EX-99.1 2 s105216_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

Section 1: Key consolidated data

Balance Sheet (Ch$mn)	Dec’16		Dec’15		% Change
Total assets		37,006,645		34,654,105		6.8	%
Gross customer loans		27,206,431		25,300,757		7.5	%
Customer deposits		20,691,024		19,538,888		5.9	%
Customer funds		25,717,092		24,048,939		6.9	%
Total shareholders’ equity		2,868,706		2,734,699		4.9	%

Income Statement (Ch$mn)	Dec’16		Dec’15		% Change
Net interest income		1,281,366		1,255,206		2.1	%
Gross revenues before provisions for loan losses		1,694,447		1,653,974		2.4	%
Provision for loan losses		-343,286		-413,694		-17.0	%
Op expenses excluding impairment and other op. exp.		-686,905		-661,208		3.9	%
Income before tax		581,836		527,442		10.3	%
Consolidated net income		474,716		452,141		5.0	%

Profitability and efficiency	Dec’16			Dec’15			Change bp
Net interest margin (NIM)¹		4.5	%		4.8	%		-30	bp
Efficiency ratio²		42.7	%		41.3	%		+140	bp
Return on avg. equity		17.1	%		17.1	%		+0	bp
Return on avg. assets		1.3	%		1.4	%		-10	bp
Return on RWA		1.8	%		1.8	%		0	bp

Asset quality ratios (%)	Dec’16			Dec’15			Change bp
NPL ratio³		2.1	%		2.5	%		-40	bp
Coverage of NPLs ratio ⁴		145.4	%		117.3	%		+2,850	bp
Cost of credit⁵		1.3	%		1.7	%		-40	bp

Structure (#)	Dec’16		Dec’15		Change (%)
Branches		434		471		-7.9	%
ATMs		1,295		1,536		-15.7	%
Employees		11,354		11,723		-3.1	%

Market capitalization	Dec’16		Dec’15		Change (%)
Net income per share (Ch$)		2.51		2.38		5.2	%
Net income per ADR (US$)		1.51		1.35		11.9	%
Stock price (Ch$/per share)		37.26		31.79		17.2	%
ADR price (US$ per share)		21.87		17.64		24.0	%
Market capitalization (US$mn)		10,303		8,310		24.0	%
Shares outstanding (millions)		188,446.1		188.446,1		0.0	%
ADRs (1 ADR = 400 shares) (millions)		471.1		471.1		0.0	%

1 NIM = Net interest income annualized divided by interest earning assets.

2 Efficiency ratio = (Net interest income + Net fee and commission income + Financial transactions net + Other operating income + Other operating expenses).

3 Capital + future interest of all loans with one installment 90 days or more overdue divided by total loans.

4 Loan loss allowance divided by capital + future interest of all loans with one installment 90 days or more overdue.

5 Provision expense annualized divided by average loans.

Section 2: Summary of result¹

12M16 ROE at 17.1%. Net contribution from business segments rises 25.6% YoY in 12M16

In 2016, Banco Santander Chile’s full year (12M16) Net income attributable to equity holders, totaled Ch$472,351 million (Ch$2.51 per share and US$1.51/ADR). The Bank’s ROE² reached 17.1% in 12M16, in line with initial guidance. The Bank achieved its ROE target due to the strong growth of our client activities despite an annual inflation rate that was below the market’s expectations and a higher corporate tax rate.

Core business profits showed solid trends throughout 2016 with healthy loan growth, stable client margins, expanding fees, sound asset quality indicators and controlled cost growth. This propelled a 25.6% YoY increase in the Net contribution from our business segments³. This was partially offset by two factors: (i) the lower inflation rate in 2016 compared to 2015 and the impact this has on our net interest margins (NIMs) and (ii) the higher effective tax rate due to the hike in the statutory tax rate.

Solid core revenue trends in 4Q16 offset by lower inflation

In the fourth quarter of 2016 (4Q16), Net income attributable to shareholders totaled Ch$108,633 million (Ch$0.58/share and US$0.35/ADR). Compared to 4Q15 net income increased 29.7% due to strong results from our business segments and the recognition of an additional provision in 4Q15 of Ch$35,000 million due to new provisioning requirements. Compared to 3Q16, net income fell 10.9% QoQ, mainly due to the lower inflation rate in 4Q16 compared to 3Q16. As a result, the Bank’s ROE reached 15.3% in 4Q16. Net contribution from our business segments, decreased 3.3% QoQ due to lower results from wholesale banking, but increased 63.8% YoY due to strong results in retail banking.

1 The information contained in this report is unaudited and is presented in accordance with Chilean Bank GAAP as defined by the Superintendency of Banks of Chile (SBIF).

2 Return on Equity, ROE = Net income attributable to shareholders divided by average shareholders’ equity.

3 Net contribution from business segments: Net interest income + Net fee and commission income + Financial transactions, net - Provision expense - Operating expenses from our reporting segments. These results exclude Financial Management, which includes, among other items, the impact of the inflation on results, and the Corporate Center where the impact of additional provisions and restructuring charges, among other items is included.

Loans up 1.3% QoQ and 7.5% YoY. Consumer loan growth accelerates in the quarter

Total loans increased 1.3% QoQ and 7.5% YoY in 4Q16. The Bank continued to focus loan growth on segments with the highest profitability, net of risk. This signified positive growth among larger SMEs and the mid to high-income individuals while still avoiding growth in the low-end of the consumer business and the low spread wholesale lending segment. Retail loans increased 2.1% QoQ and 9.2% YoY. Loans to individuals grew 2.2% QoQ and 9.3% YoY. The Bank is focusing on expanding its loan portfolio in middle and high-income individuals, but with an acceleration of growth among middle-income individuals. As a result, consumer loan was the fastest growing product in the quarter and grew 3.1% QoQ and 7.1% YoY. Loans to SMEs also expended at a healthy rate in the quarter: 2.1% QoQ (9.0% YoY). In 4Q16, loans in the Middle-market increased 1.3% QoQ (6.5% YoY). In our wholesale unit, GCB, loans decreased 6.0% QoQ and 2.6% YoY. GCB and the Middle-market area had both a record year in terms of contribution to the Bank’s bottom line. This was due to a strong increase in non-lending revenues such as cash management, investment banking and treasury services for clients, as well as positive asset quality numbers.

Demand deposits grew 9.1% in the quarter

Total customer funds (deposits plus mutual funds) managed by the Bank increased 1.6% QoQ and 6.9 YoY. Total deposits increased 3.2% QoQ and 5.9% YoY. In the quarter, non-interest bearing demand deposits led growth, expanding 9.1% QoQ and 2.5% YoY. Time deposits increased 0.2% QoQ and 8.0% YoY.

Market share gains in all products in 2016

The Bank was selective in its growth in 2016, but gained market share in loans and deposits. Our market share in deposits rose 30 basis points (bp.) between December 2015 and November 2016, the latest figure available. Loan market share increased 40 bp. The Bank gained share in all major products in the year.

4 Source: SBIF. Excludes deposits held by Chilean banks abroad.

5 Source: SBIF. Total market share includes interbank loans and for all categories market share excludes loans held by Chilean banks abroad.

Core Capital ratio at 10.5% and BIS ratio of 13.4% at year-end 2016

The Bank’s Core capital ratio⁶reached 10.5% and improved 20bp. YoY, despite the higher payout ratio adopted temporarily this year. This was due to the Bank’s solid profitability levels and the control of RWA growth. The YoY growth of RWA was 2.9% compared to 7.5% for loans. The total BIS ratio⁷reached 13.4% at year-end 2016, the same level as in 2015.

Client net interest income up 6.8% YoY. Total NIM affected by lower inflation rate in the quarter

In 4Q16, Net interest income, NII, decreased 2.1% QoQ and 0.6% YoY. The Net interest margin⁸^, NIM reached 4.2% compared to 4.5% in 3Q16 and 4.7% in 4Q15. The main reason for this decline was the lower inflation rate in 4Q16, while client margins remained stable. In 4Q16, the variation of the Unidad de Fomento (an inflation indexed currency unit), was the lowest in the year and reached 0.47% compared to 0.6% in 3Q16 and 1.1% in 4Q15. The Bank has more assets than liabilities linked to inflation and, as a result, margins fall when inflation decelerates. At the same time, the Bank’s liabilities have a shorter duration than asset, so the recent cut in interest rates should positively affect our NIMs in 2017.

The lower inflation rate was partially offset by an increase of 6.8% YoY from our Client net interest income⁹, which is NII from our business segments and excludes the impact of inflation. In 4Q16, Client NIMs (defined as Client NII divided by average loans) reached 4.8% in 4Q16 compared to 4.9% in 3Q16 and 4.8% in 4Q15. The 10bp. QoQ fall in Client NIMs compared to 3Q16 was mainly due to the shift in the loan mix away from the low-end of the consumer market, which is improving margins net of risk. In 4Q16, the NIM, net of provisions in retail banking rose 40bp. QoQ and YoY to 3.6%.

