: Shares to secure short-sale transactions in: Securities Exchange of the Santiago Stock Exchange Securities Exchange of the Electronic Stock Exchange of Chile Fixed income securities to ensure system CCLV, Bolsa de Comercio de Santiago, Bolsa de Valores Fixed income securities to ensure stock loan, Bolsa Eléctronica de Chile, Bolsa de Valores TOTAL 69 15,980 33,693 21,731 3,068 2,987 47 — 36,877 40,698 According to the provisions of internal stock market regulations, and for the purpose of securing the broker’s correct performance, the company established a pledge on its share of the Santiago Stock Exchange in favor of that institution, as recorded in Public Deed on September 13, 1990, signed before Santiago public notary Mr. Raúl Perry Pefaur, and on its share in the Electronic Stock Exchange of Chile in favor of that institution, as recorded in a contract entered into by both parties on May 16, 1990. Banchile Corredores de Bolsa S.A. keeps an insurance policy current with Chartis Chile – Compañía de Seguros Generales S.A. that expires January 2, 2013, and that covers employee fidelity, physical losses, falsification or adulteration, and currency fraud with a coverage amount equivalent to US$ 10,000,000. This secure was renewed on January 2, 2013 with maturity of January 2, 2014 for the same amount with “AIG Chile Compañía de Seguros Generales S.A.” (d) Provisions for contingencies loans: Established provisions for credit risk from contingencies operations are the followings: 2012 MCh$ 2011 MCh$ Credit lines 22,661 20,679 Bank guarantees 11,407 12,520 2,064 1,526 434 523 Guarantees and surety bonds Letters of credit Other commitments TOTAL 222 AnnualReport2012 19 86 36,585 35,334 27. Equity: (a) Capital i. Authorized, subscribed and paid shares: As of December 31, 2012, the paid-in capital of Banco de Chile is represented by 89,898,992,667 registered shares (86,942,514,973 in 2011), with no par value, fully paid and distributed. As of December 31, 2012 Number of % of Equity Shares Holding Corporate Name or Shareholders’s name Subscribed and and paid Chile Subscribed and and paid Chile -T LQ Inversiones Financieras S.A. 28,241,222,862 1,519,715,819 29,760,938,681 Sociedad Administradora de la Obligación Subordinada SAOS S.A. 28,593,701,789 — 28,593,701,789 31.81 Sociedad Matriz del Banco de Chile S.A. 12,138,537,826 — 12,138,537,826 13.50 Ever 1 BAE S. P. A. 1,926,331,458 — 1,926,331,458 2.14 Ever Chile S. P. A. 1,926,331,453 — 1,926,331,453 2.14 Banco de Chile on behalf others Chapter. XIV Resolution 5412 and 43 1,917,824,777 — 1,917,824,777 2.13 Banchile Corredores de Bolsa S.A. 1,634,542,641 55,731,549 1,690,274,190 1.88 Banco Itau Chile (on behalf foreign investors) 1,335,644,830 11,527,535 1,347,172,365 1.50 Inversiones Aspen Ltda. 1,333,288,591 — 1,333,288,591 1.48 33.10 J. P. Morgan Chase Bank 746,580,394 — 746,580,394 0.83 Banco Santander (on behalf foreign investors) 708,503,705 — 708,503,705 0.79 Inversiones Avenida Borgoño Limitada 495,315,368 30,675,913 525,991,281 0.59 Celfin Capital S.A. Corredores de Bolsa 499,986,263 13,917,749 513,904,012 0.57 Larraín Vial S.A. Corredora de Bolsa 325,708,628 12,306,250 338,014,878 0.38 Santander S.A. Corredores de Bolsa 326,666,567 4,433,433 331,100,000 0.37 BCI Corredor de Bolsa S.A. 280,512,369 12,782,432 293,294,801 0.33 A F P Provida S.A. Para Fondo de Pensiones 287,285,362 — 287,285,362 0.32 BICE Inversiones Corredores de Bolsa S.A. 144,438,155 7,563,024 152,001,179 0.17 Valores Security S.A. Corredores de Bolsa 141,080,250 3,916,384 144,996,634 0.16 Inversiones y Asesorias Fabiola S.A. 135,681,958 6,080,951 141,762,909 0.16 SUBTOTAL 83,139,185,246 1,678,651,039 84,817,836,285 94.35 Otros accionistas 4,898,628,265 182,528,117 5,081,156,382 5.65 TOTAL 88,037,813,511 1,861,179,156 89,898,992,667 100.00 Consolidated Financial Statements 223 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 As of December 31, 2012 Corporate Name or Shareholder’s Name Shares % of Equity Holding Sociedad Administradora de la Obligación Subordinada SAOS S.A. 28,593,701,789 32.89 LQ Inversiones Financieras S.A. 27,609,418,295 31.76 Sociedad Matriz del Banco de Chile S.A. 12,138,525,772 13.96 Ever 1 BAE S.A. 1,890,495,236 2.17 Ever Chile S.A. 1,890,495,231 2.17 Banchile Corredores de Bolsa S.A. 1,637,433,839 1.88 Inversiones Aspen Ltda. 1,308,484,951 1.51 Banco de Chile on behalf others Chapter. XIV Resolution 5412 and 43 1,103,378,195 1.27 J. P. Morgan Chase Bank 1,079,633,755 1.24 Banco Itau Chile (on behalf of foreign investors) 1,037,436,967 1.19 A F P Provida S.A. Para Fondo de Pensiones 783,492,630 0.90 Inversiones Avenida Borgoño Limitada 584,793,376 0.67 Celfin Capital S.A. Corredores de Bolsa 558,660,521 0.64 Banco Santander (on behalf of foreign investors) 543,774,674 0.63 Larraín Vial S.A. Corredora de Bolsa 307,245,575 0.36 Santander S.A. Corredores de Bolsa 270,466,820 0.31 BCI Corredor de Bolsa S.A. 235,516,687 0.27 A F P Habitat S. A. para el Fondo de Pensiones 209,317,353 0.24 A F P Cuprum S.A. para el Fondo de Pensiones 201,313,870 0.23 MBI Arbitrage Fondo de Inversión 163,096,437 0.19 82,146,681,973 94.48 4,795,833,000 5.52 86,942,514,973 100.00 SUBTOTAL Other minority holders TOTAL (ii) Shares: (ii.1) On June 5, 2012, Banco de Chile informed of the capitalization of 30% of the distributable net income obtained during the fiscal year ending December 31, 2011, through the issuance of fully paid-in shares, of no par value, agreed in the Extraordinary Shareholders Meeting held on March 22, 2012, which are as follows: In the said Extraordinary Shareholders Meeting, it was agreed to increase the Bank´s capital in the amount of Ch$73,910,745,344 through the issuance of 1,095,298,538 fully paid-in shares, of no par value, payable under the distributable net income for the year 2011 that was not distributed as dividends as agreed at the Ordinary Shareholders Meeting held on the same day. The issuance of fully in paid shares was registered in the Securities Register of the Superintendence of Banks and Financial Institutions with No. 4/2012, on June 4, 2012. 224 AnnualReport2012 The Board of Directors of Banco de Chile, at the meeting No. 2,754, dated May 24, 2012, set June 28, 2012, as the date for issuance and distribution of the fully paid in shares (ii.2) According to Note 5 No. (h) of Relevant Events, the Bank is in process of issue, subscription and placement of share. The following table shows the share movements from December 31, 2011 to December 31, 2012: Ordinary S Series Shares 73,834,890,472 8,716,808,951 — 82,551,699,423 Capitalization of retained earnings 1,005,766,185 — — 1,005,766,185 Transformation of the shares series “Banco de Chile-S” into ordinary shares “Banco de Chile” 8,716,808,951 (8,716,808,951) — — Fully paid the share capital increase (*) 3,385,049,365 — — 3,385,049,365 AS OF DECEMBER 31, 2010 TOTAL SHARES AS OF DECEMBER 31, 2011 Capitalization of retained earnings (**) Shares subscribed and paid TOTAL SHARES SUBSCRIBED AND PAID AS OF DECEMBER 31, 2012 Shares subscribed and not paid Shares issued and not subscribed TOTAL AS OF DECEMBER 31, 2012 Ordinary T Series Shares (***) Total Shares Ordinary Shares 86,942,514,973 — — 86,942,514,973 1,095,298,538 — — 1,095,298,538 — — 1,861,179,156 1,861,179,156 1,861,179,156 89,898,992,667 88,037,813,511 — — — 76,940,138 76,940,138 — — 2,001,370,148 2,001,370,148 88,037,813,511 — 3,939,489,442 91,977,302,953 (*) During July of 2011, the Bank concluded the capital increase process by an amount of Ch$210,114 millions, amount net of cost associated with the issuance. (**) Capitalization of March 22, 2012. See Note No. 5 (a) (***) See Note No. 5 (h) (b) Distributable income: For purposes of Law No. 19,396 (in particular Articles 24, 25 and 28 of such law) and the Central Bank Contract, Banco de Chile’s distributable net income will be determined by subtracting or adding to net income the correction of the value of the paid in capital and reserves according to the variation of the Consumer Price Index between November of the fiscal year prior to the one in which the calculation is made and November of the fiscal year in which the calculation is made. The difference between net income and distributable net income shall be registered in a reserve account since the first day of the fiscal year following the date when the calculation is made. This reserve account cannot be distributed or capitalized. Provisional article four shall be in force until the obligation of Law No. 19,396 owed by Sociedad Matriz del Banco de Chile S.A., directly or through its subsidiary SAOS S.A., has been fully paid. The amount distributable income for the period 2012 was by Ch$429,656 million (Ch$370,715 million in 2011). The above described agreement was subject to the consideration of the Council of the Central Bank of Chile, and such entity approved, in ordinary meeting that took place on December 3, 2009, determined to resolve in favor regarding the proposal. As stated, the retention of earnings for the year 2011 made in March 2012 amounted to Ch$58,092 millions (Ch$32,096 millions of income for the year 2010 retained in March 2011). Consolidated Financial Statements 225 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (c) Approval and payment of dividends: At the Ordinary Shareholders’ Meeting held on March 22, 2012, the Bank’s shareholders agreed to distribute and pay dividend No. 200 amounting to Ch$2.984740 per common share of Banco de Chile, with charge to net income for the year ended December 31, 2011. At the Ordinary Shareholders’ Meeting held on March 17, 2011, the Bank’s shareholders agreed to distribute and pay dividend No. 199 amounting to Ch$2.937587 per common share of Banco de Chile, with charge to net income for the year ended December 31, 2010 (d) Provision for minimum dividends: The Board of Directors established a minimum dividend distribution policy, where the Bank has to record a provision of 70% of net income as described in Note 2 (v). Accordingly, the Bank recorded a liability under the line item “Provisions” for an amount of MCh$300,759 (MCh$259,501 in 2011) against “Retained earnings”. (e) Earnings per share: (i) Basic earnings per share: Basic earnings per share are determined by dividing the net income attributable to the Bank shareholders in a period by the weighted average number of shares outstanding during the period. (ii) Diluted earnings per share: Diluted earnings per share are determined in the same way as Basic Earnings, but the weighted average number of outstanding shares is adjusted to take into account the potential diluting effect of stock options, warrants, and convertible debt. The basic and diluted earnings per share as of December 31, 2012 and 2011 are shown in the following table, also shows the income and share data used in the calculation of EPS: December 2012 December 2011 Basic earnings per share: Net profits attributable to ordinary equity holders of the bank (in millions) Weighted average number of “Banco de Chile – T” (*) Weighted average number of ordinary shares Dividend per shares (in Chilean pesos) 465,850 428,805 48,987,689 — 88,100,830,689 85,590,444,728 5,28 5,01 465,850 428,805 Diluted earnings per share: Net profits attributable to ordinary equity holders of the bank (in millions) Weighted average number of “Banco de Chile – T” (*) Weighted average number of ordinary shares Assumed conversion of convertible debt Adjusted number of shares Diluted earnings per share (in Chilean pesos) 48,987,689 — 88,100,830,689 85,590,444,728 — — 88,149,818,378 85,590,444,728 5.28 5.01 (*) According to Note No. 5 (h) of Relevant Events the “Banco de Chile – T” shares, will have de same rights of other shares of Banco de Chile, with the exception that they will not allow its shareholders to receive dividends and/or fully paid-in shares. 226 AnnualReport2012 As of December 31, 2012 and 2011, the Bank did not have any instruments that could lead to a dilution of its ordinary shares. (f) Other comprehensive income: The cumulative translation adjustment is generated from the Bank’s translation of its investments in foreign companies, as it records the effects of foreign currency translation for these items in equity. During period of 2012 it was made a charge to equity for an amount of Ch$58 million (credit to equity for Ch$68 millions in 2011). The fair market value adjustment for available-for-sale instruments is generated by fluctuations in the fair value of that portfolio, with a charge or credit to equity, net of deferred taxes. During the period of 2012 it was made a credit to equity for an amount of Ch$19,639 million (charge to equity for Ch$7,618 millions in 2011). Cash flow hedge adjustment it consists in the portion of income of hedge instruments registered in equity produced in a cash flow hedge. During the period of 2012 it was made a credit to equity for an amount of Ch$1,429 million (charge to equity for Ch$395 millions for the period 2011). 