Santiago, Chile, August 3, 2010, Banco de Chile (NYSE: BCH), a full service Chilean financial institution, market leader in a wide variety of credit and non-credit products and services across all segments of the Chilean financial market, today announced its results for the second quarter ended June 30, 2010. Figures are expressed in nominal terms, unless otherwise stated.

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Corredores de Bolsa · Administradora General de Fondos 

· Corredores de Seguros · Asesoria Financiera

· Factoring · Securitizadora

2010 SECOND QUARTER:

“POSITIONED FOR GROWTH”

·         Banco de Chile reports stellar second quarter net income of Ch$108 billion, reaching a ROAE of 30.0% and a ROAA of 2.5%.

·         Banco de Chile’s stock price increased by 31.2% in the 1H10, well above the 13.5% rise posted by IPSA Index.

·         Moody’s upgraded Banco de Chile’s foreign currency long-term deposits from A1 to Aa3.

·         Banco de Chile ranks first in Chile and 252 worldwide in the World Banks ranking featured by The Banker.

Arturo Tagle, CEO: “Our excellent first semester is the result of the aggressive plan we defined for 2010. We have significantly improved our profitability, reaching an outstanding ROAE of 30.0% in the 2Q10, based on earnings that totaled Ch$108 billion, within a more optimistic – but still unstable - economic scenario. This result was fueled by lower credit risk charges, strong loan growth and a higher contribution from our UF gap managed by Treasury due to the rise in inflation rate. Moreover, in order to reinforce our service quality, during the quarter we opened 5 new branches out of a total of 20 that were planned for the year. Finally, I would like to mention that in June Mr. Vikram Pandit (Citigroup’s CEO) visited the Bank in order to identify new means to enhance the synergies from the merger.”

Mario Farren, Corporate and Investment Banking Division Manager: “Our figures reflect our ability to correctly estimate market factors while limiting related risks. In line with market expectations on a rise in interest rates over the rest of the year, we have reduced our positions in fixed-income securities, selling AFS instruments and issuing ~US$480 million in subordinated bonds at low interest rates. Also, the market has rewarded our performance by applying low risk premiums on our bonds issuances.”

Pedro Samhan, CFO: “Our last subordinated bonds issuances have allowed us to enhance our capital adequacy and provide us a sound basis to continue growing in our core business. In terms of cost control, the 19.4% YoY rise posted by our operating expenses pushed-up our efficiency ratio to 47.8%. However, this increase mostly relies on particular items in other operating expenses, such as customer loyalty programs and contingency provisions. Our personnel and administrative expenses remain under control, as they have grown slightly above the inflation rate on a YoY basis and in line with our focus on operating efficiency. We aim to keep improving this area.”

NET INCOME AND

OPERATING REVENUES

During the 2Q10, we have maintained a growth trend amid enhanced market conditions and strategic decisions we have made in order to take advantage of a more favorable economic situation. As a result, our net income totaled Ch$107,808 million in the 2Q10, which represents a 47.2% YoY increase and a 6.9% QoQ rise.

As a result, during the 2Q10 we reached a solid ROAE of 30.0%, well above the 21.2% we recorded a year earlier and above the figure we attained in the 1Q10. Moreover, we are 9.2 percentage points above the ROAE posted by the Chilean banking system in the 2Q10.

The main factors that support this performance are as follows:

·      The 11.1% YoY growth posted by our net interest income, as a result of the YoY rise recorded by our total loans that offset the lower lending spreads amid a less uncertain business scenario.

·      The higher contribution from our net position in UF-denominated assets, funded by capital and liabilities denominated in Ch$, as a result of a normalized inflation. The UF increased by 0.97% in the 2Q10, whereas it decreased by 0.13% a year earlier.

·      A 5.3% YoY rise in fees and commissions, fueled by the higher volumes managed by our Securities Brokerage and Mutual Funds subsidiaries, as well as a higher activity in credits and factoring.

