FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

 

Commission File Number: 001-14554

Banco Santander Chile
Santander Chile Bank
(Translation of Registrant’s Name into English)
 
Bandera 140
Santiago, Chile
(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

    Form 20-F x     Form 40-F ¨  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

  Yes ¨   No x  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

  Yes ¨   No x  

 

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

  Yes ¨   No x  

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A


 

2
 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BANCO SANTANDER-CHILE
   
  By: /s/ Cristian Florence
  Name: Cristian Florence
  Title: General Counsel

Date: March 26, 2013

 

 

 

 

 
 

 

 

 

CONTENT

 

Consolidated Financial Statements  
   
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 5
CONSOLIDATED STATEMENTS OF INCOME 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 7
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 8
CONSOLIDATED STATEMENTS OF CASH FLOW 9
   
Notes to the Consolidated Financial Statements  
   
NOTE 01  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 11
NOTE 02  ACCOUNTING CHANGES 45
NOTE 03  SIGNIFICANT EVENTS 47
NOTE 04  OPERATING SEGMENTS 50
NOTE 05  CASH AND CASH EQUIVALENTS 54
NOTE 06  TRADING INVESTMENTS 55
NOTE 07  INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS 56
NOTE 08  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING 59
NOTE 09  INTERBANK LOANS 67
NOTE 10  LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS 68
NOTE 11  LOAN PURCHASES AND SALES 75
NOTE 12  AVAILABLE FOR SALE INVESTMENTS 78
NOTE 13  INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES 82
NOTE 14  INTANGIBLE ASSETS 84
NOTE 15  PROPERTY, PLANT, AND EQUIPMENT 86
NOTE 16  CURRENT AND DEFERRED TAXES 89
NOTE 17  OTHER ASSETS 94
NOTE 18  TIME DEPOSITS AND OTHER TIME LIABILITIES 95
NOTE 19  INTERBANK BORROWINGS 96
NOTE 20  ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES 98
NOTE 21  MATURITY OF ASSETS AND LIABILITIES 104
NOTE 22  PROVISIONS 106
NOTE 23  OTHER LIABILITIES 108
NOTE 24  CONTINGENCIES AND COMMITMENTS 109
NOTE 25  EQUITY 110
NOTE 26  CAPITAL REQUIREMENTS (BASEL) 113
NOTE 27  NON CONTROLLING INTEREST 115
NOTE 28  INTEREST INCOME AND INFLATION-INDEXING ADJUSTMENT 118
NOTE 29  FEES AND COMMISSIONS 120
NOTE 30  PROFIT AND LOSS  FROM FINANCIAL OPERATIONS 121
NOTE 31  NET FOREIGN EXCHANGE GAIN (LOSS) 122
NOTE 32  PROVISION FOR LOAN LOSSES 122
NOTE 33  PERSONNEL SALARIES AND EXPENSES 124
NOTE 34  ADMINISTRATIVE EXPENSES 128
NOTE 35  DEPRECIATION, AMORTIZATION, AND IMPAIRMENT 129
NOTE 36  OTHER OPERATING INCOME AND EXPENSES 131
NOTE 37  TRANSACTIONS WITH RELATED PARTIES 133
NOTE 38  PENSION PLANS 136
NOTE 39  FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES 139
NOTE 40  RISK MANAGEMENT 144
NOTE 41  SUBSEQUENT EVENTS 157

 

2
 

 

Deloitte
Auditores y Consultores Limitada
RUT: 80.276.200-3
Rosario Norte 407
Las Condes, Santiago
Chile
Fono: (56-2) 2729 7000
Fax: (56-2) 2374 9177
e-mail: deloittechile@deloitte.com
www.deloitte.cl

 

INDEPENDENT AUDITORS’ REPORT

 

To the Shareholders of

Banco Santander Chile

 

We have audited the accompanying consolidated financial statements of Banco Santander Chile and its subsidiaries (the "Bank"), which comprise the consolidated statements of financial position as of December 31, 2013 and 2012, and the related consolidated statements of income, statements of comprehensive income, statements of changes in equity, and statements of cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Management's Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the accounting standards and instructions issued by the Superintendency of Banks and Financial Institutions. This responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors' Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Chile. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Bank’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/acerca de la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.

 

Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.

 

 
 

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco Santander Chile and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting standards and instructions issued by the Superintendency of Banks and Financial Institutions.

 

Emphasis on an issue

 

As indicated in Note 3 to the consolidated financial statements, during December 2013 the Bank sold its entire ownership in Santander Asset Management S.A. Administradora General de Fondos to SAM Investment Holdings Limited for 99.99% of total shares and to Santander Assets Management UK Holdings Limited for the remaining 0.01% of total shares, both related companies, generating a profit of Ch$78,122 million.

 

Other matters

 

The accompanying financial statements have been translated into English for the convenience of readers outside Chile.

 

 

January 20, 2014

Santiago, Chile

 

 

Mauricio Farías

  

 
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

      As of December 31, 
      2013   2012 
   NOTE  MCh$   MCh$ 
            
ASSETS             
Cash and deposits in banks  5   1,571,810    1,250,414 
Cash items in process of collection  5   604,077    520,267 
Trading investments  6   287,567    338,287 
Investments under resale agreements  7   17,469    6,993 
Financial derivative contracts  8   1,494,018    1,293,212 
Interbank loans, net  9   125,395    90,527 
Loans and accounts receivable from customers, net  10   20,327,021    18,325,957 
Available for sale investments  12   1,700,993    1,826,158 
Held to maturity investments      -    - 
Investments in associates and other companies  13   9,681    7,614 
Intangible assets  14   66,703    87,347 
Property, plant, and equipment  15   180,215    162,214 
Current taxes  16   1,643    10,227 
Deferred  taxes  16   230,215    186,407 
Other assets  17   400,025    655,217 
TOTAL ASSETS      27.016.832    24.760.841 
              
LIABILITIES             
Deposits and other demand  liabilities  18   5,620,763    4.970.019 
Cash items in process of being cleared  5   276,379    284.953 
Obligations under repurchase agreements  7   208,972    304.117 
Time deposits and other time liabilities  18   9,675,272    9.112.213 
Financial derivative contracts  8   1,300,109    1.146.161 
Interbank borrowings  19   1,682,377    1.438.003 
Issued debt instruments  20   5,198,658    4.571.289 
Other financial liabilities  20   189,781    192.611 
Current taxes  16   50,242    525 
Deferred taxes  16   25,088    9.544 
Provisions  22   236,232    221.089 
Other liabilities  23   198,777    341.274 
TOTAL LIABILITIES      24.662.650    22,591,798 
              
EQUITY             
              
Attributable to the Bank's shareholders:      2,325,678    2.134.778 
Capital  25   891,303    891.303 
Reserves  25   1,130,991    975.460 
Valuation adjustments  25   (5,964)   (3.781)
Retained earnings      309,348    271.796 
Retained earnings from prior years      -    - 
Income for the period      441,926    388.282 
Minus:  Provision for mandatory dividends  25   (132,578)   (116.486)
Non-controlling interest  27   28,504    34.265 
TOTAL EQUITY      2,354,182    2,169,043 
              
TOTAL LIABILITIES AND EQUITY      27,016,832    24,760,841 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 5
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the years ended

 

      December 31, 
      2013   2012 
   NOTE  MCh$   MCh$ 
            
OPERATING INCOME             
              
Interest income  28   1,871,204    1,890,953 
Interest expense  28   (794,442)   (848,219)
              
Net interest income      1,076,762    1,042,734 
              
Fee and commission income  29   346,120    360,467 
Fee and commission expense  29   (116,284)   (102,780)
              
Net fee and commission income      229,836    257,687 
              
Net loss from financial operations (net trading loss)  30   (28,613)   (64,079)
Net foreign exchange gain  31   144,726    146,378 
Other operating income  36   20,508    19,758 
              
Net operating profit before provision for loan losses      1,443,219    1,402,478 
              
Provision for loan losses  32   (364,031)   (366,702)
              
NET OPERATING PROFIT      1,079,188    1,035,776 
              
Personnel salaries and expenses  33   (308,344)   (299,904)
Administrative expenses  34   (188,191)   (175,883)
Depreciation and amortization  35   (61,074)   (56,369)
Impairment of property, plant, and equipment  35   (244)   (90)
Other operating expenses  36   (62,351)   (59,716)
              
Total operating expenses      (620,204)   (591,962)
              
OPERATING INCOME      458,984    443,814 
              
Income from investments in associates and other companies  13   79,544    267 
              
Income before tax      538,528    444,081 
              
Income tax expense  16   (94,467)   (51,174)
              
NET INCOME FOR THE YEAR      444,061    392,907 
              
Attributable to:             
Equity holders of the Bank      441,926    388,282 
Non-controlling interest  27   2,135    4,625 
Earnings per share attributable to Equity holders of the Bank :             
(expressed in Chilean pesos)             
Basic earnings  25   2.345    2.060 
Diluted earnings  25   2.345    2.060 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 6
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

For the years ended

 

      December 31, 
      2013   2012 
   NOTE  MCh$   MCh$ 
            
NET INCOME FOR THE YEAR      444,061    392,907 
              
OTHER COMPREHENSIVE INCOME  - ITEMS WHICH MAY  BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS:             
              
Available for sale investments  12   10,857    (13,060)
Cash flow hedge  25   (13,572)   4,921 
              
Other comprehensive income which may be reclassified subsequently to profit or loss, before tax taxes      (2,715)   (8,139)
              
Income tax related to items which may be reclassified subsequently to profit or loss  16   543    1,572 
              
Other comprehensive income for the year which may be reclassified subsequently to profit or loss, net of tax      (2,172)   (6,567)
              
OTHER COMPREHENSIVE INCOME THAT MAY NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS      -    - 
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
      441,889    386,340 
              
Attributable to:             
Equity holders of the Bank      439,743    381,669 
Non-controlling interests  27   2,146    4,671 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 7
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2013 and 2012

 

       RESERVES   ACCUMULATED OTHER COMPREHENSIVE
INCOME
   RETAINED EARNINGS             
   Capital   Reserves
and other
retained
earnings
   Effects of
merger of
companies
under
common
control
   Available for
sale
investments
   Cash flow
hedge
   Income
tax
 effects
   Retained
earnings of
prior years
   Income for
the year
   Provision
for
mandatory
dividends
   Total
attributable to
shareholders
   Non-controlling
interest
   Total Equity 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                 
Equity as of December 31, 2011   891,303    804,752    (2,224)   3,077    394    (639)   -    435,084    (130,525)   2,001,222    33,801    2,035,023 
Adjustment for accounting changes (IAS 19) (*)   -    (1,101)   -    -    -    -    -    -    -    (1,101)   -    (1,101)
Distribution of income from previous period   -    -    -    -    -    -    435,084    (435,084)   -    -    -    - 
Equity as of January 1, 2012   891,303    803,651    (2,224)   3,077    394    (639)   435,084    -    (130,525)   2,000,121    33,801    2,033,922 
                                                             
Dividends distributions/ withdrawals made   -    -    -    -    -    -    (261,051)   -    130,525    (130,526)   (4,207)   (134,733)
Transfer of retained earnings to reserves   -    174,033    -    -    -    -    (174,033)   -    -    -    -    - 
Provision for mandatory dividends   -    -    -    -    -    -    -    -    (116,486)   (116,486)   -    (116,486)
Subtotals   -    174,033    -    -    -    -    (435,084)   -    14,039    (247,012)   (4,207)   (251,219)
Other comprehensive income   -    -    -    (13,118)   4,921    1,584    -    -    -    (6,613)   46    (6,567)
Income for the year   -    -    -    -    -    -    -    388,282    -    388,282    4,625    392,907 
Subtotals   -    -    -    (13,118)   4,921    1,584    -    388,282    -    381,669    4,671    386,340 
Equity as of December 31, 2012   891,303    977,684    (2,224)   (10,041)   5,315    945    -    388,282    (116,486)   2,134,778    34,265    2,169,043 
                                                             
Equity as of December 31, 2012   891,303    977,684    (2,224)   (10,041)   5,315    945    -    388,282    (116,486)   2,134,778    34,265    2,169,043 
Distribution of income from previous period   -    -    -    -    -    -    388,282    (388,282)   -    -    -    - 
Equity as of January 1, 2013   891,303    977,684    (2,224)   (10,041)   5,315    945    388,282    -    (116,486)   2,134,778    34,265    2,169,043 
                                                             
Own shares transactions (1)   -    29    -    -    -    -    -    -    -    29    -    29 
Dividends distributions/ withdrawals made   -    -    -    -    -    -    (232,780)   -    116,486    (116,294)   (7,907)   (124,201)
Transfer of retained earnings to reserves (*)   -    155,502    -    -    -    -    (155,502)   -    -    -    -    - 
Provision for mandatory dividends   -    -    -    -    -    -    -    -    (132,578)   (132,578)   -    (132,578)
Subtotals   -    155,531    -    -    -    -    (388,282)   -    (16,092)   (248,843)   (7,907)   (256,750)
Other comprehensive income   -    -    -    10,843    (13,572)   546    -    -    -    (2,183)   11    (2,172)
Income for the year   -    -    -    -    -    -    -    441,926    -    441,926    2,135    444,061 
Subtotals   -    -    -    10,843    (13,572)   546    -    441,926    -    439,743    2,146    441,889 
Equity as of December 31, 2013   891,303    1,133,215    (2,224)   802    (8,257)   1,491    -    441,926    (132,578)   2,325,678    28,504    2,354,182 
(1)Corresponds to the profit on sale of own shares received in lieu of payment, see Note 03 - Significant events.

 

  Total attributable to Bank
shareholders
   Allocated to
 reserves
   Allocated to
dividends
   Percentage  
distributed
   Number of    Dividend per share 
Period  MCh$   MCh$   MCh$   %   shares   (in pesos) 
                         
Year 2012 (Shareholders Meeting April 2013) (*)   387,967    155,187    232,780    60    188,446,126,794    1.235 
                               
Year 2011 (Shareholders Meeting April 2012)   435,084    174,033    261,051    60    188,446,126,794    1.385 

 

(*) For presentation purposes, these amounts have been adjusted to reflect the requirements established by IAS 19 - Revised 'Employee Benefits'. The amount of dividends distributed in 2012, are shown as that amount approved at the time by the Shareholders meeting. See Note 02 - Accounting changes.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 8
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOW

For the years ended

 

      December 31, 
      2013   2012 
   NOTE  MCh$   MCh$ 
            
A - CASH FLOWS FROM OPERATING ACTIVITIES             
CONSOLIDATED INCOME BEFORE TAX      538,528    441,081 
Debits (credits) to income that do not represent cash flows             
Depreciation and amortization  35   61,074    56,369 
Impairment of property, plant, and equipment  15   244    90 
Provision for loan losses  32   419,315    399,717 
Mark to market of trading investments      (13,711)   (9,978)
Income from investments in associates and other companies  13   (1,422)   (267)
Net gain on sale of assets received in lieu of payment  36   (17,046)   (9,307)
Provision on assets received in lieu of payment  36   3,580    3,902 
Net gain on sale of investments in associates and other companies  36   -    (599)
Net gain on sale of subsidiary companies  13   (78,122)   - 
Net gain on sale of property, plant and equipment  36   (176)   (9,194)
Charge off of assets received in lieu of payment  36   8,796    9,180 
Net interest income  28   (1,076,762)   (1,042,734)
Net fee and commission income  29   (229,836)   (257,687)
Debits (credits) to income that do not represent cash flows      38,580    18,324 
Changes  in deferred taxes  16   (27,721)   (32,653)
Increase/decrease in operating assets and liabilities             
Decrease (increase) of loans and accounts receivables from customers, net      (1,978,593)   (1,272,687)
Decrease (increase) of financial investments      175,886    (93,372)
Decrease (increase) due to resale agreements (assets)      (10,476)   5,935 
Decrease (increase) of interbank loans      (34,868)   (2,985)
Decrease (increase) of assets received or awarded in lieu of payment      4,053    45,280 
Increase of debits in customers checking accounts      397,383    462,367 
Increase (decrease) of time deposits and other time liabilities      563,059    195,535 
Increase (decrease) of obligations with domestic banks      500    - 
Increase (decrease) of other demand liabilities or time obligations      253,361    93,838 
Increase (decrease) of obligations with foreign banks      244,051    (481,677)
Increase (decrease) of obligations with Central Bank of Chile      (177)   (412)
Increase (decrease) obligations under  repurchase agreements      (95,145)   (240,264)
Increase (decrease) in other financial liabilities:      (2,830)   16,012 
Net increase of other assets and liabilities      (421,648)   (629,131)
Redemption of letters of credit      (40,231)   (45,830)
Mortgage bond issuance      70,339    - 
Senior bond issuances      664,422    623,457 
Redemption of senior bonds and payments of interest      (190,719)   (507,369)
Interest received      1,905,532    1,910,729 
Interest paid      (729,942)   (871,130)
Dividends received from investments in other companies  13   775    896 
Fees and commissions received  29   346,120    360,467 
Fees and commissions paid  29   (116,284)   (102,780)
Income tax paid  16   (94,467)   (51,174)
Total cash flow provided by (used in) operating activities      535,422    (1,018,051)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 9
 

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOW

For the years ended

 

      December 31, 
      2013   2012 
   NOTE  MCh$   MCh$ 
            
B - CASH FLOWS FROM INVESTMENT ACTIVITIES:             
Purchases of property, plant, and equipment  15   (40,789)   (36,738)
Sales of property, plant, and equipment  15   348    6,573 
Purchases of investments in associates and other companies  13   (1,440)   (61)
Sales of investments in associates and other companies  13   90,281    401 
Purchases of intangible assets  14   (18,400)   (42,262)
Total cash flow provided by (used in) investment activities      30,000    (72,087)
              
C - CASH FLOW FROM FINANCING ACTIVITIES:             
From shareholders’ financing activities      (123,036)   (396,932)
Issuance of subordinated bonds      141,043    - 
Redemption of subordinated bonds and payments of interest      (31,299)   (135,881)
Dividends paid      (232,780)   (261,051)
From non-controlling interest financing activities      (7,907)   (4,207)
Dividends and/or withdrawals paid      (7,907)   (4,207)
Total cash flow used in financing activities      (130,943)   (401,139)
              
D – NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR      434,479    (1,491,277)
              
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS      (20,699)   (3,664)
              
F - INITIAL BALANCE OF CASH AND CASH EQUIVALENTS      1,485,728    2,980,669 
              
FINAL BALANCE OF CASH AND CASH EQUIVALENTS  5   1,899,508    1,485,728 

 

      December 31 
Reconciliation of provisions for the Consolidated Statement of Cash Flow for     2013   2012 
the year     MCh$   MCh$ 
            
Provision for loan losses for cash flow purposes  32   419,315    399,717 
Recovery of loans previously charged off  32   (55,284)   (33,015)
Provision for loan losses - net      364,031    366,702 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 10
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

  

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Notes to the Consolidated Financial Statements

As of and for the years ended December 31, 2013 and 2012

 

CORPORATE INFORMATION

 

Banco Santander Chile (formerly Banco Santiago) is a corporation (limited company bank) organized under the laws of the Republic of Chile, headquartered at Bandera #140, Santiago, which provides a broad range of general banking services to its customers, from individuals to major corporations. Banco Santander Chile and its subsidiaries (collectively referred to herein as the “Bank” or “Banco Santander Chile”) offers commercial and consumer banking services, as well as other services, including factoring, collection, leasing, securities and insurance brokerage, mutual and investment fund management, and investment banking.

 

A Special Meeting of Shareholders of Banco Santiago was held on July 18, 2002, the minutes of which were notarized as a public deed on July 19, 2002 at the Notarial Office of Santiago before Notary Nancy de la Fuente Hernández, and it was agreed to merge Banco Santander Chile with Banco Santiago by merging the former into the latter, which acquired the former’s assets and liabilities. It was likewise agreed to dissolve Banco Santander Chile in advance and change the name of Banco Santiago to Banco Santander Chile. This change was authorized by Resolution No.79 of the Superintendency of Banks and Financial Institutions (SBIF), adopted on July 26, 2002, published in the Official Journal on August 1, 2002 and registered on page 19,992 under number 16,346 for the year 2002 in the Registry of Commerce of the Curator of Real Estate of Santiago.

 

In addition to the amendments to the bylaws discussed above, the bylaws have been amended on multiple occasions, the last time at the Special Shareholders Meeting of April 24, 2007, the minutes of which were notarized as a public deed on May 24, 2007 at the Notarial Office of Nancy de la Fuente Hernández. This amendment was approved pursuant to Resolution No.61 of June 6, 2007 of the Superintendency of Banks and Financial Institutions. An extract thereof and the resolution were published in the Official Journal of June 23, 2007 and registered in the Registry of Commerce for 2007 on page 24,064 under number 17,563 of the aforementioned Curator.

 

By means of this last amendment, Banco Santander Chile, pursuant to its bylaws and as approved by the Superintendency of Banks and Financial Institutions, may also use the names Banco Santander Santiago or Santander Santiago or Banco Santander or Santander.

 

Banco Santander Spain controls Banco Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander-Chile Holding S.A., which are controlled subsidiaries of Banco Santander Spain. As of December 31, 2013 Banco Santander Spain owns or controls directly and indirectly 99.5% of Santander-Chile Holding S.A. and 100% of Teatinos Siglo XXI Inversiones Ltda. This gives Banco Santander Spain control over 67.18% of the Bank’s shares.

 

a)Basis of preparation

 

These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). In the event of discrepancies between the accounting principles and the accounting criteria issued by the SBIF (Compendium of Accounting Standard), the latter will prevail.

 

For purposes of these Consolidated Financial Statements, the Bank uses certain terms and conventions for currency. “USD” refers to “U.S. dollar”, “EUR” refers to “euro”, “CNY” refers to “Chinese yuan”, “CHF” refers to “Swiss franc”, and “UF” refers to “unidad de fomento”, a national inflation-indexed unit.

 

The Notes to the consolidated financial statements contain additional information to that submitted in the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows. The notes provide narrative descriptions and other information regarding those statements in a clear, relevant, reliable and comparable manner.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 11
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

b)Basis of preparation for the Financial Statements

 

The Consolidated Financial Statements as of December 31, 2013 and 2012 consolidate the financial statements of the Bank entities over which the bank has control (including structured entities). Control is achieved when the Bank:

 

I.   Has  power over the investee;
II.   Is exposed, or has rights, to variable returns from its involvement with the investee; and
III.   Has the ability to use its power to affect its returns.

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above..

 

When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities over the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank’s voting rights in an investee are sufficient to give it power, including:

 

·the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;
·potential voting rights held by the Bank, other vote holders or other parties;
·rights arising from other agreements; and
·any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control over the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated Statement of Income and in the Consolidated Statement of Other Comprehensive Income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

 

When necessary, adjustments are made to the financial statements of the subsidiaries to bring their accounting policies into line with the Bank accounting policies.

 

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between consolidated entities are eliminated in full on consolidation.

 

Changes in the consolidated entities ownership interests in subsidiaries that do not result in losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interest and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Bank.

 

In addition, third parties’ shares in the Consolidated Bank’s equity are presented as “Non controlling interests” in the Consolidated Statement of Changes in Equity. Their share in the income for the year is presented as “Attributable to non-controlling interests” in the Consolidated Statement of Income

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 12
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The following companies are considered entities controlled by the Bank and are therefore within the scope of consolidation:

 

i.Entities controlled by the Bank through participation in equity

 

         Percent ownership share 
         As of December 31 
      Place of  2013    2012 
      Incorporation
and
  Direct   Indirect   Total   Direct   Indirect   Total 
Name of the Subsidiary  Main activity  operation  %   %   %   %   %   % 
                               
Santander Corredora de Seguros Limitada  Insurance brokerage  Santiago, Chile   99.75    0.01    99.76    99.75    0.01    99.76 
Santander S.A. Corredores de Bolsa  Financial instruments brokerage  Santiago, Chile   50.59    0.41    51.00    50.59    0.41    51.00 
Santander Asset Management S.A. Administradora General de Fondos (*)  Third-party funds administration  Santiago, Chile   -    -    -    99.96    0.02    99.98 
Santander Agente de Valores Limitada  Securities brokerage  Santiago, Chile   99.03    -    99.03    99.03    -    99.03 
Santander S.A. Sociedad Securitizadora  Purchase of credits and issuance of debt instruments  Santiago, Chile   99.64    -    99.64    99.64    -    99.64 
Santander Servicios de Recaudación y Pagos Limitada  Support society, making and receiving payments  Santiago, Chile   99.90    0.10    100.00    99.90    0.10    100.00 

 (*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013, see Note 03 - Significant events.

 

The Bank only holds complete controlling participation in Santander Servicios de Recaudación y Pagos Limitada. The detail of non-controlling participation on all the remaining subsidiaries can be seen in Note 27 - Non controlling interest.

 

ii.Entities controlled by the Bank through other considerations

 

The following companies have been consolidated based on the determination that the Bank has control as previously defined above and in accordance with IFRS 10, Consolidated Financial Statements:

 

-Santander Gestión de Recaudación y Cobranza Limitada (collection services)
-Multinegocios S.A. (management of sales force).
-Servicios Administrativos y Financieros Limitada (management of sales force)
-Fiscalex Limitada (collection services)
-Multiservicios de Negocios Limitada (call center)
-Bansa Santander S.A. (management of repossessed assets and leasing of properties)

 

iii.Associates

 

An associate is an entity over which the Bank has significant influence. Significant influence, in this case, is defined as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate.

 

The following companies are considered “Associates” in which the Bank accounts for its participation using the equity method:

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 13
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

         Percent ownership share 
       Place of  As of December 31 
      Incorporation  2013   2012 
Name Subsidiaries  Main activity  and operation  %   % 
Redbanc S.A.  ATM services  Santiago, Chile   33.43    33.43 
Transbank S.A.  Debit and credit card services  Santiago, Chile   25.00    25.00 
Centro de Compensación Automatizado  Electronic fund transfer and compensation services  Santiago, Chile   33.33    33.33 
Sociedad Interbancaria de Depósito de Valores S.A.  Delivery of securities on public offer  Santiago, Chile   29.28    29.28 
Cámara Compensación de Alto Valor S.A.  Payments clearing  Santiago, Chile   14.14    14.14 
Administrador Financiero del Transantiago S.A.  Administration of boarding passes to public transportation  Santiago, Chile   20.00    20.00 
Sociedad Nexus S.A.  Credit card processor  Santiago, Chile   12.90    12.90 
Servicios de Infraestructura de Mercado OTC S.A.  Administration of the infrastructure for the financial market of derivative instruments  Santiago, Chile   11.11    - 

 

In the case of Nexus S.A. and Cámara Compensación de Alto Valor S.A., Banco Santander Chile has a representative on the Board of Directors. According to this fact and definitions previously mentioned , the Bank has concluded that it exerts significant influence over those entities.

 

In July, 2013 national banks jointly created the company Servicios de Infraestructura de Mercado OTC S.A, and its objective is to offer certain services to the financial market, granting services of registration, confirmation, storage, consolidation and reconciliation of operations with derivative financial instruments. Banco Santander possesses an 11.11% equity participation (see Note 03 - Significant events and Note 13 - Investments in associates and other companies). This investee is considered an associate since, through its executives, the Bank has been actively involved in managing the company, in the process of organization and in the implementation of the functional structure of this company, resulting in significant influence over this company.

 

iv.Share or rights in other companies

 

Entities in which the Bank has no control or significant influence are presented in this category. These holdings are shown at purchase value.

 

c)Non-controlling interest

 

Non-controlling interest represents the portion of net income and net assets which the Bank does not own, either directly or indirectly. It is presented as “Attributable to non-controlling interest” separately in the Consolidated Statement of Income, and separately from shareholders’ equity in the Consolidated Statement of Financial Position.

 

In the case of entities controlled by the Bank through other considerations, income and equity are presented in full as non-controlling interest, since the Bank controls them, but does not have any ownership expressed as a percentage..

 

d)Operating segments

 

The Bank discloses separate information for each operating segment that

 

i.has been identified
ii.exceeds the quantitative thresholds stipulated for a segment.

 

Operating segments with similar economic characteristics often have a similar long-term financial performance. Two or more segments can be combined only if aggregation is consistent with International Financial Reporting Standards 8 “Operating Segments” (IFRS 8) and the segments have similar economic characteristics and are similar in each of the following respects:

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 14
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

i.the nature of the products and services;
ii.the nature of the production processes;
iii.the type or class of customers that use their products and services;
iv.the methods used to distribute their products or services; and
v.if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

 

The Bank reports separately on each operating segment that exceeds any of the following quantitative thresholds:

 

i.Its reported revenue, from both external customers and intersegment sales or transfers, is 10% or more of the combined internal and external revenue of all the operating segments.

 

ii.The absolute amount of its reported profit or loss is 10% or more of the greater in absolute amount of: (i) the combined reported profit of all the operating segments that did not report a loss; (ii) the combined reported loss of all the operating segments that reported a loss.

 

iii.Its assets represent 10% or more of the combined assets of all the operating segments.

 

Operating segments that do not meet any of the quantitative thresholds may be treated as segments to be reported, in which case the information must be disclosed separately if management believes it could be useful for the users of the Consolidated Financial Statements.

 

Information about other business activities of the operating segments not separately reported is combined and disclosed in the “Other segments” category.

 

According to the information presented, the Bank’s segments were determined under the following definitions: An operating segment is a component of an entity:

 

i.that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses from transactions with other components of the same entity);
ii.whose operating results are regularly reviewed by the entity’s chief executive officer, who makes decisions about resources allocated to the segment and assess its performance; and
iii.for which discrete financial information is available.

 

e)Functional and presentation currency

 

According to International Accounting Standard No.21 “The Effects of Changes in Foreign Exchange Rates” (IAS 21), the Chilean peso, which is the currency of the primary economic environment in which the Bank operates and the currency which influences its costs and revenues structure, has been defined as the Bank’s functional and presentation currency.

 

Accordingly, all balances and transactions denominated in currencies other than the Chilean Peso are treated as “foreign currency.”

 

f)Foreign currency transactions

 

The Bank grants loans and accepts deposits in amounts denominated in foreign currencies, mainly the U.S. dollar. Assets and liabilities denominated in foreign currencies, held by the Bank are translated to Chilean pesos based on the market rate published by Reuters at 1:30 p.m. on the last business day of every month; the rate used was Ch$524.20 per US$1 as of December 31, 2013 (Ch$478.75 per US$1 as of December 31, 2012).

 

The amounts of net foreign exchange gains and losses includes recognition of the effects that exchange rate variations have on assets and liabilities denominated in foreign currencies and the profits and losses on foreign exchange spot and forward transactions undertaken by the Bank.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 15
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

g)Definitions and classification of financial instruments

 

i.Definitions

 

A “financial instrument” is any contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity.

 

An “equity instrument” is a legal transaction that evidences a residual interest in the assets of an entity deducting all of its liabilities.

 

A “Financial derivative” is a financial instrument whose value changes in response to the changes in an observable market variable (such as an interest rate, a foreign exchange rate, a financial instrument’s price, or a market index, including credit ratings), whose initial investment is very small compared with other financial instruments having a similar response to changes in market factors, and which is generally settled at a future date.

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, which is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

 

ii.Classification of financial assets for measurement purposes

 

The financial assets are initially classified into the various categories used for management and measurement purposes.

 

Financial assets are included for measurement purposes in one of the following categories:

 

-Trading investments portfolio (at fair value through profit and loss): This category includes the financial assets acquired for the purpose of generating a profit in the short term from fluctuations in their prices. This category includes the portfolio of trading investments and financial derivative contracts not designated as hedging instruments.

 

-Available for sale investment portfolio: is comprised of debt instruments not classified as “held-to-maturity investments,” “Credit investments (loans and accounts receivable from customers or interbank loans)” or “Financial assets at fair value through profit or loss”. Available for sale (AFS) investments are initially recorded at cost, which includes transaction costs that are directly attributable to the acquisition. AFS instruments are subsequently measured at fair value, or based on appraisals made with the use of internal models when appropriate. Unrealized gains or losses stemming from changes in fair value are recorded as a debit or credit to Other Comprehensive Income under the heading “Other comprehensive income” within equity. When these investments are disposed of or become impaired, the cumulative amount of the adjustments at fair value recognized in Other Comprehensive Income is transferred to the Consolidated Statement of Income under “Net income from financial operations.”

 

-Held to maturity instruments portfolio: this category includes debt securities traded on an active market, with a fixed maturity, and with fixed or determinable payments, for which the Bank has both the intent and a proven ability to hold to maturity. Held to maturity investments are recorded at their amortized cost plus interest earned, minus any impairment losses established when their carrying amount exceeds the present value of estimated future cash flows.

 

-Credit investments (loans and accounts receivable from customers or interbank loans): this category includes financing granted to third parties, based on their nature, regardless of the type of borrower and the form of financing. It includes loans and accounts receivable from customers, interbank loans, and financial lease transactions in which the consolidated entities act as lessor. Loans and receivable shall be measured at amortized cost using the effective interest method.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 16
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

iii.Classification of financial assets for presentation purposes

 

For presentation purposes, the financial assets are classified by their nature into the following line items in the consolidated financial statements:

 

-Cash and deposits in banks: This line includes cash balances, checking accounts and on-demand deposits with the Central Bank of Chile and other domestic and foreign financial institutions. Amounts invested or received as overnight deposits are included in this item.

 

-Cash in process of collection: : This item represents domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to time differences, etc.

 

-Trading investments: This item includes financial instruments held-for-trading and investments in mutual funds which must be adjusted to their fair value in the same way as instruments acquired for trading.

 

-Financial derivative contracts: Financial derivative contracts with positive fair values are presented in this item. It includes both independent contracts as well as derivatives that should and can be separated from a host contract, whether they are for trading or accounting hedging, as shown in Note 8 to the Consolidated Financial Statements.

 

-Trading derivatives: Includes the fair value in favor of the Bank of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

 

-Hedging derivatives: Includes the fair value in favor of the Bank of derivatives designated as hedging instruments in hedge accounting, including the embedded derivatives separated from the hybrid financial instruments designated as hedging instruments in hedge accounting.

 

-Interbank loans: This item includes the balances of transactions with domestic and foreign banks, including the Central Bank of Chile, other than those reflected in the preceding items.

 

-Loans and accounts receivables from customers: These loans are non-derivative financial assets for which fixed or determined amounts are charged, that are not listed on an active market and which the Bank does not intend to sell immediately or in the short term. When the Bank is the lessor in a lease, and it substantially transfers the risks and benefits incidental to the leased asset, the transaction is presented in loans and accounts receivable from customers.

 

-Investment instruments: Are classified into two categories: held-to-maturity investments, and available-for-sale investments. The held-to-maturity investment category includes only those instruments for which the Bank has the ability and intent to hold them until their maturity. The remaining investments are treated as available for sale.

 

iv.Classification of financial liabilities for measurement purposes

 

The financial liabilities are initially classified into the various categories used for management and measurement purposes.

 

Financial liabilities are included, for measurement purposes, in one of the following categories:

 

-Financial liabilities held for trading (at fair value through profit or loss): financial liabilities issued to generate a short-term profit from fluctuations in their prices, financial derivatives not deemed to qualify for hedge accounting and financial liabilities arising from firm commitment under repurchase agreements or those entered into under short term commitments..

 

-Financial liabilities at amortized cost: financial liabilities, regardless of their type and maturity, not included in any of the aforementioned categories which arise from the borrowing activities of financial institutions.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 17
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

v.Classification of financial liabilities for presentation purposes

 

The financial liabilities are classified by their nature into the following line items in the consolidated statements of financial position:

 

-Deposits and other demand liabilities: This item includes all on-demand obligations except for term savings accounts, which are not considered on-demand instruments in view of their special characteristics. Obligations whose payment may be required during the period are deemed to be on-demand obligations. Operations which become callable the day after the closing date are not treated as on-demand obligations.

 

-Cash in process of being cleared: : This item represents domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to time differences, etc..

 

-Obligations under repurchase agreements: This item includes the balances of sales of financial instruments under securities repurchase and loan agreements. According to actual applicable regulation, the Bank does not record instruments acquired under resale agreements in its investment portfolio, but as investments under resale agreements.

 

-Time deposits and other demand liabilities: This item shows the balances of deposit transactions in which a term at the end of which they become callable has been stipulated.

 

-Financial derivative contracts: This item includes financial derivative contracts with negative fair values (i.e. against the Bank), whether they are for trading or for accounting hedging purposes, as set forth in Note 8.

 

-Trading derivatives: Includes the fair value against the Bank of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

 

-Hedging derivatives: Includes the fair value against the Bank of derivatives designated as hedging instruments in hedge accounting, including the embedded derivatives separated from the hybrid financial instruments designated as hedging instruments in hedge accounting.

 

-Interbank borrowings: This item includes obligations due to other domestic banks, foreign banks, or the Central Bank of Chile, which were not classified in any of the previous categories.

 

-Debt instruments issued: This encompasses three items; Obligations under letters of credit, Subordinated bonds and senior bonds placed in the local and foreign market.

 

-Other financial liabilities: This item includes credit obligations to persons other than domestic banks, foreign banks, or the Central Bank of Chile, for financing purposes or operations in the normal course of business.

 

h)Valuation of financial assets and liabilities and recognition of fair value changes

 

In general, financial assets and liabilities are initially recorded at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss includes transaction costs. Subsequently, and at the end of each reporting period, they are measured pursuant to the following criteria:

 

i.Valuation of financial assets

 

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred for their sale, except for loans and accounts receivable.

 

According to IFRS 13 Fair Value Measurement (effective date from January 1, 2013), “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 18
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place: (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, the most advantageous for the asset or liability. When there is no observable market to provide pricing information in connection with the sale of an asset or transfer a liability at the measurement date, the fair value shall be assumed in a transaction that date, considered from the perspective of a potential market who intends to maximize value associated with the asset or liability.

 

For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 

·Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

 

·Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

 

·Level 3 inputs are unobservable inputs for the asset or liability.

 

All derivatives are recorded in the Consolidated Statements of Financial Position at the fair value from their trade date. If their fair value is positive, they are recorded as an asset, and if their fair value is negative, they are recorded as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recorded in “Net income from financial operations” in the Consolidated Statement of Income.

 

Specifically, the fair value of financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If, for exceptional reasons, the quoted price cannot be determined on a given date, the fair value is determined using similar methods to those used to measure over the counter (OTC) derivatives. The fair value of OTC derivatives is the sum of the future cash flows resulting from the instrument, discounted to present value at the date of valuation (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV) and option pricing models, among other methods. Also, within the fair value of derivatives are included Credit Valuation Adjustment (CVA), all with the objective that the fair value of each instrument includes the credit risk of its counterparty.

 

“Loans and accounts receivable from customers” and “Held-to-maturity instrument portfolio” are measured at amortized cost using the “effective interest method.” “Amortized cost” is the acquisition cost of a financial asset or liability, plus or minus, as appropriate, prepayments of principal and the cumulative amortization (recorded in the consolidated income statement) of the difference between the initial cost and the maturity amount as calculated under the effective interest rate method. For financial assets, amortized cost also includes any reductions for impairment or uncollectibility. For loans and accounts receivable designated as hedged items in fair value hedges, the changes in their fair value related to the risk or risks being hedged are recorded in “Net income from financial operations”.

