---

 

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

 

 

IMPORTANT NOTICE

 

The audited financial statements included in this 6K have been prepared in accordance with the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF) of Chile. The accounting principles issued by the SBIF are substantially similar to IFRS, but there are some exceptions.  The SBIF is the banking industry regulator that according to article 15 of the General Banking Law, establishes the accounting principles to be used by the banking industry. For those principles not covered by the Compendium of Accounting Standards, banks can use generally accepted accounting principles issued by the Chilean Accountant’s Association AG and which coincides with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In the event that discrepancies exist between the accounting principles issued by the SBIF (Compendium of Accounting Standards) and IFRS, the Compendium of Accounting Standards will take precedence. The Notes to the audited 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. These notes provide a narrative description of such statements in a clear, reliable and comparable manner.

 

 

 

 

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: April 6, 2015

 

 

 

 

Exhibit 99.1

 

 

 

CONTENT

 

Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION	3
CONSOLIDATED STATEMENTS OF INCOME	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY	6
CONSOLIDATED STATEMENTS OF CASH FLOW	7
Notes to the Consolidated Financial Statements
NOTE 01  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9
NOTE 02  SIGNIFICANT EVENTS	38
NOTE 03  OPERATING SEGMENTS	41
NOTE 04  CASH AND CASH EQUIVALENTS	45
NOTE 05  TRADING INVESTMENTS	46
NOTE 06  INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS	47
NOTE 07  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING	50
NOTE 08  INTERBANK LOANS	57
NOTE 09  LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS	58
NOTE 10  AVAILABLE FOR SALE INVESTMENTS	65
NOTE 11  INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES	69
NOTE 12  INTANGIBLE ASSETS	71
NOTE 13  PROPERTY, PLANT, AND EQUIPMENT	73
NOTE 14  CURRENT AND DEFERRED TAXES	76
NOTE 15  OTHER ASSETS	81
NOTE 16  TIME DEPOSITS AND OTHER TIME LIABILITIES	82
NOTE 17  INTERBANK BORROWINGS	83
NOTE 18  ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES	85
NOTE 19  MATURITY OF ASSETS AND LIABILITIES	92
NOTE 20  PROVISIONS	94
NOTE 21  OTHER LIABILITIES	96
NOTE 22  CONTINGENCIES AND COMMITMENTS	97
NOTE 23  EQUITY	99
NOTE 24  CAPITAL REQUIREMENTS (BASEL)	102
NOTE 25  NON-CONTROLLING INTEREST	104
NOTE 26  INTEREST INCOME AND INFLATION-INDEXATION ADJUSTMENTS	107
NOTE 27  FEES AND COMMISSIONS	109
NOTE 28  PROFIT AND LOSS FROM FINANCIAL OPERATIONS	110
NOTE 29  NET FOREIGN EXCHANGE GAIN (LOSS)	111
NOTE 30  PROVISION FOR LOAN LOSSES	112
NOTE 31  PERSONNEL SALARIES AND EXPENSES	113
NOTE 32  ADMINISTRATIVE EXPENSES	114
NOTE 33  DEPRECIATION, AMORTIZATION, AND IMPAIRMENT	115
NOTE 34  OTHER OPERATING INCOME AND EXPENSES	116
NOTE 35  TRANSACTIONS WITH RELATED PARTIES	117
NOTE 36  PENSION PLANS	121
NOTE 37  FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES	124
NOTE 38  RISK MANAGEMENT	141
NOTE 39  SUBSEQUENT EVENTS	142

 

 

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, 2014 and 2013, 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.

 

Auditor's 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 © refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www2.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

 

Deloitte Touche Tohmatsu Limited is a private company limited by guarantee incorporated in England & Wales under company number 07271800, and its registered office is Hill House, 1 Little New Street, London, EC4A 3TR, United Kingdom.

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, 2014 and 2013, 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 11 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 26, 2015

Santiago, Chile

 

Mauricio Farías N.

  

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

				As of December 31,
				2014				2013
		NOTE		MCh$				MCh$
ASSETS
Cash and deposits in banks		4			1,608,888				1,571,810
Cash items in process of collection		4			531,373				604,077
Trading investments		5			774,815				287,567
Investments under resale agreements		6			-				17,469
Financial derivative contracts		7			2,727,563				1,494,018
Interbank loans, net		8			11,918				125,395
Loans and accounts receivables from customers, net		9			22,179,938				20,327,021
Available for sale investments		10			1,651,598				1,700,993
Held to maturity investments					-				-
Investments in associates and other companies		11			17,914				9,681
Intangible assets		12			40,983				66,703
Property, plant, and equipment		13			211,561				180,215
Current taxes		14			2,241				1,643
Deferred taxes		14			282,211				230,215
Other assets		15			493,173				400,025
TOTAL ASSETS					30,534,176				27,016,832
LIABILITIES
Deposits and other demand liabilities		16			6,480,497				5,620,763
Cash items in process of being cleared		4			281,259				276,379
Obligations under repurchase agreements		6			392,126				208,972
Time deposits and other time liabilities		16			10,413,940				9,675,272
Financial derivative contracts		7			2,561,384				1,300,109
Interbank borrowing		17			1,231,601				1,682,377
Issued debt instruments		18			5,785,112				5,198,658
Other financial liabilities		18			205,125				189,781
Current taxes		14			1,077				50,242
Deferred taxes		14			7,631				25,088
Provisions		20			310,592				236,232
Other liabilities		21			220,853				198,777
TOTAL LIABILITIES					27.891.197				24,662,650
EQUITY
Attributable to the Bank’s shareholders:					2,609,896				2,325,678
Capital		23			891,303				891,303
Reserves		23			1,307,761				1,130,991
Valuation adjustments		23			25,600				(5,964	)
Retained earnings					385,232				309,348
Retained earnings from prior years					-				-
Income for the period					550,331				441.926
Minus:  Provision for mandatory dividends		23			(165,099	)			(132.578	)
Non-controlling interest		25			33,083				28,504
TOTAL EQUITY					2.642.979				2,354,182
TOTAL LIABILITIES AND EQUITY					30,534,176				27,016,832

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the years ended

 

				For the years ended December 31,
				2014				2013
		NOTE		MCh$				MCh$
OPERATING INCOME
Interest income		26			2,227,018				1,871,204
Interest expense		26			(909,914	)			(794,442	)
Net interest income					1,317,104				1,076,762
Fee and commission income		27			366,729				346,120
Fee and commission expense		27			(139,446	)			(116,284	)
Net fee and commission income					227,283				229,836
Net profit (loss)  from financial operations (net trading profit/ loss)		28			(151,323	)			(28,613	)
Net foreign exchange gain (loss)		29			272,212				144,726
Other operating income		34			14,834				20,508
Net operating profit before provision for loan losses					1,680,110				1,443,219
Provision for loan losses		30			(374,431	)			(364,031	)
NET OPERATING PROFIT					1,305,679				1,079,188
Personnel salaries and expenses		31			(338,888	)			(308,344	)
Administrative expenses		32			(205,149	)			(188,191	)
Depreciation and amortization		33			(44,172	)			(61,074	)
Impairment of property, plant, and equipment		33			(36,664	)			(244	)
Other operating expenses		34			(81,108	)			(62,351	)
Total operating expenses					(705,981	)			(620,204	)
OPERATING INCOME					599,698				458,984
Income from investments in associates and other companies		11			2,165				79,544
Income before tax					601,863				538,528
Income tax expense		14			(45,552	)			(94,467	)
NET INCOME FOR THE YEAR					556,311				444,061
Attributable to:
Equity holders of the Bank					550,331				441,926
Non-controlling interest		25			5,980				2,135
Earnings per share attributable to equity holders of the Bank :
(expressed in Chilean pesos)
Basic earnings		23			2.920				2.345
Diluted earnings		23			2.920				2.345

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended

 

				December 31,
				2014				2013
		NOTE		MCh$				MCh$
NET INCOME FOR THE YEAR					556,311				444,061
OTHER COMPREHENSIVE INCOME  - ITEMS WHICH MAY  BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS
Available for sale investments		10			20,844				10,857
Cash flow hedge		23			18,982				(13,572	)
Other comprehensive income which may be reclassified subsequently to profit or loss, before tax taxes					39,826				(2,715	)
Income tax related to items which may be reclassified subsequently to profit or loss		14			(8,289	)			543
Other comprehensive income for the year which may be reclassified subsequently to profit or loss, net of tax					31,537				(2,172	)
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS					-				-
TOTAL COMPREHENSIVE INCOME FOR THE YEAR					587,848				441,889
Attributable to:
Equity holders of the Bank					581,895				439,743
Non-controlling interests		25			5,953				2,146

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2014 and 2013

 

						RESERVES								VALUATION ADJUSTMENTS												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, 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
Dividends distributions/ withdrawals made			-				-				-				-				-				-				(232,780	)			-				116,486				(116,294	)			(7,907	)			(124,201	)
Own shares transactions (1)							29				-				-				-				-				-				-				-				29				-				29
Transfer of retained earnings to reserves			-				155,502				-				-				-				-				(155,502	)			-				-				-				-				-
Provision for mandatory dividends			-				-				-				-				-				-				-				-				(132,578	)			(132,578	)			-				(132,578	)
Subtotal			-				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
Subtotal			-				-				-				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
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
Distribution of income from previous period			-				-				-				-				-				-				411,926				(411,926	)			-				-				-				-
Equity as of January 1, 2014			891,303				1,133,215				(2,224	)			802				(8,257	)			1,491				411,926				-				(132,578	)			2,325,678				28,504				2,354,182
Increase or decrease of capital and reserves			-				-				-				-				-				-				-				-				-				-				(1,374	)			(1,374	)
Dividends distributions/ withdrawals made			-				-				-				-				-				-				(265,156	)			-				132,578				(132,578	)			-				(132,578	)
Own shares transactions (1)			-				-				-				-				-				-				-				-				-				-				-				-
Transfer of retained earnings to reserves			-				176,770				-				-				-				-				(176,770	)			-				-				-				-				-
Provision for mandatory dividends			-				-				-				-				-				-				-				-				(165,099	)			(165,099	)			-				(165,099	)
Subtotal			-				176,770				-				-				-				-				(441,926	)			-				(32,521	)			(297,677	)			(1,374	)			(299,051	)
Other comprehensive income			-				-				-				20,878				18,982				(8,296	)			-				-				-				31,564				(27	)			31,537
Income for the year			-				-				-				-				-				-				-				550,331				-				550,331				5,980				556,311
Subtotal			-				-				-				20,878				18,982				(8,296	)			-				550,331				-				581,895				5,953				587,848
Equity as of December 31, 2014			891,303				1,309,985				(2,224	)			21,680				10,725				(6,805	)			-				550,331				(165,099	)			2,609,896				33,083				2,642,979

(1)

Corresponds to the profit on sale of own shares received in lieu of payment, see Note 23 - Equity

 

Period		Total attributable to Bank shareholders				Allocated to reserves				Allocated to dividends				Percentage distributed				Number of				Dividend per share
		MCh$				MCh$				MCh$				%				shares				(in pesos)
Year 2013 (Shareholders Meeting April 2014)			441,926				176,770				265,156				60				188,446,126,794				1.407
Year 2012 (Shareholders Meeting April 2013)			387,967				155,187				232,780				60				188,446,126,794				1.235

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

 

				As of December 31,
				2014				2013
		NOTE		MCh$				MCh$
A – CASH FLOWS FROM OPERATING ACTIVITIES:
CONSOLIDATED INCOME BEFORE TAX					601,863				538,528
Debits (credits) to income that do not represent cash flows					(1,009,143	)			(913,207	)
Depreciation and amortization		33			44,172				61,074
Impairment of property, plant, and equipment		34			36,664				244
Provision for loan losses		30			433,408				419,315
Mark to market of trading investments					(11,285	)			(13,711	)
Income from investments in associates and other companies		11			(2,165	)			(1,422	)
Net gain on sale of assets received in lieu of payment		34			(11,100	)			(17,046	)
Provision on assets received in lieu of payment		34			4,045				3,580
Net gain on sale of controlled companies		11			-				(78,122	)
Net gain on sale of property, plant, and equipment		34			(687	)			(176	)
Charge off of assets received in lieu of payment		36			4,694				8,796
Net interest income		26			(1,317,104	)			(1,076,762	)
Net fee and commission income		27			(227,283	)			(229,836	)
Debits (credits) to income that do not represent cash flows					115,240				38,580
Changes in deferred taxes		14			(77,742	)			(27,721	)
Increase/decrease in operating assets and liabilities					698,589				910,101
(Increase) of loans and accounts receivables from customers, net					(1,674,156	)			(1,978,593	)
(Increase) decrease of financial investments					(437,853	)			175,886
Decrease (increase) due to resale agreements (assets)					17,469				(10,476	)
Decrease (increase) of interbank loans					113,477				(34,868	)
(Increase) decrease of assets received or awarded in lieu of payments					(3,346	)			4,053
Increase of debits in customers checking accounts					727,604				397,383
Increase  of time deposits and other time liabilities					738,668				563,059
Increase  of obligations with domestic banks					65,506				500
Increase  of other demand liabilities or time obligations					132,130				253,361
(Decrease) increase of obligations with foreign banks					(516,156	)			244,051
(Decrease) of obligations with Central Bank of Chile					(126	)			(177	)
Increase (decrease) of obligations under repurchase agreements					183,154				(95,145	)
Increase (decrease) in other financial liabilities					15,344				(2,830	)
Net increase of other assets and liabilities					(791,457	)			(421,538	)
Redemption of letters of credit					(29,668	)			(40,231	)
Issuance under mortgage bonds program					36,941				70,339
Senior bond issuances					1,196,273				664,422
Redemption of mortgage bonds and payments of interest					(4,195	)			-
Redemption of senior bonds and payments of interest					(574,507	)			(190,719	)
Interest received					2,235,437				1,905,532
Interest paid					(913,800	)			(729,942	)
Dividends received from investments in other companies		11			119				665
Fees and commissions received		27			366,729				346,120
Fees and commissions paid		27			(139,446	)			(116,284	)
Income tax paid		14			(45,552	)			(94,467	)
Total cash flow provided by operating activities					291,309				535,422

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

 

				For the years ended December 31,
				2014				2013
		NOTE		MCh$				MCh$
B – CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of property, plant, and equipment		13			(59,088	)			(40,789	)
Sales of property, plant, and equipment		13			172				348
Purchases of investments in associates and other companies		11			(6,313	)			(1,440	)
Sales of investments in associates and other companies					-				90,281
Purchases of intangible assets		12			(27,437	)			(18,400	)
Total cash flow (used in) provided by  investment activities					(92,666	)			30,000
C – CASH FLOW FROM FINANCING ACTIVITIES:
From shareholder´s financing activities					(274,042	)			(123,036	)
Issuance of subordinate bonds					-				141,043
Redemption of subordinated bonds and payments of interest					(8,886	)			(31,299	)
Dividends paid					(265,156	)			(232,780	)
From non-controlling interest financing activities					-				(7,907	)
Dividends and/or withdrawals paid					-				(7,907	)
Total cash flow used in financing activities					(274,042	)			(130,943	)
D – NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS DURING THE PERIOD					(75,399	)			434,479
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS					34,893				(20,699	)
F – INITIAL BALANCE OF CASH AND CASH EQUIVALENTS					1,899,508				1,485,728
FINAL BALANCE OF CASH AND CASH EQUIVALENTS		5			1,859,002				1,899,508

 

				For the years ended December 31,
Reconciliation of provisions for the Consolidated Statements of Cash Flows for the years ended				2014				2013
				MCh$				MCh$
Provision for loan losses for cash flow purposes					433,408				419,315
Recovery of loans previously charged off					(58,977	)			(55,284	)
Provision for loan losses – net					374,431				364,031

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

CORPORATE INFORMATION

 

Banco Santander Chile (formerly Banco Santiago) is a banking corporation (limited company) operating under the laws of the Republic of Chile, headquartered at Bandera N°140, Santiago. The corporation provides a broad range of general banking services to its customers, ranging 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, including (but not limited to) factoring, collection, leasing, securities and insurance brokering, mutual and investment fund management, and investment banking.

 

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, 2014 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 the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF), the Chilean regulatory agency. The General Banking Law set out in its article 15 states that, the banks must apply accounting standards established by SBIF. For those issues not covered by the SBIF, the Bank must apply generally accepted standards issued by the Colegio de Contadores de Chile A.G (Association of Chilean Accountants), which agree to International Financial Reporting Standards (IFRS). In the event of discrepancies between the accounting principles and accounting standards issued by the SBIF (Compendium of Accounting Standards), the latter shall prevail.

 

For purposes of these financial statements we use certain terms and conventions. References to “US$”, “U.S. dollars” and “dollars” are to United States dollars, references to “EUR” are to European Economic Community Euro, references to “CNY” are to Chinese Yuan or renminbi, references to “CHF” are to Swiss franc, references to “Chilean pesos”, “pesos” or “Ch$” are to Chilean pesos, and references to “UF” are to Unidades de Fomento. The UF is an inflation-indexed Chilean monetary unit with a value in Chilean pesos that changes daily to reflect changes in the official Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics) for the previous month.

 

The Notes to the Consolidated Financial Statements contain additional information to support the figures 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 for the Period.

 

b)

Basis of preparation for the Consolidated Financial Statements

 

The Consolidated Financial Statements as of December 31, 2014 and 2013, incorporate the financial statements of the Bank entities over which the bank has control (including structured entities); and includes the adjustments, reclassifications and eliminations needed to comply with the accounting and valuation criteria established by IFRS issued by IASB, except in those cases where the SBIF regulations prevail as explained above. 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:

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

·

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 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 in certain circumstances.

 

When necessary, adjustments are made to the financial statements of the subsidiaries to ensure their accounting policies are consistent with the Bank’s accounting policies.

 

All intragroup assets, 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 a loss of control over the subsidiaries are accounted for as equity transactions. The carrying values of the Group’s equity and the non-controlling interests’ equity are adjusted to reflect the changes to 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.

 

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
				Place of		As of December 31,
				Incorporation		2014												2013
				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			-				-				-				-				-				-
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

(*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013, see Note 02 - Significant events.

(**) From May 1, 2014, this entity was absorbed by the Bank, with authorization for this transaction obtained from the SBIF on March 26, 2014.

 

The detail of non-controlling participation on all the remaining subsidiaries can be seen in Note 25 – Non-controlling interest.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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)

-

Multiservicios de Negocios Limitada (call center)

-

Bansa Santander S.A. (management of repossessed assets and leasing of properties)

-

Servicios de Cobranza Fiscalex Limitada (collection services) (*)

 

(*) As of August 1, 2014, Servicios de Cobranza Fiscalex Limitada was absorbed by Santander Gestión de Recaudación y Cobranza Limitada. See Note 02 d)i.

 

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:

 

Percentage of ownership share

Place of

As of December 31,

incorporation

2014

2013

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

29.29

29.28

Cámara de 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

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. As per the Associate definitions, the Bank has concluded that it exerts significant influence over those entities.

 

Servicios de Infraestructura de Mercado OTC S.A. is considered an associate due to the Bank’s executives being actively involved in the management of the company, including the organization and structuring of this company from the point of incorporation, therefore exercising significant influence over this company. This influence is in addition to a 11.11% holding in this associate.

 

iv.

Share or rights in other companies

 

Such entities represent those over which the Bank has no control or significant influences are presented in this category. These holdings are shown at acquisition value.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

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 Standard 8 “Operating Segments” (IFRS 8) and the segments have similar economic characteristics and are similar in each of the following respects:

 

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.

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

e)

Functional and presentation currency

 

According to IAS 21 “The Effects of Changes in Foreign Exchange Rates”, 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 makes transactions 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. representative of the month end reported; the rate used was Ch$ 608.33 per US$1 as of December, 2014 (Ch$524.20 per US$1 as of December, 2013).

 

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.

 

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 classifications used for management and measurement purposes.

 

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

 

-

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

 

-

Available for sale investments 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 determined using internal models when appropriate. Unrealized gains or losses stemming from changes in fair value are recorded as a debit or credit under the heading “Other comprehensive income” within equity. When these investments are disposed or become impaired, the cumulative amount of the adjustments at fair value recognized in “Other comprehensive income” are transferred to the Consolidated Statement of Income under “Net income from financial operations.”

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-

Held to maturity instruments portfolio: this classification 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, less 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 classification includes financing granted to third parties, based on their nature, regardless of the class 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 acts as lessor. Loans and receivables shall be measured at amortized cost using the effective interest method.

 

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 as overnight deposits are included in this item.

 

-

Cash items 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 timing 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.

 

-

Investments under resale agreements: includes balances of financial instruments purchased under resale agreement.

 

-

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 accounted for as derivatives held for hedging, as shown in Note 7 to the Consolidated Financial Statements.

 

·

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

 

·

Hedging derivatives: Includes the fair value of derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

 

-

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 certain other financial asset classifications listed above.

 

-

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 rewards incidental to the leased asset, the transaction is presented in loans and accounts receivable from customers while the leased asset is derecognized in the Bank´s statement of financial position.

 

-

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:

 

iv.

Classification of financial liabilities for measurement purposes

 

Financial liabilities are initially classified for management and measurement purposes as follows:

 

-

Financial liabilities held for trading (at fair value through profit or loss): include financial liabilities issued to generate short-term profits from fluctuations in their prices, financial derivatives not deemed to qualify for hedge accounting and financial liabilities arising from firm commitment of financial assets purchased under repurchase agreements or borrowed (“short positions”).

 

-

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

 

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 on- demand liabilities: this 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 items in process of being cleared: this represents domestic transactions in the process of transfer through a central domestic clearing house or international transactions which may be delayed in settlement due to timing differences, etc.

 

-

Obligations under repurchase agreements: this includes the balances of sales of financial instruments under securities repurchase and loan agreements. In accordance with the applicable regulation, the Bank does not record instruments acquired under repurchase agreements.

 

-

Time deposits and other time liabilities: this 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 includes financial derivative contracts with negative fair values (i.e. a liability of the Bank), whether they are for trading or for hedge accounting, as set forth in Note 7.