6 Core Capital ratio = Shareholders’ equity divided by Risk weighted Assets (RWA) according to SBIF BIS I definitions.

7 BIS ratio: Regulatory capital divided by RWA.

8 NIM: Net interest income divided by average interest earning assets.

9 Client net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII: NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from treasury positions and the interest expense of the Bank’s financial investments classified as trading, since NII from this portfolio is recognized as Financial transactions net.

Sound asset quality indicators in the quarter

The Bank’s strategy of de-risking the asset mix continues to have a positive impact on asset quality and coverage ratios in 2016. In 4Q16, the Non-performing loans (NPLs) ratio reached 2.1%, flat compared to 3Q16 and 40bp. lower than in 4Q15. Total Impaired loans, a broader measure of asset quality that includes NPLs and renegotiated loans, remained at 5.9% in 4Q16 compared to 3Q16 and improved 70bp. since 4Q15. Total Coverage of NPLs reached 145.4% in 4Q16 similar to the level attained in 3Q16 and up from 117.3% in 4Q15.

Provision for loan losses decreased 6.9% QoQ and 41.6% YoY. As a reminder, provision expense in 4Q15 included a non-recurring pre-tax provision of Ch$35,000 million directly related to the regulatory change regarding provisioning models for mortgage loans and substandard consumer and commercial loans analyzed on a collective basis. Excluding this impact, provision expense decreased 23.9% YoY in 4Q16 compared to 4Q15. The cost of credit in the quarter was 1.3% compared to 1.4% in 3Q16 and 1.8% in 4Q15. For the full year 2016, provision expense fell 9.4%, excluding the one-time provision recognized in 2015. The cost of credit in 2016 reached 1.3% compared to 1.6% in 2015.

10 90 days or more NPLs

11 Loan loss reserves over NPLs

Positive evolution of customer loyalty and satisfaction is fueling fee growth

In 2016, the Bank continued to make improvements in customer satisfaction and client loyalty. This improvement in customer service should be a key driver for continued growth of cross-selling and fee growth going forward. Loyal individual customers¹²in the high-income segment grew 11.1% YoY. Among Mid-income earners, loyal customers increased 8.0% YoY. Loyal Middle-market and SME clients¹³grew 12.9% YoY in 2016.

Net fee and commission income decreased 2.0% QoQ and grew 6.7% YoY in 4Q16. For the full year 2016, fees increased 7.1% YoY. The QoQ decline was mainly due to a reduction in the origination of mortgages that affected insurance related fees. Fee income in the rest of the Bank’s segments and products continued to grow in part due to greater product usage and customer loyalty and a recovery of fees in GCB.

Costs under control. Strong push towards expanding digital services and modernizing the branch network

Operating expenses, excluding Impairment and Other operating expenses increased 4.2% QoQ and decreased 1.2% YoY in 4Q16. The Bank has been implementing several measures to sustain cost growth in the mid-single digit range in 2017. Various initiatives were carried out in 4Q16, which explains the QoQ rise in costs. The Bank’s digital transformation and new branch formats have been successful and, therefore, the Bank accelerated its branch closure plan in the quarter. This also entailed the removing of money losing ATMs. In the quarter, the Bank closed 21 Santander Banefe branches aimed to the low-end consumer market, and removed 111 ATMs. In total, 8% of the Bank’s branch network was closed and 16% of the ATMs were eliminated in 2016. An increase in transactions through channels such as internet, mobile and phone banking have ensured no impact of these measures on our distribution capabilities and service quality. The effectiveness of the Bank’s CRM has also increased commercial productivity, as well as the implementation of other digital initiatives.

Personnel salaries and expenses in 4Q16 increased 1.7% QoQ and fell 7.0% YoY. Throughout 2015 and 2016, the Bank has been optimizing its headcount structure by reducing mid-upper level management levels and the sales force. This should sustain lower cost growth in 2017.

Amortization expenses increased 15.0% QoQ and 18.9% YoY. This rise was mainly due to the investment in software and digital banking the Bank is carrying out as part of our plan to improve productivity and efficiency.

12 Customers with 4 products plus a minimum profitability level and a minimum usage indicator, all differentiated by segment.

13 Mid-market & SMEs cross-selling differentiated by client size using a point system that depends on number of products, usage of products and income net of risk.

Summary of Quarterly Results

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Net interest income		316,649			323,407			318,671			(0.6	)%		(2.1	)%
Net fee and commission income		63,137			64,424			59,147			6.7	%		(2.0	)%
Total financial transactions, net		37,547			40,689			33,627			11.7	%		(7.7	)%
Provision for loan losses		(87,713	)		(94,211	)		(150,257	)		(41.6	)%		(6.9	)%
Operating expenses (excluding Impairment and Other operating expenses)		(178,016	)		(170,832	)		(180,126	)		(1.2	)%		4.2	%
Impairment, Other operating income and expenses, net		(16,009	)		(12,654	)		2,390			(769.8	)%		26.5	%
Operating income		135,595			150,823			83,452			62.5	%		(10.1	)%
Net income attributable to shareholders of the Bank		108,633			121,979			83,783			29.7	%		(10.9	)%
Net income/share (Ch$)		0.65			0.62			0.69			(5.6	)%		4.9	%
Net income/ADR (US$)¹		0.39			0.37			0.40			(1.0	)%		5.3	%
Total loans		27,206,431			26,868,375			25,300,757			7.5	%		1.3	%
Deposits		20,691,024			20,040,250			19,538,888			5.9	%		3.2	%
Shareholders’ equity		2,868,706			2,794,109			2,734,699			4.9	%		2.7	%
Net interest margin		4.2	%		4.5	%		4.7	%
Efficiency ratio²		44.3	%		41.1	%		43.5	%
Return on equity³		15.3	%		17.7	%		12.4	%
NPL / Total loans⁴		2.1	%		2.1	%		2.5	%
Coverage NPLs		145.8	%		145.9	%		117.3	%
Cost of credit⁵		1.3	%		1.4	%		1.8	%
Core Capital ratio⁶		10.5	%		10.3	%		10.3	%
BIS ratio		13.4	%		13.2	%		13.4	%
Branches		434			464			471
ATMs		1,295			1,406			1,536
Employees		11,354			11,557			11,723

1 The change in earnings per ADR may differ from the change in earnings per share due to exchange rate movements. Earnings per ADR were calculated using the Observed Exchange Rate (Exchange rate for the last trading day of the quarter taken from the Central Bank of Chile) for each period.

2 Efficiency ratio: Operating expenses excluding impairment and other operating expenses divided by Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income minus other operating expenses.

3 Return on equity: annualized quarterly net income attributable to shareholders divided by Average equity attributable to shareholders in the quarter. Averages calculated using monthly figures.

4 NPLs: Non-performing loans: total outstanding gross amount of loans with at least one installment 90 days or more overdue.

5 Cost of credit: annualized provision for loan losses divided by quarterly average total loans. Averages calculated using monthly figures. 4Q15 excludes additional provision of Ch$35bn.

6 Core Capital ratio = equity attributable to shareholders divided by risk weighted assets (in accordance with SBIF BIS I definitions).

Section 3: YTD Results by reporting segment

Net contribution from business segments rises 25.6% YoY in 12M16

Net contribution from business

(YTD results, Ch$ Million)

	Retail Banking¹			Middle-market²			GCB³			Total segments⁴
Net interest income		931,105			244,960			95,105			1,271,170
Change YoY		6.7	%		6.6	%		11.2	%		7.0	%
Net fee and commission income		196,845			30,851			25,077			252,773
Change YoY		3.4	%		8.1	%		64.6	%		8.0	%
Core revenues		1,127,950			275,811			120,182			1,523,943
Change YoY		6.1	%		6.8	%		19.2	%		7.1	%
Total financial transactions, net		21,141			19,577			55,927			96,645
Change YoY		30.1	%		9.4	%		11.1	%		14.4	%
Provision for loan losses		-321,614			-25,558			-2,773			-349,945
Change YoY		4.7	%		-21.7	%		-89.7	%		-4.6	%
Net operating profit⁵		827,477			269,830			173,336			1,270,643
Change YoY		7.1	%		10.8	%		39.6	%		11.4	%
Operating expenses⁶		-529,909			-83,412			-53,935			-667,256
Change YoY		-0.6	%		8.0	%		8.9	%		1.1	%
Net contribution from business segments		297,568			186,418			119,401			603,387
Change YoY		24.3	%		12.1	%		60.0	%		25.6	%

Net contribution from our business segments rose 25.6% YoY in 12M16 compared to the same period of 2015. These results exclude our Corporate Activities, which includes, among other items, the impact of inflation on results, the impact of movements in the exchange rate in our provision expense and restructuring charges.

The net contribution from Retail banking increased 24.3% YoY. Core revenues (net interest income plus fees) increased 6.1% YoY driven by loan growth and improvements in customer loyalty. Provision expense in retail banking grew 4.7% YoY as the Bank continued to bolster the coverage ratio in mass consumer lending. Costs in this segment decreased 0.6% YoY in 12M16, as productivity continued to rise.

Net contribution from the Middle-market increased 12.1% YoY in 12M16. Core revenues in this segment grew 6.8%, led by a 6.6% increase in net interest revenues driven by the improved funding mix and better loan spreads. Asset quality in the middle market also improved, leading to a 21.7% decrease in provision expenses YoY.

