UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One) |
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT
OF 1934 |
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
for
the fiscal year ended December 31, 2006
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 |
Commission
file number: 1-14554
BANCO
SANTANDER-CHILE
(d/b/a
Banco Santander Santiago and Santander Santiago)
(Exact
name of Registrant as specified in its charter)
SANTANDER-CHILE
BANK
(d/b/a
Santander Santiago Bank and Santander Santiago)
(Translation
of Registrant’s name into English)
Chile
(Jurisdiction
of incorporation)
Bandera
140
Santiago,
Chile
Telephone:
011-562 320-2000
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title
of each class
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Name
of each exchange on which registered
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American
Depositary Shares, each representing the right to receive 1,039
Shares of
Common Stock without par value
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New
York Stock Exchange
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Shares
of Common Stock, without par value*
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New
York Stock Exchange
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*
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Santander-Chile’s
shares of common stock are not listed for trading, but only in
connection
with the registration of the American Depositary Shares pursuant
to the
requirements of the New York Stock
Exchange.
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
(Title
of
Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
7.375%
Subordinated Notes due 2012
Indicate
the number of outstanding shares of each class of common stock of Banco
Santander-Chile at December 31, 2006 was:
188,446,126,794
Shares of Common Stock, without par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
x
No
o
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934.
Note
–
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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x
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o
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o
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Indicate
by check mark which financial statement item the registrant has elected
to
follow.
Item
17
o Item
18 x
If
this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
TABLE
OF CONTENTS
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Page |
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS |
1
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CERTAIN
TERMS AND CONVENTIONS |
2
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PRESENTATION
OF FINANCIAL INFORMATION |
4
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ITEM
1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
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5
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ITEM
2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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5
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ITEM
3.
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KEY
INFORMATION
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5
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ITEM
4.
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INFORMATION
ON THE COMPANY
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22
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ITEM
4A.
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UNRESOLVED
STAFF COMMENTS
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38
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ITEM
5.
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OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
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38
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ITEM
6.
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DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
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99
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ITEM
7.
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MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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108
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ITEM
8.
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FINANCIAL
INFORMATION
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111
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ITEM
9.
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THE
OFFER AND LISTING
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112
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ITEM
10.
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ADDITIONAL
INFORMATION
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114
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ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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136
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ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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158
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PART
II
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158
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ITEM
13.
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DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
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158
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ITEM
14.
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MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
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ITEM
15.
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CONTROLS
AND PROCEDURES
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158
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ITEM
16A.
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AUDIT
COMMITTEE FINANCIAL EXPERT
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160
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ITEM
16B.
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CODE
OF ETHICS
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160
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ITEM
16C.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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160
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ITEM
16D.
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EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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161
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ITEM
16E.
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PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
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161
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PART
III
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161
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ITEM
17.
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FINANCIAL
STATEMENTS
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161
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ITEM
18.
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FINANCIAL
STATEMENTS
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161
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ITEM
19.
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EXHIBITS
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161
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CAUTIONARY
STATEMENT CONCERNING
FORWARD-LOOKING
STATEMENTS
We
have
made statements in this Annual Report on Form 20-F that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear throughout this report
and include statements regarding our intent, belief or current expectations
regarding:
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asset
growth and alternative sources of
funding
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growth
of our fee-based business
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exposure
to market risks:
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projected
capital expenditures
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our
financial condition
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our
results of operation
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The
sections of this Annual Report which contain forward-looking statements include,
without limitation, “Item 3: Key Information—Risk Factors,” “Item 4: Information
on the Company,” “Item 5: Operating and Financial Review and Prospects,” “Item
8: Financial Information—Legal Proceedings,” and “Item 11: Quantitative and
Qualitative Disclosures About Market Risk.” Our forward-looking statements also
may be identified by words such as “believes,” “expects,” “anticipates,”
“projects,” “intends,” “should,” “could,” “may,” “seeks,” “aim,” “combined,”
“estimates,” “probability,” “risk,” “VaR,” “target,” “goal,” “objective,”
“future” or similar expressions.
You
should
understand that the following important factors, in addition to those discussed
elsewhere in this annual report and in the documents which are incorporated
by
reference, could affect our future results and could cause those results or
other outcomes to differ materially from those expressed in our forward-looking
statements:
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changes
in capital markets in general that may affect policies or attitudes
towards lending to Chile or Chilean
companies
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changes
in economic conditions
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the
monetary and interest rate policies of the Central
Bank
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unanticipated
turbulence in interest rates
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movements
in foreign exchange rates
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movements
in equity prices or other rates or
prices
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changes
in Chilean and foreign laws and
regulations
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competition,
changes in competition and pricing
environments
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our
inability to hedge certain risks
economically
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the
adequacy of loss allowances
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changes
in consumer spending and saving
habits
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unanticipated
increases in financing and other costs or the inability to obtain
additional debt or equity financing on attractive
terms
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changes
in, or failure to comply with, banking
regulations
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our
ability to successfully market and sell additional services to our
existing customers
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disruptions
in client service
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implementation
of new technologies
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an
inaccurate or ineffective client segmentation
model
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You
should
not place undue reliance on such statements, which speak only as of the date
that they were made. The forward-looking statements contained in this
document speak only as of the date of this Annual Report, and we do not
undertake to update any forward-looking statement to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
CERTAIN
TERMS AND CONVENTIONS
As
used in
this Annual Report, “Santander-Chile”, “Banco Santander Chile”, “the Bank”,
“we,” “our” and “us” mean Banco Santander-Chile and its consolidated
subsidiaries, the bank resulting from the merger of Santiago and Old
Santander-Chile.
When
we
refer to “Santiago” in this Annual Report, we refer to Banco Santiago and its
consolidated subsidiaries prior to its merger with Old Santander-Chile. When
we
refer to “Old Santander-Chile” in this Annual Report, we refer to the former
Banco Santander-Chile and its consolidated subsidiaries, which ceased to exist
upon its merger into Santiago, effected on August 1, 2002.
As
used in
this Annual Report, the term “billion” means one thousand million
(1,000,000,000).
In
this
Annual Report, references to “$”, “US$”, “U.S.$”, “U.S. dollars” and “dollars”
are to United States dollars, references to “Chilean pesos,” “pesos” or “Ch$”
are to Chilean pesos and references to “UF” are to Unidades de Fomento.
The UF is an inflation indexed Chilean monetary unit with a value in Chilean
pesos that changes daily to reflect changes in the official Consumer Price
Index
(“CPI”) of the Instituto Nacional de Estadísticas (the Chilean National
Institute of Statistics) for the previous month. See “Item 5: Operating and
Financial Review and Prospects” and Note 1(c) to the Audited Consolidated
Financial Statements.
In
this
Annual Report, references to the Audit Committee are to the Bank’s Comité de
Directores y Auditoría. This committee is the successor of the
Directors Committee created under Law 19,705 in 2000 and the Audit Committee
created by the Board of Directors of Banco Santiago in 1995. On September 22,
2004, the Superintendency of Banks authorized that the functions of the Audit
Committee be performed by the Directors Committee. On October 19, 2004, the
Board of Directors of Banco Santander Chile, by resolution No. 357, approved
the
merger of both committees and the transfer of all functions of both committees
to the Comité de Directores y Auditoría, which was created on the same
date.
In
this
Annual Report, references to “BIS” are to the Bank for International Settlement,
and references to “BIS ratio” are to the capital adequacy ratio as calculated in
accordance with the Basel Capital Accord.
PRESENTATION
OF FINANCIAL INFORMATION
Currency
and Accounting Principles
Santander-Chile
is a Chilean bank, which maintains its financial books and records in
Chilean pesos and prepares its Audited Consolidated Financial Statements in
conformity with generally accepted accounting principles in Chile and the rules
of the Superintendencia de Bancos e Instituciones Financieras (the
Superintendency of Banks and Financial Institutions, which is referred to herein
as the “Superintendency of Banks”), which together differ in certain significant
respects from generally accepted accounting principles in the United States
(“U.S. GAAP”). References to “Chilean GAAP” in this Annual Report are to
accounting principles generally accepted in Chile, as supplemented by the
applicable rules of the Superintendency of Banks. See Note 26 to the Audited
Consolidated Financial Statements of Santander-Chile as of December 31, 2005
and
2006 and for the years ended December 31, 2004, 2005 and 2006 contained
elsewhere in this Annual Report (together with the notes thereto, the “Audited
Consolidated Financial Statements”) for a description of the principal
differences between Chilean GAAP and U.S. GAAP, as they relate to
Santander-Chile, and a reconciliation to U.S. GAAP of net income and
shareholders’ equity.
Pursuant
to Chilean GAAP, amounts expressed in the Audited Consolidated Financial
Statements and all other amounts included elsewhere throughout this Annual
Report for all periods expressed in Chilean pesos are expressed in constant
Chilean pesos as of December 31, 2006. See Note 1(c) to the Audited Consolidated
Financial Statements.
Loans
Unless
otherwise specified, all references herein (except in the Audited Consolidated
Financial Statements) to loans are to loans and financial leases before
deduction for loan loss allowance, and, except as otherwise specified, all
market share data presented herein are based on information published
periodically by the Superintendency of Banks. Non-performing loans include
loans
for which either principal or interest is overdue, and which do not accrue
interest. Restructured loans for which no payments are overdue are not
ordinarily classified as non-performing loans. Past due loans include, with
respect to any loan, only the portion of principal and interest that is overdue
for 90 or more days, and do not include the installments of such loan that
are
not overdue or that are overdue for less than 90 days, unless legal proceedings
have been commenced for the entire outstanding balance according to the terms
of
the loan, in which case the entire loan is considered past due within 90
days after initiation of such proceedings. This practice differs from that
normally followed in the United States, where the amount classified as past
due
would include the entire amount of principal and interest on any and all loans
which have any portion overdue. See “Item 5: Operating and Financial Review and
Prospects—D. Selected Statistical Information,” “—Loan Portfolio,” “—Loans by
Economic Activity—Classification of Loan Portfolio,” and “—Classification of
Loan Portfolio Based on the Borrower’s Payment Performance.”
According
to the regulations established by the Superintendency of Banks, Santander-Chile
is required to charge off commercial loans no later than 24 months after being
classified as past due, if unsecured, and if secured, no later than 36 months
after being classified as past due. When an installment of a past due corporate
loan (whether secured or unsecured) is charged off, we must charge off all
installments which are overdue, notwithstanding our right to charge off the
entire amount of the loan. Once any amount of a loan is charged off, each
subsequent installment must be charged off as it becomes overdue,
notwithstanding our right to charge off the entire amount of the loan. In the
case of past due consumer loans, a similar practice applies, except that after
the first installment becomes past due for 90 days or more, Santander-Chile
must
charge off the entire remaining part of the loan. We may charge off any loan
(whether commercial or consumer) before the first installment becomes overdue,
but only in accordance with special procedures established by the
Superintendency of Banks. Loans are charged off against the loan
loss allowance to the extent of any required allowances for such loans; the
remainder of such loans is charged off against income. See “Item 5:
Operating and Financial Review and Prospects—D. Selected Statistical
Information—Analysis of Loan Loss Allowance.”
Outstanding
loans and the related percentages of Santander-Chile’s loan portfolio consisting
of corporate and consumer loans in “Item 4: Information on the Company—C.
Business Overview” are categorized based on the nature of the borrower.
Outstanding loans and related percentages of the loan portfolio of
Santander-Chile consisting of corporate and consumer loans in the section
entitled “Item 5: Operating and Financial Review and Prospects—D. Selected
Statistical
Information”
are categorized in accordance with the reporting requirements of the
Superintendency of Banks, which are based on the type and term of
loans.
Effect
of Rounding
Certain
figures included in this Annual Report and in the Audited Consolidated Financial
Statements have been rounded for ease of presentation. Percentage figures
included in this Annual Report have not in all cases been calculated on the
basis of such rounded figures but on the basis of such amounts prior to
rounding. For this reason, certain percentage amounts in this Annual Report
may
vary from those obtained by performing the same calculations using the figures
in the Audited Consolidated Financial Statements. Certain other amounts that
appear in this Annual Report may not sum due to rounding.
Economic
and Market Data
In
this
Annual Report, unless otherwise indicated, all macro economic data related
to
the Chilean economy is based on information published by the Banco Central
de Chile (the “Central Bank”), and all market share and other data related
to the Chilean financial system is based on information published by the
Superintendency of Banks and our analysis of such information. Information
regarding the consolidated risk index of the Chilean financial system as a
whole
is not available.
Exchange
Rates
This
Annual Report contains translations of certain Chilean peso amounts into U.S.
dollars at specified rates solely for the convenience of the reader. These
translations should not be construed as representations that the Chilean peso
amounts actually represent such U.S. dollar amounts, were converted from U.S.
dollars at the rate indicated in preparing the Audited Consolidated Financial
Statements, could be converted into U.S. dollars at the rate indicated or were
converted at all.
Unless
otherwise indicated, all the U.S. dollar amounts at any year end or for any
full
year have been translated from Chilean pesos based on the observed exchange
rate
reported by the Central Bank on December 31, 2006, which was Ch$534.43 per
US$1.00. The observed exchange rate reported by the Central Bank on December
31,
2006 is based upon the actual exchange rate as of December 31, 2006, and is
the
exchange rate specified by the Superintendency of Banks for use by Chilean
banks
in the preparation of their financial statements for the periods ended December
31, 2006. The observed exchange rate on June 14, 2007 was
Ch$529.32 per US$1.00, reflecting an accumulated appreciation of 1.0% from
December 31, 2006. The Federal Reserve Bank of New York does not report a noon
buying rate for the Chilean peso. For more information on the observed exchange
rate see “Item 3: Key Information—Exchange Rates.”
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not
Applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
ITEM
3. KEY INFORMATION
A.
Selected Financial Data
The
following table presents historical financial information about us as of the
dates and for each of the periods indicated. The following table should be
read
in conjunction with, and is qualified in its entirety by reference to, our
Audited Consolidated Financial Statements appearing elsewhere in this Annual
Report. Our Audited Consolidated Financial Statements are prepared in accordance
with Chilean GAAP, which differs in certain significant respects from U.S.
GAAP.
Note 26 to our Audited Consolidated Financial Statements provides a description
of the material
differences
between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net
income for the years ended December 31, 2004, 2005 and 2006 and shareholders’
equity at December 31, 2005 and 2006.
Under
Chilean GAAP, the merger between Santiago and Old Santander-Chile was accounted
for as a “pooling of interest” on a prospective basis. As such, the historical
financial statements for periods prior to the merger were not restated under
Chilean GAAP. Under U.S. GAAP, the merger between the two banks, which have
been
under the common control of Banco Santander Central Hispano since May 3, 1999,
is accounted for in a manner similar to a pooling of interest under U.S. GAAP.
As a consequence of the merger, we were required to restate our previously
issued U.S. GAAP historical financial information to retroactively present
the
financial results for the merged bank as if Santiago and Old Santander-Chile
had
been combined throughout the periods during which common control existed. See
Note 26(a) to our Audited Consolidated Financial Statements.
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At
and for the years ended December 31,
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(in
millions of constant Ch$ as of December 31,
2006)(1)
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(in
thousands of U.S.$)(1)(2)
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CONSOLIDATED
INCOME STATEMENT DATA
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Chilean
GAAP:
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Net
interest revenue (3)
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568,659
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328,235
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502,509
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558,266
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612,254
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1,145,620
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Provisions
for loan losses
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(72,333 |
) |
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(73,110 |
) |
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(85,451 |
) |
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(64,879 |
) |
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(123,022 |
) |
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(230,193 |
) |
Total
fees and income from services, net
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111,818
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121,280
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128,004
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141,300
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162,550
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304,156
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Other
operating income, net (3)
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(15,129 |
) |
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172,964
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14,741
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(13,595 |
) |
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18,643
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34,884
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Other
income and expenses, net
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(34,985 |
) |
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2,177
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(4,295 |
) |
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(21,923 |
) |
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(3,579 |
) |
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(6,697 |
) |
Operating
expenses
|
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(314,006 |
) |
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(271,383 |
) |
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(283,883 |
) |
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(284,968 |
) |
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(309,283 |
) |
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(578,716 |
) |
Loss
from price-level restatement
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(14,258 |
) |
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(8,352 |
) |
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(12,680 |
) |
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(18,524 |
) |
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(13,782 |
) |
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(25,788 |
) |
Income
before income taxes
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202,253
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271,812
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258,945
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295,677
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343,781
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643,266
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Income
(taxes) benefits
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(30,032 |
) |
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(47,365 |
) |
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(48,587 |
) |
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(50,885 |
) |
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(58,199 |
) |
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(108,899 |
) |
Net
income
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172,220
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224,445
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210,358
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244,792
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285,582
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534,367
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Net
income per share (7)
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0.91
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1.19
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1.12
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1.30
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1.52
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0.00284
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Net
income per ADS (4)(7)
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949.54
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1,237.48
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1,159.81
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|
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1,349.66
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|
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1,574.56
|
|
|
|
2.95
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Dividends
per share (5)
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|
1.36
|
|
|
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0.91
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|
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|
1.19
|
|
|
|
1.12
|
|
|
|
0.84
|
|
|
|
0.00158
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|
Dividends
per ADS (5)
|
|
|
1,405.82
|
|
|
|
945.54
|
|
|
|
1,237.48
|
|
|
|
1,159.81
|
|
|
|
877.28
|
|
|
|
1.64
|
|
Weighted-average
shares outstanding (in millions)
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (6)
|
|
|
564,551
|
|
|
|
306,152
|
|
|
|
474,686
|
|
|
|
564,849
|
|
|
|
631,582
|
|
|
|
1,181,786
|
|
Provision
for loan losses
|
|
|
(72,415 |
) |
|
|
(93,024 |
) |
|
|
(68,924 |
) |
|
|
(65,930 |
) |
|
|
(123,022 |
) |
|
|
(230,193 |
) |
Amortization
of goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income
|
|
|
151,210
|
|
|
|
193,801
|
|
|
|
210,499
|
|
|
|
230,834
|
|
|
|
235,917
|
|
|
|
441,437
|
|
Net
income per Share (7)
|
|
|
0.80
|
|
|
|
1.03
|
|
|
|
1.12
|
|
|
|
1.22
|
|
|
|
1.25
|
|
|
|
0.00234
|
|
Net
income per ADS (4)(7)
|
|
|
833.70
|
|
|
|
1,068.52
|
|
|
|
1,160.59
|
|
|
|
1,272.70
|
|
|
|
1,300.73
|
|
|
|
2.43
|
|
Weighted-average
shares outstanding (in millions)
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
—
|
|
Weighted-average
ADSs outstanding (in millions)
|
|
|
181.373
|
|
|
|
181.373
|
|
|
|
181.373
|
|
|
|
181.373
|
|
|
|
181.373
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilean
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
1,070,912
|
|
|
|
1,067,134
|
|
|
|
1,003,407
|
|
|
|
1,250,931
|
|
|
|
1,092,407
|
|
|
|
2,044,060
|
|
Investments
(8)
|
|
|
2,736,173
|
|
|
|
2,075,146
|
|
|
|
2,105,209
|
|
|
|
1,274,599
|
|
|
|
1,015,376
|
|
|
|
1,899,924
|
|
Loans,
net of allowances
|
|
|
8,428,519
|
|
|
|
8,079,294
|
|
|
|
8,937,656
|
|
|
|
10,208,334
|
|
|
|
11,614,895
|
|
|
|
21,733,240
|
|
Loan
loss allowances
|
|
|
(183,537 |
) |
|
|
(182,426 |
) |
|
|
(183,366 |
) |
|
|
(151,000 |
) |
|
|
(174,064 |
) |
|
|
(325,700 |
) |
Derivatives
(9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
418,795
|
|
|
|
372,688
|
|
|
|
697,356
|
|
Other
assets (3)
|
|
|
223,233
|
|
|
|
310,315
|
|
|
|
442,565
|
|
|
|
613,780
|
|
|
|
748,073
|
|
|
|
1,399,759
|
|
Total
assets (6)
|
|
|
12,765,194
|
|
|
|
11,842,219
|
|
|
|
12,772,640
|
|
|
|
13,766,439
|
|
|
|
14,843,439
|
|
|
|
27,774,339
|
|
Deposits
|
|
|
6,660,305
|
|
|
|
5,993,196
|
|
|
|
7,139,737
|
|
|
|
8,246,723
|
|
|
|
9,392,332
|
|
|
|
17,574,485
|
|
Other
interest-bearing liabilities
|
|
|
4,292,706
|
|
|
|
3,676,944
|
|
|
|
3,348,763
|
|
|
|
2,902,720
|
|
|
|
2,622,161
|
|
|
|
4,906,465
|
|
Derivatives
(9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
391,823
|
|
|
|
355,922
|
|
|
|
665,984
|
|
Shareholders'
equity
|
|
|
1,054,460
|
|
|
|
1,103,270
|
|
|
|
1,091,768
|
|
|
|
1,104,767
|
|
|
|
1,245,339
|
|
|
|
2,330,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
12,410,311
|
|
|
|
11,457,897
|
|
|
|
12,516,607
|
|
|
|
13,716,618
|
|
|
|
14,683,666
|
|
|
|
27,475,378
|
|
|
|
At
and for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)(1)
|
|
|
(in
thousands of U.S.$)(1)(2)
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
3,385,126
|
|
|
|
2,599,879
|
|
|
|
1,910,026
|
|
|
|
1,457,944
|
|
|
|
1,585,608
|
|
|
|
2,966,914
|
|
Shareholders'
equity
|
|
|
1,958,157
|
|
|
|
1,961,493
|
|
|
|
1,952,196
|
|
|
|
1,938,505
|
|
|
|
2,019,658
|
|
|
|
3,779,088
|
|
Goodwill
|
|
|
806,521
|
|
|
|
806,521
|
|
|
|
806,521
|
|
|
|
806,521
|
|
|
|
806,521
|
|
|
|
1,509,124
|
|
|
|
At
and for the year ended December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilean
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability
and performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin(10)
|
|
|
4.8 |
% |
|
|
3.0 |
% |
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
Return
on average total assets(11)
|
|
|
1.3 |
% |
|
|
1.8 |
% |
|
|
1.7 |
% |
|
|
1.8 |
% |
|
|
1.9 |
% |
Return
on average shareholders’ equity(12)
|
|
|
16.2 |
% |
|
|
22.1 |
% |
|
|
20.2 |
% |
|
|
24.1 |
% |
|
|
24.8 |
% |
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shareholders’ equity as a percentage of average total
assets
|
|
|
8.3 |
% |
|
|
8.1 |
% |
|
|
8.2 |
% |
|
|
7.4 |
% |
|
|
7.8 |
% |
Total
liabilities as a multiple of shareholders’ equity
|
|
|
11.1
|
|
|
|
9.7
|
|
|
|
11.7
|
|
|
|
12.1
|
|
|
|
11.9
|
|
Credit
Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
loans as a percentage of total loans(13)
|
|
|
3.2 |
% |
|
|
3.6 |
% |
|
|
3.7 |
% |
|
|
2.6 |
% |
|
|
2.9 |
% |
Allowance
for loan losses as percentage of total loans
|
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
2.0 |
% |
|
|
1.5 |
% |
|
|
1.5 |
% |
Past
due loans as a percentage of total loans(14)
|
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
1.5 |
% |
|
|
1.1 |
% |
|
|
0.8 |
% |
Operating
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses/operating revenue(15)
|
|
|
47.2 |
% |
|
|
43.6 |
% |
|
|
44.0 |
% |
|
|
41.5 |
% |
|
|
39.0 |
% |
Operating
expenses/average total assets
|
|
|
2.3 |
% |
|
|
2.2 |
% |
|
|
2.2 |
% |
|
|
2.1 |
% |
|
|
2.1 |
% |
Ratio
of earnings to fixed charges(16):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
interest on deposits
|
|
|
1.3
|
6 |
|
|
1.8
|
1 |
|
|
1.7
|
7 |
|
|
1.6
|
5 |
|
|
1.6
|
1 |
Excluding
interest on deposits
|
|
|
1.6
|
5 |
|
|
2.3
|
4 |
|
|
2.2
|
6 |
|
|
2.4
|
6 |
|
|
2.5
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP(17):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability
and performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (18)
|
|
|
4.7 |
% |
|
|
2.8 |
% |
|
|
4.3 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
Return
on average total assets (19)
|
|
|
1.2 |
% |
|
|
1.6 |
% |
|
|
1.8 |
% |
|
|
1.7 |
% |
|
|
1.6 |
% |
Return
on average shareholders’ equity (20)
|
|
|
8.6 |
% |
|
|
9.9 |
% |
|
|
10.8 |
% |
|
|
11.9 |
% |
|
|
11.7 |
% |
Ratio
of earnings to fixed charges(16):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
interest on deposits
|
|
|
1.3
|
7 |
|
|
1.8
|
3 |
|
|
1.8
|
7 |
|
|
1.7
|
1 |
|
|
1.6
|
0 |
Excluding
interest on deposits
|
|
|
1.6
|
7 |
|
|
2.3
|
5 |
|
|
2.4
|
3 |
|
|
2.5
|
1 |
|
|
2.5
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
rate(21)
|
|
|
2.8 |
% |
|
|
1.1 |
% |
|
|
2.4 |
% |
|
|
3.7 |
% |
|
|
2.6 |
% |
Revaluation
(devaluation) rate (Ch$/U.S.$) at period end(21)
|
|
|
8.6 |
% |
|
|
(15.9 |
%) |
|
|
(6.6 |
%) |
|
|
(8.1 |
%) |
|
|
3.9 |
% |
Number
of employees at period end
|
|
|
8,314
|
|
|
|
7,535
|
|
|
|
7,380
|
|
|
|
7,482
|
|
|
|
8,184
|
|
Number
of branches and offices at period end
|
|
|
347
|
|
|
|
345
|
|
|
|
315
|
|
|
|
352
|
|
|
|
397
|
|
(1)
|
Except
per share data, percentages and ratios, share numbers, employee numbers
and branch numbers.
|
(2)
|
Amounts
stated in U.S. dollars at and for the year ended December 31, 2006
have
been translated from Chilean pesos at the observed exchange rate
of
Ch$534.43 = U.S.$1.00 as of December 31, 2006. See “Item 3: Key
Information —Exchange Rates” for more information on the observed exchange
rate.
|
(3)
|
In
accordance with Circular N°3345 issued by the Superintendency of Banks,
which became effective on June 30, 2006, the accounting standards
for
valuing financial instruments acquired for trading or investment
purposes,
including derivative instruments on the balance sheets, were amended.
The
new accounting standards require that these instruments be carried
at
their market or fair value, and the historical differences in valuation
of
such instruments recognized with respect to any dates prior to 2006
be
adjusted directly against the Bank’s equity. Banks were
required to adopt the new accounting standards set forth in Circular
No.
3345 in preparing their financial statements at and for the six-months
ended June 30, 2006 and going forward.
|
|
In
order to implement these new accounting standards, we have created
a new
line item “derivatives” under both “assets” and “liabilities” in our
consolidated balance sheet, and reclassified certain other items
within
other assets, other liabilities, financial instruments, interest
income,
interest expenses and other operating income, net, in our consolidated
balance sheet and income statement at and for the year ended
December 31,
2006. For comparison purposes, we have also retrospectively
reclassified these items at December 31, 2005 and for the years
ended
December 31, 2004 and 2005, but did not retrospectively apply
the new
accounting standards to these items. We did not reclassify any
of these items at any date prior to 2005 or for any period prior to
the year ended December 31, 2004. See “Item 5: Operating and
Financial Review and Prospects—A. New Accounting Standards for Financial
Investments and Derivatives.”
|
(4)
|
1
American depositary share (“ADS”) = 1,039 shares of common
stock.
|
(5)
|
The
dividends per share of common stock and per ADS are determined based on
the previous year’s net income. The dividend per ADS is calculated on the
basis of 1,039 shares per ADS.
|
(6)
|
Net
interest income and total assets on a U.S. GAAP basis have been determined
by applying the relevant U.S. GAAP adjustments to net interest income
and
total assets presented in accordance with Article 9 of Regulation
S-X. See
Note 27 to our Consolidated Financial Statements at and for the years
ended December 31, 2002, 2003 and 2004 and Note 26 of our Consolidated
Financial Statements for the year ended December 31, 2005 and 2006
included in our Annual Reports on Form
20-F.
|
(7)
|
Net
income per share and per ADS in accordance with U.S.
GAAP has been calculated on the basis of the
weighted-average number of shares or ADSs, as applicable, outstanding
during the period.
|
(8)
|
Includes
principally Chilean government securities, corporate securities,
other
financial investments and investment collateral under agreements
to
repurchase (reverse repo).
|
(9)
|
For
figures at December 31, 2006, derivatives were valued at market price
and classified as a separate line item on the balance sheet. Our
derivatives holdings at December 31, 2005 have been reclassified
from
“other assets” and “other liabilities” to “derivatives”, but have not been
marked to market as would be required under currently applicable
accounting principles. At prior dates, derivatives were classified
under “other assets” or “other liabilities”, and generally recorded at net
notional amount. See “Item 5: Operating and Financial Review
and Prospects—A. New Accounting Standards for Financial Investments
and Derivatives” and Note 1 to our Audited Consolidated Financial
Statements.
|
(10)
|
Net
interest revenue divided by average-interest earning assets (as presented
in “Item 5: Operating and Financial Review and Prospects—D. Selected
Statistical Information”).
|
(11)
|
Net
income divided by average total assets (as presented in “Item 5: Operating
and Financial Review and Prospects—D. Selected Statistical
Information”).
|
(12)
|
Net
income divided by average shareholders’ equity (as presented in “Item 5:
Operating and Financial Review and Prospects—D. Selected Statistical
Information”).
|
(13)
|
Substandard
loans in the rating system prior to 2004 included all loans rated
B- or
worse. In the loan risk classification system which took effect in
2004,
substandard loans include all consumer and mortgage loans rated B-
or
worse and all commercial loans rated C2 or worse. See “Item 5: Operating
and Financial Review and Prospects—D. Selected
Statistical Information—Analysis of Substandard Loans and Amounts Past Due
loans”. Therefore, the historical figures in 2002 and 2003 are not
strictly comparable to figures in 2004, 2005 or
2006.
|
(14)
|
Past
due loans are loans on which principal or interest is overdue for 90
or more days, and do not include the installments of such loans that
are
not overdue or that are less than 90 days overdue, unless legal
proceedings have been commenced for the entire outstanding balance
according to the terms of the loan.
|
(15)
|
Operating
revenue includes “Net interest revenue,” “Total fees and income from
services, net” and “Other operating income,
net.”
|
(16)
|
For
the purpose of computing the ratios of earnings to fixed charges,
earnings
consist of earnings before income tax and fixed charges. Fixed charges
consist of gross interest expense and the proportion deemed representative
of the interest factor of rental
expense.
|
(17)
|
The
following ratios have been calculated using U.S. GAAP figures except
for
net interest margin. See footnote 18 regarding calculation of
net interest margin.
|
(18)
|
Net
interest margin has been determined by applying the relevant U.S.
GAAP
adjustments to net interest income for the years ended December 31,
2002,
2003, 2004, 2005 and 2006 presented in accordance with Article 9
of
Regulation S-X divided by average interest-earning assets calculated
on a
Chilean GAAP basis. See Note 27(y) to our Consolidated
Financial Statements at and for the years ended December 31, 2002,
2003
and 2004 and Note 26(v) of our Consolidated Financial Statements
for the
years ended December 31, 2005 and
2006.
|
(19)
|
Net
income divided by average total assets. Average total assets were
calculated as an average of the beginning and ending balances for
each
year, and total assets on a U.S. GAAP basis have been determined
by
applying the relevant U.S. GAAP adjustments to total assets presented
in
accordance with Article 9 of Regulation S-X. See Note 26 to our Audited
Consolidated Financial Statements.
|
(20)
|
Average
shareholders’ equity was calculated as an average of the beginning and
ending balances for each year. Shareholders’ equity on a U.S. GAAP basis
has been determined by applying the relevant U.S. GAAP adjustments
to
shareholders’ equity presented in accordance with Article 9 of Regulation
S-X. See Note 26(y) to our Audited Consolidated Financial
Statements.
|
(21)
|
Based
on information published by the Central
Bank.
|
Exchange
Rates
Chile
has
two currency markets, the Mercado Cambiario Formal, or the “Formal
Exchange Market” and the Mercado Cambiario Informal, or the “Informal
Exchange Market.” Under Law 18,840, the organizational law of the Central
Bank, or the Central Bank Act (Ley Orgánica Constitucional del Banco Central
de Chile), the Central Bank determines which purchases and sales of foreign
currencies must be carried out in the Formal Exchange Market. Pursuant to
Central Bank regulations which are currently in effect, all payments,
remittances or transfers of foreign currency abroad which are required to be
effected through the Formal Exchange Market may be effected with foreign
currency procured outside the Formal Exchange Market. The Formal Exchange Market
is comprised of the banks and other entities so authorized by the Central Bank.
The conversion from pesos to U.S. dollars of all payments and distributions
with
respect to the ADSs described in this Annual Report must be transacted at the
spot market rate in the Formal Exchange Market. Current regulations require
that
the Central Bank be informed of certain transactions and that they be effected
through the Formal Exchange Market.
Purchases
and sales of foreign currencies may be legally carried out in the Informal
Exchange Market. The Informal Exchange Market reflects transactions carried
out
at informal exchange rates by entities not expressly authorized to operate
in
the Formal Exchange Market. There are no limits imposed on the extent to which
the rate of exchange in the Informal Exchange Market can fluctuate above or
below the observed exchange rate. On December 31, 2006 and March 31, 2007,
the
exchange rate in the Informal Exchange Market was Ch$533.38 and Ch$539.27,
or
0.2% and 0.02%, respectively, lower than the published observed exchange rates
for such dates of Ch$534.43 and Ch$539.37, respectively, per
U.S.$1.00.
The
following table sets forth the annual low, high, average and period end observed
exchange rates for U.S. dollars for each of the following periods, as reported
by the Central Bank. We make no representation that the Chilean peso or the
U.S.
dollar amounts referred to herein actually represent, could have been or could
be converted into U.S. dollars or Chilean pesos, as the case may be, at the
rates indicated, at any particular rate or at all.
|
|
Daily Observed Exchange Rate Ch$ Per U.S.$(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
641.75
|
|
|
|
756.56
|
|
|
|
689.24
|
|
|
|
712.38
|
|
2003
|
|
|
593.10
|
|
|
|
758.21
|
|
|
|
691.54
|
|
|
|
599.42
|
|
2004
|
|
|
559.21
|
|
|
|
649.45
|
|
|
|
609.55
|
|
|
|
559.83
|
|
2005
|
|
|
509.70
|
|
|
|
592.75
|
|
|
|
559.86
|
|
|
|
514.21
|
|
2006
|
|
|
511.44
|
|
|
|
549.63
|
|
|
|
530.26
|
|
|
|
534.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
2006
|
|
|
536.63
|
|
|
|
540.80
|
|
|
|
538.65
|
|
|
|
538.22
|
|
October
2006
|
|
|
524.12
|
|
|
|
537.63
|
|
|
|
530.95
|
|
|
|
525.99
|
|
November
2006
|
|
|
523.34
|
|
|
|
530.61
|
|
|
|
527.44
|
|
|
|
529.29
|
|
December
2006
|
|
|
524.78
|
|
|
|
534.43
|
|
|
|
527.58
|
|
|
|
534.43
|
|
January
2007
|
|
|
532.39
|
|
|
|
545.18
|
|
|
|
540.51
|
|
|
|
545.18
|
|
February
2007
|
|
|
535.29
|
|
|
|
548.67
|
|
|
|
542.27
|
|
|
|
538.42
|
|
March
2007
|
|
|
535.36
|
|
|
|
541.95
|
|
|
|
538.49
|
|
|
|
539.37
|
|
April
2007
|
|
|
527.08
|
|
|
|
539.69
|
|
|
|
532.30
|
|
|
|
527.08
|
|
May
2007
|
|
|
517.64
|
|
|
|
527.52
|
|
|
|
522.02
|
|
|
|
527.52
|
|
June
2007 (through June 14)
|
|
524.30
|
|
|
529.32
|
|
|
526.88
|
|
|
529.32
|
|
(2)
|
Exchange
rates are the actual low and high, on a day-by-day basis for each
period. |
(3)
|
The
average of monthly average rates during the
year.
|
(4) |
As
reported by the Central Bank on the first business day of the following
period. |
Dividends
Under
the
current General Banking Law, a Chilean bank may only pay a single dividend
per
year (i.e., interim dividends are not permitted). Santander-Chile’s annual
dividend is proposed by its Board of Directors and is approved by the
shareholders at the annual ordinary shareholders’ meeting held the year
following that in which the dividend is generated. For example, the 2005
dividend must be proposed and approved during the first four months of 2006.
Following shareholder approval, the proposed dividend is declared and paid.
Historically, the dividend for a particular year has been declared and paid
no
later than one month following the shareholders meeting. Dividends are paid
to
shareholders of record on the fifth day preceding the date set for payment
of
the dividend. The applicable record dated for the payment of dividends to
holders of ADSs will, to the extent practicable, be the same.
Under
the
General Banking Law, Ley General de Bancos, Decreto con Fuerza de Ley
No.3 de 1997, a bank must distribute cash dividends in respect of any
fiscal year in an amount equal to at least 30% of its net income for that year,
as long as the dividend does not result in a violation of minimal capital
requirements. The balances of our distributable net income are
generally retained for use in our business (including for the maintenance of
any
required legal reserves). Although our Board of Directors currently intends
to
pay regular annual dividends, the amount of dividend payments will depend upon,
among other factors, our then current level of earnings, capital and legal
reserve requirements, as well as market conditions, and there can be no
assurance as to the amount or timing of future dividends.
Dividends
payable to holders of ADSs are net of foreign currency conversion expenses
of
the depositary and will be subject to the Chilean withholding tax currently
at
the rate of 35% (subject to credits in certain cases as described in “Item 10:
Additional Information—E. Taxation—Material
Tax Consequences of Owning Shares of Our Common Stock or ADSs—Chilean
Taxation”). See “Item 10: Additional
Information—E. Taxation”. Owners of the ADSs will not be charged
any dividend remittance fees by the depositary with respect to cash or stock
dividends.
Under
the
Foreign Investment Contract (as defined herein), the Depositary, on behalf
of
ADS holders, is granted access to the Formal Exchange Market to convert cash
dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to
ADS
holders outside Chile, net of taxes, and no separate registration by ADS holders
is required. In the past, Chilean law required that holders of shares of Chilean
companies who were not residents of Chile to register as foreign investors
under
one of the foreign investment regimes contemplated by Chilean law in order
to
have dividends, sale proceeds or other amounts with respect to their shares
remitted outside Chile through the Formal Exchange Market. On April 19, 2001,
the Central Bank deregulated the Exchange Market eliminating the need to obtain
approval from the Central Bank in order to remit dividends, but at the same
time
this eliminated the possibility of accessing the Formal Exchange Market. These
changes do not affect the current Foreign Investment Contract, which was signed
prior to April 19, 2001, which grants access to the Formal Exchange Market
with
prior approval of the Central Bank. See “Item 10: Additional
Information—D.
Exchange
Controls”.
The
following table presents dividends paid by us in nominal terms in the following
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
157,315
|
|
|
|
0.83
|
|
|
|
867.36
|
|
|
|
100%
|
|
2004
|
|
|
206,975
|
|
|
|
1.10
|
|
|
|
1,141.16
|
|
|
|
100%
|
|
2005
|
|
|
198,795
|
|
|
|
1.05
|
|
|
|
1,096.06
|
|
|
|
100%
|
|
2006
|
|
|
155,811
|
|
|
|
0.83
|
|
|
|
859.06
|
|
|
|
65%
|
|
2007
|
|
|
185,628
|
|
|
|
0.99
|
|
|
|
1,023.46
|
|
|
|
65%
|
|
|
(1)
|
Million
of nominal pesos.
|
|
(2)
|
Calculated
on the basis of 188,446 million
shares.
|
|
(3)
|
Calculated
on the basis of 1,039 shares per
ADS.
|
|
(4)
|
Calculated
by dividing dividend paid in the year by net income for the previous
year.
|
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
You
should
carefully consider the following risk factors, as well as all the other
information presented in this Annual Report before investing in securities
issued by us. The risks and uncertainties described below are not the only
ones
that we face. Additional risks and uncertainties that we do not know about
or
that we currently think are immaterial may also impair our business operations.
Any of the following risks, if they actually occur, could materially and
adversely affect our business, results of operations, prospects and financial
condition.
We
are
subject to market risks that are presented both in this subsection and in “Item
5: Operating and Financial Review and Prospects” and “Item 11: Quantitative and
Qualitative Disclosures about Market Risk.”
Risks
Associated with Our Business
Increased
competition and industry consolidation may adversely affect results of our
operations.
The
Chilean market for financial services is highly competitive. We compete with
other Chilean private sector domestic and foreign banks, with Banco del Estado,
a public sector bank, with department stores and the larger supermarket chains
that make consumer loans and sell other financial products to a large portion
of
the Chilean population. The lower middle to middle income segments of the
Chilean population and the small and medium sized corporate segments have become
the target markets of several banks, and competition in these segments is likely
to increase. As a result, net interest margins in these segments are likely
to
decline. Although we believe that demand for financial products and services
from individuals and for small and medium sized companies will continue to
grow
during the remainder of the decade, we cannot assure you that net interest
margins will be maintained at their current levels.
We
also
face competition from non-bank and non-finance competitors (principally
department stores) with respect to some of our credit products, such as credit
cards, consumer loans and insurance brokerage. In addition, we face competition
from non-bank finance competitors, such as leasing, factoring and automobile
finance companies, with respect to credit products, and from mutual funds,
pension funds and insurance companies, with respect to savings products.
Currently, banks continue to be the main suppliers of leasing, factoring and
mutual funds, and the insurance sales business has seen rapid
growth.
The
increase in competition within the Chilean banking industry in recent years
has
led to, among other things, consolidation in the industry. We expect the trends
of increased competition and consolidation to continue and result in the
formation of new large financial groups. Consolidation, which can result in
the
creation of larger and stronger competitors, may adversely affect our financial
condition and results of operations by decreasing the net interest margins
we
are able to generate. In addition, Law No. 19,769 allows insurance companies
to
participate and compete with us in the residential mortgage and credit card
businesses.
Our
allowances for impairment losses may not be adequate to cover our future actual
losses to our loan portfolio.
At
December 31, 2006, our allowance for impairment losses on loans was Ch$174,064
million, and the ratio of our allowance for impairment losses to total loans
was
1.48%. The amount of allowances is based on our current
assessment
of and expectations concerning various factors affecting the quality of our
loan
portfolio. These factors include, among other things, our borrower’s financial
condition, repayment ability and repayment intention, the realizable value
of
any collateral, the prospects for support from any guarantor, Chile’s economy,
government macroeconomic policies, interest rates and legal and regulatory
environment. Many of these factors are beyond our control. If our assessment
of
and expectations concerning the above mentioned factors differ from actual
developments, or if the quality of our loan portfolio deteriorates or the future
actual losses exceed our estimates, our allowance for impairment losses may
not
be adequate to cover actual losses and we may need to make additional provisions
for impairment losses, which may materially and adversely affect our results
of
operations and financial condition.
Our
exposure to individuals and small businesses could lead to higher levels of
past
due loans, allowances for loan losses and
charge-offs.
A
substantial number of our customers consists of individuals (approximately
43.2%
of the value of the total loan portfolio at December 31, 2006) and, to a lesser
extent, small and medium sized companies (those with annual sales of less than
US$2.2 million) which comprised approximately 16.0% of the value of the total
loan portfolio at December 31, 2006. As part of our business strategy, we seek
to increase lending and other services to small companies and individuals.
Small
companies and individuals are, however, more likely to be adversely affected
by
downturns in the Chilean economy than large corporations and high income
individuals. In addition, at December 31, 2006, our residential
mortgage loans represented 23.7% of our total loans. If the economic conditions
and real estate market in Chile experience a significant downturn, our asset
quality, results of operations and financial condition may be materially and
adversely affected. As a result of these factors, in the future we may
experience higher levels of past due loans, which could result in higher
provisions for loan losses. There can be no assurance that the levels of past
due loans and subsequent write offs will not be materially higher in the
future.
If
we are unable to maintain the quality of our loan portfolio, our financial
condition and results of operations may be materially and adversely
affected.
At
December 31, 2006, our past due loans were Ch$92,559 million, and the ratio
of
our past due loans to total loans was 0.79%. For additional information on
our
asset quality, see “Item 5: Operating and Financial Review and Prospects—D.
Selected
Statistical Information—Analysis of Substandard Loans and Amounts Past Due”. We
seek to continue to improve our credit risk management policies and procedures.
However, we cannot assure you that our credit risk management policies,
procedures and systems are free from any deficiency. Failure of credit risk
management policies may result in an increase in level of non performing loans
and adversely affect the quality of our loan portfolio. In addition, the quality
of our loan portfolio may also deteriorate due to various other reasons,
including factors beyond our control. If such deterioration were to occur,
it
would materially and adversely affect our financial conditions and results
of
operations.
The
value of the collateral securing our loans may not be sufficient, and we may
be
unable to realize the full value of the collateral securing our loan
portfolio.
The
value
of the collateral securing our loan portfolio may significantly fluctuate or
decline due to factors beyond our control, including macroeconomic factors
affecting Chile’s economy. However, we may not have current information on the
value of collateral, which may result in an inaccurate assessment for impairment
losses of our loans secured by such collateral. If this were to occur, we may
need to make additional provisions to cover actual impairment losses of our
loans, which may materially and adversely affect our results of operations
and
financial condition.
Additionally,
there are certain provisions under Chilean law that may affect our ability
to
foreclose or liquidate residential mortgages granted to us by our customers
if
the affected real estate has been declared as “family property” by a court.
Furthermore, foreclosure will be extremely limited if any party using the real
estate has filed with a court a petition requesting that such real estate be
declared as family property.
The
growth of our loan portfolio may expose us to increased loan
losses.
From
December 31, 2001 to December 31, 2006, our aggregate loan portfolio (on an
unconsolidated combined basis) grew by 40.7% in nominal terms to Ch$11,784,906
million (US$22 billion), while our consumer loan portfolio grew by 146.7% in
nominal terms to Ch$1,580,038 million (US$2,956 million), excluding lines of
credit and calculated in accordance with the loan classification system of
the
Superintendency of Banks. Because the method of classification of loans used
by
the Superintendency of Banks for its public information differs in minor
respects from that used by us for internal accounting purposes, the foregoing
figures may differ from the figures included in our financial statements. The
further expansion of our loan portfolio (particularly in the consumer, small-
and mid-sized companies and real estate segments) can be expected to expose
us
to a higher level of loan losses and require us to establish higher levels
of
provisions for loan losses.
Our
loan portfolio may not continue to grow at the same
rate.
There
can
be no assurance that in the future our loan portfolio will continue to grow
at
the same or similar rates as the historical growth rate previously experienced
by Santiago or Old Santander-Chile. Average loan growth has remained significant
in the last five years. According to the Superintendency of Banks, from December
31, 2001 to December 31, 2006, the aggregate amount of loans outstanding in
the
Chilean banking system (on an unconsolidated basis) grew by 74.4% in nominal
terms to Ch$52,782,245 million (US$98,764 million) at December 31, 2006. A
reversal of the rate of growth of the Chilean economy, a slowdown in the growth
of customer demand, an increase in market competition or changes in governmental
regulations could adversely affect the rate of growth of our loan portfolio
and
our risk index and, accordingly, increase our required allowances for loan
losses.
The
effectiveness of our credit risk management is affected by the quality and
scope
of information available in Chile.
In
assessing customers’ creditworthiness, we rely largely on the credit information
available from our own internal databases, the Superintendency of Banks, Dicom
(a nationwide credit bureau) and other sources. Due to limitations on
the availability of information and the developing information infrastructure
in
Chile, our assessment of the credit risks associated with a particular customer
may not be based on complete, accurate or reliable information. In addition,
although we have been improving our credit scoring systems to better assess
borrowers’ credit risk profiles, we cannot assure you that our credit scoring
systems collect complete or accurate information reflecting the actual behavior
of customers or that their credit risk can be assessed correctly. Without
complete, accurate and reliable information, we have to rely on other publicly
available resources and our internal resources, which may not be effective.
As a
result, our ability to effectively manage our credit risk may be materially
and
adversely affected.
Fluctuations
in the rate of inflation may affect our results of
operations.
Although
Chilean inflation has been moderate in recent years, Chile has experienced
high
levels of inflation in the past. High levels of inflation in Chile could
adversely affect the Chilean economy and have an adverse effect on our business,
financial condition and results of operations. In 2006, inflation rate was
2.6% compared to 3.7% in 2005.
Our
assets
and liabilities are denominated in Chilean pesos, UF and foreign currencies.
The
UF is revalued in monthly cycles. On each day in the period beginning the tenth
day of the current month through the ninth day of the succeeding month, the
nominal peso value of the UF is indexed up (or down in the event of deflation)
in order to reflect a proportional amount of the change in the Chilean Consumer
Price Index during the prior calendar month. One UF equaled to Ch$17,317.05
at
December 31, 2004, Ch$17,974.81 at December 31, 2005 and Ch$18,336.38 at
December 31, 2006. The effect of any changes in the nominal peso
value of our UF denominated assets and liabilities is reflected in our results
of operations as an increase (or decrease, in the event of deflation) in
interest revenue and expense, respectively. Our net interest revenue will be
positively affected by an inflationary environment to the extent that our
average UF denominated assets exceed our average UF denominated liabilities.
Our
net interest revenue will be negatively affected by inflation in any period
in
which our average UF denominated liabilities exceed our average UF denominated
assets. Our average UF denominated assets exceeded our average UF
denominated
liabilities by Ch$1,285,290 million, Ch$1,446,290 and Ch$2,567,226 at December
31, 2004, 2005 and 2006, respectively. See “Item 5: Operating and Financial
Review and Prospects—D. Selected Statistical Information—Average Balance Sheets,
Income Earned from Interest-Earning Assets and Interest Paid on Interest-Bearing
Liabilities .” We generally have more UF denominated financial
assets than UF denominated financial liabilities and, therefore, benefit from
positive monthly inflation figures and we actively manage the size of this
gap
in accordance with our views of futures inflation
expectations. Although we currently benefit from moderate levels of
inflation in Chile, due to the current structure of our assets and liabilities
(i.e., a significant portion of our loans are indexed to the inflation rate,
but
there are no corresponding features in deposits, or other funding sources that
would increase the size of our funding base), there can be no assurance that
our
business, financial condition and result of operations in the future will not
be
adversely affected by changing levels of inflation, especially in a period
of
deflation.
Our
results of operations are affected by interest rate
volatility.
Our
results of operations depend to a great extent on our net interest revenue.
In
2006, net interest revenue represented 77.2% of our operating revenue. Changes
in market interest rates could affect the interest rates earned on our interest
earning assets differently from the interest rates paid on our interest bearing
liabilities leading to a reduction in our net interest revenue or result in
a
decrease in customer’s demand for our loan or deposit
products. Interest rates are highly sensitive to many factors beyond
our control, including the reserve policies of the Central Bank, deregulation
of
the financial sector in Chile, domestic and international economic and political
conditions and other factors. Any volatility in interest rates could adversely
affect our business, our future financial performance and the price of our
securities. The following table shows the yields on the Chilean government’s
90-day notes as reported by the Central Bank of Chile at year end for the last
five years.
|
|
|
Period-end
yield on
90-day
notes (%)
|
|
|
2002
|
|
|
2.88
|
|
|
2003
|
|
|
2.58
|
|
|
2004
|
|
|
2.32
|
|
|
2005
|
|
|
4.75
|
|
|
2006
|
|
|
5.10
|
|
Since
our principal sources of funds are short-term deposits, a sudden shortage of
funds could cause an increase in costs of funding and an adverse effect on
our
revenues.
Customer
deposits are our primary source of funding. At December 31, 2006, 84.8% of
our
customer deposits had remaining maturities of one year or less, or were payable
on demand. A significant portion of our assets have longer maturities, resulting
in a mismatch between the maturities of liabilities and the maturities of
assets. If a substantial portion of our depositors withdraw their demand
deposits or do not roll over their time deposits upon maturity, our liquidity
position, results of operations and financial condition may be materially and
adversely affected. We cannot assure you that in the event of a
sudden or unexpected shortage of funds in the banking system, any money markets
in which we operate will be able to maintain levels of funding without our
incurring high funding costs or the liquidation of certain assets. If this
were
to happen, our results of operations and financial condition may be materially
and adversely affected.
We
may be unable to meet requirements relating to capital
adequacy.
We
are
required by the General Banking Law to maintain regulatory capital of at least
8% of our risk-weighted assets, net of required loan loss allowance and
deductions, and paid-in capital and reserves (“basic capital”) of at least 3% of
our total assets, net of required loan loss allowances. As a result of the
merger between Old Santander-Chile and Santiago, we were required to maintain
a
minimum regulatory capital to risk weighted assets ratio of 12%, which was
reduced to 11% as of January 1, 2005. At December 31, 2006, the ratio of our
basic capital to total assets, net of loan loss
allowance,
was 6.2%, and the ratio of our regulatory capital to risk-weighted assets,
net
of loan loss allowance and deductions, was 12.6%. Certain developments could
affect our ability to continue to satisfy the current capital adequacy
requirements applicable to us, including:
|
·
|
the
increase in risk-weighted assets as a result of the expansion of our
business;
|
|
·
|
the
failure to increase our capital
correspondingly;
|
|
·
|
losses
resulting from a deterioration in our asset
quality;
|
|
·
|
declines
in the value of our investment instrument portfolio;
and
|
|
·
|
changes
in accounting rules or in the guidelines regarding the calculation
of the
capital adequacy ratios of banks in
Chile.
|
We
may
also be required to raise additional capital in the future in order to maintain
our capital adequacy ratios above the minimum required levels. Our ability
to
raise additional capital may be limited by numerous factors, including: our
future financial condition, results of operations and cash flows; any necessary
government regulatory approvals; our credit ratings; general market conditions
for capital raising activities by commercial banks and other financial
institutions; and domestic and international economic, political and other
conditions.
If
we
require additional capital in the future, we cannot assure you that we will
be
able to obtain such capital on favorable terms, in a timely manner or at all.
Furthermore, the Superintendency of Banks may increase the minimum capital
adequacy requirements applicable to us. Accordingly, although we currently
meet
the applicable capital adequacy requirements, we may face difficulties in
meeting these requirements in the future. If we fail to meet the capital
adequacy requirements, we may be required to take corrective actions. These
measures could materially and adversely affect our business reputation,
financial condition and results of operations. In addition, if we are unable
to
raise sufficient capital in a timely manner, the growth of our loan portfolio
and other risk-weighted assets may be restricted, and we may face significant
challenges in implementing our business strategy. As a result, our prospects,
results of operations and financial condition could be materially and adversely
affected.
The
restrictions on the exposure of Chilean pension funds may affect our access
to
funding
Chilean
regulations impose restrictions on the share of assets that a Chilean pension
fund management company (Administrador de Fondos de Pension, an “AFP”)
may allocate to a single issuer, which is currently 7% per fund managed by
an
AFP (including any securities issued by the issuer and any bank deposits with
the issuer). If the exposure of an AFP to a single issuer exceeds the 7% limit,
it is required to reduce its exposure below the limit within three years. At
December 31, 2006, the aggregate exposure of AFPs to us was approximately
Ch$2,519,789 million (US$4,715 million) or 5.4% of their total assets, and
the
largest exposure of a single AFP to us was 6.6% of its total
assets. If the exposure of any AFP to us exceeds the regulatory
limit, we would need to seek alternative sources of funding, which could be
more
expensive and, as a consequence, may have a material adverse effect on our
financial condition and results of operations.
Pension
funds must also comply with other investment limits. Proposed
legislation in Chile may relax the limits on making investments abroad in order
to permit pension funds to further diversify their investment
portfolios. As a result, pension funds may change the composition of
their portfolios, including reducing their deposits with local
banks. At December 31, 2006, 28.2% of the Bank’s time deposits were
from AFPs. Although the proposed legislation referred to above is intended
to
promote a gradual relaxation of the investment limits, and we may be able to
substitute the reduced institutional funds with retail deposits, there can
be no
assurance that this occurrence will not have a material adverse impact on our
business, financial condition and results of operations.
Our
business is highly dependant on proper functioning and improvement of
information technology systems.
Our
business is highly dependant on the ability of our information technology
systems to accurately process a large number of transactions across numerous
and
diverse markets and products in a timely manner. The proper functioning of
our
financial control, risk management, accounting, customer service and other
data
processing systems is critical to our business and our ability to compete
effectively. We have backup data for our key data
processing
systems that could be used in the event of a catastrophe or a failure of our
primary systems, and have established alternative communication networks where
available. However, we do not operate all of our redundant systems on a real
time basis and cannot assure you that our business activities would not be
materially disrupted if there were a partial or complete failure of any of
these
primary information technology systems or communication networks. Such failures
could be caused by, among other things, software bugs, computer virus attacks
or
conversion errors due to system upgrading. In addition, any security breach
caused by unauthorized access to information or systems, or intentional
malfunctions or loss or corruption of data, software, hardware or other computer
equipment, could have a material adverse effect on our business, results of
operations and financial condition.
Our
ability to remain competitive and achieve further growth will depend in part
on
our ability to upgrade our information technology systems and increase our
capacity on a timely and cost effective basis. Any substantial failure to
improve or upgrade information technology systems effectively or on timely
basis
could materially and adversely affect our competitiveness, results of operations
and financial condition.
Operational
problems or errors can have a material adverse impact on our business, financial
condition and results of operations.
Santander-Chile,
like all large financial institutions, is exposed to many types of operational
risks, including the risk of fraud by employees and outsiders, failure to obtain
proper internal authorizations, failure to properly document transactions,
equipment failures and errors by employees. Fraud or other misconduct by
employees or third parties may be difficult to detect and prevent and could
subject us to financial losses and sanctions imposed by governmental authorities
as well as seriously harm our reputation. Although Santander-Chile
maintains a system of operational controls, there can be no assurance that
operational problems or errors will not occur and that their occurrence will
not
have a material adverse impact on our business, financial condition and results
of operations.
Banking
regulations may restrict our operations and thereby adversely affect our
financial condition and results of operations.
We
are
subject to regulation by the Superintendency of Banks. In addition, we are
subject to regulation by the Central Bank with regard to certain matters,
including reserve requirements and interest rates and foreign exchange
mismatches and market risks . During the Chilean financial crisis of 1982 and
1983, the Central Bank and the Superintendency of Banks strictly controlled
the
funding, lending and general business matters of the banking industry in
Chile.
Pursuant
to the General Banking Law, all Chilean banks may, subject to the approval
of the Superintendency of Banks, engage in certain businesses other than
commercial banking depending on the risk associated with such business and
the
financial strength of the bank. Such additional businesses include securities
brokerage, mutual fund management, securitization, insurance brokerage, leasing,
factoring, financial advisory, custody and transportation of securities, loan
collection and financial services. The General Banking Law also provides the
Chilean banking system with a modified version of the capital adequacy
guidelines issued by the Basle Committee on Banking Regulation and Supervisory
Practices and limits the discretion of the Superintendency of Banks to deny
new
banking licenses. There can be no assurance that regulators will not in the
future impose more restrictive limitations on the activities of banks, including
us, than those currently in effect. Any such change could have a material
adverse effect on our financial condition or results of operations.
Historically,
Chilean banks have not paid interest on amounts deposited in checking accounts.
However, since June 1, 2002, the Central Bank allows banks to pay interest
on
checking accounts. Currently, there are no applicable restrictions on the
interest that may be paid on checking accounts. We have begun to pay interest
on
some checking accounts under certain conditions. If competition or other factors
lead us to pay higher interest rates on checking accounts, to relax the
conditions under which we pay interest or to increase the number of checking
accounts on which we pay interest, any such change could have a material adverse
effect on our financial condition or results of operations.
We
must
maintain higher regulatory capital to risk-weighted assets than other banks
in
Chile. The merger of Old Santander-Chile and Santiago required a special
regulatory preapproval of the Superintendency of Banks, which was granted on
May
16, 2002. The resolution granting this preapproval imposed a mandatory minimum
regulatory capital to risk weighted assets ratio of 12% for the merged bank
compared to the 8% minimum for other banks in Chile. Effective January 1, 2005,
the Superintendency of Banks lowered our minimum regulatory capital to risk-
weighted assets ratio to 11%. Although we have not failed in the past
to comply with our capital maintenance obligations, there can be no assurance
that we will be able to do so in the future.
We
are subject to regulatory inspections and
examinations.
We
are
also subject to various inspections, examinations, inquiries, audits and other
regulatory requirements by Chilean regulatory authorities. We cannot
assure you that we will be able to meet all the applicable regulatory
requirements and guidelines, or that we will not be subject to sanctions, fines
and other penalties in the future as a result of non-compliance. If sanctions,
fines and other penalties are imposed on us for failure to comply with
applicable requirements, guidelines or regulations, our business, financial
condition, results of operations and our reputation and ability to engage in
business may be materially and adversely affected.
Risks
Relating to Chile
Our
growth and profitability depend on the level of economic activity in
Chile.
A
substantial amount of our loans are to borrowers doing business in Chile.
Accordingly, the recoverability of these loans in particular, our ability to
increase the amount of loans outstanding and our results of operations and
financial condition in general, are dependent to a significant extent on the
level of economic activity in Chile. Our results of operations and financial
condition could be affected by changes in economic or other policies of the
Chilean government, which has exercised and continues to exercise a substantial
influence over many aspects of the private sector, or other political or
economic developments in Chile. We cannot assure you that the Chilean economy
will continue to grow in the future or that those future developments in or
affecting Chile’s exports will not materially and adversely affect our business,
financial condition or results of operations.
Economic
problems encountered by other countries may adversely affect the Chilean
economy, our results of operations and the market value of our
securities.
The
prices
of securities issued by Chilean companies, including banks, are to varying
degrees influenced by economic and market considerations in other
countries. We cannot assure you that future developments in or
affecting the Chilean economy, including consequences of economic difficulties
in other markets, will not materially and adversely affect our business,
financial condition or results of operations.
We
are
directly exposed to risks related to the weakness and volatility of the economic
and political situation in Latin America, especially in Argentina and Brazil.
Although the government have stimulated economic growth in Argentina, if
Argentina’s economic environment significantly deteriorates or does not further
improve, the economy in Chile, as a neighboring country and trading
partner, could also be affected and could experience slower growth than in
recent years. The recent cuts in gas exports from Argentina to Chile could
also
adversely affect economic growth in Chile. Our business could be affected by
an
economic downturn in Brazil. This could result in the need for us to increase
our loan allowances, thus affecting our financial results, our results of
operations and the price of our securities. At December 31, 2006,
approximately 3.3% of our loans were held abroad and 0.60% of our loans were
comprised of loans to companies in Latin American countries. We cannot assure
you that crisis and political uncertainty in other Latin American countries
will
not have an adverse effect on Chile, the price of our securities or our
business.
Currency
fluctuations could adversely affect our financial condition and results of
operations and the value of our securities.
Any
future
changes in the value of the Chilean peso against the U.S. dollar could affect
the dollar value of our securities. The peso has been subject to large
devaluations and appreciations in the past and could be subject to
significant
fluctuations in the future. Our results of operations may be affected by
fluctuations in the exchange rates between the peso and the dollar despite
our
policy and Chilean regulations relating to the general avoidance of material
exchange rate exposure. In order to avoid material exchange rate exposure,
we
enter into forward exchange transactions. The following table shows the value
of
the Chilean peso relative to the U.S. dollar as reported by the Central Bank
at
year end for the last five years.
|
|
|
Exchange
rate (Ch$)
Year-end
|
|
|
Devaluation
(appreciation) (%)
|
|
|
2002
|
|
|
712.38
|
|
|
|
8.6%
|
|
|
2003
|
|
|
599.42
|
|
|
|
(15.9%)
|
|
|
2004
|
|
|
559.83
|
|
|
|
(6.6%)
|
|
|
2005
|
|
|
514.21
|
|
|
|
(8.1%)
|
|
|
2006
|
|
|
534.43
|
|
|
|
3.9%
|
|
We
may
decide to change our policy regarding exchange rate exposure. Regulations that
limit such exposures may also be amended or eliminated. Greater exchange rate
risk will increase our exposure to the devaluation of the peso, and any such
devaluation may impair our capacity to service foreign currency obligations
and
may, therefore, materially and adversely affect our financial condition and
results of operations. Notwithstanding the existence of general policies and
regulations that limit material exchange rate exposures, the economic policies
of the Chilean government and any future fluctuations of the peso against the
dollar could affect our financial condition and results of
operations.
Furthermore,
Chilean tradings in the shares underlying our ADSs will be conducted in pesos.
Cash distributions with respect to our shares of common stock are received
in
Chilean pesos by the depositary which then will convert such amounts to U.S.
dollars at the then prevailing exchange rate for the purpose of making payments
in respect of our ADSs. If the value of the Chilean peso falls relative to
the
U.S. dollar, the dollar value of our ADSs and any distributions to be received
from the depositary will be reduced. In addition, the depositary will incur
customary current conversion costs (to be borne by the holders of our ADSs)
in
connection with the conversion and subsequent distribution of dividends or
other
payments.
Chile’s
banking regulatory and capital markets environment is continually evolving
and
may change.
Chilean
laws, regulations, policies and interpretations of laws relating to the banking
sector and financial institutions are continually evolving and changing. For
example, legislation is being discussed regarding the elimination of reserve
requirements, permissions to enter the pension fund business and modifications
to maximum lending rates. Changes in banking regulations may
materially and adversely affect our business, financial condition and results
of
operations.
In
addition, certain aspects of Chilean legislation governing the capital markets
is currently being reviewed by the Constitutional Court, after being approved
by
the Chilean Congress and a new law known as Mercado de Capitales II
(“MK2”) is expected to be passed soon. MK2 is expected to, among
other things, modify certain provisions set forth in the General Banking Law
that limit the lending activity of banks. Under current legislation,
banks are not allowed to grant unsecured loans to one individual or entity
in an
aggregate amount in excess of 5% of the regulatory capital of the
bank. This limit is increased to 25% if the amount that exceeds said
5% corresponds to loans secured by collateral with an aggregate value equal
to
or higher than such excess. MK2 is expected to increase these limits
to 10% and 30% of the regulatory capital of the bank, respectively, unless
the
loans are granted to individuals or entities directly or indirectly related
to
the property or management of the bank, in which case the limits are expected
to
be maintained in 5% and 25%, respectively. Although any such increase
may increase our lending activity, it may also increase the risks associated
with the growth of our loan portfolio. See “Item 3: Key
Information—D. Risk Factors—Risks Associated with Our Business—The
growth of our loan portfolio may expose us to increased loan
losses.”
Any
downgrading of Chile debt credit rating for domestic and international debt
by
international credit rating agencies may adversely affect our business, our
future financial performance, stockholder’s equity and the price of our shares
and ADSs.
Our
ratings are equivalent to the Chilean sovereign ratings. In 2006, Moody’s
improved its rating for the Republic of Chile and also for us. Any adverse
revisions to Chile’s credit ratings for domestic and international debt by
international rating agencies may adversely affect our ratings, and our
business, future financial performance, stockholder’s equity and the price of
our equity shares and ADSs.
Chile
has different corporate disclosure and accounting standards than those you
may
be familiar with in the United States.
We
prepare
our financial statements in accordance with Chilean GAAP, which requires
management to make estimates and assumptions with respect to certain matters
that are inherently uncertain. The consolidated financial statements include
various estimates and assumptions, including but not limited to the adequacy
of
the allowance for loan losses, estimates of the fair value of certain financial
instruments, the selection of useful lives of certain assets and the valuation
and recoverability of goodwill and deferred taxes. We evaluate these estimates
and judgments on an ongoing basis. Management bases its estimates and judgments
on historical experience and on various other factors that are believed to
be
reasonable under the circumstances. Actual results in future periods could
differ from those produced by such estimates and assumptions, and if these
differences were significant enough, our reported results of operations would
be
affected materially.
Accounting,
financial reporting and securities disclosure requirements in Chile differ
from
those in the United States. Accordingly, the information about us available
to
you will not be the same as the information available to shareholders of a
U.S.
financial institution. There are also material differences between Chilean
and
U.S. accounting and financial reporting standards. As a result, Chilean
financial statements and reported earnings generally differ from those reported
based on U.S. accounting and reporting standards.
As
a
regulated financial institution, we are required to submit to the
Superintendency of Banks unaudited unconsolidated balance sheets and income
statements, excluding any note disclosure, prepared in accordance with Chilean
GAAP and the rules of the Superintendency of Banks on a monthly basis. Such
disclosure differs in a number of significant respects from information
generally available in the United States with respect to U.S. financial
institutions.
The
securities laws of Chile, which govern open or publicly listed companies such
as
us, have a principal objective of promoting disclosure of all material
corporate information to the public. Chilean disclosure requirements, however,
differ from those in the United States in some material respects. In addition,
although Chilean law imposes restrictions on insider trading and price
manipulation, applicable Chilean laws are different from those in the United
States and in certain respects the Chilean securities markets are not as highly
regulated and supervised as the U.S. securities markets.
Our
status as a controlled company and a foreign private issuer exempts us from
certain of the corporate governance standards of the New York Stock Exchange,
limiting the protections afforded to investors.
We
are a
“controlled company” and a “foreign private issuer” within the meaning of the
New York Stock Exchange corporate governance standards. Under the New York
Stock
Exchange rules, a controlled company is exempt from certain New York Stock
Exchange corporate governance requirements. In addition, a foreign private
issuer may elect to comply with the practice of its home country and not to
comply with certain New York Stock Exchange corporate governance requirements,
including the requirements that (1) a majority of the board of directors consist
of independent directors, (2) a nominating and corporate governance committee
be
established that is composed entirely of independent directors and has a written
charter addressing the committee's purpose and responsibilities, (3) a
compensation committee be established that is composed entirely of independent
directors and has a written charter addressing the committee's purpose and
responsibilities and (4) an annual performance evaluation of the nominating
and
corporate governance and compensation committees be undertaken. We currently
use
these exemptions and intend to continue using these exemptions. Accordingly,
you
will not have the same
protections
afforded to shareholders of companies that are subject to all New York Stock
Exchange corporate governance requirements.
Chile
imposes controls on foreign investment and repatriation of investments that
may
affect your investment in, and earnings from, our
ADSs.
Equity
investments in Chile by persons who are not Chilean residents have generally
been subject to various exchange control regulations which restrict the
repatriation of the investments and earnings therefrom. In April 2001, the
Central Bank eliminated the regulations that affected foreign investors except
that investors are still required to provide the Central Bank with information
related to equity investments and conduct such operations within Chile’s Formal
Exchange Market. The ADSs are subject to a contract, dated May 17, 1994, among
the depositary, us and the Central Bank (the “Foreign Investment Contract”) that
remains in full force and effect. The ADSs continue to be governed by
the provisions of the Foreign Investment Contract subject to the regulations
in
existence prior to April 2001. The Foreign Investment Contract grants
the depositary and the holders of the ADSs access to the Formal Exchange Market,
which permits the depositary to remit dividends it receives from us to the
holders of the ADSs. The Foreign Investment Contract also permits ADS
holders to repatriate the proceeds from the sale of shares of our common stock
withdrawn from the ADR facility, or that have been received free of payment
as a
consequence of spin offs, mergers, capital increases, wind-ups, share dividends
or preemptive rights transfers, enabling them to acquire the foreign currency
necessary to repatriate earnings from such investments. Pursuant to Chilean
law,
the Foreign Investment Contract cannot be amended unilaterally by the Central
Bank, and there are judicial precedents (although not binding with respect
to
future judicial decisions) indicating that contracts of this type may not be
abrogated by future legislative changes or resolutions of the Advisory Council
of the Central Bank. Holders of shares of our common stock, except for shares
of
our common stock withdrawn from the ADS facility or received in the manner
described above, are not entitled to the benefits of the Foreign Investment
Contract, may not have access to the Formal Exchange Market, and may have
restrictions on their ability to repatriate investments in shares of our common
stock and earnings therefrom.
Holders
of
ADSs are entitled to receive dividends on the underlying shares to the same
extent as the holders of shares. Dividends received by holders of ADSs will
be
paid net of foreign currency exchange fees and expenses of the depositary and
will be subject to Chilean withholding tax, currently imposed at a rate of
35.0%
(subject to credits in certain cases). If for any reason, including changes
in
Chilean law, the depositary were unable to convert Chilean pesos to U.S.
dollars, investors would receive dividends and other distributions, if any,
in
Chilean pesos.
We
cannot
assure you that additional Chilean restrictions applicable to holders of our
ADSs, the disposition of the shares underlying them or the repatriation of
the
proceeds from such disposition or the payment of dividends will not be imposed
in the future, nor can we advise you as to the duration or impact of such
restrictions if imposed.
ADS
holders may not be able to effect service of process on, or enforce judgments
or
bring original actions against, us, our directors or our executive officers,
which may limit the ability of holders of ADSs to seek relief against
us.
We
are a
Chilean corporation. None of our directors are residents of the United States
and most of our executive officers reside outside the United States. In
addition, a substantial portion of our assets and the assets of our directors
and executive officers are located outside the United States. As a result,
it
may be difficult for ADS holders to effect service of process outside Chile
upon
us or our directors and executive officers or to bring an action against us
or
such persons in the United States or Chile to enforce liabilities based on
U.S.
federal securities laws. It may also be difficult for ADS holders to enforce
in
the United States or in Chilean courts money judgments obtained in United States
courts against us or our directors and executive officers based on civil
liability provisions of the U.S. federal securities laws. If a U.S. court grants
a final money judgment in an action based on the civil liability provisions
of
the federal securities laws of the United States, enforceability of this money
judgment in Chile will be subject to the obtaining of the relevant "exequatur"
(i.e., recognition and enforcement of the foreign judgment) according to Chilean
civil procedure law currently in force, and consequently, subject to the
satisfaction of certain factors. The most important of these factors are the
existence of reciprocity, the absence of a conflicting judgment by a Chilean
court relating to the same parties and arising from the same facts and
circumstances and the Chilean courts’ determination that the U.S. courts had
jurisdiction, that process was appropriately served on the defendant and that
enforcement
would not violate Chilean public policy. Failure to satisfy any of such
requirements may result in non-enforcement of your rights.
We
cannot assure you of the accuracy or comparability of facts, forecasts and
statistics contained in this report with respect to Chile, its economy and
global banking industries.
Facts,
forecasts and statistics in this document relating to Chile, Chile’s economy and
Chilean global banking industries, including market share information, are
derived form various official and other publicly available sources generally
believed to be reliable. However, we cannot guarantee the quality and
reliability of such official and other sources of materials. In addition, these
facts, forecasts and statistics have not been independently verified by us
and,
therefore, we make no representation as to the accuracy of such facts, forecasts
and statistics, which may not be consistent with other information compiled
within or outside of Chile and may not be complete or up to date. We have taken
reasonable care in reproducing or extracting the information from such sources.
However, because of possible flawed or ineffective methodologies underlying
the
published information or discrepancies between the published information and
market practice and other problems, these facts, forecasts or statistics may
be
inaccurate and may not be comparable from period to period or to facts,
forecasts or statistics produced for other economies, and you should not unduly
rely upon them.
Risks
Relating to our ADSs
There
may be a lack of liquidity and market for our shares and
ADSs.
The
ADSs
are listed and traded on the NYSE. The common stock is listed and traded on
the
Santiago Stock Exchange, the Chile Electronic Stock Exchange and the Valparaiso
Stock Exchange, which we refer to collectively as the Chilean Stock Exchanges,
although the trading market for the common stock is small by international
standards. At December 31, 2006, we had 188,446,126,794 shares of common stock
outstanding. The Chilean securities markets are substantially smaller, less
liquid and more volatile than major securities markets in the United States.
According to Article 14 of the Ley de Mercado de Valores, Ley No.
18,045, or the Chilean Securities Market Law, the Superintendencia de
Valores y Seguros, or the Superintendency of Securities and Insurance, may
suspend the offer, quotation or trading of shares of any company listed on
one
or more Chilean Stock Exchanges for up to 30 days if, in its opinion, such
suspension is necessary to protect investors or is justified for reasons of
public interest. Such suspension may be extended for up to 120 days. If, at
the
expiration of the extension, the circumstances giving rise to the original
suspension have not changed, the Superintendency of Securities and Insurance
will then cancel the relevant listing in the registry of securities. In
addition, the Santiago Stock Exchange may inquire as to any movement in the
price of any securities in excess of 10% and suspend trading in such securities
for a day if it deems necessary.
Although
the common stock is traded on the Chilean Stock Exchanges, there can be no
assurance that a liquid trading market for the common stock will continue.
Approximately 23.09% of our outstanding common stock is held by the public
(i.e., shareholders other than Banco Santander Central Hispano S.A., to which
we
refer as Banco Santander Central Hispano, and its affiliates), including our
shares that are represented by ADSs trading on the NYSE. A limited
trading market in general and our concentrated ownership in particular may
impair the ability of an ADS holder to sell in the Chilean market shares of
common stock obtained upon withdrawal of such shares from the ADR facility
in
the amount and at the price and time such holder desires, and could increase
the
volatility of the price of the ADSs.
You
may be unable to exercise preemptive rights.
The
Ley Sobre Sociedades Anónimas, Ley No. 18,046 and the Reglamento de
Sociedades Anónimas, which we refer to collectively as the Chilean
Companies Law, and applicable regulations require that whenever we issue new
common stock for cash, we grant preemptive rights to all of our shareholders
(including holders of ADSs), giving them the right to purchase a sufficient
number of shares to maintain their existing ownership percentage. Such an
offering would not be possible unless a registration statement under the U.S.
Securities Act of 1933, as amended, were effective with respect to such rights
and common stock or an exemption from the registration requirements thereunder
were available.
Since
we
are not obligated to elect to make a registration statement available with
respect to such rights and the common stock, you may not be able to exercise
your preemptive rights. If a registration statement is not filed or an
applicable exemption is not available, the depositary will sell such holders’
preemptive rights and distribute the proceeds thereof if a premium can be
recognized over the cost of any such sale.
You
may have fewer and less well defined shareholders’ rights than with shares of a
company in the United States.
Our
corporate affairs are governed by our estatutos, or bylaws, and the
laws of Chile. Under such laws, our shareholders may have fewer or less well
defined rights than they might have as shareholders of a corporation
incorporated in a U.S. jurisdiction. For example, under legislation applicable
to Chilean banks, our shareholders would not be entitled to appraisal rights
in
the event of a merger or other business combination undertaken by
us.
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Overview
We
were
formed on August 1, 2002 through the merger of Santiago and Old
Santander-Chile, both of which were subsidiaries of our controlling shareholder,
Banco Santander Central Hispano. We are the largest bank in Chile in terms
of
total assets, total deposits, loans and shareholders’ equity. At December 31,
2006, we had total assets of Ch$14,843,439 million (US$27,774 million), loans
net of allowances outstanding of Ch$11,614,895 million (US$21,733 million),
deposits of Ch$9,392,332 million (US$17,574 million) and shareholders’ equity of
Ch$1,245,339 million (US$2,330 million). As of December 31, 2006, we employed
8,184 people (on a consolidated basis) and had the largest private branch
network in Chile with 397 branches (includes payment centers Santander
SuperCaja). Our headquarters are located in Santiago and we operate in every
major region of Chile.
We
provide
a broad range of commercial and retail banking services to our customers,
including Chilean peso and foreign currency denominated loans to finance a
variety of commercial transactions, trade financing, foreign currency forward
contracts, credit lines and a variety of retail banking services, including
mortgage financing. We seek to offer our customers a wide range of products
while providing high levels of service. In addition to our traditional banking
operations, we offer a variety of financial services including financial
leasing, financial advisory services, mutual fund management, securities
brokerage, insurance brokerage and investment management.
The
legal
predecessor of Santander-Chile was Banco Santiago (Santiago). Santiago was
incorporated by public deed dated September 7, 1977 granted at the Notary Office
of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate
and function as a bank by Resolution No. 118 of the Superintendency of Banks
on
October 27, 1977. The Bank’s bylaws were approved by Resolution No. 103 of the
Superintendency of Banks on September 22, 1977. In January 1997, Santiago merged
with Banco O’Higgins with Santiago being the surviving entity. In
1999, Santiago became a controlled subsidiary of Banco Santander Central
Hispano. As of June 30, 2002, Santiago was the second largest private
sector bank in Chile in terms of total assets, deposits, loans and shareholders’
equity.
Old
Santander-Chile was established as a subsidiary of Banco Santander Central
Hispano in 1978. In 1982, Old Santander-Chile acquired a significant portion
of
the assets and liabilities of Banco Español-Chile, a domestic bank that had
become insolvent. In July 1996, Old Santander-Chile was merged into Banco Osorno
y la Unión ("Banco Osorno") becoming “Banco Santander-Chile”, the third largest
private bank in terms of outstanding loans at that date.
Our
principal executive offices are located at Bandera 140, Santiago, Chile. Our
telephone number is 562-320-2000 and our website is www.santandersantiago.cl.
None of the information contained on our website is incorporated by reference
into, or forms part of, this Annual Report. Our agent for service of
process in the United States is Puglisi & Associates.
Relationship
with Banco Santander Central Hispano
We
believe
that our relationship with our controlling shareholder, Banco Santander Central
Hispano, offers us a significant competitive advantage over our peer Chilean
banks. Banco Santander Central Hispano is one of the largest financial groups
in
Latin America, in terms of total assets measured on a region-wide basis. It
is
the largest financial group in Spain and is a major player elsewhere in Europe,
including the United Kingdom through its Abbey subsidiary and Portugal, where
it
is the third-largest banking group. Through Santander Consumer it
also operates a leading consumer finance franchise in Germany, Italy, Spain
and
several other European countries.
Our
relationship with Banco Santander Central Hispano provides us with access to
the
group’s client base, while its multinational focus allows us to offer
international solutions to our clients’ financial needs. We also have the
benefit of selectively borrowing from Banco Santander Central Hispano’s product
offerings in other countries as well as benefiting from their know-how in
systems management. We believe that our relationship with Banco Santander
Central Hispano will also enhance our ability to manage credit and market risks
by adopting policies and know-how developed by Banco Santander Central Hispano.
Our internal auditing function has been strengthened and is more independent
from management as a result of the addition of an internal auditing department
that concurrently reports directly to our Audit Committee and the audit
committee of Banco Santander Central Hispano. We believe that this structure
leads to improved monitoring and control of our exposure to operational
risks.
Banco
Santander Central Hispano’s support includes the assignment of managerial
personnel to key supervisory areas of Santander-Chile, like Risks, Auditing,
Accounting and Financial Control. Santander-Chile does not pay any management
fees to Banco Santander Central Hispano in connection with these support
services.
B.
Organizational Structure
Banco
Santander Central Hispano controls Santander-Chile through its holdings in
Teatinos Siglo XXI S.A., which we refer to as "Teatinos Siglo XXI",
and
Santander-Chile Holding, both controlled subsidiaries. This gives Santander
Central Hispano control over 76.91% of the shares of the Bank. Economic
participation when excluding minority shareholders that participate in Santander
Chile Holding is 76.73%.
|
|
|
|
|
|
|
Teatinos
Siglo XXI S.A.
|
|
|
78,108,391,607
|
|
|
|
41.45% |
|
Santander
Chile Holding
|
|
|
66,822,519,695
|
|
|
|
35.46% |
|
Management
Team
The
chart
below sets forth the names and areas of responsibility of our senior commercial
managers.
The
chart
below sets forth the names and areas of responsibilities of our operating
managers.
C.
Business Overview
We
have
375 branches in total, 103 of which operated under the Santander Banefe brand
name. The remaining 272 branches are operated under the Santander Santiago
brand
name. In addition, we have 22 payment centers with a brand name of Santander
SuperCaja. We provide a full range of financial services to corporate and
individual customers. We divide our clients into the following
segments:
The
retail
segment primarily serves the following types of customers:
|
·
|
Lower-middle
to middle-income (Santander Banefe), consisting of individuals with
monthly income between Ch$120,000 (US$225) and Ch$400,000 (US$749),
which
are served through our Banefe branch network. This segment accounts
for
5.1% of our loans at December 31, 2006. This segment offers customers
a
range of products, including consumer loans, credit cards, auto loans,
residential mortgage loans, debit card accounts, savings products,
mutual
funds and insurance brokerage.
|
|
·
|
Middle-
and upper-income, consisting of individuals with a monthly income
greater than Ch$400,000 (US$749). Clients in this segment account
for
38.1% of our loans at December 31, 2006 and are offered a range of
products, including consumer loans, credit cards, auto loans, commercial
loans, foreign trade financing, residential mortgage loans, checking
accounts, savings products, mutual funds and insurance
brokerage.
|
|
·
|
Small
businesses, consisting of small companies with annual sales less than
Ch$1,200 million (US$2.2 million). At December 31, 2006, small
companies, or SMEs, represented approximately 16.0% of our total
loans outstanding. Customers in this segment are offered a range
of
products, including commercial loans, leasing, factoring, foreign
trade,
credit cards, mortgage loans, checking accounts, savings products,
mutual
funds and insurance brokerage.
|
The
Middle-market segment consists primarily of mid-sized companies,
companies in the real estate sector and large companies.
|
·
|
Mid-sized
companies, consisting of companies with annual sales over Ch$1,200
million (US$2.2 million) and up to Ch$3,500 million (US$6.5 million).
Customers in this segment are offered a wide range of products, including
commercial loans, leasing, factoring, foreign trade, credit cards,
mortgage loans, checking accounts, cash management, treasury services,
financial advisory, savings products, mutual funds and insurance
brokerage. At December 31, 2006, these clients represented 8.2% of
our
total loans outstanding.
|
|
·
|
Real
estate. This segment includes all companies in the real estate
sector. At December 31, 2006, these clients represented 4.7% of our
total
loans outstanding. Apart
|
|
|
from
traditional banking services, we also offer clients in the real
estate
sector specialized services for financing primarily residential
projects
in order to increase the sale of residential mortgage
loans.
|
|
·
|
Large
companies, consisting of companies with annual sales over Ch$3,500
million (US$6.5 million). Customers in this segment are offered a
wide
range of products, including commercial loans, leasing, factoring,
foreign
trade, credit cards, mortgage loans, checking accounts, cash management,
treasury services, financial advisory, savings products, mutual funds
and
insurance brokerage. At December 31, 2006, these clients represented
9.6%
of our total loans outstanding.
|
The
Wholesale segment is comprised of:
|
·
|
Companies
that are foreign multinationals or part of a large Chilean economic
group
with sales over Ch$3,500 million (US$6.5 million). At December 31,
2006,
these clients represented 15.1% of our total loans outstanding. Customers
in this segment are offered a wide range of products, including commercial
loans, leasing, factoring, foreign trade, mortgage loans, checking
accounts, cash management, treasury services, financial advisory,
savings
products, mutual funds and insurance
brokerage.
|
The
Institutional segment is comprised of:
|
·
|
Institutional
corporations such as universities, government agencies, municipalities
and
regional governments. At December 31, 2006, these clients represented
1.9%
of our total loans outstanding. We offer these customers a range of
products, including commercial loans, leasing, factoring, foreign
trade,
credit cards, mortgage loans, checking accounts, cash management,
savings
products, mutual funds and insurance
brokerage.
|
The
Treasury Division provides sophisticated financial products mainly to companies
in the wholesale banking and the middle market segments, including such products
as short-term financing and funding, securities brokerage, interest rate and
foreign currency derivatives, securitization services and other
tailored financial products. The Treasury division also manages the Bank’s
trading positions as well as the non-trading investment portfolio.
Our
leasing subsidiary (Santiago Leasing S.A.) has been segmented into the above
categories. The subsidiary Santander S.A. Agente de Valores is included in
the
Treasury Division and the mutual fund and insurance brokerage subsidiaries
are
included in the various sub-segments (other than in the Treasury
Division).
The
table
below sets forth our lines of business and certain statistical information
relating to each of them at and for the year ended December 31, 2006. Please
see
Note 26(y) to our Audited Consolidated Financial Statements for details of
revenue by business segment in the last three years.
|
|
At
and for the year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan loss provisions (1)
|
|
|
Financial
transactions, net (2)
|
|
|
Net
segment contribution (3)
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Individuals
|
|
|
5,097,010
|
|
|
|
332,444
|
|
|
|
103,476
|
|
|
|
(101,753 |
) |
|
|
-
|
|
|
|
334,167
|
|
Santander
Banefe
|
|
|
602,960
|
|
|
|
104,505
|
|
|
|
22,059
|
|
|
|
(51,893 |
) |
|
|
-
|
|
|
|
74,671
|
|
Middle-upper
income
|
|
|
4,487,044
|
|
|
|
227,590
|
|
|
|
81,374
|
|
|
|
(49,957 |
) |
|
|
-
|
|
|
|
259,007
|
|
Santiago
Leasing S.A.
|
|
|
7,006
|
|
|
|
349
|
|
|
|
43
|
|
|
|
97
|
|
|
|
-
|
|
|
|
489
|
|
Small
companies
|
|
|
1,890,736
|
|
|
|
129,854
|
|
|
|
28,671
|
|
|
|
(20,840 |
) |
|
|
-
|
|
|
|
137,685
|
|
Total
Retail
|
|
|
6,987,746
|
|
|
|
462,298
|
|
|
|
132,147
|
|
|
|
(122,593 |
) |
|
|
-
|
|
|
|
471,852
|
|
Middle-market
|
|
|
2,679,108
|
|
|
|
73,820
|
|
|
|
13,981
|
|
|
|
(720 |
) |
|
|
-
|
|
|
|
87,081
|
|
Mid-sized
companies
|
|
|
962,649
|
|
|
|
33,341
|
|
|
|
6,846
|
|
|
|
(3,501 |
) |
|
|
-
|
|
|
|
36,686
|
|
Real
estate
|
|
|
554,294
|
|
|
|
10,350
|
|
|
|
1,422
|
|
|
|
1,634
|
|
|
|
-
|
|
|
|
13,406
|
|
Large
companies
|
|
|
1,128,536
|
|
|
|
28,456
|
|
|
|
5,508
|
|
|
|
680
|
|
|
|
-
|
|
|
|
34,644
|
|
Santiago
Leasing S.A.
|
|
|
33,629
|
|
|
|
1,673
|
|
|
|
205
|
|
|
|
467
|
|
|
|
-
|
|
|
|
2,345
|
|
Wholesale
|
|
|
1,782,052
|
|
|
|
30,469
|
|
|
|
7,536
|
|
|
|
703
|
|
|
|
-
|
|
|
|
38,708
|
|
|
|
At
and for the year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan loss provisions (1)
|
|
|
Financial
transactions, net (2)
|
|
|
Net
segment contribution (3)
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Institutional
|
|
|
229,242
|
|
|
|
9,510
|
|
|
|
1,201
|
|
|
|
481
|
|
|
|
-
|
|
|
|
11,192
|
|
Treasury
(4)
|
|
|
-
|
|
|
|
32,479
|
|
|
|
1,303
|
|
|
|
-
|
|
|
|
51,604
|
|
|
|
85,386
|
|
Others
(5)
|
|
|
110,811
|
|
|
|
3,678
|
|
|
|
6,382
|
|
|
|
(893 |
) |
|
|
-
|
|
|
|
9,167
|
|
Total |
|
|
11,788,959
|
|
|
|
612,254
|
|
|
|
162,550
|
|
|
|
(123,022 |
) |
|
|
51,604 |
|
|
|
703,386 |
|
|
(1)
Includes gross provisions for loan losses, net of releases on
recoveries.
|
|
(2)
Includes the net gains from trading, net mark-to-market gains and
net
foreign exchange transactions.
|
|
(3)
Equal to the sum of net interest revenue, net fee income and net
financial
transactions, minus net provision for loan
losses.
|
|
(4)
Includes Santander S.A. Agente de
Valores.
|
|
(5)
Includes contribution of other Bank subsidiaries and other non-segmented
items.
|
Operations
through Subsidiaries
The
General Banking Law was amended on November 4, 1997, to extend the scope of
a
bank’s permissible activities, which permitted us to directly
provide leasing and financial advisory services we could formerly offer
only through our subsidiaries, to offer investment advisory services outside
of
Chile and to undertake activities we could not formerly offer directly or
through subsidiaries, such as factoring, securitization, foreign investment
funds, custody and transport of securities and insurance brokerage
services.
For
the
year ended December 31, 2006, our subsidiaries collectively accounted for
approximately 13% of our consolidated net income. The assets and operating
income of these subsidiaries as of and for the year ended December 31, 2006
represented 5.6% and 7.6% of our total assets and operating income,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santiago
Leasing S.A.
|
|
|
99.50
|
|
|
|
—
|
|
|
|
99.50
|
|
|
|
99.50
|
|
|
|
—
|
|
|
|
99.50
|
|
Santiago
Corredores de Bolsa Ltda.
|
|
|
99.19
|
|
|
|
0.81
|
|
|
|
100.00
|
|
|
|
99.19
|
|
|
|
0.81
|
|
|
|
100.00
|
|
Santander
Santiago S.A. Administradora General de Fondos
|
|
|
99.96
|
|
|
|
0.02
|
|
|
|
99.98
|
|
|
|
99.96
|
|
|
|
0.02
|
|
|
|
99.98
|
|
Santander
S.A. Agente de Valores
|
|
|
99.03
|
|
|
|
—
|
|
|
|
99.03
|
|
|
|
99.03
|
|
|
|
—
|
|
|
|
99.03
|
|
Santander
Santiago S.A. Sociedad Securitizadora
|
|
|
99.64
|
|
|
|
—
|
|
|
|
99.64
|
|
|
|
99.64
|
|
|
|
—
|
|
|
|
99.64
|
|
Santander
Santiago Corredora de Seguros Ltda.
|
|
|
99.99
|
|
|
|
—
|
|
|
|
99.99
|
|
|
|
99.99
|
|
|
|
—
|
|
|
|
99.99
|
|
Santander
Servicios de Recaudación y Pagos Ltda.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99.90
|
|
|
|
0.10
|
|
|
|
100.00
|
|
The
Board
of Directors has approved the merger between Santiago Corredores de Bolsa Ltda,
a subsidiary of the Bank, and Santander Investment S.A. Corredores de Bolsa,
an
indirect subsidiary of Banco Santander Central Hispano. As a result
of the proposed merger, the Bank will own 50.6% of the merged
entity.
Competition
Overview
The
Chilean financial services market consists of a variety of largely distinct
sectors. The most important sector, commercial banking, includes a number of
privately-owned banks and one public-sector bank, Banco del Estado (which
operates within the same legal and regulatory framework as the private-sector
banks). The private-sector banks include local banks and a number of
foreign-owned banks which are operating in Chile. The Chilean banking system
is
comprised of 25 private-sector banks and one public-sector bank. Five
private-sector banks along with the state-owned bank together accounted for
80.4% of all outstanding loans by Chilean financial institutions at December
31,
2006.