 

·

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

 

·

Hedging derivatives: includes the fair value of derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

 

-

Interbank borrowings: this includes obligations due to other domestic banks, foreign banks, or the Central Bank of Chile, other than those reflected in certain other financial liability classifications listed above.

 

-

Issued debt instruments: there are three types of instruments issued by the Bank; 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 instruments 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:

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

i.

Valuation of financial assets

 

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred in the course of a 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.

 

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

 

When using valuation techniques, the Bank shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs as available. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorized within the fair value hierarchy (i.e. Level 1, 2 or 3). IFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

 

All derivatives are recorded in the Consolidated Statements of Financial Position at the fair value previously described. This value is compared to the valuation as at the trade date. If the change in value is positive, this is recorded as an asset. If the change in value is negative, this is 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. The calculation to establish the fair value includes credit valuation adjustment (CVA), hence the fair value of each instrument should include the credit risk of its counterparty and the Bank´s own risk of the operation.

 

“Loans and accounts receivable from customers” and “Held-to-maturity investments” are measured at amortized cost using the “effective interest method.” “Amortized cost” is the acquisition cost of a financial asset or liability, adjusted as appropriate for 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 and provides for amounts not recoverable. 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 is recorded in “Net income from financial operations”.

 

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows over its remaining life. For fixed-rate financial instruments, the effective interest rate incorporates the contractual interest rate established on the acquisition date. Where applicable, the fees and transaction costs that are a part of the financial return are included. For floating-rate financial instruments, the effective interest rate matches the current rate of return until the date of the next review of interest rates.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives, whose underlying is an equity instrument that are settled by delivery of those instruments, are measured at acquisition cost adjusted for any related impairment loss.

 

The amounts at which the financial assets are recorded represent the Bank’s maximum exposure to credit risk as at the 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 under leasing agreements, assets acquired under repurchase agreements, securities loans and derivatives.

 

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 price quotations in active markets, include government debt securities, private sector debt securities, equity shares, short positions, and fixed-income securities issued.

 

In cases where price quotations cannot be observed in available markets, the Management determines a 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 however for some valuations of financial instruments, significant inputs are unobservable in the market. To determine a value for those instruments, various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

The most reliable evidence of the fair value of a financial instrument on initial recognition usually is the transaction price, however due to lack of availability of market information, the value of the instrument may be derived from other market transactions performed with the same or similar instruments or may be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

 

The main techniques used as of December 31, 2014 and 2013 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 calculated by the aforementioned internal models considers contractual terms and observable market data, which include interest rates, credit risk, exchange rates, quoted market price of shares, volatility and prepayments, among others. The valuation models are not significantly subjective, since 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.

 

iv.

Recording result

 

As a general rule, changes in the carrying amount of financial assets and liabilities are recorded in the Consolidated Statement of Income. A distinction is made 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”.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

In the case of trading investments, the fair value adjustments, interest income, indexation adjustment 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 instruments” are recorded and accumulated under “Other comprehensive income” within Equity.

 

-

When available-for-sale instruments are disposed of or determined to be impaired, the cumulative gain or loss previously accumulated as “Other comprehensive income” 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 are not held for hedging purposes are accounted for as “trading derivatives.”

 

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

 

1.

The derivative hedges one of the following three types of exposure:

 

a.

Changes in the value of assets and liabilities due to fluctuations, among others, 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, 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.

 

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

 

a.

For 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 included as “Net income from financial operations” in the Consolidated Statement of Income

 

b.

For fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments and other gains or losses due to changes in fair value of the underlying hedged item (attributable to the hedged risk) are recorded in the Consolidated Statement of Income under “Net income from financial operations”.

 

c.

For cash flow hedges, the change in fair value of the hedging instrument is included as “Cash flow hedge” in “Other comprehensive income”, until the hedged transaction occurs, thereafter being reclassified to 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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”.

 

If a derivative designated as a hedging instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, hedge accounting treatment is discontinued. When “fair value hedging” is discontinued, the fair value adjustments to the carrying amount of the hedged item arising from the hedged risk are amortized to gain or loss from that date, where applicable.

 

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognized under “Other comprehensive income” (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 is no longer expected to occur, in which case any cumulative gain 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 1) their risks and characteristics are not closely related to the host contracts, 2) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and 3) 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 the Bank intends 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 is determined by 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 of ownership 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 transferor does not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset is derecognized from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer are simultaneously recorded.

 

ii.

If the Bank retains substantially all the risks and rewards of ownership associated with the transferred financial asset, as in the case of sales of financial assets under repurchase agreements 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 derecognized 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.

-

Both the income from the transferred (but not removed) financial asset as well as any expenses incurred due to the new financial liability.

 

iii.

If the Bank neither transfers nor substantially retains all the risks and rewards of ownership 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 of 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

b.

If the transferor retains control of 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, or the fair value of the rights and obligations retained, if the transferred 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.

 

Interest and inflation adjustments on loans whose payments of principal or interest are renegotiated or refinanced or loans that are more than 90 days overdue or when the Bank believes that the debtor poses a high risk of default, are generally referred to as “suspended” and are recorded in memo accounts which are not part of the Consolidated Statements of Income. These are reported as memorandum accounts (Note 26). This interest is recognized as income upon collection.

 

The resumption of interest income recognition of previously suspended 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, C5 or C6 categories (for loans individually evaluated for impairment) as per SBIF definitions (Note 1, subsection p).

 

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

 

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 on financial assets and liabilities 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 transaction are recognized when the single transaction is performed.

 

iii.

Non-financial income and expenses

 

Non-financial income and expenses are recognized for accounting purposes on an accrual basis.

 

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 charged to 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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.

 

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 equity financial assets.

 

ii.

Non-financial assets:

 

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

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

 

In connection with other assets, impairment losses recorded in prior periods are assessed at each reporting date to determine whether the loss has decreased and should be reversed. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been 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 includes but is not limited to 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. These assets are presented at acquisition cost less the related accumulated depreciation and, if applicable, any impairment losses (when net carrying amount was 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:

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ITEM		Useful life (Months)
Land			-
Paintings and works of art			-
Assets retired for disposal			-
Carpets and curtains			36
Computers and hardware			36
Vehicles			36
IT systems and software			36
ATMs			60
Other machines and equipment			60
Office furniture			60
Telephone and communication systems			60
Security systems			60
Rights over telephone lines			60
Air conditioning systems			84
Other installations			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 accordance with 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.

 

The estimated useful lives of the items of property, plant and equipment held for own use are reviewed at the end of each reporting period to detect significant changes. 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 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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. This charge is calculated using the longer term of the life of the lease or the useful life of any leasehold improvement.

 

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.

 

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 through the effective interest method over the financing period.

 

When the assignment of these instruments involves no liability for the assignee, the Bank assumes the risks of insolvency of the parties responsible for payment.

 

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 legal or contractual rights or it is separable. The Bank recognizes an intangible asset, whether purchased or self-created (at cost), when the cost of the asset can be measured reliably and it is probable that the future economic benefits that are attributable to the asset will flow to the Bank.

 

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 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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 operating, investment or financing activities.

 

p)

Allowances for loan losses

 

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

 

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 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 Bank models 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.

Commercial loans,

ii.

Mortgage loans, and

iii.

Consumer loans.

 

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 accordance with the SBIF, in the case of companies which, due to their size, complexity or level of exposure, must be known and analyzed in detail.

 

The Bank assigns a risk category to each debtor, their contingent loans and loans. These are assigned to one of the following portfolio categories: Normal, Substandard and Impaired. The risk factors considered are: industry or economic sector, owners or managers, financial situation and payment capacity, and payment behavior.

 

The portfolio categories and their definitions are as follows:

 

i.

Normal Portfolio includes debtors with a payment capacity that allows them to meet their obligations and commitments. Evaluations of the current economic and financial environment do not indicate that this will change. The classifications assigned to this portfolio are categories from A1 to A6.

 

ii.

Substandard Portfolio includes debtors with financial difficulties or a significant deterioration of their payment capacity. There exists reasonable doubt concerning the future reimbursement of the capital and interest within the contractual terms, with limited capacity to settle 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 repayment is considered remote. This portfolio consists of debtors that demonstrate a reduced or null payment capacity with signs of a possible bankruptcy, debtors 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. The classifications assigned to this portfolio are categories from C1 to C6.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Normal and Substandard Compliance Portfolio

 

As part of individual assessment, the Bank classifies debtors into the following categories, assigning them a probability of non-performance (PNP) and severity (SEV), 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

 

The Bank first determines all credit exposures, which includes the accounting balances of loans and accounts receivable from customers plus contingent loans, less any amount recovered through executing the guarantees. The exposure of each category is determined by calculating the total balance in each portfolio (A1 to B4) and applying the expected loss rate.

 

Impaired Portfolio

 

A provision for an impaired portfolio is calculated by determining the expected loss rate, adjusting for amounts recoverable through guarantees and the present value of recoveries made through collection services after the related expenses.

 

Once the expected loss range is determined, the debtor can be classified into categories C1 to C6. Using this classification system the related allowance percentage is applied over the exposure amount, which includes loans and contingent loans related to the debtor.

 

The allowance rates applied over the calculated exposure are as follows:

 

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

II.

Allowances for group assessment

 

Group evaluations are used to approximate allowances required for loans with low balances related to individuals and small 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 indicating the debtor’s ability to pay all amounts due according to the contractual terms. The Bank uses models based on debtors’ characteristics, payment history, loans due and defaulted loans, in addition to other parameters.

 

The Bank uses methodologies to establish credit risk, based on internal models to estimate the allowances for the group-evaluated portfolio. This portfolio includes individually non-significant commercial loans, mortgage and consumer loans (including installment loans, credit cards and overdraft lines). These methods allow the Bank to independently identify the portfolio behavior and establish the provision required to cover losses arising during the year.

 

The customers are classified according to their internal and external characteristics, using customer-portfolio model 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 relationship through logistic regression between variables (for example default, payment behavior outside the Bank, socio-demographic data) and a response variable which determines the client’s risk which in this case is a default of 90 or more. Hence, 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, less any amount that can be recovered by executing guarantees (for credits other than consumer loans).

 

During the second semester of 2014, the ongoing improvement process of the allowance models led to the updating of the Bank’s allowance model for consumer and commercial loans. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, better techniques of statistical processes and of the extent of historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation.

 

This involved the release of consumer provisions of Ch$26,563 million and an increase in commercial provisions of Ch$45,141 million. As this is a change in estimation, the net increase of these improvements (Ch$18,578 million) was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IFRS 8.

 

III.

Additional provisions

 

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

 

According to No. 10 of Chapter B-1 from the SBIF Compendium of Accounting Standards, these provisions will be recorded in liabilities, similar to provisions for contingent loans. The Bank has not recorded provisions for this concept as of December 31, 2014 and 2013.

 

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 accounts receivable from customers, even if the above does not happen, the Bank will charge-off these amounts in accordance with Title II of Chapter B-2 of the Compendium of Accounting Standards (SBIF).

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

These charge-offs refer to the derecognition from the Consolidated Statements of Financial Position of the respective loan operations, including any future payments due in the case of installments loans or leasing operations (for which partial charge-offs do not exist).

 

Charge-offs are recorded under “Provision for loan losses” through the Consolidated Statement of Income in accordance with Chapter B-1 of the Compendium of Accounting Standards (SBIF), independent of the cause. Any receipt of payment for a loan previously charged-off will be recognized as a recovery within “Provision for loan losses” in the Consolidated Statement of Income.

 

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

 

V.

Recovery of loans previously charged off and accounts receivable from customers

 

Any receipt of payment for “Loans and accounts receivable from customers” previously charged-off will be recognized as a recovery within “Provision for loan losses” in the Consolidated Statement of Income.

 

Any payment agreement 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. Upon recovery of previously charged-off balances, the renegotiated loans will be recognized as an asset and the associated income as a recovery of loan loss within the “Provision for loan losses”.

 

q)

Provisions, contingent assets, and contingent liabilities

 

Provisions are liabilities of uncertain timing or amount. 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.

it is probable that an outflow of resources will be required to settle these obligations and the amount of these resources can be reliably 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 within control of the Bank.

 

The following are classified as contingent in the supplementary information:

 

i.

Guarantees and bonds: Including guarantees, bonds, standby letters of credit.

 

ii.

Confirmed foreign letters of credit: Comprises of 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.

 

v.

Interbank guarantee: Guarantees letters issued.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

vi.

Unrestricted credit lines: The balance of the available credit lines that customers may use without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts).

 

vii.

Other credit commitments: Loans that the Bank has agreed but not yet lent. These outstanding balances must be transferred at an agreed future date when events contractually agreed upon with the customer occur, such as lines of credit linked to the progress of a construction or similar projects.

 

viii.

Other contingent credits: 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 Statements of Financial Position and annual accounts reflect all significant provisions for which it is estimated that it is probable an outflow of resources will be required to meet the obligation the probability of having to meet the obligation. 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. Provisions must specify the liabilities for which they were originally recognized. Partial or total reversals are recognized when such obligations cease to exist or are reduced.

 

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, in accordance with 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 is enacted or substantially enacted.

 

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 balances 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. The 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. When 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 modeling and other valuation techniques.

 

The Bank has established allowances to cover probable losses, therefore, to estimate the allowances. These allowances must be regularly reviewed 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’ payment capacity. Increases in the allowances for loan losses are reflected as “Provision 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 estimates and assumptions made to calculate provisions 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 and in any affected future period.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

-

Allowances for loan losses (Notes 9 and 30)

-

Impairment losses of certain assets (Notes 7, 8, 9, 10, and 33)

-

The useful lives of tangible and intangible assets (Notes 12, 13 and 33)

-

The fair value of assets and liabilities (Notes 5, 6, 7, 10 and 37)

-

Commitments and contingencies (Note 22)

-

Current and deferred taxes (Note 14)

 

t)

Non-current assets held for sale

 

Non-current assets (or a group holding assets and liabilities for disposal) expected to be recovered mainly through the sale of these items rather than through the 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, 2014 and 2013 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). For assets acquired under an agreement between the client and the Bank a value is agreed upon by the parties through negotiation. When the parties do not reach an agreement and legal actions are required for the Bank to gain possession, the value for those assets is determined at auction. In both instances, an independent appraisal is performed.

 

The excess of the outstanding loan balance over the fair value is charged to income for the period, under “Provision for loan losses”.

 

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

 

Independent appraisals are obtained at least every 18 months and fair values are adjusted accordingly.

 

u)

Earnings per share

 

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

 

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 consideration the potential diluting effect of stock options, warrants, and convertible debt.

 

As of December 31, 2014 and 2013 the Bank did not have any instruments that generated dilutive effects.

 

v)

Temporary acquisition (assignment) of assets and liabilities

 

Purchases or sales of financial assets under non-optional repurchase agreements at a fixed price 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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 S.A. Sociedad Securitizadora), are not included in the Consolidated of Financial Position. Management fees are included in “Fee and commission income” in the Consolidated Statement of Income.

 

x)

Provision for mandatory dividends

 

As of December 31, 2014 and 2013 the Bank recorded a 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.

 

y)

Employee benefits

 

i.

Post-employment benefits – Defined Benefit Plan:

 

According to current collective labor agreements and other agreements, the Bank 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 Banco Santander Chile are:

 

a.

Aimed at the Bank’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 Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.

d.

The Bank will be responsible for granting the benefits directly.

 

To 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) remeasurements for net defined benefit include:

(a) actuarial gains and losses;

(b) the difference between the actual return on plan assets and the interest on plan assets included in the net interest component and;

(c) changes in the effect of the asset ceiling.

 

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 less the fair value of plan assets.

 

Plan assets comprise the pension fund 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 Bank and exist solely to pay benefits to employees. See Note 15.

 

The Bank recognizes the present service cost and the net interest of the Personnel wages and expenses on the Consolidated Statement of Income.

 

The post-employment benefits liability, recognized in the Consolidated Statement of Financial Position 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

ii. Severance provision:

 

Severance provision 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. Cash-settled share based compensation

 

The Bank allocates cash-settled share based compensation to executives of the Bank and its Subsidiaries in accordance with IFRS 2. The Bank measures the services received and the obligation incurred at fair value. Until the obligation is settled, the Bank determines the fair value at the end of each reporting period, as well as at the date of settlement, recognizing any change in fair value in the income statement of the period.

 

z)

Reclassification of items

 

Banco Santander Chile has reclassified some items in the Financial Statements to provide relevant, reliable, comparable and understandable information.

 

These reclassifications, which did not affect the Bank’s results, have no significant or material impact on the current Consolidated Financial Statements.

 

aa)

Application of new and revised International Financial Reporting Standards

 

i.

New accounting regulations and instructions issued by the SBIF as well as by the IASB not enforced as of December 31, 2014

 

As of the date of issuance of these Consolidated Financial Statements, the following accounting pronouncements have been issued by the both the SBIF and the IASB, which have been fully incorporated by the Bank and are detailed as follows:

 

1.

Accounting regulations issued by the SBIF

 

As of December 31, 2014 there are no new accounting regulations issued by SBIF to be implemented.

 

2.

New and revised IFRS standards effective in current year

 

The following new and revised IFRS have been adopted in these financial statements:

 

Amendment to IAS 32, Financial Instruments- Presentation - On December 16, 2011, the IASB amended the accounting requirements and disclosures related to offsetting of financial assets and financial liabilities by issuing amendments to IAS 32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures. These amendments are the result of the IASB and US Financial Accounting Standards Board (‘FASB’ undertaking a joint project to address the differences in their respective accounting standards regarding offsetting of financial instruments.

 

The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014. Both require retrospective application for comparative periods. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Investment Entities – Amendments to IFRS 10 – Consolidated Financial Statements; IFRS 12 – Disclosures of Involvement in Other Entities and IAS 27 – Separate Financial Statements - On October 31, 2012, the IASB published “Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)”, providing an exemption from consolidation of subsidiaries under IFRS 10 'Consolidated Financial Statements' for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' or IAS 39 'Financial Instruments: Recognition and Measurement'.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The amendments also require additional disclosure about why the entity is considered an investment entity, details of the entity's unconsolidated subsidiaries, and the nature of relationship and certain transactions between the investment entity and its subsidiaries. In addition, the amendments require an investment entity to account for its investment in a relevant subsidiary in the same way in its consolidated and separate financial statements (or to only provide separate financial statements if all subsidiaries are unconsolidated).

 

The amendments are effective for annual periods beginning on or after January 1, 2014, with early application permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets - On May 29, 2013 the IASB published “Amends to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets. The publication of IFRS 13 Fair Value Measurements amended certain disclosure requirements in IAS 36 Impairment of Assets with respect to measuring the recoverable amount of impaired assets. However, one of the modifications to the disclosure requirements was more extensive than originally intended. The IASB has rectified this with the publication of these amendments to IAS 36.

 

The amendments to IAS 36 removed the requirement to disclose the recoverable amount of each cash-generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) was significant compared with the total carrying amount of goodwill or intangible assets with indefinite useful life of the entity.

 

The amendments require an entity to disclose the recoverable amount of an individual asset (including goodwill) or a cash-generating unit to which the entity recognized or reversed deterioration during the reporting period. An entity shall disclose information about the fair value less costs to sell of an individual asset, including goodwill, or a cash-generating unit to which the entity recognized or reversed an impairment loss during the reporting period, including: (i) the level of the fair value hierarchy (IFRS 13), (ii) the valuation techniques used to measure fair value less costs to sell, and (iii) the key assumptions used in fair value measurement categorized within "Level 2" and "Level 3" of the fair value hierarchy. In addition, an entity should disclose the discount rate used when an entity recognized or reversed an impairment loss during the reporting period and the recoverable amount should be based on the fair value less costs to sell determined using a present value valuation technique.

 

The amendments should be applied retrospectively for annual periods beginning on or after January 1, 2014. Earlier application is permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Amendments to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting - On June 2013, the IASB published Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting. This modification permits the continuation of hedge accounting (under IAS 39 and the next chapter on hedge accounting under IFRS 9) when a derivative is novated to a central counterparty and certain conditions are met. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to apply the amendments and continue hedge accounting, novation to a central counterparty must happen as a consequence of laws or regulations or the introduction of laws or regulations.

 

The amendments are effective for annual periods beginning on or after January 1, 2014. Earlier application is permitted but corresponding disclosures are required. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Amendment to IAS 19 (2011), Employee Benefits - On November 21, 2013, the IASB amended IAS 19 (2011) Employee Benefits to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments permit contributions that are independent of the number of years of service to be recognized as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to periods of service. Other contributions by employees or third parties are required to be attributed to periods of service either using the plan’s contribution formula or on a straight-line basis.

 

The amendments are effective for periods beginning on or after July 1, 2014, with earlier application permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Annual Improvements 2010 – 2012 Cycle

 

IFRS 2 Share based payments, Definition of vesting condition - Appendix A ‘Defined terms’ to IFRS 2 was amended to (i) change the definitions of ‘vesting condition’ and ‘market condition’, and (ii) add definitions for ‘performance condition’ and ‘service condition’ which were previously included within the definition of ‘vesting condition’. The amendments clarify that: (a) a performance target can be based on the operations of the entity or another entity in the same group (i.e. a non-market condition) or on the market price of the equity instruments of the entity or another entity in the same group (i.e. a market condition); (b) a performance target can relate either to the performance of the entity as a whole or to some part of it (e.g. a division or an individual employee); (c) a share market index target is a non-vesting condition because it not only reflects the performance of the entity, but also of other entities outside the group; (d) the period for achieving a performance condition must not extend beyond the end of the related service period; (e) a condition need to have an explicit or implicit service requirement in order to constitute a performance condition (rather than being a non-vesting condition); (f) a market condition is a type of performance condition, rather than a non-vesting condition; and (g) if the counterparty ceases to provide services during the vesting period, this means it has failed to satisfy the service condition, regardless of the reason for ceasing to provide services. The amendments apply prospectively to share-based payment transactions with a grant date on or after July 1, 2014, with earlier application permitted.

 

IFRS 3 Business Combinations, Accounting for contingent consideration in a business combination - The amendments clarify that a contingent consideration that is classified as an asset or a liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a non-financial asset or liability. Changes in fair value (other than measurement period adjustments) should be recognized in profit or loss. Consequential amendments were also made to IFRS 9, IAS 39 and IAS 37. The amendments apply prospectively to business combination for which the acquisition date is on or after July 1, 2014. Earlier application is permitted.

