FORM 6-K

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Issuer

 

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

 

Commission File Number: 001-14554

 

Banco Santander Chile

Santander Chile Bank

(Translation of Registrant’s Name into English)

 

Bandera 140

Santiago, Chile

(Address of principal executive office)

 

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

 

Form 20-F

☒

Form 40-F

☐

 

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

 

Yes

☐

No

☒

 

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

 

Yes

☐

No

☒

 

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

 

Yes

☐

No

☒

 

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

 

 

 

EXHIBIT INDEX

 

EXHIBIT NO.		DESCRIPTION
99.1		Consolidated Interim Financial Statements as of March 31, 2021 and 2020 and December 31, 2020

 

 

SIGNATURE

 

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

 

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

 

Date: June 1, 2021

 

 

2

Exhibit 99.1

 

 

 

CONTENT
Consolidated Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION	3
CONSOLIDATED STATEMENT OF INCOME	4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	5
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY	6
CONSOLIDATED STATEMENT OF CASH FLOWS	7
Notes to the Consolidated Interim Financial Statements

 

NOTE 01	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9
NOTE 02	CHANGES IN ACCOUNTING	38
NOTE 03	SIGNIFICANT EVENTS	39
NOTE 04	REPORTING SEGMENTS	41
NOTE 05	CASH AND CASH EQUIVALENTS	44
NOTE 06	TRADING INVESTMENTS	45
NOTE 07	DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING	46
NOTE 08	INTERBANK LOANS	53
NOTE 09	LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS	54
NOTE 10	AVAILABLE FOR SALE INVESTMENTS	60
NOTE 11	INTANGIBLE ASSETS	61
NOTE 12	FIXED ASSETS AND RIGHT OF USE ASSETS AND OBLIGATION FOR LEASE CONTRACT	63
NOTE 13	CURRENT AND DEFERRED TAXES	67
NOTE 14	OTHER ASSETS	70
NOTE 15	TIME DEPOSITS AND OTHER TIME LIABILITIES	71
NOTE 16	ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES	72
NOTE 17	MATURITY OF FINANCIAL ASSETS AND LIABILITIES	79
NOTE 18	PROVISIONS	81
NOTE 19	OTHER LIABILITIES	82
NOTE 20	CONTINGENCIES AND COMMITMENTS	83
NOTE 21	EQUITY	86
NOTE 22	CAPITAL REQUIREMENTS (BASEL)	89
NOTE 23	NON-CONTROLLING INTEREST	91
NOTE 24	INTEREST INCOME	93
NOTE 25	FEES AND COMMISSIONS	95
NOTE 26	NET INCOME (EXPENSE) FROM FINANCIAL OPERATIONS	98
NOTE 27	NET FOREIGN EXCHANGE INCOME	99
NOTE 28	PROVISIONS FOR LOAN LOSSES	100
NOTE 29	PERSONNEL SALARIES AND EXPENSES	101
NOTE 30	ADMINISTRATIVE EXPENSES	102
NOTE 31	OTHER OPERATING INCOME AND EXPENSES	103
NOTE 32	TRANSACTIONS WITH RELATED PARTIES	105
NOTE 33	FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES	109
NOTE 34	RISK MANAGEMENT	116
NOTE 35	NON-CURRENT ASSETS HELD FOR SALE	131
NOTE 36	SUBSEQUENT EVENTS	132

 

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

				As of March 31,		As of December 31,
				2021		2020
			NOTE	MCh$		MCh$
ASSETS
	Cash and deposits in banks		5	3,432,117		2,803,288
	Cash items in process of collection		5	347,355		452,963
	Trading investments		6	111,248		133,718
	Investments under resale agreements			-		-
	Financial derivative contracts		7	6,720,138		9,032,085
	Interbank loans, net		8	5,023		18,920
	Loans and accounts receivables from customers, net		9	33,514,431		33,413,429
	Available for sale investments		10	7,372,106		7,162,542
	Held to maturity investments			-		-
	Investments in associates and other companies			11,064		10,770
	Intangible assets		11	82,239		82,537
	Property, plant, and equipment		12	184,566		187,240
	Right of use assets		12	193,849		201,611
	Current taxes		13	27,743		-
	Deferred taxes		13	582,263		538,118
	Other assets		14	1,902,376		1,738,856
TOTAL ASSETS				54,486,518		55,776,077
LIABILITIES
	Deposits and other demand liabilities		15	15,713,432		14,560,893
	Cash items in process of being cleared		5	281,302		361,631
	Obligations under repurchase agreements			79,026		969,808
	Time deposits and other time liabilities		15	10,603,859		10,581,791
	Financial derivative contracts		7	7,015,197		9,018,660
	Interbank borrowing			6,841,978		6,328,599
	Issued debt instruments		16	8,006,680		8,204,177
	Other financial liabilities		16	175,170		184,318
	Lease liabiilties		12	146,742		149,585
	Current taxes		13	-		12,977
	Deferred taxes		13	170,354		129,066
	Provisions		18	507,940		456,120
	Other liabilities		19	1,293,451		1,165,853
TOTAL LIABILITIES				50,835,131		52,123,478
EQUITY
	Attributable to the equity holders of the Bank			3,564,552		3,567,916
	Capital		21	891,303		891,303
	Reserves		21	2,341,986		2,341,986
	Valuation adjustments		21	(158,149)		(27,586)
	Retained earnings			489,412		362,213
		Retained earnings from prior years		517,447		-
		Income for the period		181,713		517,447
		Minus:  Provision for mandatory dividends	21	(209,748)		(155,234)
	Non-controlling interest		23	86,835		84,683
TOTAL EQUITY				3,651,387		3,652,599
TOTAL LIABILITIES AND EQUITY				54,486,518		55,776,077

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENT OF INCOME

For the periods ended

 

		As of March 31,
		2021		2020
	NOTE	MCh$		MCh$
OPERATING INCOME
Interest income	24	614,423		640,434
Interest expense	24	(183,226)		(252,135)
Net interest income		431,197		388,299
Fee and commission income	25	125,703		125,650
Fee and commission expense	25	(50,251)		(51,245)
Net fee and commission income		75,452		74,405
Net income (expense) from financial operations	26	24,712		155,694
Net foreign exchange gain (loss)	27	4,784		(132,847)
Other operating income	32	5,283		6,411
Net operating profit before provision for loan losses		541,428		491,962
Provision for loan losses	28	(88,251)		(102,870)
NET OPERATING INCOME		453,177		389,092
Personnel salaries and expenses	29	(96,870)		(99,834)
Administrative expenses	30	(69,422)		(63,624)
Depreciation and amortization	31	(27,729)		(27.714)
Impairment of property, plant and equipment	31	-		(638)
Other operating expenses	32	(25,989)		(21,057)
Total operating expenses		(220,010)		(212,867)
OPERATING INCOME		233,167		176,225
Income from investments in associates and other companies		303		138
Income before tax		233,470		176,363
Income tax expense	13	(49,500)		(31,548)
Result of continuous operations		183,970		144,815
Result of discontinued operations	36	-		-
NET INCOME FOR THE PERIOD		183,970		144,815
Attributable to:
Equity holders of the Bank		181,713		144,014
Non-controlling interest	23	2,257		801
Earnings per share of continuous operations attributable to Equity holders of the Bank (expressed in Chilean pesos):
Basic earnings	21	0.964		0.764
Diluted earnings	21	0.964		0.764

 

The accompanying notes form an integral part of these consolidated interim financial statements.

 

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

For the periods ended

 

		As of March 31,
		2021		2020
	NOTE	MCh$		MCh$
NET INCOME FOR THE PERIOD		183,970		144,815
OTHER COMPREHENSIVE INCOME - ITEMS WHICH WILL BE RECLASSIFIED TO PROFIT OR LOSS
Available for sale investments	21	(104,387)		(43,139)
Cash flow hedge	21	(74,611)		47,174
Other comprehensive income which may be reclassified subsequently to profit or loss, before tax		(178,998)		4,035
Income tax related to items which may be reclassified subsequently to profit or loss		48,330		(1,245)
Other comprehensive income for the period which may be reclassified subsequently to profit or loss, net of tax		(130,668)		2,790
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS		-		-
TOTAL OTHER COMPREHENSIVE INCOME FOR THE PERIOD		53,302		147,605
Attributable to:
Equity holders of the Bank		51,150		146,814
Non-controlling interest	23	2,152		791

 

The accompanying notes form an integral part of these consolidated interim financial statements.

 

 

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the periods ended March 31, 2021 and 2020 and December 2020

 

		RESERVES		VALUATION ADJUSTMENTS			RETAINED EARNINGS
	Capital	Reserves and other retained earnings	Effects of merger of companies under common control	Available for sale investments	Cash flow hedge	Income tax effects	Prior years retained earnings	Income for the period	Provision for mandatory dividends	Total attributable to equity holders of the Bank	(*) Non-controlling interest	Total Equity
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Equity as of December 31, 2019	891,303	2,123,372	(2,224)	29,349	(40,435)	2,993	-	552,093	(165,628)	3,390,823	79,494	3,470,317
Distribution of income from previous period	-	-	-	-	-	-	552,093	(552,093)	-	-	-	-
Equity as of January 1, 2020	891,303	2,123,372	(2,224)	29,349	(40,435)	2,993	552,093	-	(165,628)	3,390,823	79,494	3,470,317
Increase or decrease of capital and reserves	-	-	-	-	-	-	-	-	-	-	-	-
Transactions with own shares	-	-	-	-	-	-	-	-	-	-	-	-
Dividend distributions/ withdrawals made	-	-	-	-	-	-	-	-	-	-	-	-
Other equity movements	-	-	-	-	-	-	-	-	-	-	-	-
Provision for mandatory dividends	-	-	-	-	-	-	-	-	(43,204)	(43,204)	-	(43,204)
Subtotal	-	-	-	-	-	-	-	-	(43,204)	(43,204)	-	(43,204)
Other comprehensive income	-	-	-	(43,338)	47,174	(1,036)	-	-	-	2,800	(10)	2,790
Result of continuous operations	-	-	-	-	-	-	-	144,014	-	144,014	801	144,815
Result of discontinued operations	-	-	-	-	-	-	-	-	-	-	-	-
Subtotal	-	-	-	(43,338)	47,174	(1,036)	-	144,014	-	146,814	791	147,605
Equity as of March 31, 2020	891,303	2,123,372	(2,224)	(13,989)	6,739	1,957	552,093	144,014	(208,832)	3,494,433	80,285	3,574,718
Equity as of December 31, 2020	891,303	2,344,210	(2,224)	98,976	(136,765)	10,203	-	517,447	(155,234)	3,567,916	84,683	3,652,599
Distribution of income from previous period	-	-	-	-	-	-	517,447	(517,447)	-	-	-	-
Equity as of January 1, 2021	891,303	2,344,210	(2,224)	98,976	(136,765)	10,203	517,447	-	(155,234)	3,567,916	84,683	3,652,599
Increase or decrease of capital and reserves	-	-	-	-	-	-	-	-	-	-	-	-
Transactions with own shares	-	-	-	-	-	-	-	-	-	-	-	-
Dividend distributions/ withdrawals made	-	-	-	-	-	-	-	-	-	-	-	-
Other equity movements	-	-	-	-	-	-	-	-	-	-	-	-
Provision for mandatory dividends	-	-	-	-	-	-	-	-	(54,514)	(54,514)	-	(54,514)
Subtotals	-	-	-	-	-	-	-	-	(54,514)	(54,514)	-	(54,514)
Other comprehensive income	-	-	-	(104,243)	(74,611)	48,291	-	-	-	(130,563)	(105)	(130,668)
Result of continuing operations	-	-	-	-	-	-	-	181,713	-	181,713	2,257	183,970
Result of discontinued operations	-	-	-	-	-	-	-	-	-	-	-	-
Subtotal	-	-	-	(104,243)	(74,611)	48,291	-	181,713	-	51,150	2,152	53,302
Equity as of March 31, 2021	891,303	2,344,210	(2,224)	(5,267)	(211,376)	58,494	517,447	181,713	(209,748)	3,564,552	86,835	3,651,387

(*) See note 1 b) for non-controlling interest.

 

Period	Total attributable to equity holders of the Bank		Allocated to reserves		Allocated to dividends		Distributed Percentage		Number of shares		Dividend per share (in chilean pesos)
	MCh$		MCh$		MCh$		%
Year 2019 (Extraordinary Shareholders Meeting November 2020)	552,093		220,838		165,628		30		188,446,126,794		0,879
Year 2019 (Shareholders Meeting April 2020)	552,093		220,838		331,255		60		188,446,126,794		0.879
Year 2018 (Shareholders Meeting April 2019)	591,902		236,761		355,141		60		188,446,126,794		1.885

 

The accompanying notes form an integral part of these consolidated interim financial statements.

 

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the periods ended

 

			As of March 31,
			2021		2020
	NOTE		MCh$		MCh$
A – CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME FOR THE PERIOD			183,970		144,815
Debits (credits) to income that do not represent cash flows			(323,638)		(309,564)
Depreciation and amortization	31		27,729		27,714
Impairments of property, plant and equipment and intangibles	31		-		638
Provision for loan losses	28		105,187		124,956
Provision from trading investments mark to market			64		1,766
Income from investments in associates and other companies	32		(303)		(138)
Net gain on sale of assets received in lieu of payment	32		(4,577)		(5,509)
Provision on assets received in lieu of payment	32		154		941
Net gain on sale of property, plant and equipment	32		(70)		(164)
Charge off of assets received in lieu of payment	32		3,948		5,949
Net interest income	24		(431,197)		(388,299)
Net fee and commission income	25		(75,452)		(74,405)
Changes in deferred taxes	13		45,473		(8,298)
Other (credits) debits  to income that do not represent cash flows			5,406		5,285
Increase/decrease in operating assets and liabilities			763,054		(175,902)
(Increase) decrease of loans and accounts receivables from customers, net			(111,833)		(1,775,328)
(Increase) decrease of financial investments			(187,094)		(679,516)
Decrease (increase) of interbank loans			13,897		1,904
(Increase) decrease of assets received or awarded in lieu of payment			818		2,638
Increase (decrease) of debits in customers checking accounts			1,217,901		653,092
Increase (decrease) of time deposits and other time liabilities			22,068		1,017,503
Increase (decrease) of obligations with domestic banks			(30,102)		(221,659)
Increase (decrease) of other demand liabilities or time obligations			(67,583)		(9,549)
Increase (decrease) of obligations with foreign banks			454,784		704,839
Increase (decrease) of obligations with Central Bank of Chile			88,697		-
Increase (decrease) of obligations under repurchase agreements			(890,782)		(127,434)
Increase (decrease) in other financial liabilities			(9,148)		(3,636)
Net increase of other assets and liabilities			(490,097)		(879,035)
Redemption of letters of credit			(1,471)		(1,587)
Senior bond issuances			549,620		989,355
Redemption mortgage bonds and payments of interest			(2,752)		(2,665)
Redemption and maturity of senior bonds and payments of interest			(300,518)		(307,528)
Interest received			614,423		640,434
Interest paid			(183,226)		(252,135)
Dividends received from investments in other companies			-		-
Fees and commissions received	25		125,703		125,650
Fees and commissions paid	25		(50,251)		(51,245)
Total cash flow provided by (used in) operating activities			623,386		(340,651)

 

The accompanying notes form an integral part of these consolidated interim financial statements.

 

 

Banco Santander-Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the periods ended

 

			March 31,
			2021		2020
	NOTE		MCh$		MCh$
B – CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of property, plant and equipment	12		(7,035)		(4,596)
Sales of property, plant and equipment			1,444		4,149
Purchase of intangible assets	11		(8,111)		(4,099)
Total cash flow provided by (used in) investment activities			(13,702)		(4,546)
C – CASH FLOW FROM FINANCING ACTIVITIES:
From shareholder´s financing activities			(18,710)		161,247
Increase in other obligations			-		-
Subordinated bonds emisions			-		175,941
Redemption of subordinated bonds and payments of interest			(7,071)		(4,347)
Dividends paid			-		-
Lease paid			(11,369)		(10,347)
From non-controlling interest financing activities			-		-
Dividends and/or withdrawals paid			-		-
Total cash flow (used in) financing activities			(18,710)		161,247
D – NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE PERIOD			590,974		(183,950)
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS			12,576		216,789
F – INITIAL BALANCE OF CASH AND CASH EQUIVALENTS			2,894,620		3,711,334
FINAL BALANCE OF CASH AND CASH EQUIVALENTS	5		3,498,170		3,744,173

 

 

			As of March, 31,
Reconciliation of provisions for the Consolidated Interim Statements of Cash Flows for the periods			2021		2020
			MCh$		MCh$
Provision for loan losses for cash flow purposes			105,187		124,956
Recovery of loans previously charged off			(16,936)		(22,086)
Provision for loan losses - net	28		88,251		102,956

 

 

			Changes other than cash
Reconciliation of liabilities arising from financing activities	December, 31 2020 MCh$	Cash Flow MCh$	Acquisition MCh$	Foreign Currency Movement MCh$	UF Movement MCh$	Fair Value Changes MCh$	March, 31 2021 MCh$
Subordinated Bonds	1,357,539	(7,071)	-	-	16,397	-	1,366,865
Paid dividends	-	-	-	-	-	-	-
Other obligations	149,585	(11,639)	-	-	8,796	-	146,742
Total liabilities from financing activities	1,507,124	18,710	-	-	25,193	-	1,513,607

 

The accompanying notes form an integral part of these consolidated interim financial statements.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

CORPORATE INFORMATION

 

Banco Santander-Chile is a banking corporation (limited company) operating under the laws of the Republic of Chile, headquartered at Bandera N°140, Santiago. The corporation provides a broad range of general banking services to its customers, ranging from individuals to major corporations. Banco Santander-Chile and its subsidiaries (collectively referred to as the “Bank” or “Banco Santander-Chile”) offers commercial and consumer banking services, including (but not limited to) factoring, collection, leasing, securities and insurance brokering, mutual and investment fund management, and investment banking.

 

Banco Santander Spain controls Banco Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander Chile Holding S.A., which are controlled subsidiaries of Banco Santander Spain. As of December 31 2020, Banco Santander Spain owns or controls directly and indirectly 99.5% of Santander Chile Holding S.A. and 100% of Teatinos Siglo XXI Inversiones Ltda. This makes Banco Santander Spain have control over 67.18% of the Bank’s shares.

 

a)

Basis of preparation

 

The present Consolidated Financial Statements have been prepared in accordance with the Compendium of Accounting Standards (CNC) and instructions issued by the Commission for the Financial Market (CMF) (former Superintendency of Banks and Financial Institutions “SBIF”), an entity auditor that according to Law No. 21,000 that “Creates the Commission for the Financial Market”, provides in paragraph 6 of its article 5 that the Commission for the Financial Market (CMF) may “set the rules for the preparation and presentation of the reports, balance sheets, statements of situation and other financial statements of the audited entities and determine the principles according to which they must keep their accounting and in all that that is not treated by it if it does not contradict its instructions, must adhere to the generally accepted accounting criteria, which correspond to the technical standards issued by the Colegio de Contadores de Chile A.G., coinciding with the International Financial Reporting Standards (IFRS or IFRS, for its acronym in English) agreed by the International Accounting Standards Board (IASB). In case of discrepancies between the accounting principles and accounting criteria issued by the CMF (ex SBIF) in its Compendium of Accounting Standards and instructions, these will prevail last.

 

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

 

The Notes to the Consolidated Financial Statements contain additional information to support the figures submitted in the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows for the period. These contain narrative descriptions and details of these statements in a clear, relevant, reliable and comparable manner.

 

b)

Basis of preparation for the Consolidated Financial Statements

 

The Consolidated Financial Statements as of March 31, 2021 and 2020 and December 2020, include the financial statements of the entities over which the Bank has control (including structured entities); and includes the adjustments, reclassifications and eliminations needed to comply with the accounting and valuation criteria established by IFRS. Control is achieved when the Bank:

 

I.

has power over the investee (i.e., it has rights that grant the current capacity of managing the relevant activities of the investee);

II.

is exposed, or has rights, to variable returns from its involvement with the investee; and

III.

has the ability to use its power to affect its returns.

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

●

the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders.

●

the potential voting rights held by the Bank, other vote holders or other parties.

●

the rights arising from other contractual agreements.

●

any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

 

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

 

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

 

When necessary, adjustments are made to the financial statements of the subsidiaries to ensure their accounting policies are consistent with the Bank’s accounting policies. All balances and transactions between consolidated entities are eliminated.

 

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

 

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

 

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

 

i.

Entities controlled by the Bank through participation in equity

 

Name of the Subsidiary			Percent ownership share
			As of March 31,				As of December 31,				As of March 31,
		Place of	2021				2020				2020
		Incorporation and	Direct	Indirect	Total		Direct	Indirect	Total		Direct	Indirect	Total
	Main Activity	operation	%	%	%		%	%	%		%	%	%
Santander Corredora de Seguros Limitada	Insurance brokerage	Santiago, Chile	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	Santiago, Chile	50.59	0.41	51.00		50.59	0.41	51.00		50.59	0.41	51.00
Santander Asesorias Financieras Limitada	Securities brokerage	Santiago, Chile	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	Santiago, Chile	99.64	-	99.64		99.64	-	99.64		99.64	-	99.64
Klare Corredora de Seguros S.A.	Insurance brokerage	Santiago, Chile	50.10	-	50.10		50.10	-	50.10		50.10	-	50.10
Santander Consumer Finance Limitada	Financial automovite	Santiago, Chile	51.00	-	51.00		51.00	-	51.00		51.00	-	51.00
Sociedad operadora de Tarjetas de Pago Santander Getnet Chile S.A. (1)	Card Operator	Santiago, Chile	99.99	0.01	100.00		99.99	0.01	100.00		-	-	-

 

 

 

The details of non-controlling interest in all the subsidiaries can be seen in Note 23 – Non-controlling interest.

 

(1) On July 6, 2020, “Sociedad operadora de Tarjetas de Pago Santander Getnet Chile S.A” was enrolled as a subsidiary.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.

Entities controlled by the Bank through other considerations

 

The following companies have been consolidated based on the fact that the relevant activities of them are determined by the Bank (companies complementary to the banking sector) and therefore the Bank exercises control:

 

-

Santander Gestión de Recaudación y Cobranza Limitada (collection services).

-

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

-

Multiplica SpA (Development card incentive programs).

 

iii.

Associates

 

An associate is an entity over which the Bank has the ability to exercise significant influence, but not control or joint control. This ability is usually represented by a share equal to or higher than 20% of the voting rights of the Company and is accounted for using the equity method.

 

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

 

			Percentage of  ownership share
		Place of Incorporation and operation	As of March 31,		As of December 31,		As of March 31,
			2021		2020		2020
Associates	Main activity		%		%		%
Centro de Compensación Automatizado S.A.	Electronic fund transfer and compensation services	Santiago, Chile	33.33		33.33		33.33
Sociedad Interbancaria de Depósito de Valores S.A.	Repository of publically offered securities	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 to 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 Alto Valor S.A., Banco Santander-Chile has a representative in the Board of Directors, which is why Management has concluded that it exercises significant influence over the same.

 

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

 

iv.

Share or rights in other companies

 

Entities over which the Bank has no control or significant influence are presented in this category. These holdings are shown at acquisition value (historical cost) less impairment, if any.

 

c)

Non-controlling interest

 

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

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

d)

Reporting segments

 

The Bank’s operating segments correspond to the units whose operating results are regularly reviewed by the highest decision-making authority. Two or more operating segments can be added into one, only when the aggregation is consistent with the basic principle of International Financial Reporting Standard 8 “Operating Segments” (IFRS 8) and the segments have similar economic characteristics and are similar in each one of the following aspects:

 

i.

the nature of the products and services;

ii.

the nature of the production processes;

iii.

the type or category of customers to whom your products and services are destined;

iv.

the methods used to distribute your products or provide services; and

v.

if applicable, the nature of the regulatory framework, for example, banking, insurance, or public services.

 

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

 

i.

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

ii.

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

iii.

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

 

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

 

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

 

According to the information presented, the Bank’s segments were selected based on an operating segment being a component of an entity that:

 

i.

Engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses from transactions with other components of the same entity);

ii.

whose operating results are regularly reviewed by the entity’s chief executive officer, who makes decisions about resources allocated to the segment and assess its performance;

iii.

for which discrete financial information is available.

 

e)

Functional and presentation currency

 

The Bank, in accordance with IAS 21 “Effects of Variations in Exchange Rates of the Foreign Currency”, has defined as functional and presentation currency the Chilean Peso, which is the currency of the primary economic environment in which the Bank operates, it also obeys the currency that influences the structure of costs and revenues. Therefore, all balances and transactions denominated in currencies other than the Chilean Peso are considered as “Foreign currency”.

 

f)

Foreign currency transactions

 

The Bank performs transactions in foreign currencies, mainly in U.S. dollar. Assets and liabilities denominated in foreign currencies and held by the Bank are translated to Chilean pesos based on the representative market rate (discounted spot) on the month end date. The rate used was Ch$718.84 per US$1 for March 2021 (Ch$853.78 per US$1 for March 2021 and Ch$712.47 for December 2020).

 

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

 

g)

Definitions and classification of financial instruments

 

i.

Definitions

 

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

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, which is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative. As of March 31, 2021 and 2020 and December 31, 2020, Banco Santander-Chile did not keep implicit derivatives in its portfolio.

 

ii.

Classification of financial assets for measurement purposes

 

Financial assets are classified into the following specified categories: financial assets trading investments at fair value through profit or loss (FVTPL), ‘held to maturity investments’, ‘available for sale investments’ (AFS) financial assets 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.

 

A conventional purchase or sale of financial assets is the purchase or sale of a financial asset that requires the delivery of the asset during a period that is generally regulated or arises from a convention established in the market. A conventional purchase or sale of financial assets will be recognized and written off, as appropriate, by applying the accounting of the date of contracting or that of the settlement date.

Financial assets are initially recognized at fair value plus, in the case of financial assets that aren’t accounted for at fair value with changes in profit or loss, transaction costs that are directly attributable to the acquisition or issue.

 

Effective interest method

 

The effective interest method is a method of calculating the amortised 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 recognised on an effective interest basis for loans and accounts receivables other than those financial assets classified at fair value through profit or loss.

 

Trading investments

 

Financial assets are classified as FVTPL when the financial asset is either held for trading or it is designated as fair value through profit or loss.

 

A financial asset is classified as held for trading if:

 

-

It has been acquired with the purpose of selling it in the short 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 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 FVTPL.

 

Financial assets FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised incorporates any dividend or interest earned on the financial asset and is included in the ‘net income (expense) from financial operations’ line item.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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 amortised cost using the effective interest method less impairment.

 

Available for sale 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 recognised in profit or loss. Other changes in the carrying amount of available for sale investments are recognised 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 recognised 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 translated as the described in f) above. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset.

 

Loans and accounts receivables from customers

 

Loans and accounts receivable from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and accounts receivables from customers (including loans and accounts receivable from customers and interbank loans) are measured at amortised cost using the effective interest method, less any impairment.

 

Interest income is recognised by applying the effective interest rate, except for short-term receivables where discounting effects are immaterial.

 

iii.

Classification of financial assets for presentation purposes

 

For presentation purposes, the financial assets are classified by their nature into the following line items in the Consolidated Financial Statements:

 

●

Cash and deposits in banks: this line includes cash balances, checking accounts and on-demand deposits with the Central Bank of Chile and other domestic and foreign financial institutions. Amounts invested as overnight deposits are included in this item and in the corresponding items. If a special item for these operations is not mentioned, they will be included along with the accounts being reported.

 

●

Trading investments: this item includes financial instruments held-for-trading and investments in mutual funds which must be adjusted to their fair value.

 

●

Investments under resale agreements: This item presents the balances corresponding to the transactions for the purchase of instruments with an agreement and the securities loans. In accordance with current regulations, the Bank does not register as its own portfolio those papers purchased with retro-purchase agreements.

 

●

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

 

●

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

●

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

 

●

Interbank loans: this item includes the balances of transactions with domestic and foreign banks, including the Central Bank of Chile, other than those reflected in certain other financial asset classifications listed above.

 

●

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

 

●

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

 

iv.

Classification of financial liabilities for measurement purposes

 

Financial liabilities are classified as either financial liabilities FVTPL or other financial liabilities.

 

Financial liabilities FVTPL

 

As of March 31, 2021 and, 2020 and December 21, 2020, the bank does not possess any financial liabilities FVTPL.

 

Other financial liabilities

 

Other financial liabilities (including interbank borrowings, issued debt instruments and other payables) are initially recorded at fair value and subsequently measured at amortized cost using the effective interest method.

 

v.

Classification of financial liabilities for presentation purposes

 

Financial liabilities are classified by their nature into the following items in the Consolidated Statement of Financial Position:

 

●

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

 

●

Cash items in process of collection: this item includes balances from asset purchase operations that are not settled the same day, and sale of currencies not yet delivered.

 

●

Obligations under repurchase agreements: this includes the balances of sales of financial instruments under securities repurchase and loan agreements. The Bank does not record as own portfolio instruments acquired under repurchase agreements.

 

●

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

 

●

Financial derivative contracts: this includes financial derivative contracts with negative fair values (i.e. a liability of the Bank), whether they are for trading or for hedge accounting, as set forth in Note 8.

 

●

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

 

●

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

 

●

Obligations with banks: Includes obligations with other banks in the country, with foreign banks or with the Central Bank of Chile and which were not classified in any previous definition.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

●

Issued debt instruments: there are three types of instruments issued by the Bank: Obligations under letters of credit, Subordinated bonds and Senior bonds placed in the local and foreign market.

 

●

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

 

vi.

Modified of financial assets

 

When the contractual modification of the cash flows has its origin in financial difficulties of the counterparty and said flows have been adapted so that it can comply with its payment obligations, this modification will not be considered as substantial and therefore will not imply the cancellation of the current financial instrument.

 

On the other hand, when the modification of the contractual flows originate for eminently commercial reasons, said modification will be considered as substantial and therefore will imply the cancellation of the original financial instrument and the recognition of a new one. Any difference that is generated between the book value of the derecognized financial instrument and the fair value of the new financial instrument will be recognized in the Consolidated Statement of Income.

 

h)

Valuation of financial instruments and recognition of fair value changes

 

Generally, financial assets and liabilities are initially recognized at fair value, which, in the absence of evidence against it, is deemed to be the transaction price. Financial instruments, other than those measured at fair value through profit or loss, are initially recognized at fair value plus transaction costs. Subsequently, and at the end of each reporting period, financial instruments are measured with the following criteria:

 

i.

Valuation of financial instruments

 

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred in the course of a sale, except for credit investments and held to maturity investments.

 

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

 

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

 

When using valuation techniques, the Bank shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs as available. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorized within the fair value hierarchy (i.e. Level 1, 2 or 3).

 

Although the use of average prices is allowed as a practical resource to determine the fair value of an asset or a liability, the Bank makes a adjustment (FVA or fair value adjustment) when there is a gap between the purchase and sale price (close out cost).

 

IFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

 

Every derivative is recorded in the Consolidated Statements of Financial Position at fair value as previously described. This value is compared to the valuation at the trade date. If the fair value is subsequently measured positive, this is recorded as an asset, if the fair value is subsequently measured negative, this is recorded as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recorded in “Net income (expense) from financial operations” in the Consolidated Statement of Income.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Specifically, the fair value of financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If, for exceptional reasons, the quoted price cannot be determined on a given date, the fair value is determined using similar methods to those used to measure over the counter (OTC) derivatives. The fair value of OTC derivatives is the sum of the future cash flows resulting from the instrument, discounted to present value at the date of valuation (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV) and option pricing models, among other methods. Also, within the fair value of derivatives are included Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA), all with the objective that the fair value of each instrument includes the credit risk of its counterparty and Bank´s own risk. Counterparty Credit Risk (CVA) is a valuation adjustment to derivatives contracted in non-organized markets as a result of exposure to counterparty credit risk. The CVA is calculated considering the potential exposure to each counterparty in future periods. Own-credit risk (DVA) is a valuation adjustment similar to the CVA, but generated by the Bank’s credit risk assumed by our counterparties. In the case of derivative instruments contracted with Central Clearing Houses, in which the variation margin is contractually defined as a firm and irrevocable payment, this payment is considered as part of the fair value of the derivative.

 

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

 

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

 

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

 

Capital instruments whose fair value cannot be determined sufficiently objectively and financial derivatives that have these instruments as underlying assets and are settled by delivery thereof are maintained at their acquisition cost, corrected, where appropriate, by losses for deterioration they have experienced.

 

ii.

Valuation techniques

 

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

 

In cases where price quotations cannot be observed in available markets, the Bank’s management determines a best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs however for some valuations of financial instruments, significant inputs are unobservable in the market. To determine a value for those instruments, various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

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

 

The main techniques used as of March 31, 2021 and December 31, 2020, by the Bank’s internal models to determine the fair value of the financial instruments are as follows:

 

i.

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

ii.

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

iii.

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

 

The fair value of the financial instruments calculated by the aforementioned internal models considers contractual terms and observable market data, which include interest rates, credit risk, exchange rates, quoted market price of shares and market rates of raw materials, volatility, prepayments and liquidity. The Bank’s management considers that its valuation models are not significantly subjective, since these methodologies can be adjusted and evaluated, as appropriate, through the internal calculation of fair value and the subsequent comparison with the related actively traded price.

 

iii.

Hedging transactions and macrohedge

 

The Bank uses financial derivatives for the following purposes:

 

i.

To sell to customers who request these instruments in the management of their market and credit risks;

ii.

to use these derivatives in the management of the risks of the Bank entities’ own positions and assets and liabilities (“hedging derivatives”), and

iii.

to obtain profits from changes in the price of these derivatives (trading derivatives).

 

All financial derivatives that are not held for hedging purposes are accounted for as trading derivatives.

 

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

 

1.

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

 

a.

Changes in the value of assets and liabilities due to fluctuations, among others, in inflation (UF), the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

b.

Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecasted transactions (“cash flow hedge”);

c.

The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).

 

2.

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

 

a.

At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”).

b.

There is sufficient evidence that the hedge was actually effective during the life of the hedged item or position (“retrospective effectiveness”).

 

3.

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

 

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

 

a.