The
Chilean banking system has experienced increased competition in recent years
largely due to consolidation in the industry and new legislation. For example,
the merger of Banco de Chile with Banco de A. Edwards, effective January 2,
2002, resulted in the creation at that moment of the largest bank in Chile.
Shortly after that merger was consummated, Banco Santander Central Hispano
announced the merger of the two banks it owned in Chile, Banco Santander-Chile
and Banco Santiago, creating the largest bank in Chile. We also face competition
from non-bank and non-finance competitors (principally department stores) with
respect to some of our credit products, such as credit cards, consumer loans
and
insurance brokerage. In addition, we face competition from non-bank finance
competitors, such as leasing, factoring and automobile finance companies, with
respect to credit products, and mutual funds, pension funds and insurance
companies, with respect to savings products. In May 2007, Falabella,
Chile’s largest retailer, and DKS, Chile’s largest food retailer, announced
plans to merge. According to our internal estimates, this would
create the largest non-bank consumer finance company in
Chile. Currently, banks continue to be the main suppliers of leasing,
factoring and mutual funds, and the insurance sales business has grown
rapidly.
As
shown
in the following table, we are the market leader in substantially all types
of banking services in Chile:
|
|
Market
Share
at
December 31,
2005
|
|
|
Market
Share
at
December 31,
2006
|
|
|
Rank
as of
at
December 31,
2006
|
|
Commercial
loans
|
|
|
19.8 |
% |
|
|
18.7 |
% |
|
|
2
|
|
Consumer
loans
|
|
|
25.6
|
|
|
|
26.7
|
|
|
|
1
|
|
Mortgage
loans (residential and general purpose)
|
|
|
23.5
|
|
|
|
24.2
|
|
|
|
1
|
|
Residential
mortgage loans
|
|
|
24.9
|
|
|
|
25.9
|
|
|
|
1
|
|
Foreign
trade loans (loans for export, import and contingent)
|
|
|
22.0
|
|
|
|
21.5
|
|
|
|
1
|
|
Total
loans
|
|
|
22.6
|
|
|
|
22.3
|
|
|
|
1
|
|
Deposits
|
|
|
21.5
|
|
|
|
22.0
|
|
|
|
1
|
|
Mutual
funds (assets managed)
|
|
|
21.6
|
|
|
|
22.1
|
|
|
|
2
|
|
Credit
card accounts
|
|
|
37.3
|
|
|
|
35.8
|
|
|
|
1
|
|
Checking
Accounts (1)
|
|
|
25.7
|
|
|
|
27.1
|
|
|
|
1
|
|
Branches
(2)
|
|
|
20.3
|
|
|
|
20.3
|
|
|
|
1
|
|
ATM
locations (3)
|
|
|
28.1
|
|
|
|
28.6
|
|
|
|
1
|
|
Source:
Superintendency of Banks
(1)
|
According
to latest data available as of November
2006.
|
(2)
|
According
to latest data available as of March 2007.
Excluding special-service payment
centers.
|
(3)
|
According
to latest data available as of September
2006.
|
Our
market
share in Chile’s commercial loan market decreased from December 31, 2005 to
December 31, 2006, and we ranked the second in this market at December 31,
2006,
compared to the first at December 31, 2005. This is primarily due to
our reduction of the relatively low yielding large corporate
portfolio.
The
following tables set out certain statistics comparing our market position to
that of our peer group, defined as the five largest banks in Chile in terms
of
shareholders’ equity as of December 31, 2006.
Loans
As
of
December 31, 2006, our loan portfolio was the largest among Chilean banks.
Our
loan portfolio on a stand-alone basis represented 22.3% of the market for loans
in the Chilean financial system at such date. The following table sets forth
our
and our peer group’s market shares in terms of loans at the dates
indicated.
|
|
At
December 31, 2006
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Ch$
million
|
|
|
US$
million
|
|
|
Market
Share
|
|
|
Market
Share
|
|
Santander-Chile
|
|
|
11,759,586
|
|
|
|
22,004
|
|
|
|
22.3 |
% |
|
|
22.6 |
% |
Banco
de Chile
|
|
|
9,503,886
|
|
|
|
17,783
|
|
|
|
18.0
|
|
|
|
18.1
|
|
Banco
del Estado
|
|
|
6,999,019
|
|
|
|
13,096
|
|
|
|
13.3
|
|
|
|
13.3
|
|
|
|
At
December 31, 2006
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Ch$
million
|
|
|
US$
million
|
|
|
Market
Share
|
|
|
Market
Share
|
|
Banco
de Crédito e Inversiones
|
|
|
6,544,576
|
|
|
|
12,246
|
|
|
|
12.4
|
|
|
|
12.3
|
|
BBVA,
Chile
|
|
|
4,281,059
|
|
|
|
8,011
|
|
|
|
8.1
|
|
|
|
8.0
|
|
Corpbanca
|
|
|
3,331,824
|
|
|
|
6,234
|
|
|
|
6.3
|
|
|
|
6.4
|
|
Others
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilean
financial system
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Source:
Superintendency of Banks
Deposits
On
a stand
alone basis, we had a 22.0% market share in deposits, ranking the first place
among banks in Chile at December 31, 2006. Deposit market share is based on
total time deposits at the respective dates and the average monthly checking
and
demand deposit accounts for the corresponding months net of clearance. The
following table sets forth our and our peer group’s market shares in terms of
deposits at the dates indicated.
|
|
At December
31, 2006
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Ch$
million
|
|
|
US$
million
|
|
|
Market
Share(1)
|
|
|
Market
Share
|
|
Santander-Chile
|
|
|
9,208,199
|
|
|
|
17,230
|
|
|
|
22.0 |
% |
|
|
21.5 |
% |
Banco
de Chile
|
|
|
7,399,525
|
|
|
|
13,846
|
|
|
|
17.7
|
|
|
|
16.4
|
|
Banco
del Estado
|
|
|
6,401,831
|
|
|
|
11,979
|
|
|
|
15.3
|
|
|
|
17.2
|
|
Banco
de Crédito e Inversiones
|
|
|
5,206,214
|
|
|
|
9,742
|
|
|
|
12.4
|
|
|
|
12.0
|
|
BBVA,
Chile
|
|
|
3,394,178
|
|
|
|
6,351
|
|
|
|
8.1
|
|
|
|
8.0
|
|
Corpbanca
|
|
|
1,930,245
|
|
|
|
3,612
|
|
|
|
4.6
|
|
|
|
5.2
|
|
Others
|
|
|
8,331,739
|
|
|
|
15,590
|
|
|
|
19.9
|
|
|
|
19.7
|
|
Chilean
financial system
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
(1)
|
The
balances of checking and demand deposit accounts are the average
monthly
balances instead of year-end balances, as we believe that period-end
balances are not always reflective of a bank’s position in checking and
demand deposit accounts. The source for the average balances is the
Superintendency of Banks.
|
Shareholders’
equity
With
Ch$1,245,339 million (US$2,330 million) in shareholders’ equity, at December 31,
2006, we were the largest commercial bank in Chile in terms of shareholders’
equity. The following table sets forth our and our peer group’s shareholders’
equity at December 31, 2005 and 2006.
|
|
At
December 31, 2006
|
|
|
At
December 31, 2005
|
|
Equity(1)
|
|
Ch$
million
|
|
|
US$
million
|
|
|
Market
Share
|
|
|
Market
Share
|
|
Santander-Chile
|
|
|
1,245,339
|
|
|
|
2,330
|
|
|
|
21.9 |
% |
|
|
21.1 |
% |
Banco
de Chile
|
|
|
834,631
|
|
|
|
1,562
|
|
|
|
14.7
|
|
|
|
15.1
|
|
Banco
del Estado
|
|
|
502,232
|
|
|
|
940
|
|
|
|
8.8
|
|
|
|
8.7
|
|
Banco
de Crédito e Inversiones
|
|
|
587,599
|
|
|
|
1,099
|
|
|
|
10.3
|
|
|
|
9.8
|
|
BBVA,
Chile
|
|
|
295,786
|
|
|
|
553
|
|
|
|
5.2
|
|
|
|
5.6
|
|
Corpbanca
|
|
|
433,249
|
|
|
|
811
|
|
|
|
7.6
|
|
|
|
7.9
|
|
Others
|
|
|
1,798,086
|
|
|
|
3,365
|
|
|
|
31.5
|
|
|
|
31.8
|
|
Chilean
financial system
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Source:
Superintendency of Banks.
(1)
|
Percentage
of total shareholders’ equity of all Chilean
banks.
|
Efficiency
For
the
year ended December 31, 2006, we were the most efficient bank in our peer group.
The following table sets forth our and our peer group’s efficiency ratio
(defined as operating expenses as a percentage of operating revenue, which
is
aggregate of net interest revenue, fees and income from services (net ) and
other operating income (net)) for the year indicated.
Efficiency
ratio
|
|
As
of December 31, 2006
|
|
|
As
of December 31, 2005
|
|
|
|
%
|
|
|
%
|
|
Santander-Chile
|
|
|
40.6 |
% |
|
|
44.0 |
% |
Banco
de Chile
|
|
|
53.0
|
|
|
|
50.4
|
|
Banco
del Estado
|
|
|
58.9
|
|
|
|
60.7
|
|
Banco
de Crédito e Inversiones
|
|
|
57.3
|
|
|
|
52.7
|
|
BBVA,
Chile
|
|
|
66.6
|
|
|
|
68.6
|
|
Corpbanca
|
|
|
56.6
|
|
|
|
40.7
|
|
Chilean
financial system
|
|
|
52.5 |
% |
|
|
54.1 |
% |
Source:
Superintendency of Banks, stand alone basis
Return
on average equity
As
of
December 31, 2006, we were the second most profitable bank in our peer group
(as
measured by return on average equity) and the second most capitalized bank
as
measured by the BIS ratio. The following table sets forth our and our peer
group’s return on average equity for the year ended December 31, 2005 and 2006
and BIS ratio at the dates indicated:
|
|
Return
on average equity
for
the year ended December 31,
|
|
|
BIS
Ratio
at December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Santander-Chile
|
|
|
24.8 |
% |
|
|
24.1 |
% |
|
|
12.6 |
% |
|
|
12.9 |
% |
Banco
de Chile
|
|
|
25.5
|
|
|
|
26.7
|
|
|
|
10.7
|
|
|
|
11.2
|
|
Banco
del Estado
|
|
|
9.9
|
|
|
|
9.2
|
|
|
|
11.1
|
|
|
|
10.7
|
|
Banco
de Crédito e Inversiones
|
|
|
22.6
|
|
|
|
23.4
|
|
|
|
10.3
|
|
|
|
10.3
|
|
BBVA,
Chile
|
|
|
10.0
|
|
|
|
10.7
|
|
|
|
10.3
|
|
|
|
10.8
|
|
Corpbanca
|
|
|
9.5
|
|
|
|
13.8
|
|
|
|
13.6
|
|
|
|
13.5
|
|
Chilean
Financial System
|
|
|
16.7 |
% |
|
|
16.3 |
% |
|
|
12.5 |
% |
|
|
13.0 |
% |
Source:
Superintendency of Banks, except Santander-Chile. Calculated by dividing annual
net income by monthly average equity. For Santander-Chile, the average equity
is
calculated on a daily basis by the Bank (See Item 5: Operating and Financial
Review and Prospects — D. Selected Statistical Information— Average Balance
Sheets, Income Earned from Interest-Earning Assets and Interest paid on
Interest-Bearing Liabilities.
Asset
Quality
At
December 31, 2006, on a stand alone basis, we had the fourth lowest loan loss
allowance to total loans ratio in our peer group. The following table sets
forth
our and our peer group’s loan loss allowance to total loans ratios as defined by
the Superintendency of Banks at the dates indicated.
|
|
Loan
Loss allowances/total loans
at
December 31,
|
|
|
|
|
|
|
|
|
Santander-Chile
|
|
|
1.46 |
% |
|
|
1.42 |
% |
Banco
de Chile
|
|
|
1.48
|
|
|
|
1.70
|
|
Banco
del Estado
|
|
|
1.67
|
|
|
|
1.64
|
|
Banco
de Crédito e Inversiones
|
|
|
1.27
|
|
|
|
1.54
|
|
BBVA,
Chile
|
|
|
1.14
|
|
|
|
1.35
|
|
Corpbanca
|
|
|
1.40
|
|
|
|
1.56
|
|
Chilean
financial system
|
|
|
1.48 |
% |
|
|
1.61 |
% |
Source:
Superintendency of Banks
D.
Regulation and Supervision
General
In
Chile,
only banks may maintain checking accounts for their customers, conduct foreign
trade operations, and together with non-banking financial institutions, accept
time deposits. The principal authorities that regulate financial institutions
in
Chile are the Superintendency of Banks and the Central Bank. Chilean banks
are
primarily subject to the General Banking Law and secondarily, to the extent
not
inconsistent with this statute, the provisions of the Chilean Companies Law
governing public corporations, except for certain provisions which are expressly
excluded.
The
modern
Chilean banking system dates from 1925 and has been characterized by periods
of
substantial regulation and state intervention, as well as periods of
deregulation. The most recent period of deregulation commenced in 1975 and
culminated in the adoption of a series of amendments to General Banking Law.
That law, amended most recently in 2001, granted additional powers to banks,
including general underwriting powers for new issues of certain debt and equity
securities and the power to create subsidiaries to engage in activities related
to banking, such as brokerage, investment advisory and mutual fund services,
administration of investment funds, factoring, securitization products and
financial leasing services.
The
Central Bank
The
Central Bank is an autonomous legal entity created by the Chilean Constitution.
It is subject to the Chilean Constitution and its own ley orgánica
constitucional, or organic constitutional law. To the extent not
inconsistent with the Chilean Constitution or the Central Bank’s organic
constitutional law, the Central Bank is also subject to private sector laws
(but
in no event is it subject to the laws applicable to the public sector). It
is
directed and administered by a board of directors composed of five members
designated by the President of Chile, subject to the approval of the
Senate.
The
legal
purpose of the Central Bank is to maintain the stability of the Chilean peso
and
the orderly functioning of Chile’s internal and external payment system. The
Central Bank’s powers include setting reserve requirements, regulating the
amount of money and credit in circulation, establishing regulations and
guidelines regarding finance companies, foreign exchange (including the Formal
Exchange Market) and banks’ deposit-taking activities.
The
Superintendency of Banks
Banks
are
supervised and controlled by the Superintendency of Banks, an independent
Chilean governmental agency. The Superintendency of Banks authorizes the
creation of new banks and has broad powers to interpret and enforce legal and
regulatory requirements applicable to banks and financial companies.
Furthermore, in case of noncompliance with such legal and regulatory
requirements, the Superintendency of Banks has the ability to impose sanctions.
In extreme cases, it can appoint, with the prior approval of the board of
directors of the Central Bank, a provisional administrator to manage a bank.
It
must also approve any amendment to a bank’s bylaws or any increase in its
capital.
The
Superintendency of Banks examines all banks from time to time, generally at
least once a year. Banks are also required to submit their financial statements
monthly to the Superintendency of Banks, and a bank’s financial statements are
published at least four times a year in a newspaper with countrywide coverage.
In addition, banks are required to provide extensive information regarding
their
operations at various periodic intervals to the Superintendency of Banks. A
bank’s annual financial statements and the opinion of its independent auditors
must also be submitted to the Superintendency of Banks.
Any
person
wishing to acquire, directly or indirectly, 10.0% or more of the share capital
of a bank must obtain the prior approval of the Superintendency of Banks. Absent
such approval, the acquiror of shares so acquired will not have the right to
vote them. The Superintendency of Banks may refuse to grant its approval only
based on specific grounds set forth in the General Banking Law.
According
to Article 35 bis of the General Banking Law, the prior authorization of the
Superintendency of Banks is required for:
|
·
|
the
merger of two or more banks;
|
|
·
|
the
acquisition of all or a substantial portion of a banks’ assets and
liabilities by another bank;
|
|
·
|
the
control by the same person, or controlling group, of two or more
banks;
or
|
|
·
|
a
substantial increase in the existing control of a bank by a controlling
shareholder of that bank.
|
Such
prior
authorization is required solely when the acquiring bank or the resulting group
of banks would own a significant market share in loans, defined by the
Superintendency of Banks to be more than 15.0% of all loans in the Chilean
banking system. The intended purchase, merger or expansion may be denied by
the
Superintendency of Banks; or, if the acquiring bank or resulting group would
own
a market share in loans determined to be more than 20.0% of all loans in the
Chilean banking system, the purchase, merger, or expansion may be conditioned
on
one or more of the following:
|
·
|
that
the bank or banks maintain regulatory capital higher than 8.0% and
up to
14.0% of their risk-weighted
assets;
|
|
·
|
that
the technical reserve established in article 65 of the General Banking
Law
be applicable when deposits exceed one and a half times the resulting
bank’s paid-in capital and reserves;
or
|
|
·
|
that
the margin for interbank loans be reduced to 20.0% of the resulting
bank’s
regulatory capital.
|
If
the
acquiring bank or resulting group would own a market share in loans determined
by the Superintendency of Banks to be more than 15% but less than 20%, the
authorization will be conditioned on the bank or banks maintaining a regulatory
capital not lower than 10% of their risks-weighted assets for the period
specified by the Superintendency of Banks, which may not be less than one year.
The calculation of the risk-weighted assets is based on a five-category risk
classification system applied to a bank’s assets that is based on the Basel
Committee recommendations.
Pursuant
to the regulations of the Superintendency of Banks, the following ownership
disclosures are required:
|
·
|
a
bank is required to inform the Superintendency of Banks of the identity
of
any person owning, directly or indirectly, 5.0% or more of such banks’
shares;
|
|
·
|
holders
of ADSs must disclose to the depositary the identity of beneficial
owners
of ADSs registered under such holders’
names;
|
|
·
|
the
depositary is required to notify the bank as to the identity of beneficial
owners of ADSs which such depositary has registered and the bank,
in turn,
is required to notify the Superintendency of Banks as to the identity
of
the beneficial owners of the ADSs representing 5.0% or more of such
banks’
shares; and
|
|
·
|
bank
shareholders who individually hold 10.0% or more of a bank’s capital stock
and who are controlling shareholders must periodically inform the
Superintendency of Banks of their financial
condition.
|
Limitations
on Types of Activities
Chilean
banks can only conduct those activities allowed by the General Banking Law:
making loans, accepting deposits and, subject to limitations, making investments
and performing financial services. Investments are restricted to real estates
for the bank’s own use, gold, foreign currencies and debt securities.
Through subsidiaries, banks may also engage in other specific financial service
activities such as securities brokerage services, equity investments,
securities, mutual fund management, investment fund management, financial
advisory and leasing activities. Subject to specific limitations and the prior
approval of the Superintendency of Banks and the Central Bank, Chilean banks
may
own majority or minority interests in foreign banks.
On
March
2, 2002, the Central Bank of Chile authorized banks to pay interest on checking
accounts. On March 20, 2002, the Superintendency of Banks published guidelines
establishing that beginning on June 1, 2002, banks could offer a new checking
account product that pays interest. The Superintendency of Banks also stated
that these accounts may be subject to minimum balance limits and different
interest rates depending on average balances held in the account and that banks
may also charge fees for the use of this new product. For banks with a solvency
score of less than A, the Central Bank has also imposed additional caps to
the interest rate that can be paid.
Deposit
Insurance
The
Chilean government guarantees up to 90.0% of the principal amount of certain
time and demand deposits and savings accounts held by natural persons with
a
maximum value of UF120 per person (Ch$2,200,366 or U.S.$4,117 at December 31,
2006) per calendar year in the entire financial system.
Reserve
Requirements
Deposits
are subject to a reserve requirement of 9.0% for peso and foreign
currency-denominated demand deposits and 3.6% for UF, peso and foreign
currency-denominated time deposits (with terms of less than one year). For
purposes of calculating the reserve obligation, banks are authorized to deduct
daily from their foreign currency denominated liabilities, the balance in
foreign currencies of certain loans and financial investments held outside
of
Chile, the most relevant of which include:
|
·
|
cash
clearance account, which should be deducted from demand deposits
for
calculating reserve requirement;
|
|
·
|
certain
payment orders issued by pension
providers;
|
|
·
|
the
amount set aside for “technical reserve” (as described below), which can
be deducted from reserve
requirement.
|
The
Central Bank has statutory authority to require banks to maintain reserves
of up
to an average of 40.0% for demand deposits and up to 20.0% for time deposits
(irrespective, in each case, of the currency in which they are denominated)
to
implement monetary policy. In addition, to the extent that the aggregate amount
of the following types of liabilities exceeds 2.5 times the amount of a bank’s
paid-in capital and reserves, a bank must maintain a 100% “technical reserve”
against them: demand deposits, deposits in checking accounts, or
obligations payable on sight incurred in the ordinary course of business, other
deposits unconditionally payable immediately or within a term of less than
30
days and time deposits payable within 10 days prior to maturity.
The
Chilean Congress is currently reviewing legislation that will reform various
laws regulating the Chilean capital markets (Reforma al Mercado de Capitales
II). Among other things, the regulations with respect to “technical
reserve” will be modified to permit banks to use regulatory capital to determine
the amount of the reserve.
Minimum
Capital
Under
the
General Banking Law, a bank is required to have a minimum of UF800,000
(approximately Ch$14,669 million and US$27.4 million as of December 31, 2006)
of
paid-in capital and reserves, a regulatory capital of at least 8% of its
risk-weighted assets, net of required allowances, and paid-in capital and
reserves of at least 3% of its total assets, net of required
allowances.
However,
a
bank may begin its operations with 50.0% of such amount, provided that it has
a
regulatory capital of not less than 12.0% of its risk-weighted assets.
Regulatory capital is defined as the aggregate of:
|
·
|
a
bank’s paid-in capital and reserves, excluding capital attributable to
subsidiaries and foreign branches or capital
básico;
|
|
·
|
its
subordinated bonds, valued at their placement price (but decreasing
by
20.0% for each year during the period commencing six years prior
to
maturity), for an amount up to 50.0% of its basic capital;
and
|
|
·
|
its
voluntary allowances for loan losses for an amount of up to 1.25%
of risk
weighted-assets.
|
In
2002,
the General Banking Law was modified, allowing banks to begin operations with
a
minimum capital of UF 400,000 (approximately US$13.7 million as of December
31,
2006) of paid-in capital and reserves with the obligation to increase it to
UF
800,000 (approximately US$27.4 million as of December 31, 2006) in an
undetermined period of time. If a bank maintains a minimum capital of UF 400,000
(approximately US$13.7 million as of December 31, 2006), it is required to
maintain a minimum BIS ratio of 12%. When such a bank’s paid-in
capital reaches UF600,000 (approximately Ch$11,001 million and US$20.6 million
as of December 31, 2006), the total capital ratio required is reduced to
10.0%.
Capital
Adequacy Requirements
According
to the General Banking Law, each bank should have a regulatory capital of at
least 8.0% of its risk-weighted assets, net of required
allowances. The calculation of risk-weighted assets is based on a
five-category risk classification system for bank assets that is based on the
Basle Committee recommendations. In 2007, the third pillar of Basel II in Chile
will include the implementation of capital limits with market risk- and
operational risk-weighted assets.
Banks
should also have capital básico, or basic capital, of at least 3.0% of
their total assets, net of allowances. Basic capital is defined as a bank’s
paid-in capital and reserves and is similar to Tier 1 capital except that it
does not include net income for the period.
Lending
Limits
Under
the
General Banking Law, Chilean banks are subject to certain lending limits,
including the following material limits:
|
·
|
A
bank may not extend to any entity or individual (or any one group
of
related entities), except for another financial institution, directly
or
indirectly, unsecured credit in an amount that exceeds 5.0% of the
bank’s
regulatory capital, or in an amount that exceeds 25.0% of its regulatory
capital if the excess over 5.0% is secured by certain assets with
a value
equal to or higher than such excess. In the case of foreign export
trade
financing, the 5.0% ceiling for unsecured credits is raised to 10.0%
and
the 25.0% ceiling for secured credits to 30.0%. In the case of financing
infrastructure projects built by government concession, the 5.0%
ceiling
for unsecured credits is raised to 15.0% if secured by a pledge over
the
concession, or if granted by two or more banks or finance companies
which
have executed a credit agreement with the builder or holder of the
concession;
|
|
·
|
a
bank may not extend loans to another financial institution subject
to the
General Banking Law in an aggregate amount exceeding 30.0% of its
regulatory capital;
|
|
·
|
a
bank may not directly or indirectly grant a loan whose purpose is
to allow
an individual or entity to acquire shares of the lender
bank;
|
|
·
|
a
bank may not lend, directly or indirectly, to a director or any other
person who has the power to act on behalf of the bank;
and
|
|
·
|
a
bank may not grant loans to related parties (including holders of
more
than 1.0% of its shares) on more favorable terms than those generally
offered to non-related parties. Loans granted to related parties
are
subject to the limitations described in the first bullet point above.
In
addition, the aggregate amount of loans to related parties may not
exceed
a bank’s regulatory capital.
|
In
addition, the General Banking Law limits the aggregate amount of loans that
a
bank may grant to its employees to 1.5% of its regulatory capital, and provides
that no individual employee may receive loans in excess of 10.0% of this 1.5%
limit. Notwithstanding these limitations, a bank may grant to each of its
employees a single residential mortgage loan for personal use once during such
employee’s term of employment.
Certain
aspects of Chilean legislation governing capital markets is currently being
reviewed by the Chilean Congress. MK2 is expected to, among other things, modify
some of the provisions concerning lending limits. The 5% limit affecting
unsecured credit referred above is expected to be raised to 10% and the ceiling
for secured credits is expected to be raised to 30%. Such limits are expected
to
be maintained in 5% and 25% for unsecured and secured credits, respectively,
granted to individuals or entities directly or indirectly related to the
property or management of the bank. See “Item 3: Key Information—D. Risk
Factors—Risks Relating to Chile—Chile’s banking regulatory and capital markets
environment is continually evolving and may change.”
Allowance
for Loan Losses
Chilean
banks are required to provide to the Superintendency of Banks detailed
information regarding their loan portfolio on a monthly basis. The
Superintendency of Banks examines and evaluates each financial institution’s
credit management process, including its compliance with the loan classification
guidelines. Banks are classified into four categories: 1, 2, 3 and 4. Each
bank’s category depends on the models and methods used by the bank to classify
its loan portfolio, as determined by the Superintendency of Banks. Category
1
banks are those banks whose methods and models are satisfactory to the
Superintendency of Banks. Category 1 banks will be entitled to continue using
the same methods and models they currently have in place. A bank classified
as a
category 2 bank will have to maintain the minimum levels of reserves established
by the Superintendency of Banks while its board of directors will be made aware
of the problems detected by the Superintendency of Banks and required to take
steps to correct them. Banks classified as categories 3 and 4 will have to
maintain the minimum levels of reserves established by the Superintendency
of
Banks until they are authorized by the Superintendency of Banks to do otherwise.
We are classified in category 1.
Under
the
classifications effective January 1, 2004, loans are divided into: (i) consumer
loans (including loans granted to individuals for the purpose of financing
the
acquisition of consumer goods or payment of services); (ii) residential mortgage
loans (including loans granted to individuals for the acquisition, construction
or repair of residential real estate, in which the value of the property covers
at least 100% of the amount of the loan); and (iii) commercial loans (includes
all loans other than consumer loans and residential mortgage
loans).
In
accordance with the regulations, which became effective as of January 1, 2004,
the models and methods used to classify our loan portfolio must follow the
following guiding principles, which have been established by the Superintendency
of Banks and approved by our Board of Directors. In 2006, these models have
been
improved and various changes were and are being introduced. Group rating are
being phased out and replaced by statistical scoring systems. A detailed
description of this accounting policy is discussed below under “Item 5:
Operating and Financial Review and Prospects—D. Selected Statistical
Information—Loan Portfolio,” and “—Loans by Economic Activity—Classification
of Loan Portfolio” and in Note 1 of our Audited Consolidated Financial
Statements.
Capital
Markets
Under
the
General Banking Law, banks in Chile may purchase, sell, place, underwrite and
act as paying agents with respect to certain debt securities. Likewise, banks
in
Chile may place and underwrite certain equity securities. Bank subsidiaries
may
also engage in debt placement and dealing, equity issuance advice and securities
brokerage, as well as in financial leasing, mutual fund and investment fund
administration, investment advisory services and merger and acquisition
services. These subsidiaries are regulated by the Superintendency of Banks
and,
in some cases, also by the Superintendency of Securities and Insurance, the
regulator of the Chilean securities market, open-stock corporations and
insurance companies.
Legal
Provisions Regarding Banking Institutions with Economic
Difficulties
The
General Banking Law provides that if specified adverse circumstances exist
at
any bank, its board of directors must correct the situation within 30 days
from
the date of receipt of the relevant financial statements. If the board of
directors is unable to do so, it must call a special shareholders’ meeting to
increase the capital of the bank by the amount necessary to return the bank
to
financial stability. If the shareholders reject the capital increase, or if
it
is not effected within the term and in the manner agreed to at the meeting,
or
if the Superintendency of Banks does not approve the board of directors’
proposal, the bank will be barred from increasing its loan portfolio beyond
that
stated in the financial statements presented to the board of directors and
from
making any further investments in any instrument other than in instruments
issued by the Central Bank. In such a case, or in the event that a bank is
unable to make timely payment in respect of its obligations, or if a bank is
under provisional administration of the Superintendency of Banks, the General
Banking Law provides that the bank may receive a two-year term loan from another
bank. The terms and conditions of such a loan must be approved by the directors
of both banks, as well as by the Superintendency of Banks, but need not be
submitted to the borrowing bank’s shareholders for their approval. In any event,
a creditor bank cannot grant interbank loans to an insolvent bank in an amount
exceeding 25.0% of the creditor bank’s regulatory capital. The board of
directors of a bank that is unable to make timely payment of its obligations
must present a reorganization plan to its creditors in order to capitalize
the
credits, extend their respective terms, condone debts or take other measures
for
the payment of the debts. If the board of directors of a bank submits a
reorganization plan to its creditors and such arrangement is approved, all
subordinated debt issued by the bank, whether or not matured, will be converted
by operation of law into common stock in the amount required for the ratio
of
regulatory capital to risk-weighted assets not to be lower than 12.0% . If
a
bank fails to pay an obligation, it must notify the Superintendency of Banks,
which shall determine if the bank is solvent.
Dissolution
and Liquidation of Banks
The
Superintendency of Banks may establish that a bank should be liquidated for
the
benefit of its depositors or other creditors when such bank does not have the
necessary solvency to continue its operations. In such case, the Superintendency
of Banks must revoke a bank’s authorization to exist and order its mandatory
liquidation, subject to agreement by the Central Bank. The Superintendency
of
Banks must also revoke a bank’s authorization if the reorganization plan of such
bank has been rejected twice. The resolution by the Superintendency of Banks
must state the reason for ordering the liquidation and must name a liquidator,
unless the Chilean Superintendency of Banks assumes this responsibility. When
a
liquidation is declared, all checking accounts, other demand deposits received
in the ordinary course of business, other deposits unconditionally payable
immediately or that have a maturity of no more than 30 days, and any other
deposits and receipts payable within 10 days, are required to be paid by using
existing funds of the bank, its deposits with the Central Bank or its
investments in instruments that represent its reserves. If these funds are
insufficient to pay these obligations, the liquidator may seize the rest of
the
bank’s assets, as needed. If necessary and in specified circumstances, the
Central Bank will lend the bank the funds necessary to pay these obligations.
Any such loans are preferential to any claims of other creditors of the
liquidated bank.
Obligations
Denominated in Foreign Currencies
Foreign
currency denominated obligations of Chilean banks are subject to various limits
and obligations. The regulations of the Central Bank do not permit the
difference, whether positive or negative, between a bank’s assets and
liabilities denominated in any foreign currency (including assets and
liabilities denominated in U.S. dollars but payable in pesos, as well as those
denominated in pesos and indexed to the U.S. dollar exchange rate) to exceed
20%
of
the
bank’s paid-in capital and reserves; except in the case where the balance of
such assets exceeds the balance of such liabilities and the excess difference
does not exceed the bank’s allowances and reserves denominated in such foreign
currency (excluding profits to be remitted abroad). Santander-Chile must also
comply with various regulatory and internal limits regarding exposure to
movements in foreign exchange rates (See “Item 11: Quantitative and Qualitative
Disclosures About Market Risk”).
Investments
in Foreign Securities
Under
current Chilean banking regulations, banks in Chile may grant loans to foreign
individuals and entities and invest in certain securities of foreign issuers.
Chilean banks may only invest in equity securities of foreign banks and certain
other foreign companies which may be affiliates of the bank or which would
be
complementary to the bank’s business if such companies were incorporated in
Chile. Banks in Chile may also invest in debt securities traded in formal
secondary markets. Such debt securities must be (1) securities issued or
guaranteed by foreign sovereign states or their central banks or other foreign
or international financial entities, and (2) bonds issued by foreign companies.
A Bank may invest up to 5% of its regulatory capital in securities of foreign
issuers. Such securities must have a minimum rating as follows:
Table
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
P2
|
|
Baa3
|
Standard
and Poor’s
|
|
A3
|
|
BBB-
|
Fitch
IBCA
|
|
F2
|
|
BBB-
|
Duff
& Phelps
|
|
D2
|
|
BBB-
|
Thomson
Bank Watch
|
|
TBW2
|
|
BBB
|
In
the
event that the sum of the investments in foreign securities which have a: (i)
rating below that indicated in Table 1 above, and equal or exceeds the ratings
mentioned in the Table 2 below; and (ii) loans granted to other entities
resident abroad exceed 20% (and 30% for banks with a BIS ratio equal or
exceeding 10%), of the regulatory capital of such bank, the excess is subject
to
a mandatory reserve of 100%.
Table
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
P2
|
|
Ba3
|
Standard
and Poor’s
|
|
A3
|
|
BB-
|
Fitch
IBCA
|
|
F2
|
|
BB-
|
Duff
& Phelps
|
|
D2
|
|
BB-
|
Thomson
Bank Watch
|
|
TBW2
|
|
B
|
In
addition, banks may invest in foreign securities for an additional amount equal
to a 70% of their regulatory capital which ratings are equal or exceeds those
mentioned in the following Table 3. This limit constitutes an additional margin
and it is not subject to the 100% mandatory reserve.
Additionally,
a Chilean Bank may invest in foreign securities whose rating is equal or exceeds
those mentioned in the following Table 3 in: (i) term deposits with foreign
banks; and (ii) securities issued or guaranteed by sovereign states or their
central banks or those securities issued or guaranteed by foreign entities
within the Chilean State; such investment will be subject to the limits by
issuer up to 30% and 50%, respectively, of the regulatory capital of the Chilean
bank that makes the investment.
Table
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
P1
|
|
Aa3
|
Standard
and Poor’s
|
|
A1+
|
|
AA-
|
Fitch
IBCA
|
|
F1+
|
|
AA-
|
Duff
& Phelps
|
|
D1+
|
|
AA-
|
Thomson
Bank Watch
|
|
TBW1
|
|
BB
|
Chilean
banks may invest in securities without ratings issued or guaranteed by sovereign
states or their central banks and structured notes issued by investment banks
with a rating equal or above that in the immediately preceding Table 3, which
return is linked with a corporate or sovereign note with a rating equal or
above
that in Table 2.
Subject
to
specific conditions, a bank may grant loans in U.S. dollars to subsidiaries
or
branches of Chilean companies located abroad, to companies listed on foreign
stock exchanges authorized by the Central Bank and, in general, to individuals
and entities domiciled abroad, as long as the Central Bank is kept informed
of
such activities.
New
Regulations Regarding Market Risk
In
2005,
the Superintendency of Banks introduced new market risk limits and measures
for
Chilean banks. On an unconsolidated basis, the Bank must separate its balance
sheet into two separate categories: trading portfolio (Libro de
Negociación) and non-trading, or permanent, portfolio (Libro de
Banca). The trading portfolio as defined by the Superintendency of Banks
includes all instruments that are valued for accounting purposes at market
prices, free of any restrictions on immediate sale and frequently bought and
sold by the Bank or maintained with the intention of selling them in the
short-term in order to profit from short-term price variations. The non-trading
portfolio is defined as all instruments in the balance sheet not considered
in
the trading portfolio (See Item 11: Quantitative and Qualitative
Disclosures about Market Risk ).
D.
Property, Plants and Equipment
We
are domiciled in Chile and own our principal executive offices located at
Bandera 140, Santiago, Chile. We also own fifteen other buildings in the
vicinity of our headquarters and we rent four other buildings. At
December 31, 2006, we owned the premises at which 53% of our branches
were located. The remaining branches operate at rented locations. We
believe that our existing physical facilities are adequate for our
needs.
Main
properties as of December 31, 2006
|
|
|
|
Central
Offices
|
|
|
|
Owned
|
|
|
13
|
|
Rented
|
|
|
8
|
|
Total
|
|
|
21
|
|
|
|
|
|
|
Branches
(1)
|
|
|
|
|
Owned
|
|
|
165
|
|
Rented
|
|
|
163
|
|
Total
|
|
|
328
|
|
|
|
|
|
|
Other
property (2)
|
|
|
|
|
Owned
|
|
|
43
|
|
Rented
|
|
|
19
|
|
Total
|
|
|
62
|
|
(1)
|
Some
branches are located inside central office buildings and other properties.
Including these branches, the total number of branches is
375.
|
(2)
|
Consists
mainly of parking lots, mini-branches and property owned by our
subsidiaries.
|
The
following table sets forth a summary of the main computer hardware and other
systems-equipment that we own.
|
|
|
|
|
Mainframe
|
|
IBM
|
|
Back-end,
Core-System Altair, Payment means and foreign trade.
|
Midrange
|
|
IBM
|
|
Interconnections
between Mainframe and mid-range
|
Midrange
|
|
Stratus
SUN/Unix
SUN/UNIX
|
|
Tellers
Interconnections
applications Credit & debit cards
Treasury,
MIS, Work Flow, Accounting
|
Midrange
|
|
IBM
|
|
WEB
|
Desktop
|
|
IBM
|
|
Platform
applications
|
Call
Center
|
|
Avaya
Genesys
Nice
Periphonics
|
|
Telephone
system
Integration
Voice/data
Voice
recorder
IVR
|
The
main
software systems that we use are:
|
|
|
|
|
Core-System
|
|
ALTAMIRA
|
|
Accenture
|
Data
base
|
|
DB2
|
|
IBM
|
Data
base
|
|
Oracle
|
|
Oracle
|
Data
base
|
|
SQL
Server
|
|
Microsoft
|
WEB
Service
|
|
Internet
Information Server
|
|
Microsoft
|
Message
Service
|
|
MQSeries
|
|
IBM
|
Transformation
|
|
MQIntegrator
|
|
IBM
|
ITEM
4A. UNRESOLVED STAFF COMMENTS
As
of the
date of the filing of this Annual Report on 20-F, we do not have any unresolved
comments from the Securities and Exchange Commission staff regarding our
periodical reports under the Exchange Act.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
New Accounting Standards for Financial investments and
Derivatives
In
accordance with Circular N°3345 issued by the Superintendency of Banks, which
became effective on June 30, 2006, the accounting standards for valuing
financial instruments acquired for trading or investment purposes, including
derivative instruments on the balance sheets, were amended. The new accounting
standards require that these instruments be carried at their market or fair
value, and the historical differences in valuation of such instruments
recognized with respect to any dates prior to 2006 be adjusted directly against
the Bank’s equity. Banks are required to adopt the new accounting
standards set forth in Circular N° 3345 in preparing their financial statements
at and for the six-months ended June 30, 2006 and going forward.
The
following table summarizes the primary changes to the accounting standards
as a
result of our implementation of Circular N° 3345.
|
|
Before
changes to accounting
principles
|
After
changes to accounting principles
|
Derivatives
|
·
foreign
exchange forward contracts
|
·
valued
at closing spot exchange rate, initial discount/premium amortized
over the
life of contract
|
recognized
at fair value;
trading
contracts:
·
recorded at market/fair value on the balance sheet
|
|
·
forward
contracts between U.S. dollars and Ch$/UF
|
·
valued
at closing spot exchange rate, initial discount/premium amortized
over the
life of contract
|
·
revaluation gains or losses recorded as gains or
losses
from
trading activities
hedge
contracts:
·
fair value hedges: hedged assets and liabilities
are also recognized at fair value; revaluation gains or losses
on both
derivatives and hedged items are recognized as “gains/losses from trading
activities” on the income statement
·
cash flow hedges: effective portion of
revaluation gains or losses on hedged risk recognized in shareholders’
equity (such amount is recognized in income statement when the
offsetting
changes hedged affect income statement); ineffective portion of
revaluation gains or losses recognized in income
statement
|
|
|
·
interest rate swaps
|
·
difference between interest income/expense recorded in net
income
in the period when agreement is settled in cash;
·
fair
value and revaluation gains or losses are not recognized
·
net
nominal amounts are recorded under “other assets” or “other
liabilities”
|
Other
financial investments
|
·
non-
permanent investments (Trading instruments)
|
·
recognized at fair value on balance sheet; revaluation gains
or
losses and realized gains or losses are recognized in income statements
under “gains/losses from trading activities”; interest income and
indexation adjustments are reported as “interest revenue”
|
·
No changes
|
·
permanent investments (Available-for-Sale
investment instruments)
|
·
recognized at fair value on balance sheet; revaluation gains
or
losses are reported under shareholders’ equity, and recognized in income
statement under “gains/losses from trading activities” when sold or
impaired
|
·
line item “available-for-sale” portfolio changed from
“permanent”
|
|
|
|
·
Held-to-maturity investment instruments
|
·
N/A
|
·
New category; recorded at cost plus accrued interest and
adjustments, less allowance for
impairment
|
In
order
to implement these new accounting standards, we have created a new line item
“derivatives” under both “assets” and “liabilities” on our consolidated balance
sheet, and reclassified certain other items within other assets, other
liabilities, financial instruments, interest income, interest expenses and
other
operating income, net, on our consolidated balance sheet and income statement
at
and for the year ended December 31, 2006.
The
net
effect of the accounting changes on our net income for the year ended December
31, 2006 was a gain of Ch$12,580 million. For comparison
purposes, we have also retrospectively reclassified these items at December
31,
2005 and for the years ended December 31, 2004 and 2005, but
did not retrospectively apply the new accounting standards to these items.
As a
result, our results of operations and financial condition at and for the year
ended December 31, 2006 are not entirely comparable to those at any dates or
for
any periods prior to January 1, 2006 previously reported by us. If we had
applied the valuation of derivatives to market prices in the year ended December
31, 2005, the net effect on our net income would have been a gain of Ch$7,008
million.
In
connection with our implementation of the new accounting standards, for the
year
ended December 31, 2006, interest revenue and interest expense no longer include
the translation gain or loss of financial assets and liabilities indexed to
foreign currencies. Such gain or loss is now reclassified as results of foreign
exchange transactions. Amounts reported for the years ended December 31, 2004
and 2005 have been reclassified on a comparable basis. Gains or
losses on investments in mutual funds have also been reclassified from net
interest income to other operating income for the years ended December 31,
2004,
2005 and 2006.
For
the
year ended December 31, 2006, gains and losses on forward transactions have
been
reclassified to net gains (losses) on trading activities. In prior periods,
such
transactions were not marked to market and the difference between the interest
paid and received on a specified notional amount was recorded under “foreign
exchange transactions, net”. Such amounts for the years ended December 31, 2004
and 2005 have been reclassified to net gains (losses) on trading activities
in
order to be more comparable to the results for the year ended December 31,
2006,
but have not been retroactively adjusted to reflect the fair value of these
instruments.
B.
Critical Accounting Policies
We
prepare
our financial statements in accordance with Chilean GAAP, which requires
management to make estimates and assumptions with respect to certain matters
that are inherently uncertain. We also reconcile our financial statements to
U.S. GAAP (See Note 26 to our Audited Consolidated Financial Statements) and
are
required to make estimates and assumptions in this reconciliation process.
Certain critical accounting policies, in particular those relating to goodwill
and intangible assets, are only applicable for U.S. GAAP purposes. Our
consolidated financial statements include various estimates and assumptions,
including but not limited to the adequacy of the allowance for loan losses,
estimates of the fair value of certain financial instruments, the selection
of
useful lives of certain assets and the valuation and recoverability of goodwill.
We evaluate these estimates and assumptions on an ongoing basis. Management
bases its estimates and assumptions on historical experience and on various
other factors that are believed to be reasonable under the circumstances. Actual
results in future periods could differ from those estimates and assumptions,
and
if these differences were significant enough, our reported results of operations
would be affected materially.
We
believe
that the following are the more critical judgment areas or involve a higher
degree of complexity in the application of the accounting policies that
currently affect our financial condition and results of operations:
Derivative
activities
At
December 31, 2006, derivatives are valued at market price on the balance sheet
and the net unrealized gain (loss) on derivatives is classified as a separate
line item on the income statement. In prior periods, the notional amounts were
carried off the balance sheet. Our derivative holdings at December 31, 2005
have
been reclassified
from
“other assets” and “other liabilities” to “derivatives”, but have not been
marked to market as would be required under currently applicable accounting
principles.
Pursuant
to the new accounting standards, banks must mark to market derivatives. A
derivative financial instrument held for trading purposes must be marked to
market and the unrealized gain or loss recognized in income
statement. New accounting standards have also been adopted for
derivatives held for hedging purposes with effect for the six months ended
June
30, 2006 and thereafter, changes in book value of hedged items are included
in
the mark to market and trading line items, except to the extent set forth
below.
The
Superintendency of Banks recognizes three kinds of hedge accounting: (i) cash
flow hedges, (ii) fair value hedges and (iii) hedging of foreign
investments.
·
|
When
a cash flow hedge exists, the fair value movements on the part of
the
hedging instrument that is effective are recognized in equity. Any
ineffective portion of the fair value movement on the hedging instrument
is recognized in the income
statement.
|
·
|
When
a fair value hedge exists, the fair value movements on the hedging
instrument and the corresponding fair value movements on the hedged
item
are recognized in the income statement. Hedged items in the balance
sheet
are presented at their market value in
2006.
|
·
|
When
a hedge of foreign investment exposure exists (i.e. investment in
a
foreign branch), the fair value movements on the part of the hedging
instrument that is effective are recognized in equity. Any ineffective
portion of the fair value movement on the hedging instrument is recognized
in the income statement.
|
We
enter
into forward contracts for our own account and for the accounts of our
customers. The values of the forward contracts are marked to market on a monthly
basis and the revaluation gain or loss is recognized in the line item mark
to
market and trading activities. Previously, they were classified as foreign
exchange transactions, except gains or losses on UF – Ch$ forwards, which used
to be classified as net interest income.
Allowance
for loan losses
Chilean
banks are required to maintain loan loss allowances in amounts determined in
accordance with the regulations issued by the Superintendency of Banks. Under
these regulations, we must classify our portfolio into various categories of
payment capability. The minimum amount of required loan loss allowances is
determined based on fixed percentages of estimated loan losses assigned to
each
category. Since January 1, 2006, we have improved our credit scoring
systems for consumer and mortgage loans. The new credit scoring system considers
both the length of time by which the loan is overdue and the borrower’s risk
profile, which includes the borrower’s overall indebtedness and credit behavior
under the obligations to third parties. See Item 5: Operating and Financial
Review and Prospects – D. Selected Statistical Information – Loan Portfolio –
Classification of Loan Portfolio – Allowances for consumer and mortgage
loans.
In
2006,
we improved our internal provisioning models by not only focusing on
non-performance, but introducing statistical models that take into account
a
borrower’s credit history and indebtedness levels. Group ratings that determine
loan loss allowances based only on non-performance are being phased out and
replaced by statistical scoring systems. Commencing in December 2006, we no
longer analyze large commercial loans on a group basis. All large commercial
loans have since been rated on an individual basis. For large commercial loans,
leasing and factoring, we assign a risk category level to each borrower and
his
respective loans. We consider the following risk factors in classifying a
borrower’s risk category: the borrower’s industry or sector, owners or managers,
financial condition, payment ability and payment behavior. For a detailed
description of the models we use to determine loan loss allowances for
commercial loans, see Item 5: Operating and Financial Review and Prospects
– D. Selected
Statistical Information – Loan Portfolio – Classification of Loan Portfolio –
Allowances for large commercial loans. Group assessment for loan loss allowances
is permitted for a large number of borrowers whose individual loan amounts
are
relatively insignificant. Currently, we use group analysis to
determine loan loss allowances for certain types of loans, such as loans to
small- and mid-sized companies and commercial loans to individuals. See Item
5:
Operating and Financial Review and Prospects – D. Selected Statistical
Information – Loan Portfolio – Classification of Loan Portfolio – Allowances for
group evaluations on small- and mid-sized commercial loans.
Goodwill
and Intangible Assets with Indefinite Useful Lives
Under
U.S.
GAAP, we have significant intangible assets consisting of goodwill and
trademarks. We record all assets and liabilities acquired in purchase
acquisitions, including goodwill and other acquired intangibles, at their fair
value. These include amounts pushed down from Santander Chile Holding, S.A.
and
Teatinos Siglo XXI, S.A., each a direct or indirect subsidiary of Banco
Santander Central Hispano, and, together, our majority
shareholders. In 2006, we decided to change our branding strategy to
increasing the use of the brand “Santander” and phasing out the brand
“Santiago”. As a result, we have decided to amortize the brand
“Santiago” in five years using a straight-line amortization method.
Goodwill
and indefinite lived assets are no longer amortized over their estimated useful
lives using straight line and accelerated methods, and are subject to at least
an annual impairment review. The initial goodwill and intangibles recorded
and
subsequent impairment analysis requires management to make subjective judgments
concerning estimates of how the acquired asset will perform in the future using
a discounted cash flow analysis. Additionally, estimated cash flows may extend
beyond ten years and, by their nature, are difficult to determine. Events and
factors that may significantly affect the estimates include, among others,
competitive forces, customer behavior and attrition, changes in revenue growth
trends, cost structures and technology and changes in interest rates and
specific industry or market sector conditions. For a further discussion of
accounting practices for goodwill and intangible assets with indefinite useful
lives under U.S. GAAP, see Note 26 to our Audited Consolidated Financial
Statements.
Differences
between Chilean and United States Generally Accepted Accounting
Principles
Accounting
principles generally accepted in Chile vary in certain important respects from
the accounting principles generally accepted in the United States. Such
differences involve certain methods for measuring the amounts shown in the
consolidated financial statements, as well as additional disclosures required
by
accounting principles generally accepted in the United States and the accounting
treatment of the merger.
Note
26 to
our Audited Consolidated Financial Statements presents a description of the
significant differences between Chilean GAAP and U.S. GAAP. Note
26(ac) sets forth recent accounting pronouncements under U.S. GAAP.
C.
Operating Results
Chilean
Economy
All
of our
operations and substantially all of our customers are located in Chile.
Accordingly, our financial condition and results of operations are substantially
dependent upon economic conditions prevailing in Chile. In 2006, Chile’s GDP
grew by 4.0%. The Chile GDP grew by 6.4% in 2005 following growth of 6.1% in
2004 and 3.7% in 2003. The strength of the global economy has continued to
benefit Chile’s economy despite the rise in international oil prices. These
positive external economic conditions have also led to strong growth
of internal consumption and investment demand that grew 6.0% in 2006. The
average unemployment rate decreased to 8.0% in 2006 from 9.3% in
2005.
The
export
sector in Chile increased by 4.2% in 2006. Despite higher commodity prices,
lower production affected growth in this sector. The price of copper increased
by 45.8% in 2006, 45.4% in 2005 and 42.7% in 2004. Exports of copper totaled
US$33 billion, or 56%, of total Chilean exports in 2006.
CPI
Inflation in 2006 was 2.6%, compared to 3.7% in 2005. The sharp decrease in
international oil prices in the last quarter of 2006 was the main factor that
explains this decline. As a result, the Central Bank slowed the pace of interest
rate increases in the year. The overnight interbank rate set by the
Central Bank increased by 225 basis points in 2005 to 4.5% in December 2005.
In
2006, the Central Bank has raised its reference rate three times to 5.25%,
but
this rate was lowered to 5.00% in January 2007.
After
surging in the last quarter of 2005, long-term rates declined throughout 2006
as
inflation descended. The yield on the Chilean Central Bank’s 10-year note in
real terms was 3.29% at December 31, 2005. At December 31, 2006, the yield
was
3.02%.
Despite
these developments in 2006 at the macroeconomic level, economic activities
in
Chile may slow down given the volatility of international markets and the
possible slow-down of the world economic growth.
Impact
of Inflation
Inflation
impacts our results of operations. Although Chile’s inflation rate has been
moderate in recent years, Chile has experienced high levels of inflation in
the
past. High levels of inflation in Chile could adversely affect the Chilean
economy and have an adverse effect on our business, financial condition and
results of operations. Negative inflation rates also negatively impact our
results. In 2006, the inflation rate in Chile was 2.6% compared to
3.7% in 2005 and 2.4% in 2004. There can be no assurance that Chilean
inflation will not change significantly from the current level. Although we
currently benefit from moderate levels of inflation in Chile, due to the current
structure of our assets and liabilities (i.e., a significant portion of our
loans are indexed to the inflation rate, but there are no corresponding features
in deposits or other funding sources that would increase the size of our funding
base), there can be no assurance that our business, financial condition and
result of operations in the future will not be adversely affected by changing
levels of inflation. In summary:
·
|
UF
denominated assets and liabilities. Our assets and liabilities are
denominated in Chilean pesos, UF and foreign currencies. The UF is
revalued in monthly cycles. On each day in the period beginning the
tenth
day of the current month through the ninth day of the succeeding
month,
the nominal peso value of the UF is indexed up (or down in the event
of
deflation) in order to reflect a proportional amount of the change
in the
Chilean Consumer Price Index during the prior calendar month. One
UF
equaled to Ch$17,317.05 at December 31, 2004, Ch$17,974.81 at December
31,
2005 and Ch$ 18,336.38 at December 31, 2006. The effect of any
changes in the nominal peso value of our UF denominated assets and
liabilities is reflected in our results of operations as an increase
(or
decrease, in the event of deflation) in interest revenue and expense,
respectively. Our net interest revenue will be positively affected
by an
inflationary environment to the extent that our average UF denominated
assets exceed our average UF denominated liabilities. Our net interest
revenue will be negatively affected by inflation in any period in
which
our average UF denominated liabilities exceed our average UF denominated
assets. Our average UF denominated assets exceeded our average UF
denominated liabilities by Ch$2,567,226 million in 2006 compared
to
Ch$1,446,290 million in 2005. See “—D. Selected Statistical
Information—Average Balance Sheets, Income Earned from Interest-Earned
Assets and Interest Paid on Onterest-Bearing Liabilities.” The Bank
generally has more UF denominated financial assets than UF denominated
financial liabilities. In the year ended December 31, 2006, the interest
gained on interest earning assets denominated in UF decreased by
8.4%
compared to 2005 as a result of the lower inflation rate in 2006
compared
to 2005, partially offset by the effect of the larger amount of
assets than liabilities denominated in UF. The interest paid on these
liabilities decreased by 29.4% during this
period.
|
·
|
Price
level restatement. Chilean GAAP requires that financial statements be
restated to reflect the full effects of loss in the purchasing power
of
the Chilean peso on the financial position and results of operations
of
reporting entities. The Bank must adjust its capital, fixed assets
and
other non financial assets for variations in price levels. Since
the
Bank’s capital is generally larger than the sum of fixed and other non
financial assets, in an inflationary economy, the Bank would record
a loss
from price level restatement. For the year ended December 31,
2006, the loss from price level restatement totaled Ch$13,782 million
compared to Ch$18,524 million in 2005. The inflation rate used for
calculating price level restatement was 2.12% in 2006 and 3.62% in
2005.
|
|
|
|
|
IIInflation
sensitive income
|
|
|
|
|
|
|
|
|
|
|
|
(In
million of constant Chilean pesos at
December
31, 2006)
|
|
Interest
gained on UF assets |
|
|
475,760
|
|
|
|
435,593
|
|
|
|
(8.4% |
) |
Interest
paid on UF liabilities
|
|
|
(252,692 |
)
|
|
|
(178,468 |
) |
|
|
(29.4% |
) |
Price
level restatement
|
|
|
(18,524 |
) |
|
|
(13,782 |
) |
|
|
(25.6% |
) |
Net
Gain
|
|
|
|
|
|
|
|
|
|
|
19.0% |
|
·
|
Peso
denominated assets and liabilities. Interest rates prevailing in
Chile during any period primarily reflect the inflation rate during
the
period and the expectations of future inflation. The sensitivity
of our
peso denominated interest earning assets and interest bearing liabilities
to changes to such prevailing rates varies. See “—Interest Rates”
below. We maintain a substantial amount of non interest bearing peso
denominated demand deposits. Because such deposits are not sensitive
to
inflation, any decline in the rate of inflation would adversely affect
our
net interest margin on inflation indexed assets funded with such
deposits,
and any increase in the rate of inflation would increase the net
interest
margin on such assets. The ratio of the average of such demand deposits
to
average interest-earning assets was 16.6%, 16.4% and 13.9% for the
years
ended December 31, 2004, 2005 and 2006,
respectively.
|
Interest
Rates
Interest
rates earned and paid on our assets and liabilities reflect, to a certain
degree, inflation, expectations regarding inflation, changes in short-term
interest rates set by the Central Bank and movements in long-term real rates.
The Central Bank manages short-term interest rates based on its objectives
of
balancing low inflation and economic growth. Because our liabilities generally
reprice sooner than our assets, changes in the rate of inflation or short-term
rates in the economy are reflected in the rates of interest paid by us on our
liabilities before such changes are reflected in the rates of interest earned
by
us on our assets. Therefore, when short-term interest rates fall, our net
interest margin is positively impacted, but when short-term rates increase,
our
interest margin is negatively affected. At the same time, our net interest
margin tends to be adversely affected in the short-term by a decrease in
inflation rates since generally our UF denominated assets exceed our UF
denominated liabilities. See “—Impact of Inflation—Peso denominated assets and
liabilities.” An increase in long-term rates has a positive effect on our net
interest margin, because our interest earning assets generally have longer
tenors than our interest bearing liabilities. In addition, because our peso
denominated liabilities have relatively short repricing periods, they are
generally more responsive to changes in inflation or short-term rates than
our
UF denominated liabilities. As a result, during periods when current inflation
or expected inflation exceeds the previous period’s inflation, customers often
switch funds from UF denominated deposits to peso denominated deposits, which
generally bear higher interest rates, thereby adversely affecting our net
interest margin.
Foreign
Exchange Fluctuations
The
Chilean government’s economic policies and any future changes in the value of
the Chilean peso against the U.S. dollar could adversely affect our financial
condition and results of operations. The Chilean peso has been subject to
significant devaluation in the past and may be subject to significant
fluctuations in the future. In 2004 and 2005, the Chilean peso appreciated
by
6.6% and 8.1% against the dollar, respectively. In 2006, the Chilean
peso depreciated by 3.9% against the U.S. dollar. See “Item 3: Key
Information—A. Selected Financial Data—Exchange Rates.” A significant
portion of our assets and liabilities are denominated in foreign currencies,
principally the U.S. dollar, and we historically have maintained and may
continue to maintain material gaps between the balances of such assets and
liabilities. Because such assets and liabilities, as well as interest earned
or
paid on such assets and liabilities, and gains and losses realized upon the
sale
of such assets, are translated to Chilean pesos in preparing our financial
statements, our reported income is affected by changes in the value of the
Chilean peso relative to foreign currencies (principally the U.S.
dollar).
Foreign
currencies denominated obligations of Chilean banks are subject to various
limits and obligations. The regulations of the Central Bank do not
permit the difference, whether positive or negative, between a bank’s assets and
liabilities denominated in any foreign currency (including assets and
liabilities denominated in U.S. dollars but payable in pesos, as well as those
denominated in pesos and indexed to the U.S. dollar exchange rate) to exceed
20%
of the bank’s paid in capital and reserves; except in the case where the balance
of such assets exceeds the balance of such liabilities and the excess difference
does not exceed the bank’s allowances and reserves denominated in such foreign
currency (excluding profits to be remitted abroad). The Bank also
uses a sensitivity analysis to analyze and limit the
potential
loss in net interest income resulting from fluctuations of interest rates on
U.S. dollar denominated assets and liabilities and a VaR model to measure
and limit foreign currency trading risk (See “Item 11: Quantitative and
Qualitative Disclosures About Market Risk”).
Results
of Operations for the Years Ended December 31, 2004, 2005 and
2006
The
following discussion is based upon and should be read in conjunction with the
Audited Consolidated Financial Statements. The Audited Consolidated Financial
Statements have been prepared in accordance with Chilean GAAP (including the
rules of the Superintendency of Banks relating thereto), which differ in certain
significant respects from U.S. GAAP. Note 26 to the Audited Consolidated
Financial Statements describes the principal differences between Chilean GAAP
and U.S. GAAP and includes a reconciliation to U.S. GAAP of our net income
for
the years ended December 31, 2004, 2005 and 2006 and of our shareholders’ equity
at December 31, 2005 and 2006. The Audited Consolidated Financial Statements
have been restated in constant Chilean pesos of December 31, 2006. See Note
1(c)
to the Audited Consolidated Financial Statements.
Introduction
The
following table sets forth the principal components of our net income for the
years ended December 31, 2004, 2005 and 2006.
|
|
For
the year ended December 31,
|
|
|
%
Change
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2004/2005
|
|
|
2005/2006
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)
|
|
|
(in
thousands
of
US$)(1)
|
|
|
|
|
|
|
|
CONSOLIDATED
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilean
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
|
841,588
|
|
|
|
1,017,830
|
|
|
|
1,168,851
|
|
|
|
2,187,098
|
|
|
|
20.9% |
|
|
|
14.8% |
|
Interest
expense
|
|
|
(339,079 |
) |
|
|
(459,564 |
) |
|
|
(556,597 |
) |
|
|
(1,041,478 |
) |
|
|
35.5% |
|
|
|
21.1% |
|
Net
interest revenue
|
|
|
502,509
|
|
|
|
558,266
|
|
|
|
612,254
|
|
|
|
1,145,620
|
|
|
|
11.1% |
|
|
|
9.7% |
|
Provision
for loan losses
|
|
|
(85,451 |
) |
|
|
(64,879 |
) |
|
|
(123,022 |
) |
|
|
(230,193 |
) |
|
|
(24.1% |
) |
|
|
89.6% |
|
Fees
and income from services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and other services income
|
|
|
156,298
|
|
|
|
173,386
|
|
|
|
198,326
|
|
|
|
371,098
|
|
|
|
10.9% |
|
|
|
14.4% |
|
Other
services expense
|
|
|
(28,294 |
) |
|
|
(32,086 |
) |
|
|
(35,776 |
) |
|
|
(66,942 |
) |
|
|
13.4% |
|
|
|
11.5% |
|
Total
fees and income from services, net
|
|
|
128,004
|
|
|
|
141,300
|
|
|
|
162,550
|
|
|
|
304,156
|
|
|
|
10.4% |
|
|
|
15.0% |
|
Other
operating income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) from trading and brokerage
|
|
|
(7,410 |
) |
|
|
(62,569 |
) |
|
|
100,312
|
|
|
|
187,699
|
|
|
|
744.4% |
|
|
|
—% |
|
Foreign
exchange transactions, net
|
|
|
47,445
|
|
|
|
72,381
|
|
|
|
(48,708 |
) |
|
|
(91,140 |
) |
|
|
52.6% |
|
|
|
—% |
|
Others,
net
|
|
|
(25,294 |
) |
|
|
(23,407 |
) |
|
|
(32,961 |
) |
|
|
(61,675 |
) |
|
|
(7.4% |
) |
|
|
40.8% |
|
Total
other operating income, net
|
|
|
14,741
|
|
|
|
(13,595 |
) |
|
|
18,643
|
|
|
|
34,884
|
|
|
|
—% |
|
|
|
—% |
|
Other
income and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income, net
|
|
|
(4,669 |
) |
|
|
(22,480 |
) |
|
|
(4,214 |
) |
|
|
(7,885 |
) |
|
|
381.5% |
|
|
|
(81.3% |
) |
Income
attributable to investments in other companies
|
|
|
568
|
|
|
|
693
|
|
|
|
786
|
|
|
|
1,471
|
|
|
|
22.0% |
|
|
|
13.5% |
|
Losses
attributable to minority interest
|
|
|
(194 |
) |
|
|
(136 |
) |
|
|
(151 |
) |
|
|
(283 |
) |
|
|
(29.8% |
) |
|
|
11.0% |
|
Total
other income and expenses
|
|
|
(4,295 |
) |
|
|
(21,923 |
) |
|
|
(3,579 |
) |
|
|
(6,697 |
) |
|
|
410.5% |
|
|
|
(83.7% |
) |
|
|
For
the year ended December 31,
|
|
|
%
Change
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2004/2005
|
|
|
2005/2006
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)
|
|
|
(in
thousands
of
US$)(1)
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
salaries and expenses
|
|
|
(140,746 |
) |
|
|
(142,171 |
) |
|
|
(159,722 |
) |
|
|
(298,864 |
) |
|
|
1.0% |
|
|
|
12.3% |
|
Administrative
and other expenses
|
|
|
(102,159 |
) |
|
|
(102,717 |
) |
|
|
(110,948 |
) |
|
|
(207,601 |
) |
|
|
0.5% |
|
|
|
8.0% |
|
Depreciation
and amortization
|
|
|
(40,978 |
) |
|
|
(40,080 |
) |
|
|
(38,613 |
) |
|
|
(72,251 |
) |
|
|
(2.2% |
) |
|
|
(3.7% |
) |
Total
operating expenses
|
|
|
(283,883 |
) |
|
|
(284,968 |
) |
|
|
(309,283 |
) |
|
|
(578,716 |
) |
|
|
0.4% |
|
|
|
8.5% |
|
Loss
from price-level restatement
|
|
|
(12,680 |
) |
|
|
(18,524 |
) |
|
|
(13,782 |
) |
|
|
(25,788 |
) |
|
|
46.1% |
|
|
|
(25.%6 |
) |
Income
before income taxes
|
|
|
258,945
|
|
|
|
295,677
|
|
|
|
343,781
|
|
|
|
643,266
|
|
|
|
14.2% |
|
|
|
16.3% |
|
Income
taxes
|
|
|
(48,587 |
) |
|
|
(50,885 |
) |
|
|
(58,199 |
) |
|
|
(108,899 |
) |
|
|
4.7% |
|
|
|
14.4% |
|
Net
income
|
|
|
210,358
|
|
|
|
244,792
|
|
|
|
285,582
|
|
|
|
534,367
|
|
|
|
16.4% |
|
|
|
16.7% |
|
(1)
|
Amounts
stated in U.S. dollars at and for the year ended December 31, 2006
have
been translated from Chilean pesos at the exchange rate of Ch$534.43
=
US$1.00 as of December 31, 2006. See “Item 3: Key Information—A. Selected
Financial Data—Exchange Rates” for more information on the observed
exchange rate.
|
2006
and 2005. Net income for the year ended December 31, 2006
increased by 16.7% to Ch$285,582 million compared to Ch$244,792 million for
the
year ended December 31, 2005, primarily reflecting the growth of the Chilean
economy, which continued to fuel loan growth and banking activities, especially
in the higher yielding retail banking segments, which in turn has led to the
growth of our net interest revenue and fee income. Our net interest revenue
increased by 9.7% to Ch$612,254 million for the year ended December 31, 2006
compared to 2005, and fee income grew by 15.0% to Ch$162,550 million in 2006
compared to 2005. Net interest revenue growth was led by an increase in net
interest revenue from our retail banking and middle-market segments. Net
interest revenue from the retail banking segment increased by 24.2% to
Ch$462,297 million in 2006, with increases of 19.4% in the individuals segment
and 38.6% in the SMEs segment. Net interest revenue in the
middle-market segment increased by 38.4% to Ch$73,820 million in 2006 compared
to 2005. The average balance of our interest-earning assets increased by 10.6%
to Ch$13,079 billion in 2006 compared to 2005. As a result, our net interest
margin remained stable at 4.7% in 2006 compared to 2005.
Total
net
fee income increased by 15.0% to Ch$162,550 million for the year ended December
31, 2006 compared to 2005. Fees from the retail banking segment increased by
38.8% in 2006 compared to 2005, mainly due to increases in fees from checking
accounts, lines of credit and insurance brokerage and credit card fees. Fees
from the wholesale banking segment decreased by 1.3% in 2006, primarily
reflecting the decline in fees from payment agency services, letters of credit,
guarantees, pledges and other contingent loan fees, fees from the sale and
purchase of foreign currencies and underwriting fees. This was partially offset
by a higher contribution from the sale of derivatives and other treasury
services and a higher return on cash management services provided to our
wholesale customers.
The
increases in net interest revenue and fee income were partially offset by an
89.6% increase in provisions for loan losses to Ch$123,022 million for the
year
ended December 31, 2006 compared to 2005, primarily due to an 80.3% increase
in
net provision expense in the retail banking segment. Provision expense rose
from
a reversal of Ch$27,674 million in 2005 to a charge of Ch$26,614 million in
2006, primarily as a result of the growth of the Bank’s retail loans portfolio
as a proportion of its total portfolio. Retail loans are generally
higher-yielding, however, they present relatively higher credit risks than
the
Bank’s corporate loans. Charge-offs increased by 2.8% in 2006 compared to 2005,
primarily as a result of the growth of our consumer loan portfolio, for which
credit risk is higher and provisions are required to be made within much shorter
periods than the rest of the loan portfolio. Charge-offs of the consumer loan
portfolio increased by 50.0% to Ch$102,246 million in 2006 compared to 2005.
In
addition, recoveries on loans previously charged off remained stable in 2006
compared to 2005.
Operating
expenses in 2006 increased by 8.5% compared to 2005, which was primarily due
to
a 12.3% rise in personnel salaries and expenses as a result of our payment
of an
end-of-negotiation bonus in conjunction with the
signing
of
the new collective bargaining agreement in the fourth quarter of 2006. This
new
collective bargaining agreement enters into effect on March 1, 2007 and expires
on March 1, 2011. As a part of this process, an end-of-negotiation bonus was
paid, which resulted in a one-time cost of Ch$8,622 million in 2006.
Administrative expenses increased by 8.0% for the same periods, reflecting
an
increase in expenses as a result of the expansion our distribution network.
Our
efficiency ratio, despite higher costs, continued to improve, reaching a record
low of 39.0% for the year ended December 31, 2006 compared to 41.5% in
2005.
We
recorded a net gain of Ch$18,643 million for the year ended December 31, 2006
under total other operating income, net, compared to a loss
of Ch$13,595 million for 2005. Results in 2006 included a gain from
trading activities of Ch$12,580 million as a result of our adoption of the
new
accounting standards for valuing financial instruments. If we had applied the
new accounting standards for the year ended December 31, 2005, the net effect
on
our results would have been a gain of Ch$7,008 million. See Item 5: Operating
and Financial Review and Prospect — A. New Accounting
Standards for Financial Investments and Derivatives.
The
net
loss recorded in other income and expenses decreased by 83.7% in 2006 compared
to 2005, primarily due to a lower level of provisions for other
contingencies.
2004
and 2005. Net income for the year ended December 31,
2005 increased by 16.4% compared to net income in 2004. This increase was mainly
due to an 11.1% increase in net interest revenue, a 24.1% decline in provisions
for loan losses and a 10.4% increase in fee income. In 2005, the positive
economic environment led to higher loan growth and banking activities in
general, which fueled the increases in net interest revenue and net fee
income. At the same time, the quality of the Bank’s loan portfolio improved,
resulting in the decrease in provision expenses.
Other
operating income, net totaled a loss of Ch$13,595 million in 2005 compared
to a
gain of Ch$14,741 million in 2004. This was mainly due to a 79.5% decline in
net
gains from financial transactions, primarily reflecting the movement in
long-term local interest rates in 2005 compared to 2004.
Net
non-operating losses also increased by 410.5% in 2005 compared to 2004 because
results in 2004 included a one-time gain of Ch$23,093 million from the sale
of
our Santiago Express division to Empresas París.
Operating
expenses in 2005 increased slightly by 0.4% and the efficiency ratio,
representing operating expenses divided by operating income, improved to 41.5%
in 2005 compared to 44.0% in 2004.
Net
interest revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Total
individuals
|
|
|
241,092
|
|
|
|
278,433
|
|
|
|
332,444
|
|
|
|
15.5% |
|
|
|
19.4% |
|
SMEs
|
|
|
73,587
|
|
|
|
93,657
|
|
|
|
129,854
|
|
|
|
27.2% |
|
|
|
38.6% |
|
Total
retail
|
|
|
314,679
|
|
|
|
372,090
|
|
|
|
462,298
|
|
|
|
18.2% |
|
|
|
24.2% |
|
Total
middle-market
|
|
|
51,911
|
|
|
|
53,332
|
|
|
|
73,820
|
|
|
|
2.7% |
|
|
|
38.4% |
|
Wholesale
banking
|
|
|
25,904
|
|
|
|
27,083
|
|
|
|
30,469
|
|
|
|
4.5% |
|
|
|
12.5% |
|
Institutional
lending
|
|
|
5,654
|
|
|
|
6,640
|
|
|
|
9,510
|
|
|
|
17.4% |
|
|
|
43.2% |
|
Treasury
|
|
|
72,802
|
|
|
|
77,238
|
|
|
|
32,479
|
|
|
|
6.1% |
|
|
|
(57.9% |
) |
Other
|
|
|
31,559
|
|
|
|
21,883
|
|
|
|
3,678
|
|
|
|
(48.2% |
) |
|
|
(83.2% |
) |
Net
interest revenue
|
|
|
502,509
|
|
|
|
558,266
|
|
|
|
612,254
|
|
|
|
11.1% |
|
|
|
9.7% |
|
Average
interest-earning assets
|
|
|
11,149,321
|
|
|
|
11,830,880
|
|
|
|
13,079,254
|
|
|
|
6.1% |
|
|
|
10.6% |
|
Average
non-interest-bearing demand deposits
|
|
|
1,855,619
|
|
|
|
1,945,572
|
|
|
|
1,823,018
|
|
|
|
4.8% |
|
|
|
(6.3% |
) |
Net
interest margin(1)
|
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
Average
shareholders’ equity and average non-interest-bearing
demand deposits to total average interest-earning assets
|
|
|
26.0 |
% |
|
|
25.0 |
% |
|
|
22.7 |
% |
|
|
|
|
|
|
|
|
(1)
|
Net
interest margin is net interest revenue divided by average
interest-earning assets.
|
2005
and 2006. Net interest revenue for the year ended December 31, 2006
increased by 9.7% compared to 2005, mainly reflecting a 10.6% increase in
average interest-earning assets.
The
increase in net interest revenue was primarily attributable to an increase
in
net interest revenue from our retail banking and middle-market segments. Net
interest revenue from the retail banking segment increased by 24.2% to
Ch$462,298 million in 2006, with increases of 19.4% in the individuals segment
and 38.6% in the SMEs segment. Loans to higher yielding retail
banking segments increased by 20.7% in 2006 compared to 2005. Net interest
revenue from the middle-market segment increased by 38.4%, primarily due to
a
14% increase in the average balance of the loans and increased net interest
spread in this segment. In the wholesale banking segment, net interest revenue
increased by 12.5%, primarily due to the higher interest rate environment for
short-term lines of credit and trade finance. Total loans in this segment
decreased by 1.8% from December 31, 2005 to December 31,
2006. The average balance of loans in this segment also decreased in
2006 compared to 2005. Net interest revenue in the treasury segment
decreased by 57.9%, primarily reflecting the Bank’s strategy of shifting the
asset mix to higher yielding assets. Total financial investments decreased
by
20.3% from December 31, 2005 to December 31, 2006. The average
balance of financial investments decreased by 31.0% from 2005 to
2006.
This
change in asset mix was the principal factor positively affecting the net
interest margin. The increase in average interest-earning assets was primarily
attributable to a 15.0% increase in average balance of loans. This growth in
lending was driven by the stable economic environment and an increase in our
market share in retail lending. Our total loan market share decreased by 30
basis points from 22.6% as of December 31, 2005 to 22.3% as of December 31,
2006. Market share in lending to individuals increased from 25.2% as
of December 31, 2005 to 26.2% as of December 31, 2006 led by a 101 basis point
increase in residential mortgage lending and a 111 basis point increase in
consumer lending market share. The average balance of consumer loans, which
are
higher yielding compared to our other loan products, increased by 29.3% in
2006
compared to 2005. The nominal rate earned on consumer loans in 2006 reached
20.9%. The average nominal rate earned on loans was 9.4% compared to 8.9% earned
on interest-earning assets in 2006.
At
the
same time, higher interest rates on short-term debt also helped to increase
margins in 2006, notwithstanding the decline in long-term rates.
The
principal factors negatively affecting the net interest margin were the decrease
in inflation rates, the increase in short-term interest rates and a decrease
in
the ratio of the average balances of non interest bearing demand deposits and
shareholders’ equity to interest earning assets.
Our
average UF denominated assets exceeded our average UF denominated liabilities
by
Ch$2,567,226 million in 2006, compared to Ch$1,446,290 million in
2005. Inflation in 2006, measured by the annual variation of the UF,
was 2.01% in 2006 compared to 3.80% in 2005. As a result, the nominal
rate earned on UF-denominated interest-earning assets declined from 8.6% in
2005
to 7.0% in 2006. See “─Impact of Inflation” for a quantitative disclosure of the
impact of inflation on our net interest income.
As
interest-bearing liabilities generally have shorter terms than interest-earning
assets, a rise in short-term rates has a negative effect on our funding costs.
As of December 31, 2006, the amount of our interest-bearing liabilities with
a
maturity of 90 days or less exceeded our interest-earning assets with the same
maturity by Ch$353,602 million. The Central Bank’s overnight reference rate
reached 5.25% as of December 31, 2006 compared to 4.50% as of December 31,
2005. The average 90 day Central Bank rate, a benchmark rate for
deposits, increased in nominal terms from 3.53% in 2005 to 4.83% in 2006. The
average nominal rate paid on interest-bearing liabilities increased from 5.3%
in
2005 to 5.7% in 2006. The average nominal rate paid on time deposits, which
represented 64.8% of our average interest-bearing liabilities in 2006, increased
from 4.7% in 2005 to 5.6% in 2006.
As
short-term interest rates increased, so did the attractiveness of time deposits,
thereby increasing the costs of our funding mix. Average balance of time
deposits increased by 23.2% in 2006 compared to 2005. Average balance of time
deposits represented 64.8% of our average interest-bearing liabilities in 2006,
compared to 60.2% in 2005. In
addition,
we lengthened the maturities of time deposits with institutional investors
in
order to partially offset the negative effects caused by the rising short-term
interest rate environment.
The
ratio
of the average balance of free funds (non-interest bearing demand deposits
and
shareholders’ equity) to the average balance of interest-earning assets also
decreased from 25.0% in 2005 to 22.7% in 2006, primarily as a result of the
increase in short-term rates. This was partially offset by the increase in
the
spread earned on the free funds as a result of the rising interest rate
environment.
2004
and 2005. Net interest revenue for the year ended December 31, 2005
increased by 11.1% compared to 2004, mainly as a result of the 6.1% increase
in
the average balance of interest-earning assets and an increase in our net
interest margin from 4.5% in 2004 to 4.7% in 2005.
The
principal factors positively affecting our net interest margin were the change
in our asset mix and the higher inflation rate. The average balance of total
loans increased by 8.3% in 2005, compared to a 6.1% increase in the average
balance of our interest-earning assets. The average balance of loans represented
79.4% of the average balance of our interest-earning assets in 2005, compared
to
77.8% in 2004. The average nominal rate earned on loans was 9.5%, compared
to
8.5% earned on interest-earning assets as a whole in 2005.
At
the
same time, the higher inflation rate in 2005 compared to 2004 also contributed
to the increase in the net interest margin. In 2005, the inflation rate reached
3.7% compared to 2.4% in 2004. The 12.5% increase in the gap between the average
balances of UF-denominated assets and UF-denominated liabilities, combined
with
a higher inflation rate, had a positive effect on the net interest
margin. See “─Impact of Inflation”.
The
principal factors negatively affecting the net interest margin were the rise
in
short-term interest rates and a decrease in the ratio of the average balances
of
non-interest-bearing demand deposits and shareholders’ equity to
interest-earning assets. As interest-bearing liabilities generally have shorter
terms than interest-earning assets, a rise in short-term rates has a negative
effect on the Bank’s net interest margin.
The
average nominal rate paid on interest-bearing liabilities increased from 4.2%
in
2004 to 5.3% in 2005. In 2005, the overnight reference rate set by the Chilean
Central Bank increased by 225 basis points to 4.50% in December 2005. The
average 90-day Central Bank rate, a benchmark rate for deposits, increased
in
nominal terms from 1.83% in 2004 to 3.53% in 2005. As of December 31, 2005,
the
amount of our interest-bearing liabilities with a maturity of 90 days or less
exceeded our interest-earning assets with the same maturity by Ch$501,595
million. The main reason for this gap is that interest-bearing liabilities
are
mainly comprised of short-term time deposits and short-term repurchase
agreements. The average balance of time deposits represented 60.2% of the
average balance of our interest-bearing liabilities in 2005 compared to 54.4%
in
2004.
The
rise
in short-term interest rates also negatively affected our funding mix. The
average balance of time deposits increased by 22.0% in 2005, compared to a
4.8%
increase in the average balance of our non-interest-bearing demand deposits.
As
short-term interest rates increased, so did the attractiveness of time deposits.
In order to reduce the impact of rising interest rates on our net interest
margin, the Bank lengthened the maturity of deposits. In 2005, 15.6% of time
deposits had a maturity greater than 12 months, compared to 6.6% in 2004. The
ratio of the average balance of free funds (non-interest-bearing liabilities
and
shareholders’ equity) to the average balance of our interest-earning assets also
decreased as a result of the decrease in short-term interest rates from 26.0%
in
2004 to 25.0% in 2005. This was partially offset by the rise in the interest
spread earned on free funds as a result of the higher inflation rate in 2005
compared to 2004.
Provision
for loan losses
In
accordance with applicable Chilean regulations, which became effective as of
January 1, 2004, the models and methods for classifying our loan portfolio
must
follow the following guiding principles established by the Superintendency
of
Banks and approved by our Board of Directors. Under our loan classification
categories effective January 1, 2004, loans are divided into: (i) consumer
loans
(including loans granted to individuals for the purpose of financing the
purchase of consumer goods or payment of services); (ii) residential mortgage
loans
(including
loans granted to individuals for the purchase, construction or improvements
of
residential real estate, in which the value of the property covers at least
100%
of the amount of the loan); and (iii) commercial loans (includes all loans
other
than consumer loans and residential mortgage loans).
In
2006,
we improved our internal provisioning models by not only focusing on
non-performance, but introducing statistical models that take into account
a
borrower’s credit history and indebtedness levels. Group ratings that determine
loan loss allowances based only on non-performance are being phased out and
replaced by statistical scoring systems. Commencing in December 2006, we no
longer analyze large commercial loans on a group basis. All large commercial
loans have since been rated on an individual basis. For large commercial loans,
leasing and factoring, we assign a risk category level to each borrower and
his
respective loans. We consider the following risk factors in classifying a
borrower’s risk category: the borrower’s industry or sector, owners or managers,
financial condition, payment ability and payment behavior.
Group
assessment for loan loss allowances is permitted for a large number of borrowers
whose individual loan amounts are relatively
insignificant. Currently, we use group analysis to determine loan
loss allowances for certain types of loans, such as loans to small- and
mid-sized companies and commercial loans to individuals.
Commencing
in 2006, we improved and modified the methodology for analyzing consumer and
mortgage loans. All consumer and mortgage loans are assigned a provisioning
level on an individual borrower basis using a more automated and sophisticated
statistical model which considers a borrower’s credit history, including any
defaults on obligations to other creditors, as well as the overdue periods
with
respect to loans granted by us. Once the borrower’s rating is determined, the
allowance for consumer or mortgage loans is calculated based on the risk
category and the respective provisioning ratio which is directly related to
the
aging of the loan.
For
a
detailed description of the models we use to determine loan loss allowances,
see
Item 5: Operating and Financial Review and Prospects— D. Selected
Statistical Information – Loan Portfolio – Classification of Loan
Portfolio.
For
statistical information with respect to our substandard loans and allowance
for
probable loan losses, see “—D. Selected Statistical Information—Analysis of
Substandard Loans and Amounts Past Due” and “—D. Selected Statistical
Information—Analysis of Loan Loss Allowances”, as well as Note 7 to the Audited
Consolidated Financial Statements. The amount of provision charged to income
statement in any period consists of net provisions established for possible
loan
losses, net of recoveries on loans previously charged off.
The
following table sets forth, for the years indicated, certain information
relating to our provision expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Provision
expenses
|
|
|
(9,829 |
) |
|
|
27,674
|
|
|
|
(26,614 |
) |
|
|
— |
|
|
|
— |
|
Charge-offs
|
|
|
(126,394 |
) |
|
|
(139,632 |
) |
|
|
(143,475 |
) |
|
|
10.5% |
|
|
|
2.8% |
|
Recoveries
for loans previously charged off
|
|
|
50,772
|
|
|
|
47,079
|
|
|
|
47,067
|
|
|
|
(7.3% |
) |
|
|
(0.0% |
) |
Provision
expenses, net
|
|
|
(85,451 |
) |
|
|
(64,879 |
) |
|
|
(123,022 |
) |
|
|
(24.1% |
) |
|
|
89.6% |
|
Year-end
loans
|
|
|
9,121,022
|
|
|
|
10,359,334
|
|
|
|
11,788,959
|
|
|
|
13.6% |
|
|
|
13.8% |
|
Substandard
loans (1)
|
|
|
338,547
|
|
|
|
271,541
|
|
|
|
345,481
|
|
|
|
(19.8% |
) |
|
|
27.2% |
|
Past-due
loans
|
|
|
138,692
|
|
|
|
108,799
|
|
|
|
92,559
|
|
|
|
(21.6% |
) |
|
|
(14.9% |
) |
Loan
loss allowance
|
|
|
183,366
|
|
|
|
151,000
|
|
|
|
174,064
|
|
|
|
(17.7% |
) |
|
|
15.3% |
|
Substandard
loans / Year-end loans
|
|
|
3.71 |
% |
|
|
2.62 |
% |
|
|
2.93 |
% |
|
|
|
|
|
|
|
|
Past
due loans / Year-end loans
|
|
|
1.52 |
% |
|
|
1.05 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
Consolidated
risk index (2)
|
|
|
2.01 |
% |
|
|
1.46 |
% |
|
|
1.48 |
% |
|
|
|
|
|
|
|
|
Coverage
ratio (3)
|
|
|
132.21 |
% |
|
|
138.79 |
% |
|
|
188.06 |
% |
|
|
|
|
|
|
|
|
(1)
|
Substandard
loans are all mortgage and consumer loans rated B or worse and
all commercial loans rated C2 or
worse.
|
(2)
|
Loan
loss allowance divided by year end
loans.
|
(3)
|
Loan
loss allowance divided by past due
loans.
|
2005
and 2006. Net provision expenses for loan losses totaled Ch$123,022 million
for the year ended December 31, 2006, an increase of 89.6% compared to 2005,
primarily due to increase in provision expense and
charge-offs. Provision expense rose from a reversal of Ch$27,674
million in 2005 to a charge of Ch$26,614 million in 2006. The Bank’s risk index
or expected loan loss ratio, which is calculated according to the guidelines
set
by the Superintendency of Banks and our Board, increased from 1.46% in 2005
to
1.48% in 2006. This index is the main determinant of loan loss allowances.
Loan
loss allowances must be equal to the risk index multiplied by total loans.
As
the loan portfolio increased by 13.8% in 2006 and the risk index rose 2 basis
points, required loan loss allowances rose 15.3% to Ch$174,064 million,
resulting in the Ch$26,614 million provision expense in 2006. See “—D.
Selected Statistical Information—Loan by Economic Activity—Classification of
Loan Portfolio”.
Charge-offs
increased by 2.8% in 2006 compared to 2005, primarily as a result of the growth
of our consumer loan portfolio, for which credit risk is higher and loans become
loss within much shorter periods than the rest of the loan
portfolio. Charge-offs of the consumer loan portfolio increased by
50.0% to Ch$102,246 million. This was partially offset by the 44.8% decrease
in
charge-offs in the commercial loan portfolio. In 2005, the Bank charged off
various commercial loans that had been previously restructured and that bear
no
interest. See “—D. Selected Statistical Information - Analysis of Loan Loss
Allowances” and “—Classification of Loan Portfolio Based on the Borrower’s
Payment Performance”. These loans were already classified as D2 and were 90%
provisioned for. Therefore, this increase in charge-offs was offset by the
subsequent release of provisions recorded in 2005.
The
following table sets forth, for the years indicated, a breakdown of our charged
off loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Consumer
loans
|
|
|
86,703
|
|
|
|
68,144
|
|
|
|
102,246
|
|
|
|
(21.4% |
) |
|
|
50.0% |
|
Mortgage
loans
|
|
|
4,149
|
|
|
|
7,314
|
|
|
|
5,789
|
|
|
|
76.3% |
|
|
|
(20.9% |
) |
Commercial
loans
|
|
|
35,542
|
|
|
|
64,174
|
|
|
|
35,440
|
|
|
|
80.6% |
|
|
|
(44.8% |
) |
Total
charge-offs
|
|
|
126,394
|
|
|
|
139,632
|
|
|
|
143,475
|
|
|
|
10.5% |
|
|
|
2.8% |
|
In
addition, recoveries on loans previously charged off remained effectively stable
in 2006 compared to 2005. Our recovery department is currently being reorganized
and expanded in order to keep up with the growth in our retail lending
business.
Overall
asset quality indicators remained healthy in 2006. Past due loans at December
31, 2006 decreased by 14.9% compared to December 31, 2005. Past due loans as
a
percentage of total loans decreased from 1.05% at December 31, 2005 to 0.79%
at
December 31, 2006. Substandard loans increased by 27.2%, primarily due to an
increase in substandard consumer loans, which rose mainly as a result of loan
growth in this product. Total substandard loans as a percentage of total loans
increased from 2.62% at year-end 2005 to 2.93% at year-end 2006, mainly due
to
the change in loan mix towards higher yielding retail loans, which generally
present relatively higher risk than other retail loans.
The
following table sets forth, for the years indicated, the components of our
net
provision expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Total
individuals
|
|
|
(73,566 |
) |
|
|
(52,255 |
) |
|
|
(101,753 |
) |
|
|
(29.0% |
) |
|
|
94.7% |
|
SMEs
|
|
|
(16,630 |
) |
|
|
(15,737 |
) |
|
|
(20,840 |
) |
|
|
(5.4% |
) |
|
|
32.4% |
|
Total
retail
|
|
|
(90,196 |
) |
|
|
(67,992 |
) |
|
|
(122,593 |
) |
|
|
(24.6% |
) |
|
|
80.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Total
middle-market
|
|
|
8,156
|
|
|
|
1,113
|
|
|
|
(720 |
) |
|
|
(86.4 |
%) |
|
|
— |
% |
Wholesale
banking
|
|
|
3,286
|
|
|
|
1,960
|
|
|
|
703
|
|
|
|
(40.4 |
%) |
|
|
(64.1 |
%) |
Institutional
lending
|
|
|
(562 |
) |
|
|
(16 |
) |
|
|
481
|
|
|
|
(97.2 |
%) |
|
|
— |
% |
Treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
(1)
|
|
|
(6,135 |
) |
|
|
|
|
|
|
(893 |
) |
|
|
— |
% |
|
|
— |
% |
Provision
expense, net
|
|
|
(85,451 |
) |
|
|
(64,879 |
) |
|
|
(123,022 |
) |
|
|
(24.1 |
%) |
|
|
89.6 |
% |
|
(1)
Consists primarily of additional allowances on loans which are not
assigned to any of the above types or segments, if any, and provisions
for
repossessed assets.
|
Provision
expense increased by 80.3% in the retail banking segment, mainly as a result
of
the growth of our retail loan portfolio, for which credit risk is higher and
provisions are required to be made within much shorter periods than the rest
of
the loan portfolio. Charge-off of the consumer loan portfolio
increased by 50.0% in 2006 compared to 2005. Provision expense in the SMEs
segment increased in line with loan growth in this segment. Net provision
expense in the rest of the segments remained relatively stable, reflecting
the
generally healthy credit quality indicators in those segments.
We
expect
provisions for loan losses to increase in future periods in line with the
overall growth of our loan portfolio and our increased lending to small
companies and individuals which poses a higher risk of default than lending
to
traditional corporate and commercial customers. See “Item 3: Key
Information—D. Risk Factors—Risks Associated with Business—Our exposure to
individuals and small businesses could lead to higher levels of past due loans,
allowances for loan losses and charge-offs” and “Item 3: Key Information—D. Risk
Factors—Risks Associated with our Business—The growth of our loan portfolio may
expose us to increased loan losses.”
2004
and 2005. Provisions for loan losses decreased by 24.1% in 2005
compared to 2004. The growth of the Chilean economy has led to an improvement
in
asset quality indicators, which in turn resulted in a lower provision expense
in
the year. Past due loans at year-end 2005 decreased by 21.6% from year-end
2004.
Past due loans as a percentage of total loans decreased from 1.52% at year-end
2004 to 1.05% at year-end 2005. Substandard loans at year-end 2005
decreased by 19.8% from year-end 2004. The coverage ratio (loan loss allowance
as a percentage of past due loans) improved to 138.79% at year-end 2005 from
132.21% at year-end 2004.
Charge-offs
in 2005 increased by 10.5% in 2005 compared to 2004, mainly as a result of
an
increase in charge-off of commercial loans that had been previously restructured
and that bear no interest. See “—D. Selected Statistical Information—Analysis of
Loan Loss Allowances” and “—Classification of Loan Portfolio Based on the
Borrower’s Payment Performance”. These loans were already classified as D2 and
were 90% provisioned for. Therefore, this increase in charge-offs was offset
by
the subsequent release of provisions previously set aside for these
loans.
