Annual Report 2008 WorldReginfo - 5f1ce261-c299-463d-994c-4e559b2c3833 Our Mission 01 Chairman’s Letter 02 Historical Outline 04 Contents Corporate Governance and Capital Structure 06 Board of Directors 08 Corporate Governance Practices 12 Ownership of Banco de Chile 20 Banco de Chile Share 22 Economic and Financial Environment 26 Economic Environment 28 Chilean Financial System 32 Performance in 2008 36 Chief Executive Officer Report 38 Our Management 44 Principal Indicators 45 Highlights 2008 46 Results Analysis 48 Business Areas 54 Business Areas of Banco de Chile 56 Individuals and Middle Market Companies 58 Banco CrediChile 60 Wholesale, Large Companies and Real Estate 62 Corporate and Investments 66 Subsidiaries 70 Risk Management 74 Credit Risk 78 Financial Risk 85 Operational Risk 96 Social Responsibility 100 Our Staff 102 Our Community 110 Our Customers 118 Consolidated Financial Statements 120 WorldReginfo - 5f1ce261-c299-463d-994c-4e559b2c3833 Our Mission We are a leading financial corporation with a prestigious business tradition. Our call purpose is to provide financial services of excellence, offering creative and effective solutions for each customer segment and thus ensuring permanent value growth for our shareholders. Our Vision To be the best bank for our customers, the best place to work and the best investment for our shareholders. WorldReginfo - 5f1ce261-c299-463d-994c-4e559b2c3833 Chairman’s Letter Dear Shareholders, It is a particular pleasure for me to present you the annual report and with Citigroup. In particular, I emphasize the international services financial statements for the year 2008, a period in which we agreed provided to corporate and multinational customers, the wide range the absorption of Citibank Chile’s business and began a momentous of treasury products available to companies and a superior presence strategic alliance with Citigroup Inc. The year was also marked by the in investment banking business during the year. With respect to beginning of worldwide extreme turbulence in the capital markets, retail banking, the use of the new Banco Edwards Citi corporate a phenomenon from which Chile has not escaped and which will image for the branch network that brought together the offices of have effects that we shall continue observing during 2009. Despite Banco Edwards and of the former Citibank proved to be an effective this, it was a year of excellent results with an important growth in strategy for maintaining the vast majority of our customers. The volumes and the variety of business undertaken. combination of the Banco CrediChile consumer division with Financiera Atlas was successfully completed last November to The extraordinary shareholders meeting held on December 27, 2007 produce one network under the Banco CrediChile brand, with a approved the merger by absorption of Banco de Chile and Citibank fully unified sales, service and collections model. Chile, a subsidiary of Citibank N.A. of the United States of America. Banco de Chile issued new shares for this transaction which today In the area of economics, I recall that when we presented you the represent 10.44% of the total shares issued. Following the approvals annual report for 2007, we mentioned that the mortgage crisis in of all the regulators involved, the Bank thus opened its doors on the United States of America was affecting that country’s growth January 2, 2008, after having unified its financial and commercial rate and having an impact on liquidity on an international scale. operations, hence completing the merger in a very short time and The situation became much more serious in September 2008 when, with practically a full integration of functions for customers of the in conditions characterized by mistrust by all parties, large banks former banks. This was of course a very complex transaction, not collapsed in various countries of the world, prices on the most exempt from those difficulties common to processes of this kind. important stock markets fell, panic spread among investors in some However, by the second half of the year, we could appreciate with markets, bank intervention and nationalization occurred to banks satisfaction that the benefits expected from this merger and strategic from important economies, and finally there was a massive liquidity alliance had begun to bear fruits. On one hand, we were gradually injection by monetary regulators. recovering our customer’s satisfaction levels and, on the other hand, the synergies estimated in our projections started to materialize and we began to appreciate the benefits of joint or coordinated actions 2 3 WorldReginfo - 5f1ce261-c299-463d-994c-4e559b2c3833 Chairman’s Letter Annual Report 2008 While Chile has been facing this scenario in a relatively advantageous average of the banking system, reaching 22.6%. Although this position as a result of the earlier accumulation of international return rate is below the figure of