0001104659-18-023306.txt : 20180411 0001104659-18-023306.hdr.sgml : 20180411 20180410214345 ACCESSION NUMBER: 0001104659-18-023306 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20171231 FILED AS OF DATE: 20180411 DATE AS OF CHANGE: 20180410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPBANCA/FI CENTRAL INDEX KEY: 0001276671 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 000000000 STATE OF INCORPORATION: F3 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-32305 FILM NUMBER: 18749066 BUSINESS ADDRESS: STREET 1: ROSARIO NORTE 660 CITY: LAS CONDES SANTIAGO STATE: F3 ZIP: 00000 BUSINESS PHONE: 56 (2) 687-8000 MAIL ADDRESS: STREET 1: ROSARIO NORTE 660 CITY: LAS CONDES SANTIAGO STATE: F3 ZIP: 00000 20-F 1 a18-9698_120f.htm 20-F

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ANNUAL REPORT FOR THE FISCAL YEAR ENDING DECEMBER 31, 2017
As filed with the Securities and Exchange Commission on April 10, 2018

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 31, 2017

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the fiscal year ended December 31, 2017

 

Commission file number 001-32305

 

ITAÚ CORPBANCA

(Exact name of Registrant as specified in its charter)

 

 

(Translation of Registrant’s name into English)

 

Republic of Chile

(Jurisdiction of incorporation or organization)

 

Rosario Norte 660

Las Condes

Santiago, Chile

(Address of principal executive offices)

 

Investor Relations, Telephone: +(562) 2660-2555, Facsimile: +(562) 2660-2476,

Address: Rosario Norte 660, Las Condes, Santiago, Chile

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares representing common shares

 

New York Stock Exchange

Common shares, no par value*

 

New York Stock Exchange*

 

*      Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 



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Securities registered for which there is a reporting obligation pursuant Section 15(d) of the Act.

 

3.125% Senior Notes due January 15, 2018

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

512,406,760,091

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   x No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Emerging growth company o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 



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CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 20-F contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include “believes,” “expects,” “intends,” “plans,” “projects,” “estimates” or “anticipates” and similar expressions. These statements appear throughout this Annual Report, including, without limitation, under “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” are not based on historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control and include statements regarding our current intent, belief or expectations with respect to (1) our asset growth and financing plans, (2) trends affecting our financial condition or results of operations, (3) the impact of competition and regulations, (4) projected capital expenditures, and (5) liquidity. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this Annual Report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, currency exchange rates and operating and financial risks), 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:

 

·                  trends affecting our financial condition or results of operations;

 

·                  our dividend policy;

 

·                  changes in the participation of our shareholders or any other factor that may result in a change of control;

 

·                  the amount of our indebtedness;

 

·                  natural disasters;

 

·                  cyber-attacks, terrorism and other criminal activities;

 

·                  changes in general economic, business, regulatory, political or other conditions in the Republic of Chile, or Chile, or the Republic of Colombia, or Colombia, or changes in general economic or business conditions in Latin America or the global economy;

 

·                  changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Colombia, Chilean or Colombian companies or securities issued by Chilean companies;

 

·                  the monetary and interest rate policies of the Central Bank of Chile (Banco Central de Chile), or the Central Bank of Colombia (Banco de la República de Colombia);

 

·                  inflation or deflation;

 

·                  unemployment;

 

·                  our counterparties’ failure to meet contractual obligations;

 

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

 

·                  unanticipated turbulence in interest rates;

 

·                  movements in currency exchange rates;

 

·                  movements in equity prices or other rates or prices;

 

·                  changes in Chilean, Colombian and foreign laws and regulations;

 

·                  changes in Chilean or Colombian tax rates or tax regimes;

 

·                  competition, changes in competition and pricing environments;

 



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·                  concentration of financial exposure;

 

·                  our inability to hedge certain risks economically;

 

·                  the adequacy of our loss allowances, provisions or reserves;

 

·                  technological changes;

 

·                  changes in consumer spending and saving habits;

 

·                  successful implementation of new technologies;

 

·                  loss of market share;

 

·                  changes in, or failure to comply with, applicable banking, insurance, securities or other regulations;

 

·                  changes in accounting standards;

 

·                  difficulties in successfully integrating recent and future acquisitions into our operations;

 

·                  our ability to successfully complete the implementation of a new information technology core banking system in Colombia, as part of the integration process in Colombia;

 

·                  consequences of the merger of Banco Itaú Chile with and into Corpbanca on April 1, 2016 (the “Merger”) and the acquisition of the assets and liabilities of Itaú BBA Colombia S.A., Corporación Financiera (“Itaú BBA Colombia”) by us (the “Itaú Colombia Acquisition”);

 

·                  our ability to achieve revenue benefits and cost savings from the integration between former Corpbanca’s and former Banco Itaú Chile’s businesses and assets;

 

·                  our ability to address and forecast economic and social trends affecting our business, and to effectively implement the appropriate strategies; and

 

·                  the other factors identified or discussed under “Item 3. Key Information—D. Risk Factors” in this Annual Report.

 

You should not place undue reliance on such statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may make in the future. We do not undertake any obligation to release publicly any revisions to such forward-looking statements after the date of this Annual Report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

Neither Itaú Corpbanca’s independent auditors, nor any other independent accountants, have complied with, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, or disclaim any association with, the prospective financial information.

 

ENFORCEMENT OF CIVIL LIABILITIES

 

We are a banking corporation organized under the laws of Chile. The majority of our directors or executive officers are not residents of the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon us or such persons or to enforce against them or us in the United States or other foreign courts, judgments obtained in the United States predicated upon the civil liability provisions of the federal securities laws of the United States.

 

No treaty exists between the United States and Chile for the reciprocal enforcement of court judgments. Chilean courts, however, have enforced final judgments rendered in the United States, subject to the review in Chile of the United States judgment in order to ascertain whether certain basic principles of due process and public policy have been respected, without reviewing the merits of the subject matter of the case. If a United States court grants a final judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this judgment in Chile will be subject to the obtaining of the relevant “exequatur” (i.e., recognition and enforcement of the foreign judgment) according to Chilean civil procedure law in force at that time, and consequently, subject to the satisfaction of certain factors. Currently, the most important of these factors are the absence of any conflict between the foreign judgment and Chilean laws (excluding for this purpose the laws of civil procedure) and public policies;

 

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the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances; the absence of any further means for appeal or review of the judgment in the jurisdiction where judgment was rendered; the Chilean courts’ determination that the United States courts had jurisdiction; that service of process was appropriately served on the defendant and that the defendant was afforded a real opportunity to appear before the court and defend its case; and that enforcement would not violate Chilean public policy.

 

In general, the enforceability in Chile of final judgments of United States courts does not require retrial in Chile.

 

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TABLE OF CONTENTS

 

PART I

1

 

 

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1

 

 

 

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

1

 

 

 

 

ITEM 3. KEY INFORMATION

1

 

 

 

 

ITEM 4. INFORMATION ON THE COMPANY

29

 

 

 

 

ITEM  4A. UNRESOLVED STAFF COMMENTS

106

 

 

 

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

106

 

 

 

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

136

 

 

 

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

145

 

 

 

 

ITEM 8. FINANCIAL INFORMATION

149

 

 

 

 

ITEM 9. OFFER AND LISTING DETAILS

151

 

 

 

 

ITEM 10. ADDITIONAL INFORMATION

152

 

 

 

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISK

181

 

 

 

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

203

 

 

PART II

204

 

 

 

ITEM  13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

204

 

 

 

 

ITEM  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

204

 

 

 

 

ITEM 15. CONTROLS AND PROCEDURES

204

 

 

 

 

ITEM 16. RESERVED

205

 

 

 

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

205

 

 

 

 

ITEM 16B. ETHICS

205

 

 

 

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

205

 

 

 

 

ITEM  16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

206

 

 

 

 

ITEM  16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

206

 

 

 

 

ITEM  16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

206

 

 

 

 

ITEM 16G. CORPORATE GOVERNANCE

206

 

 

 

 

ITEM 16H. MINE SAFETY DISCLOSURE

208

 

 

PART III

209

 

 

 

ITEM 17. FINANCIAL STATEMENTS

209

 

 

 

 

ITEM 18. FINANCIAL STATEMENTS

209

 

 

 

 

ITEM 19. EXHIBITS

209

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

We are a Chilean bank and maintain our financial books and records in Chilean pesos and prepare our consolidated financial statements presented herewith in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As required by local regulations, our consolidated financial statements filed with the Chilean Superintendency of Banks and Financial Institutions (Superintendencia de Bancos e Instituciones Financieras), also referred to as the SBIF, and that are the basis for dividend distributions, have been prepared in accordance with Chilean accounting principles or Chilean Banking GAAP, issued by the SBIF. SBIF regulations provide that for those matters not specifically regulated by this agency, our financial statements prepared under Chilean Banking GAAP should follow the accounting principles established by IFRS. Unless otherwise indicated herein, as used hereafter IFRS refers to the standards issued by the IASB. Therefore, our consolidated financial statements filed herewith differ from the financial statements prepared in accordance with Chilean Banking GAAP. We have included herein certain information in Chilean Banking GAAP with respect to the Chilean financial system and the financial performance of the bank. These disclosures are not considered non-GAAP measures as they are required for regulatory purposes in Chile.

 

The selected consolidated financial information included herein as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017, is derived from, and presented on the same basis as, our consolidated financial statements prepared under IFRS and should be read together with such consolidated financial statements.

 

Our financial statement data as of and for the years ended December 31, 2015 and 2016 are not comparable to the data as of and for the year ended December 31, 2017 because of the Merger, which was consummated on April 1, 2016. The Merger has been accounted for as a reverse acquisition, based on guidance in IFRS 3 “Business Combinations,” with Banco Itaú Chile (the legal acquiree) considered as the accounting acquirer and Corpbanca (the legal acquirer) considered as the accounting acquiree. Accordingly, the financial statements of Itaú Corpbanca for periods prior to the acquisition date of April 1, 2016 reflect the historical financial information of Banco Itaú Chile. Before the Merger, former Banco Itaú Chile (the legal acquiree) only produced financial statements pursuant to Chilean Banking GAAP, while former Corpbanca (the legal acquirer) from 2009 to 2015 issued financial statements according to Chilean Banking GAAP and according to IFRS.

 

Readers should exercise caution in determining trends based on prior annual reports. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—The Economy—Critical Accounting Policies and Estimates.”

 

Our auditors, PricewaterhouseCoopers Consultores Auditores SpA, or PwC, an independent registered public accounting firm, have audited our consolidated financial statements in accordance with IFRS as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017. See pages F-1 and F-2 of this report for further details on PwC’s opinions.

 

Foreign Currency Markets

 

In this Annual Report, references to “$,” “US$,” “U.S. dollars” and “dollars” are to United States dollars, references to “Chilean pesos,” “Ch$” or “CLP” are to Chilean pesos, references to “UF” are to Unidades de Fomento and references to “Colombian pesos” or “COP$” are to Colombian pesos. The UF is an inflation-indexed, Chilean peso-denominated unit that is linked to and adjusted daily to reflect changes in the previous month’s Chilean Consumer Price Index (CPI) of the Chilean National Statistics Institute (Instituto Nacional de Estadísticas). As of December 31, 2017, one UF equaled US$43.61, Ch$26,798.14 and COP$130,213.11 and as of April 2, 2018, one UF equaled US$44.54, Ch$26,966.89 and COP$124,578.69. See “Item 5. Operating and Financial Review and Prospects.”

 

This Annual Report contains translations of certain Chilean peso amounts into U.S. dollars and Colombian pesos at specified rates solely for the convenience of the reader. These translations should not be construed as representations that such Chilean peso amounts actually represent such U.S. dollar or Colombian pesos amounts, were converted from U.S. dollars or Colombian pesos amounts at the rate indicated in preparing our consolidated financial statements or could be converted into U.S. dollars or Colombian pesos amounts at the rate indicated or any particular rate at all. Unless otherwise indicated, such U.S. dollar and Colombian pesos amounts have been translated from Chilean pesos based on our own exchange rate of Ch$614.48 and COP$2,985.78, respectively, per US$1.00 as of December 31, 2017.

 

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Specific Loan Information

 

Unless otherwise specified, all references in this Annual Report to total loans are to loans and financial leases before deduction for allowances for loan losses, and they do not include loans to banks or unfunded loan commitments. In addition, all market share data and financial indicators for the Chilean banking system when compared to Itaú Corpbanca’s financial information, presented in this Annual Report or incorporated by reference into this Annual Report are based on information published periodically by the SBIF, which is published under Chilean Banking GAAP and prepared on a consolidated basis. Non-performing loans include the principal and accrued interest on any loan with at least one installment more than 90 days overdue. Impaired loans include those loans on which there is objective evidence that customers will not meet some of their contractual payment obligations. Past due loans include all installments and lines of credit more than 90 days overdue, provided that the aggregate principal amount of such loans is not included. Under IFRS, a loan is evaluated on each financial statement reporting date to determine whether objective evidence of impairment exists. A loan will be impaired if and only if, objective evidence of impairment exists as a result of one or more events that occurred after the initial recognition of the loan, and such event or events have an impact on the estimated future cash flows of such loan that can be reliably estimated. It may not be possible to identify a single event that was the individual cause of the impairment. An impairment loss relating to a loan is calculated as the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the effective interest rate. Individually significant loans are individually tested for impairment. The remaining financial loans are evaluated collectively in groups with similar credit risk characteristics. The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. In the case of loans recorded at amortized cost, the reversal is recorded in income. See “Item 4. Information on the Company—Business Overview—Selected Statistical Information—Classification of Banks and Loan Portfolios; Allowances for Loan Losses.”

 

According to Decree with Force of Law No. 3 of 1997, as amended, the Ley General de Bancos or the Chilean General Banking Act, a bank must have effective net equity (patrimonio efectivo) of at least 8% of its risk weighted assets, net of required allowance for loan losses, and paid in capital and reserves, or basic capital (capital básico), of at least 3% of its total assets, net of required allowance for loan losses.

 

For these purposes, the effective net equity of a bank is the sum of (1) the bank’s basic capital, (2) subordinated bonds issued by the bank valued at their issue price for an amount of up to 50% of its basic capital (provided that the value of the bonds shall decrease by 20% for each year that elapses during the period commencing six years prior to their maturity), (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk weighted assets to the extent voluntary allowances exceed those that banks are required to maintain by law or regulation, (4) minority interests of up to 20% of the basic capital (provided that if such minority interests exceed 20%, only 20% will be taken into account), minus (5) goodwill or premiums, paid balances and investments in companies that are not consolidated and (6) certain deductions to be made in accordance with provisions of chapter 12-1 of the regulations of the SBIF (Recopilación Actualizada de Normas), or the Regulations of the SBIF.

 

Rounding and Other Matters

 

Certain figures included in this Annual Report and in our consolidated financial statements as of and for the years ended December 31, 2015, 2016 and 2017 have been rounded for ease of presentation. Percentage figures included in this Annual Report have in all cases not been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Annual Report may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements as of and for the years ended December 31, 2015, 2016 and 2017. Certain other amounts that appear in this Annual Report may similarly not sum due to rounding.

 

Inflation figures relating to Chile are those reported by the Chilean National Statistics Institute (Instituto Nacional de Estadísticas) or INE, unless otherwise stated herein or required by the context. Inflation figures relating to Colombia are those reported by the Colombian National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística) or DANE, unless otherwise stated herein or required by the context. See “—Exchange Rate Information” below.

 

In this Annual Report, all macroeconomic data related to the Chilean economy is based on information published by the Central Bank of Chile and all macroeconomic data related to the Colombian economy is based on information published by the Central Bank of Colombia. All market share and other data related to the Chilean financial system is based on information published by the SBIF as well as other publicly available information and all market share and other data related to the Colombian financial system is based on information published by the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia) as well as other publicly available information. The SBIF publishes the consolidated risk index (ratio of allowance for loans losses over total loans) of the Chilean financial system on a monthly basis. The Colombian Superintendency of Finance publishes every month the consolidated data required to calculate the risk index of the Colombian banking system (loan loss allowances and total loans).

 

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EXCHANGE RATE INFORMATION

 

Exchange Rates

 

Chile has two currency markets, the Formal Exchange Market (Mercado Cambiario Formal) and the Informal Exchange Market (Mercado Cambiario Informal). The Formal Exchange Market is comprised of banks and other entities authorized by the Central Bank of Chile. The Informal Exchange Market is comprised of entities that are not expressly authorized to operate in the Formal Exchange Market, such as certain foreign exchange houses and travel agencies, among others. The Central Bank of Chile is empowered to require that certain purchases and sales of foreign currencies be carried out on the Formal Exchange Market. Both the Formal and Informal Exchange Markets are driven by free market forces. Current regulations require that the Central Bank of Chile be informed of certain transactions and that they be effected through the Formal Exchange Market.

 

The U.S. dollar observed exchange rate (dólar observado), or the Observed Exchange Rate, which is reported by the Central Bank of Chile and published daily in the Official Gazette (Diario Oficial) is the weighted average exchange rate of the previous business day’s transactions in the Formal Exchange Market. Nevertheless, the Central Bank of Chile may intervene by buying or selling foreign currency on the Formal Exchange Market to attempt to maintain the Observed Exchange Rate within a desired range. Even though the Central Bank of Chile is authorized to carry out its transactions at the Observed Exchange Rate, it often uses spot rates instead. Many other banks carry out foreign exchange transactions at spot rates as well.