 

The “effective interest method” is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument , or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

 

For fixed-rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, are a part of the financial return. For floating-rate financial instruments, the effective interest rate coincides with the rate of return prevailing until the next benchmark interest reset date.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 19
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The amounts at which the financial assets are recorded represent, in all material respects, the Bank’s maximum exposure to credit risk at each reporting date. The Bank has also received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, equity instruments and personal securities, assets leased out under leasing and rental agreements, assets acquired under repurchase agreements, securities loans and derivatives.

 

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as trading investments.

 

ii.Valuation of financial liabilities

 

In general, financial liabilities are measured at amortized cost, as defined above, except for those financial liabilities designated as hedged items or hedging instruments and financial liabilities held for trading, which are measured at fair value.

 

iii.Valuation techniques

 

Financial instruments at fair value, determined on the basis of quotations in active markets, include government debt securities, private sector debt securities, shares, short positions, and fixed-income securities issued.

 

In cases where price quotations cannot be observed, the Management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs and, in very specific cases, they use significant inputs based on unobservable data. . Various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

IFRS 13 defines “fair value" as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique.

 

The main techniques used as of December 31, 2013 and 2012 by the Bank’s internal models to determine the fair value of the financial instruments are as follows:

 

i.In the valuation of financial instruments permitting static hedging (mainly “forwards” and “swaps”), the “present value” method is used. Estimated future cash flows are discounted using the interest rate curves of the related currencies. The interest rate curves are generally observable market data.

 

ii.In the valuation of financial instruments requiring dynamic hedging (mainly structured options and other structured instruments), the Black-Scholes model is normally used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation indexes and market liquidity.

 

iii.In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used. The main inputs used in these models are observable market data, including the related interest rate curves, volatilities, correlations and exchange rates.

 

The fair value of the financial instruments arising from the abovementioned internal models considers contractual terms and observable market data, which include interest rates, credit risk, exchange rates, the quoted market price of shares, volatility and prepayments, among other things. These methodologies can be adjusted and evaluated, as appropriate, through the internal calculation of fair value and the subsequent comparison with the related actively traded price.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 20
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

iv.Recording results

 

As a general rule, changes in the carrying amount of financial assets and liabilities are recorded in the Consolidated Statement of Income, distinguishing between those arising from the accrual of interest (which are recorded under interest income or interest expense as appropriate); and those arising for other reasons, which are recorded at their net amount under “Net income from financial operations”.

 

In the case of trading investments, the fair value adjustments, interest income, indexation and foreign exchange, are included in the Consolidated Statement of Income under “Net income from financial operations.”

 

Adjustments due to changes in fair value from:

 

“Available-for-sale financial instruments” are recorded in Other Comprehensive Income and accumulated under the heading “Other comprehensive income” within Equity.

 

-When the AFS instruments are disposed of or are determined to be impaired, the amount of the fair value adjustments accumulated as “Valuation Adjustment” is reclassified to the Consolidated Statement of Income.

 

v.Hedging transactions

 

The Bank uses financial derivatives for the following purposes:

 

i.to sell to customers who request these instruments in the management of their market and credit risks,
ii.to use these derivatives in the management of the risks of the Bank entities’ own positions and assets and liabilities (“hedging derivatives”), and
iii.to obtain profits from changes in the price of these derivatives (“trading derivatives”).

 

All financial derivatives that do not qualify for hedge accounting are accounted for as “trading derivatives.”

 

A derivative qualifies for hedge accounting if all the following conditions are met:

 

1.The derivatives hedge one of the following three types of exposure:

 

a.Changes in the value of assets and liabilities due to fluctuations, among others, in inflation (UF), in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);
b.Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecasted transactions (“cash flow hedge”);
c.The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).

 

2.It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

 

a.At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”);
b.There is sufficient evidence that the hedge was actually effective during the life of the hedged item or position (“retrospective effectiveness”).

 

3.There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 21
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The changes in the value of financial instruments qualifying for hedge accounting are recorded as follows:

 

a.In fair value hedges, the gains or losses arising on both hedging instruments and the hedged items (attributable to the type of risk being hedged) are recorded directly in the Consolidated Statement of Income.

 

b.In fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments are recorded directly in the Consolidated Statement of Income, whereas gains or losses due to changes in fair value of the hedged item (attributable to the hedged risk) are recorded in the Consolidated Statement of Income as a charge or credit, as applicable, to “Net income from financial operations”.

 

c.In cash flow hedges, the effective portion of the change in value of the hedging instrument is recorded under the heading “Cash flow hedge” within the Equity component “Other comprehensive income”, until the hedged transaction occurs, thereafter being recorded in the Consolidated Statement of Income, unless the hedged transaction results in the recognition of non–financial assets or liabilities, in which case it is included in the cost of the non-financial asset or liability.

 

d.The differences in valuation of the hedging instrument corresponding to the ineffective portion of the cash flow hedging transactions are recorded directly in the Consolidated Statement of Income under “Net income from financial operations . ”.

 

Hedge accounting is discontinued in a fair value hedge when the Bank revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to profit or loss from that date.

 

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognized in other comprehensive income under “Valuation adjustments” (from the period when the hedge was effective) remains recorded in equity until the hedged transaction occurs, at which time it is recorded in the Consolidated Statement of Income, unless the transaction, in the case of a forecast transaction cash flow hedge, is no longer expected to occur, in which case any cumulative profit or loss is recorded immediately in the Consolidated Statement of Income.

 

vi.Derivatives embedded in hybrid financial instruments

 

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as “Other financial assets (liabilities) at fair value through profit or loss” or as “Trading investments portfolio.”

 

vii.Offsetting of financial instruments

 

Financial asset and liability balances are offset, i.e., reported in the Consolidated Statements of Financial Position at their net amount, only if there is a legally enforceable right to offset the recorded amounts and an intent either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

 

viii.Derecognition of financial assets and liabilities

 

The accounting treatment of transfers of financial assets depends on the extent and the manner in which the risks and rewards associated with the transferred assets are transferred to third parties:

 

i.If the Bank transfers substantially all the risks and rewards to third parties, as in the case of unconditional sales of financial assets, sales under repurchase agreements at fair value at the date of repurchase, sales of financial assets with a purchased call option or written put option deeply out of the money, utilization of assets in which the assignor does not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset is removed from the Consolidated Statements of Financial Position.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 22
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

ii.If the Bank retains substantially all the risks and rewards associated with the transferred financial asset, as in the case of sales of financial assets under repurchase agreements to repurchase at a fixed price or at the sale price plus interest, securities lending agreements under which the borrower undertakes to return the same or similar assets, and other similar cases, the transferred financial asset is not removed from the Consolidated Statements of Financial Position and continues to be measured by the same criteria as those used before the transfer. However, the following items are recorded:

 

-An associated financial liability for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.
-The income from the transferred asset as well as the expenses associated with the liability contracted.

 

iii.If the Bank neither transfers nor substantially retains all the risks and rewards associated with the transferred financial asset—as in the case of sales of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases— the following distinction is made:

 

a.If the transferor does not retain control over the transferred financial asset: the asset is removed from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer are recorded.

 

b.If the transferor retains control over the transferred financial asset: it continues to be recorded in the Consolidated Statements of Financial Position for an amount equal to its exposure to changes in value and a financial liability associated with the transferred financial asset is recorded. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained if the transferred asset is measured at amortized cost. If the rights and obligations are retained, the asset is measured at fair value.

 

Accordingly, financial assets are only removed from the Consolidated Statements of Financial Position when the rights over the cash flows they generate have terminated or when all the inherent risks and rewards of ownership have been substantially transferred to third parties. Similarly, financial liabilities are only derecognized from the Consolidated Statements of Financial Position when the obligations specified in the contract are discharged or cancelled or the contract has matured.

 

i)Recognizing income and expenses

 

The most significant criteria used by the Bank to recognize its revenues and expenses are summarized as follows:

 

i.Interest revenue, interest expense, and similar items

 

Interest revenue and expense are recorded on an accrual basis using the effective interest method.

 

However, when a given operation or transaction is past due by 90 days or more, when it originated from a refinancing or renegotiation, or when the Bank believes that the debtor poses a high risk of default, the interest and inflation adjustments pertaining to these transactions are not recorded directly in the Consolidated Statement of Income unless they have been actually received.

 

This interest and inflation adjustments are generally referred to as “suspended” and are recorded in memo accounts. This interest is recognized as income, when collected.

 

The resumption of interest income recognition of previously impaired loans only occurs when such loans became current (i.e., payments were received such that the loans are contractually past-due for less than 90 days) or they are no longer classified under the C3, C4, D1 or D2 categories (for loans individually evaluated for impairment).

 

Dividends received from companies classified as “Investments in other companies” are recorded as income when the right to receive them arises.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 23
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

ii.Commissions, fees, and similar items

 

Fee and commission income and expenses are recognized in the Consolidated Statement of Income using criteria that vary according to their nature. The main criteria are:

 

-Fee and commission income and expenses relating to financial assets and liabilities which are measured at fair value through profit or loss are recognized when they are earned.
-Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.
-Those relating to services provided in a single act are recognized when the single act is performed.

 

iv.Loan arrangement fees

 

Fees that arise as a result of the origination of a loan, mainly application and analysis-related fees, are deferred and recognized. in the Consolidated Statement of Income over the term of the loan.

 

j)Impairment

 

i.Financial assets:

 

A financial asset, other than that at fair value through profit and loss, is evaluated on each financial statement filing date to determine whether objective evidence of impairment exists.

 

A financial asset or group of financial assets will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after initial recognition of the asset (“event causing the loss”), and this event or events causing the loss have an impact on the estimated future cash flows of a financial asset or group of financial assets.

 

An impairment loss relating to financial assets recorded at amortized cost is calculated as the difference between the recorded amount of the asset and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

 

An impairment loss relating to a financial asset available for sale is calculated based on a significant or prolonged decline in its fair value.

 

Individually significant financial assets are individually tested to determine their impairment. The remaining financial assets are evaluated collectively in groups that share similar credit risk characteristics.

 

All impairment losses are recorded in income. Any impairment loss relating to a financial asset available for sale previously recorded in equity is transferred to profit or loss.

 

The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. The reversal of an impairment loss shall not exceed the carrying amount that would have been determined if no impairment loss has been recognized for the asset in prior years. The reversal is recorded in income with the exception of available for sale financial assets; any reversal is recorded in other comprehensive income.

 

ii.Non-financial assets:

 

The Bank’s non-financial assets, excluding investment properties, are reviewed at reporting date to determine whether they show signs of impairment (i.e. its carrying amount exceeds its recoverable amount). If such evidence exists, the amount to be recovered from the assets is then estimated.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 24
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

In connection to other assets, impairment losses recorded in prior periods are assessed at each reporting date in search of any indication that the loss has decreased or disappeared and should be reversed. An impairment loss shall be reversed only if it does not exceed the carrying amount of loss for impairment recognized for the asset in prior years.

 

k)Property, plant, and equipment

 

This category includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Assets are classified according to their use as follows:

 

i.Property, plant and equipment for own use

 

Property, plant and equipment for own use (including, among other things, tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing accounts receivable from third parties which are intended to be held for continuing own use and tangible assets acquired under finance leases) are presented at acquisition cost less the related accumulated depreciation and, if applicable, any impairment losses (net carrying amount higher than recoverable amount).

 

Depreciation is calculated using the straight line method over the acquisition cost of assets less their residual value, assuming that the land on which buildings and other structures stand has an indefinite life and, therefore, is not subject to depreciation.

 

The Bank must apply the following useful lives for the tangible assets that comprise its assets:

 

ITEM  Useful
life
(Months)
 
     
Land   - 
Paintings and works of art   - 
Assets retired for disposal   - 
Carpets and curtains   36 
Computers and hardware   36 
Vehicles   36 
Computational systems and software   36 
ATM’s   60 
Machines and equipment in general   60 
Office furniture   60 
Telephone and communication systems   60 
Security systems   60 
Rights over telephone lines   60 
Air conditioning systems   84 
Installations in general   120 
Security systems (acquisitions up to October 2002)   120 
Buildings   1,200 

 

The consolidated entities assess at each reporting date whether there is any indication that the carrying amount of any of their tangible assets’ exceeds its recoverable amount. If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life, if the useful life needs to be revised.

 

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities record the reversal of the impairment loss recorded in prior periods and adjust the future depreciation charges accordingly. In no circumstance may the reversal of an impairment loss on an asset increase its carrying value above the one it would have had if no impairment losses had been recorded in prior years.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 25
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The estimated useful lives of the items of property, plant and equipment held for own use are reviewed at least at the end of each reporting period to detect significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recorded in the Consolidated Statement of Income in future years on the basis of the new useful lives.

 

Maintenance expenses relating to tangible assets (property, plant and equipment) held for own use are recorded as an expense in the period in which they are incurred.

 

ii.Assets leased out under operating leases

 

The criteria used to record the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives, and to record the impairment losses thereof, are consistent with those described in relation to property, plant and equipment held for own use.

 

l)Leasing

 

i.Finance leases

 

Finance leases are leases that substantially transfer all the risks and rewards incidental to ownership of the leased asset to the lessee.

 

When the consolidated entities act as the lessor of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term, which is equivalent to one additional lease payment and so is reasonably certain to be exercised, is recognized as lending to third parties and is therefore included under “Loans and accounts receivables from customers” in the Consolidated Statements of Financial Position.

 

When the consolidated entities act as lessees, they show the cost of the leased assets in the Consolidated Statements of Financial Position based on the nature of the leased asset, and simultaneously record a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

 

In both cases, the finance income and finance expenses arising from these contracts are credited and debited, respectively, to “Interest income” and “Interest expense” in the Consolidated Statement of Income so as to achieve a constant rate of return over the lease term.

 

ii.Operating leases

 

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

 

When the consolidated entities act as the lessor, they present the acquisition cost of the leased assets under "Property, plant and equipment”. The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment held for own use and revenues from operating leases is recorded on a straight line basis under “Other operating income” in the Consolidated Statement of Income.

 

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight line basis to “Administrative and other expenses” in the Consolidated Statement of Income.

 

iii.Sale and leaseback transactions

 

For sale at fair value and operating leasebacks, the profit or loss generated is recorded at the time of sale except in the case of excess of proceeds over fair value, which difference is amortized over the period of use of the asset. In the case of finance leasebacks, the profit or loss generated is amortized over the lease term.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 26
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

m)Factored receivables

 

Factored receivables are valued at the amount disbursed by the Bank in exchange of invoices or other commercial instruments representing the credit which the transferor assigns to the Bank. The price difference between the amounts disbursed and the actual face value of the credits is recorded as interest income in the Consolidated Statement of Income by the effective interest method over the financing period.

 

When the assignment of these instruments involves no recourse the assignor, the Bank assumes the risk..

 

n)Intangible assets

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of a legal transaction (contractual terms) or are developed internally by the consolidated entities. They are assets whose cost can be estimated reliably and from which the consolidated entities have control and consider it probable that future economic benefits will be generated.

 

Intangible assets are recorded initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

 

Internally developed computer software

 

Internally developed computer software is recorded as an intangible asset if, among other requirements (basically the Bank’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated. The estimated useful life for software is 3 years.

 

Intangible assets are amortized on a straight-line basis over their estimated useful life; which has been defined as 36 months.

 

Expenditure on research activities is recorded as an expense in the year in which it is incurred and cannot be subsequently capitalized.

 

o)Cash and cash equivalents

 

For the preparation of the cash flow statement, the indirect method was used, beginning with the Bank’s consolidated pre-tax income and incorporating non-cash transactions, as well as income and expenses associated with cash flows, which are classified as investment or financing activities.

 

For the preparation of the cash flow statement, the following items are considered:

 

i.Cash flows: Inflows and outflows of cash and cash equivalents, such as deposits with the Central Bank of Chile, deposits in domestic banks, and deposits in foreign banks.
ii.Operationing activities: Normal activities performed by banks and other activities that cannot be classified as investing or financing activities.
iii.Investing activities: The acquisition, sale, or disposal by other means of long-term assets and other investments not included in cash and cash equivalents.
iv.Financing activities: Activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 27
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

p)Allowances for Loan Losses

 

The Bank has established allowances to cover probable losses on loans and account receivables from customers in accordance with instructions issued by Superintendency of Banks and Financial Institutions and models and risk assessment as approved by the Board of Directors.

 

The Bank has developed models to determine allowances and provisions for loan losses according to the type of portfolio or operations. Loans and accounts receivables from customers are divided into three categories:

 

i.Consumer loans,
ii.Mortgage loans, and
iii.Commercial loans.

 

The Bank performs an assessment of the risk associated with loans and accounts receivable from customers to determine their allowance for loan losses as described below:

 

-Individual assessment - represents the case where the Bank assesses a debtor as individually significant, or when he/she cannot be classified within a group of financial assets with similar credit risk characteristics, due to their size, complexity or level of exposure.

 

-Group assessment - A group assessment is relevant for analyzing a large number of operations with small individual balances from individuals or small-size companies. The Bank groups debtors with similar credit risk characteristics giving to each group a default probability and recovery rate based on a historical analysis.

 

The models used to determine credit risk allowances are described as follows:

 

I.Allowances for individual assessment

 

An individual assessment of commercial debtors is necessary in the case of companies which, due to their size, complexity or level of exposure regarding the entity, must be known and analyzed in detail according to the SBIF.

 

For the purposes of establishing its provisions, the Bank assigns to each debtor, for both loans and contingent loans, a risk category, after assigning him/her to one of the portfolio categories: Normal, Substandard and Impaired. Risk factors used on the assignment are: industry or sector of the borrower, owners or managers of the borrower, their financial position and payment ability, and payment behavior.

 

The portfolio categories and their definitions are as follows:

 

i.Normal Compliance Portfolio, which corresponds to debtors with a payment ability that allows them to comply with their obligations and commitments and which is not likely to change, based on their current economic and financial position. The classifications assigned to this portfolio are categories from A1 to A6.

 

ii.Substandard Portfolio, includes debtors with financial difficulties or a significant worsening of their payment ability and about which exist reasonable doubts about the full payment of principal and interest within the agreed terms, showing some doubt as to fulfillment of their short-term financial obligations. The classifications assigned to this portfolio are categories from B1 to B4.

 

iii.Impaired Portfolio, includes debtors and their loans from which payment is considered remote since they show deteriorated or null payment ability, with signs of a possible bankruptcy, who required a forced debt restructuring or any debtor who has been in default for over 90 days in his payment of interest or capital, are included in this portfolio. The classifications assigned to this portfolio are categories from C1 to C6.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 28
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

Normal Compliance and Substandard Portfolios

 

As part of individual debtor analysis, the Bank classifies debtors in the following categories, assigning them a percentage for probability of default and loss given default, which result in the expected loss percentages.

 

Type of Portfolio  Debtor’s
Category
  Probability of
Non-
Performance
(%)
   Severity
(%)
   Expected
Loss
(%)
 
   A1   0.04    90.0    0.03600 
   A2   0.10    82.5    0.08250 
Normal portfolio  A3   0.25    87.5    0.21875 
   A4   2.00    87.5    1.75000 
   A5   4.75    90.0    4.27500 
   A6   10.00    90.0    9.00000 
   B1   15.00    92.5    13.87500 
Substandard Portfolio  B2   22.00    92.5    20.35000 
   B3   33.00    97.5    32.17500 
   B4   45.00    97.5    43.87500 

 

At the beginning, the Bank determines credit exposure, which includes the book value of loans and accounts receivable from customers plus contingent loans, minus any amount that would be recovered through guarantees execution. To the net exposure amount determined, the respective expected loss percentage is applied.

 

Impaired Portfolio

 

The allowance to impaired portfolio for the calculated, starting with the determination of the expected loss rate, deducting any amount that would be recovered through guarantee execution and the present value of recoveries through collection actions, net of related expenses.

 

Once expected loss range is determined, related allowance percentage is applied over the exposure amount, which includes loans plus contingent loans related to a debtor.

 

The allowance percentages applied over exposure are as follows:

 

Classification  Estimated range of loss  Allowance 
C1  Up to 3%   2%
C2  More than 3% and up to 20%   10%
C3  More than 20% and up to 30%   25%
C4  More than 30% and up to 50%   40%
C5  More than 50% and up to 80%   65%
C6  More than 80%   90%

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 29
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

II.Allowances for group assessment

 

The collective assessment is relevant to address a large number of smaller balance loans related to individuals and small-size companies.

 

Levels of required allowances have been established by the Bank, in accordance with loan losses methodology by classifying and grouping the loan portfolio based on similar credit risk characteristic indicative of debtor’s ability to pay all amounts due according to the contractual terms. The Bank uses models based on debtors’ characteristics, payment history, outstanding loans, and overdue loans, among others.

 

The Bank uses methodologies to establish credit risk, based on internally developed models to estimate the allowances for the group-evaluated portfolio, which include non-individually commercial significant loans, mortgage and consumer loans (including installment loans, credit cards and overdraft lines). This methodology allows the Bank to independently identify the portfolio behavior and establish the required allowance to cover losses arising during the year.

 

Customers are classified according to their internal and external characteristics, using customer- specific portfolio models to differentiate each portfolio’s risk in an appropriate manner. This is known as the allocation profile method.

 

The allocation profile method is based on a statistical construction model that establishes a relation through logistic regression between variables such as default, payment behavior outside the Bank, and socio-demographic data, among others, and a response variable which determines the client’s risk, in this case is 90 days or more of non-performance. Afterwards, common profiles are established and assigned a Probability of Non-Performance (PNP) and a recovery rate based on a historical analysis known as Severity (SEV).

 

Therefore, once the customers have been profiled and assigned a PNP and a SEV relating to the loan’s profile, the exposure at default (EXP) is calculated. This exposure includes the book value of the loans and accounts receivable from the customer, plus contingent loans, minus any amount that would be recovered by guarantee execution (for credits other than consumer loans).

 

Changes in accounting estimates

 

In 2012, and as a response to the ongoing improvement and monitoring process of the allowance models, the Bank updated its allowance model for consumer loans. Until June 2012, estimated loss rates in said model were established by the historical behavior of net charge-offs of recoveries for each risk profile. It is important to mention that this method only considered historical debt data for each specific profile and did not include the use of any other statistical information. Since June 2012, loss rate has been estimated with the product of the Probability of Default (PD) and Loss Given Default (LGD); established according to the historical behavior of the different profiles and based on a duly based historical analysis. These changes generated an effect on the income of Ch$24,753 million. The effect of these improvements was considered as a change of estimate, following International Accounting Standards No. 8 “Accounting Policies, Changes in Accounting Estimates and Errors”; therefore, the effect was reported on the Consolidated Statement of Income.

 

III.Additional Provisions

 

According to SBIF rules, banks are allowed to establish provisions over the limits described below to protect themselves from the risk of non-predictable economical fluctuations that could affect the macroeconomical environment or the situation of a specific economical sector.

 

According to Chapter B-1, No. 10, from the SBIF Compendium of Accounting Standards, these provisions will be recorded in liabilities, similar to provisions for contingent loans.

 

As of December 31 2013 and 2012, the Bank has not established provisions for these concepts.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 30
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

IV.Charge-offs

 

As a general rule, charge-offs should be done when the contract rights over cash flow expire. In the case of loans and account receivable from customers, even if the above rights have not expired, the Bank will charge-off these amounts in accordance with Title II of Chapter B-2 of the Compendium of Accounting Standards (SBIF).

 

These charge-offs consist of derecognition from the Consolidated Statements of Financial Position of the corresponding loans operations in its entirety, and, therefore, include portions not past-due of a loan in the case of installments loans or leasing operations (no partial charge-offs exists).

 

Charge-offs are always recorded within provision for loan losses through the Consolidated Statement of Income in accordance with Chapter B-1 of the Compendium of Accounting Standards (SBIF), no matter what causes the charge-off. Subsequent payments obtained from charged-off loans will be recognized in the Consolidated Statement of Income as a recovery of loans previously charged-off.

 

Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments based on the time periods expired since reaching overdue status, as described below:

 

Type of loan   Term 
      
Consumer loans with or without collateral   6 months 
Other transactions without collateral   24 months 
Commercial loans with collateral   36 months 
Mortgage loans   48 months 
Consumer leasing   6 months 
Other non-mortgage leasing transactions   12 months 
Mortgage leasing (household and business)   36 months 

 

Any renegotiation of an already charged-off loan will not give rise to income—as long as the operation is still in an impaired status—and the effective payments received are accounted for as a recovery from loans previously charged-off.

 

Renegotiated loans will be recognized as an asset if they are no longer accounted for as impaired, generating a recovery from loan previously charged-off.

 

V.Recovery of loans previously charged off and accounts receivable from customers

 

Recovery of previously charged-off loans and accounts receivable from customers, are recorded in the Consolidated Statement of Income as a deduction from provisions for loan losses.

 

q)Provisions, contingent assets, and contingent liabilities

 

Provisions are liabilities of uncertain timing or amount. These provisions are recognized in the Consolidated Statements of Financial Position when the Bank:

 

i.has a present obligation (legal or constructive) as a result of past events, and
ii.To the date of these financial statements, it is probable that an outflow of resources will be required to settle these obligations and the amount of these resources can be readily measured.

 

Contingent assets or contingent liabilities are any potential rights or obligations arising from past events whose existence will be confirmed only by the occurrence or non-occurrence if one or more uncertain future events that are not wholly under control of the Bank.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   31
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The following are classified as contingent in the supplementary information:

 

i.Guarantees and bonds: Encompasses guarantees, bonds, and standby letters of credit referred to on Chapter 8-10 of the Updated Regulations Compendium. It also includes payment guarantees from factoring transactions in accordance with Chapter 8-38 of said Compendium.

 

ii.Confirmed foreign letters of credit: Encompasses letters of credit confirmed by the Bank.

 

iii.Documentary letters of credit: Includes documentary letters of credit issued by the Bank, which have not yet been negotiated.

 

iv.Documented guarantees: Guarantees with promissory notes referred to on Chapter 8-11 of the Updated Regulations Compendium.

 

v.Interbank guarantee: Guarantee letters issued according to the provisions of Title II of Chapter 8-12 of the Updated Regulations Compendium.

 

vi.Unrestricted credit lines: The unused amount of credit lines that allow customers to draw without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts).

 

vii.Other credit commitments: Amounts not yet lent under committed loans, which must be disbursed at an agreed future date when events contractually agreed upon with the customer occur, such as in the case of lines of credit linked to the progress of a construction or similar projects.

 

viii.Other contingent credits: It includes any other kind of commitment by the Bank which may exist and give rise to lending when certain future events occur. In general, this includes unusual transactions such as pledges made to secure the payment of loans among third parties or derivative contracts made by third parties that may result in a payment obligation and are not covered by deposits.

 

The consolidated annual accounts reflect all significant provisions for which it is estimated that the probability of having to meet the obligation is more likely than not.

 

Provisions are quantified using the best available information on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year and are used to address the specific liabilities for which they were originally recognized. Partial or total reversals are recorded when such liabilities cease to exist or decrease.

 

Provisions are classified according to the obligation covered as follows:

 

-Provision for employee salaries and expenses.
-Provision for mandatory dividends
-Provisions for contingent credit risks
-Provisions for contingencies

 

r)Deferred income taxes and other deferred taxes

 

The Bank records, when appropriate, deferred tax assets and liabilities for the estimated future tax effects attributable to differences between the carrying amount of assets and liabilities and their tax bases. The measurement of deferred tax assets and liabilities is based on the tax rate, according to the applicable tax laws, using the tax rate that applies to the period when the deferred asset and liability will be settled.. The future effects of changes in tax legislation or tax rates are recorded in deferred taxes beginning on the date on which the law approving such changes is published.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   32
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

s)Use of estimates

 

The preparation of the financial statements requires Management to make estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

 

In certain cases, generally accepted accounting policies require that assets or liabilities be recorded or disclosed at their fair values. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, quoted market prices in active markets have been used as the basis for measurement. Where quoted market prices in active markets are not available, the Bank has estimated such values based on the best information available, including the use of internal valuation models and other valuation techniques.

 

The Bank has established allowances to cover incurred losses in accordance with regulations issued by the Superintendency of Banks and Financial Institutions. These regulations require that, to estimate the allowances, they must be regularly evaluated taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in forecasted portfolio quality, credit quality and economic conditions that may adversely affect the borrowers’ ability to pay. Increases in the allowances for loan losses are reflected as “Allowance for loan losses” in the Consolidated Statement of Income. Loans are charged-off when Management determines that a loan or a portion thereof is uncollectible. Charge-offs are recorded as a reduction of the allowance for loan losses.

 

The relevant estimates and assumptions are regularly reviewed by the Bank’s Management to quantify certain assets, liabilities, revenues, expenses, and commitments. Revised accounting estimates are recorded in the period in which the estimate is revised. .

 

These estimates, made on the basis of the best available information, mainly refer to:

 

-Impairment losses of certain assets (Notes 8, 9, 10, and 35)
-The useful lives of tangible and intangible assets (Notes 14, 15, and 35)
-The fair value of assets and liabilities (Notes 6, 7,8, 12, and 39)
-Commitments and contingencies (Note 24)
-Current and deferred taxes (Note 16)

 

t)Non-current assets held for sale

 

Non-current assets (or a group which includes assets and liabilities for disposal) expected to be recovered mainly through sales rather than through continued use, are classified as held for sale. Immediately prior to this classification, assets (or elements of a disposable group) are re-measured in accordance with the Bank’s policies. The assets (or disposal group) are measured at the lower of carrying amount or fair value minus cost of sales.

 

As of December 31, 2013 and 2012, the Bank has not classified any non-current assets as held for sale.

 

Assets received or awarded in lieu of payment

 

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognized at their fair value (as determined by an independent appraisal). A price is agreed upon by the parties through negotiation, or, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction. In the both cases, an independent appraisal is performed. Any excess of the fair value over the outstanding loan balance, less costs to sell of the collateral, is returned to the client.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   33
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

These assets are subsequently adjusted to their net recoverable amount less cost to sale (assuming a forced sale). The difference between the fair value of the asset and the estimated net recoverable amount less costs to sell is charged to net income for the period, under “Other operating expenses”. The result obtained in the sale of the asset is subsequently recorded under “Other operating income”.

 

Independent appraisals are obtained at least every 18 months and fair values are adjusted accordingly. No adjustments have been made between appraisals considering the stability of the real estate market in Chile during past years and the expected stability of the real estate market in the coming years.

 

At least once a year, the Bank performs the necessary analysis to update these assets’ costs to sell. According to the Bank’s survey, as of December 31, 2013 the average cost to sell was estimated at 5.7% of the appraised value (4.5% as of December 31, 2012).

 

u)Earnings per share

 

Basic earnings per share are determined by dividing the net income attributable to the Bank shareholders for the period by the weighted average number of shares outstanding during the year.

 

Diluted earnings per share are determined in the same way as basic earnings, but the weighted average number of outstanding shares is adjusted to take into account the potential diluting effect of stock options, warrants, and convertible debt.

 

As of December 31, 2013 and 2012 the Bank did not have any instruments that generated diluting effects over equity.

 

v)Temporary acquisition (assignment) of assets

 

Purchases (sales) of financial assets under non-optional resale (repurchase) agreements at a fixed price (“repos”) are recorded in the Consolidated Statements of Financial Position based on the nature of the debtor (creditor) under “Deposits in the Central Bank of Chile,” “Deposits in financial institutions” or “Loans and accounts receivable from customers” (“Central Bank of Chile deposits,” “Deposits from financial institutions” or “Customer deposits”).

 

Differences between the purchase and sale prices are recorded as financial interest over the term of the contract.

 

w)Assets under management and investment funds managed by the Bank

 

Assets owned by third parties and managed by certain companies that are within the Bank’s scope of consolidation (Santander Asset Management S.A., Administradora General de Fondos and Santander S.A. Sociedad Securitizadora), are not included in the Consolidated Statements of Financial Position. Management fees for this activity are included in “Fee and commission income” item income in the Consolidated Statement of Income.

 

x)Provision for mandatory dividends

 

As of December 31, 2013 and 2012 the Bank recorded an asset (provision) for mandatory dividends. This provision is made pursuant to Article 79 of the Corporations Act, which is in accordance with the Bank’s internal policy, pursuant to which at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by unanimous vote of the outstanding shares. This provision is recorded, as a deducting item, under the “Retained earnings – provisions for mandatory dividends” line of the Consolidated Statement of Changes in Equity.with offset to Provisions.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   34
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

y)Employee benefits

 

i.Post-employment benefits – Defined Benefit Plan:

 

According to current collective labor agreements and other agreements, Grupo Santander Chile has an additional benefit available 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.

 

Features of the Plan:

 

The main features of the Post-Employment Benefits Plan promoted by the Santander Chile Group are:

 

a.Aimed at the Group’s management
b.The general requisite to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.
c.The Santander Group will take on insurance (pension fund) on your behalf that it will pay (contribution) periodically.
d.The Santander Group will be responsible for granting the benefits directly.

 

For determine the present value of the defined benefit obligation and the current service cost, the method of projected unit credit is used.

 

Components of defined benefit cost include:

 

-current service cost and any past service cost, which are recognized in profit or loss for the period;
-net interest on the liability (asset) for net defined benefit, which is recognized in profit or loss for the period;
-new liability (asset) measurements for net defined benefit include: (a) actuarial gains and losses; (b) the performance of the plan assets and; (c) changes in the effect of the asset ceiling, which are recognized in other comprehensive income.

 

The liability (asset) for net defined benefit is the deficit or surplus, determined as the difference between the present value of the defined benefit obligation minus the fair value of plan assets.

 

Plan assets comprise the insurance policies taken out by the Group with a third party that is not a related party. These assets are held by an entity legally separated from the Group and exist solely to pay benefits to employees.

 

The Bank presents the present service cost and the net interest of the Personnel wages and expenses on the Consolidated Financial Statements of Income. Given the structure of the plan, this does not generate actuarial gains and losses, the performance plan is established and fixed during the period, so that there are no changes in the asset ceiling. Given the above, there are no recognized amounts in other comprehensive income.

 

The liability for post-employment benefits recognized in the Consolidated Statement of Financial represents the deficit or surplus in the defined benefit plans of the Bank. Any surplus resulting from the calculation is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions.

 

When employees leave the plan before meeting the requirements to be eligible for the benefit, contributions made ​​by the Group are reduced.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   35
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

ii.Severance Provision:

 

Severance for years of employment are recorded only when they actually occur or upon the availability of a formal and detailed plan in which the fundamental modifications to be made are identified, provided that such plan has already started to be implemented or its principal features have been publicly announced, or objective facts about its execution are known.

 

iii.Share-based compensation:

 

The allocation of equity instruments to executives of the Bank and its Subsidiaries as a form of compensation for their services, when those instruments are provided at the end of a specific period of employment, is recorded as an expense in the Consolidated Statement of Income under the “Personnel expenses” item, as the relevant executives provide their services over the course of the period.

 

These benefits do not generate diluting effects, since they are based on shares of Banco Santander S.A. (the parent company of Banco Santander Chile, headquartered in Spain).

 

z)Reclassification of items

 

Banco Santander Chile reclassifies items in the Financial Statements to present more clear and relevant information.

 

These reclassifications have no significant impact on the current Consolidated Financial Statements.

 

aa)New accounting standards

 

i.New and revised standards affecting amounts reported and/or disclosures in the financial statements:

 

In the current year, the Bank has applied a number of new revised IFRSs issued by the international Accounting Standard Boar (IASB) as well as accounting standards as issued by the both the SBIF that are mandatory effective for an accounting period that begins on or after 1 January 2013. These standards have been fully incorporate by the Bank and are detailed as follows:

 

1.Accounting Regulations Issued by the SBIF

 

Circular Letter No. 3548 - On March 19, 2013 the SBIF issued this circular letter to match the name used in the instructions to the newest amendments to IAS 1 replacing “Income Statement” and “Other Comprehensive Income” by “Statement of Financial Position” and “Statement of other Comprehensive Income for the period”. Management has applied this circular letter in these Financial Statements.

 

2.New and revised IFRS standards effective in current year

 

Amendment to IAS 12, Income Taxes – On December 20, 2010 the IASB published Deferred Taxes: Recovery of Underlying Assets – Modifications to IAS 12. The modifications establish an exemption to the IAS 12 general principle that the measurement of assets and liabilities by deferred taxes should reflect the tax consequences that would continue the way the entity expects to recover the book value of an asset. The exemption applies specifically to assets and liabilities by deferred taxes originating from investment properties measured using the fair value model from IAS 40 and investment properties acquired in a business combination, if this is afterwards measured using the IAS 40 fair value model. The modification incorporates the assumption that the current value of the investment property will be recovered when sold, except when the property is depreciable and kept within a business model that aims at consuming substantially all economic benefits through time rather than through sale. These modifications should be back applied demanding a back re issuance of all assets and liabilities by differed taxes within the reach of this modification, including those initially recorded in a business combination. These amendments did not have an impact on our consolidated financial statements.

 

Amendment to IFRS 1, First Time Adoption of international financial reporting standards IFRS – On December 20, 2010 the IASB published certain modifications to IFRS 1, specifically:

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   36
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

(i) Elimination of Set Dates for First Time Adopters - These modifications help first time adopters of IFRS by replacing the back application date of the un-record of financial assets and liabilities of ‘January 1, 2004’ with the ‘transition date to IFRS’. In this way, first time IFRS adopters do not have to apply the un-record requirements of IAS 39 retrospectively to a previous date and free adopters to recalculate profit and losses of ‘day 1’ over transactions that took place before the transition date to IFRS.

 

(ii) Severe hyperinflation – These modifications provide guidelines for entities coming from a sever hyperinflation, allowing them at the date of transaction of entities, to measure all assets and liabilities held before the normalization of functional currency date to fair value on the transition to IFRS date and use that fair value as the attributed cost for those assets and liabilities in the statements of opening financial position under IFRS. Entities using this exemption will have to describe the circumstances of how and why their functional currency was subjected to sever hyperinflation and the circumstances that led to end those conditions.

 

These modifications will be mandatorily applied for yearly periods beginning on or after July 1, 2012. Early implementation is permitted. The implementation of this amendment did not have an impact on the Bank’s Consolidated Financial Statements since we are already preparing our Statements according to IFRS.

 

IFRS 10, Consolidated Financial Statements - IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 changes the definition of control such that an investor has control over an investee when a) it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Additional guidance has been included in IFRS 10 to explain when an investor has control over an investee. Some guidance included in IFRS 10 that deals with whether or not an investor that owns less than 50% of the voting rights in an investee has control over the investee is relevant to the Bank. The implementation of this standard did not have a significant impact on our consolidated financial statements.

 

IFRS 11, Joint Arrangements — IFRS 11 replaces IAS 31 Interests in Joint Ventures, and the guidance contained in a related interpretation, SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers, has been incorporated in IAS 28 (as revised in 2011). IFRS 11 deals with how a joint arrangement of which two or more parties have joint control should be classified and accounted for. Under IFRS 11, there are only two types of joint arrangements – joint operations and joint ventures. The classification of joint arrangements under IFRS 11 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure, the legal form of the arrangements, the contractual terms agreed by the parties to the arrangement, and, when relevant, other facts and circumstances. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. Previously, IAS 31 contemplated three types of joint arrangements – jointly controlled entities, jointly controlled operations and jointly controlled assets. The classification of joint arrangements under IAS 31 was primarily determined based on the legal form of the arrangement (e.g. a joint arrangement that was established through a separate entity was accounted for as a jointly controlled entity).