28. Interest Revenue and Expenses: (a) On the financial statement closing date, the composition of income from interest and adjustments, not including income from hedge accounting, is as follows: 2012 Interest MCh$ Adjustment MCh$ 2011 Prepaid fees MCh$ Total MCh$ Interest MCh$ Adjustment MCh$ Prepaid fees MCh$ Total MCh$ Commercial loans 691,745 95,691 1,967 789,403 573,171 138,730 3,507 715,408 Consumer loans 514,599 1,063 7,245 522,907 428,144 1,572 6,262 435,978 Residential mortgage loans 168,937 93,775 3,913 266,625 138,541 123,899 4,474 266,914 60,791 15,546 — 76,337 49,423 22,000 — 71,423 2,786 — — 2,786 5,234 — — 5,234 12,993 — — 12,993 10,322 — — 10,322 Financial investment Repurchase agreements Loans and advances to banks Other interest revenue TOTAL 143 1,569 — 1,712 189 2,472 — 2,661 1,451,994 207,644 13,125 1,672,763 1,205,024 288,673 14,243 1,507,940 The amount of interest revenue recognized on a received basis for impaired portfolio in 2012 by Ch$9,038 million (Ch$9,112 million in 2011). Consolidated Financial Statements 227 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) At the period end, the detail of income from suspended interest is as follows: Interest Total 2012 Adjustment MCh$ Commercial loans 6,185 1,961 Residential mortgage loans 1,380 772 Consumer loans TOTAL (c) 2011 Adjustment MCh$ 8,146 5,288 1,988 7,276 2,152 1,590 932 2,522 MCh$ 269 — 269 185 — 185 7,834 2,733 10,567 7,063 2,920 9,983 2011 Reajustes MCh$ Total MCh$ As of each year end, interest and adjustment expenses (not including hedge gain) are detailed as follows: Intereses MCh$ 2012 Reajustes MCh$ Total MCh$ Intereses MCh$ Savings accounts and time deposits 441,256 55,729 496,985 341,842 84,126 425,968 Debt issued 109,742 60,480 170,222 81,554 72,342 153,896 Other financial obligations 2,117 961 3,078 2,269 1,554 3,823 Repurchase agreements 14,976 10 14,986 10,849 — 10,849 Borrowings from financial institutions 22,308 — 22,308 23,784 — 23,784 76 3,870 3,946 57 5,877 5,934 Demand deposits Other interest expenses TOTAL (d) MCh$ Interest Total 15 92 107 — 140 140 590,490 121,142 711,632 460,355 164,039 624,394 As of December 31, 2012 and 2011, the Bank uses interest rate swaps to hedge its position on the fair value of corporate bonds and commercial loans through micro-hedging Income (loss) MCh$ 2012 Expenses MCh$ Total MCh$ Income (loss) MCh$ 2011 Expenses MCh$ Total MCh$ Gain from accounting hedges 3,632 3,003 6,635 249 185 434 Loss from accounting hedges (12,637) — (12,637) (30,521) — (30,521) Net gain on hedged items TOTAL 228 AnnualReport2012 (2,291) — (2,291) 17,861 — 17,861 (11,296) 3,003 (8,293) (12,411) 185 (12,226) (e) At the end of the period the summary of interest and expenses is as follows: 2012 MCh$ 2011 MCh$ Interest revenue 1,672,763 1,507,940 Interest expenses (711,632) (624,394) SUBTOTAL 961,131 883,546 INCOME ACCOUNTING HEDGES (NET) (8,293) (12,226) 952,838 871,320 TOTAL INTEREST REVENUE AND EXPENSES, NET 29. Income and Expenses from Fees and Commissions: The income and expenses for fees and commissions shown in the Consolidated Statements of Comprehensive Income refer to the following items: 2012 MCh$ 2011 MCh$ 102,407 90,758 Collections and payments 60,341 49,764 Investments in mutual funds and other 56,043 63,809 Portfolio management 27,317 28,523 Lines of credit and overdrafts 22,892 22,771 Fees for insurance transactions 17,404 20,480 Trading and securities management 16,892 27,779 Use of distribution channel 15,942 18,430 Guarantees and letters of credit 14,454 12,888 Use Banchile’s brand 12,356 11,264 Income from fees and commission Card services Financial advisory services 3,955 3,186 22,764 18,314 372,767 367,966 Credit card transactions (42,035) (35,522) Sales force fees (10,098) (8,312) Other fees earned TOTAL INCOME FROM FEES AND COMMISSIONS Expenses from fees and commissions Fees for collections and payments (6,534) (6,619) Fees for securities transactions (2,994) (4,246) Sale of mutual fund units (2,488) (3,038) Other fees (1,361) (1,456) (65,510) (59,193) TOTAL EXPENSES FROM FEES AND COMMISSIONS Consolidated Financial Statements 229 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 30. Net Financial Operating Income: The gain (losses) from trading and brokerage activities is detailed as follows: Financial assets held-for-trading Sale of available-for-sale instruments Net loss on other transactions Derivative instruments Sale of loan portfolios (*) TOTAL 2012 MCh$ 2011 MCh$ 18,798 22,757 8,088 2,289 2,567 (353) (4,852) 44,751 146 (42,517) 24,747 26,927 (*) Includes the net profit or loss on sale of loans, as determined by the difference between cash value and the carrying value at the date of the sale, regardless of the provisions, even in the case of wholly or partially written-off. See note No. 12 (e) 31. Foreign Exchange Transactions, net: Net foreign exchange transactions are detailed as follows: 2012 MCh$ 2011 MCh$ (Loss) gain on translation difference, net 44,736 (18,495) Indexed foreign currency (9,404) 11,489 (Loss) gain from accounting hedges TOTAL 230 AnnualReport2012 (196) (967) 35,136 (7,973) 32. Provisions for Loan Losses: The movement of the results during 2012 and 2011, by concept of provisions, is summarized as follows: Loans to customers Loans and advances to Commercial Mortgage Consumer Contingent banks loans loans loans Total loans Total 2012 2011 loans 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ Provisions established: - Individual provisions — - Group provisions — — (46,807) (42,132) (4,428) (3,553) (160,775) (110,344) (212,010) (156,029) (222) — (212,232) (156,029) Provisions established, net — (396) (60,475) (42,132) (4,428) (3,553) (160,775) (110,344) (225,678) (156,029) (1,251) (5,368) (226,929) (161,793) (396) (13,668) — (*) — — — — (13,668) — (1,029) (5,368) (14,697) (5,764) Provisions released: - Individual provisions 47 - Group provisions — — — — — — — — — — Provisions released, net 47 — — 14,515 — — — — — 14,515 PROVISION, NET 47 (396) (60,475) (27,617) (4,428) (3,553) (160,775) (110,344) (225,678) (141,514) (1,251) ADDITIONAL PROVISION — — (2,271) (24,052) RECOVERY OF WRITTENOFF ASSETS — — 14,893 PROVISIONS, NET ALLOWANCES FOR CREDIT RISK 47 — — 14,515(*) — — — — — — — — 16,790 1,971 1,106 24,099 28,445 (396) (47,853) (34,879) (2,457) — 14,515 — — 47 14,515 — 149 — 149 — 149 47 14,664 (5,219) (226,882) (147,129) (2,271) (24,052) — — (2,271) (24,052) 40,963 46,341 — — 40,963 (2,447) (136,676) (81,899) (186,986) (119,225) (1,251) 46,341 (5,219) (188,190) (124,840) (*) See note No. 30 and No. 12 (e) According to the Administration, the provisions constituted by credit risk, covers probable losses that could arise from the non-recovery of assets. Consolidated Financial Statements 231 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 33. Personnel Expenses: La composición del gasto por remuneraciones y gastos del personal durante los ejercicios 2012 y 2011, es la siguiente: 2012 MCh$ 2011 MCh$ 185,479 169,114 Bonuses 71,674 100,494 Lunch and health benefits 21,954 20,272 Staff severance indemnities 12,608 6,167 Remuneration Training expenses Other personnel expenses TOTAL 232 AnnualReport2012 1,671 1,493 18,679 19,451 312,065 316,991 34. Administrative Expenses: As of December 31, 2012 and 2011, administrative expenses are detailed as follows: 2012 MCh$ General administrative expenses Information Technology and communications Maintenance and repair of property and equipment Office rental Securities and valuables transport services External advisory services Rent ATM area Office supplies Lighting, heating and other utilities Representation and transferring of personnel Legal and notary Insurance premiums P.O box, mail and postage Donations Home delivery products Equipment rental Collection sevice Fees for professional services SBIF fines Other general administrative expenses 2011 MCh$ 48,670 29,332 19,589 9,217 7,601 7,283 6,346 4,733 3,611 3,291 2,897 2,739 2,029 1,648 1,164 880 776 40 8,871 47,062 28,486 18,211 9,203 7,163 6,462 6,556 5,985 3,850 2,926 2,384 3,182 1,545 1,533 1,251 671 654 — 6,067 160,717 153,191 Outsources services Credit pre-evaluation services Data processing Expenditure on external technological developments Certification and testing technology Other 21,316 7,646 6,196 4,342 2,515 22,808 7,275 3,046 2,500 1,972 SUBTOTAL 42,015 37,601 Board expenses Board remunerations Other board expenses 2,042 614 2,086 647 SUBTOTAL 2,656 2,733 SUBTOTAL Marketing expenses Advertising 30,572 26,515 SUBTOTAL 30,572 26,515 6,434 2,672 1,379 1,014 5,423 2,601 1,240 615 11,499 9,879 247,459 229,919 Taxes, payroll taxes and contributions Contribution to the Superintendency of Banks Real estate contributions Patents Other taxes SUBTOTAL TOTAL Consolidated Financial Statements 233 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 35. Depreciation, Amortization and Impairment: (a) Amounts charged to income for depreciation and amortization during the 2012 and 2011 periods are detailed as follows: 2012 MCh$ 2011 MCh$ Depreciation and amortization Depreciation of property and equipment (Note No.16a) (b) 20,614 20,543 Amortization of intangibles assets (Note No.15b) 10,343 10,168 TOTAL 30,957 30,711 As of December 31, 2012 and 2011, the impairment loss is detailed as follows: 2012 MCh$ 2011 MCh$ Impairment loss Impairment loss on investment instruments 551 — Impairment loss on property and equipment (Note No.16a) 348 335 — 296 899 631 Impairment loss on intangibles assets (Note No.15b) TOTAL 234 AnnualReport2012 36. Other Operating Income: During 2012 and 2011, the Bank and its subsidiaries present the following under other operating income: 2012 MCh$ 2011 MCh$ Income for assets received in lieu of payment Income from sale of assets received in lieu of payment Other income SUBTOTAL 5,674 5,918 8 115 5,682 6,033 1,174 — — — Release of provisions for contingencies Country risk provisions Special provisions for foreign loans Other provisions for contingencies SUBTOTAL 624 173 1,798 173 Other income Rental income 6,007 5,614 Expense recovery 2,895 2,372 Recovery from external branches 2,379 2,207 Fiduciary and trustee commissions 466 113 Gain on sale of property and equipment 325 1,338 Monthly prepaid taxes revaluation 315 1,006 Income tax management 275 844 Income from sale of leased assets 135 1,021 51 48 Foreign trade income Refund of insurance 19 1,594 1,714 2,372 SUBTOTAL 14,581 18,529 TOTAL 22,061 24,735 Others Consolidated Financial Statements 235 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 37. Otros Gastos Operacionales: Durante los ejercicios 2012 y 2011, el Banco y sus filiales presentan otros gastos operacionales de acuerdo a lo siguiente: 2012 MCh$ 2011 MCh$ Provisions and expenses for assets received in lieu of payment Provisions for assets received in lieu of payment Charge-off assets received in lieu of payment Expenses to maintain assets received in lieu of payment SUBTOTAL 100 1,124 2,600 3,495 622 561 3,322 5,180 — 785 Provisions for contingencies Country risk provisions Special provisions for foreign loans — — Other provisions for contingencies 1,109 2,495 SUBTOTAL 1,109 3,280 18,935 17,360 Write-offs for operating risks 9,526 3,002 Provisions other assets 3,765 — Card administration 2,163 2,602 Write-offs and provisions for fraud 1,195 754 Operating expenses and charge-off leasing assets 780 792 Mortgage life insurance 309 232 Provision for recovery of leased assets 227 50 Contributions to government organizations 225 208 Civil judgments 224 388 Other expenses Cobranding Losses on sale of property and equipment 7 25 652 1,723 SUBTOTAL 38,008 27,136 TOTAL 42,439 35,596 Others 236 AnnualReport2012 38. Related Party Transactions: The related parties of companies and their subsidiaries include entities of the company’s corporate group; corporations which are the company’s parent company, associated companies, subsidiaries, associates; directors, managers, administrators, main executives or receivers of the company on their own behalf or in representation of persons other than the company, and their respective spouses or family members up to the second degree of consanguinity or affinity, as well as any entity directly or indirectly controlled through any of them, the partnerships or companies in which the aforementioned persons are owners, directly or through other individuals or corporations, of 10% or more of their capital or directors, managers, administrators or main executives; any person that on their own or with others with whom they have a joint action agreement can designate at least one member of the company’s management or controls 10% or more of the capital or of the voting capital, if dealing with a public corporation; those that establish the company’s bylaws, or with a sound basis identify the directors’ committee; and those who have held the position of director, manager, administrator, main executive or receiver within the last eighteen months. Corporations Art. 147, states that a public corporation can only enter into transactions with related parties when the objective is to contribute to the company’s interests, when terms of price, terms and conditions are commensurate to those prevailing in the market at the time of their approval and comply with the requirements and procedures stated in the same standard. Moreover, article 84 of the General Banking Law establishes limits for loans granted to related parties and prohibits the granting of loans to the Bank’s directors, managers and general representatives. Consolidated Financial Statements 237 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (a) Loans to related parties: The following table details loans and accounts receivable, contingent loans and assets related to trading and investment securities, corresponding to related entities. Production Companies (*) 2012 2011 MCh$ MCh$ Investment Companies (**) 2012 2011 MCh$ MCh$ Individuals (***) 2012 MCh$ Total 2011 MCh$ 2012 MM$ 2011 MM$ Loans and accounts receivable: Commercial loans 250,983 209,764 63,576 81,798 704 575 315,263 292,137 Residential mortgage loans — — — — 14,974 13,919 14,974 13,919 Consumer loans — — — — 3,920 3,387 3,920 3,387 GROSS LOANS 250,983 209,764 63,576 81,798 19,598 17,881 334,157 309,443 (761) (602) (136) (295) (68) (68) (965) (965) 250,222 209,162 63,440 81,503 19,530 17,813 333,192 308,478 1,864 18,670 — — — — 1,864 18,670 Provision for loan losses NET LOANS Off balance sheet accounts Guarantees Letters of credits 280 158 — — — — 280 158 24,361 21,313 2,374 2,038 — — 26,735 23,351 Immediately available credit lines 46,179 32,406 4,532 1,451 9,320 9,393 60,031 43,250 TOTAL OFF BALANCE SHEET ACCOUNT 72,684 72,547 6,906 3,489 9,320 9,393 88,910 85,429 (44) (95) (1) (2) — — (45) (97) 72,640 72,452 6,905 3,487 9,320 9,393 88,865 85,332 31,034 27,958 55 55 15,325 15,431 46,414 43,444 Banks guarantees Provision for contingencies loans OFF BALANCE SHEET ACCOUNT, NET Amount covered by Collateral Mortgage Warrant — — — — — — — — Pledge 13 — — — 7 7 20 7 2,842 2,855 17,300 17,300 10 10 20,152 20,165 33,889 30,813 17,355 17,355 15,342 15,448 66,586 63,616 For trading purposes — 2,154 — — — — — 2,154 For investment purposes — — — — — — — — TOTAL ACQUIRED INSTRUMENTS — 2,154 — — — — — 2,154 Other (****) TOTAL COLLATERAL Acquired Instruments (*) Production companies are legal entities which comply with the following conditions: i) They engage in productive activities and generate a separable flow of income, ii) Less than 50% of their assets are trading securities or investments. (**) Investment companies include those legal entities that do not comply with the conditions for production companies and are profit-oriented. (***) Individuals include key members of the management, who directly or indirectly posses the authority and responsibility of planning, administrating and controlling the activities of the organization, including directors. This category also includes their family members who are expected to have an influence or to be influenced by such individuals in their interactions with the organization. (****) These guarantees correspond mainly to shares and other financial guarantees 238 AnnualReport2012 (b) Other assets and liabilities with related parties: 2012 MCh$ 2011 MCh$ Assets Cash and due from banks Derivative instruments Other assets TOTAL 11,174 97,390 107,487 116,010 2,931 2,665 121,592 216,065 87,480 69,287 Liabilities Demand deposits Savings accounts and time deposits Derivative instruments Debt issued Borrowings from financial institutions Other liabilities TOTAL (c) 378,965 531,448 83,582 100,238 79,821 — 134,820 194,059 9,044 7,969 773,712 903,001 Income and expenses from related party transactions (*): 2012 Type of income or expense recognized Income MCh$ 2011 Expense MCh$ Income MCh$ Expense MCh$ Interest and revenue expenses 18,759 21,501 15,522 31,190 Fees and commission income 56,717 33,337 56,979 30,647 399,773 Financial operating 188,990 152,819 499,960 Provision for credit risk — 677 221 — Operating expenses — 64,213 — 65,718 Other income and expenses TOTAL 744 40 843 53 265,210 272,587 573,525 527,381 (*) This detail does not