As filed with the Securities and Exchange Commission on June 25, 2004

SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549

FORM 20-F

Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2003

Commission File Number 001-15266

BANCO DE CHILE
(Exact name of Registrant as specified in its charter)

BANK OF CHILE
(Translation of Registrant's name into English)

Republic of Chile
(Jurisdiction of incorporation or organization)

Banco de Chile
Ahumada 251
Santiago, Chile
(562) 637-1111
(Address of principal executive offices)

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

Title of each class
Name of each exchange
on which registered
American Depositary Shares, each representing 600 shares of
common stock, without nominal (par) value (“ADSs”)
          Shares of common stock, without nominal (par) value

New York Stock Exchange

New York Stock Exchange
(for listing purposes only)

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the Issuer's classes of capital or common
stock as of the close of the period covered by the annual report:

Shares of common stock: 68,079,783,605

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes          No
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17        Item 18

TABLE OF CONTENTS

Page

PART I

Item 1. Identity of Directors, Senior Management and Advisers 2
Item 2. Offer Statistics and Expected Timetable 2
Item 3. Key Information 3
Item 4. Information on the Company 15
Item 5. Operating and Financial Review and Prospects 85
Item 6. Directors, Senior Management and Employees 117
Item 7. Major Shareholders and Related Party Transactions 130
Item 8. Financial Information 131
Item 9. The Offer and the Listing 133
Item 10. Additional Information 135
Item 11. Quantitative and Qualitative Disclosures About Market Risk 150
Item 12. Description of Securities Other Than Equity Securities 161

PART II

Item 13. Defaults, Dividends, Arrearages and Delinquencies 161
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 161
Item 15. Controls and Procedures 161
Item 16. [Reserved] 162
Item 16A. Audit Committee Financial Expert 162
Item 16B. Code of Ethics 162
Item 16C. Principal Accountant Fees and Services 162
Item 16D. Exemptions from the Listing Standards for Audit Committees 163

PART III

Item 17. Financial Statements 163
Item 18. Financial Statements 163
Item 19. Exhibits 163
Index to Financial Statements F-1

i


THE MERGER

    On January 1, 2002, Banco de Chile merged with Banco de A. Edwards in a transaction in which Banco de Chile was the surviving corporate entity. As used in this annual report, unless the context otherwise requires, references to “Banco de Chile”relating to any date or period prior to January 1, 2002 (the effective date of the merger) are to Banco de Chile as it existed prior to the consummation of the merger, and such references relating to any date or period after January 1, 2002 are to Banco de Chile after the consummation of the merger.

PRESENTATION OF FINANCIAL INFORMATION

    We prepare our audited consolidated financial statements in Chilean pesos and in accordance with generally accepted accounting principles in Chile, known as Chilean GAAP, and the rules of the Superintendencia de Bancos e Instituciones Financieras, known as the Chilean Superintendency of Banks. Together, these requirements differ in certain significant respects from generally accepted accounting principles in the United States, known as U.S. GAAP. References to “Chilean GAAP” in this annual report are to Chilean GAAP, as supplemented by the applicable rules of the Chilean Superintendency of Banks. See note 28 to our audited consolidated financial statements contained elsewhere in this annual report for a description of the material differences between Chilean GAAP and U.S. GAAP, as they relate to us and our consolidated subsidiaries, and a reconciliation to U.S. GAAP of net income and shareholders’ equity.

    Pursuant to Chilean GAAP, unless otherwise indicated, financial data for all full-year periods through December 31, 2003 included in our audited consolidated financial statements and in the other financial information contained elsewhere in this annual report have been restated in constant Chilean pesos of December 31, 2003.

    In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos, and references to “UF” are to “Unidades de Fomento.” The Unidad de Fomento, or UF, is a unit of account which is linked to, and which is adjusted daily to reflect changes in, the Consumer Price Index. As of December 31, 2003, one UF equaled U.S.$28.23 and Ch$16,920. See note 1(c) to our audited consolidated financial statements. Percentages and certain dollar and peso amounts contained in this annual report have been rounded for ease of presentation.

    This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in preparing our audited consolidated financial statements or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Chilean pesos based on the Observed Exchange Rate, as described in “Item 3. Key Information—Selected Financial Data—Exchange Rates,” reported by the Banco Central de Chile, or the Central Bank, for December 30, 2003 (the latest practicable date, as December 31, 2003 was a banking holiday in Chile). The Observed Exchange Rate on June 23, 2004 was Ch$643.42=U.S.$1.00. The rate reported by the Central Bank is based on the rate for the prior business day in Chile and is the exchange rate specified by the Chilean Superintendency of Banks for use by Chilean banks in the preparation of their financial statements. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

    Unless otherwise specified, all references in this annual report to loans are to loans and financial leases before deduction of allowances for loan losses, and all market share data presented in this annual report are based on information published periodically by the Chilean Superintendency of Banks. Non-performing loans include loans as to which either principal or interest is overdue and loans that do not accrue interest. Restructured loans as to which no payments are overdue are not ordinarily classified as non-performing loans. Past due loans include, with respect to any loan, the portion of principal or interest that is 90 or more days overdue; the entire outstanding balance of any loan is included in past due loans only after legal collection

1


proceedings have been commenced. This practice differs from that normally followed in the United States, where the amount classified as past due would include the total principal and interest on all loans which have any portion overdue. See “Item 4. Information on the Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

    Unless otherwise specified, all references to “shareholders’ equity” as of December 31 of any year are to shareholders’equity after deducting our respective retained net income for such year, but all references to “average shareholders’ equity” for any year are to average shareholders’ equity including our respective retained net income.

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

MACRO-ECONOMIC AND MARKET DATA

    In this annual report, all macro-economic data relating to the Chilean economy is based on information published by the Central Bank. All market share and other data relating to the Chilean financial system as well as data on average return on shareholders’ equity are based on information published by the Chilean Superintendency of Banks. Information regarding the consolidated risk index of the Chilean financial system as a whole is not available. The Chilean Superintendency of Banks publishes the unconsolidated risk index for the financial system three times yearly in February, June and October.

PART I

Table of Contents

Item 1. Identity of Directors, Senior Management and Advisers

    Not Applicable.

Table of Contents

Item 2. Offer Statistics and Expected Timetable

    Not Applicable.

2


Table of Contents

Item 3. Key Information

SELECTED FINANCIAL DATA

    The following table presents historical financial information about us as of the dates and for each of the periods indicated. The following table should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements appearing elsewhere in this annual report. Our audited consolidated financial statements are prepared in accordance with Chilean GAAP and the rules of the Chilean Superintendence of Banks, which together differ in certain significant respects from U.S. GAAP. Note 28 to our audited consolidated financial statements provides a description of the material differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net income for the years ended December 31, 2001, 2002 and 2003 and shareholders’ equity at December 31, 2002 and 2003.

    Under Chilean GAAP, the merger between Banco de Chile and Banco de A. Edwards is accounted for as a “pooling of interest” on a prospective basis. As such, the historical financial statements for periods prior to the merger are not restated under Chilean GAAP. Under U.S. GAAP, the merger between the two banks, which have been under common control of Quiñenco S.A., since March 27, 2001, is accounted for in a manner similar to a pooling of interests under U.S. GAAP. As a consequence of the merger, we are required to restate our previously issued U.S. GAAP historical financial information to retroactively present the financial results for the merged bank as if Banco de Chile and Banco de A. Edwards had been combined throughout the periods during which common control existed. Under U.S. GAAP, the reported financial information for periods presented prior to March 27, 2001 reflects book values of Banco de A. Edwards, which had been under Quiñenco S.A.’s control since September 2, 1999. See note 28 to our audited consolidated financial statements.

  At or for the year ended December 31, 

  1999 2000 2001 2002 2003 2003






     (in millions of constant Ch$ as of December 31, 2003, except share data)  (in thousands
of U.S.$) 
 
CONSOLIDATED INCOME STATEMENT DATA
 
Chilean GAAP:
    Interest revenue Ch$ 527,891  Ch$ 589,694  Ch$ 536,330  Ch$ 696,603  Ch$ 428,704  U.S.$ 715,198 
    Interest expense (317,954) (369,640) (312,813) (325,338) (204,234) (340,719)






    Net interest revenue 209,937  220,054  223,517  371,265  224,470  374,479 
    Provisions for loan losses (53,046) (41,074) (47,736) (101,650) (60,069) (100,212)
    Total fees and income from
        services, net 40,543  41,331  44,598  79,407  103,389  172,482 
    Total other operating income (loss), net 19,183  12,460  8,677  (30,850) 96,391  160,807 
    Total other income and expenses, net 5,091  10,817  10,166  (5,967) 8,746  14,590 
    Total operating expenses (141,873) (144,275) (144,145) (250,517) (224,436) (374,422)
    Loss from price-level
        restatement (5,812) (9,802) (6,010) (9,692) (4,036) (6,733)






 
    Income before income taxes 74,023  89,511  89,067  51,996  144,455  240,991 
    Income taxes (2,050) (1,607) 1,406  1,165  (13,902) (23,192)






    Net income 71,973  87,904  90,473  53,161  130,553  217,799 






 
    Earnings per share(1) 1.60 1.96 2.01 0.78 1.92 ––
    Dividends per share(2) 1.21 2.02 1.95 2.02 0.78 ––
    Number of shares (in millions) 44,932.70 44,932.70 44,932.70 68,079.78 68,079.78 ––
 
U.S. GAAP(3):
    Interest revenue 285,931  324,905  711,262  718,640  452,246  754,473 
    Interest expense (175,805) (210,557) (414,761) (346,487) (204,148) (340,576)
    Net interest revenue 110,126  114,348  296,501  372,153  248,098  413,897 
    Provisions for loan losses (68,177) (36,457) (53,895) (107,657) (27,369) (45,659)
    Net income (8,225) (95) 50,260  17,123  130,398  217,541 
    Earnings per share(1) (0.36) (0.00) 0.87 0.25 1.92 ––
    Weighted average number of total shares(4) 23,147  23,147  57,587  68,080  68,080  ––

3


  At or for the year ended December 31, 
 
  1999 2000 2001 2002 2003 2003






     (in millions of constant Ch$ as of December 31, 2003, except share data)  (in thousands
of U.S.$) 
 
CONSOLIDATED BALANCE SHEET DATA            
 
Chilean GAAP:
    Cash and due from banks 449,841  515,640  549,225  683,187  856,834  1,429,438 
    Financial investments 1,181,795  1,442,069  1,716,197  1,614,890  1,916,324  3,196,964 
    Loans, net of allowances 3,667,699  3,887,540  3,876,574  6,004,927  6,075,955  10,136,390 
    Other assets 194,657  192,390  189,317  376,766  400,789  668,628 






    Total assets 5,493,992  6,037,639  6,331,313  8,679,770  9,249,902  15,431,420 






 
    Deposits 3,130,590  3,673,909  3,840,859  5,189,649  5,313,863  8,865,008 
    Other interest bearing liabilities 1,587,218  1,562,094  1,658,449  2,307,172  2,570,849  4,288,893 
    Other liabilities 364,772  391,411  417,686  558,537  669,514  1,116,937 






    Total liabilities 5,082,580  5,627,414  5,916,994  8,055,358  8,554,226  14,270,838 
    Shareholders’ equity Ch$ 411,412  Ch$ 410,225  Ch$ 414,319  Ch$ 624,412  Ch$ 695,676  U.S.$ 1,160,582 
 
U.S. GAAP(3):
    Financial investments 258,964  220,418  1,691,483  1,448,460  1,631,019  2,720,995 
    Loans, net 2,035,351  2,225,145  5,771,574  5,666,719  5,737,421  9,571,621 
    Total assets 2,601,034  2,914,251  8,997,114  8,683,670  9,207,415  15,360,540 
    Total liabilities 2,361,546  2,498,659  7,819,816  7,390,907  7,866,761  13,123,955 
    Total shareholders’ equity 239,488  415,592  1,177,298  1,292,760  1,340,649  2,236,577 

  At or for the year ended December 31, 

  1999  2000  2001  2002  2003 





 
CONSOLIDATED RATIOS
 
Chilean GAAP:
Profitability and Performance
Net interest margin(5) 4.15%  4.27%  3.87%  4.52%  2.75% 
Return on average total assets(6) 1.16  1.57  1.44  0.59  1.45 
Return on average shareholders’ equity(7) 19.49  23.68  23.21  8.69  20.01 
 
Capital
Average shareholders’ equity as a percentage of total assets 5.93  6.62  6.21  6.75  7.22 
Bank regulatory capital as a percentage of minimum regulatory
   capital 235.44  203.86  197.67  218.35  202.71 
Ratio of liabilities to regulatory capital(8) 14.97  17.46  18.27  14.10  15.14 
 
Credit Quality
Category B-, C and D loans as a percentage of total loans 5.74  5.75  6.28  6.69  5.16 
Past due loans as a percentage of total loans 1.11  1.36  1.23  2.35  1.69 
Allowances for loan losses as a percentage of loans category B-,
   C and D loans 52.27  52.52  54.60  52.43  55.54 
Allowances for loan losses as a percentage of past due loans 270.08  222.46  278.71  149.06  170.03 
Allowances for loan losses as a percentage of total loans 3.00  3.02  3.43  3.51  2.87 
Past due amounts as a percentage of shareholders’ equity 12.38  16.89  15.26  23.44  15.17 
Consolidated risk index 2.03  2.01  2.42  3.00  2.36 
 
Operating Ratios
Operating expenses/operating revenue 52.61  52.68  52.08  59.67  52.90 
Operating expenses/average total assets 2.28  2.57  2.30  2.76  2.48 
 
U.S. GAAP:
Profitability and Performance
Net interest margin(9) 2.18  2.22  5.12  4.53  3.03 
Return on average total assets(10) (0.13)% 0.00% 0.80% 0.19% 1.44%
__________________________
(1)

Earnings per share data are calculated by dividing net income by the weighted average of shares outstanding during the year. See footnote (4) to this table for an explanation of the weighted average calculation.

(2)

Dividends per share data are calculated by dividing the amount of the dividend paid by the weighted average of shares outstanding during the year. See footnote (4) to this table for an explanation of the weighted average calculation.

(3)

All U.S. GAAP numbers use Article 9 presentation. All U.S. GAAP figures have been calculated taking into account the U.S. GAAP adjustments set forth in note 28 to our audited consolidated financial statements.

(4)

Common shares outstanding are presented giving effect to the weighted average number of shares of the merged bank outstanding during the year. The aggregate number is calculated based on an exchange ratio of 3.135826 shares of Banco de Chile for each outstanding share of Banco de A. Edwards. Banco de A. Edwards had 7,381.41 million shares outstanding immediately prior to the merger. For the years ended December 31, 1999 and 2000, the weighted average number of shares represents Banco de A. Edwards outstanding shares presented in terms of Banco de Chile shares using the exchange ratio discussed above. For the year ended December 31, 2001, Banco de Chile's and Banco de A. Edwards' shares have been combined as of March 27, 2001.

(5)

Net interest revenue divided by average interest earning assets.

(6)

Net income (loss) divided by average total assets.

(7)

Net income (loss) divided by average shareholders’ equity.

(8)

Total liabilities divided by bank regulatory capital.

(9)

Net interest revenue under U.S. GAAP divided by average interest earning assets.

(10)

Net income under U.S. GAAP divided by average total assets.

4


Exchange Rates

    Chile has two currency markets, the Mercado Cambiario Formal, or the Formal Exchange Market, and the Mercado Cambiario Informal, or the Informal Exchange Market. Under the Central Bank Act, which is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be modified, the Central Bank determines which purchases and sales of foreign currencies must be carried out in the Formal Exchange Market. The Formal Exchange Market is comprised of the banks and other entities authorized to purchase and sell foreign currencies by the Central Bank. The conversion from pesos to U.S. dollars of all payments and distributions with respect to the ADSs must be carried out at the spot market rate in the Formal Exchange Market.

    For purposes of the operation of the Formal Exchange Market, the Central Bank sets a monthly reference exchange rate, or dolar acuerdo, taking internal and external inflation into account. The reference exchange rate is adjusted daily to reflect variations in parities between the peso and each of the U.S. dollar, the Euro and the Japanese yen. The daily Observed Exchange Rate for a given date is the average exchange rate of the transactions conducted in the Formal Exchange Market on the immediately preceding banking day, as certified by the Central Bank.

    Prior to September 1999, authorized transactions by banks were generally transacted within a certain band above or below the reference exchange rate. In order to maintain the average exchange rate within such limits, the Central Bank would intervene by selling and buying foreign currencies on the Formal Exchange Market.

    On September 2, 1999, the Central Bank resolved to eliminate the exchange rate band as an instrument of exchange rate policy, introducing more flexibility to the exchange market. For this measure, the monetary authority considered the international financial scenario, the domestic inflation rate, the level of the external accounts, and the market development of hedge exchange financial instruments. At the same time, the Central Bank announced that an intervention in the exchange market would take place only in special and qualified cases.

    Purchases and sales of foreign currencies that may be effected outside the Formal Exchange Market can be carried out in the Informal Exchange Market. The Informal Exchange Market reflects transactions carried out at informal exchange rates by entities not expressly authorized to operate in the Formal Exchange Market, such as certain foreign exchange houses and travel agencies. There are no limits on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate. On December 30, 2003 (the latest practicable date, as December 31, 2003 was a banking holiday in Chile), the average exchange rate in the Informal Exchange Market was Ch$592.75 per U.S.$1.00, or 1.11% lower than the published Observed Exchange Rate of Ch$599.42 per U.S. $1.00.

5


    The following table sets forth the annual low, high, average and period-end Observed Exchange Rate for U.S. dollars for each year beginning in 1999, as reported by the Central Bank:

Daily Observed Exchange Rate Ch$ per U.S.$(1) 

Year Low(2)  High(2)  Average(3)  Period End 




 
1999 Ch$ 468.69  Ch$ 550.93  Ch$ 508.78  Ch$ 527.70 
2000 501.04  580.37  539.49  572.68 
2001 557.13  716.62  634.94  656.20 
2002 641.75  756.56  688.94  712.38 
2003 593.10  758.21  691.40  599.42 
    December 593.10  621.27  602.90  599.42 
2004
    January 559.21  596.78  573.64  596.78 
    February 571.35  598.60  584.31  594.32 
    March 588.04  623.21  603.91  623.21 
    April 596.61  624.84  608.19  624.84 
    May 622.25  644.42  635.76  632.32 
    June(4) 636.02  649.45  645.20  643.42 
_______________
Source: Central Bank.
(1)

Nominal figures.

(2)

Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)

The average of monthly average rates during the year.

(4)

Period from June 1, 2004 through June 23, 2004.

    The Observed Exchange Rate on June 23, 2004 was Ch$643.42 = U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

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RISK FACTORS

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

    We are subject to market risks that are presented both in this subsection and in “Item 5. Operating and Financial Review and Prospects.”

Risks Relating to our Operations and the Banking Industry

    The growth of our loan portfolio may expose us to increased loan losses, and its rate of growth may decrease in the future.

    From December 31, 1998 to December 31, 2003, our aggregate loan portfolio, net of interbank loans (on an unconsolidated basis) grew by 121.2% in nominal terms and 92.3% in real terms to Ch$6,065,621 million. During the same period, our consumer loan portfolio grew by 172.6% in nominal terms and 137.1% in real terms to Ch$478,093 million, each in accordance with the loan classification system of the Chilean Superintendency of Banks. On a combined basis (combining Banco de Chile and Banco de A. Edwards), from December 31, 1998 to December 31, 2003, the aggregate loan portfolio of both banks, net of interbank loans (on an unconsolidated basis) grew by 32.0% in nominal terms and 14.8% in real terms to Ch$6,065,621 million. During the same period, on a combined basis, the consumer loan portfolio of both banks grew by 62.0% in nominal terms and 40.9% in real terms to Ch$478,093 million, each calculated in accordance with the loan classification system of the Chilean Superintendency of Banks. (Because the method of aggregation of loans used by the Chilean Superintendency of Banks for its public information differs in minor respects from that used by us for internal accounting purposes, the foregoing figures may differ from the figures included in our audited consolidated financial statements.) Further expansion of our loan portfolio (particularly in the lower-middle to middle income consumer and small- and medium-sized corporate business areas) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of allowances for loan losses. Our loan portfolio may not continue to grow at the same or similar rates in the future.

    According to the Chilean Superintendency of Banks, from December 31, 1998 to December 31, 2003, the aggregate amount of loans outstanding in the Chilean banking system (on an unconsolidated basis) grew by 39.6% in nominal terms and 21.4% in real terms to Ch$32,831,720 million. A decline in the rate of growth of the Chilean economy could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. See “Item 4. Information on the Company—Selected Statistical Information.”

    Restrictions imposed by banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.

    We are subject to regulation by the Chilean Superintendency of Banks. In addition, we are subject to regulation by the Central Bank with regard to certain matters, including interest rates and foreign exchange transactions. See “Item 4. Information on the Company—Regulation and Supervision.” During the Chilean financial crisis of 1982 and 1983, the Central Bank and the Chilean Superintendency of Banks strictly controlled the funding, lending and general business matters of the banking industry in Chile.

    Pursuant to the Ley General de Bancos, or the General Banking Law, all Chilean banks may engage in additional businesses depending on the risk of the activity and the strength of the bank. The General Banking Law also applies to the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices, or Basel Committee, and limits the

7


discretion of the Chilean Superintendency of Banks to deny new banking licenses. There can be no assurance that regulators will not in the future impose more restrictive limitations on the activities of banks, including us, than those that are currently in effect. Any such change could have a material adverse effect on our financial condition or results of operations.

    We reported a negative cash flow from operating activities for the years ended December 31, 2000, 2001 and 2003, which could have an adverse effect on our ability to operate in the future.

    During 2000, 2001 and 2003, we reported a negative cash flow from our operations. During those years, we invested a large amount of cash in Central Bank securities in order to meet our technical reserve requirements as a result of higher current account and other demand deposits levels, resulting in negative operating cash flow. From time to time, we may need to invest large amounts of cash in order to meet regulatory requirements. Given current low interest rates, our customers tend to maintain deposits in checking accounts and in other demand deposits, which are included in the technical reserve requirement, which may also result in a need to invest more cash in highly liquid products such as Central Bank securities. Either or both of these needs may affect our cash flow from operations. There can be no assurance that we will not report a negative cash flow from operating activities in the future.

    Increased competition and industry consolidation may adversely affect our operations.

    The Chilean market for financial services is highly competitive. We compete with other Chilean private sector domestic and foreign banks, with Banco del Estado de Chile, a public sector bank, and with large department stores that make consumer loans to a large portion of the Chilean population. In 2002, two new private sector banks affiliated with Chile’s largest department stores began their operations, mainly as consumer and medium-sized corporate niche banks. In 2003, a new niche bank oriented at servicing corporations began its operations, and two new authorizations were granted by the Chilean Superintendency of Bank for the creation of additional banks, oriented at servicing both individuals and corporations. The lower-middle to middle income portions of the Chilean population and the small- and medium-sized companies have become the target markets of several banks, and competition with respect to these customers is likely to increase. As a result, net interest margins in these subsegments are likely to decline. Although we believe that demand for financial products and services from lower-middle to middle income individuals and from small- and medium-sized companies will continue to grow during the remainder of the decade, there can be no assurance that net interest margins will be maintained at their current levels.