Net contribution from GCB rose 60.0% in 12M16. Core revenues increased 19.2% YoY driven by an 11.2% increase in net interest income despite a 2.6% drop in loan volumes. The Bank’s strength in cash management services and financial advisory fees has driven income in this segment. In 12M16, 90% of all revenues were generated by non-lending businesses that do not consume capital. Provision expense also fell 89.7% in the year driven by improvements in asset quality throughout 2016.

1 Retail consists of individuals and SMEs with annual sales below Ch$2,000 million.

2 Middle-market is made up of companies with annual sales exceeding Ch$2,000 million. It also serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry with annual sales exceeding Ch$800 million.

3 Global Corporate Banking, GCB: consists of foreign and domestic multinational companies with sales over Ch$10,000 million.

4 Excludes the results from Corporate Activities.

5 Net op. profit is defined as Net interest income + Net fee and commission income + Total financial transactions - provision for loan losses.

6 Operating expenses = personnel expenses +administrative expenses + depreciation.

Section 4: Loans, deposits and capital

Loans

Loans up 1.3% QoQ and 7.5% YoY. Consumer loan growth accelerates in the quarter

Total loans increased 1.3% QoQ and 7.5% YoY in 4Q16. The Bank continued to focus loan growth on segments with the highest profitability, net of risk. This signified positive growth among larger SMEs and the mid to high-income individuals while still avoiding growth in the low-end of the consumer business and the low spread wholesale lending segment. Retail loans increased 2.1% QoQ and 9.2% YoY. Loans to individuals grew 2.2% QoQ and 9.3% YoY. The Bank is focusing on expanding its loan portfolio in middle and high-income individuals, but with an acceleration of growth among middle-income individuals. As a result, consumer loan was the fastest growing product in the quarter and grew 3.1% QoQ and 7.1% YoY. Consumer loan growth among high-income earners increased 4.1% QoQ and 14.8% YoY. Among middle-income earners consumer loans grew 3.6% QoQ and 8.4% YoY. Finally, in the low end of the market, consumer loans decreased 4.5% QoQ and 17.9% YoY.

Loans by segment

(Ch$ Million)

	Quarter						Change%
	4Q16		3Q16		4Q15		4Q16 / 4Q15			4Q16 / 3Q16
Total loans to individuals¹		14,774,431		14,463,154		13,520,649		9.3	%		2.2	%
SMES		3,830,505		3,750,362		3,514,058		9.0	%		2.1	%
Retail banking		18,604,936		18,213,516		17,034,707		9.2	%		2.1	%
Middle- market		6,396,376		6,312,457		6,006,282		6.5	%		1.3	%
Global Corporate Banking		2,121,513		2,256,961		2,178,643		(2.6	)%		(6.0	)%
Total loans²		27,206,431		26,868,375		25,300,757		7.5	%		1.3	%

1 Includes consumer loans, residential mortgage loans and other commercial loans to individuals.

2 Total loans gross of loan loss allowances. Total loans include other non-segmented loans and includes interbank loans. See Note 4 of the Financial Statements

Loans by product

(Ch$ Million)

	Quarter						Change%
	4Q16		3Q16		4Q15		4Q16 / 4Q15			4Q16 / 3Q16
Consumer loans		4,446,803		4,311,786		4,150,671		7.1	%		3.1	%
Residential mortgage loans		8,619,356		8,471,975		7,812,850		10.3	%		1.7	%

Consumer confidence has been improving in the local market and unemployment figures have remained stable. For this reason, we expect that in 2017 lending in the higher yielding middle-income segment to accelerate, stable growth levels among high-income earners and a stabilization of consumer loan volumes in Santander Banefe, our mass consumer finance unit. We will also be expanding our new distribution and client model for the different retail segments, which should lead to a more efficient growth model.

Residential mortgage loan growth continued to decelerate in the quarter, expanding 1.7% QoQ and 10.3% YoY. As a reminder, this year residential projects, which obtain their building permits in 2016, are subject to the full VAT tax, which should slow the demand for mortgage loans. The Bank also continues to focus growth on mortgages with loan-to-values below 80%. Simultaneously, as the Bank’s long-term funding costs have come down, the profitability of mortgage loans has been rising. Going forward, mortgage loan growth should continue to decelerate to levels more in line with total loan growth.

Loans to SMEs also expended at a healthy rate in the quarter: 2.1% QoQ (9.0% YoY). A sound management of risk and a relevant rise in non-lending revenues are accompanying the growth of loans to SMEs and, therefore, this segment continues to contribute to the Bank’s ROEs despite slower economic growth. Asset quality in this segment also continued to improve throughout 2016 as the Bank focused its loan growth on larger and more established SMEs.

In 4Q16, loans in the Middle-market increased 1.3% QoQ (6.5% YoY). This segment has been more affected by low business confidence. We expect a reactivation of loan demand in this segment in 2017, in line with some early indicators that the Chilean economy should expand at a slightly higher pace in 2017 compared to 2016.

In GCB, loans decreased 6.0% QoQ and 2.6% YoY. As mentioned in Section 2, GCB had a record-year in terms of contribution to the Bank’s bottom line. This was due to a strong increase in non-lending revenues such as cash management, investment banking and treasury services for clients. It is important to point out that close to 90% of net revenues in this segment come from these non-lending activities. This segment generally has a volatile evolution of loan growth, due in part, to large transactions that are not necessarily recurring between one quarter and the next, which also tend to be short-term bridge loans or takedowns of credit lines. Therefore, going forward, GCB should continue to generate positive levels of profitability and loan grow in this segment will continue to be uneven.

Funding

Demand deposits grew 9.1% in the quarter

Total customer funds (deposits plus mutual funds) managed by the Bank increased 1.6% QoQ and 6.9 YoY. Total deposits increased 3.2% QoQ and 5.9% YoY. In the quarter, non-interest bearing demand deposits led growth and expanded 9.1% QoQ and 2.5% YoY. The Bank gained market share in demand deposits throughout 2016. In addition, the fourth quarter has positive seasonality in this product. Time deposits increased 0.2% QoQ and 8.0% YoY. The Bank also gained market share in time deposits in 2016. In 4Q16, the Bank proactively reduced the growth rate in this product due to the strong increase in demand deposits, as well as cheap long-term funding obtained in the bond market.

Deposits

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Demand deposits		7,539,315			6,913,452			7,356,121			2.5	%		9.1	%
Time deposits		13,151,709			13,126,798			12,182,767			8.0	%		0.2	%
Total Deposits		20,691,024			20,040,250			19,538,888			5.9	%		3.2	%
Mutual Funds¹		5,026,068			5,269,815			4,510,051			11.4	%		(4.6	)%
Total customer funds		25,717,092			25,310,065			24,048,939			6.9	%		1.6	%
Bonds		7,326,372			6,889,770			5,957,095			23.0	%		6.3	%
Adjusted loans to deposit ratio²		98.5	%		100.4	%		98.6	%

Liquidity levels remained healthy in the quarter. The Bank’s adjusted loan to deposit ratio² improved to 98.5% in 4Q16 as a result of the strong deposit growth in the quarter. These sound levels of liquidity³ allowed the Bank to improve deposit spreads in 2016. In the quarter, the Bank continued to fine-tune the pricing policy of time deposits. This has helped to improve client margins despite the shift in the loan mix to less risky / lower yielding assets.

1 Santander Chile is the exclusive broker of mutual funds managed by Santander Asset Management S.A. Administradora General de Fondos, a subsidiary of SAM Investment Holdings Limited.

2 (Loans – portion of mortgages funded with long-term bonds) / (Time deposits + demand deposits). The Bank’s mortgage loans are mainly fixed-rate long-term loans that we mainly finance with matching long-term funding and not with short-term deposits. For this reason, to calculate this ratio, we subtract residential mortgage loans in the numerator of our ratio.

3 The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) calculated under the European regulation CRD IV reached 157.5% and 109.0%, respectively at year-end 2016, rising form 124.2% and 105.6%, respectively in 3Q16. These are calculated by Santander Chile on a monthly basis for reporting purposes to Group's headquarters.

In the quarter, local pension funds experienced strong flows to their fixed income funds. This lowered long-term interest rates and improved issuance spreads. The Bank took advantage of this momentum and issued the equivalent of US$685mn in long-term bonds, mainly in the local market. The Bank also became the first Chilean issuer to place a bond in the Formosa market. These funds were mainly used to finance our fixed-rate mortgage loan book, which has an average duration of 6 years. This way we increased the spread earned on mortgage loans, while maintaining solid levels of structural liquidity. This also demonstrates that when the cost of issuing bonds abroad rises, we have access to ample liquidity in the local market at attractive rates.