constitute an Income Statement for related party transactions since assets with these parties are not necessarily equal to liabilities and each item reflects total income and expense and does not correspond to exact transactions.. (d) Related party contracts: There are no any contracts entered during 2012 and 2011 which does not represent a customary transaction within the Bank’s line of business with general customers and which accounts for amounts greater than UF 1,000. Consolidated Financial Statements 239 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (e) Payments to key management personnel: 2012 MCh$ 2011 MCh$ Remunerations 3,820 3,629 Short-term benefits 3,871 2,820 668 — Contract termination indemnity Stock−based benefits — — Others — — TOTAL 8,359 6,449 Composition of key personnel: N° de ejecutivos Position Deputy general manager CEOs of subsidiaries Division Managers (f) CEO 2011 1 1 — 1 8 8 Total 12 15 TOTAL 21 25 Gastos y Remuneraciones al Directorio: Remunerations Name of Directors Fees for attending Board meetings Fees for attending Committees and Subsidiary Board meetings (1) 2012 2011 MCh$ MCh$ 2012 MCh$ 2011 MCh$ 2012 MCh$ 2011 MCh$ 358 (*) 347 (*) 45 48 294 147 142 8 14 — Jorge Awad Mehech 49 47 23 27 Gonzalo Menéndez Duque 49 47 21 Jaime Estévez Valencia 49 47 23 Rodrigo Manubens Moltedo 49 47 23 26 49 48 Francisco Pérez Mackenna 49 47 17 22 50 46 Jorge Ergas Heyman 49 36 17 16 47 42 Thomas Fürst Freiwirth 49 47 18 23 37 Guillermo Luksic Craig 49 47 4 7 — Jacob Ergas Ergas — 10 — 4 9 Felipe Joannon Vergara — 10 — 7 Otros directores de filiales — — — 897 874 199 Pablo Granifo Lavín Andrónico Luksic Craig TOTAL Consulting 2012 MCh$ 2011 MCh$ 2012 MCh$ 2011 MCh$ 306 — — 697 701 — — — 155 156 110 107 — — 182 181 25 112 111 — — 182 183 26 92 87 — — 164 160 — — 121 121 — — 116 115 — — 113 94 34 — — 104 104 — — — 53 54 17 — — 9 31 — 12 — — — 29 — 165 166 — 86 165 252 245 965 976 — 86 2.061 2.181 (1) Includes fees paid to members of the Advisory Committee of Banchile Corredores de Seguros Ltda. of MCh$19 (MCh$9 in 2011). (*) Includes a provision of MCh$210 (MCh$205 in 2011) for an incentive subject to achieving the Bank’s forecasted earnings 240 AnnualReport2012 Total Fees paid for advisory services to the Board of Directors amount to MCh$266 (MCh$248 in 2011). Travel and other related expenses amount to MCh$329 (MCh$304 in 2011). 39. Fair Value of Financial Assets and Liabilities: Banco de Chile and its subsidiaries have defined a corporate framework for the Fair Value measurement and control to accomplish the Fair Value process according to local regulations, market standards and best practices in the industry. This framework is contained into the Banco de Chile’s Fair Value Policy. One of the most important definition in this framework is the Product Control Unit, hereinafter PCU, function. This area is independent from both the principal management and the business unit, and reports to the CFO of Banco de Chile. This area is responsible for the independent verification of Profit and Losses, and Fair Value measurement and control for all Treasury transactions; Trading, Funding and gapping and Investments deals. To accomplish the measurements and controls, Banco de Chile and its subsidiaries, take into account at least the following aspects: (i) Industry standards of fair value measurements. In the fair value calculation process, is used standard methodologies; closing prices, discounted cash flows and option models, Black-Scholes model, in the options case. The input parameters are rates, prices and volatility levels for each term and market factor that can change the fair value of any instrument in the portfolio. (ii) Quoted prices in active markets. The fair value for instruments with quoted prices in active markets is determined using daily quotes from electronic systems information as Bloomberg and Bolsa de Comercio de Santiago terminals. This quote represents the price at which the instrument is frequently buy and sell in financial markets. The prices used for determine the fair value of each instrument corresponds to the midpoint for a specific market factor, currency and term. (iii) Técnicas de Valorización. If there is not market quotes in active markets for the financial instrument, valuation techniques will be used to determine the fair value. Due to the fact that fair value models requires a set of market parameters as inputs, it is part of the fair value process to maximize the utilization based in observable quoted prices or derived from similar instruments in active markets. Nevertheless there are some cases for which neither quoted prices nor derived prices are available; in these cases external data from specialized providers, brokers such as ICAP, price for similar transactions and historical information it is used for validate the parameters that will be used as inputs. (iv) Fair value adjustments. Part of the fair value process consist in adjustment, Market Value Adjustments or MVA for short, to take into account two different market facts; bid/offer spreads and market factors liquidity. These adjustments are calculated and analyzed by the PCU and Risk Market areas. The bid/offer spread adjustment reflects the expected impact on fair value due to close long or short positions in a specific market factor and term, valuated at midpoint. For example, long positions in an asset will be impacted in order to reflect the fact that in selling that position will be quoted at bid instead at midpoint. For the bid/offer spread adjustment, market quotes or indicative prices for each position, instrument, currency and term are used. Bid, mid and offer market quotes are considered. Consolidated Financial Statements 241 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The liquidity adjustment considers the relative size to the market of each position in the portfolio. This adjustment is intended to reflect the relative size of Banco de Chile and the deepness of the markets. For this adjustment, the size of each position, recent transaction in active markets and recently observed liquidity are taking into account. (v) Fair value control. To ensure that the market input parameters that Banco de Chile is using for fair value calculations represent the state of the market and the best estimate of fair value, the PCU unit runs on a daily basis an independent verification of prices and rates. This process aims to set a preventive control on the official market parameters provided by the respective business area. A comparative control based on Mark-to-Market differences, using one set of inputs prepared by the business area and one set prepared by the PCU, is conducted before fair value calculations. The output of this process is a set of differences in fair value by currency, product and portfolio. These differences are compared with specific ranges by grouping level; currency, product and portfolio. In the event when significant differences were detected, these differences are scaled according to the amount of materiality for each grouping level, from a single report to the trader until a report to the Board. These ranges of materiality control are approved by the Assets and Liabilities Committee (ALCO). Complementary and in parallel, the PCU generates daily reports of P&L and risk market exposure. These two kind of reports allows adequate control and consistency of the parameters used in the valuation, looking backwards revision. (vi) Judgmental analysis and information to Senior Management. In particular no cases where there is no market quotations for the instrument, similar transaction prices or indicative parameters, a reasoned analysis and specific controls should be made to estimate the fair value of the operation or transaction. Within the Banco de Chile’s framework for fair value, described in the Fair Value Policy approved by the Board of Banco de Chile, the approval level required for operate this kind of instruments, there is no market information or cannot be inferred from prices or rates, is established. (a) Fair value hierarchy Banco de Chile and his subsidiaries, taken into account the preceding statements, classify all the financial instruments among the following levels: Level 1: Observable, quoted price in active markets for the same instrument or specific type of transaction to be evaluated. In this level are considered the following instruments: currency futures, Chilean central bank and treasury securities, mutual funds investments and equity. For the Chilean central bank and treasury securities, all instruments that belong to one of the following benchmark groups will be considered as Level 1: Pesos-02, Pesos-05, Pesos-07, Pesos-10, UF-02, UF-05, UF-07, UF-10, UF-20, UF-30. A benchmark group is composed by a number of instruments that have similar duration and share the same quoted price within the group. This condition allows for a greater depth of the market, assuring daily observable quotes. For each and every one of these instruments exist daily observable market valuation parameters; internal rates of return and closing prices, respectively, therefore no assumptions are needed to calculate the fair value. For currency futures as well as mutual funds and equity, closing prices times the number of instruments is used for fair value calculations. For Chilean central bank and treasury securities the internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency; CLP or CLF. 242 AnnualReport2012 The preceding described methodology corresponds to the one utilized for the Bolsa de Comercio de Santiago (Santiago’s main Exchange) and is recognized as the standard in the market. Level 2: No market quotes are available for the specific financial instrument, or the observable prices are sporadic and therefore the market does not have enough depth. For instruments in this level the valuation is done based on inference from observable market parameters; quoted prices for similar instruments in active markets. This level is composed mostly by derivatives, currency and rate derivatives, bank’s debt securities, mortgage claims, money market instruments and less liquid Chilean central bank and treasury securities. For derivatives the fair value process depend upon his value is impacted by volatility as a relevant market factor; if is the case, Black-ScholesMerton type of formula it is used. For the rest of the derivatives, swaps and forwards, net present value through discounted cash flows is used. For securities classified as level 2, the obtained internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency. In the event that there is no observable price for an instrument in a specific term, the price will be inferred from the interpolation between periods that do have observable quoted price in active markets. These models incorporate various market variables, including foreign exchange rates and interest rate curves. In some cases external data from specialized providers, brokers such as ICAP and Riskamerica, price for similar transactions and historical information it is used for validate the parameters that will be used as inputs. The techniques described above are used by the Santiago Stock Exchange in Chile, Bloomberg or the Over-the-Counter, and correspond to the standard methodology used in the local and international markets. Nivel 3: The input parameters used in the valuation are not observable through market quotes in active markets neither can be inferred directly from other transaction information in active markets. This category also includes instruments that are valued based on quoted prices for similar instruments where adjustments or assumptions are needed to reflect the differences between them. Instruments classified as level 3 correspond to Corporate Debt issued mainly Chilean and foreign companies, issued both in Chile and abroad. These instruments are classified, for accounting purposes, as Available for Sale. For this securities classified as level 3, the indicative internal rate of return is used to discount every cash flow and obtain the fair value of each instrument, for each currency. In this case only external data from specialized providers, brokers such as ICAP, Riskamerica and Interactive Data, it is used to for validate the parameters that will be used as inputs. For this level corresponds to the described technique used by both the Bolsa de Comercio de Santiago de Chile as Bloomberg, and correspond to the standard methodology used in the local and international market. Consolidated Financial Statements 243 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (b) Level hierarchy classification and figures The following table shows the figures by hierarchy, for instruments registered at fair value. Level 1 2012 2011 MCh$ MCh$ Level 2 2012 2011 MCh$ MCh$ Level 3 2012 2011 MCh$ MCh$ Total 2012 MCh$ 2011 MCh$ FINANCIAL ASSETS Financial assets held-for-trading from the Chilean Government and Central Bank Other instruments issued in Chile Instruments issued abroad 65,548 72,971 6,831 4,871 — — 72,379 77,842 188 371 87,115 191,063 — 585 87,303 192,019 — — — — — — — — Mutual fund investments 33,042 31,910 — — — — 33,042 31,910 SUBTOTAL 98,778 105,252 93,946 195,934 — 585 192,724 301,771 Forwards — — 70,166 125,766 — — 70,166 125,766 Swaps — — 258,496 258,681 — — 258,496 258,681 Call Options — — 472 1,239 — — 472 1,239 Put Options — — 341 2 — — 341 2 Futures — — — — — — — — SUBTOTAL — — 329,475 385,688 — — 329,475 385,688 Swaps — — 22 — — — 22 — SUBTOTAL — — 22 — — — 22 — 136,554 — 115,230 412,394 — — 251,784 412,394 — — 646,079 606,723 278,073 321,378 924,152 928,101 — 128,403 88,504 128,403 Derivative contracts for trading purposes Hedge accounting derivative contracts Financial assets available-for-sale from the Chilean Government and Central Bank Other instruments issued in Chile 30,538 — SUBTOTAL Instruments issued abroad 167,092 — — 57,966 761,309 1,019,117 336,039 449,781 1,264,440 1,468,898 TOTAL 265,870 105,252 1,184,752 1,600,739 336,039 450,366 1,786,661 2,156,357 FINANCIAL LIABILITIES Derivative contracts for trading purposes Forwards — — 81,790 115,797 — — 81,790 115,797 Swaps — — 264,052 272,976 — — 264,052 272,976 Call Options — — 395 1,149 — — 395 1,149 Put Options — — 387 35 — — 387 35 Futures — — — — — — — — Other — — — 21 — — — 21 SUBTOTAL — — 346,624 389,978 — — 346,624 389,978 Hedge derivative contracts Swaps — — 33,698 39,935 — — 33,698 39,935 SUBTOTAL — — 33,698 39,935 — — 33,698 39,935 TOTAL — — 380,322 429,913 — — 380,322 429,913 244 AnnualReport2012 Since last quarter of the present period, it was established a new criteria of classification of the level of financial instruments, according to what observables are their prices in the market. The new definition is described above of this disclosure. It should be noted that this change has no impact on the valuation of financial assets and liabilities measured at fair value. (c) Level 3 reconciliation The following table shows the reconciliation between stock at the beginning and the end of balance periods