Banco Santander-Chile(BSAC) - 2023 Q4 - Annual Report

Interim Consolidated Financial Statements Interim Consolidated Statements of Financial Position The Bank's consolidated financial position as of September 30, 2023, shows increased total assets and liabilities, driven by growth in key financial categories Interim Consolidated Statements of Financial Position (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :--------------------- | :------------------ | :------------------ | | Total Assets | 72,490,748 | 68,164,604 | | Cash and deposits | 2,411,594 | 1,982,942 | | Financial assets held for trading | 12,247,681 | 11,827,006 | | Financial assets at amortised cost | 43,665,555 | 42,560,431 | | Total Liabilities | 68,173,251 | 63,926,232 | | Financial liabilities at amortised cost | 47,015,699 | 43,704,024 | | Total Equity | 4,317,497 | 4,238,372 | - Total Assets increased by MCh$4,326,144 from December 31, 2022, to September 30, 2023, reflecting growth across various asset categories[231] - Total Liabilities increased by MCh$4,247,019 over the same period, primarily driven by higher financial liabilities at amortised cost[235] Interim Consolidated Statements of Income Consolidated profit for the nine months ended September 30, 2023, significantly decreased due to lower net readjustment income and higher credit loss expenses Interim Consolidated Statements of Income (MCh$) | Metric (9 months ended Sep 30) | 2023 (MCh$) | 2022 (MCh$) | Change (MCh$) | Change (%) | | :----------------------------- | :---------- | :---------- | :------------ | :--------- | | Net interest income | 490,671 | 472,274 | 18,397 | 3.90% | | Net readjustment income | 251,482 | 849,133 | (597,651) | -70.38% | | Net commission income | 387,406 | 298,960 | 88,446 | 29.58% | | Net financial result | 243,544 | 160,731 | 82,813 | 51.52% | | Total Operating Income | 1,393,956 | 1,794,293 | (400,337) | -22.31% | | Total Operational Costs | (669,632) | (725,110) | 55,478 | -7.65% | | Credit loss expenses | (352,282) | (253,444) | (98,838) | 39.00% | | Consolidated profit for the period | 334,238 | 719,060 | (384,822) | -53.52% | | Basic earnings per share (Ch$) | 1.70 | 3.75 | (2.05) | -54.67% | - Consolidated profit for the period decreased by 53.52% from MCh$719,060 in 2022 to MCh$334,238 in 2023 for the nine-month period[18][237] - Net readjustment income saw a substantial decrease of 70.38%, falling from MCh$849,133 in 2022 to MCh$251,482 in 2023[237] - Credit loss expenses increased by 39.00%, from MCh$253,444 in 2022 to MCh$352,282 in 2023, contributing to the profit decline[247] Interim Consolidated Statements of Other Comprehensive Income Total other comprehensive income for the nine months ended September 30, 2023, improved significantly, driven by positive changes in reclassifiable items, especially cash flow hedge accounting Interim Consolidated Statements of Other Comprehensive Income (MCh$) | Metric (9 months ended Sep 30) | 2023 (MCh$) | 2022 (MCh$) | Change (MCh$) | | :----------------------------- | :---------- | :---------- | :------------ | | Consolidated profit for the period | 334,238 | 719,060 | (384,822) | | Total other comprehensive income for the period | 103,342 | (16,231) | 119,573 | | Consolidated comprehensive income for the period | 437,580 | 702,829 | (265,249) | | Items that may be reclassified to profit or loss (before taxes) | 141,449 | (20,385) | 161,834 | | Cash flow hedge accounting | 158,072 | 29,124 | 128,948 | - Total other comprehensive income for the period shifted from a loss of MCh$16,231 in 2022 to a gain of MCh$103,342 in 2023[20] - Cash flow hedge accounting contributed significantly to this positive change, showing a gain of MCh$158,072 in 2023 compared to MCh$29,124 in 2022[20] Interim Consolidated Statements of Cash Flows Net cash flow from operating activities decreased significantly, while financing activities shifted to a net provision, and investment activities continued to use cash Interim Consolidated Statements of Cash Flows (MCh$) | Metric (9 months ended Sep 30) | 2023 (MCh$) | 2022 (MCh$) | Change (MCh$) | | :----------------------------- | :---------- | :---------- | :------------ | | Total cash flow provided by (used in) operating activities | 231,988 | 1,094,299 | (862,311) | | Total cash flow provided by (used in) investment activities | (61,246) | (7,357) | (53,889) | | Total cash flows used in financing activities | 306,900 | (460,493) | 767,393 | | Net increase (decrease) in cash and cash equivalents | 370,244 | 477,642 | (107,398) | | Final balance of cash and cash equivalents | 2,466,084 | 3,486,630 | (1,020,546) | - Net cash flow from operating activities decreased significantly by MCh$862,311, from MCh$1,094,299 in 2022 to MCh$231,988 in 2023[28] - Cash flows from financing activities shifted from a net use of MCh$460,493 in 2022 to a net provision of MCh$306,900 in 2023, largely due to bond placements[30][34][43] - Purchases of fixed assets increased from MCh$686 in 2022 to MCh$40,453 in 2023, and intangible asset purchases rose from MCh$6,769 to MCh$27,140[42] Interim Consolidated Statements of Changes in Equity Total equity increased from December 31, 2022, to September 30, 2023, influenced by profit and other comprehensive income, partially offset by dividends Interim Consolidated Statements of Changes in Equity (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :--------------------- | :------------------ | :------------------ | | Total Equity | 4,317,497 | 4,238,372 | | Equity holders of the Bank | 4,192,618 | 4,128,808 | | Non-controlling interest | 124,879 | 109,564 | | Profit for the period | 319,486 | 808,651 | | Dividends paid | (485,191) | (464,977) | - Total Equity increased by MCh$79,125 from December 31, 2022, to September 30, 2023[2][51] - Profit for the period attributable to equity holders was MCh$319,486 for the nine months ended September 30, 2023, compared to MCh$808,651 for the full year 2022[51] - Dividends paid amounted to MCh$485,191 in 2023, impacting retained earnings[51] Notes to the