(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Title of each class	Name of each exchange on which registered
American Depositary Shares (“ADS”), each representing the right to receive 1,039 Shares of Common Stock without par value	New York Stock Exchange
Shares of Common Stock, without par value*	New York Stock Exchange

*	Santander-Chile’s shares of common stock are not listed for trading, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer x

Accelerated filer o

Non-Accelerated filer o

 

 

 

 

---

---

 

 

 

Foreign Exchange Fluctuations

 

The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. In 2009, the Chilean peso in relation to the U.S. dollar appreciated 19.5% compared to a 26.9% depreciation in 2008. (See “Item 3: A. Selected Financial Data—Exchange Rates”). A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained and may continue to maintain material gaps between the balances of such assets and liabilities. Because such assets and liabilities, as well a s interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar). The translation gain or loss over assets and liabilities (excluding derivatives held for trading) is included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading.

 

The Bank also uses a sensitivity analysis both internal limits and according to regulatory limits to minimize the potential loss in net interest income resulting from fluctuations of interest rates on U.S. dollar denominated assets and liabilities and a VaR model to limit foreign currency trading risk (see “Item 11: Quantitative and Qualitative Disclosures About Market Risk”).

 

Results of Operations for the Years Ended December 31, 2008 and 2009

 

The following discussion is based upon and should be read in conjunction with the Audited Consolidated Financial Statements.  The Audited Consolidated Financial Statements have been prepared in accordance with IFRS. The following table sets forth the principal components of our net income for the years ended December 31, 2008 and 2009.

 

 

50

---

Table of Contents

 

		2009				2009				2008
CONSOLIDATED INCOME STATEMENT DATA		US$ ths.(1)				Ch$ million of constant pesos								% Change 2009 /2008
IFRS:
Interest income and expense
Interest income			2,381,031				1,207,778				2,061,346				(41.4	%)
Interest expense			(692,483	)			(351,262	)			(1,169,280	)			(70.0	%)
Net interest income			1,688,548				856,516				892,066				(4.0	%)
Fees and income from services
Fees and commission income			622,819				315,925				295,969				6.7	%
Fees and commission expense			(121,824	)			(61,795	)			(52,840	)			16.9	%
Total net fees and commission income			500,995				254,130				243,129				4.5	%
Other operating income
Net income from financial operations			7,663				3,887				273,477				(98.6	%)
Foreign exchange profit (loss), net			321,816				163,241				(187,042	)			(187.3	%)
Financial transactions, net			329,479				167,128				86,435				93.4	%
Other operating income			50,993				25,866				10,896				137.4	%
Total other operating income			380,472				192,994				97,331				98.3	%
Total operating income			2,570,015				1,303,640				1,232,526				5.8	%
Provision for loan losses			(658,151	)			(333,847	)			(287,983	)			15.9	%
Operating income, net of provisions			1,911,864				969,793				944,543				2.7	%
Operating expenses
Personnel salaries and expenses			(442,551	)			(224,484	)			(246,775	)			(9.0	%)
Administrative expenses			(269,516	)			(136,712	)			(133,682	)			2.3	%
Depreciation and amortization			(91,913	)			(46,623	)			(47,627	)			(2.1	%)
Impairment			(148	)			(75	)			(84	)			(10.7	%)
Other operating expenses			(72,276	)			(36,662	)			(36,298	)			1.0	%
Total operating expenses			(876,404	)			(444,556	)			(464,466	)			(4.3	%)
Net Operating income			1,035,460				525,237				480,077				9.4	%
Other non-operating results
Income from investments in other companies			586				297				632				(53.0	%)
Total other non-operating results			586				297				632				(53.0	%)
Income before tax			1,036,046				525,534				480,709				9.3	%
Income tax			(175,306	)			(88,924	)			(59,742	)			48.8
Net income			860,740				436,610				420,967				3.7
Net income attributable to:
Equity holders of the Bank			850,778				431,557				413,370				4.4
Minority interest			9,962				5,053				7,597				(33.5	%)

---

(1)	Amounts stated in U.S. dollars at and for the year ended December 31, 2009, have been translated from Chilean pesos at the exchange rate of Ch$507.25 = US$1.00 as of December 31, 2009. See “Item 3: A. Selected Financial Data—Exchange Rates”  for more information on exchange rate.

 

Net income for the year ended December 31, 2009, increased 3.7% to Ch$436,610 million. Net income attributable to equity holders of the Bank in the same period increased 4.4% to Ch$431,557 million. Our return on average equity was 27.4% in 2009 compared to 32.7% in  2008.

 

Total operating income was Ch$1,303,640 million in 2009, an increase of 5.8% compared to the corresponding period in 2008. Our net interest income decreased by 4.0% to Ch$856,516 million. The average balance of our interest-earning assets increased by 3.7% in 2009 compared to 2008. Our net interest margin decreased 40 basis points to 5.3% in 2009 due to the negative effects of deflation over margins.

 

Interest income decreased by 41.4% to Ch$1,207.8 billion, reflecting a 43.5% decline in the average rate of interest earned on interest earning assets, offset in part by a 3.7% increase in average interest earning assets.  As

 

 

51

---

Table of Contents

 

discussed in further detail below, the decline in the average rate of interest earned resulted from steep declines in market rates of interest and the effect of deflation on our UF-denominated assets, both resulting from the overall recessionary environment of 2009.

 

Net fees and commission income grew by 4.5% to Ch$254,130 million in the year ended December 31, 2009 compared to the same period of 2008. The growth in fee income was mainly driven by fees from credit, debit and ATM cards, which increased by 18.0%, reflecting increased usage of these credit cards. Fees from collections increased by 11.0% in the year ended December 31, 2009 compared to the same 2008 period. The fees from the collection of insurance increased 28.4% in 2009 compared to 2008 and was also a contributor to the overall increase in fee income.  This growth in fee income was partially offset by the 17.2% decrease in fees from checking accounts and lines of credit, which includes the maintenance fee for checking accounts and lines of credit and fees charged for the unauthorized overdraft of lines of c redit.  This decrease was mainly due to a 68.5% decrease in fees from unauthorized overdrafts of credit lines, which fees were prohibited by the Superintendency of Banks beginning in May 2009.

 

Results of financial transactions, net, which is the sum of trading activities, mark-to-market adjustments and foreign exchange transactions, totaled Ch$167,128 million in 2009, an increase of 93.4% compared to 2008. The net result from mark-to-market and trading was Ch$3,887 million in 2009, a decrease of 98.6% compared to 2008. This lower result was mainly due to the appreciation of the Chilean peso and its effect on the mark-to-market of foreign currency derivatives, which produced a loss of Ch$102,825 million, compared to a gain of Ch$178,883 million in the same period in 2008. These results were offset in part by the mark-to-market of and the realized gains from our available-for-sale fixed income portfolio. These results produced a gain of Ch$47,335 million in 2009 compared to a gain of Ch$3,807 million in 2008. In the first half of 2009, as a result of decreases in interest rates, we recognized gains from sales of our fixed income portfolio, which is mainly comprised of Central Bank bonds.

 

These results were offset by the gain from conversion to pesos of assets and liabilities denominated in foreign currencies and hedge-accounted derivatives recorded as a gain in the foreign exchange transactions line item. Foreign exchange profit (loss), net totaled a net gain of Ch$163,241 million in 2009 compared to a loss of Ch$187,042 million in 2008. The appreciation of the Chilean peso in 2009 compared to a depreciation in 2008 explains this difference in results, which was largely offset by the mark-to-market of foreign exchange derivatives in net gains from trading and our mark-to-market as described above.

 

Other operating income totaled a gain of Ch$25,866 million in 2009, a 137.4% increase from Ch$10,896 million in 2008. The gains from the sale of Bank property, plant and equipment increased 510.7% to Ch$7,622 million. This result includes a one-time gain of Ch$7,072 million from the sale of a building in December 2009. Income from the reversal of provisions for non-specific contingencies increased to Ch$14,793 million in 2009 compared to 2008 (See Note 36(a) of the Audited Consolidated Financial Statements). The Bank reversed in the second half of 2009 provisions for non-specific contingencies recognized at the beginning of 2009 and previous periods, as the Bank assigned specific credit provisions to loans in the provision for loan losses as a result of recalibration of its credit models.

 

Provisions for loan losses totaled Ch$333,847 million for the one-year period ended December 31, 2009, an increase of 15.9% compared to the corresponding period in 2008. Gross provision expense increased by 50.1% to Ch$77,290 million in 2009 compared to the corresponding period in 2008.  This increase was mainly due to the recalibration of our consumer credit scoring model, which resulted in approximately Ch$35,000 million in additional provisions of which Ch$32,000 million related to loans to individuals and Ch$3,000 million to the commercial loan book.  Charge-offs in 2009 increased 7.8% compared to 2008, totaling Ch$295,831 million. This was mainly due to a 46.1% increase in charge-offs in the commercial loan portfolio in 2009 compared to 2008 which resulted from the economic downturn that advers ely affected asset quality in various sectors of the economy. Recoveries on loans previously charged off increased by 3.6% from 2008.

 

Despite the rise in provision expense, operating income, net of provisions, increased 2.5% in 2009 compared to 2008 and totaled Ch$971,772 million.

 

 

52

---

Table of Contents

 

Operating expenses in 2009 decreased by 4.3% compared to 2008. The efficiency ratio improved from 37.6% in 2008 to 34.0% in 2009. Personnel salaries and expenses decreased by 9.0%, mainly due to a 5.3% reduction in average headcount, an 82.7% reduction in severance payments and other cost saving measures. Administrative expenses increased 2.3% in 2009 compared to 2008, mainly due to higher rent expenses for branch and ATM locations. Depreciation and amortization expense decreased by 2.1%, mainly due to lower depreciation expense of real estate as the Bank spent less on improvements and remodeling, and lower depreciation of intangibles as three important computer systems were fully depreciated in 2008.

 

Other operating expenses were Ch$36,662 million in 2009, a 1.0% increase compared to 2008, principally due to a 92.8% increase in expenses related to repossessed assets, which was a result of an increase in provisions for repossessed assets in line with the general economic downturn.

 

Net operating results, which are operating income net of provisions and operating expense, increased by 9.4% in 2009, compared to the corresponding period in 2008.

 

These operating results were offset by a 48.8% increase in income tax expense. The effective tax rate for 2009 was 16.9%, compared to 12.4% in the corresponding period in 2008, due to the change in our taxable income base. Our taxable income base changed as a result of the adoption of the new accounting standards, which eliminated price level restatement which in prior periods generated tax deductible losses.  The statutory tax rate in Chile has not changed and continues to be 17% on income before taxes.

 

 

53

---

Table of Contents

 

Net interest income

 

(in millions of Ch$, except percentages)		Year ended December 31,								% Change
		2009				2008					2009/2008
Individuals			532,060				520,332				2.3	%
Small and mid sized companies			228,928				220,058				4.0	%
Institutional			18,789				17,591				6.8	%
Total retail			779,777				757,981				2.9	%
Total middle-market			114,432				113,223				1.1	%
Global banking & markets			33,738				31,783				6.2	%
Other(1)			(71,431	)			(10,921	)			554.1	%
Net interest income			856,516				892,066				(4.0	%)
Average interest-earning assets			16,265,592				15,681,754				3.7	%
Average non-interest-bearing demand deposits			2,475,050				2,456,747				0.7	%
Net interest margin(2)			5.3	%			5.7	%			—
Average shareholders’ equity and average non-interest-bearing demand deposits to total average interest-earning assets			25.1	%			24.0	%			—

---

(1)	Consists mainly of net interest income from Financial Management and the cost of funding our fixed income trading portfolio.

 

(2)	Net interest margin is net interest income divided by average interest-earning assets.

 

Our net interest income decreased 4.0% to Ch$856,516 million in the fiscal year ended December 31, 2009 from net interest income of Ch$892,066 million in the corresponding period in 2008. Average interest earning assets increased 3.7% in 2009 compared to 2008, principally reflecting a 5.1% increase in average loans, offset in part by a 16.6% decrease in financial investments.

 

Net interest margin in 2009 was 5.3% compared to 5.7% in the same period in 2008, reflecting the deflationary environment in 2009, offset in part by a higher spread loan mix. In the twelve month period ended December 31, 2009, the value of the UF declined by 2.4% compared to an increase of 9.3% in the same period of 2008. As we have more interest-earning assets than liabilities linked to the UF, our net interest income is negatively affected by deflation. In 2009, the average gap between UF-denominated interest-earning assets and UF-denominated average interest bearing liabilities was approximately Ch$2,689,614 million compared to Ch$2,439,563 million in the corresponding period in 2008.

 

Net interest income and margins were positively affected by the fall in short-term interest rates. As interest-bearing liabilities generally have shorter terms than interest-earning assets, a fall in short-term rates has a positive effect on our margins. The overnight interbank rate set by the Central Bank was lowered by 775 basis points in 2009 and is currently at 0.50%. As a result, the average nominal rate we paid on our interest-bearing liabilities was 2.6% in 2009 compared to 11.1% in 2008.

 

The evolution of net interest income by segment was as follows:

 

·

Net interest income from the retail banking segment increased by 2.9% in 2009 compared to the 2008, with increases of 2.3% in the individuals segment, 4.0% in the small and mid-sized companies segment and 6.8% to the institutional client segment. This increase in net interest income was mainly due to a 5.3% increase in loans in retail banking in 2009 compared to 2008. Loans to small and mid-sized companies increased 0.7% and lending to institutions rose 25.9% in 2009 compared to 2008. Loan growth in Santander Banefe, the Bank’s business segment for mid-lower income individuals, decreased 12.7% in 2009 compared to 2008, reflecting the Bank’s increased selectivity in making loans in the context of 2009’s recessionary economic environment. This was offset by an 8.4% increase in lending to individuals in Banca Comercial that targets ma inly mid-upper income individuals.

 

·

Net interest income from the middle-market segment increased by 1.1%, due to higher margins in this segment as funding costs fell at a faster pace than the rate earned over interest-earning assets. This was achieved despite a 14.3% decline in loan volumes in the period being analyzed.

 

 

54

---

Table of Contents

 

·

Net interest income from the global banking and markets segment increased by 6.2%. This was achieved despite a 46.2% decline in loan volumes in the period as this segment’s margins were positively impacted by the lower interest rate environment as funding costs declined more than lending rates.

 

·

The 554.1% increase in the loss in other net interest income principally resulted from the impact of the deflationary environment on our UF asset/liability gap, which is managed by the Financial Management division.

The following table shows our balances of loans and accounts receivables from customers and interbank loans by segment at the dates indicated.

 

		As of December 31,								% Change
Loans by product		2009				2008					2009/2008
		(in millions of Ch$)
Individuals			7,287,925				6,859,547				6.2	%
Small and mid-sized companies			2,485,505				2,468,820				0.7	%
Institutional			282,933				224,776				25.9	%
Total retail			10,056,363				9,553,143				5.3	%
Total middle-market			2,471,162				2,882,943				(14.3	%)
Global banking & markets			1,194,706				2,221,144				(46.2	%)
Other			29,045				23,858				21.7	%
Total loans(1)			13,751,276				14,681,088				(6.3	%)

---

(1)	Includes interbank loans.

 

Fee and commission income

 

The following table sets forth certain components of our income from services (net of fees paid to third parties directly connected to providing those services, principally fees relating to credit card processing and ATM network administration) in the years ended December 31, 2008 and 2009.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Collections			65,782				59,237				11.0	%
Checking accounts and lines of credit			53,388				64,483				(17.2	%)
Credit, debit and ATM cards			51,670				43,772				18.0	%
Asset management			30,766				28,220				9.0	%
Letters of credit			24,558				17,092				43.7	%
Insurance brokerage			16,307				15,284				6.7	%
Custody and brokerage services			6,532				6,538				(0.1	%)
Office banking			2,552				1,944				31.3	%
Other fees			2,575				6,559				(60.7	%)
Total fees and commission income, net			254,130				243,129				4.5	%

Net fees and commission income grew by 4.5% to Ch$254,130 million in the year ended December 31, 2009 compared to the same period of 2008.

 

Fees from collections increased by 11.0% in the year ended December 31, 2009 compared to the same 2008 period. The fees from the collection of brokerage premiums on in-force credit insurance increased 28.4% in 2009 compared to 2008 and was the principal driver of this fee item.

 

Fees from checking accounts and lines of credit, which includes the maintenance fee for checking accounts and lines of credit and fees charged for the unauthorized overdraft of lines of credit, decreased 17.2% in 2009 compared to 2008.   This decrease was principally due to a 68.5% decrease in fees from unauthorized overdrafts of credit lines, which fees were prohibited by the Superintendency of Banks beginning in May 2009.

 

 

55

---

Table of Contents

 

Fees from credit, debit and ATM cards increased by 18.0%, reflecting increased usage of our credit cards, the total number of which remained substantially constant. As of December 2009, the Bank, with 33.1% of all bank credit cards in Chile, generated 38.2% of all monetary purchases in Chile. Billing was up 22.9% in real terms in 2009 compared to 8.1% for the rest of the market, excluding Santander.

 

Fees from our asset management business increased 9.0% in 2009 compared to 2008. Total funds under management increased 55.9% in the period being analyzed and totaled Ch$3,427,829 million (US$6.8 billion). The recovery of the local and global equity markets in 2009 resulted in an increase in funds under management. The Bank’s commercial teams have also proactively funneled customer deposits to mutual funds, which is a more profitable product for the Bank.

 

Fees were also driven by a 43.7% increase in fees from letters of credit and other contingent operations.  This was mainly due to higher income from stand-by letters of credit from our foreign trade finance business and correspondent banking resulting from a differential pricing strategy, based on segmenting the client base more thoroughly.

 

Insurance brokerage fees increased by 6.7%. This was mainly due to greater business volumes in our insurance brokerage subsidiary and higher sale of insurance products through our website.

 

Custody and brokerage fees decreased 0.1% in 2009 compared to 2008. This was primarily due to the lower stock brokerage fees, especially in the first quarter of 2009 when equity market activity generally decreased due to perceived adverse market conditions in 2009.

 

Fees from office banking increased 31.3%. This was mainly due to increase on-line banking activities on behalf of middle-market and corporate clients.

 

Other fee income decreased by 60.7%. This was due in part to lower fees from the issuance of cashier’s checks and other services on behalf of companies which are now done more efficiently through automated processes but at lower prices.

 

The following table sets forth, for the periods indicated our fee income from our business segments.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Individuals			171,433				160,286				7.0	%
Small and mid-sized companies			41,917				39,931				5.0	%
Institutional			1,962				1,789				9.7	%
Total retail			215,312				202,006				6.6	%
Total middle-market (Companies)			20,567				16,846				22.1	%
Global banking and markets			18,747				14,786				26.8	%
Other			(496	)			9,491				–	%
Total fees and commission income, net			254,130				243,129				4.5	%

Retail banking fees increased by 6.6% in 2009 compared to 2008 mainly as a result of the increase in fees from credit and debit cards, asset management and insurance brokerage. This was partially offset by lower fees from checking accounts and lines of credit.

 

Fees in the middle market segment increased by 22.1% mainly as a result from the rise in fees from letters of credit and contingent operations and office banking fees. The fees from the global banking and markets segment increased by 26.8% mainly as a result of an increase in fees from letters of credit, investment banking, advisory services and office banking.

 

 

56

---

Table of Contents

 

Financial transactions, net

 

The following table sets forth information regarding our income (expenses) from financial transactions in the year-ended December 31, 2008 and 2009.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Net income from financial operations			3,887				273,477				(98.6	%)
Foreign exchange profit (loss), net			163,241				(187,042	)			–	%
Total financial transactions, net			167,128				86,435				93.4	%

The net gains from financial transactions, which is the sum of trading activities, mark-to-market adjustments and foreign exchange transactions totaled Ch$167,128 million for 2009, an increase of 93.4% compared to the corresponding period in 2008. These results include the results of our Treasury Department’s trading business and financial transactions with customers as well the results of our Financial Management division.

