UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
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o
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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, 2009
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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
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Commission file number: 1-14554
BANCO SANTANDER-CHILE
(d/b/a Santander, Banco Santander, Banco Santander Santiago, and Santander Santiago)
(Exact name of Registrant as specified in its charter)
SANTANDER-CHILE BANK
(d/b/a Santander, Banco Santander, Santander Santiago Bank, and Santander Santiago)
(Translation of Registrant’s name into English)
Chile
(Jurisdiction of incorporation or organization)
Bandera 140
Santiago, Chile
Telephone: 011-562-320-2000
(Address of principal executive offices)
Robert Moreno Heimlich
Tel: +562-320-8284, Fax: +562-687-3855, E-mail: rmorenoh@santander.cl
Bandera 140, 19th Floor, Santiago, Chile
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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American Depositary Shares (“ADS”), 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
(Title of Class)
The number of outstanding shares of each class of common stock of Banco Santander-Chile at December 31, 2009, 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.
x Yes o No
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.
o Yes x No
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.
x Yes o No
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):
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Large accelerated filer x
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Accelerated filer o
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Non-Accelerated filer o
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
oU.S. GAAP
xInternational Financial Reporting Standards as issued by the International Accounting Standards Board
oOther
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
oItem 17 oItem 18
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).
o Yes x No
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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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financing plans
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impact of competition
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impact of regulation
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exposure to market risks:
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interest rate risk
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foreign exchange risk
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equity price risk
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projected capital expenditures
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liquidity
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trends affecting:
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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—Strategy,” “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 Banco Central de Chile (the “Central Bank”)
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inflation
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deflation
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unemployment
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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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changes in taxes
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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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technological changes
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changes in consumer spending and saving habits
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increased costs
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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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natural disasters
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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.
As used in this Annual Report, “Santander-Chile”, “the Bank”, “we,” “our” and “us” refer to Banco Santander-Chile and its consolidated subsidiaries.
When we refer to “Banco Santander Spain” or “Santander Spain”, we refer to our parent company, Banco Santander, S.A.
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. 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. The Bank does not perform inflation accounting, but some loan and deposits products are contracted in “UF” and are accounted for in a similar fashion as a variable rate financial instrument. See “Item 5: Operating and Financial Review and Prospects”.
In this Annual Report, references to the Audit Committee are to the Bank’s Comité de Directores y Auditoría.
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.
Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), in order to comply with requirements of the Securities and Exchange Commission (the “SEC”).
As required by local regulations, our locally filed consolidated financial statements have been prepared in accordance with accounting principles issued by the Superintendency of Banks and Financial Institutions (the “SBIF”). The accounting principles issued by the SBIF are substantially similar to IFRS but there are some exceptions. Therefore, our locally filed consolidated financial statements have been adjusted according to IFRS 1: First Time Adoption of International Financial Reporting Standards (see Note 2 to our audited consolidated financial statements attached to this Annual Report).
The notes to the audited consolidated financial statements contain information in addition to that presented in the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows. The notes provide narrative descriptions or details of these financial statements.
The audited consolidated financial statements included in this Annual Report have been prepared from accounting records maintained by the Bank and its subsidiaries.
The Consolidated Statement of Financial Position as of December 31, 2008, and January 1, 2008, as well as the Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows for the year ended December 31, 2008, included for comparative purposes, were also prepared in accordance with IFRS, on a basis consistent with the financial statements for the period ending December 31, 2009.
The transition of the consolidated financial statements of the Bank to IFRS has been carried out through the application of IFRS 1: First time adoption of International Financial Reporting Standards, applying the exemptions provided by this standard.
We have formatted our financial information according to the classification format for banks used in Chile. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the U.S. Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements.
Our auditors, Deloitte Auditores y Consultores Limitada, an independent registered public accounting firm, have audited our consolidated financial statements in respect of the years ended December 31, 2009 and 2008 included in this Annual Report in accordance with IFRS. See page F-1 to our consolidated financial statements for the 2009 and 2008 report prepared by Deloitte Auditores y Consultores Limitada.
Functional and Presentation currency
According to International Accounting Standard No 21, the Chilean peso, which is the currency of the primary economic area in which the Bank operates and the currency which influences its structure of costs and revenues, has been defined as the functional and presentation currency. Accordingly, all the balances and transactions denominated in currencies other than the Chilean peso are treated as “foreign currency.”
For presentation purposes we have translated millions of Chilean pesos (MCh$) into thousands of US dollars (ThUS$) using the rate as indicated below, for the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flow for the period ended as of December 31, 2009.
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. See “Item 5: F. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”
According to the regulations established by IFRS, a loan is evaluated on each financial statement filing date to determine whether objective evidence of impairment exists. A loans will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after the initial recognition of the loan, and such event or events have an impact on the estimated future cash flows of such loan that can be reliably estimated. It may not be possible to identify a single event that was the individual cause of the impairment.
An impairment loss relating to a loan is calculated as the difference between the recorded amount of the asset and the present value of estimated future cash flows, discounted at the effective interest rate.
Individually significant loans are individually tested to determine if impairment exists. The remaining financial assets are evaluated collectively in groups with similar credit risk characteristics.
The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. In the case of loans recorded at amortized cost, the reversal is recorded in income. See “Item 5: F. 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 the section entitled “Item 4: 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: F. 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. This disclosure is consistent with IFRS.
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 macroeconomic data related to the Chilean economy is based on information published by 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, were converted or will be 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 interbank market rate published by Reuters at 1:30 pm on the last business day of the year. On December 31, 2009, and June 25, 2010, the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$507.25 and Ch$537.25, or 0.16% more expensive and 0.45% cheaper, respectively, than the published observed exchange rate for such date of Ch$506.43 and Ch$539.68, respectively, per US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for the Chilean peso. For more information on the observed exchange rate. See “Item 3: A. Selected Financial Data—Exchange Rates.”
Not applicable.
Not applicable.
A. Selected Financial Data
The following table presents historical financial information about us as of the dates and for each of the periods indicated. The following table should be read in conjunction with, and is qualified in its entirety by reference to, our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report. Our Audited Consolidated Financial Statements and notes at and for the years ended December 31, 2008 and 2009 included in this Annual Report are prepared in accordance with IFRS and therefore differ in some respects from the financial statements at and for the years ended December 31, 2008 and 2009 previously issued by the Bank.
We have selected the following financial information from our audited consolidated financial statements. You should read this information in connection with, and this information is qualified in its entirety by reference to, our consolidated financial statements included in this Annual Report.
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As of December 31,
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2009
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2009
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2008
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In US$ thousands(1)
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In Ch$ millions(2)
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CONSOLIDATED STATEMENT OF INCOME DATA (IFRS)
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Net interest revenue
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1,688,548 | 856,516 | 892,066 | |||||||||
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Provision for loan losses
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(658,151 | ) | (333,847 | ) | (287,983 | ) | ||||||
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Fee income
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500,995 | 254,130 | 243,129 | |||||||||
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Operating costs (3)
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(804,128 | ) | (407,894 | ) | (428,168 | ) | ||||||
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Other income, net (4)
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308,782 | 156,629 | 61,665 | |||||||||
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Income before taxes
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1,036,046 | 525,534 | 480,709 | |||||||||
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Income tax
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(175,306 | ) | (88,924 | ) | (59,742 | ) | ||||||
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Net income
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860,740 | 436,610 | 420,967 | |||||||||
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Net income attributable to:
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Net income attributable to shareholders
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850,778 | 431,557 | 413,370 | |||||||||
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Minority interest
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9,962 | 5,053 | 7,597 | |||||||||
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Net income attributable to shareholders per share
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4.52 | 2.29 | 2.19 | |||||||||
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Net income attributable to shareholders per ADS (5)
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4,690.76 | 2,379.39 | 2,279.12 | |||||||||
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Dividends per share (6)
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2.70 | 1.37 | 1.13 | |||||||||
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Dividends per ADS (6)
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2,812.48 | 1,426.63 | 1,176.00 | |||||||||
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Weighted-average shares outstanding (in millions)
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- | 188,446.13 | 188,446.13 | |||||||||
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Weighted-average ADS outstanding (in millions)
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- | 181.373 | 181.373 | |||||||||
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As of December 31,
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2009
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2008
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In US$ thousands(1)
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In Ch$ millions(2)
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA (IFRS)
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Cash and deposits in banks
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4,028,503 | 2,043,458 | 855,411 | |||||||||
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Financial investments (7)
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5,209,756 | 2,642,649 | 2,746,666 | |||||||||
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Loans
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27,109,465 | 13,751,276 | 14,681,088 | |||||||||
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Loan loss allowance
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(689,063 | ) | (349,527 | ) | (274,240 | ) | ||||||
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Financial derivative contracts (assets) (8)
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2,747,911 | 1,393,878 | 1,846,509 | |||||||||
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Other assets (9)
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2,545,374 | 1,291,141 | 1,229,073 | |||||||||
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Total assets
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40,951,946 | 20,772,875 | 21,084,507 | |||||||||
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Deposits
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21,111,466 | 10,708,791 | 12,704,428 | |||||||||
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Other interest bearing liabilities
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12,287,790 | 6,232,982 | 4,769,980 | |||||||||
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Financial derivative contracts (liabilities) (8)
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2,659,253 | 1,348,906 | 1,469,724 | |||||||||
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Total shareholder’s equity (10)
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3,331,500 | 1,689,903 | 1,517,649 | |||||||||
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Attributable to shareholders (11)
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3,272,754 | 1,660,104 | 1,491,770 | |||||||||
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As of December 31,
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2009
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2008
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CONSOLIDATED RATIOS
(IFRS)
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Profitability and performance:
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Net interest margin (12)
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5.3 | % | 5.7 | % | ||||
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Return on average total assets (13)
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2.2 | % | 2.3 | % | ||||
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Return on average equity (14)
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27.3 | 32.4 | % | |||||
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Capital:
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Average equity as a percentage of average total assets (15)
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8.0 | % | 7.0 | % | ||||
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Total liabilities as a multiple of equity (16)
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11.3 | 12.9 | ||||||
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Credit Quality:
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Non-performing loans as a percentage of total loans (17)
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2.97 | % | 2.61 | % | ||||
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Allowance for loan losses as percentage of total loans
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2.54 | % | 1.87 | % | ||||
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Operating Ratios:
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Operating expenses /operating revenue (18)
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34.0 | % | 37.6 | % | ||||
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Operating expenses /average total assets
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2.2 | % | 2.5 | % | ||||
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OTHER DATA
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Inflation Rate (19)
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-1.4 | % | 7.1 | % | ||||
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Revaluation (devaluation) rate (Ch$/US$) at period end (19)
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-19.5 | % | 26.9 | % | ||||
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Number of employees at period end
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11,118 | 11,592 | ||||||
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Number of branches and offices at period end
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498 | 505 | ||||||
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(1)
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Amounts stated in U.S. dollars at and for the year ended December 31, 2009, have been translated from Chilean pesos at the interbank market exchange rate of Ch$507.25 = US$1.00 as of December 31, 2009. See “Item 3: A. Selected Financial Data—Exchange Rates” for more information on the observed exchange rate.
