BCH

Business Context and Reporting Period

This Form 6-K filing by Banco de Chile (Banco de Chile) reports the consolidated financial statements for the fiscal year ended December 31, 2018. The filing was submitted to the U.S. Securities and Exchange Commission on January 30, 2019. The bank operates as a commercial bank in Chile, offering services to individuals, corporations, and subsidiaries involved in securities brokerage, fund management, and insurance. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and Chilean regulatory standards.

Key Financial Metrics (2018 vs. 2017)

Note: MCh$ = Millions of Chilean Pesos.

Material Changes vs. Prior Period

• Asset Growth: Total assets increased by approximately 9.4% (Ch$3.1 trillion) driven by growth in loans to customers (up 9.7%) and financial assets held-for-trading.
• Profitability: Net income increased by 3.3% to Ch$594.9 billion. Net operating income rose by 8.6%.
• Loan Loss Provisions: Provisions for loan losses increased by 19.8% to Ch$281.4 billion, reflecting higher provisioning for the commercial and consumer loan portfolios.
• Capitalization: The bank executed a stock dividend in July 2018, capitalizing 40% of the 2017 distributable net income, increasing the number of shares outstanding from ~99.4 billion to ~101.0 billion.
• Accounting Changes: The bank renewed determination models for group provisions in August 2018, resulting in a net charge of Ch$28.2 billion. It also incorporated the "Debit Valuation Adjustment" (DVA) in derivative valuations, resulting in a net credit of Ch$21.9 billion.

Guidance, Outlook, and Risks

Management Commentary and Outlook: The bank maintains a focus on risk management and capital adequacy. In 2018, the bank successfully met all regulatory capital requirements and internal alerts were not activated. The bank manages liquidity through the Market Access Report (MAR) and monitors the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Risks and Contingencies:

• Credit Risk: The bank manages credit risk through individual and group evaluations. As of December 31, 2018, the non-complying portfolio (impaired) totaled Ch$783.1 billion (before allowances). The bank maintains significant collateral, primarily real estate, to mitigate these risks.
• Market Risk: The bank utilizes Value-at-Risk (VaR) and stress testing for trading portfolios. A stress test scenario indicated a potential loss of approximately Ch$13.2 billion in the trading book under adverse interest rate and spread conditions.
• Regulatory Changes: A new law (Law 21,130) published in January 2019 modernizes banking legislation, integrating the Superintendency of Banks (SBIF) into the Commission for the Financial Market (CMF) and introducing new capital requirements, including a countercyclical capital buffer.
• Legal Proceedings: There are no significant lawsuits pending that would materially affect the financial statements, though the bank maintains provisions for judicial contingencies.

Key Facts for Investor Verification

• Dividend Policy: The Board proposed a dividend of Ch$3.53 per share (70% of distributable profit) for the 2018 fiscal year, to be voted on in March 2019.
• Capital Ratios: As of December 31, 2018, the Effective Equity to Risk-Weighted Assets ratio was 13.91%, well above the regulatory minimum of 10% (specific to Banco de Chile due to historical mergers).
• ADR Ratio Change: In late 2018, the American Depositary Receipt (ADR) ratio was changed from 600 shares per ADR to 200 shares per ADR, effective November 23, 2018.
• Technology Incident: A technological security incident in May 2018 resulted in a net write-off of Ch$6.0 billion, which was subsequently fully recovered through insurance reimbursements by year-end.
• Regulatory Transition: Investors should monitor the implementation timeline of Law 21,130, which will alter risk-weighting methodologies and capital requirements over the next 18 to 48 months.