    We also face competition from non-bank competitors with respect to some of our credit products, such as credit cards and consumer loans. Non-bank competition from large department stores has become increasingly significant in the consumer lending sector. In addition, we face competition from competitors such as leasing, factoring and automobile finance companies, with respect to credit products, and mutual funds, pension funds and insurance companies, with respect to savings products and mortgage loans. Currently, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business has experienced rapid growth. See “Item 4. Information on the Company—Business Overview—Competition.”

    The increase in competition within the Chilean banking industry in recent years had led to, among other things, consolidation in the industry. For example, on August 1, 2002, Banco Santiago and Banco Santander-Chile, the then-second and third largest banks in Chile, respectively, merged creating Chile’s largest bank. In 2003, Banco del Desarrollo merged with Banco Sudameris. We expect the trends of increased competition and consolidation to continue and result in the formation of new large financial groups. Consolidation, which can result in the creation of larger and stronger banks, may adversely affect our financial condition and results of operations by affecting the net interest margins we are able to generate and by increasing our costs of operations.

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    Our exposure to small businesses and lower-middle income individuals could lead to higher levels of past due loans and subsequent charge-offs.

    Although we historically emphasized banking for large and medium-sized businesses, an increasing number of our corporate customers (approximately 9.6% of the value of the total loan portfolio) currently consist of small companies (those with annual sales of less than Ch$300 million) and, to a lesser extent, individual customers (approximately 2.6% of the value of the total loan portfolio at December 31, 2003) in the lower income individuals subsegment (annual income between Ch$1.8 million and Ch$5.4 million). Our strategy includes increasing lending and providing other services to attract additional lower-middle income individuals and small companies as customers. Small companies and lower-middle to middle income individuals are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and high income individuals. Consequently, in the future we may experience higher levels of past due loans, which could result in higher allowances for loan losses. There can be no assurance that the levels of past due loans and subsequent charge-offs will not be materially higher in the future. See “Item 4. Information on the Company—Business Overview—Principal Business Activities.”

    An affiliate of ours may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends.

    As of December 31, 2003, Sociedad Administradora de la Obligacion Subordinada SAOS S.A., or SAOS, our affiliate, holds 42% of our shares as a consequence of our 1996 reorganization. The reorganization was partially due to our 1989 repurchase from the Central Bank of certain non-performing loans that we had previously sold to the Central Bank and later exchanged for a subordinated obligation without a fixed term, known as “deuda subordinada,” or subordinated debt. Under the terms of a repayment obligation in favor of the Central Bank that SAOS assumed to replace the Central Bank subordinated debt, SAOS may be required to sell some of our shares to the public. See “Item 4. Information on the Company—History and Development of the Bank—History—The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt.”

    In exchange for assuming the Central Bank indebtedness, SAOS received from SM-Chile S.A., a holding company that controls us and SAOS, 63.6% of our shares as collateral for this indebtedness. As a result of our merger with Banco de A. Edwards, the percentage of our shares held by SAOS decreased to 42.0%. Dividends received from us are the sole source of SAOS’s revenue, which it must apply to repay this indebtedness. However, under SAOS’s agreement with the Central Bank, we have no obligation to distribute dividends to our shareholders. To the extent distributed dividends are not sufficient to pay the amount due on this indebtedness, SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If the cumulative deficit balance exceeds an amount equal to 20% of our capital and reserves, the Central Bank may require SAOS to sell a sufficient number of shares of our stock owned by SAOS to pay the entire accumulated deficit amount. As of April 30, 2004, SAOS maintained a deficit balance with the Central Bank of Ch$37,080 million, equivalent to 7.2% of our capital and reserves. As of the same date, Ch$102,438 million would have represented 20% of our capital and reserves. If from time to time in the future our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth, and to distribute stock dividends among our shareholders, the Central Bank may require us to pay the portion of the net income corresponding to shares owned by SAOS in cash to SAOS. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months. The shareholders of SM-Chile will have a right of first refusal with respect to that sale.

    We are unable to determine the likelihood that the Central Bank would require SAOS to sell shares of our common stock or that SAOS will otherwise be required to sell any stock dividends distributed by us, nor can we determine the number of such shares SAOS may be required to sell. If SAOS is required to sell shares of our stock in the public market, that sale could adversely affect the prevailing market price of our stock.

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Our results of operations are affected by interest rate volatility.

    Our results of operations depend to a great extent on our net interest revenue. In 2003, net interest revenue represented 52.9% of our operating revenue. Changes in market interest rates could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, leading to a reduction in our net interest revenue. Interest rates are highly sensitive to many factors beyond our control, including the reserve policies of the Central Bank, deregulation of the financial sector in Chile, domestic and international economic and political conditions and other factors. Any volatility in interest rates could have a material adverse effect on our financial condition or results of operations. The average annual short-term interest rate (based on the rate paid by Chilean financial institutions) for 90 to 360 day deposits was 3.74% in 2001, 1.94% in 2002, and 1.76% in 2003. The average long-term interest rate based on the Chilean Central Bank’s eight-year duration bonds was 5.52% in 2001, 4.54% in 2002, and 3.96% in 2003. See “Item 5. Operating and Financial Review and Prospects—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects —Overview—Interest Rates.”

Risks Relating to our ADSs

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

    As of December 31, 2003, L.Q. Inversiones Financieras S.A., a holding company beneficially owned by Quiñenco S.A., beneficially owned approximately 52.45% of our outstanding voting rights. These principal shareholders are in a position to elect a majority of the members of our board of directors, direct our management and control substantially all matters that are to be decided by a vote of the shareholders, including fundamental corporate transactions.

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

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

    We merged with Banco de A. Edwards, a Chilean Bank, effective as of January 1, 2002. Prior to the merger, there was no public market for our shares outside Chile or for our ADSs. While our ADSs have been listed on the New York Stock Exchange, or NYSE, since the first quarter of 2002, there can be no assurance that an active trading market for our ADSs will be sustained. During 2003, a daily average of 10,770 American Depositary Receipts, or ADRs, were traded on the NYSE. Although our shares are traded on the Santiago Stock Exchange, the Valparaiso Stock Exchange and the Chilean Electronic Stock Exchange, the market for our shares in Chile is small and illiquid. At December 31, 2003, approximately 11.91% of our outstanding shares are held by shareholders other than our principal shareholders, including SM-Chile and SAOS.

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

    You may be unable to exercise preemptive rights.

    The Ley Sobre Sociedades Anonimas No. 18,046 and the Reglamento de Sociedades Anonimas, or the Chilean Corporations Law and its regulations require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs) to purchase a sufficient number

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of shares to maintain their existing ownership percentage. Such an offering would not be possible unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.

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

    Developments in other emerging markets may adversely affect the market price of the ADSs and shares.

    The market price of the ADSs may be adversely affected by declines in the international financial markets and adverse world economic conditions. The market for Chilean securities is, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Although economic conditions are different in each country, investors’ reactions to developments in one country can affect the securities markets and the securities of issuers in other countries, including Chile. Since the fourth quarter of 1997, the international financial markets have experienced volatility. Developments in other countries may adversely affect the market price of the ADSs. If the current economic situation in Argentina continues to deteriorate, or if similar developments occur in other international financial markets in the future, the market price of the ADSs could be adversely affected.

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

    Equity investments in Chile by persons who are not Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of the investments and earnings therefrom. In April 2001, the Central Bank eliminated most of the regulations that affected foreign investors, although foreign investors still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them or the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we cannot advise you as to the duration or impact of such restrictions if imposed.

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

    We are required to withhold for tax purposes 35% of any dividend we pay to you.

    Owners of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be paid net of foreign currency exchange fees and expenses of the depositary and will be subject to Chilean withholding tax of up to 35% of the dividend, which we will withhold and pay to the Chilean tax authorities. Any dividend distributions made in property (other than common stock) will be subject to the same Chilean tax rules as cash dividends. See "Item 10. Additional Information--Taxation--Chilean Tax Considerations."

Risks Relating to Chile

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

    The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could affect the dollar value of our common stock and our ADSs. The peso has been subject to large devaluations in the past and could be subject to significant fluctuations in the future. In the

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period from December 31, 1998 to December 31, 2003, the value of the U.S. dollar relative to the Chilean peso increased approximately 10.0%, as compared to an 8.2% decrease in value in the period from December 31, 1994 to December 31, 1998.

    Chilean trading in the shares underlying our ADSs is conducted in pesos. Cash distributions with respect to our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at the then-prevailing exchange rate for the purpose of making payments in respect of our ADSs. If the value of the Chilean peso falls relative to the U.S. dollar, the dollar value of our ADSs and any distributions to be received from the depositary will be reduced. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. See “Item 10. Additional Information—Exchange Controls.”

    Inflation could adversely affect the value of our ADSs and financial condition and results of operations.

    Although Chilean inflation has moderated in recent years, Chile has experienced high levels of inflation in the past. High levels of inflation in Chile could adversely affect the Chilean economy and, indirectly, the value of our ADSs. The annual rate of inflation (as measured by changes in the Consumer Price Index and as reported by the Instituto Nacional de Estadisticas, or the Chilean National Institute of Statistics) during the last five years ended December 31, 2003 and the first five months of 2004 was:

Year Inflation
(Consumer Price
Index)


1999 2.3%  
2000 4.5
2001 2.6
2002 2.8
2003 1.1
2004 (through May 31) 1.1%
 
________________
Source: Chilean National Institute of Statistics

    Although we currently benefit from inflation in Chile due to the structure of our assets and liabilities (i.e., we have a significant amount of deposits that are not indexed to the inflation rate and do not accrue interest while a significant portion of our loans are indexed to the inflation rate), our operating results and the value of our ADSs in the future may be adversely affected by changing levels of inflation, and Chilean inflation could change significantly from the current level.

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

    A substantial amount of our loans are to borrowers doing business in Chile. Accordingly, the recoverability of these loans in particular, and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Chile. The Chilean economy has been influenced, to varying degrees, by economic conditions in other emerging market countries. There can be no assurance that the Chilean economy will continue to grow in the future or that future developments in or affecting the Chilean economy, will not materially and adversely affect our business, financial condition or results of operations. Furthermore, although our operations (with the exception of our branch in New York, our agency in Miami and our three representative offices located in Buenos Aires, Sao Paulo and Mexico City) are currently limited to Chile, we may in the future pursue a strategy of expansion into other Latin American countries. The potential success of such strategy will depend in part on political, social and economic developments in such countries.

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    According to data published by the Central Bank, the Chilean economy grew at a rate of 3.4% in 2001, 2.2% in 2002 and 3.3% in 2003. The reduction in growth prevailing in recent years, as compared to the 1990s, has adversely affected the overall asset quality of the Chilean banking system. According to information published by the Chilean Superintendency of Banks, the unconsolidated risk index of the Chilean financial system as a whole increased from 1.50% in October 1998 to 1.82% in October 2003 (the latest figures available for the financial system). Our results of operations and financial condition could also be affected by changes in economic or other policies of the Chilean government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector, or other political or economic developments in Chile.

    Argentina’s insolvency and default on its public debt which deepened the existing financial economic and political crisis in that country, has adversely affected Chile. If Argentina’s economic environment does not improve, the economy in Chile, as both a neighboring country and a trading partner, could also be adversely affected and could experience slower growth than in recent years.

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

    The accounting, financial reporting and securities disclosure requirements in Chile differ from those in the United States. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company.

    There are also important differences between Chilean and U.S. accounting and financial reporting standards. As a result, Chilean financial statements and reported earnings generally differ from those that would be reported based on U.S. accounting and reporting standards. See note 28 to our audited consolidated financial statements.

    As a regulated financial institution, we are required to submit to the Chilean Superintendency of Banks unaudited unconsolidated balance sheets and income statements, excluding any note disclosure, prepared in accordance with Chilean GAAP on a monthly basis. The Chilean Superintendency of Banks makes this information public within approximately three months of receipt. The Chilean Superintendency of Banks also makes summary financial information available within three weeks of receipt. Such disclosure differs in a number of significant respects from information generally available in the United States with respect to U.S. financial institutions.

    Chilean disclosure requirements for publicly listed companies differ from those in the United States in some important respects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities markets are not as highly regulated and closely supervised as the U.S. securities markets.

    Chilean law provides for fewer and less well-defined shareholders’ rights.

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

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FORWARD-LOOKING STATEMENTS

    This annual report contains forward-looking statements. These statements appear throughout this annual report, including, without limitation, under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Examples of such forward-looking statements include:

    Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “could,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These statements may relate to (1) our asset growth and financing plans, (2) trends affecting our financial condition or results of operations and (3) the impact of competition and regulations, but are not limited to such topics. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this annual report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors not currently expected by us would significantly alter the results set forth in these statements.

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

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

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Table of Contents

Item 4. Information on the Company

HISTORY AND DEVELOPMENT OF THE BANK

Overview

    Our bank was founded in 1893, and we believe that we have been, for much of our recent history, among the largest and most profitable Chilean banks in terms of return on assets and shareholders’ equity. We are engaged primarily in commercial banking in Chile, providing general banking services to a diverse customer base that includes large corporations, small and mid-sized businesses and individuals.

    Our legal name is Banco de Chile S.A., and we are organized as a banking corporation under the laws of the Republic of Chile and are licensed by the Chilean Superintendency of Banks to operate as a commercial bank. Our principal executive offices are located at Ahumada 251, Santiago, Chile. Our telephone number is +56 (2) 637-1111 and our website is www.bancochile.cl. Our registered agent in the United States is Banco de Chile, New York Branch. Its office is located at 535 Madison Avenue, 9th Floor, New York, New York 10022; its telephone number is +1 (212) 758-0909.

    We are a full-service financial institution providing, directly and indirectly through our subsidiaries and affiliates, a wide variety of credit and non-credit products and services to all segments of the Chilean financial market. Our operations are organized in six principal business areas:

    Our corporate banking services include commercial loans, including working capital facilities and trade finance, foreign exchange, capital market services, cash management and non-credit services such as payroll and payment services. We also provide a wide range of treasury and risk management products to our corporate customers, and we provide our individual customers with credit cards, residential mortgage, auto and consumer loans as well as traditional deposit services such as checking and savings accounts and time deposits.

    We offer international banking services through our branch in New York, our agency in Miami, representative offices in Buenos Aires, Sao Paulo and Mexico City and a worldwide network of correspondent banks. In addition to our commercial banking operations, through our subsidiaries, we offer a variety of non-banking financial services including securities brokerage, mutual fund management, financial advisory services, factoring, insurance brokerage, securitization and collection and sales services.

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    As of December 31, 2003, we had:

    According to information published by the Chilean Superintendency of Banks, as of December 31, 2003, we were the second largest private bank in Chile in terms of total loans (excluding interbank loans) with a market share of 18.5%.

    We are headquartered in Santiago, Chile and, as of December 31, 2003, had 9,133 employees and delivered financial products and services through a nationwide network of 224 branches, 2,970 automated teller machines, or ATMs, (823 of which are owned by us) located throughout Chile, and other electronic distribution channels.

History

    We were established in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agricola and Banco de Valparaiso, which created the largest privately held bank in Chile. To the best of our knowledge, we retained this status until the mid-1990s and remained the largest private bank in Chile until mid-2002.

    Beginning in the early 1970s, the Chilean government assumed control of a majority of Chilean banks, then in operation, and all but one of the foreign banks operating at the time closed their branches and offices in Chile. Throughout this era, we remained privately owned, with the Chilean government owning participating shares which it sold to private investors in 1975.

    We developed a well-recognized name in Chile and expanded our operations in foreign markets where we developed an extensive network of correspondent banks. In 1906, we established a representative office in London, which we maintained until 1985, when our foreign operations were centralized at the New York branch.

    In 1987, the General Banking Law was amended to permit banks to offer, through subsidiaries, certain services which Chilean regulators considered complementary to commercial banking services. As a consequence, in 1987 and 1988, we established four subsidiaries to provide the full range of financial products and services permitted by the amended General Banking Law. The General Banking Law was further amended in 1997 to permit banks, through their subsidiaries, to offer factoring, securitization and insurance brokerage services. As a result, in 1999 we established our insurance brokerage and factoring subsidiaries.

    Merger with Banco de A. Edwards

    At a special board meeting held on August 7, 2001, our board of directors unanimously approved a preliminary merger agreement with Banco de A. Edwards, resolved to seek the necessary regulatory approvals and resolved to summon a general extraordinary shareholders’ meeting to approve the merger once the regulatory approvals had been obtained. At an extraordinary shareholders’ meeting held on December 6, 2001, our shareholders approved the merger with Banco de A. Edwards, which became effective on January 1, 2002. In January 2002, we were listed in the NYSE under the symbol BCH. During 2002, our shares were also listed on the Latin American Stock Exchange of the Madrid Stock Exchange, or Latibex, and on the London Stock Exchange, or the LSE.

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    In 2002, we focused our attention on our integration with Banco de A. Edwards in an effort to expand our customer base and improve our competitive position across a broad spectrum of market segments and products. Consequently, 2002 was a year of significant strategic decision-making, and of multiple adjustments to our operating structure. During the course of 2002, we decided to maintain a multiple brand strategy, and we currently use the “Banco de Chile” brand name with our corporate and middle-income individual clients, the “Banco Edwards” brand name with our high-income individual clients, the “Banco Credichile” brand name with our lower-income individual clients and the “Leasing Andino” brand name for all our leasing transactions. We concluded the merger process at the end of 2002 with the consolidation of the new corporate structure and the integration of our technological platforms. We believe that we achieved operational and technological continuity, thereby assuring our continued level of quality in customer service. During the process, we merged and integrated more than 50 branches, with successful results in terms of customer retention. In 2001 and 2002, we incurred merger related costs of approximately Ch$14,735 million and Ch$31,193 million, respectively. In 2003, no further costs related to the merger were incurred.

    In 2003, we began to more fully benefit from the opportunities and strengths that were made available by the merger. We also established and developed the groundwork for Neos, our technological investment platform project, which we believe will improve our service standards and increase efficiency.

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

    During the 1982-1983 economic crisis, the Chilean banking system experienced significant instability. The financial crisis required that the Central Bank and the Chilean government provide assistance to most Chilean private sector banks, including us.

    During this period, we experienced significant financial difficulties, as a result of which the Chilean government assumed administrative control over us. In 1985 and 1986, we increased our capital and sold shares representing 88% of our capital to more than 30,000 new shareholders. As a result, no single shareholder held a controlling stake in our company. In 1987, the Chilean Superintendency of Banks returned to our shareholders the control and administration of the bank.

    Subsequent to the 1982-1983 economic crisis, like most major Chilean banks, we sold certain of our non-performing loans to the Central Bank at face value on terms that included a repurchase obligation. The repurchase obligation was later exchanged for subordinated debt of each participating bank issued in favor of the Central Bank. In 1989, pursuant to Law No. 18,818, banks were permitted to repurchase the portfolio of non-performing loans previously sold to the Central Bank for a price equal to the economic value of such loans, provided that a bank assumed a subordinated obligation equal to the difference between the face value of its loans and their economic value. In November 1989 we repurchased our portfolio of non-performing loans from the Central Bank and assumed the Central Bank’s subordinated debt relating to our non-performing loans.

    The original repayment terms of our Central Bank subordinated debt, which at December 31, 1989 equaled approximately Ch$1,049,198 million, or U.S.$1,750 million, required that a certain percentage of our income before provisions for the subordinated debt be applied to repay this obligation. The Central Bank subordinated debt did not have a fixed maturity, and payments were made only to the extent that we earned income before provisions for the subordinated debt. In 1993 we applied 72.9% of our income before provisions for the Central Bank subordinated debt to the repayment of this debt. In 1994 we applied 67.6% and in 1995 we applied 65.8% of our income before provisions for the Central Bank subordinated debt to the repayment of this debt.

    In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which Banco de Chile was converted to a holding company named SM-Chile. In turn, SM-Chile organized a new wholly owned banking subsidiary named Banco de Chile to which it contributed all of its assets and liabilities other than the Central Bank subordinated debt. SM-Chile then created SAOS, a second wholly owned

17


subsidiary that, pursuant to a prior agreement with the Central Bank, assumed a new repayment obligation in favor of the Central Bank that replaced the Central Bank subordinated debt in its entirety.

    This Central Bank indebtedness, for which SAOS is solely responsible and for which there is no recourse to us or SM-Chile, was equal to the unpaid principal of the Central Bank subordinated debt that it replaced but had terms that differed in some respects, the most important of which included a rescheduling of the debt for a term of 40 years providing for equal annual installments and a pledge of our shares as collateral for such debt. The Central Bank indebtedness bears interest at a rate of 5.0% per year and is denominated in UF. See “Item 5. Operating and Financial Review and Prospects—Overview—Inflation—UF-denominated Assets and Liabilities” for a further explanation of UF.

    In exchange for assuming the Central Bank indebtedness, SAOS received from SM-Chile, a holding company that beneficially owns us and SAOS, 63.6% of our shares as collateral for this indebtedness. As a result of our merger with Banco de A. Edwards, the percentage of our shares held by SAOS decreased to 42.0%. Dividends received from us are the sole source of SAOS’s revenue, which it must apply to repay this indebtedness. However, under SAOS’s agreement with the Central Bank, we have no obligation to distribute dividends to our shareholders. To the extent distributed dividends are not sufficient to pay the amount due on this indebtedness, SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If the cumulative deficit balance exceeds an amount equal to 20% of our capital and reserves, the Central Bank may require SAOS to sell a sufficient number of shares of our stock owned by SAOS to pay the entire accumulated deficit amount. As of April 30, 2004, SAOS maintained a deficit balance with the Central Bank of Ch$37,080 million, equivalent to 7.2% of our capital and reserves. As of the same date, Ch$102,438 million would have represented 20% of our capital and reserves. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Banking Industry—An affiliate of ours may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends.”

    If from time to time in the future our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth, and to distribute stock dividends among our shareholders, the Central Bank may require us to pay the portion of the net income corresponding to shares owned by SAOS in cash to SAOS. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months. The shareholders of SM-Chile will have a right of first refusal with respect to that sale.

Capital Expenditures

    The following table reflects our capital expenditures in each of the three years ended December 31, 2001, 2002 and 2003:

  For the Year Ended December 31,

  2001  2002  2003 



  (in millions of constant Ch$ as of December 31, 2003)
 
Computer equipment Ch$ 7,005  Ch$ 7,653  Ch$ 3,418 
Furniture, machinery and installations 2,768  3,497  2,497 
Real estate 375  646  593 
Vehicles 66  321  297 



    Subtotal 10,214  12,117  6,805 
Software 953  3,270  4,408 



    Total Ch$ 11,167  Ch$ 15,387  Ch$ 11,213 



    Our budget for capital expenditures in 2004 is Ch$25,834 million, substantially all of which will be used in Chile. Capital expenditures planned for 2004 consist mainly of expenditures for information technology, including the implementation of a technological innovation platform project designed to improve efficiency and service quality, which we refer to as “Neos.” Other capital expenditures include disbursements

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necessary to maintain and improve our existing branch office infrastructure and other maintenance required in the ordinary course of our business.

