Edgar Filing: BANK OF CHILE

Form 20-F

As filed with the Securities and Exchange Commission on April 25, 2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

Commission file number 001-15266

BANCO DE CHILE

(Exact name of Registrant as specified in its charter)

BANK OF CHILE

(Translation of Registrant’s name into English)

REPUBLIC OF CHILE

(Jurisdiction of incorporation or organization)

Banco de Chile

Paseo Ahumada 251

Santiago, Chile

(562) 2637-1111

(Address of principal executive offices)

Pedro Samhan E.

Banco de Chile

Paseo Ahumada 251

Santiago, Chile

Telephone: (562) 653-5150

Facsimile: (562) 653-5156

(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:


Title of each class		Name of each exchange on which registered
American Depositary Shares, each representing 600 shares of common stock, without nominal (par) value (“ADSs”)		New York Stock Exchange

Shares of common stock, without nominal (par) value		New York Stock Exchange (for listing purposes only)

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:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Shares of common stock: 93,175,043,991

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

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. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP ¨		IFRS x		Other ¨

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. ¨ Item 17 ¨ Item 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). Yes ¨ No x

TABLE OF CONTENTS


PART I		1

Item 1	Identity of Directors, Senior Management and Advisors	1
Item 2	Offer Statistics and Expected Timetable	1
Item 3	Key Information	1
Item 4	Information on the Company	14
Item 5	Operating and Financial Review and Prospects	94
Item 6	Directors, Senior Management and Employees	133
Item 7	Major Shareholders and Related Party Transactions	149
Item 8	Financial Information	156
Item 9	The Offer and Listing	160
Item 10	Additional Information	163
Item 11	Quantitative and Qualitative Disclosures About Market Risk	181
Item 12	Description of Securities Other Than Equity Securities	181
Item 12A	Debt Securities	181
Item 12B	Warrants & Rights	181
Item 12C	Other Securities	181
Item 12D	American Depositary Shares	181

PART II		183

Item 13	Defaults, Dividend Arrearages and Delinquencies	183
Item 14	Material Modifications to the Rights of Security Holders and Use of Proceeds	183
Item 15	Controls and Procedures	183
Item 16A	Audit Committee Financial Expert	184
Item 16B	Code of Ethics	184
Item 16C	Principal Accountant Fees and Services	184
Item 16D	Exemptions from the Listing Standards for Audit Committees	185


Item 16E	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	185
Item 16F	Change in Registrant’s Certifying Accountant	185
Item 16G	Corporate Governance	185

PART III		188

Item 17	Financial Statements	188
Item 18	Financial Statements	188
Item 19	Exhibits	188

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we have based these forward-looking statements on our expectations and projections about future events, it is possible that actual results may differ materially from our expectations. In many cases, we include a discussion of the factors that are most likely to cause forward-looking statements to differ from actual results together with the forward-looking statements themselves. These statements appear throughout this annual report, including, without limitation, under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Examples of such forward-looking statements include:

•

projections of operating revenues, net income (loss), net income (loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios;

•

statements of our plans, objectives or goals, including those related to anticipated trends, competition and regulation;

•

statements about market risks, including interest rate risk and foreign exchange risk;

•

statements about our future economic performance or that of Chile or other countries in which we operate; and

•

statements of assumptions underlying such statements.

Words such as “believe,” “anticipate,” “plan,” “aims,” “seeks,” “expect,” “intend,” “target,” “objective,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “could,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These statements may relate to (i) our asset growth and financing plans, (ii) trends affecting our financial condition or results of operations and (iii) the impact of competition and regulations, but are not limited to such topics. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this annual report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors not currently expected by us could significantly alter the results set forth in these statements.

Factors that could cause actual results to differ materially and adversely include, but are not limited to:

•

changes in general economic, business, political or other conditions in Chile, or changes in general economic or business conditions in Latin America, the United States, Europe or Asia;

•

changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Chilean companies;

•

increased costs;

•

increased competition and changes in competition or pricing environments, including the effect of new technological developments;

•

unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;

•

natural disasters;

•

the effect of tax laws on our business; and

•

the factors discussed under “—Risk Factors.”

You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. This cautionary statement should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to publicly release any revisions to such forward-looking statements after the filing of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

iii

THE MERGER

On January 1, 2008, Banco de Chile (the “Bank”) merged with Citibank Chile in a transaction in which Banco de Chile was the surviving corporate entity. As used in this annual report, unless the context otherwise requires, references to “Banco de Chile” relating to any date or period prior to January 1, 2008 (the effective date of the merger) are to Banco de Chile as it existed prior to the consummation of the merger, and such references relating to any date or period on or after January 1, 2008 are to Banco de Chile after the consummation of the merger.

PRESENTATION OF FINANCIAL INFORMATION

We prepare our audited consolidated financial statements in Chilean pesos and in accordance with International Financial Reporting Standards in effect from time to time as issued by the International Accounting Standards Board (“IFRS”). Unless otherwise specified, all financial information herein is in IFRS.

Until and including our consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2008, we prepared our audited consolidated financial statements in accordance with generally accepted accounting principles in Chile as supplemented by the applicable rules of the Superintendencia de Bancos e Instituciones Financieras de Chile (the “SBIF”) (“Chilean GAAP”), with reconciliations to generally accepted accounting principles in the United States (“U.S. GAAP”). As required by IFRS 1—First Time Adoption of International Financial Reporting Standards, our financial position as of December 31, 2008 and our results of operations for the year ended December 31, 2008 were restated in accordance with IFRS 1 for comparative purposes. Reconciliations and a description of the transition to IFRS, and the effects on our assets, liabilities, equity, net income and cash flows are presented in Note 5 to our audited consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2010. Unless otherwise indicated, the financial information included in this annual report with respect to 2009, 2010, 2011, 2012 and 2013 has been derived from financial statements that have been prepared in accordance with IFRS. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean GAAP. As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.

Since adopting IFRS, we are no longer required to reconcile our financial statements to U.S. GAAP.

For comparison purposes and as a result of changes in certain accounting policies, some line items in our consolidated statement of income and balance sheet have been reclassified for the years ended December 31, 2011 and 2012. For more information, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—New Standards Adopted in 2013”, as well as Notes 2(aj), 3 and 4 to our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report.

In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos (see Note 2(u) to our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report), and references to “UF” are to “Unidades de Fomento.” The UF is an inflation indexed Chilean monetary unit of account with a value in Chilean pesos that is linked to and adjusted daily to reflect changes in the Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the “Chilean National Statistics Institute”). As of December 31, 2013, one UF equaled Ch$23,309.56.

This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for your convenience. 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 our audited consolidated financial statements as of and for the year ended December 31, 2013 or could be converted into U.S. dollars at the rate indicated. Until November 30, 2011, Banco de Chile applied the observed exchange rate reported by the Banco Central de Chile (the “Central Bank”) in order to translate its financial statements from Chilean pesos to U.S. dollars. However, beginning December 1, 2011, Banco de Chile adopted the exchange rate of accounting representation, or spot exchange rate, for such matters. This is also described in “Item 3. Key Information—Selected Financial Data—Exchange Rates.” Thus, unless otherwise indicated, the U.S. dollar amounts have been translated from Chilean pesos based on the exchange rate of accounting representation as of December 31, 2013 as determined by our Treasury and Money Market Operations segment, on a daily basis, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. The exchange rate of accounting representation on April 15, 2014 was Ch$549.66 = U.S. $1.00. As of the same date, the observed exchange rate was Ch$549.04 = U.S.$ 1.00.

The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

Unless otherwise specified, all references in this annual report to total loans are to loans to customers before deducting allowances for loan losses, and they do not include loans to banks or contingent loans. In addition, all market share data and financial indicators for the Chilean banking system as compared to Banco de Chile’s financial information presented in this annual report are based on information published periodically by the SBIF which is published under Chilean GAAP and prepared on a consolidated basis.

In this annual report, “total past-due loans” are the loan installments that are 90 or more days overdue and the remaining outstanding balance of such loan (principal and interests) overdue. See “Item 4. Information on the Company—Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

According to Chilean regulations and for the purposes of this annual report, regulatory capital (“Regulatory Capital”) consists of:

•

basic capital, which is composed of our paid-in capital, reserves and retained earnings, excluding capital attributable to subsidiaries and foreign branches (“Basic Capital”); and

•

supplementary capital, which is composed of the following: (i) our subordinated bonds, considered at issue price (reduced by 20% for each year during the period commencing six years prior to maturity), but not exceeding 50% of our Basic Capital; plus (ii) our voluntary allowances for loan losses (up to 1.25% of risk-weighted assets to the extent voluntary allowances exceed those that banks are required to maintain by law or regulation); minus (iii) our goodwill and unconsolidated investments in companies (“Supplementary Capital”).

Certain figures included in this annual report and in our audited consolidated financial statements as of and for the year ended December 31, 2013 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, percentage amounts in this annual report may vary slightly from those obtained by performing the same calculations using the figures in our audited consolidated financial statements as of and for the year ended December 31, 2013. Certain other amounts that appear in this annual report may similarly not sum due to rounding.

Inflation figures are those reported by the Chilean National Statistics Institute, unless otherwise stated herein or required by the context.

MACRO-ECONOMIC AND MARKET DATA

In this annual report, all macro-economic data relating to the Chilean economy is based on information published by the Central Bank. All market share data, financial indicators and other data relating to the Chilean financial system are based on information published periodically by the SBIF, which is published under Chilean GAAP and prepared on a consolidated basis.

PART I

Item 1

Identity of Directors, Senior Management and Advisors

Not Applicable.

Item 2

Offer Statistics and Expected Timetable

Not Applicable.

Item 3

Key Information

SELECTED FINANCIAL DATA

The following tables present historical financial information about us as of the dates and for each of the periods indicated. The following tables should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report. The financial information for the years ended December 31, 2009, 2010, 2011, 2012 and 2013 is presented under IFRS.

Our audited consolidated financial statements have been prepared in accordance with IFRS for the years ended December 31, 2009, 2010, 2011, 2012 and 2013.


	For the Year Ended December 31,
	2009			2010			2011			2012			2013			2013
	(in millions of Ch$, except share and per share data)															(in thousands of U.S.$)⁽¹⁾
IFRS:
CONSOLIDATED STATEMENT OF INCOME DATA
Interest revenue	Ch$	900,407		Ch$	1,092,003		Ch$	1,501,684		Ch$	1,672,766		Ch$	1,765,942		U.S$	3,359,092
Interest expense		(222,883	)		(324,377	)		(624,209	)		(708,629	)		(704,371	)		(1,339,822	)

Net interest income		677,524			767,626			877,475			964,137			1,061,571			2,019,270
Net fees and commissions income		246,053			277,566			290,108			287,272			287,093			546,095
Net financial operating income		(138,179	)		17,163			58,101			16,199			32,672			62,147
Foreign exchange transactions, net		220,999			63,762			(7,973	)		35,136			71,457			135,922
Other operating income		22,190			23,584			24,735			20,887			25,884			49,235
Provisions for loan losses		(241,345	)		(157,651	)		(146,925	)		(166,420	)		(221,653	)		(421,618	)
Total operating expenses		(485,947	)		(529,969	)		(595,000	)		(612,934	)		(619,530	)		(1,178,440	)
Income attributable to associates		840			1,609			3,054			(468	)		1,780			3,386

Income before income taxes		302,135			463,690			503,575			543,809			639,274			1,215,997
Income taxes		(40,389	)		(46,425	)		(65,431	)		(63,928	)		(89,085	)		(169,453	)

Net income from continued operations, net of taxes		261,746			417,265			438,144			479,881			550,189			1,046,544
Net income from discontinued operations, net of taxes

Net income for the year	Ch$	261,746		Ch$	417,265		Ch$	438,144		Ch$	479,881		Ch$	550,189		U.S.$	1,046,544
Attributable to:
Equity holders of the parent		261,744			417,264			438,143			479,880			550,188			1,046,542
Non-controlling interest		2			1			1			1			1			2
Earnings per share⁽²⁾		3.06			4.86			4.91			5.37			5.92			0.011
Earnings per ADS		1,837.16			2,916.22			2,944.35			3,222.57			3,549.93			6.75
Dividends per share⁽³⁾		2.72			3.50			3.38			3.41			3.90			0.007
Weighted average number of shares (in millions)		85,484.08			85,850.51			89,285.13			89,347.56			92,991.45

(See footnotes below)


	As of December 31,
	2009		2010		2011		2012		2013		2013
	(in millions of Ch$, except share and per share data)										(in thousands of U.S.$)⁽¹⁾
IFRS:
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA
Cash and due from banks	Ch$	727,553	Ch$	772,329	Ch$	881,146	Ch$	684,925	Ch$	873,308	U.S.$	1,661,166
Transactions in the course of collection		526,051		429,756		373,639		310,077		300,026		570,695
Financial assets held-for-trading		351,590		279,765		269,861		159,682		326,921		621,854
Cash collateral on securities borrowed and reverse repurchase agreements		79,401		82,787		47,981		35,100		82,422		156,779
Derivative instruments		565,986		488,354		381,055		326,083		374,687		712,712
Loans and advances to banks		448,981		349,588		648,425		1,343,322		1,062,056		2,020,193
Loans to customers, net		12,879,155		14,029,968		17,023,756		18,383,958		20,441,472		38,882,812
Financial assets available-for-sale		1,267,774		1,157,105		1,471,120		1,272,316		1,681,883		3,199,199
Investments in other companies		10,494		11,072		13,196		11,674		14,407		27,404
Intangible assets		88,182		88,463		81,026		75,610		72,223		137,379
Property and equipment		205,847		204,352		207,888		205,189		197,578		375,824
Investment properties		17,840		17,459		17,079		16,698		16,317		31,037
Current tax assets		—		3,363		—		—		—		—
Deferred tax assets, net		49,733		57,678		60,025		55,801		56,421		107,321
Other assets		282,872		304,425		279,804		317,765		373,987		711,381

Total assets	Ch$	17,501,459	Ch$	18,276,464	Ch$	21,756,001	Ch$	23,198,200	Ch$	25,873,708	U.S.$	49,215,756

Current accounts and other demand deposits		3,718,076		4,446,181		4,895,426		5,470,971		5,984,332		11,383,116
Transactions in the course of payment		325,056		208,750		155,424		72,684		51,898		98,718
Cash collateral on securities lent and repurchase agreements		308,028		81,755		223,202		226,396		256,766		488,408
Saving accounts and time deposits		7,427,481		7,697,968		9,282,324		9,612,950		10,402,725		19,787,577
Derivative instruments		538,240		528,445		429,913		380,322		426,110		810,527
Borrowings from financial institutions		1,368,226		1,281,372		1,690,939		1,108,681		989,465		1,882,114
Debt issued		1,587,998		1,764,165		2,388,341		3,273,933		4,366,960		8,306,627
Other financial obligations		176,150		179,160		184,785		162,123		210,926		401,214
Currents tax liabilities		39,018		—		3,095		23,189		7,131		13,564
Deferred tax liabilities, net		—		—		—		—		—		—
Provisions		88,607		114,685		131,344		141,839		154,650		294,168
Employee benefits		43,202		55,433		60,634		64,545		67,944		129,240
Other liabilities		280,392		224,225		269,905		305,105		275,762		524,539

Total liabilities	Ch$	15,900,474	Ch$	16,582,139	Ch$	19,715,332	Ch$	20,842,738	Ch$	23,194,669	U.S.$	44,119,812

Total equity		1,600,985		1,694,325		2,040,669		2,355,462		2,679,039		5,095,944

Total liabilities and equity	Ch$	17,501,459	Ch$	18,276,464	Ch$	21,756,001	Ch$	23,198,200	Ch$	25,873,708	U.S.$	49,215,756

(See footnotes below)


	As of December 31,
	2009			2010			2011			2012			2013
IFRS:
CONSOLIDATED RATIOS
Profitability and Performance
Net interest margin⁽⁴⁾		4.48	%		4.87	%		4.80	%		4.68	%		4.67	%
Return on average total assets⁽⁵⁾		1.51			2.37			2.16			2.14			2.25
Return on average equity⁽⁶⁾		16.85			24.98			22.61			21.71			20.67
Capital
Average equity as a percentage of average total assets		8.99			9.50			9.53			9.85			10.90
Bank regulatory capital as a percentage of minimum regulatory capital		234.93			232.92			245.53			269.50			274.26
Ratio of liabilities to regulatory capital⁽⁷⁾		11.87			12.98			12.30			11.11			10.90
Credit Quality
Substandard loans as a percentage of total loans⁽⁸⁾		5.81			5.46			2.87			3.31			3.48
Allowances for loan losses as a percentage of substandard loans⁽⁸⁾		40.71			44.33			72.58			62.42			60.52
Provision for loan losses as a percentage of average loans		1.89			1.16			0.92			0.92			1.12
Allowances for loan losses as a percentage of total loans		2.37			2.42			2.09			2.07			2.10
Operating Ratios
Operating expenses/operating revenue		47.24			46.10			47.89			46.31			41.90
Operating expenses/average total assets		2.81	%		3.01	%		2.93	%		2.73	%		2.54	%

(1)

Translations of Chilean peso amounts into U.S. dollars are based on the exchange rate of accounting representation, or the spot exchange rate, which is determined on a daily basis by our Treasury, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. Thus, amounts stated in U.S. dollars as of and for the fiscal year ended December 31, 2013 have been translated from Chilean pesos based on the spot exchange rate of Ch$525.72 to U.S.$1.00 as of December 31, 2013.

(2)	Earnings per share data have been calculated by dividing net income by the weighted average number of shares outstanding during the year.

(3)	Dividends per share data are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding.

(4)

Annualized net interest income divided by average interest earning assets. The average balances for interest earning assets, including interest and readjustments, have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. Net interest margin does not include the interest earned on trading securities, which is accounted for under Other Income (Loss), Net.

(5)	Annualized net income (loss) divided by average total assets. The average balances for total assets have been calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries.

(6)	Annualized net income (loss) divided by average equity. The average balances for equity have been calculated on the basis of our daily balances.

(7)	Total liabilities divided by bank regulatory capital.

(8)	See “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard Loans and Total Past Due.”

Exchange Rates

As a general matter, prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in those cases explicitly authorized by the Central Bank. The Ley Orgánica Constitucional del Banco Central de Chile 18,840 (the “Central Bank Act”) liberalized the rules governing the purchase and sale of foreign currency. The Central Bank Act empowers the Central Bank to determine that certain purchases and sales of foreign currency specified by law must be carried out in the Mercado Cambiario Formal (the “Formal Exchange Market”). The Formal Exchange Market is composed of banks and other entities so authorized by the Central Bank. The observed exchange rate for any given day equals the average exchange rate of the transactions conducted in the Formal Exchange Market on the immediately preceding banking day, as certified by the Central Bank. Even though the Central Bank is authorized to carry out its transactions at the rates it sets, it generally uses the spot rate for its transactions. Authorized transactions by other banks are generally carried out at the spot rate.

Purchases and sales of foreign exchange are not required to be conducted in the Formal Exchange Market and therefore may be carried out in the Mercado Cambiario Informal (the “Informal Exchange Market”). There are no price limits imposed on transactions executed in the Informal Exchange Market. On December 30, 2013 (the last trading date of the year), the average exchange rate in the Informal Exchange Market was Ch$526.20 per U.S.$1.00, or 0.5% higher than the observed exchange rate of Ch$523.76 per U.S.$1.00 reported by the Central Bank on the same date.

The following table sets forth the annual low, high, average and period-end observed exchange rate for U.S. dollars for each year beginning in 2009, and the last six complete months, as reported by the Central Bank:


	Daily Observed Exchange Rate Ch$ per U.S.$(1)
Year	Low⁽²⁾		High⁽²⁾		Average⁽³⁾		Period End⁽⁴⁾
	(in Ch$)
2009		491.09		643.87		559.61		506.43
2010		468.37		549.17		510.25		468.37
2011		455.91		533.74		483.67		521.46
2012		469.65		519.69		486.49		478.60
2013		466.50		533.95		495.35		523.76
October 2013		493.36		508.58		500.81		508.58
November 2013		507.64		528.19		519.25		528.19
December 2013		523.76		533.95		529.45		523.76
2014 (through April 15)		524.61		573.24		551.48		549.04
January 2014		524.61		550.53		537.03		547.22
February 2014		546.94		563.32		554.41		563.32
March 2014		550.53		573.24		563.84		550.53
April 2014 (through April 15)		544.96		555.97		550.65		549.04

Source: Central Bank.

(1)	Figures are expressed in nominal terms.

(2)	Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)	For full years, the average of monthly average rates during the year. For full months, the daily average during the month.

(4)	As reported by the Central Bank on the first business day of the following period.

The observed exchange rate on April 15, 2014 was Ch$549.04 = U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

Until November 30, 2011, Banco de Chile applied the observed exchange rate as reported by the Central Bank in order to translate its financial statements from Chilean pesos to U.S. dollars. However, beginning December 1, 2011, Banco de Chile adopted the exchange rate of accounting representation, or spot exchange rate, for such matters. The exchange rate of accounting representation is determined on a daily basis by our Treasury based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange.

RISK FACTORS

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 also subject to market risks that are presented both in this subsection and in Note 42 to our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report.

Risks Relating to our Operations and the Chilean Banking Industry

The growth of our loan portfolio may expose us to increased loan losses.

During the last five years, our total loan portfolio has grown at a compounded average growth rate of 8.8%. The expansion in our loan portfolio has been primarily fostered by the expansion in residential mortgage and consumer loans, and, to a lesser extent, due to the growth posted in commercial loans. The enlargement of our loan portfolio is in line with our strategic priorities, although we recognize our focus on the retail banking segment may expose us to higher levels of loan losses and may require us to establish higher levels of allowances for loan losses. For the year ended December 31, 2013, our loan portfolio amounted to Ch$20,880,770 million, which represents an 11.2% annual increase as compared to the Ch$18,771,761 million that we recorded as of December 31, 2012. Similarly, our allowances for loans losses increased 13.3% from Ch$387,803 million in 2012 to Ch$439,298 million in 2013. As a result, our ratio of allowances for loan losses to total loans slightly increased over that period, from 2.07% in 2012 to 2.10% in 2013.

Our loan portfolio may not continue to grow at the same or similar rate.

We cannot assure you that our loan portfolio will continue to grow at the same rates as it has in the past. The Chilean financial industry’s aggregate loan portfolio has grown significantly over the last five years, which has been fostered by a general effort of its participants to broaden their value offerings and increase banking penetration of lower and middle income segments, as well as small and medium-sized companies. These efforts have been also supported by the robustness and growth of the Chilean economy over the last decade. However, a slowdown or negative GDP growth rates, as well as a change in the behavior of banking customers, could adversely affect the growth rate of our loan portfolio and our credit quality indicators and, accordingly, lead us to increase our requirements of allowances for loan losses. For more information, see “Item 4. Information on the Company—Regulation and Supervision” and “Item 4. Information on the Company—Selected Statistical Information.”

Restrictions imposed by banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.

We are subject to regulation by the SBIF. In addition, we are subject to regulation by the Central Bank with respect to certain matters, including interest rates and foreign exchange transactions. See “Item 4. Information on the Company—Regulation and Supervision.”

Pursuant to the Ley General de Bancos (the “General Banking Law”) all Chilean banks may, subject to the approval of the SBIF, engage in certain non-banking businesses approved by the law. The SBIF’s approval will depend on the risk of the activity and the strength of the bank. Further, the General Banking Law 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 (the “Basel Committee”) and limits the discretion of the SBIF to deny new banking licenses.

In addition, in recent years the Chilean government has focused on consumer protection matters. Accordingly, between 2010 and 2013, a number of legal and administrative regulations have been enacted, amended and revoked in order to reinforce consumer protection in all relevant aspects of the financial relationship between consumers and financial institutions. We cannot assure that there will not be new regulations and restrictions on this matter. See “Item 4. Information on the Company—Regulation and Supervision.”