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(2)
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Except per share data, percentages and ratios, share numbers, employee numbers and branch numbers.
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(3)
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Operating costs is equal to the sum of personnel expenses, administrative expenses, depreciation and amortization and impairment. See “Note 1—Impairment” to our Audited Consolidated Financial Statements.
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(4)
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Other income, net is the sum of other operating income, other operating expenses, net gains (losses) from mark-to-market and trading and foreign exchange transactions, and income from investments in other companies.
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(5)
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1 ADS = 1,039 shares of common stock.
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(6)
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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.
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(7)
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Includes financial investments held for trading, repos, financial investments available for sale and financial investments held to maturity.
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(8)
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For figures at December 31, 2008, derivatives are valued at market price and classified as a separate line item on the balance sheet. See “Note 1” of our Audited Consolidated Financial Statements.
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(9)
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Includes unsettled transactions, investments in other companies, intangible assets, property, plant and equipment, current taxes, deferred taxes and other assets.
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(10)
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Equity includes shareholders’ equity plus non-minority interest. According to IFRS, equity must include minority interest and a minimum provision for mandatory dividends. This provision is made pursuant to Article 79 of the Corporations Act, in accordance with the Bank’s internal policy, and pursuant to which at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by the unanimous vote of the outstanding shares.
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(11)
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Shareholders’ equity is calculated according to IFRS. The main difference between this and equity is that the provision for mandatory dividends equal to 30% of net income and minority interest are not included.
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(12)
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Net interest revenue divided by average interest earning assets (as presented in “Item 5: F. Selected Statistical Information”).
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(13)
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Net income divided by average total assets (as presented in “Item 5: F. Selected Statistical Information”).
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(14)
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Net income divided by average equity (as presented in “Item 5: F. Selected Statistical Information”).
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(15)
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This ratio is calculated using total equity including minority interest.
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(16)
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Total liabilities divided by equity.
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(17)
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Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment over 90 days overdue. December 31, 2008 non-performing loans amount is as reported on January 1, 2009.
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(18)
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The efficiency ratio is equal to operating expenses over operating revenue. Operating expenses includes personnel expenses, administrative expenses, depreciation and amortizations, deterioration (See “Note 1—Impairment” to our Audited Consolidated Financial Statements) and other operating expenses. Operating revenue includes net interest revenue, fee income, net gain (loss) from mark-to-market and trading, foreign exchange transactions and other operating income.
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(19)
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Based on information published by the Central Bank.
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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. According to Law 18,840, the organic law of the Central Bank, and 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 performed 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, 2009, and June 25, 2010, the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$507.25 and Ch$537.25, or 0.16% more expensive and 0.45% cheaper, respectively, than the published observed exchange rate for such date of Ch$506.43 and Ch$539.68, respectively, per US$1.00.
The following table sets forth the annual low, high, average and period end observed exchange rate for U.S. dollars for each of the following periods, as reported by the Central Bank. We make no representation that the Chilean peso or the U.S. dollar amounts referred to herein actually represent, could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated, at any particular rate or at all.
|
Daily Observed Exchange Rate Ch$ Per US$(1)
|
||||||||||||||||
|
Low(2)
|
High(2)
|
Average(3)
|
Period End(4)
|
|||||||||||||
|
Year
|
||||||||||||||||
|
2004
|
559.21 | 649.45 | 609.55 | 559.83 | ||||||||||||
|
2005
|
509.70 | 592.75 | 559.86 | 514.21 | ||||||||||||
|
2006
|
511.44 | 549.63 | 530.26 | 534.43 | ||||||||||||
|
2007
|
493.14 | 548.67 | 522.69 | 495.82 | ||||||||||||
|
2008
|
431.22 | 676.75 | 521.79 | 629.11 | ||||||||||||
|
2009
|
491.09 | 643.87 | 559.67 | 506.43 | ||||||||||||
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Daily Observed Exchange Rate Ch$ Per US$(1)
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||||||||||||||||
|
Low(2)
|
High(2)
|
Average(3)
|
Period End(4)
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|||||||||||||
|
Month
|
||||||||||||||||
|
November 2009
|
491.09 | 531.83 | 507.78 | 495.84 | ||||||||||||
|
December 2009
|
494.82 | 508.75 | 501.45 | 506.43 | ||||||||||||
|
January 2010
|
489.47 | 531.75 | 500.66 | 531.75 | ||||||||||||
|
February 2010
|
525.48 | 546.18 | 532.56 | 529.69 | ||||||||||||
|
March 2010
|
508.66 | 533.87 | 523.16 | 526.29 | ||||||||||||
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April 2010
|
514.91 | 527.38 | 520.62 | 520.99 | ||||||||||||
|
May 2010
|
517.23 | 549.17 | 533.21 | 529.23 | ||||||||||||
| June 2010 (up to June 25, 2010) | 530.32 | 548.16 | 536.27 | 539.68 | ||||||||||||
Source: Central Bank.
|
(1)
|
Nominal figures.
|
|
(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 the first business day of the following period.
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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 2009 dividend must be proposed and approved during the first four months of 2010. 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, 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 the infringement of minimum 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 JPMorgan Chase Bank, N.A., as depositary (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: E. Taxation—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs”).
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 and eliminated 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: D. Exchange Controls.”
The following table presents dividends declared and paid by us in nominal terms in the past two years:
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Year
|
Dividend
Ch$ mn (1)
|
Per share
Ch$/share (2)
|
Per ADR
Ch$/ADR (3)
|
% over
earnings (4)
|
% over
earnings (5)
|
|||||||||||||||
|
2009
|
213,295 | 1.13 | 1,176.00 | 65 | 52 | |||||||||||||||
|
2010
|
258,751 | 1.37 | 1,426.63 | 60 | 60 | |||||||||||||||
|
(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 attributable to shareholders for the previous year as required by local regulations.
|
|
|
(5)
|
Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under IFRS.
|
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, which should be read in conjunction with all the other information presented in this Annual Report. 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
We are vulnerable to the current disruptions and volatility in the global financial markets.
In the past two years, the global financial system has experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly in the second half of 2008, and many countries, including the United States, fell into recession. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, have been experiencing significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).
Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers. Any such increase in capital markets funding costs or deposit rates could have a material adverse effect on our interest margins.
In Chile, the continued economic recession has also caused a rise in unemployment, a fall in consumer spending, a fall in real estate prices and a general decline in economic activity. All of these may lead to a decrease in demand for individual and corporate borrowing, a decrease in demand for financial services and a decrease in credit card spending, which may in turn materially adversely affect our financial condition and results of operation.
Increased competition and industry consolidation may adversely affect our results of operations.
The Chilean market for financial services is highly competitive. We compete with other private sector Chilean and non-Chilean banks, with Banco del Estado, the principal public sector bank, with department stores and 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 mid-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 mid-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 and larger supermarket chains) 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.
The increase in competition within the Chilean banking industry in recent years has led to consolidation in the industry. We expect the trends of increased competition and consolidation to continue and result in the formation of large new financial groups. Consolidation in the industry, 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, since November 7, 2001, insurance companies have been allowed to participate and compete with banks in the residential mortgage and credit card businesses.
Our allowances for impairment losses may not be adequate to cover future actual losses to our loan portfolio.
At December 31, 2009, our allowance for impairment losses on loans and other assets was Ch$349,527 million, and the ratio of our allowance for impairment losses to total loans was 2.5%. 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 borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chile’s economy, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. In addition, as these factors evolve, the models we use to determine the appropriate level of allowance for impairment losses on loans and other assets require recalibration, which can lead to increased provision expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for Years Ended December 31, 2008 and 2009—Provision for loan losses”. We believe our allowance is adequate as of the date hereof for all known losses. 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 consist of individuals (approximately 53.0% of the value of the total loan portfolio at December 31, 2009, if interbank loans are included) and, to a lesser extent, small- and mid-sized companies (those with annual sales of less than US$2.4 million), which comprised approximately 18.1% of the value of the total loan portfolio at December 31, 2009. As part of our business strategy, we seek to increase lending and other services to small companies and individuals. Small companies and lower- to middle-income individuals are, however, more likely to be adversely affected by downturns in the Chilean economy than large corporations and individuals with high incomes. In addition, at December 31, 2009, our residential mortgage loan book totaled Ch$4,159,053 million, representing 30.2% of our total loans. (See “Note 9: Interbank Loans” and “Note 10: Loans and Accounts Receivables from Customers” in our Audited Consolidated Financial Statements for a description and presentation of residential mortgages in the balance sheet). If the economy and real estate market in Chile experience a significant downturn, as it may due to the global financial and economic crisis, this could materially adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to
experience higher levels of past due loans, thereby resulting in higher provisions for loan losses and subsequent write-offs. This may materially and adversely affect our asset quality, results of operations and financial condition.
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, 2009, our non-performing loans were Ch$409,067 million, and the ratio of our non-performing loans to total loans was 2.97%. For additional information on our asset quality, see “Selected Statistical Information at and for the Years Ended December 31, 2009 and 2008—Classification of Loan Portfolio Based on the Borrower’s Payment Performance”. 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 the 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, such as the macroeconomic factors affecting Chile’s economy. If such deterioration were to occur, it could materially 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. The real estate market is particularly vulnerable in the current economic climate and this may affect us as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. We may also not have sufficiently recent 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 if the real estate in question has been declared as “family property” by a court. If any party occupying the real estate files a petition with the court requesting that such real estate be declared as family property, our ability to foreclose may be very limited.
The growth of our loan portfolio may expose us to increased loan losses.
From December 31, 2004 to December 31, 2009, our aggregate loan portfolio grew by 81.0% in nominal terms to Ch$13,751,276 million (US$27.1 billion), while our consumer loan portfolio grew by 106.2% in nominal terms to Ch$2,244,049 million (US$4.4 billion). 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. The current economic turmoil may lead to a contraction in our loan portfolio.
There can be no assurance that our loan portfolio will continue to grow at similar rates to the historical growth rate. 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 continuing economic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general.
