BANK OF CHILE annual report, Q4 FY2017

Business context and reporting period

Banco de Chile filed this audited Form 20-F on April 27, 2018, covering the fiscal year ended December 31, 2017. It is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide clear Q4-only financial results. The consolidated statements are prepared under IFRS as issued by the IASB. Unless noted otherwise, amounts below are in millions of Chilean pesos (Ch$).

The bank is a full-service Chilean commercial bank operating in retail banking, wholesale banking, treasury and money markets, and financial subsidiaries. At year-end it reported Ch$32,561,437 in assets, Ch$25,451,513 in customer loans before allowances, Ch$18,983,484 in deposits, and Ch$3,545,348 in equity.

Financial performance and position

• Profitability and margins: Reported net interest margin was 4.30%, down from 4.41%; return on average assets was 1.79% and return on average equity was 16.09%. The efficiency ratio was 46.48%, versus 45.82%.
• Credit quality: Allowances were Ch$495,821, down 10.6%; allowances equaled 1.95% of loans, versus 2.18%. Loans 90 days or more past due rose 4.1% to Ch$302,595, and the past-due ratio increased to 1.19% from 1.14%. Charge-offs increased 15.1% to Ch$318,790, largely from consumer loans.
• Cash flow: Operating activities provided Ch$872,563, compared with Ch$162,539 in 2016. Investing activities used Ch$1,183,663, and financing activities provided Ch$132,662. Cash and cash equivalents declined to Ch$1,438,398 from Ch$1,655,210.
• Funding and debt: Demand deposits were Ch$8,915,706; savings accounts and time deposits were Ch$10,067,778. Debt issued was Ch$6,488,975, up from Ch$6,177,927; borrowings from financial institutions were Ch$1,195,028. Demand deposits represented 28.7% of average liabilities in 2017.
• Capital and liquidity: Regulatory capital was Ch$3,934,727, or 14.54% of risk-weighted assets, above the bank-specific 10% minimum; Tier 1 capital was 8.39% of risk-weighted assets. Management said working capital was sufficient for present needs. Reported 2017 average LCR was 0.88 and average NSFR 0.97; the regulator had not yet established limits for these ratios.
• Tax and distributions: Income tax expense rose 15.1% to Ch$115,361, with an effective rate of 16.79%; the statutory rate rose to 25.5%. Shareholders approved a Ch$3.1466-per-share cash dividend charged to 2017 distributable income and a 40% stock dividend, subject to regulatory approval.

Material changes versus the prior year

• Net income was nearly flat despite modestly higher pre-tax income. Lower other income—including weaker securities-sale gains and a loss on trading derivatives—offset stronger fee income and lower credit provisions.
• Net interest income edged up, but the margin narrowed, chiefly because lower inflation reduced income on the bank’s net UF-indexed asset position. Lower deposit costs helped offset this effect.
• Average loans grew 2.6%, but year-end total loans increased only 0.2%. Mortgage and retail lending growth offset a contraction in corporate lending; management cited weak investment demand and competition for corporate loans.
• Operating expenses were essentially stable. Fees and commissions increased 8.2%, led by transactional services, mutual fund management and stock brokerage.
• Assets increased 3.8% and equity increased to Ch$3,545,348. Cash flow from operations improved, while investment cash flow turned negative as the bank increased available-for-sale securities, including government and Central Bank bonds.

Outlook, management commentary, risks and unusual items

• Outlook: Management provided no earnings guidance. The filing describes Chilean GDP growth of 1.5% in 2017, inflation of 2.3%, and investment down 1.1%. Management noted improving activity late in the year but continuing weakness in investment and corporate lending. The Central Bank policy rate was 2.50% as of April 20, 2018; management cited expectations that it would remain there for most of 2018, with increases possible as conditions improved.
• Investment plans: The 2018 capital-expenditure budget was approximately Ch$42,174, with 64.8% allocated to IT and the balance mainly to infrastructure. The bank expected to fund this with cash on hand and long-term debt.
• Accounting transition: IFRS 9 became effective January 1, 2018. The bank estimated an after-tax reduction in opening equity of approximately Ch$27,409 for portfolios representing 71.5% of affected financial assets and commitments; assessment of the remaining 28.5% was incomplete. Management said IFRS 15 and IFRS 16 were not expected to have material impacts.
• Tax benefit: The tax deduction associated with SAOS payments on Central Bank subordinated debt is expected to end during 2018. The bank expected SAOS to repay the remaining debt in 2019, but the timing and related effects warrant attention.
• Regulation and competition: Proposed Chilean banking-law changes would introduce Basel III-related requirements and a bank-resolution framework. New liquidity limits were expected to be defined from the second half of 2018. Management cautioned that future capital, liquidity, provisioning and consumer-protection rules could affect profitability.
• Risks and contingencies: Key risks include Chilean economic conditions, interest rates and inflation, credit losses—particularly in retail and mortgages—foreign exchange, competition, cybersecurity, operational failures, funding costs and regulatory change. The bank disclosed a consumer class action concerning overdraft fees and consent to contract changes, and a challenged UF 50,000 fine against its brokerage subsidiary; outcomes could not be quantified. It also challenged determinations of minimum services and emergency teams for possible strikes.
• Audit and controls: The independent auditor issued unqualified opinions on the IFRS consolidated financial statements and internal control over financial reporting as of December 31, 2017. Management concluded disclosure controls were effective.

Most important facts for investors to verify

• Review the full audited statements and notes, especially the composition and drivers of the Ch$89,113 trading-derivative loss and the fall in other income.
• Track the rise in 90-day-plus past-due loans, consumer charge-offs, mortgage delinquencies and the retail share of the loan portfolio against the lower allowance balance.
• Confirm the final IFRS 9 opening-equity adjustment, including the unassessed portfolios, and subsequent provisioning effects.
• Assess liquidity using the bank’s detailed maturity disclosures and the reported LCR and NSFR; verify any regulatory limits introduced after filing.
• Monitor the SAOS debt repayment, end of the associated tax benefit, and completion and approval of the 2017 stock dividend.
• Check developments in the consumer claim, brokerage fine appeal, labor proceedings and proposed Chilean banking and consumer-protection reforms.