SEC Filing | Banco Santander Chile

View:

Download DOC

Download PDF

Download XLS

Download XBRL

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

☐

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .

Commission file number: 1-14554

BANCO SANTANDER-CHILE
(d/b/a Santander and Banco Santander)
(Exact name of Registrant as specified in its charter)

SANTANDER-CHILE BANK
(d/b/a Santander and Banco Santander)
(Translation of Registrant’s name into English)

Chile
(Jurisdiction of incorporation or organization)

Bandera 140, 20th floor
Santiago, Chile
Telephone: 011-562-320-2000
(Address of principal executive offices)

Robert Moreno Heimlich
Tel: 562-2320-8284, Fax: 562-696-1679, email: robert.moreno@santander.cl
Bandera 140, 20th Floor, Santiago, Chile

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

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbols	Name of each exchange on which registered
American Depositary Shares (“ADS”), each representing the right to receive 400 Shares of Common Stock without par value	BSAC	New York Stock Exchange

Shares of Common Stock, without par value*	BSAC	New York Stock Exchange

____________________

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

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

188,446,126,794 Shares of Common Stock, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒

No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐

No ☒

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒

No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒

Accelerated Filer ☐

Non-accelerated Filer ☐

Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised ﬁnancial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codiﬁcation after April 5, 2012.

Indicate by check mark whether the registrant has ﬁled a report on and attestation to its management’s assessment of the eﬀectiveness of its internal control over ﬁnancial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting ﬁrm that prepared or issued its audit report. ☒

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

☐

U.S. GAAP

☒

International Financial Reporting Standards as issued by the International Accounting Standards Board

☐

Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

☐ Item 17

☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☒

table of contents

____________________

Page

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS	1
CERTAIN TERMS AND CONVENTIONS	3
PRESENTATION OF FINANCIAL INFORMATION	3
PART I	4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3. KEY INFORMATION	4
ITEM 4. INFORMATION ON THE COMPANY	45
ITEM 4A. UNRESOLVED STAFF COMMENTS	69
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	69
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	144
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	156
ITEM 8. FINANCIAL INFORMATION	160
ITEM 9. THE OFFER AND LISTING	160
ITEM 10. ADDITIONAL INFORMATION	161
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	178
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	201
PART II	202
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	202
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	202
ITEM 15. CONTROLS AND PROCEDURES	202
ITEM 16. [RESERVED]	204
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	204
ITEM 16B. CODE OF ETHICS	204
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	204
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	205
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	205
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	205
ITEM 16G. CORPORATE GOVERNANCE	205
ITEM 16H. MINE SAFETY DISCLOSURE	206
PART III	206
ITEM 17. FINANCIAL STATEMENTS	206
ITEM 18. FINANCIAL STATEMENTS	206
ITEM 19. EXHIBITS	207

Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

We have made statements in this Annual Report on Form 20-F that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this report and include statements regarding our intent, belief or current expectations regarding:

asset growth and alternative sources of funding;

growth of our fee-based business;

financing plans;

impact of competition;

impact of regulation;

exposure to market risks including:

interest rate risk;

foreign exchange risk; and

equity price risk;

projected capital expenditures;

liquidity;

trends affecting:

our financial condition; and

our results of operation.

The sections of this Annual Report which contain forward-looking statements include, without limitation, “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company—B. Business Overview—Competition,” “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings,” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” Our forward-looking statements also may be identified by words such as “believes,” “expects,” “anticipates,” “projects,” “intends,” “should,” “could,” “may,” “seeks,” “aim,” “combined,” “estimates,” “probability,” “risk,” “VaR,” “target,” “goal,” “objective,” “future” or similar expressions.

You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report and in the documents which are incorporated by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed in our forward-looking statements:

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

changes in economic conditions;

the monetary and interest rate policies of Central Bank (as defined below);

inflation;

Table of Contents

deflation;

unemployment;

increases in defaults by our customers and impairment losses;

decreases in deposits;

customer loss or revenue loss;

unanticipated turbulence in interest rates;

movements in foreign exchange rates;

movements in equity prices or other rates or prices;

the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;

changes in Chilean and foreign laws and regulations;

changes in taxes;

competition, changes in competition and pricing environments;

our inability to hedge certain risks economically;

the adequacy of loss allowances;

technological changes;

changes in consumer spending and saving habits;

changes in demographics, consumer spending, investment or saving habits;

increased costs;

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

changes in, or failure to comply with, banking regulations;

acquisitions or restructurings of businesses that may not perform in accordance with our expectations;

our ability to successfully market and sell additional services to our existing customers;

disruptions in client service;

damage to our reputation;

natural disasters;

implementation of new technologies;

the Group’s exposure to operational losses (e.g., failed internal or external processes, people and systems);

an inaccurate or ineffective client segmentation model; and

The COVID-19 pandemic or other pandemics.

You should not place undue reliance on such statements, which speak only as of the date at which they were made. The forward-looking statements contained in this report speak only as of the date of this Annual Report, and we do not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Table of Contents

CERTAIN TERMS AND CONVENTIONS

As used in this annual report (the “Annual Report”), “Santander-Chile”, “the Bank”, “we,” “our” and “us” or similar terms refer to Banco Santander-Chile together with its consolidated subsidiaries.

When we refer to “Santander Spain,” we refer to our parent company, Banco Santander, S.A.. References to “the Group,” “Santander Group” or “Grupo Santander” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander-Chile.

As used in this Annual Report, the term “billion” means one thousand million (1,000,000,000).

In this Annual Report, references to “$”, “U.S.$”, “U.S. dollars” and “dollars” are to United States dollars; references to “Chilean pesos,” “pesos” or “Ch$” are to Chilean pesos; references to “JPY” or “JPY$” are to Japanese Yen; references to “AUD” or “AUD$” are to Australian dollars; references to “CHF” or “CHF$” are to Swiss francs; references to “CNY” or “CNY$” are to Chinese yuan renminbi; 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.

As used in this Annual Report, the terms “write-offs” and “charge-offs” are synonyms.

In this Annual Report, references to the Audit Committee are to the Bank’s Comité de Directores y Auditoría.

In this Annual Report, references to “BIS” are to the Bank for International Settlement, and references to “BIS ratio” are to the capital adequacy ratio as calculated in accordance with the Basel Capital Accord. References to the “Central Bank” are to the Banco Central de Chile. References to the “SBIF” are to the Superintendency of Banks and Financial Institutions. References to the “FMC” are to the Financial Market Commission, into which the SBIF merged on June 1, 2019.

PRESENTATION OF FINANCIAL INFORMATION

Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Any reference to IFRS in this document is to IFRS as issued by the IASB.

As required by local regulations, our locally filed consolidated financial statements have been prepared in accordance with the Compendium of Accounting Standards issued by the FMC, the Chilean regulatory agency (“Chilean Bank GAAP”). Therefore, our locally filed consolidated financial statements have been adjusted to IFRS in order to comply with the requirements of the Securities and Exchange Commission (the “SEC”). Chilean Bank GAAP principles are substantially similar to IFRS but there are some exceptions. For further details and a discussion of the main differences between Chilean Bank GAAP and IFRS, see “Item 5. Operating and Financial Review and Prospects—Accounting Standards Applied in 2019.”

This Annual Report contains our consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 (the “Audited Consolidated Financial Statements”). Such Audited Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB, and

have been audited by the independent registered public accounting firm PricewaterhouseCoopers Consultores Auditores SpA for the years ended December 31, 2020, 2019 and 2018. See page F-2 of the Audited Consolidated Financial Statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 for the audit report issued by PricewaterhouseCoopers Consultores Auditores SpA. The Audited Consolidated Financial Statements have been prepared from accounting records maintained by the Bank and its subsidiaries.

Table of Contents

The notes to the Audited Consolidated Financial Statements form an integral part of the Audited Consolidated Financial Statements and contain additional information and narrative descriptions or details of these financial statements.

We have formatted our financial information according to the classification format for banks in Chile for purposes of IFRS. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the SEC that contains formatting requirements for bank holding company financial statements.

Functional and Presentation Currency

The Chilean peso is the currency of the primary economic environment in which the Bank operates and the currency that influences its structure of costs and revenues, and in accordance with International Accounting Standard 21 – The Effects of Changes in Foreign Exchange Rates has been defined as the functional and presentation currency. Accordingly, all balances and transactions denominated in currencies other than the Chilean peso are treated as “foreign currency.” See “Note 1—Summary of Significant Accounting Principles—e) Functional and presentation currency.” For presentation purposes, we have translated Chilean pesos (Ch$) into U.S. dollars (U.S.$) using the rate as indicated below under “Exchange Rates,” for the financial information included in this Annual Report.

Loans

Unless otherwise specified, all references herein (except in the Audited Consolidated Financial Statements) to loans are to loans and financial leases before deduction for loan loss allowance, and, except as otherwise specified, all market share data presented herein is based on information published periodically by the FMC.

Outstanding loans and the related percentages of our loan portfolio consisting of corporate and consumer loans as defined in the section entitled “Item 4. Information on the Company—B. Business Overview” are categorized based on the nature of the borrower. Outstanding loans and related percentages of our loan portfolio consisting of corporate and consumer loans in the section entitled “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information” are categorized in accordance with the reporting requirements of the FMC, which are based on the type and term of loans.

Non-performing loans are also presented in accordance with reporting requirements of the FMC and include the entire principal amount and accrued but unpaid interest on loans for which either principal or interest is past-due for 90 days or more. Restructured loans for which no payments are past-due are not ordinarily classified as non-performing loans. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

At the end of each reporting period the Bank evaluates the impairment of the loan book. For December 31, 2020, 2019 and 2018 this has been assessed in accordance with IFRS 9 and for prior periods in accordance with IAS 39.

Effect of Rounding

Certain figures included in this Annual Report and in the Audited Consolidated Financial Statements have been rounded up for ease of presentation. Percentage figures included in this Annual Report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this Annual Report may vary from those obtained by performing the same calculations using the figures in the Audited Consolidated Financial Statements. Certain other amounts that appear in this Annual Report may not sum due to rounding.

Economic and Market Data

In this Annual Report, unless otherwise indicated, all macroeconomic data related to the Chilean economy is based on information published by the Central Bank, and all market share and other data related to the Chilean financial system is based on information published by the FMC and our analysis of such information.

Exchange Rates

This Annual Report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in preparing the Audited Consolidated Financial Statements, could be converted into U.S. dollars at the rate indicated, were converted or will be converted at all.

Unless otherwise indicated, all U.S. dollar amounts at any year end, for any period have been translated from Chilean pesos based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period. On December 31, 2020 the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm was Ch$712.47, or 0.17% more than the observed exchange rate published by the Central Bank for such date of Ch$711.24 per U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for the Chilean peso.

The U.S. dollar equivalent of one UF was U.S.$40.87 as of December 31, 2020, using the observed exchange rate reported by the Central Bank as of December 30, 2020 of Ch$711.24 per U.S.$1.00.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The following table presents selected historical financial information for Santander-Chile as of the dates and for each of the periods indicated. Financial information for Santander-Chile as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 has been derived from our audited consolidated financial statements prepared in accordance with IFRS. In the F-pages of this Annual Report on Form 20-F, our audited financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 are presented. The audited financial statements for 2017 and 2016 are not included in this document, but they can be found in our previous Annual Reports on Form 20-F. These consolidated financial statements differ in some respects from our locally filed financial statements as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 prepared in accordance with Chilean Bank GAAP. See “Item 4. Information on the Company—Differences between IFRS and Chilean Bank GAAP.”

The following table should be read in conjunction with, and is qualified in its entirety by reference to, our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report.

Table of Contents

	As of and for the years ended December 31,
	2020			2020			2019			2018			2017			2016
	In U.S.$ thousands(1)						In Ch$ millions (2)
CONSOLIDATED STATEMENT OF INCOME DATA (IFRS)
Net interest income		2,237,074			1,593,848			1,416,964			1,414,368			1,326,691			1,281,366
Net fee and commission income		375,143			267,278			287,086			290,885			279,063			254,424
Financial transactions, net (3)		210,251			149,797			201,692			105,082			129,752			140,358
Other operating income		11,518			8,206			13,001			23,129			62,016			6,427
Net operating profit before provision for loan losses		2,833,985			2,019,129			1,918,743			1,833,464			1,797,522			1,682,575
Provision for loan losses		(671,276	)		(478,264	)		(323,311	)		(317,408	)		(302,255	)		(342,083	)
Net operating income		2,162,709			1,540,865			1,595,432			1,516,056			1,495,267			1,340,492
Total operating expenses		(1,188,808	)		(846,990	)		(801,890	)		(754,314	)		(778,950	)		(756,041	)
Operating income		973,901			693,875			793,542			761,742			716,317			584,451
Income from investments in associates and other companies (4)		1,948			1,388			1,146			1,324			1,144			3,012
Income before tax		975,849			695,263			794,688			763,066			717,461			587,463
Income tax expense		(200,055	)		(142,533	)		(175,074	)		(167,144	)		(145,031	)		(109,031	)
Income from continuing operations		775,794			552,730			619,614			595,922			572,430			478,432
Income from discontinued operations (4)		—			—			1,699			3,771			2,819			—
Net income for the year		775,794			552,730			621,313			599,693			575,249			478,432
Net income for the period attributable to: Equity holders of the Bank		768,613			547,614			619,091			595,333			562,801			476,067
Non-controlling interests		7,181			5,116			2,222			4,360			12,448			2,365
Net income attributable to Equity holders of the Bank per share		4.08			2.91			3.29			3.16			2.99			2.53
Net income attributable to Equity holders of the Bank per ADS		1,631			1,162.38			1,314.10			1,263.71			1,406.96			1,010.51
Weighted-average shares outstanding (in millions)		188,446			188,446			188,446			188,446.1			188,446.1			188,446.1
Weighted-average ADS outstanding (in millions)		471.1			471.1			471.1			471.1			471.1			471.1
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA (IFRS)
Cash and deposits in banks		3,934,605			2,803,288			3,554,520			2,065,441			1,452,922			2,279,389
Cash items in process of collection		635,764			452,963			355,062			353,757			668,145			495,283
Investments under resale agreements		—			—			—			—			—			6,736
Financial derivative contracts		12,677,144			9,032,085			8,148,608			3,100,635			2,238,647			2,500,782
Trading investments								—			—			485,736			396,987
Interbank loans, net								—			—			162,213			268,672
Loans and accounts receivable from customers, net								—			—			26,772,544			26,147,154
Available-for-sale investments								—			—			2,574,546			3,388,906
Financial assets held for trading		187,682			133,718			270,204			77,041			—			—
Loans and account receivable at amortized cost		46,743,161			33,303,100			31,775,420			29,331,001			—			—
Loans and account receivable at fair value through other comprehensive income		97,311			69,331			66,065			68,588			—			—
Debt instrument at fair value through other comprehensive income		10,053,114			7,162,542			4,010,272			2,394,323			—			—
Equity instruments at fair value through other comprehensive income		769			548			482			483			—			—
Investments in associates and other companies		14,591			10,396			10,177			32,003			27,585			23,780
Intangible assets		115,846			82,537			73,389			66,923			63,219			58,085
Property, plant, and equipment		338,055			240,854			252,346			253,586			242,547			257,379
Rights of use assets		207,724			147,997			155,987			—			—			—
Current taxes		—			—			11,648			—			—			—
Deferred taxes		724,929			516,490			451,388			397,515			371,091			359,600
Other assets		2,452,558			1,747,374			1,439,146			991,216			764,410			847,272
TOTAL ASSETS		78,183,254			55,703,223			50,574,714			39,132,512			35,823,605			37,030,025
Deposits and other demand liabilities		20,437,202			14,560,893			10,297,432			8,741,417			7,768,166			7,539,315

Table of Contents

	As of and for the years ended December 31,
	2020			2020			2019			2018		2017			2016
	In U.S.$ thousands(1)						In Ch$ millions (2)
Cash items in process of being cleared		507,574			361,631			198,248			163,043		486,726			288,473
Obligations under repurchase agreements		1,361,191			969,808			380,055			48,545		268,061			212,437
Time deposits and other time liabilities		14,852,262			10,581,791			13,192,817			13,067,819		11,913,945			13,151,709
Financial derivative contracts		12,658,301			9,018,660			7,390,654			2,517,728		2,139,488			2,292,161
Interbank borrowings		8,882,618			6,328,599			2,519,818			1,788,626		1,698,357			1,916,368
Issued debt instruments		11,515,119			8,204,177			9,500,723			8,115,233		7,093,653			7,326,372
Other financial liabilities		258,703			184,318			226,358			215,400		242,030			240,016
Obligation for lease contract		209,953			149,585			158,494			—		—			—
Current taxes		18,214			12,977			—			8,093		6,435			29,294
Deferred taxes		181,752			129,493			99,157			15,470		9,663			7,686
Provisions		464,109			330,664			326,130			305,271		303,798			292,210
Other liabilities		1,636,354			1,165,853			2,806,325			900,408		745,363			795,785
TOTAL LIABILITIES		72,983,352			51,998,449			47,096,211			35,887,053		32,675,685			34,091,826
Capital		1,251,004			891,303			891,303			891,303		891,303			891,303
Reserves		3,289,374			2,343,580			2,122,742			1,923,022		1,781,818			1,640,112
Valuation adjustments		(35,500	)		(25,293	)		(8,856	)		11,352		(2,312	)		6,640
Retained earnings		576,166			410,501			393,681			373,619		435,228			370,803
Attributable to Equity holders of the Bank		5,081,043			3,620,091			3,398,870			3,199,296		3,106,037			2,908,858
Non-controlling interest		118,858			84,683			79,633			46,163		41,883			29,341
TOTAL EQUITY (5)		5,199,902			3,704,774			3,478,503			3,245,459		3,147,920			2,938,199
TOTAL LIABILITIES AND EQUITY		78,183,254			55,703,223			50,574,714			39,132,512		35,823,605			37,030,025

	As of and for the years ended December 31,
	2020			2019			2018			2017			2016
CONSOLIDATED RATIOS
(IFRS)
Profitability and performance:
Net interest margin (6)		3.8	%		4.0	%		4.3	%		4.3	%		4.3	%
Return on average total assets (7)		1.0	%		1.4	%		1.6	%		1.6	%		1.4	%
Return on average equity (8)		14.8	%		18.0	%		18.4	%		19.2	%		16.8	%

Capital:
Average equity as a percentage of average total assets (9)		6.7	%		8.0	%		8.8	%		8.5	%		8.1	%
Total liabilities as a multiple of equity (10)		14.0			13.5			11.1			10.4			11.6
Credit Quality:
Non-performing loans as a percentage of total loans (11)		1.4	%		2.1	%		2.1	%		2.3	%		2.1	%
Allowance for loan losses as percentage of total loans(12)		3.0	%		2.7	%		2.9	%		2.9	%		2.9	%
Operating Ratios:
Operating expenses /operating revenue (13)		41.9	%		41.8	%		41.1	%		43.3	%		44.9	%
Operating expenses /average total assets		1.4	%		1.9	%		2.0	%		2.3	%		2.1	%
OTHER DATA
CPI Inflation Rate (14)		3.0	%		3.0	%		2.6	%		2.3	%		2.7	%
Revaluation (devaluation) rate (Ch$/U.S.$) at year end (14)		4.5	%		(7.1	%)		(13.1	%)		7.8	%		5.7	%
Number of employees at period end		10,470			11,200			11,305			11,068			11,354
Number of branches and offices at period end		358			377			380			385			423

____________________

(1)

Amounts stated in U.S. dollars at and for the year ended December 31, 2020 have been translated from Chilean pesos at the interbank market exchange rate of Ch$712.47 = U.S.$1.00 as of December 31, 2020 based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period. Per share data in US$ is not in thousands.

Table of Contents

(2)

Except per share data, percentages and ratios, share numbers, employee numbers and branch numbers.

(3)

Net income (expense) from financial operations and net foreign exchange gain.

(4)

In 2019 Banco Santander sold its investments in Redbanc S.A., Transbank S.A. and Nexus S.A. in accordance with IFRS 5 and reclassified and presented these investments in Other Assets classified as held for sale separate from the rest of the investments in associates and presented the effects in the income statement as discontinued operations. See “Note 39- Non-current assets held for sale”.

(5)

Total equity includes equity attributable to equity holders of the Bank plus non-controlling interests.

(6)

Net interest income divided by average interest earning assets (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”).

(7)

Net income for the year divided by average total assets (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”).

(8)

Net income for the year divided by average equity (as presented in “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information”).

(9)

This ratio is calculated using total average equity (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”) including non-controlling interest.

(10)

Total liabilities divided by equity.

(11)

Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment over 90 days past-due. Total loans in 2020, 2019 and 2018 corresponds to loans at amortized cost.

(12)

Allowance for loan losses as of December 31, 2020, 2019 and 2018 corresponds to allowances for loans at fair value through other comprehensive income at amortized cost according to IFRS 9. Prior periods are in accordance with IAS 39.

(13)

The efficiency ratio is equal to operating expenses over operating income. Operating expenses includes personnel salaries and expenses, administrative expenses, depreciation and amortization, impairment and other operating expenses. Operating income includes net interest income, net fee and commission income, net income from financial operations (net trading income), foreign exchange gain, net and other operating income.

(14)

Based on information published by the Central Bank.

Dividends

Under the current General Banking Law, a Chilean bank may only pay a single dividend per year (i.e., interim dividends are not permitted). Santander-Chile’s annual dividend is proposed by its Board of Directors and is approved by the shareholders at the annual ordinary shareholders’ meeting held the year following that in which the dividend is generated. For example, the 2020 dividend must be proposed and approved during the first four months of 2021. Following shareholder approval, the proposed dividend is declared and paid. Historically, the dividend for a particular year has been declared and paid no later than one month following the shareholders’ meeting. Dividends are paid to shareholders of record on the fifth day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of ADSs will, to the extent practicable, be the same.

Under the General Banking Law, a bank must distribute cash dividends in respect of any fiscal year in an amount equal to at least 30% of its net income for that year, if the dividend does not result in the infringement of minimum capital requirements. The balances of our distributable net income are generally retained for use in our business (including for the maintenance of any required legal reserves). Although our Board of Directors currently intends to pay regular annual dividends, the amount of dividend payments will depend upon, among other factors, our current level of earnings, capital and legal reserve requirements, as well as market conditions, and there can be no assurance as to the amount or timing of future dividends.

Dividends payable to holders of ADSs are net of foreign currency conversion expenses of The Bank of New York Mellon, as depositary (the “Depositary”) and will be subject to the Chilean withholding tax currently at the rate of 35% (subject to credits in certain cases as described in “Item 10. Additional Information—E. Taxation—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs”).

Table of Contents

Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADS holders is required. In the past, Chilean law required that holders of shares of Chilean companies who were not residents of Chile to register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. On April 19, 2001, the Central Bank deregulated the Exchange Market and eliminated the need to obtain approval from the Central Bank in order to remit dividends, but at the same time this eliminated the possibility of accessing the Formal Exchange Market. These changes do not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, which grants access to the Formal Exchange Market with prior approval of the Central Bank. See “Item 10. Additional Information—D. Exchange Controls.”

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

Year	Dividend Ch$ millions (1)	Dividend U.S.$ millions (2)	Per share Ch$/share (3)	Per ADS U.S.$/ADS (4)	% over earnings (5)	% over earnings (6)
2017	330,646	500.9	1.75	1.06	70	69
2018	423,611	705.3	2.25	1.50	75	75
2019	355,141	531.5	1.88	1.13	60	60
2020 (7)	331,256	430.8	1.76	0.91	60	54

____________________

(1)

Millions of nominal pesos.

(2)

Millions of U.S.$ using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting.

(3)

Calculated on the basis of 188,446 million shares.

(4)

Dividend in U.S.$ million divided by the number of ADS, which was calculated on the basis of 400 shares per ADS.

(5)

Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under Chilean Bank GAAP. This is the payment ratio determined by shareholders.

(6)

Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under IFRS.

(7)

In 2020, shareholders of the Bank approved the distribution of 30% of the 2019 net income attributable to shareholders under Chilean Bank GAAP on April 30, 2020. This amounted to Ch$ 165,627 million (US$ 198.0 million using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting) or Ch$ 0.88 per share (US$ per ADR 0.49). In the Extraordinary Shareholders Meeting held on November 26, 2020, a further 30% of the 2019 earnings was approved.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

Table of Contents

D. Risk Factors

You should carefully consider the following risk factors, which should be read in conjunction with all the other information presented in this Annual Report. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we do not know about or that we currently think are immaterial may also impair our business operations. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, prospects and financial condition. The following risk factors have been grouped as follows:

(a)

Risk Factors in respect of Santander-Chile;

(b)

Risk Factors in respect of Chile;

(c)

Risk Factors in respect of our Controlling Shareholder and our ADSs; and

(d)

General Risk Factors.

The risk factors in respect of Santander-Chile are presented in the following subcategories depending on their nature:

(a)

Macro-economic Risks;

(b)

Competitive Risks;

(c)

Operational Risks;

(d)

Financial Risks; and

(e)

Legal and Regulatory Risks.

Summary of Key Risks

Our business is subject to numerous risks and uncertainties, discussed in more detail below. These risks include, among others, the following key risks:

Our operations and results have been negatively impacted by the coronavirus outbreak.

We are vulnerable to disruptions and volatility in the global financial markets.

The growth rate of our loan portfolio may be affected by economic turmoil, which could also lead to a contraction in our loan portfolio.

Our operations and results may be negatively affected by earthquakes due to the location of Chile in a highly seismic area.

Climate change can create transition risks, physical risks, and other risks that could adversely affect us.

Increased competition, including from non-traditional providers of banking services such as financial technology providers, and industry consolidation may adversely affect our results of operations.

Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients.

The growth of our loan portfolio may expose us to increased loan losses. Our exposure to individuals and small and mid-sized businesses could lead to higher levels of past due loans, allowances for loan losses and charge-offs.

Table of Contents

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Risks relating to cybersecurity, data collection, processing and storage systems and security are inherent in our business.

Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

We may not effectively manage risks associated with the replacement of benchmark indices.

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

Our financial results are constantly exposed to market risk. We are subject to fluctuations in inflation, interest rates and other market risks, which may materially and adversely affect us and our profitability.

We are subject to counterparty risk in our banking business.

Liquidity and funding risks are inherent in our business and could have a material adverse effect on our results, our costs of funds and our credit ratings.

We are subject to regulatory capital and liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.

We are subject to regulatory risk, or the risk of not being able to meet all of the applicable regulatory requirements and guidelines.

Changes to the pension fund system may affect the funding mix of the Bank

We may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are exposed to risk of loss from legal and regulatory proceedings.

Political, legal, regulatory and economic uncertainty arising from social unrest and the resulting social reforms, as well as the referendum on Chile’s constitution could adversely impact the Bank’s business

Our growth, asset quality and profitability may be adversely affected by macroeconomic and political conditions in Chile.

Currency fluctuations could adversely affect our financial condition and results of operations and the value of our securities.

Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange (“NYSE”), limiting the protections afforded to investors.

As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

Table of Contents

RISK FACTORS IN RESPECT OF SANTANDER-CHILE

Macro-Economic Risks

Our operations and results have been negatively impacted by the coronavirus outbreak, which we expect will have a continued and potentially material adverse effect on our business and results of operations for as long as the pandemic is ongoing.

Since December 2019, a novel strain of coronavirus (COVID-19) has spread around the world, including Chile. On March 18, 2020, the Chilean government declared a state of emergency and on March 19, 2020, the government ordered the suspension of all non-essential activities and a mandatory quarantine in neighborhoods with a high concentration of cases. Since that date different areas of Chile have come in and out of different levels of quarantine. These measures and similar measures have caused significant disruption of regional and global economic activity. These quarantines led to the closure of approximately 20% of our branches at the peak of the pandemic. As of December 31, 2020, 41 of our branches remained closed due to the pandemic. For the remaining of the open branches, we have instituted strict sanitary protocols and restrictions on the number of customers and personnel that can be in any individual branch at a time. As of December 31, 2020, 20% of the Bank’s central office workforce had returned to work at our headquarters, while the rest remain working remotely.

Preliminary economic figures for 2020 published by the Chilean Central Bank have shown a significant impact of the pandemic on economic activity. GDP is expected to fall by 5-6% in 2020 and as of December 2020 the unemployment rate was at 10.2%. We expect there to be an improvement in economic growth in 2021, but the risk of a second wave of the coronavirus will still be a threat in 2021.

In Chile, the industries and sectors that have been most impacted have been hotels, casinos, tourism, restaurants and airlines. As of December 31, 2020, our loan exposures to these industries totaled approximately 1.1% of its loan book. In addition, during this time, we have seen increased demand for commercial loans and an increase in the number of clients opting to defer loan payments as permitted by the terms of their loan agreements.

The Chilean government has also announced a series of measures to support lending. The largest measures were to provide an additional US$3 billion to the Guarantee Fund for Small Companies (Fogape), a state fund that guarantees loans, leases and other credits provided to small businesses, extend Fogape’s coverage to companies with annual sales of up to UF 1 million (US$34 million) and further amend the rules and regulations governing Fogape to encourage banks to provide lending to small businesses. Under Fogape’s new regulations, domestic banks, including us, may provide loans with preferential interest rates monetary policy rate (MPR) to the MPR plus 3% and terms of up to 48 months to eligible companies in an aggregate amount equal to up to 3 months of a company’s sales and receive a guarantee from Fogape of between 60% and 85% of each loan. Any recovery of all or a portion of a non-performing loan will first be used to satisfy the non-guaranteed portion of the principal amount of the loan as well as legal fees, followed by the amount of the guarantee provided by Fogape and lastly any accrued and unpaid interest and fees. In order to receive the guarantee from Fogape, such loans must have a 6-month grace period before a company must begin repaying the loan. In addition, companies that receive loans guaranteed by Fogape pursuant to these new regulations will be entitled to defer loan payments for a period of 6 months.

In February 2021, the government approved the FOGAPE 2.0 program. The maximum rate will be set at a monthly rate of TPM (overnight rate) plus 0.6%, implying an annual rate of 7.2%. The focus at this time will be to direct the loans for SMEs investments and not only for working capital needs.

Although we have received guarantees from Fogape for a portion of the Fogape loans we have granted, if our clients default on their payment obligations under these loans when they become due, or they otherwise fail to timely comply with their obligations under these loans, this will result in higher levels of non-performing loans in the future and require the recognition of additional allowances for loan losses. Moreover, we must share with Fogape a portion of any recovery made on non-performing loans guaranteed by Fogape. In addition, all other loans previously disbursed to a client from the same bank from which they receive the FOGAPE loan will also be granted

Table of Contents

a 6-month grace period for repayment. If our clients default on their obligations under these loans, which are not guaranteed by Fogape, when such grace period ends, it could result in higher levels of non-performing loans in the future and require the recognition of additional allowances for loan losses.

As of December 31, 2020, we had approved Ch$2.1 trillion of Fogape loans to our SME and Middle-market clients. In December 2020 the first installments for approximately 50% of FOGAPE loans came due with an initial repayment rate of 99.6%. Despite these positive figures, we cannot assure that these repayment trends will continue in the future and a greater extension of the COVID-19 pandemic could signify a greater deterioration of the payment ability of our clients with a FOGAPE loan.

The FMC has also issued regulations regarding the granting of grace periods for mortgages, consumer loans and commercial loans that have been affected by the COVID-19 pandemic as follows:

Additionally, we provided grace periods for our consumer portfolio for up to 3 months, our mortgage portfolio for up to 6 months, and commercial loans up to 6 months to debtors who were 0-30 days overdue as of March 31,2020. As of December 31, 2020, we had provided a grace period according to the guidelines established by our regulator for Ch$9.1 trillion of our loans. Below is a breakdown of repayment behavior at the close of 2020:

Covid-19 measures	As of December 31, 2020
Covid-19 measures	MCh$
Payment holiday	9,098,028
Payment holiday – current	734,986
Payment holiday - expired	8,363,042

The Bank is closely monitoring payment behavior once payment holidays have expired. As of December 31, 2020, Ch$8,241,191 million corresponds to clients who are servicing their debt properly, and Ch$121,850 million defaulted or requested additional extensions.

Despite this favorable evolution of asset quality, there is still risk of an increase in the NPL ratio in 2021 as these grace periods continue to expire and as access to pension fund withdrawals is no longer available. In addition, the impact on allowance for loan losses is currently uncertain as it is highly dependent on the duration of the COVID-19 pandemic, the extent and length of the economic downturn and the rules and regulations put in place to combat the COVID-19 pandemic and its effects in the future.

Chile is currently rolling out a massive vaccination process, which officially began February 3, 2021, beginning with the riskiest segments such as health workers and the elderly. Each week it will include a broader segment of the population, trickling down to those that have close contact with people in their work. Chile has requested vaccines from all major laboratories. The target is to have 5 million people vaccinated by the end of March 2021, and 13 million by the end of June 2021, which accounts for 80% of the objective population.

The extent to which the COVID-19 pandemic impacts our results will depend on the duration of the pandemic and the level of continued disruption to Chilean, regional and global economic activity, which is impossible to predict at this time. Future developments with respect to the COVID-19 pandemic are highly uncertain and new information may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain it. Furthermore, there are no indications the Chilean government will continue providing loan support programs or other forms of relief or assistance for private sector entities such as us. If the pandemic continues and further government programs are not initiated, or the ones in place are not effective, this could have a material adverse effect on us.

Latam Airlines’ bankruptcy may have a material adverse effect on our business.

On May 26, 2020, Latam Airlines Group S.A. and its affiliates in Chile, Peru, Colombia, Ecuador and the United States filed for Chapter 11 bankruptcy in the United States. In Latam’s filings with bankruptcy court, we were identified as having one of Latam’s 40 largest unsecured claims. This claim is for the frequent flier mileage program we and Latam operate, through which holders of ours and Latam’s co-branded credit card accumulate airline miles with each spend on their credit card. The Bank’s balance sheet as of December 31, 2020, included a pre-paid expense for miles acquired under this program valued at Ch$372,544 billion (US$523 million) in Other Assets.

Table of Contents

Latam and its affiliates will be able to continue flying during the pendency of its Chapter 11 bankruptcy case. In initial hearings held on May 28, 2020 under the Chapter 11 restructuring process, Latam’s motion to continue honoring its mileage program was approved. As of the date hereof, the Bank does not see the need to re-value or recognize an impairment for this pre-paid expense. However, such assets may become impaired in the future as a result of the bankruptcy proceedings and we cannot assure that at a future date the restructuring process being carried out by Latam Airlines will not have a material adverse effect on our business.

We are vulnerable to disruptions and volatility in the global financial markets.

Global economic conditions deteriorated significantly between 2007 and 2009, and some countries fell into recession. Some major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there were runs on deposits at several financial institutions, numerous institutions sought additional capital or were assisted by governments, and many lenders and institutional investors reduced or ceased providing funding to borrowers (including to other financial institutions).

In particular, we face, among others, the following risks related to an economic downturn:

Reduced demand for our products and services.

Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our conduct and regulatory risks to non-compliance and limit our ability to pursue business opportunities.

Inability of our borrowers to timely or fully comply with their existing obligations. Macroeconomic shocks may negatively impact the household income of our retail customers and may adversely affect the recoverability of our retail loans, resulting in increased loan losses.

The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.

The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.

Despite the improvement of the global economy, uncertainty remains concerning the future economic environment. Such economic uncertainty could have a negative impact on our business and results of operations. A slowing or failing of the economic expansion would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

A return to volatile conditions in the global financial markets could have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

Additionally, uncertainty in relation to the United States trade policy, especially with respect to China, has generated volatility in the global capital and currency markets.

If all or some of the foregoing risks were to materialize, this could have a material adverse effect on our financing availability and terms and, more generally, on our results, financial condition and prospects.

Table of Contents

The growth rate of our loan portfolio may be affected by economic turmoil, which could also lead to a contraction in our loan portfolio.

There can be no assurance that our loan portfolio will continue to grow at similar rates to historical growth rates. A reversal of the rate of growth of the Chilean economy, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulations could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. Economic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general.

Climate change can create transition risks, physical risks, and other risks that could adversely affect us.

Climate change may imply three primary drivers of financial risk that could

adversely affect us:

Transition risks associated with the move to a low-carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes.

Physical risks related to extreme weather impacts and longer term trends, which could result in financial losses that could impair asset values and the creditworthiness of our customers.

Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders.

These primary drivers could materialize, among others, in the following financial risks, including the following:

Credit risks: Physical climate change could lead to increased credit exposure and companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts. Central Chile is currently enduring the longest drought of its recent history.

Market risks: Market changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation.

Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours.

Reputational risk could also arise from shifting sentiment among customers and increasing attention and scrutiny from other stakeholders (investors, regulators, etc.) on our response to climate change.

Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

Competitive Risks

Increased competition, including from non-traditional providers of banking services such as financial technology providers, and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business, including in payments, in originating loans and in attracting deposits. The competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

The Chilean market for financial services is highly competitive. We compete with other private sector Chilean and non-Chilean banks, with Banco del Estado de Chile, the principal government-owned sector bank, with department

Table of Contents

stores and with larger supermarket chains that make consumer loans and sell other financial products to a large portion of the Chilean population. The lower to middle-income segments of the Chilean population and the small- and mid- sized corporate segments have become the target markets of several banks and competition in these segments may increase. In addition, there has been a trend towards consolidation in the Chilean banking industry in recent years, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank (such as department stores, insurance companies, cajas de compensación and cooperativas) and non-finance competitors (principally department stores, auto-lenders and larger supermarket chains) with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non-bank finance competitors, such as leasing, factoring, automobile finance and brokerage companies, with respect to department stores (for some credit products), and from mutual fund and pension fund management companies and insurance companies.

Non-traditional providers of banking services, such as Internet-based e-commerce providers, mobile telephone companies and Internet search engines may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.

New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business. Furthermore, the widespread adoption of new technologies, including distributed ledger, artificial intelligence and/or biometrics, to provide services such as cryptocurrencies and payments, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our Internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and mobile banking platforms in recent years could negatively impact the value of our investments in bank premises, equipment and personnel for our branch network.

The persistence or acceleration of this shift in demand towards Internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and work force. These actions could lead to losses on these assets and may lead to increased expenditures to renovate, reconfigure or close a number of our remaining branches or to otherwise reform our retail distribution channel. Furthermore, our failure to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect our competitive position.

In particular, we face the challenge to compete in an ecosystem where the relationship with the consumer is based on access to digital data and interactions. This access is increasingly dominated by digital platforms who are already eroding our results in very relevant markets such as payments. This privileged access to data can be used as a leverage to compete with us in other adjacent markets and may reduce our operations and margins in core businesses such as lending or wealth management. The alliances that our competitors are starting to build with Bigtechs can make it more difficult for us to successfully compete with them and could adversely affect us.

Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

If our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

Table of Contents

Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to offer products and services that meet the customers’ needs during the whole life cycle of the products or services, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to offer products and services that meet the customers’ needs during all their life cycle. However, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us. In addition, the cost of developing products is likely to affect our results of operations.

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks, such as the conduct risk in the relationship with customers, and development expenses. Our employees and our risk management systems, as well as our experience and that of our partners may not be sufficient to enable us to properly manage such risks. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

Our strong position in the credit card market is in part due to our credit card co-branding agreement with Chile’s largest airline. This agreement was renewed in January 2019 for seven more years. Once this agreement expires, no assurance can be given that it will be renewed, which may materially and adversely affect our results of operations and financial condition in the credit card business.

While we have successfully increased our customer service levels in recent years, should these levels ever be perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

Operational Risks

The financial problems faced by our customers could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

We may generate lower revenues from fee and commission based businesses.

The fees and commissions that we earn from the different banking and other financial services that we provide represent a significant source of our revenues. Regulatory changes that modify the fees we may charge could adversely affect our fee and commission income.

A portion of the Bank’s fee income is derived from brokerage of mutual funds, stocks and bonds and a market downturn could result in significantly lower fees from these sources. Banco Santander Chile sold its asset management business in 2013 and signed a management service agreement for a 10 year-period with the acquirer of this business in which we sell asset management funds on their behalf. Therefore, even in the absence of a market downturn, below-market performance by the mutual funds of the firm we broker for may result in a reduction in revenue we receive from selling asset management funds and adversely affect our results of operations.

Table of Contents

The further expansion of our loan portfolio (particularly in the consumer, small- and mid-sized companies and real estate segments) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of provisions for loan losses. See “Note 9—Loans and Account Receivable at Amortized Cost – under IFRS 9” and “Note 10—Loans and Account Receivable at Fair Value through Other Comprehensive Income – under IFRS 9” in our Audited Consolidated Financial Statements for a description and presentation of our loan portfolio as well as “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Loan Portfolio.”

Retail customers represent 70.5% of the value of the total loan portfolio at amortized cost as of December 31, 2020. As part of our business strategy, we seek to increase lending and other services to retail clients, which are more likely to be adversely affected by downturns in the Chilean economy. In addition, as of December 31, 2020, our residential mortgage loan portfolio totaled Ch$12,411,825 million, representing 36.1% of our total loans. See “Note 9— Loans and Account Receivable at Amortized Cost –under IFRS 9” in our Audited Consolidated Financial Statements for a description and presentation of our residential mortgage loan portfolio. If the economy and real estate market in Chile experience a significant downturn, this could materially adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to experience higher levels of past-due loans, thereby resulting in higher provisions for loan losses and subsequent charge-offs. This may materially and adversely affect our asset quality, results of operations and financial condition.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems, among others. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we may fail to identify or anticipate.

Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account.

Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or the use of such information for purposes for which it was not designed. If existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. Any of these factors could have a material adverse effect on our reputation, operating results, financial condition and prospects.

As a retail bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgement on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

Table of Contents

Some of the models and other analytical and judgement-based estimations we use in managing risks are subject to review by, and require the approval of, our regulators. If models do not comply with all their expectations, our regulators may require us to make changes to such models, may approve them with additional capital requirements or we may be precluded from using them. Any of these possible situations could limit our ability to expand our businesses or have a material impact on our financial results.

Failure to effectively implement, consistently monitor or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

The effectiveness of our credit risk management is affected by the quality and scope of information available in Chile.

In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, the FMC, the Directorio de Información Comercial (Dicom), a Chilean nationwide credit bureau, and other sources. Due to limitations in the availability of information and the developing information infrastructure in Chile, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure you that our credit scoring systems will collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we will have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and subsequently our loan loss allowances may be materially adversely affected.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments or a reduction in prepayment fees could have a material adverse effect on us. The Chilean government is presently analyzing an initiative to reduce or limit prepayment fees and the Bank does not yet have an estimate of the potential impact of such initiatives. We cannot assure you that this change or any future regulatory changes related to prepayment fees will not have a material impact on our business.

Teleworking may cause disruptions to our business.

On March 24, 2020, Law No. 21,220 (the “Teleworking Law”), which regulates the employment conditions of remote workers and teleworkers, became effective in Chile. The Teleworking Law creates a number of obligations for employers with regards to remote workers and teleworkers that may have an impact on those companies where employees are permitted to work from home or from a place other than such company’s offices.

For companies permitting remote or teleworking, the company and the employee must sign a teleworking or distance working agreement at the beginning of the employee’s working relationship with the company or at any time during the employee’s employment when remote or teleworking options are provided to such employee. The Teleworking Law also establishes a certain flexibility regarding working hours for teleworkers, providing the possibility for the parties to establish total weekly working hours, which can be distributed by the employee according to his or her convenience, when by the nature of his or her services he or she must be subject to working hours. In addition, the Teleworking Law provides employees that have signed a distance working agreement with a disconnection right, according to which the employee has the right to disconnect from work and not receive communications from the employer for a period of 12 hours in a 24-hour period.

Table of Contents

According to the Teleworking Law, employers also have additional obligations, such as (i) to provide employees with the necessary working tools to carry out their functions at a distance, (ii) to pay the costs of operation, functioning, maintenance and repair of the elements necessary for the provision of the services remotely, which includes internet and electricity, and (iii) in the case of employees subject to working hours, to implement an attendance register system authorized by the Labor Board (Dirección del Trabajo), compatible with teleworking.

As of December 31, 2020, 2,015 employees were working under the terms of the Teleworking Law. The new obligations set out in the Teleworking Law may lead to a material increase in our labor costs. Moreover, we cannot assure you that this change or any future regulatory changes related to telework or working conditions will not have a material impact on its business.

If we are unable to manage the growth of our operations or to integrate successfully our inorganic growth, this could have an adverse impact on our profitability.

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy such as our acquisition of 51% of Santander Consumer S.A. in 2019. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems, unexpected liabilities or contingencies relating to the acquired businesses, including legal claims and delivery and execution risks. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

manage efficiently the operations and employees of expanding businesses;

maintain or grow our existing customer base;

assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;

finance strategic investments or acquisitions;

align our current information technology systems adequately with those of an enlarged group;

apply our risk management policy effectively to an enlarged group; and

manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.

Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.

Table of Contents

Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner or any failure to successfully implement new cybersecurity and data privacy regulations could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments in and improvements to our information technology infrastructure in order to meet the needs of our customers. We cannot assure you that in the

future we will be able to maintain the level of capital expenditures necessary to support the continuous improvement and upgrading of our information technology infrastructure. To the extent we are dependent on any particular technology or technological solution, we may be harmed if such technology or technological solution becomes non-compliant with existing industry standards, fails to meet or exceeds the capabilities of our competitors’ equivalent technologies or technological solutions, becomes increasingly expensive to service, retain and update, becomes subject to third party claims of intellectual property infringement, misappropriation or other violation, or malfunctions or functions in a way we did not anticipate. Additionally, new technologies and technological solutions are continually being released. As such, it is difficult to predict the problems we may encounter in improving our technologies’ functionality. There is no assurance that we will be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely and cost-efficient manner could have a material adverse effect on us.

In addition, several new and proposed laws, directives and regulations are defining how to manage cybersecurity and data protection risks, including with respect to the data breach reporting requirements and supervisory processes, among others. These regulations are quite fragmented in terms of definitions, scope and applicability. A failure to successfully implement all or some of these new local, state, national and international regulations, which in some cases have severe sanctions regimes, could have a material adverse effect on us.

Risks relating to data collection, processing and storage systems and security are inherent in our business.

Like other financial institutions, we receive, manage, process, hold and transmit proprietary and sensitive or confidential information, including personal information of customers and employees in the conduct of our banking operations, as well as a large number of assets. Accordingly, our business depends on our ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential or sensitive personal data and other information using our computer systems and networks or those of our third party vendors. The proper and secure functioning of our financial controls, accounting and other data collection and processing systems is critical to our business and to our ability to compete effectively.

Cybersecurity incidents and data losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events or actors that interrupt normal business operations. We also face the risk that the design of our cybersecurity controls and procedures prove to be inadequate or are circumvented such that our data and/or client records are incomplete, not recoverable or not securely stored. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products, could produce customer claims and could materially and adversely affect us.

Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, storage and transmission capabilities to prevent against information security risk, we routinely manage personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks or subject to other information security incidents or breaches. This is especially applicable in the current response to the COVID-19 pandemic and the shift we have experienced in having a significant part of our employees working from their homes for the time being, as our employees access our secure networks through their home networks. If we cannot maintain an effective and secure electronic data and information, management and processing systems or if we fail to maintain complete physical and electronic records, this could result in disruptions to our operations, claims from customers, regulators, employees and other parties, violations of applicable privacy and other laws, regulatory sanctions and serious reputational and financial harm to us.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure, data and information from misappropriation or corruption, but our and our third-party vendors’ systems, software and networks nevertheless may be vulnerable to disruptions and failures caused by unauthorized access or misuse, computer viruses, disability devices, phishing attacks or other malicious code, fire, power loss, telecommunications failures, employee misconduct, human error, computer hackers, and other events that could have a security impact on us. An interception loss, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, employee, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action, reputational harm and financial loss. There can be no absolute assurance that we will not suffer material losses from operational risks in the future, including those relating to any security breaches.

Table of Contents

We have seen in recent years computer systems of companies and organizations being increasingly targeted, and the techniques used to obtain unauthorized, improper or illegal access to information technology systems have become increasingly complex and sophisticated. Furthermore, such techniques change frequently and are often not recognized or detected until after they have been launched and can originate from a wide variety of sources, including not only cyber criminals, but also activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could disrupt our electronic systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers or other affected individuals. If we fail to effectively manage our cybersecurity risk by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects, including through the payment of customer compensation or other damages, litigation expenses, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be impacted by cyber-attacks against national critical infrastructures of the countries where we operate, such as the telecommunications networks. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. For further information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—2. Non-financial risks—Cyber-security and data security plans.”

Although we have procedures and controls in place to safeguard personal and other confidential or sensitive information in our possession, unauthorized access or disclosures could subject us to legal actions and administrative sanctions as well as damages and reputational harm that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from employees’ potential non-compliance with policies, misconduct, negligence or fraud, which could result in regulatory sanctions and serious reputational and financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, we may be required to report events related to information security issues, events where customer information may be compromised, unauthorized access to our systems and other security breaches, to the relevant regulatory authorities.

Modifications to Law 20,009 were passed in 2020 that modified the scope of responsibility for users and issuers when a client’s cards and/or online payment or transfer user information are lost, stolen or fraudulently used (including through hacking and cloning). Cardholders are obligated to notify the bank through an easily accessible channel when their cards have been lost, stolen, or fraudulently used. For those transactions realized prior to the notice of loss or theft of a credit card, the cardholder must also notify the issuer of all of the unauthorized transactions in the same notice or up to five business days following the original notification. In cases of fraud, the user will not be responsible for the transactions that they did not authorize, and which were made prior to the fraud notification within the 30 calendar days following the issuance of said notice. In these cases, issuers are responsible for assuming these costs or must demonstrate that the transaction was in fact authorized by the owner or user of the credit card. The law also considers increasing fines and jail time for those committing theft or fraud with credit cards, which must be legally pursued by the card issuer.

In light of these developments, we are trying to limit the exposure of our clients to credit card fraud through education, insurance coverage, marketing campaigns, daily transfer amount limits, chip technology, improved ATM software, and other technological improvements, but we cannot assure that this law will not increase the financial costs related to cybercrime and credit card fraud.

Table of Contents

We rely on third parties and affiliates for important products and services.

Third party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, Internet connections and network access. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties or affiliated companies, including as a result of them not providing us their services for any reason, or performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct our business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Any restructuring could involve significant expense to us and entail significant delivery and execution risks, which could have a material adverse effect on our business, operations and financial condition.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to protect our brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory enforcement, failure to deliver minimum standards of service and quality, dealing with sectors that are not well perceived by the public (weapons industries or embargoed countries, for example), dealing with customers in sanctions lists, rating downgrades, significant variations in our share price throughout the year, compliance failures, unethical behavior, and the activities of customers and counterparties, including activities that negatively affect the environment. Further, negative publicity regarding us may result in harm to our prospects.

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We may be the subject of misinformation and misrepresentations deliberately propagated to harm our reputation or for other deceitful purposes, or by profiteering short sellers seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will effectively neutralize and contain a false information that may be propagated regarding the business, which could have an adverse effect on our operating results, financial condition and prospects.

Financial Risks

We may not effectively manage risks associated with the replacement or reform of benchmark indices.

Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks,” including those in widespread and long-standing use, have been the subject of ongoing international, national and other regulatory scrutiny and initiatives and proposals for reform. Some of these reforms are already effective while others are still to be implemented or are under consideration. These reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated.

Any of the benchmark reforms that have been proposed or implemented, or the general increased regulatory scrutiny of benchmarks, could also increase the costs and risks of administering or otherwise participating in the setting of benchmarks and complying with regulations or requirements relating to benchmarks. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain benchmarks, trigger changes in the rules or methodologies used in certain benchmarks or lead to the disappearance of certain benchmarks.

Table of Contents

Any of these developments, and any future initiatives to regulate, reform or change the administration of benchmarks, could result in adverse consequences to the return on, value of and market for loans, mortgages, securities, derivatives and other financial instruments whose returns are linked to any such benchmark, including those issued, funded or held by Banco Santander.

Various regulators, industry bodies and other market participants in the U.S. and other countries have worked to develop, introduce and encourage the use of alternative rates to replace certain benchmarks. A transition away from the widespread use of certain benchmarks to alternative rates has begun and will continue over the course of the next few years. There is no assurance that these new rates will be accepted or widely used by market participants, or that the characteristics of any of these new rates will be similar to, or produce the economic equivalent of, the benchmarks that they seek to replace. If a particular benchmark were to be discontinued and an alternative rate has not been successfully introduced to replace that benchmark, this could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities, all of which could have adverse effects on Banco Santander’s results of operations. In addition, the transition of a particular benchmark to a replacement rate could affect hedge accounting relationships between financial instruments linked to that benchmark and any related derivatives, which could adversely affect Banco Santander’s results.

In December 2020, the ICB Benchmark Administration Limited (IBA) published a consultation about its intention to stop publishing LIBOR rates in currencies other than USD since December 31, 2021, and all other LIBOR in USD since June 30, 2023.

The Bank is working in a “transition program” focused mainly in:

Identifying the risks associated with the transition and defining mitigation actions

ii.

Developing products referenced to the proposed replacement rates

iii.

Developing a transition process, through the renegotiation of existing contracts referenced to LIBOR

At December 31, 2020, the exposures of financial assets and liabilities impacted by the IBOR reform are presented below:

Loans and advances

Deposits

Debt instruments

Financial derivative contracts

(Assets)

Financial derivative contracts

(Liabilities)

Ch$mn

362,331

582,979

200,301

614,035

483,789

Furthermore, the European Money Market Institute (EMMI) announced the discontinuation of the EONIA after January 3, 2022 and that from October 2, 2019 until its total discontinuation it will be replaced by the €STR plus a spread of 8.5 basis points. Many unresolved issues remain, such as the timing of the successor benchmarks, introduction and the transition of a particular benchmark to a replacement rate, which could result in wide spread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities. These and other reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences which cannot be fully anticipated which introduces a number of risks for the Group. These risks include (i) legal risks arising from potential changes required to documentation for new and existing transactions; (ii) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (iii) business risk of a decrease in revenues of products linked to indices that will be replaced; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period, and (vii) litigation risks regarding our existing products and services, which could adversely impact our profitability. The replacement benchmarks and their transition path have been defined, but the mechanisms for implementation are under development. Accordingly, it is not currently possible to determine whether, or to what extent, any such changes would affect us. However, the implementation of alternative benchmark rates may have a material adverse effect on our business, results of operations, financial condition and prospects. We may also be adversely affected if the change restricts our ability to provide products and services or if it necessitates the development of additional information technology systems.