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 Chilean nationwide credit bureau) and other sources. Due to limitations in 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 adversely affected.
Fluctuations in the rate of inflation may affect our results of operations.
Inflation in Chile gained momentum in 2007 and 2008. In 2007 and 2008, inflation reached 7.1% and 7.8%, respectively. 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. Extended periods of deflation could also have an adverse effect on our business, financial condition and results of operations. In 2009, inflation was (1.4%).
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 on the tenth day of any given 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 proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. For more information regarding the UF, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Inflation”, “Selected Statistical Information at and for the Years Ended December 31, 2009 and 2008—Average Balance Sheets, Income Earned from Interest-Earning Assets And Interest Paid on Interest-Bearing Liabilities” and “Item 5: F. Selected Statistical Information—Average Balance Sheets, Income Earned from Interest-Earning Assets And Interest Paid on Interest-Bearing Liabilities.” Although we benefit from 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, including from extended periods of inflation that adversely affect economic growth or periods 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 income. Net interest income represented 72.4% of our operating income in 2008 and 65.7% in 2009. 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 income or a decrease in customer 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. In the current economic climate, there is a greater degree of uncertainty and unpredictability in the policy decisions and the setting of interest rates by the Central Bank. Any changes 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 2004 to 2009 and up to March 31, 2010.
|
Year
|
Yield on
90-day note at Period-end
|
|||
|
2004
|
2.24% | |||
|
2005
|
4.90 | |||
|
2006
|
5.11 | |||
|
2007
|
6.15 | |||
|
2008
|
7.86 | |||
|
2009
|
0.48 | |||
|
March 31, 2010
|
0.50% | |||
Source: Central Bank.
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 (56.1%) of funding. At December 31, 2009, 90.3% 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 number 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 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 adversely affected.
The legal 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 (Administradora 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, the AFP is required to reduce its exposure below the limit within three years. At December 31, 2009, the aggregate exposure of AFPs to us was approximately US$4.7 billion or 3.9% of their 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. Recently approved legislation in Chile (Reformas al Mercado de Capitales II (also known as MK2) relaxed the limits on making investments abroad in order to permit pension funds to further diversify their investment portfolios. As of December 31, 2009, the limit on making investments abroad was 60%. This limit was increased from 55% as of April 1, 2009 to its current level in August 2009, and will gradually increase to 80% in 2011. As a result, pension funds may change the composition of their portfolios, including reducing their deposits with local banks. At December 31, 2009, 15.8% of our time deposits were from AFPs. Although the 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 materially adverse impact on our business, financial condition and results of operations.
We may be unable to meet requirements relating to capital adequacy.
Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of 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 we are the result of the merger between two predecessors, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. At December 31, 2009, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 15.59%. Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including:
|
·
|
the increase of risk-weighted assets as a result of the expansion of our business or regulatory changes;
|
|
·
|
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;
|
|
·
|
changes in accounting rules;
|
|
·
|
changes in provisioning guidelines that are charged directly against our equity or net income; and
|
|
·
|
changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in Chile.
|
In 2012, Chilean banks will most likely adopt the guidelines set forth under Basel II with adjustments incorporated by the Superintendency of Banks. This should result in a different level of minimum capital required to be maintained by us. No assurance can be given that these changes will not have a material impact on our capitalization ratio.
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.
Our business is highly dependent on proper functioning and improvement of information technology systems.
Our business is highly dependent 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, major natural catastrophes (such as earthquakes), 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 a 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.
Like all large financial institutions, we are 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 we maintain 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 materially 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, interest rates, 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 their financial strength. 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 applies to the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel 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. 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 has allowed 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. Our current required minimum regulatory capital to risk-weighted assets ratio is 11% and as of December 31, 2009, we were at 15.59%. 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 of the applicable regulatory requirements and guidelines, or that we will not be subject to sanctions, fines, restrictions on our business or other penalties in the future as a result of noncompliance. If sanctions, fines, restrictions on our business or 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
The recent earthquake in Chile is likely to adversely affect the quality of our loan portfolio in segments of the Chilean economy that have been negatively affected and, as a result, is likely to negatively affect our results of operations.
Chile lies on the Nazca tectonic plate, making it one of the world’s most seismically active regions. Chile has been adversely affected by powerful earthquakes in the past, including an 8.0 magnitude earthquake that struck Santiago in 1985 and a 9.5 magnitude earthquake in 1960 which was the largest earthquake ever recorded.
On February 27, 2010, an 8.8 magnitude earthquake struck central Chile. The quake epicenter was located 200 miles southwest of Santiago and 70 miles north of Concepción, Chile’s second largest city. Due to the severity of the earthquake and its devastating consequences, former President Michelle Bachelet declared a national “state of catastrophe” on February 28, 2010. Significant aftershocks followed the initial earthquake, including aftershocks of 6.2, 5.4 and 5.6 magnitudes within an hour of the initial earthquake, aftershocks of 6.9, 6.7 and 6.0 magnitudes on March 11, 2010 and a 7.2 magnitude earthquake on March 13, 2010.
The regions of Bío Bío and Maule were the most severely affected regions. Concepción, located approximately 200 miles south of Santiago, was the most affected city, with its infrastructure and numerous buildings severely damaged. The coastal area of Concepción, including the neighboring cities Talcahuano and Penco, were hit by a
tsunami shortly after the earthquake that significantly damaged port facilities. Several cities in the Maule region, including its capital city of Talca, were also seriously affected by the earthquake. The region of Valparaíso, including the port of Valparaíso and the city of Viña del Mar, was also severely affected. Region VI suffered serious damages as a result of the 7.2 magnitude quake on March 13, 2010 which forced President Sebastián Piñera to declare a “state of catastrophe” in that region. Rancagua, the capital city of Region VI, located approximately 56 miles from Santiago, also suffered significant damages.
The earthquake and its aftershocks, as well as tsunamis from adjacent coastal waters, caused severe damage to Chile’s infrastructure, including roads, bridges, ports and Santiago’s international airport. According to an initial assessment by Chile’s Minister of Infrastructure, the repair of these damages, excluding damages to port facilities, is likely to take between three and four years. On March 12, 2010, President Piñera said that preliminary assessments of reconstruction costs indicate that they could total approximately US$30 billion. As of March 23, 2010, at least 1,500,000 homes are believed to have been damaged, more than 400 people are believed to have been killed and hundreds of people are missing.
The Bank’s branches, systems and employees were all impacted by the recent earthquake. Of the Bank’s 498 branches, 405 had some form of damage, of which 32 sustained serious damages and 9 were closed as of May 31, 2010. Of the Bank’s 1,856 ATMs, 100% were operating normally as of May 31, 2010. The Bank’s systems were not functioning immediately following the earthquake, but by March 1, 2010 the systems were functioning normally, all open branches were online and all remote channels were operating normally.
Of the Bank’s 11,118 employees, 194 sustained damage to their homes but there was no loss of lives. The Bank offered employees with severe damage to their homes an emergency loan of two months salary with a cap of Ch$2,000,000. The terms of these employee loans include no interest, an 18 month maturity and a 3 month grace period. The Bank expects additional costs from the earthquake, net of insurance proceeds, to total US$7.5 million related to the repair of branches, systems, ATMs and other costs. The Bank expects additional administrative expenses from the earthquake, net of insurance proceeds, recognized in 2010 to be US$6 million.
The damage to Chile’s roads, port and other infrastructure is likely to have an adverse impact on the Chilean economy, and in particular on export businesses that operate in the affected areas. The Central Bank of Chile has stated that it expects the growth of Chilean gross domestic product to slow in 2010 as a result of the earthquake. The regions of Chile most affected by the earthquake, regions VI, VII and VIII, account for approximately 12% of our loan portfolio and a broadly similar portion of our fee income. Although it is premature to assess the extent of the adverse effect of the recent earthquake on our customers and our loan portfolio, it is likely that these events will adversely affect economic activity of our customers. As a result, we may experience deterioration of asset quality and an increase in provision expense, lower fee growth due to lower consumer spending and usage of bank products and an uncertain impact on loan growth as some sectors will be negatively affected while others will be positively affected by the earthquake. All of these factors could have a material adverse impact on us, including our results of operations and financial condition. We and our corporate customers may also experience an increase in the corporate tax rate as certain government officials have proposed legislation that would raise the corporate income tax rate in order to pay for reconstruction following the earthquake, which if enacted would have an adverse effect on us. The proposed legislation would increase the corporate tax rate to 20% in 2011 from 17% currently. In 2012 the rate would be 18.5% and 17% in 2013.
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, and 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 substantial influence over many aspects of the private sector, or other political or economic developments in Chile. Chile’s economy may not continue to grow in the future and future developments could negatively affect Chile’s exports and economic activity. In line with the global economic climate, Chile’s economy contracted in 2009 for the first time since 1999. Although the economy is expected to recover in 2010, overall economic activity in Chile could be negatively affected as a consequence of the 2010 earthquake that struck parts of Chile. All this may materially adversely affect our business, financial condition or results of operations.
Economic and political 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 Asia, the United States, Europe, Brazil, Argentina and other nations, including the recent global credit crunch and economic world crisis. If these nations’ economic environments deteriorate, the economy in Chile could also be affected and could experience slower growth than in recent years. Thus, we may need to increase our allowances for loan losses, thus affecting our financial results, our results of operations and the price of our securities. At December 31, 2009, approximately 0.83% of our assets were held abroad. The global financial and sub-prime crisis has had a significant impact on the growth rate of the Chilean economy in 2009 and is expected to continue to negatively impact growth, consumption, unemployment, investment and the price of exports.
Chile is also involved in an international litigation with Peru regarding maritime borders and has had other conflicts with neighboring countries in the past. 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.
Current economic conditions may make it more difficult for us to continue funding our business on favorable terms.
Historically, one of our principal sources of funds has been time deposits. Time deposits represented 49.9% and 37.6% of our total funding as of December 31, 2008 and December 31, 2009, respectively. Large-denominations in time deposits from institutional investors may, under some circumstances, be a less stable source of funding than savings and bonds, such as during periods of significant changes in market interest rates for these types of deposit products and any resulting increased competition for such funds. The recent liquidity crisis triggered by the U.S. subprime market impacted global markets and affected sources of funding, including time deposits. As of December 31, 2009, our investment portfolio did not contain instruments (i) backed by, or otherwise related to, U.S. subprime mortgages or (ii) with exposure to monoline financial guarantors. Although our results of operations and financial position have not suffered a significant impact as a consequence of the recent credit market instability in the U.S. and the liquidity available in the Chilean market has permitted us to fund out operations and maintain our regular business activities, we cannot assure you that we will be able to continue funding our business or, if so, maintain our current levels of funding without incurring higher funding costs or having to liquidate certain assets.
