ANNUAL REPORT BANCOESTADO 2010

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2 ANNUAL REPORT BANCOESTADO 2010

3 ANNUAL REPORT BANCOESTADO 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 Key milestones A bank with 155 years of history 24 Evolution of the bank in figures, II. A BANK AT THE SERVICE OF CHILEANS 30 BancoEstado s Vision and mission 31 Strategic plan Transformation projects 37 III. SALES MANAGEMENT: BANCOESTADO IN CHILEAN S BANKARIZATION 38 BancoEstado before the banking industry: results Trends and forecasts 41 Corporate management 45 Marketing and communications 46 Divisions management CONTENTS 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.

4 I. BANCOESTADO ALWAYS WITH ITS CUSTOMERS YESTERDAY, TODAY AND TOMORROW

5 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 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 every Chilean. We want to accomplish this mission effectively, doing things focused on our customers, properties through BancoEstado. Over 400,000 micro and small entrepreneurs develop their businesses with our support. achieved by the bank, with limited risks and reaching as well an improvement in long term international risk classification. Sincerely, Segismundo Schulin-Zeuthen 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 6 7

6 Financial Summary In 2010 BancoEstado fully accomplished the goals established, in a scenario of economic recovery that On the other hand, after the 27 February earthquake, the bank took actions to help alleviate the damage improved by almost 1 percentage point over 2009, reaching 58%. CONSOLIDATED CORPORATE DATA - BANCOESTADO AND ITS SUBSIDIARIES (a) (US$ million) was affected by the serious consequences of the earthquake that struck the country in late February. suffered by customers. The impact on results of provisions and write-offs Indicators From a business perspective, the bank aimed at retaining a significant fraction of the market share achieved in 2009, which reached 16.1%. The goal was accomplished showing a loans performance that, as expected, was lower than the one of other banks, but allowed to keep much of the credit level reached during the financial crisis and even reach an increase. BancoEstado s total loans expanded 0.6% in real terms with a lower dynamism in companies loans (0.4%) than personal loans (0.8%). PROFITABILITY (Profit before taxes / capital and reserves,%) In terms of financial results, BancoEstado and its subsidiaries reached a U.S. $ 296,2 million surplus before tax, which in real terms is 28.9% higher than in the previous year. In turn, profitability reached 14.8%, higher than in 2009, reflecting basically the improvement in revenues performance and the reduction of expenditure on risk in a stronger economic period. In 2010, efficiency (measured as the ratio between administrative expenses and gross operating income) expenditure, net of written-down loan recoveries, decreased compared to the previous year, representing 0.96% of total loans of the bank as of December 2010; a figure that appears favourable compared to the 1,26% appearing in the rest of the financial system. This can be explained by a moderate increase in provisions associated with the risk of customers, punishment control and higher recoveries. During this period, BancoEstado kept the best risk rating in Latin America (according to Standard & Poor s and Moody s), in accordance with the strong rating assigned to the Republic of Chile. A major milestone during 2010 was the issuance of a U.S. $ 500 million bond in the international market, Earnings before tax Core capital 1,431 1,491 1,501 2,039 1,990 effective networth 2,218 2,168 2,233 2,824 3,003 Total loans 22,051 19,942 20,164 24,251 24,393 Total consolidated assets 35,583 33,941 33,191 36,980 40,174 Earnings before tax/ total assets (%) Earnings before tax/capital and reserves (%) Efficiency ratio (b) Provisions over loans ratio (%) Core capital/total eligible assets (%) (c) Basel ratio (%) (d) Branches CajaVecina and ServiEstado 326 1,043 2,045 3,406 4,648 Automated Services 2,204 2,320 2,663 2,900 2,995 Total annual transactions (million) % 25% 24.4% achieving very good rates. (a) Since 2008 Financial Statements are issued under IFRS regulation. (b) Administrative expenses over gross margin plus monetary adjustment. (c) Legal minimum 3%. (d) Legal minimum 8%. (e) ATMs, cash dispensers and drop boxes. Source: SBIF and BancoEstado BancoEstados results increased 28.9% in 2010, as its ROE. Efficiency improves, following previous years trend. Provisions ratio over total Loans is stabilizing after the increased suffered under financial crisis of % 15% 14.8% 2010 INTERNATIONAL RISK RATING FOR BANCOESTADO 10% 5% BancoEstado System Non-consolidated figures until 2007 Company Short Term (1) Long Term (2) Forecasts Moody s (3) P1 Aa3 Stable Standard & Poor s (4) A1 A+ Positive In 2010 BancoEstado raised its long term credit rating (Moody s). In 2010 BancoEstado kept the best risk rating in Latin America. Source: SBIF and BancoEstado (1) Foreign currency debt, equal or under one year. (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 Capitalization and counter-cycle policy affected it in 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. 8 9