Table of Contents

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in Chile’s, our controlling shareholders or our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative and other contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Chile’s sovereign debt. If Chile’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount. In addition, our ratings may be adversely affected by any downgrade in the ratings of our parent company, Santander Spain.

During 2020, as a result of the social unrest in Chile and the COVID-19 pandemic, Standard and Poor’s Ratings Services (“S&P”) and Moody’s revised the Republic of Chile and Bank’s credit ratings to a negative outlook.

Any downgrade in our debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative and other contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market some of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts and other financial commitments, we may be required to maintain a minimum credit rating or terminate such contracts or require the posting of collateral. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of our long-term credit rating precipitates downgrades to our short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than the preceding hypothetical examples, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain the current ratings or outlooks. In general, the future evolution of Santander’s ratings will be linked, to a large extent, to the impact of the COVID-19 pandemic (including, for example, a second wave, new lockdowns, etc.) on the macro outlook of our asset quality, profitability and capital. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Table of Contents

In the past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads, including as a result of the COVID-19 pandemic. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgements and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including as a result of the COVID-19 pandemic and macroeconomic factors affecting Chile’s economy. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and could have an adverse impact on Chile’s economy. The real estate market is particularly vulnerable in the current economic climate and this may affect us, as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

At December 31, 2020, 44% of our loans and advances to customers have property collateral while 21% have other types of collateral (securities, pledges and others).

In addition, auto industry technology changes, accelerated by environmental rules, could affect our auto consumer business in Chile, particularly residual values of leased vehicles, which could have a material adverse effect on our operating results, financial condition and prospects.

The credit quality of our loan portfolio may deteriorate, and our loan loss reserves could be insufficient to cover our loan losses, which could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent to a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted our results of operations and could do so in the future. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Chile or in global economic and political conditions, including as a result of the COVID-19 pandemic. In response to the COVID-19 pandemic, with the purpose of helping our customers from the credit perspective and foster their economic resilience, we have

Table of Contents

implemented several actions, including (i) providing liquidity and credit facilities to customers facing hardship; (ii) granting BBpayment deferrals in outstanding loans under the EBA Guidelines on moratoria; (iii) focus credit risk management on those economic sectors more affected by the pandemic; (iv) focus on the collections & recoveries readiness across the Group; and (v) quantifying the provisions overlay on the expected credit losses as a result of the macroeconomic shock. If we were unable to control the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

As of December 31, 2020, our non-performing loans were Ch$486,435 million, and the ratio of our non-performing loans to total loans was 1.4%. As of December 31, 2020, our allowance for loan losses was Ch$1,036,793 million, and the ratio of our allowance for loan losses to total loans was 3.0%. For additional information on our asset quality, see “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chile’s economy, government macroeconomic policies, interest rates and the legal and regulatory environment. Because many of these factors are beyond our control and there is no infallible method for predicting loan and credit losses, we cannot assure you that our current or future loan loss and reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, or if the future actual losses exceed our estimates of expected losses, we may be required to increase our loan loss reserves, which may adversely affect us. Additionally, in calculating our loan loss reserves, we employ qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon data that may not be complete.

Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.

The COVID-19 pandemic has caused high market volatility, which may materially and adversely affect us and our trading and banking book.

Market risk refers to the probability of variations in our interest income / (charge) or in the market value of our assets and liabilities due to volatility of interest rate, inflation, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

interest income / (charges);

the volume of loans originated;

credit spreads;

the market value of our securities holdings;

the value of our loans and deposits; and

the value of our derivatives transactions.

Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, the reserve policies of the Central Bank, deregulation of the financial sector in Chile, monetary policies and domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our interest income / (charges), which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results).

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

Table of Contents

While it would likely decrease funding costs, if interest rates decrease, the income we receive from our investments in securities and loans with similar maturities could be adversely affected. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions. “See Item 11. Quantitative and Qualitative Disclosure About Market Risks—E. Market Risks—Impact of Interest Rates.”

The market value of a security with a fixed interest rate generally decreases when the prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs as we implement strategies to reduce interest rate exposure in the future (which, in turn, will impact our results). The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.

High levels of inflation in Chile could adversely affect the Chilean economy and our business, financial condition and results of operations. Any change in the methodology of how the CPI index or the UF are calculated could also adversely affect our business, financial condition and results of operations. Extended periods of deflation could also have an adverse effect on our business, financial condition and results of operations. The UF is revalued in monthly cycles. On each day in the period beginning on the tenth day of any given month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. For more information regarding the UF, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation.” Although we benefit from inflation in Chile due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits, or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation, including from extended periods of inflation that adversely affect economic growth or periods of deflation. “See Item 11. Quantitative and Qualitative Disclosure About Market Risks—E. Market Risks—Impact of Inflation,”

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. Therefore, while the Bank seeks to avoid significant mismatches between assets and liabilities due to foreign currency exposure, from time to time, we may have mismatches. The Chilean peso has been subject to large devaluations and appreciations in the past and could be subject to significant fluctuations in the future. Our results of operations may be affected by fluctuations in the exchange rates between the peso and the dollar despite our policy and Chilean regulations relating to the general avoidance of material exchange rate exposure. In order to avoid material exchange rate exposure, we enter into forward exchange transactions. We may decide to change our policy regarding exchange rate exposure. Regulations that limit such exposures may also be amended or eliminated. Greater exchange rate risk will increase our exposure to the devaluation of the peso, and any such devaluation may impair our capacity to service foreign currency obligations and may, therefore, materially and adversely affect our financial condition and results of operations. Notwithstanding the existence of general policies and regulations that limit material exchange rate exposures, the economic policies of the Chilean government, new foreign currency regulations by the Central Bank and any future fluctuations of the peso against the dollar could affect our financial condition and results of operations. “See Item 11. Quantitative and Qualitative Disclosure About Market Risks—E. Market Risks—Foreign exchange fluctuations.”

If any of these risks were to materialize, our interest income / (charges) or the market value of our assets and liabilities could suffer a material adverse impact.

Table of Contents

We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

Market practices and documentation for derivative transactions in Chile may differ from those in other countries. For example, documentation may not incorporate terms and conditions of derivatives transactions as commonly understood in other countries. In addition, the execution and performance of these transactions depend on our ability to maintain adequate control and administration systems. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

At December 31, 2020, the notional value of the trading derivatives in our books amounted to Ch$377,131,597 million (with a market value of Ch$8,148,608 million of debit balance and Ch$7,390,654 million of credit balance).

At December 31, 2020, the nominal value of the hedging derivatives in our books within our financial risk management strategy and with the aim of reducing asymmetries in the accounting treatment of our operations amounted to Ch$363,668,609 million (with market value of Ch$9,032,085 million in assets and Ch$9,018,660 million in liabilities).

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation, including as a result of the COVID-19 pandemic. While we have in place liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors make it difficult to eliminate completely these risks. Constraints in the supply of liquidity, including in inter-bank lending, could materially and adversely affect the cost of funding of our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.

Our cost of obtaining funding is directly related to prevailing interest rates and to our credit spreads. Increases in interest rates and/or in our credit spreads can significantly increase the cost of our funding. Credit spreads variations are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

We rely, and will continue to rely, primarily on retail deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors beyond our control, such as general economic conditions and the confidence of retail depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition for deposits between banks or with other products, such as mutual funds. Any of these factors could significantly increase the amount of retail deposit withdrawals in a short period of time, thereby reducing our ability to access retail deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.

Table of Contents

We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. As of December 31, 2020, 99.1% of our customer deposits had remaining maturities of one year or less or were payable on demand. A significant portion of our assets have longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets. Historically, one of our principal sources of funds has been time deposits. Time deposits represented 19.0% and 28.0% of our total liabilities and equity as of December 31, 2020 and 2019, respectively. The Chilean time deposit market is concentrated given the importance in size of various large institutional investors such as pension funds and corporations relative to the total size of the economy. As of December 31, 2020, the Bank’s top 20 time deposits represented 25.1% of total time deposits, or 4.8% of total liabilities and equity, and totaled U.S.$3.7 billion. No assurance can be given that future economic stability in the Chilean market will not negatively affect our ability to continue funding our business or to maintain our current levels of funding without incurring increased funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

Central banks have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis and the COVID-19 pandemic. If current facilities were rapidly removed or significantly reduced, this could have an adverse effect on our ability to access liquidity and on our funding costs.

In response to the COVID-19 pandemic, the Chilean Central Bank has made available two lines of credit to banks to reinforce their liquidity. These lines of credit bear interest at the Central Bank’s MPR, which was 0.5% as of December 31, 2020. Pursuant to these lines of credit, a bank may borrow up to 3% of the aggregate amount of its consumer and commercial loan portfolios as of February 29, 2020 and may borrow up to an additional 12% if it uses the funds to provide loans to companies and individuals. The first line of credit is a facility available conditionally on loan growth (the “FCIC”) to ensure that banks continue to finance households and businesses in Chile. Loans provided by this line of credit may have maturities of up to 4 years and must be secured by government bonds, corporate bonds or highly rated large commercial loans as collateral. In stages 1 and 2, the Board of the Central Bank had allocated a total of US$ 40 billion to this facility, of which approximately US$30 billion has been disbursed. The Central Bank in its Monetary Policy Meeting held on January 27, 2021 announced the beginning of a third stage of this instrument (FCIC3) commencing on March 1, 20201. Loans provided under the second line of credit, the LCL, are unsecured and may have maturities of up to 2 years. In addition, borrowings by a bank under the LCL are limited to the aggregate amount of the liquidity reserve requirements of such bank. Ultimately, these lines of credit are intended to ensure banks have ample liquidity to enable them to continue financing companies and individuals. As of December 31, 2020, we had borrowed Ch$4,959,260 billion (US$7 billion) under both these lines of credit.

Additionally, our activities could be adversely impacted by liquidity tensions arising from generalized drawdowns of committed credit lines to our customers.

We cannot assure that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Table of Contents

Changes to the pension fund system may affect our liquidity levels and/or funding costs

The current pension fund system dates from the 1980s when pensions went from being state-funded to privately-funded, which requires Chilean employees to set aside 10% of their wages. As of December 31, 2020, the Chilean pension fund management companies (Administradora de Fondos de Pensión, or “AFPs”) had U.S.$5 billion invested in the Bank via equity, deposits and fixed income. The demographics of Chilean society have changed, resulting in a need to modify the system. In January 2020, the Chilean government presented a proposal for pension reform to Congress for discussion. These changes include increasing minimum pensions and introducing a social insurance scheme for events such as longevity. The amount each worker must set aside is also expected to increase from the current 10% of wages to 16%. The additional 6% would be gradually introduced over 12 years and would be a cost of the employer, thus potentially raising personnel expenses. The additional 6% would not be managed by the AFPs, but by a new government pension entity. Although the bill is currently being discussed and widely expected to be approved, we are unable to predict the final content of the law. The potential adverse effect of the proposed law on our financial condition and results of operations cannot yet be ascertained.

Moreover, in 2020, and as a result of the COVID-19 pandemic, two extraordinary withdrawals were permitted from pension funds. In total, at year-end 2020, US$31.3 billion had been withdrawn from the pension fund system. In order to avoid strong swings in asset prices, the Central Bank introduced a series of measures to ensure healthy liquidity levels including the direct purchase of bank instruments and the acquisition of government bonds in the secondary market supported by the FCIC and LCL lines available to banks as described above. The potential adverse effect of these and future withdrawals on our financial condition, liquidity levels, the ability to obtain funding from the AFPs and results of our operations cannot yet be ascertained.

Chilean regulations also impose a series of restrictions on how Chilean AFPs may allocate their assets. In the particular case of financial issuers’ there are three restrictions, each involving different assets and different limits determined by the amount of assets in each fund and the market and book value of the issuer’s equity. As a consequence, limits vary within funds of AFPs and issuers. According to our estimates in December 2020, the AFPs still had the possibility of being able to invest another U.S.$8.8 billion in the Bank via equity, deposits and fixed income. If the exposure of any AFP to Santander-Chile exceeds the regulatory limits, if the regulatory limits are reduced or the amount of funds available in the pension funds falls significantly, we would need to seek alternative sources of funding, which could be more expensive and, as a consequence, may have a material adverse effect on our financial condition and results of operations.

Legal and Regulatory Risks

We are subject to regulatory capital requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.

Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“core capital”) of at least 3% of total assets, net of required loan loss allowances. As we are the result of the merger between two predecessors with a relevant market share in the Chilean market, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. As of December 31, 2020, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 15.4% and our core capital ratio was 10.7%. Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including:

the increase of risk-weighted assets as a result of the expansion of our business or regulatory changes;

the failure to increase our capital correspondingly;

losses resulting from a deterioration in our asset quality;

declines in the value of our investment instrument portfolio;

changes in accounting standards;

changes in provisioning guidelines that are charged directly against our equity or net income; and

changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in Chile.

On January 19, 2019, the Chilean government passed a law that amends, among others, the General Banking Law (the General Banking Law, as amended, is referred to herein as the “New General Banking Law”) and established new capital regulation for banks in Chile in line with Basel III standards and the merger of the banking regulator with the FMC, transferring all SBIF attributions to the FMC. The FMC was created by Law 21,000 in 2017 and started operations December 14, 2017 (eliminating the Superintendency of Securities and Insurance as of January 15, 2018). As of June 1, 2019, the SBIF merged into the FMC.

Table of Contents

Therefore, the FMC has become the sole supervisor for the Chilean financial system overseeing insurance companies, companies with publicly traded securities, credit unions, credit card and prepaid card issuers, and banks. This Commission is responsible for the proper functioning, development and stability of the financial market, facilitating the participation of market agents and defending public faith in the financial markets. To do so, it must maintain a general and systemic vision of the market, considering the interests of investors and policyholders. It is also responsible for ensuring that the persons or entities audited, from their initiation until the end of their liquidation, comply with the laws, regulations, statutes and other provisions that govern them.

The Commission is in charge of a Council, which is composed of five members, who are appointed and are subject to the following rules:

A Commissioner appointed by the President of Chile, of recognized professional or academic prestige in matters related to the financial system, which will have the character of President of the Commission.

Four commissioners appointed by the President of Chile, from among persons of recognized professional or academic prestige in matters related to the financial system, by supreme decree issued through the Ministry of Finance, after ratification of the Senate by the four sevenths of its members in exercise, in session specially convened for that purpose.

The Council’s responsibilities include regulation, sanctioning and the definition of general supervision policies. In addition, there is a prosecutor in charge of investigations and the Chairman is responsible for supervision. The FMC acts in coordination with the Chilean Central Bank.

On October 9, 2020, the FMC published the final new regulations on regulatory capital to comply with effective net worth rules in accordance with Basel III and the New General Banking Law. The new regulation will be effective on December 1, 2021 and will be gradually implemented and adjusted to be fully effective by December 1, 2025. Pursuant to the proposed regulation, there will be three levels of capital: ordinary capital level 1 or CET1 (basic capital), additional capital level 1 or AT1 (perpetual bonds and preferred stock) and capital level 2 or T2 (subordinated bonds and voluntary provisions). Regulatory capital will be composed of the sum of CET1, AT and T2 after making some deductions, mainly for intangible assets, hybrid securities issued by foreign subsidiaries, partial deduction for deferred taxes and some reserve and profit accounts.

Under the New General Banking Law, minimum capital requirements have increased in terms of amount and quality. Total Regulatory Capital remains at 8% of risk-weighted assets which includes credit, market and operational risk. Minimum Tier 1 capital increased from 4.5% to 6% of risk-weighted assets, of which up to 1.5% may be Additional Tier 1 (AT1), either in the form of preferred shares or perpetual bonds, both of which may be convertible to common equity. The FMC also establishes the conditions and requirements for the issuance of perpetual bonds and preferred equity. Tier 2 capital is now set at 2% of risk-weighted assets.

Additional capital demands are incorporated through a Conservation Buffer of 2.5% of risk-weighted assets. The Central Bank may set an additional Counter Cyclical Buffer of up to 2.5% of risk-weighted assets in agreement with the FMC. Both buffers must be comprised of core capital.

On November 2, 2020 the FMC publishing the final guidelines regarding the identification and core capital charge for those banks considered Systemically Important Banks (“SIB”). The FMC, in with agreement from the Central Bank, also imposed additional capital requirements for SIBs of between 1-3.5% of risk-weighted assets. This additional capital requirement will be gradually phased in by 25% each year beginning on December 2021 until December 2025. With the implementation of additional capital requirements for SIBs, the requirement imposed on Banco Santander Chile to have a minimum regulatory capital ratio of 11% compared to the 8% limit for most other banks in Chile will be gradually phased out and replaced by the new regulatory requirements for a SIB.

Table of Contents

There is a total of four factors that are then weighted to reach a market share:

Size (weighted at 30%): Includes total assets consolidated in the domestic market.

Domestic interconnection (weighted at 30%): Includes assets and liabilities with financial institutions (banks and non-banks) and assets in circulation in the Chilean financial market (equity and fixed income).

Domestic substitution (weighted at 20%): Includes the share in local payments, assets in custody, deposits and loans.

Complexity (weighted at 20%): Includes factors that could lead to greater difficulties regarding costs and/ or time for the orderly resolution of the Bank. These include the notional amount of OTC derivatives, inter-jurisdictional assets and liabilities and available-for-sale assets.

The minimum amount of the sum of the factors to be considered systemic is 1000 bp, equivalent to a weighted participation of 10% of all four factors. The core capital additional charge depends on the size of the total factor, as set out in the table below:

Systemic Level	Range (bp)	Core capital additional charge (% of risk-weighted assets)
I	1000-1300	1.0%-1.25%
II	1300-1800	1.25%-1.75%
III	1800-2000	1.75%-2.5%
IV	>=2000	2.5%-3.5%

The Central Bank may also require for a SIB: (1) the addition of up to 2% to the core capital to a bank’s total assets ratios; (2) a reduction in the technical reserve requirement trigger from 2.5 times the regulatory capital to 1.5 times the regulatory capital; and/or (3) a reduction in the interbank loan limit to 20% of the regulatory capital of any SIB.

The first calculation of which level a SIB will be included in will be published in March 2021 using a bank’s balance sheet figures as of year-end 2020. Given our size and market share, it is likely that we will be classified as a SIB either in Level II or III.

The New General Banking Law also incorporates Pillar II capital requirements with the objective of assuring an adequate management of risk. The objective of this pillar is to ensure that banks maintain capital levels that are consistent with their risk profile and business model and encourages the development and use of appropriate processes to monitor and manage their risks. Pillar 2 also established an attribution for regulators to impose greater capital requirements as a result of deficient evaluations of a bank’s internal capital adequacy assessment process (ICAAP), which should consider a bank’s risk profile and a strategy to sustain adequate level of capital, even under stress scenarios. Pillar 2 also focuses on risks not considered in Pillar 1 such as reputational risks, concentration risks, liquidity risks and interest rate risk of the banking book. The FMC, with at least four votes from the Council of the FMC, will have the power to impose additional regulatory capital demands of up to 4% of risk-weighted assets, either Tier I or Tier II, if it determines that the previous capital levels and buffers are not enough for a particular financial institution.

The following table sets forth a comparison between the regulatory capital demands under the previous law, and those under the New General Banking Law:

Minimum capital requirements: Basel III, previous GBL and new requirements
Capital categories	Previous Law	New General Banking Law
(% over risk weighted assets)
(1) Shareholders’ Equity	4.5	4.5
(2) Additional Tier 1 Capital (AT1)	—	1.5
(3) Total Tier 1 Capital (1+2)	4.5	6
(4) Tier 2 Capital	3.5	2
(5) Total Regulatory Capital (3+4)	8	8
(6) Conservation Buffer		2.5 CET1
(7) Total Equity Requirement (5+6)	8	10.5
(8) Counter Cyclical Buffer	—	up to 2.5 CET1
(9) SIB* Requirement	Up to 6% in case of a merger	Between 1 - 3.5 CET1
(10) Pillar 2	2% over regulatory capital in order to be classified in Category A solvency.	Up to 4% CET1 or Tier 2

____________________

* Systemically Important Banks

Table of Contents

We believe our current capital levels are adequate, but we cannot rule out having to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required by the FMC. Our ability to raise additional capital may be limited by numerous factors, including: our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions. If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. Furthermore, the FMC may increase the minimum capital adequacy requirements applicable to us. Accordingly, although we currently meet the applicable capital adequacy requirements, we may face difficulties in meeting these requirements in the future. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions. These measures could materially and adversely affect our business reputation, financial condition and results of operations. In addition, if we are unable to raise enough capital in a timely manner, the growth of our loan portfolio and other risk-weighted assets may be restricted, and we may face significant challenges in implementing our business strategy. As a result, our prospects, results of operations and financial condition could be materially and adversely affected.

We are subject to liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.

The SBIF (now the FMC) and the Central Bank published new liquidity standards in 2015 and ratios that must be implemented and calculated by all banks. These new liquidity standards are in line with those established in Basel III. The most important liquidity ratios that have been adopted by Chilean banks are:

Liquidity coverage ratio (LCR), which measures the percentage of liquid assets over net cash outflows. The new guidelines also define liquid assets and the formulas for calculating net cash outflows.

Net Stable Funding Ratio (NSFR) which will measure a bank’s available stable funding relative to its required stable funding. Both concepts are also defined in the new regulations.

The implementation of internationally accepted liquidity ratios might require changes in business practices that affect our profitability. The LCR is a liquidity standard that measures if banks have enough high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. At December 31, 2020, our LCR ratio was 142% under Chilean regulations, which is above the 80% minimum requirement for 2020. The net stable funding ratio (NSFR) provides a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. The Chilean regulator has not yet defined a calendar of implementation for the local NSFR. This could materially increase the liquidity we are required to maintain on our balance sheet.

Table of Contents

We are subject to regulatory risk, or the risk of not being able to meet all of the applicable regulatory requirements and guidelines.

As a financial institution, we are subject to extensive regulation, inspections, examinations, inquiries, audits and other regulatory requirements by Chilean regulatory authorities, which materially affect our businesses. We cannot assure you that we will be able to meet all of the applicable regulatory requirements and guidelines, or that we will not be subject to sanctions, fines, restrictions on our business or other penalties in the future as a result of noncompliance. If sanctions, fines, restrictions on our business or other penalties are imposed on us for failure to comply with applicable requirements, guidelines or regulations, our business, financial condition, results of operations and our reputation and ability to engage in business may be materially and adversely affected.

In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have been recently adopted, the way those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs.

A draft bill currently in Congress, (the “Market Agents Bill”) proposes, among other initiatives, to regulate the banks’ ability to sell insurance tied to loans related to contingencies such as fire, earthquake, unemployment insurance etc. This bill would require financial institutions to pay half of the insurance premiums associated with loans. Additionally, it would prohibit banks from selling insurance policies underwritten by a related party. This initiative after being approved in the Chamber of Deputies, was rejected in a Mixed Congressional Committee. In its place members of Congress introduced a bill to prohibit the charging of interest over interest on overdue loans. We currently, cannot estimate an impact of these bills, if ever approved, could have on our business, but no assurance can be given that they will not have a material impact on future income.

Another bill currently in Congress proposes to regulate prepayment commissions. This bill eliminates the prepayment fee for all interest-bearing loans, permitting the debtor to pay off capital and the interests accrued at any moment during the duration of the loan, unless otherwise expressly specified in the contract. This bill would also prohibits grace periods to accrue interest. This bill is still in the early phases of congressional discussion so we cannot estimate an impact, bur no assurance can be given that this will not have a material impact on future income.

No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.

Modifications to reserve requirements may affect our business.

Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which these deposits are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100% reserve against them: demand deposits, deposits in checking accounts, obligations payable on sight incurred in the ordinary course of business and, in general, all deposits unconditionally payable immediately. The New General Banking Law also states that the FMC, with the approval from the Central Bank, may lower this threshold from 2.5 times to 1.5 times a bank’s regulatory capital for a bank considered to be a SIB. This could lead to lower loan growth and have a negative effect on our business.

Table of Contents

We are required to comply with applicable anti-money laundering (“AML”), anti-terrorism, anti-bribery and corruption, sanctions and other laws and regulations applicable to us. These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically-exposed person screening), keep our customer, account and transaction information up to date and have implemented financial crime policies and procedures detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by our AML team.

Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-bribery and corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and AML/CFT supervisors. Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

We maintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. However, emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires on-going changes to systems and operational activities. Financial crime is continually evolving and is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes, there remains a risk of regulatory breach.

If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our banking license.

The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-bribery and corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ bank products and services from being used by criminals for illegal or improper purposes.

In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate compliance procedures and internal policies. Such measures, procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, breaches of AML, anti-terrorism or sanctions requirements, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

Any such risks could have a material adverse effect on our operating results, financial condition and prospects.

Table of Contents

We are subject to extensive regulation and regulatory and governmental oversight which could adversely affect our business, operations and financial condition.

As a financial institution, we are subject to extensive regulation, inspections, examinations, inquiries, audits and other regulatory requirements by Chilean regulatory authorities, which materially affect our businesses. We cannot assure you that we will be able to meet all of the applicable regulatory requirements and guidelines, or that we will not be subject to sanctions, fines, restrictions on our business or other penalties in the future as a result of noncompliance. If sanctions, fines, restrictions on our business, higher capital requirement or other penalties are imposed on us for failure to comply with applicable requirements, guidelines or regulations, our business, financial condition, results of operations and our reputation and ability to engage in business may be materially and adversely affected.

Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.

The main regulations and regulatory and governmental oversight that can adversely impact us include but are not limited to the following (see more details on “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision”):

We are subject to regulation by the FMC and by the Central Bank with regard to certain matters, including reserve requirements, interest rates, foreign exchange mismatches and market risks. Chilean laws, regulations, policies and interpretations of laws relating to the banking sector and financial institutions are continually evolving and changing. Any new reforms could result in increased competition in the industry and thus may have a material adverse effect on our financial condition and results of operations.

Pursuant to the New General Banking Law, all Chilean banks may, subject to the approval of the FMC, engage in certain businesses other than commercial banking depending on the risk associated with such business and their financial strength. Such additional businesses include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. The New General Banking Law also applies to the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices and limits the discretion of the FMC to deny new banking licenses. There can be no assurance that regulators will not in the future impose more restrictive limitations on the activities of banks, including us. Any such change could have a material adverse effect on our financial condition or results of operations.

Historically, Chilean banks have not paid interest on amounts deposited in checking accounts. We have begun to pay interest on some checking accounts under certain conditions. If competition or other factors lead us to pay higher interest rates on checking accounts, to relax the conditions under which we pay interest or to increase the number of checking accounts on which we pay interest, any such change could have a material adverse effect on our financial condition or results of operations.

Table of Contents

The changes in the way banking institutions with economic difficulties should be treated shifts the focus from solving to anticipating potential adverse situations that may affect a bank or the banking system or that implies the dissolution and liquidation of a bank. To that extent banks will be obliged to inform the FMC whenever they are in any of a certain number of situations specified in the proposed bill and present an Early Regularization Plan for approval by the FMC. Banks in such situations will be able to undertake a preventive capital increase or receive a three-year term loan from another bank, which will be considered as capital. The creditors agreement considered in the current banking law is eliminated. In case the Regularization Plan fails or is not presented by the bank, the FMC will appoint a delegated inspector or eventually a Provisional Administrator. We cannot assure you that we will not incur in such situations in the future, which could have a material adverse impact on you.

We are exposed to risk of loss from legal and regulatory proceedings.

We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgements, regulatory enforcement actions, fines and penalties. The current regulatory and tax enforcement environment in the jurisdictions in which we operate reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

We are from time to time subject to regulatory investigations and civil and tax claims, and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending securities and derivatives activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with certainty what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be.

The amount of our reserves in respect of these matters is substantially less than the total amount of the claims asserted against us, and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period. At December 31, 2020, we had provisions for legal contingencies of Ch$1,024 million.

RISK FACTORS IN RESPECT OF CHILE

During October 2019, growing public concern over perceived social inequality led to a rise in social unrest. There are numerous demands by the population, related to more economic inclusion and fairer social relationships. Important political and social actors claim that the social unrest reflects the desire of a new constitution, as Chile’s current constitution dates back to 1980. When the government announced the possibility of enacting a new constitution, there was increased volatility in the Chilean stock market and exchange rate fluctuations that resulted in a weakening of the Chilean peso against the U.S. dollar. The share prices on local banks and bond spreads, including Santander Chile, suffered significant declines in the market as social protests continued in the country. Seventy of the Bank’s branches suffered different levels of damages during this period but most of these costs were covered by insurance. There was also a rise in early non-performance levels among SMEs, mortgage and consumer loans due to reduced working hours in the economy.

In November 2020, a referendum was held to vote on two matters: (i) whether a new constitution should be enacted and (ii) if so, whether a constituent convention should be comprised of an elected mixed assembly of current Congress members and newly elected persons or entirely comprised of newly-elected citizens. This referendum resulted in ample support for convening a fully elected Constitutional Convention to draft Chile’s new constitution. The election of the members of this convention will be held in April 2021. Each new article of the Constitution would have to be approved by two thirds of the convention. The Constitutional Convention will have approximately one year, starting in April 2021, to complete the draft of the constitution. An exit referendum with compulsory participation will then be held to ratify the new constitution.

News of the referendum calmed markets and unrest levels have improved since then. The long-term effects of this social unrest are hard to predict, but could include slower economic growth, which could adversely affect the Bank’s profitability and prospects.

Table of Contents

Our growth, asset quality and profitability may be adversely affected by macroeconomic and political conditions in Chile.

A substantial number of our loans are to borrowers doing business in Chile. Chile’s economy has experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth and declining investment. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. The Chilean economy may not continue to grow at similar rates as in the past or future developments may negatively affect Chile’s overall levels of economic activity.

Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate and inflationary environment, impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in Chile could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in Chile.

Our revenues are also subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.

Any future fluctuation in oil prices may give rise to volatility in the global financial markets and further economic instability in oil-dependent regions, such as Chile. In addition, the ability of borrowers in or exposed to the oil sector has been and may be further adversely affected by such price fluctuations.

Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions in Chile.

Any material change to United States trade policy with respect to Chile could have a material adverse effect on the economy, which could in turn materially harm our financial condition and results of operations.

Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our operating results.

Chile lies on the Nazca tectonic plate, making it one of the world’s most seismically active regions. Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.

Changes in taxes, including the corporate tax rate, in Chile may have an adverse effect on us and our clients.

The Chilean Government enacted various tax reforms in 2014, 2016 and 2020 in order to finance greater social expenditures. The most relevant change was the rise of the corporate tax rate to 27% in 2018. There is currently discussion of another tax reform to finance the growing deficit. We cannot predict at this time if these reforms will have a material impact on our business or clients or if further tax reforms will be implemented in the future. Banco Santander Chile’s effective corporate tax rate could rise in the future, which may have an adverse impact on our results of operations. Please see “Item 10—Additional information—E. Taxation” for more information regarding the impacts of this tax reform on ADR holders.

Developments in other countries may affect us, including the prices for our securities.

The prices of securities issued by Chilean companies, including banks, are influenced to varying degrees by economic and market considerations in other countries. We cannot assure you that future developments in or affecting the Chilean economy, including consequences of economic difficulties in other markets, will not materially and adversely affect our business, financial condition or results of operations.

Table of Contents

We are exposed to risks related to the weakness and volatility of the economic and political situation in Asia, the United States, Europe (including Spain, where Santander Spain, our controlling shareholder, is based), Brazil, Argentina and other nations. Although economic conditions in Europe and the United States may differ significantly from economic conditions in Chile, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Chilean issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain.

If these, or other nations’ economic conditions deteriorate, the economy in Chile, as both a neighboring country and a trading partner, could also be affected and could experience slower growth than in recent years, with possible adverse impact on our borrowers and counterparties. If this were to occur, we would potentially need to increase our allowances for loan losses, thus affecting our financial results, our results of operations and the price of our securities As of December 31, 2020, the Bank’s foreign exposure, including counterparty risk in the derivative instruments’ portfolio, was US$ 2,309 million or 3.7% of our total assets. There can be no assurance that the ongoing effects of a global financial crisis will not negatively impact growth, consumption, unemployment, investment and the price of exports in Chile. Crises and political uncertainties in other Latin American countries could also have an adverse effect on Chile, the price of our securities or our business.

Chile has considerable economic ties with China, the United States and Europe. In 2020, approximately 37.2% of Chile’s exports went to China, mainly copper. China’s economy has grown at a strong pace in recent times, but a slowdown in economic activity in China may affect Chile’s GDP and export growth as well as the price of copper, which is Chile’s main export. Chile exported approximately 14.0% of total exports to the United States and 8.8% to Europe in 2020.

Chile was recently involved in international litigation with Bolivia regarding maritime borders. We cannot assure you that crises and political uncertainty in other Latin American countries will not have an adverse effect on Chile, the price of our securities or our business.

A change in labor laws in Chile or a worsening of labor relations in the Bank could impact our business.

As of December 31, 2020 on a consolidated basis, we had 10,470 employees, of which 73.4% were unionized. In February 2021, a new collective bargaining agreement was signed with the main unions ahead of schedule, which will be effective on September 1, 2021 and expires on December 31, 2024.

There is currently a new labor reform being discussed in Congress, which, among other items, shortens the work week from 45 hours to 40 hours, excluding the lunch break. There is also discussion to increase minimum wage currently set at Ch$301,000/month (US$415/month) by up to 50%. At Santander Chile, the weekly working hours agreed under the collective bargaining agreement are 40 hours, excluding lunch, and our minimum wage is set above the legal minimum. Despite this, we cannot assure at this time that the new labor reform will not have material impact on our expenses.

These and any additional legislative or regulatory actions in Chile, Spain, the European Union, the United States or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.

Table of Contents

Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.

Issuers of securities in Chile are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, as a Chilean regulated financial institution, we are required to submit to the FMC on a monthly basis unaudited consolidated balance sheets and income statements, excluding any note disclosure, prepared in accordance with Chilean Bank GAAP as issued by the FMC. This disclosure differs in a number of significant respects from generally accepted accounting principles in the United States and information generally available in the United States with respect to U.S. financial institutions or IFRS. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

Risks FACTORS IN RESPECT OF Our Controlling Shareholder and our ADSs

Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.

We are a Chilean corporation. None of our directors are residents of the United States and most of our executive officers reside outside of the United States. In addition, all or a substantial portion of our assets and the assets of our directors and executive officers are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors, officers or controlling persons has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

It may also be difficult for ADS holders to enforce in the United States or in Chilean courts money judgments obtained in United States courts against us or our directors and executive officers based on civil liability provisions of the U.S. federal securities laws. If a U.S. court grants a final money judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this money judgment in Chile will be subject to the obtaining of the relevant “exequatur” (i.e., recognition and enforcement of the foreign judgment) according to Chilean civil procedure law currently in force, and consequently, subject to the satisfaction of certain factors. The most important of these factors are the existence of reciprocity, the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances and the Chilean courts’ determination that the U.S. courts had jurisdiction, that process was appropriately served on the defendant and that enforcement would not violate Chilean public policy. Failure to satisfy any of such requirements may result in non-enforcement of your rights.

Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.

Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A., which are controlled subsidiaries. Santander Spain has control over 67.18% of our shares and actual participation, excluding non-controlling shareholders that participate in Santander Chile Holding, S.A. of 67.12%.

Due to its share ownership, our controlling shareholder has the ability to control us and our subsidiaries, including the ability to:

elect the majority of the directors and exercise control over our company and subsidiaries;

cause the appointment of our principal officers;

Table of Contents

declare the payment of any dividends;

agree to sell or otherwise transfer its controlling stake in us; and

determine the outcome of substantially all actions requiring shareholder approval, including amendments of our by-laws, transactions with related parties, corporate reorganizations, acquisitions and disposals of assets and issuance of additional equity securities, if any.

We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain will limit other shareholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.

We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements for U.S. issuers; therefore, we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

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

Our ADSs are listed and traded on the NYSE (under the ticker “BSAC”). Our common stock is listed and traded on the Santiago Stock Exchange (under the ticker “BSANTANDER”), which we refer to as the Chilean Stock Exchange, although the trading market for the common stock is small by international standards. At December 31, 2020, we had 188,446,126,794 shares of common stock outstanding. The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. According to Article 14 of the Ley de Mercado de Valores, Ley No. 18,045, or the Chilean Securities Market Law, FMC may suspend the offer, quotation or trading of shares of any company listed on one or more Chilean stock exchanges for up to 30 days if, in its opinion, such suspension is necessary to protect investors or is justified for reasons of public interest. Such suspension may be extended for up to 120 days. If, at the expiration of the extension, the circumstances giving rise to the original suspension have not changed, the FMC will then cancel the relevant listing in the registry of securities. In addition, the Santiago Stock Exchange may inquire as to any movement in the price of any securities in excess of 10% and suspend trading in such securities for a day if it deems necessary.

Although our common stock is traded on the Chilean Stock Exchange, there can be no assurance that a liquid trading market for our common stock will continue to exist. Approximately 33.0% of our outstanding common stock is held by the public (i.e., shareholders other than Santander Spain and its affiliates), including our shares that are represented by ADSs trading on the NYSE. A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Chilean market shares of common stock obtained upon withdrawal of such shares from the ADR facility in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.

Table of Contents

Chile imposes controls on foreign investment and repatriation of investments that may affect your investment in, and earnings from, our ADSs.

Equity investments in Chile by persons who are not Chilean residents have generally been subject to various exchange control regulations, which restrict the repatriation of the investments and earnings therefrom. In April 2001, the Central Bank eliminated the regulations that affected foreign investors, except that investors are still required to provide the Central Bank with information relating to equity investments and conduct such operations within Chile’s Formal Exchange Market. The ADSs are subject to a contract, dated May 17, 1994, among the Depositary, us and the Central Bank (the “Foreign Investment Contract”) that remains in full force and effect. The ADSs continue to be governed by the provisions of the Foreign Investment Contract subject to the regulations in existence prior to April 2001. The Foreign Investment Contract grants the Depositary and the holders of the ADSs access to the Formal Exchange Market, which permits the Depositary to remit dividends it receives from us to the holders of the ADSs. The Foreign Investment Contract also permits ADS holders to repatriate the proceeds from the sale of shares of our common stock withdrawn from the ADR facility, or that have been received free of payment as a consequence of spin offs, mergers, capital increases, wind ups, share dividends or preemptive rights transfers, enabling them to acquire the foreign currency necessary to repatriate earnings from such investments. Pursuant to Chilean law, the Foreign Investment Contract cannot be amended unilaterally by the Central Bank, and there are judicial precedents (although not binding with respect to future judicial decisions) indicating that contracts of this type may not be abrogated by future legislative changes or resolutions of the Advisory Council of the Central Bank. Holders of shares of our common stock, except for shares of our common stock withdrawn from the ADS facility or received in the manner described above, are not entitled to the benefits of the Foreign Investment Contract, may not have access to the Formal Exchange Market, and may have restrictions on their ability to repatriate investments in shares of our common stock and earnings therefrom.

Holders of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be paid net of foreign currency exchange fees and expenses of the Depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35.0% (subject to credits in certain cases). If for any reason, including changes in Chilean law, the Depositary were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.

We cannot assure you that additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise you as to the duration or impact of such restrictions if imposed.

You may be unable to exercise preemptive rights.

The Ley Sobre Sociedades Anónimas, Ley No. 18,046 and the Reglamento de Sociedades Anónimas, which we refer to collectively as the Chilean Companies Law, and applicable regulations require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible in the United States unless a registration statement under the U.S. Securities Act of 1933 (“Securities Act”), as amended, were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.

Since we are not obligated to make a registration statement available with respect to such rights and the common stock, you may not be able to exercise your preemptive rights in the United States. If a registration statement is not filed or an applicable exemption is not available under U.S. securities law, the Depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of any such sale.

As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our estatutos, or by-laws, and the laws of Chile, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Chile. Under Chilean corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Chile. For example, under legislation applicable to Chilean banks, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.

Although Chilean corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Chile, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.

Table of Contents

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

Holders of ADSs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our by-laws and the laws of Chile. Holders of ADSs may exercise voting rights with respect to the common stock represented by ADSs only in accordance with the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. Holders of our common stock will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the Depositary following our notice to the Depositary requesting the Depository to do so. To exercise their voting rights, holders of ADSs must instruct the Depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADSs than for holders of our common stock. If the Depositary fails to receive timely voting instructions for all or part of the ADSs, the Depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.

Holders of ADSs also may not receive the voting materials in time to instruct the Depositary to vote the common stock underlying their ADSs. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common stocks underlying their ADSs are not voted as requested.

ADS holders may be subject to additional risks related to holding ADSs rather than shares.

Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:

as an ADS holder, you may not be able to exercise the same shareholder rights as a direct holder of ordinary shares;

we and the Depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and

the Depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.

GENERAL RISK FACTORS

Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

Disclosure controls and procedures, including internal controls, over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s US Securities and Exchange Commission’s rules and forms.

These disclosure controls and procedures have inherent limitations, which include the possibility that judgements in decision-making can be faulty and that breakdowns can occur because of errors or mistakes. Additionally, controls can be circumvented by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions, civil claims and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

Table of Contents

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgements and estimates, include impairment of loans and advances, good will impairment, valuation of financial instruments, deferred tax assets –provisions and pension obligations for liabilities.

If the judgement, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. For example, IFRS 9 was adopted as of January 1, 2018, establishing a new impairment model of expected loss and make changes to the classification and measurement requirements for financial assets and liabilities. In addition, the Bank adopted IFRS 16 as of January 1, 2019, requiring new standards for recognition, measurement, presentation and disclosure of leases. This led to approximately Ch$154,284 million of assets for the right of use and lease liabilities for the same amount as of the date of adoption of IFRS 16. Changes made to accounting standards can materially impact how we record and report our financial condition and results of operations, as well as affect the calculation of our capital ratios. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Various amendments were made to financial and accounting standards in 2020 for implementation in future periods without an impact in 2020. The Bank’s management is still evaluating the potential impact of these new standards. For further information about developments in financial accounting and reporting standards, see Note 1 to our Audited Consolidated Financial Statements.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.

Table of Contents

Our business could be affected if its capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.

Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.

We are subject to review by tax authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by tax authorities.

We are subject to the income tax laws of Chile and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental tax authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgements and interpretations about the application of these inherently complex tax laws.

If the judgement, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on our results of operations. In some jurisdictions, the interpretations of the tax authorities are unpredictable and frequently involve litigation, which introduces further uncertainty and risk as to tax expense.

We engage in transactions with related parties that others may not consider to be on an arm’s-length basis.

We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

Chilean law applicable to public companies and financial groups and institutions and our by-laws provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions, including the requirement that our board of directors approve such transactions. Furthermore, all significant related party transactions must be approved by the Audit Committee and the Board. These significant transactions are also reported in our annual shareholders meeting. Please see Note 36 of our Audited Consolidated Financial Statements and “Item 7. Major Shareholders and Related Party Transactions.”

We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Overview

We are the largest bank in the Chilean market in terms of loans (excluding loans held by subsidiaries of Chilean banks abroad) and the second largest bank in terms of total deposits (excluding deposits held by subsidiaries of Chilean banks aboard). As of December 31, 2020, we had total assets of Ch$55,703,223 million (U.S.$ 78,183 million), outstanding loans at amortized cost, net of allowances for loan losses of Ch$ 33,303,100 million (U.S.$ 46,743 million), total deposits of Ch$ 25,142,684 million (U.S.$ 35,289 million) and shareholders’ equity of Ch$ 3,620,091 million (U.S.$ 5,081 million). As of December 31, 2020, we employed 10,470 people. We have a leading presence in all the major business segments in Chile, and a large distribution network with national coverage spanning across all the country. We offer unique transaction capabilities to clients through our 358 branches and 1,199 ATMs. Our headquarters are in Santiago and we operate in every major region of Chile.

Table of Contents

We provide a broad range of commercial and retail banking services to our customers, including Chilean peso and foreign currency denominated loans to finance a variety of commercial transactions, trade, foreign currency forward contracts and credit lines and a variety of retail banking services, including mortgage financing. We seek to offer our customers a wide range of products while providing high levels of service. In addition to our traditional banking operations, we offer a variety of financial services, including financial leasing, financial advisory services, mutual fund management, securities brokerage, insurance brokerage and investment management.

The legal predecessor of Santander-Chile was Banco Santiago (“Santiago”). Old Santander-Chile was established as a subsidiary of Santander Spain in 1978. On August 1, 2002, Santiago and Old Santander Chile merged, whereby the latter ceased to exist and Santander-Chile (formerly known as Santiago) being the surviving entity.

Our principal executive offices are located at Bandera 140, 20th floor, Santiago, Chile. Our telephone number is +562-320-2000 and our website is www.santander.cl. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report. Our agent for service of process in the United States is Puglisi & Associates, 850 Library Ave., Suite 204, Newark, DE 19711. The SEC maintains a website on the Internet at http://www.sec.gov that contains reports and information statements and other information about us. The reports (including this annual report) and information statements and other information about us can be downloaded from the SEC’s website www.sec.gov website or our investor relations website www.santandercl.gcs-web.com. None of the information contained on our website, or any website referred to in this Annual Report, is incorporated by reference into, or forms part of, this Annual Report.

Relationship with Grupo Santander

We believe that our relationship with our controlling shareholder, Santander Spain, offers us a significant competitive advantage over our peer Chilean banks. Grupo Santander, our parent company, is one of the largest financial groups in Brazil and the rest of Latin America, in terms of total assets measured on a regional basis. It is the largest financial group in Spain and is a major player elsewhere in Europe, including the United Kingdom, Poland and Portugal. Through Santander Consumer, it also operates a leading consumer finance franchise in the United States, as well as in Germany, Italy, Spain, and several other European countries.

Our relationship with Santander Spain provides us with access to the group’s client base, while its multinational focus allows us to offer international solutions to our clients’ financial needs. We also have the benefit of selectively borrowing from Santander Spain’s product offerings in other countries, as well as of its know-how in systems management. We believe that our relationship with Santander Spain will also enhance our ability to manage credit and market risks by adopting policies and knowledge developed by Santander Spain. In addition, our internal auditing function has been strengthened as a result of the addition of an internal auditing department that concurrently reports directly to our Audit Committee and the audit committee of Santander Spain. We believe that this structure leads to improved monitoring and control of our exposure to operational risks.

Grupo Santander’s support of Santander-Chile includes the assignment of managerial personnel to key supervisory areas of Santander-Chile, such as risks, auditing, accounting and financial control. Santander-Chile does not pay any management fees to Santander Spain in connection with these support services.

B. Business Overview

We have 358 branches, 220 of which are operated under the Santander brand name, with the remaining branches under certain specialty brand names, including 19 under the Select brand name, 32 specialized branches for the Middle Market and 28 as auxiliary and payment centers. During 2020, we also opened 6 Santander Workcafés, reaching a total of 59 Workcafés across all regions of Chile. We provide a full range of financial services to corporate and individual customers. We divide our clients into the following groups: (i) Retail banking, (ii) Middle-market, (iii) Corporate Investment Banking and (iv) Corporate Activities (“Other”).

The Bank has the reportable segments noted below (see “Segmentation Criteria” for further information):

Table of Contents

Retail Banking

This segment consists of individuals and small to medium-sized entities (SMEs) with annual sales less than Ch$2,000 million (U.S.$2.8 million). This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stock brokerage, and insurance brokerage. Additionally, the SME clients are offered government-guaranteed loans, foreign trade services, leasing and factoring.

Middle-market

This segment serves companies and large corporations with annual sales exceeding Ch$2,000 million (U.S.$2.8 million). It also serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry who carry out projects to sell properties to third parties and annual sales exceeding Ch$800 million (U.S.$1.1 million) with no upper limit. 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, savings products, mutual funds, and insurance brokerage. Also, companies in the real estate industry are offered specialized services to finance projects, chiefly residential, with the aim of expanding sales of mortgage loans.

Corporate Investment Banking

This segment consists of foreign and domestic multinational companies with sales over Ch$10,000 million (U.S.$14.0 million). The companies within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, project finance, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investments, savings products, mutual funds and insurance brokerage.

This segment also consists of a Treasury Division which provides sophisticated financial products, mainly to companies in the Middle-market segment and Corporate Investment Banking. These include products such as short-term financing and fund raising, brokerage services, foreign exchange services, derivatives, securitization and other tailor-made products. The Treasury Division may act as broker to transactions and manages the Bank’s trading fixed income portfolio.

Corporate Activities (“Other”)

This segment mainly includes our Financial Management Division, which develops global management functions, including managing inflation rate risk, foreign currency gaps, interest rate risk and liquidity risk. Liquidity risk is managed mainly through wholesale deposits, debt issuances and the Bank’s available-for-sale portfolio. This segment also manages capital allocation by unit. These activities, with the exception of our inflation gap, usually result 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 or her assessment on the segment’s interest income, fee and commission income, and expenses.

The tables below show the Bank’s results by reporting segment for the year ended December 31, 2020, in addition to the corresponding balances of loans and accounts receivable from customers:

Table of Contents

	For the year ended December 31, 2020
	Loans and accounts receivable at amortized cost (1)		Net interest income		Net fee and commission income			Financial transactions, net (2)		Provision for loan losses			Support expenses (3)			Segment’s net contribution
	(in millions of Ch$)

Retail Banking		24,279,248		1,049,543		213,431			28,577		(317,050	)		(596,464	)		378,038
Middle-market		8,136,402		346,225		38,335			21,859		(109,999	)		(91,132	)		205,287
Corporate Investment Banking		1,635,217		114,229		23,180			82,303		(51,097	)		(72,715	)		95,900
Other		289,026		83,851		(7,668	)		17,058		(118	)		(8,235	)		84,888
Total		34,339,893		1,593,848		267,278			149,797		(478,264	)		(768,546	)		764,113
Other operating income																	8,206
Other operating expenses and impairment																	(78,444	)
Income from investments in associates and other companies																	1,388
Income tax expense																	(142,533	)
Result of continuous operations																	552,730
Result of discontinued operations																	-
Net income for the year																	552,730

____________________

(1)

Corresponds to loans and accounts receivable at amortized cost under IFRS 9, 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.

Operations through Subsidiaries

The New General Banking Law permits us to directly provide the leasing and financial advisory services that we could formerly offer only through our subsidiaries, to offer investment advisory services outside of Chile and to undertake activities that we could not formerly offer directly or through subsidiaries, such as factoring, securitization, foreign investment funds, custody and transport of securities and insurance brokerage services. For the twelve–month period ended December 31, 2020, our subsidiaries collectively accounted for 1.9% of our total consolidated assets.

		Percent ownership share as of December 31,
		2020						2019						2018
Name of the Subsidiary	Main activity	Direct		Indirect		Total		Direct		Indirect		Total		Direct		Indirect		Total
		(in %)
Santander Corredora de Seguros Limitada	Insurance brokerage		99.75		0.01		99.76		99.75		0.01		99.76		99.75		0.01		99.76
Santander Corredores de Bolsa Limitada	Financial instruments brokerage		50.59		0.41		51.00		50.59		0.41		51.00		50.59		0.41		51.00
Santander Asesorias Financieras Limitada	Financial advisory		99.03		—		99.03		99.03		—		99.03		99.03		—		99.03
Santander S.A. Sociedad Securitizadora	Purchase of credits and issuance of debt instruments		99.64		—		99.64		99.64		—		99.64		99.64		—		99.64
Klare Corredora de Seguros S.A.	Insurance brokerage		50.10		—		50.10		50.10		—		50.10		—		—		—
Santander Consumer Chile S.A.	Financing		51.00		—		51.00		51.00		—		51.00		—		—		—
Sociedad operadora de Tarjetas de Pago Santander Getnet Chile S.A.	Card operator		99.99		0.01		100.00		—		—		—		—		—		—

Table of Contents

On July 6, 2020, we registered “Sociedad Operadora de Tarjeta de Pago Santander Getnet Chile S.A” as a new subsidiary and support company. On January 7, 2021, at the Extraordinary Shareholders’ Meeting of the “Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile S.A.” the members agreed to pay total the subscribed and unpaid capital. Accordingly, “Santander Asesorías Financieras Limitada” will pay Ch$0,8 milllion in cash and Banco Santander Chile should pay Ch$37 million in cash plus assets whose appraisal determined by the Board were Ch$3,689 million, thus the shareholders will have paid 100% of the company’s capital. On January 29, 2021, the FMC through Resolution Exempt N°704 authorized the operation of “Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile S.A.” as a banking support company and its registration in the Payment Card Operator Registry, thus authorizing its commercial activities.

As of December 18, 2019, changes were made to the company name and objective of Santander Agente de Valores Limitada, becoming Santander Asesorias Financieras Limitada.

As of October 19, 2019 Klare Corredores de Seguros S.A. was established as a digital insurance brokerage and is a banking subsidiary subject to banking regulations. The Bank owns 50.1% of the company’s capital share.

As of November 15, 2019 the FMC approved the acquisition of 51% of Santander Consumer Chile S.A. by the Bank. This acquisition had been previously approved in the extraordinary shareholders’ meeting held on July 20, 2019 where it was agreed that the Bank would acquire the ownership held by SK Bergé Financiamiento S.A. and a further 2% held by the Santander Group. The total payment for the total 51% was Ch$62,136 million.

The following companies have been consolidated based on the determination that they are controlled by the Bank, in accordance with IFRS 10 Consolidated Financial Statements:

Santander Gestión de Recaudación y Cobranza Limitada (collection services)

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

Multiplica SpA (management of co-branding agreements)

As of December 2019 the Bank no longer directly consolidates Bansa Santander S.A., however it is indirectly consolidated through Santander Consumer Chile S.A. Bansa has developed a new line of business, therefore, based on IFRS 10 Consolidated Financial Statement, the Bank has ceased to exercise control, since the Bank is not exposed, or has rights, to variable returns from its involvement with the investee.

On October 4, 2019 the company Multiplica SpA was created as a banking business support company. In accordance with IFRS 10 Consolidated Financial Statement, the Bank controls the entity, since the relevant activities are addressed by the Bank, and the Bank is exposed, or has rights, to variable returns from its involvement with the investee.

