ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

3 I. BANCOESTADO ALWAYS WITH ITS CUSTOMERS - YESTERDAY, TODAY AND TOMORROW 4 Chairman’s statement 8 Financial summary 10 Corporate Governance 10 BancoEstado’s Board of Directors 11 BancoEstado’s management and subsidiaries 12 Audit committee 14 Organization Chart 15 Prizes and awards 2010 16 Key milestones 2010 CONTENTS 20 A bank with 155 years of history 24 Evolution of the bank in figures, 1990-2010

27 II. A BANK AT THE SERVICE OF CHILEANS 30 BancoEstado’s Vision and mission 31 Strategic plan 2011-2014 35 Transformation projects

37 III. SALES MANAGEMENT: BANCOESTADO IN CHILEAN’S BANKARIZATION 38 BancoEstado before the banking industry: results 2010 40 Trends and forecasts 41 Corporate management 45 Marketing and communications 46 Divisions management

63 IV. CHANNEL MANAGEMENT: THE MOST PROMINENT BANK IN CHILE

71 V. FINANCIAL MANAGEMENT 72 Financial management 74 Global Presence

75 VI. RISK MANAGEMENT

79 VII. HUMAN RESOURCES MANAGEMENT 80 Training and development

81 VIII. SUBSIDIARIES’ MANAGEMENT: COMPREHENSIVE CONCERN FOR OUR CUSTOMERS

85 IX. CONSOLIDATED FINANCIAL STATEMENTS

Attached to this report you will find a compact disc containing the financial statements of BancoEstado and its subsidiaries, the document “management’s discussion and analysis of results of operations and financial condition” and digital texts. I. BANCOESTADO ALWAYS WITH ITS CUSTOMERS YESTERDAY, TODAY AND TOMORROW ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Chairman’s Statement

During the financial year 2010, BancoEstado made We are moving forward in this great challenge. - with more than 7.5 million customers with savings and the path we are following, as reflected by the progress and took further steps aiming at supporting Thus, the bank is increasingly deepening its strategic accounts, representing over 84% of them and their awards and distinctions the bank and its subsidiaries our customers in a difficult year for the country and its planning and the execution of major projects balances in the financial sector. This is a crucial area, have received during 2010, in addition to the ones people. Thus, we achieve significant results in business impacting the retail and wholesale banking. It’s a because we are giving millions of Chileans financial obtained in previous years. and financial management, and we can continue dream aiming at changing the relationship with our support so they can have savings mechanisms. Thus, developing our institution as a universal bank serving customers, who are most of them Chileans. customers may access to home ownership, to pay Seeking to improve the information provided to our Chile and Chileans, throughout the country. for their child’s education and can have a better various audiences, this document incorporates for I can state with satisfaction that during 2010 we living standard. the first time in the history of the bank the document Most Chileans think that 2010, the Bicentennial year, moved forward in the strategic goal set by the new “Management’s Discussion and Analysis of Results of was difficult for people, businesses and institutions. administration of BancoEstado, in which I have the In parallel, we made progress in optimizing our Operations and Financial Condition,” with specialized Faced with the earthquake of February 27, the bank privilege to participate. In fact, we have the largest resources. The efficiency ratio achieved by the information to bondholders that we hope to be useful played a significant role supporting customers, and customer service network in the country and we are bank in 2010 is the best of recent years (58%). It is for investors who need to learn even more on the helping to successfully address the emergency and present in almost all the communes of the territory, measured by the ratio of current expenditures and indicators associated with our management. the reconstruction. covered through 344 offices, 84 ServiEstado service gross operating income. While this development is centers and over 4,500 CajaVecina points. With an important step, the bank’s decision is to continue I want to finish this statement congratulating the The earthquake tested BancoEstado’s great strength, the latter we have built an extensive network that improving in this area in the coming years. nearly 12,000 workers of BancoEstado and its which in 2010 reached 155 years of history. In fact, allows us to deliver financial services in many small subsidiaries for the effort and commitment shown many customers were affected by the disaster: more and remote towns. Thus, people can make their A major milestone this year was to seek out long-term to address the emergency during this financial year, than 26,000 microentrepreneurs, over 5,000 small transactions without moving to other cities, saving financing in the international market through a U.S. $ without neglecting the fulfillment of our mission. I businesses and 44 thousand people submitted claims considerable time and money. 500 million bond placed in the United States, at the also want to give our appreciation to the Government for damages to their properties. About 12% of best possible rate reached by a Latin American financial and its authorities which have given us their continued the bank’s portfolio is located in the most affected Today, about 2.9 million people use every day their institution. These funds are intended to support support. And especially to our customers who are regions. Quickly, and despite our own damage -60 CuentaRUT accounts, an easy access debit account entrepreneurship and economic growth in the country, entrusting their savings and projects to the bank, branches of different sizes were damaged and 220 that allowed spreading payment methods in the as well as the development needs of our institution. reaffirming thus the mission we’ve set: efficiently staff had major damages in their homes- we stood up less-bankarized segments. More than 2 million bankarize every Chilean. to face adversity with them. people receive their monthly salaries, pensions and s per all this activity, at the end of 2010, BancoEstado scholarships through BancoEstado. Nearly 2 million and its subsidiaries reached a 14.8% profit before Overcoming these difficulties, we intended to customers are insured with us. About 800 thousand tax on its equity, higher than the U.S.$292 million reaffirm the path we have set of developing a high customers choose the bank’s electronic checkbook. figure reached in 2009. This was achieved while impact business management. This is a path with More than half a million Chileans have bought their maintaining their loans in the highest level historically a strong social emphasis, focused in bankarizing properties through BancoEstado. Over 400,000 micro achieved by the bank, with limited risks and reaching Sincerely, every Chilean. We want to accomplish this mission and small entrepreneurs develop their businesses with as well an improvement in long term international risk Segismundo Schulin-Zeuthen effectively, doing things focused on our customers, our support. classification. Chairman fulfilling tasks and processes faster, at lower costs and with better results in order to provide a better It is important to underline the strength of one of our We managed to consolidate cross-recognition of our customer service. seals - maintaining our market leadership in savings customers and society to the steps we are taking

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Financial Summary

In 2010 BancoEstado fully accomplished the goals On the other hand, after the 27 February earthquake, improved by almost 1 percentage point over 2009, CONSOLIDATED CORPORATE DATA - BANCOESTADO AND ITS SUBSIDIARIES (a) (US$ million) established, in a scenario of economic recovery that the bank took actions to help alleviate the damage reaching 58%. was affected by the serious consequences of the suffered by customers. Indicators 2006 2007 2008 2009 2010 earthquake that struck the country in late February. The impact on results of provisions and write-offs In terms of financial results, BancoEstado and its expenditure, net of written-down loan recoveries, Earnings before tax 365 292 421 230 296 From a business perspective, the bank aimed at subsidiaries reached a U.S. $ 296,2 million surplus decreased compared to the previous year, representing Core capital 1,431 1,491 1,501 2,039 1,990 retaining a significant fraction of the market share before tax, which in real terms is 28.9% higher than 0.96% of total loans of the bank as of December effective networth 2,218 2,168 2,233 2,824 3,003 achieved in 2009, which reached 16.1%. The goal in the previous year. In turn, profitability reached 2010; a figure that appears favourable compared Total loans 22,051 19,942 20,164 24,251 24,393 was accomplished showing a loans performance 14.8%, higher than in 2009, reflecting basically to the 1,26% appearing in the rest of the financial Total consolidated assets 35,583 33,941 33,191 36,980 40,174 that, as expected, was lower than the one of other the improvement in revenues’ performance and system. This can be explained by a moderate increase Earnings before tax/ total assets (%) 1.03 0.86 1.27 0.62 0.74 banks, but allowed to keep much of the credit level the reduction of expenditure on risk in a stronger in provisions associated with the risk of customers, Earnings before tax/capital and reserves (%) 25.5 21.51 28.01 11.2 14.8 reached during the financial crisis and even reach an economic period. punishment control and higher recoveries. Efficiency ratio (b) 60.8 60.97 57.7 58.9 58.0 increase. BancoEstado’s total loans expanded 0.6% Provisions over loans ratio (%) 1.43 1.63 2.69 2.75 2.92 in real terms with a lower dynamism in companies In 2010, efficiency (measured as the ratio between During this period, BancoEstado kept the best risk Core capital/total eligible assets (%) (c) 3.97 3.87 4.41 5.34 4.62 loans (0.4%) than personal loans (0.8%). administrative expenses and gross operating income) rating in Latin America (according to Standard & Basel ratio (%) (d) 11.10 10.78 10.91 12.36 12.14 Poor’s and Moody’s), in accordance with the strong Branches 313 327 342 344 344 CajaVecina and ServiEstado 326 1,043 2,045 3,406 4,648 rating assigned to the Republic of Chile. Automated Services 2,204 2,320 2,663 2,900 2,995 Total annual transactions (million) 280 302 360 447 581 PROFITABILITY A major milestone during 2010 was the issuance of a (Profit before taxes / capital and reserves,%) U.S. $ 500 million bond in the international market, achieving very good rates. (a) Since 2008 Financial Statements are issued under IFRS regulation. · BancoEstados results increased 28.9% in 2010, as its ROE. (b) Administrative expenses over gross margin plus monetary · Efficiency improves, following previous years’ trend. adjustment. · Provisions ratio over total Loans is stabilizing after the increased suffered under financial 30% (c) Legal minimum 3%. crisis of 2008-2009. (d) Legal minimum 8%. (e) ATMs, cash dispensers and drop boxes. 24.4% 25% Source: SBIF and BancoEstado

20%

14.8% 15% 2010 INTERNATIONAL RISK RATING FOR BANCOESTADO

10% Company Short Term (1) Long Term (2) Forecasts · In 2010 BancoEstado raised its long term credit rating (Moody’s). ·In 2010 BancoEstado kept the best 5% Moody´s (3) P1 Aa3 Stable risk rating in Latin America. Standard & Poor´s (4) A1 A+ Positive BancoEstado 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 System Non-consolidated figures until 2007 (1) Foreign currency debt, equal or under one year. Source: SBIF and BancoEstado (2) Foreign currency debt, over one year. (3) In June 2010 Moody’s raised long term risk rating and forecasts. (4) In December 2010 S&P confirmed risk ratings and raised forecasts. Source: Moody’s and Standard & Poor’s.

· BancoEstado’s profitability exceeded the system’s average until 2008. · Capitalization and counter-cycle policy affected it in 2009. · I n 2010 BancoEstado’s profitability begun its recovery, and it’s expected to be back at the system’s average in the coming years.

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Gabriel Tomic Juan Carlos Méndez Pablo Silva Ricardo Moreno Salvador Valdés Jorge Rodríguez Segismundo Schulin-Zeuthen Andrés Medina Pablo Piñera Roberto Palumbo

Corporate Governance BancoEstado Management And Subsidiaries

BANCOESTADO’S and oversight the bank, regularly reviewing the In April Mr. José Luis Mardones, who led the EXECUTIVE COMMITTEE estate, securities or other property; settle credit other business somehow related in participation, BOARD OF DIRECTORS progress of its operations and activities; to approve institution since 2006, resigned as Chairman of applications and other operations authorized to dependence or interference. the Balance and Annual Report; to inform the BancoEstado. In May, meanwhile, Jessica Lopez BancoEstado´s senior management corresponds the bank, regardless of their nature and amount; BancoEstado’s management and administration is President of the Republic on the bank’s performance Saffie resigned as Vice Chairman. to the Executive Committee. It is composed by agree in internal or external credits brokerage Together with the Board of Directors and the governed by the Organic Law set forth under Law and development and suggest the destination of the Chairman, Vice Chairman and Chief Executive through credit lines, loans or otherwise, and settle Executive Committee, there are other authorities Decree No. 2, 079 of 1977. Likewise, matters not profits at the end of each period; and to perform In May 2010, the President of the Republic, Officer, as well as BancoEstado’s General Counsel, the issuance of bonds, guarantees or other security; that structure the corporate governance of the covered under the tool above are subject to the other duties as specified by law or regulations. Sebastian Piñera Echeñique, appointed Mr. who participates without a right to vote. appoint, remove, transfer, accept resignations, send bank. These are described below. General Banking Law and other provisions from the Segismundo Schulin-Zeuthen Serrano as Chairman on official mission, set disciplinary measures and private sector. BancoEstado’s Chairman is an officer under the of BancoEstado, Mr. Roberto Palumbo Ossa as The Executive Committee is responsible for the terminate contracts of senior staff; provide directly exclusive trust of the President of the Republic, and Vice Chairman, and Mrs. Jorge Rodriguez Grossi, senior management and operations of the company. or through the bank’s officers and employees all the Chairman: The bank’s senior management is exercised by the has the out-of-court representation of the bank, Salvador Valdés Prieto, Gabriel Tomic Errazuriz and It may agree, implement and execute any act or necessary instructions and recommendations for the Segismundo Schulin-Zeuthen Board of Directors. This collegiate body is composed especially before public authorities, banks and Juan Carlos Méndez as Directors. contract leading to the fulfilment of the bank’s efficient administration and good performance of Vice Chairman: of seven members, six of which are under the financial institutions, at national and international objectives. Its actions must be within the laws and the company; grant special mandates and delegate Roberto Palumbo exclusive trust of the President of the Republic level. He also chairs the meetings of the Board of regulations, and policies and standards provided to any of its members, in one or more committees, and are appointed through Supreme Decree by Directors and Executive Committee, and calls special Chairman: by monetary authorities, the Board of Directors of senior positions or one or several specially selected Chief Executive Officer: the Ministry of Finance. The seventh member, the sessions, setting the corresponding table. He must Segismundo Schulin-Zeuthen BancoEstado and the Superintendency of Banks and officers, the attention or execution of matters Pablo Piñera

Labour Director, is the employees’ representative, oversight the company and comply with any other Vice Chairman: Financial Institutions (SBIF). deemed appropriate; and designate employees General Counsel: chosen by themselves, and has an alternate. duty entrusted by the Board of Directors and the Roberto Palumbo who will act as certifying officers in procedures Andrés Medina Chairman and Vice-Chairman are selected amongst Executive Committee. Among its responsibilities, the Executive Committee and documents of the bank, as well as for its own Directors: those seven members of the Board. may: set the terms and conditions for the bank’s deliberations and agreements. Juan Carlos Méndez The Vice Chairman has the exclusive trust of the Jorge Rodríguez operations, such as guarantees, maximum amounts The Board’s duties are: to state the general policy President of the Republic and his main duty is to Gabriel Tomic and interest rates; monitor the compliance of BancoEstado’s immediate administration corresponds of the bank; to elaborate internal regulations; to subrogate the Chairman in case of absence, vacancy Salvador Valdés agreements, regulations and instructions; approve to the Chief Executive Officer, who has the exclusive approve the staff remuneration system; to set the or any other cause. This subrogation includes all the Labour Director: the annual budget for investment and expenditure trust of the President of the Republic. salaries and other allowances of staff that are not duties and powers of the Chairman, including the Pablo Silva , as well as its amendments, provisions and write- collectively negotiable, with the approval of the ones set by delegation. Likewise, he must perform offs, and the Balance and Annual Report of each In order to safeguard the necessary transparency of Labour Alternate Director: Ministry of Finance; to create or remove subsidiaries the duties and powers entrusted or delegated by the period; report every year to the Board of Directors their actions, no member of the Board of Directors Ricardo Moreno in the country or abroad; to decide on matters Board of Directors and the Executive Committee. on business operation and development; agree or the Executive Committee may participate or submitted by the Executive Committee; to supervise on investments, purchases and disposals of real vote in credit transactions, investments or any

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AUDIT COMMITTEE LEGAL DEPARTMENT BANCOESTADO SUBSIDIARIES

Created in 1995 by the Executive Committee, the The Legal department holds the legal representation receiving sanctions for legal or regulatory violations, Eight subsidiaries, supporting the core business which provide financial services, represent a complement for BancoEstado to provide the banking services needed Audit Committee is an important internal control of the bank before administrative tribunals, courts financial loss or loss of reputation for failures in the by its clients in various fields. entity, aimed at strengthening and supporting the of Law, and/or other special courts. Appointed by fulfilment of applicable laws, regulations, codes of management of corporate governance. Its role the President, the General Counsel must attend the conduct and standards of good practice. Likewise, BANCOESTADO SUBSIDIARIES partners: in insurance matters, BancoEstado set a Furthermore, the SBIF may, for purposes of is complementary to the General Counsel’s role, meetings of the Board of Directors and Executive the Management assists customers and manages MANAGEMENT six years agreement with Metlife Chile Inversiones consolidation with the bank, directly request the established by Organic Law. It consists of five members, Committee, without the right to vote. His duty their requirements. Limitada, a subsidiary of MetLife Inc. Co.; and in financial statements to these subsidiaries, and review BancoEstado S.A. expanding opportunities for savings and investment, two of which are independent from the management. is to ensure that the agreements, instruments Administradora General de Fondos all operations, books, records, accounts, documents or and contracts comply with the applicable legal Pablo Mayorga (*) BancoEstado entered into an agreement in January information to determine its solvency.