 

The initial and subsequent accounting of joint ventures and joint operations is different. Investments in joint ventures are accounted for using the equity method (proportionate consolidation is no longer allowed). Investments in joint operations are accounted for such that each joint operator recognises its assets (including its share of any assets jointly held), its liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of revenue from the sale of the output by the joint operation) and its expenses (including its share of any expenses incurred jointly). Each joint operator accounts for the assets and liabilities, as well as revenues and expenses, relating to its interest in the joint operation in accordance with the applicable Standards. The implementation of this standard did not have a significant impact on our consolidated financial statements.

 

IFRS 12, Disclosure of Interests in Other Entities - On May 12, 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities, which requires further disclosures related to interests in subsidiaries, joint agreements, associates and/or unconsolidated structured entities. IFRS 12 establishes disclosure objectives and specifies minimum disclosures that an entity should provide to fulfill those objectives. An entity should disclose information that allows users of its financial statements evaluate the nature and risks associated with interests in other entities and the effects of those interests on its financial statements. The disclosure requirements are extensive and represent and effort that could require gathering the necessary information. The implementation of this standard did not have a significant impact on our consolidated financial statements.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   37
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

IFRS 13, Fair Value Measurement - IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realisable value for the purposes of measuring inventories or value in use for impairment assessment purposes).

 

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements.

 

IFRS 13 requires prospective application from 1 January 2013. In addition, specific transitional provisions were given to entities such that they need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard. This standard was applied by the Bank in all matters that are not in conflict with the provisions of Chapter 7-12 "Fair value of financial instruments" issued by SBIF regarding the determination of fair value and IAS 39 (2009) "Financial Instruments: Recognition and Measurement.

 

Amendment to IAS 1 - Presentation of Items of Other Comprehensive Income - The amendments introduce new terminology, whose use is not mandatory, for the statement of comprehensive income and income statement. Under the amendments to IAS 1, the ‘statement of comprehensive income’ is renamed as the ‘statement of profit or loss and other comprehensive income’ [and the ‘income statement’ is renamed as the ‘statement of profit or loss’]. The amendments to IAS 1 retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require items of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis – the amendments do not change the option to present items of other comprehensive income either before tax or net of tax. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income and total comprehensive income.

 

Amendment to IAS 19 - Employee Benefits - IAS 19 (as revised in 2011) changes the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in the fair value of plan assets when they occur, and hence eliminate the ‘corridor approach’ permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. All actuarial gains and losses are recognized immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of IAS 19 are replaced with a ‘net interest’ amount under IAS 19 (as revised in 2011), which is calculated by applying the discount rate to the net defined benefit liability or asset. These changes have had an impact on the amounts recognized in profit or loss and other comprehensive income in prior years (see Note 2 – Accounting changes). In addition, IAS 19 (as revised in 2011) introduces certain changes in the presentation of the defined benefit cost including more extensive disclosures.

 

Specific transitional provisions are applicable to first-time application of IAS 19 (as revised in 2011). The Bank applied this amendment, in accordance with IAS 8 - Accounting Policies Changes. The effect of this application is shown in detail on Note 02 - Accounting changes, on these Consolidated Financial Statements.

 

Annual Improvements and International Standards to Financial Information – On May 17, 2012 the IASB issued “Annual Improvements to IFRS: 2009-2011 Cycle”, incorporating amendments to five standards.

 

-IFRS 1 - First-time adoption of standards Related to the relative implementation of the IFRS 1and loan costs.
-IAS 1 - Presentation of Financial Statements: Clarification on the requirements for comparative information.
-IAS 16 - Property, Plant and Equipment: Regarding the classification of the auxiliary equipment.
-IAS 32 - Financial Instruments: Presentation: On the tax effect of distributions to holders of equity instruments.
-IAS 34 - Interim Financial Reporting: Interim financial reporting and segmented information for total assets and liabilities.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   38
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

The amendments to the IFRS, cycle 2009-2011, are effective for annual periods beginning on or after January 1, 2013, although early application is permitted. These amendments did not have a material impact on our consolidated financial statements.

 

IAS 27 (2011), Separated Financial Statements - IAS 27 Consolidated and Separated Financial Statements was modified by IFRS 10 but keeps the current guidelines for separated financial statements. These amendments did not have a material impact on our consolidated financial statements.

 

IAS 28 (2011) - Investments in Associates and Joint Ventures - IAS 28 Investments in Associates was modified to conform the changes related to the issuing of IFRS 10 and IFRS 11. These amendments did not have a material impact on our consolidated financial statements.

 

Amendment to IFRS 10 - Consolidated Financial Statements, IFRS 11 - Joint Agreements and IFRS 12 - Disclosure of Interests in Other Entities - Transition Guidance - On June 28, 2012, the IASB published Consolidated Financial Statements, Joint Agreements and Disclosure of interests in Other Entities (amendments to IFRS 10, IFRS 11 and IFRS 12). Amendments are meant to lighten up the transition from IFRS 10, IFRS 11 and IFRS 12 by "limiting the requirement to provide comparative information adjusted only for the immediately preceding year comparative." Also, the amendments to IFRS 11 and IFRS 12 eliminate the requirement of providing comparative information for the periods prior to the immediately following year. The effective date of these amendments is for annual periods beginning on or after January 1, 2013, in line with the effective dates of IFRS 10, IFRS 11 and IFRS 12. Management believes that this amendment will be adopted in the consolidated financial statements of the Bank for the period beginning on January 1, 2014. These amendments did not have a material impact on our consolidated financial statements.

 

Amendment to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities - The Bank has applied the amendments to IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities for the first time in the current year. The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement.

 

The amendments have been applied retrospectively. The application of the amendments has had no material impact on the disclosures or on the amounts recognised in the consolidated financial statements.

 

IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine - On October 19, 2012, the IFRS Interpretations Committee published IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”). IFRIC 20 applies for all type of natural resources extracted by using the surface mine process. Individual costs of the stripping activity that improve the access to minerals must be recognized as non-current asset (“stripping activity asset”) when certain criteria are met; while the costs of normal continuous stripping activities must be recording following IAS 2 - Inventories. The stripping activity asset must be initially measured at the lower cost and, later, at lower cost or revalued amount minus depreciation or amortization and impairment losses. The interpretation is effective for yearly periods beginning on or after January 1, 2013. Early application is permitted. The amendment did not have an impact on our financial statements since its business activities do not consider the mining of natural resources.

 

ii.New accounting regulations and instructions issued by the SBIF and new and revised IFRSs in issue but not yet effective.

 

As of the date of issuance of these consolidated financial statements new IFRS had been issued by the IASB as well as accounting standards by the SBIF that were not enforced as of December 31, 2013.

 

1.Accounting Regulations issued by the SBIF

 

As of December 31, 2013 there are no new Accounting Regulations issued by the SBIF to be implemented.

 

2.New and revised IFRS standards issued by the IASB

 

IFRS 9, Financial Instruments – On November 12, 2009 the IASB issued IFRS 9, Financial Instruments. This regulation incorporates new requirements for the classification and measurement of financial assets and it is effective for yearly periods beginning on or after January 1, 2013. Early application is permitted. IFRS 9 specifies how an entity should classify and measure its financial assets. It requires that all financial assets be classified in their entirely on the basis of the entity’s business model for the management of financial assets and the features of the financial assets agreement cash flows.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   39
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

Financial assets are measured whether by amortized cost or fair value. Only financial assets classified as measured to amortize cost will be tested for Impairment. On October 28, 2010, the IFRS issued a revised version of IFRS 9, Financial Instruments. The revised Standard keeps the requirements for classification and measurement of financial assets published on November 2009 but it adds guidelines on classification and measurement of financial liabilities. As part of the restructuring of IFRS 9, the IASB has also reproduced the guidelines on un-record of financial instruments and related implementation guidelines from IAS 39 to IFRS 9. These new guidelines constitute the first stage of the IASB project to replace IAS 39. The other stages, impairment and hedge accounting, have not been finished yet.

 

The guidelines included in IFRS 9 about the classification and measurement of financial assets have not changed from those established in IAS 39. In other words, financial liabilities will continue to be measured whether by amortized cost or fair value with change in income. The concept of bifurcation of embedded derivatives in a contract by financial asset has not change either. Financial liabilities held for trade will continue to be measured at fair value with changes in profit and loss, and all other financial assets will be measured at amortized cost unless the fair value option is applied using currently existing criteria in IAS 39.

 

Notwithstanding the latter, there are two differences with regards to IAS 39:

·The presentation of effects from changes in fair value attributable to a liability’s credit risk; and
·The elimination of the cost exemption for liability derivatives to be settled by giving non traded equity instruments.

 

On December 16, 2012 the IASB issued Mandatory Implementation Date of IFRS 9 and Transition Disclosures, deferring the effective date versions of both 2009 and 2010 for annual periods beginning on or after 01 January 2015. Prior to the amendments, the application of IFRS 9 was mandatory for annual periods beginning on or after 2013. Modifications change the requirements for the transition from IAS 39 Financial Instruments: Recognition and Measurement to IFRS 9. In addition, the amendments also modify IFRS 7 Financial Instruments: Disclosures, to add certain requirements in the reporting period including the enforcement date of IFRS 9.

 

Amendments are effective for yearly periods beginning on or after January 1, 2015; early application is permitted. Management, pursuant to SBIF requirements, will not early adopt this standard. Moreover, it will not be applied until the SBIF establishes it as mandatory for all banks.

 

Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities - The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead to measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements.

 

To qualify as an investment entity, a reporting entity is required to:

·obtain funds from one or more investors for the purpose of providing them with professional investment management services;
·commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
·measure and evaluate performance of substantially all of its investments on a fair value basis.

 

Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities. Management believes that this amendment will be adopted in the consolidated financial statements of the Bank for the period beginning on January 1, 2014.

 

Investment entities – Amendments to IFRS 10 – Consolidated Financial Statements; IFRS 12 – Disclosures of Interests in Other Entities and IAS 27 – Separated Financial Statements - On October 31, 2012, the IASB issued “Investment entities (amendments to IFRS 10, IFRS 12 and IAS 27)”, providing an exception to the consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities that follow the definition of “investment entity”, as well as some investment funds. Instead, said entities will measure their investments in subsidiaries at fair value through profit and loss, pursuant to IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement.

 

Amendments also require additional disclosure about whether the entity is considered an investment entity, details of non-consolidated subsidiaries, the nature of the relationship and certain transactions between the investment entity and its subsidiaries. On the other hand, amendments force an investment entity to account for its investment in a subsidiary in the same way in the consolidated financial statements as well as in its individual financial statements (or just provide individual financial statements if all subsidiaries are not consolidated). These modifications will be effective for yearly periods beginning on or after January 1, 2014. In-advance enforcement is allowed. Early application permitted. Management believes this new regulation will be adopted in the Bank’s Consolidated Financial Statements for the period beginning on January 1, 2013. Management is currently evaluating the possible impact this might have. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   40
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities

 

The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realisation and settlement. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRIC 21 - Levies – On May 20, 2013 the IASB issued this interpretation addressing the accounting for a liability to pay a levy if such liability is within the IAS 37. It also addresses the accounting for a liability to pay a levy which amount and maturity is true. For the purposes of this Interpretation, a levy is an outflow of resources embodying economic benefits imposed by governments to entities according to legislation (laws and regulations). This is different from the outflow of resources within the reach of IAS 12 Income Tax, and fines or other penalties imposed for breaches of the legislation. An entity shall apply these modifications retrospectively for annual periods beginning on or after January 1, 2014. Earlier application permitted. If an entity applies this Interpretation for prior periods shall disclose this fact. Changes in accounting policies resulting from the application of this Interpretation shall be accounted for retrospectively in accordance with IAS 8 - Accounting policies, changes in accounting estimates and errors. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Amendment IAS 36, Impairment of the Assets – On May 29, 2013 the IASB issued Recoverable Amount Disclosures for Non-Financial Assets. The objective of this amendment is to harmonize the disclosure requirements about fair value without the disposal costs and value in use, when present value techniques are used to measure the recoverable amount of assets that are considered value impaired, requiring an entity to disclose the discount rates that have been used to determine the recoverable amount of assets that are considered value impaired .. An entity shall apply these modifications retrospectively for annual periods beginning on or after January 1, 2014. In-advance enforcement is allowed. An entity shall not apply these modifications to periods (including comparative periods) in which IFRS 13 is not applied. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Amendment IAS 39, Financial instruments: recognition and measurement – On June, 27, 2013 the IASB issued the amendment Novation of Derivatives and Continuation of Hedge Accounting, establishing that a derived contract novation with a central counterparty (clearing house) would generate a hedged interruption, derecognition of the original derivative and the recognition of the new derivative contract novated. While product novation laws or regulations do not qualify for derecognition and therefore hedge accounting will not be interrupted (if requirements are met). The effective date of application for annual periods beginning on January 1, 2014, may be applied in advance. An entity shall apply the amendment retrospectively in accordance with IAS 8 - Accounting policies, changes in accounting estimates and errors. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRS 9 - Financial Instruments – Coverage and Amendments accounting for IFRS 9, IFRS 7 and IAS 39 – On November 19, IASB issued this amendment which includes a new coverage accounting general model. It is more closely aligned with risk management, providing more useful information to users of financial statements. Moreover, the requirements relating to the fair value option for financial liabilities were changed to address own credit risk. This improvement requires that the effects of changes in credit risk of liability should not affect the income of the period unless the liabilities are hold for trading. Early adoption of this amendment is allowed without the application of the other requirements of IFRS 9. Additionally, it conditions the effective date of entry into force to the end of the draft IFRS 9, allowing equally to be adopted. The Bank’s management is assessing the potential impact of the adoption of these modifications regarding IFRS 7 and IAS 39, given that those regarding IFRS 9 shall not be applied to the financial statements of the Bank by express provision of SBIF.

 

Amendment IAS 19 – Defined benefit plans: employee contributions – On November 21, 2013 the IASB issued these modifications establishing the treatment for employee or third party contributions when accounting for the defined benefit plans. Therefore, if the amount of the contributions is independent of the number of years of service, it allows an entity to recognize these contributions as a reduction in service costs in the period in which the related service is rendered, instead of attributing contributions to periods of service, and if the amount of the contribution depends on the number of years of service, an entity to attribute these contributions to periods of service is required, using the same method of allocation required by paragraph 70 of the IAS 19, for gross proceeds (that is, using the contribution plan formula or a linear basis). These modifications apply for annual periods starting as of July 1, 2014 retroactively, as stated by IAS 8 - Accounting policies changes in accounting estimates and errors. Earlier application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   41
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

Annual modifications, cycle 2010-2012 – On December 12, 2013 this document covering seven standards was issued:

 

-IFRS 2 - Share-based Payments: It modifies the definition of 'concession consolidation condition (irrevocability)' y 'market conditions' and adds the definition of 'execution conditions' and ' service condition' (which was a part of the definition of the concession consolidation condition).
-IFRS 3 - Business Combinations: it states that the contingent considerations classified as assets or liabilities must be measure to fair value on each report date.
-NIFRS 8 - Operating Segments: it required that and entity reveals the judgments made by the administration regarding the implementations of the criteria for the operating segments aggregation and it states that the entity must only provide reconciliation between all the assets of the reportable segment and the entity's assets if the previous ones are reported regularly.
-IFRS 13 - Fair value measurement: it states that the issuing of IFRS 13 and the modification of IFRS 9 and IAS 39 did not eliminate the possibility of measuring the accounts receivable and pay in the short term those that lack an established interest rate on the invoice amount without discounting if the effect of such action is intangible.
-IAS 16 - Property, plant and equipment: it states that when a property, plant and equipment element is revaluated, the gross carrying value is adjusted consistently with the revaluation of the carrying value.
-IAS 24 - Related party disclosures: it states that an entity providing administration personnel services key to the informing entity or to the parent of the reporting entity, this is a related party of the reporting entity.
-IAS 38 - Intangibles: it states that when an intangible element is revaluated, the gross carrying value is adjusted consistently with the revaluation of the carrying value.

 

IFRS annual modifications, 2010-2012 cycle, must be implemented for annual periods starting on or after July 1, 2014. Early application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Annual modifications, cycle 2011-2013 – On December 12, 2013 this document covering four standards was issued:

 

-IFRS 1 - First-time Adoption: It states that an entity, on its first financial statements under IFRS, has the possibility of choosing between applying an existing and currently effective IFRS, and applying a new or revised IFRS which is not currently mandatory, provided earlier application is permitted. It is required that the entity applies the same version of the IFRS throughout the periods covered by the first financial statements according to IFRS.
-IFRS 3 - Business Combinations: It states that the IFRS 3 excludes from its scope the accounting for the formation of a joint agreement on the financial statements of the joint arrangement itself.
-IFRS 13 - Fair Value Measurement: It states that the scope of the exception of portfolio defined in paragraph 52 of IFRS 13, includes all contracts included under the scope of 'IAS 39 - Financial Instruments: Recognition and measurement' and 'IFRS 9 - Financial Instruments', regardless of whether they conform to the definition of financial assets or financial liabilities as set out in 'IAS 32 - Financial Instruments: Presentation'.
-IAS 40 - Investment Property: It states that if a certain transaction complies with the definition of a business combination -as defined by IFRS 3 -Business Combinations- and of investment properties -as defined by IAS 40 Investment Property-, it needs to implement both norms independently and separately.

 

IFRS annual modifications, 2011-2013 cycle, must be implemented for annual periods beginning on or after July 1, 2014. Earlier application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   42
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 02

ACCOUNTING CHANGES

 

IAS 19 – “Employee Benefits Revised” was implemented as of January 1, 2013. Regarding the Pension Plan (Defined benefits), the main change of the new version of the IAS 19 is the inability to defer the costs of 'past services' of the defined benefit plans, they have to be recognized within income at the moment of formalizing the plan and when it is modified. The amendments require an accounting change that must be applied retroactively following IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.

 

The required adjustments to comply with the IAS 19 - Employee Benefits amendments within the Consolidated Financial Statements as of December 31, 2012 are as follows:

 

Consolidated Statement of Financial  Closing balance 
as of 
December 31,
       Adjusted balance 
as of 
December 31,
 
Position  2012   Adjustments   2012 
   MCh$   MCh$   MCh$ 
Asset               
Deferred taxes   186,210    197    186,407 
Other assets   656,200    (983)(*)   655,217 
Total Assets   842,410    (786)   841,624 
                
Liabilities               
Provisions   220,993    96    221,089 
Total Liabilities   220,993    96    221,089 
                
Equity               
Reserves   976,561    (1,101)(**)   975,460 
Income for the period   387,967    315(***)   388,282 
Minus: Provision for mandatory dividends   (116,390)   (96)   (116,486)
Total Equity   1,248,138    (882)   1,247,256 

 

(*) Corresponds to decrease in deferred past service costs

(**) Corresponds to the effect, net of taxes, on pension plans that was deferred as of December 31, 2011

(***) Corresponds to an effect on income for the period

 

The adjustments required by the IAS 19 modifications as of January 1, 2012 are as follows:

 

Consolidated Statement of Financial  Closing balance 
as of 
January 1,
       Adjusted balance 
as of 
January 1,
 
Position  2012   Adjustments   2012 
   MCh$   MCh$   MCh$ 
Assets               
Deferred taxes   147,754    276    148,030 
Other assets   546,470    (1,377)(*)   545,093 
Total Assets   694,224    (1,101)   693,123 
                
Equity               
Reserves   802,528    (1,101)(**)   801,427 
Total Equity   802,528    (1,101)   801,427 

 

(*) Corresponds to decrease in pension plan for deferred pension plan

(**) Corresponds to pension plans amount pending of deferral as of December 31, 2011 (net of income tax)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   43
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 02

ACCOUNTING CHANGES, continued

 

The recasted Consolidated Statements with modifications required by IAS 19 - Employee Benefits are as follows:

 

   Closing balance 
as of 
December 31,
   IAS 19   Adjusted balance 
as of 
December 31,
 
   2012   adjustments   2012 
   MCh$   MCh$   MCh$ 
ASSETS               
Cash and deposits in banks   1,250,414    -    1,250,414 
Cash items in process of collection   520,267    -    520,267 
Trading investments   338,287    -    338,287 
Investments under resale agreements   6,993    -    6,993 
Financial derivative contracts   1,293,212    -    1,293,212 
Interbank loans, net   90,527    -    90,527 
Loans and accounts receivable from customers   18,325,957    -    18,325,957 
Available for sale investments   1,826,158    -    1,826,158 
Held to maturity investments   -    -    - 
Investments in associates and other companies   7,614    -    7,614 
Intangible assets   87,347    -    87,347 
Property, plant, and equipment   162,214    -    162,214 
Current taxes   10,227    -    10,227 
Deferred taxes   186,210    197    186,407 
Other assets   656,200    (983)   655,217 
TOTAL ASSETS   24.761.627    (786)   24,760,841 
                
LIABILITIES               
Deposits and other demand liabilities   4,970,019    -    4,970,019 
Cash items in process of being cleared   284,953    -    284,953 
Obligations under repurchase agreements   304,117    -    304,117 
Time deposits and other time liabilities   9,112,213    -    9,112,213 
Financial derivative contracts   1,146,161    -    1,146,161 
Interbank borrowings   1,438,003    -    1,438,003 
Issued debt instruments   4,571,289    -    4,571,289 
Other financial liabilities   192,611    -    192,611 
Current taxes   525    -    525 
Deferred taxes   9,544    -    9,544 
Provisions   220,993    96    221,089 
Other liabilities   341,274    -    341,274 
                
TOTAL LIABILITIES   22.591.702    96    22,591,798 
                
EQUITY               
                
Attributable to the Bank's shareholders:   2,135,660    (882)   2,134,778 
Capital   891,303    -    891,303 
Reserves   976,561    (1,101)   975,460 
Valuation adjustments   (3,781)   -    (3,781)
Retained earnings   271,577    219    271,796 
Retained earnings of prior years   -    -    - 
Income for the period   387,967    315    388,282 
Minus: Provision for mandatory dividends   (116,390)   (96)   (116,486)
Non-controlling interest   34,265    -    34,265 
                
TOTAL EQUITY   2.169.925    (882)   2,169,043 
                
TOTAL LIABILITIES AND EQUITY   24.761.627    (786)   24,760,841 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   44
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 02

ACCOUNTING CHANGES, continued

 

The necessary reclassifications made to the Income Statement for comparative purposes along with adjustments required by IAS 19 as of December 31, 2012 are detailed below:

 

   Closing balance
as of 
December 31
       IAS 19   Adjusted balance
as of 
December 31
 
   2012   Reclassification   adjustments   2012 
   MCh$   MCh$   MCh$   MCh$ 
                 
OPERATING INCOME                    
                     
Interest income   1,890,953    -    -    1,890,953 
Interest expense   (848,219)   -    -    (848,219)
Net interest income   1,042,734    -    -    1,042,734 
                     
Fee and commission income (1)   360,427    40    -    360,467 
Fees and commissions expense (1)   (89,855)   (12,925)   -    (102,780)
                     
Net fee and commission income   270,572    (12,885)   -    257,687 
                     
Net income from financial operations   (64,079)   -    -    (64,079)
Foreign exchange profit (loss), net   146,378    -    -    146,378 
Other operating income   19,758    -    -    19,758 
                     
Net operating profit before provision for loan losses   1,415,363    (12,885)   -    1,402,478 
                     
Provisions for loan losses   (366,702)   -    -    (366,702)
                     
NET OPERATING PROFIT   1,048,661    (12,885)   -    1,035,776 
                     
Personnel salaries and expenses   (300,298)   -    394    (299,904)
Administrative expenses (1)   (183,379)   7,496    -    (175,883)
Depreciation and amortization   (56,369)   -    -    (56,369)
Impairment   (90)   -    -    (90)
Other operational expenses (1)   (65,105)   5,389    -    (59,716)
                     
TOTAL OPERATIONAL EXPENSES   (605,241)   12,885    394    (591,962)
                     
OPERATING INCOME   443,420    -    394    443,814 
                     
Income from investments in associates and other companies   267    -    -    267 
                     
Income before tax   443,687    -    394    444,081 
                     
Income tax expense   (51,095)   -    (79)   (51,174)
                     
NET INCOME FOR THE PERIOD   392,592    -    315    392,907 
                     
Attributable to:                    
Bank shareholders   387,967    -    -    388,282 
Non-controlling interest   4,625    -    -    4,625 
                     
Earnings per share attributable to Bank shareholders:
(expressed in Chilean pesos)
                    
Basic earnings   2.059    -    0.001    2.060 
Diluted earnings   2.059    -    0.001    2.060 

 

(1)Reclassifications implemented during 2013 and retroactively applied for comparability purposes. These reclassifications did not modify net income for the year.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   45
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 03

SIGNIFICANT EVENTS

 

As of December 31, 2013, the following significant events have occurred and had an impact on the Bank’s operations on the Consolidated Financial Statements.

 

a) The Board

 

At the Ordinary Board Meeting No. 446 on August 20, 2013, Mr. Jesús María Zabalza Lotina presented his resignation as First Vice-president. During this session, the Board appointed Mr. Oscar von Chrismar Carvajal as Vice-president and Mr. Juan Pedro Santa María Pérez as General Director of the Bank.

 

Use of profit and distribution of dividends

 

The Ordinary Shareholders’ Meeting of Banco Santander Chile was held on April 29, 2013, chaired by Mr. Mauricio Larraín Garcés (Chairman), and attended by Jesús María Zabalza Lotina (First Vice President), Oscar von Chrismar Carvajal (Second Vice President), Víctor Arbulú Crousillat, Lisandro Serrano Spoerer, Marco Colodro Hadjes, Vittorio Corbo Lioi, Carlos Olivos Marchant, Roberto Méndez Torres, Lucía Santa Cruz Sutil, Roberto Zahler Mayanz, Juan Pedro Santa María Pérez, and Raimundo Monge Zegers (Alternate Director). Also, the CEO Claudio Melandri Hinojosa and CAO Felipe Contreras Fajardo attended the meeting.

 

According to the information presented during said meeting, the net profit of the 2012 period (named as Profit attributable to Bank shareholders in the financial statements) was MCh$387,967. The distribution of 60% of such profit was approved. Such percentage divided by the number of shares issued is equivalent to a dividend of CLP 1,235 per share payable as of April 30, 2013.

 

b) Issuance of bonds - year 2013

 

In 2013, the Bank issued bonds for CHF 300,000,000, UF 4,000,000, USD 250,000,000 and a mortgage bond for UF 300,000,000. The loan detail for 2013 is included in Note 20.

 

b.1)Senior bonds year 2013

 

Series  Amount   Term  Issuing Rate  Date of
Issue
  Maturity date
CHF floating bond  CHF 150,000,000   4 years  Libor (3 months) + 100 bp  03-28-2013  03-28-2017
Bond  CHF 150,000,000   6 years  1.75 per annum simple  09-26-2013  09-26-2019
Total  CHF300,000,000             
Bond  UF2,000,000   10 years  3.5 per annum simple  11-28-2013  01-01-2023
Bond  UF2,000,000   10 years  3.5 per annum simple  11-28-2013  09-01-2023
Total  UF4,000,000             
USD floating bond  USD250,000,000   5 years  Libor (3 months) + 100 bp  06-07-2013  06-07-2018
Total  USD   250,000,000             

 

b.2)Mortgage bonds year 2013

 

Series  Amount   Term  Interest Rate  Date of 
Issue
  Maturity date
Mortgage bond (*)  UF3,000,000   15 years  3.2 per annum simple  08-01-2013  07-01-2028
Total  UF    3,000,000             

(*)Two placements were made, each for UF 1,500,000. The first placement was made on August 1, 2013 and the second on November 20, 2013.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   46
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 03

SIGNIFICANT EVENTS, continued:

 

b.3)Subordinated bonds year 2013

 

In 2013, the Bank did not issued subordinated bonds.

 

b.4)Bonds repurchase

 

In 2013, the Bank made the following bond repurchases:

 

Date  Type  Amount 
         
05-22-2013  Subordinated  USD45,556,000 
06-16-2013  Subordinated  USD2,230,000 
06-26-2013  Senior  CLP  29,245,000,000 
07-01-2013  Senior  CLP20,000,000,000 

 

c)Selling of the subsidiary Santander Asset Management S.A. Administradora General de Fondos

 

On December, 2013 our subsidiary Santander Asset Management S.A Administradora General de Fondos was sold through a formal offer of purchase received in May 2013. The sale price was Ch$90,281 million for 100% of the shares. 99.99% were acquired by SAM Investment Holdings Limited and the remaining 0.01% by Santander Asset Management UK Holdings Limited. This operation generated MCh$78,122 of profit recorded within Income from investments in other companies. Additionally, the entities entered into a management service agreement for a 10-year period.

 

This transaction was revised by independent external evaluators who were of the opinion that the price for the offer was reasonable in consideration of their fair value appraisals. The Audit Committee and the Board of Directors ratified the appraiser’s opinion. On December 5, 2013 an Extraordinary Shareholders’ meeting was held. The offer was accepted and thus, on December 6, 2013 the SBIF was informed of this transaction.

 

d)La Polar blended bonds swap

 

In June 2013 the Bank decided to accept the option offered by the company La Polar S.A. to exchange outstanding debt and the option acceptance was communicated to the Chilean Superintendency of Securities and Insurance on June 7, 2013. This swap transaction offered the creditors of the senior and junior debt to opt for the replacement of their credit for F (senior) and G (junior) series bonds. The bonds received for this operation were originally classified as “Trading investments”. In 2013, the Bank sold all the bonds received for said swap. The net effect recorded within Income from financial operations associated to this operation was Ch$272 million loss.

 

e)Reception of own shares in lieu of payment

 

In December 2013, the Bank received 26,241,318 of its own shares in lieu of payment. The value of the shares was 757,586,851 pesos (28.87 pesos per share). Those shares were sold in the stock market during the same month, generating a price difference of Ch$29 million, which was recorded within Equity, as a reserve increase.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   47
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 03

SIGNIFICANT EVENTS, continued:

 

f) Constitution of “Servicios de Infraestructura de Mercado OTC S.A.”

 

On July 19, 2013, Banco Santander made a contribution of 1,439,574,238 pesos to participate in the company "Servicios de Infraestructura de Mercado OTC S.A.", equivalent to 1,111 shares and 1,295,746.3890 pesos each, representing 11.11% ownership.

 

This company`s objective is to manage infrastructure for the financial market, providing registration, confirmation, storage, consolidation and conciliation services for financial derivatives transactions, as well as granting related or complementary services.

 

g) Merger by absorption of Santander Servicios de Recaudación y Pagos Limitada

 

On December 17, 2013, at an Extraordinary Board of Directors meeting, a proposal for consultation was made to merge the subsidiary Santander Servicios de Recaudación y Pagos Ltda. during 2014. The Board approved the merger and commissioned the CEO to present the merger to the SBIF for authorization and for legal procedures to formalize properly.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   48
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 04

OPERATING SEGMENTS

 

The Bank manages and measures the performance of its operations by operating segment. The information disclosed in this note is not necessarily comparable to that of other financial institutions, since it is based on management’s internal information system by segment.

 

Inter-segment transactions are conducted under normal arm’s length commercial terms and conditions. Each segment’s assets, liabilities, and income include items directly attributable to the segment to which they can be allocated on a reasonable basis.

 

To achieve the strategic objectives adopted by management and adapt to changing market conditions, the Bank makes changes in its organization from time to time, which in turn have a greater or lesser impact on how it is managed or administered. Hence, this disclosure furnishes information on how the Bank is managed as of December 31, 2013. The prior year segment information presented herein has been recast to reflect the change in segment mentioned in the following paragraph..

 

During the second term of 2013, commercial banking operations were streamlined to better meet market requirements. The Institutions segment was incorporated into the Companies segment resulting in such pre-existing segments being reported to the Chief Operating Decision Maker as one.

 

The Bank has the following operating segments:

 

Individuals and PYME (Middle Market entities)

 

Individuals

 

a.Santander Banefe

Serves individuals with monthly incomes from Ch$150,000 pesos to Ch$400,000 pesos, who receive services through Santander Banefe. This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, mortgage loans, debit cards, savings products, mutual funds, and insurance brokerage.

 

b.Commercial banking

Serves individuals with monthly incomes over Ch$400,000 pesos. This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stockbrokerage, and insurance brokerage.

 

Small and mid-sized companies (PYMEs)

Considers small companies with annual sales lower than Ch$1,200 million. This segment gives customers a variety of products, including commercial loans, government-guaranteed loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, savings products, mutual funds, and insurance brokerage.

 

Companies and institutions

 

Associated

 

The Companies segment includes the Companies, Real Estate and Large Corporations sub segments:

 

a.Companies

Considers companies with annual sales over Ch$1,200 million up to Ch$10,000 million. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, savings products, mutual funds, and insurance brokerage.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   49
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 04

OPERATING SEGMENTS, continued

 

b.Real estate

This segment includes all the companies engaged in the real estate industry who carry out projects to sell properties to third parties and all builders with annual sales exceeding Ch$800 million with no ceiling. These clients are offered not only the traditional banking services but also specialized services to finance projects, chiefly residential, with the aim of expanding sales of mortgage loans.

 

c.Large Corporations

Considers companies with annual sales exceeding Ch$10.000 million. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investment, savings products, mutual funds, and insurance.

 

Institutional

 

Serves institutions such as universities, government entities, local and regional governments. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, savings products, mutual funds, and insurance.

 

Global Banking and Markets

 

The Global Banking and Markets segment is comprised of:

 

a.Corporate

Foreign and domestic multinational companies with sales over MCh$10.000. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investments, savings products, mutual funds, and insurance brokerage.

 

b.Treasury

The Treasury Division provides sophisticated financial products, mainly to companies in the Wholesale Banking area and the Companies segment. These include products such as short-term financing and fund raising, brokerage services, derivatives, securitization, and other tailor-made products. The Treasury area may act as brokers to transactions and also manages the Bank’s investment portfolio.

 

Corporate Activities (“Other”)

 

This segment includes Financial Management, which develops global management functions, involving the parent company’s structural interest risk and liquidity risk. Liquidity risk is managed mainly through debt issuances. This segment also manages the Bank’s personal funds, capital allocation by unit, and the financing of investments made. The foregoing usually results in a negative contribution to income.

 

In addition, this segment encompasses all the intra-segment income and all the activities not assigned to a given segment or product with customers.

 

The segments’ accounting policies are the same as those described in the summary of accounting policies. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations. To evaluate a segment’s financial performance and make decisions regarding the resources to be assigned to segments, the Chief Operating Decision Maker (CODM) bases his assessment on the segment's interest income, fee and commission income, and expenses.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   50
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

NOTE 04

OPERATING SEGMENTS, continued

 

Below are the tables showing the Bank’s results by operating segment, for the years ended December 31, 2013 and 2012 in addition to the corresponding balances of loans and accounts receivable from customers:

  

   As of December 31, 2013 
   Loans and
accounts 
receivable
from customers
(1)
   Net fee
for interests 
and inflation
adjustments
   Net
income
for
commissions
   ROF
(2)
   Provisions
for loan
losses
   Support
expenses
(3)
   Segment’s 
net
contribution
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                             
Segments                                   
Individuals   10,437,701    605,374    149,144    8,732    (214,006)   (350,543)   198,701 
Santander Banefe   727,452    99,182    25,648    1,614    (56,309)   (52,370)   17,765 
Commercial Banking   9,710,249    506,192    123,496    7,118    (157,697)   (298,173)   180,936 
Small and mid-sized companies (PYMEs)   3,223,215    260,856    37,641    4,798    (101,187)   (79,633)   122,475 
Individuals + PYME   13,660,916    866,230    186,785    13,530    (315,193)   (430,176)   321,176 
                                    
Associated   4,678,243    163,466    26,634    13,674    (32,642)   (53,939)   117,193 
Associated   1,757,586    73,906    14,020    7,457    (19,982)   (27,947)   47,454 
Large Corporations   1,923,810    62,953    9,026    5,930    (8,292)   (19,937)   49,680 
Real estate   996,847    26,607    3,588    287    (4,368)   (6,055)   20,059 
Institutional   353,509    30,283    2,615    562    317    (15,889)   17,888 
Companies and institutions   5,031,752    193,749    29,249    14,236    (32,325)   (69,828)   135,081 
                                    
Commercial Banking   18,692,668    1,059,979    216,034    27,766    (347,518)   (500,004)   456,257 
                                    
Global Banking and Markets   2,219,045    72,932    18,022    42,393    (16,904)   (37,728)   78,715 
Corporate   2,219,045    63,036    16,295    687    (16,904)   (19,802)   43,312 
Treasury   -    9,896    1,727    41,706    -    (17,926)   35,403 
Other   149,048    (56,149)   (4,220)   45,954    391    (20,121)   (34,145)
                                    
Total   21,060,761    1,076,762    229,836    116,113    (364,031)   (557,853)   500,827 
                                    
Other operating income                   20.508 
Other operating expenses                   (62,351)
Income from investments in other companies                   79,544 
Income tax                   (94,467)
Net income for the year                   444,061 

 

(1) Corresponds to loans and accounts receivable from customers, net, without deducting their allowances for loan losses.

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation, amortization, and impairment.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   51
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 04

OPERATING SEGMENTS, continued

 

Operating segments according to the new segmentation criteria are as follows:

 

   As of December 31, 2012 (*) 
   Loans and
accounts
receivable
from customers
(1)
   Net fee
for interests
and inflation
adjustments
   Net
income
for
commissions
   ROF
(2)
   Provisions
for loan
losses
   Support
expenses
(3)
   Segment’s
net
contribution
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                             
Segments                                   
Individuals   9,672,222    622,465    162,914    9,901    (266,850)   (335,863)   192,567 
Santander Banefe   730,362    123,043    26,357    1,288    (73,882)   (44.301)   32,505 
Commercial Banking   8,941,860    499,422    136,557    8,613    (192,968)   (291,562)   160,062 
Small and mid-sized companies (PYMEs)   2,890,251    233,622    38,115    5,009    (80,144)   (76,560)   120,042 
Individuals + PYME   12,562,473    856,087    201,029    14,910    (346,994)   (412,423)   312,609 
                                    
Associated   4,058,693    148,177    25,903    11,062    (24,186)   (50,375)   110,581 
Associated   1,626,606    70,747    13,885    5,118    (21,531)   (26,672)   41,547 
Large Corporations   1,661,837    56,086    8,722    5,623    (3,361)   (17,958)   49,112 
Real estate   770,250    21,344    3,296    321    706    (5,745)   19,922 
Institutional   355,518    28,472    2,470    615    (346)   (15,297)   15,914 
Company and institutions   4,414,211    176,649    28,373    11,677    (24,532)   (65,672)   126,495 
                                    
Commercial Banking   16,976,684    1,032,736    229,402    26,587    (371,526)   (478,095)   439,104 
                                    
Global Banking and Markets   1,863,595    50,477    19,159    52,277    5,546    (35,476)   91,983 
Corporate   1,863,595    57,822    16,832    763    5.546    (17,564)   63,399 
Treasury   -    (7,345)   2,327    51,514    -    (17,912)   28,584 
Other   126,373    (40,479)   9,126    3,435    (722)   (18,675)   (47,315)
                                    
Total   18,966,652    1,042,734    257,687    82,299    (366,702)   (532,246)   483,772 
                                    
Other operating income                   19.758 
Other operating expenses                   (59,716)
Income from investments in other companies                   267 
Income tax                   (51,174)
Net income for the year                   392,907 

 

(1) Corresponds to loans and accounts receivable from customers, net without deducting their allowances for loan losses.