Table of Contents

The Bank also has significant influence over the following entities:

			Percentage of ownership share as of December 31,
			2020		2019		2018
Associates	Main activity	Place of Incorporation and operation	(in %)
Centro de Compensación Automatizado	Electronic fund transfer and compensation services	Santiago, Chile		33.33		33.33		33.33
Sociedad Interbancaria de Depósito de Valores S.A.	Delivery of securities on public offer	Santiago, Chile		29.29		29.29		29.29
Cámara Compensación de Alto Valor S.A.	Payments clearing	Santiago, Chile		15.00		15.00		15.00
Administrador Financiero del Transantiago S.A.	Administration of boarding passes for public transportation	Santiago, Chile		20.00		20.00		20.00
Servicios de Infraestructura de Mercado OTC S.A.	Administration of the infrastructure for the financial market of derivative instruments	Santiago, Chile		12.48		12.48		12.48

In the case of Cámara Compensación de Pagos Alto Valor S.A., Banco Santander-Chile has a representative on the Board of Directors. As per the definition of associates, the Bank has concluded that it exerts significant influence over this entity.

In the case of Servicios de Infraestructura de Mercado OTC S.A., the Bank actively participates, through its executives, in the administration and in the process of organization, which is why the Administration has concluded that it exerts significant influence over it.

The Bank classifies the following entities as Assets Held for Sale and Discontinued Operations:

			Percentage of ownership share as of December 31,
			2020		2019		2018
Associates	Main activity	Place of Incorporation and operation	(in %)
Sociedad Nexus S.A.	Credit card processor	Santiago, Chile		—		1.94		12.90
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

As of December 31, 2020, the Bank is in process to sell its share participation on Redbanc S.A. and Transbank S.A. therefore it has been classified in accordance to IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” as investment available for sale. Given the facts and circumstances arising from the social contingency in Chile and the COVID-19 pandemic (situations beyond the control of the Bank), the process of sale of the shares has taken a longer time than initially estimated. However, the Bank continues committed to the sale plan for these assets, actively seeking for potential buyers and continuing its plans to develop its own acquiring network, as evidenced by the recent creation of a payment card operating company. The Bank sold its stake in Sociedad Nexus S.A. in October 2019 and January 2020. See Note 38 of our Audited Consolidated Financial Statements.

Table of Contents

Competition

Overview

The Chilean financial services market consists of a variety of largely distinct sectors. The most important sector, commercial banking, includes a number of privately-owned banks and one public-sector bank, Banco del Estado de Chile (which operates within the same legal and regulatory framework as the private sector banks). The private-sector banks include local banks and a number of foreign-owned banks operating in Chile. The Chilean banking system is comprised of 18 banks, including one public-sector bank. The six largest banks accounted for 87.2% of all outstanding loans by Chilean financial institutions as of December 31, 2020 (excluding assets held abroad by Chilean banks). In July 2018, Scotiabank Chile acquired BBVA Chile, becoming the third largest bank in terms of loans in the Chilean market. Furthermore, in the last quarter of 2018, BCI acquired the credit card financing business of Walmart Chile and the credit card of CMR Falabella was integrated into Banco Falabella. This represented an increase of total credit cards in the banking system of approximately 6%.

The Chilean banking system has experienced increased competition in recent years, largely due to consolidation in the industry and new legislation. We also face competition from non-bank and non-finance competitors, principally department stores, credit unions and cajas de compensación (private, non-profitable corporations whose aim is to administer social welfare benefits, including payroll loans, to their members) with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non-bank finance competitors, such as leasing, factoring and automobile finance companies, with respect to credit products, and mutual funds, pension funds and insurance companies, with respect to savings products. Currently, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business has grown rapidly.

All the competition data in the following sections is based on Chilean Bank GAAP.

The following tables set out certain statistics comparing our market position to that of our peer group, defined as the six largest banks in Chile in terms of total loans as of December 31, 2020 (excluding assets held by Chilean banks abroad).

	As of December 31, 2020, unless otherwise noted
	Market Share			Rank
Commercial loans		16.5	%		2
Consumer loans		21.6	%		1
Residential mortgage loans		21.5	%		1
Total loans		18.6	%		1
Deposits		17.4	%		2
Credit card usage(1)		25.0	%		1
Checking accounts(2)		25.3	%		1
Branches(2)		19.0	%		2

____________________

Source: FMC

(1)

As of October 2020, according to the latest publicly available information

(2)

As of November 2020, according to the latest publicly available information

Table of Contents

Loans

As of December 31, 2020, our loan portfolio was the largest among Chilean banks. Our loan portfolio, including interbank loans, represented 18.6% of the market for loans in the Chilean financial system as of such date. The following table sets forth our and our peer group’s market shares in terms of loans (excluding assets held by Chilean banks abroad).

	As of December 31, 2020 (Chilean Bank GAAP)
Loans	Ch$ million		U.S.$ million		Market Share
Santander-Chile		34,409,170		48,296		18.6	%
Banco de Chile		31,496,591		44,208		17.0	%
Banco de Crédito e Inversiones		26,451,150		37,126		14.3	%
Banco del Estado de Chile		25,936,163		36,403		14.0	%
Scotiabank Chile		25,430,916		35,694		13.7	%
Itaú Corpbanca		17,625,148		24,738		9.5	%
Others		23,742,744		33,325		12.8	%
Chilean financial system		185,091,882		259,789		100.0	%

____________________

Source: FMC.

Deposits

We had a 17.4% market share in deposits, ranking second among banks in Chile as of December 31, 2020. Deposit market share is based on total time and demand deposits as of the respective dates. The following table sets forth our and our peer group’s market shares in terms of deposits (excluding assets held by Chilean banks abroad).

	As of December 31, 2020 (Chilean Bank GAAP)
Deposits	Ch$ million		U.S.$ million		Market Share
Banco del Estado de Chile		30,696,893		43,085		21.3	%
Santander-Chile		25,142,684		35,289		17.4	%
Banco de Chile		24,066,770		33,779		16.7	%
Banco de Crédito e Inversiones		18,671,533		26,207		12.9	%
Scotiabank Chile		15,645,249		21,959		10.8	%
Itaú Corpbanca		12,489,172		17,529		8.6	%
Others		17,709,952		24,857		12.3	%
Chilean financial system		144,422,253		202,706		100.0	%

____________________

Source: FMC.

Total Equity

With Ch$3,567,916 million (U.S.$ 5,008 million) in equity in Chilean Bank GAAP as of December 31, 2020, we were the third largest commercial bank in Chile in terms of shareholders’ equity. The following table sets forth our and our peer group’s shareholders’ equity.

	As of December 31, 2020 (Chilean Bank GAAP)
Total Equity	Ch$ million		U.S.$ million		Market Share
Banco de Crédito e Inversiones		3,893,620		5,465		17.9	%
Banco de Chile		3,726,267		5,230		17.2	%
Santander-Chile		3,567,916		5,008		16.4	%
Scotiabank Chile		2,398,357		3,366		11.0	%
Itaú Corpbanca		2,315,411		3,250		10.7	%
Banco del Estado de Chile		2,011,964		2,824		9.3	%
Others		17,382,019		24,397		80.1	%
Chilean financial system		21,709,394		30,471		100.0	%

____________________

Source: FMC.

Table of Contents

Efficiency

As of December 31, 2020, we were the most efficient bank in our peer group. The following table sets forth our and our peer group’s efficiency ratio (defined as operating expenses as a percentage of operating revenue, which is the aggregate of net interest income, fees and income from services (net), net gains from mark-to-market and trading, exchange differences (net) and other operating income (net)) in each case under Chilean Bank GAAP.

Efficiency ratio as defined by the FMC	As of December 31, 2020 (Chilean Bank GAAP)
Santander-Chile		42.0	%
Banco de Chile		45.3	%
Scotiabank Chile		45.7	%
Banco de Crédito e Inversiones		50.9	%
Banco del Estado de Chile		57.8	%
Itaú Corpbanca		155.1	%
Chilean financial system		57.1	%

____________________

Source: FMC.

Net Income for the Period Attributable to Equity Holders

In 2020, we were the largest bank in Chile in terms of net income attributable to shareholders, which was equivalent to Ch$517,447 million (U.S.$ 726 million) measured under Chilean Bank GAAP. The following table sets forth our and our peer group’s net income.

	As of December 31, 2020 (Chilean Bank GAAP)
Net income attributable to equity holders	Ch$ million			U.S.$ million			Market Share
Santander-Chile		517,447			726			43.9	%
Banco de Chile		463,108			650			39.3	%
Banco de Crédito e Inversiones		317,454			446			26.9	%
Scotiabank Chile		275,419			387			23.4	%
Banco del Estado de Chile		142,595			200			12.1	%
Itaú Corpbanca		(925,479	)		(1,299	)		-
Others		388,771			546			33.0	%
Chilean financial system		1,179,315			1,655			100.0	%

____________________

Source: FMC.

Return on equity

As of December 31, 2020, we were the most profitable bank in our peer group (as measured by return on period-end equity under Chilean Bank GAAP) and the second most capitalized bank as measured by the Chilean BIS ratio. The following table sets forth our and our peer group’s return on average equity and BIS ratio.

	Return on period-end equity as of December 31, 2020 (Chilean Bank GAAP)			BIS Ratio as of November 30, 2020(Chilean Bank GAAP)
Santander-Chile		14.3	%		14.7	%
Banco de Chile		12.4	%		15.6	%
Scotiabank Chile		11.4	%		12.9	%
Banco de Crédito e Inversiones		8.2	%		13.1	%
Banco del Estado de Chile		7.7	%		12.7	%
Itaú Corpbanca		-38.9	%		13.3	%
Chilean financial system		5.6	%		14.3	%

____________________

Source: FMC.

Table of Contents

Asset Quality

As of December 31, 2020, we had the third lowest non-performing loan to loan ratio in our peer group. The following table sets forth our and our peer group’s non-performing loan ratio as defined by the FMC as of December 31, 2020.

	Non-performing loans / total loans(1) as of December 31, 2020(Chilean Bank GAAP)
Banco de Chile		1.0	%
Banco de Crédito e Inversiones		1.2	%
Santander-Chile		1.4	%
Scotiabank Chile		1.4	%
Itaú Corpbanca		2.3	%
Banco del Estado de Chile		2.8	%
Chilean financial system		1.6	%

____________________

Source: FMC

(1)

Excluding interbank loans.

Regulation and Supervision

General

In Chile, only banks may maintain checking accounts for their customers, conduct foreign trade operations, and, together with non-banking financial institutions, accept time deposits. The principal authorities that regulate financial institutions in Chile are the FMC and the Central Bank. Chilean banks are primarily subject to the General Banking Law, and secondarily subject, to the extent not inconsistent with this statute, to the provisions of the Chilean Companies Law governing public corporations, except for certain provisions which that expressly excluded.

The modern Chilean banking system dates from 1925 and has been characterized by periods of substantial regulation and state intervention, as well as periods of deregulation. The most recent period of deregulation commenced in 1975 and culminated in the adoption of a series of amendments to General Banking Law. That law was amended in 2001 to grant additional powers to banks, including general underwriting powers for new issues of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory and mutual fund services, administration of investment funds, factoring, securitization products and financial leasing services. The most recent amendment to the General Banking Law was introduced by law 21,130, passed in January 2019, which modernizes Chile’s banking legislation by adopting capital and resolution standards in line with the requirements of the Basel Committee.

The Central Bank

The Central Bank is an autonomous legal entity created by the Chilean Constitution. It is subject to the Chilean Constitution and its own ley orgánica constitucional, or organic constitutional law. To the extent not inconsistent with the Chilean Constitution or the Central Bank’s organic constitutional law, the Central Bank is also subject to private sector laws (but in no event is it subject to the laws applicable to the public sector). It is directed and administered by a Board of Directors composed of five members designated by the President of Chile, subject to the approval of the Chilean Senate.

Table of Contents

The legal purpose of the Central Bank is to maintain the stability of the Chilean peso and the orderly functioning of Chile’s internal and external payment systems. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, establishing regulations and guidelines regarding finance companies, foreign exchange (including the Formal Exchange Market) and banks’ deposit-taking activities.

Financial Market Commission

In 2017, Law 21,000 created the Comisión para el Mercado Financiero or Financial Market Commission (FMC). This law became a Law of the Republic in January 2018. The FMC is the sole supervisor for the Chilean financial system overseeing insurance companies, companies with publicly traded securities, credit unions, credit card and prepaid card issuers, and, as of June 1, 2019, banks. It is the responsibility of this commission to ensure the proper functioning, development and stability of the financial market, facilitating the participation of market agents and defending public faith in the financial markets. To do so, it must maintain a general and systemic vision of the market, considering the interests of investors and policyholders. Likewise, it shall be responsible for ensuring that the persons or entities audited, from their initiation until the end of their liquidation, comply with the laws, regulations, statutes and other provisions that govern them.

The Commission is in charge of a Council, which is composed of five members, who are appointed and are subject to the following rules:

A commissioner appointed by the President of Chile, of recognized professional or academic prestige in matters related to the financial system, which will have the character of president of the FMC.

The Council’s responsibilities include regulation, sanctioning and the definition of general supervision policies. In addition, there will be a prosecutor in charge of investigations and the Chairman will be responsible for supervision. The FMC will act in coordination with the Chilean Central Bank (BCCh).

The date of entry into operation of the Commission for the Financial Market was December 14, 2017. The Superintendency of Securities and Insurance was eliminated on January 15, 2018 and all functions of this Superintendency were absorbed by the FMC.

In January 2019, Law 21,130, which modernized the banking legislation contained in the General Banking Law and amended Law 21,000 (among others), was published in the Official Gazette. The law modernizes Chilean banking regulation in order to comply with Basel III practices and provisions. The law provides for stronger banking capital and reserves requirements in accordance with Basel III guidelines. The law also modernizes the corporate governance function of the FMC and, importantly, transfers the SBIF functions to the domain of the FMC. The FMC now has the faculty to determine the risk weighting of assets through a standardized model to be approved by the FMC or banks can implement their own methodology, subject to approval by the FMC. The law also imposes limitations on dividend distributions and puts in place intervention mechanisms in the event of insolvency.

The regulator examines all banks from time to time, generally at least once a year. Banks are also required to submit their financial statements monthly to the FMC, and the banks’ financial statements are published at least four times a year in a newspaper with countrywide coverage. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the FMC. A bank’s annual financial statements and the opinion of its independent auditors must also be submitted to the FMC.

Any person wishing to acquire, directly or indirectly, 10.0% or more of the share capital of a bank must obtain the prior approval of the FMC. Absent such approval, the acquirer of shares so acquired will not have the right to vote. The FMC may only refuse to grant its approval, based on specific grounds set forth in the General Banking Law.

Table of Contents

According to Article 35bis of the New General Banking Law, the prior authorization of the regulator is required for:

the merger of two or more banks;

the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank;

the control by the same person, or controlling group, of two or more banks; or

a substantial increase in the existing control of a bank by a controlling shareholder of that bank.

The intended purchase, merger or expansion may be denied by the regulator with an accompanying resolution recording the specific reasons for denial and with agreement of a majority of the Board of Directors of the Central Bank.

Pursuant to the regulations of the FMC, the following ownership disclosures are required:

a bank is required to inform the FMC of the identity of any person owning, directly or indirectly, 5.0% or more of such banks’ shares;

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

the Depositary is required to notify the bank as to the identity of beneficial owners of ADSs which such Depositary has registered and the bank, in turn, is required to notify the FMC as to the identity of the beneficial owners of the ADSs representing 5.0% or more of such banks’ shares; and

bank shareholders who individually hold 10.0% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the FMC of their financial condition.

Limitations on Types of Activities

Chilean banks can only conduct those activities allowed by the General Banking Law: making loans, accepting deposits and, subject to limitations, making investments and performing financial services. Investments are restricted to real estate for the bank’s own use, gold, foreign exchange and debt securities. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, equity investments, securities, mutual fund management, investment fund management, financial advisory and leasing activities. Subject to specific limitations and the prior approval of the FMC and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks.

Deposit Insurance

The Chilean government guarantees certain time and demand deposits and savings accounts held by natural persons with a maximum value of UF400 per person (Ch$ 11,628,132 or U.S.$ 16,349 as of December 31, 2020) per calendar year in the entire financial system and a maximum of UF200 per person per bank.

Reserve Requirements

Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). For purposes of calculating the reserve obligation, banks are authorized to deduct daily from their foreign currency denominated liabilities, the balance in foreign currency of certain loans and financial investments held outside of Chile, the most relevant of which include:

cash clearance account, which should be deducted from demand deposit for calculating reserve requirement;

certain payment orders issued by pension providers; and

the amount set aside for “technical reserve” (as described below), which can be deducted from reserve requirement.

Table of Contents

The Central Bank has statutory authority to require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which they are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100.0% “technical reserve” against them: demand deposits, deposits in checking accounts, or obligations payable on sight incurred in the ordinary course of business, and in general all deposits unconditionally payable immediately but excluding interbank demand deposits.

Minimum Capital

Capital Adequacy Requirements under BIS I

Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$23,256 million or U.S.$.32.7 million as of December 31, 2020) of paid-in capital and reserves, calculated in accordance with Chilean Bank GAAP, regulatory capital of at least 8.0% of its risk weighted assets, net of required allowances, and paid in capital and reserves of at least 3.0% of its total assets, net of required allowances, as calculated in accordance with Chilean Bank GAAP.

Regulatory capital is defined as the aggregate of:

a bank’s paid-in capital and reserves, excluding capital attributable to subsidiaries and foreign branches or capital básico;

its subordinated bonds, valued at their placement price (but decreasing by 20.0% for each year during the period commencing six years prior to maturity), for an amount up to 50.0% of its core capital; and

its voluntary allowances for loan losses for an amount of up to 1.25% of risk weighted-assets.

Capital Adequacy Requirements

According to the General Banking Law, a bank is required to have regulatory capital of at least 8.0% of its risk-weighted assets, net of required loan loss allowances, and paid-in capital and reserves (i.e., core capital) of at least 3.0% of its total assets, net of required loan loss allowances. For these purposes, the regulatory capital of a bank is the sum of: (1) the bank’s core capital; (2) subordinated bonds issued by the bank valued at their placement price for an amount up to 50.0% of its core capital, provided that the value of the bonds is required to be decreased by 20.0% for each year that elapses during the period commencing six years prior to their maturity; and (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk-weighted assets. Santander-Chile does not have goodwill, but if it did, this value would be required to be deducted from regulatory capital. When calculating risk weighted assets, we also include off-balance sheet contingent loans. The merger of Old Santander Chile and Santiago on August 1, 2002 required a special regulatory pre-approval of the SBIF (predecessor of the FMC), which was granted on May 16, 2002. The resolution granting this pre-approval imposed a regulatory capital to risk weighted assets ratio of 12.0% for the merged bank. This requirement was reduced to 11.0% by the SBIF (now the FMC) effective January 1, 2005. For purposes of weighing the risk of a bank’s assets, the General Banking Law considers five different categories of assets, based on the nature of the issuer, the availability of funds, and the nature of the assets and the existence of collateral securing such assets.

As of December 31, 2020 our ratio of regulatory capital to risk weighted assets was 15.4%.

New Capital Adequacy Requirements under the New Banking Law

On October 9, 2020, the FMC published the final regulations on regulatory capital to comply with effective net worth rules in accordance with Basel III and the New General Banking Law. The new regulation will become effective on December 1, 2021 and will be gradually implemented and adjusted to be fully in place by December 1, 2025. Pursuant to the proposed regulation, there will be three levels of capital: ordinary capital level 1 or CET1 (basic capital), additional capital level 1 or AT1 (perpetual bonds and preferred stock) and capital level 2 or T2 (subordinated bonds and voluntary provisions). Regulatory capital will be composed of the sum of CET1, AT and T2 after making some deductions, mainly for intangible assets, hybrid securities issued by foreign subsidiaries, partial deduction for deferred taxes and some reserve and profit accounts.

Table of Contents

On November 2, 2020 the FMC published the final guidelines regarding the identification and core capital charge for banks considered SIBs. The FMC, agreement with the Central Bank, also imposed additional capital requirements for SIBs of between 1-3.5% of risk-weighted assets. This additional capital requirement will be gradually phased in by 25% beginning on December 2021 until December 2025. With the implementation of additional capital requirements for SIBs, the requirement imposed on Banco Santander Chile to have a minimum regulatory capital ratio of 11% compared to the 8% limit for most other banks in Chile will be gradually phased out and replaced by the new regulatory requirements for a SIB.

There are a total of four factors that are weighted to reach a market share:

Size (weighted at 30%): Includes total assets consolidated in the domestic market.

Domestic substitution (weighted at 20%): Includes the share in local payments, assets in custody, deposits and loans.

Systemic Level	Range (bp)	Core capital additional charge (% of risk-weighted assets)
I	1000-1300	1.0%-1.25%
II	1300-1800	1.25%-1.75%
III	1800-2000	1.75%-2.5%
IV	>=2000	2.5%-3.5%

The Central Bank may also require for a SIB: (1) the addition of up to 2% to the core capital to a bank’s total assets ratios; (2) a reduction in the technical reserve requirement trigger from 2.5 times regulatory capital to 1.5 times regulatory capital; and/or (3) a reduction in the interbank loan limit to 20% of regulatory capital of any SIB.

The initial systemic level calculation for Chilean banks will be published in March 2021 using a bank’s balance sheet figures as of year-end 2020. Given our size and market share, it is likely that we will be classified as level II or III SIB.

Table of Contents

The New General Banking Law also incorporates Pillar II capital requirements with the objective of assuring an adequate management of risk. The objective of this pillar is to ensure that banks maintain capital levels that are consistent with their risk profile and business model and encourages the development and use of appropriate processes to monitor and manage their risks. Pillar 2 also granted the regulators the power to impose greater capital requirements as a result of deficient evaluations of a bank’s internal capital adequacy assessment process (ICAAP), which should consider a bank’s risk profile and a strategy to sustain adequate levels of capital, even under stress scenarios. Pillar 2 also focuses on risks not considered in Pillar 1 such as reputational risks, concentration risks, liquidity risks and interest rate risks. The FMC, with at least four votes from the Council of the FMC, will have the power to impose additional regulatory capital demands of up to 4% of risk-weighted assets, either Tier I or Tier II, if it determines that the previous capital levels and buffers are not enough for a particular financial institution.

The following table sets forth a comparison between the regulatory capital demands under the previous law, and those under the New General Banking Law:

Minimum capital requirements: Basel III, previous GBL and new requirements
Capital categories	Previous Law	New General Banking Law
(% over risk weighted assets)
(1) Shareholders’ Equity	4.5	4.5
(2) Additional Tier 1 Capital (AT1)	—	1.5
(3) Total Tier 1 Capital (1+2)	4.5	6
(4) Tier 2 Capital	3.5	2
(5) Total Regulatory Capital (3+4)	8	8
(6) Conservation Buffer		2.5 CET1
(7) Total Equity Requirement (5+6)	8	10.5
(8) Counter Cyclical Buffer	—	up to 2.5 CET1
(9) SIB* Requirement	Up to 6% in case of a merger	Between 1 - 3.5 CET1
(10) Pillar 2	2% over regulatory capital in order to be classified in Category A solvency.	Up to 4% CET1 or Tier 2

____________________

* Systemically Important Banks

Table of Contents

Risk Weightings

On December 1, 2020 the FMC published the final regulations to establishing risk weightings for calculating capital adequacy ratios under the New Banking Law.

The Basel Committee on Banking Supervision (BCBS) defines credit risk (CR) as the risk that a debtor or bank counterparty does not meet its obligations in accordance with the agreed terms. Credit risk is the most relevant in the Chilean banking industry. The mechanism in force today estimates Risk Weighted Assets by Credit Risk (RWCR) using a methodology based on the Basel I standard. The proposed standard method with Basel III standards is more advanced, since it has categories that depend on the type of counterparty and different risk factors. These categories are not based on accounting criteria, but rather on the underlying risk. Thus, all exposures that have mortgage guarantees, for example mortgage loans for housing, have a different treatment from those exposures not guaranteed by a mortgage. Additionally, in the case of mortgage-backed exposures, there will be different types of treatment depending on the type of real estate and whether the obligations are paid with income generated by the property itself. The new framework will also allow the use of internal methodologies, subject to compliance with minimum requirements. The standard in consultation includes the possibility of reducing RWCR when considering credit risk mitigators, such as compensation agreements, guarantees and other compensations.

The Basel Committee on Banking Supervision (BCBS) defines operational risk (OR) as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk but excludes strategic and reputational that a debtor or bank counterparty does not meet its obligations in accordance with the agreed terms. In order to estimate the operational risk coefficient, two factors are considered:

The business indicator component (BIC): A component that considers interest income, interest earning assets, dividend income, financial transactions, fees, and other operational income and expenses. These are then multiplied by a marginal coefficient.

Internal Loss Multiplier (ILM): This component is based on 10 years of historical operational losses, or at least five years in some special cases.

BCBS defines market risk (MR) as the risk of losses arising from movements in market prices. The risks subject to market risk capital requirements mainly includes: interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk and commodities risk for trading book instruments; and FX risk and commodities risk for banking book instruments. The FMC will not permit banks to use internal models for calculating MRWA and instead has published standardized models that all banks must use.

Table of Contents

The regulations for calculating RWA under the new guidelines must be implemented by December 1, 2021. We believe our current capital levels are adequate, but we cannot rule out having to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required by the FMC.

Lending Limits

Under the General Banking Law, Chilean banks are subject to certain lending limits, including the following material limits:

A bank may not extend to any entity or individual (or any one group of related entities), except for another financial institution, directly or indirectly, unsecured credit in an amount that exceeds 10.0% of the bank’s regulatory capital, or in an amount that exceeds 30.0% of its regulatory capital if the excess over 10.0% is secured by certain assets with a value equal to or higher than such excess. In the case of financing infrastructure projects built by government concession, the 10.0% ceiling for unsecured credits is raised to 15.0% if secured by a pledge over the concession, or if granted by two or more banks or finance companies which have executed a credit agreement with the builder or holder of the concession in the case of export loans in foreign currency the ceiling is raised to 30%;

a bank may not extend loans to another financial institution subject to the General Banking Law in an aggregate amount exceeding 30.0% of its regulatory capital;

a bank may not grant loans to a single business group, as defined in Title XV of Law 18.045, that exceeds 30% of the Bank’s regulatory capital. This limit excludes interbank loans.

if a bank originates a loan in excess of these limits, a fine equivalent to 10% of the excess will be applied to the bank.

a bank may not directly or indirectly grant a loan whose purpose is to allow an individual or entity to acquire shares of the lender bank;

a bank may not lend, directly or indirectly, to a director or any other person who has the power to act on behalf of the bank; and

a bank may not grant loans to related parties (including holders of more than 1.0% of its shares) on more favorable terms than those generally offered to non-related parties. Loans granted to related parties are subject to the limitations described in the first bullet point above. In addition, the aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.

In addition, the General Banking Law limits the aggregate amount of loans that a bank may grant to its employees to 1.5% of its regulatory capital, and provides that no individual employee may receive loans in excess of 10.0% of this 1.5% limit. Notwithstanding these limitations, a bank may grant to each of its employees a single residential mortgage loan for personal use during such employee’s term of employment.

Allowance for Loan Losses under Chilean Bank GAAP

Chilean banks are required to provide to the FMC detailed information regarding their loan portfolio on a monthly basis. The FMC examines and evaluates each financial institution’s credit management process, including its compliance with the loan classification guidelines. Banks are classified into four categories: 1, 2, 3 and 4. Each bank’s category depends on the models and methods used by the bank to classify its loan portfolio, as determined by the FMC. Category 1 banks are those banks whose methods and models are satisfactory to the FMC. Category 1 banks will be entitled to continue using the same methods and models they currently have in place. A bank classified as a category 2 bank will have to maintain the minimum levels of reserves established by the FMC while its Board of Directors will be made aware of the problems detected by the FMC and required to take steps to correct them. Banks classified as categories 3 and 4 will have to maintain the minimum levels of reserves established by the FMC until they are authorized by the FMC to do otherwise. Santander-Chile is categorized as a “Category 1” bank.

Table of Contents

Differences between IFRS and Chilean Bank GAAP

Chilean Bank GAAP, as prescribed by the Compendium of Accounting Standards (the “Compendium”), differs in certain respects from IFRS. The main differences that should be considered by an investor are the following:

Suspension of Income Recognition on Accrual Basis

In accordance with the Compendium, financial institutions must suspend recognition of income on an accrual basis in their statements of income for certain loans included in the impaired portfolio. IFRS 9 and IAS 39 did not allow the suspension of accrual of interest on financial assets for which an impairment loss has been determined. As of January 1, 2018, the Bank adopted IFRS 9. Under IFRS 9, interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become credit-impaired (or “Stage 3”), for which interest revenue is calculated by applying the effective interest rate to their amortized cost (i.e., net of ECL provision). Off-balance interests are recorded as interest income only if the Bank receives the related payments. This difference does not materially impact our Audited Consolidated Financial Statements.

Charge-offs and Accounts Receivable

The Compendium requires companies to establish deadlines for the charge-off of loans and accounts receivable. IFRS does not require any such deadline for charge-offs. A charge-off due to impairment would be recorded, if and only if, all efforts at collection of the loan or account receivable had been exhausted. Accordingly, this difference does not materially impact our Audited Consolidated Financial Statements.

Assets Received in Lieu of Payment

The Compendium requires that the initial value of assets received in lieu of payment be the value agreed upon with a debtor as a result of the loan settlement or the value awarded in an auction, as applicable. These assets are required to be written off one year after their acquisition, if the assets have not been previously disposed of. IFRS requires that assets received in lieu of payment be initially accounted for at fair value. Subsequently, asset valuation depends on the classification provided by the entity for that type of asset. No deadline is established for charging-off an asset. The Bank has adjusted the Audited Consolidated Financial Statements accordingly.

Loan Loss Allowances

Prior to the adoption of IFRS 9 on January 1, 2018, the Bank calculated loan loss allowances in accordance with IAS 39. The main difference between Chilean Bank GAAP and IFRS 9 and IAS 39 regarding loan loss allowances is that loan loss allowances under Chilean GAAP are calculated using expected loss models based on specific guidelines set by the FMC, which in turn are based on an expected losses approach while IAS 39 used an incurred loss approach. According to both Chilean Bank GAAP and IFRS, loan loss allowances are calculated using expected loss models. The models adopted with IFRS 9 used an expected loss approach, however these are not in accordance with specific guidelines under Chilean Bank GAAP given by the FMC. The FMC has not yet adopted IFRS 9 and therefore the Bank has adjusted the Audited Consolidated Financial Statements to fully comply with IFRS standards. The most significant impact of IFRS 9 on the Bank’s financial statements arises from the new impairment requirements. Impairment losses will increase and become more volatile for financial instruments in the scope of the IFRS 9 impairment model. Based on the assessment made the total impact (net of tax) of the adoption of IFRS 9 on the opening balance on the Bank’s equity at 1 January 2018 was Ch$82,454 million (net of tax).

Provisions for Country Risk and for Contingent Loan Risk

Under Chilean Bank GAAP, the Bank provisions for 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 established by the FMC and therefore are not in accordance with IFRS as issued by the IASB. Our Audited Consolidated Financial Statements have been adjusted accordingly.

Table of Contents

Also under Chilean Bank GAAP, the Bank has established allowances related to the undrawn available credit lines and contingent loans in accordance with the FMC. Prior to the adoption of IFRS 9, IAS 39 only permitted allowances following internal models based on incurred debt. With the adoption of IFRS 9, provisions for contingent loans are calculated based on expected credit loss. The Bank has adjusted the Audited Consolidated Financial Statements accordingly.

These differences do not materially impact our financial statements.

Equity instrument at FVOCI

Under IFRS 9, the Bank may make an irrevocable election to present subsequent changes in the fair value of the equity instrument in other comprehensive income. Gains or losses on derecognition of these equity instruments are not transferred to profit or loss. Under Chilean GAAP, the Bank can apply IAS 39 and accordingly, account those equity instruments at cost. The Bank’s Audited Consolidated Financial Statements have been adjusted accordingly.

Loans at FVOCI

The Bank has determined to classify a small portion of its portfolio loans as fair value through other comprehensive income, when management expects to sell if market conditions are favorable, or when the Financial Risk Committee authorizes an operation to be sold entirely or in part. For IFRS 9 purposes, the Bank reclassifies those loans into a separate portfolio and determines its fair value. Under Chilean GAAP, those loans are accounted at amortized cost.

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. Due to the adjustments made to the consolidated financial statements, we adjust deferred taxes accordingly.

Provision for Mandatory Dividends

This provision is made in accordance with the Bank’s internal policy and Article 79 of the Chilean Companies Law, 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. While the Bank uses the same policy under Chilean Bank GAAP and IFRS, the net income used to calculate the provision is adjusted in accordance with IFRS principles. However, for the distribution of dividends, the Bank uses the net income according to Chilean Bank GAAP.

Capital Markets

Under the General Banking Law, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as in financial leasing, mutual fund and investment fund administration, investment advisory services and merger and acquisition services. These subsidiaries are regulated by the FMC.

Legal Provisions Regarding Banking Institutions with Economic Difficulties

Article 112 of the New General Banking Law provides that if specified adverse economic circumstances exist at any bank, its Board of Directors must approve a financing plan to correct the situation and present it to the FMC. In its proposal, the bank must state the scheduled time within which the plan will be completed, which may not exceed 6 months. If one of the measures contained in the financing plan is to increase the capital of the bank by the amount necessary to return the bank to financial stability, the Board of Directors must call a special shareholders’ meeting to the capital increase. If the shareholders reject the capital increase, the FMC may apply one or more of the restrictions stated in Article 116 of the New General Banking Law for a period not exceeding 6 months, which may be renewed once for the same period. These restrictions include limiting the bank’s ability to grant loans to any person or legal entity linked (directly or through third parties) to the property or management of the bank, limiting loan renewals for more than 180 days, limiting security documents governing existing loans, among others.

Table of Contents

If the approval of shareholders is required for a different measure included in the plan, the Board of Directors must call the shareholders’ meeting within 15 days. The General Banking Law provides that the bank may receive a three-year term loan from one or more banking institutions. The terms and conditions of such a loan must be approved by the directors of both banks, as well as by the FMC, but need not be submitted to any institution’s shareholders for their approval. In any event, a creditor bank cannot grant interbank loans to an insolvent bank in an amount exceeding 25.0% of the creditor bank’s regulatory capital. If the bank is unable to pay the loan to its creditors, article 115 of the General Banking Law provides that a bank’s unpaid debt may be: (i) capitalized in a merger between the bank and creditor bank, where the creditor bank may establish the terms and conditions of the merger provided such terms and conditions are approved by the FMC; (ii) used to complete a capital increase agreed by the bank, provided that the shares are issued by a third party; and (iii) to subscribe and pay a capital increase. The shares acquired by the creditor bank must be sold within a period of 180 days, which can be extended by the FMC for a further 180 days.

Dissolution and Liquidation of Banks

The FMC may establish that a bank should be liquidated for the benefit of its depositors or other creditors when such bank does not have the necessary solvency to continue its operations. In such case, the FMC must revoke a bank’s authorization to exist and order its mandatory liquidation, subject to agreement by the Central Bank. The FMC must also revoke a bank’s authorization if the reorganization plan of such bank has been rejected twice. The resolution by the FMC must state the reason for ordering the liquidation and must name a liquidator, unless the FMC assumes this responsibility. When a liquidation is declared, all checking accounts and other demand deposits received in the ordinary course of business, are required to be paid by using existing funds of the bank, its deposits with the Central Bank or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the rest of the bank’s assets, as needed. If necessary and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.

On January 12, 2019, Law No. 21,130 was published in the Official Gazette of Chile. The law modernizes banking legislation including the General Banking Law by, among other things, transferring the supervisory powers of the SBIF to the FMC, updating the capital and risk management requirements applicable to banking companies in accordance with the Basel III standards, and introducing measures for the early regularization and intervention of banking companies that are at risk of insolvency.

With respect to measures for early regularization, Law No. 21,130 establishes an obligation on banks to inform the FMC if any of the regulatory non-compliance situations listed in Article 112 of the New General Banking Law arise or if it has detected any event indicative of financial instability or deficient administration. Within five days of notifying the FMC, the bank must present a regularization plan approved by its board of directors containing concrete measures that shall remedy the relevant situation and ensure the bank’s normal performance. The bank must comply with the regularization plan within 6 months of the resolution approving it. During the implementation of the plan, the bank must also submit periodic reports on its progress to the FMC, and the FMC may require the implementation of additional measures and/or prohibitions it deems necessary for the plan’s success.

Article 161 of the New General Banking Law provides that directors, managers, administrators and attorneys-in-fact who, without written authorization from the FMC, agree to, perform or cause the execution of any of the acts prohibited under Article 116 of the New General Banking Law shall be imprisoned for a term within the medium to maximum range. If a bank fails to submit the regularization plan, the plan is rejected by the FMC, the bank fails to comply with any of the measures set out in the plan, the bank repeatedly breaches the plan’s terms or is subject to fines, or if any serious event occurs that raises concerns for the bank’s financial stability, the FMC may appoint a delegated inspector, who shall have powers to, among other things, suspend any agreement of the board of directors or act of the attorneys-in-fact of the institution, and/or a provisional administrator, who shall have all the ordinary faculties that the law and the by-laws provide for the board of directors, or whoever acts in its place, and for the general manager.

Other amendments incorporated by Law No. 21,130 include the elimination of creditors’ agreements as a mechanism for regularizing a bank’s financial situation, the incorporation of modifications to financial system capitalization and preventive capitalization, and the incorporation of further requirements for bank directors.

Table of Contents

Obligations Denominated in Foreign Currencies

Santander-Chile must also comply with various regulatory and internal limits regarding exposure to movements in foreign exchange rates (See “Item 11. Quantitative and Qualitative Disclosures About Market Risk”).

Loans and Investments in Foreign Securities

Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain securities of foreign issuers. Banks may grant commercial loans and foreign trade loans, and can buy loans granted by banks abroad. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities must be (1) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (2) bonds issued by foreign companies. If the sum of investment in foreign securities and loans granted outside of Chile surpasses 70.0% of regulatory capital, the amount that exceeds 70.0% is subject to a mandatory reserve of 100.0%.

Table 1

Rating Agency	Short Term	Long Term
Moody’s	P2	Baa3
Standard and Poor’s	A3	BBB-
Fitch	F2	BBB-
Dominion Bond Rating (DBRS)	R-2	BBB (low)

In the event that the sum of: (a) loans granted abroad that are not to subsidiaries of Chilean companies, and that have a rating of BB- or less and do not trade on a foreign stock exchange, and (b) the investments in foreign securities which have a rating that is below that indicated in Table 1 above, but is equal to or exceeds the ratings mentioned in the Table 2 below and exceeds 20.0% (and 30.0% for banks with a BIS ratio equal or exceeding 10% of the regulatory capital of such bank), the excess is subject to a mandatory reserve of 100.0%.

Table 2

Rating Agency	Short Term	Long Term
Moody’s	P2	Ba3
Standard and Poor’s	A-2	BB-
Fitch	F2	BB-
Dominion Bond Rating (DBRS)	R-2	BB (low)

In addition, banks may invest in foreign securities whose ratings are equal or exceed those mentioned in Table 3 below for an additional amount equal to 70% of their regulatory capital. This limit constitutes an additional margin and is not subject to the 100% mandatory reserve.

Additionally, a Chilean bank may invest in foreign securities whose rating is equal to or exceeds those mentioned in Table 3 below in: (i) demand deposits with foreign banks, including overnight deposits in a single entity; and (ii) securities issued or guaranteed by sovereign states or their central banks or securities issued or guaranteed by foreign entities within the Chilean State, though investment will be subject to the limits by issuer up to 30.0% and 50.0%, respectively, of the regulatory capital of the Chilean bank that makes the investment. If these foreign securities do not have a rating, the individual limit will be 10.0% of regulatory capital.

Table 3

Rating Agency	Short Term	Long Term
Moody’s	P1	Aa3
Standard and Poor’s	A1+	AA-
Fitch	F1+	AA-
DBRS	R-1 (high)	AA(low)

Table of Contents

Moreover, the sum of all demand deposits with foreign banks, including overnight deposits to related parties, as defined by the Central Bank and the FMC cannot surpass 25.0% of a bank’s regulatory capital. This limit excludes foreign branches of Chilean banks or their subsidiaries, but must include amounts deposited by these entities in related parties abroad.

Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would be complementary to the bank’s business if such companies were incorporated in Chile.

United States Supervision and Regulation

Financial Regulatory Reform

Banking statutes and regulations are continually under review by the United States Congress. In addition to laws and regulations, the U.S. bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance. Many changes have occurred as a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are now in place. More recently, there have been several statutory and regulatory initiatives aimed at providing relief for the financial services industry. In 2018 the United States government enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) which, among other things, revised the thresholds for total consolidated assets at which certain enhanced prudential standards apply to bank holding companies. EGRRCPA made clear that the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) retains the right to apply enhanced prudential standards to foreign banking organizations (“FBOs”) with greater than $100 billion in global total consolidated assets, such as Santander Spain.

In October 2019, the federal banking agencies issued final rules that, pursuant to EGRRCPA, adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to certain banking organizations, including large FBOs such as Santander Spain. As a result, Santander Spain is now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations.

In November 2020 the United States held national elections and a new administration is now in place. We believe that it is likely that there will be further material changes in the way major financial institutions are regulated in the United States. Although it remains difficult to predict the exact impact these changes will have on Santander Spain’s U.S. operations, the new administration is expected to increase the regulatory requirements on large financial institutions compared to the previous administration.

Volcker Rule

Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volcker Rule”) prohibit “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. Banking entities such as Santander-Chile and Santander Spain were required to bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. Santander Spain has assessed how the Volcker Rule affects its businesses and subsidiaries, including Santander-Chile, and has brought its activities into compliance. The Group has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. The Volcker Rule contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. Santander Spain’s non-U.S. banking organization subsidiaries, including Santander-Chile, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions from the Volcker Rule. Those exemptions generally exempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the essential actions take place outside the United States and any transactions are not with U.S. persons.

Table of Contents

On July 21, 2017 the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside of the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also, in July 2017, the Federal Reserve issued guidelines for banking entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule.

As of October 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. Santander-Chile will still largely rely on the “solely outside the U.S. exemption” to conduct its trading activities.

In June 2020, the five federal agencies finalized additional amendments to the Volcker Rule related to the restrictions on ownership interests in and relationships with covered funds. These amendments became effective on October 1, 2020 with no impact on Santander Chile. Santander Spain will continue to monitor Volcker Rule-related developments and assess their impact on its operations, including those of Santander-Chile, as necessary.

U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations

Santander-Chile, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained, and accurate financial statements can be prepared. Penalties, fines and imprisonment of Santander-Chile’s officers and/or directors can be imposed for violations of the FCPA.

Furthermore, Santander-Chile is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT Act of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of Santander-Chile’s officers and/or directors.

The Anti-Money Laundering Act of 2020 (“AML Act”), enacted on January 1, 2021 as part of the National Defense Authorization Act, does not directly impose new requirements on banks, but requires the U.S. Treasury Department to issue National Anti-Money Laundering and Countering the Financing of Terrorism Priorities, and conduct studies and issue regulations that may, over the next few years, significantly alter some of the due diligence, recordkeeping and reporting requirements that the Bank Secrecy Act and Patriot Act impose on banks. The AML Act also contains provisions that promote increased information-sharing and use of technology, and increases penalties for violations of the Bank Secrecy Act and includes whistleblower incentives, both of which could increase the prospect of regulatory enforcement.

Disclosure pursuant to Section 219 of the Iran threat reduction and Syria human rights act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

As we are part of the Santander Group, we must also disclose the exposure of other entities of the Santander Group to Iran. The following activities are disclosed in response to Section 13(r) with respect to the Santander Group and its affiliates. During the period covered by this annual report:

Santander UK holds five blocked accounts for three customers, with the first customer holding one GBP savings account and one GBP current account, the second customer holding one GBP savings account, and the third customer holding two GBP current accounts. All three customers, who are resident in the UK, are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2020 were negligible relative to the overall profits of Banco Santander S.A.

Table of Contents

Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by one customer were fully inaccessible at the time of the US designation and were blocked at the time of the account going into a debit balance. The accounts held by the second customer were blocked immediately following the US designation and have remained frozen throughout 2020. These accounts are frozen in order to comply with Articles 2, 3 and 7 of Council Regulation (EC) No 881/2002 imposing certain specific restrictive measures directed against certain persons and entities associated with the Al-Qaeda network, by virtue of Commission Implementing Regulation (EU) 2015/1815. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2020.

Santander Consumer Bank, S.A. holds seven blocked correspondent accounts for Bank Melli. Three USD accounts and four EUR accounts. The accounts have been blocked since 2008. Bank Melli is currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. No revenues or profits were generated by Santander Consumer Bank, S.A. on these accounts in the year ended December 31, 2020.

The Santander Group also has certain legacy performance guarantees for the benefit of Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2020, which were negligible relative to the overall revenues and profits of Banco Santander, S.A. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

C. Organizational Structure

Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A. which are controlled subsidiaries. Santander Spain control over 67.18% of our shares and actual participation when excluding non-controlling interests participating in Santander Chile Holding S.A. of 67.12%.

Shareholder	Number of Shares		Percentage
Santander Chile Holding S.A.		66,822,519,695		35.46
Teatinos Siglo XXI Inversiones S.A.		59,770,481,573		31.72

Table of Contents

The chart below sets forth the names and areas of responsibility of our senior managers as of the date of the filing of this annual report:

D. Property, plants and equipment

We are domiciled in Chile and own our principal executive offices located at Bandera 140, 20th floor, Santiago, Chile. At December 31, 2020, we owned the locations at which 35.7% of our branches were located. The remaining branches operate at rented locations. We believe that our existing physical facilities are adequate for our needs.

Main Properties as of December 31, 2020	Number
Central Offices
Owned		4
Rented		5
Total		9

Branches
Owned		93
Rented		264
Total		357

Other property(1)
Owned		55
Rented		5
Total		60

____________________

(1) Consists mainly of parking lots, mini-branches and property owned by our subsidiaries.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Accounting Standards Applied in 2020

Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with IFRS as issued by the IASB in order to comply with requirements of the SEC. As required by the General Banking Law, which subjects Chilean banks to the regulatory supervision of the FMC, and which mandates that Chilean banks abide by the accounting standards stipulated by the FMC, our locally-filed consolidated financial statements have been prepared in accordance with Chilean Bank GAAP as issued by the FMC. The accounting principles issued by the FMC are substantially similar to IFRS but there are some exceptions, as described in Item 4. Therefore, our locally-filed consolidated financial statements have been adjusted according to IFRS as issued by the IASB.

Table of Contents

Critical Accounting Policies

Our consolidated financial statements include various estimates and assumptions, including but not limited to the adequacy of the allowance for loan losses, estimates of the fair value of certain financial instruments and the selection of useful lives of certain assets.

We evaluate these estimates and assumptions on an ongoing basis. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results in future periods could differ from those estimates and assumptions, and if these differences were significant enough, our reported results of operations would be affected materially. We believe that the following are the most critical judgment areas or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations.

Adoption of IFRS 9 in 2018: Allowance for Loan Losses

Since January 2018, the Bank has replaced the “incurred loss” model in IAS 39 with the “expected credit loss (ECL)” model of IFRS 9. See “Note 2—Accounting Changes” of our Audited Consolidated Financial Statements.

The new single impairment model applies to all financial assets measured at amortized cost and fair value through other comprehensive income (“FVOCI”), including loan commitments and contingent loans. The Bank accounted the ECL related to financial assets measured at amortized cost and FVOCI as a loss allowance in the statement of financial position and the carrying amount of these assets is stated net of the loss allowance. The ECL related to contingent loans are accounted as a provision in the statement of financial position. For financial assets that are measured at fair value through other comprehensive income, the loss allowance is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. The new model uses a dual measurement approach, under which the loss allowance is measured as either: (a) 12-month expected credit losses or (b) lifetime expected credit losses.

Based on changes in credit quality since initial recognition, IFRS 9 outlines a “three-stage” impairment model as illustrated by the following chart:

Change in credit quality since initial recognition
Stage 1	Stage 2	Stage 3
Initial recognition	Significant increase in credit risk since initial recognition	Credit impaired assets
12-month expected credit losses	Lifetime expected credit losses	Lifetime expected credit losses

The Bank, at the end of each reporting period, evaluates whether a financial instrument’s credit risk has increased since initial recognition, and consequently classifies the financial instrument in the relevant stage:

Stage 1: At initial recognition of a loan or when there has been an improved credit risk following a significant increase or impairment of assets, the Bank recognizes an allowance based on 12 months ECL.

Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance for the lifetime ECL. Stage 2 loans also include loans where the credit risk has improved following a Stage 3 classification.

Stage 3: Loans considered credit-impaired. The Bank records an allowance for the lifetime ECL, setting the probability of default at 100%.

The Bank considers reasonable and verifiable information available without undue cost or effort to it that may affect the credit risk on a financial instrument, including forward-looking information to determine whether there is or has been a significant increase in credit risk since initial recognition of a loan. Forward-looking information includes past events that affect future performance, current conditions and forecasts of future economic conditions.

Table of Contents

Expected credit loss measurement

The expected credit losses is the probability-weighted estimate of credit losses, i.e., the present value of all cash shortfalls. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. The three main components in measuring expected credit losses are:

PD: The probability of default is an estimate of the likelihood of default over a given time period. A default may only happen at a certain time over the assessed period, if the facility has not been previously de-recognized and is still in the portfolio.

LGD: The loss given default is an estimate of the loss arising after a specific default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral.

EAD: The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdown on committed facilities and accrued interest from missed payments.

For measuring 12-month and lifetime expected credit losses, cash shortfalls are identified as follows:

12-month expected credit losses: the portion of lifetime expected credit losses that represents the expected credit losses that result from default events on the financial instruments that are possible within the 12 months after the reporting date.

Lifetime expected credit losses: the expected credit losses that result from all possible default events over the expected life of the financial instrument.

Forward-looking information

The ECL model includes a broad range of forward-looking information as economic inputs, such as:

GDP growth;

Unemployment rates;

Central Bank interest rates; and

Real estate prices.

Interbank loans

According to the new balance presentation required under IFRS 9, the Bank has grouped interbank loans with loans and accounts receivable since both are measured at amortized cost and are evaluated together for impairment purposes.

Contingent loans

The Bank enters into various irrevocable loan commitments and contingent liabilities. Even though these obligations may not be recognized on the statement of financial position, they contain credit risk and, therefore, form part of the overall risk of the Bank. When the Bank estimates the ECL for contingent loan commitments and letters of credit, it estimates the expected portion of the loan commitment that will be drawn down over its expected life.

Table of Contents

Loans and account receivable measured at fair value through other comprehensive income

When the Bank enters into arrangements with its major customers for project finance and syndicated loans, the amount requested sometimes exceeds the Bank’s limit for single client exposure under credit risk policy, so these operations are approved under the condition that a portion of the loans be sold in the near term. The Bank also has loans that it expects to sell if market conditions are favorable to the Bank. These loans are measured at fair value through other comprehensive income and are subject to impairment requirements.

Valuation of Financial Instruments

Fair value is the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 provides a hierarchy that 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 hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Bank uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

For financial instruments with no available market prices, fair values are estimated 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. See “Note 38—Fair Value of Financial Assets and Liabilities” in our Audited Consolidated Financial Statements.

Derivative Activities

Derivatives are measured at fair value on the statement of financial position and the net unrealized gain (loss) on derivatives is classified as a separate line item within the income statement. Under IFRS, banks must mark-to-market derivatives. Within the fair value of derivatives are included Credit Valuation Adjustment (“CVA”) and Debit Valuation Adjustment (“DVA”), all with the objective that the fair value of each instrument includes the credit risk of its counterparty and the Bank’s own risk. The CVA is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed by each counterparty in each future period. The DVA is a valuation adjustment similar to the CVA but, in this case, it arises as a result of the Bank’s own risk assumed by its counterparties. The following inputs are used to calculate the CVA and DVA:

Expected exposure: Including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for derivatives with interim payments.

LGD: percentage of final loss assumed in a counterparty credit event/default.

Probability of default: for cases where there is no market information, proxies based on comparable companies in the same industry and with the same external rating as the counterparty, are used.

Discount factor curve.

Impairment of Available-for-Sale Financial Assets Prior to 2018

Available for sale financial assets are evaluated for impairment throughout the year and at each reporting date in order to assess whether events or changes in circumstances indicate that these assets are impaired, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. If there is objective evidence of an impairment of an asset, an impairment test is performed by comparing the investments’ recoverable amount, which is the higher of its value in use and fair value less costs to sell, with its carrying amount.

Table of Contents

The Bank evaluates available for sale financial assets with unrealized losses as of the end of each period and concludes if these were impaired. This review consists 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. See “Note 12— Debt Instruments at Fair Value through Other Comprehensive Income” in our Audited Consolidated Financial Statements.

Deferred Tax Assets and Liabilities

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. See “Note 16—Current and Deferred Taxes” of our Audited Consolidated Financial Statements.

Provisions – Contingent Liabilities

Provisions related to contingencies associated to pending signature of contracts, potential clients and other administrative claims, operational risk arise from financial transactions, potential property tax associated to leasing contracts are quantified using the best available information of uncertain future events that are not wholly within control of the Bank. These are reviewed and adjusted at each reporting date. See “Note 22—Provisions and Contingent Provisions” of our Audited Consolidated Financial Statements.

Adoption of IFRS 16 Leases

On January 1, 2019, IFRS 16 Leases has become effective; this standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, thus a lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

The Bank has elected to adopt IFRS 16 using a modified retrospective approach at the date of initial application, therefore, it has recognized a right-of-use asset for an amount equal to the lease liability, which amounted to Ch$154,284 million. For more details, see Note 14 of our Audited Consolidated Financial Statements.

Covid-19 Support Measures

The Bank has conducted an exhaustive analysis of the measures implemented as a result of COVID-19, under the perspective of modified assets. The payment holiday program granted to our consumer loan portfolio included 3-month grace periods and modified terms and installments, and allowed modified interest rates, to the current lower market rate, and was considered a substantial modification of the original contractual conditions. Therefore, these consumer loans were accounted for as the termination of the original loan and the recognition of a new financial asset. In line with our internal guide, these modifications are classified as modifications for commercial reasons, because they are not attributable to the financial difficulty of the debtor, and a new loan operation has been originated under current market conditions.