for instruments classified in Level 3: As of December 31, 2012 Purchases, Sales and Gain (Loss) Recognized in Agreements, net Equity MCh$ MCh$ Transfer to Level 1 and 2 MCh$ Balance as of December 31, 2012 MCh$ — (768) — — (768) — — — — — — — — — — — (1,410) 19,666 18,256 — (43,406) (59,432) (102,838) — — (24,958) (24,958) — 278,073 57,966 336,039 18,256 (103,606) (24,958) 336,039 As of December 31, 2011 Purchases, Sales and Gain (Loss) Recognized in Agreements, net Equity MCh$ MCh$ Transfer to Level 1 and 2 MCh$ Balance as of December 31, 2011 MCh$ Balance as of January 1, 2012 MCh$ Gain (Loss) Recognized in Income MCh$ — 585 — — 585 — 183 — — 183 — — — — — Instrumentos de Inversión Disponibles para la Venta: Del Estado y Banco Central de Chile Otros instrumentos emitidos en el país Instrumentos emitidos en el exterior SUBTOTAL — 321,378 128,403 449,781 — 1,511 (5,713) (4,202) TOTAL 450,366 (4,019) ACTIVOS FINANCIEROS Instrumentos para Negociación: Del Estado y Banco Central de Chile Otros instrumentos emitidos en el país Instrumentos emitidos en el exterior Inversiones en Fondos Mutuos SUBTOTAL Balance as of January 1, 2011 MCh$ Gain (Loss) Recognized in Income MCh$ FINANCIAL ASSETS Financial assets held-for-trading Central bank instruments Other instruments issued in Chile Instruments issued abroad Mutual funds SUBTOTAL — 1,740 — — 1,740 — 94 — — 94 — — — — — — (1,249) — — (1,249) — — — — — — 585 — — 585 Available for Sale Instruments Central bank instruments Other instruments issued in Chile Instruments issued abroad SUBTOTAL — 230,480 84,072 314,552 — 11,992 16,115 28,107 — (2,130) (3,897) (6,027) — 81,036 32,113 113,149 — — — — — 321,378 128,403 449,781 TOTAL 316,292 28,201 (6,027) 111,900 — 450,366 Consolidated Financial Statements 245 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (d) Sensitivity of level 3 instruments to changes in key assumptions of the input parameters for the valuation model. The following table shows the sensitivity, by instrument, for instruments classified as level 3 to changes in key assumptions: As of December 31, 2012 Sensitivity to changes in key assumptions of models Level 3 MCh$ MCh$ As of December 31, 2011 Sensitivity to changes in key assumptions of models Level 3 MCh$ MCh$ FINANCIAL ASSETS Financial assets held-for-trading Other instruments issued in Chile — — 585 — TOTAL — — 585 — Financial assets available-for-Sale Other instruments issued in Chile Instruments issued abroad TOTAL 278,073 (802) 321,378 (421) 57,966 (762) 128,403 (249) 336,039 (1,564) 449,781 (670) The level 3 figures in the precedent matrix represent the fair value calculated using data provided by the Business area, verified by the PCU using prices from independent market data providers. The following column, sensitivity to changes in key assumptions of models, represents the best proxy for what could be a variation, or delta, in the fair value of these instruments. The sensitivity figures are calculated as a difference in fair values. This difference is calculated as the fair value in the precedent column, Banco de Chile figures, minus the fair value obtained by using other market data set. The rationale behind this way to calculate the sensitivity is based on the appropriateness of prices and rates provided by independent sources, such as Interactive Data. This brokerage information companies uses all the available market information and is used by the major financial institutions in Chile such as Banks and Pension Funds. 246 AnnualReport2012 (e) Other assets and liabilities The following table summarizes the fair values of the Bank’s main financial assets and liabilities that are not recorded at fair value in the Statement of Financial Position. The values shown in this note do not attempt to estimate the value of the Bank’s income-generating assets, nor forecast their future behavior. The estimated fair value is as follows: Book Value 2012 MCh$ Fair Value 2011 MCh$ 2012 MCh$ 2011 MCh$ Assets Cash and due from banks 684,925 881,146 684,925 881,146 Transactions in the course of collection 396,611 373,639 396,611 373,639 35,100 47,981 35,100 47,981 1,116,636 1,302,766 1,116,636 1,302,766 14,304 15,054 14,304 15,054 Receivables from repurchase agreements and security borrowing SUBTOTAL Loans and advances to banks Domestic banks Central bank 1,100,696 300,819 1,100,696 300,819 Foreign banks 228,322 332,552 228,322 332,552 1,343,322 648,425 1,343,322 648,425 11,484,276 10,974,741 11,473,251 10,973,062 Residential mortgage loans 4,182,587 3,591,530 4,201,091 3,557,248 Consumer loans 2,667,467 2,427,032 2,683,593 2,426,959 SUBTOTAL 18,334,330 16,993,303 18,357,935 16,957,269 TOTAL 20,794,288 18,944,494 20,817,893 18,908,460 5,470,971 4,895,426 5,470,971 4,895,426 159,218 155,424 159,218 155,424 SUBTOTAL Loans to customers, net Commercial loans Liabilities Current accounts and other demand deposits Transactions in the course of payment Payables from repurchase agreements and security lending 226,396 223,202 226,396 223,202 Savings accounts and time deposits 9,612,950 9,282,324 9,589,643 9,273,010 Borrowings from financial institutions 1,108,681 1,690,939 1,103,252 1,689,172 162,123 184,785 162,123 184,785 16,740,339 16,432,100 16,711,603 16,421,019 85,967 106,965 87,088 115,825 Other financial obligations SUBTOTAL Debt Issued Letters of credit for residential purposes Letters of credit for general purposes Bonds Subordinate bonds SUBTOTAL TOTAL 29,229 45,133 29,610 48,871 2,412,233 1,488,369 2,282,014 1,459,145 746,504 747,874 726,369 728,330 3,273,933 2,388,341 3,125,081 2,352,171 20,014,272 18,820,441 19,836,684 18,773,190 Consolidated Financial Statements 247 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The fair value of assets not presented at fair value in the Statement of Financial Position is derived from balance sheet stocks and cash flows that Banco de Chile expects to receive, discounted using the relevant market interest rate for each type of transaction. These lasts cash flows are obtained from regulatory reports, in particular the C40 report. The C40 report contains cash flows, in future value, for assets and liabilities, by maturity and currency. For long term assets and liabilities, contractual cash flows are used to calculate the fair value. The cash flows are discounted by type of asset and currency to obtain their present value. The discount rates used to calculate the present value for each type of asset and liability correspond to the marginal rates of each product, considering specific rates by currency and term to capture both the risk inherent to the term as well as the expected level of each currency. For financial assets and liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate their fair value. This assumption is also applied to demand deposits and savings accounts without specific maturity. For loans, contractual cash flows and loan loss provisions are used to calculate the fair value. The cash flows are discounted by type of asset and currency to obtain their present value. Consecutively, the loan loss provision, by type of asset, is subtracted from the present value to take into account the fact that the Bank has already model the estimate probability that his customers do not fulfill their obligations. The fair value of liabilities that do not have quoted market prices, it is based on discounted cash flows, using interest rates to similar terms. The Bank did not incur any “day 1” profits or losses during the reporting period (difference between mark to market at the end of day and the effective rate of the transactions). 40. Maturity of Assets and Liabilities: The table below shows details of loans and other financial assets and liabilities grouped in accordance with their remaining maturity, including accrued interest as of December 31, 2012 and 2011, respectively. Trading and available for sale instruments are included at their fair value: 2012 Up to 1 month MCh$ Over 3 Over 1 month and month and up to 12 up to 3 months months MCh$ MM$ Over 1 year and up to 3 years MM$ Over 3 year and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ ASSETS Cash and due from banks 684,925 — — — Transactions in the course of collection 396,611 — — — Financial Assets held-for-trading 192,724 — — — — — 684,925 — — 396,611 — — 192,724 Receivables from repurchase agreements and security borrowing 8,338 855 25,907 — — — 35,100 Derivative instruments 19,155 26,190 85,576 93,733 40,801 64,042 329,497 Loans and advances to banks (**) 1,152,642 14,409 177,230 — — — 1,344,281 Loans to customers (*) (**) 1,743,729 1,863,499 3,512,461 4,110,399 1,945,584 272,371 171,017 343,665 152,075 132,382 Financial assets available-for-sale Financial assets held-to-maturity TOTAL ASSETS 248 AnnualReport2012 — — — — — 4,470,495 2,075,970 4,144,839 4,356,207 2,118,767 4,653,379 17,829,051 192,930 1,264,440 — — 4,910,351 22,076,629 2011 Over 3 Over 1 month and month and up to 12 up to 3 months months MCh$ MCh$ Up to 1 month MCh$ Over 1 year and up to 3 years MCh$ Over 3 year and up to 5 years MCh$ Over 5 years MCh$ Total MCh$ ASSETS Cash and due from banks 881,146 — — — — — 881,146 Transactions in the course of collection 373,639 — — — — — 373,639 Financial Assets held-for-trading 301,771 — — — — — 301,771 Receivables from repurchase agreements and security borrowing 40,212 6,270 1,499 — — — 47,981 Derivative instruments 28,741 32,789 107,867 88,709 59,061 68,521 385,688 300,819 — 348,612 — — — 649,431 2,130,411 2,190,492 3,906,372 3,243,770 1,477,637 136,620 231,810 267,521 118,722 222,782 Loans and advances to banks (**) Loans to customers (*) (**) Financial assets available-for-sale — — — — — 4,193,359 2,461,361 4,631,871 3,451,201 1,759,480 Financial assets held-to-maturity TOTAL ASSETS 3,536,944 16,485,626 491,443 1,468,898 — — 4,096,908 20,594,180 (*) This only includes loans that are current as of year end. Therefore, it excludes past due loans amounting to MCh$932,714 (MCh$892,167 in 2011) of which MCh$524,552 (MCh$500,603 in 2011) were less than 30 days past due. (**) The respective provisions, which amount to MCh$427,435 (MCh$384,490 in 2011) for loans to customers and MCh$959 (MCh$1,006 in 2010) for borrowings from financial institutions, have not been deducted from these balance. 2012 Over 1 month and up to 3 months MCh$ Over 3 month and up to 12 months MCh$ 5,470,971 — — — — — 5,470,971 Transactions in the course of payment 159,218 — — — — — 159,218 Payables from repurchase agreements and security lending 224,793 1,603 — — — — 226,396 3,832,539 2,356,386 2,846,609 397,643 279 30 9,433,486 27,981 30,469 60,284 116,048 48,616 96,924 380,322 181,972 153,702 631,051 141,956 — — 1,108,681 Up to 1 month MCh$ Over 1 year Over 3 year and up to 3 and up to 5 years years MCh$ MCh$ Over 5 years MCh$ Total MCh$ LIABILITIES Current accounts and other demand deposits Savings accounts and time deposits (***) Derivative instruments Borrowings from financial institutions Debt issued: Mortgage bonds Bonds Subordinate bonds Other financial obligations TOTAL LIABILITIES 5,351 5,853 15,859 35,502 21,843 30,788 115,196 47,119 133,570 56,633 456,334 358,097 1,360,480 2,412,233 1,164 2,276 34,731 48,378 151,612 508,343 746,504 106,972 1,005 5,140 10,534 7,201 31,271 162,123 10,058,080 2,684,864 3,650,307 1,206,395 587,648 2,027,836 20,215,130 Consolidated Financial Statements 249 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 2011 Up to 1 month MCh$ Over 1 month and up to 3 months MCh$ Over 3 month and up to 12 months MCh$ Over 1 year Over 3 year and up to 3 and up to 5 years years MCh$ MCh$ Over 5 years MCh$ Total MCh$ LIABILITIES Current accounts and other demand deposits Transactions in the course of payment Payables from repurchase agreements and security lending Savings accounts and time deposits (***) Derivative instruments Borrowings from financial institutions 4.895.426 — — — — — 4.895.426 155.424 — — — — — 155.424 218.578 4.553 71 — — — 223.202 4.333.690 1.937.012 2.540.911 292.426 355 30 9.104.424 36.739 34.976 91.148 98.013 58.077 110.960 429.913 138.551 200.786 1.079.317 220.368 51.917 — 1.690.939 6.190 7.063 19.699 44.374 30.581 44.191 152.098 Debt issued: Mortgage bonds Bonds 3.149 351 7.656 261.719 370.152 845.342 1.488.369 Subordinate bonds 2.639 2.068 42.599 45.082 162.619 492.867 747.874 123.512 1.009 5.371 12.355 8.191 34.347 184.785 9.913.898 2.187.818 3.786.772 974.337 681.892 1.527.737 19.072.454 Other financial obligations TOTAL LIABILITIES (***) Excluding term saving accounts, which amount to MCh$179,464 (MCh$177,900 in 2011). 41. Risk Management: (1) Introduction The Bank’s risk management is based on specialization, knowledge of the business and the experience of its teams, with professionals specifically dedicated to each different type of risks. Our policy is to maintain an integrated, forward looking approach to risk management, taking into account the current and forecasted economic environment and the risk/return ratio of all products for both the Bank and its subsidiaries. Our credit policies and processes acknowledge the particularities of each market and segment, thus affording specialized treatment to each one of them. The integrated information prepared for risk analysis is key to developing our strategic plan, this objectives include: determining the desired risk level for each business line; aligning all strategies with the established risk level; communicating desired risk levels to Bank’s commercial areas; developing models, processes and tools for evaluating, measuring and controlling risk throughout the different business lines and areas; informing the board of directors about risks and their evolution; proposing action plans to address important deviations in risk indicators and enforcing compliance of applicable standards and regulations. (a) Risk Management Structure Credit and Market Risk Management lies at the all levels of the Organization, with a structure that recognizes the relevance of the different risk areas that exist. Current levels are: 250 AnnualReport2012 (i) Board of Directors The Board is responsible for the establishment and monitoring of the Bank’s risk management structure. Due to the above, it is permanently informed regarding the evolution of the different risk areas, participating through its Finance and Financial Risk Committees, Credit Committees, Portfolio Committees and Audit Committee, which check the status of credit and market risks. In addition, it actively participates in each of them, informed of the status of the portfolio and participating in the strategic definitions that impact the quality of the portfolio. Risk management policies are established in order to identify and analyze the risks faced by the Bank, to set adequate limits and controls and monitor risks and compliance with limits. The policies and risk management systems are regularly reviewed in order for them to reflect changes in market conditions and the Bank’s activities. It, through its standards and management procedures intends to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. (ii) Finance, International