For fair value hedges, the gains or losses arising on both hedging instruments and the hedged items (attributable to the type of risk being hedged) are included as “Net income (expense) from financial operations” in the Consolidated Statement of Income.

b.

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

c.

For cash flow hedges, the change in fair value of the hedging instrument is included as “Cash flow hedge” in “Other comprehensive income”.

d.

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

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

iv.

Embedded Derivatives in hybrid financial instruments

 

Embedded Derivatives in other financial instruments or in other host contracts are accounted for separately as derivatives if 1) their risks and characteristics are not closely related to the host contracts, 2) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and 3) provided that the host contracts are not classified as “Trading investments” or as other financial assets (liabilities) at fair value through profit or loss.

 

v.

Offsetting of financial instruments

 

Financial asset and liability balances are offset, i.e., reported in the Consolidated Statements of Financial Position at their net amount, only if there is a legally enforceable right to offset the recorded amounts and the Bank intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously. As of March 31, 2021 and December 31, 2020, there is not offsetting of financial asset and liability balances.

 

vi.

Derecognition of financial assets and liabilities

 

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

 

i.

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

 

ii.

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

 

-

An associated financial liability for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.

-

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

 

iii.

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

 

a.

If the transferor does not retain control of the transferred financial asset: the asset is derecognized from the Consolidated Statement of Financial Position and any rights or obligations retained or created in the transfer are recognized.

b.

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

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

i)

Recognizing income and expenses

 

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

 

i.

Interest revenue, interest expense, and similar items

 

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

 

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

 

This interest and adjustments are generally referred to as “suspended” and are recorded as memorandum accounts in they are reported as part of the complementary information thereto and as memorandum accounts (Note 24). This interest is recognized as income, when collected.

 

The resumption of interest income recognition of previously impaired loans only occurs when such loans become current (i.e. payments were received such that the loans are contractually past-due for less than 90 days) or they are no longer classified under the C3, C4, C5, or C6 risk categories (for loans individually evaluated for impairment).

 

ii.

Commissions, fees, and similar items

 

Fee and commission income and expenses are recognized in the Consolidated Statement of Income using criteria stablished in IFRS 15 “Revenue from contracts with customers”.

 

Under IFRS 15, the Bank recognize revenue when (or as) satisfied a performance obligations by transferring a service (ie an asset) to a customer; under this definition an asset is transferred when (or as) the customer obtains control of that asset. The Bank considers the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

 

The Bank transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, and/or the Bank satisfies the performance obligation at a point in time.

 

The main income arising from commissions, fees and similar items correspond to:

 

-

Fees and commissions for lines of credits and overdrafts: includes accrued fees related to granting lines of credit and overdrafts in checking accounts.

-

Fees and commissions for guarantees and letters of credit:includes accrued fees in the period relating to granting of guarantee payment for current and contingent third party obligations.

-

Fees and commissions for card services:includes accrued and earned commissions in the period related to use of credit cards, debit cards and other cards.

-

Fees and commissions for management of accounts:includes accrued commissions for the maintenance of checking, savings and other accounts.

-

Fees and commissions for collections and payments:includes income arising from collections and payments services provided by the Bank.

-

Fees and commissions for intermediation and management of securities:includes income from brokerage, placements, administration and securitie’s custody services.

-

Fees and commissions for insurance brokerage fees: includes income arising for insurances distribution.

-

Other fees and commissions:includes income arising from currency changes,financial advisory, cashier check issuance, placement of financial products and onlilne banking services.

-

Compensation for card operation:includes commission expenses for credit and debit card operations related to income commissions card services.

-

Fees and commissions for securities transactions:includes commissions expense for deposits, securities custody service and securitie’s brokerage.

-

Other fees and commissions: includes mainly expenses generayed from online services.

 

The main expense arising from commissions, fees and similar items correspond to:

 

The Bank has incorporated disaggregated revenue disclosure and reportable segment relationship in Note 25.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Additionaly, the Bank maintains certain loyalty programme associated to its credit cards services, for which has deferred a percentage of the consideration received in the statement of financial position to comply with its related performance obligation according IFRS 15, or has liquidated on a monthly basis as far they arise.

 

iii.

Non-financial income and expenses

 

They are recognized in accordance with the criteria established in IFRS 15, identifying the performance obligation and when they are satisfied (accrued).

 

iv.

Commissions in the formalization of loans

 

The financial commissions that arise in the formalization of loans, mainly the opening or study and information commissions, are periodized and recorded in the Statement of the Consolidated Income throughout the life of the loan.

 

j)

Impairment of Non-financial assets:

 

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

 

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

 

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

 

In connection with other assets, impairment losses recorded in prior periods are assessed at each reporting date to determine whether the loss has decreased and should be reversed. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years. Losses for goodwill impairment recognized through capital gains are not reversed.

 

k)

Property, plant, and equipment

 

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

 

i.

Property, plant and equipment for own use

 

Property, plant and equipment for own use includes but is not limited to tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing accounts receivable from third parties which are intended to be held for continuing own use and tangible assets acquired under finance leases. These assets are presented at acquisition cost less the related accumulated depreciation and, if applicable, any impairment losses resulting from comparing the net value of each item to the respective recoverable amount.

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

ITEM		Useful life (in months)
Land		-
Paintings and works of art		-
Carpets and curtains		36
Computers and hardware		36
Vehicles		36
IT systems and software		36
ATMs		60
Other machines and equipment		60
Office furniture		60
Telephone and communication systems		60
Security systems		60
Rights over telephone lines		60
Air conditioning systems		84
Other installations		120
Buildings		1,200

 

The consolidated entities assess at each reporting period whether there is any indicator that the carrying amount of any tangible asset exceeds its recoverable amount. If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in accordance with the revised carrying amount and to the new remaining useful life.

 

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

 

Maintenance expenses relating to tangible assets held for own use are recorded as an expense in the period in which they are incurred.

 

ii.

Assets leased out under operating leases

 

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

 

l)

Leases

 

At inception of a contract the Bank assesses whether a contract contains a lease. A contract contains a lease if the contracts conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Bank assesses whether:

 

●

the contract involves the use of an identified asset – this may be specified explicitly or implicitly and should be physically distinct. If the supplier has a substantive substitution right, then the asset is not identified;

 

●

the Bank has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use, and

 

●

the Bank has the right to direct the use of the asset – this is decision-making purpose for which asset is use.

 

a. As a Lessee

 

The Bank recognises a right-of-use asset and a lease liability at the lease commencement date in accordance within IFRS 16 “Leases”. The main contracts that the Bank has are offices and branches related, which are necessary to carry out its activities.

 

At the beginning, the right-of-use asset is equal to the lease liability and is calculated as the present value of the lease payments discounted using the incremental interest rate at the commencement date, considering the lease term of each contract. The average incremental interest rate is 1.45%. After initial recognition, the right-of-use is subsequently depreciated using the straight-line method in accordance with the lease term of the contract, and the lease liability is amortised in accordance with the effective interest method. Financial interest is accounted as interest expense, and depreciation as depreciation expense in each period.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The term of the lease comprises non-cancelable periods established within each contract, while for lease contracts with an indefinite useful life, the Bank has determined to assign a useful life equal to the longer non-cancelable period of its lease agreements. The Bank has elected not to recognise right-of-use assets and lease liabilities for short term leases that have a lease term of 12 months or less and leases of low-value assets. The Bank recognises lease payments associated with these leases as an expense on a straight-line basis over the lease term. Any modification in the terms or lease should be treated as a new measurement.

 

At initial measurement, the Bank measures the right-of-use asset at cost. The rent of these leases are according in UF, and payable in Chilean pesos. According to the provisions of Circular No. 3,649 of the CMF (ex SBIF), the monthly variation in UF that affects the contracts established in said monetary unit should be treated as a new measurement, and therefore, readjustments should be recognized as a modification to the obligation and in parallel the amount of the asset must be adjusted for the right to use leased assets.

 

The Bank has not entered into to lease agreements with guarantee clauses for residual value or variable lease payments.

 

b. As a lessor

 

When the Bank acts as a lessor, it determines at the beginning if it corresponds to a financial or operating lease. To do this, it evaluates whether it has substantially transferred all the risks and benefits of the asset. In the affirmative case, it corresponds to a financial lease, otherwise it is a financial lease. The Bank recognizes the lease income on a straight-line basis over the lease term.

 

c. Third party financing

 

The Bank recognises the loans with third parties within “Loans and accounts receivable from customers” in the Consolidated Statements of Financial Position, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

 

The finance income and expenses arising from these contracts are recorded under “Interest income” and “Interest expense” respectively, in Consolidated Statements of Income to achieve constant return rate over the lease term.

 

m)

Factoring transactions

 

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

 

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

 

n)

Intangible assets

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of legal or contractual rights. The Bank recognizes an intangible asset, whether purchased or self-created (at cost), when the cost of the asset can be measured reliably and it is probable that the future economic benefits that are attributable to the asset will flow to the Bank.

 

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

 

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

 

Intangible assets are amortized linearly based on the estimated useful life, which has been defined by default in 36 months, and can be modified to the extent that it is demonstrated that the Bank will benefit from the use of the intangible for a different period mentioned above.

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

o)

Cash and cash equivalents

 

The indirect method is used to prepare the cash flow statement, starting with the Bank’s consolidated pre-tax income and incorporating non-cash transactions, as well as income and expenses associated with cash flows, which are classified as investing or financing activities.

 

The cash flow statement was prepared considering the following definitions:

 

i.

Cash flows: Inflows and outflows of cash and cash equivalents, such as deposits with the Central Bank of Chile, deposits in domestic banks, and deposits in foreign banks.

 

ii.

Operating activities: Principal revenue-producing activities performed by banks and other activities that cannot be classified as investing or financing activities.

 

iii.

Investing activities: The acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

 

iv.

Financing Activities: Activities that result in changes in the size and composition of equity and liabilities that are not operating or investing activities.

 

p)

Allowances for loan losses

 

The Bank continuously evaluates the entire loan portfolio and contingent loans, as it is established by the CMF, to timely provide the necessary and sufficient provisions to cover expected losses associated with the characteristics of the debtors and their loans, which determine payment behavior and recovery.

 

The Bank has established provisions for probable losses in credits and accounts receivable from customers in accordance with the instructions issued by the CMF (ex SBIF) and the credit risk rating and evaluation model approved by the Board of Directors, including the modifications introduced by Circulars N° 3,573 and N° 3,584 and their subsequent amendments which establish the standard method for residential mortgage loans and Circulars N° 3,638 and N° 3,647 related to commercial loans for group portfolio, complement and specify instructions on provisions and credits that make up the impaired portfolio.

 

The Bank uses the following models established by the CMF, to evaluate its loan portfolio and credit risk:

 

-

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

 

-

Group assessment - a group assessment is relevant for analyzing a large number of transactions with small individual balances due from individuals or small companies. The Bank groups debtors with similar credit risk characteristics giving to each group a default probability and recovery rate based on a historical analysis. The Bank has implemented standard models for mortgage loans (Circular N°3,573 and N°3,584), and commercial loan (Circular N° 3,638 and N°3,647) and internal models for consumer loans.

 

For the company Santander Consumer Finance Limitada the determination of the provision for credit risk is made using internal models under IFRS 9 to determine the expected losses for this default. These internal models are reviewed monthly and the modifications to said models are approved by the Board of Directors on a quarterly basis, after review and approval by the Company’s General Management. These models collectively evaluate the receivables, for which said loans are grouped based on similar credit risk characteristics, which indicate the debtor’s ability to pay on the entire debt, principal and interest, in accordance with the terms of the contract. In addition, this allows evaluating a large number of transactions with low individual amounts, regardless of whether they belong to individuals or small companies. Therefore, debtors and loans with similar characteristics are grouped together and each group has a risk level assigned to it. During the first half of 2020, Santander Consumer Finance Limitada carried out a calibration of its credit risk provision models, with the aim of improving the prediction parameters of customer behavior and maintaining the statistical monitoring standards, which resulted in a higher provision with an effect on results of Ch $ 1,900 million.

 

I.

Allowances for individual assessment

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The analysis of the debtor is primarily focused on their credit quality and their risk category classification of the debtor and of their respective contingent loans and loans These are assigned to one of the following portfolio categories: Normal, Substandard and Impaired. The risk factors considered are: industry or economic sector, owners or managers, financial situation and payment ability, and payment behavior.

 

The portfolio categories and their definitions are as follows:

 

i.

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

 

ii.

Substandard Portfolio includes debtors with financial difficulties or a significant deterioration of their payment ability. There is reasonable doubt concerning the future reimbursement of the capital and interest within the contractual terms, with limited ability to meet short-term financial obligations. The classifications assigned to this portfolio are categories from B1 to B4.

 

iii.

Impaired Portfolio includes debtors and their loans where repayment is considered remote, with a reduced or no likelihood of repayment. This portfolio includes debtors who have stopped paying their loans or that indicate that they will stop paying, as well as those who require forced debt restructuration, reducing the obligation or delaying the term of the capital or interest, and any other debtor who is over 90 days overdue in his payment of interest or capital. The classifications assigned to this portfolio are categories from C1 to C6.

 

Normal and Substandard Compliance Portfolio

 

As part of individual assessment, the Bank classifies debtors into the following categories, assigning them a probability of non-performance (PNP) and severity (SEV), which result in the expected loss percentages:

 

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

 

The Bank first determines all credit exposures, which includes the accounting balances of loans and accounts receivable from customers plus contingent loans, less any amount recovered through executing the financial guarantees or collateral covering the operations. The percentages of expected loss are applied to this exposure. In the case of collateral, the Bank must demonstrate that the value assigned reasonably reflects the value obtainable on disposal of the assets or equity instruments. When the credit risk of the debtor is substituted for the credit quality of the collateral or guarantor, this methodology is applicable only when the guarantor or surety is an entity qualified in a assimilable investment grade by a local or international company rating agency recognized by the CMF. Guaranteed securities cannot be deducted from the exposure amount, only financial guarantees and collateral can be considered.

 

Notwithstanding the foregoing, the Bank must maintain a minimum provision of 0.5% over loans and contingent loans in the normal portfolio.

 

Impaired Portfolio

 

The impaired portfolio includes all loans and the entire value of contingent loans of the debtors that are over 90 days overdue on the payment of interest or principal of any loan at the end of the month. It also includes debtors who have been granted a loan to refinance loans over 60 days overdue, as well as debtors who have undergone forced restructuration or partial debt condonation.

 

The impaired portfolio excludes: a) residential mortgage loans, with payments less than 90 days overdue; and, b) loans to finance higher education according to Law 20,027, provided the breach conditions outlined in Circular N°3,454 of December 10, 2008 are not fulfilled.

 

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

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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

 

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

 

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

 

Loans are maintained in the impaired portfolio until their payment ability is normal, notwithstanding the write off of each particular credit that meets conditions of Title II of Chapter B-2. Once the circumstances that led to classification in the Impaired Portfolio have been overcome, the debtor can be removed from this portfolio once all the following conditions are met:

 

i.

The debtor has no obligations of the debtor with the Bank more than 30 days overdue;

ii.

the debtor has not been granted loans to pay its obligations;

iii.

at least one of the payments include the amortization of capital;

iv.

if the debtor has made partial loan payments in the last six months, two payments have already been made;

v.

if the debtor must pay monthly installments for one or more loans, four consecutive installments have been made;

vi.

the debtor does not appear to have bad debts in the information provided by the CMF ( ex SBIF), except for insignificant amounts.

 

II.

Allowances for group assessments

 

Group assessments are used to estimate allowances required for loans with low balances related to individuals or small companies.

 

Group assessments require the formation of groups of loans with similar characteristics by type of debtor and loan conditions, in order to establish both the group payment behavior and the recoveries of their defaulted loans, using technically substantiated estimates and prudential criteria. The model used is based on the characteristics of the debtor, payment history, outstanding loans and default among other relevant factors.

 

The Bank uses methodologies to establish credit risk, based on internal models to estimate the allowances for the group-evaluated portfolio. This portfolio includes commercial loans with debtors that are not assessed individually, mortgage and consumer loans (including installment loans, credit cards and overdraft lines). These methods allow the Bank to independently identify the portfolio behavior and establish the provision required to cover losses arising during the year.

 

The customers are classified according to their internal and external characteristics into profiles, using a customer-portfolio model to differentiate each portfolio’s risk in an appropriate manner. This is known as the profile allocation method.

 

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

 

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

 

Notwithstanding the above, on establishing provisions associated with mortgage and commercial loans, the Bank must recognize minimum provisions according to standard methods established by the CMF (ex SBIF) for those types of loans. While this is considered to be a prudent minimum base, it does not relieve the Bank of its responsibility to have its own methodologies of determining adequate provisions to protect the credit risk of the portfolio.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Standard method of residential mortgage loan provisions

 

In accordance with Circular N° 3,573 issued by the CMF, the Bank began applying the standard method of provisions for residential mortgage loans. According to this method, the expected loss factor applicable to residential mortgage loans will depend on the default of each loan and the relationship between the outstanding principal of each loan and the value of the associated mortgage guarantee (Loans to Value, LTV) at the end of each month.

 

The allowance rates applied according to default and LTV are the following:

 

LTV Range	Default days at month closing	0	1-29	30-59	60-89	Impaired portfolio
LTV≤40%	PNP(%)	1,0916	21,3407	46,0536	75,1614	100
	Severity (%)	0,0225	0,0441	0,0482	0,0482	0,0537
	Expected Loss (%)	0,0002	0,0094	0,0222	0,0362	0,0537
40%< LTV ≤80%	PNP(%)	1,9158	27,4332	52,0824	78,9511	100
	Severity (%)	2,1955	2,8233	2,9192	2,9192	3,0413
	Expected Loss (%)	0,0421	0,7745	1,5204	2,3047	3,0413
80%< LTV ≤90%	PNP(%)	2,5150	27,9300	52,5800	79,6952	100
	Severity (%)	21,5527	21,6600	21,9200	22,1331	22,2310
	Expected Loss (%)	0,5421	6,0496	11,5255	17,6390	22,2310
LTV >90%	PNP(%)	2,7400	28,4300	53,0800	80,3677	100
	Severity (%)	27,2000	29,0300	29,5900	30,1558	30,2436
	Expected Loss (%)	0,7453	8,2532	15,7064	24,2355	30,2436

LTV =Loan capital/Value of guarantee

 

If the same debtor has more than one residential mortgage loan with the Bank and one of them over 90 days overdue, all their loans shall be allocated to the impaired portfolio, calculating provisions for each of them in accordance with their respective LTV.

 

For residential mortgage loans related to housing programs and grants from the Chilean government, the allowance rate may be weighted by a factor of loss mitigation (LM), which depends on the LTV percentage and the price of the property in the deed of sale (S), as long as the debtor has contracted auction insurance provided by the Chilean government.

 

Standard method of commercial loan provisions

 

In accordance with the Circular N°. 3,638 and N°. 3,647 issued by the CMF, as of July 1, 2019, the Bank began applying the standard model of provisions for student loans or other types of commercial loans.

 

Prior to the implementation of the standard method, the Bank used its internal models for the determination of group business provisions.

 

a.

Commercial leasing operations

 

For these operations, the provision factor must be applied to the current value of commercial leasing operations (including the purchase option) and will depend on the delinquency of each operation, the type of leased asset and the relationship, at closing of each month, between the current value of each operation and the value of the leased asset (PVB), as indicated in the following tables:

 

Probability  Non-Performance (PNP) by default and type of asset (%)
Default days at month closing	Type of asset
	Real Estate	Non real Estate
0	0.79	1.61
1-29	7.94	12.02
30-59	28.76	40.88
60-89	58.76	69.38
Impaired portfolio	100.00	100.00

 

Severity (SEV) by stage and type of asset (%)
PVB Stage	Real Estate	Non real Estate
PVB ≤ 40%	0.05	18.2
40% < PVB ≤ 50%	0.05	57.00
50% < PVB ≤ 80%	5.10	68.40
80% < PVB ≤ 90%	23.20	75.10
PVB > 90%	36.20	78.90

PVB= Current valiue of operation/leased asset value

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The determination of the PVB relationship will be made considering the appraisal value, expressed in UF for real estate and pesos for non-real estate, recorded at the time of granting the respective credit, taking into account any situations that may be causing pricing rises of the asset at that time.

 

b.

Student loans

 

For these operations, the provision factor should be applied to the student loan and the exposure of the contingent credit, when applicable. The determination of this factor depends on the type of student loan and the enforceability of the payment of capital or interest, at the end of each month. When payment is due, the factor will also depend on its default.

 

For the purposes of the classification of the loan, a distinction is made between those granted for the financing of higher studies granted in accordance with Law No. 20.027 (CAE) and, on the other hand, the CORFO guarantee credits or other student loans.

Probability Non-Performance (PNP) according enforceability, default and type of loan (%)
Is the principal and insterest enforceable	Default days at month closing	Student loans
		CAE	CORFO and other
Yes	0	5.20	2.90
	1-29	37.20	15.00
	30-59	59.00	43.40
	60-89	72.80	71.90
	Impaired portfolio	100.00	100.00
No	N/A	41.60	16.50

 

Severity (SEV) by stage PVB and type of asset (%)
Is the principal and insterest enforceable	Student loans
	CAE	CORFO and other
Yes	70.90
No	50.30	45.80

 

c.

Generic comercial loans and factoring

 

For factoring operations and other commercial loans, the provision factor, applicable to the amount of the loans and the exposure of the contingent credit will depend on the default of each operation and the relationship that exists, at the end of each month, between the obligations that the debtor has with the bank and the value of the real guarantees that protect them (PTVG), as indicated in the following tables:

 

Probability  Non-Performance (PNP) by default and PTVG stage (%)
Default days at month closing	Guarantee		No guarantee
	PTVG ≤ 100%	PTVG > 100%
0	1.86	2.68	4.91
1-29	11.60	13.45	22.93
30-59	25.33	26.92	45.30
60-89	41.31	41.31	61.63
Impaired portfolio	100.00	100.00	100.00

 

Severity (SEV) by PTVG stage (%)
Guarantee	PTVG stage	Factoring and other comercial loans without responsibility	Factoring with responsibility
Guarantee	PTVG ≤ 60%	5.00	3,20
	60% < PTVG ≤ 75%	20.30	12,80
	75% < PTVG ≤ 90%	32.20	20,30
	90% < PTVG	43.00	27,10
No guarantee		56,90	35.90

 

The guarantees used for the purposes of calculating the PTVG relationship of this method may be specific or general, including those that are simultaneously specific and general. A guarantee can only be considered if, according to the respective coverage clauses, it was constituted in the first degree of preference in favor of the bank and only guarantees the debtor’s credits with respect to which it is imputed (not shared with other debtors).

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The invoices assigned in the factoring operations, nor the guarantees associated with the mortgage loans, regardless of their coverage clause, will not be considered in the calculation.

 

For the calculation of the PTVG ratio, the following considerations must be taken:

 

i.

Transactions with specific guarantees: when the debtor granted specific guarantees, for generic commercial loans and factoring, the PTVG ratio is calculated independently for each secured transaction, such as the division between the amount of the loans and the contingent credit exposure and the value of the real guarantee that protects it.

 

ii.

Transactions with general guarantees: when the debtor granted general or general and specific guarantees, the Bank calculates the respective PTVG, jointly for all generic commercial loan and factoring and not contemplated in the preceding paragraph i), as the division between the sum of the amounts of the loans and exposures of contingent credits and the general, or general and specific guarantees that, according to the scope of the remaining coverage clauses, safeguard the credits considered in the numerator of the mentioned ratio.

 

The amounts of the guarantees used in the PTVG ratio of numbers i) and ii) must be determined according to:

 

-

The last valuation of the guarantee, be its appraisal or fair value, according to the type of real guarantee in question. For the determination of fair value, the criteria indicated in Chapter 7-12 of the Updated Collection of Standards should be considered.

-

Possible situations that could be causing temporary increases in the values of the guarantees.

-

Limitations on the amount of coverage established in their respective clauses.

 

d.

Provisions related to financing with a FOGAPE Covid-19 guarantee

 

On July 17, 2020, the CMF requested to determine specific provisions of the credits guaranteed by the FOGAPE Covid-19 guarantee, for which the expected losses must be determined estimating the risk of each operation, without considering the substitution of credit quality of the guarantee, according to the corresponding individual or group analysis method, in accordance with the provisions of Chapter B-1 of the Compendium of Accounting Standards. This calculation must be carried out in an aggregate manner, grouping all those operations to which the same deductible percentage is applicable. Therefore, the total amount of the expected losses resulting from the aggregate calculation of each group of operations must be contrasted with the respective total deductible amount that corresponds to them and proceed as follows, when the expected losses of the operations of a group to which the same percentage of deductible corresponds, determined according to the procedure indicated are less than or equal to the aggregate amount of the deductible, the provisions will be determined without considering the coverage of FOGAPE Covid-19, that is, without substituting the credit quality of the direct debtor for the guarantee and when they are greater than the aggregate amount of the deductible, the provisions will be determined using the substitution method provided in section 4.1 letter a) of Chapter B-1 of the Compendium of Accounting Standards and will be recognized in separate accounts at that of commercial, consumption and housing provisions. As of March 31, 2021, the Bank has established provisions for this concept of Ch $ 36,686 million (Note 9 and 38).

 

III.

Additional provisions

 

According to CMF regulation, banks are allowed to establish provisions over the limits already described, to protect themselves from the risk of non-predictable economical fluctuations that could affect the macro-economic environment or a specific economic sector. According to N°09 B-1 Chapter from the CMF Compendium of Accounting Standards, these provisions will be recorded in liabilities, similar to provisions for contingent loans, see note 3 and 28.

 

IV.

Charge-offs

 

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

 

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

 

Charge-offs are always recorded as a charge to loan risk allowances according to Chapter B-1 of the Compendium of Accounting Regulations, no matter the reason for the charge-off. Any payment received related to a loan previously charged-off will be recognized as recovery of loan previously charged-off at the Consolidated Statement of Income.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments when they exceed the time periods described below since reaching overdue status:

 

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

 

V.

Recovery of loans previously charged off and accounts receivable from customers

 

Any recovery on “Loans and accounts receivable from customers” previously charged-off will be recognized as a reduction in the credit risk provisons in the Consolidated Statement of Income.

 

Any renegotiation of a loan previously charged-off will not give rise to income, as long as the operation continues being considered as impaired. The cash payments received must be treated as recoveries of charged-off loans.

 

The renegotiated loan can only be included again in assets if it is no longer considered as impaired, also recognizing the capitalization income as recovery of charged-off loans.

 

q)

Provisions, contingent assets, and contingent liabilities

 

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

 

i.

Has a present obligation (legal or constructive) as a result of past events, and

ii.

it is probable that an outflow of resources will be required to settle these obligations and

iii.

the amount of these resources can be reliably measured.

 

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

 

The Consolidated Financial Statements reflect all significant provisions for which it is estimated that the probability of having to meet the obligation is more than likely than not. Provisions are quantified using the best available information regarding the consequences of the event giving rise to them and are reviewed and adjusted at the end of accounting period. Provisions are used when the liabilities for which they were originally recognized are settled. Partial or total reversals are recognized when such liabilities cease to exist or are reduced.

 

Provisions are classified according to the obligation covered as follows:

 

-

Provisions for employee salaries and expenses

-

Provisions for mandatory dividends

-

Provisions for contingent loan risks

-

Provisions for contingencies

 

r)

Income taxes and deferred taxes

 

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

 

Current taxes for the asset correspond to the provisional payments that exceed the provision for income tax or other loans at income tax, such as training expenses or donations to universities. Additionally, the monthly tax payment (P.P.M.) for recovering by profits absorbed by tax losses. In the case of liabilities they correspond to the provision for income tax calculated according to the results tax for the period, deducted the mandatory or voluntary provisional payments and other credits that apply to this obligation.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

s)

Use of estimates

 

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

 

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

 

The Bank has established allowances to cover cover probable losses, to estimate allowances. These allowances must be regularly reviewed taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in forecasted portfolio quality, credit quality and economic conditions that may adversely affect the borrowers’ ability to pay. Increases in the allowances for loan losses are reflected as “Provision for loan losses” in the Consolidated Statement of Income.

 

Loans are charged-off when the contractual rights for the cash flows expire, however, for loans and accounts receivable from customers the bank will charge-off in accordance with Title II of Chapter B-2 of the Compendium of Accounting Standards issued by the CMF (ex SBIF). Charge-offs are recorded as a reduction of the allowance for loan losses.

 

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

 

These estimates are based on the best available information and mainly refer to:

 

-

Allowances for loan losses (Notes 8, 9, and 28)

-

Impairment losses of certain assets (Notes 7, 8, 9, 10, and 31)

-

The useful lives of tangible and intangible assets (Notes 11, 12 and 31)

-

The fair value of assets and liabilities (Notes 6, 7, 10 and 34)

-

Commitments and contingencies (Note 20)

-

Current and deferred taxes (Note 13)

 

t)

Non-current assets held for sale

 

Non-current assets held for sale and discontinued operations

 

As of March 31, 2021 and 2020 and December 31, 2020, the Bank classified the investments in associates held up to now in Redbanc and Transbank as held for sale, in accordance with the provisions of IFRS 5 “Non-current assets held for sale and discontinued operations”, because expects to recover the book value primarily through the sale of these investments. In order to carry out this reclassification, the Bank has ensured that it complies with the requirements established for this:

 

●

It must be available in its current conditions for immediate sale and its sale must be highly probable.

●

For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or group of assets for its disposal), and a program to find a buyer and complete said purchase must have been actively initiated.

●

I must also expect the sale to meet the conditions for recognition as a sale ended within the year following the date of classification.

 

For this, the Bank will measure investments at book value, given that it represents the lowest value in relation to fair value less costs to sell. Additionally, the Bank will recognize any impairment loss on non-current assets held for sale, such as a reduction in the value of those assets to fair value less costs to sell.

 

As of March 31, 2021, the Bank has classified as “non-current assets held for sale” the investments in Transbank and Redbanc, while Nexus was sold in January 2020. For more information see Note 36.

 

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Assets received or awarded in lieu of payment.

 

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognized at their fair value. A price is agreed upon by the parties through negotiation or, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction. In the both cases, an independent appraisal is performed.

 

Any excess of the outstanding loan balance over the fair value is recognized in the Consolidated Statement of Income under “Provision for loan losses”.

 

These assets are subsequently valued at the lower of the amount initially recorded and the net realizable value, which corresponds to its fair value (liquidity value determined through an independent appraisal) less their respective costs of sale. The difference between both are recognized in the Consolidated Statement under “Other operating expenses”.

 

At the end of each year the Bank performs an analysis to review the “selling costs” of assets received or awarded in lieu of payments which will be applied at this date and during the following year. On December 2020 the average selling cost has been estimated at 3.2% of the appraisal value (3.1% for December 31, 2019). Additionally, every 18 months a review of the appraisals (independent) is carried out to adjust the fair value of the assets.

 

In general, it is estimated that these assets will be disposed of within a period of one year from their award date. In compliance with the provisions of article 84 of the General Banking Law, those goods that are not sold within said period are charged off in a single installment. On March 25, 2020, the CMF the CMF issued circular No. 2247 where it has resolved to grant an additional period of eighteen months for the sale of all assets that financial institutions have received in payment or are awarded between 1 March 2019 until September 30, 2020, also allowing the charge-off of said assets to be carried out in installments, proportional to the number of months between the date of receipt and the date set by the bank for disposal.

 

u)

Earnings per share

 

Basic earnings per share are calculated by dividing the net income attributable to the equity holders of the Bank by the weighted average number of shares outstanding during the reported period. Diluted earnings per share are calculated in a similar manner to basic earnings, but the weighted average number of outstanding shares is adjusted to take into consideration the potential diluting effect of stock options, warrants, and convertible debt. As of March 2021 and 2020 and December 31, 2020, the Bank did not have any instruments that generated equity dilution.

 

v)

Temporary acquisition (assignment) of assets and liabilities

 

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

 

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

 

w)

Assets under management and investment funds managed by the Bank

 

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

 

x)

Provision for mandatory dividends

 

As of March 31, 2021 and 2020 and December 31, 2020, the Bank recorded a provision for minimum mandatory dividends. This provision is made pursuant to Article 79 of the Corporations Act, which is in accordance with the Bank’s internal policy, which requires at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by unanimous vote of the outstanding shares. This provision is recorded as a deduction from “Retained earnings” – “Provision for mandatory dividends” in the Consolidated Statement of Changes in Equity with offset to Provisions.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

y)

Employee benefits

 

i.

Post-employment benefits – Defined Benefit Plan:

 

According to current collective labor agreements and other agreements, the Bank has an additional benefit available to its principal executives, consisting of a pension plan, whose purpose is to endow them with funds for a better supplementary pension upon their retirement.

 

Features of the Plan:

 

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

 

I.

Aimed at the Bank’s management.

II.

The general requirement is that the beneficiary must still be employed by the Bank when reaching 60 years old.

III.

The Bank will mixed collective life and savings insurance policy for each beneficiary in the plan. Regular voluntary installments will be paid into this fund by the beneficiary and matched by the Bank.

IV.

The Bank will be responsible for granting the benefits directly.

 

The projected unit credit method is used to calculate the present value of the defined benefit obligation and the current service cost.

 

Components of defined benefit cost include:

 

-

Current service cost and any past service cost, which are recognized in profit or loss for the period;

-

net interest on the liability (asset) for net defined benefit, which is recognized in profit or loss for the period;

-

new liability (asset) remeasurements for net defined benefit include: (a) actuarial gains and losses; (b) the performance of plan assets, and; (c) changes in the effect of the asset ceiling which are recognized in other comprehensive income.

 

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

 

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

 

The Bank recognizes the present service cost and the net interest of the Personnel wages and expenses on the Consolidated Statement of Income. Given the plan’s structure, it does not generate actuarial gains or losses. The plan’s performance is established and fices during the period; consequently, there are no changes in the asset’s cap. Accordingly, there are no amounts recognized in other comprehensive income.

 

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

 

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

 

ii.

Severance provision:

 

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

 

iii.

Cash-settled share based compensation

 

The Bank allocates cash-settled share based compensation to executives of the Bank and its Subsidiaries in accordance with IFRS 2. The Bank measures the services received and the obligation incurred at fair value.