 

The Informal Exchange Market reflects transactions carried out at an informal exchange rate. There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate.

 

The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

 

As of December 31, 2017, the U.S. dollar exchange rate used by us was Ch$614.48 per US$1.00 and the Colombian peso exchange rate used by us was Ch$2,985.78 per COP$1.00.

 

The following table sets forth the annual low, high, average and period-end Observed Exchange Rate for U.S. dollars for the periods set forth below, as reported by the Central Bank of Chile.

 

 

 

Daily Observed Exchange Rate (Ch$ per US$)(1)

 

 

 

Low (2)

 

High (2)

 

Average (3)

 

Period-End (4)

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

2013

 

466.50

 

533.95

 

495.00

 

523.76

 

2014

 

524.61

 

621.41

 

570.01

 

607.38

 

2015

 

597.10

 

715.66

 

654.25

 

707.34

 

2016

 

645.22

 

730.31

 

676.83

 

667.29

 

2017

 

615.22

 

679.05

 

649.33

 

615.22

 

 

 

 

 

 

 

 

 

 

 

Quarterly period

 

 

 

 

 

 

 

 

 

2016 1st Quarter

 

671.97

 

730.31

 

702.07

 

675.10

 

2016 2nd Quarter

 

657.90

 

696.96

 

677.69

 

661.49

 

2016 3rd Quarter

 

645.22

 

680.28

 

661.65

 

659.08

 

2016 4th Quarter

 

649.40

 

679.24

 

665.80

 

667.29

 

2017 1st Quarter

 

638.35

 

673.36

 

655.58

 

662.66

 

2017 2nd Quarter

 

647.47

 

679.05

 

664.68

 

663.21

 

2017 3rd Quarter

 

615.58

 

666.61

 

643.23

 

636.85

 

2017 4th Quarter

 

615.22

 

655.74

 

633.36

 

615.22

 

2018 1st Quarter

 

588.28

 

614.75

 

602.08

 

605.26

 

 

 

 

 

 

 

 

 

 

 

Month ended

 

 

 

 

 

 

 

 

 

September 2017

 

615.58

 

638.28

 

625.54

 

636.85

 

October 2017

 

619.68

 

640.52

 

629.55

 

636.49

 

November 2017

 

629.21

 

642.41

 

633.77

 

642.41

 

December 2017

 

615.22

 

655.74

 

636.92

 

615.22

 

January 2018

 

599.33

 

614.75

 

605.53

 

604.42

 

February 2018

 

588.28

 

603.25

 

596.84

 

589.15

 

March 2018

 

593.61

 

609.58

 

603.45

 

605.26

 

April 2018(5)

 

603.39

 

603.39

 

603.39

 

603.39

 

 


(1)         Nominal figures.

(2)         Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)         The average of the exchange rates on the last day of each month during the period.

(4)         Each annual period ends on December 31, and the respective period-end exchange rate is published by the Central Bank of Chile on the first business day following December 31. Each monthly period ends on the last calendar day of such month and the respective period-end exchange rate is published by the Central Bank of Chile on the first business day following the last calendar day of such month.

(5)         The information for April 2018 is as of April 2, 2018.

 

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The following table sets forth the annual low, high, average and period-end exchange rate for U.S. dollars for the periods set forth below under our policy to calculate our own exchange rate:

 

 

 

Bank’s Exchange Rate Ch$ per US$1

 

 

 

Low (2)

 

High (2)

 

Average (3)

 

Period-End

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

2013

 

466.48

 

533.95

 

495.31

 

526.41

 

2014

 

605.46

 

621.56

 

612.85

 

605.46

 

2015

 

593.49

 

714.82

 

654.55

 

710.32

 

2016

 

643.04

 

731.70

 

677.15

 

669.81

 

2017

 

614.48

 

678.23

 

649.12

 

614.48

 

 

 

 

 

 

 

 

 

 

 

Quarterly period

 

 

 

 

 

 

 

 

 

2016 1st Quarter

 

667.08

 

731.70

 

701.17

 

667.08

 

2016 2nd Quarter

 

658.95

 

695.94

 

677.29

 

659.55

 

2016 3rd Quarter

 

643.04

 

692.91

 

662.75

 

658.20

 

2016 4th Quarter

 

648.87

 

680.20

 

666.36

 

669.81

 

2017 1st Quarter

 

637.03

 

673.91

 

655.53

 

662.26

 

2017 2nd Quarter

 

645.88

 

678.23

 

664.68

 

663.97

 

2017 3rd Quarter

 

615.78

 

667.07

 

642.65

 

639.14

 

2017 4th Quarter

 

614.48

 

655.24

 

633.14

 

614.48

 

2018 1st Quarter

 

587.93

 

610.47

 

601.93

 

604.18

 

 

 

 

 

 

 

 

 

 

 

Month ended

 

 

 

 

 

 

 

 

 

September 2017

 

615.78

 

639.14

 

626.07

 

639.14

 

October 2017

 

619.19

 

639.49

 

629.68

 

636.19

 

November 2017

 

627.64

 

647.50

 

634.61

 

647.50

 

December 2017

 

614.48

 

655.24

 

635.16

 

614.48

 

January 2018

 

598.10

 

610.47

 

605.12

 

601.18

 

February 2018

 

587.93

 

603.30

 

596.22

 

594.62

 

March 2018

 

595.74

 

610.19

 

604.03

 

604.18

 

April 2018(4)

 

605.52

 

605.52

 

605.52

 

605.52

 

 


(1)         Nominal figures.

(2)         Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)         The average of the exchange rates on the last day of each month during the period.

(4)         The information for April 2018 is as of April 2, 2018.

 

Exchange Controls Considerations

 

Investments made in our common shares and our American Depositary Shares, or ADSs, are subject to the following requirements:

 

·                              any foreign investor acquiring common shares to be deposited into an ADS facility who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;

 

·                              the entity participating in the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank of Chile;

 

·                              all remittances of funds from Chile to the foreign investor upon the sale of common shares underlying ADSs, or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and

 

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·    all remittances of funds made to the foreign investor must be reported to the Central Bank of Chile.

 

When funds are brought into Chile for a purpose other than to acquire common shares to convert them into ADSs and subsequently are used to acquire common shares to be deposited into the ADS facility, such investment must be reported to the Central Bank of Chile by the custodian within ten days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank of Chile.

 

All payments made within Chile in foreign currency in connection with ADSs through the Formal Exchange Market must be reported to the Central Bank of Chile by the entity participating in the transaction. In the event there are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.

 

We cannot assure you that additional Chilean restrictions applicable to the holders of the ADSs, the disposition of shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restriction if imposed.

 

This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank Foreign Exchange Regulations, a copy of which is available in the original Spanish version at the Central Bank of Chile’s website at www.bcentral.cl.

 

A. SELECTED FINANCIAL DATA

 

The following tables present our selected financial data as of the dates and for the periods indicated. You should read the following information together with our consolidated financial statements, including the notes thereto, included in this Annual Report and the information set forth in “Item 5. Operating and Financial Review and Prospects.”

 

 

 

For the fiscal years ended December 31, 

 

 

 

2015 

 

2016

 

2017

 

2017(1)

 

 

 

Ch$

 

Ch$

 

Ch$

 

US$

 

 

 

(in millions of Ch$ and thousands of US$, except for
number of shares and per share data)
(2)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

501,982

 

1,509,203

 

1,646,329

 

2,679,223

 

Interest expense

 

(278,692

)

(870,028

)

(863,347

)

(1,405,004

)

 

 

 

 

 

 

 

 

 

 

Net interest income

 

223,290

 

639,175

 

782,982

 

1,274,219

 

 

 

 

 

 

 

 

 

 

 

Net service fee income

 

71,088

 

150,796

 

177,571

 

288,978

 

Trading and investment, foreign exchange gains and other operating income

 

50,040

 

83,551

 

95,965

 

156,173

 

 

 

 

 

 

 

 

 

 

 

Operating income before provision for loan losses

 

344,418

 

873,522

 

1,056,518

 

1,719,369

 

 

 

 

 

 

 

 

 

 

 

Provisions for loan losses

 

(42,929

)

(245,990

)

(315,417

)

(513,307

)

 

 

 

 

 

 

 

 

 

 

Total operating income, net of provision for loan losses, interest and fees

 

301,489

 

627,532

 

741,101

 

1,206,062

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

(178,460

)

(616,627

)

(731,147

)

(1,189,863

)

 

 

 

 

 

 

 

 

 

 

Total net operating income before income taxes

 

123,029

 

10,905

 

9,954

 

16,199

 

 

 

 

 

 

 

 

 

 

 

Income attributable to investment in other companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

123,029

 

10,905

 

9,954

 

16,199

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

(17,263

)

3,568

 

52,871

 

86,042

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

105,766

 

14,473

 

62,825

 

102,241

 

Income from discontinued operations

 

 

(504

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

105,766

 

13,969

 

62,825

 

102,241

 

 

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For the fiscal years ended December 31, 

 

 

 

2015 

 

2016

 

2017

 

2017(1)

 

 

 

Ch$

 

Ch$

 

Ch$

 

US$

 

 

 

(in millions of Ch$ and thousands of US$, except for
number of shares and per share data)
(2)

 

 

 

 

 

 

 

 

 

 

 

Equity holders of the bank

 

105,757

 

14,407

 

67,821

 

110,371

 

Non-controlling interest

 

9

 

(438

)

(4,996

)

(8,130

)

 

 

 

 

 

 

 

 

 

 

Net income per common share (3)

 

0.919

 

0.035

 

0.132

 

0.00022

 

Dividend per common share (4)

 

18,448

 

36,387

 

0.00121

 

0.000002

 

Gross dividends per ADS (4)

 

n.a.

 

n.a.

 

1.80814

 

0.00294

 

Shares of common stock outstanding

 

115,039,690,651

 

512,406,760,091

 

512,406,760,091

 

 

 

 


(1)         Amounts stated in U.S. dollars as of December 31, 2017 and for the year ended December 31, 2017 have been translated from Chilean pesos at our exchange rate of Ch$614.48 per US$1.00 as of December 31, 2017.

(2)         Amounts stated in millions of Chilean pesos and thousands of U.S. dollars except for net income per share, dividends per common share and dividend per ADS expressed in Chilean pesos and in U.S. dollars.

(3)         Net income per common share has been calculated on the basis of net income attributable to the equity holders of the bank divided by the weighted average number of shares outstanding for the period. For further information on basic earnings and diluted earnings please see Notes 1(ee) and 22(d) to our consolidated financial statements.

(4)         Represents dividends or net dividends paid to common shareholders or to ADS holders in respect of net income earned in the prior fiscal year.

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

 

As of December 31,

 

 

 

2015

 

2016

 

2017

 

2017(1)

 

 

 

Ch$

 

Ch$

 

Ch$

 

US$

 

 

 

(in millions of Ch$ and thousands of US$)

 

Cash and deposits in banks

 

477,809

 

1,487,137

 

964,030

 

1,568,855

 

Cash in the process of collection

 

62,095

 

145,769

 

157,017

 

255,528

 

Trading portfolio financial assets

 

17,765

 

632,557

 

415,061

 

675,467

 

Investments under agreements to resell

 

10,293

 

170,242

 

28,524

 

46,420

 

Derivative financial instruments

 

227,984

 

1,102,769

 

1,248,775

 

2,032,247

 

Loans and receivables from banks, net

 

99,398

 

150,568

 

70,077

 

114,043

 

Loans and receivables from customers, net

 

6,705,492

 

20,444,648

 

19,764,078

 

32,163,908

 

Financial investments available-for-sale

 

514,985

 

2,074,077

 

2,663,478

 

4,334,523

 

Held to maturity investments

 

 

226,433

 

202,030

 

328,782

 

Intangible assets

 

51,809

 

1,614,475

 

1,562,654

 

2,543,051

 

Property, plant equipment, net

 

33,970

 

121,043

 

130,579

 

212,503

 

Current income taxes

 

8,275

 

164,296

 

238,452

 

388,055

 

Deferred income taxes

 

13,930

 

110,765

 

140,685

 

228,950

 

Other assets

 

135,742

 

427,394

 

429,025

 

698,192

 

Non-current assets held for sale

 

1,785

 

37,164

 

18,308

 

29,794

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

8,361,332

 

28,909,337

 

28,032,773

 

45,620,318

 

 

 

 

 

 

 

 

 

 

 

Checking accounts and demand deposits

 

981,349

 

4,453,191

 

4,141,667

 

6,740,117

 

Transaction in the course of payment

 

26,377

 

67,413

 

109,496

 

178,193

 

Obligations under repurchase agreements

 

43,727

 

373,879

 

420,920

 

685,002

 

Time deposits and saving accounts

 

3,952,573

 

11,581,710

 

10,065,243

 

16,380,099

 

Derivative financial instruments

 

253,183

 

907,334

 

1,095,154

 

1,782,245

 

Borrowings from financial institutions

 

658,600

 

2,179,870

 

2,196,130

 

3,573,965

 

Debt issued

 

1,504,335

 

5,460,253

 

5,950,038

 

9,683,046

 

Other financial obligations

 

20,733

 

25,563

 

17,066

 

27,773

 

Current income tax provision

 

543

 

1,886

 

624

 

1,015

 

Deferred income taxes

 

67

 

57,636

 

26,354

 

42,888

 

Provisions

 

75,924

 

100,048

 

117,889

 

191,852

 

Other liabilities

 

52,480

 

269,810

 

463,435

 

754,191

 

Liabilities directly associated with non-current assets held for sale

 

 

7,032

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

7,569,891

 

25,485,625

 

24,604,016

 

40,040,385

 

 

 

 

 

 

 

 

 

 

 

Equity attributable to equity holders of the bank

 

791,382

 

3,184,743

 

3,211,477

 

5,226,333

 

Non-controlling interest

 

59

 

238,969

 

217,280

 

353,600

 

 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

791,441

 

3,423,712

 

3,428,757

 

5,579,933

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

8,361,332

 

28,909,337

 

28,032,773

 

45,620,318

 

 


(1)         Amounts stated in U.S. dollars as of December 31, 2017 and for the year ended December 31, 2017 have been translated from Chilean pesos at our exchange rate of Ch$614.48 per US$1.00 as of December 31, 2017.

 

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CONSOLIDATED RATIOS

 

 

 

As of and for the Year Ended December 31,  

 

 

 

2015

 

2016

 

2017

 

Profitability and Performance

 

 

 

 

 

 

 

Net interest margin(1)

 

3.0%

 

3.0%

 

3.2%

 

Return on average total assets (2)

 

1.3%

 

0.1%

 

0.2%

 

Return on average equity (3)

 

13.9%

 

0.5%

 

1.8%

 

Efficiency ratio (consolidated) (4)

 

49.6%

 

68.0%

 

67.3%

 

Dividend payout ratio (5)

 

50.0%

 

30.0%

 

40.0%

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

Average equity as a percentage of average total assets

 

9.4%

 

11.3%

 

11.9%

 

Shareholders’ equity as a percentage of total liabilities

 

10.5%

 

12.5%

 

13.1%

 

 

 

 

 

 

 

 

 

Asset Quality

 

 

 

 

 

 

 

Allowances for loan losses as a percentage of non-performing loans (6)

 

104.9%

 

158.6%

 

133.9%

 

Non-performing loans as a percentage of total loans (6)

 

1.3%

 

1.7%

 

2.3%

 

Allowances for loan losses as a percentage of total loans (Risk Index)

 

1.4%

 

2.7%

 

3.0%

 

Past due loans as a percentage of total loans (7)

 

0.8%

 

0.5%

 

0.6%

 

 

 

 

 

 

 

 

 

Other Data

 

 

 

 

 

 

 

Inflation rate

 

4.4%

 

2.7%

 

2.3%

 

Revaluation (devaluation) rate (Ch$/US$) (foreign exchange rate)

 

17.3%

 

(5.7)%

 

(8.3)%

 

Number of employees

 

2,549

 

9,659

 

9,492

 

Number of branches and offices

 

97

 

398

 

375

 

 


(1)         Net interest margin is defined as net interest income divided by average interest-earning assets.

(2)         Return on average total assets is defined as net income divided by average total assets.

(3)         Return on average equity is defined as net income divided by average shareholders’ equity.

(4)         Efficiency ratio (consolidated) is defined as total operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains from make-to-market and trading exchange differences (net) and other operating income (net).

(5)         Dividend payout ratio represents dividends divided by net income paid in each period.

(6)         Non-performing loans include the principal and interest on any loan with one installment more than 90 days overdue.

(7)         Past due loans include all installments and lines of credit more than 90 days overdue and does not include the aggregate principal amount of such loans.

 

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B.  CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C.  REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D.  RISK FACTORS

 

We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with the Securities and Exchange Commission, or the SEC, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are a non-U.S. company, there are risks associated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this document, including the following factors.

 

Risks Associated with our Business

 

The growth and composition of our loan portfolio may expose us to increased loan losses.