and Financial Risk Committee This committee meets monthly to review developments and the current status of financial positions and market, price and liquidity risk. It reviews estimated results from financial positions in order to measure the risk/return ratio of the Bank’s Treasury business, as well as the evolution of and forecasts regarding use of capital. The knowledge of the current state of the market risks allow to forecast potential future loss, with an important confidence level, in the case of adverse transactions in the main market variables or illiquidity (exchange rate, interest rates and options volatility) or a tight liquidity (either liquidity of trading in financial instruments as funding liquidity). Additionally, the Committee reviews the estimated financial results that generate these positions separately, in order to measure the risk-return businesses involved in handling financial positions of the Treasury, the evolution of the use of capital, and the estimated credit risk and market that the Bank will face in the future. The Committee also discussed the international financial exposure and liabilities major credit exposures generated by derivatives transactions. Committee is responsible for the design of policies and procedures related to the establishment of limits and alerts financial positions, as well as measurement, control and reporting of the same. Subsequently, policies and procedures are subject to approval by the Bank Board. The Finance, International and Financial Risk Committee comprises the Chairman, four Directors, the General Manager, the Manager of Corporate Risk Division, the Manager of the Corporate and Investment Banking Division, the Manager of Financial Control Division, the Manager of Treasury Division and the Manager of Financial Risk Area. The Committee meets in regular session once a month and may be cited extraordinary request of the President, two Directors or the General Manager. (iii) Credit Committees The corporate governance structure of the Bank provides various credit committees responsible for credit decisions related to the different business segments and the type of risk involved. These committees have higher expression in the Credit Committee of the Board, consisting of the General Manager, the Manager of Corporate Risk Division, and at least three directors who review weekly all operations that exceed UF750,000. Each credit committee is responsible for defining the terms and conditions of acceptance of counterparty risks considered in the evaluation, and are comprised of members with sufficient powers for decision-making. The Corporate Risk Division participates in an independently and autonomic form from commercial areas. Consolidated Financial Statements 251 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (iv) Portfolio Risk Committee The main function of Portfolio Risk Committee is to know, from a global perspective, the evolution of the composition of the Bank’s loan portfolio. This is, according to economic sectors, business segments, products, terms, and everything that would have a broad view of counterparty risk is assumed. This Committee reviews, in detail, the main exposures by economic groups, debtors, and behavioral parameters such as default indicators, past due loans, impairment, charges-off and provisions for loan losses for each segment. The mission of this Committee is to approve and propose to the Board risk management strategies differentiated. This includes credit policies, the portfolio assessment methodologies and calculation of provisions to cover expected losses. Is responsible also know the sufficiency of provision; authorize extraordinary charge-offs when it exhausted the recoveries instances and management control settlement of assets received in lieu of payments. It also reviews the methodological guidelines for the development of credit risk models, which are assessed on the Technical Committee for the Supervision of internal models. The Portfolio Risk Committee meets monthly and is composed of the Chairman of the Board, two Directors, the General Manager, the Manager of Corporate Risk Division, the Manager of the Risk Division and the Area Manager Risk Architecture. The Committee may be summoned to an extraordinary request of the President, two Directors or the General Manager. (v) Treasury The Bank’s Treasury Division is responsible for managing price risks (interest rates, exchange rates and options volatility) for its Trading and Accrual Portfolios, based on limits approved by the Board of Directors. In addition, it is the sole body responsible for ensuring that the Bank maintains adequate liquidity levels in line with market conditions and the needs of its different business units. (vi) Corporate Risk Division Banco de Chile has a team with a vast experience and knowledge in each matter related to risks associated with credit, market, operational and technology, which ensures comprehensive and consolidated management of the same, including the Bank and its subsidiaries, identifying and evaluating the risks generated in customers, in their own operations and their suppliers. The focus is on the future, finding determine with different techniques and tools, the potential changes that could affect the solvency, liquidity, the correct operation or the reputation of Banco of Chile. Regarding the management of Credit Risk, Corporate Risk Division oversees the quality of the portfolio and optimizing the risk - return to all segments of people and companies managing the stages of approval, monitoring and recovery of loans granted. (vii) Operational Risk Committee The mission of Operational Risk Committee is to identify, prioritize and set strategies to mitigate key operational risk events, ensure the implementation of the management model, establish tolerances risk, ensure compliance programs, policies and procedures relating to Privacy and Information Security, Business Continuity and Operational Risk Banco de Chile. In this year increased the frequency of execution, becoming a monthly Senior Management Committee, becoming the governing body for the Operational Risk Management and Technology. Risk management also involves the Directors of the Bank through quarterly presentations to Directors and Audit Committee on these matters. The Operational Risk Committee is composed of the General Manager, Division Manager Corporate Risk, Manager of Financial Control Division, Manager of Operations and Technology Division, Manager of Commercial Banking Area and Manager of Operational Risk and Technology. 252 AnnualReport2012 (b) Internal Audit Risk management processes throughout the Bank are continually audited by the Internal Audit Area, which analyzes the sufficiency of and compliance with risk management procedures, Internal Audit discusses the results of all evaluations with management and reports its findings and recommendations to the Board of Directors. (c) Measurement Methodology In terms of Credit Risk, provision levels and portfolio expenses are the basic measurements used to determine the credit quality of our portfolio. Risk monitoring and control are performed primarily based on established limits. These limits reflect the Bank’s business and market strategy as well as the risk level it is willing to accept, with added emphasis on selected industry sectors. The Bank’s Chief Executive Officer, on a daily basis, and the Finance, International and Market Risk Committee, on a monthly basis, receive a report detailing the evolution of the Bank’s price and liquidity risk, based on both internal and regulator-imposed metrics. Each year, the Board of Directors is presented with the results of a sufficiency test for allowances for loan loss. This test shows whether the Bank’s existing level of allowances for loan loss, both for the individual and group portfolios, is sufficient, based on historic losses or impairment experienced by the portfolio. The Board of Directors must issue a formal opinion on its sufficiency. (2) Credit Risk Credit risk is the risk that we will incur a loss because a customer or counterparty do not comply with their contractual obligations, mainly its origin is in account receivable and financial investments. This risk is managed using a global, unified and forward-looking strategy, which recognizes the current and projected economic environment of the markets and segments in which our different businesses are developing and grants appropriate credit treatment to each such market or segment by using risk limits that we are willing to accept from counterparties. Managing credit risk is, therefore, inherent to our business and must be incorporated into each segment in which we do business: In this way, we may achieve an optimum balance between assumed risks and attained returns and properly allocate capital to each business line while complying with regulations and criteria defined by the Board of Directors, in order to ensure that the Bank has an appropriate capital base for potential losses that may arise from its credit exposure. Counterparty limits are established by analyzing financial information, risk ratings, the nature of the exposure, documentation, guarantees, market conditions and the pertinent industry sector, among other factors. The process of monitoring credit quality also includes identifying in advance any possible changes in counterparty’s payment capacity, which enables us to evaluate the potential loss from these risks and take corrective actions. (a) Approval Process The analysis and credit approval operate under a differentiated approach according to each market segment, distinguishing three risk models. Consolidated Financial Statements 253 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The focus of this type of model evaluation is aimed at the mass market of individuals without commercial purposes. These models ensure compliance in three areas relevant to the admissions process: t.JOJNVNDSFEJUQFGJMTDPSJOH t#PSSPXJOH-JNJUTFYQPTVSF t5BSHFU.BSLFU The credit profile is described by statistical models “Credit Scoring” segmented for different types of customers in the commercial areas of the segment people. The predictive ability of the models has been fundamental to successfully face the risk management of the portfolio during crisis scenarios. The Risk Management centralizes data entry processes in order to ensure high standards of data quality. Regarding the target market and borrowing limits, the Bank identifies the market subsegments based on their objectives, business strategies and opportunities, establishing definitions that identify acceptable credit profile of customers, products that will be offered, limits individual exposure and expected returns. The Bank has also developed a broad level of knowledge regarding selection of customers, with a significant capacity to discriminate between subjects of different credit bases. Using this model, we have developed separate segmented models for retail banking and Banco CrediChile. In the case of our Consumer Division (Banco CrediChile), there are further distinctions for customers, which are separated into the following five sub-segments: retired persons, employees in the public sector, employees in the private sector over 40 years of age, employees in the private sector under 40 years of age and self-employed. In retail banking there are also sub-segments divided by activity and length of the customer’s relationship with the Bank. Parametric Model: The SME segment is a segment that has developed assessment schemes and ad hoc admission to their characteristics. This segment has defined a parametric model that is responsible for mass segment features a segment as well as case by case analysis. This model considers the evaluation of customers based on three pillars. These are payment behavior both internal and external, financial reporting analysis and evaluation of the client’s business. This process yields a parametric evaluation category that summarizes the credit quality of the customer through a rating, which is linked directly to the powers of credit required for each operation. Note that internal audits are performed on an ongoing basis to ensure the quality of the information used. Additionally, the Corporate Risk Division supports business significantly through the process of pre-approval of loans to customers, for optimize the relation risk-return of these segments. Thus, both the retail market and in the small and medium enterprises has specialized units that generate credit offers, according to predefined strategies for different segments. Case to case model: This type of analysis applies to wholesale market and corporations. It is characterized by individual assessment expert, which provides the level of risk, transaction amount and complexity of the business, among other variables. This approval process is also supported by a rating model which gives a more uniform assessment and determines the level of credit. In this sense there are a process and consolidated team with high level of experience and expertise in approving appropriations for the various segments and sectors in which the Bank operates. Additionally, to make more effective the admission process, the process of data collection, analysis and discussion of the proposed credit are supported by the areas of credit risk, with the objective of providing top quality to the assessment and achieve better response times to customer requirements. 