Fee
income
The
following table sets forth certain components of our income from services (net
of fees paid to third parties directly connected to providing those services,
principally fees relating to credit card processing and ATM network
administration) in the years ended December 31, 2004, 2005 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
million of constant Ch$ as of December 31, 2006,
except
percentages)
|
|
Checking
accounts & lines of credit
|
|
|
35,400
|
|
|
|
42,429
|
|
|
|
53,731
|
|
|
|
19.9 |
% |
|
|
26.6 |
% |
Collection
and administration of insurance policies
|
|
|
17,694
|
|
|
|
20,598
|
|
|
|
23,233
|
|
|
|
16.4 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
million of constant Ch$ as of December 31, 2006,
except
percentages)
|
|
Mutual
fund services
|
|
|
19,087
|
|
|
|
19,275
|
|
|
|
20,039
|
|
|
|
1.0 |
% |
|
|
4.0 |
% |
Credit
cards
|
|
|
13,466
|
|
|
|
14,117
|
|
|
|
18,650
|
|
|
|
4.8 |
% |
|
|
32.1 |
% |
Automatic
teller cards
|
|
|
13,022
|
|
|
|
13,859
|
|
|
|
14,272
|
|
|
|
6.4 |
% |
|
|
3.0 |
% |
Insurance
brokerage
|
|
|
6,788
|
|
|
|
8,406
|
|
|
|
11,397
|
|
|
|
23.8 |
% |
|
|
35.6 |
% |
Sales
and purchase of foreign currencies
|
|
|
5,271
|
|
|
|
6,619
|
|
|
|
5,957
|
|
|
|
25.6 |
% |
|
|
(10.0 |
%) |
Payment
agency services
|
|
|
4,187
|
|
|
|
2,881
|
|
|
|
2,671
|
|
|
|
(31.2 |
%) |
|
|
(7.3 |
%) |
Office
Banking
|
|
|
—
|
|
|
|
1,380
|
|
|
|
2,602
|
|
|
|
— |
% |
|
|
88.6 |
% |
Letters
of credit, guarantees, pledges and other contingent loans
|
|
|
4,828
|
|
|
|
2,816
|
|
|
|
2,522
|
|
|
|
(41.7 |
%) |
|
|
(10.4 |
%) |
Stock
brokerage
|
|
|
1,416
|
|
|
|
1,654
|
|
|
|
1,393
|
|
|
|
16.7 |
% |
|
|
(15.7 |
%) |
Underwriting
|
|
|
6,322
|
|
|
|
2,383
|
|
|
|
1,345
|
|
|
|
(62.3 |
%) |
|
|
(43.5 |
%) |
Bank
drafts and fund transfers
|
|
|
260
|
|
|
|
258
|
|
|
|
624
|
|
|
|
(0.8 |
%) |
|
|
141.9 |
% |
Custody
and trust services
|
|
|
590
|
|
|
|
651
|
|
|
|
365
|
|
|
|
10.5 |
% |
|
|
(43.9 |
%) |
Savings
accounts
|
|
|
262
|
|
|
|
244
|
|
|
|
253
|
|
|
|
(6.9 |
%) |
|
|
3.7 |
% |
Other
|
|
|
(589 |
) |
|
|
|
|
|
|
|
|
|
|
— |
% |
|
|
(6.3 |
%) |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4 |
% |
|
|
15.0 |
% |
2005
and 2006. Total net fee income increased by 15.0% to Ch$162,550 million for
the year ended December 31, 2006 compared to 2005. The positive economic
environment and the bank’s successful marketing efforts led to an overall
increase in the usage and penetration of bank products in 2006. The Bank’s total
retail banking client base increased by 11.8% in 2006, totaling 2.4 million
clients. The number of retail clients with a checking account increased by
23.0%
in 2006, reaching 496 thousand. Middle- and upper-income individual clients
who
are cross sold, defined as clients with a checking account who also uses at
least four other banking products, increased by 30.8% at December 31, 2006
compared to December 31, 2005. In Santander Banefe, the number of cross sold
clients (clients who also use at least two other products) rose by 18.1% at
December 31, 2006 compared to December 31, 2005.
Fees
from
checking accounts and lines of credit increased by 26.6%, primarily as a result
of the growth of our checking accounts and credit lines. These products are
offered together and, therefore, are being analyzed as a single
product. Our market share in checking accounts at November 2006, the
last figure available, was 27.1% compared to 25.5% at November 2005. In this
same period, our checking account base increased by 17.1%, compared to the
10.3%
increase in the market as a whole.
Fees
from
collection and administration of insurance policies increased by 12.8% for
the
year ended December 31, 2006 compared to 2005, primarily due to the growth
of
our mortgage loan book and lower than estimated claim rates, which results
in
higher administration fees paid by insurers to us.
Fees
from
our mutual fund asset management subsidiary increased by 4.0%. Total assets
under management increased by 35.9% to Ch$2,092,192 million (US$3.9 billion)
at
December 31, 2006 compared to December 31, 2005.
Credit
card fees increased by 32.1% in 2006 compared to 2005. We were the market leader
in bank credit card accounts, with a 35.8% market share as of December 31,
2006.
The transaction volumes of credit cards issued by us, measured in UFs, increased
by 12.9% in 2006 compared to 2005. The number of our credit card customer
accounts increased by 16.0% to 948,918 at December 31, 2006 compared to December
31, 2005. The rise in credit card fees is partially offset by the other credit
card expenses reflected in “Other operating losses, net.”
The
3.0%
rise in ATM fees was mainly driven by the increase in the number of ATMs
installed by the Bank. As of December 31, 2006, the Bank had 1,588 ATMs compared
to 1,422 as of December 31, 2005. The rise in ATMs was offset by increased
competition in order to obtain ATM locations with large retailers.
Insurance
brokerage fees increased by 35.6% for the year ended December 31, 2006 compared
to 2005. This was mainly as a result of an industry-wide expansion of insurance
brokerage business as banks have successfully introduced simple and low cost
insurance products to the market.
The
decrease in fees from payment agency services, letters of credit, guarantees,
pledges and other contingent loan fees, fees form the sale and purchase of
foreign currencies, underwriting fees and other fees was mainly due to increased
competitive pressure in the Corporate and Middle-market segments. This was
offset by an increase in the sales of derivatives and other treasury services,
which were included in “Other operating income” and a higher return on cash
management services provided to these customers, which was reflected in our
net
interest income.
Office
banking fees increased by 88.6% in 2006 compared to 2005 as the Bank has also
sought to increase the coverage and pricing of its on-line corporate banking
services in order to offset the decrease in collection fees.
By
segment, changes in our fee income also reflects the increase in retail banking
products. Retail banking fees increased by 38.8% in 2006 compared to 2005,
mainly due to the rise in fees from checking accounts, lines of credit,
insurance brokerage and credit cards.
Fees
from
the middle market increased by 62.4% in 2006 compared to 2005, led by the
increase in office banking services and the reclassification of the fees from
the mutual fund asset management from “other” fee income to fees from the middle
market in 2006.
Fees
from
wholesale banking decreased by 1.3%, reflecting the decline in fees from payment
agency services, letters of credit, guarantees, pledges and other contingent
loan fees, fees form the sale and purchase of foreign currencies and
underwriting fees. This was offset by an increase in sales of
derivatives and other treasury services and a higher return on cash management
services provided to these customers.
The
following table set forth, for the years indicated, a breakdown of our fee
income by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
million of constant Ch$ as of December 31, 2006,
except
percentages)
|
|
Total
individuals
|
|
|
66,574
|
|
|
|
76,057
|
|
|
|
103,476
|
|
|
|
14.2 |
% |
|
|
36.0 |
% |
SMEs
|
|
|
14,496
|
|
|
|
19,136
|
|
|
|
28,671
|
|
|
|
32.0 |
% |
|
|
49.8 |
% |
Total
retail
|
|
|
81,070
|
|
|
|
95,193
|
|
|
|
132,147
|
|
|
|
17.4 |
% |
|
|
38.8 |
% |
Total
middle-market
|
|
|
8,543
|
|
|
|
8,611
|
|
|
|
13,981
|
|
|
|
0.8 |
% |
|
|
62.4 |
% |
Wholesale
banking
|
|
|
6,875
|
|
|
|
7,636
|
|
|
|
7,536
|
|
|
|
11.1 |
% |
|
|
(1.3 |
%) |
Institutional
lending
|
|
|
1,570
|
|
|
|
1,668
|
|
|
|
1,201
|
|
|
|
6.3 |
% |
|
|
(28.0 |
%) |
Treasury
|
|
|
3,666
|
|
|
|
—
|
|
|
|
1,303
|
|
|
|
— |
% |
|
|
— |
% |
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
% |
|
|
(77.4 |
%) |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4 |
% |
|
|
15.0 |
% |
2004
and 2005. In 2005, total fee income increased by 10.4%. The positive
economic environment led to an overall increase in the usage and penetration
of
bank products in 2005. Fees from checking accounts and lines of credit increased
by 19.9%, mainly a result of the growth of our checking accounts and credit
lines. These products are sold together and, therefore, are being analyzed
as a
single product.
Insurance
brokerage fees increased by 23.8%, mainly as a result of an industry-wide
expansion of the insurance brokerage business as banks have successfully
introduced simple and low cost insurance products to the market. The 6.4% rise
in ATM fees was mainly driven by the rise of ATMs installed by the Bank that
increased by 19.5% in 2005 to 1,422 tellers. This was offset in part by the
US$2
million one-time fee earned in 2004 as a result of the strategic alliance signed
between the Bank and Empresas París in December 2004. Excluding this item, ATM
fees increased by 17.1%, generally in line with the increase of ATMs in the
period.
The
increase in other fees was mainly due to Ch$2,147 million in fees paid to the
Bank in connection with financial advisory services provided to a
company.
Fees
from
our mutual fund asset management subsidiary increased by 1.0%. Total assets
under management increased by 4.7% in 2005 compared to 2004. In 2005, the Bank
launched 12 new funds. The inflow to these new funds offset a reduction in
amount managed in fixed income funds as money flowed away from these funds
toward bank deposits due to an increase in short-term interest
rates.
The
growth
in fees was offset by a 41.7% decrease in fees from letters of credit,
guarantees, pledges and other contingent operations, in line with the decline
in
low yielding contingent loans. Underwriting fees decreased by 62.3%, mainly
due
to lower corporate bond issuances in 2005 compared to 2004. Payment agency
service fees declined by 31.2% in 2005 compared to 2004. These charges are
mainly related to collection services the Bank performs on behalf of corporate
customers. These services are increasingly being performed through our internet
banking services. Fees charged for office banking, which is internet banking
service for companies, totaled Ch$1,380 million in 2005 compared to no
significant income in previous years.
Other
operating income (expenses), net
The
following table sets forth information regarding our other operating income
(expenses), net in the years ended December 31, 2004, 2005 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Net
gains from trading and mark-to-market
|
|
|
(7,410 |
) |
|
|
(62,569 |
) |
|
|
100,312
|
|
|
|
744.4% |
|
|
|
— |
|
Foreign
exchange transactions, net
|
|
|
|
|
|
|
|
|
|
|
(48,708 |
) |
|
|
52.6% |
|
|
|
— |
|
Other
operating losses, net
|
|
|
(25,293 |
) |
|
|
(23,407 |
) |
|
|
(32,961 |
) |
|
|
(7.4% |
) |
|
|
40.8% |
|
Total
other operating income
|
|
|
|
|
|
|
(13,595 |
) |
|
|
|
|
|
|
— |
|
|
|
— |
|
2005
and 2006. Total other operating income, net, amounted to a gain of
Ch$18,643 million for the year ended December 31, 2006 compared to a loss of
Ch$13,595 million for 2005. Total other operating income, net, consists
primarily of (i) the results of our Treasury Department’s trading and hedging
activities and financial transactions with customers, and (ii) other operating
income and expenses primarily relating to repossessed assets that have not
been
charged-off, sales force expenses and other expenses relating to the Bank’s
marketing and promotional efforts.
Net
gains
from trading activities and mark-to-market adjustments totaled Ch$100,312
million in 2006. This line item in 2006 included: (i) unrealized gains of
Ch$83,825 million from mark-to-market adjustments of our derivatives portfolio
(including foreign exchange derivatives) and, (ii) gains of Ch$16,487 million
from mark to market adjustments and realized gains made in the securities
portfolio. The net result from foreign exchange transactions totaled a loss
of
Ch$48,708 million in 2006. These results mainly included the translation loss
of
assets and liabilities denominated in foreign currencies (excluding
derivatives), which was largely offset by the hedged positions with derivatives.
Our exposure to the foreign currency market is limited by guidelines of the
Central Bank and our Market Risk Department (See Item 11: Quantitative and
Qualitative Disclosures about Market Risk).
Net
gains
from trading activities and mark-to-market adjustments and foreign exchange
transactions for the years ended December 31, 2006 and 2005 are not strictly
comparable since 2006 figures include the mark-to-market adjustments of
derivatives. In accordance with Circular No. 3345 issued by the Superintendency
of Banks, effective January 1, 2006, the accounting standards for valuing
financial instruments acquired for trading or investment purposes, including
derivative instruments, were amended. In summary, we must record our derivatives
portfolio at fair value, and hedge accounting was introduced. See Item 5:
Operation and Financial Review and Prospects — A. New Accounting Standards
for Financial Investments and Derivatives. Results in 2006 included a gain
of
Ch$12,580 million following the adoption of new accounting standards reflecting
recognizing financial instruments at fair value, which resulted in a gain from
trading activities. If we had applied the new accounting standards for the
year
ended
December
31, 2005, the net effect on our results would have been a gain of Ch$7,008
million (this figure has been calculated based on the adjustment under U.S.
GAAP
for hedge accounting. See Note 26(m) to our Audited Consolidated Financial
Statements).
In
2006,
other operating losses, net, increased by 40.8% to Ch$32,961 million compared
to
a loss of Ch$23,407 million in 2005. This was primarily due to our increased
business activities, which resulted in increases in credit card related expenses
and other customer related expenses. Expenses relating to our credit card
business increased by 117.7% to Ch$5,013 million for the year ended December
31,
2006 compared to 2005, primarily as a result of relatively higher premium rates
on fraud insurance covering some of our new cards and an increase in the
membership fees paid to Transbank, the company collectively owned by major
banks
in Chile which runs credit card payment networks in
Chile. These increased costs were offset by increased fees
from our credit cards.
Customer
service expenses, which consist primarily of expenses paid to third parties
for
transporting funds for corporate customers as part of cash management
agreements, and the costs of our call center, increased by 105.0% to Ch$10,889
million in 2006 compared to 2005. This was offset by positive performance of
our
cash management business. We generate fees for collection and corporate
e-banking services and generate interest income on the floating balances of
these clients. The growth of these expenses also reflects the shift towards
more
efficient sales channels such as our call center compared to the outsourced
sales force.
The
results from the sales and expenses in maintaining repossessed assets decreased
by 78.2% to Ch$842 million in 2006 compared to 2005. In 2005, we recognized
a
gain of Ch$1,123 million from the leasing of a large repossessed asset, which
mainly explains the decline in income in this line item in 2006.
2004
and 2005. Other operating income, net totaled a loss of Ch$13,595 million
in 2005 compared to a gain of Ch$14,741 million in 2004. This was mainly due
to
an increase in net loss from trading and mark-to-market adjustments primarily
reflecting the movement of long-term local interest rates in 2005 compared
to
2004. In the first nine months of 2005, strong liquidity in the Chilean
financial systems dampened long-term yields, resulting in mark-to-market gains.
As the economy improved and inflation continued to rise, this trend reversed
sharply in the last quarter of the year, reversing a substantial portion of
the
gains recorded to that point in the year. As of December 31, 2004, the market
rate on the 10-year Central Bank bond in real terms was 3.29%. As of September
30, 2005, the yield on this same instrument had declined to 2.43%, but by
December 31, 2005, it recovered to 3.29%. In 2004, the 10-year Chilean Central
Bank bond was yielding 3.23%, down 104 basis points from year-end 2003. This
was
partially offset by a 52.6% increase in foreign exchange transactions. This
line
item in 2004 and 2005 includes net gain or loss in book value of assets or
liabilities indexed to a foreign currency. The increase in gains from foreign
exchange transactions was primarily attributable to a 8.1% appreciation of
the
peso during 2005, which partially offset the financial results on forward
contracts included in net gains from trading and mark-to-market. Our exposure
to
the foreign currency market is limited by guidelines of the Central Bank and
our
Market Risk Department (See Item 11: Quantitative and Qualitative
Disclosures about Market Risk).
Other
operating losses, net decreased by 7.4% in 2005 compared to 2004, totaling
a
loss of Ch$23,407 million. This decrease was mainly due to a 20.9% decrease
in
commissions paid to our external sales force, which totaled Ch$17,227 million
in
2005, primarily attributable to the fact that in 2004 sales force expenses
included the recognition of Ch$4,174 million in one-time sales force expenses
as
a result of the sale of the Santiago Express Division to Empresas
París. Expenses on assets received in lieu of payment also decreased
by 84.4% in 2005 compared to 2004. This was offset by a 16.6% decline in income
from the sale of repossessed assets and a rise in other expenses related to
our
credit card business.
Other
income and expenses, net
The
following table sets forth information regarding our other income and
expenses in the years ended December 31, 2004, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Non-operating
income (loss), net
|
|
|
(4,669 |
) |
|
|
(22,480 |
) |
|
|
(4,214 |
) |
|
|
381.5 |
% |
|
|
(81.3 |
%) |
Income
attributable to investments in other companies
|
|
|
568
|
|
|
|
693
|
|
|
|
786
|
|
|
|
21.9 |
% |
|
|
13.4 |
% |
Losses
attributable to minority interest
|
|
|
(194 |
) |
|
|
(136 |
) |
|
|
(151 |
) |
|
|
(30.0 |
%) |
|
|
11.0 |
% |
Total
|
|
|
(4,295 |
) |
|
|
(21,923 |
) |
|
|
(3,579 |
) |
|
|
410.4 |
% |
|
|
(83.7 |
%) |
2005
and 2006. The net loss recorded in other income and expenses, net,
decreased by 83.7% in 2006 compared to 2005, primarily due to a lower level
of
provisions for other contingencies. These contingencies are mainly related
to
non credit risks, including non specific contingencies, tax contingencies and
other non credit contingencies or impairments. In 2006, these provisions totaled
Ch$6,515 million, a decrease of 67.8% compared to 2005. The lower non-operating
loss was also due to a lower level of charge-offs of repossessed assets, which
totaled Ch$13,616 million in 2006, a decrease of 36.2% compared to 2005. This
was partially offset by a 52.6% decrease in gains from the sales of repossessed
assets previously charged off, which totaled Ch$8,050 million in 2006. (See
Note
17 to our Audited Consolidated Financial Statements).
2004
and 2005. The net loss recorded in other income and expenses, net,
increased by 410.4% in 2005 compared to 2004. In 2004, the Bank recognized
a
one-time gain of Ch$23,093 million from the sale of our former Santiago Express
Division to Empresas París. Excluding the sale, the net loss recorded in other
income and expenses, net would decrease by 20.0% in 2005 compared to 2004,
mainly as a result of a 141.1% increase in income from the sale of repossessed
assets previously charged off. This was partially offset by a 73.2% increase
in
provisions for other contingencies.
Operating
expenses
The
following table sets forth information regarding our operating expenses in
the
years ended December 31, 2004, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006,
except percentages)
|
|
Personnel
salaries and expenses
|
|
|
140,746
|
|
|
|
142,171
|
|
|
|
159,722
|
|
|
|
1.0% |
|
|
|
12.3% |
|
Administrative
expenses
|
|
|
102,159
|
|
|
|
102,717
|
|
|
|
110,948
|
|
|
|
0.6% |
|
|
|
8.0% |
|
Depreciation
and amortization
|
|
|
40,978
|
|
|
|
40,080
|
|
|
|
38,613
|
|
|
|
(2.2% |
) |
|
|
(3.7% |
) |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4% |
|
|
|
8.5% |
|
Efficiency
ratio(1)
|
|
|
44.0 |
% |
|
|
41.5 |
% |
|
|
39.0 |
% |
|
|
|
|
|
|
|
|
(1)
|
The
efficiency ratio is the ratio of total operating expenses to total
operating revenue. Total operating revenue consists of net interest
revenue, fee income from services, net, and other operating income,
net.
|
2005
and 2006. Operating expenses in 2006 increased by 8.5% compared to 2005.
The 12.3% rise in personnel salaries and expenses was mainly due to the
end-of-negotiation bonus paid in conjunction with the signing of the new
collective bargaining agreement in the fourth quarter of 2006. This new
collective bargaining agreement enters into effect on March 1, 2007 and expires
on March 1, 2011. As a part of this process, an end-of-negotiation bonus was
to
be paid, which resulted in a one-time cost of Ch$8,622 million in 2006.
Personnel costs also grew as a result of the 5.4% rise in average headcount
in
2006 compared to 2005 and an increase in bonuses paid to business teams for
reaching business targets. Our efficiency ratio, despite higher costs, continued
to improve, reaching a record low of 39.0% for the year ended December 31,
2006
compared to 41.5% in 2005.
Administrative
expenses increased by 8.0% for the same periods, reflecting an increase in
expenses as a result of the expansion of our distribution network. The branch
network totaled 397 branches as of December 31, 2006, an increase of 12.8%
since
December
2005. Our ATM network totaled 1,588 machines, an increase of 11.7% since
December 2005. We expect personnel and administrative expenses to grow at a
higher pace in future periods as a result of our strategy to expand our retail
banking business.
Depreciation
and amortization expenses decreased by 3.7% in 2006 compared to 2005. In the
fourth quarter of 2005, the Bank accelerated the depreciation of obsolete IT
projects, which resulted in the decline in depreciation expense in
2006. Going forward we expect depreciation expenses to rise as the
Bank continues to invest in branches and other fixed assets.
The
expansion of our branch and ATM network helped us increase our retail business.
The relatively larger expenses incurred as a result of the expansion of the
branch and ATM network has been partially offset by increases in productivity
as
gross operating income increased by 15.7%. As a result, our efficiency ratio,
representing operating expenses divided by operating income, improved from
41.5%
in 2005 to a record low of 39.0% in 2006. The pace of expansion of our branch
and ATM network in the medium-term may vary with fluctuations in the outlook
of
the Chilean economy.
2004
and 2005. Operating expenses in 2005 increased by 0.4% compared to 2004.
The 1.0% rise in personnel expenses reflects an increase in variable
compensation paid to commercial teams for reaching commercial targets. This
was
partially offset by a 1.7% decrease in average headcount in 2005 compared to
2004 as a result of the sale of Santiago Express. The 0.6% increase in
administrative expenses reflect an increase in expenditures for branches and
ATMs, which was partially offset by savings produced by the outsourcing of
certain back office functions, such as systems management and mortgage
processing, which we believe has improved productivity. We expect personnel
and
administrative expenses to grow at a higher pace in future periods as a result
of our strategy to expand our retail banking business. This trend was already
observable in the second half of 2005.
Depreciation
and amortization expenses decreased by 2.2% in 2005 compared to 2004, which
were
positively affected by the completion of the depreciation schedule of our core
IT systems.
Loss
from price level restatement
2005
and 2006. The loss from price level restatement totaled Ch$13,782 million
in 2006, a decrease of 25.6% compared to 2005. We must adjust our capital,
fixed
assets and other assets for the variations in price levels. Because our capital
is larger than the sum of our fixed and other assets, price level restatement
usually results in a loss and fluctuates with the inflation rate. The inflation
rate used for calculating price level restatement decreased in 2006 compared
to
2005 (2.01% in 2006 and 3.80% in 2005), resulting in a lower loss from price
level restatement. This was partially offset by an increase in the gap between
equity and other assets as we decreased our dividend payment in 2006. The lower
loss from price level restatement is also partially offset by the negative
impact on net interest income due to lower inflation rates.
2004
and 2005. Losses from price level restatement increased by 46.1% compared
to 2004. The higher loss from price level restatement reflected the higher
inflation rate used for calculating price level restatement in 2005 compared
to
2004 (3.62% in 2005 compared to 2.35% in 2004).
Income
tax
2005
and 2006. Our income tax expense increased by 14.4% to Ch$58,199 million
for the year ended December 31, 2006 compared to 2005, primarily due to a 16.3%
growth of income before taxes. The effective tax rate for 2006 was 16.9%,
compared to 17.2% for 2005. The statutory corporate tax rate was 17% (See Note
20 to our Audited Consolidated Financial Statements).
2004
and 2005. Our income tax expense increased 4.7% for the year ended December
31, 2005 compared to 2004. This rise was mainly due to a net charge to deferred
taxes of Ch$4,857 million compared to a net benefit of Ch$12,985 million in
2004. This was partially offset by a 23.7% decrease in income tax
provisions in 2005 compared to 2004. (See Note 20 to our Audited Consolidated
Financial Statements). As a result, the total income tax expenses in 2005
increased at a lower rate than the growth of pre-tax income, leading to a lower
effective tax rate. The Bank’s effective tax rate was 17.2% for the year ended
December 31, 2005, compared to 18.8% in 2004.
C.
Liquidity and Capital Resources
Sources
of Liquidity
Santander-Chile’s
liquidity depends upon its (i) capital, (ii) reserves and (iii) financial
investments, including investments in government securities. To cover any
liquidity shortfalls and to augment its liquidity position, Santander-Chile
has
established lines of credit with foreign and domestic banks and also has access
to Central Bank borrowings.
The
following table sets forth our contractual obligations and commercial
commitments by time remaining to maturity. At December 31, 2006, the scheduled
maturities of our contractual obligations and of other commercial commitments,
including accrued interest, were as follows:
|
|
|
|
|
Due after 1
year but
within 3 years
|
|
|
Due after 3
years
but
within 6 years
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Deposit
and other obligations(1)
|
|
|
5,483,618
|
|
|
|
1,196,139
|
|
|
|
219,126
|
|
|
|
10,452
|
|
|
|
6,909,335
|
|
Mortgage
finance bonds
|
|
|
65,493
|
|
|
|
105,746
|
|
|
|
133,680
|
|
|
|
225,287
|
|
|
|
530,206
|
|
Subordinated
bonds
|
|
|
40,294
|
|
|
|
—
|
|
|
|
133,427
|
|
|
|
316,695
|
|
|
|
490,416
|
|
Bonds
|
|
|
1,140
|
|
|
|
213,700
|
|
|
|
172,048
|
|
|
|
178,765
|
|
|
|
565,653
|
|
Chilean
Central Bank borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
lines for renegotiations of Loans
|
|
|
5,080
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,080
|
|
Other
Central Bank borrowings
|
|
|
134,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
134,417
|
|
Borrowings
from domestic financial institutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
sold under agreements to repurchase
|
|
|
19,929
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,929
|
|
Foreign
borrowings
|
|
|
717,979
|
|
|
|
91,021
|
|
|
|
3,267
|
|
|
|
—
|
|
|
|
812,267
|
|
Derivatives
|
|
|
266,651
|
|
|
|
27,629
|
|
|
|
49,680
|
|
|
|
11,962
|
|
|
|
355,922
|
|
Other
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Excludes
demand deposit accounts and saving accounts.
The
Bank
as of the date of the filing of this 20-F has no significant purchase
obligations.
Operational
leases
Certain
bank premises and equipment are leased under various operating leases. Future
minimum rental commitments as of December 31, 2006 under non-cancelable leases
are as follows:
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)
|
|
Due
within 1 year
|
|
|
8,383
|
|
Due
after 1 year but within 2 years
|
|
|
7,363
|
|
Due
after 2 years but within 3 years
|
|
|
5,394
|
|
Due
after 3 years but within 4 years
|
|
|
3,006
|
|
Due
after 4 years but within 5 years
|
|
|
1,539
|
|
Due
after 5 years
|
|
|
|
|
Total
|
|
|
|
|
Other
Commercial Commitments
At
December 31, 2006, the scheduled maturities of other commercial commitments,
including accrued interest, were as follows:
Other
Commercial Commitments
|
|
|
|
|
Due after 1
year but
within 3 years
|
|
|
Due after 3
years
but
within 6 years
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 2006)
|
|
Letters
of credit
|
|
|
102,707
|
|
|
|
50,448
|
|
|
|
13,093
|
|
|
|
—
|
|
|
|
166,248
|
|
Guarantees
|
|
|
553,833
|
|
|
|
22,132
|
|
|
|
642
|
|
|
|
—
|
|
|
|
576,607
|
|
Other
commercial commitments
|
|
|
275,723
|
|
|
|
5,403
|
|
|
|
67
|
|
|
|
—
|
|
|
|
281,193
|
|
Total
other commercial commitments
|
|
|
932,263
|
|
|
|
77,983
|
|
|
|
13,802
|
|
|
|
—
|
|
|
|
1,024,048
|
|
Capital
and Reserves
We
currently have regulatory capital in excess of the minimum requirement under
the
current Chilean regulations. According to the General Banking Law, a bank should
have regulatory capital of at least 8% of its risk weighted assets, net of
required loan loss allowances, and paid-in capital and reserves (“basic
capital”) of at least 3% of its total assets, net of required loan loss
allowances. For these purposes, the regulatory capital of a bank is the sum
of
(1) the bank’s basic capital, (2) subordinated bonds issued by the bank valued
at their placement price for an amount up to 50% of its basic capital; provided
that the value of the bonds shall decrease by 20% for each year that elapses
during the period commencing six years prior to their maturity, and (3) its
voluntary allowances for loan losses, for an amount of up to 1.25% of its risk
weighted assets. The merger of Old Santander-Chile and Santiago required a
special regulatory preapproval of the Superintendency of Banks, which was
granted on May 16, 2002. The resolution granting this preapproval imposed a
regulatory capital to risk weighted assets ratio of 12% for the merged bank.
This indicator was reduced to 11% by the Superintendency of Banks effective
January 1, 2005. For purposes of weighing the risk of a bank’s assets, the
General Banking Law considers five different categories of assets, based on
the
nature of the issuer, the availability of funds, the nature of the assets and
the existence of collateral securing such assets.
The
following table sets forth our regulatory capital at the dates indicated. See
Note 13 to our Audited Consolidated Financial Statements for a description
of
the minimum capital requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of constant Ch$ as
of December 31,2006, except percentages)
|
|
Base
net capital
|
|
|
859,975
|
|
|
|
959,757
|
|
3%
of total assets net of provisions
|
|
|
(402,432 |
) |
|
|
(461,315 |
) |
Excess
over minimum required capital
|
|
|
457,543
|
|
|
|
498,442
|
|
Base
net capital as a percentage of the total assets, net of
provisions
|
|
|
6.4 |
% |
|
|
6.2 |
% |
Regulatory
capital
|
|
|
1,231,997
|
|
|
|
1,418,752
|
|
11%
of risk-weighted assets
|
|
|
(1,051,696 |
) |
|
|
(1,234,458 |
) |
Excess
over minimum required capital
|
|
|
180,301
|
|
|
|
184,294
|
|
Regulatory
capital as a percentage of risk-weighted assets
|
|
|
12.9 |
% |
|
|
12.6 |
% |
Financial
Investments
The
following table sets forth our investment in Chilean government and corporate
securities and certain other financial investments at the dates indicated.
Financial investments that have a secondary market are carried at market value.
All other financial investments are carried at acquisition cost, plus accrued
interest and indexation readjustments, as applicable.
a)
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
Central
Bank securities
|
|
|
390,002
|
|
|
|
381,260
|
|
Chilean
Treasury Bonds
|
|
|
—
|
|
|
|
40,521
|
|
Other
securities
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean financial institutions
|
|
|
89,151
|
|
|
|
3,554
|
|
Mortgage
finance bonds
|
|
|
59,555
|
|
|
|
23,189
|
|
Chilean
financial institutions bonds
|
|
|
—
|
|
|
|
44
|
|
Chilean
corporate bonds
|
|
|
2,002
|
|
|
|
22,561
|
|
Other
Chilean securities
|
|
|
58,902
|
|
|
|
7,264
|
|
Other
foreign securities
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
b)
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
Central
Bank securities
|
|
|
86,114
|
|
|
|
77,738
|
|
Chilean
Treasury Bonds
|
|
|
1,226
|
|
|
|
623
|
|
Other
securities
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
Mortgage
finance bonds
|
|
|
|
|
|
|
|
|
Other
Foreign securities
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
c)
Held- to-maturity
No
financial investments were classified as held-to-maturity as of December 31,
2005 and 2006.
Remaining
Maturities and Weighted Average Rates
The
following table sets forth an analysis of our investments at December 31, 2006,
by remaining maturity and the weighted average nominal rates of our
investments:
|
|
|
|
|
Weighted
average Nominal Rate
|
|
|
After
one year but within five years
|
|
|
Weighted
average Nominal Rate
|
|
|
After
five years but within ten years
|
|
|
Weighted
average Nominal Rate
|
|
|
|
|
|
Weighted
average Nominal Rate
|
|
|
|
|
|
Weighted
average Nominal Rate
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Held
for Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank securities
|
|
|
|
|
|
|
4.0 |
% |
|
|
|
|
|
|
3.7 |
% |
|
|
|
|
|
|
2.8 |
% |
|
|
|
|
|
|
2.7 |
% |
|
|
381,260
|
|
|
|
4.0 |
% |
Chilean
Treasury Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
40,521
|
|
|
|
4.7 |
% |
Others
securities
|
|
|
|
|
|
|
2.7 |
% |
|
|
|
|
|
|
3.1 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
3.2 |
% |
|
|
|
|
|
|
3.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean financial institutions
|
|
|
|
|
|
|
6.2 |
% |
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,554
|
|
|
|
6.0 |
% |
Mortgage
finance bonds
|
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
4.4 |
% |
|
|
|
|
|
|
5.6 |
% |
|
|
|
|
|
|
4.0 |
% |
|
|
23,189
|
|
|
|
4.0 |
% |
Chilean
financial institutions bonds
|
|
|
|
|
|
|
6.1 |
% |
|
|
|
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
5.4 |
% |
Chilean
corporate bonds
|
|
|
|
|
|
|
6.9 |
% |
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
4.1 |
% |
|
|
|
|
|
|
4.0 |
% |
|
|
22,561
|
|
|
|
4.0 |
% |
Other
Chilean securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,264
|
|
|
|
|
|
Others
foreign securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
Available-for-sale
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank securities
|
|
|
21,187
|
|
|
|
4.3 |
% |
|
|
55,849
|
|
|
|
3.5 |
% |
|
|
702
|
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
77,738
|
|
|
|
3.8 |
% |
Chilean
Treasury Bonds
|
|
|
623
|
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
5.7 |
% |
Others
securities
|
|
|
|
|
|
|
3.3 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
|
|
3.2 |
% |
|
|
|
|
|
|
3.2 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
finance bonds
|
|
|
173
|
|
|
|
5.2 |
% |
|
|
2,030
|
|
|
|
4.6 |
% |
|
|
16,860
|
|
|
|
4.0 |
% |
|
|
203,609
|
|
|
|
4.2 |
% |
|
|
222,672
|
|
|
|
4.2 |
% |
Others
foreign securities
|
|
|
|
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused
sources of liquidity
The
Bank
also has credit ratings from three international agencies. We believe our credit
ratings are a positive factor when obtaining financing.
|
|
|
Long-term
bank deposits
|
|
A2
|
Senior
bonds
|
|
Aa3
|
Subordinated
debt
|
|
Aa3
|
Bank
deposits in local currency
|
|
Aa2
|
Bank
financial strength
|
|
B-
|
Short-term
deposits
|
|
P-1
|
Outlook
|
|
Stable
|
|
|
|
Long-term
Foreign Issuer Credit
|
|
A
|
Long-term
Local Issuer Credit
|
|
A
|
Short-term
Foreign Issuer Credit
|
|
A-1
|
Short-term
Local Issuer Credit
|
|
A-1
|
Outlook
|
|
Positive
|
|
|
|
Foreign
Currency Long-term Debt
|
|
A+
|
Local
Currency Long-term Debt
|
|
A+
|
Foreign
Currency Short-term Debt
|
|
F1
|
Local
Currency Short-term Debt
|
|
F1
|
Outlook
|
|
Stable
|
Working
capital
As
a bank,
we satisfy our working capital needs through general funding, the majority
of
which derives from deposits and other borrowings from the public. See
“Item 5: Operating and Financial Review and Prospects—C. Liquidity
and Capital Resources—Deposits and Other Borrowings.” In our opinion, our
working capital is sufficient for our present needs.
Liquidity
Management
Liquidity
management seeks to ensure that, even under adverse conditions, we have access
to the funds necessary to cover client needs, maturing liabilities and capital
requirements. Liquidity risk arises in the general funding for our financing,
trading and investment activities. It includes the risk of unexpected increases
in the cost of funding the portfolio of assets at appropriate maturities and
rates, the risk of being unable to liquidate a position in a timely manner
at a
reasonable price and the risk that we will be required to repay liabilities
earlier than anticipated.
Our
general policy is to maintain liquidity adequate to ensure our ability to honor
withdrawals of deposits, make repayments of other liabilities at maturity,
extend loans and meet our own working capital needs. Our minimum amount of
liquidity is determined by the statutory reserve requirements of the Central
Bank. Deposits are subject to a statutory reserve requirement of 9% for demand
deposits and 3.6% for peso, UF denominated and foreign currency denominated
time
deposits with a term of less than a year. See “Item 4: Information on the
Company—D. Regulation and Supervision.” The Central Bank has statutory authority
to increase these percentages to up to 40% for demand deposits and up to 20%
for
time deposits. In addition, a 100% special reserve (reserva técnica) applies to
demand deposits, deposits in checking accounts, other demand deposits received
or obligations payable on sight and incurred in the ordinary course of business,
other than deposits unconditionally payable immediately or within a term of
less
than 30 days and other time deposits payable within 10 days. This special
reserve requirement applies to the amount by which the total of such deposits
exceeds 2.5 times the amount of a bank’s paid-in capital and reserves. Interbank
loans are deemed to have a maturity of more than 30 days, even if payable within
the following 10 days.
The
Central Bank also requires us to comply with the following liquidity
limits:
|
•
|
Our
total liabilities with maturities of less than 30 days cannot exceed
our
total assets with maturities of less than 30 days by an amount greater
than our capital. This limit must be calculated in local currency
and
foreign currencies together as one
gap.
|
|
•
|
Our
total liabilities with maturities of less than 90 days cannot exceed
our
total assets with maturities of less than 90 days by more than twice
of
our capital. This limit must be calculated in local currency and
foreign
currencies together as one gap.
|
We
have
set other liquidity limits and ratios that minimize liquidity risk. See “Item
11: Quantitative and Qualitative Disclosure About Market Risk.”
Cash
Flow
The
tables
below set forth our main sources of cash. The subsidiaries are not an important
source of cash flow for us and therefore have no impact on our ability to meet
our cash obligations. No legal or economic restrictions exist on the ability
of
subsidiaries to transfer funds to us in the form of loans or cash dividends
as
long as these subsidiaries abide by the regulations of the Ley de Sociedad
Anónimas regarding loans to related parties and minimum dividend
payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Net
cash provided by operating activities
|
|
|
420,710
|
|
|
|
333,611
|
|
|
|
453,379
|
|
The
Ch$119,768 million increase in cash provided by operating activities in 2006
compared to 2005 was mainly due to (i) a Ch$66,187 million variation in the
net
change in interest accruals and (ii) higher level of commercial activities
reflected in an increase in net interest revenue and net fee
income.
The
Ch$87,099 million reduction in cash provided by operating activities in 2005
compared to 2004 was mainly due to a Ch$143,619 million decrease in the net
change in interest accruals in the same period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Net
cash provided by (used in) investing activities
|
|
|
(1,076,366 |
) |
|
|
(682,519 |
) |
|
|
(1,195,508 |
) |
Net
cash
used in investing activities in 2006 totaled Ch$1,195,508 million, mainly as
a
result of the growth of the Bank’s loan and financial investment portfolios. In
2005, the increase in loans was partially offset by the decrease in financial
investments. In 2004, the increase in loans also resulted in a reduction in
cash
flow for the Bank.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Net
cash provided by (used in) financing activities
|
|
|
590,145
|
|
|
|
593,002
|
|
|
|
608,364
|
|
In
2006,
the Bank financed its lending activities with increases in current accounts,
time deposits, short term funds borrowed and senior bonds. The rise in cash
from
financing activities compared to 2005 was mainly due to greater amounts of
bonds
issued and short term funds borrowed. In 2005, the Bank financed its activities
with an increase in time deposits and senior bonds, which explains the slight
rise in cash from financing activities in 2005 compared to 2004.
Deposits
and Other Borrowings
The
following table sets forth our average daily balance of liabilities for the
years ended December 31, 2004, 2005 and 2006, in each case together with the
related average nominal interest rates paid thereon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Savings
accounts
|
|
|
140,589
|
|
|
|
1.1 |
% |
|
|
2.0 |
% |
|
|
118,109
|
|
|
|
0.9 |
% |
|
|
4.3 |
% |
|
|
105,849
|
|
|
|
0.7 |
% |
|
|
1.3 |
% |
Time
deposits
|
|
|
4,254,985
|
|
|
|
33.4 |
% |
|
|
3.0 |
% |
|
|
5,192,563
|
|
|
|
37.7 |
% |
|
|
4.7 |
% |
|
|
6,401,824
|
|
|
|
43.5 |
% |
|
|
5.6 |
% |
Central
Bank borrowings
|
|
|
38,690
|
|
|
|
0.3 |
% |
|
|
4.5 |
% |
|
|
129,145
|
|
|
|
0.9 |
% |
|
|
3.7 |
% |
|
|
84,102
|
|
|
|
0.6 |
% |
|
|
5.1 |
% |
Repurchase
agreements
|
|
|
659,423
|
|
|
|
5.2 |
% |
|
|
1.9 |
% |
|
|
527,861
|
|
|
|
3.8 |
% |
|
|
5.0 |
% |
|
|
546,042
|
|
|
|
3.7 |
% |
|
|
4.9 |
% |
Mortgage
finance bonds
|
|
|
1,334,363
|
|
|
|
10.5 |
% |
|
|
8.2 |
% |
|
|
820,807
|
|
|
|
6.0 |
% |
|
|
9.4 |
% |
|
|
578,410
|
|
|
|
3.9 |
% |
|
|
7.5 |
% |
Other
interest-bearing liabilities
|
|
|
1,395,910
|
|
|
|
11.0 |
% |
|
|
5.2 |
% |
|
|
1,830,061
|
|
|
|
13.2 |
% |
|
|
5.6 |
% |
|
|
2,157,951
|
|
|
|
14.6 |
% |
|
|
6.2 |
% |
Subtotal
interest-bearing liabilities
|
|
|
7,823,960
|
|
|
|
61.5 |
% |
|
|
4.2 |
% |
|
|
8,618,546
|
|
|
|
62.5 |
% |
|
|
5.3 |
% |
|
|
9,874,178
|
|
|
|
67.0 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
|
|
%
of Total
Average
Liabilities
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Non-interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
1,855,619
|
|
|
|
14.6 |
% |
|
|
|
|
|
|
1,945,572
|
|
|
|
14.1 |
% |
|
|
|
|
|
|
1,823,018
|
|
|
|
12.4 |
% |
|
|
|
|
Contingent
liabilities
|
|
|
1,031,017
|
|
|
|
8.1 |
% |
|
|
|
|
|
|
894,393
|
|
|
|
6.5 |
% |
|
|
|
|
|
|
949,725
|
|
|
|
6.5 |
% |
|
|
|
|
Other
non-interest bearing liabilities
|
|
|
976,710
|
|
|
|
7.7 |
% |
|
|
|
|
|
|
1,310,156
|
|
|
|
9.5 |
% |
|
|
|
|
|
|
920,752
|
|
|
|
6.3 |
% |
|
|
|
|
Shareholders’
equity
|
|
|
1,038,970
|
|
|
|
8.7 |
% |
|
|
|
|
|
|
1,015,385
|
|
|
|
7.4 |
% |
|
|
|
|
|
|
1,150,156
|
|
|
|
7.8 |
% |
|
|
|
|
Subtotal
non-interest bearing liabilities
|
|
|
|
|
|
|
38.5 |
% |
|
|
|
|
|
|
|
|
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
33.0 |
% |
|
|
|
|
Total
liabilities
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
Our
most
important source of funding is our time deposits. Average time deposits
represented 43.5% of our average total liabilities and shareholders’ equity in
2006. Our current funding strategy is to continue to utilize all sources of
funding in accordance with their costs, their availability and our general
asset
and liability management strategy. Special emphasis is being placed on
lengthening the maturities of time deposits with institutional clients and
increasing in general our deposits from retail customers. We also intend to
continue to broaden our customer deposit base and to emphasize core deposit
funding. We believe that broadening our deposit base by increasing the number
of
account holders has created a more stable funding source.
Composition
of Deposits and Other Commitments
The
following table sets forth the composition of our deposits and similar
commitments at December 31, 2004, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Checking
accounts
|
|
|
1,363,417
|
|
|
|
1,486,790
|
|
|
|
1,663,414
|
|
Other
demand liabilities
|
|
|
1,008,270
|
|
|
|
682,494
|
|
|
|
763,242
|
|
Savings
accounts
|
|
|
129,945
|
|
|
|
111,742
|
|
|
|
100,848
|
|
Time
deposits
|
|
|
4,597,510
|
|
|
|
5,920,191
|
|
|
|
6,808,487
|
|
Other
commitments (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
primarily leasing accounts payable relating to purchases of
equipment.
|
Maturity
of Deposits
The
following table sets forth information regarding the currency and maturity
of
our deposits at December 31, 2006, expressed in percentages of our total
deposits in each currency category. UF-denominated deposits are similar to
peso-denominated deposits in all respects, except that the principal is
readjusted periodically based on variations in the Chilean consumer price
index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
percentages)
|
|
Demand
deposits
|
|
|
1.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.8
|
|
Savings
accounts
|
|
|
—
|
|
|
|
4.2
|
|
|
|
—
|
|
|
|
1.4
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing
within 3 months
|
|
|
54.6
|
|
|
|
15.5
|
|
|
|
76.3
|
|
|
|
46.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
percentages)
|
|
Maturing
after 3 but within 6 months
|
|
|
14.6
|
|
|
|
16.4
|
|
|
|
20.6
|
|
|
|
15.3
|
|
Maturing
after 6 but within 12 months
|
|
|
17.4
|
|
|
|
22.8
|
|
|
|
3.0
|
|
|
|
16.8
|
|
Maturing
after 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
time deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
The
following table sets forth information regarding the maturity of our outstanding
time deposits in excess of U.S.$100,000 at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)
|
|
Time
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing
within 3 months
|
|
|
1,817,277
|
|
|
|
347,504
|
|
|
|
484,861
|
|
|
|
2,649,642
|
|
Maturing
after 3 but within 6 months
|
|
|
560,218
|
|
|
|
377,321
|
|
|
|
169,663
|
|
|
|
1,107,202
|
|
Maturing
after 6 but within 12 months
|
|
|
276,600
|
|
|
|
474,018
|
|
|
|
19,916
|
|
|
|
770,534
|
|
Maturing
after 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
time deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
Borrowings
The
principal categories of our short-term borrowings are amounts borrowed under
foreign trade lines of credit, domestic interbank loans, Central Bank borrowings
and repurchase agreements. The table below presents the amounts outstanding
at
each year-end indicated and the weighted-average nominal interest rate for
each
such year by type of short-term borrowings.
|
|
As
of and for the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Nominal
Interest
Rate
|
|
|
|
|
|
Weighted-
Average
Nominal
Interest
Rate
|
|
|
|
|
|
Weighted-
Average
Nominal
Interest
Rate
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
Balances
under repurchase agreements
|
|
|
457,971
|
|
|
|
1.3 |
% |
|
|
50,834
|
|
|
|
1.8 |
% |
|
|
19,929
|
|
|
|
4.9 |
% |
Central
Bank borrowings
|
|
|
348,187
|
|
|
|
0.3 |
% |
|
|
176,878
|
|
|
|
2.1 |
% |
|
|
134,417
|
|
|
|
5.1 |
% |
Domestic
interbank borrowings
|
|
|
30,409
|
|
|
|
3.4 |
% |
|
|
2,582
|
|
|
|
1.6 |
% |
|
|
—
|
|
|
|
—
|
|
Borrowings
under foreign trade credit lines
|
|
|
|
|
|
|
4.4 |
% |
|
|
|
|
|
|
4.0 |
% |
|
|
|
|
|
|
7.7 |
% |
Total
short-term borrowings
|
|
|
|
|
|
|
1.8 |
% |
|
|
|
|
|
|
2.4 |
% |
|
|
|
|
|
|
6.6 |
% |
The
following table shows the average balance and the average nominal rate for
each
short-term borrowing category for the years indicated:
|
|
For
the year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Nominal Interest Rate
|
|
|
|
|
|
Average
Nominal Interest Rate
|
|
|
|
|
|
Average
Nominal Interest Rate
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
Balances
under repurchase agreements
|
|
|
659,423
|
|
|
|
1.9 |
% |
|
|
527,861
|
|
|
|
5.0 |
% |
|
|
546,042
|
|
|
|
4.9 |
% |
Central
Bank borrowings
|
|
|
38,690
|
|
|
|
4.5 |
% |
|
|
129,145
|
|
|
|
3.7 |
% |
|
|
84,102
|
|
|
|
5.1 |
% |
Domestic
interbank borrowings
|
|
|
53,784
|
|
|
|
0.8 |
% |
|
|
42,560
|
|
|
|
3.6 |
% |
|
|
49,294
|
|
|
|
5.1 |
% |
Borrowings
under foreign trade credit lines
|
|
|
|
|
|
|
2.3 |
% |
|
|
|
|
|
|
9.6 |
% |
|
|
|
|
|
|
5.4 |
% |
Total
short-term borrowings
|
|
|
|
|
|
|
2.6 |
% |
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
6.9 |
% |
The
following table presents the maximum month-end balances of our principal sources
of short-term borrowings during the years indicated:
|
|
Maximum
2004
Month-End
Balance
|
|
|
Maximum
2005
Month-End
Balance
|
|
|
Maximum
2006
Month-End
Balance
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Balances
under repurchase agreements
|
|
|
361,856
|
|
|
|
592,809
|
|
|
|
437,131
|
|
Central
Bank borrowings
|
|
|
340,213
|
|
|
|
378,684
|
|
|
|
304,563
|
|
Domestic
interbank borrowings
|
|
|
140,797
|
|
|
|
43,904
|
|
|
|
3,777
|
|
Borrowings
under foreign trade credit lines
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Borrowings
Our
long-term and short-term borrowings are summarized below. Borrowings are
generally classified as short-term when they have original maturities of less
than one year or are due on demand. All other borrowings are classified as
long-term, including the amounts due within one year on such borrowings. The
following table sets forth, at the dates indicated, the components of our
borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Central
Bank borrowings
|
|
|
—
|
|
|
|
134,417
|
|
|
|
134,417
|
|
Credit
lines for renegotiations of loans (a)
|
|
|
—
|
|
|
|
5,080
|
|
|
|
5,080
|
|
Balances
under repurchase agreements
|
|
|
—
|
|
|
|
19,929
|
|
|
|
19,929
|
|
Mortgage
finance bonds (b)
|
|
|
464,713
|
|
|
|
65,493
|
|
|
|
530,206
|
|
Other
borrowings: bonds (c)
|
|
|
564,513
|
|
|
|
1,140
|
|
|
|
565,653
|
|
Subordinated
bonds (d)
|
|
|
450,122
|
|
|
|
40,294
|
|
|
|
490,416
|
|
Borrowings
from domestic financial institutions
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Foreign
borrowings (e)
|
|
|
94,288
|
|
|
|
717,979
|
|
|
|
812,267
|
|
Other
obligations (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Central
Bank borrowings
|
|
|
—
|
|
|
|
176,878
|
|
|
|
176,878
|
|
Credit
lines for renegotiations of loans (a)
|
|
|
6,796
|
|
|
|
—
|
|
|
|
6,796
|
|
Balances
under repurchase agreements
|
|
|
—
|
|
|
|
50,834
|
|
|
|
50,834
|
|
Mortgage
finance bonds (b)
|
|
|
563,470
|
|
|
|
119,673
|
|
|
|
683,143
|
|
Other
borrowings: bonds (c)
|
|
|
422,292
|
|
|
|
1,754
|
|
|
|
424,046
|
|
Subordinated
bonds (d)
|
|
|
393,929
|
|
|
|
—
|
|
|
|
393,929
|
|
Borrowings
from domestic financial institutions
|
|
|
—
|
|
|
|
2,582
|
|
|
|
2,582
|
|
Foreign
borrowings (e)
|
|
|
65,605
|
|
|
|
1,055,923
|
|
|
|
1,121,528
|
|
Other
obligations (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
Credit lines for renegotiations of loans
Central
Bank borrowings include credit lines for the renegotiations of loans and other
Central Bank borrowings. These credit lines were provided by the Central Bank
for the renegotiations of loans due to the need to refinance debts as a result
of the economic recession and crisis of the banking system in the early 1980’s.
The lines for the renegotiations, which are considered long-term, are related
with mortgage loans linked to the UF index and bore a real annual interest
rate
of 3.6% and 3.0% as of December 31, 2005 and 2006, respectively. The following
table sets forth, at the dates indicated, our credit lines for renegotiations
of
loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Total
credit lines for renegotiations of loans
|
|
|
6,796
|
|
|
|
5,080
|
|
The
maturities of the outstanding amounts due under these credit lines, which are
considered long-term, are as follows:
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Due
within 1 year
|
|
|
5,080
|
|
(b)
Mortgage finance bonds
These
bonds are used to finance the granting of mortgage loans. The outstanding
principal amounts of the bonds are amortized on a quarterly basis. The range
of
maturities of these bonds is between five and twenty years. The bonds are linked
to the UF index and bear a real weighted-average annual interest rate of 5.2%.
The following table sets forth the remaining maturities of our mortgage finance
bonds at December 31, 2006.
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Due
within 1 year
|
|
|
65,493
|
|
Due
after 1 year but within 2 years
|
|
|
54,556
|
|
Due
after 2 years but within 3 years
|
|
|
51,190
|
|
Due
after 3 years but within 4 years
|
|
|
48,896
|
|
Due
after 4 years but within 5 years
|
|
|
44,711
|
|
Due
after 5 years
|
|
|
|
|
Total
mortgage finance bonds
|
|
|
|
|
(c)
Bonds
The
following table sets forth, at the dates indicated, our issued
bonds.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Santiago
bonds, Series A,B,C,D and F
|
|
|
11,350
|
|
|
|
9,179
|
|
Santander
Bonds denominated in UF
|
|
|
165,122
|
|
|
|
342,774
|
|
Santander
Bonds denominated in US$
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Santiago
bonds include series A, B, C and F issued by the former Santiago S.A. and series
B and D issued by the former Banco O’Higgins prior to its merger with the Bank
in 1997. These bonds are intended to finance loans that have a maturity of
greater than one year, are linked to the UF index and bear a weighted-average
annual interest rate of 7.0% with interest and principal payments due
semi-annually.
On
December 17, 2004, Santiago Leasing S.A., ceded through public deed a total
of
UF 3,041,102 (Ch$52,663 million at December 31, 2004) in bonds to Banco
Santander Chile. These bonds are linked to the UF index and bear an annual
interest rate of 5.6%. At December 31, 2005 and 2006, the balance was included
in Santander bonds linked to the UF.
Santander
bonds include bonds issued by the former Banco Santander-Chile and bonds issued
by the Bank since August 2002. These bonds are intended to finance loans that
have a maturity of greater than one year, are linked to the UF index and bear
a
weighted average annual interest rate of 6.5%.
On
October
5, 2005, the Bank issued bonds denominated in UF in an aggregate principal
amount of UF8,000,000, which bear an average annual interest rate of
3.0%.
On
May 25,
2006, the Bank issued bonds denominated in UF in an aggregate principal amount
of UF6,000,000, which bear an average annual interest rate of 4.6%.
On
August
17, 2006, the Bank issued senior bonds denominated in UF in an aggregate
principal amount of UF895,000, which bear an average annual interest rate of
3.7%.
On
December 9, 2004, the Bank issued senior bonds denominated in U.S. dollars
in an
aggregate principal amount of US$400 million. These bonds carry a nominal
interest rate of LIBOR plus 0.35% per annum (4.81% and 5.35% at December 31,
2005 and 2006). The interest is payable quarterly and the principal is to be
paid after a term of 5 years.
The
maturities of these bonds are as follows:
|
|
|
|
|
|
(in
millions of constant Ch$ as of
December
31, 2006)
|
|
Due
within 1 year
|
|
|
1,140
|
|
Due
after 1 year but within 2 years
|
|
|
—
|
|
Due
after 2 years but within 3 years
|
|
|
213,700
|
|
Due
after 3 years but within 4 years
|
|
|
146,290
|
|
Due
after 4 years but within 5 years
|
|
|
15,414
|
|
Due
after 5 years
|
|
|
|
|
Total
bonds
|
|
|
|
|
d)
Subordinated bonds
The
following table sets forth, at the dates indicated, the balances of our
subordinated bonds.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Santiago
bonds denominated in US$ (1)
|
|
|
44,045
|
|
|
|
42,703
|
|
Santander
bonds denominated in US$ (2) (6)
|
|
|
265,381
|
|
|
|
272,183
|
|
Santiago
Bonds linked to the UF (3)
|
|
|
54,485
|
|
|
|
49,017
|
|
Santander
Bonds linked to the UF (4) (5)
|
|
|
30,018
|
|
|
|
126,513
|
|
Total
subordinated bonds
|
|
|
|
|
|
|
|
|
(1)
|
On
July 17, 1997, the former Banco Santiago issued subordinated bonds
denominated in U.S. dollars in an aggregate principal amount of US$300
million. The bonds carry a nominal interest rate of 7.0% per annum,
with
semi-annual interest payments and one repayment of principal after
a term
of 10 years.
|
(2)
|
On
January 16, 2003, the Bank completed the voluntary exchange for its
new
subordinated bonds, which will mature in 2012. A total of US$221,961,000
in principal of the Santiago bonds was offered and redeemed by the
Bank.
The bonds carry a nominal interest rate of 7.375% per annum, with
semi-annual interest payments and one repayment of principal after
a term
of 10 years.
|
(3)
|
The
Series C and E Bonds outstanding as of December 31, 2005 and 2006
are
intended for the financing of loans with a maturity of greater than
one
year. They are linked to the UF index and carry an annual interest
rate of
7.5% and 6.0% respectively, with interest and principal payments
due
semi-annually.
|
(4)
|
The
Series C, D and E Bonds outstanding as of December 31, 2005 and 2006
are
intended for the financing of loans with a maturity of greater than
one
year. They are linked to the UF index and carry an annual interest
rate of
7.0%, with interest and principal payments due
semi-annually.
|
(5)
|
During
2006, the Bank issued subordinated bonds denominated in UF in an
aggregate
principal amount of UF5,000,000, which bear an average annual rate
of
4.4%.
|
(6)
|
On
December 9, 2004, the Bank issued subordinated bonds denominated
in U.S.
dollars in an aggregate principal amount of US$300 million. These
bonds
carry a nominal interest rate of 5.375% per annum, with semi-annual
interest payments and one repayment of principal after a term of
10
years.
|
The
maturities of these bonds, which are considered long-term, are as
follows:
|
|
|
|
|
|
(in
millions of constant Ch$ as of December
31, 2006)
|
|
Due
within 1 Year
|
|
|
40,294
|
|
Due
after 1 year but within 2 years
|
|
|
—
|
|
Due
after 2 years but within 3 years
|
|
|
—
|
|
Due
after 3 years but within 4 years
|
|
|
—
|
|
Due
after 4 years but within 5 years
|
|
|
17,378
|
|
Due
after 5 years
|
|
|
|
|
Total
subordinated bonds
|
|
|
|
|
e)
Foreign borrowings
These
are
short-term and long-term borrowings from foreign banks. The maturities of these
borrowings are as follows:
|
|
|
|
|
|
(in
millions of constant Ch$
as
of December 31, 2006)
|
|
Due
within 1 Year
|
|
|
717,979
|
|
Due
after 1 year but within 2 years
|
|
|
91,021
|
|
Due
after 2 years but within 3 years
|
|
|
—
|
|
Due
after 3 years but within 4 years
|
|
|
3,267
|
|
Due
after 4 years but within 5 years
|
|
|
—
|
|
Due
after 5 years
|
|
|
|
|
Total
foreign borrowings
|
|
|
|
|
The
foreign borrowings are denominated principally in U.S. dollars, and are
principally used to fund the Bank’s foreign trade loans, and bear an annual
average interest rate of 3.7% and 5.3% at December 31, 2005 and 2006,
respectively.
f)
Other obligations
Other
obligations are summarized as follows:
|
|
|
|
|
|
(in
millions of constant Ch$
as
of December
31, 2006)
|
|
Due
within 1 Year
|
|
|
3,369
|
|
Due
after 1 year but within 2 years
|
|
|
3,454
|
|
Due
after 2 years but within 3 years
|
|
|
2,153
|
|
Due
after 3 years but within 4 years
|
|
|
2,143
|
|
Due
after 4 years but within 5 years
|
|
|
1,623
|
|
Due
after 5 years
|
|
|
|
|
Total
long-term obligations
|
|
|
|
|
Amounts
due to credit card operators
|
|
|
21,877
|
|
Acceptance
of letters of credit
|
|
|
|
|
Total
short-term obligations
|
|
|
|
|
Total
other obligations
|
|
|
|
|
Other
Off-Balance Sheet Arrangements and Commitments
We
are
party to transactions with off-balance sheet risk in the normal course of our
business. These transactions expose us to credit risk in addition to amounts
recognized in the consolidated financial statements.
These
transactions include commitments to extend credit not otherwise accounted for
as
contingent loans, such as overdraft protection and credit card lines of credit.
Such commitments are agreements to lend to a customer at a future date, subject
to the customer compliance with the contractual terms. The aggregate amount
of
these commitments was Ch$2,957,980 million at December 31, 2006, which will
be
financed with our deposit base. Since a substantial portion of these commitments
is expected to expire without being drawn upon, the total amount of commitments
does not necessarily represent our actual future cash requirements. We use
the
same credit policies in making commitments to extend credit as we do for
granting loans. In the opinion of our management, our outstanding commitments
do
not represent an unusual credit risk.
From
time
to time, the Bank enters into agreements to securitize certain assets by selling
those assets to unconsolidated and unaffiliated entities, which then sell debt
securities secured by those assets. These sales are non recourse to the Bank.
However, in the past, the Bank has occasionally purchased a subordinated bond
issued by the unconsolidated entity. At December 31, 2006, we did not hold
any
of these subordinated bonds in our investment portfolio.
Asset
and Liability Management
Please
refer to "Item 11: Quantitative and Qualitative Disclosures about Market
Risk —
Asset and Liability Management" regarding our policies with respect to asset
and
liability management.
Capital
Expenditures
The
following table reflects capital expenditures in each of the three years ended
December 31, 2004, 2005 and 2006:
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Land
and Buildings
|
|
|
3,713
|
|
|
|
5,682
|
|
|
|
10,138
|
|
Machinery
and Equipment
|
|
|
9,635
|
|
|
|
10,609
|
|
|
|
7,774
|
|
Furniture
and Fixtures
|
|
|
2,764
|
|
|
|
3,813
|
|
|
|
4,105
|
|
Vehicles
|
|
|
445
|
|
|
|
865
|
|
|
|
836
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in capital expenditures in 2006 compared to 2005 was mainly due to
the
investment in branches and automatic teller machines (ATMs). In 2007, we expect
a similar level of investment in expanding our distribution
network.
D.
Selected Statistical Information
The
following information is included for analytical purposes and should be read
in
conjunction with our financial statements as well as the discussion in “Item 5:
Operating and Financial Review and Prospects.” Pursuant to Chilean GAAP, the
financial data in the following tables for all periods through December 31,
2005
have been restated in constant Chilean pesos as of December 31, 2006. The UF
is
linked to, and is adjusted daily to, reflect changes in the previous month’s
Chilean consumer price index. See Note 1(c) to our Audited Financial
Consolidated Statements.
Average
Balance Sheets, Income Earned from Interest-Earning Assets and Interest Paid
on
Interest-Bearing Liabilities
The
average balances for interest-earning assets and interest-bearing liabilities,
including interest and readjustments received and paid, have been calculated
on
the basis of daily balances for us on an unconsolidated basis. Such average
balances are presented in Chilean pesos (Ch$), in Unidades de Fomento
(UF) and in foreign currencies (principally U.S.$). Figures from our
subsidiaries have been calculated on the basis of monthly balances. The average
balances of our subsidiaries, except Santander S.A. Agente de Valores , have
not
been categorized by currency. As such it is not possible to calculate average
balances by currency for such subsidiaries on the basis of daily, weekly or
monthly balances.
The
nominal interest rate has been calculated by dividing the amount of interest
and
principal readjustment due to changes in the UF index (gain or loss) during
the
period by the related average balance, both amounts expressed in constant pesos.
The nominal rates calculated for each period have been converted into real
rates
using the following formulas:
Where:
Rp
= real
average rate for peso-denominated assets and liabilities (in Ch$ and UF) for
the
period;
Rd
= real
average rate for foreign currency-denominated assets and liabilities for the
period;
Np
=
nominal average rate for peso-denominated assets and liabilities for the
period;
Nd
=
nominal average rate for foreign currency-denominated assets and liabilities
for
the period;
D
=
devaluation rate of the Chilean peso to the U.S. dollar for the period;
and
I
=
inflation rate in Chile for the period (based on the variation of the Chilean
Consumer Price Index).
The
real
interest rate can be negative for a portfolio of peso-denominated loans when
the
inflation rate for the period is higher than the average nominal rate of the
loan portfolio for the same period. A similar effect could occur for a portfolio
of foreign currency denominated loans when the inflation rate for the period
is
higher than the sum of the devaluation rate for the period and the corresponding
average nominal rate of the portfolio.
The
formula for the average real rate for foreign currency denominated assets and
liabilities (Rd) reflects a gain or loss in purchasing power caused by the
difference between the devaluation rate of the Chilean peso and the inflation
rate in Chile during the period.
The
following example illustrates the calculation of the real interest rate for
a
dollar-denominated asset bearing a nominal annual interest rate of 10.0% (Nd
=
0.10), assuming a 5.0% annual devaluation rate (D = 0.05) and a 12.0% annual
inflation rate (I = 0.12):
In
the
example, since the inflation rate was higher than the devaluation rate, the
real
rate is lower than the nominal rate in dollars. If, for example, the annual
devaluation rate were 15.0%, using the same numbers, the real rate in Chilean
pesos would be 12.9%, which is higher than the nominal rate in U.S. dollars.
Using the same numbers, if the annual inflation rate were greater than 15.5%,
the real rate would be negative.
Contingent
loans (consisting of guarantees and open and unused letters of credit) have
been
treated as interest-earning assets. Although the nature of the income derived
from such assets is similar to a fee, Chilean banking regulations require that
such income be accounted for as interest revenue. As a result of this treatment,
the comparatively low rates of interest earned on these assets have a distorting
effect on the average interest rate earned on total interest-earning
assets.
The
real
rate for contingent loans has been stated as the nominal rate, since we do
not
have an effective funding obligation for these loans. The foreign exchange
gains
or losses on foreign currency-denominated assets and liabilities have not been
included in interest revenue or expense. Similarly, interest on financial
investments does not include trading gains or losses on these investments.
Interest is not recognized during periods in which loans are past due. However,
interest received on past due loans includes interest on such loans from the
original maturity date.
Non-performing
loans that are overdue for 90 days or less have been included in each of the
various categories of loans, and therefore affect the various averages.
Non-performing loans consist of loans as to which either principal or interest
is overdue (i.e., non accrual loans) and restructured loans earning no interest.
Non-performing loans that are overdue for 90 days or more are shown as a
separate category of loans (Past due loans). Interest and/or indexation
readjustments received on all non-performing U.S. dollar-denominated loans
during the periods are included as interest revenue. However, all
peso-denominated loans that are classified as non-performing do not accrue
interest or indexation adjustments as interest revenue.
Included
in interbank deposits are checking accounts maintained in the Central Bank
and
foreign banks. Such assets have a distorting effect on the average interest
rate
earned on total interest-earning assets because currently balances maintained
in
Chilean peso amounts do not earn interest, and the only balances held in a
foreign currency that earn interest are those maintained in U.S. dollars, but
those only earn interest on the amounts that are
legally
required to be held for liquidity purposes. Additionally, this account includes
interest earned by overnight investments. Consequently, the average interest
earned on such assets is comparatively low. We maintain these deposits in these
accounts to comply with statutory requirements and to facilitate international
business, rather than to earn income.
The
monetary gain or loss on interest-earning assets and interest-bearing
liabilities is not included as a component of interest revenue or interest
expense because inflation effects are taken into account in the calculation
of
real interest rates.
The
average balances for 2004 and 2005 have been reclassified for comparative
purposes in line with the changes made to the financial statements for those
years under the new accounting standards. See Note 2 to the Audited Consolidated
Financial Statements and Item 5: Operating and Financial Review and Prospects
– A. New
Accounting Standards for Financial Investments and Derivatives.
The
following tables show, by currency of denomination, average balances and, where
applicable, interest amounts and real rates for our assets and liabilities
for
the years ended December 31, 2004, 2005 and 2006.
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets
|
|
|
|
Interbank
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
9,303
|
|
|
|
342
|
|
|
|
1.2 |
% |
|
|
3.7 |
% |
|
|
38,646
|
|
|
|
1,676
|
|
|
|
0.7 |
% |
|
|
4.3 |
% |
|
|
22,629
|
|
|
|
1,245
|
|
|
|
3.3 |
% |
|
|
5.5 |
% |
UF
|
|
|
2,504
|
|
|
|
113
|
|
|
|
2.0 |
% |
|
|
4.5 |
% |
|
|
10,358
|
|
|
|
746
|
|
|
|
3.5 |
% |
|
|
7.2 |
% |
|
|
6,574
|
|
|
|
437
|
|
|
|
4.4 |
% |
|
|
6.6 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
1.3 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
1.3 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
3.6 |
% |
|
|
5.8 |
% |
Financial
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
509,609
|
|
|
|
13,905
|
|
|
|
0.2 |
% |
|
|
2.7 |
% |
|
|
512,289
|
|
|
|
30,076
|
|
|
|
2.2 |
% |
|
|
5.9 |
% |
|
|
668,134
|
|
|
|
44,327
|
|
|
|
4.4 |
% |
|
|
6.6 |
% |
UF
|
|
|
744,471
|
|
|
|
51,536
|
|
|
|
4.3 |
% |
|
|
6.9 |
% |
|
|
616,717
|
|
|
|
54,221
|
|
|
|
5.0 |
% |
|
|
8.8 |
% |
|
|
559,115
|
|
|
|
45,977
|
|
|
|
6.0 |
% |
|
|
8.2 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(6.0 |
%) |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
(8.4 |
%) |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
7.7 |
% |
|
|
5.8 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(1.6 |
%) |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
(2.6 |
%) |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
6.3 |
% |
|
|
6.7 |
% |
Commercial
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
2,752,643
|
|
|
|
355,302
|
|
|
|
10.2 |
% |
|
|
12.9 |
% |
|
|
3,096,302
|
|
|
|
431,868
|
|
|
|
10.0 |
% |
|
|
13.9 |
% |
|
|
3,706,920
|
|
|
|
573,887
|
|
|
|
13.1 |
% |
|
|
15.5 |
% |
UF
|
|
|
2,801,996
|
|
|
|
218,037
|
|
|
|
5.2 |
% |
|
|
7.8 |
% |
|
|
3,880,241
|
|
|
|
336,468
|
|
|
|
4.9 |
% |
|
|
8.7 |
% |
|
|
4,811,905
|
|
|
|
337,336
|
|
|
|
4.8 |
% |
|
|
7.0 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(6.3 |
%) |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
(7.8 |
%) |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
7.8 |
% |
|
|
6.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
6.3 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
5.9 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
8.4 |
% |
|
|
10.3 |
% |
Mortgage
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
578
|
|
|
|
36
|
|
|
|
3.7 |
% |
|
|
6.2 |
% |
|
|
529
|
|
|
|
34
|
|
|
|
2.7 |
% |
|
|
6.4 |
% |
|
|
462
|
|
|
|
37
|
|
|
|
5.8 |
% |
|
|
8.0 |
% |
UF
|
|
|
1,321,903
|
|
|
|
131,871
|
|
|
|
7.3 |
% |
|
|
10.0 |
% |
|
|
757,220
|
|
|
|
82,136
|
|
|
|
7.0 |
% |
|
|
10.8 |
% |
|
|
549,144
|
|
|
|
48,985
|
|
|
|
6.7 |
% |
|
|
8.9 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
7.3 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
7.0 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
6.7 |
% |
|
|
8.9 |
% |
Contingent
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
78,359
|
|
|
|
1,516
|
|
|
|
(0.5 |
%) |
|
|
1.9 |
% |
|
|
152,147
|
|
|
|
1,935
|
|
|
|
(2.3 |
%) |
|
|
1.3 |
% |
|
|
203,043
|
|
|
|
2,770
|
|
|
|
(0.7 |
%) |
|
|
1.4 |
% |
UF
|
|
|
194,459
|
|
|
|
1,848
|
|
|
|
(1.5 |
%) |
|
|
1.0 |
% |
|
|
225,195
|
|
|
|
2,189
|
|
|
|
(2.6 |
%) |
|
|
1.0 |
% |
|
|
266,867
|
|
|
|
2,858
|
|
|
|
(1.0 |
%) |
|
|
1.1 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(8.8 |
%) |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
(11.1 |
%) |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
2.0 |
% |
|
|
0.2 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(6.8 |
%) |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
(7.4 |
%) |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
0.5 |
% |
|
|
0.7 |
% |
Past
due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
64,883
|
|
|
|
10,250
|
|
|
|
13.0 |
% |
|
|
15.8 |
% |
|
|
50,953
|
|
|
|
7,791
|
|
|
|
11.3 |
% |
|
|
15.3 |
% |
|
|
47,164
|
|
|
|
9,362
|
|
|
|
17.4 |
% |
|
|
19.8 |
% |
UF
|
|
|
88,979
|
|
|
|
—
|
|
|
|
(2.4 |
%) |
|
|
0.0 |
% |
|
|
69,709
|
|
|
|
—
|
|
|
|
(3.5 |
%) |
|
|
0.0 |
% |
|
|
46,515
|
|
|
|
—
|
|
|
|
(2.1 |
%) |
|
|
0.0 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(8.9 |
%) |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
(11.3 |
%) |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
1.8 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
3.9 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
2.6 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
7.6 |
% |
|
|
9.8 |
% |
Total
interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
3,415,375
|
|
|
|
381,351
|
|
|
|
8.5 |
% |
|
|
11.2 |
% |
|
|
3,850,866
|
|
|
|
473,380
|
|
|
|
8.4 |
% |
|
|
12.3 |
% |
|
|
4,648,352
|
|
|
|
631,628
|
|
|
|
11.2 |
% |
|
|
13.6 |
% |
UF
|
|
|
5,154,312
|
|
|
|
403,405
|
|
|
|
5.2 |
% |
|
|
7.8 |
% |
|
|
5,559,440
|
|
|
|
475,760
|
|
|
|
4.8 |
% |
|
|
8.6 |
% |
|
|
6,240,120
|
|
|
|
435,593
|
|
|
|
4.8 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets
|
|
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(6.9 |
%) |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
(8.8 |
%) |
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
6.5 |
% |
|
|
4.6 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
3.4 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
3.2 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
7.3 |
% |
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
NON-INTEREST-EARNING
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
639,826
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
595,819
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
344,228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances
for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
(176,906 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(171,323 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(154,874 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(176,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
221,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,636
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
386,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
229,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
682,144
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
21,711
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,638
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest earning assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
1,070,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
854,957
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,099,021
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
21,711
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,638
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
4,485,983
|
|
|
|
381,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,705,823
|
|
|
|
473,380
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,747,373
|
|
|
|
631,628
|
|
|
|
—
|
|
|
|
—
|
|
UF
|
|
|
5,176,024
|
|
|
|
403,405
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,581,551
|
|
|
|
475,760
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,268,758
|
|
|
|
435,593
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
162
|
|
|
|
3
|
|
|
|
(0.5 |
%) |
|
|
2.0 |
% |
|
|
430
|
|
|
|
3
|
|
|
|
(2.9 |
%) |
|
|
0.6 |
% |
|
|
595
|
|
|
|
9
|
|
|
|
(0.6 |
%) |
|
|
1.5 |
% |
UF
|
|
|
140,427
|
|
|
|
2,739
|
|
|
|
(0.5 |
%) |
|
|
2.0 |
% |
|
|
117,679
|
|
|
|
5,026
|
|
|
|
0.6 |
% |
|
|
4.3 |
% |
|
|
105,254
|
|
|
|
1,356
|
|
|
|
(0.8 |
%) |
|
|
1.3 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
%) |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.6 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
(0.8 |
%) |
|
|
1.3 |
% |
Time
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
1,904,088
|
|
|
|
52,066
|
|
|
|
0.2 |
% |
|
|
2.7 |
% |
|
|
2,183,034
|
|
|
|
95,941
|
|
|
|
0.7 |
% |
|
|
4.4 |
% |
|
|
3,367,242
|
|
|
|
207,098
|
|
|
|
3.9 |
% |
|
|
6.2 |
% |
UF
|
|
|
1,510,734
|
|
|
|
65,874
|
|
|
|
1.8 |
% |
|
|
4.4 |
% |
|
|
2,134,671
|
|
|
|
126,739
|
|
|
|
2.2 |
% |
|
|
5.9 |
% |
|
|
2,098,190
|
|
|
|
98,155
|
|
|
|
2.5 |
% |
|
|
4.7 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(7.7 |
%) |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
(9.1 |
%) |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
6.6 |
% |
|
|
4.7 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
%) |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
(0.3 |
%) |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
3.9 |
% |
|
|
5.6 |
% |
Central
Bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
18,103
|
|
|
|
393
|
|
|
|
(0.3 |
%) |
|
|
2.2 |
% |
|
|
115,670
|
|
|
|
3,748
|
|
|
|
(0.4 |
%) |
|
|
3.2 |
% |
|
|
32,879
|
|
|
|
1,737
|
|
|
|
3.1 |
% |
|
|
5.3 |
% |
UF
|
|
|
20,587
|
|
|
|
1,342
|
|
|
|
3.9 |
% |
|
|
6.5 |
% |
|
|
13,475
|
|
|
|
995
|
|
|
|
3.6 |
% |
|
|
7.4 |
% |
|
|
51,223
|
|
|
|
2,546
|
|
|
|
2.8 |
% |
|
|
5.0 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
2.0 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
0.1 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
2.9 |
% |
|
|
5.1 |
% |
Repurchase
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
292,516
|
|
|
|
17,396
|
|
|
|
3.4 |
% |
|
|
5.9 |
% |
|
|
241,947
|
|
|
|
7,314
|
|
|
|
(0.6 |
%) |
|
|
3.0 |
% |
|
|
383,511
|
|
|
|
18,411
|
|
|
|
2.6 |
% |
|
|
4.8 |
% |
UF
|
|
|
9,864
|
|
|
|
(805 |
) |
|
|
(10.4 |
%) |
|
|
(8.2 |
%) |
|
|
193,967
|
|
|
|
10,658
|
|
|
|
1.8 |
% |
|
|
5.5 |
% |
|
|
11,364
|
|
|
|
569
|
|
|
|
2.8 |
% |
|
|
5.0 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(9.8 |
%) |
|
|
(1.0 |
%) |
|
|
|
|
|
|
|
|
|
|
(2.9 |
%) |
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
6.9 |
% |
|
|
5.1 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
4.0 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
(0.1 |
%) |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
3.8 |
% |
|
|
4.9 |
% |
Mortgage
finance bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
UF
|
|
|
1,334,363
|
|
|
|
109,676
|
|
|
|
5.6 |
% |
|
|
8.2 |
% |
|
|
820,807
|
|
|
|
76,891
|
|
|
|
5.5 |
% |
|
|
9.4 |
% |
|
|
578,410
|
|
|
|
43,132
|
|
|
|
5.2 |
% |
|
|
7.5 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
5.6 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
5.5 |
% |
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
5.2 |
% |
|
|
7.5 |
% |
Other
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
61,563
|
|
|
|
1,308
|
|
|
|
(0.3 |
%) |
|
|
2.1 |
% |
|
|
39,213
|
|
|
|
1,498
|
|
|
|
0.2 |
% |
|
|
3.8 |
% |
|
|
48,688
|
|
|
|
2,582
|
|
|
|
3.1 |
% |
|
|
5.3 |
% |
UF
|
|
|
288,527
|
|
|
|
33,359
|
|
|
|
8.9 |
% |
|
|
11.6 |
% |
|
|
206,803
|
|
|
|
32,383
|
|
|
|
11.6 |
% |
|
|
15.7 |
% |
|
|
426,469
|
|
|
|
32,710
|
|
|
|
5.4 |
% |
|
|
7.7 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(5.6 |
%) |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
(7.5 |
%) |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
7.6 |
% |
|
|
5.7 |
% |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(2.4 |
%) |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
(5.1 |
%) |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
7.1 |
% |
|
|
6.2 |
% |
Total
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
2,276,432
|
|
|
|
71,166
|
|
|
|
0.6 |
% |
|
|
3.1 |
% |
|
|
2,580,294
|
|
|
|
108,504
|
|
|
|
0.6 |
% |
|
|
4.2 |
% |
|
|
3,832,915
|
|
|
|
229,837
|
|
|
|
3.8 |
% |
|
|
6.0 |
% |
UF
|
|
|
3,304,502
|
|
|
|
212,185
|
|
|
|
3.8 |
% |
|
|
6.4 |
% |
|
|
3,487,402
|
|
|
|
252,692
|
|
|
|
3.5 |
% |
|
|
7.2 |
% |
|
|
3,270,910
|
|
|
|
178,468
|
|
|
|
3.3 |
% |
|
|
5.5 |
% |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
(7.0 |
%) |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
(7.8 |
%) |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
7.2 |
% |
|
|
5.4 |
% |
Total
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
%) |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
(0.7 |
%) |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
4.6 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for rate
data)
|
|
NON-INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
demand deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
1,855,619
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,945,572
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,822,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
1,855,619
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,945,572
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,823,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Contingent
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
78,359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203,043
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
194,460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225,195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
266,867
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
758,198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
479,815
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
1,031,017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
894,393
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
949,725
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
948,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
687,565
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
605,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
391,772
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
422,664
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
(363,689 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
199,926
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
976,710
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,310,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
920,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
1,038,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,015,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
1,038,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,015,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
non-interest-bearing liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
3,921,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,800,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,781,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
586,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
647,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
430,622
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
394,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
716,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
631,378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
4,902,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,165,506
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,843,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
6,198,007
|
|
|
|
71,166
|
|
|
|
|
|
|
|
|
|
|
|
6,380,962
|
|
|
|
108,504
|
|
|
|
|
|
|
|
|
|
|
|
7,614,566
|
|
|
|
229,837
|
|
|
|
|
|
|
|
|
|
UF
|
|
|
3,890,734
|
|
|
|
212,185
|
|
|
|
|
|
|
|
|
|
|
|
4,135,262
|
|
|
|
252,692
|
|
|
|
|
|
|
|
|
|
|
|
3,701,532
|
|
|
|
178,468
|
|
|
|
|
|
|
|
|
|
Foreign
currencies
|
|
|
2,637,535
|
|
|
|
55,728
|
|
|
|
|
|
|
|
|
|
|
|
3,267,828
|
|
|
|
98,368
|
|
|
|
|
|
|
|
|
|
|
|
3,401,731
|
|
|
|
148,292
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
339,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Net Interest Revenue and Interest Expense: Volume and Rate
Analysis
The
following table allocates, by currency of denomination, changes in our interest
revenue and interest expense between changes in the average volume of
interest-earning assets and interest-bearing liabilities and changes in their
respective nominal interest rates for 2006 compared to 2005 and 2005 compared
to
2004. Volume and rate variances have been calculated based on movements in
average balances over the period and changes in nominal interest rates on
average interest-earning assets and average interest-bearing
liabilities.
|
|
Increase
(Decrease) from 2004 to 2005
Due
to Changes in
|
|
|
|
|
|
Increase
(Decrease) from 2005 to 2006
Due
to Changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change from 2004 to 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change from 2005 to 2006
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Interest-earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interbank
deposits
|
|
|
|
Ch$
|
|
|
1,078
|
|
|
|
61
|
|
|
|
193
|
|
|
|
1,334
|
|
|
|
(689 |
) |
|
|
464
|
|
|
|
(192 |
) |
|
|
(431 |
) |
UF
|
|
|
356
|
|
|
|
67
|
|
|
|
210
|
|
|
|
633
|
|
|
|
(272 |
) |
|
|
(62 |
) |
|
|
23
|
|
|
|
(309 |
) |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(961 |
) |
|
|
|
|
|
|
(169 |
) |
|
|
(740 |
) |
Financial
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
75
|
|
|
|
16,002
|
|
|
|
84
|
|
|
|
16,171
|
|
|
|
9,195
|
|
|
|
3,586
|
|
|
|
1,091
|
|
|
|
14,251
|
|
UF
|
|
|
(8,844 |
) |
|
|
13,922
|
|
|
|
(2,389 |
) |
|
|
2,685
|
|
|
|
(5,069 |
) |
|
|
(3,700 |
) |
|
|
346
|
|
|
|
(8,244 |
) |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,783 |
) |
|
|
|
|
|
|
(5,896 |
) |
|
|
|
|
Subtotal
|
|
|
(7,595 |
) |
|
|
|
|
|
|
(2,225 |
) |
|
|
|
|
|
|
(3,657 |
) |
|
|
|
|
|
|
(4,459 |
) |
|
|
|
|
Commercial
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
44,358
|
|
|
|
28,627
|
|
|
|
3,574
|
|
|
|
76,566
|
|
|
|
84,876
|
|
|
|
49,541
|
|
|
|
9,770
|
|
|
|
142,019
|
|
UF
|
|
|
83,904
|
|
|
|
24,938
|
|
|
|
9,596
|
|
|
|
118,431
|
|
|
|
81,055
|
|
|
|
(65,964 |
) |
|
|
(15,838 |
) |
|
|
868
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,614 |
) |
|
|
(5,209 |
) |
|
|
|
|
Mortgage
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
(3 |
) |
|
|
1
|
|
|
|
(0 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
8
|
|
|
|
(1 |
) |
|
|
3
|
|
UF
|
|
|
(56,355 |
) |
|
|
11,501
|
|
|
|
(4,913 |
) |
|
|
(49,735 |
) |
|
|
(22,472 |
) |
|
|
(14,387 |
) |
|
|
3,953
|
|
|
|
(33,151 |
) |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(56,358 |
) |
|
|
|
|
|
|
(4,913 |
) |
|
|
(49,737 |
) |
|
|
(22,476 |
) |
|
|
(14,379 |
) |
|
|
|
|
|
|
(33,148 |
) |
Contingent
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
1,427
|
|
|
|
(519 |
) |
|
|
(489 |
) |
|
|
419
|
|
|
|
662
|
|
|
|
152
|
|
|
|
51
|
|
|
|
835
|
|
UF
|
|
|
292
|
|
|
|
42
|
|
|
|
7
|
|
|
|
341
|
|
|
|
417
|
|
|
|
225
|
|
|
|
42
|
|
|
|
670
|
|
Foreign
currencies
|
|
|
(307 |
) |
|
|
|
|
|
|
(155 |
) |
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
(90 |
) |
Subtotal
|
|
|
|
|
|
|
|
|
|
|
(637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
(2,200 |
) |
|
|
(328 |
) |
|
|
71
|
|
|
|
(2,459 |
) |
|
|
(580 |
) |
|
|
2,344
|
|
|
|
(174 |
) |
|
|
1,571
|
|
UF
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currencies
|
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(2,200 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
(2,459 |
) |
|
|
(580 |
) |
|
|
|
|
|
|
(174 |
) |
|
|
|
|
Total
interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
44,735
|
|
|
|
43,844
|
|
|
|
3,433
|
|
|
|
92,029
|
|
|
|
93,460
|
|
|
|
56,095
|
|
|
|
10,545
|
|
|
|
158,248
|
|
UF
|
|
|
19,353
|
|
|
|
50,470
|
|
|
|
2,511
|
|
|
|
72,355
|
|
|
|
53,659
|
|
|
|
(83,888 |
) |
|
|
(11,474 |
) |
|
|
(40,166 |
) |
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,139 |
) |
|
|
|
|
|
|
(5,037 |
) |
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,966 |
) |
|
|
|
|
|
|
Increase
(Decrease) from 2004 to 2005
Due
to Changes in
|
|
|
Net
Change
|
|
|
Increase
(Decrease) from 2005 to 2006
Due
to Changes in
|
|
|
Net
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Interest-bearing
liabilities
|
|
|
|
Savings
accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
5
|
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
-
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
6
|
|
UF
|
|
|
(444 |
) |
|
|
3,259
|
|
|
|
(528 |
) |
|
|
2,287
|
|
|
|
(534 |
) |
|
|
(3,530 |
) |
|
|
373
|
|
|
|
(3,670 |
) |
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(439 |
) |
|
|
|
|
|
|
(531 |
) |
|
|
|
|
|
|
(533 |
) |
|
|
(3,526 |
) |
|
|
|
|
|
|
(3,664 |
) |
Time
deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
7,628
|
|
|
|
31,615
|
|
|
|
4,631
|
|
|
|
43,875
|
|
|
|
52,105
|
|
|
|
34,929
|
|
|
|
18,947
|
|
|
|
111,158
|
|
UF
|
|
|
27,206
|
|
|
|
23,821
|
|
|
|
9,838
|
|
|
|
60,865
|
|
|
|
(2,152 |
) |
|
|
(27,751 |
) |
|
|
474
|
|
|
|
(28,584 |
) |
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Ch$
|
|
|
2,117
|
|
|
|
194
|
|
|
|
1,045
|
|
|
|
3,355
|
|
|
|
(2,649 |
) |
|
|
2,429
|
|
|
|
(1,739 |
) |
|
|
(2,011 |
) |
UF
|
|
|
(464 |
) |
|
|
179
|
|
|
|
(62 |
) |
|
|
(347 |
) |
|
|
2,793
|
|
|
|
(323 |
) |
|
|
(906 |
) |
|
|
1,551
|
|
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,645 |
) |
|
|
(460 |
) |
Repurchase
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
(3,007 |
) |
|
|
(8,571 |
) |
|
|
1,482
|
|
|
|
(10,082 |
) |
|
|
(6,237 |
) |
|
|
193,075
|
|
|
|
(165,908 |
) |
|
|
11,097
|
|
UF
|
|
|
(15,030 |
) |
|
|
1,346
|
|
|
|
25,130
|
|
|
|
11,463
|
|
|
|
(10,043 |
) |
|
|
9,310
|
|
|
|
(8,765 |
) |
|
|
(10,089 |
) |
Foreign currencies
|
|
|
(1,225 |
) |
|
|
|
|
|
|
(27,835 |
) |
|
|
|
|
|
|
|
|
|
|
(4,046 |
) |
|
|
(2,606 |
) |
|
|
(1,019 |
) |
Subtotal
|
|
|
(19,262 |
) |
|
|
|
|
|
|
(1,223 |
) |
|
|
|
|
|
|
(10,654 |
) |
|
|
|
|
|
|
(177,279 |
) |
|
|
(11 |
) |
Mortgage
finance bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
UF
|
|
|
(42,211 |
) |
|
|
15,322
|
|
|
|
(5,897 |
) |
|
|
(32,785 |
) |
|
|
(22,785 |
) |
|
|
(15,595 |
) |
|
|
4,606
|
|
|
|
(33,759 |
) |
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(42,211 |
) |
|
|
|
|
|
|
(5,897 |
) |
|
|
(32,785 |
) |
|
|
(22,785 |
) |
|
|
(15,595 |
) |
|
|
|
|
|
|
(33,759 |
) |
Other
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
(475 |
) |
|
|
1,043
|
|
|
|
(379 |
) |
|
|
190
|
|
|
|
360
|
|
|
|
588
|
|
|
|
142
|
|
|
|
1,084
|
|
UF
|
|
|
(9,449 |
) |
|
|
11,822
|
|
|
|
(3,348 |
) |
|
|
(976 |
) |
|
|
34,488
|
|
|
|
(16,544 |
) |
|
|
(17,573 |
) |
|
|
327
|
|
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,049 |
) |
|
|
|
|
Total
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
6,268
|
|
|
|
24,279
|
|
|
|
6,776
|
|
|
|
37,338
|
|
|
|
43,580
|
|
|
|
231,025
|
|
|
|
(148,557 |
) |
|
|
121,334
|
|
UF
|
|
|
(40,392 |
) |
|
|
55,749
|
|
|
|
25,133
|
|
|
|
40,507
|
|
|
|
1,767
|
|
|
|
(54,433 |
) |
|
|
(21,791 |
) |
|
|
(74,224 |
) |
Foreign currencies
|
|
|
|
|
|
|
|
|
|
|
(23,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(15,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,218 |
) |
|
|
|
|
Interest-Earning
Assets: Net Interest Margin
The
following table analyzes, by currency of denomination, the levels of average
interest-earning assets and net interest earned by Santander-Chile, and
illustrates the comparative margins obtained, for each of the years indicated
in
the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Total
average interest-earning assets
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
3,415,375
|
|
|
|
3,850,866
|
|
|
|
4,648,352
|
|
UF
|
|
|
5,154,312
|
|
|
|
5,559,440
|
|
|
|
6,240,120
|
|
Foreign
currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest earned (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
310,185
|
|
|
|
364,876
|
|
|
|
401,791
|
|
UF
|
|
|
191,220
|
|
|
|
223,068
|
|
|
|
257,125
|
|
Foreign
currencies
|
|
|
|
|
|
|
(29,678 |
) |
|
|
(46,662 |
) |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
9.1 |
% |
|
|
9.5 |
% |
|
|
8.6 |
% |
UF
|
|
|
3.7 |
% |
|
|
4.0 |
% |
|
|
4.1 |
% |
Foreign
currencies
|
|
|
0.0 |
% |
|
|
-1.2 |
% |
|
|
-2.1 |
% |
Total
|
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
Net
interest margin, excluding contingent loans (2)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ch$
|
|
|
9.3 |
% |
|
|
9.9 |
% |
|
|
9.0 |
% |
UF
|
|
|
3.9 |
% |
|
|
4.2 |
% |
|
|
4.3 |
% |
Foreign
currencies
|
|
|
0.1 |
% |
|
|
-1.6 |
% |
|
|
-2.7 |
% |
Total
|
|
|
5.0 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
(1)
|
Net
interest earned is defined as interest revenue earned less interest
expense incurred.
|
(2)
|
Net
interest margin is defined as net interest earned divided by average
interest-earning assets.
|
(3)
|
Pursuant
to Chilean GAAP, Santander-Chile also includes contingent loans as
interest-earning assets. See “—Loan Portfolio—Contingent
loans.”
|
Return
on Equity and Assets; Dividend Payout
The
following table presents certain information and selected financial ratios
for
Santander-Chile for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for
percentages)
|
|
Net
income
|
|
|
210,358
|
|
|
|
244,792
|
|
|
|
285,582
|
|
Average
total assets
|
|
|
12,726,276
|
|
|
|
13,784,052
|
|
|
|
14,717,829
|
|
Average
shareholders’ equity
|
|
|
1,038,970
|
|
|
|
1,015,385
|
|
|
|
1,150,156
|
|
Net
income as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
|
1.65 |
% |
|
|
1.78 |
% |
|
|
1.94 |
% |
Average shareholders’ equity
|
|
|
20.25 |
% |
|
|
24.11 |
% |
|
|
24.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for
percentages)
|
|
Average
shareholders’ equity as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
|
8.16 |
% |
|
|
7.37 |
% |
|
|
8.98 |
% |
Declared
cash dividend
|
|
|
210,358
|
|
|
|
159,114
|
|
|
|
185,628
|
|
Dividend
payout ratio, based on net income
|
|
|
100.00 |
% |
|
|
65.00 |
% |
|
|
65.00 |
% |
Loan
Portfolio
The
following table analyzes our loans by product type. Except where otherwise
specified, all loan amounts stated below are before deduction for loan loss
allowances. Total loans reflect our loan portfolio, including principal amounts
of past due loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Commercial
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
commercial loans
|
|
|
3,175,410
|
|
|
|
2,724,428
|
|
|
|
3,335,267
|
|
|
|
3,732,589
|
|
|
|
4,048,221
|
|
Foreign
trade loans
|
|
|
583,648
|
|
|
|
469,114
|
|
|
|
523,292
|
|
|
|
522,605
|
|
|
|
741,776
|
|
Interbank
loans
|
|
|
4,517
|
|
|
|
155,099
|
|
|
|
138,602
|
|
|
|
198,779
|
|
|
|
151,491
|
|
Leasing
contracts
|
|
|
462,654
|
|
|
|
468,402
|
|
|
|
531,434
|
|
|
|
677,936
|
|
|
|
764,408
|
|
Other
outstanding loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans backed by mortgage bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
980,207
|
|
|
|
973,911
|
|
|
|
613,041
|
|
|
|
422,848
|
|
|
|
329,178
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
|
|
776,743
|
|
|
|
842,793
|
|
|
|
1,142,729
|
|
|
|
1,421,523
|
|
|
|
1,800,507
|
|
Past
due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
loans (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For
purposes of loan classification, contingent loans are considered
as
commercial loans.
|
(2)
|
All
of the above categories except mortgage loans, past due loans and
contingent loans are combined into “Loans” as reported in the tables set
forth under “—Average Balance Sheets, Income Earned from Interest-Earning
Assets and Interest Paid on Interest-Bearing
Liabilities.”
|
The
loan
categories are as follows:
Commercial
loans are long-term and short-term loans granted in Chilean pesos, on an
adjustable or fixed rate basis, primarily to finance working capital or
investments. Starting January 1, 2004, checking overdraft
lines for companies are classified as commercial loans.