For the mortgage loan portfolio, original contractual conditions were not modified, instead, the clients signed an addendum for the postponed installments, and a complementary operation was generated, with the mortgage guarantee covering both operations. Neither the monthly installments nor the rates were modified. This measure was granted only to clients with less than 30 days past due, and we have observed, once the postponed periods have ended, that 98% of our clients are meeting their obligations in a timely manner. In line with our internal guide, we have concluded that the modifications granted to customers with no past due days were classified as modifications for commercial reasons, while clients with any past due or that have had some restructuring (marked special risk), were classified as modifications for the financial difficulty of the debtor, and the Bank has calculated the difference between the gross carrying amount and the present value of the modified loans discounted at the original effective interest rate. The amount was not material to the Bank.

Table of Contents

A. Operating Results

Chilean Economy

All of our operations and substantially all of our customers are located in Chile. Accordingly, our financial condition and results of operations are substantially dependent upon economic conditions prevailing in Chile. In 2018, the Chilean economy grew 4.0% While during 2019 the Chilean economy only grew 1.1% due to lower global growth, which was affected by the China-U.S. trade dispute and the social unrest that affected Chile in the last quarter of the year. In 2020, the Chilean economy suffered due to the COVID-19 pandemic with extensive lockdowns in place, which led to an economic contraction of approximately 6.0% in 2020. Chilean GDP is expected to grow around 4.5% in 2021.

As of December 2020, the average unemployment rate for 2020 was 10.2%, compared to 7.1% in the same period of 2019. The higher unemployment rate in 2020 was due to the loss of jobs during the lockdowns caused by the pandemic.

The exchange rate appreciated by 4.5% in 2020 and depreciated by 7.0% in 2019. After a strong depreciation in the last months of 2019 after the social unrest, the peso began to appreciate once more at the beginning of 2020. However, as the COVID-19 pandemic began to spread around the world, the uncertainty and lower economic expectations made the exchange rate depreciate more than 14% and reach Ch$860 in April. In the following months, the exchange rate began to appreciate once more as quarantines began to be lifted and China improved its growth expectations. The Central Bank also actively intervened in the exchange rate market in order to regulate the peso and push it towards historical levels, and the pension fund withdrawals forced pension funds to liquidate international equities, further appreciating the peso.

CPI inflation remained at 3.0% in 2020. The Central Bank continued to relax monetary policy throughout much of 2020 given the contraction of the economy in 2020 from the pandemic and an inflation rate consistently at or below the Central Bank’s target of 3%. The current Monetary Policy Rate is 0.5% compared to 1.75% at year-end 2019.

The growth of the Chilean banking sector evolved in line with overall economic developments and the acquisition carried out by Chilean banks of loan portfolios previously owned by non-banks. Total loans as of December 31, 2020, in the Chilean financial system, excluding loans held abroad by Chilean banks, grew 2.8% year-over-year. Total customer deposits (defined as time deposits plus checking accounts), excluding amounts held by Chilean banks abroad, increased 7.1% year-over-year as of December 31, 2020. The non-performing loans (defined as loans with an installment that is at least 90 days past-due) to total loans ratio decreased from 1.9% at year-end 2019 to 1.6% at year-end 2020. This decrease occurred due to the high liquidity levels in the system after the government approved various initiatives to help the population during the COVID-19 pandemic.

Impact of Inflation

Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. Inflation impacts our results of operations as some loan and deposit products are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$29,070.33 at December 2020, Ch$28,309.94 at December 31, 2019 and Ch$27,565.79 at December 31, 2018. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 2.7% in 2020, 2.7% in 2019 and 2.9% in 2018. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are significantly less features in deposits and other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:

Table of Contents

UF-denominated assets and liabilities. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest-bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively. Our net interest income will be positively affected by an inflationary environment to the extent that our average UF-denominated interest earning assets exceed our average UF-denominated interest-bearing liabilities. Our net interest income will be positively affected by deflation in any period in which our average UF-denominated interest-bearing liabilities exceed our average UF-denominated interest earning assets. Our net interest income will be negatively affected in a deflationary environment if our average UF-denominated interest earning assets exceed our average UF-denominated interest-bearing liabilities.

Inflation and interest rate hedge. A key component of our asset and liability policy is the management of interest rate risk. The Bank’s assets generally have a longer maturity than our liabilities. As the Bank’s mortgage portfolio grows, the maturity gap tends to rise as these loans, which are contracted in UF, have a longer maturity than the average maturity of our funding base. As most of our long-term financial instruments and mortgage loans are contracted in UF and most of our deposits are in nominal pesos, the rise in mortgage lending increases the Bank’s exposure to inflation and to interest rate risk. The size of this gap is limited by internal and regulatory guidelines in order to avoid excessive potential losses due to strong shifts in interest rates. In order to keep this duration gap below regulatory limits, the Bank issues long term bonds denominated in UF or interest rate swaps. The financial cost of the bonds and the efficient part of these hedges is recorded as net interest income. In 2019, the loss from the swaps taken in order to hedge mainly for inflation and interest rate risk and included in net interest income totaled a loss of Ch$15,461 million in 2020 compared to a loss of Ch$31,346 million in 2019 and a loss of Ch$18,799 million in 2018. The average gap between our interest earnings assets and total liabilities linked to the inflation, including hedging, was Ch$6,173,541 million in 2020, Ch$4,279,082 million in 2019 and Ch$4,537,476 million in 2018. Therefore, our sensitivity to a 100 basis point shift in UF inflation considering our year end gap would be approximately Ch$62 billion.

The financial impact of the gap between our interest earning assets and liabilities denominated in UF including hedges was Ch$173,668 million in 2020, Ch$114,340 million in 2019 and Ch$126,260 million in 2018. Although annual UF inflation ended at the same level as 2019, in 2020 we took advantage of the inflation volatility and therefore had a 51.9% increase in these results.

	As of December 31,							% Change
Impact of inflation on net interest income		2020		2019		2018			2020/2019		2019/2018
		(in millions of Ch$)
Results from UF GAP(1)		173,668		114,340		126,260			51.9	%	(9.4	%)
Annual UF inflation		2.7	%	2.7	%	2.9	%

____________________

(1)

UF GAP is net interest income from asset and liabilities denominated in UFs and include the results from hedging the size of this gap via interest rate swaps.

Peso-denominated assets and liabilities. Interest rates prevailing in Chile during any period primarily reflect the inflation rate during the period and the expectations of future inflation. The sensitivity of our peso-denominated interest earning assets and interest-bearing liabilities to changes to such prevailing rates varies. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Interest Rates.” We maintain a substantial amount of non-interest-bearing peso-denominated demand deposits. Because such deposits are not sensitive to inflation, any decline in the rate of inflation would adversely affect our net interest margin on inflation indexed assets funded with such deposits, and any increase in the rate of inflation would increase the net interest margin on such assets. The ratio of the average of such demand deposits and average shareholder’s equity to average interest-earning assets was 33.5%, 30.5%, and 30.6%, for the years ended December 31, 2020, 2019 and 2018, respectively.

Table of Contents

Interest Rates

Interest rates earned and paid on our assets and liabilities reflect, to a certain degree, inflation, expectations regarding inflation, changes in short term interest rates set by the Central Bank and movements in long term real rates. The Central Bank manages short term interest rates based on its objectives of balancing low inflation and economic growth. Because our liabilities are generally re-priced sooner than our assets, changes in the rate of inflation or short-term rates in the economy are reflected in the rates of interest paid by us on our liabilities before such changes are reflected in the rates of interest earned by us on our assets. Therefore, when short term interest rates fall, our net interest margin is positively impacted, but when short term rates increase, our interest margin is negatively affected. At the same time, our net interest margin tends to be adversely affected in the short term by a decrease in inflation rates since generally our UF-denominated assets exceed our UF-denominated liabilities. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation—Peso-denominated assets and liabilities.” An increase in long term rates has a positive effect on our net interest margin, because our interest earning assets generally have longer terms than our interest-bearing liabilities. A flattening of the yield curve (i.e. long-term rates falling quicker than short-term rates) negatively affects our margins by lowering loan yields at a greater pace than deposits costs. In addition, because our peso-denominated liabilities have relatively short re-pricing periods, they are generally more responsive to changes in inflation or short-term rates than our UF-denominated liabilities. As a result, during periods when or expected inflation exceeds the previous period’s inflation, customers often switch funds from UF-denominated deposits to peso-denominated deposits, which generally bear higher interest rates, thereby adversely affecting our net interest margin.

Foreign Exchange Fluctuations

The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. The Central Bank exchange rate appreciated 4.5% in 2020 and depreciated 7.0% in 2019. A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained and may continue to maintain material gaps between the balances of such assets and liabilities. Our current strategy is not to maintain a significant difference between the balances of our assets and liabilities in foreign currencies. In 2020 and 2019, the Bank held significant short-term assets in US$ overnight deposits in order to maintain strong liquidity levels in this currency due to the social unrest and then the pandemic. In 2018, the Bank, in its spot position, usually held more liabilities than assets in foreign currencies, mainly the U.S. dollar, as a result of an ample supply of U.S. dollar deposits from companies that receive export revenues, foreign correspondent bank loans and bonds issued abroad. In either case, any differences are usually hedged using forwards and cross-currency swaps. Including derivatives, the Bank seeks to run no foreign currency risk in its non-trading balance sheet. Because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar). The translation gain or loss over assets and liabilities (excluding derivatives held for trading) and derivatives accounted under hedge accounting standards are included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading. The Bank also uses a sensitivity analysis with both internal limits and regulatory limits to seek to manage the potential loss in net interest income resulting from fluctuations of interest rates on U.S. dollar denominated assets and liabilities and a VaR model to limit foreign currency trading risk.

See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Foreign exchange fluctuations” for more detail on the Bank’s exposure to foreign currency.

Segmentation Criteria

The accounting policies used to determine the Bank’s income and expenses by reporting segment are the same as those described in the summary of accounting policies in “Note 1—Summary of Significant Accounting Policies” of the Bank’s Consolidated Financial Statements and are customized to meet the needs of the Bank’s management. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations.

Table of Contents

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 or her assessment on the segment’s interest income, fee and commission income, and expenses. The Bank’s reporting segments have three Chief Operating Decision Makers: (i) the Director of Retail banking, (ii) the Director of the Middle-market segment and (iii) the Director of Corporate Investment Banking, each of which report to our Chief Executive Officer. All reporting segment information is presented following this structure.

Under IFRS 8, the Bank has aggregated operating segments with similar economic characteristics according to the aggregation criteria specified in the standard. A reporting segment consists of clients that are offered differentiated but, considering how their performance is measured, homogenous services based on IFRS 8 aggregation criteria, thus they form part of the same reporting segment. The clients included in each business segment are constantly revised and reclassified if a client no longer meets the criteria for the segment they are in and transferred to a different CODM. Therefore, variations of loan volumes and profit and loss items reflect business trends as well as client migration effects. Overall, this aggregation has no significant impact on the understanding of the nature and effects of the Bank’s business activities and the economic environment.

The Bank’s reportable segments are (i) Retail banking, (ii) Middle-market, (iii) Corporate Investment Banking and (iv) Corporate Activities (“Other”). See “Note 4—Reporting Segments” of our Audited Consolidated Financial Statements for more information.

Table of Contents

Results of Operations for the Years Ended December 31, 2020 and 2019

In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the results of our operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to “Item 5. – A. Operating Results – Results of Operations for the Year Ended December 31, 2098 Compared to the Year Ended December 31, 2018” in our Annual Report on Form 20-F for the year ended December 31, 2019.

The following discussion is based upon and should be read in conjunction with the Audited Consolidated Financial Statements. The Audited Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB. The following table sets forth the principal components of our net income for the years ended December 31, 2020 and 2019.

Consolidated Income Statement Data IFRS

	2020			2020			2019			% Change 2020/2019
	(U.S.$ thousands)(1)			(Ch$ million)
Interest income and expense
Interest income		3,133,222			2,232,327			2,321,381			(3.8	%)
Interest expense		(896,149	)		(638,479	)		(904,417	)		(29.4	%)
Net interest income		2,237,074			1,593,848			1,416,964			12.5	%
Fees and income from services
Fees and commission income		633,236			451,162			498,658			(9.5	%)
Fees and commission expense		(258,094	)		(183,884	)		(211,572	)		(13.1	%)
Total net fees and commission income		375,143			267,278			287,086			(6.9	%)
Financial transactions, net
Net income (expense) from financial operations		127,444			90,800			(78,165	)		(216.2	%)
Net foreign exchange gain		82,807			58,997			279,857			(78.9	%)
Financial transactions, net		210,251			149,797			201,692			(25.7	%)
Other operating income		11,518			8,206			13,001			(36.9	%)
Net operating profit before provision for loan losses		2,833,985			2,019,129			1,918,743			5.2	%
Provision for loan losses		(671,276	)		(478,264	)		(323,311	)		47.9	%
Net operating profit		2,162,709			1,540,865			1,595,432			(3.4	%)
Operating expenses
Personnel salaries and expenses		(573,596	)		(408,670	)		(410,157	)		(0.4	%)
Administrative expenses		(351,524	)		(250,450	)		(233,612	)		7.2	%
Depreciation and amortization		(153,587	)		(109,426	)		(106,092	)		3.1	%
Impairment of property, plant and equipment		(895	)		(638	)		(2,726	)		(76.6	%)
Other operating expenses		(109,206	)		(77,806	)		(49,303	)		57.8	%
Total operating expenses		(1,188,808	)		(846,990	)		(801,890	)		5.6	%
Net Operating income		973,901			693,875			793,542			(12.6	%)
Income from investments in associates and other companies (2)		1,948			1,388			1,146			21.1	%
Income before tax		975,849			695,263			794,688			(12.5	%)
Income tax expense		(200,055	)		(142,533	)		(175,074	)		(18.6	%)
Income from continuous operations		775,794			552,730			619,614			(10.8	%)
Income from discontinued operations (2)		0			0			1,699			(100.0	%)
Consolidated net income for the year		775,794			552,730			621,313			(11.0	%)
Net income for the year attributable to:
Equity holders of the Bank		768,613			547,614			619,091			(11.5	%)
Non-controlling interests		7,181			5,116			2,222			130.2	%

____________________

(1)

Amounts stated in U.S. dollars at and for the year ended December 31, 2020 have been translated from Chilean pesos at the exchange rate of Ch$712.47 = U.S.$1.00 as of December 31, 2020.

(2)

As of December 31, 2020, the Bank is in process of selling its share participation on Redbanc S.A. and Transbank S.A. and has classified its participation as an investment available for sale in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”. The Bank sold its stake in Sociedad Nexus S.A. in October 2019 and January 2020. See Note 38 of our Audited Consolidated Financial Statements.

Table of Contents

Results of Operations for the Years Ended December 31, 2020 and 2019

Net income for the year attributable to equity holders of the Bank decreased 11.5% in 2020 compared to 2019 and totaled Ch$547,614 million. Our return on annualized average equity was 14.8% in 2020 compared to 18.0% in 2019.

In 2020, net operating profit before loan losses was Ch$2,019,129 million, an increase of 5.2% compared to 2019. Our net interest income increased 12.5% in 2020 compared to 2019. This was mainly driven by loan growth, higher gains from inflation-indexed assets and lower cost of funds due to the high liquidity in the market and a lower rate environment. Overall, our net interest margin declined to 3.8% in 2020 from 4.0% in 2019.

Net fees and commission income decreased 6.9% to Ch$267,278 million in the twelve-month period ended December 31, 2020 compared to the same period in 2019. Lower consumption in the economy and a higher saving rate negatively affected fees from lines of credit. Fees from collections decreased 30.3% in 2020 compared to 2019. This line item includes, among other items, fees collected on behalf of insurance companies for insurance that is sold with some loan products, especially mortgage loans. Lower loan origination due to the pandemic lowered this fee item. Insurance brokerage fees and fees from checking accounts also declined after a law was passed that increased banks liability for cyber fraud and prohibited the sale of insurance for this item. This was partially offset by the rise in fees from credit, debit and ATM cards which increased 35.3% in 2020. The switch to the four-part pricing model, which uses the international interchange fees set by the main card brands (i.e. MasterCard, Visa, AMEX), and out of the pricing model set by Chile’s main credit card acquirer (Transbank) resulted in a lower fee expenses.

Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange gain (loss), totaled Ch$149,797 million in the year ended December 31, 2020, a decrease of 25.7% compared to the same period in 2019. These results include the results of our Treasury Division’s transactions with customers, as well as the results of our non-client treasury operations, mainly the Financial Management Division. Client treasury services totaled Ch$145,222 million, an increase of 4.7% compared to 2019. The higher market volatility due to the COVID-19 pandemic led to higher demand for hedging from our Corporate and Middle-market clients. The results from non-client treasury income decreased 92.7% to Ch$4,576 million in 2020 compared to 2019. This lower result was mainly due to the results of the Bank’s Financial Management Division that decreased 56.2% to Ch$27,918 million in 2020 compared to 2019 and the results from CVA which totaled a loss of Ch$23,216 million. The growth of the Bank’s derivative portfolio and the increase in counterparty risk drove the rise in CVA adjustment loss in 2020.

Total other operating income decreased by 36.9% in 2020 compared to 2019, totaling a gain of Ch$8,206 million. This was mainly due to lower income from insurance compensation due to damages since in 2019 the Bank received compensation for the damages to our branches during the social unrest that affected Chile in October- December of 2019.

As a result of the factors mentioned above, net operating profit decreased 3.4% in 2020 compared to 2019 and totaled Ch$1,540,865 million.

Operating expenses in the year ended December 31, 2020 increased 5.6% compared to the corresponding period in 2019. The efficiency ratio was 41.9% in 2020 and 41.8% in 2019.

The 0.4% decrease in personnel salaries and expenses was mainly due to a decrease in variable incentives, severance payments, training and other benefits that decreased 6.9%, while salary costs only grew by 1.9%. Headcount decreased 6.5% in 2020, ending the year at 10,470 employees in the Bank.

Table of Contents

Depreciation and amortization expense increased 3.1% in 2020 compared to 2019. This increase was mainly due to a higher depreciation of fixed assets in the period.

In 2020, impairment expenses totaled Ch$638 million, a 76.6% decrease compared to the previous year as there was a strong impairment of fixed assets in 2019 as a result of the social unrest that affected Chile in October – December 2019.

Other operating expenses were Ch$77,806 million in 2020, an increase of 57.8% compared to 2019. This was mainly due to higher provisions for contingencies due to the effects of the COVID-19 pandemic and a rise in cyber fraud insurance costs.

Total income tax expense by the Bank in 2020 was Ch$142,533 million, a 18.6% decrease compared to 2019, mainly driven by the 8.9% decrease in net income before taxes.

Net Interest Income

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$, except percentages)
Retail banking		1,049,543		960,361			9.3	%
Middle-market		346,225		298,587			16.0	%
Corporate Investment banking		114,229		98,154			16.4	%
Total reporting segments		1,509,997		1,357,102			11.3	%
Other(1)		83,851		59,862			40.1	%
Net interest income		1,593,848		1,416,964			12.5	%
Average interest-earning assets		42,239,387		35,850,253			17.8	%
Average non-interest-bearing demand deposits		10,403,347		7,466,991			39.3	%
Net interest margin(2)		3.77	%	3.95	%
Average shareholders’ equity and average non-interest-bearing demand deposits to total average interest-earning assets		33.5	%	30.5	%

____________________

(1)

Consists mainly of net interest income from the Financial Management Division, including the inflation gap, and the cost of funding our financial assets held for trading. Each segment obtains funding from its clients. Any surplus deposits are transferred to the Financial Management Division, which in turn makes such excess available to other areas that need funding. The Financial Management Division also sells the funds it obtains in the institutional funding market at a transfer price equal to the market price of the funds. This segment also includes intra-segment income and activities not assigned to a given segment or product line.

(2)

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

For the year ended December 31, 2020 our net interest income totaled Ch$1,593,848 million and increased 12.5% from Ch$1,416,964 million in 2019. Average interest earning assets increased 17.8% in the same period. During 2020, the loan portfolio grew 5.1%, but mainly in lower yielding commercial and mortgage loans. The higher growth from interest earning assets came from short-term assets as the Bank invested the higher liquidity in the system in low-risk and low-yielding assets. This caused the average interest rate earned on interest earning assets indexed to the UF to decrease from 5.9% in 2019 to 5.2% in 2020, despite similar levels of UF inflation in both years. The nominal yield earned on peso-denominated interest earning assets also declined from 8.2% in 2019 to 6.2% in 2020 due to a lower rate environment for most of 2020 and growth in low-yielding and low risk peso denominated assets. All the factors mentioned above led to a decline in the overall average interest earned over interest earning assets from 6.5% in 2019 to 5.3% in 2020.

Average nominal interest rate earned on interest earning assets	2020			2019
Ch$		6.2	%		8.2	%
UF		5.2	%		5.9	%
Foreign currencies		2.7	%		3.4	%
Total		5.3	%		6.5	%

Table of Contents

The average rate paid on our interest bearing liabilities decreased to 2.2% in 2020 from 3.5% in 2019. This was mainly due to a lower rate environment in 2020 triggered by the Central Bank’s relaxation of monetary policy due to lower than expected economic growth. This especially reduced the nominal rate paid on Ch$ denominated time deposits. The nominal rate paid over the average balance of these deposits fell from 3.3% in 2019 to 1.3% in 2020. The Central Bank also gave liquidity lines to the banks at the Monetary Policy Rate, which was set at 0.5% for most of the year with a maturity of these lines of up to four years. The rate paid on foreign currencies also declined as the exchange rate appreciated.

Average nominal interest rate paid on interest bearing liabilities	2020			2019
Ch$		1.3	%		3.3	%
UF		5.4	%		5.1	%
Foreign currencies		1.5	%		2.3	%
Total		2.2	%		3.5	%

Additionally, in 2020, average non-interest bearing demand deposits increased 39.3%, which helped to lower total funding costs as well.

In summary, the growth of lower yielding assets partially offset by a cheaper funding cost and mix, led to a decline in our net interest margin to 3.77% in 2020 compared to 3.95% in 2019.

Net interest income from our reporting segments totaled Ch$1,509,997 million and increased 11.3% compared to 2019. This rise was mainly due to the growth of the loan book, which grew 5.1% in 2020 and the improved funding mix driven by lower time deposit costs and a greater amount of non-interest bearing demand deposits. The changes in net interest income by segment in 2020 as compared to 2019 were as follows:

Net interest income from Retail banking increased 9.3%, led by a 5.9% increase in loan volumes. Mortgage loans continued to grow steadily in the year, as rates remained fairly low compared to historical levels although they did increase compared to 2019. Consumer loans decreased during the year due to the lower demand during the pandemic. Government aid coupled with the access to private pension accounts also resulted in low demand for consumer loans. Retail also includes SMEs, which had a strong loan growth due to the strong demand of FOGAPE government-guaranteed loans in the year. However, these loans however, are lower yielding, as the interest rate is capped at the Central Bank Monetary Policy Rate (currently at 0.5%) plus a spread of 3.0%.

Net interest income from the Middle-market segment increased 16.0% in 2020 mainly due to loan growth of 0.5% in 2020 and an improved funding in the year driven by the rise in demand deposits.

Net interest income from the Corporate Investment Banking segment increased 16.4% in 2020 compared to 2019. Loans increased 2.0%, mainly driven by working capital lines of credit in order to maintain high liquidity levels during the pandemic. The spread of this product rose during the year. The improved funding mix also drove the growth in net interest income in this segment.

Other net interest income consists mainly of net interest income from the Bank’s ALCO, which includes the net interest income from the Bank’s debt instruments recorded at fair value through other comprehensive income, deposits in the Central Bank, and the financial cost of supporting our cash position and financial investments held for trading (the interest income from which is recognized as net income from financial operations and not interest income). The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” increased 40.1% to Ch$83,851 million in 2020 compared to 2019. This was mainly due to the higher average UF inflation gap in the year as management took advantage of the higher inflation rate recorded in the second half of the year.

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

Table of Contents

	At December 31,			% Change
		2020	2019		2020/2019
		(in millions of Ch)
Retail banking		24,279,248	22,926,377		5.9	%
Middle-market		8,136,402	8,093,496		0.5	%
Corporate Investment banking		1,635,217	1,603,633		2.0	%
Other (1)		289,026	48,009		502.0	%
Total loans		34,339,893	32,671,515		5.1	%

____________________

(1)

Includes interbank loans.

The following table shows interest income of financial assets by valuation as of December 31, 2020 and 2019.

	At December 31,			% Change
		2020	2019		2020/2019
		(in millions of Ch$)
Financial assets measured at amortized cost(1)		2,114,620	2,195,339		(3.7	%)
Financial assets measured al FVOCI(2)		105,417	97,319		8.3	%
Other interest		13,586	21,979		(38.2	%)
Interest income not including income from hedge accounting		2,233,623	2,314,637		(3.5	%)

____________________

(1)

Financial assets measured at amortized cost include loans measured at amortized cost as described above and investments under resale agreements. The effective interest method is used in the calculation of the amortized cost of the financial asset and in the allocation and recognition of the interest revenue over the relevant period.

(2)

Financial assets measured at fair value through other comprehensive income include the interest income from debt instruments. These mainly consisted of securities and bonds of the Chilean Central Bank that contain contractual terms that give rise on specific dates to cash flows that are solely payments of principal and interest (SPPI), and are measured at FVOCI.

Fee and Commission Income

Net fees and commission income decreased 6.9% to Ch$267,278 million in the twelve-month period ended December 31, 2020 compared to the same period in 2019. The following table sets forth certain components of our income from services (net of fees paid to third parties directly connected to providing those services, principally fees relating to credit card processing and ATM network administration) in the years ended December 31, 2020 and 2019.

	Year ended December 31,			% Change
		2020	2019		2020/2019
		(in millions of Ch$)
Credit, debit and ATM cards		73,297	54,189		35.3	%
Collections		23,242	33,355		(30.3	%)
Insurance brokerage		39,764	49,664		(19.9	%)
Letters of credit		36,277	35,039		3.5	%
Checking accounts		34,825	35,949		(3.1	%)
Custody and brokerage services		10,376	9,154		13.3	%
Lines of credit		7,428	10,314		(28.0	%)
Others		42,069	59,422		(29.2	%)
Total fees and commission income, net		267,278	287,086		(6.9	%)

Fees from credit, debit and ATM cards increased 35.3% in 2020. The switch to the four-part pricing model, which uses the international interchange fees set by the main card brands (i.e. MasterCard, Visa, AMEX), and out of the pricing model set by Chile’s main credit card acquirer (Transbank) drove this result mainly via a reduction in card expenses. We also increased the number of ATMs during the year, from 1,088 in 2019 to 1,199 in 2020, giving us higher fees from clients from other banks and financial institutions using our machines.

Table of Contents

Fees from collections decreased 30.3% in 2020 compared to 2019. This line item includes, among other items, credit-related insurance collected on behalf of insurance companies, such as fire and earthquake insurance that are mandatory with mortgage loans. During 2020 the lower origination of loans negatively affected this line item.

Insurance brokerage fees decreased 19.9% due to lower demand as a result of by the pandemic. Brokerage of fraud insurance also declined after a law was passed that made banks liable for cyber fraud and prohibited the sale of insurance for this item. This was partially offset by the increase in sales of car and life insurance policies as advances in our digital platforms have enabled clients to search for and purchase these products online.

Fees from letters of credit and other contingent operations increased 3.5% in 2020. This line corresponds to international and foreign trade financing business with clients. Business growth drove this revenue line in 2020 as export growth remained solid in 2020, driven by higher commodity prices and demand from China.

Fees from checking accounts decreased 3.1% in 2020 compared to 2019. This was mainly due to the effects of the cyber fraud law, where some checking account plan prices had to be readjusted due to the elimination of components of fraud insurance for checking accounts. This was partially offset by the rise in the Bank’s checking account base. The number of checking accounts increased 29.2% to 1,378,539 driven by digital onboarding platforms such as Santander Life. Our corporate cash management services also continued to boost fee growth in this product.

Brokerage and custody fees increased 13.3% in 2020 as compared to 2019 due to higher volumes in our brokerage business, custody fees, and bond issuances for our clients.

Fees from lines of credit decreased 28.0% due to a decrease of usage of these lines as a result of the fall in consumption, the greater access to liquidity due to the withdrawal of pension fund savings and the rise in household savings rate during the pandemic.

The 29.2% decrease in other fee income in 2020 compared to 2019 was mainly due to lower fees earned by our Corporate Investment Banking segment for investment banking and advisory services, in line with the slowdown of economic growth. Fees from the brokerage of mutual funds also decreased 6.9% in 2020 compared to 2019 and totaled Ch$44,072 million. As rates decreased, especially those earned by money market funds, average fees charged over these funds fell in tandem. In December 2013, our Asset Management business was sold, but we continue to serve as an exclusive broker for Santander Asset Management, the acquirer of our asset management business.

The following table sets forth, for the periods indicated our fee income broken down by segment for the periods indicated:

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Retail banking		213,431		230,627			(7.5	%)
Middle-market		38,335		38,712			(1.0	%)
Corporate Investment banking		23,180		29,103			(20.4	%)
Other		(7,668	)	(11,356	)		(32.5	%)
Total fees and commission income, net		267,278		287,086			(8.1	%)

Fees from Retail banking decreased 7.5% in 2020 compared to 2019. Lower product usage due to the pandemic and the economic slowdown drove this decline in retail fees along with the negative impact of the new regulations regarding cyber fraud on insurance brokerage and checking account fees. This was offset by the growth of card fees as mentioned above.

The 1.0% decrease in fees from the Middle-market segment was mainly due to lower economic activity due to the pandemic.

Fees from the Corporate Investment banking segment decreased 20.4% in 2020 compared to 2019, mainly due to lower investment banking fees as a result of lower economic growth.

Table of Contents

Fees in Other decreased from a loss of Ch$11,356 million in 2019 to a loss of Ch$7,668 million in 2020 mainly due to lower insurance fees paid to Zurich, our insurance partner.

Financial Transactions, Net

The following table sets forth information regarding our income (loss) from financial transactions for the years ended December 31, 2020 and 2019.

	Year ended December 31,				% Change
		2020	2019			2020/2019
		(in millions of Ch$)
Net income from financial operations		90,800	(78,165	)		--%
Foreign exchange gain, net		58,997	279,857			(78.9	%)
Total financial transactions, net		149,797	201,692			(25.7	%)

Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange gain, totaled Ch$149,797 million in the year ended December 31, 2020, a decrease of 25.7% compared to the same period in 2019. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our Financial Management Division.

Internal Bank policy does not allow significant foreign currency mismatches and requires that the results included in Total financial transactions, net include not only the market-to-market of our foreign currency spot position, but also the results of the derivatives used to hedge currency risk. The mark-to-market of our spot position is included in the line item Foreign exchange gain, net along with the effect of those derivatives accounted for under hedge accounting rules. The derivatives used to hedge foreign currency risk, but which are classified as trading are included in the line item Net income from financial operations. For more details regarding our management and exposure to foreign currency risk, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”

The results from net income (loss) from financial operations totaled a gain of Ch$90,800 million in 2020 compared to a loss of Ch$78,165 million in 2019.

	For the year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Net (loss) gains on trading derivatives		42,704		(162,183	)		--%
Net gains on financial assets at fair value through profit or loss		1,671		11,878			(85.9	%)
Net gains on derecognition of financial assets measured at amortized cost		80,679		63,672			26.7	%
Sale of loans and accounts receivables from customers		(62	)	3,310			(101.9	%)
Current portfolio		48		63			(23.4	%)
Charged-off portfolio		(110	)	3,248			(103.4	%)
Repurchase of issued bonds		1,848		3,265			(43.4	%)
Other income (expense) from financial operations		(36,039	)	1,893			(2004.8	%)
Total income (expense)		90,800		(78,165	)		(216.2	%)

The gain from financial operations in 2020 compared to a gain in 2019 was mainly due to:

(i)

A gain of Ch$42,704 million in the sub-item net gains on trading derivatives compared to a loss of Ch$162,183 million in 2020. Movements in foreign currency and interest rates affect this line item because it includes the valuation adjustments of our derivatives classified as trading. After a sharp depreciation of the peso at the end of 2019 and during the initial months of 2020, the peso strengthened significantly during the rest of the year. The Central Bank exchange rate appreciated 4.5% in 2020, which led to a net gain from trading of derivatives. From the peak on March 20, 2020 to December 31, 2020 the peso appreciated 18.0% compared to the US dollar. Regarding rates, after an initial sell-off of Chilean bonds during the initial period of the pandemic, rates across the yield curve descended sharply and stabilized. This volatility resulted in important movements in the net gain (loss) from trading derivatives. We use derivatives classified as trading, mainly forwards and cross-currency swaps, to hedge the net foreign currency spot position between short-term assets and short-term liabilities and it includes results from our client foreign currency business, such as the sale of currency derivatives, like forwards. At year end 2019 and throughout 2020, the Bank continued to maintain relatively high levels of short-term dollar liquidity deposited overnight in high rated banks given the social unrest and year-end 2019, followed by the pandemic in 2020. Therefore, in both periods, on average, the Bank had more short-term assets in dollars than short-term liabilities, which was hedged through a short-term foreign currency liability position classified as trading. In 2019, as the peso depreciated, this resulted in a loss in this line item and in 2020, as the peso appreciated, this resulted in a gain in this line item.

Table of Contents

(ii)

The 26.7% increase in the gains on the derecognition of financial assets measured at amortized cost, which totaled Ch$80,679 million. This increase was mainly due a decline in local interest rates as yields came down along the whole nominal and UF peso yield curve, that increased the realized gain from these investments, especially in the second quarter of 2020. These investments are mainly comprised of fixed income instruments issued by the Central Bank of Chile and the Republic of Chile.

This was partially offset by:

(iii)

Lower gains from financial assets at fair value through profit or loss, which decreased 85.9% and ended the year at a gain of Ch$1,671 million. In this line item the mark-to-market and interest income of the trading fixed income portfolio are recognized. Although local interest rates remained low, the yield curve steepened as the year progressed, reducing the gain from investments compared to 2019. These investments are also mainly comprised of Chilean Central Bank instruments.

(iv)

In 2020, the Bank repurchased certain bonds at a price below par, resulting in the gain recorded in this line item. Due to the high liquidity this year from the high growth in demand deposits and the Central Bank lines, the repurchasing program was stronger than previous years, and although the gains were not as strong as 2019, it was seen as a medium-term strategy to lower the cost of funds. See “Note 20—Issued Debt Instruments and Other Financial Liabilities—b) Senior Bonds” in the Audited Consolidated Financial Statements.

(v)

The net loss of Ch$36,039 million in the sub-line item others was mainly due to a larger loss from credit value adjustment of our derivative portfolio that is included in this line item. The growth of the Bank’s derivative portfolio and the increase in counterparty risk, caused by the pandemic drove the rise in CVA loss in 2020.

The net result from foreign exchange transactions totaled a gain of Ch$58,997 million in 2020 compared to Ch$279,857 million in 2019.

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Net profit or loss from foreign currency exchange differences		90,133		(89,893	)		(200.3	%)
Hedge-accounting derivatives		(27,624	)	362,374			(107.6	%)
Translation gains and losses over assets and liabilities indexed to foreign currencies, net		(3,512	)	7,376			(147.6	%)
Net results from foreign exchange gain		58,997		279,857			(78.9	%)

Included in these results is the sub-item Net profit or loss from foreign currency exchange differences which includes the mark-to-market of the Bank’s spot position and results from our client foreign currency business, such as currency transactions. The Central Bank exchange rate appreciated 4.5% in 2020 and depreciated 7.0% in 2019, which reflects the gain from our net liability spot position in 2020 versus a net loss for 2019. This is offset by the results from hedge-accounting derivatives and the results from derivatives classified as trading.

Table of Contents

Results from the sub-item hedge-accounting derivative are mainly comprised of the mark-to-market of derivatives that are used to mainly hedge the foreign currency risk of our long-term foreign currency funding. Therefore, we generally have a net foreign currency asset position in our hedge-accounting derivatives. These are mainly cross-currency swaps that are accounted under hedge accounting rules. These derivatives produced a loss of Ch$3,512 million in 2020, due to the appreciation of the peso in the 2020.

Finally, the Bank has some assets and liabilities that are in Chilean pesos, but indexed to foreign currency. This position produced a loss in 2020 of Ch$3,512 million.

In order to more easily compare the results from financial transactions, net, we present the following table that separates the results by lines of business for 2020 and 2019.

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Client treasury products		107,538		101,519			5.9	%
Market-making with clients		37,703		37,129			1.5	%
Client treasury services		145,222		138,648			4.7	%
Sale of loans and charged-off loans		(126	)	3,310			(103.8	%)
CVA adjustments		(23,216	)	(3,957	)		486.7	%
Financial Management Division and others(1)		27,918		63,691			(56.2	%)
Non-client treasury income (loss)		4,576		63,044			(92.7	%)
Total financial transactions, net		149,797		201,692			(25.7	%)

____________________

(1)

The Financial Management Division manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk.

Client treasury services totaled Ch$145,222 million, an increase of 4.7% compared to 2019. The results from client treasury products and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2020, the results from client treasury products increased 5.9%. The higher market volatility due to the COVID-19 pandemic led to higher demand for hedging from our Corporate and Middle-market clients. The results from market-making with client services increased 1.5% in 2020, mainly due an improvement in business volumes of tailor-made treasury services and cash management sold to specific corporate clients, even after a strong year in this line item in 2019. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.

The results from non-client treasury income decreased 92.7% to Ch$4,576 million in 2020 compared to 2019. These results include the income from sale of loans, including charged-off loans, CVA adjustments and the results from our Financial Management Division. The results of the Bank’s Financial Management Division decreased 56.2% to Ch$27,918 million in 2020 compared to 2019. During 2020, the Bank prepaid various bonds and interbank borrowings in foreign currency as cheaper local funding became available from non-interest bearing deposits and Central Bank lines. These liability management exercises included the unwinding of the rate and currency hedges. In some instances, this resulted in an initial loss recognized in this line item, but a cheaper funding cost going forward. This was partially offset by higher results derived from gains on the derecognition of financial assets measured at amortized cost, which totaled Ch$80,679 million in 2020.

The results from the sale of loans totaled a loss of Ch$126 million in 2020 compared to a gain of Ch$3,310 million in 2019 due to lower demand for these sales during the pandemic.

The results from CVAs totaled a loss of Ch$23,216 million. This was mainly due to a loss from CVA adjustments of our derivative portfolio which is included in this line item, since the CVA generated by derivatives taken for hedging and on behalf of clients is not part of client income or part of Financial Management’s profit and loss. The growth of the Bank’s derivative portfolio and the increase in counterparty risk drove the rise in CVA adjustment loss in 2020.

Table of Contents

Other Operating Income

	Year ended December 31,			% Change
		2020	2019		2020/2019
		(in millions of Ch$)
Income from assets received in lieu of payment		5,934	5,613		5.7	%
Release of contingencies provisions		503	-		--%
Other income		1,769	7,388		(76.1	%)
Leases		-	-		--%
Income from sale of property, plant and equipment		865	2,456		(64.8	%)
Compensation from insurance companies due to damages		702	4,681		(85.0	%)
Other		202	251		(19.5	%)
Total		8,206	13,001		(36.9	%)

Total other operating income decreased by 36.9% in 2020 compared to 2019 and totaled a gain of Ch$8,206 million. This was mainly due to lower income from insurance compensation due to damages as the Bank received compensation for the damages to our branches during the social unrest that affected Chile in October- December of 2019. This was slightly compensated by a release of non-credit contingencies in 2020, and a 5.7% increase in income from assets received in lieu of payment.

Expected Credit Loss Allowance

The following table sets forth certain information relating to our provision for expected credit losses for the years ended 2020 and 2019.

	As of December 31, 2020
	Stage 1						Stage 2						Stage 3
	Individual			Collective			Individual			Collective			Individual			Collective			Total
	(in millions of Ch$)
Commercial loans		(20,055	)		(9,617	)		(35,861	)		(23,410	)		(115,730	)		(86,016	)		(290,691	)
Mortgage loans		-			(16,603	)		-			5,966			-			(7,636	)		(18,273	)
Consumer loans		-			(19,024	)		-			18,914			-			(161,466	)		(161,576	)
Contingent loans		(1,335	)		1,600			(1,624	)		(4,023	)		14			(423	)		(5,789	)
Loans and AR at FVOCI		(1,253	)		-			-			-			-			-			(1,253	)
Debt at FVOCI		-			(682	)		-			-			-			-			(682	)
Total Expected credit losses allowance		(22,643	)		(44,326	)		(37,485	)		(2,552	)		(115,716	)		(255,543	)		(478,264	)

	As of December 31, 2019
	Stage 1						Stage 2						Stage 3
	Individual			Collective			Individual			Collective			Individual			Collective			Total
	(in millions of Ch$)
Commercial loans		(3,002	)		(4,930	)		(10,469	)		(8,686	)		(79,501	)		(33,657	)		(140,245	)
Mortgage loans		-			(1,177	)		-			(4,998	)		-			(8,237	)		(14,412	)
Consumer loans		-			(8,875	)		-			(15,280	)		-			(145,328	)		(169,483	)
Contingent loans		45			589			10			24			152			188			1,008
Loans and AR at FVOCI		5			-			-			-			-			-			5
Debt at FVOCI		-			(184	)		-			-			-			-			(184	)
Total Expected credit losses allowance		(2,952	)		(14,577	)		(10,459	)		(28,940	)		(79,349	)		(187,034	)		(323,311	)

Table of Contents

For the year ended December 31, 2020 provisions for expected credit loss totaled Ch$478,264 million and increased 47.9% compared to 2019. This rise was mainly due to growth of our loan book and an increase in expected losses driven by the economic slowdown as the COVID-19 pandemic forced many cities into lockdown. In April, the Bank completed a calibration of parameters, resulting in additional allowance for Ch$2,066 million. Additionally, with current COVID-19 infection rates having increased and continued high levels of uncertainty in the macro-economic outlook and to address a potential lag in defaults, the Bank’s management has determined to recorded overlay or post-model adjustments overlays for an amount of Ch$59,000 million, wherein Ch$29,000 million addressed macroeconomics’ variables and Ch$30,000 million associated to expected behavior of Fogape loans. The table below breaks down these results by main product item:

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Commercial loans		(290,691	)	(140,245	)		107.3	%
Mortgage loans		(18,273	)	(14,412	)		26.8	%
Consumer loans		(161,576	)	(169,483	)		(4.7	%)
Contingent loans		(5,789	)	1,008			--%
Loans and AR at FVOCI		(1,253	)	5			--%
Debt at FVOCI		(682	)	(184	)		270.7	%
Total Provision For Loan Losses		(478,264	)	(323,311	)		47.9	%

Provisions for expected credit losses of our commercial loans totaled Ch$290,691 million for the year ended December 31, 2020 and increased 107.3% compared to 2019. This segment has been the most affected by the lockdowns, increasing the risk of default and the transfer of clients to Stage 2. There was also a rise in write-offs of companies who were not able to withstand the effects of the pandemic. The strong growth in loan growth in commercial loans during the year mainly came from Fogape loans, which were state-guaranteed loans mainly given to SMEs in order to help them cope with the lower economic activity due to the Covid-19 pandemic. The Bank decided to be prudent and increased provisioning for these loans with an overlay of Ch$30,000 million specifically for these loans, under Stage 2 for those loans analyzed on a collective basis.

Provisions for expected credit losses for mortgage loans totaled an expense of Ch$18,273 million for the year ended December 31, 2020, compared to an expense of Ch$14,412 million in 2019. Mortgage loans increased 10.2% in 2020 compared to 2019. Mortgage loans had good payment behavior despite the pandemic, as at the peak almost half of this portfolio was under a grace period. The lower economic growth increased provisions in all stages, except Stage 2, where provisions were released due to the healthy payment behavior. It is important to note that the majority of grace periods ended in October and November 2020, and almost all of clients were back on track paying on time. In June 2020, the Bank decided to take an overlay due to the deterioration of macroeconomic variables, and assigned Ch$11,600 million under Stage 1.

The provisions for expected credit losses for consumer loans totaled a charge of Ch$161,576 million and decreased 4.7% in 2020 compared to 2019. Although the 3-month grace periods were given out at the beginning of the COVID-19 pandemic (the majority in April and May), around 12% of this loan book took advantage of this relief program. During the year, as these loans began repaying once again, there was no increase in overdue loans, and provisions from Stage 2 were released. It is important to note that the consumer portfolio also contracted in 2020, as there was lower demand for these types of products due to the high liquidity of households after the government approved various initiatives, including pension fund withdrawals. Regardless of other factors, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition and consumer loans are written off after 6 months. These positive trends in the risk of our consumer loan portfolio may reverse if the economy continues to decelerate and unemployment rises in 2021. In June 2020 the Bank decided to take an overlay due to the deterioration of macroeconomic variables, and assigned a total of Ch$17,400 million to a specific group of operations in the following manner: Ch$10,700 million to specific operations under Stage 1 and $6,700 million to specific operations under Stage 2.

Table of Contents

Recoveries on loans previously charged-off decreased 9.4% in 2020 compared to 2019. The pandemic limited recovery efforts during 2020. The following table shows recoveries of loans previously charged-off by type of loan.

	Year ended December 31,			% Change
		2020	2019		2020/2019
		(in millions of Ch$)
Recovery of loans previously charged-off
Consumer loans		39,373	42,432		(7.2	%)
Residential mortgage loans		9,584	13,652		(29.8	%)
Commercial loans		25,969	26,629		(2.5	%)
Total recoveries		74,926	82,713		(9.4	%)

In some instances, we will sell a portfolio of charged-off loans to a third party. Gain (loss) on these charged-off loans is recognized as net income from financial transactions as disclosed in “Note 29—Net Income (Expense) from Financial Operations” of our Audited Consolidated Financial Statements. The following table sets forth information about our sale of charged-off loans for the year ended December 31, 2020 and 2019.

	Year ended December 31,				% Change
		2020		2019		2020/2019
		(in millions of Ch$)
Gains (losses) on sale of loans previously charged-off		(110	)	3,248		(103.4	%)

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

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Retail banking		(317,050	)	(279,969	)		13.2	%
Middle-market		(109,999	)	(38,746	)		183.9	%
Corporate Investment banking		(51,097	)	224			--%
Other		(118	)	(4,820	)		(97.6	%)
Total provisions, net		(478,264	)	(323,311	)		47.9	%

Net provisions expense from retail banking increased 13.2% in 2020 compared to 2019. This was mainly driven by higher provisions for SMEs due in part to the loan growth in this segment through FOGAPE loans and an increase in expected loss of this portfolio due to the pandemic and slower economic growth.

Net provision expense from the Middle-market segment increased 183.9% in 2020 due to the rise in the expected loss of this portfolio and the increase in write-offs of commercial loans in this segment as a result of the COVID-19 pandemic lockdowns and lower economic growth.

Net provision expense from Corporate Investment banking totaled an expense of Ch$51,097 million compared to a release of Ch$224 million in 2019. This is mainly due to the rise in the expected loss of this portfolio as a result of the COVID-19 pandemic lockdowns and lower economic growth.

Total provisions, net included in Others totaled an expense of Ch$118 million, 97.6% lower than in 2019. This difference is explained by a change in the way the effects of the exchange rate over provision expenses are recognized. In 2020, the impact of foreign currency movements on provision expenses and the corresponding hedge was included in Financial Transactions, net.

We believe that our loan loss allowances are currently adequate for all known and expected credit losses.

Table of Contents

Operating Expenses

The following table sets forth information regarding our operating expenses in the years ended December 31, 2020 and 2019.

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Personnel salaries and expenses		(408,670	)	(410,157	)		(0.4	%)
Administrative expenses		(250,450	)	(233,612	)		7.2	%
Depreciation and amortization		(109,426	)	(106,092	)		3.1	%
Impairment		(638	)	(2,726	)		(76.6	%)
Other operating expenses		(77,806	)	(49,303	)		57.8	%
Total operating expenses		(846,990	)	(801,890	)		5.6	%
Efficiency ratio(1)		41.9	%	41.8	%

____________________

(1)

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

Operating expenses in the year ended December 31, 2020 increased 5.6% compared to the corresponding period in 2019. The efficiency ratio was 41.9% in 2020 and 41.8% in 2019.

Administrative expenses increased 7.2% in the year ended December 31, 2020 compared to the corresponding period in 2019, mainly due to higher IT and communications costs, as many of our employees worked from home and new systems that would work remotely were implemented. The Bank also continued to invest in IT to develop the Bank’s digital services and back-office platform, which is allowing the Bank to consolidate the branches and create efficiencies in the long-term. IT investments include: (i) SuperDigital, a mobile app, which provides non-banked clients access to transactional banking services with a digital prepaid debit and credit card, (ii) Santander Life, a digital banking service that rewards clients for positive credit and saving behavior through the accumulation of “Merits”, which results in reduced interest rates on loan products, (iii) Klare, a digital open platform being developed for selling insurances products, (iv) other digital processes for back office functions and (v) the opening and transformation of branches into the new WorkCafé format. As of December 31, 2020, the Bank had a total of 358 branches, 59 of which were in the WorkCafé format. The table below provides a breakdown of the Bank’s branch network during the periods indicated.

	Year ended December 31,				% Change
	2020		2019		2020/2019
Traditional branches		273		279		(2.2	%)
Middle-market centers		7		7		0.0	%
Santander Select		19		38		(50.0	%)
WorkCafés		59		53		11.3	%
Total branches		358		377		(5.0	%)
Total ATMs (including depositary ATMs)		1,199		1,088		10.2	%

Depreciation and amortization expense increased 3.1% in 2020 compared to 2019. This increase was mainly due to a higher depreciation of fixed assets in the period.

In 2020, impairment expenses totaled Ch$638 million, a 76.6% decrease compared to the previous year as there was a strong impairment of fixed assets as a result of the social unrest that affected Chile in October and November 2019.

Other operating expenses were Ch$77,806 million in 2020, an increase of 57.8% compared to 2019. This was mainly due to higher provisions for contingencies due to the effects of COVID-19. This increase in other operating expenses also reflects the increase in insurance premiums the Bank must pay to cover for vandalism and cyber fraud losses. See “Note 35—Other Operating Income and Expenses” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.

Table of Contents

The following table sets forth, for the periods indicated, our personnel salaries, administrative and depreciation and amortization expenses broken down by business segment. These amounts exclude impairment and other operating expenses.

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Retail banking		(596,464	)	(575,511	)		3.6	%
Middle-market		(91,132	)	(97,054	)		(6.1	%)
Corporate Investment banking		(72,715	)	(65,343	)		11.3	%
Other		(8,235	)	(11,953	)		(31.1	%)
Total personnel, administrative expenses, depreciation and amortization(1)		(768,546	)	(749,861	)		2.5	%

____________________

(1)

Excludes impairment and other operating expenses.

By business segment, the 2.5% increase in costs excluding impairment and other operating expenses in 2020 compared to the corresponding period in 2019 was mainly due to a rise in cost in the Retail and Corporate Investment Banking segments. This rise in costs was driven by the increase in administrative expenses explained above, which mainly impacted retail banking where the majority of the Bank’s employees work. Higher costs were also driven by higher IT investments across all business segments and the costs of branch transformations in Retail banking.

Income tax

	Year ended December 31,					% Change
		2020		2019			2020/2019
		(in millions of Ch$)
Net income before tax		695,263		794,688			(8.9	%)
Income tax expense		(142,533	)	(175,074	)		(18.6	%)
Effective tax rate(1)		20.5	%	22.0	%

____________________

(1)

The effective tax rate is the income tax expense divided by net income before tax.

Total income tax expense by the Bank in 2020 was Ch$142,533 million, an 18.6% decrease compared to 2019. Net income before tax decreased 8.9%. The Bank paid an effective tax rate of 20.5% in 2020 compared to 22.0% in 2019. The statutory corporate tax rate in Chile in both 2020 and 2019 was 27%. The Bank usually pays a lower effective tax rate than the statutory rate since in our Chilean tax books we must re-measure capital each year for the variation in CPI inflation and this produces a tax loss. In 2020 the Bank also booked a lower effective tax rate compared to 2019 due larger gains from the sale of Chilean Treasury instruments that are not subject to income tax. See “Note 16—Current and Deferred Taxes” of the Audited Consolidated Financial Statements for more detail on income tax expense.

B. Liquidity and Capital Resources

Sources of Liquidity

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

The following table sets forth our contractual obligations and commercial commitments by time remaining to maturity. As of the date of the filing of this Annual Report, the Bank does not have significant purchase obligations.

Table of Contents

As of December 31, 2020, the scheduled maturities of our contractual obligations and of other commercial commitments, including accrued interest, were as follows:

	Demand		Up to 1 month		Between 1 and 3 months		Between 3 and 12 months		Subtotal up to 1 year		Between 1 and 3 years		Between 3 and 5 years		More than 5 years		Subtotal after 1 year		Total
As of December 31, 2020	(in millions of Ch$)
Obligations under repurchase agreements		-		969,808		-		-		969,808		-		-		-		-		969,808
Checking accounts, time deposits and other time liabilities(1)		15,082,442		5,843,682		2,912,985		1,434,246		25,273,355		163,053		44,384		23,523		230,960		25,504,315
Financial derivatives contracts		-		386,690		445,376		931,358		1,763,424		1,552,482		1,708,509		3,994,245		7,255,236		9,018,660
Interbank borrowings		16,832		238,414		222,992		855,434		1,333,672		1,140,426		3,854,501		-		4,994,927		6,328,599
Issue debt instruments		-		344,732		447,117		343,155		1,135,005		1,813,341		2,499,560		2,756,271		7,069,172		8,204,177
Obligations for lease agreements		-		-		-		25,526		25,526		44,933		35,679		43,447		124,059		149,585
Other financial liabilities(2)		144,478		38,148		1,375		27		184,028		89		105		96		290		184,318
Subtotal		15,243,752		7,821,474		4,029,845		3,589,746		30,684,818		4,714,324		8,142,738		6,817,582		19,674,644		50,359,462
Contractual interest payments(3)		86,195		18,938		72,710		242,462		420,305		143,531		137,902		25,676		307,109		727,413
Total		15,329,947		7,840,412		4,102,555		3,832,209		31,105,122		4,857,855		8,280,640		6,843,258		19,981,753		51,086,875

____________________

(1)

Includes demand deposits and other demand liabilities, cash items in process of being cleared and time deposits and other time liabilities.

(2)

Mainly includes amounts owed to credit card processors and to the Chilean Production Development Corporation (Corporación de Fomento de la Producción de Chile), the state development agency.

(3)

The table above includes future cash interest payments. For variable rate obligations, we assume the same rate as the last rate known. Various of the payment obligations in the table above are variable debt instruments, since they are denominated in UF, for which we have estimated a long-term inflation rate equal to 3%, which is at the center of the Central Bank’s long-term inflation target. No exclusions requiring further explanation have been made in this table.