7 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 BOARD OF DIRECTORS and oversight the bank, regularly reviewing the progress of its operations and activities; to approve the Balance and Annual Report; to inform the In April Mr. José Luis Mardones, who led the institution since 2006, resigned as Chairman of BancoEstado. In May, meanwhile, Jessica Lopez EXECUTIVE COMMITTEE BancoEstado s senior management corresponds estate, securities or other property; settle credit applications and other operations authorized to the bank, regardless of their nature and amount; other business somehow related in participation, dependence or interference. 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 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 The bank s senior management is exercised by the Board of Directors. This collegiate body is composed of seven members, six of which are under the exclusive trust of the President of the Republic and are appointed through Supreme Decree by the Ministry of Finance. The seventh member, the exclusive trust of the President of the Republic, and has the out-of-court representation of the bank, especially before public authorities, banks and financial institutions, at national and international level. He also chairs the meetings of the Board of Directors and Executive Committee, and calls special sessions, setting the corresponding table. He must Vice Chairman, and Mrs. Jorge Rodriguez Grossi, Salvador Valdés Prieto, Gabriel Tomic Errazuriz and Juan Carlos Méndez as Directors. Chairman: Segismundo Schulin-Zeuthen senior management and operations of the company. It may agree, implement and execute any act or contract leading to the fulfilment of the bank s objectives. Its actions must be within the laws and regulations, and policies and standards provided by monetary authorities, the Board of Directors of BancoEstado and the Superintendency of Banks and or through the bank s officers and employees all the necessary instructions and recommendations for the efficient administration and good performance of the company; grant special mandates and delegate to any of its members, in one or more committees, senior positions or one or several specially selected officers, the attention or execution of matters Chairman: Segismundo Schulin-Zeuthen Vice Chairman: Roberto Palumbo Chief Executive Officer: Pablo Piñera Labour Director, is the employees representative, chosen by themselves, and has an alternate. Chairman and Vice-Chairman are selected amongst those seven members of the Board. The Board s duties are: to state the general policy oversight the company and comply with any other duty entrusted by the Board of Directors and the Executive Committee. The Vice Chairman has the exclusive trust of the President of the Republic and his main duty is to Vice Chairman: Roberto Palumbo Directors: Juan Carlos Méndez Jorge Rodríguez Gabriel Tomic Financial Institutions (SBIF). Among its responsibilities, the Executive Committee may: set the terms and conditions for the bank s operations, such as guarantees, maximum amounts and interest rates; monitor the compliance of deemed appropriate; and designate employees who will act as certifying officers in procedures and documents of the bank, as well as for its own deliberations and agreements. BancoEstado s immediate administration corresponds General Counsel: Andrés Medina 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 salaries and other allowances of staff that are not collectively negotiable, with the approval of the Ministry of Finance; to create or remove subsidiaries in the country or abroad; to decide on matters or any other cause. This subrogation includes all the duties and powers of the Chairman, including the ones set by delegation. Likewise, he must perform the duties and powers entrusted or delegated by the Board of Directors and the Executive Committee. Labour Director: Pablo Silva Labour Alternate Director: Ricardo Moreno the annual budget for investment and expenditure, as well as its amendments, provisions and writeoffs, and the Balance and Annual Report of each period; report every year to the Board of Directors on business operation and development; agree trust of the President of the Republic. In order to safeguard the necessary transparency of their actions, no member of the Board of Directors 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 10 11

