Business Context and Reporting Period
Company: Banco de Chile (Foreign Private Issuer)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2016
Filing Date: July 29, 2016
Currency: Millions of Chilean Pesos (MCh$)
Banco de Chile is a Chilean commercial bank offering retail, wholesale, treasury, and subsidiary services. The financial statements are prepared in accordance with the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF) and International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Operating Revenues | 886,431 MCh$ | 800,138 MCh$ |
| Net Interest Income | 606,272 MCh$ | 587,744 MCh$ |
| Net Fees and Commission Income | 157,757 MCh$ | 145,794 MCh$ |
| Provisions for Loan Losses | (157,759) MCh$ | (124,809) MCh$ |
| Net Operating Income | 328,932 MCh$ | 323,471 MCh$ |
| Net Income for the Period | 283,512 MCh$ | 285,098 MCh$ |
| Basic EPS (Ch$) | 2.95 | 2.97 |
| Total Assets (June 30, 2016) | 31,007,979 MCh$ | 31,292,944 MCh$ (Dec 31, 2015) |
| Total Equity (June 30, 2016) | 2,791,000 MCh$ | 2,740,087 MCh$ (Dec 31, 2015) |
| Cash and Cash Equivalents | 1,600,732 MCh$ | 2,093,908 MCh$ (Dec 31, 2015) |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 10.8% to 886,431 MCh$, driven by a 3.2% increase in net interest income and an 8.2% increase in net fees and commissions.
- Provisioning Increase: Provisions for loan losses rose significantly by 26.4% to 157,759 MCh$. This increase was primarily due to a new definition of default (Circular No. 3,584) requiring recalibration of group provision models, resulting in a higher charge of 13,443 MCh$, partially offset by regulatory changes releasing provisions totaling 14,096 MCh$.
- Net Income Stability: Despite higher revenues and higher provisions, net income remained relatively flat, decreasing slightly by 0.6% to 283,512 MCh$.
- Asset Composition: Loans to customers increased slightly to 24,099,024 MCh$, while financial assets held-for-trading increased significantly to 1,441,372 MCh$ from 866,654 MCh$ at year-end 2015.
- Dividend Policy Change: The Board established a new policy effective January 2016 to constitute a provision for minimum dividends equal to 60% of distributable net income (previously 70%).
Guidance, Outlook, and Risks
- Management Commentary: The bank highlighted the impact of regulatory changes on provisioning models. Management noted that the increase in provisions was a one-time effect of recalibrating models to new default definitions.
- Executive Changes: Mr. Arturo Tagle Quiroz resigned as CEO effective April 30, 2016. Mr. Eduardo Ebensperger Orrego was appointed CEO effective May 1, 2016.
- Capitalization: The bank approved the capitalization of 30% of the 2015 distributable net income through the issuance of bonus shares, increasing the share count to 97,624,347,430.
- Accounting Standards: The bank is assessing the impact of new IFRS standards (IFRS 9, IFRS 15, IFRS 16) which are not yet effective but will be adopted in future periods (2018-2019).
- Legal Contingencies: The bank faces collective actions regarding consumer contract clauses (fees on credit lines, tacit consent). A provision of 21,680 MCh$ has been established for these legal contingencies.
- Subsequent Events: The subsidiary Banchile Trade Services Limited was formally dissolved on July 5, 2016.
Investor Verification Checklist
- Provisioning Impact: Verify the sustainability of the loan loss provision ratio given the regulatory recalibration and the specific charge of 13,443 MCh$ related to the new default definition.
- Dividend Payouts: Confirm the cash flow impact of the new 60% minimum dividend provision policy and the recent dividend payment of 366,654 MCh$ for 2015.
- Asset Quality: Review the composition of the "Non-Complying Portfolio" (770,852 MCh$) and the adequacy of the 599,292 MCh$ total allowances for loan losses.
- Derivative Exposure: Assess the risk associated with the large derivative portfolio (Notional amount ~7.6 trillion MCh$) and the fair value adjustments recorded in equity.
- Regulatory Compliance: Monitor the bank's progress in adopting IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) ahead of their mandatory implementation dates.