INTRODUCTION. Mission

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1 I INTRODUCTION Mission To offer competitive financial services that contribute to Chile s development and facilitate the access of all Chileans to products and services that make their lives easier and more secure. Background Witness to and protagonist of a long history, BancoEstado goes back to 1855, when the Caja de Crédito Hipotecario (a mortgage banking institution) was created, just a few decades after Chile s Independence from Spain. The merger of this body with the Caja Nacional de Ahorros (a savings bank, 1910), the Caja de Crédito Agrario (a farm-oriented bank, 1925) and the Instituto de Crédito Industrial (an industrial credit institution, 1928) created the Banco del Estado de Chile (Chilean state bank) on 12 June In 2003, it celebrated its 50 th anniversary. Financial Highlights BancoEstado and its subsidiaries enjoyed some landmark achievements and results in Consolidated before-tax income rose 18.8% to more than 67 billion pesos, bringing return on capital and reserves (return on equity, ROE) to 19.3%. The earnings to assets ratio (return on assets, ROA) also improved, as did international agency risk ratings. The bank s net loans rose 7.7%, more than double the rest of the system. Consumer credits, which rose 37.3%, and mortgages, which rose 14.3%, drove this increase. Although these results were achieved in an economic context favorable to rising loans, for BancoEstado 2003 was a demanding year, given the decline in its traditional income, significantly linked to fiscal accounts. The bank successfully met this important challenge by generating new sources of income, raising its competitiveness, and creating new business opportunities, as part of an integrated modernization process. 3

2 BancoEstado and Subsidiaries Consolidated Data (Figures in millions of pesos, December 2003) Indicators Net earnings before tax 46,647 56,654 67,327 Base capital 329, , ,154 Effective equity 395, , ,898 Total loans 3,856,444 4,095,862 4,456,446 Total assets 5,990,377 6,709,166 7,473,371 Net income before tax over total assets (ROA, %) Net income before tax over capital and reserves (ROE, %) Efficiency index a) Credit portfolio risk rate (%) Base capital over total weighted assets (%) b) Basel index (%) c) Number of automated services 1,810 1,864 1,894 Number of branches Total monthly transactions (December, millions) a) Administrative expenditures over gross margin plus monetary correction. b) c) Legal minimum 3%. Legal minimum 8%. 4

3 RETURN ON EQUITY (ROE), Before-tax income*/capital and reserves, % 21,0 19,0 19,3 19,6** 17,0 15,0 16,3 15,8** 13,0 11,0 9, BancoEstado Rest of the System * The bank is subject to an additional 40% tax; for comparison's sake before-tax income is used. ** Non-consolidated figures. The Bank s International Rating Agency Risk* Financial strength Moody s Baa1 C+ Standard & Poor s A _ * Long-term debt in foreign currency, maturing more than one year hence. 5

4 Letter from the Chairman The recognition of customers and institutions, strong commercial growth and solid profits, the result of efforts from management and employees, are some of BancoEstado s main achievements during 2003, the year in which we commemorated our 50 th anniversary. Commercial success, achieved in an extremely competitive milieu, occurred at the same time as the bank remained socially responsible, especially in terms of providing banking services to sectors normally excluded for geographic or social reasons, and offering new products and services to customers. In fact, ours is the only bank present in almost half of Chile s municipal areas (comunas); one of every two Chileans has a savings account in BancoEstado; and we provide two of every three mortgages within the banking system. In recent years, and particularly in 2003, the bank has faced a new scenario as its traditional income, especially that arising from fiscal accounts, whose yield is linked to the inflation rate, declined significantly, making alternative sources of income a necessity. By reorganizing our product and service mix and boosting competitiveness, the company has been able to turn around this situation and achieve good results. Today, BancoEstado s development depends primarily on its customers and its ability to develop new business areas. This is a mega-bank facing a globalized world that, thanks to the consolidation of its own modernization, has honed its competitive skills in the personal, business and financial intermediation markets. We have become a fully competitive bank, which maintains and expands its social role; and a successful bank, based on its solvency, as Moody s indicated when it boosted our financial strength rating from C to C+. Recently Standard & Poor s responded similarly, noting that BancoEstado has the best risk rating for foreign currency debt in Chile and Latin America, as it pushed our rating up from A- to A. Achievements in the commercial and financial spheres have led to a consolidated rise in profitability, which went from 16.3% in 2002 to 19.3% in 2003, yielding pre-tax income of over 67 billion pesos, that is almost 11 billion pesos more than in The bank s subsidiaries made an important contribution to this result, as they complemented BancoEstado s customer service with a wider range of offerings and excellent specialized business services: insurance, financial advice to very small businesses, security intermediation, fund management, collections, financial communications and a contact center. 6