This entity is responsible for the maintenance, standards and to report legal issues submitted for Compliance Manager: BancoEstado Centro de Servicios S.A. 2009 with the French BNP Paribas Investment implementation and operation of the bank’s internal his consideration. Álvaro Del Barrio Patricia Morales Partners, one of the largest banks worldwide. Advisors and External Auditors controls, the risks of business activities carried out BancoEstado Contacto 24 Horas S.A. Jaime Reyes The bank hires risk rating companies to evaluate and the enforcement of rules and procedures. Related Entities General Counsel: its instruments as part of the normal practices for Likewise, they must review external auditors’ reports, BancoEstado S.A. Corredores de Bolsa BancoEstado shares, represents and/or participates Andrés Medina Jorge Ramírez public-offered securities issuers. Thus, investors balance sheets and other financial statements; DIVISION MANAGERS at different levels in the following entities. None of materialize their investment decisions under well- proposals of auditors and risk rating entities; review BancoEstado Corredores de Seguros S.A. these are subsidiaries of the bank. Joaquín Alegría (**) known risk standards and guidelines, increasing the background of related operations; and analyse BancoEstado has six Management Divisions which transparency and information on conditions of the BancoEstado Microempresas S.A. remuneration systems and main compensation report directly to Chief Executive Officer. Ownership interest: AUDIT OFFICE Asesorías Financieras entity as an issuer of financial instruments. plans for executives. Soledad Ovando -Administrador Financiero Transantiago S.A. (21%) The Comptroller is responsible for the internal -Bolsa de Comercio de Santiago S.A. (2.0833%) Chief Credits Manager: BancoEstado Servicios de Cobranzas S.A. Additionally, it has a external audit service which Its objectives are to ensure efficiency, maintenance, control and oversight of the bank’s accounts, Carlos Eterovic Arnoldo Courard -Bolsa Electrónica de Chile S.A. (2.439%) reviews the individual and consolidated financial implementation and operation of risk management services and offices. He must evaluate and promote -Operadora de Tarjetas de Créditos Nexus S.A. (12.903%) statements of BancoEstado and its Subsidiaries, as systems and internal control, as well as the improvements in risk management and internal Chief Financial Officer: Sociedad de Servicios Transaccionales -Sociedad Operadora de la Cámara de Compensación CajaVecina S.A. required by the SBIF and the Superintendency of compliance with the rules and procedures control of the bank and its subsidiaries, to protect Carlos Martabit Jorge Stuardo de Pagos de Alto Valor S.A. (Combanc S.A.) (10.23%) Securities and Insurance (SVS), as appropriate. governing the banking activity, and identify business the resources of clients, financial assets and Chief Administration Officer: -Transbank S.A. (8.7188%) risks undertaken by the bank and its subsidiaries; reputation of the bank. Victoria Martínez supervise the operations of the Audit Office and While all of these subsidiaries belong to BancoEstado, Supervision and reporting Corporate Risk Manager: its independence from management; to serve as they are independent companies with their own to external agencies Comptroller: Eduardo De Las Heras liaison and coordinator of work between internal Pedro Bolados objectives and strategies. However, they share the and external audit, acting as well as a link between Operations and Systems corporate mission and are part of the same team. Controller them and fulfilling all duties and responsibilities Division Manager: Overall corporate governance of these companies As the rest of the financial industry, BandoEstado Fernando León established by the Superintendency of Banks and depends on the Executive Committee. is regulated by the Superintendency of Banks and Financial Institutions. COMPLIANCE MANAGEMENT Planning and Management Financial Institutions (SBIF), which enforces the laws, Control Officer: Subsidiaries have been created in order to ensure regulations, statutes and other related provisions, During 2010 the Committee held 14 meetings. The Compliance Manager is responsible for Óscar González a high quality, lower cost and more efficient and extensively controls all operations and business managing regulatory, reputational and operational administration of the services provided to customers activities. Chairman: risks, allowing BancoEstado to be a sustainable requiring more specialized care. This allows the Juan Carlos Méndez organization and serve the diverse audiences. diversification of the bank’s business within the As per Article 70, letter b), the SBIF’s oversight reach (*) Pedro Rojas scope of their own line of business and enables the as well subsidiaries, and business support companies Acted as General Manager of this subsidiary until Members: The Management has an independent nature and central line to continue in the strategic development. according to Article 74, both from the General Banking February 28, 2011. Roberto Palumbo identifies, advises, warns, monitors and reports Jorge Rodríguez Law, where the bank is shareholder or has a stake, and (**) Fernando Silva Patricio Meller compliance risks in the organization and promotes For the development of two business areas, which existence or incorporation has been previously Acted as General Manager of this subsidiary until December 10, 2010. Guillermo Ramírez a culture of compliance, avoiding exposure to risk of the bank set strategic alliances with world-class authorized by the Superintendency.

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Board of Directors

Chairman: Segismundo Schulin-Zeuthen Audit Committee Vice Chairman: Roberto Palumbo Chairman: Juan Carlos Méndez Directors: Juan Carlos Méndez Members: Jorge Rodríguez Roberto Palumbo Gabriel Tomic Jorge Rodríguez Salvador Valdés Patricio Meller Guillermo Ramírez Labour Director: Pablo Silva

Labour Alternate Director: Ricardo Moreno Prizes and Awards 2010

Executive Committee

Chairman: Segismundo Schulin-Zeuthen Best seller Prize 2010 Place to Work Institute and magazine Capital. ACHAP double distinction awards Vice Chairman: Organization Chart The journal Diario Financiero and the university BancoEstado Micro-Enterprises was ranked in the Two spots for CajaVecina were granted with silver Roberto Palumbo Unviersidad Autónoma de Chile awarded 5th place. and bronze medal in the “XI Festival de Televisión, Chief Executive Officer: Pablo Piñera BancoEstado for handling the financial crisis and for Gráfica, Radio y Creatividad ACHAP 2010”. its financial performance in 2009. Direct Marketing General Counsel: Andrés Medina International Award The Lab Y&R highlights Merco Spain ALMADI assigned the Silver Medal in the category BancoEstado as one of the best Merco ranked the bank among the 50 most “Direct Mail Product B2C” to the campaign “Help brands in Chile General Counsel: Comptroller: me my friend.” Andrés Medina Pedro Bolados prestigious companies in the country and the first The Bank was ranked at the place 30 among the 100 in ethics and CSR awareness. best brands in Chile, according to the BrandAsset Chief Executive Officer: Silver BIG! marketing Valuator 2010. Pablo Piñera Corporate Mutual Fund Award The campaigns “Great Challenges” from Wholesale Fund Pro Platinum Performance assigned to the Banking, and “Income Tax Operation” from BancoEstado’s Corporate Mutual Fund the diploma Customers Service won the award above. Compliance Manager: Planning and Management Control Officer : Álvaro del Barrio Óscar González to the second best fund in national debt under or equal to 90 days. Capital and ProCalidad Consumer satisfaction BancoEstado received a good practices award as per Chief Commercial Chief Financial Chief Administration Corporate Risk Operations and Systems Internship executives award Officer : Officer: Officer: Manager: Divicion Manager: Meta 4 awarded the program “Executives Internship listening its customers. Arnoldo Courard Carlos Martabit Victoria Martínez Eduardo De Las Heras Fernando León in Claims Resolution” for being an innovative practice in human resources. Among the best companies for working mothers and fathers Among the Best Places to Work The ranking developed by magazine Ya and The Bank took the place 26 in the ranking of the Fundación Chile Unido acknowledged the bank for Best Places to Work in Chile, prepared by Great its policies to reconcile work and family life. Prize Consumer satisfaction.

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FEBRUARY APRIL JUNE Key Milestones • BancoEstado is leader in number of customers • Feller Rate gave a AAA rating to BancoEstado, as • BancoEstado addressed a successful placement of a using their private Internet site. According to the SBIF, per the stability of its funding sources, good credit subordinated bond - Series I2, amounting UF 3 million, in 2010 between December 2009 and December 2010 the management and leadership in savings and mortgage equivalent to U.S.$117 million, at a 28 years term with number of customers who entered with user password financing. a 3.74% interest rate. to www.bancoestado.cl increased by 46%. • BancoEstado paid more than 500,000 “March • BancoEstado collaborated in the fifth version of Expo bonus”, 84% of the total amount of beneficiaries of ArribaMiPyme, which offered services for entrepreneurs • Thousands of people went each Saturday to the this government subsidy. and recovery of micro, small and medium businesses Paseo Ahumada in Santiago Downtown to enjoy a affected by the earthquake. Chilean film series that BancoEstado offered for free. • BancoEstado celebrated in Parral the closure of the Chilean films road show they sponsored in the communities most affected by the 27 February catastrophe.

JANUARY MARCH MAY JULY • According to ECLAC, compared to other public banks • BancoEstado strengthened its branches, extended • The President of the Republic, Sebastián Piñera, • BancoEstado signed an agreement with the National at a regional level, BancoEstado showed the highest ServiEstado’s working hours and set mobile banks to appointed as new members of BancoEstado’s Board Irrigation Commission to improve farmers’ funding increase in loans during the peak of the international facilitate access to financial services in the districts of Directors Mr. Segismundo Schulin-Zeuthen as access to repair and rebuild irrigation works damaged financial crisis. affected by the earthquake and tsunami in the Chairman; Roberto Palumbo Ossa as Vice President, and by the earthquake. Biobío and the Maule Regions. Mr. Jorge Rodriguez Grossi, Mr. Salvador Valdés Prieto, • The bank supported the concert “Song for Haiti”, to Mr. Gabriel Tomic Errazuriz and Mr. Juan Carlos Mendez raise funds for earthquake victims in that country. as Directors. • In the areas most affected by the earthquake, the bank postponed the payment of 6 mortgage dividends for its customers and rescheduled loans for micro and • The branch of Talcahuano gets operational again, small entrepreneurs. completing the process of reactivating the offices damaged by the earthquake in the region of Bio-Bio.

• MetLife Chile Inversiones Limitada paid U.S.$58 million in equity stake to BancoEstado Insurance Brokers.

• BancoEstado achieved the highest taxes payment in history. The contribution for tax year 2009 was over U.S.$459.4 million.

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AUGUST SEPTEMBER OCTOBER

• BancoEstado held its IX Housing Fair. The exhibit • BancoEstado issued in international markets, U.S., • BancoEstado signed an agreement with AvalChile to included more than 200 projects from 20 real estate Europe and Asia a 10 years bond for US$ 500 million expand and improve access of SMEs to bank financing. companies, with very convenient rates for those who with semiannual interest rate. dream of their own home. • BancoEstado was ranked as a leader in amount of customers with access codes to enter their website to make transactions. This represents 33% of online customers at national level.

NOVEMBER DECEMBER • BancoEstado delivered 300 computers to schools • BancoEstado delivered for the sixth consecutive and colleges in the Regions most affected by the 27 time the Muhammad Yunus Entrepreneur Prize, an February earthquake, helping to reduce the digital gap initiative that recognizes the entrepreneurial capacity of along the country. microentrepreneurs, their effort and innovation. • According to a study based on ratings from Moody’s, Standard & Poor’s and Fitch, BancoEstado is the safest • In Quintay, with the President of the Republic, • BancoEstado’s Savings Museum reopened with new bank in Latin America. BancoEstado celebrated the major advances in facilities, in the premises of the Bank’s Headquarters. bankarization with the opening of the CajaVecina

• During Chile’s Bicentennial, BancoEstado celebrated number 4,000 and 400,000 microentrepreneurs. • The Santiago Stock Exchange ranked BancoEstado 155 years providing financial services to Chileans. Brokers in the first place in the ranking of volume • BancoEstado’s Customers could make Christmas traded in financial intermediation instruments and and New Year purchases with credit card at 0% fixed income. Likewise, BancoEstado led the total stock interest rate. trading operations of all markets, with U.S.$143.5 billion. • BancoEstado commemorated the World Savings Day with representatives of the Global Compact, financial • The Guarantee Fund for Small Entrepreneurs system authorities and students and school teachers (FOGAPE), managed by BancoEstado, celebrated 30 from Marqués de Ovando School. years of existence and coincided with its fourth bid in 2010, which awarded USD$ 7 million in guarantees.

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1855 1910 1928 1977 2001 2004 2007 2009 Creation of the Creation of Creation of the Enactment of the Change Strategic alliance Launching of Strategic Alliance Caja de Crédito the National Institute for Constitutional Organic corporate image. between BancoEstado CuentaRUT and with BNP Paribas Hipotecario. Savings Fund. Industrial Credit. Law of Banco del Estado and MetLife Inc. CajaVecina. Investment Partners. (Decree No. 2,079). Creation of ServiEstado

1884 1926 1953 1995 2003 2005 2008 2010 Creation of the Creation of the Foundation of Starts modernization Integration of Opening of Capitalization of More than one million Caja de Ahorros Agricultural Banco del Estado project of the bank. BancoEstado and New York Branch. U.S. $ 500 million. customers using de Santiago. Credit Bank. of Chile. Redbanc ATM Internet banking. network. 150 years serving the country. Opening of the CajaVecina number 4,000.