Obligations for lease agreements

Certain bank premises and equipment are leased and the scheduled maturities of obligations for lease agreements as of December 31, 2020 were as follows:

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		25,526
Due after 1 year but within 2 years		23,461
Due after 2 years but within 3 years		21,472
Due after 3 years but within 4 years		19,343
Due after 4 years but within 5 years		16,336
Due after 5 years		43,447
Total		149,585

Other Commercial Commitments

As of December 31, 2020, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

	Up to 1 month		Between 1 and 3 months		Between 3 and 12 months		Between 1 and 5 years		More than 5 years		Total
Other Commercial Commitments	(in millions of Ch$)
Performance guarantee		114,653		181,399		437,835		303,165		46,971		6,620
Foreign letters of credit confirmed		18,247		48,056		16,163		313		—		—
Letters of credit issued		42,089		83,764		36,201		3,065		—		—
Personal guarantees		33,588		29,958		367,164		10,798		—		—
Total other commercial commitments		208,577		343,177		857,363		317,341		46,971		6,620

Table of Contents

Risk-Weighted Assets and Regulatory Capital

We currently have regulatory capital in excess of the minimum requirement under the current Chilean regulations. According to the General Banking Law, a bank is required to have regulatory capital of at least 8.0% of its risk-weighted assets, net of required loan loss allowances, and paid-in capital and reserves (i.e., core capital) of at least 3.0% of its total assets, net of required loan loss allowances. For these purposes, the regulatory capital of a bank is the sum of: (1) the bank’s core capital; (2) subordinated bonds issued by the bank valued at their placement price for an amount up to 50.0% of its core capital, provided that the value of the bonds is required to be decreased by 20.0% for each year that elapses during the period commencing six years prior to their maturity; and (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk-weighted assets. Santander-Chile does not have goodwill, but if it did, this value would be required to be deducted from regulatory capital. When calculating risk weighted assets, we also include off-balance sheet contingent loans. The merger of Old Santander Chile and Santiago on August 1, 2002 required a special regulatory pre-approval of the SBIF (predecessor of the FMC), which was granted on May 16, 2002. The resolution granting this pre-approval imposed a regulatory capital to risk weighted assets ratio of 12.0% for the merged bank. This requirement was reduced to 11.0% by the SBIF effective January 1, 2005. For purposes of weighing the risk of a bank’s assets, the General Banking Law considers five different categories of assets, based on the nature of the issuer, the availability of funds, and the nature of the assets and the existence of collateral securing such assets.

The following table sets forth our consolidated and risk-weighted assets and regulatory capital as of December 31, 2020 and 2019 as required by Chilean regulation.

	Consolidated assets as of				Risk-weighted assets(1)
	December 31, 2020		December 31, 2019		December 31, 2020		December 31, 2019
		(Ch$ million)
Asset Balance (Net of allowances)
Cash and deposits in bank		2,803,228		3,554,520		—		—
Unsettled transactions		452,963		355,062		173,466		112,948
Trading investments		133,718		270,204		14,655		26,825
Investments under resale agreements		—		—		—		—
Financial derivative contracts(2)		2,742,701		1,355,786		1,602,495		964,623
Interbank loans		18,920		14,833		15,250		14,833
Loans and accounts receivables from customers		33,413,429		31,823,735		26,651,340		27,316,050
Available-for-sale investments		7,162,542		4,010,272		618,908		258,958
Investments in other companies		10,770		10,467		10,770		10,467
Intangibles assets		82,537		73,389		82,537		73,389
Property, plant and equipment		187,240		197,833		187,240		197,833
		201,611		210,500		201,611		210,500
Current taxes		—		11,648		—		1,165
Deferred taxes		538,118		462,867		53,812		46,287
Other assets		1,236,376		1,434,308		1,233,016		1,421,361
Off-balance sheet assets
Contingent loans		4,378,214		4,938,194		2,615,644		2,823,713
Total		53,362,428		48,723,618		33,460,744		33,478,952

					Ratio
	December 31, 2020		December 31, 2019		December 31, 2020		December 31, 2019
	(Ch$ million)				(in %)
Core capital(3)		3,567,916		3,390,823		6.69		6.96
Regulatory capital(4)		5,134,843		4,304,401		15.37		12.86

____________________

(1)

As required by local regulations.

(2)

Derivatives are shown as required by Chapter 12-1 RAN of Chilean Bank GAAP guidelines

(3)

As a percentage of total assets.

(4)

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

Table of Contents

Financial Investments

As of January 1, 2018 the Bank adopted IFRS 9 as follows:

On initial recognition, financial assets and financial liabilities are measured at the transaction price, i.e. the fair value of the consideration given or received (IFRS 13). In the case of financial instruments not at fair value through profit or loss, transaction costs are directly attributable to the acquisition or issue of the financial asset or financial liability. After initial recognition, an entity shall measure a financial liability at amortized cost and an entity shall measure a financial asset at:

(a) Amortized Cost

Financial assets that are held in a business model to collect the contractual cash flows and contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at amortized cost.

The effective interest method is used in the calculation of the amortized cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period. The effective interest rate (“EIR”) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability.

(b) Fair Value through Other Comprehensive Income (FVOCI)

Financial assets that are debt instruments held in a business model that is achieved by both collecting contractual cash flow and selling, and that contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at FVOCI. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognized in other comprehensive income, until the assets are sold. Upon disposal, the cumulative gain and losses in OCI are recognized in the income statement.

Financial assets that do not contain contractual terms that give rise on specified dates to cash flows that are SPPI, or if the financial assets, or if the financial asset is not held in a business model that is either (i) a business model to collect the contractual cash flows or (ii) a business model that is achieved by both collecting contractual cash flows and selling.

Financial assets held for trading are recognized at fair value through profit or loss, likewise derivatives contracts for trading purposes.

(d) Equity Instruments

For certain equity instruments, the Bank may make an irrevocable election to present subsequent changes in the fair value of the instrument in other comprehensive income, except for dividend income which is recognized in profit or loss. Gains or losses on derecognition of these equity instruments are not transferred to profit or loss.

Table of Contents

Prior to January 1, 2018 the Bank classified financial instruments in accordance with IAS 39 as follows:

Financial assets are classified into the following specified categories: trading investments at fair value through profit or loss (FVTPL), ‘held to maturity investments’, ‘available for sale investments (AFS)’ and ‘loans and accounts receivable from customers’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular purchases or sales of financial assets are recognized and derecognized on a trade basis. Regular way purchases or sales of financial assets require delivery of the asset within the time frame established by regulation or convention in the marketplace.

Effective Interest Method

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

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at fair value through profit or loss.

Financial Assets at FVTPL — Trading investments

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling it in the near term; or

on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or

it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘net income (expense) from financial operations’ line item.

Held to Maturity Investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment.

Table of Contents

Available-for-Sale Investments (AFS Investments)

AFS investments are non-derivatives that are either designated as AFS or are not classified as (a) loans and accounts receivable from customers, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (trading investments).

Financial instruments held by the Bank that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Bank also has investments in financial instruments that are not traded in an active market but that are also classified as AFS investments and stated at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale investments are recognized in other comprehensive income and accumulated under the heading of Valuation Adjustment. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

Dividends on AFS equity instruments are recognized in profit or loss when the Bank’s right to receive the dividends is established.

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and converted to Chilean pesos using the market rate. The foreign exchange gains and losses that are recognized in profit or loss are determined based on the amortized cost of the monetary asset.

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.

Detail regarding the financial investments discussed above is presented below.

a) Financial Assets Held For Trading / Trading Investments

	As of December 31,
	2020		2019		2018
	(in millions of Ch$)
Central Bank and Government Securities
Chilean Central Bank bonds		419		1,952		22,947
Other Chilean Central Bank and government securities		—		268,252		48,211
Subtotal		131,827		270,204		71,158
Other Chilean Securities
Chilean corporate bonds		1,472		—		—
Subtotal		1,472		—		—
Foreign securities
Other foreign financial instruments		—		—		5,883
Subtotal		—		—		5,883
Investments in mutual funds		—		—		—
Subtotal		—		—		—
Total		133,718		270,204		77,041

b) Debt instruments at fair value through other comprehensive income (FVOCI) - under IFRS 9

As of December 31, 2020, 2019 and 2018, the debt instruments at fair value through other comprehensive income (FVOCI) in accordance with IFRS 9 are as follows:

Table of Contents

	As of December 31,
	2020		2019		2018
	(in millions of Ch$)
Chilean central bank and government securities
Chilean central bank bonds		—		272,802		657,096
Chilean central bank notes		1,008,450		1,186,724		56,719
Other Chilean central bank and government securities		5,344,910		1,908,031		1,207,221
Subtotal		6,353,360		3,367,557		1,921,036
of which sold under repurchase agreement		969,409		379,294		16,109
Other Chilean securities
Time deposits in Chilean financial institutions		299		398		2,693
Mortgage finance bonds of Chilean financial institutions		14,022		16,748		19,227
Other instruments issued in the country		2,410		2,410		2,907
Subtotal		16,731		19,556		24,827
of which sold under repurchase agreement		399		131		128
Foreign financial securities
Foreign Central Banks and Government securities		269,803		197,685		280,622
Other foreign financial securities		522,648		425,474		167,838
Subtotal		792,451		623,159		448,460
of which sold under repurchase agreement		—		—		—
Total		7,162,542		4,010,272		2,394,323

Analysis of investments

The following table sets forth an analysis of our investments as of December 31, 2020 by remaining maturity and the weighted average nominal rates of such investments.

	Within one year		Weighted average Nominal Rate		After one year but within five years		Weighted average Nominal Rate		After five years but within ten years		Weighted average Nominal Rate		After ten years		Weighted average Nominal Rate		Total		Weighted average Nominal Rate
As of December 31, 2020	(in millions of Ch$, except rates)
Financial Assets Held For Trading / Trading Investments
Central Bank and Government Securities
Central Bank bonds		349		0.33		70		0.83		—		—		—		—		419		0.41
Central Bank notes		—		—		—		—		—		—		—		—		—		—
Central Bank and government securities		3,460		1.32		17,348		1.25		105,813		1.88		5,206		3.20		131,827		1.84
Subtotal		3,809		0.00		17,418		0.00		105,813		0.00		5,206		0.00		132,246		0.00
Other Chilean Securities		—		—		—		—		—		—		—		—		—		—
Time deposits in Chilean financial institutions		—		—		—		—		—		—		—		—		—		—
Mortgage bonds of Chilean financial institutions		—		—		—		—		—		—		—		—		—		—
Chilean financial institutions bonds		—		—		—		—		—		—		—		—		—		—
Chilean corporate bonds		—		—		1,472		3.50		—		—		—		—		1,472		3.50
Other Chilean securities		—		—		—		—		—		—		—		—		—		—
Subtotal		—		—		1,472		—		—		—		—		—		1,472		—
Foreign Financial Securities		—		—		—		—		—		—		—		—		—		—
Other foreign financial instruments		—		—		—		—		—		—		—		—		—		—

Table of Contents

	Within one year		Weighted average Nominal Rate		After one year but within five years		Weighted average Nominal Rate		After five years but within ten years		Weighted average Nominal Rate		After ten years		Weighted average Nominal Rate		Total		Weighted average Nominal Rate
As of December 31, 2020	(in millions of Ch$, except rates)
Subtotal	—		—		—		—		—		—		—		—		—		—
Investment in mutual funds		—		—		—		—		—		—		—		—		—		—
Mutual funds administered by related parties		—		0.03		—		—		—		—		—		—		—		—
Subtotal		—		—		—		—		—		—		—		—		—		—
Total		—		—		—		—		—		—		—		—		—		—

Debt instruments at FVOCI
Central Bank bonds		—		—		—		—		—		—		—		—		—		—
Central Bank notes		1,008,450		0.02		—		—		—		—		—		—		1,008,450		0.02
Central Bank and government securities		92,295		0.43		2,332,326		1.18		2,920,289		1.67		—		—		5,344,910		1.44
Subtotal		1,100,744		—		2,332,326		—		2,920,289		—		—		—		6,353,360		—
Other Chilean Securities		—		—		—		—		—		—		—		—		—		—
Time deposits in Chilean financial institutions		299		0.24		—		—		—		—		—		—		299		0.24
Mortgage bonds of Chilean financial institutions		20		3.98		4,440		3.72		7,204		3.49		2,359		3.91		14,022		3.63
Chilean financial institutions bonds		—		—		—		—		—		—		—		—		—		—
Chilean corporate bonds		—		—		—		—		—		—		—		—		—		—
Other Chilean securities		193		0.05		—		—		—		—		2,217		—		2,410		0.05
Subtotal		512		—		4,440		—		7,204		—		4,576		—		16,731		—
Other financial securities		—		—		—		—		—		—		—		—		—		—
Central Bank and Government Foreign Securities		—		—		—		—		269,803		—		—		—		269,803		—
Other Foreign financial securities		94,122		0.20		248,001		2.45		180,525		2.60		—		—		522,648		2.27
Subtotal		94,122		—		248,001		—		450,328		—		—		—		792,451		—
Total		1,195,378		—		2,584,767		—		3,377,820		—		4,576		—		7,162,542		—

Working Capital

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

Liquidity Management

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

The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO now uses as its liquidity portfolio those defined by the FMC and the Chilean Central Bank, which are in line with those established in BIS III. As of December 31, 2020, the breakdown of the Bank’s liquid assets by levels was the following:

Table of Contents

	December 31, 2020		December 31, 2019
		(Ch$ million)		(Ch$ million)
Balance as of:
Cash and cash equivalent		988,320		1,305,534
Level 1 liquid assets (1)		2,490,810		2,452,599
Level 2 liquid assets (2)		12,681		15,105
Total liquid assets		3,491,811		3,773,238

____________________

(1)

Includes instruments issued by the Central Bank of Chile or other central banks with a AAA rating, instruments issued by the Chilean government or other sovereign with a AAA rating and instruments issued by development banks with a AAA rating. Assets encumbered through repurchase agreements are deducted from the liquidity portfolio including those left as collateral under the FCIC funding program with the Central Bank of Chile.

(2)

Includes instruments issued by governments, central banks and development banks of foreign countries with a risk rating of A- to AA+ and mortgage bonds issued by Chilean banks that are acceptable at the Chilean Central Bank’s repo window.

	December 31, 2020		December 31, 2019
		(Ch$ million)		(Ch$ million)
Average balance as of:
Cash and cash equivalent		1,161,367		1,618,667
Level 1 liquid assets (1)		3,164,890		2,674,995
Level 2 liquid assets (2)		13,311		16,927
Total liquid assets		4,339,568		4,309,589

____________________

(1)

(2)

Our general policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments of other liabilities at maturity, extend loans and meet our own working capital needs. Our minimum amount of liquidity is determined by the statutory reserve requirements of the Central Bank. Deposits are subject to a statutory reserve requirement of 9.0% for demand deposits and 3.6% for Chilean peso-, UF- and foreign currency denominated time deposits with a term of less than a year. See “Item 4. Information on the Company—B. Business Overview—Competition—Regulation and Supervision.” The Central Bank has statutory authority to increase these percentages to up to 40.0% for demand deposits and up to 20.0% for time deposits. In addition, a 100.0% special reserve (reserva técnica) applies to demand deposits, deposits in checking accounts, other demand deposits received or obligations payable on sight and incurred in the ordinary course of business, other than deposits unconditionally payable immediately. This special reserve requirement applies to the amount by which the total of such deposits exceeds 2.5 times the amount of a bank’s regulatory capital. Interbank loans are deemed to have a maturity of more than 30 days, even if payable within the following 10 days.

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

The sum of the liabilities with a maturity of less than 30 days may not exceed the sum of the assets with a maturity of less than 30 days by an amount greater than our Shareholders’ equity. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2020 the percentage of (i) our liabilities with a maturity of less than 30 days in excess of our assets with a maturity of less than 30 days to (ii) our capital and reserves was 57%, thus resulting in our compliance.

The sum of the liabilities in foreign currency with a maturity of less than 30 days may not exceed the sum of the assets in foreign currency with a maturity of less than 30 days by more than an amount greater than our Shareholders’ equity. At December 31, 2020 the percentage of (i) our liabilities with a maturity of less than 30 days in foreign currency in excess of our assets in foreign currency with a maturity of less than 30 days to (ii) our capital and reserves was 11%, as the Bank had more foreign currency assets than liabilities for the calculation of this limit.

Table of Contents

The sum of the liabilities with a maturity of less than 90 days may not exceed the sum of the assets with a maturity of less than 90 days by more than 2 times our Shareholders’ equity. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2020 the percentage of (i) our liabilities with a maturity of less than 90 days in excess of our assets with a maturity of less than 90 days to (ii) our capital and reserves was 45%, thus resulting in our compliance.

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

Cash Flow

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

	Year ended December 31,
	2020			2019		2018
	Millions of Ch$
Net cash (used in) provided by operating activities		(819,993	)		1,855,586		1,022,492

Our operating activities used cash for Ch$819,993 million in 2020, mainly due to higher redemption of senior bonds and payments of interest and decrease of obligations with foreign banks as the Financial Management division was more active prepaying bonds as the Bank had access to cheaper funding through the Central Bank. There was also a decrease in time deposits and liabilities, which was partially offset by an increase of debits in customers checking accounts.

Our operating activities generated cash of Ch$1,855,586 million in 2019, mainly due to the rise in debits in customer checking accounts and the issuance of senior bonds. This was compensated by the growth of loans and financial investments.

	Year ended December 31,
	2020			2019			2018
	Millions of Ch$
Net cash (used in) provided by investment activities		(70,105	)		(141,790	)		(91,565	)

In 2020, the Bank’s investment activities consumed cash in an amount of Ch$70,105 million mainly due to purchases of property, plant and equipment, as well as intangible assets. This was partly compensated by the sale of some fixed assets.

In 2019, the Bank’s investment activities consumed cash in an amount of Ch$141,790 million mainly due to the purchase of Santander Consumer Finance S.A.

	Year ended December 31,
	2020		2019			2018
	Millions of Ch$
Net cash provided by (used in) financing activities		102,090		(385,286	)		(423,611	)

In 2020, net cash provided in financing activities was Ch$102,090 million due to the placement of subordinated bonds, which amounted to a cash increase of Ch$475,390 million. This was partially offset by the annual dividend payment. In 2019 and 2018, the net cash used in financing activities can be explained by the Bank’s annual dividend payment each year.

100

Table of Contents

Deposits and Other Borrowings

The following table sets forth our average balance of liabilities for the years ended December 31, 2020, 2019 and 2018, in each case together with the related average nominal interest rates paid thereon.

	2020								2019								2018
	Average Balance		% of Total Average Liabilities			Average Nominal Rate			Average Balance		% of Total Average Liabilities			Average Nominal Rate			Average Balance		% of Total Average Liabilities			Average Nominal Rate
	(in millions of Ch$, except percentages)
Interest-bearing liabilities
Savings accounts		138,671		0.2	%		2.5	%		120,896		0.3	%		2.5	%		117,885		0.3	%		2.7	%
Time deposits		14,248,478		25.5	%		1.2	%		13,779,534		31.9	%		2.6	%		13,154,916		35.3	%		2.8	%
Central Bank borrowings		2,881,600		5.2	%		0.0	%		-		0.0	%		0.0	%		4		0.0	%		6.0	%
Repurchase agreements		243,280		0.4	%		0.8	%		414,951		1.0	%		2.5	%		291,913		0.8	%		2.3	%
Mortgage finance bonds		14,580		0.0	%		7.6	%		20,923		0.0	%		7.7	%		28,685		0.1	%		8.0	%
Other interest bearing liabilities		11,202,635		20.1	%		4.2	%		11,261,529		26.1	%		4.8	%		9,401,475		25.3	%		4.8	%
Subtotal interest-bearing liabilities		28,729,244		51.5	%		2.2	%		25,597,833		59.2	%		3.5	%		22,994,878		61.8	%		3.6	%
Non-interest bearing liabilities
Non-interest bearing deposits		10,403,347		18.6	%					7,466,991		17.3	%					6,763,546		18.2	%
Derivatives		9,793,162		17.5	%					4,165,330		9.6	%					2,020,857		5.4	%
Other non-interest bearing liabilities		3,171,540		5.7	%					2,549,130		5.9	%					2,170,906		5.8	%
Shareholders’ equity		3,734,243		6.7	%					3,450,729		8.0	%					3,263,155		8.8	%
Subtotal non-interest bearing liabilities		27,102,291		48.5	%					17,632,180		40.8	%					14,218,464		38.2	%
Total liabilities		55,831,535		100.0	%					43,230,013		100.0	%					37,213,342		100.0	%

Our most important source of funding is our deposits. Average time deposits plus non-interest bearing demand deposits represented 44.2% of our average total liabilities and shareholders’ equity in 2020. Our current funding strategy is to continue to utilize all sources of funding in accordance with their costs, their availability and our general asset and liability management strategy. Special emphasis is being placed on lengthening the maturities of funding with institutional clients, diversifying our bond holder base and broadening our core deposit funding. We believe that broadening our deposit base by increasing the number of account holders has created a more stable funding source.

Composition of Deposits

The following table sets forth the composition of our deposits and similar commitments at December 31, 2020, 2019, 2018, 2017 and 2016.

101

Table of Contents

	2020		2019		2018		2017		2016
	(in millions of Ch$)
Demand deposits and other demand obligations
Current accounts		11,342,648		8,093,108		6,794,132		6,272,656		6,144,688
Other deposits and demand accounts		1,583,183		741,103		709,711		590,221		564,966
Other demand obligations		1,635,062		1,463,221		1,237,574		905,289		829,661
Subtotals		14,560,893		10,297,432		8,741,417		7,768,166		7,539,315
Time deposits and other time deposits
Time deposits		10,421,872		13,064,932		12,944,846		11,792,466		13,031,319
Time saving accounts		153,330		123,787		118,587		116,179		116,451
Other time deposits		6,589		4,098		4,386		5,300		3,939
Subtotals		10,581,791		13,192,817		13,067,819		11,913,945		13,151,709
Total deposits and other commitments		25,142,684		23,490,249		21,809,236		19,682,111		20,691,024

Maturity of Interest Bearing Deposits

The following table sets forth information regarding the currency and maturity of our interest bearing deposits as of December 31, 2020, expressed in percentages of our total deposits in each currency category. UF-denominated deposits are similar to peso-denominated deposits in all respects, except that the principal is readjusted periodically based on variations in the Chilean consumer price index.

	Ch$			UF			Currencies			Total
Demand deposits		0.04	%		0.51	%		0.02	%		0.06	%
Savings accounts		0.03	%		30.63	%		0.00	%		1.45	%
Time deposits:
Maturing within 3 months		80.88	%		20.14	%		93.46	%		80.03	%
Maturing after 3 but within 6 months		14.79	%		1.74	%		5.54	%		12.73	%
Maturing after 6 but within 12 months		3.80	%		7.84	%		0.97	%		3.55	%
Maturing after 12 months		0.45	%		39.15	%		0.02	%		2.18	%
Total time deposits		99.93	%		68.86	%		99.98	%		98.49	%
Total deposits		100.00	%		100.00	%		100.00	%		100.00	%

The following table sets forth information regarding the maturity of our outstanding time as of December 31, 2020.

	Ch$		UF		Foreign Currencies		Total
			(in millions of Ch$)
Time deposits:
Maturing within 3 months		6,820,331		99,144		1,548,819		8,468,294
Maturing after 3 but within 6 months		1,247,178		8,549		91,729		1,347,456
Maturing after 6 but within 12 months		320,437		38,588		16,135		375,160
Maturing after 12 months		37,986		192,725		251		230,962
Total time deposits		8,425,932		339,006		1,656,934		10,421,872

Short-term Borrowings

The principal categories of our short-term borrowings are repurchase agreements and interbank borrowings. The table below presents the amounts outstanding at each year-end indicated and the weighted-average nominal interest rate for each such year by type of short-term borrowing.

102

Table of Contents

	2020					2019					2018
	Balance		Weighted- Average Nominal Interest Rate			Balance		Weighted -Average Nominal Interest Rate			Balance		Weighted- Average Nominal Interest Rate
			(in millions of Ch$, except percentages)
Obligations arising from repurchase agreements		969,808		0.9	%		380,055		2.4	%		48,545		2.5	%
Obligations with the Central Bank		4,959,260		0.5	%		—		—			—		—
Loans from domestic financial institutions		217,102		1.0	%		143,865		—			—		—
Foreign obligations		1,116,570		1.4	%		1,985,773		2.8	%		1,648,955		2.5	%
Total short-term borrowings		7,262,740		0.7	%		2,509,693		2.6	%		1,697,500		2.5	%

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

	2020					2019					2018
	Average Balance		Average Nominal Interest Rate			Average Balance		Average Nominal Interest Rate			Average Balance		Average Nominal Interest Rate
	(in millions of Ch$, except percentages)
Obligations arising from repurchase agreements		243,280		0.8	%		414,951		2.5	%		291,913		2.3	%
Obligations with the Central Bank		2,881,600		0.0	%		—		—			4		6.0	%
Loans from domestic financial institutions		120,002		0.0	%		270		—			80		—
Foreign obligations		1,860,825		5.2	%		1,903,862		2.3	%		1,462,975		2.3	%
Total short-term borrowings		5,105,707		1.9	%		2,319,083		2.4	%		1,754,972		2.3	%

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

	Maximum 2020 Month-End Balance		Maximum 2019 Month-End Balance		Maximum 2018 Month-End Balance
	(in millions of Ch$)
Obligations arising from repurchase agreements		969,808		527,836		345,927
Obligations with the Central Bank		4,974,125		-		5
Loans from domestic financial institutions		217,102		271,620		164,606
Foreign obligations		2,953,037		3,025,476		1,918,519
Total short-term borrowings		9,114,072		3,824,932		2,429,057

Total Borrowings

	As of December 31, 2020
	Long-term		Short-term		Total
	(in millions of Ch$)
Central Bank credit lines for renegotiations of loans (a)		4,959,260		—		4,959,260
Obligations under repurchase agreements		—		969,808		969,808
Mortgage finance bonds (b)		78,870		5,465		84,335
Senior bonds (c)		5,625,431		1,124,558		6,749,989
Mortgage bonds(d)		5,137		84,787		89,924
Subordinated bonds(e)		1,357,539		—		1,357,539
Borrowings from domestic financial institutions		217,102		—		217,102
Foreign borrowings(f)		35,667		1,116,570		1,152,237
Other obligations(g)		290		184,028		184,318
Total borrowings		7,320,036		3,485,216		10,805,252

103

Table of Contents

	As of December 31, 2019
	Long-term		Short-term		Total
	(in millions of Ch$)
Central Bank credit lines for renegotiations of loans (a)	—		—		—
Obligations under repurchase agreements		—		380,055		380,055
Mortgage finance bonds (b)		12,489		6,013		18,502
Senior bonds (c)		6,496,011		2,078,202		8,574,213
Mortgage bonds(d)		84,787		5,137		89,924
Subordinated bonds(e)		818,084		—		818,084
Borrowings from domestic financial institutions		127,748		158,855		286,603
Foreign borrowings(f)		262,425		1,970,790		2,233,215
Other obligations(g)		318		226,040		226,358
Total borrowings		7,801,862		4,825,092		12,626,954

	As of December 31, 2018
	Long-term		Short-term		Total
	(in millions of Ch$)
Central Bank credit lines for renegotiations of loans (a)	—		—		—
Obligations under repurchase agreements		—		48,545		48,545
Mortgage finance bonds (b)		18,660		6,830		25,490
Senior bonds (c)		6,353,967		844,898		7,198,865
Mortgage bonds(d)		90,088		4,833		94,921
Subordinated bonds(e)		795,956		1		795,957
Borrowings from domestic financial institutions		—		—		—
Foreign borrowings(f)		139,671		1,648,955		1,788,626
Other obligations(g)		9,529		205,871		215,400
Total borrowings		7,407,871		2,759,933		10,167,804

(a) Central Bank credit lines for renegotiations of loans

In response to the COVID-19 pandemic, the Chilean Central Bank has made two lines of credit available to banks to reinforce their liquidity and to fund loans for SMEs with government guarantees. These lines of credit bear interest at the Central Bank’s monetary policy rate (MPR), which was 0.5% as of December 31, 2020.

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		-
Due after 1 year but within 2 years		1.104.759
Due after 2 years but within 3 years		-
Due after 3 years but within 4 years		3.854.501
Due after 4 years but within 5 years		-
Due after 5 years		-
Central Bank credit lines for renegotiations of loans		4.959.260

104

Table of Contents

(b) 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 pay a yearly interest rate.

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		5,465
Due after 1 year but within 2 years		8,773
Due after 2 years but within 3 years		9,056
Due after 3 years but within 4 years		9,348
Due after 4 years but within 5 years		9,649
Due after 5 years		42,044
Total mortgage finance bonds		84,335

The following table sets forth, at the dates indicated, our issued senior bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund assets with similar durations.

	As of December 31,
	2020		2019		2018
	(in millions of Ch$)
Senior Bonds in UF		4,017,708		4,814,604		4,095,741
Senior Bonds in U.S.$		1,263,714		1,649,238		1,094,267
Senior Bonds in CHF		466,738		499,485		386,979
Senior Bonds in Ch$		639,489		1,242,633		1,291,900
Current bonds in AUD		125,781		124,748		24,954
Santander bonds in JPY		68,093		77,797		191,598
Senior bonds in EUR		168,466		165,708		113,426
Total senior bonds		6,749,989		8,574,213		7,198,865

The maturities of these bonds are as follows:

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		1,124,558
Due after 1 year but within 2 years		1,047,241
Due after 2 years but within 3 years		742,081
Due after 3 years but within 4 years		1,228,524
Due after 4 years but within 5 years		1,250,897
Due after 5 years		1,356,688
Total bonds		6,749,989

In 2020, the Bank issued bonds for UF 1,996,000 and USD 742,500,000 as detailed as follows:

Series	Currency	Amount	Term	Issuance rate	Series approval date	Series maximum amount	Maturity date
W1	UF	1,996,000	5 yr. 3 months	1.55%	01-12-2019	2,000,000	01-06-2020
Total UF		1,996,000				2,000,000
USD Bond	USD	742,500,000	5 yr.	2.70%	07-01-2020	750,000,000	07-01-2025
Total USD		742,500,000				750,000,000

105

Table of Contents

(d) Mortgage bonds

These bonds are used to finance mortgage loans with certain characteristics such as loan-to-value ratios below 80.0% and a debt servicing ratio of the client lower than 20.0%. All outstanding mortgage bonds are UF denominated.

The maturities of our mortgage bonds are as follows:

	As of December 31,
	2020		2019
	(in millions of Ch$)
Due within 1 year		5,465		5,137
Due after 1 year but within 2 years		8,773		8,248
Due after 2 year but within 3 years		9,056		8,514
Due after 3 year but within 4 years		9,348		8,788
Due after 4 year but within 5 years		9,649		9,072
Due after 5 years		42,044		50,165
Total mortgage bonds		84,335		89,924

During 2020, the Bank did not place any mortgage bonds.

(e) Subordinated bonds

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

	As of December 31,
	2020		2019		2018
	(in millions of Ch$)
Subordinated bonds linked to the Ch$		202,634		—		1
Subordinated bonds linked to the U.S.$		—		—		—
Subordinated bonds linked to the UF		1,154,905		818,084		795,956
Total subordinated bonds		1,357,539		818,084		795,957

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

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		—
Due after 1 year but within 2 years		—
Due after 2 years but within 3 years		—
Due after 3 years but within 4 years		—
Due after 4 years but within 5 years		—
Due after 5 years		1,357,539
Total subordinated bonds		1,357,539

During 2020, the Bank issued the following subordinated bonds.

Series	Currency	Amount	Term	Issuance rate	Series approval date	Series maximum amount	Maturity date
USD Bond	USD	200,000,000	10 yr.	3.79%	21-01-220	200,000,000	21-01-2030
Total USD		200,000,000				200,000,000
USTDH20914	UF	3,000,000	14 yr. 5 months	3.00%	01-09-2014	3,000,000	01-09-2034
USTDH30914	UF	3,000,000	19 yr. 5 months	3.15%	01-09-2014	3,000,000	01-09-2039
USTDW20320	UF	5,000,000	15 yr. 3 months	3.50%	01-03-2020	5,000,000	01-09-2035
Total UF		11,000,000				11,000,000

106

Table of Contents

(f) Foreign borrowings

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

	As of December 31, 2020
		(in millions of Ch$)
Due within 1 year		1,116,570
Due after 1 year but within 2 years		35,667
Due after 2 years but within 3 years		—
Due after 3 years but within 4 years		—
Due after 5 years		—
Total loans from foreign financial institutions		1,152,237

(g) Other obligations

Other obligations are summarized as follows:

	As of December 31, 2020
		Ch$ millions
Long term obligations
Due after 1 years but within 2 years		42
Due after 2 years but within 3 years		47
Due after 3 years but within 4 years		50
Due after 4 years but within 5 years		55
Due after 5 years		96
Long-term financial obligations subtotals		290
Short term obligations:
Amounts due to credit card operators		134,790
Acceptance of letters of credit		1,460
Other long-term financial obligations, short-term portion		47,778
Short-term financial obligations subtotals		184,028
Other financial obligations totals		184,318

Other Off-Balance Sheet Arrangements and Commitments

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

107

Table of Contents

The following table presents the Bank’s outstanding contingent loans as of December 31, 2020, 2019 and 2018:

	As of December 31,
	2020		2019		2018
	(in millions of Ch$)
Letters of credit issued		165,119		140,572		223,420
Foreign letters of credit confirmed		82,779		70,192		57,038
Performance guarantee		1,090,643		1,929,894		1,954,205
Personal guarantee		441,508		451,950		133,623
Total contingent liabilities		1,780,049		2,592,608		2,368,286
Lines of credit with immediate availability		8,391,414		8,732,422		8,997,650
Other irrevocable obligation		406,234		485,991		327,297
Total loan commitments		10,577,697		9,218,413		9,324,947
Totals		8,797,648		11,811,021		11,693,233

Asset and Liability Management

Please refer to “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for information regarding our policies with respect to asset and liability management.

Capital Expenditures

The following table reflects capital expenditures in each of the three years ended December 31, 2020, 2019 and 2018:

	Year Ended December 31,
	2020		2019		2018
	(in millions of Ch$)
Land and Buildings		5,720		10,065		30,396
Machinery, Systems and Equipment		25,237		33,302		27,697
Furniture, Vehicles, Other(1)		7,586		7,602		8,646
Total		38,543		50,969		66,739

____________________

(1)

Includes assets ceded under operating leases.

The decrease in capital expenditures in 2020 was due to lower fixed asset investments during the pandemic. We continued to invest in the digital transformation of the front and back offices, and new digital products and branch security measures.

C. Selected Statistical Information

The following information is included for analytical purposes and should be read in conjunction with our Audited Consolidated Financial Statements, as well as the discussion in this “Item 5. Operating and Financial Review and Prospects.” The UF is linked to, and is adjusted daily to reflect changes in, the previous month’s Chilean consumer price index. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation.”

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

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

108

Table of Contents

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

Foreign exchange gains or losses on foreign currency-denominated assets and liabilities are not included in interest income or expense. When a financial asset becomes credit-impaired and is, therefore, regarded as “Stage 3”, the Bank suspends the interest income recognition in the income statement. Similarly, trading and mark-to-market gains or losses on investments are not included in interest income or expense. Interest is not recognized on non-performing loans. Non-performing loans that are past-due for 90 days or less have been included in each of the various categories of loans, and therefore affect the various averages. Non-performing loans consist of loans as to which either principal or interest is past-due (i.e., non-accrual loans) and restructured loans earning no interest.

Included in interbank deposits are checking accounts maintained in the Central Bank and foreign banks. Such assets have a distorting effect on the average interest rate earned on total interest-earning assets because currently balances maintained in Chilean peso amounts do not earn interest, and the only balances held in a foreign currency that earn interest are those maintained in U.S. dollars, but those only earn interest on the amounts that are legally required to be held for liquidity purposes. Additionally, this account includes interest earned by overnight investments. Consequently, the average interest earned on such assets is comparatively low. We maintain these deposits in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income. See Note 1—Summary of Significant Accounting Policies—(k) Recognizing Income and Expenses of our Audited Consolidated Financial Statements.

The following tables show, by currency of denomination, average balances and, where applicable, interest amounts and real rates for our assets and liabilities for the years ended December 31, 2020, 2019 and 2018.

	For the year ended December 31,
	2020							2019							2018
	Average Balance		Interest Earned		Average Nominal Rate			Average Balance		Interest Earned		Average Nominal Rate			Average Balance		Interest Earned		Ave rage Nominal Rate
Assets
Interest earning assets
Deposits in Central Bank
Ch$		800,147		648		0.1	%		496,804		822		0.2	%		451,805		5,930		1.3	%
UF		—		—		—%			—		—		—%			—		—		—%
Foreign currency		—		—		—%			—		—		—%			—		—		—%
Total		800,147		648		0.1	%		496,804		822		0.2	%		451,805		5,930		1.3	%
Financial investments (1)
Ch$		3,181,194		55,005		1.7	%		1,571,480		36,695		2.3	%		1,490,010		64,839		4.4	%
UF		1,246,124		33,941		2.7	%		877,872		17,547		2.0	%		826,333		35,573		4.3	%
Foreign currency		1,735,842		18,099		1.0	%		958,466		10,519		1.1	%		677,343		10,616		1.6	%
Total		6,163,159		107,044		1.7	%		3,407,818		64,761		1.9	%		2,993,686		111,028		3.7	%
Commercial Loans
Ch$		7,484,216		414,119		5.5	%		6,668,248		459,659		6.9	%		6,651,575		461,343		6.9	%
UF		6,625,490		368,774		5.6	%		6,075,706		374,361		6.2	%		5,553,732		357,932		6.4	%
Foreign currency		3,239,259		131,554		4.1	%		2,974,697		134,925		4.5	%		2,852,514		116,991		4.1	%
Total		17,348,965		914,447		5.3	%		15,718,651		968,945		6.2	%		15,057,821		936,266		6.2	%
Consumer loans
Ch$		4,889,877		568,864		11.6	%		5,023,394		643,526		12.8	%		4,288,778		585,064		13.6	%
UF		15,201		1,081		7.1	%		18,003		1,273		7.1	%		19,517		1,470		7.5	%
Foreign currency		41,836		—		—%			65,880		—		—%			55,440		—		—%
Total		4,946,915		569,946		11.5	%		5,107,277		644,799		12.6	%		4,363,735		586,534		13.4	%
Mortgage loans
Ch$		3,495		45		1.3	%		4,938		67		1.4	%		6,826		106		1.5	%
UF		11,887,610		637,911		5.4	%		10,581,292		633,871		6.0	%		9,497,908		597,548		6.3	%
Foreign currency		—		—		—%			—		—		—%			—		—		—%
Total		11,891,105		637,956		5.4	%		10,586,230		633,938		6.0	%		9,504,734		597,654		6.3	%

109

Table of Contents

	For the year ended December 31,
	2020								2019								2018
	Average Balance			Interest Earned		Average Nominal Rate			Average Balance			Interest Earned		Average Nominal Rate			Average Balance			Interest Earned		Ave rage Nominal Rate
Interbank loans
Ch$		3,709			36		1.0	%		35,415			1,263		3.6	%		35,178			897		2.6	%
UF		—			—		—%			—			—		—%			—			—		—%
Foreign currency		—			—		—%			—			—		—%			—			—		—%
Total		3,709			36		1.0	%		35,415			1,263		3.6	%		35,178			897		2.6	%
Investment agreements to resell
Ch$		(3,069	)		290		(9.5	%)		14,638			1,481		10.1	%		11,564			1,341		11.6	%
UF		342			—		—%			149			42		27.9	%		380			—		—%
Foreign currency		4,485			—		—%			—			—		—%			—			—		—%
Total		1,758			290		16.5	%		14,787			1,523		10.3	%		11,944			1,341		11.2	%
Threshold (2)
Ch$		374,624			163		0.0	%		95,994			372		0.4	%		83,959			590		0.7	%
UF		148,612			—		—%			4			—		—%			4			—		—%
Foreign currency		560,394			1,796		0.3	%		387,273			4,958		1.3	%		257,337			4,077		1.6	%
Total		1,083,630			1,959		0.2	%		483,271			5,330		1.1	%		341,300			4,667		1.4	%
Total interest earning assets
Ch$		16,734,192			1,039,172		6.2	%		13,910,911			1,143,885		8.2	%		13,019,695			1,120,110		8.6	%
UF		19,923,379			1,041,707		5.2	%		17,553,026			1,027,094		5.9	%		15,897,874			992,523		6.2	%
Foreign currency		5,581,816			151,448		2.7	%		4,386,316			150,402		3.4	%		3,842,64			131,684		3.4	%
Total		42,239,387			2,232,327		5.3	%		35,850,253			2,321,381		6.5	%		32,760,203			2,244,317		6.9	%

Non-interest earning assets
Cash
Ch$		812,285								723,924								622,469
UF		—								—								—
Foreign currency		118,930								121,966								122,178
Total		931,215								845,890								744,647
Allowance for loan losses
Ch$		(1,031,368	)							(848,776	)							(844,671	)
UF		—								—								—
Foreign currency		(10	)							(17	)							(41	)
Total		(1,031,378	)							(848,793	)							(844,712	)
Fixed assets
Ch$		205,251								90,157								225,115
UF		—								—								—
Foreign currency		—								—								—
Total		205,251								90,157								225,115
Derivatives
Ch$		10,474,854								4,617,101								2,186,596
UF		—								—								—
Foreign currency		—								—								—
Total		10,474,854								4,617,101								2,186,596
Financial Investment (Trading)
Ch$		260,368								133,743								167,090
UF		90,303								75,187								92,164
Foreign currency		101,224								114,922								49,520
Total		451,895								323,852								308,774
Other assets
Ch$		1,422,348								1,792,250								1,345,349
UF		194,257								77,148								74,713
Foreign currency		943,706								482,155								412,657
Total		2,560,311								2,351,553								1,832,719

110

Table of Contents

	For the year ended December 31,
	2020					2019					2018
	Average Balance		Interest Earned		Average Nominal Rate	Average Balance		Interest Earned		Average Nominal Rate	Average Balance		Interest Earned		Ave rage Nominal Rate
Total non-interest earning assets
Ch$		12,143,738					6,508,399					3,701,948
UF		284,560					152,335					166,877
Foreign currency		1,163,850					719,026					584,314
Total		13,592,148					7,379,760					4,453,139

Total assets
Ch$		28,877,930		1,039,172			20,419,310		1,143,772			16,721,643		1,120,110
UF		20,207,940		1,041,707			17,705,361		1,027,094			16,064,751		992,523
Foreign currency		6,745,666		151,448			5,105,342		150,402			4,426,948		131,684
Total		55,831,535		2,232,327			43,230,013		2,321,268			37,213,342		2,244,317

	For the year ended December 31,
	2020							2019							2018
	Average Balance		Interest Earned		Average Nominal Rate			Average Balance		Interest Earned		Average Nominal Rate			Average Balance		Interest Earned		Ave rage Nominal Rate

Liabilities And Shareholders’ Equity

Interest bearing liabilities
Savings accounts
Ch$		2,224		6		0.3	%		1,874		5		0.3	%		1,830		5		0.3	%
UF		136,447		3,438		2.5	%		119,022		3,043		2.6	%		116,055		3,130		2.7	%
Foreign currency		—		—		0.0	%		—		—		—%			—		—		—%
Total		138,671		3,443		2.5	%		120,896		3,048		2.5	%		117,885		3,135		2.7	%
Time deposits
Ch$		10,237,170		121,926		1.2	%		10,674,547		291,100		2.7	%		9,792,164		289,990		3.0	%
UF		655,923		23,321		3.6	%		1,004,456		33,744		3.4	%		1,133,420		45,401		4.0	%
Foreign currency		3,355,384		19,119		0.6	%		2,100,531		27,612		1.3	%		2,229,332		28,581		1.3	%
Total		14,248,478		164,367		1.2	%		13,779,534		352,456		2.6	%		13,154,916		363,972		2.8	%
Central bank borrowings
Ch$		2,881,600		21		0.0	%		—		—		—%			—		114		—%
UF		—		—		—%			—		—		—%			4		—		6.0	%
Foreign currency		—		—		—%			—		—		—%			—		—		—%
Total		2,881,600		21		0.0	%		—		—		—%			4		114		6.0	%
Repurchase Agreements
Ch$		164,468		2,037		1.2	%		237,937		10,181		4.3	%		184,458		4,632		2.5	%
UF		-		28		0.0	%		—		1		—%			2		—		—%
Foreign currency		78,812		-		-%			177,014		36		—%			107,453		2,036		1.9	%
Total		243,280		2,066		0.8	%		414,951		10,218		2.5	%		291,913		6,668		2.3	%
Mortgage finance bonds
Ch$		—		—		—%			—		—		—%			—		—		—%
UF		14,580		1,112		7.6	%		20,923		1,611		7.7	%		28,685		2,305		8.0	%
Foreign currency		-		-		-%			—		—		—%			—		—		—%
Total		14,580		1,112		7.6	%		20,923		1,611		7.7	%		28,685		2,305		8.0	%
Other interest bearing liabilities
Ch$		1,364,789		71,351		5.2	%		1,718,861		115,923		6.7	%		1,305,791		81,616		6.3	%
UF		5,197,993		295,984		5.7	%		5,503,352		302,825		5.5	%		4,778,773		278,362		5.8	%
Foreign currency		4,639,853		100,135		2.2	%		4,039,316		118,336		2.9	%		3,316,911		93,777		2.8	%
Total		11,202,635		467,471		4.2	%		11,261,529		537,084		4.8	%		9,401,475		453,755		4.8	%
Total interest bearing liabilities
Ch$		14,650,251		195,342		1.3	%		12,633,219		417,209		3.3	%		11,284,243		376,357		3.3	%
UF		6,004,944		323,882		5.4	%		6,647,753		341,224		5.1	%		6,056,939		329,198		5.4	%
Foreign currency		8,074,049		119,255		1.5	%		6,316,861		145,984		2.3	%		5,653,696		124,394		2.2	%
Total		28,729,244		638,479		2.2	%		25,597,833		904,417		3.5	%		22,994,878		829,949		3.6	%

111

Table of Contents

	For the year ended December 31,
	2020					2019					2018
	Average Balance		Interest Earned		Average Nominal Rate	Average Balance		Interest Earned		Average Nominal Rate	Average Balance		Interest Earned		Ave rage Nominal Rate
Non-interest bearing liabilities
Non-interest bearing demand deposits
Ch$		10,066,738					7,282,508					6,561,631
UF		56,330					56,262					47,091
Foreign currency		280,280					128,221					154,824
Total		10,403,347					7,466,991					6,763,546
Derivatives
Ch$		9,793,162					4,165,330					2,020,857
UF		—					—					—
Foreign currency		—					—					—
Total		9,793,162					4,165,330					2,020,857
Other non-interest bearing liabilities
Ch$		1,181,832					1,115,058					946,965
UF		586,273					447,362					405,225
Foreign currency		1,403,435					986,710					818,716
Total		3,171,540					2,549,130					2,170,906
Shareholders’ equity
Ch$		3,734,243					3,450,729					3,263,155
UF		—					—					—
Foreign currency		—					—					—
Total		3,734,243					3,450,729					3,263,155

Total non-interest bearing liabilities and shareholders’ equity
Ch$		24,775,974					16,013,625					12,792,608
UF		642,602					503,624					452,316
Foreign currency		1,683,715					1,114,931					973,540
Total		27,102,291					17,632,180					14,218,464

Total Liabilities and Shareholders’ Equity
Ch$		39,426,226		195,342			28,646,844		417,209			24,076,851		376,357
UF		6,647,546		323,882			7,151,377		341,224			6,509,255		329,198
Foreign currency		9,757,764		119,255			7,431,792		145,984			6,627,236		124,394
Total		55,831,535		638,479			43,230,013		904,417			37,213,342		829,949

____________________

(1)

For the periods ending December 31, 2020, 2019 and 2018 this line item includes debt instruments at fair value through other comprehensive income according to IFRS 9.

(2)

Threshold is the asset generated when we post collateral for a derivative with a counterparty that has negative mark-to-market for us. Some Central Security Depository agreements permit this collateral to generate interest at the overnight rate and this is the source of interest income associated with this asset.

112

Table of Contents

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

The following table allocates, by currency of denomination, changes in our net interest revenue and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective nominal interest rates for 2020 compared to 2019 and 2019 compared to 2018. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities.

	Increase (Decrease) from 2019 to 2020 Due to Changes in									Increase (Decrease) from 2018 to 2019 Due to Changes in
	Volume			Rate			Net Change from 2019 to 2020			Volume			Rate			Net Change from 2018 to 2019
Assets
Interest earning assets
Deposits in Central Bank
Ch$		(177	)		3			(174	)		(451	)		(4,657	)		(5,108	)
UF		0			0			0			—			—			—
Foreign currency		0			0			0			—			—			—
Subtotal		(177	)		3			(174	)		(451	)		(4,657	)		(5,108	)
Financial investments
Ch$		19,621			(1,311	)		18,310			1,315			(29,459	)		(28,144	)
UF		14,382			2,012			16,394			811			(18,837	)		(18,026	)
Foreign currency		7,617			(38	)		7,580			(111	)		15			(96	)
Subtotal		41,620			663			42,283			2,015			(48,281	)		(46,266	)
Commercial loans
Ch$		(98,615	)		53,076			(45,539	)		1,390			(3,074	)		(1,684	)
UF		(8,234	)		2,646			(5,587	)		129,183			(112,754	)		16,429
Foreign currency		(4,214	)		844			(3,371	)		10,461			7,472			17,933
Subtotal		(111,063	)		56,565			(54,497	)		141,034			(108,356	)		32,678
Consumer loans
Ch$		(30,668	)		(43,994	)		(74,662	)		134,945			(76,484	)		58,461
UF		(194	)		2			(192	)		(92	)		(103	)		(196	)
Foreign currency		0			(0	)		0			—			—			—
Subtotal		(30,862	)		(43,992	)		(74,854	)		134,853			(76,587	)		58,265
Mortgage loans
Ch$		(21	)		(0	)		(21	)		(94	)		55			(39	)
UF		5,435			(1,395	)		4,040			191,144			(154,822	)		36,322
Foreign currency		0			0			0			—			—			—
Subtotal		5,413			(1,395	)		4,019			191,050			(154,767	)		36,283
Interbank loans
Ch$		(1,208	)		(19	)		(1,227	)		—			366			366
UF		—			—			—			—			—			—
Foreign currency		—			—			—			—			—			—
Subtotal		(1,208	)		(19	)		(1,227	)		—			366			366
Investment under agreement to resell
Ch$		(1,363	)		172			(1,191	)		697			(556	)		140
UF		958			(999	)		(42	)		5			36			42
Foreign currency		0			0			0			—			—			—
Subtotal		(405	)		(827	)		(1,233	)		702			(520	)		182
Threshold
Ch$		(215	)		6			(209	)		(92	)		(126	)		(218	)
UF		—			—			—			—			—			—
Foreign currency		(3,611	)		449			(3,162	)		953			(72	)		881
Subtotal		(3,826	)		455			(3,371	)		861			(198	)		663
Total interest earnings assets
Ch$		(112,646	)		7,933			(104,714	)		137,710			(113,935	)		23,774
UF		12,347			2,266			14,613			321,051			(286,480	)		34,571
Foreign currency		(208	)		1,255			1,047			11,303			7,415			18,718
Total		(100,508	)		11,453			(89,055	)		470,064			(393,000	)		77,063

113

Table of Contents

	Increase (Decrease) from 2019 to 2020 Due to Changes in									Increase (Decrease) from 2018 to 2019 Due to Changes in
	Volume			Rate			Net Change from 2019 to 2020			Volume			Rate			Net Change from 2018 to 2019
Liabilities and Shareholders’ Equity
Interest bearing liabilities
Savings accounts
Ch$		1			—			1			—			—			—
UF		401			(6	)		395			2			(89	)		(87	)
Foreign currency		—			—			—			—			—			—
Subtotal		402			(6	)		395			2			(89	)		(87	)
Time deposits
Ch$		(57,222	)		(111,951	)		(169,173	)		(172	)		1,282			1,110
UF		(10,628	)		205			(10,423	)		(2,536	)		(9,120	)		(11,657	)
Foreign currency		(9,226	)		733			(8,492	)		(1,015	)		46			(969	)
Subtotal		(77,077	)		(111,013	)		(188,089	)		(3,723	)		(7,793	)		(11,516	)
Central bank borrowings
Ch$		—			21			21			—			(114	)		(114	)
UF		—			—			—			—			—			—
Foreign currency		—			—			—			—			—			—
Subtotal		—			21			21			—			(114	)		(114	)
Repurchase agreements
Ch$		(6,089	)		(2,055	)		(8,144	)		(41	)		5,590			5,549
UF		0			27			27			1			—			1
Foreign currency		(35	)		(0	)		(35	)		(3,256	)		1,255			(2,001	)
Subtotal		(6,124	)		(2,028	)		(8,152	)		(3,295	)		6,845			3,550
Mortgage finance bonds
Ch$		—			—			—			—			—			—
UF		(496	)		(4	)		(499	)		(593	)		(101	)		(694	)
Foreign currency		—			—			—			—			—			—
Subtotal		(496	)		(4	)		(499	)		(593	)		(101	)		(694	)
Other interest bearing liabilities
Ch$		(35,543	)		(9,029	)		(44,572	)		21,814			12,493			34,307
UF		(8,060	)		1,219			(6,841	)		107,121			(82,658	)		24,463
Foreign currency		(23,347	)		5,146			(18,201	)		23,553			1,006			24,559
Subtotal		(66,949	)		(2,664	)		(69,614	)		152,488			(69,159	)		83,329
Total interest bearing liabilities
Ch$		(98,853	)		(123,014	)		(221,867	)		21,601			19,251			40,852
UF		(18,783	)		1,441			(17,343	)		103,995			(91,969	)		12,026
Foreign currency		(32,608	)		5,879			(26,729	)		19,282			2,307			21,589
Total		(150,244	)		(115,694	)		(265,938	)		144,879			(70,411	)		74,468

Interest-Earning Assets: Net Interest Margin

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

114

Table of Contents

	Year ended December 31,
	2020			2019			2018
	(in millions of Ch$)
Total average interest-earning assets
Ch$		16,734,192			13,910,911			13,019,695
UF		19,923,379			17,553,026			15,897,874
Foreign currencies		5,581,816			4,386,316			3,842,634
Total		42,239,387			35,850,253			32,760,203
Net interest earned (1)
Ch$		843,830			726,676			743,753
UF		717,824			685,870			663,325
Foreign currencies		32,194			4,418			7,290
Total		1,593,848			1,416,964			1,414,368
Net interest margin (2)
Ch$		5.0	%		5.2	%		5.7	%
UF		3.6	%		3.9	%		4.2	%
Foreign currencies		0.6	%		0.1	%		0.2	%
Total		3.8	%		4.0	%		4.3	%

____________________

(1)

Net interest earned is defined as interest revenue earned less interest expense incurred.