·      An important decrease of our credit risk charges fueled by an upbeat outlook for the local economy that raised the payment capacity of our clients and eased our collections.

For the 2Q10 we posted total operating revenues of Ch$294,040 million, which translates into an 11.3% YoY increase and is 2.0% above the 1Q10 amount. The YoY growth mainly relies on:

·      The rise in interest revenues as a result of a 10.1% YoY rise of our loan portfolio, fueled by the growth of our Retail Segment, primarily in residential mortgage and commercial loans, and – to a lesser extent – by our Wholesale Segment.

·      Higher net gains from our trading and available-for-sale portfolios. Amid favorable market conditions we have benefited from mark-to-market while minimizing the effect of expected rises in interest rates by reducing our fixed-income positions.

·      A net financial margin that reached 5.8% in the 2Q10, 47 bp above the margin attained in the 2Q09. The rise is explained by a normalized inflation rate that derived in a higher contribution from our UF denominated assets gap.

·      An improved funding structure mix, based on our market leadership in demand deposits and checking accounts. During the 2Q10 our non-interest bearing liabilities posted a 22.7% YoY rise, whereas our interest bearing liabilities grew by only 2.6%.

Total Operating Revenues

Breakdown

CREDIT QUALITY AND

OPERATING EXPENSES

Our provisions for loan losses reached Ch$35,669 million in the 2Q10, which is 42.3% below the figure posted a year earlier and 33.5% under the level registered in the 1Q10.

The YoY drop relates to a better outlook for the local economy and some specific sectors - such as fishing and retail - as compared to the 1H09. The risk profiles of these industries have improved as the economic indicators

are gradually returning to their mid-term values, from which we significantly reduced the provisions in our Wholesale segment. To a lesser extent, our Retail segment also recorded an upturn, due to a recovery in the customers’ payment capacity fueled by a lower unemployment rate and a higher consumer confidence.

Accordingly, our ratio of provisions to average loans fell from 1.97% in the 2Q09 to 1.07% in the 2Q10, whereas the ratio of past due to total loans dropped from 0.77% to 0.68% in the period. As a result, our provisions to average loans ratio was 28 bp below the Chilean banking system, whereas, as of June 2010, our coverage ratio (allowances to past due loans) was 3.7x as compared to 1.8x recorded by the local banking system.

Although we expect that credit risk charges should return to their mid-term levels, the chance of isolated credit risk volatilities, emerged from specific corporate customers, is still present.

As compared to 2Q09, our operating expenses posted a 19.4% YoY rise, to reach Ch$140,549 million in the 2Q10. This upsurge was mainly fueled by the growth of Other Operating Expenses that rose to Ch$22,803 million in the 2Q10 from Ch$5,241 million one year ago, and – to a lesser extent – due to a 4.3% YoY rise in personnel that is in line with inflation (while our headcount slightly decreased), as well as administrative expenses that went up by 7.2% on a YoY basis, due to fixed assets repairs by ~Ch$1.7 billion as a result of the earthquake and – to a lesser extent – higher IT expenses.

The rise posted by our other operating expenses mostly relies on particular items, such as: (i) contingency provisions by Ch$6 billion, set up in order to afford unexpected credit risk deteriorations, (ii) Ch$3.8 billion related to an adjustment of commissions over-accrued during prior periods, (iii) greater expenses by Ch$5.4 billion, related to a customer loyalty program intended to reinforce the use of our credit cards (co-branding hereafter), and (iv) fixed assets write-offs by Ch$465 million as a result of the earthquake.

The operating expenses YoY rise led to a temporary upsurge of our efficiency ratio. In fact, the ratio of operating expenses to operating revenues rose from 44.6% in the 2Q09 to 47.8% in the 2Q10, but, as noted above, most of this rise relates to particular items.