254 AnnualReport2012 (b) Control and Follow up The ongoing control and follow-up of credit risk is the basis for proactive portfolio management and enables risk to be recognized opportunely, thus identifying business opportunities and detecting potential impairment before it occurs. In the wholesale business segment, control and follow-up are realized through a combination of reviews. The most relevant are the following: t )JHIMFWFMTUSVDUVSFEQPSUGPMJPSFWJFXTXJUISFTQFDUUPUIFJNQBDUPGTQFDJGJDNBDSPFDPOPNJDGMVDUVBUJPOTJOSFMFWBOUTFDUPSTPGBDUJWJUZEFGJOJOH case-by-case actions plans. t $POTUBOUNPOJUPSJOHTZTUFNJOPSEFSUPEFUFDUFBSMZPOUIPTFDVTUPNFSTUIBUTIPXQPUFOUJBMSJTLTBHSFFJOHPOTQFDJGJDBDUJPOQMBOTGPSUIFTF customers with the corresponding client servicing team. t 1BZNFOUBSSFBSTNBOBHFNFOUCBDLFECZQSFEJDUJWFJOEJDBUPSTPGSJTLMFWFMXJUIGPMMPXVQBOEBDUJPOQMBOTJOUIFDBTFPGPVSNPTUJNQPSUBOU customers, plus management of differentiated strategies for early recovery. t 'PMMPXVQPGUIFDPOEJUJPOTSFTUSJDUJPOTBOEDPWFOBOUTJNQPTFECZUIFDSFEJUDPNNJUUFFUPBMMPQFSBUJPOTSFRVJSJOHJUEVFUPUIFJSJNQPSUBODFPS complexity. t $POUSPMPGUIFFYQPTVSFBTXFMMBTUIFTVGGJDJFODZPGHVBSBOUFFTHSBOUFEJOUIFGPSNPGTIBSFTNPOJUPSJOHGMVDUVBUJPOTBOEQSFQBSJOHBDUJPOQMBOT in the event of insufficient coverage. t 'PMMPXVQTDIFNFTPGDSFEJUCFIBWJPSWBSJBCMFTBOECPSSPXFSTGJOBODJBMDPOEJUJPO Risk segmentation strategies for collections processes and policies to a better integration of loan approval and monitoring processes, aligned behind a single vision of customer credit fundamentals. (c) Derivative Instruments The value of derivative financial instruments is always reflected in the Bank’s balance sheet. The risks derived from these instruments, determined using SBIF models, are controlled against lines of credit of the counterparty at the inception of each transaction. (d) Portfolio Concentration Maximum credit risk exposure per counterparty without considering collateral or other credit enhancements as of December 31, 2012 and 2011 does not exceed 10% of the Bank’s effective equity. Consolidated Financial Statements 255 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2012: Chile MCh$ United States MCh$ FINANCIAL ASSETS Cash and Due from Banks 499,473 167,186 Financial Assets held-for-trading from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad Mutual fund investments SUBTOTAL 72,379 87,303 — 33,042 192,724 — — — — — 35,100 — 57,852 99,245 439 341 — — 157,877 2,652 123,676 — — — — 126,328 — 22 — — — — 22 — — — — — — — 1,100,696 14,309 80,458 1,195,463 — — — — 11,570,499 4,090,683 2,792,539 18,453,721 17,534 4,277 1,922 23,733 251,784 924,152 — 1,175,936 — — 83,759 83,759 — — Receivables from repurchase agreements and security borrowing Derivative Contracts for Trading Purposes Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Hedge Derivative Contracts Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Loans and advances to Banks Central Bank of Chile Domestic banks Foreign banks SUBTOTAL Loans to Customers, Net Commercial loans Residential mortgage loans Consumer loans SUBTOTAL Financial Assets Available-for-Sale from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad SUBTOTAL Financial assets held-to-Maturity 256 AnnualReport2012 Brazil MCh$ Other MCh$ Total MCh$ — 18,266 684,925 — — — — — — — — — — 72,379 87,303 — 33,042 192,724 — — 35,100 — — — — — — — 9,662 35,575 33 — — — 45,270 70,166 258,496 472 341 — — 329,475 — — — — — — — — — — — — — — — 22 — — — — 22 — — 109,505 109,505 — — 39,313 39,313 1,100,696 14,309 229,276 1,344,281 15,507 4,107 1,522 21,136 128,044 99,600 35,531 263,175 11,731,584 4,198,667 2,831,514 18,761,765 — — 4,745 4,745 — — — — 251,784 924,152 88,504 1,264,440 — — — Consolidated Financial Statements 257 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Financial Services MCh$ Government MCh$ Retail (Individuals) MCh$ Trade MCh$ Manufacturing MCh$ Mining MCh$ FINANCIAL ASSETS Cash and Due from Banks 216,843 — — — — — Financial Assets held-for-trading from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad Mutual fund investments SUBTOTAL — 87,115 — 33,042 120,157 — — — — — — — — — — — — — — — — — — — — — — — — — 25,979 — 2,280 3,212 — — 65,113 232,459 354 85 — — 298,011 — — — — — — — 1 — — — — — 1 3,092 6,039 92 215 — — 9,438 1,084 5,447 26 27 — — 6,584 53 725 — — — — 778 — 22 — — — — 22 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 14,309 229,276 243,585 — — — — — — — — — — — — — — — — — — — — — 6,609 3,131 — — — — 3,503,474 2,557,411 — 80,676 40,109 — 15,970 9,400 — 2,702 1,532 — 801,159 88,504 889,663 — — — — — — — — — 18,262 — 18,262 — — — — — 5,024 — 5,024 — — — — — — Receivables from repurchase agreements and security borrowing Derivative Contracts for Trading Purposes Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Hedge Derivative Contracts Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Loans and advances to Banks Central Bank of Chile Domestic banks Foreign banks SUBTOTAL Loans to Customers, Net Commercial loans (*) Residential mortgage loans Consumer loans Financial Assets Available-for-Sale from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad SUBTOTAL Financial assets held-to-Maturity (*) See commercial loans by industry sector in Note 12 (d). 258 AnnualReport2012 Electricity, Gas and Water MCh$ Agriculture and Livestock MCh$ MCh$ Forestry MCh$ Fishing MCh$ Transportation and Telecom MCh$ Construction MCh$ Services MCh$ Other MCh$ Total MCh$ — — — — — — — 468,082 684,925 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 72,379 188 — — 72,567 72,379 87,303 — 33,042 192,724 — 160 — — — 1,854 1,615 — 35,100 75 4,986 — — — — 5,061 321 1,819 — — — — 2,140 — — — 9 — — 9 114 279 — 5 — — 398 207 5,569 — — — — 5,776 13 963 — — — — 976 93 210 — — — — 303 — — — — — — — 70,166 258,496 472 341 — — 329,475 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 22 — — — — 22 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,100,696 — — 1,100,696 1,100,696 14,309 229,276 1,344,281 — — 5 — 27,697 33,664 — — — — 1,840 840 — 23,934 16,280 — 17,322 9,870 — 105,181 38,440 — 413,262 120,832 — 4,198,667 2,831,514 — 41,309 — 41,309 — — — — — 44,303 — 44,303 — — — — — 7,640 — 7,640 — — — — — 2,164 — 2,164 251,784 4,291 — 256,075 251,784 924,152 88,504 1,264,440 — — — — — — — — — Consolidated Financial Statements 259 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2011: Chile MCh$ United States MCh$ Cash and Due from Banks 622,082 228,796 Financial Assets held-for-trading from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad Mutual fund investments SUBTOTAL 77,842 191,857 — 31,910 301,609 — — — — — 47,945 — 101,356 110,203 1,239 2 — — 212,800 10,490 117,592 — — — — 128,082 FINANCIAL ASSETS Receivables from repurchase agreements and security borrowing Derivative Contracts for Trading Purposes Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Hedge Derivative Contracts Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Loans and advances to Banks Central bank of Chile Domestic banks Foreign banks SUBTOTAL Loans to Customers, Net Commercial loans Residential mortgage loans Consumer loans SUBTOTAL Financial Assets Available-for-Sale from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad SUBTOTAL Financial assets held-to-Maturity 260 AnnualReport2012 — — — — — — — — — — — — — — 300,819 15,059 182,429 498,307 — — — — 11,011,933 3,508,169 2,528,655 17,048,757 8,952 3,984 1,960 14,896 412,394 928,101 21,870 1,362,365 — — 71,740 71,740 — — Brazil MCh$ Other MCh$ Total MCh$ — 30,268 881,146 — — — — — — 162 — — 162 77,842 192,019 — 31,910 301,771 — 36 47,981 — — — — — — — 13,920 30,886 — — — — 44,806 125,766 258,681 1,239 2 — — 385,688 — — — — — — — — — — — — — — — — — — — — — — — 91,530 91,530 — — 59,594 59,594 300,819 15,059 333,553 649,431 18,400 3,135 1,243 22,778 165,454 92,146 33,762 291,362 11,204,739 3,607,434 2,565,620 17,377,793 — — 4,712 4,712 — — 30,081 30,081 412,394 928,101 128,403 1,468,898 — — — Consolidated Financial Statements 261 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Financial Services MCh$ Government MCh$ Retail (Individuals) MCh$ Trade MCh$ Manufacturing MCh$ Mining MCh$ FINANCIAL ASSETS Cash and Due from Banks 328,933 — — — — — Financial Assets held-for-trading from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad Mutual fund investments SUBTOTAL — 191,999 — 30,626 222,625 — — — — — — — — — — — — — — — — — — — — — — — — — 13,619 — — 2,780 92 512 60,037 185,892 1,167 — — — 247,096 — 672 — — — — 672 9 — — — — — 9 2,006 3,933 68 2 — — 6,009 5,787 4,333 — — — — 10,120 1,457 59 — — — — 1,516 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15,059 333,404 348,463 — — — — — — — — — — — — — — — — — — — — — 5,175 3,250 — — — — 3,101,327 1,957,143 — 71,639 40,137 — 14,687 8,599 — 2,506 1,573 217,429 892,287 113,497 1,223,213 — — — — — — — — — 2,393 — 2,393 — — — — — 67 — 67 — — — — — — Receivables from repurchase agreements and security borrowing Derivative Contracts for Trading Purposes Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Hedge Derivative Contracts Forwards Swaps Call Options Put Options Futures Other SUBTOTAL Loans and advances to Banks Central Bank of Chile Domestic banks Foreign banks SUBTOTAL Loans to Customers, Net Commercial loans (*) Residential mortgage loans Consumer loans Financial Assets Available-for-Sale from the Chilean Government and Central Bank of Chile Other instruments issued in Chile Instruments issued abroad SUBTOTAL Financial assets held-to-Maturity (*) See commercial loans by industry sector in Note No.12 (d). 262 AnnualReport2012 Electricity, Gas and Water MCh$ Agriculture and Livestock MCh$ MCh$ Forestry MCh$ Fishing MCh$ Transportation and Telecom MCh$ Construction MCh$ Services MCh$ Other MCh$ Total MCh$ — — — — — — 72,759 479,454 881,146 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 77,842 20 — 1,284 79,146 77,842 192,019 — 31,910 301,771 21,045 — 57 118 5,959 76 156 3,567 47,981 160 8,394 — — — — 8,554 5,337 18,241 — — — — 23,578 151 34 — — — — 185 326 906 — — — — 1,232 148 2,136 — — — — 2,284 313 909 — — — — 1,222 101 230 — — — — 331 49,934 32,942 4 — — — 82,880 125,766 258,681 1,239 2 — — 385,688 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 300,819 — 149 300,968 300,819 15,059 333,553 649,431 — — 9 — 21,524 28,208 — 2,819 1,557 — 1,442 728 — 22,073 16,433 — 15,208 8,022 — 95,712 40,244 — 253,322 459,717 — 3,607,434 2,565,620 — 6,097 — 6,097 — — 14,906 14,906 — 3,247 — 3,247 — — — — — 15,009 — 15,009 — 2,307 — 2,307 — — — — 194,965 6,694 — 201,659 412,394 928,101 128,403 1,468,898 — — — — — — — — — Consolidated Financial Statements 263 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (e) Collaterals and Other Credit Enhancements The amount and type of collateral required depends on the counterparty’s credit risk assessment. The Bank has guidelines regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are: t 'PSDPNNFSDJBMMPBOT3FTJEFOUJBMBOEOPOSFTJEFOUJBMSFBMFTUBUFMJFOTBOEJOWFOUPSZ t 'PSSFUBJMMPBOT.PSUHBHFTPOSFTJEFOUJBMQSPQFSUZ The Bank also obtains collateral from parent companies for loans granted to their subsidiaries. Management makes sure its collateral is acceptable according to both external standards and internal policy guidelines and parameters. The Bank has approximately 182,387 collateral assets, the majority of which consist of real estate. The Bank also uses mitigating tactics for credit risk on derivative transactions. To date, the following mitigating tactics are used: t "DDFMFSBUJOHUSBOTBDUJPOTBOEOFUQBZNFOUVTJOHNBSLFUWBMVFTBUUIFEBUFPGEFGBVMUPGPOFPGUIFQBSUJFT t 0QUJPOGPSCPUIQBSUJFTUPUFSNJOBUFFBSMZBOZUSBOTBDUJPOTXJUIBDPVOUFSQBSUZBUBHJWFOEBUFVTJOHNBSLFUWBMVFTBTPGUIFSFTQFDUJWFEBUF t .BSHJOTFTUBCMJTIFEXJUIUJNFEFQPTJUTCZDVTUPNFSTUIBUDMPTF'9GPSXBSETXJUITVCTJEJBSZ#BODIJMF$PSSFEPSFTEF#PMTB4" (f) Credit Quality by Asset Class The Bank determines the credit quality of financial assets using internal credit ratings. The rating process is linked to the Bank’s approval and monitoring processes and is carried out in accordance with risk categories established by current standards. Credit quality is continuously updated based on any favorable or unfavorable developments to customers or their environments, considering aspects such as commercial and payment behavior as well as financial information. The Bank also conducts reviews of companies in certain industry sectors that are affected by macroeconomic or sector-specific variables. Such reviews allow the Bank to timely establish any necessary allowance loan losses that are sufficient to cover losses for potentially uncollectable loans. 264 AnnualReport2012 The following table shows credit quality by asset class for balance sheet items, based on the Bank’s credit rating system. As of December 31, 2012:: Normal MCh$ Individual Portfolio Substandard Non-complying MCh$ MCh$ Group Portfolio Normal Non-complying MCh$ MCh$ Total MCh$ FINANCIAL ASSETS Loans and advances to banks Central Bank of Chile Domestic banks 1,100,696 — — — — 1,100,696 14,309 — — — — 14,309 229,276 — — — — 229,276 1,344,281 — — — — 1,344,281 9,331,407 204,369 145,022 1,864,798 185,988 11,731,584 Residential mortgage loans — — — 4,148,374 50,293 4,198,667 Consumer loans — — — 2,649,995 181,519 2,831,514 9,331,407 204,369 145,022 8,663,167 417,800 18,761,765 Foreign banks SUBTOTAL Loans to customers (before allowances for loan losses) Commercial loans SUBTOTAL Al 31 de diciembre de 2011: Normal MCh$ Individual Portfolio Substandard Non-complying MCh$ MCh$ Group Portfolio Normal Non-complying MCh$ MCh$ Total MCh$ FINANCIAL ASSETS(*) Loans and advances to banks Central Bank of Chile Domestic banks 300,819 — — — — 300,819 15,059 — — — — 15,059 Foreign banks 333,553 — — — — 333,553 SUBTOTAL 649,431 — — — — 649,431 9,401,508 56,405 163,859 1,443,208 137,812 11,202,792 Residential mortgage loans — — — 3,543,520 63,914 3,607,434 Consumer loans — — — 2,439,495 126,125 2,565,620 9,401,508 56,405 163,859 7,426,223 327,851 17,375,846 Loans to customers (before allowances for loan losses) Commercial loans SUBTOTAL (*) There are loans subject of hedge accounting amounted Ch$1,947 million. Consolidated Financial Statements 265 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Analysis of age of portfolio loan, over-due loans by financial asset class: Terms: Default 1: 1 to 29 days Default 2: 30 to 59 days Default 3: 60 to 89 days As of December 31, 2012: Default 1 MCh$ Default 2 MCh$ Default 3 MCh$ 52 — — Commercial loans 23,049 20,677 3,774 47,500 Import-export financing 22,717 102 193 23,012 Factoring transactions Loans and advances to banks Total MM$ 52 38,976 6,289 1,061 46,326 Commercial lease transactions 2,551 750 366 3,667 Other loans and receivables 1,269 1,050 920 3,239 Residential mortgage loans 1,111 647 457 2,215 Consumer loans 16,010 6,775 6,873 29,658 105,735 36,290 13,644 155,669 Default 1 MCh$ Default 2 MCh$ Default 3 MCh$ Total MM$ Loans and advances to banks 19,694 — — 19,694 Commercial loans 16,797 6,206 6,718 29,721 TOTAL Al 31 de diciembre del 2011: Import-export financing 15,802 962 406 17,170 Factoring transactions 32,623 4,701 532 37,856 Commercial lease transactions 2,201 594 292 3,087 Other loans and receivables 1,213 1,115 929 3,257 Residential mortgage loans Consumer loans TOTAL 205 400 379 984 13,732 6,815 5,575 26,122 102,267 20,793 14,831 137,891 The value of collateral maintained by the Bank for loans individually classified as impaired as of December 31, 2012 and 2011 is MCh$29,952 and MCh$35,186 respectively. The value of collateral maintained by the Bank for loans over-due but non-impaired as of December 31, 2012 and 2011 is MCh$214,093 and MCh$104,543 respectively. 