Interim Consolidated Financial Statements NOTE 01 - Background of the Institution Banco Santander-Chile is a Chilean banking corporation supervised by the FMC, listed on the NYSE, and controlled by Banco Santander Spain - Banco Santander-Chile is a banking corporation organized under Chilean laws, supervised by the Financial Market Commission (FMC), and listed on the NYSE through an ADR program[53] - The Bank provides a wide range of general banking services, including consumer and commercial banking, factoring, leasing, securities and insurance brokerage, and investment fund management[54] - As of September 30, 2023, Banco Santander Spain directly or indirectly controls 67.18% of the Bank's shares through its subsidiaries Teatinos Siglo XXI Inversiones SA and Santander Chile Holding SA[49] NOTE 02 - Breakdown of Main Accounting Standards This note details the accounting policies and standards used, covering preparation basis, consolidation, financial instruments, fixed assets, leases, and impairment - Interim Consolidated Financial Statements are prepared following the Compendium of Accounting Standards for Banks (CASB) and FMC instructions, adhering to IASB standards where not in conflict[55] - Control over an investee is established when the Bank has power, exposure to variable returns, and the ability to use its power to influence returns, consistent with IFRS 10 'Consolidated Financial Statements'[58] - Financial assets are classified and measured at amortised cost, fair value through other comprehensive income, or fair value through profit or loss, based on the business model and contractual cash flow characteristics (SPPI test)[102][103][111] a. Preparation Basis Interim Consolidated Financial Statements are prepared following the Compendium of Accounting Standards for Banks (CASB) and FMC instructions - These Interim Consolidated Financial Statements are prepared following the Compendium of Accounting Standards for Banks (CASB) and instructions from the Financial Market Commission (FMC)[55] - Where not covered by FMC regulations and not in conflict, generally accepted accounting criteria coinciding with International Accounting Standards Board (IASB) technical standards are applied[55] b. Preparation of the Interim Consolidated Financial Statements Consolidated financial statements incorporate individual interim financial statements of the Bank and its controlled affiliates, adhering to IFRS 10 - Consolidated financial statements incorporate individual interim financial statements of the Bank and its controlled affiliates, adhering to IFRS 10 'Consolidated Financial Statements'[58] - Control is achieved when the Bank has power over the investee, exposure or rights to variable returns, and the ability to use its power to influence returns[58] - Profit or loss and other comprehensive income components are attributed to the Bank's equity holders and non-controlling interests[62] i. Entities controlled by the Bank through participation in equity This section lists entities controlled by the Bank through equity participation, detailing their main activity, place of incorporation, and ownership percentage | Entity | Main Activity | Place of Incorporation | Sep 30, 2023 Total Ownership (%) | | :-------------------------------------- | :--------------------------------- | :--------------------- | :------------------------------- | | Santander Corredora de Seguros Limitada | Insurance brokerage | Santiago, Chile | 99.76 | | Santander Corredores de Bolsa Limitada | Brokerage of financial instruments | Santiago, Chile | 51.00 | | Santander Asesoria: Financieras Limitada| Securities brokerage | Santiago, Chile | 99.03 | | Santander SA Sociedad Securitizadors | Acquisition of loans | Santiago, Chile | 99.64 | | Klare Corredora de Seguros SA | Insurance brokerage | Santiago, Chile | 50.10 | | Santander Consumer Finance Limitada | Automotive financing | Santiago, Chile | 51.00 | | Santander Getnet Chile | Card Operator | Santiago, Chile | 100.00 | ii. Entities controlled by the Bank through other considerations The Bank consolidates entities where it determines relevant activities, exercising control despite not holding a majority equity stake - The Bank consolidates entities like Santander Gestión de Recaudación y Cobranza Limitada, Banca Santander SA, and Multiplica SpA because it determines their relevant activities, thus exercising control despite not necessarily having majority equity participation[68] iii. Associated entities This section lists associated entities where the Bank exercises significant influence, accounted for using the equity method | Associate | Main Activity | Place of Operation | Sep 30, 2023 Ownership (%) | | :-------------------------------------- | :------------------------------------------------ | :----------------- | :----------------------- | | Redbanc SA | ATM service | Santiago, Chile | 33.43 | | Transbank SA | Debit and credit card service | Santiago, Chile | 25.00 | | Centro de Compensación Automatizado SA | Electronic funds transfer and compensation services | Santiago, Chile | 33.33 | | Sociedad Interbancaria de Depósito de Valores SA | Repository of publicly offered securities | Santiago, Chile | 29.29 | | Cámara Compensación de Alto Valor SA | Payment clearing | Santiago, Chile | 15.00 | | Administrador Financiero del Transantiago SA | Smart cards for public transportation | Santiago, Chile | 20.00 | | Servicios de Infraestructura de Mercado OTC SA | Financial market infrastructure for derivatives | Santiago, Chile | 12.48 | - Associated entities are those where the Bank exercises significant influence (typically 20% or more voting rights) but not control, and are accounted for using the equity method (IAS 28)[69] iv. Share or rights in other companies Entities without control or significant influence are measured at fair value through other comprehensive income, with dividends recognized in the Income Statement - Entities where the Bank has no control or significant influence are measured at fair value in compliance