5 In the business sphere we developed major sales campaigns and pioneered the transfer of the benefits from successive interest rate cuts applied by the Central Bank, which were well received among our customers. Among these campaigns, consumer credits stand out, as this segment rose 37%, bringing 43,000 new customers, more than one-third of the total rise in consumer banking during this period. Similarly, mortgages performed well, especially the Hipotecazo (great mortgage) campaign, which achieved five times its initial target. BancoEstado retained its undisputed leadership in this segment, as loans grew 14% for a market share of 29%. In terms of the number of operations, this share rises to 73%, given the enormous number of small mortgages granted to complement Housing and Urbanism Ministry subsidies to buyers. In line with the bank s social role, in 2003 we successfully developed an insurance service, acting as intermediaries for more than 2,400,000 policies, up 600,000 from the previous year. Here the challenge is to bring banking services to the broadest sectors of the population, that is, offer everyone market instruments at a low price so they can deal successfully with the uncertainties of individual and collective life. Today we are the second largest bank insurance broker and for us this is a very significant product. We also reaffirmed our leadership in financing microbusinesses, offering state-of-the-art technologies to low income entrepreneurs who normally have no access to banks. This program, which in 2000 had 17,000 customers, achieved a record number of 90,000 customers in We are fulfilling our social role, without subsidizing, to ensure that individual entrepreneurs can develop their skills with our support. After lengthy negotiations, during the current fiscal year the connection between the Redbanc and BancoEstado networks of automatic telling machines started up, bringing significant benefits to the country as this favored 8 million bank card holders. In December alone, there were more than 2.7 million inter-network transactions. These positive results led BancoEstado to receive important recognition based on customers and institutions opinions. Particularly outstanding were the award granted by Gestión magazine, as the Most Outstanding Business of the Year, and the ProCalidad award, which selected our bank as one of the seven companies in its class, best evaluated by customers. At BancoEstado people are fundamental. Through the Strategic Alliance between management and employees, we have been able to create a single strategic vision of the institution and to implement it in a consensual manner. Thus, the commitment of BancoEstado employees has been crucial to carrying out the company s profound modernization. 7

6 The Alliance has consolidated through internal work between management and the union. We have met and listened throughout the whole country, organizing meetings in which more than 3000 employees have participated, generated hundreds of innovations, many of which have been applied with a resulting improvement in the quality of customer service. The growing participation of women in senior management posts within the bank is another outstanding achievement. In particular, we would like to note the President of Chile s appointment of Mrs. Ingrid Antonijevic H. as a member of the Board; she is the first woman to hold the post of board member in the Chilean banking system. Our challenge is to continue to raise our service quality and customer satisfaction, to reinforce their loyalty and trust, a vital attribute of this institution. We aspire to be a multi-bank that provides excellent service to all sectors of the population and that suitably responds to people s needs, offering them the best solutions. We trust that with the commitment of the bank s employees and customers support, we will continue to grow strongly and provide improved services, especially in personal banking, mortgages, consumer credits and insurance, as well as serving micro-firms, for which our goal is to reach more than 100,000 customers in The main challenge facing Chile today is to achieve a sustainable high growth and a fair distribution of its benefits. This has encouraged us to find new ways of doing things. Along with maintaining the confidence and the solvency that have always distinguished BancoEstado, our commitment is to become a mega-bank that daily improves its ability to meet families needs, accompanies business people in their projects and, ultimately, makes an excellent contribution to the country s development. Jaime Estévez Valencia Chairman 8

7 Senior Officers Board of Directors Jaime Estévez Valencia Chairman Marco Colodro Hadjes Vice-Chairman Ingrid Antonijevic Hahn Director José Pablo Arellano Marín Director Genaro Arriagada Herrera Director Antonio Schneider Chaigneau Director Pablo Silva Manríquez Labor Director Manuel Soza Huerta Alternate Labor Director Audit Committee Members José Pablo Arellano Marín Chairman Ingrid Antonijevic Hahn Jaime Estévez Valencia Juan Carlos Méndez González* * Appointed in January

8 Executive Committee, General Counsel, and Controller Jaime Estévez Valencia Chairman Marco Colodro Hadjes Vice-Chairman José Manuel Mena Valencia Chief Executive Officer Alberto Chacón Oyanedel General Counsel Jéssica López Saffie Controller Management Senior Management Arnoldo Courard Bull General Manager of Credits Carlos Martabit Scaff General Manager of Finance Luis Alberto Soto Illanes General Manager of Administration Fernando León Sade Operations and Systems Division Manager Victoria Martínez Ocamica Branches and Electronic Banking Division Manager Francisco Mobarec Asfura Risk Corporate Manager 10