LOAN PORTFOLIO AND

FUNDING STRUCTURE

As of June 2010, our loan portfolio amounted to Ch$13,506 billion, which represents a 10.1% YoY increase and a 3.0% QoQ rise. The YoY rise is aligned with strategic decisions we have made in order to focus our growth in the Retail Segment, which explains the expansion of our residential mortgage loans that boosted by 15.9% in the 2Q10, as compared to a year earlier and by 5.2% with respect to last quarter.

In addition, our portfolio of commercial loans also shows an interesting YoY increase of 9.0%, which is consistent with a more upbeat business sentiment that has encouraged large companies to gradually retake postponed projects based on improved market conditions. To a lesser extent, worth noting is the higher factoring activity, which reflects the higher dynamism in the Chilean economy, especially from the 4Q09. 

Finally, the consumer loans rose by 7.8% on a YoY basis, to reach Ch$1,965 billion in the 2Q10. This YoY increase relates to an annual growth of 11.4% posted by the product in our Individuals and SME Division and a YoY drop of 1.4% in our Consumer Finance Division. Accordingly, we foresee a higher growth for this product over the rest of the year, as long as the economy continues its recovery trend and the more flexible risk policies that we are currently applying – in line with this better economic outlook – encourage the credit demand from low and middle-income individuals.

 (In Billions of Ch$, except for %)

Our funding structure remains sound. We hold an upward trend on our non-interest bearing liabilities that posted a 22.7% YoY increase in the 2Q10, mainly due to our market leadership in demand deposits and checking accounts. Our new service models have allowed us to improve the cross-selling and cash management services, reaching 24.4% market share as of June-10. Also, we have gained 84 bp of market in the period June-09/June-10. 

Regarding our interest bearing liabilities, they only recorded a 2.6% YoY rise, reaching Ch$10,553 billion as of June, 2010 that derives in a YoY strengthening of our ratio of average interest earning assets to average interest bearing liabilities from 1.34x as of June 2009 to 1.39x as of June 2010.

Finally, during the 2Q10, we have issued senior bonds by Ch$78 billion (~US$144 million) and subordinated bonds by a total amount of Ch$262 billion (~US$480 million). These issuances – carried out at low risk premiums with respect to the central bank comparable bonds – make sense within a context of low interest rates and market expectations of interest rate rises over the next periods. Also, the issuances of subordinated bonds enhance our capital structure and provide us room to grow in our different business segments.

CAPITAL MANAGEMENT

As of June 30, 2010, our equity equaled Ch$1,338,878 million, which is only 0.4% below the figure we registered a year earlier. This decrease amounts to approximately Ch$6,000 million, which is basically explained by:

·      The charge of Ch$16 billion related to the first application of a new regulation of allowances for loan losses linked to contingent credits, including lines of credit and credit cards. This new rule went into effect January 1st, 2010.

·      Almost Ch$31 billion of reserves distributed in dividends, in addition to a 100% payout ratio for the fiscal year ended December 31, 2009, according to a new definition of distributable earnings agreed by our shareholders in an extraordinary meeting carried out on March 2010.

·      Approximately Ch$47 billion in additional provisions for minimum dividends as a result of the above-mentioned greater earnings.

·      All the above factors were partly offset by Ch$86 billion in additional net income reached as of June 2010 with respect to a year earlier.

In terms of capital adequacy, we keep ratios well above the minimum requirements imposed by the Chilean Superintendency of Banks and Financial Institutions to Banco de Chile, of 3% for Basic Capital to Total Assets and 10% for Total Capital to Risk-Adjusted Assets.

Notwithstanding the slight decrease in equity and the YoY increase of 8.2% in total assets, we hold a ratio of Basic Capital to Total Assets of 6.5% as of June 2010.

Similarly, our ratio of Total Capital to Risk Adjusted Assets reached 13.5% in the 2Q10, as compared to the 11.9% recorded last quarter. This is mostly explained by the previously mentioned issuances of subordinated bonds of approximately US$480 million.

Finally, Moody’s has upgraded our rating from A1 to Aa3 for foreign currency long-term deposits, recognizing our suitable financial position as a support of our business activity.