 

IFRS 8 Operating Segments, Aggregation of Operating Segments - The amendments require an entity to disclose the judgments made by management in applying the aggregation criteria to operating segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have ‘similar economic characteristics’. It clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted.

 

IFRS 13 Fair Value Measurement, Short-term receivables and payables - The Basis for Conclusions was amended to clarify that the issuance of IFRS 13 and consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of not discounting is immaterial.

 

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, Revaluation method: proportionate restatement of accumulated depreciation/amortization - The amended requirements clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/amortization is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted. An entity is required to apply to amendments to all revaluations recognized in the annual period in which the amendments are first applied and in the immediately preceding annual period. An entity is permitted, but not required, to restate any earlier periods presented.

 

IAS 24 Related Party Disclosures, Key management personnel - The amendments clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted.

 

The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Annual Improvements 2011 – 2013 Cycle

 

IFRS 1 First-time Adoption of International Financial Reporting Standards, Meaning of “effective IFRS” - The amendment clarifies that a first-time adopter is allowed, but not required, to apply a new IFRS that is not yet mandatory if that IFRS permits early application. If an entity chooses to early apply a new IFRS, it must apply that new IFRS retrospectively throughout all periods

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

presented unless IFRS 1 provides an exemption or an exception that permits or requires otherwise. Consequently, any transitional requirements of that new IFRS do not apply to a first-time adopter that chooses to apply that new IFRS early.

 

IFRS 3 Business Combinations, Scope exception for joint ventures - The scope section was amended to clarify that IFRS 3 does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself.

 

IFRS 13 Fair Value Measurement, Scope of portfolio exception (paragraph 52) - The scope of the portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis was amended to clarify that it includes all contracts that are within the scope of, an accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definitions of financial assets or financial liabilities within IAS 32. Consistent with the prospective initial application of IFRS 13, the amendment must be applied prospectively from the beginning of the annual period in which IFRS was initially applied.

 

IAS 40 Investment Property, Interrelationship between IFRS 3 and IAS 40 - IAS 40 was amended to clarify that this standard and IFRS 3 Business Combinations are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring investment property must determine whether (a) the property meets the definition of investment property in IAS 40, and (b) the transaction meets the definition of a business combination under IFRS 3. The amendment applies prospectively for acquisitions of investment property in periods commencing on or after July 1, 2014. An entity is only permitted to adopt the amendments early and/or restate prior periods if the information to do so is available.

 

The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRIC 21, Levies - On May 20, 2013, the IASB published the IFRIC 21, Levies. The new interpretation provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain.

 

This interpretation defines a levy as "a resource outflow involving future economic benefits that are imposed by governments on entities in accordance with the law". Taxes within the scope of IAS 12 Income Taxes are excluded from the scope as well as fines and penalties. The payments to governments for services or the acquisition of an asset under a contractual arrangement are also excluded. That is, the tax should be a non-reciprocal transfer to a government when the tax paying entity does not receive goods or services in return. For the purpose of interpretation, a "government" is defined in accordance with IAS 20 Accounting for Government Grants and Disclosures of Government Assistance. When an entity acts as an agent of a government to collect a tax, the cash flows received from the agency are outside the scope of this interpretation. This interpretation identifies the event which gives rise to the obligation to recognize a liability, which is the payment of tax in accordance with the relevant legislation.

 

IFRIC 21 provides the following guidance on recognition of a liability to pay levies: (i) the liability is recognized progressively if the obligating event occurs over a period of time; (ii) if an obligation is triggered on reaching a minimum threshold, the liability is recognized when that minimum threshold is reached. The interpretation is applicable retrospectively for annual periods beginning on or after January 1, 2014.

 

The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

ii.

New accounting regulations and instructions issued by the SBIF as well as by the IASB not enforced as of December 31, 2014.

 

At the end date of these financial statements new IFRS had been published as well as interpretations of these regulations by the SBIF that were not mandatory as of December 31, 2014. Though in some cases the IASB has allowed for their in advance adoption, the Bank has not done so up to said date.

 

1.

Accounting Regulations Issued by the SBIF

 

On December 30, 2014 the SBIF issued Circular 3.573 containing amendments to Chapters B-1, B-2 and E of the Compendium of Accounting Standards. The amendments establish a standardized method for measuring residential mortgage loans that will apply from 2016. Also it provides complementary information for loans and provisions that are in the impaired portfolio.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

2.

New and revised IFRS in issue but not yet effective:

 

IFRS 9 “Financial Instruments” (“IFRS 9”) – In July 2014, the IASB issued the final version of IFRS 9 which includes the completion of all phases of the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ as discussed below.

 

Phase 1: Classification and measurement of financial assets and financial liabilities. Financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. The standard also introduces a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. The requirements for the classification and measurement of financial liabilities were carried forward unchanged from IAS 39, however, the requirements relating to the fair value option for financial liabilities were changed to address own credit risk and, in particular, the presentation of gains and losses within other comprehensive income.

Phase 2: Impairment methodology. IFRS 9 fundamentally changes the impairment requirements relating to the accounting for an entity’s expected credit losses on its financial assets and commitments to extend credit. It is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an entity always accounts for expected credit losses, and changes in those expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition.

Phase 3: Hedge accounting. These requirements align hedge accounting more closely with risk management and establish a more principle-based approach to hedge accounting. Dynamic hedging of open portfolios is being dealt with as a separate project and until such time as that project is complete, entities can choose between applying the hedge accounting requirements of IFRS 9 or to continue to apply the existing hedge accounting requirements in IAS 39. The revised hedge accounting requirements in IFRS 9 are applied prospectively.

 

The effective date of IFRS 9 is 1 January 2018. For annual periods beginning before 1 January 2018, an entity may elect to early apply only the requirements for the presentation of gains and losses on financial liabilities designated at fair value through profit or loss. The impact of the standard is currently being assessed. It is not yet practicable to quantify the effect of IFRS 9 on these consolidated financial statements. IFRS 9 will not apply to the Financial Statements of the Bank as expressly stated by the SBIF until it states that this standard is obligatory for all banks.

 

IFRS 14, Regulatory Deferral Accounts -issued on January 30, 2014 the IASB issued IFRS 14 Regulatory Deferral Accounts. This standard is applicable to first-time adopter of IFRS and for entities which are involved in rate-regulated activities and recognized regulatory deferral account balances under its previous general accepted accounting principles. This standard requires separate presentation of regulatory deferral account balances in the statement of financial position and statement of comprehensive income.

 

IFRS 14 is effective for an entity’s firs annual IFRS financial statements for a period beginning on or after January 1, 2016, with earlier application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRS 15, Revenue from Contracts with Customers - issued on May 28, 2014, the IASB has published its new standard, IFRS 15 Revenue from contracts with customers. At the same time, the Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09.

 

The new standard provides a single, principles based five-step model to be applied to all contracts with customers, i) identify the contract with the customer, ii) identify the performance obligations in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligations in the contracts, v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

IFRS 15 must be applied in an entity’s firs annual IFRS financial statements for periods beginning on or after 1 January 2017. Application of the Standard is mandatory and early adoption is permitted. An entity that chooses to apply IFRS 15 earlier than 1 January 2016 must disclose this fact. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Accounting for Acquisitions of interests in Joint Operations (Amendments to IFRS 11) - issued on May 6, 2014 the IASB has issued “Accounting for Acquisitions of Interests in Joint Operations (amendments to IFRS 11)”, the amendments clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business.

 

Amends IFRS 11 Joint Arrangements to require an acquirer of an interest in a joint operation in which the activity constitutes a business (as defined in IFRS 3 Business Combinations) to:

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

·

apply all of the business combinations accounting principles in IFRS 3 and other IFRSs, except for those principles that conflict with the guidance in IFRS 11

 

·

disclose the information required by IFRS 3 and other IFRSs for business combinations.

 

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted but corresponding disclosures are required. The amendments apply prospectively. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38) - issued on May 12, 2014 the IASB has published “Clarification of Acceptable Methods of depreciation and amortization (amendments to IAS 16 and IAS 38)”. The amendments provide additional guidance on how the depreciation or amortization of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Equity Method in Separate Financial Statements (Amendments to IAS 27) - issued on August 12, 2014, the IASB has published “Equity Method in Separate Financial Statements (Amendments to IAS 27)”. The amendments reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements.

 

The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements:

·

at cost,

 

·

in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or

 

·

using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

 

The accounting option must be applied by category of investments.

 

In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards.

 

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments are to be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) - issued on September 11, 2014, the IASB has published 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)'. The amendments address a conflict between the requirements of IAS 28 'Investments in Associates and Joint Ventures' and IFRS 10 'Consolidated Financial Statements' and clarify the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:

 

· require full recognition in the investor's financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations)

 

· require the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognized only to the extent of the unrelated investors’ interests in that associate or joint venture.

 

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Disclosure initiative (Amendments to IAS 1) - issued on December 18, 2014 the IASB added an initiative on disclosure to its work program in 2013 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) - issued on December 18, 2014 the IASB has published 'Investment Entities: Applying the Consolidation Exception, Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures (2011) to address issues that have arisen in the context of applying the consolidation exception for investment entities.

 

They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Annual Improvements 2012-2014 Cycle

 

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, Changes in methods of disposal - Adds specific guidance in IFRS 5 for cases in which an entity reclassify an asset from held for sale to held for distribution or vice versa and cases in which held-for-distribution accounting is discontinued.

 

IFRS 7 Financial Instruments: Disclosures (with consequential amendments to IFRS 1), Servicing contracts - Adds additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of determining the disclosures required.

 

IAS 19 Employee Benefits, Discount rate - Clarifies that the high quality corporate bonds used in estimating the discount rate for post-employment benefits should be denominated in the same currency as the benefits to be paid (thus, the depth of the market for high quality corporate bonds should be assessed at currency level).

 

IAS 34 Interim Financial Reporting, Disclosure of information “elsewhere in the interim financial report” - Clarifies the meaning of 'elsewhere in the interim report' and requires a cross-reference

 

The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 02

SIGNIFICANT EVENTS

 

As of December 31, 2014, the following significant events have occurred and affected the Bank`s operations and Consolidated Financial Statements.

 

a) The Board

 

In the Ordinary Board Meeting of Banco Santander Chile held on April 22, 2014, the Chairman of the Board, Mr. Mauricio Larraín Garcés, presented his resignation. In this session, Mr. Vittorio Corbo Lioi was designated as Chairman with Mr. Mauricio Larraín Garcés continuing to form part of the Board of Directors as a Director.

 

On September 3, 2014 the Superintendency of Banks and Financial Institutions was informed of the resignation of Carlos Olivos Marchant, who served as director. The President proposed that the Director Marco Colodro Hadjes replace Carlos Olivos as a member and chairman of the Audit Committee of Directors. This was approved unanimously by those present.

 

In the Ordinary Board Meeting dated September 23, 2014 the Board appointed Orlando Poblete Iturrate as the new director who until then had served as Alternate Director, therefore his previous position became vacant.

 

Use of Profits and Distribution of Dividends

 

The Shareholders’ Meeting of Banco Santander Chile held on April 22, 2014, was chaired by Mr. Vittorio Corbo Lioi (Chairman), and attended by Oscar von Chrismar Carvajal (First Vice President), Roberto Méndez Torres (Second Vice President), Víctor Arbulú Crousillat, the Directors: Marco Colodro Hadjes, Mauricio Larraín Garcés, Carlos Olivos Marchant, Lucía Santa Cruz Sutil, Juan Pedro Santa María Pérez, Lisandro Serrano Spoerer, Roberto Zahler Mayanz, Raimundo Monge Zegers (Alternate Director) and Orlando Poblete Iturrate (Alternate Director). Also, the CEO Claudio Melandri Hinojosa and CAO Felipe Contreras Fajardo attended the meeting.

 

According to the information presented in aforementioned meeting, 2013 net income (designated in the financial statements as “Income attributable to equity holders of the Bank”) amounted to Ch$441,926 million. The Board approved the distribution of 60% of such net income, yielding a Ch$1.407 dividend per share, payable starting on April 23, 2014. Also, it was approved that the remaining 40% of the profits will be retained in the Bank’s reserves.

 

b) Taxation Reforms

 

On September 29, 2014 Law No. 20,780 was published in the Official Journal. This law amended the Chilean tax system, including Income Tax, Stamp Duty and Taxation Codes. Regarding the Income Tax Law, the key changes are:

 

·

Each company must formally elect to join a tax scheme. There are two alternative tax schemes under this law. The deadline for such election is the second half of 2016.

 

·

The schemes are:

 

-

Attributed system, reaching a tax rate of 25% in 2017. This system involves payment of taxes independent of withdrawals or distributions of profits.

 

-

Semi-Integrated System, reaching a tax rate of 27% in 2018. This system involves payment of taxes on the withdrawal or distribution of profits to shareholders. The corporate income tax paid on the profits distributed is creditable against the final taxes. Profits distributed are subject to withholding income tax of 35%, except for non-residents of Chile where a double taxation agreement exists between Chile and the foreign entity’s country of residence.

 

·

The current rate of 20% is changed to 21% for the year 2014, to 22.5% in 2015, 24% in 2016 and 25% in 2017 for the attributed system. If the semi-integrated system is chosen the rate for 2017 will be 25.5% eventually reaching 27% in 2018.

 

The Bank has estimated the effect of the tax reform using the Semi-Integrated System. A decision has not yet been subject to discussion by the Bank's shareholders. The estimated net effect of this reform is Ch$35,411 million, this has been recorded at December 31, 2014 in "Income taxes" in the Consolidated Statement of Income. This Ch$35,411 million consists of a higher tax of Ch$3,175 million for the current tax year and a lesser deferred tax expense of Ch$38,586 million (temporary asset differences).

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 02

SIGNIFICANT EVENTS, continued

 

c) Issuance of bonds - at December 31, 2014

 

In the year ended December 31, 2014 the Bank has issued senior bonds in the amount of CHF300,000,000, UF11,400,000, USD750,000,000, CLP75,000,000,000, AUD125,000,000 and JPY 27,300,000,000. Debt issuance information is included in Note 15.

 

c.1) Senior bonds

 

Series

Amount

Term

Issuance rate

Issuance date

Maturity date

Bond

CHF 300,000,000

3 years

1.00% per annum simple

01-31-2014

07-31-2017

Total

CHF 300,000,000

Bond

UF 2,000,000

5 years

3.5% per annum simple

02-21-2014

10-01-2018

Bond

UF 2,000,000

7 years

3.5% per annum simple

08-28-2014

01-01-2021

Bond

UF 2,400,000

10 years

3.40% biannually

10-29-2014

01-01-2024

Bond

UF 3,000,000

5 years

2.65% biannually

12-11-2014

07-01-2019

Bond

UF 2,000,000

10 years

3.00% biannually

12-16-2014

01-01-2024

Total

UF 11,400,000

Bond

CLP 25,000,000,000

5 years

6.2% per annum simple

02-22-2014

09-01-2018

Bond

CLP 50,000,000,000

5 years

5.50% per annum simple

11-22-2014

07-01-2019

Total

CLP 75,000,000,000

USD floating bond

USD 250,000,000

5 years

Libor (3 months)+75 bp

02-19-2014

02-19-2019

USD floating bond

USD 500,000,000

5 years

Libor (3 months)+90 bp

04-15-2014

04-11-2017

Total

USD 750,000,000

Bond

AUD 125,000,000

3 years

4.5% per annum simple

03-13-2014

03-13-2017

Total

AUD 125,000,000

JPY floating bond

JPY 6,600,000,000

3 years

Libor (3 months) +65 bp

04-24-2014

04-24-2017

JPY current bond 2017

JPY 2,000,000,000

3 years

0.72% per annum simple

04-24-2014

04-24-2017

JPY current bond 2019

JPY 18,700,000,000

5 years

0.97% per annum simple

04-24-2014

04-24-2019

Total

JPY 27,300,000,000

 

c.2) Subordinated bonds

 

As at December 31, 2014, the Bank had not issued subordinated bonds in this financial year.

 

c.3) Repurchase of bonds

 

The Bank has conducted the following repurchase of bonds as of December 31, 2014:

 

Date		Series			Amount
02-21-2014		Senior bond			CLP	118,409,000,000
03-03-2014		Senior bond			UF	6,000,000

 

c.4) Mortgage bonds at December 1, 2014

 

As of December 31, 2014 the Bank has issued the following bonds:

 

Series

Currency

Amount

Term

Issuance rate

Issuance date

Maturity date

Bond

UF

1,500,000

18 years

3.20% biannually

01-09-2014

01-04-2032

Total

UF

1,500,000

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 02

SIGNIFICANT EVENTS, continued

 

d) Investments in Subsidiaries

 

d.1) Mergers and Acquisitions

 

Merger of Santander Servicios de Recaudación y Pagos Limitada

 

The Bank has effected its merger of the subsidiary Santander Servicios de Recaudación y Pagos Limitada through the transferof all the rights from Santander Corredora de Seguros Limitada to the Bank on May 01, 2014. Authorization was granted by the SBIF on March 26, 2014. This merger included the conversion of "Supercaja" branches to branches of the Bank and the transfer of rights held by Santander Corredora de Seguros Limitada to the Bank who now hold 100% of the rights, becoming the legal successor of that company.

 

Merger of Servicios de Cobranza Fiscalex Limitada

 

On August 01, 2014, the company Servicios de Cobranza Fiscalex Limited was acquired by Santander Gestión de Recaudación y Cobranza Limitada. Both companies were previously consolidated by the Bank, therefore no material effect should be observed in the Bank’s Consolidated Financial Statements.

 

d.2) Capital increase of Transbank S.A.

 

In the Transbank’s Shareholders’ Meeting held in June of the current year, it was agreed to capitalize retained earnings and increase the capital by approximately Ch$25,200 million. The Bank has participated in proportion to its ownership share (25%), resulting a contribution of approximately Ch$6,313 million to Transbank.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 03

OPERATING SEGMENTS

 

The Bank manages and measures the performance of its operations by operating segment which function under three divisions. 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, 2014. The information relating to 2013 has been prepared using the current criteria so that the figures presented are comparable.

 

The Bank has the following operating segments falling under each reportable segment header noted below:

 

Individuals

 

a.

Santander Banefe

Serves individuals with monthly incomes from Ch$150,000 to Ch$400,000, who receive services through Santander Banefe. This operating 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. This operating 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.

 

SME`s

 

Small companies are considered to be companies with annual sales less than Ch$1,200 million. This operating 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

 

Companies

 

The Companies segment includes the Middle market, Real Estate and Large Corporations operating segments:

 

a.

Middle market

 

Companies with annual sales in excess of Ch$1,200 million but not more than Ch$10,000 million are included in this operating segment. The companies within this operating segment have access to many 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.

 

b.

Real estate

 

This operating segment includes all the companies engaged in the real estate industry who carry out projects to sell properties to third parties and annual sales exceeding Ch$800 million with no upper limit. 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 03

OPERATING SEGMENTS, continued

 

c.

Large Corporations

 

This operating segment is made up of companies with annual sales exceeding Ch$10,000 million. The companies within this segment have access to many 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.

 

Institutions

 

Serves institutions such as universities, government entities, local and regional governments. The institutions within this segment have access to many 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 is comprised of:

 

a.

Corporate

 

This segment consists of foreign and domestic multinational companies with sales over Ch$10,000 million. The companies within this segment have access to many 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 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 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 03

OPERATING SEGMENTS, continued

 

Below are the tables showing the Bank’s results by operating segment for the years ended December 31, 2014 and 2013 in addition to the corresponding balances of loans and accounts receivable from customers:

 

						As of December 31, 2014
		Loans and accounts receivable from customers (1)				Net interest income				Net fee and commission income				Financial transactions, net (2)				Provision for loan losses				Support expenses (3)				Segment’s net contribution
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Individuals			11,836,082				611,520				150,148				11,929				(166,296	)			(395,621	)			211,680
Santander Banefe			752,267				91,979				21,257				1,352				(46,410	)			(44,657	)			23,521
Commercial Banking			11,083,815				519,541				128,891				10,577				(119,886	)			(350,964	)			188,159
Small and mid-sized (SMEs)			3,354,840				269,483				47,011				6,529				(162,734	)			(83,985	)			76,304
Subtotal			15,190,922				881,003				197,159				18,458				(329,030	)			(479,606	)			287,984
Companies			5,053,974				185,699				26,958				15,687				(42,252	)			(55,636	)			130,456
Middle market			1,888,557				80,497				13,460				8,420				(24,741	)			(31,225	)			46,411
Large Corporations			2,138,226				72,303				8,798				6,734				(15,050	)			(18,416	)			54,369
Real estate			1,027,191				32,899				4,700				533				(2,461	)			(5,995	)			29,676
Institutions			390,895				33,608				2,447				655				(57	)			(13,587	)			23,066
Subtotal			5,444,869				219,307				29,405				16,342				(42,309	)			(69,223	)			153,522
Subtotal Commercial Banking			20,635,791				1,100,310				226,564				34,800				(371,339	)			(548,829	)			441,506
Global Banking and Markets			2,201,913				87,737				21,952				55,180				(3,086	)			(41,944	)			119,839
Corporate			2,201,913				72,747				21,188				1,169				(3,086	)			(21,045	)			70,973
Treasury			-				14,990				764				54,011				-				(20,899	)			48,866
Other			54,945				129,057				(21,233	)			30,909				(6	)			2,564				141,291
Total			22,892,649				1,317,104				227,283				120,889				(374,431	)			(588,209	)			702,636
Other operating income																											14,834
Other operating expenses and impairment																											(117,772	)
Income from investments in associates and other companies																											2,165
Income tax expense																											(45,552	)
Net income for the year																											556,311

 

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

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

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 03

OPERATING SEGMENTS, continued

 

		As of December 31, 2013
		Loans and accounts receivable from customers (1)				Net interest income				Net fee and commission income				Financial transactions, net (2)				Provision for loan losses				Support expenses (3)				Segment’s net contribution
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Individuals			10,474,663				604,979				141,717				8,731				(214,017	)			(361,365	)			180,045
Santander Banefe			730,979				99,161				23,289				1,613				(56,255	)			(45,355	)			22,453
Commercial Banking			9,743,684				505,818				118,428				7,118				(157,762	)			(316,010	)			157,592
Small and mid-sized (SMEs)			3,228,865				260,241				43,049				4,798				(101,541	)			(74,472	)			132,075
Subtotal			13,703,528				865,220				184,766				13,529				(315,558	)			(435,837	)			312,120
Companies			4,682,221				163,617				26,545				13,674				(32,209	)			(51,182	)			120,445
Middle market			1,757,977				74,227				14,153				7,457				(19,578	)			(27,990	)			48,269
Large Corporations			1,927,075				62,881				8,862				5,930				(8,262	)			(17,330	)			52,081
Real estate			997,169				26,509				3,530				287				(4,369	)			(5,862	)			20,095
Institutions			353,559				29,837				2,654				562				317				(11,635	)			21,735
Subtotal			5,035,780				193,454				29,199				14,236				(31,892	)			(62,817	)			142,180
Subtotal Commercial Banking			18,739,308				1,058,674				213,965				27,765				(347,450	)			(498,654	)			454,300
Global Banking and Markets			2,268,440				72,659				17,432				42,393				(16,862	)			(38,270	)			77,352
Corporate			2,268,440				62,763				15,659				687				(16,862	)			(18,806	)			43,441
Treasury			-				9,896				1,773				41,706				-				(19,464	)			33,911
Other			53,013				(54,571	)			(1,561	)			45,955				281				(20,685	)			(30,581	)
Total			21,060,761				1,076,762				229,836				116,113				(364,031	)			(557,609	)			501,071
Other operating income																											20,508
Other operating expenses and impairment																											(62,595	)
Income from investments in associates and other companies																											79,544
Income tax expense																											(94,467	)
Net income for the year																											444,061

 

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

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

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 04

CASH AND CASH EQUIVALENTS

 

a)

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

 

		As of December 31,
		2014 MCh$				2013 MCh$
Cash and deposits in banks
Cash			594,979				551,136
Deposits in the Central Bank of Chile			167,444				797,363
Deposits in domestic banks			50				81
Deposits in foreign banks			846,415				223,230
Subtotals – Cash and deposits in banks			1,608,888				1,571,810
Cash in process of collection, net			250,114				327,698
Cash and cash equivalents			1,859,002				1,899,508

 

The balance of funds held in cash and at the Central Bank of Chile reflects the reserves that the Bank must maintain on average each month in accordance with the regulations governing minimum reserves.