with IFRS 9 'Financial Instruments'[71] - Changes in fair value for these instruments are recognized in 'Accumulated other comprehensive income - Items that will not be reclassified to profit or loss', while dividends are recorded in the Income Statement[72] c. Non-controlling interest Non-controlling interest represents the portion of net income and net assets not owned by the Bank, presented separately in financial statements - Non-controlling interest represents the portion of net income and net assets not owned by the Bank, presented separately in the Interim Consolidated Statements of Income and Financial Position[77] - For entities controlled through 'other considerations' (not equity participation), profit and equity are fully presented as non-controlling interest[78] d. Reporting segments Operating segments are identified based on business activities, regularly reviewed by the CEO for resource allocation and performance assessment - Operating segments are identified as components engaging in business activities, whose results are regularly reviewed by the CEO for resource allocation and performance assessment, and for which discrete financial information is available[82][83] - Segments are reported separately if their revenues, results, or assets exceed 10% of the combined total across all operating segments[80] e. Functional and presentation currency The Chilean Peso is the Bank's functional and presentation currency, reflecting its primary economic environment - The Chilean Peso is defined as the Bank's functional and presentation currency, as it is the currency of the primary economic environment in which the Bank operates[85] f. Transactions in foreign currency Foreign currency assets and liabilities are translated at month-end market exchange rates, with gains/losses recognized from exchange rate changes and transactions - Assets and liabilities denominated in foreign currencies, primarily US dollars, are translated into Chilean Pesos at the market exchange rate at the end of the reported month[86] - Net foreign exchange gain and loss includes effects of exchange rate changes on foreign currency-denominated assets and liabilities, and profit/loss on foreign exchange spot and forward transactions[87] g. Cash and cash equivalents Cash flow statements use the indirect method, starting with pre-tax income and including deposits with the Central Bank and other banks - The indirect method is used for cash flow statements, starting with consolidated pre-tax income and incorporating non-cash transactions and cash flows from investing/financing activities[88] - Cash and cash equivalents include deposits with the Central Bank of Chile, domestic banks, and abroad[89] h. Definitions, classification and measurement of financial assets/liabilities This section defines, classifies, and measures financial assets and liabilities based on business models, contractual cash flows, and IFRS 9 criteria - A financial instrument is any contract giving rise to a financial asset in one entity and a financial liability or equity instrument in another[91] - Financial assets are classified based on the entity's business models for managing them and the contractual cash flow characteristics (SPPI test)[102][103] - Financial assets are subsequently measured at amortised cost, fair value through other comprehensive income, or fair value through profit or loss, while financial liabilities are generally measured at amortised cost, except for derivatives[111][114] i. Definitions This section provides core definitions for financial instruments, financial assets, and financial liabilities - Defines 'financial instrument' as a contract creating a financial asset and a financial liability or equity instrument in different entities[91] - Defines 'financial asset' as cash, an equity instrument of another entity, or a contractual right to receive/exchange financial assets under favorable conditions[92] - Defines 'financial liability' as a contractual obligation to deliver/exchange financial assets under potentially unfavorable conditions[93] ii. Initial recognition Financial assets or liabilities are recognized when the entity becomes a party to the contractual terms, with conventional purchases/sales recognized using trade or settlement date accounting - A financial asset or liability is recognized when the entity becomes part of the contractual terms of the instrument[101] - Conventional purchases or sales of financial assets are recognized using trade date or settlement date accounting[101] iii. Classification of financial assets/liabilities Financial assets are classified based on business model and contractual cash flow characteristics, while most financial liabilities are measured at amortised cost - Financial assets are classified based on the business model for managing them and the contractual cash flow characteristics (SPPI test)[102][103] - Business models include 'hold to collect cash flows', 'maintain for collection and sale', and 'other models' (fair value through profit or loss)[105] - All financial liabilities are subsequently measured at amortised cost, except for derivative liabilities measured at fair value through profit or loss[109] iv. Measurement of financial assets/liabilities Financial assets are measured at amortised cost, fair value through other comprehensive income, or fair value through profit or loss, based on specific criteria - Financial assets are measured at amortised cost if held to collect cash flows and contractual terms result in solely principal and interest payments[111] - Financial assets are measured at fair value through other comprehensive income if held for both collecting contractual cash flows and selling, and contractual terms result in solely principal and interest payments[111] - Financial assets not meeting amortised cost or FVOCI criteria are measured at fair value through profit or loss[112] v. Derecognition of financial assets/liabilities Financial assets are derecognized when contractual rights expire or risks/rewards are