CAPITAL ADEQUACY

LOCAL RATINGS

INTERNATIONAL RATINGS

RESULTS BY

BUSINESS SEGMENTS

Our retail banking segment continued consolidating the upward trend in results evidenced in the 1Q10. The segment’s net income before taxes totaled Ch$34,489 million in the 2Q10, 26.4% above the figure posted a year earlier. This rise was mainly supported by:

·      A 10.3% YoY growth in the segment’s net interest income, as a result of the higher lending activity shown by our individuals and SME division, whose loans to customers posted a 12.8% YoY rise, especially prompted by the residential mortgage loans.

·      A credit quality that is becoming more aligned with mid-term levels. In fact, the provisions recorded a 27.5% YoY drop due to improved risk profiles through the whole segment, but especially in our Consumer Division, whose provisions to average loans ratio fell from 11.2% in the 2Q09 to 6.7% in the 2Q10.

·      The favorable effect of the UF increase in the 2Q10 that led to a higher contribution from the capital allocated to the segment.

The former factors allowed offsetting: (i) a 19.4% YoY rise posted by the segment’s operating expenses, primarily related to non-recurring items, like fixed-assets repairs due to the earthquake, co-branding, as well as the adjustment of over-accrued commissions, and (ii) a 6.1% YoY drop in fees and net commissions, mainly associated to the lower lending activity shown by our Consumer division.

The net income before taxes from our wholesale banking segment posted a significant YoY increase of 266.0% to reach Ch$24,561 million in the 2Q10. This important growth mainly relies on:

·      Lower credit risk charges that led to a 67.1% YoY shrink in the segment’s provisions for loan losses. This is aligned with a stronger economy and a better financial position of corporations to meet their liabilities. Also, 2Q09 was specially challenging in credit risk matters, as important sectors – like fishing – faced productive problems that led us to sharply increase provisions.

·      Fees and commissions that went up by 23.7%, primarily as a result of higher foreign trade, credit and factoring activities.

·      A significant YoY rise posted by the other operating income, due to the effect of the exchange rate (Ch$/US$) rise on the hedge of US$-denominated allowances for loan losses.

·      A higher yield from the capital allocated to the segment, due to the positive UF variation in the 2Q10, as compared to the 2Q09.

Although corporations are retaking their investment projects, there is still a delay in such matter. Thus, despite this segment shows a 6.1% YoY rise in loans, these figures are still below our expectations. This issue and the improved credit risk – that led to lower lending spreads in the 2Q10 as compared to the 2Q09 – explain the slight reduction in the segment’s net interest income.

An inflation rate that is returning to average levels continues boosting our Treasury segment, whose net income before taxes posted a 19.1% YoY rise, to reach Ch$45,309 million in the 2Q10. The YoY variance is mainly explained by:

·      The above-mentioned inflation rate effect. Whereas the UF decreased by 0.13% in the 2Q09, the same inflation-indexed currency experienced an increase of 0.97% in the 2Q10, which derived in a higher contribution from the UF gap managed by Treasury.

·      Gains from the sale of certain fixed-income securities of our available-for-sale portfolio to take advantage of low interest rates and market expectations on their increase over next periods.

·      The above-mentioned gains allowed us to offset lower income from foreign currency funding and gaping activities as a result of lower interest rates as compared to the 2Q09.

In terms of assets, our trading and available-for-sale portfolios posted a 63.6% and an 8.4% YoY drop, respectively, mainly due to the sale of Central Bank bonds, especially those with longer duration.

Our operations through subsidiaries keep growing as compared to 2009. Thus, during the 2Q10 these companies registered a net income before taxes of Ch$13,886 million which is 6.2% above the figure posted in the 2Q09. This variance is primarily explained by:

·      The growth of our Securities Brokerage subsidiary, supported by specific financial operations and – to a lesser extent - by higher trading volumes (+11.7% YoY), factors that boosted the company’s income from fees and commissions by 78.6% on a YoY basis.