Reaches the goal of 400,000 microentrepreneur customers.

20 21 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BACKGROUND BANCOESTADO EMERGES BancoEstado’s history begins in 1855 with the creation On July 24, 1953, the President Carlos Ibáñez del The change of century was an opportunity to change This target must be carried out efficiently, because of the Mortgage Fund (Caja de Crédito Hipotecario) Campo merged the Mortgage Fund, the National BancoEstado’s image and name. BancoEstado was the bank resources come from all Chileans. Being under the State supervision during the administration Savings Fund, the Agricultural Credit Fund and the known as a modern institution, keeping its mission efficient means being careful in spending and as of President Manuel Montt. By that time, the country Industrial Credit Institute, creating the Banco del and values, in order that every Chilean, anywhere, efficient and profitable as relevant competition. had no banks and the Fund provided loans and took Estado de Chile, today BancoEstado. On September can be an entrepreneur and develop. Likewise, servicing emerging segments, the bank deposits of individuals, companies and institutions. 1st, 1953 BancoEstado started operating as an aims at adjusting profitability as per lower income autonomous state enterprise, with legal status and In 2002 the networking of Redbanc and BancoEstado and costs involved in providing products and Nearly three decades later, in 1884, the Santiago own patrimony. ATMs was completed, serving all banking customers services to these sectors. BancoEstado’s profitability Savings Fund (Caja de Ahorros de Santiago) is created through more than 3,500 ATMs. The modernization strengthens its social role and ensures sustainable to encourage workers’ savings. A six year old boy The just created Banco del Estado had six departments: process included the introduction of electronic growth of the company. deposit of 100 pesos gave birth to the first account in banking, savings, agriculture, industrial, mortgage banking; a model that combines face-to-face that Savings Fund. One year later, the Fund managed and investment. Its mission was to provide credit channels such as offices, CajaVecina and ServiEstado 45,000 accounts and by 1900 it had offices in 12 in an organized and effective way, pointing at the with automation and remote servicing, as well as cities along the country. productive sectors and individuals that private banks the opening of the New York office and the creation did not attend. of subsidiaries supporting the core business. Both Funds were merged in 1910 to create the National Savings Bank (Caja Nacional de Ahorros), Another role of the bank was bringing the banking In 2003 we celebrated 50 years since Banco del whose focus was savings and mortgage loans for benefits throughout the country, even to the farthest Estado was created. That year marked the progress workers. Those mortgage loans required a payment corners, i.e. “bankarizing” people. Thus, during made by the bank aiming at strengthening Chileans of 25% in advance, and the remainder in annual the first 20 years, the bank of all Chileans was bankarization, as well as the steps made to have a instalments, which stimulated the construction of consolidated as the largest in Chile. bank that meets the needs of its customers. urban communities. MODERNITY AND GROWTH BancoEstado is currently present in 100% of The National Savings Fund reached 1,400,000 accounts One of the events driving the bank to be part of communes along the country through its offices, in 1927 and had 147 offices along the country. That the modernization of the country and its institutions ServiEstado or CajaVecina points. Its strategy is to same year was opened the Agricultural Credit Fund was the transformation projects developed in the achieve an efficient bankarization. Bankarization and one year later, the Industrial Credit Institute. mid-90’s. By then, the bank implemented a strategic work involves, in addition to its commercial role, plan to reconcile economic and social efficiency; a social inclusion role - which distinguishes it from In 1939, the earthquake of Chillán left 30 people to improve customer service; to introduce a other banks - to set financial system at everyone’s dead. The National Savings Fund supported the management style focused on results, and sought to reach, facilitating access to services as well as reconstruction of the devastated area and adopted a achieve stability and progress of its workers together development and entrepreneurial opportunities for flexible credit policy for the victims. with a higher competitiveness. individuals and businesses.

22 23 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Evolution of the Bank in Figures, 1990 - 2010

BANCOESTADO: TOTAL LOANS * BANCOESTADO: MARKET SHARE (U.S. $ billion December 2010) (%)

16% 24

20 12% · At closure of 2010, BancoEstado’s 16 · Increasing and sustained loans trend market share was of 15.2% during the entire period. · In 2010 total amount of loans reached 8% 12 over US$ 24.4 billion.

8 4%

4

0% 0 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010

Source: BancoEstado Consolidated since 2008 Source: BancoEstado

BANCOESTADO: COMMERCIAL LOANS* EVOLUTION OF LOANS BANCOESTADO AND GDP (US$ billions - December 2010) (Ratio 1990=100)

600 12

500 10

· During the last 2 decades, BancoEstado’s 400 Loans have quintupled. In that same period, 8 · Permanent support for companies and the GDP increased in 2.7 times. entrepre neurs. · In 2010 business Loans grew at a lower · Between 2000 and 2010 loans increased at a 300 10,9% average per year, while GDP expanded 6 rate, after the strong growth occurred at a 3,8% rate per year. in 2009. 200 4

100 2

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 1990 1995 2000 2005 2010 Loans BancoEstado GDP

Source: BancoEstado and Central Bank Consolidated since 2008 Source: BancoEstado

24 25 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCOESTADO: MORTGAGE LOANS BANCOESTADO: ROE (US$ billion - December 2010) (RETURN ON EQUITY BEFORE TAXES, %*)

10

25%

8 · BancoEstado is one of the leaders in · Profitability in time allows to mortgage funding, especially in low-in strengthen social role and ensure 20% come segments. the bank’s sustainable growth. · In 2010, profitability recovered and · The bank as a 24% market share in the 6 reached 14.8%, after the previous total amount of Loans, and has 59% of 15% the current mortgage loans appearing period adjustment (ROE: 11.0%), inthe system. due to the capitalization and coutercyclical policy developed. 4 10%

5% 2

0 1991 1995 2000 2005 2010 0 1990 1995 2000 2005 2010

Source: BancoEstado Consolidated since 2005. Source: BancoEstado.

BANCOESTADO: EFFICIENCY RATE BANCOESTADO: CAPITAL AND RESERVES (Administrative expenses / gross operating result *) (US$ billion - December 2010)

2.0

80%

1.6

70% · A strong and solvent bank. · Capital increases were funded with 1.2 profits until 2008. In 2009, the extraordinary capitalization expanded 60% · During the last decade, the ef ficiency quotient shows a sig the activity, keeping a high solvency. nificant improvement. That trend continued during 2010. 0.8

50%

0.4

40% 1991 1995 2000 2005 2010

0.0 1991 1995 2000 2005 2010

Consolidated since 2005. Source: BancoEstado Source: BancoEstado

26 27 II. A BANK AT THE SERVICE OF CHILEANS ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Vision and Mission of BancoEstado Strategic Plan 2011 – 2014

Bankarization is the engine that drives BancoEstado’s BancoEstado retains and maximize its profitability, management and its main focus as well: to which belongs to every Chilean. democratize access to the financial system and make it available to all Chileans. Improvements in efficiency require to raise productivity, still ranked at levels under the system Visión BancoEstado has a medium-term strategic plan and with a structure of assets with a low capacity to whose main objective is to “bankarize” in a generate incomes. sustainable manner. A bank of excellence, with a STRATEGIC PILLARS The main challenge for the period 2011 - 2014 will high social impact business be to combine an aggressive bankarization strategy Strategic planning is built on BancoEstado’s and the need to improve efficiency and profitability fundamental strategic statements contained in their management. indicators. This, in an auspicious scenario for 2011 definitions of vision and mission, as described above, in the banking industry, with a projected GDP and in the positioning expected amongst its clients. growth of around 6% and close to 13% for loans in the system. BancoEstado’s positioning is characterized by its proximity and long-term relationship with its In order to bankarize, this company needs to be a customers; delivering a competitive quality service; massive and relevant bank. This role involves the use committed in the promotion of entrepreneurship of low cost and high quality mass payment systems, and financial inclusion, and as a state bank which and alternative channels. actively promotes bankarization .

In this context appears the target of improving the Mission efficiency ratio and return on equity (ROE). Thus, We exist so that every Chilean, anywhere, can initiate and develop new initiatives.

30 31 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

STRATEGIC GUIDELINES 2011 – 2014

• The challenge of bankarization • Improving efficiency and profitability STRATEGIC PLAN 2011 – 2014 Strategic Map 2011-2014 Various global indicators agree that there This goal is essential for BancoEstado. First, because the BancoEstado’ strategic plan has been revised is a strong correlation between economic bank must retain and maximize profitability, which is in recent years as a result of a continuous Social Impact Business Management development and bankarization. Developed an asset that belongs to all Chileans. Second, because improvement process. countries are highly bankarized, and a less customers need quality service at an affordable price. Profitability development in countries implies a lower Third, because it is embedded in a competitive industry, The bank’s strategic objectives are expressed Financial Social Bankarization Impact bankarization as well. For this reason, responsive to market opportunities. And finally, the Strategic Map set for the period. The overall Efficiency Risk the national objective of moving towards because if BancoEstado is efficient and profitable, it approach is a business management with high development means that the first priority for gains legitimacy to make the necessary investments social impact; all the objectives stated in the BancoEstado is the bankarization of Chile. for future development and growth. Strategic Map aim at achieving the vision and

mission of BancoEstado. In social terms, the Customer Loyalty Mass and and exchange to relevant Bank Bankarizing means opening doors, giving BancoEstado committed itself to reach a 50% efficiency objective is bankarization. In the financial sector, increase revenue opportunities, contributing to modernization rate and achieve a return similar to the average of the the objectives are to improve efficiency and profitability. Clients and bringing people and businesses the benefits system by 2014 (and over 16% in 2011). Value Proposal of technology. Through bankarization every Access Quality Closeness Chilean, anywhere in the country, will count • high impact initiatives to improve Customers are at the core of the Strategic Map. This Transparency on bank to meet their financial needs. In efficiency and profitability: map shows the results to be attained with clients in all, bankarizing is improving living standards BancoEstado also promotes a set of short-term initiatives order to achieve the objectives of bankarization and of individuals and their families as well as that will impact on revenues and costs in 2011. efficiency. It highlights the values offered, which are enterprises’. Initiatives impacting the generation of characterized by being accessible, close, transparent incomes: and provide a high-quality service. Thus, BancoEstado Increase in • Increase crossed banking and products, especially in SLAS in critical Mass support processes To achieve this, the bank must be able to provide will increase significantly its operating revenues and Internal processes productivity and cost Processes reduction in processes and technology financial services throughout the entire country. mass segments. will become a even more massive, relevant and Thus, it’s essential to expand the network of • Increase financial income with the right balance sustainable bank. CajaVecina up to 6,500 points in 2011. Likewise, between risk and profitability. savings mechanisms must be increased - Initiatives impacting costs: Bankarizing with efficiency involves significant especially the savings account in which the bank • Improve information on process costs and assign challenges in internal processes: improve quality is leading with more than 7.5 million customers responsibilities for each process. standards (SLA) in critical processes through process Staff competencies development with active accounts - and providing housing • Accelerate the migration of on-site transactions to management methods; improve productivity and/ Intangibles access for lower-income Chileans. on-line transactions channels. or cost reduction in critical processes; and install • Anticipate deadlines and deliverables for processes and technologies supporting the mass- The bank’s ongoing commitment is promoting transformation projects. related target. financial inclusion for individuals and companies • Improve the system of incentives to be in line with through the design of different products and the emphasis on efficiency and profitability. One of the major bank’s assets are people. In this area low-cost customer service channels specially perfeccionando en los últimos años producto de un the objectives are the development of competencies defined for each segment. proceso de mejora continua. as supervision, leadership, sales and customer service.

32 33 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Business Transformation Programme of BancoEstado

As BancoEstado is in a changing process to provide of channels, services and products. Likewise, during STRATEGIC PROGRAMS a higher quality service to its customers. For a this period there has been significant progress in The Strategic Plan involves a set of projects long time, it has been consistently working on controlling and monitoring the indicators of the projects that are pillars of the Strategic Plan. That is technological platform operation and in streamlining strengthening the implementation of the BancoEstado’s Business Transformation Programme. the processes for its administration. This resulted in objectives set in customers, internal processes At the Retail Banking level, this programme a reduction of incidents, especially those affecting and intangible assets. adjusts the interaction with individuals and clients, contributing to the improvement of the microenterprises. At the Wholesale Banking level, it perceived service quality. In terms of customers, major developments such provides a new service for large, medium and small as the Retail Banking Transformation Program businesses and public institutions. The process seeks Partially operating, the Retail Banking Programme to innovate, expand and develop new capacities shows its first results as, for example, the issuance (PTBM) are being carried out. These initiatives enhancing the bank’s competitiveness and enabling of BancoEstado’s Mobile Web Site, Electronic deeply transform the relationship with customers, the achievement of the targets set for the period. Collection and Revision of Powers and Signatures; incorporating tools that will improve management validation of Electronic Contracts on the Internet and achieve strategic objectives. This great task needs to count on all the bank’s 24 hours, and the AP Insurance Sales over the areas. In order to develop the above, the bank Internet, among other initiatives. Another relevant In turn, the Wholesale Bank Transformation developed new technologies that change its internal and high impact line is the Business Management system structures in order to maximize the efficiency Model, aiming at improving productivity of business Programme was implemented during 2010. It of processes and to provide customers multiple executives, as well as improvements implemented aimed at strengthening the link and knowledge channels such as the Business Platform, Internet, in cash and desk management that have helped to of customers in this segment, generating the Sales and Service Module , Mobile Banking and Call reduce transaction costs. skills needed in technology, service processes Center. and practices in order to meet the strategic As for the Wholesale Banking, the project aims at objectives defined for each of the services that The centerpiece of the Business Transformation increasing the link and knowledge of customers, Programme and particularly of both banking generating the required changes and capabilities, compose it. services defined above is multi-channel marketing, both in technological and service process and which implies that both the executive and the client practice levels. Concerning internal processes, one of the major have access to the same information, regardless the projects involving critical processes aims at channel through which they communicate with the The implementation started in 2010 and has already improving the service quality and reduce costs and bank , to sell products through various channels. shown significant results. One of them is the failures rates occurring with customers. development of new capacities of the web site for The transformation required new technology this particular segment of customers. In addition to products that, together, can reduce the costs of the improvements in current accounts, this channel developing and deploying applications; can reduce will provide more friendly management platforms labour costs and speed time needed for production that will integrate multiple business operations.