 

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 which have not been processed through the central domestic clearinghouse or international transactions which may be delayed in settlement due to timing differences. These transactions were as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Assets
Documents held by other banks (documents to be cleared)			261,758				289,723
Funds receivable			269,615				314,354
Subtotal			531,373				604,077
Liabilities
Funds payable			281,259				276,379
Subtotal			281,259				276,379
Cash in process of collection, net			250,114				327,698

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 05

TRADING INVESTMENTS

 

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds			270,004				75,577
Chilean Central Bank Notes			-				100
Other Chilean Central Bank and Government securities			461,340				189,962
Subtotal			731,344				265,639
Other Chilean securities
Time deposits in Chilean financial institutions			-				-
Mortgage finance bonds of Chilean financial institutions			-				-
Chilean financial institution bonds			-				10,042
Chilean corporate bonds			36,339				2,229
Other Chilean securities			-				-
Subtotal			36,339				12,271
Foreign financial securities
Foreign Central Banks and Government securities			-				-
Other foreign financial instruments			-				-
Subtotal			-				-
Investments in mutual funds
Funds managed by related entities			7,132				9,657
Funds managed by others			-				-
Subtotal			7,132				9,657
Total			774,815				287,567

 

As of December 31, 2014 and 2013, there are no securities sold under repurchase agreements to clients and financial institutions.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 06

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, 2014 and 2013, rights associated with instruments acquired under contracts to resell are as follows:

 

		As of December 31,
		2014																2013
		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			-				-				-				-				-				-				-				-
Chilean Central Bank Notes			-				-				-				-				-				-				-				-
Other securities from the Government and the Chilean Central Bank			-				-				-				-				17,469				-				-				17,469
Subtotal			-				-				-				-				17,469				-				-				17,469
Instruments from other 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

 

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 06

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, 2014 and 2013, obligations related to instruments sold under repurchase agreements are as follows:

 

		As of December 31,
		2014																2013
		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 3 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			105,702				-				-				105,702				66,937				-				-				66,937
Chilean Central Bank Notes			153				-				-				153				22				-				-				22
Other securities from the Government and the Chilean Central Bank			10,644				-				-				10,644				23,879				-				-				23,879
Subtotal			116,499				-				-				116,499				90,838				-				-				90,838
Instruments from other domestic institutions:
Time deposits in Chilean financial institutions			275,285				342				-				275,627				112,743				5,391				-				118,134
Mortgage finance bonds of Chilean financial institutions			-				-				-				-				-				-				-				-
Chilean financial institution bonds			-				-				-				-				-				-				-				-
Chilean corporate bonds			-				-				-				-				-				-				-				-
Other Chilean securities			-				-				-				-				-				-				-				-
Subtotal			275,285				342				-				275,627				112,743				5,391				-				118,134
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			391,784				342				-				392,126				203,581				5,391				-				208,972

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 06

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, 2014 and 2013, valued at fair value:

 

		As of December 31,
		2014												2013
		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			105,680				-				105,680				66,933				-				66,933
Chilean Central Bank Notes			153				-				153				22				-				22
Other securities from the Government and the Chilean Central Bank			10,642				-				10,642				23,863				-				23,863
Subtotal			116,475				-				116,475				90,818				-				90,818
Other Chilean securities:
Time deposits in Chilean financial institutions			275,675				-				275,675				118,195				-				118,195
Mortgage finance bonds of Chilean financial institutions			-				-				-				-				-				-
Chilean financial institution bonds			-				-				-				-				-				-
Chilean corporate bonds			-				-				-				-				-				-
Other Chilean securities			-				-				-				-				-				-
Subtotal			275,675				-				275,675				118,195				-				118,195
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			392,150				-				392,150				209,013				-				209,013

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

 

a)

As of December 31, 2014 and 2013 the Bank holds the following portfolio of derivative instruments:

 

		As of December 31, 2014
		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			97,812				846,168				668,166				1,612,146				9,821				2,540
Cross currency swaps			-				193,704				694,852				888,556				110,448				7,997
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			-				-				-				-				-				-
Subtotal			97,812				1,039,872				1,363,018				2,500,702				120,269				10,537
Cash flow hedge derivatives
Currency forwards			-				-				-				-				-				-
Interest rate swaps			-				-				-				-				-				-
Cross currency swaps			11,329				850,555				1,727,283				2,589,167				131,880				21,996
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			-				-				-				-				-				-
Subtotal			11,329				850,555				1,727,283				2,589,167				131,880				21,996
Trading derivatives
Currency forwards			8,740,802				20,156,612				2,155,381				31,052,795				342,726				277,789
Interest rate swaps			1,675,560				16,147,587				37,838,280				55,661,427				518,392				485,798
Cross currency swaps			524,274				4,395,731				19,028,968				23,948,973				1,609,197				1,761,196
Call currency options			160,560				89,701				-				250,261				1,587				2,597
Call interest rate options			-				-				103,474				103,474				795				633
Put currency options			153,999				157,757				34,491				346,247				2,575				485
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			258,425				-				-				258,425				142				353
Subtotal			11,513,620				40,947,388				59,160,594				111,621,602				2,475,414				2,528,851
Total			11,622,761				42,837,815				62,250,895				116,711,471				2,727,563				2,561,384

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

		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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b)

Hedge accounting

 

Fair value hedges:

 

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, 2014 and 2013, classified by term to maturity:

 

		As of December 31, 2014
		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			-				-				-				-				-
Available for sale investments
Yankee bonds			-				-				-				-				-
Mortgage financing bonds			-				-				-				3,291				3,291
Treasury bonds (BTP)			-				20,000				135,000				20,000				175,000
Central bank bonds (BCP)			-				28,000				13,000				147,500				188,500
Time deposits and other demand liabilities
Time deposits			761,481				33,000				-				-				794,481
Issued debt instruments
Senior bonds			376,203				261,437				286,792				414,998				1,339,430
Subordinated bonds			-				-				-				-				-
Interbank borrowings
Interbank loans			-				-				-				-				-
Total			1,137,684				342,437				434,792				585,789				2,500,702
Hedging instrument
Cross currency swaps			955,185				342,437				434,792				464,123				2,196,537
Interest rate swaps			182,499				-				-				121,666				304,165
Total			1,137,684				342,437				434,792				585,789				2,500,702

 

		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 loans			12,213				-				-				-				12,213
Available for sale investments
Yankee bonds			-				-				-				28,308				28,308
Mortgage financing bonds			-				-				-				3,652				3,652
Time deposits and other demand liabilities
Time deposits			55,000				-				-				27,971				82,971
Issued debt instruments
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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

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 notional amount of the hedged items as of December 31, 2014 and 2013, and the period when the cash flows will be generated:

 

		As of December 31, 2014
		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			10,078				78,927				-				-				89,005
Available for sale investments
Yankee bond			-				-				-				287,078				287,078
Chilean Central Bank bonds			11,448				11,509				-				-				22,957
Time deposits			289,819				-				-				-				289,819
Issued debt instruments
Senior bonds (variable rate)			-				882,875				152,083				-				1,034,958
Senior bonds (fixed rate)			-				-				-				-				-
Interbank borrowings
Interbank loans			550,539				314,811				-				-				865,350
Total			861,884				1,288,122				152,083				287,078				2,589,167
Hedging instrument
Cross currency swaps			861,884				1,288,122				152,083				287,078				2,589,167
Total			861,884				1,288,122				152,083				287,078				2,589,167

 

		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
Issued debt instruments
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

 

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

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, 2014
		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			22,834				26,763				10,039				5,449				65,085
Outflows			(27,361	)			(19,007	)			(2,186	)			-				(48,554	)
Net flows			(4,527	)			7,756				7,853				5,449				16,531
Hedging instrument
Inflows			27,361				19,007				2,186				-				48,554
Outflows (*)			(22,834	)			(26,763	)			(10,039	)			(5,449	)			(65,085	)
Net flows			4,527				(7,756	)			(7,853	)			(5,449	)			(16,531	)

 

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b.2) Forecasted cash flows for inflation risk:

 

		As of December 31, 2014
		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			62,551				39,579				-				-				102,130
Outflows			-				-				-				-				-
Net flows			62,551				39,579				-				-				102,130
Hedging instrument
Inflows			-				-				-				-				-
Outflows			(62,551	)			(39,579	)			-				-				(102,130	)
Net flows			(62,551	)			(39,579	)			-				-				(102,130	)

 

		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	)

 

b.3) Forecasted cash flows for exchange 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

 

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

c)

The accumulated effect of the mark to market adjustment of cash flow hedges 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, 2014 and 2013, and is as follows:

 

		As of December 31,
Hedged item		2014				2013
		MCh$				MCh$
Interbank loans			4,208				(3,809	)
Issued debt instruments			5,981				(723	)
Available for sale investments			(726	)			(3,744	)
Loans and accounts receivable from customers			1,262				19
Net flows			10,725				(8,257	)

 

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, 2014 and 2013, Ch$2,348 million and Ch$152 million respectively, were recognized in income.

 

During the year, 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 income for the year:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Bond hedging derivatives			(16	)			(33	)
Interbank loans hedging derivatives			446				1,550
Cash flow hedge net income (*)			430				1,517

 

(*) See Note 23 - Equity, letter d)

 

e)

Net investment hedges in foreign operations:

 

As of December 31, 2014 and 2013, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 08

INTERBANK LOANS

 

a)

As of December 31, 2014 and 2013, balances of “Interbank loans” are as follows:

 

		As of December 31,
		2014				2013
		MCh$				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			44				66
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			11,899				125,383
Overdrafts in checking accounts			-				-
Non-transferable foreign bank deposits			-				-
Other foreign bank loans			-				-
Provisions and impairment for foreign bank loans			(25	)			(54	)
Total			11,918				125,395

 

b)

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

 

		As of December 31,
		2014												2013
		Domestic banks MCh$				Foreign banks MCh$				Total MCh$				Domestic banks MCh$				Foreign banks MCh$				Total MCh$
Balance as of January 1			-				54				54				-				46				46
Charge-offs			-				-				-				-				-				-
Provisions established			-				60				60				-				127				127
Provisions released			-				(89	)			(89	)			-				(119	)			(119	)
Total			-				25				25				-				54				54

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS

 

a)

Loans and accounts receivable from customers

 

As of December 31, 2014 and 2013, the composition of the loan portfolio is as follows:

 

As of December 31, 2014		Assets before allowances																Allowances established
		Normal portfolio				Substandard portfolio				Impaired portfolio				Total				Individual allowances				Group allowances				Total				Assets net balance
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans
Commercial loans			7,523,582				234,524				566,843				8,324,949				139,628				139,446				279,074				8,045,875
Foreign trade loans			1,644,096				72,213				69,923				1,786,232				59,754				1,278				61,032				1,725,200
Checking accounts debtors			248,471				6,376				11,384				266,231				3,823				6,457				10,280				255,951
Factoring transactions			322,337				2,482				3,022				327,841				4,459				725				5,184				322,657
Leasing transactions			1,346,867				82,299				60,218				1,489,384				18,264				6,763				25,027				1,464,357
Other loans and account receivable			113,156				717				21,790				135,663				6,376				11,028				17,404				118,259
Subtotal			11,198,509				398,611				733,180				12,330,300				232,304				165,697				398,001				11,932,299
Mortgage loans
Loans with mortgage finance bonds			55,040				-				2,316				57,356				-				353				353				57,003
Mortgage mutual loans			113,741				-				2,409				116,150				-				552				552				115,598
Other mortgage mutual loans			6,092,647				-				365,878				6,458,525				-				47,839				47,839				6,410,686
Subtotal			6,261,428				-				370,603				6,632,031				-				48,744				48,744				6,583,287
Consumer loans
Installment consumer loans			1,989,755				-				331,020				2,320,775				-				201,931				201,931				2,118,844
Credit card balances			1,335,268				-				27,319				1,362,587				-				44,050				44,050				1,318,537
Leasing transactions			5,187				-				83				5,270				-				80				80				5,190
Other consumer loans			224,681				-				5,062				229,743				-				7,962				7,962				221,781
Subtotal			3,554,891				-				363,484				3,918,375				-				254,023				254,023				3,664,352
Total			21,014,828				398,611				1,467,267				22,880,706				232,304				468,464				700,768				22,179,938

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

As of December 31, 2013		Assets before allowances																Allowances established
		Normal portfolio				Substandard portfolio				Impaired portfolio				Total				Individual allowances				Group allowances				Total				Assets net balance
		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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

b)

Portfolio characteristics:

 

As of December 31, 2014 and 2013 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,
		2014				2013				2014				2013				2014				2013				2014				2013
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				%				%
Commercial loans
Manufacturing			1,126,268				1,216,914				-				-				1,126,268				1,216,914				4.92				5.78
Mining			428,847				464,865				-				-				428,847				464,865				1.87				2.21
Electricity, gas, and water			567,548				222,110				-				-				567,548				222,110				2.48				1.05
Agriculture and livestock			871,247				806,092				-				-				871,247				806,092				3.81				3.83
Forest			98,039				183,716				-				-				98,039				183,716				0.43				0.87
Fishing			256,818				265,917				-				-				256,818				265,917				1.12				1.26
Transport			758,339				721,931				-				-				758,339				721,931				3.31				3.43
Communications			167,004				249,499				-				-				167,004				249,499				0.73				1.18
Construction			1,365,841				1,337,791				-				-				1,365,841				1,337,791				5.97				6.35
Commerce			2,773,410				2,578,979				11,899				125,383				2,785,309				2,704,362				12.17				12.84
Services			469,141				447,861				-				-				469,141				447,861				2.05				2.13
Other			3,447,842				3,206,643				-				-				3,447,842				3,206,643				15.06				15.23
Subtotal			12,330,344				11,702,318				11,899				125,383				12,342,243				11,827,701				53.92				56.16
Mortgage loans			6,632,031				5,625,812				-				-				6,632,031				5,625,812				28.97				26.71
Consumer loans			3,918,375				3,607,248				-				-				3,918,375				3,607,248				17.11				17.13
Total			22,880,750				20,935,378				11,899				125,383				22,892,649				21,060,761				100.00				100.00

 

(*)

Includes domestic interbank loans for Ch$44 million as of December 31, 2014 (Ch$66 million as of December 31, 2013), see Note 8.

 

(**)

Includes foreign interbank loans for Ch$11,899 million as of December 31, 2014 (Ch$125,383 million as of December 31, 2013), see Note 8.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

c)

Impaired Portfolio

 

i)

As of December 31, 2014 and 2013, the impaired portfolio is as follows:

 

		As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Individual impaired portfolio			420,038				-				-				420,038				317,534				-				-				317,534
Non-performing loans (collectively evaluated)			367,791				179,417				97,119				644,327				364,890				155,688				92,723				613,301
Other impaired portfolio			95,335				191,186				266,365				552,886				122,464				167,713				256,689				546,866
Total			883,164				370,603				363,484				1,617,251				804,888				323,401				349,412				1,477,701

 

ii)

The impaired portfolio with or without guarantee as of December 31, 2014 and 2013 is as follows:

 

		As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Secured debt			408,759				341,860				48,133				798,752				385,712				302,219				49,051				736,982
Unsecured debt			474,405				28,743				315,351				818,499				419,176				21,182				300,361				740,719
Total			883,164				370,603				363,484				1,617,251				804,888				323,401				349,412				1,477,701

 

iii)

The portfolio of non-performing loans as of December 31, 2014 and 2013 is as follows:

 

		As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Secured debt			130,999				157,608				8,292				296,899				151,494				136,768				7,241				295,503
Unsecured debt			236,792				21,809				88,827				347,428				213,396				18,920				85,482				317,798
Total			367,791				179,417				97,119				644,327				364,890				155,688				92,723				613,301

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

d)

Allowances

 

The changes in allowance balances during 2014 and 2013 are as follows:

 

Activity during 2014		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Balance as of January 1, 2014			200,230				100,170				43,306				264,585				608,291
Allowances established			74,839				99,648				14,959				129,410				318,856
Allowances released			(15,903	)			(7,127	)			(6,561	)			(38,275	)			(67,866	)
Allowances released due to charge-off			(26,862	)			(26,994	)			(2,960	)			(101,697	)			(158,513	)
Balances as of December 31, 2014			232,304				165,697				48,744				254,023				700,768

 

Activity during 2013		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Balance as of January 1, 2013			154,935				95,938				35,990				263,259				550,122
Allowances established			85,628				36,724				21,314				155,921				299,587
Allowances released			(22,014	)			(11,151	)			(9,216	)			(35,482	)			(77,863	)
Allowances released due to 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

 

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

 

ii)

Country risk to cover the risk taken when holding or committing resources with any foreign country. These allowances are established according to country risk classifications as set by Chapter 7-13 of the Updated Compilation of Rules, issued by the SBIF. The balances of allowances as of December 31, 2014 and 2013 are Ch$155 million and Ch$470 million, respectively. These are presented in Note 20 "Provisions" in the liabilities of the Consolidated Statement of Financial Position.

 

iii)

According to SBIF’s regulations (compendium of Accounting Standards), the Bank has established allowances related to the undrawn available credit lines and contingent loans. The balances of allowances as of December 31, 2014 and 2013 are Ch$16,036 million and Ch$18,767 million, respectively and are presented in Note 20 "Provisions" in the liabilities of the Consolidated Statement of Financial Position.

 

i.

Allowances established on customer and interbank loans

 

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Customers loans			318,856				299,587
Interbank loans			60				127
Total			318,916				299,714

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

ii.

Portfolio by its Impaired and non-impaired status.

 

		As of December 31, 2014
		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			11,225,561				5,959,902				3,361,922				20,547,385				374,317				129,185				160,292				663,794				11,599,878				6,089,087				3,522,214				21,211,179
Overdue for 1-29 days			136,012				94,212				116,315				346,539				38,909				18,164				53,921				110,994				174,921				112,376				170,236				457,533
Overdue for 30-89 days			85,562				207,314				76,654				369,530				107,093				51,435				60,676				219,204				192,655				258,749				137,330				588,734
Overdue for 90 days or more			-				-				-				-				362,846				171,819				88,595				623,260				362,846				171,819				88,595				623,260
Total portfolio before allowances			11,447,135				6,261,428				3,554,891				21,263,454				883,165				370,603				363,484				1,617,252				12,330,300				6,632,031				3,918,375				22,880,706
Overdue loans (less than 90 days) presented as portfolio percentage			1.94	%			4.82	%			5.43	%			3.37	%			16.53	%			18.78	%			31.53	%			20.42	%			2.98	%			5.60	%			7.85	%			4.57	%
Overdue loans (90 days or more) presented as portfolio percentage.			-				-				-				-				41.08	%			46.36	%			24.37	%			38.54	%			2.94	%			2.59	%			2.26	%			2.72	%

 

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

 

iii.

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

 

		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	%

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS

 

As of December 31, 2014 and 2013, detail of instruments deemed as available for sale investments is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds			381,117				364,821
Chilean Central Bank Notes			384				1,078
Other Chilean Central Bank and Government securities			353,419				146,295
Subtotal			734,920				512,194
Other Chilean securities
Time deposits in Chilean financial institutions			590,382				1,011,354
Mortgage finance bonds of Chilean financial institutions			31,693				33,856
Chilean financial institution bonds			-				-
Chilean corporate bonds			-				-
Other Chilean securities			-				-
Subtotal			622,075				1,045,210
Foreign financial securities
Foreign Central Banks and Government securities			-				-
Other foreign financial securities			294,603				143,589
Subtotal			294,603				143,589
Total			1,651,598				1,700,993

 

As of December 31, 2014 and 2013, the line item Chilean Central Bank and Government securities item includes securities sold under repurchase agreements to clients and financial institutions for Ch$116,464 million and Ch$90,818 million, respectively.