Foreign
trade loans are fixed rate, short-term loans made in foreign currencies
(principally U.S.$) to finance imports and exports.
Interbank
loans are fixed rate, short-term loans to financial institutions that
operate in Chile.
Leasing
contracts are agreements for the financial leasing of capital equipment and
other property.
Other
outstanding loans mainly include mortgage loans (fixed and variable rate)
that are inflation-indexed long-term loans with monthly payments of principal
and interest secured by a real property mortgage. These are financed by our
general borrowings. Other outstanding loans also include factoring operations.
Previous to 2004, this line item
also
included checking account overdrafts, which since January 1, 2004 have
been classified as commercial or consumer loans depending on their
origin.
Mortgage
loans backed by mortgage bonds are inflation-indexed, fixed rate, long-term
loans with monthly payments of principal and interest secured by a real property
mortgage that are financed with mortgage finance bonds. At the time of approval,
these types of mortgage loans cannot be more than 75.0% of the lower of the
purchase price or the appraised value of the mortgaged property or such loan
will be classified as a commercial loan.
Consumer
loans are loans to individuals, granted in Chilean pesos, generally on a
fixed rate basis, to finance the purchase of consumer goods or to pay for
services. They also include credit card balances subject to interest charges.
Starting January 1, 2004, checking overdraft lines for
individuals have been classified as commercial loans.
Past
due loans include, with respect to any loan, the amount of principal or
interest that is overdue for 90 days or more, and does not include the
installments of such loan that are not overdue or that are overdue for less
than
90 days, unless legal proceedings have been commenced for the entire outstanding
balance according to the terms of the loan.
Contingent
loans consist of guarantees granted by us in Ch$, UF and foreign currencies
(principally U.S.$), as well as open and unused letters of credit. (Unlike
U.S.
GAAP, Chilean GAAP requires such loans to be included on a bank’s balance
sheet.)
Collateral
provided generally consists of mortgages on real estate, pledges of marketable
securities, letters of credit or cash. The existence and amount of collateral
generally vary from loan to loan.
Maturity
and Interest Rate Sensitivity of Loans
The
following table sets forth an analysis by type and time remaining to maturity
of
our loans at December 31, 2006:
|
|
|
|
|
Due
after 1 year but up to 5 years
|
|
|
|
|
|
Total
balance at December 31, 2006
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Commercial
loans
|
|
|
1,922,965
|
|
|
|
1,292,174
|
|
|
|
833,082
|
|
|
|
4,048,221
|
|
Consumer
loans
|
|
|
1,067,706
|
|
|
|
721,834
|
|
|
|
10,967
|
|
|
|
1,800,507
|
|
Mortgage
loans
|
|
|
57,317
|
|
|
|
186,524
|
|
|
|
242,008
|
|
|
|
485,849
|
|
Leasing
contacts
|
|
|
205,712
|
|
|
|
387,303
|
|
|
|
171,393
|
|
|
|
764,408
|
|
Foreign
trade loans
|
|
|
612,101
|
|
|
|
94,991
|
|
|
|
34,684
|
|
|
|
741,776
|
|
Interbank
loans
|
|
|
151,491
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,491
|
|
Other
outstanding loans
|
|
|
296,779
|
|
|
|
521,425
|
|
|
|
1,863,257
|
|
|
|
2,681,461
|
|
Past
due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present the interest rate sensitivity of outstanding loans
due
after one year at December 31, 2006 (not including contingent loans). See also
“Item 11: Quantitative and Qualitative Disclosures About Market Risk—Interest
Rate Sensitivity.”
|
|
|
|
|
|
(in
millions of
constant
Ch$
as
of
December
31, 2006)
|
|
Variable
Rate
|
|
|
|
Ch$
|
|
|
115
|
|
UF
|
|
|
1,062,737
|
|
Foreign
currencies
|
|
|
|
|
Subtotal
|
|
|
|
|
Fixed
Rate
|
|
|
|
|
Ch$
|
|
|
1,441,165
|
|
UF
|
|
|
3,766,811
|
|
Foreign
currencies
|
|
|
|
|
Subtotal
|
|
|
|
|
Total
|
|
|
|
|
Loans
by Economic Activity
The
following table sets forth, at the dates indicated, an analysis of our loan
portfolio based on the borrower’s principal economic activity. Loans to
individuals for business purposes are allocated to their economic activity.
The
table does not reflect outstanding contingent loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for
percentages)
|
|
Agriculture,
Livestock, Agribusiness, Fishing
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
and livestock
|
|
|
250,397
|
|
|
|
2.7
|
|
|
|
304,163
|
|
|
|
2.8
|
|
Fruit
|
|
|
81,264
|
|
|
|
0.9
|
|
|
|
103,080
|
|
|
|
0.9
|
|
Forestry
and wood extraction
|
|
|
49,608
|
|
|
|
0.5
|
|
|
|
105,804
|
|
|
|
1.0
|
|
Fishing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and Petroleum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
and quarries
|
|
|
35,195
|
|
|
|
0.4
|
|
|
|
43,168
|
|
|
|
0.4
|
|
Natural
gas and crude oil extraction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tobacco,
food and beverages
|
|
|
119,358
|
|
|
|
1.3
|
|
|
|
141,069
|
|
|
|
1.3
|
|
Textiles,
clothing and leather goods
|
|
|
59,002
|
|
|
|
0.6
|
|
|
|
53,834
|
|
|
|
0.5
|
|
Wood
and wood products
|
|
|
54,274
|
|
|
|
0.6
|
|
|
|
66,589
|
|
|
|
0.7
|
|
Paper,
printing and publishing
|
|
|
68,436
|
|
|
|
0.7
|
|
|
|
64,607
|
|
|
|
0.6
|
|
Oil
refining, carbon and rubber
|
|
|
102,880
|
|
|
|
1.1
|
|
|
|
111,304
|
|
|
|
1.0
|
|
Production
of basic metal, non minerals, machine and equipment
|
|
|
123,328
|
|
|
|
1.3
|
|
|
|
130,205
|
|
|
|
1.2
|
|
Other
manufacturing industries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity,
Gas and Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity,
gas and water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for
percentages)
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
buildings
|
|
|
306,903
|
|
|
|
3.3
|
|
|
|
371,625
|
|
|
|
3.4
|
|
Other
constructions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
308,518
|
|
|
|
3.3
|
|
|
|
378,380
|
|
|
|
3.5
|
|
Retail,
restaurants and hotels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transport,
Storage and Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transport
and storage
|
|
|
212,928
|
|
|
|
2.3
|
|
|
|
276,227
|
|
|
|
2.6
|
|
Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services, Insurance and Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
insurance and companies
|
|
|
609,723
|
|
|
|
6.5
|
|
|
|
612,610
|
|
|
|
5.7
|
|
Real
estate and other services provided to companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community,
Social and Personal Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community,
social and personal services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, foreign country loans totaled Ch$390,010 million,
representing 2.56% of our total assets. No foreign country represents
more than 1% of our assets.
Credit
Review Process
The
Risk
Division, our credit analysis and risk management group, is largely independent
of our Commercial Division. Risk evaluation teams interact regularly with our
clients. For larger transactions, risk teams in our headquarters work directly
with clients when evaluating credit risks and preparing credit applications.
Various credit approval committees, all of which include Risk Division and
Commercial Division personnel, must verify that the appropriate qualitative
and
quantitative parameters are met by each applicant. Each committee’s powers are
defined by our Board of Directors.
In
addition, Banco Santander Central Hispano is involved in the credit approval
process of our largest loans and borrowers. If a single borrower or an economic
group owes us an aggregate amount in excess of US$40 million, any additional
loan to such borrower or member of such group must be reviewed by Banco
Santander Central Hispano. Once a year, the Executive Committee of Banco
Santander Central Hispano reviews those loans booked by us in excess of US$40
million.
Credit
Approval: Corporate
In
preparing a credit proposal for a corporate client, Santander-Chile’s personnel
verify such parameters as debt servicing capacity (including, usually, projected
cash flows), the company’s financial history and projections for the economic
sector in which it operates. The Risk Division is closely involved in this
process, and prepares the credit
application
for the client. All proposals contain an analysis of the client’s strengths and
weaknesses, a rating and a recommendation. Credit limits are determined not
on
the basis of outstanding balances of individual clients, but on the direct
and
indirect credit risk of entire financial groups. For example, a corporation
will
be evaluated together with its subsidiaries and affiliates.
Credit
Approval: Retail Banking
Santander-Chile’s
Risk Division for Individuals reports to the Risk Division for Individuals
and
small businesses, and is responsible for the risk policies for this segment.
The
credit evaluation process is based on an evaluation system known as
Garra which is decentralized, automated and is based on a scoring
system which incorporates our Credit Risk policies. The credit evaluation
process is based on the gathering of information to determine a client’s
financial stability, payment capacity and commercial nature. The following
parameters are used to evaluate an applicant’s credit risk: (i) income, (ii)
length of current employment, (iii) indebtedness, (iv) credit reports and (v)
background information, which is accessed by means of internal and external
databases. Operations which cannot be approved by Garra are sent to the
Approval Center, a centralized area that carries out yearly analyses and
renewals of credit lines and credit cards and evaluates higher risk
credits.
Credit
Approval: Banefe
Banefe’s
Risk division is fully integrated into Santander-Chile’s Risk Department for
Individuals and Micro businesses. In managing its credit risks, Banefe applies
a
specific set of general policies and rules which differs from the rest of
Santander-Chile, due to its own market orientation. These policies and rules,
as
well as product specific guidelines, are developed by the Risk Division, which
also defines the responsibilities of the various units and personnel
participating in the credit approval process and the operating procedures for
the granting of credit. Additionally, there exists a Risk Committee in which
persons from the commercial area participate and where modifications to the
risk
policies are discussed.
The
credit
evaluation process is based on Santander-Chile’s general credit policies, which
define, among other things, Banefe’s target markets, as well as the parameters
used to evaluate an applicant’s credit risk. The most relevant parameters used
to evaluate an applicant’s credit risk are (i) income, (ii) length of current
employment, (iii) indebtedness, (iv) credit reports and (v) background
information, which is accessed by means of internal and external databases.
Additionally this area utilizes credit scoring models for evaluating the credit
risk of some products.
The
credit
evaluation process is, for the most part, decentralized and is carried out
by
credit analysts at branch offices who use the Syseva system (Sistema de
Evaluación de Riesgos) for approving an operation, which includes the credit
risk parameters and credit scoring mechanisms mentioned above. Additionally,
a
central unit exists, which reports to Banefe’s Risk Division, that carries out
yearly analyses and renewals of credit lines and credit cards and evaluates
higher risk credit or operations that cannot be approved or rejected
automatically through Syseva.
The
following table lists our committees from which credit approval is required
depending on total risk exposure:
Approved
By
|
|
Maximum
approval in Thousands of US$
|
|
Executive
Credit Committee
|
|
>20,000
|
|
Senior Credit
Committee
|
|
|
20,000
|
|
Business
Segment Committee
|
|
|
8,000-10,000
|
|
Large
Companies
|
|
|
10,000
|
|
Real
estate sector
|
|
|
10,000
|
|
Medium-sized
companies
|
|
|
8,000
|
|
Regional
Committee
|
|
|
5,000
|
|
Branch
committee
|
|
|
300
|
|
Companies
|
|
|
300
|
|
Mortgage
|
|
|
120
|
|
Persons
|
|
|
30
|
|
The
Executive Credit Committee is comprised of the Chairman of the Board, three
additional Board members, the Corporate Legal Counsel, the CEO, the Manager
of
Global Banking, the Corporate Director of Risk and two senior members of the
Credit Risk department that present the loans being reviewed. This committee
reviews the loan positions reviewed by the Senior Credit Committee above US$10
million and approves those loan positions greater than US$20 million. In
addition, any loan position above US$40 million must also be reviewed by Banco
Santander Central Hispano’s credit committee.
The Senior
Credit Committee is comprised of the CEO, the Manager of the Wholesale segment,
the Manager of the Medium sized companies segment, General Counsel, the
Corporate Director of Credit Risk and the Manager of Credit Admissions.
The Senior Credit Committee reviews and will either approve or deny
transactions in the range of US$8 million to US$20 million that have been
previously approved by one of the Business Segment Committees: (i) Large
Companies, (ii) Medium sized Companies and (iii) Real Estate. The Regional
Committees have a maximum approval of up to US$5 million. The Regional
Committees oversee the branch networks outside of Santiago. At the branch level,
the maximum approval is US$300,000 for companies, US$30,000 for individuals
and
US$120,000 for mortgages. For the lower level committees, credit granting
authority varies according to the seniority and experience of the committee
members, and the values indicated represent upper limits. All committees include
at least two bank officers from the commercial and credit areas.
We
also
have a department designated to monitor the quality of the loan portfolio on
a
continuous basis. The purpose of this special supervision is to maintain
constant scrutiny of the portions of the portfolio that represent the greatest
risk and to anticipate any deterioration. Based on this ongoing review of the
loan portfolio, we believe we are able to detect problem loans and make a
decision on a client’s status. This includes measures such as reducing or
extinguishing a loan, or requiring better collateral from the client. The
control systems require that loans be reviewed at least three times per
year for those clients in the lowest category of credit watch.
The
following table lists Banefe’s personnel from whom credit approval is required,
depending upon total risk exposure. These attributions are granted based on
specific training processes given by the Risk Division and according to the
experience and professional background of the employee.
|
|
Range
in US$ (Excludes mortgage loans)
|
|
Risk
Division Manager
|
|
>
12,500
|
|
Assistant
Risk Division Managers
|
|
|
6,250-12,500
|
|
Zone
Manager
|
|
|
3,125-6,250
|
|
Branch
Assistant Manager
|
|
|
1,550-3,125
|
|
Credit
Analyst
|
|
|
1,170-1,550
|
|
Commercial
Executive
|
|
|
0-1,170
|
|
Classification
of Loan Portfolio
Chilean
banks are required to provide to the Superintendency of Banks detailed
information regarding their loan portfolio on a monthly basis. The
Superintendency of Banks examines and evaluates each financial institution’s
credit management process, including its compliance with the loan classification
guidelines. Banks are classified into four categories: 1, 2, 3 and 4. Each
bank’s category depends on the models and methods used by the bank to classify
its loan portfolio, as determined by the Superintendency of Banks. Category
1
banks are those banks whose methods and models are satisfactory to the
Superintendency of Banks. Category 1 banks will be entitled to continue using
the same methods and models they currently have in place. A bank classified
as a
category 2 bank will have to maintain the minimum levels of reserves established
by the Superintendency of Banks while its board of directors will be made aware
of the problems detected by the Superintendency of Banks and required to take
steps to correct
them.
Banks classified as categories 3 and 4 will have to maintain the minimum levels
of reserves established by the Superintendency of Banks until they are
authorized by the Superintendency of Banks to do otherwise. We are classified
in
category 1.
Under
the
classifications effective January 1, 2004, loans are divided into: (i) consumer
loans (including loans granted to individuals for the purpose of financing
the
purchase of consumer goods or payment of services); (ii) residential mortgage
loans (including loans granted to individuals for the purchase, construction
or
improvement of residential real estate, in which the value of the property
covers at least 100% of the amount of the loan); and (iii) commercial loans
(includes all loans other than consumer loans and residential mortgage
loans).
In
accordance with the regulations, which became effective as of January 1, 2004,
the models and methods used to classify our loan portfolio must follow the
following guiding principles, which have been established by the Superintendency
of Banks and approved by our Board of Directors. In 2006, these models have
been
improved and various changes have been introduced. Since
then, our internal provisioning models have focused on not only
non-performance, we have also introduced statistical models that take into
account a borrower’s credit history and indebtedness levels. Group
ratings that determine loan loss allowances based only on non-performance are
being phased out and replaced by statistical scoring systems.
Allowances
for large commercial loans
For
large
commercial loans, leasing and factoring, the Bank assigns a risk category level
to each borrower and his respective loans. The Bank considers the following
risk
factors within the analysis: industry or sector of the borrower, owners or
managers of the borrower, their financial situation, their payment capacity
and
payment behavior. The Bank assigns one of the following risk categories to
each
loan and borrower:
|
iv.
|
Classifications
A1, A2 and A3, assigned to borrowers with no apparent credit
risk.
|
|
v.
|
Classifications
B, assigned to borrowers with some credit risk but no apparent
deterioration of payment capacity.
|
|
vi.
|
Classifications
C1, C2, C3, C4, D1 and D2, assigned to borrowers whose loans have
deteriorated.
|
Before
December 1, 2006, for loans classified as A1, A2, A3 and B, the Board of
Directors was authorized to determine the levels of required
reserves. Effective December 1, 2006, for loans classified as A1, A2,
A3 and B, the Bank assigns a specific level of risk to each borrower and,
therefore, amount of loan loss allowance is determined on a case by case
basis. All commercial loans for Companies, including leasing and
factoring, have since been rated using a model for evaluating and calculating
provisions on an individual basis. Since a debtor’s behavior varies
over time, in order to determine the provisions, it is necessary to make a
distinction between normal debtors and deteriorated debtors.
Debtor
Classes
Two
debtor
classes have been determined based on debtors’ credit behavior in order to
calculate loan loss allowance:
·
|
Normal
Debtors: Debtors that are current on their payment obligations and
show no
sign of deterioration in their credit
quality.
|
·
|
Deteriorated
Debtors: Debtors that present some degree of non-payment on the
obligations to the Bank, including debtors 5% or more of whose loan
balances with us have been non-performing for more than three months,
whose loans with us have been charged off or administered by our
Recovery
Unit, or classified as Precontenciosos (PRECO or
Deteriorated)
|
Definition
of Expected Loan Loss = Loan Loss Allowance
The
expected loss is obtained by multiplying all risk factors defined in the
following equation:
EL |
= PNP
x EXP x SEV
|
|
|
EL |
= Expected
Loss
|
PNP |
= Probability
of Non-Performing
|
EXP |
= Exposure
|
SEV |
= Severity
|
EL
=
Expected Loss. The expected loss is how much could be lost in the event a debtor
does not perform the obligations under the loan.
PNP
=
Probability of Non-performing. This variable, expressed as a
percentage, indicates the probability that a debtor will default next year.
This
percentage is associated with the internal rating we give to each
debtor, which is determined statistically according to the historical credit
quality evolution of debtors with similar ratings.
EXP = Exposure.
This corresponds to the value of commercial loans without discounting the value
of guarantees or collateral.
SEV
=
Severity. This is the effective loss rate for debtors in the same segment,
which
is determined statistically based on the historical effective losses for the
Bank for each segment.
Determination
of loan loss allowance according to Borrower Class
Normal
Debtors
·
|
The
loan loss allowance for each debtor is calculated based on the Expected
Loss equation (EL = PNP x EXP x
SEV).
|
·
|
A
risk category is assigned to each debtor based on the PNP summarized
in
the following table:
|
PNP
result
|
|
Classification
|
|
Loan
Loss Allowance (Pre-Dec. 2006)
|
|
Loan
loss allowance
as
of and after Dec. 2006
|
|
|
|
|
|
|
|
External
Classification> AA
|
|
A1
|
|
|
0% |
|
Determined
by a
|
PNP
≤ 0.01%
|
|
A2
|
|
|
0% |
|
model
on an
|
0.01%
< PNP ≤ 0.04%
|
|
A3
|
|
|
0.5% |
|
|
PNP>
0.04%
|
|
B
|
|
|
1.0% |
|
|
Deteriorated
Debtors
For
loans
classified in Categories C1, C2, C3, C4, D1 and D2, the Bank must have the
following levels of allowance:
|
|
|
|
|
|
C1
|
|
Up
to 3%
|
|
|
2%
|
|
C2
|
|
More
than 3% up to 19%
|
|
|
10%
|
|
C3
|
|
More
than 19% up to 29%
|
|
|
25%
|
|
C4
|
|
More
than 29% up to 49%
|
|
|
40%
|
|
D1
|
|
More
than 49% up to 79%
|
|
|
65%
|
|
D2
|
|
More
than 79%
|
|
|
90%
|
|
(1)
|
Represents
percentages of the required allowance to the aggregate amount of
principal
and accrued but unpaid interest of the
loan.
|
Allowances
for consumer and mortgage loans
The
classification of consumer and mortgage loans is directly related to the aging
of the installment. The following table sets forth our methodology for analyzing
consumer and mortgage loans prior to 2006.
|
|
Consumer
loans overdue status
|
|
|
Residential
mortgage loans
overdue
status
|
|
|
Allowances
as a percentage of
aggregate
exposure
(1)
|
|
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Days)
|
|
|
(Days)
|
|
|
|
|
A
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
— |
% |
B
|
|
|
1
|
|
|
|
30
|
|
|
|
1
|
|
|
|
180
|
|
|
|
1
|
|
B-
|
|
|
31
|
|
|
|
60
|
|
|
|
181
|
|
|
>181
|
|
|
|
20
|
|
C
|
|
|
61
|
|
|
|
120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
D
|
|
|
121
|
|
|
>121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
(1)
|
In
effect until December 31, 2005. Represents the percentages of
the required allowance to the aggregate amount of the principal and
accrued but unpaid interest of loans. As of January 1, 2006,
the risk category was determined by days of
non-payment. However, the classification did not determine loan
loss allowance levels.
|
Commencing
in 2006, the Bank improved and modified the methodology for analyzing consumer
and mortgage loans. All consumer and mortgage loans are now assigned
an allowance level on an individual borrower basis utilizing a more automated
and sophisticated statistical model and considering borrower’s credit history,
including any defaults on obligations to other creditors, as well as the overdue
periods on the loans borrowed from the Bank. Once the rating of the
client is determined, the allowance for consumer and mortgage loans is
calculated using a risk category and related allowance to loan ratio which
is
directly related to the overdue periods. The following table sets
forth the allowance to loan ratios on loans based on overdue time.
|
|
|
|
|
|
|
|
|
1-30
|
|
|
|
31-60
|
|
|
|
61-120
|
|
|
|
121-180
|
|
|
|
181-360
|
|
|
|
361-
720
|
|
|
>720
|
|
Consumer
|
Profile
1
|
|
|
5.2 |
% |
|
|
16.5 |
% |
|
|
29.7 |
% |
|
|
90.5 |
% |
|
Charged-off
|
|
|
|
—
|
|
|
|
—
|
|
|
Profile
2
|
|
|
8.8 |
% |
|
|
20.0 |
% |
|
|
48.4 |
% |
|
|
90.5 |
% |
|
Charged-off
|
|
|
|
—
|
|
|
|
—
|
|
|
Profile
3
|
|
|
13.5 |
% |
|
|
24.7 |
% |
|
|
48.4 |
% |
|
|
90.5 |
% |
|
Charged-off
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
Profile
1
|
|
|
0.3 |
% |
|
|
0.5 |
% |
|
|
1.2 |
% |
|
|
2.4 |
% |
|
|
6.8 |
% |
|
|
14.1 |
% |
|
|
28.3 |
% |
|
Profile
2
|
|
|
1.5 |
% |
|
|
1.6 |
% |
|
|
2.5 |
% |
|
|
4.4 |
% |
|
|
6.8 |
% |
|
|
14.1 |
% |
|
|
28.3 |
% |
(1)
|
Represents
the percentage of required allowance amount to the aggregate amount
of the
principal and accrued but unpaid interest on the loan. These
percentages may vary as the model is being
improved.
|
Further
improvements were implemented in the three month period ended March 31,
2007. First, the Bank now differentiates between old and new clients
when determining a client’s risk profile for consumer loans. This
modification did not result in any significant change in provision expense,
but
is expected to reduce monthly volatility of provisions and
charge-offs. Second, the Bank is in the process of implementing
additional modifications, the most important of which is to lengthen the period
for back-testing to determine a client’s risk profile from 12 to 24 months for
consumer loans. To determine loan loss allowance for residential
mortgage loans, the Bank still uses the table shown above.
Allowances
for group evaluations on small and mid-sized commercial loans
·
|
Allowances
for group evaluations are permitted for a large number of borrowers
whose
individual loan amounts are relatively insignificant. These
models are intended to be used primarily to analyze commercial loans
to
individuals and small companies.
|
·
|
Levels
of required allowance are determined by the Bank according to the
estimated loss that may result from the loans, by classifying the
loan
portfolio using one or both of the following
models:
|
|
i.
|
A
model based on the characteristics of the borrowers and their outstanding
loans. Borrowers and their loans with similar characteristics
will be placed into groups and each group will be assigned a risk
level.
|
|
ii.
|
A
model based on the performance of a group of loans. Loans with
analogous past payment histories and similar characteristics will
be
placed into groups and each group will be assigned a risk
level. Currently, the Bank is utilizing group analysis for
determining the loan loss for certain types of loans such as lending
to
small and mid-sized companies and commercial loans to
individuals.
|
Additional
reserves
Banks
are
permitted to establish allowances above the limits described above only to
cover
specific risks that have been authorized by their board of directors. Voluntary
reserves that cover no specific risk are no longer permitted.
Analysis
of Santander-Chile’s Loan Classification
The
following tables provide statistical data regarding the classification of our
loans at the end of each of the last five years.
|
|
|
|
Category
|
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
|
|
|
|
|
Percentage
of Evaluated Loans
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
A
|
|
|
2,929,507
|
|
|
|
637,719
|
|
|
|
1,399,766
|
|
|
|
4,966,992
|
|
|
|
64.2 |
% |
B
|
|
|
2,309,672
|
|
|
|
88,541
|
|
|
|
102,904
|
|
|
|
2,501,117
|
|
|
|
32.3 |
% |
B-
|
|
|
118,081
|
|
|
|
28,280
|
|
|
|
34,030
|
|
|
|
180,391
|
|
|
|
2.3 |
% |
C
|
|
|
30,979
|
|
|
|
20,448
|
|
|
|
2,925
|
|
|
|
54,352
|
|
|
|
0.7 |
% |
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
% |
Total
of evaluated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
evaluated
|
|
|
86.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
89.90 |
% |
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
|
|
|
|
|
Percentage
of Evaluated Loans
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
A
|
|
|
3,176,211
|
|
|
|
675,259
|
|
|
|
1,344,592
|
|
|
|
5,196,062
|
|
|
|
69.7 |
% |
B
|
|
|
1,727,932
|
|
|
|
103,337
|
|
|
|
127,301
|
|
|
|
1,958,570
|
|
|
|
26.3 |
% |
B-
|
|
|
109,200
|
|
|
|
33,611
|
|
|
|
41,740
|
|
|
|
184,551
|
|
|
|
2.5 |
% |
C
|
|
|
30,330
|
|
|
|
26,879
|
|
|
|
2,550
|
|
|
|
59,759
|
|
|
|
0.8 |
% |
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
% |
Total
of evaluated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
evaluated
|
|
|
86.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
90.2 |
% |
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
|
|
|
|
|
Percentage
of Evaluated Loans
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
A
|
|
|
|
|
|
965,821
|
|
|
|
1,777,768
|
|
|
|
2,743,589
|
|
|
|
30.1 |
% |
A1
|
|
|
442,636
|
|
|
|
|
|
|
|
|
|
|
|
442,636
|
|
|
|
4.9 |
% |
A2
|
|
|
3,794,387
|
|
|
|
|
|
|
|
|
|
|
|
3,794,387
|
|
|
|
41.6 |
% |
A3
|
|
|
677,021
|
|
|
|
|
|
|
|
|
|
|
|
677,021
|
|
|
|
7.4 |
% |
B
|
|
|
665,011
|
|
|
|
99,236
|
|
|
|
91,615
|
|
|
|
855,862
|
|
|
|
9.4 |
% |
B-
|
|
|
|
|
|
|
35,022
|
|
|
|
39,319
|
|
|
|
74,341
|
|
|
|
0.8 |
% |
C
|
|
|
|
|
|
|
32,559
|
|
|
|
2,200
|
|
|
|
34,759
|
|
|
|
0.4 |
% |
C1
|
|
|
268,980
|
|
|
|
|
|
|
|
|
|
|
|
268,980
|
|
|
|
2.9 |
% |
C2
|
|
|
58,584
|
|
|
|
|
|
|
|
|
|
|
|
58,584
|
|
|
|
0.6 |
% |
C3
|
|
|
33,240
|
|
|
|
|
|
|
|
|
|
|
|
33,240
|
|
|
|
0.4 |
% |
C4
|
|
|
25,197
|
|
|
|
|
|
|
|
|
|
|
|
25,197
|
|
|
|
0.3 |
% |
D
|
|
|
|
|
|
|
20,849
|
|
|
|
1
|
|
|
|
20,850
|
|
|
|
0.2 |
% |
D1
|
|
|
26,724
|
|
|
|
|
|
|
|
|
|
|
|
26,724
|
|
|
|
0.3 |
% |
D2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
% |
Total
of evaluated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
evaluated
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
|
|
|
|
|
Percentage
of Evaluated Loans
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
A
|
|
|
|
|
|
1,176,550
|
|
|
|
2,198,450
|
|
|
|
3,375,000
|
|
|
|
32.6 |
% |
A1
|
|
|
437,692
|
|
|
|
|
|
|
|
|
|
|
|
437,692
|
|
|
|
4.2 |
% |
A2
|
|
|
4,201,820
|
|
|
|
|
|
|
|
|
|
|
|
4,201,820
|
|
|
|
40.6 |
% |
A3
|
|
|
946,197
|
|
|
|
|
|
|
|
|
|
|
|
946,197
|
|
|
|
9.1 |
% |
B
|
|
|
664,408
|
|
|
|
149,579
|
|
|
|
123,588
|
|
|
|
937,575
|
|
|
|
9.1 |
% |
B-
|
|
|
|
|
|
|
46,630
|
|
|
|
27,405
|
|
|
|
74,035
|
|
|
|
0.7 |
% |
C
|
|
|
|
|
|
|
36,574
|
|
|
|
1,887
|
|
|
|
38,461
|
|
|
|
0.4 |
% |
C1
|
|
|
189,509
|
|
|
|
|
|
|
|
|
|
|
|
189,509
|
|
|
|
1.8 |
% |
C2
|
|
|
40,684
|
|
|
|
|
|
|
|
|
|
|
|
40,684
|
|
|
|
0.4 |
% |
C3
|
|
|
20,654
|
|
|
|
|
|
|
|
|
|
|
|
20,654
|
|
|
|
0.2 |
% |
C4
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
|
|
0.1 |
% |
D
|
|
|
|
|
|
|
25,415
|
|
|
|
|
|
|
|
25,415
|
|
|
|
0.3 |
% |
D1
|
|
|
24,199
|
|
|
|
|
|
|
|
|
|
|
|
24,199
|
|
|
|
0.2 |
% |
D2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
% |
Total
of evaluated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
evaluated
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
Residential
Mortgage
Loans
|
|
|
|
|
|
Percentage
of Evaluated Loans
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except for
percentages)
|
|
A
|
|
|
|
|
|
1,487,466
|
|
|
|
2,634,335
|
|
|
|
4,121,801
|
|
|
|
35.0 |
% |
A1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A2
|
|
|
5,120,492
|
|
|
|
|
|
|
|
|
|
|
|
5,120,492
|
|
|
|
43.4 |
% |
A3
|
|
|
1,629,798
|
|
|
|
|
|
|
|
|
|
|
|
1,629,798
|
|
|
|
13.8 |
% |
B
|
|
|
152,256
|
|
|
|
169,411
|
|
|
|
122,194
|
|
|
|
443,861
|
|
|
|
3.8 |
% |
B-
|
|
|
|
|
|
|
62,506
|
|
|
|
19,778
|
|
|
|
82,284
|
|
|
|
0.7 |
% |
C
|
|
|
|
|
|
|
63,471
|
|
|
|
31,848
|
|
|
|
95,319
|
|
|
|
0.8 |
% |
C1
|
|
|
127,526
|
|
|
|
|
|
|
|
|
|
|
|
127,526
|
|
|
|
1.1 |
% |
C2
|
|
|
22,094
|
|
|
|
|
|
|
|
|
|
|
|
22,094
|
|
|
|
0.2 |
% |
C3
|
|
|
19,100
|
|
|
|
|
|
|
|
|
|
|
|
19,100
|
|
|
|
0.2 |
% |
C4
|
|
|
22,601
|
|
|
|
|
|
|
|
|
|
|
|
22,601
|
|
|
|
0.2 |
% |
D
|
|
|
|
|
|
|
36,344
|
|
|
|
14,396
|
|
|
|
50,740
|
|
|
|
0.4 |
% |
D1
|
|
|
26,430
|
|
|
|
|
|
|
|
|
|
|
|
26,430
|
|
|
|
0.2 |
% |
D2
|
|
|
26,913
|
|
|
|
|
|
|
|
|
|
|
|
26,913
|
|
|
|
0.2 |
% |
Total
of evaluated loans
|
|
|
7,147,210
|
|
|
|
1,819,198
|
|
|
|
2,822,551
|
|
|
|
11,788,959
|
|
|
|
100.0 |
% |
Total
loans
|
|
|
7,147,210
|
|
|
|
1,819,198
|
|
|
|
2,822,551
|
|
|
|
11,788,959
|
|
|
|
|
|
Percentage
evaluated
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
Classification
of Loan Portfolio Based on the Borrower’s Payment
Performance
Accrued
interest and UF indexation adjustments from overdue loans are recognized only
when, and to the extent, received. Non performing loans include loans as to
which either principal or interest is overdue, and which do not accrue interest.
Restructured loans as to which payments are not overdue are not ordinarily
classified as non performing loans. Past due loans include, with respect to
any
loan, only the portion of principal or interest that is overdue for 90 or more
days, and do not include the installments of such loan that are not overdue
or
that are overdue for less than 90 days, unless legal proceedings have been
commenced for the entire outstanding balance according to the terms of the
loan,
in which case the entire loan is considered past due within 90 days of the
beginning of such proceedings. This practice differs from that normally followed
in the United States, where the amount classified as past due would include
the
entire amount of principal and interest on any and all loans which have any
portion overdue.
According
to the regulations established by the Superintendency of Banks, we are required
to write off commercial loans not later than 24 months after being classified
as
past due, if unsecured, and if secured, not later than 36 months after being
classified as past due. When an installment of a past due commercial loan
(either secured or unsecured) is written off, we must write off all installments
which are overdue, notwithstanding our right to write off the entire amount
of
the loan. Once any amount of a loan is written off, each subsequent installment
must be written off as it becomes overdue, notwithstanding our right to write
off the entire amount of the loan. In the case of past due consumer loans,
a
similar practice applies, except that after the first installment becomes past
due for six-months, we must write off the entire remaining part of the loan.
We
may write off any loan (commercial or consumer) before the first installment
becomes overdue only in accordance with special procedures established by the
Superintendency of Banks. In certain circumstances we must write off an overdue
loan (commercial or consumer) sooner than the terms set forth above. Loans
are
written off against the loan loss allowance to the extent of any required
allowances for such loans; the remainder of such loans is written off against
income.
In
general, legal collection proceedings are commenced with respect to consumer
loans once they are overdue for 90 days and, with respect to mortgage loans,
once they are past due for 120 days. Legal collection proceedings are always
commenced within one year of such loans becoming past due, unless the bank
determines that the size of the past due amount does not warrant such
proceedings. In addition, the majority of our commercial loans are short–term,
with single payments at maturity. Past due loans are required to be covered
by
individual loan loss allowance equivalent to 100.0% of any unsecured portion
thereof. See “—Loan Loss Allowances.”
The
following table sets forth as of December 31 of each of the last five years
the
amounts that are current as to payments of principal and interest and the
amounts overdue:
Total
Loans
The
following table sets forth a loan aging schedule at the end of each of the
last
five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Current
|
|
|
8,340,170
|
|
|
|
8,014,989
|
|
|
|
8,935,845
|
|
|
|
10,191,728
|
|
|
|
11,637,090
|
|
Overdue
for 1-29 days
|
|
|
46,706
|
|
|
|
40,419
|
|
|
|
31,077
|
|
|
|
38,353
|
|
|
|
39,150
|
|
Overdue
for 30-89 days
|
|
|
42,522
|
|
|
|
21,860
|
|
|
|
15,408
|
|
|
|
20,454
|
|
|
|
20,160
|
|
Overdue
for 90 days or more (“past due”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdue
loans expressed as a percentage of total loans
|
|
|
3.2 |
% |
|
|
3.0 |
% |
|
|
2.0 |
% |
|
|
1.6 |
% |
|
|
1.3 |
% |
Past
due loans as a percentage of total loans
|
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
1.5 |
% |
|
|
1.1 |
% |
|
|
0.8 |
% |
We
suspend
the accrual of interest and readjustments on all overdue loans. The amount
of
interest that would have been recorded on overdue loans if they had been
accruing interest was Ch$5,163 million, Ch$6,012 million and Ch$5,087 million
for the years ended December 31, 2004, 2005 and 2006, respectively. Accrued
interest and UF indexation adjustments from overdue loans are recognized only
when, and to the extent, received.
Loans
included in the previous table which have been restructured and that bear no
interest are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Ch$
|
|
|
9,418
|
|
|
|
15,258
|
|
|
|
19,408
|
|
|
|
1,556
|
|
|
|
1,590
|
|
Foreign
currency
|
|
|
783
|
|
|
|
4,914
|
|
|
|
9,990
|
|
|
|
1,624
|
|
|
|
27,471
|
|
UF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount
of interest that would have been recorded on these loans for the years ended
December 31, 2004, 2005 and 2006 if these loans had been earning a market
interest rate was Ch$3,102 million, Ch$410 million and Ch$2,075 million,
respectively.
Loan
Loss Allowances
The
following table sets forth our balance of loan loss allowances, the minimum
allowances to be established by us in accordance with the regulations of the
Superintendency of Banks and our total loan loss allowances expressed as a
percentage of total loans. Amounts at December 31, 2002 and 2003 were determined
under the regulations then in effect, and amounts at December 31, 2004, 2005
and
2006 were determined under the current rules.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Allowance based
on the requirements of the Superintendency of Banks
|
|
|
144,683
|
|
|
|
155,320
|
|
|
|
183,366
|
|
|
|
151,000
|
|
|
|
174,064
|
|
Allowance based
on 0.75%
|
|
|
64,591
|
|
|
|
61,963
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Individual,
global and additional loan loss allowances
|
|
|
169,674
|
|
|
|
182,039
|
|
|
|
183,366
|
|
|
|
151,000
|
|
|
|
174,064
|
|
Minimum
allowance required
|
|
|
169,674
|
|
|
|
182,039
|
|
|
|
183,366
|
|
|
|
151,000
|
|
|
|
174,064
|
|
Voluntary
allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loan loss allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loan allowances as a percentage of total loans
|
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
2.0 |
% |
|
|
1.5 |
% |
|
|
1.5 |
% |
Analysis
of Substandard Loans and Amounts Past Due
The
following table analyzes our substandard loans (i.e., all of the loans included
in categories B-, C and D) and past due loans and the allowances for loan losses
existing at the dates indicated. Substandard loans in the old rating system
included all loans rated B- or worse. In the current loan rating system,
substandard loans include all consumer loans and mortgage loans rated B- or
worse and all commercial loans rated C2 or worse. Therefore, the figure for
substandard loans in 2002 and 2003 are not comparable to the figures in the
following years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Total
loans
|
|
|
8,612,056
|
|
|
|
8,261,720
|
|
|
|
9,121,022
|
|
|
|
10,359,334
|
|
|
|
11,788,959
|
|
Substandard
loans (1)
|
|
|
274,413
|
|
|
|
295,563
|
|
|
|
338,547
|
|
|
|
271,541
|
|
|
|
345,481
|
|
Substandard
loans as a percentage of total loans
|
|
|
3.19 |
% |
|
|
3.58 |
% |
|
|
3.71 |
% |
|
|
2.62
|
|
|
|
2.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
past due(2)
|
|
|
182,658
|
|
|
|
184,452
|
|
|
|
138,692
|
|
|
|
108,799
|
|
|
|
92,559
|
|
To
the extent secured(3)
|
|
|
68,820
|
|
|
|
63,082
|
|
|
|
45,254
|
|
|
|
44,664
|
|
|
|
43,694
|
|
To
the extent unsecured
|
|
|
113,838
|
|
|
|
121,370
|
|
|
|
93,438
|
|
|
|
64,135
|
|
|
|
48,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
past due as a percentage of total loans
|
|
|
2.12 |
% |
|
|
2.23 |
% |
|
|
1.52 |
% |
|
|
1.05 |
% |
|
|
0.79 |
% |
To
the extent secured(3)
|
|
|
0.80 |
% |
|
|
0.76 |
% |
|
|
0.50 |
% |
|
|
0.43 |
% |
|
|
0.37 |
% |
To
the extent unsecured
|
|
|
1.32 |
% |
|
|
1.47 |
% |
|
|
1.02 |
% |
|
|
0.62 |
% |
|
|
0.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
loss allowances as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
2.13 |
% |
|
|
2.21 |
% |
|
|
2.01 |
% |
|
|
1.46 |
% |
|
|
1.48 |
% |
Total
loans excluding contingent loans
|
|
|
2.31 |
% |
|
|
2.48 |
% |
|
|
2.24 |
% |
|
|
1.60 |
% |
|
|
1.62 |
% |
Total
amounts past due
|
|
|
100.48 |
% |
|
|
98.90 |
% |
|
|
132.21 |
% |
|
|
138.79 |
% |
|
|
188.06 |
% |
Total
amounts past due-unsecured
|
|
|
161.23 |
% |
|
|
150.31 |
% |
|
|
196.24 |
% |
|
|
235.44 |
% |
|
|
356.21 |
% |
(1)
|
Substandard
loans in the old rating system included all loans rated B- or worse.
In
the new loan rating system, substandard loans include all consumer
and
mortgage loans rated B- or worse and all commercial loans rated C2
or
worse. Therefore, the December 31, 2002 and 2003 numbers are not
entirely
comparable to the numbers at the year-end of 2004, 2005 and
2006.
|
(2)
|
Represents
only the past due amounts. In accordance with Chilean
regulations, past due loans are those that are overdue for 90 days or
more as to any payments of principal or
interest.
|
(3)
|
Security
generally consists of mortgages on real estate, pledges of marketable
securities, letters of credit or
cash.
|
Analysis
of Loan Loss Allowances
The
following table analyzes our loan loss allowances and changes in the allowances
attributable to write-offs, provisions, allowances released, allowances on
loans
acquired and the effect of price-level restatement on loan loss allowances.
Chilean GAAP requires that the loan loss allowance be debited the full amount
of
all charge-offs (irrespective of whether the charged-off loan was fully
provisioned) and simultaneously credited the same amount through the taking
of a
new provision. The net effect of these two entries, which are included in the
table below under “charge-offs” and “allowances established,” respectively, is
to leave the loan loss allowance unchanged following the charge-off of a loan.
Subsequently, at the end of each calendar month, loan loss allowances are
released to the extent not needed. Such releases, which are included in the
table below under “allowances released,” therefore include any amounts relating
to provisions originally made in respect of loans that have been charged
off.
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Loan
loss allowances at beginning of the year
|
|
|
106,478
|
|
|
|
183,537
|
|
|
|
182,426
|
|
|
|
183,366
|
|
|
|
151,000
|
|
Increase
in loan allowance due to the Merger
|
|
|
73,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release
of allowances upon charge-offs (1)
|
|
|
(88,170 |
) |
|
|
(108,690 |
) |
|
|
(126,394 |
) |
|
|
(139,632 |
) |
|
|
(143,475 |
) |
Allowances
established (2)
|
|
|
112,171
|
|
|
|
135,785
|
|
|
|
153,406
|
|
|
|
164,697
|
|
|
|
206,087
|
|
Allowances
released(3)
|
|
|
(15,291 |
) |
|
|
(26,475 |
) |
|
|
(21,280 |
) |
|
|
(51,024 |
) |
|
|
(36,414 |
) |
Price-level
restatement(4)
|
|
|
(5,175 |
) |
|
|
(1,731 |
) |
|
|
(4,792 |
) |
|
|
(6,407 |
) |
|
|
(3,134 |
) |
Loan
loss allowances at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of charge-offs to total loans
|
|
|
1.0 |
% |
|
|
1.3 |
% |
|
|
1.4 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
Loan
loss allowances at end of period as a percentage of total
loans
|
|
|
2.1 |
% |
|
|
2.2 |
% |
|
|
2.0 |
% |
|
|
1.5 |
% |
|
|
1.5 |
% |
(1)
|
Reflects
release of loan loss allowance equal to the entire amount of loans
charged
off, including any portion of such loans with respect to which no
allowance had been established prior to the
charge-off.
|
(2)
|
Includes,
in addition to provisions made in respect of increased risk of loss
during
the period, provisions made to replace allowances released upon charge-off
of loans. See Note (1) to this
table.
|
(3)
|
Represents
the amount of loan loss allowances released during the year as a
consequence of reduction in the level of risk existing in the loan
portfolio, including as a result of improvement in the credit risk
classification of borrowers and the charge-off of
loans.
|
(4)
|
Reflects
the effect of inflation on the allowances for loan losses at the
beginning
of each period, adjusted to constant pesos of December 31,
2006.
|
The
following table shows charge-offs by Santander-Chile by type of
loans:
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Consumer
loans
|
|
|
39,614
|
|
|
|
61,927
|
|
|
|
86,703
|
|
|
|
68,144
|
|
|
|
102,246
|
|
Residential
Mortgage loans
|
|
|
2,541
|
|
|
|
4,869
|
|
|
|
4,149
|
|
|
|
7,314
|
|
|
|
5,789
|
|
Commercial
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows recoveries by Santander-Chile by type of
loans:
|
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Commercial
loans
|
|
|
10,940
|
|
|
|
16,292
|
|
|
|
22,157
|
|
|
|
15,836
|
|
|
|
15,330
|
|
Consumer
loans
|
|
|
15,087
|
|
|
|
18,972
|
|
|
|
26,321
|
|
|
|
28,865
|
|
|
|
29,000
|
|
Residential
mortgage loans
|
|
|
1,416
|
|
|
|
1,503
|
|
|
|
2,294
|
|
|
|
2,378
|
|
|
|
2,737
|
|
Loans
reacquired from the Central Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on
information available regarding our borrowers, we believe that our loan loss
allowances are sufficient to cover known potential losses and losses inherent
in
a loan portfolio of the size and nature of our loan portfolio.
Allocation
of the Loan Loss Allowances
The
following tables set forth, at December 31 of each of the last five years,
the
proportions of our required minimum loan loss allowances that were attributable
to our commercial, consumer and residential mortgage loans, and the amount
of
voluntary allowances (which are not allocated to any particular category) at
each such date.
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
amount as a percentage of loans in
category
|
|
|
Allowance
amount as a percentage of total
loans
|
|
|
Allowance
amount as a percentage of total
allocated allowances(2)
|
|
|
|
|
|
Allowance
amount as a percentage of loans in
category
|
|
|
Allowance
amount as a percentage of total
loans
|
|
|
Allowance
amount as a percentage of total allocated
allowances(2)
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Commercial
loans
|
|
|
115,230
|
|
|
|
1.83% |
|
|
|
1.34% |
|
|
|
73.0% |
|
|
|
116,286
|
|
|
|
1.97% |
|
|
|
1.41% |
|
|
|
66.42% |
|
Consumer
loans
|
|
|
40,240
|
|
|
|
5.11% |
|
|
|
0.47% |
|
|
|
9.2% |
|
|
|
47,621
|
|
|
|
5.56% |
|
|
|
0.57% |
|
|
|
27.21% |
|
Residential
mortgage loans
|
|
|
|
|
|
|
0.68% |
|
|
|
0.12% |
|
|
|
17.8% |
|
|
|
|
|
|
|
0.74% |
|
|
|
0.14% |
|
|
|
6.37% |
|
Total
allocated allowances
|
|
|
165,966
|
|
|
|
1.93% |
|
|
|
1.93% |
|
|
|
100.0% |
|
|
|
175,066
|
|
|
|
2.12% |
|
|
|
2.12% |
|
|
|
100.0% |
|
Leasing
|
|
|
3,707
|
|
|
|
0.05% |
|
|
|
0.04% |
|
|
|
|
|
|
|
6,973
|
|
|
|
0.08% |
|
|
|
0.08% |
|
|
|
|
|
Voluntary
allowances
|
|
|
|
|
|
|
0.15% |
|
|
|
0.16% |
|
|
|
|
|
|
|
|
|
|
|
0.01% |
|
|
|
0.01% |
|
|
|
|
|
Total
allowances
|
|
|
|
|
|
|
2.13% |
|
|
|
2.13% |
|
|
|
|
|
|
|
|
|
|
|
2.21% |
|
|
|
2.21% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
amount as a
percentage
of
loans
in
category
|
|
|
Allowance
amount
as
a
percentage of
total
loans
|
|
|
Allowance
amount
as a
percentage
of
total
allocated
allowances(2)
|
|
|
|
|
|
Allowance
amount
as
a
percentage
of
loans
in
category
|
|
|
Allowance
amount
as a
percentage
of
total
loans
|
|
|
Allowance
amount
as a
percentage
of
total
allocated
allowances(2)
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Commercial
loans
|
|
|
109,167
|
|
|
|
1.80% |
|
|
|
1.20% |
|
|
|
62.73% |
|
|
|
71,134
|
|
|
|
1.08% |
|
|
|
0.69% |
|
|
|
49.73% |
|
Consumer
loans
|
|
|
54,761
|
|
|
|
4.75% |
|
|
|
0.60% |
|
|
|
31.47% |
|
|
|
64,060
|
|
|
|
4.46% |
|
|
|
0.62% |
|
|
|
44.78% |
|
Residential
mortgage loans
|
|
|
|
|
|
|
0.53% |
|
|
|
0.11% |
|
|
|
5.80% |
|
|
|
|
|
|
|
0.33% |
|
|
|
0.07% |
|
|
|
5.49% |
|
Total
allocated allowances
|
|
|
174,030
|
|
|
|
1.91% |
|
|
|
1.91% |
|
|
|
100.0% |
|
|
|
143,041
|
|
|
|
1.38% |
|
|
|
1.38% |
|
|
|
100.0% |
|
Leasing
|
|
|
9,336
|
|
|
|
0.10% |
|
|
|
0.10% |
|
|
|
|
|
|
|
7,959
|
|
|
|
0.08% |
|
|
|
0.08% |
|
|
|
|
|
Voluntary
allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allowances
|
|
|
|
|
|
|
2.01% |
|
|
|
2.01% |
|
|
|
|
|
|
|
|
|
|
|
1.46% |
|
|
|
1.46% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
amount
as
a
percentage
of
loans
in
category
|
|
|
Allowance
amount
as a
percentage
of
total
loans
|
|
|
Allowance
amount
as
a
percentage
of
total
allocated
allowances(2)
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Commercial
loans
|
|
|
62,541
|
|
|
|
0.88
|
|
|
|
0.53% |
|
|
|
37.32% |
|
Consumer
loans
|
|
|
98,253
|
|
|
|
5.40
|
|
|
|
0.83% |
|
|
|
58.63% |
|
Residential
mortgage loans
|
|
|
|
|
|
|
0.24% |
|
|
|
0.06% |
|
|
|
4.05% |
|
Total
allocated allowances
|
|
|
167,583
|
|
|
|
1.42% |
|
|
|
1.42% |
|
|
|
100.0% |
|
Leasing
|
|
|
6,481
|
|
|
|
0.06% |
|
|
|
0.06% |
|
|
|
|
|
Voluntary
allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allowances
|
|
|
|
|
|
|
1.48% |
|
|
|
1.48% |
|
|
|
|
|
(1)
|
In
millions of constant Chilean pesos as of December 31,
2006.
|
(2)
|
Based
on our loan classification, as required by the Superintendency of
Banks
for the purpose of determining the loan loss
allowance.
|
E.
Research and Development, Patents and Licenses, etc.
We
do not
currently conduct any significant research and development
activities.
F.
Trend Information
As
of the
date of filing this Annual Report, we are unaware of any trend, uncertainty,
demands, commitments or events that would have a material effect on the
company’s net revenues, profitability, liquidity or capital resources that has
not been discussed above or that would cause reported financial information
to
not necessarily be indicative of future operating results or financial
conditions. For the three month period ended March 31, 2007, our net
income totaled Ch$72,189 million, an increase of 9.1% in real terms compared
to
the same period in 2006. Net interest income increased by 20.6% and
fee income increased by 14.6% compared to the same period in
2006. Provision expense rose by 38.9% for the three month period
ended March 31, 2007 compared to the same period in 2006. Operating
expenses increased by 7.5% compared to the same period in 2006. The
efficiency ratio reached 37.9% at March 31, 2007 compared to 38.3% at March
31,
2006.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Directors
We
are
managed by our Board of Directors, which, in accordance with our by-laws,
consists of 11 directors and two alternates who are elected at annual ordinary
shareholders’ meetings. The current members of the board of directors were
elected by the shareholders in the ordinary shareholders’ meeting held on April
19, 2005. Members of the board of directors are elected for three-year terms.
The term of each of the current board members expires on April of 2008.
Cumulative voting is permitted for the election of directors. The board of
directors may appoint replacements to fill any vacancies that occur during
periods between elections. If any member of the board of directors resigns
before his or her term has ended, and no other alternate director is available
to take the position at the next annual ordinary shareholders’ meeting, a new
replacing member will be elected. In January 2006, Juan Colombo resigned and
on
April 25, 2006 Claudia Bobadilla was elected by shareholders to the Board.
On
April 24, 2007, Juan Manuel Hoyos Martínez de Irujo was elected to the Board,
replacing Juan Andrés Fontaine who resigned in March 2007. Our executive
officers are appointed by the Board of Directors and hold office at its
discretion. Scheduled meetings of the board of directors are held monthly.
Extraordinary meetings can be held when called in one of three ways: by the
Chairman of the board of directors, by three directors with the consent of
the
Chairman of the board of directors or by the majority of directors. None of
the
members of our Board of Directors has a service contract which entitles any
Director to any benefits upon termination of employment with
Santander-Chile.
Our
current directors are as follows:
|
|
|
|
|
|
|
Mauricio
Larraín Garcés
|
|
Chairman
and Director
|
|
Asset
and Liability Committee
Executive
Credit Committee
Marketing
and Communications Committee
|
|
April
2008
|
Marcial
Portela Alvarez
|
|
First
Vice Chairman and Director
|
|
—
|
|
April
2008
|
Benigno
Rodríguez Rodríguez
|
|
Second
Vice Chairman and Director
|
|
Audit
Committee
|
|
April
2008
|
Víctor
Arbulú Crousillat
|
|
Director
|
|
Audit
Committee
|
|
April
2008
|
Marco
Colodro Hadjes
|
|
Director
|
|
Executive
Credit Committee
|
|
April
2008
|
Lucía
Santa Cruz Sutil
|
|
Director
|
|
—
|
|
April
2008
|
Juan
Manuel Hoyos Martínez de Irujo
|
|
Director
|
|
—
|
|
April
2008
|
|
|
|
|
|
|
|
Juan
Andrés Fontaine Talavera(1)
|
|
Director
|
|
Asset
and Liability Committee
|
|
March
2007
|
Roberto
Méndez Torres
|
|
Director
|
|
Executive
Credit Committee
Marketing
and Communications Committee
|
|
April
2008
|
Carlos
Olivos Marchant
|
|
Director
|
|
Audit
Committee
Executive
Credit Committee
|
|
April
2008
|
Roberto
Zahler Mayanz
|
|
Director
|
|
Asset
and Liability Committee
|
|
April
2008
|
Claudia
Bobadilla Ferrer
|
|
Director
|
|
—
|
|
April
2008
|
Raimundo
Monge Zegers
|
|
Alternate
Director
|
|
—
|
|
April
2008
|
Jesús
Zabalza Lotina
|
|
Alternate
Director
|
|
—
|
|
April
2008
|
|
(1)
Resigned in March 2007.
|
Mauricio
Larraín Garcés is our Chairman. He is a member of the Asset and Liability
Committee, the Executive Credit Committee and the Marketing and Communication
Committee. He is the former Executive Vice Chairman of the Board of Directors
of
Old Santander-Chile. He is also director of Santander Chile Holding S.A. and
Universia Chile S.A. He is a director of the Asociación de Bancos e
Instituciones Financieras de Chile. Mr. Larraín began working at
Santander-Chile in 1989. Previous to that he was Intendente of the
Superintendency of Banks, Manager of External Debt at the Banco Central de
Chile
and a Senior Finance Specialist at the World Bank in Washington. He holds
degrees in Economics (Candidate) and in Law from Universidad Católica de Chile
and from Harvard University.
Marcial
Portela Alvarez became a Director on May 6, 1999 and Vice Chairman of the
Board on May 18, 1999. He currently oversees all of Banco Santander Central
Hispano’s investments in Latin America and was the Director of Administration
(Medios) at Banco Santander from November 1998 until the formation of
Banco Santander Central Hispano. In the past, he was the CEO of Telefónica
Internacional, Vice Chairman of Telefonica España and the Managing Director of
Banco Argentaria and also worked at several other banks, including Banco
Exterior, Caja Postal, Banco Hipotecario and BBV. Mr. Portela is also a member
of the Advisory Council of the University of Chicago and a professor at
Universidad Deusto. Mr. Portela holds a degree in Sociology from the University
of Lovaina and a Political Science degree from the Universidad de
Madrid.
Benigno
Rodríguez Rodríguez became a Director on March 19, 1996. He is a member of
the Audit Committee. He served as Vice Chairman of the Board of Santiago from
April 17, 2002 through the date the merger was consummated. Before that he
served as Santiago’s Director of Management Information Systems. He is a
director of Santander Chile Holding S.A., Aurum S.A., Altec Chile, Teatinos
Siglo XXI, Santander Holding Perú and Segovía XXI España. Mr. Rodriguez holds a
degree in Economics from the Universidad Complutense of Madrid.
Víctor
Arbulú Crousillat became a Director on May 6, 1999. He is a member of the
Audit Committee. He is also director of Teatinos Siglo XXI and Aurum S.A. He
was
a Managing Director of JPMorgan, member of its European management committee
and
Chief Executive Officer for Spain and Portugal from 1988 until 1998. He has
worked for JPMorgan for over 25 years in various positions in Europe, North
America and South America. Mr. Arbulu also worked for the Inter-American
Development Bank. Mr. Arbulu holds a degree in Engineering and a Masters of
Business Administration.
Marco
Colodro Hadjes became a Director on April 19, 2005. Mr. Colodro is a member
of the Executive Credit Committee. Mr. Colodro also serves as a
Director of Telefónica Chile and a Director of Codelco. He is a former chairman
of TVN (national television network) and vice chairman of Banco del Estado
(state bank). He was also owner of Agencia de Valores Alfa S.A. Prior to that
he
was Foreign Trade Director at the Central Bank of Chile. Mr. Colodro holds
a
degree in Economics from Universidad de Chile, and a Ph.D. from University
of
Paris.
Lucía
Santa Cruz Sutil became a Director on August 19, 2003. Ms. Santa Cruz holds
a degree in History and a Masters Degree in Philosophy from Oxford University.
She has been a Director of the Political Economy Institute of Universidad Adolfo
Ibañez since 2001. Ms. Santa Cruz is also a director of Universia Chile S.A. She
is also on the Board of Compañía de Seguros Generales y de Vida La Chilena
Consolidada and Fundación Minera Escondida. She
is
also on
the Advisory Board of Nestle Chile and the Fundación Educacional Santa Teresa de
Avila. She is also a member of the Self-Regulation Committee for Insurance
Companies in Chile.
Juan
Manuel Hoyos Martínez de Irujo was the Managing Director of McKinsey &
Company in Spain between 1997 and 2004. He was also President of the Client
Committee of this company’s Board. Currently, he is in charge of partner
development worldwide and is still part of the Board of the firm. His
consulting career has been focused in the areas of strategy and organization
of
corporations, especially in the telecommunications, banking and metallurgy
sectors. He has worked with companies in Spain, USA, Latin America, United
Kingdom, Portugal and Africa. He is an Economist from the Universidad
Complutense de Madrid and he has an MBA in Finance and Accounting from Columbia
University. He began his career in 1978 at Mckinsey, he was named partner in
1984 and Director in 1991.
Juan
Andrés Fontaine Talavera became a Director on February 26, 1998 and
resigned as Director in March 2007. He was a member of the Asset and
Liability Committee. He is a senior partner at Juan Andrés Fontaine y Asociados,
an economic consulting firm in Chile, a board member of several companies and
a
professor at the Catholic University in Chile.
Roberto
Méndez Torres is a former member of the Board of Old Santander-Chile, to
which he was appointed in 1996. He is a member of the Executive Credit Committee
and the Marketing and Communication Committee. He is also Director of AFP
Bansander S.A. and Director of Universia S.A. He is a professor of
Economics at Universidad Católica de Chile. Mr. Mendez also sits on the
Consejo Consultor del Rector de la Universidad Católica de Chile. He
has been Advisor to Grupo Santander-Chile since 1989. Mr. Méndez is President
and Director of Adimark Chile. He graduated with a degree in Business from
Universidad Católica de Chile, and holds an MBA and a Ph.D. from the Graduate
School of Business at Stanford University.
Carlos
Olivos Marchant became a Director on April 15, 1987. He is Chairman of the
Audit Committee and a member of the Executive Credit Committee. He was Chairman
of the Board of Santiago from May, 1999 until the date of the merger. He is
also
a director of Compañia Cervecerías Unidas S.A., Inversiones Rentas S.A. and
Inversiones Tajamar Ltda. Prior to that, he was Vice Chairman of the board
since
March 31, 1998. He is a partner in the law firm Guerrero, Olivos, Novoa y
Errazuriz. From 1981 to 1983, Mr. Olivos served as General Counsel of the
Central Bank of Chile, and from 1984 to 1986 he served as Chairman of the board
of directors of Banco Osorno. Mr. Olivos holds a law degree from the Universidad
de Chile and a Masters of Jurisprudence from New York University School of
Law.
Roberto
Zahler Mayanz became a Director on August 31, 1999. He is a member of the
Asset and Liability Committee. Currently, he is President of Zahler & Co, a
consulting firm. He is also director of Air Liquide-Chile and member of the
CLAAF or the Latin American Committee for Financial Affairs. He was also
President of the Board of Siemens Chile and the Advisory Board of Deutsche
Bank
Americas Bond Fund. He was also a visiting professor at the IMF’s Research
Department and a member of the Quota Formula Review Committee of the
International Monetary Fund. Between 1991 and 1996 he was President of the
Central Bank of Chile and Vice-President from 1989-1991. He also serves as
a
consultant for the World Bank, the IDB, the IMF and the International Bank
of
Settlements. Mr. Zahler has also provided technical assistance to various
Central Banks and Finance Ministries in most countries of Latin America,
Indonesia, Kosovo and Thailand. Mr. Zahler holds a degree in Business
Administration from the Universidad de Chile and a Masters in Economics from
the
University of Chicago.
Claudia
Bobadilla Ferrer was elected to the Board in April 2006. She is CEO of
Fundación País Digital, a member of the Executive Committee of Innovation and
Technology of ICARE, council member of Endeavor Chile and Executive Director
of
the Chile-Japón Siglo XXI Committee. She was also founder and President of
Comunidad Mujer, an organization dedicated to increasing women’s participation
in the workforce. She was previously Director of Legal Affairs at Terra Networks
Chile S.A. Between 2003 and 2005 she was an external consultant to companies
in
matters regarding work and family and was a manager of an alliance between
the
private sector and the Ministry of Education regarding quality certification
of
nursery schools and day care centers. She is a lawyer from the Universidad
Diego
Portales.
Raimundo
Monge Zegers became an Alternate Director on April 29, 2003. He is
Corporate Director of Strategic Planning for Grupo Santander-Chile and is CEO
of
Santander-Chile Holding S.A. and Santander Inversiones Ltda. He is also
President of Santander S.A. Sociedad Securitizadora and Santander Factoring
S.A.
He is a director of Santander Multimedios S.A., Soince S.A., AFP Bansander
S.A.,
Santiago Leasing S.A., Teatinos Siglo XXI S.A. and Bansa Santander S.A.. Mr.
Monge has a degree in business from the Universidad Católica de Chile and a MBA
from the University of California, Los Angeles.
Jesús
Zabalza Lotina became a Director on April 19, 2005. He has worked for 22
years in the Spanish financial systems, and served as CEO in Banco Viscaya,
Banco Hipotecario, Caja Postal and La Caixa. He as also served as director
in
several affiliate companies on La Caixa and Telefónica in Spain. He is Managing
Director of America’s División of Santander Group for retail banking, and vice
president of the Spanish Association of Finance Executives (AEEF). He also
serves as Director of Banco Santander Bancorp in Puerto Rico. Mr. Zabalza holds
a degree in Industrial Engineering from the University of Bilbao.
Senior
Management
Our
senior
managers are as follows:
|
|
|
|
|
Oscar
von Chrismar
|
|
Chief
Executive Officer
|
|
August
1, 2003
|
José
Alberto García Matanza
|
|
Corporate
Director of Credit Risk
|
|
January
1, 2005
|
Guillermo
Sabater
|
|
Corporate
Financial Controller
|
|
July
1, 2006
|
Ramón
Sanchez
|
|
Corporate
Director of Internal Audit
|
|
January
1, 2004
|
José
Manuel Manzano
|
|
Corporate
Director of Human Resources
|
|
October
31, 2002
|
Andres
Roccatagliata
|
|
Manager,
Retail Banking
|
|
October
31, 2002
|
Fernando
Massú
|
|
Manager,
Global Banking
|
|
October
6, 2005
|
Alejandro
Cuevas
|
|
Manager,
Banefe Consumer Division
|
|
July
18, 2002
|
Andrés
Heusser
|
|
Manager,
Middle-market Banking
|
|
October
1, 2004
|
Roberto
Jara
|
|
Chief
Accounting Officer
|
|
July
18, 2002
|
Juan
Fernández
|
|
Manager,
Administration and Operations
|
|
July
18, 2002
|
Gonzalo
Romero
|
|
General
Counsel
|
|
July
18, 2002
|
Oscar
von Chrismar C. became the CEO of Santander-Chile in August 2003 after
being Manager of Global Banking following the merger. Prior to that he was
the
former CEO of Old-Santander Chile since September 1997, after being General
Manager of Banco Santander-Peru since September 1995. Mr. von Chrismar is also
President of Santander S.A. Agente de Valores and a director of Santiago Leasing
S.A. Prior to that, Mr. von Chrismar was the manager of the Finance Division
of
Santander-Chile, a position he had held since joining Santander-Chile in 1990.
Mr. von Chrismar holds an Engineering degree from the Universidad de Santiago
de
Chile.
José
Alberto García Matanza became Director of the Risk Division in January
2005. Mr. García has served in various senior positions Banco Santander Central
Hispano since 1990 in Spain, Colombia and Argentina. Mr. García holds a degree
in Economics from the University of Cantabria, Spain.
Guillermo
Sabater is the Corporate Financial Controller of Santander-Chile, and is in
charge of the Accounting and Financial Control Departments. He has held this
position since July 2006. Previously, Mr. Sabater was responsible for Risk
and
Management Control at Santander Consumer (the European Consumer Finance Division
of Santander Group) at the Madrid headquarters and Internal Audit Manager of
the
Group. Mr. Sabater has an Economics and Business Administration degree from
C.U.N.E.F. (Universidad Complutense of Madrid).
Ramón
Sánchez is the Corporate Director of Internal Auditing, a position he has
held since January 2004. Previously, Mr. Sánchez was Director of Internal
Auditing in Banco Santander in Puerto Rico. Mr. Sánchez has served in various
positions in Banco Santander Central Hispano since 1995, including Senior Vice
President of auditing in Madrid. Mr. Sánchez holds a law degree from the
Universidad of Salamanca.
José
Manuel Manzano was appointed Corporate Director of Human Resources for
Santander-Chile on October 31, 2002. Previously he served as Manager of Human
Resources for Old Santander-Chile since 1999. Prior to that he was General
Manager of Santander Fund Management and Managing Director of Bancassurance.
He
is also a Director of Santander Chile Holding. Mr. Manzano holds an MBA and
a
degree in Business from Universidad Católica de Chile.
Andrés
Roccatagliata is our Retail Banking Manager. He is the former manager of
Old Santander-Chile’s Retail Division, a position he held from 1999 until August
2002, when the merger with Santiago was consummated. Mr. Roccatagliata is also
a
director of Santander Santiago S.A. Administradora de Fondos Mutuos, Altavida
Santander Seguros de Vida S.A. and Redbank S.A. Prior to that he served as
Manager of Distribution of Old Santander-Chile in June 1997 and was responsible
for the branch network of Old Santander-Chile. From 1993 to 1997, Mr.
Roccatagliata was the Commercial Manager of Banefe. Before that, he was a
Regional and Branch Manager from 1987 to 1990. Mr. Roccatagliata holds a degree
in business from the Universidad de Santiago and an MBA from the Universidad
Adolfo Ibáñez.
Fernando
Massú Taré is the Manager of Global Banking that includes wholesale banking
and treasury services. He is the former manager of the Treasury and Finance
Division of Old-Santander Chile, a position he held since May 1995. Mr. Massú is
also a director of Santander Santiago S.A. Administradora de Fondos Mutuos
and
Sociedad Interbancaria de Depósito de Valores S.A. From September 1992 until May
1995 he was Treasurer at Banco de Comercio e Industria, a Portuguese affiliate
of Banco Santander Central Hispano, S.A., and prior to that he was a
Vice-President at Citibank, Chile. Mr. Massú, a graduate of Universidad Técnica
Federico Santa María, holds a degree in Business Administration.
Alejandro
Cuevas became Manager of the Banefe Division of Santander-Chile in January
2000. Mr. Cuevas is also a director of Altavida Santander Seguros de Vida S.A.
and Transbank S.A. Prior to that he was the Commercial Manager of Banefe between
May 1997 and December 1999 and Marketing Manager of Banefe from March 1995
to
May 1997. Mr. Cuevas has a business degree from Universidad de
Chile.
Andrés
Heusser is our Middle Banking Manager. He has held the same position in the
Old Santander-Chile since 1990, when he joined the Santander Group. Mr. Heusser
is also a director of Santiago Leasing S.A. and Santander Factoring S.A. Mr.
Heusser holds a degree in business from the Universidad de Santiago and an
MBA
from the Universidad Adolfo Ibáñez.
Roberto
Jara is our Chief Accounting Officer. He is the former Chief Accounting
Officer at Old Santander-Chile, a position he held from March 1998 until August
2002, when the merger with Santiago was consummated. He joined Old
Santander-Chile in 1978 and held several positions there, such as Sub-Manager
of
Budget and Costs and Chief of IT Projects. Mr. Jara is a CPA and holds a degree
in Tax Management from Universidad Adolfo Ibañez.
Juan
Fernández is our manager of Administration and Operations. He is the former
Manager of Administration and Cost Control of Old Santander-Chile, a position
he
held from April 1999 until August 2002, when the merger with Santiago was
consummated. Mr. Fernández is also Director of Santander Chile Holding S.A.,
Santander S.A. Sociedad Securitizadora, Santander Factoring S.A., Altec S.A.,
Bansa Santander S.A., Multinegocios S.A. and Procura Digital Chile S.A.
Previously Mr. Fernández served as Manager for Accounting and Administration of
Old Santander-Chile since January 1993. Prior to that, Mr.
Fernández held positions at Banchile Agencia de Valores y
Subsidiarias, and at JPMorgan in Santiago and Madrid.
Gonzalo
Romero is our General Counsel, a position he has held since July 18, 2002.
He is also a director of Santander Santiago S.A. Sociedad Securitizadora. Mr.
Romero, a lawyer, joined Old Santander-Chile in February 1997 as General
Counsel. He was the General Manager of Banco Concepción from 1991 to
1996 and the General Counsel of Banco Concepción from 1986 to 1990. He has a
Degree in Law from the Universidad de Chile.
B. Compensation
For
the
year ended December 31, 2006, the aggregate amount of compensation paid by
us to
all of our directors was Ch$489,3 million, including attendance fees and monthly
stipends. For the year ended December 31, 2006, the
aggregate
amount of compensation paid by us to all of our executive officers and our
management members was Ch$28,307 million (US$52.9 million). At our annual
shareholder meeting held on April 25, 2007, shareholders approved a monthly
stipend per director of UF 209 (US$7,171). This amount will be increased by
UF
25 per month (US$858) if a Board member is named to one or more committees
of
the Board. In addition, we pay certain directors professional service
fees for the consulting services they rendered to us in their fields of
expertise. For the year ended December 31, 2006, payments to our directors
for
consulting fees totaled Ch$410 million (US$767,000).
We
do not
pay any contingent or deferred compensation and there is no stock option or
profit-sharing plan for our administrative, supervisory or management personal.
Furthermore, nothing was set aside or accrued by us to provide pension,
retirement or similar benefits for our directors and executive
officers.
We
pay
bonuses to our administrative, supervisory and management personnel based on
pre-defined goals (mainly commercial but also including items such as customer
satisfaction) and our overall performance in the year. These bonuses are
provisioned for monthly, according to the degree of accomplishment of our
budget. We also give bonuses throughout the year to commercial teams for
performance in other commercial contests. None of the members of our Board
of
Directors has a service contract which would entitle any director to any
benefits upon termination of employment with Santander-Chile. Santander-Chile
currently does not have any profit-sharing arrangements with its employees.
There is no system for the granting of options or securities of Santander
- Chile to employees. In January 2007, the management of Banco Santander
Central Hispano announced an intention to grant each active employee working
for
Banco Santander Central Hispano or an entity controlled by Banco Santander
Central Hispano as of June 2007 a one-time gift of 100 shares in Banco Santander
Central Hispano to celebrate its 150th
anniversary.
C. Board
Practices
Summary
Comparison of Corporate Governance Standards and New York Stock Exchange Listed
Company Standards
As
a
“Foreign Private Issuer” under the United States Securities Exchange Act of 1934
that is listed on the New York Stock Exchange (“NYSE”), we are required to
provide a brief general summary of the significant ways in which our corporate
governance standards, which are dictated by Chilean corporate law, differ from
those followed by U.S. companies under NYSE listing standards.
Please
note that because more than 50% of our voting power is held by another company,
Banco Santander Central Hispano, S.A., we would be permitted to elect certain
exemptions under NYSE corporate governance standards. Specifically, as a U.S.
company, we could elect to be exempted from the requirements (i) that we have
a
majority of independent directors (as defined by the NYSE), (ii) that we have
a
nominating/ corporate governance committee meeting certain conditions, and
(iii)
that we have a compensation committee meeting certain requirements. Because
we
would not be required to follow these standards if we were a U.S. company,
we do
not discuss the differences, if any, between these provisions and our own
corporate governance procedures in the table below.
The
table
below summarizes the significant differences between our corporate governance
standards and those required by the NYSE for listed U.S. companies.
NYSE
Listed Company Requirement
|
|
Santander-Chile
Corporate Governance Standard
|
Non-management
directors must meet at regularly scheduled executive sessions without
management.
|
|
Under
Chilean law, a company’s executive officers may not serve as such
company’s directors. As a result, our board consists entirely of
“non-management” directors, making separate meetings
unnecessary.
|
|
|
|
Shareholders
must be given the opportunity to vote on all equity-compensation
plans and
material revisions thereto.
|
|
Shareholders’
vote is not required for any equity-compensation plans other than
those
for the directors. Our compensation policies currently do not provide
for
equity compensation, therefore do not trigger shareholders’
vote.
|
Listed
companies must adopt and disclose corporate governance
guidelines.
|
|
We
follow the corporate governance guidelines established under Chilean
laws,
a summary of which is included in this 20-F.
|
|
|
|
Listed
companies must adopt and disclose a code of business conduct and
ethics
for directors and employees, and promptly disclose any waivers of
the code
for directors or executive officers.
|
|
We
have a code of business ethics and conduct which must be signed by
all
employees and are included as exhibits to this
20-F.
|
Summary
of Corporate Governance Standards
Santander-Chile
has adopted diverse measures to promote good corporate governance. Among the
measures adopted are:
|
·
|
Board
of Directors mainly composed of professionals not related to Banco
Santander Central Hispano, our parent
company.
|
|
·
|
Active
participation of directors in main committees of the
Bank.
|
|
·
|
All
personnel must subscribe to a code of ethics and good conduct. Those
who
interact directly with the capital markets must also subscribe to
an
additional code of conduct.
|
|
·
|
Segregation
of functions in order to assure adequate management of risks.
Commercial functions separated from back office functions. Risk
management functions independent of commercial functions. Main credit
decisions taken in committees.
|
|
·
|
Internal
Auditing functions clearly independent from the administrative
functions.
|
|
·
|
The
Bank also has an Internal Compliance Division that oversees the
fulfillment of the Bank’s codes of
conduct.
|
Santander-Chile
has a commitment to transparency. This includes:
|
·
|
Equal
treatment for all shareholders. One share = one
vote.
|
|
·
|
Monthly
publication of the Bank’s results by the Superintendency of
Banks.
|
|
·
|
Quarterly
report of a detailed analysis of Bank results published by us about
30
days after the close of each interim quarter and 40 days after close
of
the full year.
|
|
·
|
Quarterly
conference call open to the public.
|
|
·
|
All
information relevant to the public available immediately on the web
page
www.santandersantiago.cl.
|
|
·
|
Ample
and periodic coverage of Bank by international and local stock
analysts.
|
|
·
|
The
Bank has five credit risk ratings by five independent rating agencies,
local and international.
|
Audit
Committee
|
|
|
Carlos
Olivos
|
|
Chairman
|
Benigno
Rodríquez. R.
|
|
Vice
Chairman
|
Víctor
Arbulú. C.
|
|
Member
|
The
Audit
Committee (Comité de Directores y Auditoría) is comprised of three
members of the board of directors. The General Secretary is the
Committee Secretary. The Chief Executive Officer, General Auditor and
other persons from the Bank can be invited to the meetings if necessary and
presents on specific matters. This Committee’s primary responsibility is to
support the board of directors in the continuous improvement of our system
of
internal controls, which includes reviewing the work of both the external
auditors and the Internal Audit Department. The committee is also responsible
for analyzing observations made by regulatory entities of the Chilean financial
system about us and for recommending measures to be taken by our management
in
response. This committee also performs functions of a remuneration committee
as
established in Chilean Law, and reviews annually the salary and bonus programs
for the executive officers of the Bank. The external auditors are
recommended by this committee to our board of directors and appointed by our
shareholders at the annual shareholders’ meeting.
Additionally,
this committee is responsible for:
|
·
|
Presenting
to the board of directors a list of candidates for the selection
of an
external auditor.
|
|
·
|
Presenting
to the board or directors a list of candidates for the selection
of rating
agencies.
|
|
·
|
Overseeing
and analyzing the results of the external audit and the internal
reviews.
|
|
·
|
Coordinating
the activities of internal auditing with the external auditors’
review.
|
|
·
|
Analyzing
the interim and year-end financial statements and reporting the results
to
the board of directors.
|
|
·
|
Analyzing
the external auditors’ reports and their content, procedures and
scope.
|
|
·
|
Analyzing
the rating agencies’ reports and their content, procedures and
scope.
|
|
·
|
Obtaining
information regard the effectiveness and reliability of the internal
control systems and procedures.
|
|
·
|
Analyzing
the information systems performance, its sufficiency, reliability
and use
in connection with decision-making
processes.
|
|
·
|
Obtaining
information regarding compliance with the company’s policies regarding the
due observance of laws, regulations and internal rules to which the
company is subject.
|
|
·
|
Obtaining
information and resolve conflict of interest matters and investigating
suspicious and fraudulent
activities.
|
|
·
|
Analyzing
the reports of the inspection visits, instructions and presentations
of
the Superintendency of Banks.
|
|
·
|
Obtaining
information, analyzing and verifying the company’s compliance with the
annual audit program prepared by the Internal Audit
Department.
|
|
·
|
Informing
the board of directors of accounting changes and their
effects.
|
|
·
|
Examining
on an annual basis the compensation plans of high level executives
and
managers.
|
Asset
and Liability Committee
|
|
|
Mauricio
Larraín
|
|
Chairman
|
Roberto
Zahler
|
|
Member
|
Juan
Andrés Fontaine
|
|
Member
|
The
Comité de Activos y Pasivos or the Asset and Liability Committee (the
“ALCO”), following guidelines set by the Board of Directors, Santander
Central
Hispano’s Global Risk Department, is responsible for establishing
Santander-Chile’s policies, procedures and limits with respect to market risks
and monitoring the overall performance in light of the risks assumed. The ALCO
constantly monitors whether these policies are fulfilled. Santander-Chile’s
Market Risk and Control Department and the Finance Division carry out the
day-to-day risk management of the trading and non-trading activities of
Santander-Chile.
The
composition of the Asset and Liabilities Committee includes the Chairman of
the Board, two additional members of the Board, the Chief Executive Officer,
the
Manager of the Finance Division, the Manager of Market Risk, the Financial
Controller and other senior members of management. Senior members of
Santander-Chile’s Finance Division meet monthly on a formal basis with the Asset
and Liabilities Management Committee and outside consultants.
Executive
Credit Committee
|
|
|
Mauricio
Larraín
|
|
Chairman
|
Carlos
Olivos
|
|
Member
|
Roberto
Méndez
|
|
Member
|
Marco
Colodro
|
|
Member
|
The
Executive Credit Committee is comprised of the Chairman of the Board, three
additional Board members, the Corporate Legal Counsel, the CEO, the Manager
of
Global Banking, the Corporate Director of Risk, the Manager of Corporate
Banking, the Manager of Middle Market and two senior members of the Credit
Risk
department that present the loans being reviewed for approval. This committee
confirms the loan positions reviewed by the Senior Credit Committee, with
approval rights up to the maximum exposure permitted by the General Banking
Law.
Marketing
and Communications Committee
|
|
|
Mauricio
Larraín
|
|
Chairman
|
Roberto
Méndez
|
|
Member
|
The
Marketing and Communications Committee is comprised of the Chairman of the
Board
and an additional Board member, the CEO, the Manager of Retail Banking, the
Manager of Banefe, the Manager of Human Resources, the Manager of Corporate
Communications, the Manager of Marketing and other senior managers of the Bank.
This committee reviews and confirms all matters related to products, corporate
image and communications.
D. Employees
As
of
December 31, 2006, on a consolidated basis, we had 8,184 employees, 7,839 of
whom were bank employees and 345 of whom were employees of our subsidiaries.
With respect to the average number of employees for the Bank only, during the
year ended December 31, 2005 and 2006 we had an average of 7,192 and 7,607
employees, respectively. We have traditionally enjoyed good relations with
our
employees and their unions. Of the total headcount, 3,510 or 42,9% were
unionized. In 2003, we signed a collective bargaining agreement with the Bank’s
main unions. In November 2006, we concluded advance negotiations of a new
collective bargaining agreement to replace the 2003 agreement. The new
collective bargaining agreement became effective on March 1,2007 and will expire
on March 1, 2011. The primary terms of the new collective bargaining agreement
include improved employee benefits relating to scholarships, sick days and
insurance coverage for employees and a 5% increase in salaries as of May 2007
for employees with gross monthly incomes below Ch$800,000 (US$1,500).
Furthermore, we agreed to award an end-of-negotiation bonus based on the level
of salaries, and non-executive employees will receive an additional special
bonus based on each employee’s years of service at the Bank. The payment of
these bonuses represents a total cost of US$20 million. We generally apply
the
terms of our collective
bargaining
agreement to unionized and nonunionized employees. The following chart
summarizes the number of employees employed by the bank.
|
|
|
Executives
|
|
365
|
Professionals
|
|
3,970
|
Administrative
|
|
|
Total
|
|
|
E.
Share Ownership
As
of
December 31, 2006, the following directors and executives held shares in
Santander-Chile:
|
|
|
Mauricio
Larraín G
|
|
568
|
Juan
Andrés Fontaine T
|
|
561,954 (1)
|
Juan
Fernández F
|
|
35,536
|
(1)
|
Resigned
as Director in March 2007.
|
No
director or executive officer owns more than 1% of the shares of
Santander-Chile.
Santander-Chile
currently does not have any arrangements for involving employees in its capital
and there is no systematic arrangement for grant of options or shares or
securities to them. However, our parent company, Banco Santander
Central Hispano, has announced that it will be granting to each
employee working for an entity within the Banco Santander Central
Hispano group 100 shares in Banco Santander Central Hispano in 2007. See
"—B.
Compensation" above.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major
Shareholders
As
of
December 31, 2006, Santander-Chile’s largest shareholders were the
following:
|
|
|
|
|
|
|
Teatinos
Siglo XXI S.A.
|
|
|
78,108,391,607
|
|
|
|
41.45 |
% |
Santander
Chile Holding
|
|
|
66,822,519,695
|
|
|
|
35.46 |
% |
Banco
Santander Central Hispano controls Santander-Chile through its holdings in
Teatinos Siglo XXI and Santander-Chile Holding, which are controlled
subsidiaries of Banco Santander Central Hispano. As of December 31, 2006, Banco
Santander Central Hispano directly or indirectly owned or controlled 99.5%
of
Santander-Chile Holding and directly or indirectly owned or controlled 100%
of
Teatinos Siglo XXI S.A. This gives Banco Santander Central Hispano control
over
76.91% of the shares of the Bank, and an economic participation, when
excluding minority shareholders, of 76.73% at December 31, 2006.
Prior
to
December 11, 2006, Grupo Empresarial Santander, a subsidiary of Banco Santander
Central Hispano, held 7.23% of Santander-Chile’s outstanding capital stock in
the form or ADSs. On December 11, 2006, Grupo Empresarial Santander
sold its entire holding of our shares through a registered public
offering. As a result of this offering, Banco Santander Central
Hispano currently owns, directly or indirectly, 76.91% of our outstanding
capital stock.
Banco
Santander Central Hispano is in a position to cause the election of a majority
of the members of Santander-Chile’s Board of Directors, to determine its
dividend and other policies and to determine substantially all matters to be
decided by a vote of shareholders. Banco Santander Central Hispano
holds ordinary shares to which no
special
voting rights are attached. Each share represents one vote and there are no
shareholders with different voting rights.
The
number
of outstanding shares of Santander-Chile (of which there is only one class,
being ordinary shares) at December 31, 2006 was 188,446,126,794 shares, without
par value. Santander-Chile’s shares are listed for trading on the Chilean Stock
Exchanges and on the New York Stock Exchange in the form of ADRs. The market
capitalization of Santander-Chile at the same date was Ch$4,673,463 million
(US$8,745 million), representing 188,446,126,794 shares of common stock. At
December 31, 2006, Santander-Chile had 13,909 holders registered in Chile,
including the Bank of New York, as depositary (the “Depositary”) of
Santander-Chile’s American Depositary Share Program. As of December 31, 2006,
there were a total of 8 ADR holders on record. Since some of these ADRs are
held
by nominees, the number of record holders may not be representative of the
number of beneficial holders.
Other
than
the information disclosed in this section, there are no arrangements, in the
knowledge of Santander-Chile, which can result in a change of control of
Santander-Chile.
B. Related
Party Transactions
The
Chilean Companies Law requires that our transactions with related parties be
on
a market basis, that is, on similar terms to those customarily prevailing in
the
market. We are required to compare the terms of any such transaction
to those prevailing in the market at the date the transaction is to be entered
into. Directors of companies that violate this provision are liable
for losses resulting from such violations.
In
addition, under the Chilean Companies Law, a company may not enter into a
transaction in which one or more of its directors has a direct or indirect
interest unless (i) such transaction has received the prior approval of the
company’s board of directors and (ii) the terms of such transaction are
consistent with the terms of transactions of a similar type prevailing in the
market. If it is not possible to make this determination,
the board may appoint two independent evaluators. The evaluators’
final conclusions must be made available to shareholders and directors for
a
period of 20 business days, during which shareholders representing 5% or more
of
the issued voting shares may request the board to call a shareholders’ meeting
to resolve the matter, with the agreement of two thirds of the issued voting
shares required for approval. For purposes of this regulation, the
law considers the amount of a proposed transaction to be material if (1) it
exceeds 1% of the company’s net worth (provided that it also exceeds 2,000UF) or
(2) it exceeds 20,000 UF.
All
resolutions approving such transactions must be reported to the company’s
shareholders at the next annual shareholders’ meeting. Violations of
this provision may result in administrative, criminal or civil liability to
the
corporation, the shareholders and/or third parties who suffer losses as a result
of such violation.
Loans
granted to related parties
Related
party loans, all of which are current, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
Operating
companies
|
|
|
150,070
|
|
|
|
112,986
|
|
Investment
companies (1)
|
|
|
203,261
|
|
|
|
3,948
|
|
Individuals
(2)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
(1)
|
Includes
companies whose purpose is to hold shares in other
companies.
|
(2)
|
Includes
debt obligations that are equal to or greater than UF3,000, the aggregate
principal amount of which amounted to an equivalent of US$102,930 at
December 31, 2006. Includes loans to certain executive officers.
All of
the loans to the executive officers were made in our
|
|
ordinary
course of business, were made on substantially the same terms,
including
interest rates and collateral, as those prevailing at the time
for
comparable transactions with other persons, and did not involve
more than
the normal risk of collectibility or present other unfavorable
features.
|
Under
the
Chilean General Banking Law, Chilean banks are subject to certain lending
limits, including the following:
|
·
|
a
bank may not extend to any person or legal entity (or group of related
entities), directly or indirectly, unsecured loans in an amount that
exceeds 5.0% of the bank’s regulatory capital, or secured loans in an
amount that exceeds 25.0% of its regulatory capital. In the case
of
foreign export trade finance, this 5.0% ceiling is raised to: 10.0%
for
unsecured financing, 30.0% for secured financing. This ceiling is
raised
to 15.0% for loans granted to finance public works under the concessions
system contemplated in the Decree with Force of Law 164 of 1991,
of the
Ministry of Public Works, provided that either the loan is secured
on the
concession, or the loan is granted as part of a loan
syndication;
|
|
·
|
a
bank may not grant loans bearing more favorable terms than those
generally
offered by banks in the same community to any entity (or group of
related
entities) that is directly or indirectly related to its owners or
management;
|
|
·
|
a
bank may not extend loans to another bank in an aggregate amount
exceeding
30.0% of its regulatory capital;
|
|
·
|
a
bank may not directly or indirectly grant a loan the purpose of which
is
to allow the borrower to acquire shares in the lending
bank;
|
|
·
|
a
bank may not lend, directly or indirectly, to a director or any other
person who has the power to act on behalf of the bank, or to certain
related parties;
|
|
·
|
a
bank may not grant loans to individuals or legal entities involved
in the
ownership or management of the bank, whether directly or indirectly
(including holders of 1.0% or more of its shares), on more favorable
terms
than those generally offered to non-related parties. Loans may not
be
extended to senior executives and to companies in which such individuals
have a participation of 5.0% or more of the equity or net earnings
in such
companies. The aggregate amount of loans to related parties may not
exceed
a bank’s regulatory capital; and
|
|
·
|
the
maximum aggregate amount of loans that a bank may grant to its employees
is 1.5% of its regulatory capital, and no individual employee may
receive
loans in excess of 10.0% of such 1.5% limit. These limitations do
not
apply to a single home mortgage loan for personal use per term of
employment of each employee.
|
|
|
We
are not aware of any loans to any related parties exceeding the above
lending limits.
|
Other
transactions with related parties:
During
the
years ended December 31, 2006, the Bank had the following significant income
(expenses) from services provided to (by) related parties:
|
|
Year
ended December 31, 2006
|
|
Company
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Redbanc
S.A. (payment for administering ATM network)
|
|
|
(4,056 |
) |
Transbank
S.A. (payments for administering credit card network)
|
|
|
(8,168 |
) |
Sixtra
Chile S.A. (Computer services)
|
|
|
-
|
|
Santander
G.R.C. Ltda. (collection services)
|
|
|
(1,563 |
) |
Santander
Chile Holding S.A. (rent)
|
|
|
32
|
|
|
|
Year
ended December 31, 2006
|
|
Company
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Santander
Factoring S.A. (rent)
|
|
|
52
|
|
Bansa
Santander S.A. (rent and sale of repossessed assets)
|
|
|
(2,426 |
) |
AFP
Bansander S.A (rent)
|
|
|
179
|
|
Altec
S.A. (technology services)
|
|
|
(5,627 |
) |
Santander
Investment Chile S.A. (rent)
|
|
|
91
|
|
Altavida
Cia. De Seguro De Vida S.A. (rent and payment of life insurance
policies
relating to certain loans)
|
|
|
(1,005 |
) |
Plaza
El Trebol S A (rent)
|
|
|
(195 |
) |
Other(1)
|
|
|
(479 |
) |
Total
|
|
|
(23,165 |
) |
(1)
Consists
primarily of payment of stipend to Board members.
C. Interests
of Experts and Counsel
Not
applicable.