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation, amortization, and impairment.

(*) Adjusted for comparative purposes, as previously described in Note 02.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   52
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 05

CASH AND CASH EQUIVALENTS

 

a)The detail of the balances included under cash and cash equivalents is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Cash and deposits in banks          
Cash   551,136    435,687 
Deposits in the Central Bank of Chile   797,363    520,031 
Deposits in domestic banks   81    4,057 
Deposits in foreign banks   223,230    290,639 
Subtotals – Cash and deposits in banks   1,571,810    1,250,414 
           
Cash in process of collection, net   327,698    235,314 
           
Cash and cash equivalents   1,899,508    1,485,728 

 

The level of funds in cash and at the Central Bank of Chile, which are included in the “Deposits in the Central Bank of Chile” line, reflects regulations governing the reserves that the Bank must maintain on average each month.

 

b)Cash in process of collection and in process of being cleared:

 

Cash items in process of collection and in process of being cleared represent domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to time differences. These transactions are as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Assets          
Documents held by other banks (documents to be cleared)   289,723    238,714 
Funds receivable   314,354    281,553 
Subtotal   604,077    520,267 
Liabilities          
Funds payable   276,379    284,953 
Subtotal   276,379    284,953 
           
Cash in process of collection, net   327,698    235,314 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   53
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 06

TRADING INVESTMENTS

 

The detail of instruments deemed as financial trading investments is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Chilean Central Bank and Government securities          
Chilean Central Bank Bonds   75,577    267,008 
Chilean Central Bank Notes   100    3,397 
Other Chilean Central Bank and Government securities   189,962    48,160 
Subtotal   265.639    318,565 
           
Other Chilean securities          
Time deposits in Chilean financial institutions   -    3,531 
Mortgage finance bonds of Chilean financial institutions   -    - 
Chilean financial institution bonds   10,042    - 
Chilean corporate bonds   2,229    - 
Other Chilean securities   -    - 
Subtotal   12,271    3,531 
           
Foreign financial securities          
Foreign Central Banks and Government securities   -    - 
Other foreign financial instruments   -    - 
Subtotal   -    - 
           
Investments in mutual funds          
Funds managed by related entities   9,657    16,191 
Funds managed by others   -    - 
Subtotal   9,657    16,191 
           
Total   287,567    338,287 

 

As of December 31, 2013 and 2012, there were no securities sold under contracts to resell to clients and financial institutions.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   54
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 07

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS

 

a)Rights arising from resale agreements

 

The Bank purchases financial instruments agreeing to resell them at a future date. As of December 31, 2013 and 2012, rights associated with instruments acquired under contracts to resell are as follows:

 

   As of December 31, 
   2013   2012 
   From 1 day
and less
than 3
months
   More than 3
months and 
less than
 1 year
   More
than 1
year
   Total   From 1
day and
less than 3
months
   More than 3
months and
 less than 
1 year
   More
than 1
year
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Securities from the Chilean Government and the Chilean Central Bank                                        
Chilean Central Bank Bonds   -    -    -    -    6,993    -    -    6,993 
Chilean Central Bank Notes   -    -    -    -    -    -    -    - 
Other securities from the Government and the Chilean Central Bank   17,469    -    -    17,469    -    -    -    - 
Subtotal   17,469    -    -    17,469    6,993    -    -    6,993 
Instruments from other domestic institutions domestic institutions:                                        
Time deposits in Chilean financial institutions   -    -    -    -    -    -    -    - 
Mortgage finance bonds of Chilean financial institutions   -    -    -    -    -    -    -    - 
Chilean financial institution bonds   -    -    -    -    -    -    -    - 
Chilean corporate bonds   -    -    -    -    -    -    -    - 
Other Chilean securities   -    -    -    -    -    -    -    - 
Subtotal   -    -    -    -    -    -    -    - 
Foreign financial securities:                                        
Foreign government or central banks securities central banks securities   -    -    -    -    -    -    -    - 
Other foreign financial instruments   -    -    -    -    -    -    -    - 
Subtotal   -    -    -    -    -    -    -    - 
Investments in mutual funds:                                        
Funds managed by related entities   -    -    -    -    -    -    -    - 
Funds managed by others   -    -    -    -    -    -    -    - 
Subtotal   -    -    -    -    -    -    -    - 
                                         
Total   17,469    -    -    17,469    6,993    -    -    6,993 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile   55
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 07

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued:

 

b)Obligations arising from repurchase agreements

 

The Bank raises funds by selling financial instruments and committing itself to buy them back at future dates, plus interest at a predetermined rate. As of December 31, 2013 and 2012, obligations related to instruments sold under repurchase agreements are as follows:

 

   As of December 31, 
   2013   2012 
   From 1 day 
to less than 
3 months
   More than
3
months
and 
less than 
1 year
   More
than 
1 year
   Total   From 1 day
 to less than
 3 months
   More than

months
and 
less than 
1 year
   More
than 
1 year
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Securities from Chilean Government and the Chilean Central Bank                                        
Chilean Central Bank Bonds   66,937    -    -    66,937    155,869    -    -    155,869 
Chilean Central Bank Notes   22    -    -    22    33    -    -    33 
Other securities from the Government and the Chilean Central Bank   23,879    -    -    23,879    -    -    -    - 
Subtotal   90,838    -    -    90,838    155,902    -    -    155,902 
Instruments from other domestic institutions:                                        
Time deposits in Chilean financial institutions   112,743    5,391    -    118,134    144,935    3,280    -    148,215 
Mortgage finance bonds of Chilean financial institutions   -    -    -    -    -    -    -    - 
Chilean financial institution bonds   -    -    -    -    -    -    -    - 
Chilean corporate bonds   -    -    -    -    -    -    -    - 
Other Chilean securities   -    -    -    -    -    -    -    - 
Subtotal   112,743    5,391    -    118,134    144,935    3,280    -    148,215 
Foreign financial securities:                                        
Foreign government or central banks securities   -    -    -    -    -    -    -    - 
Other foreign financial instruments   -    -    -    -    -    -    -    - 
Subtotal   -    -    -    -    -    -    -    - 
Investments in mutual funds:                                        
Funds managed by related entities   -    -    -    -    -    -    -    - 
Funds managed by others   -    -    -    -    -    -    -    - 
Subtotal   -    -    -    -    -    -    -    - 
                                         
Total   203,581    5,391    -    208,972    300,837    3,280    -    304,117 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile   56
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 07

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued:

 

c) Below is the detail by portfolio of collateral associated with repurchase agreements as of December 31, 2013 and 2012, valued at fair value:

 

   As of December 31, 
   2013   2012 
   Available
 for sale
portfolio
   Trading
portfolio
   Total   Available
for sale
portfolio
   Trading
portfolio
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Chilean Central Bank and Government securities:                              
Chilean Central Bank Bonds   66,933    -    66,933    156,307    -    156,307 
Chilean Central Bank Notes   22    -    22    33    -    33 
Other securities from the Government and the Chilean Central Bank   23,863    -    23,863    -    -    - 
Subtotal   90,818    -    90,818    156,340    -    156,340 
Other Chilean securities:                              
Time deposits in Chilean financial institutions   118,195    -    118,195    148,277    -    148,277 
Mortgage finance bonds of Chilean financial institutions   -    -    -    -    -    - 
Chilean financial institution bonds   -    -    -    -    -    - 
Chilean corporate bonds   -    -    -    -    -    - 
Other Chilean securities   -    -    -    -    -    - 
Subtotal   118,195    -    118,195    148,277    -    148,277 
Foreign financial securities:                              
Foreign Central Banks and Government securities   -    -    -    -    -    - 
Other foreign financial instruments   -    -    -    -    -    - 
Subtotal   -    -    -    -    -    - 
Investments in mutual funds:                              
Funds managed by related entities   -    -    -    -    -    - 
Funds managed by others   -    -    -    -    -    - 
Subtotal   -    -    -    -    -    - 
                               
Total   209,013    -    209,013    304,617    -    304,617 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   57
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

 

a)As of December 31, 2013 and 2012 the Bank holds the following portfolio of derivative instruments:

 

   As of December 31, 2013 
   Notional amount   Fair value 
   Up to 3 
months
   More than 3 
months to 
1 year
   More than 
1 year
   Total   Assets   Liabilities 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Fair value hedge derivatives                              
Currency forwards   -    -    -    -    -    - 
Interest rate swaps   -    55,000    375,599    430,599    9,951    1,020 
Cross currency swaps   -    233,824    899,293    1,133,117    63,528    1,754 
Call currency options   -    -    -    -    -    - 
Call interest rate options   -    -    -    -    -    - 
Put currency options   -    -    -    -    -    - 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   -    -    -    -    -    - 
Subtotal   -    288,824    1,274,892    1,563,716    73,479    2,774 
                               
Cash flow hedge derivatives                              
Currency forwards   -    -    -    -    -    - 
Interest rate swaps   -    -    -    -    -    - 
Cross currency swaps   522,451    937,529    661,676    2,121,656    60,453    13,927 
Call currency options   -    -    -    -    -    - 
Call interest rate options   -    -    -    -    -    - 
Put currency options   -    -    -    -    -    - 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   -    -    -    -    -    - 
Subtotal   522,451    937,529    661,676    2,121,656    60,453    13,927 
                               
Trading derivatives                              
Currency forwards   14,972,304    9,801,554    1,749,378    26,523,236    198,130    188,745 
Interest rate swaps   4,526,349    11,332,697    25,005,852    40,864,898    241,528    243,326 
Cross currency swaps   1,634,855    3,927,402    14,246,746    19,809,003    915,099    847,821 
Call currency options   443,944    42,805    5,557    492,306    1,327    2,403 
Call interest rate options   -    7,031    -    7,031    -    - 
Put currency options   428,638    38,450    2,936    470,024    3,831    1,108 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   54,777    -    -    54,777    171    5 
Subtotal   22,060,867    25,149,939    41,010,469    88,221,275    1,360,086    1,283,408 
                               
Total   22,583,318    26,376,292    42,947,037    91,906,647    1,494,018    1,300,109 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile   58
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

   As of December 31, 2012 
   Notional amount   Fair value 
   Up to 3 
months
   More than 3 
months to 
1 year
   More than 
1 year
   Total   Assets   Liabilities 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Fair value hedge derivatives                              
Currency forwards   -    -    -    -    -    - 
Interest rate swaps   95,200    397,092    395,471    887,763    12,647    4,054 
Cross currency swaps   25,396    14,975    671,942    712,313    12,716    4,361 
Call currency options   -    -    -    -    -    - 
Call interest rate options   -    -    -    -    -    - 
Put currency options   -    -    -    -    -    - 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   -    -    -    -    -    - 
Subtotal   120,596    412,067    1,067,413    1,600,076    25,363    8,415 
                               
Cash flow hedge derivatives                              
Currency forwards   13,704    -    -    13,704    -    298 
Interest rate swaps   -    -    -    -    -    - 
Cross currency swaps   268,693    666,668    689,045    1,624,406    1,851    52,589 
Call currency options   -    -    -    -    -    - 
Call interest rate options   -    -    -    -    -    - 
Put currency options   -    -    -    -    -    - 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   -    -    -    -    -    - 
Subtotal   282,397    666,668    689,045    1,638,110    1,851    52,887 
                               
Trading derivatives                              
Currency forwards   17,560,012    7,109,216    563,301    25,232,529    159,624    187,304 
Interest rate swaps   4,578,678    9,882,478    13,752,690    28,213,846    204,800    230,380 
Cross currency swaps   1,126,961    3,215,654    11,639,636    15,982,251    899,174    665,100 
Call currency options   413,452    8,032    -    421,484    567    1,485 
Call interest rate options   3,917    14,458    12,481    30,856    24    20 
Put currency options   402,234    1,928    -    404,162    1,777    516 
Put interest rate options   -    -    -    -    -    - 
Interest rate futures   -    -    -    -    -    - 
Other derivatives   19,415    -    -    19,415    32    54 
Subtotal   24,104,669    20,231,766    25,968,108    70,304,543    1,265,998    1,084,859 
                               
Total   24,507,662    21,310,501    27,724,566    73,542,729    1,293,212    1,146,161 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile   59
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b)Hedge Accounting

 

Fair Value Hedge:

 

The Bank uses cross-currency swaps, interest rate swaps, and call money swaps to hedge its exposure to changes in fair value of hedged items attributable to interest rates. The aforementioned hedging instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate.

 

Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 2013 and 2012, classified by term to maturity:

 

   As of December 31, 2013 
   Within 1 year   Between 1 and 3
years
   Between 3 and 6
years
   Over 6 years   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Hedged item                         
Loans and accounts receivables from customers:                         
Mortgage loan   12,213    -    -    -    12,213 
Available for sale investments:                         
Yankee Bond   -    -    -    28,308    28,308 
Mortgage finance bonds   -    -    -    3,652    3,652 
Time deposits and other demand liabilities:                         
Time deposits   55,000    -    -    27,971    82,971 
Debt instruments issued:                         
Senior bonds   -    335,805    109,497    769,659    1,214,961 
Subordinated bonds   104,840    -    -    -    104,840 
Interbank borrowings:                         
Interbank loans   116,771    -    -    -    116,771 
Total   288,824    335,805    109,497    829,590    1,563,716 
Hedging instrument:                         
Cross currency swaps   233,824    178,545    109,497    611,251    1,133,117 
Interest rate swaps   55,000    157,260    -    218,339    430,599 
Total   288,824    335,805    109,497    829,590    1,563,716 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   60
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

   As of December 31, 2012 
   Within 1 year   Between 1 and 3
years
   Between 3 and 6
years
   Over 6 years   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Hedged item                         
Available for sale investments:                         
Senior bonds   10,295    -    -    25,000    35,295 
Yankee Bond   -    -    -    4,791    4,791 
Mortgage finance bonds   -    -    -    3,995    3,995 
Time deposits and other demand liabilities:                         
Time deposits   497,368    -    -    27,409    524,777 
Debt instruments issued:                         
Senior bonds   -    300,769    4,568    557,226    862,563 
Subordinated bonds   -    143,655    -    -    143,655 
Other financial liabilities:                         
Short-term loans   25,000    -    -    -    25,000 
Total   532,663    444,424    4,568    618,421    1,600,076 
Hedging instrument:                         
Cross currency swaps   40,371    300,769    4,568    366,605    712,313 
Interest rate swaps   492,292    143,655    -    251,816    887,763 
Total   532,663    444,424    4,568    618,421    1,600,076 

 

Cash flow hedges:

 

The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and interbank loans at a variable rate. To cover the inflation risk in some items, both forwards as well as currency swaps are used.

 

Below is the nominal amount of the hedged items as of December 31, 2013 and 2012, and the period when the cash flows will be generated:

 

   As of December 31, 2013 
   Within 1
year
   Between 1 and 3
years
   Between 3 and 6
years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Loans and accounts receivables from customers:                         
Mortgage loan   21,623    69,502    -    -    91,125 
Available for sale investments:                         
Yankee Bond   -    -    -    118,577    118,577 
Chilean Central Bank Bonds   -    22,958    -    18,084    41,042 
Time deposits   379,331    11,328    -    -    390,659 
Debt instruments issued:                         
Senior bonds (variable rate)   288,310    102,062    219,567    -    609,939 
Senior bonds (fixed rate)   43,189    -    -    -    43,189 
Interbank borrowings:                         
Interbank loans   727,527    99,598    -    -    827,125 
Total   1,459,980    305,448    219,567    136,661    2,121,656 
Hedging instrument:                         
Cross currency swaps   1,459,980    305,448    219,567    136,661    2,121,656 
Total   1,459,980    305,448    219,567    136,661    2,121,656 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 61
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

  

   As of December 31, 2012 
   Within 1
year
   Between 1 and 3
years
   Between 3
and 6
years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Loans and accounts receivables from customers:                         
Mortgage loans   -    44,649    -    -    44,649 
Available for sale investments:                         
Senior bonds   -    -    -    28,265    28,265 
Time deposits   33,502    11,328    -    -    44,830 
Time deposits and other demand liabilities:                         
Time deposits   51,008    -    -    -    51,008 
Debt instruments issued:                         
Senior bonds (variable rate)   52,780    239,425    93,232    -    385,437 
Senior bonds (fixed rate)   57,102    106,942    -    -    164,044 
Interbank borrowings:                         
Interbank loans   754,673    165,204    -    -    919,877 
Total   949,065    567,548    93,232    28,265    1,638,110 
                          
Hedging instrument:                         
Cross currency swaps   935,361    567,548    93,232    28,265    1,624,406 
Currency forwards   13,704    -    -    -    13,704 
Total   949,065    567,548    93,232    28,265    1,638,110 

 

Below is an estimate of the periods in which flows are expected to be produced:

 

b.1) Forecasted cash flows for interest rate risk:

 

   As of December 31, 2013 
   Within 1 
year
   Between 1 and
3 years
   Between 3 and
6 years
   Over 6 
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   21,532    10,870    4,102    1,614    38,118 
Outflows   (12,180)   (10,667)   (6,107)   -    (28,954)
Net flows   9,352    203    (2,005)   1,614    9,164 
                          
Hedging instrument                         
Inflows   12,180    10,667    6,107    -    28,954 
Outflows (*)   (21,532)   (10,870)   (4,102)   (1,614)   (38,118)
Net flows   (9,352)   (203)   2,005    (1,614)   (9,164)

 

(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

Consolidated Financial Statements December 2013 / Banco Santander Chile 62
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

   As of December 31, 2012 
   Within 1
year
   Between 1 and
3 years
   Between 3
and 6
years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   3,084    -    -    -    3,084 
Outflows   (16,759)   (6,515)   (577)   -    (23,851)
Net flows   (13,675)   (6,515)   (577)   -    (20,767)
                          
Hedging instrument                         
Inflows   16,759    6,515    577    -    23,851 
Outflows   (3,084)   -    -    -    (3,084)
Net flows   13,675    6,515    577    -    20,767 

 

(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

 

b.2) Forecasted cash flows for inflation risk:

 

   As of December 31, 2013 
   Within
1 year
   Between 1
and 3
years
   Between 3
and 6 years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   104,730    10,861    -    -    115,591 
Outflows   (425)   (927)   (1,783)   (1,709)   (4,844)
Net flows   104,305    9,934    (1,783)   (1,709)   110,747 
                          
Hedging instrument                         
Inflows   425    927    1,783    1,709    4,844 
Outflows   (104,730)   (10,861)   -    -    (115,591)
Net flows   (104,305)   (9,934)   1,783    1,709    (110,747)

 

   As of December 31, 2012 
   Within
1 year
   Between 1
and 3
years
   Between 3 and
6 years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   24,089    20,802    -    -    44,891 
Outflows   (2,938)   (2,658)   (2,301)   (2,991)   (10,888)
Net flows   21,151    18,144    (2,301)   (2,991)   34,003 
                          
Hedging instrument                         
Inflows   2,938    2,658    2,301    2,991    10,888 
Outflows   (24,089)   (20,802)   -    -    (44,891)
Net flows   (21,151)   (18,144)   2,301    2,991    (34,003)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 63
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b.3) Forecasted cash flows for interest rate risk:

 

   As of December 31, 2013 
   Within
1 year
   Between 1
and 3
years
   Between 3
and 6 years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   -    -    -    -    - 
Outflows   (64,772)   -    -    -    (64,772)
Net flows   (64,772)   -    -    -    (64,772)
                          
Hedging instrument                         
Inflows   64,772    -    -    -    64,772 
Outflows   -    -    -    -    - 
Net flows   64,772    -    -    -    64,772 

  

   As of December 31, 2012 
   Within
1 year
   Between 1
and 3
years
   Between 3 and
6 years
   Over 6
years
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
Hedged item                         
Inflows   -    -    -    -    - 
Outflows   (1,825)   (64,772)   -    -    (66,597)
Net flows   (1,825)   (64,772)   -    -    (66,597)
                          
Hedging instrument                         
Inflows   1,825    64,772    -    -    66,597 
Outflows   -    -    -    -    - 
Net flows   1,825    64,772    -    -    (66,597)

 

c)The accumulated effect of the mark to market adjustmnet of cash flow hedges validation produced by hedge instruments used in hedged cash flow was recorded in the Consolidated Statement of Changes in Equity -specifically within Other comprehensive income, as of December 31, 2013 and 2013, is as follows:

 

   As of December 31, 
  2013   2012 
Hedged item  MCh$   MCh$ 
         
Interbank loans   (3,809)   2,943 
Time deposits and other time liabilities   -    (551)
Issued debt instruments   (723)   3,349 
Available for sale investments   (3,744)   (560)
Loans and accounts receivable from customers   19    134 
Net flows   (8,257)   5,315 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 64
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 08

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

Since the inflows and outflows for both the hedged element and the hedging instrument mirror each other, the hedges are nearly 100% effective, which means that the fluctuations of fair value attributable to risk components are almost completely offset. As of December 31, 2013 and 2012, Ch$152 million and Ch$46 million respectively, were recognized in income.

 

During the period, the Bank did not have any cash flow hedges of forecast transactions.

 

d)Below is a presentation of income generated by cash flow hedges amount that were reclassified from other comprehensive income to the period's income:

 

   For the year ended December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Bond hedging derivatives   (33)   (863)
Interbank loans hedging derivatives   1,550    1,458 
           
Cash flow hedge net income   1,517    595 
See Note 25 - Equity, letter d)

 

e)Net investment hedges in foreign operations:

 

As of December 31, 2013 and 2012, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 65
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 09

INTERBANK LOANS

 

a)At the end of the 2013 and 2012 reporting periods, the balances in the “Interbank loans” item are as follows:

 

   As of December 31, 
   2013
MCh$
   2012
MCh$
 
         
Domestic banks          
Loans and advances to banks   -    - 
Deposits in the Central Bank of Chile - not available   -    - 
Non-transferable Chilean Central Bank Bonds   -    - 
Other Central Bank of Chile loans   -    - 
Interbank loans   66    27 
Overdrafts in checking accounts   -    - 
Non-transferable domestic bank loans   -    - 
Other domestic bank loans   -    - 
Allowances and impairment for domestic bank loans   -    - 
           
Foreign Interbank Loans          
Interbank loans - Foreign   125,383    90,546 
Overdrafts in checking accounts   -    - 
Non-transferable foreign bank deposits   -    - 
Other foreign bank loans   -    - 
Provisions and impairment for foreign bank loans   (54)   (46)
           
Total   125,395    90,527 

  

b)The amount in each period for provisions and impairment of interbank loans is shown below:

 

   As of December 31 
   2013   2012 
   Domestic
banks
   Foreign
banks
   Total   Domestic
banks
   Foreign
banks
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Balance as of January 1   -    46    46    1    146    147 
Charge-offs   -    -    -    -    -    - 
Provisions established   -    127    127    -    299    299 
Provisions release   -    (119)   (119)   (1)   (399)   (400)
                               
Total   -    54    54    -    46    46 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 66
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS

 

a)Loans and accounts receivable from customers

 

As of December 31, 2013 and 2012, the composition of the loan portfolio is as follows:

 

   Assets before allowances   Provisions established     
  Normal 
portfolio
   Substandard 
Portfolio
   Impaired
portfolio
   Total   Individual
allowances
   Group
allowances
   Total   Assets 
net balance
 
As of December 31, 2013  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Commercial loans                                        
Commercial loans   6,993,770    246,661    557,251    7,797,682    123,354    81,478    204,832    7,592,850 
Foreign trade loans   1,731,328    47,164    61,842    1,840,334    50,574    878    51,452    1,788,882 
Checking accounts debtors   264,957    3,176    11,524    279,657    3,513    4,755    8,268    271,389 
Factoring transactions   310,228    2,613    3,273    316,114    4,305    617    4,922    311,192 
Leasing transactions   1,235,369    73,819    40,626    1,349,814    13,739    5,016    18,755    1,331,059 
Other loans and account receivable   99,524    617    18,510    118,651    4,745    7,426    12,171    106,480 
Subtotal   10,635,176    374,050    693,026    11,702,252    200,230    100,170    300,400    11,401,852 
                                         
Mortgage loans                                        
Loans with mortgage finance bonds   69,273    -    3,024    72,297    -    470    470    71,827 
Mortgage mutual loans   69,742    -    2,091    71,833    -    380    380    71,453 
Other mortgage mutual loans   5,163,396    -    318,286    5,481,682    -    42,456    42,456    5,439,226 
Subtotal   5,302,411    -    323,401    5,625,812    -    43,306    43,306    5,582,506 
                                         
Consumer loans                                        
Installment consumer loans   1,847,289    -    320,832    2,168,121    -    221,723    221,723    1,946,398 
Credit card balances   1,212,134    -    23,747    1,235,881    -    37,300    37,300    1,198,581 
Leasing transactions   3,383    -    68    3,451    -    68    68    3,383 
Other consumer loans   195,030    -    4,765    199,795    -    5,494    5,494    194,301 
Subtotal   3,257,836    -    349,412    3,607,248    -    264,585    264,585    3,342,663 
                                         
Total   19,195,423    374,050    1,365,839    20,935,312    200,230    408,061    608,291    20,327,021 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 67
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

   Assets before allowances   Provisions established     
  Normal
portfolio
   Substandard
Portfolio
   Impaired
portfolio
   Total   Individual
allowances
   Group
allowances
   Total   Assets
Net balance
 
As of December 31, 2012  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Commercial loans                                        
Commercial loans   6,585,063    187,762    543,592    7,316,417    108,184    83,690    191,874    7,124,543 
Foreign trade loans   1,220,303    28,085    22,035    1,270,423    26,306    921    27,227    1,243,196 
Checking accounts debtors   191,714    3,692    9,949    205,355    1,709    2,519    4,228    201,127 
Factoring transactions   317,837    869    3,536    322,242    3,538    784    4,322    317,920 
Leasing transactions   1,168,825    66,724    42,006    1,277,555    14,985    5,987    20,972    1,256,583 
Other loans and account receivable   78,506    765    17,758    97,029    213    2,037    2,250    94,779 
Subtotal   9,562,248    287,897    638,876    10,489,021    154,935    95,938    250,873    10,238,148 
                                         
Mortgage loans                                        
Loans with mortgage finance bonds   88,643    -    3,561    92,204    -    493    493    91,711 
Mortgage mutual loans   43,690    -    2,415    46,105    -    936    936    45,169 
Other mortgage mutual loans   4,910,218    -    223,054    5,133,272    -    34,561    34,561    5,098,711 
Subtotal   5,042,551    -    229,030    5,271,581    -    35,990    35,990    5,235,591 
                                         
Consumer loans                                        
Installment consumer loans   1,502,346    -    355,311    1,857,657    -    218,474    218,474    1,639,183 
Credit card balances   1,023,776    -    30,697    1,054,473    -    38,719    38,719    1,015,754 
Leasing transactions   3,433    -    255    3,688    -    160    160    3,528 
Other consumer loans   192,937    -    6,722    199,659    -    5,906    5,906    193,753 
Subtotal   2,722,492    -    392,985    3,115,477    -    263,259    263,259    2,852,218 
                                         
Total   17,327,291    287,897    1,260,891    18,876,079    154,935    395,187    550,122    18,325,957 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 68
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

b)Portfolio characteristics:

 

As of December 31, 2013 and 2012, the portfolio before allowances is as follows, by customer’s economic activity:

 

   Domestic loans (*)   Foreign interbank loans
(**)
   Total loans   Distribution percentage 
   As of December 31   As of December 31,   As of December 31,   As of December 31, 
   2013   2012   2013   2012   2013   2012   2013   2012 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   %   % 
Commercial loans                                        
Manufacturing   1,216,914    1,014,777    -    -    1,216,914    1,014,777    5.78    5.35 
Mining   464,865    292,217    -    -    464,865    292,217    2.21    1.54 
Electricity, gas, and water   222,110    337,269    -    -    222,110    337,269    1.05    1.78 
Agriculture and livestock   806,092    770,558    -    -    806,092    770,558    3.83    4.06 
Forest   183,716    120,002    -    -    183,716    120,002    0.87    0.63 
Fishing   265,917    188,803    -    -    265,917    188,803    1.26    1.00 
Transport   721,931    511,407    -    -    721,931    511,407    3.43    2.70 
Communications   249,499    179,544    -    -    249,499    179,544    1.18    0.95 
Construction   1,337,791    1,130,194    -    -    1,337,791    1,130,194    6.35    5.96 
Commerce   2,578,979    2,396,428    125,383    90,546    2,704,362    2,486,974    12.84    13.11 
Services   447,861    400,716    -    -    447,861    400,716    2.13    2.11 
Other   3,206,643    3,147,133    -    -    3,206,643    3,147,133    15.23    16.59 
                                         
Subtotal   11,702,318    10,489,048    125,383    90,546    11,827,701    10,579,594    56.16    55.78 
                                         
Mortgage loans   5,625,812    5,271,581    -    -    5,625,812    5,271,581    26.71    27.79 
                                         
Consumer loans   3,607,248    3,115,477    -    -    3,607,248    3,115,477    17.13    16.43 
                                         
Total   20,935,378    18,876,106    125,383    90,546    21,060,761    18,966,652    100.00    100.00 

 

(**)Includes domestic interbank loans for Ch$66 million as of December 31, 2013 (Ch$27 million as of December 31, 2012), see Note 9.

 

(**)Includes foreign interbank loans for Ch$125,383 million as of December 31, 2013 (Ch$90,546 million as of December 31, 2012), see Note 9.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 69
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

c)Impaired Portfolio (*)

 

i)As of December 31, 2013 and 2012, the impaired portfolio is as follows:

 

   As of December 31, 
   2013   2012 
   Commercial   Mortgage   Consumer   Total   Commercial   Mortgage   Consumer   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Individual impaired portfolio   317,534    -    -    317,534    298,868    -    -    298,868 
Non-performing loans   364,890    155,688    92,723    613,301    320,461    159,802    117,504    597,767 
Other impaired portfolio   122,464    167,713    256,689    546,866    96,793    69,228    275,481    441,502 
Total   804,888    323,401    349,412    1,477,701    716,122    229,030    392,985    1,338,137 

 

(*) Impaired portfolio includes loans classified as substandard in groups B3 and B4, as well as the impaired portfolio.

 

ii)The impaired portfolio with or without guarantee as of December 31, 2013 and 2012 is as follows:

 

   As of December 31, 
   2013   2012 
   Commercial   Mortgage   Consumer   Total   Commercial   Mortgage   Consumer   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Secured debt   385,712    302,219    49,051    736,982    377,169    208,616    51,549    637,334 
Unsecured debt   419,176    21,182    300,361    740,719    338,953    20,414    341,436    700,803 
Total   804,888    323,401    349,412    1,477,701    716,122    229,030    392,985    1,338,137 

 

iii)The portfolio of non-performing loans as of December 31, 2013 and 2012 is as follows:

 

   As of December 31, 
   2013   2012 
   Commercial   Mortgage   Consumer   Total   Commercial   Mortgage   Consumer   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Secured debt   151,494    136,768    7,241    295,503    154,675    143,814    8,293    306,782 
Unsecured debt   213,396    18,920    85,482    317,798    165,786    15,988    109,211    290,985 
Total   364,890    155,688    92,723    613,301    320,461    159,802    117,504    597,767 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 70
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

d)Allowances

 

The changes in allowance balances during 2013 and 2012 are as follows:

 

   Commercial
loans
   Mortgage
loans
   Consumer
loans
     
   Individual   Group   Group   Group   Total 
Activity during 2013  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balance as of December 31, 2012   154,935    95,938    35,990    263,259    550,122 
Allowances established   85,628    36,724    21,314    155,921    299,587 
Allowances release   (22,014)   (11,151)   (9,216)   (35,482)   (77,863)
Released allowances by charge-off   (18,319)   (21,341)   (4,782)   (119,113)   (163,555)
Balances as of December 31, 2013   200,230    100,170    43,306    264,585    608,291 

  

   Commercial
loans
   Mortgage
loans
   Consumer
loans
     
   Individual   Group   Group   Group   Total 
Activity during 2012  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balances as of December 31, 2011   147,917    97,115    35,633    243,022    523,687 
Allowances established   48,745    31,772    10,741    239,607    330,865 
Allowances release   (20,716)   (16,624)   (7,449)   (38,471)   (83,260)
Charge-off released allowances   (21,011)   (16,325)   (2,935)   (180,899)   (221,170)
Balances as of December 31, 2012   154,935    95,938    35,990    263,259    550,122 

 

In addition to credit risk provisions, there are provisions held for:

 

i)Country risk to cover the risk taken when holding or commiting resources with any foreign country. These allowances are established according to country risk classifications as set for Chapter 7-13 of the Updated Compilation of Rules issued by the SBIF. The balances of allowances as of December 31, 2013 and 2012 are Ch$470 million and Ch$88 million, respectively.

 

ii)According to SBIF's regulations (Compendium of Accounting Standards), the Bank has established allowances related to unused balances of credit lines with free disposal and contingent loans. The balances of allowances as of December 31, 2013 and 2012 are Ch$18,767 million and Ch$17,850 million, respectively.

 

e)Allowances established on customers and interbank loans

 

The following chart shows the balance of allowances established, associated with credits granted to customers and banks:

 

   As of December 31 
   2013   2012 
         
Customers loans   299,587    330,865 
Interbank loans   127    299 
Total   299,714    331,164 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 71
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

f)Portfolio by its Impaired and non-impaired status.

 

   As of December 31, 2013 
   Non-impaired   Impaired   Portfolio total 
   Commercial   Mortgage   Consumer   Total non
impaired
   Commercial   Mortgage   Consumer   Total
impaired
   Commercial   Mortgage   Consumer   Total
portfolio
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                 
Current portfolio   10,665,404    5,017,319    3,071,977    18,754,700    335,382    102,214    151,804    589,400    11,000,786    5,119,533    3,223,781    19,344,100 
Overdue for 1-29 days   142,613    103,335    122,088    368,036    34,715    23,111    57,693    115,519    177,328    126,446    179,781    483,555 
Overdue for 30-89 days   89,347    181,757    63,771    334,875    74,863    51,143    54,202    180,208    164,210    232,900    117,973    515,083 
Overdue for 90 days or more   -    -    -    -    359,928    146,933    85,713    592,574    359,928    146,933    85,713    592,574 
                                                             
Total portfolio before allowances   10,897,364    5,302,411    3,257,836    19,457,611    804,888    323,401    349,412    1,477,701    11,702,252    5,625,812    3,607,248    20,935,312 
                                                             
Overdue loans (less than 90 days) presented as portfolio percentage   2.13%   5.38%   5.70%   3,61%   13.61%   22.96%   32.02%   20.01%   2.92%   6.39%   8.25%   4,77%
                                                             
Overdue loans (90 days or more) presented as portfolio percentage.   -    -    -    -    44.72%   45.43%   24.53%   40.10%   3.08%   2,61%   2.38%   2,83%

 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 72
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 10

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

g)Portfolio by its Impaired and non-impaired status, continued.

 

   As of December 31, 2012 
   Non-impaired   Impaired   Portfolio total 
   Commercial   Mortgage   Consumer   Total non
impaired
   Commercial   Mortgage   Consumer   Total
impaired
   Commercial   Mortgage   Consumer   Total
portfolio
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                 
Current portfolio   9,500,231    4,725,955    2,511,869    16,738,055    273,481    43,502    160,480    477,463    9,773,712    4,769,457    2,672,349    17,215,518 
Overdue for 1-29 days   195,667    202,142    132,475    530,284    63,868    18,391    60,055    142,314    259,535    220,533    192,530    672,598 
Overdue for 30-89 days   77,001    114,454    78,148    269,603    75,659    34,240    68,316    178,215    152,660    148,694    146,464    447,818 
Overdue for 90 days or more   -    -    -    -    303,114    132,897    104,134    540,145    303,114    132,897    104,134    540,145 
                                                             
Total portfolio before allowances   9,772,899    5,042,551    2,722,492    17,537,942    716,122    229,030    392,985    1,338,137    10,489,021    5,271,581    3,115,477    18,876,079 
                                                             
Overdue loans (less than 90 days) presented as portfolio percentage   2.79%   6.28%   7.74%   4.56%   19.48%   22.98%   32.67%   23.95%   3.93%   7.00%   10.88%   5.94%
                                                             
Overdue loans (90 days or more) presented as portfolio percentage   -    -    -    -    42.33%   58.03%   26.50%   40.37%   2.89%   2.52%   3.34%   2.86%

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 73
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 11

LOAN PURCHASES AND SALES

 

a)Sale of portfolios

 

In 2013 and 2012 the following loan trading operations were conducted:

  

   For the year ended December 31, 2013 
   Book
value
   Selling
price
   Income
from
financial
operations
   Provisions
on
Credit risk
   Net
income
total
 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Sale of Charged-off loans (1)   -    70    70    -    70 
Sale of Charged-off loans (1)   -    1,548    1,548    -    1,548 
Sale of Current loans (2)   109    23    (86)   38    (48)
Sale of Current loans (2)   4,827    6,590    1,763    -    1,763 
Charged-off portfolio (*)   -    -    (118)   -    (118)
Total   4,936    8,231    3,177    38    3,215 

(*) Difference in selling price of charged-off portfolios from previous years is Ch$118 million loss.

 

   For the year ended December 31, 2012 
   Book
value
   Selling
price
   Income
from
financial
operations
   Reserve fund   Net
income
Total
 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Sale of Charged-off loans (1)   -    2,608    2,608    (518)   2,090 
Sale of Current loans (2)   17,808    18,587    779    -    779 
Sale of Current loans (2)   5,689    7,655    1,966    -    1,966 
Total   23,497    28,850    5,353    (518)   4,835 

  

(1)Sale of charged-off loans

 

In 2013, Banco Santander Chile signed an agreement to sell charged-off consumer loans to Matic Kart S.A (March) and to Vantrust (September). Details are as follows:

 

   Portfolio
nominal value
   Selling price 
Date  MCh$   MCh$ 
         
03-01-2013 (a)   2,035    70 
09-27-2013 (b)   72,915    1,548 
Total   74,950    1,618 

 

a)Sale of allowance portfolio previously charged-off. The total sale of the portfolio was Ch$81 million. However, there was a refund for Ch$11 million in June, 2013 generating a net profit of Ch$70 million which was recorded as gains from sales of charged-off portfolio.

 

b)Sale of allowance portfolio previously charged-off. The total sale of the portfolio was Ch$1,839 million. However, there was a refund for Ch$291 million generating a net profit of Ch$$1,548 million which was recorded as gains from sales of charged-off portfolio.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 74
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 11

LOAN PURCHASES AND SALES, continued:

  

In 2012, Banco Santander Chile signed an agreement to sell loans previously charged-off to Fondo de Inversiones Cantábrico. These were the sales:

 

   Portfolio
nominal value
   Selling price 
Date  MCh$   MCh$ 
         
01-24-2012  13,130   853 
02-21-2012   13,357    868 
03-20-2012   13,638    887 
Total   40,125    2,608 

 

The income from these transactions was Ch$ 2,090 million. This amount was recorded as income from sale of loans previously charged-off within "Income from financial operations”. See Note 30.

