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: Three months ended March 31, 2019

Filing Date: April 25, 2019

Currency: Millions of Chilean Pesos (MCh$)

Banco de Chile is a Chilean commercial bank offering a broad range of services including corporate, SME, and personal banking, as well as treasury and international services. The bank operates through four main segments: Retail, Wholesale, Treasury, and Subsidiaries. The financial statements are prepared in accordance with IFRS and Chilean Superintendency of Banks standards.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by approximately 29% year-over-year, from MCh$142,651 million in Q1 2018 to MCh$101,537 million in Q1 2019. This was primarily driven by higher provisions for loan losses and increased operating expenses.
• Increased Provisions: Provisions for loan losses rose significantly to MCh$89,156 million (up from MCh$70,945 million), reflecting a more conservative credit risk assessment or deterioration in specific portfolio segments.
• Revenue Composition: While Net Interest Income declined slightly (MCh$300,970 million vs. MCh$316,517 million), Net Fees and Commission Income increased by 16% to MCh$103,410 million, indicating growth in non-interest revenue streams.
• Operating Expenses: Total operating expenses increased to MCh$220,824 million from MCh$204,247 million. A significant portion of this increase is attributed to Depreciation and Amortization, which more than doubled to MCh$17,203 million due to the adoption of IFRS 16 (Leases).
• Balance Sheet Growth: Total assets grew modestly by 0.5% to MCh$36.1 trillion. Loans to customers increased by MCh$249 billion.

Guidance, Outlook, and Management Commentary

• Accounting Policy Change (IFRS 16): The bank adopted IFRS 16 "Leases" effective January 1, 2019. This resulted in the recognition of right-of-use assets (MCh$155,502 million) and lease liabilities (MCh$153,896 million) on the balance sheet. This adoption significantly impacted depreciation and amortization expenses and the presentation of operating expenses.
• Dividend Policy: The Board of Directors established a provision for minimum dividends of 60% of the net distributable profit for the year. Shareholders approved the distribution of Dividend No. 207 of Ch$3.527 per share on March 28, 2019, totaling MCh$356,311 million.
• Strategic Alliance: On January 28, 2019, the bank entered into a 15-year strategic alliance with Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A., granting them exclusive access to provide insurance to the bank's clients via face-to-face and digital channels.
• Outlook: Management notes that transactions do not have a cyclical or seasonal nature. No significant subsequent events were reported between March 31, 2019, and the filing date.

Key Facts for Investor Verification

• Credit Quality: Verify the drivers behind the 25% increase in provisions for loan losses (MCh$89,156 million) to assess potential credit deterioration in the commercial or consumer portfolios.
• IFRS 16 Impact: Confirm the long-term impact of the new lease accounting standard on future operating margins, as depreciation of right-of-use assets is now a significant line item.
• Dividend Sustainability: Review the bank's cash flow generation relative to the MCh$356 billion dividend payment made in Q1 2019 and the 60% minimum dividend provision policy.
• Non-Interest Revenue Growth: Analyze the sustainability of the 16% growth in fee and commission income, particularly in light of the new insurance partnership with Chubb.
• Liquidity Position: Note the increase in cash and cash equivalents to MCh$2.46 trillion, providing a strong liquidity buffer.