(2)

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

Return on Equity and Assets; Dividend Payout

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

	Year ended December 31,
	2020			2019			2018
		Ch$ million
Net income		552,730			621,313			599,693
Net income attributable to shareholders		547,614			619,091			595,333
Average total assets		55,831,535			43,230,013			37,213,342
Average equity		3,734,243			3,450,729			3,263,155
Net income as a percentage of:
Average total assets		1.0	%		1.4	%		1.6	%
Net income attributable to shareholders as a percentage of:
Average equity		14.8	%		18.0	%		18.2	%
Average equity as a percentage of:
Average total assets		6.7	%		8.0	%		8.8	%
Cash dividend (1)		n/a			331,256			355,141
Dividend payout ratio, based on net income attributable to shareholders (2)		n/a			60.0	%		60.0	%

____________________

(1)

As of the report date, dividends to be paid in 2021 of the 2020 shareholders’ income has yet to be announced.

(2)

In 2020, shareholders of the Bank approved the distribution of 30% of the 2019 net income attributable to shareholders under Chilean Bank GAAP on April 30, 2020. This amounted to Ch$ 165,628 million (US$ 198.0 million using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting) or Ch$ 0.88 per share (US$ per ADR 0.49). In the Extraordinary Shareholders Meeting held on November 26, 2020, a further 30% of the 2019 earnings was approved. Therefore, in total a 60% of the net income attributable to shareholders of 2019 under Chilean Bank GAAP was distributed to shareholders, totaling Ch$ 331,256 million or Ch$ 1.76 per share.

115

Table of Contents

Dividends declared at the annual shareholders’ meeting of each year correspond to the Bank’s earnings of the previous year. The following table presents dividends declared and paid by us in nominal terms in the past four years:

Year paid	Dividend Ch$ millions (1)		Dividend U.S.$ millions (2)		Per share Ch$/share (3)		Per ADS U.S.$/ADS (4)		% over earnings (5)		% over earnings (6)
2017		330,646		496.5		1.75		1.05		70		69
2018		423,611		702.32		2.25		1.49		75		75
2019		355,141		531.5		1.88		1.13		60		60
2020 (7)		331,256		430.84		1.76		0.91		60		60

____________________

(1)

Millions of nominal pesos.

(2)

Millions of U.S.$ using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting.

(3)

Calculated on the basis of 188,446 million shares.

(4)

Calculated on the basis of 400 shares per ADS.

(5)

Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under Chilean Bank GAAP.

(6)

Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under IFRS.

(7)

In 2020, shareholders of the Bank approved the distribution of 30% of the 2019 net income attributable to shareholders under Chilean Bank GAAP on April 30, 2020. This amounted to Ch$ 165,628 million (US$ 198.0 million using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting) or Ch$ 0.88 per share (US$ per ADR 0.49). In the Extraordinary Shareholders Meeting held on November 26, 2020, a further 30% of the 2019 earnings was approved. Therefore, in total a 60% of the net income attributable to shareholders of 2019 under Chilean Bank GAAP was distributed to shareholders, totaling Ch$ 331,256 million or Ch$ 1.76 per share.

Loan Portfolio

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

	As of December 31,
		2020(1)	2019(1)	2018(1)	2017	2016
		(in millions of Ch$)
Commercial Loans:
Commercial loans		13,509,548	11,723,039	11,148,859	9,990,656	9,853,657
Foreign trade loans		1,239,271	1,713,633	1,752,437	1,574,513	1,829,904
Checking account debtors		125,610	196,893	215,162	195,696	179,468
Factoring transactions		497,679	489,400	380,983	449,890	296,751
Student loans		63,380	71,273	79,916	-	-
Leasing transactions		1,355,157	1,424,862	1,443,724	1,457,004	1,485,123
Other loans and accounts receivable		196,544	243,225	165,063	240,883	222,562
Subtotal		16,987,189	15,862,325	15,186,144	13,908,642	13,867,465

Mortgage loans:
Mortgage finance bond backed loans		7,809	12,298	17,426	24,060	32,579
Mortgage mutual loans		92,960	100,152	108,536	115,078	119,934
Other mortgage mutual loans		12,311,056	11,150,545	10,025,019	8,957,757	8,466,843
Subtotal		12,411,825	11,262,995	10,150,981	9,096,895	8,619,356

116

Table of Contents

	As of December 31,
		2020(1)	2019(1)	201 (1)	2017	2016
		(in millions of Ch$)
Consumer loans:
Installment consumer loans		3,688,592	3,917,536	3,189,670	2,910,742	2,722,365
Credit card loans		1,125,908	1,377,710	1,417,152	1,364,980	1,448,118
Consumer leasing contracts		3,121	3,952	4,157	4,715	5,117
Other consumer loans		123,258	246,997	265,310	277,255	271,203
Subtotal		4,940,879	5,546,195	4,876,289	4,557,692	4,446,803

Subtotal Loans to customers		34,339,893	32,671,515	30,213,414	27,563,229	26,933,624

Interbank loans (2)		—	—	—	162,685	272,807

Total		34,339,893	32,671,515	30,213,414	27,725,914	27,206,431

____________________

(1)

Loans as of December 31, 2020, 2019 and 2018 are loans at amortized cost in accordance with IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost - under IFRS 9” of our Audited Consolidated Financial Statements.

(2)

Interbank loans for December 31, 2020, 2019 and 2018 are included within commercial loans.

At December 31, 2020, the Bank had some loans measured at fair value through other comprehensive income according to IFRS 9 as follows:

	Stage 1		Stage 2		Stage 3
	Individual		Individual		Individual		Total
Gross carrying amount at January 1, 2020		66,166		—		—		66,166
Net changes on financial assets		3,857		—		—		3,857
Foreign Exchange adjustments		662		—		—		662
At December 31, 2020		70,685		—		—		70,685

The loan categories are as follows:

Commercial loans

Interbank loans are long-term and short-term loans made to other local or international banks, granted in Chilean pesos or foreign currencies, usually at a variable rate linked to LIBOR or other interbank rates.

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

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

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

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

Student loans mainly include long-term loans made to finance tertiary education mainly in fixed real rates (UF) some of which some are guaranteed by the state. These loans, per Chilean regulations, must be classified as commercial loans since they are guaranteed by the Chilean State under Law 20.027 through CORFO, the government’s development agency.

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

Other loans and accounts receivable loans include other loans and accounts payable.

117

Table of Contents

Mortgage loans

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

Mortgage finance bond backed loans are inflation-indexed, fixed or variable rate, long-term loans with monthly payments of principal and interest secured by a real property mortgage that are financed with mortgage finance bonds. At the time of approval, these types of mortgage loans cannot be more than 75.0% of the lower of the purchase price or the appraised value of the mortgaged property or such loan will be classified as a commercial loan. Mortgage bonds are our general obligations, and we are liable for all principal and accrued interest on such bonds. In addition, if the issuer of a mortgage finance bond becomes insolvent, the General Banking Law’s liquidation procedures provide that these types of mortgage loans with their corresponding mortgage bonds shall be auctioned as a unit and the acquirer must continue paying the mortgage finance bonds under the same conditions as the original issuer.

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

Consumer loans

Installment consumer loans are loans to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis, to finance the purchase of consumer goods or to pay for services. This includes auto loans originated through Santander Consumer Chile.

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

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

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

Other loans and accounts receivable from customers include draft lines for individuals.

Non-client loans

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

Maturity and Interest Rate Sensitivity of Loans

The following table sets forth an analysis by type and time remaining to maturity of our loans at amortized cost as of December 31, 2020.

	Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years		Total balance as of December 31, 2019
			(in millions of Ch$)
General commercial loans (1)		3,676,431		2,011,903		7,821,214		13,509,548
Foreign trade loans		1,156,377		34,622		48,272		1,239,271
Leasing contracts		45,203		304,213		1,005,741		1,355,157
Other outstanding loans		729,998		65,870		87,345		883,213
Subtotal commercial loans		5,608,009		2,416,608		8,962,572		16,987,189
Residential loans backed by mortgage bonds		25		6,084		1,700		7,809
Other residential mortgage loans		4,783		55,352		12,343,881		12,404,016
Subtotal residential mortgage loans		4,808		61,436		12,345,581		12,411,825
Consumer loans		912,168		1,475,735		2,552,976		4,940,879
Total loans at amortized cost		6,524,985		3,953,779		23,861,129		34,339,893

____________________

(1)

Interbank loans for December 31, 2020 are included within commercial loans in accordance with disclosures for IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements.

118

Table of Contents

The following tables present the total amount of loans due after one year that have fixed and variable interest rates as of December 31, 2020. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Interest Rates.”

	As of December 31, 2020
		(in millions of Ch$)
Variable Rate
Ch$		—
UF		1,817,253
Foreign currencies		—
Subtotal		1,817,253
Fixed Rate		—
Ch$		9,785,772
UF		15,323,050
Foreign currencies		888,833
Subtotal		25,997,655
Total		27,814,908

Loans by Economic Activity

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

As of December 31, 2020, 2019 and 2018, loans by economic activity according to IFRS 9 are listed below:

	Total loans at amortized cost								% of
As of December 31, 2020	Stage 1		Stage 2		Stage 3		Total		Total Loans
		Ch$ Million
Commercial loans
Manufacturing		1,180,220		130,361		67,640		1,378,221		4.0	%
Mining		265,195		161,631		6,789		433,615		1.3	%
Electricity, gas, and water		349,849		27,848		6,577		384,274		1.1	%
Agriculture and livestock		1,024,795		233,552		87,517		1,345,864		3.9	%
Forest		141,892		23,463		13,820		179,175		0.5	%
Fishing		209,182		20,128		4,842		234,152		0.7	%
Transport		622,161		97,624		58,076		777,861		2.3	%
Communications		294,957		28,433		7,725		331,115		1.0	%
Construction(*)		811,807		61,828		85,734		959,369		2.8	%
Commerce		2,549,770		223,884		89,684		2,863,338		8.3	%
Services		3,506,443		393,319		239,535		4,139,297		12.1	%
Other		3,302,527		416,235		242,146		3,960,908		11.5	%
Subtotal		14,258,798		1,818,306		910,085		16,987,189		49.5	%

Mortgage loans		11,518,363		392,372		501,090		12,411,825		36.1	%

Consumer loans		4,439,163		236,595		265,121		4,940,879		14.4	%

Total loans at amortized cost		30,216,324		2,447,273		1,676,296		34,339,893		100.0	%

119

Table of Contents

	Total loans at amortized cost								% of
As of December 31, 2019	Stage 1		Stage 2		Stage 3		Total		Total Loans
		Ch$ Million
Commercial loans
Manufacturing		1,110,484		107,356		67,974		1,285,814		3.9	%
Mining		280,297		123,005		3,739		407,041		1.2	%
Electricity, gas, and water		309,941		22,907		8,196		341,044		1.0	%
Agriculture and livestock		1,020,857		172,984		93,440		1,287,281		3.9	%
Forest		132,483		17,035		15,689		165,207		0.5	%
Fishing		223,980		24,879		7,695		256,554		0.8	%
Transport		665,570		64,115		34,192		763,877		2.3	%
Communications		206,660		28,122		6,168		240,950		0.7	%
Construction(*)		782,265		85,435		106,568		974,268		3.0	%
Commerce		2,655,982		110,326		30,107		2,796,415		8.6	%
Services		2,971,563		190,097		204,472		3,366,132		10.3	%
Other		3,442,541		298,806		236,395		3,977,742		12.2	%
Subtotal		13,802,623		1,245,067		814,635		15,862,325		48.6	%

Mortgage loans		10,275,966		457,948		529,081		11,262,995		34.5	%

Consumer loans		4,963,047		292,718		290,430		5,546,195		17.0	%

Total loans at amortized cost		29,041,636		1,995,733		1,634,146		32,671,515		100.0	%

	Total loans at amortized cost								% of
As of December 31, 2018	Stage 1		Stage 2		Stage 3		Total		Total Loans
		Ch$ Million
Commercial loans
Manufacturing		992,786		92,931		54,048		1,139,765		3.8	%
Mining		182,342		21,821		4,585		208,748		0.7	%
Electricity, gas, and water		384,288		22,365		2,279		408,932		1.4	%
Agriculture and livestock		934,199		166,271		100,781		1,201,251		4.0	%
Forest		120,371		9,402		14,115		143,888		0.5	%
Fishing		238,348		11,104		3,569		253,021		0.8	%
Transport		716,493		55,011		37,802		809,306		2.7	%
Communications		178,215		30,407		7,222		215,844		0.7	%
Construction(*)		723,600		88,691		93,747		906,038		3.0	%
Commerce		2,950,517		189,623		199,924		3,340,064		11.1	%
Services		1,771,595		81,159		12,915		1,865,669		6.2	%
Other		4,120,052		331,471		242,094		4,693,617		15.5	%
Subtotal		13,312,806		1,100,255		773,083		15,186,144		50.3	%

Mortgage loans		9,258,962		447,496		444,523		10,150,981		33.6	%

Consumer loans		4,341,740		249,039		285,510		4,876,289		16.1	%

Total loans at amortized cost		26,913,508		1,796,790		1,503,115		30,213,414		100.0	%

______________________

(*)

In 2018, we improved the classification of our construction loans, reassigning loans for real estate investment companies to the Services category.

120

Table of Contents

As of December 31, 2017 and 2016 loans by economic activity is reported according to IAS 39.

	Domestic loans (*) as of December 31,				Foreign interbank loans (**) as of December 31,
	2017		2016		2017		2016
	(in millions of Ch$)
Commercial loans
Manufacturing		1,218,232		1,180,886		—		—
Mining		302,037		340,554		—		—
Electricity, gas and water		336,048		442,936		—		—
Agriculture and livestock		1,114,597		1,096,659		—		—
Forestry		98,941		96,806		—		—
Fishing		215,994		296,592		—		—
Transport		697,948		787,510		—		—
Communications		168,744		196,934		—		—
Construction		1,977,417		1,792,485		—		—
Commerce		3,131,870		3,120,400		162,685		272,733
Services		467,747		482,900		—		—
Other		4,179,067		4,032,877		—		—
Subtotals		13,908,642		13,867,539		162,685		272,733
Mortgage loans		9,096,895		8,619,356		—		—
Consumer loans		4,557,692		4,446,803		—		—
Total		27,563,229		26,933,698		162,685		272,733

____________________

(*)

Includes domestic interbank loans.

(**)

Includes foreign interbank loans.

	Total loans as of December 31,				% of total loans as of December 31,
	2017		2016		2017			2016
	(in millions of Ch$)
Commercial loans
Manufacturing		1,218,232		1,180,886		4.4	%		4.3	%
Mining		302,037		340,554		1.1	%		1.3	%
Electricity, gas and water		336,048		442,936		1.2	%		1.6	%
Agriculture and livestock		1,114,597		1,096,659		4.0	%		4.0	%
Forestry		98,941		96,806		0.4	%		0.4	%
Fishing		215,994		296,592		0.8	%		1.1	%
Transport		697,948		787,510		2.5	%		2.9	%
Communications		168,744		196,934		0.6	%		0.7	%
Construction		1,977,417		1,792,485		7.1	%		6.6	%
Commerce		3,294,555		3,393,133		11.9	%		12.5	%
Services		467,747		482,900		1.7	%		1.8	%
Other		4,179,067		4,032,877		15.1	%		14.8	%
Subtotals		14,071,327		14,140,272		50.8	%		52.0	%
Mortgage loans		9,096,895		8,619,356		32.8	%		31.7	%
Consumer loans		4,557,692		4,446,803		16.4	%		16.3	%
Total		27,725,914		27,206,431		100.0	%		100.0	%

121

Table of Contents

Foreign Assets and Loans

Santander-Chile’s Asset and Liability Committee, or ALCO, is responsible for determining the maximum foreign country exposure the Bank is permitted to have. The ALCO has determined that the total foreign country exposure cannot be greater than 1-time regulatory capital. To determine this, each country is classified using a ranking system from 1 to 6 based on the definition promulgated by the FMC, in which the main consideration is the international rating of each country. The ALCO has also set a higher limit if the foreign exposure is to related parties. As of December 31, 2020, the Bank’s foreign exposure, including the estimate of counterparty risk in our derivatives portfolio, was U.S.$2,639 million, or 3.4% of our assets. For more information, please see Note 39 of our Audited Consolidated Financial Statements.

Below, there are additional details regarding our exposure to countries in categories other than 1, the riskiest categories we have exposure to as of December 31, 2020 considering fair value of derivative instruments. In this category Mexico is the largest exposure as shown in the table below.

Country	Classification (1)		Derivative Instruments (adjusted to market)		Deposits		Loans		Financial Investments		Total Exposure
							US$ Million
Colombia		2		0.81		—		—		—		0.81
Italy		2		—		3.36		0.13		—		3.49
Mexico		2		9.86		0.03		—		—		9.89
Panama		2		5.77		—		—		—		5.77
Peru		2		1.61		—		—		—		1.61
Total				18.05		3.39		0.13		—		21.57

_____________________

(1)

Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the FMC.

Our exposure to Santander Group is as follows:

Counterpart	Country	Classification		Derivative instruments (market adjusted)		Deposits		Loans		Financial Investments		Total Exposure
									US$ million
Banco Santander Spain*	Spain		1		176.34		139.90		—		—		316.24
Santander UK	UK		1		20.95		0.05		—		—		21.00
Banco Santander Mexico	Mexico		2		9.86		0.03		—		—		9.89
Santander Group					207.15		139.98		—		—		347.13

____________________

We have included our exposure to Santander branches in New York and Hong Kong as exposure to Spain.

122

Table of Contents

The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, there is no credit exposure.

As of December 31, 2020, we had no applicable sovereign exposure, no unfunded exposure, no credit default protection and no current developments.

Classification of Loan Portfolio

Credit Risk Governance

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

The Bank’s governance rules have established the existence of the Board Risk Committee. This committee is responsible for revising and following all risks that may affect us, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes seven Board members.

The Board has delegated the duty of credit risk management to the Board’s Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

Formulate credit policies by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submitting 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 credit risk in terms of individual debtors, debtor groups, industry segments and countries. Approval levels are assigned to the corresponding officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are continually revised. 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 the Executive Risk Committee works directly with customers to assess credit risks and prepare risk requests.

Propose and approve the risk appetite metrics.

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.

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. 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 reviews are subject to similar processes.

123

Table of Contents

The following diagram illustrates the governance of our credit risk division including the committees with approval power:

Role of Santander Spain’s Global Risk Department: Credit Risk

In matters regarding Credit Risk, Santander Spain’s Global Risk Department has the following role:

All credit risks greater than Ch$63,500 million (or U.S.$89.1 million), after being approved locally, are reviewed by Santander Spain. This additional review ensures that no global exposure limit is being breached.

In standardized risks, the consumer and mortgage scoring models are developed locally. Its approval instance will depend on the relative importance of the models (“Tier” of the model); in this way, if the model is of the greatest importance, it is approved in risk committees of the Headquarters (Spain); otherwise, it is approved locally.

For each scoring model, a quarterly Risk Report is prepared, which is reviewed locally and is also sent to Santander Analytics (Santander Spain). This report indicates the stability of the model and its levels of predictability.

Credit Approval: Loans approved on an individual basis

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

124

Table of Contents

Credit Approval: Loans approved on a group basis

The majority of loans to individuals and small and mid-sized companies are approved by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sources and the FMC.

Classification of Loan Portfolio

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

Impairment assessment (policy applicable from January 1, 2018)

In accordance with the requirements of IFRS 9 the Bank has developed a new credit risk model, applicable from January 1, 2018.

a. Definition of default and cure

The Bank considers a financial instrument defaulted and therefore Stage 3 for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. Such events include:

Internal rating of the borrower indicating default or near-default;

The borrower requesting emergency funding from the Bank;

The borrower having past due liabilities to public creditors or employees;

The borrower is deceased;

A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral;

A material decrease in the borrower’s turnover or the loss of a major customer;

A covenant breach not waived by the Bank;

The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection; and/or

Debtor’s listed debt or equity suspended at the primary exchange because of rumors or facts about financial difficulties.

It is the Bank’s policy to consider a financial instrument as “cured” and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least twelve consecutive months (and 24 months for special vigilance operations). The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition.

125

Table of Contents

b. Internal rating and PD estimation

The Bank’s Credit Risk Department operates internal rating models. The models incorporate both qualitative and quantitative information, in addition to borrower-specific information, utilize supplemental external information that could affect the borrower’s behavior. The internal credit grades are assigned based on our internal scoring policy. PDs are then adjusted for IFRS 9 ECL calculations to incorporate forward-looking information and the IFRS 9 Stage classification of the exposure. In relation to the credit quality of the investment portfolio, local regulations specify that banks are able to hold only local and foreign fixed–income securities with certain exceptions. Additionally, Banco Santander-Chile has internal policies to ensure that only securities approved by the Market Risk department, which are listed in an internal document entitled “APS” – Products and underlying Approval, are acquired. The Credit Risk Department sets the exposure limits to the approved securities. The APS is updated on a daily basis.

As of December 31, 2020, 92.5% our total investment portfolio corresponds to securities issued by the Chilean Central Bank and US treasury notes.

c. Exposure at default

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client’s ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a Stage 1 loan, the Bank assesses the possible default events within 12 months for the calculation of the 12mECL. However, if a Stage 1 loan that is expected to default in the 12 months from the balance sheet date and is also expected to cure and subsequently default again, then all linked default events are taken into account. For Stage 2 and Stage 3 the exposure at default is considered for events over the lifetime of the instruments. For Stage 3, as the instruments are already in default the exposure will be the outstanding balance.

d. Loss given default

The credit risk assessment is based on a standardized LGD assessment framework that results in a certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realized from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios (evaluated collective), based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types) as well as borrower characteristics.

Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9 LGD rate for each group of financial instruments. Under IFRS 9, LGD rates are estimated for the Stage 1, Stage 2 and Stage 3 IFRS 9 segment of each asset class. The inputs for these LGD rates are estimated and, where possible, calibrated through back testing against recent recoveries. These are repeated for each economic scenario as appropriate.

e. Significant increase in credit risk (SICR)

The Bank continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to a 12-month ECL or Lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list (special vigilance). The Bank may also consider that events explained in letter a) above are a significant increase in credit risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.

When estimating ECLs on a collective basis for a group of similar assets, the Bank applies the same principles for assessing whether there has been a significant increase in credit risk since initial recognition.

126

Table of Contents

Quantitative criteria for SICR Stage 2:

The quantitative criteria is used to identify where an exposure has increased in credit risk and it is applied based on whether an increase in the lifetime PD since the recognition date exceeds the threshold set in absolute terms. The following formula is used to determine such threshold:

Threshold = Lifetime PD (at reporting date) – Lifetime PD (at origination)

Collectively assessed				Individually assessed
Mortgages	Other loans	Revolving (Credit cards)	Collectively assessed SME	Individually assessed SME	Middle market	Corporate and Investment Banking
39.57%	39.11%	15.73%	39.11%	22.69%	4.5%	Santander Group criteria

There is also a relative threshold of 100% of all portfolios with the exception of the Corporate and Investment Banking Portfolio.

Qualitative criteria for SICR Stage 2:

The qualitative criteria is based on the existence of evidence that leads to an automatic classification of financial instruments in Stage 2 - mainly 30 days overdue and restructured. Thresholds of SICR are calibrated based on the average ECL of exposures that are 30 days overdue or with a level of credit risk considered to be “significant”.

Collectively assessed				Individually assessed
Mortgages	Other loans	Revolving (Credit cards)	Collectively assessed SME	Individually assessed SME	Middle market	Corporate and Investment Banking
Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days
Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring
				Clients that are considered to be substandard or in incompliance (pre-legal action)	Clients that are considered to be substandard or in incompliance (pre-legal action)	Clients that are considered to be substandard or in incompliance (pre-legal action)

These thresholds are defined by the Model Committee and the Integral Risk Committee, and are evaluated annually with updates made depending on impacts and definitions of the risk models associated to each portfolio.

f. Grouping financial assets measured on a collective basis

The Bank calculates ECLs either on a collective or an individual basis.

The Bank evaluates on an individual basis commercial loans that are greater than Ch$400 million (US$56,143), while smaller commercial loans, mortgage loans and consumer loans are grouped into homogeneous portfolios, based on a combination of internal and external characteristics.

127

Table of Contents

g. Modified loans

If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term.

If the modification results in derecognition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recognition for the purposes of the impairment requirements.

h. Collateral and other credit enhancement

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral.

The main types of collateral obtained are, as follows:

For securities lending and reverse repurchase transactions, cash or securities

For corporate and small business lending, charges over real estate properties, inventory and trade receivables and, in special circumstances, government guarantees

For retail lending, mortgages over residential properties

According to the Bank’s policy when an asset (such as real estate) is repossessed it is transferred to assets held for sale at its fair value less cost to sell as a non-financial asset at the repossession date.

Analysis of Santander-Chile’s Loan Classification

The following table shows classifications of our individually assessed loans and related provisions as of December 31, 2020, 2019 and 2018 according to IFRS 9.

	As of December 31, 2020
Commercial	Stage 1		Stage 2		Stage 3		Total Individually Assessed		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
	(in Ch$ millions)								%			(in Ch$ millions)								%
A1		45,862		-		-		45,862		0.13	%		3		-		-		3		0.00	%
A2		1,095,506		3,265		-		1,098,771		3.20	%		900		54		-		954		0.09	%
A3		1,863,480		19,658		-		1,883,138		5.48	%		3,318		339		-		3,657		0.35	%
A4		2,632,793		42,529		-		2,675,322		7.79	%		7,329		606		-		7,935		0.77	%
A5		2,538,748		164,341		232		2,703,321		7.87	%		11,498		4,618		78		16,194		1.56	%
A6		1,588,410		289,460		53		1,877,923		5.47	%		16,541		14,010		53		30,604		2.95	%
B1		-		715,348		-		715,348		2.08	%		-		25,679		-		25,679		2.48	%
B2		-		161,239		233		161,472		0.47	%		-		9,566		138		9,704		0.94	%
B3		-		65,684		695		66,379		0.19	%		-		3,764		434		4,198		0.40	%
B4		-		73,248		49,430		122,678		0.36	%		-		3,008		21,014		24,022		2.32	%
C1		-		29,863		138,171		168,034		0.49	%		-		2,201		48,365		50,566		4.88	%
C2		-		12,282		69,491		81,773		0.24	%		-		926		27,021		27,947		2.70	%
C3		-		1,550		55,378		56,928		0.17	%		-		86		15,603		15,689		1.51	%
C4		-		2,227		48,177		50,404		0.15	%		-		143		21,038		21,181		2.04	%
C5		-		3,981		36,822		40,803		0.12	%		-		267		20,397		20,664		1.99	%
C6		-		5,040		131,384		136,424		0.40	%		-		185		107,364		107,549		10.37	%
Subtotal		9,764,799		1,589,715		530,066		11,884,580		34.61	%		39,589		65,452		261,505		366,546		35.35	%

128

Table of Contents

Commercial	Stage 1		Stage 2		Stage 3		Total Collectively Assessed		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
	(in Ch$ millions)								%			(in Ch$ millions)								%
Commercial		4,493,999		228,591		380,019		5,102,609		14.86	%		40,943		44,315		193,268		278,526		26.86	%
Mortgage		11,518,363		392,372		501,090		12,411,825		36.14	%		25,065		8,441		79,016		112,522		10.85	%
Consumer		4,439,163		236,595		265,121		4,940,879		14.39	%		88,825		31,732		158,642		279,199		26.93	%
Subtotal		20,451,525		857,558		1,146,230		22,455,313		65.39	%		154,833		84,488		430,926		670,247		64.65	%
Total		30,216,324		2,447,273		1,676,296		34,339,893		100.00	%		194,422		149,940		692,431		1,036,793		100.00	%

	As of December 31, 2019
Commercial	Stage 1		Stage 2		Stage 3		Total Individually Assessed		Percentage		Stage 1		Stage 2		Stage 3			Total ECL Allowance		Percentage
	(in Ch$ millions)								%		(in Ch$ millions)									%
A1		99,042		-		-		99,042		0.30		2		-					2		0.00	%
A2		907,659		37		-		907,696		2.78		443		-					443		0.05	%
A3		2,418,990		61		-		2,419,051		7.41		2,617		-					2,617		0.29	%
A4		3,262,671		7,184		-		3,269,855		10.01		4,399		22					4,421		0.49	%
A5		2,188,717		22,163		-		2,210,880		6.77		7,618		515					8,133		0.91	%
A6		1,086,401		47,157		487		1,134,045		3.47		6,461		1,410		20	/8		8,079		0.90	%
B1		-		603,201		-		603,201		1.85		-		12,641		-			12,641		1.41	%
B2		-		82,781		560		83,341		0.26		-		3,773		205			3,978		0.44	%
B3		-		85,034		817		85,851		0.26		-		3,367		261			3,628		0.40	%
B4		-		83,039		50,662		133,701		0.41		-		4,085		21,910			25,995		2.90	%
C1		-		45,433		113,004		158,437		0.49		-		3,516		50,440			53,956		6.02	%
C2		-		8,865		66,965		75,830		0.23		-		614		28,504			29,118		3.25	%
C3		-		15,762		32,839		48,601		0.15		-		221		11,281			11,502		1.28	%
C4		-		2,405		38,967		41,372		0.13		-		170		20,039			20,209		2.26	%
C5		-		847		44,057		44,904		0.14		-		43		27,586			27,629		3.08	%
C6		-		998		52,649		53,647		0.16		-		12		35,732			35,744		3.99	%
Subtotal		9,963,480		1,004,967		401,007		11,369,454		34.80		21,540		30,389		196,166			249,095		27.69	%

Commercial	Stage 1		Stage 2		Stage 3		Total Collectively Assessed		Percentage		Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
	(in Ch$ millions)								%		(in Ch$ millions)								%
Commercial		3,839,143		240,100		413,628		4,492,871		13.75		35,887		25,555		197,032		258,474		28.84	%
Mortgage		10,275,966		457,948		529,081		11,262,995		34.47		8,446		14,509		78,104		101,059		11.28	%
Consumer		4,963,047		292,718		290,430		5,546,195		16.98		67,396		50,808		170,263		288,467		32.19	%
Subtotal		19,078,156		990,766		1,233,139		21,302,061		65.20		111,729		90,872		445,399		648,000		72.31	%
Total		29,041,636		1,995,733		1,634,146		32,671,515		100.00		133,269		121,261		641,565		896,095		100.00	%

129

Table of Contents

	As of December 31, 2018
Commercial	Stage 1		Stage 2		Stage 3		Total Individually Assessed		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
	(in Ch$ millions)								%			(in Ch$ millions)								%
A1		29,998						29,998		0.10	%		2		—		—		2		0.00	%
A2		1,074,789						1,074,789		3.56	%		525		—		—		525		0.06	%
A3		2,699,684		309				2,699,993		8.94	%		2,526		—		—		2,526		0.29	%
A4		3,200,608		16,546				3,217,154		10.65	%		8,865		323		—		9,188		1.04	%
A5		1,755,259		26,141				1,781,400		5.90	%		11,296		453		—		11,749		1.33	%
A6		935,499		45,671				981,170		3.25	%		6,975		2,213		—		9,188		1.04	%
B1		—		494,915		187		495,102		1.64	%		—		14,107		79		14,186		1.61	%
B2		—		81,955		156		82,111		0.27	%		—		2,786		66		2,852		0.32	%
B3		—		67,089		614		67,703		0.22	%		—		3,841		233		4,074		0.46	%
B4		—		47,653		45,480		93,133		0.31	%		—		2,488		19,688		22,176		2.51	%
C1		—		46,383		108,325		154,708		0.51	%		—		2,548		48,147		50,695		5.75	%
C2		—		15,678		39,246		54,924		0.18	%		—		1,261		18,171		19,432		2.20	%
C3		—		19,655		26,204		45,859		0.15	%		—		733		10,803		11,536		1.31	%
C4		—		3,560		32,445		36,005		0.12	%		—		246		17,077		17,323		1.96	%
C5		—		703		64,762		65,465		0.22	%		—		32		40,541		40,573		4.60	%
C6		—		1,525		69,510		71,035		0.22	%		—		35		43,310		43,345		4.91	%
Subtotal		9,695,837		867,783		386,929		10,950,549		36.24	%		30,189		31,066		198,115		259,370		29.39	%

Commercial	Stage 1		Stage 2		Stage 3		Total Collectively Assessed		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
	(in Ch$ millions)								%			(in Ch$ millions)								%
Commercial		3,616,969		232,472		386,154		4,235,595		14.02	%		43,541		24,574		179,317		247,432		28.04	%
Mortgage		4,341,740		249,039		285,510		4,876,289		16.14	%		70,904		54,372		159,066		284,342		32.22	%
Consumer		9,258,962		447,496		444,523		10,150,981		33.60	%		9,006		15,102		67,162		91,270		10.34	%
Subtotal		17,217,671		929,007		1,116,187		19,262,865		63.76	%		123,451		94,048		405,545		623,044		70.61	%
Total		26,913,508		1,796,790		1,503,116		30,213,414		100.00	%		153,640		125,114		603,660		882,414		100.00	%

Write-offs

As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge- offs consist of de-recognition from the Consolidated Statements of Financial Position of the corresponding loans operations in its entirety, and, therefore, include portions not past-due of a loan in the case of installments loans or leasing operations (no partial charge-offs exists). Subsequent payments obtained from charged-off loans will be recognized in the Consolidated Statement of Income as a recovery of loans previously charged-off. Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments based on the time periods expired since reaching overdue status, as described below:

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

Any 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. In general, legal collection proceedings are commenced with respect to consumer loans once they are past-due for at least 90 days and, with respect to mortgage loans, once they are past-due for at least 120 days. Legal collection proceedings are always commenced within one year of such loans becoming past-due, unless we determine that the size of the past-due amount does not warrant such proceedings. In addition, the majority of our commercial loans are short-term, with single payments at maturity. Past-due loans are required to be covered by individual loan loss reserves equivalent to 100.0% of any unsecured portion thereof.

130

Table of Contents

Analysis of Stage 1, Stage 2 and Stage 3 loans

Commercial loans at amortized cost

In 2020, commercial loans grew 7.1% or Ch$1,124,864 million with growth mainly coming from our SME segment through the FOGAPE loans. In 2020, there was a rise in commercial loans transferred to Stage 2 as a result of an adjustment due to the deterioration of macroeconomic variables. In June 2020, Ch$228,000 million where transferred from Stage 1 to Stage 2. The transfers to stage 3 and the increase in write-offs was due to the slower economic growth as result of the lockdowns due to the COVID-19 pandemic, which affected loans in the SME segment, as well as Middle-market and Corporate loans in sectors more heavily affected by the pandemic.

	Stage 1						Stage 2						Stage 3						Total
Commercial loans	Individual			Collective			Individual			Collective			Individual			Collective
	(In millions of Ch$)
Gross carrying amount at January 1, 2020		10,208,264			3,594,359			1,004,967			240,100			401,007			413,628			15,862,325
Transfers
Transfers to stage 2		(1,355,492	)		(277,926	)		1,355,492			277,926			-			-			-
Transfers to stage 3		(2,492	)		(52,304	)		-			-			2,492			52,304			-
Transfers to stage 3		-			-			(198,124	)		(163,049	)		198,124			163,049			-
Transfers to stage 1		239,349			162,768			(239,349	)		(162,768	)		-			-			-
Transfers to stage 2		-			-			4,022			117,446			(4,022	)		(117,446	)		-
Transfers to stage 1		-			138			-			-			-			(138	)		-
Net changes on financial assets		676,413			867,445			(337,291	)		(80,505	)		(537	)		(28,040	)		1,097,485
Write-off		-			-			-			-			(66,989	)		(101,548	)		(168,537	)
Foreign exchange adjustments and others		(1,243	)		10,082			(2	)		(559	)		(9	)		52			8,321
At December 31, 2020		9,764,799			4,493,999			1,589,715			228,591			530,066			380,019			16,987,189

Mortgage loans at amortized cost

In 2020, mortgage loans grew 10.2% or Ch$1,148,830 million, as the lower long-term interest rates drove clients to take out more mortgages. Mortgage loans classified in Stage 2 and Stage 3 declined 14.3% and 5.3%, respectively. After the 6-month grace periods expired for the majority of these loans in November 2020, most of our clients showed a positive payment behavior and remained under Stage 1.

	Stage 1			Stage 2			Stage 3
Mortgage loans	Collective			Collective			Collective			Total
	(in millions of Ch$)
Gross carrying amount at January 1, 2020		10,275,966			457,948			529,081			11,262,995
Transfers
Transfers to stage 2		(248,167	)		248,167			-			-
Transfers to stage 3		(53,621	)		-			53,621			-
Transfers to stage 3		-			(215,547	)		215,547			-
Transfers to stage 1		321,954			(321,954	)		-			-
Transfers to stage 2		-			248,635			(248,635	)		-
Transfers to stage 1		463			-			(463	)		-
Net changes on financial assets		1,221,898			(25,440	)		(22,147	)		1,174,311
Write-off		-			-			(25,831	)		(25,831	)
Foreign exchange adjustments and others		(130	)		563			(83	)		350
At December 31, 2020		11,518,363			392,372			501,090			12,411,825

131

Table of Contents

Consumer loans at amortized cost

In 2020, consumer loans decreased 10.9% or Ch$ 605,316 million due to low demand for loans following the COVID-19 pandemic lockdowns. This decrease is explained be the fact that we are mainly focused on lending to high-income earners, who mostly kept their jobs and increased their savings household rate. The majority of households also accessed their pension fund withdrawal, which in the initial stage was tax free, and therefore demand for consumer loans fell.

	Stage 1			Stage 2			Stage 3
Consumer loans	Collective			Collective			Collective			Total
	(in millions of Ch$)
Gross carrying amount at January 1, 2020		4,963,047			292,718			290,430			5,546,195
Transfers
Transfers to stage 2		(410,942	)		410,942			-			-
Transfers to stage 3		(16,962	)		-			16,962			-
Transfers to stage 3		-			(223,169	)		223,169			-
Transfers to stage 1		238,800			(238,800	)		-			-
Transfers to stage 2		-			57,574			(57,574	)		-
Transfers to stage 1		2,225			-			(2,225	)		-
Net changes on financial assets		(337,006	)		(62,658	)		13,763			(385,901	)
Write-off		-			-			(219,402	)		(219,402	)
Foreign Exchange adjustments		1			(12	)		(4	)		(15	)
At December 31, 2020		4,439,163			236,595			265,121			4,940,879

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

The following table analyzes our non-performing and impaired loans. Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest. For 2020, 2019 and 2018 impaired loans include all loans classified as Stage 3 according to IFRS 9. Prior to January 1, 2018, impaired loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See “Note 9—Loans and Accounts Receivables from Customers—(a) Loans and accounts receivable from customers” in the Audited Consolidated Financial Statements.

	2020 (1)			2019 (1)			2018 (1)			2017			2016
							(Ch$ million)
Total loans		34,339,893			32,671,515			30,213,414			27,725,914			27,206,431
Allowance for loan losses		1,036,793			896,095			882,414			791,157			790,605
Impaired loans(2)		1,676,296			1,634,146			1,503,116			1,803,173			1,615,441
Impaired loans as a percentage of total loans		4.88	%		5.00	%		4.97	%		6.50	%		5.94	%
Amounts non-performing		486,435			671,336			631,649			633,461			564,131
To the extent secured(3)		285,731			375,052			323,095			318,218			298,537
To the extent unsecured		200,704			296,284			308,554			315,243			265,594
Amounts non-performing as a percentage of total loans		1.42	%		2.05	%		2.09	%		2.28	%		2.07	%
To the extent secured(3)		0.83	%		1.15	%		1.07	%		1.15	%		1.10	%
To the extent unsecured		0.58	%		0.91	%		1.02	%		1.14	%		0.98	%
Loans loss allowances as a percentage of:
Total loans		3.02	%		2.74	%		2.92	%		2.85	%		2.91	%
Total amounts non-performing		213.14	%		133.48	%		139.70	%		124.89	%		140.15	%
Total amounts non-performing- unsecured		516.58	%		302.44	%		285.98	%		250.97	%		297.67	%

____________________

(1)

For 2020, 2019 and 2018, loan information corresponds to loans at amortized cost in accordance with IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost - under IFRS 9” of the Audited Consolidated Financial Statements.

(2)

For 2018, 2019 and 2020 impaired loans include all loans classified as Stage 3 according to IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost - under IFRS 9” of the Audited Consolidated Financial Statements. Prior to January 1, 2018, impaired loans include (a) for loans individually evaluated for impairment:

132

Table of Contents

(i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. Renegotiated loans on which payments are not past-due are not ordinarily classified as non-performing loans, but do not accrue interest.

(3)

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

A break-down of the loans included in the previous table which have been classified as impaired, including renegotiated loans, is as follows:

As of December 31, 2020

Impaired loans at amortized cost

Commercial

Residential mortgage

Consumer

Total

(in millions of Ch$)

Total impaired loans at amortized cost

910,085

501,090

265,121

1,676,296

In 2020, we saw an increase in impaired loans (Stage 3) in our portfolio due to the effects of the pandemic, especially in the commercial portfolio. Both residential and consumer clients decreased the amount of impaired loans, mainly due to good payment behavior as a result of our focus on high income earners and as the government permitted people to access their private pensions to counter the effects of an economic slowdown. The consumer portfolio also shrunk in the year.

As of December 31, 2019

Impaired loans at amortized cost

Commercial

Residential mortgage

Consumer

Total

(in millions of Ch$)

Total impaired loans at amortized cost

814,635

529,081

290,430

1,634,146

In 2019, we saw an increase in impaired loans (Stage 3) in our portfolio due to the effects of the social unrest in the latter part of the year.

As of December 31, 2018

Impaired loans at amortized cost

Commercial

Residential mortgage

Consumer

Total

(in millions of Ch$)

Total impaired loans at amortized cost

773,083

444,523

285,510

1,503,116

In 2018, we saw a decrease in impaired loans (Stage 3) in our portfolio despite a strong increase in loan volumes during the year. Apart from the adoption of IFRS 9 criteria, this was due to an improvement in management of client risk and risk appetite.

	As of December 31, 2017
Impaired loans	Commercial		Residential mortgage		Consumer		Total
	(in millions of Ch$)
Non-performing loans		368,522		161,768		103,171		633,461
Commercial loans at risk of default (1)		427,890		—		—		427,890
Other impaired loans consisting mainly of renegotiated loans (2)		217,091		300,776		223,955		741,822
Total		1,013,503		462,544		327,126		1,803,173

133

Table of Contents

	As of December 31, 2016
Impaired loans	Commercial		Residential mortgage		Consumer		Total
	(in millions of Ch$)
Non-performing loans		316,838		147,572		99,721		564,131
Commercial loans at risk of default (1)		439,707		—		—		439,707
Other impaired loans consisting mainly of renegotiated loans (2)		172,624		250,116		188,863		611,603
Total		929,169		397,688		288,584		1,615,441

____________________

(1)

Total loans to a debtor, whose allowance level is determined on an individual basis with a risk of defaulting.

(2)

Renegotiated loans for loans whose loan loss allowance is analyzed on a group basis.

As of December 31, 2020, 2019 and 2018 under IFRS 9

Modified loans

When a loan measured at amortized cost has been renegotiated or modified but not derecognized, the Bank must recognize the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the EIR before modification. If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made by comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term. If the modification results in derecognition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recognition for the purposes of the impairment requirements.

	As of December 31, 2020
	Stage 1		Stage 2			Stage 3			Total
	(in millions of Ch$)
Gross carrying amount		30,216,324		2,447,273			1,676,296			34,339,893
Modified loans		-		799,572			886,021			1,685,593
%		-		36.67	%		52.86	%		4.91	%

ECL allowance		194,422		149,940			692,431			1,036,793
Modified loans				33,118			409,485			442,603
%				22.09	%		59.14	%		42.69	%

	As of December 31, 2019
	Stage 1		Stage 2			Stage 3			Total
	(in millions of Ch$)
Gross carrying amount		29,041,636		1,995,733			1,634,146			32,671,515
Modified loans		-		512,529			611,316			1,123,845
%		-		25.7	%		37.4	%		3.4	%

ECL allowance		133,269		121,261			641,565			896,095
Modified loans		-		36,329			242,649			278,978
%		-		30.0	%		37.8	%		31.1	%

	As of December 31, 2018
	Stage 1		Stage 2			Stage 3			Total
	(in millions of Ch$)
Gross carrying amount		26,913,508		1,796,790			1,503,116			30,213,414
Modified loans		—		582,513			815,094			1,397,607
%				32.4	%		54.2	%		4.6	%


ECL allowance		153,640		125,114			603,660			882,414
Modified loans		—		44,099			323,802			367,901
%		—		35.3	%		53.6	%		41.7	%

134

Table of Contents

The following table shows the success rate of renegotiated consumer and residential loans used for management purposes, for the periods indicated. The success rate for consumer loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2020, minus the amount of such renegotiated loans that have been charged off as of December 31, 2020, divided by (ii) the total amount of such renegotiated loans. The success rate for residential mortgage loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2020, divided by (ii) the total amount of such renegotiated loans. A charge-off of a residential mortgage loan is not generally included in measuring the success rate of mortgage renegotiations since the period to charge-off a mortgage loan is 48 months after an installment is past-due.

Period of Renegotiation	Success Rate Consumer Loans at December 31, 2020			Residential Mortgage Loans at December 31, 2020
First Quarter 2019		40.1	%		79.9	%
Second Quarter 2019		44.4	%		87.5	%
Third Quarter 2019		52.5	%		76.6	%
Fourth Quarter 2019		69.0	%		75.1	%
First Quarter 2020		69.1	%		79.3	%
Second Quarter 2020		85.1	%		73.5	%
Third Quarter 2020		94.7	%		91.8	%
Fourth Quarter 2020		99.1	%		93.3	%

The COVID-19 pandemic has had a major impact on Chile and global economies in 2020. Because this, the Chilean government has announced a program in agreement with the major banks in the country, through which SME’s may apply for COVID-19 credit lines for working capital at a real interest rate close to 0% and guaranteed by FOGAPE. Additionally, the Bank – in accordance with FMC’s instruction to facilitate access to credit for companies and households - has provided payment holiday terms of up to three months to mortgage customers with no more 30 days past due. This was extended by a further three months for customers in need. For consumer loans, the Bank has granted benefits such as a 3-month grace period to start paying, increases in terms, decreases in installments, and has even opted for current lower market rates.

Customers who sought COVID-19 related support, including payment holidays, were not the subject of any wider SICR triggers, and do not have to be moved to Stage 2 for a lifetime ECL assessment unless they had triggered other SICR criteria, and payment holidays also did not cause accounts to become past due and therefore did not automatically trigger a Stage 2 or Stage 3 lifetime ECL assessment.

The assessment of SICRs and the measurement of ECLs required to be based on reasonable and supportable information that is available to an entity without undue cost or effort. The Bank has developed estimates based on the best available information about past events, current conditions and forecasts of economic conditions. In assessing forecast conditions, the Bank has considered the effects of COVID-19 and the government support measures being undertaken. Despite of the above, with current COVID-19 infection rates having increased and continued high levels of uncertainty in the macro-economic outlook and to address a potential lag in defaults, we make use of a management overlay as part of our provisions for credit losses.

135

Table of Contents

The Bank has conducted an exhaustive analysis of the measures implemented as a result of COVID-19, under the perspective of modified assets. Thus, in our commercial loan portfolio, the COVID-19 credit lines for working capital guaranteed by FOGAPE were new operations, hence, they were left out of the analysis. The modifications granted to our consumer loan portfolio were 3-month grace periods, modified terms and installments, and allowed modified interest rate, to the current market lower rates. Therefore, these consumer loans were accounted for a new financial assets. In line with our internal guide, these modifications are classified as modifications for commercial reasons, because they are not attributable to the financial difficulty of the debtor, and a new loan operation has been originated under current market conditions.

For the mortgage loan portfolio, original contractual conditions were not modified. Instead, the clients signed an addendum for the postponed installments, and a complementary operation was generated, with the mortgage guarantee covering both operations. Neither the monthly installments nor the rates were modified. This measure was granted only to clients with less than 30 days past due, and 98% of our clients are meeting their obligations in a timely manner. In line with our internal guide, we have concluded that the modifications granted to customers with no past due days were classified as modifications for commercial reasons, while clients with any past dues or that have had some restructuring, were classified as modifications for the financial difficulty of the debtor, and the Bank has calculated the difference between the gross carrying amount and the present value of the modified loans discounted at the original effective interest rate. The amount of these loans was not material to the Bank.

COVID-19 support measures

As of December 31, 2020, the relief measures were classified into new loans subject to government guarantee and payment holiday granted by the Bank:

COVID-19 measures	As of December 31, 2020
COVID-19 measures	In millions of Ch$ (Ch$mn)
New loans subject to government guarantee	2,076,119
Payment holiday	9,098,028
Payment holiday – current	734,986
Payment holiday - expired	8,363,042

The payment holidays were mainly granted to mortgage loan agreements, and postponed principal, interest, inflation and insurances. The Bank has closely monitored the payment holidays which have expired, determining that Ch$8,241,191 million correspond to clients who are servicing their debt properly, and Ch$121,850 million to clients that have defaulted.

The following table shows residual maturity of the grace periods that have not expired as of December 31, 2020:

Residual maturity		<= 6 months	<= 12 months	<= 12 months	> 2 year <= 5 year
Residual maturity	Ch$mn	Ch$mn	Ch$mn	Ch$mn	Ch$mn
New loans subject to government guarantee	2,076,119	-	-	214,400	1,861,719
Payment holiday – current	734,986	722,746	7,861	4,379	-

136

Table of Contents

The following diagram shows the breakdown of the Covid-19 measures as of December 31, 2021, including those that have expired and the aggregate amount of loans that are paying on time and those that are overdue:

Analysis of Loan Loss Allowances

The following tables show for 2020 the movement of provisions for expected credit losses for loans at amortized cost according to IFRS 9:

Commercial loans

	Stage 1						Stage 2						Stage 3
	Individual			Collective			Individual			Collective			Individual			Collective			Total
	(In millions of Ch$)
ECL allowance at January 1, 2020		21,539			35,888			30,389			25,555			196,165			197,033			506,569
Transfers
Transfers to stage 2		(23,652	)		(16,137	)		50,253			48,464			-			-			58,928
Transfers to stage 3		(9	)		(3,007	)		-			-			1,089			22,152			20,225
Transfers to stage 3		-			-			(25,214	)		(29,540	)		73,885			55,645			74,776
Transfers to stage 1		2,919			4,921			(9,322	)		(20,605	)		-			-			(22,087	)
Transfers to stage 2		-			-			943			4,424			(1,560	)		(22,995	)		(19,188	)
Transfers to stage 1		-			5			-			-			-			(45	)		(40	)
Net changes of the exposure and modifications in credit risk		39,971			19,449			18,462			15,122			58,915			43,498			195,417
Write-off		-			-			-			-			(66,989	)		(100,393	)		(167,382	)
Foreign exchange adjustments and others		(1,179	)		9			(59	)		895			-			11			(323	)
At December 31, 2020		39,589			40,943			65,452			4,315			261,505			193,268			645,072

137

Table of Contents

Mortgage loans

	Stage 1						Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2020		8,446			14,509			78,104			101,059
Transfers
Transfers to stage 2		(5,250	)		12,502			-			7,252
Transfers to stage 3		(472	)		-			4,548			4,076
Transfers to stage 3		-			(8,923	)		20,034			11,111
Transfers to stage 1		3,187			(13,912	)		-			(10,725	)
Transfers to stage 2		-			7,033			(28,146	)		(21,113	)
Transfers to stage 1		2			-			(37	)		(35	)
Net changes of the exposure and modifications in credit risk		19,162			(2,791	)		30,352			46,723
Write-off		-			-			(25,831	)		(25,831	)
Foreign exchange adjustments and others		(10	)		23			(8	)		5
At December 31, 2020		25,065			8,441			79,016			112,522

Consumer loans

	Stage 1						Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2020		67,396			50,808			170,263			288,467
Transfers
Transfers to stage 2		(36,422	)		95,850			-			59,428
Transfers to stage 3		(1,484	)		-			9,061			7,577
Transfers to stage 3		-			(75,229	)		108,792			33,563
Transfers to stage 1		13,589			(41,928	)		-			(28,339	)
Transfers to stage 2		-			10,162			(28,649	)		(18,487	)
Transfers to stage 1		254			-			(865	)		(611	)
Net changes of the exposure and modifications in credit risk		45,492			(7,926	)		104,328			141,894
Write-off.		-			-			(204,286	)		(204,286	)
Foreign exchange adjustments and others..		-			(5	)		(2	)		(7	)
At December 31, 2020		88,825			31,732			158,642			279,199

The following tables show for 2019 the movement of provisions for expected credit losses for loans at amortized cost according to IFRS 9:

Commercial loans

	Stage 1						Stage 2						Stage 3
	Individual			Collective			Individual			Collective			Individual			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2019(*)		30,189			44,104			31,066			24,945			198,115			179,771			508,190
Transfers
Transfers to stage 2		(7,786	)		(20,058	)		17,237			68,705			-			-			58,098
Transfers to stage 3		-			(2,666	)		-			-			-			16,087			13,421
Transfers to stage 3		-			-			(8,567	)		(42,601	)		44,203			71,200			64,235
Transfers to stage 1		1,576			4,838			(7,525	)		(22,278	)		-			-			(23,389	)
Transfers to stage 2		-			-			685			9,667			(3,867	)		(27,482	)		(20,997	)
Transfers to stage 1		-			88			-			-			-			(242	)		(154	)
Net changes of the exposure and modifications in credit risk		(6,948	)		14,199			(3,151	)		(12,533	)		41,365			54,962			87,894
Write-off		-			-			-			-			(83,844	)		(94,014	)		(177,858	)
Foreign exchange adjustments and others		4,508			(4,617	)		644			(350	)		193			(3,249	)		(2,871	)
At December 31, 2019		21,539			35,888			30,389			25,555			196,165			197,033			506,569

____________________

(*) Include loans and ECL balances of the acquired Santander Consumer Chile S.A.