 

The net income from financial operations was Ch$3,887 million in 2009, a decrease of 98.6% compared to 2008. This lower result was mainly due to the appreciation of the Chilean peso and its effect on the mark-to-market of foreign currency derivatives, which was a loss of Ch$102,825 million, compared to a gain of Ch$178,883 million in the same period in 2008. These lower results were also due to lower interest income from our investments classified as trading. This was mainly due to the deflation in the period, which lowered the interest earned on these assets. These results were offset in part by the mark-to-market and the realized gains from our available-for-sale fixed income portfolio. These results totaled a gain of Ch$47,335 million in 2009 compared to a gain of Ch$3,807 million in 2008. In the last quarter of 200 8, we increased our domestic bond portfolio as a result of the strong inflow of deposits and the high interest rate environment.  In the first half of 2009, as interest rates decreased we recognized gains from our fixed income portfolio. This portfolio is mainly comprised of Central Bank bonds.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Derivatives classified as trading			(102,825	)			178,883				–	%
Trading investments			49,220				77,222				(36.3	%)
Sale of loans			9,231				15,017				(38.5	%)
Available-for-sale instruments sales			47,335				3,807				1143.4	%
Other results			926				(1,452	)			(163.8	%)
Net income from financial operations			3,887				273,477				(98.6	%)

These results were offset by the conversion gain of assets and liabilities denominated in foreign currencies and hedge-accounted derivatives recorded as a gain in the foreign exchange transactions line item. The derivatives included in this line item are mainly cross-currency swaps that hedge interest rate risk of bonds issued abroad. Foreign exchange profit (loss), net totaled a net gain of Ch$163,241 million in 2009 compared to a loss of Ch$187,042 million in 2008. The appreciation of the Chilean peso in 2009 compared to a depreciation in 2008 explains this difference in results and which was largely offset by the mark-to-market of foreign exchange derivatives in net gains from trading and mark-to-market as described above.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Foreign exchange transactions			401,695				(402,927	)			–	%
Hedge-accounting derivatives			(266,221	)			243,979				–	%
Translation gains and losses over  assets and liabilities indexed to foreign currencies			27,767				(28,094	)			–	%
Net results from foreign exchange profit (loss)			163,241				(187,042	)			–	%

 

57

---

Table of Contents

 

Excluding derivatives that qualify for hedge accounting, the conversion and mark-to-market of foreign currency derivatives are for the most part recognized as a gain or loss in the net results from mark-to-market and trading and not as foreign exchange transactions. This distorts the results from mark-to-market and trading and foreign exchange transactions. In order to more easily compare the results from financial transactions, net, we present the following table that separates the results by line of business.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(In million of Chilean pesos)
Santander Global Connect and market-making			89,847				89,659				0.2	%
Proprietary trading			14,360				4,311				233.1	%
Sale of loans and charged-off loans			9,231				15,017				(38.5	%)
Financial Management (ALCO) and other results			53,690				(22,552	)			–	%
Total financial transactions, net			167,128				86,435				93.4	%

The results from Santander Global Connect (SGC) and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. Santander Global Connect is a specialized platform designed to facilitate the sale of derivatives to a broad range of companies in all segments and through the branch network. In 2009, the results from SGC and market-making increased by 0.2% to Ch$89,847 million.

 

The results from proprietary trading totaled a gain of Ch$14,360 million in 2009 compared to a gain of Ch$4,311 million in 2008. The sharp reduction in rates, especially in the first half of 2009, had a positive effect on our proprietary trading positions compared to the surge in inflation and rates in 2008.

 

The results from the Financial Management Division and other results totaled a gain of Ch$53,690 million in 2009 compared to a loss of Ch$22,552 million in 2008. The Financial Management Division manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, shareholders’ equity and liquidity. The aim of the Financial Management Division is to inject stability and recurrence into the net interest income of commercial activities and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk. The gain recognized by the Financial Management Division was mainly due to the sale of available-for-sale fixed income instruments as rates fell, especially in the first quarter of 2009 in order to o ffset the negative impact of deflation on net interest margins.

 

Other operating income

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(In million of Chilean pesos)
Gain on sales of assets received in lieu of payment			29				1,518				(98.1	%)
Recovery of charged-off of assets received in lieu of payment			--				--
Income from assets received in lieu of payment			29				1,518				(98.1	%)
Net results from sale of investment in other companies			1,859				4,348				(57.2	%)
Operational leases			1,123				1,304				(13.9	%)
Gain on sale of Bank premises and equipment			7,622				1,248				510.7	%
Recovery of provisions for non-specific contingencies			14,793				1,246				1087.2	%
Other			440				1,232				(64.3	%)
Sub-total other income			23,978				5,030				376.7	%
Total other operating income			25,866				10,896				137.4	%

Other operating income totaled a gain of Ch$25,866 million in 2009, an 137.4% increase from Ch$10,896 million in 2008.  In 2009, income from repossessed assets totaled Ch$29 million, a 98.1% decline compared to the corresponding period in 2008, mainly due to the economic downturn, which led to us holding on to repossessed assets for longer periods. Income from the sale of investments in other companies decreased by 57.2% mainly as a result of a Ch$1,847 million gain from the sale of shares in Visa Inc. and MasterCard in the first half of 2009,

 

 

58

---

Table of Contents

 

compared to a Ch$974 million one-time gain from the sale of shares in the Santiago Stock Exchange and a Ch$3,368 million one-time gain from the sale of shares in Visa Inc. in the first half of 2008.

 

The gains from the sale of Bank premises and equipment increased 510.7% to Ch$7,622 million. This result includes a one-time gain of Ch$7,072 million from the sale of a building in December 2009.

 

Finally, gains from the recovery of provisions for non-specific contingencies increased 1,087.2% to Ch$14,793 million. This figure includes the reversal during 2009 of non-specific contingencies, recognized at the beginning of 2009 and previous periods, as the Bank assigned specific credit provisions to loans, which were reflected under provision for loan losses, as a result of recalibration of its credit models (See Provision Expense and Note 36(a) to our Audited Consolidated Financial Statements.

 

Provision for loan losses

 

The following table sets forth, for the periods indicated, certain information relating to our provision expenses.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Gross provision expenses(1)			(77,290	)			(51,505	)			50.1	%
Charge-offs			(295,831	)			(274,372	)			7.8	%
Recoveries of loans previously charged-off			39,274				37,894				3.6	%
Provision expenses, net			(333,847	)			(287,983	)			15.9	%
Period-end loans(2)			13,751,276				14,681,088				(6.3	%)
Past due loans(3)			193,250				160,824				20.2	%
Non-performing loans(4)			409,067				383,458				6.7	%
Substandard loans(5)			1,485,737				870,259				70.7	%
Loan loss allowance(6)			349,527				274,240				27.5	%
Non-performing loans / period-end loans(4)			2.97	%			2.61	%
Past due loans / period-end loans			1.41	%			1.10	%
Expected loan loss ratio(7)			2.54	%			1.87	%
Coverage ratio non-performing loans(8)			85.44	%			71.52	%
Coverage ratio past due loans(9)			180.87	%			170.52	%

---

(1)	Net of the reversal of allowances on loans charged off during the period.

 

(2)	Includes Ch$95,534 million in 2008 and Ch$23,412 million in 2009 in interbank loans.

 

(3)	Past-due loans all are installments and lines of credit that are over 90 days overdue.

 

(4)	Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment over 90 days overdue.  December 31, 2008 non-performing loans amount is as reported on January 1, 2009.

 

(5)

Substandard loans prior to December 2009 include: (i) all non-performing loans, (ii) all renegotiated consumer loans, and (iii) all commercial loans that are at risk of default. As of December 31, 2009, substandard loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing,  (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See Note 10(a) of the Consolidated Financial Statements. As a result of this change in definition substandard loans as of December 31, 2009 are not comparable to December 31, 2008 figures.

 

(6)	Includes Ch$35 million in 2008 and Ch$42 million in 2009 in loan loss allowances for interbank loans.

 

(7)	Loan loss allowance divided by total loans.

 

(8)	Loan loss allowance divided by non-performing loans.

 

(9)	Loan loss allowance divided by past due loans.

 

Net provision expense for loan losses totaled Ch$287,983 million for the year ended December 31, 2009, an increase of 15.9% compared to 2008.

 

 

59

---

Table of Contents

 

Gross provision expense increased by 50.1% to Ch$77,290 million in 2009 compared to the corresponding period in 2008.  This rise was mainly due to the recalibration of our consumer credit scoring model. All consumer loans are now assigned a provision at the moment a loan is granted that depends on the risk profile of the client. In addition, the historical time period used for statistically determining the risk level of consumer loans was shortened in the first half of 2009 from 21 months to 18 months for non-renegotiated loans and 12 months for renegotiated loans. This recalibration was done in order to increase the weighting of the time period in which the economic downturn has been affecting the risk levels of the consumer loan book. The Bank also made some adjustments to its commercial loan portfolio cred it scoring models in 2009. In total these changes resulted in approximately Ch$35,000 million in additional provisions in 2009 of which Ch$32,000 million were with respect to loans to individuals and Ch$3,000 million the commercial loan book.  The rise in gross provisions was also due to an increase in risk of the commercial loan book, especially in the salmon sector.  The following table shows provision expense by type of loan:

 

Gross provision expense by loan product		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Consumer loans			(19,030	)			(12,207	)			55.9	%
Residential mortgage loans			(3,903	)			(3,044	)			28.2	%
Commercial loans			(53,042	)			(35,812	)			48.1	%
Contingent loans (off-balance sheet)			(1,308	)			(407	)			221.4	%
Interbank loans			(7	)			(35	)			80.0	%
Total gross provisions			(77,290	)			(51,505	)			50.1	%

Charge-offs increased 8.1% in 2009 compared to 2008, totaling Ch$296,526 million. This was mainly due to a 48.2% increase in charge-offs in the commercial loan portfolio in 2009 compared to 2008 as a result of the economic downturn that hurt asset quality in various sectors of the economy. Charge-offs in the consumer loan portfolio increased 1.1%.  The following table shows charge-offs by type of loan.

 

Charge-offs by loan product		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Consumer loans			(239,005	)			(236,405	)			1.1	%
Residential mortgage loans			(8,708	)			(5,032	)			73.1	%
Commercial loans			(48,118	)			(32,935	)			46.1	%
Total charge-offs			(295,831	)			(274,372	)			7.8	%

Recoveries on loans previously charged off increased by 3.6% in from to 2008. This was mainly due to increased collection efforts by our commercial teams, whose compensation was revised in 2009 to provide greater incentives to increase recoveries. The increased participation by our commercial teams in the recovery process and our efforts toward controlling initial non-performance has had a positive effect on the levels of loan loss recoveries in the period.

 

Recovery of loans previously charged-off		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Consumer loans			28,268				26,718				5.8	%
Residential mortgage loans			2,560				1,932				32.5	%
Commercial loans			8,446				9,244				(8.6	%)
Total recoveries			39,274				37,894				3.6	%

 

60

---

Table of Contents

 

The following table sets forth, for the periods indicated our provision expense broken down by business segment.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Individuals			(230,503	)			(221,715	)			4.0	%
Small and mid sized companies (SMEs)			(76,075	)			(53,669	)			41.7	%
Institutional			(327	)			(290	)			12.8	%
Total retail			(306,905	)			(275,674	)			11.3	%
Total middle-market (Companies)			(24,333	)			(16,188	)			50.3	%
Global banking & markets			(2,511	)			(759	)			230.8	%
Other			(98	)			4,638				(102.1	%)
Total provisions, net			(333,847	)			(287,983	)			15.9	%

 

By business segment, the 15.9% increase in provision was provision expense was mainly due to the 41.7% increase in net provision expense among SMEs, the middle market and global banking and markets.  This rise was due to an increase in risk of the commercial loan book as a result of the economic downturn and higher provisions in the salmon sector, which are mainly middle market clients.

 

Net provision expense among individuals only increased 4.0% in 2009 compared to 2008.  During 2009, we also sought to reduce exposure to the riskiest consumer loans. Loan growth in Santander Banefe, the Bank’s business segment for mid-lower income individuals, decreased 12.7% in 2009 compared to 2008. This was offset by an 8.4% increase in lending to individuals in Banca Comercial that encompasses mainly the less riskier mid-upper income individuals. We also modified our collection procedures for short-term non-performing consumer loans (< 90 days and before being charged-off) by placing commercial teams as the main responsible for performing this task instead of the collections area.  This was done by increasing the weighting of recoveries on variable incentives for commercial teams and im proving  IT systems so commercial teams could receive more quickly alerts regarding their client base.

 

Asset quality indicators deteriorated in 2009 as a result of the economic recession, but with a more favorable evolution in the second half of the year. The expected loss ratio, loan loss allowances over total loans, which measures how much we expect to lose on our loan book, according to our internal models and the Superintendency of Banks guidelines, reached 2.54% as of December 31, 2009 compared to 1.87% as of December 31, 2008. The ratio of past due loans as a percentage of total loans reached 1.41% as of December 31, 2009 compared to 1.10% as of December 31, 2008. Total non-performing loans, a new measure of asset quality introduced in 2009, which includes not only the past due installments, but also the full balance of any loan with one or more installments more than 90 days overdue, reached 2.97% as of December 31, 2009 compared to 2.61% as of December 31, 2008.

 

We believe that our loan loss allowances are currently adequate for all known and expected losses. In 2010 our required loan loss allowances will be impacted by the effects of the recent earthquake on asset quality, in addition to the normal evolution of our business.  On February 27, 2010, areas of Chile were affected by an earthquake.  These areas should be negatively affected economically and therefore asset quality indicators should deteriorate in these areas.  The Bank’s loan exposure to the areas most affected (Regions VI-VIII) is approximately Ch$1,658,845 million or 11.8% of the Bank’s loan portfolio as of February 28, 2010.  We are currently unable to estimate the extent of the earthquake’s impact on asset quality because not enough time has passed sinc e the earthquake, although the impact could be material.  See “Risk Factors— The recent earthquake in Chile is likely to adversely affect the quality of our loan portfolio in segments of the Chilean economy that have been negatively affected and, as a result, is likely to negatively affect, as a result, is likely to negatively.”

 

 

61

---

Table of Contents

 

Operating expenses

 

The following table sets forth information regarding our operating expenses in the year ended December 31, 2008 and 2009.

 

			Year ended December 31,								% Change
			2009				2008				2009/2008
			(in millions of Ch$)
Personnel salaries and expenses			(224,484	)			(246,775	)			(9.0	%)
Administrative expenses			(136,712	)			(133,682	)			2.3	%
Depreciation and amortization			(46,623	)			(47,627	)			(2.1	%)
Impairment			(75	)			(84	)			(10.7	%)
Other operating expenses			(36,662	)			(36,298	)			1.0	%
Total operating expenses			(444,556	)			(464,466	)			(4.3	%)
Efficiency ratio (1)			34.0	%			37.6	%

---

(1)	The efficiency ratio is the ratio of total operating expenses to total operating income. Total operating income consists of net interest income, fee income, and other operating income.

 

Operating expenses in 2009 decreased by 4.3% compared to 2008. The efficiency ratio improved from 37.6% in 2008 to 34.0% in 2009. The 9.0% decrease in personnel salaries and expenses was mainly due to the 5.3% reduction in average headcount, an 82.7% reduction in severance payments and other cost saving measures.

 

Administrative expenses increased 2.3% in 2009 compared to 2008, mainly due to higher rent expenses for branch and ATM locations.

 

The impact on administrative expenses from the earthquake, net of insurance proceeds, recognized in 2010 is expected to be US$6 million.

 

Depreciation and amortization expense decreased by 2.1%, mainly due to lower depreciation expense of real estate as we spent less on improvements and remodeling and lower depreciation of intangibles as three important computer systems completed their depreciation schedule in 2008.

 

The following table sets forth, for the periods indicated our personnel, administrative and depreciation expenses broken down by business segment.

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Individuals			(268,934	)			(281,532	)			(4.5	%)
Small and mid-sized companies			(58,741	)			(61,663	)			(4.7	%)
Institutional			(6,799	)			(7,189	)			(5.4	%)
Total retail			(334,474	)			(350,384	)			(4.5	%)
Total middle-market (Companies)			(30,628	)			(32,692	)			(6.3	%)
Global banking and markets			(29,485	)			(31,184	)			(5.4	%)
Other			(13,307	)			(13,908	)			(4.3	%)
Total personnel, administrative, depreciation and impairment expense			(407,894	)			(428,168	)			(4.7	%)

 

By business segment, the 4.7% decrease in personnel, administrative and depreciation expenses was mainly due to cost cutting and increases in productivity among all business segments.

 

 

62

---

Table of Contents

 

		Year ended December 31,								% Change
Other operating expenses		2009				2008					2009/2008
		(in millions of Ch$)
Repossessed asset expenses			(6,128	)			(3,178	)			92.8	%
Credit card expenses			(5,902	)			(7,286	)			(19.0	%)
Customer service expenses			(8,807	)			(9,366	)			(6.0	%)
Other expenses			(15,825	)			(16,468	)			(3.9	%)
Total			(36,662	)			(36,298	)			1.0	%

 

Other operating expenses were Ch$36,662 million in 2009, a 1.0% increase compared to 2008. Other operating expenses include provisions and expenses related to repossessed assets, expenses related to our credit card business, customer service expenses mainly related to our call-center and other expenses such as non-credit charge-offs, the cost of insurance policies (mainly life insurance) over products, tax paid on interest of foreign debt issued by us. Other operating expenses also include provisions for contingencies that may be non-specific credit or other impairments such as tax and legal contingencies. The rise in other expenses was mainly due to a 92.8% rise in expenses related to repossessed assets, which was a results of an increase in provisions for repossessed assets in line with the economic downturn and high er expenses to maintain repossessed assets.

Income tax

 

		Year ended December 31,								% Change
		2009				2008					2009/2008
		(in millions of Ch$)
Income before tax			525,534				480,709				9.3	%
Income tax			(88,924	)			(59,742	)			48.8	%
Effective tax rate(1)			16.9	%			12.4	%

---

(1)	The effective tax is the income tax divided by net income before tax.

 

Our income tax expense increased by 48.0% in 2009 compared to 2008. As a consequence of the adoption of new accounting standards, our taxable income base changed, mainly as a result of the elimination of price level restatement. In a positive inflationary environment, we previously recognized a tax deductible loss from price level restatement in our income statement. In 2008, we recognized in our historical income statement a Ch$78,027 million loss from price level restatement. Historical and non-restated income before taxes in 2008 totaled Ch$394,745 million. The effective tax rate paid on non-restated historical income before taxes was 16.1% in 2008 compared to 16.9% in 2009. The statutory tax rate in Chile has not changed and is 17% on income before taxes.  Going forward and in line with the Chilean govern ment’s proposal for financing the reconstruction of the areas of Chile affected by the earthquake the statutory corporate tax rate will rise to 20% in 2011 to gradually return to 17% by 2013.

 

			Year ended December 31,								% Change
			2009				2008 (historical non-restated)				2009/2008
			(in millions of Ch$)
Income before tax			525,534				394,745				33.1	%
Income tax			(88,924	)			(63,728	)			39.5	%
Effective tax rate(1)			16.9	%			16.1	%

---

(1)	The effective tax  is the income tax divided by net income before tax.

 

 

63

---

Table of Contents

 

E. Liquidity and Capital Resources

 

Sources of Liquidity

 

Santander Chile’s liquidity depends upon its (i) capital, (ii) reserves and (iii) financial investments, including investments in government securities. To cover any liquidity shortfalls and to augment its liquidity position, Santander-Chile has established lines of credit with foreign and domestic banks and also has access to Central Bank borrowings.

 

The following table sets forth our contractual obligations and commercial commitments by time remaining to maturity.  As of the date of the filing of this Annual Report, the Bank does not have significant purchase obligations. At December 31, 2009, the scheduled maturities of our contractual obligations and of other commercial commitments, including accrued interest, were as follows:

 

Contractual Obligations		Due within 1 year				Due after 1 year but within 3 years				Due after 3 years but within 6 years				Due after 6 years				Total
		(in millions of Ch$)
Deposits and other obligations (1)			6,035,291				1,006,289				23,157				11,535				7,076,272
Mortgage finance bonds			50,011				60,378				72,064				81,411				263,864
Subordinated bonds			-				132,110				172,832				287,084				592,026
Bonds			166,814				656,785				674,846				570,341				2,068,786
Chilean Central Bank borrowings:
Credit lines for renegotiations of Loans			1,850				-				-				-				1,850
Other Central Bank borrowings			947,753				-				-				-				947,753
Borrowings from domestic financial institutions			26,301				-				-				-				26,301
Investments under repurchase agreements			166,852				-				-				-				166,852
Foreign borrowings			1,812,296				206,343				-				-				2,018,639
Derivatives			375,097				370,429				329,440				273,940				1,348,906
Other obligations			37,898				8,097				33,523				67,393				146,911
Total of cash obligations			9,620,163				2,440,431				1,305,862				1,291,704				14,658,160

---

(1)	Excludes demand deposit accounts and saving accounts.