 

In 2017 our aggregate gross loan portfolio decreased by 3.0% due to weak economic activity in both Chile and Colombia, in addition to a devaluation of 7.8% of the Colombian peso against the Chilean peso. Our business strategy is to grow profitably while increasing the size of our loan portfolio.

 

Through the further expansion of our loan portfolio in retail segments, we are seeking to decrease our corporate segment concentration and, as a result, balance our loan portfolio and strengthen our retail operation (particularly in the consumer segment), which may expose us to a higher level of loan losses and require us to establish higher levels of provisions for loan losses.

 

As of December 31, 2017, commercial loans represented 67.3% of our total loan portfolio compared to 69.7% as of December 31, 2016. As of December 31, 2017, mortgage loans represented 20.4% of our total loan portfolio compared to 18.5% as of December 31, 2016 and consumer loans represented 12.3% of our total loan portfolio compared to 11.8% as of December 31, 2016.

 

Although the consumer loans portfolio represents the single highest level of risk in our loan portfolio, the most material loan losses experienced during 2016 and 2017 came from our largest wholesale clients. As of December 31, 2017, the risk index (ratio of allowance for loans losses over total loans) of the consumer segment was 5.4% while other business units of our loan portfolio, such as mortgage loans and commercial loans, had lower risk indexes of 0.8% and 3.3%, respectively.

 

Our consumer loan portfolio may experience loan losses due to the absence of collateral in respect of unsecured loans, insufficient collateral in collateralized loans, and risks relating to the circumstances of individual borrowers, including unemployment or incapacitation of our consumer borrowers.

 

We believe our total allowances for loan losses is adequate as of the date hereof to cover all known losses in our total loan portfolio. The growth of our loan portfolio may expose us to a higher level of loan losses and require us to establish proportionately higher levels of provisions for loan losses, which would offset the increased income that we can expect to receive as our loan portfolio grows.

 

Our loan portfolio may not continue to grow at the same or similar rate.

 

Past performance of our loan portfolio may not be indicative of future performance. Our loan portfolio may not continue to grow at the same or similar rates as the growth rate that we historically experienced, particularly in light of the growth in recent years attributable to the acquisitions in Colombia of Banco Santander Colombia S.A., now Itaú Corpbanca Colombia S.A. (“Itaú Corpbanca Colombia”), in May 2012 (the “Santander Colombia Acquisition”), Helm Bank in August 2013 (the “Helm Bank Acquisition”) and the Merger in Chile in April 2016. Additionally, changes in the Chilean or Colombian economies, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulations could also adversely affect the rate of growth of our loan portfolio and our risk index.

 

Our allowances for loan losses may not be adequate to cover the future actual losses to our loan portfolio.

 

As of December 31, 2017, our allowance for loan losses was Ch$618,527 million (excluding allowances for loan losses on loans and receivable to banks) and the risk index (or allowances for loan losses to total loans) was 3.0%. The amount of allowance for

 

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loan losses is based on our current assessment and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among others, our customers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chilean and Colombian economies, government macroeconomic policies, interest rates and the legal and regulatory environment. Many of these factors are beyond our control. In addition, as these factors evolve, the models we use to determine the appropriate level of allowance for loan losses require recalibration, which may lead to increased provision for loan losses. If our assessment of, and expectations concerning, the above mentioned factors differ from actual developments, if the quality of our loan portfolio deteriorates or if the future actual losses exceed our estimates, our provisions may not be adequate to cover actual losses and we may need to make additional reserves, which may materially and adversely affect our results of operations and financial condition.

 

If we are unable to maintain the quality of our loan portfolio, our financial condition and results of operations may be materially and adversely affected.

 

As of December 31, 2017, our non-performing loans were Ch$462,015 million, which resulted in a non-performing to total loans ratio of 2.3% as of December 31, 2017. We seek to continue to improve our credit risk management policies and procedures. However, we cannot assure you that our credit risk management policies, procedures and systems are free from any deficiency. Failure of credit risk management policies may result in an increase in the level of non-performing loans and adversely affect the quality of our loan portfolio. In addition, the quality of our loan portfolio may also deteriorate due to various other reasons, including factors beyond our control, such as the macroeconomic factors affecting the Chilean or Colombian economies. If such deterioration were to occur, it could materially and adversely affect our financial conditions and results of operations.

 

Additionally, due to limitations in the availability of information and the developing information infrastructure in Chile and Colombia, our assessment of the credit risks associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure you that our credit scoring systems collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly.

 

Furthermore, a substantial number of our customers consist of individuals and small-to-medium-sized enterprises, or SMEs. Our business results relating to our lower-income individual and SME customers are, however, more likely to be adversely affected by downturns in the Chilean and Colombian economies, including increases in unemployment, than our business from large corporations and high-income individuals. For example, unemployment directly affects the capacity of individuals to obtain and repay consumer loans. Consequently, this could materially and adversely affect the liquidity, business and financial condition of our customers, which may in turn cause us to experience higher levels of past due loans, and result in higher allowances for loan losses, which could in turn materially affect our asset quality, results of operations and financial conditions.

 

The value of any collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

 

From time to time, we require our borrowers to collateralize their loans with guarantees, pledges of particular assets or other security. The value of any collateral securing our loan portfolio may significantly fluctuate or decline due to factors beyond our control. Such factors include market factors, environmental risks, natural disasters, macroeconomic factors and political events affecting the Chilean or Colombian economies. Any decline in the value of the collateral securing our loans may result in a reduction in the recovery from collateral realization and may have an adverse impact on our results of operations and financial condition.

 

In addition, we may face difficulties in perfecting our liens and enforcing our rights as a secured creditor. In particular, timing delays and procedural problems in enforcing against collateral and local protectionism in the markets in which we operate may make foreclosures on collateral and enforcement of judgments difficult, and may result in losses that could materially and adversely affect our results of operations and financial condition.

 

We may be unable to meet requirements relating to capital and liquidity adequacy.

 

Chilean banks are required by the Chilean General Banking Act to maintain regulatory capital of at least 8% of risk-weighted assets, net of required allowance for loan losses and deductions, and basic capital of at least 3% of total assets, net of required allowance for loan losses. Due to the Merger, the SBIF considered the bank to be a systemically important bank and therefore imposed a larger regulatory minimum capital of 10% on the bank instead of 8%. For the purposes of maintaining a high solvency classification from the SBIF and continued compliance with the SBIF’s capital requirements on us, our intention is to have the highest classification from the SBIF. As of December 31, 2017, our regulatory capital to risk weighted assets ratio was 14.7% according to the rules issued by the SBIF, which implement the Basel I capital requirements standards in Chile.

 

In line with the pending adoption of Basel III regulations in Chile, the SBIF has proposed an increase to the minimum effective BIS capital adequacy ratio from the current 8% to 10.5%, not including the cyclical buffer requirements and those for the designated Systemically Important Financial Institutions (“SIFI”). However, given that this regulation is not yet applicable, it is not possible to determine a precise new capital position. In this way, the bank contemplates periodic reviews in order to volatility in the projections.

 

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Considering the above, Itaú Corpbanca expects to target a capital ratio based on the greater of 1.2 times the minimum regulatory capital requirement or the average regulatory capital ratio of the three largest private banks in Chile and Colombia. As of December 31, 2017, according to public information published by the SBIF, the average regulatory capital ratio of the three largest private banks in Chile was 13.9%. See “Item 4—Information on the Company—B. Business Overview— Capital Adequacy Requirements” for more information on capital adequacy requirements in Chile.

 

Additionally, Colombian financial institutions are subject to capital adequacy requirements that are based on applicable Basel Committee standards. The regulations establish four categories of assets, which are each assigned different risk weights, and require that a credit institution’s Technical Capital (as defined below) be at least 9% of that institution’s total risk-weighted assets, and that its ordinary basic capital be at least 4.5% of that institution’s total risk-weighted assets. Technical Capital for the purposes of the Colombian regulations consists of the sum of tier one capital (ordinary basic capital), additional tier one capital (additional basic capital) and tier two capital (additional capital). As of December 31, 2017, the consolidated ratio for our Colombian operations (calculated according to the Colombian Superintendency of Finance definitions for “Total Solvency” (“Solvencia Total”)) was 12.7%. See “Item 4—Information on the Company—B. Business Overview— Capital Adequacy Requirements” for more information on capital adequacy requirements in Colombia.

 

Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including:

 

·      the increase of risk-weighted assets as a result of the expansion of our business;

 

·      the failure to increase our capital correspondingly;

 

·      losses resulting from a deterioration in our asset quality;

 

·      declines in the value of our available-for-sale investment portfolio;

 

·      goodwill and minority interest;

 

·      changes in accounting rules;

 

·      changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in the countries we operate; and

 

·      fluctuations in exchange rates that could impact our loan portfolio, valuation adjustments due to the translation effects in equity or hedging strategies.

 

Although we have historically complied with our capital maintenance obligations in the jurisdictions where we operate, there can be no assurance that we will continue to do so in the future. We may be required to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required levels. Our ability to raise additional capital may be limited by numerous factors, including: our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions. If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions or subject to sanctions in the jurisdictions where we operate. These measures or sanctions could materially and adversely affect our business reputation, financial condition and results of operations.

 

In 2015, the SBIF and the Central Bank published new liquidity standards and ratios to be implemented and calculated by all banks. The first stage of these new liquidity requirements, which is currently being implemented, is intended to improve the information—in quantity and quality—about the actual situation of banks without imposing specific limits, except liquidity mismatches for 30-day and 90-day periods, for which thresholds with respect to banks’ capital, are already in place. As of December 31, 2017, the liquidity coverage ratio (LCR) for our Chilean operations was 161.4%. Since we have no certainty regarding the limits to be imposed by the regulator to the banking industry and Itaú Corpbanca in particular, we cannot assure you that new liquidity requirements will not have a material impact on our financial condition or results of operations in the future. See “Item 4—Information on the Company—B. Business Overview— Reserve Requirements” for more information on liquidity requirements in Chile.

 

Liquidity adequacy requirements for Colombian financial institutions (as set forth in Resolución Externa No. 5 de 2008, as amended, issued by the board of directors of the Central Bank of Colombia) include 11% on demand and savings deposits, with the exception of time certificates of deposit under 18 months, in which case the percentage is 4.5% or 0% when they exceed that term. As of December 31, 2017, the LCR for our Colombian operations (calculated according to the Colombian Superintendency of Finance) was 444% (121.4% under our internal models based on Basel III standards). Although we have historically complied with our required liquidity ratios, there can be no assurance that we will continue to do so in the future. See “Item 4—Information on the Company—B. Business Overview— Reserve Requirements” for more information on liquidity requirements in Colombia.

 

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We are dependent on key personnel.

 

Our development, operation and growth depends significantly upon the efforts and experience of our board of directors, senior management and other key executives. The loss of key personnel for any reason, including retirement or our inability to timely attract and retain qualified management personnel to replace them, could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to market risk.

 

We are directly and indirectly affected by changes in local and international market conditions. Market risk, or the risk of losses in positions arising from movements in market prices, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt, short-term borrowings, proprietary trading in assets and liabilities and derivatives. Changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.

 

Our results of operations are affected by interest rate volatility and inflation rate volatility.

 

Our results of operations depend to a great extent on our net interest income. In 2015, 2016 and 2017, our ratio of net interest income to total operating income was 64.8%, 73.2% and 74.1%, respectively. Changes in market interest rates in Chile or Colombia could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities leading to a reduction in our net interest income. Interest rates are highly sensitive to many factors beyond our control, including the monetary policies of the Central Bank of Chile and the Central Bank of Colombia, changes in regulation of the financial sector in Chile and Colombia, domestic and international economic and political conditions and other factors. Yields on the Chilean government’s 90-day benchmark rate reached a high of 3.1% and a low of 2.8% in 2015, a high of 3.6% and a low of 3.5% in 2016 and a high of 3.2% and a low of 2.5% in 2017. On the other hand, the Colombian government does not issue short-term bonds of 30, 60 or 90 days as the Chilean government does. Instead, every month the board of directors of the Central Bank of Colombia determines the benchmark rate in order to achieve a specific goal of inflation. Yields on the Colombian benchmark rate reached a high of 5.8% and a low of 4.5% for 2015, a high of 7.8% and a low of 5.8% for 2016 and a high of 7.5% and a low of 4.8% for 2017. As of December 31, 2015, 2016 and 2017, we had Ch$515 million, Ch$2,074 million, and Ch$2,663 million, respectively, in financial investments available-for-sale. In the current global economic climate, there is a greater degree of uncertainty and unpredictability in the policy decisions and the setting of interest rates by the Central Bank of Chile and the Central Bank of Colombia and, as a result, any volatility in interest rates could adversely affect us, including our future financial performance and the market value of our securities. In addition, inflation rate volatility could adversely affect our net interest income due to fluctuations in the gap between assets and liabilities that are indexed to the UF.

 

Increased competition and industry consolidation may adversely affect the results of our operations.

 

The Chilean and Colombian markets for financial services are highly competitive and competition is likely to increase.

 

In Chile, we face competition from banking and non-banking institutions with respect to the different products we offer. In the consumer and other loans businesses, we compete with other banks, credit unions and public social security funds (cajas de compensación). In some of our credit products, we face competition from department stores, large supermarket chains and leasing, factoring and automobile finance companies, and in the saving products and mortgage loans businesses we compete with mutual funds, pension funds, insurance companies and with residential mortgage loan managers (Administradoras de Mutuos Hipotecarios). Furthermore, under the Chilean General Banking Act, representative offices of non-Chilean banks are allowed to promote the credit products and services of their headquarters, which has increased, and may further increase, competition in our industry and, thus, have an adverse effect on our results of operation and financial condition.

 

In Colombia, we also operate in a highly competitive environment and increased competitive conditions are to be expected in the jurisdictions where we operate. Intensified merger activity in the financial services industry produces larger, better capitalized and more geographically diverse firms that are capable of offering a wider array of financial products and services at more competitive prices. Our ability to maintain our competitive position in Colombia depends mainly on our ability to fulfill new customers’ needs through the development of new products and services and offer adequate services and strengthen our customer bases through cross-selling. Our Colombian operations will be adversely affected if we are not able to maintain efficient service strategies, or overcome certain delays or difficulties in the transition of the integration of the operational services and activities of Itaú Corpbanca Colombia and Helm Bank. In addition, our efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined by competitive pressures.

 

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Our risk management system may not be sufficient to avoid losses that could have a material adverse effect on our business, financial condition and results of operations.

 

In addition to granting loans, part of our financial portfolio consists of trading transactions by our treasury division. Our financial success depends on, among other factors, our ability to accurately balance the risks we take and the returns we gain from our transactions. We use various processes to identify, analyze, manage and control our risk exposure, both in favorable and adverse market conditions. However, these processes involve subjective and complex judgments and assumptions, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. Because of the nature of these risks, we cannot guarantee that our risk management efforts will prevent us from experiencing material losses. In particular, we may experience losses that could have a material adverse effect on our business, financial condition and results of operations if, among other factors:

 

·      we are not capable of identifying all of the risks that may affect our portfolio;

 

·      our risk analysis or our measures taken in response to such risks are inadequate or inaccurate;

 

·      the markets move in an unexpected and adverse way with respect to speed, direction, strength or other aspects and our ability to manage risks in such a scenario is restricted;

 

·      our clients are affected by unforeseen events resulting in their default or losses in an amount higher than those considered in our risk analyses; or

 

·      collateral pledged in our favor is insufficient to cover our clients’ obligations to us if they default.

 

We are subject to concentration risk.

 

Concentration risk is the risk associated with potential high financial losses triggered by significant exposure to a particular component of risk, whether it be related to a particular counterparty, industry or geographic concentration. Examples of such risks include significant exposure to a single counterparty, counterparties operating in the same economic sector or geographic region, or financial instruments that depend on the same index or currency.

 

We believe that an excessive concentration with respect to a particular risk factor could have a material adverse effect on our business, financial condition and results of operations.

 

We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.

 

In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. While we believe that these estimates and assumptions are reasonable under the current circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, our reported operating results could be materially adversely affected.

 

Changes in accounting standards could impact reported earnings.

 

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. We cannot assure you that future changes in financial accounting and reporting standards will not substantially affect our results of operations or performance indicators, as we do not know the extent of future standards.

 

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities.

 

We are subject to the tax laws and regulations of Chile and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws.

 

If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on our results of operations.

 

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As a result of the inherent limitations in our disclosure and accounting controls, misstatements due to error or misconduct may occur and not be detected.

 

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file with or submit to the SEC under the Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to management, recorded, processed summarized and reported within the time periods specified in SEC rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, including related accounting controls, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.

 

Any failure by us to maintain effective internal control over financial reporting may adversely affect investor confidence and, as a result, the value of investments in our securities.

 

We are required under the Sarbanes-Oxley Act of 2002 to furnish a report by our management on the effectiveness of our internal control over financial reporting and to include a report by our independent auditors attesting to such effectiveness. Any failure by us to maintain effective internal control over financial reporting could adversely affect our ability to report accurately our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent auditors determine that we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market prices of our shares and ADSs could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies subject to SEC regulation, also could restrict our future access to the capital markets.