8 AUDIT COMMITTEE LEGAL DEPARTMENT BANCOESTADO SUBSIDIARIES Created in 1995 by the Executive Committee, the Audit Committee is an important internal control The Legal department holds the legal representation of the bank before administrative tribunals, courts receiving sanctions for legal or regulatory violations, financial loss or loss of reputation for failures in the Eight subsidiaries, supporting the core business which provide financial services, represent a complement for BancoEstado to provide the banking services needed 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 is complementary to the General Counsel s role, the President, the General Counsel must attend the meetings of the Board of Directors and Executive conduct and standards of good practice. Likewise, the Management assists customers and manages BANCOESTADO SUBSIDIARIES MANAGEMENT partners: in insurance matters, BancoEstado set a six years agreement with Metlife Chile Inversiones Furthermore, the SBIF may, for purposes of consolidation with the bank, directly request the established by Organic Law. It consists of five members, two of which are independent from the management. Committee, without the right to vote. His duty is to ensure that the agreements, instruments and contracts comply with the applicable legal their requirements. BancoEstado S.A. Administradora General de Fondos Pablo Mayorga (*) Limitada, a subsidiary of MetLife Inc. Co.; and in expanding opportunities for savings and investment, BancoEstado entered into an agreement in January financial statements to these subsidiaries, and review all operations, books, records, accounts, documents or information to determine its solvency. This entity is responsible for the maintenance, implementation and operation of the bank s internal controls, the risks of business activities carried out and the enforcement of rules and procedures. Likewise, they must review external auditors reports, balance sheets and other financial statements; proposals of auditors and risk rating entities; review the background of related operations; and analyse remuneration systems and main compensation plans for executives. Its objectives are to ensure efficiency, maintenance, implementation and operation of risk management systems and internal control, as well as the compliance with the rules and procedures governing the banking activity, and identify business risks undertaken by the bank and its subsidiaries; supervise the operations of the Audit Office and its independence from management; to serve as liaison and coordinator of work between internal and external audit, acting as well as a link between them and fulfilling all duties and responsibilities established by the Superintendency of Banks and standards and to report legal issues submitted for his consideration. General Counsel: Andrés Medina AUDIT OFFICE The Comptroller is responsible for the internal control and oversight of the bank s accounts, services and offices. He must evaluate and promote improvements in risk management and internal control of the bank and its subsidiaries, to protect the resources of clients, financial assets and reputation of the bank. Comptroller: Pedro Bolados Compliance Manager: Álvaro Del Barrio DIVISION MANAGERS BancoEstado has six Management Divisions which report directly to Chief Executive Officer. Chief Credits Manager: Arnoldo Courard Chief Financial Officer: Carlos Martabit Chief Administration Officer: Victoria Martínez Corporate Risk Manager: Eduardo De Las Heras Operations and Systems Division Manager: Fernando León BancoEstado Centro de Servicios S.A. Patricia Morales BancoEstado Contacto 24 Horas S.A. Jaime Reyes BancoEstado S.A. Corredores de Bolsa Jorge Ramírez BancoEstado Corredores de Seguros S.A. Joaquín Alegría (**) BancoEstado Microempresas S.A. Asesorías Financieras Soledad Ovando BancoEstado Servicios de Cobranzas S.A. Carlos Eterovic Sociedad de Servicios Transaccionales CajaVecina S.A. Jorge Stuardo While all of these subsidiaries belong to BancoEstado, they are independent companies with their own objectives and strategies. However, they share the corporate mission and are part of the same team. Overall corporate governance of these companies depends on the Executive Committee with the French BNP Paribas Investment Partners, one of the largest banks worldwide. Related Entities BancoEstado shares, represents and/or participates at different levels in the following entities. None of these are subsidiaries of the bank. Ownership interest: -Administrador Financiero Transantiago S.A. (21%) -Bolsa de Comercio de Santiago S.A. (2.0833%) -Bolsa Electrónica de Chile S.A. (2.439%) -Operadora de Tarjetas de Créditos Nexus S.A. (12.903%) -Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. (Combanc S.A.) (10.23%) -Transbank S.A. (8.7188%) Supervision and reporting to external agencies Controller As the rest of the financial industry, BandoEstado is regulated by the Superintendency of Banks and Advisors and External Auditors The bank hires risk rating companies to evaluate its instruments as part of the normal practices for public-offered securities issuers. Thus, investors materialize their investment decisions under wellknown risk standards and guidelines, increasing transparency and information on conditions of the entity as an issuer of financial instruments. Additionally, it has a external audit service which reviews the individual and consolidated financial statements of BancoEstado and its Subsidiaries, as required by the SBIF and the Superintendency of Securities and Insurance (SVS), as appropriate. Financial Institutions. During 2010 the Committee held 14 meetings. COMPLIANCE MANAGEMENT The Compliance Manager is responsible for Planning and Management Control Officer: Óscar González Subsidiaries have been created in order to ensure a high quality, lower cost and more efficient Financial Institutions (SBIF), which enforces the laws, regulations, statutes and other related provisions, and extensively controls all operations and business managing regulatory, reputational and operational administration of the services provided to customers activities. Chairman: Juan Carlos Méndez Members: Roberto Palumbo Jorge Rodríguez Patricio Meller Guillermo Ramírez risks, allowing BancoEstado to be a sustainable organization and serve the diverse audiences. The Management has an independent nature and identifies, advises, warns, monitors and reports compliance risks in the organization and promotes a culture of compliance, avoiding exposure to risk of requiring more specialized care. This allows the diversification of the bank s business within the scope of their own line of business and enables the central line to continue in the strategic development. For the development of two business areas, the bank set strategic alliances with world-class As per Article 70, letter b), the SBIF s oversight reach as well subsidiaries, and business support companies according to Article 74, both from the General Banking Law, where the bank is shareholder or has a stake, and which existence or incorporation has been previously authorized by the Superintendency. (*) Pedro Rojas Acted as General Manager of this subsidiary until February 28, (**) Fernando Silva Acted as General Manager of this subsidiary until December 10,