 

 

64

---

Table of Contents

Operational Leases

 

Certain bank premises and equipment are leased under various operating leases. Future minimum rental commitments as of December 31, 2009, under non-cancelable leases are as follows:

 

		As of December 31, 2009
		(in millions of Ch$)
Due within 1 year			12,161
Due after 1 year but within 2 years			11,201
Due after 2 years but within 3 years			9,139
Due after 3 years but within 4 years			7,685
Due after 4 years but within 5 years			6,478
Due after 5 years			22,240
Total			68,904

 

Other Commercial Commitments

 

As of December 31, 2009, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

 

Other Commercial Commitments		Due within 1 year				Due after 1 year but within 3 years				Due after 3 years but within 6 years				Due after 6 years				Totals
		(in millions of Ch$)
Letters of credit issued			148,521				7,435				-				-				155,956
Letters of credit confirmed			33,239				2,417				162				-				35,818
Available credit lines			4,615,787				-				-				-				4,615,787
Guarantees			455,583				161,314				37,952				931				655,780
Other commercial commitments			153,482				15,980				469				-				169,931
Total other commercial commitments			5,406,612				187,146				38,583				931				5,633,272

Risk-Weighted Assets and Regulatory Capital

 

We currently have regulatory capital in excess of the minimum requirement under the current Chilean regulations. According to the General Banking Law, a bank is required to have regulatory capital of at least 8% of its risk weighted assets, net of required loan loss allowances, and paid-in capital and reserves (i.e., the basic capital, as defined above) of at least 3% of its total assets, net of required loan loss allowances. For these purposes, the regulatory capital of a bank is the sum of (1) the bank’s basic capital, (2) subordinated bonds issued by the bank valued at their placement price for an amount up to 50% of its basic capital; provided that the value of the bonds is required to be decreased by 20% for each year that elapses during the period com mencing six years prior to their maturity, and (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk weighted assets. Santander Chile does not have goodwill, but if it did, this value would be required to be deducted from regulatory capital. When calculating risk weighted assets, the Bank also includes off-balance sheet contingent loans. The merger of Old Santander-Chile and Santiago required a special regulatory pre-approval of the Superintendency of Banks, which was granted on May 16, 2002. The resolution granting this pre-approval imposed a regulatory capital to risk weighted assets ratio of 12% for the merged bank. This requirement was reduced to 11% by the Superintendency of Banks effective January 1, 2005. For purposes of weighing the risk of a bank’s assets, the General Banking Law considers five different categories of assets, based on the nature of the issuer, the availability of funds, and the nature of the assets and the existence of collateral securing such assets.

 

The following table sets forth our consolidated and risk-weighted assets and regulatory capital as of December 31, 2008 and 2009.

 

65

---

Table of Contents

 

		Consolidated assets								Risk-weighted assets
		2009				2008				2009				2008
		(Ch$ million)
Asset Balance (Net of allowances)
Cash and deposits in bank			2,043,458				855,411				-				-
Unsettled transactions			468,134				335,405				191,287				58,580
Trading investments			798,539				1,166,426				41,918				97,594
Investments under resale agreements			14,020				-				14,020				-
Financial derivative contracts			1,391,886				1,459,901				837,692				844,892
Interbank loans			23,370				95,499				4,674				19,100
Loans and accounts receivables from customers			13,378,379				14,311,349				11,717,337				12,721,633
Available for sale investments			1,830,090				1,580,240				154,089				167,995
Investments in other  companies			7,417				7,277				7,417				7,277
Intangibles assets			77,260				68,232				77,260				68,232
Property, plant and equipment			184,122				200,389				184,122				200,389
Current taxes			4,541				18,715				454				1,872
Deferred taxes			95,229				88,825				9,523				8,883
Other assets			452,559				508,655				269,313				382,452
Off-balance sheet assets
Contingent loans			1,160,118				1,240,690				693,009				735,126
Total			21,929,122				21,937,014				14,202,115				15,314,025
										Ratio
			2009				2008				2009				2008
		(Ch$ million)								%				%
Basic capital			1,658,316				1,489,689				7.56	(1)			6.79	(1)
Regulatory capital			2,214,092				2,104,225				15.59	(2)			13.74	(2)

---

(1)	As a percentage of total assets.

 

(2)	As a percentage of risk weighted assets (BIS ratio).

 

Financial Investments

 

The following table sets forth our investment in Chilean government and corporate securities and certain other financial investments at the dates indicated. Financial investments that have a secondary market are carried at market value. All other financial investments are carried at acquisition cost, plus accrued interest and indexation readjustments, as applicable. Interest income from the trading portfolio is no longer included as interest income, but as income from trading and mark-to-market of securities.

 

 

66

---

Table of Contents

 

a) Trading

 

		As of December 31,
		2009				2008
		(in millions of Ch$)
Chilean Central Bank and Government Securities
Chilean Central Bank bonds			667,703				786,263
Chilean Central Bank notes			63,868				218,355
Other Chilean Central Bank and government securities			29,806				71,739
Subtotal			761,377				1,076,357
Other Chilean Securities
Time deposits in Chilean financial institutions			-				-
Mortgage bonds of Chilean financial institutions			11				2,787
Chilean financial institutions bonds			-				3,030
Chilean corporate bonds			-				24,832
Other Chilean securities			-				-
Subtotal			11				30,649
Foreign Financial Securities
Other foreign financial instruments			-				-
Subtotal			-				-
Investments in mutual funds
Funds managed by related entities			37,151				59,420
Subtotal			37,151				59,420
Total			798,539				1,166,426

 

 

67

---

Table of Contents

b) Available for sale

 

		As of December 31,
		2009				2008
		(in millions of Ch$)
Chilean Central Bank and Government Securities
Chilean Central Bank bonds			1,063,879				690,123
Chilean Central Bank notes			264,011				49,204
Other Chilean Central Bank and government securities			212,362				93,128
Subtotal			1,540,252				832,455
Other Chilean Securities
Time deposits in Chilean financial institutions			41,407				1,305
Mortgage bonds of Chilean financial institutions			236,847				284,033
Chilean corporate bonds			11,584				13,522
Subtotal			289,838				298,860
Others Financial Securities
Central Bank and Government Foreign Securities			-				-
Other Foreign financial securities(1)			-				448,925
Subtotal			-				448,925
Total			1,830,090				1,580,240

---

(1)	Corresponds to overnight dollar deposits in the U.S.

 

c) Held-to-maturity

 

No financial investments were classified as held-to-maturity as of December 31, 2008 and 2009.

 

 

68

---

Table of Contents

 

The following table sets forth an analysis of our investments as of December 31, 2009, by remaining maturity and the weighted average nominal rates of such investments.

 

		Within one year				Weighted average Nominal Rate				After one year but within five years				Weighted average Nominal Rate				After five years but within ten years				Weighted average Nominal Rate				After ten years				Weighted average Nominal Rate				Total				Weighted average Nominal Rate
		(in millions of Ch$ , except rates)
Held for Trading
Central Bank and Government Securities
Central Bank bonds			639,870				1.5	%			25,850				2.2	%			1,983				3.2	%			–				–				667,703				1.5	%
Central Bank notes			26,551				3.4	%			32,599				2.4	%			1,250				3.0	%			3,468				2.8	%			63,868				2.8	%
Other Chilean Central Bank and Treasury securities			–				–	%			12,813				2.8	%			16,993				3.5	%			–				–				29,806				3.2	%
Subtotal			666,421								71,262								20,226								3,468								761,377
Other Chilean Securities
Mortgage finance bonds			–				–	%			–				–	%			–				–	%			11				4.0	%			11				4.0	%
Chilean financial institutions bonds			–				–	%			–				–	%			–				–	%			–				–	%			–				–	%
Chilean corporate bonds			–				–	%			–				–	%			–				–	%			–				–	%			–				–	%
Subtotal			–								–								–								11								11
Investment in mutual funds
Mutual funds administered by related parties			37,151				0.1	%			–								–								–								37,151				0.1	%
Subtotal			37,151								–								–								–								37,151
Total			703,572								71,262								20,226								3,479								798,539

 

69

---

 

		Within one year				Weighted average Nominal Rate				After one year but within five years				Weighted average Nominal Rate				After five years but within ten years				Weighted average Nominal Rate				After ten years				Weighted average Nominal Rate				Total				Weighted average Nominal Rate
		(in millions of Ch$, except percentages )
Available-for-sale Investments
Central Bank and Government Securities
Central Bank Bonds			310,326				0.8	%			537,921				2.9	%			205,813				4.1	%			9,819				3.1	%			1,063,879				2.5	%
Central Bank notes			198,877				0.1	%			63,533				0.2	%			1,601				1.8	%			–				–	%			264,011				0.1	%
Others securities			10,838				1.5	%			5,800				2.8	%			177,653				4.9	%			18,071				3.2	%			212,362				4.5	%
Subtotal			520,041								607,254								385,067								27,890								1,540,252
Other Chilean Securities
Deposits in Chilean Financial Institutions			41,407				0.1	%			–				–	%			–				–	%			–				–	%			41,407				0.1	%
Mortgage Finance Bonds			28				5.4	%			2,125				3.6	%			26,073				3.8	%			208,621				3.9	%			236,847				3.9	%
Chilean Corporate Bonds			–				–	%			11,584				4.9	%			–				–	%			–				–	%			11,584				4.9	%
Subtotal			41,435				–	%			13,709				–	%			26,073				–	%			208,621				–	%			289,838				–	%
Total			561,476				–	%			620,963				–	%			411,140				–	%			236,511				–	%			1,830,090				–	%

 

Credit Risk Ratings

 

The Bank also has credit ratings from three international agencies.

 

Moody’s	Rating
Long-term foreign currency bank deposits	Aa3
Senior bonds	Aa3
Subordinated debt	A1
Bank Deposits in Local Currency	Aa3
Bank financial strength	B-
Short-term deposits	P-1
Outlook	Stable

Standard & Poor’s	Rating
Long-term Foreign Issuer Credit	A+
Long-term Local Issuer Credit	A+
Short-term Foreign Issuer Credit	A-1
Short-term Local Issuer Credit	A-1
Outlook	Stable

Fitch	Rating
Foreign Currency Long-term Debt	A+
Local Currency Long-term Debt	A+
Foreign Currency Short-term Debt	F1
Local Currency Short-term Debt	F1
Individual rating	B
Outlook	Stable

 

On June 15, 2009, Moody’s downgraded the credit risk ratings of 25 Spanish banks, but maintained the rating of our parent company, but with negative outlook. Any adverse revisions to our parent company’s ratings and/or Chile’s credit ratings for domestic and international debt by international rating agencies may adversely affect our ratings. In 2010 Fitch ratings performed a similar downgrade of Spanish banks. Our ratings may also be negatively affected by a worsening of our financial condition, especially in terms of asset quality indicators.

 

 

70

---

Table of Contents

 

On June 16, 2010, Moody’s upgraded the Bank’s foreign currency rating to Aa3 in line with a similar action to Chile’s sovereign rating.

 

Working Capital

 

As a bank, we satisfy our working capital needs through general funding, the majority of which derives from deposits and other borrowings from the public. (See “Item 5: E. Liquidity and Capital Resources—Deposits and Other Borrowings”). In our opinion, our working capital is sufficient for our present needs.

 

Liquidity Management

 

Liquidity management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.

 

Our general policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments of other liabilities at maturity, extend loans and meet our own working capital needs. Our minimum amount of liquidity is determined by the statutory reserve requirements of the Central Bank. Deposits are subject to a statutory reserve requirement of 9% for demand deposits and 3.6% for Chilean peso, UF-denominated and foreign currency denominated time deposits with a term of less than a year. (See “Item 4: D. Regulation and Supervision”). The Central Bank has statutory authority to increase these percentages to up to 40% for demand deposits and up to 20% for time deposits. In addition, a 100% special reserve (reserva técnica) applies to demand deposits, deposits in checking accounts, other demand deposits received or obligations payable on sight and incurred in the ordinary course of business, other than deposits unconditionally payable immediately. This special reserve requirement applies to the amount by which the total of such deposits exceeds 2.5 times the amount of a bank’s regulatory capital. Interbank loans are deemed to have a maturity of more than 30 days, even if payable within the following 10 days.

 

The Central Bank also requires us to comply with the following liquidity limits:

 

·

Our total liabilities with maturities of less than 30 days cannot exceed our total assets with maturities of less than 30 days by an amount greater than our capital. This limit must be calculated in local currency and foreign currencies together as one gap.

 

·

Our total liabilities with maturities of less than 90 days cannot exceed our total assets with maturities of less than 90 days by more than twice of our capital. This limit must be calculated in local currency and foreign currencies together as one gap.

 

We have set other liquidity limits and ratios that minimize liquidity risk. See “Item 11: Quantitative and Qualitative Disclosure About Market Risk.”

 

 

71

---

Table of Contents

 

Cash Flow

 

The tables below set forth our main sources of cash. The subsidiaries are not an important source of cash flow for us and therefore have no impact on our ability to meet our cash obligations. No legal or economic restrictions exist on the ability of subsidiaries to transfer funds to us in the form of loans or cash dividends as long as these subsidiaries abide by the regulations of the Ley de Sociedad Anónimas regarding loans to related parties and minimum dividend payments. Please see our Consolidated Statements of Cash Flows in our Audited Consolidated Financial Statements for a detailed breakdown of the Bank’s cash flow.

 

Millions of Ch$		Year ended December 31,
		2009				2008
Net cash provided by operating activities			1,323,587				(10,324	)

Cash provided by operating activities totaled Ch$1,323,587 million in 2009 as a result of higher business activity, bond issuances and the decrease of our loan book. This was partially offset by the decrease in deposits. The Ch$(10,324) million in cash consumed by operating activities in 2008 was mainly due to an increase in the Bank’s loan book offset in part by the rise in deposits.

 

Millions of Ch$		Year ended December 31,
		2009				2008
Net cash provided by investment activities			(28,129	)			(45,339	)

Net cash used in investing activities in 2009 totaled Ch$28,129 million. The largest consumption of cash involved the purchase of fixed and intangible assets offset in part by the sale of fixed assets. In 2008, the consumption of cash for investing totaled Ch$45,339 million for the same reasons as in 2009.

 

Millions of Ch$		Year ended December 31,
		2009				2008
Net cash provided by financing activities			(172,065	)			(173,608	)

In 2009, the net cash used by financing activities totaled Ch$172,065 million and the main consumption the redemption of bonds and dividends paid. In 2008 the consumption of cash by financing activities was due to similar reasons.

 

72

---

Table of Contents

 

 

Deposits and Other Borrowings

 

The following table sets forth our average daily balance of liabilities for the years ended December 31, 2008 and 2009, in each case together with the related average nominal interest rates paid thereon.

 

(millions of Ch$, except percentages)		2009												2008
		Average Balance				% of Total Average Liabilities				Average Nominal Rate				Average Balance				% of Total Average Liabilities				Average Nominal Rate
Savings accounts			100,294				0.5	%			(1.0	%)			100,520				0.5	%			8.5	%
Time deposits			8,355,446				41.8	%			2.8	%			8,343,001				45.1	%			9.8	%
Central Bank borrowings			297,346				1.5	%			0.9	%			58,546				0.3	%			8.6	%
Repurchase agreements			486,000				2.4	%			2.9	%			376,365				2.0	%			10.6	%
Mortgage finance bonds			301,501				1.5	%			2.8	%			372,493				2.0	%			15.0	%
Other interest bearing liabilities			3,909,793				19.6	%			2.5	%			3,373,806				18.3	%			14.3	%
Subtotal interest bearing liabilities			13,450,380				67.3	%			2.6	%			12,624,731				68.2	%			11.1	%
Non-interest bearing liabilities
Non-interest bearing deposits			2,475,050				12.4	%							2,456,747				13.3	%
Derivatives			1,387,026				6.9	%							1,332,232				7.2	%
Other non-interest bearing liabilities			1,079,516				5.4	%							769,286				4.2	%
Shareholders’ equity			1,599,938				8.0	%							1,299,098				7.1	%
Subtotal non-interest bearing liabilities			6,541,530				32.7	%							5,857,363				31.8	%
Total liabilities			19,991,910				100.0	%							18,482,094				100.0	%

 

Our most important source of funding is our time deposits. Average time deposits represented 41.8% of our average total liabilities and shareholders’ equity in 2009. Our current funding strategy is to continue to utilize all sources of funding in accordance with their costs, their availability and our general asset and liability management strategy. Special emphasis is being placed on lengthening the maturities of time deposits with institutional clients and increasing in general our deposits from retail customers. We also intend to continue to broaden our customer deposit base and to emphasize core deposit funding. We have also followed the strategy in 2009 of increasing senior and subordinated bonds to increase the duration of liabilities and fund the gro wth of the mortgage portfolio. We believe that broadening our deposit base by increasing the number of account holders has created a more stable funding source.

 

Composition of Deposits

 

The following table sets forth the composition of our deposits and similar commitments at December 31, 2008 and 2009.

 

		2009				2008
		(in millions of Ch$)
Demand deposits and other demand obligations
Current accounts			2,776,607				2,268,991
Other deposits and demand accounts			303,495				206,347
Other demand obligations			453,432				472,824
Subtotals			3,533,534				2,948,162
Time deposits and other time deposits
Time deposits			4,219,392				9,476,024
Time saving accounts			98,985				102,951
Other time deposits			2,856,880				177,291
Subtotals			7,175,257				9,756,266
Total deposits and other commitments			10,708,791				12,704,428

 

 

 

73

---

Table of Contents

 

Maturity of Deposits

 

The following table sets forth information regarding the currency and maturity of our deposits as of December 31, 2009, expressed in percentages of our total deposits in each currency category. UF-denominated deposits are similar to peso-denominated deposits in all respects, except that the principal is readjusted periodically based on variations in the Chilean consumer price index.

 

		Ch$				UF				Foreign Currencies				Total
Demand deposits			0.1	%			-				-				0.0	%
Savings accounts			0.0	%			3.7	%			-				1.4	%
Time deposits:
Maturing within 3 months			75.9	%			24.2	%			77.8	%			57.0	%
Maturing after 3 but within 6 months			10.8	%			12.0	%			13.4	%			11.6	%
Maturing after 6 but within 12 months			7.9	%			28.2	%			8.8	%			15.5	%
Maturing after 12 months			5.3	%			31.9	%			0.0	%			14.5	%
Total time deposits			99.9	%			96.3	%			100.0	%			98.6	%
Total deposits			100.0	%			100.0	%			100.0	%			100.0	%

The following table sets forth information regarding the maturity of our outstanding time deposits in excess of US$100,000 as of December 31, 2009.

 

		Ch$				UF				Foreign Currencies				Total
		(in millions of Ch$)
Time deposits:
Maturing within 3 months			2,338,964				644,901				618,582				3,602,447
Maturing after 3 but within 6 months			399,730				342,275				120,692				862,697
Maturing after 6 but within 12 months			258,880				743,318				79,976				1,082,174
Maturing after 12 months			159,056				746,733				68				905,857
Total time deposits			3,156,630				2,477,227				819,318				6,453,175

Short-term Borrowings

 

The principal categories of our short-term borrowings are amounts borrowed under foreign trade lines of credit, domestic interbank loans, Central Bank borrowings and repurchase agreements. The table below presents the amounts outstanding at each year-end indicated and the weighted-average nominal interest rate for each such year by type of short-term borrowing.

 

		2009								2008
		Balance				Weighted- Average Nominal Interest Rate				Balance				Weighted- Average Nominal Interest Rate
		in millions of Ch$, except percentages
Balances under repurchase agreements			166,852				0.2	%			291,940				6.3	%
Central Bank borrowings			947,753				0.5	%			269,430				8.5	%
Domestic interbank borrowings			26,301				0.4	%			5,003				8.1	%
Borrowings under foreign trade credit lines			1,812,296				0.7	%			1,107,997				1.9	%
Total short-term borrowings			2,953,202				0.6	%			1,674,370				3.7	%

 

 

 

74

---

Table of Contents

 

The following table shows the average balance and the average nominal rate for each short-term borrowing category for the years indicated.

 

		2009								2008
		Average Balance				Average Nominal Interest Rate				Average Balance				Average Nominal Interest Rate
		(in millions of Ch$, except percentages)
Investment under repurchase agreements			486,000				2.9	%			376,365				9.9	%
Central Bank borrowings			297,346				0.9	%			58,546				8.5	%
Domestic interbank borrowings			81,767				1.7	%			43,341				8.1	%
Borrowings under foreign trade credit lines			1,433,710				1.9	%			1,276,543				3.9	%
Total short-term borrowings			2,298,823				2.0	%			1,754,795				5.4	%

The following table presents the maximum month-end balances of our principal sources of short-term borrowings during the years indicated.