 

Our reliance on short-term deposits as our principal source of funds exposes us to sudden increases in our costs of funding which could have a material adverse effect on our revenue.

 

Time deposits and other term deposits are our primary sources of funding, which represented 40.9% of our liabilities as of December 31, 2017. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, our liquidity position, results of operations and financial condition may be materially and adversely affected. We cannot assure you that in the event of a sudden or unexpected shortage of funds, any money markets in which we operate will be able to maintain levels of funding without incurring higher funding costs or the liquidation of certain assets. If this were to happen, our business, results of operations and financial condition may be materially and adversely affected.

 

Currency fluctuations could adversely affect our financial condition and results of operations and the value of our securities.

 

Economic policies and any future changes in the value of the Chilean peso or the Colombian peso against the U.S. dollar could affect the dollar value of our securities, since the equity value of Itaú Corpbanca is hedged against our base currency Chilean peso. The Chilean peso and the Colombian peso have been subject to significant fluctuations in their value against the U.S. dollar in the past and could be subject to similar fluctuations in the future. As of December 31, 2015, the Chilean peso depreciated against the U.S. dollar by 17.3% and the Colombian peso depreciated against the U.S. dollar by 31.64%, each as compared to December 31, 2014. As of December 31, 2016, the Chilean peso appreciated against the U.S. dollar by 5.7% and the Colombian peso appreciated against the U.S. dollar by 4.72%, each as compared to December 31, 2015. As of December 31, 2017, the Chilean peso appreciated against the U.S. dollar by 8.3% and the Colombian peso appreciated against the U.S. dollar by 0.56%, each as compared to December 31, 2016.

 

Our results of operations may be affected by fluctuations in exchange rates between and among the Chilean peso, the Colombian peso and the U.S. dollar despite our internal policy and Chilean and Colombian regulations relating to the general avoidance of material exchange rate gaps. As of December 31, 2015, 2016 and 2017, the gap between foreign currency denominated assets and foreign currency denominated liabilities, excluding derivatives, was Ch$222,673 million, Ch$(606,535) million and Ch$(571,951) million, respectively.

 

We may decide to change our policy regarding exchange rate gaps. Regulations that limit such gaps may also be amended or eliminated. Greater exchange rate gaps could increase our exposure to the devaluation of the Chilean peso and/or the Colombian peso, and any such devaluation may impair our capacity to service our foreign-currency obligations and may, therefore, materially and adversely affect our financial condition and results of operations.

 

Our business is highly dependent on proper functioning and improvement of information technology systems.

 

Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively. We have backup data for our key data processing systems that could be used in the event of a catastrophe or a failure of

 

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our primary systems, and have established alternative communication networks where available. However, we cannot assure you that our business activities would not be materially disrupted if there were a partial or complete failure of any of these primary information technology systems or communication networks. Such failures could be caused by, among other things, software bugs, computer virus attacks, cyber-attacks or conversion errors due to system upgrading. In addition, a cyber-attack, including any security breach caused by unauthorized access to information or systems, intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, could have a material adverse effect on our business, results of operations and financial condition.

 

Our ability to remain competitive and achieve further growth will depend in part on our ability to upgrade our information technology systems and increase our capacity on a timely and cost effective basis. Any substantial failure to improve or upgrade information technology systems effectively or on a timely basis could materially and adversely affect our business, financial condition and results of operations.

 

Our business in Colombia is dependent on certain technology service agreements with affiliates of Banco Santander, S.A.

 

Upon our acquisition of Banco Santander Colombia in 2012, Banco Santander, S.A. agreed to cause certain of its affiliates to provide us certain technology services. Our business in Colombia is still dependent on such service and support of such affiliates of Banco Santander, S.A. We have recently extended the technology service agreements entered into with such affiliates (including Produban Servicios Informáticos Generales S.L. and Ingeniería de Software Bancario S.L.) until at least May 31, 2018. If the affiliates of Banco Santander, S.A. are unable to service and support our business in Colombia or if we are unable to integrate our information technology systems into our business in Colombia after the expiration of the technology service agreements, then such failure could materially and adversely affect our business, financial condition and results of operations.

 

A worsening of labor relations in Chile or Colombia could impact our business.

 

As of December 31, 2017, on a consolidated basis we had 5,848 employees in Chile (including 31 at our New York Branch), of which 62.3% were unionized, and 3,644 employees in Colombia, of which 27.9% were unionized. We are parties to collective bargaining agreements with unions representing our employees in Chile and Colombia. Itaú Corpbanca’s current labor agreements with five unions in Chile were subscribed on 2017 and expire on May 31, 2020, November 23, 2020 and December 4, 2020. Itaú Corpbanca Colombia’s current labor agreement with 23 unions in Colombia was subscribed on September 1, 2017 and expires on August 31, 2019. We generally apply the relevant terms of our collective bargaining agreement to unionized and non-unionized employees in each of the markets in which we operate. We have traditionally enjoyed good relations with our employees and their unions. However, we may not be able to renew our collective bargaining agreements on satisfactory terms or at all. This could result in strikes or work stoppages, which could result in substantial losses. The terms of existing or renewed agreements could also significantly increase our costs or negatively affect us. Also, a strengthening of cross-industry labor movements may result in increased employee or labor costs that could materially and adversely affect our business, financial condition or results of operations.

 

Law 20,940, which became effective on April 1, 2017, introduces significant amendments to the Chilean labor system. The principal amendments enacted by Law 20,940 to the existing labor framework in Chile include, among others:

 

·      Collective bargaining coverage was expanded to certain employees who were prevented from exercising this right, such as apprentices, temporary workers and others. Before the amendments to the labor law, employees who could hire and dismiss employees, were not able to bargain collectible as part of the employees. After the amendments to the labor law, only employees with legal capacity to represent the employer are not able to bargain collectible, unless they do so representing the employer.

 

·      Collective bargaining agreements currently in effect will constitute a floor for the negotiation of new conditions of employment. The financial situation of the company or business as of the date of discussions for a new agreement would not have any bearing on collective bargaining negotiations.

 

·      The employer’s right to replace those workers participating in a strike with current or new employees while the strike is taking place will be curtailed and replaced with an obligation from unions to provide the personnel required to comply with “minimum services” through “emergency teams.”

 

·      Unions may annually request from large companies information regarding the remunerations and duties associated with each category of employees.

 

·      After the amendments to the labor law, unions will have to agree in the extension of benefits to those employees who are not currently unionized.

 

·      In case of unions that include employees from several companies of the same industry (Sindicato Interempresa) the companies will be forced to bargain with them and not only with their own employees.

 

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The implementation of Law 20,940, as it increases the collective bargaining power of labor unions, may have adverse effects on our overall employment and operating costs and may increase the likelihood of business disruptions on our activities in Chile, which could negatively affect our financial condition and results of operations. The amendments to the labor law intend to encourage the collective bargaining and increase the unionization rates.

 

We are subject to counterparty risk.

 

We are exposed to counterparty risk in addition to credit risks associated with our lending activities. We routinely conduct transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

 

We may incur losses if any of our counterparties fail to meet their contractual obligations, due to bankruptcy, lack of liquidity, operational failure or other reasons that are exclusively attributable to our counterparties. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries. Failure to meet contractual obligations by our counterparties could have a material adverse effect on our business, financial condition and results of operations.

 

We rely on third parties for important products and services.

 

Third-party vendors provide key components of our business infrastructure such as different loan servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third-party vendors could also entail significant delays and expense and could negatively impact our business.

 

We may experience operational problems, errors or misconduct.

 

We are exposed to many types of operational risks, including the risk of misconduct by employees and outsiders, failure to obtain proper authorizations, failure to properly document transactions, equipment failures and errors by employees. Although we maintain a system of operational controls, there can be no assurances that operational problems or errors will not occur and that their occurrence will not have a material adverse effect on our business, financial condition and results of operations.

 

Our anti-money laundering and anti-terrorist financing measures may not prevent third parties from using us as a conduit for those activities, which could have a material adverse effect on our business, financial condition and results of operations.

 

We are required to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations, and we have adopted various policies and procedures, including internal controls and “know-your customer” procedures, aimed at preventing money laundering and terrorist financing. In addition, because we also rely on our correspondent banks having their own appropriate anti-money laundering and anti-terrorist financing procedures, we use what we believe are commercially reasonable procedures for monitoring our correspondent banks. However, these measures, procedures and compliance may not be entirely effective in preventing third parties from using us (and our correspondent banks) as a conduit for money laundering (including illegal cash operations) or terrorist financing without our (and our correspondent banks’) knowledge or consent. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could be harmed and we could become subject to fines, sanctions or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), which could have a material adverse effect on our business, financial condition and results of operation.

 

Banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.

 

We are subject to regulation in the markets in which we operate, including by the SBIF and by the Central Bank of Chile in Chile, and by the Central Bank of Colombia, the Colombian Ministry of Finance, the Colombian Superintendency of Finance, the Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio), or SIC, and the Self-Regulatory Organization (Autorregulador del Mercado de Valores-AMV, or the SRO) in Colombia.

 

Pursuant to the Chilean General Banking Act in Chile and the Financial System Organic Act (Estatuto Orgánico del Sistema Financiero) in Colombia, we may, subject to the necessary regulatory approvals, engage in the commercial banking business and in certain businesses in addition to traditional commercial banking. Such additional businesses may include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. Regulators may in the future impose more restrictive limitations on the activities of banks, including us.

 

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New capital adequacy requirements could require us to inject further capital into our business as well as in businesses we acquire, or to capitalize dividends, restrict the type or volume of transactions we enter into, or set limits on or require the change of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.

 

As a result of the 2008 global financial crisis, there has been an increase in government regulation of the financial services industry in many countries. Such regulation may also be increased in Chile and/or in Colombia, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, numerous novel regulatory proposals have been discussed or proposed. If enacted, new regulations could require us to inject further capital into our business, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.

 

On February 23, 2017, Law No. 21,000, was published. This new law modifies, among other matters, the corporate governance and operation of the Chilean regulator for securities and insurance and establishes the Chilean Commission for the Financial Market (Comisión para el Mercado Financiero, or the CMF). For more information, see “Item 4.  Information on the Company—B. Business Overview—Changes in the Governance of Our Regulators.” These changes in our regulators’ laws may result in further changes in banking regulations or other consequences that could have a material adverse effect on our financial condition or results of operations.

 

The banking regulatory and capital markets environment in which we operate is continually evolving and may change.

 

Changes in banking regulations may materially and adversely affect our business, financial condition and results of operations. Chilean laws, regulations, policies and interpretations of laws relating to the financial system are continually evolving and changing.

 

In Chile, new regulations have been enacted in the past years which have, among others things, (a) increased the limit on the amount that a bank is allowed to grant as an unsecured loan to a single individual or entity (currently set at 10% of its regulatory capital and up to 30% of its regulatory capital if any loans granted in excess of the 10% are secured by certain collateral, for persons non-related to the bank and at 5% or 25% if loans in excess of 5% are secured by certain collateral, for certain groups of persons related to the bank), (b) allowed marketing and promotion activities of credit products and services by non-Chilean banks with representative offices in Chile, (c) strengthened consumers’ rights in connection with financial products and services; and (d) lowered the maximum legal interest rate that can be imposed in general loans valued at over UF 200. These amendments have affected the Chilean banking industry in several ways including by increasing competition, increasing the risks associated with the growth of loan portfolios, providing additional scrutiny regarding prices and contracts for financial products and have caused a loss of flexibility in the determination of price and product distribution strategies in the retail banking unit.

 

Colombia has also experienced recent changes in applicable laws, regulations and policies, such as those regarding financial inclusion and consumer protection. In order to promote financial inclusion, the Colombian Congress passed Law No. 1,735 of 2014, which created a new type of financial entity called Specialized Electronic Deposit and Payment Institutions (Sociedades Especializadas en Depósitos y Pagos Electrónicos, or SEDPEs). Previously, the only activities these entities were authorized to perform were remote cash-in and cash-out deposit operations, the allocation of customers’ funds in electronic deposit accounts and the offering of transactional services such as remittances, transfers and payments. However, SEDPES have recently been authorized to use correspondent networks and open accounts remotely, and SEDPE customers are authorized to have more than one account per SEDPE, which may further encourage the utilization of SEDPEs in the Colombian financial market. Additionally, along with the global trend to increase the use of technology for different financial services, new regulations may be issued by the Colombian government in order to facilitate the incorporation of these entities into the financial system. Such changes and trends may increase competition in the Colombian financial market and may impair our ability to expand or retain our customer base.

 

In addition, recently, the Colombian government has expressed its intention to submit this year a bill before the Colombian Congress to change the equivalency of the Colombian Peso by removing three zeroes from current denomination, which may oblige us to incur various operational costs in order to guarantee the continuity of our daily operations.

 

We also have limited operations outside of Chile and Colombia, including Peru, Spain and the United States. Changes in the laws or regulations applicable to our business in the countries where we operate, or the adoption of new laws, and related regulations or their applicability or interpretation, may have an adverse effect on our operations and financial condition.

 

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We are subject to regulatory inspections, examinations and to the imposition of fines by regulatory authorities in Chile and in Colombia.

 

We are also subject to various inspections, examinations, inquiries, audits and other regulatory requirements by Chilean and Colombian regulatory authorities.

 

We cannot assure you that we will be able to meet all of the applicable regulatory requirements and guidelines, or that we will not be subject to other sanctions, fines, restrictions on our business or other penalties in the future as a result of non-compliance. If other sanctions, fines, restrictions on our business or other penalties are imposed on us for failure to comply with applicable requirements, guidelines or regulations, our business, financial condition, results of operations and our reputation and ability to engage in business may be materially and adversely affected.

 

Pursuant to letter No. 16,191, the SBIF fined the bank for an alleged infringement to the individual lending limits provided by article 84 No. 1, in relation to article 85 of the Chilean General Banking Act. The total amount was Ch$21,765 million. In an extraordinary meeting on January 4, 2016, the bank’s board of directors agreed: to communicate the letter as a material event, expressing disagreement with the alleged infringement and to instruct management to exercise each and every legal action in order to obtain the annulment of the fines.

 

On January 8, 2016, the bank paid the full amount of the fines as a mandatory condition precedent to exercise its appeal rights. On January 18, 2016, the bank brought an action before the Santiago Court of Appeals seeking the annulment of the fines. Pursuant to a final ruling by the Court of Appeals of Santiago dated August 31, 2016, the fines imposed by the SBIF pursuant to letter No.16,191 were declared illegal. In accordance with Article 22 of the General Law on Banks, the favorable ruling obtained by Itaú Corpbanca is not subject to appeal.

 

On September 6, 2016, the SBIF filed a complaint (recurso de queja) against the judges of the Court of Appeals of Santiago before the Supreme Court, which was dismissed by the Supreme Court on May 9, 2017.

 

On October 19, 2017, the SBIF filed a complaint against Itaú Corpbanca regarding the same alleged violations, giving rise to a new administrative procedure. On November 14, 2017, Itaú Corpbanca filed a special constitutional rights action (acción de protección) before the Santiago Court of Appeals that was declared inadmissible. This ruling was confirmed by the Supreme Court. The administrative procedure is still pending.

 

Failure to protect personal information could materially and adversely affect our business, financial condition and results of operations.

 

We manage and hold confidential personal information of customers in the conduct of our banking operations, and offer various internet-based services to our clients, including online banking services. We could be liable for breaches of security in our online banking services, including cybersecurity breaches. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services. In certain cases, we are responsible for protecting customers’ proprietary information as well as their accounts with us. We have security measures and processes in place to defend against these cybersecurity risks but these cyber-attacks are rapidly evolving (including computer viruses, malicious code, phishing or other information security breaches), and we may not be able to anticipate or prevent all such attacks, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Individuals may also seek to intentionally disrupt our online banking services or compromise the confidentiality of customer information with criminal intent. Although we have procedures and controls to safeguard personal information in our possession, as well as systems and processes that are designed to recognize and assist in preventing security breaches, failure to protect against or mitigate breaches of security or other unauthorized disclosures could constitute a breach of privacy or other laws, subject us to legal actions and administrative sanctions as well as damages, adversely affect our ability to offer and grow our online services, result in the loss of customer relationships, negatively impact our reputation, and have an adverse effect on our business, results of operations and financial condition.

 

In recent years, computer systems of companies and organizations have been targeted, not only by cyber criminals, but also by activists and rogue states. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could disrupt our electronic systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber security risk, for example by failing to update our systems and processes in response to new threats, our reputation could be harmed and our operating results, financial condition and prospects could be adversely affected through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be impacted by cyber-attacks against national critical infrastructures of the countries where we operate; for example, the telecommunications network. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect

 

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our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack.

 

Our loan and investment portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.

 

Our loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and adversely affects our operating results. Prepayment risk also has an adverse impact on our residential mortgage portfolio, since prepayments could shorten the weighted average life of this portfolio, which may result in a mismatch in funding or in reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on our business, financial condition and results of operations.

 

Exposure to government debt could have an adverse effect on our business, financial condition and results of operations.