266 AnnualReport2012 (g) Assets Received in Lieu of Payment The Bank has received assets in lieu of payment totaling MCh$2,556 and MCh$4,608 as of December 31, 2012 and 2011, respectively, the majority of which are properties. All of these assets are managed for sale. (h) Renegotiated Assets The impaired loans are considered to be renegotiated when the corresponding financial commitments are restructured and the Bank assesses the probability of recovery as sufficiently high. The following table details the book value of loans with renegotiated terms per financial asset class: 2012 MCh$ 2011 MCh$ FINANCIAL ASSETS Loans and advances to banks Central Bank of Chile — — Domestic banks — — Foreign banks — — SUBTOTAL — — 96,445 119,637 Loans to customers, net Commercial loans Residential mortgage loans 23,132 26,286 Consumer loans 220,451 192,802 SUBTOTAL 340,028 338,725 TOTAL RENEGOTIATED FINANCIAL ASSETS 340,028 338,725 The Bank evaluates allowances loan losses in two segments: individually assessed allowances loan losses and group assessed allowances loan losses, which are described in more detail in Note No. 2(m). (3) Market Risk Market Risk is referred as to the potential loss the Bank may incur due to the scarcity of liquidity or due to an adverse change of market factors levels (such as FX rates, equity prices, interest rates, options volatility, etc). Consolidated Financial Statements 267 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 (a) Liquidity Risk: The Bank measures and monitors the Trading Liquidity risk for derivative and debt instruments by establishing DV01 limits to certain specific tenors for each yield curve. Trading Liquidity for debt instruments of the Accrual Book is not limited explicitly, understanding that in this case the postions are expected to be held until medium term or even maturity. Funding Liquidity is controlled and limited using the regulatory C08 Index report. The SBIF sets the following limits for the C08 index: t'PSFJHO$VSSFODZCBMBODFTIFFUEBZT$JOEFY t"MM$VSSFODJFTCBMBODFTIFFUEBZT$JOEFY t"MM$VSSFODJFTCBMBODFTIFFUEBZT$JOEFY The SBIF authorized Banco de Chile to utilize the C08 Adjusted Index report, which includes behavioral maturity assumptions for some specific balance sheet items, such as roll-over or evergreen pattern for some portion of the loan portfolio; some portion of the demand deposits are considered core and therefore no withdrawal is reported, etc. As of December 31, 2011, the 1-30 days Adjusted C08 Index for the foreign currency balance sheet items was slightly lower than 0.13. The 1-30 days Adjusted C08 Index for all currencies balance sheet items on that date is reported as 0.31; the value of the same index for the period 1 to 90 days is 0.39. The maturity profile of the consolidated financial liabilities of Banco de Chile and its subsidiaries, as of 2012 and 2011 end-of-year, is detailed below: Up to 1 month MCh$ Between 1 and 3 months MCh$ Between 3 and 12 months MCh$ Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ Total MCh$ Liabilities as of December 31, 2012 Current accounts and other demand deposits Transactions in the course of payment Accounts Payable from repurchase agreements and security lending Savings accounts and time deposits 5,470,971 — — — — — 5,470,971 159,218 — — — — — 159,218 226,396 — — — — — 226,396 4,271,345 2,508,688 2,814,055 393,247 279 30 9,987,644 Derivative instruments 231,117 134,729 321,148 244,826 132,688 236,071 1,300,579 Borrowings from financial institutions 135,353 176,467 630,745 141,444 — — 1,084,009 Other financial obligations 876,101 606,477 505,718 898,318 713,053 2,377,962 5,977,629 11,370,501 3,426,361 4,271,666 1,677,835 846,020 2,614,063 24,206,446 154,600 79,406 256,717 425,612 229,070 TOTAL UNDISCOUNTED FINANCIAL LIABILITIES (EXCLUDING DERIVATIVES WITH OFFSETTING AGREEMENTS) Derivatives with offsetting agreements 268 AnnualReport2012 434,677 1,580,082 Up to 1 month MCh$ Between 1 and 3 months MCh$ Between 3 and 12 months MCh$ Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ Total MCh$ Liabilities as of December 31, 2011 Current accounts and other demand deposits 4,895,426 — — — — — 4,895,426 Transactions in the course of payment 155,424 — — — — — 155,424 Accounts Payable from repurchase agreements and security lending 222,756 446 — — — — 223,202 Savings accounts and time deposits 4,441,786 1,951,047 2,607,906 290,481 355 30 9,291,605 Derivative instruments 515,787 439,237 244,021 48,804 — — 1,247,849 Borrowings from financial institutions 483,190 800,101 407,648 — — — 1,690,939 89,141 13,738 149,234 423,070 603,744 1,559,965 2,838,892 10,803,510 3,204,569 3,408,809 762,355 604,099 1,559,995 20,343,337 3,637,260 4,068,859 2,616,022 944,230 13,004,333 Other financial obligations TOTAL UNDISCOUNTED FINANCIAL LIABILITIES (EXCLUDING DERIVATIVES WITH OFFSETTING AGREEMENTS) Derivatives with offsetting agreements 671,072 1,066,890 The evolution of the loan-to-deposit ratio for 2012 and 2011 is detailed below: December 31, 2012 December 31, 2011 Maximum 2.35 2.05 Minimum 2.20 1.93 Average 2.31 1.98 Banco de Chile has established internal liquidity triggers, in addition to those required by the regulatory entities, such as large funds providers ratios in order to ensure the funding sources diversification; maturity concentration triggers, which avoids large amounts of liabilities maturing in one single day, etc. These and other financial ratios are monthly monitored in order to early detect structural changes of the balance sheet profile. Additionally, the bank is closely monitoring market triggers, such as interest rates levels, intervention of the FX market by the Central Bank, the 5-year Chile CDS spread, etc. These allow the bank to early prevent systemic crisis due to market conditions. (b) Price Risk: Price Risk Measurement and Limits The Price Risk measurement process is implemented thorough several reports, both regulatory and internal, and also separately for the Trading Book and the Bank Book (also referred as to the Accrual Portfolio). For the Trading Book, the regulatory risk measurement is obtained by using standardized methodologies (SBIF C41 report) that estimates the potential loss that the Bank may face considering interest rate positions reported according to its repricing tenors and fluctuations provided by the regulatory entity (these fluctuations are taken from Basel Agreement 1993 standardized tables for the Trading Book risk measurement). The impact due to FX open positions is obtained using huge fluctuations (8% for liquid FX rates and 30% for the illiquid ones). The SBIF does not establish a separate limit for this particular risk but a global one that includes this risk (also called Market Risk Equivalent or MRE) and 10% of the Risk Weighted Assets (also called RAAP assets). The sum of MRE and the 10% of the RAAP assets cannot exceed the 100% of the bank’s Tier-1 Capital. In the future, the Operational Risk will be added to the above sum. Consolidated Financial Statements 269 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Additionally, the Bank has established internal limits for the Trading Book. In fact, there are limits for the FX net open positions (FX Delta), for the interest rate sensitivities generated by the derivatives and debt securities portfolios (DV01 or also called Rho) and and for the FX volatility sensitivity (Vega). Limits are established on an aggregate basis but also for some specific repricing tenor points. The use of these limits are monitored, controlled and reported on a daily basis by independent parties to the senior management of the bank. The internal governance framework also establishes that these limits are approved by the board and must be reviewed at least annually. From January 2011, the Bank utilizes the parametric VaR (Value-at-Risk or VaR) as a risk measurement tool for trading portfolios. The model includes 99% confidence level; volatility of market factors fluctuations and correlations between them are obtained from historical observed closing rates for one-year period. This VaR number is escalated by 22 days (a calendar month) for reporting purposes. The interest rate risk generated by the Bank Book is measured by using standard regulatory tools (SBIF C40 report) and internal built-in methodologies. The latter are based on gap analysis of assets/liabilities repricing tenors. The regulatory risk measurement for the Bank Book due to interest rate fluctuations is obtained through the SBIF C40 report. The report includes models for reporting interest rate gaps and standardized adverse interest rate fluctuations. The regulatory entity has requested from banks to establish internal limits for this regulatory risk measurement. Limits must be established separately for short term and long term portfolios. The short term risk limit must be expressed as a percentage of the NIM and the long term risk limit as a percentage of the Tier-1 Capital. The bank is currently using 25% for both limits. The use of these limits during 2012 is illustrated below: Banking Risk Book Riesgo Libro Banca Largo Plazo Maximum Use Short term Banking Risk Book Average Use Long Term 18.7% 7.7% 18.1% Minimum Use Additionally, the Bank during 2011 and 2012 finished the implementation of the internal models for measuring, limiting, controlling and reporting interest rate exposures (IRE) and interest rate risks (also called Earnings at Risk or EaR) for the Accrual Book. The Accrual book includes all balance sheet items (even some items that are excluded by the regulators in the analysis of the Bank Book, such as Capital and Fixed Assets, for example). The internal models consider a more comprehensive and detailed analysis of interest rates fluctuations, exchange rates and inflation than the SBIF C40 report required by regulators. The Market Risk Policy of Banco de Chile enforces to perform daily stress tests for trading portfolios and on a monthly basis for accrual portfolios. The output of the stress testing process is compared to corresponding trigger levels: in the case triggers are breached, the senior management is notified in order to implement further actions, if necessary. Moreover, intra-month actual P&L for trading activities is compared to some trigger levels: escalation to senior levels is also done when breaches occur. 270 AnnualReport2012 The following table illustrates the interest rate positions of the Bank Book (repricing tenors) as of December 31, 2012 and 2011: Up to 1 month MCh$ Between 1 and 3 months MCh$ Assets as of December 31, 2012 Cash and due from banks 653,511 — Transactions in the course of collection 366,036 — Accounts receivable from repurchase agreements and security borrowing 582 — Derivative instruments 128,964 81,085 Loans and advances to banks 1,152,648 14,731 Loans to customers, net 3,172,424 2,390,933 Financial assets available-for-sale 57,370 178,055 Financial assets held-to-maturity — — TOTAL ASSETS 5,531,535 2,664,804 Assets as of December 31, 2011 Cash and due from banks Transactions in the course of collection Receivables from repurchase agreements and security borrowing Derivative instruments Loans and advances to banks Loans to customers, net Financial assets available-for-sale Financial assets held-to-maturity TOTAL ASSETS Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ Total MCh$ — — — — — — — — — 150,971 7,463 21,564 178,761 — — 4,769,542 4,329,131 2,083,220 381,448 235,786 192,490 — — — 5,480,722 4,572,380 2,297,274 — 653,511 — 366,036 — 582 110,414 500,461 — 1,346,140 5,314,078 22,059,328 323,967 1,369,116 — — 5,748,459 26,295,174 Between 3 and 12 months MCh$ Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ 827,381 — — 295,420 — — 10,023 — — 173,624 64,468 195,555 390,315 58,436 172,557 3,019,622 2,342,355 4,343,456 121,318 235,860 301,013 — — — 4.837.703 2.701.119 5.012.581 — — — — 31,678 4,091,996 194,846 — 4.318.520 — — — — — 1,920,759 281,719 — 2.202.478 — 827,381 — 295,420 — 10,023 — 433,647 — 652,986 4,537,489 20,255,677 530,203 1,664,959 — — 5.067.692 24.140.093 Between 1 and 3 months MCh$ Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ Up to 1 month MCh$ Up to 1 month MCh$ Between 1 and 3 months MCh$ Between 3 and 12 months MCh$ Between 3 and 12 months MCh$ Total MCh$ Total MCh$ Liabilities as of December 31, 2012 Current accounts and demand deposits Transactions in the course of payment Accounts payable from repurchase agreements and security lending Savings accounts and time deposits Derivative instruments 5,531,827 — — — — — 5,531,827 127,611 — — — — — 127,611 — 5,268 5,268 — — — — 4,223,812 2,371,455 2,908,748 417,885 279 30 9,922,209 3,903 3,477 26,924 175,376 83,186 260,272 553,138 Borrowings from financial institutions 304,070 450,332 348,390 — — — 1,102,792 Debt issued 119,449 162,656 253,617 683,676 689,980 2,337,558 4,246,936 96,108 1,373 7,246 15,543 11,432 34,754 166,456 10,412,048 2,989,293 3,544,925 1,292,480 784,877 Other financial obligations TOTAL LIABILITIES 2,632,614 21,656,237 Consolidated Financial Statements 271 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 Up to 1 month MCh$ Between 1 and 3 months MCh$ Between 3 and 12 months MCh$ Between 1 and 3 years MCh$ Between 3 and 5 years MCh$ More than 5 years MCh$ Total MCh$ Liabilities as of December 31, 2011 Current accounts and demand deposits Transactions in the course of payment Accounts payable from repurchase agreements and security lending Savings accounts and time deposits Derivative instruments Borrowings from financial institutions Debt issued Other financial obligations TOTAL LIABILITIES 4,906,774 — — — — — 4,906,774 87,821 — — — — — 87,821 48,578 — — — — — 48,578 4,451,516 1,952,826 2,639,046 343,867 82,220 30 9,469,505 1,739 3,119 20,276 167,445 78,059 246,035 516,673 498,777 788,018 401,493 — — — 1,688,288 20,262 24,436 142,005 521,265 700,642 1,759,365 3,167,975 12,650 39,466 189,623 111,134 1,368 7,457 17,548 10,126,601 2,769,767 3,210,277 1,050,125 873,571 2,044,896 20,075,237 Price Risk Sensitivity Analysis The Bank has focused on stress tests as the main measurement tool for analyzing price risk sensitivity. The analysis is implemented for the Trading Book and the Bank Book separately. After the financial crisis started during 2008 and based on the various studies and analyses made on this specific matter, the Bank adopted this tool when it notices that it is more reliable than normal distribution instruments such as VaR for trading portfolios or EaR for accrual portfolios, since: (a) The recent financial crisis shows fluctuations that are materially higher than those used through VaR with 99% of confidence level. (b) The recent financial crisis shows also that correlations between these fluctuations that are materially different to those used through VaR, since crisis precisely indicate severe disconnections between the behavior of market factors respect to the patterns normally observed. (c) Trading liquidity dramatically decreased in emerging markets during the financial crisis (in the case of Chile too) and therefore, the escalaltion of the daily VaR is a very gross approximation of the expected loss. Stress tests are produced observing historical events and collecting market factors data. The former allow the Bank to gauge actual distress events in terms of magnitude but mainly focused on detecting unusual fluctuations. The latter gives the Bank the technical background for implementing statistical analysis. An updated database is maintained including historical data of foreign exchange rates, debt instruments yields to maturity, derivatives swap yields, foreign exchange volatilities, etc. that enable the Bank to maintain up-to-date records of historical volatility of market factors fluctuations and correlations between these ones. 272 AnnualReport2012 Given the above, the stress tests may be implemented modeling directional fluctuations but also knowing the magnitude of the modeled fluctuations relative to statistical data and also how frequent the fluctuation modeled