 

As of December 31, 2014 and 2013, the line item Other National Institutions Securities includes securities sold to customers and financial institutions under repurchase agreements totaling Ch$275,650 million and Ch$118,195 million, respectively.

 

As of December 31, 2014 available for sale investments included a net unrealized profit of Ch$21,684 million, recorded as a “Valuation adjustment” in Equity, distributed between a profit of Ch$21,680 million attributable to Bank shareholders and a profit of Ch$4 million attributable to non-controlling interest.

 

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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS, continued

 

Gross profits and losses realized on the sale of available for sale investments as of December 31, 2014, 2013 and 2012, are as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Sale of available for sale investments generating realized profits			2,064,836				3,826,358
Realized profits			6,079				9,326
Sale of available for sale investments generating realized losses			92,620				388,401
Realized losses			64				1,098

 

The Bank evaluated those instruments with unrealized losses as of December 31, 2014 and 2013 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 significant or prolonged decline in its investment portfolio, since most of the decline in fair value of these instruments was caused by market conditions which the Bank considers to be temporary. All of the instruments that have unrealized losses as of December 31, 2014 and 2013, were not in a continuous unrealized loss position for more than one year.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS, continued

 

The following charts show the available for sale investments unrealized profit and loss, as of December 31, 2014 and 2013.

 

As of December 31, 2014:

 

		Less than 12 months																More than 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			370,858				381,117				10,297				(38	)			-				-				-				-				370,858				381,117				10,297				(38	)
Chilean Central Bank Notes			385				384				-				(1	)			-				-				-				-				385				384				-				(1	)
Other Chilean Central Bank and Government securities			343,847				353,419				9,572				-				-				-				-				-				343,847				353,419				9,572				-
Subtotal			715,090				734,920				19,869				(39	)			-				-				-				-				715,090				734,920				19,869				(39	)
Other Chilean securities
Time deposits in Chilean financial institutions			592,398				590,382				600				(2,616	)			-				-				-				-				592,398				590,382				600				(2,616	)
Mortgage finance bonds of Chilean financial institutions			31,693				31,693				218				(218	)			-				-				-				-				31,693				31,693				218				(218	)
Chilean financial institution bonds			-				-				-				-				-				-				-				-				-				-				-				-
Chilean corporate bonds			-				-				-				-				-				-				-				-				-				-				-				-
Other Chilean securities			-				-				-				-				-				-				-				-				-				-				-				-
Subtotal			624,091				622,075				818				(2,834	)			-				-				-				-				624,091				622,075				818				(2,834	)
Foreign financial securities
Foreign Central Banks and Government securities			-				-				-				-				-				-				-				-				-				-				-				-
Other foreign financial securities			290,733				294,603				3,870				-				-				-				-				-				290,733				294,603				3,870				-
Subtotal			290,733				294,603				3,870				-				-				-				-				-				290,733				294,603				3,870				-
Total			1,629,914				1,651,598				24,557				(2,873	)			-				-				-				-				1,629,914				1,651,598				24,557				(2,873	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS, continued

 

The following charts show the available for sale investments unrealized profit and loss, as of December 31, 2014 and 2013, continued.

 

As of December 31, 2013:

 

		Less than 12 months																More than 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			-				-				-				-				-				-				-				-				-				-				-				-
Other foreign financial securities			145,672				143,589				-				(2,083	)			-				-				-				-				145,672				143,589				-				(2,083	)
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	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 11

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES

 

a)

The Consolidated Statements of Financial Position reflect investments in associates and other companies amounting to Ch$17,914 million as of December 31, 2014, and Ch$9,681 million, as of December 31, 2013, as shown in the following table:

 

										Investment
		Ownership interest								Investment value								Profit and loss for the years
		As of December 31,								As of December 31,								ended December 31,
		2014				2013				2014				2013				2014				2013
		%				%				MCh$				MCh$				MCh$				MCh$
Company
Redbanc S.A.			33.43				33.43				1,725				1,513				211				139
Transbank S.A. (1)			25.00				25.00				8,646				1,309				1,022				9
Centro de Compensación Automatizado			33.33				33.33				894				673				220				125
Sociedad Interbancaria de Depósito de Valores S.A.			29.29				29.28				745				585				170				112
Cámara de Compensación de Alto Valor S.A.			14.14				14.14				709				673				107				63
Administrador Financiero del Transantiago S.A.			20.00				20.00				2,229				1,947				282				732
Sociedad Nexus S.A.			12.90				12.90				1,123				972				195				145
Servicios de Infraestructura de Mercado OTC S.A. (3)			11.11				11.11				1,258				1,424				(172	)			(16	)
Subtotal											17,329				9,096				2,035				1,309
Shares or rights in other companies
Bladex											136				136				20				16
Bolsas de Comercio											425				417				110				97
Others											24				32				-				-
Subtotal											17,914				9,681				2,165				1,422
Sale of Santander Asset Management S.A.
Administradora General de Fondos (2)											-				-				-				78,122
Total											17,914				9,681				2,165				79,544

 

(1)

In the Transbank’s Shareholders’ Meeting held in June 3, 2014, it was agreed to capitalize retained earnings and increase the capital by approximately Ch$25,200 million. The Bank has participated in proportion to its ownership share (25%), resulting in a contribution of approximately Ch$6,313 million to Transbank.

 

(2) In December 2013, Santander Asset Management S.A. Administradora General de Fondos was sold for Ch$ $90,281 million, generating an income of Ch$78,122 million, which was recognized with the income from associates which amounted to Ch$79.544 million at December 31, 2013.

 

(3) In July 2013, Banco Santander acquired 1,111 shares in the company "Servicios de Infraestructura de Mercado OTC S.A." for Ch$1,440 million,

 

b)

The investments in associates and other companies do not have a market price.

 

c)

Summary of financial information of associates as of and for the years ended December 31, 2014 and 2013:

 

		As of December 31
		2014																2013
														Net																Net
		Assets				Liabilities				Equity				income				Assets				Liabilities				Equity				income
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Centro de Compensación Automatizado			3,731				1,117				1,953				661				2,994				1,012				1,606				376
Redbanc S.A.			19,215				14,246				4,336				633				18,023				13,622				3,984				417
Transbank S.A.			535,507				501,330				30,088				4,089				483,004				477,772				5,196				36
Sociedad Interbancaria de Depósito de Valores S.A.			2,715				314				1,863				538				2,113				20				1,711				382
Sociedad Nexus S.A.			14,438				6,185				6,745				1,508				13,309				6,112				6,075				1,122
Servicios de Infraestructura de Mercado OTC S.A.			12,001				1,094				12,603				(1,696	)			14,608				3,188				11,560				(140	)
Administrador Financiero del Transantiago S.A.			70,302				59,157				9,737				1,408				63,981				54,244				6,076				3,661
Cámara de Compensación de Alto Valor S.A.			5,278				636				3,901				741				5,435				906				4,085				444
Total			663,187				584,079				71,226				7,882				603,467				556,876				40,293				6,298

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 11

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES, continued

 

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 2014 and 2013 is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Opening balance as of January 1,			9,681				7,614
Acquisition of investments (1)			6,313				1,440
Sale of investments			-				-
Participation in income			2,165				1,422
Dividends received			(119	)			(663	)
Other equity adjustments			(126	)			(132	)
Total			17,914				9,681

 

(1)

See reference (1) of part a) of this note.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 12

INTANGIBLE ASSETS

 

a)

As of December 31, 2014 and 2013, the composition of intangible assets is as follows:

 

														As of December 31, 2014
		Years of useful life				Average remaining useful life				Net opening balance as of January 1, 2013				Gross balance				Accumulated amortization				Net balance
										MCh$				MCh$				MCh$				MCh$
Licenses			3				2				2,197				10,441				(8,435	)			2,006
Software development (acquired)			3				2				64,506				232,418				(193,441	)			38,977
Total											66,703				242,859				(201,876	)			40,983

 

														As of December 31, 2013
		Years of useful life				Average remaining useful life				Net opening balance as of 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 (acquired)			3				2				84,726				242,023				(177,517	)			64,506
Total											87,347				251,978				(185,275	)			66,703

 

b)

The changes in the value of intangible assets during the periods ended December 31, 2014 and December 2013 is as follows:

 

b.1) Gross balance

 

Gross balances		Licenses				Software development				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			9,955				242,023				251,978
Acquisitions			486				26,951				27,437
Disposals and Impairment			-				(36,556	)			(36,556	)
Other			-				-				-
Balances as of December 31, 2014			10,441				232,418				242,859
Balances as of January 1, 2013			9,329				224,671				234,000
Acquisitions			626				17,774				18,400
Disposals and Impairment			-				-				-
Other			-				(422	)			(422	)
Balances as of December 31, 2013			9,955				242,023				251,978

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 12

INTANGIBLE ASSETS, continued

 

b.2) Accumulated amortization

 

Accumulated amortization		Licenses				Software development				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			(7,758	)			(177,517	)			(185,275	)
Year’s amortization			(677	)			(15,924	)			(16,601	)
Other changes			-				-				-
Balances as of December 31, 2014			(8,435	)			(193,441	)			(201,876	)
Balances as of January 1, 2013			(6,708	)			(139,945	)			(146,653	)
Year’s amortization			(1,050	)			(37,572	)			(38,622	)
Other changes			-				-				-
Balances as of December 31, 2013			(7,758	)			(177,517	)			(185,275	)

 

c)

The Bank has no restriction on intangible assets as of December 31, 2014 and 2013. Additionally, the intangibles assets have not been pledged as guarantee for fulfillment of financial liabilities. Also, the Bank has no debt related to intangible assets as of those dates.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014 AND 2013

 

NOTE 13

PROPERTY, PLANT, AND EQUIPMENT

 

a)

As of December 31, 2014 and 2013, the composition of property, plant, and equipment balances are composed as follows:

 

						As of December 31, 2014
		Net opening balance as of January 1, 2014				Gross balance				Accumulated depreciation				Net balance
		MCh$				MCh$				MCh$				MCh$
Land and buildings			128,119				209,668				(67,072	)			142,596
Equipment			38,841				108,416				(59,316	)			49,100
Ceded under operating leases			4,329				4,888				(638	)			4,250
Other			8,926				43,499				(27,884	)			15,615
Total			180,215				366,471				(154,910	)			211,561

 

						As of December 31, 2013
		Net opening balance as of January 1, 2013				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

 

b)

The activity in property, plant, and equipment as of December 31, 2014 and 2013 is as follows:

 

b.1) Gross balance

 

2014		Land and buildings				Equipment				Ceded under operating leases				Other				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2014			184,711				85,857				4,888				32,207				307,663
Additions			24,957				22,785				-				11,346				59,088
Disposals			-				(118	)			-				(54	)			(172	)
Impairment due to damage (*)			-				(108	)			-				-				(108	)
Other			-				-				-				-				-
Balances as of December 31, 2014			209,668				108,416				4,888				43,499				366,471

 

(*)

Banco Santander Chile recognized an impairment of Ch$108 million on its financial statements as of December 31, 2014 due to damages to ATMs. Compensation received from insurance totaled Ch$661 million, which is presented within Other operating income and expenses (see Note 34).

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 13

PROPERTY, PLANT, AND EQUIPMENT, continued

 

		Land and buildings				Equipment				Ceded under 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 (*)			-				(244	)			-				-				(244	)
Other			-				-				-				102				102
Balances as of December 31, 2013			184,711				85,857				4,888				32,207				307,663

 

(*) Banco Santander Chile recognized an impairment of Ch$244 million on its financial statements as of December 31, 2013 due to damages to ATMs. Compensation received from insurance totaled Ch$725 million, which is presented within Other operating income and expenses (see Note 34).

 

b.2) Accumulated depreciation

 

		Land and buildings				Equipment				Ceded under operating leases				Other				Total
2014		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2014			(56,592	)			(47,016	)			(559	)			(23,281	)			(127,448	)
Depreciation charges in the period			(10,483	)			(12,331	)			(79	)			(4,678	)			(27,571	)
Sales and disposals in the period			2				31				-				76				109
Transfers			-				-				-				-				-
Other			-				-				-				-				-
Balances as of December 31, 2014			(67,073	)			(59,316	)			(638	)			(27,883	)			(154,910	)

 

		Land and buildings				Equipment				Ceded under 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	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 13

PROPERTY, PLANT, AND EQUIPMENT, continued

 

c)

Operational leases – Lessor

 

As of December 31, 2014 and 2013, the future minimum lease cash inflows under non-cancellable operating leases are as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			453				637
Due after 1 year but within 2 years			1,140				508
Due after 2 years but within 3 years			278				300
Due after 3 years but within 4 years			278				263
Due after 4 years but within 5 years			276				263
Due after 5 years			1,755				2,148
Total			4,180				4,119

 

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,
		2014				2013
		MCh$				MCh$
Due within 1 year			19,225				18,941
Due after 1 year but within 2 years			17,509				16,948
Due after 2 year but within 3 years			16,416				15,161
Due after 3 years but within 4 years			15,206				14,083
Due after 4 years but within 5 years			13,012				12,902
Due after 5 years			58,213				61,730
Total			139,581				139,765

 

e)

As of December 31, 2014 and 2013, the Bank has no financial leases which cannot be unilaterally rescinded.

 

f)

The Bank has no restriction on property, plant and equipment as of December 31, 2014 and 2013. Additionally, the property, plant, and equipment have not been provided as guarantees of financial liabilities. The Bank has no debt in connection with property, plant and equipment.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 14

CURRENT AND DEFERRED TAXES

 

a)

Current taxes

 

As of December 31, 2014 and 2013, 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,
		2014				2013
		MCh$				MCh$
Summary of current tax liabilities (assets)
Current tax (assets)			(2,241	)			(1,643	)
Current tax liabilities			1,077				50,242
Total tax payable (recoverable)			(1,164	)			48,599
(Assets) liabilities current taxes detail (net)
Income tax, tax rate 21% (20% as of December 31, 2013)			122,150				117,095
Minus:
Provisional monthly payments			(115,743	)			(61,730	)
Credit for training expenses			(1,764	)			(1,656	)
Land taxes leasing			(3,357	)			(2,987	)
Grant credits			(1,587	)			(1,892	)
Other			(863	)			(231	)
Total tax payable (recoverable)			(1,164	)			48,599

 

b)

Effect on income

 

The effect of tax expense on income for the years ended December 31, 2014 and 2013 is comprised of the following items:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Income tax expense
Current tax			122,150				117,095
Credits (debits) for deferred taxes
Origination and reversal of temporary differences			(77,742	)			(27,721	)
Subtotals			44,408				89,374
Tax for rejected expenses (Article No.21)			746				392
Other			398				4,701
Net charges for income tax expense			45,552				94,467

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 14

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, 2014 and 2013 is as follows:

 

		As of December 31,
		2014								2013
		Tax rate				Amount				Tax rate				Amount
		%				MCh$				%				MCh$
Tax calculated over profit before tax			21.00				126,391				20.00				107,706
Permanent differences			(6.47	)			(38,956	)			(2.04	)			(10,989	)
Single penalty tax (rejected expenses)			0.12				746				0.07				392
Effect of tax reform changes on deferred tax (*)			(6.52	)			(39,262	)			-				-
Real estate taxes			(0.56	)			(3,357	)			(0.55	)			(2,987	)
Other			-				(10	)			0.06				345
Effective rates and expenses for income tax			7.57				45,552				17.54				94,467

 

(*) The effect of the tax reform was Ch$35,411 million. In the fourth quarter an additional effect of Ch$3,851 million was generated by the fluctuation of deferred taxes (recognized as of December 31, 2014).

 

d)

Effect of deferred taxes on comprehensive income

 

Below is a summary of the separate effect of deferred tax on other comprehensive income, showing the asset and liability balances, for the years ended December 31, 2014 and 2013:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Available for sale investments			24				31
Cash flow hedges			(2,252	)			1,651
Total deferred tax assets recognized through other comprehensive income			(2,228	)			1,682
Deferred tax liabilities
Available for sale investments			(4,578	)			(199	)
Cash flow hedges			-				-
Total deferred tax liabilities recognized through other comprehensive income			(4,578	)			(199	)
Net deferred tax balances in equity			(6,806	)			1,483
Deferred taxes in equity attributable to Bank shareholders			(6,805	)			1,491
Deferred tax in equity attributable to non-controlling interests			(1	)			(8	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 14

CURRENT AND DEFERRED TAXES, continued

 

e)

Effect of deferred taxes on income

 

As of December 31, 2014 and 2013, the Bank has recorded effects for deferred taxes in the financial statements.

 

Below are the effects of deferred taxes on assets, liabilities and income:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Interests and adjustments			10,999				7,203
Non-recurring charge-offs			7,988				9,787
Assets received in lieu of payment			1,209				1,149
Property, plant and equipment			5,154				3,579
Allowance for loan losses			125,195				92,088
Provision for expenses			28,902				19,130
Derivatives			9,939				19
Leased assets			73,886				52,447
Subsidiaries tax losses			7,887				5,716
Valuation of investments			4,895				-
Other			8,385				37,415
Total deferred tax assets			284,439				228,533
Deferred tax liabilities
Valuation of investments			-				(11,593	)
Depreciation			(395	)			(315	)
Other			(2,658	)			(12,981	)
Total deferred tax liabilities			(3,053	)			(24,889	)

 

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,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Recognized through other comprehensive income			(2,228	)			1,682
Recognized through profit or loss			284,439				228,533
Total deferred tax assets			282,211				230,215
Deferred tax liabilities
Recognized through other comprehensive income			(4,578	)			(199	)
Recognized through profit or loss			(3,053	)			(24,889	)
Total deferred tax liabilities			(7,631	)			(25,088	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 14

CURRENT AND DEFERRED TAXES, continued

 

g)

Complementary information related to the circular issued by the local Tax Service (SII) and the SBIF

 

g.1) Loans and accounts receivable from customers, net

 

		As of December 31,
		2014																2013
						Tax value of assets																Tax value of assets
		Financial								Impaired Portfolio								Financial								Impaired Portfolio
		value of								With				Without				value of								With				Without
		assets				Total				Guarantees				Guarantees				assets				Total				Guarantees				Guarantees
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Interbank loans			11,943				11,943				-				-				125,449				125,449				-				-
Commercial loans			10,513,400				10,541,375				116,155				167,153				11,702,252				10,063,170				123,387				134,807
Consumer loans			3,913,105				3,945,458				1,747				24,865				3,607,248				3,651,539				321				14,995
Mortgage loans			6,632,029				6,646,305				90,693				8,697				5,625,812				5,636,214				77,861				1,154
Total			21,070,477				21,145,081				208,595				200,715				21,060,761				19,476,372				201,569				150,956

 

g.2) Allowances for the impaired portfolio without guarantees

 

		Balance as of 01.01.2014				Allowance charge-off				Allowance established				Allowance release				Balance as of 31.12.2014
		MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans			134,807				(87,403	)			266,434				(146,685	)			167,153
Consumer loans			14,995				(110,094	)			143,741				(23,777	)			24,865
Mortgage loans			1,154				(2,108	)			22,181				(12,530	)			8,697
Total			150,956				(199,605	)			432,356				(182,992	)			200,715
		Balance as of 01.01.2013 MCh$				Allowance charge-off MCh$				Allowance established MCh$				Allowance release MCh$				Balance as of 31.12.2013 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

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 14

CURRENT AND DEFERRED TAXES, continued

 

g.3) Direct charge-offs and recoveries

 

		As of December 31,
		2014 MCh$				2013 MCh$
Direct charge-offs according to Art. 31 N°4 (paragraph II)			33,519				31,551
Cancellations that generated the release of allowances			-				-
Recoveries or renegotiations of charged-off loans			50,420				53,952
Total			83,939				85,503

 

g.4) Application of article 31 N°4 (paragraph I and II)

 

		As of December 31,
		2014 MCh$				2013 MCh$
Charge-offs according to paragraph I			-				-
Cancellations according to paragraph III			38,229				32,496
Total			38,229				32,496

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 15

OTHER ASSETS

 

Other assets item includes the following:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Assets for leasing (1)			66,656				41,402
Assets received or awarded in lieu of payment (2)
Assets received in lieu of payment			12,270				14,448
Assets awarded for and through auction			12,055				6,530
Provision on assets received in lieu of payment or awarded			(3,561	)			(2,914	)
Subtotal			20,764				18,064
Other assets
Guarantee deposits			3,013				68,330
Gold investments			422				373
VAT credit			11,579				8,705
Income tax recoverable			38,674				42,354
Prepaid expenses (3)			204,626				34,970
Assets recovered from leasing for sale			1,042				5,747
Pension plan assets			1,857				1,822
Accounts and notes receivable			47,153				60,256
Notes receivable through brokerage and simultaneous transactions			53,142				75,145
Other receivable assets			10,251				9,746
Other assets			33,994				33,111
Subtotal			405,753				340,559
Total			493,173				400,025

 

(1)

Assets available to be granted under the financial leasing agreements.

 

(2)

The Assets received in lieu of payment correspond to assets received as payment of debts due from customers. The total of these assets acquired in this way should not at any time exceed 20% of regulatory capital of the Bank. These assets now account for 0.37% (0.48% as of December 31, 2013) of the Bank’s effective equity.

 

Assets awarded in judicial sale correspond to those acquired in judicial auction 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. The Bank is expected to complete the sale within one year from the date on which the asset are received or acquired. When they are not sold within that period of time, the Bank must charge-off those assets.

 

Additionally, a provision is recorded for the difference between the initial rewarded value rewarded plus any additions and the estimated realizable value (appraisal) when the former is greater.

