Banco de Chile(BCH) - 2020 Q4 - Annual Report

PART I Item 3. Key Information This section presents selected financial data for 2018-2020, highlighting a significant 2020 net income decrease due to increased loan loss provisions and lower net interest income, alongside a comprehensive list of operational, industry, and economic risks, particularly from COVID-19 Selected Financial Data Net income decreased 33.4% to Ch$401,630 million in 2020, driven by a 65.0% rise in loan loss provisions, while total assets grew 11.1% to Ch$45,550,960 million Consolidated Statement of Income Data (IFRS, in Ch$ millions) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net interest income | 1,320,977 | 1,371,278 | 1,316,788 | | Provisions for loan losses | (249,771) | (331,601) | (547,106) | | Total operating expenses | (839,708) | (902,250) | (877,752) | | Income before income taxes | 763,402 | 777,406 | 504,853 | | Net income for the year | 603,634 | 603,745 | 401,630 | | Earnings per share (Ch$) | 5.98 | 5.98 | 3.98 | Consolidated Statement of Financial Position Data (IFRS, in Ch$ millions) | Indicator | As of Dec 31, 2019 | As of Dec 31, 2020 | | :--- | :--- | :--- | | Total assets | 41,013,874 | 45,550,960 | | Loans to customers, net | 29,384,039 | 30,101,583 | | Total liabilities | 37,108,113 | 41,553,879 | | Total equity | 3,905,761 | 3,997,081 | Consolidated Ratios | Ratio | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net interest margin | 4.35% | 4.13% | 3.50% | | Return on average equity | 16.78% | 15.15% | 10.10% | | Allowances for loan losses as a % of total loans | 2.10% | 2.16% | 2.70% | Risk Factors Key risks include increased loan losses, Basel III regulatory constraints, intense competition, and significant adverse impacts from the COVID-19 pandemic, alongside cybersecurity threats and Chilean political instability - The COVID-19 pandemic is a major risk factor, impacting the global and Chilean economies, which could adversely affect the bank's business, results of operations, and financial condition. The pandemic led to a 5.8% GDP contraction in Chile in 2020, increased unemployment, and a significant rise in provisions for loan losses[53][54][55] - Regulatory changes, particularly the adoption of Basel III guidelines, may impose stricter capital adequacy, liquidity, and credit risk provisioning requirements, potentially constraining operations and affecting financial results. The implementation timeline for Basel III has been delayed by one year due to COVID-19, with new requirements starting in December 2021[25][27] - Growth in riskier loan segments, such as retail banking, exposes the bank to higher potential loan losses. In 2020, allowances for loan losses increased by 28.8% to Ch$836,107 million, mainly due to the economic contraction caused by the COVID-19 pandemic, which deteriorated the risk profiles of individuals and companies[22] - Political and social instability in Chile, including the social unrest of October 2019 and the ongoing process to draft a new constitution, presents a significant risk. These events could lead to slower economic growth, increased volatility, and negatively impact asset quality and profitability[62][63] - The bank faces cybersecurity risks, highlighted by a 2018 incident that resulted in a Ch$6,900 million operational write-off. The shift to remote work due to COVID-19 has heightened these risks, prompting reinforced security measures and the creation of a dedicated Cybersecurity Division[41][42] Item 4. Information on the Company This section details Banco de Chile's history, business structure, competitive strengths, and strategic priorities, emphasizing its strong brand, leading market position, and customer-centric digital transformation, alongside regulatory overview and loan portfolio statistics History and Development of the Bank Founded in 1893, Banco de Chile's history includes key mergers, full repayment of Central Bank subordinated debt in 2019, and significant investment in digital transformation, with Ch$47,102 million in 2020 capital expenditures - In 2020, the bank launched the FAN account, a fully digital onboarding bank account, to promote financial inclusion and strengthen its market-leading position in demand deposits. This initiative attracted over 150,000 users by year-end[75][113] - A significant historical event was the full repayment of the Central Bank subordinated debt on April 30, 2019. This event led to the dissolution of SAOS and the liquidation of SM-Chile, simplifying the ownership structure