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 will affect the U.S. dollar value of our securities. The Chilean 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 period end for the last six years and the five months ended May 31, 2010 and the devaluation or revaluation of the peso relative to the U.S. dollar in each of those periods.
|
Year
|
Exchange rate (Ch$)
Period-end
|
Devaluation (Revaluation) (%)
|
||||||
|
2004
|
559.83 | (6.6 | %) | |||||
|
2005
|
514.21 | (8.1 | %) | |||||
|
2006
|
534.43 | 3.9 | % | |||||
|
2007
|
495.82 | (7.2 | %) | |||||
|
2008
|
629.11 | 26.9 | % | |||||
|
2009
|
506.43 | (19.5 | %) | |||||
|
May 31, 2010
|
529.23 | 4.5 | % | |||||
Source: Central Bank.
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 trading in the shares underlying our ADSs is conducted in pesos. Cash distributions with respect to our shares of common stock are received in Chilean pesos by the Depositary, which converts 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 by our ADS holders from the Depositary will be reduced.
Chile’s banking regulatory and capital markets environment is continually evolving and may change.
Changes in banking regulations may materially and adversely affect our business, financial condition and results of operations. Chilean laws, regulations, policies and interpretations of laws relating to the banking sector and financial institutions are continually evolving and changing. In 2007, new regulations governing the Chilean capital markets were approved (Reformas al Mercado de Capitales II (also known as MK2)). These regulations, among other things, modified certain provisions set forth in the General Banking Law. Under new legislation, the limit on the amount that a bank is allowed to grant as an unsecured loan to a single individual or entity was increased to 10% of our regulatory capital (and up to 30% of our regulatory capital if any loans granted in excess of the 10% is secured by collateral). Previously, these limits were set at 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 and increase competition as the number of banks that can compete in the corporate segment increases.
Further new regulations governing the Chilean capital markets are being discussed. Chile’s Congress passed a new bill on June 1, 2010 (known as MK3) that aims to increase trading in Chile, Latin America’s third-biggest securities market, by allowing new instruments such as exchange-traded funds and covered bonds. The Chamber of Deputies, Chile’s lower house, voted in favor of the bill, which also seeks to ease credit access for consumers and small companies. The measures will make it easier for foreign banks to offer loans in Chile, cut securitization costs and allow banks to sell bonds backed by mortgages. The new law will also offer tax breaks to foreign investors in Chilean mutual funds. The bill also aims to reduce the cost of setting up mutual funds and create an exchange-traded funds industry by modifying mutual fund rules to allow secondary trading and enable pension funds to invest in them. The new law also removes limits on employing non-Chileans that may have prevented overseas fund managers from opening offices in Chile. It also strikes down a law that prevented foreign banks from advertising loans. The new class of bonds, known as “mortgage bonds,” will be debt backed by the company that sells them as well as by a pool of mortgages, as in European covered bonds. Unlike covered bonds, they may be issued by non-banks as well as banks.
The current Finance Minister, Felipe Larrain, plans another package of reforms known as MKB (Reformas al Mercado Financiero Bicentenario). The MKB is comprised of a series of administrative changes and new regulations over the next four years. The reforms include the creation of a financial consumer protection agency, the transformation of the local securities exchange regulator (SVS) into a securities commission and giving more autonomy to the SBIF. The new regulations would also aim to expand the use of the Chilean peso and simplify taxes on fixed-income securities. The proposed legislation would also include measures to increase bank penetration and household savings. The reforms also aim to create new instruments that give more efficient financing alternatives to small and mid-sized companies and individuals, together with creating specific statutes for niche banks and micro credit financing. The proposed legislation would also reduce the pro-cyclicality of loan loss provisions and seek to enhance solvency and liquidity (the latter must be done through a change in the General Banking Law).
These new reforms could result in increased competition in the industry and thus may have a material adverse effect on our financial condition and results of operations.
Increased regulation of the financial services industry in Chile could increase our costs and result in lower profits.
As a result of the recent global financial crisis, there has been an increase in government regulation of the financial services industry in many countries. Such regulation may also be increased in Chile, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, novel regulatory proposals abound in the current environment. If enacted, new regulations could require us to inject further capital into our business as well as in businesses we acquire, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
In line with the future adoption of Basel II regulations in Chile, the Superintendency of Banks has recently proposed to increase the minimum regulatory capital ratio from 8% to 10%, which would require an amendment to the General Banking Law. Although currently we have a regulatory capital ratio of 15.59%, this change could require us to inject additional capital to our business in the future.
A worsening of labor relations in Chile could impact our business.
As of December 31, 2009, on a consolidated basis we had 11,118 employees, of which 58.2% were unionized. In May 2010, a new collective bargaining agreement was signed, which will become effective on January 1, 2011 and that will expire on December 31, 2014, but this may be negotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. We have traditionally enjoyed good relations with our employees and their unions, but we cannot assure you that in the future a strengthening of cross-industry labor movements will not materially and adversely affect our business, financial condition or results of operations.
Any downgrading of Chile’s debt credit rating for domestic and international debt and/or our parent company’s ratings by international credit rating agencies may also affect our ratings, our business, our future financial performance, stockholder’s equity and the price of our shares and ADSs.
Our foreign currency deposit ratings are equivalent to the Chilean sovereign ratings. On July 31, 2009, Moody’s downgraded our foreign currency senior ratings, foreign currency subordinated bond ratings and local currency deposit ratings, following similar action on the ratings of our parent company, Banco Santander Spain. In addition, on February 23, 2010, Moody’s further downgraded the subordinated debt ratings and preferred share ratings of our parent company. Moody’s and Standard and Poor’s both have a negative outlook for our parent company’s ratings. Any adverse revisions to our parent company’s ratings and/or Chile’s credit ratings for domestic and international debt by international rating agencies may adversely affect our ratings, 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.
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 IFRS and U.S. accounting and financial reporting standards.
The securities laws of Chile, which govern open or publicly listed companies such as us, aim to promote 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 (“NYSE”), limiting the protections afforded to investors.
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE 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 NYSE 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 NYSE corporate governance requirements. For more details on the differences between our corporate governance standards and the NYSE standards, please see “Item 6: C. Board Practices – Summary Comparison of Corporate Governance Standards and NYSE Listed Company Standards”.
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 relating 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 the Chilean banking industry, including market share information, are derived from various official and other publicly available sources that we generally believe 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 possibly 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.
Our ADSs are listed and traded on the NYSE. Our 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, 2009, 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 our common stock is traded on the Chilean Stock Exchanges, there can be no assurance that a liquid trading market for our common stock will continue to exist. Approximately 23.09% of our outstanding common stock is held by the public (i.e., shareholders other than Banco Santander Spain 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 in the United States unless a registration statement under the U.S. Securities Act of 1933 (“Securities Act”), 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 make a registration statement available with respect to such rights and the common stock, you may not be able to exercise your preemptive rights in the United States. If a registration statement is not filed or an applicable exemption is not available under U.S. securities law, 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 clearly defined shareholders’ rights than with shares of a company in the United States.
Our corporate affairs are governed by our estatutos, or by-laws, and the laws of Chile. Under such laws, our shareholders may have fewer or less clearly 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.
Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.
Holders of ADSs will not be direct shareholders of our company and will be unable to enforce directly the rights of shareholders under our by-laws and the laws of Chile. Holders of ADSs may exercise voting rights with respect to the common stock represented by ADSs only in accordance with the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. Holders of our common stock will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the Depositary following our notice to the Depositary requesting the Depository to do so. To exercise their voting rights, holders of ADSs must instruct the Depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADSs than for holders of our common stock. If the Depositary fails to receive timely voting instructions for all or part of the ADSs, the Depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
Holders of ADSs also may not receive the voting materials in time to instruct the Depositary to vote the common stock underlying their ADSs. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common stock underlying their ADSs are not voted as requested.
A. History and Development of the Company
Overview
We are the largest bank in Chile in terms of total assets, total deposits and shareholders’ equity. At December 31, 2009, we had total assets of Ch$20,772,875 million (US$40,952 million), loans net of allowances outstanding of Ch$13,751,276 million (US$27,109 million), total deposits of Ch$10,708,791 million (US$21,111 million) and
shareholders’ equity of Ch$1,689,903 million (US$3,331 million). As of December 31, 2009, we employed 11,118 people (on a consolidated basis) and had the largest private branch network in Chile with 498 branches. 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, foreign currency forward contracts and 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. Santiago’s by-laws 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 Spain. 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 Spain 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 becoming “Banco Santander-Chile”, the third largest private bank in terms of outstanding loans at that date.
On August 1, 2002, Santiago and Old Santander Chile merged, whereby the latter ceased to exist and Santander-Chile (formerly known as Santiago) being the surviving entity.
Our principal executive offices are located at Bandera 140, Santiago, Chile. Our telephone number is +562-320-2000 and our website is www.santander.cl. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report.
Relationship with Banco Santander Spain
We believe that our relationship with our controlling shareholder, Banco Santander Spain, offers us a significant competitive advantage over our peer Chilean banks. Banco Santander Spain is one of the largest financial groups in Brazil and the rest of Latin America, in terms of total assets measured on a regional 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 the United States as well as in Germany, Italy, Spain, and several other European countries.
Our relationship with Banco Santander Spain 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 Spain’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 Spain will also enhance our ability to manage credit and market risks by adopting policies and know-how developed by Banco Santander Spain. 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 Spain. We believe that this structure leads to improved monitoring and control of our exposure to operational risks.
Banco Santander Spain’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 Spain in connection with these support services.
B. Organizational Structure
Banco Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander-Chile Holding, which are controlled subsidiaries. This gives Banco Santander Spain control over 76.91% of the shares of the Bank and actual participation when excluding minority shareholders that participate in Santander Chile Holding is 76.74%.
|
Shareholder
|
Number of Shares
|
Percentage
|
||||||
|
Teatinos Siglo XXI Inversiones Ltda.
|
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 498 total branches, 260 of which are operated under the Santander brand name, with the balance under certain specialty names, including 98 under the Santander Banefe brand name, 46 under the SuperCaja brand name, 24 under the BancaPrime brand name and 41 as auxiliary and payment centers. We provide a full range of financial services to corporate and individual customers. We divide our clients into the following segments: (i) Retail, (ii) Middle–Market and (iii) Global Banking and Markets.