 

(3)

The increase was primarily because of a prepayment associated with the commercial alliance LAN, which is valid until 2020.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 16

TIME DEPOSITS AND OTHER TIME LIABILITIES

 

As of December 31, 2014 and 2013, the composition of the line item Time deposits and other liabilities is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Deposits and other demand liabilities
Checking accounts			5,131,130				4,403,526
Other deposits and demand accounts			554,785				569,395
Other demand liabilities			794,582				647,842
Total			6,480,497				5,620,763
Time deposits and other time liabilities
Time deposits			10,303,167				9,567,855
Time savings account			107,599				104,143
Other time liabilities			3,174				3,274
Total			10,413,940				9,675,272

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 17

INTERBANK BORROWINGS

 

As of December 31, 2014 and 2013 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			94				220
Subtotal			94				220
Loans from domestic financial institutions			66,006				500
Loans from foreign financial institutions
Standard Chartered Bank - New York			206,471				349,433
Mizuho Corporate Bank			192,522				131,273
Citibank N.A. - New York			177,246				181,107
Wells Fargo Bank N.A. – New York			140,060				144,284
Banco Interamericano del Desarrollo			121,575				104,929
Bank of Montreal – Toronto			103,439				80,820
The Toronto Dominion Bank – Toronto			73,110				70,803
HSBC Bank of New York			30,430				26,222
Canadian Imperial Bank of Comm			24,341				-
National Bank of Abu Dhabi			18,235				15,741
Bank of America			15,331				94,388
European Investment Bank			12,702				-
The Bank of New York Mellon			12,184				26,224
KFW IPEX Bank GMBH			12,184				-
Commerzbank N.A. – Miami			6,097				5,254
Standard Chartered Bank - Hong Kong			4,851				1,059
Banco Santander – Brasil S.A.			2,459				-
Banco Santander – Hong Kong			1,959				5,781
U.S. Bank			1,193				174
Banco Itaú – Paraguay S.A.			1,156				-
Bank of China			737				105
Commerzbank A.G. - Frankfurt			425				107,843
HSBC Bank USA			391				179
J.P. Morgan Chase Bank N.A. - New York			385				164
Banco Santander – Madrid			369				500
YAPI VE KREDI BANKASI A.S.			363				-
Banco Sudameris Paraguay S.A.			308				-
Wachovia Bank N.A.- Miami			299				7,394
First Union National Bank			276				-
Deutsche Bank A.G.- New York			269				13,109
ING Bank N.V. - Vienna			267				-
Banco do Brasil S.A. – London			249				146
Banque Generale Du luxembourg			237				-
Standard Chartered Bank			228				-
Unicrédito Italiano - New York			225				-
BBVA Banco Francés S.A.			210				26
Banca Popolare di Vicenza SCPA			174				76
National Westminster Bank PLC			145				136
Banco de Occidente			123				248
Banco Bradesco S.A.			93				60
Banca Commerciale Italiana S. P.			47				23
Banca Nazionale del Lavoro S. P.			26				38
Turkiye Halk Bankasi			22				23
Banco de Sabadell S.A.			17				250
Landesbank Baden Wuerttemberg			-				108,566
Sumitomo Mitsui Banking Corporation			-				102,379
Banco Santander – Montevideo			-				52,442
Royal Bank of Scotland – London			-				44,608
Unicrédito Italiana SPA			-				993
Woori Bank			-				627
Lanschot Bankiers N.V.			-				446
Banco Popolare di Novara			-				351
National Agricultural Cooperative			-				259
Banco Popular Español S.A.			-				224
Banco Bilbao Vizcaya Argentaria			-				221
Bank of Tokio Mitsubishi			-				174
Intesa Sanpaolo SPA - USA			-				173
United Bank of India			-				160
State Bank of India			-				89
Discount Bank – Montevideo			-				73
Unicredit Banca d Impresa			-				47
Bancolombia S.A. - Panamá			-				9
Other			2,071				2,004
Subtotal			1,165,501				1,681,657
Total			1,231,601				1,682,377

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 17

INTERBANK BORROWINGS, continued

 

a)

Obligations with Central Bank of Chile

 

Debts to the Central Bank of Chile include credit lines for renegotiation of loans and other borrowings. These credit lines were provided by the Central Bank of Chile for 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,
		2014				2013
		MCh$				MCh$
Total Line of credit for renegotiation with Central Bank of Chile			94				220

 

b)

Loans from domestic financial institutions

 

These obligations’ maturities are as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			66,006				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			66,006				500

 

c)

Foreign obligations

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			717,416				1,529,511
Due within 1 and 2 year			242,863				152,146
Due within 2 and 3 year			192,522				-
Due within 3 and 4 year			-				-
Due after 5 years			12,700				-
Total loans from foreign financial institutions			1,165,501				1,681,657

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

 

As of December 31, 2014 and 2013, composition of this item is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Other financial liabilities
Obligations to public sector			65,843				68,075
Other domestic obligations			136,021				118,683
Foreign obligations			3,261				3,023
Subtotal			205,125				189,781
Issued debt instruments
Mortgage finance bonds			81,509				101,667
Senior bonds			4,868,487				4,190,918
Mortgage bond			109,200				70,339
Subordinated bonds			725,916				835,734
Subtotal			5,785,112				5,198,658
Total			5,990,237				5,338,439

 

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, 2014
		Current				Non-current				Total
		MCh$				MCh$				MCh$
Mortgage finance bonds			6,561				74,948				81,509
Senior bonds			1,166,602				3,701,885				4,868,487
Mortgage bond			3,778				105,422				109,200
Subordinated bonds			10,451				715,465				725,916
Issued debt instruments			1,187,392				4,597,720				5,785,112
Other financial liabilities			120,549				84,576				205,125
Total			1,307,941				4,682,296				5,990,237

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

		As of December 31, 2013
		Current				Non-current				Total
		MCh$				MCh$				MCh$
Mortgage finance bonds			6,473				95,194				101,667
Senior bonds			1,088,379				3,102,539				4,190,918
Mortgage bond			1,925				68,414				70,339
Subordinated bonds			149,033				686,701				835,734
Issued debt instruments			1,245,810				3,952,848				5,198,658
Other financial liabilities			101,698				88,083				189,781
Total			1,347,508				4,040,931				5,388,439

 

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 5.83% as of December 31, 2014 (5.21% as of December 31, 2013).

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			6,561				6,473
Due after 1 year but within 2 years			6,971				9,744
Due after 2 year but within 3 years			8,282				8,759
Due after 3 year but within 4 years			10,366				9,921
Due after 4 year but within 5 years			6,198				12,512
Due after 5 years			43,131				54,258
Total mortgage finance bonds			81,509				101,667

 

b)

Senior bonds

 

The following table shows senior bonds by currency:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Santander bonds in UF			1,797,438				1,964,905
Santander bonds in US$			2,191,347				1,658,789
Santander bonds in CHF			443,186				246,284
Santander bonds in Ch$			236,025				277,530
Santander bonds in CNY			-				43,410
Current bonds in AUD			62,472				-
Santander bonds in JPY			138,019				-
Total senior bonds			4,868,487				4,190,918

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

i.

Placement of senior bonds:

 

In 2014, the Bank issued bonds for UF11,400,000; CLP 75,000,000,000; CHF 300,000,000; USD 750,000,000, AUD 125,000,000, and JPY 27,300,000,000 detailed as follows:

 

Series		Amount				Term		Issuance rate		Issuance date		Series issued amount			Maturity date
EB Series		UF	2,000,000			5 years		3.5% per annum simple		02-21-2014		UF	2,000,000		10-01-2018
ED Series		UF	2,000,000			7 years		3.5% per annum simple		08-28-2014		UF	2,000,000		01-01-2021
EF Series		UF	2,400,000			10 years		3.40% biannually		10-29-2014		UF	2,400,000		01-01-2024
SB Series		UF	3,000,000			5 years		2.65% biannually		12-11-2014		UF	3,000,000		07-01-2019
SA Series		UF	2,000,000			10 years		3.00% biannually		12-16-2014		UF	2,000,000		07-01-2024
UF Total		UF	11,400,000
EA Series		CLP	25,000,000,000			5 years		6.2% per annum simple		02-22-2014		CLP	25,000,000,000		09-01-2018
SE Series		CLP	50,000,000,000			5 years		5.50% biannually		11-21-2014		CLP	50,000,000,000		07-01-2019
CLP Total		CLP	75,000,000,000
CHF Bond		CHF	300,000,000			3 years		1% per annum simple		01-31-2014		CHF	300,000,000		07-31-2017
CHF Total		CHF	300,000,000
DN Current Bond		USD	250,000,000			5 years		Libor (3 months) + 75 bp		02-19-2014		USD	250,000,000		02-19-2019
Floating Bond		USD	500,000,000			3 years		Libor (3 months) + 90 bp		04-15-2014		USD	500,000,000		04-11-2017
USD Total		USD	750,000,000
AUD Bond		AUD	125,000,000			3 years		4.5% per annum simple		03-13-2014		AUD	125,000,000		03-13-2017
AUD Total		AUD	125,000,000
JPY Floating Bond		JPY	6,600,000,000			3 years		Libor (3 months) + 65 bp		04-24-2014		JPY	6,600,000,000		04-24-2017
JPY Current Bond		JPY	2,000,000,000			3 years		0.72% per annum simple		04-24-2014		JPY	2,000,000,000		04-24-2017
JPY Current Bond		JPY	18,700,000,000			5 years		0.97% per annum simple		04-24-2014		JPY	18,700,000,000		04-24-2019
JPY Total		JPY	27,300,000,000

 

During 2014, the Bank repurchased bonds for CLP 118,409,000,000 and UF 6,000,000.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

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		6.6% 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$ 46,245,000,000.

 

ii.

Nominal bonds to be placed:

 

As of December 31, 2014, there are no outstanding amounts of bonds authorized, to be issued.

 

iv.

The maturities of senior bonds are as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			1,166,602				1,088,379
Due after 1 year but within 2 years			646,380				685,865
Due after 2 year but within 3 years			1,037,521				558,776
Due after 3 year but within 4 years			381,263				422,722
Due after 4 year but within 5 years			566,430				277,689
Due after 5 years			1,070,291				1,127,487
Total senior bonds			4,868,487				4,190,918

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

c)

Mortgage bonds

 

Detail of mortgage bonds per currency is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Mortgage bonds in UF			109,200				70,339
Total mortgage bonds			109,200				70,339

 

i.

Allocation of mortgage bonds

 

In 2014, the Bank issued bonds for UF 1,500,000, detailed as follows:

 

Series

Amount

Term

Issuance rate

Issuance date

Series issued amount

Maturity date

AB Series

UF

1,500,000

18 years

3.2% biannually

09-01-2014

UF

1,500,000

04-01-2032

Total UF

UF

1,500,000

 

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 Series

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 Mortgage bond are as follows:

 

		As of December 31,
		2013				2012
		MCh$				MCh$
Due within 1 year			3,778				1,925
Due after 1 year but within 2 years			6,065				3,943
Due after 2 year but within 3 years			6,261				4,070
Due after 3 year but within 4 years			6,463				4,202
Due after 4 year but within 5 years			6,671				4,337
Due after 5 years			79,962				51,862
Total Mortgage bonds			109,200				70,339

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

d)

Subordinated bonds

 

Detail of the subordinated bonds per currency is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Subordinated bonds denominated in USD			3				139,802
Subordinated bonds denominated in UF			725,913				695,932
Total subordinated bonds			725,916				835,734

 

i.

Allocation of subordinated bonds

 

During 2014, the Bank has not placed any subordinated bonds.

 

During 2013, the Bank placed 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 2013, the Bank performed a partial repurchase of bonds for USD 47,786,000.

 

The maturities of subordinated bonds, are as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			10,451				149,033
Due after 1 year but within 2 years			6,311				9,951
Due after 2 year but within 3 years			-				6,011
Due after 3 year but within 4 years			-				-
Due after 4 year but within 5 years			-				-
Due after 5 years			709,154				670,739
Total subordinated bonds			725,916				835,734

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

e)

Other financial liabilities

 

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Non-current portion:
Due after 1 year but within 2 years			3,380				3,389
Due after 2 year but within 3 years			2,248				2,389
Due after 3 year but within 4 years			20,988				3,045
Due after 4 year but within 5 years			15,116				20,862
Due after 5 years			42,844				58,398
Non-current portion subtotal			84,576				88,083
Current portion:
Amounts due to credit card operators			112,530				97,027
Acceptance of letters of credit			2,496				741
Other long-term financial obligations, short-term portion			5,523				3,930
Current portion subtotal			120,549				101,698
Total other financial liabilities			205,125				189,781

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 19

MATURITY OF ASSETS AND LIABILITIES

 

As of December 31, 2014 and 2013, the detail of the maturities of assets and liabilities is as follows:

 

As of December 31, 2014		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
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Assets
Cash and deposits in banks			1,538,888				70,000				-				-				1,608,888				-				-				-				1,608,888
Cash items in process of collection			531,373				-				-				-				531,373				-				-				-				531,373
Trading investments			-				263,034				-				164,823				427,857				171,620				175,338				346,958				774,815
Investments under resale agreements			-				-				-				-				-				-				-				-				-
Financial derivative contracts			-				131,675				152,441				350,432				634,548				1,078,925				1,014,090				2,093,015				2,727,563
Interbank loans (1)			2,872				-				9,071				-				11,943				-				-				-				11,943
Loans and accounts receivables from customers (2)			814,557				2,168,019				1,774,873				3,773,848				8,531,297				7,084,202				7,265,207				14,349,409				22,880,706
Available for sale investments			-				22,652				158,014				526,410				707,076				184,376				760,146				944,522				1,651,598
Held to maturity investments			-				-				-				-				-				-				-				-				-
Total assets			2,887,690				2,655,380				2,094,399				4,815,513				12,452,982				8,519,123				9,214,781				17,733,904				30,186,886
Liabilities
Deposits and other demand liabilities			6,480,497				-				-				-				6,480,497				-				-				-				6,480,497
Cash items in process of being cleared			281,259				-				-				-				281,259				-				-				-				281,259
Obligations under repurchase agreements			-				390,331				1,453				342				392,126				-				-				-				392,126
Time deposits and other time liabilities			112,025				5,343,226				2,480,158				2,289,405				10,224,814				130,427				58,699				189,126				10,413,940
Financial derivative contracts			-				125,884				176,048				319,488				621,420				1,028,017				911,947				1,939,964				2,561,384
Interbank borrowings			4,133				137,921				227,898				413,564				783,516				435,309				12,776				448,085				1,231,601
Issued debt instruments			-				176,649				319,516				691,227				1,187,392				2,693,946				1,903,774				4,597,720				5,785,112
Other financial liabilities			114,564				1,934				746				3,305				120,549				41,733				42,843				84,576				205,125
Total liabilities			6,992,478				6,175,945				3,205,819				3,717,331				20,091,573				4,329,432				2,930,039				7,259,471				27,351,044

 

(1)

Interbank loans are presented on a gross basis. The amount of allowance is Ch$25 million.

(2)

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$398,001 million, Mortgage loans Ch$48,744 million and Consumer loans Ch$254,023 million.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 19

MATURITY OF ASSETS AND LIABILITIES, continued

 

As of December 31, 2013		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
		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)			1,224				66,264				56,901				1,060				125,449				-				-				-				125,449
Loans and accounts receivables from customers (2)			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			-				89,778				574,679				596,536				1,260,993				2,060,070				1,877,595				3,937,665				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				5,857,722				3,232,857				3,772,903				18,970,083				2,839,942				2,342,286				5,182,228				24,152,311

 

(1)

Interbank loans are presented on a gross basis. The amount of allowance is Ch$54 million.

(2)

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 loans Ch$264,585 million.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 20

PROVISIONS

 

a)

As of December 31, 2014 and 2013, the composition is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Provisions for personnel salaries and expenses.			46,759				39,501
Provisions for mandatory dividends			165,099				132,578
Provisions for contingent loan risk:
Provisions for available on demand credit lines			16,036				18,767
Other provisions for contingent credit risk			12,139				11,847
Provisions for contingencies			70,404				33,069
Provisions for country risk			155				470
Total			310,592				236,232

 

b)

Below is the activity regarding provisions during the years ended December 31, 2014 and 2013:

 

		Provisions
		Personnel salaries and expenses				Contingent loans risk				Contingencies				Mandatory dividends				Country risk				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2014			39,501				30,614				33,069				132,578				470				236,232
Provisions established			57,071				8,410				57,032				165,099				438				288,050
Application of provisions			(46,777	)			-				(9,664	)			(132,578	)			-				(189,019	)
Provisions released			-				(10,849	)			(10,033	)			-				(753	)			(21,635	)
Reclassifications			(3,036	)			-				-				-				-				(3,036	)
Balances as of December 31, 2014			46,759				28,175				70,404				165,099				155				310,592
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

 

c)

Provisions for personnel salaries and expenses:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Provision for seniority compensation			1,917				691
Provision for stock-based personnel benefits			-				809
Provision for performance bonds			24,540				18,218
Provision for vacations			19,746				18,741
Provision for other personnel benefits			556				1,042
Total			46,759				39,501

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 20

PROVISIONS, continued

 

d)

Provision for seniority compensation:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Balances as of January 1, 2014			691				1,299
Provisions established			3,377				2,096
Payments			(2,151	)			(2,704	)
Prepayments			-				-
Provisions released			-				-
Other movements			-				-
Total			1,917				691

 

e)

Movement of provision for performance bonds:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Balances as of January 1, 2014			18,218				23,667
Provisions established			40,395				23,063
Application of provisions			(32,335	)			(27,005	)
Provisions released			(1,738	)			(1,507	)
Total			24,540				18,218

 

f)

Movement of provision for personnel vacations:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Balances as of January 1, 2014			18,741				18,802
Provisions established			11,161				12,311
Application of provisions			(9,204	)			(12,372	)
Provisions released			(952	)			-
Total			19,746				18,741

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 21

OTHER LIABILITIES

 

The other liabilities line item is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Accounts and notes payable			90,261				84,729
Unearned income			478				384
Guarantees received (threshold)			39,639				2,631
Notes payable through brokerage and simultaneous transactions			27,751				-
Other payable obligations			43,550				95,266
Withheld VAT			1,698				1,165
Other liabilities			17,476				14,602
Total			220,853				198,777

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 22

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, 2014, the Banks and its subsidiaries have provisions for this item of Ch$1,437 million and Ch$738 million, respectively (Ch$1,224 million as of December 31, 2013) which is included in “Provisions” in the Consolidated Statements of Financial Position as provisions for contingencies.

 

b)

Contingent loans

 

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Letters of credit issued			205,920				218,032
Foreign letters of credit confirmed			75,813				127,600
Guarantees			1,481,154				1,212,799
Personal guarantees			262,169				181,416
Subtotal			2,025,056				1,739,847
Available on demand credit lines			5,699,573				5,141,831
Other irrevocable credit commitments			109,520				47,376
Total			7,834,149				6,929,054

 

c)

Held securities

 

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Third party operations
Collections			172,070				217,948
Assets from third parties managed by the Bank and its affiliates			1,247,923				1,015,817
Subtotals			1,419,993				1,233,765
Custody of securities
Securities held in custody			238,264				304,535
Securities held in custody deposited in other entity			552,741				532,072
Issued securities held in custody			16,383,501				15,351,545
Subtotals			17,174,506				16,188,152
Total			18,594,499				17,421,917

 

During 2014, the Bank classified the portfolios managed by private banking in “Assets from third parties managed by the Bank and its affiliates”. At the end of December 2014, the balance for this was Ch$ 1,247,888 million (Ch$ 1,015,781 million at December 31, 2013).

 

d)

Guarantees

 

Banco Santander Chile has a comprehensive officer fidelity insurance policy, No. 2951729, 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, 2014 to June 30, 2015.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 22

CONTINGENCIES AND COMMITMENTS, continued

 

e)

Contingent loans and liabilities

 

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

 

Santander Agente de Valores Limitada

 

In accordance with the provisions of Article No. 30 and onward of Law No. 18,045 on the Securities Market, the Company provided a guarantee in the amount of UF4,000 through Insurance Policy No. 214116436, underwritten by the Compañía de Seguros de Crédito Continental S.A., which matures on December 19, 2015.

 

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$24,859 million to cover default risk on transactions entered into instantaneously or within short timeframes.

 

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 additional guarantees entered at the Electronical Stock Market for Ch$1,091 million as of December 31, 2014.

 

iii)

As of December 31, 2014, the following legal situations are in process:

 

-

Case of “Nahum vs. Santander Investment S.A. Corredores de Bolsa” followed in Santiago 27th Civil Court File No. 659-2012, amounting to Ch$ 200 million. The first ruling was appealed and annulled and the time for submitting a second appeal expired on August 27, 2013. The case has not yet returned to the preliminary stage.

 

-

Case of “Inverfam S.A. vs. Santander Investment S.A. Corredores de Bolsa” predecessor of Santander S.A. Corredores de Bolsa, followed in Santiago First Civil Court, File No. 32.543-2011; a claim for indemnity damages from the loss of some securities destined to Optimal Funds which were affected by the Madoff case, that amount to Ch$107 million, approximately. It is expected that a meeting will take place to agree upon a resolution.

 

-

Case of “Bilbao vs. Santander Investment S.A. Corredores de Bolsa”, predecessor to Santander S.A. Corredores de Bolsa, followed in Santiago 20th Civil Court, File No. 15549-2012. As of December 31, 2014, the period to provide evidence has expired and evidentiary proceedings are pending.

 

-

Case of “Echeverria con Santander Corredora”, followed in Santiago 21st Civil Court File No. c21-366-2014: a claim for indemnity damages for the failure of acquiring shares. Value: Ch$ 59,594,764. It is pending the Company’s procedural defense.

 

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 relating to its obligations as an intermediary for insurance contracts. The company purchased a guarantee policy No. 10025805, covering UF500 and professional liability policy No. 10025806 for its insurance brokers, covering UF 60,000 from the Seguros Generales Consorcio Nacional de Seguros S.A. Policies valid from April 15, 2014 to April 14, 2015.

 

ii)

There are lawsuits for UF 4,791.47; which relates to goods given in leasing. Our lawyers have estimated, according to the criteria defined IAS 37, a loss of Ch$106.3 million. The estimated loss amount was recorded as provisions.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 23

EQUITY

 

a)

Capital

 

As of December 31, 2014 and 2013 the Bank had 188,446,126,794 shares outstanding, all of which are subscribed for and paid in full, amounting to Ch$891,303 million. All shares have the same rights, and have no preferences or restrictions.

 

The activity with respect to shares during 2014 and 2013 was as follows:

 

		Shares as of December 31,
		2014				2013
Issued as of January 1			188,446,126,794				188,446,126,794
Issuance of paid shares			-			.	-
Issuance of outstanding shares			-				-
Stock options exercised			-				-
Issued as of December 31,			188,446,126,794				188,446,126,794

 

As of December 31, 2014 and 2013 the Bank does not have any of its own shares in treasury, nor do any of the consolidated companies.