4 Source: SBIF, excludes deposits held abroad by Chilean banks.

5 Interest expense paid over nominal peso deposits/ average balance of nominal pesos time deposits. Source: SBIF.

Shareholders’ equity and regulatory capital

YTD ROE at 17.1%. Core Capital ratio at 10.5% and BIS ratio of 13.4% at year-end 2016

Equity

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Capital		891,303			891,303			891,303			0.0	%		0.0	%
Reserves		1,640,112			1,640,112			1,527,893			7.3	%		0.0	%
Valuation adjustment		6,640			8,091			1,288			415.5	%		(17.9	)%
Retained Earnings:		330,651			254,603			314,215			5.2	%		29.9	%
Retained earnings prior periods		-			-			-			—%			—%
Income for the period		472,351			363,718			448,878			5.2	%		29.9	%
Provision for mandatory dividend		(141,700	)		(109,115	)		(134,663	)		5.2	%		29.9	%
Equity attributable to equity holders of the Bank		2,868,706			2,794,109			2,734,699			4.9	%		2.7	%
Non-controlling interest		29,341			31,720			30,181			(2.8	)%		(7.5	)%
Total Equity		2,898,047			2,825,829			2,764,880			4.8	%		2.6	%
Quarterly ROE		15.3	%		17.7	%		12.4	%
YTD ROE		17.1	%		17.7	%		17.1	%

Shareholders’ equity totaled Ch$2,868,706 million as of December 31, 2016. The Bank’s ROE in 2016 reached 17.1%, in line with guidance. The Bank’s Core capital ratio1 reached 10.5% at year-end 2016 and 20bp higher than the core capital ratio a year-end 2015, despite the higher payout ratio paid in 2016. The total BIS ratio2reached 13.4% at year-end 2016, the same level as in 2015. The YoY growth of RWA was 2.9% compared to 7.5% for loans.

Regulatory capital

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Tier I (Core Capital)		2,868,706			2,794,109			2,734,699			4.9	%		2.7	%
Tier II		789,001			786,936			803,517			(1.8	)%		0.3	%
Regulatory capital		3,657,707			3,581,045			3,538,216			3.4	%		2.1	%
Risk weighted assets		27,237,835			27,130,807			26,457,597			2.9	%		0.4	%
Tier I (Core Capital) ratio		10.5	%		10.3	%		10.3	%
BIS ratio		13.4	%		13.2	%		13.4	%

1 Core Capital ratio = Shareholders’ equity divided by Risk-weighted Assets (RWA) according to SBIF BIS I definitions.

2 BIS ratio: Regulatory capital divided by RWA.

Section 5: Analysis of quarterly income statement

Net interest income

Client net interest income up 6.8% YoY. Total NIMs affected by low inflation in the quarter

In 4Q16, Net interest income, NII, decreased 2.1% QoQ and 0.6% YoY. The Net interest margin, NIM reached 4.2% compared to 4.5% in 3Q16 and 4.7% in 4Q15. The main reason for this decline was the lower inflation rate in 4Q16 while client margins remained stable.

Net Interest Income / Margin (Ch$ Million)
	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Client net interest income		324,823			324,062			304,106			6.8	%		0.2	%
Non-client net interest income		(8,174	)		(655	)		14,565			(156.1	)%		1147.9	%
Net interest income		316,649			323,407			318,671			(0.6	)%		(2.1	)%
Average interest-earning assets		29,901,912			28,979,918			27,198,485			9.9	%		3.2	%
Average loans from reporting segments¹		26,952,880			26,550,078			25,188,164			7.0	%		1.5	%
Avg. net gap in inflation indexed (UF) instruments²		4,619,723			4,760,308			2,389,707			93.3	%		(3.0	)%
Interest earning asset yield³		7.0	%		7.4	%		8.1	%
Cost of funds⁴		3.3	%		3.3	%		3.8	%
Client net interest margin⁵		4.8	%		4.9	%		4.8	%
Net interest margin (NIM)⁶		4.2	%		4.5	%		4.7	%
Quarterly inflation rate⁷		0.5	%		0.6	%		1.1	%
Central Bank reference rate		3.50	%		3.50	%		3.25	%

In order to improve the explanation of margins, we have divided the analysis of Net interest income between Client net interest income and Non-client net interest income⁸.

Client NII. In 4Q16, Client NII increased 0.2% QoQ and 6.8% YoY. Average loans from reporting segments increased 1.5% QoQ and 7.0% YoY. Client NIMs (defined as Client NII divided by average loans), which excludes the impact of inflation, reached 4.8% in 4Q16 compared to 4.9% in 3Q16 and 4.8% in 4Q15. The 10bp QoQ fall in Client NIMs compared to 3Q16 was mainly due to the shift in the loan mix away from the low-end of the consumer market. This is leading to a gradual improvement in the Bank’s cost of credit, which should continue in 2017. In 4Q16, the NIM, net of provisions in retail banking rose 40bp. QoQ and YoY to 3.6%. We expect in 2017 that the NIM net of provisions in retail baking to expand a further 10-20bp.

1 Average loans from business segments. Excludes loans not assigned to any business segment.

2 The average quarterly difference between assets and liabilities indexed to the Unidad de Fomento (UF), an inflation indexed unit.

3 Interest income divided by average interest earning assets.

4 Interest expense divided by sum of average interest bearing liabilities and demand deposits.

5 Annualized Client Net interest income divided by average loans.

6 Inflation measured as the variation of the Unidad de Fomento in the quarter.

7 Annualized Net interest income divided by average interest earning assets.

8 Client Net interest income: NII from the Bank’s reporting segments that includes NII from the Retail, Middle-market and GCB segments, excluding GCB’s Treasury division. Non-client NII: NII from Bank’s inflation gap, the financial cost of hedging, the financial cost of the Bank’s structural liquidity position, NII from the available for sale portfolio and the interest expense to fund the Bank’s trading investment portfolio. The interest from the Bank’s financial investments classified as trading are recognized as Financial transactions net.

Non-client NII. In 4Q16, the variation of the Unidad de Fomento (an inflation indexed currency unit), was the lowest in the year and reached 0.47% compared to 0.6% in 3Q16 and 1.1% in 4Q15. The Bank has more assets than liabilities linked to inflation and, as a result, margins go down when inflation decelerates and vice-versa. Currently our sensitivity to a 100 bp. decline in inflation is a reduction of approximately 15bp. of NIM. Total UF inflation in 2016 was 2.7% and we expect UF inflation of 2.6% in 2017¹¹. At the same time, the Bank’s liabilities have a shorter duration than asset, so a 100bp average yearly fall in short-term interest rates would result in a 12bp. rise in NIMs. We expect short-term interest rates to fall by an average of 25 points in 2017.

Overall, NIMs should be stable for the full year 2017 compared to 2016, given our outlook for inflation, rates and client NIMs, while NIMs, net of the cost of credit, should expand between 10-20bp.

9 Client Net interest margin is the NIM from reporting segments (Retail, Middle-market and GCB). Inflation corresponds to the quarterly inflation measured by the variation of the Unidad de Fomento (UF).

10 Net interest margin from Retail banking: gross and net of provisions.

11 Our forecasts for quarterly UF inflation are: 1Q17: 0.3%, 2Q16: 0.9%, 3Q16: 0.5%, 4Q16: 0.9%.

Asset quality and provision for loan losses

Sound asset quality indicators in the quarter

Provision for loan losses (Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Gross provisions		(60,675	)		(68,553	)		(80,548	)		(24.7	)%		(11.5	)%
Charge-offs¹		(46,071	)		(45,783	)		(52,239	)		(11.8	)%		0.6	%
Gross provisions and charge-offs		(106,746	)		(114,336	)		(132,787	)		(19.6	)%		(6.6	)%
Loan loss recoveries		19,033			20,125			17,530			8.6	%		(5.4	)%
Provision for loan losses excluding change in provisioning model		(87,713	)		(94,211	)		(115,257	)		(23.9	)%		(6.9	)%
Additional provisions for change in provisioning model²		—			—			(35,000	)		—%			—%
Provision for loan losses		(87,713	)		(94,211	)		(150,257	)		(41.6	)%		(6.9	)%
Cost of credit³		1.3	%		1.4	%		1.8	%
Total loans⁴		27,206,431			26,868,375			25,300,757			7.5	%		1.3	%
Total Loan loss allowances (LLAs)		820,311			812,707			754,696			8.7	%		0.9	%
Non-performing loans⁵(NPLs)		564,131			556,965			643,468			(12.3	)%		1.3	%
NPLs consumer loans		99,721			94,233			113,467			(12.1	)%		5.8	%
NPLs commercial loans		316,838			317,070			346,868			(8.7	)%		(0.1	)%
NPLs residential mortgage loans		147,572			145,662			183,133			(19.4	)%		1.3	%
Impaired loans⁶		1,615,441			1,594,267			1,669,341			(3.2	)%		1.3	%
Impaired consumer loans		288,584			282,709			331,310			(12.9	)%		2.1	%
Impaired commercial loans		929,169			918,918			941,884			(1.3	)%		1.1	%
Impaired residential mortgage loans		397,688			392,640			396,147			0.4	%		1.3	%
Risk Index⁷(LLA / Total loans)		3.0	%		3.0	%		3.0	%
NPL / Total loans		2.1	%		2.1	%		2.5	%
NPL / consumer loans		2.2	%		2.2	%		2.7	%
NPL / commercial loans		2.3	%		2.3	%		2.6	%
NPL / residential mortgage loans		1.7	%		1.7	%		2.3	%
Impaired loans / total loans		5.9	%		5.9	%		6.6	%
Impaired consumer loan ratio		6.5	%		6.6	%		8.0	%
Impaired commercial loan ratio		6.7	%		6.7	%		7.1	%
Impaired mortgage loan ratio		4.6	%		4.6	%		5.1	%
Coverage of NPLs⁸		145.4	%		145.9	%		117.3	%
Coverage of NPLs non-mortgage⁹		182.3	%		182.4	%		152.8	%
Coverage of consumer NPLs		300.9	%		318.6	%		227.3	%
Coverage of commercial NPLs		144.9	%		141.9	%		128.5	%
Coverage of mortgage NPLs		44.1	%		42.8	%		27.9	%

1 Charge-offs corresponds to the direct charge-offs and are net of the reversal of provisions already established on charged-off loans.