the previous year, I should point out reserves and fiscal savings, we should remember that we are not that the present one is based on capital and reserves substantially immune to these events. In recent months, the local capital markets higher than those at the end of last year, increased by Ch$322 suffered an important liquidity shortage, principally in foreign billion as a result of the merger already mentioned. The year’s net currency, a situation that banks in Chile and especially Banco de income thus was Ch$272 billion, equivalent to earnings per share Chile were able to resolve with a good outcome. The volatility of of Ch$3.368272. the monthly inflation rate and exchange rates has been another aspect of the second half of 2008. In particular, Banco de Chile’s I would like to praise the Bank´s management and every member self-imposed additional strict liquidity standards and strengthened of the corporation. The effort and enthusiasm shown during the its commercial relations with correspondent banks and institutional year just ended made excellent results possible in a particularly investors which enabled it to maintain intact its solid financial complex scenario. I am confident that we shall count on all their position and confirm its high reputation in Chile and abroad. skills to continue growing the prestige, reputation and strength of this institution. It should be mentioned that among other remarkable events during 2008, Banco de Chile obtained several loans from important foreign Knowing that Banco de Chile has to maintain a position of banks, even in the periods of greatest market concerns. Specifically, undisputed leadership in the Chilean capital markets, I would like to the signing of a loan granted by a bank in the Popular Republic of make clear the commitment of the Board of Directors to continue China, the first sign that the efforts made for building strong and promoting those initiatives that guarantee excellence in the provision long-term commercial relations with Asian banks were succeeding. of financial services to individuals and companies. We are conscious that the recession already affecting Europe and the United States is having repercussions in Chile and we know we only just now perceive the first impacts. I have no doubt that 2009 will be a difficult year. The low growth projected for domestic demand and economic activity in general, makes us cautious when making forecasts regarding our industry performance. This is why the Bank’s Board has favored the maintenance of the prudent credit policies that have characterized us in previous years. It is in our interest to continue assisting customers to overcome this low point in the economic cycle but, at the same time, to reinforce the importance of strict supervision of the loan portfolio quality, acting constantly with responsibility and precaution. Pablo Granifo L. Regarding the results contained in the financial statements I am Chairman of the Board presenting to you, I should confirm that Banco de Chile has once again earned an annual return on capital much higher than the 3 WorldReginfo - 5f1ce261-c299-463d-994c-4e559b2c3833 Historical Outline 1907 In 1907, Banco de Chile opened an agency in London which was vital for obtaining foreign banks finance and for developing foreign trade to and from Chile. This new agency was of great importance to the country during the economic growth Chile experienced during the First World War and later in the search for solutions after the sudden crash in nitrates prices in the 1920s. 1926 In April 1926, the Bank relocated its head office from that of Banco Nacional de Chile in Huérfanos Street 930 to a brand-new building at Ahumada Street 251, the institution’s present head office. That same year, the Banco Central de Chile was created and a new General Banking Law passed which gave rise to the Superintendency of Banks, which replaced the General Inspectorate of Banks which had 1894 existed since 1912. The Banco Central de Chile then became the most Banco de Valparaíso main hall, currently branch Valparaiso Prat of Banco de Chile important agent in the banking system stabilization, a role which Banco de Chile had performed to a large degree over previous decades. 1894 Banco de Chile is a banking corporation established in Chile that began The Bank survived the 1930s crisis thanks to its strong capital base; to operate in this name on January 2, 1894 with the merger of the and continued its development, remaining during that period as businesses of three banks: Banco de Valparaíso, founded in 1856; the country’s largest bank and one of the most respected and solid Banco Nacional de Chile, founded in 1865; and Banco Agrícola de Chile corporations. which started to operate in 1869. In this sense, Banco de Valparaíso, the first bank in Chile constituted as a corporation, is the real origin of 1973 In 1973, following the bank nationalization process ordered by the Banco de Chile.