·      The significant 28.1% YoY increase posted by the assets managed by our Mutual Funds subsidiary, along with the 13.1% YoY rise in the number of participants, all of which that led to a 34.2% increase in the company’s fees and commissions.

·      The upward trend in results shown by our Insurance Brokerage subsidiary fueled by a 19.3% YoY growth posted by the insurance premiums.

The prior factors more than offset the YoY shrink posted by the net income from our Factoring and Financial Advisory subsidiaries. Whereas the former has been affected by the inflation and its effects on the company’s exposure to UF denominated liabilities, the latter is due to the lower debt restructuring activity observed during the 2Q10 as compared to the 2Q09.

The most significant differences are as follows:

·         Under Chilean GAAP, the merger of Banco de Chile and Citibank Chile was accounted for under the pooling-of-interest method, while under IFRS, and for external financial reporting purposes, the merger of the two banks was accounted for as a business combination in which the Bank is the acquirer as required by IFRS 3 “Business Combinations”. Under IFRS 3, the Bank recognized all acquired net assets at fair value as determined at the acquisition date, as well as the goodwill resulting from the purchase price consideration in excess of net assets recognized. 

·         Allowances for loan losses are calculated based on specific guidelines set by the Chilean Superintendency of Banks based on an expected losses approach. Under IFRS, IAS 39 “Financial instruments: Recognition and Measurement,” allowances for loan losses should be adequate to cover losses in the loan portfolio at the respective balance sheet dates based on an analysis of estimated future cash flows.  According to Chilean GAAP, the Bank records additional allowances related to expected losses not yet incurred, whereas under IFRS these expected losses must not be recognized. 

·         Assets received in lieu of payments are measured at historical cost or fair value, less cost to sell, if lower, on a portfolio basis and written-off if not sold after a certain period in accordance with specific guidelines set by the Chilean Superintendency of Banks. Under IFRS, these assets are deemed non-current assets held-for-sale and their accounting treatment is set by IFRS 5 “Non-current assets held for sale and Discontinued operations”. In accordance with IFRS 5 these assets are measured at historical cost or fair value, less cost to sell, if lower.  Accordingly, under IFRS these assets are not written off unless impaired. 

·         Chilean companies are required to distribute 30% of their net income to shareholders unless a majority of shareholders approve the retention of profits. In accordance with Chilean GAAP, the Bank records a minimum dividend allowance based on its distribution policy, which requires distribution of at least 70% of the period net income, as permitted by the Chilean Superintendency of Banks. Under IFRS, only the portion of dividends that is required to be distributed by Chilean Law must be recorded, i.e., 30% as required by Chilean Corporations Law.

FORWARD-LOOKING INFORMATION

The information contained herein incorporates by reference statements which constitute ‘‘forward-looking statements,’’ in that they include statements regarding the intent, belief or current expectations of our directors and officers with respect to our future operating performance. Such statements include any forecasts, projections and descriptions of anticipated cost savings or other synergies. You should be aware that any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties, and that actual results may differ from those set forth in the forward-looking statements as a result of various factors (including, without limitations, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates, and operating and financial risks related to managing growth and integrating acquired businesses), many of which are beyond our control. The occurrence of any such factors not currently expected by us would significantly alter the results set forth in these statements.

Factors that could cause actual results to differ materially and adversely include, but are not limited to:

·      changes in general economic, business or political or other conditions in Chile or changes in general economic or business conditions in Latin America;

·      changes in capital markets in general that may affect policies or attitudes toward lending to Chile or Chilean companies;

·      unexpected developments in certain existing litigation;

·      increased costs;

·      unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms.

Undue reliance should not be placed on such statements, which speak only as of the date that they were made. Our independent public accountants have not examined or compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to such forward-looking statements after completion of this offering to reflect later events or circumstances or to reflect the occurrence of unanticipated events.