and increasing the stock's free-float[75][85][87] Capital Expenditures (in Ch$ millions) | Category | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Computer equipment | 12,702 | 28,117 | 20,658 | | Software | 23,512 | 20,928 | 18,631 | | Total | 51,577 | 64,440 | 47,102 | Business Overview The bank operates through Retail, Wholesale, Treasury, and Subsidiaries segments, with Retail comprising 64.1% of the loan portfolio, leveraging strong brand, leading market positions, and superior asset quality with a 0.97% delinquency ratio Loan Portfolio and Income by Business Segment (2020, in Ch$ millions) | Business Segment | % of Total Loans | Income before Income Tax (millions of Ch$) | | :--- | :--- | :--- | | Retail market | 64.1% | 271,384 | | Wholesale market | 35.8% | 187,318 | | Treasury and money market | – | 64,936 | | Operations through subsidiaries | 0.1% | 65,434 | - The bank holds a leading market position in several key areas as of December 31, 2020, including 1 in demand deposits (20.8% share), 1 in mutual funds management (24.2% share), and 1 in net fees and commissions income (22.5% share)[90][91] - Asset quality is a key strength. As of December 31, 2020, the bank's delinquency ratio (loans 90+ days past due) was 0.97%, significantly below the industry average of 1.70% (excluding Banco de Chile). Its coverage ratio was 249.5%, well above the industry average of 163.2%[99] Regulation and Supervision The Chilean banking system is regulated by the CMF and Central Bank, with phased Basel III implementation introducing stricter capital requirements starting December 2021, covering capital adequacy, lending limits, liquidity, and market risk, which the bank met with a 16.0% Regulatory Capital ratio in 2020 - The implementation of Basel III guidelines is a key regulatory change, introducing new capital requirements such as CET1, Tier 1, and Tier 2 ratios, along with conservation and potential countercyclical buffers. The phase-in period was postponed due to COVID-19 and is now set to begin in December 2021[227][229] - The primary regulatory bodies are the Financial Market Commission (CMF), which replaced the SBIF in 2019, and the Central Bank of Chile. The CMF oversees the entire financial market, including banks, securities, and insurance[217][219] - The bank is subject to specific capital requirements, including maintaining a Regulatory Capital ratio of at least 10% of risk-weighted assets. As of December 31, 2020, the bank's ratio was 16.0%, well above the requirement[226][338] Selected Statistical Information In 2020, average interest-earning assets grew to Ch$37.7 trillion, but NIM declined to 3.55%; past-due loans decreased to 0.97% due to pandemic support, while loan loss allowances increased to 2.70%, reflecting heightened credit risk Loan Portfolio Composition (as of Dec 31, in Ch$ millions) | Loan Type | 2019 (millions of Ch$) | 2020 (millions of Ch$) | | :--- | :--- | :--- | | Commercial loans | 16,294,212 | 17,601,597 | | Mortgage loans | 9,206,727 | 9,387,372 | | Consumer loans | 4,532,333 | 3,948,721 | | Total loans | 30,033,272 | 30,937,690 | Analysis of Allowances for Loan Losses (in Ch$ millions) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Allowances at beginning of period | 495,821 | 585,378 | 649,233 | | Allowances established | 309,621 | 377,055 | 519,959 | | Allowances at end of period | 585,378 | 649,233 | 836,107 | | % of total loans | 2.10% | 2.16% | 2.70% | - Total past-due loans (90 days or more) decreased significantly in 2020 to Ch$299,408 million from Ch$418,768 million in 2019. This was primarily due to government relief measures and loan rescheduling programs offered to customers affected by the COVID-19 pandemic[313] Item 5. Operating and Financial Review and Prospects This section analyzes the 33.5% decrease in 2020 net income, driven by increased loan loss provisions and lower net interest income due to COVID-19, covering critical accounting policies, segment performance, liquidity, capital resources, and ongoing pandemic impacts Operating Results Net income fell 33.5% to Ch$401,630 million in 2020, primarily due to a 65.0% increase in loan loss provisions and a 4.0% decrease in net interest income, while the Treasury segment's income surged 188.1% - Net income for 2020 was Ch$401,630 million, a 33.5% decrease from 2019. This was primarily caused by a 65.0% increase in provisions for loan losses and a 4.0% decrease in net interest income, reflecting the economic impact of the COVID-19 pandemic[366] - The bank implemented