 

In millions of Ch$		Maximum  2009 Month-End Balance				Maximum  2008 Month-End Balance
Investment under repurchase agreements			1,165,241				425,463
Central Bank borrowings			2,711				2,675
Domestic interbank borrowings			256,717				154,101
Borrowings under foreign trade credit lines			2,014,913				1,751,620
Total short-term borrowings			3,439,582				2,333,859

 

 

 

75

---

Table of Contents

 

Total Borrowings

 

		As of December 31, 2009
		Long-term				Short-term				Total
		(in millions of Ch$)
Central Bank Credit lines for renegotiations of loans (a)			-				1,850				1,850
Investment under repurchase agreements			-				1,114,605				1,114,605
Mortgage finance bonds (b)			213,853				50,011				263,864
Senior bonds (c)			1,901,972				166,814				2,068,786
Subordinated bonds (d)			592,026				-				592,026
Borrowings from domestic financial institutions			-				26,301				26,301
Foreign borrowings (e)			206,343				1,812,296				2,018,639
Other obligations (f)			109,013				37,898				146,911
Total borrowings			3,023,207				3,209,775				6,232,982

		As of December 31, 2008
		Long-term				Short-term				Total
		(in millions of Ch$)
Central Bank Credit lines for renegotiations of loans (a)			-				3,012				3,012
Investment under repurchase agreements			853				561,370				562,223
Mortgage finance bonds			289,913				54,767				344,680
Senior bonds			1,362,198				256,582				1,618,780
Subordinated bonds			687,912				-				687,912
Borrowings from domestic financial institutions			-				5,003				5,003
Foreign borrowings			309,055				1,107,997				1,417,052
Other obligations			32,277				99,041				131,318
Total borrowings			2,682,208				2,087,772				4,769,980

 

(a)      Interbank borrowings

 

As of December 31, 2009 and December 31, 2008, interbank borrowings are summarized as follows:

 

		As of December 31,
Ch$ million		2009				2008
Central Bank borrowings			1,850				3,012
Financial entities borrowings			26,301				5,003
Foreign Financial entities borrowings			2,018,639				1,417,052
Total			2,046,790				1,425,067

 

 

 

76

---

Table of Contents

 

Credit lines for renegotiations of loans

 

Central Bank borrowings include credit lines for the renegotiations of loans and other Central Bank borrowings. These credit lines were provided by the Central Bank for the renegotiations of loans due to the need to refinance debts as a result of the economic recession and crisis of the banking system in the early 1980s. The lines for the renegotiations, which are considered long-term, are related with mortgage loans linked to the UF index and bore a real annual interest rate of 3% as of December 31, 2008 and 2009. The maturities of the outstanding amounts due under these credit lines, which are considered long-term, are as follows:

		As of December 31, 2009
		(in millions of Ch$)
Due within 1 year			1,850
Total			1,850

(b)      Mortgage finance bonds

 

These bonds are used to finance the granting of mortgage loans. The outstanding principal amounts of the bonds are amortized on a quarterly basis. The range of maturities of these bonds is between five and twenty years. The bonds are linked to the UF index and bear a real weighted-average annual interest rate of 4.6% and 4.7% as of December 31, 2008 and 2009, respectively. The following table sets forth the remaining maturities of our mortgage finance bonds at December 31, 2009.

 

		As of December 31, 2009
		(in millions of Ch$)
Due within 1 year			50,011
Due after 1 year but within 2 years			31,804
Due after 2 years but within 3 years			28,574
Due after 3 years but within 4 years			23,277
Due after 4 years but within 5 years			27,350
Due after 5 years			102,848
Total mortgage finance bonds			263,864

(c)      Senior Bonds

 

The following table sets forth, at the dates indicated, our issued bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund the Bank’s mortgage portfolio.

 

		As of December 31,
		2009				2008
		(in millions of Ch$)
Santander bonds denominated in UF			1,660,877				1,362,198
Santander bonds denominated in US$			407,909				256,582
Total bonds			2,068,786				1,618,780

 

 

 

77

---

Table of Contents

 

The maturities of these bonds are as follows:

 

		As of December 31, 2009 (in millions of Ch$)
Due within 1 year			166,814
Due after 1 year but within 2 years			218,339
Due after 2 years but within 3 years			438,446
Due after 3 years but within 4 years			378,064
Due after 4 years but within 5 years			171,647
Due after 5 years			695,476
Total bonds			2,068,786

In 2009 the Bank also issued senior bonds for UF 16,289,000 and USD 800,000.000.

 

Bonds Series	Amount	Term	Issue Rate	Issue Date	Maturity Date
F1	UF 3,000,000	8 years	3.50% per annum simple	5/2/2008	5/2/2016
F2	UF 2,379,000	9 years	4.20% per annum simple	9/1/2008	9/1/2017
F3	UF 3,000,000	5 years	4.50% per annum simple	2/1/2009	2/1/2014
F4	UF 3,000,000	4 years	4.50% per annum simple	2/1/2009	2/1/2013
F5	UF 3,000,000	4.5 years	2.50% per annum simple	5/1/2009	11/1/2013
F6	UF 3,000,000(*)	5 years	3.50% per annum simple	9/1/2009	9/1/2014
F7	UF 3,000,000(**)	4.5 years	3.30% per annum simple	11/1/2009	5/1/2014
Total	UF 20,379,000
144 A	USD 500,000,000	3 years	2.88% per annum simple	11/13/2009	11/13/2012
144 A	USD 300,000,000	3 years	2.88% per annum simple	11/13/2009	11/13/2012
Total	USD 800,000,000

 

---

(*)	On September 1, 2009 a line of bank bonds totaling UF 3,000,000 corresponding to Series F6 with a 5-year term was registered in the SBIF’s Registry of Securities. The F6 bond has an unplaced face value of UF 1,090,000 as of December 31, 2009.

 

(**)	On November 1, 2009 a line of bonds totaling UF 3,000,000 corresponding to Series F7 with a 4.5-year term was registered in the Superintendency of Banks and Financial Institutions’ registry of securities. No placements of this bond have been made in the current fiscal year.

 

(d)      Subordinated bonds

 

The following table sets forth, at the dates indicated, the balances of our subordinated bonds. The following table sets forth, at the dates indicated, our issued subordinated bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund the Bank’s mortgage portfolio and can be considered in the Bank’s regulatory capital.

 

		As of December 31,
		2009				2008
		(in millions of Ch$)
Subordinated bonds denominated in US$			278,087				364,410
Subordinated bonds linked to the UF			313,939				323,502
Total subordinated bonds			592,026				687,912

 

 

 

78

---

Table of Contents

 

The maturities of these bonds, which are considered long-term, are as follows.

 

		As of December 31, 2009
		(in millions of Ch$)
Due within 1 year			-
Due after 1 year but within 2 years			12,899
Due after 2 years but within 3 years			119,211
Due after 3 years but within 4 years			-
Due after 4 years but within 5 years			158,876
Due after 5 years			301,040
Total subordinated bonds			592,026

In 2009, the Bank issued subordinated bonds in the local market for UF 300,000 (Ch$6,283 million), as follows:

 

Subordinated bonds
Series	Amount	Term	Issue rate	Issue date	Maturity date
G2 (*)	UF 300,000	30 years	4.8% per annum simple	9/1/2008	3/1/2038
Total	UF 300,000

---

(*)	As of December 31, 2009 there are unplaced Series G2 bonds with a U.F. face value 1,950,000.

 

(e)      Foreign borrowings

 

These are short-term and long-term borrowings from foreign banks used to fund our foreign trade business. The maturities of these borrowings are as follows.

 

		As of December 31, 2009
		(in millions of Ch$)
Due within 1 year			1,812,296
Due after 1 year but within 2 years			206,343
Total foreign borrowings			2,018,639

The foreign borrowings are denominated principally in U.S. dollars, and are principally used to fund the Bank’s foreign trade loans, and bear an annual average interest rate of 3.9% and 1.4% at December 31, 2008 and 2009, respectively.

 

(f)      Other obligations

 

Other obligations are summarized as follows:

 

		As of December 31, 2009
		(in millions of Ch$)
Due after 1 year but within 2 years			4,583
Due after 2 years but within 3 years			3,515
Due after 3 years but within 4 years			3,556
Due after 4 years but within 5 years			27,868
Due after 5 years			69,491
Total long term obligations			109,013
Amounts due to credit card operators			31,045
Other obligations, due in less than 1 year			6,853
Total short-term obligations			37,898
Total other obligations			146,911

 

 

 

79

---

Table of Contents

 

Other Off-Balance Sheet Arrangements and Commitments

 

In the ordinary course of our business, we are party to transactions with off balance sheet risk in the normal course of our business. These transactions expose us to credit risk in addition to amounts recognized in the consolidated financial statements. The most important off-balance sheet item are contingent loans. Contingent loans consist of guarantees granted by us in Ch$, UF and foreign currencies (principally US$), unused letters of credit and commitments to extend credit such as overdraft protection and credit card lines of credit. Such commitments are agreements to lend to a customer at a future date, subject to the customer compliance with the contractual terms. Since a substantial portion of these commitments is expected to expire without being drawn upon, the total amount of commitments does not necessarily represent our actual future cash requirements. We use the same credit policies in making commitments to extend credit as we do for granting loans. In the opinion of our management, our outstanding commitments do not represent an unusual credit risk.

 

The following table presents the Bank’s outstanding contingent loans as of December 31, 2008 and 2009:

 

		As of December 31,
		2009				2008
		(in millions of Ch$)
Issued and documented letters of credit			155,956				181,381
Confirmed foreign letters of credit			35,818				122,783
Documented guarantees			655,780				766,727
Other guarantees			169,931				172,568
Subtotals			1,017,485				1,243,459
Lines of credit with immediate availability			4,615,787				4,041,849
Totals			5,633,272				5,285,308

Asset and Liability Management

 

Please refer to “Item 11: Quantitative and Qualitative Disclosure about Market Risk—Asset and Liability Management” regarding our policies with respect to asset and liability management.

 

Capital Expenditures

 

The following table reflects capital expenditures in each of the three years ended December 31, 2008 and 2009:

 

		Year Ended December 31,
		2009				2008
		(in millions of Ch$)
Land and Buildings			5,730				10,310
Machinery and Equipment			5,085				5,949
Furniture and Fixtures			202				2,304
Vehicles			678				589
Other			61				410
Total			11,756				19,562

 

The decrease in capital expenditures in 2009 compared to 2008 was mainly due to the lower investment in branches and ATMs. We expect to invest US$376 million in branches, ATMs, phone banking, internet banking and other client relationship systems between 2010 and 2012. We expect to spend US$6.0 million in costs related to the earthquake.

 

 

80

---

Table of Contents

 

F. Selected Statistical Information

 

The following information is included for analytical purposes and should be read in conjunction with our Audited Consolidated Financial Statements as well as the discussion in the section entitled “Management’s Discussion and Analysis of our Financial Condition and Results of Operations.”  The UF is linked to, and is adjusted daily to, reflect changes in the previous month’s Chilean consumer price index.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Inflation. The following tables show, by currency of denomination, average balances and, where applicable, interest amounts and real rates for our assets and liabilities for the years ended December 31, 2008 and 2009.

 

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

 

The average balances for interest-earning assets and interest-bearing liabilities, including interest and readjustments received and paid, have been calculated on the basis of daily balances for us on an unconsolidated basis. Such average balances are presented in Chilean pesos, UFs and in foreign currencies (principally U.S. dollars). Figures from our subsidiaries have been calculated on the basis of monthly balances. The average balances of our subsidiaries, except Santander S.A. Agente de Valores, have not been categorized by currency. As such it is not possible to calculate average balances by currency for such subsidiaries on the basis of daily, weekly or monthly balances.

 

The nominal interest rate has been calculated by dividing the amount of interest and principal readjustment due to changes in the UF index (gain or loss) during the period by the related average balance, both amounts expressed in constant pesos. The nominal rates calculated for each period have been converted into real rates using the following formulas:

 

Where:

 

Rp	=	real average rate for peso-denominated assets and liabilities (in Ch$ and UF) for the period;
Rd	=	real average rate for foreign currency-denominated assets and liabilities for the period;
Np	=	nominal average rate for peso-denominated assets and liabilities for the period;
Nd	=	nominal average rate for foreign currency-denominated assets and liabilities for the period;
D	=	devaluation rate of the Chilean peso to the U.S. dollar for the period; and
I	=	inflation rate in Chile for the period (based on the variation of the Chilean Consumer Price Index).

 

The real interest rate can be negative for a portfolio of peso-denominated loans when the inflation rate for the period is higher than the average nominal rate of the loan portfolio for the same period. A similar effect could occur for a portfolio of foreign currency denominated loans when the inflation rate for the period is higher than the sum of the devaluation rate for the period and the corresponding average nominal rate of the portfolio.

 

 

 

81

---

Table of Contents

 

 

The formula for the average real rate for foreign currency denominated assets and liabilities (Rd) reflects a gain or loss in purchasing power caused by the difference between the devaluation rate of the Chilean peso and the inflation rate in Chile during the period. The following example illustrates the calculation of the real interest rate for a dollar-denominated asset bearing a nominal annual interest rate of 10.0% (Nd = 0.10), assuming a 5.0% annual devaluation rate (D = 0.05) and a 12.0% annual inflation rate (I = 0.12):

 

 

In the example, since the inflation rate was higher than the devaluation rate, the real rate is lower than the nominal rate in dollars. If, for example, the annual devaluation rate were 15.0%, using the same numbers, the real rate in Chilean pesos would be 12.9%, which is higher than the nominal rate in U.S. dollars. Using the same numbers, if the annual inflation rate were greater than 15.5%, the real rate would be negative.

 

Foreign exchange gains or losses on foreign currency-denominated assets and liabilities are not included in interest income or expense. Similarly, interest on the available for sale investment portfolio does not include trading or mark-to-market gains or losses on these investments. Interest is not recognized on non-performing loans.   Non-performing loans that are overdue for 90 days or less have been included in each of the various categories of loans, and therefore affect the various averages. Non-performing loans consist of loans as to which either principal or interest is overdue (i.e., non-accrual loans) and restructured loans earning no interest.

 

Included in interbank deposits are checking accounts maintained in the Central Bank and foreign banks. Such assets have a distorting effect on the average interest rate earned on total interest-earning assets because currently balances maintained in Chilean peso amounts do not earn interest, and the only balances held in a foreign currency that earn interest are those maintained in U.S. dollars, but those only earn interest on the amounts that are legally required to be held for liquidity purposes. Additionally, this account includes interest earned by overnight investments. Consequently, the average interest earned on such assets is comparatively low. We maintain these deposits in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.

 

The following tables show, by currency of denomination, average balances and, where applicable, interest amounts and real rates for our assets and liabilities for the years ended December 31, 2008 and 2009.

 

 

82

---

Table of Contents

 

		Year ended December 31,
		2009																2008
		Average Balance				Interest Earned				Average Real Rate				Average Nominal Rate				Average Balance				Interest Earned				Average Real Rate				Average Nominal Rate
		(in millions of Ch$, except for rate data)
ASSETS
INTEREST-EARNING ASSETS
Deposits in Central Bank
Ch$			207,738				2,652				3.9	%			1.3	%			114,052				9,515				(0.5	%)			8.3	%
UF			–				–				–	%			–	%			–				–				–	%			–	%
Foreign currencies			–				–				–	%			–	%			–				–				–	%			–	%
Subtotal			207,738				2,652				3.9	%			1.3	%			114,052				9,515				(0.5	%)			8.3	%
Financial investments
Ch$			939,455				32,782				6.2	%			3.5	%			851,635				80,356				0.5	%			9.4	%
UF			547,220				4,507				3.5	%			0.8	%			614,704				51,794				(0.4	%)			8.4	%
Foreign currencies			486,051				5,840				(17.8	%)			1.2	%			900,291				5,888				19.1	%			0.7	%
Subtotal			1,972,726				43,129				(0.5	%)			2.2	%			2,366,630				138,038				7.3	%			5.8	%
Commercial Loans
Ch$			3,624,473				375,026				13.2	%			10.4	%			3,232,299				456,590				4.8	%			14.1	%
UF			2,822,742				111,952				6.7	%			4.0	%			3,015,409				410,113				4.3	%			13.6	%
Foreign currencies			1,053,718				53,074				(14.7	%)			5.0	%			1,076,102				60,080				24.9	%			5.6	%
Subtotal			7,500,933				540,052				6.9	%			7.2	%			7,323,810				926,783				7.6	%			12.7	%
Consumer loans
Ch$			2,018,473				501,981				28.1	%			24.9	%			1,835,824				449,591				14.3	%			24.5	%
UF			115,640				6,320				8.2	%			5.5	%			113,148				18,161				6.6	%			16.1	%
Foreign currencies			8,161				1				(18.8	%)			–	%			8,161				–				18.3	%			–	%
Subtotal			2,142,274				508,302				26.9	%			23.7	%			1,957,133				467,752				13.9	%			23.9	%
Mortgage loans
Ch$			6,028				535				11.7	%			8.9	%			14,359				1,310				0.2	%			9.1	%
UF			3,946,434				101,804				5.3	%			2.6	%			3,637,661				510,362				4.7	%			14.0	%
Foreign currencies			–				–				–	%			–	%			–				–				–	%			–	%
Subtotal			3,952,462				102,339				5.3	%			2.6	%			3,652,020				511,672				4.7	%			14.0	%
Interbank Loans
Ch$			19,532				262				4.0	%			1.3	%			16,838				1,077				(2.3	%)			6.4	%
UF			–				–				–	%			–	%			56				–				(8.2	%)			–	%
Foreign currencies			2,521				–				(18.8	%)			–	%			5,618				196				22.4	%			3.5	%
Subtotal			22,053				262				1.4	%			1.2	%			22,512				1,273				3.8	%			5.7	%
Investments under agreements to resell
Ch$			261,288				10,680				6.8	%			4.1	%			21,148				1,610				(1.2	%)			7.6	%
UF			852				31				6.4	%			3.6	%			–				–				–	%			–	%
Foreign currencies			198				6				(16.4	%)			3.0	%			–				–				–	%			–	%
Subtotal			262,338				10,717				6.8	%			4.1	%			21,148				1,610				(1.2	%)			7.6	%
Threshold
Ch$			–				–				–	%			–	%			–				–				–	%			–	%
UF			–				–				–	%			–	%			–				–				–	%			–	%
Foreign currencies			205,068				325				(18.7	%)			0.2	%			224,449				4,703				20.8	%			2.1	%
Subtotal			205,068				325				(18.7	%)			0.2	%			224,449				4,703				20.8	%			2.1	%
Total interest-earning assets (1)
Ch$			7,076,987				923,918				16.0	%			13.1	%			6,086,155				1,000,049				6.9	%			16.4	%
UF			7,432,888				224,614				5.7	%			3.0	%			7,380,978				990,430				4.2	%			13.4	%
Foreign currencies			1,755,717				59,246				(16.1	%)			3.4	%			2,214,621				70,867				22.1	%			3.2	%
Subtotal			16,265,592				1,207,778				7.8	%			7.4	%			15,681,754				2,061,346				7.8	%			13.1	%

 

 

83

---

Table of Contents

 

Year ended December 31,

2009

2008

Average Balance

Interest Earned

Average Real Rate

Average Nominal Rate

Average Balance

Interest Earned

Average Real Rate

Average Nominal Rate

(in millions of Ch$, except for rate data)

NON-INTEREST-EARNING ASSETS

Cash

Ch$

398,396

–

–

–

275,180

–

–

–

UF

–

–

–

–

–

–

–

–

Foreign currencies

14,482

–

–

–

19,432

–

–

–

Subtotal

412,878

–

–

–

294,612

–

–

–

Reserves for loan losses

–

–

–

Ch$

(315,361

)

–

–

–

(248,172

)

–

–

–

UF

–

–

–

–

–

–

–

–

Foreign currencies

–

–

–

–

–

–

–

–

Subtotal

(315,361

)

–

–

–

(248,172

)

–

–

–

Fixed Assets

–

–

–

Ch$

215,789

–

–

–

257,548

–

–

–

UF

–

–

–

–

–

–

–

–

Foreign currencies

–

–

–

–

–

–

–

–

Subtotal

215,789

–

–

–

257,548

–

–

–

Derivatives

–

–

–

Ch$

1,708,712

–

–

–

1,861,855

–

–

–

UF

(184,072

)

–

–

–

(1,507,963

)

–

–

–

Foreign currencies

(7,390

)

–

–

–

1,064,876

–

–

–

Subtotal

1,517,250

–

–

–

1,418,768

–

–

–

Financial investments trading (1)

–

–

–

Ch$

233,977

–

–

–

125,073

–

–

–

UF

726,009

–

–

–

308,302

–

–

–

Foreign currencies

45,029

–

–

–

28,367

–

–

–

Subtotal

1,005,015

–

–

–

461,742

–

–

–

Other assets

–

–

–

Ch$

688,310

–

–

–

184,142

–

–

–

UF

42,584

–

–

–

66,754

–

–

–

Foreign currencies

159,853

–

–

–

364,946

–

–

–

Subtotal

890,747

–

–

–

615,842

–

–

–

Total non-interest earning assets

–

–

–

Ch$

2,929,823

–

–

–

2,455,626

–

–

–

UF

584,521

–

–

–

(1,132,907

)

–

–

–

Foreign currencies

211,974

–

–

–

1,477,621

–

–

–

Total

3,726,318

–

–

–

2,800,340

–

–

–

TOTAL ASSETS

Ch$

10,006,810

923,918

–

–

8,541,781

1,000,049

–

–

UF

8,017,409

224,614

–

–

6,248,071

990,430

–

–

Foreign currencies

1,967,691

59,246

–

–

3,692,242

70,867

–

–

Total

19,991,910

1,207,778

–

–

18,482,094

2,061,346

–

–

 

 

84

---

Table of Contents

 

 