 

Until the obligation is settled, the Bank calculates the fair value at the end of each reporting period, as well as at the date of settlement, recognizing any change in fair value in the income statement for the period.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

z)	New accounting pronouncements

 

I.	Adoption of new accounting standards and instructions issued by both the current Commission for the Financial Market (CMF) and by The International Accounting Standards Board:

 

At the date of issuance of these Consolidated Financial Statements, the new accounting pronouncements issued by both the current CMF (ex SBIF) and the International Accounting Standards Board, which have been fully adopted by the Bank, are detailed below.

 

1.	Accounting Standards issued by the current Financial Market Commission (CMF), exSuperintendency of Banks and Financial Institutions.

 

As of March 31, 2021 the bank has no relevant standards in relation to Covid-19, nonetheless it has the following pronouncement in relation to Basel III:

 

Circular N° 2,285 – Fianncial report R11 on Systemic Bank Clasification. Instructions are supplemented and first report deadline is extended.

 

This circular released January 26, 2021, supplements the instructions to prepare the new report R11, it also extends its first deadline until March 1, 2021. The first report will contain information related to each month of the 2020 year. The bank immediately implemented this circular and is currently reporting the report in the right time and manner.

 

2.	Accounting Standards issued by the International Accounting Standards Board

 

Reform of the benchmark interest rate. Phase 2 - On August 27, 2020 the IASB has finalized its response to the ongoing rate reform of interbank offer (IBOR) and other reference interest rates by issuing a package of amendments to IFRS Standards. The The amendments are intended to help companies provide investors with useful information on the effects of the reform on the states financial institutions of those companies. The amendments complement those issued in 2019 and focus on the effects on the financial statements when a company replaces the rate of reference interest for an alternative reference rate as a result of the reform.

 

The modifications of this final phase refer to:

 

●

changes in contractual cash flows: a company will not have to derecognise or adjust the carrying amount of instruments due to the changes required by the reform, but will update the effective interest rate to reflect the change to the reference rate alternative;

 

●

hedge accounting - a business will not have to discontinue its hedge accounting just because it makes the changes required by the reform, if the hedge meets the other hedge accounting criteria; Y

 

●

disclosures: a company will be required to disclose information about new risks arising from the reform and how it manages the transition at alternative reference rates.

 

These amendments are effective for annual reporting periods beginning on or after January 1, 2021, and early adoption is permitted. The Bank has been working since 2019 on the transition of different risk-free reference rates (hereinafter also “RFR”), including the LIBOR rate. In this context, the Bank’s work plan includes the identification of the impacted customers, the impacted areas, the various risks to which the Bank is exposed, the determination of work teams regarding each risk, the involvement of the high administration in a robust project governance plan and an action plan for each of the impacted / identified risk areas, which will allow us to face the challenges imposed by the changes in the reference rates.

 

Amendment to IFRS 16 - Rental concessions related to Covid-19. On May 29, 2020, the IASB issued this amendment to provide an exception to tenants from not accounting for a lease concession as a lease amendment if it is related to Covid-19. But you must disclose the application of this exception. The modification is effective as of June 1, 2020, with early application allowed even for financial institutions that have not yet been authorized as of May 28, 2020. The Bank has decided not to take any concession in relation to its lease contracts, therefore that this modification has not had an impact on the Bank’s Consolidated Financial Statements.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

II.	New accounting standards and instructions issued by both the Commission for the Financial Market (CMF) and by the International Accounting Standards Board that have not come into effect as of March 31, 2021.

 

As of the closing date of these financial statements, new International Financial Reporting Standards had been published as well as interpretations of them, which were not mandatory as of March 31, 2021. Although in some cases the early application is permitted by the IASB, the Bank has not taken that option.

 

1.	Accounting Standards issued by the current Financial Market Commission (CMF), exSuperintendency of Banks and Financial Institutions.

 

Circular N ° 2243 - Compendium of Accounting Standards for Banks. On December 20, 2019, the CMF issued the updated version of the compendium of accounting standards for banks (CNCB), which mainly incorporates the new modifications introduced by the International Accounting Standards to the international financial reporting standards (IFRS) in recent years, particularly IFRS 9, 15 and 16, also establishes new limitations or precisions due to the need to follow more prudential criteria (ie. Chapter 5 of impairment of IFRS 9) that are detailed in chapter A-2. The amendments seek greater convergence with IFRS, improve financial information disclosures and contribute to the transparency of the banking system. On April 20, 2020, the CMF issued Circular No. 2249 that postpones the entry into force of the new CNCB from January 1, 2011 with a transition date of January 1, 2021 for purposes of comparative financial statements in March 2022. Additionally, the change of criteria for the suspension of the recognition of income for interest and readjustments (chapter B-2), must be adopted no later than January 1, 2022, with the transition date the beginning of any previous month as of such date, recording the impact against equity and revealing the date on which this criterion was adopted.

 

During 2020, the Bank has conducted an implementation plan for the new compendium based on a diagnosis where, through an exhaustive analysis, it allowed us to determine the impacts generated at the systems level, availability of information, chart of accounts, financial statements and disclosures. , among others and to be able to elaborate an implementation plan and governance of the project that allows us to dimension the tasks to be executed, deadlines and necessary efforts, and to be able to control this process in an optimal way, communicating the advances and situations identified to the senior administration, which it is strongly involved in this process. At the end of 2020, we observed significant progress in the defined implementation plan, where we do not see major inconveniences to face its culmination during 2021.

 

Circular N ° 2283 - Promotion of market discipline and transparency through the disclosure of information requirements from banking entities (Pillar 3). Incorporates Chapter 21-20 to the Updated Compilation of Standards. Issued on December 1, 2020, this regulation introduces the requirements for banking institutions to disclose information regarding their position and capital structure in a single format, in order to reduce information asymmetries. To do this, banking entities must publish the Pillar 3 document independently or together with their financial statements, reporting each of the tables and forms established in the standard, this will allow the market and users of the information a better evaluation of the situation of each entity when knowing the risk profile of local banking institutions. This regulation becomes effective as of December 1, 2022, and must be published for the first time in 2023 (1st quarter). The Bank is evaluating the impact of this regulation and will include it in the work table on the subject.

 

2.	Accounting Standards issued by the International Accounting Standards Board

 

IFRS 9, Financial Instruments - On July 24, 2014, the IASB published the final version of IFRS 9 - Financial Instruments, including the regulations already issued together with a new expected loss model and minor modifications to the classification and measurement requirements for financial assets, adding a new category of financial instruments: assets at fair value with changes in other comprehensive result for certain debt instruments. It also includes an additional guide on how to apply the business model and testing of contractual cash flow characteristics.

 

On October 12, 2017, “Amendment to IFRS 9: Characteristics of Anticipated Cancellation with Negative Compensation” was published, which clarifies that according to the current requirements of IFRS 9, the conditions established in Test SPPI are not met if the Bank should make a settlement payment when the client decides to terminate the credit. With the introduction of this modification, in relation to termination rights, it is allowed to measure at amortized cost (or FVOCI) in the case of negative compensation.

 

At the local level, the CMF of Banks has established that this standard is part of the new CNCB applicable as of January 1, 2021, except in relation to the impairment of financial instruments (chapter 5.5) and paragraphs 5.4.1 (a) and (b), 5.4.3. and 5.4.4. regarding placements (“Debt from Banks” and “Credits and accounts receivable from customers”, or contingent credits), since the criteria for these topics are defined in chapters B-1 and B-3 of the aforementioned Compendium .

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Amendments to IFRS 10 and IAS 28 - Sale and Contribution of Assets between an Investor and its Associate or Joint Venture - On September 11, 2014, the IASB published this amendment, which clarifies the scope of the gains and losses recognized in a transaction that involves to an associate or joint venture, and that this depends on whether the asset sold or contribution constitutes a business. Therefore, the IASB concluded that all of the gains or losses should be recognized against the loss of control of a business. Likewise, profits or losses resulting from the sale or contribution of a non-business subsidiary (IFRS 3 definition) to an associate or joint venture must be recognized only to the extent of unrelated interests in the associate or business set.

 

This standard was initially effective as of January 1, 2016, however, on December 17, 2015 the IASB issued “Effective Date of Amendment to IFRS 10 and IAS 28” indefinitely postponing the entry into force of this standard.

 

IFRS 17 Insurance Contracts - This regulation issued on May 18, 2017, establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to apply to reinsurance contracts held and investment contracts issued with discretionary participation components. IFRS 17 supersedes IFRS 4 Insurance Contracts.

 

IFRS 17 will apply to annual periods beginning on or after January 1, 2021. Its early application is permitted. This rule does not apply directly to the Bank, however, the Bank has an interest in the insurance business and will ensure that this rule is applied correctly and in a timely manner.

 

Modification to IAS 1 - Classification of liabilities as current and non-current - On January 23, 2020 the IASB issued this modification that affects only the presentation of liabilities in the statement of financial position. The classification as current or non-current should be based on the rights existing at the end of the reporting period and align the wording in all the affected paragraphs by referring to the right to defer settlement for at least 12 months and specify that only the rights in force at the end The reporting period affects the classification of a liability. Along the same lines, it clarifies that the classification is not affected by the expectations of whether an entity will exercise its right to defer the settlement of a liability and makes it clear that the settlement refers to the transfer to the counterparty of cash, equity instruments , other assets or services. This modification is effective as of January 1, 2022 with retroactive effect, and early application allowed. The Bank’s administration will evaluate the impact that this rule will have on the presentation of the statement of situation.

 

Annual Improvements to IFRSs 2018-2020. On May 15, 2020, the IASB issued the following improvements:

 

-

IFRS 1 First Adoption of IFRS’s - Subsidiary as first-time adopter: the amendment allows a subsidiary that applies paragraph D16 (a) of IFRS 1 measure the accumulated differences using the amounts reported by its parent, based on the date.

-

IFRS 9 Financial Instruments - Fees in the “10% test” for derecognition of financial liabilities: The amendment clarifies that Fees should include an entity when it applies the “10% test” in paragraph B3.3.6 of IFRS 9 when assessing derecognition of a financial liability. A entity will include only commissions paid and received between the entity (the debtor) and the lender, including commissions paid and received by the entity or the lender on behalf of others.

-

IFRS 16 Leases - Lease Incentives: The amendment to Illustrative Example 13 that accompanies IFRS 16 removes from the example the illustration of reimbursement of improvements to the landlord to resolve any possible confusion regarding the treatment of leasing that may arise because of how lease incentives are illustrated in that example.

-

IAS 41 Agriculture - Taxes on fair value measurement: the amendment eliminates the requirement of paragraph 22 of IAS 41 for entities exclude cash flows from taxes when measuring the fair value of a biological asset using the present value technique. This will guarantee consistency with the requirements of IFRS 13.

 

The improvements to IFRS 1, IFRS 9 and IAS 41 are effective as of January 1, 2022, with earlier application permitted. The amendment to IFRS 16 only refers to an illustrative example, so it does not set an effective date. The Bank’s management will evaluate the impact that this standard will have on the presentation of the situation.

 

Improvements to IAS 16 Property, plant and equipment - Income before intended use. On May 15, 2020, the IASB published this improvement, which prohibits deducting from the cost of an item of property, plant and equipment any income from the sale of items produced while they are located and placed in the necessary conditions for it to operate. in the manner intended by management. Instead, an entity recognizes the income from the sale of those items and the cost of producing them, in profit or loss. This amendment is effective as of January 1, 2022, with early application permitted. The Bank’s administration will evaluate the impact that this regulation will have on the presentation of the statement of situation.

 

Modification IAS 37 - Onerous contracts, costs of fulfilling a contract. On May 15, 2020, the IASB published this amendment, which establishes that the cost of fulfilling a contract comprises the costs that are directly related to the contract. The costs that are directly related to a contract can be incremental costs of fulfilling that contract (examples would be direct labor, materials) or an allocation of other costs that are directly related to the fulfillment of contracts (an example would be the allocation of the depreciation charge for an item of property, plant and equipment used to fulfill the contract). This amendment is effective as of January 1 2022, with early application allowed. The Bank’s management will evaluate the impact that this standard will have on the presentation of the statement situation.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Modification to IFRS 3 - Reference to the conceptual framework. On May 15, 2020 the IASB published this amendment which updates IFRS 3 to refer to the 2018 Conceptual Framework instead of the 1989 Framework. Additionally, it adds to IFRS 3 a requirement for transactions and other events within the scope of IAS. 37 or IFRIC 21, for an acquirer to apply IAS 37 or IFRIC 21 (instead of the Conceptual Framework) in identifying liabilities assumed in a business combination, and adds an explicit statement stating that an acquirer should not recognize assets contingents acquired in a business combination. This amendment is effective as of January 1, 2022, with early application permitted. The Bank’s management will evaluate the impact that this standard will have on the presentation of the balance sheet.

 

Amendment to IAS 8 - Definition of accounting estimates. On February 12, 2021, the IASB published this amendment to help entities distinguish between accounting policy and accounting estimate. The definition of change in accounting estimates is replaced with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financials statements that are subject to measurement uncertainty.”

 

The amendments are effective for annual periods beginning on or after January 1, 2023 and changes in accounting policies and changes in accounting estimates that occur on or after the beginning of that period. The above application is allowed. The Bank’s management will evaluate the impact that this standard will have on the presentation of the balance sheet.

 

Amendment to IAS 1 and IFRS 2 Practice Statements - Accounting Policy Disclosures. On February 12, 2021, the IASB published this amendment that is intended to assist in identiying which accounting policies should be disclosed in financial statements. Modifications include:

 

-

an entity is required to disclose its material accounting policy information rather than its significant accounting policies

-

explains how an entity can identify material accounting policies and gives examples of when accounting policies are likely to be material

-

the amendments clarify that the information on accounting policies may be material due to its nature, even if the related amounts are immaterial; the amendments clarify that information on accounting policies is material if users of an entity’s financial statements will need it to understand other material information in the financial statements; and

-

the amendments clarify that, if an entity discloses immaterial accounting policy information, such information will not hide the material accounting policy information.

 

In addition, the IFRS 2 Practice Statement has been amended by adding guidance and examples to explain and demonstrate the application of the “four-step materiality process” to accounting policy information to support amendments to IAS 1.

 

The modifications are applied prospectively. The amendments to IAS 1 are effective for annual periods beginning on or after January 1, 2023. Early application is permitted. Once the entity applies the amendments to IAS 1, it is also allowed to apply the amendments to the IFRS 2 Practice Statement. The Bank’s management will evaluate the impact that this standard will have on the presentation of the balance sheet.

 

 

NOTE 02

ACCOUNTING CHANGES

 

As of the date of these Consolidated Financial Statements, there are no accounting changes to disclose.

 

 

NOTE 03

SIGNIFICANT EVENTS

 

As of March 31, 2021, the following significant events have occurred and affected the Bank’s operations and Consolidated Financial Statements.

 

a)

The Board

 

On March 30, 2021, in an extraordinary session of the Board of Directors, it was agreed to summon an Ordinary Shareholders Meeting scheduled for April 29, 2020 with the intention to propose a new distribution of profits and payment of dividends equivalent to 60% of the retained earnings as of December 31, 2020 equivalent to $ 1.64751729 per share and to propose that the remaining 40% of the profits for the fiscal year to be destined to increase the Bank’s reserves.

 

b)	COVID-19 or SARS CoV-2

 

The aid measures that the Bank has granted in the current pandemic context are classified into new operations granted under Fogape guarantees and rescheduled operations:

 

Covid-19	As of March 31, 2021
	MCh$
Operations with Fogape guarantee	1,967,117
Rescheduling	8,760,276
Reactivate Fogape	241,664

 

c)	Laws and Regulation

 

Chilean Central Bank

 

Due to the importance of the FCIC for the implementation of monetary policy and financial stability and considering the evolution of the financing needs of companies and the adjustments in the Government’s guarantee programs, the Central Bank of Chile announced on 27 January 2021, the start of a third stage of this instrument (FCIC3). In particular, this new stage is aimed at: (i) completing the committed execution of this monetary policy instrument, and (ii) deepening and extending commercial credit due to the prolongation of the sanitary emergency and the need to support the country’s reactivation process, responding to the current financial needs of companies, complementing the recently enacted Fogape-Reactiva program, especially in its refinancing line. FCIC 3 came into effect on March 1, 2021 and there will be a limit of US $ 2 billion per bank. Additionally, the Fogape-Reactiva program is a new economic support measure that includes financing for working capital, investment and refinancing for SMEs until December 31, 2021.

 

d)

Companies

 

On January 7, 2021, the Extraordinary Shareholders’ Meeting of Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile SA agreed to pay the total subscribed and unpaid equity by its shareholders, for a total amount of MMCh$ 3,727. Shareholder Santander Asesorias Financieras made its payment in cash for MCh $ 800. The shareholder Banco Santander Chile made its payment in part with cash for MMCh$ 38 and also contributing assets valued by the extraordinary Shareholders’ Meeting at MMCh$ 3,689.

 

On January 29, 2021, in exempt resolution N°. 704, the Council of the Financial Market Commission adopted in the Ordinary Session N°. 220 dated January 28, 2021, to approve the application for authorization of operation for Sociedad Operadora de Tarjetas de Pago Santander Getnet Chile S.A. as a bank support company and its registration in the single register of Payment Card Operators of this Institution.

 

On March 22, 2021, Getnet, through an Extraordinary Shareholders’ Meeting, agreed to modify the company’s bylaws with regard to the number of Directors, from 3 to 5.

 

 

NOTE 03

SIGNIFICANT EVENTS, continued

 

e)	Issuance of bank bonds

 

e.1)	Senior bonds

 

During 2021, the Bank has issued current bonds for USD 150,000,000. The detail of the placements made during the current year is included in Note 19.

 

Series	Currency	Term (years)	Issuance rate (Annual) %	Issue date	Amount	Maturity date
USD Bond	USD	2 years and 10 months	0.71	02-25-2021	50,000,000	12-28-2023
USD Bond	USD	2 years and 11 months	0.72	02-26-2021	100,000,000	01-26-2024
Total	USD				150,000,000

 

f)

Others

 

On February 3, 2021, the Bank’s Board of Directors in an extraordinary session approved the constitution of additional voluntary provisions for an amount that amounts to $ 24,000 million, in order to mitigate possible future effects of the current health crisis on the loan portfolio of the Bank.

 

 

NOTE 04

REPORTING SEGMENTS

 

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

 

Inter-segment transactions are conducted under normal arm’s length commercial terms and conditions. Each segment’s assets, liabilities, and income include items directly attributable to the segment to which they can be allocated on a reasonable basis. A business segment comprises clients to whom a differentiated product offering is directed but which are homogeneous in terms of their performance and which is measured in a similar way.

 

In order to achieve compliance with the strategic objectives established by senior management and adapt to changing market conditions, from time to time, the Bank makes adjustments in its organization, modifications that in turn impact to a greater or lesser extent, in the way in which it is managed. As such, current disclosure provides information for all periods presented on how the Bank is managed as of March 31, 2021.

 

The Bank has the reportable segments noted below:

 

Retail Banking

 

Consists of individuals and small to middle-sized entities (SMEs) with annual income less than Ch$2,000 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, stockbrokerage, and insurance brokerage. Additionally the SME clients are offered government-guaranteed loans, leasing and factoring.

 

Middle-market

 

This segment is made up of companies and large corporations with annual sales exceeding Ch$2,000 million. It 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 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 residential projects, with the aim of expanding sales of mortgage loans.

 

Global Corporate Banking

 

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

 

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

 

 

NOTE 04

REPORTING SEGMENTS, continued

 

Corporate Activities (“Other”)

 

This segment mainly includes the results of 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 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 assessment on the segment’s interest income, fee and commission income, and expenses.

 

Below are the tables showing the Bank’s amounts by business segment, for the periods ending as of March 31, 2021 and 2020:

 

			March 31, 2021
	Loans and accounts receivable from customers (1)	Demand and time deposits (2)	Net interest income	Net fee and commission income	Financial transactions, net (3)	Provision for loan losses	Support expenses (4)	Segment’s net contribution
	MCh$		MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Retail Banking	4,630,411	12,352,459	260,599	60,944	8,459	(52,582)	(152,847)	124,573
Middle-market	8,188,908	5,598,380	84,031	9,906	5,674	(9,914)	(20,859)	68,838
Global Corporate Banking	1,629,062	6,655,663	22,591	6,914	28,215	335	(17,691)	40,364
Other	58,725	1,710,789	63,976	(2,312)	(12,852)	(26,090)	(2,624)	20,098
Total	34,507,106	26,317,291	431,197	75,452	29,496	(88,251)	(194,021)	253,873
Other operating income								5,283
Other operating expenses								(25,989)
Income from investments in associates and other companies								303
Income tax expense								(49,500)
Result of continuous operations								183,970
Result of discontinued operations								-
Net income for the period								183,970

 

(1)

Loans receivable from customers plus the balance indebted by banks, without deducting their allowances for loan losses.

(2)

Corresponds to demand and time deposits.

(3)

The sum of net income (expense) from financial operations and foreign exchange gains or losses.

(4)

The sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 

 

NOTE 04

REPORTING SEGMENTS, continued

 

			March 31, 2020
	Loans and accounts receivable from customers (1)	Demand and time deposits (2)	Net interest income	Net fee and commission income	Financial transactions, net (3)	Provision for loan losses	Support expenses (4)	Segment’s net contribution
	MCh$		MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Retail Banking	23,390,396	9,960,282	250,051	58,332	7,530	(72,346)	(148,841)	94,726
Middle-market	8,789,095	5,120,588	77,039	10,710	3,399	(17,617)	(22,732)	50,799
Global Corporate Banking	2,172,932	7,262,857	23,375	6,423	8,693	(1,214)	(17,350)	19,927
Other	2,736	2,914,218	37,834	(1,060)	3,225	(11,693)	(2,249)	26,057
Total	34,355,159	25,257,945	388,299	74,405	22,847	(102,870)	(191,172)	191,509
Other operating income								6,411
Other operating expenses								(21,695)
Income from investments in associates and other companies								138
Income tax expense								(31,548)
Result of continuous operations								144,815
Result of discontinued operations								-
Net income for the period								144,815

 

(1)

Loans receivable from customers plus the balance indebted by banks, without deducting their allowances for loan losses.

(2)

Corresponds to demand and time deposits.

(3)

The sum of net income (expense) from financial operations and foreign exchange gains or losses.

(4)

The sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 

 

NOTE 05

CASH AND CASH EQUIVALENTS

 

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

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Cash and deposit in banks
Cash		645,666		665,397
Deposit in the Central Bank of Chile		740,130		1,313,394
Deposit in domestic banks		1,650		1,571
Deposit in foreign banks		2,044,671		822,926
Subtotal		3,432,117		2,803,288
Cash items in process of collection, net		66,053		91,332
Cash and cash equivalents		3,498,170		2,894,620

 

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

 

b)	Operations in process of settlement:

 

Operations in process of settlement are transactions with only settlement pending, which will increase or decrease the funds of the Central Bank of Chile or of banks abread, usually within the next 24 or 48 working hours to each end of operation. These operations are as follows:

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Assets
Documents held by other banks (document to be cleared)		89,132		137,396
Funds receivable		258,223		315,567
Subtotal		347,355		452,963
Liabilities
Funds payable		281,302		361,631
Subtotal		281,302		361,631
Cash items in process of collection, net		66,053		91,332

 

 

NOTE 06

TRADING INVESTMENTS

 

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

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds		2,523		419
Chilean Central Bank Notes		-		-
Other Chilean Central Bank and Government securities		80,923		131,827
Subtotal		83,446		132,246
Other Chilean securities
Time deposits in Chilean financial institutions		-		-
Mortgage finance bonds of Chilean financial institutions		-		-
Chilean financial institutions bonds		-		-
Chilean corporate bonds		24,129		1,472
Other Chilean securities		-		-
Subtotal		24,129		1,472
Foreign financial securities
Foreign Central Banks and Government securities		-		-
Other foreign financial instruments		3,673		-
Subtotal		3,673		-
Investments in mutual funds
Funds managed by related entities		-		-
Funds managed by third parties		-		-
Subtotal		-		-
Total		111,248		133,718

 

As of March 31, 2021 and 2020 and December 31, 2020, there were no trading investments sold under contracts to resell to clients and financial institutions.

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

 

a)

As of March 31, 2021 and 2020 and December 31, 2020, the Bank holds the following portfolio of derivative instruments:

 

	As of March 31, 2021
	Notional amount					Fair value
	Up to 3 Months	More than 3 months to 1 year	More than 1 year	Total		Assets	Liabilities
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$
Fair value hedge derivatives
Currency forwards	-	-	-	-		-	-
Interest rate swaps	-	510,783	5,762,275	6,273,058		12,170	162,632
Cross currency swaps	19,500	597,462	4,669,649	5,286,611		88,859	114,772
Call currency options	-	-	-	-		-	-
Call interest rate options	-	-	-	-		-	-
Put currency options	-	-	-	-		-	-
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	19,500	1,108,245	10,431,924	11,559,669		101,029	277,404
Cash flow hedge derivatives
Currency forwards	94,732	920,188	590,223	1,605,143		1,329	1,149
Interest rate swaps	-	-	-	-		-	-
Cross currency swaps	164,550	1,061,906	11,917,008	13,143,464		34,390	208,409
Call currency options	-	-	-	-		-	-
Call interest rate options	-	-	-	-		-	-
Put currency options	-	-	-	-		-	-
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	259,282	1,982,094	12,507,231	14,748,607		35,719	209,558
Trading derivatives
Currency forwards	21,175,260	14,157,194	8,248,637	43,581,091		442,070	527,104
Interest rate swaps	7,746,069	20,656,107	87,528,086	115,930,262		2,522,198	2,458,573
Cross currency swaps	4,629,637	15,973,919	150,171,203	170,774,759		3,618,723	3,541,068
Call currency options	55,556	17,086	58,096	130,738		195	382
Call interest rate options	-	-	-	-		-	-
Put currency options	48,239	9,286	58,797	116,322		205	1,108
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	33,654,761	50,813,592	246,064,819	330,533,172		6,583,390	6,528,235
Total	33,933,543	53,903,931	269,003,974	356,841,448		6,720,138	7,015,197

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

	As of December 31, 2020
	Notional amount					Fair value
	Up to 3 months	More than 3 months to 1 year	More than 1 year	Total		Assets	Liabilities
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$
Fair value hedge derivatives
Currency forwards	-	-	-	-		-	-
Interest rate swaps	50,000	410,687	5,064,113	5,524,800		33,816	83,666
Cross currency swaps	317,400	601,987	5,634,700	6,554,087		294,562	178,529
Call currency options	-	-	-	-		-	-
Call interest rate options	-	-	-	-		-	-
Put currency options	-	-	-	-		-	-
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	367,400	1,012,674	10,698,813	12,078,887		328,378	262,195
Cash flow hedge derivatives
Currency forwards	2,121,326	503,280	601,582	3,226,188		2,985	3,556
Interest rate swaps	-	-	-	-		-	-
Cross currency swaps	424,358	498,373	9,777,491	10,700,222		35,902	183,386
Call currency options	-	-	-	-		-	-
Call interest rate options	-	-	-	-		-	-
Put currency options	-	-	-	-		-	-
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	2,545,684	1,001,653	10,379,073	13,926,410		38,887	186,942
Trading derivatives
Currency forwards	22,729,787	12,175,074	8,215,576	43,120,437		1,085,327	1,158,904
Interest rate swaps	14,006,503	22,118,742	97,803,009	133,928,254		3,651,651	3,588,912
Cross currency swaps	6,719,065	15,138,056	138,352,345	160,209,466		3,921,440	3,819,446
Call currency options	129,339	31,641	57,581	218,561		1,527	909
Call interest rate options	-	-	-	-		-	-
Put currency options	112,145	16,173	58,276	186,594		4,875	1,352
Put interest rate options	-	-	-	-		-	-
Interest rate futures	-	-	-	-		-	-
Other derivatives	-	-	-	-		-	-
Subtotal	43,696,839	49,479,686	244,486,787	337,663,312		8,664,820	8,569,523
Total	46,609,923	51,494,013	265,564,673	363,668,609		9,032,085	9,018,660

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b)	Microhedge accounting

 

Fair value microhedge

 

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

 

The hedged items and hedge instruments under fair value hedges as of March 31, 2021 and 2020 and December 31, 2020, classified by term to maturity are as follows:

 

As of March 31, 2021	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Available for sale investments
Chilean Sovereign bonds	10,783	10,783	144,755	251,670	417,991
Mortgage finance bonds	748	-	-	-	748
American treasury bonds	-	-	179,710	-	179,710
Chilean General treasury bonds	-	-	-	-	-
Central bank bonds (BCP)	-	-	-	-	-
Time deposits and other demand liabilities
Time deposits	-	58,867	-	-	58,867
Issued debt instruments
Senior bonds	19,500	870,178	2,366,963	594,657	3,851,298
Subordinated bonds	-	107,826	323,478	143,769	575,073
Obligations with Banks:
Interbank loans	-	-	-	-	-
Central bank loans	-	2,629,000	1,839,001	-	4,468,001
Total	31,031	3,676,654	4,853,907	990,096	9,551,688
Hedging instrument
Cross currency swaps	20,248	904,045	2,309,680	594,657	3,828,630
Interest rate swaps	10,783	2,772,609	2,544,227	395,439	5,723,058
Total	31,031	3,676,654	4,853,907	990,096	9,551,688

 

As of December 31, 2020	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Available for sale investments
Chilean Sovereign bonds	10,687	10,687	138,044	249,440	408,858
Mortgage financing bonds	-	918	-	-	918
American treasury bonds	-	-	178,118	-	178,118
Chilean General treasury bonds	-	-	-	-	-
Central bank bonds	-	-	-	-	-
Time deposits and other demand liabilities
Time deposits	58,238	58,217	-	-	116,455
Issued debt instruments
Senior bonds	88,023	801,349	2,112,831	1,220,521	4,222,724
Subordinated bonds	-	-	249,363	142,494	391,857
Obligations with Banks:
Interbank loans	-	-	-	-	-
Chilean central bank loans	-	-	3,865,000	-	3,865,000
Total	156,948	871,171	6,543,356	1,612,455	9,183,930
Hedging instrument
Cross currency swaps	96,261	835,484	2,056,864	1,220,521	4,209,130
Interest rate swaps	60,687	35,687	4,486,492	391,934	4,974,800
Total	156,948	871,171	6,543,356	1,612,455	9,183,930

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

Cash flow microhedges

 

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

 

The notional values of the hedged items as of March 31, 2021 and 2020 and December 31, 2020, the periods when the cash flows will be generated are the following:

 

As of March 31, 2021	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan	1,087,364	3,726,351	3,969,648	1,972,959	10,756,322
Commercial loans	-	-	-	-	-
Available for sale investments
Time deposits (ASI)	-	-	41,813	14,377	56,190
Chilean Sovereign bonds	-	-	-	-	-
Chilean Central Bank bonds	-	177,838	901,744	198,621	1,278,203
Time deposits and other time liabilities
Time deposits	28,754	-	-	-	28,754
Issued debt instruments
Senior bonds (variable rate)	168,927	-	-	-	168,927
Senior bonds (fixed rate)	582,535	456,431	637,310	410,139	2,086,415
Interbank borrowings
Interbank loans	373,796	-	-	-	373,796
Total	2,241,376	4,360,620	5,550,515	2,596,096	14,748,607
Hedging instrument
Cross currency swaps	1,226,456	3,770,397	5,550,515	2,596,096	13,143,464
Currency forwards	1,014,920	590,223	0	0	1,605,143
Total	2,241,376	4,360,620	5,550,515	2,596,096	14,748,607

 

As of December 31, 2020	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan	1,926,918	2,520,951	2,761,742	2,084,180	9,293,791
Commercial loans	-	-	-	-	-
Available for sale investments
Time deposits	-	-	42,532	-	42,532
Chilean Sovereign bonds	-	-	-	-	-
Chilean Central Bank bonds	-	175,875	891,791	196,428	1,264,094
Time deposits and other time liabilities
Time deposits	-	-	-	-	-
Issued debt instruments
Senior bonds (variable rate)	167,430	-	-	-	167,430
Senior bonds (fixed rate)	1,125,253	610,385	643,700	415,865	2,795,203
Interbank borrowings
Interbank loans	327,736	35,624	-	-	363,360
Total	3,547,337	3,342,835	4,339,765	2,696,473	13,926,410
Hedging instrument
Cross currency swaps	922,731	2,741,253	4,339,765	2,696,473	10,700,222
Currency forwards	2,624,606	601,582	-	-	3,226,188
Total	3,547,337	3,342,835	4,339,765	2,696,473	13,926,410

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

An estimate of the periods in which flows are expected to be produced is as follows:

 

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

 

As of March 31, 2021	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Inflows	87,778	2,388	4,046	1,613	95,825
Outflows	(510,813)	(627,329)	(249,089)	(358,522)	(1,745,753)
Net flows	(423,035)	(624,941)	(245,043)	(356,909)	(1,649,928)
Hedging instrument
Inflows	510,813	627,329	249,089	358,522	1,745,753
Outflows (*)	(87,778)	(2,388)	(4,046)	(1,613)	(95,825)
Net flows	423,035	624,941	245,043	356,909	1,649,928

 

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

 

As of December 31, 2020	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Inflows	18,219	2,284	2,512	-	23,015
Outflows	(90,303)	(123,604)	(104,198)	(83,397)	(401,502)
Net flows	(72,084)	(121,320)	(101,686)	(83,397)	(378,487)
Hedging instrument
Inflows	90,303	123,604	104,198	83,397	401,502
Outflows (*)	(18,219)	(2,284)	(2,512)	-	(23,015)
Net flows	72,084	121,320	101,686	83,397	378,487

 

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

 

b.2)	Forecasted cash flows for inflation risk:

 

As of March 31, 2021	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Inflows	102,439	387,709	774,419	560,461	1,825,028
Outflows	(14,724)	(22,230)	(61,013)	(29,623)	(127,590)
Net flows	87,715	365,479	713,406	530,838	1,697,438
Hedging instrument
Inflows	14,724	22,230	61,013	29,623	127,590
Outflows	(102,439)	(387,709)	(774,419)	(560,461)	(1,825,028)
Net flows	(87,715)	(365,479)	(713,406)	(530,838)	(1,697,438)

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

As of December 31, 2020	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Inflows	114,734	257,698	457,046	406,499	1,235,977
Outflows	(32,238)	(19,702)	(55,388)	(26,993)	(134,321)
Net flows	82,496	237,996	401,658	379,506	1,101,656
Hedging instrument
Inflows	32,238	19,702	55,388	26,993	134,321
Outflows	(114,734)	(257,698)	(457,046)	(406,499)	(1,235,977)
Net flows	(82,496)	(237,996)	(401,658)	(379,506)	(1,101,656)

 

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

 

As of March 31, 2021 and 2020 and December 31, 2020, the Bank did not have cash flow hedges for exchange rate risk.