BUSINESS OVERVIEW

Business Strategy

    Our long-term strategy is to maintain our position as a leading bank in Chile, providing a broad range of financial products and services to large corporations, small and mid-sized companies and individuals nationwide. As part of this strategy, we operate under a multi-brand approach in order to target the different market segments, taking advantage of our well positioned brand names: “Banco de Chile,” “Banco de A. Edwards,” “Banchile,” “Banco Credichile” and “Leasing Andino.” Our strategy is focused on:

    The key components of our strategy are described below.

    Deliver Superior Customer Service

    Our banking strategy is focused on developing long-term relationships with our customers by emphasizing customer service and providing a broad range of financial products and services. As the Chilean economy recovers, we expect that our corporate and individual customers will continue to require more comprehensive credit and non-credit financial services than in the past.

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    Expand Fee-Based Services

    In recent years, our margins from traditional lending activities have declined significantly and, as a result, we have increasingly shifted our focus to developing other sources of revenue such as fee-based products and services. Our consolidated income from fees and other services has continued to grow over the last three years and was Ch$103,389 million in 2003, an increase of 30.2% from Ch$79,407 million in 2002. We seek to continue to grow fee revenue by developing new services and by cross-selling these services to our base of existing customers. In our corporate business, we intend to actively market fee-based services such as electronic banking, receivables collection, payroll services, supplier payments, investment advisory services and cash management. In our retail banking business area, we seek to increase revenues from fee-based services such as telephone and electronic banking, ATMs, general checking services, credit cards, mutual funds, securities brokerage and insurance brokerage.

    Maintain Focus on Operating Efficiencies

    In 2003, our consolidated operating expenses represented approximately 52.9% of our operating revenue. As the Chilean banking sector continues to grow, we believe that a low-cost structure will become increasingly important to compete profitably.

    We have invested heavily in technology during recent years (approximately Ch$7,653 million in 2002 and Ch$3,418 million in 2003) and plan to continue to focus on technology in the future to achieve further improvements in customer service and operating efficiency. In 2003, we began the first stage of Neos, and in 2003, capital expenditures associated with Neos amounted to Ch$2,871 million. We estimate that our Neos related capital expenditures will amount to Ch$11,946 million in 2004.

    Provide Competitive International Products and Services

    We intend to provide to our primarily Chilean customer base a complete array of international products at competitive prices. Our primary focus in this respect will be on trade financing of customer related operations, one of our traditional areas of international activity. To implement this strategy, we intend to take advantage of our New York branch and Miami agency to strengthen our relationships with Chilean businesses engaged in international trade.

    There can be no assurance that we will be able to realize our strategic objectives. For a discussion of certain risks applicable to our operations and to Chile that may affect our ability to meet our objectives, see “Item 3. Key Information—Risk Factors.”

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Ownership Structure

    The following diagram shows ownership structure at December 31, 2003:

Share Repurchase Program

    On March 20, 2003, at an extraordinary shareholders’ meeting, our shareholders approved the establishment of a share repurchase program to be conducted on the various Chilean stock exchanges on which our shares are listed and/or through a tender offer conducted in accordance with the Chilean Corporations Law. Up to one percent of our issued shares may be bought directly in the Chilean stock exchanges in a twelve-month period, without requiring a tender offer. The program is expected to last for two years from June 5, 2003.

    Under the terms of the share repurchase program, the maximum percentage of shares to be repurchased cannot exceed the equivalent of three percent of our paid-in capital and the minimum price that we will pay for the shares must be the weighed average of the closing prices of the shares as quoted by the Santiago Stock Exchange for the 45 business days preceding the repurchase. The maximum price that we may pay for the shares is 15% in excess of that average.

    The Central Bank authorized the program on June 2, 2003, subject to the following conditions:

    The Chilean Superintendency of Banks authorized the program on July 2, 2003.

    On March 25, 2004, our board of directors resolved to commence a tender offer for 1,701,994,590 of our shares, representing 2.5% of our total capital, at a purchase price of Ch$31 per share. The tender offer expired on April 26, 2004. 5,000,844,940 shares were tendered in the tender offer. Given that the number of

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acceptance orders received exceeded the number of shares we were authorized to repurchase, pursuant to the terms of the offer, we repurchased shares on a pro-rata basis.

    The shares bought under the share repurchase program must be sold within 24 months of their respective acquisition. Otherwise, paid-in capital must be reduced by the amount of the repurchased shares that were not resold. Shareholders will have a preferential right to acquire the repurchased shares if we decide to sell them unless our board of directors approves the sale of up to 1.0% of our shares during a twelve-month period on any stock exchange on which our shares are listed. Repurchased shares, although registered in our name, do not have voting or dividend rights.

Principal Business Activities

    We are a full-service financial institution providing, directly and indirectly through our subsidiaries and affiliates, a wide variety of credit and non-credit products and services to all segments of the Chilean financial market. The following diagram illustrates, in summary form, our principal business areas, which operate through us or, in the case of “Operations through subsidiaries,” through our subsidiaries:

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    The following table provides information on the composition of our loan portfolio and our consolidated net income before tax for the year ended December 31, 2003, allocated among our principal business areas:

Loans Consolidated net
income
before tax
(1)


(in millions of constant Ch$ as of December 31, 2003, except for percentages)
       
Large corporations Ch$ 2,606,504 41.8% Ch$ 50,583
Middle market companies 1,559,263 24.9     38,155
International banking 270,717 4.3     12,202
Retail banking 1,732,369 27.7     36,561
Treasury and money market operations 8,501 0.1     19,142
Operations through subsidiaries 77,992 1.2     21,266
Other (adjustments and eliminations) - -     (33,454)



    Total Ch$ 6,255,346 100.0% Ch$ 144,455



____________________
(1)

Consolidated net income before tax consists of the sum of operating revenues and other income and expenses, net, and the deduction for operating expenses and provisions for loan losses. The net income before tax breakdown shown is used for internal reporting, planning and marketing purposes and is based on, among other things, our estimated funding cost and direct and indirect cost allocations. This breakdown may differ in some respects from breakdowns of our operating income for financial reporting and regulatory purposes. Separate information on the operations, assets and income of our eight financial services subsidiaries and affiliates is provided below under "--Operations through Subsidiaries."

    The following table provides our consolidated operating revenues, for the period indicated, allocated among our principal business areas:

  For the Year Ended December 31,

  2001  2002  2003 



  (in millions of constant Ch$ as of December 31, 2003)
 
Large corporations Ch$ 61,991  Ch$ 91,578  Ch$ 88,286 
Middle market companies 86,222  111,021  106,078 
International banking 18,567  2,615  16,377 
Retail banking 86,801  147,112  145,572 
Treasury and money market operations 17,251  25,389  22,768 
Operations through subsidiaries 20,848  41,787  52,900 
Other (adjustments and eliminations) (14,888) 320  (7,731)



        Total Ch$ 276,792  Ch$ 419,822  Ch$ 424,250 



    The following table provides a geographic market breakdown of our operating revenues for the years indicated.

  For the Year Ended December 31,

  2001  2002  2003 



  (in millions of constant Ch$ as of December 31, 2003)
 
Chile Ch$ 262,263  Ch$ 418,701  Ch$ 409,587 
    Banking operations 241,415  376,914  356,687 
    Operations through subsidiaries 20,848  41,787  52,900 
Foreign branch operations 14,529  1,121  14,663 
    New York 11,220  (1,473) 11,834 
    Miami 3,309  2,594  2,829 



        Total Ch$ 276,792  Ch$ 419,822  Ch$ 424,250 



    Large Corporations

    In general, our large corporations business area services domestic companies with annual sales in excess of Ch$12,000 million, multinational corporations, financial institutions, governmental entities and companies affiliated with Chile’s largest conglomerates (regardless of size). This business area offers these

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companies a broad range of products and services tailored to their specific needs. These services include deposit-taking and lending in both pesos and foreign currency, trade and project financing and various non-credit services, such as collection, supplier payments and payroll management. In addition, our large corporations business area offers a broad range of banking products and services including working capital financing, lines of credit, commercial loans, leasing, corporate financial services, foreign trade financing, letters of credit in domestic and foreign currencies, mortgage loans, payment and asset management services, checking accounts and time deposits, and, through our subsidiaries, brokerage, mutual funds and investment fund management services. All of our branches (except the Credichile branches) provide services to our large corporations business area customers directly and indirectly.

    Our large corporate customers are engaged in a wide spectrum of industry sectors. As of December 31, 2003, this business area had primarily made loans to customers engaged in:

See “—Selected Statistical Information.”

    At December 31, 2003, we had approximately 2,117 large corporate debtors. Loans to large corporations totaled approximately Ch$2,606,504 million at December 31, 2003, representing 41.8% of our total loans at that date. Our large corporations business area accounted for Ch$50,583 million of our consolidated net income before tax for the year ended December 31, 2003.

    The following table sets forth the composition of our portfolio of loans to large corporations as of December 31, 2003:

As of December 31, 2003

(in millions of constant Ch$ as of December 31, 2003, except for percentages)
 
Commercial loans Ch$ 1,625,068 62.4%
Foreign trade loans 432,204 16.6    
Contingent loans 247,802 9.5    
Leasing contracts 124,956 4.8    
Mortgage loans 70,920 2.7    
Consumer loans 274 0.0    
Other loans 105,280 4.0    


    Total Ch$ 2,606,504 100.0%


    Our large corporations business area’s loan portfolio consists principally of unsecured loans with maturities between one and six months and of medium- and long-term loans to finance fixed assets, investment projects and infrastructure projects. In addition, our large corporations business area issues contingent credit obligations in the form of letters of credit, bank guarantees and similar obligations in support of the operations of our large corporate customers. See “—Selected Statistical Information.”

    The market for loans to large corporations in Chile in recent years has been characterized by reduced profit margins, due in part to the greater direct access of such customers to domestic and international capital markets and other sources of funds. As a result, we have been increasingly focused on generating fee services,

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such as payroll processing, dividend payments and billing services as well as computer banking services. This strategy has enabled us to maintain profitable relationships with our large corporate customers while preserving the ability to extend credit when appropriate opportunities arise.

    We are party to approximately 3,414 payment service contracts and approximately 839 collection service contracts with large corporate customers. Under these payment contracts, we provide large corporate customers with a system to manage their accounts and make payments to suppliers, pension funds and employees, thereby reducing administrative costs. We believe that cash management and payment service contracts provide a source of low-cost deposits and the opportunity to cross-market our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our large corporate customers, providing centralized collection services for their accounts receivables and other similar payments.

    Middle Market Companies

    We serve the financing needs of small and medium-size companies through our middle market companies business area. We generally define middle market companies as those with annual sales of between Ch$300 million and Ch$12,000 million and small or emerging companies as those with annual sales of between Ch$45 million and Ch$300 million. As of December 31, 2003, our middle market companies business area had approximately 66,765 checking account holders, of which approximately 74% are small or emerging companies. In terms of loans amounts, however, approximately 60.9% of the middle market companies business area’s total loan portfolio represents loans to medium-size companies.

    Our middle market companies business area offers its customers a broad range of financial products, including project financing, working capital financing, mortgage loans and debt rescheduling, as well as other alternatives such as leasing operations, factoring, mutual funds, insurance and securities brokerage services and collection services (through our Banchile subsidiaries). We also offer our clients full advisory services aimed at facilitating foreign trade, as well as comprehensive financing and service alternatives.

    We have developed a set of services designed to facilitate and optimize the operational and financial management of small and medium size companies. These services include payment services (such as employee compensation, taxes and employee benefits), payments to suppliers and automated bill payments. We provide most of these services through remote service channels, such as the internet and, as of December 31, 2003, delivered such services to approximately 24,400 customers. We also provide account receipts and instrument collection services through electronic means. All of these products and services are available through our nationwide branch network.

    Through our subsidiaries, our middle market companies business area offers our customers a full range of financial advisory, stock brokerage, mutual fund management and general and life insurance brokerage services.

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    The following table sets forth the composition of our portfolio of loans to middle market companies as of December 31, 2003:

As of December 31, 2003

(in millions of constant Ch$ as of December 31, 2003, except for percentages)
 
Commercial loans Ch$ 749,408 48.2%
Mortgage loans 315,641 20.2    
Leasing contracts 139,278 8.9    
Foreign trade loans 119,210 7.6    
Contingent loans 98,498 6.3    
Consumer loans(1) 11,098 0.7    
Other loans 126,130 8.1    


Total Ch$ 1,559,263 100.0%


_______________
(1)

Certain commercial loans to individuals are classified as consumer loans.

    Our middle market companies business area’s loan portfolio consists primarily of short- and long-term commercial loans and mortgage loans. At December 31, 2003, this business area had primarily made loans to customers engaged in:

See “—Selected Statistical Information.”

    At December 31, 2003, we had Ch$1,559,263 million of outstanding loans to small and medium-size companies, representing 24.9% of our total loan portfolio at that date. Small and medium-size banking clients accounted for approximately Ch$38,155 million of our consolidated net income before tax for the year ended December 31, 2003.

    Commercial Loans. Our middle market companies business area’s commercial loans, which mainly consist of project financing and working capital loans, are denominated in pesos, UF or U.S. dollars. Commercial loans may have fixed or variable rates of interest and generally mature between one and three months from the date of the loan. At December 31, 2003, our middle market companies business area had outstanding commercial loans of Ch$749,408 million, representing 48.2% of the middle market companies business area’s total loans and 12.0% of our total loans at that date.

    Mortgage Loans. Our middle market companies business area’s commercial mortgage loans are denominated in UF and generally have maturities of between five and 30 years. At December 31, 2003, this business area had granted mortgage loans outstanding of approximately Ch$315,641 million, representing 20.2% of the middle market companies business area’s total loans and 5.0% of our total loans at such date.

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    International Banking

    Through our international banking business area, we offer a range of international services, principally import and export financing, letters of credit, guarantees and other forms of credit support, as well as currency swaps, banking services and treasury services for our corporate clients in Chile and abroad.

    Our international banking business area has two main lines of business: foreign currency products and management of our international network. This business area deals with all banking products that involve foreign currency, including those related to foreign trade. Our international banking business area designs foreign currency products, educates our account officer sales force about our foreign currency products, monitors our market share participation and promotes the use of our foreign currency products. Included in this business area is a group of foreign trade specialists that advises our customers about our services related to insurance, shipping and customs, with the objective of obtaining the most desirable conditions for the non-banking stages of our customers’ foreign trade transactions.

    Our international banking business area does not, however, have credit granting authority for these purposes. Instead, the area participates in a team effort with the account officers who establish credit limits, and our international banking trade specialists interact directly with our customers, ensuring that the price they pay for our services is adequate and that the quality of the services provided meets pre-established levels.

    As of December 31, 2003, we had Ch$658,280 million in foreign trade loans, representing 10.5% of our total loans as of that date, and Ch$106,810 million in letters of credit and other contingent obligations related to foreign trade operations, representing 1.7% of our total loans as of that date.

    Our international banking business area also manages our international network. This network is made up of a branch in New York and an agency in Miami, three representative offices (located in Mexico City, Sao Paulo and Buenos Aires) and approximately 700 correspondent banks. We have established credit relations with 200 correspondent banks and an account relationship with approximately 43 correspondent banks.

    We use our international network in order to:

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    The following table sets forth, as of December 31, 2003, the composition of our portfolio of loans originated through our New York branch and Miami agency:

As of December 31, 2003 
 
  New York Branch Miami Agency
 

(in millions of constant Ch$ as of December 31, 2003) 
 
Foreign trade loans Ch$ 29,673  Ch$ 31,141 
Commercial loans 58,264  37,494 
Interbank loans 391  4,331 
Contingent loans 3,045  4,337 
Other loans 799  209 


    Total Ch$ 92,172  Ch$ 77,512 


    The following table sets forth, as of December 31, 2003, the sources of funding for our New York branch and for the Miami agency:

  As of December 31, 2003

  New York Branch  Miami Agency 


  (in millions of constant Ch$ as of December 31, 2003, except for percentages)
 
Current accounts Ch$ 85,376  22.1% Ch$ 20,482  13.4%
Certificates of deposits and time
    deposits 199,694  51.6     123,771  80.8    
Other demand deposits 50,574  13.1     4,018  2.6    
Contingent liabilities 3,045  0.8     4,337  2.8    
Foreign borrowings 43,292  11.2     256  0.2    
Other liabilities 4,578  1.2     241  0.2    




    Total Ch$ 386,559  100.0% Ch$ 153,105  100.0%




    New York Branch. Our wholly owned New York branch was established in 1982 and provides a range of general banking services, including deposit-taking, mainly to non-residents of the United States. At December 31, 2003, the New York branch had total assets of Ch$417,810 million, including a loan portfolio of Ch$92,172 million, representing 1.5% of our total loan portfolio. Of the New York branch’s loans, Ch$58,264 million were commercial loans, mostly to large private corporations in Chile and in other Latin American countries. The remaining Ch$33,908 million were principally foreign trade loans, amounting to Ch$29,673 million, and contingent loans (letters of credit and stand-by letters of credit), amounting to Ch$3,045 million. In 2003, our New York branch recognized a net income of Ch$10,661 million, primarily as a result of the sale of Latin American investment securities.

    Investments in bonds and foreign securities were Ch$258,266 million at December 31, 2003, most of which consisted of private sector bonds. The New York branch’s allowances for loan losses totaled Ch$681 million, which represented 0.7% of the branch’s loan portfolio at December 31, 2003. In addition, our New York branch had Ch$100 million in country risk allowances.

    Funding sources for the New York branch include current account, money market accounts and deposits for less than 30 days of Ch$224,432 million, time deposits of Ch$111,212 million and foreign borrowings of Ch$43,292 million, which is also the outstanding balance of the branch’s long-term syndicated bank loans.

    As of December 31, 2003, the New York branch had capital of Ch$31,250 million (including net income of Ch$10,661 for the year).

    At December 31, 2003, the New York branch did not have past due loans. Although the New York branch manages its assets and liabilities locally, it follows the same credit processes as are followed in Santiago, Chile and all credit decisions are made by our account officers in Santiago, Chile.

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    Miami Agency. Our wholly owned Miami agency was opened in 1995 and provides a range of traditional commercial banking services, mainly to non-residents of the United States, including deposit-taking, providing credit to finance foreign trade and making loans to individuals or Chilean companies involved in foreign trade. Additionally, our Miami agency provides correspondent banking services to financial institutions, including working capital loans, letters of credit and bankers’ acceptances. At December 31, 2003, our Miami agency had total assets of Ch$159,333 million, a loan portfolio of Ch$77,512 million representing 1.2% of our total loan portfolio, and an investment portfolio of Ch$61,070 million. Our Miami agency’s loan portfolio at December 31, 2003 consisted primarily of Ch$37,494 million of commercial loans to Latin American private sector companies, including Chilean companies with operations in other Latin American countries, and Ch$31,141 million of foreign trade loans. The agency’s funding sources include demand deposits, money market accounts and deposits for less than 30 days (Ch$77,225 million), time deposits (Ch$71,045 million) and contingent liabilities (Ch$4,337 million). The equity of the Miami agency as of December 31, 2003 was Ch$6,229 million, including net income of Ch$734 million for the year.

    At December 31, 2003, the Miami agency did not have past due loans. Allowances for loan losses amounted to Ch$580 million, not including the Ch$495 million in country risk allowances. Although the Miami agency manages its assets and liabilities locally, it follows the same credit processes as are followed in Santiago, Chile, and all credit decisions are made by our account officers in Santiago, Chile.

    Individual customer accounts and our deposit taking activities are monitored under strict customer approval procedures that are encompassed in our anti-money laundering program.

    Representative offices. The principal function of our representative offices in Argentina, Brazil and Mexico is to search for business opportunities in the areas of trade finance and private sector financing and to monitor the development and evolving economies of these countries. These offices serve as points of contact for our customers who have business with or operate directly within these countries.

    Retail Banking

    Our retail banking business area serves the needs of retail customers from high- to lower-middle income individuals, with service being segmented according to the client’s income. At December 31, 2003, loans made by this business area represented 27.7% of our total loan portfolio. Approximately Ch$36,561 million of our net income before tax for the year ended December 31, 2003 was accounted for by our retail banking business area.

    The following table sets forth the composition of our retail banking business area’s loan portfolio as of December 31, 2003:

As of December 31, 2003 

(in millions of constant Ch$ as of December 31, 2003, except for percentages) 
     
Mortgage loans Ch$ 741,469  42.8%
Consumer loans 466,721  26.9    
Commercial loans 86,766  5.0    
Leasing contracts 4,722  0.3    
Contingent loans 912  0.1    
Foreign trade loans 37  0.0    
Other loans(1) 431,742  24.9    


    Total Ch$ 1,732,369  100.0%


__________________
(1)

Other loans include primarily mortgage loans financed by our general borrowings and lines of credit.

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    High- and Middle-Income Individuals. We define high- and middle-income individuals as those with annual income in excess of Ch$5.4 million (in 2003, per capita annual income in Chile was approximately Ch$2.5 million).

    Our high- and middle-income individuals subsegment offers our customers a broad range of retail banking products, including residential mortgage loans, lines of credit and other consumer loans, credit cards, checking accounts, savings accounts and time deposits. We also offer mutual funds and brokerage services to individuals as described under “—Operations through Subsidiaries” below. At December 31, 2003, we had outstanding extensions of credit to approximately 259,141 high- and middle-income individuals, including approximately 35,361 residential loans, 223,785 lines of credit, 110,838 other consumer loans and 237,758 credit card accounts. At the same date, this area maintained 302,487 checking accounts, 123,213 savings accounts and 59,743 time deposits.

    We provide service to high- and middle-income individual customers through a network of 172 branches including four specialized “Private Banking” centers, 18 specialized transaction centers and 2,970 ATMs (823 of which are owned by us) located throughout Chile that form part of a network operated by Redbanc S.A., a company owned by us and 13 other private sector financial institutions. Since 1994, we have offered a nationwide phone-banking service that permits our high- and middle-income individual customers to receive balances and other account-related information, transfer funds between accounts and effect a wide variety of credit transactions. In 1997, we launched a full 24-hour banking service under the brand “TodaHora” and our homepage on the internet to better serve our high- and middle-income individual customers.

    Installment Loans. Our consumer installment loans to high- and middle-income individuals are generally incurred, up to a customer’s approved credit limit, to finance the cost of goods or services, such as cars, travel and household furnishings. Consumer loans are denominated in both pesos and UF, bear interest at fixed or variable rates of interest and generally are repayable in installments of up to 36 months.

    At December 31, 2003, we had Ch$309,318 million in installment loans, which accounted for 66.3% of the retail banking business area’s consumer loans. A majority of installment loans are denominated in pesos and are payable monthly.