	Year ended December 31,
	2009				2008
	Average Balance	Interest Paid	Average Real Rate	Average Nominal Rate	Average Balance	Interest Paid	Average Real Rate	Average Nominal Rate
	(in millions of Ch$, except for rate data)
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Savings accounts
Ch$	777	11	4.1%	1.5%	739	13	(6.5%)	1.8%
UF	99,517	(1,039)	1.6%	(1.0%)	99,781	8,516	(0.3%)	8.5%
Foreign currencies	-	-	-	-	-	-	-	-
Subtotal	100,294	(1,028)	1.6%	(1.0%)	100,520	8,529	(0.3%)	8.5%
Time deposits
Ch$	4,442,195	183,641	6.9%	4.1%	3,879,461	291,134	(1.3%)	7.5%
UF	2,490,859	19,618	3.4%	0.8%	2,958,841	368,973	3.3%	12.5%
Foreign currencies	1,422,392	26,614	(17.3%)	1.9%	1,504,699	55,842	(4.8%)	3.7%
Subtotal	8,355,446	229,873	1.7%	2.8%	8,343,001	715,949	(0.3%)	9.8%
Central Bank borrowings
Ch$	295,319	2,561	3.5%	0.9%	55,300	4,570	(0.6%)	8.3%
UF	2,027	(11)	2.1%	(0.5%)	3,246	386	2.8%	11.9%
Foreign currencies	-	-	-	-	-	-	-	-
Subtotal	297,346	2,550	3.5%	0.9%	58,546	4,956	(0.4%)	8.6%
Repurchase agreements
Ch$	461,168	13,454	5.6%	2.9%	311,307	34,487	2.0%	11.1%
UF	23,915	429	4.5%	1.8%	9,080	940	1.3%	10.4%
Foreign currencies	917	1	(18.7%)	0.1%	55,978	1,925	(5.0%)	3.4%
Subtotal	486,000	13,884	5.5%	2.9%	376,365	37,352	0.9%	10.6%
Mortgage finance bonds
Ch$	-	-	-	-	-	-	-	-
UF	301,501	8,391	5.5%	2.8%	372,493	55,713	5.6%	15.0%
Foreign currencies	-	-	-	-	-	-	-	-
Subtotal	301,501	8,391	5.5%	2.8%	372,493	55,713	5.6%	15.0%
Other interest-bearing liabilities
Ch$	141,415	8,173	8.6%	5.8%	99,390	10,697	(1.7%)	10.8%
UF	1,825,455	40,171	4.9%	2.2%	1,497,974	260,230	7.8%	17.4%
Foreign currencies	1,942,923	49,248	(16.6%)	2.5%	1,776,442	75,854	(4.2%)	4.3%
Subtotal	3,909,793	97,592	(5.7%)	2.5%	3,373,806	346,781	1.3%	14.3%
Total interest-bearing liabilities
Ch$	5,340,874	207,840	6.6%	3.9%	4,346,197	340,901	(1.0%)	7.8%
UF	4,743,274	67,559	4.1%	1.4%	4,941,415	694,758	4.7%	14.1%
Foreign currencies	3,366,232	75,863	(17.0%)	2.3%	3,337,119	133,621	(4.5%)	4.0%
Total	13,450,380	351,262	(0.2%)	2.6%	12,624,731	1,169,280	0.3%	11.1%

 

 

 

85

---

Table of Contents

 

		Year ended December 31,
		2009																2008
		Average Balance				Interest Paid				Average Real Rate				Average Nominal Rate				Average Balance				Interest Paid				Average Real Rate				Average Nominal Rate
		(in millions of Ch$ except for rate data)
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing demand deposits
Ch$			2,458,860				-				-				-				2,455,741				-				-				-
UF			13,039				-				-				-				25				-				-				-
Foreign currencies			3,151				-				-				-				981				-				-				-
Subtotal			2,475,050				-				-				-				2,456,747				-				-				-
Derivatives
Ch$			1,059,863				-				-				-				1,027,615				-				-				-
UF			193,392				-				-				-				168,985				-				-				-
Foreign currencies			133,771				-				-				-				135,632				-				-				-
Subtotal			1,387,026				-				-				-				1,332,232				-				-				-
Other non-interest-bearing liabilities
Ch$			512,216				-				-				-				423,539				-				-				-
UF			287,124				-				-				-				244,874				-				-				-
Foreign currencies			280,176				-				-				-				100,873				-				-				-
Subtotal			1,079,516				-				-				-				769,286				-				-				-
Shareholders` Equity
Ch$			1,599,938				-				-				-				1,299,098				-				-				-
UF			-				-				-				-				-				-				-				-
Foreign currencies			-				-				-				-				-				-				-				-
Subtotal			1,599,938				-				-				-				1,299,098				-				-				-
Total non-interest-bearing liabilities and shareholders’ equity
Ch$			5,630,877				-				-				-				5,205,993				-				-				-
UF			493,555				-				-				-				413,884				-				-				-
Foreign currencies			417,098				-				-				-				237,486				-				-				-
Total			6,541,530				-				-				-				5,857,363				-				-				-
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Ch$			10,971,751				207,840				-				-				9,552,190				340,901				-				-
UF			5,236,829				67,559				-				-				5,355,299				694,758				-				-
Foreign currencies			3,783,330				75,863				-				-				3,574,605				133,621				-				-
Total			19,991,910				351,262				-				-				18,482,094				1,169,280				-				-

 

Changes in Net Interest Revenue and Interest Expense: Volume and Rate Analysis

 

The following table allocates, by currency of denomination, changes in our interest revenue and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective nominal interest rates for 2008 compared to 2007 and 2009 compared to 2008. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities.

 

 

86

---

Table of Contents

 

						Increase (Decrease) from 2008 to 2009
						Due to Changes in
						Volume				Rate				Rate and Volume				Net Change from 2008 to 2009
ASSETS
Interest-earning assets
Deposits in Central Bank
		Ch $					7,745				(8,019	)			(6,589	)			(6,863	)
		UF					–				–				–				–
		Foreign currency					–				–				–				–
		Total					7,745				(8,019	)			(6,589	)			(6,863	)
Financial investments
		Ch $					8,230				(50,596	)			(5,208	)			(47,574	)
		UF					(5,673	)			(46,741	)			5,127				(47,287	)
		Foreign currency					(2,793	)			4,711				(1,966	)			(48	)
		Total					(236	)			(92,626	)			(2,047	)			(94,909	)
Commercial loans
		Ch $					54,608				(121,432	)			(14,740	)			(81,564	)
		UF					(26,253	)			(290,379	)			18,471				(298,161	)
		Foreign currency					(1,161	)			(5,980	)			135				(7,006	)
		Total					27,194				(417,791	)			3,866				(386,731	)
Consumer loans
		Ch $					44,382				7,283				725				52,390
		UF					401				(11,978	)			(264	)			(11,841	)
		Foreign currency					–				1				–				1
		Total					44,783				(4,694	)			461				40,550
Mortgage loans
		Ch $					(762	)			(30	)			17				(775	)
		UF					43,220				(416,573	)			(35,205	)			(408,558	)
		Foreign currency					–				–				–				–
		Total					42,458				(416,603	)			(35,188	)			(409,333	)
Interbank loans
		Ch $					174				(853	)			(136	)			(815	)
		UF					–				–				–				–
		Foreign currency					(108	)			(196	)			108				(196	)
		Total					66				(1,049	)			(28	)			(1,011	)
Investments Under Agreements to Resell
		Ch $					18,227				(744	)			(8,413	)			9,070
		UF					–				–				31				31
		Foreign currency					–				–				6				6
		Total					18,227				(744	)			(8,376	)			9,107
Threshold
		Ch $					–				–				–				–
		UF					–				–				–				–
		Foreign currency					(409	)			(4,335	)			366				(4,378	)
		Total					(409	)			(4,335	)			366				(4,378	)
Total interest-earning assets
		Ch $					132,604				(174,391	)			(34,344	)			(76,131	)
		UF					11,695				(765,671	)			(11,840	)			(765,816	)
		Foreign currency					(4,471	)			(5,799	)			(1,351	)			(11,621	)
		Total					139,828				(945,861	)			(47,535	)			(853,568	)

 

 

 

87

---

Table of Contents

 

		Increase (Decrease) from 2008 to 2009
		Volume				Rate				Rate and Volume				Net Change from 2008 to 2009
LIABILITIES
Interest-bearing liabilities
Savings accounts
Ch$			1				(2	)			(1	)			(2	)
UF			(23	)			(9,556	)			24				(9,555	)
Foreign currencies			–				–				–				–
Subtotal			(22	)			(9,558	)			23				(9,557	)
Time deposits
Ch$			42,473				(130,967	)			(18,999	)			(107,493	)
UF			(58,434	)			(345,739	)			54,818				(349,355	)
Foreign currencies			(3,100	)			(27,585	)			1,457				(29,228	)
Subtotal			(19,061	)			(504,291	)			37,276				(486,076	)
Central Bank borrowings
Ch$			19,885				(4,097	)			(17,797	)			(2,009	)
UF			(145	)			(403	)			151				(397	)
Foreign currencies			–				–				–				–
Subtotal			19,740				(4,500	)			(17,646	)			(2,406	)
Repurchase agreements
Ch$			16,680				(25,457	)			(12,256	)			(21,033	)
UF			1,544				(780	)			(1,275	)			(511	)
Foreign currencies			(1,880	)			(1,855	)			1,811				(1,924	)
Subtotal			16,344				(28,092	)			(11,720	)			(23,468	)
Mortgage finance bonds
Ch$			–				–				–				–
UF			(10,630	)			(45,368	)			8,676				(47,322	)
Foreign currencies			–				–				–				–
Subtotal			(10,630	)			(45,368	)			8,676				(47,322	)
Other interest-bearing liabilities
Ch$			4,542				(4,967	)			(2,099	)			(2,524	)
UF			57,055				(227,400	)			(49,714	)			(220,059	)
Foreign currencies			7,360				(31,056	)			(2,910	)			(26,606	)
Subtotal			68,957				(263,423	)			(54,723	)			(249,189	)
Total interest-bearing liabilities
Ch$			83,581				(165,490	)			(51,152	)			(133,061	)
UF			(10,633	)			(629,246	)			12,680				(627,199	)
Foreign currencies			2,380				(60,496	)			358				(57,758	)
Total			75,328				(855,232	)			(38,114	)			(818,018	)

 

 

88

---

Table of Contents

 

Interest-Earning Assets: Net Interest Margin

 

The following table analyzes, by currency of denomination, the levels of average interest-earning assets and net interest earned by Santander-Chile, and illustrates the comparative margins obtained, for each of the years indicated in the table.

 

		2009				2008
		(in millions of Ch$)
Total average interest-earning assets
Ch$			7,076,987				6,086,155
UF			7,432,888				7,380,978
Foreign currencies			1,755,717				2,214,621
Total			16,265,592				15,681,754
Net interest earned (1)
Ch$			716,078				659,148
UF			157,055				295,672
Foreign currencies			(16,617	)			(62,754	)
Total			856,516				892,066
Net interest margin (2)
Ch$			10.1	%			10.8	%
UF			2.1	%			4.0	%
Foreign currencies			(0.9	%)			(2.8	%)
Total			5.3	%			5.7	%

 

---

(1)	Net interest earned is defined as interest revenue earned less interest expense incurred.

 

(2)	Net interest margin is defined as net interest earned divided by total average interest-earning assets.

 

Return on Equity and Assets; Dividend Payout

 

The following table presents certain information and selected financial ratios for Santander-Chile for the years indicated.

 

Ch$ million		2009				2008
Net income			436,610				420,967
Average total assets			19,991,910				18,482,094
Average equity			1,599,938				1,299,098
Net income as a percentage of:
Average total assets			2.2	%			2.3	%
Average equity			27.3	%			32.4	%
Average equity as a percentage of:
Average total assets			8.0	%			7.0	%

 

The following table presents dividends declared and paid by us in nominal terms in the following years:

 

Year		Dividend Ch$ mn (1)				Per share Ch$/share (2)				Per ADR Ch$/ADR (3)				% over earnings (4)				% over earnings (5)
2009			213,295				1.13				1,176.00				65				52
2010			258,751				1.37				1,426.63				60				60

---

(1)	Millions of nominal pesos.

 

(2)	Calculated on the basis of 188,446 million shares.

 

(3)	Calculated on the basis of 1,039 shares per ADS.

 

(4)	Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year as required by local regulations.

 

(5)	Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under IFRS.

 

 

 

89

---

Table of Contents

 

Loan Portfolio

 

The following table analyzes our loans by product type. Except where otherwise specified, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including principal amounts of past due loan and substandard loans. Any collateral provided generally consists of a mortgage on real estate, a pledge of marketable securities, a letter of credit or cash. The existence and amount of collateral generally vary from loan to loan.

 

		As of December 31,
		2009				2008
		(Ch$ million)
Commercial Loans:
Commercial loans			5,489,595				5,475,455
Foreign trade loans(1)			636,328				1,459,184
Loans with mortgage guarantee			92,911				121,400
Factoring operations			130,272				323,136
Leasing contracts			964,698				965,094
Other loans and accounts receivables from customers			10,958				11,591
Subtotal			7,324,762				8,355,860
Mortgage loans:
Draft loans			175,592				228,722
Mortgage finance bonds			199,139				197,305
Other mortgage mutual loans			3,784,322				3,554,529
Leasing contracts			-				-
Other loans and accounts receivables from customers			-				-
Subtotal			4,159,053				3,980,556
Consumer loans:
Installment consumer loans			1,378,044				1,347,142
Credit card loans			586,937				582,593
Consumer leasing contracts			3,835				4,865
Other consumer loans			275,233				314,538
Subtotal			2,244,049				2,249,138
Subtotal Loans to customers			13,727,864				14,585,554
Interbank loans			23,412				95,534
Total			13,751,276				14,681,088

---

(1)	The decline in foreign trade loans is due to lower trade volume as a result of the global economic slowdown and a focus on higher yielding loans.

 

The loan categories are as follows:

 

Commercial loans

 

Commercial loans are long-term and short-term loans, including checking overdraft lines for companies granted in Chilean pesos, inflation linked, US$ linked or denominated in US$. The interest on these loans is fixed or variable and is used primarily to finance working capital or investments. General commercial loans also includes factoring operations.

 

Foreign trade loans are fixed rate, short-term loans made in foreign currencies (principally U.S.$) to finance imports and exports.

 

 

 

90

---

Table of Contents

 

Mortgage loans financed with mortgage bonds mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by issuing mortgage bonds.

 

Factoring operations mainly include short-term loans to companies with a fixed monthly nominal rate backed by a company invoice.

 

Leasing contracts are agreements for the financial leasing of capital equipment and other property.

 

Other outstanding loans include other loans and accounts payable.

 

Residential mortgage loans

 

Draft loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These loans can be endorsed to a third party.  These are financed by our general borrowings.

 

Residential mortgage loans backed by mortgage bonds are inflation-indexed, fixed or variable rate, long-term loans with monthly payments of principal and interest secured by a real property mortgage that are financed with mortgage finance bonds. At the time of approval, these types of mortgage loans cannot be more than 75% of the lower of the purchase price or the appraised value of the mortgaged property or such loan will be classified as a commercial loan. Mortgage bonds are our general obligations, and we are liable for all principal and accrued interest on such bonds. In addition, if the issuer of a mortgage finance bond becomes insolvent, the General Banking Law’s liquidation procedures provide that these types of mortgage loans with their correspondin g mortgage bonds shall be auctioned as a unit and the acquirer must continue paying the mortgage finance bonds under the same conditions as the original issuer.

 

Other mortgage mutual loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by our general borrowings.

 

Consumer loans

 

Installment consumer loans are loans to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis, to finance the purchase of consumer goods or to pay for services.

 

Consumer loans through lines of credit are checking overdraft lines to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis and linked to an individual’s checking account.

 

Credit card loans include credit card balances subject to nominal fixed rate interest charges.

 

Consumer leasing contracts are agreements for the financial leasing of automobiles and other property to individuals.

 

Non-client loans

 

Interbank loans are fixed rate, short-term loans to financial institutions that operate in Chile.

 

 

 

91

---

Table of Contents

 

Maturity and Interest Rate Sensitivity of Loans

 

The following table sets forth an analysis by type and time remaining to maturity of our loans at December 31, 2009.

 

		Due in 1 year or less				Due after 1 year through 5 years				Due after 5 years				Total balance at December 31, 2009
		(in millions of Ch$)
General commercial loans			2,414,031				1,954,832				1,120,732				5,489,595
Foreign trade loans			510,427				99,550				26,351				636,328
Leasing contracts			255,535				456,909				252,254				964,698
Other outstanding loans			146,796				87,345				–				234,141
Subtotal commercial loans			3,326,789				2,598,636				1,399,337				7,324,762
Residential loans backed by mortgage bonds			36,904				77,193				61,495				175,592
Other residential mortgage loans			250,723				732,598				3,000,140				3,983,461
Subtotal residential mortgage loans			287,627				809,791				3,061,635				4,159,053
Consumer loans			1,262,996				894,390				86,663				2,244,049
Subtotal			4,877,412				4,302,817				4,547,635				13,727,864
Interbank loans			23,412				–			–					23,412
Total loans			4,900,824				4,302,817				4,547,635				13,751,276

 

The following tables present the interest rate sensitivity of outstanding loans due after one year at December 31, 2009. (See also Item 5: D. Operating Results—Interest Rates.)

 

		As of December 31, 2009
		(in millions of Ch$)
Variable Rate
Ch$			689,171
UF			1,576,384
Foreign currencies			23,764
Subtotal			2,289,319
Fixed Rate
Ch$			3,143,448
UF			2,979,859
Foreign currencies			437,826
Subtotal			6,561,133
Total			8,850,452

 

 

 

92

---

Table of Contents

 

Loans by Economic Activity

 

The following table sets forth, at the dates indicated, an analysis of our client loan portfolio based on the borrower’s principal economic activity and geographic distribution. Loans to individuals for business purposes are allocated to their economic activity.

 

		Domestic loans (*) as of December 31,								Foreign loans as of December 31,								Total loans as of December 31,								% of total loans as of December 31,
		(in millions of Ch$)
		2009				2008				2009				2008				2009				2008				2009 %				2008 %
Commercial loans
Manufacturing			640,395				937,305				–				–				640,395				937,305				4.66				6.39
Mining			67,057				323,269				–				–				67,057				323,269				0.49				2.20
Electricity, gas and water			144,386				207,542				–				–				144,386				207,542				1.05				1.41
Agriculture and livestock			610,909				647,897				–				–				610,909				647,897				4.44				4.41
Forestry			71,085				88,554				–				–				71,085				88,554				0.52				0.60
Fishing			127,025				170,934				–				–				127,025				170,934				0.92				1.16
Transport			362,508				423,856				–				–				362,508				423,856				2.64				2.89
Communications			164,077				192,750				–				–				164,077				192,750				1.19				1.31
Construction			817,293				887,391				–				–				817,293				887,391				5.94				6.04
Commerce			1,650,903				2,219,987				23,409				95,534				1,674,312				2,315,521				12.18				15.78
Services			288,256				395,840				–				–				288,256				395,840				2.10				2.70
Other			2,380,871				1,860,535				–				–				2,380,871				1,860,535				17.31				12.68
Subtotals			7,324,765				8,355,860				23,409				95,534				7,348,174				8,451,394				53.44				57.57
Mortgage loans			4,159,053				3,980,556				–				–				4,159,053				3,980,556				30.24				27.11
Consumer loans			2,244,049				2,249,138				–				–				2,244,049				2,249,138				16.32				15.32
Totals			13,727,867				14,585,554				23,409				95,534				13,751,276				14,681,088				100.00				100.00

 

(*) As of March 31, 2010, foreign country loans, including foreign interbank deposits classified as financial investments totaled Ch$35,763 million, representing 0.18% of our total assets.

 

Classification of Loan Portfolio

 

Credit Review Process

 

The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

 

In addition, Banco Santander Spain is involved in the credit approval process of our largest loans and borrowers. If a single borrower or an economic group owes us an aggregate amount in excess of US$40 million, any additional loan to such borrower or member of such group must be reported to Banco Santander Spain.

 

Credit Approval

 

The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the

 

 

93

---

Table of Contents

 

appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

 

In addition, Banco Santander Spain is involved in the credit approval process of our largest loans and borrowers. If a single borrower or an economic group owes us an aggregate amount in excess of US$40 million, any additional loan to such borrower or member of such group must be reported to Banco Santander Spain.

 

The following table lists our committees from which credit approval is required depending on total risk exposure for loans evaluated on an individual basis:

 

Approved By		Maximum approval in Thousands of US$
Executive Credit Committee		>20,000
Loan Credit Committee			20,000
Business Segment Committee			8,000-10,000
Large Companies			10,000
Real estate sector			10,000
Medium-sized companies			8,000
Regional Committee			5,000
Branch committee			300
Companies			300
Mortgage			120
Persons			30

The Executive Credit Committee is comprised of the Chairman of the Board, three additional Board members, the Corporate Legal Counsel, the CEO, the Manager of Global Banking, the Corporate Director of Risk and two senior members of the Credit Risk department who present the loans being reviewed. This committee reviews the loan positions reviewed by the Senior Credit Committee above US$10 million and approves those loan positions greater than US$20 million. In addition, any loan position above US$40 million must also be reviewed by Banco Santander Spain’s credit committee.

