Table of Contents

 

 

 

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Report of Foreign Private Issuer

 

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

 

For the month of February, 2015

 

Commission File Number 001-15266

 

BANK OF CHILE

(Translation of registrant’s name into English)

 

Paseo Ahumada 251

Santiago, Chile

(Address of principal executive offices)

 

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

 

Form 20-F x

 

Form 40-F o

 

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

 

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

 

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

 

Yes o

 

No x

 

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

 

 

 



Table of Contents

 

BANCO DE CHILE

REPORT ON FORM 6-K

 

Attached Banco de Chile’s Consolidated Financial Statements with notes for the period 2013.

 



Table of Contents

 

 

Consolidated Financial Statements

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

 

 

 

Santiago, Chile

 

December 31, 2014 and 2013

 



Table of Contents

 

Consolidated Financial Statements

 

BANCO DE CHILE AND SUBSIDIARIES

 

December 31, 2014 and 2013

 

(Translation of consolidated financial statements originally issued in Spanish)

 

Index

 

 

I.

Report of Independent Registered Public Accounting Firm

 

II.

Consolidated Statements of Financial Position

 

III.

Consolidated Statements of Income

 

IV.

Consolidated Statements of Other Comprehensive Income

 

V.

Consolidated Statements of Changes in Equity

 

VI.

Consolidated Statements of Cash Flows

 

VII.

Notes to the Consolidated Financial Statements

 

 

Ch$ or CLP

=

Chilean pesos

 

MCh$

=

Millions of Chilean pesos

 

US$ or USD

=

U.S. dollars

 

ThUS$

=

Thousands of U.S. dollars

 

JPY

=

Japanese yen

 

EUR

=

Euro

 

MXN

=

Mexican pesos

 

HKD

=

Hong Kong dollars

 

PEN

=

Peruvian nuevo sol

 

CHF

=

Swiss franc

 

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).

 

 

 

 

 

IFRS

=

International Financial Reporting Standards

 

IAS

=

International Accounting Standards

 

RAN

=

Compilation of Standards of the Chilean Superintendency of Banks

 

IFRIC

=

International Financial Reporting Interpretations Committee

 

SIC

=

Standards Interpretation Committee

 



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2014 and 2013

(Expressed in million of Chilean pesos)

 

BANCO DE CHILE AND SUBSIDIARIES

 

INDEX

 

 

Page

Consolidated Statement of Financial Position

4

Consolidad Statements of Comprehensive Income

5

Consolidated Statement of Changes in Equity

7

Consolidated Statements of Cash Flows

8

1.

Company Information:

9

2.

Summary of Significant Accounting Principles:

10

3.

New Accounting Pronouncements:

45

4.

Changes in Accounting Policies and Disclosures:

51

5.

Relevant Events:

52

6.

Segment Reporting:

58

7.

Cash and Cash Equivalents:

62

8.

Financial Assets Held-for-trading:

63

9.

Repurchase Agreements and Security Lending and Borrowing:

64

10.

Derivative Instruments and Accounting Hedges:

66

11.

Loans and advances to Banks:

73

12.

Loans to Customers, net:

74

13.

Investment Securities:

81

14.

Investments in Other Companies:

83

15.

Intangible Assets:

86

16.

Property and equipment:

89

17.

Current and Deferred Taxes:

92

18.

Other Assets:

96

19.

Current accounts and Other Demand Deposits:

97

20.

Savings accounts and Time Deposits:

97

21.

Borrowings from Financial Institutions:

98

22.

Debt Issued:

100

23.

Other Financial Obligations:

104

24.

Provisions:

104

25.

Other Liabilities:

108

26.

Contingencies and Commitments:

109

27.

Equity:

115

28.

Interest Revenue and Expenses:

121

29.

Income and Expenses from Fees and Commissions:

124

30.

Net Financial Operating Income:

125

31.

Foreign Exchange Transactions, net:

125

32.

Provisions for Loan Losses:

126

33.

Personnel Expenses:

127

34.

Administrative Expenses:

128

35.

Depreciation, Amortization and Impairment:

129

36.

Other Operating Income:

130

37.

Other Operating Expenses:

131

38.

Related Party Transactions:

132

39.

Fair Value of Financial Assets and Liabilities:

138

40.

Maturity of Assets and Liabilities:

151

41.

Risk Management:

153

42.