 

c)	The accumulated effect of the mark to market adjustment of cash flow hedges produced by hedge instruments used in hedged cash flow was recorded in the Consolidated Statement of Changes in Equity, specifically within Other comprehensive income as of December 31, 2020 and 2019, and is as follows:

 

		As of March 31,
Hedged item		2021		2020
		MCh$		MCh$
Interbank loans		(61)		(8,602)
Time deposits		207		-
Issued debt instruments		2,372		(28,061)
Available for sale investments		(35,412)		1,887
Loans and accounts receivable from customers		(177,495)		41,515
Chilean sovereign bond		(987)		-
Net flows		(211,376)		6,739

 

Since the inflows and outflows for both the hedged element and the hedging instrument mirror each other, the hedges are nearly 100% effective, which means that the fluctuations of fair value attributable to risk components are almost completely offset.

 

During the year, the bank did not have any cash flow hedges of forecast transactions.

 

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

 

	As of March 31,
	2021		2020
	MCh$		MCh$
Bond hedging derivatives	(782)		(783)
Interbank loans hedging derivatives	(4,490)		1
Cash flow hedge net income	(5,272)		(782)

 

(*)	See Note 21 “Equity”, letter e).

 

e)	Net investment hedges in foreign operations:

 

As of March 31, 2021 and 2020 and December 31, 2020, the Bank does not have any net foreign investment hedges in its hedge accounting portfolio.

 

 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

f)	Fair value macrohedges

 

The Bank has macrocoverages for loans and accounts receivable from clients, specifically for the mortgage loan portfolio and for the commercial loan portfolio, the following is the detail,

 

	Notional amount
As of March 31, 2021	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan	596,714	543,803	-	317,464	1,457,981
Commercial loans	500,000	50,000	-	-	550,000
Total	1,096,714	593,803	-	317,464	2,007,981
Hedging instrument
Cross currency swaps	596,714	543,803	-	317,464	1,457,981
Currency forwards	500,000	50,000	-	-	550,000
Total	1,096,714	593,803	-	317,464	2,007,981

 

	Notional amount
As of December 31, 2020	Within 1 year	Between 1 and 3 years	Between 3 and 6 years	Over 6 years	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan	823,126	786,352	-	735,479	2,344,957
Commercial loans	400,000	150,000	-	-	550,000
Total	1,223,126	936,352	-	735,479	2,894,957
Hedging instrument	823,126	786,352	-	735,479	2,344,957
Cross currency swaps	400,000	150,000	-	-	550,000
Currency forwards	1,223,126	936,352	-	735,479	2,894,957
Total	823,126	786,352	-	735,479	2,344,957

 

As of March 31, 2021 and 2020 and December 31, 2020, MCh $ 379,157 and MCh $ 327,938 are presented in “other assets” for the valuation of the net assets or liabilities hedged at fair value in a macro hedge, see Note 14.

 

As of March 31, 2021 and 2020 and December 31, 2020, MCh $ 145,474 and MCh $ 51,089 are presented in “other assets” for the valuation of the net assets or liabilities hedged at fair value in a micro hedge, see Note 19.

 

 

NOTE 08

INTERBANK LOANS

 

a)	As of March 31, 2021 and 2020 and December 31, 2020, the balances for “Interbank loans” are the following:

 

	As of March 31,	As of December 31,
	2021	2020
	MCh$	MCh$
Domestic banks
Loans and advances to banks	-	-
Deposits in the Central Bank of Chile - not available	-	-
Non-transferable Chilean Central Bank Bonds	-	-
Other Central Bank of Chile loans	-	-
Interbank loans	-	-
Overdrafts in checking accounts	-	-
Non-transferable domestic bank loans	-	-
Foreign trade credits Chilean exports	-	4,591
Other domestic bank loans	-	-
Allowances and impairment for domestic bank loans	-	(4)
Foreign interbank loans
Interbank loans – Foreign	5,033	14,339
Overdrafts in checking accounts	-	-
Non-transferable foreign bank deposits	-	-
Other foreign bank loans	-	-
Provisions and impairment for foreign bank loans	(10)	(6)
Total	5,023	18,920

 

b)	The amount of provisions and impairment of interbank loans is detailed below:

 

	As of March 31,				As of December 31,
	2021				2020
	Domestic banks	Foreign banks	Total		Domestic banks	Foreign banks	Total
	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$
Balance as of January 1	4	6	10		-	19	19
Charge-offs	-	-	-		-	-	-
Provisions established	-	9	9		9	21	30
Provisions released	(4)	(5)	(9)		(5)	(34)	(39)
Total	-	10	10		4	6	10

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS

 

a)	Loans and accounts receivable from customers

 

As of March 31, 2021 and 2020 and December 2020, the composition of the loan portfolio is the following:

 

As of March 31, 2021	Assets before allowances					Established allowances (*)
	Normal portfolio	Substandard portfolio	Non- compliance portfolio	Total		Individual allowances	Group allowances	Total		Assets Net Balances
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$		MCh$
Commercial loans
Commercial loans (*)	12,040,064	778,772	782,255	13,601,091		(274,346)	(266,446)	(540,792)		13,060,299
Foreign trade loans	1,036,016	198,103	37,246	1,271,365		(55,277)	(3,494)	(58,771)		1,212,594
Checking accounts debtors	92,852	11,671	11,475	115,998		(4,043)	(7,766)	(11,809)		104,189
Factoring transactions	391,980	5,691	4,143	401,814		(6,180)	(785)	(6,965)		394,849
Student Loans	54,045	-	6,981	61,026		-	(3,490)	(3,490)		57,536
Leasing transactions	1,101,248	156,068	83,847	1,341,163		(17,310)	(5,779)	(23,089)		1,318,074
Other loans and account receivable	184,903	2,744	18,678	206,325		(4,561)	(15,422)	(19,983)		186,342
Subtotal	14,901,108	1,153,049	944,625	16,998,782		(361,717)	(303,182)	(664,899)		16,333,883
Mortgage loans
Loans with mortgage finance bonds	6,589	-	355	6,944		-	(43)	(43)		6,901
Mortgage mutual loans	89,597	-	2,015	91,612		-	(332)	(332)		91,280
Other mortgage mutual loans	12,165,664	-	411,854	12,577,518		-	(66,601)	(66,601)		12,510,917
Subtotal	12,261,850	-	414,224	12,676,074		-	(66,976)	(66,976)		12,609,098
Consumer loans
Installment consumer loans	3,396,677	-	206,686	3,603,363		-	(233,213)	(233,213)		3,370,150
Credit card balances	1,093,398	-	6,877	1,100,275		-	(17,898)	(17,898)		1,082,377
Leasing transactions	3,022	-	6	3,028		-	(25)	(25)		3,003
Other consumer loans	118,905	-	1,646	120,551		-	(4,631)	(4,631)		115,920
Subtotal	4,612,002	-	215,215	4,827,217		-	(255,767)	(255,767)		4,571,450
Total	31,774,960	1,153,049	1,574,064	34,502,073		(361,717)	(625,925)	(987,642)		33,514,431

 

(*)	Contains fogape provisions for Ch $ 36,686 million.

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

As of December 31, 2020	Assets before allowances					Established allowances (*)
	Normal portfolio	Substandar portfolio	Non- compliance portfolio	Total		Individual allowances	Group allowances	Total		Assets Net Balances
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$		MCh$
Commercial loans
Commercial loans	12,080,177	700,855	778,863	13,559,895		(268,296)	(252,388)	(520,684)		13,039,211
Foreign trade loans	1,002,748	195,262	41,261	1,239,271		(56,499)	(3,513)	(60,012)		1,179,259
Checking accounts debtors	104,216	9,389	12,005	125,610		(4,553)	(7,225)	(11,778)		113,832
Factoring transactions	488,633	5,195	3,851	497,679		(5,839)	(653)	(6,492)		491,187
Student Loans	56,040	-	7,340	63,380		-	(3,630)	(3,630)		59,750
Leasing transactions	1,119,641	153,005	82,511	1,355,157		(17,001)	(8,002)	(25,003)		1,330,154
Other loans and account receivable	171,523	2,172	22,849	196,544		(5,461)	(13,629)	(19,090)		177,454
Subtotal	15,022,978	1,065,878	948,680	17,037,536		(357,649)	(289,040)	(646,689)		16,390,847
Mortgage loans
Loans with mortgage finance bonds	7,428	-	381	7,809		-	(45)	(45)		7,764
Mortgage mutual loans	91,115	-	1,845	92,960		-	(329)	(329)		92,631
Other mortgage mutual loans	11,906,388	-	404,668	12,311,056		-	(60,907)	(60,907)		12,250,149
Subtotal	12,004,931	-	406,894	12,411,825		-	(61,281)	(61,281)		12,350,544
Consumer loans
Installment consumer loans	3,454,520	-	234,072	3,688,592		-	(247,223)	(247,223)		3,441,369
Credit card balances	1,118,130	-	7,778	1,125,908		-	(16,923)	(16,923)		1,108,985
Leasing transactions	3,105	-	16	3,121		-	(35)	(35)		3,086
Other consumer loans	121,411	-	1,847	123,258		-	(4,660)	(4,660)		118,598
Subtotal	4,697,166	-	243,713	4,940,879		-	(268,841)	(268,841)		4,672,038
Total	31,725,075	1,065,878	1,599,287	34,390,240		(357,649)	(619,162)	(976,811)		33,413,429

 

(*)	Contains fogape provisions for Ch $ 35,789 million.

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

b)	Portfolio characteristics

 

As of March 31, 2021 and 2020 and December 31, 2020, the portfolio before allowances by customer’s economic activity is the following:

 

	Domestic loans (*)			Foreign interbank loans (**)			Total loans			Distribution percentage
	As of March 31,	As of December 31,		As of March 31,	As of December 31,		As of March 31,	As of December 31,		As of March 31,	As of December 31,
	2021	2020		2021	2020		2021	2020		2021	2020
	MCh$	MCh$		MCh$	MCh$		MCh$	MCh$		%	%
Commercial loans
Manufacturing	1,396,360	1,378,221		-	-		1,396,360	1,378,221		4,05	4,01
Mining	341,682	433,615		-	-		341,682	433,615		0,99	1,26
Electricity, gas, and water	331,651	384,274		-	-		331,651	384,274		0,96	1,12
Agriculture and livestock	1,335,324	1,345,864		-	-		1,335,324	1,345,864		3,87	3,91
Forest	182,142	179,176		-	-		182,142	179,176		0,53	0,52
Fishing	233,500	234,151		-	-		233,500	234,151		0,68	0,68
Transport	767,774	777,601		-	-		767,774	777,601		2,22	2,26
Communications	385,261	331,115		-	-		385,261	331,115		1,12	0,96
Construction	976,920	959,369		-	-		976,920	959,369		2,83	2,79
Commerce	3,649,892	3,712,568		5,033	14,339		3,654,925	3,726,907		10,59	10,83
Services	2,827,014	2,863,338		-	-		2,827,014	2,863,338		8,19	8,32
Other	4,571,262	4,442,835		-	-		4,571,262	4,442,835		13,25	12,91
Subtotal	16,998,782	17,042,127		5,033	14,339		17,003,815	17,056,466		49,29	49,57
Mortgage loans	12,676,074	12,411,825		-	-		12,676,074	12,411,825		36,73	36,07
Consumer loans	4,827,217	4,940,879		-	-		4,827,217	4,940,879		13,98	14,35
Total	34,502,073	34,394,831		5,033	14,339		34,507,106	34,409,170		100,00	100,00

 

(*)	Includes domestic interbank loans for Ch$ 0 million as of March 31, 2021 (Ch$4,591 million as of December 31, 2020), see Note 8.

(**)	Includes foreign interbank loans for Ch$ 5,033 million as of March 31, 2021 (Ch$14,339 million as of December 31, 2020), see Note 8.

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

c)	Impaired portfolio (*)

 

i)	As of March 31, 2021 and December 2020, the impaired portfolio is the following:

 

	As of March 31,								As of December 31,
	2021								2020
	Commercial		Mortgage		Consumer		Total		Commercial		Mortgage		Consumer		Total
	MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$
Individually impaired portfolio	611,207		-		-		611,207		588,334		-		-		588,334
Non-performing loans (collectively evaluated)	302,885		88,503		43,770		435,158		331,382		108,625		46,428		486,435
Other impaired portfolio	220,571		325,721		171,445		717,737		219,660		298,269		197,285		715,214
Total	1,134,663		414,224		215,215		1,764,102		1,139,376		406,894		243,713		1,789,983

 

(*)	The impaired portfolio corresponds to the sum of loans classified as substandard B3 and B4 category as well as the non-compliance portfolio (C1-C6). As they are debtors subject to group evaluation, it includes all the credits of the “Portfolio in Default”

 

ii)	The impaired portfolio with or without warranty as of March 31, 2021 and December 2020 is the following:

 

	As of March 31,								As of December 31,
	2021								2020
	Commercial		Mortgage		Consumer		Total		Commercial		Mortgage		Consumer		Total
	MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$
Secured debt	701,723		389,202		30,761		1,121,686		720,785		381,182		34,720		1,136,687
Unsecured debt	432,940		25,022		184,454		642,416		418,591		25,712		208,993		653,296
Total	1,134,663		414,224		215,215		1,764,102		1,139,376		406,894		243,713		1,789,983

 

iii)	The non-performing loans portfolio as of March 31, 2021 and December 31, 2020 is the following:

 

	As of March 31,								As of December 31,
	2021								2020
	Commercial		Mortgage		Consumer		Total		Commercial		Mortgage		Consumer		Total
	MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$
Secured debt	154,987		83,241		5,859		244,087		177,316		101,279		7,136		285,731
Unsecured debt	147,898		5,262		37,911		191,071		154,066		7,346		39,292		200,704
Total	302,885		88,503		43,770		435,158		331,382		108,625		46,428		486,435

 

iv)	Reconciliation of loans, with past due loans as of March 31, 2021 and December 31, 2020, is the following:

 

	As of March 31,								As of December 31,
	2021								2020
	Commercial		Mortgage		Consumer		Total		Commercial		Mortgage		Consumer		Total
	MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$
With defaults equal to or greater than 90 days	300,112		87,294,		41,037		428,443		329,009		107,905		43,128		480,042
With defaults up to 89 days, classified in past due portfolio	2,373		1,209		2,733,		6,175		2,373		720		3,300		6,393
Total	302,885		88,503		43,770		435,158		331,382		108,625		46,428		486,435

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

d)	Allowances

 

The changes in allowances balances during the periods for 2021 and 2020 is the following:

 

For the period ended as of March 31, 2021	Commercial Loans (*)		Mortgage Loans	Mortgage Loans	Interbank Loans	Total
	Individual	Group	Group	Group
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Balance as of January 1, 2021	357,649	289,040	61,281	268,841	10	976,821
Allowances established	18,433	39,286	7,307	34,820	9	99,855
Allowances released	(10,912)	(11,701)	(174)	(17,130)	(9)	(39,926)
Allowances released due to charge-off	(3,453)	(13,443)	(1,438)	(30,764)	-	(49,098)
Balance as of December 31, 2020	361,717	303,182	66,976	255,767	10	987,652

 

(*)	Contains allowances for Covid-19 Fogape commercial loans equivalent to Ch $ 36,686 million.

 

For the period ended as of December 31, 2020	Commercial Loans (*)		Mortgage Loans	Mortgage Loans	Interbank Loans	Total
	Individual	Group	Group	Group
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Balance as of January 1, 2020	236,549	275,893	68,461	312,245	19	893,167
Allowances established	184,691	124,057	15,884	223,493	30	548,155
Allowances released	(44,878)	(54,394)	(17,141)	(79,846)	(39)	(196,298)
Allowances released due to charge-off	(18,713)	(56,516)	(5,923)	(187,051)	-	(268,203)
Balance as of December 31, 2020	357,649	289,040	61,281	268,841	10	976,821

 

(*)	Contains allowances for Covid-19 Fogape commercial loans equivalent to Ch $ 35,789 million.

 

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

 

i)

Country risk to cover the risk taken when holding or committing resources with any foreign country, these allowances are established according to country risk classifications as set forth in Chapter 7-13 of the Updated Compilation of Rules, issued by the CMF (ex SBIF), the balances of allowances as of March 31, 2021 and December 31, 2020 are Ch$ 51 million and Ch$ 49 million respectively. These are presented as “Allowances” in the liabilities section of the “Consolidated Interim Statement of Financial Position”.

 

ii)

According to CMF (ex SBIF) regulations (compendium of Accounting Standards), the Bank has established allowances related to the undrawn available credit lines and contingent loans. The balances of allowances as of March 31, 2021 and December 31, 2020 are Ch$ 17,767 million and Ch$17,293 million, respectively, and are presented as “Allowances” in the liabilities section of the “Consolidated Interim Statement of Financial Position”.

 

iii)

Under the rules of the CMF (ex SBIF), banks are allowed to establish provisions above the limits described above, in order to protect themselves from the risk of unpredictable economic fluctuations that may affect the macroeconomic environment or the situation of a specific economic sector. The Bank as of March 31, 2021 and December 31, 2020 has additional provisions for Ch$ 150,000 million and Ch$ 126,000 million, which are presented as liabilities in the “Provisions” caption of the Consolidated Statements of Financial Position.

 

 

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

e)	Portfolio by its impaired and non-impaired condition

 

	As of March 31, 2021
	Non-impaired					Impaired					Total portfolio
	Commercial	Mortgage	Consumer	Total non- impaired		Commercial	Mortgage	Consumer	Total impaired		Commercial	Mortgage	Consumer	Total portfolio
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$
Current portfolio	15,760,519	12,128,619	4,526,635	32,415,773		676,947	221,741	116,697	1,015,385		16,437,466	12,350,360	4,643,332	33,431,158
Overdue for 1-29 days	52,286	24,152	49,670	126,108		71,303	7,727	20,192	99,222		123,589	31,879	69,862	225,330
Overdue for 30-89 days	51,314	109,079	35,697	196,090		86,301	97,462	37,289	221,052		137,615	206,541	72,986	417,142
Overdue for 90 days or more	-	-	-	-		300,112	87,294	41,037	428,443		300,112	87,294	41,037	428,443
Total portfolio before allowances	15,864,119	12,261,850	4,612,002	32,737,971		1,134,663	414,224	215,215	1,764,102		16,998,782	12,676,074	4,827,217	34,502,073
Overdue loans (less than 90 days) presented as portfolio percentage	0.65%	1.09%	1.85%	0.98%		13.89%	25.39%	26.71%	18.16%		1.54%	1.88%	2.96%	1.86%
Overdue loans (90 days or more) presented as portfolio percentage	-	-	-	-		26.45%	21.07%	19.07%	24.29%		1.77%	0.69%	0.85%	1.24%

 

	As of December 31, 2020
	Non-impaired					Impaired					Total portfolio
	Commercial	Mortgage	Consumer	Total non- impaired		Commercial	Mortgage	Consumer	Total impaired		Commercial	Mortgage	Consumer	Total portfolio
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$
Current portfolio	15,818,599	11,872,157	4,611,792	32,302,548		717,471	223,798	140,463	1,081,732		16,536,070	12,095,955	4,752,255	33,384,280
Overdue for 1-29 days	36,813	23,997	53,581	114,391		22,016	5,806	23,549	51,371		58,829	29,803	77,130	165,762
Overdue for 30-89 days	42,748	108,777	31,793	183,318		70,880	69,385	36,573	176,838		113,628	178,162	68,366	360,156
Overdue for 90 days or more	-	-	-	-		329,009	107,905	43,128	480,042		329,009	107,905	43,128	480,042
Total portfolio before allowances	15,898,160	12,004,931	4,697,166	32,600,257		1,139,376	406,894	243,713	1,789,983		17,037,536	12,411,825	4,940,879	34,390,240
Overdue loans (less than 90 days) presented as portfolio percentage	0.50%	1.11%	1.82%	0.91%		8.15%	18.48%	24.67%	12.75%		1.01%	1.68%	2.94%	1.53%
Overdue loans (90 days or more) presented as portfolio percentage	-	-	-	-		28.88%	26.52%	17.70%	26.82%		1.93%	0.87%	0.87%	1.40%

 

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS

 

As of March 31, 2021 and December 31, 2020, details of instruments defined as available for sale investments are as follows:

 

	As of March 31,	As of December 31,
	2021	2020
	MCh$	MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds	-	-
Chilean Central Bank Notes	1,496,005	1,008,450
Other Chilean Central Bank and Government securities (*)	5,138,977	5,344,910
Subtotal	6,634,982	6,353,360
Sold under repurchase agreement	78,954	969,508
Other Chilean securities
Time deposits in Chilean financial institutions	492	492
Mortgage finance bonds of Chilean financial institutions	13,227	14,022
Chilean financial institution bonds	-	-
Chilean corporate bonds	-	-
Other Chilean securities	2,229	2,217
Subtotal	15,948	16,731
Sold under repurchase agreement	72	300
Foreign financial securities
Foreign Central Banks and Government securities	195,808	269,803
Other foreign financial securities	525,368	522,648
Subtotal	721,176	792,451
Sold under repurchase agreement	-	-
Total	7,372,106	7,162,542

 

(*)	Corresponds to Treasury bonds in Chilean pesos and UF.

 

The Bank holds instruments maintained with “Chilean central bank and government securities”, which guarantee derivatives transactions through Comder Contraparte Central S,A, in the local market as of March 31, 2021 and December 31, 2020, for an amount of MCh$ 112,100 and MCh$ 158,600 while “Foreign financial securities” guarantee derivatives transactions through London Clearing House (LCH), as of March 31, 2021 and December 31, 2020 they amount to Ch$70,605 and Ch$7,685 respectively. Additionally to comply with the initial margin required by European EMIR standard, the Bank maintains guarantees with Euroclear amounting to MCh$ 298,319 as of March 31, 2021 and MCh$ 258,183 as of December 31, 2020.

 

As of March 31, 2021, the instruments available for sale include balances of unrealized net profits of MCh$ 4,252 recognized as “Valuation accounts” in equity, distributed between a loss of MCh$ 5,267 attributable to equity holders of the Bank and a lass of MCh$ 1,015 million attributable to non-controlling interest.

 

As of December 31, 2020 the instruments available for sale include balances of unrealized net profits of MCh$ 100,135 recognized as “Valuation accounts” in equity, distributed between a gain of MCh$ 98,976 attributable to equity holders of the Bank and a gain of MCh$ 1,159 attributable to non-controlling interest.

 

 

NOTE 11

INTANGIBLE ASSETS

 

a)	As of March 31, 2021 and December 31, 2020 the composition of intangible assets is as follows:

 

				As of March 31, 2021
		Average remaining useful life	Net opening balance as of January 1, 2021	Gross balance	Accumulated amortization	Net balance
			MCh$	MCh$	MCh$	MCh$
Software development		2	82,537	290,300	(208,061)	82,239
Total			82,537	290,300	(208,061)	82,239

 

				As of December 31, 2020
		Average remaining useful life	Net opening balance as of January 1, 2020	Gross balance	Accumulated amortization	Net balance
			MCh$	MCh$	MCh$	MCh$
Software development		2	73,389	320,531	(237,994)	82,537
Total			73,389	320,531	(237,994)	82,537

 

b)	The changes in the value of intangible assets during the periods of March 31, 2021 and December 31, 2020 is the following:

 

b.1)	Gross balance

 

Gross balances	Software development	Total
	MCh$	MCh$
Balances as of January 1, 2021	284,534	284,534
Additions	8,111	8,111
Disposals and impairment (*)	(2,345)	(2,345)
Other	-	-
Balances as of March 31, 2021	290,300	290,300
Balances as of January 1, 2020	250,002	250,002
Additions	35,170	35,170
Disposals and impairment (*)	(638)	(638)
Other	-	-
Balances as of December 31, 2020	284,534	284,534

 

(*)	See Note 31 a).

 

 

NOTE 11

INTANGIBLE ASSETS, continued

 

b.2)	Accumulated amortization

 

Accumulated amortization	Software development	Total
	MCh$	MCh$
Balances as of January 1, 2021	(201,997)	(201,997)
Amortization for the period	(6,064)	(6,064)
Other changes	-	-
Balances as of March 31, 2021	(208,061)	(208,061)
Balances as of January 1, 2020	(176,613)	(176,613)
Amortization for the period	(25,384)	(25,384)
Other changes	-	-
Balances as of December 31, 2020	(201,997)	(201,997)

 

c)	The Bank has no restriction on intangible assets as of March 31, 2021 and December 31, 2020. Additionally, the intangible assets have not been pledged as guarantee to secure compliance with financial liabilities. Also, the Bank has no debt related to Intangible assets as of those dates.

 

 

NOTE 12

FIXED ASSETS AND RIGHT OF USE ASSETS AND OBLIGATION FOR LEASE CONTRACT

 

a)	As of March 31, 2021 and December 31, 2020 the property, plant and equipment balances is the following:

 

		As of March 31, 2021
	Net opening balance as of January 1, 2021	Gross balance	Accumulated depreciation	Net balance
	MCh$	MCh$	MCh$	MCh$
Land and building	114,080	180,942	(66,664)	114,278
Equipment	52,448	247,975	(197,133)	50,842
Other	20,712	75,969	(56,523)	19,446
Total	187,240	504,886	(320,320)	184,566

 

		As of December 31, 2020
	Net opening balance as of January 1, 2020	Gross balance	Accumulated depreciation	Net balance
	MCh$	MCh$	MCh$	MCh$
Land and building	120,133	179,420	(65,340)	114,080
Equipment	55,494	243,084	(190,636)	52,448
Other	22,206	75,159	(54,447)	20,712
Total	197,833	497,663	(310,423)	187,240

 

b)	The changes in the value of property, plant and equipment as of March 31, 2021 and December 31, 2020 is the following:

 

b.1)	Gross balance

 

2021	Land and buildings	Equipment	Other	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2021	179.420	243.084	75.159	497.663
Additions	323	6.371	341	7.035
Disposals	-	(1.349)	(95)	(1.444)
Impairment due to damage	-	-	-	-
Other	1.199	(131)	564	1.632
Balances as of March 31, 2021	180.942	247.975	75.969	504.886

 

2020	Land and buildings	Equipment	Other	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2020	175,370	219,600	69,758	464,728
Additions	1,556	25,233	7,500	34,289
Disposals	(3,719)	(1,748)	(2,099)	(7,566)
Impairment due to damage	-	-	-	-
Other	6,213	-	-	6,213
Balances as of December 31, 2020	179,420	243,084	75,159	497,663

 

 

NOTE 12

FIXED ASSETS AND RIGHT OF USE ASSETS AND OBLIGATION FOR LEASE CONTRACT, continued

 

b.2)	Accumulated depreciation

 

2021	Land and buildings	Equipment	Other	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2021	(65,341)	(190,636)	(54,447)	(310,423)
Depreciation forthe period	(2,386)	(6,988)	(2,206)	(11,580)
Sales and disposals during the period	-	491	130	621
Others	1,063	-	-	1,063
Balances as of March 31, 2021	(66,664)	(197,133)	(56,523)	(320,319)

 

2020	Land and buildings	Equipment	Other	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2020	(55,237)	(164,106)	(47,552)	(266,895)
Depreciation for the period	(8,987)	(28,370)	(8,915)	(46,273)
Sales and disposals during  the period	3,701	1,840	2,021	7,562
Others	(4,817)	-	-	(4,817)
Balances as of December 31, 2020	(65,341)	(190,636)	(54,447)	(310,423)

 

c)

The composition of the right of use assets as of March 31, 2021 and December 31, 2020 is the following:

 

		As of March 31, 2021
	Net opening balance as of January 1, 2021	Gross balance	Accumulated depreciation	Net balance
	MCh$	MCh$	MCh$	MCh$
Land and building	147,997	201,070	(56,004)	145,066
Lease improvements	53,614	128,298	(79,515)	48,783
Total	201,611	329,368	(135,519)	193,849
		As of December 31, 2020
	Net opening balance as of January 1, 2020	Gross balance	Accumulated depreciation	Net balance
	MCh$	MCh$	MCh$	MCh$
Land and building	157,572	197,573	(49,576)	147,997
Lease improvements	52,928	129,079	(75,465)	53,614
Total	210,500	326,652	(125,041)	201,611

 

 

NOTE 12

FIXED ASSETS AND RIGHT OF USE ASSETS AND OBLIGATION FOR LEASE CONTRACT, continued

 

d)

The movement of the right of use assets under lease during the 2021 and 2020 period, is the following:

 

d.1)

Gross balance

 

2021	Land and building	Lease improvements	Total
	MCh$	MCh$	MCh$
Balances as of January 1, 2021	197,573	129,079	326,652
Additions	7,233	895	8,128
Disposals	(3,736)	-	(3,736)
Impairment	-	-	-
Other	-	(1,676)	(1,676)
Balances as of March 31, 2021	201,070	128,298	329,368

 

2020	Land and building	Lease improvements	Total
	MCh$	MCh$	MCh$
Balances as of January 1, 2020	182,910	127,035	309,945
Additions	24,136	12,070	36,206
Disposals	(9,473)	(3,813)	(13,286)
Impairment	-	-	-
Other	-	(6,213)	(6,213)
Balances as of December 31, 2020	197,573	129,079	326,652

 

d.2)

Accumulated amortization

 

2021	Land and building	Lease improvements	Total
	MCh$	MCh$	MCh$
Balances as of January 1, 2020	(49,576)	(75,465)	(125,041)
Amortization for the period	(7,098)	(2,987)	(10,085)
Sales and disposals during  the period	670	-	670
Transfers	-	-	-
Others	-	(1,063)	(1,063)
Balances as of March 31, 2021	(56,004)	(79,515)	(135,519)

 

2020	Land and building	Lease improvements	Total
	MCh$	MCh$	MCh$
Balances as of January 1, 2020	(25,338)	(74,107)	(99,445)
Amortization for the period	(27,731)	(10,038)	(37,769)
Sales and disposals during  the period	3,496	3,862	7,358
Transfers	-	-	-
Others	(3)	4,817	4,815
Balances as of December 31, 2020	(49,576)	(75,465)	(125,041)

 

e)

Obligation for lease contract

 

As of March 31, 2021 and December 31, 2020, the obligations for lease agreements are as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Obligations for lease contracts	146,742		149,585
Totales	146,742		149,585

 

NOTE 12

FIXED ASSETS AND RIGHT OF USE ASSETS AND OBLIGATION FOR LEASE CONTRACT, continued

 

f)

Expenses associated with assets for the right to use leased assets and Obligations for lease agreements

 

	As of March 31,
	2021		2020
	MCh$		MCh$
Depreciation	10,085		9,644
Interests	585		703
Short term lease	969		1,002
Total	11,639		11,349

 

g)

As of March 31, 2021 and December 31, 2020, the maturity level of the obligations for lease agreements, according to their contractual maturity is as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Due within 1 year	24,937		25,526
Due after 1 year but within 2 years	23,474		23,461
Due after 2 years but within 3 years	21,480		21,472
Due after 3 years but within 4 years	19,488		19,343
Due after 4 years but within 5 years	16,066		16,336
Due after 5 years	41,297		43,447
Total	146,742		149,585

 

h)

Operational leases - Lessor

 

As of March 31, 2021 and December 31, 2020, the future minimum lease cash inflows under non-cancellable operating leases are as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Due within 1 year	1,101		740
Due after 1 year but within 2 years	1,567		1,015
Due after 2 years but within 3 years	978		736
Due after 3 years but within 4 years	802		639
Due after 4 years but within 5 years	630		448
Due after 5 years	1,781		1,283
Total	6,859		4,861

 

i)

As of March 31, 2021 and December 31, 2020 the Bank has no finance leases which cannot be cancelled unilaterally.

 

j)

The Bank has no restriction on property, plant and equipment as of March 31, 2021 and December 31, 2020. Additionally, the property, plant, and equipment have not been provided as guarantees to secure compliance with financial liabilities. The Bank has no debt in connection with property, plant and equipment.

 

 

NOTE 13

CURRENT AND DEFERRED TAXES

 

a)

Current taxes

 

As of March 31, 2021 and December 31, 2020, the Bank recognizes taxes payable (recoverable), which is determined based on the currently applicable tax legislation, This amount is recorded net of recoverable taxes, and is shown as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Summary of current tax liabilities (assets)
Current tax (assets)	(27,743)		-
Current tax liabilities	-		12,977
Total tax payable (recoverable)	(27,743)		12,977
Detail of current tax (assets) liabilities (net)
Income tax	176,770		172,944
Less:
Provisional monthly payments	(199,928)		(156,387)
Credit for training expenses	(2,137)		(2,137)
Grant credits	(1,373)		(1,360)
Other	(1,075)		(83)
Total tax payable (recoverable)	(27,743)		12,977

 

b)

Income Tax

 

The effect that the tax expense has on income for the period ended March 31, 2021 and 2020 is comprised of the following items:

 

		As of March 31,
		2021 MCh$		2020 MCh$
Income tax expense
Current tax		1,527		40,627
Credits (debits) for deferred taxes
Origination and reversal of temporary differences		45,473		(8,100)
Subtotal		47,000		32,167
Tax for rejected expenses (Article N° 21)		205		194
Other		2,295		(813)
Net income tax expense		49,500		31,548

 

c)

Effective tax rate reconciliation

 

The reconciliation between the income tax rate and the effective rate used in the determination of the income tax expense as of March 31, 2021 and 2020 is the following:

 

	As of March 31,
	2021				2020
	Tax rate		Amount		Tax rate		Amount
	%		MCh$		%		MCh$
Tax calculated over profit before tax	27.00		63,037		27.00		47,618
Permanent differences (1)	(7.15)		(16,694)		(9.53)		(16,811)
Rate change effect	0.09		205		0.11		194
Other	1.26		2,952		0.31		547
Effective rates and income tax expense	21.20		49,500		17.89		31,548

 

(1)

Mainly corresponds to the permanent differences originated from the Own Tax Monetary Correction and the effect of the bonds received to article 104 of LIR.