 

The Loan Credit Committee is comprised of the CEO, the Manager of the Wholesale segment, the Manager of the Medium-sized companies segment, General Counsel, the Corporate Director of Credit Risk and the Manager of Credit Admissions. The Loan Credit Committee reviews and will either approve or deny transactions in the range of US$8 million to US$20 million that have been previously approved by one of the Business Segment Committees: (i) Large Companies, (ii) Medium-sized Companies and (iii) Real Estate. The Regional Committees have a maximum approval of up to US$5 million. The Regional Committees oversee the branch networks outside of Santiago. At the branch level, the maximum approval is US$300,000 for companies, US$30,000 for individuals and US$120,000 for mortgages. For the lower level committees, credit granting aut hority varies according to the seniority and experience of the committee members, and the values indicated represent upper limits. All committees include at least two bank officers from the commercial and credit areas.

 

We also have a department designated to monitor the quality of the loan portfolio on a continuous basis. The purpose of this special supervision is to maintain constant scrutiny of the portions of the portfolio that represent the greatest risk and to anticipate any deterioration. Based on this ongoing review of the loan portfolio, we believe that we are able to detect problem loans and make a decision on a client’s status. This includes measures such as reducing or extinguishing a loan, or requiring better collateral from the client. The control systems require that these loans be reviewed at least three times per year for those clients in the lowest category of credit watch.

 

Credit Approval: Corporate

 

In preparing a credit proposal for a corporate client, Santander-Chile’s personnel verify such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process, and prepares the credit application for the client. All proposals contain an analysis of the client’s strengths and weaknesses, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiaries and affiliates.

 

 

 

94

---

Table of Contents

 

Credit Approval: Retail Banking

 

Retail loans are evaluated and approved by the Risk for Individuals, Micro businesses and Small Businesses Division. The majority of loans to individuals are approved by the Standardized Risk Area. The credit evaluation  process is based on an evaluation system known as Garra for Banco Santander and Syseva for Santander Banefe, both processes are decentralized, automated and are based on a scoring system which incorporates our Credit Risk Policies.

 

The credit evaluation process is based on the gathering of information to determine a client’s financial stability, payment capacity and commercial nature. The following parameters are used to evaluate an applicant’s credit risk: (i) income, (ii) length of current employment, (iii) indebtedness, (iv) credit reports and (v) background information, which is accessed by means of internal and external databases. Operations which cannot be approved by Garra or Syseva are sent to the Approval Center, a centralized area that carries out yearly analyses and renewals of credit lines and credit cards and evaluates higher risk credits.

 

The following table lists our approval limits for loans evaluated using standardized statistical models:

 

Bank excluding Banefe

 

Non-mortgage loans

 

Approved By		Non-Mortgage Loans Up to Ch$ million
Corporate Manager of Standardized Risk			300
Manager Approval Center			150
Segment Risk Manager			100
Risk Manager			80
Senior Analyst			40
Junior Analyst			10

Mortgage loans

 

Approved by:		Mortgage Loans Up to UF
Corporate Manager of Standardized Risk			20,000
Admissions Manager			14,000
Segment Risk Manager			9,000
Risk Manager			9,000
Senior Analyst			5,000
Junior Analyst			3,000

Santander Banefe

 

Non-mortgage loans

 

Approved By		Non-Mortgage Loans Up to Ch$ million
Corporate Manager of Standardized Risk			300
Manager Approval Center			150
Segment Risk Manager			20
Risk Manager			15
Risk Analyst			6

 

 

 

95

---

Table of Contents

 

Mortgage loans

 

Approved By		Mortgage Loans Up to UF
Corporate Manager of Standardized Risk			20,000
Admissions Manager			14,000
Segment Risk Manager			4,000
Risk Manager			2,500
Risk Analyst			1,500

Classification of Loan Portfolio

 

Loans are divided into: (i) consumer loans (including loans granted to individuals for the purpose of financing the acquisition of consumer goods or payment of services); (ii) residential mortgage loans (including loans granted to individuals for the acquisition, construction or repair of residential real estate, in which the value of the property covers at least 100% of the amount of the loan); and (iii) commercial loans (includes all loans other than consumer loans and residential mortgage loans). The models and methods used to classify our loan portfolio and establish credit loss allowances must follow the following guiding principles, which have been established by the Superintendency of Banks and approved by our Board of Directors.

 

Allowances for large commercial loans

 

For large commercial loans, leasing and factoring, the Bank assigns a risk category level to each borrower and its respective loans. The Bank considers the following risk factors: industry or sector of the borrower, owners or managers of the borrower, borrower’s financial situation, its payment capacity and payment behavior. The Bank assigns one of the following risk categories to each loan and borrower:

 

i.

Classifications A1, A2 and A3 correspond to borrowers with no apparent credit risk.

 

ii.

Classification B corresponds to borrowers with some credit risk but no apparent deterioration of payment capacity.

 

iii.

Classifications C1, C2, C3, C4, D1 and D2 correspond to borrowers whose loans have deteriorated.

 

For loans classified as A1, A2, A3 and B, the Bank assigns a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case-by-case basis. The amount of allowances for the remaining classifications is set by the Superintendency of Banks as described below. All commercial loans for companies, including leasing and factoring, have been individually rated. In determining provisions, we make a distinction between normal debtors and deteriorated debtors.

 

Debtor Classes

 

Two debtor classes have been determined based on debtors’ credit behavior in order to calculate loan loss allowance:

 

·	Normal Debtors, which are classified as A1, A2, A3 or B, are current on their payment obligations and show no sign of deterioration in their credit quality.

 

·	Deteriorated Debtors, which are classified as C1, C2, C3, C3, C4, D1 or D2, includes loans with us have been charged off or administered by our Recovery Unit, or classified as Precontenciosos (PRECO or Deteriorated).

 

 

 

96

---

Table of Contents

 

Expected Loan Loss = Loan Loss Allowance

 

The expected loss is obtained by multiplying all risk factors defined in the following equation:

 

EL

=

PNP x EXP x SEV

 

EL	=	Expected Loss
PNP	=	Probability of Non-Performing
EXP	=	Exposure
SEV	=	Severity

EL = Expected Loss. The expected loss is how much could be lost in the event a debtor does not perform the obligations under the loan.

 

PNP = Probability of Non-Performing. This variable, expressed as a percentage, indicates the probability that a debtor will default next year. This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates. The internal rating can be different from ratings obtained from external third parties.

 

EXP  = Exposure. This corresponds to the value of commercial loans without discounting the value of guarantees or collateral.

 

SEV  = Severity. This is the effective loss rate for debtors in the same segment, which is determined statistically based on the historical effective losses for the Bank for each segment.

 

Determination of loan loss allowance  according to Borrower Class

 

Normal Debtors

 

·	The loan loss allowance for each debtor is calculated based on the Expected Loss equation (EL = PNP * EXP * SEV).

 

·	A risk category is assigned to each debtor based on the PNP summarized in the following table:

 

PNP result		Classification		Loan loss allowance
External Classification> AA-		A1		Determined by a
PNP ≤  1%		A2		model
1% < PNP ≤  4%		A3		on an
PNP > 4%		B		individual basis

Deteriorated Debtors

 

For loans classified in Categories C1, C2, C3, C4, D1 and D2, the Bank must have the following levels of allowance, which are required by the provisioning model of the Bank:

 

Classification		Estimated loss		Allowance(1)
C1		Up to 3%		2%
C2		More than 3% up to 19%		10%
C3		More than 19% up to 29%		25%
C4		More than 29% up to 49%		40%
D1		More than 49% up to 79%		65%
D2		More than 79%		90%

---

(1)	Represents percentages of the aggregate amount of principal and accrued but unpaid interest of the loan.

 

 

 

97

---

Table of Contents

 

New Guidelines of Provisioning Levels for Contingent Loans in 2010

 

Commencing in January 2010, all Chilean banks will be required by the SBIF to include in the calculation of expected loss and reserve levels, a percentage of off-balance sheet contingent loans. This includes, among others, lines of credit approved but not disbursed, unused credit card lines, stand-by letters of credit and other operations guaranteed by the Bank.  As a result, a greater percentage of these assets will be included in the calculation of risk weighted assets.  The impact of this change was Ch$52,662 million charged against equity as of March 31, 2010. This provision only applies to locally filed financial statements.

 

Off-balance sheet contingent operations		Percentage of total debt outstanding to be included in new risk weightings
Guarantees		50%-100%
Lines of credit and unused credit card balances		50%
Stand-by letters of credit		20%

 

Allowances for consumer loans

 

Consumers are assigned an allowance level on and based on credit risk profiles, utilizing a more automated statistical model and considering such borrower’s credit history, including any defaults on obligations to other creditors, as well as the overdue periods on loans from us. We differentiate between old and new clients when determining a client’s risk profile for consumer loans and those that have gone through some type of renegotiation in the past in the financial system. All loans are assigned a provision at the moment a loan is granted depending on the risk profile of the client. We are continuously improving and recalibrating our credit scoring and provisioning models and this may change the minimum provision standards for the various client p rofiles as depicted in this document.  The following table sets forth the required allowances for consumer loans in 2009.

 

				Allowance Level(1)
				Not renegotiated								Renegotiated
Loan type		Risk Profile		New Clients				Old Clients				New Clients				Old Clients
Consumer		Profile 1			30.5	%			21.0	%			31.4	%			38.4	%
		Profile 2			21.7	%			17.7	%			21.2	%			26.4	%
		Profile 3			14.9	%			9.7	%			6.1	%			22.1	%
		Profile 4			12.3	%			6.2	%							8.90	%
		Profile 5			8.9	%			2.9	%							2.10	%
		Profile 6			5.7	%			1.4	%			-				-
		Profile 7			2.7	%			0.6	%			-				-

---

(1)	Percentage of total outstanding.

 

Allowances for residential mortgage loans

 

Residential mortgage loans are assigned an allowance level based on credit risk profiles, utilizing a more automated and sophisticated statistical model and considering such borrower’s credit history, including any defaults on obligations to other creditors, as well as the overdue periods on the loans borrowed from us. Once the rating of the client is determined, the allowance for mortgage loans is calculated using a risk category and related allowance to loan ratio, which is directly related to the overdue periods. The following table sets forth the allowance to loan ratios on loans based on overdue time.  The ratios represent the percentage of required allowance amount to the aggregate amount of the principal and accrued but unpaid interest on the loan.

 

Loan type			Overdue days
				1-30				31-60				61-120				121-180				181-360				361- 720			>720
Mortgage	Profile 1			0.3	%			0.5	%			1.2	%			2.4	%			6.8	%			14.1	%			28.3	%
	Profile 2			1.5	%			1.6	%			2.5	%			4.4	%			6.8	%			14.1	%			28.3	%

 

 

 

98

---

Table of Contents

 

Allowances for group evaluations on small and mid-sized commercial loans

 

·	Allowances based on group evaluations are permitted for a large number of borrowers whose individual loan amounts are relatively insignificant. These models are intended to be used primarily to analyze commercial loans to individuals and small companies.

 

·	Levels of required reserves are to be determined by the Bank, according to the estimated loss that may result from the loans, by classifying the loan portfolio using one or both of the following models:

 

i.

A model based on the characteristics of the borrowers and their outstanding loans—borrowers and their loans with similar characteristics will be placed into groups and each group will be assigned a risk level.

 

ii.

A model based on the behavior of a group of loans—loans with analogous past payment histories and similar characteristics will be placed into groups and each group will be assigned a risk level.

 

Additional reserves

 

Banks are permitted to establish allowances above the limits described above only to cover specific risks that have been authorized by their Board of Directors. Voluntary reserves that cover no specific risk are no longer permitted.

Analysis of Santander Chile’s Loan Classification

 

The following tables provide statistical data regarding the classification of our loans at December 31, 2008 and 2009.

 

		As of December 31, 2009
Category		Commercial Loans				Consumer Loans				Residential Mortgage Loans				Total Loans				Percentage Evaluated Loans
A			–				1,895,241				–				1,895,241				13.8	%
A1			–				–				–				–				–
A2			3,187,959				–				3,808,195				6,996,154				50.9	%
A3			2,998,956				–				223,928				3,222,884				23.5	%
B			601,080				165,181				10,481				776,742				5.5	%
B-			–				69,150				–				69,150				0.5	%
C			–				74,735				3,636				78,371				0.6	%
C1			224,732				–				18,101				242,833				1.8	%
C2			97,885				–				8,640				106,525				0.8	%
C3			60,679				–				2,012				62,691				0.4	%
C4			56,985				–				27,294				84,279				0.6	%
D			–				39,742				–				39,742				0.3	%
D1			80,574				–				42,438				123,012				0.9	%
D2			39,324				–				14,328				53,652				0.4	%
Totals			7,348,174				2,244,049				4,159,053				13,751,276				100.0	%

 

		As of December 31, 2008
Category		Commercial Loans				Consumer Loans				Residential Mortgage Loans				Total Loans				Percentage Evaluated Loans
A			–				1,811,060				3,562,617				5,373,677				36.7	%
A1			–				–				–				–				–	%
A2			6,463,445				–				–				6,463,445				44.0	%
A3			1,351,054				–				–				1,351,054				9.2	%
B			208,954				203,375				199,087				611,416				4.2	%
B-			–				75,281				79,930				155,211				1.1	%
C			–				94,507				64,972				159,479				1.1	%
C1			220,434				–				–				220,434				1.5	%
C2			26,738				–				–				26,738				0.2	%
C3			34,296				–				–				34,296				0.2	%
C4			36,100				–				–				36,100				0.2	%
D			–				64,915				73,950				138,865				0.9	%
D1			48,711				–				–				48,711				0.3	%
D2			61,662				–				–				61,662				0.4	%
Total loans			8,451,394				2,249,138				3,980,556				14,681,088				100.0	%

 

 

 

99

---

Table of Contents

 

Classification of Loan Portfolio Based on the Borrower’s Payment Performance

 

Accrued interest from overdue loans are recognized only when, and to the extent, received. Non-performing loans includes loans as to which either principal or interest is more than 90 days overdue, and which do not accrue interest.

 

Past due loans include, with respect to any loan, only the portion of principal or interest that is overdue for 90 or more days, and do not include the installments of such loan that are not overdue or that are overdue for less than 90 days, unless legal proceedings have been commenced for the entire outstanding balance according to the terms of the loan, in which case the entire loan is considered past due within 90 days of the beginning of such proceedings.

 

Substandard loans in 2008 include: (i) all non-performing loans, (ii) all renegotiated consumer loans and (iii) all commercial loans that are at risk of default. As of December 31, 2009 substandard loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See Note 10(a) of the Consolidated Financial Statements. As a result of this change in definition substandard loans as of December 31, 2009 are not comparable to December 31, 2008 figures. Restructured loans, on which payments are not overdue, are not ordinarily classified as non-performing loans, but do not accrue interest. Prior to 2009, only restructured commercial loans did not accrue interest.

 

The term for charging-off loans must now be calculated from the beginning of arrears (one installment is 90 days overdue) and once this term is reached, the entire loan is charged-off . The following is a table showing the principal types of loans and their respective terms for charge-offs as stipulated by the new accounting standards:

 

Type of contract		Term
Leasing Operations
Consumer leasing		6 months
Other leasing operations		12 months
Property leasing (commercial or residential)		36 months
Other Operations
Consumer credits with or without real guarantees		6 months
Other operations without real guarantees		24 months
Commercial credits with real guarantees		36 months
Mortgage loans for housing		48 months

We may write off any loan (commercial or consumer) before the first installment becomes overdue only in accordance with special procedures established by the Superintendency of Banks. In certain circumstances, we must write off an overdue loan (commercial or consumer) sooner than the terms set forth above. Loans are written off against the loan loss reserve to the extent of any required allowances for such loans; the remainder of such loans is written off against income.

 

In general, legal collection proceedings are commenced with respect to consumer loans once they are overdue for 90 days and, with respect to mortgage loans, once they are past due for 120 days. Legal collection proceedings are always commenced within one year of such loans becoming past due, unless we determine that the size of the past due amount does not warrant such proceedings. In addition, the majority of our commercial loans are short–

 

 

100

---

Table of Contents

 

 

term, with single payments at maturity. Past due loans are required to be covered by individual loan loss reserves equivalent to 100.0% of any unsecured portion thereof.

 

The following table sets forth a loan aging schedule at the end of 2008 and 2009. Amounts shown as overdue and past due include only installments that are overdue or past due and not the aggregate principal amount of such loans.

 

 

 

101

---

Table of Contents

 

		As of December 31,
		2009				2008
		(in millions of Ch$, except percentages)
Overdue for 1-29 days(1)			36,264				50,029
Overdue for 30-89 days(1)			22,846				41,022
Overdue for 90 days or more (Past due loans) (2)			193,250				160,824
Non-performing loans(3)			409,067				383,458
Substandard loans(4)			1,485,737				870,259
Total loans			13,751,276				14,681,088
Overdue loans expressed as a percentage of total loans			1.84	%			1.72	%
Past due loans expressed as a percentage of total loans			1.41	%			1.10	%
Non-performing loans as a percentage of total loans			2.97	%			2.61	%
Substandard loans as a percentage of total loans			10.80	%			5.93	%

---

(1)	Includes only the overdue portion. Does not include the aggregate principal amount of such loans.

 

(2)	All installments and lines of credit more than 90 days overdue. Does not include the aggregate principal amount of such loans.

 

(3)	Non-performing loans are all loans with at least one installment over 90 days overdue and includes the aggregate principal amount of such loans.

 

(4)

Substandard loans prior to December 2009 include: (i) all non-performing loans, (ii) all renegotiated consumer loans and (iii) all commercial loans that are at risk of default. As of December 31, 2009, substandard loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans with some risk of default. See Note 10(a) of the Consolidated Financial Statements. As a result of this change in definition substandard loans as of December 31, 2009 are not comparable to December 31, 2008 figures.

 

(5)	Includes reserves for interbank loans.

 

(6)	Includes interbank loans.

 

We suspend the accrual of interest and readjustments on all overdue loans. The amount of interest that would have been recorded on overdue loans if they had been accruing interest was Ch$20,320 million and Ch$21,899 million for the years ended December 31, 2008 and 2009, respectively. Accrued interest and UF indexation adjustments from overdue loans are recognized only when, and to the extent, received.

 

Loans included in the previous table which have been restructured and that bear no interest are as follows.

 

		As of December 31,
		2009				2008
		(Ch$ million)
Ch$			276,703				17,631
Foreign currency			45,030				2,556
UF			78,973				32,941
Total			400,706				53,128

 

The amount of interest that would have been recorded on these loans for the years ended December 31, 2008 and 2009, if these loans had been earning a market interest rate was Ch$7,461 million and Ch$47,888 million, respectively.  The increase in foregone interest is mainly due to a regulatory change in 2009 which prohibited banks from recognizing interest on restructured consumer loans. We do not accrue interest on restructured loans.

 

 

 

102

---

Table of Contents

 

Loan Loss Allowances

 

The following table sets forth our balance of loan loss allowances, the minimum allowances to be established by us in accordance with the regulations of the Superintendency of Banks and our total loan loss allowances expressed as a percentage of total loans as of December 31, 2008 and 2009.

 

		As of December 31,
		2009				2008
		In millions of Ch$
Individual, global and additional loan loss allowances			349,527				274,240
Minimum reserves required			349,527				274,240
Voluntary reserves			-				-
Total loan loss allowances			349,527				274,240
Total loan allowances as a percentage of total loans (expected loss ratio)			2.5	%			1.9	%

 

Analysis of Substandard Loans and Amounts Past Due

 

The following table analyzes our substandard loans. Substandard loans in 2008 include: (i) all non-performing loans, (ii) all renegotiated consumer loans and (iii) all commercial loans that are at risk of default. As of December 31, 2009, substandard loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See Note 10(a) of the Consolidated Financial Statements. As a result of this change in definition substandard loans as of December 31, 2009 are not comparable to December 31, 2008 figures.

 

		As of December 31,
		2009				2008
		(Ch$ million)
Total loans			13,751,276				14,681,088
Substandard loans			1,485,737				870,259
Substandard loans as a percentage of total loans			10.80	%			5.93	%
Amounts past due			193,250				160,824
To the extent secured			114,282				69,053
To the extent unsecured			78,968				91,771
Amounts past due as a percentage of total loans			1.41	%			1.10	%
To the extent secured(2)			0.83	%			0.47	%
To the extent unsecured			0.57	%			0.63	%
Loans loss allowances as a percentage of:
Total loans			2.54	%			1.87	%
Total amounts past due			180.87	%			170.52	%
Total amounts past due-unsecured			442.62	%			298.83	%

 

---

(1)          Security generally consists of mortgages on real estate, pledges of marketable securities, letters of credit or cash.