    Mortgage Loans. At December 31, 2003, there were outstanding mortgage loans of Ch$687,602 million to high- and middle-income individuals, which represented 39.7% of the retail banking business area’s total loans and 11.0% of our total loan portfolio. A feature of our mortgage loans to individuals is that mortgaged property typically secures all of a mortgagor’s credit with us, including credit card and other loans.

    Our residential mortgage loans generally have maturities between five and 30 years and are generally denominated in UF. To reduce our exposure to interest rate fluctuations and inflation with respect to our residential loan portfolio, a majority of these residential loans are currently funded through the issuance of mortgage finance bonds, which are recourse obligations with payment terms that are matched to the residential loans and which bear a real market interest rate plus a fixed spread over the rate of change in the UF. Chilean banking regulations limit the amount of a residential mortgage loan that may be financed with a mortgage finance bond to the lesser of 75% of the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after-tax monthly income.

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    We have promoted the expansion of a mortgage-lending product, which we call “Mutuos Hipotecarios” as an alternative form to traditional financing of mortgage loans with mortgage bonds. Whereas our traditional mortgage loans are financed by means of mortgage finance bonds, Mutuos Hipotecarios are financed with our general funds, especially long-term subordinated bonds. Mutuos Hipotecarios is a product that is tradable among banks, investment funds and insurance companies. Mutuos Hipotecarios offer the opportunity to finance 80% of the lower of the purchase price or the appraised value of the property, as opposed to the 75% that a standard mortgage would allow.

    At December 31, 2003, we were Chile’s second largest private sector bank in terms of amount of mortgage loans and, based on information prepared by the Chilean Superintendency of Banks; we accounted for approximately 17.3% of the residential mortgage loans in the Chilean banking system and approximately 23.3% of such loans made by private sector banks.

    Credit Cards. We issue both Visa and MasterCard credit cards, and our product portfolio includes both personal and corporate cards. In addition to traditional cards, our credit card portfolio also includes co-branded cards (Travel Club and Global Pass), and 41 affinity card groups (of which 31 are associated with our co-branded programs and e-cards under the brand name NetCard).

    As of December 31, 2003, we had 260,305 valid accounts, with 399,005 cards in the high-middle income individuals subsegment. Total charges on our cards during 2003 amounted to Ch$335,234 million, with Ch$288,256 million corresponding to purchases and service payments in Chile and abroad and Ch$46,978 million corresponding to cash advances (both within Chile and abroad). These charge volumes represent a 27.0% market share in terms of volume of use of bank credit cards issued in Chile.

    As of December 31, 2003, our credit card loans in the high- and middle-income individuals subsegment amounted to Ch$61,461 million and represented 13.2% of our retail banking business area’s consumer loans.

    Two Chilean companies that are affiliated with us, Transbank S.A. and Nexus S.A., provide us with merchant acquisition and credit card processing services. As of December 31, 2003, Transbank had 18 shareholders and Nexus had seven shareholders, all of which are banks. As of December 31, 2003, our equity ownership in Transbank was 17.4% and our equity interest in Nexus was 25.8%.

    We believe that the Chilean market for credit cards has a high potential for growth, especially among consumers in the middle-income subsegment, that average merchant fees will continue to decline and that stores that do not currently accept credit cards will generally begin to do so. We also believe that, in addition to the other banks that operate in Chile, our main competitors are department store cards and other non-banking businesses involved in the issuance of credit cards.

    Debit Cards. We have different types of cards with debit options. Depending on their specifications, these cards can be used for banking transactions on the ATMs that operate on the local network, Redbanc, the Visa International PLUS network, the local network of merchants participating in the local Redcompra debit program or the international network of merchants associated with the Electron program. We have given these debit cards different names (Chilecard Normal, Chilecard Plus, Chilecard Electron, Chilecard Empresas, Banjoven, Cheque Electronico, Multiedwards, Cuenta Directa and Cuenta Familiar) based on their specific functions and the relevant brand and target market to which they are oriented. In order to promote the use of debit cards in Chile, in October 2000 we and other banks associated with Transbank launched a promotional campaign to encourage the use of Redcompra debit cards as a means of payment at local stores. We have attained a 30.3% market share of debit card transactions, with more than 10.1 million transactions performed in 2003.

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    Lines of Credit. We had 223,785 approved lines of credit to customers in our high- and middle-income individuals subsegment at December 31, 2003 and outstanding advances to 164,544 individuals totaling Ch$89,299 million, or 5.2% of the retail banking business area total loans.

    Our individual lines of credit are generally available on a revolving basis, up to an approved credit limit, and may be used for any purpose. Advances under lines of credit are denominated in pesos and bear interest at a rate that is set monthly. At the customer’s option, a line of credit loan may be renewed and re-priced for successive monthly periods, in each case subject to minimum monthly payments.

    Deposit Products. We seek to increase our deposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relatively low cost, stable funding source, as well as the opportunity to cross-market our other products and services. We offer a broad range of checking accounts, time deposits and savings accounts to our individual customers. Checking accounts are peso-denominated and mostly non-interest bearing (approximately 0.2% of total retail checking accounts are interest-bearing) and savings accounts are denominated in UF and bear interest at a fixed rate. Time deposits are denominated in pesos, UF and U.S. dollars. Most time deposits bear interest at a fixed rate with a term of 30 to 360 days.

    While historically demand has been mainly for UF-denominated deposits during times of high inflation, demand for deposits denominated in pesos has increased in the current environment of lower and more stable inflation rates in Chile.

    At December 31, 2003, the retail banking business area administered 302,487 checking accounts for approximately 293,509 customers with an aggregate balance of Ch$324,902 million. At such date, our checking account balances totaled approximately Ch$1,227,877 million and represented 14.4% of our total liabilities.

    Lower Income Individuals — Credichile. We offer products and services to the lower-middle to middle income portions of the Chilean population through Credichile, which we established specifically to serve the needs of customers in this market subsegment. Credichile represents a distinct delivery channel for our products and services in this market subsegment, maintaining a separate brand and network of 52 Credichile branches and nine other credit centers. Credichile offers our customers a range of products, including consumer loans, credit cards, auto loans and residential mortgage loans and a special demand deposit account (see “—Bancuenta” below) targeted at low-income customers. At December 31, 2003, Credichile had approximately 142,783 customers and total loans outstanding of Ch$159,552 million, representing 2.6% of our total loan portfolio at that date.

    Improved economic conditions in Chile over the last decade and the growth of the Chilean middle class has resulted in increased demand for consumer credit by lower-middle income individuals, whom we classify as persons with annual income between Ch$1.8 million and Ch$5.4 million. Many of these individuals have not had prior exposure to banking products or services. Credichile focuses on developing and marketing innovative segment-oriented products to satisfy the needs of individuals in this subsegment while introducing them to the banking system and complements the services offered in our other business areas, especially our large corporations business area, by offering services to employers such as direct deposit capabilities that engender the use of our services by employees.

    The Chilean Superintendency of Banks requires greater allowances for loan losses with lower credit classifications, such as those of Credichile. Credichile employs its own credit scoring system and other criteria to evaluate and monitor credit risk. Credichile seeks to ensure the quality of our loan portfolio through adherence to our loan origination procedures, particularly the use of our credit scoring system and credit management policies, including the use of credit bureaus and the services of the Chilean Superintendency of Banks. Credichile uses rigorous procedures for collection of past due loans. Socofin S.A., our specialized collection subsidiary, provides collection services. We believe that we have the necessary procedures and

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infrastructure in place to manage the exposure to a higher degree of credit risk that Credichile presents. These procedures allow us to take advantage of the higher growth and earnings potential of this subsegment of the banking industry while helping to manage the exposure to higher risk. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Banking Industry—The growth of our loan portfolio may expose us to increased loan losses, and its rate of growth may decrease in the future.”

    Consumer Lending. Credichile provides short- to medium-term consumer loans and credit card services. As of December 31, 2002, Credichile had approximately 125,071 consumer loans that totaled Ch$90,096 million outstanding at December 31, 2003. As of the same date, Credichile customers had 28,404 valid credit card accounts, with loans of Ch$5,846 million and total charges of Ch$2,378 million.

    Bancuenta. Credichile introduced Bancuenta as a basic deposit product that provides consumers flexibility and ease of use, and which allows us to tap a section of the consumer market that previously was not part of the banking system. The Bancuenta account is a non-interest bearing demand deposit account without checking privileges targeted at customers who want a secure and comfortable means of managing and accessing their money. The customer may use the ATM card linked to the Bancuenta account (which may include a revolving line of credit) to make deposits or automatic payments to other Credichile accounts through a network of ATMs available through the Redbanc system.

    At December 31, 2003, Credichile had approximately 451,207 Bancuenta accounts. Bancuenta account holders pay an annual fee, a fee each time the account holder draws on the Bancuenta line of credit and interest on any outstanding balance under the line of credit. All fees and interest due on a Bancuenta account are withdrawn automatically on a monthly basis from funds available in the account. Bancuenta allows us to offer our large corporate customers the ability to pay their employees by direct deposit of funds into the individual employee’s account at Credichile. We believe this product can lead to stronger long-term relationships with our large and middle market corporate customers and with the employees of such customers.

    Treasury and Money Market Operations

    Our treasury and money market operations business area provides a wide range of financial services to our customers including currency intermediation, forwards contracts, interest rate swaps, transactions under repurchase agreements and investment products based on bonds, mortgage notes and deposits. We also offer investments in mutual funds and stock brokerage services.

    In addition to providing services, our treasury and money market business area is focused on managing currency, interest rate and maturity gaps, ensuring adequate liquidity levels and managing our investment portfolio. This business area also performs the intermediation of fixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.

    The treasury and money market business area is also in charge of monitoring compliance with regulatory deposit limits, technical reserves and maturity and rate matches, and monitors our adherence to the security margins defined by regulatory limits, as well as risk limits for rate, currency and investment gaps. The treasury and money market business area continually monitors the funding costs of the local financial system, comparing them with our costs.

    Our investment portfolio as of December 31, 2003 amounted to Ch$1,916,324 million, of which 71.2% corresponded to securities issued by the Central Bank and the Chilean Government, 14.2% corresponded to securities from foreign issuers, 12.1% corresponded to securities issued by local financial institutions and 2.5% corresponded to securities issued by Chilean corporate issuers. Our investment strategy is designed with a view to supplementing our expected profitability, risks and economic variable projections. Our investment strategy is kept within regulatory limits as well as internal limits defined by our financial committee and our Asset and Liability Management Committee, or ALCO.

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    Operations through Subsidiaries

    We have made several strategic long-term investments in financial services companies, which are engaged in activities complementary to our commercial banking activities. Our principal goal in making these investments is to develop a comprehensive financial services group capable of meeting the diverse financial needs of our current and potential clients.

    Chile’s General Banking Law, which took effect in 1981, restricted the ability of Chilean banks to provide non-banking financial services, although prior thereto we had established a leasing subsidiary in 1977 and a mutual fund subsidiary in 1980. In 1987, the law was amended and banks were permitted to offer, through subsidiaries, certain services considered complementary to commercial banking activities. During the period from 1987 to 1989, we established two additional subsidiaries to provide the full range of financial products and services that could be offered indirectly by Chilean banks under Chilean law. These products and services include financial leasing, financial advisory services, mutual funds and securities brokerage services. The General Banking Law was further amended in 1997 to extend the scope of permissible activities of banks and their subsidiaries to include factoring, securitization and insurance brokerage, all of which have been incorporated by us as new activities.

    On April 23, 1999, we increased our 65% interest in Leasing Andino S.A. by acquiring, together with Banchile Asesoria Financiera S.A., all of the shares of Leasing Andino owned by Orix Corporation. On July 1, 1999, we acquired the remaining 6,380 shares outstanding in Leasing Andino and, consequently, held 100% of this company’s share capital. Leasing Andino was then dissolved and we assumed all of its rights and obligations. We are continuing the financing lease activities developed by Leasing Andino, and have maintained the Leasing Andino brand and trademark.

    On June 27, 2002, we acquired 100% of the shares of Promarket S.A. and Socofin. These subsidiaries are closed corporations (sociedad anonima cerrada). For a description of the business activities of these subsidiaries, see “—Sales Services” and “—Collection Services.”

    The following table sets forth information with respect to our financial services subsidiaries at December 31, 2003:

As of or for the year ended December 31, 2003

Assets Shareholders' Equity Net Income (loss)



(in millions of constant Ch$ as of December 31, 2003) 
       
Banchile Corredores de Bolsa S.A Ch$ 248,664  Ch$ 29,959  Ch$ 9,010 
Banchile Administradora General de
    Fondos S.A 10,849  9,454  5,767 
Banchile Factoring S.A 70,875  7,021  1,910 
Banchile Asesoria Financiera S.A 1,443  1,212  781 
Banchile Corredores de Seguros Ltda. 3,839  3,271  718 
Banchile Securitizadora S.A 7,272  547  26 
Promarket S.A 703  278  (72)
Socofin S.A Ch$ 3,792  Ch$ 775  Ch$ 138 

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    The following table sets out our ownership interest in our financial services subsidiaries at December 31, 2003:

  Ownership

  Direct Indirect


 
Banchile Administradora General de Fondos S.A. 99.98%   0.02%  
Banchile Corredores de Seguros Ltda. 99.75     0.25    
Banchile Corredores de Bolsa S.A. 99.68     0.31    
Banchile Factoring S.A. 99.52     0.48    
Banchile Asesoria Financiera S.A. 99.94     -    
Banchile Securitizadora S.A. 99.00     1.00    
Promarket S.A. 99.00     1.00    
Socofin S.A. 99.00     1.00    

    Each of these subsidiaries is incorporated under the laws of Chile.

    Securities Brokerage Services. We provide securities brokerage services through Banchile Corredores de Bolsa S.A. Banchile Corredores is registered with the Superintendencia de Valores y Seguros, or the Chilean Superintendency of Securities and Insurance, the regulator of Chilean open stock corporations, as a securities broker and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores has provided stock brokerage services, fixed income investments and foreign exchange products to individuals and businesses through our branch network. During the year ended December 31, 2003, Banchile Corredores had an aggregate trading volume on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange of approximately Ch$3,102,399 million. At December 31, 2003, Banchile Corredores had equity of Ch$29,959 million, and for the year ended December 31, 2003, had net income of Ch$9,010 million, which represented 6.9% of our consolidated net income for such period.

    Mutual and Investment Fund Management. Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2003, according to data prepared by the Chilean Superintendency of Securities and Insurance, Banchile Administradora General de Fondos was the largest mutual fund manager in Chile, managing 28.5% of all Chilean mutual funds assets. At December 31, 2003, Banchile Administradora General de Fondos operated 35 mutual funds and managed Ch$1,414,227 million in net assets on behalf of 116,255 corporate and individual participants. Banchile Administradora General de Fondos also operates an investment fund, Banchile Trust, and manages Ch$7,000 million in assets on behalf of 370 participants.

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    The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos at December 31, 2003:

  Net Asset Value
  As of December 31, 2003
Name of Fund Type of Fund (in millions of constant Ch$)
Utilidades Fixed income (short/medium term) Ch$  354,047   
Liquidez 2000 Fixed income (short term) 163,399 
Deposito XXI Fixed income (medium/long term) 184,185 
Corporativo Fixed income (short term) 149,591 
Estrategico Fixed income (medium/long term) 89,858 
Corporate Dollar Fund Fixed income (short term) 85,704 
Horizonte Fixed income (medium/long term) 58,039 
Patrimonial Fixed income (short term) 54,027 
Performance Fixed income (short/medium term) 67,401 
Banchile Acciones Equity 40,263 
Ahorro Fixed income (medium/long term) 36,024 
Alianza Debt/Equity (medium/long term) 34,993 
Disponible Fixed income (short term) 17,343 
Crecimiento Fixed income (short term) 13,814 
Inversion Fixed income (medium/long term) 10,226 
Operacional Fixed income (short term) 8,876 
Capitalisa Accionario Equity 6,537 
Renta Futura Fixed income (short/medium term) 6,177 
Euro Money Market Fund Fixed income (short term) 4,409 
Emerging Fund Debt/Equity 3,950 
Latin America Fund Debt/Equity 3,911 
Cobertura Fixed income (medium/long term) 3,853 
Dolar Fund Fixed income (medium/long term) 3,687 
U.S. Fund Debt/Equity 2,973 
Global Debt/Equity 1,720 
U.S. High Technology Fund Debt/Equity 1,660 
Asia Fund Debt/Equity 1,402 
Euro Fund Debt/Equity 1,348 
Technology Fund Debt/Equity 1,132 
U.S. Stability Fund Debt/Equity 922 
International Bond Fixed income (medium/long term) 668 
Euro Technology Fund Debt/Equity 635 
Medical & Health-Care Fund Debt/Equity 633 
U.S. Bond Fund Fixed income (medium/long term) 420 
Telecommunication Fund Debt/Equity 400 
 
    Total   Ch$  1,414,227   
 

    At December 31, 2003, Banchile Administradora General de Fondos had equity of Ch$9,454 million and for the year ended December 31, 2003, had net income of Ch$5,767 million, which represented 4.4% of our consolidated net income for such period.

    Factoring Services. We provide factoring services to our customers through Banchile Factoring S.A. Through this service, we purchase our customers’ outstanding debt portfolios, such as bills, notes, promissory notes or contracts, advancing them the cash flows involved and performing the collection of the related instruments. As of December 31, 2003, Banchile Factoring had net income of Ch$1,910 million, with a 27.2% return on shareholders’ equity and an estimated 21.0% market share in Chile’s factoring industry.

    Financial Advisory Services. We provide financial advisory and other investment banking services to our customers through Banchile Asesoria Financiera S.A. The services offered by Banchile Asesoria Financiera are directed primarily to our corporate customers and include advisory services regarding mergers and acquisitions, restructuring, project financing and strategic alliances. As of December 31, 2003, Banchile Asesoria Financiera had equity of Ch$1,212 million, and for the year ended December 31, 2003, had net income of Ch$781 million.

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    Insurance Brokerage. We provide insurance brokerage services to our customers through Banchile Corredores de Seguros Ltda. At the beginning of 2000 we began to offer life insurance policies associated with consumer loans and non-credit related insurance to our individual clients and the general public. As of December 31, 2003, Banchile Corredores de Seguros had equity of Ch$3,271 million, and for the year ended December 31, 2003, had net income of Ch$718 million. Banchile Corredores de Seguros had a 2.4% market share by amount of policies sold by insurance brokerage companies during 2001, the latest year for which information is available for insurance brokerage companies.

    Securitization Services. We offer investment products to meet the demands of institutional investors such as private pension funds and insurance companies through Banchile Securitizadora S.A. This subsidiary securitizes financial assets, which involves the issuance of a debt instrument, with a credit rating, that can be traded in the Chilean marketplace, backed by a bundle of revenue-producing assets of the client company. As of December 31, 2003, Banchile Securitizadora had a net equity of Ch$547 million, and for the year ended December 31, 2003 had net income of Ch$26 million. Banchile Securitizadora had a 15.7% market share by volume of assets securitized as of March 31, 2004.

    Sales Services. Promarket manages the direct sales force that sells and promotes our products and services (such as checking accounts, consumer loans and credit cards), together with those of our subsidiaries, and researches information about potential customers. As of December 31, 2003, Promarket had equity of Ch$278 million, and for the year ended December 31, 2003 had net loss of Ch$72 million.

    Collection Services. We provide judicial and extra-judicial collection services of loans on our behalf or on behalf of third parties through Socofin. As of December 31, 2003, Socofin had equity of Ch$775 million, and for the year ended December 31, 2003 had a net income of Ch$138 million.

   Distribution Channels and Electronic Banking

    Our distribution network provides integrated financial services and products to our customers through a wide range of channels. This network includes ATMs, branches, on-line banking and phone-banking devices. We own and operate 823 ATMs, and are connected to the nationwide Redbanc ATM network of approximately 2,970 ATMs. In addition, we are connected to the nationwide Banco Estado ATM network of approximately 801 ATMs. These ATMs allow customers to conduct self-service banking transactions during banking and non-banking hours.

    As of December 31, 2003, we had a network of 224 retail branches throughout Chile. The branch system serves as a distribution network for all of the products and services offered to our customers. Our full-service branches accept deposits, disburse cash, offer the full range of our retail banking products such as consumer loans, automobile financing, credit cards and checking accounts, lend to small- and medium-size companies and provide information to current and potential customers.

    We offer electronic banking services to our customers 24 hours a day through our internet website, www.bancochile.cl, which has homepages that are segmented by market. Our retail homepage offers a broad range of services, including the payment of bills, electronic fund transfers, stop payment and non-charge orders, as well as a wide variety of account inquiries. Our middle market companies homepage offers services including our office banking service, Banconexion Web, which enables our middle market companies customers to perform all of their banking transactions from their offices. Both homepages offer our customers the sale of third-party products with exclusive benefits. We also have a homepage designed for our investor customers, through which they can perform transactions such as stock trading, time deposit taking and opening savings accounts. Our foreign trade customers can rely on our international business homepage, which enables them to inquire about the status of their foreign trade transactions and perform transactions such as opening letters of credit, recording import collection and hedging on instructions and letters of credit. In 2003, approximately 124,900 individual customers and 26,600 corporate customers performed close to 8.4 million transactions monthly on our website.

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    In addition, we provide our customers with access to a 24-hour phone-banking call center that grants them access to account information and allows them to effect fund transfers and certain payments. This service, through which we receive approximately 1,146,000 calls per month, has enabled us to develop customer loyalty campaigns, sell financial services and products, answer specialized inquiries about our remote services and receive and resolve complaints by customers and non-customers.

    We are, in conjunction with 13 other private Chilean banks, a shareholder of Redbanc S.A., a corporation that executes electronic transfer services and provides support services to banks through the installation, operation, maintenance and development of equipment and systems for the automatic and electronic transfer of funds. The availability of this transfer capability facilitates our ability to service our customers efficiently.

    In 2001, in association with Banco de Credito e Inversiones, we created a company called Comercio Electronico Artikos Chile S.A. with the purpose of providing Chilean companies with the opportunity to trade their products and services on an electronic basis through the internet. We supplement this service with a wide range of financial services and electronic payment means. Artikos Chile uses the Commerce One platform, a world leader in business-to-business technological solutions.

Competition

   Overview

    The Chilean market for banking and other financial services is highly competitive, and we face significant competition in each of our principal areas of operation. The Chilean financial services market consists of a number of distinct sectors. The most important sector, commercial banking, includes 25 privately owned banks and one public sector bank, Banco del Estado. The privately owned banks have traditionally been divided between those that are principally Chilean-owned, of which there are twelve, and those that are principally foreign-owned, of which there are 13. At December 31, 2003, three banks, Banco Santander-Chile (22.6%), our bank (18.5%) and the public sector bank, Banco del Estado (13.0%) together accounted for 54.1% of all outstanding loans by Chilean financial institutions, net of interbank loans. Chilean-owned banks together accounted for 60.1% of total loans outstanding while foreign-owned banks accounted for 39.9% of total loans outstanding.