a Support Plan for customers affected by COVID-19, rescheduling Ch$414,155 million in loan installments and granting nearly Ch$1,890,000 million in government-guaranteed (FOGAPE-COVID) loans as of December 31, 2020[355] - The Retail Banking segment's income before tax decreased by 22.7% in 2020, driven by lower income from consumer loans and demand deposits. The Wholesale Banking segment's income before tax fell by 38.9%, mainly due to a significant increase in loan loss provisions[406][407][414] - The Treasury and Money Market segment's income before tax increased by 188.1% in 2020, benefiting from proactive management that capitalized on interest rate volatility and marking-to-market gains in its investment portfolio[406][416] Liquidity and Capital Resources The bank maintains sound liquidity, with customer deposits comprising 56.1% of liabilities in 2020; net cash used in operating activities was Ch$2.47 trillion, shifting from an inflow, yet the bank fully complied with all regulatory liquidity and capital requirements, holding Ch$1,821,843 million in excess capital - The bank's primary funding sources are customer deposits (current accounts, demand, savings, and time deposits) and debt issuances. In 2020, customer deposits represented 56.1% of average total liabilities[443] - In 2020, the bank utilized Central Bank liquidity facilities (FCIC program) established in response to the COVID-19 pandemic, borrowing approximately Ch$3,110,600 million at a low interest rate of 0.5%[430] Capital Adequacy (Chilean GAAP, in Ch$ millions) | Indicator | As of Dec 31, 2019 | As of Dec 31, 2020 | | :--- | :--- | :--- | | Total Regulatory Capital | 4,569,090 | 4,878,500 | | Total Regulatory Capital required | (3,230,734) | (3,056,657) | | Excess over minimum | 1,338,356 | 1,821,843 | Trend Information The ongoing COVID-19 pandemic remains the dominant trend, creating uncertainty for 2021 economic recovery despite government and Central Bank support measures like FCIC and FOGAPE loan programs, and pension fund withdrawals, whose long-term effects are uncertain - The COVID-19 pandemic continues to be the dominant trend, with a recent increase in cases in Chile leading to new mobility restrictions and lockdowns, creating uncertainty for the 2021 economic recovery[446] - Chilean authorities have implemented significant support measures, including the Central Bank's FCIC lending facility and the government's FOGAPE loan guarantee programs (FOGAPE-COVID and FOGAPE-REACTIVA), to ensure liquidity and support credit flow to businesses[448][452] - The Chilean Congress approved multiple withdrawals from individual pension fund accounts (two in 2020, a third in April 2021) to provide financial relief to citizens, injecting significant liquidity into the economy but with uncertain long-term consequences[454] Item 6. Directors, Senior Management and Employees This section details the 11-member Board of Directors, chaired by Pablo Granifo L., with representation from Quiñenco S.A. and Citigroup, and outlines board committees; as of December 31, 2020, the bank had 13,134 employees, with 75.2% unionized - The Board of Directors is composed of 11 members and 2 alternates. Pablo Granifo L. serves as Chairman, and key directors represent the interests of the main shareholder groups, Quiñenco S.A. (Luksic family) and Citigroup Inc[461][462] Board of Directors Compensation (Year ended Dec 31, 2020, in Ch$ millions) | Category | Amount (in millions of Ch$) | | :--- | :--- | | Remuneration | 1,290 | | Fees for Attending Meetings | 320 | | Board of Directors of Subsidiaries | 1,178 | | Consulting | 7 | | Total | 2,795 | - As of December 31, 2020, the company had 13,134 employees on a consolidated basis, a decrease from 13,562 in 2019. Of these, 75.2% were unionized. The bank successfully renegotiated collective bargaining agreements with several unions during 2020 and early 2021[511][513] Item 7. Major Shareholders and Related Party Transactions This section details the bank's ownership, with LQIF and its affiliate holding a 51.15% controlling stake as of April 23, 2021, jointly owned by Quiñenco S.A. (controlling) and Citigroup, outlining strategic partnership agreements and related party transactions totaling Ch$369,248 million in loans - The controlling shareholder is LQ Inversiones Financieras S.A. (LQIF), which, along with its affiliate, owned 51.15% of the bank's shares as of April 23, 2021. LQIF is 50% owned by Quiñenco S.A. and 50% by Citigroup, but Quiñenco retains control of LQIF and, consequently, Banco