BCH

Business Context and Reporting Period

Company: Banco de Chile (Foreign Private Issuer)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Nine months ended September 30, 2019

Filing Date: October 24, 2019

Currency: Millions of Chilean Pesos (MCh$)

Banco de Chile is a commercial bank operating in Chile, offering services to individuals, SMEs, and corporations, including treasury, international banking, and subsidiary activities in brokerage, insurance, and investment management. The financial statements are prepared in accordance with IFRS and Chilean accounting standards.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 8.6% to MCh$1,484,825, driven by a 2.4% rise in net interest income and a 24.8% surge in net fees and commission income.
• Profitability: Net income rose 2.9% to MCh$445,863. Net operating income increased 8.7% to MCh$564,715.
• Loan Loss Provisions: Provisions for loan losses increased 11.7% to MCh$245,807, reflecting higher credit risk provisioning.
• Balance Sheet Expansion: Total assets grew 9.8% year-over-year (vs. Dec 2018) to MCh$39.4 trillion. Loans to customers increased to MCh$28.9 trillion.
• Derivatives: Derivative instruments (assets) increased significantly to MCh$2,544,156 from MCh$1,513,947 at year-end 2018, largely due to trading derivatives.
• IFRS 16 Adoption: The bank adopted IFRS 16 "Leases" effective January 1, 2019, recognizing leased assets of MCh$153,758 and lease liabilities of MCh$149,409, which were previously off-balance sheet.

Guidance, Outlook, Risks, and Unusual Items

• Dividend Policy: The Board established a provision for minimum dividends of 60% of net distributable profit for 2019. A provision of MCh$229,953 was recorded as of September 30, 2019.
• Strategic Alliance: In January 2019, the bank entered a 15-year strategic alliance with Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A., granting exclusive access to distribute insurance via the bank's channels. An upfront payment of UF 5,367,057 was received.
• Subsequent Events (Social Unrest): Following the reporting period, social unrest in Chile caused damage to physical branches and ATMs. The bank states these assets are insured and no significant effects on results have been identified as of the filing date.
• Legal Contingencies: The bank faces administrative charges from the CMF (formerly SVS) regarding transactions involving SQM shares in 2011. The bank has not made provisions as legal advisors estimate solid grounds for dismissal.
• Accounting Changes: Adoption of IFRS 16 resulted in a cumulative effect on equity of MCh$144,529 million recorded on January 1, 2019.

Key Facts for Investor Verification

• Credit Quality: Verify the composition of the impaired portfolio (MCh$820,792) and the adequacy of the MCh$655,561 million in total allowances given the 11.7% increase in provisions.
• Derivative Exposure: Review the significant increase in trading derivatives (MCh$114.5 trillion notional) and the associated fair value volatility.
• Lease Liabilities: Confirm the impact of IFRS 16 on future cash flows, with MCh$159,824 million in future lease payments.
• Dividend Payout: Monitor the finalization of the 60% minimum dividend provision and its impact on distributable earnings.
• Regulatory Environment: Track the resolution of the CMF administrative charges regarding SQM share transactions.