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

10 Key Milestones in 2010 FEBRUARY BancoEstado is leader in number of customers using their private Internet site. According to the SBIF, between December 2009 and December 2010 the number of customers who entered with user password to increased by 46%. Thousands of people went each Saturday to the Paseo Ahumada in Santiago Downtown to enjoy a Chilean film series that BancoEstado offered for free. APRIL Feller Rate gave a AAA rating to BancoEstado, as per the stability of its funding sources, good credit management and leadership in savings and mortgage financing. BancoEstado paid more than 500,000 March bonus, 84% of the total amount of beneficiaries of this government subsidy. BancoEstado celebrated in Parral the closure of JUNE BancoEstado addressed a successful placement of a subordinated bond - Series I2, amounting UF 3 million, equivalent to U.S.$117 million, at a 28 years term with a 3.74% interest rate. BancoEstado collaborated in the fifth version of Expo ArribaMiPyme, which offered services for entrepreneurs and recovery of micro, small and medium businesses affected by the earthquake. 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 at a regional level, BancoEstado showed the highest increase in loans during the peak of the international financial crisis. The bank supported the concert Song for Haiti, to raise funds for earthquake victims in that country. BancoEstado strengthened its branches, extended ServiEstado s working hours and set mobile banks to facilitate access to financial services in the districts affected by the earthquake and tsunami in the Biobío and the Maule Regions. In the areas most affected by the earthquake, the The President of the Republic, Sebastián Piñera, appointed as new members of BancoEstado s Board of Directors Mr. Segismundo Schulin-Zeuthen as Chairman; Roberto Palumbo Ossa as Vice President, and Mr. Jorge Rodriguez Grossi, Mr. Salvador Valdés Prieto, Mr. Gabriel Tomic Errazuriz and Mr. Juan Carlos Mendez as Directors. BancoEstado signed an agreement with the National Irrigation Commission to improve farmers funding access to repair and rebuild irrigation works damaged by the earthquake. bank postponed the payment of 6 mortgage dividends for its customers and rescheduled loans for micro and small entrepreneurs. The branch of Talcahuano gets operational again, 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