34 35 III. SALES MANAGEMENT: BANCOESTADO IN CHILEANS’ BANKARIZATION ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

PROVISIONS OVER TOTAL LOANS BancoEstado Before (%) the Banking Industry: Results 2010, Trends and Forecasts

In 2010 worldwide economy rebounded after the effects of the earthquake and tsunami that Brazil Colombia 6.2

deep financial and economic crisis experienced in ravaged the country. Indeed, after a few months Mexico 5.7 the previous biennium. Industrialized countries the activity resumed its pace, showing great 5.2 showed a slow recovery, affected by significant dynamism in investment and consumption, Argentina tax and monetary imbalances that would need which resulted in a strong employment growth United States Spain 3.6 3.5 time to be adjusted. In contrast, emerging and in the improvement of entrepreneurs and Chile 3.1

economies kept a strong growth dynamics. consumers’ expectations. 2.6 Portugal This trend will continue while overheating risks 2.2 United Kingdom Japan and the appreciation of their currencies are Chile remains one of the countries with the · Provisions over total Loans in Chile 1.4 1.4 is within controlled ranges that can appropriately addressed. highest financial development in Latin America. be compared to developed countries. At the same time, banking shows an The country is especially remarkable in the level appropriate solvency. In Chile, the economic recovery begun in late of bankarization reached, with a credit depth 2009 was temporarily interrupted due to the reaching 77% of the GDP. Source: International Monetary Fund (2010)

BASEL RATIO BANKING DEPTH WORLDWIDE (Banking Loans / GDP, %) (Net assets / risk-weighted assets, %) Spain Argentina Portugal Brazil China Mexico 153 18.4 Japan 146 17.5 144 United Kingdom United States 16.4 Chile · Chile shows a high Loan Colombia 15.8 Japan Spain

depth in the Region, but is still 14.8 14.7 United Kingdom

far from developed countries. 13.6 Germany 12.8 Portugal 105 Chile 12.2 93 88 United States 10.6 77 59 Brazil Colombia 37 Mexico Argentina 28 14 13

Source: Financial Access 2010, The World Bank. Source: International Monetary Fund (2010)

38 39 ANNUALMEMORIA REPORT ANUAL BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Corporate THE EARTHQUAKE OF FEBRUARY 27

Management Satisfied for having responded to the country and each of our customers SLOW GROWTH AND HIGH RETURNS On the other hand, the average profitability of the Bankarization continues developing, driven by the During 2010, BancoEstado’s activity was focused A conservative and responsible management was ON THE BANKING SYSTEM IN 2010 banking system continues growing and showing widespreading of payment methods, supported in developing bankarization to have a greater performed during the period. This management After the earthquake, BancoEstado The banking activity and economy expanded at record levels, supported by a lower expenditure basically on electronic banking that can expand inclusion of all sectors in society, particularly the allowed to hold the record volume of activity strengthened its work teams to face the disaster a similar rate, but under the two digit market in provisions and write-offs and the increase in services at reduced costs. lower income ones. Financial sustainability is reached by the bank in 2009, after the capitalization and to support its customers. This involved: forecasts appeared earlier this year. Indeed, the interest margins and commissions. essential for succeeding in this task. The bank needs of that year. The focus at a business level remained • Postponement of 6 mortgage payments for expansion of output and employment are not In short, the industry rebounded in 2010 and to be profitable to have the resources to develop its on customer guidance, through segmentation customers from the Maule and Bio-Bio regions strongly reflected in the evolution of bank loans. In parallel, operational efficiency (administrative consolidated its results, anticipating good forecasts activities. in order to reach customers with the appropriate (45 thousand operations benefited). support expenses over gross operating margin) for 2011 and future years. In a favourable scenario products and services. • Delay in 2 instalments of consumer loans and/ In 2010, total loans expanded 6.1%. Performance shows a slight decline since late 2009, ending the of economic growth and institutional stability, the It also sought to respond quickly to the or study loans for customers affected by the for mortgage and consumer loans was in line with year at 46.0%, given a relatively lower growth in banking system is expected to continue providing requirements arising from the earthquake of The need for a more efficient operation, both earthquake (57 thousand operations benefited). the recovery of domestic demand and reached a operating revenues as per administrative support economic and social development for the country, February 27. The quake, which meant a $30 billion in expense control and revenue growth, was • More than 26 thousand microentrepreneur rough 9% annual growth. Meanwhile, commercial costs. increasingly expanding access to financial products loss for the country, affected 26,000 clients in the emphasized at all levels of the organization. customers benefited (34 thousand operations) loans increased only 4.3%. and services to all families and businesses. microenterprise segment, five thousand from small INDUSTRY OUTLOOK FOR 2011 business, and 44,000 customers who submitted Thus, in 2010 the bank reached a slight expansion • Special communication channels to report Due to the impact of the international financial 2011 outlook shows a further expansion in bank claims for damage in their properties. Given this of loans and increased profits, maintaining a limited claims. 43,666 reports of damaged properties crisis on local economy and, additionally, to lending, driven by a vigorous economy and high complex scenario, the bank and its staff had a quick and controlled risk. received (the greatest bulk of the banking the increased demands resulting from the employment levels. Thus, we can anticipate a first reaction and created work teams along the system). new legislation and the introduction of new strong growth in consumer loans (15%), followed year focused in properly solving an unprecedented BancoEstado’s total loans expanded at a moderate • Insurance: 99% of claims settled and/or paid measurement models, provisions ratio over total by housing loans (13%) and commercial’ (12%). overload. 0.6% in 2010, after having grown 22% in 2009. by the bank (36,600 thousand paid). loans showed a strong increase. However, it is At the same time, profits are expected to further • BancoEstado and the Ministry of Agriculture currently quite stable, even though it remains at a increase, but at lower rates than in 2010 given the signed an agreement to provide funding for level above the previous closure. higher base for comparison. farmers who need to repair or rebuild damaged irrigation systems.

• Special conditions for those who lost their homes and called for a new loan.

40 41 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

NET LOANS EVOLUTION 2005-2010 * (Annual variation %) BancoEstado’s clients

The results of the period confirm that in 2010 by the wide range of services and products 7,544,682 BancoEstado is still the most massive bank of offered to meet their needs. 24 savings accounts clients Chile. Many thousands of clients, including

20 individuals and companies access the bank One in five people with loans in domestic banks are

21.7 · In 2010 total Loans recorded a moderate 291,752 growth: BancoEstado’s expansion was of 0.6%, current accounts clients virtually, remote or in person every day, attracted funded by BancoEstado. 16 and 7% for the rest of the system. 16.7 15.8 2,881,000 12 14.4 14.1 MARKET SHARE / N OF DEBTORS*

13.7 ° CuentaRut clients (September - 2010) 10.7 8 9.6 8.5 BancoEstado 799,199

4 7.2 Rest of the System electronic check book clients 0.6 0 581,195 -2,7 credit cards clients -4 16% Bank 2 2005 2006 2007 2008 2009 2010 534,254 mortgage loans clients

1,999,936 * Consolidated since 2008 Rest of the 37% Source: SBIF. clients with insurance services System

19% 438,296 BancoEstado clients with consumer or students ACTIVITY GROWTH 2010 loans (Annual Actual variation, %)

loans BancoEstado (%) Rest of the system 436,000 micro and small business clients 10% Bank 3 Totals net 0.6% 7.2% Bank 1 18% Business 0.4% 4.9% 1,015,467 clients on-line People 0.8% 11.2% * 6,1 million debtors; debtors appear in every bank where they hold debts. Source:: SBIF Housing 2.6% 11.1% 2,249,000 Consumer: people receiving their monthly · BancoEstado has the highest amount of debtors recorded in the system: 1,184,000 (19%) In instalments -8.8% 9.8% payments as remunerations, pensions and scholarships Credit cards 11.1% 26.2% 671 Claims management showed positive results for It is important to note that BancoEstado receives Source: SBIF public institutions clients customers by year’s end. In December 2010 the less complaints (3.8/10,000 debtors) than the

· Loans evolution in 2010 was driven by individuals-oriented loans, specially mortgage Loans. timely response within the deadlines established, competition within the financial sector (4.4/10,000 Source: BancoEstado. was of 85.6%. debtors).

42 43 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

CLAIMS SUBMITTED TO FINANCIAL INSTITUTIONS* (average/10,000 debtors) Marketing and

6 Communications

5 During 2010, BancoEstado maintained its Communications and 4 communication channels with customers and social responsibility

4.4 *Includes claims and other queries received in writing at the SBIF until relevant audiences through marketing and corporate 3.8 In terms of corporate communications, the bank 3 3.7 Sep-10. communications. **Relevant competition are the five has internal means such as the Intranet and the major private banks 2 magazine Compromiso, in addition to the weekly MARKETING MANAGEMENT electronic newsletter that supports the bank’s 1 A In early 2010, the bank was focused in appropriate business management, named “La Red al Día”. and timely inform in its actions in order to help the 0 · BancoEstado recorded a lower BancoEstado Competing Industry** System Average level of claims than its relevant earthquake victims and the community in general. competing companies. On the other hand, the website www.corporativo. The support provided to customers was focused on individuals and small and microenterprises affected bancoestado.cl addresses external communications. through the postponement in payment of consumer This website provides clear and timely information to Source: SBIF. loans, dividends, and insurance instalments. its stakeholders, as well as the information required by Law N° 20,285 of Public Information Access. At the same time, the bank reported a strong BANCOESTADO EFFICIENCY RATIO * Once the country went back to normal, the bank improvement its efficiency ratio (measured as the (Administrative support costs / gross operating income,%) decided to increase access to banking products such The bank also maintains channels of communication ratio between administrative expenses and gross as CajaVecina and CuentaRUT in less bankarized with the media to reach its public audience. operating income), which stood at 58%. This segments, which took hold in September with the result is due to a higher income from indexation launching of the “Chilean” credit card: unique in Besides this report, BancoEstado has been and the ongoing and systematic effort to control the market with less opening requirements and 75% elaborating for the last six years a Sustainability administrative expenses. more flexibility in payment methods. Report. This document informs on the bank’s management in the social, economic and In terms of marketing recognition, in 2010 the environmental areas. In addition, and consistent 65% 69.3% bank obtained two Big! awards and a silver Amauta 68.1% with its social role, the institution promotes ethical

65.2% award. Likewise, CajaVecina received two awards and transparent behaviour at the corporate level, 62.7% for two spots in the XI Festival de Television, Gráfica, 61.9% 61.0% 60.8% Radio y Creatividad Integrada ACHAP 2010 and was including compliance of regulations and code of

55% 58.9% · The improvement trend in BancoEstado’s 58.0% efficiency continued during 2010, strongly ranked in the 30 place at the BAV ranking of brands. ethics and conduct for employees and contractors. supported by the higher incomes from indexation and the ongoing and systematic effort to control administrative expenses. 45% 2002 2003 2004 2005 2006 2007 2008 2009 2010

*Consolidated since 2005. Source: BancoEstado.

44 45 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

ACTUAL INCREASE IN CONSUMER LOANS Divisions Management (Balance, December Rate 2001 = 100)

During 2010, BancoEstado’s business strategy aimed The market for personal banking in 2010 was LOANS at consolidating the increase in activity achieved strongly influenced by the effects of the earthquake. during the previous year, strengthening its sales BancoEstado developed a strategy to minimize Consumer loans 450 396 capacity and accompanying the national economic the impact of the earthquake on their customers, After growing 13.3% in 2009, consumer loans 400 recovery. postponing payments of consumer loans in March experienced a fall in 2010. Despite the above, and April, and postponing as well six mortgage 350 BancoEstado ranks fourth in this market (10.5% In parallel, BancoEstado kept its strategic focus dividends between March and August. Likewise, 300 255 market share). in bankarization, increasing Chileans’ access to during the year the bank had to deal with different 250 financial services, especially those with low income, situations related to insurance payments. 200 which is consistent with its vision and mission. 150 As a strategic guideline in personal banking, BancoEstado succeeded in the fulfilment of its goals BancoEstado is committed to achieve significant 100 in most of divisions and segments. improvements in efficiency and quality for its 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 customers. To move in this direction, during 2010 RETAIL BANKING the bank sought to remain relevant and influential in the market, increase efficiency in managing transaction costs and increase the number of Retail banking plays a key role in financial customers, as well as the link with them through BancoEstado development of Chilean population and small Rest of the System crossed products. * Source: SBIF and BancoEstado entrepreneurs.

Personal banking All the above showed improvements during 2010. · Between 2001 and 2010 BancoEstado’s Consumer Loans increased four-fold, despite the fall occurred this year after During 2010 BancoEstado maintained a strategy On one hand, sales quality of personal and mortgage the strong expansion of 2009. with attractive products and prices for its customers, loans – as well as CuentaRUT - improved. On the without sacrificing income and risk indicators, and other hand, we designed and/or fine-tuned value improving the efficiency indicators. offers for each customer segment and sub-segment.

46 47 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

MARKET SHARE: MORTGAGE LOANS BALANCES * Market share: mortgage STUDENT LOAN CUSTOMERS * (Number of debtors, December 2010)

23.7% BancoEstado

Rest of the 13% System 27% BancoEstado

Rest of the 27.9% System Student Loans Mortgage Loans 14.9% Bank 2 BancoEstado is one of the leaders in study funding. BancoEstado is leading middle and low income Indeed, loans granted under this portfolio doubled mortgage-oriented segments. During 2010, the between 2006 and 2010. Bank continued promoting mortgage loans at low interest rates and supported the real estate sector Bank 1 40% 8% Bank 3 In 2010 the number of customers in this segment with fairs and exhibitions. 9.8% Bank 3 Bank 1 23.7% was of 97 thousand, capturing 27% of total debtors of the system, with a US$748 million loan 12% Bank 2 Although the bank participates in all the mortgage balance (one third of the stock market.). It should be debt tranches, most of its operations are focused * Total Mortgage Loans by MMM$ 19.349 noted that 95% of the loans granted by the bank in tranches under UF 1,000, which represent 88% Source: SBIF are associated with incentive plans (CORFO Secured of its housing clients and 61% of their loans in this Loans, CORFO funded loans, CORFO funded and *Total debtors: 365,016 segment. Source: SBIF. guaranteed loans and Loans under Law No. 20,027) MARKET SHARE: MORTGAGE LOANS OPERATIONS* (October 2010)

STUDENT LOANS* (US$ million)

Bank 1 11%

Bank 3 4% Rest of the 14% System

Bank 2 11%

33% BancoEstado

59% BancoEstado

Rest of the 15% System Bank 1 28%

11% Bank 3 * Total amount of operations:: 1,25 millones. Source: SBIF. Bank 2 14% · BancoEstado is one of the leaders in mortgage Loans, with 24% of the market share. · BancoEstado is the main mortgage Loans financing entity in Chile, with 59% of the current loans appearing in the banking system. Total stock: US$ 2.28 billion Source: SBIF.

48 49 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCOESTADO´S MORTGAGE LOANS BY DEBT RANGE (Percentage as of December 2010)

Over UF 3,000 2.3%

25.7% Up to UF 400

Between UF 1,000 37.2% and UF 3,000 Savings and investment products The bank offers various savings and investment products to its customers in its specialized centres, Margarita Marín which are promoted through various campaigns.