  

(2)Sale of current loans

 

In 2013, Banco Santander Chile signed an agreement to sell current consumer loans to Matic Kart S.A and to the Chilean Government. Details of these transactions are as follows:

 

   Portfolio
nominal value
   Selling price 
Date  MCh$   MCh$ 
         
03-01-2013 (a)   109    23 
12-27-2013 (b)   4,827    6,590 
Total   4,936    6,613 

 

a)Sale of current portfolio totaled Ch$ 109 million, the effect on income was approximately Ch$ 23 million.

 

b)Sale of current portfolio for Ch$4,827 million. The portfolio was sold for Ch$6,590 million, generating a profit for Ch$1,763 million.

 

In 2012, Banco Santander Chile signed an agreement to sell current mortgage loans to Metlife Chile Seguros de Vida S.A. Details of these transactions are as follows:

 

   Portfolio
nominal value
   Selling price 
Date  MCh$   MCh$ 
         
01-19-2012 (a)   9,032    9,349 
02-02-2012 (a)   7,849    8,250 
08-13-2012 (a)   927    988 
12-27-2012 (b)   5,689    7,655 
Total   23,497    26,242 

 

(a)The income from mortgage loan portfolio sale was Ch$779 million, which was recorded within Income from Financial Operations. See Note 30.
(b)The income from mortgage loan portfolio sale was Ch$1,966 million, which was recorded within Income from Financial Operations. See Note 30.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 75
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 11

LOAN PURCHASES AND SALES, continued:

 

b)Loan purchase

 

i.In 2012, there were no purchases of loans.
ii.In September 2013, the following loan purchase transactions were performed:

 

On September 12, 2013, the Bank purchased a loan portfolio from Corpbanca for Ch$24,317 million. Loans purchased correspond to loans granted to Sociedad Nacional de Oleoductos S.A for Ch$10,741 million; and to Colbún for Ch$13,576 million. Total loans purchase amount Ch$24,238 million.

 

Additionally, on December 27, 2013, loans granted by Corpbanca to Falabella were purchased for Ch$18,350 million.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 76
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 12

AVAILABLE FOR SALE INVESTMENTS

 

As of December 31, 2013 and 2012, the detail of the instruments deemed as available for sale investments is as follows:

  

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Chilean Central Bank and Government securities          
Chilean Central Bank Bonds   364,821    712,278 
Chilean Central Bank Notes   1,078    8,270 
Other Chilean Central Bank and Government securities    146,295    296,010 
Subtotal   512,194    1,016,558 
Other Chilean securities          
Time deposits in Chilean financial institutions   1,011,354    756,136 
Mortgage finance bonds of Chilean financial institutions   33,856    37,319 
Chilean financial institution bonds   -    - 
Chilean corporate bonds   -    - 
Other Chilean securities   -    321 
Subtotal   1,045,210    793,776 
Foreign financial securities          
Foreign Central Banks and Government securities   143,589    - 
Other foreign financial securities   -    15,824 
Subtotal   143,589    15,824 
           
Total   1,700,993    1,826,158 

 

As of December 31, 2012 and 2013, the line item Chilean Central Bank and Government securities item includes securities sold with repurchase agreements to clients and financial institutions for Ch$ 90,818 million and Ch$ 156,340 million, respectively.

 

As of December 31, 2013 and 2012, the line item Other National Institutions Securities includes securities sold to customers and financial institutions under repurchase agreements totaling Ch$ 118,195 million and Ch$ 148,277 million, respectively.

 

As of December 31, 2013 available for sale investments included a net unrealized profit of Ch$ 840 million, recorded as a “Valuation adjustment” in Equity, distributed between a profit of Ch$ 802 million attributable to Bank shareholders and a profit of Ch$ 38 million attributable to non-controlling interest.

 

As of December 31, 2012 available for sale investments included a net unrealized loss of Ch$ 10,017 million, recorded as a “Valuation adjustment” in Equity, distributed between a loss of Ch$ 10,041 million attributable to Bank shareholders and a profit of Ch$ 24 million attributable to non-controlling interest.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 77
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 12
AVAILABLE FOR SALE INVESTMENTS, continued

 

Gross profits and losses realized on the sale of available for sale instruments as of December 31, 2013 and 2012, are as follows:

  

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Sale of available for sale investments generating realized profits   3,826,358    4,886,706 
Realized profits   9,326    2,574 
Sale of available for sale investments generating realized losses   388,401    665,779 
Realized losses   1,098    503 

  

The Bank evaluated those instruments with unrealized losses as of December 31, 2013 and 2012 and concluded they were only temporary impairments. This review consisted of evaluating the economic reasons for any declines, the credit ratings of the securities’ issuers, and the Bank’s intention and ability to hold the securities until the unrealized loss is recovered. Based on this analysis, the Bank believes that there were no other than temporary impairments in its investment portfolio, since most of the decline in fair value of these securities was caused by market conditions which the Bank considers to be temporary. All of the instruments that have unrealized losses as of December 31, 2013 and 2012, were in a continuous unrealized loss position for less than one year.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 78
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 12

AVAILABLE FOR SALE INVESTMENTS, continued

 

The following charts show the available for sale investments unrealized profit and loss, as of December 31, 2013 and 2012.

 

As of December 31, 2013:

 

   Under 12 months   Over 12 months   Total 
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                 
Chilean Central Bank and Government securities                                                            
Chilean Central Bank Bonds   363,708    364,821    1,708    (595)   -    -    -    -    363,708    364,821    1,708    (595)
Chilean Central Bank Notes   1,088    1,078    -    (10)   -    -    -    -    1,088    1,078    -    (10)
Other Chilean Central Bank and Government securities   145,870    146,295    596    (171)   -    -    -    -    145,870    146,295    596    (171)
Subtotal   510,666    512,194    2,304    (776)                       510,666    512,194    2,304    (776)
                                                             
Other Chilean securities                       -    -    -    -                     
Time deposits in Chilean financial institutions   1,009,661    1,011,354    1,811    (118)   -    -    -    -    1,009,661    1,011,354    1,811    (118)
Mortgage finance bonds of Chilean financial institutions   34,154    33,856    108    (406)   -    -    -    -    34,154    33,856    108    (406)
Chilean financial institution bonds   -    -    -    -    -    -    -    -    -    -    -    - 
Chilean corporate bonds   -    -    -    -    -    -    -    -    -    -    -    - 
Other Chilean securities   -    -    -    -    -    -    -    -    -    -    -    - 
Subtotals   1,043,815    1,045,210    1,919    (524)                       1,043,815    1,045,210    1,919    (524)
                                                             
Foreign financial securities                       -    -    -    -                     
Foreign Central Banks and Government securities   145,672    143,589    -    (2,083)   -    -    -    -    145,672    143,589    -    (2,083)
Other foreign financial securities                       -    -    -    -                     
Subtotal   145,672    143,589    -    (2,083)                       145,672    143,589    -    (2,083)
                        -    -    -    -                     
Total   1,700,153    1,700,993    4,223    (3,383)   -    -    -    -    1,700,153    1,700,993    4,223    (3,383)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 79
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 12

AVAILABLE FOR SALE INVESTMENTS, continued

 

As of December 31, 2012:

 

   Under 12 months   Over 12 months   Total 
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
   Amortized
cost
   Fair value   Unrealized
profit
   Unrealized
loss
 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Chilean Central Bank and Government securities                                                            
Chilean Central Bank Bonds   720,198    712,278    362    (8,282)   -    -    -    -    720,198    712,278    362    (8,282)
Chilean Central Bank Notes   8,408    8,270    -    (138)   -    -    -    -    8,408    8,270    -    (138)
Other Chilean Central Bank and Government instruments   297,863    296,010    521    (2,374)   -    -    -    -    297,863    296,010    521    (2,374)
Subtotals   1,026,469    1,016,558    883    (10,794)   -    -    -    -    1,026,469    1,016,558    883    (10,794)
                                                             
Other Chilean securities                                                            
Time deposits in Chilean financial institutions   755,903    756,136    498    (265)   -    -    -    -    755,903    756,136    498    (265)
Mortgage finance bonds of Chilean financial institutions   37,925    37,319    71    (677)   -    -    -    -    37,925    37,319    71    (677)
Chilean financial institution bonds   -    -    -    -    -    -    -    -    -    -    -    - 
Chilean corporate bonds   -    -    -    -    -    -    -    -    -    -    -    - 
Other Chilean securities   320    321    1    -    -    -    -    -    320    321    1    - 
Subtotals   794,148    793,776    570    (942)   -    -    -    -    794,148    793,776    570    (942)
                                                             
Foreign financial securities                                                            
Foreign Central Banks and Government securities   -    -    -    -    -    -    -    -    -    -    -    - 
Other foreign financial securities   15,558    15,824    266    -    -    -    -    -    15,558    15,824    266    - 
Subtotals   15,558    15,824    266    -    -    -    -    -    15,558    15,824    266    - 
                                                             
Total   1,836,175    1,826,158    1,719    (11,736)   -    -    -    -    1,836,175    1,826,158    1,719    (11,736)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 80
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 13

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES

 

a)The Consolidated Statements of Financial Position reflect investments in other companies amounting to Ch$ 9,681 million as of December 31, 2013, and Ch$ 7,614 million, as of December 31, 2012, as shown in the following table:

 

       Investment 
   Ownership interest
As of December 31
   Investment value
As of December 31,
   Profit and loss
As of December 31,
 
   2013   2012   2013   2012   2013   2012 
   %   %   MCh$   MCh$   MCh$   MCh$ 
Company                              
Redbanc S.A. (1)   33.43    33.43    1,513    1,374    139    (199)
Transbank S.A. (2)   25.00    25.00    1,309    1,607    9    306 
Centro de Compensación Automatizado   33.33    33.33    673    548    125    116 
Sociedad Interbancaria de Depósito de Valores S.A.   29.28    29.28    585    501    112    86 
Cámara de Compensación de Alto Valor S.A. (4)   14.14    14.14    673    678    63    114 
Administrador Financiero del Transantiago S.A. (3)   20.00    20.00    1,947    1,215    732    (527)
Sociedad Nexus S.A.   12.90    12.90    972    1,106    145    278 
Servicios de Infraestructura de Mercado OTC S.A. (5)   11.11    -    1,424    -    (16)   - 
Subtotal             9,096    7,029    1,309    174 
Shares or rights in other companies                              
Bladex             136    136    16    13 
Stock Exchanges             417    417    97    80 
Others             32    32    -    - 
Subtotal             9,681    7,614    1,422    267 
Selling of Santander Asset Management S.A. Administradora General de Fondos (6)             -    -    78,122    - 
                               
Total             9,681    7,614    79,544    267 

 

(1)Losses arising from these investments were mainly due to the charge-off of Accounts receivable from Banco Estado which had to make a payment for brand usage under arbitration procedures. On May 31, 2012, the arbitrating judge decided that the payment did not comply with the contract between Redbank and Banco Estado, and Redbanc charged-off that payment, with an effect on income of Ch$ 1,176 million.

 

(2)In July 2012, Banco Santander Chile sold 3,628,154 shares from the Sociedad de apoyo Transbank S.A, decreasing its share from 32.71% to 25%. The transaction amount was Ch$1,000 million and the book value of such investment was Ch$401 million, generating a profit of Ch$599 million recorded as other income. See Note 36.

 

(3)Losses arising from this investment were mainly due to the end of the renegotiation process with the Ministry of Transport and Telecommunications of our current service contract. The Bank signed a complementary contract of “Mutual Termination of Contract” for “Providing of complementary financial administration services of the Santiago Public Transportation System resources”. As a result, Administrador Financiero del Transantiago S.A. had to adjust its income, charging Ch$ 7,177 million against 2012 income.

 

(4)In August 2012, Banco Santander Chile bought 144 shares from Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor S.A through Banco Scotiabank Chile, increasing its ownership from 12.65% to 14.14%. The purchase of such shares was for Ch$61 million.

 

(5)In July 2013, Banco Santander Chile bought 1,111 shares from Servicios de Infraestructura de Mercado OTC for Ch$1,440 million.

 

(6)In December 2013, the subsidiary Santander Asset Management S.A General de Fondos was sold for Ch$90,281 million. This generated profit of Ch$78,122 million which was included within income from investments in associates and other companies.

 

b)Investments in associates and other companies do not have market prices.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 81
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 13

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES, continued

 

c)Summary of financial information of associates as of and for the years ended December 31, 2013 and 2012:

 

   As of December 31, 
   2013   2012 
   Assets   Liabilities   Equity   Net income   Assets   Liabilities   Equity   Net income 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Centro de Compensación Automatizado   2,994    1,012    1,606    376    2,014    405    1,263    346 
Redbanc S.A.   18,023    13,622    3,984    417    15,973    11,863    4,706    (596)
Transbank S.A.   483,004    477,772    5,196    36    316,881    310,576    5,076    1,224 
Sociedad Interbancaria de Depósito de Valores S.A.   2,113    20    1,711    382    1,714    4    1,415    295 
Sociedad Nexus S.A.   13,309    6,112    6,075    1,122    14,439    8,027    4,256    2,156 
Servicios de Infraestructura de Mercado OTC S.A.   14,608    3,188    11,560    (140)   -    -    -    - 
Administrador Financiero del Transantiago S.A.   63,981    54,244    6,076    3,661    81,017    74,940    8,714    (2,637)
Cámara de Compensación de Alto Valor S.A.   5,435    906    4,085    444    5,109    772    3,631    706 
Total   603,467    556,876    40,293    6,298    437,147    406,587    29,061    1,494 

 

d)Restrictions over the ability of associated companies to transfer funds to investors.

 

There are no significant restrictions regarding the capacity of associates to transfer funds, whether in cash dividends, refund of loans, or advance payments to the Bank.

 

e)Activity with respect to investments in other companies during 2013 and 2012 is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Initial book value   7,614    8,728 
Acquisition of investments (1)   1,440    61 
Sale of investments (2) (4)   -    (401)
Participation in income   1,422    267 
Dividends received (3)   (663)   (690)
Other equity adjustments   (132)   (351)
           
Total   9,681    7,614 

 

(1)See letter a), reference (4) and (5)
(2)See letter a), reference (2)
(3)As of December 31, 2013 y 2012, dividends from investments accounted for the cost method were Ch$112 million and Ch$206 million, respectively, are not included.
(4)The sale of Santander Asset Management S.A. Administradora General de Fondos is not included due to this was a subsidiary.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 82
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 14

INTANGIBLE ASSETS

 

a)As of December 31, 2013 and 2012, the composition of the item is as follows:

 

               As of December 31, 2013 
   Years of
useful
life
   Average
remaining
useful life
   Net opening
balance
January 1,
2013
   Gross
balance
   Accumulated
amortization
   Net balance 
           MCh$   MCh$   MCh$   MCh$ 
                         
Licenses   3    2    2,621    9,955    (7,758)   2,197 
Software development   3    2    84,726    242,023    (177,517)   64,506 
                               
Total             87,347    251,978    (185,275)   66,703 

 

 

               As of December 31, 2012 
   Years of
useful
life
   Average
remaining
useful life
   Net opening
balance
January 1,
2012
   Gross
balance
   Accumulated
amortization
   Net balance 
           MCh$   MCh$   MCh$   MCh$ 
                         
Licenses   3    2    2,496    9,329    (6,708)   2,621 
Software development   3    2    78,243    224,671    (139,945)   84,726 
                               
Total             80,739    234,000    (146,653)   87,347 

  

b)The activity in intangible assets during December 31, 2013 and 2012 is as follows:

 

b.1) Gross balance

 

  Licenses   Software
development
   Total 
Gross balances  MCh$   MCh$   MCh$ 
             
Balances as of January 1, 2013   9,329    224,671    234,000 
Acquisitions   626    17,774    18,400 
Disposals   -    -    - 
Other   -    (422)   (422)
Balances as of December 31, 2013   9,955    242,023    251,978 
                
Balances as of January 1, 2012   8,085    184,133    192,218 
Acquisitions   1,244    41,018    42,262 
Disposals   -    (480)   (480)
Other   -    -    - 
Balances as of December 31, 2012   9,329    224,671    234,000 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 83
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 14

INTANGIBLE ASSETS, continued

 

b.2) Accumulated amortization

 

  Licenses   Software development   Total 
Accumulated amortization  MCh$   MCh$   MCh$ 
             
Balances as of January 1, 2013   (6,708)   (139,945)   (146,653)
Period year’s amortization   (1,050)   (37,572)   (38,622)
Other changes   -    -    - 
Balances as of December 31, 2013   (7,758)   (177,517)   (185,275)
                
Balances as of January 1, 2012   (5,589)   (105,890)   (111,479)
Year’s amortization   (1,119)   (34,055)   (35,174)
Other changes   -    -    - 
Balances as of December 31, 2012   (6,708)   (139,945)   (146,653)

  

c)The Bank has no restriction on intangible assets as of December 31, 2013 and 2012. Additionally, the intangibles assets have not been pledged as guarantee for fulfillment of financial liabilities. Also, the Bank has no debt related to Property, plant, and equipment as of those dates.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 84
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 15

PROPERTY, PLANT, AND EQUIPMENT

 

a)As of December 31, 2013 and 2012, the composition of property, plant, and equipment is as follows:

 

       As of December 31, 2013 
   Net opening
balance
January 1, 2012
   Gross
balance
   Accumulated
depreciation
   Net
balance
 
   MCh$   MCh$   MCh$   MCh$ 
                 
Land and buildings   119,853    184,711    (56,592)   128,119 
Equipment   28,625    85,857    (47,016)   38,841 
Ceded under operating leases   4,507    4,888    (559)   4,329 
Other   9,229    32,207    (23,281)   8,926 
Total   162,214    307,663    (127,448)   180,215 

  

       As of December 31, 2012 
   Net opening
balance
January 1, 2012
   Gross
balance
   Accumulated
depreciation
   Net
balance
 
   MCh$   MCh$   MCh$   MCh$ 
                 
Land and buildings   118,493    167,241    (47,388)   119,853 
Equipment   22,570    66,170    (37,545)   28,625 
Ceded under operating leases   4,071    4,996    (489)   4,507 
Other   7,925    28,957    (19,728)   9,229 
Total   153,059    267,364    (105,150)   162,214 

  

b)The activity in property, plant, and equipment during 2013 and 2012 is as follows:

 

b.1)Gross balance

  

  Land and
buildings
   Equipment   Ceded under an
operating leases
   Other   Total 
2013  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balances as of January 1, 2013   167,241    66,170    4,996    28,957    267,364 
Additions   17,470    20,171    -    3,148    40,789 
Disposals   -    (240)   (108)   -    (348)
Impairment due to damage (i)   -    (244)   -    -    (244)
Other   -    -    -    102    102 
Balances as of December 31, 2013   184,711    85,857    4,888    32,207    307,663 

  

i)Banco Santander Chile recognized on its financial statements as of December 31, 2013 Ch$ 244 million impairment from damages to ATMs. Compensation received from insurance totaled Ch$ 725 million, which is presented within Other operating income and expenses (Note 36).

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 85
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 15

PROPERTY, PLANT, AND EQUIPMENT, continued

  

  Land and
buildings
   Equipment   Ceded under an
operating leases
   Other   Total 
2012  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balances as of January 1, 2012   156,950    51,781    4,477    24,081    237,289 
Additions   16,658    14,570    519    4,991    36,738 
Disposals (i)   (6,367)   (91)   -    (115)   (6,573)
Impairment due to damage (ii)   -    (90)   -    -    (90)
Transfers   -    -    -    -    - 
Other   -    -    -    -    - 
Balances as of December 31, 2012   167,241    66,170    4,996    28,957    267,364 

 

i)As disclosed in Note 36 - Other operating income and expenses, Banco Santander Chile sold 17 offices, which at the time of the sale had a net book value of approximately Ch$ 6,367 million.

 

ii)Banco Santander Chile recognized on its financial statements as of December 31, 2012 Ch$ 90 million impairment from damages to ATMs. Compensation received from insurance totaled Ch$ 262 million, which is presented within “Other operating income and expenses” (Note 36).

  

b.2) Accumulated depreciation

 

  Land and
buildings
   Equipment  

Ceded under an

operating
leases

   Other   Total 
2013  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balances as of January 1, 2013   (47,388)   (37,545)   (489)   (19,728)   (105,150)
Depreciation charges in the period   (9,207)   (9,554)   (89)   (3,602)   (22,452)
Sales and disposals in the period   3    83    19    49    154 
Transfers   -    -    -    -    - 
Other   -    -    -    -    - 
Balances as of December 31, 2013   (56,592)   (47,016)   (559)   (23,281)   (127,448)

   

  Land and
buildings
   Equipment   Ceded under
an operating
leases
   Other   Total 
2012  MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Balances as of January 1, 2012   (38,485)   (29,211)   (378)   (16,156)   (84,230)
Depreciation charges in the period   (9,125)   (8,351)   (111)   (3,608)   (21,195)
Sales and disposals in the period   222    17    -    36    275 
Transfers   -    -    -    -    - 
Other   -    -    -    -    - 
Balances as of December 31, 2012   (47,388)   (37,545)   (489)   (19,728)   (105,150)

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 86
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 15

PROPERTY, PLANT, AND EQUIPMENT, continued

 

c)Operational leases – Lessor

 

As of December 31, 2013 and 2012, the future minimum lease cash inflows under non-cancellable operating leases are as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   637    1.163 
Due after 1 year but within 2 years   508    626 
Due after 2 years but within 3 years   300    502 
Due after 3 years but within 4 years   263    294 
Due after 4 years but within 5 years   263    258 
Due after 5 years   2,148    2,148 
           
Total   4,119    4,991 

 

d)Operational leases – Lessee

 

Certain Bank’s premises and equipment are leased under various operating leases. Future minimum rental payments under non-cancellable leases are as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   18,941    16,266 
Due after 1 year but within 2 years   16,948    14,845 
Due after 2 year but within 3 years   15,161    12,960 
Due after 3 years but within 4 years   14,083    11,443 
Due after 4 years but within 5 years   12,902    10,465 
Due after 5 years   61,730    63,035 
           
Total   139,765    129,014 

 

e)As of December 31, 2013 and 2012, the Bank has no financial leases which cannot be unilaterally rescinded.

 

f)The Bank has no restriction on intangible assets as of December 31, 2013 and 2012. Additionally, the property, plant, and equipment have not been surrendered as guarantees for the compliance of financial liabilities. Also, the Bank has no debt regarding Property, plant, and equipment as of those dates.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 87
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 16

CURRENT AND DEFERRED TAXES

 

a) Current taxes

 

As of December 31, 2013 and 2012, the bank recognizes an income tax provision, which is determined based on the currently applicable tax legislation. This provision is recorded net of recoverable taxes, as shown as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Summary of current tax liabilities (assets)          
Current tax (assets)   (1,643)   (10,227)
Current tax liabilities   50,242    525 
           
Total tax payable (recoverable)   48,599    (9,702)
           
(Assets) liabilities current taxes detail (net)          
Income tax, tax rate 20%   117,095    83,381 
Minus:          
Provisional monthly payments (PPM)   (61,730)   (84,940)
Credit for training expenses   (1,656)   (1,505)
Land taxes leasing   (2,987)   (2,939)
Grant credits   (1,892)   (2,534)
Other   (231)   (1,165)
           
Total tax payable (recoverable)   48,599    (9,702)

  

b) Effect on income

 

The effect of tax expense on income for the years ended December 31, 2013 and 2012 is comprised of the following items:

 

   As of December 31 
   2013
MCh$
   2012
MCh$
 
         
Income tax expense          
Current tax   117,095    83,381 
           
Credits (debits) for deferred taxes          
Origination and reversal of temporary differences   (27,721)   (32,653)
Subtotals   89,374    50,728 
Tax for rejected expenses (Article No.21)   392    936 
Other   4,701    (490)
Net charges for income tax expense   94,467    51,174 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 88
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 16

CURRENT AND DEFERRED TAXES, continued:

 

c)Effective tax rate reconciliation

 

The reconciliation between the income tax rate and the effective rate applied in determining tax expenses as of December 31, 2013 and 2012, is as follows:

 

   As of December 31 
   2013   2012 
   Tax
rate
   Amount   Tax
rate
   Amount 
   %   MCh$   %   MCh$ 
                 
Tax calculated over profit before tax   20.00    107,706    20,00    88,816 
Permanent differences   (2.04)   (10,989)   (2.74)   (12,161)
Single penalty tax (rejected expenses)   0.07    392    0.21    936 
Rate change effect (*)   -    -    (3.66)   (16,221)
Real estate taxes   (0.55)   (2,987)   (1.87)   (8,324)
Other   0.06    345    (0.42)   (1,872)
Effective rates and expenses for income tax   17,54    94,467    11.52    51,174 

 

(*)Law No. 20,455 from 2010 increased the first class tax rate to be applied to companies on the taxable income during 2011 and 2012, to 20% and 18.5% respectively. Nonetheless, law No. 20,630 published in the Official Newspaper on September 27, 2012 increased the First Class Rate from 18.5% to 20%, permanently, for transactions accounted from January 1, 2012 onwards. This created income for MCh$ 16,221, corresponding to the fluctuation of the deferred tax expense/benefit.

 

d) Effect of deferred taxes on comprehensive income

 

Below is a summary of the separate effect of deferred tax on Equity, showing the asset and liability balances, for the years ended December 31, 2013 and 2012:

  

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Deferred tax assets          
Available for sale investments   31    2,004 
Cash flow hedges   1,651    389 
Total deferred tax assets affecting other with effect in other comprehensive incomes   1,682    2,393 
           
Deferred tax liabilities          
Available for sale investments   (199)   (1)
Cash flow hedges   -    (1,452)
Total deferred tax liabilities affecting other with effect in other comprehensive incomes   (199)   (1,453)
           
Net deferred tax balances in equity   1,483    940 
           
Deferred taxes in equity attributable to Bank shareholders   1,491    945 
Deferred tax in equity attributable to non-controlling interests   (8)   (5)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 89
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 16

CURRENT AND DEFERRED TAXES, continued

 

e)Effect of deferred taxes on income

 

As of 2013 and 2012, the Bank has recorded deferred tax effects in its financial statements.

 

Below are the effects of deferred taxes on assets, liabilities and income as of December 31, 2013 and 2012:

 

   As of December 31 
   2013
MCh$
   2012
MCh$
 
Deferred tax assets          
Interests and adjustments   7,203    7,854 
Non-recurring charge-offs   9,787    12,046 
Assets received in lieu of payment   1,149    1,265 
Property, plant and equipment   3,579    3,654 
Allowance for loan losses   92,088    96,071 
Provision for expenses   19,130    17,903 
Derivatives   19    54 
Leased assets   52,447    39,168 
Subsidiaries tax losses   5,716    5,232 
Other   37,415    767 
Total deferred tax assets   228,533    184,014 
           
Deferred tax liabilities          
Valuation of investments   (11,593)   (6,555)
Depreciation   (315)   (261)
Other   (12,981)   (1,275)
Total deferred tax liabilities   (24,889)   (8,091)

 

f)Summary of deferred tax assets and liabilities

 

Below is a summary of the deferred taxes impact on equity and income.

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Deferred tax assets          
Recognized through other comprehensive income   1,682    2,393 
Recognized through profit or loss   228,533    184,014 
Total deferred tax assets   230,215    186,407 
           
Deferred tax liabilities          
Recognized through other comprehensive income   (199)   (1,453)
Recognized through profit or loss   (24,889)   (8,091)
Total deferred tax liabilities   (25,088)   (9,544)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 90
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 16

CURRENT AND DEFERRED TAXES, continued:

 

g)Supplementary information related to the Circular issued by the local tax authority and SBIF:

 

g.1) Loans and accounts receivables from customers

 

   As of December 31, 2013   As of December 31, 2012 
       Tax value assets       Tax value assets 
           Non-performing loans           Non-performing loans 
   Financial       With   Without   Financial       With   Without 
   value assets   Total   Guarantees   Guarantees   value assets   Total   Guarantees   Guarantees 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Interbank loans   125,449    125,449    -    -    90,573    90,527    -    - 
Commercial loans   11,702,252    10,063,170    123,387    134,807    10,489,021    8,914,074    108,784    117,987 
Consumer loans   3,607,248    3,651,539    321    14,995    3,115,477    3,171,438    519    15,420 
Mortgage loans   5,625,812    5,636,214    77,861    1,154    5,271,581    5,281,568    64,616    12,312 
Total   21,060,761    19,476,372    201,569    150,956    18,966,652    17,457,607    173,919    145,719 

 

g.2) Provisions for substandard loans without bonds

 

   Balance as of
01.01.2013
   Allowance
charge-offs
   Provisions
established
   Provisions
release
   Balance as of
12.31.2013
 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Commercial loans   117,987    (63,380)   212,042    (131,842)   134,807 
Consumer loans   15,420    (191,994)   229,482    (37,913)   14,995 
Mortgage loans   12,312    (5,715)   29,859    (35,302)   1,154 
Total   145,719    (261,089)   471,383    (205,057)   150,956 

 

   Balance as of
01.01.2012
   Allowance
charge-offs
   Provisions
established
   Provisions
release
   Balance as of
12.31.2012
 
   MCh$   MCh$   MCh$   MCh$   MCh$ 
                     
Commercial loans   93,672    (981)   134,081    (108,785)   117,987 
Consumer loans   13,068    (4,738)   77,114    (70,024)   15,420 
Mortgage loans   3,777    (481)   37,780    (28,764)   12,312 
Total   110,517    (6,200)   248,975    (207,573)   145,719 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   91
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 16

CURRENT AND DEFERRED TAXES, continued:

 

g.3) Direct charge offs and recoveries

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
Direct charges offs Art. 31 No.4 Paragraphs II   31,551    6,454 
Cancellations that created release of provisions        - 
Retrieval or renegotiations of charged-off loans   53,952    31,322 
Total   85,503    37,776 

 

g.4) Enforcement of art.31 No.4 Paragraphs I and II

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
Charge-offs according to paragraph I   -    - 
Cancellations according to paragraph III   32,496    7,698 
Total   32,496    7,698 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   92
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 17

OTHER ASSETS

 

Other assets item includes the following:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Assets for leasing (*)   41,402    42,891 
           
Assets received or awarded in lieu of payment (**)          
Assets received in lieu of payment   14,448    15,058 
Assets awarded at judicial sale   6,530    9,974 
Provision on assets received in lieu of payment or awarded   (2,914)   (3,091)
Subtotals   18,064    21,941 
           
Other assets          
Guarantee deposits   68,330    256,854 
Gold investments   373    464 
VAT credit   8,705    10,337 
Income tax recoverable   42,354    28,274 
Prepaid expenses   34,970    50,870 
Assets recovered from leasing for sale   5,747    3,335 
Pension plan assets   1,283    1,989 
Accounts and notes receivable   60,256    82,378 
Notes receivable through brokerage and simultaneous transactions   75,145    89,314 
Other receivable assets   9,746    29,883 
Other assets   33,650    36,687 
Subtotals   340,559    590,385 
           
Total   400,025    655,217 

 

(*)Assets available to be granted under the financial leasing agreements.

 

(**)Assets received in lieu of payment correspond to assets received as payment of overdue debts. The total assets held that correspond to this type must not exceed 20% of the Bank’s effective equity. These assets currently represent 0.48% (0.55% as of December 31, 2012) of the Bank’s effective equity.

 

Assets awarded in judicial sales correspond to those acquired in a judicial sale as payment of debts previously subscribed with the Bank. The assets awarded through a judicial sale are not subject to the aforementioned requirement. These properties are assets available for sale. For most assets, sale is expected to be completed within one year from the date on which the asset was received or acquired. If the asset in question is not sold within the year, it must be written off.

 

In addition, a provision is recorded for the initial award value plus its additions and its estimated realization value (appraisal) if the first is higher.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   93
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 18

TIME DEPOSITS AND OTHER TIME LIABILITIES

 

As of December 31, 2013 and 2012, the composition of the line item Time deposits and other liabilities is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Deposits and other demand liabilities          
Checking accounts   4,403,526    4,006,143 
Other deposits and demand accounts   569,395    455,315 
Other demand liabilities   647,842    508,561 
           
Total   5,620,763    4,970,019 
           
Time deposits and other time liabilities          
Time deposits   9,567,855    9,008,902 
Time savings account   104,143    101,702 
Other time liabilities   3,274    1,609 
           
Total   9,675,272    9,112,213 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   94
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 19

INTERBANK BORROWINGS

 

At December 31, 2013 and 2012 the line item Interbank borrowings is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
Loans from financial institutions and the Central Bank of Chile          
Other obligations with Central Bank of Chile   220    398 
Subtotals   220    398 
Loans from domestic financial institutions   500    - 
Loans from foreign financial institutions          
Standard Chartered Bank - New York   349,433    279,966 
Citibank N.A. - New York   181,107    187,036 
Wells Fargo Bank N.A. – New York   144,284    - 
Mizuho Corporate Bank   131,273    95,290 
Landesbank Baden Wuerttemberg   108,566    - 
Commerzbank A.G. - Frankfurt   107,843    88,801 
Banco Interamericano del Desarrollo   104,929    - 
Sumitomo Mitsui Banking Corporation   102,379    67,105 
Bank of America   94,388    139,570 
Bank of Montreal – Toronto   80,820    112,236 
The Toronto Dominion Bank – Toronto   70,803    74,486 
Banco Santander – Montevideo   52,442    57,532 
Royal Bank of Scotland – London   44,608    40,784 
The Bank of New York Mellon   26,224    - 
HSBC Bank of New York   26,222    - 
National Bank of Abu Dhabi   15,741    - 
Deutsche Bank A.G.- New York   13,109    245 
Wachovia Bank N.A.- Miami   7,394    204,184 
Banco Santander – Hong Kong   5,781    4,283 
Commerzbank N.A. – Miami   5,254    14,368 
Standard Chartered Bank - Hong Kong   1,059    - 
Unicrédito Italiana SPA   993    - 
Woori Bank   627    - 
Lanschot Bankiers N.V.   446    - 
Banco Popolare di Novara   351    308 
National Agricultural Cooperative   259    - 
Banco de Sabadell S.A.   250    - 
Banco de Occidente   248    - 
Banco Popular Español S.A.   224    - 
Banco Bilbao Vizcaya Argentaria   221    - 
HSBC Bank USA   179    - 
Bank of Tokio Mitsubishi   174    - 
U.S. Bank   174    513 
Intesa Sanpaolo SPA - USA   173    - 
J.P. Morgan Chase Bank N.A. - New York   164    48,176 
United Bank of India   160    - 
Banco do Brasil S.A. – London   146    285 
National Westminster Bank PLC   136    - 
Bank of China   105    1,510 
State Bank of India   89    - 
Banca Popolare di Vicenza SCPA   76    208 
Discount Bank – Montevideo   73    3,835 
Banco Bradesco S.A.   60    245 
Unicredit Banca d Impresa   47    544 
Banca Nazionale del Lavoro S.P.   38    216 
BBVA Banco Francés S.A.   26    - 
Banca Commerciale Italiana S.P.   23    494 
Turkiye Halk Bankasi   23    403 
Bancolombia S.A. - Panamá   9    709 
UBS A.G.   -    3,786 
Banca Antoniana Popolare – Venetto   -    746 
Unicrédito Italiano - New York   -    410 
Banco Santander – Madrid   500    660 
Banco General S.A.   -    349 
Banco Español de Crédito   -    281 
ING Bank N.V. - Vienna   -    257 
Banco Sofisa   -    212 
Other   2,004    7,572 
Subtotals   1,681,657    1,437,605 
Total   1,682,377    1,438,003 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   95
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 19

INTERBANK BORROWINGS, continued:

 

a)Obligations with Central Bank of Chile

 

Debts to the Central Bank of Chile include credit lines for the renegotiation of loans and other borrowings. These credit lines were provided by the Central Bank of Chile for the renegotiation of loans due to the need to refinance debt as a result of the economic recession and crisis of the banking system in the early 1980s.

 

The outstanding amounts owed to the Central Bank of Chile under these credit lines are as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
           
Totals Line of credit for renegotiation with Central Bank of Chile   220    398 

 

b)Loans from domestic financial institutions

 

These obligations’ maturities are as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   500    - 
Due within 1 and 2 year   -    - 
Due within 2 and 3 year   -    - 
Due within 3 and 4 year   -    - 
Due after 5 years   -    - 
           
Total loans from domestic financial institutions   500    - 

 

c)Foreign obligations

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   1,529,511    1,272,994 
Due within 1 and 2 year   152,146    164,611 
Due within 2 and 3 year   -    - 
Due within 3 and 4 year   -    - 
Due after 5 years   -    - 
           
Total loans from foreign financial institutions   1,681,657    1,437,605 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   96
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

 

As of December 31, 2013 and 2012, the composition of the related item is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Other financial liabilities          
Obligations to public sector   68,075    96,185 
Other domestic obligations   118,683    93,653 
Foreign obligations   3,023    2,773 
Subtotals   189,781    192,611 
Issued debt instruments          
Mortgage finance bonds   101,667    128,086 
Senior bonds   4,190,918    3,717,213 
Mortgage bond   70,339    - 
Subordinated bonds   835,734    725,990 
Subtotals   5,198,658    4,571,289 
           
Total   5,338,439    4,763,900 

 

Debts classified as current are either demand obligations or will mature in one year or less. All other debts are classified as non-current. The Bank’s debts, both current and non-current, are summarized below:

 

   As of December 31, 2013 
   Current   Non-current   Total 
   MCh$   MCh$   MCh$ 
             
Mortgage finance bonds   6,493    95,174    101,667 
Senior bonds   1,603,929    2,586,989    4,190,918 
Mortgage bond   -    70,339    70,339 
Subordinated bonds   138,466    697,268    835,734 
Issued debt instruments   1,748,888    3,449,770    5,198,658 
                
Other financial liabilities   101,698    88,083    189,781 
                
Total   1,850,586    3,537,853    5,388,439 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   97
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued:

 

   As of December 31, 2012 
   Current   Non-current   Total 
   MCh$   MCh$   MCh$ 
                
Mortgage finance bonds   6,863    121,223    128,086 
Senior bonds   534,852    3,182,361    3,717,213 
Subordinated bonds   16,037    709,953    725,990 
Issued debt instruments   557,752    4,013,537    4,571,289 
                
Other financial liabilities   101,335    91,276    192,611 
                
Total   659,087    4,104,813    4,763,900 

 

a)Mortgage finance bonds

 

These bonds are used to finance mortgage loans. Their principal amounts are amortized on a quarterly basis. The range of maturities of these bonds is between five and twenty years. Loans are indexed to UF and create a yearly interest rate of 5.21% as of December 31, 2013 (5.95% as of December 31, 2012).