There can be no assurance that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect. Any such change could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance.

Regarding Basel III, it is important to note that the SBIF has suggested that these guidelines may be implemented in Chile in the future, which could impose new requirements for all Chilean banks, including us. Similarly, the Chilean Central Bank has announced that it is working on developing new liquidity standards for local banks. Since neither the SBIF nor the Central Bank has provided any indication as to when and how these guidelines will be implemented or even presented to the market, we do not expect they will affect our profitability or results of operations in 2014. Nevertheless, we cannot assure you that these guidelines will not affect our financial performance in the future, if adopted.

As for credit risk provisioning matters, on December 18, 2013 the SBIF published for comments a set of amendments to the regulations on allowances for loan losses and credit risk matters. These amendments propose a standard model for calculating allowances for loan losses associated with residential mortgage loans only, although the SBIF announced that an approach will be proposed for consumer and commercial loans in the future. As for residential mortgage loans, the amendments are intended to introduce a standard model for determining allowances for loan losses that includes past-due behavior and loan-to-value ratios. Similarly, the proposed amendments establish specific guidelines regarding the treatment of collateral when calculating provisions for loan losses and provisioning factoring loans. In addition, on February 13, 2014 the SBIF published for comments a new regulation that aims to establish minimum requirements to be met by any bank in order to use internal models for calculating allowances for loan losses. These requirements have to do with both banks (capital adequacy, management qualification, and satisfactory evaluation by the SBIF) and their credit risk management system (ad hoc organizational structure, quality assurance, etc.). Even though this proposal is at an initial stage of analysis, we cannot assure you that it will not materially affect our results of operations or financial condition in the future, if adopted.

Increased competition and industry consolidation may adversely affect our operations.

The Chilean market for financial services is highly competitive. We compete with other Chilean and foreign banks, with Banco del Estado de Chile, which is government-owned, and with large department stores that grant consumer loans to a large portion of the Chilean population, especially in the low and middle-income segments. In addition, the retail market (which encompasses individuals and small and medium-sized companies) has become the target market of several banks. Accordingly, competition within this market is increasing as banks are continuously incorporating new and tailored products, while they strive to improve service quality. As a result, net interest margins (after provisions for loan losses) in these sub-segments are likely to decline over time.

We also face competition from non-bank competitors in some of our credit products, especially credit cards and consumer loans. In these markets, competition from non-banking companies like large department stores, private compensation funds, and saving and credit cooperatives has become increasingly significant. In addition, we face competition from other types of competitors, such as leasing, factoring and automobile financing companies (especially in credit products), as well as mutual funds, pension funds and insurance companies within the market for savings products and mortgage loans. Currently, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business is experiencing fast growth. However, we cannot assure you that this trend will continue in the future. See “Item 4. Information on the Company—Business Overview—Competition.”

In the past, increasing competition within the Chilean banking industry has been accompanied by a consolidation wave. We expect that both of these trends will continue and result in the creation of larger and stronger financial groups offering a wide range of products and services and targeting most of the segments in the Chilean banking market. These trends may adversely affect us because they may increase the interest rates we pay to attract depositors and decrease the interest rates we charge our customers for loans, resulting in a decrease of the net interest margins we are able to generate.

Our exposure to certain segments of the retail market could lead to higher levels of total past-due loans and subsequent charge-offs.

Although we historically focused on banking for the wholesale market and high-income individuals, an increasing portion of our retail banking segment consists of small and medium-sized companies (approximately 7.7% of our total loan book as of December 31, 2013, including companies with annual sales of up to Ch$1,600 million) and, to a lesser extent, of lower-income individuals (approximately 3.8% of our total loan book as of December 31, 2013, including individuals with monthly incomes ranging from Ch$170,000 to Ch$500,000). Our strategy aims to increase lending and banking penetration by providing multiple value propositions to attract additional retail customers. These customers are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and high-income individuals. Consequently, in the future we may be exposed to higher levels of total past-due loans and subsequent write-offs, which could result in materially higher allowances for loan losses and adversely affect our results of operations.

As of December 31, 2013 our total past-due loans (loans overdue 90 days or more) reached Ch$236,730 million, which represented a 30.2% annual increase as compared to the figure recorded in 2012. Also, as of December 31, 2013 our total past-due loans were composed of 79.1% of retail banking past-due loans (consumer and residential mortgage loans to individuals, as well as commercial loans to small and medium sized companies) and 20.9% of wholesale banking past-due loans (commercial loans to large companies and corporations). During the prior fiscal year, our past-due portfolio encompassed 77.3% of retail banking past-due loans and 22.7% wholesale banking past-due credits.

The annual increase in the amount of past-due loans had mainly to do with greater balances of past-due loans associated with SMEs and, to a lesser extent individual banking. This trend of higher delinquency was in line with an economic cycle that showed some signs of slowdown in 2013, after three years of sustained growth, with annual GPD expansion rates above 5.0%. Even though we have tightened the whole credit process, from assessment to collection, we cannot assure you this trend will not continue if global or local economic conditions deteriorate in the future.

For more information, see “Item 4. Information on the Company—Business Overview—Principal Business Activities.”

One of our affiliates may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends.

As of December 31, 2013, Sociedad Administradora de la Obligación Subordinada S.A. (“SAOS”), our affiliate, held 30.69% of our shares as a consequence of our 1996 reorganization. This reorganization was due in part to the 1989 repurchase by the Central Bank of certain non-performing loans that we had previously sold to the Central Bank and later exchanged for subordinated debt without a fixed term. For more information, see “Item 4. Information on the Company—History and Development of the Bank—History—The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt.”

In exchange for assuming the Central Bank debt, SAOS received from SM-Chile S.A. (“SM-Chile”), the holding company that controls us and SAOS, a stake of 63.6% of our shares as collateral for this debt. Dividends received from us are the sole source of SAOS’s revenues, which—in turn—must be used to repay this debt. To the extent distributed dividends are not sufficient to pay the amount due on this debt, SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If this cumulative deficit balance exceeds 20% of our paid-in capital and reserves, the Central Bank may require SAOS to sell a sufficient number of our shares to pay the entire amount of the accumulated deficit. As of March 31, 2014, SAOS maintained a surplus with the Central Bank of Ch$373,556 million, equivalent to a 16.9% of our paid-in capital and reserves as of the same date.

Furthermore, if our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth and to distribute stock dividends, the Central Bank may require us to pay in cash to SAOS the portion of net income corresponding to its stake in our shares. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months. SM-Chile shareholders will have a right of first refusal with respect to that sale.

If SAOS is required to sell shares of our stock for any of the aforementioned circumstances in the public market, that sale could adversely affect the prevailing market price of our stock.

The results of our operations are affected by inflation and interest rate volatility.

The results of our operations depend to a great extent on our net interest income, which represented 71.8% of our total operating revenues in 2013. Changes in inflation and nominal interest rates could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in a reduction in our net income. Inflation and interest rates are highly sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, domestic and international economic and political conditions, among other factors. Any volatility in interest rates could have a material adverse effect on our financial condition and results of operations.

The average annual short-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 5.61% in 2011, 5.90% in 2012 and 5.20% in 2013. The average long-term nominal interest rate based on the interest rate of the Central Bank’s five-year bonds was 5.67% in 2011, 5.26% in 2012 and 5.14% in 2013.

Inflation in Chile has been moderate in recent years, especially in comparison with periods of high inflation in the 1980s and 1990s. High levels of inflation in Chile could adversely affect the Chilean economy, the consumers’ purchase power and, indirectly, our results of operations. The annual rate of inflation (as measured by annual changes in the CPI and as reported by the Chilean National Institute of Statistics) during the last five years and the first three months of 2014 was:


Year	Inflation (CPI Variation)
2008		7.1	%
2009		(1.4	)
2010		3.0
2011		4.4
2012		1.5
2013		3.0
2014 (through March 31)		1.5	%

Source: Chilean National Institute of Statistics

Although we benefit from a higher than expected inflation rate in Chile due to the structure of our assets and liabilities (we have a significant net asset position indexed to the inflation rate), significant changes in inflation with respect to current levels could adversely affect our results of operations and, therefore, the value of both our shares and ADSs.

For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Interest Rates.”

Operational problems or errors can have a material adverse impact on our business, financial condition and results of operations.

As all large financial institutions, we are exposed to many operational risks, including the risk of fraud by employees and outsiders, failure to obtain proper internal authorizations, failure to properly document transactions, equipment failures, errors made by employees and natural disasters, such as earthquakes or tsunamis. Although we maintain a system of operational controls composed of world-class human and technological resources, as well as comprehensive contingency plans, there can be no assurance that operational problems or errors will not occur and that their occurrence will not have a material adverse impact on us.

Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.

We have access to large amounts of confidential financial information and control substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous remote access to their accounts and the possibility of transferring substantial financial assets by electronic means. Accordingly, cybersecurity is a material risk for us.

We depend on a variety of internet-based data processing, communication, and information exchange platforms and networks. Thus, we cannot assure you that all of our systems are entirely free from vulnerability. Additionally, we enter into contracts with several third-parties to provide the business, data and communication services we offer to our customers. If information security is breached, or if one of our employees breaches compliance procedures, information could be lost or misappropriated, which may affect our results of operations, damage others or result in potential litigation. Cybersecurity incidents, such as computer break-ins, phishing, identity theft and other disruptions could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us in excess of insurance coverage, and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of service providers, intend to continuously implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that these security measures will be successful.

Exposure to European sovereign debt or related instruments and future turmoil and destabilization related thereto could negatively affect our business.

Although emerging markets were less impacted by the global financial crisis of 2008 and showed a quick recovery, concerns about the possibility of a recession in developed countries cannot be ruled out yet, especially due to the fiscal condition of certain European economies (such as Greece, Italy, Ireland, Portugal and Spain, also called PIIGS economies). Debt levels and fiscal unreliability of these countries have resulted in uncertainty regarding the outlook for the global economy and a potential contagion to other economies linked to these countries. Although developed countries are gradually overcoming the troubles associated with the financial turmoil of 2008 and the subsequent instability of PIIGS countries, we cannot dismiss concerns regarding future volatility.

Likewise, we are unable to determine and predict the effects that this situation could have on the GDP growth of Chile’s main commercial partners and the entire world. Also, these factors could translate into a slowdown in the local economy that could affect the decision making processes of individuals and companies regarding consumption and investment. All of these factors could adversely affect the demand for credits in the Chilean Banking industry. We cannot assure you that these developments will not occur or that they will not affect our results of operations or financial condition.

As of December 31, 2013 we had a total exposure to PIIGS economies of Ch$18,751 million (U.S.$35.7 million), which represents 0.07% of our total assets as of the same date. This exposure was concentrated in only two economies, Italy and Spain, and it was related to contingent credits, such as standby letter of credits in favor of us as well as third parties. As of the same date, we had no additional exposure to PIIGS countries, in any type of instrument, such as financial assets available-for-sale, assets held for trading, derivatives, commercial loans, credit lines, confirming export letters of credits, etc.

Risks Relating to our ADSs

Our principal shareholders may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.

As of April 15, 2014, LQ Inversiones Financieras S.A. (“LQIF”), a holding company beneficially owned by Quiñenco S.A. and Citigroup Chile S.A., holds directly and indirectly approximately 51.22% of the voting rights of our shares. These principal shareholders are in a position to elect a majority of the members of our board of directors, direct our management and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions.

Actions by our principal shareholders with respect to the disposition of the shares or ADSs they beneficially own, or the perception that such actions may occur, may adversely affect the trading price of our shares on the various stock exchanges on which they are listed and, consequently, the market price of the ADSs.

There may be a lack of liquidity and a limited market for our shares and ADSs.

While our ADSs have been listed on the New York Stock Exchange (the “NYSE”) since the first quarter of 2002, there can be no assurance that an active trading market for our ADSs will be sustained. During 2013, a daily average of 16,121 of our American Depositary Receipts (“ADRs”) were traded on the NYSE, according to data provided by Bloomberg. Although our shares are traded on the Santiago Stock Exchange, the Valparaiso Stock Exchange and the Chilean Electronic Stock Exchange, the market for our shares in Chile is small and somewhat illiquid. As of April 15, 2014 approximately 24.80% of our outstanding shares were held by shareholders other than our principal shareholders, including LQIF, SM-Chile, SAOS and Ergas Group.

If an ADS holder withdraws the underlying shares from the ADR facility, the small size of the market, its limited liquidity, as well as our concentrated ownership, may impair the ability of the ADS holder to sell the shares in the Chilean market in the amount and at the price and time such holder desires, and could increase the volatility of the price of our ADSs.

You may be unable to exercise preemptive rights.

The Ley Sobre Sociedades Anónimas No. 18,046 (the “Chilean Corporations Law”) and the Reglamento de Sociedades Anónimas (the “Chilean Corporations Regulations”) require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs) to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible unless a registration statement under the Securities Act were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.

We may elect not to make a registration statement available with respect to the preemptive rights and the common stock, in which case you may not be able to exercise your preemptive rights. If a registration statement is not filed, 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.

Developments in international financial markets may adversely affect the market price of the ADSs and shares.

The market price of our ADSs and shares may be adversely affected by volatility in international financial markets and adverse global economic conditions. The market for Chilean securities and the Chilean economy as a whole are, to diverse extents, influenced by economic and market conditions in the United States, Europe and certain emerging market countries, especially Asian countries, and also economic as well as political developments in Latin American countries. Although economic conditions are different in each country, investors’ reactions to specific issues in one country can affect the financial markets in others, including Chile. Therefore, unfavorable developments in other countries—especially in developed economies and Chile’s main commercial partners—may adversely affect the market price of our ADSs and shares.

In particular, since August 2007, there has been significant volatility in worldwide financial markets due to consequences from the announcement, by several U.S. banks and financial institutions, of significant write-downs related to their exposure to mortgage-backed securities and other financial instruments. This situation, also known as the subprime crisis, translated into several and significant government bail-outs for important banks worldwide, bankruptcy for some others and an active M&A market in the financial industry intended to maintain the confidence of investors and customers, as well as avoiding bank runs. Although the Chilean economy was not directly exposed to the U.S. housing credit market and —historically— we have not directly held any assets related to such financial instruments, the subprime crisis impacted the Chilean economy by the end of 2008, including banking activity. Currently, the U.S. economy seems to be overcoming the effects of the subprime crisis, as evidenced by recovering mid-term growth rates, employment and consumption, while the Federal Reserve is tapering the expansionary monetary policy it has used for the past several years. However, we cannot assure you that these past developments will not repeat in the future or that any future developments in international markets could not affect us, including our results of operations and consequently the market price of our ADSs and shares.

Financial deterioration in certain European countries was another indirect effect of the subprime crisis that occurred in the United States. Although our exposure to European sovereign debt is not significant, we cannot assure you that volatility in global financial markets due to the uncertainty regarding the Eurozone fiscal condition will not continue and affect the Chilean economy and consequently our financial condition and results of operations. Accordingly, the price of our ADS could be adversely affected by a new financial turmoil in the Eurozone, political issues, a slower than expected recovery, or a deterioration in healthier economies, such as Germany, that could translate into increasing volatility and uncertainty all over the world.

In the past, Chile has imposed controls on foreign investment and repatriation of investments that affected investments in, and earnings from, our ADSs.

Equity investments held in Chile by non-Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of investments and earnings therefrom. In April 2001, the Central Bank eliminated most of the regulations affecting foreign investors, although they still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them, the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we can neither determine in advance nor advise you as to when or how those restrictions could impact you, if imposed.

If for any reason, including changes in Chilean law, the depositary for our ADSs were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.

We are required to withhold 35% from any dividends we pay to you.

ADS holders are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by ADS holders will be paid net of foreign currency exchange fees and expenses of the depositary and will be subject to Chilean withholding tax of 35% of the dividend, which we will withhold and pay to the Chilean tax authorities. Any dividend distributions made in property (other than common stock) will be subject to the same Chilean tax rules as cash dividends. For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”

Risks Relating to Chile

Our growth and profitability depend on the level of economic activity in Chile.

Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamism of the Chilean economy and specific macroeconomic variables such as inflation, unemployment, consumption and investment. The global financial crisis of 2008 that dramatically affected the economic growth in developed countries also affected the Chilean economy by the end of 2008 and during the first three quarters of 2009. This translated into a subsequent slowdown in the local banking industry due to

lower levels of consumption and deteriorated credit quality in loan portfolios prompted by increasing unemployment and financial stress experienced by certain economic sectors. Conversely, between 2010 and 2012 the local economy and the banking industry evidenced a significant upturn, fostered by real GDP growth that averaged 5.7% per year, mainly as a result of the recovery in consumption and investment, as well as higher fiscal spending associated with the reconstruction process after a significant earthquake. In 2013, the Chilean economy entered into a moderate slowdown by recording a 4.1% GDP expansion. The lower dynamism was caused by an important slowdown in investment which posted a slight 0.4% annual growth, principally owing to postponed projects in the mining and energy sectors, as well as companies waiting for better economic signals. On the other hand, consumption remained strong by growing 5.4% in 2013. In line with the economic cycle, banking activity decreased as compared to 2012 in spite of maintaining attractive figures in loan growth and profitability. Although Chilean economic growth continues to be above the average of comparable countries and the world, we cannot assure you that the local economy will continue expanding in the future or developments in, or affecting, the Chilean economy and the local banking industry will not materially and adversely affect us, our business, financial condition or results of operations. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview”.

Currency fluctuations could adversely affect the value of our ADSs and any distributions on the ADSs.

The Chilean Government’s economic policies and any future changes in the value of the Chilean peso with respect to the U.S. dollar could affect the dollar value of our common stock and our ADSs. Given the floating exchange rate regime that exists in Chile, the Chilean peso has been subject to large fluctuations in the past and could continue this trend in the future. According to information published by the Chilean Central Bank, between December 31, 2012 and December 31, 2013, the value of the U.S. dollar relative to the Chilean peso increased by approximately 9.4%, as compared to the decrease of 8.2% recorded in the period from December 31, 2011 to December 31, 2012. See “Item 3. Key Information—Exchange rates.”

Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. Cash dividends associated with our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at the then-prevailing exchange rate for making payments in respect of our ADSs. If the value of the U.S. dollar increases relative to the Chilean peso, the dollar value of our ADSs and any distributions to be received from the depositary will decrease. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. For more information, see “Item 10. Additional Information—Exchange Controls.”

Our results of operations may be affected by fluctuations in the exchange rates between the Chilean peso and the U.S. dollar despite our policy and Chilean regulations related to the general avoidance of material exchange rate mismatches. In order to reduce the effect of exchange rate mismatches we enter into foreign exchange derivative transactions that hedge our exposure. As of December 31, 2013, our foreign currency-denominated assets and Chilean peso-denominated assets, which contain repayment terms linked to changes in foreign currency exchange rates, were exceeded by our foreign currency-denominated liabilities and Chilean peso-denominated liabilities, which contain repayment terms linked to changes in foreign currency exchange rates, by an amount of Ch$781 million, or 0.04% of our paid-in capital and reserves.

We may decide to change our policy regarding exchange rate mismatches. Regulations that limit such mismatches may also be amended or eliminated by regulatory institutions. Higher exchange rate mismatches will increase our exposure to the devaluation of the Chilean peso, and any such devaluation may impair our capacity to service foreign-currency obligations and may, therefore, materially and adversely affect us, our financial condition and results of operations. Additionally, the economic policies of the Chilean Government and any future fluctuations of the Chilean peso with respect to the U.S. dollar could adversely affect our financial condition and results of operations.

Chile has corporate disclosure standards different from those you may be familiar with in the United States.

Chilean disclosure requirements for publicly listed companies differ from those in the United States in some significant aspects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities markets are not as highly regulated and closely supervised as the U.S. securities markets. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company. For more information, see “Item 16G. Corporate Governance.”

Chilean law provides shareholders with fewer and less well-defined rights.

Our corporate affairs are governed by our estatutos (bylaws) and the laws of Chile. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.

A Potential Tax Reform in Chile may Increase our Tax Burden

A new administration assumed control of the Chilean government in March 2014. The new president has recently announced and sent to the Chilean congress a tax reform bill intended to finance improvements to the Chilean educational system, among other matters. The bill contemplates a gradual increase in the statutory corporate income tax rate, from the current 20.0% to a maximum of 25.0%, over a four-year period. In addition, the proposed bill includes changes in personal taxation for dividends-related taxes affecting both local and foreign investors, from a basis on cash dividends to a basis on accrued earnings of companies held as an investment. Similarly, the bill proposes a reduction in the tax rate for the upper income bracket, in the case of individuals, from 40.0% to 35.0%. As a result, the announced tax reform could adversely affect our results of operations, costs and profitability in the future. However, since the reform has not been yet passed in the congress, we cannot yet accurately estimate its potential effects on our operations. For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations—Tax Reform Proposal, by Presidential message N°24-362 (April 1, 2014).”

Item 4

Information on the Company

History and Development of the Bank

Overview

We were founded in 1893, and we have been, for much of our history, among the largest and most profitable Chilean banks in terms of return on assets and equity in Chile. Our core business is commercial banking in Chile, providing traditional banking products and specialized financial services to our diversified customer base of individuals and companies.

Our legal name is Banco de Chile and we are organized as a banking corporation under the laws of Chile and were licensed by the SBIF to operate as a commercial bank on September 17, 1996. Our main executive offices are located at Paseo Ahumada 251, Santiago, Chile, our telephone number is +56 (2) 2637-1111 and our website is www.bancochile.cl. Our representative in the United States is Puglisi & Associates, with offices at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

We are a full-service financial institution that provides, directly and indirectly through our subsidiaries and affiliates, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market, providing powerful and differentiated value offerings to our customers. Our business is not materially affected by seasonality.

We organize our operations and deliver our services to our customers through the following four principal business segments:

(i)

retail banking;

(ii)

wholesale banking;

(iii)

treasury and money markets; and

(iv)

subsidiaries.

We provide our retail customers with credit cards, residential mortgage loans and consumer loans, as well as traditional deposit services, such as current accounts, demand deposits, savings accounts and time deposits. Our retail customers are composed of micro, small and medium sized companies that we serve by providing them with short and long term loans, as well as diverse deposit solution, in order to satisfy their needs. Our banking services for wholesale customers include commercial loans (which include factoring and leasing), foreign trade, capital markets services, cash management and non-lending services, such as payroll and payment services, as well as a wide range of treasury, financial advisory and risk management products.

In 2008, we supplemented our products and services and enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile.

As of December 31, 2013, we also offered international banking services through our Trade Services subsidiary in Hong Kong, our representative office in Beijing, and a worldwide network of correspondent banks.

In addition to our traditional banking operations, our subsidiaries and affiliates permit us to offer a variety of non-banking but specialized financial services including securities brokerage, mutual funds management, investment banking, insurance brokerage, securitization, collection and credit pre-evaluation services.

According to the SBIF, as of December 31, 2013 and excluding the operations of subsidiaries abroad, we were the second largest bank in Chile in terms of total loans with a market share of 19.1%, the largest provider of commercial loans with a market share of 19.5%, the second largest provider of consumer loans with a market share of 20.9% and the second largest privately owned bank in terms of residential mortgage loans with a market share of

17.4%. Also, as published by the SBIF, we were the largest bank in terms of net income with a market share of 26.8% and the first bank in terms of current account balances held by individuals with a market share of 30.2%, both as of December 31, 2013. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 2013 we were the largest provider of mutual funds management with a market share of 21.3%.