34.8% Between UF 400 and UF 1,000 Term Savings In 2010 BancoEstado had the absolute and A home “close historical leadership in term savings. 87% from * Nº de operaciones totales: 1,25 millones. Source: BancoEstado. from heaven” the 13.7 million savings book in the market are Margarita Marin Naranjo’s first and She applied and received the housing BancoEstado’s, which in turn holds 84% of the unique job was at the Telephone subsidy and BancoEstado granted her · 88% of BancoEstado’s mortgage loans customers have Loans under total amount of savings, equivalent to US$5,12 UF 1,000, i.e. 61% of the Loans in this segment. Company of Chile, first in the office a 20-years term mortgage loan, with of La Serena and since 1980 at the which she bought an apartment in billion. premises of that company in Santiago the same building where she was down town, San Martin street. previously renting. She retired in 2001 Since the very beginning, BancoEstado has been and then made an amortization of committed to Chileans’ savings as a key instrument Consistent with the above, in social housing BANCOESTADO´S CLIENTS WITH When arriving to the capital, she debt. “I did it to reduce instalments. BancoEstado made a significant contribution during MORTGAGE LOANS - BY RANGE luckily found a place for rent at When I was working I had no for development. It counts on more than 7.5 million 2010, funding about 24,000 houses under the (Percentage as of December 2010) walking distance of her workplace, in problems paying the dividends, but customers in this product. an old, comfortable and safe building since I retired it has been a little more Special Housing Program (DS04). Mutual Funds in Tucapel Jiménez street. Until difficult but I’ve continued paying BancoEstado operates in mutual funds since 2004. today Ms. Marin lives there, first as and, God willing, this year I will pay a tenant for 12 years, and now in her off the loan”, she said. Its subsidiary, Administradora General de Fondos, Over Between UF 1,000 0.3% UF 3,000 own apartment acquired through a accounts for 9.1% of the participants in the industry 11.6% and UF 3,000 mortgage loan of BancoEstado. “It is a 70 square meters apartment and stands in fifth place in the market. on the seventh floor of this building, In the early nineties, the Municipality very close from heaven” she says of Santiago started a housing smiling. It is her home and she is During the year, BancoEstado expanded the program to reverse the neglect and happy because everything is nearby. alternatives in savings and investment for its deterioration suffered by most of She’s fine living downtown in customers with the release and incorporation of the the historic city centre. To encourage Santiago. Between 400 25.3% and UF 1,000 the establishment of middle-income new Bicentennial Income Mutual Fund. This fixed families there, the Ministry of Now she’s retired, she spends the income instrument is an alternative for customers Housing provided support through an days working with her husband in interested in medium and long term savings and 62.8% urban renewal grant, and commercial a lingerie microenterprise he has in Up to UF 400 investments. banks through mortgage loans. the commune of Renca. “we have to continue working hard”, she Margarita was waiting for the modestly explains. Moreover, the National Shares Mutual Fund of opportunity to have her own home. BancoEstado stood at second place in the market by number of participants and at the fifth place as per * Nº de operaciones totales: 1,25 millones. Source: BancoEstado. assets managed in its category.

50 51 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

MARKET SHARE IN TERM SAVINGS, NOVEMBER 2010

MARKET SHARE IN TERM SAVINGS ACCOUNTS - TOTAL* Payment methods

CuentaRUT CuentaRut has been essential in widespreading payment methods. BancoEstado is leading debit cards thanks to the rapid growth of this instrument. Rest of the 13% ACTIVE CUENTARUT System (Stock - thousands) CuentaRut ‘s main feature is its inclusion capacity,

BancoEstado 87% as it has minimum opening requirements. Among · BancoEstado is absolute leader in term savings accounts, both in amount and in number of other operations, this instrument, which is a accounts. debit card, receive remuneration payments, make transfers in cash, pay services and make purchases. *Total amount of accounts: 13.7 millons. 3,000

73% CuentaRut holders have an income under 2,500 2,881 US$427, 30% live in rural areas far from urban 2,000

centres, and more than four in ten holders of these 2,262 cards have no other banking product or just have a 1,500 savings account. Source: SBIF 1,000 1,236 BancoEstado’s growth in active CuentaRut cards MARKET SHARE IN 500 TERM SAVINGS BALANCES* remained during 2010, reaching almost 2.9 million 612 19 with 27% increase as per 2009. 0 2006 2007 2008 2009 2010

The above situation strengthened the leadership Source: BancoEstado. of the bank in debit cards, reaching a 30% market

share, including mainly CuentaRUT cards and those · During 2010 the bank continued strongly expanding payment methods, associated with checking accounts and e- checking exceeding 2.8 million active CuentaRuts.

Rest of the accounts. 16% System

BancoEstado 84%

*Total term savings: US$ 6.1 billion Source: SBIF

52 53 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

subsidiary. Electronic check-book and current account At the end of 2010, BancoEstado had over BancoEstado’s electronic check-books increased 3.3% USD$213.7 million in brokered premiums. 42.3% of BANCOESTADO’S MARKET VALID INSURANCE POLICIES SHARE IN DEBIT CARDS in 2010, reaching about 800 thousand customers. the insurances (1.9 million) is associated with home (thousands) (December 2010) Likewise, the number of accounts grew by 7.2% loans. The portfolio of this subsidiary accounts for compared to 2009. BancoEstado is ranked in the fourth 484,000 mortgage loans, and 99.8% of them have place in this matter. fire and earthquake insurance, which has helped alleviate the situation of customers affected by the Bank 1 22% Credit Cards earthquake and tsunami. 4,532 4,500 As per the rapid, convenient and safe conditions 4,186 30% BancoEstado * 4,000 2,615 offered by BancoEstado’s credit cards, they represent Because of this phenomenon the bank received 3,739 1,924 3,500 an increasingly used method. In 2010, the bank 43,666 claims in buildings. 99% has already been 3,328 3,083 1,877 3,000 2,776

maintained its leadership in customer growth with liquidated and 33,715 payments have been released, 1,883

2,500 2,309 1,759 Bank 2 19% this product. The 31% increase as per 2009, ranked totalling US$135.4 million. The management of such 2,172 1,536 2,000

the Bank at the fourth place in number of cards, insurance – which is complex within this industry 1,220 978

1,549 2,262 1,500

with 10.2% market share. because of the number of claims - was addressed 1,917 1,862 506 by a special work program, which speeded up the 1,000 1,445 1,329 1,189 1,240 1,043 Rest of the 1,194 14% An important milestone during the period was the reception of claims. They received the equivalent to 500 System launching of the new credit card “Chilean”, aiming 6 years of operations under normal circumstances Bank 3 15% 0 at low incomes people, which has the particularity and included branches, call centres and internet 2002 2003 2004 2005 2006 2007 2008 2009 2010 to let the customer to define the amount of monthly assistance.

*10.6 millions of active cards payments. Source: Transbank. Mortgage loans related The monthly survey of quality of service levels for Others Source: BancoEstado. Insurance internal and final customers showed a significant · BancoEstado leads bank credit cards, thanks to the fast growth of CuentaRut; BancoEstado act as broker in life and general improvement in satisfaction rates, averaging 61% which increased in more than 1.6 millions in 2008 - 2010. · Widespreanding of insurances, with more than insurances that meet the needs of large segments of evaluations with results between 6 and 7 during 4.5 million valid insurances covering families of the population. At the end of 2010, it was ranked the year. This, despite the considerable increase in and companies. third in bank brokerage with over 4.5 billion of requests for payments, due to the earthquake. valid insurances, corresponding to approximately 2 million customers, 8.9% more than in 2009. Lower income segments are relevant for their insurance portfolio, as it represents as well a contribution to the country’s bankarization.

This dissemination of insurances was possible by the strategic partnership of the bank and MetLife. In May 2010, that company paid $ 58 million corresponding to the last liability of its share in that

54 55 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

MICROENTERPRISE BANKING

Microenterprise Work includes the assistance or BancoEstado recorded a 10.6% real growth in MICRORENTERPRISE funding self-employed customers or business loans, which amounted US$1.1 million. CUSTOMERS AND LENDING (US$ million and thousand customers) owners that employ up to 10 workers (including Cristián Lara the owner or manager)(1) and develop productive The complex scenario developed after the activities, trade or service related, with a turnover earthquake on February 27 involved adapting under 2,400 UF per year. plans to face the emergency. Coordination with other agencies, including the State Development A microentrepreneur with 1,200 The microenterprise sector is considered “key” Network, the Development Corporation (CORFO) an innovative spirit 1,098 to the country and to BancoEstado, given the and the Ministry of Agriculture, was critical and 1,000 993 410 social and economic impact generated by a sound meant significant support to microentrepreneurs. The Entrepreneurship Prize Muhammad that was successfully launched on the 365 Yunus, created by BancoEstado five local market. Investment in facilities 800 335 management of business entrepreneurs, benefiting

years ago to recognize the efforts and equipment for the development 284 812 more than 2 million people in the bankarizing Part of the work during that period was also of Chilean entrepreneurs awarded of this application was possible with 600 process. Funding access for microentrepreneurs to maintain good results and achieve the goals in 2010 Mr. Crisitán Lara Martínez in a bank loan as well. 219 675 169

the Innovation category. Mr. Lara 400 486 is a key lever to improve their competitiveness set in early 2010. This required the innovative 138 developed , an innovative initiative This innovative microentrepreneur and enable them to improve their living standard development of alternative models to reach our 90 334 which contributes to economic explains that “this work represents 200 with tools allowing housing, study and insurance customers. The success in this area is also explained 56 activity, employment generation and intellectual talent, working labour 196 152 funding, among other financial services specifically by the permanent presence of officers in the field, environmental stewardship of his city, development and savings to our 0 86 designed for this sector. a way of working that since 1996 has become the Valdivia. customers as per the high cost of 2002 2003 2004 2005 2006 2007 2008 2009 2010 original products.” He adds that hallmark of the subsidiary and has allowed to know Until recent years Christian Lara “empty toners so far ended in thrash During the period, the bank increased its loans firsthand the difficulties, demands and needs of worked as a telephone company clerk, and refilling them is important for a under a controlled risk and put special emphasis on thousands entrepreneurs. but he dreamed of a more motivating city like Valdivia, which is specially alternative related to his computer sensitive about the need to protect offering its customers the possibility of using State studies. Thus, he opened a toner refill the environment. Thus, BancoEstado’s Loans (Millions - December 2010) guarantees. As in earlier periods, the subsidiary BancoEstado Nº of Clients (thousands) shop in 2005. A loan from BancoEstado support has been crucial, and the Source: BancoEstado. Microenterprise received important awards and and the support of his account Muhammad Yunus prize is a big boost Thus, BancoEstado consolidated its historical recognitions for its management and the impact of manager in Valdivia’s Branch allowed for this initiative. “ him to move to a better location. · In 2010 BancoEstado strongly supported smaller leadership at a national level in terms of their activities on social promotion. Recycling, natural resources and enterprises, incorporation of over 45 thousand new microentrepreneur customers. microenterprise assistance, confirming the above Good business results and his concern renewable energy are in the sights of with the achievement of 400 thousand customers on recycling were the starting point other projects that Cristian Lara hopes in October. In addition, during that period, of a micro-enterprise process that to develop someday “It’s important to culminated today with the creation of work on something of interest, more an alternative product: Lord Print, a than making money, I want to make trademark for a remanufactured toner my dreams come true.”

(1) The details on the winners of the Entrepreneur Award Muhammad Definition of enterprise size as per Chilean production development systim. Yunus in 2010 is in www.corporativo.bancoestado.cl

56 57 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Small Business Banking Closeness in the relationship of small business Educational institutions, public and private This specialized banking holds 65 platforms with the bank has been key to achieve the above. schools are also a very important segment. This deployed along the country, with 160 accounts BancoEstado’s account manager is present in the item reached a 5.9% loan growth during 2010. managers whose mission is to assist and serve field, knows the actual status of the businessman, Likewise, trade and services are areas that customers, which are companies with annual sales its facilities and the business cycle. Thus, he can BancoEstado Small Business considers priority. between UF 2,400 and UF 40,000. In 2010, small timely react and be proactive in meeting his/her companies’ market share was around 15%. requirements. BancoEstado reacted immediately after the earthquake and addressed the situation of The management challenge in 2010 was ensuring Agriculture is important for this bank, which has customers affected by the emergency, giving the loyalty in most of customers who - in 2009 - developed financing tools, lending policies and necessary clearance to recover their production Eliana Obregón requested the support of counter-cyclic policies business knowledge in order to address their units and reschedule commitments agreed with Support in times of crisis developed by BancoEstado. The challenge for next needs with a high competitiveness. the bank. year will be expanding the number of customers. The four-floor building of the on 57 students, and courses were Subsidized/Private School Villa El from first through fourth grade. Sol rises imposingly at El Morro and Today the school has 1,357 students Alejandro Guzman, municipality of from kindergarten up to 12th grade. El Bosque, in the south of Santiago. Its track record, the good results BancoEstado loan support made achieved in the SIMCE test and the possible its construction in 2009, in a strong positioning achieved in the period of international financial crisis. municipality of El Bosque indicate that it is consolidated educational “We needed to grow and adjust to project. SMALL BUSINESS LOANS the requirements of full day school,” (U.S.$ million) recalls the school holder, the teacher Meanwhile, the relationship with Eliana Obregon Briones. “Thus, with BancoEstado became deepen. “We our own contributions and the promise are very pleased by the support and of funding from another bank, the interest of their accounts managers in works started in early 2009. However, our management and projects,” said the lending process took too long Eliana Obregon. 1,300 so, as we were urged, we chose the alternative of BancoEstado, which was In 2010 another school of scientific and 1,100 our salvation. “ humanistic education for 650 students

1,145 in the municipality of Isla de Maipo

900 1,075 Obregon said that BancoEstado was developed. That project required 938 “understood our situation, positively a US$1.2 million leaseback operation

700 833 evaluated the project and we soon got which is currently under process. And the support that allowed us to take by the year 2012 another institution is 655 500 it forward and even build an annex being planned, now in the V region, facility for our preschool area.” plus a gym to continue with the 494 implementation of the Head school.

300 373 · During the last decade, BancoEstado was 318 308 permanently supporting entrepreneurship and The Villa El Sol School was created in Those projects count as well on development of smaller business. 100 1983. By that time, it counted only BancoEstado’s support. 2002 2003 2004 2005 2006 2007 2008 2009 2010

Loans (Billions - December 2010) Source: BancoEstado.