 

As of December 31, 2014 the shareholder composition was as follows:

 

Corporate Name or Shareholder's Name		Shares				ADRs (*)				Total				% of equity holding
Santander Chile Holding S.A.			66,822,519,695				-				66,822,519,695				35.46
Teatinos Siglo XXI Inversiones Limitada			59,770,481,573				-				59,770,481,573				31.72
J.P. Morgan Chase Bank			-				31,370,004,471				31,370,004,471				16.65
Banks on behalf of third parties			10,949,884,423				-				10,949,884,423				5.81
Pension fund (AFP) on behalf of third parties			10,082,508,540				-				10,082,508,540				5.35
Other minority holders			9,450,728,092				-				9,450,728,092				5.01
Total			157,076,122,323				31,370,004,471				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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 23

EQUITY, continued

 

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

 

Corporate Name or Shareholder's Name		Shares				ADRs (*)				Total				% of equity holding
Santander Chile Holding S.A.			66,822,519,695				-				66,822,519,695				35.46
Teatinos Siglo XXI Inversiones Limitada			59,770,481,573				-				59,770,481,573				31.72
J.P. Morgan Chase Bank			-				30,087,328,471				30,087,328,471				15.97
Banks on behalf of third parties			11,590,917,506				-				11,590,917,506				6.15
Pension funds (AFP) on behalf of third parties			10,533,224,876				-				10,533,224,876				5.58
Other minority holders			9,641,654,673				-				9,641,654,673				5.12
Total			158,358,798,323				30,087,328,471				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)

Dividends

 

Dividends have been distributed as per the Consolidated Statements of Changes in Equity.

 

c)

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

 

		As of December 31,
		2014				2013
		MCh$				MCh$
a) Basic earnings per share
Total attributable to Bank shareholders			550,331				441,926
Weighted average number of outstanding shares			188,446,126,794				188,446,126,794
Basic earnings per share (in Ch$)			2.920				2.345
b) Diluted earnings per share
Total attributable to Bank shareholders			550,331				441,926
Weighted average number of outstanding shares			188,446,126,794				188,446,126,794
Adjusted number of shares			188,446,126,794				188,446,126,794
Diluted earnings per share (in Ch$)			2.920				2.345

 

As of December 31, 2014 and 2013 the Bank does not own instruments with dilutive effects.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 23

EQUITY, continued

 

d)

Other comprehensive income from available for sale investments and cash flow hedges:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Available for sale investments
As of January 1,			840				(10,017	)
Gain (loss) on the fair value adjustment of available for sale investments, before tax			16,183				2,629
Reclassification from other comprehensive income to income for the year			4,661				8,228
Subtotal			20,844				10,857
Total			21,684				840
Cash flow hedges
As of January 1,			(8,257	)			5,315
Gains (losses) on the re-measurement of cash flow hedges, before tax			18,552				(15,089	)
Reclassification adjustments on cash flow hedges, before tax			430				1,517
Amounts removed from equity and included in carrying amount of non-financial asset (liability) which acquisition or incurrence was hedged as a highly probable transaction			-				-
Subtotal			18,982				(13,572	)
Total			10,725				(8,257	)
Other comprehensive income, before taxes			32,409				(7,417	)
Income tax related to other comprehensive income components
Income tax relating to available for sale investments			(4,554	)			(168	)
Income tax relating to cash flow hedges			(2,252	)			1,651
Total			(6,806	)			1,483
Other comprehensive income, net of tax			25,603				(5,934	)
Attributable to:
Bank shareholders (Equity holders of the Bank)			25,600				(5,964	)
Non-controlling interest			3				30

 

The Bank expects that the results included in "Other comprehensive income" will be reclassified to profit or loss when the specific conditions have been met.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 24

CAPITAL REQUIREMENTS (BASEL)

 

In accordance with 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 net 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 weighting 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% risk weighting, meaning that it is not necessary to hold equity to back these assets according to current regulations. Property, plant and equipment have a 100% risk weighting, meaning that a minimum capital equivalent to 11% of these assets must be held. All derivatives traded off the exchanges are also assigned a risk weighting, 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, which changed the risk exposure of contingent allocations 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	%
g) Other loan commitments:
- Higher education loans Law No. 20,027			15	%
- Other			100	%
h) Other contingent loans			100	%

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 24

CAPITAL REQUIREMENTS (BASEL), continued

 

The levels of basic capital and effective net equity as of December 31, 2014 and 2013, are as follows:

 

		Consolidated assets								Risk-weighted assets
		As of December 31,								As of December 31
		2014				2013				2014				2013
		MCh$				MCh$				MCh$				MCh$
Balance-sheet assets (net of allowances)
Cash and deposits in banks			1,608,888				1,571,810				-				-
Cash items in process of collection			531,373				604,077				90,203				66,672
Trading investments			774,815				287,567				89,605				40,924
Investments under resale agreements			-				17,469				-				3,494
Financial derivative contracts (*)			1,154,471				1,008,026				996,334				862,810
Interbank loans, net			11,918				125,395				2,384				25,079
Loans and accounts receivables from customers, net			22,179,938				20,327,021				19,519,483				18,071,792
Available for sale investments			1,651,598				1,700,993				190,137				238,835
Investments in associates and other companies			17,914				9,681				17,914				9,681
Intangible assets			40,983				66,703				40,983				66,703
Property, plant, and equipment			211,561				180,215				211,561				180,215
Current taxes			2,241				1,643				224				164
Deferred taxes			282,211				230,215				28,221				23,022
Other assets			493,173				400,025				493,173				346,533
Off-balance-sheet assets
Contingent loans			3,976,465				3,436,773				2,265,904				2,013,057
Total			32,937,549				29,967,613				23,946,126				21,948,981

 

(*)

“Financial derivative contracts” are presented at their “Credit Equivalent Risk” value as established in Chapter 12-1 of the Updated Compilation of Rules issued by the SBIF.

 

The levels of basic capital and effective net equity at the close of each period are as follows:

 

		As of December 31,								Ratio As of December 31,
		2014				2013				2014				2013
		MCh$				MCh$				%				%
Basic capital			2,609,896				2,325,678				7.92				7.76
Effective net equity			3,354,702				3,033,741				14.00				13.82

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 25

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
As of December 31, 2014		Non- controlling				Equity				Income				Available for sale investments				Deferred tax				Total other comprehensive income				Comprehensive income
		%				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Subsidiaries:
Santander Agente de Valores Limitada			0.97				558				87				-				-				-				87
Santander S.A. Sociedad Securitizadora			0.36				2				-				-				-				-				-
Santander S.A. Corredores de Bolsa			49.00				20,928				1,239				(34	)			7				(27	)			1,212
Santander Asset Management S.A. (1) Administradora General de Fondos			-				-				-				-				-				-				-
Santander Corredora de Seguros Limitada			0.25				154				(4	)			-				-				-				(4	)
Subtotal							21,642				1,322				(34	)			7				(27	)			1,295
Entities controlled through other considerations:
Bansa Santander S.A.			100.00				5,671				2,236				-				-				-				2,236
Santander Gestión de Recaudación y Cobranzas Limitada (2)			100.00				1,037				1,531				-				-				-				1,531
Multinegocios S.A.			100.00				730				253				-				-				-				252
Servicios Administrativos y Financieros Limitada.			100.00				2,001				315				-				-				-				315
Servicios de Cobranzas Fiscalex Limitada (2)			-				-				-				-				-				-				-
Multiservicios de Negocios Limitada.			100.00				2,002				323				-				-				-				324
Subtotal							11,441				4,658				-				-				-				4,658
Total							33,083				5,980				(34	)			7				(27	)			5,953

 

(1) Santander Assets Management S.A. Administradora General de Fondos was sold in November 2013.

(2) On August 01, 2014 the company Servicios de Cobranza Fiscalex Limitada was acquired by Santander Gestión de Recaudación y Cobranza Limitada.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 25

NON-CONTROLLING INTEREST, continued

 

														Other comprehensive income
As of December 31, 2013		Non- controlling				Equity				Income				Available for sale investments				Deferred tax				Total other comprehensive income				Comprehensive income
		%				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 (1)			49.00				19,698				1,656				11				(2	)			9				1,665
Santander Asset Management S.A. Administradora General de Fondos (2)			0.02				-				9				-				-				-				9
Santander Corredora de Seguros Limitada			0.25				149				1				-				-				-				1
Subtotal							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
Subtotal							8,184				382				-				-				-				382
Total							28,504				2,135				14				(3	)			11				2,146

 

(1)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.

 

(2) 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 25

NON-CONTROLLING INTEREST, 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 conforming accounting policy adjustments:

 

		As of December 31,
		2014																2013
		Assets				Liabilities				Capital				Net income				Assets				Liabilities				Capital				Net income
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Santander Corredora de Seguros Limitada			70,602				9,068				63,078				(1,544	)			67,956				8,484				59,012				460
Santander S.A. Corredores de Bolsa			74,408				31,790				40,171				2,447				110,917				70,799				36,735				3,383
Santander Asset Management S.A. Administradora General de Fondos (1)			-				-				-				-				-				-				-				-
Santander Agente de Valores Limitada			339,787				282,233				48,556				8,998				194,812				146,255				39,581				8,976
Santander S.A. Sociedad Securitizadora			622				61				640				(79	)			725				74				764				(113	)
Santander Gestión de Recaudación y Cobranzas Ltda. (2)			4,917				3,880				458				579				4,978				4,703				2,505				(2,230	)
Multinegocios S.A. (management of sales force)			1,959				1,229				477				253				1,441				963				244				234
Servicios Administrativos y Financieros Ltda. (management of sales force).			2,956				955				1,686				315				2,412				725				1,411				276
Servicio de Cobranza Fiscalex Ltda.(2)			-				-				-				-				4,008				3,376				216				416
Multiservicios de Negocios Ltda. (call center).			3,401				1,399				1,679				323				3,049				1,371				1,299				379
Bansa Santander S.A.			31,062				25,391				3,435				2,236				28,490				25,055				2,128				1,307
Total			529,714				356,006				160,180				13,528				418,788				261,805				143,895				13,088

 

(1) Santander Assets Management S.A. Administradora General de Fondos was sold in November 2013.

 

(2) On August 01, 2014 the company Servicios de Cobranza Fiscalex Limitada was acquired by Santander Gestión de Recaudación y Cobranza Limitada.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 26

INTEREST INCOME AND INFLATION-INDEXATION 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.

 

a)

For the years ended December 31, 2014 and 2013, the income from interest and inflation-indexation adjustments, not including income from hedge accounting, was attributable to the following items:

 

		For the years ended December 31,
		2014																2013
		Interest				Inflation- indexation adjustments				Prepaid fees				Total				Interest				Inflation- indexation adjustments				Prepaid fees				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Resale agreements			1,223				-				-				1,223				2,254				-				-				2,254
Interbank loans			139				-				-				139				195				-				-				195
Commercial loans			706,190				208,427				7,883				922,500				728,597				72,570				4,980				806,147
Mortgage loans			245,980				328,212				18,230				592,422				232,860				108,702				13,234				354,796
Consumer loans			603,804				5,108				3,205				612,117				611,936				2,184				3,030				617,150
Investment instruments			61,774				25,461				-				87,235				77,240				7,815				-				85,055
Other interest income			10,584				3,218				-				13,802				5,282				(1,063	)			-				4,219
Interest income			1,629,694				570,426				29,318				2,229,438				1,658,364				190,208				21,244				1,869,816

 

b)

As indicated in section i) of Note 01, suspended interest relates to loans with late payments of 90 days or more, which are recorded in memorandum accounts until they are effectively received.

 

For the years ended December 31, 2014 and 2013, the suspended interest and adjustments income consists of the following:

 

		For the years ended December 31,
		2014												2013
		Interest				Inflation- indexation adjustments				Total				Interest				Inflation- indexation adjustments				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans			16,337				8,416				24,753				17,219				4,426				21,645
Mortgage loans			3,925				8,529				12,454				3,935				4,549				8,484
Consumer loans			5,529				807				6,336				6,004				749				6,753
Total			25,791				17,752				43,543				27,158				9,724				36,882

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 26

INTEREST INCOME AND INFLATION-INDEXATION ADJUSTMENTS, continued

 

c)

For the years ended December 31, 2014 and 2013, the expenses from interest and inflation-indexation adjustments, excluding expense from hedge accounting, is as follows:

 

		For the years ended December 31,
		2014												2013
		Interest				Inflation- indexation adjustments				Total				Interest				Inflation- indexation adjustments				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Demand deposits			(6,189	)			(1,909	)			(8,098	)			(5,225	)			(588	)			(5,813	)
Repurchase agreements			(7,052	)			-				(7,052	)			(12,092	)			-				(12,092	)
Time deposits and liabilities			(334,841	)			(74,384	)			(409,225	)			(426,812	)			(22,787	)			(449,599	)
Interbank borrowings			(19,015	)			(9	)			(19,024	)			(21,233	)			(5	)			(21,238	)
Issued debt instruments			(175,886	)			(137,460	)			(313,346	)			(171,659	)			(53,952	)			(225,611	)
Other financial liabilities			(3,131	)			(1,729	)			(4,860	)			(4,712	)			(661	)			(5,373	)
Other interest expense			(2,636	)			(17,839	)			(20,475	)			(2,340	)			(3,749	)			(6,089	)
Interest expense total			(548,750	)			(233,330	)			(782,080	)			(644,073	)			(81,742	)			(725,815	)

 

d)

For the years ended December 31, 2014 and 2013, the income from interest and inflation-indexation adjustments is as follows separately disclosing in a line below the effects of associated expenses and hedging:

 

		For the years ended December 31,
		2014				2013
Items		MCh$				MCh$
Interest income			2,229,438				1,869,816
Interest expense			(782,080	)			(725,815	)
Interest income			1,447,358				1,144,001
Income from hedge accounting (net)			(130,254	)			(67,239	)
Total net interest income			1,317,104				1,076,762

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 27

FEES AND COMMISSIONS

 

This item includes the amount of fees earned and paid during the year, except for those which are an integral part of the financial instrument’s effective interest rate:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Fee and commission income
Fees and commissions for lines of credits and overdrafts			7,015				7,025
Fees and commissions for guarantees and letters of credit			32,403				30,131
Fees and commissions for card services			147,256				127,101
Fees and commissions for management of accounts			29,031				28,044
Fees and commissions for collections and payments			35,355				45,190
Fees and commissions for intermediation and management of securities			9,286				10,482
Fees and commissions for investments in mutual funds or others (*)			-				31,154
Insurance brokerage fees			34,695				32,253
Office banking			17,602				15,165
Other fees earned			54,086				19,575
Total			366,729				346,120

 

(*) Due to the sale of Santander Asset Management S.A. Administradora General de Fondos, the Bank does not have any fees and commissions on investments in mutual funds recorded.

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Fee and commission expense
Compensation for card operation			(104,095	)			(87,776	)
Fees and commissions for securities transactions			(979	)			(4,287	)
Office banking and other fees			(34,372	)			(24,221	)
Total			(139,446	)			(116,284	)
Net fees and commissions income			227,283				229,836

 

The fees earned in transactions with letters of credit are presented in the Consolidated Statements of Income in the line item “Interest income”.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 28

PROFIT AND LOSS FROM FINANCIAL OPERATIONS

 

For the years ended December 31, 2014 and 2013, the detail of income from financial operations is as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Profit and loss from financial operations
Trading derivatives			(215,691	)			(76,525	)
Trading investments			45,952				29,985
Sale of loans and accounts receivables from customers
Current portfolio			1,261				1,677
Charged-off portfolio			4,809				1,500
Available for sale investments			6,934				10,258
Repurchase of issued bonds			5,198				4,502
Other profit and loss from financial operations			214				(10	)
Total			(151,323	)			(28,613	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 29

NET FOREIGN EXCHANGE GAIN (LOSS)

 

Net foreign exchange income 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.

 

For the years ended December 31, 2014 and 2013, net foreign exchange income is as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Net foreign exchange gain (loss)
Net profit (loss) from currency exchange differences			(370,282	)			(242,841	)
Hedging derivatives:			621,767				379,910
Income from inflation-indexed assets in foreign currency			22,404				8,600
Income from inflation-indexed assets in foreign currency			(1,677	)			(943	)
Total			272,212				144,726

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 30

PROVISIONS FOR LOAN LOSSES

 

For the years ended December 31, 2014 and 2013, activity within income for provisions for loan losses is a follows:

 

						Loans and accounts receivable from customers																								Total
For the year ended December 31, 2014		Interbank loans				Commercial loans								Mortgage loans				Consumer loans				Contingent loans
		Individual				Individual				Group				Group				Group				Individual				Group
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Charged-off loans, net of provisions:			-				(10,811	)			(74,596	)			(9,948	)			(89,531	)			-				-				(184,886	)
Provisions established			(60	)			(74,839	)			(99,648	)			(14,959	)			(129,410	)			(4,769	)			(3,641	)			(327,326	)
Total provisions and charge-offs			(60	)			(85,650	)			(174,244	)			(24,907	)			(218,941	)			(4,769	)			(3,641	)			(512,212	)
Provisions released			89				15,903				7,127				6,561				38,275				4,431				6,418				78,804
Recovery of loans previously charged-off			-				5,302				11,645				5,122				36,908				-				-				58,977
Net charge to income			29				(64,445	)			(155,472	)			(13,224	)			(143,758	)			(338	)			2,777				(374,431	)

 

						Loans and accounts receivable from customers																								Total
For the year ended December 31, 2013		Interbank loans				Commercial loans								Mortgage loans				Consumer loans				Contingent loans
		Individual				Individual				Group				Group				Group				Individual				Group
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Charged-off loans, net of provisions:			-				(8,071	)			(61,991	)			(21,173	)			(102,525	)			-				-				(193,760	)
Provisions established			(127	)			(85,628	)			(36,724	)			(21,314	)			(155,921	)			(6,679	)			(3,109	)			(309,502	)
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	)

 

The detail of Charge-off of individually significant loans, is as follows:

 

		Loans and accounts receivable from customers
As of December 31, 2014		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Charge-off of loans			37,673				101,590				12,908				191,228				343,399
Provision applied			(26,862	)			(26,994	)			(2,960	)			(101,697	)			(158,513	)
Net charge offs of individually significant loans			10,811				74,596				9,948				89,531				184,886

 

		Loans and accounts receivable from customers
As of December 31, 2013		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Charge-off of loans			26,390				83,332				25,955				221,638				357,315
Provision applied			(18,319	)			(21,341	)			(4,782	)			(119,113	)			(163,555	)
Net charge offs of individually significant loans			8,071				61,991				21,173				102,525				193,760

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 31

PERSONNEL SALARIES AND EXPENSES

 

For the years ended December 31, 2014 and 2013, the composition of personnel salaries and expenses is as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Personnel compensation			213,364				197,695
Bonuses			77,145				67,805
Stock-based benefits			329				684
Senior compensation			10,551				8,828
Pension plans			1,395				(311	)
Training expenses			2,477				2,366
Day care and kindergarten			2,485				2,542
Health funds			4,615				3,569
Other personnel expenses			26,527				25,166
Total			338,888				308,344

 

Share-based compensation (settled in cash)

 

In accordance with IFRS 2, equity instruments settled in cash are allocated to executives of the Bank and its Subsidiaries as a form of compensation for their services. The Bank measures the services received and the cash obligation at fair value at the end of each reporting period and on the settlement date, recognizing any change in fair value in the income statement for the period.

 

For the years ended December 31, 2014and 2013, share-based compensation amounted to Ch$329 million and Ch$684 million.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 32

ADMINISTRATIVE EXPENSES

 

For the years ended December 31, 2014 and 2013, the composition of the item is as follows:

 

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
General administrative expenses			125,271				116,685
Maintenance and repair of property, plant and equipment			17,498				15,368
Office lease			28,348				26,105
Equipment lease			94				106
Insurance payments			3,302				2,989
Office supplies			4,567				4,579
IT and communication expenses			29,379				29,144
Lighting, heating, and other utilities			4,131				3,871
Security and valuables transport services			17,089				15,879
Representation and personnel travel expenses			4,173				5,255
Judicial and notarial expenses			2,192				1,619
Fees for technical reports and auditing			6,891				6,400
Other general administrative expenses			7,607				5,370
Outsourced services			51,504				44,411
Data processing			32,253				26,489
Products sale			1,502				1,820
Archive service			3,305				1,728
Valuation service			2,119				2,265
Outsourcing			5,608				9,489
Other			6,717				2,620
Board expenses			1,314				1,154
Marketing expenses			16,419				15,800
Taxes, payroll taxes, and contributions			10,641				10,141
Real estate taxes			1,415				1,201
Patents			1,525				1,843
Other taxes			15				4
Contributions to SBIF			7,686				7,093
Total			205,149				188,191

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 33

DEPRECIATION, AMORTIZATION AND IMPAIRMENT

 

a)

Depreciation, amortization and impairment charges for the years ended December 31, 2014 and 2013, are detailed below:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Depreciation and amortization
Depreciation of property, plant, and equipment			(27,571	)			(22,452	)
Amortizations of Intangible assets(*)			(16,601	)			(38,622	)
Total depreciation and amortization			(44,172	)			(61,074	)
Impairment
Impairment of property, plant, and equipment			(108	)			(244	)
Impairment of intangibles (*)			(36,556	)			-
Total impairment			(36,664	)			(244	)
Total			(80,836	)			(61,318	)

 

As of December 31, 2014, the costs for Property, plant, and equipment impairment totaled Ch$108 million, mainly due to damages to ATMs (Ch$244 million as of December 31, 2013, respectively).

 

(*) The Bank, in its strategic objectives, initiated a plan to transform its business and operating model with a focus on the client. Therefore, there have arisen a number of new requirements for the Bank to adapt to changing customer demands and establish new ways to interact with them. This change in strategy resulted in a number of applications that are in use or in development that needed to be tested for impairment. Following the testing, in accordance with IAS 36 the Bank has recognized an impairment of Ch$36,664 million.