occurred in the past. In order to comply with IFRS 7.40, we include the following exercise illustrating an estimation of the impact of feasible but reasonable fluctuations of interest rates, swaps yield, foreign exchange rates and foreign exchange volatilities embedded in the Trading and Accrual portfolios. Given that the Bank’s portfolio includes positions denominated in nominal and real interest rates, these fluctuations must be aligned with realistic inflation changes forecast. The exercise is implemented in a very simplistic way: trading portfolios impacts are estimated by multiplying DV01s by expected interest rates shifts; accrual portfolios impacts are computed by multiplying cumulative gaps by forward interest rates modeled fluctuations. However, this methodology includes the limitation that the interest rates convexity is not properly captured when material fluctuations are modeled; additionally, neither convexity nor prepayments behaviors are captured for the accrual portfolio analysis. In any case, given the magnitude of the shifts, the methodology may be accurate enough for the purposes and scope of the analysis. The following table illustrates the fluctuations modeled and used in the stress testing process. Bonds yields, derivatives yields, FX rates, FX CLP/ USD volatility and inflation fluctuations are shown for each tenor point. Equity prices fluctuations are not included given that the positions held in the stockbrokerage house (Banchile Corredores de Bolsa SA) are negligible. In fact, equity positions are typically very small given that this legal vehicle is mostly focused on customer driven transactions (brokerage service or equity swaps transactions closed with customers). The directions of these fluctuations were chosen between four scenarios (two positive economic scenarios and two negative economic scenarios) in order to generate the worst impact within the four above mentioned: Market Factor Fluctuations: adverse scenario 3m CLP Derivatives (bps) CLP Bonds (bps) -110 -101 CLF Derivatives (bps) 410 CLF Bonds (bps) 395 USD Offshore 3m Derivatives (bps) Spread USD On/Off Derivatives (bps) -4 335 Vol FX CLP/USD (%) 8.0% Inflation’s Change Period n-1 to n (Monthly Basis) (%) -0.47% 6m -142 -114 49 41 -5 258 6.6% 0.02% 9m -157 -121 -37 -34 -6 246 5.9% -0.08% 1 year -171 -123 -30 -12 -7 224 5.4% -0.27% 2 years -166 -111 -10 10 -24 163 5.4% -0.06% 4 years -225 -128 -48 -31 -38 78 - -0.02% 6 years -205 -125 -67 -58 -45 76 - 0.00% 10 years -157 -131 -97 -99 -54 83 - 0.02% 16 years -147 -129 -98 -99 -62 83 - -0.02% 20 years -148 -131 -101 -101 -65 83 - -0.02% Bps = Basic points Consolidated Financial Statements 273 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 The impact on Trading Book as of 31 December 2012 is the following: Ganancia o Pérdida Potencial en el Libro de Negociación BCh (MCh$) CLP Interest Rate (3,169) Derivatives (3,197) Securities 27 CLF Interest Rate (3,157) Derivatives (1,867) Securities (1,291) USD, EUR, JPY Offshore Interest Rate (175) USD, EUR, JPY On/Off Spread (107) Total Interest Rate Total FX Total Vega FX Potential P&L Impact: Interest Rate + FX + Vega Banco de Chile Expected P&L (12 Months) Banco de Chile Tier1 Capital (6,609) 171 451 (5,986) 490,000 2,007,573 Potential P&L Impact / (Tier1 Capital + Expected P&L next 12 months) -0.2% Potential P&L Impact / (expected 12 months annual) -1.2% The scenario modeled would generate losses in the Trading Book up to Ch$ 6,000 MM or slightly above USD 12 MM. In any case, these huge fluctuations would not result in material losses compared to the expected P&L for the next twelve months or the Tier 1 Capital. The impact of such fluctuations in the Accrual portfolio, which is not necessarily a gain/loss but greater/lower net revenue from funds generation, is illustrated below: POTENTIAL MARGINAL NRFF ACCRUAL BOOK (next 12 months) MCh$ Mayor/(Menor Ingreso) (62,925) Libro CLP TOTAL (61,007) Libro CLF TOTAL (3,289) Libro FCY TOTAL 1,371 The main impact would occur in the CLP book, as the result of a severe drop in the inflations levels. The lower net revenues from funds in the following 12 months would reach CH$ 63,000 MM, which ies equivalent to 1.5 months of P&L budgeted for the year 2013. 274 AnnualReport2012 Finally, the next table illustrates the shadow mark-to-market impact (the impact on equity but not on income) in the AFS portfolio due to the referred interest rate fluctuations: Instrument Available for Sale Portfolio Impact Adverse Scenario Impact due to interest rate DV01(+1 bps) change (USD) (USD) CLP (86,798) (3,4) (1,645) CLF (362,128) (26,6) (12,732) USD (187,511) IMPACTO TOTAL (4) Impact due to interest rate change (MCh$) (16,0) (7,670) (46,0) (22,047) Capital Requirements and Capital Management: The main objectives of the Bank’s capital management are to ensure compliance with regulatory requirements, maintain a strong credit rating and capital ratios. During 2012, the Bank has fully complied with capital requirements demanded. As part of its Capital Management Policy, the Bank has established capital adequacy alerts, values more stringent than those required by the regulator, which are monitored on an ongoing basis. A date has not been activated any alerts on defined internal Capital Management Policy. The Bank manages capital by making adjustments considering changes in economic conditions and the risk characteristics of their business. For this, the Bank may adjust the amount of dividend payment to shareholders or issue capital instruments. The Bank actively manages and core capital to cover the risks inherent in their business. The Bank’s capital adequacy is monitored using, among other measures, rates and rules established by the SBIF. Regulatory Capital In accordance with the Chilean General Banking Law, the Bank must maintain a minimum ratio of Effective Equity to Consolidated Risk-Weighted Assets of 8%, net of required provisions, and a minimum ratio of Basic Capital to Total Consolidated Assets of 3%, net of required provisions. However, due to the 2008 merger of Banco de Chile and Citibank Chile, the Superintendency of Banks (SBIF), in Resolution N° 209 from December 26, 2007, increased the limit on the Bank’s ratio of effective equity to risk-weighted assets to 10%. In this context, the SBIF ratified the use of the 10% as minimum fixed in December 2001 when authorizing merge by absorption of Banco Edwards in Banco de Chile. For this purpose, Effective Equity is determined based on Capital and Reserves or Basic Capital, adjusted by: (a) adding subordinated bonds up to 50% of Basic Capital, (b) adding additional loan provisions, and (c) subtracting the asset balance of goodwill or overpayments and (d) adding unconsolidated investments in companies. Assets are weighted using risk categories, which are assigned a risk percentage based on the capital needed to back each asset. There are 5 risk categories (0%, 10%, 20%, 60% and 100%). For example, cash, due from banks and financial instruments issued by the Chilean Central Bank have 0% risk, which means, in accordance with current standards, no capital is required to back these assets. Property and equipment have 100% risk, which means that minimum capital equivalent to 8% of the value of these assets is needed (10% in the case of Banco de Chile). Consolidated Financial Statements 275 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 All derivative instruments traded off-market are taken into account to determine risk assets using conversion factors over notional values, thus calculating the value of the credit risk exposure (or “credit equivalent”). For weighting purposes, “credit equivalent” also considers off-balance sheet contingent loans. Levels of Basic Capital and Effective Equity as of December 31, 2012 and 2011 are as follows: Consolidated assets 2012 2011 MCh$ MCh$ Risk-weighted assets 2012 2011 MCh$ MCh$ Balance sheet assets (net of provisions) Cash and due from banks 684,925 881,146 Transactions in the course of collection 396,611 Financial Assets held-for-trading 192,724 Receivables from repurchase agreements and security borrowing Derivative instruments Loans and advances to banks Loans to customers, net Financial assets available-for-sale Financial assets held-to-maturity Investments in other companies Intangible assets Property and equipment Current tax assets 832 16,472 373,639 53,978 100,236 301,771 55,025 78,314 35,100 47,981 35,100 47,981 329,497 385,688 328,642 378,788 1,343,322 648,425 231,182 335,562 18,334,330 16,993,303 16,658,476 15,555,760 1,264,440 1,468,898 416,938 488,760 — — — — 13,933 15,418 13,933 15,418 34,290 35,517 33,151 33,757 205,189 207,888 205,189 207,887 2,684 1,407 268 141 Deferred tax assets 127,143 116,282 12,714 11,628 Other assets 296,878 263,584 SUBTOTAL 296,879 229,650 18,342,307 17,500,354 Off-balance-sheet assets Contingent loans 3,945,940 3,484,007 TOTAL RISK-WEIGHTED ASSETS As of December 31, 2012 MCh$ % 2,367,215 2,084,517 20,709,522 19,584,871 As of December 31, 2011 MCh$ % Basic Capital (*) 2,007,057 7.33 1,739,173 6.85 Effective Equity 2,738,311 13.22 2,529,135 12.91 (*) Basic Capital corresponds to equity attributable to equity holders in the Statement of Consolidated Financial Position. 276 AnnualReport2012 42. Own assets securitizations: During 2012, the Bank subscribed a Securitization agreement issuance and an assignment agreement without responsibility with the subsidiary Banchile Securitizadora S.A., whereby two fixed rate commercial loans were transferred. Then Banchile Securitizadora S.A. created the Segregated Equity (“Patrimonio Separado”) according to the title XVIII of the law No. 18,045. The securitizated assets finally became part of the separated equity in order to support the serie A bond issuance, which were fully transferred to third parties. As of the transaction date, the book value of the credits assigned was Ch$30,276 million and the effective amount received in the transference was Ch$30,407 million, which generated an income of Ch$131 million and also a credit provisions release for the amount of Ch$24 million. Furthermore, the subsidiary Banchile Securitizadora S.A. charged a commission for Ch$160 million, to the bank corresponding to debt structured process services. The bank acquired the subordinated bond (serie C) issued by Segregated Equity in Ch$22,485 equivalent to UF 1 (Unidad de Fomento), which represented less than 0.001% of the total amount of the Bond issued by Segregated Equity for the amount of Ch$30,407 million (par value amounted Ch$30,196 million). This bond was registered in available-for-sale and as of December 31, 2012 its fair value is Ch$22,841, this amount represents the maximum exposure of the bank will have in this transaction. The bank analyzed all the relevant aspects of the transaction, according to indicated in the NIC 39 and in the SIC 12, related to assets derecognized and consolidation rules. In this regards the bank concludes that (i) has substantially transferred all benefits and risks of assets assigned to the Segregated Equity; (ii) do not manage directly nor indirectly the activities of the segregated equity; (iii) do not have decision rights, which allows to obtain substantial benefits from the assets assigned; (iv) do not maintain any control over assets assigned, neither over the Segregate Equity. As a consequence of this, the bank proceeded to derecognized the credits involved in transaction and have not consolidated with the Segregated Equity. Additional information of the transaction Securitized asset value as of December 31, 2012 $24,795 millones Securitized bond value as of December 31, 2012 $24,644 millones Securitized assets - remaining term 5 años Securitized bond - remaining term 5 años Rate securitized assets UF + 4.83% Rate securitized bond UF + 4.54% During 2012 and 2011, the bank has not executed any other securitization transaction involving owns assets. Consolidated Financial Statements 277 Notes to the Consolidated Financial Statements Banco de Chile and Subsidiaries for the years ended December 31, 2012 and 2011 43. Subsequent Events: (a) According to Note No. 5 letter (h) of Relevant Events, the Bank is in process of issue, subscription and placement of shares. To date, January 24, 2013 the situation of this process is the following: Subscribed and paid shares Subscribed and not paid shares (b) Shares number % 2,504,355,648 63.6 3,306,917 0.1 Shares issued and not subscribed 1,431,826,877 36.3 Total shares 3,939,489,442 100.0 In the Ordinary Meeting No. 2,769 held on the January 24, 2013, the Board of Directors of Banco de Chile resolved to call an Ordinary Shareholders Meeting to be held on the March 21, 2013 with the objective of proposing, among other matters, the distribution of the Dividend number 201 of Ch$3.41625263165 per every of the 88.037.813.511 “Banco de Chile” shares, which will be payable at the expense of the distributable net income obtained during the fiscal year ending the 31st of December, 2012, corresponding to 70% of such income. Likewise, the Board of Directors resolved to call an Extraordinary Shareholders Meeting to be held on the same date in order to propose, among other things, the capitalization of 30% of the distributable net income obtained during the fiscal year ending the 31st of December, 2012, through the issuance of fully paid-in shares, of no par value, with a value of $71.97 per “Banco de Chile” share which will be distributed among the shareholders in the proportion of 0.02034331347 shares for each “Banco de Chile” share, and to adopt the agreements that are necessary in this regard, subject to the exercise of the options established in article 31 of Law 19,396. In Management’s opinion, there are no other significant subsequent events that affect or could affect the consolidated financial statements of the Bank and its subsidiaries between December 31, 2012 and the date of issuance of these consolidated financial statements. Héctor Hernández G. Gerente de Contabilidad 278 AnnualReport2012 Arturo Tagle Q. Gerente General Legal Name: Banco de Chile Taxpayer ID: 97.004.000-5 Headquarters Ahumada 251, Santiago, Chile Phone (56-2) 2637 1111 - Fax (56-2) 2637 3434 www.bancochile.cl Swift BCHI CL RM Sao Paulo Representation Office Rua Haddock Lobo, 746 - 4º andar Cerqueira Cesar, CEP 01414 - 000 Sao Paulo, Brasil Phone (55-11) 3060 8686 Fax (55-11) 3083 1888 [email protected] Banchile Trade Services Limited c/o Tricor Services Ltd. Level 28, Three Pacific Place, 1 Queen’s Road East, Hong Kong Phone (85-2) 2282 6710 - (85-2) 2282 6707 Fax (85-2) 2375 3372 Design stormind.cl Beijing Representation Office 606 West Tower, Twin Tower, B-12 Jianguomenwai Avenue, Chaoyang District, Beijing Phone (86-10) 5879 4301 Fax (86-10) 5109 6040 [email protected] Investor Relations Agustinas 975, piso 3, of 301 Phone (56-2) 2653 5151 - (56-2) 2653 3554 [email protected] Share Department Agustinas 975, of 541, Santiago, Chile Phone (56-2) 2653 2980 - (56-2) 2653 2294 Photography Pedro Pablo Valverde G. Printing Fyrma Gráfica