2 In January 2016, Chilean banks in accordance with rules adopted by the SBIF, implemented a new standard credit-provisioning model to calculate loan loss allowances for consumer, commercial and residential mortgage loans. This new model will mainly affect mortgage loans, but will also have some impacts on loan loss allowance levels for consumer and commercial loans analyzed on a group basis. The main modification is the inclusion of greater provisions requirements for mortgage loans with a loan / collateral ratios greater than 80%. The Bank recognized an additional provision of Ch$35,000 million in 4Q15 as a result of this new requirement.

3 Annualized provision for loan losses / quarterly average total loans. Averages are calculated using monthly figures. 4Q15 excludes the one-time provision expense of ch$35,000 million.

4 Includes interbank loans

5 Total outstanding gross amount of loans with at least one installment 90 days or more overdue.

6 Include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C6 and, (ii) the carrying amount of all loans to an individual client with at least one NPL (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated.

7 LLA / Total loans. Measures the percentage of loans that banks must provision for given their internal models and the SBIF’s guidelines.

8 LLA / NPLs.

9 LLA of commercial and consumer loans / NPLs of commercial and consumer loans.

The Bank’s strategy of de-risking the asset mix continues to have a positive impact on asset quality and coverage ratios in 2016. In 4Q16, the Non-performing loans (NPLs) ratio reached 2.1%, flat compared to 3Q16 and 40bp. lower than in 4Q15. Total Impaired loans, a broader measure of asset quality that includes NPLs and renegotiated loans, remained at 5.9% in 4Q16 compared to 3Q16 and improved 70bp. since year-end 2015. Total Coverage of NPLs reached 145.4% in 4Q16 similar to the level attained in 3Q16 and up from 117.3% in 4Q15.

Provision for loan losses decreased 6.9% QoQ and 41.6% YoY. As a reminder, provision expense in 4Q15 included a non-recurring pre-tax provision of Ch$35,000 million directly related to regulatory change regarding provisioning models for mortgage loans and substandard consumer and commercial loans analyzed on a collective basis. Excluding this impact, provision expense decreased 23.9% YoY in 4Q16 compared to 4Q15. The cost of credit in the quarter was 1.3% compared to 1.4% in 3Q16 and 1.8% in 4Q15. By product, the evolution of Provision for loan losses in 4Q16 was as follows:

Provision for loan losses

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Consumer loans		(44,454	)		(68,131	)		(51,993	)		(14.5	)%		(34.8	)%
Commercial loans¹⁰		(41,846	)		(27,503	)		(61,474	)		(31.9	)%		52.2	%
Residential mortgage loans		(1,413	)		1,423			(1,790	)		(21.1	)%		(199.3	)%
Provision for loan losses		(87,713	)		(94,211	)		(115,257	)¹¹		(23.9	)%		(6.9	)%

Provisions for loan losses for consumer loans decreased 34.8% QoQ and 14.5% YoY in 4Q16. As mentioned in previous earnings reports, the Bank has been enforcing a strategy of lowering exposure to the low-end of the consumer loan market. This entailed an active policy of charging-off and bolstering coverage ratio in the lower income segment. In 2016, this signified approximately Ch$36,000 million in higher provisions for consumer loans. We expect lower provisions for consumer lending in 2017, given the aforementioned rise in coverage plus the change in the consumer loan mix, improvements in admission policy and more efficient recovery efforts.

The Coverage ratio of consumer NPLs reached 300.9% at year-end 2016. The Consumer loan NPL ratio finished the year at a level of 2.2% flat. The Impaired consumer loan ratio in 4Q16 was 6.5% similar to 3Q16 and 150bp lower than the level recorded at year-end 2015.

Provisions for loan losses for commercial loans increased 52.2% QoQ. This was mainly due to the downgrades of loans in the Global corporate banking segment and the Middle-market. Asset quality in commercial lending remained healthy in the quarter.

The commercial NPL ratio reached 2.3%, flat compared to 3Q16 and 30bp lower than in 4Q15. At the same time, the Impaired commercial impaired loan ratio ended the year at 6.7% compared to 7.1% in 4Q15. The Coverage ratio of commercial NPLs reached 144.9% as of December 2016.

Provisions for loan losses for residential mortgage loans totaled Ch$1,413 million in the quarter. The Impaired mortgage loan ratio reached 4.6%, flat QoQ and 50bp lower than in 4Q15. The NPL ratio of mortgage loan was 1.7% in 4Q16 and 3Q16 and improved from 2.3% in 4Q15. The Coverage ratio of mortgage NPLs also increased to 44.1% as of December 2016.

10 Includes provision for loan losses for contingent loans.

11 Excludes the Ch$35,000 million recognized in 4Q15 as additional provisions stemming from a new standard credit-provisioning model to calculate loan loss allowances for consumer, commercial and residential mortgage loans

Net fee and commission income

Positive evolution of customer loyalty and satisfaction is gradually fueling fee growth

Fee Income by client segment

(Ch$ Million)

	Quarter						Change%
	4Q16		3Q16		4Q15		4Q16 / 4Q15			4Q16 / 3Q16
Retail banking¹		48,492		49,048		48,081		0.9	%		(1.1	)%
Middle-market		7,509		7,820		7,115		5.5	%		(4.0	)%
Global corporate banking		6,275		6,249		3,372		86.1	%		(0.4	)%
Others		861		1,306		579		48.7	%		(34.1	)%
Total		63,137		64,423		59,147		6.7	%		(2.0	)%

In 2016, the Bank continued to make improvements in customer satisfaction and client loyalty. This is the result of various years of investments in technology, the more efficient layout of our branch network and extensive training. This improvement in customer service should be a key driver for continued growth of cross-selling and fee growth going forward. Loyal individual customers (clients with >4 products plus minimum usage and profitability levels) in the high-income segment grew 11.1% YoY. Among Mid-income earners, loyal customers increased 8.0% YoY. Loyal Middle-market and SME clients grew 12.9% YoY.

1 Includes fees to individuals and SMEs.

2 Loyal high income and middle income customers with 4 products plus a minimum profitability level and a minimum usage indicator, all differentiated by segment. SME + Middle-market cross-selling differentiated by client size using a point system that depends on number of products, usage of products and income net of risk.

Net fee and commission income decreased 2.0% QoQ and grew 6.7% YoY in 4Q16. For the full year 2016, fees increased 7.1% YoY. The QoQ decline was mainly due to a 1.1% decrease in retail banking fees. This was mainly due to the reduction in the velocity of mortgage loan growth that negatively affected insurance related fees.

Compared to 4Q15, fee income grew 6.7%. Fee income in the rest of the Bank’s segments and products continued to grow in part due to greater product usage and customer loyalty and a recovery of fees in GCB. In GCB, the Bank has won an important share of the investment banking, cash management and advisory services for the large projects being developed in Chile.

By products, the evolution of fees was as follows:

Fee Income by product

(Ch$ Million)

	Quarter						Change%
	4Q16		3Q16		4Q15		4Q16 / 4Q15			4Q16 / 3Q16
Credit, debit & ATM card fees		11,676		11,769		10,904		7.1	%		(0.8	)%
Insurance brokerage		10,368		11,009		10,530		(1.5	)%		(5.8	)%
Asset management		10,149		9,927		9,384		8.2	%		2.2	%
Guarantees, pledges and other contingent operations		8,997		8,934		8,761		2.7	%		0.7	%
Collection fees		8,023		7,556		9,055		(11.4	)%		6.2	%
Checking accounts		7,921		7,819		7,799		1.6	%		1.3	%
Fees from brokerage		2,053		2,256		1,717		19.6	%		(9.0	)%
Other Fees³		3,950		5,154		997		296.2	%		(23.4	)%
Total fees		63,137		64,424		59,147		6.7	%		(2.0	)%

3 Mainly includes fees from GCB related to financial advisory services and lines of credit

Total financial transactions, net

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Net income (expense) from financial operations¹		(74,850	)		(158,191	)		(111,983	)		(33.2	)%		(52.7	)%
Net foreign exchange gain²		112,397			198,880			145,610			(22.8	)%		(43.5	)%
Total financial transactions, net		37,547			40,689			33,627			11.7	%		(7.7	)%

Results from Total financial transactions, net was a gain of Ch$37,547 million in 4Q16, decreasing 7.7% QoQ and increasing 11.7% YoY. It is important to point out that the Bank does not run a significant foreign currency gap. The Bank’s spot position in foreign currency is hedged with derivatives that are either considered trading derivatives or hedge accounting derivatives. Derivatives that are considered trading are marked-to-market in net income from financial operations. Hedge accounting derivatives are mark-to-market together with the hedged item in net foreign exchange results. This distorts these line items, especially in periods of a strong appreciation or depreciation of the exchange rate.

