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, 2016

Filing Date: April 29, 2016

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. The bank operates through four main segments: Retail, Wholesale, Treasury, and Subsidiaries. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and local regulations issued by the Superintendency of Banks and Financial Institutions (SBIF).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 7.7% to MCh$410,852 million, driven primarily by a 14.2% increase in Net Interest Income (MCh$301,171 million) and a 7.4% increase in Net Fees and Commission Income.
• Profitability: Net Income rose 13.5% year-over-year to MCh$132,527 million. Net Operating Income increased by 10.9% to MCh$151,912 million.
• Expense Management: Total operating expenses increased by 8.4% to MCh$194,110 million. Personnel expenses rose 12.5% to MCh$105,298 million, and administrative expenses increased 11.5% to MCh$76,220 million.
• Loan Portfolio: Loans to customers (net) remained relatively stable, decreasing slightly by 0.2% to MCh$23,896,852 million compared to the prior year-end. Total allowances for loan losses were MCh$602,547 million.
• Cash Flow: Net cash flows from operating activities were positive at MCh$239,846 million, a significant improvement from a negative MCh$52,334 million in Q1 2015. However, financing activities resulted in a net outflow of MCh$810,701 million, largely due to dividend payments and debt redemptions.

Guidance, Outlook, Risks, and Unusual Items

• Executive Leadership Change: The Board of Directors accepted the resignation of CEO Arturo Tagle Quiroz, effective April 30, 2016. Eduardo Ebensperger Orrego was appointed as the new CEO, effective May 1, 2016.
• Dividend Policy Change: The Board established a new minimum dividend provision policy effective January 1, 2016, requiring a provision of 60% of distributable net income (previously 70%). A dividend of MCh$366,654 million was paid in Q1 2016.
• Accounting Rule Changes: Implementation of new SBIF rules in January 2016 regarding risk classifications and factoring operations resulted in a net provision release of MCh$3,308 million. Conversely, a new definition of non-complying loans resulted in a charge to income of MCh$7,853 million.
• Legal Contingencies: The bank faces collective actions regarding consumer contract clauses (fees, tacit consent, self-service channels). Provisions for legal contingencies totaled MCh$14,973 million as of March 31, 2016.
• Future Standards: The bank is assessing the impact of upcoming IFRS standards (IFRS 9, IFRS 15, IFRS 16) with mandatory adoption dates ranging from 2018 to 2019.

Investor Verification Checklist

• CEO Transition: Verify the integration plan and strategic continuity following the change in Chief Executive Officer.
• Dividend Sustainability: Confirm the impact of the reduced minimum dividend provision (60% vs 70%) on future cash distributions and retained earnings.
• Asset Quality: Review the composition of the "Non-Complying Portfolio" (MCh$778,206 million) and the adequacy of allowances given the recent regulatory definition changes.
• Legal Exposure: Monitor the status of the collective consumer actions and the sufficiency of the MCh$14,973 million provision.
• Interest Rate Sensitivity: Assess the bank's exposure to interest rate fluctuations given the significant volume of derivative instruments (MCh$1.1 trillion notional value) used for hedging.