Banco de Chile — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed April 26, 2019. This is an audited annual report, not a standalone fourth-quarter earnings filing, and the supplied text does not provide clear Q4-only results. Financial statements are prepared in Chilean pesos under IFRS as issued by the IASB; comparisons with Chilean GAAP figures are not directly comparable.
Business context and key financial metrics
Banco de Chile is a full-service Chilean bank operating through retail banking, wholesale banking, treasury and money markets, and subsidiaries. It reported leading market positions in demand deposits, mutual fund management and net income, and was the country’s second-largest bank by loans.
| Metric | FY2018 / Dec. 31, 2018 | Comparison with 2017 |
|---|---|---|
| Net interest income | Ch$1,320,977 million | Up 7.0% |
| Net fees and commissions | Ch$359,955 million | Up 3.5% |
| Total operating revenue | Ch$1,846,070 million | Up approximately 9.4% |
| Provisions for loan losses | Ch$251,323 million | Up 13.6% |
| Operating expenses | Ch$838,156 million | Up 6.9% |
| Income before tax | Ch$763,402 million | Up 11.0% |
| Net income | Ch$603,634 million | Up 5.5% |
| Net interest margin | 4.35% | Up from 4.30% |
| Return on average equity | 16.78% under IFRS | Up from 16.09% |
| Cost-to-income ratio | 45.4% | Improved from 46.5% |
At year-end, total assets were Ch$35,617,447 million, net loans Ch$27,341,254 million and total loans before allowances Ch$27,926,632 million. Deposits were Ch$20,240,662 million; debt issued was Ch$7,475,552 million; borrowings from financial institutions were Ch$1,516,759 million; and equity was Ch$3,673,716 million. Regulatory capital was 13.9% of risk-weighted assets against the Bank’s 10% minimum; the basic capital ratio was 8.3%.
Cash and cash equivalents ended the year at Ch$1,281,278 million. Operating cash flow was a net outflow of Ch$1,334,745 million, investing cash flow a net inflow of Ch$416,534 million, and financing cash flow a net inflow of Ch$644,970 million. Management stated that working capital was sufficient for present needs. The Bank reported an average LCR of 0.91 during 2018; no regulatory LCR or NSFR limits applied during the year.
Loans 90 or more days past due were Ch$305,530 million, or 1.09% of loans, compared with 1.19% in 2017. Allowances were Ch$585,378 million, or 2.10% of loans, versus Ch$495,821 million and 1.95% in 2017.
Material changes versus 2017
- Net income rose 5.5%, supported by higher net interest income and a recovery in net financial operating income, partly offset by higher credit provisions, expenses and income taxes.
- Loan balances increased 9.7%, with growth in retail lending and a recovery in commercial lending toward year-end. The loan-loss allowance balance increased 18.1%; management attributed most of the increase to IFRS 9’s initial adoption, with additional effects from loan growth and currency movements.
- Other income, net, increased 57.0% to Ch$165,138 million. Net financial operating income moved from a Ch$29,661 million loss to income of Ch$117,142 million, while net foreign-exchange transaction income fell from Ch$104,875 million to Ch$2,701 million. Results were materially affected by peso depreciation and derivative positions.
- Income tax expense increased 38.5% to Ch$159,768 million. The effective tax rate rose to 20.9% from 16.8%, reflecting a higher statutory rate, reduced tax deductions related to the subordinated debt, and other tax effects.
- Cash generated by operations turned negative, largely because increased loan originations used cash. Investing cash flow reversed to an inflow as the Bank reduced purchases of investment securities.
Outlook, management commentary, risks and unusual items
- Outlook: The filing gives no formal quantitative earnings or revenue guidance. Management described Chile’s 2018 recovery as supportive of lending, citing 4.0% GDP growth and 4.7% growth in investment. It planned to continue customer-service, digitalization, productivity and risk-control initiatives. The 2019 capital-expenditure budget was approximately Ch$72,421 million, with 72% allocated to information technology.
- Accounting change: IFRS 9 took effect January 1, 2018. Its initial adoption reduced opening equity by Ch$62,726 million after tax and increased opening allowances and provisions by Ch$91,746 million before tax. IFRS 15 had no material reported effect. IFRS 16 took effect in 2019; the filing estimates an initial right-of-use asset and lease liability of approximately Ch$145,383 million.
- Cybersecurity incident: An international cyberattack in May 2018 resulted in an operational write-off of approximately Ch$6,900 million. The Bank reported Ch$6,329 million in insurance reimbursements, temporary service interruptions, and no evidence of customer fund misappropriation based on its internal analysis. It created a Cybersecurity Division and increased related investment and operating expenditure. Future attacks, customer claims, regulatory action and reputational harm remain risks.
- Regulatory transition: Chile’s new banking law provides for Basel III capital requirements and transfer of banking supervision from the SBIF to the CMF. Specific implementation rules and potential capital buffers were not yet settled. A phased LCR minimum was scheduled to begin at 60% in 2019 and rise to 100% by 2023.
- Central Bank subordinated debt and ownership: The filing anticipated full repayment by SAOS on April 30, 2019 using dividends on 2018 earnings, followed by liquidation of SAOS and SM-Chile. The expected change would increase LQ Inversiones Financieras’ direct ownership to approximately 46.34% and increase public float. The 2018 dividend of Ch$3.52723589646 per share was approved in March 2019.
- Contingencies: Banchile Corredores de Bolsa contested a UF 50,000 fine related to SQM share transactions; proceedings were ongoing. Banco de Chile was also challenging the regulator’s determination of minimum strike services and emergency teams. A consumer-protection collective action was settled and concluded in 2018.
- Other risks: The Bank highlighted Chilean economic conditions, competition and margin pressure, retail and SME credit exposure, interest rates and inflation, foreign-exchange movements, fair-value estimates, funding and ratings, cybersecurity and evolving regulation. Chile’s sovereign downgrade by Moody’s in 2018 was followed by a similar downgrade of the Bank to A1, with stable outlook; S&P and Fitch maintained their ratings.
Most important facts for investors to verify
- Review the audited financial statements and IFRS 9 transition disclosures, especially the effects on credit allowances, opening equity and year-over-year comparability.
- Confirm the final net financial impact of the cyberattack, including insurance recovery, any remaining losses, and subsequent control or customer consequences.
- Track loan growth, retail/SME delinquencies, allowance coverage and charge-offs as the portfolio expands.
- Verify completion and terms of SAOS debt repayment and the resulting ownership, voting control and public-float changes.
- Assess the final Basel III and liquidity rules, including any capital buffers, implementation timetable and effects on profitability or distributions.
- Monitor the Chubb bancassurance agreement’s regulatory approvals, economics and distribution obligations.
- Check the status and financial exposure of the SQM-related litigation and the minimum-services labor proceeding.