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   6,493    6,863 
Due after 1 year but within 2 years   9,760    7,595 
Due after 2 year but within 3 years   8,768    14,752 
Due after 3 year but within 4 years   9,921    11,026 
Due after 4 year but within 5 years   12,511    11,923 
Due after 5 years   54,214    75,927 
Total mortgage bonds   101,667    128,086 

 

b)Senior bonds

 

The following table shows senior bonds by currency:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Santander bonds in UF   1,964,905    2,025,105 
Santander bonds in USD   1,658,789    1,269,454 
Santander bonds in CHF   246,284    90,249 
Santander bonds in Ch$   277,530    293,933 
Santander bonds in CNY   43,410    38,472 
Total senior bonds   4,190,918    3,717,213 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   98
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued:

 

i.Placement of senior bonds:

 

In 2013, the Bank placed bonds for UF 13,768,000; CLP 32,500,000,000; CHF 300,000,000; and USD 250,000,000 detailed as follows:

 

Series  Amount   Term  Issuance rate  Issuance
date
  Series issued
amount
   Maturity
date
E1 Series  UF 2,742,000   5 years  3.5% per annum simple  02-01-2011  UF 4,000,000   02-01-2016
E2 Series  UF 952,000   7 years  3.0% per annum simple  01-01-2012  UF 4,000,000   07-01-2018
E3 Series  UF 2,244,000   8.5 years  3.5% per annum simple  01-01-2011  UF 4,000,000   07-01-2019
E6 Series  UF 3,720,000   10 years  3.5% per annum simple  04-01-2012  UF 4,000,000   04-01-2022
E9 Series  UF 2,000,000   10 years  3.5% per annum simple  01-01-2013  UF 2,000,000   01-01-2023
FD Series  UF 110,000   5 years  3.0% per annum simple  08-01-2010  UF 110,000   08-01-2015
EC Series  UF 2,000,000   10 years  3.5 % per annum simple  11-28-2013  UF 2,000,000   09-01-2023
Total UF  UF 13,768,000                   
E4 Series  CLP 7,500,000,000   5 years  6.75 % per annum simple  06-01-2011  CLP 50,000,000,000   06-01-2016
E8 Series  CLP 25,000,000,000   10 years  6.75% per annum simple  11-01-2012  CLP 25,000,000,000   11-01-2022
CLP Total  CLP 32,500,000,000                   
CHF floating bond  CHF 150,000,000   4 years  Libor (3 months) + 100 bp  03-28-2013  CHF 150,000,000   03-28-2017
CHF Bond  CHF 150,000,000   6 years  1.75% per annum simple  09-26-2013  CHF 150,000,000   09-26-2019
CHF Total  CHF 300,000,000                   
USD floating bond  USD 250,000,000   5 years  Libor (3 months) + 100 bp  06-07-2013  USD 250,000,000   06-07-2018
USD Total  USD 250,000,000                   

 

During 2013, the Bank performed a partial repurchase of bonds for Ch$ 49,245,000,000

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   99
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued:

 

In 2012, the Bank placed bonds for UF 698,000; CLP 55,600,000,000; USD 1,085,990,000; and CNY 500,000,000 detailed as follows:

 

Series  Amount    Term  Issuance rate  Issuance
date
  Series issued
amount
   Maturity
date
FD  UF 50,000   5 years  3.00% per annum simple  08-01-2010  UF 3,000,000   08-01-2015
E1  UF 362,000   5 years  3.00% per annum simple  02-01-2011  UF 4,000,000   02-01-2016
E3  UF 6,000   8.5 years  3.50 % per annum simple  01-01-2011  UF 4,000,000   07-01-2019
E6  UF 280,000   10 years  3.50 % per annum simple  04-01-2012  UF 4,000,000   04-01-2022
Total UF  UF 698,000                   
E4  CLP 5,600,000,000   5 years  6.75 % per annum simple  06-01-2011  CLP 50,000,000,000   06-01-2016
E5  CLP 25,000,000,000   10 years  6,30% per annum simple  12-01-2011  CLP 25,000,000,000   12-01-2021
E7  CLP 25,000,000,000   5 years  6.75 % per annum simple  03-01-2012  CLP 25,000,000,000   03-01-2017
CLP Total  CLP 55,600,000,000                   
Floating rate bond  USD 250,000,000   2 years  Libor (3 months) + 200 bp  02-14-2012  USD 250,000,000   02-14-2014
Zero coupon floating bond  USD 85,990,000   1 year  Libor (3 months) + 100 bp  08-29-2012  USD 85,990,000   08-30-2013
Senior bonds  USD 750,000,000   10 years  3.875% per annum simple  0920-2012  USD 750,000,000   09-20-2022
USD Total  USD 1,085,990,000                   
Senior bonds  CNY 500,000,000   2 years  3.75% per annum simple  11-26-2012  CNY 500,000,000   11-26-2014
CNY Total  CNY 500,000,000                   

 

During 2012, partial repurchases of bonds were made for CHF 45,000,000 and USD 53,500,000.

 

ii.Nominal bonds to be placed:

 

As of December 31, 2013, there are no outstanding amounts not previously authorized bonds still to be placed.

 

iii.The maturities of senior bonds are as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   1,603,929    534,852 
Due after 1 year but within 2 years   674,784    600,723 
Due after 2 year but within 3 years   338,853    643,791 
Due after 3 year but within 4 years   321,589    610,817 
Due after 4 year but within 5 years   154,368    323,474 
Due after 5 years   1,097,395    1,003,556 
Total senior bonds   4,190,918    3,717,213 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   100
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

c)Mortgage bonds

 

Detail of mortgage bonds per currency is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Mortgage bonds in UF   70,339    - 
Total mortgage bonds   70,339    - 

 

i.Allocation of mortgage bonds

 

In 2013, the Bank issued bonds for UF 3,000,000, detailed as follows:

 

Series  Amount    Term  Issuance rate  Issuance
date
  Series issued
amount
   Maturity
date
BH  UF 3,000,000   15 years  3.2% per annum simple  07-31-2013  UF 3,000,000   07-31-2028
Total UF  UF 3,000,000                   

 

The maturities of senior Mortgage bond are as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   -    - 
Due after 1 year but within 2 years   -    - 
Due after 2 year but within 3 years   -    - 
Due after 3 year but within 4 years   -    - 
Due after 4 year but within 5 years   -    - 
Due after 5 years   70,339    - 
Total senior bonds   70,339    - 

 

d)Subordinated bonds

 

Detail of the subordinated bonds per currency is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Subordinated bonds denominated in USD   139,802    174,285 
Subordinated bonds denominated in UF   695,932    551,705 
Total subordinated bonds   835,734    725,990 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   101
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued:

 

i.Allocation of subordinated bonds

 

During 2013, the Bank places subordinated bonds for UF 5,900,000.

 

The following chart shows details related to subordinated bonds allocations:

 

Series  Amount   Term  Issuance rate  Issuance
date
  Series issued
amount
   Maturity
date
G5  UF 1,900,000   20 years  3.9 % per annum simple  04-05-2011  UF 4,000,000   04-01-2031
H1  UF 4,000,000   30 years  3.9 % per annum simple  11-04-2011  UF 4,000,000   04-01-2041
Total  UF 5,900,000                   

 

During the first half of 2012, the Bank performed a partial repurchase of bonds for USD 47,786,000.

During 2012, the Bank did not issued any subordinated bonds on the market.

 

The maturities of subordinated bonds considered non-current, are as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year   138,466    16,037 
Due after 1 year but within 2 years   14,039    182,844 
Due after 2 year but within 3 years   4,140    9,535 
Due after 3 year but within 4 years   -    5,760 
Due after 4 year but within 5 years   -    - 
Due after 5 years   679,089    511,814 
Total subordinated bonds   835,734    725,990 

 

c)Other financial liabilities

 

The composition of other financial obligations, by maturity, is detailed below:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Due within 1 year          
Due after 1 year but within 2 years   3,389    3,897 
Due after 2 year but within 3 years   2,389    2,501 
Due after 3 year but within 4 years   3,045    3,090 
Due after 4 year but within 5 years   20,862    2,937 
Due after 5 years   58,398    78,851 
Non-current portion subtotals   88,083    91,276 
           
Current portion:          
Amounts due to credit card operators   97,027    70,410 
Acceptance of letters of credit   741    1,683 
Other long-term financial obligations, short-term portion   3,930    29,242 
Current portion subtotals   101,698    101,335 
           
Total other financial liabilities   189,781    192,611 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   102
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 21

MATURITY OF ASSETS AND LIABILITIES

 

As of December 31, 2013 and 2012, the detail of the maturities of assets and liabilities is as follows:

 

    Demand   Up to 
1 month
   Between 1 and
3 months
   Between 3
and
12 months
   Subtotal
up to 1 year
   Between 1
and 
5 years
   More than
5 years
   Subtotal
More than 1
year
   Total 
As of December 31, 2013  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                     
Assets                                             
Cash and deposits in banks   1,571,810    -    -    -    1,571,810    -    -    -    1,571,810 
Cash items in process of collection   604,077    -    -    -    604,077    -    -    -    604,077 
Trading investments   -    10,018    17    -    10,035    203,608    73,924    277,532    287,567 
Investments under resale agreements   -    -    17,469    -    17,469    -    -    -    17,469 
Financial derivative contracts   -    168,785    99,471    225,617    493,873    565,329    434,816    1,000,145    1,494,018 
Interbank loans (*)   1,224    66,264    56,901    1,060    125,449    -    -    -    125,449 
Loans and accounts receivables from customers (**)   773,387    2,173,231    1,776,530    3,533,313    8,256,461    6,367,870    6,310,981    12,678,851    20,935,312 
Available for sale investments   -    228,997    240,018    627,052    1,096,067    275,281    329,645    604,926    1,700,993 
Held to maturity investments   -    -    -    -    -    -    -    -    - 
                                              
Total assets   2,950,498    2,647,295    2,190,406    4,387,042    12,175,241    7,412,088    7,149,366    14,561,454    26,736,695 
                                              
Liabilities                                             
Deposits and other demand liabilities   5,620,763    -    -    -    5,620,763    -    -    -    5,620,763 
Cash items in process of being cleared   276,379    -    -    -    276,379    -    -    -    276,379 
Obligations under repurchase agreements   -    185,140    18,466    5,366    208,972    -    -    -    208,972 
Time deposits and other time liabilities   104,233    5,351,489    2,333,001    1,743,525    9,532,248    87,380    55,644    143,024    9,675,272 
Financial derivative contracts   -    126,257    89,128    223,414    438,799    510,661    350,649    861,310    1,300,109 
Interbank borrowings   8,199    104,490    216,472    1,201,070    1,530,231    152,146    -    152,146    1,682,377 
Issued debt instruments   -    470,600    688,261    590,027    1,748,888    1,548,733    1,901,037    3,449,770    5,198,658 
Other financial liabilities   97,027    568    1,111    2,992    101,698    29,685    58,398    88,083    189,781 
                                              
Total liabilities   6.106.601    6.238.544    3.346.439    3.766.394    19.457.978    2.328.605    2.365.728    4.694.333    24.152.311 

 

(*)Interbank loans are presented on a gross basis. The amount of allowance is MCh$54.
(**)Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$300,400 million, Mortgage loans Ch$43,306 million, and Consumer loansCh$264,585 million.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   103
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 21

MATURITY OF ASSETS AND LIABILITIES, continued:

 

   Demand   Up to
1 month
   Between 1 and
3 months
   Between 3
and
12 months
   Subtotal 
up to 1 year
   Between 1
and
5 years
   More than
5 years
   Subtotal
More than 1
year
   Total 
As of December 31, 2012  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                     
Assets                                             
Cash and deposits in banks   1,250,414    -    -    -    1,250,414    -    -    -    1,250,414 
Cash items in process of collection   520,267    -    -    -    520,267    -    -    -    520,267 
Trading investments   -    19,565    2,597    237,726    259,888    58,138    20,261    78,399    338,287 
Investments under resale agreements   -    6,993    -    -    6,993    -    -    -    6,993 
Financial derivative contracts   -    58,311    77,728    216,832    352,871    571,315    369,026    940,341    1,293,212 
Interbank loans (*)   60,654    -    29,919    -    90,573    -    -    -    90,573 
Loans and accounts receivables from customers (**)   1,123,417    1,156,145    1,736,942    2,995,860    7,012,364    5,925,100    5,938,615    11,863,715    18,876,079 
Available for sale investments   -    112,173    234,566    519,181    865,920    506,152    454,086    960,238    1,826,158 
Held to maturity investments   -    -    -    -    -    -    -    -    - 
                                              
Total assets   2,954,752    1,353,187    2,081,752    3,969,599    10,359,290    7,060,705    6,781,988    13,842,693    24,201,983 
                                              
Liabilities                                             
Deposits and other demand liabilities   4,970,019    -    -    -    4,970,019    -    -    -    4,970,019 
Cash items in process of being cleared   284,953    -    -    -    284,953    -    -    -    284,953 
Obligations under repurchase agreements   -    275,303    25,534    3,280    304,117    -    -    -    304,117 
Time deposits and other time liabilities   65,854    4,981,947    2,278,958    1,600,701    8,927,460    133,760    50,993    184,753    9,112,213 
Financial derivative contracts   -    71,445    80,484    208,473    360,402    503,036    282,723    785,759    1,146,161 
Interbank borrowings   5,820    82,965    185,730    998,877    1,273,392    164,611    -    164,611    1,438,003 
Issued debt instruments   -    10,855    168,817    378,080    557,752    2,422,240    1,591,297    4,013,537    4,571,289 
Other financial liabilities   70,136    718    733    29,748    101,335    12,425    78,851    91,276    192,611 
                                              
Total liabilities   5,396,782    5,423,233    2,740,256    3,219,159    16,779,430    3,236,072    2,003,864    5,239,936    22,019,366 

 

(*)Interbank loans are presented on a gross basis. The amount of allowance is MCh$ 46.
(**)Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$250,873 million, Mortgage loans Ch$35,990 million, and Consumer loans Ch$263,259 million.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   104
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 22

PROVISIONS

 

a)As of December 31, 2013 and 2012, the composition shown is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Provisions for personnel salaries and expenses.   39,501    47,574 
Provisions for mandatory dividends   132,578    116,486 
Provisions for contingent loan risk          
Provision for immediately available credit lines   18,767    17,850 
Other allowances for contingent loan risk   11,847    8,941 
Provisions for contingencies   33,069    30,150 
Provisions for Country risk   470    88 
Total   236,232    221,089 

 

b)Below is the activity regarding provisions during the years ended December 31, 2013 and 2012:

 

   Provisions  for     
   Personnel
salaries
and expenses
   Allowance
for
contingent
loans
   Contingencies   Mandatory
dividends
   Risk
country
   Total 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Balances as of January 1, 2013   47,574    26,791    30,150    116,486    88    221,089 
Provisions established   35,515    9,788    98,964    132,578    635    277,480 
Application of provisions   (43,588)   -    (3,675)   (116,486)   -    (163,749)
Provisions released   -    (5,965)   (88,932)   -    (253)   (95,150)
Reclassifications   -    -    (3,438)   -    -    (3,438)
Other   -    -    -    -    -    - 
                               
Balances as of December 31, 2013   39,501    30,614    33,069    132,578    470    236,232 
                               
Balances as of January 1, 2012   42,974    24,988    20,557    130,525    19    219,063 
Provisions established   39,151    7,926    26,382    116,486    464    190,409 
Application of provisions   (34,551)   (6,123)   (12,469)   (130,525)   -    (183,668)
Provisions released   -    -    (4,862)   -    (395)   (5,257)
Reclassifications   -    -    542    -    -    542 
Other   -    -    -    -    -    - 
                               
Balances as of December 31, 2012   47,574    26,791    30,150    116,486    88    221,089 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   105
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 22

PROVISIONS, continued

 

c)Provisions for personnel salaries and expenses.

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Provision for seniority compensation   691    1,299 
Provision for stock-based personnel benefits   809    1,986 
Provision for performance bonds   18,218    23,667 
Provision for vacations   18,741    18,802 
Provision for other personnel benefits   1,042    1,820 
Total   39,501    47,574 

 

d)Seniority compensation:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Balances as of January 1, 2013   1,299    1,510 
Increase in provisions   2,096    2,069 
Payments made   (2,704)   (2,280)
Prepayments   -    - 
Provisions released   -    - 
Other   -    - 
Total   691    1,299 

 

e)Movements in provision for performance bonds:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Balances as of January 1, 2013   23,667    21,788 
Provisions established   23,063    22,737 
Application of provisions   (27,005)   (20,858)
Provisions released   (1,507)   - 
Other   -    - 
Total   18,218    23,667 

 

f)Movements in provision for personnel vacation

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Balances as of January 1, 2013   18,802    17,196 
Provisions established   12,311    13,019 
Application of provisions   (12,372)   (11,413)
Provisions released   -    - 
Other   -    - 
Total   18,741    18,802 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   106
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 23

OTHER LIABILITIES

 

The other liabilities line item is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Accounts and notes payable   84,729    89,034 
Unearned income   384    426 
Guarantees received (threshold)   2,631    179,820 
Other payable obligations   95,266    59,824 
Withheld VAT   1,165    1,254 
Other liabilities   14,602    10,916 
           
Total   198,777    341,274 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   107
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 24

CONTINGENCIES AND COMMITMENTS

 

a)Lawsuits and legal procedures

 

As of the issuance date of these financial statements, the Bank and its affiliates were subject to certain legal actions in the normal course of their business. As of December 31, 2013, the Banks and its subsidiaries have provisions for this item of Ch$ 1,224 million (Ch$ 428 million as of December 31, 2012) which is included in “Contingency Provisions” in the Consolidated Statements of Financial Position. In addition, there are other lawsuits for UF26,512, which primarily relates to the litigation between Santander Corredores de Seguros Limitada and its clients for leasing assets.

 

b)Contingent loans

 

The following table shows the Bank’s contractual obligations to issue loans:

 

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Letters of credit issued   218,032    199,420 
Foreign letters of credit confirmed   127,600    113,878 
Guarantees   1,212,799    1,046,114 
Personal guarantees   181,416    139,059 
Subtotals   1,739,847    1,498,471 
Available on demand credit lines   5,141,831    4,933,335 
Other irrevocable credit commitments   47,376    63,828 
Total   6,929,054    6,495,634 

 

c)Held securities

 

The Bank holds securities in the normal course of its business as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Third party operations          
Collections   217,948    287,128 
Assets from third parties managed by the Bank and its affiliates (1)   1,015,817    821,080 
Subtotals   1,233,765    1,108,208 
Custody of securities          
Securities held in custody   304,535    227,554 
Securities held in custody deposited in other entity   532,072    573,129 
Issued securities held in custody   15,351,545    14,931,587 
Subtotals   16,188,152    15,732,270 
Total   17,421,917    16,840,478 
(1)This includes the portfolios run by private-sector banking for $1,015,781 and $821,045 million as of December 31, 2013 and 2012, respectively.

 

d)Guarantees

 

Banco Santander Chile has a comprehensive officer fidelity insurance policy, No. 2823611, with the Chilena Consolidada de Seguros insurance company, for USD $5,000,000, which jointly covers both the Bank and its affiliates for the period from July 1, 2013 to June 30, 2014.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   108
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 24

CONTINGENCIES AND COMMITMENTS, continued:

 

e)Contingent loans and liabilities

 

To satisfy its clients’ needs, the Bank took on several contingent loans and liabilities, yet these could not be recognized in the Consolidated Statements of Financial Position; these contain loan risks and they are, therefore, part of the Bank’s global risk.

 

Santander Agente de Valores Limitada

 

i)To ensure correct and full performance of all its obligations as an Agent, in conformity with Articles No.30 and onward of Law No.18,045 on the Securities Market, the Company provided a guarantee in the amount of UF 4,000 through Insurance Policy No.213117286, underwritten by the Compañía de Seguros de Crédito Continental S.A., which matures on December 19, 2014.

 

Santander S.A. Corredores de Bolsa

 

i)The Company has given guarantees to the Bolsa de Comercio de Santiago for a current value of Ch$ 17,660 million to cover simultaneous operations.

 

ii)In addition, the company has issued a guarantee to CCLV Contraparte Central S.A. (formerly known as Cámara de Compensación) in cash, for a total Ch$ 3,000 million and an additional guarantee to the Santiago Stock Exchange for MCh$ 953 as of December 31, 2013.

 

iii)The company possesses a performance bond No.B008643 from Banco Santander Chile to comply with the General rule (Norma de Carácter General) No.120 issued by SVS for USD 500,000, which covers participants who acquire Morgan Stanley Sicav foreign mutual funds valid until September 12, 2014.

 

Santander Corredora de Seguros Limitada

 

i)In accordance with Circular No.1,160 of the Chilean Securities and Insurance Supervisor, the Company has an insurance policy to fully implement and comply with its financial liabilities in connection with its obligations as an intermediary in insurance contracts. The company purchased a guarantee policy for insurance brokers (No.10023615), and a professional liability policy (No.10023624) for its insurance brokers, from the Consorcio Nacional de Seguros S.A. Insurance Company, which have UF 500 and UF 60,000 coverage, respectively, and are valid from April 15, 2013 to April 14, 2014.

 

ii)The Company keeps a performance bond with Banco Santander Chile to guarantee fulfillment of the terms of the public tendering for payment protection insurance and payment protection insurance plus ITP 2/3. The amount equals UF5,000 and is valid until July 31, 2015. For the same reason, the Company holds a performance bond for fulfillment of the public tendering for fire insurance for UF5,000 with said banking institution.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   109
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 25

EQUITY

 

a)Capital

 

As of December 31, 2013 and 2012 the Bank had 188,446,126,794 shares outstanding, all of which are subscribed for and paid in full. All shares have the same rights, and have no preferences or restrictions.

 

The activity with respect to shares during 2013 and 2012 was as follows:

 

   SHARES
As of December 31,
 
   2013   2012 
         
Issued as of January 1   188,446,126,794    188,446,126,794 
Issue of paid shares   -    - 
Issue of outstanding shares   -    - 
Stock options exercised   -    - 
Issued as period end   188,446,126,794    188,446,126,794 

  

As of December 31, 2013 and 2012 the Bank does not have any of its own shares in treasury, nor do any of the consolidated companies.

 

As of December 31, 2013 the shareholder composition was as follows:

 

Corporate Name or Shareholder's Name  Shares   ADRs (*)   Total   % of
equity holding
 
                 
Teatinos Siglo XXI Inversiones Limitada   59,770,481,573    -    59,770,481,573    31.72 
Santander Chile Holding S.A.   66,822,519,695    -    66,822,519,695    35.46 
J.P. Morgan Chase Bank   -    30,087,328,471    30,087,328,471    15.97 
Banks and stock brokers on behalf of third parties   12,264,223,820    -    12,264,223,820    6.51 
AFP on behalf of third parties   4,412,572,678    -    4,412,572,678    2.34 
Other minority holders   3,660,897,625    11,428,102,932    15,089,000,557    8.00 
Total             188,446,126,794    100.00 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   110
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 25

EQUITY, continued

 

As of December 31, 2012 the shareholder composition was as follows:

 

Corporate Name or Shareholder's Name  Shares   ADRs (*)   Total   % of
equity holding
 
                 
Teatinos Siglo XXI Inversiones Limitada   59,770,481,573    -    59,770,481,573    31.72 
Santander Chile Holding S.A.   66,822,519,695    -    66,822,519,695    35.46 
J.P. Morgan Chase Bank   -    35,111,060,871    35,111,060,871    18.63 
BNP Paribas Arbitrage   173,328,889    -    173,328,889    0.09 
MBI Arbitrage Fondo de Inversion   495,766,248    -    495,766,248    0.26 
Banks and stock brokers on behalf of third parties   12,473,837,817    -    12,473,837,817    6.62 
AFP on behalf of third parties   6,346,809,483    -    6,346,809,483    3.37 
Other minority holders   3,839,358,209    3,412,964,009    7,252,322,218    3.85 
Total             188,446,126,794    100.00 

 

(*)American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets.

 

b)Reserves

 

In April 2013, due to the Shareholders’ Meeting, the Bank agreed to capitalized 40% of the profits from 2012 as reserves; which equals Ch$ 155,502 million (Ch$ 174,033 million in 2012).

 

c)Dividends

 

The distribution of dividends is detailed in the chart of the Consolidated Statements of Changes in Equity.

 

d)As of December 31, diluted earnings and basic earnings were as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
a) Basic earnings per share          
Total attributable to Bank shareholders   441,926    388,282 
Weighted average number of outstanding shares   188,446,126,794    188,446,126,794 
Basic earnings per share (in Ch$)   2.345    2.060 
           
b) Diluted earnings per share          
Total attributable to Bank shareholders   441,926    388,282 
Weighted average number of outstanding shares   188,446,126,794    188,446,126,794 
Assumed conversion of convertible debt   -    - 
Adjusted number of shares   188,446,126,794    188,446,126,794 
Diluted earnings per share (in Ch$)   2.345    2.060 

 

As of December 31, 2013 and 2012 the Bank does not own instruments with dilutive effects.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   111
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 25

EQUITY, continued

 

d)Other comprehensive income of available for sale investments and cash flow hedges:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Available for sale investments          
As of January 1   (10,017)   3,043 
Gain (losses) on the re-measurement of available for sale investments, before tax   2,629    (15,131)
Reclassification from other comprehensive income to income   8.,228    2.,071 
Subtotals   10.,857    (13,060)
Total   840    (10.,017)
           
Cash flow hedges          
As of January 1   5.,315    394 
Gains (losses) on the re-measurement of cash flow hedges, before tax   (15,089)   4.,326 
Reclassification adjustments on cash flow hedges, before tax   1.,517    595 
Amounts removed from equity and included in carrying amount of non-financial asset (liability) which acquisition or incurrence was hedged as a highly probable transition   -    - 
Subtotals   (13,572)   4.,921 
Total   (8,257)   5.,315 
           
Other comprehensive income, before taxes   (7,417)   (4,702)
           
Income tax related to other comprehensive income components          
Income tax relating to available for sale investments   (168)   2.,003 
Income tax relating to cash flow hedges   1.,651    (1,063)
Total   1.,483    (940)
           
Other comprehensive income, net of tax   (5,934)   (3,762)
Attributable to:          
Bank shareholders (Equity holders of the Bank)   (5,964)   (3,781)
Non-controlling interest   30    19 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   112
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 26

CAPITAL REQUIREMENTS (BASEL)

 

Pursuant to the Chilean General Banking Law, the Bank must maintain a minimum ratio of effective equity to risk-weighted consolidated assets of 8% net of required allowances, and a minimum ratio of basic equity to consolidated total assets of 3%, net of required allowances. However, as a result of the Bank’s merger in 2002, the SBIF has determined that the Bank’s combined effective equity cannot be lower than 11% of its risk-weighted assets. Effective equity is defined for these purposes as basic equity (capital and reserves) plus subordinated bonds, up to a maximum of 50% of basic equity.

 

Assets are allocated to different risk categories, each of which is assigned a weighted percentage according to the amount of capital required to be held for each type of asset. For example, cash, deposits in banks and financial instruments issued by the Central Bank of Chile have a 0% weighted risk, meaning that it is not necessary to hold equity to back these assets according to current regulations. Property, plant and equipment have a 100% weighted risk, meaning that a minimum capital equivalent to 11% of these assets must be held. All derivatives traded off the exchanges are also assigned a weighted risk, using a conversion factor applied to their notional values, to determine the amount of their exposure to credit risk. Off-balance-sheet contingent credits are also included for weighting purposes, as “Credit equivalents.”

 

According to Chapter 12-1 of the SBIF’s Recopilación Actualizada de Normas [Updated Compilation of Rules] effective January 2010, the SBIF changed existing regulation with the enforcement of Chapter B-3 from the Compendium of Accounting Standards, with changed the risk exposure of contingent loans from 100% exposition to the following:

 

Type of contingent loan  Exposure 
     
a) Pledges and other commercial commitments   100%
b) Foreign letters of credit confirmed   20%
c) Letters of credit issued   20%
d) Guarantees   50%
e) Interbank guarantee letters   100%
f) Available lines of credit   50%
h) Other loan commitments     
- Higher Education Loans Law No. 20,027   15%
- Other   100%
h) Other contingent loans   100%

 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   113
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 27

CAPITAL REQUIREMENTS (BASEL), continued:

 

The levels of basic capital and effective net equity as of December 31, 2013 y 2012 are as follows:

 

   Consolidated assets   Risk-weighted assets 
   As of December 31,   As of December 31, 
   2013   2012   2013   2012 
   MCh$   MCh$   MCh$   MCh$ 
                 
Balance-sheet assets (net of allowances)                    
Cash and deposits in banks   1,571,810    1,250,414    -    - 
Cash items in process of collection   604,077    520,267    66,672    75,429 
Trading investments   287,567    338,287    40,924    21,713 
Investments under repurchase agreements   17,469    6,993    3,494    6,993 
Financial derivative contracts (*)   1,008,026    937,291    862,810    830,133 
Interbank loans   125,395    90,527    25,079    18,105 
Loans and accounts receivable from customers   20,327,021    18,325,957    18,071,792    16,205,004 
Available for sale investments   1,700,993    1,826,158    238,835    200,285 
Investments in other companies   9,681    7,614    9,681    7,614 
Intangible assets   66,703    87,347    66,703    87,347 
Property, plant, and equipment   180,215    162,214    180,215    162,214 
Current taxes   1,643    10,227    164    1,023 
Deferred taxes   230,215    186,407    23,022    18,641 
Other assets   400,025    655,217    346,533    402,547 
Off-balance-sheet assets                    
Contingent loans   3,436,773    3,201,028    2,013,057    1,903,368 
Total   29,967,613    27,605,948    21,948,981    19,940,416 

 

“Financial derivative contracts” are presented at their “Credit Equivalent Risk” value as established in Chapter 12-1 of the Updated Compilation of Ruled issued by the SBIF.

 

The levels of basic capital and effective net equity at the close of each period are as follows:

 

       Ratio 
   As of December 31,   As of December 31, 
   2013   2012   2013   2012 
   MCh$   MCh$   %   % 
                 
Basic capital   2,325,678    2,134,778    7.76    7.73 
Effective net equity   3,033,741    2,734,434    13.82    13.71 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   114
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 27

NON-CONTROLLING INTEREST

 

a)The non-controlling interest included in the equity and the income from the subsidiaries is summarized as follows:

 

               Other comprehensive income 
    Non-
controlling
   Equity   Income   Available
for sale
investments
   Deferred
tax
   Total other
comprehensive
income
   Comprehensive
income
 
As of December 31, 2013  %   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                             
Subsidiaries:                                   
Santander Agente de Valores Limitada   0.97    471    87    3    (1)   2    89 
Santander S.A. Sociedad Securitizadora   0.36    2    -    -    -    -    - 
Santander S.A. Corredores de Bolsa (*)   49.00    19,698    1,656    11    (2)   9    1,665 
Santander Asset Management S.A. (**) Administradora General de Fondos   0.02    -    9    -    -    -    9 
Santander Corredora de Seguros Limitada   0.25    149    1    -    -    -    1 
Subtotals        20,320    1,753    14    (3)   11    1,764 
                                    
Entities controlled through other considerations:                                   
Bansa Santander S.A.   100.00    3,435    1,307    -    -    -    1,307 
Santander Gestión de Recaudación y Cobranzas Limitada   100.00    275    (2,230)   -    -    -    (2,230)
Multinegocios S.A.   100.00    477    234    -    -    -    234 
Servicios Administrativos y Financieros Limitada.   100.00    1,686    276    -    -    -    276 
Servicios de Cobranzas Fiscalex Limitada   100.00    632    416    -    -    -    416 
Multiservicios de Negocios Limitada.   100.00    1,679    379    -    -    -    379 
Subtotals        8,184    382    -    -    -    382 
                                    
Total        28,504    2,135    14    (3)   11    2,146 
(*)In June 2013, Santander S.A Corredores de Bolsa, distributed total accumulated income from previous years, decreasing equity. The amount of dividends distributed to non-controlling interest was Ch$7,590 million.

 

(**)According to Note 3 Significant events, letter c), this subsidiary was sold in December 2013. This note presents the effect of the consolidation of the subsidiary until November 2013.
Consolidated Financial Statements December 2013 / Banco Santander Chile   115
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 27

NON-CONTROLLING INTERESTS continued

 

               Other comprehensive income 
    Non-
controlling
   Equity   Income   Available
for sale
investments
   Deferred
tax
   Total other
comprehensive
income
   Comprehensive
income
 
As of December 31, 2012  %   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                             
Subsidiaries:                                   
Santander Agente de Valores Limitada   0.97    656    84    1    -    1    85 
Santander S.A. Sociedad Securitizadora   0.36    3    -    -    -    -    - 
Santander S.A. Corredores de Bolsa   49.00    25,646    2,423    57    (12)   45    2,468 
Santander Asset Management S.A. Administradora General de Fondos   0.02    10    4    -    -    -    4 
Santander Corredora de Seguros Limitada   0.25    148    4    -    -    -    4 
Subtotals        26,463    2,515    58    (12)   46    2,561 
                                    
Entities controlled through other considerations:                                   
Bansa Santander S.A.   100.00    2,127    1,098    -    -    -    1,098 
Santander Gestión de Recaudación y Cobranzas Limitada   100.00    2,505    171    -    -    -    171 
Multinegocios S.A.   100.00    244    93    -    -    -    93 
Servicios Administrativos y Financieros Limitada.   100.00    1,411    328    -    -    -    328 
Servicios de Cobranzas Fiscalex Limitada   100.00    216    64    -    -    -    64 
Multiservicios de Negocios Limitada.   100.00    1,299    356    -    -    -    356 
Subtotals        7,802    2,110    -    -    -    2,110 
                                    
Total        34,265    4,625    58    (12)   46    4,671 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   116
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 27

NON-CONTROLLING INTERESTS, continued

 

b)The overview of the financial information of the subsidiaries included in the consolidation of the Bank that possess non-controlling interests is as follows, which does not include consolidation or homogenization adjustments:

 

   As of December 31 
   2013   2012 
               Net               Net 
   Assets   Liabilities   Capital   income   Assets   Liabilities   Capital   income 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Santander Corredora de Seguros Limitada   67,956    8,484    59,012    460    69,863    10,520    57,795    1,548 
Santander S.A. Corredores de Bolsa   110,917    70,799    36,735    3,383    138,147    85,921    47,193    5,033 
Santander Asset Management S.A. Administradora General de Fondos (*)   -    -    -    -    58,186    8,981    27,262    21,943 
Santander Agente de Valores Limitada   194,812    146,255    39,581    8,976    215,126    147,545    58,900    8,681 
Santander S.A. Sociedad Securitizadora   725    74    764    (113)   849    87    836    (74)
Santander Gestión de Recaudación y Cobranzas Ltda.   4,978    4,703    2,505    (2,230)   6,313    3,808    2,334    171 
Multinegocios S.A. (management of sales force)   1,441    963    244    234    2,020    1,777    150    93 
Servicios Administrativos y Financieros Limitada (management of sales force).   2,412    725    1,411    276    2,748    1,337    1,083    328 
Servicio de Cobranza Fixcalex Ltda.   4,008    3,376    216    416    3,500    3,284    152    64 
Multiservicios de Negocios Limitada (call center).   3,049    1,371    1,299    379    3,483    2,183    944    356 
Bansa Santander S.A.   28,490    25,055    2,128    1,307    28,938    26,810    1,029    1,099 
Total   418,788    261,805    143,895    13,088    529,173    292,253    197,678    39,242 

(*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013. See Note 3 - Significant events

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   117
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 28

INTEREST AND INFLATION-INDEXING ADJUSTMENTS

 

This item refers to interest earned in the period from the financial assets whose return, whether implicitly or explicitly, is determined by applying the effective interest rate method, regardless of the value at fair value, as well as the reclassifications of products as a consequence of hedge accounting.

 

a)As of December 31, 2013 and 2012 the composition of income from interest and inflation-indexing adjustments, not including income from hedge accounting, is as follows:

 

   As of December 31, 
   2013   2012 
   Interest   Inflation
adjustments
   Prepaid fees   Total   Interest   Inflation
adjustments
   Prepaid fees   Total 
Items  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Repurchase agreements   2,254    -    -    2,254    4,796    (10)   -    4,786 
Interbank loans   195    -    -    195    790    -    -    790 
Commercial loans   728,597    72,570    4,980    806,147    698,925    78,762    4,924    782,611 
Mortgage loans   232,860    108,702    13,234    354,796    227,994    123,297    11,401    362,692 
Consumer loans   611,936    2,184    3,030    617,150    613,543    2,804    2,797    619,144 
Investment instruments   77,240    7,815    -    85,055    95,732    2,011    -    97,743 
Other interest income   5,282    (1,063)   -    4,219    19,880    3,037    -    22,917 
                                         
Interest income   1,658,364    190,208    21,244    1,869,816    1,661,660    209,901    19,122    1,890,683 

 

b)As indicated in section i), Note 1, suspended interest correspond to operations with late payments up to 90 days or more, which are recorded in off-balance-sheet accounts until they are effectively received.

 

As of December 31, 2013 and 2012, the detail of income from suspended interest is as follows:

 

   As of December 31, 
   2013   2012 
   Interest   Inflation
adjustments
   Total   Interest   Inflation
adjustments
   Total 
Off balance sheet  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Commercial loans   17,219    4,426    21,645    16,907    3,688    20,595 
Mortgage loans   3,935    4,549    8,484    3,962    4,882    8,844 
Consumer loans   6,004    749    6,753    7,825    917    8,742 
                               
Total   27,158    9,724    36,882    28,694    9,487    38,181 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   118
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 28

INTEREST AND INFLATION-INDEXING ADJUSTMENTS, continued:

 

c)As of December 31, 2013 and 2012, the composition of expense from interest and inflation-indexing adjustments, excluding expense from hedge accounting is as follows:

 

   As of December 31, 
   2013   2012 
   Interest   Inflation
adjustments
   Total   Interest   Inflation
adjustments
   Total 
Items  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                         
Demand deposits   (5,225)   (588)   (5,813)   (3,601)   (535)   (4,136)
Repurchase agreements   (12,092)   -    (12,092)   (10,707)   9    (10,698)
Time deposits and liabilities   (426,812)   (22,787)   (449,599)   (456,348)   (45,743)   (502,091)
Interbank loans   (21,233)   (5)   (21,238)   (26,182)   (14)   (26,196)
Issued debt instruments   (171,659)   (53,952)   (225,611)   (172,138)   (64,006)   (236,144)
Other financial liabilities   (4,712)   (661)   (5,373)   (4,884)   (881)   (5,765)
Other interest expense   (2,340)   (3,749)   (6,089)   (2,366)   (3,435)   (5,801)
Interest expense total   (644,073)   (81,742)   (725,815)   (676,226)   (114,605)   (790,831)

 

d)As of December 31, 2013 and 2012, the overview of interests and inflation-indexing adjustments is as follows:

 

   As of December 31, 
   2013   2012 
Items  MCh$   MCh$ 
         
Interest income   1,869,816    1,890,683 
Interest expense   (725,815)   (790,831)
           
Interest income   1,144,001    1,099,852 
           
Income from hedge accounting (net)   (67,239)   (57,118)
           
Total net interest income   1,076,762    1,042,734 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   119
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 29

FEES AND COMMISSIONS

 

This item includes the amount of fees earned and paid in the period, except for those which are an integral part of the financial instrument’s effective interest rate:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Fee and commission income          
Fees and commissions for lines of credits and overdrafts   7,025    9,296 
Fees and commissions for guarantees and letters of credit   30,131    28,523 
Fees and commissions for card services   127,101    127,437 
Fees and commissions for management of accounts   28,044    28,755 
Fees and commissions for collections and payments   45,190    56,481 
Fees and commissions for intermediation and management of securities   10,482    11,272 
Fees and commissions for investments in mutual funds or others   31,154    33,414 
Insurance brokerage fees   32,253    34,670 
Office banking   15,165    13,507 
Other fees earned   19,575    17,112 
Total   346,120    360,467 

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Fee and commission expense          
Compensation for card operation   (87,776)   (78,892)
Fees and commissions for securities transactions   (4,287)   (1,687)
Office banking and other fees   (24,221)   (22,201)
Total   (116,284)   (102,780)
           
Net fees and commissions income   229,836    257,687 

 

The fees earned in transactions with letters of credit are presented on the Consolidated Statements of Income in the line item “Interest income”.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile   120
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF DECEMBER 31, 2013 AND 2012

NOTE 30

PROFIT AND LOSS FROM FINANCIAL OPERATIONS

 

This item includes adjustments for changes in financial instruments, except for interest attributable to the application of the effective interest rate method for adjustments to asset values, as well as the income earned in purchases and sales of financial instruments.