11 AUGUST BancoEstado held its IX Housing Fair. The exhibit included more than 200 projects from 20 real estate companies, with very convenient rates for those who dream of their own home. SEPTEMBER BancoEstado issued in international markets, U.S., Europe and Asia a 10 years bond for US$ 500 million with semiannual interest rate. 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. OCTOBER BancoEstado signed an agreement with AvalChile to expand and improve access of SMEs to bank financing. According to a study based on ratings from Moody s, Standard & Poor s and Fitch, BancoEstado is the safest bank in Latin America. During Chile s Bicentennial, BancoEstado celebrated 155 years providing financial services to Chileans. NOVEMBER BancoEstado delivered 300 computers to schools and colleges in the Regions most affected by the 27 February earthquake, helping to reduce the digital gap along the country. In Quintay, with the President of the Republic, BancoEstado celebrated the major advances in bankarization with the opening of the CajaVecina number 4,000 and 400,000 microentrepreneurs. BancoEstado s Customers could make Christmas and New Year purchases with credit card at 0% interest rate. BancoEstado commemorated the World Savings Day with representatives of the Global Compact, financial system authorities and students and school teachers from Marqués de Ovando School. DECEMBER BancoEstado delivered for the sixth consecutive time the Muhammad Yunus Entrepreneur Prize, an initiative that recognizes the entrepreneurial capacity of microentrepreneurs, their effort and innovation. BancoEstado s Savings Museum reopened with new facilities, in the premises of the Bank s Headquarters. The Santiago Stock Exchange ranked BancoEstado Brokers in the first place in the ranking of volume traded in financial intermediation instruments and fixed income. Likewise, BancoEstado led the total stock trading operations of all markets, with U.S.$143.5 billion. The Guarantee Fund for Small Entrepreneurs (FOGAPE), managed by BancoEstado, celebrated 30 years of existence and coincided with its fourth bid in 2010, which awarded USD$ 7 million in guarantees

12 1855 Creation of the Caja de Crédito Hipotecario Creation of the National Savings Fund Creation of the Institute for Industrial Credit Enactment of the Constitutional Organic Law of Banco del Estado (Decree No. 2,079) Change corporate image Strategic alliance between BancoEstado and MetLife Inc. Creation of ServiEstado 2007 Launching of CuentaRUT and CajaVecina Strategic Alliance with BNP Paribas Investment Partners Creation of the Caja de Ahorros de Santiago Creation of the Agricultural Credit Bank Foundation of Banco del Estado of Chile Starts modernization project of the bank Integration of BancoEstado and Redbanc ATM network Opening of New York Branch. 150 years serving the country Capitalization of U.S. $ 500 million More than one million customers using Internet banking. Opening of the CajaVecina number 4,000. Reaches the goal of 400,000 microentrepreneur customers