    As a commercial bank offering a range of services to all types of businesses and individual customers, we face a variety of competitors, ranging from other large, privately owned commercial banks to more specialized entities like “niche” banks. The principal commercial banks in Chile include Banco Santander-Chile, Banco de Credito e Inversiones and BBVA Banco BHIF, which we consider to be our primary competitors. Nevertheless, we face competition to a lesser extent from Banco del Estado, which has a larger distribution network and larger customer base than we do. Banco del Estado, which operates under the same regulatory regime as Chilean private sector banks, was the third largest bank in Chile at December 31, 2003, with outstanding loans, net of interbank loans, of Ch$4,255,307 million, representing a 13.0% market share, according to data published by the Chilean Superintendency of Banks.

    In the large corporations business area, we consider our strongest competitors to be Banco Santander-Chile, Banco de Credito e Inversiones and BBVA Banco BHIF. We also consider these banks to be our most significant competitors in the middle market companies business area.

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    In the retail banking business area, we compete with other private sector Chilean banks, as well with Banco del Estado. Among private Chilean banks, we consider our strongest competitors in this business area to be Banco Santander-Chile and Banco de Credito e Inversiones, as each of these banks has developed business strategies that focus on the lower-middle to middle income subsegments of the Chilean population. In the individual banking sector, particularly with respect to high-income individuals, we compete with both private Chilean and foreign-owned banks and consider our strongest competitors in this market to be Banco Santander-Chile and Citibank.

    The Chilean banking industry has experienced increased levels of competition in recent years, including from foreign banks, which has led to, among other things, consolidation in the industry. Consequently, strategies have, on an overall basis, been aimed at reducing costs and improving efficiency standards. Our income may decrease due to the extent and intensity of competition.

    We expect the trend of increased competition and consolidation to continue, particularly in connection with the formation of new large financial groups and the creation of new niche banks. In this regard, in mid-1996 Banco Santander of Spain took control of Banco Osorno and merged it into its Chilean operations, changing its name to Banco Santander-Chile. In addition, Banco O’ Higgins and Banco de Santiago merged in January 1997, forming Banco Santiago. In 1999, Banco Santander of Spain took control of Banco Santiago. In August 2002, Banco Santiago and Banco Santander–Chile, the second and fourth largest banks in Chile at that date, respectively, merged and became Chile’s largest bank. In 2003, Banco del Desarrollo merged with Banco Sudameris. Although we believe that we are currently large enough to compete effectively in our target markets, any further consolidation in the Chilean financial system may adversely affect our competitive position in the Chilean financial services industry.

    Historically, commercial banks in Chile have competed in the retail market against each other, with finance companies and with department stores, the latter two having traditionally been focused on consumer loans to middle- and low-income subsegments. However, finance companies have gradually disappeared as most of them have been merged into the largest banks.

    Non-bank competition from large department stores has become increasingly significant in the consumer lending sector. Indeed, two new consumer-oriented banks, affiliated with Chile’s largest department stores have been established during recent years. Although these new banks had a market share of less than 1% as of December 31, 2003, according to the Chilean Superintendency of Banks, the opening of these banks is likely to bring increased competition into the consumer banking business.

    In addition, some local investor groups have announced their intention to incorporate new banks in 2004. We expect that the addition of these new banks will lead to greater competition, particularly in banking services directed to middle-income individuals.

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    The following table provides certain statistical information on the Chilean financial system as of December 31, 2003:

  As of December 31, 2003
 
  Assets Loans(1) Deposits Shareholders’ Equity(2)
 



  Amount Share Amount Share Amount Share Amount Share
 







  (in millions of constant Ch$ as of December 31, 2003, except percentages)
   
Domestic private sector
    banks
Ch$ 21,407,497  43.4% Ch$ 15,465,806  47.1% Ch$ 12,451,497  44.3% Ch$ 1,849,326  42.6%
Foreign-owned banks 20,420,456  41.5    13,110,607  39.9    11,235,418  40.0    2,115,539  48.7   
 







Private sector total Ch$ 41,827,953  84.9    Ch$ 28,576,413  87.0    Ch$ 23,686,915  84.3    Ch$ 3,964,865  91.3   
Banco del Estado 7,431,151  15.1    4,255,307  13.0    4,406,461  15.7    378,934  8.7   
 







    Total banking system Ch$ 49,259,104  100.0% Ch$ 32,831,720  100.0% Ch$ 28,093,376  100.0% Ch$ 4,343,799  100.0%
___________________
Source:

Chilean Superintendency of Banks

(1)

Net of interbank loans.

(2)

Shareholders' equity includes net income for purposes of this table.

   Loans

    The following table sets forth our market share in terms of loans (excluding interbank loans), and our principal private sector competitors, as of the dates indicated:

  Bank Loans(1)
 
  As of December 31,
 
  1999  2000  2001  2002  2003 
 




Banco Santander-Chile 12.3%   11.5%   11.7%   24.7%   22.6%  
Banco de Chile 12.4     12.7     12.1     18.7     18.5    
Banco de Credito e Inversiones 8.1     7.9     9.0     10.4     11.2    
BBVA Banco BHIF 5.4     5.8     6.0     6.7     7.3    
Banco Santiago(2) 16.1     15.8     16.1     -     -    
Banco de A. Edwards(3) 7.7     8.3     7.4     -     -    
 




    Total market share for six banks 62.0%   62.0%   62.3%   60.5%   59.6%  
 




___________________
Source:

Chilean Superintendency of Banks

(1)

For ease of comparison, interbank loans have been eliminated.

(2)

Banco Santiago merged with Banco Santander-Chile in August 2002.

(3)

Banco de A. Edwards merged with us on January 1, 2002.

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   Risk Index

    At October 31, 2003, our unconsolidated risk index of 2.40% was higher than the financial system’s 1.82%. For a discussion of risk index, see “—Selected Statistical Information.” The following graph illustrates the five-year history of our unconsolidated loan portfolio risk index compared to the risk index of total loans in the Chilean financial system as of October 31 for each of the years indicated.

___________________
Source: Chilean Superintendency of Banks

    Our unconsolidated risk index primarily increased in 2002 and 2003 (relative to prior years) as a result of our merger with Banco de A. Edwards.

    The following table sets forth the unconsolidated risk index of the six largest private sector banks and that of the financial system as a whole (including such six banks) at October 31 in each of the last five years:

  Unconsolidated Risk Index As of
 
  October 31,
 
  1999  2000  2001  2002  2003 
 




Banco Santiago(1) 1.39%   1.34%   1.26%   -        -       
Banco de A. Edwards(2) 2.79     2.90     3.23     -      -     
Banco de Credito e Inversiones 1.57     1.95     1.63     1.34% 1.30%
BBVA Banco BHIF 2.11     2.18     1.81     1.68     1.42    
Banco Santander-Chile 1.23     1.42     1.38     1.61     1.85    
Banco de Chile 2.07     2.01     2.03     2.98     2.40    
Financial system 1.98% 2.08% 1.90% 1.95% 1.82%
___________________
Source:

Chilean Superintendency of Banks

(1)

Banco Santiago merged with Banco Santander-Chile in August 2002.

(2)

Banco de A. Edwards merged with us on January 1, 2002.

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   Credit Quality

    At December 31, 2003, according to information published by the Chilean Superintendency of Banks, we had an unconsolidated ratio of past due loans to total loans of 1.74%. The following table sets forth the ratio of past due loans to total loans for the six largest private sector banks at December 31 in each of the last three years:

  Past Due Loans to Total Loans
 
  As of December 31,
 
  2001  2002  2003 
 


Banco Santiago(1) 1.37%   -       -      
Banco de A. Edwards(2) 3.31     -     -    
Banco de Credito e Inversiones 1.37     1.09% 1.11%
Banco de Chile 1.29     2.43     1.74    
BBVA Banco BHIF 2.10     1.97     1.91    
Banco Santander-Chile 1.36     2.15     2.24    
 


    Total for six banks 1.65%   2.03%   1.83%  
 


___________________
Source:

Chilean Superintendency of Banks

(1)

Banco Santiago merged with Banco Santander-Chile in August 2002.

(2)

Banco de A. Edwards merged with us on January 1, 2002.

   Deposits

    We had deposits of Ch$4,867,113 million at December 31, 2003 on an unconsolidated basis. In unconsolidated terms, our 17.3% of the market share for deposits, including borrowings from domestic financial institutions, placed us in second place among private sector banks. The following table sets forth the market shares in terms of deposits for the six private sector banks with the largest market share as of December 31 in each of the last three years:

  Deposits
 
  As of December 31,
 
  2001  2002  2003 
 


Banco Santiago(1) 13.4%   -   -  
Banco de A. Edwards(2) 6.6 - -
BBVA Banco BHIF 5.3 6.9% 7.7%
Banco de Credito e Inversiones 9.2 10.3 10.8
Banco de Chile 12.7 16.7 17.3
Banco Santander-Chile 12.7 22.1 19.9
 


    Total market share for six banks 59.9%   56.0%   55.7%  
 


___________________
Source:

Chilean Superintendency of Banks

(1)

Banco Santiago merged with Banco Santander-Chile in August 2002.

(2)

Banco de A. Edwards merged with us on January 1, 2002.

   Shareholders’ Equity

    With Ch$565,123 million in shareholders’ equity (not including net income), according to information published by the Chilean Superintendency of Banks, at December 31, 2003, we were the second largest private sector commercial bank in Chile in terms of shareholders’ equity.

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    The following table sets forth the level of shareholders’ equity for the largest private sector banks in Chile as of December 31 in each of the last three years:

  Shareholders' Equity
 
  As of December 31,
 
  2001  2002  2003 
 


  (in millions of constant Ch$ as of December 31, 2003)
Banco de A. Edwards(1) Ch$ 238,508 
Banco Santiago(2) 437,160 
BBVA Banco BHIF 237,133  Ch$ 239,135  Ch$ 237,470 
Banco de Credito e Inversiones 228,834  257,211  287,854 
Banco de Chile 323,846  571,251  565,123 
Banco Santander-Chile Ch$ 376,357  Ch$ 813,949  Ch$ 810,417 
___________________
Source:

Chilean Superintendency of Banks

(1)

Banco de A. Edwards merged with us on January 1, 2002.

(2)

Banco Santiago merged with Banco Santander-Chile in August 2002.

   Return on Average Shareholders’ Equity

    Our return on average shareholders’ equity (including net income for the year) for the year ended December 31, 2003 was 20.4%, according to information published by the Chilean Superintendency of Banks. The following table sets forth our return on average shareholders’ equity and the returns of our principal competitors and the Chilean financial system, in each case as of December 31 in each of the last five years:

  Return on Average Shareholders' Equity
Year Ended December 31,
 
  1999  2000  2001  2002  2003 
 




Banco de A. Edwards(1) (4.2)% 1.5% 4.3% -     -    
Banco Santiago(2) 12.3     20.2     24.6     -     -    
BBVA Banco BHIF 5.7     7.4     6.3     8.8% 10.6%
Banco de Chile 19.5     23.6     23.7     8.9     20.4    
Banco de Credito e Inversiones 14.1     19.2     22.0     20.7     22.4    
Banco Santander-Chile 16.8     22.3     22.3     16.9     22.7    
 




Total average financial system 9.2% 12.6% 15.9% 13.7% 15.1%
 




___________________
Source:

Chilean Superintendency of Banks

(1)

Banco de A. Edwards merged with us on January 1, 2002.

(2)

Banco Santiago merged with Banco Santander-Chile in August 2002.

   Efficiency

    For the year ended December 31, 2003, our operating expenses as a percentage of our operating revenues, or efficiency ratio, was 55.4%, mainly influenced by non-recurring charges related to the merger.

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    The following table sets forth the efficiency ratios of the six largest private sector Chilean banks at December 31 in each of the last three years:

  Efficiency Ratio(1)
 
  As of December 31,
 
  2001  2002  2003 
 


Banco Santiago(2) 50.3% -     -    
Banco de A. Edwards(3) 65.3     -     -    
Banco Santander-Chile 46.6     50.1% 46.5%
Banco de Credito e Inversiones 55.5     54.8     51.3    
Banco de Chile 56.3     61.0     55.4    
BBVA Banco BHIF 64.1     64.6     61.0    
    Average for six banks 54.4% 55.5% 51.4%
___________________
Source:

Chilean Superintendency of Banks

(1)

Calculated by dividing operating expense by operating revenue.

(2)

Banco Santiago merged with Banco Santander-Chile in August 2002.

(3)

Banco de A. Edwards merged with us on January 1, 2002.

REGULATION AND SUPERVISION

    In Chile, only banks may maintain checking accounts for their customers, conduct foreign trade operations and, together with financial companies, accept time deposits. The principal authorities that regulate financial institutions in Chile are the Chilean Superintendency of Banks and the Central Bank. Chilean banks are primarily subject to the General Banking Law and secondarily, to the extent not inconsistent with that law, the provisions of the Chilean Corporations Law governing public corporations, except for certain provisions that are expressly excluded.

    The modern Chilean banking system dates back to 1925 and has been characterized by periods of substantial regulation and state intervention as well as periods of deregulation. The most recent period of deregulation commenced in 1975 and culminated in the adoption of a series of amendments to the General Banking Law. That law, amended most recently in 2004, granted additional powers to banks, including general underwriting powers for new issues of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, administration of investment funds, factoring, securitization products and financial leasing services. Following the Chilean banking crisis of 1982 and 1983, the Chilean Superintendency of Banks assumed control of 19 banks representing approximately 51% of the total loans in the banking system. As part of the assistance that the Chilean government provided to Chilean banks, the Central Bank permitted banks to sell to it a certain portion of their problem loan portfolios at the book value of the loan portfolios. Each bank then repurchased such loans at their economic value (which, in most cases, was substantially lower than the book value at which the Central Bank had acquired the loans), with the difference to be repaid to the Central Bank out of future income. Pursuant to Law No. 18,818, which was passed in 1989, this difference was converted into subordinated debt.

The Central Bank

    The Central Bank is an autonomous legal entity created by the Chilean Constitution. It is subject to the Chilean Constitution and its organic constitutional law, the “ley organica constitucional.” To the extent not inconsistent with the Chilean Constitution or the Central Bank’s organic constitutional law, the Central Bank is also subject to private sector laws, but is not subject to the laws applicable to the public sector. It is directed and administered by a board of directors composed of five members designated by the President of Chile, subject to Senate approval.

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    The legal purpose of the Central Bank is to maintain the stability of the Chilean peso and the orderly functioning of Chile’s internal and external payment system. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, and establishing regulations and guidelines regarding finance companies, foreign exchange (including the Formal Exchange Market) and banks’ deposit-taking activities.

The Chilean Superintendency of Banks

    Banks are supervised and controlled by the Chilean Superintendency of Banks, an independent Chilean governmental agency. The Chilean Superintendency of Banks authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial companies. Furthermore, in case of noncompliance with its legal and regulatory requirements, the Chilean Superintendency of Banks has the ability to impose sanctions. In extreme cases, it can appoint, with the prior approval of the board of directors of the Central Bank, a provisional administrator to manage a bank. It must also approve any amendment to a bank’s bylaws or any increase in its capital.

    The Chilean Superintendency of Banks examines all banks from time to time, generally at least once a year. Banks are also required to submit unconsolidated unaudited financial statements to the Chilean Superintendency of Banks on a monthly basis and to publish their unaudited financial statements at least four times a year in a newspaper with countrywide coverage. Financial statements as of December 31 must be audited. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the Chilean Superintendency of Banks. A bank’s annual financial statements and the opinion of its independent auditors must also be submitted to the Chilean Superintendency of Banks.

    Any person wishing to acquire, directly or indirectly, 10.0% or more of the share capital of a bank must obtain the prior approval of the Chilean Superintendency of Banks. The absence of such approval will cause the holder of such shares so acquired not to have the right to vote such shares. The Chilean Superintendency of Banks may only refuse to grant its approval, based on specific grounds set forth in the General Banking Law.

    According to Article 35 bis of the General Banking Law the prior authorization of the Chilean Superintendency of Banks is required for:

    Such prior authorization is required solely when the acquiring bank or the resulting group of banks would own a significant market share in loans, defined by the Chilean Superintendency of Banks to be more than 15.0% of all loans in the Chilean banking system. The intended purchase, merger or expansion may be denied by the Chilean Superintendency of Banks. Alternatively, a purchase, merger or expansion, when the acquiring bank or resulting group would own a market share in loans defined by the Chilean Superintendency of Banks to be more than 20.0% of all loans in the Chilean banking system, may be conditioned on one or more of the following:

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    If the acquiring bank or resulting group would own a market share in loans defined by the Chilean Superintendency of Banks to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining an effective equity not lower than 10% of their risk-weighted assets for the time set forth by the Chilean Superintendency of Banks, which may not be less than one year.

    Pursuant to the regulations of the Chilean Superintendency of Banks, the following ownership disclosures are required:

    In addition, the regulations require bank shareholders who individually hold 10.0% or more of a bank’s capital stock and who are controlling shareholders to periodically inform the Chilean Superintendency of Banks of their financial condition.

Limitations on Types of Activities

    Chilean banks can only conduct those activities allowed by the General Banking Law, including: making loans, factoring and leasing activities, accepting deposits and, subject to limitations, making investments and performing financial services. Investments are restricted to real estate for the bank’s own use, gold, foreign exchange and debt securities. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, mutual fund management, investment fund management, financial advisory, securitization and leasing activities. Subject to specific limitations and the prior approval of the Chilean Superintendency of Banks and the Central Bank, Chilean banks may own majority or minority interests in foreign banks.

    On March 2, 2002 the Central Bank authorized banks to pay interest on checking accounts. On March 20, 2002 the Chilean Superintendency of Banks published guidelines establishing that beginning on June 1, 2002, banks could offer a new checking account product that pays interest. The Chilean Superintendency of Banks also stated that these accounts may be subject to minimum balance limits and different interest rates depending on average balances held in the account. This product is optional and banks may also charge fees for the use of this new product. For banks with a solvency score of less than A the Central Bank has also imposed additional caps to the interest rate that can be charged.

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Deposit Insurance

    The Chilean government guarantees up to 90.0% of the principal amount of certain time and demand deposits held by individuals in the Chilean banking system. The Chilean government guarantee covers those obligations with a maximum value of UF108 per person (Ch$1,827,360 or U.S.$3,049 as of December 31, 2003) per calendar year.

Reserve Requirements

    Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits. The Central Bank has statutory authority to increase these percentages to up to 40% for demand deposits and up to 20% for time deposits, to implement monetary policy.

    In addition, we are subject to a reserve requirement applicable to Chilean banks pursuant to which we must hold a certain amount of assets in cash or in highly liquid instruments. This reserve is equal to the amount by which the daily balance of:

in the aggregate exceeds 2.5 time the amount of our capital and reserves.

    Chilean regulations also require that gaps between assets and liabilities maturing within less than 30 days not exceed a bank’s basic capital and that gaps among assets and liabilities maturing within less than 90 days not exceed twice a bank’s equity.

    The interest rate mismatches of a bank’s foreign currency liabilities may not exceed 8.0% of its effective equity ratio.

Minimum Capital

    Under the General Banking Law, a bank must have a minimum paid-in capital and reserves of UF800,000 (Ch$13,536 million or U.S.$22.0 million as of December 31, 2003). However, a bank may begin its operations with 50.0% of such amount, provided that it has a effective equity ratio (defined as effective equity as a percentage of risk weighted assets) of not less than 12.0%. When such a bank’s paid-in capital reaches UF600,000 (Ch$10,152 million or U.S.$17.0 million as of December 31, 2003) the effective equity ratio requirement is reduced to 10.0%.

Capital Adequacy Requirements

    According to the General Banking Law, each bank should have an effective equity of at least 8.0% of its risk weighted assets (net) of required allowances. Effective equity is defined as the aggregate of:

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    Banks should also have a net capital base of at least 3.0% of its total assets (net) of required allowances. An amendment to the General Banking Law enacted on November 7, 2001 eliminated the exclusion of the investment in subsidiaries and foreign branches from the calculation of net capital base.

    The calculation of risk-weighted assets is based on a five category risk classification system to be applied to a bank assets that is based on the Basel Committee recommendations.

Lending Limits

    Under the General Banking Law, Chilean banks are subject to certain lending limits, including the following material limits:

    In addition, the General Banking Law limits the aggregate amount of loans that a bank may grant to its employees to 1.5% of its effective equity, and provides that no individual employee may receive loans in excess of 10.0% of this 1.5% limit. Notwithstanding these limitations, a bank may grant to each of its employees a single residential mortgage loan for personal use once during such employee’s term of employment.

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Allowances for Loan Losses

    Chilean banks are required to provide to the Chilean Superintendency of Banks detailed information regarding their loan portfolio on a monthly basis. Each bank is also required to maintain global allowances for loan losses, the amount of which must at least equal the aggregate amount of its outstanding loans multiplied by the greater of (1) its “risk index” or (2) 0.75%. See “—Selected Statistical Information” for an explanation of the “risk index” and other information regarding allowances for loan losses. As of October 31, 2003, our unconsolidated risk index was 2.40% compared with an average for the Chilean financial system as a whole (i.e., all banks) of 1.82%, as of that date (the latest available information for 2003 for the Chilean financial system).

    Banks in Chile are also required to maintain individual allowances for loans on which any payment of principal or interest is 90 days or more overdue. Individual allowances for loan losses equal to 100.0% of the past due portion of such past due loan are required to the extent that the loan is unsecured. In the event that non-payment of a portion of a loan permits a bank to accelerate the loan, and the bank commences legal proceedings against the debtor to collect the full amount of the loan, the individual loan loss allowances must be equal to 100.0% of the loan within 90 days as of the filing of the lawsuit. The Chilean Superintendency of Banks has ruled that in the case of past due loans, individual allowances for loan losses should be made only for the difference between 100.0% of the past due portion of a past due loan (or the full amount of the loan if the preceding sentence applies) and the allowances made for such loan when calculating the global loan loss allowances. As of December 31, 2003, the aggregate amount of our individual allowances for loan losses was 22.0% of the required minimum allowances for loan losses. Prior to January 1, 2004, a bank could also voluntarily maintain additional allowances for loan losses in excess of the minimum amounts required as global and individual allowances.

Classification of Banks

    The Chilean Superintendency of Banks regularly examines and evaluates each financial institution’s credit management process, including its compliance with the loan classification guidelines, and on that basis classifies banks and other financial institutions into five categories. In accordance with amended regulations effective as of January 1, 2004, Category I is reserved for financial institutions that have been rated level A (the highest rating) in terms of solvency and management. Category II is reserved for financial institutions that have been rated level A in terms of solvency and level B in terms of management; or level B in terms of solvency and level A in terms of management or level B in terms of solvency and level B in terms of management. Category III is reserved for financial institutions that have been rated level B in terms of solvency, and level B in terms of management for two or more consecutive review periods; or level A in terms of solvency and level C in terms of management or level B in terms of solvency and level C in terms of management. Category IV is reserved for financial institutions that are rated level A or B in terms of solvency that have been rated level C in terms of management for two or more consecutive review periods. Category V is reserved for financial institutions that have been rated level C in terms of solvency, irrespective of their level of management.