As of December 31, 2013 we had:

•

total assets of Ch$25,873,708 million (approximately U.S.$49,216 million);

•

total loans of Ch$20,880,770 million (approximately U.S.$39,718 million), before deducting allowances for loan losses;

•

total deposits of Ch$16,387,057 million (approximately U.S.$ 31,171 million), of which Ch$5,984,332 million (approximately U.S.$ 11,383 million) correspond to current account and demand deposits;

•

equity (including net income, non-controlling interest and provisions for minimum dividends) of Ch$2,679,039 million (approximately U.S.$ 5,096 million);

•

net income of Ch$550,189 million (approximately U.S.$ 1,047 million); and

•

market capitalization of Ch$7,109,256 million (approximately U.S.$ 13,523 million).

As of December 31, 2013, we had 14,723 employees and delivered financial products and services through a nationwide distribution network of 430 branches, and 1,804 ATMs that are part of a larger ATM network operated by Redbanc S.A. (a company owned by us and 11 other privately owned banks) that comprises 6,397 ATMs.

History

We were founded in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, which created the largest privately held bank in Chile. We have played an important role in the economic history of Chile. Before the creation of the Central Bank in 1926 and prior to the enactment of the General Banking Law, we were the main stabilization agent of the Chilean banking system, a role that is now performed by the Chilean Central Bank. Beginning in the early 1970s, the Chilean Government assumed control of a majority of Chilean banks, and all but one of the foreign banks that were operating at that time closed their branches and offices within the country. Throughout this era, we remained as a privately-owned bank, with the exception of a portion of our shares owned by the Chilean Government that were sold to private investors in 1975. Throughout our history we have developed a well-recognized brand name in Chile and expanded our operations in foreign markets, where we developed an extensive network of correspondent banks. In the early twentieth century, we established a representative office in London, which we maintained until 1985, when our operations in Europe were moved to Frankfurt. The office in Frankfurt was closed in 2000, when our foreign operations were centralized at the New York branch. In 1987 and 1988, we established four subsidiaries to provide a full range of specialized financial products and services as permitted by the General Banking Law. In 1999, we widened our scope of specialized financial services by creating our insurance brokerage and factoring subsidiaries. According to our estimates, we remained the largest private bank in Chile until 1996. During the early 2000s, the Chilean banking industry witnessed intense merger and acquisition activity. In 2002, we merged with Banco de A. Edwards, which allowed us to expand our business to new customer segments. In 2008, we sold our U.S. branches to Citigroup in connection with our merger with Citibank Chile that was carried out during the same year. As a result of these consolidations, we currently operate a distribution network that is composed of three brand names, namely, “Banco de Chile” (which operates throughout Chile), “Banco Edwards-Citi” (which is primarily oriented to higher income segments) and “Banco CrediChile” (which is focused on consumer loans and sight accounts for lower and middle income segments). In 2012, we became the market leader in net income and the most profitable bank (the highest return on average equity and average capital and reserves) within the Chilean banking industry, according to information released by the SBIF. Similarly, among our peers we were the bank with the best credit quality indicators in terms of past-due loans, provisions for loan losses over average loans and past-due loans coverage. Also, during 2012 we

maintained our leadership in mutual funds and current accounts for individuals, while our investment banking subsidiary maintained the market leading position in corporate bond placements within the local market, according to information available at the Chilean Association of Mutual Funds, the SBIF and the Superintendency of Securities and Insurance, respectively. In terms of funding diversification, we improved our access to foreign debt markets by placing senior bonds in Hong Kong and Peru for a total aggregate amount of approximately U.S.$193 million. Similarly, we established a commercial paper program in the U.S. market of U.S.$1,000 million.

In 2013 we continued to enhance our competitive advantages. As a result, we completed a very successful year by ranking first in operating revenues—for the first time in our recent history—and net income, according to information released by the SBIF. These achievements enabled us to remain the most profitable bank in Chile in terms of return on average equity and average assets. Our leading position in net income was also a consequence of our market-leading performance in expenses, which allowed us to reach the lowest efficiency ratio in the local industry, according to information published by the SBIF. Also, in order to maintain a convenient and well diversified liability structure, we have continued to seek alternative financing opportunities, especially overseas. In this regard, during 2013 we carried out four placements in Switzerland for a total amount of approximately US$785 million. Also, we established a US$2 billion medium term notes program (the “MTN Program”) in Luxemburg. Under this program we issued medium term notes in Hong Kong and Japan of approximately US$168 million and US$167 million, respectively.

Merger with Banco de A. Edwards

On December 6, 2001, our shareholders approved our merger with Banco de A. Edwards, which became effective on January 1, 2002. Banco de A. Edwards had been listed on the NYSE since 1995, and in January 2002, we were listed on the NYSE under the symbol BCH. Since 2002, our shares have also been traded on the Latin American Stock Exchange of the Madrid Stock Exchange (“Latibex”) and the London Stock Exchange (“LSE”). We concluded the merger process with the consolidation of a new corporate structure and the integration of our technological platforms. As for Latibex, on October 18, 2013, we voluntarily delisted our trading units from that market,

Merger with Citibank Chile

On December 27, 2007, our shareholders approved our merger with Citibank Chile, which became effective on January 1, 2008. During 2008, we integrated Citibank Chile’s technological platforms with ours and established a new organizational structure in order to satisfy the needs of our customers and to achieve important synergies. We concluded the merger process with the integration of Corporación Financiera Atlas S.A. (Citibank Chile’s consumer division) into our consumer division (CrediChile), which allowed us to nearly double our customer base and market share in consumer finance.

Our partnership with Citigroup Inc., an internationally well-known brand name, enabled us to broaden the scope of financial services that we offer to our customers through the addition of global financial services and other benefits. As a result of this partnership, we entered into a global connectivity agreement (the “Global Connectivity Agreement”), which has supported the creation of (i) an international personal banking unit, responsible for optimizing access to financial services outside Chile to our local retail customers, (ii) a global transactional services unit, responsible for executing local and international cash management services, as well as custody and foreign trade assistance, to our wholesale customers, and (iii) an enhanced investment banking unit, responsible for providing financial advisory services and access to global capital markets to our Chilean corporate customers.

Technological Projects

In 2011, our technological projects aimed to support the development of new products and services, improve the efficiency and productivity of our internal systems and processes, reinforce our technological infrastructure and minimize our operational risks. Thus, the main projects developed throughout 2011 were: (i) the implementation of new websites and a phone-based sales platform, in addition to the launch of “Banca Móvil” (mobile solutions for tablets and smartphones) for our retail banking segment; (ii) the development of operational and technological processes required to release the “Banco de Chile | Entel” credit card; (iii) the release of a new platform for options trading; (iv) a new system of financial evaluation for companies that supports the tasks carried out by our Corporate Risk Management Division; and (v) the setup of a new data center.

Throughout 2012, our IT priorities were focused on improving operating efficiency through diverse projects intended to enhance internal processes in quality and timing, as well as reinforcing security in transactional services. Our main IT projects in 2012 included: (i) the automation of product application forms for small and medium sized companies, (ii) implementation of a new online platform for current accounts, (iii) approval of individuals’ and SMEs’ operations through scanned documentation, (iv) time-improving procedures for foreign exchange operations, (v) new systems for managing and trading derivatives, and (vi) the implementation of a new platform for financial planning. For security matters, we implemented world-class security software that is intended to avoid fraud in electronic money transfers. Similarly, we implemented improved ATMs shield procedures.

During 2013, we focused on ensuring the stability of our IT systems and implementing improvements to key processes in order to provide our customers with better service quality. Accordingly, the main IT projects undertaken in 2013 had to do with: (i) upgrading our internet-based array of services, in order to significantly improve the availability of our internet platforms for personal and corporate banking, (ii) setting up a security device (chip) in credit cards that should enable us to reduce the rate of fraud in this business and maintain our industry-leading position in these matters, (iii) improving the uptime of ATMs, (iv) enhancing product-related platforms for factoring, insurance, time and demand deposits, and (v) strengthening credit-assessment and granting by implementing the final stages of a new system of financial evaluation for companies and optimizing required documentation for lending.

Therefore, we maintain our commitment of anticipating and minimizing cybersecurity risks, as mentioned in “Item 3. Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry” and “Item 3. Risk Factors—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.”

The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt

During the 1982-1983 economic crisis, the Chilean banking system experienced significant instability that required the Central Bank and the Chilean Government to provide assistance to most Chilean private sector banks, including us. During this period, we experienced significant financial difficulties. In 1985 and 1986, we increased our capital and sold shares representing 88% of our capital to more than 30,000 new shareholders. As a result, no single shareholder held a controlling stake in the Bank. In 1987, the SBIF returned complete control and administration of the Bank to our shareholders and our Board of Directors by ending our provisional administration based on our successful capital increases as required by Law 18,401.

Subsequent to the crisis, like most major Chilean banks, we sold certain of our non-performing loans to the Central Bank at face value on terms that included a repurchase obligation. The repurchase obligation was later exchanged for subordinated debt of each participating bank issued in favor of the Central Bank. In 1989, pursuant to Law No. 18,818, banks were permitted to repurchase the portfolio of non-performing loans for a price equal to the economic value of such loans, provided that the bank assume a subordinated obligation equal to the difference between the face and economic value of such loans. In November 1989, we repurchased our portfolio of non-performing loans from the Central Bank and assumed the Central Bank’s subordinated debt related to our non-performing loans.

The original repayment terms of our Central Bank subordinated debt, which at December 31, 1989 equaled approximately Ch$1,448,654 million (in real terms as of December 31, 2013), required that a certain percentage of our income before provisions for the subordinated debt be applied to repay this obligation. The Central Bank subordinated debt did not have a fixed maturity, and payments were made only to the extent that we earned income before provisions for the subordinated debt. In 1993 we applied 72.9% of our income before provisions to repay the Central Bank subordinated debt. In 1994 we applied 67.6%, and in 1995 we applied 65.8% of our income before provisions to repay the Central Bank subordinated debt.

In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which we were converted into a holding company named SM-Chile. In turn, SM-Chile organized a new wholly-owned banking subsidiary named Banco de Chile, to which the former contributed all of its assets and liabilities, other than the Central Bank subordinated debt, to the latter. In addition, SM-Chile created SAOS, a second wholly-owned subsidiary that, pursuant to a prior agreement with the Central Bank, assumed a new repayment obligation in favor of the Central Bank that replaced the Central Bank subordinated debt in its entirety.

This Central Bank debt, for which SAOS is solely responsible and for which there is no recourse to us or SM-Chile, was equal to the unpaid principal of the Central Bank subordinated debt that it replaced but had terms that differed in some aspects, such as the rescheduling of the debt for a term of 40 years providing for equal annual installments and a pledge of our shares as collateral for such debt. The Central Bank debt bears interest at a rate of 5.0% per year and is UF-denominated.

In exchange for assuming the Central Bank debt, SAOS received from SM-Chile 63.6% of our shares as collateral. Although shares held by SAOS as collateral have economic rights that belong to the Chilean Central Bank, their voting rights are exercised by SM-Chile’s shareholders. As a result of our merger with Banco de A. Edwards, the percentage of our shares held by SAOS decreased to 42.0%. Subsequently, as of December 31, 2013 the percentage of our shares held by SAOS was 30.7%, as a result of: (i) capital increases agreed to at Extraordinary Shareholders’ Meetings held in May 2007, January 2011 and October 2012, (ii) stock dividends paid in May 2006, May 2007, June 2009, April 2011, June 2012 and May 2013, and (iii) our merger with Citibank Chile in January 2008.

Dividends received from us are the sole source of SAOS’s revenues, to be applied by legal mandate to repay its debt to the Central Bank of Chile. SAOS does not have any other material debt, as it is a special purpose legal entity created by Law 19,396 whose only business is to own Banco de Chile shares and repay the obligation to the Central Bank of Chile. To the extent distributed dividends are not sufficient to pay the amount due on its debt; SAOS is permitted to maintain a cumulative deficit balance with the Central Bank that SAOS commits to pay with future dividends. If the cumulative deficit balance exceeds an amount equal to 20% of our paid-in capital and reserves, the Central Bank may require SAOS to sell a sufficient number of shares of our stock to pay the entire accumulated deficit amount. As of March 31, 2014, SAOS maintained a surplus with the Central Bank of Ch$373,556 million, equivalent to 16.9% of our paid-in capital and reserves as of the same date. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Banking Industry—Our affiliate may be obligated to sell shares of our stock in the public market if we do not pay sufficient dividends”.

As of December 31, 2013, the outstanding subordinated debt balance held by SAOS amounted to Ch$649,521 million (including accrued interest). SAOS paid to the Central Bank a total of Ch$131,530 million during 2011, Ch$124,342 million in 2012 and Ch$151,560 million in 2013, exceeding in each of those years the required minimum annual payment.

As of December 31, 2013, the major shareholder of SM-Chile was LQ Inversiones Financieras S.A. (a subsidiary of Quiñenco S.A.), which owned, directly and indirectly, 58.2% of SM-Chile’s total shares. As of the same date, our major shareholders were LQ Inversiones Financieras S.A., SAOS and SM-Chile, each having a direct participation of 32.6%, 30.7% and 13.0% in our total common stock, respectively. It is important to mention that on January 31, 2014 LQ Inversiones Financieras S.A. (our major shareholder) closed the sale of 6,700,000,000 shares of Banco de Chile through a public secondary offering (dutch auction), which resulted in a 7.20% decrease of the ownership interest in Banco de Chile. Accordingly, as of April 15, 2014, LQ Inversiones Financieras S.A. owned, directly and indirectly, 51.2% of our shares, with a direct stake of 25.4%. See “Item 5. Operating and Financial Review and Pospectus—Recent Developments.”

If from time to time in the future our shareholders decide to retain and capitalize all or part of our annual net income in order to finance our future growth and to distribute stock dividends, the Central Bank may require us to pay the portion of the net income corresponding to shares owned by SAOS in cash to SAOS. If we distribute stock dividends and the Central Bank does not require us to pay that portion in cash, the shares received by SAOS must be sold by SAOS within the following 12 months. The shareholders of SM-Chile will have a right of first refusal with respect to that sale.

Capital Expenditures

The following table sets forth our capital expenditures in each of the three years ended December 31, 2011, 2012 and 2013:


	For the Year Ended December 31,
	2011		2012		2013
	(in millions of Ch$)
BANK’S INTERNAL REPORTING POLICIES:
Computer equipment	Ch$	8,797	Ch$	7,750	Ch$	7,509
Furniture, machinery and installations		9,425		8,949		4,303
Real estate		3,481		337		62
Vehicles		370		945		375

Subtotal		22,073		17,981		12,249
Software		9,597		9,116		5,511

Total	Ch$	31,670	Ch$	27,097	Ch$	17,760

Our budget for capital expenditures for 2014 is Ch$59,184 million, 62.9% of which is related to information technology expenditures and 37.1% of which is associated with infrastructure projects. The budget for capital expenditures is in line with our strategic priorities of improving our efficiency and reinforcing our proximity to our customers, particularly in our retail banking segment, through physical as well as non-physical contact channels. These capital expenditures are principally financed by our capital and long-term debt financing.

Among the budgeted expenditures for information technology, 45.1% corresponds to new and ongoing IT projects intended to provide us with business solutions as well as productivity improvements, 34.9% is related to critical projects involved in our mid-term IT plan, while the remaining 20.1% consists of investment in technological equipment and improvements or renewal of our ATMs nationwide network.

Our 2014 budget for infrastructure expenditures includes disbursements associated with new branches, as well as the renovation and relocation of some of our existing commercial branches, and general maintenance and renewal investments.

BUSINESS OVERVIEW

Our Competitive Strengths

Building on our knowledge of the Chilean financial market, we have historically been able to develop significant competitive advantages based on our strong brand recognition, our widespread branch network, the diversity and relative size of our customer base, our highly competitive funding structure, the superior asset quality of our loan portfolio as compared to our peers in Chile, an attractive risk-return relationship and our market leadership in a diverse range of financial products and services.

Our main competitive strengths are:

Brand Recognition and Strong Corporate Image

We have operated in the Chilean financial industry for 120 years under the “Banco de Chile” brand name. In order to provide our customers with specialized value offerings and a wider range of financial products and services, we have also developed the “Banco Edwards|Citi”, “Banco CrediChile” and “Banchile” brand names. We believe our long-standing history in the Chilean market is recognized by our customers and the general public, who associate us with quality, reliability and social responsibility within the Chilean financial industry, as demonstrated in various polls conducted by well-known market research companies. According to market research conducted by Adimark GFK (part of the GFK Group), during 2013 we remained the most recognized brand among financial institutions operating in Chile. Also, in 2013, Merco (a corporate reputation monitor headquartered in Spain) ranked Banco de Chile as the market leader in corporate reputation for all companies operating in Chile. In addition, research conducted by Millward Brown Optimor (a marketing consultancy focused on brands, media and communications that is part of Kantar Group) ranked Banco de Chile as the second most valuable brand in Chile and the most valuable in the Chilean banking industry. We believe that our long history in the Chilean banking industry is a key element that differentiates us from our competitors.

Additionally, we believe that our merger with Citibank Chile reinforced our corporate image as a leading financial institution within Chile and allowed us to gain recognition among customers and investors all over the world.

We also believe that our strong corporate image is further strengthened by our commitment to social responsibility, which includes supporting the Teleton Foundation (a non-governmental organization dedicated to assisting and treating Chilean children), our partnership with institutions dedicated to improving the quality of Chilean education, our participation in campaigns intended to improve the quality of life of needy people, our commitment to the development of sports in Chile by supporting the national soccer team and tennis players and our environmental pledge that has led us to implement policies to conserve energy and forestry resources, as well as other initiatives intended to strengthen our role in, and contribution to Chilean society.

Business Scale and Leading Market Position

We are one of the largest financial institutions in Chile and a market leader in a broad range of financial products and services within the Chilean financial system, as listed in the following table:


	As of December 31, 2013
	Market Share			Market Position
Commercial Loans⁽¹⁾		19.5	%		1^st
Average Balances of Total Demand Deposits and Current Account⁽¹⁾		23.2	%		1^st
Current Accounts Balances held by Individuals		30.2	%		1^st
Mutual Funds (Assets Under Management)		21.3	%		1^st
Net Fees and Commissions Income		22.2	%		1^st
Net Income for the Period		26.8	%		1^st

Source: SBIF and Chilean Association of Mutual Funds.

(1)	Excluding operations of subsidiaries abroad.

We have traditionally had a strong presence in the wholesale segment with long-term relationships with major local and multinational companies that operate in Chile. We have been able to maintain this leading position by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to successfully serve our customers’ needs. We have also added value to our service offerings by including treasury products for hedging purposes, together with investment banking, insurance brokerage and other specialized financial services through our subsidiaries.

In addition, in recent years we have been focused on further penetrating the retail banking business through diverse value offerings intended to cover all of the populations and enterprises we target. Therefore, in recent years we have prioritized growing our residential mortgage portfolio and expanding our presence in transactional services such as credit cards, current accounts and sight accounts, as we believe they are effective means to build long-term relationships and customer loyalty and to increase cross-selling opportunities. As a result, through our Commercial Division (Individual and SME Banking), we lead the market in services offered to high-income individuals for whom we have developed an attractive and complete portfolio of financial services, including a full range of wealth management services through one of our subsidiaries. Also, our Consumer Finance Division (Banco CrediChile) has become one of the largest providers of consumer loans among the Chilean banks’ consumer divisions, based on comprehensive service offerings for low- and middle-income individuals. This has been recently supplemented by the implementation of business solutions for low-scale entrepreneurs and individual customers in periphery districts. This broad variety of services has also enabled us to lead the Chilean market in terms of income from fees and commissions.

We believe our financial strength, prestige and brand recognition among Chilean customers have allowed us to become the market leader in terms of current account balances within the Chilean financial system, especially among individuals, who have demonstrated their preference for our services. Our position was further consolidated in the financial downturn in 2009, when we benefited from a “flight-to-quality” effect as investors were seeking a reliable institution to keep their funds.

Robust Customer Base and Nationwide Distribution Network

We believe that we have one of the largest customer bases among financial institutions in Chile. We have prioritized expanding this customer base by implementing attractive and tailored value offerings, based on continuously improving segmentation. As a result, over the last three years (2010 to 2013), our customer base has expanded at a compound average growth rate (“CAGR”) of 5.5%. In line with our strategic priorities and the characteristics of the markets we target, our retail banking customer base (individuals and SMEs) has expanded at a CAGR of 5.6% over the last three years and our wholesale banking customer base has grown at a CAGR of 4.4% over the last three years. As of December 31, 2013, we had approximately 1,882,000 customers, including approximately 1,154,000 borrowers, approximately 696,000 current accounts holders, approximately 129,000 time deposit holders, approximately 380,000 saving account holders and approximately 1,463,000 credit card holders.

We believe that our robust customer base is both an essential driver of our business and a valuable asset that enables us to cross-sell our products and services.

In order to better serve our customers, we are present in all regions of Chile and strive to be accessible to every Chilean customer through our broad branch network as well as non-physical contact channels. As of December 31, 2013, we had a nationwide branch network of 430 branches, the second largest in Chile among non-governmental banks, according to information published by the SBIF. This network is composed of 244 branches under our “Banco de Chile” brand name, 41 branches under our “Banco Edwards|Citi” brand name and 145 branches under our “Banco CrediChile” brand name. We believe that our broad branch network enables us to develop close relationships with our customers and therefore we are constantly assessing new branch locations throughout Chile.

In addition, to improve our customer service, we are constantly reviewing the appearance and layout of our branches. We aim to turn each of our branches into a business generating unit. As a result, we have revised and redesigned our service models in most of our credit-lending units in order to maximize branch profitability and enable our on-site account executives to focus on serving customers and developing new businesses rather than focusing on administrative tasks, which have been mostly transferred to centralized back-office staff.

We have also enhanced our branch network with non-physical remote channels, such as ATMs and internet-based online platforms. As of December 31, 2013, we had 1,804 ATMs throughout Chile.

Diversified Value Offering of Financial Products and Services

In response to the diverse needs of our customers, we have become a full-service financial group that operates under a multi-brand approach, offering a wide range of traditional banking products and services to our customers that are supplemented by specialized financial services provided by our subsidiaries, including:

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securities brokerage,

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mutual funds management,

•

securitization,

•

financial advisory,

•

insurance brokerage,

•

collection services, and

•

credit-assessment services.

In addition, our strategic alliance with Citigroup Inc. and our Global Connectivity Agreement have allowed us to broaden our service offerings by adding a comprehensive portfolio of international financial services that previously we could only partially provide.

All of the above is supplemented by tailored service models based on the needs of consumers across all of our markets.

Competitive Funding Structure

We believe that we have a cost-effective and highly competitive funding structure based on our leading market position in current accounts and demand deposits, especially among individuals. According to the SBIF, as of December 31, 2013, we held 30.2% of individuals’ current account balances, which was the market-leading position among Chilean banks. As of that same date and according to information published by the SBIF, the total balance of our non-interest bearing current accounts and demand deposits represented 23.1% of our total funding structure, as compared to the 17.8% reported by the Chilean financial system as a whole, excluding Banco de Chile.

We believe that our funding structure provides us with a cost advantage over our competitors (which use a higher proportion of interest bearing liabilities), as current accounts and demand deposits are the cheapest funding source available in Chile, since they are non-interest bearing liabilities. Also, due to our high international credit rating we have one of the lowest costs of funding from liabilities associated with interest-bearing deposits.

Furthermore, we are constantly striving to diversify our funding in order to maintain a competitive cost of funding and improve our liquidity. In those efforts, during 2013 we completed four long-term debt placements in Switzerland for a total amount of CHF775 million (approximately US$785 million) and established a US$2 billion medium term notes program (the “MTN Program”). Under the MTN Program, we have recently issued medium term notes for HKD 1,399 million (approximately US$168 million) in Hong Kong, and two series of medium terms notes for a total amount of JP¥ 16,900 million (approximately US$167 million) in Japan. In addition, we issued long-term bonds in the local market for a total amount of Ch$505,000 million (approximately US$ 960 million).”