58 59 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

FOGAPE: 30 years servicing small business WHOLESALE BANKING The Guarantee Fund for Small Businesses (FOGAPE) managed by BancoEstado and supervised BancoEstado’s wholesale banking portfolio consists by the SBIF, continues playing a useful role in supporting entrepreneurship and sustaining the Corporate, large companies and Transaction services payment chain of different-sized companies. of Medium and Large business, corporate and institutions The increasing trend of transaction services institutional banking. The market for this area includes three sub-sectors continued during 2010. The number of agreements This mechanism, which in 2010 has marked 30 years, is crucial for small business, because it facilitates access to financial markets in terms and amounts. The FOGAPE is the most used of customers: large companies (annual sales increased by 9% as per 2009, reaching nearly 4,000, system of guarantees by SMEs, and in Latin America has become the main reference on the Medium Business Banking between UF 300,000 and UF 1,500,000); corporate with a total of 1,570,000 workers benefited, which subject. This bank assist companies with annual sales companies (annual sales over UF 1,500,000), and is 11% more than in 2009. During the first 9 months of the year, management had a 50% discount on fees for the use of between UF 40,000 and UF 300,000. During institutional banking. the guarantee paid by SMEs. To sustain the Fund in the long term, in September we proceeded 2010, its management was focused in continuing More than 2,249,000 people receive their monthly to normalized prices. with the market penetration plan, which showed In the case of large companies, BancoEstado’s wages, pensions and annual tax returns through A tender of FOGAPE guarantees for UF $52 million was planned for 2010, but after the a 12% increase in the number of customers and a management in 2010 aimed at achieving a BancoEstado. In that operation, the return credited earthquake in February it rose to UF 54 million, equivalent to US$2,300 million. The bidding 2% real in loans. reached a historical participation of 30 institutions, including banks and subsidiaries, savings closer relationship, providing advice, support and to BancoEstado accounts increased to 58% of the and credit unions and mutual guarantee institutions (IGR). total, under the agreement with the Treasury of commitment. Business management resulted in an Commercial activity during that period was the Republic. 1,165,000 families received a family In 2010 the Fund undertook a historic amount of over 78 000 transactions, exceeding the 18% real increase in loans and 12% for clients. record of 2009, with 52,500 guarantees, and 2005, with 34,500 operations. Likewise, it particularly focused on credit support to companies bonus through the bank and 180,000 payments of placed a new record in the amount of secured financing, for approximately USD$2,900 million, affected by the international financial crisis of 2009 emergency scholarships from the National Board 77% over previous year’s results. With corporate companies, the bank’s management and the earthquake. To help clients who suffered of Student Aid and Scholarships (JUNAEB) were sought to deepen the relationship with customers damage in its facilities, the medium business bank released as well. through crossed products and banks, in order to FOGAPE: TOTAL LOANS AND SECURED FINANCING implemented the rescheduling of its loans, giving maintain the market penetration achieved in the them the time necessary to return to their activity During 2010, BancoEstado signed important previous period. Milestone 2008 2009 2010 Variation % and resume the payment of its liabilities. agreements to pay wages and provide banking 2009-2010 services to businesses, municipalities and other In this segment, during 2010 the bank was part in This bank was present as well in the financing of institutions such as the Military Work Service. This Number of credits infrastructure in the field of education, tourism and 15 transactions relevant to the local banking industry guaranteed by the Fund 24,080 52,510 78,716 50% institution agreed with the bank the payment of (syndicated and bilateral bank loans), reaching a Total amount of secured health; in operational support and equipment in honoraria to civilians hired to clean and rebuild the loans per year (UF) 12,286,252 37,832,395 66,944,889 77% trade, agribusiness, transport, mining contractors credit exposure of US$1,062 million, which is 23% areas affected by the earthquake. Number of enterprises and forestry sectors. of the total. guaranteed by the Fund 38,133 48,240 66,129 37% Number of IFIS Likewise, the execution of agreements for the These results and the countercyclical work in 2009 participating in tenders 19 26 30 15% payment of remunerations and suppliers with contributed to consolidate the vision of BancoEstado the clients of this bank has helped to deepen the as an efficient, timely and reliable alternative both “FOGAPE Guarantees granted per year” business relationship with them and extend the in normal and crisis times and a major financial range of services BancoEstado provides to their institution that supports all the companies in their dependents and contractors. operations, projects and investments.

60 61 IV. CHANNEL MANAGEMENT: THE MOST PROMINENT BANK IN CHILE ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

CAJAVECINA POINTS

4,500

4,000 4,564

3,500 · CajaVecina & CuentaRUT drive bankarization: extension of service 3,000 coverage and greater demand. BancoEstado shows the highest coverage of all BancoEstado has a network of 344 branches, 1,812 increasingly incorporating advice services wherever 3,327 2,500 banking institutions in the country, consolidating its ATMs of its own -supplemented by 6,141 private feasible, aiming at a higher quality of attention. 2,000 leadership in this subject, offering financial services to ATMs (Redbanc) along Chile - 918 instant balance The goal is to massively support clients in their daily 1,500 the largest number of Chileans. It is present in every machines, and 265 deposit boxes located in different lives and in their financial transactions, through 2,000 1,000 district of the country (346), except in the Antarctica, branches, plus 84 ServiEstado branches. BancoEstado’s payment methods. covering low-income and isolated communities. 500 1,003 2 Likewise, in 76 communes of Chile, accounting 4,564 CajaVecina points must be added to this The value proposition lies in accessible and simple 0 300 2005 2006 2007 2008 2009 2010 for 2 million people, BancoEstado is the only bank network, as a channel whose presence grew 37% products and services. The core of the offer is self- having a branch or auxiliary branch. Additionally, during 2010. Remote assistance provided through service, through Internet, ATMs and cell phones, and BancoEstado is also present with its CajaVecina points the Lota Call Center and the Internet banking remote assistance through CajaVecina points, the call in 122 communes that have no branches, with a total platform increased as well. center and ServiEstado branches. On-site attention Source: BancoEstado. population of more than one million people. is focused on products and opening hours specially In all these servicing channels, the relationship defined as per the target group, using sales teams During 2010, the bank’s multi-channel service with customers is based on the personal assistance and express sales modules. network continued growing. At the end of this year, principle, both in person or remotely, and it will be CajaVecina At the end of the period, BancoEstado counts on 4,564 CajaVecina points located at stores and BANCOESTADO NATIONAL COVERAGE small shops in neighborhoods and towns lacking financial services due to distance, connectivity, Channel 2010 Claudio Rozas access difficulties or to the low incomes of their inhabitants. BancoEstado subsidiaries 344 A place that benefits all ServiEstado branches 84 In order facilitate financial services to people living CajaVecina servicing points 4,564 Claudio Rozas Concha is the operator of business premises. The relationship we had to visit,” said Claudio Rozas. in those locations, BancoEstado signed a strategic the CajaVecina number 4000, launched is now consolidated thanks to the “Now people can do their deposits Lota Contact Center units 220 alliance with the Fondo de Desarrollo Tecnológico by BancoEstado in November 2010. He incorporation of a CajaVecina, which and withdrawals right from here, use ATMs (cash dispensers) 1,812 (Technology Development Fund), to install an was “born and raised in Quintay” and serves the local community and a lot their CuentaRUT, pay dividends and Deposit boxes 265 he was a fisherman like his father until, of visitors who, especially in summer water, electricity, cable TV, telephone, electronic device in these places which is connected Instant balance machines 918 disappointed by the low expectations time, disrupt this coastal town’s life. and freeways bills; they can pay to the bank. of this activity, he decided a decade ago The existence of this bank service installments for air ticket purchases to retire, in order to stay with his wife, point ended with the forced trips to and even the ones of a cemetery” . Source: BancoEstado. Any client may perform basic operations such as Teresa del Carmen Otazo, working in Valparaiso the residents had do several “Claudito”, a mini-market that both times in a month in some cases, to make He says that CajaVecina has improved drafts, deposits, transfers and loan payments, using have started two years before in this their bank transactions and paperwork, the living standard of all the inhabitants · BancoEstado has the largest servicing points network along the country. CajaVecina, under the slogan “your neighborhood beautiful cove beach in the Region of with the consequent waste of time and of Quintay. “For us, as owners of a bank”. Valparaiso. money for food and bus tickets or fuel mini-market, this meant an increase in for their vehicles. number of customers who, along with They are long standing customers doing their transactions, they increase of BancoEstado. some years ago “The trip was expensive for us and the demand for the products we sell they requested huge bank loans to we used to spend at least half a day here. So, in the end, we all have been buy a fishing boat and expand their in bank transactions and in companies benefited”.

64 65 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

ServiEstado for 89% of the bank’s total in this period. This During this period, a mobile portal to be used with ServiEstado has been created in 2004 to offer a increase is essential in order to reduce operating cell phone with Internet connection (m.bancoestado. new model of attention, expanding BancoEstado’s costs and widespread financial services. cl) has been issued, ranking BancoEstado amongst service, and focusing on current account the most innovative banks in the sector. transactions, savings and payments of loans and In the use of Internet, BancoEstado is a leader taxes. During 2010, 26 million transactions have among Chilean banking institutions, with over 1 Proportionally, the bank’s customers make more INTERNET CUSTOMERS been performed in the 84 ServiEstado service points million customers in late 2010 operating through electronic transactions than the rest of the system: (Thousands) along the country. Transactions through this channel this channel (www.bancoestado.cl). During the 15% versus 13%, respectively. increased 25.3% in 2010, compared to 2009, and year, the number of customers increased 46%, the number of branches raised from 79 to 84. incorporating 322,000 new customers. Modernization, continuous improvement and safe THOUSANDS 1,100 conditions of the bank’s website were crucial in the 1,000 More electronic transactions Nearly one in three customers (30%) in the banking increase of internet use. 900 sector which operates on Internet uses the bank’s 1,015 During 2010, the number of automated transactions 800 of BancoEstado increased 37% over the previous platform. In 2010, customers of BancoEstado made 700

year. At the same time, these transactions accounted about 141 million transactions on the Internet. 600 693

500

400

300 367 200 236 100 145 98 0 AUTOMATED TRANSACTIONS 2005 2006 2007 2008 2009 2010 (annual)

Source: BancoEstado

MILLION 100% · The automation of transactions has been crucial for 89.0% · Most of BancoEstado’s Customers of BancoEstado use Internet for banking 84.5% widespreading BancoEstado’s services, as per the 80.8% operations. 550 reduction of operating costs. 75.8% 80% · Transactions performed by BancoEstado’s customers on the Internet have grown 71.9% · Automated transactions increased by over 37% in 2010, exponentially in recent years; in 2010 only, they increased 94%, reaching over 141 66.8% representing 89% of the bank’s transactions. million in that year.

450 517 57.6% 58.7% 53.2% 60% 49.1% 350 377 40%

250 291

229 20%

150 201 176 126 128 107 50 87 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Number of transactions. % over total transactions.

Source: BancoEstado.

66 67 ANNUAL REPORT BANCOESTADO 2010 ANNUALMEMORIA REPORT ANUAL BANCOESTADO 2010 Country Map and Bank Coverage By Commune CAJAVECINA, BANK AND SERVIESTADO BRANCHES INCLUDED

MARKET SHARE ON INTERNET CUSTOMERS* (December 2010) BancoEstado Branches ATM´S ServiEstado CajaVecina Total

Rest of the 15.3% 15.2% Bank 3 System Arica y Parinacota 3 20 2 113 138

· BancoEstado is a leader in banking customers Tarapacá 4 27 3 77 using Internet, with a 30% market share. 111 ·The increase in 2010 was of 46%, as over 322 thousand new clients were incorporated. Antofagasta 12 50 2 131 195 Bank 1 19.7%

30.4% BancoEstado Atacama 9 30 2 85 126 * 3.34 million customers Source: SBIF

Coquimbo 16 69 3 197 285 Bank 2 19.3%

Valparaíso 38 190 11 436 675

Lib. General Bernardo O`Higgins 21 75 3 345 444 ANNUAL TRANSACTIONS OVER THE INTERNET BY BANCOESTADO CUSTOMERS (Million) Del Maule 18 77 2 366 463

Biobío 38 149 9 440 636 MILLION 150 La Araucania 24 80 4 240 348 130 141

110 De Los Ríos 10 53 2 65 130 90

70 De Los Lagos 73 23 84 5 149 261 50

30 40 Aysén 5 10 1 55 71 31 28 24 10 2005 2006 2007 2008 2009 2010 Magallanes 5 30 1 44 80

Metropolitana Source: BancoEstado 118 773 34 1,821 2,746

CHILE 344 1,812 84 4,564 6,709

68 69 MEMORIA ANUAL BANCOESTADO 2010 V. FINANCIAL MANAGEMENT ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Financial Management

As a company with public responsibility, during Bank Profitability 57% effective annual rate of its profits. This figure TAXES PAID BY BANCOESTADO. Diversification of funding sources 2010BancoEstado implemented a prudent financial includes an additional 40% rate above the one BY PROFIT AND TAXES US$ MILLIONS BancoEstado has excellent stability and solvency management in order to maintain its traditional BancoEstado’s earnings before tax reached USD$ paid by private banks in Chile. This factor is crucial conditions, and the best risk rating in Chile’s banking 292 million, surpassing last lustrum’s average Year Net Profit Income Special Total soundness, safeguarding customers’ interests and in final results of the company. Previous Year Tax Tax 40% industry. Consequently, it can offer investors and significantly over 2009 figures. Likewise, contributing to Chile and Chileans’ development. profitable, safe and reliable financial instruments. consolidated profit before tax over the bank’s capital 2001 38.3 17.2 46.5 101.9 and reserves climbed to 14.8%. 2002 39.0 13.4 36.3 88.6 Targets established for this period considered The funding diversification strategy used by 2003 35.2 19.6 52.7 107.5 maintaining adequate levels of liquidity, through BancoEstado resulted in a US$ 500 million bond In 2010, BancoEstado reached a historic volume an efficient management and the diversification 2004 31.0 12.2 37.3 80.5 issued in international markets of the U.S., Europe of US$ 558.6 million paid to the Treasury through of funding sources. Resources obtained allowed and Asia. This placement, due in 10 years, reached a taxes and transfer of profits, confirming its strong 2005 15.5 31.3 63.6 110.4 a smooth management of growth projects and quite better interest rate than other similar issuances support to the country’s development. As other 2006 3.7 30.9 76.3 110.9 customer requirements. by other banks. public companies, BancoEstado pay taxes for a 2007 5.0 30.7 79.0 114.8

2008 4.2 43.4 105.7 153.2 In this operation, which enabled the incorporation of 2009 93.5 4.8 7.0 105.3 more than 130 international investors, the demand

2010 99.1 137.9 321.6 558.6 exceeded 3.5 times the amount of the issuance. This issuance reflects the interest generated by the Total 918.814 soundness, solvency and financial strength of the Source: BancoEstado bank, opening new funding opportunities. EARNINGS BEFORE TAXES (Million dollars at December 2010) Previously, BancoEstado had placed a US$ 117 BOND ISSUE 2010 million subordinated bond, at a 28-year term, strengthening the assets of the institution and its Type Millions Issue rate Placement Term in Month & (%) (%) years year business development plans. MMUS$ 350 · Earnings before taxes averaged about Subordinado U.F. 3.0 4.50 3.74 28.0 01-2010 Likewise, BancoEstado subscribed with the German US$ 270 million in the period 2005-2010 Senior US$ 500 4.125 4.325 10.0 09-2010 · Strong recovery of earning before tax 300 KFW Bank a 5-year term bilateral credit of US$ 140 in 2010. 307