    For classification purposes, banks are rated according to their solvency using the following guidelines: Level A banks are those banks whose effective equity (after deduction of accumulated losses during the financial year) to risk weighted assets ratio is equal or greater than 10.0 %. Level B banks are those whose effective equity (after deduction of accumulated losses during the financial year) to risk weighted assets ratio is equal or greater than 8.0% and lower than 10.0%, and level C banks are those whose effective equity (after deduction of the accumulated losses during the financial year) to risk weighted assets ratio is lower than 8.0%.

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    For classification purposes, a bank’s management is rated as follows: Level A banks are those banks that are not rated as level B or C banks. Level B banks are those banks that show some level of weakness in their internal controls, information systems, timely follow up of risks, private risk rating or capacity to face contingency scenarios. Level C banks are those banks that have shown significant deficiencies in their internal controls, information systems, timely follow up of risks, private risk rating or capacity to face contingency scenarios.

    We have been classified in Category I since December 1991, when the classification system established by the Chilean Superintendency of Banks became applicable to us.

    In addition, in accordance with the new regulations effective as of January 1, 2004, banks are classified in categories 1, 2, 3 and 4 depending on how the models and methods used by the bank to classify its loan portfolio and determine allowances for loan losses and possible losses vary from those determined by the Chilean Superintendency of Banks. Category 1 banks are those banks whose methods and models are satisfactory to the Chilean Superintendency of Banks. Category 1 banks are entitled to continue using the same methods and models they currently have in place. A bank classified as a Category 2 bank must maintain the minimum levels of allowances established by the Chilean Superintendency of Banks while its board of directors is made aware of the problems detected by the Chilean Superintendency of Banks and takes steps to correct them. Finally, banks classified as categories 3 and 4 banks must maintain the minimum levels of allowances established by the Chilean Superintendency of Banks until they are authorized by the Chilean Superintendency of Banks to do otherwise.

   Classification of Loan Portfolio

    For purposes of these new classifications, loans are divided into: (i) consumer loans (including loans granted to individuals for the purpose of financing the acquisition of consumer goods or payment of services); (ii) residential mortgage loans (including loans granted to individuals for the acquisition, construction or repair of residential real estate, in which the value of the property covers at least 100% of the amount of the loan); (iii) leasing operations (including consumer leasing, commercial leasing and residential leasing); (iv) factoring operations and (v) commercial loans (includes all loans other than the loans described in (i) through (iv) above).

    In accordance with the new regulations effective as of January 1, 2004, the models and methods used to classify our loan portfolio must follow the following guiding principles, which have been established by the Chilean Superintendency of Banks.

   Models based on the individual analysis of borrowers

    One of the following risk categories must be assigned to each loan and borrower upon finishing the analysis:

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Classification Estimated range of loss Allowance
C1 Up to 3% 2%
C2 More than 3% up to 19% 10%
C3 More than 19% up to 29% 25%
C4 More than 29% up to 49% 40%
D1 More than 49% up to 79% 65%
D2 More than 79% 90%

   Models based on group analysis

Additional Allowances

    Under the new regulations, banks may create allowances above the limits described above only to cover specific risks that have been authorized by their board of directors. The concept of voluntary allowances has been eliminated by the new regulation.

Obligations Denominated in Foreign Currencies

    Foreign currency denominated obligations of Chilean banks are subject to four requirements:

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Capital Markets

    Under the General Banking Law, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as in financial leasing, mutual fund and investment fund administration, factoring, investment advisory services and merger and acquisition services. The Chilean Superintendency of Banks generally regulates these subsidiaries. However, the Chilean Superintendency of Securities and Insurance regulates some of these subsidiaries. The Chilean Superintendency of Securities and Insurance is the regulator of the Chilean securities market and of open stock corporations.

Legal Provisions Regarding Banking Institutions with Economic Difficulties

    The General Banking Law provides that if specified adverse circumstances exist at any bank, its board of directors must correct the situation within 30 days from the date of receipt of the relevant financial statements. If the board of directors is unable to do so, it must call a special shareholders’ meeting to increase the capital of the bank by the amount necessary to return the bank to financial stability. If the shareholders reject the capital increase, or if it is not effected within the term and in the manner agreed to at the meeting, or if the Chilean Superintendency of Banks does not approve the board of directors proposal, the bank will be barred from increasing its loan portfolio beyond that stated in the financial statements presented to the board of directors and from making any further investments in any instrument other than in instruments issued by the Central Bank. In such a case, or in the event that a bank is unable to make timely payment in respect of its obligations or if a bank is under provisional administration of the Chilean Superintendency of Banks, the General Banking Law provides that the bank may receive a two-year term loan from another bank. The terms and conditions of such a loan must be approved by the directors of both banks, as well as by the Chilean Superintendency of Banks, but need not be submitted to the borrowing bank’s shareholders for their approval. In any event, a creditor bank cannot grant interbank loans to an insolvent bank in an amount exceeding 25.0% of the creditor bank’s effective equity. The board of directors of a bank that is unable to make timely payment of its obligations must present a reorganization plan to its creditors in order to capitalize the credits, extend their respective terms, forgive debts or take other measures for the payment of the debts. If the board of directors of a bank submits a reorganization plan to its creditors and such arrangement is approved, all subordinated debt issued by the bank, whether or not matured, will be converted by operation of law into common stock in the amount required for the ratio of effective equity to risk-weighted assets not to be lower than 12.0%. If a bank fails to pay an obligation, it must notify the Chilean Superintendency of Banks, which shall determine if the bank is solvent.

Dissolution and Liquidation of Banks

    The Chilean Superintendency of Banks may establish that a bank should be liquidated for the benefit of its depositors or other creditors when such bank does not have the necessary solvency to continue its operations. In such case, the Chilean Superintendency of Banks must revoke a bank’s authorization to exist and order its mandatory liquidation, subject to agreement by the Central Bank. The Chilean Superintendency of Banks must also revoke a bank’s authorization if the reorganization plan of such bank has been rejected twice. The resolution by the Chilean Superintendency of Banks must state the reason for ordering the

52


liquidation and must name a liquidator, unless the Superintendent of Banks assumes this responsibility. When a liquidation is declared, all checking accounts, other demand deposits received in the ordinary course of business, other deposits unconditionally payable immediately or that have a maturity of no more than 30 days, and any other deposits and receipts payable within 10 days, are required to be paid by using existing funds of the bank, its deposits with the Central Bank or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the rest of the bank’s assets, as needed. If necessary and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.

Investments in Foreign Securities

    Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain foreign currency securities. Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would support the bank’s business if such companies were incorporated in Chile. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities shall qualify as (1) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (2) bonds issued by foreign companies. Such foreign currency securities must have a minimum rating as follows:

Rating Agency Short Term Long Term
Moody's P2 Baa3
Standard and Poor's A3 BBB-
Fitch IBCA F2 BBB-

    A Chilean bank may invest in securities having a minimum rating as follows, provided that in case the total amount of these investments exceeds 20%, (or 30% in certain cases), of the effective equity of the bank, an allowance of 100% of the excess shall be established by the bank:

Rating Agency Short Term Long Term
Moody's P2 Ba3
Standard and Poor's A3 BB-
Fitch IBCA F2 BB-

    If investments in these securities and certain loans referred to below exceed 70% of the effective equity of the bank, an allowance for 100% of the excess shall be established, unless the excess, up to 70% of the bank’s effective equity, is invested in securities having a minimum rating as follows:

Rating Agency Short Term Long Term
Moody's P1 Aa3
Standard and Poor's A-1+ AA-
Fitch IBCA F1+ AA-

    Subject to specific conditions, a bank may grant loans in dollars to subsidiaries or branches of Chilean companies located abroad, to companies listed on foreign stock exchanges authorized by the Central Bank and, in general, to individuals and entities domiciled abroad, as long as the Central Bank is kept informed of such activities.

    In the event that the sum of the investments of a bank in foreign currency and of the commercial and foreign trade loans granted to foreign individuals and entities exceeds 70.0% of the effective equity of such bank, the excess is subject to a mandatory reserve of 100.0%

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PROPERTY, PLANTS AND EQUIPMENT

    We are domiciled in Chile, and own the approximately 71,000 square meter building, located at Ahumada 251, Santiago, Chile, that serves as our executive offices, and which serves as the executive offices for most our subsidiaries. In addition, we own an approximately 15,000 square meter building located at Huerfanos 740, Santiago, Chile, where the remainder of our executive offices are located. At December 31, 2003, we owned the properties on which 125 of our full service branches are located (approximately 98,000 square meters of office space). We lease office space for our remaining 99 full service branches and for the New York branch and Miami agency, as well as for our representative offices. We also own properties throughout Chile for back office and administrative operations, as well as for storage of documents and other purposes. We believe that our facilities are adequate for our present needs and suitable for their intended purposes.

    We also own approximately 140,000 square meters in mainly recreational physical facilities in Chile, which we use to assist our employees in maintaining a healthy work and life balance and which we use for incentive and integration activities.

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SELECTED STATISTICAL INFORMATION

    The following information is included for analytical purposes and should be read in conjunction with our audited consolidated financial statements as well as “Item 5. Operating and Financial Review and Prospects.”

Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities

    The average balances for interest earning assets and interest bearing liabilities, including interest and readjustments received and paid, have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. These average balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies (principally U.S. dollar). The UF is a unit of account which is linked to, and which is adjusted daily to reflect changes in, the Consumer Price Index. See notes 1(b) and (c) to our audited consolidated financial statements.

    The nominal interest rate has been calculated by dividing the amount of interest and principal readjustment gain or loss during the period by the related average balance, both amounts expressed in constant pesos. The nominal rates calculated for each period have been converted into real rates using the following formulas:

 

Where:

Rp = real average rate for peso-denominated assets and liabilities (in Ch$ and UF) for the period;

Rd = real average rate for foreign currency-denominated assets and liabilities for the period;

Np = nominal average rate for peso-denominated assets and liabilities for the period;

Nd = nominal average rate for foreign currency-denominated assets and liabilities for the period;

D = devaluation rate of the Chilean peso to the dollar for the period; and

I = inflation rate in Chile for the period (based on the variation of the Consumer Price Index).

    The real interest rate can be negative for a portfolio of peso-denominated loans when the inflation rate for the period is higher than the average nominal rate of the loan portfolio for the same period. A similar effect could occur for a portfolio of foreign currency-denominated loans when the inflation rate for the period is higher than the sum of the devaluation rate for the period and the corresponding average nominal rate of the portfolio.

    The formula for the average real rate for foreign currency-denominated assets and liabilities (Rd) reflects a gain or loss in purchasing power caused by the difference between the devaluation rate of the Chilean peso and the inflation rate in Chile during the period.

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    The following example illustrates the calculation of the real interest rate for a U.S. dollar asset bearing a nominal annual interest rate of 10% (Nd = 0.10), assuming a 5% annual devaluation rate (D = 0.05) and a 12% annual inflation rate (I = 0.12):

    In the example, since the inflation rate was higher than the devaluation rate, the real rate is lower than the nominal rate in dollars. If, for example, the annual devaluation rate were 15%, using the same numbers, the real rate in Chilean pesos would be 12.9%, which is higher than the nominal rate in dollars. Using the same numbers, if the annual inflation rate were greater than 15.5%, the real rate would be negative.

    Because of the significant revaluation of the Chilean peso against the U.S. dollar in 2003 (the published Observed Exchange Rate was Ch$599.42 per U.S. $1.00 on December 31, 2003 as compared to Ch$712.38 per U.S. $1.00 on December 31, 2002), and the fact that nominal interest rates and the inflation rate were comparatively low in 2003, most real interest rates on foreign currency assets and liabilities shown in the tables in “—Selected Statistical Information” are negative for 2003.

    Contingent loans (consisting of guarantees and open and unused letters of credit) have been treated as interest bearing assets. Although the nature of the income derived from such assets is similar to a fee, Chilean banking regulations require that such income be accounted for as interest revenue. As a result of this treatment, the comparatively low rates of interest earned on these assets have a distorting effect on the average interest rate earned on total interest earning assets.

    The real rate for contingent loans has been stated as the nominal rate, since we do not have an effective funding obligation for these loans. The foreign exchange gains or losses on foreign currency denominated assets and liabilities have not been included in interest revenue or expense. Similarly, interest on financial investments does not include trading gains or losses on these investments.

    Nonperforming loans that are not yet 90 days or more overdue have been included in each of the various categories of loans, and therefore affect the various averages. Nonperforming loans consist of loans as to which either principal or interest is overdue (i.e., non accrual loans) and restructured loans earning no interest. Nonperforming loans that are 90 days or more overdue are shown as a separate category of loans (“Past due loans”). Interest and/or indexation readjustments received on all non-performing loans during the periods are included as interest revenue.

    Included in interbank deposits are current accounts maintained in the Central Bank and overseas banks. Such assets have a distorting effect on the average interest rate earned on total interest earning assets because:

Consequently, the average interest earned on such assets is comparatively low. These deposits are maintained by us in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.

    The monetary gain or loss on interest earning assets and interest bearing liabilities is not included as a component of interest revenue or interest expense because inflation effects are taken into account in the calculation of real interest rates.

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    The following tables show, by currency of denomination, average balances and, where applicable, interest amounts, nominal and real rates for our assets and liabilities for the years ended December 31, 2001, 2002 and 2003:

Year Ended December 31,

2001 2002 2003



Average
balance
Interest earned Average nominal rate Average real rate Average
balance
Interest earned Average nominal rate Average real rate Average
balance
Interest earned Average nominal rate Average real rate












(in millions of constant Ch$ as of December 31, 2003, except percentages)
                                     
Assets                                    
 
Interest earning assets
 
Interbank deposits
    Ch$ Ch$ Ch$ -    -    Ch$ Ch$ -    -    Ch$ Ch$ -    -   
    UF     -    -        -    -        -    -   
    Foreign currency   120,716    6,206  5.14% 17.37%   215,444    3,960  1.84% 7.52%   120,061    1,820  1.52% (15.49)%






        Total   120,716    6,206  5.14    17.37      215,444    3,960  1.84  7.52    120,061    1,820  1.52    (15.49)   






Financial investments
    Ch$   194,873    15,679  8.05    5.27      459,185    49,455  10.77    7.73      780,556    8,555  1.10    0.03   
    UF   900,043    72,675  8.07    5.29      1,003,502    68,431  6.82    3.89      637,557    (37,029) -    -   
    Foreign currency   467,427    21,570  4.61    16.78      375,701    12,882  3.43    9.20      361,055    9,189  2.55    (14.63)   






        Total   1,562,343    109,924  7.04    8.73      1,838,388    130,768  7.11    5.94      1,779,168    (19,285) -    -   






Commercial loans
    Ch$   416,545    85,712  20.58    17.48      888,260    138,528  15.60    12.43      1,126,735    127,495  11.32    10.14   
    UF   1,429,456    138,132  9.66    6.84      1,857,557    151,459  8.15    5.19      1,788,468    99,493  5.56    4.45   
    Foreign currency   187,404    12,512  6.68    19.09      300,318    6,965  2.32    8.03      247,813    3,134  1.26    (15.70)   






        Total   2,033,405    236,356  11.62    10.15      3,046,135    296,952  9.75    7.58      3,163,016    230,122  7.28    4.89   






Consumer loans
    Ch$   187,365    47,795  25.51    22.28      365,522    85,858  23.49    20.10      394,782    80,870  20.48    19.21   
    UF   19,318    2,284  11.82    8.95      29,054    2,970  10.22    7.20      27,080    2,460  9.08    7.93   
    Foreign currency     -    -        -    -        -    -   






        Total   206,683    50,079  24.23    21.03      394,576    88,828  22.51    19.15      421,862    83,330  19.75    18.49   






Interbank loans
    Ch$   64,627    2,685  4.15    1.48      63,947    2,315  3.62    0.78      54,470    1,346  2.47    1.39   
    UF     -    -        -    -        -    -   
    Foreign currency   36,237    2,891  7.98    20.54      36,473    1,416  3.88    9.68      29,249    568  1.94    (15.13)   






        Total   100,864    5,576  5.53    8.32      100,420    3,731  3.72    4.01      83,719    1,914  2.29    (4.39)   






Leasing contracts
    Ch$   1,551    277  17.86    14.83      1,243    209  16.81    13.61      6,122    602  9.83    8.67   
    UF   116,903    15,312  13.10    10.19      173,147    21,272  12.29    9.21      209,882    20,990  10.00    8.84   
    Foreign currency   55,523    13,181  23.74    38.13      67,243    10,917  16.24    22.72      49,236    (4,676) -    -   






        Total   173,977    28,770  16.54    19.15      241,633    32,398  13.41    12.99      265,240    16,916  6.38    7.19   






Foreign trade loans
    Ch$     -    -      5,953    281  4.72    1.85      44,618    1,931  4.33    3.22   
    UF     -    -      972    66  6.79  3.86    12,690    497  3.92  2.82 
    Foreign currency   432,365    6,313  1.46    13.26      611,249    4,121  0.67    6.29      597,019    1,896  0.32    (16.49)   






        Total   432,365    6,313  1.46    13.26      618,174    4,468  0.72    6.25      654,327    4,324  0.66    (14.77)   






Mortgage loans
    Ch$     -    -        -    -        -    -   
    UF   806,332    88,550  10.98    8.13      1,243,318    132,192  10.63    7.60      1,157,150    106,295  9.19    8.03   
    Foreign currency     -    -        -    -        -    -   






        Total   806,332    88,550  10.98    8.13      1,243,318    132,192  10.63    7.60      1,157,150    106,295  9.19    8.03   






Contingent loans
    Ch$   37,189    2,715  7.30    7.30      44,515    1,409  3.17    3.17      44,549    1,343  3.01    3.01   
    UF   69,425    1,144  1.65    1.65      126,520    1,544  1.22    1.22      128,715    1,662  1.29    1.29   
    Foreign currency   184,795    381  0.21    0.21      199,231    324  0.16    0.16      221,558    256  0.12    0.12   






        Total   291,409    4,240  1.45    1.45      370,266    3,277  0.89    0.89      394,822    3,261  0.83    0.83   

 




Past due loans
    Ch$   12,215    -    -      31,659    -    -      28,376    0.01    (1.05)   
    UF   36,002    316  0.88    (1.72)      103,352    29  0.03    (2.72)      97,931    -    (1.05)   
    Foreign currency   4,348    -    -      11,181    -    -      9,043    -    -   






        Total   52,565    316  0.60    (1.18)      146,192    29  0.02    (1.92)      135,350    0.01    (0.98)   






Total interest
    earning assets
    Ch$   914,365    154,863  16.94    13.93      1,860,284    278,055  14.95    11.79      2,480,208    222,145  8.96    7.80   
    UF   3,377,479    318,413  9.43    6.61      4,537,422    377,963  8.33    5.36      4,059,473    194,372  4.79    3.68   
    Foreign currency   1,488,815    63,054  4.24    16.36      1,816,840    40,585  2.23    7.94      1,635,034    12,187  0.75    (16.13)   






        Total Ch$ 5,780,659 Ch$ 536,330 9.28% 10.28% Ch$ 8,214,546 Ch$ 696,603 8.48% 7.39% Ch$ 8,174,715 Ch$ 428,704 5.24% 0.97%






57


  Year Ended December 31,
 
  2001 2002 2003
 


  Average balance Interest earned Average
nominal
rate
Average
real rate
Average balance Interest earned Average nominal rate Average
real rate
Average balance Interest earned Average nominal rate Average
real rate
 











  (in millions of constant Ch$ as of December 31, 2003, except percentages)
Assets                        
 
Non–interest earning assets Cash and due from banks
    Ch$ Ch$ 353,262 Ch$ Ch$ 494,748 Ch$ Ch$ 529,030 Ch$
    UF 383
    Foreign currency 45,802 67,826 112,839






        Total 399,064 562,957 641,869






Allowances for loan losses                        
    Ch$ (124,235) (222,593) (191,835)
    UF
    Foreign currency (4,598) (3,914) (3,849)






        Total (128,833) (226,507) (195,684)






Fixed assets                        
    Ch$ 84,299 144,091 132,614
    UF
    Foreign currency 1,326 1,712 1,401






        Total 85,625 145,803 134,015






Other assets                        
    Ch$ 91,526 239,866 213,086
    UF 1,684 2,123 1,215
    Foreign currency 50,785 126,765 64,679






        Total 143,995 368,754 278,980






Total non – interest earning assets                        
    Ch$ 404,852 656,112 682,895
    UF 1,684 2,506 1,215
    Foreign currency 93,315 192,389 175,070






        Total 499,851 851,007 859,180






Total assets                        
    Ch$ 1,319,217 154,863 2,516,396 278,055 3,163,103 222,145
    UF 3,379,163 318,413 4,539,928 377,963 4,060,688 194,372
    Foreign currency 1,582,130 63,054 2,009,229 40,585 1,810,104 12,187






        Total Ch$ 6,280,510 Ch$ 536,330 —% —% Ch$ 9,065,553 Ch$ 696,603 —% —% Ch$ 9,033,895 Ch$ 428,704 —% —%






58


Year Ended December 31,

2001 2002 2003



Average
balance
Interest paid Average nominal rate Average real rate Average
balance
Interest paid Average nominal rate Average real rate Average
balance
Interest paid Average nominal rate Average real rate












Liabilities (in millions of constant Ch$ as of December 31, 2003, except percentages)
                                     
Interest bearing liabilities                                    
 
Interest bearing demand deposits
    Ch$ Ch$ Ch$ Ch$ Ch$ Ch$ Ch$
    UF            
    Foreign currency            






        Total            






Savings accounts
    Ch$            
    UF   95,517    6,056  6.34% 3.61%   171,009    7,232  4.23% 1.37%   174,847    2,914  1.67% 0.59%
    Foreign currency            






        Total   95,517    6,056  6.34  3.61    171,009    7,232  4.23  1.37    174,847    2,914  1.67  0.59 






Time deposits
    Ch$   848,355    65,159  7.68  4.91    1,812,960    96,549  5.33  2.44    1,747,927    61,806  3.54  2.44 
    UF   1,327,686    96,552  7.27  4.51    944,398    41,855  4.43  1.57    779,979    18,555  2.38  1.30 
    Foreign currency   500,061    14,137  2.83  14.79    792,949    6,623  0.84  6.46    800,582    3,634  0.45  (16.37)






        Total   2,676,102    175,848  6.57  6.56    3,550,307    145,027  4.08  3.11    3,328,488    83,995  2.52  (2.35)






Central Bank borrowings
    Ch$   31,088    1,766  5.68  2.96    57,113    2,137  3.74  0.90    64,256    1,547  2.41  1.32 
    UF   2,793    163  5.84  3.11    4,032    123  3.05  0.22    3,310    156  4.71  3.60 
    Foreign currency           677    18  2.66  (14.54)






        Total   33,881    1,929  5.69  2.97    61,145    2,260  3.70  0.85    68,243    1,721  2.52  1.28 






Repurchase agreements
    Ch$   130,326    8,715  6.69  3.94    212,405    8,814  4.15  1.29    213,171    6,891  3.23  2.14 
    UF   9,611    577  6.00  3.28    5,245    97  1.85  (0.94)   24,777    826  3.33  2.24 
    Foreign currency   37,715    2,316  6.14  18.49    157,772    1,557  0.99  6.62    113,001    979  0.87  (16.03)






        Total   177,652    11,608  6.53  6.99    375,422    10,468  2.79  3.50    350,949    8,696  2.48  (3.70)






Mortgage finance bonds
    Ch$            
    UF   842,115    80,497  9.56  6.74    1,280,975    123,797  9.66  6.66    1,025,770    75,720  7.38  6.24 






    Foreign currency            
        Total   842,115    80,497  9.56  6.74    1,280,975    123,797  9.66  6.66    1,025,770    75,720  7.38  6.24 






Other interest bearing liabilities(1)
    Ch$   21,581    8,580  39.76  36.16    36,450    3,652  10.02  7.00    43,297    7,929  18.31  17.06 
    UF   178,182    17,278  9.70  6.88    324,934    29,553  9.10  6.10    293,926    22,507  7.66  6.52 
    Foreign currency   393,395    11,017  2.80  14.76    394,986    3,349  0.85  6.48    678,301    752  0.11  (16.66)






        Total   593,158    36,875  6.22  13.17    756,370    36,554  4.83  6.34    1,015,524    31,188  3.07  (8.51)






Total interest bearing liabilities
    Ch$   1,031,350    84,220  8.17  5.38    2,118,928    111,152  5.25  2.36    2,068,651    78,173  3.78  2.68 
    UF   2,455,904    201,123  8.19  5.41    2,730,593    202,657  7.42  4.48    2,302,609    120,678  5.24  4.13 
    Foreign currency   931,171    27,470  2.95  14.93    1,345,707    11,529  0.86  6.49    1,592,561    5,383  0.34  (16.47)






        Total Ch$ 4,418,425  Ch$ 312,813 7.08% 7.41% Ch$ 6,195,228 Ch$ 325,338 5.25% 4.19% Ch$ 5,963,821 Ch$ 204,234 3.42% (1.87)%






___________________
(1)

Other interest bearing liabilities primarily include foreign borrowings, subordinated bonds, bonds and borrowings from domestic financial institutions.