transferred, while liabilities are derecognized when extinguished - Financial assets are derecognized when contractual rights to cash flows expire or are transferred, or when substantially all risks and rewards of ownership are transferred[115][213] - Financial liabilities are derecognized only when extinguished (discharged, cancelled, or expired)[117] vi. Offsetting a financial asset with a financial liability Financial assets and liabilities are offset only when there is a legally enforceable right and an intention to settle net, with no offsets reported by the Bank - Financial assets and liabilities are offset and presented net only when there is a legally enforceable right to set off and an intention to settle net or realize/settle simultaneously[118] - As of September 30, 2023, and December 31, 2022, the Bank has no financial asset/liability offsets[118] i. Financial derivatives and accounting hedges The Bank uses financial derivatives for risk management and trading, with specific criteria for hedge accounting and recognition of value changes - The Bank uses financial derivatives for customer risk management, proprietary position risk management (hedging), and to benefit from value changes (trading)[119] - For a derivative to qualify as a hedging instrument, it must cover specific risks (fair value, cash flow, or net investment), be highly effective, and be adequately documented[122][124][125] - Changes in value for fair value hedges are included in 'Net income (expense) from financial operations', while for cash flow hedges, the effective portion is recorded in 'Valuation accounts - cash flow hedges' within equity[126][127] j. Fair value of financial assets and liabilities Fair value is defined as the exit price in an orderly transaction, estimated using market prices or validated models, and categorized by a three-level hierarchy - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market at the measurement date[131] - When no market price exists, fair value is estimated using prices from recent similar transactions or validated valuation models, maximizing observable input data[137][138] - A fair value hierarchy (Level 1, 2, 3) is established, prioritizing quoted prices in active markets (Level 1) and giving lowest priority to unobservable inputs (Level 3)[149] k. Fixed assets Fixed assets are presented at acquisition cost minus depreciation and impairment, with depreciation calculated using the straight-line method over estimated useful lives - Fixed assets for own use are presented at acquisition cost minus accumulated depreciation and impairment loss[161] - Depreciation is calculated using the straight-line method over the estimated useful life, with land having an indefinite life[162] Useful Life of Fixed Assets (Months) | ITEM | Useful Life (Months) | | :---------------------------------- | :------------------- | | Carpets and curtains | 36 | | Computers and Hardware | 36 | | Vehicles | 36 | | ATMs and teleconsultations | 60 | | Machines and general equipment | 60 | | Office furniture | 60 | | Telephone and communication systems | 60 | | Security systems | 60 | | Rights over telephone lines | 60 | | Air conditioning systems | 84 | | Other installations | 120 | | Buildings | 1,200 | l. Leases As a lessee, the Bank recognizes right-of-use assets and lease liabilities, while as a lessor, leases are classified as financial or operating - As a lessee, the Bank recognizes a right-of-use asset and a lease liability at the lease start date, calculated as the present value of lease payments discounted at the incremental interest rate[171] - As a lessor, the Bank classifies leases as financial or operating based on whether substantially all risks and benefits of the asset are transferred, recognizing lease rentals on a straight-line income basis for operating leases[174][175] - For third-party financing, the present value of lease payments receivable is recognized as loans under 'Loans and receivables from customers', with financial income/expense recorded to achieve a constant return rate[177] m. Factoring transactions Factored receivables are valued at the disbursed amount, with the price difference recognized as interest income, and the Bank assumes insolvency risks - Factored receivables are valued at the amount disbursed by the Bank, with the price difference recorded as interest income using the effective interest method over the financing period[178] - The Bank assumes insolvency risks when the assignment of instruments involves no liability on the part of the assignee[178] n. Intangible assets Intangible assets are non-monetary assets without physical substance, recognized at cost, and amortised linearly over their estimated useful life - Intangible assets are non-monetary assets without physical substance, recognized at acquisition or production cost when reliably measurable and expected to generate future economic benefits[179] - Internally developed computer software is recorded as an intangible asset if identifiable and capable of generating future economic benefits[180] - Intangible assets are amortised linearly over their estimated useful life, typically 36 months, unless a different period of benefit is demonstrated[180] o. Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered primarily through a sale transaction within one year - Non-current assets are classified as held for sale if their carrying amount will be recovered primarily through a sale transaction rather than continued use, requiring immediate availability and high sale probability within one year[182] - Assets classified as held for sale are measured at the lower of their carrying amount or fair value less selling costs[183] - Assets received or awarded in lieu of payment are recorded at an agreed price or judicial auction amount, and subsequently valued at the lower of the initially recorded figure and net realisable value[185][187] p. Income and expense recognition Interest income and expense are recognized on an accrual basis using the effective interest rate method, while commission income follows IFRS 15 - Interest income and expense are recognized on an accrual basis using the effective interest rate method, ceasing accrual when a loan is 90 days overdue[190] - Commission income and expenses are recognized under IFRS 15 'Revenue from contracts with customers' when performance obligations are satisfied by transferring the service to the customer[194][198] - Financial fees and commissions arising on loan origination are accrued and recognized over the life of the loan[206] q. Provisions for credit risk on loans and receivables and contingent liabilities The Bank establishes provisions for expected credit losses on loans and contingent liabilities, classifying debtors and applying standard or internal provisioning models - The Bank evaluates its loan and contingent loan portfolio to create sufficient provisions for expected losses, using individual and group assessment models established by the FMC[725] - Debtors are classified into Normal, Substandard, and Impaired portfolios based on credit quality, payment ability, and delinquency, with specific probability of non-performance and severity rates[29][272][294][728] - For mortgage and commercial loans, the Bank applies standard provisioning methods from the CASB, while for consumer loans, it uses internal models, always recognizing the higher value between standard and internal methods[284][304][308] r. Impairment of financial assets other than loans and receivables and contingent liabilities The Bank applies IFRS 9's three-step impairment model, using 12-month or lifetime expected credit loss based on credit risk changes and forward-looking information - The Bank applies IFRS 9 'Financial Instruments' to determine impairment, using a dual measurement approach: 12-month expected credit loss or lifetime expected credit loss[348][349][369][370] - The 'three-step' impairment model classifies financial instruments into Phase 1 (12-month ECL), Phase 2 (lifetime ECL due to significant credit risk increase), and Phase 3 (credit-impaired assets, lifetime ECL)[350][373] - Expected credit loss (ECL) estimates are based on probability of default (PD), loss given default (LGD), and exposure at default (EAD), incorporating forward-looking information and multiple scenarios[374] s. Impairment of non-financial assets Non-financial assets are reviewed for impairment indicators, and if the carrying amount exceeds the recoverable amount, it is written down - Non-financial assets are reviewed at each reporting date for impairment indicators, and if the carrying amount exceeds the recoverable amount, it is written down[377] - The recoverable amount is the higher of fair value minus disposal costs and value in use, with impairment losses recognized immediately in profit or loss[360] t. Provisions, contingent assets and liabilities Provisions are recognized for present legal or constructive obligations with probable resource outflows, while contingent items are potential rights/obligations from past events - Provisions are recognized when there is a present legal or constructive obligation from past events, a probable outflow of resources to settle it, and the amount can be reliably measured[397] - Contingent assets/liabilities are potential rights/obligations arising from past events, confirmed only by uncertain future occurrences outside the Bank's control[382] u. Income tax and deferred taxes Deferred tax assets and liabilities are recognized for future tax effects of temporary differences, calculated using applicable tax rates and netted on a consolidated level - Deferred tax assets and liabilities are recognized for future tax effects of temporary differences between carrying amounts and tax bases, calculated using the tax rate applicable in the year of realization/settlement[383] - Tax items are cleared at the taxing entity's level and then netted on a consolidated level for presentation in the Interim Consolidated Statements of Financial Position[384] v. Employee benefits The Bank offers a defined benefit pension plan for executives, calculated using the projected unit credit method, and measures cash-settled share-based payments at fair value - The Bank offers a defined benefit pension plan for main executives, with benefits accruing if they remain employed until age 60[385][403] - The projected unit credit method is used to calculate the present value of defined benefit obligations and current service costs[404] - Cash-settled share-based payments to executives are measured at fair value, with changes recognized in the income statement[407][429] w. Use of Estimates Financial statement preparation requires management estimates and assumptions, with key areas including loan loss allowances, asset impairment, and fair value measurements - Preparation of financial statements requires management to make estimates and assumptions affecting reported values of assets, liabilities, revenues, and expenses, with actual results potentially differing[408] - Key estimates include allowances for loan loss, impairment of assets, useful lives of tangible/intangible assets, fair value of financial instruments, and current/deferred taxes[412][433] x. Temporary acquisition (assignment) of assets Purchases or sales of financial assets under non-optional repurchase agreements are recorded as financial assignments/receipts, with price differences recognized as financial interest - Purchases or sales of financial assets under non-optional repurchase agreements (repos) are recorded as financial assignments/receipts based on the nature of the debtor/creditor[412] - The price difference between purchase and sale is recorded as financial interest over the contract's life[434] y. Earnings per share Basic earnings per share are calculated by dividing net income by weighted average shares, with no dilutive instruments affecting diluted EPS - Basic earnings per share are calculated by dividing net income attributable to equity holders by the weighted average number of outstanding shares[433] - Diluted