Superior Asset Quality

We are one of the Chilean financial institutions with the highest credit quality and the healthiest loan portfolio in Chile. We believe this asset quality is the result of our well-known prudent risk management approach and accurate credit risk models that are continuously being updated and have enabled us to maintain relatively low levels of total past-due loans and high coverage indicators over the last few years. According to the SBIF, as of December 31, 2013, we had a delinquency ratio (total past-due loans as a percentage of total loans) of 1.1%, which is well below the delinquency ratio of 2.4% reported by the Chilean financial system, excluding Banco de Chile, as of the same date. Additionally, we maintain the highest coverage ratio (the ratio of allowances for loan losses to total past-due loans) in the Chilean financial system, which as of December 31, 2013 was equal to 2.0 times, as compared to 1.0 times for the Chilean financial system as a whole, excluding Banco de Chile, as of the same date.

Our Business Strategy

Purpose

‘We are a company that contributes to the economic development of the country by offering attractive financial solutions to individuals and enterprises.’

Mission

‘We are a leading and globally-connected corporation with a prestigious business tradition. We provide excellent financial services to each type of customer by offering creative, fast and effective solutions for each segment, and ensuring that we add value for our customers, shareholders, employees and community as a whole.’

To accomplish this mission, we believe it is essential to attain industry leadership in all businesses and financial areas in which we operate, namely, profitability, efficiency, business scale, customer base, human resources development and corporate social responsibility.

This mission also requires initiatives to achieve comprehensive excellence in management, with customer satisfaction as our major goal. We use high industry standards in information technology, business models and quality, all of which is summarized by the value creation cycle below:

LOGO

Vision

‘We aspire to be, in all things we do, the best bank for our customers, the best place to work and the best investment for our shareholders. In order to accomplish this vision, we are committed to the development of our employees and the community as a whole.’

Throughout our history, we have aspired to be the leading bank in the Chilean financial system. This vision involves and commits us to all of the diverse stakeholders related to our business, namely, customers, employees, investors and the community. Our vision is shared and internalized by all areas across the corporation, senior management and the board of directors and constitutes the basis for our strategic objectives.

Among the main stakeholders that we strive to satisfy are:

•

Our Customers

•

Our aim is to gain substantial knowledge of our customers in order to align our value offerings to their needs, requirements and aspirations in order to build long-term relationships.

•

In addition, our brand recognition, corporate reputation and market leadership within the local financial industry represent important competitive advantages that we must capitalize on, preserve and improve by providing all of our customers with innovative and tailored value offerings.

•

Our Employees

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Our human resources are one of our core competitive advantages, given our team’s commitment, dedication and distinctive identity within the local financial system.

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We also believe that promoting a better work environment is key for providing exceptional customer service. For this reason, we focus on creating effective communication channels and developing a meritocratic culture by rewarding our employees’ talents and achievements.

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Our Community

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We believe that our business actions and financial performance depend on our community involvement. As a result, we strive to continuously reinforce our commitment to the community by carrying out diverse social impact initiatives and providing contributions and solutions in challenging circumstances.

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We are committed to entrepreneurship, the integration of disabled people, high-quality education, overcoming poverty, the integration of elderly people, transparency and relationship-building strategies with our suppliers, as well as environmental protection.

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Our Shareholders

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We maintain our shareholders’ trust by engaging in projects and businesses intended to maximize the company’s long-term value, while being prudent with regards to business-related risks.

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Also, through commercial strategies that combine enhanced service quality and higher returns, we have been able to add significant value to our shareholders. This approach—which we expect to maintain—distinguishes us within the Chilean financial system.

Strategic Priorities

Our long-term strategy is to maintain profitable growth enhancing our position as a leading financial institution in Chile by providing a broad range of financial products and services to corporations and individuals nationwide. As part of this strategy, we have developed a multi-brand approach to target different market segments. We intend to leverage our strongly positioned brand names “Banco de Chile”, “Banco Edwards|Citi” and “Banco CrediChile” in traditional banking, which are supplemented by specialized financial services (such as securities brokerage services, mutual funds management, securitization services, financial advisory services and insurance brokerage services) provided by our subsidiaries that operate under the “Banchile” brand name.

Since the performance of our business depends on many factors, we cannot assure you that we will be able to implement our strategies successfully or that we will be able to reach our strategic goals. For a discussion of certain risks applicable to our operations, industry and country we operate in, see “Risk Factors”.

Our business model is focused on those lines of business that add significant economic value to our shareholders, have appropriate levels of risk and allow us to strengthen long-term relationships with our customers. We seek sustained growth, particularly in higher-margin segments and business areas that show strong growth potential. Accordingly, in recent years we have reoriented our business focus towards the retail, large companies and treasury segments, in which we aim to achieve the same prominent position that we have obtained in the corporate segment. Thus, we strive to:

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Lead the Retail Banking Business

In our retail banking segment, our aim is to lead the market by creating differentiated and comprehensive value offerings based on a deep and continuously improving segmentation that permits us to engage in profitable and high-growth potential business opportunities. Thus, we expect to expand our business and customer base by developing tailored service models, enlarging our branch network, enhancing our presence in the small and medium companies market and reinforcing certain lending products that should enable us to consolidate long-term relationships with our upper and middle-income individual customers, especially through payment channels usage (such as credit cards), installment loans and residential mortgage loans. Similarly, we aspire to target lower-income individuals and microenterprises by promoting payroll-deduction lending and attracting customers previously unattached to any bank through a basic array of services, as well as providing commercial credit.

Throughout 2013 we prioritized growth in middle and upper income segments in personal banking as we recognized potential risk for lower income individuals by taking into consideration the slowdown observed in the local economy. For this reason, we have achieved an accurate segmentation in personal banking, which has enabled us to developed tailored offers to middle and higher income individuals. Thus, among less risky individuals we promoted growth in transactional services, especially credit cards, which enabled us to increase loan-related balances by 17.0% on an annual basis. Similarly, installment loans increased by 9.5% for middle and upper income individuals while mortgage loans recorded an overall 12.8% increase among these customers.

Notwithstanding the above, we continued to expand the range of financial services that we provide to lower-income individuals and microenterprises, segments that have not been fully penetrated by banks. In this regard, ‘Caja Chile’ network—which provides lower income customers with a suite of basic financial services through a transactional platform located in local convenience stores—completed 2013 with more than 2,000 convenience stores participating in the network. Similarly, our unit of ‘Microenterprises Banking’ strengthened during 2013 and ended the year with approximately 17,200 customers.

These initiatives are intended to take advantage of the retail banking segment’s growth potential. Even though Chile’s per capita GDP has tripled over the last 20 years, banking penetration in the Chilean economy is still below comparable countries, particularly within the low- and middle-income population segments and with respect to certain banking products such as residential mortgage loans. We believe we can grow further in this segment since, according to the SBIF, as of December 31, 2013, we had a 17.4% market share in residential mortgage loans and a 20.9% market share in consumer loans, both below the market stake held by the market leader. As for residential mortgage loans, due to our effective commercial strategies, we have been able to narrow the gap between us and the market leader from 4.4% as of December 31, 2012 to 3.3% as of December 31, 2013. With respect to consumer

loans, however, the gap between us and the market leader increased from 2.2% as of December 31, 2012 to 3.7% as of December 31, 2013. This increase may be understood in the context of a riskier environment that led us to tighten the entire credit process in this product, from assessment to collection, which also led us to limit lending in consumer loans in order to maintain our commitment to a balanced risk-return equation.

Despite our efforts to increase market penetration of Retail Banking, especially in lending products, we believe that the fierce competition in the banking industry compels us to innovate in terms of new products and services to diversify our revenue sources. Accordingly, we have strived to build comprehensive value offerings for our retail segment, prioritizing fee-based income. As a result, our consolidated income from fees and other services has become an important source of revenue for us, reaching Ch$287,272 million (or 21.7% of our total operating revenues) in 2012 and Ch287,093 million (or 19.4% of our total operating revenues) in 2013. We aim to generate increasing amounts of fees and commission revenue by developing innovative products and services and reinforcing cross-selling, within a complex regulatory environment.

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Lead the Wholesale Banking Business

In our wholesale banking segment (which targets companies with annual sales over Ch$1,600 million), we aim to maintain our leading market position in terms of loans, as well as achieve higher profitability in a market that is characterized by low margins. We intend to accomplish these goals by increasing our cross-selling of non-lending products and services through various initiatives. We are focused on improving our offering of cash management services, enhancing our internet-based services, increasing the penetration of products designed by our treasury and money market operations segment, enhancing our presence in certain lending products such as leasing and factoring and promoting international businesses by taking advantage of the commercial synergies related to both our merger with Citibank Chile (such as the Global Connectivity Agreement with Citigroup) and the specialized financial services offered by our subsidiaries, such as securities brokerage, mutual funds management and financial advisory in order to appropriately meet the needs of certain niches within this business segment.

In addition to our traditional lending activities, we have developed supplemental financial services in order to achieve profitable growth by diversifying our revenue sources. Thus, we have increasingly added and developed fee-based and non-lending products and services such as financial advisory, cash management services and foreign exchange derivative transactions. All of these specialized financial services permit us to cross-sell our large customer base and obtain important gains in profitability for a segment that is well-recognized by low margins. As a result, according to our management information system, we increased our cross-selling indicator of non-lending revenues to lending revenues from a multiple of 1.34 in 2009 to a multiple of 1.78 as of December 31, 2013. We expect to continue enhancing our cross-sell indicators in order to optimize the profitability of the wholesale banking segment. This achievement joined to the higher penetration that we have attained in our Large Companies and Real Estate Division (annual turnover between Ch$1,600 and Ch$70,000 million) that increased from 25.6% in 2012 to 27.5% in 2013. This has been the result of an aggressive plan intended to enhance the closeness with the customer through a dual model of service that includes several on-site visits.

We also promote diverse services such as leasing, factoring and cash management in this segment. As of December 31, 2013, we ranked first in factoring loans within the Chilean banking industry by holding a 21.6% market share and ranked second in leasing contracts in Chile with a 20.2% market share, including operations of subsidiaries abroad. Regarding cash management services, during 2013 we increased volumes related to payment and collection agreements by approximately 28.9% and 29.1%, respectively.

Also, in our effort to offer tailor-made solutions and recognize the needs of different customer segments, during 2013 we defined a new group of customers called “Family Office”. This group includes companies that manage investments and trusts for a single family that we aim to target through a joint model of service that includes the interaction between our Wholesale Banking Segment and our subsidiary Banchile Inversiones.

In our treasury and money market operations segment, we intend to take advantage of our specialized knowledge to increase the penetration of popular products in our current customer base while offering innovative products to potential clients. Also, we continuously seek newer and more convenient funding choices, locally and internationally, in order to support our long-term business strategy by promoting an adequate diversification of our funding structure.

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Improve Service Quality

We are convinced that in a highly competitive industry such as the Chilean banking system, a customer-centric focus is critical to generating loyalty and creating long-term, profitable relationships. We believe that our high service quality is a competitive strength that differentiates us from competitors and supports our long term strategy by responding to the preferences of our current and potential customers. We strive to continuously improve our relationships with customers by developing commercial strategies aligned with their needs, as well as improving our response time and customer satisfaction indicators.

Consistent with this view, our strategic priorities are focused on achieving high service quality standards within the industry, which has translated into diverse initiatives that seek to improve the satisfaction of our customers directly or indirectly. The most important initiative in this regard is the implementation of a customer-centered service quality model intended to improve the customer experience. We have a dedicated team responsible for assessing and improving the quality of our services. This team of employees from different areas of the Bank has set new policies and lead projects to achieve the highest service quality standards within the Chilean banking industry. Recently our attention has been focused on (i) ensuring the operational performance and availability of contact channels, services and systems, (ii) automating operational procedures with a focus on minimizing errors and manual tasks, (iii) redesigning critical processes that have an impact on customer satisfaction by improving availability, training, homogeneity and response time for each segment or contact channel, (iv) redesigning the requirement and complaint attention process by applying a customer-oriented vision (timing and quality), (v) expediting our credit–approval processes and (vi) developing specialized solutions and enhancing the use of remote access platforms for wholesale banking customers.

We also expect to continue benchmarking our competitors’ service performance and incorporate best practices from other markets, industries and countries.

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Promote Operating Efficiency

We believe that operating efficiency is a key competitive advantage. Accordingly, our strategy for efficiency intends to achieve the highest productivity and the tightest cost control. We believe that cost control will be increasingly important in our efforts to maintain high profitability ratios in a changing business environment. To accomplish these goals, we have invested in information technology and the development of simpler, more manageable, secure and modern business processes and platforms to attain faster response times and higher productivity. We also continue to enhance our strategic development capabilities, increase our business scale (generating economies of scale), develop economies of scope by incorporating new financially related businesses, reinforce the productivity of our branch network, enhance our remote transactional channels, improve our credit processes, develop a higher level of automation in our internal processes and consolidate our cost control policy and monitoring procedures.

In 2011, 2012 and 2013, we invested a total of approximately Ch$48,300 million (approximately Ch$18,400 million, Ch$16,900 million and Ch$13,000 million in 2011, 2012 and 2013, respectively) in information technology, mainly software and hardware, as we believe this is one of the best ways to improve our service quality and operating efficiency. Similarly, we are developing internal processes intended to reduce and keep our expenses under control.

We continue to focus on improving operating efficiency through diverse projects intended to improve the quality and responsiveness of internal operating processes, such as increased automation of back-office matters and the implementation of new IT platforms for financial planning and commercial tasks. We also seek to improve security in transactional services to reduce operational risks, using anti-fraud security software for electronic transfers and other security measures to avoid attacks on our network of ATMs.

As a result of these initiatives, our efficiency ratio, which is the percentage of our consolidated operating expenses to our consolidated operating revenues, has maintained suitable levels over the last three years. During 2011, 2012 and 2013, our efficiency ratio was 47.9%, 46.3% and 41.9%, respectively. Based on information published by the SBIF, under Chilean GAAP, as of December 31, 2013 we had the lowest efficiency ratio in the local banking industry.

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Enhance our Social Reputation

We believe that improving our social reputation is crucial to meet our strategic goals in the midst of societal changes in Chile and worldwide, so we aim to create improved mechanisms in order to build positive connections with our communities. Therefore, we have undertaken a wide range of initiatives intended to encourage active participation in different areas of society. This view is shared by the Bank and its employees, who support the development of Chile through diverse methods such as promoting social progress, contributing to environmental protection, decreasing extreme poverty, providing high-quality education to needy people, assisting disabled young people, fostering cultural development and embracing campaigns intended to overcome the effects of specific adverse events such as natural disasters. We aim to develop a comprehensive model to consistently manage and control our social reputation to enhance our connections with our communities and soften any adverse reputational effects from banking activities.

In line with this view, during 2013 we continued to support different social endeavors by collaborating with “Desafío Levantemos Chile”, which is an initiative intended to promote entrepreneurship throughout Chile and especially within lower income segments. Thus, in 2013 we supported the creation of a School of Entrepreneurs in Valdivia (southern Chile), which along with other school in Santiago, have permitted to train more than 500 micro-entrepreneurs. In addition, we have maintained our commitment to disabled people by supporting Teleton Foundation assisting disabled children, as well as disable athletes and artists. Similarly, we continued to support needy people by contributing to improve quality of education across lower income segments through Astoreca Foundation. Finally, we are also committed to environmental protection. As a matter of fact, during 2013 we implemented diverse initiatives and promoted an ecological culture across the corporation in order to lower the impact of our operations on the environment.

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Alignment of Human Resources and Culture

We believe human resources are a key element of our long-term goals. In order to consolidate profitable growth, achieve high standards of service quality, attain operating efficiency and build an excellent corporate reputation over the long run, we must have a motivated and highly qualified workforce that is committed to our corporate values, including ethical conduct, responsibility, integrity, prudence, justice, loyalty and respect.

Accordingly, we strive to develop a distinctive culture among our employees by promoting: (i) a clear focus on the customer, (ii) confidence and responsibility, (iii) leadership and empowerment, (iv) collaboration and teamwork and (v) innovation and continuous improvement.

We also seek to remain one of the most respected employers in Chile. For this reason, we have recently undertaken diverse projects and initiatives intended to emphasize our commitment to recruiting and retaining excellent employees, including a new platform that manages the internal mobility of our employees. Also, we have improved our competence evaluation methodology to identify remarkable employees and enhance their career development. As for training activities, we have continued to focus on generating leadership capabilities through diverse programs. We believe these initiatives are aligned with our strategy and the professional development that our team aspires to achieve.

During 2013 we rethought our business strategy and its connection with our employees in order to align corporate values and goals with carreer development and personal desires of our collaborators. In this vein, our Human Resources Division developed a project intended to define the identity and purpose of each business and back office division within the Bank. This exercise allowed us to enhance values and the alignment of each team with the corporate mission and objectives. Also, training activities continued to be a main focus for us. During 2013 more than 10,300 employees participated in at least one training course.

In addition, quality of life is a keystone for us, as we understand that employees need to develop their life, not only professionally but also in personal terms. Thus, in 2013 we undertook specific projects related to health and wellness for our staff by improving the Comprehensive Insurance policy that benefits them, maintaining a preventive medical assessment program and enhancing our special program of entertainment activities.

All of these achievements translated into a positive response from our staff in the annual survey of employee satisfaction.

Ownership Structure⁽¹⁾

The following diagram shows our ownership structure as of April 15, 2014:

LOGO

(1)	The ownership structure diagram reflects share ownership and not voting rights. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

Principal Business Activities

We are a full-service financial institution that provides, directly and indirectly through our subsidiaries and affiliates, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market. Accordingly, for management purposes we organize our operations in the following four business segments:

LOGO

The information related to our business segments presented in this section has been prepared in accordance with our internal reporting policies. See “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2011, 2012 and 2013—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2011, 2012 and 2013—Summary of Differences between Internal Reporting Policies and IFRS” for a description of the most significant differences between our internal reporting policies and IFRS.

The following table sets forth information on the composition of our loan portfolio and our consolidated income before income tax in accordance with our internal reporting policies for the year ended December 31, 2013, allocated among our principal business segments:


	Total Loans				Income before Income Tax⁽¹⁾
	For the Year Ended December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Retail market	Ch$	10,516,812	50.4	%	Ch$	303,235
Wholesale market		10,345,428	49.6			247,406
Treasury and money market operations		—	—			10,096
Operations through subsidiaries		7,271	0.0			32,802
Other (Adjustments and Eliminations)		—	—			—

Total	Ch$	20,869,511	100.0	%	Ch$	593,539

(1)

This net income breakdown is used for internal reporting and planning purposes and it is based on, among other things, our estimated funding cost and direct and indirect cost allocations. This breakdown may differ in some extents from breakdowns of our operating income for financial reporting and regulatory purposes. Separate information on the operations, assets and income of our financial services subsidiaries and affiliates is provided below under “—Operations through Subsidiaries.”

The following table sets forth our consolidated operating revenues in accordance with our internal reporting policies, allocated among our principal business segments, for the years indicated:


	For the Year Ended December 31,
	2011			2012			2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$)
Retail market	Ch$	760,542		Ch$	842,088		Ch$	923,222
Wholesale market		289,193			338,406			403,063
Treasury and money market operations		31,517			32,735			16,307
Operations through subsidiaries		135,727			122,698			126,576
Other (adjustments and eliminations)		(11,862	)		(13,873	)		(13,143	)

Total Operating Revenues	Ch$	1,205,117		Ch$	1,322,054		Ch$	1,456,025

The following table sets forth a geographic market breakdown of our operating revenues in accordance with our internal reporting policies for the years indicated:


	For the Year Ended December 31,
	2011			2012			2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$)
Chile	Ch$	1,216,887		Ch$	1,335,862		Ch$	1,469,110
Banking operations		1,081,252			1,213,229			1,342,592
Operations through subsidiaries		135,635			122,633			126,518
Foreign operations		92			65			58
Operations through subsidiaries		92			65			58
Other (adjustments and eliminations)		(11,862	)		(13,873	)		(13,143	)

Total Operating Revenues	Ch$	1,205,117		Ch$	1,322,054		Ch$	1,456,025

Retail Banking Segment

Our retail banking segment serves the financial needs of individuals and small and medium-sized companies through our branch network. As of December 30, 2013, we had 285 branches that operate under our “Banco de Chile” and “Banco Edwards|Citi” brand names and 145 branches that operate within the “Banco CrediChile” network. As of December 31, 2013, loans granted to our retail banking segment amounted to Ch$10,516,812 million and represented 50.4% of our total loans as of the same date.

In terms of composition, as set forth in the following table, as of December 31, 2013 our retail segment’s loan portfolio was principally focused on residential mortgage loans, which represented 44.9% of the segment’s loan book. The remaining loans were distributed between consumer (29.0%) and commercial loans (26.1%).


	As of December 31, 2013
	(in millions of Ch$, except percentages)
BANK’S INTERNAL REPORTING POLICIES:
Commercial loans	Ch$	2,744,128	26.1	%
Residential mortgage loans		4,724,263	44.9
Consumer loans		3,048,421	29.0

Total	Ch$	10,516,812	100.0	%

We serve the retail market through two different and specialized divisions: (i) the Commercial Division (Individual and SME Banking) and (ii) the Consumer Finance Division (or Banco CrediChile).

Commercial Division (Individual and SME Banking)

The Commercial Division (Individual and SME Banking) is responsible for offering financial services to individuals with monthly incomes over Ch$500,000 (or Ch$6.0 million per year) and to small and medium-sized companies with annual sales of up to approximately Ch$1,600 million. This division manages the portion of our branch network that operates under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 285 branches as of December 31, 2013.

The strategy followed by the Commercial Division (Individual and SME Banking) is mainly focused on sub-segmentation, multi-brand positioning, cross-sell of lending and non-lending products and service quality based on customized service models for specific customer needs. Loyalty programs have been increasingly incorporated into our commercial targets for each sub-segment and they have enabled us to increase the use of our credit cards and our commission–based income. In addition, the division’s operations count on the support of specialized call centers and internet banking services, along with a wide range of management tools that allow us to measure returns, the performance of cross-sold products and the effectiveness of marketing campaigns.

During 2013 we strived to maintain a market-leading position in all of the businesses that we compete in, with a focus on transactional services (credit and debit cards), residential mortgage loans and commercial loans to SMEs. Beyond financial results and market position, we also put significant effort into developing and implementing world-class technological devices intended to improve our service quality standards. In this regard, during 2013 we became the first bank in Chile that issued credit cards with a “security chip”. This device was inserted in order to reduce the rate of fraud in credit cards by securing identity and confidentiality in cash withdrawals and payments.

As of December 31, 2013, the Commercial Division (Individual and SME Banking) served 881,868 individual customers (hereafter “customer” should be understood as the sum of individuals or companies that hold at least a current account, a credit card or a sight account) and 75,237 small and medium-sized Chilean companies. This customer base resulted jointly in total loans granted to 712,550 borrowers, which includes 99,420 residential mortgage loans debtors, 88,742 commercial loan debtors, 369,789 utilized lines of credit, 325,529 installment loans and 1,139,007 credit card accounts. As of the same date, the division held 695,386 current accounts, 146,836 savings accounts and 170,252 time deposits.

As of December 31, 2013, loans granted by our Commercial Division (Individual and SME Banking) accounted for Ch$9,723,637 million represented 46.6% of our total loans and 92.5% of loans granted by our retail market segment. The following table sets forth the composition of the division’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2013:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Commercial loans
Commercial credits	Ch$	2,247,044	23.1	%
Leasing contracts		286,128	2.9
Other loans		192,333	2.0
Total Commercial Loans		2,725,505	28.0
Residential Mortgage Loans		4,655,994	47.9
Consumer Loans
Installment loans		1,399,983	14.4
Credit cards		702,679	7.2
Lines of credit and other loans		239,476	2.5
Total Consumer Loans		2,342,138	24.1

Total	Ch$	9,723,637	100.0	%

We offer a variety of financial services to individuals and small and medium-sized companies, directly through the division or indirectly through our subsidiaries, such as current accounts, automatic bill payment, debit cards, credit cards, revolving credit lines, residential mortgage loans, consumer loans, commercial loans, mortgage loans for general purposes, leasing agreements, factoring services, mutual funds management and stock brokerage, support in foreign trade transactions, payments and collections, insurance brokerage (which includes life and casualty insurance), savings instruments and foreign currency services.