ITEM
8. FINANCIAL INFORMATION
A. Consolidated
Statements and Other Financial Information
Financial
Information
See
“Item
18: Financial Statements”
Legal
Proceedings
On
August
28, 1996, Banco Español de Crédito (later acquired by Banco BBVA BHIF) filed a
complaint against Auca Forestal S.A. and O’Higgins Corredores de Bolsa Ltda.
(currently Santander Investment S.A. Corredores de Bolsa, a subsidiary of the
Bank ). This suit was resolved in favor of the plaintiff in July,
2006. As of December 31, 2006, the subsidiary maintained a provision
of Ch$271 million, which covers this contingency in its entirety and is in
process of being liquidated once the interest payment is
determined.
On
August
26, 1992, a suit was filed by the Chilean Internal Revenue Service against
the
Bank and is still pending. The Appeals Court partially resolved in
favor of the Bank and substantially reduced the amount of tax
contested. In the opinion of our legal advisors, these claims are not
likely to have, individually or in the aggregate, a material adverse effect
on
our consolidated financial condition or results of operations, and as of
December 31, 2006, the Bank maintained a provision of Ch$530 million, which
covers the entire claim.
Banco
Santander-Chile and Santander S.A. Agente de Valores (“Agencia”) were subject to
a lawsuit brought by Orsini con Orsini y Otros, which was seeking damages in
an
amount of approximately US$500,000, claiming the Bank and the Agencia
incorrectly issued and cashed funds from a deceased client’s account. In 2006,
the Supreme Court ruled in our favor, bringing an end to this legal
proceeding.
As
a
result of a fraud committed by Grupo Inverlink against the Corporación de
Fomento de la Producción (CORFO) and others, various legal actions were brought
against certain instruments that are managed by the funds administered by
Santander S.A. Administradora General de Fondos, a subsidiary of the Bank.
Grupo
Inverlink fraudulently obtained financial instruments from CORFO, mainly time
deposits, and sold them in the market. Unaware of the illegal actions of Grupo
Inverlink, the funds managed by a subsidiary of us acquired and
administered these instruments. On March 13, 2003, our subsidiary signed a
letter stating that it will return to CORFO the value of these instruments
if
ordered by a court to do so, which freed up the financial instruments from
legal
action. As no legal proceedings have been instituted against us in connection
with this matter, we have not made any provisions in respect of it.
Our
General Counsel was indicted by the national treasury in a lawsuit regarding
the
repayment by Inverlink Corredores de Bolsa of a Ch$980 million (equivalent
to
US$1.8 million) loan made to it by Banco Santander Chile. Repayment was made
by
tendering to Banco Santander Chile a cashier’s check issued by another bank in
favor of Banco Santander Chile. The Bank was not legally required to
verify the legitimacy of the funds used to obtain the cashier’s check and,
authenticity of the cashier’s check and, accordingly, cashed it in satisfaction
of its loan to Inverlink. Subsequently, the Bank learned that the
cashier’s check had been obtained from the issuing bank by Inverlink Corredores
de Bolsa with funds fraudulently obtained from CORFO. The Bank has actively
cooperated with the investigation and agreed to pay Ch$980 million to CORFO.
In
Janaury 2007, the Courts approved the motion to end this trial against our
General Counsel. The national treasury appealed this ruling and the motion
of
the Court has since been stayed. We believe that our actions and those of our
General Counsel, who continues in his position, were lawful.
In
addition, we are subject to certain claims and are party to certain legal and
arbitration proceedings incidental to the normal course of our business
including claims for alleged operational errors. We do not believe
that the liabilities related to such claims and proceedings are likely to have,
individually or in the aggregate, a material adverse effect on our consolidated
financial condition or results of operations. Nevertheless, based on
management’s individual analysis of each proceeding, we have made provisions in
the amount reported as “Provisions for lawsuit and other” in Note 10(b) to
our Audited Consolidated Financial Statements. Other than the proceedings
described above, there are no material proceedings in which any of our
directors, any members of our senior management or any of our affiliates is
either a party adverse to us or to our subsidiaries or has a material interest
adverse to us or our subsidiaries.
Dividends
and dividend policy
See
“Item
3: Key Information—A. Selected Financial Data—Dividends”.
ITEM
9. THE OFFER AND LISTING
A. Historical
Trading Information
As
the
former Santiago was the legal surviving entity of the merger with Old
Santander-Chile and the corporate name was changed to “Banco Santander-Chile”
upon the merger, shareholders of Old Santander Chile received 3.55366329 shares
of Banco Santiago for every one share of Old Santander Chile that they owned
on
the record date for the merger. Therefore, trading information for
2002 prior to the merger corresponds to former Santiago shares and
ADRs. The table below shows, for the periods indicated, the annual,
quarterly and monthly high and low closing prices (in nominal Chilean pesos)
of
the shares of our common stock on the Santiago Stock Exchange and the annual,
quarterly and monthly high and low closing prices (in U.S. dollars) as reported
by the NYSE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Price History
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
14.70
|
|
|
|
10.80
|
|
|
|
22.90
|
|
|
|
15.99
|
|
2003
|
|
|
15.30
|
|
|
|
12.65
|
|
|
|
24.65
|
|
|
|
17.05
|
|
2004
|
|
|
18.20
|
|
|
|
13.30
|
|
|
|
33.90
|
|
|
|
23.55
|
|
2005
|
|
|
22.75
|
|
|
|
17.11
|
|
|
|
45.86
|
|
|
|
30.40
|
|
2006
|
|
|
26.20
|
|
|
|
19.60
|
|
|
|
51.46
|
|
|
|
37.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Price History
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
19.60
|
|
|
|
17.55
|
|
|
|
35.25
|
|
|
|
30.71
|
|
2nd
Quarter
|
|
|
19.20
|
|
|
|
17.11
|
|
|
|
34.50
|
|
|
|
30.40
|
|
3rd
Quarter
|
|
|
22.30
|
|
|
|
17.79
|
|
|
|
43.87
|
|
|
|
32.10
|
|
4th
Quarter
|
|
|
22.75
|
|
|
|
20.00
|
|
|
|
45.86
|
|
|
|
38.00
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
25.09
|
|
|
|
21.60
|
|
|
|
49.85
|
|
|
|
43.10
|
|
2nd
Quarter
|
|
|
23.20
|
|
|
|
19.60
|
|
|
|
46.80
|
|
|
|
37.40
|
|
3rd
Quarter
|
|
|
24.00
|
|
|
|
19.75
|
|
|
|
46.50
|
|
|
|
37.66
|
|
4th
Quarter
|
|
|
26.20
|
|
|
|
22.90
|
|
|
|
51.46
|
|
|
|
44.69
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
26.75
|
|
|
|
24.35
|
|
|
|
51.14
|
|
|
|
46.75
|
|
Monthly
Price History
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
2006
|
|
|
24.92
|
|
|
|
23.38
|
|
|
|
49.18
|
|
|
|
46.08
|
|
January
2007
|
|
|
25.85
|
|
|
|
24.60
|
|
|
|
49.49
|
|
|
|
47.11
|
|
February
2007
|
|
|
26.75
|
|
|
|
24.35
|
|
|
|
51.14
|
|
|
|
46.90
|
|
March
2007
|
|
|
26.44
|
|
|
|
24.45
|
|
|
|
51.14
|
|
|
|
46.75
|
|
April
2007
|
|
|
27.10
|
|
|
|
25.20
|
|
|
|
53.13
|
|
|
|
49.40
|
|
May
2007
|
|
|
26.20
|
|
|
|
24.49
|
|
|
|
52.15
|
|
|
|
48.39
|
|
June
2007 (through June 14)
|
|
25.41
|
|
|
24.90
|
|
|
50.16
|
|
|
49.06
|
|
Sources:
Santiago Stock Exchange Official Quotation Bulletin; NYSE.
(1)
Pesos
per share reflect nominal price at trade date.
(2)
One
ADS represents 1,039 shares of common stock.
B.
Plan of Distribution
Not
applicable
C. Nature
of Trading Market
Nature
of Trading Market
Shares
of
our common stock are traded on the Chilean Stock Exchanges. Each ADS represents
1,039 shares of common stock. ADRs have been issued pursuant to the Deposit
Agreement, dated as of August 1, 2002, among Santander-Chile, the Depositary
and
all holders from time to time of ADRs. As of December 31, 2006, 25,957,667
ADSs
were outstanding (equivalent to 26,970,016,013 shares of common stock or 14.3%
of the total number of issued shares of common stock).
D. Selling
Shareholders
Not
Applicable.
E. Dilution
Not
Applicable.
F. Expenses
of the Issue
Not
Applicable.
ITEM
10. ADDITIONAL INFORMATION
A. Share
Capital
Not
applicable.
B. Memorandum
and Articles of Association
The
legal
predecessor of Santander-Chile was Banco Santiago (Santiago). Santiago was
incorporated by public deed dated September 7, 1977 granted at the Notary Office
of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate
and function as a bank by Resolution No. 118 of the Superintendency of Banks
on
October 27, 1977. The Bank’s bylaws were approved by Resolution No. 103 of the
Superintendency of Banks on September 22, 1977. In January 1997, Santiago merged
with Banco O’Higgins’ with Santiago as the surviving entity. In 1999, Santiago
became a controlled subsidiary of Banco Santander Central Hispano.
Shareholder
rights in a Chilean bank that is also an open stock (public) corporation are
governed by (1) the corporation’s estatutos, which effectively serve
the purpose of both the articles or certificate of incorporation and the by-laws
of a company incorporated in the United States, (2) the General Banking Law
and
(3) to the extent not inconsistent with the General Banking Law, by the
provisions of Chilean Companies Law applicable to open stock corporations,
except for certain provisions that are expressly excluded. Article 137 of the
Chilean Companies Law provides that all provisions of the Chilean Companies
Law
take precedence over any contrary provision in a corporation’s
estatutos. Both the Chilean Companies Law and our estatutos
provide that legal actions by shareholders against us (or our officers or
directors) to enforce their rights as shareholders or by one shareholder against
another in their capacity as such are to be brought in Chile in arbitration
proceedings, notwithstanding the plaintiff’s right to submit the action to the
ordinary courts of Chile.
The
Chilean securities markets are principally regulated by the Superintendency
of
Securities and Insurance under the Chilean Securities Market Law and the Chilean
Companies Law. In the case of banks, compliance with these laws is supervised
by
the Superintendency of Banks. These two laws provide for disclosure
requirements, restrictions on insider trading and price manipulation and
protection of minority investors. The Chilean Securities Market Law sets forth
requirements relating to public offerings, stock exchanges and brokers, and
outlines disclosure requirements for companies that issue publicly offered
securities. The Chilean Companies Law sets forth the rules and requirements
for
establishing open stock corporations while eliminating government supervision
of
closed (closely-held) corporations. Open stock (public) corporations are those
with 500 or more shareholders, or companies in which 100 or more shareholders
own at least 10.0% of the subscribed capital (excluding those whose individual
holdings exceed 10.0%), and all other companies that are registered in the
Securities Registry of the Superintendency of Securities and
Insurance.
Board
of Directors
The
Board
of Directors has 11 regular members and 2 alternate members, elected by
shareholder vote at General Shareholders’ Meetings. The directors may be either
shareholders or non-shareholders of the Company.
A
director
remains in office for three years and may be reelected
indefinitely. If for any reason, the General Shareholders’ Meeting
where the newly appointments of directors are to be made is not held, the duties
of those serving as such shall be extended until their replacements are
designated, in which case, the Board of Director shall convene a Meeting at
the
earliest possible time in order to effect the appointments.
The
directors are entitled to compensation for the performance of their duties.
The
amount of their compensation is determined annually by the General Shareholders’
Meeting. In addition, payments in the form of wages, fees, travel accounts,
expense accounts, dues as representatives of the Board of Directors and other
cash payments, payments in kind or royalties of any sort whatsoever, may be
paid
to certain directors for the performance of specific duties or tasks in addition
to their functions as directors imposed upon them specifically by the General
Shareholders’ Meeting. Any special compensation is authorized or approved at the
General Shareholders’ Meeting,
and
for
that purpose, a detailed and separate entry shall be made in the Annual Report,
which shall expressly indicate the complete name of each of the directors
receiving special compensation.
Without
prejudice to any other incapacity or incompatibility established by law, the
following may not be directors: (a) those persons who have been sentenced or
are
being tried, either as principals or accessories, for crimes punishable with
a
penalty of temporary or permanent suspension from or incapacity to hold public
office; (b) those persons who have been declared bankrupt and have not been
rehabilitated; (c) members of the House of Representatives and the Senate;
(d)
directors or employees of any other financial institution; employees appointed
by the President of the Republic and employees or officers of (i) the State,
(ii) any public service, public institution, semi-public institution, autonomous
entity or state-controlled company (any such entity a “Public Entity”) (iii) any
enterprise, corporation or public or private entity in which the State or a
Public Entity has a majority interest, has made capital contributions, or is
represented or participating, provided that persons holding positions in
teaching activities in any of the above entities may be directors; and (e)
The
Bank’s employees, which shall not prevent a director from holding on a temporary
basis and for a term not to exceed ninety days the position of General Manager.
Chief Executive Officers may not be elected as directors.
For
purposes of the appointment of directors, each shareholder shall have the right
to one vote per share for purposes of appointing a single person, or to
distribute his votes in between candidates as he may deem convenient, and the
persons obtaining the largest number of votes in the same and single process
shall be awarded positions, until all positions have been filled. The election
of the regular and alternate board members shall be carried out separately.
For
purposes of the casting of the vote, the Chairman and the Secretary, together
with any other persons that may have been previously designated by the Meeting
to sign the minutes thereof, shall issue a certificate giving evidence of the
oral votes of shareholders attending, following the order of the list of
attendance being taken.
Each
shareholder shall be entitled, however, to cast his vote by means of a ballot
signed by him, stating whether he signs for his own account or as a
representative. This entitlement notwithstanding, in order to expedite the
voting process, the Chairman of the Bank or the Superintendency, as the case
may
be, is entitled to order that the vote be taken alternatively or by oral vote
or
by means of ballots. At the time of polling, the Chairman may instruct that
the
votes be read aloud, in order for those in attendance to count for themselves
the number of votes issued and verify the outcome of the voting
process.
The
Secretary tabulates the votes and the Chairman announces those who have obtained
the largest majorities until all the director positions have been filled. The
Secretary places the documents evidencing the outcome of the count, duly signed
by the persons charged with the duty of verifying the number of votes issued,
together with the ballots delivered by the shareholders who did not vote orally,
in an envelope which shall be closed and sealed with the corporate seal and
shall remain deposited with the Bank for a least two years.
Every
appointment of directors, or any changes in the appointment of directors, shall
be transcribed into a public deed before a notary public, published in a
newspaper of Santiago and notified to the Superintendency of Banks and Financial
Institutions, by means of the filing of a copy of the respective public deed.
Likewise, the appointments of General Manager, Manager and Deputy Managers
shall
be communicated and transcribed into a public deed.
If
a
director ceases to be able to perform his or her duties, whether by reason
of
conflict of interest, limitation, legal incapacity or bankruptcy, impossibility,
resignation or any other legal cause, the vacancy shall be filled as follows:
(a) the positions of regular directors shall be filled by an alternate director;
and (b) the positions of alternate directors vacated upon the application of
(a)
above, and the positions of regular directors if a regular director’s position
can not be filled pursuant to clause (a) because both alternate members have
already become regular members, shall be filled by the Board of Directors on
its
first meeting after the vacancy occurs. Board members appointed pursuant to
clause (b) will remain in the position until the next General Shareholders’
Meeting, where the appointment may be ratified, in which case, the replacment
director will remain in his or her position until the expiration of the term
of
the director he or she replaced.
The
alternate directors may temporarily replace regular directors in case of their
absence or temporary inability to attend a board meeting, or in a definitive
manner in case of vacancy. The alternate board members are always
entitled
to attend and speak at board meetings. They will be entitled to vote at such
meetings only when a regular member is absent and such alternate member acts
as
the absent member’s replacement.
During
the
first meeting following the General Shareholders’ Meeting, the Board of
Directors shall elect in separate votes from among its members, a Chairman,
a
First Vice Chairman and a Second Vice Chairman. In the event of a tie, the
appointment shall be decided by lottery.
The
Board
of Directors meet in ordinary sessions at least once a month, held on pre-set
dates and times determined by the Board. Extraordinary meetings are held
whenever called by the Chairman, whether at his own will or upon the request
of
three or more directors, so long as the Chairman determines in advance that
the
meeting is justified, except if the request is made by the absolute majority
of
the directors in office, in which case the meeting shall be held without such
prior determination. The extraordinary meetings may only address those matters
specifically included in the agenda for the extraordinary meeting, except that,
if the meeting is attended by all the directors in office, they may agree
otherwise by a unanimous vote. Extraordinary meetings shall be called by means
of a written instrument signed by the Chairman or the Secretary or his alternate
and delivered to each of the directors at least three days prior to the date
set
for the meeting.
The
quorum
for the Board of Directors’ Meeting is six of its members. Resolutions shall be
adopted by the affirmative vote of the absolute majority of the attending
directors. In the event of a tie, the person acting as the Chairman of the
meeting shall cast a deciding vote.
Directors
having a vested interest in a negotiation, act, contract or transaction that
is
not related to the bank business, either as principal or as representative
of
another person, shall communicate such fact to the other directors. If the
respective resolutions are approved by the Board, it shall be in accordance
to
the prevailing fair market conditions and director’s interest must be disclosed
at the next General Shareholders’ Meeting.
The
discussions and resolutions of the Board of Directors shall be recorded in
a
special book of minutes maintained by the Secretary. The relevant minutes shall
be signed by the directors attending the meeting and by the Secretary, or his
alternate. If a director determines that the minutes for a meeting are
inaccurate or incomplete, he is entitled to record an objection before actually
signing the minutes. The resolutions adopted may be carried out prior to the
approval of the minutes at a subsequent meeting. In the event of death, refusal
or incapacity for any reason of any of the directors attending to sign the
minutes, such circumstance shall be recorded at the end of the minutes stating
the reason for the impediment.
The
directors are personally liable for all of the acts they effect in the
performance of their duties. Any director who wishes to disclaim responsibility
for any act or resolution of the Board of Directors must to record his
opposition in the minutes, and the Chairman must report the opposition at the
following General Shareholders’ Meeting.
The
Board
will represent the Bank in and out of court and, for the performance of the
Bank’s business, a circumstance that will not be necessary to prove before third
parties, it will be empowered with all the authorities and powers of
administration that the law or the By-laws do not set as exclusive to the
General Shareholders’ Meeting, without being necessary to grant any special
power of attorney, even for those acts that the law requires to do so. This
provision is notwithstanding the judicial representation of the Bank that is
part of the General Manager’s authorities. The Board may delegate part of its
authority to the General Manager, to the Managers, Deputy Managers or Attorneys
of the Bank, a Director, a Commission of Directors, and for specifically
determined purposes, in other persons.
Meetings
and Voting Rights
An
ordinary annual meeting of shareholders is held within the first four months
of
each year. The ordinary annual meeting of shareholders is the corporate body
that approves the annual financial statements, approves all dividends in
accordance with the dividend policy determined by our Board of Directors, elects
the Board of Directors and approves any other matter that does not require
an
extraordinary shareholders’ meeting. The last ordinary annual meeting of our
shareholders was held on April 24, 2007. Extraordinary meetings may
be called by
our
Board
of Directors when deemed appropriate, and ordinary or extraordinary meetings
must be called by our Board of Directors when requested by shareholders
representing at least 10.0% of the issued voting shares or by the
Superintendency of Banks. Notice to convene the ordinary annual meeting or
an
extraordinary meeting is given by means of three notices which must be published
in a newspaper of our corporate domicile (currently Santiago) or in the Official
Gazette in a prescribed manner, and the first notice must be published not
less
than 15 days nor more than 20 days in advance of the scheduled meeting. Notice
must also be mailed 15 days in advance to each shareholder and given to the
Superintendency of Banks and the Chilean Stock Exchanges. Currently, we publish
our official notices in the El Mercurio newspaper of Santiago.
The
quorum
for a shareholders’ meeting is established by the presence, in person or by
proxy, of shareholders representing at least an absolute majority of the issued
shares. If a quorum is not present at the first meeting, the meeting can be
reconvened (in accordance with the procedures described in the previous
paragraph) and, upon the meeting being reconvened, shareholders present at
the
reconvened meeting are deemed to constitute a quorum regardless of the
percentage of the shares represented. The shareholders’ meetings pass
resolutions by the affirmative vote of an absolute majority of those voting
shares present or represented at the meeting. The vote required at any
shareholders’ meeting to approve any of the following actions, however, is a
two-thirds majority of the issued shares:
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a
change in corporate form, spin-off or
merger;
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an
amendment of the term of existence, if any, and the early dissolution
of
the bank;
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a
change in corporate domicile;
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a
decrease of corporate capital previously approved by the Superintendency
of Banks, provided it is not reduced below the legal minimum
capital;
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a
decrease in the number of directors previously approved by the
Superintendency of Banks;
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the
approval of contributions and appraisal of properties other than
cash, in
those cases where it is permitted by the General Banking
Act;
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the
amendment of authority of the general shareholders meeting or the
restriction of the authority of the board of
directors;
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the
transfer of 50.0% or more of the corporate assets, regardless of
whether
it includes liabilities, or the implementation or amendment of any
business plan that contemplates the transfer of 50.0% or more of
the
corporate assets;
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a
change in the manner of distribution of profits established in the
by-laws;
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any
non-cash distribution in respect of the
shares;
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the
repurchase of shares of stock in the Bank;
or
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the
approval of material related-party transactions when requested by
shareholders representing at least 5.0% of the issued and outstanding
shares with right to vote if they determine that the terms and conditions
of those transactions are not favorable to the interests of the bank
or if
two independent assessments of those transactions requested by the
Board
materially differ from each other.
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Shareholders
may accumulate their votes for the election of directors and cast all of their
votes in favor of one person.
In
general, Chilean law does not require a Chilean open stock corporation to
provide the level and type of information that U.S. securities laws require
a
reporting company to provide to its shareholders in connection with a
solicitation of proxies. However, shareholders are entitled to examine the
books
of the bank within the 15-day period
before
the
ordinary annual meeting. Under Chilean law, a notice of a shareholders’ meeting
listing matters to be addressed at the meeting must be mailed not fewer than
15
days prior to the date of such meeting, and, in cases of an ordinary annual
meeting, shareholders holding a prescribed minimum investment must be sent
an
Annual Report of the bank’s activities which includes audited financial
statements. Shareholders who do not fall into this category but who request
it
must also be sent a copy of the bank’s Annual Report. In addition to these
requirements, we regularly provide, and management currently intends to continue
to provide, together with the notice of shareholders’ meeting, a proposal for
the final annual dividend.
The
Chilean Corporations Law provides that whenever shareholders representing 10.0%
or more of the issued voting shares so request, a Chilean company’s Annual
Report must include, in addition to the materials provided by the board of
directors to shareholders, such shareholders’ comments and proposals in relation
to the company’s affairs. Similarly, the Chilean Corporations Law provides that
whenever the board of directors of an open stock corporation convenes an
ordinary shareholders’ meeting and solicits proxies for that meeting, or
distributes information supporting its decisions, or other similar material,
it
is obligated to include as an annex to its Annual Report any pertinent comments
and proposals that may have been made by shareholders owning 10.0% or more
of
the company’s voting shares who have requested that such comments and proposals
be so included.
Only
shareholders registered as such with us on the fifth business day prior to
the
date of a meeting are entitled to attend and vote their shares. A shareholder
may appoint another individual (who need not be a shareholder) as his proxy
to
attend and vote on his behalf. Every shareholder entitled to attend and vote
at
a shareholders’ meeting has one vote for every share subscribed. Each share
represents one vote and there are no special classes of shares with different
rights. Our bylaws do not include any condition that is more significant than
required by law to change the right of shareholders.
Capitalization
Under
Chilean law, the shareholders of a company, acting at an extraordinary
shareholders’ meeting, have the power to authorize an increase in such company’s
capital. When an investor subscribes for issued shares, the shares are
registered in such investor’s name, even if not paid for, and the investor is
treated as a shareholder for all purposes except with regard to receipt of
dividends and the return of capital, provided that the shareholders may, by
amending the by-laws, also grant the right to receive dividends or distributions
of capital. The investor becomes eligible to receive dividends and returns
of
capital once it has paid for the shares (if it has paid for only a portion
of
such shares, it is entitled to reserve a corresponding pro-rata portion of
the
dividends declared and/or returns of capital with respect to such shares unless
the company’s by-laws provide otherwise). If an investor does not pay for shares
for which it has subscribed on or prior to the date agreed upon for payment,
the
company is entitled under Chilean law to auction the shares on the stock
exchange and collect the difference, if any, between the subscription price
and
the auction proceeds. However, until such shares are sold at auction, the
subscriber continues to exercise all the rights of a shareholder (except the
right to receive dividends and return of capital).
Article
22
of Chilean Corporations Law states that the purchaser of shares of a company
implicitly accepts its by-laws and any agreements adopted at shareholders’
meetings.
Approval
of Financial Statements
Our
Board
of Directors is required to submit our audited financial statements to the
shareholders annually for their approval. The approval or rejection of such
financial statements is entirely within our shareholders’ discretion. If our
shareholders reject our financial statements, our board of directors must submit
new financial statements not later than 60 days from the date of such rejection.
If our shareholders reject our new financial statements, our entire Board of
Directors is deemed removed from office and a new board of directors is elected
at the same meeting. Directors who individually approved such rejected financial
statements are disqualified for re-election for the ensuing period.
Registrations
and Transfers
We
act as
our own registrar and transfer agent, as is customary among Chilean companies.
In the case of jointly owned shares, an attorney-in-fact must be appointed
to
represent the joint owners in dealings with us.
Dividend,
Liquidation and Appraisal Rights
Under
the
Chilean Corporations Law, Chilean companies are generally required to distribute
at least 30.0% of their earnings as dividends.
In
the
event of any loss of capital, no dividends can be distributed so long as such
loss is not recovered. Also, no dividends of a bank above the legal minimum
can
be distributed if doing so would result in the bank exceeding its ratio of
risk-weighted assets to regulatory capital or total assets.
Dividends
that are declared but not paid by the date set for payment at the time of
declaration are adjusted from the date set for payment to the date such
dividends are actually paid, and they accrue interest.
We
may
declare a dividend in cash or in shares. When a share dividend is declared
above
the legal minimum (which minimum must be paid in cash), our shareholders must
be
given the option to elect to receive cash. Our ADS holders may, in the absence
of an effective registration statement under the Securities Act or an available
exemption from the registration requirement thereunder, effectively be required
to receive a dividend in cash. See “—Ownership Restrictions—Preemptive Rights
and Increases of Share Capital.”
In
the
event of our liquidation, the holders of fully paid shares would participate
equally and ratably, in proportion to the number of paid-in shares held by
them,
in the assets available after payment of all creditors.
In
accordance with the General Banking Law, our shareholders do not have appraisal
rights.
Ownership
Restrictions
Under
Article 12 of the Chilean Securities Market Law and the regulations of the
Superintendency of Banks, shareholders of open stock corporations are required
to report the following to the Superintendency of Securities and Insurance
and
the Chilean Stock Exchanges:
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any
direct or indirect acquisition or sale of shares that results in
the
holder’s acquiring or disposing, directly or indirectly, 10.0% or more of
an open stock corporation’s share capital;
and
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any
direct or indirect acquisition or sale of shares or options to buy
or sell
shares, in any amount, if made by a holder of 10.0% or more of an
open
stock corporation’s capital or if made by a director, liquidator, main
officer, general manager or manager of such
corporation.
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In
addition, majority shareholders must include in their report whether their
purpose is to acquire control of the company or if they are making a financial
investment. A beneficial owner of ADSs representing 10.0% or more of our share
capital will be subject to these reporting requirements under Chilean
law.
Under
Article 54 of the Chilean Securities Market Law and the regulations of the
Superintendency of Securities and Insurance, persons or entities intending
to
acquire control, directly or indirectly, of an open stock corporation,
regardless of the acquisition vehicle or procedure, and including acquisitions
made through direct subscriptions or private transactions, are also required
to
inform the public of such acquisition at least 10 business days before the
date
on which the transaction is to be completed, but in any case, as soon as
negotiations regarding the change of control begin (i.e., when information
and
documents concerning the target are delivered to the potential acquiror) through
a filing with the Superintendency of Securities and Insurance, the stock
exchanges and the companies controlled by and that control the target and
through a notice published in two Chilean newspapers, which notice must
disclose, among other information, the person or entity purchasing or selling
and the price and conditions of any negotiations.
Prior
to
such publication, a written communication to such effect must be sent to the
target corporation, to the controlling corporation, to the corporations
controlled by the target corporation, to the Superintendency of Securities
and
Insurance, and to the Chilean stock exchanges on which the securities are
listed.
In
addition to the foregoing, Article 54A of the Chilean Securities Market Law
requires that within two business days of the completion of the transactions
pursuant to which a person has acquired control of a publicly traded company,
a
notice shall be published in the same newspapers in which the notice referred
to
above was published and notices shall be sent to the same persons mentioned
in
the preceding paragraphs.
The
provisions of the aforementioned articles do not apply whenever the acquisition
is being made through a tender or exchange offer.
Title
XXV
of the Chilean Securities Market Law on tender offers and the regulations of
the
Superintendency of Securities and Insurance provide that the following
transactions must be carried out through a tender offer:
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an
offer which allows a person to take control of a publicly traded
company,
unless (i) the shares are being sold by a controlling shareholder
of such
company at a price in cash which is not substantially higher than
the
market price and the shares of such company are actively traded on
a stock
exchange and (ii) those shares are acquired (a) through a capital
increase, (b) as a consequence of a merger, (c) by inheritance or
(d)
through a forced sale; and
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an
offer for a controlling percentage of the shares of a listed company
if
such person intends to take control of the parent company (whether
listed
or not) of such listed company, to the extent that the listed company
represents 75.0% or more of the consolidated net worth of the parent
company.
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In
addition, Article 69 ter of the Companies Law requires that whenever a
controlling shareholder acquires two thirds of the voting shares of a listed
company, such controlling shareholder must offer to purchase the remaining
shares from the minority shareholders in a tender offer.
Article
200 of the Chilean Securities Market Law prohibits any shareholder that has
taken control of a publicly traded company to acquire, for a period of 12 months
from the date of the transaction in which it gained control of the publicly
traded company, a number of shares equal to or greater than 3.0% of the
outstanding issued shares of the target without making a tender offer at a
price
per share not lower than the price paid at the time of taking control. Should
the acquisition from the other shareholders of the company be made on a stock
exchange and on a pro rata basis, the controlling shareholder may purchase
a
higher percentage of shares, if so permitted by the regulations of the stock
exchange.
Title
XV
of the Chilean Securities Market Law sets forth the basis to determine what
constitutes a controlling power, a direct holding and a related party. The
Chilean Securities Market Law defines control as the power of a person or group
of persons acting (either directly or through other entities or persons)
pursuant to a joint action agreement, to direct the majority of the votes at
the
shareholders’ meetings of the corporation, to elect the majority of members of
its board of directors, or to influence the management of the corporation
significantly. Significant influence is deemed to exist in respect of the person
or group of persons with an agreement to act jointly that holds, directly or
indirectly, at least 25.0% of the voting share capital, unless:
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another
person or group of persons acting pursuant to joint action agreement,
directly or indirectly, controls a stake equal to or greater than
the
percentage controlled by such person or group of
persons;
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the
person or group does not control, directly or indirectly, more than
40.0%
of the voting share capital and the percentage controlled is lower
than
the sum of the shares held by other shareholders holding more than
5.0% of
the share capital (either directly or pursuant to a joint action
agreement); or
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in
cases where the Superintendency of Securities and Insurance has ruled
otherwise, based on the distribution or atomization of the overall
shareholding.
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According
to the Chilean Securities Market Law, a joint action agreement is an agreement
among two or more parties which, directly or indirectly, own shares in a
corporation at the same time and whereby they agree to participate with the
same
interest in the management of the corporation or in taking control of the same.
The law presumes that such an agreement exist between:
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a
principal and its agents;
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spouses
and relatives within certain degrees of
kinship;
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entities
within the same business group; and
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an
entity and its controller or any of the members of the
controller.
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Likewise,
the Superintendency of Securities and Insurance may determine that a joint
action agreement exists between two or more entities considering, among other
things, the number of companies in which they participate and the frequency
with
which they vote identically in the election of directors, appointment of
managers and other resolutions passed at extraordinary shareholders’
meetings.
According
to Article 96 of the Chilean Securities Market Law, a business group is a group
of entities with such ties in their ownership, management or credit liabilities
that it may be assumed that the economic and financial action of such members
is
directed by, or subordinated to, the joint interests of the group, or that
there
are common credit risks in the credits granted to, or in the acquisition of
securities issued by, them. According to the Chilean Securities Market Law,
the
following entities are part of the same business group:
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a
company and its controller;
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all
the companies with a common controller together with that
controller;
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all
the entities that the Superintendency of Securities and Insurance
declares
to be part of the business group due to one or more of the following
reasons:
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a
substantial part of the assets of the company is involved in the
business
group, whether as investments in securities, equity rights, loans
or
guaranties;
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the
company has a significant level of indebtedness and the business
group has
a material participation as a lender or
guarantor;
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any
member of a group of controlling entities of a company mentioned
in the
first two bullets above and there are grounds to include it in the
business group; or
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the
company is controlled by a member of a group of controlling entities
and
there are grounds to include it in the business
group.
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Article
36
of the General Banking Law states that as a matter of public policy, no person
or company may acquire, directly or indirectly, more than 10.0% of the shares
of
a bank without the prior authorization of the Superintendency of Banks, which
may not be unreasonably withheld. The prohibition would also apply to beneficial
owners of ADSs. In the absence of such authorization, any person or group of
persons acting in concert would not be permitted to exercise voting rights
with
respect to the shares or ADSs acquired. In determining whether or not to issue
such an authorization, the Superintendency of Banks considers a number of
factors enumerated in the General Banking Law, including the financial stability
of the purchasing party.
According
to Article 35 bis of the General Banking Law, the prior authorization
of the Superintendency of Banks is required for:
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the
merger of two or more banks;
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the
acquisition of all or a substantial portion of a banks’ assets and
liabilities by another bank;
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the
control by the same person, or controlling group, of two or more
banks;
or
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a
substantial increase in the existing control of a bank by a controlling
shareholder of that bank.
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This
prior
authorization is only required when the acquiring bank or the resulting group
of
banks would own a significant market share in loans, defined by the
Superintendency of Banks to be more than 15.0% of all loans in the Chilean
banking system. The intended purchase, merger or expansion may be denied by
the
Superintendency of Banks; or, if the acquiring bank or resulting group would
own
a market share in loans determined to be more than 20.0% of all loans in the
Chilean banking system, the purchase, merger, or expansion may be conditioned
on
one or more of the following:
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the
bank or banks maintaining regulatory capital higher than 8.0% and
up to
14.0% of risk-weighted assets;
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the
technical reserve established in Article 65 of the General Banking
Law
being applicable when deposits exceed one and a half times the resulting
bank’s paid-in capital and reserves;
or
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the
margin for interbank loans be reduced to 20.0% of the resulting bank’s
regulatory capital.
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If
the
acquiring bank or resulting group would own a market share in loans determined
by the Superintendency of Banks to be more than 15% but less than 20%, the
authorization will be conditioned on the bank or banks maintaining a regulatory
capital not lower than 10% of their risks weighted assets for the period
specified by the Superintendency of Banks, which may not be less than one year.
The calculation of the risk weighted assets is based on a five category risk
classification system applied to a bank’s assets that is based on the Basel
Committee recommendations.
According
to the General Banking Law, a bank may not grant loans to related parties on
terms more favorable than those generally offered to non-related parties.
Article 84 No. 2 of the General Banking Law and the regulations issued by the
Superintendency of Banks creates the presumption that natural persons who are
holders of shares and who beneficially own more than 1.0% of the shares are
related to the bank and imposes certain restrictions on the amounts and terms
of
loans made by banks to related parties. This presumption would also apply to
beneficial owners of ADSs representing more than 1.0% of the shares. Finally,
according to the regulations of the Superintendency of Banks, Chilean banks
that
issue ADSs are required to inform the Superintendency of Banks if any person,
directly or indirectly, acquires ADSs representing 5.0% or more of the total
amount of shares of capital stock issued by such bank.
Article
16
bis of the General Banking Law provides that the individuals or legal
entities that, individually or with other people, directly control a bank and
who individually own more than 10.0% of its shares must send to the
Superintendency of Banks reliable information on their financial situation
in
the form and in the opportunity set forth in Resolution No 3,156 of the
Superintendency of Banks.
Preemptive
Rights and Increases of Share Capital
The
Chilean Corporations Law provides that whenever a Chilean company issues new
shares for cash, it must offer its existing shareholders the right to purchase
a
number of shares sufficient to maintain their existing ownership percentages
in
the company. Pursuant to this requirement, preemptive rights in connection
with
any future issue of shares will be offered by us to the depositary as the
registered owner of the shares underlying the ADSs. However, the depositary
will
not be able to make such preemptive rights available to holders of ADSs unless
a
registration statement under the Securities Act is effective with respect to
the
underlying shares or an exemption from the registration requirements thereunder
is available.
We
intend
to evaluate, at the time of any preemptive rights offering, the practicality
under Chilean law and Central Bank regulations in effect at the time of making
such rights available to our ADS holders, as well as the costs and potential
liabilities associated with registration of such rights and the related shares
of common stock under the Securities Act, and the indirect benefits to us of
thereby enabling the exercise by all or certain holders of ADSs of their
preemptive rights and any other factors we consider appropriate at the time,
and
then to make a decision as to whether to file such registration statement.
We
cannot assure you that any registration statement
would
be
filed. If we do not file a registration statement and no exemption from the
registration requirements under the Securities Act is available, the depositary
will sell such holders’ preemptive rights and distribute the proceeds thereof if
a premium can be recognized over the cost of such sale. In the event that the
depositary is not able, or determines that it is not feasible, to sell such
rights at a premium over the cost of any such sale, all or certain holders
of
ADSs may receive no value for such rights. Non-U.S. holders of ADSs may be
able
to exercise their preemptive rights regardless of whether a registration
statement is filed. The inability of all or certain holders of ADSs to exercise
preemptive rights in respect of shares of common stock underlying such ADSs
could result in such holders not maintaining their percentage ownership of
the
common stock following such preemptive rights offering unless such holder made
additional market purchases of ADSs or shares of common stock.
Under
Chilean law, preemptive rights are exercisable or freely transferable by
shareholders during a period that cannot be less than 30 days following the
grant of such rights. During such period, and for an additional 30-day period
thereafter, a Chilean corporation is not permitted to offer any unsubscribed
shares for sale to third parties on terms which are more favorable than those
offered to its shareholders. At the end of such additional 30-day period, a
Chilean open stock corporation is authorized to sell unsubscribed shares to
third parties on any terms, provided they are sold on a Chilean stock exchange.
Unsubscribed shares that are not sold on a Chilean stock exchange can be sold
to
third parties only on terms no more favorable for the purchaser than those
offered to shareholders.
Description
of American Depositary Shares
This
section summarizes all of the material provisions of the Amended and Restated
Deposit Agreement, dated as of August 1, 2002, among Banco Santander-Chile
(formerly known as Banco Santiago), The Bank of New York, as depositary, and
the
holders of ADRs from time to time pursuant to which the American Depositary
Receipts (which we refer to as ADRs) were issued. We refer to this agreement
as
the “deposit agreement.” We do not, however, describe every aspect of the
deposit agreement. You should read the deposit agreement for a more detailed
description of the terms of the ADRs. Additional copies of the deposit agreement
are available for inspection at the Corporate Trust Office of the depositary,
which is presently located at 101 Barclay Street, New York, New York
10286.
American
Depositary Receipts
The
depositary will issue ADRs evidencing American depositary shares (which we
refer
to as ADSs) pursuant to the deposit agreement. Each ADS will represent 1,039
shares of our common stock deposited with us, as custodian. An ADR may represent
any number of ADSs. Only persons in whose names ADRs are registered on the
books
of the depositary will be treated by the depositary and us as holders of
ADRs.
Pursuant
to the terms of the deposit agreement, holders, owners and beneficial owners
of
ADRs will be subject to any applicable disclosure requirements regarding
acquisition and ownership of shares of common stock or ADSs representing shares
of our common stock as are applicable pursuant to the terms of our
estatutos or Chilean laws, as each may be amended from time to time.
See “—Ownership Restrictions” for a description of the disclosure requirements
applicable to shares of common stock and the consequences of noncompliance.
The
depositary has agreed, subject to the terms and conditions of the deposit
agreement, to comply with our instructions as to such requirements.
Deposit
and Withdrawal of Common Stock
Upon
written order of the depositor, the depositary will execute and deliver to
the
persons specified in the written order, an ADR or ADRs registered in the name
of
such person or persons for the number of ADSs issuable in respect of such
deposit, subject to the terms of the deposit agreement and upon
the:
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deposit
with the custodian of the required number of shares of common stock
accompanied by any appropriate instrument of transfer or endorsement
in
the form satisfactory to the
custodian;
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delivery
of such certifications and payments as may be required by the custodian
or
the depositary;
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payment
of the required fees, charges and taxes;
and
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if
required by the depositary and as applicable, the delivery to the
depositary of an agreement or instrument providing full transfer
to the
custodian or its nominee of any dividend or right to subscribe shares
or
to receive other property or the proxy or proxies entitling the custodian
to vote on the shares.
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The
execution and delivery of the ADRs will take place at any of the depositary’s
designated transfer offices.
The
depositary will not accept for deposit any shares of common stock unless it
receives evidence of necessary regulatory approvals, if any.
The
depositary may issue ADRs against rights to receive shares from us, any of
our
agents or a central clearing agency approved in writing by us. The depositary
may issue ADRs against other rights to receive shares only if:
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such
other rights are fully collateralized (marked-to-market daily) with
cash
or U.S. government securities until such shares of common stock are
deposited;
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each
applicant for such ADRs represents in writing that it owns such shares,
has assigned all beneficial right, title and interest in such shares
to
the depositary and will hold such shares for the account of the depositary
until delivery of the shares following the depositary’s
request;
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such
transaction may be terminated by the depositary on no more than five
business days’ notice; and
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all
ADRs issued against rights to receive shares represent no more than
20.0%
of the shares actually deposited. The depositary may retain any
compensation received by it in connection with these transactions,
including without limitation, earnings on such
collateral.
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Notwithstanding
any other provisions of the deposit agreement or the ADR to the contrary,
holders of ADRs are entitled to withdraw the deposited shares at any time,
subject only to:
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temporary
delays caused by closing the transfer books of the depositary or
us;
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temporary
delays caused by the deposit of shares of common stock in connection
with
voting at a shareholders’ meeting or the payment of
dividends;
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the
payment of fees, taxes and similar charges;
and
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compliance
with any U.S. or foreign laws or governmental regulations relating
to the
ADRs or to the withdrawal of the deposited
shares.
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ADR
holders are entitled to receive from the custodian’s office in Chile, after they
surrender ADRs at the depositary’s office and pay any fees, governmental charges
and taxes provided in the deposit agreement:
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any
other property that the surrendered ADRs evidence the right to receive;
and
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a
certificate from the custodian stating that the applicable deposited
shares are being transferred to the person or persons specified by
the
surrendering holder and that the depositary waives in favor of such
person
the right of access to the formal exchange market relating to such
withdrawn shares.
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At
its
discretion, the depositary may deliver the property that the ADR holders
surrendering ADRs have the right to receive (other than the certificates
representing the shares) at its office. At the request, risk and expense of
the
ADR holder surrendering ADRs, deposited shares and other proper documents of
title may be forwarded from our office in Chile to the depositary’s office for
delivery to the surrendering holders. In the event the depositary determines
that there is a reasonable possibility that a tax would be imposed upon the
withdrawal of shares in exchange for surrendered ADRs, it may require that
the
withdrawing investor provide satisfactory security to it in an amount sufficient
to cover the estimated amount of the tax.
Dividends,
Other Distributions and Rights
The
depositary is required to convert promptly into dollars and transfer to the
United States all cash dividends and other cash distributions denominated in
Chilean pesos (or any other currency other than dollars) that it receives in
respect of the deposited shares, to the extent that it can do so on a reasonable
basis and subject to Chilean law and the Foreign Investment Contract. The
depositary is also required to distribute the amount received in dollars to
the
holders of ADRs upon an averaged or other practicable basis without regard
to
any distinctions among holders on account of exchange restrictions or the date
of delivery of any ADR or ADRs or otherwise. The amount distributed by the
depositary will be reduced by any amounts to be withheld by us, the depositary
or by us acting as custodian, including amounts on account of any applicable
taxes and certain other expenses. For further information regarding applicable
taxes, see “—Taxation.”
If
the
depositary determines that in its judgment any currency other than dollars
received by it cannot be converted on a reasonable basis and transferred, or
if
the Foreign Investment Contract shall cease to be in effect or the rights of
the
depositary thereunder shall be restricted or suspended, the depositary, may
after consultation with us, distribute such foreign currency received by it
or
hold such foreign currency (without liability for interest) for the respective
accounts of the ADR holders entitled to receive the same.
If
we
declare a dividend in or free distribution of additional shares, the depositary
may (with our approval) and shall (if we so request), distribute to the ADR
holders (in proportion to the number of ADSs evidenced by their respective
ADRs)
additional ADRs evidencing an aggregate number of ADSs that represents the
number of shares of common stock received in such dividend or free distribution.
Instead of delivering ADRs of fractional ADSs, the depositary will sell the
amount of shares represented by the aggregate of such fractions and will
distribute the net proceeds to holders of ADRs in accordance with the deposit
agreement. If additional ADRs (other than ADRs for fractional ADSs) are not
so
distributed, each ADS shall thereafter also represent the additional shares
distributed.
If
we
offer (or cause to be offered) to the holders of shares any rights to subscribe
for additional shares of common stock or any rights of any other nature, the
depositary shall, after consultation with us, have discretion:
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as
to the procedure followed to make such rights available to ADR
holders;
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in
disposing of such rights for the benefit of such owners and making
the net
proceeds available in dollars to holders;
or
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if
the depositary may not make such rights available or dispose of such
rights and make the proceeds available, allowing the rights to lapse
unexercised (without incurring liability to any person as a consequence
thereof);
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provided
that the depositary will, at our request, either:
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if
it determines that it is lawful and feasible to do so, make such
rights
available to ADR holders by means of warrants or employ such other
method
as it may deem feasible in order to facilitate the exercise, sale
or
transfer of rights by such holder;
or
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sell
such rights or warrants or other instruments at public or private
sale, at
such place or places and upon such terms as it may deem proper, and
allocate the net proceeds of such sales for the account of the owners
of
ADRs otherwise entitled upon an averaged or other practicable basis
without regard to any distinctions among holders on account of exchange
restrictions or the date of delivery of an ADR or ADRs or
otherwise.
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Conversion
of such net proceeds from pesos to dollars is subject to the terms and
conditions of the Foreign Investment Contract, including presentation to the
Central Bank of a request for access to the Formal Exchange Market.
In
this
regard, we may, in our sole discretion, decide not to register the securities
to
which such rights relate under the Securities Act where such registration may
be
required in connection with the offer or sale of such
securities.
In this case, ADR holders would not be permitted to purchase such securities
or
otherwise exercise such rights and the depositary would, to the extent possible,
dispose of such rights for the account of such holders as provided above. Such
a
disposal or rights may reduce the equity interest that ADR holders have in
us.
If
the
depositary determines that any distribution of property other than cash
(including shares of common stock or rights to subscribe therefor) is subject
to
any tax or governmental charge that it is obligated to withhold, the depositary
may dispose of all or a portion of such property in such amounts and in such
manner as it deems necessary and practicable to pay such taxes or governmental
charges. The depositary will distribute the net proceeds of any such sale or
the
balance of any such property after deduction of such taxes or governmental
charges to the ADR holders.
Upon
any
split, consolidation, cancellation or any other reclassification of shares
of
common stock, or upon any recapitalization, reorganization, merger or
consolidation or sale of assets affecting us, or to which we are a party, any
securities that shall be received by the depositary or the custodian in respect
of shares shall be treated as newly deposited shares under the deposit
agreement, and ADSs shall from then on represent the right to receive the
securities so received, except when (1) additional ADRs (as in the case of
a
stock dividend), or (2) the depositary calls for the surrender of outstanding
ADRs to be exchanged for new ADRs.
Record
Dates
Whenever
any distribution is being made upon deposited shares of common stock, or
whenever the depositary shall receive notice of any meeting of holders of shares
or whenever the depositary shall find it necessary or convenient in connection
with the giving of any notice, solicitation or any consent or any other matter,
the depositary will fix, by notice to ADR holders and to us, a record date
(which, to the extent practicable, shall be the same as the corresponding record
date set by us or otherwise shall be the earliest practicable day thereafter)
for the determination of the ADR holders who are entitled to receive such
dividend, distribution or rights, or net proceeds of the sale thereof, to
exercise the rights of ADR holders with respect to such changed number of
shares, or to give instructions for the exercise of voting rights, if any,
at
any such meeting, subject to the provisions of the deposit
agreement.
Voting
of the Underlying Deposited Securities
When
the
depositary receives any notice of a meeting of holders of common stock, it
will
mail to all ADR holders a notice containing:
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the
information included in such notice received by
it;
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a
statement that each holder as of a specified record date will be
entitled,
subject to Chilean law and the provisions of or governing the deposited
shares, to instruct the depositary as to the exercise of the voting
rights, if any, pertaining to the deposited shares represented by
ADSs
evidenced by such holder’s ADRs;
and
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a
statement as to the manner in which each such holder of ADRs may
instruct
the depositary to exercise any right to vote held by such
holder.
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See
“—Meetings and Voting Rights.” The holders of ADRs at the close of business on
the date specified by the depositary are entitled, subject to any applicable
provisions of Chilean law, our bylaws or the shares, to instruct the depositary
how to exercise the voting rights, if any, pertaining to the shares represented
by their ADSs. The depositary will endeavor, insofar as practicable and
permitted under Chilean law and the shares, to vote the shares so represented
in
accordance with any such written instructions of holders of ADRs. The depositary
may not itself exercise any voting discretion over any shares. If the depositary
does not receive instructions from a holder of ADRs, the depositary shall deem
such holder to have instructed it to give discretionary proxy to a person
designated by us to vote the underlying shares.
Reports
and Notices
The
depositary will mail ADR holders any reports and communications received from
us
that are made generally available to holders of shares of common stock. The
depositary will also send to ADR holders copies or summaries of such reports
when furnished by us.
On
or
before the first date notice is given by us, by publication or otherwise, of
any
meeting or adjournment of a meeting of shareholders or of the taking of any
action by shareholders other than at a meeting, or the making of any
distribution on or offering of rights in respect of the deposited shares, we
will send the depositary a copy of the notice in the form given or to be given
to holders of shares. The depositary will arrange for the mailing to all ADR
holders of a notice containing the information (or a summary of the information)
contained in any notice of a meeting of holders of shares it
receives.
Amendment
and Termination of the Deposit Agreement
The
form
of the ADRs and the deposit agreement may at any time be amended by an agreement
between us and the depositary. Any amendment that imposes or increases any
fees
or charges (other than the fees of the depositary for the execution and delivery
or the cancellation of ADRs and taxes and other governmental charges), or that
otherwise prejudices any substantial existing right of ADR holders, will not
take effect as to outstanding ADRs until the expiration of 30 days after notice
of such amendment has been given to the holders of outstanding ADRs. Every
holder of an ADR at the time such amendment becomes effective will be deemed,
by
continuing to hold such ADR, to consent and agree to such amendment and to
be
bound by the deposit agreement as amended. Except in order to comply with
mandatory provisions of applicable law, in no event may any amendment impair
the
right of any ADR holder to surrender his ADR and receive therefor the shares
and
other property represented by it.
Whenever
so directed by us, the depositary will terminate the deposit agreement by
mailing notice of such termination to the holders of all ADRs at least 30 days
prior to the date fixed in such notice for termination. The depositary may
likewise terminate the deposit agreement at any time 90 days after it has
delivered to us a notice of its election to resign, provided that a successor
depositary shall not have been appointed and accepted its appointment as
provided in the deposit agreement.
If
any
ADRs remain outstanding after the date of termination, the depositary
will:
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discontinue
the registration of transfer of
ADRs;
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suspend
the distribution of dividends to the holders thereof;
and
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not
give any further notices or perform any further acts under the deposit
agreement, except
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the
collection of dividends and other distributions pertaining to the
shares
of common stock and any other property represented by such
ADRs;
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the
sale of rights as provided in the deposit agreement;
and
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the
delivery of shares, together with any dividends or other distributions
received with respect thereto and the net proceeds of the sale of
any
rights or other property, in exchange for surrendered
ADRs.
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As
soon as
practicable after the one year anniversary of any date of termination, the
depositary shall sell the shares and any other property represented by any
ADRs
that have not been surrendered and hold the net proceeds in a segregated
account, together with any other cash then held, without liability for interest,
in trust for the pro rata benefit of ADR holders that have not surrendered
their
ADRs. After making such sale, the depositary shall be discharged from all
obligations to us, except for certain indemnification and accounting
obligations. Upon termination of the deposit agreement, we will also be
discharged from all obligations thereunder, except for certain obligations
to
the depositary.
Charges
of Depositary
The
depositary will charge anyone to whom ADRs are delivered and anyone who
surrenders ADRs $5.00 per 100 ADSs (or portion thereof) so issued or
surrendered.
We
will
pay certain other charges of the depositary under the deposit agreement, except
for:
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taxes
and other governmental charges (which are payable by ADR holders
and
persons depositing shares);
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any
applicable share transfer or registration fees on deposit or withdrawal
of
shares (which are also payable by such holders and
persons);
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any
applicable fees in connection with the execution, delivery, transfer
or
surrender of, or distributions on, ADRs (which are also payable by
such
holders and persons);
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such
cable, telex, facsimile transmission and delivery charges and such
expenses as are expressly provided to be at the expense of such holders
and persons; and
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expenses
that are paid or incurred by the depositary in connection with the
conversion into dollars, pursuant to the deposit agreement, or any
other
currency received by the depositary in respect of the shares held
on
deposit (which are reimbursable to the depositary out of such
dollars).
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Liability
of Holders for Taxes or Other Charges
Any
tax or
other governmental charge or expense (including, without limitation, any Chilean
tax on a gain realized or deemed to be realized, upon the withdrawal or sale
of
shares of common stock or other property held by the custodian or depository
in
respect of such shares) payable by the custodian, the depositary or its nominee
as the registered holder of any deposited shares represented by ADSs evidenced
by any ADR shall be payable by the holder of such ADR to the depositary. The
depositary may refuse to effect registration of transfer and withdrawal of
shares underlying such ADR until such payment is made, and may withhold any
dividends or other distributions or may sell for the account of the holder
thereof any part or all of the deposited shares underlying such ADR and may
apply such dividends or distributions or the proceeds of any such sale in
payment of any such tax or other governmental charge or expense, the holder
of
such ADR remaining liable for any deficiency.
Transfer
of American Depositary Receipts
The
ADRs
are transferable on the books of the depositary, provided that the depositary
may close the transfer books, at any time and from time to time, when deemed
expedient by it in connection with the performance of its duties or at our
request. The depositary or the custodian may require payment from the person
presenting an ADR or the depositor of the shares of a sum sufficient to
reimburse it for any tax or other governmental charge, and any stock transfer
or
registration fee with respect thereto and payment of any applicable fees payable
by the holders of ADRs as a condition to the execution and delivery,
registration of transfer, split-up, combination or surrender of any ADR or
transfer and withdrawal of shares of common stock.
The
depositary may refuse to deliver ADRs, register the transfer of any ADR or
make
any distribution of, or related to, shares until it has received such proof
of
citizenship, residence, exchange control approval, payment of all applicable
Chilean taxes or other governmental charges, legal or beneficial ownership
or
other information as it may deem necessary or proper or as we may require by
written request to the depositary. The execution and delivery or transfer of
ADRs generally may be suspended during any period when our transfer books or
the
transfer books of the depositary are closed or if deemed necessary or advisable
by us or the depositary. ADR holders may inspect the transfer books of the
depositary at any reasonable time, provided that such inspection shall not
be
for the purpose of communicating with other holders of the ADRs in the interest
of a business or object other than our business or a matter related to the
deposit agreement or the ADRs.
General
Neither
we
nor the depositary will be liable to the holders of ADRs if prevented or delayed
in performing their obligations under the deposit agreement by any present
or
future law, regulation, decree, order or other action of the United States,
Chile or any other country, or of any other governmental authority (including
any action that may constitute a breach by the Central Bank of its obligation
under the Foreign Investment Contract), or by reason of any provision, present
or future, of the Foreign Investment Contract, or by reason of any act of God,
war or circumstances beyond their control or in the case of the depositary,
any
provision of our bylaws or of the securities deposited. Our obligations and
those of the depositary are expressly limited to performing their respective
duties specified therein without negligence or bad faith.
So
long as
any ADRs or ADSs are listed on one or more stock exchanges, the depositary
will
act as registrar or, with our approval, appoint a registrar or one or more
co-registrars, for registration of such ADRs in accordance with any requirements
of such exchanges. Such registrars or co-registrars shall, upon our request,
and
may, with our approval, be removed and a substitute or substitutes appointed
by
the depositary. The depositary will periodically furnish the Chilean
Superintendency of Banks with the list of the registered holders of ADRs and
a
list of all beneficial owners who do not object to the disclosure of this
information.
ADS
holders are subject to certain provisions of the rules and regulations
promulgated under the U.S. Securities Exchange Act of 1934, as amended, or
the
Exchange Act, and to the regulations of the Chilean Superintendency of Banks
relating to the disclosure of interests in the shares of common stock. Any
ADS
holder who has or comes to have a directly or indirectly, an interest of 5.0%
(or such other percentage as may be prescribed by law or regulation) or more
of
our outstanding shares must:
·
|
under
the Exchange Act, within 10 days after acquiring such interest and
thereafter upon certain changes in such interests, notify us as required
by such rules and regulations; and
|
·
|
under
regulations of the Chilean Superintendency of Banks, within 15 days
after
acquiring such interest, send to us a notarized declaration as to
the
number of shares and ADSs beneficially owned by it and commit to
report to
us any subsequent acquisitions of shares or
ADSs.
|
In
addition, ADR holders are subject to the reporting requirements contained in
Articles 12 and 54 and Titles XV and XXV of the Chilean Securities Market Law
and Article 16 bis of the General Banking Law and the ownership limitations of
Articles 35 bis and 36 of the General Banking Law (which provisions may apply
when a holder beneficially owns or intends to purchase 10.0% or more of our
shares or has the intention of taking control of us).
ADS
holders who beneficially own more than 1.0% of the shares of common stock are
also subject to the presumption created by Article 84 No. 2 of the General
Banking Law that such owners are related parties to the Bank, and are thus
subject to certain restrictions on the amounts and terms of loans made by banks
to related parties.
Valuation
of Underlying Shares for Chilean Law Purposes
For
all
purposes of valuation under Chilean law, the acquisition value of the shares
of
common stock delivered to any holder upon surrender of ADRs shall be the highest
reported sale price of the shares on the Santiago Stock Exchange on the day
during which the transfer of the shares is recorded under the name of such
holder. In the event that no such sale price is reported by such Exchange during
that day, the value shall be deemed to be the highest trade price on the day
during which the last trade took place. However, if 30 or more days have elapsed
since the last trade, such value shall be adjusted in accordance with the
variation of the Chilean consumer price index during the period since such
last
trade date.
C. Material
Contracts
On
June
30, 2000, we entered into a long-term contract with IBM for the operation of
certain of our systems. On October 15, 2002, this contract was amended as a
result of the merger. IBM provides us with information technology services
and
hardware infrastructure to run our core transactional systems. We signed a
contract with
IBM
for
such activities which expires in 2012, pursuant to which we agreed to pay IBM
approximately US$10 million per year for five years. At December 31,
2006, aggregate remaining payments were expected to total US$44.4 million over
the life of the contract, including taxes.
In
the
fourth quarter of 2003, the Bank and Almacenes París, the third largest retailer
in Chile, announced a strategic alliance to strengthen commercial synergies
between both entities and offer exclusive benefits to their clients. This
alliance was consummated in December 2004 when Santander-Chile transferred
to
Empresas París part of the financial assets and branch network of
Santander-Chile’s Santiago Express division, along with this division’s
personnel, which became Banco París. In addition, the Bank transferred
Ch$120,808 million (US$226 million) in assets to Empresas París, generating a
profit of Ch$23,093 million (US$43.2 million) recorded in non-operating income
in 2004.
In
December 2003, we signed an agreement with Altec, Banco Santander Central
Hispano’s systems management company for Latin America, in order to outsource
certain system management functions. This contract has a term of three years
commencing on January 1, 2004. The main services Altec provides to us are
development and maintenance of applications and systems technology and
engineering. Pursuant to this contract, We pay Altec certain service
fees comprising of fixed charges and variable charges. The current
service rates effective 2007 include annual fixed charges in a total amount
of
UF24,186 (Ch$443.3 million or US$829,856) and variable rates ranging from UF0.90
to UF0.95 per hour.
In
August
2005, the Bank entered into a contract with the Sociedad Operadora de la Cámara
de Compensación de Pagos de alto Valor S.A. (ComBanc) in order to participate in
the “Servicio Cámara de Compensación de Pagos de Alto Valor”, which is an
electronic clearing system for transactions for large movements between demand
deposit accounts. The Bank must pay fixed and variable fees for participating
in
this system. The fixed fee was UF243 (Ch$4.5 million or US$8,337). The variable
fee depends on the Bank’s market share in demand deposits and was UF1,339
(Ch$24.6 million or US$45,941) at December 31, 2006.
In
February 2007, the Bank agreed to pledge its shares in Administrador Financiero
de Transantiago ("AFT") in favor of the service providers of Santiago’s new
public transportation system, TransSantiago. AFT is the company in charge of
administering the finances of the new transportation system, TransSantiago,
and
all shareholders in AFT had to pledge their shares to the service
providers. This pledge was approved by our shareholders at a special
Shareholders’ Meeting held on April 24, 2007. The book value of the
Bank’s investment in AFT was US$2.2 million at December 31, 2006.
D.
Exchange Controls
The
Central Bank is responsible for, among other things, monetary policies and
exchange controls in Chile. Appropriate registration of a foreign investment
in
Chile grants the investor access to the Formal Exchange Market. See“Item 3: Key
Information—A. Selected Financial Data—Exchange Rates.” Foreign investments
can be registered with the Foreign Investment Committee under Decree Law No.
600
or can be registered with the Central Bank under the Central Bank Act. The
Central Bank Act is an organic constitutional law requiring a “special majority”
vote of the Chilean Congress to be amended. Since April 18, 2001, all
exchange controls in Chile have been eliminated.
Previously,
Chilean law mandated that holders of shares of Chilean companies that were
not
residents of Chile register as foreign investors under one of the foreign
investment regimes contemplated by Chilean law in order to receive dividends,
sale proceeds or other amounts with respect to their shares remitted outside
Chile through the Formal Exchange Market. Under the Foreign Investment Contract
(as defined herein), the Depositary, on behalf of ADS holders, is granted access
to the Formal Exchange Market to convert cash dividends from Chilean pesos
to
U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net
of
taxes, and no separate registration by ADR holders is required. As of April
19,
2001, the Central Bank deregulated the Exchange Market, eliminating the need
to
obtain approval from the Central Bank in order to remit dividends, but at the
same time eliminating the possibility of guaranteeing access to the Formal
Exchange Market. It is important to point out that this does not affect the
current Foreign Investment Contract, which was signed prior to April 19, 2001
and still permits access to the Formal Exchange Market based on the prior
approval of the Central Bank. Therefore the holders of ADRs of
Santander-Chile
are still subject to the Foreign Investment Contract, including its clauses
referring to the prior exchange rules including the now extinct Chapter XXVI
of
the Compedium.
E. Taxation
The
following discussion summarizes certain material Chilean tax and United States
federal income tax consequences to beneficial owners arising from the purchase,
ownership and disposition of the ADSs. The summary does not purport to be a
comprehensive description of all potential Chilean tax and United States federal
income tax considerations that may be relevant to a decision to purchase, own
or
dispose of the ADSs and is not intended as tax advice to any particular
investor. This summary does not describe any tax consequences arising under
the
laws of any state, locality or other taxing jurisdiction other than Chile and
the United States. There is currently no income tax treaty between the United
States and Chile.
Material
Tax Consequences of Owning Shares of Our Common Stock or
ADSs
Chilean
Taxation
The
following is a summary of certain Chilean tax consequences of the ownership
of
shares of Santander-Chile’s common stock or of ADSs evidenced by ADRs by Foreign
Holders (as defined herein). The summary does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision
to purchase, own or dispose of shares or ADSs and does not purport to deal
with
the tax consequences applicable to all categories of investors, some of whom
may
be subject to special rules. Holders of shares or ADSs are advised to consult
their own tax advisors concerning the Chilean and other tax consequences of
the
ownership of shares or of ADSs evidenced by ADRs.
The
description of Chilean tax laws set forth below is based on Chilean laws in
force as of the date of this Annual Report and is subject to any changes in
such
laws occurring after the date of this Annual Report. These changes can be made
on a retroactive basis.
For
purposes of this summary, the term “Foreign Holder” means either (1) in the case
of an individual, a person who is not resident or domiciled in Chile (for
purposes of Chilean taxation, (a) an individual holder is resident in Chile
if
he or she has resided in Chile for more than six months in one calendar year,
or
a total of more than six months in two consecutive fiscal years and (b) an
individual is domiciled in Chile if he or she resides in Chile with the actual
or presumptive intent of staying in Chile); or (2) in the case of a legal
entity, a legal entity that is not domiciled in Chile, unless the shares of
Santander-Chile’s common stock or ADSs are assigned to a branch or a permanent
establishment of such entity in Chile.
Taxation
of Dividends
Cash
dividends paid by Santander-Chile with respect to shares of its common stock
held by a Foreign Holder, including shares represented by ADSs, will be subject
to a 35% Chilean withholding tax, which is withheld and paid over by
Santander-Chile (the “Withholding Tax”). If Santander-Chile has paid corporate
income tax (the “First Category Tax”) on the income from which the dividend is
paid, a credit for the First Category Tax effectively reduces the rate of
Withholding Tax. When a credit is available, the Withholding Tax is computed
by
applying the 35% rate to the pre-tax amount needed to fund the dividend and
then
subtracting from the tentative withholding tax so determined the amount of
First
Category Tax actually paid on the pre-tax income. For purposes of determining
the rate at which First Category Tax was paid, dividends are treated as paid
from Santander-Chile’s oldest retained earnings.
The
effective rate of Withholding Tax to be imposed on dividends paid by
Santander-Chile will vary depending upon the amount of First Category Tax paid
by Santander-Chile on the earnings underlying the dividends. The effective
rate
for the First Category Tax attributed to earnings generated during the fiscal
year 2004 and onwards is 17.0%. Full applicability of the First Category Tax
credit at the 17.0% rate results in an effective Withholding Tax rate of 2l.7
%.
Consequently, the Withholding Tax rate with respect to dividends fluctuates
between 21.7% and 35.0%, depending on whether or not we are subject to the
First
Category Tax.
The
example below illustrates the effective Chilean Withholding Tax burden on a
cash
dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%,
an effective First Category Tax rate of 17% and a distribution of all of the
net
proceeds available after payment of the First Category Tax.
Taxable
income
|
|
US$
100
|
|
First
Category Tax (17% of US$100)
|
|
|
(17 |
) |
Net
proceeds available
|
|
|
83
|
|
Dividend
payment
|
|
|
83
|
|
Withholding
Tax (35% of the sum of the dividend (US$83) and the available First
Category Tax credit (US$17)
|
|
|
(35 |
) |
First
Category Tax credit
|
|
|
17
|
|
Payable
Withholding Tax
|
|
|
(18 |
) |
Net
dividend received
|
|
|
65(83-18
|
) |
Effective
dividend withholding tax rate
|
|
|
21.7
|
% |
|
|
|
(18/83
|
) |
Dividend
distributions made in kind would be subject to the same Chilean tax rules as
cash dividends. Stock dividends are not subject to Chilean taxation. The
distributions of preemptive rights relating to shares of common stock will
not
be subject to Chilean taxation.
Taxation
of Capital Gains
Gain
realized on the sale, exchange or other disposition by a Foreign Holder of
ADSs
(or ADRs evidencing ADSs) will not be subject to Chilean taxation, provided
that
such disposition occurs outside Chile or that it is performed under the rules
of
Title XXIV of the Chilean Securities Market Law, as amended by Law No. 19,601,
dated January 18, 1999. The deposit and withdrawal of shares of common stock
in
exchange for ADRs will not be subject to any Chilean taxes.
Gain
recognized on a sale or exchange of shares of common stock (as distinguished
from sales or exchanges of ADSs representing such shares of common stock) by
a
Foreign Holder will be subject to both the First Category Tax and the Chilean
withholding tax (the former being creditable against the latter) if (1) the
Foreign Holder has held such shares of common stock for less than one year
since
exchanging ADSs for the shares of common stock, (2) the Foreign Holder acquired
and disposed of the shares of common stock in the ordinary course of its
business or as a regular trader of stock or (3) the sale is made to a company
in
which the Foreign Holder holds an interest. In all other cases, gain on the
disposition of shares of common stock will be subject only to the First Category
Tax levied as sole tax. The sale of shares of common stock by a Foreign Holder
to an individual or entity resident or domiciled in Chile is subject to a
provisional withholding. Such a provisional withholding will be equal
to (i) 5% of the amount, without any deduction, paid to, credited to, account
for, put at the disposal of, or corresponding to, the Foreign Holder if the
transaction is subject to the First Category Tax as sole tax, unless the gain
subject to taxation can be determined, case in which the withholding is equal
to
17% on the gain, or (ii) 20% of the amount, without any deduction, paid to,
credited to, account for, put at the disposal of, or corresponding to, the
Foreign Holder if the transaction is subject to the First Category Tax, and
the
Chilean withholding tax, with a credit of the First Category Tax already paid.
For income tax purposes, the capital gain shall be the difference between the
sales price and the acquisition cost of the stock. The tax basis of
shares of common stock received in exchange for ADSs will be the acquisition
value of such shares. The valuation procedure set forth in the deposit
agreement, which values shares of common stock that are being exchanged at
the
highest price at which they trade on the Santiago Stock Exchange on the date
of
the exchange, generally will determine the acquisition value for this purpose.
Consequently, the conversion of ADSs into shares of common stock and sale of
such shares of common stock for the value established under the deposit
agreement will not generate a capital gain subject to taxation in
Chile.
In
the
case where the sale of the shares is made on a day that is different than the
date on which the exchange is recorded, capital gains subject to taxation in
Chile may be generated. On October 1, 1999, the Chilean Internal Revenue Service
issued Ruling No. 3708 whereby it allowed Chilean issuers of ADSs to amend
the
deposit
agreements
to which they are parties in order to include a clause that states that, in
the
case that the exchanged shares are sold by the ADSs’ holders in a Chilean Stock
Exchange, either on the same day in which the exchange is recorded in the
shareholders’ registry of the issuer or the two prior business days to such
date, the acquisition price of such exchanged shares shall be the price
registered in the invoice issued by the stock broker that participated in the
sale transaction. Consequently, because we have included this clause in the
form
of ADR attached to the deposit agreement, the capital gain that may be generated
if the shares received in exchange for ADSs were sold within two days prior
to
the date on which the exchange is recorded, will not be subject to
taxation.
The
distribution and exercise of preemptive rights relating to the shares of common
stock will not be subject to Chilean taxation. Cash amounts received in exchange
for the shares or assignment of preemptive rights relating to the shares will
be
subject to both the First Category Tax and the Chilean withholding tax (the
former being creditable against the latter to the extent described
above).
In
certain
cases and provided certain requirements are met, capital gains realized on
the
sale of actively traded stock of Chilean public companies may be exempt from
Chilean income taxes. Our stock is currently considered an actively traded
stock
in the Santiago Stock Exchange, and Foreign Holders of the stock may qualify
for
an income tax exemption. Foreign Holders are urged to consult with their own
tax
advisors to determine whether an exemption applies to them.
Other
Chilean Taxes
No
Chilean
inheritance, gift or succession taxes apply to the transfer or disposition
of
the ADSs by a Foreign Holder, but such taxes generally will apply to the
transfer at death or by gift of shares of Santander-Chile’s common stock by a
Foreign Holder. No Chilean stamp, issue, registration or similar taxes or duties
apply to Foreign Holders of shares or ADSs.
Withholding
Tax Certificates
Upon
request, Santander-Chile will provide to foreign holders appropriate
documentation evidencing the payment of Chilean withholding taxes. For further
information, the investor should contact: Robert Moreno,
[email protected].
Dividends
payable to holders of ADSs are net of foreign currency conversion expenses
of
the Depositary and will be subject to the Chilean withholding tax currently
at
the rate of 35% (subject to credits in certain cases as described above). Owners
of the ADSs will not be charged any dividend remittance fees by the Depositary
with respect to cash or stock dividends.
U.S.
Federal Income Tax Considerations
The
following is a discussion of material U.S. federal income tax consequences
of
purchasing, owning and disposing of shares or ADSs, but it does not purport
to
be a comprehensive description of all of the tax considerations that may be
relevant to a particular person’s decision to acquire such securities. The
discussion applies only if you hold shares or ADSs as capital assets for tax
purposes and it does not address special classes of holders, such
as:
·
|
certain
financial institutions;
|
·
|
dealers
and traders in securities or foreign
currencies;
|
·
|
persons
holding shares or ADSs as part of a hedge, straddle or conversion
transaction;
|
·
|
persons
whose functional currency for U.S. federal income tax purposes is
not the
U.S. dollar;
|
·
|
partnerships
or other entities classified as partnerships for U.S. federal income
tax
purposes;
|
·
|
persons
liable for the alternative minimum
tax;
|
·
|
tax-exempt
organizations; or
|
·
|
persons
holding shares or ADSs that own or are deemed to own ten percent
or more
of our voting stock.
|
This
discussion is based on the Internal Revenue Code of 1986, as amended (the
“Code”), administrative pronouncements, judicial decision and final, temporary
and proposed Treasury regulations, all as currently in effect. These laws are
subject to change, possibly on a retroactive basis. It is also based in part
on
representations by the depositary and assumes that each obligation under the
Deposit Agreement and any related agreement will be performed in accordance
with
its terms. Please consult your own tax advisers concerning the U.S. federal,
state, local and foreign tax consequences of purchasing, owning and disposing
of
shares or ADSs in your particular circumstances.
The
discussion below applies to you only if you are a beneficial owner of shares
or
ADSs and are for U.S. federal tax purposes:
·
|
a
citizen or resident of the United
States;
|
·
|
a
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or any political
subdivision thereof; or
|
·
|
an
estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
|
In
general, if you hold ADSs, you will be treated as the holder of the underlying
shares represented by those ADSs for U.S. federal income tax purposes.
Accordingly, no gain or loss will be recognized if you exchange ADSs for the
underlying shares represented by those ADSs.
The
U.S.
Treasury has expressed concerns that parties to whom ADSs are pre-released
may
be taking actions that are inconsistent with the claiming of foreign tax credits
for holders of ADSs. Such actions would also be inconsistent with the claiming
of the reduced rate of tax, described below, applicable to dividends received
by
certain non-corporate holders. Accordingly, the analysis of the creditability
of
Chilean taxes and the availability of the reduced rate for dividends received
by
certain non-corporate holders, each described below, could be affected by future
actions that may be taken by the parties to whom the ADSs are
pre-released.
Taxation
of Distributions
Distributions
paid on ADSs or shares, other than certain pro rata distributions of common
shares or rights, will be treated as dividends to the extent paid out of current
or accumulated earnings and profits (as determined under U.S. federal income
tax
principles). Since we do not maintain calculations of our earnings and profits
under U.S. federal income tax principles, U.S. holders will generally be
required to treat such distributions as taxable dividends. Subject to applicable
limitations and the discussion above regarding concerns expressed by the U.S.
Treasury, under current law, certain dividends paid by qualified foreign
corporations to certain non-corporate U.S. Holders in taxable years beginning
before January 1, 2011, are taxable at a maximum rate of 15%. A foreign
corporation is treated as a qualified foreign corporation with respect to
dividends paid on stock which is readily tradable on a securities market in
the
United States, such as the New York Stock Exchange where our ADSs are traded.
You should consult your own tax advisers to determine whether the favorable
rates may apply to dividends you receive and whether you are subject to any
special rules that limit your ability to be taxed at this favorable
rate. The amount of the dividend will include any amounts
withheld by us or our paying agent in respect of Chilean taxes at the effective
rate as described above under “—Chilean Taxation.” The amount of the dividend
will be treated as foreign source dividend income to you and will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations under the Code.
Dividends
paid in Chilean pesos will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the date of your
(or
in the case of ADSs, the depositary’s) receipt of the dividend, regardless of
whether the payment is in fact converted into U.S. dollars. If the dividend
is
converted into U.S. dollars on the date of receipt, you generally should not
be
required to recognize foreign currency gain or loss in respect of the dividend
income. You may have foreign currency gain or loss if you do not convert the
amount of such dividend into U.S. dollars on the date of its
receipt.
Subject
to
applicable limitations that may vary depending upon your circumstances and
the
discussion above regarding concerns expressed by the U.S. Treasury, Chilean
taxes withheld from cash dividends on shares or ADSs at the withholding tax
rate, reduced in respect of any First Category Tax, as described above under
“
—Chilean Taxation,” generally will be creditable against your U.S. federal
income tax liability. The limitation on foreign taxes eligible for credit is
determined separately with respect to specific classes of income. Instead of
claiming a credit, you may, at your election, deduct such Chilean taxes in
computing your taxable income, subject to generally applicable limitations
under
U.S. law. You should consult your own tax advisers to determine whether you
are
subject to any special rules that limit your ability to make effective use
of
foreign tax credits.
Sale
and Other Disposition of Shares or ADSs
For
U.S.
federal income tax purposes, gain or loss you realize on the sale or other
disposition of shares or ADSs generally will be capital gain or loss, and will
be long-term capital gain or loss if you held the shares or ADSs for more than
one year. The amount of your gain or loss will be equal to the difference
between your tax basis in the shares or ADSs disposed of and the amount realized
on the disposition. Such gain or loss will generally be U.S. source gain or
loss
for foreign tax credit purposes. Consequently, you may not be able to utilize
a
credit for Chilean withholding taxes imposed on gain from shares or
ADSs. You should consult your own tax advisers regarding the
availability of foreign tax credits upon the sale or other disposition of your
shares or ADSs.
Passive
Foreign Investment Company Rules
Based
on
proposed Treasury regulations (“Proposed Regulations”), we believe that we were
not a “Passive Foreign Investment Company” (“PFIC”) for U.S. federal income tax
purposes for the year ended December 31, 2006, and we do not anticipate becoming
a PFIC thereafter. However, since the Proposed Regulations may not be
finalized in their current form and since PFIC status depends upon the
composition of a company’s income and assets and the market value of its assets
(including, among others, less than 25 percent owned equity investments) from
time to time, there can be no assurance that we will not be considered a PFIC
for any taxable year. If we were treated as a PFIC for any taxable year during
which you held an ADS or a share, certain adverse tax consequences could apply
to you.
If
we are
treated as a PFIC for any taxable year, gain recognized by you on a sale or
other disposition of an ADS or share would generally be allocated ratably over
your holding period for the ADS or share. The amounts allocated to the taxable
year of the sale or other exchange and to any year before we became a PFIC
would
be taxed as ordinary income. The amount allocated to each other taxable year
would be subject to tax at the highest rate in effect for individuals or
corporations, as appropriate, and an interest charge would be imposed on the
amount allocated to such taxable year. Further, any distribution in respect
of
ADSs or shares in excess of 125 percent of the average of the annual
distributions on ADSs or shares received by you during the preceding three
years
or your holding period, whichever if shorter, would be subject to taxation
as
described above. Certain elections may be available (including a mark to market
election) to you that may help mitigate the adverse tax consequences. In
addition, if we were to be treated as a PFIC in a taxable year in which we
pay a
dividend or the prior taxable year, the 15% dividend rate discussed above with
respect to dividends paid to non-corporate shareholders would not
apply.
Information
Reporting and Backup Withholding
Payment
of
dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are subject to
information reporting and to backup withholding unless (i) you are a
corporation
or other exempt recipient or (ii), in the case of backup withholding, you
provide a correct taxpayer identification number and certify that you are not
subject to backup withholding.
The
amount
of any backup withholding from a payment to you will be allowed as a credit
against your U.S. federal income tax liability and may entitle you to a refund,
provided that the required information is timely furnished to the Internal
Revenue Service.
F. Dividends
and Paying Agents
Not
applicable.
G. Statement
by Experts
Not
applicable.
H. Documents
on Display
The
documents concerning Santander-Chile which are referred to in this Annual Report
may be inspected at our offices at Bandera 140 Santiago, Chile. We are, and
Santiago and Old Santander-Chile were, subject to the information reporting
requirements of the Exchange Act, except that, as a foreign issuer, we are
not
subject to the proxy rules or the short-swing profit and disclosure rules of
the
Exchange Act. In accordance with these statutory requirements, we file or
furnish reports and other information with the SEC. Reports and other
information filed or furnished by us with the SEC may be inspected and copied
at
the public reference room maintained by the SEC at 100 F street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Section by calling the SEC at 1-800-732-0330. Our filings
with
the SEC are also available through the SEC'S Internet site at
http://www.sec.gov and can also be inspected and copied at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York
10005.
I. Subsidiary
Information
Not
applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
This
section describes the market risks that we are exposed to, the tools and
methodology used to control these risks, the portfolios over which these market
risk methods were applied and quantitative disclosure that demonstrate the
level
of exposure to market risk that we are assuming. This section also discloses
the
derivative instruments that we use to hedge exposures and offer to our
clients.
The
principal types of risk inherent in Santander-Chile’s business are market,
liquidity, operational and credit risks. The effectiveness with which we are
able to manage the balance between risk and reward is a significant factor
in
our ability to generate long term, stable earnings growth. Toward that end,
our
senior management places great emphasis on risk management.
Market
Risk
Market
risk is the risk of losses due to unexpected changes in interest rates, foreign
exchange rates, inflation rates and other rates or prices. We are exposed to
market risk mainly as a result of the following activities:
·
|
trading
in financial instruments, which exposes us to interest rate and foreign
exchange rate risk;
|
·
|
engaging
in banking activities, which subjects us to interest rate risk, since
a
change in interest rates affected gross interest income, gross interest
expense and customer behavior;
|
·
|
engaging
in banking activities, which exposes us to inflation rate risk, since
a
change in expected inflation affects gross interest income, gross
interest
expense and customer behavior;
|
·
|
trading
in the local equity market, which subjects us to potential losses
caused
by fluctuations of the stock market;
and
|
·
|
investing
in assets whose returns or accounts are denominated in currencies
other
than the Chilean peso, which subjects us to foreign exchange risk
between
the Chilean peso and such other
currencies.
|
Market
Risk Exposure Categories
Inflation
Although
Chilean inflation has been moderate in recent years, Chile has experienced
high
levels of inflation in the past. High levels of inflation in Chile could
adversely affect the Chilean economy and have an adverse effect on our business,
financial condition and results of operations. In 2006, inflation rate was
2.6%,
compared to 3.7% in 2005 and 2.4% in 2004.
UF
denominated assets and liabilities. The “Unidad de Fomento” (UF) is
revalued in monthly cycles. On every day in the period beginning the tenth
day
of the current month through the ninth day of the succeeding month, the nominal
peso value of the UF is indexed up (or down in the event of deflation) in order
to reflect each day a proportional amount of the prior calendar month’s change
in the CPI. One UF equaled to Ch$17,317.05 at December 31, 2004, Ch$17,974.81
at
December 31, 2005 and Ch$18,336.38 at December 31, 2006. The effect
of any changes in the nominal peso value of our UF denominated assets and
liabilities is reflected in our results of operations as an increase (or
decrease, in the event of deflation) in interest revenue and expense,
respectively. The majority of long-term bonds with a maturity greater than
5
years are denominated in UFs.
Peso
Denominated Assets and Liabilities. Rates of interest prevailing in Chile
during any period reflect in significant part the rate of inflation during
the
period and expectations of future inflation. All bonds with a maturity of up
to
5 years are denominated in pesos.
Interest
Rates
Interest
rates earned and paid on Santander-Chile’s assets and liabilities reflect to a
certain degree inflation and expectations regarding inflation as well as shifts
in short term rates related to the Central Bank’s monetary policies. The Central
Bank manages short term interest rates based on its objectives of balancing
low
inflation and economic growth. In 2006, the Central Bank last increased the
reference rate on July 14, 2006 to 5.25%, but reduced it by 25 basis points
to
5.0% in January 2007.
Foreign
Exchange Fluctuations
Changes
in
the value of the Chilean peso against the U.S. dollar could adversely affect
the
financial condition and results of operations of Santander-Chile.
Santander-Chile had a policy of minimizing the effect of the fluctuation of
the
exchange rate on its results and balance sheet. In 2004 and 2005, the Chilean
peso appreciated 6.6% and 8.1% against the dollar, respectively. In
the year ended December 31, 2006, the Chilean peso depreciated 3.9% against
the
U.S. dollar.
Asset
and Liability Management
Our
policy
with respect to asset and liability management is to capitalize on our
competitive advantages in treasury operations, maximizing our net interest
revenue and return on assets and equity with a view to limiting interest rate,
liquidity and foreign exchange risks within the limits provided by Chilean
banking regulations. Subject to these constraints, we constantly have mismatched
positions with respect to interest rates and foreign
currencies.
Our asset and liability management policies are developed by ALCO following
guidelines and limits established by our Board of Directors, Banco Santander
Central Hispano’s Global Risk Department and our Market Risk and Control
Department. The ALCO is composed of the Chairman of the Board, two
additional members of the Board, the Chief Executive Officer, the Manager
of the Finance Division, the Manager of Market Risk, the Financial
Controller and other senior members of management. Senior members of
Santander-Chile’s Finance Division meet daily and, on a formal basis, weekly
with the Asset and Liabilities Management Committee and outside consultants.
In
addition, our Controller reports weekly on all of our positions to the ALCO.
Our
limits and positions are reported on a daily basis to Banco Santander Central
Hispano’s Global Risk Department. The ALCO reports as often as deemed necessary
to our Board of Directors. The risk limits set by the ALCO are implemented
by
our Finance Division and are controlled by the Market Risk and Control
Department, which establishes guidelines and policies for risk management on
a
day-to-day basis. The composition of our assets, liabilities and shareholders’
equity at December 31, 2006 by currency and term is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
337,675
|
|
|
|
-
|
|
|
|
754,732
|
|
|
|
1,092,407
|
|
|
|
7.4 |
% |
Other
assets:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
3,359,913
|
|
|
|
1,131,543
|
|
|
|
1,318,070
|
|
|
|
5,809,526
|
|
|
|
39.2 |
% |
From
one to three years
|
|
|
604,810
|
|
|
|
836,978
|
|
|
|
75,903
|
|
|
|
1,517,691
|
|
|
|
10.2 |
% |
More
than three years
|
|
|
929,043
|
|
|
|
4,736,150
|
|
|
|
184,613
|
|
|
|
5,849,806
|
|
|
|
39.4 |
% |
Bank
premises and equipment and others
|
|
|
579,432
|
|
|
|
3,499
|
|
|
|
165,142
|
|
|
|
748,073
|
|
|
|
5.0 |
% |
Allowance
for loan losses
|
|
|
(174,064 |
) |
|
|
|
|
|
|
|
|
|
|
(174,064 |
) |
|
|
(1.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of total assets
|
|
|
38.0 |
% |
|
|
45.2 |
% |
|
|
16.8 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
deposits
|
|
|
2,155,828
|
|
|
|
169,961
|
|
|
|
157,208
|
|
|
|
2,482,997
|
|
|
|
16.7 |
% |
Other
liabilities:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
3,790,326
|
|
|
|
1,944,785
|
|
|
|
2,186,874
|
|
|
|
7,921,985
|
|
|
|
53.4 |
% |
From
one to three years
|
|
|
241,062
|
|
|
|
631,721
|
|
|
|
149,956
|
|
|
|
1,022,739
|
|
|
|
6.9 |
% |
More
than three years
|
|
|
289,969
|
|
|
|
1,356,228
|
|
|
|
524,182
|
|
|
|
2,170,379
|
|
|
|
14.6 |
% |
Shareholders’
equity
|
|
|
959,757
|
|
|
|
-
|
|
|
|
-
|
|
|
|
959,757
|
|
|
|
6.5 |
% |
2006
net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of total liabilities and shareholders’ equity
|
|
|
52.0 |
% |
|
|
27.6 |
% |
|
|
20.4 |
% |
|
|
100.0 |
% |
|
|
|
|
(1)
|
Other
assets include our rights under foreign exchange contracts, and other
liabilities include our obligations under foreign exchange contracts.
Mortgage finance bonds issued by us are included as other liabilities,
and
mortgage finance bonds held in our financial investment portfolio
(issued
by third parties) are included as other
assets.
|
We
have
generally maintained more peso denominated liabilities than peso denominated
assets and more UF-denominated assets than UF-denominated liabilities. In the
context of a rising CPI, this has in the past had a positive impact on our
net
income by generating net income from adjustments of the UF that exceeds losses
arising from price level restatements. This effect is expected to decrease
significantly if rates of inflation decrease.
Interest
Rate Sensitivity
A
key
component of our asset and liability policy is the management of interest rate
sensitivity. Interest rate sensitivity is the relationship between market
interest rates and net interest revenue due to the maturity or repricing
characteristics of interest-earning assets and interest-bearing liabilities.
For
any given period, the pricing structure is matched when an equal amount of
such
assets and liabilities mature or reprice in that period. Any mismatch of
interest-earning
assets and interest-bearing liabilities is known as a gap position. A positive
gap denotes asset sensitivity and means that an increase in interest rates
would
have a positive effect on net interest revenue while a decrease in interest
rates would have a negative effect on net interest revenue.
Our
interest rate sensitivity strategy takes into account not only the rates of
return and the underlying degree of risk, but also liquidity requirements,
including minimum regulatory cash reserves, mandatory liquidity ratios,
withdrawal and maturity of deposits, capital costs and additional demand for
funds. We monitor our maturity mismatches and manage them within established
limits.
The
following table sets forth the repricing of our interest-earning assets and
interest-bearing liabilities at December 31, 2006 and may not reflect interest
rate gap positions at other times. In addition, variations in interest rate
sensitivity may exist within the repricing periods presented due to the
differing repricing dates within the period. Variations may also arise among
the
different currencies in which interest rate positions are held.
As
the
following table reflects, we have a negative gap for most periods of one year
or
less as our main source of funding are short term time deposits. The majority
of
assets and liabilities with a maturity of 90 days or less are denominated in
nominal pesos. Ninety days or more is also the most common repricing period
for
UF-denominated time deposits. In the case of interest-earning assets and
interest-bearing liabilities denominated in UF, our exposure to changes in
interest rates is reduced by the fact that a significant portion of the interest
rate earned or paid on such assets or liabilities is indexed to reflect
the effect of inflation, and as a result our gap position is limited to
variations in the real interest rate among such assets and liabilities.
Moreover, mortgage loans which have 8- to 20-year terms were generally financed
through bonds issued for the same terms and in the same currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006, except
percentages)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interbank
deposits
|
|
|
144,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144,666
|
|
Financial
investments
|
|
|
236,145
|
|
|
|
125
|
|
|
|
11,149
|
|
|
|
7,267
|
|
|
|
59,206
|
|
|
|
309,949
|
|
|
|
391,535
|
|
|
|
1,015,376
|
|
Loans
|
|
|
1,881,622
|
|
|
|
423,772
|
|
|
|
371,530
|
|
|
|
796,436
|
|
|
|
783,394
|
|
|
|
1,846,630
|
|
|
|
4,084,480
|
|
|
|
10,187,864
|
|
Mortgage
loans
|
|
|
5,865
|
|
|
|
4,676
|
|
|
|
4,658
|
|
|
|
14,219
|
|
|
|
27,899
|
|
|
|
101,096
|
|
|
|
327,436
|
|
|
|
485,849
|
|
Contingent
loans
|
|
|
143,318
|
|
|
|
128,559
|
|
|
|
103,868
|
|
|
|
190,827
|
|
|
|
177,622
|
|
|
|
240,145
|
|
|
|
38,348
|
|
|
|
1,022,687
|
|
Past
due loans
|
|
|
92,559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
2,504,175
|
|
|
|
557,132
|
|
|
|
491,205
|
|
|
|
1,008,749
|
|
|
|
1,048,121
|
|
|
|
2,497,820
|
|
|
|
4,841,799
|
|
|
|
12,949,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,964,107
|
|
|
|
940,303
|
|
|
|
547,954
|
|
|
|
1,111,341
|
|
|
|
919,913
|
|
|
|
1,195,779
|
|
|
|
229,938
|
|
|
|
6,909,335
|
|
Central
Bank borrowings
|
|
|
135,266
|
|
|
|
598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,633
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139,497
|
|
Balances
under agreements to repurchase
|
|
|
19,820
|
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,929
|
|
Mortgage
finance bonds
|
|
|
30,407
|
|
|
|
2,361
|
|
|
|
2,182
|
|
|
|
14,473
|
|
|
|
16,070
|
|
|
|
105,746
|
|
|
|
358,967
|
|
|
|
530,206
|
|
Other
liabilities
|
|
|
164,789
|
|
|
|
50,803
|
|
|
|
47,415
|
|
|
|
225,078
|
|
|
|
323,549
|
|
|
|
310,328
|
|
|
|
810,567
|
|
|
|
1,932,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
2,314,389
|
|
|
|
994,174
|
|
|
|
597,551
|
|
|
|
1,350,892
|
|
|
|
1,263,165
|
|
|
|
1,611,853
|
|
|
|
1,399,472
|
|
|
|
9,531,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset/liability
gap
|
|
|
189,786
|
|
|
|
(437,042 |
) |
|
|
(106,346 |
) |
|
|
(342,143 |
) |
|
|
(215,044 |
) |
|
|
885,967
|
|
|
|
3,442,327
|
|
|
|
3,417,505
|
|
Cumulative
gap
|
|
|
189,786
|
|
|
|
(247,256 |
) |
|
|
(353,602 |
) |
|
|
(695,745 |
) |
|
|
(910,789 |
) |
|
|
(24,822 |
) |
|
|
3,417,505
|
|
|
|
|
|
Exchange
Rate Sensitivity
The
regulations of the Central Bank do not permit the difference, whether positive
or negative, between a bank’s assets and liabilities denominated in any foreign
currency (including assets and liabilities denominated in U.S. dollars but
payable in pesos, as well as those denominated in pesos and indexed to the
U.S.
dollar exchange rate) to exceed 20% of the bank’s paid in capital and reserves;
except in case where the balance of such assets exceeds the balance of such
liabilities and the excess difference does not exceed the bank’s allowances and
reserves denominated in such foreign currency (excluding profits to be remitted
abroad). Santander-Chile has set an absolute limit on the size of its net
foreign currency trading position. At December 31, 2006, this was
equal to US$200 million. The Bank also uses a sensitivity analysis to limit
the
potential loss in fluctuations of U.S. interest rates on interest income and
a
VaR model to limit foreign currency risk.