59


Year Ended December 31,

2001 2002 2003



Average
balance
Interest paid Average nominal rate Average real rate Average
balance
Interest paid Average nominal rate Average real rate Average
balance
Interest paid Average nominal rate Average real rate












Liabilities (in millions of constant Ch$ as of December 31, 2003, except percentages)
                                     
Non–interest bearing
    liabilities
 
Non–interest bearing
    demand deposits
    Ch$ Ch$ 805,569 Ch$ Ch$ 1,207,113 Ch$ Ch$ 1,360,430 Ch$
    UF   3,288     13,266     11,448  
    Foreign currency   258,403     373,359     456,051  






        Total   1,067,260     1,593,738     1,827,929  






Contingent liabilities
    Ch$   37,083     44,460     44,426  
    UF   69,061     126,461     128,303  
    Foreign currency   185,029     199,575     222,085  






        Total   291,173     370,496     394,814  






Other non–interest bearing
    Ch$   34,690     111,716     107,331  
    UF   4,732     5,406     3,911  
    Foreign currency   74,386     177,088     83,682  






        Total   113,808     294,210     194,924  






Shareholders’ equity
    Ch$   389,844     611,881     652,407  
    UF            
    Foreign currency            






        Total   389,844     611,881     652,407  






Total non–interest bearing liabilities and shareholders’ equity
    Ch$   1,267,186     1,975,170     2,164,594  
    UF   77,081     145,133     143,662  
    Foreign currency   517,818     750,022     761,818  






        Total   1,862,085     2,870,325     3,070,074  






Total liabilities and shareholders’ equity
    Ch$   2,298,536   84,220   4,094,098   111,152   4,233,245   78,173
    UF   2,532,985   201,123   2,875,726   202,657   2,446,271   120,678
    Foreign currency   1,448,989   27,470   2,095,729   11,529   2,354,379   5,383






        Total Ch$ 6,280,510 Ch$ 312,813 -%  -%  Ch$ 9,065,553 Ch$ 325,338 -%  -%  Ch$ 9,033,895 Ch$ 204,234 -%  -% 






60


Interest Earning Assets and Net Interest Margin

    The following table analyzes, by currency of denomination, the levels of our average interest earning assets and net interest, and illustrates the comparative margins obtained, for each of the periods indicated.

  Year Ended December 31,

  2001  2002  2003 



  (in millions of constant Ch$ as of December 31, 2003, except for percentages)
 
Total average interest earning assets
    Ch$ Ch$ 914,365  Ch$ 1,860,284  Ch$ 2,480,208 
    UF 3,377,479  4,537,422  4,059,473 
    Foreign currency 1,488,815  1,816,840  1,635,034 



        Total 5,780,659  8,214,546  8,174,715 



Net interest earned(1)
    Ch$ 70,643  166,903  143,972 
    UF 117,290  175,306  73,694 
    Foreign currency 35,584  29,056  6,804 



        Total Ch$ 223,517  Ch$ 371,265  Ch$ 224,470 



Net interest margin, nominal basis(2)
    Ch$ 7.73% 8.97% 5.80%
    UF 3.47  3.86  1.82 
    Foreign currency 2.39  1.60  0.42 



        Total 3.87%  4.52%  2.75% 



___________________

(1)

Net interest earned is defined as interest revenue earned less interest expense incurred.

(2)

Net interest margin, nominal basis is defined as net interest earned divided by average interest earning assets.

Changes in Net Interest Revenue—Volume and Rate Analysis

    The following tables compare, by currency of denomination, changes in our net interest revenue between 2002 and 2003 and between 2001 and 2002 caused by (1) changes in the average volume of interest earning assets and interest bearing liabilities and (2) changes in their respective nominal interest rates. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rate, average interest earning assets and average interest bearing liabilities. The net change attributable to changes in both volume and rate has been allocated proportionately to the change in volume and the change in rate.

61


  Increase (Decrease)
from 2001 to 2002
due to changes in

Net change
from
2001 to 2002

Increase (Decrease)
from 2002 to 2003
due to changes in

Net change
from
2002 to 2003

  Volume
Rate
Volume
Rate
Assets (in millions of constant Ch$ as of December 31, 2003)
 
Interest earning assets            
 
Interbank deposits
    Ch$ Ch$ —  Ch$ —  Ch$ —  Ch$ —  Ch$ —  Ch$ — 
    UF —  —  —  —  —  — 
    Foreign currency 3,150  (5,396) (2,246) (1,533) (607) (2,140)






        Total 3,150  (5,396) (2,246) (1,533) (607) (2,140)






Financial investments
    Ch$ 27,028  6,748  33,776  20,997  (61,897) (40,900)
    UF 7,802  (12,046) (4,244) (55,315) (50,145) (105,460)
    Foreign currency (3,762) (4,926) (8,688) (485) (3,208) (3,693)






        Total 31,068  (10,224) 20,844  (34,803) (115,250) (150,053)






Commercial loans
    Ch$ 77,705  (24,889) 52,816  32,144  (43,177) (11,033)
    UF 37,121  (23,794) 13,327  (5,446) (46,520) (51,966)
    Foreign currency 5,177  (10,724) (5,547) (1,064) (2,767) (3,831)






        Total 120,003  (59,407) 60,596  25,634  (92,464) (66,830)






Consumer loans
    Ch$ 42,124  (4,061) 38,063  6,535  (11,523) (4,988)
    UF 1,028  (342) 686  (193) (317) (510)
    Foreign currency —  —  —  —  —  — 






        Total 43,152  (4,403) 38,749  6,342  (11,840) (5,498)






Interbank loans
    Ch$ (28) (342) (370) (308) (661) (969)
    UF —  —  —  —  —  — 
    Foreign currency 19  (1,494) (1,475) (241) (607) (848)






        Total (9) (1,836) (1,845) (549) (1,268) (1,817)






Leasing contracts
    Ch$ (53) (15) (68) 512  (119) 393 
    UF 6,962  (1,002) 5,960  4,066  (4,348) (282)
    Foreign currency 2,430  (4,694) (2,264) (6,982) (8,611) (15,593)






        Total 9,339  (5,711) 3,628  (2,404) (13,078) (15,482)






Foreign trade loans
    Ch$ 281  —  281  1,675  (25) 1,650 
    UF 66  —  66  470  (39) 431 
    Foreign currency 2,001  (4,193) (2,192) (94) (2,131) (2,225)






        Total 2,348  (4,193) (1,845) 2,051  (2,195) (144)






Mortgage loans
    Ch$ —  —  —  —  —  — 
    UF 46,546  (2,904) 43,642  (8,741) (17,156) (25,897)
    Foreign currency —  —  —  —  —  — 






        Total 46,546  (2,904) 43,642  (8,741) (17,156) (25,897)






Contingent loans
    Ch$ 457  (1,763) (1,306) (67) (66)
    UF 755  (355) 400  27  91  118 
    Foreign currency 28  (85) (57) 33  (101) (68)






        Total 1,240  (2,203) (963) 61  (77) (16)






Past due loans
    Ch$ —  —  —  — 
    UF 214  (501) (287) (1) (24) (25)
    Foreign currency —  —  —  —  —  — 






        Total 214  (501) (287) (1) (21) (22)






Total interest earning assets
    Ch$ 147,514  (24,322) 123,192  61,556  (117,466) (55,910)
    UF 100,494  (40,944) 59,550  (65,133) (118,458) (183,591)
    Foreign currency 9,043  (31,512) (22,469) (10,366) (18,032) (28,398)






    Total Ch$ 257,051 Ch$ (96,778) Ch$ 160,273 Ch$ (13,943) Ch$ (253,956) Ch$ (267,899)






62


  Increase (Decrease)
from 2001 to 2002
due to changes in

Net change
from
2001 to 2002

Increase (Decrease)
from 2002 to 2003
due to changes in

Net change
from
2002 to 2003

  Volume
Rate
Volume
Rate
  (in millions of constant Ch$ as of December 31, 2003)
 
Liabilities
 
Interest bearing liabilities
 
Interest bearing demand deposits
    Ch$ Ch$ —  Ch$ —  Ch$ —  Ch$ —  Ch$ —  Ch$ — 
    UF —  —  —  —  —  — 
    Foreign currency —  —  —  —  —  — 






        Total —  —  —  —  —  — 






Savings accounts
    Ch$ —  —  —  —  —  — 
    UF 3,665  (2,489) 1,176  159  (4,477) (4,318)
    Foreign currency —  —  —  —  —  — 






        Total 3,665  (2,489) 1,176  159  (4,477) (4,318)






Time deposits
    Ch$ 56,195  (24,805) 31,390  (3,351) (31,392) (34,743)
    UF (23,247) (31,450) (54,697) (6,365) (16,935) (23,300)
    Foreign currency 5,632  (13,146) (7,514) 63  (3,052) (2,989)






        Total 38,580  (69,401) (30,821) (9,653) (51,379) (61,032)






Central Bank borrowings
    Ch$ 1,120  (749) 371  243  (833) (590)
    UF 56  (96) (40) (25) 58  33 
    Foreign currency —  —  —  18  —  18 






        Total 1,176  (845) 331  236  (775) (539)






Repurchase agreements
    Ch$ 4,189  (4,090) 99  32  (1,955) (1,923)
    UF (190) (290) (480) 600  129  729 
    Foreign currency 2,476  (3,235) (759) (404) (174) (578)






        Total 6,475  (7,615) (1,140) 228  (2,000) (1,772)






Mortgage finance bonds
    Ch$ —  —  —  —  —  — 
    UF 42,403  897  43,300  (21,998) (26,079) (48,077)
    Foreign currency —  —  —  —  —  — 






        Total 42,403  897  43,300  (21,998) (26,079) (48,077)






Other interest bearing liabilities
    Ch$ 3,791  (8,719) (4,928) 791  3,486  4,277 
    UF 13,409  (1,134) 12,275  (2,652) (4,394) (7,046)
    Foreign currency 44  (7,712) (7,668) 1,458  (4,055) (2,597)






        Total 17,244  (17,565) (321) (403) (4,963) (5,366)






Total interest bearing liabilities
    Ch$ 65,295  (38,363) 26,932  (2,285) (30,694) (32,979)
    UF 36,096  (34,562) 1,534  (30,281) (51,698) (81,979)
    Foreign currency 8,152  (24,093) (15,941) 1,135  (7,281) (6,146)






        Total Ch$ 109,543 Ch$ (97,018) Ch$ 12,525 Ch$ (31,431) Ch$ (89,673) Ch$ (121,104)






Investment Portfolio

    The following table sets forth our investment in Chilean government and corporate securities and certain other financial investments as of December 31, 2001, 2002 and 2003. Financial investments traded on a secondary market are shown adjusted to market value, following specific instructions from the Chilean Superintendency of Banks. These instructions provide for the recognition of such adjustments against income except in the case of a permanent portfolio, where an equity account, “Unrealized gains (losses) on permanent financial investments,” may be directly adjusted, subject to certain restrictions.

63


  December 31,  Weighted Average Nominal Rate 


  2001  2002  2003  at December 31, 2003




  (in millions of constant Ch$ as of December 31, 2003, except for rate data) 
 
Central Bank and Government Securities
    Marketable debt securities Ch$ 547,221 Ch$ 599,067 Ch$ 968,401 3.45%
    Marketable debt securities with limited secondary market 400,872  273,446  —  —    
    Chilean government securities 27,217  5,532  41,848  5.01    
    Investments purchased under agreements to resell 30,817  32,499  29,660  3.68    
    Investments collateral under agreements to repurchase 79,823  196,984  324,576  3.23    




        Subtotal 1,085,950  1,107,528  1,364,485  3.45    




Corporate Securities and Other Financial Investments
    Investments in Chilean financial institutions 6,492  45,494  131,945  3.00    
    Mortgage finance bonds issued by us 144,191  —  —  —    
    Foreign government notes 256,758  51,617  33,613  1.39    
    Investments in foreign countries 127,776  279,890  186,559  2.72    
    Other financial investments 28,874  48,123  106,365  6.46    
    Investments collateral under agreements to repurchase 66,156  82,238  93,357  4.94    




        Subtotal 630,247  507,362  551,839  3.80    




        Total Ch$ 1,716,197  Ch$ 1,614,890  Ch$ 1,916,324  3.55%




    At December 31, 2003, financial instruments issued by the Central Bank were the only financial instruments we held whose aggregate book value exceeded 10% of our shareholders’ equity. These financial instruments are accounted for in the audited consolidated financial statements at market value. See note 1(f) to our audited consolidated financial statements. The value of such investments at December 31, 2003 is as follows:

Issuer Carrying Value  Market Value 



(in millions of constant Ch$ as of December 31, 2003)
 
Central Bank Ch$ 1,292,977  Ch$ 1,292,977 

    The following table sets forth an analysis of our investments at December 31, 2003, by time remaining to maturity and the weighted average nominal rates of such investments:

  Within one
Year(1)
Rate After one year but within five years Rate After five years Rate Total Rate








  (in millions of constant Ch$ as of December 31, 2003, except for rate data) 
Central Bank and Government Securities                
    Marketable debt securities Ch$ 968,401  3.45%  Ch$ —  —%  Ch$ —  —%  Ch$ 968,401  3.45% 
    Chilean government securities 41,848  5.01     —  —     —  —     41,848  5.01    
    Investments purchased under agreements to
        resell
29,660  3.68     —  —     —  —     29,660  3.68    
    Investments collateral under
        agreements to repurchase
324,576  3.23     —  —     —  —     324,576  3.23    








        Subtotal 1,364,485  3.45     —  —     —  —     1,364,485  3.45    








Corporate Securities and Other Financial Investments
    Investments in Chilean financial institutions 131,945  3.00     —  —     —  —     131,945  3.00    
    Mortgage finance bonds issued by us 33,613  1.39     —  —     —  —     33,613  1.39    
    Foreign government notes 186,559  2.72     —  —     —  —     186,559  2.72    
    Other financial investments 97,409  6.40     8,956  7.11     —  —     106,365  6.46    
    Investments collateral under agreements
        to repurchase
93,357  4.94     —  —     —  —     93,357  4.94    








        Subtotal 542,883 3.75     8,956 7.11     —     551,839 3.80    








        Total Ch$ 1,907,368 3.54% Ch$ 8,956  7.11% Ch$ —  —%  Ch$ 1,916,324 3.55% 








__________________
(1)

In accordance with the regulations of the Chilean Superintendency of Banks, trading investments are classified as due within 1 year.

64


The following table sets forth an analysis under U.S. GAAP of investments and deposits held to maturity by type:

  As of December 31, 

2001 2002 2003



Instruments Carrying
Value
Unrealized Gains (Losses) Estimated Fair Value Carrying
Value
Unrealized Gains (Losses) Estimated Fair Value Carrying
Value
Unrealized Gains (Losses) Estimated Fair Value










(in millions of constant Ch$ as of December 31, 2003)
Foreign private sector                  
    debt securities 8,188  —  8,188  —  —  —  —  —  — 
Foreign financial
    institutions debt
    securities 1,860  38  1,898  —  —  —  —  —  — 
U.S. government debt
    securities 37,396  73  37,469  39,450  39,455  21,017  21,021 
Chilean government
    securities Ch$ 413,006  (7,481) Ch$ 405,525  277,505  277,510  —  —  — 









Total Ch$ 460,450  (7,370) Ch$ 453,080  Ch$ 316,955  Ch$ 10  Ch$ 316,965  Ch$ 21,017  Ch$ 4  Ch$ 21,021 









Loan Portfolio

    The following table analyzes our loans by type of loan and risk classification. All loan amounts stated below are before deduction of allowances for loan losses. Total loans reflect our loan portfolio, including past due principal amounts.

  December 31,

  1999  2000  2001  2002  2003 





  (in millions of constant Ch$ as of December 31, 2003) 
 
Commercial loans:
    General commercial loans Ch$ 1,596,010  Ch$ 1,706,247  Ch$ 1,684,195  Ch$ 2,542,492  Ch$ 2,557,000 
    Foreign trade loans 400,035  394,691  392,323  617,788  658,280 
    Interbank loans 19,161  29,060  24,698  55,366  13,223 
    Leasing contracts 199,640  180,450  173,893  251,584  268,956 
    Other outstanding loans 285,439  367,714  333,069  607,899  636,649 





        Subtotal commercial loans 2,500,285  2,678,162  2,608,178  4,075,129  4,134,108 





Mortgage loans:
    Residential 346,653  380,494  432,916  586,575  604,099 
    Commercial 418,892  423,036  407,587  612,569  523,931 





        Subtotal mortgage loans 765,545  803,530  840,503  1,199,144  1,128,030 





Consumer loans 192,771  203,117  216,625  416,885  478,093 





Past due loans:
    Commercial loans 32,360  45,924  39,571  130,433  90,548 
    Residential mortgage loans 3,514  4,700  6,556  10,347  11,180 
    Consumer loans 2,789  3,040  2,841  4,594  3,370 
    Leasing contracts 3,373  786  458  1,012  405 





        Subtotal past due loans 42,036  54,450  49,426  146,386  105,503 





 
Contingent loans 280,592  269,410  299,599  385,585  409,612 





        Total loans Ch$ 3,781,229  Ch$ 4,008,669  Ch$ 4,014,331  Ch$ 6,223,129  Ch$ 6,255,346 





    The loan categories are as follows:

    Commercial loans are long-term and short-term loans made in Chilean pesos, on an adjustable or fixed rate basis, to finance working capital or investments.

    Consumer loans are loans to individuals, made in Chilean pesos, generally on a fixed rate basis, to finance the purchase of consumer goods or to pay for services. They also include credit card balances subject to interest charges.

65


    Mortgage loans are inflation-indexed, fixed rate, long-term loans with monthly payments of principal and interest secured by a real property mortgage. Mortgage loans are financed in one of two ways, as traditional mortgage loans that are financed by mortgage finance bonds; or as flexible mortgages that are financed by our own funds. At present, the amount of a mortgage loan cannot be more than 75% of the value of the mortgaged property if it is financed by mortgage finance bonds and 80% of the value of the mortgaged property in the case of flexible mortgages.

    Foreign trade loans are fixed rate, short-term loans made in foreign currencies (principally U.S. dollars) to finance imports and exports.

    Interbank loans are fixed rate, short-term loans to financial institutions that operate in Chile.

    Leasing contracts are agreements for the financial leasing of capital equipment and other property.

    Other outstanding loans include lines of credit, bills of exchange and mortgage loans, which are financed by our general borrowings.

    Past due loans are loansthat are overdue as to any payment of principal or interest by 90 days or more.

    Contingent loans consist of guarantees granted by us in Chilean pesos, UF and foreign currencies, principally U.S. dollars, as well as open and unused letters of credit. Unlike U.S. GAAP, Chilean GAAP requires such loans to be included on a bank’s balance sheet. See note 28 to our consolidated audited financial statements.

    Any collateral provided generally consists of a mortgage on real estate, a pledge of marketable securities, a letter of credit or cash. The existence and amount of collateral varies from loan to loan.

Maturity and Interest Rate Sensitivity of Loans as of December 31, 2003

    The following table sets forth an analysis by type and time remaining to maturity of our loans at December 31, 2003:

Balance as of December 31, 2003 Due within 1 month Due after 1 month but within 6 months Due after 6 months but within 12 months Due after 1 year but within 3 years Due after 3 years but within 5 years Due after 5 years







(in millions of constant Ch$ as of December 31, 2003) 
Commercial loans Ch$ 2,557,000  Ch$ 498,489  Ch$ 693,165  Ch$ 304,409  Ch$ 542,825  Ch$ 210,215  Ch$ 307,897 
Consumer loans 478,093  97,168  85,464  82,421  177,208  30,265  5,567 
Mortgage loans 1,128,030  12,189  40,767  49,154  197,540  189,156  639,224 
Foreign trade loans 658,280  67,979  479,376  104,864  5,834  152  75 
Interbank loans 13,223  8,501  3,155  156  1,411  —  — 
Leasing contracts 268,956  6,928  27,768  31,098  86,107  49,670  67,385 
Other outstanding loans 636,649  262,235  43,628  11,391  37,822  37,158  244,415 
Past due loans 105,503  105,503  —  —  —  —  — 







    Subtotal 5,845,734  1,058,992  1,373,323  583,493  1,048,747  516,616  1,264,563 
Contingent loans 409,612  80,361  184,804  68,691  62,031  11,974  1,751 







        Total loans Ch$ 6,255,346  Ch$ 1,139,353  Ch$ 1,558,127  Ch$ 652,184  Ch$ 1,110,778  Ch$ 528,590  Ch$ 1,266,314 







66


    The following table presents the interest rate sensitivity of our outstanding loans due after one year as of December 31, 2003, not including contingent loans:

As of December 31, 2003

 

(in millions of constant Ch$ as of December 31, 2003)

Variable rate

 

 

Ch$

 

Ch$ 8,272

 

UF

 

491,836

 

Foreign currency

 

103,464

 
   
 

    Total

 

603,572

 

Fixed rate

 

 

Ch$

 

424,463

 

UF

 

1,778,231

 

Foreign currency

 

23,660

 
   
 

    Total

 

2,226,354

 
   
 

        Total

 

Ch$ 2,829,926

 
   
 

67


Loans by Economic Activity

    The following table sets forth at the dates indicated an analysis of our loan portfolio based on the borrower's principal economic activity. Loans to individuals for business purposes are allocated to their respective economic activity. The table does not reflect outstanding contingent loans.