 

 

NOTE 13

CURRENT AND DEFERRED TAXES, continued

 

d)

Effect of deferred taxes on other comprehensive income

 

A summary of the separate effect of deferred tax on other comprehensive income, showing the asset and liability balances, for the periods ended March 31, 2021 and December 31, 2020 is the following:

 

		As of December 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Deferred tax assets
Available for sale investments		8.532		14.091
Cash flow hedges		57.072		36.927
Total deferred tax assets recognized through other comprehensive income		65,604		18.718
Deferred tax liabilities
Available for sale investments		(7.384)		(41.128)
Cash flow hedges		-		-
Total deferred tax liabilities recognized through other comprehensive income		(7,384)		(16.007)
Net deferred tax balances in equity		58,220		2.711
Deferred taxes in equity attributable to equity holders of the bank		58,494		2.993
Deferred tax in equity attributable to non-controlling interests		(274)		(282)

 

e)

Effect of deferred taxes on income

 

During 2020 and 2019, the Bank has registered in its financial statements the effects from deffered taxes.

Below are effects of deferred taxes on assets, liabilities and income allocated due to temporary differences:

 

	As of  March 31,		As of  December 31,
	2021		2020
	MCh$		MCh$
Deferred tax assets
Interests and adjustments	8,434		8,166
Non-recurring charge-offs	16,253		17,705
Assets received in lieu of payment	2,949		3,294
Exchange rate adjustments	-		89
Property, plant and equipment	422		-
Provision for loan losses	259,646		259,245
Provision for expenses	88,550		101,321
Leased assets	93,917		89,458
Prepaid expenses	165		-
Subsidiaries tax losses	45,992		7,394
Assets for the right to use leased assets	451		428
Total deferred tax assets	516,659		487,100
Deferred tax liabilities
Valuation of investments	(21,914)		(19,967)
Property, plant and equipment	(6,189)		(7,394)
Anticipated expenses	(16,520)		(16,691)
Valuation provision	(6,273)		(6,591)
Derivatives	(109,228)		(37,265)
Exchange rate adjustments	(2,751)		-
Others	(95)		(30)
Total deferred tax liabilities	(162,970)		(87,938)

 

 

NOTE 13

CURRENT AND DEFERRED TAXES, continued

 

f)

Summary of deferred tax assets and liabilities

 

The effect of deferred taxes on equity and income is the following:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Deferred tax assets
Recognized through other comprehensive income	65,604		51,018
Recognized through profit or loss	516,659		487,100
Total deferred tax assets	582,263		538,118
Deferred tax liabilities
Recognized through other comprehensive income	(7,384)		(41,128)
Recognized through profit or loss	(162,970)		(87,938)
Total deferred tax liabilities	(170,354)		129,066

 

 

NOTE 14

OTHER ASSETS

 

The composition of other assets is the following:

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Assets for leasing (1)		54,841		62,967
Assets received or awarded in lieu of payment (2)
Assets received in lieu of payment		7,471		8,289
Assets awarded at judicial sale		13,298		17,430
Provision on assets received in lieu of payment or awarded		(502)		(1,196)
Subtotal		20,267		24,523
Other assets
Guarantee deposits (margin accounts) (3)		670,253		608,359
Non-current assets classified as held for sale (4)		22,036		22,036
Investments in gold		765		765
VAT credit tax		27,213		27,519
Prepaid expenses (6)		379,154		327,938
Assets recovered from leasing held for sale		380,670		387,668
Macro-hedging valuation adjustment (5)		3,418		3,191
Pension plan assets		673		673
Accounts and notes receivable		112,320		100,504
Notes receivable through brokerage and simultaneous transactions		60,960		41,960
Other receivable accounts		27,440		33,567
Other assets		142,366		97,186
Subtotal		1,827,268		1,651,366
Total		1,902,376		1,738,856

 

1)

Corresponds to the assets available to be delivered under the financial lease modality.

2)

The goods received in payment correspond to the goods received as payment of debts due from customers. The set of goods that remain acquired in this way must not exceed 20% of the Bank’s effective equity at any time. These assets currently represent 0.16% (0.29% as of December 31, 2019) of the Bank’s effective equity.

The assets awarded in judicial auction, correspond to assets that have been acquired at judicial auction in payment of debts previously contracted with the Bank. The assets acquired at judicial auction are not subject to the above mentioned margin. These properties are assets available for sale. For most assets, the sale can be completed within one year from the date the asset is received or acquired, In case the good is not sold within a year, it must be punished.

Additionally, a provision is recorded for the difference between the initial award value plus the additions and their estimated realizable value, when the former is higher.

3)

Correspond to deposits left in guarantee from determined derivative contracts. These guarantees become operative when the valuation from these derivatives surpases the defined thresholds for the contracts, these can be in favor or against the Bank.

4)

Corresponds to the interests in Redbanc S.A. and Transbank S.A., which have been reclassified as non-current assets classified as held for sale in accordance with IFRS 5 “Non-current assets held for sale and discontinued operations “, for additional information see Note 1 t), Note 40.

5)

Corresponds to the balances of the market value of the net assets or liabilities covered by hedges in a macro hedge (Note No. 08).

6)

In this item, the Bank has recorded the prepaid expense related to the Santander LATAM Pass program, which will naturally be consumed as our clients use the Bank’s transactional products, and therefore, the respective LATAM miles are assigned to them. Pass (loyalty program administered by LATAM Airlines Group SA). During the month of May 2020, LATAM Airlines Group S.A initiated a reorganization process in the Court of the Southern District of New York under Chapter 11, a process whose main objective is for the airline to continue operating. In this context, LATAM has publicly indicated that its intention is to honor all current and future tickets, as well as travel vouchers, miles and frequent flyer programs. The Court of the Southern District of New York, agreed in the first hearing to honor and maintain the frequent flyer program, explicitly “in the ordinary course of business” (that is, without changes), since it considered it as an important asset for the company. Along the same lines, LATAM has formalized two tranches of the DIP (Debtor in Possession) financing proposal for a total of USD 2,200 million, managing to capture all the resources that LATAM has indicated as necessary to operate during the crisis. In October 2020, it made the first disbursement of US $ 1,150 million of the DIP financing, which represents 50% of the amount available, which will allow it to reestablish its operation and work on the reorganization plan. On January 27, 2021, Latam Airlines’ request was approved to postpone, until June 30, 2021, the deadline to present its reorganization plan. Given the announcement made by the Chilean government regarding travel restrictions to and from abroad, LATAM Airlines Group reported that it has sufficient liquidity to face this period.

 

 

NOTE 15

TIME DEPOSITS AND OTHER TIME LIABILITIES

 

As of March 31, 2021 and December 31, 2020, the composition of the item time deposits and other liabilities time is as follows:

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Deposits and other demand liabilities
Checking accounts		12,560,549		11,342,648
Other deposits and demand accounts		1,515,600		1,583,183
Other demand liabilities		1,637,283		1,635,062
Subtotal		15,713,432		14,560,893
Time deposits and other time liabilities
Time deposits		10,431,079		10,421,872
Time savings account		165,790		153,330
Other time liabilities		6,990		6,589
Subtotal		10,603,859		10,581,791
Total		26,317,291		25,142,684

  

  

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

 

As of March 31, 2021 and December 31, 2020, the composition for this item is the following:

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Other financial liabilities
Obligations to public sector		1		-
Other domestic obligations		158,291		175,344
Foreign obligations		16,878		8,974
Subtotal		175,170		184,318
Issued debt instruments
Mortgage finance bonds		10,843		12,314
Senior bonds		6,546,819		6,749,989
Mortgage Bonds		82,153		84,335
Subordinated bonds		1,366,865		1,357,539
Subtotal		8,006,680		8,204,177
Total		8,181,850		8,388,495

 

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

 

	As of March 31, 2021
	Current	Non-current	Total
	MCh$	MCh$	MCh$
Mortgage finance bonds	4,669	6,174	10,843
Senior bonds	982,423	5,564,396	6,546,819
Mortgage Bonds	7,326	74,827	82,153
Subordinated bonds	-	1,366,865	1,366,865
Issued debt instruments	994,418	7,012,262	8,006,680
Other financial liabilities	174,969	201	175,170
Total	1,169,387	7,012,463	8,181,850

  

	As of December 31, 2020
	Current	Non-current	Total
	MCh$	MCh$	MCh$
Mortgage finance bonds	4,982	7,332	12,314
Senior bonds	1,124,558	5,625,431	6,749,989
Mortgage Bonds	5,465	78,870	84,335
Subordinated bonds	-	1,357,539	1,357,539
Issued debt instruments	1,135,005	7,069,172	8,204,177
Other financial liabilities	184,028	290	184,318
Total	1,319,033	7,069,462	8,388,495

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

a)

Mortgage finance bonds

 

These bonds are used to finance mortgage loans. Their principal amounts are amortized on a quarterly basis. The range of maturiy of these bonds is between five and twenty years. Loans are indexed to UF and create a yearly interest rate of 5.21% as of March 31, 2021 (5.20% as of December 31, 2020).

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Due within 1 year		4,669		4,982
Due after 1 year but within 2 years		3,554		3,816
Due after 2 years but within 3 years		1,956		2,375
Due after 3 years but within 4 years		642		979
Due after 4 years but within 5 years		22		162
Due after 5 years		-		-
Total mortgage finance bonds		10,843		12,314

 

b)

Senior bonds

 

The following table shows senior bonds by currency:

 

		As of March 31,		As of December 31,
		2021		2020
		MCh$		MCh$
Santander bonds in UF		3,663,078		4,017,708
Santander bonds in USD		1,512,001		1,263,714
Santander bonds in CHF		443,610		466,738
Santander bonds in Ch$		573,441		639,489
Santander bonds in AUD		127,383		125,781
Santander bonds in JPY		64,340		68,093
Santander bonds in EUR		162,966		168,466
Total senior bonds		6,546,819		6,749,989

 

i.

Placement of senior bonds:

 

As of March 31, 2021 the Bank has placed bonds for UF 4,000,000 and USD 150,000,000 detailed as follows:

 

Series	Currency	Amount placed	Term (years)	Issuance rate (Annual)	Issue date	Placement date	Amount	Maturity date
W1	UF	4,000,000	5 and 3 months	1.55 anual	12-01-2018	02-04-2021	6,000,000	06-01-2025
Total UF		4,000,000					6,000,000
Bond USD	USD	50,000,000	2 and 10	0.71 anual	02-25-2021	02-25-2021	50,000,000	12-28-2023
Bond USD	USD	100,000,000	2 and 11	0.72 anual	02-26-2021	02-26-2021	100,000,000	01-16-2024
Total USD		150,000,000					150,000,000

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

During 2021, the Bank repurchased the following bonds:

 

Date		Type	Currency	Amount
02-18-2021		Senior	UF	8,000
02-18-2021		Senior	CLP	14,720,000,000
02-22-2021		Senior	CLP	500,000,000
02-22-2021		Senior	CLP	150,000,000
02-24-2021		Senior	UF	300,000
03-04-2021		Senior	UF	519,000
03-05-2021		Senior	CLP	300,000,000
03-05-2021		Senior	CLP	1,900,000,000
03-22-2021		Senior	UF	50,000
03-24-2021		Senior	UF	150,000
03-24-2021		Senior	UF	7,000

 

During 2020, the Bank repurchased the following bonds:

 

Date		Type	Currency	Amount
02-01-2020		Senior	UF	357.000
03-01-2020		Senior	UF	300.000
09-01-2020		Senior	UF	60.000
09-01-2020		Senior	UF	27.000
13-01-2020		Senior	CLP	50.000.000
14-01-2020		Senior	UF	109.000
14-01-2020		Senior	CLP	9.820.000.000
14-01-2020		Senior	UF	131.000
14-01-2020		Senior	UF	322.000
15-01-2020		Senior	USD	2.490.000
15-01-2020		Senior	UF	47.000
16-01-2020		Senior	CLP	400.000.000
16-01-2020		Senior	UF	1.000
17-01-2020		Senior	UF	28.000
20-01-2020		Senior	UF	74.000
21-01-2020		Senior	UF	171.000
21-01-2020		Senior	UF	181.000
21-01-2020		Senior	CLP	330.000.000
22-01-2020		Senior	CLP	11.430.000.000
24-01-2020		Senior	UF	2.000
29-01-2020		Senior	UF	1.000
29-01-2020		Senior	CLP	120.000.000
30-01-2020		Senior	CLP	10.000.000
31-01-2020		Senior	UF	40.000
06-02-2020		Senior	CLP	6.000.000.000
07-02-2020		Senior	CLP	1.180.000.000
11-02-2020		Senior	CLP	7.430.000.000
12-02-2020		Senior	CLP	2.520.000.000
13-02-2020		Senior	CLP	10.000.000.000
17-02-2020		Senior	UF	2.000
17-02-2020		Senior	UF	15.000
18-02-2020		Senior	UF	50.000
18-02-2020		Senior	UF	4.000
20-02-2020		Senior	UF	350.000
20-02-2020		Senior	UF	115.000
21-02-2020		Senior	UF	57.000
21-02-2020		Senior	UF	24.000
24-02-2020		Senior	UF	250.000
24-02-2020		Senior	UF	10.000
26-02-2020		Senior	UF	169.000
26-02-2020		Senior	UF	1.000
27-02-2020		Senior	UF	180.000
27-02-2020		Senior	UF	11.000
27-02-2020		Senior	CLP	6,750,000,000
02-03-2020		Senior	UF	1,000
05-03-2020		Senior	UF	2,000

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

Date		Type	Currency	Amount
09-03-2020		Senior	UF	261,000
09-03-2020		Senior	UF	150,000
11-03-2020		Senior	UF	2,000
17-03-2020		Senior	UF	850,000
18-03-2020		Senior	UF	150,000
19-03-2020		Senior	USD	5,000,000
23-03-2020		Senior	UF	95,000
23-03-2020		Senior	USD	5,000,000
24-03-2020		Senior	CLP	1,250,000,000
30-03-2020		Senior	UF	62,000
31-03-2020		Senior	UF	360,000
31-03-2020		Senior	UF	5,000
01-04-2020		Senior	CLP	1,000,000,000
02-04-2020		Senior	UF	5,184,000
02-04-2020		Senior	CLP	16,710,000,000
03-04-2020		Senior	CLP	32,800,000,000
03-04-2020		Senior	UF	27,000
06-04-2020		Senior	CLP	101,400,000,000
06-04-2020		Senior	UF	157,000
06-04-2020		Senior	USD	10,000,000
07-04-2020		Senior	CLP	3,990,000,000
07-04-2020		Senior	UF	6,659,000
07-04-2020		Senior	USD	10,000,000
08-04-2020		Senior	CLP	210,000,000
13-04-2020		Senior	CLP	970,000,000
14-04-2020		Senior	CLP	2,000,000,000
17-04-2020		Senior	CLP	11,900,000,000
05-05-2020		Senior	USD	49,000,000
14-05-2020		Senior	USD	47,000,000
02-06-2020		Senior	CLP	6,020,000,000
03-06-2020		Senior	UF	100,000
03-06-2020		Senior	CLP	10,750,000,000
05-06-2020		Senior	USD	5,000,000
08-06-2020		Senior	CLP	23,000,000,000
12-06-2020		Senior	CLP	150,000,000
16-06-2020		Senior	CHF	12,160,000
17-06-2020		Senior	CHF	36,785,000
19-06-2020		Senior	CLP	112,490,000,000
22-06-2020		Senior	CLP	1,500,000,000
26-06-2020		Senior	CLP	3,500,000,000
02-07-2020		Senior	CLP	4,620,000,000
10-07-2020		Senior	CHF	2,000,000
10-07-2020		Senior	CLP	500,000,000
15-07-2020		Senior	CLP	490,000,000
17-07-2020		Senior	UF	1,000
17-07-2020		Senior	CLP	29,780,000,000
13-08-2020		Senior	UF	345,000
14-08-2020		Senior	USD	3,350,000
21-08-2020		Senior	UF	100,000
21-08-2020		Senior	UF	77,000
24-08-2020		Senior	UF	11,000
25-08-2020		Senior	UF	14,000
09-09-2020		Senior	UF	24,000
09-09-2020		Senior	UF	70,000
09-09-2020		Senior	UF	45,000
10-09-2020		Senior	UF	210,000
23-09-2020		Senior	USD	5,000,000
28-09-2020		Senior	UF	50,000
29-09-2020		Senior	UF	1,000
30-09-2020		Senior	UF	43,000
10-01-2020		Senior	UF	4,000
10-06-2020		Senior	UF	1,000
10-06-2020		Senior	UF	1,000
10-06-2020		Senior	CLP	50,000,000
10-06-2020		Senior	UF	1,000
10-06-2020		Senior	UF	1,000
10-15-2020		Senior	UF	2,000

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

Date		Type	Currency	Amount
10-20-2020		Senior	USD	2,000,000
10-01-2020		Senior	USD	5,153,000
11-19-2020		Senior	USD	20,000,000
11-16-2020		Senior	USD	1,000,000
11-18-2020		Senior	USD	10,000,000
11-15-2020		Senior	USD	477,510,000

 

ii.

Maturities for senior bonds are the following:

 

	As of March 31,		As of  December 31,
	2021		2020
	MCh$		MCh$
Due within 1 year	982,423		1,124,558
Due after 1 year but within 2 years	1,252,938		1,047,241
Due after 2 years but within 3 years	651,379		742,081
Due after 3 years but within 4 years	1,634,699		1,228,524
Due after 4 years but within 5 years	985,068		1,250,897
Due after 5 years	1,040,312		1,356,688
Total senior bonds	6,546,819		6,749,989

 

c)

Mortgage bonds

 

The detail of mortgage bonds per currency is the following:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Mortgage bonds in UF	82,153		84,335
Total mortgage bonds	82,153		84,335

 

i.

Placement of Mortgage bonds

As of March 31, 2020 and December 31, 2020, the Bank has not placed any mortgage bonds.

 

ii.

Maturities of mortgage bonds is as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Due within 1 year	7,326		5,465
Due after 1 year but within 2 years	8,767		8,773
Due after 2 years but within 3 years	9,050		9,056
Due after 3 years but within 4 years	9,342		9,348
Due after 4 years but within 5 years	9,643		9,649
Due after 5 years	38,025		42,044
Total mortgage bonds	82,153		84,335

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

d)

Subordinated bonds

 

i.

Detail of subordinated bonds per currency is as follows:

 

	As of March 31,		As of  December 31
	2021		2020
	MCh$		MCh$
Subordinated bonds denominated in Ch$	-		-
Subordinated bonds denominated in USD	202,634		202,634
Subordinated bonds denominated in UF	1,164,231		1,154,905
Total subordinated bonds	1,366,865		1,357,539

 

ii.

Placement of subordinated bonds

 

During 2021, the Bank has not placed any bonds.

 

As of December 31, 2020 the Bank has placed bonds for USD 200,000,000 and UF 11.000.000 detailed as follows:

 

Series	Currency	Amount placed	Term (years)	Issuance rate	Issue date	Series Maximum amount	Maturity date
Bono USD	USD	200,000,000	10	3.79%	01-21-2020	200,000,000	21-01-2030
Total USD		200,000,000				200,000,000
USTDH20914	UF	3,000,000	14 y 5 months	3.00%	09-01-2014	3,000,000	01-09-2034
USTDH30914	UF	3,000,000	19 y 5 months	3.15%	09-01-2014	3,000,000	01-09-2039
USTDW20320	UF	5,000,000	15 y 3 months	3.50%	03-01-2020	5,000,000	01-09-2035
Total UF		11,000,000				11,000,000

 

ii.

The maturity of the subordinated bonds is as follows:

 

The maturity of the subordinated bonds is as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
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	1,366,865		1,357,539
Total mortgage bonds	1,366,865		1,357,539

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

e)

Other financial liabilities

 

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

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Non-current portion:
Due after 1 year but within 2 years	44		42
Due after 2 year but within 3 years	48		47
Due after 3 year but within 4 years	52		50
Due after 4 year but within 5 years	57		55
Due after 5 years	-		96
Non-current portion subtotal	201		290
Current portion:
Amounts due to credit card operators	131,821		134,790
Acceptance of letters of credit	4,713		1,460
Other long-term financial obligations, short-term portion	38,435		47,778
Current portion subtotal	174,969		184,028
Total other financial liabilities	175,170		184,318

 

 

NOTE 17

MATURITY OF FINANCIAL ASSETS AND LIABILITIES

 

As of March 31, 2021 and December 31, 2020, the detail of the maturities of assets and liabilities is as follows:

 

As of March 31, 2021	Demand	Up to 1 month	Between 1 and 3 months	Between 3 and 12 months	Up to 1 year Subtotal	Between 1 and 3 years	Between 3 and 5 years	More than 5 years	More than 1 year Subtotal	Total
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Assets
Cash and deposits in banks	3,432,117	-	-	-	3,432,117	-	-	-	-	3,432,117
Cash items in process of collection	347,355	-	-	-	347,355	-	-	-	-	347,355
Trading investments	-	-	-	852	852	1,491	32,429	76,476	110,396	111,248
Investments under resale agreements	-	-	-	-	-	-	-	-	-	-
Financial derivatives contracts	-	186,807	145,461	541,614	873,882	1,527,551	1,503,808	2,814,897	5,846,256	6,720,138
Interbank loans (1)	-	5,033	-	-	5,033	-	-	-	-	5,033
Loans and accounts receivables from customers (2)	198,734	1,353,195	1,735,838	3,086,857	6,374,624	3,645,431	578,985	23,903,033	28,127,449	34,502,073
Available for sale investments	-	1,495,097	-	121,041	1,616,138	205,546	4,535,223	1,015,199	5,755,968	7,372,106
Held to maturity investments	-	-	-	-	-	-	-	-	-	-
Guarantee deposits (margin accounts)	670,253	-	-	-	670,253	-	-	-	-	670,253
Total assets	4,648,459	3,040,132	1,881,299	3,750,364	13,320,254	5,380,019	6,650,445	27,809,605	39,840,069	53,160,323
Liabilities
Deposits and other demand liabilities	15,713,432	-	-	-	15,713,432	-	-	-	-	15,713,432
Cash items in process of collection	281,302	-	-	-	281,302	-	-	-	-	281,302
Obligations under repurchase agreements	-	79,026	-	-	79,026	-	-	-	-	79,026
Time deposits and other time liabilities	172,779	5,958,089	2,060,452	2,196,810	10,388,130	146,405	45,273	24,051	215,729	10,603,859
Financial derivatives contracts	-	173,058	127,237	754,812	1,055,107	1,364,838	1,707,950	2,887,302	5,960,090	7,015,197
Interbank borrowings	1,814,021	208,095	491,287	1,079,601	3,593,004	-	3,248,974	-	3,248,974	6,841,978
Issued debts instruments	-	164,185	192,392	637,841	994,418	1,927,643	2,639,417	2,445,202	7,012,262	8,006,680
Other financial liabilities	146,131	24,232	4,496	30	174,889	98	117	66	281	175,170
Obligations for lease agreements	-	-	-	24,937	24,937	44,954	35,554	41,297	121,805	146,742
Guarantees received (margin accounts)	574,010	-	-	-	574,010	-	-	-	-	574,010
Total liabilities	18,701,675	6,606,685	2,875,864	4,694,031	32,878,255	3,483,938	7,677,285	5,397,918	16,559,141	49,437,396

 

(1)

Interbank loans are presented on a gross basis, The amount of allowances is Ch$10 million.

(2)

Loans and accounts receivables from customers are presented on a gross basis, Provisions on loans amounts according to customer type are the following: Commercial loans Ch$ 664,899 million, Mortgage loans Ch$ 66,976 million and Consumer loans Ch$ 255,767 million.

 

NOTE 17

MATURITY OF FINANCIAL ASSETS AND LIABILITIES, continued

 

As of December 31, 2020	Demand	Up to 1 month	Between 1 and 3 months	Between 3 and 12 months	Up to 1 year Subtotal	Between 1 and 3 years	Between 3 and 5 years	More than 5 years	More than 1 year Subtotal	Total
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Financial Assets
Cash and deposits in banks	2,803,288	-	-	-	2,803,288	-	-	-	-	2,803,288
Cash items in process of collection	452,963	-	-	-	452,963	-	-	-	-	452,963
Trading investments	-	680	2,630	499	3,809	633	18,257	111,019	129,909	133,718
Investments under resale agreements	-	-	-	-	-	-	-	-	-	-
Financial derivatives contracts	-	385,231	401,486	795,881	1,582,598	1,723,334	1,692,142	4,034,011	7,449,487	9,032,085
Interbank loans (1)	-	12,969	5,961	-	18,930	-	-	-	-	18,930
Loans and accounts receivables from customers (2)	170,214	1,233,302	1,437,698	3,670,246	6,511,460	3,659,994	308,651	23,910,135	27,878,780	34,390,240
Available for sale investments	-	1,006,983	493	188,977	1,196,453	205,150	2,378,752	3,382,187	5,966,089	7,162,542
Held to maturity investments	-	-	-	-	-	-	-	-	-	-
Guarantee deposits (margin accounts)	608,359	-	-	-	608,359	-	-	-	-	608,359
Total financial assets	4,034,824	2,639,165	1,848,268	4,655,603	13,177,860	5,589,111	4,397,802	31,437,352	41,424,265	54,602,125
Financial Liabilities
Deposits and other demand liabilities	14,560,893	-	-	-	14,560,893	-	-	-	-	14,560,893
Cash items in process of collection	361,631	-	-	-	361,631	-	-	-	-	361,631
Obligations under repurchase agreements	-	969,808	-	-	969,808	-	-	-	-	969,808
Time deposits and other time liabilities	159,918	5,843,682	2,912,985	1,434,246	10,350,831	163,053	44,384	23,523	230,960	10,581,791
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
Issued debts instruments	-	344,732	447,117	343,156	1,135,005	1,813,341	2,499,560	2,756,271	7,069,172	8,204,177
Other financial liabilities	144,478	38,148	1,375	27	184,028	89	105	96	290	184,318
Obligations for lease agreements	-	-	-	25,526	25,526	44,933	35,679	43,447	124,059	149,585
Guarantees received (margin accounts)	624,205	-	-	-	624,205	-	-	-	-	624,205
Total financial liabilities	15,867,957	7,821,474	4,029,845	3,589,747	31,309,023	4,714,324	8,142,738	6,817,582	19,674,644	50,983,667

 

(1)

Interbank loans are presented on a gross basis, The amount of allowances is Ch$ 10 million.

(2)

Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to customer type of loan are the following: Commercial loans for MCh$ 646,689, Mortgage loans for MCh$ 61,281 and Consumer loans for MCh$ 268,841.

 

NOTE 18

PROVISIONS

 

a)

As of December 31, 2020 and 2019, the detail for the provisions is as follows:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Provision for employee salaries and expenses	70,762		104,270
Provision for mandatory dividends	209,748		155,234
Provision for contingent loan risks:
Provision for lines of credit of immediate disponibility	17,767		17,293
Other provisions for contingent loans	19,624		19,460
Provision for contingencies	39,988		33,814
Additonal provisions	150,000		126,000
Provision for foreign bank loans	51		49
Total	507,940		456,120

 

 

NOTE 19

OTHER LIABILITIES

 

Other liabilities consist of:

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Accounts and notes payable	228,306		227,518
Income received in advance	550		6,698
Adjustment due to macro-hedging valuation (3)	145,474		51,089
Guarantees received (margin accounts) (1)	574,010		624,205
Notes payable through brokerage and simultaneous transactions (2)	58,272		12,504
Other payable obligations	12,452		139,622
Withholding VAT	13,696		14,129
Accounts payable insurance companies	184,592		13,911
Other liabilities	76,099		76,177
Total	1,293,451		1,165,853

 

(1)

Guarantee deposits (margin accounts) correspond to collaterals associated with derivative financial contracts. These guarantees operate when the mark to market from derivative financial instruments exceed the levels of threshold agreed in the contracts, which could result in a delivery or reception of collateral for the Bank.

(2)

On December 31, 2019, Santander Corredora de Bolsa acted as an intermediary in the public offer of shares held between Latam and Delta, which was paid to shareholders on January 3, 2020.

(3)

Corresponds to net hedging assets and liabilietes adjusted to market value see Note 7.

 

NOTE 20

CONTINGENCIES AND COMMITMENTS

 

a)

Lawsuits and legal procedures

 

At the date of issuance of these consolidated financial statements, there are several legal actions brought against the Bank in relationship with operations of the line of business. As of March 31, 2021, the Bank maintains provisions for this concept that amount to MCh$ 1,127 (MCh$ 1,024 as of December 31, 2020), which are in the Consolidated Statement of Financial Position, forming part of the item “Provisions for contingencies”.

 

Banco Santander Chile

 

The Bank currently undergoes 15 lawsuits for various legal actions in the amount of MCh$ 899 million, our attorneys have not estimated material losses for these lawsuits.

 

Santander Corredores de Bolsa Limitada

 

Ongoing lawsuit “Echeverría with Santander Corredora” (currently Santander Corredores de Bolsa Ltda.), being held before the 21st Civil Court of Santiago, Rol C-21.366-2014, on compensation for damages due to failures in the purchase of shares, the amount of the claim is for Ch$ 60,000,000. Regarding its current situation as of December 31, 2020, this lawsuit is in the evidence gathering stage, therefore, Santander Corredores de Bolsa Limitada is waiting for the court to resolve.

 

Santander Corredora de Seguros Limitada

 

There are lawsuits amounting to UF 13,201 corresponding to processes mainly for goods delivered in leasing. Our lawyers have not estimated additional material losses for these trials.

 

Santander Consumer Finance Limitada

 

- Lawsuit “Erna Mining and Machinery Service with Santander Consumer Finance Ltda.”, being held by the 11th Civil Court of Santiago, Rol C-9459-2019, according to the latest update, the abandonment of the procedure has not yet been requested.

- Lawsuit “Banco Bilbao Viscaya Argentaria Chile with Roca Olivares Olga”, being held by the 2nd Civil Court of Talcahuano, Rol C-1272-2017, main trial filed since 2020.

- Lawsuit “Hawas with Santander Consumer”, being held by the 30th Civil Court of Santiago, Rol C-890-2019, notice of evidence is notified, in which it is indicated that the probationary term is suspended.

- Lawsuit “Rocío Barrientos with Santander Consumer”, being held by the 2nd San Bernardo Local Police Court, Rol 2779-5-2020, ordering evidentiary proceedings: completed. Waiting for sentence.

- Lawsuit “Merino with Santander Consumer”, being held by the 27th Civil Court of Santiago, Rol C-17495-2020. A Dilatory Exception was filed by SCF against the lawsuit, which is pending resolution. Once that happens, there is a period of 10 days to answer the claim.

 

b)

Contingent loans

 

To meet customer needs, the Bank acquired several irrevocable commitments and contingent liabilities, although these obligations should not be recognized in the Consolidated Statement of Financial Position, these contain credit risks and are therefore part of the Bank’s overall risk.

 

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

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Contingent loans
Letters of credit issued	229,245		165,119
Foreign letters of credit confirmed	73,217		82,779
Performance guarantees	1,158,440		1,090,643
Personal guarantees	438,680		441,508
Subtotal	1,899,582		1,780,049
On demand credit lines	8,520,371		8,391,414
Other irrevocable credit commitments	411,339		406,234
Total	10,831,292		10,577,697

 

 

NOTE 20

CONTINGENCIES AND COMMITMENTS, continued

 

c)

Held securities

 

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

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Third party operations
Collections	67,774		83,392
Transferred financial assets managed by the Bank	17,728		18,017
Assets from third parties managed by the Bank and its affiliates	1,404,036		1,352,032
Subtotal	1,489,538		1,453,441
Custody of securities
Securities held in custody	12,013,784		11,022,790
Securities held in custody deposited in other entity	925,026		808,186
Issued securities held in custody	10,296,523		10,461,847
Subtotal	23,235,333		22,292,823
Total	24,724,871		23,746,264

 

The Bank classified the portfolios managed by private banking in “Assets from third parties managed by the Bank and its affiliates”, as of March 31, 2021, the balance for this was MCh$ 1,404,001 (MCh$ 1,351,997 as of December 31, 2020),

 

d)

Guarantees

 

Banco Santander-Chile has an integral bank policy of coverage of Official Loyalty N°5207785 in force with the company Compañía de Seguros Chilena Consolidada SA, Coverage for 50,000,000 USD per claim with an annual limit of 100,000,000 USD, which covers both the Bank and its subsidiaries, with an expiration date of June 30, 2021.

 

Santander Corredores de Bolsa Limitada

 

i)

As of March 31, 2021, the Company has comprehensive guarantees in the Santiago Stock Exchange to cover simultaneous operations carried out through its own portfolio for a total of MCh$ 6,848(MCh$ 6,493 as of December 31, 2020).

 

ii)

Additionally, as of March 31, 2021, the Company holds a guarantee in CCLV Contraparte Central S.A., in cash, for an amount of MCh$ 11,800 (MCh$ 11,800 as of December 31, 2020).

 

iii)

In order to ensure the correct and full compliance of all its obligations as Brokerage Broker, in accordance with the provisions of articles 30 and following of Law N° 18,045 on Securities Market, the Company has delivered fixed-income securities to the Santiago Stock Exchange for a present value of MCh$ 1,000 as of March 31, 2021 (Ch$ 1,001 as of December 31, 2020).

 

iv)

As of March 31, 2021, the company has a guarantee for equity loans in the amount of MCh$ 3,468 (MCh$ 3,481 as of December 31, 2020).

 

Santander Corredora de Seguros Limitada

 

i)

In accordance with those established in Circular N° 1,160 of the CMF, the company has contracted an insurance policy to respond to the correct and full compliance with all obligations arising from its operations as an intermediary in the hiring insurance.

 

ii)

On March 26, 2021, the insurance policy for insurance brokers was renewed N°10046944, this policy covers UF 500, and the professional liability policy for insurance brokers N°10046940 for an amount equivalent to UF 60,000, were contracted with the Insurance Company Generales Chilena Consolidada SA Both are valid from April 15, 2021 to April 14, 2022.