 

We invest in debt securities issued by the Chilean and Colombian governments, the Central Bank of Chile and the Chilean Ministry of Finance that, for the most part, are short-term and highly liquid instruments. As of December 31, 2017, 6.4% of our total assets comprised of securities issued by the Chilean government and 3.9% of our total assets comprised securities issued by foreign governments, mostly by the Colombian government. If the Chilean or Colombian governments default on the timely payment of such securities, our business, financial condition and results of operations may be adversely affected.

 

A downgrade of Itaú Corpbanca’s counterparty credit rating by international or domestic credit rating agencies could materially and adversely affect our debt credit rating for domestic and international debt, our business, our future financial performance, shareholders’ equity and the value of our securities.

 

Following the consummation of the Merger, Standard & Poor’s and Moody’s upgraded our long and short term ratings to BBB+/A-2 and A3/Prime-2, respectively. On August 4, 2017, Standard and Poor’s confirmed the aforementioned ratings and removed the ‘CreditWatch Negative’ assigned on July 14, 2017 following the sovereign downgrade. The Outlook is ‘Negative’ reflecting S&P’s view that there is at least a one-in-three chance that they could downgrade us and other eight Chilean financial institutions if growth in lending and property prices picks up in Chile, leading to pressures on economic imbalances given the country’s already weakened external position. The latter led to a downgrade of Chile sovereign rating on July 13, 2017.

 

Any adverse revision to our credit ratings in Chile or Colombia for domestic and international debt by international and domestic rating agencies may adversely affect our debt ratings, and, as a result, our cost of funding, including interest rates paid on our deposits and securities. If this were to happen, it could have a material adverse effect on our business, future financial performance, shareholders’ equity and the value of our securities.

 

Mismatches in the maturity of our loan portfolio and our funding sources as well as exchange rate fluctuations related to our funding sources could materially and adversely affect our business, financial condition and results of operations and our capacity to expand our loan business.

 

We are exposed to maturity mismatches between our loans and sources of funding. The majority of our loan portfolio consists of fixed interest rate loans, and the yield from our loans depends on our ability to balance our cost of funding with the interest rates we charge to our borrowers. An increase in market interest rates in Chile or Colombia could increase our cost of funding, especially the cost of time deposits, and could reduce the spread we earn on our loans, materially and adversely affecting our business, financial condition and results of operations.

 

Any mismatch between the maturity of our loan portfolio and our sources of funding would magnify the effect of any imbalance in interest rates, also representing a liquidity risk if we fail to obtain funding on an ongoing basis. In addition, since part of our funding comes from securities denominated in U.S. dollars or other foreign currencies that we issue abroad, any devaluation of the Chilean or Colombian peso against the U.S. dollar or such other foreign currencies could increase the cost of funding in relation to these securities. An increase in our total cost of funds for any of these reasons could result in an increase in the interest rates on our loans, which could, as a result, affect our business, financial condition and results of operations and our ability to attract new customers and expand our loan business.

 

We are subject to financial and operational risks associated with derivative transactions.

 

We enter into derivative transactions primarily to deliver services to our clients, for hedging purposes and, on a limited basis, for trading purposes. These transactions are subject to market, liquidity, counterparty (the risk of insolvency or other inability of a counterparty to perform its obligations to us) and operational risks.

 

Market practices and documentation for derivative transactions in Chile and Colombia may differ from those in other countries. For example, documentation may not incorporate terms and conditions of derivatives transactions as commonly understood in other countries. In addition, the execution and performance of these transactions depend on our ability to develop adequate control and

 

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administration systems and to hire and retain qualified personnel. Moreover, our ability to monitor and analyze these transactions depends on our information technology systems. These factors may further increase risks associated with derivative transactions and, if they are not adequately controlled, could materially and adversely affect our results of operations and financial condition.

 

Our level of insurance might not be sufficient to fully cover all liabilities that may arise in the course of our business and insurance coverage might not be available in the future.

 

We maintain insurance for losses resulting from fire, explosions, floods and electrical shorts and outages at our various buildings and facilities. We also have civil liability insurance covering material and physical losses and damages that may be suffered by third parties. We cannot assure you that our level of insurance is sufficient to fully cover all liabilities that may arise in the course of our business or that insurance will continue to be available in the future. In addition, we may not be able to obtain insurance on comparable terms in the future. Our business and results of operations may be adversely affected if we incur liabilities that are not fully covered by our insurance policies.

 

The occurrence of natural disasters or terrorist events in the regions where we operate could impair our ability to conduct business effectively and could adversely affect our results of operations.

 

We are exposed to the risk of natural disasters such as earthquakes or tsunamis as well as floods, mudslides and volcanic eruptions in the regions where we operate. We also recognize that natural disasters could be amplified by the effects of the climate change phenomenon. In the event of a natural disaster, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business in the affected region, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of our local employees and managers were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised. A natural disaster, such as the earthquake and tsunami that affected Chile in 2010, could damage some of our branches and automated teller machines, or ATMs, forcing us to close damaged facilities or locations, increased recovery costs as well as cause economic harm to our clients. A natural disaster or multiple catastrophic events could have a material adverse effect on local businesses in the affected region and could result in substantial volatility or adverse harm in our business, financial condition and results of operations for any fiscal quarter or year. Furthermore, we are exposed to terrorist events resulting in physical damage to our buildings (including our headquarters, offices, branches and ATMs) and/or injury to customers, employees and others. Although we maintain comprehensive contingency plans and security procedures, there can be no assurance that terrorist events will not occur and that their occurrence will not have a material adverse impact on our business and results of operations for any fiscal quarter or year.

 

Other businesses controlled by Itaú Unibanco may face difficulties from a business or reputational standpoint and affect us.

 

We are currently controlled by Itaú Unibanco, which as of April 2, 2018 had a 36.06% beneficial ownership stake in us. Since we are part of a larger conglomerate of companies owned by Itaú Unibanco, if other businesses controlled by Itaú Unibanco face difficulties from a business or reputational standpoint, we may suffer adverse consequences. If we were to be associated with these events, our reputation could be harmed, which could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to arbitration and litigation proceedings that could materially adversely affect our business, financial position and results of operations if an unfavorable ruling were to occur.

 

As described in “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings,” we are currently subject to legal proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. From time to time, we may become involved in arbitration, litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. We cannot assure you that the current or other legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise have a material adverse effect on our business, financial condition and results of operations should an unfavorable ruling occur. See “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings.”

 

On December 20, 2016, Helm LLC initiated an arbitration proceeding (the “Arbitration”) against respondents Itaú Corpbanca and Corp Group Holding Inversiones Ltda. (“Corp Group”), and nominal respondent Itaú Corpbanca Colombia (collectively with Corp Group and Itaú Corpbanca, “Respondents”), by filing a Request for Arbitration in the ICC’s International Court of Arbitration in New York. Helm LLC alleged that Corp Group and Itaú Corpbanca had breached the Amended and Restated Shareholders Agreement of HB Acquisition S.A.S., dated July 31, 2013, between shareholders of Itaú Corpbanca Colombia (the “SHA”). As relief, Helm LLC is seeking, among other things, damages of $598 million, reflecting what it claims is the value to which it is entitled in return for its shares in Itaú Corpbanca Colombia, plus interest. On February 14, 2017, Respondents filed their answers to Helm LLC’s Request for Arbitration, denying Helm LLC’s claims, and Corp Group and Itaú Corpbanca filed a counterclaim against Helm LLC for breaching the SHA. As relief under their counterclaim, Corp Group and Itaú Corpbanca are seeking, among other things, for Helm LLC’s rights under the SHA to be terminated. On April 19, 2017, Helm LLC filed a reply to Corp Group and Itaú Corpbanca’s counterclaim. The Arbitration has continued pursuant to the applicable procedures and an evidentiary hearing is expected to take place in July 2018. Itaú Corpbanca believes Helm LLC’s claim is without merit and intends to enforce its rights under the SHA and applicable law.

 

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We may incur financial losses and damages to our reputation from environmental and social risks.

 

In recent years, environmental and social risks have been recognized as increasingly relevant, since they can affect the creation of shared value in the short, medium and long terms from the standpoint of the organization and its main stakeholders.

 

Environmental and social issues may affect our activities and the revenue of our clients, causing reputational damage, delays in payments or default, especially in the case of significant environmental and social incidents. Environmental and social risks become more evident when we finance projects, where should there be environmental damage caused by projects in which we were involved with respect to the financing thereof, we could be deemed to be indirectly responsible for such damage and could consequently be held liable for certain damages.

 

Risks Relating to Chile, Colombia and Other Countries in Which We Operate

 

Chile has different corporate disclosure and accounting standards than those you may be familiar with in the United States.

 

As a regulated financial institution, we are required to submit to the SBIF unaudited consolidated and unconsolidated balance sheets and income statements on a monthly basis. As of January 2008, the statements have to be prepared in accordance with the Compendium of Accounting Standards (Compendio de Normas Contables y Manual del Sistema de Información), or the “Compendium,” and the rules of the SBIF. Although Chilean banks are required to apply IFRS as of January 1, 2009, certain exceptions introduced by the SBIF prevent banks from achieving full convergence, for example loan loss provisions, assets received in lieu of payment among others. Also, the SBIF is vested with the authority to issue specific orders to banks, including on accounting matters. In situations not addressed by the guidance issued by the SBIF, institutions must follow the generally accepted accounting principles issued by the Association of Chilean Accountants, which coincide with IFRS. However, our consolidated financial statements as of and for the three years ended December 31, 2017 have been prepared in accordance with IFRS in order to comply with SEC requirements.

 

Our consolidated financial statements include the necessary adjustments and reclassifications to the incorporated financial statements of each of Itaú Corpbanca’s subsidiaries and the New York Branch to bring their accounting policies and valuation criteria into line with those applied by the bank, in accordance with IFRS.

 

The securities laws of Chile, which govern open or publicly listed companies such as ours, have as one of their principal objectives promoting disclosure of all material corporate information to the public. Chilean disclosure requirements, however, differ from those in the United States in some important respects. Although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean laws are different from those in the United States and in certain respects the Chilean securities markets are not as highly regulated and supervised as the United States securities markets.

 

Chile may impose controls on foreign investment and repatriation of investments that may affect our investors’ investment in, and earnings from, our ADSs.

 

Investors who are not Chilean residents are required to provide the Central Bank of Chile with information related to equity investments and conduct such operations within the Formal Exchange Market. See “Item 10. Additional Information—D. Exchange Controls” for a discussion of the types of information required to be provided.

 

Owners of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be converted into U.S. dollars and distributed net of foreign currency exchange fees and fees of the depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35% (subject to credits in certain cases). If for any reason, including changes in Chilean laws or regulations, the depositary were unable to convert Chilean pesos to U.S. dollars, investors in our ADSs may receive dividends and other distributions, if any, in Chilean pesos.

 

Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them or the repatriation of the proceeds from such disposition or the payment of dividends could be imposed in the future and we cannot advise you as to the duration or impact of such restrictions, if imposed.

 

The legal restrictions on the exposure of Chilean pension funds may adversely affect our access to funding.

 

Chilean regulations impose restrictions on the share of assets that a Chilean pension fund management company (Administradora de Fondos de Pensiones, or AFP) may allocate: (i) per fund (considering all sub-funds within an AFP (A, B, C, D or E)), to deposits in checking accounts and term deposit accounts and in debt securities issued by a single banking institution (or guaranteed by such bank); (ii) per type of sub-fund, to shares, deposits, derivatives and debt securities of a single banking institution (or guaranteed by such bank); and (iii) per fund (considering all sub-funds), to shares issued by a single banking institution. Additionally, each fund managed by an AFP is permitted to make deposits with a bank for an amount not to exceed the equivalent of such bank’s equity. If the exposure of a pension fund managed by an AFP to a single bank exceeds such limit for investments in securities, the AFP for such pension fund is required to reduce the fund’s exposure below the limit within three years.

 

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As of December 31, 2017, the aggregate exposure of AFPs to us was US$5,996 million or 2.8% of their total assets. If the exposure of any AFP to us exceeds the regulatory limits, we would need to seek alternative sources of funding, which could be more expensive and, as a consequence, may have a material adverse effect on our business, financial condition and results of operations.

 

Future increases in the corporate tax rate or additional modifications to the tax systems of the countries in which we operate may have a material adverse effect on us.

 

On September 29, 2014, Law No. 20,780 (the “Tax Reform”) went into effect, introducing significant changes to the Chilean tax system and strengthening the powers of the Chilean IRS (Servicio de Impuestos Internos) to control and prevent tax avoidance. One of the main purposes of this reform was to finance major educational reforms under discussion in the Chilean Congress. Subsequently, on February 8, 2016, Law No. 20,899, which simplifies the income tax system and modifies other legal tax provisions, went into effect.

 

As a corporation (sociedad anónima), we are subject to the partially-integrated tax regime (corporate tax of 25.5% for 2017 and 27% beginning in 2018). Under this system, when the income is actually withdrawn from a company, non-Chilean resident shareholders would be subject to a 35% withholding tax, while Chilean resident shareholders would be required to pay the progressive Complementary Global Tax, with rates ranging between 0% and 35%, against which only a 65% of the corporate tax will be allowed to be used as a credit against the withholding tax or the Complementary Global Tax; provided that, the deduction available to shareholders resident in a country with which Chile has an agreed tax treaty would be 100%. See “Item 4—Information on the Company—B. Business Overview—Recent Regulatory Developments in Chile—Tax Reform.”

 

In addition, on December 29, 2016, the Colombian Government approved a tax reform under Law No. 1,819. See “Item 4—Information on the Company—B. Business Overview— Recent Regulatory Developments in Colombia — Tax Reform.”

 

Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting stated expenses and deductions, and eliminating incentives and non-taxed income. We cannot assure you that the manner in which corporate taxes are interpreted and applied in the jurisdictions where we operate will not change in the future. In addition, governments may decide to levy additional taxes in the jurisdictions where we operate. The current tax reforms and any further changes to taxes in the jurisdictions where we operate could have a material adverse effect on our business, financial condition and results of operations. Furthermore, uncertainty relating to tax legislation in the jurisdictions where we operate poses a constant risk to Itaú Corpbanca.

 

Potential changes to the pension system in Chile may impose an increase in our labor costs and therefore have a material adverse effect on our financial results.

 

On August 10, 2017, former President Michelle Bachelet submitted a bill of law (No. 117-65) with the purpose of introducing changes to the existing Chilean pension funds system. Under the current private system, employees make contributions to fund their individual pension accounts. Under former President Bachelet’s proposal, for the first time, companies would have to contribute to the system. The proposal contemplates, among other measures, a gradual increase over the next six years from the current 10% contribution funded by employees to a 15% contribution in which the additional 5% will be exclusively funded by employers. As proposed, part of this additional contribution would go to a common fund (the “solidarity fund” or pilar solidario), rather than employees’ personal savings accounts, in order to increase the pensions for certain lower-income individuals. There are several economic and political discussions over the content of this bill of law. However, it is possible to anticipate that some additional contribution from the employers to the Chilean social security system will be approved, which may cause a relevant increase in our labor costs and, therefore, have a material adverse effect on our financial results.

 

Colombian tax haven regulation could adversely affect our business and financial results.

 

Decree No. 1,966 of 2014 amended by Decree No. 2,095 of 2014 designates 37 jurisdictions as tax havens for Colombian tax purposes. In October 2014, Panama and Colombia signed a memorandum of understanding by which they agreed to execute a double taxation treaty. However, if Panama is considered a tax haven under Colombian tax regulations, the clients of our Colombian subsidiaries in Panama who are residents in such jurisdiction would be subject to the following regulations: (i) higher withholding tax rates including a higher withholding rates over financial yields derived from investments in the Colombian securities market, (ii) the Colombian transfer pricing regime and its reporting duties, (iii) an assumption for Colombian authorities of residency for the purposes of qualifying a conduct as abusive under tax regulations, (iv) the disallowance of payments made to residents or entities located in tax havens as costs or deductions, unless the respective withholding tax has been applied and (v) other additional information disclosure requirements.

 

Any downgrading of Chile’s or Colombia’s debt credit rating for domestic and international debt by international credit rating agencies may also affect our business and future financial performance.

 

Any adverse revisions to Chile’s or Colombia’s credit ratings for domestic and international debt by international rating agencies may adversely affect our ratings, and, as a result, our cost of funding, including interest rates paid on our deposits and

 

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securities. In December 2017, S&P downgraded the rating of its long-term foreign currency sovereign credit ratings on Colombia from “BBB” to “BBB-,” on the grounds of Colombia’s weakened fiscal and external profiles generating diminished policy flexibility. Additionally, in February 2018 Moody’s changed Colombia’s rating outlook from stable to negative. This was driven by (i) expectation of a slower pace of fiscal consolidation and weakening fiscal metrics and (ii) the risk that new government, post the 2018 presidential elections, will not have an effective mandate to pass additional fiscal measures to preserve Colombia’s fiscal strength. Currently, Colombia’s long-term debt denominated in foreign currency is rated “BBB-” by S&P, “Baa2” with negative outlook by Moody’s and “BBB” by Fitch. We cannot assure you that Colombia’s credit rating or rating outlook will not be further downgraded in the future. In July 2017, S&P downgraded Chile’s long-term foreign currency rating to “A+” from “AA-”, with a stable outlook. Also, Fitch Ratings downgraded Chile’s long-term foreign-currency issuer default rating (IDR) to “A” from “A+”, and long-term local-currency IDR to “A+” from “AA-” with a stable outlook. Finally, Moody’s changed outlook on Chile’s ratings to negative. We cannot assure you that Chile’s credit rating or rating outlook will not be further downgraded in the future. If further adverse revisions to Chile’s or Colombia’s credit ratings or rating outlook were to occur, it could have a material adverse effect on our business, future financial performance, shareholders’ equity and the value of our securities.