In
recent
years, our results of operations have benefited from fluctuations in the
exchange rate between the Chilean peso and the U.S. dollar in part due to our
policy and Central Bank regulations relating to the control of material exchange
rate mismatches. However, the rate of devaluation or appreciation of the peso
against the U.S. dollar could also be expected to have the following principal
effects:
(i) If
we maintain a net asset position in U.S. dollars and a devaluation of the peso
against the U.S. dollar occurs, we would record a related gain, and if an
appreciation of the peso occurs, we would record a related loss;
(ii) If
we maintain a net liability position in U.S. dollars and a devaluation of the
peso against the dollar occurs, we would record a related loss, and if an
appreciation of the peso occurs, we would record a related gain;
(iii) If
the inflation rate for a period exceeded the devaluation of the peso against
the
U.S. dollar during the same period, this would mean that in real terms the
peso
appreciated against the U.S. dollar. Therefore, we would record a related gain
if we had a net asset position in UFs that exceeded a net liability position
in
U.S. dollars, and we would record a related loss if we had a net liability
position in U.S. dollars that exceeded a net asset position in UFs;
and
(iv) If
the inflation rate for a period were lower than the rate of devaluation of
the
peso against the U.S. dollar during the same period, this would mean that in
real terms the peso depreciated against the U.S. dollar. Therefore, we would
record a related gain if we maintained a net asset position in U.S. dollars
and a net liability position in UFs and would record a related loss if it had
a
net liability position in U.S. dollars and a net asset position in
UFs.
We
enter
into foreign exchange forward contracts and interest rate swap contracts as
part
of our asset and liability management. We enter into two fundamental types
of
foreign forward exchange contracts: (i) transactions covering two foreign
currencies and (ii) transactions covering only Chilean pesos and UFs against
U.S. dollars. We use the first type for hedging purposes, such as when we take
a
liability position in foreign currency other than the U.S. dollar, and use
the
second type, which is carried out only in the Chilean local market, to take
foreign currency positions, subject to the regulatory requirement that the
forward foreign currency exposure must be included in the maximum net foreign
currency position permitted by applicable regulations. See “Item 4: Information
on the Company—D. Regulation and Supervision” and “Item 5:Operating and
Financial Review and Prospects—D. Asset and Liability Managemen—Average
Balance Sheets, Income Earned from Interest-Earned Assets and Interest Paid
on Interest-Bearing Liabilities.”
The
Central Bank requires that foreign exchange forward contracts be made only
in
U.S. dollars and other major foreign currencies. As noted above, substantially
all of our forward contracts are made in U.S. dollars against the Chilean peso
or the UF. We may enter into foreign currency forward contracts with companies
organized and located outside of Chile, including foreign subsidiaries of
Chilean companies. We believe that as the market for forward contracts deepens,
our client base in Chile as well as our relationship with Banco Santander
Central Hispano will give us an advantage in positioning ourselves within this
new market.
Statistical
Tools for Measuring and Managing Risk: Regulatory Method
On
an
unconsolidated basis, the Bank must separate its balance sheet in two
separate categories: trading portfolio (Libro de Negociación) and
non-trading, or permanent, portfolio (Libro de Banca). The trading
portfolio as defined by the Superintendency of Banks includes all instruments
valued at market prices, free of any restrictions on their immediate sale
and that are frequently bought and sold by the bank or are maintained with
the
intention of selling them in the short term in order to profit from short term
price variations. The non-trading portfolio is defined as all instruments in
the
balance sheet not considered in the trading portfolio.
We
must
also report the following absolute risk levels:
Trading
portfolio:
|
·
|
Exposure
to interest rate risk: Interest rate risk of the trading portfolio
is
basically a sensitivity analysis, which is the calculated potential
losses
assuming an increase in nominal rate yield curves, real rates and
foreign
currency rates by 75 to 350 basis
points.
|
|
·
|
Exposure
to foreign currency risk: The foreign currency risk is calculated
using
sensitivity factors linked to the credit risk rating of the issuing
country.
|
|
·
|
Market
risk exposure of options: Options risk is calculated using sensitivity
factors called delta, gamma and vega that basically measure the
sensitivity of the value of the options to changes in the price of
the
underlying security and its
volatility.
|
Non-trading
portfolio:
|
·
|
Exposure
to short-term interest rate risk: Sensitivity analysis that is calculated
for assets and liabilities with maturities of less than 1 year, assuming
a
200 basis point parallel shift of the nominal yield curve, 400 for
real
rates and 200 for foreign interest
rates.
|
|
·
|
Exposure
to inflation risk: Sensitivity analysis that is calculated for assets
and
liabilities with maturities of less than 1 year, assuming a 200 basis
point parallel shift of the nominal yield curve, 400 for real rates
and
200 for foreign interest rates.
|
|
·
|
Exposure
to long-term interest rate risk: Sensitivity analysis that is calculated
for assets and liabilities with maturities from 1 to over 20 years,
assuming a 200 basis point parallel shift of the nominal yield curve,
400
for real rates and 200 for foreign interest
rates.
|
The
Superintendency of Banks has defined various limits for these
risks.
|
1)
|
EMR
limit. A bank’s regulatory capital must be greater or equal to the sum of
the exposure to market risk multiplied by the minimum capital adequacy
ratio defined in the General Banking Law. In other
words:
|
RC
– ((k * RWA) + EMR) > 0
Where:
|
RC:
|
Regulatory
capital as defined by the General Banking
Law.
|
|
K:
|
Minimum
capital adequacy ratio. The Bank is required to use a 10% minimum
capital
adequacy ratio for the purpose of calculating the EMR
limit.
|
|
RWA:
|
Consolidated
risk-weighted assets as defined by the General Banking
Law.
|
|
EMR:
|
Exposure
to market risk. Santander-Chile’s EMR is equal to the total market risk of
its unconsolidated trading portfolio. This includes interest
rate risk,
foreign currency risk and risks derived from
options.
|
2) Limit
on exposure to short-term interest rate and inflation risk of the Bank’s
non-trading portfolio. Santander-Chile’s exposure to short-term interest rate
and inflation risk of the non-trading portfolio cannot exceed 20% of its
unconsolidated net interest income plus fees sensitive to interest rate
volatility.
3) Limit
on exposure to long-term interest rate risk of a bank’s non-trading portfolio.
Santander-Chile’s exposure to long-term interest rate risk of the unconsolidated
non-trading portfolio cannot exceed 35% of its regulatory capital.
The
following is a description of the models adopted by local regulators for
measuring market risks.
Interest
rate risk of trading portfolio: Regulatory method
The
interest rate risk of the trading portfolio as defined by the Central Bank
of
Chile is equal to the sum of:
1) The
sensitivity analysis of the trading portfolio
2) Vertical
adjustment factor
3) Horizontal
adjustment factor
The
sensitivity factor of the trading portfolio is calculated using the following
formula:
|
M
|
14
|
|
Sensitivity
=
|
S
|
S
|
(amt
*
Amt
- amt
*
Lmt
)
|
|
M
|
t=1
|
|
Where:
Amt
|
=
Trading Assets (pesos, inflation linked and foreign
currency)
|
Lmt
|
=
Liabilities funding trading positions (pesos, inflation linked and
foreign
currency)
|
amt
|
=
Sensitivity factor to rise in interest rates
|
t
|
=
Time period
|
M
|
=
Currency (pesos, inflation linked and foreign currency)
|
S
|
=
Summation
|
|
|
=
Absolute value
|
The
vertical adjustment factor is calculated in the following manner
|
M
|
14
|
|
Vertical
adjustment =
|
S
|
S
|
b
* Compensated
net position
|
|
M
|
T=1
|
|
|
M
|
14
|
|
Compensated
net position =
|
S
|
S
|
Min(amt
*
Amt
; amt
*
Lmt
)
|
|
M
|
T=1
|
|
Where:
Amt
|
=
Trading Assets (pesos, inflation linked and foreign
currency)
|
Lmt
|
=
Liabilities funding trading positions (pesos, inflation linked and
foreign
currency)
|
amt
|
=
Sensitivity factor to rise in interest rates
|
t
|
=
Time period
|
M
|
=
Currency (pesos, inflation linked and foreign currency)
|
b
|
=
Vertical
adjustment factor = 10%
|
A
horizontal adjustment must be made following the vertical adjustment. To
determine the horizontal adjustment, one must multiply the horizontal adjustment
factor by the compensated net position for Zones 1, Zone 2, Zone 3, Zones 1
and
2, Zones 2 and 3 and Zones 1 through 3.
|
λ
*
Adjusted net position
|
Compensated
net position Zone 1, 2 or 3
|
Min(Σ
Adjusted net asset position; Σabsolute
value of adjusted net liability position in Zone 1, 2 or 3
)
|
Compensated
net position Zones 1 and 2
|
Min(Σ
Adjusted net asset position in Zones 1 and 2, Σabsolute
value of adjusted net liability position in Zones 1 and
2)
|
Compensated
net position Zones 2 and 3
|
Min(Σ
Adjusted net asset position in Zone 3 and Zone 2 (deducting
adjusted net asset position that have been compensated for with net
liability positions in Zone 1), Σabsolute
value of adjusted net liability position in Zone 3 and Zone 2 (deducting
adjusted net liability positions that have been compensated for with
net
liability positions in Zone 1))
|
Compensated
net position Zones 1 – 3
|
Min(Σ
Adjusted net asset position in Zone 3 and Zone 1 (deducting
adjusted net asset position that have been compensated for with net
liability positions in Zone 2), Σabsolute
value of adjusted net liability position in Zone 3 and Zone 1 (deducting
adjusted net liability positions that have been compensated for with
net
liability positions in Zone 2))
|
The
following table illustrates the value of the different factors used for
calculating the interest rate risk of the trading portfolio.
Table
1 Sensitivity Factors - Trading Portfolio
Zone
|
T
|
Period
|
Change
in
Interest
rate (bp)
|
Sensitivity
factor(
amt
)
|
Vertical
adjustment
factor
|
Horizontal adjustment
factor
|
|
|
|
peso
|
UF
|
FX
|
Peso
|
UF
|
FX
|
(β)
|
(λ)
|
Zone
1
|
1
|
Up
to 30 days
|
125
|
350
|
125
|
0.0005
|
0.0014
|
0.0005
|
10%
|
40%
|
40%
|
|
100%
|
2
|
31
days to 3 mths
|
125
|
300
|
125
|
0.0019
|
0.0047
|
0.0020
|
3
|
3
–
6 mths
|
125
|
250
|
125
|
0.0042
|
0.0088
|
0.0044
|
4
|
6
–
9 mths
|
125
|
200
|
125
|
0.0069
|
0.0116
|
0.0072
|
5
|
9
mths – 1 year
|
125
|
175
|
125
|
0.0095
|
0.0140
|
0.0100
|
Zone
2
|
6
|
1-2
years
|
100
|
125
|
100
|
0.0124
|
0.0166
|
0.0133
|
30%
|
40%
|
7
|
2-3
years
|
100
|
100
|
100
|
0.0191
|
0.0211
|
0.0211
|
8
|
3-4
years
|
100
|
100
|
100
|
0.0248
|
0.0281
|
0.0281
|
Zone
3
|
9
|
4-5
years
|
75
|
75
|
75
|
0.0221
|
0.0258
|
0.0258
|
30%
|
|
10
|
5-7
years
|
75
|
75
|
75
|
0.0263
|
0.0320
|
0.0320
|
11
|
7-10
years
|
75
|
75
|
75
|
0.0307
|
0.0401
|
0.0401
|
12
|
10-15
years
|
75
|
75
|
75
|
0.0332
|
0.0486
|
0.0486
|
13
|
15-20
years
|
75
|
75
|
75
|
0.0317
|
0.0534
|
0.0534
|
14
|
>
20 years
|
75
|
75
|
75
|
0.0278
|
0.0539
|
0.0539
|
Below
is
an example of how the interest risk of the trading portfolio is calculated.
This
calculation must be done for each type of currency (peso, inflation indexed
and
foreign currency).
Interest
rate and inflation risk of non-trading portfolio: Regulatory
method
The
short-term interest rate risk and inflation risk of the non-trading portfolio
as
defined by the Central Bank is equal to:
|
|
M
|
5
|
|
|
|
|
|
|
|
|
|
Sensitivity
=
|
S
|
S
|
(Amt
- Lmt )
* mt
|
|
+
|
|
NPur
* t
|
+
|
Df
|
|
|
|
M
|
t=1
|
|
|
|
|
|
|
|
|
The
long-term interest rate risk of the non-trading portfolio is calculated
according to the following formula:
|
|
M
|
14
|
|
|
|
Sensitivity
=
|
S
|
S
|
(Amt
- Lmt )
* rt
|
|
|
|
M
|
t=1
|
|
|
Where:
Amt
|
=
Non-trading Assets (pesos, inflation linked and foreign
currency)
|
Lmt
|
=
Non-trading Liabilities (pesos, inflation linked and foreign
currency)
|
mt
|
=
Sensitivity factor associated with interest rate movement
scenario
|
NPur
|
=
Net position in inflation linked instruments, including those subject
to
price level restatement
|
t
|
=
Factor that measures the sensitivity of/to movements in the inflation
index. This factor is equal to 2%
|
Df
|
=
Effect on fees from shifts in interest rate. Each bank must determine
which fees are sensitive to shifts in interest rates and assume a
200
basis point movement.
|
rt
|
=
Sensitivity factor to increase in interest rates
|
t
|
=
Time period
|
M
|
=
Currency (pesos, inflation linked and foreign currency)
|
S
|
=
Summation
|
|
|
=
Absolute value
|
The
following table illustrates the value of the different factors used for
calculating the interest and inflation rate risks of the non-trading
portfolio.
Table
2 Sensitivity Factors Non-trading Portfolio
|
t
|
Period
|
Change
in
interest
rate (bp)
|
Sensitivity
factor long-term
(rt)
|
Sensitivity
factor short-term
|
|
|
peso
|
UF
|
FX
|
peso
|
UF
|
FX
|
(mt)
|
1
|
Up
to 30 days
|
200
|
400
|
200
|
0.0008
|
0.0016
|
0.0008
|
0.0192
|
2
|
31
days to 3 mths
|
200
|
400
|
200
|
0.0030
|
0.0063
|
0.0031
|
0.0167
|
3
|
3
–
6 mths
|
200
|
400
|
200
|
0.0067
|
0.0140
|
0.0070
|
0.0125
|
4
|
6
–
9 mths
|
200
|
400
|
200
|
0.0110
|
0.0231
|
0.0116
|
0.0075
|
5
|
9
mths – 1 year
|
200
|
400
|
200
|
0.0152
|
0.0320
|
0.0160
|
0.0025
|
6
|
1-2
years
|
200
|
400
|
200
|
0.0248
|
0.0399
|
0.0266
|
|
7
|
2-3
years
|
200
|
400
|
200
|
0.0382
|
0.0422
|
0.0422
|
|
8
|
3-4
years
|
200
|
400
|
200
|
0.0496
|
0.0563
|
0.0563
|
|
9
|
4-5
years
|
200
|
400
|
200
|
0.0591
|
0.0690
|
0.0690
|
|
10
|
5-7
years
|
200
|
400
|
200
|
0.0702
|
0.0856
|
0.0856
|
|
11
|
7-10
years
|
200
|
400
|
200
|
0.0823
|
0.1076
|
0.1076
|
|
12
|
10-15
years
|
200
|
400
|
200
|
0.0894
|
0.1309
|
0.1309
|
|
13
|
15-20
years
|
200
|
400
|
200
|
0.0860
|
0.1450
|
0.1450
|
|
14
|
>
20 years
|
200
|
400
|
200
|
0.0762
|
0.1480
|
0.1480
|
|
Foreign
currency risk: local method
The
foreign currency risk as defined by the Central Bank is equal
to:
Where:
|
NAP
|
=Net
asset position
|
|
NLP
|
=Net
liability position
|
|
NPgold
|
=Net
position in gold
|
|
si
|
=Sensitivity
factor
|
|
Maximum
|
=Maximum
value
|
|
S
|
=Summation
|
|
|
|
=Absolute
value
|
The
following table illustrates the value of the different factors used for
calculating foreign currency risk.
Table
3 Sensitivity Factors Foreign Currency Risk
|
|
|
|
|
|
I
|
|
All
currencies of countries with a AAA sovereign rating
|
|
8%
|
J
|
|
All
other currencies
|
|
35%
|
Options
risk: Regulatory method
The
exposure to market risk of options is calculated using sensitivity factors
delta, gamma and vega.
Delta
Delta
of a
derivative security is the rate of change of its price relative to the price
of
the underlying asset. It is the first derivative of the curve that relates
the
price of the derivative to the price of the underlying security. When delta
is
large, the price of the derivative is sensitive to small changes in the price
of
the underlying security.
Gamma
Gamma
of a
derivative security is the rate of change of delta relative to the price of
the
underlying asset; i.e., the second derivative of the option price relative
to
the security price. When gamma is small, the change in delta is small. The
Gamma
impact is calculated using the following formula.
Gamma
impact = Gamma * (Variation of underlying security)^2 / 2
When
the
underlying security for an interest rate options is a debt instrument, then
the
variation of the value of the underlying security will be calculated using
the
sensitivity factors established in Tables 1 and 2 above. When the underlying
security is an interest rate, then the change in interest rates assumed will
be
those used in Table 1 and 2 above. Finally, for foreign exchange options, the
variation of the underlying security will be calculated using the factors used
in Table 3 above.
Vega
Vega
is
one of the sensitivity factors used to measure sensitivity to the implied
volatilities of the underlying security. Vega is the rate of change in the
price
of a derivative security relative to the volatility of the underlying security.
When vega is large, the security is sensitive to small changes in volatility.
In
general, a long option position will benefit from rising implied volatilities
and suffer from declining implied volatilities. Short option positions display
opposite behavior. As defined by the Central Bank, the Vega Risk is the sum
in
absolute value of the vega
impacts
for each option a bank holds. These impacts will be calculated assuming a change
of 25% in the volatility rate.
Assumptions
and Limitations of Scenario Simulations/Sensitivity Analysis (Regulatory
method)
Our
scenario simulation methodology should be interpreted in light of the
limitations of our models, which include:
|
·
|
The
scenario simulation assumes that the volumes remain on balance sheet
and
that they are always renewed at maturity, omitting the fact that
credit
risk considerations and pre-payments may affect the maturity of certain
positions.
|
|
·
|
This
model assumes set shifts in interest rates and sensitivity factors
for
different time periods and does not take into consideration any other
scenario for each time period or other sensitivity
factors.
|
|
·
|
The
model does not take into consideration the sensitivity of volumes
to these
shifts in interest rates.
|
|
·
|
The
model does not take into consideration our subsidiaries which are
subject
to market risks.
|
Quantitative
Disclosures about Market Risk: Regulatory Method
The
following table illustrates at December 31, 2005 and 2006, our market risk
exposure according to the Chilean regulatory method. This report is
sent to the Superintendency of Banks and is published on our website on a
quarterly basis. In 2006, the Bank increased its maximum exposure to long term
interest rate fluctuations from 25% to 35% of regulatory capital. This
modification was approved by the Board of Directors and was performed in order
to conform internal interest rate risk limits with regulatory
limits.
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Market
risk of Trading portfolio (EMR)
|
|
|
|
|
|
|
Interest
rate risk of trading portfolio
|
|
|
80,423
|
|
|
|
22,489
|
|
Foreign
currency risk of trading portfolio
|
|
|
2,984
|
|
|
|
24,841
|
|
Risk
from interest rate options
|
|
|
23,753
|
|
|
|
31,111
|
|
Risk
from foreign currency options
|
|
|
9,182
|
|
|
|
1
|
|
Total
market risk of trading portfolio
|
|
|
116,342
|
|
|
|
78,442
|
|
10%
x Risk-weighted assets
|
|
|
946,201
|
|
|
|
1,126,349
|
|
Subtotal
|
|
|
1,062,543
|
|
|
|
1,204,791
|
|
Limit
= Regulatory Capital
|
|
|
1,209,635
|
|
|
|
1,418,303
|
|
Available
margin
|
|
|
147,092
|
|
|
|
213,512
|
|
|
|
|
|
|
|
|
|
|
Non-trading
portfolio market risk
|
|
|
|
|
|
|
|
|
Short-term
interest rate risk
|
|
|
24,281
|
|
|
|
27,344
|
|
Inflation
risk
|
|
|
22,172
|
|
|
|
37,050
|
|
Long
term interest rate risk
|
|
|
289,675
|
|
|
|
305,834
|
|
Total
market risk of non-trading portfolio
|
|
|
336,128
|
|
|
|
370,228
|
|
|
|
|
|
|
|
|
|
|
Regulatory
limit of exposure to short-term interest rate and inflation
risk
|
|
|
|
|
|
|
|
|
Short-term
exposure to interest rate risk
|
|
|
24,281
|
|
|
|
27,344
|
|
Exposure
to inflation risk
|
|
|
22,172
|
|
|
|
37,050
|
|
Limit:
20% of (net interest income + net fee income sensitive to interest
rates)
|
|
|
89,929
|
|
|
|
119,339
|
|
Available
margin
|
|
|
43,476
|
|
|
|
54,945
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31,
2006)
|
|
Regulatory
limit of exposure to long term interest rate risk
|
|
|
|
|
|
|
|
|
Long-term
exposure to interest rate risk
|
|
|
289,675
|
|
|
|
305,834
|
|
Limit:
25% of regulatory capital in 2005, 35% of regulatory capital in
2006
|
|
|
302,409
|
|
|
|
496,406
|
|
Available
margin
|
|
|
12,734
|
|
|
|
190,572
|
|
Internal
Regulations Regarding Market Risk
Our
relationship with Banco Santander Central Hispano has allowed us to take
advantage of Banco Santander Central Hispano’s banking policies, procedures and
standards, especially with respect to credit approval and risk management.
Banco
Santander Central Hispano has successfully used these policies and expertise
in
the Spanish and other banking markets, and our management believes that such
policies and expertise have a beneficial effect upon our operations. Below
is a
qualitative and quantitative description of our market risks according to our
internal guidelines. These guidelines were established prior to the adoption
of
the applicable regulations required by local authorities and are still being
used.
The
main
difference between the regulatory and internal methods is that the internal
measures divide the Bank’s balance sheet into three categories and impose limits
based on these categories. Our internal methods also takes into account
Santander S.A. Agente de Valores. As a result, the sensitivity analysis
performed incorporates a broader range of instruments and portfolios. The
internal method also incorporates a value at risk (“VaR”) methodology for
measuring the market risk of our consolidated trading positions.
Value
at Risk: Consolidated Trading Portfolio
The
VaR
model is mainly used to measure the market risk of our trading portfolio. The
Finance Division manages trading activities following the guidelines set by
the
ALCO and Banco Santander Central Hispano’s Global Risk Department. The Market
Risk and Control Department’s activities consist of (i) applying VaR techniques
(as discussed above) to measure interest rate risk; (ii) marking to market
our
trading portfolios and measuring daily profit and loss from trading activities;
(iii) comparing actual trading VaR and other limits against the established
limits; (iv) establishing control procedures for losses in excess of such
limits; and (v) providing information about trading activities to the ALCO,
other members of senior management, the Finance Division and Banco Santander
Central Hispano’s Global Risk Department.
The
Bank
has a consolidated trading position comprised of fixed income trading, foreign
currency trading and a minor equity trading position. The market risk of this
trading portfolio is measured by using a VaR technique. The composition of
this
portfolio mainly consisted of Central Bank bonds, mortgage bonds and low risk
Chilean corporate bonds issued locally. There is also an equity portfolio that
represents less than 5% of the total trading portfolio. Under Chilean GAAP,
a
bank must separate its unconsolidated financial investment portfolio between
“trading” and “available for sale” investment portfolios. Under Chilean GAAP,
the unrealized holding gains (losses) related to investments classified as
available for sale have been included in equity. The size of the available
for
sale portfolio is limited to an amount equal to such bank’s capital. Any amount
above this must be considered as “trading”; the unrealized gains (losses)
related to investments classified as “trading” are included in operating
results. The ALCO has taken a conservative approach and has set even more
restrictive limits on the Finance Division’s actual trading portfolio. This
portfolio is denominated “Cartera de Negociación”. The market risk of the
portfolio defined as “trading” for accounting purposes is measured by using the
regulatory method.
VaR
Model
All
VaR
measurements are intended to determine the distribution function for the change
in value of a given portfolio, and once this distribution is known, to calculate
a percentile linked to the confidence level required which will be equal to
the
VaR under those parameters. Therefore, if the distribution function of the
change in value of a portfolio is known and given by f(x), where x is the random
variable of the change in value of the portfolio, then the VaR for a determined
level of confidence of k% is given by the number such that:
or:
As
calculated by Santander-Chile, VaR is an estimate of the expected maximum loss
in the market value of a given portfolio over a one day horizon at a one tailed
99.00% confidence interval. It is the maximum one day loss that Santander-Chile
would expect to suffer on a given portfolio 99.00% of the time, subject to
certain assumptions and limitations discussed below. Conversely, it is the
figure that Santander-Chile would expect to exceed only 1.0% of the time. VaR
provides a single estimate of market risk that is comparable from one market
risk to the other. Volatility is calculated utilizing 520 historical
observations. A one day holding period is utilized.
Santander-Chile
uses VaR estimates to alert senior management whenever the statistically
expected losses in its trading portfolio exceed prudent levels. Limits on VaR
are used to control exposure on the fixed income trading portfolio, the net
foreign currency trading position and the equity trading portfolio.
Santander-Chile’s trading portfolio is mainly comprised of government bonds,
mortgage finance bonds, the foreign currency trading position and a minor
position in equities through Santander S.A. Agente de Valores. A
daily VaR is calculated for the trading portfolio.
Assumptions
and Limitations of VaR Model
Our
VaR
model assumes that changes in the market risk factors have a normal distribution
and that the parameters of this joint distribution (in particular, the standard
deviation of risk factor changes and the correlation between them) have been
estimated accurately. The model assumes that the correlation and changes in
market rates/prices included in our historical databases are independent and
identically distributed random variables, and provide a good estimate of
correlation and rate/price changes in the future.
Our
VaR methodology should be interpreted in light of the limitations of our models,
which include:
|
·
|
Changes
in market rates and prices may not be independent and identically
distributed random variables or have a normal distribution. In particular,
the normal distribution assumption may underestimate the probability
of
extreme market moves;
|
|
·
|
The
historical data we use in our VaR model may not provide the best
estimate
of the joint distribution of risk factor changes in the future, and
any
modifications in the data may be inadequate. In particular, the use
of
historical data may fail to capture the risk of possible extreme
adverse
market movements independent of the time range utilized. For example,
the
use of extended periods of historical data might erroneously lead
to an
important decrease in volatility especially after the Asian crisis.
We
typically use 520 historical observations of market data depending
on
circumstances, but also monitor other ranges of market data in order
to be
more conservative. However, reliable historical risk factor data
may not
be readily available for certain instruments in our
portfolio;
|
|
·
|
A
one day time horizon may not fully capture the market risk positions
that
cannot be liquidated or hedged within one day. It would not be possible
to
liquidate or hedge all positions in one
day;
|
|
·
|
At
present, we compute VaR at the close of business and trading positions
may
change substantially during the course of the trading
day;
|
|
·
|
The
use of 99% confidence level does not take account of, nor makes any
statement about, any losses that might occur beyond this level of
confidence; and
|
|
·
|
Value
at risk does not capture all of the complex effects of the risk factors
on
the value of positions and portfolios and could, therefore, underestimate
potential losses.
|
There
are
also a number of approximations in the VaR calculation. For example, benchmark
indexes are used instead of certain risk factors, and in the case of some
activities, not all the relevant risk factors are taken into account which
can
be due to difficulties obtaining daily data.
Quantitative
Disclosures: Market Risk Consolidated Trading Portfolio
(VaR)
We
did not
exceed our daily VaR in 2005 and 2006 in the fixed income, equity or foreign
currency trading portfolios. For Santander-Chile’s various trading portfolios,
the average, high and low amounts of the daily VaR in the years ended December
31, 2005 and 2006 were the following:
|
|
For
the year ended December 31,
|
|
Consolidated
Trading Portfolio
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
High
|
|
|
9.2
|
|
|
|
12.3
|
|
Low
|
|
|
4.6
|
|
|
|
3.9
|
|
Average
|
|
|
6.6
|
|
|
|
6.2
|
|
|
|
For
the year ended December 31,
|
|
Fixed
income Trading Portfolio
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
High
|
|
|
9.3
|
|
|
|
8.6
|
|
Low
|
|
|
3.7
|
|
|
|
3.9
|
|
Average
|
|
|
6.3
|
|
|
|
6.3
|
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
High
|
|
|
0.9
|
|
|
|
0.67
|
|
Low
|
|
|
0.0
|
|
|
|
0.0
|
|
Average
|
|
|
0.4
|
|
|
|
0.27
|
|
|
|
For
the year ended December 31,
|
|
Foreign
currency Trading Portfolio
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
High
|
|
|
4.0
|
|
|
|
3.3
|
|
Low
|
|
|
0.0
|
|
|
|
0.02
|
|
|
|
For
the year ended December 31,
|
|
Foreign
currency Trading Portfolio
|
|
|
|
|
|
|
|
|
|
(in
millions of US.$)
|
|
Average
|
|
|
1.4
|
|
|
|
0.93
|
|
Quantitative
Disclosure: Derivatives
Derivatives
The
Bank
enters into transactions involving derivative instruments, particularly foreign
exchange contracts, as part of its asset and liability management, and in acting
as a dealer in order to satisfy its clients’ needs. The notional amounts of
these contracts are carried off-balance sheet.
Foreign
exchange forward contracts involve an agreement to exchange the currency of
one
country for the currency of another country at an agreed-upon price and
settlement date. These contracts are generally standardized contracts, normally
for periods between 1 and 180 days and are not traded in a secondary market;
however, in the normal course of business and with the agreement of the original
counterparty, they may be terminated or assigned to another
counterparty.
When
the
Bank enters into a forward exchange contract, it analyses and approves the
credit risk (the risk that the counterparty might default on its obligations).
Subsequently, on an ongoing basis, it monitors the possible losses involved
in
each contract. To manage the level of credit risk, the Bank generally deals
with
counterparties of good credit standing, enters into master netting agreements
whenever possible and when appropriate, and obtains collateral.
The
Chilean Central Bank requires that foreign exchange forward contracts be made
only in U.S. dollars and other major foreign currencies. In the case of the
Bank, most forward contracts are made in U.S. dollars against the Chilean peso
or the UF. Occasionally, forward contracts are also made in other currencies,
but only when the Bank acts as an intermediary.
During
the
year ended December 31, 2005 and 2006, the Bank entered into interest rate
and
cross currency swap agreements to manage exposure to fluctuation in currencies
and interest rates. The differential between the interest paid or
received on a specified notional amount is recognized under the caption “Amounts
payable from forward contracts, net”. The fair value of the swap agreement and
changes in the fair value as a result of changes in market interest rates are
recognized in the consolidated financial statements.
The
Bank’s
foreign currency futures and forward operations and other derivative products
outstanding at December 31, 2005 and 2006 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
in designated hedge accounting
relationships
|
|
Cash
Flow hedge (CF) or fair value hedge (FV)
|
|
|
|
|
|
After
3 months but within one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Currency
Forwards
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate swaps
|
|
(FV)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
210,298
|
|
|
|
1,173
|
|
|
|
2,354
|
|
Currency
swaps
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
(FV)
|
|
|
|
843,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,871
|
|
Call
currency options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Call
interest rate options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
(
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
in designated hedge accounting
relationships
|
|
Cash
Flow hedge (CF) or fair value hedge (FV)
|
|
|
|
|
|
After
3 months but within one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Derivative
instruments for trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
forwards
|
|
|
|
|
|
|
6,017,519
|
|
|
|
3,435,681
|
|
|
|
378,885
|
|
|
|
82,608
|
|
|
|
99,422
|
|
Interest
rate swaps
|
|
|
|
|
|
|
457,994
|
|
|
|
1,178,930
|
|
|
|
3,923,328
|
|
|
|
34,958
|
|
|
|
68,165
|
|
Currency
swaps
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
|
|
|
|
|
2,744,066
|
|
|
|
1,348,617
|
|
|
|
129,703
|
|
|
|
247,486
|
|
|
|
142,058
|
|
Call
currency options
|
|
|
|
|
|
|
47,608
|
|
|
|
372,092
|
|
|
|
-
|
|
|
|
4,384
|
|
|
|
4,372
|
|
Call
interest rate options
|
|
|
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
|
|
|
|
|
|
29,706
|
|
|
|
346,691
|
|
|
|
-
|
|
|
|
1,448
|
|
|
|
1,032
|
|
Interest
rate future
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
|
|
|
|
313,055
|
|
|
|
106,886
|
|
|
|
101,542
|
|
|
|
631
|
|
|
|
648
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
notional amounts refer to the U.S. dollar bought or sold or to the U.S. dollar
equivalent of foreign currency bought or sold for future
settlement. The contract terms correspond to the maturity of the
contracts as from the date of the transaction to the date of the
settlement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments in designated hedge accounting
relationships
|
|
Cash
Flow hedge (CF) or fair value hedge (FV)
|
|
|
|
|
|
After
3 months but within one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Forwards
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate swaps
|
|
(FV)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
401
|
|
|
|
131
|
|
|
|
212
|
|
Currency
swaps
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
(FV)
|
|
|
|
77
|
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,276
|
|
Call
currency options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Call
interest rate options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
|
|
(
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
(
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments for trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
forwards
|
|
|
|
|
|
|
4,862,614
|
|
|
|
3,690,484
|
|
|
|
359,919
|
|
|
|
249,275
|
|
|
|
283,218
|
|
Interest
rate swaps
|
|
|
|
|
|
|
362,666
|
|
|
|
2,244,684
|
|
|
|
2,651,871
|
|
|
|
3,593
|
|
|
|
9,799
|
|
Currency
swaps
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
|
|
|
|
|
907
|
|
|
|
559
|
|
|
|
37
|
|
|
|
165,209
|
|
|
|
88,131
|
|
Call
currency options
|
|
|
|
|
|
|
-
|
|
|
|
26,255
|
|
|
|
-
|
|
|
|
413
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments in designated hedge accounting
relationships
|
|
Cash
Flow hedge (CF) or fair value hedge (FV)
|
|
|
|
|
|
After
3 months but within one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call
interest rate options
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
|
|
|
|
-
|
|
|
|
10,502
|
|
|
|
-
|
|
|
|
174
|
|
|
|
174
|
|
Put
interest rate options
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
|
|
|
|
651,257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
For
the operations prior to January 1, 2006, the Bank has applied the
criteria
described in Note 1g to our Audited Consolidated Financial
Statement.
|
The
notional amounts refer to the U.S. dollar bought or sold or to the U.S. dollar
equivalent of foreign currency bought or sold for future settlement. The
contract terms correspond to the maturity of the contracts as from the date
of the transaction to the date of the settlement.
Sensitivity
Analysis: Consolidated Non-trading Portfolios
The
Bank’s
non-trading portfolio or Financial Management (Gestión Financiera) portfolio
includes the majority of the Bank’s assets and liabilities that are not trading,
including the loan portfolio. Investment and funding decisions are heavily
influenced by commercial strategies.
We
use a
sensitivity analysis to measure the market risk of the local and foreign
currency-denominated non-trading portfolio. We perform a scenario
simulation by calculating the potential loss over the entire balance from an
increase (or decrease) of 100 basis points in the entire yield curve in terms
of
local rates. All local currency positions indexed to inflation are adjusted
for
a sensitivity factor of 0.57, which represents a shift of yield curve by 57
basis points in real rates and 100 basis point in nominal rates. The same
scenario is performed for the net foreign currency position and U.S. dollar
interest rates. We set limits as to the maximum loss these types of movements
in
interest rates can lead to over our capital and net financial income budgeted
for the year. These limits are calculated according to the formulas
discussed below.
Scenario
Simulation (Net Financial Income)
To
determine the percentage of our budgeted net financial income for the year
that
is at risk of loss upon a sudden 100 basis point movement in the entire yield
curve, we utilize the following equation:
n: Number
of intervals in which sensitivity is measured.
ti: Average
maturity (or duration) for each interval being measured.
Δr:
Change in interest rate. A 100 basis point increase (decrease) in the yield
curve is used.
GAP: Difference
between assets and liabilities that are sensitive to interest rates for each
period.
Scenario
Simulation (Capital and Reserves)
To
determine the percentage of our capital and reserves that is at risk of loss
upon a sudden 100 basis point movement in the entire yield curve, we utilize
the
following equation:
N: Number
of intervals in which sensitivity is measured.
Dmj: Modified
duration for interval i.
Δr:
Change in interest rate. A 100 basis point increase (decrease) in the yield
curve is used.
GAP: Difference
between assets and liabilities that are sensitive to interest rates for each
period.
Consolidated
limits:
To
determine the consolidated limit, the foreign currency limit is added to the
local currency limit for both the net financial income loss limit and the loss
limit over capital and reserves using the following formula:
Consolidated
limit = Square root of a2 + b2 + 2ab
a:
limit
in local currency.
b:
limit
in foreign currency.
Since
correlation is assumed to be 0, 2ab = 0.
Assumptions
and Limitations of Scenario Simulations/Sensitivity
Analysis
The
most
important assumption is the usage of a 100 basis point shift in the yield curve
(57 basis points for real rates). We use a 100 basis point shift since a sudden
shift of this magnitude is considered realistic, but not an everyday occurrence
given historical movements in the yield curve, and significant in terms of
the
possible effects a shift of this size could have on our performance. The Global
Risk Department at Banco Santander Central Hispano has also set comparable
limits by country in order to be able to compare, monitor and consolidate market
risk by country in a realistic and orderly manner.
Our
scenario simulation methodology should be interpreted in light of the
limitations of our models, which include:
|
·
|
The
scenario simulation assumes that the volumes remain on the balance
sheet
and that they are always renewed at maturity, omitting the fact that
credit risk considerations and pre-payments may affect the maturity
of
certain positions.
|
|
·
|
This
model assumes an equal shift throughout the entire yield curve and
does
not take into consideration different movements for different
maturities.
|
|
·
|
The
model does not take into consideration the sensitivity of volumes
to these
shifts in interest rates.
|
|
·
|
The
limits to the loss of the budgeted financial income are calculated
over an
expected financial income for the year which may not be obtained,
signifying that the actual percentage of financial income at risk
could be
higher than expected.
|
Quantitative
Disclosure of Market Risk: Non-trading Portfolio (Sensitivity Analysis/Scenario
Simulations)
The
Finance Division manages the risk arising out of the consolidated
non-trading portfolios under guidelines approved by the ALCO and Banco Santander
Central Hispano’s Global Risk Department. In carrying out its market risk
management functions, the Finance Division manages interest rate risk that
arises from any mismatches with
respect
to
rates, maturities, repricing periods, notional amounts or other mismatches
between our interest earning assets and our interest bearing
liabilities.
The
Market
Risk and Control Department: (i) applies scenario simulations (as discussed
below) to measure the interest rate risk of the local currency activities and
the potential loss as forecast by these simulations; and (ii) provides the
ALCO,
the Finance Division and Banco Santander Central Hispano’s Global Risk
Department with risk/return reports.
Non-trading
local currency portfolio
The
potential loss in the market value of our local currency-denominated non-trading
portfolio resulting from a 100 basis point shift in the yield curve was set
at
approximately Ch$60,000 million of equity in 2006. The Bank has remained within
the consolidated limit for this portfolio that is set by the ALCO in 2006,
with
only a minor breach of US$284,415 above the limit. At the same time, the
variation in net interest income caused by a 100 basis point shift of the local
yield curve may not exceed Ch$20,000 million and Santander-Chile was within
the
limits established in 2006. This limit is internally set by the
ALCO. The ALCO has authority to lower this limit. However,
approval from the Banco Santander Central Hispano's Global Risk Department
is
required to lift this limit. The following table sets forth the loss
limit and the high, low and average potential loss in 2005 and 2006 resulting
from a 100 basis point shift in the relevant interest rate.
|
|
Local
Currency-denominated Financial Management
Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Loss
limit at December 31, 2006
|
|
|
20,000
|
|
|
|
60,000
|
|
High
|
|
|
18,281
|
|
|
|
60,152
|
|
Low
|
|
|
2,564
|
|
|
|
43,561
|
|
Average
in 2006
|
|
|
9,397
|
|
|
|
53,844
|
|
|
|
Local
Currency-denominated Financial Management
Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of constant Ch$ as of December 31, 2006)
|
|
Loss
limit at December 31, 2006
|
|
|
20,000
|
|
|
|
60,000
|
|
High
|
|
|
10,537
|
|
|
|
61,958
|
|
Low
|
|
|
115
|
|
|
|
36,592
|
|
Average
in 2005
|
|
|
2,642
|
|
|
|
51,389
|
|
Non-trading
foreign currency portfolio
For
our
net non-trading foreign currency position, any loss caused by a 100 basis point
shift in U.S. dollar interest rates may not exceed US$45 million of equity
and
US$30 million of budgeted net interest income. These limits are internally
imposed limits set by the ALCO. The ALCO has the authority to lower
this limit. However, approval from Banco Santander Central Hispano's
Global Risk Department is required to lift this limit. The following
table sets forth the loss limit and the high, low and average potential loss
in
2005 and 2006 resulting from a 100 basis point shift in the interest rates
on
U.S. dollar-denominated assets and liabilities.
|
|
Foreign
Currency-denominated Financial Management
Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
Loss
limit at December 31, 2006
|
|
|
30.0
|
|
|
|
45.0
|
|
High
|
|
|
28.0
|
|
|
|
10.6
|
|
Low
|
|
|
2.5
|
|
|
|
1.0
|
|
Average
in 2006
|
|
|
12.0
|
|
|
|
6.0
|
|
|
|
Foreign
Currency-denominated Financial Management
Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
Loss
limit at December 31, 2005
|
|
|
30.0
|
|
|
|
45.0
|
|
High
|
|
|
14.1
|
|
|
|
30.0
|
|
Low
|
|
|
0.0
|
|
|
|
1.4
|
|
Average
in 2005
|
|
|
3.7
|
|
|
|
20.2
|
|
Combined
non-trading local and foreign currency
We
track a
consolidated indicator to track the total interest risk of the local and foreign
currency-denominated non-trading portfolios. The consolidated loss limit for
equity at risk was set at Ch$60,000 million for 2006. In 2006, we remained
within the limits established except for a minor breach of US$352,777 above
the
limit. In 2005, it was temporarily raised to Ch$66,000 million, but was again
lowered to its historical level in 2006. At the same time, the
variation in net interest income caused by a 100 basis point shift of the local
yield curve may not exceed Ch$30,000 million. The following table, which
contemplates a 100 basis point shift in the relevant interest rate, indicates
that Santander-Chile was within the limits established in 2006. These
limits are an internally imposed limit set by the ALCO and Banco Santander
Central Hispano’s Global Risk Department. The ALCO has authority to
lower these limits. However, approval from Banco Santander Central
Hispano's Global Risk Department is required to lift these limits.
|
|
Combined
Financial Management Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
Loss
limit at December 31, 2006
|
|
|
30,000
|
|
|
|
60,000
|
|
High
|
|
|
23,719
|
|
|
|
60,188
|
|
Low
|
|
|
4,458
|
|
|
|
43,758
|
|
Average
in 2006 (through June 30, 2006)
|
|
|
11,604
|
|
|
|
53,961
|
|
|
|
Combined
Financial Management Portfolio
|
|
|
|
|
|
|
|
|
|
|
(in
millions of U.S.$)
|
|
Loss
limit at December 31, 2005
|
|
|
30,000
|
|
|
|
66,000
|
|
High
|
|
|
12,059
|
|
|
|
62,624
|
|
Low
|
|
|
599
|
|
|
|
39,866
|
|
Average
in 2005
|
|
|
3,764
|
|
|
|
52,969
|
|
Volume
Limits
We
have
also developed volume limits, which place a cap on the actual size of the
different portfolios being monitored.
Fixed
Income: Volume Equivalent. This system is considered to be an additional
limit to the size of our consolidated fixed income trading portfolio. This
measure seeks to conform the different instruments in our fixed income trading
portfolio and convert the portfolio into a single instrument with a duration
of
one year. Santander-Chile limits the size of this volume equivalent
portfolio. The equivalent volume is calculated by the Market Risk and
Control Department and limits are set by the ALCO with respect to the size
of
the volume equivalent portfolio.
Net
Foreign Currency Trading Position: Maximum Net Position. We also set an
absolute limit on the size of Santander-Chile’s consolidated net foreign
currency trading position. At December 31, 2006, this was equal to US$200
million. The limit on the size of the net foreign currency position is
determined by the ALCO and is calculated and monitored by the Market Risk and
Control Department.
Liquidity
Management
The
Central Bank also requires us to comply with the following liquidity
limits:
|
·
|
The
sum of the liabilities with a maturity of less than 30 days may not
exceed
the sum of the assets with a maturity of less than 30 days by more
than an
amount greater than our capital. This limit must be calculated in
local
currency and foreign currencies together as one gap. At
December 31, 2006, the percentage of (x) our liabilities with a maturity
of less than 30 days in excess of our assets with a maturity of less
than
30 days to (y) our capital and reserves was
43%.
|
|
·
|
The
sum of the liabilities with a maturity of less than 90 days may not
exceed
the sum of the assets with a maturity of less than 90 days by more
than 2
times our capital. This limit must be calculated in local currency
and
foreign currencies together as one gap. At December 31, 2006,
the percentage of (x) our liabilities with a maturity of less than
90 days
in excess of our assets with a maturity of less than 90 days to (y)
2
times our capital and reserves was
58%.
|
We
have
also set internal liquidity limits. The Market Risk Control Department measures
two other liquidity indicators:
1.
Net accumulated liquidity gap:
|
·
|
Net
accumulated liquidity gap, which represents the amount of the assets
with
a maturity of up to 30 days in excess of the liabilities with a maturity
of up to 30 days, is required to be no less than US$0,
i.e.,
|
The
following table sets forth our net accumulated liquidity gap at December 31,
2006 and our average net accumulated liquidity gap for the year of
2006.
Net
accumulated liquidity gap
|
|
|
|
At
December 31, 2006
|
|
|
275
|
|
Average
in 2006
|
|
|
455
|
|
2.
Liquidity coefficient (LC):
Liquidity
coefficient, calculated by dividing (x) liquid assets (at liquidation value)
by
(y) the sum of total liabilities, capital and contingent liabilities, is
required to be no less than 2%, i.e., Liquid assets (at liquidation value)
/
(Total liabilities capital + contingent)>= 2%
The
following table sets forth our liquidity coefficients at December 31, 2006
and
for the year of 2006.
|
|
|
|
|
|
|
At
December 31, 2006
|
|
|
19.2 |
% |
|
|
39.0 |
% |
Average
in 2006
|
|
|
23.5 |
% |
|
|
42.3 |
% |
Other
Subsidiaries
For
VaR
measurements and scenario simulations, our consolidated trading and consolidated
non-trading portfolios do not consolidate the asset liability structure of
the
following subsidiaries:
|
·
|
Santiago
Corredores de Bolsa Ltda.
|
|
·
|
Santander
Santiago S.A. Administradora General de
Fondos
|
|
·
|
Santander
Santiago S.A. Sociedad
Securitizadora
|
|
·
|
Santander
Santiago Corredora de Seguros Santander
Ltda.
|
|
·
|
Santander
Servicios de Recaudación y Pagos
Ltda.
|
The
balance sheets of these subsidiaries are mainly comprised of assets and
liabilities that are not sensitive to market risk, fixed assets and capital,
and
in total only represent 1.0% of our total consolidated assets.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable.
PART
II
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not
applicable.
ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not
applicable.
ITEM
15. CONTROLS AND PROCEDURES
Management’s
Annual Report on Internal Control Over Financial Reporting (English
translation)
The
Bank’s
President, Chief Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining adequate internal control over financial
reporting.
For
this
purpose, we confirm that we have designed the controls and procedures,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements
as
well as of other financial data for external purposes in accordance with
generally accepted accounting principles.
The
Bank’s
internal control over financial reporting is a process designed and effected
under the supervision of management to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the financial statements and other financial data for external purposes
in accordance with generally accepted accounting principles applicable to the
Bank, and includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transaction and dispositions of assets of the
Bank;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements and other financial data in accordance
with generally accepted accounting principles applicable to the Bank,
and
that receipts and expenditures of the Bank are being made only in
accordance with authorizations of the Bank’s management and directors;
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
an
unauthorized acquisition, use or disposition of the Bank’s assets that
could have a material effect on the financial
statements.
|
Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions that affect the Bank, such as rules
and regulations, business conditions, etc., or that the degree of compliance
with the policies or procedures may deteriorate.
The
Bank’s
President, Chief Executive Officer and Chief Financial Officer, have assessed
the effectiveness of the Bank’s internal control over financial reporting as of
December 31, 2006 in accordance with the criteria set forth by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO) in the “Enterprise
Risk Management – Integrated Framework”.
Based
on
our assessment, our management believes that, as of December 31, 2006,
our internal control over financial reporting is effective based on those
criteria.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by Deloitte S.L.,
an independent registered public accounting firm, as stated in their audit
report, which follows below.
Report
of Independent Registered Public Accounting Firm (English
translation)
To
the
Board of Directors and Shareholders of Banco Santander Chile
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting, that Banco
Santander Chile and its subsidiaries (collectively referred to as “Banco
Santander Chile” or the “Bank”) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Bank’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the
Bank’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A
bank’s
internal control over financial reporting is a process designed by, or under
the
supervision of, the bank’s principal executive and principal financial officers,
or persons performing similar functions, and effected by the bank’s board of
directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A bank’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the bank; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the bank are being
made only in accordance with authorizations of management and directors of
the
bank; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the bank’s assets
that could have a material effect on the financial statements.
Because
of
the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected
on
a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, management’s assessment that the Bank maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the
Bank maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2006 and 2005 of the Bank and the related
consolidated
statements of income, cash flows and changes in shareholders’ equity for each of
the two years ended December 31, 2006, and our report dated May 10, 2007,
expressed an unqualified opinion on those consolidated financial statements
and
included three explanatory paragraphs stating that (1) during 2006 the Bank
modified its basis for recording and valuation of financial investments acquired
for trading, available-for-sale or held-to-maturity investments and derivative
instruments. The nature and effect of such modification is explained
in Note 2 to the consolidated financial statements of the Bank, (2) the
accounting principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United States
of
America (“U.S. GAAP”), and that the information relating to the nature and
effect of such differences is presented in Note 26 to the consolidated financial
statements of the Bank and (3) that a convenience translation of Chilean peso
amounts to U.S. dollars was presented.
/s/
Deloitte & Touche
Santiago
-
Chile
May
10,
2007
ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our
board
of directors has determined that two of the members of our Audit Committee,
Benigno Rodríguez Rodríguez and Víctor Arbulú Crousillat, meet the requirements
of an “audit committee financial expert” in accordance with SEC rules and
regulations, in that they have an understanding of Chilean GAAP and financial
statements, the ability to assess the general application of Chilean GAAP in
connection with the accounting for estimates, accruals and reserves, experience
analyzing and evaluating financial statements that present a breadth and level
of complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by our
consolidated financial statements, an understanding of internal controls over
financial reporting, and an understanding of audit committee functions. All
three members of our Audit Committee have experience overseeing and assessing
the performance of Santander-Chile and its consolidated subsidiaries and our
external auditors with respect to the preparation, auditing and evaluation
of
our consolidated financial statements.
All
three
members of our Audit Committee are considered to be independent according to
applicable NYSE criteria. Benigno Rodríguez R. and Víctor Arbulú C. are relying
on the exemption provided by Rule 10A-3(b)(1)(iv)(B), which allows an otherwise
independent director to serve on both the audit committee of the issuer and
the
board of directors of an affiliate.
ITEM
16B. CODE OF ETHICS
The
Bank
has adopted a code of ethics that is applicable to all of the Bank’s employees
and a copy is included as an exhibit hereto. We will provide to any person
without charge, upon request, a copy of our code of ethics. Please email
[email protected] to request a copy.
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Amounts
paid to the auditors for statutory audit and other services were as
follows:
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
Audit
Services
|
|
(in
millions of constant Ch$
as
of December 31, 2006)
|
|
-
Statutory audit
|
|
|
805
|
|
|
|
677
|
|
-
Audit-related regulatory reporting
|
|
|
|
|
|
|
|
|
Tax
Fees
|
|
|
|
|
|
|
|
|
-
Compliance
|
|
|
—
|
|
|
|
—
|
|
-
Advisory Services
|
|
|
|
|
|
|
—
|
|
All
Other Services
|
|
|
|
|
|
|
—
|
|
Total
|
|
|
|
|
|
|
|
|
Statutory
audit: Consists of fees billed for professional services rendered in
connection with the audit of our consolidated financial statements that are
provided by Deloitte in 2005 and 2006 in connection with statutory and
regulatory filings or engagements, and attest services.
Audit-related
regulatory reporting: Consists of fees billed for assurance and related
services that were specifically related to the performance of the audit and
review of our filings under the 1933 Act.
Auditors
are pre-approved by the Audit Committee. The selection of external auditors
is
subject to approval by shareholders at the Annual Shareholders’ Meeting. All
proposed payments have been presented to our Audit Committee, which has
determined that they are reasonable and consistent with internal
policies.
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES.
Not
applicable.
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
In
2006,
neither Santander-Chile nor any of its affiliates purchased any of
Santander-Chile’s equity securities.
PART
III
ITEM
17. FINANCIAL STATEMENTS.
We
have
responded to Item 18 in lieu of this item.
ITEM
18. FINANCIAL STATEMENTS.
Reference
is made to Item 19 for a list of all financial statements filed as a part of
this Annual Report.
ITEM
19. EXHIBITS.
(a)
Index
to Financial Statements
|
Page
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
Consolidated
Balance Sheets at December 31, 2005 and 2006
|
F-4
|
Consolidated
Statements of Income for each of the three years ended December 31,
2006
|
F-6
|
Consolidated
Statements of Cash Flows for each of the three years ended December
31,
2006
|
F-7
|
Consolidated
Statements of Shareholders’ Equity for each of the three years ended
December 31, 2006
|
F-8
|
Notes
to the Consolidated Financial Statements
|
F-9
|
(b)
Index
to Exhibits:
Exhibit
Number
|
Description
|
|
|
1A.1
|
Restated
Articles of Incorporation of Santander-Chile (Spanish Version)
(incorporated by reference to our Registration Statement on Form
F-4
(Registration No. 333-100975) filed with the Commission on December
12,
2002).
|
|
|
1A.2
|
Restated
Articles of Incorporation of Santander-Chile (English translation)
(incorporated by reference to our Registration Statement on Form
F-4
(Registration No. 333-100975) filed with the Commission on December
12,
2002).
|
1B.1
|
Amended
and Restated By-Laws (estatutos) of Santander-Chile (Spanish Version)
(incorporated by reference to our Annual Report on Form 20-F for
the
fiscal year ended December 31, 2004 (File No. 1-14554) filed with
the
Commission on June 30, 2005).
|
|
|
1B.2
|
Amended
and Restated By-Laws (estatutos) of Santander-Chile (English translation)
(incorporated by reference to our Annual Report on Form 20-F for
the
fiscal year ended December 31, 2004 (File No. 1-14554) filed with
the
Commission on June 30, 2005).
|
|
|
2A.1
|
Form
of Amended and Restated Deposit Agreement, dated August 1, 2002,
among
Banco Santander-Chile (formerly known as Banco Santiago), the Bank
of New
York (as depositary) and Holders of American Depositary Receipts
(incorporated by reference to our Registration Statement on Form
F-6
(Registration No. 333-97303) filed with the Commission on July 26,
2002).
|
|
|
2A.2
|
Form
of Foreign Investment Contract among Banco Santiago, JPMorgan Chase
Bank
and the Central Bank of Chile relating to the foreign exchange treatment
of an investment in ADSs (accompanied by an English translation)
(Incorporated by reference to our Registration Statement on Form
F-1
(Registration No. 333-7676) filed with the Commission on October
23,
1997).
|
|
|
2A.3
|
Copy
of the Central Bank Chapter XXVI Regulations Related to the Acquisition
of
Shares in Chilean Corporations and the Issuance of Instrument on
Foreign
Stock Exchanges or under Other Terms and Conditions of Issue (accompanied
by an English translation) (incorporated by reference to Old
Santander-Chile’s Annual Report for the fiscal year ended December 31,
1996 (File No. 1-13448) filed with the Commission on June 30,
1997).
|
|
|
2B.1
|
Agreement
for the Issuance of Bonds dated November 26, 1996 between Old
Santander-Chile and Banco Security (accompanied by an English translation)
(incorporated by reference to Old Santander-Chile’s Annual Report for the
fiscal year ended December 31, 1996 (File No. 1-13448) filed with
the
Commission on June 30, 1997).
|
|
|
2B.2
|
Indenture
dated December 9, 2004 between Santander-Chile and Deutsche Bank
Trust
Company Americas, as trustee, providing for issuance of securities
in
series (incorporated by reference to our Annual Report on Form 20-F
for
the fiscal year ended December 31, 2006 (File No. 1-14554) filed
with the
Commission on April 12, 2006).
|
|
|
2B.3
|
Indenture
dated March 16, 2001, as amended on May 30, 2003, October 22, 2004,
May 3,
2005, and September 20, 2005 between Santander-Chile and Banco de
Chile,
as trustee, relating to issuance of UF14 million senior notes (copy
to be
furnished upon request).
|
|
|
4A.1
|
Automatic
Teller Machines Participation Agreement dated October 1, 1988 between
Banco Espanol-Chile (predecessor to Old Santander-Chile) and REDBANC
(accompanied by an English translation) (incorporated by reference
to Old
Santander-Chile’s Annual Report for the fiscal year ended December 31,
1996 (File No. 1-13448) filed with the Commission on June 30,
1997).
|
|
|
4A.2
|
Outsourcing
agreement between Banco Santiago and IBM de Chile S.A.C. dated June
30,
2000 (including English summary) (incorporated by reference to Banco
Santiago’s Annual Report on Form 20-F for the fiscal year ended December
31, 2000 (File No. 1-14554) filed with the Commission on December
31,
2000).
|
|
|
4A.3
|
Systems
and Technology Service and Consulting Agreement between Santander-Chile
and Altec dated December 30, 2003 (English translation) (incorporated
by
reference to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 (File No. 1-14554) filed with the Commission on
December
31, 2004).
|
|
|
4A.4
|
Purchase-Sale
Contract between Santander-Chile and Empresas Almacenes París dated
December 6, 2004 (English translation) (incorporated by reference
to our
Annual Report on Form 20-F for the fiscal year ended December 31,
2006
(File No. 1-14554) filed with the Commission on April 12,
2006).
|
4A.5
|
Service
Participant operationg contract dated August 9, 2005 between
Banco Santander-Chile and Socieded Operadora de la Cámera de
Compensación de Pagos de Alto Valor (English translation) (filed
herewith).
|
|
|
4A.6
|
Commercial
Pledge Agreement dated February 5, 2007 by Santander-Chile of shares
in
Administrador Financiero de Transantiago (English Translation) (filed
herewith).
|
|
|
7.1
|
Statement
explaining Calculation of Ratios (incorporated by reference to Old
Santander-Chile’s Annual Report on Form 20-F for the fiscal year ended
December 31, 2000 (File No. 1-13448) filed with the Commission on
June 28,
2001).
|
|
|
8.1
|
List
of Subsidiaries (incorporated by reference to our Annual Report on
Form
20-F for the fiscal year ended December 31, 2004 (File No. 1-14554)
filed
with the Commission on June 30, 2005).
|
|
|
11.1
|
Code
of Conduct for Executive Personnel of Banco Santander-Chile and
Subsidiaries (incorporated by reference to our Annual Report on Form
20-F
for the fiscal year ended December 31, 2004 (File No. 1-14554) filed
with
the Commission on June 30, 2005).
|
|
|
11.2
|
Code
of Conduct for all Grupo Santander Personnel (incorporated by reference
to
our Annual Report on Form 20-F for the fiscal year ended December
31, 2004
(File No. 1-14554) filed with the Commission on June 30,
2005).
|
|
|
12.1
|
Section
302 Certification by the Chief Executive Officer.
|
|
|
12.2
|
Section
302 Certification by the Chief Financial Officer.
|
|
|
13.1
|
Section
906 Certification.
|
|
|
23.1
|
Consent
of Deloitte & Touche Sociedad de Auditores y Consultores,
Ltda.
|
|
|
23.2
|
Consent
of PricewaterhouseCoopers
|
We
will
furnish to the Securities and Exchange Commission, upon request, copies of
any
unfiled instruments that define the rights of holders of long-term debt of
Banco
Santander-Chile.
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing
on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
|
BANCO
SANTANDER-CHILE
|
|
|
|
|
By:
|
/s/
Gonzalo Romero A.
|
|
Name:
|
Gonzalo
Romero A.
|
|
Title:
|
General
Counsel
|
Date: June
18, 2007.
BANCO
SANTANDER CHILE
CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
|
Page
|
|
|
Reports
of independent registered public accounting firms
|
F-2
|
Audited
consolidated financial statements:
|
|
Consolidated
balance sheets at December 31, 2005 and 2006
|
F-4
|
Consolidated
statements of income for each of the three years in the period
ended
December 31, 2006.
|
F-6
|
Consolidated
statements of cash flows for each of the three years in the period
ended
December 31, 2006
|
F-7
|
Consolidated
statements of shareholders’ equity for each of the three years in
the period ended December 31, 2006
|
F-8
|
Notes
to consolidated financial statements
|
F-9
|
Ch$
|
-
|
Chilean
pesos
|
MCh$
|
-
|
Millions
of Chilean pesos
|
US$
|
-
|
United
States dollars
|
ThUS$
|
-
|
Thousands
of United States dollars
|
UF
|
-
|
A
UF
is a daily-indexed, peso-denominated monetary unit. The UF rate
is set daily in advance based on the previous month’s inflation
rate.
|
|
|
Deloitte
&
Touche
Sociedad
de Auditores y
Consultores Ltda.
RUT:
80.276.200-3
Av.
Providencia
1760
Floors
6, 7, 8 y
9
Providencia,
Santiago
Chile
Phone:
(56-2) 270
3000
Fax:
(56-2) 374
9177
www.deloitte.cl
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Banco
Santander Chile:
We
have
audited the accompanying consolidated balance sheets of Banco Santander
Chile
and its subsidiaries (collectively referred to as “Banco Santander Chile” or the
“Bank”) as of December 31, 2006 and 2005, and the related consolidated
statements of income, cash flows and changes in shareholders’ equity for each of
the two years ended December 31, 2006, all expressed in millions of constant
Chilean pesos. These consolidated financial statements (including the
related Notes) are the responsibility of the Bank’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements
of Banco Santander Chile for the year ended December 31, 2004 were audited
by
other auditors whose report, dated June 28, 2005 (except for the restatement
to
constant Chilean pesos of December 31, 2006, for which the date is April
13,
2007) expressed an unqualified opinion on those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Banco Santander Chile
and
its subsidiaries as of December 31, 2006 and 2005, the results of their
operations and their cash flows for the years then ended, in conformity
with
accounting principles generally accepted in Chile and the rules of the
Superintendencia de Bancos e Instituciones Financieras.
As
explained further indicated in Note 2 to the consolidated financial statements,
during 2006 the Bank modified its basis for recording and valuation of
financial
investments acquired for trading, available-for-sale or held-to-maturity
investments and derivative instruments.
Accounting
principles generally accepted in Chile vary in certain significant respects
from
accounting principles generally accepted in the United States of America
(U.S.
GAAP). Information relating to the nature and effect of such
differences is presented in Note 26 to the consolidated financial
statements.
Our
audit
also comprehended the translation of Chilean peso amounts into U.S. dollar
amounts and, we are not aware of any modifications that should be made
for such
translation to be in conformity with the basis stated in Note 1.r. Such
U.S.
dollar amounts are presented solely for the convenience of readers in the
United
States of America.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Bank’s internal
control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated May 10, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Bank’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Bank’s internal
control over financial reporting.
/s/
Deloitte & Touche
Santiago
–
Chile
May
10,
2007
|
|
Member
of
Deloitte
Touche
Tohmatsu
|
|
|
|
PricewaterhouseCoopers
Santiago
de
Chile
Av.
Andrés Bello
2711
Torre
Costanera -Pisos 3, 4
y 5
Las
Condes
Teléfono
[56](2)
9400000
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Banco
Santander Chile
We
have
audited the accompanying consolidated statements of income, of cash flows and
of
shareholders’ equity of Banco Santander Chile (formerly Banco Santiago) and its
subsidiaries (the “Bank”) for the year ended December 31, 2004, all expressed in
millions of constant Chilean pesos. These financial statements are
the responsibility of the Bank’s management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with auditing standards generally accepted
in
Chile and the Standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Banco Santander Chile (formerly Banco Santiago) and its subsidiaries for
the
year ended December 31, 2004, in conformity with accounting principles generally
accepted in Chile and the rules of the regulatory agencies referred to in Note
1.
Accounting
principles generally accepted in Chile vary in certain important respects from
accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in Note 26 to the consolidated financial statements.
/s/
PricewaterhouseCoopers
Santiago,
Chile
June
28,
2005, except for the restatement to
constant
Chilean pesos of December 31, 2006,
for
which
the date is April 13, 2007.
BANCO
SANTANDER CHILE
CONSOLIDATED
BALANCE SHEETS
Adjusted
for general price-level changes and expressed
in
millions of constant Chilean pesos (MCh$) as of
December
31, 2006 and thousands of US dollars (ThUS$)
|
|
|
As
of December 31,
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND DUE FROM BANKS (Note 3)
|
|
|
|
|
|
|
|
|
|
Non
- interest bearing
|
|
|
1,035,350
|
|
|
|
947,741
|
|
|
|
1,773,368
|
|
Interbank
deposits-interest bearing
|
|
|
215,581
|
|
|
|
144,666
|
|
|
|
270,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and due from banks
|
|
|
1,250,931
|
|
|
|
1,092,407
|
|
|
|
2,044,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
(Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
675,961
|
|
|
|
639,461
|
|
|
|
1,196,529
|
|
Available
for sale
|
|
|
575,028
|
|
|
|
345,108
|
|
|
|
645,750
|
|
Investment under
agreements to resell
|
|
|
23,610
|
|
|
|
30,807
|
|
|
|
57,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
1,274,599
|
|
|
|
1,015,376
|
|
|
|
1,899,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS,
NET (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
3,732,589
|
|
|
|
4,048,221
|
|
|
|
7,574,839
|
|
Consumer
loans
|
|
|
1,421,523
|
|
|
|
1,800,507
|
|
|
|
3,369,023
|
|
Mortgage
loans
|
|
|
648,180
|
|
|
|
485,849
|
|
|
|
909,098
|
|
Foreign
trade loans
|
|
|
522,605
|
|
|
|
741,776
|
|
|
|
1,387,976
|
|
Interbank
loans
|
|
|
198,779
|
|
|
|
151,491
|
|
|
|
283,463
|
|
Leasing
contracts (Note 6)
|
|
|
677,936
|
|
|
|
764,408
|
|
|
|
1,430,324
|
|
Other
outstanding loans
|
|
|
2,099,746
|
|
|
|
2,681,461
|
|
|
|
5,017,422
|
|
Past
due loans
|
|
|
108,799
|
|
|
|
92,559
|
|
|
|
173,192
|
|
Contingent
loans
|
|
|
949,177
|
|
|
|
1,022,687
|
|
|
|
1,913,603
|
|
Reserve for
loan losses (Note 7)
|
|
|
(151,000 |
) |
|
|
(174,064 |
) |
|
|
(325,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans, net
|
|
|
10,208,334
|
|
|
|
11,614,895
|
|
|
|
21,733,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DERIVATIVES
(Note 12)
|
|
|
418,795
|
|
|
|
372,688
|
|
|
|
697,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment, net (Note 8)
|
|
|
226,068
|
|
|
|
231,360
|
|
|
|
432,910
|
|
Assets
received in lieu of payment
|
|
|
18,328
|
|
|
|
15,775
|
|
|
|
29,517
|
|
Assets
to be leased
|
|
|
32,694
|
|
|
|
30,293
|
|
|
|
56,683
|
|
Investments
in other companies (Note 9)
|
|
|
6,838
|
|
|
|
6,654
|
|
|
|
12,451
|
|
Other
(Note 10)
|
|
|
329,852
|
|
|
|
463,991
|
|
|
|
868,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
613,780
|
|
|
|
748,073
|
|
|
|
1,399,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
13,766,439
|
|
|
|
14,843,439
|
|
|
|
27,774,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes are an integral part of these consolidated financial
statements.
BANCO
SANTANDER CHILE
CONSOLIDATED
BALANCE SHEETS
Adjusted
for general price-level changes and expressed
in
millions of constant Chilean pesos (MCh$) as of
December
31, 2006 and thousands of US dollars (ThUS$)
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
(Note
1 r)
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSITS
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
|
|
|
|
|
|
|
|
Current
accounts
|
|
|
1,486,790
|
|
|
|
1,663,414
|
|
|
|
3,112,501
|
|
Bankers'
drafts and other deposits
|
|
|
728,000
|
|
|
|
819,583
|
|
|
|
1,533,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest bearing
|
|
|
2,214,790
|
|
|
|
2,482,997
|
|
|
|
4,646,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts and other deposits
|
|
|
6,031,933
|
|
|
|
6,909,335
|
|
|
|
12,928,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
|
8,246,723
|
|
|
|
9,392,332
|
|
|
|
17,574,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INTEREST BEARING LIABILITIES (Note 11)
|
|
|
|
|
|
|
|
|
|
Chilean
Central Bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
lines for renegotiations of loans
|
|
|
6,796
|
|
|
|
5,080
|
|
|
|
9,505
|
|
Other
Central Bank borrowings
|
|
|
176,878
|
|
|
|
134,417
|
|
|
|
251,515
|
|
Total
Chilean Central Bank borrowings
|
|
|
183,674
|
|
|
|
139,497
|
|
|
|
261,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
under agreements to repurchase
|
|
|
50,834
|
|
|
|
19,929
|
|
|
|
37,291
|
|
Mortgage
finance bonds
|
|
|
683,143
|
|
|
|
530,206
|
|
|
|
992,097
|
|
Other
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
424,046
|
|
|
|
565,653
|
|
|
|
1,058,423
|
|
Subordinated
bonds
|
|
|
393,929
|
|
|
|
490,416
|
|
|
|
917,643
|
|
Borrowings
from domestic financial institutions
|
|
|
2,582
|
|
|
|
|
|
|
|
|
|
Foreign
borrowings
|
|
|
1,121,528
|
|
|
|
812,267
|
|
|
|
1,519,876
|
|
Other
obligations
|
|
|
42,984
|
|
|
|
64,193
|
|
|
|
120,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other borrowings
|
|
|
1,985,069
|
|
|
|
1,932,529
|
|
|
|
3,616,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other interest bearing liabilities
|
|
|
2,902,720
|
|
|
|
2,622,161
|
|
|
|
4,906,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DERIVATIVES (Note
12)
|
|
|
391,823
|
|
|
|
355,922
|
|
|
|
665,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
liabilities (Note 10)
|
|
|
951,062
|
|
|
|
1,024,048
|
|
|
|
1,916,150
|
|
Other
(Note 10)
|
|
|
167,849
|
|
|
|
202,115
|
|
|
|
378,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other liabilities
|
|
|
1,118,911
|
|
|
|
1,226,163
|
|
|
|
2,294,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
AND COMMITMENTS (Note 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
1,495
|
|
|
|
1,522
|
|
|
|
2,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
12,661,672
|
|
|
|
13,598,100
|
|
|
|
25,444,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and reserves
|
|
|
859,975
|
|
|
|
959,757
|
|
|
|
1,795,852
|
|
Income
for the year
|
|
|
244,792
|
|
|
|
285,582
|
|
|
|
534,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
1,104,767
|
|
|
|
1,245,339
|
|
|
|
2,330,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
13,766,439
|
|
|
|
14,843,439
|
|
|
|
27,774,339
|
|
The
accompanying Notes are an integral part of these consolidated financial
statements.
BANCO
SANTANDER CHILE
CONSOLIDATED
STATEMENTS OF INCOME
Expressed
in millions of constant Chilean pesos (MCh$) as of
December
31, 2006 and thousands of US dollars (ThUS$)
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
1 r)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
REVENUE AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
|
841,588
|
|
|
|
1,017,830
|
|
|
|
1,168,851
|
|
|
|
2,187,098
|
|
Interest
expense
|
|
|
(339,079 |
) |
|
|
(459,564 |
) |
|
|
(556,597 |
) |
|
|
(1,041,478 |
) |
Net
interest revenue
|
|
|
502,509
|
|
|
|
558,266
|
|
|
|
612,254
|
|
|
|
1,145,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISIONS
FOR LOAN LOSSES (Note 7)
|
|
|
(85,451 |
) |
|
|
(64,879 |
) |
|
|
(123,022 |
) |
|
|
(230,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEES
AND INCOME FROM SERVICES (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and other services income
|
|
|
156,298
|
|
|
|
173,386
|
|
|
|
198,326
|
|
|
|
371,098
|
|
Other
services expenses
|
|
|
(28,294 |
) |
|
|
(32,086 |
) |
|
|
(35,776 |
) |
|
|
(66,942 |
) |
Total
fees income and expenses from services, net
|
|
|
128,004
|
|
|
|
141,300
|
|
|
|
162,550
|
|
|
|
304,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
from trading activities
|
|
|
117,514
|
|
|
|
68,009
|
|
|
|
141,869
|
|
|
|
265,458
|
|
Losses
from trading activities
|
|
|
(124,924 |
) |
|
|
(130,578 |
) |
|
|
(41,557 |
) |
|
|
(77,759 |
) |
Foreign
exchange transactions, net
|
|
|
47,445
|
|
|
|
72,381
|
|
|
|
(48,708 |
) |
|
|
(91,140 |
) |
Other
operating income
|
|
|
12,060
|
|
|
|
5,549
|
|
|
|
5,619
|
|
|
|
10,514
|
|
Other
operating expenses
|
|
|
(37,354 |
) |
|
|
(28,956 |
) |
|
|
(38,580 |
) |
|
|
(72,189 |
) |
Total
other operating income (loss), net
|
|
|
14,741
|
|
|
|
(13,595 |
) |
|
|
18,643
|
|
|
|
34,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (Note 17)
|
|
|
35,574
|
|
|
|
21,311
|
|
|
|
16,592
|
|
|
|
31,046
|
|
Non-operating
expenses (Note 17)
|
|
|
(40,243 |
) |
|
|
(43,791 |
) |
|
|
(20,806 |
) |
|
|
(38,931 |
) |
Income
attributable to investments in other companies (Note 9)
|
|
|
568
|
|
|
|
693
|
|
|
|
786
|
|
|
|
1,471
|
|
Minority
interest
|
|
|
(194 |
) |
|
|
(136 |
) |
|
|
(151 |
) |
|
|
(283 |
) |
Total
other income and (expenses), net
|
|
|
(4,295 |
) |
|
|
(21,923 |
) |
|
|
(3,579 |
) |
|
|
(6,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
salaries and expenses
|
|
|
(140,746 |
) |
|
|
(142,171 |
) |
|
|
(159,722 |
) |
|
|
(298,864 |
) |
Administrative
and other expenses
|
|
|
(102,159 |
) |
|
|
(102,717 |
) |
|
|
(110,948 |
) |
|
|
(207,601 |
) |
Depreciation
and amortization
|
|
|
(40,978 |
) |
|
|
(40,080 |
) |
|
|
(38,613 |
) |
|
|
(72,251 |
) |
Total
operating expenses
|
|
|
(283,883 |
) |
|
|
(284,968 |
) |
|
|
(309,283 |
) |
|
|
(578,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS FROM PRICE-LEVEL RESTATEMENT (Note 23)
|
|
|
(12,680 |
) |
|
|
(18,524 |
) |
|
|
(13,782 |
) |
|
|
(25,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
258,945
|
|
|
|
295,677
|
|
|
|
343,781
|
|
|
|
643,266
|
|
Income
taxes (Note 20)
|
|
|
(48,587 |
) |
|
|
(50,885 |
) |
|
|
(58,199 |
) |
|
|
(108,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME FOR THE YEAR
|
|
|
210,358
|
|
|
|
244,792
|
|
|
|
285,582
|
|
|
|
534,367
|
|
The
accompanying Notes are an integral part of these consolidated financial
statements.
BANCO
SANTANDER CHILE
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Expressed
in millions of constant Chilean pesos (MCh$) as of
December
31, 2006 and thousands of US dollars (ThUS$)
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
1r)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
210,358
|
|
|
|
244,792
|
|
|
|
285,582
|
|
|
|
534,367
|
|
Charge
(credit) to income not representing cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
136,222
|
|
|
|
111,958
|
|
|
|
170,088
|
|
|
|
318,261
|
|
Depreciation
and amortization
|
|
|
40,978
|
|
|
|
40,080
|
|
|
|
38,613
|
|
|
|
72,251
|
|
Net
decrease in financial investments (trading account)
|
|
|
(671 |
) |
|
|
4,357
|
|
|
|
(3,090 |
) |
|
|
(5,783 |
) |
(Gain)
loss on sales of bank premises and equipment
|
|
|
(205 |
) |
|
|
(207 |
) |
|
|
(563 |
) |
|
|
(1,054 |
) |
(Gain)
loss on sales of goods received in lieu of payment
|
|
|
(4,528 |
) |
|
|
(4,621 |
) |
|
|
(1,963 |
) |
|
|
(3,673 |
) |
Net
changes in other assets and liabilities
|
|
|
(71,539 |
) |
|
|
(24,505 |
) |
|
|
(111,093 |
) |
|
|
(207,872 |
) |
Share
of profit in equity method investments
|
|
|
(568 |
) |
|
|
(693 |
) |
|
|
(786 |
) |
|
|
(1,471 |
) |
Minority
interest
|
|
|
194
|
|
|
|
136
|
|
|
|
151
|
|
|
|
283
|
|
Write-offs
of assets received in lieu of payment
|
|
|
22,150
|
|
|
|
21,435
|
|
|
|
13,616
|
|
|
|
25,477
|
|
Net
change in interest accruals
|
|
|
59,187
|
|
|
|
(84,432 |
) |
|
|
(18,245 |
) |
|
|
(34,139 |
) |
Price-level
restatement
|
|
|
12,680
|
|
|
|
18,524
|
|
|
|
13,782
|
|
|
|
25,789
|
|
Other
|
|
|
16,452
|
|
|
|
6,787
|
|
|
|
49,287
|
|
|
|
92,224
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
420,710
|
|
|
|
333,611
|
|
|
|
435,379
|
|
|
|
814,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in loans
|
|
|
(1,086,477 |
) |
|
|
(1,103,351 |
) |
|
|
(1,516,675 |
) |
|
|
(2,837,930 |
) |
Net
change in proceeds from sale of goods received in lieu of
payment
|
|
|
44,177
|
|
|
|
48,610
|
|
|
|
27,040
|
|
|
|
50,596
|
|
Purchases
of bank premises and equipment
|
|
|
(20,013 |
) |
|
|
(21,932 |
) |
|
|
(25,120 |
) |
|
|
(47,004 |
) |
Investments
in other companies
|
|
|
(309 |
) |
|
|
(1,365 |
) |
|
|
-
|
|
|
|
-
|
|
Net
(increase) decrease in securities purchased under agreements to
resell
|
|
|
-
|
|
|
|
(99,988 |
) |
|
|
69,644
|
|
|
|
130,314
|
|
Net
change in other financial investments
|
|
|
(15,461 |
) |
|
|
491,038
|
|
|
|
246,274
|
|
|
|
460,817
|
|
Proceeds
from sales of bank premises and equipment
|
|
|
770
|
|
|
|
3,685
|
|
|
|
2,718
|
|
|
|
5,087
|
|
Dividends
received from equity investments
|
|
|
947
|
|
|
|
784
|
|
|
|
611
|
|
|
|
1,143
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(1,076,366 |
) |
|
|
(682,519 |
) |
|
|
(1,195,508 |
) |
|
|
(2,236,977 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in current accounts
|
|
|
140,177
|
|
|
|
117,869
|
|
|
|
173,996
|
|
|
|
325,573
|
|
Net
increase (decrease) in savings accounts and time deposits
|
|
|
728,752
|
|
|
|
1,397,198
|
|
|
|
836,693
|
|
|
|
1,565,580
|
|
Net
increase (decrease) in bankers drafts and other deposits
|
|
|
71,824
|
|
|
|
(370,603 |
) |
|
|
118,438
|
|
|
|
221,616
|
|
Net
increase (decrease) in investments sold under agreements to
repurchase
|
|
|
38,363
|
|
|
|
(177,511 |
) |
|
|
(32,220 |
) |
|
|
(60,288 |
) |
Increase
in mortgage finance bonds
|
|
|
72,188
|
|
|
|
18,254
|
|
|
|
217
|
|
|
|
405
|
|
Repayments
of mortgage finance bonds
|
|
|
(410,799 |
) |
|
|
(490,809 |
) |
|
|
(204,392 |
) |
|
|
(382,448 |
) |
Proceeds
from bond issues
|
|
|
414,511
|
|
|
|
113,677
|
|
|
|
201,700
|
|
|
|
377,412
|
|
Repayments
of bond issues
|
|
|
(155,594 |
) |
|
|
(244,881 |
) |
|
|
(66,902 |
) |
|
|
(125,182 |
) |
Short-term
funds borrowed
|
|
|
101,880
|
|
|
|
225,825
|
|
|
|
405,565
|
|
|
|
758,873
|
|
Short-term
borrowings repaid
|
|
|
(440,251 |
) |
|
|
613,450
|
|
|
|
(309,261 |
) |
|
|
(578,675 |
) |
Proceeds
from issuance of long-term borrowings
|
|
|
(92,222 |
) |
|
|
(42,132 |
) |
|
|
(9,091 |
) |
|
|
(17,011 |
) |
Central
Bank borrowings
|
|
|
345,941
|
|
|
|
(356,651 |
) |
|
|
(350,568 |
) |
|
|
(655,966 |
) |
Dividends
paid
|
|
|
(224,625 |
) |
|
|
(210,684 |
) |
|
|
(155,811 |
) |
|
|
(291,547 |
) |
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
590,145
|
|
|
|
593,002
|
|
|
|
608,364
|
|
|
|
1,138,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF PRICE-LEVEL RETATEMENT ON CASH AND DUE FROM BANKS
|
|
|
1,784
|
|
|
|
3,430
|
|
|
|
(6,759 |
) |
|
|
(12,648 |
) |
NET
DECREASE IN CASH AND DUE FROM BANKS
|
|
|
(63,727 |
) |
|
|
247,524
|
|
|
|
(158,524 |
) |
|
|
(296,623 |
) |
CASH
AND DUE FROM BANKS, BEGINNING OF THE YEAR
|
|
|
1,067,134
|
|
|
|
1,003,407
|
|
|
|
1,250,931
|
|
|
|
2,340,683
|
|
CASH
AND DUE FROM BANKS, END OF THE YEAR
|
|
|
1,003,407
|
|
|
|
1,250,931
|
|
|
|
1,092,407
|
|
|
|
2,044,060
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash movements (assets received in lieu of payment)
|
|
|
40,991
|
|
|
|
29,378
|
|
|
|
19,614
|
|
|
|
36,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
446,151
|
|
|
|
479,029
|
|
|
|
591,401
|
|
|
|
1,106,601
|
|
Taxes
|
|
|
2,820
|
|
|
|
1,617
|
|
|
|
1,988
|
|
|
|
3,720
|
|
The
accompanying Notes are an integral part of these consolidated financial
statements.
BANCO
SANTANDER CHILE
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Expressed
in millions of constant Chilean pesos (MCh$) as of December 31,
2006
(except
for number of shares)
|
|
Number
|
|
|
Paid-in
|
|
|
|
|
|
Financial
|
|
|
Net
Income
|
|
|
|
|
|
|
of
|
|
|
Share
|
|
|
Legal
|
|
|
Investment
|
|
|
for
the
|
|
|
|
|
|
|
Shares
|
|
|
capital
|
|
|
Reserve
|
|
|
Reserve
|
|
|
Year
|
|
|
Total
|
|
|
|
Millions
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2004, (historical)
|
|
|
188,446
|
|
|
|
702,551
|
|
|
|
105,363
|
|
|
|
2,503
|
|
|
|
212,108
|
|
|
|
1,022,525
|
|
Retained
earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
212,108
|
|
|
|
-
|
|
|
|
(212,108 |
) |
|
|
-
|
|
Dividend
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(212,108 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(212,108 |
) |
Price-level
restatement
|
|
|
-
|
|
|
|
17,423
|
|
|
|
2,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,871
|
|
Unrealized
losses in financial investment
classified
as permanent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,671
|
|
|
|
-
|
|
|
|
2,671
|
|
Net
Income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198,795
|
|
|
|
198,795
|
|
Balances
as of December 31, 2004
|
|
|
188,446
|
|
|
|
719,974
|
|
|
|
107,811
|
|
|
|
5,174
|
|
|
|
198,795
|
|
|
|
1,031,754
|
|
Balances
at December 31, 2004 restated in constant Chilean
pesos of December
31, 2006
|
|
|
188,446
|
|
|
|
761,853
|
|
|
|
114,082
|
|
|
|
5,475
|
|
|
|
210,358
|
|
|
|
1,091,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of January 1, 2005, (historical)
|
|
|
188,446
|
|
|
|
719,974
|
|
|
|
107,811
|
|
|
|
5,174
|
|
|
|
198,795
|
|
|
|
1,031,754
|
|
Retained
earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
198,795
|
|
|
|
-
|
|
|
|
(198,795 |
) |
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(198,795 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(198,795 |
) |
Price-level
restatement
|
|
|
-
|
|
|
|
26,063
|
|
|
|
3,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,648
|
|
Unrealized
losses in financial investment
classified
as permanent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,485 |
) |
|
|
-
|
|
|
|
(20,485 |
) |
Net
Income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
239,710
|
|
|
|
239,710
|
|
Balances
as of December 31, 2005
|
|
|
188,446
|
|
|
|
746,037
|
|
|
|
111,396
|
|
|
|
(15,311 |
) |
|
|
239,710
|
|
|
|
1,081,832
|
|
Balance
at December 31, 2005, restated in constant Chilean pesos
of December 31, 2006
|
|
|
188,446
|
|
|
|
761,853
|
|
|
|
113,759
|
|
|
|
(15,635 |
) |
|
|
244,792
|
|
|
|
1,104,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of January 1, 2006, (historical)
|
|
|
188,446
|
|
|
|
746,037
|
|
|
|
111,396
|
|
|
|
(15,311 |
) |
|
|
239,710
|
|
|
|
1,081,832
|
|
Retained
earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
239,710
|
|
|
|
-
|
|
|
|
(239,710 |
) |
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(155,811 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(155,811 |
) |
Price-level
restatement
|
|
|
-
|
|
|
|
15,816
|
|
|
|
4,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,329
|
|
Change
in accounting principles (See note 2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(936 |
) |
|
|
-
|
|
|
|
(936 |
) |
Unrealized
losses in financial investment classified
as available for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,343
|
|
|
|
-
|
|
|
|
14,343
|
|
Net
Income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
285,582
|
|
|
|
285,582
|
|
Balance
as of December 31, 2006
|
|
|
188,446
|
|
|
|
761,853
|
|
|
|
199,808
|
|
|
|
(1,904 |
) |
|
|
285,582
|
|
|
|
1,245,339
|
|
The
accompanying Notes are an integral part of these consolidated financial
statements.
Expressed
in millions of constant Chilean pesos (MCh$)
of
December 31, 2006 (except as indicated)
NOTE
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
a.
Basis of presentation - Banco Santander Santiago (formerly Banco
Santiago) is a corporation (sociedad anónima bancaria) organized under
the laws of the Republic of Chile that provides a broad range of general
banking
services to customers, from individuals to major corporations. Banco
Santander Santiago and its subsidiaries (collectively referred to herein
as the
“Bank” “Banco Santander Chile”) offer general commercial and consumer banking
services and provide other services, including factoring, collection, leasing,
securities and insurance brokerage, mutual and investment funds management
and
investment banking.
Through
resolution No.79 dated July 26, 2002 the Chilean Superintendencia de Bancos
e Instituciones Financieras (the “Superintendency of Banks”) approved the
merger agreed upon by the Extraordinary Shareholders’ Meetings of the former
Banco Santander-Chile and Banco Santiago, both held on July 18,
2002.
On
August
1, 2002, the legal merger agreed upon by Banco Santiago with former Banco
Santander-Chile took place, through the contribution of the assets of the
latter
to Banco Santiago, which assumed the total liabilities. The merger was accounted
for under Chilean GAAP in a manner commonly referred to as a “pooling of
interests” on a prospective basis from January 1, 2002. As such, the financial
statements of the former Banco Santander-Chile were retroactively combined
with
those of Banco Santiago at book values at January 1, 2002.
By
virtue
of the merger, Banco Santiago later changed its name to Banco Santander
Chile. The shareholders of the former Banco Santander-Chile became
shareholders of the merged bank, receiving 3.55366329 shares of the merged
Bank
in exchange for each share of the former Banco Santander-Chile.
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Chile and regulations of
the
Superintendency of Banks, collectively referred to as “Chilean
GAAP.” For the convenience of the reader, the consolidated financial
statements have been translated into English.
The
consolidated financial statements include Banco Santander Chile and its majority
owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. The majority
interests of Banco Santander Chile as of December 31, 2005 and 2006 were
as
follows:
|
|
Percentage
Owned
|
|
|
|
December
2005
|
|
|
December
2006
|
|
|
|
Direct
|
|
|
Indirect
|
|
|
Total
|
|
|
Direct
|
|
|
Indirect
|
|
|
Total
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santiago
Leasing S.A.
|
|
|
99.50
|
|
|
|
-
|
|
|
|
99.50
|
|
|
|
99.50
|
|
|
|
-
|
|
|
|
99.50
|
|
Santiago
Corredores de Bolsa Ltda. (2)
|
|
|
99.19
|
|
|
|
0.81
|
|
|
|
100.00
|
|
|
|
99.19
|
|
|
|
0.81
|
|
|
|
100.00
|
|
Santander
Santiago S.A. Administradora General de Fondos
|
|
|
99.96
|
|
|
|
0.02
|
|
|
|
99.98
|
|
|
|
99.96
|
|
|
|
0.02
|
|
|
|
99.98
|
|
Santander
S.A. Agente de Valores
|
|
|
99.03
|
|
|
|
-
|
|
|
|
99.03
|
|
|
|
99.03
|
|
|
|
-
|
|
|
|
99.03
|
|
Santander
Santiago S.A. Sociedad Securitizadora
|
|
|
99.64
|
|
|
|
-
|
|
|
|
99.64
|
|
|
|
96.64
|
|
|
|
-
|
|
|
|
99.64
|
|
Santander
Santiago Corredora de Seguros Ltda.
|
|
|
99.99
|
|
|
|
-
|
|
|
|
99.99
|
|
|
|
99.99
|
|
|
|
-
|
|
|
|
99.99
|
|
Santander
Servicios de Recaudación y Pagos Ltda. (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99.90
|
|
|
|
0.10
|
|
|
|
100.00
|
|
(1)
|
On
September 27, 2006 the Bank formed a new subsidiary, “Santander Servicios
de Recaudación y Pagos Ltda.” in which they became a 99.9% owner for
Mch$739 millions dedicated to collection and payment
services. The new subsidiary is organized under the laws of
Republic of Chile and started its operations in October
2006.
|
(2)
|
On
December 28, 2006 the partners of the company accorded to increase
capital
by Ch$7,768 million. Additionally, and as indicated in Note 25
to the
financial statements, in 2007 this company plans to merged with
the
related company Santander Investment S.A. Corredores de Bolsa,
which will
be the legal surviving entity and
subsidiary of de Bank.
|
b.
Use of estimates in the preparation of financial statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In certain
cases generally accepted accounting principles require that assets or
liabilities be recorded or disclosed at their fair values. The fair
value is the amount at which an asset could be bought or sold, or in the
case of
a liability could be incurred or settled in a current transaction between
willing parties, other than in a forced or liquidation sale. Where available,
quoted market prices in active markets have been used as the basis for the
measurement. Where quoted market prices in active markets are not
available, the Bank has estimated such values based on the best information
available, including using modeling and other valuation techniques.
We
have
established allowances to cover probable loan losses in accordance with
regulations issued by the Chilean Superintendency of Banks. These
regulations require us to estimate allowances based on an individual and
group
classification system as explained in Note 1 (m).
As
described above, the allowance for loan losses requires us to make estimates
and, consequently, we regularly evaluate our allowance for loan losses by
taking
into consideration factors such as changes in the nature and volume of our
loan
portfolio, trends in forecasted portfolio credit quality and economic conditions
that may affect our borrowers’ ability to pay. Increases in our
allowance for loan losses are reflected as provisions for loan losses in
our
income statement. Loans are charged off when management determines
that the loan or a portion thereof is uncollectible. Charge-offs are
recorded as a reduction of the allowance for loan losses.
c.
Price-level restatement - The consolidated financial statements are
prepared on the basis of general price-level accounting in order to reflect
the
effect of changes in the purchasing power of the Chilean peso during each
period. At the end of each reporting period, the consolidated
financial statements are restated in terms of the general purchasing power
of
the Chilean peso (“constant pesos”) using changes in the Chilean Consumer Price
Index (“CPI”) as follows:
-
|
Non-monetary
assets, liabilities and shareholders’ equity accounts are restated in
terms of period-end purchasing
power.
|
-
|
Consistent
with general banking practices in Chile, no specific purchasing
power
adjustments of income statement amounts are
made.
|
-
|
Monetary
items are not restated as such items are, by their nature, stated
in terms
of current purchasing power in the financial
statements.
|
-
|
The
price-level restatement credit or charge in the income statement
represents the monetary gain or loss in purchasing power from holding
monetary assets and liabilities exposed to the effects of
inflation.
|
-
|
All
the amounts contained in the accompanying consolidated financial
statements have been restated in Chilean pesos of general purchasing
power
of December 31, 2006 (“constant pesos”) applied under the “prior month
rule”, as described below, to reflect changes in the CPI from the
financial statement dates to December 31, 2006. This updating
does not change the prior periods’ statements or information in any way
except to update the amounts to constant pesos of similar purchasing
power.
|
The
general price-level restatements are calculated using the official CPI of
the
Chilean National Institute of Statistics and are based on the “prior month
rule”, in which the inflation adjustments at any balance sheet date are based
on
the consumer price index at the close of the preceding month. The CPI
is considered by the business community, the accounting profession and the
Chilean government to be the index which most closely complies with the
technical requirement to reflect the variation in the general level of prices
in
the country and, consequently, is widely used for financial reporting purposes
in Chile.