292 Source: BancoEstado 250 million. The Yankee CD’s funding program made by 272 263 263

248 the New York branch stands out as well. 200 226 186

150 180 151 100 124

50

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average US dollar December 2010 Source: BancoEstado

72 73 ANNUAL REPORT BANCOESTADO 2010

Global Presence VI. RISK MANAGEMENT

BancoEstado supports its customers in foreign NEW YORK BRANCH trade operations through a worldwide corre- BancoEstado’s New York Branch provides financial spondent banks network. It assumes risks from services to its bank corporate and institutional US$ 500 MILLION BOND banking and country counterparts, enabling cus- customers to manage funds overseas, such as PLACEMENT tomers to be protected against risk of non com- various options for managing investments, cash, pliance when exporting. It also issues guarantees Successful placement positions international payments and loans to Chile or BancoEstado in international to back customers’ business overseas. overseas. markets of U.S., Europe and Asia During 2010, the amount of letters of credit con- This branch also contributes to the task of • The bond will have a unique capital maturity firmed – which protect the exports of bank custom- diversifying funding sources through a deposit at the tenth year. ers overseas - amounted over US$ 300 million. program developed since 2009, which in 2010

• 4.323% interest rate, equivalent to 170 base reached about US$ 1,600 million in 7-days to International rating agencies gave BancoEstado – points over U.S. Treasury benchmark. 3-years term deposits. and its instruments - a favorable evaluation. In • Requests from over 130 international this sense, one of the milestones of 2010 was the PERSONAL BANKING SERVICES investors. highest rating granted by Moody’s, from A1 to BancoEstado offers services to Chileans living • The demand exceeded 3.5 times the amount Aa3, in the long-term foreign currency deposits. abroad both in person or through the call center. of the issuance. Likewise, S&P granted a A+ international rating To reach the bank via internet , customers must

• The placement opens new funding as per the bank’s solvency. access the website www.bancoestado.cl, under opportunities and support the needs of our the “Chilean Overseas” section. Through this customers. Thus, BancoEstado held the best risk rating in platform, customers can submit mortgage loan Latin America according to Standard & Poor’s applications, electronic check-book, housing • The Issuance confirms BancoEstado’s and Moody’s, consistently with the strong ratings and deferred debit saving accounts, and send soundness, solvency and financial strength. granted to the country. remittances, among other services.

74 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

Affected by the global economic downturn occurred During this period, the SBIF issued new regulations RISK INDICATORS PROVISIONS COVERAGE / in 2009, the Chilean economy showed a significant on credit risk provisions, which came into effect in Both, BancoEstado and the financial system showed PORTFOLIO 90-DAYS DUE recovery of its growth rate in 2010. The development January 2011. Main changes were introduced in a slight increase in risk capital provisions, due to the of credit risk policies which were consistent with the individual debt analysis and additional provisions, implementation of new risk models and regulatory institution’s long-term strategy allowed BancoEstado in order to mitigate business cycle fluctuations. changes. to continue expanding its business. BancoEstado kept the necessary safeguards in 2010 500% to face the impacts of these changes. Likewise, provisions coverage on BancoEstado’s

One of the most significant events affecting the portfolio with over 90 days default shows a favorable 400% 469% country’s economy was the February earthquake, Risk management has been developed independently position, compared to the rest of the financial 300% whose magnitude and extent affected a significant from commercial areas, ensuring the existence of system for each portfolio (consumer, commercial *The high weighting of housing in total portfolio conditions the aggregated number of customers, to whom BancoEstado duly effective counterparts in the lending process, and and mortgage). coverage, when compared to the rest of 276% supported by granting facilities for the payment of fully covering all the business segments, within a 200% the system their loans. A strong and consistent policy in mortgage framework of deliberative decisions. There were also minor increases in provisions, write- 100% loans protected by earthquake insurance benefitted off control and higher levels of recoveries, supporting 137% 119% 108% those customers whose homes were damaged or 26% the reduction of net charge on BancoEstado’s loans. 17% 0% 53% destroyed, mitigating the risk of such loans. As a result, BancoEstado returned to the same level Business Loans Consumer Loans Mortgage* TOTAL* before 2008 financial crisis. This trend appears as well in the rest of the financial system.

Banco Estado Rest of the System Source: BancoEstado and SBIF

TOTAL LOAN PLACEMENT PROVISIONS RATIO NET CHARGES (%) (Provisions expenses - recoveries) / Total loans

3.50%

3.00% 2.0% 1.82% 2.50%

1.6% 2.00% 2.92%

2.75% 1.39% 2.11% 1.50% 1.26%

1.78% 1.32% 2.17% 1.2% 1.30%

1.00% 1.50% 1.41% 1.63% 1.00% 1.43% 0.96% 0.50% 0.8% 0.70% 0.81% 0.00% 0.67% 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.4% 2006 2007 2008 2009 2010

BancoEstado Rest of the System BancoEstado Source: SBIF & BancoEstado Rest of the System Source: BancoEstado and SBIF

76 77 ANNUAL REPORT BANCOESTADO 2010 VII. HUMAN RESOURCES MANAGEMENT

FINANCIAL RISK OPERATIONAL RISK risks, the constant monitoring of key indicators defined and the recording of losses and incidents

BancoEstado makes permanent efforts to identify, BancoEstado implemented an Operational Risk in process. measure, monitor and limit risks, in order to make Management Model according to international best more efficient business decisions. During that period, practices, and consistent with the requirements of Basel II. Main achievements during 2010: main activities have been focused on improving the • Establishment of risk tolerance levels, for the most comprehensive framework of both market risk and The strategy to managing this risk considered critical processes. liquidity policies. the integration of a “process” approach, with • Integration of Operational Risk Management the Information Security and Business Continuity practices with Process Management practices. · Provide a independent measurement, monitoring institutional management. • Preparation and distribution of a Best Practices and control of these risks for each business unit. Guidelines for Operational Risk Management, to This model is managed by the Operational Risk support staff training in this subject. · Incorporate new advanced technological Committee, the Heads of Processes in the Bank • Consolidation of the Operational Risk System to systems and applications into the market risk and and its subsidiaries, and the Performance and report and monitor risk indicators and loss basis. liquidity measurement and control process during Operational Security Division. the year, raising quality and reliability of these measurements. The Operational Risk Committee is composed by members of senior management. It is responsible for · Adjust assets and liabilities as per valorization, approving the risk levels accepted by the institution, regulatory imputation, market risk and liquidity risk. and requests Process Managers the necessary actions to keep risks under control. · Define and monitor the established limits. Perform periodical tests on market and liquidity risks behavior To date, the most relevant processes are addressed under stress scenarios, as well as the ability of the by the Operational Risk Management. Those models used to capture them properly. processes allow the identification of the most critical

78 ANNUAL REPORT BANCOESTADO 2010 COMPREHENSIVE CONCERN FOR OUR CUSTOMERS VIII. SUBSIDIARIES’ MANAGEMENT:

Employees are the key resource for BancoEstado Another initiative confirming BancoEstado’s priority TRAINING AND DEVELOPMENT in the fulfillment of its objectives. Thus, priority given to its customers is the Customer Listening 7,500 workers took several training courses on attention is paid to personnel training and Program, developed in 17 district management of issues related to their duties in the bank. development, as well as to count on adequate the personal banking. More than 140 customers working conditions. The commitment of the staff participated in 2010, attending meetings together 644 workers attended courses and studies related to with the institution is evident and is reflected, for with their account managers. the banking business. The annual average training example, in the quick response of the bank to hours per employee in 2010 was of 54 in the bank, operate back normally in the regions affected by BancoEstado has been concerned about a better life with a total of 530,910 hours for all the staff. In the earthquake. quality for its staff and to increase productivity, which addition, 324 emergency instructors received 1,944 has resulted in different initiatives such as preventive training hours. In 2010 BancoEstado had 8,739 direct employees, health campaigns and psychological support, the 98% of which were under continuing contract. 61% creation of a telephone medical advice service to The number of workers who received scholarships of the total staff works in branches and central areas staff and their families, and legal counseling by and support for university careers rose 12.3% over in the Metropolitan Region, followed by Valparaíso phone and on Internet; the creation of blogs and the previous year, from 464 to 521. with 6.8% and the Concepción, with 6.7%. virtual communities; and a recognition program for outstanding workers. After the earthquake, social 42% of the staff are women. During 2010’s support programs to workers from the affected financial year, 52% of the contracts have been regions have been carried out. granted to female personnel, reflecting a rise in this trend. All this activity has resulted in several awards in 2010. BancoEstado is one of the 35 best companies BancoEstado continues developing the internship to work in the country, according to a study program in Customer Service and Conflict Resolution carried out by the “Great Place to Work - Chile”. for senior executives. 12 officers participated on It is ranked at the 26th place, with 76% of positive the first program and 32 in the second one. This responses from its employees. At the same time, activity tries to put in direct contact, face to face, BancoEstado is one of the ten best companies for executives and customers, to better understand working mothers and fathers in Chile, according to their needs, improve the assistance given and the Fundación Chile Unido and “Ya” magazine from address their concerns. El Mercurio newspaper.

80 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCOESTADO coEstado as per the last installment of its shares in impact suffered by this subsidiary in its customer to mandatory contributions to the Pension Funds million - 20% of transactions is currently being done remote areas, but also for densely packed areas MICROEMPRESAS S.A. BancoEstado Corredores de Seguros S.A.. This pay- service flow after the earthquake. Companies, with very low investment levels (US$ by internet. abandoned by the industry, either because of their ASESORÍAS FINANCIERAS ment confirms the success of the strategic alliance 10.7) and tax benefits. low income levels or risk factors. This subsidiary promotes and supports micro- established in November 2004 between the two BANCOESTADO S.A. At the end of the year, BancoEstado Corredores de entrepreneurship, giving financial solutions to the needs companies, whose purpose of widespreading insur- ADMINISTRADORA GENERAL DE At the end of 2010, three new internal regulations Bolsa S.A. continues leading fixed income markets During this period, BancoEstado consolidated its according to each microenterprise. BancoEstado is ance policies enabled them to reach large segments FONDOS. for diversified mutual funds, supplementing and financial intermediation, with US$ 100,098 national leadership in coverage through CajaVecina, leading this segment at a national level. with new offers for them. After six years offering savings and investment BancoEstado’s offer, have been sent to the million in financial intermediation instruments reaching a total of 4,564 service points, representing alternatives, BancoEstado S.A. Administradora Superintendency of Securities and Insurance. traded in the Santiago Stock Exchange, and US$ 37.2% increase over 2009. This requires on-site presence and knowledge on both The fire insurance portfolio for mortgage loans re- General de Fondos accounts for 9.1% of total 43,263 million in fixed income instruments, i.e. the specific nature of this sector and the each client’s ceived 60,720 claims due to the earthquake of Feb- participants in this industry, and stands in the 5th On the other hand, the strategic partnership with 22% and 20% market share respectively. BANCOESTADO CENTRO DE needs. This subsidiary inaugurated its branch 200 in ruary 2010. This number of claims is equivalent to place in the market. During 2010, it reached a French bank BNP Paribas, allowed the access SERVICIOS S.A. Porvernir, as a way to commemorate the bicentenary of six years of normal operations, concentrated in a 20% growth in financial resources managed, and of national investors to sophisticated financial Together with ServiEstado, in 2010 the bank In 2010, BancoEstado Centro de Servicios S.A. Chile. At the end of the year, it reached 201 branches. short period. 72% of the claims referred to build- 17% in mutual fund holders. instruments at a national and international level, reached over 37,000 customers buying and selling - better known as ServiEstado – rose 25.3% in ings and 28% to contents. with a minimum investment. foreign currency in this subsidiary throughout the the number of transactions as per the previous During the financial year 2010, BancoEstado This subsidiary’s Mutual Fund “Acciones country, maximizing the multichannel access to year, surpassing 26 million. ServiEstado branches Microempresas S.A. reached a significant 10.6% BancoEstado’s mortgage customers, who count on Nacionales” (National Shares) reached 13,000 Another milestone during that period was the 2nd financial services. increased from 79 to 84 in the same period. real growth in loans. Customers exceeded 410,000 earthquake insurance coverage since 2000, could participants in 2010, with USD$ 127.1 million in place obtained by “BancoEstado Corporativo” by the end of 2010. repair their homes and recover their living standard, financial resources managed. It was ranked at the (Corporate) Mutual Fund in the Platinum SOCIEDAD DE SERVICIOS Besides cash transactions, this subsidiary supports as they received a UF 3 million payment approxi- 5th place as per its size, and 2nd as per number of Performance Awards, granted by Fund Pro, in the TRANSACCIONALES the expansion of the CuentaRUT card for related BANCOESTADO CORREDORES DE mately in benefits. participants. This fund had an attractive profitability category of 90-days-term national debt. CAJAVECINA S.A. services, such as multi-channel password, cards and SEGUROS S.A. close to 30% in 2010. The model created and implemented by BancoEstado signed registration forms. This subsidiary intermediates life and general insur- At the end of 2010, this subsidiary was ranked at the BANCOESTADO in 2006 allows customers and non customers ance policies that cover about 11% of the national third place of bank brokers, with over 4.5 billion valid The subsidiary incorporated the Bicentennial CORREDORES DE BOLSA S.A. to perform a range of transactions: deposits, BANCOESTADO SERVICIOS population and contributes to the country’s devel- insurance policies, corresponding approximately to 2 Income Mutual Fund, offering a medium and long It is one of the largest of financial intermediation withdrawals, BancoEstado’s loan payments, DE COBRANZAS S.A. opment and bankarization. It also provides solutions million customers, 8.9% more than in 2009. term savings and investment option for customers operators in local market. Nowadays, its challenges transfers, balance inquiries, payments of services This subsidiary manages financial normalization in risks and contingencies for the lower income seg- looking for over one year term fixed-income are in the development of financial solutions and scholarships/pensions recoveries through any of debtors. ments. Its portfolio considers insurance policies ac- During the year, the monthly survey on service instruments. It requires low investment amounts to satisfy the needs of all kind of customers, payment method used by the bank. cording to each social sub-segment. quality held to internal and final customers showed (from US$ 10.7) and has high liquidity. especially individuals. The extension of opening hours from Monday to a strong improvement in satisfaction levels, reach- During 2010, the subsidiary further expanded Saturday between 8:00 and 20:00 hours is one of In May 2010, MetLife Chile Inversiones Limitada, a ing a 6 or 7 score in 61% of the reviews. This is Another interesting alternative during 2010 was the In 2010 this subsidiary showed a strong growth of CajaVecina points along the country, not only to the milestones of that year concerning products and Met Life Inc. Co. subsidiary, paid $58 million to Ban- a significant achievement, considering the strong Voluntary Pension Saving (APV), as a complement shares traded by third parties, exceeding US$ 64.1 provide access to financial services for people from services, as it facilitates timely payment of debtors.