earnings per share adjust for potential dilutive effects of stock options, warrants, and convertible debt; however, the Bank held no such instruments as of September 30, 2023, and December 31, 2022[433] z. Assets and investment funds managed by the Bank Assets managed by the Bank's consolidated entities but owned by third parties are not included in the financial statements, with commissions recognized as income - Assets managed by the Bank's consolidated entities but owned by third parties are not included in the Interim Consolidated Statements of Financial Position[413] - Commissions generated from this activity are included in 'Fee and commission income' in the Interim Consolidated Statement of Income[413] aa. Provision for mandatory dividends The Bank recognizes a liability for mandatory dividends, requiring at least 30% of net income distribution, recorded as a deduction from retained earnings - The Bank recognized a liability (provision) for minimum or mandatory dividends, requiring at least 30% of net income to be distributed, unless otherwise resolved by shareholders[414] - This provision is recorded as a deduction from 'Retained earnings' under 'Provision for dividends, interest payments and repricing of equity financial instruments' in the Interim Consolidated Statements of Changes in Equity[414] NOTE 03 - New Accounting Pronouncements Issued and Adopted or Issued and Not Yet Adopted This note outlines new accounting pronouncements from FMC and IASB, detailing those adopted without material impact and those issued but not yet adopted - General Standard No 484 (FMC) establishes requirements for fees charged on money lending transactions, effective August 1, 2023, with no material impact on the Bank's financial statements[417][419] - Amendments to IAS 1 (liability classification), IAS 8 (accounting estimates), IAS 1 and IFRS 2 (accounting policy disclosures), and IAS 12 (deferred taxation) have been adopted, with no material impact on the Bank's financial statements[420][421][439][441] - New pronouncements, including IFRS S1 (sustainability-related financial disclosures) and IFRS S2 (climate-related disclosures), are issued but not yet mandatory, with the Administration assessing their potential effects for effective dates starting January 1, 2024[445][465] 1. Pronouncements issued and adopted This section details new accounting pronouncements issued by the FMC and IASB that have been adopted, with no material impact on the Bank's financial statements - General Standard No 484 from the FMC, effective August 1, 2023, sets rules for commissions on credit operations, defining inherent services and requiring clear debtor information[417][418][419] - IASB amendments adopted include IAS 1 (liability classification), IAS 8 (definition of accounting estimates), IAS 1 and IFRS 2 (disclosures of accounting standards), and IAS 12 (deferred taxation from single transactions), all with no material impact on the Bank's financial statements[420][421][439][441] 2. Issued pronouncements which have not yet been adopted This section outlines new accounting pronouncements issued but not yet adopted, including FMC's new provisioning methodology and IASB's sustainability disclosures - The FMC is consulting on a new standardized methodology for calculating provisions for consumer and contingent loans, expected to be effective by January 2025[442] - IASB amendments not yet adopted include IAS 7 and IFRS 7 (supplier finance arrangements), IFRS S1 (general sustainability-related financial disclosures), and IFRS S2 (climate-related disclosures), all with effective dates starting January 1, 2024, and currently under assessment by management[444][445][465] NOTE 04 - Accounting Changes As of the issuance date of these Interim Consolidated Financial Statements, there were no accounting changes to disclose - As of the date these Interim Consolidated Financial Statements were issued, there were no accounting changes to disclose[467] NOTE 05 - Significant Events Significant events include dividend distribution, Board changes, bond issuances, Transbank stock sale process, and a new Central Bank liquidity program - At the April 19, 2023, Shareholders' Meeting, 60% of 2022 net profit (MCh$485,191) was approved for dividend distribution (Ch$2.57469221 per share), with the remaining 40% allocated to increase reserves and retained earnings[452] - In 2023, the Bank issued current FMC bonds for CLP 750,000,000,000 and UF 21,000,000[455] - The Central Bank of Chile launched a special program for liquidity certificates (PDL) on September 26, 2023, with the Bank investing MCh$1,903,008 in these instruments by October 24, 2023[456] - Transbank shareholder banks began the process of selling their stock ownership due to changes in the payment system model[487] NOTE 06 - Business Segment The Bank manages operations through Retail Banking, Middle-market, Global Corporate Banking, and Corporate Activities, assessing performance based on various income and expense metrics - The Bank's business segments include Retail Banking (individuals and SMEs), Middle-market (companies and large corporations), Global Corporate Banking (foreign and Chilean multinational companies), and Corporate Activities ('Other') for unallocated activities and financial management[459][476][491][492][499] - Inter-segment transactions are conducted under normal commercial terms, and each segment's assets, liabilities, and results are directly attributable or reasonably allocable[490] Net Segment Contribution (9 months ended Sep 30, 2023) (MCh$) | Segment | Loans and receivables from clients (1) (MCh$) | Demand and time deposits (2) (MCh$) | Net Interest and adjustment Income (MCh$) | Net commission Income (MCh$) | Net gains on financial transactions (3) (MCh$) | Provisions (MCh$) | Support Expenses (4) (MCh$) | Net segment contribution (MCh$) | | :----------------------------- | :-------------------------------------------- | :---------------------------------- | :---------------------------------------- | :--------------------------- | :--------------------------------------------- | :---------------- | :-------------------------- | :------------------------------ | | Retail Banking | 28,179,460 | 13,592,425 | 1,023,549 | 290,631 | 31,889 | (319,252) | (493,764) | 533,053 | | Middle-market | 8,820,787 | 5,716,751 | 348,347 | 48,489 | 21,198 | (39,222) | (79,802) | 299,010 | | Corporate Investment Banking | 3,124,061 | 7,776,203 | 186,294 | 36,400 | 142,998 | 5,558 | (67,745) | 303,505 | | Corporate Activities ("Other") | (82,152) | 1,469,941 | (816,037) | 11,886 | 47,459 | 634 | (10,286) | (766,344) | | Total | 40,042,156 | 28,555,320 | 742,153 | 387,406 | 243,544 | (352,282) | (651,597) | 369,224 | NOTE 07 - Cash and Cash Equivalents Total cash and cash equivalents increased as of September 30, 2023, primarily driven by higher cash and deposits in domestic banks and cash in collection process Cash and Cash Equivalents (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Cash and deposits in banks | 2,411,594 | 1,982,942 | | Cash | 1,210,438 | 1,110,830 | | Deposits in the Central Bank of Chile| 59,687 | 444,491 | | Deposits in domestic banks | 1,140,363 | 424,975 | | Cash in collection process | 2,088,892 | 843,816 | | Total cash and cash equivalents | 2,466,085 | 2,079,886 | - Total cash and cash equivalents increased by MCh$386,199 from December 31, 2022, to September 30, 2023[556] - Cash in collection process saw a substantial increase from MCh$843,816 to MCh$2,088,892, indicating a higher volume of pending settlements[541] NOTE 08 - Financial Assets Held for Trading at Fair Value with Changes in Profit and Loss Financial assets held for trading increased as of September 30, 2023, primarily due to growth in financial derivative contracts and debt financial instruments Financial Assets Held for Trading at Fair Value with Changes in Profit and Loss (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Total Financial assets held for trading | 12,247,681 | 11,827,006 | | Financial derivatives contracts | 11,975,997 | 11,672,960 | | Debt financial instruments | 271,684 | 154,046 | | Currency forwards (Notional) | 55,174,288 | 34,652,380 | | Interest rate swaps (Notional) | 88,325,447 | 93,513,106 | | Currency and interest rate swaps (Notional) | 64,709,122 | 61,029,754 | - Financial derivatives contracts increased by MCh$303,037, from MCh$11,672,960 to MCh$11,975,997[577] - Debt financial instruments saw a significant increase of MCh$117,638, from MCh$154,046 to MCh$271,684[577] - Notional amount of Currency forwards increased by MCh$20,521,908, while Interest rate swaps decreased by MCh$5,187,759[577][559] NOTE 09 - Non-Marketable Financial Assets Mandatorily Measured at Fair Value Through Profit or Loss The Bank has no assets classified in the category of non-marketable financial assets mandatorily measured at fair value through profit or loss - The Bank has no assets classified in this category[580][624] NOTE 10 - Financial Assets and Liabilities Designated at Fair Value Through Profit or Loss The Bank has no financial assets or liabilities designated at fair value through profit or loss - The Bank has no assets classified in this category[581] NOTE 11 - Financial Assets at Fair Value Through Other Comprehensive Income Financial assets at fair value through other comprehensive income increased, primarily in debt instruments of the Chilean Central Bank and Government, with unrealized losses deemed not impaired Financial Assets at Fair Value Through Other Comprehensive Income (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Total Financial assets at FVOCI | 7,058,984 | 6,023,039 | | Debt financial instruments | 6,961,694 | 5,880,733 | | Instruments of the Chilean Central Bank and Government | 5,190,946 | 4,074,413 | | Unrealised profit (loss) | (125,900) | (109,392) | | Expected credit loss (Debt financial instruments) | 1,259 | 877 | | Expected credit loss (Commercial loans) | 136 | 326 | - Total financial assets at FVOCI increased by MCh$1,035,945 from December 31, 2022, to September 30, 2023[625] - Unrealized profit (loss) for the period was MCh$(125,900) as of September 30, 2023, compared to MCh$(109,392) as of December 31, 2022[586] - The Bank concluded that instruments with unrealized losses were not impaired, attributing declines to temporary market conditions and its intention/ability to hold securities[605] NOTE 12 - Financial Derivative Contracts for Hedge Accounting Purposes The Bank uses financial derivative contracts for micro- and macro-hedges of interest rate and foreign currency risks, maintaining high effectiveness in its hedging strategies Financial Derivative Contracts for Hedge Accounting Purposes (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Fair value hedge derivatives (Assets) | 487,004 | 289,326 | | Fair value hedge derivatives (Liabilities) | 1,536,701 | 1,499,436 | | Cash flow hedge derivatives (Assets) | 349,126 | 188,436 | | Cash flow hedge derivatives (Liabilities) | 887,268 | 1,289,358 | | Total Assets (Hedge Accounting) | 836,130 | 477,762 | | Total Liabilities (Hedge Accounting) | 2,423,969 | 2,788,794 | - The Bank uses cross-currency swaps, interest rate swaps, and call money swaps for fair value micro-hedges to cover interest rate risk, changing long-term issues from fixed to floating rates[612] - Cash flow micro-hedging involves cross-currency swaps, forwards, and cross-currency swaps to hedge interest rate and foreign currency fluctuations, as well as inflation risk[249] - Macro-hedges are applied to mortgage and commercial loan portfolios, with figures of MCh$129,406 (assets) and MCh$131,410 (liabilities) for mark-to-market valuation as of September 30, 2023[678][688][722] NOTE 13 - Financial Assets at Amortised Cost Financial assets at amortised cost increased, primarily driven by loans and receivables from clients, with detailed movements in credit risk provisions and credit concentration Financial Assets at Amortised Cost (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Total Financial assets at amortised cost | 43,665,555 | 42,560,431 | | Rights under repurchase and securities lending agreements | 4,155 | 0 | | Debt financial instruments | 4,752,706 | 4,867,591 | | Interbank loans | 12,995 | 32,955 | | Loans and receivables from clients | 38,895,699 | 37,659,885 | | Provisions established for credit risk | (1,133,457) | (1,036,525) | - Loans and receivables from clients increased by MCh$1,235,814, reaching MCh$38,895,699 as of September 30, 2023[707] - Provisions established for credit risk increased by MCh$96,932, reflecting changes in portfolio risk[707] - The concentration of credit risk by economic activity shows significant exposure in Real estate services (MCh$2,580,098) and Wholesale trade (MCh$1,802,223) as of September 30, 2023[1352] a. Rights under repurchase and securities lending agreements The Bank's net balances in instruments with rights under repurchase commitments amounted to MCh$4,155 as of September 30, 2023, with a MCh$1 million credit risk impairment - As of September 30, 2023, the Bank's net balances in instruments with rights under repurchase commitments amount to MCh$4,155[709] - The credit risk impairment for these rights is MCh$1 million[709] b. Debt financial instruments Debt financial instruments, primarily from the Chilean Central Bank and Government, totaled MCh$4,753,711, with provisions for credit risk increasing to MCh$1,005 Debt Financial Instruments (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Debt financial instruments | 4,753,711 | 4,868,485 | | Instruments of the Chilean Central Bank and Government | 4,753,711 | 4,868,485 | | Accrued impairment on debt financial instruments | (1,005) | (894) | - Provisions for credit risk on debt financial instruments amounted to MCh$1,005 as of September 30, 2023, an increase from MCh$894 at December 31, 2022[681][709] c. Interbank loans Interbank loans significantly decreased from December 31, 2022, to September 30, 2023, with a corresponding reduction in provisions for foreign bank loans Interbank Loans (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Total Interbank loans | 13,000 | 32,991 | | Foreign trade loans Chilean exports | 13,000 | 32,991 | | Established provisions | 5 | 36 | - Interbank loans decreased significantly from MCh$32,991 at December 31, 2022, to MCh$13,000 at September 30, 2023[697][699] - Provisions for loans to foreign banks decreased from MCh$36 to MCh$5 over the same period[697][699] d. Loans and receivables from clients Net financial assets from loans and receivables increased, driven by growth in commercial and mortgage loans, alongside an increase in credit risk provisions Loans and Receivables from Clients (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Commercial loans | 17,938,478 | 17,684,589 | | Mortgage loans | 16,650,160 | 15,729,009 | | Consumer loans | 5,440,518 | 5,282,812 | | Provisions established for credit risk | (1,133,457) | (1,036,525) | | Net financial assets | 38,895,699 | 37,659,885 | - Net financial assets from loans and receivables increased by MCh$1,235,814 from December 31, 2022, to September 30, 2023[707] - Commercial loans increased by MCh$253,889, while mortgage loans increased by MCh$921,151[707] - Provisions for commercial loans increased from MCh$(641,014) to MCh$(665,657)[707] e. Contingent loan balances Contingent loan exposure for guarantees and sureties decreased significantly, while established provisions for contingent loans saw a slight increase Contingent Loan Balances (MCh$) | Metric | Sep 30, 2023 (MCh$) | Dec 31, 2022 (MCh$) | | :----------------------------------- | :------------------ | :------------------ | | Guarantees and sureties | 574,452 | 924,172 | | Letters of credit for goods movement operations | 38,005 | 51,104 | | Transactions related to contingent events | 772,954 | 757,433 | | Immediately repayable unrestricted credit lines | 1,008,473 | 972,244 | | Credits for higher studies Law No 20:027 (CAE) | 335,817 | 343,430 | | Other irrevocable credit commitments | 0 | 0 | | Established provisions | 17,500 | 17,218 | - Contingent loan exposure for Guarantees and sureties decreased significantly from MCh$924,172 to MCh$574,452[263][719] - Established provisions for contingent loans increased slightly from MCh$17,218 to MCh$17,500[263][719] f. Breakdown of movement in established provisions - Receivable from banks Provisions for receivables from banks remained stable at MCh$36, with new loans originated offset by payments from loans Breakdown of Movement in Established Provisions - Receivable from Banks (MCh$) | Metric (Receivable from banks) | Jan 1, 2023 (MCh$) | Sep 30, 2023 (MCh$) | | :----------------------------------- | :----------------- | :------------------ | | Balance as of January 1, 2023 | 36 | 36 | | New loans originated | 98 | 98 | | Paid from loans | (128) | (128) | | Exchange rate difference | (1) | (1) | | Other changes in provisions | 5 | 5 | | Balance as of September 30, 2023 | 36 | 36 | - The balance of provisions for receivables from banks remained stable at MCh$36 from January 1 to September 30, 2023[721] - New loans originated added MCh$98, while payments from loans reduced provisions by MCh$128[721] g. Breakdown of movement in established provisions - Commercial Loans Provisions for commercial loans increased from January 1 to September 30, 2023, influenced by new originations, payments, and charge-offs Breakdown of Movement in Established Provisions - Commercial Loans (MCh$) | Metric (Commercial Loans) | Jan 1, 2023 (MCh$) | Sep 30, 2023 (MCh$) | | :----------------------------------- | :----------------- | :------------------ | | Balance as of January 1, 2023 | 641,014 | 641,014 | | Change in measurement without portfolio reclassifying | 199,724 | 199,724 | | New loans originated | 339,401 | 339,401 | | Paid from loans | (498,177) | (498,177) | | Provision application for charge-offs | (49,072) | (49,072) | | Exchange rate difference | 6,013 | 6,013 | | Balance as of September 30, 2023 | 665,657 | 665,657 | - Provisions for commercial loans increased from **MCh