9 Managers Eugenia Aguilar Rozas Northern Branches Patricio Andrade Garafulich Corporate Processes Cristián Aylwin Jolfre Financial Control Hernán Baeza Jara Customer Service Antonio Bertrand Hermosilla Financial Resources Arturo Barrios Almarza Mass Banking Processes Humberto Cipriano Zamorano Southern Branches Rodrigo Collado Lizama Information and Technology Camilo Concha Burgos Business Banking Sebastián del Campo Edwards Personal Banking Jorge Fernández Correa Communications Oscar González Narbona Planning and Research Pedro González Reyes Accounting and Budgeting Darko Homan Varljen Logistical Support Pablo Mayorga Vásquez International Business Patricia Pearcy Pozo Institutional Banking Jaime Pizarro Tapia Small Business Hernán Saavedra Parra Electronic Banking Adriana Salcedo Moya Deputy Counsel Jorge Stuardo Luengo Metropolitan Region Gastón Suárez Crothers Marketing Omar Torres Plaza Welfare Emiliano Figueroa Sandoval Debt Restructuring General Managers of Subsidiaries Edgardo Cabañas Cardemil BancoEstado S.A. Corredores de Bolsa (stock broking) Sergio Enriquez Essmann BancoEstado S.A. Administradora General de Fondos (general fund management) 11

10 Guillermo González Cueto BancoEstado Servicios de Cobranza S.A. (collections agency) Iván León Avila Globalnet Comunicaciones Financieras S.A. (financial communications) Soledad Ovando Green BancoEstado Microempresas S.A. Asesorías Financieras (financial consultants to small businesses). Enrique Schaub Weidein BancoEstado Contacto 24 horas S.A. (24-hour contact) Fernando Silva Segovia BancoEstado Corredores de Seguros Ltda. (insurance brokers) Highlights First quarter Launching of the Creditazo (great credit) campaign, February and March. Interconnection with Redbanc succeeded, favoring 8 million bank card holders. The Fondo de Garantía para Pequeños Empresarios (small business guarantee fund, FOGAPE) allocated US$ 60 million in its first annual auction of guarantee rights. The Talca Industrial Fair The bank served more than 10,000 small farmers throughout the country; 40% were in the Maule Region. The program placing 100 university students in practice with microbusinesses was implemented. More than 2,400 employees of the Municipality of Concepción received their salaries via electronic check book using an automated payroll system (Sistema de Remuneraciones Automatizado). 12

11 Second quarter Insurance offer launched. One of the main products offered is Tarjeta Segura (safe card), which protects customers from losses arising from assault, fraud and cloning. Agricultural insurance is implemented, which protects producers from crop losses and damages due to bad weather. Twenty one specialized platforms to service small businesses throughout the country officially open. FOGAPE allocated US$ 78 million in its second auction. The bank successfully issues US$ 71 million in subordinate bonds, maturing in 22 years with a five-year grace period. Third quarter Launching of the credit to small business at a 0.87% monthly interest rate. FOGAPE allocated US$ 82 million in its third auction. Launching of the Independence anniversary celebration Creditazo (great credit) campaign, offering credits for up to 60 months, with three months grace. Ingrid Antonijevic Hahn and Antonio Schneider Chaigneau joined BancoEstado s Board of Directors, appointed by the President of Chile, Ricardo Lagos. Inter-network transactions soared during the first six months of integration between BancoEstado and Redbanc networks. The Cuenta de Ahorro Niños (children s saving account) was created, expressing the bank s commitment to Chile s future. At several hospitals passbooks were handed out to minors, with a starting deposit of 10,000 pesos. Almost 7,000 employees at Codelco s northern division are benefited by an agreement with the bank that offers them preferential conditions. BancoEstado celebrates its 50 th anniversary with customers and employees. 13

12 Fourth quarter The multi-product line for small businesses was implemented. 21 new platforms for small business were inaugurated. With two other banks, BancoEstado granted a syndicated loan to the Chilean-Italian- French company, Sociedad Concesionaria Bas Dos, to build new prisons in Antofagasta and Concepción. The insurance marketing campaign was launched, with the best premiums and coverage on the market. The President of Chile invited BancoEstado s Chairman to the presidential palace, La Moneda, along with the union leadership and labor Directors, to congratulate them for the Strategic Alliance s achievements. More than 300 business people participated in the Eighth Annual Meeting of BancoEstado s Banking Business Area. BancoEstado s program providing credits to micro businesses celebrated its seventh anniversary, having reached 90,000 small business entrepreneurs. BancoEstado provided a US$ 20 million loan to build the new Atacama Region Airport. More than 3000 public health employees in Arica and Antofagasta became favored by a product and service agreement. 14