Installment Loans

Our consumer installment loans are generally incurred, up to a customer’s approved credit limit, to afford the goods or services purchases, such as cars, travels and household furnishings. Consumer loans may be denominated in both pesos and UF, bear fixed or variable interest rates and are generally repayable in installments over a period of up to 36 months.

As of December 31, 2013, we had Ch$1,399,983 million in installment loans granted by our Commercial Division (Individual and SME Banking), which accounted for 45.9 % of the retail market business segment’s consumer loans. Most of these installment loans are denominated in Chilean pesos and are payable monthly.

Residential Mortgage Loans

As of December 31, 2013, we had outstanding residential mortgage loans of Ch$4,732,307 million, which represented 22.7% of our total loans. According to information published by the SBIF, as of December 31, 2013, we were Chile’s second largest privately owned bank in terms of mortgage loans, accounting for approximately 21.7 % of mortgage loans granted by Chilean privately owned banks, excluding loans granted by Banco del Estado, a government-owned bank, and operations of banks’ subsidiaries that operate abroad.

Our residential mortgage loans are generally denominated in UF and have maturities that range between five and thirty years. As of December 31, 2013, the average residual maturity of our residential mortgage loan portfolio was 17.2 years. Originally, we funded our residential mortgage loans through the issuance of mortgage finance bonds, which are recourse obligations only to us with payment terms that are matched to the residential loans. Also, the mortgage finance bonds bear real market interest rates plus a fixed spread over the variable rate of the UF, which permits us to reduce our exposure to interest rate fluctuations and inflation. Chilean banking regulations allow us to finance up to 100% of a residential mortgage loan with mortgage finance bonds, based on the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after-tax monthly income, when the customer belongs to the low-income population segment. However, that limit may be adjusted for the middle and high-income population segments.

Over the last decade, we have also promoted the expansion of Mutuos Hipotecarios, a mortgage-lending product, which is not financed by mortgage finance bonds, but instead through our general funds. Mutuos Hipotecarios allow customers to finance up to 100% of the purchase price or the appraised value of the property, whichever is lower, instead of the 75% that a standard mortgage would allow. As of December 31, 2013, our residential mortgage loan portfolio was principally composed of Mutuos Hipotecarios, as customers have preferred them due to their flexibility and simplicity (for instance the interest rate is known in advance by the customer), as they permit financing of up to 100% of the properties purchase price and are easier to prepay.

The following table sets forth the composition of our residential mortgage loan portfolio by product type:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Secured Residential Mortgage Loans⁽¹⁾
Loans financed with Mortgage Bonds	Ch$	87,354	1.8	%
Mutuos Hipotecarios		4,644,953	98.2

Total Secured Residential Mortgage Loans	Ch$	4,732,307	100.0	%

(1)	Correspond to the Bank’s total secured residential mortgage loans and not only those associated with the Commercial Division (Individual and SME Banking).

As shown above, as of December 31, 2013 residential mortgage loans related to Mutuos Hipotecarios represented 98.2% of our total residential mortgage loan portfolio, while the remaining 1.8% corresponded to mortgage loans financed with Mortgage Bonds. As of the same date, the Mutuos Hipotecarios portfolio had an average origination period of 3.9 years (the period from the date when the loans were granted to the specified date) and just 1.0% of these loans were granted by CrediChile. Conversely, as of December 31, 2013 loans financed with Mortgage Bonds had an average origination period of 13.1 years (the period from the date when the loans were granted) and 25.2% of these loans were granted by CrediChile. In terms of credit risk, in 2013, loans related to Mutuos Hipotecarios, as well as those financed with Mortgage Bonds, had low gross (before recoveries) credit risk ratios of 0.13% and 0.20%, respectively. The difference between both ratios is explained by the previously mentioned factors and also by the Bank’s stricter requirements to grant Mutuos Hipotecarios that may finance up to 100% of the property’s purchase price. It is important to mention that the residential mortgage loan portfolio financed with Mortgage Bonds is annually decreasing in amount and as a proportion of the total residential mortgage loan portfolio, since currently customers prefer Mutuos Hipotecarios. Accordingly, the portfolio of residential mortgage loans financed with Mortgage Bonds is expected to have increasing gross credit risk ratios over time until its expiration, because the proportion of non-performing loans becomes higher as long as responsible borrowers terminate their liability with the bank.

Regarding Mortgage Bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of the Mortgage Bond obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, in the ordinary course of business, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.

For those loans that finance a higher portion of the property appraised value, we demand that customers comply with stricter requirements, which are verified during the credit assessment stage. These requirements are related to: (i) the history of the relationship between the Bank and the customer (new or current client), (ii) credit risk scores, (iii) monthly income, (iv) type of job (employed or self-employed), and (v) years employed. In order to illustrate the above mentioned, the table below sets forth an example of requirements for residential mortgage loans that finance up to 90% and more than 90% of the property value, with a common term and granted to employed as well as self-employed new customers.


Credit–granting Requirements (in millions of Ch$, except percentages)
New Clients	Requirements (in millions of Ch$, except percentages)
Loan / Property value	£ 90%	> 90%
Employed
• Years employed	> 1 year	> 1 year

• Monthly Income	> Ch$0.5	> Ch$1.3

Self-Employed
• Years Employed⁽¹⁾	> 2 years	> 2 years

• Monthly Income	> Ch$0.5	> Ch$1.3

(1)	In case of self-employed clients, years employed refers to the minimum period of time in which the customer has been filing annual tax declarations with the Chilean Internal Revenue Service.

During 2013, 33.4% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2013, loans financing between 75% and 90% of the property appraised value represented 30.7% of these loans, loans financing between 50% and 75% of the property value represented 18.7% of these loans, and loans financing less than 50% of the property value represented 17.2% of these loans. It is important to mention that during 2013 we tightened our credit-granting policy for residential mortgage loans, principally by restricting loan financing to up to 100% of the property’s value. This explains the decrease in the share of residential mortgage loans that financed between 90% and 100% of the property value from 46.8% in 2012 to 33.4% in 2013.

An additional feature of our mortgage loans is that mortgaged property typically secures all of the mortgagor’s credit with us, including installment loans and due balances associated with credit cards and credit lines. Our total amount of loans secured by real estate guarantees, their loan-to-value (LTV) ratio and their relative share in our total loan portfolio, as of December 31, 2013, are depicted in the table below:


	As of December 31, 2013
	Outstanding Balance		LTV⁽²⁾⁽³⁾			% of Bank’s Total Loans
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Secured Loans⁽¹⁾
Residential Mortgage Loans	Ch$	4,732,307		70.1	%		22.7	%
Other than mortgage loans		563,575		27.9			2.7

Total Secured Loans	Ch$	5,295,882		78.4	%		25.4	%

(1)	Correspond to Bank’s total secured loans and not only those associated with the Commercial Division (Individual and SME Banking).

(2)	Unless otherwise indicated, LTV ratio is computed as the amount of secured loans divided by the value of their associated collateral.

(3)	For other-than-mortgage loans, the LTV ratio is computed as the amount of the excess guarantee (after deductions) of the balance of the associated residential mortgage loans, as those guarantees are initially established in order to secure the residential mortgage loan.

The LTV ratios provided above are based on estimated property values that we update monthly with the collateral valuation models managed by our Corporate Risk Division. These models determine a rate of depreciation that provides an updated collateral value, based on variables such as geographic location, last appraisal date, type of property and type of customer. Accordingly, the LTV ratios set forth above take into account the most recent available data regarding collateral values.

In addition, the following table sets forth the composition of the other-than-mortgage loans secured by real estate guarantees:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Secured Other-than-Mortgage Loans⁽¹⁾
Consumer Loans	Ch$	372,677	66.1	%
Credit Lines		48,743	8.7
Credit Cards		142,155	25.2

Total Secured Other-than-Mortgage Loans	Ch$	563,575	100.0	%

(1)	Correspond to Bank’s total secured Other-than-Mortgage Loans and not only those associated with the Commercial Division (Individual and SME Banking).

Unlike in other countries, in addition to the specific legal rights afforded by the mortgage loan (including foreclosure rights), the Bank may collect the pending balance of the mortgage loan over other assets of the mortgage debtor based on certain legal liens provided by law (derecho de prenda general). Regarding the foreclosure processes, as permitted by Chilean regulations we may write-off secured loans (such as residential mortgage loans) the earlier of 48 months from the date the loans become overdue and once we have made all efforts for recovering the past due loan without success. This applies to residential mortgage loans financed with mortgage finance bonds as well as for Mutuos Hipotecarios. Our foreclosure processes comply with the procedures specified by Chilean regulation. However, as we strive to continuously improve our collection processes, we have achieved average terms of 30 months for foreclosures associated with residential mortgage loans.

As for our historical loss rates, we periodically review our collateral pricing models by adjusting the parameters that support them, such as appreciation and depreciation rates, as well as updated recovery and loss rates, based on historical and empirical data. Thus, we normally revise our collateral pricing models by incorporating updated information from re-appraised assets or foreclosure processes that have been completed by the Bank in the past.

In addition, the valuation of guarantees is based on a prudent approach, which aims to anticipate and cover unexpected reductions in their market price as a result of changes in market variables, such as an unforeseen slowdown in the global or local economy, lack of liquidity of real estate assets or decrease in real salaries. Accordingly, our collateral pricing models depreciate the value of the guarantee regarding the market value determined by an independent appraiser. This approach has allowed us to minimize the loss rates, as the value obtained from auctions (if foreclosure applies) generally exceeds the value assigned to the asset as guarantee.

Credit Cards

As of December 31, 2013, we issued both individual and corporate Visa, MasterCard and Diners credit cards. In addition to traditional credit cards, our portfolio also includes co-branded cards (e.g., “Travel Club,” “Global Pass,” and “Advantage,” among others), and 63 affinity card groups, most of which were associated with our co-branded programs.

Two of our affiliates, Transbank S.A. and Nexus S.A., provide us with merchant acquisition and credit card processing services. As of December 31, 2013, Transbank S.A. had twelve shareholders and Nexus S.A. had seven shareholders, all of which were banks. As of the same date, our equity ownership in Transbank S.A. was 26.2% and our equity ownership in Nexus S.A. was 25.8 %

As of December 31, 2013, the Commercial Division had 1,139,007 valid credit card accounts, with 1,304,090 credit cards issued to individuals and small and medium-sized companies. Total charges on our credit cards during 2013 amounted to Ch$2,475,256 million, with Ch$2,031,034 million corresponding to purchases and service payments in Chile and abroad and Ch$444,222 million corresponding to cash advances both within Chile and abroad. These amounts of purchases and withdrawals (which do not include charges associated with credit cards issued by CrediChile) accounted for 25.9% of the total charge volume of banks’ credit cards issued in Chile in 2013, according to statistics provided by Transbank S.A.

As of December 31, 2013, our credit card loans to individuals and small and medium-sized companies amounted to Ch$702,679 million and represented 23.1% of our retail market business segment’s consumer loans.

We believe that the Chilean market for credit cards has a high growth potential, especially among lower- and middle-income customer segments, as the average merchant fees should continue to decline due to increasing competition from other banks that operate in Chile, as well as large department stores and other non-banking competitors that are involved in the issuance of credit cards. As a result, in 2010 we created a new Credit and Debit Card Area, which is responsible for developing commercial strategies to reinforce this payment channel by supporting the activities carried out by our Commercial Division (Individual and SME Banking). Based on this strategy, the mentioned business unit issued roughly 100,864 new credit cards in 2013 and consolidated the strategic alliance settled in 2011 with a mobile phone provider that resulted in the new “Banco de Chile | Entel” credit card.

Commercial Credits

Commercial loans granted by our Commercial Division (Individual and SME Banking) mainly consist of project financing and working capital loans granted to small and medium-sized companies, which are denominated in Chilean pesos, UF and U.S. dollars and may bear fixed or variable rates of interest and generally mature between one and three months. As of December 31, 2013, our Commercial Division (Individual and SME Banking) had outstanding commercial loans of Ch$2,247,044 million, representing 21.4% of the retail market business segment’s total loans and 10.8% of our total loans as of the same date.

Leasing Contracts

Leasing contracts are financial leases for capital equipment and property. Leasing contracts may bear fixed or variable interest rates and they generally have terms that range from one to five years for equipment and from five to twenty years for properties. Most of these contracts are denominated in UF. As of December 31, 2013, our Commercial Division (Individual and SME Banking) had outstanding leasing contracts of Ch$286,128 million, representing 2.7% of the retail market business segment’s total loans and 1.4% of our total loans as of the same date.

Non-Residential Mortgage Loans

Non-residential mortgage loans granted to individuals and small- and medium-sized companies are loans intended to finance the acquisition of offices, land, facilities and other real estate assets. Non-residential mortgage loans are denominated in UF and generally have maturities between eight and twelve years. As of December 31, 2013, our Commercial Division (Individual and SME Banking) had non-residential mortgage loans of approximately Ch$43,827 million, representing 0.4% of the retail market business segment’s total loans and 0.2% of our total loans as of the same date.

Debit Cards

We offer different types of debit cards to our customers. Depending on their specifications, these cards can be used for banking transactions at ATMs that operate on the local network, such as Redbanc, the Visa International PLUS network, the local network of merchants participating in the local Redcompra debit program or the international network of merchants associated with the Electron program. We have given different names to these debit cards depending on the card’s specific functions and the link between the brand and target market which they serve. During 2013, we offered the following cards: Chilecard Electron, Chilecard Plus, Chilecard Normal, Banjoven, Multiedwards and Citicard. As of December 31, 2013, according to monthly statistics provided by Transbank S.A., the division had a 16.5% market share of debit card purchase transactions (not including debit cards issued by Banco CrediChile, as those are reported under our Consumer Finance Division), which corresponds to approximately 66.7 million transactions throughout the year.

Lines of Credit

The Commercial Division had approximately 596,857 approved lines of credit to individual customers and small and medium-sized companies as of December 31, 2013, and outstanding advances to 369,789 individual customers and small and medium-sized companies that totaled Ch$239,489 million, or 2.3% of the retail market business segment’s total loans and 1.1% of our total loans.

Our lines of credit for individual customers are generally available on a revolving basis, up to an approved credit limit, and may be used for any purpose. Advances under lines of credit are denominated in Chilean pesos and bear an interest rate that is set monthly.

Deposit Products

We strategically offer deposit products to increase our deposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relatively low-cost, stable source of funding, as well as an opportunity to cross-market our other products and services. In this regard, we offer current accounts, time deposits and savings accounts to our individual customers. Current accounts are Chilean peso-denominated and the majority bear no interest (approximately 0.1% of our total current accounts are interest-bearing), and savings accounts are denominated in UF and bear a fixed-interest rate. Time deposits may be denominated in Chilean pesos, UF and U.S. dollars and most bear interest at a fixed rate with terms that range between thirty to 360 days.

While historically demand has been mainly for UF-denominated deposits during periods of high inflation, demand for Chilean peso-denominated deposits has increased in recent years as a consequence of lower and more stable inflation rates in Chile. This trend was also observed during the financial crisis of 2008 and 2009, when we benefited from a flight-to-quality effect. Due to the high volatility observed in the financial markets and low interest rates (in line with monetary stimulus prompted by central banks worldwide) customers and non-customers increasingly deposited their funds in our current accounts, particularly those denominated in Chilean pesos, as inflation was negative.

Consumer Finance Division (Banco CrediChile)

The Consumer Finance Division provides loans and other financial services to low and middle-income segments (individuals whose monthly incomes range from Ch$170,000 to Ch$ 500,000), which historically have only been partially served by financial institutions. Also, our Consumer Finance Division serves micro-businesses. Banco CrediChile represents an alternative delivery channel for our products and services to these segments, maintaining a separate brand supported by a network of 145 Banco CrediChile branches as of December 31, 2013. Banco CrediChile was established in 2004 from what was formerly our consumer banking division. During 2008, Banco CrediChile was merged with the consumer division of Citibank Chile (Corporación Financiera Atlas S.A.) as a consequence of our merger with Citibank Chile.

Banco CrediChile offers its customers a variety of banking products, such as consumer loans, credit cards, residential mortgage loans and a special demand deposit account (see “—CrediChile Sight Accounts”) targeted at low-income customers. As of December 31, 2013, Banco CrediChile had 900,882 customers and total loans outstanding that amounted to Ch$793,175 million, representing 3.8% of our total loans outstanding as of the same date.

The following table sets forth the composition of Banco CrediChile’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2013:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Consumer loans
Installment loans	Ch$	626,786	79.0	%
Credit cards		79,137	10.0
Lines of credit		360	0.0

Total consumer loans		706,283	89.0
Residential mortgage loans		68,269	8.6
Commercial loans		18,623	2.4

Total	Ch$	793,175	100.0	%

Our Consumer Finance Division focuses on developing and marketing innovative and customized products targeted to satisfy the needs of its customers while introducing them to the banking system. Banco CrediChile complements the services offered by our other business segments, especially our wholesale market segment, by offering services to employers, such as direct deposit capabilities, that stimulate the use of our services by employees.

In order to improve its value offering, during 2012 CrediChile launched two new services, namely, ‘Caja Chile’ and ‘Microenterprises Banking’. The former consists of a limited range of basic financial services (e.g. deposits, withdrawals and bill payments) offered to customers and non-customers through remote IT platforms located in small convenience stores within socially and/or geographically isolated areas of Chile. On the other hand, the ‘Microenterprises Banking’ is a specialized portfolio of financial services designed for Microenterprises (generally personal businesses) that includes financial advisory, lending and non-lending products and general financial solutions for a segment that has been traditionally uncovered by the banking services. During 2013, Banco CrediChile continued to enhance these service models as we believe they are a suitable means to penetrate those segments by offering tailor-made solutions. As of December 31, 2013 Banco CrediChile had implemented the ‘Caja Chile’ solution in more than 2,000 convenience stores, within 255 communities throughout Chile. As of the same date, approximately 17,200 microenterprises customers were part of the division’s customer base. In addition, during 2013 Banco CrediChile started an internal process intended to design and define new segments within the Consumer Finance business, in order to better serve the needs of diverse segments and offer a more complete array of services.

The SBIF requires higher allowances for loan losses for those banks with low credit classifications. This is the case for Banco CrediChile, which employs a specific credit scoring system, developed by our corporate risk division, as well as other criteria to evaluate and monitor credit risk. Thus, in order to ensure the quality of its loan portfolio, Banco CrediChile adheres to our general loan origination procedures, particularly with regard to the use of our credit scoring system and credit management policies, including the use of credit bureaus and the services of the SBIF. In addition, Banco CrediChile carries out rigorous procedures for collection of past-due loans through Socofin S.A., our specialized collection subsidiary. We believe that we have suitable procedures and infrastructure in place to manage the risk exposure of Banco CrediChile. These procedures allow us to take advantage of the attractive

growth and earnings potential of this market segment while helping to manage exposure to higher risk. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—The growth of our loan portfolio may expose us to increased loan losses” and “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry— Our loan portfolio may not continue to grow at the same or similar rate.”

Consumer Lending

Banco CrediChile provides short to medium-term consumer loans and credit card services. As of December 31, 2013, Banco CrediChile had approximately 340,625 consumer loan debtors related to credits with outstanding balances of Ch$626,786 million. As of the same date, Banco CrediChile customers had 323,494 valid credit card accounts, with total outstanding balances of Ch$79,137 million.

CrediChile Sight Accounts

Banco CrediChile offers its customers CrediChile Sight Accounts, a basic deposit product that is flexible and easy to use. This product allows us to tap into a section of the consumer market that previously was not participating in the banking system. The CrediChile Sight Account is a non-interest bearing demand deposit account without checking privileges targeted at customers who want a secure and comfortable means of managing and accessing their money. Customers may use an ATM card linked to their Sight Account (which may include a revolving line of credit) to make deposits or automatic payments to other Banco CrediChile accounts through a network of 6,397 ATMs available through the Redbanc network as of December 31, 2013.

As of December 31, 2013, Banco CrediChile had approximately 844,587 sight accounts. Holders of these sight accounts pay an annual fee, a fee related to the number of withdrawals on the sight account line of credit and interest on any outstanding balance under the line of credit. All fees and interest due on a CrediChile Sight Account are withdrawn automatically on a monthly basis from funds available in the account. CrediChile Sight Account allows us to offer our wholesale customers the ability to pay their employees by direct deposit of funds into the individual employee’s account at Banco CrediChile. We believe this product can lead to stronger long-term relationships with our wholesale customers and their employees.

Wholesale Banking Segment

Our wholesale market business segment serves the needs of corporate customers. In 2013, this business segment recorded annual operating revenues of approximately Ch$ 403,063 million, which represented 27.7% of our total operating revenues, and annual income before income tax of Ch$247,406 million, which represented 41.7% of our consolidated income before income tax. As of December 31, 2013, loans granted by this business segment amounted to Ch$ 10,345,428 million and represented 49.6% of our total loan portfolio.

The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2013:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Commercial credits	Ch$	7,615,956	73.6	%
Foreign trade loans		1,116,157	10.8
Leasing loans		923,585	8.9
Factoring loans		471,562	4.6
Other loans		218,168	2.1

Total	Ch$	10,345,428	100.0	%

As of December 31, 2013, we had 10,064 debtors out of a total of 23,798 wholesale customers. Our wholesale customers are engaged in a wide range of economic sectors. As of December 31, 2013, this business segment’s loans were mainly related to:

•

financial services (approximately 26.7% of all loans granted by this business segment);

•

commerce and trade (approximately 17.7% of all loans granted by this business segment);

•

manufacturing (approximately 13.1% of all loans granted by this business segment);

•

communication and transportation (approximately 12.5% of all loans granted by this business segment);

•

construction (approximately 12.1% of all loans granted by this business segment);

•

agriculture, forestry and fishing (approximately 3.8% of all loans granted by this business segment);

•

community, social and personal services (approximately 3.8% of all loans granted by this business segment); and

•

mining (approximately 0.9% of all loans granted by this business segment).

In line with our strategy of identifying and differentiating market segments in order to provide improved value propositions for a diversified customer base, we have defined two divisions within the wholesale market segment based on annual sales: (i) the Corporate Division and (ii) the Large Companies and Real Estate Division.

Corporate Division

The Corporate Division provides services to corporations whose annual sales exceed approximately Ch$70,000 million. This division’s customers consist of a large proportion of Chile’s publicly-traded companies, subsidiaries of multinational companies and conglomerates (including those operating in the financial, commercial, manufacturing, industrial and infrastructure sectors), and projects and concessions.

As of December 31, 2013, we had 810 corporations as debtors out of a total of 5,281 customers in our Corporate Division with total outstanding loans of Ch$3,942,250 million, which represented 18.9% of our total loan book as of the same date.

The following table sets forth the composition of our Corporate Division’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2013:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Commercial credits	Ch$	3,233,929	82.0	%
Foreign trade loans		365,095	9.3
Factoring loans		137,816	3.5
Leasing loans		63,262	1.6
Other loans		142,148	3.6

Total	Ch$	3,942,250	100.0	%

We offer a wide range of products to large corporations that include short- and long-term financing, working capital loans, mortgage loans, leasing, long-term syndicated loans and factoring, as well as investment banking services offered by our subsidiary Banchile Asesoría Financiera S.A. We also offer payment services (payrolls, suppliers, pensions, dividends, etc.), collection services and connections to international funds transfer networks, as well as traditional deposit products, in particular current accounts.