13 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 in 1927 and had 147 offices along the country. That same year was opened the Agricultural Credit Fund and one year later, the Industrial Credit Institute. In 1939, the earthquake of Chillán left 30 people dead. The National Savings Fund supported the reconstruction of the devastated area and adopted a flexible credit policy for the victims. One of the events driving the bank to be part of the modernization of the country and its institutions was the transformation projects developed in the mid-90 s. By then, the bank implemented a strategic plan to reconcile economic and social efficiency; to improve customer service; to introduce a management style focused on results, and sought to achieve stability and progress of its workers together with a higher competitiveness. communes along the country through its offices, ServiEstado or CajaVecina points. Its strategy is to achieve an efficient bankarization. Bankarization work involves, in addition to its commercial role, a social inclusion role - which distinguishes it from other banks - to set financial system at everyone s reach, facilitating access to services as well as development and entrepreneurial opportunities for individuals and businesses

14 Evolution of the Bank in Figures, BANCOESTADO: TOTAL LOANS * (U.S. $ billion December 2010) BANCOESTADO: MARKET SHARE (%) 24 16% 20 12% Increasing and sustained loans trend during the entire period. In 2010 total amount of loans reached over US$ 24.4 billion. At closure of 2010, BancoEstado s market share was of 15.2% 8% 8 4% % Consolidated since 2008 Source: BancoEstado Source: BancoEstado EVOLUTION OF LOANS BANCOESTADO AND GDP (Ratio 1990=100) BANCOESTADO: COMMERCIAL LOANS* (US$ billions - December 2010) During the last 2 decades, BancoEstado s Loans have quintupled. In that same period, the GDP increased in 2.7 times. Between 2000 and 2010 loans increased at a 10,9% average per year, while GDP expanded at a 3,8% rate per year Permanent support for companies and entrepre neurs. In 2010 business Loans grew at a lower rate, after the strong growth occurred in Loans BancoEstado GDP Source: BancoEstado and Central Bank Consolidated since 2008 Source: BancoEstado 24 25

15 BANCOESTADO: MORTGAGE LOANS (US$ billion - December 2010) BANCOESTADO: ROE (RETURN ON EQUITY BEFORE TAXES, %*) 10 25% BancoEstado is one of the leaders in mortgage funding, especially in low-in come segments. The bank as a 24% market share in the total amount of Loans, and has 59% of the current mortgage loans appearing inthe system Profitability in time allows to strengthen social role and ensure the bank s sustainable growth. In 2010, profitability recovered and reached 14.8%, after the previous period adjustment (ROE: 11.0%), due to the capitalization and coutercyclical policy developed. 20% 15% 10% 2 5% Source: BancoEstado Consolidated since Source: BancoEstado. BANCOESTADO: EFFICIENCY RATE (Administrative expenses / gross operating result *) BANCOESTADO: CAPITAL AND RESERVES (US$ billion - December 2010) % % 60% During the last decade, the ef ficiency quotient shows a sig nificant improvement. That trend continued during A strong and solvent bank. Capital increases were funded with profits until In 2009, the extraordinary capitalization expanded the activity, keeping a high solvency. 50% % Consolidated since Source: BancoEstado Source: BancoEstado 26 27

16 II. A BANK AT THE SERVICE OF CHILEANS

17 ANNUAL REPORT BANCOESTADO 2010 ANNUAL REPORT BANCOESTADO 2010 Vision and Mission of BancoEstado Strategic Plan Visión A bank of excellence, with a high social impact business management. Bankarization is the engine that drives BancoEstado s management and its main focus as well: to democratize access to the financial system and make it available to all Chileans. BancoEstado has a medium-term strategic plan whose main objective is to bankarize in a sustainable manner. The main challenge for the period will be to combine an aggressive bankarization strategy and the need to improve efficiency and profitability indicators. This, in an auspicious scenario for 2011 in the banking industry, with a projected GDP growth of around 6% and close to 13% for loans in the system. In order to bankarize, this company needs to be a massive and relevant bank. This role involves the use of low cost and high quality mass payment systems, and alternative channels. BancoEstado retains and maximize its profitability, which belongs to every Chilean. Improvements in efficiency require to raise productivity, still ranked at levels under the system and with a structure of assets with a low capacity to generate incomes. STRATEGIC PILLARS Strategic planning is built on BancoEstado s fundamental strategic statements contained in their definitions of vision and mission, as described above, and in the positioning expected amongst its clients. BancoEstado s positioning is characterized by its proximity and long-term relationship with its customers; delivering a competitive quality service; committed in the promotion of entrepreneurship and financial inclusion, and as a state bank which actively promotes bankarization. Mission We exist so that every Chilean, anywhere, can initiate and develop new initiatives. In this context appears the target of improving the efficiency ratio and return on equity (ROE). Thus, 30 31

