Banco de Chile(BCH) - 2023 Q4 - Annual Report

Part I Key Information The bank faces operational, country-specific, and security-related risks associated with its business and ADSs Risks Relating to our Operations and the Chilean Banking Industry Operational risks include loan portfolio quality, regulatory changes, market competition, and rising fraud losses - The bank's loan portfolio growth slowed to 2.5% in 2023, driven by residential mortgage and consumer loans[19][21] - The bank is subject to new Basel III capital requirements, including a 1.25% systemic buffer and a 0.5% countercyclical buffer[24][26] - As of December 31, 2023, the bank's Liquidity Coverage Ratio (LCR) was 289% and its Net Stable Funding Ratio (NSFR) was 127%, both in full compliance[27] - Net operational write-offs due to external fraud increased significantly to Ch$18,050 million in 2023, largely due to new liability laws[30] - New interchange fee limits are expected to reduce fiscal year 2024 gross revenues by approximately Ch$22,500 million[34] Risks Relating to Chile The bank's performance is exposed to Chile's economic slowdown, political uncertainty, and currency fluctuations Chilean Economic Indicators (2022 vs. 2023) | Indicator | 2022 | 2023 | | :--- | :--- | :--- | | GDP Growth | 2.4% | 0.2% | | Household Consumption Growth | 2.9% | -5.2% | | Private Investment Growth | 2.8% | -1.1% | | Average Unemployment Rate | 7.9% | 8.7% | | Inflation (CPI Variation) | 12.8% | 3.9% | - In October 2023, S&P maintained Chile's sovereign credit rating at 'A' but revised the outlook from stable to negative[72] - The Chilean government is discussing a new tax reform proposal, the "Tax Deal for Development," creating uncertainty for the bank[74] - The value of the U.S. dollar relative to the Chilean peso increased by approximately 2.9% during 2023, affecting ADS values[79] Risks Relating to our American Depositary Shares (ADSs) ADS holders face risks from concentrated ownership, limited market liquidity, and constraints on exercising rights - As of April 19, 2024, principal shareholder LQ Inversiones Financieras S.A. (LQIF) holds approximately 51.15% of the voting rights[93] - The Chilean market for the bank's shares is described as small and somewhat illiquid, which may impair the ability of ADS holders to sell shares[94] - ADS holders face practical limitations in exercising voting and preemptive rights due to procedural and registration requirements[95] Information on the Company The company's history, business segments, strategy, regulatory landscape, and key financial statistics are detailed History and Development of the Bank The bank's evolution since 1893 is marked by key mergers, debt repayment, and a recent focus on digital transformation - In 2023, Banco de Chile maintained its leadership with a 27.7% market share in net income and a ROAE of 26.3% (under Chilean GAAP)[109] - The bank fully paid off its subordinated debt to the Central Bank on April 30, 2019, a legacy of the 1982-1983 economic crisis[110] Capital Expenditures (in millions of Ch$) | Category | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Computer equipment | 22,367 | 9,823 | 11,136 | | Furniture, machinery & installations | 2,349 | 2,090 | 2,922 | | Real estate | 9,477 | 6,041 | 10,277 | | Software | 30,222 | 56,891 | 59,955 | | Total | 64,415 | 75,597 | 84,706 | - The capital expenditure budget for 2024 is approximately Ch$94,850 million, with 81.5% allocated to information technology investments[120] Business Overview The bank's strategy focuses on customer-centricity across its retail, wholesale, treasury, and subsidiary segments Market Position as of December 31, 2023 | Product/Service | Market Share | Market Position | | :--- | :--- | :--- | | Commercial Loans | 16.2% | 2nd | | Current Accounts Balances (Individuals) | 24.4% | 1st | | Mutual Funds (Assets Under Management) | 21.9% | 1st | | Net Fees and Commissions Income | 20.1% | 1st | - The bank's digital FAN Account reached 1.4 million customers by the end of 2023, promoting financial inclusion[132][149] - The bank maintains a prudent risk profile, with a delinquency ratio (90+ days past due) of 1.43% as of Dec 31, 2023, below the industry average[136] Loan Portfolio by Business Segment (Dec 31, 2023) | Segment | Loan Amount (millions of Ch$) | % of Total Loans | | :--- | :--- | :--- | | Retail banking | 24,132,997 | 64.2% | | Wholesale banking | 13,457,648 | 35.8% | | Total | 37,600,703 | 100.0% | Regulation and Supervision The bank operates under strict regulations from the CMF and Central Bank, including Basel III and new Fintech laws - The CMF is the primary supervisor of the Chilean banking industry, responsible for authorizing, enforcing, and sanctioning[274][276] - Under Basel III, the bank must meet minimum capital ratios such as CET1 ≥ 4.5%, plus additional conservation and systemic buffers[293][295] - Regulatory liquidity requirements include a Liquidity Coverage Ratio (LCR) limit of 100% and a Net Stable Funding Ratio (NSFR) limit phasing to 100%[310] - A new methodology for calculating expected credit losses on consumer loans is expected to have an adverse impact of Ch$60,000-Ch$65,000 million[341] Selected Statistical Information Key financial statistics show a lower net interest margin, loan portfolio growth, and evolving asset quality ratios Net Interest Margin Analysis | Metric | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Average interest earning assets (Ch$M) | 42,666,108 | 46,245,217 | 48,911,534 | | Net interest earned (Ch$M) | 1,618,943 | 2,498,299 | 2,233,180 | | Net interest margin | 3.79% | 5.40% | 4.57% | Loan Portfolio