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, 2018

Filing Date: October 30, 2018

Currency: Millions of Chilean Pesos (MCh$)

Banco de Chile is a Chilean commercial bank offering a broad range of services including corporate, SME, personal, and consumer banking, as well as treasury and international services. The bank is organized into four segments: Retail, Wholesale, Treasury, and Subsidiaries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 7.2% to MCh$1,367,067 million, driven by a 7.7% increase in Net Interest Income and a 3.8% increase in Net Fees and Commission Income.
• Loan Loss Provisions: Provisions for loan losses increased significantly by 25.3% to MCh$220,057 million. This increase was partially due to a change in accounting estimates regarding provision models, resulting in a one-time charge of MCh$38,681 million.
• Net Income: Net income remained relatively flat, decreasing slightly by 0.1% to MCh$433,351 million, despite higher revenues, due to the increased provisions and higher operating expenses.
• Asset Growth: Total assets grew by 6.9% compared to year-end 2017, primarily driven by growth in loans to customers (up 6.3% to MCh$26.4 trillion) and financial assets held-for-trading.
• Operating Expenses: Total operating expenses increased by 6.9% to MCh$627,467 million, with personnel expenses rising 6.9% and administrative expenses rising 2.4%.

Guidance, Outlook, and Risks

• Accounting Policy Changes: The bank renewed its determination models for provisions for portfolios evaluated as a group in August 2018, incorporating new guidelines for Probability of Default (PD) and Loss Given Default (LGD). This resulted in a charge of MCh$38,681 million recognized in the period.
• Unusual Items: A technological security incident on May 24, 2018, resulted in a write-off of MCh$6,839 million for external fraud against accounts held with foreign correspondent banks. The bank is pursuing recovery and insurance claims.
• Capitalization: In July 2018, the bank capitalized 40% of its 2017 net distributable income, issuing 1.57 billion fully paid-in shares, increasing total share count to 101.0 billion.
• Subsequent Event: On October 23, 2018, the bank announced a modification to its ADR program, changing the ratio from 600 shares per ADR to 200 shares per ADR, effective November 23, 2018.
• Risks: The bank maintains significant exposure to credit risk, foreign exchange risk, and interest rate risk. It utilizes derivative instruments (swaps, forwards, options) for hedging purposes. Legal contingencies are generally considered normal for the industry, with a provision of MCh$156 million as of September 30, 2018.

Investor Verification Checklist

• Provision Model Impact: Verify the long-term impact of the renewed credit risk provision models and the MCh$38,681 million one-time charge on future earnings.
• Asset Quality: Review the composition of the impaired portfolio (Substandard and Non-Complying) which totaled MCh$768,652 million as of September 30, 2018.
• ADR Ratio Change: Confirm the impact of the ADR ratio change (600 to 200) on liquidity and trading volume for US-based investors.
• Fraud Recovery: Monitor updates on the recovery of funds related to the MCh$6,839 million technological security incident.
• Dividend Policy: Note the provision for minimum dividends of MCh$221,286 million (60% of net distributable income) recorded as a liability.