18 STRATEGIC GUIDELINES The challenge of bankarization Improving efficiency and profitability STRATEGIC PLAN Strategic Map 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 development in countries implies a lower bankarization as well. For this reason, the national objective of moving towards customers need quality service at an affordable price. Third, because it is embedded in a competitive industry, responsive to market opportunities. And finally, because if BancoEstado is efficient and profitable, it The bank s strategic objectives are expressed the Strategic Map set for the period. The overall approach is a business management with high Financial Efficiency Profitability Risk Bankarization Social Impact 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 Bankarizing means opening doors, giving BancoEstado committed itself to reach a 50% efficiency mission of BancoEstado. In social terms, the objective is bankarization. In the financial sector, Customer Loyalty and exchange to increase revenue Mass and relevant Bank opportunities, contributing to modernization and bringing people and businesses the benefits of technology. Through bankarization every Chilean, anywhere in the country, will count on bank to meet their financial needs. In all, bankarizing is improving living standards of individuals and their families as well as rate and achieve a return similar to the average of the system by 2014 (and over 16% in 2011). high impact initiatives to improve efficiency and profitability: BancoEstado also promotes a set of short-term initiatives that will impact on revenues and costs in the objectives are to improve efficiency and profitability. Customers are at the core of the Strategic Map. This map shows the results to be attained with clients in order to achieve the objectives of bankarization and efficiency. It highlights the values offered, which are Clients Access Value Proposal Quality Transparency Closeness enterprises. To achieve this, the bank must be able to provide financial services throughout the entire country. Initiatives impacting the generation of incomes: Increase crossed banking and products, especially in mass segments. characterized by being accessible, close, transparent and provide a high-quality service. Thus, BancoEstado will increase significantly its operating revenues and will become a even more massive, relevant and Internal Processes SLAS in critical processes Increase in productivity and cost reduction in processes Mass support processes and technology Thus, it s essential to expand the network of CajaVecina up to 6,500 points in Likewise, savings mechanisms must be increased - especially the savings account in which the bank is leading with more than 7.5 million customers with active accounts - and providing housing access for lower-income Chileans. The bank s ongoing commitment is promoting financial inclusion for individuals and companies through the design of different products and low-cost customer service channels specially defined for each segment. Increase financial income with the right balance between risk and profitability. Initiatives impacting costs: Improve information on process costs and assign responsibilities for each process. Accelerate the migration of on-site transactions to on-line transactions channels. Anticipate deadlines and deliverables for transformation projects. Improve the system of incentives to be in line with the emphasis on efficiency and profitability. perfeccionando en los últimos años producto de un proceso de mejora continua. sustainable bank. Bankarizing with efficiency involves significant challenges in internal processes: improve quality standards (SLA) in critical processes through process management methods; improve productivity and/ or cost reduction in critical processes; and install processes and technologies supporting the massrelated target. One of the major bank s assets are people. In this area the objectives are the development of competencies as supervision, leadership, sales and customer service. Intangibles Staff competencies development 32 33

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

20 III. SALES MANAGEMENT: BANCOESTADO IN CHILEANS BANKARIZATION