 

 

NOTE 20

CONTINGENCIES AND COMMITMENTS, continued

 

Klare Corredora de Seguros S.A.

 

In accordance with the provisions of Circular No. 1,160 of the CMF, the Company has contracted an insurance policy to respond to the correct and complete fulfillment of all the obligations arising from its operations as an intermediary in the contracting of insurance. The guarantee policy for insurance brokers No. 163143, which covers UF 500, contracted with Compañía HDI Seguros de Garantia y Crédito S.A. They are valid from April 15, 2020 to April 14, 2021. On April 5, 2021, this policy was renewed having a coverage from April 15, 2021 to April 14, 2022.

 

Sociedad Operadora de Cards de Pago Santander Getnet Chile S.A.

 

From July 1, 2020 to June 30, 2021, Banco Santander Chile has established the integral bank policy for employee loyalty coverage No. FL00297A, in force with Compañía de Seguros Chilena Consolidada SA, coverage with a general limit of USD50,000,000 per event and USD100,000,000 in the annual aggregate, in each and every event which jointly covers both the Bank and its Subsidiaries.

 

 

NOTE 21

EQUITY

 

a)

Equity

 

As of March 31, 2020 and 2019 the Bank has 188,446,126,794 shares outstanding amounting to MCh$ 891,303, all of which are subscribed for and paid in full. All shares have the same rights, and have no preferences or restrictions.

 

The movement in shares for the period of March 31, 2021 and December 31, 2020 is the following:

 

	Shares
	As of March 31,	As of December 31,
	2021	2020
Issued as of January 1	188,446,126,794	188,446,126,794
Issuance of paid shares	-	-
Issuance of outstanding shares	-	-
Stock options exercised	-	-
Issued a period end	188,446,126,794	188,446,126,794

 

As of March 31, 2021 and December 31, 2020 the Bank does not own any of its shares in treasury, nor do any of the consolidated companies.

 

As of March 31, 2021 the shareholder composition is the following:

 

Corporate Name or Shareholder’s Name	Shares	ADRs (*)	Total	% of equity holding
Santander Chile Holding S,A,	66,822,519,695	-	66,822,519,695	35.46
Teatinos Siglo XXI Inversiones Limitada	59,770,481,573	-	59,770,481,573	31.72
The Bank of New York Mellon	-	21,071,931,671	21,071,931,671	11.18
Banks on behalf of third parties	16,078,116,461	-	16,078,116,461	8.53
Pension funds (AFP) on behalf of third parties	11,877,762,784	-	11,877,762,784	6.30
Stock brokers on behalf of third parties	6,272,197,562	-	6,272,197,562	3.33
Other minority holders	6,553,117,048	-	6,553,117,048	3.47
Total	167,374,195,123	21,071,931,671	188,446,126,794	100.00

 

(*)

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

 

As of December 31, 2020 the shareholder composition is the following:

 

Corporate Name or Shareholder’s Name	Shares	ADRs (*)	Total	% of equity holding
Santander Chile Holding S,A,	66,822,519,695	-	66,822,519,695	35.46
Teatinos Siglo XXI Inversiones Limitada	59,770,481,573	-	59,770,481,573	31.72
The Bank of New York Mellon	-	22,450,671,671	22,450,671,671	11.91
Banks on behalf of third parties	15,925,407,468	-	15,925,407,468	8.45
Pension fund (AFP) on behalf of third parties	9,929,343,874	-	9,929,343,874	5.27
Stock brokers on behalf of third parties	6,892,162,980	-	6,892,162,980	3.66
Other minority holders	6,655,539,533	-	6,655,539,533	3.53
Total	165,995,455,123	22,450,671,671	188,446,126,794	100.00

 

(*)

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

 

 

NOTE 21

EQUITY, continued

 

b)

Reserves

 

On March 30, 2021, in an Extraordinary Board meeting, it was agreed to summon an Ordinary Shareholders’ Meeting, for April 29, 2021 in order to propose a distribution of profits and payment of dividends, equivalent to 60% of the retained earnings as of December 31, 2020 which amount to $ 1.64751729 per share and propose that the remaining 40% of the earnings for fiscal year 2020 to be used to increase the Bank’s reserves.

 

During 2020, on the Shareholders’ Meeting held in April, it was agreed to capitalize 40% of the retained earnings from previous years to reserves, equivalent to MCh$220,838 (MCh$ 236,761 in 2019).

 

c)

Dividends

 

The distribution of dividends has been disclosed in the Consolidated Statements of Changes in Equity.

 

d)

Diluted earnings per share and basic earnings per share

 

As of March 31, 2021 and 2020, the composition of diluted earnings per share and basic earnings per share are as follows:

 

	As of March 31,
	2021		2020
	MCh$		MCh$
a) Basic earnings per share
Total attributable to equity holders of the Bank	181,713		144,014
Weighted average number of outstanding shares	188,446,126,794		188,446,126,794
Basic earnings per share (in Ch$)	0,964		0,764
Diluted earnings per share continuing operations (in Ch$)	0,964		0,764
b) Diluted earnings per share
Total attributable to equity holders of the Bank	181,713		144,014
Weighted average number of outstanding shares	188,446,126,794		188,446,126,794
Assumed conversion of convertible debt	-		-
Adjusted number of shares	188,446,126,794		188,446,126,794
Diluted earnings per share (in Ch$)	0,964		0,764
Diluted earnings per share continuing operations (in Ch$)	0,964		0,764

 

As of March 31, 2021 and 2020, the Bank does not own instruments with dilutive effects.

 

 

NOTE 21

EQUITY, continued

 

e)

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

 

	As of March 31,		As of December 31,
	2021		2020
	MCh$		MCh$
Available for sale investments
As of January 1,	100,135		30,398
Gain (losses) on the re-valuation of available for sale investments, before tax	(104,323)		26,128
Reclassification from other comprehensive income to net income for the year	-		-
Net income realized	(64)		43,609
Subtotal	(104,387)		69,737
Total	(4,252)		100,135
Cash flow hedges
As of January 1,	(136,765)		(40,435)
Gains (losses) on the re-valuation of cash flow hedges, before tax	(69,339)		(93,182)
Reclassification and adjustments on cash flow hedges, before tax	(5,272)		(3,148)
Amounts removed from equity and included in carrying amount of non-financial asset (liability) whose acquisition or assignment was hedged as a highly probable transaction	-		-
Subtotal	(74,611)		(96,330)
Total	(211,376)		(136,765)
Other comprehensive income, before tax	(215,628)		(36,630)
Income tax related to other comprehensive income components
Income tax relating to available for sale investments	1,148		(27,037)
Income tax relating to cash flow hedges	57,072		36,927
Total	58,220		9,890
Other comprehensive income, net of tax	(157,408)		(26,740)
Attributable to:
Equity holders of the Bank	(158,149)		(27,586)
Non-controlling interest	741		846

 

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

 

 

NOTE 22

CAPITAL REQUIREMENTS (BASEL)

 

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

 

Assets are allocated to different risk categories, each of which is assigned a weighting percentage according to the amount of capital required to be held for each type of asset. For example, cash, deposits in banks and financial instruments issued by the Central Bank of Chile have a 0% risk weighting, meaning that it is not necessary to hold equity to back these assets according to current regulations. Property, plant and equipment have a 100% risk weighting, meaning that a minimum capital equivalent to 11% of these assets must be held. All derivatives traded off the exchanges are also assigned a risk weighting, using a conversion factor applied to their notional values, to determine the amount of their exposure to credit risk, Off-balance-sheet contingent credits are also included for weighting purposes, as “Credit equivalents”.

 

According to Chapter 12-1 of the CMF (ex SBIF), Recopilación Actualizada de Normas [Updated Compilation of Rules] effective January 2010, the CMF changed existing regulation with the enforcement of Chapter B-3 from the Compendium of Accounting Standards, which changed the risk exposure of contingent allocations from 100% exposure to the following:

 

Type of contingent loan		Exposure
a) Pledges and other commercial commitments		100%
b) Foreign letters of credit confirmed		20%
c) Letters of credit issued		20%
d) Guarantees		50%
e) Interbank guarantee letters		100%
f) Available lines of credit		35%
g) Other loan commitments:
- Higher education loans Law N°. 20,027		15%
- Other		100%
h) Other contingent loans		100%

 

On January 12, 2019, Law 21,130 that Modernizes Banking Legislation was published in the Official Gazette. This law introduces modifications, among other regulatory bodies, to the General Law of Banks (LGB), to Law 21,000 that created the Commission for the Financial Market, to the Organic Law of the State Bank of Chile and to the Tax Code. On March 30, 2020, the CMF informs on the flexibility to implement Basel III. In coordination with the Central Bank of Chile, they resolved to postpone the implementation of the capital requirements required by the standard by one year and to maintain the current general regulatory framework for banking capital requirements until December 2021. The new General Banking Law (updated through Law 21,130) defines general guidelines to establish a capital adequacy system in line with the international standards of Basel III, giving the CMF the power to dictate the framework of capital in a prudent manner. In particular, the CMF is empowered, with the prior favorable agreement of the Board of the Central Bank of Chile (BCCh), to define, through regulations, the new methodologies for calculating assets weighted by credit, market and operational risk; the conditions of issuance of hybrid instruments AT1, and the determination and capital charges for banks of local systemic importance. It also introduced conservation and counter-cyclical buffers and expanded the CMF’s powers to make prudential discounts to regulatory capital and require additional measures, including higher capital, from banks that present deficiencies in the supervisory evaluation process (pillar 2). The implementation of Basel III makes it possible to focus risk management towards a more comprehensive vision of them, with a focus on capital adequacy.

 

In accordance with the foregoing, last December the CMF completed the process of issuing the necessary regulations for the implementation in Chile of the capital framework of the Basel III standards. But in the current context of a coronavirus pandemic, the CMF, in coordination with the Central Bank of Chile and in line with the measures adopted by regulators at the international level, decided to postpone the implementation of the APR calculation for one year and maintain it temporarily the general regulatory framework in force until November 30, 2021.

 

As of the date of these consolidated financial statements, the CMF has issued the following circulars related to Basel III,

 

●

Circular No. 2,270 - General criteria and guidelines for determining additional equity requirements as a result of the supervision process pursuant to Title V and article 66 quinquies of the General Banking Law. Updates Chapter 1-13 and introduces new Chapter 21-13 to the Updated Collection of Standards for Banks.

●

Circular No. 2,272 - Additional basic capital, articles 66 bis and 66 ter of the General Banking Law. Incorporates Chapter 21-12 to the Updated Compilation of Standards.

●

Circular No. 2,273 - Ratio between basic capital and total assets. Incorporates Chapter 21-30 to the Updated Compilation of Standards.

●

Circular No. 2,274 - Equity for legal and regulatory purposes. Incorporates Chapter 21-1 into the Updated Compilation of Standards to replace Chapter 12-1.

 

 

NOTE 22

CAPITAL REQUIREMENTS (BASEL), continued

 

●

Circular No. 2,276 - Factors and methodology for banks or a group of banks rated as systemically important. It incorporates Chapter 21-11 the Updated Compilation of Standards and updates provisions of Chapter 12-14.

●

Circular No. 2,279 - Preferred shares, bonds without a fixed maturity term and subordinated bonds. Incorporates Chapters 21-2 and 21-3 to the Updated Compilation of Standards.

●

Circular No. 2,280 - Standardized Methodology for the Computation of Assets Weighted by Operational Risk. Incorporates Chapter 21- 8 to the Updated Compilation of Standards.

●

Circular No. 2,281 - Determination of weighted assets for credit risk. Incorporates Chapter 21-6 to the Updated Compilation of Standards.

●

Circular No. 2,282 - Incorporates a new Chapter 21-7 on the determination of assets weighted by market risk to the Updated Compilation of Standards.

●

Circular No. 2,283 - Promotion of market discipline and transparency through the disclosure of information requirements from banking entities (Pillar 3). Incorporates Chapter 21-20 to the Updated Compilation of Standards.

●

Circular N ° 2,284 - Creates R11 file related to the measurement of the systemic importance index.

 

These standards come into effect on December 1, 2020, their applications will be gradual depending on the standard to be dealt with.

 

The levels of basic capital and effective net equity as of March 31, 2021 and December 31, 2020, are the following:

 

	Consolidated assets				Risk-weighted assets (***)
	As of March 31,		As of December 31,		As of March 31,		As of December 31,
	2021		2020		2021		2020
	MCh$		MCh$		MCh$		MCh$
Balance-sheet assets (net of allowances)
Cash and deposits in banks	3,432,117		2,803,288		-		-
Cash in process of collection	347,355		452,963		113,781		173,466
Trading investments	111,248		133,718		35,894		14,655
Investments under resale agreements	-		-		-		-
Financial derivative contracts (*)	2,631,932		2,742,701		1,590,214		1,602,495
Interbank loans, net	5,023		18,920		5,023		15,250
Loans and accounts receivables from customers, net	33,514,431		33,413,429		26,614,229		26,651,340
Available for sale investment	7,372,106		7,162,542		590,988		618,908
Investments in associates and other companies	11,064		10,770		11,064		10,770
Intangible assets	82,239		82,537		82,239		82,537
Property, plant, and equipment	184,566		187,240		184,566		187,240
Right of use assets	193,849		201,611		193,849		201,611
Current taxes	27,744		-		2,774		-
Deferred taxes	582,263		538,118		58,226		53,812
Other assets(**)	1,315,097		1,236,376		1,306,172		1,233,016
Off-balance-sheet assets
Contingent loans	4,470,787		4,378,214		2,673,849		2,615,644
Total	54,281,820		53,362,427		33,462,867		33,460,744

(*)

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

(**)

On March 30, 2020, the CMF published circular No. 2248, which indicates that the CMF has authorized the presentation of net positions of derivatives and guarantees granted to third parties, under the protection of bilateral compensation agreements recognized by the Central Bank of Chile. For purposes of computing assets for capital adequacy.

(***)

On August 21, 2020, circular No. 2265 was published indicating the new treatment, where the amounts of the credits that are guaranteed by the Chilean Treasury are incorporated into category 2 of the risk-weighted asset classification. , CORFO and FOGAPE, which consequently went from having a credit risk weight of 100% to 10%.

 

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

 

	Ratio
	As of March 31,		As of December 31,		As of March 31,		As of December 31,
	2021		2020		2021		2020
	MCh$		MCh$		%		%
Basic capital / Common equity level 1	3,651,387		3,652,599		6.73		6.84
Effective net equity	5,168,252		5,143,843		15.44		15.37

 

a)

It reflects the net amount of equity of dependent entities attributable to capital instruments which do not belong, directly or indirectly, to the Bank, including the portion of the income for the period that has been attributed to them.

 

NOTE 23

NON-CONTROLLING INTEREST

 

The non-controlling interest included in the equity and the income from the subsidiaries is summarized as follows:

 

				Other comprehensive income
As of March 31, 2021	Non controlling interest	Equity	Income	Available for sale investments	Deferred tax	Total other comprehensive income	Comprehensive income
	%	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Subsidiaries:
Santander Corredora de Seguros Limitada	0.25	175	1	-	-	-	1
Santander Corredores de Bolsa Limitada	49.41	22,646	219	8	(2)	6	5
Santander Asesorías Financieras Limitada	0.97	496	3	(152)	41	(111)	(108)
Santander S.A. Sociedad Securitizadora	0.36	2	-	-	-	-	-
Klare Corredora de Seguros S.A.	49.90	2,610	(294)	-	-	-	(294)
Santander Consumer Finance Limitada	49.00	31,859	2,165	-	-	-	2,165
Subtotal		57,788	2,094	(144)	39	(105)	1,989
Entities controlled through other considerations:
Santander Gestión de Recaudación y Cobranzas Limitada	100.00	20,064	150	-	-	-	150
Bansa Santander S.A.	100.00	4,790	109	-	-	-	109
Multiplica Spa	100.00	4,193	(96)	-	-	-	(96)
Subtotal		29,047	163	-	-	-	163
Total		86,835	2,257	(144)	39	(105)	2,152

 

				Other comprehensive income
As of December 31, 2020	Non-controlling interest	Equity	Income	Available for sale investments	Deferred tax	Total other comprehensive income	Comprehensive income
	%	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Subsidiaries:
Santander Corredora de Seguros Limitada	0.25	174	(4)	(4)	1	(3)	(7)
Santander Corredores de Bolsa Limitada	49.41	22,613	351	(38)	9	(29)	322
Santander Asesorías Financieras Limitada	0.97	493	(5)	152	(41)	111	106
Santander S.A. Sociedad Securitizadora	0.36	2	-	-	-	-	-
Klare Corredora de Seguros S.A.	49.90	2,902	(880)	-	-	-	(880)
Santander Consumer Chile S.A	49.00	29,648	5,619	-	-	-	5,619
Subtotal		55,834	5,081	110	(31)	79	5,160
Entities controlled through other considerations:
Santander Gestión de Recaudación y Cobranzas Limitada	100.00	4,808	(127)	-	-	-	(127)
Bansa Santander S.A. (1)	100.00	19,565	349	-	-	-	349
Multiplica Spa	100.00	4,476	(187)	-	-	-	(187)
Subtotal		28,849	35	-	-	-	35
Total		84,683	5,116	110	(31)	79	5,195

 

 

NOTE 23

NON-CONTROLLING INTEREST, continued

 

b)

A summary of the financial information of subsidiaries included in the consolidation with non-controlling interests (before consolidation or conforming adjustments) is as follows:

 

	As of March 31,						As of December 31,
	2021						2020
					Net Income					Net Income
		Assets	Liabilities	Capital			Assets	Liabilities	Capital
		MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$
Santander Corredora de Seguros Limitada	Filial	82,105	12,502	69,145	458		79,936	10,777	70,554	(1,395)
Santander Corredores de Bolsa Limitada	Filial	115,726	69,510	45,773	443		94,802	49,038	45,053	711
Santander Asesorías Financieras Limitada (*)	Filial	52,205	936	50,928	341		52,070	1,142	51,454	(526)
Santander S,A, Sociedad Securitizadora	Filial	914	473	456	(15)		630	175	547	(92)
Klare Corredora de Seguros S.A.	Filial	5,812	584	5,817	(589)		6,415	599	7,579	(1,763)
Santander Consumer Finance Limitada	Filial	533,412	468,394	60,589	4,429		693,992	633,177	49,348	11,467
Sociedad operadora de Tarjetas de Pago Santander Getnet Chile S.A.	Filial	24,394	7,505	18,990	(2,101)		16,448	1,185	16,273	(1,010)
Santander Gestión de Recaudación y Cobranzas Limitada	EPE	6,965	2,175	4,681	109		7,789	3,108	4,808	(127)
Bansa Santander S.A.	EPE	79,659	59,595	19,914	150		84,496	64,582	19,565	349
Multiplica Spa	EPE	4,233	40	4,289	(96)		4,336	47	4,476	(187)
Total		905,425	621,714	280,582	3,129		1,040,914	763,830	269,657	7,427

 

 

NOTE 24

INTEREST INCOME

 

This item refers to interest earned in the period from the financial assets whose return, whether implicitly or explicitly, is determined by applying the effective interest rate method, regardless of the value at fair value, as well as the effect of hedge accounting.

 

a)

As of March 31, 2021 and 2020, the income from interest income, not including income from hedge accounting, is attributable to the following items:

 

	As of March 31,
	2021					2020
	Interest	Inflation adjustments	Prepaid  fees	Total		Interest	Inflation adjustments	Prepaid  fees	Total
Items	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$
Resale agreements	33	-	-	33		47	-	-	47
Interbank loans	-	-	-	-		25	-	-	25
Commercial loans	163,081	71,232	4,356	238,669		187,920	65,980	2,625	256,525
Mortgage loans	81,650	138,238	178	220,066		82,320	115,328	265	197,913
Consumer loans	121,948	108	1,301	123,357		152,794	131	1,672	154,597
Investment instruments	18,764	19,315	-	38,079		15,634	9,809	-	25,443
Other interest income	498	790	-	1,288		5,894	806	-	6,700
Interest income without income from hedge accounting	385,974	229,683	5,835	621,492		444,634	192,052	4,562	641,250

 

b)

As indicated in section i) of Note 1, suspended interest relates to loans with payments over 90 days overdue, which are recorded in off-balance sheet accounts until they are effectively received.

 

As of March 31, 2021 and 2020, the suspended interest and adjustments income consists of the following:

 

	As of March 31,
	2021				2020
	Interest	Inflation adjustments	Total		Interest	Inflation adjustments	Total
Items	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$
Commercial loans	11,841	9,442	21,283		13,991	9,957	23,948
Mortgage loans	2,148	213	2,361		3,196	8,400	11,596
Consumer loans	2,118	7,155	9,273		3,863	268	4,131
Total	16,107	16,810	32,917		21,050	18,625	39,675

 

 

NOTE 24

INTEREST INCOME, continued

 

c)

As of March 31, 2021 and 2020, the expenses from interest expense, excluding expense from hedge accounting, are as follows:

 

	As of March 31,
	2021				2020
	Interest	Inflation adjustments	Total		Interest	Inflation adjustments	Total
Items	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$
Demand deposits	(3,048)	(672)	(3,720)		(3,456)	(561)	(4,017)
Repurchase agreements	(73)	-	(73)		(1,161)	-	(1,161)
Time deposits and liabilities	(10,900)	(4,101)	(15,001)		(64,157)	(10,945)	(75,102)
Interbank borrowings	(8,621)	-	(8,621)		(13,641)	-	(13,641)
Issued debt instruments	(47,536)	(55,229)	(102,765)		(66,977)	(54,532)	(121,509)
Other financial liabilities	(44)	(9)	(53)		(431)	(6)	(437)
Obligations for lease agreements	(580)	-	(580)		(703)	-	(703)
Other interest expense	(642)	(4,833)	(5,475)		(5,095)	(7,358)	(12,453)
Interest expense without expenses from hedge accounting	(71,444)	(64,844)	(136,288)		(155,621)	(73,402)	(229,023)

 

d)

As of March 31, 2021 and 2020, the income and expense from interest is as follows:

 

	As of March 31,
	2021	2020
Items	MCh$	MCh$
Interest income less income from hedge accounting	621,492	641,250
Interest expense less expense from hedge accounting	(136,288)	(229,023)
Net Interest income (expense) from hedge accounting	485,204	412,227
Hedge accounting (net)	(54,007)	(23,928)
Total net interest income	431,197	388,299

 

 

NOTE 25

FEES AND COMMISSIONS

 

a)

Fees and commissions includes the value of fees earned and paid during the year, except those which are an integral part of the financial instrument’s effective interest rate:

 

		As of March 31,
		2020		2019
		MCh$		MCh$
Fee and commission income
Fees and commissions for lines of credits and overdrafts		1,858		1,735
Fees and commissions for guarantees and letters of credit		8,858		9,486
Fees and commissions for card services		56,407		56,128
Fees and commissions for management of accounts		9,136		8,841
Fees and commissions for collections and payments		5,903		9,272
Fees and commissions for intermediation and management of  securities		3,141		3,181
Fees and commissions for insurance marketing		10,219		11,625
Office banking		4,026		3,651
Fees for other services rendered		11,151		12,029
Other fees earned		15,004		9,702
Total		125,703		125,650

 

		As of December 31,
		2020		2019
		MCh$		MCh$
Fee and commission expense
Compensation for card operations		(34,754)		(39,743)
Fees and commissions for securities transactions		(509)		(266)
Office banking		(581)		(467)
Interbank Services		(7,379)		(5,488)
Other fees		(7,028)		(5,281)
Total		(50,251)		(51,245)
Net fees and commissions income		75,452		74,405

 

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

 

 

NOTE 25

FEES AND COMMISSIONS, continued

 

b)

Income and expenses from commissions that are generated through the different segments of the business are presented in the following chart as well as the calendar which recognizes ordinary activity income.

 

	Segments						Calendar recognizing ordinary activity income
As of March 31, 2021	Retail Banking	Middle Market	Global Corporate Banking	Others	Total		Transfered through time	Transfered in an exact moment	Accrual model
	Mch$	Mch$	Mch$	Mch$	Mch$		Mch$	Mch$	Mch$
Fee and commission income
Fees and commissions for lines of credits and overdrafts	1.556	225	74	3	1.858		1.858	-	-
Fees and commissions for guarantees and letters of credit	2.744	4.206	1.799	109	8.858		8.858	-	-
Fees and commissions for card services	53.882	1.878	644	3	56.407		13.113	43.294	-
Fees and commissions for management of accounts	8.263	608	192	73	9.136		9.136	-	-
Fees and commissions for collections and payments	5.587	226	74	16	5.903		-	2.610	3.293
Fees and commissions for intermediation and management of  securities	959	46	1.964	172	3.141		-	3.141	-
Fees and commissions for insurance marketing	10.219	-	-	-	10.219		-	-	10.219
Office banking	2.768	1.087	171	-	4.026		-	4.026	-
Fees for other services rendered	10.370	645	132	4	11.151		-	11.151	-
Other fees earned	6.515	3.398	5.561	(470)	15.004		-	15.004	-
Totals	102.863	12.319	10.611	(90)	125.703		32.965	79.226	13.512
Fee and commission expense
Compensation for card operations	(33.310)	(766)	(177)	(501)	(34.754)		-	(16.414)	(18.340)
Fees and commissions for securities transactions	(241)	(44)	(14)	(210)	(509)		-	(509)	-
Office banking	(367)	(80)	(134)	-	(581)		-	(581)	-
Interbank Services	(3.337)	(502)	(1.678)	(1.862)	(7.379)		-	(7.379)	-
Other fees	(4.664)	(1.021)	(1.694)	351	(7.058)		-	(7.028)	-
Totals	(41.919)	(2.413)	(3.697)	(2.222)	(50.251)		-	(31.911)	(18.340)
Net fees and commissions income	60.944	9.906	6.914	(2.312)	75.452		32.965	47.315	(4.828)

 

 

NOTE 25

FEES AND COMMISSIONS, continued

 

Income and expenses from commissions that are generated through the different segments of the business are presented in the following chart as well as the calendar which recognizes ordinary activity income, continued:

 

	Segments						Calendar recognizing ordinary activity income
As of March 31, 2020	Retail Banking	Middle Market	Global Corporate Banking	Others	Total		Transfered through time	Transfered in an exact moment	Accrual model
	Mch$	Mch$	Mch$	Mch$	Mch$		Mch$	Mch$	Mch$
Fee and commission income
Fees and commissions for lines of credits and overdrafts	1.591	141	1	2	1.735		1.735	-	-
Fees and commissions for guarantees and letters of credit	2.928	4.615	1.896	47	9.486		9.486	-	-
Fees and commissions for card services	52.869	2.143	1.098	18	56.128		11.522	44.606	-
Fees and commissions for management of accounts	7.999	621	219	2	8.841		8.841	-	-
Fees and commissions for collections and payments	8.824	327	92	29	9.272		-	4.055	5.217
Fees and commissions for intermediation and management of  securities	798	47	2.185	151	3.181		-	3.181	-
Fees and commissions for insurance marketing	11.625	-	-	-	11.625		-	-	11.625
Office banking	2.481	994	176	-	3.651		-	3.651	-
Fees for other services rendered	10.812	968	233	16	12.029		-	12.029	-
Other fees earned	3.640	3.369	2.746	53	9.702		-	9.702	-
Totals	103.567	13.225	8.646	212	125.650		31.584	77.224	16.842
Fee and commission expense
Compensation for card operations	(38.540)	(957)	(246)	-	(39.743)		-	(22.392)	(17.351)
Fees and commissions for securities transactions	-	-	(13)	(253)	(266)		-	(266)	-
Office banking	(298)	(98)	(71)	-	(467)		-	(467)	-
Interbank Services	(3.469)	(759)	(1.260)	-	(5.488)		-	(5.488)	-
Other fees	(2.928)	(701)	(633)	(1.019)	(5.281)		-	(5.281)	-
Totals	(45.235)	(2.515)	(2.223)	(1.272)	(51.245)		-	(33.894)	(17.351)
Net fees and commissions income	58.332	10.710	6.423	(1.060)	74.405		31.584	43.330	(509)

 

 

NOTE 26

NET INCOME (EXPENSE) FROM FINANCIAL OPERATIONS

 

Includes the amount of the adjustments from the financial instruments variation, except those attributable to the interest accrued by the application of the effective interest rate method of the value adjustments of the assets, as well as the results obtained in their sale.

 

As of March 31, 2021 and 2020, the detail of income from financial operations is as follows:

 

		As of March 31,
		2021		2020
		MCh$		MCh$
Profit and loss from financial operations
Trading derivatives		27,567		147,716
Trading investments		(1,647)		(4,261)
Sale of loans and accounts receivables from customers
Current portfolio		-		-
Charged-off portfolio		(108)		11
Available for sale investments		1.304		8,455
Repurchase of issued bonds (1)		(1,818)		5,043
Other profit and loss from financial operations		(586)		(1,270)
Total		24,712		155,694

 

(1)

As of March 31, 2021 the Bank hasn’t made any repurchases of bonds, see Note 16.

 

 

NOTE 27

NET FOREIGN EXCHANGE INCOME

 

Net foreign exchange income includes the income earned from foreign currency trading, differences arising from converting monetary items in a foreign currency to the functional currency, and those generated by non-monetary assets in a foreign currency at the time of their sale.

 

As of March 31, 2021 and 2020, net foreign exchange income is as follows:

 

		As of March 31,
		2021		2020
		MCh$		MCh$
Net foreign exchange gain (loss)
Net gain (loss) from currency exchange differences		(2,768)		(505,007)
Hedging derivatives		4,359		356,810
Income from assets indexed to foreign currency		3,193		15,350
Income from liabilities indexed to foreign currency		-		-
Total		4,784		(132,847)

 

 

NOTE 28

PROVISIONS FOR LOAN LOSSES

 

a)

The movement in provisions for loan losses registered as of March 31, 2021 and 2020 is the following:

 

		Loans and accounts receivable from customers
As of March 31, 2021	Interbank loans Individual	Commercial loans		Mortgage loans	Consumer loans	Contingent loans		Additional Provisions
		Individual	Group	Group	Group	Individual	Group		Total
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Charged-off of loans	-	(3,024)	(12,510)	(2,674)	(2,413)	-	-	-	(20,621)
Provisions established	(9)	(18,433)	(39,286)	(7,307)	(34,820)	(772)	(610)	(24,000)	(125,237)
Total provisions and charge-offs	(9)	(21,457)	(51,796)	(9,981)	(37,233)	(772)	(610)	(24,000)	(145,858)
Provisions released	9	10,912	11,701	174	17,130	293	452	-	40,671
Recovery of loans previously charged-off	-	2,238	3,317	2,207	9,174	-	-	-	16,936
Net charge to income	-	(8,307)	(36,778)	(7,600)	(10,929)	(479)	(158)	(24,000)	(88,251)

 

		Loans and accounts receivable from customers
As of March 31, 2020	Interbank loans Individual	Commercial loans			Mortgage loans	Consumer loans	Contingent loans		Additional Provisions	Total
		Individual	Group		Group	Group	Individual	Group
	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Charged-off of loans	-	(7,931)	(15,103)		(2,842)	(1,508)	-	-	-	(27,384)
Provisions established	(3)	(32,507)	(23,034)		(3,428)	(64,233)	(1,792)	(707)	-	(125,714)
Total provisions and charge-offs	(3)	(40,438)	(38,137)		(6,280)	(65,741)	(1,792)	(707)	-	(153,098)
Provisions released (*)	9	2,632	6,072		2,842	16,184	141	262	-	28,142
Recovery of loans previously charged-off	-	8,171	2,702		2,805	8,408	-	-	-	22,086
Net charge to income	6	(29,635)	(29,363)		(633)	(41,149)	(1,651)	(445)	-	(102,870)

 

b)

The detail for Charge-off to individually significant loans, is the following:

 

	Loans and accounts receivable from customers
As of March 31, 2021	Commercial loans		Mortgage loans	Consumer loans
	Individual	Group	Group	Group	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Charge-off of loans	6,477	25,953	4,112	33,177	69,719
Provision applied	(3,453)	(13,443)	(1,438)	(30,764)	(49,098)
Net charge offs of individually significant loans	3,024	12,510	2,674	2,413	20,621

 

	Loans and accounts receivables from customers
As of March 31, 2020	Commercial loans		Mortgage loans	Consumer loans
	Individual	Group	Group	Group	Total
	MCh$	MCh$	MCh$	MCh$	MCh$
Charge-off of loans	12,858	27,739	4,600	63,837	109,034
Provision applied	(4,927)	(12,636)	(1,758)	(63,329)	(81,650)
Net charge offs of individually significant loans	7,931	15,103	2,842	1,508	27,384

 

 

NOTE 29

PERSONNEL SALARIES AND EXPENSES

 

As of March 31, 2021 and 2020, the composition for personnel salaries and expenses is the following:

 

		As of March 31,
		2021		2020
		MCh$		MCh$
Personnel compensation		55,849		60,446
Bonuses or gratuities		22,363		23,482
Stock-based benefits		1,262		(2,136)
Seniority compensation		5,352		5,428
Pension plans		358		327
Training expenses		607		998
Day care and kindergarden		707		751
Health and welfare funds		1,583		1,696
Other personnel expenses		8,789		8,842
Total		96,870		99,834

 

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.

 

The balance corresponding to benefits based on equity instruments as of March 31, 2021 and 2020 amounts to MCh$ 1,262 million and MCh$ 2,136, respectively.