Subsequent Events:

183

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

3



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2014 and 2013

(Expressed in million of Chilean pesos)

 

 

 

Notes

 

2014

 

2013

 

 

 

 

 

MCh$

 

MCh$

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

7

 

915,133

 

873,308

 

Transactions in the course of collection

 

7

 

400,081

 

374,471

 

Financial assets held-for-trading

 

8

 

548,471

 

393,134

 

Cash collateral on securities borrowers and reverse repurchase

 

9

 

27,661

 

82,422

 

Derivative instruments

 

10

 

832,193

 

374,688

 

Loans and advances to banks

 

11

 

1,155,365

 

1,062,056

 

Loans to customers, net

 

12

 

21,348,033

 

20,389,033

 

Financial assets available-for-sale

 

13

 

1,600,189

 

1,673,704

 

Financial assets held-to-maturity

 

13

 

 

 

Investments in other companies

 

14

 

25,312

 

16,670

 

Intangible assets

 

15

 

26,593

 

29,671

 

Property and equipment

 

16

 

205,403

 

197,578

 

Current tax assets

 

17

 

3,468

 

3,202

 

Deferred tax assets

 

17

 

202,869

 

145,904

 

Other assets

 

18

 

355,057

 

318,029

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

 

27,645,828

 

25,933,870

 

LIABILITIES

 

 

 

 

 

 

 

Current accounts and other demand deposits

 

19

 

6,934,373

 

5,984,332

 

Transactions in the course of payment

 

7

 

96,945

 

126,343

 

Cash collateral on securities lent and repurchase agreements

 

9

 

249,482

 

256,766

 

Savings accounts and time deposits

 

20

 

9,721,246

 

10,402,725

 

Derivative instruments

 

10

 

859,752

 

445,132

 

Borrowings from financial institutions

 

21

 

1,098,716

 

989,465

 

Debt issued

 

22

 

5,057,956

 

4,366,960

 

Other financial obligations

 

23

 

186,573

 

210,926

 

Current tax liabilities

 

17

 

22,498

 

10,333

 

Deferred tax liabilities

 

17

 

35,029

 

36,569

 

Provisions

 

24

 

601,714

 

551,898

 

Other liabilities

 

25

 

246,388

 

268,105

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

 

25,110,672

 

23,649,554

 

 

 

 

 

 

 

 

 

EQUITY

 

27

 

 

 

 

 

Attributable to equity holders of the parent:

 

 

 

 

 

 

 

Capital

 

 

 

1,944,920

 

1,849,351

 

Reserves

 

 

 

263,258

 

213,636

 

Other comprehensive income

 

 

 

44,105

 

15,928

 

Retained earnings:

 

 

 

 

 

 

 

Retained earnings from previous periods

 

 

 

16,379

 

16,379

 

Income for the year

 

 

 

591,080

 

513,602

 

Less:

 

 

 

 

 

 

 

Provision for minimum dividends

 

 

 

(324,588

)

(324,582

)

Subtotal

 

 

 

2,535,154

 

2,284,314

 

Non-controlling interests

 

 

 

2

 

2

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

 

2,535,156

 

2,284,316

 

TOTAL LIABILITIES AND EQUITY

 

 

 

27,645,828

 

25,933,870

 

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

4



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2014 and 2013

(Expressed in million of Chilean pesos)

 

 

 

Notes

 

2014

 

2013

 

 

 

 

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

Interest revenue

 

28

 

2,033,846

 

1,763,540

 

Interest expense

 

28

 

(788,788

)

(704,371

)

Net interest income

 

 

 

1,245,058

 

1,059,169

 

 

 

 

 

 

 

 

 

Income from fees and commissions

 

29

 

387,452

 

386,733

 

Expenses from fees and commissions

 

29

 

(115,264

)

(99,639

)

Net fees and commission income

 

 

 

272,188

 

287,094

 

 

 

 

 

 

 

 

 

Net financial operating income

 

30

 

29,459

 

11,084

 

Foreign exchange transactions, net

 

31

 

70,225

 

71,457

 

Other operating income

 

36

 

29,472

 

27,221

 

Total operating revenues

 

 

 

1,646,402

 

1,456,025

 

 

 

 

 

 

 

 

 

Provisions for loan losses

 

32

 

(283,993

)

(241,613

)

OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES

 

 

 

1,362,409

 

1,214,412

 

 

 

 

 

 

 

 

 

Personnel expenses

 