 

 

Analysis of Loan Loss Allowances

 

The following table analyzes our loan loss allowances and changes in the allowances attributable to write-offs, provisions, allowances released, allowances on loans acquired.  Loan loss allowances must be debited the full amount of all charge-offs (irrespective of whether the charged-off loan was fully provisioned) and simultaneously credited the same amount through the taking of a new provision. The net effect of these two entries, which are included in the table below under “charge-offs” and “allowances established,” respectively, is to leave the loan loss allowance unchanged following the charge-off of a loan. Subsequently, at the end of each calendar month, loan loss allowances are released to the extent not needed. Such releases, which are included in the table below under

 

 

 

103

---

Table of Contents

 

“allowances released,” therefore include any amounts relating to provisions originally made in respect of loans that have been charged off.

 

		Year Ended December 31,
		2009				2008
		(in millions of Ch$, except percentages)
Loan loss allowances at beginning of the year			274,240				230,404
Release of allowances upon charge-offs (1)			(295,831	)			(274,372	)
Allowances established (2)			398,416				326,121
Allowances released (3)			(27,298	)			(7,913	)
Loan loss allowances at end of year			349,527				274,240
Ratio of charge-offs to total loans			2.0	%			2.0	%
Loan loss allowances at end of period as a percentage of total loans			2.5	%			1.9	%

 

---

(1)	Reflects release of loan loss allowance equal to the entire amount of loans charged off, including any portion of such loans with respect to which no allowance had been established prior to the charge-off.

 

(2)	Includes, in addition to provisions made in respect of increased risk of loss during the period, provisions made to replace allowances released upon charge-off of loans. See Note (1) to this table.

 

(3)	Represents the amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and the charge-off of loans.

 

The following table shows charge-offs by Santander-Chile by type of loan.

 

		Year Ended December 31,
		2009				2008
		(in millions of Ch$)
Commercial loans			48,118				32,935
Consumer loans			239,005				236,405
Residential mortgage loans			8,708				5,032
Total			295,831				274,372

The following table shows recoveries by Santander-Chile by type of loan.

 

		Year Ended December 31,
		2009				2008
		(in millions of Ch$)
Commercial loans			8,446				9,244
Consumer loans			28,268				26,718
Residential mortgage loans			2,560				1,932
Total			39,274				37,894

 

Based on information available regarding our borrowers, we believe that our loan loss allowances are sufficient to cover known potential losses and losses inherent in a loan portfolio of the size and nature of our loan portfolio.

 

 

 

104

---

Table of Contents

 

Allocation of the Loan Loss Allowances

 

The following tables set forth, at December 31 of each of the two  years, the proportions of our required minimum loan loss allowances that were attributable to our commercial, consumer and residential mortgage loans, and the amount of voluntary allowances (which are not allocated to any particular category) at each such date.

 

		As of December 31, 2009																As of December 31, 2008
		Allowance amount (1)				Allowance amount as a percentage of loans in category				Allowance amount as a percentage of total loans				Allowance amount as a percentage of total allocated allowances (2)				Allowance amount (1)				Allowance amount as a percentage of loans in category				Allowance amount as a percentage of total loans				Allowance amount as a percentage of total allocated allowances (2)
Commercial loans			158,600				2.49	%			1.15	%			46.42	%			107,656				1.46	%			0.73	%			40.22	%
Consumer loans			166,503				4.00	%			1.21	%			48.74	%			147,446				3.70	%			1.00	%			55.07	%
Residential mortgage loans			16,534				0.74	%			0.12	%			4.84	%			12,630				0.56	%			0.09	%			4.71	%
Total allocated allowances			341,637				2.68	%			2.48	%			100.00	%			267,732				1.97	%			1.82	%			100.00	%
Leasing			7,848				0.81	%			0.06	%							6,473				0.67	%			0.04	%
Interbank loans			42				0.18	%			-	%							35				0.04	%			-	%
Total allowances			349,527				2.54	%			2.54	%							274,240				1.87	%			1.87	%

 

 

 

105

---

Table of Contents

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Directors

 

We are managed by our Board of Directors, which, in accordance with our by-laws, consists of 11 directors and two alternates who are elected at annual ordinary shareholders’ meetings. Except as noted below, the current members of the Board of Directors were elected by the shareholders in the ordinary shareholders’ meeting held on April 22, 2008. Members of the Board of Directors are elected for three-year terms. Except as noted below, the term of each of the current board members expires in April of 2011. Cumulative voting is permitted for the election of directors. The Board of Directors may appoint replacements to fill any vacancies that occur during periods between elections. If any member of the Board of Directors resigns before his or her term has ended, and no other alternate director is available to take the position at the next annual ordinary shareholders’ meeting a new replacing member will be elected. Our executive officers are appointed by the Board of Directors and hold office at its discretion. Scheduled meetings of the Board of Directors are held monthly. Extraordinary meetings can be held when called in one of three ways: by the Chairman of the Board of Directors, by three directors with the consent of the Chairman of the Board of Directors or by the majority of directors. None of the members of our Board of Directors has a service contract which entitles any Director to any benefits upon termination of employment with Santander-Chile.

 

Our current directors are as follows:

 

Directors	Position	Committees	Term Expires
Mauricio Larraín Garcés	Chairman and Director	Asset and Liability Committee Executive Credit Committee Market Committee Marketing and Communications Committee University Committee	April 2011
Jesús Zabalza Lotina	First Vice Chairman and Director	—	April 2011
Oscar Von Chrismar Carvajal	Second Vice Chairman and Director	Asset and Liability Committee Executive Credit Committee Market Committee Strategy Committee Technology Committee	April 2011
Carlos Olivos Marchant	Director	Audit Committee Executive Credit Committee	April 2011
Víctor Arbulú Crousillat	Director	Audit Committee	April 2011
Marco Colodro Hadjes	Director	Asset and Liability Committee Executive Credit Committee Market Committee	April 2011
Lucía Santa Cruz Sutil (1)	Director	Audit Committee University Committee	April 2011
Roberto Méndez Torres	Director	Executive Credit Committee Marketing and Communications Committee University Committee	April 2011
Vittorio Corbo Lioi	Director	Asset and Liability Committee Market Committee	April 2011
Roberto Zahler Mayanz (1)	Director	Asset and Liability Committee Market Committee	April 2011
Claudia Bobadilla Ferrer	Director	Technology Committee Analysis and Resolution Committee	April 2011
Juan Manuel Hoyos Martínez de Irujo	Alternate Director	Strategy Committee	April 2011
Raimundo Monge Zegers	Alternate Director	Asset and Liability Committee Strategy Committee	April 2011

 

(1)  In May 2010 Lucía Santa Cruz resigned from the Audit Committee and was replaced by Roberto Zahler, an independent Board member.

 

 

 

106

---

Table of Contents

 

 

Mauricio Larraín Garcés is our Chairman. He is a member of the Asset and Liability Committee, the Executive Credit Committee, the Market Committee, the Marketing and Communications Committee and the University Committee. He is also President of Santander Chile Holding S.A. and Universia Chile S.A. He is a Director of the Asociación de Bancos e Instituciones Financieras de Chile and the Santiago Stock Exchange. He is also a member of the Council of Paz Ciudadana and was a former President of ICARE. Mr. Larraín began working at Santander-Chile in 1989. Previously, he was Intendente (Director) of the Superintendency of Banks, Manager of External Debt at the Banco Central de Chile and a Senior Finance Specialist at the World Bank in Washington. He holds degrees in Law from Universidad Católica de Chile and from Harvard University.

 

Jesús María Zabalza Lotina became a Director and Vice-Chairman of the Board on October 28, 2008. He currently is a Director of Grupo Santander’s Latin America Division and a Board member of Banco Santander Puerto Rico and President of the Board of Banco Santander Colombia. Mr. Jesús Zabalza is a patron of the Fundación Padre Garralda. Previously, Mr. Zabalza was Director of Retail Banking in Madrid of Banco BBVA. He was also on the Board of e-La Caixa, Telefónica Factoring S.A, Adeslas y Terra. Mr. Zabalza holds a degree in Industrial Engineering from the University of Bilbao.

 

Oscar von Chrismar Carvajal became Executive Vice-Chairman of the Board on January 1, 2010 after having served as the chief executive officer of Santander-Chile since August 2003.  Mr. Von Chrismar is a member of the Asset and Liability Committee, Executive Credit Committee, Market Committee, Strategy Committee and the Technology Committee.  Prior to assuming the chief executive officer post, he was the Manager of Global Banking. Prior to the merger, he was the former chief executive officer of Old Santander-Chile since September 1997, after being General Manager of Banco Santander-Peru since September 1995. Mr. von Chrismar is also Alternate Director of Universia Chile S.A. Prior to that, Mr. von Chrismar was the manager of the Finance Divisi on of Santander-Chile, a position that he had held since joining Santander-Chile in 1990. Mr. von Chrismar holds an Engineering degree from the Universidad de Santiago de Chile.

 

Carlos Olivos Marchant is Director since 2007 and has been a Board member since the merger was consummated in 2002. He is Chairman of the Audit Committee and a member of the Executive Credit Committee. He was Chairman of the Board of Santiago since 1987 until the date of the merger, and he was Chairman of that board between May 1999 until the merger. He is a partner in the law firm Guerrero, Olivos, Novoa y Errazuriz. From 1981 to 1983, Mr. Olivos served as General Counsel of the Central Bank of Chile, and from 1984 to 1986, he served as Chairman of the Board of Directors of Banco Osorno. Mr. Olivos holds a law degree from the Universidad de Chile and a Masters of Jurisprudence from New York University School of Law.

 

Vittorio Corbo Lioi is one of Chile’s leading economists. In 2003, Mr. Corbo was named President of Chile’s Central Bank. Following the end of his tenure there, Mr. Corbo has been named to various boards and is currently a Senior Investigator at the Centro de Estudio Públicos (CEP), a local think tank. Previously, Mr. Corbo between 1991 and 1995 was an economic advisor to the Bank and a member of the Board of Santander Chile between 1995 and 2003. Mr. Corbo is a member of the Asset and Liability Committee and the Market Committee. Mr. Corbo has a Business Administration Degree from the Universidad de Chile and a Ph.D. in Economics from MIT.

 

Víctor Arbulú Crousillat became a Director on May 6, 1999. He is a member of the Audit Committee and has been designated as a Financial Expert. He was a Managing Director of JPMorgan, member of its European management committee and Chief Executive Officer for Spain and Portugal from 1988 until 1998. He has worked for JPMorgan for over 25 years in various positions in Europe, North America and Latin America. Mr. Arbulú also worked for the Inter-American Development Bank. He is also Director of Aurum S.A. Mr. Arbulú holds a degree in Engineering and a Masters of Business Administration.

 

Marco Colodro Hadjes became a Director on April 19, 2005. Mr. Colodro is a member of the Asset and Liability Committee, Executive Credit Committee and Market Committee. Mr. Colodro was President of the Board of Telefónica Chile and a Director of Codelco. He is a former chairman of TVN (national television network) and former vice chairman of Banco del Estado (state bank). He was also owner of Agencia de Valores Alfa S.A. Prior to that, he was Foreign Trade Director at the Central Bank of Chile. Mr. Colodro holds a degree in Economics from the Universidad de Chile, and has done post-graduate studies at the University of Paris.

 

 

 

107

---

Table of Contents

 

Lucía Santa Cruz Sutil became a Director on August 19, 2003. Ms. Santa Cruz was a member of the Bank’s Audit Committee until May 2010 and the University Committee. Ms. Santa Cruz holds a degree in History and a Masters Degree in Philosophy from Oxford University. She is the Dean of the College of Liberal Arts of the Universidad Adolfo Ibañez. Ms. Santa Cruz is also a Director of Universia Chile S.A. She is also on the Board of Compañía de Seguros Generales y de Vida La Chilena Consolidada and Fundación Minera Escondida. She is also on the Advisory Board of Nestle Chile and the Fundación Educacional Santa Teresa de Avila. She is also a member of the Self-Regulation Committee for Insurance Companies in Chile.

 

Roberto Méndez Torres is a former member of the Board of Old Santander-Chile, to which he was appointed in 1996. He is a member of the Executive Credit Committee, the Marketing and Communication Committee and the University Committee. He is a professor of Economics at Universidad Católica de Chile. He has been Advisor to Grupo Santander-Chile since 1989. Mr. Méndez is President and Director of Adimark Chile Gfk and on the Board of the Chilean and German Chamber of Commerce. He is also Vice-Chairman of Universia S.A. He graduated with a degree in Business from Universidad Católica de Chile, and holds an MBA and a Ph.D. from the Graduate School of Business at Stanford University.

 

Roberto Zahler Mayanz became a Director on August 31, 1999. He is a member of the Audit Committee since May 2010, the Asset and Liability Committee and the Market Committee. Currently, he is President of Zahler & Co, a consulting firm. He is also Director of Air Liquide-Chile and member of the CLAAF or the Latin American Committee for Financial Affairs. He was formerly President of the Board of Siemens Chile. He was also a visiting professor at the IMF’s Research Department. Between 1991 and 1996, he was President of the Central Bank of Chile and Vice-President from 1989 to 1991. He also serves as a consultant for the World Bank, the IDB, the IMF and the International Bank of Settlements. Mr. Zahler has also provided technical assistance to various Cent ral Banks and Finance Ministries in most countries of Latin America, Indonesia and Kosovo. Mr. Zahler holds a degree in Business Administration from the Universidad de Chile and a Masters in Economics from the University of Chicago.

 

Claudia Bobadilla Ferrer was elected to the Board in April 2006. She is a member of the Technology Committee and the Analysis and Resolution Committee. She is CEO of Fundación País Digital, a member of the Executive Committee of Innovation and Technology of ICARE, council member of Endeavor Chile and Executive Director of the Chile-Japón Siglo XXI Committee. She was also founder and President of Comunidad Mujer, an organization dedicated to increasing women’s participation in the workforce. She is a member of the council of Fundación Chilena del Pacífico, Proyecto Astronómico ALMA and Movimiento Educación 2020. She was previously Director of Legal Affairs at Terra Networks Chile S.A. She is a lawyer from the Universidad Di ego Portales.

 

Juan Manuel Hoyos Martínez de Irujo was the Managing Director of McKinsey & Company in Spain from 1997 to 2003 where he was also President of the Client Committee of McKinsey’s Board. He began his career at McKinsey where he was named partner in 1984 and Director in 1991. Currently, he is in charge of partner development worldwide and continues to serve on the Board. His consulting career has been focused in the areas of strategy and organization of corporations, especially in the telecommunications, banking and metallurgy sectors. He has worked with companies in Spain, the United States, Latin America, the United Kingdom, Portugal and Africa.  He is currently a member of the Strate gy Committee of the Bank.  He received an economics degree from the Universidad Complutense de Madrid and holds an MBA in Finance and Accounting from Columbia University.

 

Raimundo Monge Zegers became an Alternate Director on April 29, 2003.  He is currently a member of the Strategy Committee of the Bank. He is Corporate Director of Strategic and Financial Planning for Grupo Santander-Chile and is CEO of Santander-Chile Holding S.A. and Santander Inversiones Ltda. He is also President of Santander S.A. Sociedad Securitizadora and Santander Factoring S.A. He is a Director of Aurum S.A., Santander Asset Management Chile S.A. and Bansa Santander S.A. Mr. Monge has a degree in business from the Universidad Católica de Chile and an MBA from the University of California, Los Angeles.

 

 

 

108

---

Table of Contents

 

Senior Management

 

Our senior managers are as follows:

 

Senior Manager		Position		Date Appointed
Claudio Melandri		Chief Executive Officer		January 1, 2010
Gabriel Montoya		Corporate Financial Controller		April 1, 2009
José Manuel Manzano		Corporate Director of Risk		July 1, 2007
Javier Montero		Corporate Director of Internal Audit		May 1, 2010
Alejandra Mehech		Corporate Director Human Resources		May 1, 2010
Joaquín Quirante		Global Banking and Markets		March 11, 2008
Francisco Murillo		Manager Retail Banking		May 1, 2010
Felipe Contreras		Chief Accounting Officer		October 1, 2008
Juan Fernández		Administration and Operations		July 18, 2002
Emiliano Muratore		Manager Financial Management		April 8, 2008
Juan Pedro Santa María		General Counsel		July 30, 2009

Claudio Melandri became the Chief Executive Officer of Santander-Chile in January 2010 after being our Retail Banking Manager since February 21, 2008. He started his career at Santander-Chile in 1990 becoming a regional branch manager and manager of Santander-Chile’s branch network. He was also a Vice-President at Banco Santander Venezuela from 2005 to 2007. In 2007, he was appointed Corporate Director of Human Resources of Banco Santander-Chile. He is also on the Board of Santander Seguros de Vida S.A., Santander Asset Management S.A. Administradora General de Fondos and Santander Seguros Generales S.A. Mr. Melandrí has a Business Degree from the Universidad Tecnológica Metropolitana in Chile.

 

Gabriel Montoya B. was appointed Financial Controller of Santander Chile in April 2009 and has been working for Santander Spain and its affiliates since 1997. Between 2005-2009, Mr. Montoya was Director of the MIS America Project and was responsible for implementing management information systems in Chile, Mexico, Puerto Rico, Argentina and Brazil. Previous to that Mr. Montoya was Financial Controller of Santander Puerto Rico, Head of Financial Control for the Americas Division of Santander and various other management positions in Santander Colombia. He is a Director of  Santander Consumer Chile S.A. Mr. Montoya has a Business Administration Degree from Universidad del Rosario and an Executive Administration Diploma from the Universidad de los Andes, b oth in Colombia.

 

José Manuel Manzano became Corporate Director of Risk in July 2007. Prior to that he was Corporate Director of Human Resources for Santander-Chile since October 31, 2002. Previously, he served as Manager of Human Resources for Old Santander-Chile since 1999. He was also General Manager of Santander Fund Management and Managing Director of Bancassurance. He is also a Director of Santander Chile Holding and Santander S.A. Sociedad Securitizadora. Mr. Manzano holds an MBA and a degree in Business from Universidad Católica de Chile.

 

Javier Montero is the Corporate Director of Internal Auditing, a position he has held since May 1, 2010. Prior to that he was Manager of Internal Auditing in the Financial Risk Department at Banco Santander Chile since 2006. Mr. Montero has worked for Grupo Santander since 2000 in the Internal Auditing Division of Grupo Santander. Mr. Montero has a Business Degree and an Auditing degree from Universidad San Pablo in Madrid.

 

Francisco Murillo was appointed Manager of Retail Banking of Santander-Chile on May 1, 2010. Prior to that, he held the position of Corporate Director of Human Resources for Santander-Chile since February 21, 2008. Mr. Murillo has worked in Grupo Santander Chile since 1993. Previously he served as Corporate Director of Santander Asset Management and President of Bansander AFP. He was also the former CEO and Chief Investment Officer of Bansander AFP. Mr. Murillo is President of Santander Asset Management S.A. Administradora de General de Fondos, President of Santander Seguros de Vida S.A., President of Santander Seguros Generales S.A., Director of Santander Chile Holding, Director of Aurum S.A., Director of Santander Asset Management Chile S.A., Director of Santan der Consumer Chile S.A., Director of Santander Factoring, CEO of Teatinos Siglo XXI Inversiones Ltda and CEO of Aurum S.A. Mr. Murillo has a Business Degree from the Universidad Adolfo Ibañez.

 

Alejandra Mehech was appointed Corporate Director of Human Resources for Santander-Chile on May 1, 2010. Prior to that, Mrs. Mehech served as manager of Human Resources for the Global Businesses area and for top executives, position she held since December 2007. She has also served as manager of Human Resources of the

 

 

 

109

---

Table of Contents

 

Asset Management Division of Grupo Santander in Chile. Mrs. Mehech has worked in Grupo Santander since 1994 and holds a Business Degree and a degree in Sociology, both from Universidad Católica de Chile.

 

Joaquin Quirante was appointed the Manager of Global Banking and Markets, that includes wholesale banking and treasury services, on March 11, 2008. Mr. Quirante began working for Santander in 2004 and was the Global Manager of Debt Capital Markets. Previous to working at Santander, Mr. Quirante worked for 9 years at Bank of America where he also led the Debt Capital Markets Group for Southern Europe. He also was a vice-president of Risk for the Bank of America in the UK and worked in the International Division of Argentaria. He is on the Board of Santander S.A. Corredores de Bolsa. Mr. Quirante is an economist from the Universidad Complutense de Madrid and has a MBA from IESE.

 

Juan Carlos Chómali became Manager of the Santander Banefe Division of Santander-Chile in Month, 2010. Prior to that he was Manager of Retail Banking of Santander-Chile, position he held since January 2010 and after being our Corporate Director of Customers and Quality. Prior to that he was Commercial Manager of Bansander AFP, Manager of E-Business of Grupo Santander, General Manager of Santander Multimedios, Manager of Remote Banking at Banco Santander. Mr. Chómali is also Director of Universia Chile S.A., Director of Aquanima Chile S.A., Santander Asset Management S.A. Administradora General de Fondos, Santander Seguros de Vida S.A. and Director of Santander Seguros Generales S.A. Mr. Chómali has a degree in business from the Universidad Cató ;lica de Chile and a certificate in Marketing from the University of California, Los Angeles.