The Retail segment is comprised of the following sub–segments:
|
·
|
Lower–middle to middle–income, consisting of individuals with monthly incomes between Ch$150,000 (US$296) and Ch$400,000 (US$789) and served through our Banefe branch network. This segment accounts for 4.4% of our total loans outstanding at December 31, 2009. 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$789). Clients in this segment account for 48.6% of our total loans outstanding at December 31, 2009 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 and mid-sized companies, consisting of small companies with annual revenue of less than Ch$1,200 million (US$2.4 million). At December 31, 2009, this segment represented approximately 18.1% 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.
|
|
·
|
Institutional, such as universities, government agencies, municipalities and regional governments. At December 31, 2009, these clients represented 2.1% of our total loans outstanding. Customers in this sub-segment are also offered the same products that are offered to the customers in our small businesses segment. This sub-segment is included in the Retail segment because customers in this sub-segment are a potential source for new individual customers.
|
The Middle–Market segment is comprised of the following sub–segments:
|
·
|
Companies, consisting of companies with annual revenue over Ch$1,200 million (US$2.4 million) and up to Ch$10,000 million (US$19.7 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, 2009, these clients represented 7.6% of our total loans outstanding.
|
|
·
|
Real estate, consisting of all companies in the real estate sector with annual revenue over Ch$800 million (US$1.6 million), including construction companies and real estate companies that execute projects for sale to third parties. At December 31, 2009, these clients represented 7.1% of our total loans outstanding. To these clients we offer, in addition to traditional banking services, specialized services for financing, primarily residential projects, in order to increase the sale of residential mortgage loans.
|
|
·
|
Large corporations, consisting of companies with annual revenue over Ch$10,000 million (US$19.7 million). Customers in this segment are also offered the same products that are offered to the customers in our mid–sized companies segment. At December 31, 2009, these clients represented 3.2% of our total loans outstanding.
|
The Global Banking and Markets segment is comprised of the following sub–segments:
|
·
|
Wholesale banking corporate, consisting of companies that are foreign multinationals or part of a larger Chilean economic group with sales of over Ch$10,000 million (US$19.7 million). At December 31, 2009, these clients represented 8.7% of our total loans outstanding. Customers in this segment are offered a wide range of products, including commercial loans, leasing, factoring, foreign trade, mortgage loans, checking accounts, cash management, treasury services, financial advisory, savings products, mutual funds and insurance brokerage.
|
|
·
|
The Treasury Division provides sophisticated financial products mainly to companies in the wholesale banking and the middle–market segments. This includes products such as short–term financing and funding, securities brokerage, interest rate and foreign currency derivatives, securitization services and other tailor made financial products. The Treasury division also manages our trading positions.
|
In addition, we have a Corporate Activities segment comprised of all other operational and administrative activities that are not assigned to a specific segment or product mentioned above. These activities include Financial Management, which manages global functions such as the management of our structural foreign exchange gap position, our structural interest rate risk and our liquidity risk. Financial Management also oversees the use of our resources, the distribution of capital among our different units and the overall financing cost of investments.
The table below sets forth our lines of business and certain statistical information relating to each of them for the year ended December 31, 2009. Please see “Note 4” to our Audited Consolidated Financial Statements for details of revenue by business segment in the last three years.
|
As of Dec ember 31, 2009 (Ch$ million)
|
||||||||||||||||||||||||||||
|
Loans and accounts receivable from customers (1)
|
Net interest income
|
Net fee income
|
Financial transactions, net (2)
|
Net loan loss allowances (3)
|
Operating expenses (4)
|
Net segment contribution (5)
|
||||||||||||||||||||||
|
SEGMENTS
|
||||||||||||||||||||||||||||
|
Individuals
|
7,287,925 | 532,060 | 171,433 | 19,027 | (230,503 | ) | (268,934 | ) | 223,083 | |||||||||||||||||||
|
Santander Banefe
|
609,808 | 115,840 | 29,452 | 5,078 | (82,588 | ) | (54,913 | ) | 12,869 | |||||||||||||||||||
|
Commercial Banking
|
6,678,117 | 416,220 | 141,981 | 13,949 | (147,915 | ) | (214,021 | ) | 210,214 | |||||||||||||||||||
|
SMEs
|
2,485,505 | 228,928 | 41,917 | 11,037 | (76,075 | ) | (58,741 | ) | 147,066 | |||||||||||||||||||
|
Institutional
|
282,933 | 18,789 | 1,962 | 664 | (327 | ) | (6,799 | ) | 14,289 | |||||||||||||||||||
|
Companies
|
2,471,162 | 114,432 | 20,567 | 16,181 | (24,333 | ) | (30,628 | ) | 96,219 | |||||||||||||||||||
|
Companies
|
1,051,875 | 53,407 | 9,813 | 7,248 | (8,618 | ) | (15,989 | ) | 45,861 | |||||||||||||||||||
|
Real estate
|
982,938 | 17,792 | 2,338 | 148 | 2,041 | (4,280 | ) | 18,039 | ||||||||||||||||||||
|
Large Corporations
|
436,349 | 43,233 | 8,416 | 8,785 | (17,756 | ) | (10,359 | ) | 32,319 | |||||||||||||||||||
|
Global Banking & Markets
|
1,194,706 | 33,738 | 18,747 | 64,557 | (2,511 | ) | (29,485 | ) | 85,046 | |||||||||||||||||||
|
Corporate
|
1,194,706 | 54,728 | 19,387 | 5 | (2,511 | ) | (14,803 | ) | 56,806 | |||||||||||||||||||
|
Treasury (6)
|
- | (20,990 | ) | (640 | ) | 64,552 | - | (14,682 | ) | 28,240 | ||||||||||||||||||
|
Other (7)
|
29,045 | (71,431 | ) | (496 | ) | 55,662 | (98 | ) | (13,307 | ) | (29,670 | ) | ||||||||||||||||
|
TOTAL
|
13,751,276 | 856,516 | 254,130 | 167,128 | (333,847 | ) | (407,894 | ) | 536,033 | |||||||||||||||||||
|
Other operating income
|
25,866 | |||||||||||||||||||||||||||
|
Other operating expenses
|
(36,662 | ) | ||||||||||||||||||||||||||
|
Income from investments in other companies
|
297 | |||||||||||||||||||||||||||
|
Income tax
|
(88,924 | ) | ||||||||||||||||||||||||||
|
Consolidated profit (loss) for the year
|
436,610 | |||||||||||||||||||||||||||
|
(1)
|
Loans and accounts receivables from customers plus interbank loans, gross of loan loss allowances.
|
|
(2)
|
Includes net gains from trading, net mark-to-market gains and foreign exchange transactions.
|
|
(3)
|
Includes gross provisions for loan losses, net of releases on recoveries.
|
|
(4)
|
Equal to the sum of personnel expenses, administrative expenses, amortizations and depreciations and deterioration.
|
|
(5)
|
Equal to the sum of the net interest revenue, net fee income and net financial transactions, minus net provision for loan losses and operating expenses.
|
|
(6)
|
Includes the Treasury’s client business and trading business.
|
|
(7)
|
Includes contribution of non-segmented items such as interbank loans, the cost of the Bank’s capital and fixed assets. Financial transactions, net included in other is mainly comprised of the results from the Financial Management Division (Gestion Financiera). The area of Financial Management carries out the function of managing the structural interest rate risk, the structural position in inflation indexed assets and liabilities, shareholder’s equity and liquity. The aim of Financial Management is to inject stability and recurrence into the net income of commercial activities and to assure the Bank complies with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk.
|
Operations through Subsidiaries
Today, the General Banking Law permits us to directly provide the leasing and financial advisory services that 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 twelve–month period ended December 31, 2009, our subsidiaries collectively accounted for 2.8% of our total consolidated assets.
|
Percentage Owned
|
||||||||||||||||||||||||
|
Subsidiary
|
As of December 2009
|
As of December 2008
|
||||||||||||||||||||||
|
Direct
|
Indirect
|
Total
|
Direct
|
Indirect
|
Total
|
|||||||||||||||||||
|
%
|
%
|
%
|
%
|
%
|
%
|
|||||||||||||||||||
|
Santander S.A. Corredores de Bolsa(1) (2)
|
50.59 | 0.41 | 51.00 | 50.59 | 0.41 | 51.00 | ||||||||||||||||||
|
Santander Corredores de Seguro Ltda. (Ex–Santander Leasing S.A.) (2) (3) (4)
|
99.75 | 0.01 | 99.76 | 99.75 | 0.01 | 99.76 | ||||||||||||||||||
|
Santander Asset Management 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 S.A. Sociedad Securitizadora
|
99.64 | – | 99.64 | 99.64 | – | 99.64 | ||||||||||||||||||
|
Santander Servicios de Recaudación y Pagos Limitada
|
99.90 | 0.10 | 100.00 | 99.90 | 0.10 | 100.00 | ||||||||||||||||||
|
(1)
|
During the Extraordinary Shareholders’ Meeting held on January 15, 2007 by Santander Investment S.A. Corredores de Bolsa, a related company to Banco Santander Chile, the merger between Santiago Corredores de Bolsa Limitada, a subsidiary of Banco Santander Chile, into Santander Investment S.A. Corredores de Bolsa was approved and became 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 Limitada.
|
|
(2)
|
During fiscal year 2008, the following subsidiaries changed their registered commercial names:
|
|
|
a. Santander Corredores de Seguro Ltda.
|
|
|
b. Santander S.A. Corredores de Bolsa
|
|
(3)
|
On December 4, 2007, the Superintendency of Bank, authorized the statutes modification, social rights sell and merger of the subsidiaries Santander Leasing S.A. (formerly Santiago Leasing S.A.) and Santander Corredora de Seguros Limitada (formerly Santander Santiago Corredora de Seguros Limitada).
|
|
(4)
|
During the Extraordinary Shareholders’ Meeting held on October 1, 2008 by Santander Corredora de Seguros S.A., a company affiliated with Banco Santander Chile, approved the merger which incorporated the affiliated Santander Corredora de Seguros Limitada into Santander Corredora de Seguro S.A. (previously Santander Leasing S.A.). The merger was effective January 1, 2008. At the time of the above mentioned merger, Santander Corredora de Seguros S.A. became a legal extension of Santander Corredora de Seguros Limitada. The merger of Santander Corredora de Seguros S.A. and Santander Corredora de Seguros Limitada did not result in any changes in accounting for Banco Santander Chile.
|
The consolidation/valuation methods used up to December 31, 2008 will continue to be used for subsidiaries and investment in other companies. Furthermore, pursuant to the provisions of International Accounting Standard (IAS) 27 and Standard Interpretations Committee (SIC) 12, we must determine the existence of Special Purpose Entities (SPE), which must be consolidated with the financial results of the Bank. As a result, we have incorporated into our financial statements the following companies:
|
·
|
Santander Gestión de Recaudación y Cobranzas Ltda. (collection services)
|
|
·
|
Multinegocios S.A. (management of sales force)
|
|
·
|
Servicios Administrativos y Financieros Ltda. (management of sales force)
|
|
·
|
Servicios de Cobranzas Fiscalex Ltda. (collection services)
|
|
·
|
Multiservicios de Negocios Ltda. (call center)
|
|
·
|
Bansa Santander S.A. (management of repossessed assets and leasing of properties)
|
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 24 private–sector banks and one public–sector bank. The five largest private–sector banks along with the state–owned bank together accounted for 82.1% of all outstanding loans by Chilean financial institutions at December 31, 2009.