 

Chilean and Colombian authorities exercise influence on the Chilean and Colombian economies. Changes in monetary, fiscal and foreign exchange policies or in the Chilean and Colombian governments’ structures may adversely affect us.

 

Chilean and Colombian authorities intervene from time to time in the Chilean and Colombian economies, through changes in fiscal, monetary, and foreign exchange policies, which may adversely affect us. These changes may impact variables that are crucial for our growth strategy (such as foreign exchange and interest rates, liquidity in the currency market, tax burden, and economic growth), thus limiting our operations in certain markets, affecting our liquidity and our clients’ ability to pay and, consequently, affecting us.

 

In addition, changes in the Chilean and Colombian governments’ structure may result in changes in government policies, which may affect us. This uncertainty may, in the future, contribute to an increase in the volatility of the Chilean and Colombian capital markets, which, in turn, may have an adverse impact on us. Other political, diplomatic, social and economic developments in Chile, Colombia or other countries that affect Chile and Colombia may also affect us.

 

Our growth and profitability depend on the level of economic activity in Chile, Colombia and other emerging markets.

 

Substantially all of our loans are to borrowers doing business in Chile or Colombia. Accordingly, the recoverability of these loans in particular, our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Chile and Colombia. The Chilean and Colombian economies have been influenced, to varying degrees, by economic conditions in other emerging market countries. Future developments in or affecting the Chilean or Colombian economies, including consequences of economic difficulties in emerging and developed markets, including some of our neighbor countries, or a deceleration in the economic growth of Asian or other developed nations to which Chile and Colombia export a majority of their respective goods, could materially and adversely affect our business, financial condition or results of operations.

 

Our results of operations and financial condition could also be affected by changes in economic or other policies of the Chilean or Colombian governments, which have each exercised and continue to exercise a substantial influence over many aspects of the private sector, or other political or economic developments in Chile. In addition, our financial condition and results of operations could also be affected by regulatory changes in administrative practices or other political or economic developments in or affecting Chile or Colombia, over which we have no control.

 

Inflation and government measures to curb inflation could adversely affect our financial condition and results of operations.

 

Although Chilean and Colombian inflation have been low in recent years, Chile and Colombia have experienced high inflation in the double-digit levels in the past. Such high levels of inflation in Chile or Colombia could adversely affect the Chilean and Colombian economies and have an adverse effect on our results of operations if such inflation is not accompanied by a matching devaluation of the local currency. We cannot make any assurances that Chilean or Colombian inflation will not revert to prior levels in the future.

 

We may be unsuccessful in addressing the challenges and risks presented by our operations in countries outside Chile.

 

We now operate a banking business in Colombia through Itaú Corpbanca Colombia and in Panama through subsidiaries of Itaú Corpbanca Colombia. Our operations are focused on retail banking, as well as wholesale and commercial banking and providing financing and deposit services to SMEs and individuals with medium-high income levels. Itaú Corpbanca Colombia provides a broad range of commercial and retail banking services to its customers, operating principally in the cities of Bogotá, Medellín, Cali, Bucaramanga, Cartagena and Barranquilla.

 

We have limited experience conducting credit card and consumer finance businesses in countries outside Chile. Accordingly, we may not be successful in managing credit card and consumer finance operations outside of our traditional domestic market in

 

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Chile. We may face delays in payments by customers and higher delinquency rates in any market we enter into, which could necessitate higher provisions for loan losses and, consequently, have an adverse effect on our financial performance.

 

Colombia has experienced internal security issues that have had or could have in the future a negative effect on the Colombian economy.

 

Colombia has experienced internal security issues, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, or the FARC), National Liberation Army (Ejército de Liberación Nacional, or the ELN), paramilitary groups and drug cartels. In remote regions of the country with minimal governmental presence, these groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers.

 

Despite the peace agreement between the Colombian government and FARC, which have reduced guerrilla and criminal activity, particularly in the form of terrorism attacks, homicides, kidnappings and extortion, such activities persist in Colombia, and possible escalation of such activities and the effects associated with them have had and may have in the future a negative impact on the Colombian economy and on our operations in Colombia, including our customers, employees, results of operations and financial condition, and physical assets.

 

The final peace agreement was reached in September 2016 and the government submitted it to a referendum that was not approved. However, the Colombian Congress subsequently approved the peace agreement, and in December 2016 the agreement implementation process began. The final agreement is expected to provide FARC with several benefits including: (i) changes in legislation concerning access to credit and financial services; (ii) tax benefits; and (iii) more favorable labor regulations. Such agreements and other legislative changes arising therefrom may have a negative impact on the Colombian economy and on our operations in Colombia.

 

In addition, the peace agreement reached with FARC may be modified by future governments, including the new president that will take office in 2018. If there are deviations from the peace agreement, there can be no assurance that criminal actions will not escalate in Colombia.

 

ELN, paramilitary groups and drug cartels’ were not part of the peace negotiations. It is expected that their activities will continue.

 

The peace agreement signed with FARC may result in the enactment of new laws and regulations, whose potential impact cannot be predicted.

 

The implementation of the peace agreement between the Colombian government and FARC will require the enactment of new laws and regulations, which may impact our activity in ways we cannot anticipate. Recently, legislation was enacted in connection with the implementation of the Rural Reform (Reforma Rural Integral) as provided under the peace agreement, such legislation included the creation of a Land Fund for the Rural Reform (Fondo de Tierras para la Reforma Rural Integral), and set forth the parameters to grant land to certain benefited populations and which properties are subject to be granted. Additionally, on April 2, 2018, the Colombian Superintendency of Finance issued External Circular No. 005, which sets forth rules governing the integration of former FARC members into the financial system. The impact of such new legislation is still unknown, and further regulations may be required for such legislation to be implemented. New laws or regulations enacted in connection with the implementation of the peace agreement may impact our activity and may have a negative effect on our financial condition and results of operations in Colombia.

 

Tensions with Venezuela and Ecuador may affect the Colombian economy and, consequently, our results of operations and financial condition.

 

Diplomatic relations with Venezuela and Ecuador, two of Colombia’s historical main trading partners, have from time to time been tense and affected by events surrounding the Colombian armed forces combat of the FARC throughout Colombia, particularly on Colombia’s borders with Venezuela and Ecuador.

 

Additionally, further deterioration in relations with Venezuela and Ecuador may result in the closing of borders, the imposition of trade barriers or a breakdown of diplomatic ties, any of which could have a negative impact on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition. In 2015, the Venezuelan government abruptly closed the Colombian-Venezuelan border which resulted in a substantial decrease in trade between Colombia and Venezuela, representing in that year less than 0.7% of total Colombian exports. In recent years, diplomatic tensions between the two governments have increased. We cannot assure you that there will not be further closures of the border, which may result in further deterioration of trade and could have a negative impact in the Colombian economy, especially in private consumption.

 

Recently Colombia has faced an increase in migration from Venezuela. The unprecedented migration wave is putting strains on Colombia. Mass migration threatens to increase political instability and social conflict in Colombia. Additionally, mass migration of Venezuelans to Colombia has created tense diplomatic relations which will likely hinder regional cooperation in reaching a solution to the migration crisis.

 

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Constitutional collective actions (acciones populares), class actions (acciones de grupo) and other similar legal actions in Chile and Colombia involving claims for significant monetary awards against financial institutions may have an adverse effect on our business and results of operations.

 

Under the Chilean Consumer Protection Act and under the Colombian Constitution and Law 472 of 1998, individuals may initiate collective or class actions to protect their collective or class rights, as applicable. See “Item 4—Information on the Company—B. Business Overview— Promulgation of Bill of Law Amending Consumer Protection Act.” In the past few years, Chilean financial institutions have experienced limited numbers of collective and class actions mostly relating to abusive clauses in standard contracts.

 

In the past few years, Colombian financial institutions, including Itaú Corpbanca Colombia, have experienced a substantial increase in the aggregate number of these actions. The great majority of such actions have been related to fees, financial services and interest rates, and their outcome is uncertain. Pursuant to Law No. 1,425 of 2010, monetary awards for plaintiffs in constitutional collective actions were eliminated as of January 1, 2011. Nevertheless, individuals continue to have the right to initiate constitutional or class actions against Itaú Corpbanca Colombia.

 

Future restrictions on interest rates or banking fees could negatively affect our profitability.

 

In the future, additional regulations in the jurisdictions where we operate could impose limitations regarding interest rates or fees charged by Itaú Corpbanca. Any such limitations could materially and adversely affect our results of operations and financial situation.

 

The Colombian Commerce Code limits the amount of interest that may be charged in commercial transactions. In the future, regulations could impose limitations regarding interest rates or fees we charge. Any such limitations could materially and adversely affect our results of operations and financial position. In the past, there have been disputes in Colombia among merchants, payment services and banks regarding interchange fees. Although such disputes have been resolved, the SIC, may initiate new investigations relating to the interchange fees. This possibility may lead to additional decreases in such fees, which in turn could adversely our operations in Colombia and our consolidated financial results.

 

Furthermore, the Colombian government has the authority to establish and define criteria and formulas applicable to the calculation of banking fees and other charges and to establish caps on the banking fees, credit card fees, and other charges that we impose on our customers. The Colombian government has established a cap on the fees banks can charge on withdrawals from ATMs outside their own networks. Additionally, under Colombian regulation, banks are prohibited from charging prepayment penalties or fees on loans, other than in mortgage loans, except when the outstanding amount of a loan is more than the equivalent of 880 monthly minimum wages, or SMMLV (approximately US$240,000). In mortgage loans, irrespective of their principal amount or in other loans in which the outstanding amount is greater than 880 SMMLV, prepayment penalties or fees may be charged but only when expressly contemplated under the governing loan agreement. Further limits or regulations regarding banking fees, and uncertainties with respect thereto could have a negative effect on Itaú Corpbanca Colombia and our results of operations and financial condition.

 

Insolvency laws may limit our monetary collection and ability to enforce our rights.

 

On January 9, 2014, a new insolvency act was published in Chile in the Official Gazette (Ley No. 20,720 de Reorganización y Liquidación de Empresas y Personas, or the Chilean Insolvency Act) and came into effect on October 10, 2014. Under the Chilean Insolvency Act, monetary collection and enforcement of rights by a creditor may face limitations such as those arising from the Insolvency Protection (as defined below) recognized by the act. For more information on these limitations please see “Item 4—Information on the Company—B. Business Overview—Recent Regulatory Developments in Chile.”

 

Colombian insolvency laws provide that creditors of an insolvent debtor in default are prohibited from initiating collection proceedings outside the bankruptcy or reorganization process of such debtor. In addition, all collection proceedings outstanding at the beginning of any bankruptcy or reorganization process of any insolvent debtor must be suspended and creditors are prevented from enforcing their rights against the collateral and other assets of the debtor until the reorganization has been agreed (in which case the collection proceeding is resolved within the reorganization agreement) or it is declared that no reorganization was agreed. Additionally, Colombian laws provide insolvency protection for non-merchant individuals. This insolvency protection entails that, once a non-merchant individual has ceased paying his or her debts, such individual can initiate a voluntary insolvency proceeding before a notary public or mediator to reach an agreement with its creditors. The terms of any agreement reached with a group (two or more) of creditors that represent more than 50% of the total amount of the claims will be mandatorily applicable to all relevant creditors. There are other protections such as an automatic stay for 80 days, which could be extended by 30 additional days. These legal limitations make it difficult to recover on defaulted loans, and as a result, may cause Itaú Corpbanca Colombia to enhance its credit requirements which would result in decreased lending to individuals by making it more expensive. In addition, increased difficulties in enforcing debt and other monetary obligations due to this insolvency law could have an adverse effect on Itaú Corpbanca Colombia and our results of operations and financial condition.

 

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The Central Bank of Colombia may impose requirements on our (and other Colombian residents’) ability to obtain loans in foreign currency.

 

The Central Bank of Colombia may impose certain mandatory deposit requirements in connection with foreign currency denominated loans obtained by Colombian residents, including Itaú Corpbanca Colombia, although no such mandatory deposit requirement is currently in effect. We cannot predict or control future actions by the Central Bank of Colombia in respect of deposit requirements, which may involve the establishment of a mandatory deposit percentage, and the use of such measures by the Central Bank of Colombia may raise our cost of raising funds and reduce our financial flexibility.

 

Risks Relating to Expansion and Integration of Acquired Businesses

 

We may not be able to manage our growth successfully.

 

We have been expanding the scope of our operations over the past few years, and we expect that this expansion will continue. As we continue to grow, we must improve our operational, technical and managerial knowledge and compliance systems in order to effectively manage our operations across the expanded group. Failure to integrate, monitor and manage expanded operations could have a material adverse effect on our business, reputation and financial results. Our future growth will also depend on our access to internal and external financing sources. We may be unable to access such financing on commercially acceptable terms or at all.

 

Integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.

 

We have engaged in a number of mergers and acquisitions in the past, including the Merger, the Santander Colombia Acquisition, the Helm Bank Acquisition and the subsequent merger of Helm Bank with and into Itaú Corpbanca Colombia, consummated on June 1, 2014, that may make further mergers and acquisitions in the future as part of our growth strategy. We believe that these transactions will contribute to our continued growth and competitiveness in the Chilean, Colombian, and international banking sectors.

 

These acquisitions and mergers and the integration of such institutions and assets involve certain risks, which as of the current stage of such transactions may still include remaining risks such as:

 

·      integrating new networks, information systems, financial and accounting systems, risk and other management systems, financial planning and reporting, products and customer bases into our existing business may run into difficulties, cause us to incur unexpected costs and operating expenses and place additional demands on management time; and

 

·      the expected operation and financial synergies and other benefits from such mergers or acquisitions may not be fully achieved.

 

If we fail to achieve the business growth opportunities, cost savings and other benefits we anticipate from mergers and acquisition transactions, or incur greater integration costs than we have estimated, our results of operations and financial condition may be materially and adversely affected.

 

Acquisitions and strategic partnerships may not perform in accordance with expectations or may disrupt our operations and adversely affect our business financial condition and results of operations.

 

A component of our strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy we have consummated (i) the Santander Colombia Acquisition in 2012 (now “Itaú Corpbanca Colombia”); (ii) the Helm Bank Acquisition in 2013 (Helm Bank was merged with and into Itaú Corpbanca Colombia on June 1, 2014); and (iii) the Merger in 2016. We will continue to consider additional strategic acquisitions and alliances from time to time, inside and outside of Chile and Colombia. Strategic acquisitions and alliances, could expose us to risks with which we have limited or no experience. Future acquisitions may also be subject to regulatory approval, which we may not receive, particularly in view of our increasing market share in the Colombian banking industry.

 

We must necessarily base any assessment of potential acquisitions and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions and alliances may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our business, financial condition and results of operations.

 

In addition, new demands on our existing organization, management and employees resulting from the integration of new acquisitions could disrupt our operations and adversely affect our business, financial condition and results of operations.

 

Itaú Corpbanca may be unable to fully realize the anticipated benefits of the combination of Corpbanca and Banco Itaú Chile.

 

On April 1, 2016, Corpbanca and Banco Itaú Chile completed a business combination, which was consummated through the Merger. The Merger brought together two large financial institutions that had previously operated as independent companies. Significant management attention and resources have been and will continue to be required to integrate certain aspects of the business

 

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practices and operations of Corpbanca and Banco Itaú Chile. The success of the Merger will depend, in part, on the ability of Itaú Corpbanca to realize anticipated revenue synergies, cost savings and growth opportunities resulting from the combination of the businesses of former Corpbanca and former Banco Itaú Chile. We expect to generate synergies resulting from optimization of organizational structures, scalable IT systems, savings related to the branch network and reductions in administrative expenses. There is a risk, however, that Itaú Corpbanca may not be able to combine the businesses of Corpbanca and Banco Itaú Chile in a manner that permits Itaú Corpbanca to realize these revenue synergies, cost savings and growth opportunities in the time, manner or amounts it expects or at all. Potential difficulties Itaú Corpbanca may encounter as part of the merger process include, among other things:

 

·      complexities associated with managing the combined companies;

 

·      the need to implement, integrate and harmonize various business-specific operating procedures and systems, as well as the financial, accounting, information and other systems of Corpbanca and Banco Itaú Chile;

 

·      the need to coordinate the existing products and customer bases of Corpbanca and Banco Itaú Chile; and

 

·      potential unknown liabilities and unforeseen increased expenses or delays associated with the Merger and the other transactions described in the Transaction Agreement (as defined below).