138

Table of Contents

Mortgage loans

	Stage 1						Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2019		9,006			15,102			67,162			91,270
Transfers
Transfers to stage 2		(3,318	)		20,509			-			17,191
Transfers to stage 3		(311	)		-			5,994			5,683
Transfers to stage 3		-			(12,598	)		31,654			19,056
Transfers to stage 1		1,374			(13,849	)		-			(12,475	)
Transfers to stage 2		-			8,341			(29,303	)		(20,962	)
Transfers to stage 1		6			-			(193	)		(187	)
Net changes of the exposure and modifications in credit risk		1,655			(3,054	)		32,561			31,162
Write-off		-			-			(34,184	)		(34,184	)
Foreign exchange adjustments and others		34			58			4,413			4,505
At December 31, 2019		8,446			14,509			78,104			101,059

Consumer loans

	Stage 1			Stage 2			Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2019 (*)		75,495			60,467			165,052			301,014
Transfers
Transfers to stage 2		(28,717	)		109,916			-			81,199
Transfers to stage 3		(1,633	)		-			11,699			10,066
Transfers to stage 3		-			(78,909	)		111,334			32,425
Transfers to stage 1		7,941			(32,506	)		-			(24,565	)
Transfers to stage 2		-			17,002			(31,914	)		(14,912	)
Transfers to stage 1		47			-			(233	)		(186	)
Net changes of the exposure and modifications in the credit risk		15,641			(25,712	)		135,298			125,227
Write-off		-			-			(223,919	)		(223,919	)
Foreign Exchange adjustments		(1,378	)		550			2,946			2,118
At December 31, 2019		67,396			50,808			170,263			288,467

____________________

(*) Include loans and ECL balances of the acquired Santander Consumer Chile S.A.

The following tables show for 2018 the movement of provisions for expected credit losses for loans at amortized cost according to IFRS 9:

Commercial loans

	Stage 1						Stage 2						Stage 3
	Individual			Collective			Individual			Collective			Individual			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2018		29,797			50,014			28,282			23,041			191,397			160,182			482,713
Transfers
Transfers to stage 2		(2,719	)		(1,525	)		8,005			8,169			—			—			11,930
Transfers to stage 3		(241	)		(2,697	)		—			—			6,612			29,839			33,513
Transfers to stage 3		—			—			(5,541	)		(6,776	)		22,705			17,475			27,863
Transfers to stage 1		167			553			(411	)		(3,402	)		—						(3,093	)
Transfers to stage 2		—						330			1,854			(1,704	)		(6,776	)		(6,296	)
Transfers to stage 1		—			22			—			—			—			(72	)		(50	)
Net changes of the exposure and modifications in the credit risk		4,105			3,770			2,740			2,855			1,251			29,253			43,974
Write-off		—			—			—						(37,439	)		(58,510	)		(95,949	)
Foreign Exchange adjustments		(920	)		(6,696	)		(2,339	)		(1,167	)		15,293			7,926			12,197
At December 31, 2018		30,189			43,541			31,066			24,574			198,115			179,317			506,802

139

Table of Contents

Mortgage loans

	Stage 1			Stage 2			Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2018		14,602			20,227			73,190			108,019
Transfers
Transfers to stage 2		(516	)		3,846			—			3,330
Transfers to stage 3		(383	)		—			9,060			8,677
Transfers to stage 3		—			(2,518	)		8,056			5,538
Transfers to stage 1		263			(6,255	)		—			(5,992	)
Transfers to stage 2		—			2,296			(10,185	)		(7,889	)
Transfers to stage 1		232			—			(232	)		—
Net changes of the exposure and modifications in the credit risk		1,601			575			(1,784	)		392
Write-off		—			—			(13,548	)		(13,548	)
Foreign Exchange adjustments		(6,793	)		(3,069	)		2,605			(7,257	)
At December 31, 2018		9,006			15,102			67,162			91,270

Consumer loans

	Stage 1			Stage 2			Stage 3
	Collective			Collective			Collective			Total
	(in millions of Ch$)
ECL allowance at January 1, 2018		72,712			54,557			170,090			297,359
Transfers
Transfers to stage 2		(2,117	)		14,655			—			12,538
Transfers to stage 3		(1,431	)		—			16,311			14,880
Transfers to stage 3		—			(3,913	)		10,721			6,808
Transfers to stage 1		1,320			(4,890	)		—			(3,570	)
Transfers to stage 2		—			2,943			(9,107	)		(6,164	)
Transfers to stage 1		18			—			(18	)		—
Net changes of the exposure and modifications in the credit risk		3,782			(8,572	)		42,194			37,404
Write-off		—			—			(64,506	)		(64,506	)
Foreign Exchange adjustments		(3,380	)		(408	)		(6,619	)		(10,407	)
At December 31, 2018		70,904			54,372			159,066			284,342

As of January 1, 2018, the Bank has adopted IFRS 9. The following table reconciles the prior period’s closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new expected loss impairment model according to IFRS 9.

	Loans loss allowance under IAS 39		Reclassification			Remeasurement		Loans loss allowance under IFRS 9
	(in millions of Ch$)
Loans and receivable (IAS 39)/ Financial assets at amortized cost (IFRS 9)
Interbank loans		472		(472	)		—		—
Loans and account receivable from customers		790,685		84			97,322		888,091
Total loans and account receivable at amortized cost		791,157		(388	)		97,322		888,091

140

Table of Contents

The following table provides the details of the roll-forwards in 2017 and 2016 of our allowance for loan losses under IAS 39, including decrease of allowances due to charge-offs, allowances established, allowances released, gross provision expense and opening and closing balance:

	Commercial loans						Mortgage loans			Consumer loans
Activity during 2017	Individual			Group			Group			Group			Interbank loan			Total
	(in millions of Ch$)
Balances as of December 31, 2016		246,336			183,106			57,009			300,019			4,135			790,605
Allowances established (1)		64,658			148,681			43,621			252,038			307			509,305
Allowances released (2)		(55,925	)		(20,491	)		(11,427	)		(46,089	)		(3,970	)		(137,902	)
Released allowances by charge- off (3)		(36,279	)		(92,223	)		(20,137	)		(222,212	)		—			(370,851	)
Balances as of December 31, 2017		218,790			219,073			69,066			283,756			472			791,157

	Commercial loans						Mortgage loans			Consumer loans
Activity during 2016	Individual			Group			Group			Group			Interbank loan			Total
	(in millions of Ch$)
Balances as of December 31, 2015		256,505			174,696			62,427			267,507			1,166			762,301
Allowances established (1)		61,002			133,855			50,892			280,544			3,052			529,345
Allowances released (2)		(43,183	)		(14,432	)		(34,246	)		(30,790	)		(83	)		(122,734	)
Released allowances by charge- off (3)		(27,988	)		(111,013	)		(22,064	)		(217,242	)		—			(378,307	)
Balances as of December 31, 2016		246,336			183,106			57,009			300,019			4,135			790,605

____________________

(1)

Represents gross allowances made in respect of increased risk of loss during the period and loan growth.

(2)

Represents the gross amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and loans paid.

(3)

Represents the gross amount of loan loss allowances removed due to charge-off.

141

Table of Contents

Allocation of the Loan Loss Allowances

The following tables set forth, as of December 31, 2020, 2019 and 2018 according to IFRS 9 and for the previous four years listed under IAS 39, the proportions of our required loan loss allowances that were attributable to our commercial, consumer and residential mortgage loans at each such date.

	As of December 31, 2020
	Total ECL Allowance		Allowance amount as a percentage of loans in category			Allowance amount as a percentage of total loans at amortized cost			Allowance amount as a percentage of total allowances for loans at amortized cost
		Ch$ million
Commercial loans
Interbank loans		1		0.0	%		0.0	%		0.0	%
Commercial loans		498,146		3.7	%		1.5	%		48.0	%
Foreign trade loans		41,261		3.3	%		0.1	%		4.0	%
Checking accounts debtors		11,602		9.2	%		0.0	%		1.1	%
Factoring transactions		4,129		0.8	%		0.0	%		0.4	%
Student loans		8,798		13.9	%		0.0	%		0.8	%
Leasing transactions		59,687		4.4	%		0.2	%		5.8	%
Other loans and accounts receivable		21,448		10.9	%		0.1	%		2.1	%
Subtotals		645,072		3.8	%		1.9	%		62.2	%
Residential mortgage loans
Loans with mortgage finance bonds		84		1.1	%		0.0	%		0.0	%
Mortgage mutual loans		758		0.8	%		0.0	%		0.1	%
Other mortgage mutual loans		111,680		0.9	%		0.3	%		10.8	%
Subtotals		112,522		0.9	%		0.3	%		10.9	%
Consumer loans
Installment consumer loans		255,516		6.9	%		0.7	%		24.6	%
Credit card balances		19,959		1.8	%		0.1	%		1.9	%
Consumer leasing contracts		67		2.1	%		0.0	%		0.0	%
Other consumer loans		3,657		3.0	%		0.0	%		0.4	%
Subtotals		279,199		5.7	%		0.8	%		26.9	%
Totals loans to clients		1,036,793		3.0	%		3.0	%		100.0	%

	As of December 31, 2019
	Total ECL Allowance		Allowance amount as a percentage of loans in category			Allowance amount as a percentage of total loans at amortized cost			Allowance amount as a percentage of total allowances for loans at amortized cost
		Ch$ million
Commercial loans
Interbank loans		1		0.0	%		0.0	%		0.0	%
Commercial loans		384,124		3.3	%		1.2	%		42.9	%
Foreign trade loans		28,387		1.7	%		0.1	%		3.2	%
Checking accounts debtors		11,900		6.0	%		0.0	%		1.3	%
Factoring transactions		3,296		0.7	%		0.0	%		0.4	%
Student loans		9,319		13.1	%		0.0	%		1.0	%
Leasing transactions		44,645		3.1	%		0.1	%		5.0	%
Other loans and accounts receivable		24,615		10.1	%		0.1	%		2.7	%
Subtotals		506,569		3.2	%		1.6	%		56.5	%
Residential mortgage loans
Loans with mortgage finance bonds		137		1.1	%		0.0	%		0.0	%
Mortgage mutual loans		816		0.8	%		0.0	%		0.1	%
Other mortgage mutual loans		100,106		0.9	%		0.3	%		11.2	%
Subtotals		101,059		0.9	%		0.3	%		11.3	%
Consumer loans
Installment consumer loans		255,061		6.5	%		0.8	%		28.5	%
Credit card balances		27,337		2.0	%		0.1	%		3.1	%
Consumer leasing contracts		122		3.1	%		0.0	%		0.0	%
Other consumer loans		5,947		2.4	%		0.0	%		0.7	%
Subtotals		288,467		5.2	%		0.9	%		32.2	%
Totals loans to clients		896,095		2.7	%		2.7	%		100.0	%

142

Table of Contents

	As of December 31, 2018
	Total ECL Allowance		Allowance amount as a percentage of loans in category			Allowance amount as a percentage of total loans at amortized cost			Allowance amount as a percentage of total allowances for loans at amortized cost
		Ch$ million
Commercial loans
Interbank loans		10		0.1	%		0.0	%		0.0	%
Commercial loans		368,786		3.3	%		1.2	%		41.8	%
Foreign trade loans		39,917		2.3	%		0.1	%		4.5	%
Checking accounts debtors		13,784		6.4	%		0.0	%		1.6	%
Factoring transactions		4,353		1.1	%		0.0	%		0.5	%
Student loans		11,190		14.0	%		0.0	%		1.3	%
Leasing transactions		38,800		2.7	%		0.1	%		4.4	%
Other loans and accounts receivable		29,962		18.2	%		0.1	%		3.4	%
Subtotals		506,802		3.3	%		1.7	%		57.4	%
Residential mortgage loans
Loans with mortgage finance bonds		177		1.0	%		0.0	%		0.0	%
Mortgage mutual loans		805		0.7	%		0.0	%		0.1	%
Other mortgage mutual loans		90,288		0.9	%		0.3	%		10.2	%
Subtotals		91,270		0.9	%		0.3	%		10.3	%
Consumer loans
Installment consumer loans		247,387		7.8	%		0.8	%		28.0	%
Credit card balances		28,788		2.0	%		0.1	%		3.3	%
Consumer leasing contracts		127		3.1	%		0.0	%		0.0	%
Other consumer loans		8,040		3.0	%		0.0	%		0.9	%
Subtotals		284,342		5.8	%		0.9	%		32.2	%
Totals loans to clients		882,414		2.9	%		2.9	%		100.0	%

	As of December 31, 2017											As of December 31, 2016
	Total Allowance		Allowance amount as a percentage of loans in category			Allowance amount as a percentage of total loans			Allowance amount as a percentage of total allowances			Total Allowance		Allowance amount as a percentage of loans in category			Allowance amount as a percentage of total loans			Allowance amount as a percentage of total allowances
	Ch$ Million
Commercial loans
Commercial loans		301,990		3.0	%		1.1	%		38.2	%		308,166		3.1	%		1.1	%		39.0	%
Foreign trade loans		50,470		3.2	%		0.2	%		6.4	%		57,820		3.2	%		0.2	%		7.3	%
Checking accounts debtors		14,466		7.4	%		0.1	%		1.8	%		9,648		5.4	%					1.2	%
Factoring transactions		5,995		1.3	%		—			0.8	%		5,407		1.8	%		—			0.7	%
Leasing transactions		30,322		2.1	%		0.1	%		3.8	%		23,139		1.6	%		0.1	%		2.9	%
Other loans and accounts receivable		34,620		14.4	%		0.1	%		4.4	%		25,262		11.4	%		0.1	%		3.2	%
Subtotals		437,863		3.1	%		1.6	%		55.3	%		429,442		3.1	%		1.6	%		54.3	%
Residential mortgage loans
Loans with mortgage finance bonds		123		0.5	%		—			—			16		—			—			—
Mortgage mutual loans		594		0.5	%		—			0.1	%		190		0.2	%		—			—
Other mortgage mutual loans		68,349		0.8	%		0.2	%		8.6	%		56,803		0.7	%		0.2	%		7.2	%
Subtotals		69,066		0.8	%		0.2	%		8.7	%		57,009		0.7	%		0.2	%		7.2	%
Consumer loans
Installment consumer loans		240,962		8.3	%		0.9	%		30.5	%		249,545		9.2	%		0.9	%		31.6	%
Credit card balances		33,401		2.4	%		0.1	%		4.2	%		41,063		2.8	%		0.2	%		5.2	%
Consumer leasing contracts		62		1.3	%		—			—			72		1.4	%		—			—
Other consumer loans		9,331		3.4	%		—			1.2	%		9,339		3.4	%		—			1.2	%
Subtotals		283,756		6.2	%		1.0	%		35.9	%		300,019		6.7	%		1.1	%		37.9	%
Totals loans to clients		790,685		2.9	%		2.9	%		99.9	%		786,470		2.9	%		2.9	%		99.5	%
Interbank loans		472		0.3	%		—			0.1	%		4,135		1.5	%		—			0.5	%
Totals		791,157		2.9	%		2.9	%		100.0	%		790,605		2.9	%		2.9	%		100.0	%

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

143

Table of Contents

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management Directors

We are managed by our Board of Directors, which, in accordance with our by-laws, consists of 9 directors and two alternates who are elected at our ordinary shareholders’ meetings. The current members of the Board of Directors were elected by the shareholders in the ordinary shareholders’ meeting held on April 30, 2020. Members of the Board of Directors are elected for three-year terms. The term of the current Board members expires in April of 2023.

Cumulative voting is permitted for the election of directors. The Board of Directors may appoint replacements to fill any vacancies that occur during periods between elections. If any member of the Board of Directors resigns before his or her term has ended, and no other alternate director is available to take the position at the next annual ordinary shareholders’ meeting a new replacing member will be elected. Our executive officers are appointed by the Board of Directors and hold office at its discretion. Scheduled meetings of the Board of Directors are held monthly. Extraordinary meetings can be held when called in one of three ways: by the Chairman of the Board of Directors, by three directors with the consent of the Chairman of the Board of Directors or by the majority of directors. None of the members of our Board of Directors has a service contract which entitles any Director to any benefits upon termination of employment with Santander-Chile.

Our current directors are as follows:

Directors	Position	Committees	Term Expires
Claudio Melandri Hinojosa	President	Asset and Liability Committee Strategy Committee (President) Market Committee Remuneration Committee Integral Risk Committee Management Appointment Committee	Apr-23

Rodrigo Vergara Montes	First Vice President	Market Committee Audit Committee Asset and Liability Committee (President) Strategy Committee	Apr-23

Orlando Poblete Iturrate	Second Vice President	Remuneration Committee (President) Audit Committee (President)	Apr-23

Felix de Vicente Mingo	Director	Asset and Liability Committee Audit Committee Integral Risk Committee Strategy Committee	Apr-23

Alfonso Gómez Morales	Director	Integral Risk Committee (President) Strategy Committee Remuneration Committee Market Committee Asset and Liability Committee	Apr-23

Ana Dorrego	Director	–	Apr-23

Rodrigo Echenique Gordillo	Director	–	Apr-23

Lucia Santa Cruz Sutil	Director	Strategy Committee Analysis and Resolution Committee Market committee Integral Risk Committee	Apr-23

144

Table of Contents

Directors	Position	Committees	Term Expires
Juan Pedro Santa Maria Perez	Director	Audit Committee (Secretary) Analysis and Resolution Committee (President) Integral Risk Committee	Apr-23

Blanca Bustamante Bravo	Alternate Director	Integral Risk Committee Strategy Committee Management Appointment Committee (President)	Apr-23

Oscar von Chrismar Carvajal	Alternate Director	Integral Risk Committee Market Committee (President) Strategy Committee Management Appointment Committee Asset and Liability Committee Analysis and Resolution Committee	Apr-23

____________________

Claudio Melandri Hinojosa became the Executive Chairman on February 27, 2018 and is country head ofupo Santander in Chile. He is also President of Santander Chile Holding S.A. and Vice President of Universia Chile S.A.. He has more than 30 years of experience in the financial indusy and was Chief Executive Officer of Santander Chile from January 2010 to March 2018. He started his career in Banco Concepción and joined Grupo Santander in 1990, where he has held various positions of responsibility, including Regional Manager, Manager of the branch network, Human Resources Manager and Manager of Commercial Banking. He was also a Vice President at Banco Santander Venezuela for three years in the commercial area of this country. Mr. Melandri has degrees in Business and Accounting and holds a Master of Business Administration from the Universidad Adolfo Ibañez.

Rodrigo Vergara became a director and First Vice President of the Board on July 12, 2018. He was President of the Central Bank of Chile between 2011 and 2016 and was a member of the Board of the Central Bank of Chile between 2009 and 2011. Mr. Vergara is an associate researcher at the Centre of Public Studies (CEP) and a research fellow at Harvard’s Mossavar-Rahmani Center for Business and Government (Kennedy School). He is a professor of Economics at Pontificia Universidad Católica de Chile and an economic consultant and board member for various companies. He graduated with an Economics Degree from the Pontificia Universidad Católica de Chile in 1985 and earned a Doctorate Degree in Economics from Harvard University in 1991. Between 1985 and 1995, he worked at the Central Bank of Chile where he was promoted to Chief Economist in 1992. He has been an economic consultant for central banks and governments within Latin America, Eastern Europe, Asia and Africa. He has also been an external consultant for the World Bank, the International Monetary Fund, the Inter-American Development Bank and the United Nations. He has served, among others, as a member in the Presidential Work and Equity Commission, the Advisory Commission on the Free Trade Agreement between Chile and the US, the National Savings Commission, the Fiscal Rule Commission and the Covid Economic Plan Commission. Mr. Vergara is the author of numerous articles published in specialized journals and has edited several books.

Orlando Poblete Iturrate is the Second Vice President and has served on the Board since April 22, 2014. Since 1991, Mr. Poblete has been a professor at the Universidad de los Andes. Between 1997 and 2004, he was Dean of the Law School at the Universidad de los Andes and until 2014 he served as Chancellor. He is also a partner at the law firm Orlando Poblete & Company. He is a member of the Counsel of the Arbitration and Mediation of Santiago of the Chamber of Commerce of Santiago. Previously, between 1979 and 1991, he was a professor of Procedural Law at the Universidad de Chile. Mr. Poblete is a lawyer from the University of Chile and has a Masters in Law from the same university. He is also a graduate of the Directive Management of Companies Program (PADE) of ESE Business School of the Universidad de los Andes.

Félix de Vicente Mingo became a director on March 27, 2018. He has a Business degree with a specialization in Economics from the Universidad de Chile. Between 2013 and 2014, he was Minister of Economy, Development and Tourism of Chile. Before this, he was a Trade Commissioner of ProChile, an institution of the Ministry of Foreign Affairs dedicated to promoting Chilean products abroad. His first position was in a fruit export company in the O’Higgins region of Chile and then Manager of Administration and Finance of Telemercados Europa, as well as being president and partner of various companies in Chile and abroad.

145

Table of Contents

Alfonso Gómez became a director on March 27, 2018. He has a Civil Engineering degree from the Universidad Católica de Chile, a Ph.D. of the Royal College of Art of London and he is an advisor to the Innovation Center UC Anacleto Angelini. He started his career in the Industrial and System Engineering Department of Universidad Católica de Chile. He was founder of various companies, such as Apple Chile, Unlimited and Virtualia, the first social network developed in Latin America. He has been a director of numerous companies and institutions such as the National Council of Culture and the Arts and Fundación País Digital, and the National Council of Innovation. He was Dean of the Faculty of Engineering and later Dean of the Business School of the Adolfo Ibáñez University.

Ana Dorrego became a director on March 15, 2015. She has been working at the Santander Group since 2000, mainly in the Financial Planning and Corporate Development department, coordinating the Group’s planning processes and following up on the different Santander Group units and projects. She is also director at CACEIS since December 2019. She was director of E-business development for the Santander Group and previously she was a corporate client relationship manager and commercial director of transactional banking at Bankinter. Ms. Dorrego holds a degree in Business Administration from the Universidad Pontificia de Comillas ICAI-ICADE, and a master’s degrees in Business Administration from Deusto University – Bilbao, Spain, and Adolfo Ibañez, Miami/Chile.

Rodrigo Echenique Gordillo became a director on March 26, 2019. He is currently the President of the Banco Santander Foundation and a board member of BSI (Banco Santander International). He is an Independent Director of Inditex. He is a member of the Board of Trustees of the Spain-US Council Foundation, Vice President of the Board of Trustees of the Teatro Real, member of the Board of Trustees of the Reina Sofía School of Music, of the Fundación Empresa y Crecimiento and of the ProCNIC and CNIC Foundation. He has been CEO, Vice President and Executive Director of Banco Santander, S.A. He has also been President of Santander Spain and Banco Popular. He was a member of the Board of Directors of Banco Santander, S.A. from 1987 to 2020. He has been a member of the Board of Banco Santander International and Santander Investment. He was also Vice President of Banco Banif, S.A., President of Allfunds Bank and SPREA. He has been a member of the Board of Directors of several industrial and financial companies: such as Ebro Azúcares y Alcoholes, S.A., Industrias Agricolas, S.A., SABA, S.A. and Lar, S.A. He was President of the Social Council of the Carlos III University of Madrid. A board member and then Chairman of the Advisory Board of Accenture, S.A., Lucent Technologies, Quercus and Agrolimen, S.A. He has been Chairman of Vallehermoso, S.A., Vocento, S.A., NH Hotels Group, Metrovacesa, S.A. and Merlin Properties, SOCIMI, S.A. He has a law degree from the Universidad Complutense de Madrid and is a State Attorney.

Lucía Santa Cruz Sutil became a director on August 19, 2003. She is a Member of the Board of the Universidad Adolfo Ibañez. She is director of Compañía de Seguros Generales y de Vida La Chilena Consolidada (Zurich). She is a member of the Academy of Social, Political and Moral Sciences of the Institute of Chile. She was a member of the Advisory Board of Nestle Chile and the Self-Regulation Committee for Insurance Companies in Chile. Ms. Santa Cruz is a historian and holds a M.Phil. in Philosophy from Oxford University and holds a Doctor Honoris Causa degree in Social Sciences from King’s College, University of London.

Juan Pedro Santa María Pérez became a director on July 24, 2012 after having served as Corporate Legal Director for Grupo Santander Chile, Legal Counsel for Santander-Chile, Banco O’Higgins and Banco Santiago. He has been President of the Legal Committee of the Asociación de Bancos e Instituciones Financieras de Chile for over 20 years and President Pro-Tempore of the Financial Law Committee of the Federación Latinoamericana de Bancos (FELABAN). He is a member of the Counsel of Arbitrage and Mediation of the Chamber of Commerce of Santiago. Mr. Santa María holds a degree in Law from the Pontificia Universidad Católica de Chile.

Blanca Bustamante Bravo became an alternate director on April 28, 2015. She holds a commercial engineering degree with mention in economics from Universidad Católica de Chile. Her professional experience includes the role of economic analyst for the Central Bank of Chile and research analyst for Oppenheimer & Co. in New York and IM Trust. In 1998, she joined Viña Concha y Toro as Head of Investor Relations, a position held until 2010. In 2001, she also became deputy manager of Corporate Communications and in 2017 became Director of Corporative Affairs. Currently she holds the position of Director of Investor Relations. Since 2013, she has been a director in the Center for Research & Innovation for Viña Concha y Toro.

146

Table of Contents

Oscar von Chrismar Carvajal joined the Board on December 22, 2009 and is currently an alternate director. Mr. von Chrismar holds a Civil Engineering degree from the Universidad de Santiago de Chile with specialist studies in the US and Europe. He is a director of Sinacofi and the Stock Exchange since April 2012. He joined Banco Santander in 1990 as a manager of the finance division. Between 1995 and 1996 he was General Manager of Banco Santander Peru. In 1997, he became the General Manager of Santander Chile, a position he held until December 2009 when he joined the Board of Directors. Mr. von Chrismar was also a board member of Banco Santander Argentina, Peru and Colombia and the Santiago Stock Exchange. Prior to joining the Santander Group, he was Manager of the Finance Division for Morgan Bank and Manager of Finance of ING Bank. He has more than 25 years of experience in the banking industry.

Senior Management

Our senior managers are as follows:

Senior Manager	Position	Date Appointed
Miguel Mata	Chief Executive Officer	Mar-18
Matias Sánchez	Director of Retail Banking	Mar-16
Fred Meller	Director of Corporate and Investment Banking	Jan-11
Jose Manuel Manzano	Director of Middle-Market	Apr-16
Emiliano Muratore	Chief Financial Officer	Apr-16
Guillermo Sabater	Financial Controller	Nov-15
Franco Rizza	Director of Risk	Feb-14
Ricardo Bartel	Director of Technology and Operations	Jun-15
María Eugenia de la Fuente	Director of Human Resources	Jun-15
Sergio Avila	Director of Administration and Costs	Mar-15
Jonathan Covarrubias	Chief Accounting Officer	May-19
Carlos Volante	Director of Clients and Service Quality	Jan-14
Cristian Florence	General Counsel	Sep-12
Oscar Gomez	Director of Internal Audit	Jan-20
Cristian Peirano	Director of Corporate Products	Apr-19

Miguel Mata became the Chief Executive Officer in March 2018. Previously, he was Deputy General Manager among other diverse roles related to the business strategy of Santander-Chile. Mr. Mata joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. He previously served as the Financial Controller of Banco Santiago. He has been working in the banking industry since 1990, when he joined Banco O’Higgins, one of the predecessors to Banco Santiago. He is also a Director of Santander Consumer Chile S.A. and was president of Santander Asset Management S.A., as well as a director of Redbanc and Transbank, representing Banco Santander. Mr. Mata holds a degree in Engineering from Universidad Católica de Chile.

Matias Sánchez became Director of Retail Banking in March 2016. He was the Middle-Market Director between 2013 and 2016 at Santander Chile. Previously, he worked for 18 years in Banesto, part of Grupo Santander as the deputy general head of Commercial Banking, and as Chief Executive Officer of Gescoban Soluciones S.A. Mr. Sánchez is an Economist of the Alicante University (Spain), with post-graduate studies in the Instituto de Empresa and IESE, both in Madrid. He also has a diploma in Leadership from Harvard Business School.

Fred Meller became Director of Santander Corporate and Investment Banking in January 2011. Prior to that, he was Manager of Markets for Europe and UK for Santander Spain. Previously, he served as Treasurer and was responsible for the Finance Division of Santander Chile. He was also General Manager of Santander Agente de Valores and is currently a director of Deposito Central de Valores de Chile and of the Bolsa Electronica de Chile. Mr. Meller holds a business degree from Universidad Central de Chile and has participated in management programs at Kellogg Business School and Universidad de los Andes.

José Manuel Manzano became Director of our Middle-market banking segment on April 1, 2016. Prior to that, he was Manager of Personnel, Organization and Costs of Banco Santander Chile, since September 2013. He was Corporate Director of Risk since September 2007, and Manager of Human Resources for Santander-Chile since 1999. He was also General Manager of Santander Administradora General de Fondos and Managing Director of Santander AFAP in Uruguay. He is currently a director of Santander Chile Holding S.A., Santander Asset Management S.A. and Zurich Santander S.A. Mr. Manzano holds a Master of Business Administration and a commercial engineering degree from Universidad Católica de Chile.

147

Table of Contents

Emiliano Muratore became the Chief Financial Officer for Santander-Chile in April 2016. From Buenos Aires, Argentina, he has more than 22 years of experience in the Santander Group. He joined Santander Rio (Argentina) in 1999 and after four years he was moved to the Group headquarters in Madrid as part of a young talent development program, where he started his experience in the finance division. In 2006, he moved to Santander Chile where, in 2008, he was appointed as Manager of the Financial Division, bearing responsibility for the management of structural financial risks. After eight years, he was promoted to Chief Financial Officer. Mr. Muratore has a degree in business from Universidad Católica Argentina in Buenos Aires and a postgraduate degree in finance from Universidad de San Andrés in Buenos Aires. In 2018 he completed the Advanced Management Program at Harvard Business School. Currently, he is chairman of the financial management and infrastructure committee at Chile’s Banking Association (ABIF). He also serves as board member at Fundación Belén Educa, a non-for-profit organization that manages 12 schools targeted to disadvantaged families.

Guillermo Sabater is the Financial Controller of Santander-Chile and has been working for Santander Group and its affiliates for 28 years. Between 2009 and 2015, he was Senior Executive Vice President of Santander in the US and CFO and Controller of Sovereign Bank and Santander Holdings USA. Before that, he was the financial controller of Banco Santander Chile between 2006 and 2009. He also served for three years, between 2003 and 2006, as Financial Controller of the Consumer Finance Division in Madrid, Spain. Mr. Sabater also served as an internal auditor during his first ten years at the company. He has a degree in Economics and Business Administration from the University College of Financial Studies at the University Complutense de Madrid and completed a Program in Executive Development at the Institute of Business and has completed various courses at institutions such as Babson College and Boston University.

Franco Rizza became Chief Risk Officer in February 2014. Previously, he was director of Global Collections & Recoveries in the Madrid headquarters, covering all countries where the Group has commercial banking activities outside Spain. Between 2010 and 2013, he was the Chief Risk Officer of Banco Santander in Uruguay. He joined the Group in 1989 in Argentina, where he held various positions, including Regional Manager, Product Manager and Retail Credit Risk Manager. He has completed studies in Business and Risk Management in Argentina and Spain.

Ricardo Bartel became the Manager of Technology and Operation in June 2015 after joining Santander Chile in October 2014 as Manager of Operational Services of the same division. Mr. Bartel has both a Civil Engineering degree and a Master of Business Administration from Universidad Católica de Chile. He is also a graduate of the Directive Management of Companies Program (PADE) of ESE Business School of the Universidad de los Andes. He has previously held various management positions in product and service companies such as Chief Financial Officer at Madeco, Logistics and Distribution Manager and Chief Financial Officer of CCU SA. and Chief Executive Officer of Empresas Relsa S.A. and Laboratorio Maver.

María Eugenia de la Fuente is the Director of Human Resources and Communications. Ms. de la Fuente has a commercial engineering degree from the Universidad de Chile and a Master’s degree in tax planning from the Universidad Adolfo Ibañez. She has more than 30 years of experience in strategic planning and human resource management for both private and public companies. From March 2010 to February 2013, she was the Undersecretary to the Chief of Staff for the first government of President Sebastian Piñera. From 2013 to 2015, she was Managing Director of Transparency and Client Services for Corpbanca and Chief Executive Officer of BZD Consultores. She assumed her current role at Santander-Chile in June 2015.

Sergio Avila is Director of Administration and Costs. He has worked at Banco Santander Chile for 19 years in Asset Management, Corporate Finance, Retail banking, Middle-market and Risks. Mr. Avila has a Bachelor of Science and Master of Science in Civil Engineering Degree from the Universidad Católica de Chile.

Carlos Volante became Director of Clients’ and Service Quality of Santander Chile in January 2014. He joined the Santander Group in 1990, holding various responsibilities within the organization, including manager of the Branch Network, general manager of the Administrator of Mutual Funds, Mortgage Manager, Product Manager and Monitoring Commercial Banking. He was also Executive Vice President of Commercial Banking at Banco de Venezuela Grupo Santander. Between 2012 and 2013, he was general manager of the Corona Commercial Credit Group. Mr. Volante is an accountant auditor from the University of Talca and attended the DPA and has an MBA from the Universidad Adolfo Ibáñez. He also has a master’s degree in Philosophy and participated in the PADE program at the Universidad de los Andes.

148

Table of Contents

Cristian Florence is our General Counsel, a position he has held since September 2012. Prior to that he served as Chief Lawyer at Santander-Chile. Mr. Florence joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. He started working in the banking industry in 1991, when he joined Centrobanco, a predecessor of Banco O’Higgins and Banco Santiago serving at several positions in the law departments. Mr. Florence is also a Director of Zurich Santander Seguros Generales Chile S.A., Zurich Santander Seguros de Vida Chile S.A. and Santander Asset Management S.A. Administradora General de Fondos. He has a degree in Law from the Universidad Gabriela Mistral and a Master of Laws (LLM) from the same university and is a professor of Civil Law.

Oscar Gómez is Director of Internal Audit a position he has held since January 2020. He has worked for Grupo Santander since 1997 in different positions in the Internal Audit Division, including serving as the Corporate Director for Financial Risk Information. Mr. Gómez has a degree in Economic and Business Science from Universidad de Cantabria and is certified by the IIA (Institute of Internal Auditors) as CIA (Certified Internal Auditor) and CRMA (Certification in Risk Management Assurance). He has also completed post graduate studies at Instituto de Empresa (Spain).

Cristian Peirano became the Director of Corporate Products in April 2019, date on which he reintegrated to the Bank. He has more than 30 years of experience in the banking industry. He previously held the positions of manager of corporate products for 10 years at another institution. Between 1986 and 2002 he was responsible for the areas and divisions of Research, Commercial Corporates and Risk at Banco O-Higgins and Banco Santiago, as well as director of subsidiaries in Chile and abroad. Furthermore, between 1999 and 2009 he worked in Banco Santander, which merged with Banco Santiago, as manager of Middle-market Banking and manager of Products. He has a business degree from Universidad Católica de Chile.

Jonathan Covarrubias was named Chief Accounting Officer of Santander-Chile in May 2019. He has over 19 years of experience in the banking industry, having started at Santander Chile in 2001. Previously he has held managerial positions related to the Consolidation and Reporting Departments, overseeing our Chilean, U.S. and Spanish GAAP reporting requirements. Mr. Covarrubias is a public accountant from the University of Santiago. He has a Masters in International Management of Companies’ Administration from the University of Zaragoza and has participated in the ESE Business School Advanced Management Program. Mr. Covarrubias is also certified by the Comité de Acreditación de Conocimientos en el Mercado de Valores (CAMV) in Chile.

B. Compensation

For the year ended December 31, 2020, the aggregate amount of compensation paid by us to all of our directors, executive officers and management members was Ch$31,961 million (U.S.$45 million). For the year ended December 31, 2020, the aggregate amount of compensation paid by us to all of our directors was Ch$1,452 million (U.S.$2 million), in monthly stipends. At our annual shareholder meeting held on April 30, 2020, shareholders agreed to maintain the remunerations approved in the previous shareholders’ meeting in 2019. In addition, a monthly stipend per director of UF 250 (U.S.$10,200), UF 500 (U.S.$20,400) for the Chairman of the Board and UF 375 (U.S.$15,301) for the Vice-Chairman’s of the Board was set. This amount will be increased by UF 30 per month (U.S.$1,224) if a Board member is named to one or more committees of the Board. The additional amount will be UF 60 (U.S.$2,448) for the President of a committee and UF 15 (US$612) for the Vice-President of one or more committees. In the case of the Integral Risk Committee, which holds sessions twice a month, the remuneration received by a regular board member is UF 15 (U.S.$612) per session with the President of this committee receiving 30 UF (U.S.$1,224) per session. Remuneration will be limited to two sessions per month, even if more sessions are held. Shareholders also approved the Audit Committee remuneration for its members. The remuneration received by a regular board member is UF 115 (U.S.$4,692) with the President of this committee receiving 230 UF (U.S.$9,384). This remuneration is in line with Chilean corporate governance law. In addition, we can pay certain directors professional service fees for the consulting services that they render to us in their fields of expertise. For the year ended December 31, 2020, we did not make any such payments to our directors.

149

Table of Contents

Santander-Chile and its affiliates have designed variable-compensation plans for their employees, based on performance targets and objectives, the achievement of which are evaluated and paid on a quarterly and/or annual basis.

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, 2020, 2019 and 2018, share-based compensation amounted to Ch$(1,589) million, Ch$ (315) million and Ch$ (337) million.

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 subject to the following terms:

The general requisite to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.

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.

The Bank will be responsible for granting the benefits directly.

If the working relationship between the executive and the 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, the executive or his/her family 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 2020 totaled Ch$8,224 million (Ch$7,195 million in 2019). The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

Calculation method

We use 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.

150

Table of Contents

Actuarial hypothesis assumptions

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other. The most significant actuarial hypotheses considered in the calculations were:

	Plans post-employment 2020	Plans post-employment 2019

Mortality chart	RV-2014	RV-2014
Termination of contract rates	5.0%	5.0%
Impairment chart	PDT 1985	PDT 1985

Assets related to the pension fund contributed by the Bank into the Seguros Euroamerica insurance company with respect to defined benefit plans are presented as net of associated commitments. Activity for post-employment benefits is as follows:

	As of December 31,
	2020			2019
	(in millions of Ch$)
Plan assets		8,224			7,195
Commitments for defined-benefit plans					—
For active personnel		(7,551	)		(6,525	)
Incurred by inactive personnel		—			—
Minus:
Unrealized actuarial (gain) losses		—			—
Balances at year end		673			670

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

	For the years ended December 31,
	2020			2019			2018
	(in millions of Ch$)
a) Fair value of plan assets
Opening balance		7,195			6,804			7,919
Expected yield of insurance contracts		3,985			333			353
Employer contributions		870			859			836
Actuarial (gain) losses		—			—			—
Premiums paid		—			—			—
Benefits paid		(226	)		(801	)		(2,304	)
Fair value of plan assets at year end		8,224			7,195			6,804
b) Present value of obligations
Opening balance		(6,525	)		(5,958	)		(6,998	)
Net incorporation of Group companies		—			—			—
Service cost		(1,026	)		(566	)		(1,069	)
Interest cost		—			—			—
Curtailment/settlement effect		—			—			—
Benefits paid		—			—			—
Past service cost		—			—			—
Actuarial (gain) losses		—			—			—
Other		—			—			2,109
Present value of obligations at year end		(7,551	)		(6,525	)		(5,958	)
Net balance at year end		673			670			846

151

Table of Contents

Plan expected profit:

	As of December 31,
	2020	2019	2018
Type of expected yield from the plan’s assets	UF + 2.50% annual	UF + 2.50% annual	UF + 2.50% annual
Type of yield expected from the reimbursement rights	UF + 2.50% annual	UF + 2.50% annual	UF + 2.50% annual

Plan associated expenses:

	For the years ended December 31,
	2020			2019			2018
	(in millions of Ch$)
Current period service expenses		1,026			566			1,069
Interest cost		—			—			—
Expected yield from plan’s assets		(385	)		(333	)		(353	)
Expected yield of insurance contracts linked to the Plan:		—			—			—
Extraordinary allocations		—			—			—
Actuarial (gain)/ losses recorded in the period		—			—			—
Past service cost		—			—			—
Other		—			—			—
Total		641			223			716

C. Board Practices

Audit Committee

Board member		Position in Committee
Orlando Poblete		President
Felix de Vicente		Member
Rodrigo Vergara		Member
Juan Pedro Santa María		Secretary

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors and the Committee Secretary is Juan Pedro Santa Maria. The Chief Executive Officer, General Counsel, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the independent registered public accounting firm and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

This committee is also responsible for:

Presenting to the Board of Directors a list of candidates for the selection of an external auditor to be proposed at the Annual Shareholders’ Meeting.

Presenting to the Board of Directors a list of candidates for the selection of rating agencies.

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

Overseeing and coordinating the Bank’s operational risk policies.

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

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

152

Table of Contents

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

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

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

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

Investigating suspicious and fraudulent activities (including conflicts).

Analyzing the reports of the inspection visits, instructions and presentations of the FMC.

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

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

Integral Risk Committee

The Integral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general. It also evaluates the reasonability of the systems for measurement and control of the following risks: Credit risk, Market risk, Operational risk, Cybersecurity, Solvency risk (BIS), Legal risks, Compliance risks and Reputational risks.

This Committee includes six Board members. This committee also includes the Chief Executive Officer, the Director of Risk and other senior level executives from the risk and commercial side of our business. The Board members of this committee are the following:

Board member		Position in Committee
Alfonso Gomez		President
Oscar von Chrismar		Member
Felix de Vicente		Member
Blanca Bustamante		Member
Juan Pedro Santa Maria Perez		Member
Claudio Melandri		Member
Lucía Santa Cruz		Member

Asset and Liability Committee (ALCO)

The ALCO includes the Chairman and Vice Chairman of the Board and three additional members of the Board, the Chief Executive Officer, the Chief Financial Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.

Board member		Position in Committee
Rodrigo Vergara		President
Claudio Melandri		Member
Oscar von Chrismar		Member
Felix de Vicente Mingo		Member
Alfonso Gomez		Member

153

Table of Contents

The main functions of the ALCO are:

Making the most important decisions, approving the risk appetite and limits regarding our exposure to inflation, interest rate risk, funding, capital and liquidity levels.

Review of the evolution of the most relevant local and international markets and monetary policies.

Market Committee

The Market Committee includes the Chairman of the Board, the Vice Chairman of the Board, two additional members of the Board, the Chief Executive Officer, the Director of Corporate Investment Banking, the Chief Financial Officer, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

Board member		Position in Committee
Oscar von Chrismar		President
Rodrigo Vergara		Member
Lucía Santa Cruz		Member
Claudio Melandri		Member
Alfonso Gomez		Member

The Market Committee is responsible for:

Establishing a strategy for the Bank’s trading investment portfolio.

Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.

Reviewing the net foreign exchange exposure and limit.

Reviewing the results of the Bank’s client treasury business

Reviewing the evolution of the most relevant local and international markets and monetary policies.

Strategy Committee

Board member		Position in Committee
Claudio Melandri		President
Rodrigo Vergara		Member
Felix de Vicente		Member
Alfonso Gomez		Member
Lucia Santa Cruz		Member
Blanca Bustamante		Member
Oscar von Chrismar		Member

The Strategy Committee oversees our strategic planning process and follow-up, as well as the identification of broad business opportunities and threats.

Analysis and Resolution Committee

Board member		Position in Committee
Juan Pedro Santa María Pérez		President
Oscar von Chrismar		Member
Lucía Santa Cruz		Member

154

Table of Contents

The Analysis and Resolution Committee defines and controls the compliance of policies, regulations and general and specific objectives regarding the prevention of money laundering and the financing of terrorism, in accordance with local rules and regulations as well as with the Santander Group.

Management Appointment Committee

Board member		Position in Committee
Blanca Bustamante		President
Claudio Melandri		Member
Oscar von Chrismar		Member

The Management Appointment Committee oversees the revision and application of policies and procedures of roles defined as “key positions” and also the review of other positions within the organization in general.

Remuneration Committee

Board member		Position in Committee
Orlando Poblete		President
Alfonso Gómez		Member
Claudio Melandri		Member

The Remuneration Committee reviews the documentation referring to the evaluation and remuneration of roles defined as “key positions” and other member of the organization in general.

D. Employees

As of December 31, 2020, on a consolidated basis, we had 10,470 employees: 9,842 of whom were bank employees, 121 of which were employees of our subsidiaries and 628 were employees of entities controlled by the Bank through other considerations. We have traditionally enjoyed good relations with our employees and their unions. Of the total headcount of us and our subsidiaries, 7,819 or 74.7% were unionized. In February 2018, a new collective bargaining agreement was signed with the main unions, which came into effect on September 1, 2018 and which expires on August 31, 2021, though it may be renegotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. The following chart summarizes the number of employees employed by the bank.

Employees	As of December 31, 2020
Executives		254
Supervisors		1,298
Professionals		5,920
Administrative		2,998
Total		10,470

E. Share Ownership

No director or executive officer owns more than 1% of the shares of Santander-Chile as of December 31, 2020. Santander-Chile currently does not have any arrangements for involving employees in its capital and there is no systematic arrangement for grant of options or shares or securities of Santander-Chile to them. 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. See “Item 6—Directors, Senior Management and Employees—Compensation” for more details.

155

Table of Contents

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Shareholder	Number of Shares		Percentage
Santander Chile Holding S.A.		66,822,519,695		35.46	%
Teatinos Siglo XXI Inversiones S.A.		59,770,481,573		31.72	%

Santander Spain is in a position to elect of a majority of the members of Santander-Chile’s Board of Directors, to determine its dividend and other policies and to determine substantially all matters to be decided by a vote of shareholders. Santander Spain holds ordinary shares to which no special voting rights are attached. Each share represents one vote and there are no shareholders with different voting rights.

The number of outstanding shares of Santander-Chile (of which there is only one class, being ordinary shares) at December 31, 2020, was 188,446,126,794 shares, without par value. Santander-Chile’s shares are listed for trading on the Chilean Stock Exchange and on the NYSE in connection with the registration of ADRs. The market capitalization of Santander-Chile at December 31, 2020 on the Chilean Stock Exchange was Ch$6,426,013 million and U.S.$8,946 million on the NYSE. At December 31, 2020, Santander-Chile had 11,733 holders of its ordinary shares registered in Chile, including The Bank of New York Mellon as Depositary (the “Depositary”) of Santander-Chile’s ADS Program. Other than the information disclosed in this section, there are no arrangements to the knowledge of Santander-Chile that can result in a change of control of Santander-Chile. As of December 31, 2020, there were a total of 28 ADR holders on record. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.

B. Related Party Transactions

The Chilean Companies Law requires that our transactions with related parties be on a market basis, that is, on similar terms to those customarily prevailing in the market. We are required to compare the terms of any such transaction to those prevailing in the market at the date the transaction is to be entered into. Directors of companies that violate this provision are liable for losses resulting from such violations.

156

Table of Contents

In addition, under the Chilean Companies Law, a company may not enter into a transaction with related parties unless (i) such transaction has received the prior approval of the company’s Board of Directors and (ii) the terms of such transaction are consistent with the terms of transactions of a similar type prevailing in the market. If it is not possible to make this determination, the board may appoint two independent evaluators. The evaluators’ final conclusions must be made available to shareholders and directors for a period of 20 business days, during which shareholders representing 5% or more of the issued voting shares may request the board to call a shareholders’ meeting to resolve the matter, with the agreement of two thirds of the issued voting shares required for approval. For purposes of this regulation, the law considers the amount of a proposed transaction to be material if (1) it exceeds 1% of the company’s net worth (provided that it also exceeds UF2,000) or (2) it exceeds UF20,000.

All resolutions approving such transactions must be reported to the company’s shareholders at the annual shareholders’ meeting. Violations of this provision may result in administrative or civil liability to the corporation, the shareholders and/or third parties who suffer losses as a result of such violation.

Loans granted to related parties

In addition to subsidiaries and associated entities, the Bank’s “related parties” include the “key personnel” of the Bank’s executive staff (members of the Bank’s Board of Directors and the Senior Managers of Santander-Chile and its subsidiaries, together with their close relatives), as well as the entities over which the key personnel could exert 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., Santander Spain. The table below shows loans and accounts receivable and contingent loans with related parties. For more information, see “Note 34—Transactions with Related Parties” in our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report:

157

Table of Contents

	As of December 31,
	2020												2019												2018
	Companies of the Group			Associated companies			Key personnel			Other			Companies of the Group			Associated companies			Key personnel			Other			Companies of the Group			Associated companies			Key personnel			Other
	(in millions of Ch$)
Loans and accounts receivable:
Commercial loans		352,590			265			3,939			900			246,868			375			2,986			685			122,289			459			4,299			233
Mortgage loans		-			-			22,428			-			-			-			20,473			-			—			—			18,814			—
Consumer loans		-			-			6,131			-			-			-			5,781			-			—			—			5,335			—
Loans and accounts receivable:		352,590			265			32,498			900			246,868			375			29,240			685			122,289			459			28,448			233
Allowance for loan losses		(1,138	)		(9	)		(137	)		(14	)		(122	)		(182	)		(179	)		(10	)		(308	)		(9	)		(116	)		(5	)
Net loans		351,452			256			32,361			886			246,746			192			29,061			675			121,981			450			28,332			228

Guarantees		3,323			-			27,203			442			462,513			-			23,918			288			442,854			—			22,893			7,171
Contingent loans:
Personal guarantees		-			-			-			-			-			-			-			-			—			—			—			—
Letters of credit		3,447			-			-			93			4,112			-			-			63			5,392			—			2,060			44
Guarantees		811			-			-			-			464,691			-			-			-			445,064			—			3,364			—
Contingent loans:		4,258			-			-			93			468,803			-			-			63			450,456			—			5,424			44
Allowance for contingent loans		(6	)		-			-			-			(835	)		-			-			-			(1	)		—			(18	)		—
Net contingent loans		4,252			-			-			93			467,968			-			-			63			450,455						5,406			44

Loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and (c) did not involve more than the normal collection risk.

Under the Chilean General Banking Law, Chilean banks are subject to certain lending limits, including the following:

a bank may not extend to any person or legal entity (or group of related entities), directly or indirectly, unsecured loans in an amount that exceeds 5.0% of the bank’s regulatory capital, or secured loans in an amount that exceeds 25.0% of its regulatory capital. In the case of foreign export trade finance, this 5.0% ceiling is raised to: 10.0% for unsecured financing, 30.0% for secured financing. This ceiling is raised to 15.0% for loans granted to finance public works under the concessions system contemplated in the Decree with Force of Law 164 of 1991, of the Ministry of Public Works, provided that either the loan is secured on the concession, or the loan is granted as part of a loan syndication;

a bank may not grant loans bearing more favorable terms than those generally offered by banks in the same community to any entity (or group of related entities) that is directly or indirectly related to its owners or management;

a bank may not extend loans to another bank in an aggregate amount exceeding 30.0% of its regulatory capital;

a bank may not directly or indirectly grant a loan, the purpose of which is to allow the borrower to acquire shares in the lending bank;

a bank may not lend, directly or indirectly, to a Director or any other person who has the power to act on behalf of the bank, or to certain related parties; and

a bank may not grant loans to individuals or legal entities involved in the ownership or management of the bank, whether directly or indirectly (including holders of 1.0% or more of its shares), on more favorable terms than those generally offered to non-related parties. Loans may not be extended to senior executives and to companies in which such individuals have a participation of 5.0% or more of the equity or net earnings in such companies. The aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.

We are not aware of any loans to any related parties exceeding the above lending limits.

158

Table of Contents

The table below shows all other assets and liabilities with related parties:

	As of December 31,
	2020								2019								2018
	Companies of the Group		Associated companies		Key personnel		Other		Companies of the Group		Associated companies		Key personnel		Other		Companies of the Group		Associated companies			Key personnel		Other
	(in millions of Ch$)
Assets
Cash and deposits in banks		703,069		-		-		-		171,816		-		-		-		189,803		—			—		—
Trading investments		-		-		-		-		-		-		-		-		—		—			—		—
Obligations under repurchase agreements		-		-		0		-		-		-		-		-		—		—			—		—
Financial derivative contracts		978,696		186,038		33		7		2,058,715		218,610		-		55		748,632		105,358			—		9
Available-for-sale investments		-		-		-		-		-		-		-		-		—		—			—		—
Other assets		445,609		412,277		-		-		185,317		210,579		-		-		38,960		51,842			—		—
Liabilities
Deposits and other demand liabilities		1,146,273		4,484		5,997		3,242		25,261		93,761		4,624		566		27,515		(21,577	)		2,493		(480	)
Obligations under repurchase agreements		961,718		-		101		-		138,498		5,000		270		80		6,501		—			329		68
Time deposits and other time liabilities		1,221,893		100		4,706		864		1,183,235		282,171		4,246		2,204		2,585,337		—			3,189		(838	)
Financial derivative contracts		1,137,502		354,108		-		-		2,159,660		288,013		-		3		770,624		112,523			—		—
Interbank borrowings		-		-		-		-		-		-		-		-		—		—			—		—
Issued debt instruments		349,002		-		-		-		363,154		-		-		-		335,443		—			—		—
Other financial liabilities		-		-		-		-		6,231		-		-		-		6,807		—			—		—
Other liabilities		1,210		4,484		5,997		3,242		8,130		146,164		-		-		60,884		89,817			—		—

Other transactions with related parties

During the years ended December 31, 2020, 2019 and 2018, the Bank had the following significant income (expenses) from services provided to (by) related parties:

	As of December 31,
	2020											2019											2018
	Companies of the Group			Associated companies			Key personnel			Other		Companies of the Group			Associated companies			Key personnel			Other		Companies of the Group			Associated companies			Key personnel			Other
	(in millions of Ch$)
Interest income and inflation-indexation adjustments		(30,586	)		21			1,202			10		(41,181	)		(5,235	)		1,151			26		(53,256	)		(156	)		1,252			508
Fee and commission income and expenses		34,147			22,596			152			24		28,274			14,499			232			28		91,178			7,826			305			22
Net income (expense) from financial operations and net foreign exchange gain (loss)(1)		(390,737	)		240,565			-			-		(586,318	)		(84,236	)		-			-		(566,677	)		65,727			27			(12	)
Other operating income and expenses		0			(522	)		-			-		406			(2,026	)		-			-		42			1,388			—			—
Key personnel compensation and expenses		0			-			(31,961	)		-		-			-			(9,548	)		-		—			—			(11,761	)		—
Administrative and other expenses		(45,478	)		(16,763	)		-			-		(11,877	)		(47,757	)		-			-		(43,035	)		(50,764	)		—			—
Total		(432,654	)		245,897			(30,607	)		34		(610,696	)		(124,755	)		(8,165	)		54		(571,748	)		24,021			(10,177	)		518

____________________

(1)

Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.