In order to understand more clearly these line items, we present them by business area in the following table:

Total financial transactions, net by business

(Ch$ Million)

	Quarter						Change%
	4Q16		3Q16		4Q15		4Q16 / 4Q15			4Q16 / 3Q16
Client treasury services		21,104		23,631		20,420		3.3	%		(10.7	)%
Non client treasury income³		16,443		17,058		13,207		24.5	%		(3.6	)%
Total financ. transactions, net		37,547		40,689		33,627		11.7	%		(7.7	)%

Client treasury services revenues were down 10.7% QoQ and increased 3.3% YoY. This movement of client treasury revenues, which usually makes up the bulk of our treasuring income, reflects the demand on behalf of clients for treasury products mainly for their hedging needs or market making services.

Non-client treasury revenues decreased 7.7% QoQ. This variation was mainly due to the sharp rise in long-term interest rates, especially in the month of November that lowered the gains from mark-to-market of the Bank’s investment portfolio, which is only comprised of Chilean and U.S. sovereign risk.

1 These results include the realized gains of the Available for sale investment portfolio, realized and unrealized gains and interest revenue generated by Trading investments, gains or losses from the sale of charged-off loans and the realized gains (loss) or mark-to-market of derivatives.

2 The results recorded as Foreign exchange gain mainly include the translation gains or losses of assets and liabilities denominated in foreign currency as well as from our hedge accounting derivatives.

3 Non client treasury income. These results include the income from sale of loans, including charged-off loans, interest income and the mark-to-market of the Bank’s trading portfolio, realized gains from the Bank’s available for sale portfolio and other results from our Financial Management Division.

Operating expenses and efficiency

Costs under control. Strong push towards expanding digital services and modernizing the branch network

Operating expenses

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Personnel salaries and expenses		(101,306	)		(99,643	)		(108,961	)		(7.0	)%		1.7	%
Administrative expenses		(57,898	)		(54,830	)		(55,344	)		4.6	%		5.6	%
Depreciation & amortization		(18,812	)		(16,359	)		(15,821	)		18.9	%		15.0	%
Operating expenses¹		(178,016	)		(170,832	)		(180,126	)		(1.2	)%		4.2	%
Impairment of property, plant and equipment		(139	)		(10	)		(1	)		13800.0	%		1290.0	%
Branches		434			464			471			(7.9	)%		(6.5	)%
Standard		270			278			276			(2.2	)%		(2.9	)%
Middle-market centers		8			8			8			0.0	%		0.0	%
Select		53			54			53			0.0	%		(1.9	)%
Banefe & other payment centers		103			124			134			(23.1	)%		(16.9	)%
ATMs		1,295			1,406			1,536			(15.7	)%		(7.9	)%
Employees		11,354			11,557			11,723			(3.1	)%		(1.8	)%
Efficiency ratio²		44.3	%		41.1	%		43.5	%
YTD Efficiency ratio²		42.7	%		42.1	%		41.3	%
YTD Cost / Assets³		1.9	%		1.9	%		2.0	%

Operating expenses, excluding Impairment and Other operating expenses increased 4.2% QoQ and decreased 1.2% YoY in 4Q16. The Bank has been implementing several measures to sustain cost growth in the mid-single digit range in 2017. Total costs for the full year 2016 grew 3.9%. Management expects a similar trend in 2017.

QoQ cost growth in the quarter was driven by a 5.6% QoQ rise in administrative expenses. The Bank’s digital transformation and new branch formats have been highly successful and, therefore, the Bank accelerated its branch closure plan in the quarter. This also entailed the removing of money losing ATMs. In the quarter, the Bank closed 21 Santander Banefe branches attending the mass consumer market and removed 111 ATMs. In total, 8% of the Bank’s branch network was closed and 16% of the ATMs were eliminated in 2016. An increase in transactions through channels such as internet, mobile and phone banking have replaced this. The effectiveness of the Bank’s CRM has also increased productivity, as well as the implementation of other digital initiatives.

1 Excluding Impairment and Other operating expenses.

2 Efficiency ratio: Operating expenses as defined in Note 1 / Operating income. Operating income = Net interest income + Net fee and commission income + Total financial transactions, net + Other operating income - Other operating expenses.

3 Operating expenses as defined in footnote 1 above, annualized / Total assets.

The Bank is transforming its branch network by adopting two main branch formats: (i) a multi-segment approach with smaller branches that are multi-segment with dedicated spaces for the different business segments (Select, SME Advance, Banefe, etc.) and: (ii) our Work Café spaces that are high tech / high touch branches with no human tellers or back offices. These new branches are more productive and client friendly and therefore, we do not expect this to impact our business volumes. In 2016, we opened 2 Work Café and 57 branches have been remodeled to our new multi-segment format. In 2017, we expect to open approximately 18 Work Café. At the same time we will be closing and consolidating less efficient branches.

Personnel salaries and expenses in 4Q16 increased 1.7% QoQ and fell 7.0% YoY. As a reminder, in 4Q15, the Bank recognized a non-recurring severance expenses of Ch$6,300 million. Excluding this, personnel expenses still decreased 1.3% YoY in the quarter. Throughout 2015 and 2016, the Bank has been optimizing its headcount structure by reducing mid-upper level management levels and the sales force. This should generate lower cost growth in 2017.

Other operating income, net & Income tax

Other operating income, net and Corporate tax

(Ch$ Million)

	Quarter									Change%
	4Q16			3Q16			4Q15			4Q16 / 4Q15			4Q16 / 3Q16
Other operating income		4,456			3,984			4,496			(0.9	)%		11.8	%
Other operating expenses		(20,326	)		(16,628	)		(2,105	)		865.6	%		22.2	%
Other operating income, net		(15,870	)		(12,644	)		2,391			(763.7	)%		25.5	%
Income from investments in associates and other companies		764			1,076			610			25.2	%		(29.0	)%
Income tax income (expense)		(27,126	)		(29,218	)		(4,480	)		505.5	%		(7.2	)%
Effective income tax rate		19.9	%		19.2	%		5.3	%

Other operating income, net, totaled a loss of Ch$15,870 million in 4Q16. This rise can be explained by a greater amount of charge-offs of repossessed assets and a larger amount of other operational charge-offs.

Income tax expenses in 4Q16 totaled Ch$27,126 million and the effective tax rate reached 19.9% compared to 19.2% in 3Q16 and 5.3% in 4Q16. In 12M16, the Bank paid an effective tax rate of 18.4% compared to 14.3% in 12M15. The rise in the effective tax rate was mainly due to: (i) the higher statutory tax rate, the statutory corporate tax rate in 2016 increased to 24.0% compared to 22.5% in 2015 and; (ii) the lower CPI inflation rate in 12M16 (+3.0%) compared to 12M15 (+4.4%), which results in a lower price level restatement charge to taxable income, since for tax purposes the Bank must readjust its capital for inflation. The statutory corporate tax rate will rise again to 25.5% in 2017 and to 27% in 2018. Therefore, the Bank’s effective tax rate should be approximately 20%-21% in 2017.

YTD income tax¹

(Ch$ Million)

	12M						Change%
	2016			2015			2016 / 2015
Net income before tax		581,836			527,442			10.3	%
Price level restatement of capital²		(101,027	)		(124,138	)		(18.6	)%
Net income before tax adjusted for price level restatement		480,809			403,304			19.2	%
Statutory Tax rate		24.0	%		22.5	%		6.7	%
Income tax expense at Statutory rate		(115,394	)		(90,743	)		27.2	%
Tax benefits³		8,274			15,442			(46.4	)%
Income tax		(107,120	)		(75,301	)		42.3	%
Effective tax rate		18.4	%		14.3	%

1 This table is for informational purposes only. Please refer to note 14 in our annual financials for more details.

2 For tax purposes, capital is indexed to CPI inflation. The statutory tax rate is applied over net income before tax adjusted for price level restatement.

3 Mainly includes income tax credits from property taxes paid on leased assets as well as the impact from fluctuations in deferred tax assets and liabilities.

Section 6: Credit risk ratings

International ratings

The Bank has credit ratings from three leading international agencies. In 4Q16, Moody’s reaffirmed our ratings with outlook stable and Fitch placed our outlook on negative following a similar action on the sovereign ratings.