 

b)

The changes in book value due to depreciation and amortization from January 1, 2013 and 2014 through December 31, 2013 and 2014 are as follows:

 

		Depreciation and amortization
		2014
		Property, plant, and equipment				Intangible assets				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			(127,448	)			(185,275	)			(312,723	)
Depreciation and amortization charges in the period			(27,571	)			(16,601	)			(44,172	)
Sales and disposals in the period			109				-				109
Other			-				-				-
Balances as of December 31, 2014			(154,910	)			(201,876	)			(356,786	)

  

		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	)

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 34

OTHER OPERATING INCOME AND EXPENSES

 

a)

Other operating income is comprised of the following components:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Income from assets received in lieu of payment
Income from sale of assets received in lieu of payment			2,811				6,571
Recovery of charge-offs and income from assets received in lieu of payment			8,289				10,475
Subtotal			11,100				17,046
Income from the sale of participation in companies
Income from the sale of participation in companies			-				-
Subtotal			-				-
Other income
Leases			805				328
Income from sale of property, plant and equipment			687				176
Recovery of provisions for contingencies			315				77
Compensation from insurance companies due to damages			661				725
Other			1,266				2,156
Subtotal			3,734				3,462
Total			14,834				20,508

 

b) Other operating expenses are detailed as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Allowances and expenses for assets received in lieu of payment
Charge-offs of assets received in lieu of payment			4,694				8,796
Provision on assets received in lieu of payment			4,045				3,580
Expenses for maintenance of assets received in lieu of payment			2,489				2,461
Subtotal			11,228				14,837
Credit card expenses			2,638				2,157
Customer services			9,940				10,954
Other expenses
Operating charge-offs			6,153				8,222
Life insurance and general product insurance policies			8,919				7,348
Additional tax on expenses paid overseas			3,055				2,862
Provisions for contingencies			29,004				5,805
Payment of Retail Association			1,021				1,079
Expense for adopting chip technology on cards			1,476				2,283
Other			7,674				6,804
Subtotal			57,302				34,403
Total			81,108				62,351

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 35

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 and the 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, states that any transaction with a related party must be made under equitable conditions similar to those that customarily prevail in the market.

 

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, General Manager, or representatives.

 

Transactions between the Bank and its related parties are specified below and have been divided into four categories:

 

Santander Group Companies

 

This category includes all the companies that are controlled by the Santander Group around the world, and hence, including 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 and the 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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 35

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,
		2014																2013
		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			51,647				9,614				4,348				8,743				47,305				618				4,022				51,141
Mortgage loans			-				-				19,941				-				-				-				15,561				-
Consumer loans			-				-				2,798				-				-				-				2,061				-
Loans and account receivables:			51,647				9,614				27,087				8,743				47,305				618				21,644				51,141
Allowance for loan losses			(139	)			(10	)			(46	)			(18	)			(238	)			(3	)			(44	)			(6	)
Net loans			51,508				9,604				27,041				8,725				47,067				615				21,600				51,135
Guarantees			409,339				-				23,896				1,289				124,420				-				19,237				2,326
Contingent loans
Personal guarantees			-				-				-								-				-				-				-
Letters of credit			16,000				-				-				11				30,714				-				-				-
Guarantees			432,802				-				-				762				172,274				-				-				9,989
Contingent loans			448,802				-				-				773				202,988				-				-				9,989
Allowance for contingent loans			(12	)			-				-				-				(22	)			-				-				(4	)
Net contingent loans			448,790				-				-				773				202,966				-				-				9,985

 

Loan activity to related parties during 2014 and 2013, is shown below:

 

		As of December 31,
		2014																2013
		Companies of the Group				Associated companies				Key personnel				Others				Companies of the Group				Associated companies				Key personnel				Others
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1,			250,293				618				21,644				61,130				107,384				668				19,512				59,166
Loans granted			338,784				9,108				11,651				17,585				161,763				377				7,313				14,858
Loans payments			(88,628	)			(112	)			(6,208	)			(69,199	)			(18,854	)			(427	)			(5,181	)			(12,894	)
Total			500,449				9,614				27,087				9,516				250,293				618				21,644				61,130

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 35

TRANSACTIONS WITH RELATED PARTIES, continued

 

b) Assets and liabilities with related parties

 

		As of December 31,
		2014																2013
		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			193,377				-				-				-				5,306				-				-				-
Trading investments			-				-				-				-				-				-				-				-
Investments under resale agreements			-				-				-				-				-				-				-				-
Financial derivative contracts			995,468				-				-				-				557,026				-				-				-
Available for sale investments			-				-				-				-				-				-				-				-
Other assets			2,776				-				-				-				2,460				-				-				-
Liabilities
Deposits and other demand liabilities			5,061				1,168				2,403				4,602				58,030				10,406				2,783				23,300
Obligations under repurchase agreements			47,010				-				-				-				59,703				-				-				-
Time deposits and other time liabilities			269,381				2,320				81,079				81,079				54,212				299				3,774				156,977
Financial derivative contracts			1,395,507				-				-				-				537,162				-				-				-
Issued debts instruments			336,323				-				-				-				96,872				-				-				-
Other financial liabilities			846				-				-				-				3,912				-				-				-
Other liabilities			771				-				-				-				462				-				-				-

 

c)

Income (expenses) recorded due to transactions with related parties

 

		As of December 31,
		2014																2013
		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- indexation adjustments			(11,130	)			25				1,963				(2,509	)			(8,812	)			50				1,065				(1,082	)
Income and expenses from fees and services			30,591				84				230				167				-				75				120				3,615
Net income from financial operations and foreign exchange transactions (*)			(315,918	)			-				20				(10,051	)			(8,690	)			-				(4	)			(1,534	)
Other operating income and expenses			1,158				-				-				-				955				-				-				-
Income from investments in associates and other companies (**)			-				-				-				-				78,122				-				-				-
Key personnel compensation and expenses			-				-				(31,361	)			-				-				-				(31,652	)			-
Administrative and other expenses			(30,342	)			(33,961	)			-				-				(28,371	)			(30,758	)			-				-
Total			(325,641	)			(33,852	)			(29,148	)			(12,393	)			33,204				(30,633	)			(30,471	)			999

 

(*)

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 subsidiary Santander Asset Management S.A. Administradora General de Fondos.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 35

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:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
Personnel compensation			17,410				16,954
Board member’s salaries and expenses			1,235				1,083
Bonuses or gratifications			12,358				11,267
Compensation in stock			310				684
Training expenses			78				55
Seniority compensation			234				1,064
Health funds			288				290
Other personnel expenses			504				566
Pension plans (*)			1,395				(311	)
Total			33,812				31,652

 

(*) Some of the executives that qualified for this benefit left the Group for different reasons, without complying with the requirements to use the benefit, therefore the obligation amount decreased, which generated the reversal of provisions.

 

 

e)

Composition of key personnel

 

As of December 31, 2014 and 2013, the composition of the Bank’s key personnel is as follows:

 

Position		No. of executives
		As of December 31
		2014				2013
Director			13				12
Division manager			18				16
Department manager			90				80
Manager			54				60
Total key personnel			175				168

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 36

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:

 

a.	The plan is aimed at the Group’s management
b.	The general requirement 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) for the employee’s behalf where it will pay (defined contribution) periodically.
d.	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.

 

Plan Assets owned by the Bank at the end of 2014 totaled Ch$6,495 million (Ch$5,171 million in 2013).

 

The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

 

Calculation method:

Use of the projected unit credit 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:

 

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.

 

 

		Plans post- employment		Plans post- employment
		2014		2013
Mortality chart		RV-2009		RV-2009
Termination of contract rates		5.0%		5.0%
Impairment chart		PDT 1985		PDT 1985

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 36

PENSION PLANS, continued

 

Activity for post-employment benefits is as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Plan assets			6,495				5,171
Commitments for defined-benefit plans
For active personnel			(4,639	)			(3,888	)
Incurred by inactive personnel			-				-
Minus:
Unrealized actuarial (gain) losses			-				-
Balances at year end			1,856				1,283

 

Year’s cash flow for post-employment benefits is as follows:

 

		For the years ended December 31,
		2014				2013
		MCh$				MCh$
a) Fair value of plan assets
Opening balance			5,171				5,584
Expected yield of insurance contracts			446				247
Employer contributions			878				(660	)
Actuarial (gain) losses (*)			-				-
Premiums paid			-				-
Benefits paid			-				-
Fair value of plan assets at year end			6,495				5,171
b) Present value of obligations
Present value of obligations opening balance			(3,244	)			(3,594	)
Net incorporation of Group companies			-				-
Service cost			(1,395	)			(311	)
Interest cost			-				-
Curtailment/settlement effect			-				-
Benefits paid			-				-
Past service cost			-				-
Actuarial (gain) losses			-				17
Other			-				-
Present value of obligations at year end			(4,639	)			(3,888	)
Net balance at year end			1,856				1,283

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 36

PENSION PLANS, continued

 

Plan expected profit:

 

		As of December 31,
		2014		2013
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,
		2014				2013
		MCh$				MCh$
Current period service expenses			1,395				311
Interest cost			-				-
Expected yield from plan’s assets			(446	)			(247	)
Expected yield of insurance contracts linked to the Plan:
Extraordinary allocations			-				-
Actuarial (gain)/ losses recorded in the period			-				(17	)
Past service cost			-				-
Other			-				-
Total			949				47

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 37

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 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, 2014 and 2013:

 

		As of December 31,
		2014								2013
		Book value				Fair value				Book value				Fair value
		MCh$				MCh$				MCh$				MCh$
Assets
Cash and deposits in banks			1,608,888				1,608,888				1,571,810				1,571,810
Cash items in process of collection			531,373				531,373				604,077				604,077
Trading investments			774,815				774,815				287,567				287,567
Investments under resale agreements			-				-				17,469				17,469
Financial derivative contracts			2,727,563				2,727,563				1,494,018				1,494,018
Loans and accounts receivable from customers and interbank loans, net			22,191,856				24,187,545				20,452,416				23,562,746
Available for sale investments			1,651,598				1,651,598				1,700,993				1,700,993
Liabilities
Deposits and interbank borrowings			18,126,038				18,470,479				16,978,412				16,921,614
Cash items in process of being cleared			281,259				281,259				276,379				276,379
Investments under repurchase agreements			392,126				392,126				208,972				208,972
Financial derivative contracts			2,561,384				2,561,384				1,300,109				1,300,109
Issued debt instruments and other financial liabilities			5,990,237				6,456,142				5,388,439				5,729,213

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 37

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 determines as exit price in accordance with IFRS 13.

 

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.

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 37

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 37

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, 2014 and 2013:

 

		Fair value measurement
		2014				Level 1				Level 2				Level 3
As of December 31,		MCh$				MCh$				MCh$				MCh$
Assets
Trading investments			774,815				731,344				43,471				-
Available for sale investments			1,651,598				1,028,639				622,075				884
Derivatives			2,727,563				-				2,684,782				42,781
Total			5,153,976				1,759,983				3,350,328				43,665
Liabilities
Derivatives			2,561,384				-				2,561,384				-
Total			2,561,384				-				2,561,384				-

 

		Fair value measurement
		2013				Level 1				Level 2				Level 3
As of 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			1,300,109				-				1,298,690				1,419
Derivatives			1,300,109				-				1,298,690				1,419

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 37

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, 2014 and 2013:

 

		Assets				Liabilities
		MCh$				MCh$
As of January 1, 2014			52,104				(1,419	)
Total realized and unrealized profits (losses)
Included in statement of income			(8,485	)			1,419
Included in other comprehensive income			46				-
Purchases, issuances, and loans (net)			-				-
As of December 31, 2014			43,665				-
Total profits or losses included in comprehensive income for 2014 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2014			(8,439	)			1,419

 

		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 unrealized profit (losses) related to assets or liabilities as of December 31, 2013			(11,045	)			(313	)

 

The realized and unrealized profits (losses) included in comprehensive income for 2014 and 2013, 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, 2014 and 2013 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, 2014
		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			-				-				-				2,552,301				2,443,668				108,633				175,262				117,716				57,546
Repurchase agreements			-				-				-				-				-				-				41,912				1,793				40,119
Total			-				-				-				2,552,301				2,443,668				108,633				217,174				119,509				97,665

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

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;

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

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.

 

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

Below is the distribution by financial asset of the Bank’s maximum exposure to credit risk as of December 31, 2014 and 2013, without deduction of collateral or credit improvements received:

 

				As of December 31,
				2014				2013
				Amount of exposure				Amount of exposure
		Note		MCh$				MCh$
Cash and deposits in banks		4			1,608,888				1,571,810
Cash items in process of collection		4			531,373				604,077
Trading investments		5			774,815				287,567
Investments under resale agreements		6			-				17,469
Financial derivative contracts		7			2,727,563				1,494,018
Loans and accounts receivable from customers and interbank loans, net		8 and 9			22,191,856				20,452,416
Available for sale investments		10			1,651,598				1,700,993
Off-balance commitments:
Letters of credit issued		22			205,920				218,032
Foreign letters of credit confirmed		22			75,813				127,600
Guarantees		22			1,481,154				1,212,799
Available credit lines		22			5,699,573				5,141,831
Personal guarantees		22			262,169				181,416
Other irrevocable credit commitments		22			109,520				47,376
Total					37,320,242				33,057,404

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

The following table shows loan portfolio information as set forth in our internal scoring policy, described in Note 01 o) “Allowance for loans losses” as of December 31, 2014 and 2013:

 

		As of December 31,
Category		2014																2013
Commercial		Individual				Percentage				Allowance				Percentage				Individual				Percentage				Allowance				Percentage
Portfolio		MCh$				%				MCh$				%				MCh$				%				MCh$				%
A1			120,646				0.53	%			42				0.01	%			381,551				1.81	%			135				0.02	%
A2			1,790,389				7.82	%			1,202				0.17	%			2,013,820				9.56	%			1,323				0.22	%
A3			3,029,274				13.23	%			3,340				0.48	%			2,730,837				12.97	%			2,923				0.48	%
A4			2,535,098				11.07	%			17,062				2.43	%			2,115,403				10.04	%			15,823				2.60	%
A5			858,830				3.75	%			13,114				1.87	%			838,697				3.98	%			13,712				2.25	%
A6			475,212				2.08	%			11,406				1.63	%			443,059				2.10	%			11,981				1.97	%
B1			183,932				0.80	%			9,172				1.31	%			181,676				0.86	%			8,061				1.33	%
B2			64,695				0.28	%			5,910				0.84	%			80,513				0.38	%			4,229				0.70	%
B3			75,074				0.33	%			10,351				1.48	%			77,940				0.37	%			10,430				1.72	%
B4			74,910				0.33	%			11,028				1.57	%			33,922				0.16	%			5,318				0.87	%
C1			79,148				0.35	%			1,583				0.23	%			56,040				0.27	%			1,121				0.18	%
C2			66,267				0.29	%			6,627				0.95	%			46,996				0.22	%			4,700				0.77	%
C3			16,742				0.07	%			4,185				0.60	%			20,780				0.10	%			5,195				0.85	%
C4			33,074				0.14	%			13,229				1.89	%			43,109				0.21	%			17,243				2.83	%
C5			59,585				0.26	%			38,730				5.53	%			61,246				0.29	%			39,811				6.54	%
C6			94,832				0.41	%			85,348				12.18	%			64,755				0.31	%			58,279				9.59	%
Subtotal			9,557,708				41.74	%			232,329				33.17	%			9,190,344				43.63	%			200,284				32.92	%

 

		Group				Percentage				Allowance				Percentage				Group				Percentage				Allowance				Percentage
		MCh$				%				MCh$				%				MCh$				%				MCh$				%
Commercial
Normal portfolio			2,401,003				10.49	%			51,027				7.28	%			2,237,256				10.62	%			30,864				5.07	%
Impaired portfolio			383,532				1.68	%			114,670				16.36	%			400,101				1.90	%			69,306				11.39	%
Subtotal			2,784,535				12.17	%			165,697				23.64	%			2,637,357				12.52	%			100,170				16.46	%
Mortgage
Normal portfolio			6,261,428				27.35	%			17,574				2.50	%			5,302,411				25.18	%			15,701				2.58	%
Impaired portfolio			370,603				1.62	%			31,170				4.45	%			323,401				1.54	%			27,605				4.54	%
Subtotal			6,632,031				28.97	%			48,744				6.95	%			5,625,812				26.72	%			43,306				7.12	%
Consumer
Normal portfolio			3,554,891				15.53	%			116,865				16.67	%			3,257,836				15.47	%			112,468				18.49	%
Impaired portfolio			363,484				1.59	%			137,158				19.57	%			349,412				1.66	%			152,117				25.01	%
Subtotal			3,918,375				17.12	%			254,023				36.24	%			3,607,248				17.13	%			264,585				43.50	%
Total			22,892,649				100.00	%			700,793				100.00	%			21,060,761				100.00	%			608,345				100.00	%

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

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 lesser likelihood of meeting their financial obligations in the short term.

 

-

Categories C and D 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 30 for the detail of the Bank’s impaired loans and the associated allowances. Also, see Note 19 for a detail of the maturity of the Bank’s financial assets.

 

Exposure to credit risk in foreign derivative contracts

 

As of December 31, 2014, the Bank’s foreign exposure -including counterparty risk in the derivative instruments’ portfolio- was USD 1,711 million or 3.45% 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 the below represents our majority of exposure to categories other than 1 is. Below we detail exposure to Italy and Spain as of December 31, 2014, considering fair value of derivative instruments.

 

Country		Classification (1)				Derivative Instruments (adjusted to market) USD MCh$				Deposits USD MCh$				Loans USD MCh$				Financial investments USD MCh$				Total Exposure USD MCh$
Spain			2				4.13				-				0.09				-				4.22
Italy			2				49.65				3.28				0.18				-				53.11
Other			3				1.37				0.21				0.53				-				2.11
Total							55.15				3.49				0.8				-				59.44

 

(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

1

4.79

311.26

-

-

316.05

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

Impairment of other financial instruments

 

As of December 31, 2014 and 2013, 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 assessing 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, 2014 and 2013.

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Non-impaired financial assets:
Properties/mortgages			14,643,933				12,701,836
Investments and others			2,005,276				1,347,770
Impaired financial assets:
Properties/ mortgages			420,033				663,889
Investments and others			12,314				27,810
Total			17,081,556				14,741,305

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

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.

 

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,
		2014				2013
		%				%
30 days			32.00				30.00
30 days foreign currency			-				(22.00	)
90 days			15.00				31.00

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

Below, is the breakdown by maturity, of the asset and liability balances of the Bank as of December 31, 2014 and 2013, which also includes off-balance commitments:

 

As of December 31, 2014		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
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Maturity of assets (Note 19)			2,887,690				2,655,380				2,094,399				4,815,513				8,519,123				9,214,781				30,186,886
Maturity of liabilities (Note 19)			(6,992,478	)			(6,175,945	)			(3,205,819	)			(3,717,331	)			(4,329,432	)			(2,930,039	)			(27,351,044	)
Net maturity			(4,104,788	)			(3,520,565	)			(1,111,420	)			1,098,182				4,189,691				6,284,742				2,835,842
Off-balance commitments:
Personal guarantees			-				(17,626	)			(6,858	)			(169,875	)			(54,126	)			(13,684	)			(262,169	)
Foreign letters of credit confirmed			-				(2,426	)			(26,807	)			(4,085	)			(42,495	)			-				(75,813	)
Letters of credit issued			-				(54,701	)			(108,218	)			(43,001	)			-				-				(205,920	)
Guarantees			-				(122,176	)			(188,378	)			(620,143	)			(522,233	)			(28,224	)			(1,481,154	)
Net maturity, including commitments			(4,104,788	)			(3,717,494	)			(1,441,681	)			261,078				3,570,837				6,242,834				810,786

 

As of December 31, 2013		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
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Maturity of assets (Note 19)			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 19)			(6,106,601	)			(5,857,722	)			(3,232,857	)			(3,772,903	)			(2,839,942	)			(2,342,286	)			(24,152,311	)
Net maturity			(3,156,103	)			(3,210,427	)			(1,042,451	)			614,139				4,572,146				4,807,080				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	)			(3,412,324	)			(1,349,786	)			(87,509	)			4,085,181				4,765,078				844,537

 

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.

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

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.

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

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.

 

At no time in 2014 and 2013 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 approximately one out of hundred business days. Also, a maximum VaR limit was established that can be applied over the trading portfolio. Both in 2014 and 2013, 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		2014 USDMM				2013 USDMM
Consolidated:
High			3.77				3.48
Low			1.06				1.061
Average			1.91				1.72
Fixed-income investments:
High			3.99				2.39
Low			1.06				0.97
Average			1.78				1.57
Variable-income investments
High			0.15				0.19
Low			0.00				0.00
Average			0.00				0.00
Foreign currency investments
High			2.39				3.20
Low			0.06				0.06
Average			0.58				0.69

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

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.

 

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.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 38

RISK MANAGEMENT, continued

 

Market risk – Financial management portfolio – December 31, 2014 and 2013

 

		2014								2013
		Effect on financial income				Effect on capital				Effect on financial income				Effect on capital
Financial management portfolio – local currency (MCh$)
Loss limit			38,150				192,660				35,500				167,530
High			27,707				112,133				28,923				86,196
Low			16,904				77,231				21,129				69,729
Average			21,077				92,809				25,124				77,849
Financial management portfolio – foreign currency (in millions of $US)
Loss limit			40				70				30				30
High			16				39				17				26
Low			-				10				2				2
Average			10				28				10				19
Financial management portfolio – consolidated (in MCh$)
Loss limit			40,650				172,390				35,500				167,530
High			27,949				112,364				28,958				86,212
Low			17,441				77,848				21,204				69,787
Average			21,404				93,245				25,146				77,891

 

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

-

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 9 of the financial statements for a detail of the concentration of the Bank’s loans and accounts receivable by industry.

 

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

NOTE 39

SUBSEQUENT EVENTS

 

Between January 1, 2015 and the date on which these Consolidated Financial Statements were issued (January 26, 2015), no other events have occurred which could significantly affect their interpretation.

 

FELIPE CONTRERAS FAJARDO		CLAUDIO MELANDRI HINOJOSA
Chief Accounting Officer		Chief Executive Officer