Only transactions with related parties equal to or greater than UF5,000 (Ch$143 million) are included individually in the table above. Transactions with related parties between UF1,000 (Ch$29 million) and up to UF5,000 are included in other transactions with related parties. All transactions were conducted at arm’s length.

159

Table of Contents

C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial Information

See “Item 18. Financial Statements.”

Legal Proceedings

We are subject to certain claims and are party to certain legal and arbitration proceedings in the normal course of our business, including claims for alleged operational errors. We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our consolidated financial condition or results of operations. There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.

Upon the recommendation of our legal advisors, we estimate that our aggregate liability if all legal proceedings were determined adversely to us could result in significant losses not estimated by us. As of the date of the Audited Consolidated Financial Statements, the Bank and its affiliates were subject to certain legal actions in the normal course of their business. As of December 31, 2020, the Bank has provisions for these legal actions of Ch$1,024 million (Ch$1,274 million as of December 31, 2019), which are included in “Provisions” in the Audited Consolidated Statements of Financial Position as provisions for contingencies.

Dividends and dividend policy

See “Item 3. Key Information—A. Selected Financial Data—Dividends.”

B. Significant Changes

None.

ITEM 9.THE OFFER AND LISTING

A. Plan of Distribution

Not applicable

B. Nature of Trading Market

Nature of Trading Market

Shares of our common stock are traded on the Chilean Stock Exchange. Each ADS represents 400 shares of common stock. ADRs have been issued pursuant to the amended and restated deposit agreement dated as of August 4, 2015. As of December 31, 2020, 56,126,679 ADSs were outstanding equivalent to 22,450,671,671 shares of common stock or 11.91% of the total number of issued shares of common stock.

C. Selling Shareholders

Not applicable.

D. Dilution

Not applicable.

160

Table of Contents

E. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The legal predecessor of Santander-Chile was Banco Santiago (“Santiago”). Santiago was incorporated by public deed dated September 7, 1977 granted at the Notary Office of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate and function as a bank by Resolution No. 118 of the SBIF on October 27, 1977. The Bank’s by-laws were approved by Resolution No. 103 of the SBIF on September 22, 1977. In January 1997, Santiago merged with Banco O’Higgins, with Santiago as the surviving entity. In 1999, Santiago became a controlled subsidiary of Santander Spain. On January 9, 2017 in an Extraordinary Shareholder Meeting, the shareholders’ approved an amendment of the Bank’s Articles of Incorporation.

Our official name is Banco Santander-Chile and Banco Santander and Santander can also be used (formerly Banco Santander Santiago, Santander Santiago could also be used, but these names were eliminated in the new Articles of Incorporation).

The Bank has a single series of capital stock, which amounts to Ch$891,302,881,691, divided into 188,446,126,794 registered shares with no par value. The capital stock is fully subscribed for, deposited, and paid up. Each share represents one vote and there are no special classes of shares with different rights. Our by-laws do not include any condition that is more significant than required by law to change the right of shareholders.

Shareholder rights in a Chilean bank that is also an open stock (public) corporation are governed by (1) the corporation’s estatutos, which effectively serve the purpose of both the articles or certificate of incorporation and the by-laws of a company incorporated in the United States, (2) the General Banking Law and (3) to the extent not inconsistent with the General Banking Law, by the provisions of Chilean Companies Law applicable to open stock corporations, except for certain provisions that are expressly excluded. Article 137 of the Chilean Companies Law provides that all provisions of the Chilean Companies Law take precedence over any contrary provision in a corporation’s estatutos. Both the Chilean Companies Law and our estatutos provide that legal actions by shareholders against us (or our officers or directors) to enforce their rights as shareholders or by one shareholder against another in their capacity as such are to be brought in Chile in arbitration proceedings.

The Chilean securities markets are principally regulated by the FMC under the Chilean Securities Market Law and the Chilean Companies Law. In the case of banks, compliance with these laws is supervised by the SBIF. These two laws provide for disclosure requirements, restrictions on insider trading and price manipulation and protection of non-controlling investors. The Chilean Securities Market Law sets forth requirements relating to public offerings, stock exchanges and brokers, and outlines disclosure requirements for companies that issue publicly offered securities. The Chilean Companies Law sets forth the rules and requirements for establishing open stock corporations while eliminating government supervision of closed (closely-held) corporations. Open stock (public) corporations are those with 500 or more shareholders, or companies in which 100 or more shareholders own at least 10.0% of the subscribed capital (excluding those whose individual holdings exceed 10.0%), and all other companies that are registered in the Securities Registry of the FMC.

Santander-Chile is a bank providing a broad range of commercial and retail banking services, as well as a variety of financial services. Our objects and purposes can be found in Article 4 of our by-laws.

Board of Directors and Managers

Currently, the Board of Directors consists of nine directors and two alternates, elected by shareholder vote at Ordinary Shareholders’ Meetings. The directors may be either shareholders or non-shareholders of the Company. There is no age limit for directors. The directors may be shareholders or persons who are not members of the company.

161

Table of Contents

The directors shall hold office for three years and may be indefinitely re-elected, and their terms of office shall be renewed in their entirety at the conclusion of each term of office. If the Ordinary Shareholders’ Meeting at which periodic elections of directors occur is not held at the stipulated time for any reason, the incumbency of those who have completed their terms shall be understood to be extended until their replacements are appointed, and the Board shall be obligated to summon a Shareholders’ Meeting to make said appointments within thirty days.

The directors shall be compensated for their service. The amount of their compensation shall be fixed annually at the Ordinary Shareholders’ Meeting. Such compensation shall be in addition to any salaries, fees, travel expenses, representation expenses, payments due as delegates of the Board, or other stipends in money, kind, or royalties of any class, whether assigned to particular directors at the Ordinary Shareholders’ Meeting or by Board approval, for specific functions or work above and beyond their obligations as directors which have been entrusted to them precisely at the Ordinary Shareholders’ Meeting or by the Board. A detailed and separate record of these special compensations must be made in the Annual Report, indicating the full name of each director who has received them.

Without prejudice to other legal disqualifications or conflicts of interest, the following persons cannot serve as directors: (a) a person who has been convicted or is on trial for crimes penalized with a principal or accessory penalty of temporary suspension or permanent disqualification to hold public positions or offices; (b) a debtor subject to a pending insolvency procedure for liquidation, (c) legislators; (d) directors or employees of any other financial institution; (e) employees of the Office of the President of Chile or employees or officials of the Treasury or of the Services, Fiscal or Semi-Fiscal Institutions, Autonomous Agencies, State-Owned Enterprises, and generally all the Public Services created by law, as well as those of companies, partnerships, or public or private entities to which the State or its companies, partnerships, or centralized or decentralized institutions have contributed the majority capital or a proportion equal thereto, or have a similar representation or participation, provided that the limitation prescribed in this letter (e) shall not apply to persons who hold teaching positions; and (f) Bank employees.

In the elections of directors, each shareholder shall have one vote per share held or represented, and may cast all such votes in favor a single candidate or distribute them as deemed convenient; those who receive the largest number of votes in an election shall be proclaimed as elected, until the number of persons to be elected is reached. Elections of principal and alternate directors must be held separately. To proceed to a vote, the Chairman and the Secretary, jointly with the persons who have previously been designated at the Ordinary Shareholders’ Meeting to sign the minutes thereof, must make a documentary record of the votes which are cast through voice vote by the shareholders present, according to the list of attendance. However, any shareholder shall be entitled to vote on a ballot signed by him, stating whether he signs on his own behalf or as a proxy. In any event, to facilitate the casting or speed of a vote, the Chairman of the Bank or the FMC, if applicable, may order an alternative procedure or permit either a voice vote or a ballot vote, or any other procedure stipulated as adequate for the purpose. In counting the results, the Chairman shall read out the votes cast aloud so that all the persons present can count the votes themselves and the truthfulness of the result can be verified. The Secretary shall add up the votes and the Chairman shall announce the candidates that receive the largest majorities and proclaim them thereby elected, until the number of persons to be elected is reached. The Secretary shall place the document reflecting the vote count, signed by the persons responsible for taking note of the votes cast, as well as the ballots delivered by the shareholders who did not vote by voice, in an envelope which shall be closed and sealed with the corporate seal, and shall be kept on file at the Bank for at least two years.

Every election to the Board, or every change to the composition of the Board, must be recorded in a public deed executed before a Notary, published in a Santiago newspaper, and reported to the FMC by sending an authorized copy of the respective public deed. The appointments of the General Manager and Assistant Deputy Manager must likewise be reported and converted into a public deed.

Vacancies that arise when a director ceases to be able to perform his or her duties, either because he becomes subject to any conflict of interest, limitation, or legal disqualification or because he is subject to a pending insolvency procedure for liquidation, or due to impossibility of serving, unjustified absence, death, resignation, or for another legal cause, shall be filled in the following manner: (a) vacancies of principal directors by alternate directors; and (b) in case of vacancies of alternate directors because of the application or circumstances not provided for in letter (a) above, or vacancies of principal directors which could not be filled as provided for in this letter because the alternate directors have become principal directors, the appropriate replacements shall be appointed at the first board of directors meeting to be held. The directors so designated shall remain in office until the next Ordinary Shareholders’ Meeting, at which the definitive appointments shall be made for the time remaining to complete the replaced directors’ terms.

162

Table of Contents

The alternate directors may always take part in a Board meeting and have the right to speak at any such meeting. However, they shall have the right to vote only when they replace a principal director.

The Board shall separately elect a Chairman, a First Vice Chairman, and a Second Vice Chairman from among its members at the first meeting held after the Shareholders’ Meeting has appointed it or at its first meeting held after the persons in question have ceased to hold the position for any reason. In case of a tie vote, the person who chairs the meeting shall have the tie-breaking vote.

The Board shall appoint a General Manager who is responsible for the management of the Bank’s business and represents the Bank in all its offices. The General Manager has the right to participate in discussions at Board meetings but may not vote at such meetings. The Board shall also appoint one or more Managers who are responsible for the transactions and business of the Bank at the offices, branch offices, divisions and services placed under their management. The Directors, Managers and other employees of the Bank shall be personally responsible for non-compliance with the Bank’s by-laws and other legal or regulatory provisions arising from the performance of their duties, and liable for such infringements which are affected with their knowledge.

The Board meetings shall be held at the company’s domicile unless the directors unanimously resolve to hold a particular session at a different location, or all the directors participate in any such meeting held at a different location. The Board shall meet in ordinary session at least once a month, on the days and at the times the Board designates, and additionally, in extraordinary sessions from time to time when summoned by the Chairman at his or her own initiative or at the request of three or more directors, following the Chairman’s determination of the need for a meeting, unless it is requested by an absolute majority of the incumbent directors, in which case the meeting must necessarily be held without the need for a prior determination. Only the topics specifically stated in the notice of meeting may be addressed at extraordinary meetings, unless all the incumbent directors are present, and they unanimously agree otherwise. Summonses to extraordinary meetings shall be made in accordance with and in the form prescribed by law.

The quorum for Board meetings shall be the absolute majority of the number of directors entitled to vote as prescribed in our by-laws. Resolutions shall be adopted by the absolute majority of the directors present who are entitled to vote. In case of a tie vote, the person who chairs the meeting shall have the tie-breaking vote. Directors who, though not present, are in simultaneous and permanent communication through technological means which have been authorized by the FMC shall be understood to participate in the meetings.

Directors who have an interest in a business dealing, legal act, contract, or operation or transaction not specifically of a banking nature, or as representatives of another person, must inform the other directors thereof. The respective resolutions shall be approved by the Board and must be in accordance with conditions of equity similar to those customarily prevailing in the market and they shall be disclosed at the next Ordinary Shareholders’ Meeting by the person who chairs such meeting.

A record of the Board’s deliberations and resolutions shall be made in a special minute book to be kept by the Secretary. The minutes must be consecutively numbered, with one numbering sequence assigned to ordinary meetings and another to extraordinary meetings, and they must be signed by the directors who took part in the meeting and the Secretary or the person who performs his or her functions. A director who believes certain minutes contain inaccuracies or omissions is entitled to record his or her reservations prior to signing them. Resolutions may be carried out without the need to approve the minutes at a subsequent meeting. If any of the persons present dies, refuses to sign the minutes, or is prevented from doing so for any reason, a record of said impediment shall be made at the foot thereof.

The directors shall be personally responsible or liable for all the legal acts they execute in the performance of their functions. A director who wishes to avoid responsibility or liability for any legal act or resolution of the Board must make a record of his or her opposition in the minutes and the Chairman shall be informed thereof at the next Ordinary Shareholders’ Meeting.

163

Table of Contents

The Board shall represent the Bank judicially and extra-judicially and for the pursuit of its corporate purpose, which need not be demonstrated to third parties in any manner; it shall be vested with all the authorities and powers of administration that the law or the by-laws do not define as pertaining exclusively to Shareholders’ Meetings, without the need to confer any special power of attorney whatsoever, even for legal acts or contracts for which the laws so require. The foregoing does not impair the Bank’s judicial representation by the General Manager. The Board may delegate part of its powers to the General Manager, to one or more managers, assistant managers, or attorneys of the Bank, to a director, or to a committee of Directors, as well as to other persons for specific purposes.

The Board shall designate three Directors from among its members to serve on a Comité de Directores (Audit Committee) which shall be governed by the provisions of Article 50bis of the Chilean Companies Law.

The Chairman/President

The Chairman of the Board shall likewise be the president of the company and the chairman of the Shareholders’ Meetings. He shall have the following obligations and authorities, in addition to those prescribed in the pertinent legal and regulatory provisions, in our by-laws, or by the Board: (a) chair the Board and Shareholders’ Meetings; (b) enforce strict compliance with the by-laws, the Board’s resolutions, and the resolutions of the Shareholders’ Meetings; (c) summon the Board meetings; and (d) sign the annual reports and the resolutions and communications of the Board and the Shareholders’ Meetings. In the absence or temporary impediment of the Chairman/President, the First Vice Chairman/First Vice President shall act in his or her stead, and in the latter’s absence, the Second Vice Chairman/Second Vice President shall act, or finally, the person designated by the Board from among its members or the shareholder designated at the Shareholders’ Meeting, as the case may be. Replacement is an internal company procedure that shall not require any formality, and it shall not be necessary to demonstrate its validity to third parties in order to assure the validity of the replacement’s actions; the sole fact of its occurrence suffices to make said actions effective.

Meetings and Voting Rights

The shareholders shall meet in Ordinary or Extraordinary Shareholders’ Meetings held in Santiago. The resolutions adopted at a validly summoned and convened Shareholders’ Meeting, in conformity with the by-laws, shall be binding on all of the shareholders.

The Ordinary Shareholders’ Meetings shall be held annually on the dates determined by the Board within the first four months following the date of the annual balance sheet. There shall be an Extraordinary Shareholders’ Meeting whenever the company’s needs so require. The meetings shall be summoned by the Board at its own initiative or at the request of shareholders representing at least 10% of the issued shares having a legal right to vote. If in this circumstance, the Board, and through it the Chairman, refuses to issue a summons, the FMC may be requested to do so.

The summons to a Shareholders’ Meeting shall be given through a prominent notice to be published three times on different days in the Santiago newspaper which has been chosen at the Ordinary Shareholders’ Meeting, and in the absence of agreement or in the event of a suspension or disappearance of the designated newspaper’s circulation, in the Official Journal, at the time, in the form, and under the conditions stipulated by the Regulations of the Chilean Companies Law. Summonses to Extraordinary Shareholders’ Meetings shall state the topics which will be submitted to them. The summons to a meeting shall likewise be announced through a letter sent to the shareholders a minimum of fifteen days in advance of the date set for the meeting, which must contain a reference to the topics to be addressed at it. Failure to send said letter shall not invalidate the summons, without prejudice to legal liabilities. On a date no later than that of the first notice of a summons for an Ordinary Shareholders’ Meeting, each shareholder must be sent a copy of the Bank’s Annual Report and Balance Sheet, including the auditors’ opinion and its respective notes.

Quorum for Shareholders’ Meetings shall be established by the presence of as many shareholders as represent, directly or by proxy, at least an absolute majority of the issued voting shares. If said quorum is not satisfied, a new summons shall be given, for a meeting which must be scheduled to be held in the manner prescribed in Article 37 of our by-laws, indicating that it is a second summons and scheduling the new meeting to be held within the forty five days subsequent to the date scheduled for the meeting that was not held due to a lack of quorum. A meeting called by a second summons shall lawfully convene with the number of issued voting shares present or represented thereat.

164

Table of Contents

In the absence of a special rule, a Shareholders’ Meeting resolution shall be adopted by an absolute majority of the voting shares present or represented.

The Ordinary Shareholders’ Meetings have the following responsibilities: (a) deliberate and resolve on the Annual Report and Balance Sheet which must be submitted by the Board; (b) annually designate an external auditing firm in conformity with the provisions of law to report on the balance sheet and comply with the legal requirements; (c) elect the members of the Board when appropriate pursuant to our by-laws; (d) resolve the distribution of the liquid profits or earnings for each fiscal year, and at the Board’s request, order the distribution of a dividend to the shareholders as of the end of each fiscal year, as prescribed in the by-laws; and (e) in general, deliberate and pass resolutions on any other topic of corporate interest which is not reserved to an Extraordinary Shareholders’ Meeting. The revocation of all the Board members elected by the shareholders and the designation of their replacements may be resolved at an Ordinary or Extraordinary Shareholders’ Meeting, but any individual or collective revocation of one or more Board members would accordingly be invalid.

The Extraordinary Shareholders’ Meetings are reserved for certain topics indicated by law or by our by-laws. Resolutions on the topics indicated in the notice of meeting may be adopted at Extraordinary Shareholders’ Meetings.

The shareholders may have themselves represented at Meetings by another person, whether a shareholder or not, as is stipulated in the Chilean Companies Law.

A record of the deliberations and resolutions at any Shareholders’ Meeting shall be made in a special minute book to be kept by the Secretary, if any, or in his or her absence by the Bank’s General Manager. The minutes shall be signed by the Chairman or the person who performs his or her functions, by the Secretary and three shareholders elected by the Meeting, or by all the persons present if they number fewer than three. In the event of death, refusal, or impediment to signing the minutes on the part of any of the persons who must do so, a record of the impediment shall be made at the foot thereof. An extract of the minutes shall be made to record what happened at the meeting, and an official copy of the following data shall necessarily be made: the names of the shareholders present and the number of shares owned or represented by each of them (a brief summary of any objections may be omitted if it is attached to the same page or roll of attendance), a list of the proposals submitted for discussion and the results of the votes taken, and the list of the shareholders who voted for or against. Solely by the unanimous consent of the persons present may a record of any event occurring at the meeting that is related to the company’s interests be deleted from the minutes.

The persons present at any Shareholders’ Meetings shall sign a roll of attendance on which they shall indicate the number of shares the signatory holds, the number of shares he represents, and the name of the shareholder he represents.

In general, Chilean law does not require a Chilean open stock corporation to provide the level and type of information that U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of the bank within the 15-day period before the ordinary annual meeting. In addition to these requirements, we regularly provide, and management currently intends to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend.

Annual Report, Balance Sheet, and Distribution of Profits

A Balance Sheet shall be drawn up as of the thirty-first day of December of each year, to be submitted to the Ordinary Shareholders’ Meeting for its consideration, jointly with the Annual Report. The Balance Sheet and Statement of Income shall be published in conformity with the currently applicable legal and regulatory provisions. The approval or rejection of such financial statements is entirely within our shareholders’ discretion. If our shareholders reject our financial statements, our Board of Directors must submit new financial statements not later than 60 days from the date of such rejection. If our shareholders reject our new financial statements, our entire Board of Directors is deemed removed from office and a new Board of Directors is elected at the same meeting. Directors who individually approved such rejected financial statements are disqualified for re-election for the ensuing period.

165

Table of Contents

The profits attributable to shareholders reflected in the Balance Sheet shall be applied preferentially to absorb prior-year losses. The balance which is earned shall be allocated as may be resolved by the Shareholders’ Meeting, at the Board’s recommendation, to: (a) an increase of the effective capital, the formation of a fund for future capitalizations or dividends, or other special reserve funds; these uses shall receive the amounts the Meeting deems convenient, in conformity with the limits and obligations prescribed by law; and (b) the distribution of dividends to the shareholders in proportion to their shareholdings.

Under the Chilean Corporations Law, Chilean companies are generally required to distribute at least 30.0% of their earnings as dividends. No dividends of a bank above the legal minimum can be distributed if doing so would result in the bank infringing its ratio of regulatory capital to risk-weighted assets and shareholders’ equity to total assets.

Dividends that are declared but not paid by the date set for payment at the time of declaration are adjusted from the date set for payment to the date such dividends are actually paid, and they accrue interest.

We may declare a dividend in cash or in shares. When a share dividend is declared above the legal minimum (which minimum must be paid in cash), our shareholders must be given the option to elect to receive cash. Our ADS holders may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “Item 10.B.—Memorandum and Articles of Association—Preemptive Rights and Increases of Share Capital.” A dividend entitlement lapses after 5 years and the funds go to the Chilean Treasury.

Liquidation and Appraisal Rights

The Bank may be dissolved and liquidated if it is so resolved at an Extraordinary Shareholders’ Meeting, with the favorable vote of at least two thirds of the issued voting shares, and approved by the Superintendent of Banks and Financial Institutions.

Once the voluntary dissolution to which the preceding article refers has been resolved, the Shareholders’ Meeting at which it is resolved shall appoint a committee of three shareholders to proceed to the company’s liquidation. The liquidating committee so created shall act with the powers and obligations which the by-laws confer on the Board, and it shall keep the shareholders informed of the liquidation’s progress, shall summon Ordinary Shareholders’ Meetings on the dates scheduled for them, being authorized to likewise summon Extraordinary Shareholders’ Meetings. In all other respects the provisions of the Commercial Code, the applicable provisions of the Chilean Companies Law, and the corporate regulations which govern the company shall be followed. In accordance with the General Banking Law, our shareholders do not have appraisal rights.

Arbitration

Any difficulty which may arise between the Bank and any of the shareholders or directors, or between such persons, in connection with the application of the by-laws or the recognition of the existence, nonexistence, validity, nullity, construction, performance or breach, dissolution, liquidation, or any other cause shall be submitted to resolution by two arbitrators at law and in equity, who shall rule without subsequent appeal, one of whom shall be appointed by each party. If they cannot reach agreement, the parties shall appoint a third arbitrator to resolve the discord. If there is no agreement for the third arbitrator’s appointment, the two previously appointed arbitrators shall make the designation. If either party refuses to participate in the appointment of arbitrators or, after they have been appointed, there is no agreement on the ruling and neither the parties nor the arbitrators have designated the third arbitrator to resolve the discord, the designation of said arbitrator, if any, or of the third participant in discord, shall be made by the Ordinary Court of Justice, and the person so designated must necessarily be one who has held or currently holds the position of attorney and member of the Honorable Supreme Court.

Capitalization

Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in such company’s capital. When an investor subscribes for issued shares, the shares are registered in such investor’s name, even if not paid for, and the investor is treated as a shareholder for all purposes except with regard to receipt of dividends and the return of capital, provided that the shareholders may, by amending the by-laws, also grant the right to receive dividends or distributions of capital. The investor becomes eligible to receive dividends and returns of capital once it has paid for the shares (if it has paid for only a portion of such shares, it is entitled to reserve a corresponding pro-rata portion of the dividends declared and/or returns of capital with respect to such shares unless the company’s by-laws provide otherwise). If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on the stock exchange and collect the difference, if any, between the subscription price and the auction proceeds. However, until such shares are sold at auction, the subscriber continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital).

Article 22 of the Chilean Corporations Law states that the purchaser of shares of a company implicitly accepts its by-laws and any agreements adopted at shareholders’ meetings.

166

Table of Contents

Registrations and Transfers

We act as our own registrar and transfer agent, as is customary among Chilean companies. In the case of jointly owned shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.

Ownership Restrictions

Under Article 12 of the Chilean Securities Market Law and the regulations of the FMC, shareholders of open stock corporations are required to report the following to the FMC and the Chilean stock exchanges:

any direct or indirect acquisition or sale of shares that results in the holder’s acquiring or disposing, directly or indirectly, 10.0% or more of an open stock corporation’s share capital; and

any direct or indirect acquisition or sale of shares or options to buy or sell shares, in any amount, if made by a holder of 10.0% or more of an open stock corporation’s capital or if made by a director, liquidator, main officer, general manager or manager of such corporation.

In addition, majority shareholders must include in their report whether their purpose is to acquire control of the company or if they are making a financial investment. A beneficial owner of ADSs representing 10.0% or more of our share capital will be subject to these reporting requirements under Chilean law.

Under Article 54 of the Chilean Securities Market Law and the regulations of the FMC, persons or entities intending to acquire control, directly or indirectly, of an open stock corporation, regardless of the acquisition vehicle or procedure, and including acquisitions made through direct subscriptions or private transactions, are also required to inform the public of such acquisition at least 10 business days before the date on which the transaction is to be completed, but in any case, as soon as negotiations regarding the change of control begin (i.e., when information and documents concerning the target are delivered to the potential acquirer) through a filing with the FMC, the stock exchanges and the companies controlled by and that control the target and through a notice published in two Chilean newspapers, which notice must disclose, among other information, the person or entity purchasing or selling and the price and conditions of any negotiations.

Prior to such publication, a written communication to such effect must be sent to the target corporation, to the controlling corporation, to the corporations controlled by the target corporation, to the FMC, and to the Chilean stock exchanges on which the securities are listed.

In addition to the foregoing, Article 54A of the Chilean Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs.

The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer.

Title XXV of the Chilean Securities Market Law on tender offers and the regulations of the FMC provide that the following transactions must be carried out through a tender offer:

167

Table of Contents

an offer which allows a person to take control of a publicly traded company, unless (i) the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange and (ii) those shares are acquired (a) through a capital increase, (b) as a consequence of a merger, (c) by inheritance or (d) through a forced sale; and

an offer for a controlling percentage of the shares of a listed company if such person intends to take control of the parent company (whether listed or not) of such listed company, to the extent that the listed company represents 75.0% or more of the consolidated net worth of the parent company.

In addition, Article 199 of the Chilean Securities Market Law requires that whenever a controlling shareholder acquires two thirds of the voting shares of a listed company, such controlling shareholder must offer to purchase the remaining shares from the non-controlling shareholders in a tender offer.

Article 200 of the Chilean Securities Market Law prohibits any shareholder that has taken control of a publicly traded company to acquire, for a period of 12 months from the date of the transaction in which it gained control of the publicly traded company, a number of shares equal to or greater than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.

Title XV of the Chilean Securities Market Law sets forth the basis to determine what constitutes a controlling power, a direct holding and a related party. The Chilean Securities Market Law defines control as the power of a person or group of persons acting (either directly or through other entities or persons) pursuant to a joint action agreement, to direct the majority of the votes at the shareholders’ meetings of the corporation, to elect the majority of members of its Board of Directors, or to influence the management of the corporation significantly. Significant influence is deemed to exist in respect of the person or group of persons with an agreement to act jointly that holds, directly or indirectly, at least 25.0% of the voting share capital, unless:

another person or group of persons acting pursuant to joint action agreement, directly or indirectly, controls a stake equal to or greater than the percentage controlled by such person or group of persons;

the person or group does not control, directly or indirectly, more than 40.0% of the voting share capital and the percentage controlled is lower than the sum of the shares held by other shareholders holding more than 5.0% of the share capital (either directly or pursuant to a joint action agreement); or

in cases where the Superintendency of Securities and Insurance (now the FMC) has ruled otherwise, based on the distribution or atomization of the overall shareholding.

According to the Chilean Securities Market Law, a joint action agreement is an agreement among two or more parties which, directly or indirectly, own shares in a corporation at the same time and whereby they agree to participate with the same interest in the management of the corporation or in taking control of the same. The law presumes that such an agreement exists between:

a principal and its agents;

spouses and relatives within certain degrees of kinship;

entities within the same business group; and

an entity and its controller or any of the members of the controller.

Likewise, the FMC may determine that a joint action agreement exists between two or more entities considering, among other things, the number of companies in which they participate and the frequency with which they vote identically in the election of directors, appointment of managers and other resolutions passed at extraordinary shareholders’ meetings.

168

Table of Contents

According to Article 96 of the Chilean Securities Market Law, a business group is a group of entities with such ties in their ownership, management or credit liabilities that it may be assumed that the economic and financial action of such members is directed by, or subordinated to, the joint interests of the group, or that there are common credit risks in the credits granted to, or in the acquisition of securities issued by, them. According to the Chilean Securities Market Law, the following entities are part of the same business group:

a company and its controller;

all the companies with a common controller together with that controller;

all the entities that the FMC declares to be part of the business group due to one or more of the following reasons:

a substantial part of the assets of the company is involved in the business group, whether as investments in securities, equity rights, loans or guaranties;

the company has a significant level of indebtedness and the business group has a material participation as a lender or guarantor;

any member of a group of controlling entities of a company mentioned in the first two bullets above and there are grounds to include it in the business group; or

the company is controlled by a member of a group of controlling entities and there are grounds to include it in the business group.

Article 36 of the General Banking Law states that as a matter of public policy, no person or company may acquire, directly or indirectly, more than 10.0% of the shares of a bank without the prior authorization of the FMC, which may not be unreasonably withheld. The prohibition would also apply to beneficial owners of ADSs. In the absence of such authorization, any person or group of persons acting in concert would not be permitted to exercise voting rights with respect to the shares or ADSs acquired. In determining whether or not to issue such an authorization, the FMC considers a number of factors enumerated in Article 28 of the General Banking Law, including, among others (i) the financial stability of the purchasing party and (ii) the legitimacy of the purchasing party.

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

the merger of two or more banks;

the acquisition of all or a substantial portion of a banks’ assets and liabilities by another bank;

the control by the same person, or controlling group, of two or more banks; or

a substantial increase in the existing control of a bank by a controlling shareholder of that bank.

The FMC may deny its authorization with an accompanying resolution recording the specific reasons for denying the authorization and with the agreement of a majority of the Board of Directors of the Central Bank, provided there is notice of such agreement within 10 banking business days (which may be extended under Law 18,840).

According to the General Banking Law, a bank may not grant loans to related parties on terms more favorable than those generally offered to non-related parties. Article 84 No. 2 of the New General Banking Law provides that the FMC will determine, by means of a general rule, who must be considered a related party of the bank. In addition, the FMC will establish rules to determine if certain persons constitute a group of related parties in one or more of the following circumstances: (i) business or administrative relationships that allow a person to exercise relevant and permanent influence over another’s decisions; (ii) an assumption will be made that the loans granted to one person will be used in benefit of the other; and (iii) an assumption will be made that diverse persons maintain relationships that create a unit of economic interests. Finally, according to the regulations of the FMC, Chilean banks that issue ADSs are required to inform the FMC if any person, directly or indirectly, acquires ADSs representing 5.0% or more of the total amount of shares of capital stock issued by such bank.

169

Table of Contents

Article 16bis of the General Banking Law provides that the individuals or legal entities that, individually or with other people, directly control a bank and who individually own more than 10.0% of its shares must send to the FMC reliable information on their financial situation with the content and in the opportunity set forth in a general rule issued by the FMC, which will not exceed the information required for open-stock corporations (sociedad anónima abierta).

There are no limitations for non-resident or foreign shareholders to hold or exercise voting rights on the securities.

Preemptive Rights and Increases of Share Capital

The Chilean Corporations Law provides that whenever a Chilean company issues new shares for cash, it must offer its existing shareholders the right to purchase a number of shares sufficient to maintain their existing ownership percentages in the company. According to our by-laws, options for subscription of capital increases must be offered on a preemptive basis to the shareholders, in proportion to the number of shares each shareholder owns, and the released shares which are issued shall be distributed in the same proportion.

Pursuant to this requirement, preemptive rights in connection with any future issue of shares will be offered by us to the Depositary as the registered owner of the shares underlying the ADRs. However, the Depositary will not be able to make such preemptive rights available to holders of ADSs unless a registration statement under the Securities Act is effective with respect to the underlying shares or an exemption from the registration requirements thereunder is available.

We intend to evaluate, at the time of any preemptive rights offering, the practicality under Chilean law and Central Bank regulations in effect at the time of making such rights available to our ADS holders, as well as the costs and potential liabilities associated with registration of such rights and the related shares of common stock under the Securities Act, and the indirect benefits to us of thereby enabling the exercise by all or certain holders of ADSs of their preemptive rights and any other factors we consider appropriate at the time, and then to make a decision as to whether to file such registration statement. We cannot assure you that any registration statement would be filed. If we do not file a registration statement and no exemption from the registration requirements under the Securities Act is available, the Depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of such sale. In the event that the Depositary is not able, or determines that it is not feasible, to sell such rights at a premium over the cost of any such sale, all or certain holders of ADSs may receive no value for such rights. Non-U.S. holders of ADSs may be able to exercise their preemptive rights regardless of whether a registration statement is filed. The inability of all or certain holders of ADSs to exercise preemptive rights in respect of shares of common stock underlying such ADSs could result in such holders not maintaining their percentage ownership of the common stock following such preemptive rights offering unless such holder made additional market purchases of ADSs or shares of common stock.

Under Chilean law, preemptive rights are exercisable or freely transferable by shareholders during a period that cannot be less than 30 days following the grant of such rights. During such period, and for an additional 30-day period thereafter, a Chilean corporation is not permitted to offer any unsubscribed shares for sale to third parties on terms which are more favorable than those offered to its shareholders. At the end of such additional 30-day period, a Chilean open stock corporation is authorized to sell unsubscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange. Unsubscribed shares that are not sold on a Chilean stock exchange can be sold to third parties only on terms no more favorable for the purchaser than those offered to shareholders.

C. Material Contracts

During the past two years, we were not a party to any material contract outside the ordinary course of business.

D. Exchange Controls

The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the Formal Exchange Market.

170

Table of Contents

Foreign investments can be registered with the Foreign Investment Committee under Decree Law No. 600 or can be registered with the Central Bank under the Central Bank Act. The Central Bank Act is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be amended. Since April 18, 2001, all exchange controls in Chile have been eliminated.

Previously, Chilean law mandated that holders of shares of Chilean companies that were not residents of Chile register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in order to receive dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADR holders is required. As of April 19, 2001, the Central Bank deregulated the Exchange Market, eliminating the need to obtain approval from the Central Bank in order to remit dividends, but at the same time eliminating the possibility of guaranteeing access to the Formal Exchange Market. However, this did not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, and which still permits access to the Formal Exchange Market based on the prior approval of the Central Bank. Therefore, the holders of ADRs of Santander-Chile are still subject to the Foreign Investment Contract, including its clauses referring to the prior exchange rules including the now extinct Chapter XXVI of the Compendium.

E. Taxation

The following discussion summarizes certain Chilean tax and United States federal income tax consequences to beneficial owners arising from the ownership and disposition of our common stock or ADSs. The summary does not purport to be a comprehensive description of all potential Chilean and United States federal income tax considerations that may be relevant to a decision to own or dispose of our common stock or ADSs and is not intended as tax advice to any particular investor. This summary does not describe any tax consequences arising under the laws of any state, locality or other taxing jurisdiction other than Chile and the United States. There is currently no income tax treaty between the United States and Chile. However, the U.S. government and the government of Chile signed on February 4, 2010 the Proposed Income Tax Treaty between the United States of America and the Republic of Chile (the “Proposed U.S.-Chile Treaty”), which is now subject to ratification by the U.S. Senate and Chilean Congress. If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.

Material Tax Consequences of Owning Shares of Our Common Stock or ADSs

Chilean Taxation

The following is a summary of certain Chilean tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs by Foreign Holders (as defined herein). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to own or dispose of shares of our common stock or ADSs and does not purport to address the tax consequences applicable to all categories of investors, some of whom may be subject to special rules. Holders of shares of our common stock or ADSs are advised to consult their tax advisers concerning the Chilean and other tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs.

The description of Chilean tax laws set forth below is based on Chilean laws in force as of the date of this Annual Report and can be subject to any changes in such laws occurring after the date of this Annual Report. Although it is uncommon, legal changes can be made on a retroactive basis. However, changes in regulations or interpretations held by the Chilean tax authorities may not be used retroactively against taxpayers who acted in good faith relying on such modified regulations or interpretations.

For purposes of this summary, the term “Foreign Holder” means either (1) in the case of an individual, a person who is not resident or domiciled in Chile; or (2) in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless the shares of our common stock or ADSs are assigned to a branch or a permanent establishment of such entity in Chile. For purposes of Chilean taxation, (a) an individual holder is resident in Chile if he or she has remained in Chile for a period of more than 183 days in any 12-month period (which need not be consecutive), and (b) an individual is domiciled in Chile if he or she resides in Chile with the actual or presumptive intent of staying in Chile (intention that can be evidenced by circumstances such as the acceptance of an employment in Chile or the relocation to Chile of his or her family).

171

Table of Contents

The Income Tax Law provides that a Foreign Holder is subject to income taxes on his or her Chilean-sourced income. For these purposes, Chilean source income means earnings from activities performed within Chilean territory or from sale, disposition or other transactions in connection with assets or goods located in Chile. Indirect sale regulations may also attribute Chilean sourced income.

Taxation of Dividends

Cash dividends paid by us with respect to shares of our common stock held by a Foreign Holder, including shares represented by ADSs, will be subject to a 35% Chilean Withholding Tax (“WHT”), which is withheld, filed and paid over by us.

If we have paid Corporate Income Tax (“CIT”) on the income from which the dividend is paid, a credit for the CIT (reduced, in certain circumstances by a related fiscal debit, as described below) effectively reduces the rate of WHT.

When a credit is available, the WHT is computed by applying the 35% rate to the pre-tax amount needed to fund the dividend and then subtracting from the tentative WHT so determined the amount of CIT actually paid on the pre-tax income. For determining the pre-tax amount of the dividend, the CIT credit will depend on the amounts accumulated in the Accumulated Credit Balance (SAC), at the date of withdrawal or distribution.

In general, 35% of CIT paid on the income from which a dividend is paid gives rise to a fiscal debit owed to the Chilean Treasury at the time the dividend distribution is made to a Foreign Holder. Accordingly, a Foreign Holder generally may apply a net credit equal to only 65% of the CIT to reduce WHT.

However, if the Foreign Holder is a resident of a country with which Chile has a tax treaty for the avoidance of double taxation (a “Double Tax Treaty”) in force, the Foreign Holder may be entitled to apply the entire CIT against WHT otherwise due. Moreover, if the Foreign Holder is a resident of a country with a signed Double Tax Treaty that has not entered into force on January 1, 2020, (as in the case of United States) the Foreign Holder would also be entitled to a 100% CIT credit, without reduction by any related fiscal debit, until December 31, 2026. If at such date the treaty has not entered into force, the Foreign Holder will be subject to the general rules, and hence entitled only to a net credit of 65% of the CIT as described above. In accordance with the above, upon the distribution of profits to Foreign Holders, a 35% WHT applies, and only 65% of the CIT is creditable against such WHT, with the remaining 35% being paid back to the Chilean Treasury; thus, the combined tax rate on profits earned in Chile amounts to 44.45%. However, if the Foreign Holder resides in a country with which Chile has a Double Tax Treaty in force, the full 27% CIT is creditable, resulting in combined tax rate of 35%.

It is worth mentioning that, on February 24, 2020, the “Modernization Tax Law” was enacted and published in the Chilean Official Gazette, after a year and a half of discussion. The original bill went through substantial amendments both in the Chamber of Deputies and in the Senate of the Chilean Congress, incorporating the amendments agreed back in “Tax Agreement” between the Senate’s Finance Commission and the Government.

Regarding the corporate tax system, the Modernization Tax Law sets forth a single partially integrated tax regime, applicable to companies whose annual sales exceed 75,000 UF (approximately USD 2.8 million). Under this single regime, the CIT remains at 27%, which is partially creditable against the final taxation of Foreign Holders, unless they reside in a tax treaty country, in which case the CIT is fully creditable, as explained above.

Another relevant modification that was incorporated in the Modernization Tax Law relates to Foreign Holders that reside in a country with a signed Double Tax Treaty that has not entered into force as of January 1, 2020, (such as in the case of United States). In such case, the Foreign Holders would be entitled to a 100% CIT credit, without deduction, until December 31, 2026. Before the Modernization Tax Law, this tax benefit was effective only until December 31, 2021.

To prove residency in a country with which Chile has a Double Tax Treaty, whether signed or in force, a Foreign Holder must produce a government-issued residence certificate, recognizing the taxpayer as a resident of the corresponding country. Foreign Holders are urged to consult with their tax advisers regarding all requirements to be entitled to the 100% CIT credit.

172

Table of Contents

The WHT applicable to withdrawals, remittances or distributions abroad must be determined taking into account an interim CIT credit, based on the corporate tax rate in force in the year of the remittance or distribution. Therefore, taxation of the withdrawal, remittance or distribution shall year-end. Any withholding tax difference determined at year-end must: a) be paid in the annual tax return to be declared by the Chilean company in April of the following year or b) be requested as a refund by the Foreign Holder through an administrative process or through the annual tax return to be filed in April of the year following the distribution of the dividend.

The example below illustrates the effective Chilean WHT burden on a cash dividend received by a Foreign Holder, assuming a WHT rate of 35.0%, a statutory CIT rate of 27.0% and a distribution of all of the net proceeds available after payment of the CIT.

100% Credit available
Taxable income	U.S.$100
CIT (27.0% of U.S.$100)		(27.0	)
Net proceeds available		73.0
Dividend payment		73.0
Withholding Tax (35.0% of the sum of the dividend (U.S.$73.0) and the available CIT credit (U.S.$27.0))		35.0
CIT credit		(27.0	)
Payable WHT		8.0
Net dividend received		65 (73.0-8.0)
		11.0	%
Effective dividend withholding tax rate		(8.0/73.0	)

65% Credit available
Taxable income	U.S.$100
CIT (27.0% of U.S.$100)		(27.0	)
Net proceeds available		73.0
Dividend payment		73.0
Withholding Tax (35.0% of the sum of the dividend (U.S.$73.0) and the available CIT credit (U.S.$27.5))		35.0
CIT credit		(27.00	)
CIT debt		9.45
Payable WHT		17.55
Net dividend received		55.55 (73.0-17.45)
		24.0	%
Effective dividend withholding tax rate		(17.45/73.0	)

Dividend distributions made in kind would be subject to the same Chilean tax rules as cash dividends.

Stock dividends received by the Foreign Holder are not subject to Chilean taxation.

If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty for their own circumstances.

Taxation of Capital Gains

Gain realized on the sale, exchange or other disposition by a Foreign Holder of ADSs will not be subject to Chilean taxation, provided that such sale or disposition occurs outside Chile or that it is performed under the rules of Title XXIV of the Chilean Securities Market Law, as amended by Law No. 19,601, dated January 18, 1999. The deposit and withdrawal of shares of common stock in exchange for ADSs will not be subject to any Chilean taxes.

173

Table of Contents

Gain recognized on a sale or exchange of shares of common stock (as distinguished from sales or exchanges of ADSs representing such shares of common stock) by a Foreign Holder to an individual or entity that is not resident or domiciled in Chile will be subject to WHT. This tax must be withheld by the purchaser, with an interim rate of 10.0% of the total price without any deduction, unless the gain subject to taxation can be determined, in which case the withholding will be equal to 35.0% of the gain.

Notwithstanding the above, if the seller evidences that no capital gain was generated, the WHT would not be applicable. For tax purposes, the capital gain shall be the difference between the sales price and the acquisition cost of the stock.

The tax basis of shares of common stock received in exchange for ADSs will be the acquisition value of such shares. The valuation procedure set forth in the deposit agreement states that the highest price at which shares of common stock were exchanged on the Santiago Stock Exchange on the date of the exchange generally will determine the acquisition value for this purpose. Consequently, the conversion of ADSs into shares of common stock and sale of such shares of common stock for the value established under the deposit agreement made on the date of the exchange will not generate a capital gain subject to taxation in Chile. In the case where ADSs were exchanged for shares and the subsequent sale of the shares is made on a different day from the one on which the exchange is recorded in the shareholders’ registry of the issuer, capital gains subject to taxation in Chile may be generated, depending on the difference between the acquisition value and the sale price.

On October 1, 1999, the Chilean Internal Revenue Service issued Ruling N°3,708 whereby it allowed Chilean issuers of ADSs to amend the Deposit Agreements in which they are parties in order to include a clause that states that, in the case that the exchanged shares are sold by the ADSs’ holder on a Chilean stock exchange, either on the same day on which the exchange is recorded in the shareholders’ registry of the issuer or within the two prior business days to such date, the acquisition price of such exchanged shares shall be the price registered in the invoice issued by the stock broker that participated in the sale transaction.

Consequently, as we have included this clause in the form of ADRs attached to the deposit agreement, the capital gain that might be generated if the shares received in exchange for ADSs were sold within two days prior to the date on which the exchange is recorded in the shareholders’ registry of the issuer, will not be subject to Chilean taxation. Distribution and exercise of preemptive rights relating to the shares of common stock will not be subject to Chilean taxation.

Cash amounts received in exchange for the shares or assignment of preemptive rights relating to the shares will be subject to both the CIT and the WHT (the former being creditable against the latter to the extent described above). In certain cases, and provided certain requirements are met, capital gains realized on the sale of actively traded stock of Chilean public companies may be exempt from Chilean income taxes.

Our stock is currently considered to be an actively traded stock in the Santiago Stock Exchange, and Foreign Holders of the stock may qualify for an income tax exemption. Foreign Holders are urged to consult with their own tax advisers to determine whether an exemption applies to them.

If the Proposed U.S.-Chile Double Tax Treaty becomes effective, it may further restrict the amount of Chilean tax, if any, imposed on gains derived from the sale or exchange of shares of common stock by U.S. residents eligible for the benefits of the treaty. U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.

Other Chilean Taxes

No Chilean inheritance, donation or succession taxes apply to the transfer or disposition of the ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by donation of shares of our common stock by a Foreign Holder. No Chilean stamp, issue, registration or similar taxes or duties apply to Foreign Holders of shares or ADSs.

Withholding Tax Certificates

Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of Withholding Taxes. For further information, the investor should contact: Robert Moreno, irelations@santander.cl. Dividends payable to holders of ADSs are net of foreign currency conversion expenses of the Depositary and will be subject to the Withholding Tax currently at the rate of 35% (subject to credits in certain cases as described above).

174

Table of Contents

U.S. Federal Income Tax Considerations

The following is a discussion of material U.S. federal income tax consequences of owning and disposing of shares of our common stock or ADSs to U.S. holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such common stock or ADSs. The discussion applies only if you are a U.S. holder holding shares of our common stock or ADSs as capital assets for U.S. federal income tax purposes. It does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances, including the alternative minimum tax and the Medicare contribution tax, nor does it describe all tax consequences that may be relevant to U.S. holders subject to special rules, such as:

certain financial institutions;

insurance companies;

dealers and traders in securities who use a mark-to-market method of tax accounting;

persons holding shares or ADSs as part of a hedge, “straddle,” conversion transaction, integrated transaction or similar transaction;

persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;

persons holding shares of our common stock or ADSs that own or are deemed to own ten percent or more of the voting power or value of our stock;

persons who acquired shares of our common stock or ADSs pursuant to the exercise of any employee stock option plan or otherwise as compensation; or

persons whose shares or ADSs are held in connection with a trade or business conducted outside the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes owns shares of our common stock or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships owning shares of our common stock or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the shares of our common stock or ADSs.

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the Depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. In addition, this discussion does not address U.S. state, local and non-U.S. tax consequences. Please consult your tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of shares or ADSs in your particular circumstances.

As used herein, a “U.S. holder” is a person that for U.S. federal income tax purposes is a beneficial owner of shares of our common stock or ADSs and is:

a citizen or individual resident of the United States;

175

Table of Contents

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, a state thereof or the District of Columbia; or

an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.

Taxation of Distributions

Distributions paid on shares of our common stock or ADSs, other than certain pro rata distributions of common shares or rights, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. holders as dividends. Subject to applicable limitations, certain dividends paid by “qualified foreign corporations” to certain non-corporate U.S. holders may be taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE where our ADSs are traded. You should consult your tax advisers to determine whether favorable rates may apply to dividends you receive and whether you are subject to any special rules that limit your ability to be taxed at such favorable rates. The amount of the dividend will include any amounts withheld by us or our paying agent in respect of Chilean taxes at the effective rate (after credit for CIT) as described above under “ — Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Taxation of Dividends.” The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.

Dividends will be included in your income on the date of your (or in the case of ADSs, the Depositary’s) receipt of the dividend. The amount of any dividend income paid in Chilean pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Subject to applicable limitations that may vary depending upon your circumstances, Chilean taxes withheld from cash dividends on shares of our common stock or ADSs, reduced by the credit for any CIT, as described above under “—Chilean Taxation—Taxation of Dividends,” generally will be creditable against your U.S. federal income tax liability. If the Proposed U.S.-Chile Treaty becomes effective, any Chilean income taxes withheld from dividends on shares or ADSs in excess of the rate provided by the treaty will not be creditable by a U.S. holder who is eligible for the benefits of the treaty. The rules governing foreign tax credits are complex and you should consult your tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits. Instead of claiming a credit, you may, at your election, deduct such Chilean taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.

176

Table of Contents

Sale or Other Disposition of Shares or ADSs

For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of shares of our common stock or ADSs generally will be capital gain or loss, and will be long-term capital gain or loss if you held the shares of our common stock or ADSs for more than one year. The amount of your gain or loss will be equal to the difference between your tax basis in the shares of our common stock or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. If a Chilean tax is withheld on the sale or disposition of the shares of our common stock or ADSs, your amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Chilean tax. See “—Chilean Taxation—Taxation of Capital Gains” for a description of when a disposition may be subject to taxation by Chile. Such gain or loss generally will be U.S.-source gain or loss for foreign tax credit purposes. Consequently, you may not be able to credit any Chilean tax imposed on the disposition of shares of our common stock or ADSs against your taxable income unless you have other foreign-source income in the appropriate foreign tax credit category. If the Proposed U.S.-Chile Treaty becomes effective, however, a U.S. holder who is eligible for the benefits of the treaty and whose gain from the sale of shares is not exempt from Chilean tax under such treaty may elect to treat disposition gain that is subject to Chilean tax as foreign-source gain and claim a credit in respect of the tax. You should consult your tax advisers as to whether the Chilean tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources. Alternatively, instead of claiming a credit, you may elect to deduct otherwise creditable taxes in computing your income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.

Passive Foreign Investment Company Rules

Based on proposed Treasury regulations (the “Proposed Regulations”), including those which are proposed to be effective for taxable years beginning after December 31, 1994, we believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for the year ended December 31, 2020. However, since the Proposed Regulations may not be finalized in their current form and since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25 percent owned equity investments) from time to time, and, if recently proposed Treasury regulations are finalized in their current form, the location of activities that produce active banking income and the location of our customers, there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any taxable year during which you held an ADS or a share of our common stock, certain adverse tax consequences could apply to you.

If we were a PFIC for any taxable year during which you held shares of our common stock or ADSs, gain recognized by you on a sale or other disposition (including certain pledges) of a share of our common stock or an ADS would generally be allocated ratably over your holding period for the share of our common stock or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for that taxable year. Similar rules would apply to any distribution in respect of shares of our common stock or ADSs that exceeds 125% of the average of the annual distributions on shares of our common stock or ADSs received by you during the preceding three years or your holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments of the shares of our common stock or ADSs (including, with respect to our ADSs, a mark-to-market election). In addition, if we were a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable rates discussed above with respect to dividends paid to non-corporate holders would not apply.

If we were to be treated as a PFIC in any taxable year, a U.S. holder may be required to file reports with the Internal Revenue Service containing such information as the Treasury Department may require.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding, unless you are a corporation or other exempt recipient or in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

Certain U.S. holders may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). You should consult your tax advisers regarding any reporting obligations you may have with respect to shares of our common stock or ADSs.

177

Table of Contents

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

The documents concerning us which are referred to in this Annual Report may be inspected at our offices at Bandera 140, 20^thfloor, Santiago, Chile. We are subject to the information reporting requirements of the Exchange Act, except that, as a foreign issuer, we are not subject to the proxy rules or the short-swing profit and disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Section by calling the SEC at 1-800-732-0330. The SEC maintains a website on the Internet at http://www.sec.gov that contains reports and information statements and other information about us. The reports and information statements and other information about us can be downloaded from the SEC’s website or our investor relations website www.santandercl.gcs-web.com and can also be inspected and copied at the offices of the NYSE, Inc., 20 Broad Street, New York, New York 10005. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report.

I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction

The principal types of risk inherent in Santander-Chile’s business are market, liquidity, operational and credit risks. The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long term, stable earnings growth. Toward that end, our Board and senior management places great emphasis on risk management.

A. Integral Risk Committee

The Integral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general. It also evaluates the reasonability of the systems for measurement and control of the following risks: Credit risk; Market risk, Operational risk, Cybersecurity, Solvency risk (BIS), Legal risks, Compliance risks and Reputational risks.

Board member		Position in Committee
Alfonso Gomez		President
Oscar von Chrismar		Member
Félix de Vicente		Member
Blanca Bustamante		Member
Juan Pedro Santa María Pérez		Member
Claudio Melandri		Member
Lucía Santa Cruz		Member

178

Table of Contents

B. Audit Committee

Board member		Position in Committee
Orlando Poblete Iturrate		President
Felix de Vicente Mingo		Member
Rodrigo Vergara Montes		Member
Juan Pedro Santa María Pérez		Secretary

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors and the Committee Secretary is Juan Pedro Santa María. The Chief Executive Officer, General Counsel, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the independent registered public accounting firm and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.