 

As of December 31,

 

2001

2002

2003

 


Loan
Portfolio

% of loan
Portfolio

Loan
Portfolio

% of loan
Portfolio

Loan
Portfolio

% of loan
Portfolio

 





 

(in millions of constant Ch$ as of December 31, 2003, except for percentages)

Agriculture, Livestock, Forestry, Agribusiness, Fishing

Agriculture and livestock

Ch$ 165,684

4.46%

Ch$ 198,304

3.40%

Ch$ 205,756

3.52%

Fruit

142,252

3.83   

166,316

2.85   

159,241

2.72   

Forestry and wood extraction

26,668

0.72   

30,856

0.53   

17,519

0.30   

Fishing

91,161

2.45   

96,206

1.65   

91,432

1.56   

 





    Subtotal

425,765

11.46   

491,682

8.43   

473,948

8.10   

Mining and Petroleum

Mining and quarries

46,912

1.26   

94,064

1.61   

106,432

1.82   

Natural gas and crude oil extraction

14,735

0.41   

38,478

0.66   

13,599

0.23   

 





    Subtotal

61,647

1.67   

132,542

2.27   

120,031

2.05   

Manufacturing

Tobacco, food and beverages

127,686

3.44   

165,320

2.83   

159,224

2.72   

Textiles, clothing and leather goods

50,236

1.35   

69,572

1.19   

67,068

1.15   

Wood and wood products

38,364

1.03   

52,625

0.90   

61,010

1.04   

Paper, printing and publishing

12,413

0.33   

20,169

0.35   

17,347

0.30   

Oil refining, carbon and rubber

58,799

1.58   

61,573

1.05   

68,150

1.17   

Production of basic metal, non-mineral, machine and equipment

150,372

4.05   

155,418

2.66   

166,073

2.84   

Other manufacturing industries

28,158

0.76   

72,083

1.23   

72,639

1.24   

 





    Subtotal

466,028

12.54   

596,760

10.21   

611,511

10.46   

Electricity, Gas and Water

Electricity, gas and water

54,005

1.45   

77,220

1.32   

72,073

1.23   

 





    Subtotal

54,005

1.45   

77,220

1.32   

72,073

1.23   

Construction

Residential buildings

92,094

2.48   

150,933

2.59   

138,553

2.37   

Other constructions

201,403

5.42   

251,515

4.31   

336,183

5.75   

 





    Subtotal

293,497

7.90   

402,448

6.90   

474,736

8.12   

Commerce

Wholesale

106,343

2.86   

261,833

4.49   

286,270

4.90   

Retail, restaurants and hotels

340,114

9.16   

429,643

7.36   

421,327

7.21   

 





    Subtotal

446,457

12.02   

691,476

11.85   

707,597

12.11   

Transport, Storage and Communications

Transport and storage

99,862

2.69   

113,346

1.94   

126,088

2.16   

Communications

28,119

0.76   

26,912

0.46   

40,414

0.69   

 





    Subtotal

127,981

3.45   

140,258

2.40   

166,502

2.85   

Financial Services

 

Financial insurance and companies

338,068

9.10   

615,054

10.54   

527,269

9.02   

Real estate and other financial services

367,047

9.88   

532,291

9.12   

573,442

9.81   

 





    Subtotal

705,115

18.98   

1,147,345

19.66   

1,100,711

18.83   

Community, Social and Personal Services

           

Community, social and personal services

88,736

2.38   

295,899

5.06   

276,431

4.73   

 





    Subtotal

88,736

2.38   

295,899

5.06   

276,431

4.73   

Consumer Loans

363,887

9.80   

815,335

13.97   

827,508

14.16   

Residential Mortgage Loans

681,614

18.35   

1,046,579

17.93   

1,014,686

17.36   

 





        Total

Ch$ 3,714,732

100.00%

Ch$ 5,837,544

100.00%

Ch$ 5,845,734

100.00%

 





68


Foreign Country Outstanding Loans

    Our cross-border outstanding loans are principally trade-related. These loans include loans to foreign financial institutions and foreign corporations, some of which are guaranteed by their Chilean parent company. The table below lists the total amounts outstanding to borrowers in certain foreign countries at the end of the last three years, and thus does not include foreign trade-related loans to domestic borrowers.

 

As of December 31,

 

2001

2002

2003

 


(in millions of constant Ch$ as of December 31, 2003)

Albania

Ch$ 16

Ch$ 35

Ch$ —

Argentina

37,868

30,080

11,353

Australia

4

Austria

878

46

311

Belgium

161

434

382

Bolivia

865

179

6

Brazil

36,587

53,624

44,546

British West Indies

28,344

27,041

10,847

Canada

161

964

631

China

7,628

8,957

Colombia

4,117

6,403

2,587

Denmark

70

21

Ecuador

69

86

307

El Salvador

5,532

48

35

Finland

212

258

1,119

France

2,127

15,588

17,061

Germany

42

845

3,759

Holland

47

1,206

131

Hong Kong

258

223

1,496

India

178

545

4,652

Israel

16

12

Italy

538

937

Japan

3,053

2,177

12,634

Korea

32

3,220

Kuwait

18

Malaysia

18

Mexico

35,282

48,599

37,201

Monaco

30

Morocco

41

Netherlands

4,297

New Zealand

126

Norway

1,103

Panama

10,531

12,573

6,086

Paraguay

55

Peru

19,224

19,919

7,804

Portugal

108

Singapore

58

4,337

39

Slovenia

56

South Africa

18

258

42

South Korea

546

548

1,166

Spain

309

4,804

6,194

Switzerland

427

271

552

Sweden

384

1,550

1,484

Taiwan

515

105

United Arab Emirates

27

212

517

United Kingdom

948

6,815

2,626

United States

22,185

28,069

15,619

Uruguay

102

2

3,035

Venezuela

3,483

6,022

Yugoslavia

157

 


    Total

Ch$ 214,146

Ch$ 279,897

Ch$ 216,043

 


69


    We also maintain deposits abroad, as needed to conduct our foreign trade transactions and manage liquidity. The table below lists the largest amounts of foreign deposits by country at the end of the past three years:

 

December 31,

 

2001

2002

2003

 


(in millions of constant Ch$ as of December 31, 2003)

Australia

Ch$ 19

Ch$ 40

Ch$ 44

Austria

30

41

62

Belgium

113

73

203

Canada

150

267

367

China

199

162

Denmark

53

669

504

Finland

40

13

8

France

418

71

201

Germany

1,683

2,391

4,256

Italy

386

872

1,463

Japan

326

331

846

Netherlands

111

89

236

Norway

15

42

30

Spain

426

80

178

Sweden

100

120

84

Switzerland

298

230

196

United Kingdom

340

369

434

United States

83,581

87,599

86,939

 


    Total

Ch$ 88,288

Ch$ 93,297

Ch$ 96,213

 


Credit Review Process

    Our credit review system requires that two or more loan officers approve any loan to our customers, and that at least one of the loan officers have sufficient authority to cover our total risk exposure with respect to that customer.

    The evaluation of total customer credit risk takes into account the direct risk outstanding and the added risk involved in the proposed transaction, the indirect risks associated with guarantees or security given by the customer, and the risk associated with other entities or individuals who have a direct or indirect affiliation with the customer, including in each case outstanding principal (adjusted for inflation), interest and the balance of any unused lines of credit and other credit transactions approved but not completed.

    Transactions in which the total customer credit risk is more than UF150,000 (approximately Ch$2,500 million) require the approval of a credit committee, which includes three directors and our Chief Executive Officer. Transactions in which the total customer credit risk is equal to or less than UF150,000 may be approved by other executives, depending on the amount involved, as follows:

Limit in UF

 

Credit committee including members of the board of directors

up to legal limits

Chief executive officer

up to UF 150,000

Senior credit risk officer

up to UF 125,000

Executive credit risk officers

up to UF 100,000

Other credit risk officers

up to UF 60,000

Executive vice president of corporate banking

up to UF 50,000

Other department heads

up to UF 15,000

Other officers

under UF 10,000

70


    In addition to reviewing the credit limit, the business area extending the credit must review the terms of the loan, the interest rate and any security to be obtained.

    To evaluate a customer's credit risk, our commercial executives use various computerized data bases that provide information such as the customer's profile, indebtedness to us, financial statements, monthly sales information, profitability reports, indebtedness to other Chilean financial institutions and payment history with other creditors. For this purpose, the Chilean Superintendency of Banks makes information regarding a customer's indebtedness within the financial system available to banks. For individual customers, scoring and other automated systems are used to determine the customer's profile and payment capacity in terms of income, education, family obligations, other financial obligations and other factors.

    Our credit process is based on credit policies approved by our board of directors and procedures established by the credit committee. The credit risk management area is responsible for evaluating for us in the aggregate the risk presented by our current or potential customers. We also rely upon the collective efforts of our professional analysts who conduct reviews at the request of any of our commercial divisions and senior management. These reports analyze the amount of a credit, its use, its term, the customer's financial situation, the customer's profile and the market in which the customer operates. These reports are prepared in four different formats: in-depth, summary, follow-up and project analysis. The risk control division reviews periodically the quality of our loans, including the related loan classifications. This division has a team of inspectors who audit on an ongoing basis the compliance with the credit review process by the commercial executives who are involved in the credit analysis process, the various categories of risk assigned to customers, the reports on past due loans and our evaluation of debtors.

Classification of Loan Portfolio

    Chilean banks are required to classify their outstanding exposures on an ongoing basis for the purpose of determining the amount of allowances for loan losses. The Chilean Superintendency of Banks establishes the guidelines used by banks for such classifications, although banks are given some latitude in devising more stringent classification systems within such guidelines. The Chilean Superintendency of Banks amended its guidelines effective as of January 1, 2004. The amended guidelines do not apply to periods prior to January 1, 2004, and the amended guidelines have not been followed in preparing the information presented in “—Selected Statistical Information.” For a description of the amended guidelines see “Item 4. Information on the Company—Regulation and Supervision—Classification of Banks—Classification of Loan Portfolio.” The Chilean Superintendency of Banks regularly examines and evaluates each financial institution's credit management process, including its compliance with the loan classification guidelines.

    The information presented in “—Selected Statistical Information” has been prepared in accordance with the guidelines of the Chilean Superintendency of Banks in effect as of December 31, 2003, which we refer to as the previous guidelines. Under the previous guidelines, the Chilean Superintendency of Banks classified banks and other financial institutions into three categories. Category I was reserved for institutions that fully comply with the loan classification guidelines. Institutions were rated in Category II if their loan classification system revealed deficiencies that needed to be corrected by the bank's management. Lastly, Category III indicated significant deviations from the Chilean Superintendency of Banks guidelines that clearly reflected inadequacies in the evaluation of the risk and estimated losses associated with loans. We were classified as a Category I bank under the previous guidelines.

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    Under the previous guidelines, for purposes of classification, loans were divided into consumer loans, residential mortgage loans and commercial loans, which for these classification purposes included all loans other than consumer loans and residential mortgage loans. In the case of commercial loans, the classification was based on the estimated losses on all loans outstanding to the borrower, as determined by the bank. In the case of consumer and residential mortgage loans, the extent to which payments are overdue determined the classification. Commercial and consumer loans were rated under the previous guidelines A, B, B-, C or D, while residential mortgage loans were rated only A, B or B-. For a description of the new classifications in effect under the amended guidelines that are effective as of January 1, 2004, see “Item 4. Information on the Company—Regulation and Supervision—Classification of Banks.” Our total exposure to each of our customers and the classification of their loans are continuously reviewed by our commercial officers and by the risk control division. The allowances required for each category of loans under the previous guidelines were as follows:

 

Commercial loans
range of
estimated losses

Consumer loans
past due
status
(1)

Residential
mortgage loans
past due status
(1)

Allowances
as a percentage
of aggregate
exposure

 


Category

From

To

From

To

From

To









(Days)

(Days)

A

B

1%

5%

1

30

1

180

1%

B-

5    

39    

31

60

181

>81

20    

C

40    

79    

61

120

60    

D

80%

100%

>121

121

90%

___________________
(1)

In addition, we maintained additional allowances for consumer and residential mortgage loans, including renegotiated loans.

    The previous guidelines applicable to commercial loans required that we classify the greater of:

    The previous guidelines also required that we classify 100% of our residential mortgage and consumer loans. For these purposes, the loan amount included outstanding principal, whether or not past due, and accrued and unpaid interest.

    According to our internal credit policies, we classified our loans through December 31, 2003 using the previous guidelines. The criteria for determining the range of estimated losses for purposes of the classification of commercial loans was as follows:

Category “A” :
A borrower's loans were Category “A” if we had no doubt as to the borrower's ability to repay the loans in a timely manner, except to the extent reflected in the loan's original terms, including all interest due, and the revenues generated from the business of the borrower are sufficient to service the debt. If the borrower's business did not generate the revenues needed for debt service, or if repayment depended on revenues generated by another entity, its loans were not included in this category, even if fully secured.

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Category “B” :
This category included loans outstanding to borrowers who had shown some degree of non-compliance with their obligations under the original conditions of their loans, but whose past financial records and market history indicated that such non-compliance should be temporary and, in any case, should not significantly affect the terms for repayment. This category also included loans to customers involved in economic activities that represented a higher risk for us. Category “B” was also the highest category for loans outstanding to borrowers whose source of repayment depended on revenues generated by another entity, and loans outstanding to borrowers whose business did not generate the revenues needed for debt service, but only if the loans were fully secured.
 
Category “B-”:
Loans included in this category were principally loans outstanding to borrowers who were experiencing financial difficulties and whose operational revenues or liquid assets were insufficient to service the loans and where the security for the loan covered 61% to 95% of the outstanding amount. Also included in this category were loans outstanding to borrowers whose financial history was insufficient or difficult to establish. Loans bearing interest rates that, due to our cost of funds, generate a financial loss of between 5% and 39% of the outstanding amount were also included in this category. Our internal guidelines prohibited us from categorizing as better than B- any loan to a customer for which the loan was currently subject to legal collection proceedings even if the customer's loan was more than fully secured.
 
Category “C”:
This category included loans outstanding to borrowers who were experiencing serious financial difficulties and whose operational revenues or liquid assets were insufficient to service the loans and where the security for the loan would cover 21% to 60% of the outstanding amount. Loans bearing interest rates that, due to our cost of funds, generate a financial loss of between 40% and 79% of the outstanding amount were also included in this category. We expected to suffer some degree of loss with respect to loans to borrowers in this category.
 
 
Category “D”:
This category included loans outstanding to borrowers for which the estimated recovery amount on all loans is 20% or less. A charge-off of most of these outstanding loans was expected.

Analysis of Our Loan Classification

    The following tables provide statistical data regarding the classification of our loans at the end of each of the last five years. As discussed above, our risk analysis system requires that loans to all customers be evaluated and classified, including past due and contingent loans:

As of December 31, 1999

 

Category

 Commercial Loans

 Consumer Loans

Residential Mortgage Loans

Total
Loans

Percentage
of Evaluated
Loans







 

(in millions of constant Ch$ as of December 31, 2003)

A

Ch$ 1,338,050

Ch$ 169,799

Ch$ 432,114

Ch$ 1,939,963

51.79%

B

1,543,146

12,538

33,409

1,589,093

42.42    

B–

174,093

4,724

3,806

182,623

4.87    

C

20,479

5,038

25,517

0.68    

D

5,615

3,463

9,078

0.24    

 




Total evaluated loans

Ch$ 3,081,383

Ch$ 195,562

Ch$ 469,329

Ch$ 3,746,274

100.00%

 




Total loans

Ch$ 3,116,338

Ch$ 195,562

Ch$ 469,329

Ch$ 3,781,229

 



 

Percentage evaluated

98.88%

100.00%

100.00%

99.08%

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As of December 31, 2000

 

Category

Commercial Loans

Consumer Loans

Residential Mortgage Loans

Total
Loans

Percentage
of Evaluated
Loans







 

(in millions of constant Ch$ as of December 31, 2003)

A

Ch$ 1,481,093

Ch$ 178,952

Ch$ 482,245

Ch$ 2,142,290

53.98%

B

1,542,520

15,419

37,653

1,595,592

40.21    

B–

182,266

5,083

6,658

194,007

4.89    

C

22,815

3,958

26,773

0.67    

D

7,096

2,746

9,842

0.25    

 




Total evaluated loans

Ch$ 3,235,790

Ch$ 206,158

Ch$ 526,556

Ch$ 3,968,504

100.00%

 




Total loans

Ch$ 3,275,955

Ch$ 206,158

Ch$ 526,556

Ch$ 4,008,669

 



 

Percentage evaluated

98.77%

100.00%

100.00%

99.00%


As of December 31, 2001

 

Category

Commercial Loans

Consumer Loans

Residential Mortgage Loans

Total
Loans

Percentage
of Evaluated
Loans







 

(in millions of constant Ch$ as of December 31, 2003)

A

Ch$ 1,351,295

Ch$ 189,985

Ch$ 526,873

Ch$ 2,068,153

52.10%

B

1,590,443

17,213

41,114

1,648,770

41.54    

B–

173,098

5,827

7,223

186,148

4.69    

C

52,901

3,850

56,751

1.43    

D

6,805

2,591

9,396

0.24    

 




Total evaluated loans

Ch$ 3,174,542

Ch$ 219,466

Ch$ 575,210

Ch$ 3,969,218

100.00%

 




Total loans

Ch$ 3,219,655

Ch$ 219,466

Ch$ 575,210

Ch$ 4,014,331

 



 

Percentage evaluated

98.60%

100.00%

100.00%

98.88%


As of December 31, 2002

 

Category

Commercial Loans

Consumer Loans

Residential Mortgage Loans

Total
Loans

Percentage
of Evaluated
Loans







 

(in millions of constant Ch$ as of December 31, 2003)

A

Ch$ 2,233,961

Ch$ 357,688

Ch$ 783,437

Ch$ 3,375,086

54.69%

B

2,278,171

39,133

63,572

2,380,876

38.57    

B–

219,415

9,505

19,733

248,653

4.03    

C

121,439

8,162

129,601

2.10    

D

30,902

6,990

37,892

0.61    

 




Total evaluated loans

Ch$ 4,883,888

Ch$ 421,478

Ch$ 866,742

Ch$ 6,172,108

100.00%

 




Total loans

Ch$ 4,934,909

Ch$ 421,478

Ch$ 866,742

Ch$ 6,223,129

 



 

Percentage evaluated

98.97%

100.00%

100.00%

99.18%


As of December 31, 2003

 

Category

Commercial Loans

Consumer Loans

Residential Mortgage Loans

Total
Loans

Percentage
of Evaluated
Loans







 

(in millions of constant Ch$ as of December 31, 2003)

A

Ch$ 2,227,167

Ch$ 428,789

Ch$ 822,102

Ch$ 3,478,058

55.97%

B

2,308,827

32,311

70,442

2,411,580

38.82    

B–

179,748

8,356

21,092

209,196

3.37    

C

66,098

6,907

73,005

1.18    

D

35,712

5,099

40,811

0.66    

 




Total evaluated loans

Ch$ 4,817,552

Ch$ 481,462

Ch$ 913,636

Ch$ 6,212,650

100.00%

 




Total loans

Ch$ 4,860,248

Ch$ 481,462

Ch$ 913,636

Ch$ 6,255,346

 



 

Percentage evaluated

99.12%

100.00%

100.00%

99.32%

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Classification of Loan Portfolio Based on the Borrower's Payment Performance

    Interest and indexation readjustments from overdue loans are only recognized when and to the extent effectively received. Overdue loans are classified in groups of one to 29 days overdue, 30 to 89 days overdue, and 90 or more days overdue. This last group is referred to as “past due loans”. Past due loans must be covered by individual allowances for loan losses equivalent to 100% of any unsecured portion thereof, but only if, and to the extent that, the aggregate of all allowances for loan losses exceeds global allowances for loan losses. See ”—Allowances for Loan Losses—Individual Allowances for Loan Losses.”

    The following table sets forth as of December 31 of each of the last five years the amounts that are current as to payments of principal and interest and the amounts that are overdue:

Domestic Loans

 

As of December 31,

 

1999

2000

2001

2002

2003

 




(in millions of constant Ch$ as of December 31, 2003)

Current

Ch$ 3,485,925

Ch$ 3,691,795

Ch$ 3,727,793

Ch$ 5,750,096

Ch$ 5,899,609

Overdue 1-29 days

26,298

12,965

17,331

26,479

20,577

Overdue 30-89 days

12,291

10,196

6,566

22,458

13,614

Overdue 90 days or more (“past due”)

42,036

44,180

48,495

144,199

105,503

 




    Total loans

Ch$ 3,566,550

Ch$ 3,759,136

Ch$ 3,800,185

Ch$ 5,943,232

Ch$ 6,039,303

 





Foreign Loans

 

As of December 31,

 

1999

2000

2001

2002

2003

 




(in millions of constant Ch$ as of December 31, 2003)

Current

Ch$ 214,679

Ch$ 239,263

Ch$ 212,815

Ch$ 277,710

Ch$ 216,043

Overdue 1-29 days

354

Overdue 30-89 days

46

Overdue 90 days or more (“past due”)

10,270

931

2,187

 




    Total loans

Ch$ 214,679

Ch$ 249,533

Ch$ 214,146

Ch$ 279,897

Ch$ 216,043

 





Total Loans

 

As of December 31,

 

1999

2000

2001

2002

2003

 




(in millions of constant Ch$ as of December 31, 2003)

Current

Ch$ 3,700,604

Ch$ 3,931,058

Ch$ 3,940,608

Ch$ 6,027,806

Ch$ 6,115,652

Overdue 1-29 days

26,298

12,965

17,685

26,479

20,577

Overdue 30-89 days

12,291

10,196

6,612

22,458

13,614

Overdue 90 days or more (“past due”)

42,036

54,450

49,426

146,386

105,503

 




    Total loans

Ch$ 3,781,229

Ch$ 4,008,669

Ch$ 4,014,331

Ch$ 6,223,129

Ch$ 6,255,346

 




Overdue loans expressed as a percentage of total loans

2.13%

1.94%

1.84%

3.14%

2.23%

Past due loans as a percentage of total loans

1.11%

1.36%

1.23%

2.35%

1.69%