 

As of December 31, 2013 and 2012, the detail of the income from financial operations is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Net income from financial operations          
Trading derivatives   (76,525)   (104,344)
Trading investments   29,985    36,338 
Sale of loans and accounts receivables from customers          
Current portfolio (Note 11)   1,677    2,745 
Charged-off portfolio (Note 11)   1,500    2,090 
Available for sale investments   10,258    (1,764)
Repurchase of issued bonds   4,502    760 
Other income from financial operations   (10)   96 
Total   (28,613)   (64,079)

 

NOTE 31

NET FOREIGN EXCHANGE GAIN (LOSS)

 

This item includes the income earned from foreign currency trading, differences arising from converting monetary items in a foreign currency to the functional currency, and those generated by non-monetary assets in a foreign currency at the time of their sale.

 

As of December 31, 2013 and 2012, the detail of foreign exchange income is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Currency exchange differences          
Net profit (loss) from currency exchange differences   (242,841)   270,990 
Hedging derivatives:   379,910    (120,610)
Income from inflation-indexed assets in foreign currency   8,600    (5,574)
Income from inflation-indexed assets in foreign currency   (943)   1,572 
Total   144,726    146,378 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 121
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 32

PROVISIONS FOR LOAN LOSSES

 

a)The 2013 and 2012 activity within income for allowances and impairment is as follows:

 

   Loans and accounts receivable from customers            
   Interbank
loans
   Commercial
loans
   Mortgage
loans
   Consumer
loans
   Contingent
loans
     
   Individual   Individual   Group   Group   Group   Individual   Group   Total 
As of December 31, 2013  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Charged-off individually significant loans   -    (8,071)   -    -    -    -    -    (8,071)
Provisions established   (127)   (85,628)   (98,715)   (42,487)   (258,446)   (6,679)   (3,109)   (495,191)
Total provisions and charge-offs   (127)   (93,699)   (98,715)   (42,487)   (258,446)   (6,679)   (3,109)   (503,262)
Provisions released   119    22,014    11,151    9,216    35,482    2,128    3,837    83,947 
Recovery of loans previously charged off   -    4,572    9,973    4,735    36,004    -    -    55,284 
Net charge to income   (8)   (67,113)   (77,591)   (28,536)   (186,960)   (4,551)   728    (364,031)

 

   Loans and accounts receivable from customers            
  Interbank
loans
   Commercial
loans
   Mortgage
loans
   Consumer
loans
   Contingent
loans
     
   Individual   Individual   Group   Group   Group   Individual   Group   Total 
As of December 31, 2012  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Charged-off individually significant loans   -    (5,470)   -    -    -    -    -    (5,470)
Provisions established   (299)   (48,745)   (83,181)   (25,314)   (318,565)   (3,292)   (4,634)   (484,030)
Total provisions and charge-offs   (299)   (54,215)   (83,181)   (25,314)   (318,565)   (3,292)   (4,634)   (489,500)
Provisions released   400    20,716    16,624    7,449    38,471    2,017    4,106    89,783 
Recovery of loans previously charged off   -    1,991    6,704    2,305    22,015    -    -    33,015 
Net charge to income   101    (31,508)   (59,853)   (15,560)   (258,079)   (1,275)   (250)   (366,702)

 

b)The detail of Charge-off of individually significant loans, is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Charge-off of loans   26,390    26,481 
Provision applied   (18,319)   (21,011)
Net charge offs of individually significant loans   8,071    5,470 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 122
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 33

PERSONNEL SALARIES AND EXPENSES

 

a)Composition of personnel salaries and expenses

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Personnel compensation   197,695    188,563 
Bonuses or gratifications   67,805    66,666 
Stock-based benefits   684    1,747 
Seniority compensation:   8,828    8,966 
Pension plans (*)   (311)   58 
Training expenses   2,366    2,423 
Day care and kindergarten   2,542    2,487 
Health funds   3,493    3,571 
Welfare fund   76    397 
Other personnel expenses   25,166    25,026 
Total   308,344    299,904 

(*) As of January 1, 2013, the modifications to the IAS 19 - Employee Benefits, were launched with retroactive effects. See Note 02 - Accounting Changes.

 

b)Share-based compensation:

 

Banco Santander Chile and Subsidiaries, as part of Santander Group in Spain (Banco Santander S.A.), adheres to the variable offsetting plans designed by the central office regarding the salaries of their employees, linked to the achievement of objectives, which is evaluated and rewarded on a quarterly and/or yearly basis. In addition, there are multi-year variable compensation plans aimed at keeping and motivating sellers. Their payment depends on the extent to which objectives are achieved. Goals are based on individual and group performance, and measured at least once a year.

 

Long-term incentive policy

 

The Board of Directors of the equity holders of Banco Santander S.A. (with its Central Office located in Spain, hereinafter the "Parent Company"), approved a long-term incentive plan which was ratified locally. This plan focuses on the Santander Group’s executive directors and certain executive employees in Spain and other Santander Group companies.

 

Stock performance plan

 

The plan includes a multi-year incentive plan compensated in shares by the Parent Company. The beneficiaries are Executive Directors, other Senior management members and other employees determined by the Directors Committee from the Parent Company or its deputy, the Executive Committee. These shares will be distributed if the following criteria are met:

 

i.The share price reaches the top 10 as compared to 30 other global banks.
ii.Earnings per share reach the top 10 as compared to 30 other global banks.
iii.The Bank has achieved its commercial and financial budget objectives in the last two years.
iv.The executive has achieved his/her personal targets during the last two years and has continued to work at the Bank until the end of the program.

 

This plan involves the implementation of successive cycles of shares delivered to the beneficiaries. Each cycle lasts three years so, each year a new cycle will begin and, since 2009 onwards, another cycle will end. The aim is to establish a proper sequence between the end of the incentive program linked to the previous plan (I06) and the following cycles of this plan. Therefore, the first two cycles started in July, 2007. The first one lasted two years (PI09) and the second one adhered to the three year standard duration (PI10)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 123
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 33

PERSONNEL SALARIES AND EXPENSES, continued

 

The commencement of the third-cycle (PI11) and fourth-cycle (PI12) incentive plans were approved by the Parent Company in June 2008 and 2010, respectively. These new plans consist of three-year cycles and are linked to the fulfillment of the predetermined objectives. In June, 2010, the fifth cycle (PI13) was approved. In June, 2011 the sixth and last plan of shares linked to the fulfillment of objectives (PI14) was approved. The first cycle (PI09) was cancelled on July 31, 2009, the second one (PI10) was cancelled on July 31, 2010, the third one (PI11) was cancelled on July 31, 2011, and the forth one (P12) was cancelled on July 31, 2012.

 

For each cycle, the maximum number of shares that may correspond to each beneficiary is established based on who had been active in the Group over the period covered by the plan. The objective -which fulfillment will determine the number of shares to be delivered- is defined by comparing the evolution of the Group with a group of financial entities of reference. It will be linked solely to the Total Shareholder Return (TSR). Regarding the plans approved prior to June 2008, the objectives that had determined the number of shares to deliver were defined by comparing the evolution of the Group with a group of financial entities of reference, linked to two parameters: the Total Shareholder Return (TSR) and the Growth of Earnings per Share (EPS).

 

The final number of shares to be granted in each cycle is determined by the degree of fulfillment of the objectives on the third anniversary of each cycle (with the exception of the first cycle, for which the second anniversary is used), and the shares are delivered within seven months from the date the cycle ends.

 

Regarding PI13, by the completion of the relevant cycle, the TSR was calculated relative to Santander and every entity of the reference group. The list of reference entities was ordered from largest to smallest, thus determining the percentage of shares to be delivered, on the basis of the following scale and according to the relative position of Santander within the group of financial entities for reference:

 

Santander’s position in the
TSR Ranking
  Maximum percentage
of shares earned
 
     
1st to 5th   100.00%
6th   82.50%
7th   65.00%
8th   47.50%
9th   30.00%
10th and more   0.00%

 

As for PI14, the application of a certain criterion related to TSR will determine the percentage of shares to be delivered, on the basis of the following scale and according to the relative position of Banco Santander S.A. (Spain) within the group of financial entities of reference:

 

Position of Santander on the
TSR Ranking
  Percentage
of shares earned
above the average
 
     
1st to 5th   100.00%
6th   86.05%
7th   72.00%
8th   58.00%
9th   44.00%
10th   30.00%
11th to 17th   0.00%

 

If any of the entities of the reference group was to be acquired by a different company, it would be eliminated from the reference group. In such case, the percentage will be determined based on Santander`s placement in relation to the remaining entities, based on quartiles. If Santander falls within the first quartile (including the top 25th percentile) of the reference group, Santander will earn the highest share percentage, as noted above. No share will be earned if Santander falls below the average (50th percentile) of the reference group. If Santander equals the median (50th percentile), it will earn 30% of the maximum amount. Lastly, for positions in-between the average (50th percentile exclusive) and the first quartile (25th percentile exclusive), it will be calculated be means of linear interpolation.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 124
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 33

PERSONNEL SALARIES AND EXPENSES, continued

 

As of December 31, 2013, the objectives were not met, so Plan I13 was terminated, however as of December 31, 2012, the objectives were met completely for Plan I12. Plan I14 is still active, so the Bank has recorded an anount of MCh$684 (MCh$ $1,747 as of December 31, 2012), which is included within the income of the specific period on which beneficiaries provided their services to Banco Santander Chile. This program had no effects on non-controlling interest. The fair value was calculated as described:

 

The fair value of each of those plans conceived by the Group is calculated on the grant date. Volatility is measured using an implied volatility model.

 

The calculation of the fair value of the stock plan linked to objectives is as follows:

 

-It has been considered that the beneficiaries will not leave over the period of each plan.

 

-The fair value of the relative position of the TSR was determined by the Banco Santander S.A.(Spain) on the grant date based on an independent expert report using a the Monte Carlo valuation model. The expert ran 10,000 simulations to determine the TSR for each of the reference financial institutions (benchmark), considering the aforementioned variables. The results (each of which represents the distribution of a number of shares) are classified in descending order through the calculation of the weighted average, and this amount is discounted at the risk-free interest rate.

 

   PI12   PI13   PI14 
Expected volatility (*)   42.36%   49.65%   51.35%
Historical annual dividend return   4.88%   6.34%   6.06%
Risk-free interest rate   2.04%   3.33%   4.07%

 

(*) Determined based on the historical volatility of the corresponding period (three years).

 

The application of the simulations under the Monte Carlo model results in a percentage value representing the probability of vesting of 55.42% for the I12 plan, 62.62% for the I13 plan and 55.39% for the I14 plan. Fair value measurement takes into account market conditions (TSR and EPS) and we recognize compensation expense for employees who satisfy vesting conditions (such as service conditions).

 

This appraisal as the price per share (determined as an average of the 15 working days after April 1st of the year when each plan was implemented) determine the cost per share this benefit shall have for Chile.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 125
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 33

PERSONNEL SALARIES AND EXPENSES, continued

 

Below is a table which provides a detail of the foregoing:

 

   Number of   Exercise
price
     Number of   Maturity
commencement
of the exercise
  Date of
termination
of exercise
    shares      Group of employees   individuals    period   period
                      
Options granted (Plan I12)   327,882    -   Manager   157   07-01-2009  06-30-2012
Options granted (Plan I12)   36,848    -   Other non-managerial positions   76   07-01-2009  06-30-2012
Plans in force on December 31, 2009   364,730                    
                         
2010 Flow                        
Options granted (Plan I12)   564,339    -   Manager   170   07-01-2009  06-30-2012
Options granted (Plan I12)   43,787    -   Other non-managerial positions   63   07-01-2009  06-30-2012
Options granted (Plan I13)   310,902    -   Manager   166   07-01-2010  06-30-2013
Options granted (Plan I13)   65,148    -   Other non-managerial positions   68   07-01-2010  06-30-2013
Plans in force on December 31, 2010   1,348,906                    
                         
2011 Flow                        
Options granted (Plan I12)   591,686    -   Manager   157   07-01-2009  06-30-2012
Options granted (Plan I12)   79,631    -   Other non-managerial positions   77   07-01-2009  06-30-2012
Options granted (Plan I13)   650,474    -   Manager   166   07-01-2011  06-30-2013
Options granted (Plan I13)   136,303    -   Other non-managerial positions   68   07-01-2011  06-30-2013
Options granted (Plan I14)   268,318    -   Manager   147   07-01-2012  06-30-2014
Options granted (Plan I14)   27,185    -   Other non-managerial positions   82   07-01-2012  06-30-2014
Plans in force on December 31, 2011   3,102,503                    
                         
2012 Flow                        
Options granted Plan I12   601,101    -   Manager   157   07-01-2009  06-30-2012
Options granted Plan I12   63,254    -   Other non-managerial positions   77   07-01-2009  06-30-2012
Options granted Plan I13   501,456    -   Manager   166   07-01-2010  06-30-2013
Options granted Plan I13   129,076    -   Other non-managerial positions   114   07-01-2010  06-30-2013
Options granted Plan I14   508,144    -   Manager   147   07-01-2011  06-30-2014
Options granted Plan I14   46,810    -   Other non-managerial positions   82   07-01-2011  06-30-2014
Options exercised Plan I12   (2,085,008)   -   Manager   157   07-01-2009  06-30-2012
Options exercised Plan I12   (223,520)   -   Other non-managerial positions   77   07-01-2009  06-30-2012
Plans in force on December 31, 2012   2,643,816                    
                         
2013 Flow                        
Plan I13 terminated (*)   (1,462,832)   -   Manager   166   -  -
Plan I13 terminated (*)   (330,527)   -   Other non-managerial positions   114   -  -
Plans in force on December 31, 2013   850,457                    
                         
                         
Plan I14   850,457                    

 

(*) Plan I13 does not comply with the assignation requirements

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 126
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 34

ADMINISTRATIVE EXPENSES

 

As of December 31, 2013 and 2012, the composition of the item is as follows:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
General administrative expenses   116,685    106,308 
Maintenance and repair of property, plant and equipment   15,368    14,290 
Office lease   26,105    24,369 
Equipment lease   106    367 
Insurance payments   2,989    2,420 
Office supplies   4,579    5,796 
IT and communication expenses   29,144    24,873 
Lighting, heating, and other utilities   3,871    4,086 
Security and valuables transport services   15,879    11,929 
Representation and personnel travel expenses   5,255    5,101 
Judicial and notarial expenses   1,619    1,113 
Fees for technical reports and auditing   6,400    7,396 
Other general administrative expenses   5,370    4,568 
Outsourced services   44,411    41,127 
Data processing   26,489    26,581 
Products sale   1,820    1,686 
Archive services   1,728    795 
Valuation services   2,265    1,957 
Furniture storage   579    478 
Outsourcing   9,489    8,253 
Other   2,041    1,377 
Board expenses   1,154    1,073 
Marketing expenses   15,800    16,899 
Taxes, payroll taxes, and contributions   10,141    10,476 
Real estate taxes   1,201    1,615 
Patents   1,843    1,961 
Other taxes   4    15 
Contributions to SBIF   7,093    6,885 
Total   188,191    175,883 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 127
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 35

DEPRECIATION, AMORTIZATION, AND IMPAIRMENT

 

a)Depreciation, amortization and impairment charges for the years ended December 31, 2013 and 2012, are detailed below:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Depreciation and amortization          
Depreciation of property, plant, and equipment   (22,452)   (21,195)
Amortizations of Intangible assets   (38,622)   (35,174)
Total depreciation and amortization   (61,074)   (56,369)
Impairment of property, plant, and equipment   (244)   (90)
Total   (61,318)   (56,459)

 

As of December 31, 2013, the costs for Property, plant, and equipment impairment totaled Ch$ 244 million, mainly due to damages to ATMs (Ch$ 90 million as of December 31, 2012).

 

b)The reconciliation between the book values and balances as of December 31, 2013 and 2012 is as follows:

 

   Depreciation and amortization 
   2013 
   Property,
plant, and
equipment
   Intangible
assets
   Total 
   MCh$   MCh$   MCh$ 
             
Balances as of January 1, 2013   (105,150)   (146,653)   (251,803)
Depreciation and amortization charges in the period   (22,452)   (38,622)   (61,074)
Sales and disposals in the period   154    -    154 
Other   -    -    - 
Balances as of December 31, 2013   (127,448)   (185,275)   (312,723)

  

   Depreciation and amortization 
   2012 
   Property, plant,
and equipment
   Intangible
assets
   Total 
   MCh$   MCh$   MCh$ 
             
Balances as of January 1, 2012   (84,230)   (111,479)   (195,709)
Depreciation and amortization charges in the period   (21,195)   (35,174)   (56,369)
Sales and disposals in the period   275    -    275 
Other   -    -    - 
Balances as of December 31, 2012   (105,150)   (146,653)   (251,803)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 128
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 36

OTHER OPERATING INCOME AND EXPENSES

 

a)Other operating expenses are comprised of the following components:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
Income from assets received in lieu of payment          
Income from sale of assets received in lieu of payment   6,571    2,654 
Recovery of charge-offs and income from assets received in lieu of payment   10,475    6,653 
Subtotals   17,046    9,307 
Income from sale of investments in other companies          
Gain on sale of investments in other companies   -    599 
Subtotals   -    599 
Other income          
Leases   328    142 
Income from sale of property, plant and equipment (1)   176    9,194 
Recovery of provisions for contingencies   77    - 
Compensation from insurance companies due to damages   725    262 
Other   2,156    254 
Subtotals   3,462    9,852 
           
Total   20,508    19,758 

  

(1)During 2013, no offices were sold. As of December 31, 2012 the sale of offices is detailed as follows:

 

  Number 
of
   Book value   Selling
price
   Profit 
As of December 31, 2012  assets   MCh$   MCh$   MCh$ 
August   2    361    1,045    684 
September   9    4,578    9,485    4,907 
October   4    704    1,274    570 
December   2    724    3,127    2,403 
Total   17    6,367    14,931    8,564 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 129
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 36

OTHER OPERATING INCOMES AND EXPENSES continued:

 

b)Other operating expenses are detailed as follows:

 

   December 31, 
   2013   2012 
   MCh$   MCh$ 
Allowances and expenses for assets received in lieu of payment        
Charge-offs of assets received in lieu of payment   8,796    9,180 
Provision on assets received in lieu of payment   3,580    3,902 
Expenses for maintenance of assets received in lieu of payment   2,461    2,630 
Subtotals   14,837    15,712 
           
Credit card expenses   2,157    973 
           
Customer services   10,954    8,674 
           
Other expenses          
Operating charge-offs (1)   8,222    8,366 
Life insurance and general product insurance policies   7,348    7,211 
Additional tax on expenses paid overseas   2,862    3,283 
Income for sale of property, plant and equipment   46    72 
Provisions for contingencies   5,805    7,964 
Expense for compensations   5,873    5,594 
Retail Association Payment   1,079    1,279 
Expense for adopting chip technology on cards   2,283    - 
Other   885    588 
Subtotals   34,403    34,357 
           
Total   62,351    59,716 

 

(1)Includes Ch$ 1,566 million paid to our customers as compensation for the delay in fund transferring that took place on October 31, 2012.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 130
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 37

TRANSACTIONS WITH RELATED PARTIES

 

In addition to Affiliates and associated entities, the Bank’s “related parties” include its “key personnel” from the executive staff (members of the Bank’s Board of Directors and Managers of Banco Santander Chile and its affiliates, together with their close relatives), as well as the entities over which the key personnel could exercise significant influence or control.

 

The Bank also considers the companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent, i.e., Banco Santander S.A. (located in Spain).

 

Article 89 of the Ley de Sociedades Anónimas (Public Companies Act), which is also applicable to banks, provides that any transaction with a related party must be made under equitable conditions similar to those that customarily prevail in the market.

 

Moreover, Article 84 of the Ley General de Bancos (General Banking Act) establishes limits for loans that can be granted to related parties and prohibits lending to the Bank’s directors, managers, or representatives.

 

Transactions between the Bank and its related parties are specified below. To facilitate comprehension, we have divided the information into four categories:

 

Santander Group Companies

 

This category includes all the companies that are controlled by the Santander Group around the world, and hence, it also includes the companies over which the Bank exercises any degree of control (Affiliates and special-purpose entities).

 

Associated companies

 

This category includes the entities over which the Bank, in accordance with section b) of Note 1 to these Financial Statements, exercises a significant degree of influence and which generally belong to the group of entities known as “business support companies.”

 

Key personnel

 

This category includes members of the Bank’s Board of Directors and managers of Banco Santander Chile and its affiliates, together with their close relatives.

 

Other

 

This category encompasses the related parties that are not included in the groups identified above and which are, in general, entities over which the key personnel could exercise significant influence or control.

 

The terms for transactions with related parties are equivalent to those which prevail in transactions made under market conditions or to which the corresponding considerations in kind have been attributed.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 131
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 37

TRANSACTIONS WITH RELATED PARTIES, continued:

 

a) Loans to related parties:

 

Below are loans and receivables as well as contingent loans that correspond to related entities:

 

   As of December 31 
   2013   2012 
   Companies
of the
Group
   Associated
companies
   Key
personnel
   Other   Companies
of the Group
   Associated
companies
   Key
personnel
   Other 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Loans and accounts receivables:                                        
Commercial loans   47,305    618    4,022    51,141    46,790    668    2,910    57,723 
Mortgage loans   -    -    15,561    -    -    -    15,089    - 
Consumer loans   -    -    2,061    -    -    -    1,513    - 
Loans and accounts receivables:   47,305    618    21,644    51,141    46,790    668    19,512    57,723 
                                         
Allowance for loan losses   (326)   (3)   (444)   (6)   (326)   (3)   (39)   (9)
Net loans   47,067    615    21,600    51,135    46,461    665    19,473    57,714 
                                         
Guarantees   124,420    -    19,237    2,326    9    -    17,909    1,349 
                                         
Contingent loans:                                        
Personal guarantees   -    -    -    -    -    -    -    - 
Letters of credit   30,714    -    -    -    25,697    -    -    - 
Guarantees   172,274    -    -    9,989    34,897    -    -    1,443 
Contingent loans:   202,988    -    -    9,989    60,594    -    -    1,443 
                                         
Provisions for contingent loans   (22)   -    -    (4)   (513)   -    -    (2)
                                         
Net contingent loans   202,966    -    -    9,985    60,579    -    -    1,441 

 

Loan activity to related parties during the years 2013 and 2012 is shown below:

 

   As of December 31, 
   2013   2012 
   Societies   Companies   Group       Societies   Companies   Group     
   Personnel   key   partners   Other   of the Group   key   partners   Other 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Opening balances as of January 1,   107,384    668    19,512    59,166    52,673    663    19,698    63,081 
Loans granted   161,763    377    7,313    14,858    78,586    21    6,132    10,927 
Loans payments   (18,854)   (427)   (5,181)   (12,894)   (23,875)   (16)   (6,318)   (14,842)
                                         
Total   250,293    618    21,644    61,130    107,384    668    19,512    59,166 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 132
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 37

TRANSACTIONS WITH RELATED PARTIES, continued:

 

b)Assets and liabilities with related parties

 

   As of December 31, 
   2013   2012 
   Companies
of the Group
   Associated
companies
   Key
personnel
   Other   Companies
of the Group
   Associated
 companies
   Key 
personnel
   Other 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Assets                                
Cash and deposits in banks   5,306    -    -    -    5,357    -    -    - 
Trading investments   -    -    -    -    -    -    -    - 
Obligations under repurchase agreements loans   -    -    -    -    -    -    -    - 
Financial derivative contracts   557,026    -    -    -    526,734    -    -    - 
Available for sale investments   -    -    -    -    -    -    -    - 
Other assets   2,460    -    -    -    4,339    -    -    - 
                                         
Liabilities                                        
Deposits and other demand liabilities   58,030    10,406    2,783    23,300    65,386    2,563    2,286    17,211 
Obligations under repurchase agreements loans   59,703    -    -    -    92,862    -    -    - 
Time deposits and other time liabilities   54,212    299    3,774    156,977    97,449    373    2,842    39,193 
Financial derivative contracts   537,162    -    -    -    387,903    -    -    - 
Issued debt instruments   96,872    -    -    -    67,368    -    -    - 
Other financial liabilities   3,912    -    -    -    103,207    -    -    - 
Other liabilities   462    -    -    -    1,241    -    -    - 

 

c)Income (expenses) recorded due to transactions with related parties

 

   As of December 31, 
   2013   2012 
   Companies
of the Group
   Associated
companies
   Key
personnel
   Other   Companies of
the Group
   Associated
companies
   Key
personnel
   Other 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                 
Income (expense) recorded                                        
Income and expenses from interest and inflation adjustments   (8,812)   50    1,065    (1,082)   (11,660)   54    948    (2,819)
Income and expenses from fees and services   -    75    120    3,615    (1,191)   59    114    214 
Net income from financial operations and
foreign exchange transactions (*)
   (8,690)   -    (4)   (1,534)   241,424    -    (1)   107 
Other operating revenues and expenses   955    -    -    -    643    -    -    - 
Income for Investments in other companies (**)   78,122    -    -    -    -    -    -    - 
Key personnel compensation and expenses   -    -    (31,652)   -    -    -    (30,999)   - 
Administrative and other expenses   (28,371)   (30,758)   -    -    (23,121)   (20,461)   -    - 
Total   33,204    (30,633)   (30,471)   999    206,095    (20,348)   (29,938)   (2,498)

 

(*)Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.
(**)Corresponds to the profit from the sale of the Santander Asset Management S.A Administradora General de Fondos subsidiary.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 133
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 37

TRANSACTIONS WITH RELATED PARTIES, continued:

 

d)Payments to Board members and key management personnel

 

The compensation received by key management personnel, including Board members and all the executives holding Manager positions shown in the “Personnel salaries and expenses” and/or “Administrative expenses” items of the Consolidated Statements of Income, corresponds to the following categories:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Personnel compensation   16,954    16,880 
Board members’ salaries and expenses   1,083    1,034 
Bonuses or gratifications   11,267    10,255 
Compensation in stock   684    1,508 
Training expenses   55    138 
Seniority compensation   1,064    12 
Health funds   290    289 
Other personnel expenses   566    431 
Pension plans (*)   (311)   452 
Total   31,652    30,999 

(*) Some of the executives that qualified for this benefit are no longer members of the Group for various reasons, lowering the amount of the obligation thus generating an income from allowance reversals.

 

e)Composition of key personnel

 

As of December 31, 2013 and 2012, the composition of the Bank’s key personnel is as follows:

 

   No. of executives 
   As of December 31 
Position  2013   2012 
         
Director   12    13 
Division manager   16    19 
Department manager   80    85 
Manager   60    63 
Total key personnel   168    180 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 134
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 37

TRANSACTIONS WITH RELATED PARTIES, continued:

 

f)Stock-based benefits

 

The following table details the activity in stock-based benefits paid to key personnel of the Bank and its subsidiaries. The detail for each of these benefit plans is described in section b) of Note 33:

 

    Number of     Exercise
price
          Number of     Date of
commencement
of the exercise
  Date of
termination
of exercise
    shares         Group of employees     individuals     period   period
                                 
Options granted (Plan I12)     327,882       -     Manager       157     07-01-2009   06-30-2012
Plans in force on December 31, 2009     327,882                                
                                       
2010 Flow                                      
Options granted (Plan I12)     564,339       -     Manager       170     07-01-2009   06-30-2012
Options granted (Plan I13)     310,902       -     Manager       166     07-01-2010   06-30-2013
Plans in force on December 31, 2010     1,203,123                                
                                       
2011 Flow                                      
Options granted (Plan I12)     591,686       -     Manager       157     07-01-2009   06-30-2012
Options granted (Plan I13)     650,474       -     Manager       166     07-01-2010   06-30-2013
Options granted (Plan I14)     268,318       -     Manager       147     07-01-2011   06-30-2014
Plans in force on December 31, 2011     2,713,601                                
                                       
2012 Flow                                      
Options granted Plan I12     601,101       -     Manager       157     07-01-2009   06-30-2012
Options granted Plan I13     501,456       -     Manager       166     07-01-2010   06-30-2013
Options granted Plan I14     508,144       -     Manager       147     07-01-2011   06-30-2014
Options exercised Plan I12     (2,085,008 )     -     Manager       157     07-01-2009   06-30-2012
Plans in force on December 31, 2012     2,239,294                                
                                       
2013 Flow                                      
Plan I13 terminated (*)     (1,462,832 )     -     Manager       166     -   -
Plans in force on December 31, 2013     776,462                                
                                       
Plan I14     776,462                                

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 135
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 38

PENSION PLANS

 

The Bank has an additional benefit available to its principal executives, consisting of a pension plan. The purpose of the pension plan is to endow the executives with funds for a better supplementary pension upon their retirement.

 

For this purpose, 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 conditions:

 

e.The plan is aimed at the Group’s management
f.The general requirement to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.
g.The Santander Group will take on insurance (pension fund) for the employee’s behalf where it will pay (defined contribution) periodically.
h.The Santander Group will be responsible for granting the benefits directly.

 

If the working relationship between the manager and the respective company ends, before s/he fulfills the abovementioned requirements, s/he will have no rights under this benefit plan.

 

In the event of the executive’s death or total or partial disability, s/he will be entitled to receive this benefit.

 

The Bank will make contributions to this benefit plan on the basis of mixed collective insurance policies whose beneficiary is the Bank. The life insurance company with whom such policies are executed is not an entity linked or related to the Bank or any other Santander Group company.

 

Rights owned by the Bank due to the plan at the end of 2013 totaled Ch$ 5,171 million (Ch$ 5,584 million in 2012).

 

The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

 

Calculation method:

Use of the credit unit projected method which considers each working year as generating an additional amount of rights over benefits and values each unit separately. It is calculated based primarily on fund contributions, as well as other factors such as the legal annual pension limit, seniority, age and yearly income for each unit valued individually.

 

Actuarial hypothesis assumptions:

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other. The most significant actuarial hypotheses considered in the calculations were:

  

  

Plans 
post-

employment

 

Plans 
post-

employment

   2013  2012
       
Mortality chart  RV-2009  RV-2009
Termination of contract rates  5.0%  5.0%
Impairment chart  PDT 1985  PDT 1985

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 136
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 38

PENSION PLANS, continued:

 

Assets related to the pension fund contributed by the Bank into the Seguros Euroamérica insurance company with respect to defined benefit plans are presented as net of associated commitments.

 

Activity for post-employment benefits is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
Plan assets   5,171    5,584 
Commitments for defined-benefit plans          
For active personnel   (3,888)   (3,595)
Incurred by inactive personnel   -    - 
Minus:          
Unrealized actuarial (gain) losses   -    - 
Balances at the period end   1,283    1,989 

  

Year’s cash flow for post-employment benefits is as follows:

 

   As of December 31, 
   2013   2012 
   MCh$   MCh$ 
         
a) Fair value of plan assets          
Opening balance   5,584    5,508 
Expected yield of insurance contracts   247    326 
Employer contributions   (660)   (250)
Actuarial (gain) losses (*)   -    - 
Premiums paid   -    - 
Benefits paid   -    - 
Fair value of plan assets at year end   5,171    5,584 
b) Present value of obligations          
Present value of obligations opening balance   (3,594)   (3,143)
Net incorporation of Group companies   -    - 
Service cost   (311)   (452)
Interest cost   -    - 
Curtailment/settlement effect   -    - 
Benefits paid   -    - 
Past service cost   -    - 
Actuarial (gain) losses   17    - 
Other   -    - 
Present value of obligations at year end   (3,888)   (3,595)
Net balance at year end   1,283    1,989 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 137
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 38

PENSION PLANS, continued:

 

Plan expected profit:

 

    As of December 31  
    2013     2012  
             
Type of expected yield from the plan’s assets     UF + 2.50% annual       UF + 2.50% annual  
Type of yield expected from the reimbursement rights     UF + 2.50% annual       UF + 2.50% annual  

 

Plan associated expenses:

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
         
Current period service expenses   311    452 
Interest cost   -    - 
Expected yield from plan’s assets   (247)   (326)
Expected yield of insurance contracts linked to the Plan:          
Extraordinary allocations   -    - 
Actuarial (gain)/ losses recorded in the period   (17)   - 
Past service cost   -    - 
Other   -    - 
Total   47    126 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 138
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 39

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The measurement of fair value assumes the transaction to sale and asset or the transference of the liability happens within the main asset or liability market, or the most advantageous market for the asset or liability.

 

For financial instruments with no available market prices, fair values have been estimated by using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community. In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

These techniques are inherently subjective and are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations. Hence, the fair value estimated for an asset or liability may not coincide exactly with the price at which that asset or liability could be delivered or settled on the date of its valuation, and may not be justified in comparison with independent markets.

 

Determination of fair value of financial instruments

 

Below is a comparison between the value at which the Bank’s financial assets and liabilities are recorded and their fair value as of December 31, 2013 and 2012:

 

   As of December 31, 
   2013   2012 
   Book value   Fair value   Book value   Fair value 
   MCh$   MCh$   MCh$   MCh$ 
                 
Assets                    
Cash and deposits in banks   1,571,810    1,571,810    1,250,414    1,250,414 
Cash items in process of collection   604,077    604,077    520,267    520,267 
Trading investments   287,567    287,567    338,287    338,287 
Investments under resale agreements   17,469    17,469    6,993    6,993 
Financial derivative contracts   1,494,018    1,494,018    1,293,212    1,293,212 
Loans and accounts receivable from customers and interbank loans   20,452,416    23,562,746    18,416,484    20,682,784 
Available for sale investments   1,700,993    1,700,993    1,826,158    1,826,158 
                     
Liabilities                    
Deposits and interbank borrowings   16,978,412    16,921,614    15,520,235    15,495,714 
Cash items in process of being cleared   276,379    276,379    284,953    284,953 
Investments under repurchase agreements   208,972    208,972    304,117    304,117 
Financial derivative contracts   1,300,109    1,300,109    1,146,161    1,146,161 
Issued debt instruments and other financial liabilities   5,388,439    5,729,213    4,763,900    5,300,998 

 

In addition, the fair value estimates presented above do not attempt to estimate the value of the Bank’s profits generated by its business activity, nor its future activities, and accordingly, they do not represent the Bank’s value as a going concern. Below is a detail of the methods used to estimate the financial instruments’ fair value

 

a)Cash and deposits in banks

 

The recorded value of cash and interbank loans approximates its estimated fair value in view of these instruments’ short-term nature.

 

b)Cash items in process of collection, trading investments, available for sale investment instruments, and investments under resale agreements

 

The estimated fair value of these financial instruments was established using market values or estimates from an available dealer, or quoted market prices of similar financial instruments. Investments with maturity of less than one year are evaluated at recorded value since, due to their short maturity term, they are considered as having a fair value not significantly different from their recorded value. To estimate the fair value of debt investments or representative values in these lines of businesses, we take into consideration additional variables and elements, as long as they apply, including the estimate of prepayment rates and credit risk of issuers.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 139
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 39

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued:

 

c)Loans and accounts receivable from customers and interbank loans

 

Fair value of commercial, mortgage and consumer loans and credit cards is measured through a discounted cash flow (DCF) analysis. To do so, we use current market interest rates considering product, term, amount and similar loan quality. Fair value of loans with 90 days or more of delinquency are measured by means of the market value of the associated guarantee, minus the rate and term of expected payment. For variable rate loans whose interest rates change frequently (monthly or quarterly) and that are not subjected to any significant credit risk change, the estimated fair value is based on their book value.

 

d)Deposits

 

Disclosed fair value of deposits that do not bear interest and saving accounts is the amount payable at the reporting date and, therefore, equals the recorded amount. Fair value of time deposits is calculated through a discounted cash flow calculation that applies current interest rates from a monthly calendar of scheduled maturities in the market.

 

e)Short and long term issued debt instruments

 

The fair value of these financial instruments is calculated by using a discounted cash flow analysis based on the current incremental lending rates for similar types of loans having similar maturities.

 

f)Financial derivative contracts

 

The estimated fair value of financial derivative contracts is calculated using the prices quoted on the market for financial instruments having similar characteristics.

 

The fair value of interest rate swaps represents the estimated amount that the Bank expects to receive or pay to rescind the contracts or agreements, bearing in mind the term structures of the interest rate curve, the underlying asset’s volatility, and the counterparty’s credit risk.

 

If there are no quoted prices from the market (either direct or indirect) for any derivative instrument, the respective fair value estimates have been calculated by using models and valuation techniques such as Black-Scholes, Hull, and Monte Carlo simulations, taking into consideration the relevant inputs/outputs such as volatility of options, observable correlations between underlying assets, counterparty credit risk, implicit price volatility, the velocity with which the volatility reverts to its average value, and the straight-line relationship (correlation) between the value of a market variable and its volatility, among others.

 

Measurement of fair value and hierarchy

 

IFRS 13 - Fair Value Measurement, provides a hierarchy of reasonable values which separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments. The hierarchy reflects the significance of the inputs used in making the measurement. The three levels of the hierarchy of fair values are the following:

 

• Level 1: the inputs are quoted prices (unadjusted) on active markets for identical assets and liabilities that the Bank can access on the measurement date.

 

• Level 2: inputs other than the quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

• Level 3: inputs are unobservable inputs for the asset or liability i.e. they are not based on observable market data.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 140
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 39

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued:

 

The hierarchy level within which the fair value measurement is categorized in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.

 

The best evidence of a financial instrument’s fair value at the initial time is the transaction price (Level 1).

 

In cases where quoted market prices cannot be observed, Management makes its best estimate of the price that the market would set using its own internal models which in most cases use data based on observable market parameters as a significant input (Level 2) and, in very specific cases, significant inputs not observable in market data (Level 3). Various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

Financial instruments at fair value and determined by quotations published in active markets (Level 1) include:

 

-Chilean Government and Department of Treasury bonds

 

Instruments which cannot be 100% observable in the market are valued according to other inputs observable in the market (Level 2).

 

The following financial instruments are classified under Level 2:

 

Type of

financial instrument

 

Model

used in valuation

  Description
ž  Mortgage and private bonds   Present Value of Cash Flows Model  

Internal Rates of Return (“IRRs”) are provided by RiskAmerica, according to the following criterion:

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given nemotechnic, the reported rate is the weighted average amount of the observed rates.

In the case there are no valid transactions for a given nemotechnic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on historical spread for the same item or similar ones.