As of December 31, 2013, we were party to approximately 1,188 payment service contracts and approximately 207 collection service agreements with corporations. We believe that cash management and payment service contracts provide us with a source of low-cost deposits and the opportunity to cross-sell our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our corporate customers, providing centralized collection services for their accounts receivable and other similar payments. For the year ended December 31, 2013, volumes associated with payment and collection agreements increased by approximately 28.9% and 29.1%, respectively.

In order to provide highly competitive and differentiated services, our Corporate Division has the direct support of our Treasury and Money Market Operations segment, which directly fulfills our corporate customers’ liquidity, short-term loans and hedging needs. We have also improved our technology to facilitate connections with customers and enhance their self-service practices. Similarly, we offer derivative products, which we believe have become increasingly important, especially those associated with Chilean peso-U.S. dollar and UF-U.S. dollar forward contracts and interest rate swaps.

In recent years, the market for loans to corporations in Chile has been characterized by reduced margins that have been associated with increasing competition. This fierce competition has involved not only local banking players but also, increasingly, overseas lenders who are eager to lend to Chilean businesses. Consequently, we have focused on optimizing the profitability in this segment through enhancing our cross-sell fee generating services, such as payroll processing, dividend payments and billing services, as well as computer banking services. This strategy has enabled us to maintain profitable relationships with our corporate customers while preserving the ability to extend credit when appropriate business opportunities arise.

During 2013, the division continued to enrich its value propositions for satisfying customers’ needs. Thus, the Corporate Division, in association with our Financial Advisory subsidiary, focused on assisting some of its customers in international debt issuances. Similarly, the division has strived to build tailored solutions for its customers, including bridge financing, sindicated and cross-border loans. These initiatives allowed the division to increase the segment penetration by approximately 40 basis points in 2013 as compared to 2012. Finally, it is also worth noting that this division was in charge of managing the Global Depositary Notes program subscribed by the Bank. Banco de Chile became the first local bank in implementing this kind of service for overseas investors. In all of these matters, the synergies that arise from the Global Connectivity Agreement with Citigroup have been crucial when assisting our corporate customers with off-shore transactions.

Large Companies and Real Estate Division

Our Large Companies and Real Estate Division provides a broad range of financial products and services (such as electronic banking, leasing, foreign trade and financial consultancy) to companies with annual sales that range from approximately Ch$1,600 million to approximately Ch$70,000 million. Customers served by this division are those related to the commercial, manufacturing, agricultural, forestry, fishing, infrastructure and real estate sectors.

As of December 31, 2013, we had 9,254 large companies and real estate debtors out of a total of 18,517 customers in this Division. Loans granted by the Large Companies and Real Estate Division amounted to Ch$6,403,178 million as of the same date, which represented 30.7% of our total loans.

The following table sets forth the composition of the Large Companies and Real Estate Division’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2013:


	As of December 31, 2013
BANK’S INTERNAL REPORTING POLICIES:	(in millions of Ch$, except percentages)
Commercial credits	Ch$	4,382,027	68.4	%
Leasing loans		860,323	13.5
Foreign trade loans		751,062	11.7
Factoring loans		333,746	5.2
Other loans		76,020	1.2

Total	Ch$	6,403,178	100.0	%

The products and services offered by this division are mainly related to commercial loans, lines of credit, foreign trade and foreign currency transactions, factoring services, leasing, mortgage loans, syndicated loans, mergers and acquisitions, debt restructuring assistance, payments and collections services, current accounts and related services, corporate credit cards, cash and investment management, forward contracts to hedge against currency fluctuations and insurance brokerage.

This division’s aim is to deliver exceptional service to its customers based on proactive financial support that enhances long-term relationships with customers. Over time, the division has developed service models intended to take advantage of synergies arising from the interaction of account and specialized support executives responsible for ensuring comprehensive customer service. These models have enabled the division to strengthen customer relationships and product offerings.

In 2013 the division continued strengthening its presence in commercial credits, with a 34.6% annual increase in loan balances. This significant loan growth includes part of a loan portfolio acquisition from a local competitor in a total amount of approximately Ch$500,000 million. Nevertheless, adjusted by this purchase, the division would have also recorded a double-digit growth rate in commercial loans. In addition, the division was focused on promoting alternative funding sources for its customers. As a result, loans associated with leasing contracts recorded a 9.0% annual rise in outstanding balances.

Our leasing segment is part of the Large Companies and Real Estate Division. Similarly, our factoring business is mainly associated with loan activity related to the Large Companies and Real Estate Division. Finally, in our aim to continuously improve our knowledge of customers’ needs, during 2013 the division improved the level of segmentation for its customer base by recognizing a new segment called “family offices.” This segment involves companies that manage investments and trusts for a single family with total assets above a specific amount of money. Through this initiative, we aim to provide these customers with specific and tailor-made solutions without affecting the relationship between the bank and the companies owned by these families, which are already served by other bank’s divisions.

Treasury and Money Markets Operations

Our Treasury and Money Market Operations business segment provides a wide range of financial services to our customers, including currency intermediation, forward contracts, interest rate swaps, transactions under repurchase agreements and investment products based on bonds, mortgage finance bonds and deposits.

In addition, our Treasury and Money Market Operations business segment is focused on managing our currency, interest rate and maturity gaps, ensuring adequate liquidity levels, managing our investment portfolio and performing the intermediation of fixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.

The Treasury and Money Market Operations business segment is also responsible for (i) the issuance of short- and long-term senior bonds, as well as long-term subordinated bonds, in Chile or abroad, (ii) monitoring compliance with regulatory deposit limits, technical reserves and maturity and rate matches/mismatches, (iii) monitoring our adherence to the security margins defined by regulatory limits, and risk limits for interest rate, currency and investment gaps. This segment continually monitors the Bank’s cost of funding by benchmarking with the rest of the local financial system and financing alternatives in Chile or abroad.

Regarding funding functions carried out by our Treasury, during 2013, we continued to develop a funding diversification strategy by conducting important transactions. These transactions have been intended to not only take advantage of attractive interest rate opportunities but also to improve our liquidity standards by issuing debt of longer maturities, as well as diversify our liability structure in terms of markets. Accordingly, during 2013 we carried out important international bond issuances in markets like Japan (U.S.$167 million) and Hong Kong (U.S.$168 million) under a MTN program. Similarly, we undertook four bond placements in Switzerland (U.S.$785 million). Also, we issued new short-term bonds under the U.S.$1,000 million Commercial Paper program that we maintain in the U.S. As of December 31, 2013 we had a year-end balance of commercial paper that amounted to approximately U.S.$400 million. Lastly, worth noting is that as required by our Board of Directors, an international bond issuance is carried out if and only if its cost (including costs of interest rate swaps) is below the cost of raising funds locally and the currency or interest rate exposure is fully hedged via cross-currency swaps.

The funding functions carried out by our Treasury division are complemented by our international area, namely International Financial Institutions (“IFI”), which manages relations with correspondent banks worldwide, facilitating international payments and obtaining foreign currency financing for us. As of December 31, 2013, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 180 correspondent banks, from which we maintained 37 account relationships. IFI played an important role in structuring international transactions aimed at diversifying our funding.

Regarding the management of our securities portfolio, as of December 31, 2013 it amounted to Ch$ 2,008,804 million and was composed of available-for-sale securities that totaled Ch$1,681,883 million and securities held for trading that amounted to Ch$326,921 million. As for the type of instruments included in our securities portfolio, as of December 31, 2013, 54.8% consisted of securities issued by local financial institutions, 32.4% consisted of securities issued by the Central Bank and the Chilean Government, 9.0% consisted of securities issued by non-financial Chilean corporate issuers and other securities and 3.8% consisted of securities from foreign issuers. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are goals for us and, therefore, equity instruments only represented 0.4% of our investment portfolio as of December 31, 2013.

Operations through Subsidiaries

We have made several strategic long-term investments in financial services companies that are engaged in activities complementary to our commercial banking activities. In making these investments our goal is to develop a comprehensive financial group capable of meeting the diverse financial needs of our current and potential clients by offering traditional banking products and specialized financial services through our different subsidiaries.

On June 19, 2013, Banco de Chile acquired all of the shares of Banchile Factoring S.A. owned by Banchile Asesoría Financiera. As a result of this transaction, Banco de Chile fully acquired the assets and liabilities of Banchile Factoring S.A. and on June 30, 2013 this subsidiary was dissolved. See “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2011, 2012 and 2013—Business Segments”.

The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2013:


BANK’S INTERNAL REPORTING POLICIES:	Assets		Equity		Net Income
	(in millions of Ch$)
Banchile Trade Services Limited (Hong Kong)	Ch$	864	Ch$	848	Ch$	36
Banchile Administradora General de Fondos S.A .		59,749		53,030		11,641
Banchile Asesoría Financiera S.A.		4,558		3,754		2,012
Banchile Corredores de Seguros Ltda		10,558		8,673		3,907
Banchile Corredores de Bolsa S.A		547,929		83,355		9,327
Banchile Securitizadora S.A.		410		311		(111	)
Socofin S.A		8,382		955		253
Promarket S.A		2,016		914		79

Total	Ch$	634,466	Ch$	151,840	Ch$	27,144

The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2013:


	Ownership Interest
	Direct (%)		Indirect (%)		Total (%)
Banchile Trade Services Limited (Hong Kong)		100.00		—		100.00
Banchile Administradora General de Fondos S.A .		99.98		0.02		100.00
Banchile Asesoría Financiera S.A.		99.96		—		99.96
Banchile Corredores de Seguros Ltda.		99.83		0.17		100.00
Banchile Corredores de Bolsa S.A .		99.70		0.30		100.00
Banchile Securitizadora S.A .		99.00		1.00		100.00
Socofin S.A.		99.00		1.00		100.00
Promarket S.A.		99.00		1.00		100.00

Each of these subsidiaries is incorporated in Chile, except for Banchile Trade Services Limited, which is incorporated in Hong Kong.

Securities Brokerage Services

We provide securities brokerage services through Banchile Corredores de Bolsa S.A. Banchile Corredores de Bolsa S.A. is registered as a securities broker with the Superintendencia de Valores y Seguros de Chile (the “Chilean Superintendency of Securities and Insurance”), the regulator of Chilean publicly listed companies, and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores de Bolsa S.A. has provided stock brokerage services, fixed-income investments and foreign exchange products to individuals and companies through our branch network. During the year ended December 31, 2013, Banchile Corredores de Bolsa S.A. recorded an aggregate stock trading turnover on the Santiago Stock Exchange, the Chilean Electronic Stock Exchange and the Valparaíso Stock Exchange that amounted to approximately Ch$5,189,264 million. As of December 31, 2013, Banchile Corredores de Bolsa S.A. had equity of Ch$83,355 million and, for the year ended December 31, 2013, recorded net income of Ch$9,327 million, which represented 1.7% of our consolidated net income for that period.

In early 2009, Citibank Agencia de Valores S.A. merged with and into Banchile Corredores de Bolsa S.A.

Mutual and Investment Fund Management

Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2013, according to data prepared by the Chilean Superintendency of Securities and Insurance, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 21.3% of all Chilean mutual funds assets. As of December 31, 2013, Banchile Administradora General de Fondos S.A. operated 86 mutual funds and had Ch$4,515,954 million in assets under management owned by approximately 379,193 corporate and individual investors. Also, as of December 31, 2013, Banchile Administradora General de Fondos S.A. operated eight public investment funds (Chile Small Cap, Banchile Inmobiliario IV, Banchile Inmobiliario V, Banchile Inmobiliario VI, Latam Small Mid-Cap, Plusvalia Eficiente, Rentas Inmobiliarias I, and Chile Blend) and two private investment funds (J. Verne II and Minero), managing a total amount of Ch$188,738 million in net assets on behalf, of 228 participants.

The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2013:


Name of Fund	Type of Fund	Net Asset Value As of December 31, 2013
		(in millions of Ch$)
2nd Best Chile EE.UU.	Fixed income (medium/long term)	Ch$	2,072
Ahorro	Fixed income (medium/long term)		160,964
Alianza	Fixed income (medium/long term)		159,117
Andes Acciones	Equity		726
Asia Fund	Debt/Equity		5,146
Asiatico Accionario	Equity		15,895
Balance I	Debt/Equity		14,486
Banchile-Acciones	Equity		36,906
Bonos Soberanos	Fixed income (medium/long term)		13,603
Booster Balanced	Fixed income (medium/long term)		1,013
Booster China Stocks	Fixed income (medium/long term)		3,570
Booster Europa	Fixed income (medium/long term)		4,861
Booster Real Estate	Fixed income (medium/long term)		4,359
Bric Accionario	Equity		378
Capital Efectivo	Fixed income (short term)		117,654
Capital Empresarial	Fixed income (short term)		57,685
Capital Financiero	Fixed income (short term)		247,516
Capitalisa-Acc.	Equity		2,940
Cash	Fixed income (short term)		445,552
Chile Bursatil Garantizado	Fixed income (medium/long term)		4,660
Chile 18 Q	Equity		9,337
Chile Accionario	Equity		18,672
Corporate Dollar	Fixed income (short term)		406,211
Corporativo	Fixed income (short term)		214,224
Crecimiento	Fixed income (short/medium term)		138,685
Depósito Plus G	Fixed income (medium/long term)		12,956
Depósito XXI	Fixed income (medium/long term)		216,164
Deuda Dolar	Fixed income (medium/long term)		7,266
Deuda Estatal	Fixed income (medium/long term)		30,910
Deuda Nacional	Fixed income (medium/long term)		6,978
Deuda Pesos 1-5 Años	Fixed income (medium/long term)		49,152
Disponible	Fixed income (shor term)		40,005
Dollar Investment G.	Fixed income (medium/long term)		10,821
Emerging Fund	Debt/Equity		14,671
Emerging Market	Debt/Equity		12,617
Estrategia Agresiva	Debt/Equity		1,287
Estrategia Conservadora	Debt/Equity		17,314
Estrategico	Fixed income (medium/long term)		257,055
Euro Money Market	Fixed income (short term)		12,091
Europa Accionario Garantizado	Fixed income (medium/long term)		2,268
Europa Desarrollada	Debt/Equity		16,238
Europe Equity Tax Advantage	Debt/Equity		5,463
Flexible	Fixed income (short term)		46,444
Fondo Mutuo Deposito Plus IV Garantizado	Fixed income (medium/long term)		13,547
Global Dollar	Debt/Equity		4,572
Global Mid Cap	Debt/Equity		18,456
Global Stock Garantizado	Fixed income (medium/long term)		3,075
Horizonte	Fixed income (medium/long term)		107,894
Inversion Brasil	Debt/Equity		3,638
Inversion China	Debt/Equity		5,611
Inversion Dollar 30	Debt/Equity		1,381
Inversion USA	Debt/Equity		23,895
Inversionista I	Equity		12,196
Latam Mid Cap	Equity		2,390
Latin America Fund	Debt/Equity		17,197
Latina Accionario	Debt/Equity		5,941
Liquidez 2000	Fixed income (short term)		388,351
Liquidez Full	Fixed income (short term)		336,673
Mid Cap	Equity		20,965
Mix Moderado	Debt/Equity		765
Oportunidades Sectoriales	Debt/Equity		5,432
Patrimonial	Fixed income (short term)		165,451


Name of Fund	Type of Fund	Net Asset Value As of December 31, 2013
		(in millions of Ch$)
Performance	Fixed income (short/medium term)		9,977
Depósito Plus II Garantizado	Fixed income (medium/long term)		9,061
Depósito Plus III Garantizado	Fixed income (medium/long term)		11,157
Quant Global	Debt/Equity		84
Renta Futura	Fixed income (medium/long term)		216,859
Retorno Accionario	Equity		89
Retorno Dolar	Fixed income (medium/long term)		19,221
Retorno L.P. UF	Fixed income (medium/long term)		24,982
Sb Europa China	Fixed income (medium/long term)		1,713
Small Cap USA Garantizado	Fixed income (medium/long term)		5,393
Twin Win Europa 103 Garantizado	Fixed income (medium/long term)		3,772
Twin Win Europe Equity	Fixed income (medium/long term)		6,376
Twin Win USA Pesos	Fixed income (medium/long term)		10,310
U.S Dollar Fund	Debt/Equity		9,136
U.S Mid Cap	Debt/Equity		41,272
USA Equity Tax Advantage	Equity		7,864
Utilidades	Fixed income (short/medium term)		110,319
Viejo Continente ACC	Debt/Equity		6,499
Vision Dinamica A	Debt/Equity		10,894
Vision Dinamica ACC	Debt/Equity		4,114
Vision Dinamica B	Debt/Equity		4,506
Vision Dinamica C	Debt/Equity		8,113
Vision Dinamica D	Debt/Equity		2,845
Vision Dinamica E	Debt/Equity		8,036

Total		Ch$	4,515,954

As of December 31, 2013, Banchile Administradora General de Fondos S.A. recorded equity of Ch$53,030 million and, for the year ended December 31, 2013, net income of Ch$11,641 million, which represented 2.1% of our 2013 consolidated net income.

Financial Advisory Services

We provide financial advisory and other investment banking services to our customers through Banchile Asesoría Financiera S.A. The services offered by Banchile Asesoría Financiera S.A. are primarily targeted to our corporate customers and include advisory services concerning mergers and acquisitions, restructuring, project finance and strategic alliances. As of December 31, 2013, Banchile Asesoría Financiera S.A. had equity of Ch$3,754 million and, for the year ended December 31, 2013, net income of Ch$2,012 million, which represented 0.4% of our 2013 consolidated net income.

Insurance Brokerage

We provide insurance brokerage services to our customers through Banchile Corredores de Seguros Limitada. In 2000, we began to offer life insurance policies associated with consumer loans and non-credit related insurance to our individual customers and the general public. As of December 31, 2013, Banchile Corredores de Seguros Limitada had equity of Ch$8,673 million and, for the year ended December 31, 2013 net income of Ch$3,907 million, which represented 0.7% of our 2013 consolidated net income. According to the Chilean Insurance Companies Association, as of December 31, 2012 (the latest year for which information is available), Banchile Corredores de Seguros Limitada had a 4.5% market share in the total amount of life and casualty insurance policies (in Chilean pesos) sold by insurance brokerage companies in Chile, excluding life annuities.

Securitization Services

We offer investment products to meet the needs of institutional investors, such as private pension funds and insurance companies, through Banchile Securitizadora S.A. This subsidiary securitizes financial assets, and issues debt instruments with credit ratings that can be traded in the Chilean marketplace, backed by a bundle of revenue-producing assets of the client company. As of December 31, 2013, Banchile Securitizadora S.A. had equity of Ch$311 million and, for the year ended December 31, 2013, it reported a net loss of Ch$111 million. Also as of December 31, 2013, Banchile Securitizadora S.A. had a 20.0% market share in the total volume of assets securitized in Chile. This market share refers to the percentage of existing stock of securitized assets as of the mentioned date.

Credits pre-evaluation services

Promarket S.A. provides credit pre-evaluation services to the Bank and its subsidiaries, including researching potential customers. As of December 31, 2013, Promarket S.A. had equity of Ch$914 million and, for the year ended December 31, 2013, net income of Ch$79 million.

Collection Services

Socofin S.A. provides judicial and extra-judicial loan collection services to the Bank. As of December 31, 2013, Socofin S.A. had equity of Ch$955 million and, for the year ended December 31, 2013, net income of Ch$253 million.

Trade Services

In November 2004, we began offering direct trade services to our customers through Banchile Trade Services Limited, which acts as our trade finance entity in markets such as China, Hong Kong, Taiwan and South Korea. As of December 31, 2013, Banchile Trade Services Limited had equity of Ch$848 million and, for the year ended December 31, 2013, net income of Ch$36 million.

Distribution Channels and Electronic Banking

Our distribution network provides integrated financial services and products to our customers through a wide range of channels. The network includes ATMs, branches, on-line banking and phone-banking devices. As of December 31, 2013, we had 1,804 ATMs (that form part of Redbanc’s 6,397 ATMs system) which allowed our customers to conduct self-service banking transactions during banking and non-banking hours.

As of December 31, 2013, we had a network of 430 retail branches throughout Chile. Our branch system serves as a distribution network for all of the products and services offered to our customers. Our full-service branches accept deposits, cash withdrawals, offer the full range of our retail banking products, such as consumer loans, credit cards, mortgage loans and current accounts, and provide information to current and potential customers.

We offer electronic banking services to our customers 24 hours a day through our internet website, www.bancochile.cl, which has tailored homepages for the different markets we serve. Our corporate homepage offers a broad range of services, including the payment of bills, electronic fund transfers, non-charge orders, as well as a wide variety of account inquiries. These services include our office banking service, Banconexion Web, which enables our corporate customers to perform all of their banking transactions from their offices. Our homepage also offers products with exclusive benefits provided by our customer loyalty marketing programs, which enhance our relationships with customers. We also have a homepage designed for our investor customers, through which they can trade stocks, take deposits and open savings accounts. Our foreign trade customers can rely on our international business homepage, www.bancochile.com, which enables them to inquire about the status of their foreign trade transactions and perform transactions, such as opening letters of credit, recording import collection and hedging on instructions and letters of credit. On an average monthly basis, during 2013 approximately 607,000 individual and corporate customers performed nearly 30.2 million transactions per month on our website, of which approximately 6.0 million were monetary transactions.

In addition, we provide our customers with access to a 24-hour phone-banking call center through which they can access account information, transfer funds and make certain payments. This service, through which we receive approximately 442,100 calls per month on average, has enabled us to develop customer loyalty campaigns, sell financial products and services, answer specialized inquiries about our remote services and receive and resolve complaints by customers and non-customers.

Involvement with the Transantiago Plan

Since June 2005, we have been a shareholder in Administrador Financiero del Transantiago (“AFT”), the company responsible for the financial management of the overhaul of Santiago’s public transit system (the “Transantiago Plan”). Other majority shareholders of the company include three other major Chilean banks, a financial services company and a technology services company. We own 20% of AFT’s capital stock, which represented an original capitalization of approximately U.S.$13.4 million as of June 8, 2005.

The Transantiago Plan has faced operational deficits that are being funded by means of permanent and temporary fiscal subsidies in accordance with the provisions of Law 20,378, enacted in September 2009.

In 2007, as shareholders of AFT, we made extraordinary contributions for a total amount of U.S.$4.1 million with the purpose of financing AFT’s expenses, which were capitalized as of December 31, 2007. Between January and April 2008, we made additional funds available to AFT in the amount of U.S.$358,000 to pay AFT’s expenses arising from the Transantiago Plan. We have made no additional funds available after April 2008 and we estimate that, as shareholders, it will not be necessary to make extraordinary contributions for financing AFT’s operations.

On December 2012, AFT and the Chilean Ministry of Transports and Telecommunications entered into a new agreement that limits the services to be provided by AFT to the financial management of the Transantiago System’s resources. This new agreement significantly reduces the AFT’s incomes and operational expenses, while materially reducing the AFT’s risk.

Competition

Overview

The Chilean market for banking and other financial services is highly and increasingly competitive and consists of a number of different market sectors. The most important sector is commercial banking that—as of December 31, 2013—consisted of 23 banks, 22 of them privately-owned and one government-owned bank, namely, Banco del Estado. As of December 31, 2013, the four largest Chilean banks accounted for 65.1% of all outstanding loans granted by Chilean financial institutions (excluding subsidiaries abroad): Banco Santander—Chile (19.2%), Banco de Chile (19.1%), Banco del Estado (13.6%) and Banco de Crédito e Inversiones (13.2%).