The Chilean banking system has experienced increased competition in recent years largely due to consolidation in the industry and new legislation. Effective in November 2007, Scotiabank Sud Americano merged with Banco del Desarrollo, while in January 2008, Banco de Chile merged with Citibank 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. 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 for nearly every banking service in Chile:
|
As of December 31, 2009,
unless otherwise noted
|
||||||||
|
Market Share
|
Rank
|
|||||||
|
Commercial loans
|
17.2 | % | 2 | |||||
|
Consumer loans
|
25.8 | 1 | ||||||
|
Residential mortgage loans
|
23.7 | 2 | ||||||
|
Foreign trade loans (loans for export, import and contingent)
|
17.9 | 2 | ||||||
|
Total loans
|
19.9 | 1 | ||||||
|
Deposits(1)
|
18.2 | 3 | ||||||
|
Mutual funds (assets managed)
|
19.7 | 2 | ||||||
|
Credit card accounts
|
34.8 | 1 | ||||||
|
Checking Accounts(2)
|
26.2 | 1 | ||||||
|
Branches(3)
|
19.9 | 1 | ||||||
Source: Superintendency of Banks
|
(1)
|
Net of clearance (excludes amounts being cleared with other banks).
|
|
(2)
|
According to latest data available as of November 2009.
|
|
(3)
|
According to latest data available as of September 2009. Excludes special–service payment centers.
|
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 total loans market share as of December 31, 2009.
Loans
As of December 31, 2009, our loan portfolio was the largest among Chilean banks. Our loan portfolio on a stand–alone basis represented 19.9% 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.
|
As of December 31, 2009
|
||||||||||||
|
Loans
|
Ch$ million
|
US$ million
|
Market
Share
|
|||||||||
|
Santander Chile
|
13,727,864 | 27,063 | 19.9 | % | ||||||||
|
Banco de Chile
|
13,184,553 | 25,992 | 19.1 | |||||||||
|
Banco del Estado
|
11,078,221 | 21,840 | 16.1 | |||||||||
|
Banco de Crédito e Inversiones
|
8,797,325 | 17,343 | 12.8 | |||||||||
|
Corpbanca
|
5,011,656 | 9,880 | 7.3 | |||||||||
|
BBVA, Chile
|
4,818,896 | 9,500 | 7.0 | |||||||||
|
Others
|
12,319,530 | 24,287 | 17.9 | |||||||||
|
Chilean financial system
|
68,938,045 | 135,905 | 100.0 | % | ||||||||
Source: Superintendency of Banks
Deposits
On a stand alone basis, we had a 18.3% market share in deposits, ranking third among banks in Chile at December 31, 2009. Deposit market share is based on total time and demand deposits at the respective dates. The following table sets forth our and our peer group’s market shares in terms of deposits at the dates indicated.
|
As of December 31, 2009
|
||||||||||||
|
Deposits
|
Ch$ million
|
US$ million
|
Market
Share
|
|||||||||
|
Santander Chile
|
10,708,791 | 21,111 | 18.2 | % | ||||||||
|
Banco de Chile
|
11,145,557 | 21,973 | 19.0 | |||||||||
|
Banco del Estado
|
10,763,983 | 21,220 | 18.4 | |||||||||
|
Banco de Crédito e Inversiones
|
7,892,111 | 15,559 | 13.5 | |||||||||
|
BBVA, Chile
|
3,837,236 | 7,565 | 6.6 | |||||||||
|
Corpbanca
|
3,812,315 | 7,516 | 6.5 | |||||||||
|
Others
|
10,409,967 | 20,522 | 17.8 | |||||||||
|
Chilean financial system
|
58,569,960 | 115,466 | 100.0 | % | ||||||||
Source: Superintendency of Banks
Shareholders’ equity
With Ch$1,658,316 million (US$3,269 million) in shareholders’ equity at December 31, 2009, we were the largest commercial bank in Chile in terms of shareholders’ equity. The following table sets forth our and our peer group’s shareholders’ equity at December 31, 2009.
|
As of December 31, 2009
|
||||||||||||
|
Shareholders’ Equity(1)
|
Ch$ million(2)
|
US$ million
|
Market
Share
|
|||||||||
|
Santander Chile
|
1,658,316 | 3,269 | 20.7 | % | ||||||||
|
Banco de Chile
|
1,392,745 | 2,746 | 17.4 | |||||||||
|
Banco del Estado
|
933,484 | 1,840 | 11.7 | |||||||||
|
Banco de Crédito e Inversiones
|
896,150 | 1,767 | 11.2 | |||||||||
|
Corpbanca
|
503,535 | 993 | 6.3 | |||||||||
|
BBVA, Chile
|
479,960 | 946 | 6.0 | |||||||||
|
Others
|
2,139,319 | 4,217 | 26.7 | |||||||||
|
Chilean financial system
|
8,003,509 | 15,778 | 100.0 | % | ||||||||
Source: Superintendency of Banks.
(1) Percentage of total shareholders’ equity of all Chilean banks.
(2) As required by local regulations.
Efficiency
For the year ended December 31, 2009, 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 the aggregate of net interest income, fees and income from services (net), net gains from mark–to–market and trading, exchange differences (net) and other operating income (net)) for the twelve–month period indicated.
|
Efficiency ratio
|
As of December 31, 2009(1)
|
|||
|
%
|
||||
|
Santander Chile
|
32.2 | % | ||
|
Banco de Chile
|
46.7 | |||
|
Banco del Estado
|
61.9 | |||
|
Banco de Crédito e Inversiones
|
46.4 | |||
|
BBVA, Chile
|
48.0 | |||
|
Corpbanca
|
40.8 | |||
|
Chilean financial system
|
46.1 | % | ||
Source: Superintendency of Banks.
(1) As required by local regulations.
Net income
For the twelve–month period ended December 31, 2009, we were the largest bank in Chile in terms of net income with Ch$436,306 million (US$860.1 million). The following table sets forth our and our peer group’s net income for the year ended December 31, 2009.
|
As of December 31, 2009
|
||||||||||||
|
Net income(1)
|
Ch$ million(2)
|
US$ million
|
Market
Share
|
|||||||||
|
Santander Chile
|
436,306 | 860.1 | 35.6 | % | ||||||||
|
Banco de Chile
|
257,887 | 508.4 | 21.0 | |||||||||
|
Banco de Crédito e Inversiones
|
160,774 | 317.0 | 13.1 | |||||||||
|
Corpbanca
|
85,109 | 167.8 | 6.9 | |||||||||
|
BBVA, Chile
|
68,030 | 134.1 | 5.6 | |||||||||
|
Banco del Estado
|
60,357 | 119.0 | 4.9 | |||||||||
|
Others
|
156,724 | 309.0 | 12.8 | |||||||||
|
Chilean financial system
|
1,225,187 | 2,415.4 | 100.0 | % | ||||||||
Source: Superintendency of Banks.
(1) Net income before minority interest.
(2) As required by local regulations.
Return on average equity
As of December 31, 2009, we were the most profitable bank in our peer group (as measured by return on average equity) and the most capitalized bank as measured by the BIS ratio. The following table sets forth our and our peer group’s return on average equity and BIS ratio for the year ended December 31, 2009.
|
Return on average equity
as of December 31, 2009
|
BIS Ratio as of
December 31, 2009
|
|||||||
|
Santander Chile
|
27.3 | 15.6 | % | |||||
|
Banco de Chile
|
19.0 | 12.7 | ||||||
|
Banco del Estado
|
6.3 | 12.4 | ||||||
|
Banco de Crédito e Inversiones
|
19.3 | 12.1 | ||||||
|
BBVA, Chile
|
14.7 | 14.0 | ||||||
|
Corpbanca
|
17.5 | 13.9 | ||||||
|
Chilean Financial System
|
15.5 | % | 14.3 | % | ||||
|
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.
|
Asset Quality
At December 31, 2009, on a stand alone basis, we had the second highest loan loss allowance to total loans ratio (expected loss ratio) in our peer group. The following table sets forth our and our peer group’s loan loss allowance to total loans ratio as defined by the Superintendency of Banks at the dates indicated.
|
Loan loss allowances/total loans as of December 31, 2009
|
||||
|
Santander Chile
|
2.54 | % | ||
|
Banco de Chile
|
2.45 | |||
|
Banco del Estado
|
2.75 | |||
|
Banco de Crédito e Inversiones
|
2.21 | |||
|
BBVA, Chile
|
1.61 | |||
|
Corpbanca
|
1.91 | |||
|
Chilean financial system
|
2.43 | % | ||
Source: Superintendency of Banks
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 cases 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 by-laws 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. The Superintendency of Banks may only refuse to grant its approval, based on specific grounds set forth in the General Banking Law.
According to Article 35bis 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 estate for the bank’s own use, gold, foreign exchange 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.
Since June 1, 2002, Chilean banks are allowed to 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.
On June 5, 2007, pursuant to Law 20.190, new regulations became effective authorizing banks to enter into transactions involving a wider range of derivatives, such as futures, options, swaps, forwards and other derivative instruments or contracts subject to specific limitations established by the Central Bank of Chile. Previously, banks were able to enter into transactions involving derivatives, but subject to more restrictive guidelines.
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$2,513,146 or US$4,954 as of December 31, 2009) per calendar year in the entire financial system.
Reserve Requirements
Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for 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 currency 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 deposit for calculating reserve requirement;
|
|
·
|
certain payment orders issued by pension providers; and
|
|
·
|
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 regulatory capital, 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, and in general all deposits unconditionally payable immediately.
Minimum Capital
Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$16,754 million or US$33.0 million as of December 31, 2009) of paid-in capital and reserves, 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.
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.
|
Capital Adequacy Requirements
According to the General Banking Law, each bank should have 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 Basel Committee recommendations. On 2009, the Superintendency of Banks postponed until 2012 the application of the third pillar of Basel II in Chile, which
includes the implementation of capital limits with market risk and operational risk-weighted assets. These changes must be approved by Congress as it involves a modification to the General Banking Law.