de Chile[514][518] - The bank maintains several key agreements with Citigroup, including a Global Connectivity Agreement, Cooperation Agreement, and Master Services Agreement, which frame their strategic partnership and provide for reciprocal services and business referrals[521][523][525] - As of December 31, 2020, the bank held an aggregate of Ch$369,248 million in loans to related parties. These transactions are conducted in the ordinary course of business on terms substantially the same as those for non-related parties[528] Item 8. Financial Information This section covers legal proceedings, noting an ongoing appeal regarding a fine for Banchile Corredores de Bolsa S.A., and dividend distributions, with a Ch$2.18 per share dividend approved for 2020, representing a 60% payout of distributable net income - The bank's subsidiary, Banchile Corredores de Bolsa S.A., is involved in a legal proceeding regarding a fine for an alleged infringement of the Securities Market Law. A civil court reduced the initial fine from UF 50,000 to UF 7,500, but the judgment is currently under appeal by both parties[530] Cash Dividends Declared per Common Share (in Ch$) | Year | Average Dividend per Share | | :--- | :--- | | 2018 | 3.76 | | 2019 | 3.53 | | 2020 | 3.47 | - In March 2021, shareholders approved a dividend of Ch$2.1805 per share against 2020 net distributable income. The board's policy is to provision for a minimum dividend equivalent to 60% of the distributable net income generated each fiscal year[535][537] Item 9. The Offer and Listing This section describes the trading markets for the company's securities, with common stock on Chilean exchanges and American Depositary Shares (ADSs) listed on the NYSE under "BCH", each representing 200 common shares, including historical price data - The company's common stock is traded on Chilean stock exchanges, primarily the Santiago Stock Exchange. Its American Depositary Shares (ADSs) are listed on the NYSE under the ticker "BCH"[540] - Each ADS represents 200 shares of common stock. This ratio was changed from 1-for-600 to 1-for-200 effective November 23, 2018[540][597] ADS Price History (NYSE, U.S.$ per ADS) | Year | High | Low | | :--- | :--- | :--- | | 2018 | 105.50 | 27.88 | | 2019 | 32.48 | 19.78 | | 2020 | 22.40 | 13.62 | Item 10. Additional Information This section provides supplementary details on corporate structure, exchange controls, and taxation, summarizing bylaws, shareholder rights, Central Bank exchange regulations, and Chilean tax implications for foreign holders, including a 35% dividend withholding tax with potential corporate tax credit - Chilean law requires a preemptive rights offering to existing shareholders for any new issuance of shares for cash. The company will evaluate whether to register these rights for ADS holders on a case-by-case basis[553][555] - Foreign exchange transactions, including the remittance of dividends and capital, must be conducted through the Formal Exchange Market and reported to the Central Bank of Chile. Currently, there are no major restrictions on repatriation of funds for foreign investors[563][565] - Cash dividends paid to foreign holders are subject to a 35% Chilean Withholding Tax. This can be partially offset by a tax credit for the corporate tax paid by the bank. Foreign holders from countries with a Double Taxation Avoidance Treaty with Chile (including the U.S., pending ratification) can use 100% of the corporate tax as a credit[568] Item 15 & 16. Controls, Procedures and Corporate Governance This section addresses internal controls and corporate governance, with management concluding effectiveness as of December 31, 2020, and EY Audit SpA issuing an unqualified report; it details the Code of Ethics, principal accountant fees, and compliance with NYSE corporate governance standards, noting foreign private issuer differences - Management assessed the company's internal control over financial reporting as effective as of December 31, 2020, based on the COSO 2013 framework. The independent registered public accounting firm, EY Audit SpA, concurred with this assessment[601][602] - The company has determined that Mr. Alfredo Ergas, a member of the Directors/Audit Committee, qualifies as an "audit committee financial expert" under SEC rules[602] Principal Accountant Fees (in Ch$ millions) | Fee Type | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Audit fees | 756 | 817 | 772 | | Tax fees | 42 | 21 | 22 | | Other fees | 129 | 182 | – | | Total fees | 927 | 1,020 | 794 |