Composition (as of Dec 31) | Loan Type | 2022 (Ch$M) | 2023 (Ch$M) | | :--- | :--- | :--- | | Commercial loans | 20,308,745 | 20,030,044 | | Mortgage loans | 11,422,322 | 12,310,768 | | Consumer loans | 4,995,230 | 5,310,462 | | Total loans | 36,726,297 | 37,651,274 | Asset Quality Ratios (as of Dec 31) | Ratio | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Past-due loans (90+ days) / Total loans | 0.90% | 1.17% | 1.57% | | Allowances for loan losses / Total loans | 1.97% | 2.24% | 1.89% | Operating and Financial Review and Prospects The bank's 2023 financial performance saw lower net income due to reduced inflation, offset by lower credit losses Operating Results Net income decreased 5.0% in 2023, as lower net interest income was partially offset by reduced credit loss provisions Consolidated Net Income Components (in millions of Ch$) | Component | 2022 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Net interest and UF indexation income | 2,266,129 | 1,920,792 | (15.2)% | | Net fees and commissions income | 522,132 | 534,032 | 2.3% | | Other income (loss), net | 354,362 | 561,764 | 58.4% | | Expected credit losses | (412,130) | (201,944) | (51.0)% | | Operating expenses | (995,483) | (1,118,503) | 12.4% | | Income before income taxes | 1,735,010 | 1,696,141 | (2.2)% | | Net income | 1,445,801 | 1,374,027 | (5.0)% | - The decrease in net interest income was primarily driven by lower inflation, which reduced income from the bank's net asset position in UF[509] - Provisions for expected credit losses decreased significantly due to a better economic outlook for 2024[509] Income Before Tax by Business Segment (in millions of Ch$) | Segment | 2022 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Retail banking | 766,304 | 634,301 | (17.2)% | | Wholesale banking | 717,197 | 746,013 | 4.0% | | Treasury and Money Market | 97,342 | 40,131 | (58.8)% | | Subsidiaries | 104,349 | 97,077 | (7.0)% | Liquidity and Capital Resources The bank maintains a strong liquidity and capital position, with key ratios well above regulatory minimums Key Ratios as of December 31, 2023 | Ratio | Actual | Phase-In Regulatory Limit | | :--- | :--- | :--- | | Leverage Ratio | 9.04% | 3.0% | | Common Equity Tier 1 (CET1) Ratio | 13.73% | 7.0% | | Tier 1 Ratio | 13.73% | 8.5% | | Total Capital Ratio | 17.45% | 10.5% | - As of December 31, 2023, the bank's LCR was 289% and NSFR was 127%, demonstrating strong liquidity positions[594] Consolidated Cash Flows (in millions of Ch$) | Activity | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 3,005,641 | 128,612 | 1,725,787 | | Net cash used in investing activities | (2,987,305) | (847,815) | (346,500) | | Net cash from (used in) financing activities | 1,376,413 | (161,803) | (1,556,020) | Directors, Senior Management and Employees The bank's governance is led by an 11-member board, with a total employee count of 12,217 at year-end 2023 - The Board of Directors consists of 11 directors and two alternate directors, elected every three years for terms expiring in March 2026[644] Board of Directors Compensation (Year Ended Dec 31, 2023) | Category | Amount (millions of Ch$) | | :--- | :--- | | Remuneration | 1,519 | | Fees for Attending Meetings | 371 | | Fees for Board/Committee of Subsidiaries | 1,457 | | Total | 3,347 | - The bank has numerous board and management committees to ensure robust governance, including a Directors/Audit Committee and a Sustainability Committee[662][664][667][682] Employee Headcount (Consolidated) | Year | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Total Employees | 12,284 | 12,550 | 12,217 | Major Shareholders and Related Party Transactions LQ Inversiones Financieras S.A. is the controlling shareholder, and the bank engages in regulated transactions with related parties - As of March 31, 2024, LQ Inversiones Financieras S.A. (LQIF) and its subsidiary collectively own 51.15% of Banco de Chile's shares[700][702] - The bank has several key agreements with Citigroup Inc, which frame their strategic partnership and were extended to January 1, 2026[708][710] - As of December 31, 2023, the bank held an aggregate of Ch$301,733 million in loans to related parties, made in the ordinary course of business[711] Financial Information This section covers legal proceedings, dividend policy, and consolidated financial statements - The bank is involved in a consumer protection lawsuit filed by SERNAC with a potential financial impact that is currently not estimable[714] - A long-standing investigation by Spanish judicial authorities concerning alleged money laundering was definitively dismissed in 2022[715][717] Cash Dividends Declared per Common Share | Year | Dividend Payout Ratio | Dividend per Share (Ch$) | | :--- | :--- | :--- | | 2021 | 47.56% | 2.18 | | 2022 | 68.14% | 5.34 | | 2023 | 69.71% | 8.58 | - In March 2024, shareholders approved a dividend of Ch$8.077 per share based on 2023 net income[721] Additional Information Details on corporate structure, Chilean exchange controls, and taxation for both foreign and U.S. ADS holders are provided - Under Chilean law, shareholders have preemptive rights, but making these rights available to ADS holders is not guaranteed[740] - Foreign exchange transactions, including investments in ADSs, must be conducted through Chile's Formal Exchange Market and reported to the Central Bank[753][755] - For foreign holders, cash dividends are subject to a 35% Chilean Withholding Tax, with potential credits available under tax treaties[760][762] - For U.S. Holders, dividends paid on ADSs are expected to be treated as 'qualified dividend income' subject to preferential tax rates[781]