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.
Starting in 2008, banks are able to include net income for the period as basic capital, net of a 30% deduction for minimum dividends accrued.
Within the scope of Basel II in Chile, further changes in regulation may occur. See “Risk Factors—Risks Relating to Chile—Chile’s banking regulatory and capital markets environment is continually evolving and may change.”
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 10.0% of the bank’s regulatory capital, or in an amount that exceeds 30.0% of its regulatory capital if the excess over 10.0% is secured by certain assets with a value equal to or higher than such excess. These limits were raised from 5.0% and 25.0%, respectively, in 2007 by the Reformas al Mercado de Capitales II (also known as MK2). In the case of financing infrastructure projects built by government concession, the 10.0% 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.
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.
Under our loan classification categories 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). A detailed description of the models established for determining loan loss allowances is set forth in “Item 5: F. Selected Statistical Information—Classification of Loan Portfolio” and in Note 1 of our Audited Consolidated Financial Statements.
New Guidelines of Provisioning Levels for Contingent Loans in 2010
Commencing in January 2010, all Chilean banks will be required by the SBIF to include in the calculation of expected loss and reserve levels, a percentage of off-balance sheet contingent loans. This includes, among others, lines of credit approved but not disbursed, unused credit card lines, stand-by letters of credit and other operations guaranteed by the Bank. As a result, a greater percentage of these assets will be included in the calculation of risk weighted assets. The impact of this change was Ch$52,662 million charged against equity as of March 31, 2010. This provision only applies to locally filed financial statements.
|
Off-balance sheet contingent operations
|
Percentage of total debt outstanding to be included in new risk weightings
|
|
|
Guarantees
|
50%-100%
|
|
|
Lines of credit and unused credit card balances
|
50%
|
|
|
Stand-by letters of credit
|
20%
|
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 and other demand deposits received in the ordinary course of business, 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 Risks”).
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
|
Rating Agency
|
Short Term
|
Long Term
|
||
|
Moody’s
|
P2
|
Baa3
|
||
|
Standard and Poor’s
|
A3
|
BBB-
|
||
|
Fitch
|
F2
|
BBB-
|
||
|
Duff & Phelps
|
D2
|
BBB-
|
In the event that the sum of the investments in foreign securities which have a: (i) rating that is below that indicated in Table 1 above, but is equal to 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
|
Rating Agency
|
Short Term
|
Long Term
|
||
|
Moody’s
|
P2
|
Ba3
|
||
|
Standard and Poor’s
|
A3
|
BB-
|
||
|
Fitch
|
F2
|
BB-
|
||
|
Duff & Phelps
|
D2
|
BB-
|
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 to 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
|
Rating Agency
|
Short Term
|
Long Term
|
||
|
Moody’s
|
P1
|
Aa3
|
||
|
Standard and Poor’s
|
A1+
|
AA-
|
||
|
Fitch
|
F1+
|
AA-
|
||
|
Duff & Phelps
|
D1+
|
AA-
|
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 to or above that in the immediately preceding Table 3, which return is linked with a corporate or sovereign note with a rating equal to 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 for the financial markets
Further new regulations governing the Chilean capital markets are being discussed. Chile’s Congress passed a new bill on June 1, 2010 (known as MK3) that aims to increase trading in Chile, Latin America’s third-biggest securities market, by allowing new instruments such as exchange-traded funds and covered bonds. The Chamber of Deputies, Chile’s lower house, voted in favor of the bill, which also seeks to ease credit access for consumers and small companies. The measures will make it easier for foreign banks to offer loans in Chile, cut securitization costs and allow banks to sell bonds backed by mortgages. The new law will also offer tax breaks to foreign investors in Chilean mutual funds. The bill also aims to reduce the cost of setting up mutual funds and create an exchange-traded funds industry by modifying mutual fund rules to allow secondary trading and enable pension funds to invest in them. The new law also removes limits on employing non-Chileans that may have prevented overseas fund managers from opening offices in Chile. It also strikes down a law that prevented foreign banks from advertising loans. The new class of bonds, known as “mortgage bonds,” will be debt backed by the company that sells them as well as by a pool of mortgages, as in European covered bonds. Unlike covered bonds, they may be issued by non-banks as well as banks.
The current Finance Minister, Felipe Larrain, plans another package of reforms known as MKB (Reformas al Mercado Financiero Bicentenario). The MKB is comprised of a series of administrative changes and new regulations over the next four years. The reforms include the creation of a financial consumer protection agency, the transformation of the local securities exchange regulator (SVS) into a securities commission and giving more autonomy to the SBIF. The new regulations would also aim to expand the use of the Chilean peso and simplify taxes on fixed-income securities. The proposed legislation would also include measures to increase bank penetration and household savings. The reforms also aim to create new instruments that give more efficient financing alternatives to
small and mid-sized companies and individuals, together with creating specific statutes for niche banks and micro credit financing. The proposed legislation would also reduce the pro-cyclicality of loan loss provisions and seek to enhance solvency and liquidity (the latter must be done through a change in the General Banking Law).
U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations
The Bank, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of the Bank’s officers and/or directors can be imposed for violations of the FCPA.
Furthermore, the Bank is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT ACT of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of the Bank’s officers and/or directors.
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 ten other buildings in the vicinity of our headquarters and we rent five other buildings. At December 31, 2009, we owned the locations at which 33.5% of our branches were located. The remaining branches operate at rented locations. We believe that our existing physical facilities are adequate for our needs.
The Bank’s branches, systems and employees were all impacted by the recent earthquake. Of the Bank’s 498 branches, 405 had some form of damage, of which 32 sustained serious damages and 9 were closed as of May 31, 2010. Of the Bank’s 1,856 all were operating normally as of May 31, 2010. The Bank’s systems were not functioning immediately following the earthquake, but by March 1, 2010 the systems were functioning normally, all open branches were online and all remote channels were operating normally. The Bank expects additional administrative expenses from the earthquake, net of insurance proceeds, recognized in 2010 to be US$6 million.
|
Main properties as of December 31, 2009
|
Number
|
|||
|
Central Offices
|
||||
|
Own
|
10 | |||
|
Rented
|
5 | |||
|
Total
|
15 | |||
|
Branches (1)
|
||||
|
Own
|
167 | |||
|
Rented
|
245 | |||
|
Total
|
412 | |||
|
Other property (2)
|
||||
|
Own
|
62 | |||
|
Rented
|
6 | |||
|
Total
|
68 | |||
|
(1)
|
Some branches are located inside central office buildings and other properties. Including these branches the total number of branches is 498. Special payment centers are included in Other property.
|
|
(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.
|
Category
|
Brand
|
Application
|
|
Mainframe
|
IBM
|
Back-end, Core-System Altair, Payment means and foreign trade.
|
|
Midrange
|
IBM
|
Interconnections between Mainframe and mid-range
|
|
Midrange
|
SUN/Unix
SUN/UNIX
|
Interconnections applications Credit & debit cards
Treasury, MIS, Work Flow, Accounting
|
|
Midrange
|
IBM
|
WEB
|
|
Desktop
|
IBM/HP/Lenovo
|
Platform applications
|
|
Call Center
|
Avaya
Genesys
Nice
Periphonics
|
Telephone system
Integration Voice/data
Voice recorder
IVR
|
The main software systems that we use are:
|
Category
|
Product
|
Origin
|
||
|
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
|
As of the date of the filing of this Annual Report on 20-F, we do not have any unresolved comments from the U.S. Securities and Exchange Commission.
A. Accounting Standards Applied in 2009
Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), in order to comply with requirements of the Securities and Exchange Commission (the “SEC”).
As required by local regulations, our locally filed consolidated financial statements have been prepared in accordance with accounting principles issued by the Superintendency of Banks and Financial Institutions (the “SBIF”). The accounting principles issued by the SBIF are substantially similar to IFRS but there are some exceptions. Therefore, our locally filed consolidated financial statements have been adjusted according to IFRS 1: First Time Adoption of International Financial Reporting Standards (see Note 2 to our audited consolidated financial statements attached to this Annual Report).
In Chile, the local securities exchange regulator (SVS) announced in 2004 that all public companies will be required to present full IFRS financial statements beginning in 2009. The convergence from local accounting regulations to IFRS is to follow a gradual adoption plan which will take place over at least a three-year period from 2009 to 2011, beginning with banking institutions in 2009. Full convergence is the intended goal of the transition to IFRS. However, due to the gradual approach to the adoption of IFRS and because not all regulators require full IFRS, different accounting frameworks will coexist for a period of time.
Chilean banks are subject to the regulatory supervision of the SBIF under the provisions of the General Banking Act (“Act”) of 1997. The Act establishes that in accordance with legal regulations, Chilean banks must abide by the accounting standards stipulated by the SBIF.
The SBIF, by means of Circular No. 3,410 (2007) and Circular No. 3,443 (2008) announced the “Compendium of Accounting Standards”, which contains new accounting standards and reporting formats for the financial industry required to be adopted by banking institutions effective January 1, 2009. Banks are required to apply the new accounting and reporting to the current period financial statements for 2009 and to retrospectively apply the new standard to January 1, 2008 and include an opening balance sheet for the reporting period ended December 31, 2008.
Although banks are required to apply IFRS as of January 1, 2009, certain exceptions introduced by the SBIF prevent the banks from achieving full convergence with IFRS. In those situations which are not addressed by the guidance issued by the SBIF, institutions shall follow the generally accepted accounting principles issued by the Association of Chilean Accountants which coincide with IFRS as issued by the IASB (“IFRS-IASB”).
Therefore, as stated above, in order to comply with requirements of the SEC, the Bank has prepared the consolidated financial statements included in this Annual Report under IFRS-IASB.
Santander-Chile’s transition date to IFRS is January 1, 2008. The Bank prepared its opening balance under these standards as of such date. Consequently, the date of adoption of the new standards by the Bank and its subsidiaries is January 1, 2009.
Note 2 to our consolidated financial statements, “First time adoption of International Financial Reporting Standards”, provides a reconciliation between the balances of the Consolidated Statement of Financial Position at the opening and closing of the year ending December 31, 2008 and the corresponding Consolidated Statement of Income, Consolidated Statement of Comprehensive Income and Consolidated Statement of Cash Flows generated during such year. Therefore, the figures shown in the Bank’s financial statements for 2008, included in the attached financial statements, differ from those reported in the previous year, which were prepared under the previous accounting standards.
The notes to the audited consolidated financial statements contain information in addition to that presented in the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows. These notes provide a narrative description of such statements.