Moody’s		Rating
Bank Deposit		Aa3/P-1
Baseline Credit Assessment		a2
Adjusted Baseline Credit Assessment		a2
Senior Unsecured		Aa3
Commercial Paper		P-1

Standard and Poor’s		Rating
Long-term Foreign Issuer Credit		A
Long-term Local Issuer Credit		A
Short-term Foreign Issuer Credit		A-1
Short-term Local Issuer Credit		A-1

Fitch		Rating
Foreign Currency Long-term Debt		A+
Local Currency Long-term Debt		A+
Foreign Currency Short-term Debt		F1
Local Currency Short-term Debt		F1
Viability rating		a+

Local ratings

Our local ratings are the following:

Local ratings	Fitch Ratings	Feller Rate
Shares	1CN1	1CN1
Short-term deposits	N1+	N1+
Long-term deposits	AAA	AAA
Mortgage finance bonds	AAA	AAA
Senior bonds	AAA	AAA
Subordinated bonds	AA	AA+

Section 7: Share performance

As of December 31, 2016

Ownership Structure:

Total Shareholder Return

Santander ADR vs. SP500 (Base 100 = 12/31/2015)

ADR price (US$) 12M16

12/31/16:			21.87
Maximum (12M16):			23.48
Minimum (12M16):			15.98

Market Capitalization: US$10,303 million

P/E 12month trailing*:	12.7
P/BV (12/31/16)**:	2.5
Dividend yield***:	5.3	%

* Price as of Dec 31, 2016 / 12mth. earnings

** Price as of Dec 31, 2016/Book value as of 12/31/16

***Based on closing price on record date of last dividend payment.

Average daily traded volumes 12M16

US$ million

Total Shareholder Return

Santander vs IPSA Index (Base 100 = 12/31/2015)

Local share price (Ch$) 12M16

12/31/16:			37.26
Maximum (12M16):			38.05
Minimum (12M16):			29.10

Dividends:

Year paid	Ch$/share		% of previous year’s earnings
2013:		1.24		60	%
2014:		1.41		60	%
2015:		1.75		60	%
2016:		1.79		75	%

Annex 1: Balance sheet

Unaudited Balance Sheet

	Dec-16			Dec-16			Dec-15			Dec-16/Dec-15
	US$ Ths			Ch$ Million						% Chg.
Cash and deposits in banks		3,422,506			2,279,389			2,064,806			10.4	%
Cash items in process of collection		743,668			495,283			724,521			(31.6	)%
Trading investments		596,077			396,987			324,271			22.4	%
Investments under resale agreements		10,114			6,736			2,463			173.5	%
Financial derivative contracts		3,754,928			2,500,782			3,205,926			(22.0	)%
Interbank loans, net		409,362			272,635			10,861			2410.2	%
Loans and account receivables from customers, net		39,209,437			26,113,485			24,535,201			6.4	%
Available for sale investments		5,088,447			3,388,906			2,044,411			65.8	%
Held-to-maturity investments		-			-			-			—	%
Investments in associates and other companies		35,706			23,780			20,309			17.1	%
Intangible assets		87,215			58,085			51,137			13.6	%
Property, plant and equipment		386,455			257,379			240,659			6.9	%
Current taxes		-			-			-			—	%
Deferred taxes		559,608			372,699			331,714			12.4	%
Other assets		1,262,011			840,499			1,097,826			(23.4	)%
Total Assets		55,565,533			37,006,645			34,654,105			6.8	%

Deposits and other demand liabilities		11,320,293			7,539,315			7,356,121			2.5	%
Cash items in process of being cleared		433,143			288,473			462,157			(37.6	)%
Obligations under repurchase agreements		318,974			212,437			143,689			47.8	%
Time deposits and other time liabilities		19,747,311			13,151,709			12,182,767			8.0	%
Financial derivatives contracts		3,441,683			2,292,161			2,862,606			(19.9	)%
Interbank borrowings		2,877,429			1,916,368			1,307,574			46.6	%
Issued debt instruments		11,000,559			7,326,372			5,957,095			23.0	%
Other financial liabilities		360,384			240,016			220,527			8.8	%
Current taxes		43,985			29,294			17,796			64.6	%
Deferred taxes		11,541			7,686			3,906			96.8	%
Provisions		463,937			308,982			329,118			(6.1	)%
Other liabilities		1,194,872			795,785			1,045,869			(23.9	)%
Total Liabilities		51,214,111			34,108,598			31,889,225			7.0	%
Equity
Capital		1,338,293			891,303			891,303			0.0	%
Reserves		2,462,631			1,640,112			1,527,893			7.3	%
Valuation adjustments		9,970			6,640			1,288			415.5	%
Retained Earnings:		496,473			330,651			314,215			5.2	%
Retained earnings from prior years		-			-			-			—	%
Income for the period		709,236			472,351			448,878			5.2	%
Minus: Provision for mandatory dividends		(212,763	)		(141,700	)		(134,663	)		5.2	%
Total Shareholders' Equity		4,307,366			2,868,706			2,734,699			4.9	%
Non-controlling interest		44,056			29,341			30,181			(2.8	)%
Total Equity		4,351,422			2,898,047			2,764,880			4.8	%
Total Liabilities and Equity		55,565,533			37,006,645			34,654,105			6.8	%

Annex 2: YTD Income statements

YTD Income Statement Unaudited

	Dec-16			Dec-16			Dec-15			Dec-16/Dec-15
	US$ Ths			Ch$ Million						% Chg.
Interest income		3,208,775			2,137,044			2,085,988			2.4	%
Interest expense		(1,284,802	)		(855,678	)		(830,782	)		3.0	%
Net interest income		1,923,973			1,281,366			1,255,206			2.1	%
Fee and commission income		647,423			431,184			402,900			7.0	%
Fee and commission expense		(265,405	)		(176,760	)		(165,273	)		7.0	%
Net fee and commission income		382,018			254,424			237,627			7.1	%
Net income (expense) from financial operations		(551,102	)		(367,034	)		(457,897	)		(19.8	)%
Net foreign exchange gain		761,850			507,392			603,396			(15.9	)%
Total financial transactions, net		210,748			140,358			145,499			(3.5	)%
Other operating income		27,476			18,299			15,642			17.0	%
Gross revenue before provisions for loan losses		2,544,215			1,694,447			1,653,974			2.4	%
Provision for loan losses		(515,444	)		(343,286	)		(413,694	)		(17.0	)%
Net operating profit		2,028,770			1,351,161			1,240,280			8.9	%
Personnel salaries and expenses		(593,293	)		(395,133	)		(387,063	)		2.1	%
Administrative expenses		(339,959	)		(226,413	)		(220,531	)		2.7	%
Depreciation and amortization		(98,137	)		(65,359	)		(53,614	)		21.9	%
Op. expenses excl. Impairment and Other operating expenses		(1,031,389	)		(686,905	)		(661,208	)		3.9	%
Impairment of property, plant and equipment		(351	)		(234	)		(21	)		1014.3	%
Other operating expenses		(127,925	)		(85,198	)		(54,197	)		57.2	%
Total operating expenses		(1,159,665	)		(772,337	)		(715,426	)		8.0	%
Operating income		869,105			578,824			524,854			10.3	%
Income from investments in associates and other companies		4,523			3,012			2,588			16.4	%
Income before tax		873,628			581,836			527,442			10.3	%
Income tax expense		(160,841	)		(107,120	)		(75,301	)		42.3	%
Net income from ordinary activities		712,787			474,716			452,141			5.0	%
Net income discontinued operations		—			—			—			—	%
Net income attributable to:
Non-controlling interest		3,551			2,365			3,263			(27.5	)%
Net income attributable to equity holders of the Bank		709,236			472,351			448,878			5.2	%

The exchange rate used to calculate the figures in dollars was Ch$666.0 / US$1

Annex 3: Quarterly income statements

Unaudited Quarterly Income Statement

	4Q16			4Q16			3Q16			4Q15			4Q16/4Q15			4Q16/3Q16
	US$ Ths			Ch$ Million									% Chg.
Interest income		790,285			526,330			535,777			549,675			(4.2	)%		(1.8	)%
Interest expense		(314,836	)		(209,681	)		(212,370	)		(231,004	)		(9.2	)%		(1.3	)%
Net interest income		475,449			316,649			323,407			318,671			(0.6	)%		(2.1	)%
Fee and commission income		168,449			112,187			108,842			105,341			6.5	%		3.1	%
Fee and commission expense		(73,649	)		(49,050	)		(44,418	)		(46,194	)		6.2	%		10.4	%
Net fee and commission income		94,800			63,137			64,424			59,147			6.7	%		(2.0	)%
Net income (expense) from financial operations		(112,387	)		(74,850	)		(158,191	)		(111,983	)		(33.2	)%		(52.7	)%
Net foreign exchange gain		168,764			112,397			198,880			145,610			(22.8	)%		-	%
Total financial transactions, net		56,377			37,547			40,689			33,627			11.7	%		(7.7	)%
Other operating income		6,691			4,456			3,984			4,496			(0.9	)%		11.8	%
Net operating profit before provisions for loan losses		633,317			421,789			432,504			415,941			1.4	%		(2.5	)%
Provision for loan losses		(131,701	)		(87,713	)		(94,211	)		(150,257	)		(41.6	)%		(6.9	)%
Net operating profit		501,616			334,076			338,293			265,684			25.7	%		(1.2	)%
Personnel salaries and expenses		(152,111	)		(101,306	)		(99,643	)		(108,961	)		(7.0	)%		1.7	%
Administrative expenses		(86,934	)		(57,898	)		(54,830	)		(55,344	)		4.6	%		5.6	%
Depreciation and amortization		(28,246	)		(18,812	)		(16,359	)		(15,821	)		18.9	%		15.0	%
Op. expenses excl. Impairment and Other operating expenses		(267,291	)		(178,016	)		(170,832	)		(180,126	)		(1.2	)%		4.2	%
Impairment of property, plant and equipment		(209	)		(139	)		(10	)		(1	)		-%			1290.0	%
Other operating expenses		(30,520	)		(20,326	)		(16,628	)		(2,105	)		865.6	%		22.2	%
Total operating expenses		(298,020	)		(198,481	)		(187,470	)		(182,232	)		8.9	%		5.9	%
Operating income		203,596			135,595			150,823			83,452			62.5	%		(10.1	)%
Income from investments in associates and other companies		1,147			764			1,076			610			25.2	%		(29.0	)%
Income before tax		204,743			136,359			151,899			84,062			62.2	%		(10.2	)%
Income tax expense		(40,730	)		(27,126	)		(29,218	)		(4,480	)		505.5	%		(7.2	)%
Net income from ordinary activities		164,014			109,233			122,681			79,582			37.3	%		(11.0	)%
Net income discontinued operations		-			-			-			-			-			-
Net income attributable to:
Non-controlling interest		901			600			702			(4,201	)		(114.3	)%		(14.5	)%
Net income attributable to equity holders of the Bank		163,113			108,633			121,979			83,783			29.7	%		(10.9	)%