The
values
of the CPI used for price-level restatement purposes are as
follows:
|
|
|
|
Change
|
|
Period
|
|
Index*
|
|
in
index
|
|
2004
|
|
|
117.28
|
|
|
2.5%
|
|
2005
|
|
|
121.53
|
|
|
3.6%
|
|
2006
|
|
|
124.11
|
|
|
2.1%
|
|
*
|
Index
as of November 30 of each period compared with the index as of
November 30
of the prior year, under the prior month rule described
above.
|
The
price-level adjusted consolidated financial statements do not purport to
represent appraised values, replacement cost, or any other current value
of
assets at which transactions would take place currently and are only intended
to
restate all non-monetary financial statement components in terms of local
currency of a single purchasing power and to include in the net result for
each
year the gain or loss in purchasing power arising from the holding of monetary
assets and liabilities exposed to the effects of inflation.
d.
Index-linked assets and liabilities - Certain of the Bank’s
interest-earning assets and interest-bearing liabilities are expressed in
index-linked units of account. The principal index-linked unit used
in Chile is the Unidad de Fomento (UF), a unit of account which changes daily
from the tenth day of the current month to the ninth day of the next month,
to
reflect the changes in the Chilean CPI over the previous month. The
carrying amounts of such assets and liabilities change with the changes in
the
UF and serve to offset the price-level restatement gains or losses from holding
such assets and liabilities. As the Bank’s UF assets exceed its UF
liabilities, any increase in the index results in a net gain on
indexation. Values for the UF as of December 31 of each
period are as follows in historical Chilean pesos:
Period
|
|
Ch$
|
|
2004
|
|
|
17,317.05
|
|
2005
|
|
|
17,974.81
|
|
2006
|
|
|
18,336.38
|
|
e.
Interest revenue and expense recognition - Interest revenue and expense
are recognized on an accrual basis using the effective interest method. The
carrying amounts of loans, investments and liabilities are stated at their
cost,
adjusted for accrued interest and the indexation adjustment applicable to
such
balances that are index-linked. The effect of index linkage charges
on interest-earning assets end interest earning liabilities is reflected
in the
income statement as an increase or decrease in interest revenue or
expense.
The
Bank
suspends the accrual of interest and indexation adjustments of principal
on loan
installment payments due beginning on the first day that such loan installment
payments are overdue. The Bank continues to accrue interest and
indexation on the principal payments not yet overdue for those loans that
have
installments overdue unless the Bank believes those amounts are
uncollectible. Interest accrued prior to the loan becoming overdue
remains on the Bank’s books and is considered to be a part of the loan balance
when determining the allowance for loan losses. Payments received on
overdue loans are first applied to reduce the recorded balance of accrued
interest receivable, if any, and thereafter are recognized as income to the
extent of interest earned but not recorded; any excess payments are then
applied
to principal. Accrued interest and indexation adjustments are
included in the Bank’s recorded investment in the loan for the purpose of
determining the required allowance for loan losses.
f.
Foreign currency - The Bank makes loans and accepts deposits in amounts
denominated in foreign currencies, principally the US dollar. Such
assets and liabilities are translated at the observed rate reported by the
Central Bank of Chile at the balance sheet date.
The
amount
of net gains and losses on foreign exchange includes the recognition of the
effects that variations in the exchange rates have on assets and liabilities
denominated in foreign currencies and the gains or losses on foreign exchange
spot and forward transactions undertaken by the Bank.
g.
Derivative activities –
Prior
to
January 1, 2006, under Chilean GAAP, the Bank accounted for forward contracts
between foreign currencies and U.S. dollars at fair value with realized and
unrealized gains and losses on these instruments recognized in net income.
Forward contracts between the U.S. dollar and the Chilean peso or the UF
are
valued at the closing spot exchange rate of each balance sheet date, with
the
initial discount or premium being amortized over the life of the contract
in
accordance with Chilean hedge accounting criteria.
Under
Chilean GAAP the Bank records differences between interest income and interest
expense on interest rate swap transactions and interest on debt instruments,
in
net income in the period when cash settlements under the agreements are
made. The fair value of the swap agreement and changes in the fair
value as a result of changes in market interest rates were not recognized
at
each period-close in the Chilean GAAP consolidated financial
statements.
Effective
January 1, 2006, under the requirements of Circular No. 3,345 of the
Superintendency of Banks, the accounting treatment of certain derivative
instruments and hedges of financial assets changed. Traditional
financial instruments which meet the definition of a “derivative” such as
forwards in foreign currency and unidades de fomento (inflation index-linked
units of account), interest rate futures, currency and interest rate swaps,
currency and interest rate options, and others are recognized initially in
the
balance sheet at cost (including transaction fees) and, at subsequent period
ends, at their fair value. The fair value is obtained from market
quotes, discounted cash flow models and option valuation models, as
applicable.
Certain
terms may be incorporated into non-derivative financial instruments whose
risk
and economic characteristics are not clearly and closely related to those
of the
host contract which may require their bifurcation from the host contract
and
treatment as a separate derivative subject to that dictated by Circular
No.3,345.
When
a
derivative contract is signed, it must be designated by the Bank as a
speculative contract or a hedge. Any changes in the fair value of speculative
financial derivative contracts are recorded
in Income under “Gains from trading activities” or “Losses from
trading activities”, as applicable. If the derivative is classified
as a hedge , it may be: (1) a fair value hedge, or (2) a cash flow hedge
. To
qualify as a hedge for accounting purposes, the instruments must comply with
all
the following conditions: (a) hedging must be formally documented at initiation;
(b) hedging must be expected to be highly effective; (c) the efficiency of
the
hedge can be measured reasonably; and (d) the hedge is highly effective with
regard to the risk hedged, continuously throughout its lifetime, to qualify
as
highly effective, the hedge relationship should meet, both at the inception
and
in any moment, the following requirements:
a)
|
Prospectively:
It should be expected that the changes in the fair value or in
the cash
flows of the hedged financial instruments will almost be offset
by the
changes in the fair value or in the cash flows of the hedging
instruments.
|
b) |
Retrospectively:
The offsetting effects should be within 80% and 125% of the
changes in the hedged item.
|
c)
|
All
the values should be reliably
calculated. |
d)
|
Effectiveness
should be tested at least each time that the financial statements
are
prepared
|
Certain
derivative transactions that do not classify to be accounted for as
hedges are treated and reported as trading, even though they may
provide an effective economic hedge for managing risk
positions.
When
a
derivative hedges exposure to changes in the fair value of an existing asset
or
liability, the latter is recorded at its fair value. Earnings or losses from
measuring the fair value of both the item hedged and the hedging derivative
are
recognized in income. If the item hedged in a fair value hedge is a firm
commitment, the changes in the fair value of the commitment with regard to
the
risk hedged are recorded as assets or liabilities with the offsetting effect
recorded in income. When an asset or liability is acquired as a result of
the
commitment, the initial recognition of the acquired asset or liability is
adjusted to fair value.
When
a
derivative hedges exposure to changes in the cash flows of existing assets
or
liabilities, or expected transactions, the effective portion of the changes
in
fair value with regard to the risk hedged is recorded in shareholders’
equity. Any ineffective portion is recognized directly in the
period’s income. The amounts recorded directly in shareholders’ equity are
transferred to in income in the same periods in which the offsetting changes
in assets or liabilities hedged affect the income
statement.
When
fair
value hedge accounting is used for a portfolio hedge of interest rate risk
and
the hedge item is designated as an amount of currency, the earnings or losses
from measuring the fair value of both the portfolio hedged and the hedge
are
recognized in income.
h.
Financial investments - Before January 1, 2006, the Bank’s financial
investments were classified as trading or permanent in accordance with the
regulations of the Superintendency of Banks with unrealized gains and losses
on
trading investments included in Other operating income (expenses), and
unrealized gains and losses on permanent investments included in a separate
component of Shareholders’ equity. Investment securities maintained
by the Bank’s subsidiaries were carried on a stand-alone basis on the
subsidiary’s financial statements at the lower of price-level restated cost or
market value.
The
Bank’s
previously identified “trading” investments, although not classified as such in
prior years, for accounting purposes, were treated the same as those classified
as “trading” since January 1, 2006. Additionally, over all periods presented,
classification for accounting purposes has been conformed.
Effective
January 1, 2006 the accounting for financial instruments acquired for trading
or
investments purposes (available-for-sale or held-to- maturity) are classified
as
follows:
i.
|
Trading
Instruments - Instruments for trading are securities acquired for
which the Bank has the intent to generate earnings from short-term
price
fluctuations or through brokerage margins, or that are included
in a
portfolio created for such purposes.
|
|
Instruments
for trading are valued at their fair value according to market prices
on
the closing date of the balance sheet. Mark to market
adjustments, as well as realized gains/losses from trading , are
included
in the Income Statement under “Earnings (losses) from trading activities”.
Interest income and indexation adjustments are reported as
“Interest revenue”. |
ii.
|
Investment
Instruments - Investment instruments are classified into two
categories: Held to maturity investments and Instruments available
for
sale. Held to maturity investments only include those instruments
for
which the Bank has the intent and ability to hold to maturity.
Investment
instruments not classified as held to maturity or trading are considered
to be available for sale. Investment instruments are recognized
initially at cost, which includes transaction
costs.
|
|
Investment
instruments are recorded initially at cost. Instruments available
for sale
are valued at each subsequent period-end at their fair value
according to
market prices or valuations obtained by using models. Mark
to market
adjustments are reported in a separate component of Shareholders’
equity. When these investments are sold or become impaired, the
amount of the adjustments to fair value accumulated in Shareholders’
equity is reclassified to the income statement and reported
under “Gain
from trading activities” or “Losses from trading activities”, as
applicable.
Held
to maturity investments are recorded at their cost value plus
accrued
interest and adjustments, less provisions for impairment recorded
when the
book value is higher than its estimated return.
Interest
and indexation adjustments of held to maturity investments
and available
for sale investments are included under “Interest revenue and expenses”.
Investment instruments designated as hedges are accounted for
under the
appropriate derivative accounting literature.
All
purchases and sales of investment instruments, to be delivered
within the deadline stipulated by market regulations and conventions,
are
recognized on the commitment date , which is the date on which
the
commitment is made to purchase or sell the asset. Other purchases
or sales
are treated as forwards until they are liquidated.
The
Bank enters into security repurchase agreements as a form of
borrowing. In this regard, the Bank’s investments that are sold
subject to a repurchase obligation and that serve as collateral
for the
borrowing are reclassified as “investment collateral under agreements to
repurchase” and carried at market value. The liability for the repurchase
of the investment is classified as “investments under agreements to
repurchase” and is carried at cost plus accrued interest.
The
Bank also enters into resale agreements as a form of investment.
Under
these agreements the Bank purchases securities, which are included
as
assets under the caption “investments under agreements to resell” and are
carried at cost plus accrued interest.
All
other financial investments are carried at acquisition cost
plus accrued
interest and UF-indexation adjustments, as
applicable.
|
i.
Leasing contracts - The Bank leases certain property that meets the
criteria for direct financing leases. At the time of entering into a
direct financing lease transaction, the Bank records the gross financing
receivable, unearned income and estimated residual value of leased
equipment. There are no significant residual values assumed by the
Bank. Unearned income represents the excess of the gross financing
receivable plus the estimated residual value over the cost of the property
acquired. Unearned income is recognized in such a manner as to
produce a constant periodic rate of return on the net investment in the direct
financing lease. The net investment in financing leases is included
in the account “Lease Contracts” in the loan section of the consolidated balance
sheet.
j.
Factored receivables - Factoring receivable loans are valued at the
amount disbursed to the borrower. The price difference between the
amounts disbursed and the actual face value of the receivables is earned
and
recorded as interest income over the financing period. The borrowers
are responsible for the payments of the loans if the receivables are not
collected.
k.
Premises and equipment - Premises and equipment are stated at
acquisition cost net of accumulated depreciation and have been restated for
price-level changes. Depreciation is calculated on a straight-line
method over the estimated useful lives of the underlying
assets.
The
costs
of maintenance and repairs are charged to expense. The costs of
significant refurbishment and improvements are capitalized and are then
amortized over the period of the benefit or the remaining life of the premises
and equipment, whichever is less, on a straight-line basis.
l.
Investments in other companies - Shares or rights in companies that are
integral to the operations of the Bank, where the Bank holds less than majority
interest, are accounted for under the equity method. Other minority investments
are carried at cost restated for price-level changes.
m.
Allowance for loan losses - The Bank has set up allowances for probable
loan losses in accordance with the instructions issued by the Superintendency
of
Banks and the models for rating and evaluating credit risk approved by the
Bank’s Board of Directors.
The
following describes the calculation of the allowance for loan
losses.
Allowances
for individual evaluations on commercial loans
The
Bank
assigns a risk category level to each borrower and his respective
loans.
The
Bank
considers the following risk factors within the analysis: industry or sector
of
the borrower, owners or managers of the borrower, their financial situation,
their payment capacity and payment behavior.
The
Bank
assigns one of the following risk categories to each loan and
borrower:
i.
|
Classifications
A1, A2 and A3, correspond to borrowers with no apparent credit
risk.
|
ii.
|
Classifications
B, correspond to borrowers with some credit risk but no apparent
deterioration of payment capacity.
|
iii.
|
Classifications
C1, C2, C3, C4, D1 and D2 correspond to borrowers whose loans have
deteriorated.
|
For
loans
classified as A1, A2, A3 and B, the board of directors of the Bank is authorized
to determine the levels of required reserves. For loans classified in
Categories C1, C2, C3, C4, D1 and D2, the bank must have the following levels
of
reserves:
Classification
|
Estimated
range of loss
|
Reserve
|
C1
|
Up
to 3%
|
2%
|
C2
|
More
than 3% up to 19%
|
10%
|
C3
|
More
than 19% up to 29%
|
25%
|
C4
|
More
than 29% up to 49%
|
40%
|
D1
|
More
than 49% up to 79%
|
65%
|
D2
|
More
than 79%
|
90%
|
Commencing
in 2006, the Bank improved the methodology for loans classified as categories
A1, A2, A3 and B. All commercial loans were assigned with a specific level
of
risk.
Loan
classification model for
commercial, consumer and mortgage loans on an group
basis
Allowances
for group
evaluations
·
|
Suitable
for the evaluation of a large number of borrowers whose individual
loan
amounts are relatively small. These models are intended to be
used primarily to analyze loans to individuals and small
companies.
|
·
|
Levels
of required reserves are to be determined by the
Bank, according to the estimated loss that may result from the
loans, by classifying the loan portfolio using one or both of the
following models:
|
|
i.
|
A
model based on the characteristics of the borrowers and their outstanding
loans. Borrowers and their loans with similar characteristics
will be placed into groups and each group will be assigned a risk
level.
|
|
ii. |
A
model based on the behavior of a group of loans. Loans with
analogous past payment histories and similar characteristics will
be
placed into groups and each group will be assigned a risk
level.
|
Provisioning
for consumer and mortgage
loan
The
provisioning for consumer and mortgage loan is directly related to the aging of
the installment.
Commencing
in 2006, the Bank improved and modified the methodology for analyzing consumer
and mortgage loans. All consumer and mortgage loans will be assigned a rating
on
an individual basis utilizing a more automated and sophisticated statistical
model and considering also borrower’s credit behavior. Once the rating of
the client is determined the provisioning of consumer and mortgage loans
is
calculated using a risk category and related % which is directly related
to the
aging.
Additional
reserves
Under
the
regulations, banks are permitted to establish reserves above the limits
described above only to cover specific risks that have been authorized by
their
board of directors.
Charge-offs
In
accordance with the regulations of the Superintendency of Banks the Bank
charges
off loans or portions thereof when collection efforts have been
exhausted. Under the rules and regulations established by the
Superintency of Banks, charge-offs must be made within the following maximum
prescribed limits:
·
|
24
months after a loan is past due (3 months for consumer loans) for
loans
without collateral; and
|
·
|
36
months after a loan is past due for loans with
collateral.
|
The
Bank
will also charge-off commercial loans prior to the meeting of this criteria
when
the Bank no longer considers such loans or portions thereof to be
collectible.
Loan
loss
recoveries
Recoveries
on charged-off loans as well as recoveries on loans which were reacquired
from
the Chilean Central Bank (the “Central Bank”), are recorded directly to income
and presented as a reduction of the provision for loans losses.
n.
Fees and expenses related to loans and services - Fees and expenses
related to loans, as well as fees for services rendered, are deferred and
recognized in income over the term of the loans to which they relate equivalent
to the period during which the services are performed.
The
fees
correspond to remunerations charged to the mutual funds and investment
funds
administered are registered on base yielded. These fees are
established in the Internal Regulations of each one the funds
administered
o.
Income taxes - Income taxes payable are recognized in an amount that
approximates the amount due on the respective income tax return pursuant
to
Chilean tax legislation.
Deferred
taxes are recorded in accordance with Technical Bulletin No. 60 and the
complementary technical bulletins thereto issued by the Chilean Association
of
Accountants.
p.
Assets received in lieu of payment - Assets received in lieu of payment
are carried at the lower of price-level restated cost and the market value
of
such assets, considered as a whole. Assets that have not been sold within
one
year are written-off, as instructed by the Superintendency of
Banks.
q.
Statement of cash flows - For purposes of reporting cash flows, cash
and cash equivalents include cash and due from banks. (For the year ended
December 31, 2004, 2005 and 2006), the consolidated statements of cash
flows
have been prepared in accordance with Technical Bulletin No. 65 of the
Chilean
Association of Accountants.
r.
Convenience translation to U.S. dollars - The Bank maintains its
accounting records and prepares its consolidated financial statements in
Chilean
pesos. The US dollar amounts disclosed in the accompanying financial
statements are presented solely for the convenience of the reader at the
December 31, 2006 observed exchange rate of Ch$534.43 per
US$1.00. This translation should not be construed as representing
that the Chilean peso amounts actually represent or have been, or could
be,
converted into U.S. dollars at such a rate or at any other rate.
NOTE
2.
|
ACCOUNTING
CHANGES
|
On
December 20, 2005, the Superintendency of Banks and Financial Institutions
issued Circular No. 3,345 and related amendments through Circular No.3,349
dated
February 7, 2006, Circular No. 3,355 dated May 25, 2006 and Circular No.
3,358
dated May 31, 2006, governing the application of new accounting principles
and
the valuation and classification of financial instruments acquired, derivative
instruments, accounting hedges and write-offs of financial assets on the
balance
sheet. The aforementioned changes in accounting principles
and valuation at January 1, 2006, called for adjustments, if applicable,
to fair
value, on said instruments to be made directly against shareholders’ equity; the
amount was MCh$(936).
For
comparative purposes, the balances at December 31, 2005 have been regrouped
and
reclassified, but not adjusted to fair value, based on the transition provisions
established in Circular No.3,345 and its subsequent amendments as mentioned
above.
In
accordance with the rules of the Superintendency of Banks, the Bank must
maintain certain non interest-bearing balances in its account with the
Central
Bank. The required balances are based upon specified financial criteria,
including the level of the Bank’s assets, the amount of its foreign borrowings
and its average liabilities. Restricted amounts totaled MCh$238,410
and MCh$290,958 as of December 31, 2005 and 2006, respectively.
Financial
investments are classified at the time of the purchase, based on management’s
intentions, as either trading instruments or investment instruments the
latter
of which are categorized as Available for sale and Held to
maturity.
A
summary
of financial investments is as follows:
|
|
As
of December 31,
|
|
Central
Bank and Government Securities |
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank Securities
|
|
|
390,002
|
|
|
|
381,260
|
|
Chilean
Treasury Bonds
|
|
|
-
|
|
|
|
40,521
|
|
Other
Securities
|
|
|
17,101
|
|
|
|
357
|
|
Subtotal
|
|
|
407,103
|
|
|
|
422,138
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean Financial Institutions
|
|
|
89,151
|
|
|
|
3,554
|
|
Mortgage
Finance Bonds
|
|
|
59,555
|
|
|
|
23,189
|
|
Chilean
financial Institutions Bonds
|
|
|
-
|
|
|
|
44
|
|
Chilean
Corporate Bonds
|
|
|
2,002
|
|
|
|
22,561
|
|
Chilean
Others Securities
|
|
|
58,902
|
|
|
|
7,264
|
|
Central
Bank and Government Foreign Securities
|
|
|
-
|
|
|
|
-
|
|
Other
Foreign Securities
|
|
|
59,248
|
|
|
|
160,711
|
|
Subtotal
|
|
|
268,858
|
|
|
|
217,323
|
|
Total
|
|
|
675,961
|
|
|
|
639,461
|
|
Central
Bank and government securities include repurchase agreements sold to clients
and
financial institutions for an amount of MCh$50,250 and MCh$20,061 as of
December
31, 2005 and 2006 respectively. Other Financial Investments does not include
any
repurchase agreements sold to clients and financial
institutions.
b)
Available for sale
Investments
|
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
Central
Bank and Government Securities |
|
MCh$
|
|
|
MCh$
|
|
Central
Bank Securities
|
|
|
86,114
|
|
|
|
77,738
|
|
Chilean
Treasury Bonds
|
|
|
1,226
|
|
|
|
623
|
|
Other
Securities
|
|
|
34,494
|
|
|
|
18,531
|
|
Subtotal
|
|
|
121,834
|
|
|
|
96,892
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean Financial Institutions
|
|
|
-
|
|
|
|
-
|
|
Mortgage
Finance Bonds
|
|
|
423,970
|
|
|
|
222,672
|
|
Chilean
financial Institutions Bonds
|
|
|
-
|
|
|
|
-
|
|
Chilean
Corporate Bonds
|
|
|
-
|
|
|
|
-
|
|
Chilean
Others Securities
|
|
|
-
|
|
|
|
-
|
|
Central
Bank and Government Foreign Securities
|
|
|
-
|
|
|
|
-
|
|
Other
Foreign Securities
|
|
|
29,224
|
|
|
|
25,544
|
|
Subtotal
|
|
|
453,194
|
|
|
|
248,216
|
|
Total
|
|
|
575,028
|
|
|
|
345,108
|
|
Central
Bank and government securities include repurchase agreements sold to clients
and
financial institutions for an amount of MCh$1,756 and MCh$2,067 as of December
31, 2005 and 2006 respectively. Other Financial Investments does not include
any
repurchase agreements sold to clients and financial institutions.
c)
Held to maturity Investments
As
of
December 31, 2005 and 2006 no financial investments were classified as
held to
maturity.
The
loans
on the accompanying consolidated balance sheets consist of the subcategories
as
described below.
Commercial
loans are long-term and short-term loans made to companies and
businesses. These loans are granted in Chilean pesos on an adjustable
or fixed rate basis to finance working capital or investments.
Consumer
loans are loans to individuals granted in Chilean pesos, generally on a
fixed rate basis, to finance the purchase of consumer goods or to pay for
services. Credit card balances subject to interest charges are also
included in this category.
Mortgage
loans are inflation-indexed, fixed rate, long-term loans with monthly
payments of principal and interest collateralized by a real property
mortgage. These loans are specifically funded through the issuance of
mortgage finance bonds, which are bonds generally issued to third party
investors in order that the Bank finance its loans to property
owners. At the time of issuance, the amount of a mortgage loan cannot
exceed 75% of the value of the property.
Foreign
trade loans are fixed rate, short-term loans granted in foreign currencies
(principally U.S. dollars) to finance imports and exports.
Interbank
loans are fixed rate, short-term loans to financial institutions that
operate in Chile.
Lease
contracts are agreements to finance the acquisition of capital equipment
and other property.
Other
outstanding loans principally include current account overdrafts, bills of
exchange and mortgage loans that are financed by the Bank’s general
borrowings.
Past
due loans include, with respect to any loan, the amount of principal or
interest that is 90 days or more overdue, and do not include the installments
of
such loan that are not overdue or that are less than 90 days overdue, unless
legal proceedings have been commenced for the entire outstanding balance
according to the terms of the loan.
Contingent
loans mainly consist of open and unused letters of credit together with
guarantees granted by the Bank in Ch$, UF and foreign currencies (principally
U.S. dollars).
The
following table summarizes the most significant loan concentrations, expressed
as a percentage of total loans, excluding contingent loans and on a gross
basis.
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
Community,
social and personal services
|
|
|
18.9% |
|
|
|
16.7% |
|
Residential
mortgage loans
|
|
|
25.0% |
|
|
|
26.0% |
|
Consumer
credit
|
|
|
15.2% |
|
|
|
16.9% |
|
Financial
services
|
|
|
10.4% |
|
|
|
8.8% |
|
Commerce
|
|
|
8.4% |
|
|
|
8.3% |
|
Manufacturing
|
|
|
6.0% |
|
|
|
5.6% |
|
Construction
|
|
|
6.5% |
|
|
|
6.8% |
|
Agriculture,
livestock, agribusiness, fishing
|
|
|
4.7% |
|
|
|
5.7% |
|
Electricity,
gas and water
|
|
|
0.8% |
|
|
|
0.9% |
|
Transport,
storage and communications
|
|
|
3.4% |
|
|
|
3.6% |
|
Mining
and petroleum
|
|
|
0.7% |
|
|
|
0.7% |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0% |
|
|
|
100.0% |
|
A
substantial amount of the Bank’s loans are to borrowers doing business in
Chile.
The
amounts shown as leasing contracts are amounts receivable under lease agreements
and have the following maturities as of December 31, 2005 and
2006. Unearned income presented in the table corresponds to the
interest to be earned in the future as of each year-end.
|
|
As
of December 31, 2005
|
|
|
As
of December 31, 2006
|
|
|
|
Total
|
|
|
Unearned
|
|
|
Net
lease
|
|
|
Total
|
|
|
Unearned
|
|
|
Net
lease
|
|
|
|
receivable
|
|
|
income
|
|
|
receivable
|
|
|
receivable
|
|
|
income
|
|
|
receivable
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
|
203,726
|
|
|
|
(30,424 |
) |
|
|
173,302
|
|
|
|
266,485
|
|
|
|
(29,544 |
) |
|
|
236,941
|
|
Due
after 1 year but within 2 years
|
|
|
161,425
|
|
|
|
(24,428 |
) |
|
|
136,997
|
|
|
|
189,480
|
|
|
|
(25,425 |
) |
|
|
164,055
|
|
Due
after 2 year but within 3 years
|
|
|
116,673
|
|
|
|
(17,969 |
) |
|
|
98,704
|
|
|
|
132,837
|
|
|
|
(21,842 |
) |
|
|
110,995
|
|
Due
after 3 year but within 4 years
|
|
|
79,750
|
|
|
|
(13,530 |
) |
|
|
66,220
|
|
|
|
89,100
|
|
|
|
(17,050 |
) |
|
|
72,050
|
|
Due
after 4 year but within 5 years
|
|
|
59,239
|
|
|
|
(10,317 |
) |
|
|
48,922
|
|
|
|
55,476
|
|
|
|
(10,665 |
) |
|
|
44,811
|
|
Due
after 5 years
|
|
|
190,778
|
|
|
|
(36,987 |
) |
|
|
153,791
|
|
|
|
180,935
|
|
|
|
(45,379 |
) |
|
|
135,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
811,591
|
|
|
|
(133,655 |
) |
|
|
677,936
|
|
|
|
914,313
|
|
|
|
(149,905 |
) |
|
|
764,408
|
|
Leased
assets consist principally of real estate, industrial machinery, vehicles
and
computer equipment.
NOTE
7.
|
ALLOWANCE
FOR LOAN LOSSES
|
The
changes in the allowance for loan losses are as follows:
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1,
|
|
|
182,426
|
|
|
|
183,366
|
|
|
|
151,000
|
|
Price-level
restatement (1)
|
|
|
(4,792 |
) |
|
|
(6,407 |
) |
|
|
(3,134 |
) |
Charge
offs
|
|
|
(126,394 |
) |
|
|
(139,632 |
) |
|
|
(143,475 |
) |
Allowances
established
|
|
|
153,406
|
|
|
|
164,697
|
|
|
|
206,087
|
|
Allowances
released
|
|
|
(21,280 |
) |
|
|
(51,024 |
) |
|
|
(36,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as December 31,
|
|
|
183,366
|
|
|
|
151,000
|
|
|
|
174,064
|
|
(1)
|
Reflects
the effect of inflation on the allowance for loan losses at the
beginning
of each period, adjusted to constant pesos of December 31,
2006.
|
The
provision for loan losses included in the results of operations for the periods
indicated is as follows:
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Provision
established
|
|
|
153,406
|
|
|
|
164,697
|
|
|
|
206,087
|
|
Net
provision established (released)
|
|
|
|
|
|
|
|
|
|
|
|
|
for
assets received in lieu of payment
|
|
|
1,027
|
|
|
|
(724 |
) |
|
|
1,268
|
|
Direct
charge-offs
|
|
|
3,070
|
|
|
|
(991 |
) |
|
|
(852 |
) |
Provision
released
|
|
|
(21,280 |
) |
|
|
(51,024 |
) |
|
|
(36,414 |
) |
Recovery
of loans previously charged off
|
|
|
(50,772 |
) |
|
|
(47,079 |
) |
|
|
(47,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge to income
|
|
|
85,451
|
|
|
|
64,879
|
|
|
|
123,022
|
|
NOTE
8.
|
BANK
PREMISES AND EQUIPMENT, NET
|
The
major
categories of Bank premises and equipment, net of accumulated depreciation
are
as follows:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
197,016
|
|
|
|
198,980
|
|
Furniture
and fixtures
|
|
|
7,618
|
|
|
|
10,035
|
|
Machinery
and equipment
|
|
|
14,485
|
|
|
|
15,451
|
|
Vehicles
|
|
|
1,075
|
|
|
|
1,246
|
|
Other
|
|
|
5,874
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
Total
bank premises and equipment, net
|
|
|
226,068
|
|
|
|
231,360
|
|
Related
depreciation expense was MCh$17,320 and MCh$19,291 as of December 31, 2005
and
2006 respectively.
NOTE
9.
|
INVESTMENTS
IN OTHER COMPANIES
|
Investments
in other companies consist of the following:
|
|
|
As
of December 31,
|
|
|
|
Ownership
interest
|
|
|
Participation
in net income
|
|
|
Book
Value
|
|
|
|
2005
|
|
|
2006
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
%
|
|
|
%
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redbank
S.A.
|
|
|
33.42
|
|
|
|
33.42
|
|
|
|
192
|
|
|
|
187
|
|
|
|
201
|
|
|
|
1,225
|
|
|
|
1,239
|
|
Transbank
S.A.
|
|
|
32.71
|
|
|
|
32.71
|
|
|
|
262
|
|
|
|
263
|
|
|
|
264
|
|
|
|
1,716
|
|
|
|
1,717
|
|
Tarjetas
Inteligentes S.A. (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(141 |
) |
|
|
(43 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Centro
de Compensación Automática
|
|
|
33.33
|
|
|
|
33.33
|
|
|
|
32
|
|
|
|
35
|
|
|
|
40
|
|
|
|
218
|
|
|
|
240
|
|
Sociedad
Interbancaria de Depósito de Valores S.A.
|
|
|
29.28
|
|
|
|
29.28
|
|
|
|
59
|
|
|
|
58
|
|
|
|
68
|
|
|
|
310
|
|
|
|
313
|
|
Camara
de Compensacion Alto Valor S.A. (4)
|
|
|
11.66
|
|
|
|
11.52
|
|
|
|
(18 |
) |
|
|
(23 |
) |
|
|
58
|
|
|
|
287
|
|
|
|
346
|
|
Adm
Financ. Transantiago (2)
|
|
|
20.00
|
|
|
|
20.00
|
|
|
|
-
|
|
|
|
(126 |
) |
|
|
(95 |
) |
|
|
1,292
|
|
|
|
1,197
|
|
Nexus
S.A. (4)
|
|
|
12.90
|
|
|
|
12.90
|
|
|
|
91
|
|
|
|
93
|
|
|
|
119
|
|
|
|
584
|
|
|
|
610
|
|
Bolsa
de Comercio de Santiago (Stock Exchange) (4)
|
|
|
4.17
|
|
|
|
4.17
|
|
|
|
93
|
|
|
|
233
|
|
|
|
(128 |
) |
|
|
590
|
|
|
|
616
|
|
Bolsa
Electrónica de Chile. (4)
|
|
|
2.50
|
|
|
|
2.50
|
|
|
|
-
|
|
|
|
29
|
|
|
|
(3 |
) |
|
|
71
|
|
|
|
75
|
|
Bolsa
de Comercio de Valparaíso (3) (4)
|
|
|
2.22
|
|
|
|
1.67
|
|
|
|
-
|
|
|
|
(2 |
) |
|
|
-
|
|
|
|
10
|
|
|
|
10
|
|
Cámara
de Compensación (4)
|
|
|
0.15
|
|
|
|
0.15
|
|
|
|
-
|
|
|
|
(1 |
) |
|
|
-
|
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments in other companies accounted
for
under the equity method
|
|
|
|
|
|
|
|
|
|
|
570
|
|
|
|
703
|
|
|
|
524
|
|
|
|
6,306
|
|
|
|
6,367
|
|
Other
investments carried at cost
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
262
|
|
|
|
532
|
|
|
|
287
|
|
Total
investments in other companies
|
|
|
|
568
|
|
|
|
693
|
|
|
|
786
|
|
|
|
6,838
|
|
|
|
6,654
|
|
(1)
|
On
December 19, 2005, in compliance with the agreement adopted by
the
Shareholders Extraordinary meeting, the company “Empresas Tarjetas
Inteligentes S.A.”, was liquidated.
|
(2)
|
On
July 7, 2005, the Bank acquired 20% of “Administrador Financiero
Transantiago S.A. in the amount of MCh$1,353
(historical).
|
(3)
|
On
August 19, 2005, the company “Bolsa de Comercio de Valparaiso” make a
capital increase which was not subscribed to by the
Bank.
|
(4)
|
Acquired
prior to January 1, 2004.
|
NOTE
10.
|
OTHER
ASSETS AND OTHER LIABILITIES
|
a)
Other assets
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Amounts
receivable under spot foreign exchange transactions
|
|
|
49,339
|
|
|
|
91,302
|
|
Real
time gross settlement (RTGS) receivable
|
|
|
21,499
|
|
|
|
31,377
|
|
Credit
card charges in process
|
|
|
30,472
|
|
|
|
27,318
|
|
Deferred
income taxes (Note 20)
|
|
|
46,090
|
|
|
|
45,453
|
|
Prepaid
and deferred expenses
|
|
|
55,615
|
|
|
|
62,710
|
|
Transactions
in process
|
|
|
7,421
|
|
|
|
13,409
|
|
Recoverable
taxes
|
|
|
7,850
|
|
|
|
14,816
|
|
Stamp
taxes recoverable
|
|
|
517
|
|
|
|
4,821
|
|
Receivable
on sales of assets received in lieu of payment
|
|
|
1,885
|
|
|
|
1,783
|
|
Guarantees
issued
|
|
|
35,234
|
|
|
|
79,079
|
|
Pending
consignment
|
|
|
-
|
|
|
|
291
|
|
Account
receivable
|
|
|
56,392
|
|
|
|
38,990
|
|
Mutual
Funds
|
|
|
1,385
|
|
|
|
30,565
|
|
Other
|
|
|
16,153
|
|
|
|
22,077
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
329,852
|
|
|
|
463,991
|
|
b) Other
liabilities
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Amounts
payable under spot foreign exchange transactions
|
|
|
76,216
|
|
|
|
99,082
|
|
Deferred
income taxes (Note 20)
|
|
|
5,409
|
|
|
|
8,437
|
|
Transactions
in process
|
|
|
3,604
|
|
|
|
5,157
|
|
Provision
for staff benefits
|
|
|
11,930
|
|
|
|
14,115
|
|
Income
taxes
|
|
|
8,540
|
|
|
|
15,116
|
|
Provisions
for lawsuits and others
|
|
|
32,937
|
|
|
|
29,571
|
|
Value
added tax payable
|
|
|
4,619
|
|
|
|
5,143
|
|
Deferred
fees
|
|
|
8,083
|
|
|
|
7,597
|
|
Real
time gross settlement (RTGS) payable
|
|
|
5,319
|
|
|
|
14,483
|
|
Other
|
|
|
11,192
|
|
|
|
3,221
|
|
|
|
|
|
|
|
|
|
|
Total
Other Liabilities
|
|
|
167,849
|
|
|
|
202,115
|
|
c)
Contingent liabilities
Contingent
liabilities consist of open and unused letters of credit, together with
guarantees by the Bank in Chilean pesos, UF's and foreign currencies
(principally US dollars). The liability represents the Bank’s
obligations under such agreements. The Bank’s rights under these
agreements are recognized as assets under the caption “Contingent loans”
(Note 5). Since many of these commitments to extend credit may
expire without being drawn upon, the total contingent liabilities do not
necessarily represent future cash obligations.
NOTE
11.
|
OTHER
INTEREST BEARING LIABILITIES
|
The
Bank’s
long-term and short-term borrowings are summarized below. Borrowings
are generally classified as short-term when they have original maturities
of
less than one year or are due on demand. All other borrowings are
classified as long-term, including the amounts due within one year on such
borrowings.
|
|
As
of December 31, 2005
|
|
Total
Borrowings
|
|
Long-term
|
|
|
Short-term
|
|
|
Total
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Central
bank borrowings (a)
|
|
|
-
|
|
|
|
176,878
|
|
|
|
176,878
|
|
Credit
lines for renegotiations of loans (a)
|
|
|
6,796
|
|
|
|
-
|
|
|
|
6,796
|
|
Investment
under agreements to repurchase
|
|
|
-
|
|
|
|
50,834
|
|
|
|
50,834
|
|
Mortgage
finance bonds (b)
|
|
|
563,470
|
|
|
|
119,673
|
|
|
|
683,143
|
|
Other
borrowings bonds (c)
|
|
|
422,292
|
|
|
|
1,754
|
|
|
|
424,046
|
|
Subordinated
bonds (d)
|
|
|
393,929
|
|
|
|
-
|
|
|
|
393,929
|
|
Borrowings
from domestic financial institutions
|
|
|
-
|
|
|
|
2,582
|
|
|
|
2,582
|
|
Foreign
borrowings (e)
|
|
|
65,605
|
|
|
|
1,055,923
|
|
|
|
1,121,528
|
|
Other
obligations (f)
|
|
|
12,000
|
|
|
|
30,984
|
|
|
|
42,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
1,464,092
|
|
|
|
1,438,628
|
|
|
|
2,902,720
|
|
|
|
As
of December 31, 2006
|
|
|
|
Long-term
|
|
|
Short-term
|
|
|
Total
|
|
Total
Borrowings
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Central
bank borrowings (a)
|
|
|
-
|
|
|
|
134,417
|
|
|
|
134,417
|
|
Credit
lines for renegotiations of loans (a)
|
|
|
-
|
|
|
|
5,080
|
|
|
|
5,080
|
|
Investment
under agreements to repurchase
|
|
|
-
|
|
|
|
19,929
|
|
|
|
19,929
|
|
Mortgage
finance bonds (b)
|
|
|
464,713
|
|
|
|
65,493
|
|
|
|
530,206
|
|
Other
borrowings bonds (c)
|
|
|
564,513
|
|
|
|
1,140
|
|
|
|
565,653
|
|
Subordinated
bonds (d)
|
|
|
450,122
|
|
|
|
40,294
|
|
|
|
490,416
|
|
Borrowings
from domestic financial institutions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
borrowings (e)
|
|
|
94,288
|
|
|
|
717,979
|
|
|
|
812,267
|
|
Other
obligations (f)
|
|
|
11,972
|
|
|
|
52,221
|
|
|
|
64,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
1,585,608
|
|
|
|
1,036,553
|
|
|
|
2,622,161
|
|
a)
Central
Bank borrowings
Central
Bank borrowings include credit lines for the renegotiations of loans and
other
Central Bank borrowings. These credit lines were provided by the Central
Bank
for the renegotiations of loans due to the need to refinance debts as a result
of the economic recession and crisis of the banking system in the early 1980's.
The credit lines for the renegotiations, which are considered long-term,
are
related with mortgage loans linked to the UF index and bear an annual interest
rate of 3.6% and 3.0% at December 31, 2005 and 2006 respectively. The maturities
of the outstanding amounts due to the Central Bank are as follows:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Total
credit lines for renegotiation of loans
|
|
|
6,796
|
|
|
|
5,080
|
|
The
maturities of MCh$5,080 due under these long-term credit lines, are due within
one year.
b)
Mortgage
finance bonds
These
bonds are used to finance mortgage loans. The outstanding principal
amounts of the bonds are amortized on a quarterly basis. The range of
maturities of these bonds is between five and twenty years. The bonds
are linked to the UF index and bear a weighted-average annual interest rate
of
5.2%.
|
|
As
of December 31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
|
|
|
|
Due
within 1 Year
|
|
|
65,493
|
|
Due
after 1 year but within 2 years
|
|
|
54,556
|
|
Due
after 2 years but within 3 years
|
|
|
51,190
|
|
Due
after 3 years but within 4 years
|
|
|
48,896
|
|
Due
after 4 years but within 5 years
|
|
|
44,711
|
|
Due
after 5 years
|
|
|
265,360
|
|
Total
mortgage finance bonds
|
|
|
530,206
|
|
c) Bonds
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Santiago
bonds, Series A,B,C,D and F
|
|
|
11,350
|
|
|
|
9,179
|
|
Santander
Bonds linked to the UF
|
|
|
165,122
|
|
|
|
342,774
|
|
Santander
Bonds denominated in US$
|
|
|
247,574
|
|
|
|
213,700
|
|
|
|
|
424,046
|
|
|
|
565,653
|
|
Santiago
bonds include series A, B, C and F issued by the former Santiago S.A. and
series
B and D issued by the former Banco O’Higgins, prior to its merger with the Bank
in 1997. These bonds are intended to finance loans that have a maturity of
greater than one year, are linked to the UF index and bear a weighted-average
annual interest rate of 7.0% with interest and principal payments due
semi-annually.
On
December 17, 2004 Santiago Leasing S.A., ceded through public deed a total
of UF
3,041,102 (MCh$53,779 at December 31, 2004) in bonds to Banco Santander Chile,
this bonds are linked to the UF index and bear an annual interest rate of
5.6%. As of December 31, 2005 and 2006, the balance is included in
Santander bonds linked to the UF.
Santander
bonds were issued by the former Banco Santander-Chile. These bonds
are intended to finance loans that have a maturity of greater than one year,
are
linked to the UF index and bear a weighted average annual interest rate of
6.5%.
On
October
5, 2005 the Bank issued bonds, denominated in UF for a total of UF8.000.000
which bear an average annual interest rate of 3.0%.
On
May 25,
2006 the Bank issued bonds, denominated in UF for a total of UF6.000.000
which
bear an average annual interest rate of 4.6%.
On
August
17, 2006 the Bank issued bonds, denominated in UF for a total of UF895.000
which
bear an average annual interest rate of 3.7%.
On
December 9, 2004, the Bank issued senior bonds, denominated in U.S. dollars,
for
a total of US$400 million. These bonds carry a nominal interest rate of LIBOR
plus 0.35% per annum (4.81% and 5.35% at December, 2005 and 2006), quarterly
interest payments and one repayment of principal after a term of 5
years.
The
maturities of these bonds are as follows:
|
|
As
of
December
31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
|
|
|
|
Due
within 1 Year
|
|
|
1,140
|
|
Due
after 1 year but within 2 years
|
|
|
-
|
|
Due
after 2 years but within 3 years
|
|
|
213,700
|
|
Due
after 3 years but within 4 years
|
|
|
146,290
|
|
Due
after 4 years but within 5 years
|
|
|
15,414
|
|
Due
after 5 years
|
|
|
189,109
|
|
Total
bonds
|
|
|
565,653
|
|
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Santiago
bonds denominated in US$(1)
|
|
|
44,045
|
|
|
|
42,703
|
|
Santander
bonds denominated in US$(2) (6)
|
|
|
265,381
|
|
|
|
272,183
|
|
Santiago
Bonds linked to the UF (3)
|
|
|
54,485
|
|
|
|
49,017
|
|
Santander
Bonds linked to the UF (4) (5)
|
|
|
30,018
|
|
|
|
126,513
|
|
Total
subordinated bonds
|
|
|
393,929
|
|
|
|
490,416
|
|
(1)
|
On
July 17, 1997, the former Banco Santiago issued subordinated bonds,
denominated in U.S. dollars, for a total of US$300 million. The
bonds
carry a nominal interest rate of 7.0% per annum, semi-annual interest
payments and one repayment of principal after a term of 10
years.
|
(2)
|
On
January 16, 2003, the Bank completed the voluntary exchange of
its new
subordinated bonds, which will mature in 2012. A total of
US$221,961,000 in principal of the Santiago bonds was offered and
redeemed
by the Bank. The bonds carry a nominal interest rate of 7.375%
per annum, semi-annual interest payments and one repayment of principal
after a term of 10 years.
|
(3)
|
The
Series C and E Bonds outstanding as of December 31, 2005 and 2006
are
intended for the financing of loans with a maturity of greater
than one
year. They are linked to the UF index and carry an annual
interest rate of 7.5% and 6.0% respectively, with interest and
principal
payments due semi-annually.
|
(4)
|
The
Series C, D and E Bonds outstanding as of December 30, 2005 and
2006 are
intended for the financing of loans with a maturity of greater
than one
year. They are linked to the UF index and carry an annual
interest rate of 7.0% with interest and principal payments due
semi-annually.
|
(5)
|
During
2006 the Bank issued subordinated bonds, denominated in UF for
a total of
UF5.000.000 which bear an average annual interest rate of
4.4%.
|
(6)
|
On
December 9, 2004, the Bank issued subordinated bonds, denominated
in U.S.
dollars, for a total of US$300 million. These bonds carry a nominal
interest rate of 5.375% per annum, semi-annual interest payments
and one
repayment of principal after a term of 10
years.
|
The
maturities of these bonds, which are considered long-term, are as
follows:
|
|
As
of
December
31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
|
|
|
|
|
Due
within 1 Year
|
|
|
40,294
|
|
Due
after 1 year but within 2 years
|
|
|
-
|
|
Due
after 2 years but within 3 years
|
|
|
-
|
|
Due
after 3 years but within 4 years
|
|
|
-
|
|
Due
after 4 years but within 5 years
|
|
|
17,378
|
|
Due
after 5 years
|
|
|
432,744
|
|
Total
subordinated bonds
|
|
|
490,416
|
|
e)
Foreign
borrowings
These
are
short-term and long-term borrowings from foreign banks. The
maturities of these borrowings are as follows:
|
|
As
of
December
31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
|
|
|
|
Due
within 1 Year
|
|
|
717,979
|
|
Due
after 1 year but within 2 years
|
|
|
91,021
|
|
Due
after 2 years but within 3 years
|
|
|
-
|
|
Due
after 3 years but within 4 years
|
|
|
3,267
|
|
Due
after 4 years but within 5 years
|
|
|
-
|
|
Due
after 5 years
|
|
|
-
|
|
Total
foreign borrowings
|
|
|
812,267
|
|
The
foreign borrowings are denominated principally in U.S. dollars, and are
principally used to fund the Bank’s foreign trade loans and bear an annual
average interest rate of 3.7% and 5.3% at December 31, 2005 and
2006.
f)
Other obligations
Other
obligations are summarized as follows:
|
|
As
of
December
31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
|
|
|
|
Due
within 1 Year
|
|
|
3,369
|
|
Due
after 1 year but within 2 years
|
|
|
3,454
|
|
Due
after 2 years but within 3 years
|
|
|
2,153
|
|
Due
after 3 years but within 4 years
|
|
|
2,143
|
|
Due
after 4 years but within 5 years
|
|
|
1,623
|
|
Due
after 5 years
|
|
|
2,599
|
|
Total
long term obligations
|
|
|
15,341
|
|
Short-term
obligations:
Amounts
due to credit card operators
|
|
|
21,877
|
|
Acceptance
of letters of credit
|
|
|
26,975
|
|
Total
short – term obligations
|
|
|
48,852
|
|
|
|
|
|
|
Total
other obligations
|
|
|
64,193
|
|
NOTE
12.
|
DISCLOSURES
REGARDING DERIVATIVE FINANCIAL
INSTRUMENTS
|
The
Bank
enters into transactions involving derivative instruments, particularly foreign
exchange contracts, as part of its asset and liability management, and in acting
as a dealer in order to satisfy its clients’ needs. The notional amounts of
these contracts are carried off-balance sheet.
Foreign
exchange forward contracts involve an agreement to exchange the currency of
one
country for the currency of another country at an agreed-upon price and
settlement date. These contracts are generally standardized contracts, normally
for periods between 1 and 180 days and are not traded in a secondary market;
however, in the normal course of business and with the agreement of the original
counterparty, they may be terminated or assigned to another
counterparty.
When
the
Bank enters into a forward exchange contract, it analyses and approves the
credit risk (the risk that the counterparty might default on its obligations).
Subsequently, on an ongoing basis, it monitors the possible losses involved
in
each contract. To manage the level of credit risk, the Bank deals with
counterparties of good credit standing, enters into master netting agreements
whenever possible and when appropriate, obtains collateral.
The
Chilean Central Bank requires that foreign exchange forward contracts be made
only in US dollars and other major foreign currencies. In the case of the Bank,
most forward contracts are made in US dollars against the Chilean peso or the
UF. Occasionally, forward contracts are also made in other currencies, but
only
when the Bank acts as an intermediary.
During
the
period ended December 31, 2005 and 2006, the Bank entered into interest rate
and
cross currency swap agreements to manage exposure to fluctuation in currencies
and interest rates. The differential between the interest paid or
received on a specified notional amount is recognized under the caption “Amounts
payable from forward contracts, net”. The fair value of the swap
agreement and changes in the fair value as a result of changes in market
interest rates are recognized in the consolidated financial
statements.
The
Bank’s
foreign currency futures and forward operations and other derivative products
outstanding at December 31, 2005 and 2006 are summarized below:
|
|
|
As
of December 31, 2006
|
|
|
|
|
Notional
amounts
|
|
|
Fair
Value
|
|
|
Cash
Flow
hedge
(CF)
or
fair
value
hedge
(FV)
|
|
Within
3
months
|
|
|
After
3 months
but within
one
year
|
|
|
After
one year
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Derivative
instruments in designated hedge accounting
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Forwards
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate Swaps
|
(FV)
|
|
|
-
|
|
|
|
-
|
|
|
|
210,298
|
|
|
|
1,173
|
|
|
|
2,354
|
|
Currency
Swaps
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency Swaps
|
(FV)
|
|
|
843,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,871
|
|
Call
currency options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Call
interest rate options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
|
843,969
|
|
|
|
-
|
|
|
|
210,298
|
|
|
|
1,173
|
|
|
|
40,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments for trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
forwards
|
|
|
|
6,017,519
|
|
|
|
3,435,681
|
|
|
|
378,885
|
|
|
|
82,608
|
|
|
|
99,422
|
|
Interest
rate swaps
|
|
|
|
457,994
|
|
|
|
1,178,930
|
|
|
|
3,923,328
|
|
|
|
34,958
|
|
|
|
68,165
|
|
Currency
swaps
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
|
|
2,744,066
|
|
|
|
1,348,617
|
|
|
|
129,703
|
|
|
|
247,486
|
|
|
|
142,058
|
|
Call
currency options
|
|
|
|
47,608
|
|
|
|
372,092
|
|
|
|
-
|
|
|
|
4,384
|
|
|
|
4,372
|
|
Call
interest rate options
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
|
|
|
29,706
|
|
|
|
346,691
|
|
|
|
-
|
|
|
|
1,448
|
|
|
|
1,032
|
|
Interest
rate future
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
|
313,055
|
|
|
|
106,886
|
|
|
|
101,542
|
|
|
|
631
|
|
|
|
648
|
|
Subtotal
|
|
|
|
9,609,948
|
|
|
|
6,788,997
|
|
|
|
4,533,458
|
|
|
|
371,515
|
|
|
|
315,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
10,453,917
|
|
|
|
6,788,997
|
|
|
|
4,743,756
|
|
|
|
372,688
|
|
|
|
355,922
|
|
The
notional amounts refer to the US dollar bought or sold or to the US dollar
equivalent of foreign currency bought or sold for future
settlement. The contract terms correspond to the duration of the
contracts as from the date of the transaction to the date of the
settlement.
|
|
|
As
of December 31, 2005
|
|
|
|
|
Notional
amounts
|
|
|
Book
Value (*)
|
|
|
|
|
Within
3
months
|
|
|
After
3 months
but within
one
year
|
|
|
After
one
year
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Derivative
instruments in designated hedge accounting
relationships
|
Cash
Flow
hedge
(CF)
or
fair
value
hedge
(FV)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Forwards
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate Swaps
|
(FV)
|
|
|
-
|
|
|
|
-
|
|
|
|
401
|
|
|
|
131
|
|
|
|
212
|
|
Currency
Swaps
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency Swaps
|
(FV)
|
|
|
77
|
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,276
|
|
Call
currency options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Call
interest rate options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
interest rate options
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
(
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
|
77
|
|
|
|
129
|
|
|
|
401
|
|
|
|
131
|
|
|
|
10,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments for trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
forwards
|
|
|
|
4,862,614
|
|
|
|
3,690,484
|
|
|
|
359,919
|
|
|
|
249,275
|
|
|
|
283,218
|
|
Interest
rate swaps
|
|
|
|
362,666
|
|
|
|
2,244,684
|
|
|
|
2,651,871
|
|
|
|
3,593
|
|
|
|
9,799
|
|
Currency
swaps
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cross
currency swaps
|
|
|
|
907
|
|
|
|
559
|
|
|
|
37
|
|
|
|
165,209
|
|
|
|
88,131
|
|
Call
currency options
|
|
|
|
-
|
|
|
|
26,255
|
|
|
|
-
|
|
|
|
413
|
|
|
|
-
|
|
Call
interest rate options
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Put
currency options
|
|
|
|
-
|
|
|
|
10,502
|
|
|
|
-
|
|
|
|
174
|
|
|
|
174
|
|
Put
interest rate options
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
rate future
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
derivatives
|
|
|
|
651,257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
Subtotal
|
|
|
|
5,877,444
|
|
|
|
5,972,484
|
|
|
|
3,011,827
|
|
|
|
418,664
|
|
|
|
381,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
5,877,521
|
|
|
|
5,972,613
|
|
|
|
3,012,228
|
|
|
|
418,795
|
|
|
|
391,823
|
|
(*)
For
the operations previous to January 1, 2006, the Bank has applied the criteria
described in note 1g.
The
notional amounts refer to the US dollar bought or sold or to the US dollar
equivalent of foreign currency bought or sold for future
settlement. The contract terms correspond to the duration of the
contracts as from the date of the transaction to the date of the
settlement.
NOTE
13.
|
MINIMUM
CAPITAL REQUIREMENTS
|
The
Superintendency of Banks requires Chilean Banks to maintain a minimum capital
of
800,000 UF, equivalent to MCh$14,669 as of December 31, 2006. In addition,
Banks
are required to maintain a minimum basic capital of at least 3% of total assets
after deductions for mandatory provisions, while effective net equity may not
be
lower than 8% of its risk weighted assets. However, as a result of
the merger in 2002, the Chilean Superintendency of Banks and Financial
Institutions determined that the actual equity of the merged bank could not
be
lower than 11% of its risk-weighted assets. Effective net equity is
defined as basic equity, plus voluntary loan loss allowances, up to a maximum
of
1.25% of risk-weighted assets, and the qualifying proportion of subordinated
bonds with scheduled maturities in excess of six years, for which early
repayment is not permitted. Chilean Banks are permitted to include in effective
net equity principal subordinated bond amounts up to a maximum of fifty percent
of the basic capital.
The
Bank’s
actual qualifying “net capital base” and “effective equity” to support the
Bank’s risk-weighted assets as of December 31, 2005 and 2006, are
shown in the following table:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Net
capital base
|
|
|
859,975
|
|
|
|
959,757
|
|
3%
of total assets net of provisions
|
|
|
(402,432 |
) |
|
|
(461,315 |
) |
Excess
over minimum required equity
|
|
|
457,543
|
|
|
|
498,442
|
|
Net
capital base as a percentage of the total assets, net of
provisions
|
|
|
6.4 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
Effective
equity
|
|
|
1,231,997
|
|
|
|
1,418,752
|
|
11%
of the risk-weighted assets
|
|
|
(1,051,696 |
) |
|
|
(1,234,458 |
) |
Excess
over minimum required equity
|
|
|
180,301
|
|
|
|
184,294
|
|
Effective
equity as a percentage of the risk-weighted assets
|
|
|
12.9 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
NOTE
14.
|
SHAREHOLDERS’
EQUITY
|
a)
Share capital
As
of
December 31, 2005 and 2006 the Bank's paid-in capital consisted of
188,446,126,794 authorized issued and outstanding shares with no fixed nominal
value.
b)
Dividends
The
distributions of dividends related to net income for the periods 2004 and 2005
as approved by the Annual Shareholders' Meeting of Banco Santander Chile, are
as
follows:
Shareholders
|
|
Dividend
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Percentage
|
|
Meeting
|
|
(historical)
|
|
|
Paid
|
|
|
per
share
|
|
|
Paid
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
Ch$
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr-05
|
|
198,795
|
|
|
210,358
|
|
|
1.12
|
|
|
100%
|
|
Apr-06
|
|
155,811
|
|
|
159,114
|
|
|
0.84
|
|
|
65%
|
|
(1)
|
Dividend
paid has been restated in constant Chilean pesos of December 31,
2006
|
(2)
|
%
of
net income paid as dividend, agreed by the Ordinary Shareholders’
Meeting
|
NOTE
15.
|
TRANSACTIONS
WITH RELATED PARTIES
|
In
accordance with the Chilean General Banking Law and the rules of the
Superintendency of Banks, related parties are defined as individuals and
companies who are directors, officers or shareholders who own more than one
percent of the Bank’s shares. Companies in which a director, officer or
shareholder of the Bank holds more than a 5% interest and companies that
have
common directors with the Bank are also considered to be related parties.
In the
following table, trading or manufacturing companies are defined as operating
companies, and companies whose purpose is to hold shares in other companies
are
defined as holding companies.
a)
Loans granted to related parties
Related
party loans, all of which are current, are as follows:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
Loans
|
|
|
Collateral
Pledged
|
|
|
Loans
|
|
|
Collateral
Pledged
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
companies
|
|
|
144,539
|
|
|
|
74,356
|
|
|
|
150,070
|
|
|
|
112,986
|
|
Investment
companies
|
|
|
299,694
|
|
|
|
67,389
|
|
|
|
203,261
|
|
|
|
3,948
|
|
Individuals
|
|
|
20,665
|
|
|
|
19,286
|
|
|
|
24,450
|
|
|
|
22,343
|
|
Total
|
|
|
464,898
|
|
|
|
161,031
|
|
|
|
377,781
|
|
|
|
139,277
|
|
(1)
|
Includes
companies whose purpose is to hold shares in other
companies.
|
(2)
|
Includes
debt obligations that are individually equal to or greater than UF
3,000,
equivalent to MCh$55 as of December 31,
2006.
|
The
activities in the balances of loans to related parties are as
follows:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Balance
as of January 1,
|
|
|
237,148
|
|
|
|
464,898
|
|
New
loans
|
|
|
683,231
|
|
|
|
398,477
|
|
Repayments
|
|
|
(447,197 |
) |
|
|
(492,248 |
) |
Price-
level restatements
|
|
|
(8,284 |
) |
|
|
6,654
|
|
Balance
as of December 31,
|
|
|
464,898
|
|
|
|
377,781
|
|
b)
Other transactions with related parties
During
the
years ended December 31, 2004, 2005 and 2006, the Bank had the following
significant income (expenses) from services provided to (by) related
parties:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Income/Expense
|
|
|
Income/Expense
|
|
|
Income/Expense
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Redbanc
S.A.
|
|
|
(3,378 |
) |
|
|
(3,615 |
) |
|
|
(4,056 |
) |
Transbank
S.A.
|
|
|
(4,770 |
) |
|
|
(5,984 |
) |
|
|
(8,168 |
) |
Sixtra
Chile S.A.
|
|
|
(46 |
) |
|
|
(34 |
) |
|
|
-
|
|
Santander
G.R.C. Ltda.
|
|
|
565
|
|
|
|
(1,146 |
) |
|
|
(1,563 |
) |
Santander
Chile Holding S.A.
|
|
|
87
|
|
|
|
49
|
|
|
|
32
|
|
Santander
Factoring S.A.
|
|
|
55
|
|
|
|
51
|
|
|
|
52
|
|
Bansa
Santander S.A.
|
|
|
(2,407 |
) |
|
|
1,144
|
|
|
|
(2,426 |
) |
A.F.P.
Bansander S.A.
|
|
|
151
|
|
|
|
155
|
|
|
|
179
|
|
Altec
S.A.
|
|
|
(5,938 |
) |
|
|
(6,644 |
) |
|
|
(5,627 |
) |
Santander
Investment Chile S.A.
|
|
|
90
|
|
|
|
90
|
|
|
|
91
|
|
Altavida
Cia. De Seguros De Vida S.A.
|
|
|
6,960
|
|
|
|
69
|
|
|
|
(1,005 |
) |
Plaza
El Trébol S A
|
|
|
(112 |
) |
|
|
(201 |
) |
|
|
(195 |
) |
Other
|
|
|
(437 |
) |
|
|
(304 |
) |
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(9,180 |
) |
|
|
(16,370 |
) |
|
|
(23,165 |
) |
Article
89
of the Chilean Companies Law requires that the Bank’s transactions with related
parties be on a market basis or on terms similar to those customarily prevailing
in the market.
NOTE
16.
|
FEES
AND INCOME FROM SERVICES
|
Fees
and
income from services and the related expenses are summarized as
follows:
|
|
Year
ended December 31,
|
|
|
|
Income
|
|
|
Expenses
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Fees
and income from services:
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
agency services
|
|
|
4,187
|
|
|
|
2,881
|
|
|
|
2,671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Checking
accounts
|
|
|
37,201
|
|
|
|
38,939
|
|
|
|
45,734
|
|
|
|
(3,973 |
) |
|
|
(5,055 |
) |
|
|
(4,138 |
) |
Credit
cards
|
|
|
25,157
|
|
|
|
28,198
|
|
|
|
36,858
|
|
|
|
(11,691 |
) |
|
|
(14,081 |
) |
|
|
(18,208 |
) |
Automatic
teller cards
|
|
|
21,049
|
|
|
|
22,466
|
|
|
|
24,293
|
|
|
|
(8,027 |
) |
|
|
(8,607 |
) |
|
|
(10,021 |
) |
Letters
of credit, guarantees, pledges and other contingent
loans
|
|
|
4,828
|
|
|
|
2,816
|
|
|
|
2,522
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lines
of credit
|
|
|
2,172
|
|
|
|
8,826
|
|
|
|
12,422
|
|
|
|
-
|
|
|
|
(281 |
) |
|
|
(287 |
) |
Underwriting
|
|
|
6,322
|
|
|
|
2,383
|
|
|
|
1,345
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bank
drafts and fund transfers
|
|
|
260
|
|
|
|
258
|
|
|
|
624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sales
and purchases of foreign currencies
|
|
|
5,892
|
|
|
|
7,056
|
|
|
|
6,418
|
|
|
|
(621 |
) |
|
|
(437 |
) |
|
|
(461 |
) |
Insurance
brokerage
|
|
|
8,994
|
|
|
|
10,787
|
|
|
|
11,833
|
|
|
|
(2,206 |
) |
|
|
(2,381 |
) |
|
|
(436 |
) |
Custody
and trust services
|
|
|
590
|
|
|
|
704
|
|
|
|
714
|
|
|
|
-
|
|
|
|
(53 |
) |
|
|
(349 |
) |
Mutual
fund services
|
|
|
19,087
|
|
|
|
19,275
|
|
|
|
20,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28 |
) |
Saving
accounts
|
|
|
262
|
|
|
|
244
|
|
|
|
253
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agreements
of administration and collection
|
|
|
17,694
|
|
|
|
20,598
|
|
|
|
23,233
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
brokerage
|
|
|
1,545
|
|
|
|
1,718
|
|
|
|
1,460
|
|
|
|
(129 |
) |
|
|
(64 |
) |
|
|
(67 |
) |
Other
|
|
|
1,058
|
|
|
|
6,237
|
|
|
|
7,879
|
|
|
|
(1,647 |
) |
|
|
(1,127 |
) |
|
|
(1,781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (expense)
|
|
|
156,298
|
|
|
|
173,386
|
|
|
|
198,326
|
|
|
|
(28,294 |
) |
|
|
(32,086 |
) |
|
|
(35,776 |
) |
NOTE
17.
|
NON-OPERATING
INCOME AND EXPENSES
|
Non-operating
income and expenses are set forth below:
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Non-operating
income:
|
|
|
|
|
|
|
|
|
|
Gain
on sale of Bank premises and equipment
|
|
|
315
|
|
|
|
321
|
|
|
|
568
|
|
Gain
on sales of assets received in lieu of payment previously charged
-off
|
|
|
7,039
|
|
|
|
16,970
|
|
|
|
8,050
|
|
Rental
income
|
|
|
1,168
|
|
|
|
1,235
|
|
|
|
1,196
|
|
Recovery
of expenses
|
|
|
202
|
|
|
|
116
|
|
|
|
27
|
|
Recovery
of previously written-off loans
|
|
|
3,498
|
|
|
|
2,637
|
|
|
|
6,250
|
|
Gain
on sale of credit division Santiago Express (1)
|
|
|
23,093
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
259
|
|
|
|
32
|
|
|
|
501
|
|
Total
non-operating income
|
|
|
35,574
|
|
|
|
21,311
|
|
|
|
16,592
|
|
(1)
|
On
December 6, 2004, the contract regarding the sale of the Bank’s Santiago
Express Division to Empresas Almacenes París S.A. was signed. This
contract included the sale and transfer of financial assets comprised
of
loans given by Santiago Express and intangible assets that permit
for this
Division to continue operating. The final sale price was MCh$ 120,807
that
generated a gain of MCh$23,093.
|
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
of assets received in lieu of payment
|
|
|
22,150
|
|
|
|
21,532
|
|
|
|
13,616
|
|
Loss
on sales of bank premises and equipment
|
|
|
110
|
|
|
|
57
|
|
|
|
5
|
|
Other
|
|
|
17,983
|
|
|
|
22,202
|
|
|
|
7,185
|
|
Total
non-operating expenses
|
|
|
40,243
|
|
|
|
43,791
|
|
|
|
20,806
|
|
NOTE
18.
|
DIRECTORS'
EXPENSES AND REMUNERATION
|
The
following items were charged to expense for services provided by the members
of
the Board:
|
Years
ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
MCh$
|
|
MCh$
|
|
MCh$
|
|
|
|
|
|
|
|
|
Remuneration
established by the General Shareholders’
|
|
|
|
|
|
|
meeting,
including attendance fees
|
351
|
|
416
|
|
489
|
|
NOTE
19.
|
FOREIGN
CURRENCY POSITION
|
The
consolidated balance sheets include assets and liabilities denominated in
foreign currencies which have been translated into Chilean pesos at the
applicable exchange rates as of December 31, 2005 and 2006, and assets and
liabilities which are denominated in Chilean pesos subject to exchange rate
fluctuations, as detailed below.
|
|
As
of December 31, 2005
|
|
|
As
of December 31, 2006
|
|
|
|
Denominated
in
|
|
|
Denominated
in
|
|
|
|
Foreign
|
|
|
Chilean
|
|
|
Total
|
|
|
Foreign
|
|
|
Chilean
|
|
|
Total
|
|
|
|
currency
|
|
|
pesos
|
|
|
|
|
|
currency
|
|
|
pesos
|
|
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
944,936
|
|
|
|
-
|
|
|
|
944,936
|
|
|
|
754,732
|
|
|
|
-
|
|
|
|
754,732
|
|
Financial
investments
|
|
|
116,889
|
|
|
|
127,311
|
|
|
|
244,200
|
|
|
|
247,073
|
|
|
|
93,240
|
|
|
|
340,313
|
|
Loans
( including contingent loans )
|
|
|
1,073,236
|
|
|
|
22,945
|
|
|
|
1,096,181
|
|
|
|
1,238,139
|
|
|
|
135
|
|
|
|
1,238,274
|
|
Other
assets (*)
|
|
|
6,021,790
|
|
|
|
3
|
|
|
|
6,021,793
|
|
|
|
165,133
|
|
|
|
8
|
|
|
|
165,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
8,156,851
|
|
|
|
150,259
|
|
|
|
8,307,110
|
|
|
|
2,405,077
|
|
|
|
93,383
|
|
|
|
2,498,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,208,306
|
|
|
|
465
|
|
|
|
1,208,771
|
|
|
|
1,201,469
|
|
|
|
141
|
|
|
|
1,201,610
|
|
Contingent
liabilities
|
|
|
487,404
|
|
|
|
-
|
|
|
|
487,404
|
|
|
|
491,435
|
|
|
|
-
|
|
|
|
491,435
|
|
Due
to domestic bank
|
|
|
9,645
|
|
|
|
932
|
|
|
|
10,577
|
|
|
|
27,199
|
|
|
|
761
|
|
|
|
27,960
|
|
Due
to foreign bank
|
|
|
1,121,529
|
|
|
|
-
|
|
|
|
1,121,529
|
|
|
|
812,267
|
|
|
|
-
|
|
|
|
812,267
|
|
Other
liabilities (*)
|
|
|
5,484,365
|
|
|
|
867
|
|
|
|
5,485,232
|
|
|
|
484,946
|
|
|
|
2
|
|
|
|
484,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,311,249
|
|
|
|
2,264
|
|
|
|
8,313,513
|
|
|
|
3,017,316
|
|
|
|
904
|
|
|
|
3,018,220
|
|
Net
assets (liabilities) in foreign currency
|
|
|
(154,398 |
) |
|
|
147,995
|
|
|
|
(6,403 |
) |
|
|
(612,239 |
) |
|
|
92,479
|
|
|
|
(519,760 |
) |
(*)
|
Regarding
with the changes described in Note 2 to the consolidated financial
statements, starting on January 1, 2006, the derivative transactions
are
recorded at fair value which includes the effects of any foreign
currency
fluctuation as denominated in Chilean pesos, if applicable, therefore,
for
2006, they are not included in this
note.
|
a)
Deferred taxes
The
Bank
records the effects of deferred taxes on its consolidated financial statements
in accordance with Technical Bulletin No. 60 and the complementary technical
bulletins thereto issued by the Colegio de Contadores de Chile A.G.
As
described in that accounting standard, beginning January 1, 1999, the Bank
recognized the consolidated tax effects generated by the temporary differences
between financial and tax values of assets and liabilities. At the same date,
the net deferred tax asset/liability determined was completely offset against
a
net “complementary” account. Such complementary deferred tax balances are being
amortized over the estimated reversal periods corresponding to the underlying
temporary differences as of January 1, 1999. In accordance with Technical
Bulletin No. 60, deferred tax asset and liability amounts are presented net
of
the related unamortized complementary account balances in the consolidated
balance sheet. Deferred income tax balances were as follows:
|
|
Deferred
taxes as of
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Assets
|
|
|
|
|
|
|
Interest
and indexation for tax purposes
|
|
|
6,568
|
|
|
|
6,204
|
|
Assets
received in lieu of payment
|
|
|
1,629
|
|
|
|
1,410
|
|
Foreign
exchange
|
|
|
774
|
|
|
|
768
|
|
Allowance
for loan losses
|
|
|
16,534
|
|
|
|
21,230
|
|
Other
provisions
|
|
|
10,929
|
|
|
|
11,202
|
|
Forward
contracts
|
|
|
1,010
|
|
|
|
(497 |
) |
Leasing
assets
|
|
|
8,628
|
|
|
|
5,076
|
|
Other
|
|
|
18
|
|
|
|
60
|
|
Total
|
|
|
46,090
|
|
|
|
45,453
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Valuation
of investments
|
|
|
22
|
|
|
|
(2,129 |
) |
Deferred
expenses
|
|
|
(1,536 |
) |
|
|
(1,945 |
) |
Other
|
|
|
(3,895 |
) |
|
|
(4,363 |
) |
Total
|
|
|
(5,409 |
) |
|
|
(8,437 |
) |
Net
difference
|
|
|
40,681
|
|
|
|
37,016
|
|
b)
Income tax expense for the year ended December 31, 2004, 2005 and 2006 was
as
follows:
|
|
Year ended December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Amortization
of deferred tax complementary account
|
|
|
80
|
|
|
|
(27 |
) |
|
|
-
|
|
Deferred
tax benefit (expense) for the year
|
|
|
12,905
|
|
|
|
(4,830 |
) |
|
|
(2,820 |
) |
Net
benefit (charge) to deferred taxes
|
|
|
12,985
|
|
|
|
(4,857 |
) |
|
|
(2,820 |
) |
Income
tax provision – current
|
|
|
(59,932 |
) |
|
|
(45,725 |
) |
|
|
(55,278 |
) |
Other
taxes
|
|
|
(1,640 |
) |
|
|
(303 |
) |
|
|
(101 |
) |
Income
tax expense
|
|
|
(48,587 |
) |
|
|
(50,885 |
) |
|
|
(58,199 |
) |
NOTE
21.
|
CONTINGENCIES
AND COMMITMENTS
|
a) Committed
resources:
At
December 31, 2005, the Bank placed a lien on financial investments for
approximately MCh$44,861 (UF 2,446,570), on guaranties associated with business
operations, which at year-end have not been set up.
b)
Contingencies:
On
August
28, 1996, Banco Español de Crédito filed a complaint against Auca Forestal S.A.
and O’Higgins Corredores de Bolsa Ltda. (currently Santiago Corredores de Bolsa
Ltda.). The Bank’s management and its legal counsel, believe that the resolution
of this contingency is not likely to result in significant losses to the
subsidiary. As of December 31, 2006, the subsidiary maintained a
provision of MCh$271 which covers this contingency.
As
of
December 31, 2005 and 2006, the subsidiary Santiago Leasing S.A. leased property
with deferred customs duties. The subsidiary may eventually have to pay such
duties, amounting to MUS$72 and MUS$10, respectively, on behalf of the
leaseholder, if not paid by the latter. Leased assets subject to deferred custom
duties amounts to MCh$55.5 as of December 31, 2006 (MCh$56.0. in
2005).
On
August
26, 1992, a suit was filed by the Chilean Internal Revenue Service against
the
Bank and is still pending. The Appeals Court partially resolved in
favor of Banco Santander Chile and substantially reduced the amount of the
tax
difference. In the opinion of our legal advisors, these claims are
not likely to have, in the aggregate, a material adverse effect on our
consolidated financial condition or results of operations and as of December
31,
2006 the Bank maintained a provision of Ch$530 million, which covers the
totality of this claim.
In
addition, we are subject to certain claims and are party to certain legal and
arbitration proceedings incidental to the normal course of our business
including claims for alleged operational errors. We do not believe
that the liabilities related to such claims and proceedings are likely to have,
in the aggregate, a material adverse effect on our consolidated financial
condition or results of operations, however, based on management individual
analysis of each proceeding, we have provisioned the amount in “Provisions for
lawsuit and other” in Note 10 (b).
The
subsidiary Santander S.A. Agente de Valores (the “Agent”), maintains a claim for
indemnity of losses named “Orsini con Orsini y Otros”, Rol N°1452-2000, before
the 28° Civil Court of Santiago. The final sentence in first instance, dated
December 18, 2001, was unfavorable for the Agent; therefore it filed an
annulment action against the judicial decision, and an appeal. On November
4,
2005, the Court of Appeals rejected the annulment action against the judicial
decision, however it accepted the appeal filed by the Agent, repealing the
first
instance sentence and rejecting the claim filed against
Santander S.A. Agente de Valores. The defendant filed, before the
Supreme Court, an annulment action against the judicial decision, which is
in
process. This legal contingency has not been provisioned as the
amount of the claim cannot be estimated at this time.
There
are
no material proceedings in which any of our directors, any members of our senior
management, or any of our affiliates is either a party adverse to us or our
subsidiaries or has a material interest adverse to us or our
subsidiaries.
As
a
result of the fraud committed by Grupo Inverlink against the Corporación de
Fomento de la Producción (CORFO) and others, various legal measures were taken
against certain instruments administered by Santander S.A. Administradora
General de Fondos. On March 13, 2003 this Company assumed the obligation
to
return to CORFO the amount of these instruments if ordered by a court to
do so.
As of December 31, 2006 and in accordance with our legal advisors we do not
believe any type of provisions is necessary given the current state of this
legal proceeding.
c)
Guarantees from operations:
In
order
to ensure the correct and full compliance of all its obligations as Securities
Agent, in conformity with article No 30, and subsequent articles of Law 18.045
on the Securities Market, the subsidiary Santander S.A. Agente de Valores
established a guaranty for UF 4,000 for insurance policy N° 206112564,
underwritten by Compañía de Seguros de Crédito Continental S.A. whose maturity
is December 19, 2007.
In
order
to comply with Article 30 of Law No. 18,045, Santiago Corredores de Bolsa
Ltda.
maintains in custody with the Bolsa de Comercio de Santiago a guarantee of
their
performance worth Ch$440.2 million that expires on October 31,
2007.
Additionally,
Santiago Corredores de Bolsa Ltda. has a guarantee with the Bolsa de
Comercio de Santiago in the amount of Ch$961.3 million in fixed income
instruments in order to be able to participate in the Compensation and
Liquidation system of this stock Exchange.
In
conformity with the General Character Regulation N°125, the subsidiary Santander
Santiago S.A. Administradora General de Fondos designated the Bank as the
representative of the benefits of guarantees set up per each of its funds
administered for UF 1,187,863.12. In addition to these bank guarantees, other
guarantees were entered into for approximately Ch$ 117,525.9 millions for
the
Mutual Funds’ guaranteed profitability.
Integral
Insurance:
In
conformity with a resolution of the Board of Directors of the la Bolsa de
Comercio de Santiago in a resolution dated November 1997, Santiago Corredores
de
Bolsa Ltda. has contracted an insurance policy with the Compañía de Seguros
Generales la Interamericana, that covers matters such as: employee fraud,
document loss, falsification or modification of documents and counterfeit
documents for an amount of US$ 50 million. This policy expires on June 30,
2007.
In
accordance with Circular No. 1,160 of the Superintendencia de Valores y Seguros,
Santander Santiago Corredora de Seguros Ltda. maintains an insurance policy
in
order to fulfill all obligations in connection with its obligations as a
broker
of insurance polcies. This insurance policy was taken with Compañía de Seguros
Chilena Consolidada S.A. in an amount equal to UF 60,000 and that covers
the
period between April 15, 2006 and April 14, 2007.
NOTE
22.
|
FIDUCIARY
ACTIVITIES
|
The
following items are recorded in memorandum accounts by the Bank and represent
fiduciary safekeeping and custody services:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
Securities
held in safe custody
|
|
|
9,407,155
|
|
|
|
11,196,514
|
|
Amount
to be collected on behalf of local third parties
|
|
|
129,018
|
|
|
|
115,682
|
|
Amount
to be collected on behalf of foreign third parties
|
|
|
205,746
|
|
|
|
201,873
|
|
Total
|
|
|
9,741,919
|
|
|
|
11,514,069
|
|
The
price-level restatement loss is determined by restating the following
non-monetary assets, liabilities and equity:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Restatement
of non monetary accounts based on Consumer Price Index:
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment, net
|
|
|
5,536
|
|
|
|
9,151
|
|
|
|
4,765
|
|
Investments
in other companies
|
|
|
90
|
|
|
|
354
|
|
|
|
170
|
|
Other
non-monetary assets and liabilities
|
|
|
2,721
|
|
|
|
2,248
|
|
|
|
1,612
|
|
Shareholders'
equity
|
|
|
(21,027 |
) |
|
|
(30,277 |
) |
|
|
(20,329 |
) |
Loss
from price-level restatement, net
|
|
|
(12,680 |
) |
|
|
(18,524 |
) |
|
|
(13,782 |
) |
NOTE
24.
|
SALES
AND PURCHASE OF LOANS
|
From
time
to time, the bank sells and purchases loans based on specific requirements
from
customers. During the years ended December 31, 2004, 2005 and 2006,
the Bank sold loans in the amount of MCh$164,727, MCh$93,492 and MCh$185,690,
respectively; however, the Bank does not enter into loans for future sale.
During the years ended December 31, 2004, 2005 and 2006, the Bank purchased
loans totaling MCh$28,536, MCh$22,744 and MCh$26,367 respectively. Any
gains or
losses on such transactions are recognized in results of operations at
the time
of the transactions.
The
aggregate gains (losses) on sales of loans were MCh$23,093, MCh$631 and
MCh$1,718 for the years ended December 31, 2004, 2005 and 2006,
respectively.
NOTE
25.
|
SUBSEQUENT
EVENTS
|
In
conformity with the established in Articles 9 and 10 of Law No. 18,045 and
Chapter 18-10 of the Recopilación Actualizada de Normas de la
Superintendencia de Bancos e Instituciones Financieras, in the
Extraordinary Shareholders’ Meeting held on January 15, 2007 by Santander
Investment S.A. Corredores de Bolsa, a related company to Banco Santander Chile,
approved the merger between Santiago Corredores de Bolsa Ltda, a subsidiary
of
Banco Santander Chile, into Santander Investment S.A. Corredores de
Bolsa, effective January 1, 2007. Santander Investment S.A.
Corredores de Bolsa, as of January 15, 2007, became a subsidiary of Banco
Santander Chile and the legal successor of Santiago Corredores de Bolsa
Ltda.
In
January
2007, it was announced that management plans that each active employee of
Santander in June 2007 will be given 100 free shares in Banco Santander Central
Hispano S.A. to mark the 150th anniversary
of
Santander.
Between
December 31, 2006 and the date of these financial statements, no other
significant subsequent event exists that could materially affect these financial
statements.
NOTE
26.
|
DIFFERENCES
BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
|
The
following is a description of the significant differences between accounting
principles generally accepted in Chile and accounting principles of the
Superintendency of Banks (collectively, “Chilean GAAP”), and accounting
principles generally accepted in the United States (“U.S. GAAP”).
References
below to “SFAS” are to United States Statements of Financial Accounting
Standards. Pursuant to Chilean GAAP, the Bank’s consolidated financial
statements recognize certain effects of inflation.
The
cumulative inflation rate in Chile as measured by the CPI for the three years
period ended December, 2006 was approximately 8.45%. Chilean GAAP requires
that
financial statements of banks be restated to reflect the total effect of the
loss in the purchasing power of the Chilean peso on the financial position
and
results of operations of reporting entity. The method, described in Note 1
(c),
is based on a model which enables calculation of net inflation gains or losses
caused by monetary assets and liabilities exposed to changes in the purchasing
power of local currency, by restating all non-monetary accounts in the financial
statements. The model prescribes that the historical cost of such accounts
be
restated for general price-level changes between the date of origin of each
item
and the end of the period. As permitted under Item 18 of Form 20-F of
SEC Regulation S-X no adjustments have been made to reflect the elimination
of
price-level adjustments.
(a)
|
Business
Combinations
|
(1)
|
Under
Chile GAAP, business combinations accounted for under the purchase
accounting method do not require the pushdown of the associated goodwill
to the acquired entity. Furthermore, prior to January 1, 2004, assets
acquired and liabilities assumed were recorded at their carrying
value
upon acquisition with the excess of the purchase price over the carrying
value recorded as goodwil1. Additionally, “pooling of
interests” treatment may be more widely applied than under U.S.
GAAP.
|
|
Under
U.S. GAAP, when following the purchase accounting method, pushdown
accounting to the acquired entity is required when certain conditions
are
met. Also, under U.S. GAAP, purchase accounting requires that the fair
value of the assets acquired and the liabilities assumed be recorded
with
the excess of the purchase price over such fair values recorded as
goodwill. |
|
The
following business combinations of the holding companies of the Bank
were
accounted for as follows thereby generating the differences noted
in the
Chile GAAP to U.S. GAAP reconci1iations of net income and shareholders'
equity:
On
April 17, 1999, Banco Centra1 Hispanoamericano S.A. (“BCH”) merged into
Banco Santander S.A. to create Banco Santander Central Hispano
(“BSCH”). For Chile GAAP purposes, the merger was accounted for
as a “pooling of interests”. For U.S. GAAP purposes, purchase
accounting was applied. Prior to Apri1 17, 1999, BCH indirectly
held a 21.75% investment in Banco Santiago (a predecessor entity
to the
Bank) through a 50% participation in Teatinos Siglo XXI (“Teatinos”). At
the time, the other 50% of Teatinos was owned by Quiñenco S.A.
(“Quiñenco”). A minority interest of approximately 35.5% was held by the
Central Bank of Chile.
On
May 3, 1999, BSCH purchased the 50% of Teatinos that it did not already
own from Quiñenco. Purchase accounting was applied under both
Chile GAAP and U.S. GAAP.
On
May 17, 1999 the Central Bank and BSCH announced they had entered
into an
agreement regarding the disposition of their respective shares
of Santiago. Under this agreement, the Central Bank has an
irrevocable put option to sell to BSCH its Santitago shares in the
two
years, period beginning May 15, 2000.
The
total goodwi1l and other fair value accounting adjustments generated
under
U.S. GAAP were pushed down to the level of the predecessor entities
to the
Bank books. Fair value amounts recorded for assets acquired and
liabi1ities assumed under U.S. GAAP were recorded at carrying value
on the
Chile GAAP books.
|
(2)
|
Under
Chi1ean GAAP, mergers of common control entities are recorded under
the
"pooling of interests" method. Should the minority interest be
bought out,
purchase accounting is not applied to that percentage. Additionally,
historical financial statements for periods prior to the merger
are not
restated under the “as if” pooling of interests
methodology.
|
|
Under
U.S. GAAP, mergers of common control entities are also recorded
under the
"pooling of interests" method. However, under U.S. GAAP, in
certain circumstances, the step acquisition of a minority interest
would
be required to be accounted for under purchase accounting (which
step
acquisition goodwill would also require "pushdown" as mentioned
in
(1)). Additionally, U.S. GAAP requires the restatement of prior
period financial statements under the “as if” pooling of interests
methodology.
The
following transactions were structured such that they generated
the above
differences resulting in adjustments in the Bank's Chile GAAP to
U.S. GAAP
reconciliations of net income and shareholders' equity:
On
Apri1 22, 2002, the Central Bank, under the agreement described
above sold
its remaining 35.44% participation in Banco Santiago to Teatinos,
the
primary shareholder of the former Banco Santander-Chile and a wholly
owned
subsidiary of BSCH.
|
|
On
August 1, 2002, Banco Santiago and the former Banco Santander-Chile
(predecessor entity to the Bank) merged. To effect the merger,
the minority interest of 11% of Banco Santander-Chile was bought
out
through the issuance of former Banco Santiago shares (as Banco Santiago
was considered the acquirer). As a resu1t of the merger between
the former Banco Santiago and the former Banco Santander-Chi1e, the
former
Banco Santiago issued 89,511,910,227 shares in exchange for all the
outstanding common shares of the former Banco Santander-Chi1e using
an
exchange ratio of 3.55366329 for each former Banco Santander-Chile
share.
The
Bank did not record deferred taxes under either Chile GAAP or U.S.
GAAP on
any goodwill or intangible asset acquired as the result of the acquisition
as these items do not generate temporary differences as defined in
either
Chile GAAP nor U.S. GAAP accounting
pronouncements.
|
(b)
|
Amortization
of Goodwill and Intangible
Asset
|
The
Bank
adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other
Intangible Assets”, (“SFAS 142”) as of January 1, 2002. SFAS 142 applies to all
goodwill and identified intangible assets acquired in a business combination.
Under the new standard, beginning January 1, 2002, all goodwill, including
that
acquired before initial application of the standard, and indefinite-lived
intangible assets are not amortized, but must be tested for impairment at least
annually. The Bank has not amortized any U.S. GAAP goodwill since the provisions
of SFAS N°142, became effective. As the Bank has performed the annual impairment
tests of goodwill and intangible assets with indefinite lives as required by
the
standard, which did not result in any impairment.
Additionally,
the Bank has evaluated the remaining useful life of their intangible assets,
that are not being amortized in each reporting period in other to determine
whether events and circumstances continue to support an indefinite useful
life.
During
2006, the Bank decided to change the strategy related to the use of its brand
name by encouraging the use of Banco Santander and phasing out the Banco
Santander - Santiago. The Bank has started to amortize the Santiago brand name
pushed down to it as part of Teatino’s acquisition of the former Banco Santiago
over a period of 5 years using a straight line amortization method.
Under
Chilean GAAP, prior to 1999, the Bank did not record the effects of deferred
income taxes. Effective January 1, 1999, and in accordance with the new
accounting standard under Chilean GAAP (Technical Bulletin No. 60), the Bank
was
required to record the effects of deferred tax assets and liabilities based
on
the liability method, with deferred tax assets and liabilities established
for
temporary differences between the financial reporting basis and the tax basis
of
the Bank’s assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized. As a transitional provision to reduce the impact
of adoption of this standard, the Bank was permitted to record a contra
("complementary") asset or liability as of the date of implementation of the
new
accounting standard, i.e. January 1, 1999, related to the effects of deferred
income taxes from prior years. These complementary assets and liabilities are
to
be amortized over the average estimated period of reversal of the temporary
differences which generate the future income tax asset or
liability.
At
the end
of 2005, these complementary accounts were fully amortized.
Under
SFAS
No. 109, “Accounting for Income Taxes” (“SFAS 109”), income taxes are recognized
using the balance sheet method (since 1999) in a manner similar to Chilean
GAAP,
however U.S. GAAP did not adopt transitional provisions equivalent to the
“complementary accounts” mentioned in the previous paragraph, but instead,
flowed any adoption effects directly through the income statements in
“Cumulative Effect of a Change in Accounting Principle”.
The
effects of elimination of the complementary assets and liabilities and their
respective amortization as well as effects of recording deferred income taxes
on
U.S. GAAP adjustments are included in the reconciliation of consolidated net
income and shareholders’ equity in paragraph (t) below. Additional disclosures
required under SFAS 109 are further described in paragraph (w)
below.
As
required by Chilean General Banking Law, unless otherwise decided by a
two-thirds vote of the issued and subscribed shares, the Bank must distribute
a
cash dividend in an amount equal to at least 30% of its net income for each
year
as determined in accordance with Chilean GAAP, and record that dividend against
retained earnings or current year income in shareholders’ equity when it has
been approved by the Annual Shareholders’ meeting subsequent to year-end unless
a higher legally binding commitment to distribute dividends exists, or unless
and except to the extent the Bank has unabsorbed prior year
losses. Under the provisions issued by the AICPA International
Practice Task Force, such mandatory dividends, as of the year end reporting
date, represent and are reported as “temporary equity”. However,
when, as allowed by regulation, actions of shareholders are taken prior to
the
date of financial statement issuance, evidencing that such minimum dividend
will
not be fully distributed, the reclassification of such dividend may be limited
to such lesser amount authorized by shareholder ratification. The effect of
recording mandatory dividends in accordance with U.S. GAAP is included in the
reconciliation of net income and shareholders’ equity in paragraph (t)
below.
(e)
|
Interest
income recognition on non-accrual
loans
|
Under
Chilean GAAP the Bank suspends the accrual of interest on loans when it is
determined to be a loss or when it becomes past due. Previously
accrued but uncollected interest on overdue loans is not reversed at the time
the loan ceases to accrue interest. Under U.S. GAAP, recognition of
interest on loans is generally discontinued when, in the opinion of management,
there is an indication that the borrower may be unable to meet payments as
they
become due. As a general practice, this occurs when loans are 90 days or more
overdue. Any accrued but uncollected interest is reversed against
interest income at that time.
In
addition, under Chilean GAAP, any payment received on overdue loans is treated
as income to the extent of interest earned but not recorded, after reducing
any
recorded accrued interest receivable. Any remaining amount is then applied
to
reduce the outstanding principal balance. Under U.S. GAAP, any payment received
on loans when the collectibility of the principal is in doubt is treated as
a
reduction of the outstanding principal balance of the loan until such doubt
is
removed. The effect of the difference in interest recognition on non accrual
loans is considered not material to the Bank’s financial position and results of
its operations.
(f)
|
Repurchase
agreements
|
The
Bank
enters into repurchase agreements as a source of financing. In this regard,
until 2005, the Bank’s investments which are sold subject to repurchase
agreements were reclassified from their investment category to “investment
collateral under agreements to repurchase”. Under U.S. GAAP, no such
reclassification would be made, since, in substance, the investment securities
serve only as collateral for the borrowing. For purposes of presentation of
balance sheet in accordance with U.S. GAAP and in format required by the
Securities and Exchange Commission under rules 210.9 to 210.9-07 of Regulation
S-X (“Article 9”), which is included in paragraph (v) to this note, investments
which collateralize such borrowings are shown in their investment
category.
As
is
described in Note 2, under the new rules established by Circular Nº 3,345 and
related amendments, starting January 1, 2006, the new accounting criteria do
not
differ significantly from U.S. GAAP, SFAS No. 115.
(g)
|
Contingent
assets and
liabilities
|
In
accordance with Chilean GAAP, the Bank recognizes rights and obligations with
respect to contingent loans as contingent assets and
liabilities. Contingent liabilities consist of open, unused and
standby letters of credit, together with guarantees by the Bank in Chilean
peso,
UF and foreign currencies (principally US dollars). The liabilities represent
the Bank’s obligations under such agreements. Under U.S. GAAP, such contingent
amounts are not recognized on the consolidated balance sheets, however, they
are
disclosed. The reclassification to eliminate the contingent assets against
the
contingent liabilities recorded under Chile GAAP has been included in the
balance sheets Article 9 in paragraph (v) below.
Within
contingent assets and liabilities the Bank includes financial guarantees.
Disclosures required in accordance with FIN 45 “Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” are included in paragraph (ab) below. For neither
contingencies nor guarantees is there recorded an adjustment to the U.S. GAAP
reconciliation of net income or shareholders’ equity, as none met the
requirements for recognition in the income statements.
(h)
|
Investment
securities
|
Under
U.S.
GAAP, SFAS N°115, “Accounting for Certain Investments in Debt and Equity
Securities” (“SFAS 115”) requires that debt and equity securities be classified
in accordance with the Bank’s intent and ability to hold the security, as
follows:
·
|
Debt
securities for which the Bank has the positive intent and ability
to hold
to maturity are classified as held-to-maturity securities and are
reported
at amortized cost. As of December 31, 2005 and 2006 the Bank
did not classify any security as
held-to-maturity.
|
·
|
Debt
and equity securities that are bought and held by the Bank, principally
for the purpose of selling them in the near term, are classified
as
trading securities and reported at fair value, with unrealized gains
and
losses included in earnings.
|
·
|
Debt
and equity securities not classified as either held–to-maturity securities
or trading securities are classified as available-for-sale securities
and
reported at fair value, with unrealized gains and losses excluded
from
earnings and reported in a separate component of shareholders’
equity.
|
SFAS
N°
115 established that in the case of foreign-currency-denominated
available-for-sale debt securities, the change in fair value expresses in an
entity’s functional currency is the total of the changes in market price of the
security as expressed in the local currency due to factors such as changes
in
interest rates and credit risk and the change in the exchange rate between
the
local currency and the instruments denominated currency. EITF 96-15
established that the entire change in the fair value
of foreign-currency-denominated available-for-sale debt
securities should be reported in stockholders’ equity.
Until
2005, under Chilean GAAP the Bank classifies its financial investments as
“trading” or “permanent”(see Note 1). Financial investments held by the Bank
with a secondary market are stated at fair market value with unrealized gains
and losses included in a separate component of shareholders’ equity for those
classified as permanent and with unrealized gains and losses included in other
operating results for those classified as trading which all realized gains
and
losses flow through income. All other financial investments are carried at
acquisition cost plus accrued interest and UF indexation adjustments. Investment
securities maintained by the Bank’s subsidiaries were carried at the lower of
price-level restated cost or market value. Additionally, during 2001 the former
Banco Santander-Chile received permission from the Superintendency of Banks
to
record at amortized cost (i.e. not adjusted to market value) a portion of its
portfolio of Chilean Government securities, which are hedged by specific
interest rate swap agreements. During 2005, the aforementioned portfolio of
Chilean government securities was completely amortized. Similarly, under Chilean
GAAP, interest rate swap agreements were not recorded at fair value (see
paragraph (m) below).
As
of
December 31, 2005, under Chilean GAAP, the unrealized holding gains (losses)
related to investments classified as permanent have been included in equity,
which does not differ from the treatment “available-for-sale” under U.S. GAAP.
Similarly “trading” securities accounting treatment did not differ from
“trading” securities treatment under U.S. GAAP.
As
is
described in Note 2, on December 20, 2005 the Superintendency of Banks issued
Circular No. 3,345 and related amendments, requiring the application of new
accounting principles and valuation criteria for financial instruments acquired
for trading or investment (available-for-sale or held to maturity),
derivative instruments, accounting hedges and write-offs of financial
assets in the balance sheet. Starting January 1, 2006, the Bank classifies
their
financial investments in accordance with the Bank’s intent and ability to hold
the security, as trading, available for sale or held to maturity. The new
accounting principles and valuation criteria do not differ significantly from
U.S. GAAP, SFAS No 115. The accounting criteria followed by the Bank’s
subsidiaries on a standalone basis have not been changed, however, under the
new
rules established by Circular No. 3,345, for consolidated purposes, the Bank
was
required to perform all the necessary adjustments at the consolidation level
to
conform with the requirements of Circular No. 3,345.
Based
upon
the criteria described above and for presentation purposes, the Bank
reclassified its portfolio of investments in debt and equity securities to
“available-for-sale” or “trading”.
Prior
to
January 1, 2006, the adjustment to U.S. GAAP represents the foreign exchange
difference on available-for-sale securities which, under EITF 96-15, is recorded
in Shareholders equity. For the year ended December 31, 2006, the cumulative
effect of prior year differences reversed.
The
following are required disclosures for investments classified as
available-for-sale in accordance with SFAS 115 and based on Article 9 balance
sheet under U.S. GAAP. Realized gains and losses are determined using the
proceeds from sales less the cost (specific identification method) of the
investments identified to be sold. Additionally, any unrealized
gain/loss previously recorded in equity for these investments is reversed
through the income statements. Gross gains and losses realized on the
sale of available-for-sale securities for the years ended as of December 31,
2004, 2005 and 2006 are as follows:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Proceeds
from sales of “available-for-sale” securities generating realized
gains
|
|
|
996,264
|
|
|
|
679,622
|
|
|
|
590,057
|
|
Realized
gains
|
|
|
23,556
|
|
|
|
7,611
|
|
|
|
9,085
|
|
Proceeds
from sales of “available-for-sale” securities generating realized
losses
|
|
|
269,511
|
|
|
|
315,509
|
|
|
|
216,802
|
|
Realized
losses
|
|
|
1,752
|
|
|
|
2,553
|
|
|
|
3,877
|
|
(i) Other
than temporary impairment of available for sale securities
Until
2005
under Chilean GAAP the Bank was not required to evaluate if marketable
securities were considered to be other than temporarily impaired. As
is described in Note 2, starting January 1, 2006, under Chilean GAAP, the
evaluation of marketable securities considered to be other than temporarily
impaired is required, if the decline in fair value is judged to be other than
temporary. In such circumstances, the cost basis of the security is written
down
to fair value and the amount written down is charged against
income. The impairment is not considered as having established a new
cost basis for the security and therefore, under certain conditions, recovery
up
to the extent of the initial cost basis may be recorded. Additionally, Chile
GAAP does not require the inclusion of foreign exchange differences to be
included in the unrealized gains/loss on available-for-sale securities in
equity. The portion related to foreign exchange gain (loss) is recorded directly
in income.
Under
U.S.
GAAP, SFAS 115 requires that the Bank determine whether individual
securities classified as available for sale have been impaired on an other
than
temporary basis. If the decline in value is judged to be other than
temporary, the cost basis of the individual security is written down
to a new cost basis and the amount by which it
is written down is included in earnings (that is, accounted for
as a realized loss). The new cost basis does not change when
subsequent recoveries in fair value occur. Subsequent increases in
the fair value of available for sale securities are included in other
comprehensive income and subsequent decreases in fair value, if not other
than temporary , are also included in the other
comprehensive income.
The
bank
reviewed its portfolio as of December 31, 2005 and concluded that there was
no
other than temporary impairment as of this date. This review consisted of
evaluating the economic reasons for any declines, credit rating of
the issuers of the securities and management’s intention and ability to hold the
securities until the unrealized loss is recovered. At December 31, 2005, based
on this analysis, the Bank believed that there were no other than
temporary impairments in its investment portfolio because most of the
decline in fair value of these securities were caused by the appreciation of
the
Chilean Peso in relation to the U.S. Dollar which the Bank considered to be
temporary. Most of the securities that have unrealized losses as of December
31,
2005 had been in a continuous unrealized loss position for less than one
year.
As
of
December 31, 2006 the Bank considered that the continued devaluation of the
U.S.
Dollar relative to the Chilean Peso was an indication of other-than temporary
impairment. As a result, an impairment of MCh$4,954 as of June 30, 2006 an
additional MCh$634 as of December 31, 2006 for U.S. GAAP purposes was recognized
for unrealized losses related to U.S. Dollar denominated debt securities
classified as available for sale. The effect of other than temporary impairment
of available for sale securities is included in the reconciliation of
consolidated net income paragraph (t) below.
The
bank
reviewed the remaining portfolio as of December 31, 2006 and concluded that
there was no other than temporary impairment as of this date. This review
consisted of evaluating the economic reasons for any declines, credit
rating of the issuers of the securities and management’s intention and ability
to hold the securities until the unrealized loss is recovered. At December
31,
2006, based on this analysis, the Bank believed that there were no
other than temporary impairments in its investment portfolio because
most of the decline in fair value of these securities were caused by market
condition which the Bank considered to be temporary. Most of the securities
that
have unrealized losses as of December 31, 2006 had been in a continuous
unrealized loss position for less than one year.
The
carrying value and market value of securities available-for-sale as of December
31, 2004, 2005 and 2006 are as follows:
Available-for-Sale
Investments 2006
|
|
|
|
|
|
|
|
Gross
Unrealized Losses (1) (2)
|
|
|
Estimated
Fair Value
|
|
Central
Bank and Government Securities
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank Securities
|
|
|
77,694
|
|
|
|
123
|
|
|
|
(79 |
) |
|
|
77,738
|
|
Chilean
Treasury bonds
|
|
|
625
|
|
|
|
-
|
|
|
|
(2 |
) |
|
|
623
|
|
Others
Securities
|
|
|
18,518
|
|
|
|
106
|
|
|
|
(93 |
) |
|
|
18,531
|
|
Subtotal
|
|
|
96,837
|
|
|
|
229
|
|
|
|
(174 |
) |
|
|
96,892
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
finance Bonds
|
|
|
223,215
|
|
|
|
964
|
|
|
|
(1,507 |
) |
|
|
222,672
|
|
Others
Foreign Securities
|
|
|
26,222
|
|
|
|
-
|
|
|
|
(678 |
) |
|
|
25,544
|
|
Subtotal
|
|
|
249,437
|
|
|
|
964
|
|
|
|
(2,185 |
) |
|
|
248,216
|
|
Total
|
|
|
346,274
|
|
|
|
1,193
|
|
|
|
(2,359 |
) |
|
|
345,108
|
|
Available-for-Sale
Investments 2005
|
|
|
|
|
|
|
|
Gross
Unrealized Losses (1)
|
|
|
Estimated
Fair Value
|
|
Central
Bank and Government Securities
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank Securities
|
|
|
86,720
|
|
|
|
370
|
|
|
|
(977 |
) |
|
|
86,113
|
|
Chilean
Treasury bonds
|
|
|
1,227
|
|
|
|
4
|
|
|
|
(4 |
) |
|
|
1,227
|
|
Others
Securities
|
|
|
33,994
|
|
|
|
701
|
|
|
|
(201 |
) |
|
|
34,494
|
|
Subtotal
|
|
|
121,941
|
|
|
|
1,075
|
|
|
|
(1,182 |
) |
|
|
121,834
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
finance Bonds
|
|
|
442,250
|
|
|
|
334
|
|
|
|
(18,613 |
) |
|
|
423,971
|
|
Others
Foreign Securities
|
|
|
29,674
|
|
|
|
-
|
|
|
|
(451 |
) |
|
|
29,223
|
|
Subtotal
|
|
|
471,924
|
|
|
|
334
|
|
|
|
(19,064 |
) |
|
|
453,194
|
|
Total
|
|
|
593,865
|
|
|
|
1,409
|
|
|
|
(20,246 |
) |
|
|
575,028
|
|
Available-for-Sale
Investments 2004
|
|
|
|
|
|
|
|
Gross Unrealized
Losses (1)
|
|
|
Estimated
Fair Value
|
|
Central
Bank and Government Securities
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank Securities
|
|
|
118,734
|
|
|
|
965
|
|
|
|
(222 |
) |
|
|
119,477
|
|
Chilean
Treasury bonds
|
|
|
164,044
|
|
|
|
6,309
|
|
|
|
(34 |
) |
|
|
170,319
|
|
Others
Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
282,778
|
|
|
|
7,274
|
|
|
|
(256 |
) |
|
|
289,796
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
finance Bonds
|
|
|
51,958
|
|
|
|
314
|
|
|
|
(257 |
) |
|
|
52,015
|
|
Chilean
Financial Institutions Bonds
|
|
|
118,793
|
|
|
|
674
|
|
|
|
(901 |
) |
|
|
118,566
|
|
Chilean
Corporate Bonds
|
|
|
76,578
|
|
|
|
113
|
|
|
|
(452 |
) |
|
|
76,239
|
|
Others
Foreign Securities
|
|
|
50,390
|
|
|
|
456
|
|
|
|
(477 |
) |
|
|
50,369
|
|
Subtotal
|
|
|
297,719
|
|
|
|
1,557
|
|
|
|
(2,087 |
) |
|
|
297,189
|
|
Total
|
|
|
580,497
|
|
|
|
8,831
|
|
|
|
(2,343 |
) |
|
|
586,985
|
|
(1)
|
Investments
with unrealized losses are disclosed and segregated in accordance
with
paragraph 21 of EITF 03-01. Such unrealized losses were caused by
interest
rate increases. The contractual terms of these investments do not
permit
the issuer to settle the securities at a price less than the amortized
cost of the investment.
|
(2)
|
During
2006, as was described in paragraph above the Bank determined that
certain
of its foreign-currency-denominated available-for-sale debt securities
had
declines in value that were considered other than temporary, recording
a
charge to net income of MCh$5,588 to record these securities at their
market values at that date. Future unrealized gains or losses will
be
recorded in other comprehensive income consistent with the accounting
treatment for available-for-sale
securities.
|
The
following table shows the unrealized loss position of the available-for-sale
investments as of December 31, 2006 and 2005.
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
Available
for sale Investments
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Amortized
cost
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank Securities
|
|
|
20,505
|
|
|
|
20,427
|
|
|
|
(78 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
20,505
|
|
|
|
20,427
|
|
|
|
(78 |
) |
Chilean
Treasury Bonds
|
|
|
625
|
|
|
|
623
|
|
|
|
(2 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
625
|
|
|
|
623
|
|
|
|
(2 |
) |
Other
Securities
|
|
|
14,114
|
|
|
|
14,021
|
|
|
|
(94 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
14,114
|
|
|
|
14,021
|
|
|
|
(94 |
) |
Subtotal
|
|
|
35,244
|
|
|
|
35,070
|
|
|
|
(174 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
35,244
|
|
|
|
35,070
|
|
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean Financial Institutions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage
Finance Bonds
|
|
|
130,308
|
|
|
|
128,801
|
|
|
|
(1,507 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
130,308
|
|
|
|
128,801
|
|
|
|
(1,507 |
) |
Chilean
financial Institutions Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Corporate Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Others Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Central
Bank and Government Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
Foreign Securities
|
|
|
26,222
|
|
|
|
25,544
|
|
|
|
(678 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
26,222
|
|
|
|
25,544
|
|
|
|
(678 |
) |
Subtotal
|
|
|
156,530
|
|
|
|
154,345
|
|
|
|
(2,185 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
156,530
|
|
|
|
154,345
|
|
|
|
(2,185 |
) |
Total
|
|
|
191,774
|
|
|
|
189,415
|
|
|
|
(2,359 |
) |
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
191,774
|
|
|
|
189,415
|
|
|
|
(2,359 |
) |
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
Available
for sale Investments
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank Securities
|
|
|
68,624
|
|
|
|
67,647
|
|
|
|
(977 |
) |
|
|
18
|
|
|
|
18
|
|
|
|
-
|
|
|
|
68,642
|
|
|
|
67,665
|
|
|
|
(977 |
) |
Chilean
Treasury Bonds
|
|
|
12,398
|
|
|
|
12,193
|
|
|
|
(205 |
) |
|
|
110
|
|
|
|
110
|
|
|
|
-
|
|
|
|
12,508
|
|
|
|
12,303
|
|
|
|
(205 |
) |
Other
Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal
|
|
|
81,022
|
|
|
|
79,840
|
|
|
|
(1,182 |
) |
|
|
128
|
|
|
|
128
|
|
|
|
-
|
|
|
|
81,150
|
|
|
|
79,968
|
|
|
|
(1,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits in Chilean Financial Institutions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage
Finance Bonds
|
|
|
411,610
|
|
|
|
393,022
|
|
|
|
(18,588 |
) |
|
|
570
|
|
|
|
545
|
|
|
|
(25 |
) |
|
|
412,180
|
|
|
|
393,567
|
|
|
|
(18,613 |
) |
Chilean
financial Institutions Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Corporate Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Others Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Central
Bank and Government Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
Foreign Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,118
|
|
|
|
25,667
|
|
|
|
(451 |
) |
|
|
26,118
|
|
|
|
25,667
|
|
|
|
(451 |
) |
Subtotal
|
|
|
411,610
|
|
|
|
393,022
|
|
|
|
(18,588 |
) |
|
|
26,688
|
|
|
|
26,212
|
|
|
|
(476 |
) |
|
|
438,298
|
|
|
|
419,234
|
|
|
|
(19,064 |
) |
Total
|
|
|
492,632
|
|
|
|
472,862
|
|
|
|
(19,770 |
) |
|
|
26,816
|
|
|
|
26,340
|
|
|
|
(476 |
) |
|
|
519,448
|
|
|
|
499,202
|
|
|
|
(20,246 |
) |
(j)
Contractual maturities and other disclosures
The
contractual maturities of securities classified by the Bank as
available-for-sale are as follows:
|
|
As
of December 31, 2006
|
|
Available-for-Sale
Investments:
|
|
Within
one year
|
|
|
After
one year but within five years
|
|
|
After
five years but within ten years
|
|
|
After
ten years
|
|
|
Total
|
|
|
|
(in
millions of constant Ch$ of December 31, 2006)
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank Securities
|
|
|
21,187
|
|
|
|
55,849
|
|
|
|
702
|
|
|
|
-
|
|
|
|
77,738
|
|
Chilean
Treasury bonds
|
|
|
623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
623
|
|
Others
Securities
|
|
|
8,538
|
|
|
|
8,056
|
|
|
|
1,197
|
|
|
|
740
|
|
|
|
18,531
|
|
Total
|
|
|
30,348
|
|
|
|
63,905
|
|
|
|
1,899
|
|
|
|
740
|
|
|
|
96,892
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Finance Bonds
|
|
|
173
|
|
|
|
2,030
|
|
|
|
16,860
|
|
|
|
203,609
|
|
|
|
222,672
|
|
Chilean
Financial Institutions Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Corporate Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Others Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Central
Bank and Government Foreign Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
Foreign Securities
|
|
|
14,557
|
|
|
|
-
|
|
|
|
10,987
|
|
|
|
-
|
|
|
|
25,544
|
|
Subtotal
|
|
|
14,730
|
|
|
|
2,030
|
|
|
|
27,847
|
|
|
|
203,609
|
|
|
|
248,216
|
|
Total
|
|
|
45,078
|
|
|
|
65,935
|
|
|
|
29,746
|
|
|
|
204,349
|
|
|
|
345,108
|
|
|
|
As
of December 31, 2005
|
|
Available-for-Sale
Investments:
|
|
Within
one year
|
|
|
After
one year but within five years
|
|
|
After
five years but within ten years
|
|
|
After
ten years
|
|
|
Total
|
|
|
|
(in
millions of constant Ch$ of December 31, 2005)
|
|
Central
Bank and Government Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
Bank Securities
|
|
|
13,246
|
|
|
|
51,821
|
|
|
|
21,016
|
|
|
|
30
|
|
|
|
86,113
|
|
Chilean
Treasury bonds
|
|
|
5,192
|
|
|
|
15,188
|
|
|
|
13,689
|
|
|
|
1,609
|
|
|
|
35,678
|
|
Others
Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
18,438
|
|
|
|
67,009
|
|
|
|
34,705
|
|
|
|
1,639
|
|
|
|
121,791
|
|
Others
Financial Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Finance Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Financial Institutions Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Corporate Bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chilean
Others Securities
|
|
|
85
|
|
|
|
6,682
|
|
|
|
53,071
|
|
|
|
364,176
|
|
|
|
424,014
|
|
Central
Bank and Government Foreign Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
Foreign Securities
|
|
|
3,556
|
|
|
|
14,617
|
|
|
|
11,050
|
|
|
|
-
|
|
|
|
29,223
|
|
Subtotal
|
|
|
3,641
|
|
|
|
21,299
|
|
|
|
64,121
|
|
|
|
364,176
|
|
|
|
453,237
|
|
Total
|
|
|
22,079
|
|
|
|
88,308
|
|
|
|
98,826
|
|
|
|
365,815
|
|
|
|
575,028
|
|
Under
U.S.GAAP, the Bank is required to disclose the amounts of unrealized holding
gains and losses included in income on securities classified as
trading. For the years ended December 31, 2004, 2005 and 2006, the
Bank recognized in income net unrealized holding gains (losses) of MCh$2,627,
MCh$(1,614) and MCh$(163,7) respectively, on these securities.
(k)
Allowance for loan losses
The
determination of loan losses under U.S. GAAP differs from that under Chilean
GAAP in the following respects:
1. |
Allowance
for loan losses |
|
Under
Chilean GAAP, the allowance for loan losses is calculated according
to
specific guidelines set out by the rules of the Superintendency of
Banks.
Under
U.S. GAAP, allowances for loan losses should be adequate to cover
inherent
losses in the loan portfolio at the respective balance sheet dates.
The
Bank has estimated its required allowance under U.S. GAAP in the
following
manner:
|
|
· |
All
loans of the Bank were classified in accordance with the rules of
the
Superintendency of Banks.
|
|
·
|
Allowances
for commercial loans classified in loan risk category A1, A2, A3,
B or C1
which were not considered impaired under SFAS No. 114, “Accounting by
Creditors for Impairment of a Loan” (“SFAS 114”) were analyzed by loan
category and were adjusted where necessary to reflect the estimated
inherent losses in the loan portfolio based upon the historical movements
and trends in the Bank’s loan classifications (“migration
analysis”).
|
|
·
|
In
addition, specific additional allowances were determined for commercial
loans, i.e. those loans which were not considered above, on the following
basis:
|
|
i.
|
Commercial
loans greater than MCh$100, which were considered impaired in accordance
with the criteria established by SFAS 114 were valued at the present
value
of the expected future cash flows discounted at the loan’s effective
contractual interest rate, or at the fair value of the collateral
if the
loans were collateral dependent.
|
|
ii. |
Allowances
for commercial loans which were under MCh$100 (i.e. those loans which
were
not considered in the above SFAS 114 analysis), were calculated using
the
weighted average loan provision, by loan classification, as determined
in
(i). In addition, estimated incurred losses were adjusted based
on results of a migration analysis referred to
above. |
|
iii.
|
Allowance
for loan losses for mortgage and consumer loans were determined based
on
historical loan charge-offs, after considering the recoverability
of the
underlying collateral.
|
Based
on
the preceding calculations under provisions of SFAS No.114 the Bank reduced
the
total loan loss allowance by MCh$8,170 and MCh$8,170 for the years ended
December 31, 2005 and 2006, respectively.
Based
on
the loan losses allowance estimation process described above, the Bank
determined the allowance for loan losses under U.S. GAAP, and compared this
estimate with the reported allowance determined in accordance with the
guidelines established by the Superintendency of Banks. The
fluctuation of the recorded additional loan loss allowance required by the
Superintendency of Banks, was then deducted from the additional allowance
requirements under U.S. GAAP to arrive at a cumulative U.S. GAAP adjustment
for
the Bank, as follows:
|
|
|
As
of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
U.S.
GAAP loan loss allowance
|
|
|
(142,830 |
) |
|
|
(165,894 |
) |
|
Chilean
GAAP loan allowance required by the Superintendency of
Banks
|
|
|
151,000
|
|
|
|
174,064
|
|
|
U.S.
GAAP adjustment
|
|
|
8,170
|
|
|
|
8,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Chilean GAAP additional loan loss allowance
|
|
|
-
|
|
|
|
-
|
|
|
Cumulative
U.S. GAAP adjustment
|
|
|
8,170
|
|
|
|
8,170
|
|
The
effect
of accounting for loan losses in accordance with U.S. GAAP is included in the
reconciliation of the net income and shareholders' equity in paragraph (t)
below.
As
of
December 31, 2005 and 2006, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114 totaled MCh$257,736
and MCh$310,656, respectively, with a corresponding valuation allowance of
MCh$117,692 and MCh$124,924, respectively. For the
years ended December 31, 2005 and 2006, the average recorded investment in
impaired loans was MCh$290,882 and MCh$271,582, respectively. For the
three years ended December 31, 2004, 2005 and 2006, during the portion of the
year that the loans were impaired, the Bank recognized MCh$2,019, MCh$559 and
MCh$438 of interest on impaired loans. As of December 31, 2005 and 2006, the
Bank had made provisions against all loans which it considered to be
impaired.
Under
Chilean GAAP and U.S. GAAP recoveries of loans previously charged-off are
presented as a reduction of the provision for loan losses.
The
following presents an analysis under U.S. GAAP, for the years ended December
31,
2004, 2005 and 2006, of the changes in the reserve for loan losses during the
years presented:
|
|
|
As
of December 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
Allowances
for loan losses in accordance with U.S. GAAP, as of January
1
|
|
|
188,827
|
|
|
|
174,145
|
|
|
|
142,830
|
|
|
Price-level
restatement (1)
|
|
|
(4,792 |
) |
|
|
(6,407 |
) |
|
|
(3,134 |
) |
|
Loan
loss recoveries
|
|
|
50,772
|
|
|
|
47,079
|
|
|
|
47,067
|
|
|
Charge-offs
|
|
|
(126,394 |
) |
|
|
(139,632 |
) |
|
|
(143,475 |
) |
|
Additions
charged to operations
|
|
|
65,732
|
|
|
|
67,645
|
|
|
|
122,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances
for loan losses in accordance with U.S. GAAP, as of December
31,
|
|
|
174,145
|
|
|
|
142,830
|
|
|
|
165,894
|
|
|
(1)
|
Reflects
the effect of inflation on the allowance of loan losses under Chilean
GAAP
at the beginning of each period, adjusted to constant Chilean pesos
of
December 31, 2006.
|
As
discussed in Note 1 (m) of these financial statements, under Chilean GAAP the
Bank charges off loans when collection efforts have been exhausted. Under the
rules and regulations established by the Superintendency of Banks, charge-offs
must be made within the following maximum prescribed limits:
|
-
|
24
months after a loan is past due (6 months for consumer loans) for
loans
without collateral;
|
|
-
|
36
months after a loan is past due for loans with
collateral.
|
Under
U.S.
GAAP, loans should be written-off in the period that they are deemed
uncollectible. The Bank believes that the charge-off policies it applies in
accordance with Chilean GAAP are substantially the same as those required under
U.S. GAAP, and therefore the potential difference is not significant to the
presentation of its financial statements.
(l)
Investments in other companies
Under
Chilean GAAP, certain long-term investments of less than 20% (as the definition
of “significant influence” included investments of between 10% and 20% prior to
January 1, 2004) of the outstanding shares in other companies had been and
continue to be recorded using the equity method of accounting (see Note 9 (4))
those acquired subsequent to that date use the cost method. Under U.S. GAAP
those investments generally would have been recorded at cost. The
effect of accounting for investments in other companies in accordance with
U.S.
GAAP is included in the reconciliation of consolidated net income and
shareholders’ equity in paragraph (t) below.
(m)
Derivatives
Chilean
banks are permitted to use foreign exchange forward contracts (covering either
foreign currencies against the U.S. dollar, the UF against the Chilean peso
or
the UF and the Chilean peso against the U.S. dollar), forward rate agreements
and interest rate swaps. Currently, the use of derivatives in Chile is regulated
by the Chilean Central Bank, which requires that all foreign exchange forward
contracts be made only in U.S. dollars and other major foreign
currencies.
All
derivative instruments are subject to market risk, which is defined as the
risk
that future changes in market conditions may make an investment more or less
valuable. The Bank managed their individual exposure to market risk on a global
basis in accordance with risk limits set by senior management by buying or
selling instruments or entering into offsetting foreign exchange and interest
rate positions.
The
Bank
enters into derivative transactions for its own behalf and to meet customers’
risk management needs. Generally the Bank enters into forward
contracts in U.S. dollars against the Chilean peso or the UF, however,
occasionally, forward contracts are also made in other currencies, but only
when
the Bank acts as an intermediary. Other derivative transactions include
primarily interest rate swaps (pay fixed-receive floating) and rate lock
agreements. These are used for hedging purposes in order to manage,
among other risks, interest rate and fair value risk related to the Yankee
bonds
of Chilean companies, Chilean Government securities bought by the Bank and
certain mortgage loans.
In
order
to manage any credit risk associated with its derivative products, the Bank
grants lines of credit to its counterparties, in accordance with its credit
policies, for each derivative transaction. The counterparty risk exposure is
a
function of the type of derivative, the term to maturity of the transaction
and
the volatility of the risk factors that affect the derivative’s market
value.
Under
Chilean GAAP, the Bank accounts for forward contracts between foreign currencies
and U.S. dollars at fair value with realized and unrealized gains and losses
on
these instruments recognized in other income. Until 2005, forward contracts
between the U.S. dollar and the Chilean peso or the UF were valued at the
closing spot exchange rate of each balance sheet date, with the initial discount
or premium being amortized over the life of the contract in accordance with
Chilean hedge accounting criteria outstanding at this date. Also until 2005,
under Chilean GAAP the Bank records differences between interest income and
interest expense on interest rate swap transactions, in net income in the period
when cash settlements under the agreements were made. The fair value
of the swap agreement and changes in the fair value as a result of changes
in
market interest rates were not recognized at each period-close in the Chilean
GAAP consolidated financial statements.
As
is
described in Note 2, on December 20, 2005 the Superintendency of Banks and
Financial Institutions (SBIF) issued Circular No.3,345 and related amendments,
instructing the application of new accounting principles and valuation criteria
for derivative instruments and hedges accounting in the balance sheet as is
described in Note 1 g. The new accounting principles and valuation criteria
do
not differ significantly from U.S. GAAP, SFAS N° 133 and related
amendments.
Effective
January 1, 2006, under the requirements of Circular No. 3,345 of the
Superintendency of Banks, the accounting treatment of certain derivative
instruments and hedges of financial assets changed. Traditional
financial instruments which meet the definition of a “derivative”
such as forwards in foreign currency and unidades de fomento (inflation
index-linked units of account), interest rate futures, currency and interest
rate swaps, currency and interest rate options, and others are recognized
initially in the balance sheet at cost (including transaction fees) and, at
subsequent period ends, at their fair value. The fair value is
obtained from market quotes, discounted cash flow models and option valuation
models, as applicable.
Beginning
January 1, 2001, the Bank adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No.138, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment
of
FASB Statement No. 133" (collectively “SFAS 133”), which establishes
comprehensive accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The standard requires that all derivative instruments be
recorded in the balance sheet at fair value. However, the accounting for changes
in fair value of the derivative instrument depends on the purpose for which
the
derivative instrument was entered into and whether the derivative instrument
qualifies as a hedge. The standards also require formal documentation of hedging
relationships and effectiveness testing when hedge accounting is to be applied.
If the derivative
instrument
does not qualify as a hedge, changes in fair value are reported in earnings
when
they occur. If the derivative instrument qualifies as a hedge, the accounting
treatment varies based on the type of risk being hedged.
Even
thought the methodology to asses Hedge Accounting under Chilean GAAP and U.S.
GAAP are the same, there are certain criteria’s that are presented under Chilean
GAAP and not under U.S. GAAP. As of December 31, 2006 hedged accounting applied
under Chilean GAAP on the mortgage loans portfolio classified in “Other
Outstanding Loans” does not meet the criteria described in SFAS No 133 paragraph
21 a), which paragraph establishes that the change in fair value attributable
to
the hedged risk for each individual item in a hedged portfolio must be expected
to respond in a generally proportionate manner to the overall change in the
fair
value of the aggregate portfolio attributable to the hedged risk. Given the
lack
of compliance with this paragraph of the hedge undertaken and documented as
such
in Chilean GAAP, an adjustment has been included in the amount of MCh$31,833
and
MCh$29,915 as of and for the year ended December 31, 2006, respectively, in
our
reconciliation of shareholders’ equity and net income in paragraph
(t) below. As there are differences in Hedge Accounting between Chilean GAAP
and
U.S. GAAP some transactions registered as Hedging derivatives under Chilean
GAAP
are reversed for U.S. GAAP purposes and registered as Trading derivatives as
is
described in the table below.
|
|
Assets
MCh$
|
|
|
Liabilities
MCh$
|
|
|
Chilean
GAAP
Balance
Sheet
MCh$
|
|
|
U.S.
GAAP Adjustment
MCh$
|
|
|
U.S.
GAAP
Balance
Sheet
MCh$
|
|
Hedging
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Risk Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap
|
|
|
1,173
|
|
|
|
(2,354 |
) |
|
|
(1,181 |
) |
|
|
-
|
|
|
|
(1,181 |
) |
Currency
Swap
|
|
|
-
|
|
|
|
(37,871 |
) |
|
|
(37,871 |
) |
|
|
31,833
|
|
|
|
(6,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Hedging Derivatives
|
|
|
1,173
|
|
|
|
(40,225 |
) |
|
|
(39,052 |
) |
|
|
31,833
|
|
|
|
(7,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Risk Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap
|
|
|
34,958
|
|
|
|
(68,165 |
) |
|
|
(33,207 |
) |
|
|
-
|
|
|
|
(33,207 |
) |
Options
and Future
|
|
|
1,448
|
|
|
|
(1,032 |
) |
|
|
416
|
|
|
|
-
|
|
|
|
416
|
|
Currency
Swap
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,833 |
) |
|
|
(31,833 |
) |
Foreign
Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
purchase/sale of foreign currency
|
|
|
82,608
|
|
|
|
(99,422 |
) |
|
|
(16,814 |
) |
|
|
-
|
|
|
|
(16,814 |
) |
Currency
Options
|
|
|
4,384
|
|
|
|
4,372
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
Currency
Swap
|
|
|
247,486
|
|
|
|
(142,058 |
) |
|
|
105,428
|
|
|
|
-
|
|
|
|
105,428
|
|
Other
|
|
|
631
|
|
|
|
(648 |
) |
|
|
(17 |
) |
|
|
-
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Trading Derivatives
|
|
|
371,515
|
|
|
|
(315,697 |
) |
|
|
55,818
|
|
|
|
(31,833 |
) |
|
|
23,985
|
|
Total
Net Derivatives
|
|
|
372,688
|
|
|
|
(355,922 |
) |
|
|
16,766
|
|
|
|
-
|
|
|
|
16,766
|
|
Before
January 1, 2006 Chilean accounting rules do not consider the existence of
derivative instruments embedded in other contracts and therefore they were
not
reflected in the financial statements. For U.S. GAAP purposes, certain implicit
or explicit terms included in host contracts that affect some or all of the
cash
flows or the value of other exchanges required by the contract in a manner
similar to a derivative instrument, must be separated from the host contract
and
accounted for at fair value. The Bank separately measures embedded derivatives
as freestanding derivative instruments at their estimated fair values
recognizing changes in earnings when they occur. Currently the only host
contracts that the Bank has, which have implicit or explicit terms that must
be
separately accounted for at fair value, are service type contracts related
to
computer service agreement and insurance agreements.
For
December 31, 2005 the effects of the adjustments with respect to foreign
exchange contracts, interest rate and foreign currency swaps agreements on
the
net income and shareholders’ equity of the Bank are included in paragraph (t)
below.
For
the
years ended December 31, 2004, 2005 and 2006 the effects of embedded derivatives
were not significant.
(n)
Recoveries of loans previously charged-off
Under
Chilean GAAP recoveries on charged-off loans as well as recoveries on loans
which were reacquired from the Chilean Central Bank were recorded directly
to
income. Under U.S. GAAP, loans that have been previously written-off cannot
be
reinstated, and only actual cash recoveries from any previously charged-off
loans would be recognized as income. Consequently, the effect of the recovery
of
these reinstated loans for Chilean GAAP purposes, net of cash recoveries, has
been eliminated in the reconciliation to U.S. GAAP
(o)
Capitalization of interest costs
For
Chilean GAAP purposes, the Bank does not capitalize interest costs on the assets
that are constructed for its own use. Under SFAS No. 34, interest
costs should be capitalized as they are considered part of the historical cost
of acquiring these assets. The effect of accounting for
capitalization of interest costs in accordance with U.S. GAAP is included in
the
reconciliation of net income and shareholders’ equity in paragraph (t)
below.
(p)
Mortgage loans purchased
Banco
Santander Chile acquired mortgage loans (so called ANAP portfolio) from former
savings and loans institutions at a discount. In 1990, based on the
then-existing regulations, the discount on a portion of the loans acquired
was
recognized as income. Under U.S. GAAP, such discount should be amortized over
the life of the related loans. The effect of accounting for mortgage loans
purchased in accordance with U.S. GAAP is included in the reconciliation of
net
income and shareholders’ equity in paragraph (t) below. As of December 31, 2005,
the discount was completely amortized.
(q)
Acquisition of Financial Assets
The
following business combinations took place prior to the merger of Banco Santiago
and Banco Santander-Chile which continue to require adjustments between Chilean
GAAP and U.S. GAAP in the net income and shareholders’ equity reconciliations in
(t):
(1)
|
Acquisition
of Banco O’Higgins
|
For
Chilean GAAP purposes, the merger between the former Banco Santiago and Banco
O’Higgins that took place during 1997 was accounted for using “pooling of
interests”. The assets acquired and liabilities assumed were combined
at their carrying values on the books of the successor entity and the operations
were accounted for as combined from January 1, 1997.
For
U.S.
GAAP purposes, the former Banco Santiago accounted for the business combination
as a purchase of Banco O’Higgins. Consequently, goodwill was recorded
as the difference between the purchase price and the fair value of the assets
acquired and the liabilities assumed (which, in management’s opinion,
approximated book value).
The
unamortized goodwill associated with this merger on the books of Banco Santiago,
for U.S. GAAP purposes, as of the date of the merger with the former Banco
Santiago Santander-Chile is implicitly included in the goodwill of Teatinos
which had been acquired by BCSH as explained in (a).
(2)
|
Acquisition
of Banco Osorno y la Unión
|
During
1996, the former Banco Santander-Chile merged with Banco Osorno y la Unión
(“Banco Osorno”). The treatment for both Chilean GAAP purposes and
U.S. GAAP purposes was equivalent to the treatment in the Banco O’Higgins
transaction in (1) with the exception that the acquisition of Banco Osorno
was
defined as a reverse acquisition.
(r)
Assets received in lieu of payment
As
instructed by the Superintendency of Banks, assets received in lieu of payment
are carried at cost, less a global valuation allowance if the total of the
fair
value of those assets is lower than the carrying amount. If the asset is not
sold within one year, then recorded asset amounts should be written-off on
a
straight-line basis over the following 12-month period.
Under
U.S.
GAAP, assets received in lieu of payment are initially recorded at fair value
less any estimated costs to sell at the date of foreclosure, on an individual
asset basis. Subsequent to foreclosure, valuations should be periodically
performed to record any impairment. The effect of recording these assets in
accordance with U.S. GAAP in the Bank is included in the reconciliation of
net
income and shareholders' equity in paragraph (t) below.
(s)
Accrued interest and indexation adjustment
Under
Chilean GAAP, accrued interest and indexation adjustment are presented with
the
principle amounts of the investments to which they accrete. Under
U.S. GAAP accrued interest and indexation adjustment would be presented as
separate line items in the balance sheet. The amount of this reclassification
is
not readily determinable.
(t)
Summary of net income and shareholders’ equity
differences
The
following is a reconciliation of net income under Chilean GAAP to the
corresponding amounts under U.S.
GAAP:
|
|
Year
Ended December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
1(r))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income in accordance with
Chilean GAAP
|
|
|
210,358
|
|
|
|
244,792
|
|
|
|
285,582
|
|
|
|
534,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push-down
accounting (Note
26 (a))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and
writte-off of trademarks
and other
|
|
|
(10,934 |
) |
|
|
(13,261 |
) |
|
|
(17,032 |
) |
|
|
(31,869 |
) |
Amortization
of fair value
increment of net assets
|
|
|
(3,848 |
) |
|
|
(3,850 |
) |
|
|
(3,846 |
) |
|
|
(7,197 |
) |
Deferred
income taxes (Note 26(c))
|
|
|
26
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Investment
securities (Note
26(h))
|
|
|
664
|
|
|
|
2,575
|
|
|
|
(472 |
) |
|
|
(883 |
) |
Allowance
for loan losses
(Note 26(k))
|
|
|
15,622
|
|
|
|
(1,050 |
) |
|
|
-
|
|
|
|
-
|
|
Other
than temporary impairment
(Note 26(i))
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,588 |
) |
|
|
(10,456 |
) |
Investments
in other companies
(Note 26(l))
|
|
|
(8 |
) |
|
|
9
|
|
|
|
(117 |
) |
|
|
(219 |
) |
Derivatives
(Note 26(m))
|
|
|
(6,650 |
) |
|
|
7,008
|
|
|
|
(29,915 |
) |
|
|
(55,975 |
) |
Recoveries
of loans (Note 26(n))
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Capitalization
of interest costs
(Note 26(o))
|
|
|
(51 |
) |
|
|
(51 |
) |
|
|
(51 |
) |
|
|
(95 |
) |
Mortgage
loans purchased (Note
26(p))
|
|
|
42
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
Assets
received in lieu of payment
(Note 26(r))
|
|
|
8,138
|
|
|
|
(4,817 |
) |
|
|
1,484
|
|
|
|
2,777
|
|
Deferred
tax effect of U.S. GAAP
adjustments
|
|
|
(2,870 |
) |
|
|
(638 |
) |
|
|
5,872
|
|
|
|
10,987
|
|
Net
income in accordance with U.S. GAAP
|
|
|
210,499
|
|
|
|
230,834
|
|
|
|
235,917
|
|
|
|
441,437
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (losses) on available-for-sale securities (26 (x))
|
|
|
664
|
|
|
|
(23,319 |
) |
|
|
16,772
|
|
|
|
31,383
|
|
Comprehensive
income in accordance with U.S. GAAP
|
|
|
211,163
|
|
|
|
207,515
|
|
|
|
252,689
|
|
|
|
472,820
|
|
The
following is a reconciliation of shareholders’ equity under Chilean GAAP to the
corresponding amounts under U.S. GAAP:
|
|
At
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
(Note
1(r))
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity in accordance with Chilean GAAP
|
|
|
1,104,767
|
|
|
|
1,245,339
|
|
|
|
2,330,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push
Down Accounting (Note 26(a))
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
501,242
|
|
|
|
501,242
|
|
|
|
937,900
|
|
Fair
value of
intangibles
|
|
|
78,096
|
|
|
|
61,064
|
|
|
|
114,259
|
|
Fair
value increment of net
assets
|
|
|
9,206
|
|
|
|
5,360
|
|
|
|
10,030
|
|
Mandatory
dividends (Note 26(d))
|
|
|
(73,439 |
) |
|
|
(85,675 |
) |
|
|
(160,311 |
) |
Investment
securities (Note
26(h))
|
|
|
3,070
|
|
|
|
-
|
|
|
|
-
|
|
Allowance
for loan losses (Note
26(k))
|
|
|
8,170
|
|
|
|
8,170
|
|
|
|
15,287
|
|
Investments
in other companies
(Note 26(l))
|
|
|
411
|
|
|
|
294
|
|
|
|
550
|
|
Derivatives
(Note 26(m))
|
|
|
(1,918 |
) |
|
|
(31,833 |
) |
|
|
(59,564 |
) |
Recoveries
of loans (Note 26(n))
|
|
|
(1,302 |
) |
|
|
(1,302 |
) |
|
|
(2,436 |
) |
Capitalization
of interest costs
(Note 26(o))
|
|
|
3,875
|
|
|
|
3,824
|
|
|
|
7,155
|
|
Assets
received in lieu of payment
(Note 26(r))
|
|
|
3,699
|
|
|
|
5,183
|
|
|
|
9,698
|
|
Deferred
tax effect of U.S. GAAP
adjustments
|
|
|
(2,651 |
) |
|
|
2,713
|
|
|
|
5,076
|
|
Acquisition
of financial assets
(Note 26(q))
|
|
|
305,279
|
|
|
|
305,279
|
|
|
|
571,225
|
|
Shareholders’
equity in accordance with U.S. GAAP
|
|
|
1,938,505
|
|
|
|
2,019,658
|
|
|
|
3,779,088
|
|
The
following summarized the changes in the shareholders’ equity of the Bank under
U.S. GAAP during the years ended December 31, 2004, 2005 and 2006:
|
|
As
of December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note
(1r))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January
1,
|
|
|
1,961,494
|
|
|
|
1,952,196
|
|
|
|
1,938,505
|
|
|
|
3,627,238
|
|
Monetary
indexation of dividends
paid
|
|
|
(241 |
) |
|
|
(517 |
) |
|
|
(186 |
) |
|
|
(348 |
) |
Dividends
paid
|
|
|
(224,445 |
) |
|
|
(210,358 |
) |
|
|
(159,114 |
) |
|
|
(297,726 |
) |
Mandatory
dividends, previous
date
|
|
|
67,333
|
|
|
|
63,108
|
|
|
|
73,439
|
|
|
|
137,415
|
|
Mandatory
dividends, closing
date
|
|
|
(63,108 |
) |
|
|
(73,439 |
) |
|
|
(85,675 |
) |
|
|
(160,311 |
) |
Unrealized
gains on
available-for-sale investments, net of tax
|
|
|
664
|
|
|
|
(23,319 |
) |
|
|
16,772
|
|
|
|
31,383
|
|
Net
income in accordance with U.S.
GAAP
|
|
|
210,499
|
|
|
|
230,834
|
|
|
|
235,917
|
|
|
|
441,437
|
|
Balance
at December
31,
|
|
|
1,952,196
|
|
|
|
1,938,505
|
|
|
|
2,019,658
|
|
|
|
3,779,088
|
|
(u)
Earnings per share
The
following disclosure of net income per share information is not generally
required for presentation in the financial statements under Chilean GAAP
but is
required under U.S. GAAP. Earnings per share are determined by dividing net
income by the weighted average number of total shares outstanding.
|
|
Years
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Chilean
GAAP (1)
|
|
Ch$
|
|
|
Ch$
|
|
|
Ch$
|
|
Earnings
per share
|
|
|
1.12
|
|
|
|
1.30
|
|
|
|
1.52
|
|
Weighted
average number of total shares outstanding (in millions)
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations
|
|
|
0.99
|
|
|
|
-
|
|
|
|
-
|
|
Earnings
per share from discontinued operations
|
|
|
0.12
|
|
|
|
-
|
|
|
|
-
|
|
Net
income per share
|
|
|
1.12
|
|
|
|
1.22
|
|
|
|
1.24
|
|
Weighted
average number of total shares outstanding (in millions)
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
|
|
188,446.1
|
|
(1)
|
Basic
earnings per share have been calculated by dividing net income
by the
weighted average number of common shares outstanding during the
year.
There are no potentially dilutive effects on the calculation of
earnings
per share.
|
(v)
Article 9 Income Statements and Balance Sheets
The
presentation of the consolidated financial statements differs significantly
from
the format required by the Securities and Exchange Commission under rules
210.9
to 210.9-07 of Regulation S-X (Article 9). The Chilean GAAP balance sheets
and
income statements have been restated in constant Chilean pesos of December
31,
2006 purchasing power using the adjustment factor arising from the CPI, and
are
presented in the format prescribed by Article 9 of Regulation S-X. Additionally
all adjustments to U.S. GAAP included in paragraph (t) have been
incorporated.
The
principal reclassifications which were made to the primary Chilean GAAP
consolidated financial statements in order to present them in the Article
9
format are as follows:
1.
|
Elimination
of contingent assets and liabilities from the balance
sheet.
|
2.
|
Reclassification
of fees relating to contingent loans from interest income under
Chilean
GAAP to non interest income under Article
9.
|
3.
|
Presentation
in the Income Statements of the results of discontinued operations
arising
from the sale of the Santiago Express Division in 2004 and in accordance
with SFAS No. 144, “Accounting for the Impairment or Disposal of
long-Lived Assets”.
|
4.
|
Reclassification
of Mutual Funds registered in Other Assets under Chilean GAAP to
trading
securities under Article 9.
|
The
following balance sheets as of December 31, 2005 and 2006 have been prepared
in
accordance with U.S. GAAP, except for the inclusion of price-level restatement
permitted under item 18 of Regulation S-X , and are presented in accordance
with
the requirements of Article 9.
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
1,035,351
|
|
|
|
947,741
|
|
Interest
bearing deposits
|
|
|
302,407
|
|
|
|
148,220
|
|
Investments
under agreements to resell
|
|
|
23,610
|
|
|
|
30,807
|
|
Investments:
|
|
|
|
|
|
|
|
|
Trading
Investments
|
|
|
593,591
|
|
|
|
666,472
|
|
Available-for-sale
investments
|
|
|
575,028
|
|
|
|
345,108
|
|
Sub-total
|
|
|
2,529,987
|
|
|
|
2,138,348
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
9,572,446
|
|
|
|
10,914,351
|
|
Unearned
income
|
|
|
(133,657 |
) |
|
|
(149,905 |
) |
Allowance
for loan losses
|
|
|
(142,830 |
) |
|
|
(165,894 |
) |
Loans,
net
|
|
|
9,295,959
|
|
|
|
10,598,552
|
|
Premises
and equipment, net
|
|
|
264,130
|
|
|
|
266,508
|
|
Goodwill,
net
|
|
|
806,521
|
|
|
|
806,521
|
|
Intangibles,
net
|
|
|
78,096
|
|
|
|
61,064
|
|
Derivatives
|
|
|
428,888
|
|
|
|
372,688
|
|
Other
assets
|
|
|
313,037
|
|
|
|
439,985
|
|
Total
Assets
|
|
|
13,716,618
|
|
|
|
14,683,666
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non
interest bearing
|
|
|
2,214,790
|
|
|
|
2,482,997
|
|
Interest
bearing
|
|
|
6,033,248
|
|
|
|
6,909,335
|
|
Total
deposits
|
|
|
8,248,038
|
|
|
|
9,392,332
|
|
Short-term
borrowings
|
|
|
1,394,598
|
|
|
|
1,016,624
|
|
Investments
sold under agreement to repurchase
|
|
|
50,834
|
|
|
|
19,929
|
|
Derivatives
|
|
|
391,965
|
|
|
|
355,922
|
|
Other
liabilities
|
|
|
233,239
|
|
|
|
292,071
|
|
Long-term
debt
|
|
|
1,457,944
|
|
|
|
1,585,608
|
|
Sub-total
|
|
|
3,528,580
|
|
|
|
3,270,154
|
|
Minority
interest
|
|
|
1,495
|
|
|
|
1,522
|
|
Common
stock
|
|
|
761,853
|
|
|
|
761,853
|
|
Other
shareholders’ equity
|
|
|
1,176,652
|
|
|
|
1,257,805
|
|
Total
Liabilities and Shareholders’ Equity
|
|
|
13,716,618
|
|
|
|
14,683,666
|
|
Total
assets set forth in the basic Chilean GAAP balance sheets are reconciled
to
total assets in the Article 9 balance sheets above as follows:
|
|
As
of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Total
assets of the Bank under Chilean GAAP
|
|
|
13,766,439
|
|
|
|
14,843,439
|
|
Elimination
of off-setting assets and liabilities:
|
|
|
|
|
|
|
|
|
Contingent
loans
|
|
|
(949,177 |
) |
|
|
(1,022,687 |
) |
U.S.
GAAP adjustments (1)
|
|
|
899,356
|
|
|
|
862,914
|
|
Total
assets under Article 9 presentation
|
|
|
13,716,618
|
|
|
|
14,683,666
|
|
(1)
|
These
net assets represent those which differ in recorded cost from Chile
GAAP
or are non-existent in Chile GAAP.
|
The
following income statements have been prepared in accordance with U.S. GAAP
and
are presented in accordance with requirements of Article 9, except for the
inclusion of price-level restatement permitted under Item 18 of Regulation
S-X:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
|
709,774
|
|
|
|
910,932
|
|
|
|
1,039,334
|
|
Interest
on investments
|
|
|
94,310
|
|
|
|
117,104
|
|
|
|
118,620
|
|
Interest
on deposits with banks
|
|
|
455
|
|
|
|
2,422
|
|
|
|
33,409
|
|
Interest
on investments under agreement to resell
|
|
|
1,884
|
|
|
|
1,519
|
|
|
|
574
|
|
Total
interest
income
|
|
|
806,423
|
|
|
|
1,031,977
|
|
|
|
1,191,937
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
(131,394 |
) |
|
|
(248,769 |
) |
|
|
(340,409 |
) |
Interest
on investments under agreement to repurchase
|
|
|
(18,242 |
) |
|
|
(16,302 |
) |
|
|
(36,518 |
) |
Interest
on short-term debt
|
|
|
(27,910 |
) |
|
|
(47,855 |
) |
|
|
(63,562 |
) |
Interest
on long-term debt
|
|
|
(133,732 |
) |
|
|
(130,605 |
) |
|
|
(103,537 |
) |
Interest
on other borrowed funds
|
|
|
(7,749 |
) |
|
|
(5,072 |
) |
|
|
(2,547 |
) |
Price
level restatement (1)
|
|
|
(12,710 |
) |
|
|
(18,525 |
) |
|
|
(13,782 |
) |
Total
interest
expense
|
|
|
(331,737 |
) |
|
|
(467,128 |
) |
|
|
(560,355 |
) |
Net
interest
income
|
|
|
474,686
|
|
|
|
564,849
|
|
|
|
631,582
|
|
Provision
for loan losses
|
|
|
(68,924 |
) |
|
|
(65,930 |
) |
|
|
(123,022 |
) |
Net
interest income after provision for loan losses
|
|
|
405,762
|
|
|
|
489,919
|
|
|
|
508,560
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and commissions, net
|
|
|
86,488
|
|
|
|
87,427
|
|
|
|
125,593
|
|
Gain
on trading activities
|
|
|
32,791
|
|
|
|
18,166
|
|
|
|
64,338
|
|
Net
gains (losses) on foreign exchange activities
|
|
|
8,050
|
|
|
|
2,741
|
|
|
|
(48,708 |
) |
Other
|
|
|
29,729
|
|
|
|
22,101
|
|
|
|
(15,583 |
) |
Total
other
income
|
|
|
157,058
|
|
|
|
130,435
|
|
|
|
125,640
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
(137,981 |
) |
|
|
(142,170 |
) |
|
|
(159,723 |
) |
Net
premises and equipment expenses
|
|
|
(50,386 |
) |
|
|
(50,453 |
) |
|
|
(49,936 |
) |
Administration
expenses
|
|
|
(89,586 |
) |
|
|
(92,395 |
) |
|
|
(99,676 |
) |
Other
expenses
|
|
|
(51,177 |
) |
|
|
(61,868 |
) |
|
|
(36,470 |
) |
Minority
interest
|
|
|
(194 |
) |
|
|
(136 |
) |
|
|
(151 |
) |
Total
other
expenses
|
|
|
(329,324 |
) |
|
|
(347,022 |
) |
|
|
(345,956 |
) |
Income
from continuing operations before income taxes
|
|
|
233,496
|
|
|
|
282,329
|
|
|
|
288,244
|
|
Income
taxes from continuing operations
|
|
|
(46,597 |
) |
|
|
(51,495 |
) |
|
|
(52,327 |
) |
Income
from continuing operations
|
|
|
186,899
|
|
|
|
230,834
|
|
|
|
235,917
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
from discontinued operations of Santiago Express Division
|
|
|
5,341
|
|
|
|
-
|
|
|
|
-
|
|
Gain
on disposal of Santiago Express Division
|
|
|
23,093
|
|
|
|
-
|
|
|
|
-
|
|
Income
tax expense
|
|
|
(4,834 |
) |
|
|
-
|
|
|
|
-
|
|
Income
from discontinued operations
|
|
|
23,600
|
|
|
|
-
|
|
|
|
-
|
|
Net
income
|
|
|
210,499
|
|
|
|
230,834
|
|
|
|
235,917
|
|
Other
comprehensive income
|
|
|
664
|
|
|
|
(23,319 |
) |
|
|
16,772
|
|
Comprehensive
income
|
|
|
211,163
|
|
|
|
207,515
|
|
|
|
251,689
|
|
(1)
|
The
price-level adjustment includes the effect of inflation primarily
resulting from interest-earning assets and interest-bearing liabilities.
As the Bank does not record the price-level adjustment for separate
categories of assets and liabilities, such adjustment is presented
as a
component of interest expense.
|
Consolidated
statements of cash flows
Under
U.S.
GAAP, changes in other assets and liabilities such as other receivables,
prepaid
assets and accruals for salaries and vacations should be presented as cash
flows
from operating activities. Under Chilean GAAP, these are presented as
cash flows from investing activities. Additionally, the non-cash
movements related to assets received in lieu of payments are not reported
as
supplemental information under Chilean GAAP, as usually required under U.S.
GAAP.
The
consolidated statements of cash flows have been prepared in accordance with
Chilean GAAP, and are presented in accordance with the requirements of Article
9, except for the inclusion of price-level restatement permitted under item
18
of Regulation S-X. Presentation of the cash flow statements under U.S. GAAP
would require additional breakdown of certain line items presented “net” in the
Chilean GAAP cash flow. Additionally, for Chilean GAAP purposes, certain
items
classified as “Other assets” are defined as cash equivalent for cash flow
purposes which would also be defined as cash equivalents in the balance sheet
in
U.S. GAAP. And, lastly cash flow from purchases, sales and maturity of trading
securities are presented as investing activities in Chilean GAAP while they
would be presented as operating activity in U.S. GAAP.
The
following condensed consolidated statements of cash flows have been prepared
in
accordance with U.S. GAAP, and are presented in accordance with the requirements
of Article 9 as described above:
|
|
Years
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,018,046
|
|
|
|
(498,836 |
) |
|
|
508,260
|
|
Net
cash used in (provided by) investing activities
|
|
|
(1,673,702 |
) |
|
|
149,928
|
|
|
|
(1,268,389 |
) |
Net
cash provided by financing activities
|
|
|
590,145
|
|
|
|
593,002
|
|
|
|
608,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flow
|
|
|
(65,511 |
) |
|
|
244,094
|
|
|
|
(151,765 |
) |
Inflation
effect on cash and cash equivalents
|
|
|
1,784
|
|
|
|
3,430
|
|
|
|
(6,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and due from banks
|
|
|
(63,727 |
) |
|
|
247,524
|
|
|
|
(158,524 |
) |
Cash
and due from Banks, beginning of the year
|
|
|
1,067,134
|
|
|
|
1,003,407
|
|
|
|
1,250,931
|
|
Cash
and due from banks, end of the year
|
|
|
1,003,407
|
|
|
|
1,250,981
|
|
|
|
1,092,407
|
|
(w)
Income taxes
The
reconciliation of the provision for income taxes charged to income under
Chilean
GAAP to the corresponding amounts under U.S. GAAP is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Charge
for the period under Chilean GAAP
|
|
|
48,587
|
|
|
|
50,885
|
|
|
|
58,199
|
|
U.S.
GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax effect of applying SFAS No. 109
|
|
|
(26 |
) |
|
|
(28 |
) |
|
|
-
|
|
Deferred
tax effect of U.S. GAAP adjustments
|
|
|
2,870
|
|
|
|
638
|
|
|
|
(5,872 |
) |
Charge
for the period under U.S. GAAP
|
|
|
51,431
|
|
|
|
51,495
|
|
|
|
52,327
|
|
Deferred
tax assets and liabilities for the Bank under U.S. GAAP are summarized as
follows:
|
|
As
of December 31,
|
|
Temporary
differences
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Assets
|
|
|
|
|
|
|
Assets
received in lieu of payment
|
|
|
1,629
|
|
|
|
529
|
|
Foreign
exchange
|
|
|
774
|
|
|
|
768
|
|
Accrued
interest
|
|
|
3,032
|
|
|
|
2,808
|
|
Allowance
for loan losses
|
|
|
10,361
|
|
|
|
19,841
|
|
Other
provisions
|
|
|
14,465
|
|
|
|
14,598
|
|
Derivatives
|
|
|
1,336
|
|
|
|
4,915
|
|
Bank
premises and equipment
|
|
|
8,628
|
|
|
|
4,426
|
|
Other
|
|
|
3,214
|
|
|
|
281
|
|
Total
deferred tax assets
|
|
|
43,439
|
|
|
|
48,166
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
Temporary
differences
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Liabilities
|
|
|
|
|
|
|
Accelerated
depreciation
|
|
|
2,629
|
|
|
|
3,522
|
|
Valuation
of investments
|
|
|
(21 |
) |
|
|
2,129
|
|
Prepaid
expenses
|
|
|
1,536
|
|
|
|
1,945
|
|
Other
|
|
|
1,266
|
|
|
|
841
|
|
Total
deferred tax liabilities
|
|
|
5,410
|
|
|
|
8,437
|
|
Net
deferred tax assets
|
|
|
38,029
|
|
|
|
39,729
|
|
The
Bank
has not recorded a valuation allowance against any of its deferred tax assets
as
it believes that it is more likely than not that it will recover their
value.
The
U.S.
GAAP provision for income taxes differs from the amount of income tax provision
determined by applying the Chilean statutory income tax rate to U.S. GAAP
pretax
income as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Chilean
taxes due at the statutory rate
|
|
|
44,529
|
|
|
|
47,996
|
|
|
|
49,001
|
|
Increase
(decrease) in rates resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
income
|
|
|
(96 |
) |
|
|
(6,009 |
) |
|
|
(6,268 |
) |
Non-deductible
expenses
|
|
|
4,485
|
|
|
|
7,254
|
|
|
|
6,698
|
|
Amortization
of intangibles
|
|
|
2,513
|
|
|
|
2,254
|
|
|
|
2,895
|
|
At
effective tax rate
|
|
|
51,431
|
|
|
|
51,495
|
|
|
|
52,327
|
|
The
Chilean statutory first category (corporate) income tax rate was 17% for
the
years ended December 31, 2004, 2005 and 2006.
(x)
Accumulated other comprehensive income
The
Bank
presents accumulated other comprehensive income and its components with the
objective of reporting a measure of all changes in shareholders’ equity that
result from transactions and other economic events of the period other than
transactions with owners (“comprehensive income”). Comprehensive income is the
total net income and other non-owner equity transactions that result in changes
in net equity. The following represents accumulated other comprehensive income
of the Bank, net of deferred taxes as of December 31, 2004, 2005 and
2006:
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Beginning
balance
|
|
|
(21,826 |
) |
|
|
3,710
|
|
|
|
(18,116 |
) |
Price-level restatement
(1)
|
|
|
453
|
|
|
|
(77 |
) |
|
|
376
|
|
Unrealized
gains on securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains arising during the period
|
|
|
25,415
|
|
|
|
(4,320 |
) |
|
|
21,095
|
|
Less:
reclassification adjustment for gains included in net
income
|
|
|
5,208
|
|
|
|
(885 |
) |
|
|
4,323
|
|
Net
unrealized gains
|
|
|
20,207
|
|
|
|
(3,435 |
) |
|
|
16,772
|
|
Ending
balance
|
|
|
(1,166 |
) |
|
|
198
|
|
|
|
(968 |
) |
|
|
As
of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCh$
|
|
|
Mch$
|
|
|
MCh$
|
|
Beginning
balance
|
|
|
6,488
|
|
|
|
(1,104 |
) |
|
|
5,384
|
|
Price-level restatement
(1)
|
|
|
(219 |
) |
|
|
38
|
|
|
|
(181 |
) |
Unrealized
gains on securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains arising during the period
|
|
|
(33,153 |
) |
|
|
5,636
|
|
|
|
(27,517 |
) |
Less:
reclassification adjustment for net gains/losses included in
net income
|
|
|
5,058
|
|
|
|
(860 |
) |
|
|
4,198
|
|
Net
unrealized gains
|
|
|
(28,095 |
) |
|
|
4,776
|
|
|
|
(23,319 |
) |
Ending
balance
|
|
|
(21,826 |
) |
|
|
3,710
|
|
|
|
(18,116 |
) |
|
|
|
|
|
|
As
of December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Beginning
balance
|
|
|
5,828
|
|
|
|
(991 |
) |
|
|
4,837
|
|
Price-level restatement
(1)
|
|
|
(141 |
) |
|
|
23
|
|
|
|
(117 |
) |
Unrealized
gains on securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains arising during the period
|
|
|
(21,003 |
) |
|
|
3,570
|
|
|
|
(17,433 |
) |
Less:
reclassification adjustment for net gains/losses included in net
income
|
|
|
21,804
|
|
|
|
(3,707 |
) |
|
|
18,097
|
|
Net
unrealized gains
|
|
|
801
|
|
|
|
(137 |
) |
|
|
664
|
|
Ending
balance
|
|
|
6,488
|
|
|
|
(1,104 |
) |
|
|
5,384
|
|
(1)
|
Reflects
the effect of inflation on the accumulated other comprehensive
income at
the beginning of each period, adjusted to constant pesos as of
December
31, 2006.
|
(y)
Segment Information
The
following disclosure of segment information is not required for presentation
in
the financial statements under Chilean GAAP, however in accordance with SFAS
No.
131 “Disclosures about Segments of an Enterprise and Related Information” the
Bank discloses the following segment information based on the management
approach. The Bank’s internal organization is structured on the basis of the
client segments the Bank serves. We provide a full range of financial services
to corporate and individual customers. We divide clients in this segment
into
the following segments:
·
|
Lower-middle
to middle-income (Santander Banefe), consisting of individuals with
monthly income between Ch$120,000 (US$225) and Ch$400,000 (US$
749), which
are served through our Banefe branch network. This segment accounts
for
5.1% of our loans as of December 31, 2006. This segment offers
customers a
range of products, including consumer loans, credit cards, auto
loans,
residential mortgage loans, debit card accounts, savings products,
mutual
funds and insurance brokerage.
|
·
|
Middle-
and upper-income, consisting of individuals with a monthly income
greater than Ch$400,000 (US$749). Clients in this segment account
for
38.1% of our loans as of December 31, 2006 and are offered a range
of
products, including consumer loans, credit cards, auto loans, commercial
loans, foreign trade financing, residential mortgage loans, checking
accounts, savings products, mutual funds and insurance
brokerage.
|
·
|
Small
businesses, consisting of small companies with annual sales less than
Ch$1,200 million (US$2.2 million). As of December 31, 2006, small
companies represented approximately 16.0% of our total loans outstanding.
Customers in this segment are offered a range of products, including
commercial loans, leasing, factoring, foreign trade, credit cards,
mortgage loans, checking accounts, savings products, mutual funds
and
insurance brokerage.
|
The
Middle-market comprised of mid-sized companies, companies in the real estate
sector and large companies as follows:
·
|
Mid-sized
companies, consisting of companies with annual sales over Ch$1,200
million (US$2.2 million) and up to Ch$3,500 million (US$6.5 million).
Customers in this segment are offered a wide range of products,
including
commercial loans, leasing, factoring, foreign trade, credit cards,
mortgage loans, checking accounts, cash management, treasury services,
financial advisory, savings products, mutual funds and insurance
brokerage. As of December 31, 2006, these clients represented 8.2%
of our
total loans outstanding.
|
·
|
Real
estate. This segment also includes all companies in the real estate
sector. As of December 31, 2006, these clients represented 4.7%
of our
total loans outstanding. To clients in the real estate sector we
offer
apart from traditional banking services, specialized services for
financing primarily residential projects in order to increase the
sale of
residential mortgage loans.
|
·
|
Large
companies, consisting of companies with annual sales over Ch$3,500
million (US$6.5 million). Customers in this segment are offered
a wide
range of products, including commercial loans, leasing, factoring,
foreign
trade, credit cards, mortgage loans, checking accounts, cash management,
treasury services, financial advisory, savings products, mutual
funds and
insurance brokerage. As of December 31, 2006, these clients represented
9.6% of our total loans
outstanding.
|
The
Wholesale segment is comprised of:
·
|
Companies
that are foreign multinationals or part of a large Chilean economic
group
with sales over Ch$3,500 million (US$6.5 million). As of December
31,
2006, these clients represented 15.1% of our total loans outstanding.
Customers in this segment are offered a wide range of products,
including
commercial loans, leasing, factoring, foreign trade, mortgage loans,
checking accounts, cash management, treasury services, financial
advisory,
savings products, mutual funds and insurance
brokerage.
|
The
Institutional segment is comprised of:
·
|
Institutional
corporations such as universities, government agencies, municipalities
and
regional governments. As of December 31, 2006, these clients represented
1.9% of our total loans outstanding and offer customers a range
of
products, including commercial loans, leasing, factoring, foreign
trade,
credit cards, mortgage loans, checking accounts, cash management,
savings
products, mutual funds and insurance
brokerage.
|
·
|
The
Treasury Division provides sophisticated financial products mainly
to
companies in the wholesale banking and the middle market segments.
This
includes products such as short-term financing and funding, securities
brokerage, interest rate and foreign currency derivatives, securitization
services and other tailor made financial products. The Treasury
division
also manages the Bank’s trading positions as well as the non-trading
investment portfolio.
|
·
|
Our
leasing subsidiary (Santiago Leasing S.A.) has been segmented into
the
above categories. The subsidiary Santander S.A. Agente de Valores
is
included in the Treasury Division and the mutual fund and insurance
brokerage subsidiaries are included in the various sub-segments
(other
than in the Treasury Division).
|
The
accounting policies of the segments are the same as those described in the
summary of significant accounting principles, and are customized to meet
the
needs of management of the Bank. The Bank derives a majority of its revenues
from interest income and the chief operating decision maker relies primarily
on
net interest revenue to assess the performance of the segments and make
decisions about resources to be allocated to the segments.
The
table
below sets forth our lines of business and certain statistical information
relating to each of them as of December 31, 2004, 2005 and
2006.
For
the twelve month period ended December 31, 2006
|
|
(millions
of constant Ch$ as of December 31, 2006)
|
|
Segment
|
|
Loans
|
|
|
Net
interest
revenue
|
|
|
Fees
|
|
|
Net
loan loss
allowances
(1)
|
|
|
Financial
transactions,
net
(2)
|
|
|
Net
segment
contribution
(3)
|
|
Individuals
|
|
|
5,097,010
|
|
|
|
332,444
|
|
|
|
103,476
|
|
|
|
(101,753) |
|
|
|
-
|
|
|
|
334,167
|
|
Santander
Banefe
|
|
|
602,960
|
|
|
|
104,505
|
|
|
|
22,059
|
|
|
|
(51,893) |
|
|
|
-
|
|
|
|
74,671
|
|
Middle-upper
income
|
|
|
4,487,044
|
|
|
|
227,590
|
|
|
|
81,374
|
|
|
|
(49,957) |
|
|
|
-
|
|
|
|
259,007
|
|
Santiago
Leasing
|
|
|
7,006
|
|
|
|
349
|
|
|
|
43
|
|
|
|
97
|
|
|
|
-
|
|
|
|
489
|
|
SMEs
|
|
|
1,890,736
|
|
|
|
129,854
|
|
|
|
28,671
|
|
|
|
(20,840) |
|
|
|
-
|
|
|
|
137,685
|
|
Total
Retail
|
|
|
6,987,746
|
|
|
|
462,298
|
|
|
|
132,147
|
|
|
|
(122,593) |
|
|
|
-
|
|
|
|
471,852
|
|
Middle-market
|
|
|
2,679,108
|
|
|
|
73,820
|
|
|
|
13,981
|
|
|
|
(720) |
|
|
|
-
|
|
|
|
87,081
|
|
Mid-sized
companies
|
|
|
962,649
|
|
|
|
33,341
|
|
|
|
6,846
|
|
|
|
(3,501) |
|
|
|
-
|
|
|
|
36,686
|
|
Real
estate
|
|
|
554,294
|
|
|
|
10,350
|
|
|
|
1,422
|
|
|
|
1,634
|
|
|
|
-
|
|
|
|
13,406
|
|
Large
companies
|
|
|
1,128,536
|
|
|
|
28,456
|
|
|
|
5,508
|
|
|
|
680
|
|
|
|
-
|
|
|
|
34,644
|
|
Santiago
Leasing
|
|
|
33,629
|
|
|
|
1,673
|
|
|
|
205
|
|
|
|
467
|
|
|
|
-
|
|
|
|
2,345
|
|
Wholesale
|
|
|
1,782,052
|
|
|
|
30,469
|
|
|
|
7,536
|
|
|
|
703
|
|
|
|
-
|
|
|
|
38,708
|
|
Institutional
|
|
|
229,242
|
|
|
|
9,510
|
|
|
|
1,201
|
|
|
|
481
|
|
|
|
-
|
|
|
|
11,192
|
|
Treasury
(4)
|
|
|
-
|
|
|
|
32,479
|
|
|
|
1,303
|
|
|
|
-
|
|
|
|
51,604
|
|
|
|
85,386
|
|
Others
(5)
|
|
|
110,811
|
|
|
|
3,678
|
|
|
|
6,382
|
|
|
|
(893) |
|
|
|
-
|
|
|
|
9,167
|
|
Total
|
|
|
11,788,959
|
|
|
|
612,254
|
|
|
|
162,550
|
|
|
|
(123,022) |
|
|
|
51,604
|
|
|
|
703,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,961) |
|
Other
income and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,579) |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309,283) |
|
Price
level restatement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,782) |
|
Net
income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,781
|
|
(1)
|
Includes
allowances for loan losses, charge-offs and loan loss
recoveries.
|
(2)
|
Equal
to the sum of net gains (loss) from trading and brokerage and foreign
exchange transactions, net
|
(3)
|
Equal
to net interest revenue plus fee income plus financial transactions,
net
minus allowances for loan losses.
|
(4)
|
Includes
Santander S.A. Agente de Valores
|
(5)
|
Includes
contribution of other Bank subsidiaries and other non-segmented
items.
|
For
the twelve month period ended December 31, 2005
|
|
(millions
of constant Ch$ as of December 31, 2006)
|
|
Segment
|
|
Loans
|
|
|
Net
interest
revenue
|
|
|
Fees
|
|
|
Net
loan
loss
allowances (1)
|
|
|
Financial
transactions,
net
(2)
|
|
|
Net
segment
contribution
(3)
|
|
Individuals
|
|
|
4,296,691
|
|
|
|
278,433
|
|
|
|
76,057
|
|
|
|
(52,255) |
|
|
|
-
|
|
|
|
302,235
|
|
Santander
Banefe
|
|
|
501,842
|
|
|
|
84,064
|
|
|
|
16,240
|
|
|
|
(26,828) |
|
|
|
-
|
|
|
|
73,476
|
|
Middle-upper
income
|
|
|
3,794,345
|
|
|
|
194,207
|
|
|
|
59,817
|
|
|
|
(25,457) |
|
|
|
-
|
|
|
|
228,567
|
|
Santiago
Leasing
|
|
|
504
|
|
|
|
162
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
192
|
|
SMEs
|
|
|
1,493,527
|
|
|
|
93,657
|
|
|
|
19,136
|
|
|
|
(15,737) |
|
|
|
-
|
|
|
|
97,056
|
|
Total
Retail
|
|
|
5,790,218
|
|
|
|
372,090
|
|
|
|
95,193
|
|
|
|
(67,992) |
|
|
|
-
|
|
|
|
399,291
|
|
Middle-market
|
|
|
2,350,111
|
|
|
|
53,332
|
|
|
|
8,611
|
|
|
|
1,113
|
|
|
|
-
|
|
|
|
63,056
|
|
Mid-sized
companies
|
|
|
822,159
|
|
|
|
25,136
|
|
|
|
4,265
|
|
|
|
(1,787) |
|
|
|
-
|
|
|
|
27,614
|
|
Real
estate
|
|
|
510,010
|
|
|
|
8,546
|
|
|
|
1,091
|
|
|
|
(712) |
|
|
|
-
|
|
|
|
8,925
|
|
Large
companies
|
|
|
1,015,521
|
|
|
|
18,874
|
|
|
|
3,255
|
|
|
|
3,469
|
|
|
|
-
|
|
|
|
25,598
|
|
Santiago
Leasing
|
|
|
2,421
|
|
|
|
776
|
|
|
|
-
|
|
|
|
143
|
|
|
|
-
|
|
|
|
919
|
|
Wholesale
|
|
|
1,815,041
|
|
|
|
27,083
|
|
|
|
7,636
|
|
|
|
1,960
|
|
|
|
-
|
|
|
|
36,679
|
|
Institutional
|
|
|
197,285
|
|
|
|
6,640
|
|
|
|
1,668
|
|
|
|
(16) |
|
|
|
-
|
|
|
|
8,292
|
|
Treasury
(4)
|
|
|
-
|
|
|
|
77,238
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,812
|
|
|
|
87,050
|
|
Others
(5)
|
|
|
206,679
|
|
|
|
21,883
|
|
|
|
28,192
|
|
|
|
57
|
|
|
|
-
|
|
|
|
50,131
|
|
Total
|
|
|
10,359,334
|
|
|
|
558,266
|
|
|
|
141,300
|
|
|
|
(64,879) |
|
|
|
9,812
|
|
|
|
644,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,407) |
|
Other
income and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,923) |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284,968) |
|
Price
level restatement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,524) |
|
Net
income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
allowances for loan losses, charge-offs and loan loss
recoveries.
|
(2)
|
Equal
to the sum of net gains (loss) from trading and brokerage and foreign
exchange transactions, net
|
(3)
|
Equal
to net interest revenue plus fee income plus financial transactions,
net
minus allowances for loan losses.
|
(4)
|
Includes
Santander S.A. Agente de Valores
|
(5)
|
Includes
contribution of other Bank subsidiaries and other non-segmented
items.
|
For
the twelve month period ended December 31, 2004
|
|
(millions
of constant Ch$ as of December 31, 2006)
|
|
Segment
|
|
Loans
|
|
|
Net
interest
revenue
|
|
|
Fees
|
|
|
Net
loan
loss
allowances (1)
|
|
|
Financial
transactions,
net
(2)
|
|
|
Net
segment
contribution
(3)
|
|
Individuals
|
|
|
3,571,781
|
|
|
|
241,092
|
|
|
|
66,574
|
|
|
|
(73,566) |
|
|
|
-
|
|
|
|
234,100
|
|
Santander
Banefe
|
|
|
419,725
|
|
|
|
74,749
|
|
|
|
13,633
|
|
|
|
(24,633) |
|
|
|
-
|
|
|
|
63,749
|
|
Middle-upper
income
|
|
|
3,149,990
|
|
|
|
166,129
|
|
|
|
52,941
|
|
|
|
(48,926) |
|
|
|
-
|
|
|
|
170,144
|
|
Santiago
Leasing
|
|
|
2,066
|
|
|
|
214
|
|
|
|
-
|
|
|
|
(7) |
|
|
|
-
|
|
|
|
207
|
|
SMEs
|
|
|
1,176,385
|
|
|
|
73,587
|
|
|
|
14,496
|
|
|
|
(16,630) |
|
|
|
-
|
|
|
|
71,453
|
|
Total
Retail
|
|
|
4,748,166
|
|
|
|
314,679
|
|
|
|
81,070
|
|
|
|
(90,196) |
|
|
|
-
|
|
|
|
305,553
|
|
Middle-market
|
|
|
2,114,160
|
|
|
|
51,911
|
|
|
|
8,543
|
|
|
|
8,156
|
|
|
|
-
|
|
|
|
68,610
|
|
Mid-sized
companies
|
|
|
711,571
|
|
|
|
22,621
|
|
|
|
3,469
|
|
|
|
(4,015) |
|
|
|
-
|
|
|
|
22,075
|
|
Real
estate
|
|
|
475,693
|
|
|
|
9,738
|
|
|
|
748
|
|
|
|
(2,244) |
|
|
|
-
|
|
|
|
8,242
|
|
Large
companies
|
|
|
916,977
|
|
|
|
18,526
|
|
|
|
4,326
|
|
|
|
14,447
|
|
|
|
-
|
|
|
|
37,299
|
|
Santiago
Leasing
|
|
|
9,919
|
|
|
|
1,026
|
|
|
|
-
|
|
|
|
(32) |
|
|
|
-
|
|
|
|
994
|
|
Wholesale
|
|
|
1,956,499
|
|
|
|
25,904
|
|
|
|
6,875
|
|
|
|
3,286
|
|
|
|
-
|
|
|
|
36,065
|
|
Institutional
|
|
|
163,785
|
|
|
|
5,654
|
|
|
|
1,570
|
|
|
|
(562) |
|
|
|
-
|
|
|
|
6,662
|
|
Treasury
(4)
|
|
|
-
|
|
|
|
72,802
|
|
|
|
3,666
|
|
|
|
-
|
|
|
|
40,035
|
|
|
|
116,503
|
|
Others
(5)
|
|
|
138,412
|
|
|
|
31,559
|
|
|
|
26,280
|
|
|
|
(6,135) |
|
|
|
-
|
|
|
|
51,704
|
|
Total
|
|
|
9,121,022
|
|
|
|
502,509
|
|
|
|
128,004
|
|
|
|
(85,451) |
|
|
|
40,035
|
|
|
|
585,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,294) |
|
Other
income and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,295) |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283,883) |
|
Price
level restatement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,680) |
|
Net
income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
allowances for loan losses, charge-offs and loan loss
recoveries.
|
(2)
|
Equal
to the sum of net gains (loss) from trading and brokerage and foreign
exchange transactions, net
|
(3)
|
Equal
to net interest revenue plus fee income plus financial transactions,
net
minus allowances for loan losses.
|
(4)
|
Includes
Santander S.A. Agente de Valores
|
(5)
|
Includes
contribution of other Bank subsidiaries and other non-segmented
items.
|
(z)
Estimated Fair Value of Financial Instruments
The
estimated fair value of a financial instrument is defined as the amount at
which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. For those financial
instruments with no quoted market prices available, fair values have been
estimated using present values or other valuation techniques. These techniques
are inherently subjective and are significantly affected by the assumptions
used, including the discounts rate, estimates of future cash flows and
prepayment assumptions. In that regard, the derived fair value estimates
cannot
be substantiated by comparison to independent markets and, in many cases,
could
not be realized in immediate settlement of the instruments.
In
addition, the estimated fair values presented below do not attempt to estimate
the value of the Bank’s revenue generating businesses and anticipated future
business activities, and therefore do not represent the Bank’s value as a going
concern.
The
following notes summarize the major methods and assumptions used in estimating
the fair values of financial instruments:
·
|
Cash
and due from banks
|
The
book
value of cash and due from banks approximates its estimated fair value due
to
the short-term nature of these instruments.
·
|
Spot
foreign exchange
transactions
|
The
book
value of spot foreign exchange transactions approximates its estimated fair
value due to the short-term nature of these instruments.
·
|
Financial
investments, investments under agreements to repurchase and investments
under agreements to
resell
|
The
estimated fair value of these financial instruments was determined using
either
quoted market prices or dealer quotes where available, or quoted market prices
of financial instruments with similar characteristics. Investments
maturing in less than one year are valued at book value because they are,
due to
their relatively short period to maturity, considered to have a fair value
which
is not materially different from their book value.
For
variable-rate loans that reprice frequently and have no significant change
in
credit risk, estimated fair values are based on book values. The
estimated fair-values for certain mortgage loans, credit card loans, and
other
consumer loans are based on quoted market prices of similar loans, adjusted
for
differences in loan characteristics. Fair values of commercial loans
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Fair values for non-accruing loans are estimated
using discounted cash flow analyses arising from the liquidation of the
underlying collateral values, where applicable (or other expected sources
of
payments), at an estimated discount rate.
The
fair
value disclosed for non-interest bearing deposits and savings accounts is
the
amount payable at the reporting date and, as a result, is equal to the carrying
amount. Fair value for time deposits is estimated using a discounted
cash flow calculation that applies interest rates currently offered to a
schedule of aggregated expected monthly maturities on time
deposits. The value of long-term relationships with depositors is not
taken into account in estimating the fair values disclosed.
·
|
Chilean
Central Bank borrowings, Mortgage finance bonds and Other
borrowings
|
The
fair
value of these financial instruments is estimated using discounted cash flow
analyses based on the Bank’s current incremental borrowing rates for similar
types of borrowing arrangements with similar remaining maturities.
The
estimated fair value of foreign exchange forward contracts was determined
using
quoted market prices of financial instruments with similar
characteristics.
The
fair
value of interest rate swaps represents the estimated amount the Bank would
expect to receive or pay to terminate the contracts or agreements, taking
into
account current interest rates.
As
no
quoted market prices are available for the interest rate swap, cross currency
swap and forward exchange rate instruments held by the Bank, such estimates
have
been estimated using modeling and other valuation techniques.
The
estimated fair values of financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
1,035,351
|
|
|
|
1,035,351
|
|
|
|
947,741
|
|
|
|
947,741
|
|
Interest
bearing deposits
|
|
|
302,406
|
|
|
|
302,406
|
|
|
|
148,220
|
|
|
|
148,220
|
|
Investment
under agreements to resell
|
|
|
23,610
|
|
|
|
23,610
|
|
|
|
30,807
|
|
|
|
30,807
|
|
Financial
investments
|
|
|
1,168,619
|
|
|
|
1,168,619
|
|
|
|
981,015
|
|
|
|
981,015
|
|
Loans,
net (2)
|
|
|
9,295,959
|
|
|
|
10,037,509
|
|
|
|
10,598,552
|
|
|
|
11,057,159
|
|
Derivatives
instruments
|
|
|
418,795
|
|
|
|
428,888
|
|
|
|
372,688
|
|
|
|
372,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
8,100,586
|
|
|
|
8,379,744
|
|
|
|
9,392,332
|
|
|
|
9,405,393
|
|
Investments
under agreements to repurchase
|
|
|
50,834
|
|
|
|
50,834
|
|
|
|
19,929
|
|
|
|
19,929
|
|
Short
and long-term debt
|
|
|
2,852,542
|
|
|
|
2,508,375
|
|
|
|
2,602,232
|
|
|
|
2,877,179
|
|
Derivative
financial instruments
|
|
|
391,823
|
|
|
|
391,965
|
|
|
|
355,922
|
|
|
|
355,922
|
|
(1)
|
Carrying
amounts correspond to Chilean GAAP figures plus U.S. GAAP adjustments
described in paragraph (t) which are shown in Article 9 balance
sheet
paragraph (v).
|
(2)
|
The
amounts of loans in the above table excludes contingent loans since
they
represent undisbursed amounts under undrawn letters of credit and
other
credit guarantees granted by the
Bank.
|
(aa)
Obligations Arising From Lease Commitments
The
bank
leases certain premises, which are accounted for as operating leases. The
amounts payable under the terms of the leases, which are not reflected on
the
consolidated balance sheets, are shown in the following table and reflect
future
rental expenses in constant Chilean pesos as of December 31, 2006:
|
|
As
of December 31,
|
|
|
|
2006
|
|
|
|
MCh$
|
|
Due
within 1 year
|
|
|
8,383
|
|
Due
after 1 year but within 2 years
|
|
|
7,363
|
|
Due
after 2 years but within 3 years
|
|
|
5,394
|
|
Due
after 3 years but within 4 years
|
|
|
3,006
|
|
Due
after 4 years but within 5 years
|
|
|
1,539
|
|
Due
after 5 years
|
|
|
254
|
|
Total
|
|
|
25,939
|
|
The
rental
expense on premises for the Bank was MCh$10,127, MCh$10,206 and MCh$11,188
for
the years ended December 31, 2004, 2005 and 2006, respectively.
(ab)
Contingent liabilities
Contingent
liabilities consist of open and unused letters of credit, together with
guarantees granted by the Bank in Chilean pesos, UF and foreign currencies
(principally U.S. dollars). The liability represents the Bank’s obligations
under such agreements. The Bank’s rights under these agreements are recognized
as assets on the Bank’s Chilean GAAP balance sheets under the caption
“Contingent loans” (See note 5).
|
|
As
of December 31, 2006
|
|
|
|
Book
value
|
|
|
Contract
amount
|
|
|
|
MCh$
|
|
|
MCh$
|
|
Standby
letters of credits
|
|
|
86
|
|
|
|
166,248
|
|
Foreign
office guarantees
|
|
|
1,457
|
|
|
|
576,607
|
|
Performance
bond
|
|
|
244
|
|
|
|
281,193
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,787
|
|
|
|
1,024,048
|
|
Guarantees
in the form of performance bonds, standby letters of credit and foreign office
guarantees are issued in connection with agreements made by customers to
counterparties. If the customer fails to comply with the agreement, the
counterparty may enforce the performance bond as a remedy. Credit risk arises
from the possibility that the customer may not be able to repay the Bank
for
performance bonds. To mitigate credit risk, the Bank generally determines
the
need for specific covenant, guarantee and collateral requirements on a
case-by-case basis, depending on the nature of the financial instrument and
the
customer’s creditworthiness.
The
expiration of guarantees per period is as follows:
|
|
As
of December 31, 2006
|
|
|
|
Due
within
1
year
|
|
|
Due
after 1
year
but
within
3
years
|
|
|
Due
after 3
years
but
within
5
years
|
|
|
Due
after
5
years
|
|
|
Total
|
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
|
MCh$
|
|
Standby
letters of credits
|
|
|
102,707
|
|
|
|
50,448
|
|
|
|
13,093
|
|
|
|
-
|
|
|
|
166,248
|
|
Foreign
office guarantees
|
|
|
553,833
|
|
|
|
22,132
|
|
|
|
642
|
|
|
|
-
|
|
|
|
576,607
|
|
Performance
bonds
|
|
|
275,723
|
|
|
|
5,403
|
|
|
|
67
|
|
|
|
-
|
|
|
|
281,193
|
|
Total
|
|
|
932,263
|
|
|
|
77,983
|
|
|
|
13,802
|
|
|
|
-
|
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1,024,048
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(ac)
Recent accounting pronouncements
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On
November 3, 2005, the FASB issued FASB Staff Position (FSP) FAS
115-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application
to
Certain Investments.” This FSP, which is effective for reporting periods
beginning after December 15, 2005, replaces the impairment evaluation
guidance (paragraphs 10-18) of EITF issue No.03-1, The Meaning
of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, with references to existing other-than-temporary (OTT)
impairment guidance. The FSP also clarifies that an investor
should recognize an impairment loss no later than when the impairment
is
deemed other than temporary, even if a decision to sell has not
been
made. The adoption of this FSP did not have a material effect
on the Bank´s consolidated financial position, results of operations or
cash flows.
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In
May, 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”. This Statement is
effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Account Principles Board Opinion
20 previously required that most voluntary changes in accounting
principle
be recognized by including in net income of the period of the change
the
cumulative effect of changing to the new accounting
principle. This Statement requires retrospective application to
prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific
effects
or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting
change on one or more individual prior periods presented, this
Statement
requires that the new accounting principle be applied to the balances
of
assets and liabilities as of the beginning of the earliest period
for
which retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings
(or other
appropriate components of equity or net assets in the statement
of
financial position) for that period rather than being reported
in an
income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle
to all
prior periods, this Statement requires that the new accounting
principle
be applied as if it were adopted prospectively from the earliest
date
practicable.
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On
February, 2006, the FASB issued SFAS No. 155 “Accounting for Certain
Hybrid Financial Instruments” an amendment at FASB Statements No. 133 and
140. This Statement:
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a.
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Permits
fair value remeasurement for any hybrid financial instrument that
contains
an embedded derivative that otherwise would require
bifurcation
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b.
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Clarifies
which interest-only strips and principal-only strips are not subject
to
the requirements of Statement 133
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c.
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Establishes
a requirement to evaluate interests in securitized financial assets
to
identify interests that are freestanding derivatives or that are
hybrid
financial instruments that contain an embedded derivative requiring
bifurcation
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d.
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Clarifies
that concentrations of credit risk in the form of subordination
are not
embedded derivatives
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e.
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Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains
to a
beneficial interest other than another derivative financial
instrument.
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This
Statement is effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The fair value election provided for in paragraph 4(c) of this Statement
may also be applied upon adoption of this Statement for hybrid financial
instruments that had been bifurcated under paragraph 12 of Statement 133
prior
to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity’s fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period
for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis.
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On
March, 2006, the FASB issued SFAS No. 156 “Accounting for Servicing of
Financial Assets” an amendment at FASB Statements No.140. This Statement
requires:
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1.
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An
entity to recognize a servicing asset or servicing liability each
time it
undertakes an obligation to service a financial asset by entering
into a
servicing contract in any of the following
situations:
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A
transfer of the servicer’s financial assets that meets the requirements
for sale accounting
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A
transfer of the servicer’s financial assets to a qualifying
special-purpose entity in a guaranteed mortgage securitization
in which
the transferor retains all of the resulting securities
and classifies them
as either available-for-sale securities or trading securities
in
accordance with FASB Statement No. 115, “Accounting for Certain
Investments in Debt and Equity
Securities”.
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An
acquisition or assumption of an obligation to service a financial
asset
that does not relate to financial assets of the servicer
or its
consolidated affiliates
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2.
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Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if
practicable.
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3.
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Permits
an entity to choose either of the following subsequent
measurement methods
for each class of separately recognized servicing assets
and servicing
liabilities:
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Amortization
method - Amortize servicing assets or servicing liabilities
in proportion
to and over the period of estimated net servicing
income or net servicing
loss and assess servicing assets or servicing liabilities
for impairment
or increased obligation based on fair value at each
reporting
date.
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Fair
value measurement method - Measure servicing
assets or servicing
liabilities at fair value at each reporting date
and report changes in
fair value in earnings in the period in which
the changes
occur.
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4.
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At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities
with
recognized servicing rights, without calling into question
the treatment
of other available-for-sale securities under Statement 115,
provided that
the available-for-sale securities are identified in some manner
as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
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5.
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Requires
separate presentation of servicing assets and servicing
liabilities
subsequently measured at fair value in the statement of
financial position
and additional disclosures for all separately recognized
servicing assets
and servicing liabilities.
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An
entity
should adopt this Statement as of the beginning of its first fiscal
year that
begins after September 15, 2006. Earlier adoption is permitted
as of the
beginning of an entity’s fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements, for
any period of
that fiscal year. The effective date of this Statement is the date
an entity
adopts the requirements of this Statement.
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In
June 2006, the FASB issued FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”—an interpretation of FASB Statement
No. 109 (“FIN 48”). FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be
taken in a tax return. FIN 48 also provides guidance on
accounting for derecognition, interest, penalties, accounting in
interim
periods, disclosure and classification of matters related to uncertainty
in income taxes, and transitional requirements upon adoption of
FIN
48. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. We are currently evaluating
the impact of the adoption of FIN 48 on our consolidated financial
position and results of operations.
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On
September, 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”.
This Statement defines fair value, establishes a framework for
measuring
fair value in generally accepted accounting principles (GAAP),
and expands
disclosures about fair value measurements. This Statement applies
under
other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this
Statement will change current practice. Fair Value Measurements,
is
effective for financial statements issued for fiscal years beginning
after
November 15, 2007, and interim periods within those fiscal years.
Earlier
application is encouraged, provided that the reporting entity has
not yet
issued financial statements for that fiscal year, including any
financial
statements for an interim period within that fiscal
year.
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On
September, 2006, the FASB issued SFAS No. 158 “Accounting for Defined
Benefit Pension and Other Postretirement Plans” an amendment of FASB
statements No. 87, 88, 106 and 132
(reviewed).
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This
Statement improves financial reporting by requiring an employer to recognize
the
overfunded or underfunded status of a defined benefit postretirement plan
(other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in
which the changes occur through comprehensive income of a business entity
or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. The required date of adoption
of
the recognition and disclosure provisions of this Statement differs for an
employer that is an issuer of publicly traded equity securities (as defined)
and
an employer that is not. For purposes of this Statement, an employer is deemed
to have publicly traded equity securities if any of the following conditions
is
met: The employer has issued equity securities that trade in a public market,
which may be either a stock exchange (domestic or foreign) or an
over-the-counter market, including securities quoted only locally or
regionally. The employer has made a filing with a regulatory agency
in preparation for the sale of any class of equity securities in a public
market.
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On
February, 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Liabilities” including an amendment of FASB Statement No.
115.
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This
statements permits entities to choose to measure at fair value many financial
instruments and certain other items. The objective it to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. This Statements is expected to expand the use
of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments.
The
Bank
does not believe these pronouncements will have a material effect on its
results
of operations, cash flows, or financial position.
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F-80