 

In addition, it is possible that the integration process could result in:

 

·      diversion of management’s attention from their normal areas of responsibility to address integration issues; and

 

·      the disruption of Itaú Corpbanca’s ongoing businesses or inconsistencies in its standards, controls, procedures and policies,

 

each of which could adversely affect Itaú Corpbanca’s ability to maintain good relationships with its customers, suppliers, employees and other constituencies, or to achieve the anticipated benefits of the Merger, and could increase costs or reduce its earnings or otherwise adversely affect the business, financial condition, results of operations and/or prospects of Itaú Corpbanca. Actual revenue synergies, cost savings, growth opportunities and efficiency and operational benefits resulting from the Merger may be lower and may take longer than Itaú Corpbanca currently expects. Therefore if the benefits from the Merger are not as expected, we may be required to record impairment losses on the carrying amount (including goodwill) of the acquired business, which may have a material adverse effect on our financial condition and results of operations. See “Item 5. Operating and Financial Review and Prospects – A. Operating Results -  Critical Accounting Policies and Estimates – Estimate of Impairment of Goodwill.”

 

The integration of two large companies also presents significant management challenges. In order to achieve the anticipated benefits of the Merger, the operations of the two companies are being reorganized and their resources will need to be combined in a timely and flexible manner. There can be no assurance that Itaú Corpbanca will be able to implement these steps as anticipated or at all. If Itaú Corpbanca fails to achieve the planned restructuring within the time frame that is currently contemplated or to the extent that is currently planned, or if for any other reason the expected revenue synergies, cost savings and growth opportunities fail to materialize, the Merger may not produce the benefits that Itaú Corpbanca currently anticipates.

 

Itaú Corpbanca has incurred significant costs and expenses in connection with the Merger and will continue to incur additional costs and expenses.

 

Itaú Corpbanca has incurred and will continue to incur substantial expenses in connection with the integration process derived from the Merger. In 2014 and 2015, after the Merger was announced but prior to its consummation, expenses were related to transaction costs associated to the closing of the Merger, such as investment banks, legal advisors, auditors, filing fees, printing expenses and other related charges. After the Merger, expenses have been related to restructuring costs associated to one-time integration expenses. There are also many processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger. Any delay in the integration of the business operations of former Corpbanca and former Banco Itaú Chile or factors beyond Itaú Corpbanca’s control could affect the total amount or the timing of the integration and implementation expenses.

 

If additional unanticipated significant costs are incurred in connection with the Merger, these costs and expenses could, particularly in the near term, exceed the savings that Itaú Corpbanca expects to achieve from the elimination of duplicative expenses and the realization of economies of scale, other efficiencies and cost savings. Although Itaú Corpbanca expects to achieve savings and economies of scale sufficient to offset these integration and implementation costs over time, this net benefit may not be achieved in the near term or at all.

 

Itaú Corpbanca’s future results will suffer if it cannot effectively manage its expanded operations following completion of the Merger.

 

The size of Itaú Corpbanca’s combined business following the completion of the Merger is significantly larger and more complex than the previous businesses of former Corpbanca or former Banco Itaú Chile individually. Itaú Corpbanca’s future success will depend, in part, on its ability to manage this expanded business, posing substantial challenges for management. There can be no

 

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assurances that Itaú Corpbanca will be successful or that it will fully realize the expected operating efficiencies, cost savings, revenue synergies and other benefits currently anticipated from the Merger.

 

We may have problems successfully completing the implementation of a new information technology core banking system in Colombia.

 

A key element of our expansion strategy consists in the acquisition of existing businesses and their integration into our business model and administration and management processes. During 2017, we continued the technology integration process of the bank in Colombia, which includes the implementation of a unique integrated information technology core banking system in Colombia. The original project, which we had been implementing since February 2013, was discontinued after the Merger. New management decided to maintain the existing proprietary platform that Helm Bank had and to integrate all existing IT information instead of implementing a fully new information technology core banking system as originally planned. If we are unable to successfully complete the integration into one platform, the integration process in Colombia could be adversely affected, which could adversely affect our financial condition, results of operations and liquidity. The integration into one single information technology core banking system in Itaú Corpbanca Colombia is underway, on 2017 the branch network migration began, and it is expected to finish in the first half of 2018.

 

Risks Relating to Our Securities

 

Our controlling shareholder is able to exercise significant control over us which could result in conflicts of interest.

 

Itaú Unibanco is the sole controlling shareholder of Itaú Corpbanca. As of April 2, 2018, Itaú Unibanco beneficially owned 36.06% of our voting common shares. In addition, (i) Itaú Unibanco and (ii) Inversiones Gasa Limitada, CorpGroup Holding Inversiones Limitada, CorpGroup Banking S.A., Compañía Inmobiliaria y de Inversiones Saga SpA and CorpGroup Interhold SpA (together, “CorpGroup”) have signed a shareholders’ agreement to determine certain aspects related to corporate governance, dividend policy, transfer of shares, liquidity and other matters (the “Itaú CorpGroup Shareholders’ Agreement”). Itaú Unibanco and CorpGroup are in position to elect 11 of the 13 members of our board of directors. The Itaú CorpGroup Shareholders’ Agreement provides that the directors appointed by Itaú Unibanco and CorpGroup will vote, to the extent permitted by the law, in a block and in accordance with the recommendation of Itaú Unibanco, subject to certain exceptions. Accordingly, Itaú Unibanco is able to control the actions taken by the board of directors of Itaú Corpbanca on most matters, which could result in conflicts of interest.

 

U.S. securities laws do not require us to disclose as much information to investors as a U.S. issuer is required to disclose.

 

The corporate disclosure requirements applicable to us may not be equivalent to the requirements applicable to a U.S. company and, as a result, you may receive less information about us than you might otherwise receive in connection with a comparable U.S. company. We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that apply to “foreign private issuers.” The periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers.

 

We are required to file an annual report on Form 20-F, but we are not required to file any quarterly reports. A U.S. registrant must file an annual report on Form 10-K and three quarterly reports on Form 10-Q.

 

We are required to furnish current reports on Form 6-K, but the information that we must disclose in those reports is governed primarily by Chilean law disclosure requirements and may differ from Form 8-K’s current reporting requirements imposed on a U.S. issuer.

 

We are not subject to the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the short swing insider trading reporting and recovery requirements under Section 16 of the Exchange Act.

 

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange.

 

We are a “controlled company” and a “foreign private issuer” within the meaning of the New York Stock Exchange (NYSE) corporate governance standards, which exempts us from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (i) a majority of our board of directors (directorio), consist of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken, and (v) the members of the audit committee meet the Exchange Act Rule 10A-3(b)(1) independence requirements. We currently use these exemptions and intend to continue using these exemptions. Accordingly, you will not have the same protections afforded to investors

 

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in companies that are subject to all NYSE corporate governance requirements. See “Item 16G. Corporate Governance” for a comparison of the corporate governance standards of the New York Stock Exchange and Chilean practice.

 

Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.

 

We are organized under the laws of Chile and our principal place of business (domicilio social) is in Santiago, Chile. Most of our directors, officers and controlling persons reside outside of the United States. In addition, all or a substantial portion of our assets are located outside of the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the United States federal securities laws.

 

Risks Relating to Our ADSs and Common Shares

 

There may be a lack of liquidity and market for our ADSs and common shares.

 

A lack of liquidity in the markets may develop for our ADSs, which would negatively affect the ability of the holders to sell our ADSs or the price at which holders of our ADSs desire to sell them. Future trading prices of our ADSs will depend on many factors including, among other things, prevailing interest rates, our operating results and the market for similar securities.

 

Our common shares underlying the ADSs are listed and traded on the Santiago Stock Exchange and the Chilean Electronic Exchange, although the trading market for the common shares is small by international standards.

 

In addition, according to article 14 of the Ley No. 18,045 de Mercado de Valores (the “Chilean Securities Market Act”), the CMF –formerly Superintendencia de Valores y Seguros or Chilean Superintendency of Securities and Insurance– may suspend the offer, quotation or trading of shares of any company listed on the Chilean stock exchanges for up to 30 days if, in its opinion, such suspension is necessary to protect investors or is justified for reasons of public interest. Such suspension may be extended for up to 120 days. If, at the expiration of the extension, the circumstances giving rise to the original suspension have not changed, the CMF will then cancel the relevant listing in the registry of securities. These and other factors may substantially limit your ability to sell the common shares underlying your ADSs at a price and time at which you wish to do so.

 

You may be unable to exercise preemptive rights.

 

The Ley 18,046 sobre Sociedades Anónimas and the Reglamento de Sociedades Anónimas, which we refer to collectively as the Chilean Corporations Act, and applicable regulations establish that whenever we issue new common shares for cash, we are obligated by law to grant preemptive rights to all of our shareholders (including the depositary on behalf of the holders of ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. However, we may not be able to offer shares to United States holders of ADSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of common shares unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Act, is effective with respect to such rights and common shares, or an exemption from the registration requirements of the Act is available.

 

Our existing shareholders who do not participate in any future preemptive rights offering will suffer an immediate dilution of their percentage equity participation in us. In addition, investors who purchase ADSs or common shares may be subject to dilution of their equity participation in us upon the completion of any future preemptive rights offering. Investors will not know the extent to which they will be diluted until the expiration of any future preemptive rights offering in Chile.

 

You may have fewer and less well defined shareholders’ rights than with shares of a company in the United States.

 

Our corporate affairs are governed by our Estatutos Sociales, or By-laws, and the laws of Chile. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, under legislation applicable to Chilean banks, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.

 

Holders of ADSs are not entitled to attend shareholders’ meetings, and they may only vote through the depositary.

 

Under Chilean law, a shareholder is required to be registered in our shareholders’ registry at least five business days before a shareholders’ meeting in order to vote at such meeting. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to vote at shareholders’ meetings, because the shares underlying the ADSs will be registered in the name of the depositary. While a holder of ADSs is entitled to instruct the depositary as to how to vote the shares represented by ADSs in accordance with the procedures provided for in the deposit agreement, a holder of ADSs will not be able to vote its shares directly at a shareholders’ meeting or to appoint a proxy to do so. In certain instances, a discretionary proxy may vote our shares underlying the ADSs if a holder of ADSs does not instruct the depositary with respect to voting. In addition, the vote of a holder of ADSs may not be necessary to approve certain matters since under Chilean law, substantially all of the forms of corporate action can be approved with the votes of our controlling shareholder, Itaú Unibanco, in a duly summoned shareholders’ meeting, except for certain matters requiring supermajority approval according to Chilean law.

 

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U.S. holders of our ADSs or common shares could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

 

If you are a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations”) and we are a passive foreign investment company, or PFIC, for any taxable year during which you own our ADSs or common shares, you could be subject to adverse U.S. tax consequences. As of the date of this Annual Report, we do not expect to be classified as a PFIC for U.S. federal income tax purposes for our current taxable year or for any taxable year in the foreseeable future. However, the determination of whether we are a PFIC is made on an annual basis and will depend on the composition and nature of our income and the composition, nature and value of our assets from time to time, and therefore no assurance can be provided regarding our PFIC status. You should consult your tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of the ADSs or common shares in your particular circumstances. See “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations” for additional information related to the PFIC rules and their application to the bank.

 

Holders of the ADSs or our common shares could be subject to a 30% U.S. withholding tax.

 

Pursuant to Sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended, or the Code, and U.S. Treasury Regulations promulgated thereunder, a 30% withholding tax may, in the future, be imposed on all or some of the payments on the ADSs or our common shares to holders and non-U.S. financial institutions receiving payments on behalf of holders that, in each case, fail to comply with information reporting, certification and related requirements. This withholding tax, if it applies, could apply to any payment made with respect to the ADSs or our common shares, and ADSs or shares of our common shares held through a non-compliant institution may be subject to withholding even if the holder otherwise would not be subject to withholding. U.S. holders are urged to consult their tax advisers regarding the application of these rules to their ownership of the ADSs or our common shares. See “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations” for additional information related to these rules and their application to holders of ADSs or our common shares.

 

Exchange controls and withholding taxes in Chile may limit repatriation of your investment.

 

Equity investments in Chile by persons who are not Chilean residents may be subject to exchange control regulations that govern the repatriation of investments and earnings.

 

Dividends received by holders of ADSs are paid net of foreign currency exchange fees and fees and expenses of the depositary and are subject to Chilean withholding tax, currently imposed at a rate of 35%, subject to credits in certain cases as described under “Item 10. Additional Information—E. Taxation—Chilean Tax Considerations.” In order to facilitate capital movements from and into Chile and to encourage foreign investment, the Central Bank of Chile eliminated many foreign exchange restrictions and adopted the Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) effective April 19, 2001.

 

We cannot assure you that additional Chilean restrictions applicable to the holders of ADSs, the disposition of the shares underlying the ADSs or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise as to the duration or impact of such restrictions, if imposed. If for any reason, including changes in the Foreign Investment Agreement or Chilean law, the depositary is not able to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions, if any, in Chilean pesos.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.  HISTORY AND DEVELOPMENT OF THE COMPANY

 

We are a publicly traded company (sociedad anónima) organized under the laws of Chile and licensed by the SBIF to operate as a commercial bank. Our legal name is Itaú Corpbanca, and our commercial name is Banco Itaú and/or Itaú. Our principal executive offices are located at Rosario Norte 660, Las Condes, Santiago, Chile. Our telephone number is 56-2-2660-8000 and our website is www.itau.cl. Our agent in the United States is Itaú Corpbanca New York Branch, Attention: Joaquín Rojas Walbaum, located at 885 Third Avenue, 33rd Floor, New York, NY 10022. Information set forth on our website does not constitute a part of this Annual Report. Itaú Corpbanca is organized under the laws of Chile and its subsidiaries are organized under the laws of Chile and Colombia. The terms “Itaú Corpbanca,” “Itaú,” “the bank,” “we,” “us” and “our” in this Annual Report refer to Itaú Corpbanca together with its subsidiaries unless otherwise specified.

 

History

 

The bank’s history has been extensive and with a challenging road that has led us to become the oldest private operating bank in Chile, incorporated as Banco de Concepción by Decree No. 180 of the Chilean Ministry of Finance on October 3, 1871, and legally began operations as a bank on October 16 of the same year. We were founded by a group of residents of the city of Concepción, Chile, led by Aníbal Pinto, who would later become President of Chile.

 

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In 1971, Banco de Concepción was transferred to a government agency, Corporación de Fomento de la Producción (the Chilean Corporation for the Development of Production, or CORFO). Also in 1971, Banco de Concepción acquired Banco Francés e Italiano in Chile, which provided for the expansion of Banco de Concepción into Santiago. In 1972 and 1975, the bank acquired Banco de Chillán and Banco de Valdivia, respectively. In November 1975, CORFO sold its shares of the bank to private business persons, who took control of the bank in 1976. In 1980, the name of the bank was changed to Banco Concepción. In 1983, control of Banco Concepción was assumed by the SBIF. The bank remained under the control of the SBIF through 1986, when it was acquired by Sociedad Nacional de Minería (the Chilean National Mining Society, or SONAMI). Under SONAMI’s control, Banco Concepción focused on providing financing to small- and medium-sized mining interests, increased its capital and sold a portion of its high-risk portfolio to the Central Bank of Chile.

 

Investors led by Mr. Alvaro Saieh Bendeck purchased a majority interest of Banco Concepción from SONAMI in 1996. Following the acquisition by Mr. Alvaro Saieh Bendeck in 1996, the brand name changed to Corpbanca, hired a management team with substantial experience in the Chilean financial services industry and commenced a period of significant growth fueled by organic expansion and acquisitions. Our first significant transactions were the acquisition of the assets of the consumer loan division of Corfinsa and the finance company Financiera Condell S.A. in 1998. Both combined created the bank’s Consumer Division, Banco Condell, focused on the middle-low income segment of the population in Chile.

 

With a view to its internationalization in November 2004, the bank completed the listing process that enabled it to trade its ADSs on the New York Stock Exchange. Five years later, the New York Branch was opened as a support for clients who can see their possibilities of financing in the United States expanded. Two years later, Corpbanca opened its representative office in Spain, whose role is to inform and promote the bank with foreign companies and serve as a liaison with bank clients in Chile and Colombia.

 

In June 2012, former Corpbanca finalized the acquisition of Banco Santander Colombia S.A. (now Itaú Corpbanca Colombia). With this acquisition, we became the first Chilean bank to have a banking subsidiary outside the country. In 2013, we acquired Helm Bank S.A., and the following year, merged it with and into Itaú Corpbanca Colombia, maintaining the networks of branches separately: Itaú Corpbanca Colombia and Helm.

 

Becoming a large bank with a regional presence prompted our former controlling shareholder to enter, in early 2014, into a merger agreement with Itaú Unibanco and Banco Itaú Chile.

 

Itaú financial group expanded into Chile in September 2006 after the acquisition of BankBoston (Chile). On February 28, 2007, BankBoston (Chile) was named Banco Itaú Chile, after the Superintendency of Banks and Financial Institutions approved the acquisition.

 

In June 2015, the Extraordinary Shareholders Meetings of Corpbanca and Banco Itaú Chile agreed to the merger, which was approved by the Superintendency of Banks and Financial Institutions in September of the same year. The Merger was consummated on April 1, 2016, the date on which the bank was renamed “Itaú Corpbanca.”

 

As of December 31, 2017, the bank is the fourth largest private bank in Chile with approximately 10.8% market share in the local credit market.