 

 

NOTE 30

ADMINISTRATIVE EXPENSES

 

As of March 31, 2021 and 2020, the composition for administrative expenses is the following:

		As of March 31,
		2021		2020
		MCh$		MCh$
General administrative expenses		40,248		36,829
Maintenance and repair of property, plant and equipment		5,439		5,395
Expenses for short-term lease agreements		969		1,002
Other expenses of obligations for lease agreements		18		28
Insurance premiums		1,453		1,310
Office supplies		1,183		1,108
IT and communication expenses		19,723		16,483
Lighting, heating, and other utilities		1,432		1,418
Security and valuables transport services		3,672		3,541
Representation and personnel travel expenses		446		551
Judicial and notarial expenses		274		227
Fees for technical reports and auditing		2,161		1,917
Other administrative expenses		3,478		3,849
Outsourced services		19,017		18,821
Data processing		9,073		7,773
Archive service		770		823
Valuation service		901		816
Outsourced staff		1,867		4,190
Other		6,406		5,219
Board expenses		375		354
Marketing expenses		5,153		4,994
Taxes, payroll taxes, and contributions		4,629		2,626
Real estate taxes		459		451
Patents		761		584
Other taxes		4		3
Contributions to CMF (ex SBIF)		3,405		1,588
Total		69,422		63,624

 

 

NOTE 31

DEPRECIATION, AMORTIZATION AND IMPAIRMENT

 

a)

The values of depreciation and amortization during March 31, 2021 and 2020 are detailed below:

 

		As March 31,
		2021		2020
		MCh$		MCh$
Depreciation and amortization
Property, plant, and equipment depreciation		11.580		11.518
Intangible assets amortization		6.064		6.552
Amortization for Right of use assets		10.085		9.644
Total depreciation and amortization		27.729		27.714
Impairment of fixed assets		-		-
Impairment of intangibles (*)		-		638
Impairment for Right of use assets		-		-
Totales		27.729		28.352

(*) As of March 31, 2020, the amount for impairment amounts to MCh$ 638, due to IT project obsolescence.

 

b)

The changes in book value due to depreciation and amortization for March 31, 2021 and 2020 are the following:

		Depreciation and amortization 2021
	Property, plant, and equipment	Intangible assets	Right of use assets	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2021	(310,423)	(201,997)	(125,041)	(637,461)
Depreciation and amortization for the period	(11,580)	(6,064)	(10,085)	(27,729)
Sales and disposals in the period	621	-	670	1,291
Other	1,063	-	(1,063)	-
Balance as of March 31, 2021	(320,319)	(208,061)	(135,519)	(663,899)

 

		Depreciation and amortization 2020
	Property, plant, and equipment	Intangible assets	Right of use assets	Total
	MCh$	MCh$	MCh$	MCh$
Balances as of January 1, 2020	(266,895)	(176,613)	(99,445)	(546,440)
Depreciation and amortization for the period	(11,518)	(6,552)	(9,644)	(27,714)
Sales and disposals in the period	4,131	-	5,275	9,406
Other	-	-	-	-
Balance as of March 31, 2020	(274,282)	(183,165)	(103,814)	(564,748)

 

 

NOTE 31

OTHER OPERATING INCOME AND EXPENSES

 

a)

Other operating income is conformed by the following concepts:

 

		As of March 31,
		2021		2020
		MCh$		MCh$
Income from assets received in lieu of payment
Income from sale of assets received in lieu of payment		1,330		1,079
Recovery of charge-offs and income from assets received in lieu of payment		2,467		2,841
Other income from assets received in lieu of payment		780		1,589
Subtotal		4,577		5,509
Provisions released due to country risk		-		-
Other income
Income from sale of fixed assets
Compensation from insurance companies due to damages		70		164
Income other than interest and commissions from leasing contracts		44		89
Other		592		649
Subtotal		706		902
Total		5,283		6,411

 

b)

Other operating expenses is conformed by the following concepts:

 

		As of March 31,
		2021		2020
		MCh$		MCh$
Allowances and expenses for assets received in lieu of payment
Charge-offs of assets received in lieu of payment		3,948		5,949
Provisions on assets received in lieu of payment		154		941
Expenses for maintenance of assets received in lieu of payment		353		397
Subtotal		4,455		7,287
Credit card expenses		114		210
Customer services		456		354
Other expenses
Operating charge-offs		1,304		1,102
Life insurance and general product insurance policies		10,442		5,827
Gain (Loss) for sale of PP&E		-		-
Expense for the Retail Association		74		34
Expense on sale of participation on associates		-		19
Land tax leasing operation (*)		525		-
Commercial representation expenses		2,549		-
Other		6,070		6,224
Subtotal		20,964		13,206
Total		25,989		21,057

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES

 

Associated and dependent entities are the Bank’s “related parties”, however, this also includes its “key personnel” from the executive staff (members of the Bank’s Board of Directors and Managers of Banco Santander-Chile and its affiliates, together with their close relatives), as well as the entities over which the key personnel could exercise significant influence or control.

 

The Bank also includes those companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent company i.e., Banco Santander S.A. (located in Spain).

 

Article 89 of the Ley de Sociedades Anónimas (Public Companies Act), which is also applicable to banks, states that any transaction with a related party must be made under equitable conditions similar to those that customarily prevail in the market.

 

Article 84 of the Ley General de Bancos (General Banking Act) establishes limits for loans that can be granted to related parties and prohibits lending to the Bank’s directors, General Manager, or representatives.

 

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

 

Companies with relation to the Santander Group

 

This category includes all the companies that are controlled by the Santander Group around the world, and hence, it also includes the companies over which the Bank exercises any degree of control (Affiliates and special-purpose entities).

 

Associated companies

 

This category includes the entities over which the Bank exercises a significant degree of influence, in accordance with section b) of Note 1, and which generally belong to the group of entities known as “business support companies”.

 

Key personnel

 

This category includes members of the Bank’s Board of Directors and managers of Banco Santander-Chile and its affiliates, together with their close relatives.

 

Other

 

This category encompasses the related parties that are not included in the groups identified above and which are, in general, entities over which the key personnel could exercise significant influence or control.

 

The terms for transactions with related parties are equivalent to those which prevail in transactions made under market conditions or to which the corresponding considerations in kind have been attributed.

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

a)

Loans to related parties

 

Loans and receivables as well as contingent loans are as follows:

 

	As of March 31,				As of December 31,
	2021				2020
	Santander Group Companies	Associated companies	Key personnel	Other	Santander Group Companies	Associated companies	Key personnel		Other
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$		MCh$
Loans and accounts receivable
Commercial loans	242,662	247	3,910	754	352,590	265		3,939	900
Mortgage loans	-	-	22,375	-	-	-		22,428	-
Consumer loans	-	-	5,369	-	-	-		6,131	-
Loans and account receivable	242,662	247	31,654	754	352,590	265		32,498	900
Provision for loan losses	(856)	(28)	(126)	(12)	(1,138)	(9)		(137)	(14)
Net loans	241,806	219	31,528	742	351,452	256		32,361	886
Guarantees	3,457	-	27,081	437	3,323	-		27,203	442
Contingent loans
Personal guarantees	-	-	-	-	-	-		-	-
Letters of credit	3,685	-	-	65	3,447	-		-	93
Performance guarantees	910	-	-	-	811	-		-	-
Contingent loans	4,595	-	-	65	4,258	-		-	93
Provision for contingent loans	(8)	-	-	-	(6)	-		-	-
Net contingent loans	4,587	-	-	65	4,252	-		-	93

 

	As of March 31,				As of December 31,
	2021				2020
	Santander Group companies	Associated companies	Key personnel	Other	Santander Group companies	Associated companies		Key personnel	Other
	MCh$	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$
Opening balances as of January 1,	356,848	265	32,498	993	715,671		375	29,240	748
Loans granted	5,671	-	1,245	2	388,896		-	8,080	727
Loan payments	(115,262)	(18)	(2,089)	(176)	(747,719)		(110)	(4,822)	(482)
Total	247,257	247	31,654	819	356,848		265	32,498	993

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

b)

Assets and liabilities with related parties

 

	As of March 31,			As of December 31,
	2021				2020
	Santander Group Companies	Associated companies	Key personnel	Other	Santander Group Companies	Associated companies	Key personnel	Other
	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$	MCh$
Assets
Cash and deposits in banks	1,912,274	-	-	-	703,069	-	-	-
Trading investments	-	-	-	-	-	-	-	-
Investments under resale agreements	-	-	-	-	-	-	-	-
Financial derivative contracts	754,965	109,079	27	4	978,696	186,038	33	7
Available for sale investments	-	-	-	-	-	-	-	-
Other assets	537,089	533,357	-	-	445,609	412,277	-	-
Liabilities
Deposits and other demand liabilities	41,736	3,044	8,857	983	17,118	4,484	5,997	3,242
Obligations under repurchase agreements	37,051	-	187	-	961,718	-	101	-
Time deposits and other time liabilities	1,409,023	1,671	5,757	958	1,409,404	100	4,706	864
Financial derivative contracts	1,096,509	172,058	-	3	1,137,502	354,108	-	-
Bank obligation	-	-	-	-	544,291	-	-	-
Issued debts instruments	322,650	-	-	-	349,022	-	-	-
Other financial liabilities	-	-	-	-	-	-	-	-
Other liabilities	4,371	322,194	-	-	1,210	232,344	-	-

 

c)

Recognized income (expense) with related parties

 

	As of March 31,
	2021					2020
	Companies with relation to the Santander Group	Associated companies	Key personnel	Other		Companies with relation to the Santander Group	Associated companies	Key personnel	Other
	MCh$	MCh$	MCh$	MCh$		MCh$	MCh$	MCh$	MCh$
Income (expense) recorded
Income and expenses from interest and inflation	(1,564)	31	428	8		(13,243)	6	381	(2)
Fee and commission income and expenses	10,489	4,305	44	6		32,258	30,025	40,246	6,207
Net income (expense) from financial operations and foreign exchange transactions (*)	(19,518)	19,607	-	(1)		(936,823)	16,211	-	-
Other operating income and expenses	64	(506)	-	-		124	(4,594)	-	-
Key personnel compensation and expenses	-	-	(10,868)	-		-	-	(7,374)	-
Administrative and other expenses	(9,964)	(16,082)	-	-		(15,807)	(6,147)	-	-
Total	(20,493)	7,355	(10,396)	13		(933,492)	35,501	33,253	6,215

 

(*)

Primarily relates to derivative contracts used to hedge economically the exchange risk of assets and liabilities that hedge positions of the Bank and its subsidiaries.

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

d)

Payment to Board members and key management personnel

 

The compensation received by key management personnel, including Board members and all the executives holding Manager positions, is shown in the “Personnel salaries and expenses” and/or “Administrative expenses” of the Consolidated Interim Statements of Income, and detailed as follows:

 

	As of March 31,
	2021		2020
	MCh$		MCh$
Personnel compensation	4.063		4.019
Board member’s salaries and expenses	375		336
Bonuses or gratuity	4.440		4.207
Compensation in stock	1.257		(2.136)
Training expenses	70		344
Seniority compensation	358		327
Health funds	54		36
Other personnel expenses	68		69
Pension Plans	183		171
Total	10.868		7.374

 

e)

Composition of key personnel

 

As of March 31, 2021 and December 31, 2020, the composition of the Bank’s key personnel is as follows:

 

Position	N° of executives
	As of March 31,	As of December 31,
	2020	2020
Directors	11	11
Division managers	13	13
Managers	95	96
Total key personnel	119	120

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction on the main market (or the most advantageous) at the measurement date in the current market conditions (in other words, an exit price) regardless of whether that price is directly observable or estimated by using a different valuation technique. The measurement of fair value assumes the sale transaction of an asset or the transference of the liability happens within the main asset or liability market, or the most advantageous market for the asset or liability.

 

For financial instruments with no available market prices, fair values have been estimated by using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community. In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

These techniques are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations. Hence, the fair value estimated for an asset or liability may not coincide exactly with the price at which that asset or liability could be delivered or settled on the date of its valuation, and may not be justified in comparison with independent markets.

 

Determination of fair value of financial instruments

 

Below is a comparison between the value at which the Bank’s financial assets and liabilities are recorded and their fair value as of March 31, 2021 and December 31, 2020:

 

	As of March 31, 2021				As of December 31, 2020
	Book value		Fair value		Book value		Fair value
	MCh$		MCh$		MCh$		MCh$
Assets
Trading investments	111,248		111,248		133,718		133,718
Financial derivative contracts	6,720,138		6,720,138		9,032,085		9,032,085
Loans and accounts receivable from customers and interbank loans, (net)	33,519,454		36,861,155		33,432,349		36,990,699
Investments available for sale	7,372,106		7,372,106		7,162,542		7,162,542
Guarantee deposits (margin accounts)	670,253		670,253		608,359		608,359
Liabilities
Deposits and interbank borrowings	33,159,269		33,490,355		31,471,283		32,047,227
Financial derivative contracts	7,015,197		7,015,197		9,018,660		9,018,660
Issued debt instruments and other financial liabilities	8,181,850		8,977,493		8,388,495		9,590,678
Guarantees received (margin accounts)	574,010		574,010		624,205		624,205

 

Fair value is approximated to book value in the following accounts, due to their short-term nature in the following cases: cash and bank deposits, operations with liquidation in progress and buyback contracts as well as security loans.

 

In addition, the fair value estimates presented above do not attempt to estimate the value of the Bank’s profits generated by its business activity, nor its future activities, and accordingly, they do not represent the Bank’s value as a going concern.

 

Below is a detail of the methods used to estimate the financial instruments’ fair value.

 

a)

Operations pending settlement, trading investments, available for sale investment instruments, repurchase agreements and securities loans

 

The estimated fair value of these financial instruments was established using market values or estimates from an available dealer, or quoted market prices of similar financial instruments. Investments with maturities of less than 1 year are evaluated at recorded value since they are considered as having a fair value not significantly different from their recorded value, due to their short maturity term. To estimate the fair value of debt investments or representative values in these lines of businesses, we take into consideration additional variables and elements, as long as they apply, including the estimate of prepayment rates and credit risk of issuers.

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

b)

Loans and accounts receivable from customers and interbank loans

 

Fair value of commercial, mortgage and consumer loans and credit cards is measured through a discounted cash flow (DCF) analysis To do so, we use current market interest rates considering product, term, amount and similar loan quality. Fair value of loans with 90 days or more of delinquency are measured by means of the market value of the associated guarantee, minus the rate and term of expected payment. For variable rate loans whose interest rates change frequently (monthly or quarterly) and that are not subjected to any significant credit risk change, the estimated fair value is based on their book value.

 

c)

Deposits

 

Disclosed fair value of deposits that do not bear interest and saving accounts is the amount payable at the reporting date and, therefore, equals the recorded amount. Fair value of time deposits is calculated through a discounted cash flow calculation that applies current interest rates from a monthly calendar of scheduled maturities in the market.

 

d)

Short and long term issued debt instruments

 

The fair value of these financial instruments is calculated by using a discounted cash flow analysis based on the current incremental lending rates for similar types of loans having similar maturities.

 

e)

Financial derivative contracts

 

The estimated fair value of financial derivative contracts is calculated using the prices quoted on the market for financial instruments having similar characteristics.

 

The fair value of interest rate swaps represents the estimated amount that the Bank expects to receive to cancel the contracts or agreements, considering the term structures of the interest curve, volatility of the underlying asset and credit risk of counterparties.

 

If there are no quoted prices from the market (either direct or indirect) for any derivative instrument, the respective fair value estimates have been calculated by using models and valuation techniques such as Black-Scholes, Hull, and Monte Carlo simulations, taking into consideration the relevant inputs/outputs such as volatility of options, observable correlations between underlying assets, counterparty credit risk, implicit price volatility, the velocity with which the volatility reverts to its average value, and the straight-line relationship (correlation) between the value of a market variable and its volatility, among others.

 

Fair value and hierarchy measurement

 

IFRS 13: Fair Value Measurement, provides a hierarchy of reasonable values which separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments. The hierarchy reflects the significance of the inputs used in making the measurement. The three levels of the hierarchy of fair values are the following:

 

●

Level 1: the inputs are quoted prices (unadjusted) on active markets for identical assets and liabilities that the Bank can access on the measurement date.

 

●

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

 

●

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

 

The hierarchy level within which the fair value measurement is categorized in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.

 

The best evidence of a financial instrument’s fair value at the initial time is the transaction price (Level 1).

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

In cases where quoted market prices cannot be observed. Management makes its best estimate of the price that the market would set using its own internal models which in most cases use data based on observable market parameters as a significant input (Level 2) and, in very specific cases, significant inputs not observable in market data (Level 3). Various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

Financial instruments at fair value and determined by quotations published in active markets (Level 1) include:

 

-

Chilean Government and Department of Treasury bonds

 

-

Mutual Funds

 

Instruments which cannot be 100% observable in the market are valued according to other inputs observable in the market (Level 2).

 

The following financial instruments are classified under Level 2:

 

Type of financial instrument			Model used in valuation		Description
●	Mortgage and private bonds		Present Value of Cash Flows Model		Internal Rates of Return (“IRRs”) are provided by RiskAmerica, according to the following criterion: If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given mnemonic, the reported rate is the weighted average amount of the observed rates. In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on historical spread for the same item or similar ones.
●	Time deposits		Present Value of Cash Flows Model		IRRs are provided by RiskAmerica, according to the following criterion: If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given mnemonic, the reported rate is the weighted average amount of the observed rates. In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on issuer curves.
●	Constant Maturity Swaps (CMS), FX and Inflation Forward (Fwd) , Cross Currency Swaps (CCS), Interest Rate Swap (IRS)		Present Value of Cash Flows Model		IRRs are provided by ICAP, GFI, Tradition, and Bloomberg according to this criterion: With published market prices, a valuation curve is created by the bootstrapping method and is then used to value different derivative instruments.
●	FX Options		Black-Scholes		Formula adjusted by the volatility smile (implicit volatility). Prices (volatility) are provided by BGC Partners, according to this criterion: With published market prices, a volatility surface is created by interpolation and then these volatilities are used to value options.
●	Guarantee deposits, guarantee received (Treshold)		Present Value of Cash Flows Model		Collateral associated to derivatives financial contracts: Swap Camara Promedio(CMS), FX and inflation Forward, Cross Currency Swap (CCS), Interest Rate Swap (IRS) y FX options.

 

In limited occasions significant inputs not observable in market data are used (Level 3). To carry out this estimate, several techniques are used, including extrapolation of observable market data or a mix of observable data.

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following financial instruments are classified under Level 3:

Type of financial instrument			Model used in valuation		Description
●	Caps/ Floors/ Swaptions		Black Normal Model for Cap/Floors and Swaptions		There is no observable input of implicit volatility.
			Black – Scholes		There is no observable input of implicit volatility.
			Hull-White		Hybrid HW model for rates and Brownian motion for FX, There is no observable input of implicit volatility.
			Implicit Forward Rate Agreement (FRA)		Start Fwd unsupported by MUREX (platform) due to the UF forward estimate.
●	Cross currency swap, Interest rate swap, Call money swap in Tasa Activa Bancaria (Active Bank Rate) TAB		Present Value of Cash Flows Model		Validation obtained by using the interest curve and interpolating at flow maturities, but TAB is not a directly observable variable and is not correlated to any market input.
			Present Value of Cash Flows Model		Valuation using prices of instruments with similar characteristics plus a penalty rate for liquidity.
			Present Value of Cash Flows Model		With the published market prices, the valuation curve is constructed using the bootstrapping method and then this curve is used to value the different derivatives.
●	Reconigtion bonds		Spread over risk free		Valuation by stochastic dynamic model to obtain discount rate.

 

The Bank does not believe that any change in unobservable inputs with respect to level 3 instruments would result in a significantly different fair value measurement.

 

The following table presents the assets and liabilities that are measured at fair value on a recurring basis, as of March 31, 2021 and December 31, 2020.

 

	Fair value measurement
As of March 31,	2021		Level 1		Level 2		Level 3
	MCh$		MCh$		MCh$		MCh$
Assets
Trading investments	111,248		83,446		27,802		-
Available for sale investments	7,372,106		7,357,834		13,726		546
Derivatives	6,720,138		-		6,713,277		6,861
Guarantee deposits (margin accounts)	670,253		-		670,253		-
Total	14,873,745		7,441,280		7,425,058		7,407
Liabilities
Derivatives	7,015,197		-		7,015,197		-
Guarantees received (margin accounts)	574,010		-		574,010		-
Total	7,589,207		-		7,589,207		-

 

	Fair value measurement
As of December 31,	2020		Level 1		Level 2		Level 3
	MCh$		MCh$		MCh$		MCh$
Assets
Trading investments	133,718		132,246		1,472		-
Available for sale investments	7,162,542		7,145,285		16,731		526
Derivatives	9,032,085		-		9,024,484		7,601
Guarantee deposits (margin accounts)	608,359		-		608,359		-
Total	16,936,704		7,277,531		9,651,046		8,127
Liabilities
Derivatives	9,018,660		-		9,015,900		2,760
Guarantees received (margin accounts)	624,205		-		624,205		-
Total	9,642,865		-		9,640,105		2,760

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following table presents the assets and liabilities that are not measured at fair value in the consolidated statement of financial position. Its fair value is disclosed as of March 31, 2021 and December 31, 2020:

 

	Fair value measurement
As of March 31,	2021		Level 1		Level 2	Level 3
	MCh$		MCh$		MCh$	MCh$
Assets
Credits and accounts receivable from customers and owed by banks	36,861,155		-		-	36,861,155
Total	36,861,155		-		-	36,861,155
Liabilities
Deposits and obligations with banks	33,490,355		-		17,776,923	15,713,432
Debt instruments issued and other obligations	8,977,493		-		8,977,493	-
Total	42,467,848		-		26,754,416	15,713,432

	Fair value measurement
As of December 31,	2020		Level 1		Level 2		Level 3
	MCh$		MCh$		MCh$		MCh$
Assets
Credits and accounts receivable from customers and owed by banks	36,990,699		-		-		36,990,699
Total	36,990,699		-		-		36,990,699
Liabilities
Deposits and obligations with banks	32,047,227		-		17,486,334		14,560,893
Debt instruments issued and other obligations	9,590,678		-		9,590,678		-
Total	41,637,905		-		27,077012		14,560,893

 

There was no transfer between levels 1 and 2 for the periods ended March 31, 2021 and December 31, 2020.

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following table presents the Bank’s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant entries (Level 3) as of March 31, 2021 and December 31, 2020:

 

	Assets		Liabilities
	MCh$		MCh$
As of January 1, 2021	8,127		2,760
Total realized and unrealized profits (losses)
Included in statement of income	(346)		-
Included in other comprehensive income	20		-
Purchases, issuances, and loans (net)	-		-
Transfer	(394)		(2,760)
As of March 31, 2021	7,407		-
Total profits or losses included in comprehensive income at March 31, 2021 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2020	(720)		(2,760)

  

	Assets		Liabilities
	MCh$		MCh$
As of January 1, 2020	15,613		2,950
Total realized and unrealized profits (losses)	(196)		1,012
Included in statement of income	(179)		-
Included in other comprehensive income	-		-
Purchases, issuances, and loans (net)	(7,111)		(1,202)
As of December 31, 2020	8,127		2,760
Total profits or losses included in comprehensive income at December 31, 2020 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2019	(7,486)		(190)

 

The realized and unrealized profits (losses) included in comprehensive income for 2021 and 2020, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the Statement of Comprehensive Income in the associate line item.

 

The potential effect as of March 31, 2021 and 2020 on the valuation of assets and liabilities valued at fair value on a recurrent basis through unobservable significant entries (level 3), generated by changes in the principal assumptions if other reasonably possible assumptions that are less or more favorable were used, is not considered by the Bank to be significant.

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following tables show the financial instruments subject to compensation in accordance with IAS 32, for 2021 and 2020:

 

	Linked financial instruments, compensated in balance
As of March 31, 2021	Gross amounts	Compensated in balance	Net amount presented in balance	Remains of unrelated and / or unencumbered financial instruments	Amount in Statements of Financial Position
	Ch$ Million	Ch$ Million	Ch$ Million	Ch$ Million	Ch$ Million
Assets
Financial derivative contracts	6,586,284	-	6,586,284	133,854	6,720,138
Investments under resale agreements	-	-	-	-	-
Loans and accounts receivable from customers, and Interbank loans, net	-	-	-	33,519,453	33,519,453
Total	6,586,284	-	6,586,284	33,653,307	40,239,591
Liabilities
Financial derivative contracts	6,893,748	-	6,893,748	121,449	7,015,197
Investments under resale agreements	79,026	-	79,026	-	79,026
Déposits and interbank borrowings	-	-	-	33,159,269	33,159,269
Total	6,972,774	-	6,972,774	33,280,718	40,253,492

  

	Linked financial instruments, compensated in balance
As of December 31, 2020	Gross amounts	Compensated in balance	Net amount presented in balance	Remains of unrelated and / or unencumbered financial instruments	Amount in Statements of Financial Position
	Ch$ Million	Ch$ Million	Ch$ Million	Ch$ Million	Ch$ Million
Assets
Financial derivative contracts (*)	8,840,436	-	8,840,436	191,649	9,032,085
Investments under resale agreements	-	-	-	-	-
Loans and accounts receivable from customers, and Interbank loans, net	-	-	-	33,432,349	33,432,349
Total	8,840,436	-	8,840,436	33,623,998	42,464,434
Liabilities
Financial derivative contracts (*)	8,922,079	-	8,922,079	96,581	9,018,660
Investments under resale agreements	969,808	-	969,808	-	969,808
Déposits and interbank borrowings	-	-	-	31,471,283	31,471,283
Total	9,891,887	-	9,891,887	31,567,864	41,459,751

 

(*) In these items there are guarantees for MCh $ 191,802 and MCh$ 96,263 for derivatives assets and liabilities respectively.

 

 

NOTE 34

RISK MANAGEMENT

 

Introduction and general description

 

The Bank, due to its activities with financial instruments is exposed to several types of risk. The main risks related to financial instruments that apply to the Bank are as follow:

 

Market risk: rises from holding financial instruments whose value may be affected by fluctuations in market conditions, generally including the following types of risk:

 

a.

Foreign excharge risk: this arises as a consequence of fluctuations in market interest rates,

b.

Interest rate risk: this arises as a consequence of fluctuations in market interest rates,

c.

Price risk: this arises as a consequence of changes in market prices, either due to factor specific to the instrument itself or due to factors that affect all the instruments negotiated in the market,

d.

Inflation risk: this arises as a consequence of changes in Chile’s inflation rate, whose effect would be mainly applicable to financial instruments denominated in UF.

 

Credit risk: this is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reason of insolvency or inability of the individuals or legal entitles in question to continue as a going concern, causing a financial loss to the other party.

 

Liquidity risk: is the possibility that an entity may be unable to meet its payment commitments, or that in order to meet them, it may have to raise funds with onerous terms or risk damage to its image and reputation.

 

Operating risk: this is a risk arising from human errors, system error, fraud or external events which may damage the Bank’s reputation, may have legal or regulatory implication, or cause financial losses.

 

Capital risk: is the risk that the Bank has insufficient quantity and / or quality of capital to meet the minimum requirements to operate as a bank, respond to market expectations regarding its creditworthiness and support the growth of its business and any strategies that may emerge in accordance with your strategic plan.

 

This note includes information on the Bank’s exposure to these risk an on its objetives, policies, and processes involved in their measurement and management.

 

Risk management structure

 

The Board of Directors is responsible for the establishment and monitoring of the Bank’s risk management structure and, to this end, has a corporate governance system in line with international recommendations and trends, adapted to the Chilean regulatory reality and adapted to best practices, advanced markets in which it operates, To better exercise this function, the Board of Directors has established the Comprehensive Risk Committee (“CIR”), whose main mission is to assist in the development of its functions related to the Bank’s control and risk management, Complementing the CIR in risk management, the Board also has 3 key committees: Assets and Liabilities Committee (CAPA), Markets Committee (“CDM”) and the Directors and Audit Committee (“CDA”), Each of the committees is composed of directors and executive members of the Bank’s management.

 

The CIR is responsible for developing Bank risk management policies in accordance with the guidelines of the Board of Directors, the Global Risk Department of Santander Spain and the regulatory requirements issued by the CMF, These policies have been created mainly to identify and analyze the risk faced by the Bank, establish risk limits and appropriate controls, and monitor risks and compliance with limits, The Bank’s risk management policies and systems are regularly reviewed to reflect changes in market conditions, and the products or services offered, The Bank, through the training and management of standards and procedures, aims to develop a disciplined and constructive control environment, in which all its employees understand their duties and obligations.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

Market risk

 

Market risk arises as a consequence of the activity maintained in the markets, through financial instruments whose value may be affected by variations in market conditions, reflected in changes in the different assets and financial risk factors, The risk can be mitigated through hedges through other products (assets / liabilities or derivatives), or by undoing the operation / open position, The objective of market risk management is the management and control of exposure to market risk within acceptable parameters.

 

There are four major risk factors that affect market prices: interest rates, exchange rates, price, and inflation, Additionally, and for certain positions, it is also necessary to consider other risks, such as spread risk, base risk, commodity risk, volatility or correlation risk.

 

Market risk management

 

The internal management of the Bank to measure market risk is mainly based on the procedures and standards of Santander Spain, which are based on analyzing management in three main components:

 

-

trading portfolio;

-

local financial management portfolio;

-

portfolio of foreign financial management,

 

The trading portfolio consists mainly of those investments valued at their fair value, free of any restriction for immediate sale and that are often bought and sold by the Bank with the intention of selling them in the short term in order to benefit from the short-term price variations, The financial management portfolios include all financial investments not considered in the trading portfolio.

 

The general responsibility for market risk lies with the ALCO, The Bank’s risk / finance department is responsible for the preparation of detailed management policies and their application in the Bank’s operations in accordance with the guidelines established by the ALCO and by the Global Risk Department of Banco Santander de España.

 

The functions of the department in relation to the trading portfolio entail the following:

 

i,

apply “Value at Risk” (VaR) techniques to measure interest rate risk.

ii,

adjust the trading portfolios to the market and measure the profit and daily loss of commercial activities.

iii,

compare the real VAR with the established limits.

iv,

establish procedures to control losses in excess of predetermined limits and

v,

Provide information on the negotiation activities for the ALCO, other members of the Bank’s Management, and the Global Risk Department of Santander – Spain.

 

The functions of the department in relation to the financial management portfolios entail the following:

 

i,

apply sensitivity simulations (as explained below) to measure the interest rate risk of activities in local currency and the potential loss foreseen by these simulations and

ii,

provides the respective daily reports to the ALCO, other members of the Bank’s Management, and the Global Risk Department of Santander – Spain.

 

Market risk - Negotiation portfolio

 

The Bank applies VaR methodologies to measure the market risk of its trading portfolio, The Bank has a consolidated commercial position composed of fixed income investments, foreign currency trading and a minimum equity investment position, The composition of this portfolio consists essentially of bonds of the Central Bank of Chile, mortgage bonds and locally issued low-risk corporate bonds, At the end of the year, the trading portfolio did not present investments in stock portfolios.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

For the Bank, the VaR estimate is made under the historical simulation methodology, which consists of observing the behavior of the losses and gains that would have occurred with the current portfolio if the market conditions of a certain historical period were in force, , from that information, infer the maximum loss with a certain level of confidence, The methodology has the advantage of accurately reflecting the historical distribution of market variables and of not requiring any specific probability distribution assumption, All VaR measures are intended to determine the distribution function for the change in the value of a given portfolio, and once this distribution is known, to calculate the percentile related to the level of confidence needed, which will be equal to the value at risk in virtue of those parameters, As calculated by the Bank, the VaR is an estimate of the maximum expected loss of the market value of a given portfolio within a 1-day horizon at a confidence level of 99,00%, It is the maximum loss of a day in which the Bank could expect to suffer in a certain portfolio with a 99,00% confidence level, In other words, it is the loss that the Bank would expect to exceed only 1,0% of the time, The VaR provides a single estimate of market risk that is not comparable from one market risk to another, The returns are calculated using a 2 year time window or at least 520 data obtained from the reference date of VaR calculation backwards in time.

 

The Bank does not calculate three separate VaRs, A single VaR is calculated for the entire trading portfolio, which, in addition, is segregated by type of risk, The VaR program performs a historical simulation and calculates a profit and loss statement (G & P) for 520 data points (days) for each risk factor (fixed income, currencies and variable income), The G & P of each risk factor is added and a consolidated VaR calculated with 520 data points or days, At the same time, the VaR is calculated for each risk factor based on the individual G & P calculated for each factor, Moreover, a weighted VaR is calculated in the manner described above but which gives a weight greater than the 30 most recent data points, The largest of the two VaRs is reported.

 

The Bank uses the VaR estimates to deliver a warning in case the statistically estimated losses in the trading portfolio exceed the prudent levels and, therefore, certain predetermined limits exist.

 

Limitations of the VaR model

 

When applying this calculation methodology no assumption is made about the probability distribution of changes in risk factors, simply use the changes observed historically to generate scenarios for the risk factors in which each of the positions will be valued, in portfolio.

 

It is necessary to define a valuation function fj (xi) for each instrument j, preferably the same one that it uses to calculate the market value and results of the daily position, This valuation function will be applied in each scenario to generate simulated prices of all the instruments in each scenario.

 

In addition, the VaR methodology must be interpreted considering the following limitations:

 

-

Changes in market rates and prices may not be independent and identically distributed random variables, nor may they have a normal distribution, In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;

 

-

The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in risk factors in the future, and any modification of the data may be inadequate, In particular, the use of historical data may fail to capture the risk of possible extreme and adverse market fluctuations regardless of the period of time used;

 

-

a 1-day time horizon may not fully capture those market risk positions that can not be liquidated or hedged in one day, It would not be possible to liquidate or cover all positions in a day;

 

-

VaR is calculated at the close of business, however trading positions may change substantially during the trading day;

 

-

The use of 99% confidence level does not take into account, nor does it make any statement about, the losses that may occur beyond this level of trust, and

 

-

The model as such VaR does not capture all the complex effects of the risk factors on the value of the positions or portfolios, and therefore, could underestimate the potential loss.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

The Bank did not exceeded for the 2021 and 2020 periods the VaR limits in relation to the 3 components that make up the trading portfolio: fixed income investments, variable income investments and investments in foreign currency.

 

The Bank performs daily back-testing and, in general, it is discovered that trading losses exceed the estimated VaR almost one in every 100 trading days, At the same time, a limit was established for the maximum VaR that is willing to accept on the trading portfolio, In both 2021 and 2020, the Bank has remained within the maximum limit established for the VaR, even in those instances in which the real VaR exceeded the estimate.