33

 

(384,512

)

(323,236

)

Administrative expenses

 

34

 

(270,537

)

(252,501

)

Depreciation and amortization

 

35

 

(30,501

)

(28,909

)

Impairment

 

35

 

(2,085

)

(2,247

)

Other operating expenses

 

37

 

(27,027

)

(16,051

)

TOTAL OPERATING EXPENSES

 

 

 

(714,662

)

(622,944

)

 

 

 

 

 

 

 

 

NET OPERATING INCOME

 

 

 

647,747

 

591,468

 

 

 

 

 

 

 

 

 

Income attributable to associates

 

14

 

2,861

 

2,071

 

Income before income tax

 

 

 

650,608

 

593,539

 

Income tax

 

17

 

(59,527

)

(79,936

)

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

591,081

 

513,603

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Equity holders of the parent

 

 

 

591,080

 

513,602

 

Non-controlling interests

 

 

 

1

 

1

 

 

 

 

 

 

Ch$

 

Ch$

 

Net income per share attributable to equity holders of the parent:

 

 

 

 

 

 

 

Basic net income per share

 

27

 

6.24

 

5.44

 

Diluted net income per share

 

27

 

6.24

 

5.44

 

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

5



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2014 and 2013

 (Expressed in million of Chilean pesos)

 

 

 

Notes

 

2014

 

2013

 

 

 

 

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

591,081

 

513,603

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASIFFIED SUBSEQUENTLY TO PROFIT OR LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses):

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on available for sale instruments

 

13

 

7,107

 

14,221

 

Gains and losses on derivatives held as cash flow hedges

 

10

 

29,756

 

(18,069

)

Cumulative translation adjustment

 

 

 

80

 

71

 

Subtotal Other comprehensive income before income taxes that will be reclassified subsequently to profit or loss

 

 

 

36,943

 

(3,777

)

 

 

 

 

 

 

 

 

Income tax related to other comprehensive income that will be reclassified subsequently to profit or loss

 

 

 

(8,766

)

770

 

 

 

 

 

 

 

 

 

Total other comprehensive income items that will be reclassified subsequently to profit or loss

 

 

 

28,177

 

(3,007

)

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASIFFIED SUBSEQUENTLY TO PROFIT OR LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss in defined benefit plans

 

 

 

(399

)

(166

)

 

 

 

 

 

 

 

 

Subtotal Other comprehensive income that will not be reclassified subsequently to profit or loss

 

 

 

(399

)

(166

)

 

 

 

 

 

 

 

 

Income tax related to other comprehensive income that will not be reclassified subsequently to profit or loss

 

 

 

103

 

33

 

 

 

 

 

 

 

 

 

Total other comprehensive income items that will not be reclassified subsequently to profit or loss

 

 

 

(296

)

(133

)

 

 

 

 

 

 

 

 

TOTAL CONSOLIDATED COMPREHENSIVE INCOME

 

 

 

618,962

 

510,463

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Equity holders of the parent

 

 

 

618,961

 

510,462

 

Non-controlling interest

 

 

 

1

 

1

 

 

 

 

Ch$

 

Ch$

 

Comprehensive net income per share attributable to equity holders of the parent:

 

 

 

 

 

Basic net income per share

 

6.54

 

5.40

 

Diluted net income per share

 

6.54

 

5.40

 

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

6



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2014 and 2013

 (Expressed in millions of Chilean pesos)

 

 

 

 

 

 

 

Reserves

 

Other comprehensive income

 

Retained earnings

 

 

 

 

 

 

 

 

 

Notes

 

Paid-in
Capital

 

Other
reserves

 

Reserves
from
earnings

 

Unrealized
gains (losses)
on available-
for- sale

 

Derivatives
cash flow
hedge

 

Cumulative
translation
adjustment

 

Retained
earnings

from
previous
periods

 

Income for
the year

 

Provision for
minimum
dividends

 

Attributable
to equity
holders of the
parent

 

Non-
controlling
interest

 

Total
equity

 

 

 

 

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2012

 

 

 

1,629,078

 

30,496

 

145,318

 

17,995

 

1,034

 

(94

)

16,379

 

467,610

 

(300,759

)

2,007,057

 

2

 

2,007,059

 

Capitalization of retained earnings

 

27

 

86,202

 

 

 

 

 

 

 

(86,202

)

 

 

 

 

Income distribution

 

 

 

 

1,760

 

 

 

 

 

 

(1,760

)

 

 

 

 

Income retention (released) according to law

 

 

 

 

 

36,193

 

 

 

 

 

(36,193

)

 

 

 

 

Paid and distributed dividends

 

27

 

 

 

 

 

 

 

 

(343,455

)

300,759

 

(42,696

)

(1

)

(42,697

)

Equity adjustment investment in other companies

 

 

 

 

2

 

 

 

 

 

 

 

 

2

 

 

2

 

Defined benefit plans adjustment

 

 

 

 

(133

)

 

 

 

 

 

 

 

(133

)

 

(133

)

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

71

 

 

 

 

71

 

 

71

 

Derivatives cash flow hedge, net

 

 

 

 

 

 

 

(14,455

)

 

 

 

 

(14,455

)

 

(14,455

)

Valuation adjustment on available-for-sale instruments (net)

 

 

 

 

 

 

11,377

 

 

 

 

 

 

11,377

 

 

11,377

 

Subscription and payment of shares

 

27

 

134,071

 

 

 

 

 

 

 

 

 

134,071

 

 

134,071

 

Income for the period 2013

 

 

 

 

 

 

 

 

 

 

513,602

 

 

513,602

 

1

 

513,603

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(324,582

)

(324,582

)

 

(324,582

)

Balances as of December 31, 2013

 

 

 

1,849,351

 

32,125

 

181,511

 

29,372

 

(13,421

)

(23

)

16,379

 

513,602

 

(324,582

)

2,284,314

 

2

 

2,284,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalization of retained earnings

 

27

 

95,569

 

 

 

 

 

 

 

(95,569

)

 

 

 

 

Income distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income retention (released) according to law

 

 

 

 

 

49,913

 

 

 

 

 

(49,913

)

 

 

 

 

Paid and distributed dividends

 

27

 

 

 

 

 

 

 

 

(368,120

)

324,582

 

(43,538

)

(1

)

(43,539

)

Equity adjustment investment in other companies

 

 

 

 

5

 

 

 

 

 

 

 

 

5

 

 

5

 

Defined benefit plans adjustment

 

 

 

 

(296

)

 

 

 

 

 

 

 

 

(296

)

 

(296

)

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

80

 

 

 

 

80

 

 

80

 

Derivatives cash flow hedge, net

 

 

 

 

 

 

 

23,507

 

 

 

 

 

23,507

 

 

23,507

 

Valuation adjustment on available-for-sale instruments (net)

 

 

 

 

 

 

4,590

 

 

 

 

 

 

4,590

 

 

4,590

 

Income for the period 2014

 

 

 

 

 

 

 

 

 

 

591,080

 

 

591,080

 

1

 

591,081

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(324,588

)

(324,588

)

 

(324,588

)

Balances as of December 31, 2014

 

 

 

1,944,920

 

31,834

 

231,424

 

33,962

 

10,086

 

57

 

16,379

 

591,080

 

(324,588

)

2,535,154

 

2

 

2,535,156

 

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

7



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2014 and 2013

(Expressed in million of Chilean pesos)

 

 

 

Notes

 

2014

 

2013

 

 

 

 

 

MCh$

 

MCh$

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income for the year

 

 

 

591,081

 

513,603

 

Items that do not represent cash flows:

 

 

 

 

 

 

 

Depreciation and amortization

 

35

 

30,501

 

28,909

 

Impairment of intangibles assets and property and equipment

 

35

 

2,085

 

2,247

 

Provision for loan losses, net of recoveries

 

32

 

303,003

 

262,467

 

Provision of contingent loans

 

32

 

4,800

 

12,692

 

Fair value adjustment of financial assets held-for-trading

 

 

 

1,764

 

(1,612

)

(Income) loss attributable to investments in other companies

 

14

 

(2,486

)

(1,780

)

(Income) loss sales of assets received in lieu of payment

 

36

 

(3,484

)

(6,126

)

(Income) loss on sales of property and equipment

 

36 - 37

 

(155

)

(219

)

(Increase) decrease in other assets and liabilities

 

 

 

(33,182

)

(42,730

)

Charge-offs of assets received in lieu of payment

 

37

 

1,622

 

1,891

 

Other credits (debits) that do not represent cash flows

 

 

 

22,255

 

9,890

 

(Gain) loss from foreign exchange transactions of other assets and other liabilities

 

 

 

(246,060

)

(148,118

)

Net changes in interest and fee accruals

 

 

 

(128,527

)

29,324

 

Changes in assets and liabilities that affect operating cash flows:

 

 

 

 

 

 

 

(Increase) decrease in loans and advances to banks, net

 

 

 

(94,186

)

281,524

 

(Increase) decrease in loans to customers, net

 

 

 

(944,367

)

(2,259,317

)

(Increase) decrease in financial assets held-for-trading, net

 

 

 

27,620

 

(165,629

)

(Increase) decrease in deferred taxes, net

 

17

 

(60,919

)

(12,381

)

Increase (decrease)in current account and other demand deposits

 

 

 

948,593

 

512,875

 

Increase (decrease) in payables from repurchase agreements and security lending

 

 

 

5,282

 

33,016

 

Increase (decrease) in savings accounts and time deposits

 

 

 

(650,150

)

797,009

 

Proceeds from sale of assets received in lieu of payment

 

 

 

6,393

 

8,454

 

Total cash flows provided by (used in) operating activities

 

 

 

(218,517

)

(144,011

)

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

(Increase) decrease in financial assets available-for-sale

 

 

 

124,832

 

(367,258

)

Purchases of property and equipment

 

16

 

(31,513

)

(12,249

)

Proceeds from sales of property and equipment

 

 

 

200

 

505

 

Purchases of intangible assets

 

15

 

(5,382

)

(5,511

)

Investments in other companies

 

14

 

(6,608

)

(1,440

)

Dividends received from investments in other companies

 

14

 

195

 

956

 

Total cash flows provided by (used in) investing activities

 

 

 

81,724

 

(384,997

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Redemption in mortgage finance bonds

 

 

 

(16,713

)

(20,734

)

Proceeds from bond issuances

 

22

 

1,826,552

 

1,607,265

 

Redemption of bond issuances

 

 

 

(1,149,274

)

(536,823

)

Proceeds from subscription and payment of shares

 

 

 

 

134,071

 

Dividends paid

 

27

 

(368,120

)

(343,455

)

Increase (decrease) in borrowings from financial institutions

 

 

 

4,584

 

(323,055

)

Increase (decrease) in other financial obligations

 

 

 

(18,883

)

54,074

 

Increase (decrease) in Borrowings from Central Bank

 

 

 

 

 

Proceeds from borrowings with Central Bank of Chile (long-term)

 

 

 

18

 

 

Payment of borrowings from Central Bank (long-term)

 

 

 

(20

)

(7

)

Proceeds from foreign borrowings

 

 

 

917,204

 

844,776

 

Payment of foreign borrowings

 

 

 

(811,697

)

(639,571

)

Proceeds from other long-term borrowings

 

 

 

7,091

 

609

 

Payment of other long-term borrowings

 

 

 

(13,211

)

(6,285

)

Total cash flows provided by (used in) financing activities

 

 

 

377,531

 

770,865

 

 

 

 

 

 

 

 

 

TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR

 

 

 

240,738

 

241,857

 

Net effect of exchange rate changes on cash and cash equivalents

 

 

 

46,222

 

60,437

 

Cash and cash equivalents at beginning of year

 

 

 

1,538,618

 

1,236,324

 

Cash and cash equivalents at end of year

 

7

 

1,825,578

 

1,538,618

 

 

 

 

2014

 

2013

 

 

 

MCh$

 

MCh$

 

Operating cash flow of Interest:

 

 

 

 

 

Interest received

 

1,705,103

 

1,669,559

 

Interest paid

 

(588,572

)

(581,066

)

 

The accompanying notes 1 to 42 form an

integral part of these consolidated financial statements

 

8



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2014 and 2013

(Expressed in million of Chilean pesos)

 


 

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” or “Superintendencia”). 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 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, insurance brokerage, financial advisory and securitization.

 

Banco de Chile’s legal domicile is Paseo 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, 2014 were authorized for issuance in accordance with the directors’ resolution on January 29, 2015.

 

For convenience of 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 (IFRS).

 

9



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

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, these shall prevail.

 

(b)                       Basis of consolidation:

 

The financial statements of Banco de Chile as of December 31, 2014 and 2013 have been consolidated with its Chilean subsidiaries and foreign subsidiary using the global integration method (line-by-line).  They include preparation of individual financial statements of the Bank and companies that participate in the consolidation, and it include adjustments and reclassifications necessary to homologue accounting policies and valuation criteria applied by the Bank.  The Consolidated Financial Statements have been prepared using the same accounting policies for similar transactions and other events in equivalent circumstances.

 

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

 

10



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(i)                          Subsidiaries

 

Consolidated financial statements as of December 31, 2014 and 2013 incorporate financial statements of the Bank and its subsidiaries.  According IFRS 10 — “Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically the Bank have power over the investee when has existing rights that give it the ability to direct the relevant activities of the investee.

 

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

 

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

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

·                      Rights emanated from other contractual arrangements.

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

 

11



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(i)                          Subsidiaries, continued

 

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

 

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

 

 

 

 

 

 

 

 

 

Interest Owned

 

 

 

 

 

 

 

Functional

 

Direct

 

Indirect

 

Total

 

RUT

 

Subsidiaries

 

Country

 

Currency

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

%

 

%

 

%

 

%

 

%

 

%

 

44,000,213-7

 

Banchile Trade Services Limited

 

Hong Kong

 

US$

 

100.00

 

100.0

 

 

 

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

 

96,571,220-8

 

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 and Joint Ventures:

 

Associates

 

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

 

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

 

12



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(ii)                        Associates and Joint Ventures, continued:

 

Joint Ventures

 

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

 

According IFRS 11, an entity shall be determining type of joint arrangement: “Joint Operation” or “Joint Venture”.

 

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

 

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

 

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

 

·                  Artikos S.A.

·                  Servipag Ltda.

 

(iii)                     Shares or rights in other companies

 

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

 

(iv)                    Special purpose entities

 

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

 

As of December 31, 2014 and 2013 the Bank does not control and has not created any SPEs.

 

13



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(v)                       Fund management

 

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

 

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

 

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

· The rights held by third parties.

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

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

 

The Bank and its subsidiaries manage on behalf and for the benefit of investors, acting in that relationship only as Agent. Under this category, and as provided in the aforementioned rule, do not control these funds when they exercise their authority to make decisions. Therefore, as of December 31, 2014 and 2013 act as agent, and therefore do not consolidate any fund.

 

(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 No. 15);

2.         Useful lives of property and equipment and intangible assets (Note No. 15 and No. 16);

3.         Current taxes and deferred taxes (Note No.17);

4.         Provisions (Note No. 24);

5.         Contingencies and commitments (Note No. 26);

6.         Provision for loan losses (Note No.11, Note No. 12 and Note No. 32);

7.         Fair value of financial assets and liabilities (Note No. 39)

 

14



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(d)                       Use of estimates and judgment, continued:

 

During the year ended December 31, 2014, there have been no other significant changes, different to it indicated above.

 

Estimates and relevant assumptions are regularly reviewed by the Bank’s Management to quantify certain assets, liabilities, income, expenses and commitments. The accounting estimations reviewed are recognised in the period in which the estimate is evaluated.

 

(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)                          Initial recognition

 

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

 

(ii)                       Classification

 

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

 

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.

 

15



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

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

 

(iii)                     Derecognition, continued:

 

(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.

 

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.

 

(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.

 

16



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

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

 

(vi)                    Fair value measurements

 

Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).

 

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

 

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

 

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

 

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.

 

17



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

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

 

(vi)                    Fair value measurements, continued:

 

The Bank has financial 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.

 

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

 

The Bank’s fair value disclosures are included in Note 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.

 

18



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(g)                         Transactions in foreign currency, continued:

 

As of December 31, 2014, 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$606.09  to US$1.  As of December 31, 2013, the Bank used the observed exchange rate equivalent to Ch$525.72 to US$1.

 

The gain of MCh$70,225 for net foreign exchange transactions, net (foreign exchange income of MCh$71,457 in 2013) 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).

 

(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.

 

19



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(i)                               Cash and cash equivalents, continued:

 

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

 

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

 

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

 

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

 

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

 

(j)                              Financial assets held-for-trading:

 

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

 

Financial assets held-for-trading are stated at their fair 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”.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(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, through of method of amortised cost. According to rules, the Bank not register as own portfolio the instruments bought within resale agreements.

 

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.

 

As of December 31, 2014 and 2013 it not exist operations corresponding to securities lending.

 

(l)                               Derivative instruments:

 

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

 

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

 

In addition, the Bank includes in the valorization of derivatives the “Counterparty Valuation Adjustment” (CVA), to reflect the counterparty risk in the determination of fair value.  This valorization doesn’t consider the Bank’s own credit risk, known as “Debit Valuation Adjustment” (DVA) in conformity with standards issued by SBIF.

 

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

 

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

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(l)                               Derivative instruments, continued:

 

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

 

(1)                      A hedge of the fair value of existing assets or liabilities or firm commitments, or

(2)                      A hedge of cash flows related to existing assets or liabilities or forecasted transactions.

 

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

 

(a)              at its inception, the hedge relationship has been formally documented;

(b)            it is expected that the hedge will be highly effective;

(c)             the effectiveness of the hedge can be measured in a reasonable manner; and

(d)            the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship.

 

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

 

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

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(l)                               Derivative instruments, continued:

 

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

 

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

 

(m)                       Loans to customers:

 

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

 

(i)         Valuation method

 

Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method, 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.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                       Loans to customers, continued:

 

(ii)      Lease contracts

 

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

 

(iii)                    Factoring transactions

 

Corresponds to invoices and other commercial instruments representative of credit, with or without recourse, received in factoring operations and which are registered to book value plus interest and adjustments until to maturity.

 

In those cases where the transfer of these instruments it was made without responsibility of the grantor, the Bank assumes the default risk.

 

(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:

 

·       Financial difficulties evident of the debtor or significant worsening of their credit quality.

·       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.

·       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.

·       The obligations of the debtor are negotiated with a significant loss due to the vulnerability of the debtor’s payment capacity.

·       Adverse changes produced in the technological, market, economic or legal area in which the debtor operates, which potentially compromise the debtor’s payment capacity.

 

24



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                       Loans to customers, continued:

 

(iv)                   Impairment of loans, continued:

 

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 and, in the case of loans and in the case of contingent loans, they are shown in liabilities under “Provisions”.

 

In accordance with what is stipulated by the 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 Non-complying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply.

 

25



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                       Loans to customers, continued:

 

(v)     Allowance for loan losses, continued:

 

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

 

v.i.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

 

Category

 

Probability of
default (%)

 

Loss given
default (%)

 

Expected
loss (%)

 

Normal Loans

 

A1

 

0.04

 

90.0

 

0.03600

 

 

A2

 

0.10

 

82.5

 

0.08250

 

 

A3

 

0.25

 

87.5

 

0.21875

 

 

A4

 

2.00

 

87.5

 

1.75000

 

 

A5

 

4.75

 

90.0

 

4.27500

 

 

A6

 

10.00

 

90.0

 

9.00000

 

Substandard Loans

 

B1

 

15.00

 

92.5

 

13.87500

 

 

B2

 

22.00

 

92.5

 

20.35000

 

 

B3

 

33.00

 

97.5

 

32.17500

 

 

B4

 

45.00

 

97.5

 

43.87500

 

 

26



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                       Loans to customers, continued:

 

(v)     Allowance for loan losses, continued:

 

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

 

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

 

Allowances for Normal and Substandard Loans

 

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

 

The exposure affects to allowances applicable to loans plus contingent loans minus the amounts to be recovered by way of the foreclosure of 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

= Exposure subject to allowances

GE

= Guaranteed exposure

EAP

= (Loans + Contingent Loans) – Financial Guarantees

 

However, independent of the results obtained from the equation above, the bank must be assigned a minimum provision level of 0.50% of the Normal Loans (including contingent loans).

 

v.i.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.

 

27



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                       Loans to customers, continued:

 

(v)     Allowance for loan losses, continued:

 

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

 

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

 

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

 

Classification

 

Expected loss

 

Allowance (%)

 

Non-complying loans

 

C1

 

Up to 3%

 

2

 

 

C2

 

More than 3% up to 20%

 

10

 

 

C3

 

More than 20% up to 30%

 

25

 

 

C4

 

More than 30% up to 50%

 

40

 

 

C5

 

More than 50% up to 80%

 

65

 

 

C6

 

More than 80%

 

90

 

 

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

 

Expected loss                    = (TE – R) / TE

Allowance                                     = TE x (AP/100)

 

Where:

TE

= total exposure

R

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

AP

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

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                   Loans to customers, continued:

 

(v)                      Allowance for loan losses, continued:

 

(v.ii)             Allowances for group evaluations

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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 .

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                   Loans to customers, continued:

 

(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