 

Felipe Contreras F. was named Chief Accounting Officer of Santander Chile in October 2008. He has worked for 14 years in the Bank’s Accounting Department, most recently as Manager of the Consolidation and Reporting Departments, overseeing the Bank’s Chilean, U.S. and Spanish GAAP reporting requirements. He recently was in charge of the Bank’s recent transition to International Financial Reporting Standards. Mr. Contreras is a Public Accountant from the University of Santiago and is currently a candidate to a Masters in Advanced Finance from the Universidad Adolfo Ibáñez.

 

Juan Fernández is our manager of Administration and Operations. He is the former Manager of Administration and Cost Control of Old Santander-Chile, a position he held from April 1999 until August 2002, when the merger with Santiago was consummated. Mr. Fernández is also Director of Santander Chile Holding S.A., Aquanima Chile S.A., Santander Factoring S.A., Isban Chile S.A., Bansa Santander S.A., Santander Consumer Chile S.A., Multinegocios S.A. and Santander S.A. Corredores de Bolsa. Previously Mr. Fernández served as Manager for Accounting and Administration of Old Santander-Chile since January 1993. Prior to that, Mr. Fernández held positions at Banchile Agencia de Valores y Subsidiar ias, and at JPMorgan in Santiago and Madrid.

 

Emiliano Muratore was appointed Manager of Financial Management in April 2008. Mr. Muratore entered Santander Group in 1999 in Santander Argentina. From 2002 to 2006 he worked in  Financial Management in Santander Spain. He is on the Board of Santander S.A. Agente de Valores. Mr. Muratore has a Business Degree from the Universidad Católica Argentina and a Masters in Finance from the Universidad de San Andrés in Buenos Aires.

 

Juan Pedro Santa María  is our General Counsel, a position he has held since July 30, 2009 after being General Counsel of Grupo Santander Chile. He is also a Director of Santander Chile Holding S.A., Santander Factoring S.A., Bansa Santander S.A., Aquanima Chile S.A., Director of Aurum S.A. and Director of Santander Asset Management Chile S.A. Mr. Santa María, a lawyer, previously worked at Banco O’Higgins and Banco Santiago. He has been Chairman of the Law Committee at the Asociación de Bancos e Instituciones Financieras de Chile for the last twenty years.  He has a degree in Law from the Pontificia Universidad Católica de Chile.

 

B.           Compensation

 

For the year ended December 31, 2009, the aggregate amount of compensation paid by us to all of our directors was Ch$645 million, including attendance fees and monthly stipends. For the year ended December 31, 2009, the aggregate amount of compensation paid by us to all of our executive officers and our management members was Ch$28,663 million (US$56.5 million). At our annual shareholder meeting held on April 27, 2010, shareholders approved a monthly stipend per director of UF 230 (US$9,496), UF 460 (US$18,992) for the Chairman of the Board and UF 345 (US$14,244) for the Vice-Chairman of the Board. This amount will be increased by UF 30 per month (US$1,239) if a Board member is named to one or more committees of the Board. For the President of a committee the additional amount will be UF 60 (US$2,477) and UF 45 (US$1,8 58) for the Vice-President of a committee.

 

 

110

---

Table of Contents

 

 

Shareholders also approved the Audit Committee 2010 budget and the remuneration for its members. The remuneration is a 33% additional compensation over the monthly stipend received by a regular board member, or UF 77 (US$3,179), totaling a monthly stipend of UF 307 (US$12,675). This remuneration is in line with the new Chilean corporate governance law. In addition, we pay certain directors professional service fees for the consulting services that they rendered to us in their fields of expertise. For the year ended December 31, 2009, payments to our directors for consulting fees totaled Ch$526 million (US$1.0 million).

 

Santander Spain has set up remuneration systems tied to the performance of the stock market price of the shares of Santander Spain based on the achievement of two targets: appreciation of its share price and growth in earnings per share, in both cases based on a sample of comparable banks.

 

In this regard, certain high-level executives of Santander Chile participate in this global incentive-retention program implemented by Santander Spain. This consisted of giving to qualifying executives a fixed number of options on shares of Santander, if the following parameters were met: (i) share price growth in the top 10 compared to 30 other global banks, (ii) earnings per share growth in the top 10 compared to 30 other global banks, (iii) that Banco Santander Chile achieved its commercial and financial budget targets in the last two years and (iv) that the executive achieved his personal targets in the last two years, and remained employed with the Bank until the end of the incentive program. This program has no dilutive effect for Santander Chile minority shareholders.

 

The fair value of each option granted is calculated at the grant date. In order to value the incentive-retention plan, two valuation reports were performed by two multinational investment banks. These valuation specialists used the Black-Scholes equity option pricing model considering the following parameters: the expected life of the options, interest rates, volatility, exercise price, market price and dividends of Santander Spain shares and the shares of comparable banks. The fair value of the options granted was calculated as the average value resulting from the two valuations.

 

Number of Shares

Euros Exercise Price

Employee Group

Number of Persons

Date of Commencement of Exercise Period

Date of Expiry of Exercise Period

Plans in force on January 1, 2005
Rights granted (Plan I06)	4,284,700		9.09 (**)		Managers		123		1/15/2008		1/15/2009
Options exercised	-		-		-
Options cancelled or not exercised	(267,700)		-		-		(6)		1/15/2008		1/15/2009
Plans in force on December 31, 2005	4,017,000		9.09
Options exercised	-		-		-
Options cancelled, net (Plan I06)	(166,600)		9.09		Managers		(5)		1/15/2008		1/15/2009
Plans in force on December 31, 2006	3,850,400		9.09
Rights granted (Plan I09)	270,823		-		Managers		159		6/23/2007		7/31/2009
Rights granted (Plan I09)	12,844		-		Other non-managerial positions		23		6/23/2007		7/31/2009
Rights granted (Plan I10)	402,865		-		Managers		159		6/23/2007		7/31/2010
Rights granted (Plan I10)	18,564		-		Other non-managerial positions		23		6/23/2007		7/31/2010
Options cancelled, net (Plan I06)	(184,900)		9.09		Managers
Plans in force on December 31, 2007	4,370,596		-
Rights granted (Plan I09)	134,985		-		Managers		159		6/23/2007		7/31/2009
Rights granted (Plan I09)	6,401				Other non-managerial positions		22		6/23/2007		7/31/2009
Rights granted (Plan I10)	133,874		-		Managers		159		6/23/2007		7/31/2010
Rights granted (Plan I10)	6,169		-		Other non-managerial positions		22		6/23/2007		7/31/2010
Options cancelled, net (Plan I06)	(565,650)		-		-				4/15/2008		1/15/2009
Options exercised, net (Plan I06)	(3,099,850)		-		Managers		90

 

 

 

111

---

Table of Contents

 

Number of Shares

Euros Exercise Price

Employee Group

Number of Persons

Date of Commencement of Exercise Period

Date of Expiry of Exercise Period

Plans in force on December 31, 2008	986,525
Rights granted (Plan I09)	269,472		-		Managers		159		6/23/2007		7/31/2009
Rights granted (Plan I09)	12,780		-		Other non-managerial positions		22		6/23/2007		7/31/2009
Rights granted (Plan I10)	400,842		-		Managers		159		6/23/2007		7/31/2010
Rights granted (Plan I10)	18,470		-		Other non-managerial positions		22		6/23/2007		7/31/2010
Rights granted (Plan I11)	443,098		-		Managers		161		7/31/2008		7/31/2011
Rights granted (Plan I11)	32,927		-		Other non-managerial positions		53		7/31/2008		7/31/2011
Rights granted (Plan I12)	458,850		-		Managers		176		7/31/2009		7/31/2012
Rights granted (Plan I12)	63,305		-		Other non-managerial positions		95		7/31/2009		7/31/2012
Rights granted (Plan I09)	(675,280)		-		Managers		159
Rights granted (Plan I09)	(32,025)		-		Other non-managerial positions		22
Plans in force on December 31, 2009	1,978,964
Of which:
Plan I10	980,784
Plan I11	476,025
Plan I12	522,155

 

 (**)The exercise price of the options under Plan I06 is €9.09 per share, which is the weighted average of the daily average market price of the Bank shares on the continuous market in the first 15 trading days of January 2005. This was the criterion established in the resolution approving Plan I06 adopted at the Annual General Meeting of Santander Spain held on June 18, 2005.

 

Long-term incentive policy

 

During 2007, Santander Spain’s Board of Directors approved a long-term incentive policy for the period 2008-2010 aimed at Group Santander’s executive directors and certain executive personnel in Spain and other Santander Group companies. Certain high-level executives of Santander Chile participate in this global Performance Share Plan implemented by Santander Spain.

 

As of December 31, 2008 approximately 90 of the Bank’s executives enrolled in Plan PI06 exercised 3,099,850 options on Banco Santander S.A. shares (the Parent Company located in Spain) at a price of €9,09.

 

Performance Share Plan

 

This multi-annual incentive plan is payable in shares of Santander Spain. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the Board of Directors of Santander Spain or, when delegated by it, the Executive Committee.

 

This plan will involve successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive program linked to the previous plan and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having duration of two years (PI09) and the second cycle having a standard three-year term (PI10). In June 2008 and 2009, the third and fourth three-year cycles were approved by Santander Spain (PI11 and PI12, respectively). These new three-year cycle plans began to impact the Consolidated Income Statement of 2009.

 

For each cycle, a maximum number of shares of Santander Spain is established for each beneficiary who remains in the Bank’s employ for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered, are defined by comparing the Santander Group’s performance with that of a benchmark group of financial institutions and are linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). These parameters each have a 50% weighting in determining the percentage of shares to be delivered. In addition, the executives of Santander Chile must also meet their local commercial and earnings

 

 

 

112

---

Table of Contents

 

goals in order to receive this benefit, and the Bank must also reach other commercial and earnings targets set by Santander Spain.

 

The ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary will be considered), and the shares will be delivered within a maximum period of seven months from the end of the cycle. This number will range from the maximum percentage of shares, if Grupo Santander, for each of the measures considered (TSR and EPS growth), ranks within the third quartile of the Benchmark Group, including the 75th percentile, to 30% of the maximum number of shares if it is placed at the median (50th percentile). If Grupo Santander ranks below the median, all assignments of shares will be rendered null and void.

 

Plan PI09 ended in 2009 and rights over 707,305 shares were exercised by 181 Bank executives. In addition, Plan PI10 commenced during that fiscal year; rights over 419,312 shares were granted to 181 executives, yielding a cumulative total of 980,784 shares to be distributed to 181 executives. Plan PI11 allocated 476,025 rights over shares, and Plan PI12 allocated 522,155 rights over shares, to 214 and 271 executives, respectively. At December 31, 2009, the Bank recorded a cost for the period of Ch$2,371 million (US$4.677 million) corresponding to the fair value of plan PI09 (which ended on July 31, 2009), Plan I10, Plan I11 and Plan I12 for the equity instruments distributed. This amount is charged to income on the specific period in which the beneficiaries provide their services to the Bank.

 

At December 31, 2009 the fair value of the Share Plans based on the achievement of the stated objectives was calculated as follows:

 

·	It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.

 

·

The fair value of 50% relating to the Bank’s relative TSR (Total Shareholder Return) position was determined by an independent expert based on the use of the Monte Carlo valuation model which carried out 10,000 simulations to determine the TSR of each of the companies in the Benchmark Group, taking into account the aforementioned variables. The results (each of which represents the delivery of a number of shares) are classified in descending order by calculating the weighted average and discounting this amount at the risk-free interest rate.

 

	PI09	PI10	PI11	PI12
Expected volatility(*)	16.25%	15.67%	19.31%	42.36%
Annual dividend yield based on historical	3.23%	3.24%	3.47%	4.88%
Risk-free interest rate [return on Treasury Bonds (zero coupon)] over the life of the plan	4.473%	4.497%	4.83%	2.04%

 

(*) Determined on the basis of historical volatility over the period (two or three years)

 

The application of the simulation model resulted in percentage values of 42.7% for PI09, 42.3% for PI10 (second cycle), 44,9% for PI11 (third cycle) and 55.4% for PI12 (fourth cycle), which are applied to 50% of the value of the shares granted, in order to determine the book value of the TSR-based portion of the incentive. Since this valuation relates to a market condition, it cannot be adjusted after the grant date.

 

In view of the high correlation between TSR and EPS (Earning per Share), it was considered reasonable to conclude that, in a high percentage of cases, the TSR value is also valid for EPS. Therefore, it was determined that the fair value of the portion of the plans linked to the Bank’s relative EPS position, i.e. of the remaining 50% of the shares granted, was the same as that of the 50% corresponding to the TSR. Since this valuation refers to a non-market condition, the number of shares expected to vest shall be reviewed and adjusted on a yearly basis.

 

 

113

---

Table of Contents

 

 

 Post employment benefits

 

During the second half of 2009, the Bank granted an additional benefit to its principal executives, consisting of a pension plan whose purpose is to endow them with funds for a better supplementary pension upon their retirement. In practical terms, the Bank will match the voluntary contributions made by the beneficiaries for their future pensions with an equivalent contribution. The executives will be entitled to receive this benefit only when they fulfill the following linked conditions: i) retire from the Bank (or from any other Santander Group company) and be 60 years of age or older and; ii) the reason for termination of their employment may not be any of the legal grounds for dismissal attributable to the executive in question. During the period, the Bank made a contribution of $4,726 million, and a current contri bution of $267 million. For more information, see “Note 37—g Post employment benefits” on our Audited Consolidated Financial Statements.

 

C.           Board Practices

 

Audit Committee

 

Board member		Position in Committee
Carlos Olivos		Chairman
Víctor Arbulú Crousillat		Vice Chairman and Financial Expert
Roberto Zahler*		Member
*Replaced Lucia Santa Cruz who resigned in May 2010

 

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. The General Secretary is the Committee Secretary. The Chief Executive Officer, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditors and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory e ntities of the Chilean financial system about us and for recommending measures to be taken by our management in response. This committee also performs functions of a remuneration committee as established in Chilean Law, and reviews annually the salary and bonus programs for the executive officers of the Bank. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

 

This committee is also responsible for:

 

·	Presenting to the Board of Directors a list of candidates for the selection of an external auditor.

 

·	Presenting to the board or directors a list of candidates for the selection of rating agencies.

 

·	Overseeing and analyzing the results of the external audit and the internal reviews.

 

·	Coordinating the activities of internal auditing with the external auditors’ review.

 

·	Analyzing the interim and year-end financial statements and reporting the results to the Board of Directors.

 

·	Analyzing the external auditors’ reports and their content, procedures and scope.

 

·	Analyzing the rating agencies’ reports and their content, procedures and scope.

 

·	Obtaining information regarding the effectiveness and reliability of the internal control systems and procedures.

 

·	Analyzing the information systems performance, and its sufficiency, reliability and use in connection with decision-making processes.

 

 

 

114

---

Table of Contents

 

·	Obtaining information regarding compliance with the company’s policies regarding the due observance of laws, regulations and internal rules to which the company is subject.

 

·	Obtaining information and resolving conflict of interest matters and investigating suspicious and fraudulent activities.

 

·	Analyzing the reports of the inspection visits, instructions and presentations of the Superintendency of Banks.

 

·	Obtaining information, analyzing and verifying the company’s compliance with the annual audit program prepared by the internal audit department.

 

·	Informing the Board of Directors of accounting changes and their effects.

 

·	Examining on an annual basis the compensation plans of high level executives and managers.

 

Asset and Liability Committee

 

Board member		Position in Committee
Mauricio Larraín		Chairman
Oscar von Chrismar		Member
Marco Colodro		Member
Vittorio Corbo		Member
Roberto Zahler		Member

 

The Comité de Activos y Pasivos or the Asset and Liability Committee (the “ALCO”), following guidelines set by the Board of Directors and Santander Spains’s Global Risk Department, is responsible for establishing Santander-Chile’s policies, procedures and limits with respect to market risks and monitoring the overall performance in light of the risks assumed. The ALCO constantly monitors whether these policies are adhered to. Santander-Chile’s Market Risk and Control Department and the Financial Management Division perform the day-to-day risk management functions required for the trading and non-trading activities of Santander-Chile.

 

The Asset and Liabilities Management Committee includes the Chairman of the Board and four additional members of the Board, the Chief Executive Officer, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, the Financial Controller and other senior members of management. Senior members of Santander-Chile’s Finance Division have a formal meeting each month with the Asset and Liabilities Management Committee and outside consultants.

 

 

Market Committee

 

Board member		Position in Committee
Mauricio Larraín		Chairman
Oscar von Chrismar		Member
Roberto Zahler		Member
Marco Colodro		Member
Vittorio Corbo		Member

 

The Comité de Mercados or the Market Committee is responsible for establishing Santander-Chile’s policies, procedures and limits with respect to its trading portfolio, market risks and monitoring the overall performance in light of the risks assumed. The ALCO constantly monitors whether these policies are fulfilled. Santander-Chile’s Market Risk and Control Department carry out the day-to-day risk management functions required for the trading and non-trading activities of Santander-Chile.

 

The Market Committee includes the Chairman of the Board, four additional members of the Board, the Chief Executive Officer, the Manager of Global Banking and Markets, the Manager of the Treasury Division, the Manager

 

 

 

115

---

Table of Contents

 

of Proprietary Trading,  the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

 

 

Executive Credit Committee

 

Board member		Position in Committee
Mauricio Larraín		Chairman
Oscar von Chrismar		Member
Carlos Olivos		Member
Roberto Méndez		Member
Marco Colodro		Member

 

The Executive Credit Committee is comprised of the Chairman of the Board, three additional Board members, the Corporate Legal Counsel, the CEO, the Manager of Global Banking, the Corporate Director of Risk, the Manager of Corporate Banking, the Manager of Middle Market and two senior members of the Credit Risk department that present the loans being reviewed for approval. This committee confirms the loan positions reviewed by the Senior Loan Committee, with approval rights up to the maximum exposure permitted by the General Banking Law.

 

Marketing and Communications Committee

 

Board member		Position in Committee
Mauricio Larraín		Chairman
Roberto Méndez		Member

 

The Marketing and Communications Committee is comprised of the Chairman of the Board and an additional Board member, the CEO, the Manager of Retail Banking, the Manager of Santander Banefe, the Manager of Human Resources, the Manager of Corporate Communications, the Manager of Marketing and other senior managers of the Bank. This committee reviews and confirms all matters related to products, corporate image and communications.

 

Technology Committee

 

Board member		Position in Committee
Claudia Bobadilla		Member
Oscar von Chrismar Carvajal		Member

 

The Technology Committee reviews all matters related to analyzing technological developments that improve efficiency and client service. This committee oversees the Annual Technology Plan, which includes the   automation of key processes, telecommunication innovations, information security, market intelligence and new technological trends.

 

University Committee

 

Board member		Position in Committee
Mauricio Larraín		Member
Lucía Santa Cruz		Member
Roberto Méndez		Member

 

The University Committee reviews the Bank’s support for higher education and integrates this with the growth of the Institutional business segment and retail banking for college graduates.

 

 

 

116

---

Table of Contents

 

Strategy Committee

 

Board member		Position in Committee
Oscar von Chrismar Carvajal		Member
Raimundo Monge		Member
Juan Hoyos		Member

 

The Strategy Committee is in charge of the Bank’s strategic planning process and follow-up.

 

D.           Employees

 

As of December 31, 2009, on a consolidated basis we had 11,118 employees, 8,411 of whom were bank employees, 350 of whom were employees of our subsidiaries and 2,357 were employees of Special Purpose Entities. Prior to December 31, 2009, we did not consolidate these Special Purpose Entities or include these employees in our headcount disclosures.  We have traditionally enjoyed good relations with our employees and their unions. Of the total headcount of the Bank and his subsidiaries, 4,822 or 54.7% were unionized. In May 2010, a new collective bargaining agreement was signed, which will become effective on January 1, 2011 and that will expire on December 31, 2014, but this may be negotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargainin g agreement to unionized and non-unionized employees. The following chart summarizes the number of employees employed by the bank.

 

Employees		2009
Executives			636
Professionals			4,414
Administrative			6,068
Total			11,118

 

E.           Share Ownership

 

 

No director or executive officer owns more than 1% of the shares of Santander-Chile. As of December 31, 2009, the following directors and executives held shares in Santander-Chile:

 

 

 

Directors	Shares
Mauricio Larraín Garcés	568
Carlos Olivos Marchant	1,960,822
Senior Managers
Juan Fernández	35,536

 

Santander-Chile currently does not have any arrangements for involving employees in its capital and there is no systematic arrangement for grant of options or shares or securities of Banco Santander-Chile to them. However, our parent company gave each employee 100 shares in Banco Santander Spain stock in 2007. This program had no costs for Santander-Chile.

 

 

117

---

Table of Contents