We face significant and increasing competition in all market segments in which we operate. As a commercial bank that offers a wide range of services to all types of businesses and individual customers, we face a variety of competitors, ranging from other large, privately-owned commercial banks to more specialized entities, such as “niche” banks. We also increasingly face competition, from non-banking companies like large department stores, private compensation funds, and saving and credit cooperatives with respect to some of our credit products, such as credit cards and consumer loans. Furthermore, in recent years and given the outstanding credit rating held by the country, as well as the liquidity observed in overseas markets, middle market companies and corporations have increasingly taken advantage of these facts by issuing long-term debt and replacing loans rendered by local banks. In addition, we face competition from other types of competitors, such as leasing, factoring and automobile financing companies (especially in credit products), as well as mutual funds, pension funds and insurance companies, within the market for savings products and mortgage loans. Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business is experiencing fast growth, but we cannot assure you that this trend will continue in the future

Within the local banking industry, our primary competitors are the principal commercial banks in Chile, namely, Banco Santander—Chile, Banco de Crédito e Inversiones, Banco Bilbao Vizcaya Argentaria Chile (BBVA), and Corpbanca. Nevertheless, we also face competition from Banco del Estado, a government-owned bank, which has a larger customer base than we do. Banco del Estado, which operates under the same regulatory regime as Chilean privately-owned banks, was the third largest bank in Chile as of December 31, 2013, with outstanding total loans of Ch$14,786,254 million, representing a 13.6% market share (excluding operations of subsidiaries abroad), according to data published by the SBIF.

In the retail market, we compete with other privately-owned Chilean banks, as well as with Banco del Estado, which has a large customer base of individuals. Among privately-owned banks, we believe our strongest competitors in this market are Banco Santander—Chile and Banco de Crédito e Inversiones, as these banks have developed diversified business strategies focused on both small and medium-sized companies and lower to middle income segments of the Chilean population. In addition, we believe our strongest competitors in the high-income individual segment are Banco Santander—Chile and Banco Itaú Chile, as these banks rely on specialized business units that provide wealth management and traditional banking services, as we do. We also compete with companies that offer non-banking specialized financial services in the high-income individuals segment such as Larrain Vial and BTG Pactual, whose core businesses are stock brokerage, financial advisory and wealth management services.

In the wholesale market, we believe our strongest competitors are also Banco Santander—Chile, Banco de Crédito e Inversiones, Corpbanca and Banco Bilbao Vizcaya Argentaria Chile (BBVA). Similarly, we believe these banks are our most significant competitors in the small and medium-sized companies’ business segment.

Historically, commercial banks in Chile have competed in the retail market against each other, and finance companies and department stores, with the latter two having traditionally been focused on consumer loans to low and middle-income segments. However, finance companies gradually disappeared between the 1990s and 2000s, as most of them merged into the largest commercial banks that dominate the Chilean banking industry today. Also, by the end of 1990s, the Chilean financial industry witnessed the rise of non-traditional banking competitors: large department stores. During the 2000s, these players gained increasing significance in the consumer-lending sector, as they were permitted to issue financial products such as credit cards. Currently, there are three consumer-oriented banks affiliated with Chile’s largest department stores: Banco Falabella, Banco Ripley and Banco Paris. Although these banks had a combined market share (excluding operations of subsidiaries abroad) of only 1.9% as of December 31, 2013, according to the SBIF, the presence of these banks is likely to make consumer banking more competitive over the next few years, especially within the lower income segment.

The Chilean banking industry has experienced increased levels of competition in recent years from domestic as well as foreign banks, which has triggered a consolidation wave within the industry. Consequently, banks’ strategies have been increasingly focused on reducing costs and improving efficiency standards in order to compete effectively with the larger banks. Although we are making our best efforts in order to operate within this competitive environment, we acknowledge that our income may decrease as a result of increasing competition.

Regarding mergers and acquisitions events in the local banking industry, most of these transactions have involved international players seeking to participate in the local market. Thus, in mid-1996, Banco Santander of Spain took control of Banco Osorno and merged it into its Chilean operations, changing its name to Banco Santander-Chile. In January 1997, Banco O’ Higgins and Banco de Santiago merged, forming Banco Santiago and in 1999 Banco Santander of Spain acquired Banco Santiago. During 2001, Banco de Chile merged with Banco de A. Edwards, which was effective on January 1, 2002. In August 2002, Banco Santiago and Banco Santander–Chile, then the second and fourth largest banks in Chile, respectively, merged and became Chile’s largest bank under the Banco Santander-Chile brand name. In 2003, Banco del Desarrollo merged with Banco Sudamericano, and in 2004, Dresdner Banque Nationale de Paris merged with Banco Security. In 2005, Banco de Crédito e Inversiones merged with Banco Conosur. In 2007, Banco Itaú acquired Bank Boston unit in Chile, while Rabobank acquired HNS Bank and Scotiabank acquired Banco del Desarrollo. In the first quarter of 2008, we merged with Citibank Chile, and afterwards the Superintendency of Banks authorized the opening of a branch of the Norwegian bank DnB NOR and the acquisition of ABN Amro Bank by The Royal Bank of Scotland. In early 2009, the merger agreement between Scotiabank Sudamericano and Banco del Desarrollo was completed, through which the former became Scotiabank Chile and the latter ceased to exist. In addition, during 2009, Banco Monex was acquired by Consorcio Group, which absorbed the operations of the former and its subsidiaries, becoming Banco Consorcio.

In addition, consolidation and overseas expansion has emerged as a means of inorganic growth for local banks. Actually, during 2012 Corpbanca, fourth-ranked among Chilean privately-owned banks in terms of total loans as of December 31, 2011, acquired a former Santander Group’s subsidiary in Colombia and consolidated its balance sheet and results of operations beginning May 31, 2012. In addition, by the end of 2012, Corpbanca made a bid for acquiring Helm Bank in Colombia. Based on the publicly available information, the bid process was completed and fully authorized in July 2013 and Corpbanca started to consolidate the balance sheet of this new subsidiary beginning August 31, 2013. As of December 31, 2013 loans associated with Corpbanca’s operations in Colombia amounted to Ch$5,177,052 million and represented 4.5% of the industry’ total loans.

Similarly, by the end of May 2013, Banco de Crédito e Inversiones (BCI)—the third largest privately-owned bank in Chile in terms of total loans as of December 31, 2013 with a 13.2% market share (excluding operations of subsidiaries abroad)—announced the acquisition of the City National Bank, headquartered in Florida, U.S. According to public information published by the SBIF as of February 28, 2014 (the latest available date), based, BCI had not consolidated the operations of City National Bank.

Lastly, by the end of 2013 Corpbanca’s controlling shareholders announced its intention to sell part of its stake to a local or international player. On January 29, 2014, Corpgroup (controlling shareholder) accepted the bid of Brazil’s Itau Unibanco, through which Itau merges its own Chilean and Colombian subsidiaries with Corpbanca. The merged bank, on a pro forma basis, would have had a 12.2% market share as of December 31, 2013, excluding operations of subsidiaries abroad.

We expect these trends of increasing competition and consolidation to continue, particularly in connection with the formation of new large financial groups and the creation of new niche banks. Although we believe that we are currently large enough to compete effectively in all of our target markets, any further consolidation in the Chilean financial services industry may adversely affect our competitive position. We are working on developing and enhancing our competitive strengths to ensure our sustainability.

Below there is a set of tables and figures for the years ended December 31, 2011, 2012 and 2013 that shows our position within the Chilean financial industry. The market information is set forth under Chilean GAAP as published by the SBIF and—unless otherwise indicated—excludes data related to operations of subsidiaries abroad.

The following table sets forth certain statistical information on the Chilean financial system as of December 31, 2013, according to information published by the SBIF under Chilean GAAP:


	As of December 31, 2013
	(in millions of Ch$, except percentages)
	Assets					Loans⁽¹⁾⁽²⁾					Deposits⁽²⁾					Equity⁽³⁾
CHILEAN GAAP:	Amount		Share			Amount		Share			Amount		Share			Amount		Share
Private sector banks	Ch$	133,190,340		83.9	%	Ch$	94,233,350		86.4	%	Ch$	73,752,200		80.1	%	Ch$	11,819,382		91.6	%
Banco del Estado		25,560,282		16.1			14,786,254		13.6			18,369,535		19.9			1,082,294		8.4

Total banking system	Ch$	158,750,622		100.0	%	Ch$	109,019,604		100.0	%	Ch$	92,121,735		100.0	%	Ch$	12,901,676		100.0	%

Source: SBIF

(1)	Loans to customers, net of interbank loans.

(2)	Excludes operations of subsidiaries abroad.

(3)	For purposes of this table, equity includes capital and reserves, net income for the period and provisions for minimum dividends.

Loans

We had total loans of Ch$20,869,511 million as of December 31, 2013, according to information published by the SBIF under Chilean GAAP. The following table sets forth our market share and the market share of our principal privately-owned competitors in terms of total loans, as of the dates indicated, according to information published by the SBIF under Chilean GAAP:


	Total Loans⁽¹⁾⁽²⁾
CHILEAN GAAP:	As of December 31,
	2011			2012			2013
Banco Santander—Chile		19.7	%		19.1	%		19.2	%
Banco de Chile		19.8			19.0			19.1
Banco de Crédito e Inversiones		12.9			13.2			13.2
Banco Corpbanca		7.7			8.4			7.3
BBVA Bilbao Vizcaya		7.0			7.1			6.9

Accumulated market share		67.1	%		66.8	%		65.7	%

Source: SBIF

(1)	Provisions for loan losses not deducted.

(2)	Excludes operations of subsidiaries abroad.

Credit Quality

The following table sets forth the ratio of allowances to total loans of the largest private banks in Chile and that of the Chilean financial system as a whole (including such banks) as of December 31, 2011, 2012 and 2013, according to information published by the SBIF under Chilean GAAP:


	Allowances to Total Loans⁽¹⁾
CHILEAN GAAP:	As of December 31,
	2011			2012			2013
Banco Santander—Chile		3.02	%		2.91	%		2.91	%
Banco de Crédito e Inversiones		2.44			2.29			2.32
Banco de Chile		2.21			2.28			2.30
BBVA Bilbao Vizcaya		2.02			1.80			1.72
Banco Corpbanca		1.54			1.27			1.55

Financial system		2.36	%		2.27	%		2.36	%

Source: SBIF

(1)	Excludes operations of subsidiaries abroad.

The following table sets forth the ratio of total past-due loans to total loans for the largest private banks in Chile as of December 31, 2011, 2012 and 2013 on an individual basis, according to information published by the SBIF under Chilean GAAP:


	Total Past-Due Loans to Total Loans⁽¹⁾
CHILEAN GAAP:	As of December 31,
	2011			2012			2013
Banco de Chile		1.03	%		0.97	%		1.13	%
Banco Corpbanca		1.62			1.30			1.21
BBVA Bilbao Vizcaya		1.92			1.22			1.50
Banco de Crédito e Inversiones		2.34			2.07			2.39
Banco Santander—Chile		2.95			3.17			2.93

Financial system		2.62	%		2.22	%		2.15	%

Source: Chilean SBIF

(1)	The Superintendency of Banks only releases past-due information on an individual basis for Chilean banks.

Deposits

We had total deposits (including demand deposits and time deposits) of Ch$16,387,057 million as of December 31, 2013, according to information published by the SBIF under Chilean GAAP. The following table sets forth the market shares in terms of total deposits for private banks as of December 31, 2011, 2012 and 2013 on a consolidated basis, according to information published by the SBIF under Chilean GAAP:


	Total Deposits⁽¹⁾
CHILEAN GAAP:	As of December 31,
	2011			2012			2013
Banco de Chile		18.5	%		17.8	%		17.8	%
Banco Santander—Chile		17.4			16.6			16.6
Banco de Crédito e Inversiones		13.0			12.8			12.6
BBVA Bilbao Vizcaya		6.5			6.3			6.4
Banco Corpbanca		7.2			8.2			6.3

Total market share		62.6	%		61.7	%		59.7	%

Source: SBIF

(1)	Excludes operations of subsidiaries abroad.

Capital and Reserves

The following table sets forth the level of capital and reserves for the largest private banks in Chile as of December 31, 2011, 2012 and 2013 according to information published by the SBIF under Chilean GAAP:


	Capital and Reserves
CHILEAN GAAP:	As of December 31,
	2011		2012		2013
Banco de Chile	Ch$	1,569,871	Ch$	1,841,968	Ch$	2,095,296
Banco Santander—Chile		1,730,464		1,898,348		2,044,834
Banco Corpbanca		643,218		936,275		1,639,493
Banco de Crédito e Inversiones		1,039,161		1,230,078		1,371,894
BBVA Bilbao Vizcaya	Ch$	490,608	Ch$	592,336	Ch$	631,434

Source: SBIF

Return on Capital and Reserves

The following table sets forth our return on capital and reserves and the returns on capital and reserves of our principal privately owned competitors and the Chilean banking industry as a whole, in each case as of December 31, 2011, 2012 and 2013, according to information published by the SBIF under Chilean GAAP:


	Return on Capital and Reserves⁽¹⁾⁽²⁾
CHILEAN GAAP:	Year Ended December 31,
	2011			2012			2013
Banco de Chile		27.3	%		25.3	%		24.5	%
Banco de Crédito e Inversiones		25.1			22.1			21.9
Banco Santander—Chile		25.1			20.4			21.6
BBVA Bilbao Vizcaya		15.2			11.0			8.0
Banco Corpbanca		19.1			12.8			9.5

Financial System average		19.3	%		15.6	%		15.9	%

Source: SBIF

(1)	Corresponds to net income attributable to equity holders divided by the year end balance of Capital and Reserves.

(2)	Includes operations of subsidiaries abroad.

Efficiency

The following table sets forth the efficiency ratios of the largest private Chilean banks as of December 31, 2011, 2012 and 2013, according to information published by the SBIF under Chilean GAAP:


	Efficiency Ratio⁽¹⁾⁽²⁾
CHILEAN GAAP:	As of December 31,
	2011			2012			2013
Banco de Chile		50.2	%		47.2	%		42.8	%
Banco Santander—Chile		41.4			42.8			43.0
Banco de Crédito e Inversiones		47.2			49.6			48.2
Banco Corpbanca		44.6			56.7			52.9
BBVA Bilbao Vizcaya		55.7			59.5			58.4

Financial System average		50.0	%		51.2	%		49.9	%

Source: SBIF

(1)	Calculated by dividing operating expense by operating revenue.

(2)	Includes operations of subsidiaries abroad.

REGULATION AND SUPERVISION

General

In Chile, only banks may maintain current 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 SBIF and the Central Bank. Chilean banks are primarily subject to the General Banking Law and secondarily, to the extent not inconsistent with that law, the provisions of the Chilean Corporations Law governing public corporations, except for certain provisions that are expressly excluded.

The Chilean banking system dates back to 1925 and has been characterized by periods of substantial regulation and government 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 the General Banking Law. In 2004, amendments to the General Banking Law granted additional powers to banks, including general underwriting powers for new issuances of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, investment fund management, factoring, securitization products and financial leasing services. Prior to 2006, banks had the option of distributing less than 30% of their earnings as dividends in any given year, subject to approval of the holders of at least two-thirds of the bank’s common stock. In 2006, however, the General Banking Law was amended to eliminate this alternative.

Following the Chilean banking crisis of 1982 and 1983, the SBIF assumed control of banks representing approximately 51% of the total loans in the banking system. As part of the assistance that the Chilean Government provided to Chilean banks, the Central Bank permitted banks to sell to it a certain portion of their non-performing loan portfolios at book value. Each bank then repurchased such loans at their economic value (which, in most cases, was substantially lower than the book value at which the Central Bank had acquired them), with the difference to be repaid to the Central Bank out of future income. Pursuant to Law No. 18,818, which was passed in 1989, this difference was converted into subordinated debt.

The Central Bank

The Central Bank is an autonomous legal entity created under the framework of the Chilean Constitution. It is subject to its Ley Orgánica Constitucional (the “Organic Constitutional Law”) and the Chilean Constitution. To the extent not inconsistent with its Organic Constitutional Law or the Chilean Constitution, the Central Bank is also subject to general laws applicable to the private sector, but is not subject to the laws applicable to the public sector. The Central Bank is directed and administered by a board of directors composed of five members designated by the President of Chile, subject to Senate approval.

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 systems. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, and establishing regulations and guidelines regarding financial companies, foreign exchange (including the Formal Exchange Market) and bank deposit-taking activities.

The Superintendency of Banks

Banks are supervised and controlled by the SBIF, a Chilean governmental agency. The SBIF authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial institutions. Furthermore, in cases of noncompliance with its legal and regulatory requirements, the SBIF 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 also has the mandate to approve any amendment to a bank’s bylaws or any increase in its capital.

In addition, our subsidiaries Banchile Corredores de Bolsa S.A., Banchile Administradora General de Fondos S.A., Banchile Securitizadora S.A. and Banchile Corredores de Seguros Ltda. are supervised by the SVS.

The SBIF examines all banks from time to time, usually at least once a year. Banks are required to submit unconsolidated unaudited financial statements to the SBIF on a monthly basis and to publish their unaudited financial statements at least four times a year in a newspaper of national circulation. A bank’s financial statements as of December 31 of each year must be audited and submitted to the SBIF together with the opinion of its independent auditors. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the SBIF.

Any person wishing to acquire, directly or indirectly, 10% or more of the share capital of a bank must obtain prior approval from the SBIF. Without such approval, the holder will not have the right to vote such shares. The SBIF may only refuse to grant its approval based on specific grounds set forth in the General Banking Law.

According to Article 35 bis of the General Banking Law, the prior authorization of the SBIF is required for each of the following:

•

the merger of two or more banks;

•

the acquisition of all or a substantial portion of a bank’s 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 share ownership of a bank by a controlling shareholder of that bank.

Such prior authorization is required only when the acquiring bank or the resulting group of banks would own a market share in loans determined by the SBIF to be more than 15% of the Chilean banking system loans. The intended purchase, merger or expansion may be denied by the SBIF, or, if the acquiring bank or resulting group would own a market share in loans determined to be more than 20% of the Chilean banking system loans, the purchase, merger, or expansion may be conditioned on one or more of the following:

•

that the bank or banks maintain Regulatory Capital above 8% and up to 14% of their risk-weighted assets;

•

that the technical reserve established in article 65 of the General Banking Law be applicable when deposits exceed 1.5 times the resulting bank’s paid-in capital and reserves; or

•

that the amount of interbanking loans be reduced to 20% of the resulting bank’s Regulatory Capital.

If the acquiring bank or resulting group would own a market share in loans determined by the SBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining Regulatory Capital not below 10% of their risk-weighted assets for a period set by the SBIF, which may not be less than one year. The calculation of 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 SBIF, the following ownership disclosures are required:

•

banks must disclose to the SBIF the identity of any person owning, directly or indirectly, 5% or more of its shares;

•

holders of ADSs must disclose to the depositary the identity of beneficial owners of ADSs registered under such holders’ names;

•

the depositary must disclose to the bank the identity of beneficial owners of ADSs which the depositary has registered, and the bank, in turn, must disclose to the SBIF the identity of the beneficial owners of the ADSs representing 5% or more of such bank’s shares; and

•

bank shareholders who individually hold 10% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the SBIF of their financial condition.

Limitations on Types of Activities

Chilean banks can only conduct those activities allowed by the General Banking Law, including loan placements, factoring and leasing activities, accepting deposits and, subject to certain 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, mutual fund management, investment fund management, foreign capital fund management, financial advisory, securitization and factoring activities. Subject to specific limitations and the prior approval of the SBIF and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks.

In March 2002, the Central Bank authorized banks to pay interest on current accounts and the SBIF published guidelines permitting banks to offer and charge fees for the use of a current account product that pays interest. Under these guidelines, these accounts may be subject to a minimum balance and different interest rates depending on average balances held in the account. The Central Bank has imposed additional caps on the interest rate that can be charged by banks with a solvency score of less than A.

In June 2007, the Chilean Government passed Law No. 20,190, which amended various aspects of Chile’s capital markets regulatory framework, such as the General Banking Law, Securities, Insurance, Venture Capital and Tax law. Law No. 20,190 is aimed at improving the access to financing for start-up companies and small businesses in order to strengthen confidence in the stock market and to stimulate the development of the financial market in general. The General Banking Law was amended to achieve these goals by, among other things, revising regulations concerning demand deposits, increasing certain credit limits, and redefining the calculations to determine the proper amount for a bank’s reserves. In addition, the General Banking Law was amended to allow local banks to engage in derivatives such as options, swaps and forward contracts, thereby eliminating prior existing legal impediments to those practices.

As a consequence of Chile’s accession to the Organization for Economic Co-operation and Development, the Chilean Congress introduced new corporate governance regulations in 2009. The Chilean Corporations Law and the Chilean Securities Markets Law were amended such that public companies with capital above 1,500,000 UF that have at least 12.5% of their voting shares owned by shareholders representing less than 10% of the voting shares are required to have at least one independent director in their board of directors. In order to assure the independence of this director, certain requirements were established to protect minority shareholders’ decisions. In addition, regulation was passed to expand the disclosure requirements of publicly-held companies and to hold members of boards of directors liable for not complying with such disclosure obligations.

Deposit Insurance

According to the General Banking Law, local or foreign currency denominated deposits at banks or financial companies are insured as described below.

The Chilean Government guarantees up to 100% of the principal amount of the following deposits:

•

deposits in current accounts;

•

deposits in savings accounts of demand deposits;

•

other demand deposits; and

•

deposits in savings accounts with unlimited withdrawals.

In addition, the Chilean Government guarantees up to 90% of the principal amount of time deposits held by individuals in the Chilean banking system. This guarantee covers obligations with a maximum value of UF108 per person (Ch$2,517,432 or U.S.$4,788,54 as of December 31, 2013).

Reserve Requirements

Deposits are subject to a reserve requirement of 9% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to increase these percentages to as much as 40% for demand deposits and as much as 20% for time deposits, to implement monetary policy.

In addition, Chilean banks must hold a certain amount of assets in cash or highly liquid instruments. This reserve requirement is equal to the amount by which the daily balance of deposits payable on demand, net of clearing, exceeds 2.5 times the amount of the bank’s Regulatory Capital. Deposits payable on demand include the following:

•

deposits in current accounts;

•

other demand deposits or obligations payable on demand and incurred in the ordinary course of business;

•

saving deposits that allow unconditional withdrawals that bear a stated maturity; and

•

other deposits unconditionally payable immediately.

Chilean regulations also require that (i) gaps between assets and liabilities maturing within less than 30 days do not exceed a bank’s Basic Capital and (ii) gaps between assets and liabilities maturing within less than 90 days do not exceed twice a bank’s Basic Capital. Behavioral assumptions of assets and liabilities maturities are accepted if approved by the SBIF.

As of December 31, 2013 Banco de Chile fully complied these reserve requirements.

Minimum Capital

Under the General Banking Law, a bank must have a minimum paid in capital and reserves of UF 800,000 (Ch$18,648 million or U.S.$35.5 million as of December 31, 2013). However, a bank may begin its operations with 50% of such amount, provided that it has a Regulatory Capital ratio (defined as Regulatory Capital as a percentage of risk weighted assets) of not less than 12%. When such a bank’s paid in capital reaches UF600,000 (Ch$13,986 million or U.S.$26.6 million as of December 31, 2013), the Regulatory Capital ratio requirement is reduced to 10%.

As of December 31, 2013 Banco de Chile fully complied minimum capital requirements.

Capital Adequacy Requirements

According to the General Banking Law, each bank should have Regulatory Capital of at least 8% of its risk-weighted assets, net of required allowances. This percentage may be increased by the regulators according to what has been stated above.

Banks should also have a Basic Capital of at least 3% of their total assets, net of required allowances.

The terms Regulatory Capital and Basic Capital are defined under “Presentation of Financial Information” at the beginning of this annual report.

As of December 31, 2013 Banco de Chile fully complied all of capital adequacy requirements.

Market Risk Regulations

In September 2005, the SBIF introduced new regulations for measuring market risks (e.g., price and liquidity risks). This entity introduced standardized methodologies based on Basel Market Risk Measurement models for measuring and reporting price risks. These methodologies allow local banks to determine interest rate, foreign exchange (“FX”) and options risks (for FX and interest rate transactions) taken in both their trading and accrual books. Additionally, this entity provided funding liquidity risk measurements standards which included the alternative to model the maturity tenor of some balance sheet items following behavioral assumptions.