The exchange rate used to calculate the figures in dollars was Ch$666.0 / US$1

Annex 4: Quarterly evolution of main ratios and other information

(Ch$ millions)
	Dec-15			Mar-16			Jun-16			Sep-16			Dec-16
Loans
Consumer loans		4,150,671			4,141,786			4,239,461			4,311,786			4,446,803
Residential mortgage loans		7,812,850			8,099,477			8,321,626			8,471,975			8,619,356
Commercial loans		13,326,359			13,452,772			13,602,948			13,807,911			13,867,465
Interbank loans		10,877			31,926			236,532			276,703			272,807
Total loans (including interbank)		25,300,757			25,725,961			26,400,567			26,868,375			27,206,431
Allowance for loan losses		(754,696	)		(784,102	)		(795,405	)		(812,707	)		(820,311	)
Total loans, net of allowances		24,546,061			24,941,859			25,605,162			26,055,668			26,386,120

Loans by segment
Individuals		13,520,649			13,893,656			14,257,390			14,463,154			14,774,431
SMEs		3,514,058			3,589,801			3,687,640			3,750,362			3,830,505
Retail		17,034,707			17,483,457			17,945,030			18,213,516			18,604,936
Middle-market		6,006,282			6,065,108			6,134,698			6,312,457			6,396,376
Corporate		2,178,643			2,095,871			2,237,493			2,256,961			2,121,513
Total loans reporting segments		25,219,632			25,644,436			26,317,221			26,782,934			27,122,825
Other		81,125			81,525			83,327			85,441			83,606
Total loans (including interbank)		25,300,757			25,725,961			26,400,548			26,868,375			27,206,431

Deposits
Demand deposits		7,356,121			7,079,271			7,238,303			6,913,452			7,539,315
Time deposits		12,182,767			12,722,899			12,997,791			13,126,798			13,151,709
Total deposits		19,538,888			19,802,170			20,236,094			20,040,250			20,691,024
Mutual funds (Off balance sheet)		4,510,051			4,695,924			4,881,450			5,269,815			5,026,068
Total customer funds		24,048,939			24,498,094			25,117,544			25,310,065			25,717,092
Loans / Deposits¹		98.6	%		98.3	%		99.0	%		100.4	%		98.5	%

Average balances
Avg. interest earning assets		27,198,485			27,801,471			28,628,066			28,979,918			29,901,912
Avg. Loans from reporting segments		25,188,162			25,432,032			25,980,829			26,550,078			26,952,880
Avg. assets		34,507,339			34,754,591			35,195,160			35,869,635			36,163,077
Avg. demand deposits		6,830,026			7,181,633			7,280,495			7,132,397			7,094,735
Avg equity		2,703,134			2,772,379			2,714,063			2,755,631			2,833,914
Avg. free funds		9,533,160			9,954,012			9,994,558			9,888,028			9,928,649

Capitalization
Risk weighted assets		26,457,597			26,608,992			26,876,727			27,130,807			27,237,835
Tier I (Shareholders' equity)		2,734,699			2,821,692			2,704,685			2,794,109			2,868,706
Tier II		803,517			773,581			781,772			786,936			789,001
Regulatory capital		3,538,216			3,595,272			3,486,457			3,581,046			3,657,707
Tier I ratio		10.3	%		10.6	%		10.1	%		10.3	%		10.5	%
BIS ratio		13.4	%		13.5	%		13.0	%		13.2	%		13.4	%

Profitability & Efficiency
Net interest margin (NIM)²		4.7	%		4.5	%		4.6	%		4.5	%		4.2	%
Client NIM³		4.8	%		4.9	%		4.8	%		4.9	%		4.8	%
Efficiency ratio⁴		43.5	%		41.6	%		43.8	%		41.1	%		44.3	%
Costs / assets⁵		2.1	%		1.9	%		1.9	%		1.9	%		1.9	%
Avg. Demand deposits / interest earning assets		25.1	%		25.8	%		25.4	%		24.6	%		23.7	%
Return on avg. equity		12.4	%		18.1	%		17.1	%		17.7	%		15.3	%
Return on avg. assets		1.0	%		1.4	%		1.3	%		1.4	%		1.2	%
Return on RWA		1.3	%		1.9	%		1.7	%		1.8	%		1.6	%

(Ch$ millions)
	Dec-15			Mar-16			Jun-16			Sep-16			Dec-16
Asset quality
Impaired loans⁶		1,669,341			1,642,087			1,645,082			1,594,267			1,615,441
Non-performing loans (NPLs)⁷		643,468			638,344			566,177			556,965			564,131
Past due loans⁸		364,771			353,610			340,761			336,337			324,312
Loan loss reserves		754,696			784,102			795,405			812,707			820,311
Impaired loans / total loans		6.6	%		6.4	%		6.2	%		5.9	%		5.9	%
NPLs / total loans		2.5	%		2.5	%		2.1	%		2.1	%		2.1	%
PDL / total loans		1.4	%		1.4	%		1.3	%		1.3	%		1.2	%
Coverage of NPLs (Loan loss allowance / NPLs)		117.3	%		122.8	%		140.5	%		145.9	%		145.4	%
Coverage of PDLs (Loan loss allowance / PDLs)		206.9	%		221.7	%		233.4	%		241.6	%		252.9	%
Risk index (Loan loss allowances / Loans)⁹		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Cost of credit (prov expense annualized / avg. loans)		2.4	%		1.2	%		1.3	%		1.4	%		1.3	%

Network
Branches		471			470			468			464			434
ATMs		1,536			1,529			1,484			1,406			1,295
Employees		11,723			11,793			11,653			11,557			11,354

Market information (period-end)
Net income per share (Ch$)		0.44			0.67			0.62			0.65			0.58
Net income per ADR (US$)		0.25			0.39			0.37			0.39			0.35
Stock price		31.79			32.57			31.92			34.04			37.26
ADR price		17.64			19.35			19.37			20.69			21.87
Market capitalization (US$mn)		8,310			9,116			9,126			9,747			10,303
Shares outstanding		188,446.1			188,446.1			188,446.1			188,446.1			188,446.1
ADRs (1 ADR = 400 shares)		471.1			471.1			471.1			471.1			471.1

Other Data
Quarterly inflation rate¹⁰		1.1	%		0.7	%		0.9	%		0.6	%		0.5	%
Central Bank monetary policy reference rate (nominal)		3.25	%		3.50	%		3.50	%		3.50	%		3.50	%
Observed Exchange rate (Ch$/US$) (period-end)		707.34			675.10			661.49			659.08			660.00

1 Ratio =( Loans - mortgage loans) / (Time deposits + demand deposits)

2 NIM = Net interest income annualized divided by interest earning assets

3 Client NIM = Net interest income from reporting segments annualized over average loans

4 Efficiency ratio =(Net interest income+ net fee and commission income +financial transactions net + Other operating income +other operating expenses) divided by (Personnel expenses + admiinistrative expenses + depreciation). Excludes impairment charges

5 Costs / assets = (Personnel expenses + adm. Expenses + depreciation) / Total assets

6 Impaired loans include: (A) for loans individually evaluated for impairment, (i) the carrying amount of all loans to clients that are rated C1 through C6 and (ii) the carrying amount of loans to an individual client with a loan that is non-performing, regardless of category, excluding residential mortgage loans, if the past-due amount on the mortgage loan is less than 90 days; and (B) for loans collectively evaluated for impairment, (i) the carrying amount of total loans to a client, when a loan to that client is non-performing or has been renegotiated, excluding performing residential mortgage loans, and (ii) if the loan that is non-performing or renegotiated is a residential mortgage loan, all loans to that client.

7 Capital + future interest of all loans with one installment 90 days or more overdue.

8 Total installments plus lines of credit more than 90 days overdue

9 Based on internal credit models and SBIF guidelines. Banks must have a 100% coverage of risk index

10 Calculated using the variation of the Unidad de Fomento (UF) in the period.