 

ž  Time deposits   Present Value of Cash Flows Model  

IRRs are provided by RiskAmerica, according to the following criterion:

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given nemotechnic, the reported rate is the weighted average amount of the observed rates.

In the case there are no valid transactions for a given nemotechnic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on issuer curves.

         
ž  Constant Maturity Swaps (CMS), FX and Inflation Forward (Fwd) , Cross Currency Swaps (CCS), Interest Rate Swap (IRS)   Present Value of Cash Flows Model  

IRRs are provided by ICAP, GFI, Tradition, and Bloomberg according to this criterion:

With published market prices, a valuation curve is created by the bootstrapping method and is then used to value different derivative instruments.

         
ž  FX Options   Black-Scholes  

Formula adjusted by the volatility smile (implicit volatility). Prices (volatility) are provided by BGC Partners, according to this criterion:

With published market prices, a volatility surface is created by interpolation and then these volatilities are used to value options.

 

In limited occasions significant inputs not observable in market data are used (Level 3). To carry out this estimate, several techniques are used, including extrapolation of observable market data or a mix of observable data.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 141
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 39

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued:

 

The following financial instruments are classified under Level 3:  

 

Type of

 financial instrument

 

Model

used in valuation

  Description
ž  Caps/ Floors/ Swaptions   Black Normal Model for Cap/Floors and Swaptions   There is no observable input of implicit volatility.
         
ž  UF options   Black – Scholes   There is no observable input of implicit volatility.
         
ž  Cross currency swap with window   Hull-White   Hybrid HW model for rates and Brownian motion for FX There is no observable input of implicit volatility.
         
ž  CCS (special contracts)   Implicit Forward Rate Agreement (FRA)   Start Fwd unsupported by MUREX (platform) due to the UF forward estimate.
         
ž  Cross currency swap, Interest rate swap, Call money swap in Tasa Activa Bancaria (Active Bank Rate) TAB,   Present Value of Cash Flows Model   Validation obtained by using the interest curve and interpolating at flow maturities, but TAB is not a directly observable variable and is not correlated to any market input.
         
ž  Bonds (in our case, low liquidity bonds)   Present Value of Cash Flows Model   Valued by using similar instrument prices plus a charge/off rate by liquidity.  

 

The following table presents the assets and liabilities that are measured at fair value on a recurrent basis, as of December 31, 2013 and 2012:

 

   Fair value measurement 
  2013   Level 1   Level 2   Level 3 
December 31,  MCh$   MCh$   MCh$   MCh$ 
                 
Assets                    
Trading investments   287,567    275,296    12,271    - 
Available for sale investments   1,700,993    654,945    1,045,210    838 
Derivatives   1,494,018    -    1,442,752    51,266 
Total   3,482,578    930,241    2,500,233    52,104 
                     
Liabilities                    
Derivatives   1,300,109    -    1,298,690    1,419 
Total   1,300,109    -    1,298,690    1,419 

 

   Fair value measurement 
  2012   Level 1   Level 2   Level 3 
December 31,  MCh$   MCh$   MCh$   MCh$ 
                 
Assets                    
Trading investments   338,287    334,756    3,531    - 
Available for sale investments   1,826,158    1,020,904    803,895    1,359 
Derivatives   1,293,212    -    1,231,422    61,790 
Total   3,457,657    1,355,660    2,038,848    63,149 
                     
Liabilities                    
Derivatives   1,146,161    -    1,145,055    1,106 
Total   1,146,161    -    1,145,055    1,106 

  

Consolidated Financial Statements December 2013 / Banco Santander Chile 142
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 39

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued:

 

The following table presents the Bank’s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant entries (Level 3) as of December 31, 2013 and 2012:

 

   Assets   Liabilities 
   MCh$   MCh$ 
         
As of January 1, 2013   63,149    (1,106)
           
Total realized and unrealized profits (losses):          
Included in statement of income   (10,524)   (313)
Included in other comprehensive income   (521)   - 
Purchases, issuances, and loans (net)   -    - 
           
As of December 31, 2013   52,104    (1,419)
           
Total profits or losses included in comprehensive income for 2013 that are attributable to change in   (11,045)   (313)

 

   Assets   Liabilities 
   MCh$   MCh$ 
         
As of January 1, 2012   83,483    (1,369)
           
Total realized and unrealized profits (losses):          
Included in statement of income   (19,724)   263 
Included in other comprehensive income   (610)   - 
Purchases, issuances, and loans (net)   -    - 
           
As of December 31, 2012   63,149    (1,106)
           
Total profits or losses included in comprehensive income for 2012 that are attributable to change in   (20,334)   263 

 

The realized and unrealized profits (losses) included in comprehensive income for 2013 and 2012, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the Statement of Comprehensive Income in the associate line item.

 

The potential effect as of December 31, 2013 and 2012 on the valuation of assets and liabilities valued at fair value on a recurrent basis through unobservable significant entries (level 3), generated by changes in the principal assumptions if other reasonably possible assumptions that are less or more favorable were used, is not considered by the Bank to be significant.

 

The following sheet shows the financial instruments subject to offsetting according to IAS 32:

 

   As of December 31, 2013 
   Linked financial instruments subject to
offsetting
   Linked financial instruments not subject
to offsetting
   Other financial instruments 
  Gross
value of
financial
assets
   Gross value
of financial
liabilities
compensated
on the
balance
sheet
   Net amount
("+" or "-") of
financial assets
presented on
the balance
sheet
   Financial
instruments-
Assets
   Financial
instruments-
Liabilities
   Net
amount
   Assets   Liabilities   Net amount 
Financial instrument  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Financial derivative contracts   -    -    -    1,309,025    1,240,820    68,205    184,993    59,289    125,704 
Repurchase agreements   -    -    -    -    -    -    17,469    208,972    (191,503)
Total   -    -    -    1,309,025    1,240,820    68,205    202,462    268,261    (65,799)

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 143
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT

 

Introduction and general description

 

The Bank, due to its activities with financial instruments is exposed to several types of risks. The main risks related to financial instruments that apply to the Bank are as follows:

 

-Market risk: rises from holding financial instruments whose value may be affected by fluctuations in market conditions, generally including the following types of risk:
a.Foreign exchange risk: this arises as a consequence of exchange rate fluctuations among currencies.
b.Interest rate risk: this arises as a consequence of fluctuations in market interest rates.
c.Price risk: this arises as a consequence of changes in market prices, either due to factors specific to the instrument itself or due to factors that affect all the instruments negotiated in the market.
d.Inflation risk: this arises as a consequence of changes in Chile’s inflation rate, whose effect would be mainly applicable to financial instruments denominated in UFs.

 

-Credit risk: this is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party.

 

-Liquidity risk: is the possibility that an entity may be unable to meet its payment commitments, or that in order to meet them, it may have to raise funds with onerous terms or risk damage to its image and reputation.

 

-Operating risk: this is a risk arising from human errors, system errors, fraud or external events which may damage the Bank’s reputation, may have legal or regulatory implications, or cause financial losses.

 

This note includes information on the Bank’s exposure to these risks and on its objectives, policies, and processes involved in their measurement and management.

 

Risk management structure

 

The Board is responsible for the establishment and monitoring of the Bank’s risk management structure, for which purpose it has an on-line corporate governance system which incorporates international recommendations and trends, adapted to Chilean regulatory conditions and given it the ability to apply the most advanced practices in the markets in which the Bank operates. To optimize the performance of this function, the Board of Directors has established the Asset and Liability Committee (“ALCO”), whose principal task is to assist in carrying out its functions relating to oversight and management of the Bank’s risks. To complement the ALCO in the risk management function, the Board also has three key committees: the Markets Committee (“CDM,” the acronym in Spanish) the Executive Credit Committee (“CEC,” the acronym in Spanish) and the Audit Committee (“CDA,” the acronym in Spanish). Each of these committees is composed of directors and executive members of the Bank’s management.

 

The ALCO is responsible for developing risk handling policies of the Bank following the Board and Santander Spain Global Risk Department guidelines, as well as the requirements of the Chilean SBIF. Said policies have been created mainly to identify and analyze the risks the Bank faces, establishing risk limits and adequate control monitoring risks, and the abiding by of limits. Risk handling policies and systems are revised regularly to reflect changes in market conditions and products or services offered. The Bank, through the creation and management of regulations and procedures, aims at developing a disciplined and constructive control environment in which all employees understand their role and duties.

 

To carry out its duties, the ALCO works directly with the Bank’s control and risk departments, whose joint objectives include the following:

 

-evaluate risks whose magnitude might threaten the Bank’s solvency or which might potentially pose significant risks to its operations or reputation;
-ensure that the Bank is equipped with the means, systems, structures, and resources, consistent with best practices, which enable the implementation of the risk management strategy;
-ensure the integration, control, and management of all the Bank’s risks;
-apply homogeneous risk principles, policies, and metrics throughout the Bank and its businesses;
-develop and implement a risk management model at the bank, in order for risk exposure to be adequately integrated into the different decision making processes;
Consolidated Financial Statements December 2013 / Banco Santander Chile 144
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

-identify risk concentrations and mitigation alternatives, monitor the macroeconomic and competitive environment, quantifying sensitivities and the foreseeable impact of different scenarios on risk positioning; and
-carry out the management of structural liquidity, interest rate, and exchange rate risks, as well as those arising from the Bank’s own resource base.

 

To achieve the aforementioned objectives, the Bank (its management and the ALCO) performs a variety of activities relating to risk management, including the following: calculate exposures to risk from different portfolios and/or investments, taking into consideration mitigating factors (guarantees, netting, collateral, etc.); calculate the probabilities of expected loss for each portfolio and/or investment; assign loss factors to new transactions (rating and scoring); measure the risk values of the portfolios and/or investments based on different scenarios by means of historical simulations; specify limits for potential losses based on the different risks incurred; determine the potential impact of the structural risks on the Bank’s Consolidated Statements of Income; set limits and alerts which guarantee the Bank’s liquidity; and identify and quantify the operating risks by line of business, so as to facilitate their mitigation through corrective actions.

 

The CDA is mainly responsible for supervising compliance with the Bank’s risk management policies and procedures, and for reviewing the adaptation of the risk management framework to the risks faced by the Bank.

 

Credit risk

 

Credit risk is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party. To manage credit risk, the Bank consolidates all elements and components of credit risk exposure (e.g. individual delinquency risk, innate risk of a business line or segment, and/or geographical risk).

 

Mitigation of credit risk for loans and accounts receivable

 

The Board has delegated the duty of credit risk management to the ALCO and CEC, as well as to the Bank’s risk departments, whose roles are summarized below:

 

-Formulation of credit policies, by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submission of reports, documentation and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

 

-Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of that risk in terms of individual debtors, debtor groups, industry segment and country. Approval levels are assigned to the correspondent officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are revised constantly. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and even the CEC work directly with customers to assess credit risks and prepare risk requests. Moreover, Banco Santander España participates in the process to approve larger credits; for example, to customers or economic groups with debts over USD 40 million.

 

-Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating, and liquidity (for investments).

 

-Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.

 

-Revise and evaluate credit risk. Review and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments. Credit renewal and revisions are subject to similar processes.
Consolidated Financial Statements December 2013 / Banco Santander Chile 145
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

When preparing a credit request for a corporate customer, the Bank verifies several parameters such as debt service capacity (generally including future cash flows), the customer's financial records and/or projections for their economic sector. The risk division is closely involved in this process. All applications include an analysis of the customer’s strengths and weaknesses, as well as a risk classification and a recommendation. Credit limits are not established over customers’ outstanding balances but on the direct and indirect credit risk of the financial group. For example, a corporation would be evaluated together with subsidiaries and affiliates.

 

Consumer loans are evaluated and approved by their respective risk divisions (individual, SME), and the evaluation process is based on an evaluation system known as Garra (Banco Santander) and Syseva (Santander Banefe). Both of these processes are decentralized, automated, and based on a scoring system that includes the credit risk policies adopted by the Bank’s Board. The loan application process is based on a collection of information to determine the customer’s financial condition and payment capacity. The parameters used to assess the credit risk of the applicant include different variables such as income levels, duration of current job, indebtedness, reports from credit reporting agencies, etc.

 

-Provide advice, training, and specialized knowledge to the business units in order to promote the Bank’s best practices in credit risk management.

 

Mitigation of credit risk of other financial assets (investments, derivatives, commitments)

 

As a part of the acquisition process of financial investments and financial instruments, the Bank examines the probability of uncollectability from issuers or counterparties, using internal and external evaluations, such as risk evaluators that are independent from the Bank. The Bank is also governed by a strict and conservative policy which ensures that the issuers of its investments and the counterparties in derivative transactions are highly reputable.

 

In addition, the Bank holds a variety of instruments which imply credit risk, but are not reflected in the Consolidated Statement of Financial Position, such as: guarantees and bonds, documentary letters of credit, performance bonds, and commitments to grant loans.

 

Guarantees and bonds represent an irrevocable payment obligation. If a guaranteed customer fails to meet their obligations to third parties secured by the Bank, the Bank will make the relevant payments; hence, these transactions imply the same credit risk exposure as an ordinary loan.

 

Documentary letters of credit are commitments documented by the Bank on behalf of customers, which are secured by the shipped merchandise to which they relate, and hence, have a lower risk than direct indebtedness. Performance bonds are contingent commitments which become enforceable only if the customer fails to carry out the work agreed upon with a third party who is secured by such performance bonds.

 

In the case of loan commitments, the Bank is potentially exposed to losses for an amount equivalent to the amount unused of the commitment. However, the expected loss amount is lower than the commitment’s unused amount. The Bank controls the maturity term of credit lines since generally, long-term obligations have a larger credit risk than short-term ones.

 

Maximum credit risk exposure

 

For financial assets recorded in the Consolidated Statements of Financial Position, risk exposure equals their book amount. For financial guarantees granted, the maximum exposure to credit risk equals the maximum amount the Banks would have to pay if the financial guaranty was executed.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 146
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Below is the distribution by financial asset of the Bank’s maximum exposure to credit risk as of December 31, 2013 and 2012, without deduction of collateral or credit improvements received:

 

      As of December 31 
      2013   2012 
      Amount of
exposure
   Amount of
exposure
 
   Note  MCh$   MCh$ 
            
Cash and deposits in banks  5   1,571,810    1,250,414 
Cash items in process of collection  5   604,077    520,267 
Trading investments  6   287,567    338,287 
Investments under resale agreements  7   17,469    6,993 
Financial derivative contracts  8   1,494,018    1,293,212 
Loans and accounts receivable from customers and interbank loans, net  9 and 10   20,452,416    18,416,484 
Available for sale investments  12   1,700,993    1,826,158 
              
Off-balance commitments:             
Letters of credit issued  24   218,032    199,420 
Foreign letters of credit confirmed  24   127,600    113,878 
Guarantees  24   1,212,799    1,046,114 
Available credit lines  24   5,141,831    4,933,335 
Personal guarantees  24   181,416    139,059 
Other irrevocable credit commitments  24   47,376    63,828 
Total      33,057,404    30,147,449 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 147
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Credit quality is classified as described in the SBIF’s Compendium of Standards as of December 31, 2013 and 2012:

 

   December 31 
Category  2013   2012 
Commercial  Individual   Percentage   Allowance   Percentage   Individual   Percentage   Allowance   Percentage 
Portfolio  MCh$   %   MCh$   %   MCh$   %   MCh$   % 
                                 
A1   381,551    1.81%   135    0.02%   169,601    0.89%   59    0.01%
A2   2,013,820    9.56%   1,323    0.22%   1,945,252    10.26%   1,249    0.23%
A3   2,730,837    12.97%   2,923    0.48%   2,531,416    13.35%   2,650    0.48%
A4   2,115,403    10.04%   15,823    2.60%   1,587,998    8.37%   12,230    2.22%
A5   838,697    3.98%   13,712    2.25%   701,917    3.70%   12,356    2.25%
A6   443,059    2.10%   11,981    1.97%   335,676    1.77%   13,972    2.54%
B1   181,676    0.86%   8,061    1.33%   133,240    0.70%   5,699    1.04%
B2   80,513    0.38%   4,229    0.70%   77,411    0.41%   4,714    0.86%
B3   77,940    0.37%   10,430    1.72%   41,266    0.22%   5,393    0.98%
B4   33,922    0.16%   5,318    0.87%   35,980    0.19%   7,331    1.33%
C1   56,040    0.27%   1,121    0.18%   45,104    0.24%   902    0.16%
C2   46,996    0.22%   4,700    0.77%   30,796    0.16%   3,080    0.56%
C3   20,780    0.10%   5,195    0.85%   34,685    0.18%   8,672    1.58%
C4   43,109    0.21%   17,243    2.83%   28,246    0.15%   11,298    2.05%
C5   61,246    0.29%   39,811    6.54%   36,545    0.19%   23,754    4.32%
C6   64,755    0.31%   58,279    9.59%   46,246    0.24%   41,622    7.57%
Subtotal   9,190,344    43.63%   200,284    32.92%   7,781,379    41.02%   154,981    28.18%

 

   Group   Percentage   Allowance   Percentage   Group   Percentage   Allowance   Percentage 
   MCh$   %   MCh$   %   MCh$   %   MCh$   % 
Commercial                                        
Normal portfolio   2,237,256    10.62%   30,864    5.07%   2,380,961    12.55%   33,821    6.15%
Impaired portfolio   400,101    1.90%   69,306    11.39%   417,254    2.20%   62,117    11.29%
Subtotal   2,637,357    12.52%   100,170    16.46%   2,798,215    14.75%   95,938    17.44%
Mortgage                                        
Normal portfolio   5,302,411    25.18%   15,701    2.58%   5,042,551    26.59%   17,485    22.99%
Impaired portfolio   323,401    1.54%   27,605    4.54%   229,030    1.21%   18,505    24.85%
Subtotal   5,625,812    26.72%   43,306    7.12%   5,271,581    27.80%   35,990    47.84%
Consumer                                        
Normal portfolio   3,257,836    15.47%   112,468    18.49%   2,722,492    14.36%   126,493    3.18%
Impaired portfolio   349,412    1.66%   152,117    25.01%   392,985    2.07%   136,766    3.36%
Subtotal   3,607,248    17.13%   264,585    43.50%   3,115,477    16.43%   263,259    6.54%
Total   21,060,761    100.00%   608,345    100.00%   18,966,652    100.00%   550,168    100.00%

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 148
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Regarding the individually evaluated portfolio, the different categories and levels within each category correspond to:

 

-Category A or Normal Portfolio. Consists of debtors with a payment capacity that allows them to fulfill their financial obligations and commitments and who, according to their financial situation, are not likely to experience a change in this condition in the short term.

 

-Category B or Substandard Portfolio. Includes debtors with financial difficulties or whose payment capacity has been diminished and about whom the Bank has considerable doubts about the total reimbursement of the capital and interest according to the agreed terms, showing they have a mess likelihood of meeting their financial obligations in the short term.

 

-Category C or Default Portfolio.  Consists of those debtors where the Bank considers the ability of reimbursement remote since they have an impaired or null payment capacity.

 

Regarding the portfolios evaluated on a group basis, all of the associated operations are evaluated together.

 

See Note 32 for the detail of the Bank’s impaired loans and the associated allowances. Also, see Note 21 for a detail of the maturity of the Bank’s financial assets.

 

Exposure to credit risk in foreign derivative contracts

 

As of December 31, 2013, the Bank’s foreign exposure -including counterparty risk in the derivative instruments’ portfolio- was USD 991 million or 1.9% of assets. In the table below, exposure to derivative instruments is calculated by using the equivalent credit risk; which equals the replacement carrying amount plus the maximum potential value, considering the cash collateral that minimizes exposure.

 

Below, there are additional details regarding our exposure to Spain and Italy, since they are classified above 1 and where most of our exposure to categories other than 1 is. We do not have sovereign exposure to Spain or Italy. Below we detail exposure to Italy and Spain as of December 31, 2013, considering fair value of derivative instruments.

 

Country  Classification
(1)
   Derivative Instruments
(adjusted to market)
USD MM
   Deposits
USD MM
   Loans
USD MM
   Financial
investments
USD MM
   Total
Exposure
USD MM
 
Spain   2    0,28    8,56    0,04    -    8,88 
Italy   2    66,40    4,04    0,84    -    71,28 
Other   2    5,08    0,17    0,98    -    6,23 
Total        71,76    12,77    1,86    -    86,39 

(1) Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.

 

*The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, the net credit exposure is USD 0

 

Our exposure to Spain within the group is as follows:

Counterpart  Country  Classification   Derivative instruments (market
adjusted)
USD MM
   Deposits
USD MM
   Loans
USD
MM
   Financial
Investments
USD MM
   Exposure
Exposure
USD MM
 
Banco Santander España  Spain   2    0,28    8,56    -    -    8,84 

  

*The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, the net credit exposure is USD 0.28

 

**We have included our exposure to Santander branches in New York and Hong Kong as exposure to Spain.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 149
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Impairment of other financial instruments

 

As of December 31, 2013 and 2012, the Bank had no significant impairments of its financial assets other than loans and accounts receivable

 

Security interests and credit improvements

 

The maximum exposure to credit risk is reduced in some cases by security interests, credit improvements, and other actions which mitigate the Bank’s exposure. Based on the foregoing, the creation of security interests are a necessary but not a sufficient condition for granting a loan; accordingly, the Bank’s acceptance of risks requires the verification of other variables and parameters, such as the ability to pay or generate funds in order to mitigate the risk being taken on.

 

Procedures for management and valuation of securities are described in the internal policies of risk management. Said policies set the basic principles for credit risk management, including the management of securities received in customers’ operations. In this sense, the risk management model includes valuating the existence of adequate and sufficient guarantees that allow recovering the credit when the debtor’s circumstances prevent them from fulfilling their obligations.

 

The procedures used for the valuation of security interests utilize the prevailing market practices, which provide for the use of appraisals for mortgage securities, market prices for stock securities, fair value of the participating interest for investment funds, etc. All security interests received must be instrumented properly and registered on the relevant register, as well as have the approval of legal divisions of the Bank.

 

In addition, the Bank has classification tools that allow it to group the credit quality of transactions or customers. To study how this probability varies, the Bank has historical databases that keep this internally generated information. Classification tools vary according to the analyzed customer (commercial, consumer, SMEs, etc.).

 

Below is the detail of security interests, collateral, or credit improvements provided to the Bank as of December 31, 2013 and 2012.

 

   As of December 31 
   2013   2012 
   MCh$   MCh$ 
Non-impaired financial assets:          
Properties/mortgages   12,701,836    11,462,572 
Investments and others   1,347,770    869,036 
Impaired financial assets:          
Properties/ mortgages   663,889    1,145,721 
Investments and others   27,810    105,903 
Total   14,741,305    13,583,232 

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 150
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Liquidity risk

 

Liquidity risk is the risk that the Bank may have difficulty meeting the obligations associated with its financial obligations.

 

Liquidity risk management

 

The Bank is exposed on a daily basis to requirements for cash funds from various banking activities, such as wires from checking accounts, fixed-term deposit payments, guarantee payments, disbursements on derivatives transactions, etc. As typical in the banking industry, the Bank does not hold cash funds to cover the balance of all the positions, as experience shows that only a minimum level of these funds will be withdrawn, which can be accurately predicted with a high degree of certainty.

 

The Bank’s approach to liquidity management is to ensure— whenever possible—to have enough liquidity on hand to fulfill its obligations at maturity, in both normal and stressed conditions, without entering into unacceptable debts or risking the Bank’s reputation. The Board establishes limits on the minimal part of available funds close to maturity to fulfill said payments as well as over a minimum level of interbank operations and other loan facilities that should be available to cover transfers at unexpected demand levels. This is constantly reviewed. Additionally, the Bank must comply with the regulation limits established by the SBIF for maturity mismatches.

 

These limits affect the mismatches of future flows of income and expenditures of the Bank on an individual basis. They are:

 

i. mismatches of up to 30 days for all currencies, up to the amount of basic capital;

ii. mismatches of up to 30 days for foreign currencies, up to the amount of basic capital; and

iii. mismatches of up to 90 days for all currencies, twice the basic capital.

 

The Bank’s treasury department (“Treasury”) receives information from all business units about the liquidity profile of its financial assets and liabilities in addition to details from other future cash flows that arise from future business transactions. Based on this information, Treasury keeps a short-term liquid assets portfolio, mainly composed of liquid investments, interbank loans, and advanced payments, to guarantee that the Bank has enough liquidity. Liquidity needs of business units are fulfilled through short-term transfers from Treasury to cover any short-term variation and long-term financing to address all structural liquidity requirements.

 

The Bank monitors its liquidity position daily to establish future flows of inflow and outflow. At each month's closing, stress tests are carried out in which a variety of scenarios are used, from normal market conditions to those that contain significant fluctuations. Liquidity policy and procedures are subjected to review and approval of the Bank’s Board. There are periodic reports which detail the Bank’s, and its subsidiaries’, liquidity position, including any exceptions and adopted correcting measures, which are also reviewed periodically by the ALCO.

 

The Bank relies on customer (retail) and institutional deposits, obligations to banks, debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits have maturities of more than one year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short-term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk through continual supervision of the market trends and price management.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 151
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Exposure to liquidity risk

 

A similar, yet not identical, measure is the calculation used to measure the Bank´s liquidity limit as established by the SBIF. The Bank determines a mismatch percentage for purposes of calculating such liquidity limit which is calculated by dividing its benefits (assets) by its obligations (liabilities) according to maturity based on estimated repricing. The mismatch amount permitted for the 30 day and under period is 1 times [regulatory] capital and for the 90 day and under period – 2 times [regulatory] capital.

 

The following table displays the actual derived percentages as calculated per above:

 

   As of December 31, 
   2013   2012 
   %   % 
30 days   30.00    51.00 
30 days foreign currency   (22.00)   3.00 
90 days   31.00    29.00 

 

Next, is the breakdown by maturity, of the asset and liability balances of the Bank as of December 31, 2013 and 2012, which also includes off-balance commitments:

 

  Demand   Up to 
1 month
   Between 1
 and 3 
months
   Between 3
 and 12
months
   Between 1
and 5 years
   More than
 5 years
   Total 
 As of December 31, 2013  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Maturity of assets (Note 21)   2,950,498    2,647,295    2,190,406    4,387,042    7,412,088    7,149,366    26,736,695 
Maturity of liabilities (Note 21)   (6,106,601)   (6,238,544)   (3,346,439)   (3,766,394)   (2,328,605)   (2,365,728)   (24,152,311)
Net maturity   (3,156,103)   (3,591,249)   (1,156,033)   620,648    5,083,483    4,783,638    2,584,384 
Off-balance commitments:                                   
Personal guarantees   -    (7,745)   (9,292)   (137,269)   (19,001)   (8,109)   (181,416)
Foreign letters of credit confirmed   -    (17,347)   (50,984)   (24,639)   (26,543)   (8,087)   (127,600)
Letters of credit issued   -    (48,634)   (101,181)   (46,210)   (22,007)   -    (218,032)
Guarantees   -    (128,171)   (145,878)   (493,530)   (419,414)   (25,806)   (1,212,799)
                                    
Net maturity, including commitments   (3,156,103)   (3,793,146)   (1,463,368)   (81,000)   4,596,518    4,741,636    844,537 

 

  Demand   Up to
1 month
   Between 1
and 3
months
   Between 3
and 12
months
   Between 1
and 5
years
   More than
5
years
   Total 
As of December 31, 2012  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Maturity of assets (Note 21)   2,954,752    1,353,187    2,081,752    3,969,599    7,060,705    6,781,988    24,201,983 
Maturity of liabilities (Note 21)   (5,396,782)   (5,423,233)   (2,740,256)   (3,219,159)   (3,236,072)   (2,003,864)   (22,019,366)
Net maturity   (2,442,030)   (4,070,046)   (658,504)   750,440    3,824,633    4,778,124    2,182,617 
Off-balance commitments:                                   
Personal guarantees   -    (23,315)   (24,201)   (22,051)   (65,571)   (3,921)   (139,059)
Foreign letters of credit confirmed   -    (4,786)   (22,127)   (40,870)   (46,095)   -    (113,878)
Letters of credit issued   -    (520,56)   (103,153)   (6,351)   (37,860)   -    (199,420)
Guarantees   -    (82,428)   (136,561)   (312,299)   (488,770)   (26,056)   (1,046,114)
                                    
Net maturity, including commitments   (2,442,030)   (4,232,631)   (944,546)   368,869    3,186,337    4,748,147    684,146 

 

The tables above show cash flows without deducting financial assets and liabilities over the estimated maturity base. Future cash flows from these instruments might vary significantly compared to this analysis. For example, we expect that demand deposits remain stable or grow steadily and we do not expect to execute all unrecognized loan obligations. In addition, the above detail excludes available credit lines since they do not have contractually defined maturities.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 152
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Market risk

 

Market risk arises as a consequence of the market activity, by means of financial instruments whose value can be affected by market variations, reflected in different assets and financial risk factors. The risk can be diminished by means of hedging through other products (assets/liabilities or derivative instruments) or terminating the open transaction/position. The objective of market risk management is to manage and control market risk exposure within acceptable parameters.

 

There are four major risk factors that affect the market prices: type of interest, type of exchange, price, and inflation. In addition and for certain positions, it is necessary to consider other risks as well, such as spread risk, base risk, commodity risk, volatility or correlation risk.

 

Market risk management

 

The Bank’s internal management measure market risk based mainly on the procedures and standards of Santander Spain, which are in turn based on analysis of management in three principal components:

 

-trading portfolio;
-domestic financial management portfolio;
-foreign financial management portfolio.

 

The trading portfolio is comprised mainly of investments, valued at fair value, and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intent of selling them in the short term in order to benefit from short-term price fluctuations. The financial management portfolios include all the financial investments not considered a part of trading portfolio.

 

The ALCO has the general responsibility for the market risk. The Bank’s risk/finance department is responsible for formulating detailed management policies and applying them to the Bank’s operations, in conformity with the guidelines adopted by the ALCO and the Global Risk Department of Banco Santander – Spain.

 

The department’s functions in connection with trading portfolio include the following: 

 

i.apply the “Value at Risk” (VaR) techniques to measure interest rate risk,
ii.adjust the trading portfolios to market and measure the daily income and loss from commercial activities,
iii.compare the real VaR with the established limits,
iv.establish procedures to prevent losses in excess of predetermined limits, and
v.furnish information on the trading activities to the ALCO, other members of the Bank’s management, and the Global Risk Department of Santander – Spain.

 

The department’s functions in connection with financial management portfolios include the following: 

 

i.perform sensitivity simulations (as explained below) to measure interest rate risk for activities denominated in local currency and the potential losses forecasted by these simulations, and
ii.provide daily reports thereon to the ALCO, other members of the Bank’s management, and the Global Risk Department of Santander - Spain.

 

Market risk - trading portfolio

 

The Bank applies VaR methods to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position that is made up of fixed income investments, foreign exchange trading, and a minimum position of investments in equity shares. This portfolio is mostly made of Chilean Central Bank bonds, mortgage bonds and corporate bonds issued locally at low risk. At the closing date, the trading portfolio did not show investments in another portfolio.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 153
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

For the Bank, the VaR estimate is done through the historical simulation method which consists of observing the behavior of profit and loss that might have taken place with the current portfolio if the market conditions at a given time had been present and, based on that information, infer maximum losses with a determined confidence level. This method has the advantage of reflecting precisely the historical distribution of market values and not requiring any distribution assumption for a specific probability. All VaR measures are designed to establish the distribution function for the value change in a given portfolio and, once this distribution is known, to calculate the percentile related to the necessary confidence level, which will match the risk value in virtue of those parameters. As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value of a given portfolio in one day, with 99.00% confidence. It is the maximum loss in one day the Bank could expect in a given portfolio with a confidence level of 99.00%. In other words, it is the loss the Bank would have to deal only 1.0% of the time. VaR provides a single estimation of the market risk that cannot be compared with other market risks. Returns are calculated using a time window of 2 years or, at least, 520 data points gathered since the reference date in the past to calculate VaR.

 

The Bank does not calculate three separate VaRs. Only one VaR is calculated for the entire trading portfolio which, in addition, is separated into risk types. The VaR program carries out a historical simulation and calculates a profit (ganancia or “G”) and loss (pérdida or “P”) G&P Statement for 520 data points (days) for each risk factor (fixed income, currency, and variable income). Each risk factor’s G&P is added and a consolidated VaR is calculated with 520 data points or days. In addition, the VaR is calculated for each risk factor based on the individual G&P calculated for each. Additionally, a weighted VaR is calculated following the above mentioned method but giving a larger weight to the 30 most recent data points. The highest VaR is reported. In 2011 and 2010, we were still using the same VaR model and the methodology has not changed.

 

The Bank uses VaR estimates to issue a warning in case the statistically estimated losses for the trading portfolio exceed the cautionary levels.

 

Limitations of the VaR model

 

When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.

 

It is necessary to define a valuation function fj(xi) for each instrument j, preferably the same one used to calculate the market value and income of the daily position. This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.

 

In addition, the VaR methodology should be interpreted taking into consideration the following limitations:

 

-Changes in market rates and prices may not be independent and identically distributed random variables, and may not have a normal distribution. In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;

 

-The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate. In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;

 

-A 1-day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day. It would not be possible to liquidate or cover all the positions in a single day;

 

-The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;

 

-The use of a 99% level of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and

 

-A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 154
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

At no time in 2013 and 2012 did the Bank exceed the VaR limits in connection with the three components which comprise the trading portfolio: fixed-income investments, variable-income investments and foreign currency investments.

 

The Bank carries out back-testings on a daily basis and, generally, discovers that trading losses exceed the estimated VaR almost one out hundred business days. Also, a maximum VaR limit was established that can be applied over the trading portfolio. Both in 2013 and 2012, the Bank has kept within the maximum limit it established for the VaR; even when the real VaR exceeded estimations.

 

High, low and average levels for each component and year were as follows:

 

VaR  2013
USDMM
   2012
USDMM
 
Consolidated:          
High   3,48    4,62 
Low   1,061    0,96 
Average   1,72    2,33 
           
Fixed-income investments:          
High   2,39    4,99 
Low   0,97    0,95 
Average   1,57    2,24 
           
Variable-income investments          
High   0,19    0,07 
Low   0,00    0,00 
Average   0,00    0,00 
           
Foreign currency investments          
High   3,20    3,23 
Low   0,06    0,03 
Average   0,69    0,66 

 

Market risk - local and foreign financial management

 

The Bank’s financial management portfolio includes most of the Bank’s non-trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.

 

The Bank uses a sensitivity analysis to measure market risk for domestic and foreign currencies (not included in the trading portfolio). The Bank carries out a simulation of scenarios that will be calculated as the difference between current flows in the chosen scenario (curve with a parallel movement of 100 basis points (“bp”) in all its sections) and its value in the base scenario (current market). All positions in domestic currency indexed to inflation (UF) are adjusted by a sensitivity factor of 0.57 which represents a change in the curve of 57bp in all real rates and 100 bp in nominal rates. The same scenario is carried out for net positions in foreign currency and interest rates in USD. In addition, the Bank has established limits regarding maximum loss this kind of movement in interest rates can have over capital and net financial income budgeted for the year.

 

To establish the consolidated limit, we add the foreign currency limit to the domestic currency limit and multiple by 2 the sum of the multiplication of them together both for net financial loss limit as well as for the capital and reserves loss limit, using the following formula:

 

Consolidated limit = square root of a2 + b2 + 2ab

a: domestic currency limit

b: foreign currency limit

Since we assume the correlation is 0; 2ab = 0. 2ab = 0.

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 155
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

Limitations of the sensitivity models

 

The most important assumption is using an exchange rate of 100 bp based on yield curve (57 bp for real rates). The Bank uses a 100 bp exchange since sudden changes of this magnitude are considered realistic. Santander Spain Global Risk Department has also established comparable limits by country, so as to compare, control and consolidate market risk by country in a realistic and orderly fashion.

 

In addition, the sensitivity simulation methodology should be interpreted taking into consideration the following limitations:

 

-The simulation of scenarios assumes that the volumes remain consistent in the Bank’s Consolidated Statements of Financial Position and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.

 

-This model assumes an identical change along the entire length of the yield curve and does not take into account the different movements for different maturities.

 

-The model does not take into account the volume sensitivity which results from interest rate changes.

 

-The limits to losses of budgeted financial income are calculated based on the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.

 

Market risk – Financial management portfolio – December 31, 2013 and 2012

 

   2013   2012 
   Effect on
financial
income
   Effect on
capital
   Effect on
financial
income
   Effect on
capital
 
                 
Financial management portfolio – local currency (MCh$)                
Loss limit   35,500    167,530    37,300    167,530 
High   28,923    86,196    26,233    100,175 
Low   21,129    69,729    13,885    85,546 
Average   25,124    77,849    20,054    92,312 
Financial management portfolio – foreign currency (in millions of $US)                    
Loss limit   30    30    40,0    40,0 
High   17    26    24,3    14,7 
Low   2    2    3,7    4,5 
Average   10    19    12,8    11,7 
Financial management portfolio – consolidated (in MCh$)                    
Loss limit   35,500    167,530    39,200    167,530 
High   28,958    86,212    26,437    100,201 
Low   21,204    69,787    17,037    85,566 
Average   25,146    77,891    21,165    92,457 

 

Operating risk

 

Operating risk is the risk of direct or indirect losses stemming from a wide variety of causes related to the Bank’s processes, personnel, technology, and infrastructure, as well as external factors other than credit, market, or liquidity, such as those related to legal or regulatory requirements. Operating risks arise from all the Bank’s operations.

 

The Bank’s objective is to manage operating risk in order to mitigate economic losses and damage to the Bank’s reputation through a flexible internal control structure.

 

The Bank’s management has the main responsibility to develop and apply controls to mitigate operating risks. This responsibility is supported by the global development of the Bank’s standards for operating risk management in the following areas:

 

-Requirements for adequate segregation of duties, including independent authorization of transactions
-Requirements for reconciliation and supervision of transactions

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 156
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2013 AND 2012

NOTE 40

RISK MANAGEMENT, continued:

 

-Compliance with the applicable legal and regulatory requirements
-Documentation of controls and procedures
-Requirements for periodic evaluation of applicable operating risks and improvement of the controls and procedures to address the risks that are identified
-Requirements for disclosure of operating losses and the proposed corrective measures
-Development of contingency plans
-Training and professional development
-Adoption of ethical business standards
-Reduction or mitigation of risks, including acquisition of insurance policies if they are effective

 

Compliance with the Bank’s standards is supported by a program of periodic reviews conducted by the Bank’s internal audit unit, whose results are internally submitted to the management of the business unit that was examined and to the CDA.

 

Risk Concentration

 

The Bank operates mainly in Chile, thus most of its financial instruments are concentrated in that country. See Note 10 of the financial statements for a detail of the concentration of the Bank’s loans and accounts receivable by industry.

 

NOTE 41

SUBSEQUENT EVENTS

 

In January 2014, a bond was issued for CHF 300,000,000, with an interest rate of 1% and a maturity date on July 31, 2017.

 

Between January 1, 2014 and the date on which these Consolidated Financial Statements were issued (January 20, 2014), no other events have occurred which could significantly affect their interpretation.

 

FELIPE CONTRERAS FAJARDO

Accounting Manager

 

CLAUDIO MELANDRI HINOJOSA

Chief Executive Officer

 

Consolidated Financial Statements December 2013 / Banco Santander Chile 157