The trading book is composed of portfolios of debt and equity instruments that have a liquid secondary market and therefore their valuation at market prices and the corresponding profit and losses impact is representative of market conditions. In addition, all derivative transactions and the FX mismatches are also part of the trading book. The accrual book comprises all of the asset and liability balance sheet items that are not part of the trading book.

The regulation provides that 8% of the sum of the risk-weighted assets and 12.5 times the price risk of the trading book may not be higher than Regulatory Capital. In light of our merger with the operations of Citibank Chile in 2008, the SBIF has raised the applicable percentage for us from 8% to 10%. As of December 31, 2013, the price risk of our trading book totaled Ch$40,864 million.

The following table shows our regulatory risk availability, computed as the difference between the risk and our Regulatory Capital, as of December 31, 2013:


	As of December 31, 2013
	(in millions of Ch$, except percentage)
(a) 10% risk-weighted assets		2,298,110
(b) Trading price risk		52,574
(c = a + b) Total risk		2,350,684
(d) Regulatory Capital		2,999,061
(e = d – c) Risk Availability		648,377
(f = c/d) Risk used as a Percentage of Regulatory Capital		78.4	%

Interest rate risk generated by the accrual book is measured against a self-imposed limit equal to the lesser of 12-month rolling net revenues and our Basic Capital.

The guidelines for measuring liquidity risk are mainly focused on constructing an expected cash flow analysis for the following 30 and 90 days, broken down by currency. Net outflows may not exceed the amount of our Basic Capital for the following 30 days or two times that amount for the following 90 days. Subject to approval of the SBIF, the cash flow analysis may include behavioral run-off assumptions for some specific liability balance sheets items (demand deposits, time deposits, etc.) and behavioral roll-over assumptions for some asset items of the consolidated statement of financial position data (loans, etc.).

In June 2006, the SBIF introduced new regulations relating to (i) the valuation process of debt instruments and (ii) the measurement and reporting of credit risk generated by derivative transactions.

Prior to June 2006, the SBIF allowed banks to classify debt instruments for accounting and business purposes as either “Trading” or “Held-to-Maturity” only. Starting in June 2006, a new alternative classification was added (“Available-for-Sale”). No changes to the classification system have occurred since June 2006.

Credit risk for derivative transactions, for regulatory purposes, must be measured and reported as:

Derivatives Credit risk = Current Mark-to-Market (if positive) + Credit Risk Factor (%) * Notional Amount

The Current Mark-to-Market (“CMTM”) of the transaction, if positive, reflects the amount of money owed by the counterparty today, e.g. corresponding to the amount the counterparty would pay us if the transaction were unwound today. As we are interested in measuring the maximum amount of money that the customer would owe us within the life of the transaction, the maximum potential future value of the transaction is added to the

CMTM. This potential value is measured as the Credit Risk Factor multiplied by the Notional Amount. Hence, the Credit Risk Factor reflects the potential value that the transaction may take in favor of the bank (under some confidence level) within its remaining tenor. The regulator determines the Credit Risk Factor by considering market factors (three categories: interest rates, FX rates or equity prices) involved in the respective transactions and the remaining tenor. In addition, banks usually develop their own Credit Risk Factors models to assess credit risk not only under regulatory guidelines. Netting and credit mitigation schemes, such as recouponing, early termination, margins, etc. have been allowed by regulators so that banks can better manage their credit risk.

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, directly or indirectly, unsecured credit in an amount that exceeds 10% of the bank’s Regulatory Capital, or in an amount that exceeds 30% of its Regulatory Capital if the excess over 10% is secured by certain assets with a value equal to or higher than such excess.

•

In the case of financing infrastructure projects built through the concession mechanism, the 10% ceiling for unsecured credits is raised to 15% if secured by a pledge over the concession, or if granted by two or more banks or financial 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% of its Regulatory Capital.

•

A bank may not extend to any individual or entity that is, directly or indirectly, related to the ownership or management of the bank, credit under more favorable terms with respect to repayment conditions, interest rates or collateral than those granted to third parties in similar transactions. The aggregate amount of such credits granted to related persons may not exceed 5% of the bank’s Regulatory Capital. The 5% unsecured ceiling is raised to 25% of the bank’s Regulatory Capital if the excess over 5% is secured by certain assets with a value equal to or higher than such excess. In any case, the aggregate amount of these credits granted by the bank may not exceed the bank’s Regulatory Capital.

•

A bank may not directly or indirectly grant a loan, the purpose of which 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.

•

A bank may not grant loans to related parties (including holders of more than 1% 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. 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% 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 during such employee’s term of employment.

As of December 31, 2013 Banco de Chile fully complied the lending limits established by the General Banking Law.

Classification of Banks

The SBIF regularly examines and evaluates each bank’s solvency and credit management process, including its compliance with loan classification guidelines. On the basis of this evaluation, it classifies banks into various categories.

Solvency and Management

In accordance with amended regulations of the SBIF effective as of January 1, 2004, banks are classified into categories “I” through “V” based upon their solvency and management ratings. This classification is confidential.


Category I:		This category is reserved for financial institutions that have been rated level A in terms of solvency and management.

Category II:		This category is reserved for financial institutions that have been rated (i) level A in terms of solvency and level B in terms of management, (ii) level B in terms of solvency and level A in terms of management, or (iii) level B in terms of solvency and level B in terms of management.

Category III:		This category is reserved for financial institutions that have been rated (i) level B in terms of solvency and level B in terms of management for two or more consecutive review periods, (ii) level A in terms of solvency and level C in terms of management, or (iii) level B in terms of solvency and level C in terms of management.

Category IV:		This category is reserved for financial institutions that are rated level A or B in terms of solvency and have been rated level C in terms of management for two or more consecutive review periods.

Category V:		This category is reserved for financial institutions that have been rated level C in terms of solvency, irrespective of their rating level of management.

A bank’s solvency rating is determined by its Regulatory Capital (after deducting accumulated losses during the financial year) to risk-weighted assets ratio. This ratio is equal to or greater than 10% for level A banks, equal to or greater than 8% and less than 10% for level B banks and less than 8% for level C banks.

With respect to a bank’s management rating, level A banks are those that are not rated as level B or C. Level B banks display some weakness in internal controls, information systems, response to risk, private risk rating or ability to manage contingency scenarios. Level C banks display significant deficiencies in internal controls, information systems, response to risk, private risk rating or ability to manage contingency scenarios.

Obligations Denominated in Foreign Currencies

Foreign currency-denominated obligations of Chilean banks are subject to two requirements:

•

a reserve requirement of 9% for demand deposits and 3.6% for time deposits. See “—Reserve Requirements”; and

•

net foreign currency outflows may not exceed the amount of the Basic Capital for the following 30 days or two times that amount for the following 90 days.

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 mutual fund and investment fund administration, factoring, investment advisory services and merger and acquisition services. The SBIF generally regulates these subsidiaries. However, the Chilean Superintendency of Securities and Insurance regulates some of these subsidiaries. The Chilean Superintendency of Securities and Insurance is the regulator of the Chilean securities market and publicly-held corporations.

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 an extraordinary 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 30-day period and in the manner agreed to at the meeting, or if the SBIF 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 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 SBIF, 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 board of directors of both banks, as well as by the SBIF, but need not be submitted to the borrowing bank’s shareholders for their approval. A creditor bank may not grant such interbank loans to an insolvent bank in an amount exceeding 25% 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, forgive 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 to be no lower than 12%. If a bank fails to pay an obligation, it must notify the SBIF, which shall determine if the bank is solvent.

Dissolution and Liquidation of Banks

The SBIF may establish that a bank should be liquidated for the benefit of its depositors or other creditors when the bank does not have the necessary solvency to continue its operations. In which case, the SBIF must revoke the bank’s authorization to exist and order its mandatory liquidation, subject to the agreement of the Central Bank. The SBIF must also revoke the bank’s authorization if the reorganization plan of the bank has been rejected twice. The resolution by the SBIF must state the reason for ordering the liquidation and must name a liquidator, unless the SBIF assumes this responsibility. When a liquidation is declared, all current accounts, other demand deposits received in the ordinary course of business, other deposits unconditionally payable immediately or that have a maturity of no more than 30 days, and any other deposits and receipts payable within 10 days of its maturity date, are required to be paid by using the bank’s existing funds, 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 bank’s remaining 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.

Investments in Foreign Securities

Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain foreign currency securities. 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 support 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 shall qualify as (i) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (ii) bonds issued by foreign companies. Such foreign currency securities must have a minimum rating as indicated in the table below and, if the investments in these securities and the loans referred to above exceed 70% of the Regulatory Capital of the bank, an allowance for 100% of the excess shall be established:


Rating Agency	Short Term	Long Term
Moody’s	P2	Baa3
Standard and Poor’s	A2	BBB–
Fitch IBCA	F2	BBB–

A Chilean bank may invest in securities having a minimum rating as follows, provided that if the total amount of these investments and the loans referred to above exceed 20% (or 30% in certain cases) of the Regulatory Capital of the bank, an allowance of 100% of the excess shall be established by the bank:


Rating Agency	Short Term	Long Term
Moody’s	P2	Ba3
Standard and Poor’s	A2	BB–
Fitch IBCA	F2	BB–

However, a Chilean bank may invest in securities up to an additional amount of 70% of the bank’s Regulatory Capital without having to establish an additional allowance, if such securities have a minimum rating of:


Rating Agency	Short Term	Long Term
Moody’s	P1	Aa3
Standard and Poor’s	A–1+	AA–
Fitch IBCA	F1+	AA–

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 located in countries with an international risk rating no less than BB- or its equivalent and, in general, to individuals and entities residing or domiciled abroad.

Procedures for the Management of Information of Interest to the Market

In order to ensure compliance with the provisions of the Chilean Securities Market Law and regulations, issued by the Chilean Superintendency of Securities and Insurance and the SBIF, our board of directors approved, on January 29, 2010, the Manual for the Management of Information of Interest to the Market (the “Manual”).

The Manual’s main objective is to provide timely disclosure of our policies and internal regulations in connection with the disclosure of information to the public and the systems that have been implemented by us.

In addition, these policies and internal regulations establish codes of conduct that our employees and other persons with access to certain information must comply with in order to protect information related to us.

The Manual is available to the general public on our web page at www.bancochile.cl.

Prevention of Money Laundering and the Financing of Terrorism

On December, 18, 2003 Law 19.913 created the Financial Analysis Unit and enacted new rules regarding money laundering. On March 6, 2006, the SBIF issued regulations governing the requirements applicable to banks with respect to prevention of money laundering and terrorism financing. The regulations, as amended, are aimed at incorporating international anti-money laundering (“AML”) and terrorism financing laws to the Chilean banking industry. Pursuant to these regulations, the SBIF requires that banks implement an Anti-Money Laundering and Terrorism Financing system based mainly on the “know your customer” concept. Moreover, these policies and procedures must be approved by the board of directors of each bank and must take into account the volume and complexity of its operations and other related parties.

Based on these requirements, a Customer Identification Program (as part of the Anti-Money Laundering and Terrorism Financing system) is needed to enable a bank to reestablish the reasonable belief that it knows the true identity of its customers. In general, the program includes:

•

properly identifying customers, including their background, source and amount of funds, country of origin and other risk factors;

•

identifying what the SBIF has defined as “persons politically exposed” (“PEPs”) both within Chile and abroad; and

•

establishing procedures to open accounts and products, with different documentation requirements needed for different types of accounts and products.

The Anti-Money Laundering and Terrorism Financing system required by local regulations must also include the following components:

•

AML policies and procedures aimed at preventing a bank from being used as an intermediary to carry out money laundering operations;

•

appointment of a compliance officer on a senior management level who is responsible for coordinating and monitoring day-to-day AML compliance;

•

establishment of an AML Committee for the purposes of planning and coordinating compliance with AML policies and procedures;

•

use of software tools to detect, monitor and report unusual operations related to transactions made by customers on different products;

•

implementation of personnel selection policies and a training program, in order to prevent money laundering;

•

establishment of a Code of Conduct in order to, among other things, guide employee behavior and prevent possible conflicts of interest; and

•

independent testing by the compliance department, which must be conducted by a bank’s internal audit department.

Consumer-Oriented Regulation

On December 5, 2011, Law 20.555 was published in the Diario Oficial, amending the Chilean Consumer Protection Law. The most significant changes enacted by Law 20.555 were:

•

new agreements entered into by banks and consumer must fully disclose the costs that the consumer assumes, as well as the periodicity, and the mechanisms to modify them. In addition, new agreements must fully disclose all terms, events of default, events of early termination, and automatic payments;

•

banks must inform consumers periodically as to the complete, detailed cost of the banking product, as well as of the cost of the services rendered. The information must include the cost that the consumer will assume if he terminates the agreement before the end of its term;

•

before rendering a service or delivering a product, banks must give the consumer a quote, which must include costs, rates, and conditions;

•

if the consumer so wishes banks must terminate the rendering of a service;

•

banks must inform guarantors as to their rights and obligations before they assume the role of guarantor;

•

irrevocable mandates and mandates in blank are prohibited by the law;

•

when consumers execute standard form contracts, banks must explain, in writing, the main provisions of the agreement; and

•

banks may only modify fees and costs of services and banking products if the mechanisms to modify them are based on objective and verifiable factors previously agreed to in the agreement. In addition, the cost of banking services and products may not be modified without the consent of the consumer.

This amendment became effective on March 5, 2012; however, with regards to banking product agreements entered into before such date, the amendment does not affect the substantive rights acquired by the parties in those agreements. This amendment created a new legal framework “Sernac Financiero”, whose purpose is to monitor and oversee the relationship between customers and financial institutions, with a particular focus on lending activities and contracts.

In July 2012, the government enacted the regulations that implement Law 20,555, which address mortgage loans, consumer loans, credit cards, the “Sernac Seal” (Sello Sernac), and other financial products and services. The new regulations govern, among other matters, the form and content of communications that financial institutions must periodically provide to their customers. Likewise, the new regulations implement the so-called “Summary Sheet” (Hoja Resumen), which must precede the contracts that consumers enter into with financial institutions. The Summary Sheet is intended to provide a clear and understandable summary of the terms and conditions that govern financial products and services.

The Sernac Seal is a new concept introduced by Law 20,555 and consists of a non-mandatory certification granted by the Chilean government agency in charge of consumer protection (Servicio Nacional del Consumidor, “Sernac”), by which that agency confirms that the contracts used by a financial institution when providing products and services comply with the Consumer Protection Act. In this regard, the new regulation establishes the specific requirements for financial institutions to obtain such certification as well as the events that may lead to its termination. Among the requirements to obtain the certification, financial institutions must provide a consumer service and adopt a dispute resolution procedure as defined by Law 20,555 and its regulation.

All of these regulations are already implemented by Banco de Chile, except Sernac Seal, which is not mandatory.

On April 30, 2013, the SBIF revoked several regulations that governed in general terms the collection of fees and expenses, the possibility of collecting them in certain cases, changing the fees to be charged to customers, and their exclusion from the calculation of the effective interest rate. The SBIF said that this revocation occurred because, based on the amendments incorporated by law No 20,555, it lacks authority to continue regulating these matters.

On December 19, 2013, the Ministry of Economy published a regulation for the manner and conditions under which consumers validly express their consent to financial contracts. Additionally, this regulation established the effects of a customer’s rejection or non-acceptance of an amendment proposed by the bank or other supplier. However, this regulation was revoked on March 26, 2014.

New Insurance Brokerage Regulations

On December 17, 2011, effective as of July 1, 2012, a new law regulating insurance commissions related to mortgage loans was enacted. This law imposed restrictions and obligations on lenders such as a mandatory bid process for insurance related to mortgage loans and a general prohibition on commissions benefiting the lender. Although this law became effective on July 1, 2012, it did not have any impact on our business activity in 2012 due to the characteristics of the insurance contracts associated with residential mortgage loans, which consist of collective insurance policies that are renewed every January 1st. The implementation of this law did not have a material impact on our operations in 2013, and we do not expect material effects from its application onwards.

In addition, on December 1, 2013, a new regulation affecting all insurance brokerage businesses in Chile became effective. This regulation is a result of Law No. 20,667 that was enacted on May 9, 2013 and Circular No. 2114 issued by the SVS on July 26, 2013. The new regulation establishes that, in the case of early termination of an insurance policy paid for in advance (for example, because of the early repayment of the related loan), all unearned premiums must be refunded to the customer by the company that issued the policy. This refund obligation includes both the unearned premiums and commissions relating to the remaining policy period, such as brokerage fees (e.g., the fees of our subsidiary Banchile Corredores de Seguros Limitada) and any other commissions. The premiums and commissions subject to refund will be calculated in proportion to the unelapsed period. This refund obligation applies with respect to insurance policies issued after this new regulation became effective. Prior to this new regulation, unearned premiums were refunded only if the early termination took place within the later of forty-five days after the issuance of the insurance policy, or one-tenth of the total term of the insurance policy (from the date of issuance). We do not expect these new refund obligations to have a material effect on our results of operations.

New Maximum Legal Interest Rates

On December 13, 2013, a new law—Law 20,715—regulating maximum interest rates became effective upon publication in the Chilean Official Gazette. This legislation affects all Chilean businesses that charge interests (including all banks, department stores and any other commerce or financial provider) on loans up to UF 200 (approximately U.S.$ 8,900), including installment loans, credit cards and credit lines related loans, as well as overdue loans. This regulation establishes among other things, a new methodology for calculating the maximum legal interest rate for loans—not indexed to inflation—longer than a 90-day term, which results in a reduction of the maximum legal interest rate applicable to such debtors. We do not expect this law will have a material effect on our results of operations.

Bankruptcy Law

On January 9, 2014, a new Bankruptcy Law was published in the Chilean Official Gazette and will become effective nine months following such publication (October 10, 2014). This new law aims to promote agreements and avoid liquidations. Among the main changes introduced by this law is Article 57, which is intended to protect debtors and provides that, during a 30-day term beginning on the date of the appointment of observers:

(i)

the creditors of a debtor may not request its liquidation;

(ii)

no proceeding seeking the issuance of a warrant of attachment, execution or similar process may be initiated against a debtor;

(iii)

no proceeding seeking the restitution of leased assets may be initiated against a debtor;

(iv)

all proceedings referred to in (ii) and (iii) directly above will be suspended, as well as the term of the statute of limitations;

(v)

all the agreements entered into by a debtor will remain valid and effective and its payments terms and conditions will remain in force. Consequently, these agreements may not be early terminated without the consent of the debtor nor be enforced, even if the commencement of a reorganization proceeding under the Bankruptcy Law constitutes an event of default under such agreement. Thus, any guarantees granted to secure the obligations of the debtor may not be enforced; and

(vi)

if a debtor forms part of a public registry as a contractor or service provider, and it is in compliance with its obligations with the relevant principal, it cannot be excluded from such public registry and may not be prohibited from participating in any relevant bidding process.

ORGANIZATIONAL STRUCTURE

The following diagram presents our current corporate structure, including our subsidiaries and their respective direct ownership interests, as of April 15, 2014:

LOGO

With the exception of Banchile Trade Services Limited, which was incorporated in Hong Kong, all of the subsidiaries presented above have their jurisdiction of incorporation in the Republic of Chile. See “—Business Overview—Principal Business Activities—Operations through Subsidiaries” for more information on our subsidiaries.

PROPERTY, PLANT AND EQUIPMENT

We are domiciled in Chile and own the building located at Paseo Ahumada 251, Santiago, Chile, that is approximately 77,500 square meters and serves as the headquarters for the Bank and its subsidiaries. In addition, we own three buildings located at Huerfanos 740, Agustinas 733 and Andrés Bello 2687, Santiago, Chile where the remainder of our executive offices are located. The total area we own in these buildings is equivalent to approximately 46,300 square meters.

As of December 31, 2013, we owned the properties on which 176 of our full-service branches and other points of sale are located (approximately 112,350 square meters of office space). Also, as of December 31, 2013, we had leased office space for 249 of our full-service branches with office space of approximately 72,041 square meters, while our remaining 5 branches and other points of sale were managed through special partnership agreements between the property’s owner and us. We also own properties throughout Chile for back office and administrative operations, as well as for storage of documents and other purposes. We believe that our facilities are adequate for our present needs and suitable for their intended purposes.

As of December 31, 2013, we also owned approximately 133,500 square meters in mainly recreational physical facilities in Chile, which we use to assist our employees in maintaining a healthy work and life balance and which we use for incentive and integration activities.

SELECTED STATISTICAL INFORMATION

The following information is included for analytical purposes and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2013 appearing elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.”

Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities

The average balances for interest-earning assets and interest-bearing liabilities, including interest and readjustments received and paid, were calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. These average balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies (principally the U.S. dollar). The UF is an inflation-indexed Chilean monetary unit of account with a value in Chilean pesos which is linked to, and which is adjusted daily to reflect changes in, the CPI of the Chilean National Institute of Statistics.

The nominal interest rate has been calculated by dividing the amount of interest and principal readjustment gain or loss during the period by the related average balance, both amounts expressed in constant pesos.

Foreign exchange gains or losses on foreign currency-denominated assets and liabilities have not been included in interest revenue or expense. Interest received on past due loans includes interest on such loans from the original maturity date. For our impaired portfolio and high risk loans, we apply a conservative approach of discontinuing accrual-basis recognition of interest revenue in the income statement and they are only recorded once received.

Included in cash and due from banks are current accounts maintained in the Central Bank and overseas banks. Such assets have a distorting effect on the average interest rate earned on total interest earning assets because of balances maintained in:

•

the Central Bank, only the portion that is legally required to be held for liquidity purposes earns interest; and

•

overseas banks earn interest on certain accounts in certain countries.

Consequently, the average interest earned on such assets is comparatively low. These deposits are maintained by us in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.

The following tables set forth, by currency of denomination, average balances and, where applicable, interest amounts and nominal rate for our assets and liabilities under IFRS for the years ended December 31, 2011, 2012 and 2013:


	For the Year Ended December 31,
	2011							2012						2013
IFRS:	Average balance		Interest earned⁽¹⁾		Average nominal rate			Average balance		Interest earned⁽¹⁾		Average nominal rate		Average balance		Interest earned⁽¹⁾		Average nominal rate
	(in millions of Ch$, except percentages)
Assets
Interest earning assets
Deposits in Central Bank
Ch$	Ch$	226,531	Ch$	2,472		1.09	%	Ch$	279,627	Ch$	1,569		0.56	Ch$	294,427	Ch$	1,386		0.47	%
UF		—		—		—			—		—		—		—		—		—
Foreign currency		108,460		189		0.17			90,671		143		0.16		101,845		265		0.26

Total		334,991		2,661		0.79			370,298		1,712		0.46		396,272		1,651		0.42	%

Financial investments
Ch$		630,882		32,721		5.19			703,721		51,727		7.35		797,743		26,424		3.31	%
UF		669,778		41,375		6.18			788,630		38,889		4.93		930,818		50,314		5.41	%
Foreign currency		261,591		7,673		2.93			255,998		3,229		1.26		218,414		4,723		2.16	%

Total		1,562,251		81,769		5.23			1,748,349		93,845		5.37		1,946,975		81,461		4.18	%

Loans in advance to banks
Ch$		393,579		10,322		2.62			381,578		12,993		3.41		496,870		15,728		3.17	%
UF		—		—		—			—		—		—		—		—		—
Foreign currency		—		—		—			—		—		—		—		—		—

Total		393,579		10,322		2.62			381,578		12,993		3.41		496,870		15,728		3.17	%

Commercial loans
Ch$		4,556,598		356,534		7.82			5,440,874		441,789		8.12		5,906,716		467,912		7.92