 

The high, low and average levels for each component and for each year were the following:

 

VAR	2021 MMUSD		2020 MMUSD
Consolidated:
High	4.66		12.82
Low	1.75		1.94
Average	2.81		4.45
Fixed income investments:
High	4.60		11.96
Low	1.64		1.50
Average	2.64		3.19
Variable income investments:
High	0.01		0.01
Low	-		-
Average	-		-
Foreign currency investments
High	3.21		6.47
Low	0.08		0.71
Average	0.08		2.85

 

Market risk – local and foreign financial management

 

The Bank’s financial management portfolio includes most of the Bank’s assets and non-trading liabilities, including the loan / loan portfolio, For these portfolios, investment and financing decisions are heavily influenced by the Bank’s commercial strategies.

 

The Bank uses a sensitivity analysis to measure the market risk of local and foreign currency (not included in the trading portfolio), The Bank performs a scenario simulation which will be calculated as the difference between the present value of the flows in the chosen scenario (curve with parallel movement of 100 bp in all its tranches) and its value in the base scenario (current market) , All positions in local currency indexed to inflation (UF) are adjusted by a sensitivity factor of 0,57, which represents a change in the rate curve at 57 basis points in real rates and 100 basis points in nominal rates, The same scenario is carried out for net foreign currency positions and interest rates in US dollars, The Bank has also established limits regarding the maximum loss that these types of movements in interest rates may have on capital and net financial income budgeted for the year.

 

To determine the consolidated limit, the foreign currency limit is added to the local currency limit for both the net financial loss limit and the capital and reserve loss limit, using the following formula:

 

Bound limit = square root of a2 + b2 + 2ab

a: limit in national currency.

b: limit in foreign currency.

Since it is assumed that the correlation is 0. 2ab = 0.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

Limitation of the sensitivity models

 

The most important assumption is the use of a change of 100 basis points in the yield curve (57 basis points for real rates), The Bank uses a change of 100 basis points given that sudden changes of this magnitude are considered realistic, The Global Risk Department of Santander Spain has also established comparable limits by country, in order to be able to compare, monitor and consolidate the market risk by country in a realistic and orderly manner.

 

In addition, the methodology of sensitivity simulations should be interpreted considering the following limitations:

 

-

The simulation of scenarios assumes that the volumes remain in the Bank’s Consolidated Statement of Financial Position and that they are always renewed at maturity, omitting the fact that certain considerations of credit risk and prepayments may affect the maturity of certain positions.

 

-

This model assumes an equal change in the entire performance curve of everything and does not take into account the different movements for different maturities.

 

-

The model does not take into account the sensitivity of volumes resulting from changes in interest rates.

 

-

The limits to the losses of budgeted financial income are calculated on the basis of expected financial income for the year that can not be obtained, which means that the actual percentage of financial income at risk could be greater than expected.

 

Market risk – Financial management portfolio – March 31, 2021 and December 31, 2020.

 

	2021			2020
	Effect on financial income	Effect on capital		Effect on financial income	Effect on capital
Financial management portfolio – local currency (MCh$)
Loss limit	32.865	84.864		100,000	329,275
High	16.349	83.761		66,504	302,263
Low	15.814	83.579		26,492	214,596
Average	16.081	83.670		45,380	255,070
Financial management portfolio – foreign currency (Th$US)
Loss limit	32.644	31.193		32	53
High	913	7.217		19	47
Low	691	6.981		2	12
Average	802	7.099		5	33
Financial management portgolio (MCh$)
Loss limit	32.865	84.864		100,000	329,275
High	16.699	77.563		67,584	286,436
Low	16.276	77.509		25,111	210,706
Average	16.488	77.536		46,044	246,292

 

To fulfill its functions, the CIR works directly with the Bank’s risk and control departments, whose joint objectives include:

 

-

evaluate those risks that, due to their size, could compromise the solvency of the Bank, or that present potentially significant operational or reputation risks;

-

ensure that the Bank is provided with the means, systems, structures and resources in accordance with the best practices that allow for the implementation of the strategy in risk management;

-

ensure the integration, control and management of all Bank risks;

-

execute the application throughout the Bank and its businesses of homogeneous risk principles, policies and metrics;

-

develop and implement a risk management model in the Bank, so that the risk exposure is properly integrated in the different decision-making processes;

-

identify risk concentrations and mitigation alternatives, monitor the macroeconomic and competitive environment, quantify sensitivities and the foreseeable impact of different scenarios on the positioning of risks; Y

-

manage the structural liquidity risks, interest rates and exchange rates, as well as the Bank’s own resources base.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

To comply with the aforementioned objectives, the Bank (Administration and ALCO) carries out several activities related to risk management, which include: calculating the risk exposures of the different portfolios and / or investments, considering mitigating factors (guarantees, netting , collaterals, etc,); calculate the probabilities of expected loss of each portfolio and / or investments; assign the loss factors to the new operations (rating and scoring); measure the risk values of the portfolios and / or investments according to different scenarios through historical simulations; establish limits to potential losses based on the different risks incurred; determine the possible impacts of structural risks in the Consolidated Statements of Results of the Bank; set the limits and alerts that guarantee the Bank’s liquidity; and identify and quantify operational risks by business lines and thus facilitate their mitigation through corrective actions.

 

The CDA is primarily responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks the Bank faces.

 

Credit risk

 

Credit risk is the risk that one of the parties to the financial instrument contract fails to comply with its contractual obligations due to insolvency or disability of natural or legal persons and causes a financial loss in the other party, For purposes of credit risk management, the Bank consolidates all the elements and components of credit risk exposure (eg risk of individual default by creditor, innate risk of a line of business or sector, and / or geographical risk).

 

Mitigation of credit risk for loans and accounts receivable

 

The Board of Directors has delegated responsibility for credit risk management to the Comprehensive Risk Committee (CIR) and the Bank’s risk departments whose roles are summarized as follows:

 

-

Formulation of credit policies, in consultation with the business units, covering the requirements of guarantee, credit evaluation, risk rating and presentation of reports, documents and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

 

-

Establish the structure of the authorization for the approval and renewal of credit applications, The Bank structures levels of credit risk by placing limits on the concentration of that risk in terms of individual debtors, groups of debtors, segments of industries and countries, The authorization limits are assigned to the respective officers of the business unit (commercial, consumption, PYMEs) to be monitored permanently by the Administration, In addition, these limits are reviewed periodically, The risk assessment teams at branch level interact regularly with clients, however for large operations, the risk teams of the parent company and even the CIR, work directly with clients in the evaluation of credit risks and preparation of credit risk, credit applications, Inclusively, Banco Santander España participates in the process of approving the most significant loans, for example to clients or economic groups with debt amounts greater than US $ 40 million.

 

-

Limit concentrations of exposure to customers, counterparts, in geographic areas, industries (for accounts receivable or credits), and by issuer, credit rating and liquidity (for investments).

 

-

Develop and maintain the Bank’s risk classification in order to classify the risks according to the degree of exposure to financial loss faced by the respective financial instruments and with the purpose of focusing the management or risk management specifically on the associated risks.

 

-

Review and evaluate credit risk The risk divisions of the Administration are largely independent of the commercial division of the bank and evaluate all credit risks in excess of the designated limits, prior to the approval of credits to customers or prior to the acquisition of specific investments, Credit renewals and revisions are subject to similar processes.

 

In the preparation of a credit request for a corporate client, the Bank verifies several parameters such as the debt service capacity (including, generally, projected cash flows), the client’s financial history and / or projections for the economic sector in which it operates, The risk division is closely involved in this process, All requests contain an analysis of the client’s strengths and weaknesses, a rating and a recommendation, The credit limits are not determined based on the outstanding balances of the clients, but on the direct and indirect credit risk of the financial group, For example, a limited company would be evaluated together with its subsidiaries and affiliates.

 

Consumer loans are evaluated and approved by their respective risk divisions (individuals, PYMEs) and the evaluation process is based on an evaluation system known as Garra (Banco Santander) and Syseva of Santander Banefe, both processes are decentralized, automated and they are based on a scoring system that includes the credit risk policies implemented by the Bank’s Board of Directors, The credit application process is based on the collection of information to determine the client’s financial situation and ability to pay, The parameters that are used to assess the credit risk of the applicant include several variables such as: income levels, duration of current employment, indebtedness, reports of credit agencies.

  

 

NOTE 34

RISK MANAGEMENT, continued

 

Mitigation of credit risk of other financial assets (investments, derivatives, commitments)

 

As part of the process of acquiring financial investments and financial instruments, the Bank considers the probability of uncollectibility of issuers or counterparties using internal and external evaluations such as independent risk evaluators of the Bank, In addition, the Bank is governed by a strict and conservative policy which ensures that the issuers of its investments and counterparties in transactions of derivative instruments are of the highest reputation.

 

In addition, the Bank operates with various instruments that, although they involve exposure to credit risk, are not reflected in the Consolidated Statement of Financial Position, such as: guarantees and bonds, documentary letters of credit, guarantee slips and commitments to grant loans.

 

The guarantees and bonds represent an irrevocable payment obligation, In the event that a guaranteed client does not fulfill its obligations with third parties who are liable to the Bank, the latter will make the corresponding payments, so that these transactions represent the same exposure to credit risk as a common loan.

 

Documentary letters of credit are commitments documented by the Bank on behalf of the client that are guaranteed by the merchandise shipped to which they are related and, therefore, have a lower risk than direct indebtedness, Guarantee slips correspond to contingent commitments that are made effective only if the client does not comply with the performance of works agreed with a third party, guaranteed by them.

 

When it comes to commitments to grant credit, the Bank is potentially exposed to losses in an amount equivalent to the unused total of the commitment, However, the probable amount of loss is less than the unused total of the commitment, The Bank monitors the maturity of credit lines because generally long-term commitments have a higher credit risk than short-term commitments.

 

Maximun credit risk exposure

 

For financial assets recognized in the Consolidated Statement of Financial Position, exposure to credit risk is equal to their book value, For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the Bank would have to pay if the guarantee were executed.

 

Below is the distribution by financial asset and off-balance a sheet commitments of the Bank’s maximum exposure to credit risk as March 31, 2021 and December 31, 2020, without deduction of collateral, security interests or credit improvements recived:

 

		As of March 31, 2021		As of December 31, 2020
		Amount of exposure		Amount of exposure
	Note	MCh$		MCh$
Deposits in banks	5	2,786,451		2,137,891
Cash ítems in process of collection	5	347,355		452,963
Trading investments	6	111,248		133,718
Investments under resale agreements		-		-
Financial derivative contracts	7	6,720,138		9,032,085
Loans and accounts receivable from customers and interbank loans, net	8 and 9	33,519,454		33,432,349
Available for sale investments	10	7,372,106		7,162,542
Off-balance commitments:
Letters of credit issued	20	229,245		165,119
Foreign letters ofcredit confirmed	20	73,217		82,779
Guarantees	20	1,158,440		1,090,643
Available credit lines	20	8,520,371		8,391,414
Personal guarantees	20	438,680		441,508
Other irrevocable credit commitments	20	411,339		406,234
Total		61,688,044		62,929,245

  

 

NOTE 34

RISK MANAGEMENT, continued

 

Regarding the quality of the credits, these are classified in accordance with what is described in the compendium of regulations of the CMF as of March 31, 2021 and December 31, 2020:

 

Category	As of March 31, 2020								As of December 31, 2020
Comercial Portfolio	Individual		Percentage		Allowance		Percentage		Individual		Percentage		Allowance		Percentage
	MCh$		%		MCh$		%		MCh$		%		MCh$		%
A1	20,328		0.06		6		-		35,166		0.10		11		-
A2	711,841		2.06		468		0.05		708,645		2.06		466		0.05
A3	1,773,752		5.14		2,604		0.26		1,971,814		5.73		2,932		0.30
A4	2,698,744		7.82		16,843		1.71		2,452,158		7.13		17,261		1.77
A5	2,666,515		7.73		33,966		3.44		2,824,129		8.21		35,107		3.59
A6	1,884,908		5.46		39,015		3.95		1,953,513		5.68		41,468		4.25
B1	790,197		2.29		25,351		2.57		715,349		2.08		21,420		2.19
B2	174,451		0.51		7,329		0.74		161,472		0.47		9,326		0.95
B3	70,365		0.20		3,182		0.32		66,379		0.19		3,331		0.34
B4	118,036		0.34		23,174		2.35		122,678		0.36		19,284		1.97
C1	176,273		0.51		3,525		0.36		168,035		0.49		3,361		0.34
C2	89,622		0.26		8,962		0.91		81,772		0.24		8,177		0.84
C3	42,429		0.12		10,607		1.07		56,928		0.17		14,232		1.46
C4	54,250		0.16		21,700		2.20		50,403		0.15		20,161		2.06
C5	53,806		0.16		44,974		4.55		40,803		0.12		26,522		2.72
C6	132,713		0.38		120,011		12.15		136,424		0.40		134,590		13.78
Subtotal	11,458,230		33.21		361,717		36.63		11,545,668		33.57		357,649		36.61
	Group		Percentage		Allowance		Percentage		Group		Percentage		Allowance		Percentage
	MCh$		%		MCh$		%		MCh$		%		MCh$		%
Commercial
Normal Portfolio	5,143,969		14.91		88,289		8.94		5,077,553		14.76		78,137		8.00
Impaired portfolio	396,583		1.15		214,894		21.75		414,315		1.20		210,903		21.59
Subtotal	5,540,552		16.06		303,182		30.69		5,491,868		15.96		289,040		29.59
Mortgage
Normal Portfolio	12,261,850		35.54		23,690		2.40		12,004,931		34.91		23,674		2.42
Impaired portfolio	414,224		1.20		43,286		4.38		406,894		1.18		37,607		3.85
Subtotal	12,676,074		36.74		66,976		6.78		12,411,825		36.09		61,281		6.27
Mortgage
Normal Portfolio	4,612,002		13.37		95,211		9.64		4,697,166		13.66		95,567		9.78
Impaired portfolio	215,215		0.62		160,556		16.26		243,713		0.72		173,274		17.75
Subtotal	4,827,217		13.99		255,767		25.90		4,940,879		14.38		268,841		27.53
Total	34,502,073		100.00		987,642		100.00		34,390,240		100.00		976,811		100.00

 

 

NOTE 34

RISK MANAGEMENT, continued

 

As of March 31, 2021 and December 31, 2020, the Bank estimates that the credit quality of its other financial assets and financial liabilities is not significant for disclosure.

 

Regarding the individual evaluation portfolio, the different categories correspond to:

 

-

Categories A or Portfolio in Normal Compliance, is one that is made up of debtors whose ability to pay them it allows compliance with its financial obligations and commitments, and that according to the evaluation of its economic-financial situation, it is not seen that this condition changes in the short term.

 

-

Categories B or Substandard Portfolio, is one that contemplates debtors with financial difficulties or significant worsening of their ability to pay and over which there are reasonable doubts about the total reimbursement of principal and interest in the terms agreed upon, showing a low slack to meet with your financial obligations in the short term.

 

-

Categories C or Portfolio in Default, is made up of those debtors whose recovery is considered remote, since they show a deteriorated or no capacity to pay.

 

As for the group evaluation portfolios, a joint evaluation of the operations that compose it is carried out.

 

Refer to Note 28 for details of impaired Bank loans and their respective provisions. Also refer to the Note 17 for a breakdown of the maturities of the Bank’s financial assets.

 

Exposure to credit risk in derivative contracts with abroad

 

As of March 31, 2021, the Bank’s foreign exposure, including the counterparty risk in the derivative portfolio, was USD 4,039.29 million or 2,46% of the assets, In the table below, the exposure to derivative instruments is calculated using the equivalent credit risk, which is equal to the net value of the replacement plus the maximum potential value, considering the collateral in cash, which mitigates the exposure.

Below, additional details are included regarding our exposure to those countries that have a rating of 1 and that correspond to the largest exposures, The following is the exposure as of March 31, 2021, considering the fair value of the derivative instruments.

 

Country	Clasification	Derivative instrument
		(adjusted to market)	Deposits	Loans	Financial investments	Total exposure
		MM USD	M USD	M USD	M USD	M USD
China	2	-	-	6.13	-	6.13
Colombia	2	0.32	-	0.29	-	1.07
Italy	2	-	1.36	0.12	-	1.48
Mexico	2	.3.92	0.03	-	-	9,82
Panama	2	1.79	-	-	-	3.96
Peru	2	1.51	-	0.02	-	1.32
Portugal	2	-	-	0.20	-	0.20
Total		7.54	1.39	6.76	-	23.98

 

Our exposure to Spain within the group is as follows:

 

Counterpart	Country	Clasification	Derivative intruments (adjusted to market) M USD	Deposits M USD	Loans M USD	Financial investments M USD	Total exposure M USD
Banco Santander España (*)	Spain	1	566,07	2,633.63	0.24	-	376.67

(*) We include our exposure to Santander Hong Kong, BSCH Spain and Santander NY as exposure to Spain.

  

 

NOTE 34

RISK MANAGEMENT, continued

 

Impairment of other financial instruments

As of March 31, 2021 and December 31, 2020, the Bank did not have significant impairments in its financial assets other than credits and/or accounts receivable.

 

Security interests and credit improvements

 

The maximum exposure to credit risk, in some cases, is reduced by guarantees, credit enhancements and other actions that mitigate the Bank’s exposure, Based on this, the constitution of guarantees is a necessary but not sufficient instrument in the granting of a loan; therefore, the acceptance of risk by the Bank requires the verification of other variables or parameters such as the ability to pay or generate resources to mitigate the risk incurred.

 

The procedures for the management and valuation of guarantees are included in the internal risk management policy, These policies establish the basic principles for the management of credit risk, which includes the management of guarantees received in transactions with customers, In this sense, the risk management model includes assessing the existence of appropriate and sufficient guarantees that allow the recovery of the loan to be carried out when the debtor’s circumstances do not allow it to meet its obligations.

 

The procedures used for the valuation of the guarantees are in accordance with the best practices of the market, which involve the use of valuations in real estate guarantees, market price in stock values, value of the shares in an investment fund, etc, All the collateral received must be properly instrumented and registered in the corresponding registry, as well as having the approval of the Bank’s legal divisions.

 

The Bank also has rating tools that allow ordering the credit quality of operations or clients, In order to study how this probability varies, the Bank has historical databases that store the information generated internally, The qualification tools vary according to the segment of the analyzed client (commercial, consumption, SMEs, etc,).

 

The following is a breakdown of impaired and non-impaired financial assets that have collateral, collateral or credit enhancements associated with the Bank as of March 31, 2021 and December 31, 2020:

 

	As of March 31, 2021		As of December 31, 2020
	MCh$		MCh$
Non-impaired financial assets:
Properties/mortgages	25,893,054		25,424,161
Investments and others	2,133,554		2,306,062
Impaired financial assets:
Properties/mortgages	1,555,166		1,548,568
Investments and others	67,543		65,668
Total	29,739,317		29,344,459

  

 

NOTE 34

RISK MANAGEMENT, continued

 

Liquidity risk

Liquidity risk is the risk that the Bank has difficulties in complying with the obligations associated with its financial obligations.

 

Liquidity risk management

 

The Bank is exposed daily to requirements of cash funds from several banking transactions such as current account drafts, payments of term deposits, guarantee payments, disbursements of derivative operations, etc, As is inherent in banking activity, the Bank does not hold funds in cash to cover the balance of those positions, since experience shows that only a minimum level of these funds will be withdrawn, which can be foreseen with a high degree of certainty.

 

The Bank’s approach to liquidity management is to ensure, to the extent possible, that it always has sufficient liquidity to meet its obligations at maturity, under normal circumstances and stress conditions, without incurring unacceptable losses or risking risk, of damage to the reputation of the Bank, The Board sets limits on a minimum portion of funds to be made available to meet such payments and on a minimum level of inter-bank operations and other lending facilities that should be available to cover drafts at unexpected levels of demand, which is reviewed periodically, On the other hand, the Bank must comply with regulatory limits dictated by the CMF for the mismatches of terms.

 

These limits affect the mismatches between future income and expenditure flows of the Bank considered individually and are the following:

 

i, Mismatches of up to 30 days for all currencies, up to once the basic capital;

ii, mismatches of up to 30 days for foreign currencies, up to once the basic capital; and

iii, mismatches of up to 90 days for all currencies, twice the basic capital.

 

The treasury department receives information from all the business units on the liquidity profile of its financial assets and liabilities and details of other projected cash flows derived from future businesses, According to this information, treasury maintains a portfolio of liquid assets in the short term, composed largely of liquid investments, loans and advances to other banks, to ensure that the Bank maintains sufficient liquidity, The liquidity needs of the business units are met through short-term transfers from treasury to cover any short-term fluctuation and long-term financing to address all structural liquidity requirements.

 

The Bank monitors its liquidity position on a daily basis, determining the future flows of its expenses and revenues, In addition, stress tests are carried out at the end of each month, for which a variety of scenarios are used, covering both normal market conditions and fluctuation conditions, The liquidity policy and procedures are subject to review and approval by the Bank’s Board of Directors, Periodic reports are generated detailing the liquidity position of the Bank and its affiliates, including any exceptions and corrective measures adopted, which are regularly reviewed by the ALCO.

 

The Bank is based on client (retail) and institutional deposits, bonds with banks, debt instruments and time deposits as its main sources of financing, Although most of the obligations with banks, debt instruments and time deposits have maturities of more than one year, customer and retail deposits tend to have shorter maturities and a large proportion of them are payable within 90 days, days, The short-term nature of these deposits increases the liquidity risk of the Bank and therefore the Bank actively manages this risk by constantly monitoring market trends and price management.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

Exposure to liquidity risk

 

One of the key measures used by the Bank to manage liquidity risk is the proportion of net liquid assets to customer deposits, For this purpose, the net liquid assets must include cash / cash, cash equivalents and debt investments for which there is an active and liquid market minus the deposits of the banks, fixed income securities issued, loans and other commitments maturing in next month, A similar measure, but not identical, is used as a calculation to measure the Bank’s compliance with the liquidity limit established by the CMF, where the Bank determines the mismatch between its rights and obligations according to maturity according to the estimated performance.

 

The proportions of the mismatches at 30 days in relation to capital and 90 days in relation to 2 times the capital are shown in the following table:

 

	As of March 31,		As of December 31,
	2021		2020
	%		%
30 days	6		30
30 days foreign	-		15
90 days	2		32

 

Following is a breakdown, by contractual maturities, of the balances of the Bank’s assets and liabilities as of March 31, 2021 and December 31, 2020, considering also those unrecognized commitments:

 

As of March 31, 2021	Demand	Up to 1 month	Between 1 and 3 months	Between 3 and 12 months	Between 1 and 3 years	Between 3 and 5 years	More than 5 years	Total
	MM$	MM$	MM$	MM$	MM$	MM$	MM$	MM$
Asset expiration (Note 20)	4,648,459	3,040,132	1,881,299	3,750,364	5,380,019	6,650,445	27,809,605	53,160,323
Expiration of liabilities (Note 20)	(18,701,675)	(6,606,685)	(2,875,864)	(4,694,031)	(3,483,938)	(7,677,285)	(5,397,918)	(49,437,396)
Net expiration	(14,053,216)	(3,566,553)	(994,565)	(943,667)	1,896,081	(1,026,840)	22,411,687	3,722,927
Unrecognized loan / credit commitments
Guarantees and bonds	-	(363,302)	(53,986)	(16,822)	(4,570)	-	-	(438,680)
Letters of credit from abroad confirmed	-	(73,105)	-	(112)	-	-	-	(73,217)
Letters of documentary credits issued	-	(227,048)	(1,067)	(1,130)	-	-	-	(229,245)
Guarantee	-	(437,402)	(184,359)	(207,345)	(298,274)	(25,249)	(5,812)	(1,158,440)
Net maturity, including commitments	(14,053,216)	(4,667,409)	(1,233,976)	(1,169,077)	1,593,237	(1,052,089)	22,405,875	1,823,345

 

As of December 31, 2019	A la vista	Hasta 1 mes	Entre 1 y 3 meses	Entre 3 y 12 meses	Entre 1 y 3 años	Entre 3 y 5 años	Más de 5 años	Total
	MM$	MM$	MM$	MM$	MM$	MM$	MM$	MM$
Asset expiration (Note 20)	4,034,824	2,639,165	1,848,268	4,655,603	5,589,111	4,397,802	31,437,352	54,602,125
Expiration of liabilities (Note 20)	(15,867,957)	(7,821,474)	(4,029,845)	(3,589,747)	(4,714,324)	(8,142,738)	(6,817,582)	(50,983,667)
Net expiration	(11,833,133)	(5,182,309)	(2,181,577)	1,065,856	874,787	(3,744,936)	24,619,770	3,618,458
Unrecognized loan / credit commitments
Guarantees and bonds	-	(33,588)	(29,958)	(367,164)	(10,798)	-	-	(441,508)
Letters of credit from abroad confirmed	-	(18,247)	(48,056)	(16,163)	(313)	-	-	(82,779)
Letters of documentary credits issued	-	(42,089)	(83,764)	(36,201)	(3,065)	-	-	(165,119)
Guarantee	-	(114,653)	(181,399)	(437,835)	(303,165)	(46,971)	(6,620)	(1,090,643)
Net maturity, including commitments	(11,833,133)	(5,390,886)	(2,524,754)	208,493	557,446	(3,791,907)	24,613,150	1,838,409

 

The above tables show the undiscounted cash flows of the Bank’s financial assets and liabilities on the estimated maturity basis. The expected cash flows of the Bank from these instruments can vary considerably compared to this analysis. For example, demand deposits are expected to remain stable or have an increasing trend, and unrecognized loan commitments are not expected to be executed all that have been arranged, In addition, the above breakdown excludes available lines of credit, since they lack contractual defined maturities.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

Operating risk

 

Operational risk is the risk of direct or indirect losses arising from a wide variety of causes related to the Bank’s processes, personnel, technology and infrastructure, and external factors that are not credit, market or liquidity, such as those related to legal or regulatory requirements, Operating risks arise from all Bank operations.

 

The objective of the Bank is the management of operational risk in order to mitigate economic losses and damages to the Bank’s reputation with a flexible structure of internal control.

 

The Bank’s Administration has the primary responsibility for the development and application of controls to deal with operational risks, This responsibility is supported by the overall development of the Bank’s standards for operational risk management in the following areas:

 

-

Requirements for the proper segregation of functions, including the independent authorization of operations

-

Requirements for reconciliation and supervision of transactions

-

Compliance with applicable legal and regulatory requirements

-

Documentation of controls and procedures

-

Requirements for the periodic evaluation of the applicable operational risks, and the adequacy of the controls and procedures to deal with the identified risks

-

Requirements for the disclosure of operating losses and the proposed corrective measures

-

Development of contingency plans

-

Training and professional development / training

-

Establishment of business ethics standards

-

Reduction or mitigation of risks, including contracting insurance policies if they are effective.

 

Compliance with Bank regulations is supported by a program of periodic reviews carried out by the Bank’s internal audit and whose examination results are presented internally to the management of the business unit examined and to the Directors and Audit Committee.

 

The Bank operates mainly in Chile, therefore most of its financial instruments are concentrated in that country. Refer to Note No. 09 of the Consolidated Financial Statements for a detail of the concentration by industry of the Bank’s credits and accounts receivable.

 

Capital risk

 

The Group defines capital risk as the risk that the Group or any of its companies may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

 

The objectives in this connection include most notably:

●

To meet the internal capital and capital adequacy targets.

●

To meet the regulatory requirements.

●

To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.)

●

To support the growth of the businesses and any strategic opportunities that may arise.

 

The Group has a capital adequacy position that surpasses the levels required by regulations,

 

Capital management seeks to optimize the creation of value in the Bank and in its business segments. The Bank continually assesses its risk-return ratios through its basic capital, effective equity, economic capital, and return on equity. With regard to capital adequacy, the Banks carry out their internal process based on the CMF (ex SBIF) standards that are based on the Basel Capital Accord (Basel I) and as of December 1, 2020 the CMF will based on Basel III. Economic capital is the capital required to bear all the risk of commercial activity with a certain level of solvency.

 

Capital is managed according to the risk environment, the economic performance of Chile and the business cycle, Board may modify our current equity policies to address changes in the mentioned risk environment.

  

 

NOTE 34

RISK MANAGEMENT, continued

 

Minimum equity

 

Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately MCh$23,516 or U.S.$ 32,7 million as of March 31, 2021) of paid-in capital and reserves, calculated in accordance with CMF.

 

Equity requirement

 

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 (“basic capital”) of at least 3% of total assets, net of required loan loss allowances, Regulatory capital and basic capital are calculated based on the consolidated financial statements prepared in accordance with the Compendium of Accounting Standards issued by the CMF, 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 March 31, 2021, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 15.44% and our core capital ratio was 6.73%.

 

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 basic capital;

●

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 basic capital; and

●

its voluntary allowances for loan losses for an amount of up to 1,25% of risk weighted-assets.

 

On August 21, 2020, circular No. 2265 was published indicating the new treatment, where the amounts of the credits that are guaranteed by the Chilean Treasury are incorporated into category 2 of the risk-weighted asset classification. , CORFO and FOGAPE, which consequently went from having a credit risk weight of 100% to 10%.

 

Since December 1, the regulatory capital definition has changed and is defined as follows:

 

●

Paid capital of the bank for ordinary shares subscribed and paid;

●

Premium paid for the instruments included in this capital component;

●

Reserves, both non-profit and non-profit, due to the depreciation of bonds without a fixed maturity term and due to the expiration of bonds without a fixed maturity term;

●

Items of “other accumulated comprehensive income”;

●

Retained earnings from previous years, profit (loss) for the year, net of provisions for minimum dividends, appreciation of bonds with no fixed maturity term and payment of interest and / or dividends of issued regulatory capital financial instruments;

●

Non-controlling interest as indicated in the Compendium of Accounting Standards (CNC).

 

BASILEA III adoption in Chile

 

The new General Banking Law (updated through Law 21,130) defines general guidelines to establish a capital adequacy system in line with the international standards of Basel III, giving the CMF the power to dictate the framework of capital in a prudent manner. In particular, the CMF is empowered, with the prior favorable agreement of the Board of the Central Bank of Chile (BCCh), to define by regulation, the new methodologies for calculating assets weighted by credit, market and operational risk; the conditions of issuance of hybrid instruments AT1, and the determination and capital charges for banks of local systemic importance. It also introduced conservation and counter-cyclical buffers and expanded the CMF’s powers to make prudential discounts to regulatory capital and require additional measures, including higher capital, from banks that present deficiencies in the supervisory evaluation process (pillar 2). The implementation of Basel III makes it possible to focus risk management towards a more comprehensive vision of them, with a focus on capital adequacy.

 

In accordance with the foregoing, last December the CMF completed the process of issuing the necessary regulations for the implementation in Chile of the capital framework of the Basel III standards. But in the current context of a coronavirus pandemic, the CMF, in coordination with the Central Bank of Chile and in line with the measures adopted by regulators at the international level, decided to postpone the implementation of the APR calculation for one year and maintain it temporarily the general regulatory framework in force until November 30, 2021.

 

 

NOTE 34

RISK MANAGEMENT, continued

 

Additionally, it was decided to advance in the transitory credit risk standard, a capital mitigation mechanism to facilitate the development of the debt agreement market, and that complements a similar treatment of state guarantees already granted by the CMF this year. In the case of Pillar 3, implementation was postponed until 2023.

 

The Bank, for its part, is already working on the implementation of the regulations through a multidisciplinary group, which are carrying out the necessary exercises and required developments, including the implementation of the files designed by the regulator for this purpose, taking into account consideration of the implementation schedule.

 

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

 

					Ratio
	As of March 31,		As of December 31,		As of March 31,		As of December 31,
	2021		2020		2021		2020
	MCh$		MCh$		%		%
Basic capital / Common equity level 1	3,651,387		3,652,599		6.73		6.69
Regulatory capital	5,168,252		5,143,843		15.44		15.37

 

Concentration of risk

 

The Bank operates mainly in Chile, so most of its financial instruments are concentrated in that country, Refer to Note 9 of the financial statements for a breakdown of the concentration by industry of the Bank’s receivables and accounts receivable.

  

 

NOTE 35

NON-CURRENT ASSETS HELD FOR SALE

 

Banco Santander has embarked on an internal process of developing its acquisition network, thereby abandoning investments in the companies that provided such services. Therefore, senior management has engaged in a buyer search plan for such shareholdings.

 

As required by IFRS 5, the Bank has presented the non-current asset classified as held for sale by isolating it from the rest of the investments in associates, in the same way it has presented the income associated with said investments as non-current results in a comparative way.

 

Given the facts and circumstances arising from the social contingency in Chile and the global pandemic due to Covid-19 (situations beyond the Bank’s control), 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 said assets and to its acquisition network development plan, evidenced by the recent creation of a payment card operating company and the active search for potential buyers.

 

The following investments in associates were classified to non-current assets held for sale:

 

		As of March 31, 2021		As of December 31, 2020
	Participation	Assets	Result	Assets	Result
	%	MCh$	MCh$	MCh$	MCh$
Transbank	25.00	19,093	-	19,093	-
Nexus	-	-	-	-	-
Redbanc	33.43	2,943	-	2,943	-
Totales		22,036	-	22,036	-

(*)	By public deed dated January 22, 2020, the sale of 79,577 shares that Banco Santander Chile held with Nexus S.A. was materialized with Banco Itau-Corpbanca, thus completing the total sale of the stake that the Bank held in Nexus S.A.

  

 

NOTE 36

SUBSEQUENT EVENTS

 

During April 2021, in order to improve the prediction of customer behavior and maintain high monitoring standards, the Bank implemented a calibration of its credit risk group provision models. The effects of this calibration will imply an increase of provisions for an amount less than 1% of the Bank’s consolidated equity.

 

On April 22, 2021, the Ordinary Shareholders’ Meeting of Transbank S.A. was held. where the modifications to the bylaws proposed by the Board of Directors were approved, which considered the increase of the company’s capital stock.

 

In view of the persistence of the Covid-19 pandemic, with the consequent effects on the normal development of economic activities, on April 23, 2021, the CMF instructed to extend until July 31, 2021, the exceptional treatment of group and individual credit risk provisions.

 

There are no other subsequent events that occurred between April 1, 2021 and the date of issuance of these Interim Consolidated Financial Statements (April 26, 2021) to disclose.

 

 

 

JONATHAN COVARRUBIAS H. Chief Accounting Officer

MIGUEL MATA HUERTA Chief Executive Officer