BCH

Business Context and Reporting Period

Company: Banco de Chile (Foreign Private Issuer)

Filing Type: Form 6-K (Interim Consolidated Financial Statements)

Reporting Period: Six months ended June 30, 2017

Currency: Millions of Chilean Pesos (MCh$)

Banco de Chile is a Chilean commercial bank offering a broad range of services including corporate, retail, and treasury banking, as well as securities brokerage and insurance through subsidiaries. The financial statements are prepared in accordance with IFRS and Chilean Superintendency of Banks standards.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased by 5.8% to MCh$299,811 million, driven by a 20.7% increase in Net Fees and Commission Income and a 20.6% reduction in Provisions for Loan Losses.
• Revenue Composition: While Total Operating Revenues decreased slightly (1.8%), Net Interest Income grew by 3.4%. The decline in total revenue was primarily due to a significant drop in Net Financial Operating Income (from MCh$99,260 million to MCh$26,707 million), largely attributed to losses on trading derivatives.
• Asset Growth: Total assets grew by 2.3%. Loans to customers increased by 1.1% to MCh$25,043,464 million. Financial assets held-for-trading increased significantly by 32.8% to MCh$1,867,111 million.
• Liabilities: Debt issued increased by 7.0% to MCh$6,609,678 million. Borrowings from financial institutions rose by 7.9%.
• Cash Flow: Operating cash flows improved significantly to MCh$418,069 million (compared to MCh$204,366 million in 2016). However, investing activities resulted in a net outflow of MCh$577,268 million, primarily due to purchases of available-for-sale financial assets.

Guidance, Outlook, Risks, and Unusual Items

• Dividends and Capitalization: The Board approved a dividend of Ch$2.92 per share for 2016 (paid in 2017) and the capitalization of 40% of 2016 net distributable income. On July 27, 2017, the bank issued 1.82 billion fully paid-in shares, increasing total share count to approximately 99.44 billion.
• Regulatory Actions: In February 2017, the Financial Analysis Unit imposed an administrative warning and a fine of UF 500 on the bank for erroneous reporting of information between April 2011 and June 2012.
• Legal Contingencies: The bank maintains provisions of MCh$21,607 million for judicial contingencies. A significant collective lawsuit regarding overdraft fees and contract clauses is pending, with the probationary period concluded.
• Accounting Changes: The bank is preparing for the adoption of IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers), mandatory from January 1, 2018. The impact of IFRS 9 cannot yet be quantified.
• Derivatives: The bank holds significant derivative positions (MCh$938,160 million assets / MCh$968,315 million liabilities) used for hedging and trading. Trading derivatives contributed to a loss in Net Financial Operating Income compared to the prior year.

Key Facts for Investor Verification

• Loan Quality: Verify the composition of the impaired portfolio (MCh$840,565 million) and the adequacy of the MCh$592,513 million in loan loss allowances.
• Derivative Exposure: Review the fair value hierarchy (Level 3 instruments) and the sensitivity of trading derivatives to market changes, given the volatility in Net Financial Operating Income.
• Capital Structure: Confirm the impact of the recent share issuance (July 2017) on diluted earnings per share for future periods.
• Regulatory Compliance: Monitor the status of the collective lawsuit regarding consumer contracts and the outcome of the administrative fine imposed by the Financial Analysis Unit.
• IFRS 9 Implementation: Assess the bank's progress in implementing IFRS 9, which will change the methodology for recognizing expected credit losses.