The financial statements for the period ending as of December 31, 2009 were the first prepared according to IFRS. This change incorporates the following important aspects:
- Significant changes in accounting policies, valuation criteria, and forms of presentation of financial statements.
- A significant increase in the information included in the notes to the financial statements.
The following is a description of the nature of the principal effects or adjustments arising from the first time adoption of IFRS:
Financial Statements—Consolidation Requirements
The consolidation/valuation methods used up to December 31, 2008 under previous accounting standards have continued to be used for subsidiaries and investments in other companies. Furthermore, pursuant to the provisions of International Accounting Standard (IAS) 27 and Standard Interpretations Committee (SIC) 12, the Bank must determine the existence of Special Purpose Entities (SPE), which must be consolidated with the financial results of the Bank. As a result, we have incorporated into our financial statements the following companies:
-Santander Gestión de Recaudación y Cobranzas Ltda. (collection services)
-Multinegocios S.A. (management of sales force)
-Servicios Administrativos y Financieros Ltda. (management of sales force)
-Fiscalex Ltda. (collection services)
-Multiservicios de Negocios Ltda. (call center)
-Bansa Santander S.A. (management of repossessed assets and leasing of properties)
Investments in other companies
The effects generated by adopting IFRS on each of the companies in which we have investments consolidated by the equity method are reflected in this item based on the percentage of these companies’ equity that is held by us.
Price level restatement
Pursuant to IAS 29 “Financial Information in Hyperinflationary Economies,” a price level restatement will henceforth be applied only when the entity whose functional currency is that of a hyperinflationary economy (defined as an economy experiencing 100 percentage points of inflation in 3 years). The Bank’s functional currency is the Chilean peso. Since the Chilean economy does not meet the aforementioned requirements, the Bank was required to eliminate the price level restatement as of January 1, 2008. Pursuant to the use of exceptions permitted or required by IFRS 1, the price level restatement applied up to December 31, 2007 was not reversed.
Property, plant and equipment and intangible assets
The main effects of the recalculation of depreciation and amortization of intangible assets (software and information technology developments) and property, plant and equipment as a result of the elimination of the price-level restatement (as described above) and the determination of the cost of property, plant and equipment on January 01, 2008 are included.
In accordance with IFRS 1, a first-time adopter may elect to use a revaluation pursuant to previous accounting standards of an item of property, plant and equipment at, or before, the date of transition to IFRS at deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (i) fair value; or (ii) cost or depreciated cost in accordance with IFRS. The Bank has elected to revalue certain items of property, plant and equipment at its fair value and use that fair value at its deemed cost. For the remaining items of property, plant and equipment, it has used the depreciated cost for revaluation pursuant to previous accounting standards as its deemed cost.
Assets received in lieu of payment
Previously, assets received in lieu of payment (“ARP”) were valued at cost (the price agreed upon with the debtor for the transfer in payment or the value determined at a judicial auction, as the case may be, after price-level restatement), minus a provision for individual valuation based on an independent appraisal.
The most important change in the valuation of ARP in IFRS (in addition to the elimination of the price-level restatement as described previously) is that, when making the provision for initial valuation, it is necessary to take into account its net realizable value, i.e., its fair value (independent appraised value), minus the necessary costs of maintaining and divesting it.
According to studies performed by the Bank, an average cost of sale (the cost of maintaining and divesting the good) estimated at 5.8% of the appraised value was determined as of January 1, 2008; such cost rose to 6.5% as of December 31, 2008.
The effects generated by the application of the cost of sale described above are presented in this item.
Charge-offs
Under previous accounting standards, the term for charging off (or impairment loss on loans) past-due and late installments on credits and accounts receivable was calculated from the time of their classification in the past-due portfolio, which represented loans in arrears for payment of principal and interest by ninety days or more. This method was realized previously on a scheduled payment by payment basis.
Under IAS 39 “Financial Instruments: Recognition and Measurement” an impairment loss of a financial asset or a group of financial assets is recognized if, and only if , objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a loss event), and that loss (or events) has an impact on the estimated future cash flows of a financial asset or group of financial assets that can be reliably estimated. It may not be possible to identify a single event that caused the impairment. According to this definition, the impairment is determined for each loan by considering its total amount and no longer on a scheduled payment by payment basis as under previous accounting standards.
An impairment relating to a loan is calculated as the difference between the recorded asset’s carrying value and the present value of estimated future cash flows, discounted at the effective interest rate.
Individually significant financial assets are individually tested to determine their impairment. All impairments are recorded in the Consolidated Statement of Income.
The Bank has recognized the effects arising from the application of IFRS for charge-offs of loans and accounts receivable, as well as the associated effect caused in the allowances established for each transaction (when 100% of the transaction was charged-off, the related allowances were released).
Deferred taxes
This item brings together the tax effects (deferred taxes) generated by the timing differences arising, in turn, out of the aforementioned adjustments, whether they apply directly to shareholders' equity or to income.
B. First time adoption of International Financial Reporting Standards (IFRS)
The transition of the consolidated financial statements of the Bank to IFRS has been carried out through the application of IFRS 1: First time adoption of International Financial Reporting Standards, applying the exemption provided by this standard.
The Bank has applied the following exemptions as permitted by IFRS 1:
i. Business Combinations
The Bank has applied the exemption provided under IFRS 1 for business combinations, and, therefore, did not apply IFRS 3, Business Combinations retrospectively to those business combinations that occurred prior to the transition date of January 1, 2008.
ii. Value or revaluations as deemed cost
The Bank elected to measure certain items of property, plant and equipment at the date of transition at their fair value and use that fair value as their deemed cost at that date. Likewise, the Bank decided to measure the other items of property, plant and equipment at their price-level restated cost as of January 1, 2008.
C. Other Critical Accounting Policies
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 it believes 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
As of December 31, 2008 and 2009, 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.
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 the income statement. The Superintendency of Banks recognizes three kinds of hedge accounting: (i) cash flow hedges, (ii) fair value hedges and (iii) hedging of foreign investments.
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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.
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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 since 2006.
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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.
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Allowance for loan losses
The Bank maintains loan loss allowances in amounts determined in accordance with its internal models. These models for rating and evaluating credit risk are approved by the Bank’s Board of Directors. Our 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 borrower’s obligations to third parties. (See “Item 5: F. Selected Statistical Information—Loan Portfolio—Classification of Loan Portfolio.”
Our internal provisioning models use 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. Large commercial loans are rated on an individual basis. For large commercial loans, leasing and factoring, we assign a risk category level to each borrower and its respective loans. We consider the following risk factors in classifying a borrower’s risk category: (i) the borrower’s industry or sector, (ii) owners or managers, (iii) financial condition, (iv) payment ability and (v) payment behavior. For a detailed description of the models we use to determine loan loss allowances for commercial loans. See “Item 5: F. Selected Statistical Information—Loan Portfolio—Classification of Loan Portfolio—Allowances for large commercial loans.” Group assessment for loan loss allowances is applied 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: F. Selected Statistical Information—Loan Portfolio—Classification of Loan Portfolio—Allowances for group evaluations on small- and mid-sized commercial loans.”)
D. 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 this country. In the first half of 2009, the Chilean economy continued to feel the effects of the global financial crisis while in the second half of the year economic growth began to gather momentum. As a result, for the full year 2009, GDP contracted 1.4% compared to an increase of 3.4% in 2008. In 1Q10, the economy contracted 1.5% mainly due to the impacts of the earthquake that occurred in February 2010.
Quarterly and Yearly Evolution of GDP, %
The decline in the Chilean economy in 2009 was due in part to the fall in the average prices of Chile’s main exports. The average price of copper in 2009 fell 28% compared to the average price in 2008. In the same period, the average price of fish meal increased 1.7% and average paper pulp prices decreased 29.2%. This led to a 20.2% decrease in total exports which totaled US$53.0 billion in 2009 compared to US$66.5 billion in 2008. The recovery of the Chilean economy in the second half was led in part by a recovery of the prices of Chile’s main exports. The year-end price of copper increased 126.7%, fish meal increased 46% and paper pulp prices rose 19.4% compared to the year-end price of these products in 2008.
Evolution of Prices of Chile’s Main Exports (Base 100 = Dec. 2007)
Source: Banco Central de Chile
The global economic crisis also affected domestic demand levels (investment and consumption) in 2009. Total investment in 2009 decreased 33.3% and private sector consumption increased 0.2%. This was partially offset by an 8.2% rise in government spending levels as the government used part of the sovereign funds accumulated in previous years. At year-end 2009 the Chilean government still had US$17 billion in sovereign funds and the Chilean Central Bank had reserves of US$26.2 billion. The general decline in domestic demand had a negative impact on unemployment, which averaged 9.9% in 2009 compared to 9.6% compared to 7.7% in 2008.
The CPI reversed the upward trend seen in 2008 and prices fell in 2009. CPI deflation reached 1.4% in 2009 compared to a 7.1% rise in prices in 2008. As a result of the contraction of price levels and lower economic activity, interest rates declined in 2009. The overnight interbank rate set by the Central Bank was lowered by 750 basis points in 2009 and is currently at 1.0%. Despite this deflation, the Chilean peso appreciated in 2009 as the value of the dollar weakened worldwide. As of December 31, 2009, the Chilean peso had appreciated 19.5% against the dollar since year-end 2008.
Central Bank Reference Rate, %
Source: Banco Central de Chile
Banking Sector
The Chilean banking sector also evolved in line with the economic developments during 2009 with a reduction in the volume of loan growth as result of the economic slowdown and an increase in disintermediation among large corporate clients through the local bond market. Total loans as of December 31, 2009 in the Chilean financial system were Ch$68,938,045 million (US$136 billion), a decrease of 1.9% compared to the balance of loans as of December 31, 2008. Total customer funds defined as time deposits plus checking accounts plus mutual funds totaled Ch$75,929,201 million (US$150 billion) as of December 31, 2009, an increase of 5.0% compared to year-end 2008. The table below demonstrates the deterioration of asset quality in the Chilean financial system was observable as a result of the economic slowdown from 2008 to 2009:
Evolution of expected loan loss ratio*
* Expected loss divided by Total loans. Expected loss = Loan loss reserves / Total loans. Source: Superintendency of Banks
Earthquake
On February 27, 2010, Chile was struck by an 8.8 magnitude earthquake, which mainly affected the mid-southern regions of Chile. As a result of these developments, economic activity in Chile could be adversely affected in 2010. We also expect the economy and banking activity generally and our results of operations specifically in 2010 to be adversely affected. We may experience any or all of the following: