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 January, 2013

 

Commission File Number 001-15266

 

BANK OF CHILE

(Translation of registrant’s name into English)

 

Ahumada 251  
Santiago, Chile

(Address of principal executive offices)

 

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

 

Form 20-F  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 Financial Statements with notes as of December 31, 2012.

 



Table of Contents

 

 

Consolidated Financial Statements

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

 

 

 

Santiago, Chile

 

December 31, 2012 and 2011

 



Table of Contents

 

Consolidated Financial Statements

 

BANCO DE CHILE AND SUBSIDIARIES

 

December 31, 2012 and 2011

 

(Translation of consolidated financial statements originally issued in Spanish)

 

Index

 

I.

Consolidated Statements of Financial Position

II.

Consolidated Statements of Comprehensive Income

III.

Consolidated Statements of Changes in Equity

IV.

Consolidated Statements of Cash Flows

V.

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

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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

BANCO DE CHILE AND SUBSIDIARIES

 

INDEX

 

 

 

Page

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:

43

4.

Changes in Accounting Policies and Disclosures:

48

5.

Relevant Events:

49

6.

Segment Reporting:

53

7.

Cash and Cash Equivalents:

57

8.

Financial Assets Held-for-trading:

58

9.

Repurchase Agreements and Security Lending and Borrowing:

59

10.

Derivative Instruments and Accounting Hedges:

62

11.

Loans and advances to Banks:

68

12.

Loans to Customers, net:

69

13.

Investment Securities:

75

14.

Investments in Other Companies:

77

15.

Intangible Assets:

79

16.

Property and equipment:

82

17.

Current and Deferred Taxes:

84

18.

Other Assets:

88

19.

Current accounts and Other Demand Deposits:

89

20.

Savings accounts and Time Deposits:

89

21.

Borrowings from Financial Institutions:

90

22.

Debt Issued:

92

23.

Other Financial Obligations:

95

24.

Provisions:

95

25.

Other Liabilities:

99

26.

Contingencies and Commitments:

100

27.

Equity:

104

28.

Interest Revenue and Expenses:

110

29.

Income and Expenses from Fees and Commissions:

113

30.

Net Financial Operating Income:

114

31.

Foreign Exchange Transactions, net:

114

32.

Provisions for Loan Losses:

115

33.

Personnel Expenses:

116

34.

Administrative Expenses:

117

35.

Depreciation, Amortization and Impairment:

118

36.

Other Operating Income:

119

37.

Other Operating Expenses:

120

38.

Related Party Transactions:

121

39.

Fair Value of Financial Assets and Liabilities:

126

40.

Maturity of Assets and Liabilities:

136

41.

Risk Management:

138

42.

Own assets securitizations:

166

43.

Subsequent Events:

168

 

The accompanying notes 1 to 43 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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

Notes

 

2012

 

2011

 

 

 

 

 

MCh$

 

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

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

 

23,261,066

 

21,740,947

 

LIABILITIES

 

 

 

 

 

 

 

Current accounts and other demand deposits

 

19

 

5,470,971

 

4,895,426

 

Transactions in the course of payment

 

7

 

159,218

 

155,424

 

Payables from Repurchase Agreements and Security Lending

 

9

 

226,396

 

223,202

 

Savings accounts and time deposits

 

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

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

 

21,254,007

 

20,001,772

 

 

 

 

 

 

 

 

 

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

 

 

 

16,379

 

16,379

 

Income for the year

 

 

 

465,850

 

428,805

 

Less:

 

 

 

 

 

 

 

Provision for minimum dividends

 

 

 

(300,759

)

(259,501

)

Subtotal

 

 

 

2,007,057

 

1,739,173

 

Non-controlling interests

 

 

 

2

 

2

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

 

2,007,059

 

1,739,175

 

TOTAL LIABILITIES AND EQUITY

 

 

 

23,261,066

 

21,740,947

 

 

The accompanying notes 1 to 43 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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

A. CONSOLIDATED STATEMENT OF INCOME

 

 

 

Notes

 

2012

 

2011

 

 

 

 

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

Interest revenue

 

28

 

1,661,467

 

1,495,529

 

Interest expense

 

28

 

(708,629

)

(624,209

)

Net interest income

 

 

 

952,838

 

871,320

 

 

 

 

 

 

 

 

 

Income from fees and commissions

 

29

 

372,767

 

367,966

 

Expenses from fees and commissions

 

29

 

(65,510

)

(59,193

)

Net fees and commission income

 

 

 

307,257

 

308,773

 

 

 

 

 

 

 

 

 

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

 

Total operating revenues

 

 

 

1,342,039

 

1,223,782

 

 

 

 

 

 

 

 

 

Provisions for loan losses

 

32

 

(188,190

)

(124,840

)

OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES

 

 

 

1,153,849

 

1,098,942

 

 

 

 

 

 

 

 

 

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

)

TOTAL OPERATING EXPENSES

 

 

 

(633,819

)

(613,848

)

 

 

 

 

 

 

 

 

NET OPERATING INCOME

 

 

 

520,030

 

485,094

 

 

 

 

 

 

 

 

 

Income attributable to associates

 

14

 

(229

)

3,300

 

Income before income tax

 

 

 

519,801

 

488,394

 

Income tax

 

17

 

(53,950

)

(59,588

)

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

465,851

 

428,806

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Bank’s Owners

 

 

 

465,850

 

428,805

 

Non-controlling interests

 

 

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Ch$

 

Ch$

 

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

 

 

The accompanying notes 1 to 43 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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

B.    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Notes

 

2012

 

2011

 

 

 

 

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

465,851

 

428,806

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses):

 

 

 

 

 

 

 

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

 

13

 

24,510

 

(9,484

)

Gains and losses on derivatives held as cash flow hedges

 

 

 

1,777

 

(485

)

Cumulative translation adjustment

 

 

 

(58

)

68

 

Other comprehensive income before income taxes

 

 

 

26,229

 

(9,901

)

 

 

 

 

 

 

 

 

Income tax related to other comprehensive income

 

17

 

(5,220

)

1,956

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

 

21,009

 

(7,945

)

 

 

 

 

 

 

 

 

TOTAL CONSOLIDATED COMPREHENSIVE INCOME

 

 

 

486,860

 

420,861

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Bank’s owners

 

 

 

486,859

 

420,860

 

Non-controlling interest

 

 

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Ch$

 

Ch$

 

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

 

6



Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

for the years ended December 31, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

 

 

 

 

 

 

 

Reserves

 

Other comprehensive income

 

Retained earnings

 

 

 

 

 

 

 

 

 

Notes

 

Paid-in
Capital

 

Other
reserves

 

Reserves
from
earnings

 

Unrealized
gains (losses)
on available-
for- sale

 

Derivatives
cash flow
hedge

 

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, 2010

 

 

 

1,158,752

 

32,256

 

55,130

 

5,974

 

 

(104

)

16,091

 

378,529

 

(242,503

)

1,404,125

 

2

 

1,404,127

 

Capitalization of retained earnings

 

27

 

67,217

 

 

 

 

 

 

 

(67,217

)

 

 

 

 

Income retention (released) according to law

 

 

 

 

 

32,096

 

 

 

 

 

(32,096

)

 

 

 

 

Paid and distributed dividends

 

27

 

 

 

 

 

 

 

 

(279,216

)

242,503

 

(36,713

)

(1

)

(36,714

)

Subscription and payment of shares

 

27

 

210,114

 

 

 

 

 

 

 

 

 

210,114

 

 

210,114

 

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

68

 

 

 

 

68

 

 

68

 

Derivatives cash flow hedge, net

 

 

 

 

 

 

 

(395

)

 

 

 

 

(395

)

 

(395

)

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

 

 

 

 

 

 

(7,618

)

 

 

 

 

 

(7,618

)

 

(7,618

)

Equity adjustment in subsidiary

 

 

 

 

 

 

 

 

 

288

 

 

 

288

 

 

288

 

Income for the period 2011

 

 

 

 

 

 

 

 

 

 

428,805

 

 

428,805

 

1

 

428,806

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(259,501

)

(259,501

)

 

(259,501

)

Balances as of December 31, 2011

 

 

 

1,436,083

 

32,256

 

87,226

 

(1,644

)

(395

)

(36

)

16,379

 

428,805

 

(259,501

)

1,739,173

 

2

 

1,739,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalization of retained earnings

 

27

 

73,911

 

 

 

 

 

 

 

(73,911

)

 

 

 

 

Income retention (released) according to law

 

 

 

 

 

58,092

 

 

 

 

 

(58,092

)

 

 

 

 

Paid and distributed dividends

 

27

 

 

 

 

 

 

 

 

(296,802

)

259,501

 

(37,301

)

(1

)

(37,302

)

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

(58

)

 

 

 

(58

)

 

(58

)

Derivatives cash flow hedge, net

 

 

 

 

 

 

 

1,429

 

 

 

 

 

1,429

 

 

1,429

 

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

 

 

 

 

 

 

19,639

 

 

 

 

 

 

19,639

 

 

19,639

 

Subscription and payment of shares

 

27

 

119,084

 

 

 

 

 

 

 

 

 

119,084

 

 

119,084

 

Income for the period 2012

 

 

 

 

 

 

 

 

 

 

465,850

 

 

465,850

 

1

 

465,851

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(300,759

)

(300,759

)

 

(300,759

)

Balances as of December 31, 2012

 

 

 

1,629,078

 

32,256

 

145,318

 

17,995

 

1,034

 

(94

)

16,379

 

465,850

 

(300,759

)

2,007,057

 

2

 

2,007,059

 

 

The accompanying notes 1 to 43 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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

Notes

 

2012

 

2011

 

 

 

 

 

MCh$

 

MCh$

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income for the year

 

 

 

465,851

 

428,806

 

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

 

Fair value adjustment of financial assets held-for-trading

 

 

 

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

)

(Income) loss on sales of property and equipment

 

 

 

(318

)

(1,311

)

(Increase) decrease in other assets and liabilities

 

 

 

34,555

 

131,430

 

Charge-offs of assets received in lieu of payment

 

37

 

2,600

 

3,495

 

Other credits (debits) that do not represent cash flows

 

 

 

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

)

Changes in assets and liabilities that affect operating cash flows:

 

 

 

 

 

 

 

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

 

 

 

(695,376

)

(298,023

)

(Increase) decrease in loans to customers, net

 

 

 

(1,529,338

)

(3,024,978

)

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

 

 

 

52,892

 

9,203

 

(Increase) decrease in deferred taxes, net

 

17

 

(6,444

)

(8,201

)

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

 

Proceeds from sale of assets received in lieu of payment

 

 

 

9,510

 

10,221

 

Total cash flows provided by (used in) operating activities

 

 

 

(479,698

)

(447,203

)

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

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

 

 

 

295,572

 

(460,773

)

Purchases of property and equipment

 

16

 

(17,981

)

(22,073

)

Proceeds from sales of property and equipment

 

 

 

400

 

1,711

 

Purchases of intangible assets

 

15

 

(9,116

)

(9,597

)

Investments in other companies

 

14

 

(71

)

 

Dividends received from investments in other companies

 

14

 

943

 

761

 

Total cash flows provided by (used in) investing activities

 

 

 

269,747

 

(489,971

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Increase in mortgage finance bonds

 

 

 

 

 

Repayment of mortgage finance bonds

 

 

 

(27,529

)

(38,433

)

Proceeds from bond issuances

 

22

 

1,233,985

 

749,586

 

Redemption of bond issuances

 

 

 

(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)

 

 

 

20

 

91

 

Payment of borrowings from Central Bank (long-term)

 

 

 

(56

)

(106

)

Proceeds from foreign borrowings

 

 

 

325,247

 

805,594

 

Payment of foreign borrowings

 

 

 

(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

 

 

 

 

 

 

 

 

 

TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR

 

 

 

(161,864

)

(25,199

)

Net effect of exchange rate changes on cash and cash equivalents

 

 

 

(31,720

)

7,412

 

Cash and cash equivalents at beginning of year

 

 

 

1,429,908

 

1,447,695

 

Cash and cash equivalents at end of year

 

7

 

1,236,325

 

1,429,908

 

 

 

 

 

 

 

 

 

2012

 

2011

 

 

 

MCh$

 

MCh$

 

Operating cash flow of Interest:

 

 

 

 

 

Interest received

 

1,614,122

 

1,356,265

 

Interest paid

 

(657,235

)

(545,534

)

 

The accompanying notes 1 to 43 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, 2012 and 2011

(Translation of financial statements originally issued in Spanish)

(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”). 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.

 

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, the latter shall prevail.

 

(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.

 

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

 

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

 

 

 

 

 

 

 

Functional

 

Direct

 

Indirect

 

Total

 

RUT 

 

Subsidiaries

 

Country

 

Currency

 

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 where the Bank has significant influence over their operating and financial management policy decisions, 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.

 

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.

 

11



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(b)                      Basis of consolidation, continued:

 

(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.

 

12



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(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.

 

(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.

 

13



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(e)                        Asset and liability valuation criteria, continued:

 

(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.

 

14



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(e)                        Asset and liability valuation criteria, continued:

 

(iii)                    Derecognition, continued:

 

(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.

 

(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.

 

15



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(e)                        Asset and liability valuation criteria, continued:

 

(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.

 

16



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(e)                        Asset and liability valuation criteria, continued:

 

(vi)                   Fair value measurements, continued:

 

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.

 

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.

 

17



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, 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).

 

(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.

 

18



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(i)                           Cash and cash equivalents, continued:

 

(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.

 

(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”.

 

19



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(l)                           Derivative instruments, continued:

 

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)                      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.

 

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.

 

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.

 

20



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(l)                           Derivative instruments, continued:

 

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.

 

21



Table of Contents

 

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” 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.

 

(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:

 

·                               Evident financial difficulties 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.

 

22



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 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 Non-complying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply..

 

23



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:

 

(vi)                    Allowance for individual evaluations, continued:

 

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

 

Category

 

Probability of
default (%)

 

Loss given
default (%)

 

Expected
loss (%)

 

 

 

A1

 

0.04

 

90.0

 

0.03600

 

 

 

A2

 

0.10

 

82.5

 

0.08250

 

Normal Loans

 

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

 

 

 

B1

 

15.00

 

92.5

 

13.87500

 

Substandard Loans

 

B2

 

22.00

 

92.5

 

20.35000

 

 

 

B3

 

33.00

 

97.5

 

32.17500

 

 

 

B4

 

45.00

 

97.5

 

43.87500

 

 

24



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:

 

(vi)                              Allowance for individual evaluations, continued:

 

vi.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 0.5% 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.

 

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:

 

(vi)                              Allowance for individual evaluations, continued:

 

vi.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 (%)

 

 

C1

 

Up to 3 %

 

2

 

 

C2

 

More than 3% up to 20%

 

10

Non-complying loans

 

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).

 

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:

 

(vii) 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.

 

27



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                    Loans to customers, continued:

 

(vi)                    Charge-offs, continued

 

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

 

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

 

a)                           The Bank, based on all available information, concludes that will not obtain any cash flow of the credit recorded as an asset.

b)                           When the debt (without “executive title”, a collectability category pursuant to local law) meets 90 days since it was recorded as an asset.

a)                           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.

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

 

Term

Consumer leases

 

  6 months

Other non-real estate lease transactions

 

12 months

Real estate leases (commercial or residential)

 

36 months

 

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

 

28



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                    Loans to customers, continued:

 

(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.

 

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).

 

29



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(n)                        Financial assets held-to-maturity and available-for-sale, continued:

 

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.

 

(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.

 

30



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(p)                        Intangible assets, continued:

 

(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.

 

Estimated useful lives for 2012 and 2011 are as follows:

 

Buildings

 

50 years

Installations

 

10 years

Equipment

 

3 years

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.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(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”.

 

32



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(u)                        Provisions and contingent liabilities:

 

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

 

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

 

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

 

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

 

The following are classified as contingent 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.

 

33



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(u)                        Provisions and contingent liabilities, continued:

 

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.

 

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

 

Exposure

 

a)  Guarantors and pledges

 

100

%

b)  Confirmed foreign letters of credit

 

20

%

c)  Documentary letters of credit issued

 

20

%

d)  Guarantee deposits