82 83 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010 IX. CONSOLIDATED FINANCIAL STATEMENTS

To improve the contact with its debtors, during As per the earthquake, this subsidiary was closed 2010 BancoEstado implemented a new predic- for two months, which lead to a reduction in tive dialer. This device will include voice mes- monthly incoming and outgoing calls by 15.3% saging services, SMS messages and virtual cam- and 18.0% respectively. paigns as well, which will lead this call center at the cutting edge of these technologies. One of the milestones of 2010 was the incorporation of the predictive dialer, which In 2010, this subsidiary –together with external supports accounting tasks and customer companies- reached a 45.9% increase in write- information management. offs recovery as per 2009, for individuals, micro and small enterprises segments.

BANCOESTADO CONTACTO 24 HORAS S.A. This subsidiary is responsible for the Bank’s Call Center, which operates in the city of Lota. Due to the merge of the web, ATM and CajaVecina services during 2010, BancoEstado Contacto 24 Horas S.A. expanded its activities, integrating the help desk operations with the Contact Centre. Corporate banking has been included as well.

Its activity during 2010 made an important contribution of USD$5.6 million to Lota’s economy, which is 24.4% over the figure of 2009.

The subsidiary increased credit card sales by 35.5% and insurance cards by 35.1%, reaching the 65,000 active credit cards annual goal.

84 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

INDEPENDENT AUDITORS’ REPORT

To the Chairman and Board of Directors of Banco del Estado de Chile

1. We have audited the consolidated statements of financial position of Banco del Estado de Chile and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended. These financial statements (including the related notes) are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements, based on our audits.

2. We conducted our audits in accordance with generally accepted auditing standards in Chile. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Bank’s management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

3. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Banco del Estado de Chile and subsidiaries as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended, in conformity with the Accounting Standards and instructions issued by the Superintendency of Banks and Financial Institutions.

4. As explained in Note 2, the Bank has chosen to partially anticipate the recognition of the provisions in Chapter B-1 of the Compendium of Accounting Standards. This recognition resulted in a charge in the income for the year ended December 31, 2010 for MCh$9,273 (including deferred taxes effects).

5. Our audit also comprehended the translation of Chilean peso amounts into U.S. dollar amounts and we are not aware of any modifications that should be made for such translation to be in conformity with the basis stated in Note 1.2 c. Such U.S. dollar amounts and financial statements translation into English are presented solely for the convenience of readers outside Chile.

February 14, 2011

Jorge Ortiz Martínez

87 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Financial Position Consolidated Statements of Income As of December 31, 2010 and 2009 As of and for the years ended December 31, 2010 and 2009 (In millions of Chilean pesos – MCh$ and in millions of US Dollars - MUS$) (In millions of Chilean pesos – MCh$ and in millions of US Dollars - MUS$)

31.12.2010 31.12.2010 31.12.2009 31.12.2010 31.12.2010 31.12.2009 MUS$ MCh$ MCh$ MUS$ MCh$MM$ MCh$

ASSETS Interest income 2,017 944,114 652,017 Interest expenses ( 896) ( 419,551) ( 171,380) Cash and deposits in banks 4,327 2,025,077 1,159,475 Unsettled transactions 434 203,341 173,604 Net interest and indexation income 1,121 524,563 480,637 Trading investments 2,765 1,293,963 305,684 Investments under repurchase agreements 30 13,811 55,416 Fees and commission income 373 174,675 161,290 Financial derivative contracts 368 172,089 221,389 Fees and commission expense ( 60) ( 28,147) ( 21,614) Interbank loans 199 93,340 50,969 Loans and accounts receivables from customers 23,682 11,083,448 10,773,582 Net fee and commission income 313 146,528 139,676 Available-for-sale investments 6,598 3,087,961 3,316,640 Held to maturity investment 155 72,457 139,935 Net loss from financial operations ( 89) ( 41,816) ( 129,596) Investments in other companies 9 4,014 3,927 Foreign exchange gain (loss) net 219 102,546 175,967 Intangibles 44 20,407 23,830 Other operating income 18 8,482 32,763 Property, plant and equipment 503 235,590 230,005 Deferred taxes 754 353,102 290,532 Total operating income 1,582 740,303 699,447 Other assets 306 143,235 148,540 Provision for loan losses ( 235) ( 109,712) ( 146,487)

TOTAL ASSETS 40,174 18,801,835 16,893,528 NET OPERATING PROFIT 1,347 630,591 552,960

LIABILITIES Personnel salaries expenses ( 549) ( 256,904) ( 252,160) Administrative expenses ( 273) ( 127,888) ( 121,347) Deposits and other demand liabilities 9,187 4,299,355 3,608,754 Depreciation and amortization ( 82) ( 38,143) ( 34,088) Unsettled transactions 312 146,001 93,783 Impairment ( 1) ( 575) - Investments under repurchase agreements 871 407,660 419,329 Other operating expenses ( 148) ( 69,236) ( 40,212) Time deposits and other time liabilities 17,832 8,345,402 7,149,387

Financial derivative contracts 485 227,178 232,590 TOTAL OPERATING EXPENSES ( 1,053) ( 492,746) ( 447,807) Interbank borrowings 1,285 601,527 719,533 Issued debt instruments 7,185 3,362,582 3,204,316 NET OPERATING INCOME 294 137,845 105,153 Other financial liabilities 12 5,514 11,570 Current taxes 197 92,236 186,690 Income (loss) from investments 2 757 ( 219) Deferred taxes 63 29,504 62,914 Provisions 606 283,661 207,096 Income before taxes 296 138,602 104,934 Other liabilities 141 66,036 62,624 Income tax expense ( 115) ( 53,815) ( 44,869)

TOTAL LIABILITIES 38,176 17,866,656 15,958,586 NET INCOME FOR THE YEAR 181 84,787 60,065 EQUITY: Attributable to : Attributable to the owners of the bank Equity owners of the Bank 164 76,634 51,686 Capital 595 278,497 278,497 Non-controlling interests 17 8,153 8,379 Reserves 1,409 659,378 655,604 Valuation accounts ( 22) ( 10,460) ( 2,517) 181 84,787 60,065

Retained earnings: Net income for the period 164 76,634 51,686 Less: Provision for distribution of income to the benefit of the state ( 156) ( 72,705) ( 51,686)

1,990 931,344 931,584 Non-controlling interests 8 3,835 3,358

TOTAL EQUITY 1,998 935,179 934,942

TOTAL LIABILITIES AND EQUITY 40,174 18,801,835 16,893,528

88 89 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity As of and for the years ended December 31, 2010 and 2009 As of and the years ended December 31, 2010 and 2009 (In millions of Chilean pesos - MCh$ and in millions of US Dollars - MUS$) (In millions of Chilean pesos – MCh$ and in millions of US Dollars - MUS$)

31.12.2010 31.12.2010 31.12.2009 Valuation accounts

MUS$ MCh$ MCh$ Capital Reserves Available Cash Translation Income Income Provision for Total Non- Total MCh$ MCh$ for sale flow difference tax for the distribution attributable controlling equity Investment hedges MCh$ MCh$ year of neta income to the bank interests MCh$ Net operating profit 1,347 630,737 552,960 MCh$ MCh$ MCh$ for the equity MCh$ Total operating expenses ( 1,053) ( 492,892) ( 447,807) government owners MCh$ MCh$

OPERATING INCOME 294 137.845 105.153 Equity as of January 01, 2009 4,000 594,048 ( 14,110) - 3,683 8,043 108,968 ( 2,371) 702,261 1,508 703,769 Transfers - 108,968 - - - - ( 108,968) - - - - Income (loss) from investments in other companies 2 757 ( 219) Dividends paid - ( 47,412) - - - - - 2,371 ( 45,041) ( 7,637) ( 52,678) Income before income tax 296 138,602 104,934 Variation of available for sale investment - - 15,751 - - ( 8,978) - - 6,773 - 6,773 Income tax expense ( 115) ( 53,815) ( 44,869) Adjustment for translation difference NY Branch - - - - ( 6,906) - - - ( 6,906) - ( 6,906) Capital increase 274,497 ------274,497 - 274,497 INCOME FOR THE PERIOD BEFORE COMPREHENSIVE INCOME 181 84,787 60,065 Sale of ownership interest in subsidiary ------1,108 1,108 Provision for distribution of minimum income Other Comprehensive Income in benefit of the state ------( 51,686) ( 51,686) - ( 51,686) Available for sale investment ( 12) ( 5,755) 15,751 Net income for the year ------51,686 - 51,686 8,379 60,065 Exchange differences in translation of foreign transactions ( 5) ( 2,257) ( 6,906) Effect of cash flow hedge ( 17) ( 7,749) - Equity as of December 31, 2009 278,497 655,604 1,641 - ( 3,223) ( 935) 51,686 ( 51,686) 931,584 3,358 934,942

OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES ( 34) ( 15,761) 8,845 Equity as of January 01, 2010 278,497 655,604 1,641 - ( 3,223) ( 935) 51,686 ( 51,686) 931,584 3,358 934,942 Transfers - 5,300 - - - - ( 51,686) - ( 46,386) - ( 46,386) Income tax on other comprehensive income 17 7,818 ( 8,978) Equity effect Circular No.3,489 (a) - ( 1,526) ------( 1,526) - ( 1,526) Dividends paid ------46,386 46,386 ( 7,676) 38,710 TOTAL OTHER COMPREHENSIVE INCOME FOR THE PERIOD ( 17) ( 7,943) ( 133) Variation of available for sale investment - - ( 5,755) - - 3,401 - - ( 2,354) - ( 2,354) Variation of hedge accounting derivatives - - - ( 7,749) - 4,417 - - ( 3,332) - ( 3,332) CONSOLIDATED OTHER COMPREHENSIVE INCOME FOR THE PERIOD 164 76,844 59,932 Adjustment for translation difference NY Branch - - - - ( 2,257) - - - ( 2,257) - ( 2,257) Provision for distribution of minimum income Attributable to consolidated income for the year in benefit of the state ------( 67,405) ( 67,405) - ( 67,405) Equity owners of the Bank 164 76,634 51,686 Net income for the year ------76,634 - 76,634 8,153 84,787 Non-controlling interests 17 8,153 8,379 Equity as of December 31, 2010 278,497 659,378 ( 4,114) (7,749) ( 5,480) 6,883 76,634 ( 72,705) 931,344 3,835 935,179 181 84,787 60,065 Equity as of December 31, 2010 MUS$ 595 1,409 ( 9) ( 16) ( 12) 15 164 (156) 1,990 8 1,998 Attributable to consolidated comprehensive income for the year Equity owners of the Bank 147 68,691 51,553 Non-controlling interests 17 8,153 8,379 (a) Charge to income net of deferred taxes as a result of the accounting change indicated in Note 2 to the Consolidated Financial Statements. 164 76,844 59,932

90 91 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010

BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31, 2010 and 2009 (In millions of Chilean pesos - MCh$ and in millions of US Dollars - MUS$)

31.12.2010 31.12.2010 31.12.2009 MUS$ MCh$ MCh$ CASH FLOWS FROM OPERATING ACTIVITIES

Net Income for the Year 181 84,787 60,065

Charges (credits) to income that do not represent cash flow: Depreciation and amortization 82 38,143 34,088 Impairment of assets 1 575 - Provisions for credit risks 235 109,712 146,487 Adjustment to market value of non-permanent investments 72 33,714 231,402 (Gain) loss from investments in companies ( 2) ( 757) 219 Net (income) from sales of assets received in lieu of payment - ( 102) ( 19) Loss (gain) on sale of fixed assets - ( 28) 105 (Gain) on sale of permanent investments - - ( 12,449) Write-off of assets received in lieu of payment 1 443 631 Other charges to income that do not represent cash movements 271 127,039 109,008 Net interest and adjustments ( 1,121) ( 524,563) ( 480,637) Net commission accrued (313) ( 146,528) ( 139,676)

Changes in assets and liabilities affecting operating flow: (Increase) decrease of trading instruments ( 2,090) ( 978,105) ( 117,505) (Increase) in loans (896) (419,578) (1,738,489) Decrease (increase) in held-to-maturity and available-for-sale investments ( 2,152) (1,006,986) 1,066,565 (Increase) decrease in other credit operations ( 90) ( 42,371) 219,553 Increase in creditors in checking accounts 1,263 591,139 157,732 Increase of deposits and loans 2,810 1,315,380 938,181 Increase (decrease) in other demand and time liabilities ( 42) ( 19,903) 135,862 General Facts Increase (decrease) in other obligations through brokerage of documents ( 25) ( 11,669) 62,725 Decrease in obligations in letters of credit ( 369) ( 172,607) ( 223,222) Increase (decrease) in loans obtained from local banks 29 13,684 ( 4,130) R.U.T (Chilean tax identity number) Increase (decrease) in loans obtained from foreign banks 52 24,386 ( 64,803) Increase in loans obtained from the Central Bank ( 333) ( 156,076) 156,076 97.030.000-7 Net decrease (increase) in other assets and liabilities ( 464) ( 217,285) ( 39,102) Commissions received 373 174,675 161,290 Commissions paid ( 60) ( 28,147) ( 21,614) Head Office Interest and indexation received 1,945 910,410 945,088 Avenida Libertador Bernardo O´Higgins Nº 1111 Interest and indexation paid ( 881) ( 412,158) ( 431,490) Santiago de Chile Net cash flow (used in) operating activities ( 1,523) ( 712,776) 1,151.941

Web Site CASH FLOWS FROM INVESTING ACTIVITIES: www.bancoestado.cl Purchase of property, plant and equipment and intangibles ( 89) ( 41,684) ( 73,287) Sale of fixed assets and intangible assets 3 1,357 1,142 Investment in Company - - 4 Postal Code and Ardes Sale of investments in companies - - 13,557 Correo 21, Casilla 240 - V, Código Postal 6501186 Dividends received from investments in companies 1 340 397 Sale of assets received in lieu of payment 6 2,748 650

Net cash (used in) provided by investing activities ( 79) ( 37,239) ( 57,537) Swift BECH CL RM CASH FLOWS FROM FINANCING ACTIVITIES:

Capital increases - - 274,497 Main Switchboard Bond issuance 653 305,393 217,907 Release of bonds ( 23) ( 10,619) ( 6,937) (56)-(2)-970 7000 Payment of income from previous year at the benefit of the state ( 99) ( 46,386) ( 47,412)

Net cash provided by financing activities 531 248,388 438,055 BancoEstado 24 Horas (24 Hour Line) 600 200 7000 Net variation for the period of cash and cash equivalent ( 1,071) ( 501,627) 1,532,459

Cash and cash equivalent at the beginning of period 7,101 3,323,531 1,791,072

Cash and cash equivalent at the end of period 6,030 2,821,904 3,323,531

92 Design and Layout Vial Lambiasi

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