 

In this way, the stories of Banco Itaú Chile and Corpbanca were merged into a single one, with Corpbanca contributing a long and successful business trajectory which, since its beginning in 1871 in the city of Concepción, has had a clear goal: offering clients a service of excellence being faithful to what inspired its founders. On the other hand, Itaú Unibanco, with more than 90 years of history in Brazil, contributed all its experience as the largest private bank in Latin America and one of the largest banks in the world measured in market capitalization with a leading presence in the Brazilian market.

 

Our business model is the result of the combination of the local banks’ strengths and local knowledge, which will allow us to reach more clients, with an extended range of products and financial solutions.

 

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A summary of the main milestones in the history of the bank is set forth in the following chart:

 

 

GRAPHIC

 

The Merger

 

On January 29, 2014, Corpbanca and Itaú Chile agreed to merge (the “Transaction Agreement”). The shareholders of former Corpbanca approved the Merger in an extraordinary shareholders’ meeting held on June 26, 2015, and the shareholders of former Banco Itaú Chile gave their consent to the merger in an extraordinary shareholders’ meeting held on June 30, 2015.

 

On April 1, 2016 the Merger was consummated and Banco Itaú Chile was merged with and into Corpbanca. As of April 2, 2018, Itaú Unibanco and CorpGroup beneficially own 36.06% and 30.65% of our outstanding common shares, respectively. Itaú Unibanco and CorpGroup also entered into the Itaú CorpGroup Shareholders’ Agreement. Upon the consummation of the Merger, Itaú Unibanco became the controlling shareholder of the merged bank. For a description of the Itaú CorpGroup Shareholders’ Agreement and the Transaction Agreement, see “Item 10. Additional Information—C. Material Contracts.”

 

Immediately following the Merger, the corresponding subsidiaries of Banco Itaú Chile and Corpbanca continued to operate independently and their respective clients were served by their current executives. In January 2017, December 2017 and April 2018, respectively, each of our securities brokerage (corredoras de bolsa) subsidiaries, our general fund managers’ (administradoras generales de fondos) subsidiaries, and our insurance broker’s subsidiaries, were consolidated, leaving one entity for each business.

 

By consolidating operations in Chile and Colombia, the new bank became one of Chile’s largest private financial institutions, ranking fourth in the industry with a market share by loans of 10.8% in Chile at the end of 2017. The Merger and combination of the strengths of both banks has translated into an expansion in the offer of products and services for our clients, with a large branch platform in Chile (201) and Colombia (174).

 

Client Migration

 

In order to migrate our clients from Corpbanca’s platform systems to Banco Itaú Chile’s, we set forth a gradual process defined as “migration waves,” which started after we consummated the Merger. For this purpose, we scheduled several waves to migrate Corpbanca’s customers. The migration waves also included the change of image of certain Corpbanca branches. This process was completed during the fourth quarter of 2017.

 

In parallel to the migration waves, we started to integrate the processes and systems of the merged banks, which contemplate the following three stages in order to achieve the Target Operational Model, or TOM:

 

·      TOM LD1: This stage included integrating all the financial statements, balance sheets and regulatory reports (SBIF, SII, Central Bank of Brazil) of both banks. It also included delivering a single credit position (credit, financial and market risk) of customers from both of the merged banks, and having one single trading desk. This stage was completed with the first filing of financial information of Itaú Corpbanca with the SBIF in early May 2016.

 

·      TOM Migration: This stage included migrating customers, developing functional gaps for customers of both banks to enjoy the functionalities offered by each bank separately, and building the necessary drivers of coexistence of both bank’s systems. This stage was completed by the end of 2017.

 

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·      TOM Technology and Operations: This stage refers to the technological integration and implementation of improvements of both banks supported in a single core banking. This stage is in progress, and we expect to complete it by 2018.

 

The Itaú Colombia Acquisition

 

The obligation of the parties to the Transaction Agreement to cause Itaú Corpbanca to acquire all of the outstanding shares of Itaú BBA Colombia or to carry out a merger of Itaú Corpbanca Colombia, formerly Banco Corpbanca Colombia, with Itaú BBA Colombia was amended on January 20, 2017 and replaced with the obligation of the parties to cause Itaú Corpbanca Colombia to acquire the assets and liabilities of Itaú BBA Colombia at their book value in accordance with the terms and conditions agreed by Itaú Corpbanca Colombia and Itaú BBA Colombia on November 1, 2016 (the “Itaú Colombian Asset & Liabilities Acquisition”). The Itaú Colombian Asset & Liabilities Acquisition was approved by the shareholders of Itaú Corpbanca Colombia and the Colombian Superintendency of Finance (the “CFS”) and completed on June 16, 2017, as established in the agreement signed on June 1, 2017 between Itaú Corpbanca Colombia, as assignee, and Itaú BBA Colombia S.A. Corporación Financiera, as assignor. Pursuant to the Itaú Colombian Asset & Liabilities Acquisition transaction, Itaú Corpbanca Colombia paid to Itaú BBA Colombia S.A. Corporación Financiera Ch$33,205 million. This agreement also contemplated the rendering of certain services by Itaú Corpbanca Colombia in favor of Itaú BBA Colombia and the hiring of the senior management of Itaú BBA Colombia by Itaú Corpbanca Colombia.

 

Additionally, the amendment to the Transaction Agreement also included the postponement of the date for Itaú Corpbanca to purchase the shares that CorpGroup holds in Itaú Corpbanca Colombia. The purchase of those shares of Itaú Corpbanca Colombia held by CorpGroup (currently representing 12.36% of shares outstanding), which was previously agreed to be carried out no later than January 29, 2017, was postponed until January 28, 2022, subject to receipt of the applicable regulatory approvals. The purchase price for the shares has not changed and will be US$3.5367 per share plus (i) interest from (and including) August 4, 2015 until (but excluding) the payment date at an annual interest rate equal to Libor plus 2.7% minus (ii) the sum of (x) the aggregate amount of dividends paid by Itaú Corpbanca Colombia to CorpGroup since the date of the Transaction Agreement, plus (y) the accrued interest with respect to the amount of such dividends since the date of their payment until the payment date of the purchase price, at an annual interest rate equal to Libor plus 2.7%.

 

Capital Expenditures

 

The following table reflects our capital expenditures in the years ended December 31, 2015, 2016 and 2017:

 

 

 

For the Year Ended December 31,

 

 

 

2015

 

2016

 

2017

 

 

 

(in millions of Ch$)

 

Land and buildings

 

 

11,002

 

27,125

 

Machinery and equipment

 

15,766

 

87,600

 

50,681

 

Furniture and fixtures

 

 

 

 

Vehicle

 

 

 

 

Other

 

715

 

6,555

 

9,349

 

Total

 

16,481

 

105,157

 

87,155

 

 

Total capital expenditures in 2017 of Ch$87,155 million consisted mainly of Ch$42,903 million in expenses relating to the purchase of software and computer equipment and other IT-related expenses, including those related to the post-Merger integration of IT systems. For further details relating to these results and related divestitures, see Notes 1(m) and 13 of our consolidated financial statements included herein.

 

B.  BUSINESS OVERVIEW

 

COMPETITIVE STRENGTHS

 

We believe that the Merger will enable us to emerge as a leading banking platform in Chile and Colombia as a result of the following strengths:

 

Banking Platform with Larger Scale

 

We believe that as a result of the Merger, we have greater scale and resources to grow and compete more effectively in Chile and Colombia. The merged bank has become the fourth largest private bank in Chile and will result in a banking platform for future expansion in the Andean Region. According to the SBIF, as of December 31, 2017, we ranked fourth among private banks in total loans with 10.8% market share on an unconsolidated basis (taking into account only our operations in Chile). Additionally, as of the same date, the SBIF ranked us fourth in total deposits with 8.5% market share among private banks in the Chilean market.

 

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In 2017, our operations in Chile and Colombia reached an aggregate net income of Ch$ 62,825 million. This result was primarily driven by both macroeconomic impacts and specific events to Itaú Corpbanca particularly higher provisions for loan losses in Chile as further discussed below in “Item 5—Operating and Financial Review and Prospects—A. Operating Results—The Economy—Results of Operations for the Years Ended December 31, 2015, 2016 and 2017—Net Income.”

 

Unique Control and Support from a Leading Institution

 

We believe that the Merger has provided us with a competitive advantage over our competitors. Since Itaú Unibanco is the largest private financial institution in Brazil and a premier Latin American franchise, the Merger provides us with an opportunity to leverage Itaú Unibanco’s strong global client relationships in the markets the bank operates while enhancing opportunities for growth abroad.

 

We expect that Itaú Corpbanca will be able to expand its offering of banking products through a successful managing model, segmentation and digitalization, all based on Itaú Unibanco’s strategy. Our balance sheet provides us with cross-selling opportunities and allows us to benefit from additional synergies through: (i) the optimization of cost structures; (ii) savings derived from an enhanced branch network; (iii) savings derived from scalable IT systems; and (iv) improvements in the cost of funding.

 

Diversified Footprint in Chile and Colombia

 

We believe that the enhanced footprint that Itaú Corpbanca has in Chile and Colombia gives us an increased ability to grow and compete more effectively within those countries, further consolidating our market position in Chile and Colombia.

 

We believe that our acquisitions in Colombia give us a distinct advantage over our competitors in Chile and Colombia. We are the first, and until September 30, 2015 we were the only, Chilean-based bank to acquire a universal bank outside Chile. As of today, we remain the only Chilean-based bank to have a footprint in Colombia through a universal bank. As of December 31, 2017, according to the SBIF, Itaú Corpbanca was the fourth largest private bank in Chile by loans and deposits and according to the Colombian Superintendency of Finance, Itaú Corpbanca Colombia was the seventh largest bank in Colombia in terms of loans and deposits.

 

Experienced Management Team

 

The chairman of our board of director, Mr. Jorge Andrés Saieh Guzmán, became chairman in February 2012. He has over 17 years of experience as a member of our board of directors. Our chief executive officer (CEO), Milton Maluhy, assumed office in 2016. He is part of Itaú Unibanco since 2002 and a partner since 2010. Mr. Maluhy was president director of Rede S.A. (former Redecar S.A.) and executive director of Itaú Unibanco, responsible for alliances between Itaú Unibanco and retail chains, as well as head of Itaú Unibanco’s credit card area. Our chief financial officer (CFO), Gabriel Moura, has over 21 years of experience in the banking and financial industry. He is part of Itaú Unibanco since 2000 and a partner since 2010. The CEO of Itaú Corpbanca Colombia, Alvaro Pimentel, has over 21 years of experience in Itaú Unibanco. He has a degree in economics from the Universidade Estadual de Campinas—Unicamp in Brazil and an Executive MBA in finance from Insper in Brazil. A number of the members of the board of directors of Itaú Corpbanca Colombia also have a wealth of experience in the Colombian market and the banking and financial services industry.

 

Sound Risk Management

 

We believe that our asset quality is superior to the market average in terms of credit risk metrics, despite negative credit events during 2017. As of December 2017, our non-performing loan to total loans and our write-offs to average outstanding loans ratios were 2.3% and 1.1%, respectively. After the Merger, we revised our risk policies to align credit criteria to Itaú’s internal risk policies. This risk management philosophy enables us to identify risks and resolve potential problems on a timely basis.

 

Operating in a Stable Economic Environment Within Latin America

 

We conduct a majority of our business in Chile and a significant amount in Colombia. The Chilean and Colombian economies have generally demonstrated a stable macroeconomic environment in terms of growth and inflation. The Chilean economy is generally recognized as among the most stable in Latin America, as evidenced by its investment grade ratings of Aa3 by Moody’s, A+ by Standard & Poor’s and A by Fitch Ratings, the highest ratings in the region. Chile has consistently received investment-grade credit ratings since Standard & Poor’s and Moody’s started coverage in 1992 and 1994, respectively. Moody’s and Fitch Ratings have an investment grade rating of Colombia of Baa2 and BBB, respectively, with a “negative” and “stable” outlook, respectively. Standard & Poor’s has an investment grade rating of Colombia of BBB-, with a “stable” outlook.

 

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STRATEGY

 

Our strategy aims at enhancing our market position in the Chilean and Colombian financial services industry in terms of profitability, market share and service coverage. The key elements of our strategy are:

 

Continue to Grow our Operations Profitably as a Universal Bank

 

We seek to achieve organic growth in all of our lines of business in Chile and Colombia by offering competitive products and services to our clients. We believe that we have developed a successful wholesale banking business model, which allows us to realize high margins on the cross-selling of our products to our large corporate clients. Our intention is to continue to expand the wholesale banking business model to our operations in Colombia. We are focusing our marketing and sales efforts on adapting this business model to apply to our SME clients in Chile and Colombia. Additionally, we believe that our strong franchise in the retail banking unit offers us the potential for significant growth in our loan portfolio, in the low-, mid- and high-income segments. In particular, we believe that there is significant opportunity to expand our wealth management business through the offering of unique investment products and opportunities. We believe that the Merger has given us a complementary banking operations and an improved market position, which enhances our client servicing models. In addition, we seek to identify and pursue growth throughout enhancing strategic opportunities. We will continue to evaluate additional strategic acquisitions and alliances from time to time, inside and outside of Chile and Colombia.

 

Further Penetrate the Colombian Financial Services Market

 

We intend to capitalize on the growth of the Colombian market given that we believe that our Colombian operation will offer us significant opportunities for growth. Specifically, we benefit from comparable lower banking penetration rates in terms of GDP per capita in Colombia. The strategic acquisitions in Colombia and Itaú Corpbanca’s mandate to expand businesses in the Andean Region demonstrate our commitment to the Colombian financial market. With respect to our current operations in Colombia, in order to improve our operational efficiency and increase our market share in key sectors, we are putting in place our commercial and operational standards and best practices, while capitalizing on the local management expertise, customer base, services and products. As a result of the Itaú Colombian Asset & Liabilities Acquisition, we expect to achieve a stronger penetration of the wholesale market. We also expect to leverage on Itaú Unibanco’s retail banking best practices, our new controlling shareholder.

 

Actively Pursue Cross-Selling Opportunities

 

We intend to increase our market share and profitability by continuing to cross-sell services and products to our existing clients. We have instituted processes that facilitate our ability to offer additional financial services to our clients, which we believe will increase our revenue from high-value-added services. In addition, we cross-sell loan products to our checking and savings account customers that are tailored to their individual needs and financial situation. We believe that the Merger has provided us with further opportunities to offer our clients an improved product menu leveraging the strong position of Itaú Unibanco in both wholesale and retail business.

 

Efficiency

 

We are committed to continuing to improve our operating efficiency and profitability. We are working to increase use of internet and mobile banking by our customers, by offering them better technology solutions. Our senior management is focused on implementing technological solutions aimed to identify means of improving our overall profitability and to optimize our cost structure, such as online time deposits which have been an innovative product of great success in Chile. Through these initiatives, we will continue to strive to improve our efficiency ratio. As of December 31, 2017, we had a consolidated efficiency ratio of 67.3% (defined as operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains from mark-to-market and trading, exchange differences (net) and other operating income (net)).

 

After the Merger, we have started to enjoy several benefits, including a greater scale and resources to compete more effectively and more efficiently. We believe the merged bank has the potential to continue to generate synergies in Chile which will result in efficiency improvements.

 

Focus on Building Customer Satisfaction

 

The quality of service that we provide to our customers is key to our growth strategy. We not only focus on gaining new customers, but on strengthening and establishing long-term relationships. We believe this is done through a constant effort to identify and understand our clients’ needs and to measure their satisfaction. We also continue to develop new processes and technological solutions to improve our customer service. This is a key component of our strategy to continuously create value.

 

OWNERSHIP STRUCTURE

 

Itaú Corpbanca capital stock is comprised of 512,406,760,091 common shares traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Shares are also traded as depositary receipts on the New York Stock Exchange in the form of ADSs.

 

Since the consummation of the Merger on April 1, 2016, Itaú Corpbanca has been controlled by Itaú Unibanco. After the Merger, Itaú Unibanco indirectly acquired an additional 2.13% and 0.35% share capital of Itaú Corpbanca from the Saieh Family, on

 

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October 26, 2016 and on September 15, 2017, respectively. As a result of these acquisitions, the current shareholder structure is as follows:

 

GRAPHIC

 

PRINCIPAL BUSINESS ACTIVITIES

 

We provide a broad range of wholesale and retail banking services to our customers in Chile and Colombia. In addition, we provide financial advisory services, mutual fund management, insurance brokerage and securities brokerage services through our subsidiaries, and banking services through our New York Branch.

 

The following table sets forth a breakdown of our revenue by geographic market for the years ended December 31, 2015, 2016 and 2017:

 

 

 

Net Interest Income by Geographic Market

 

 

 

2015

 

2016

 

2017

 

 

 

Chile

 

Colombia

 

Total

 

Chile

 

Colombia

 

Total

 

Chile

 

Colombia

 

Total

 

 

 

(in millions of Ch$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

501,982

 

 

501,982

 

1,013,951

 

495,252

 

1,509,203

 

1,067,124

 

579,205

 

1,646,329

 

Interest expense

 

(278,692

)

.

 

(278,692

)

(554,246

)

(315,782

)

(870,028

)

(529,584

)

(333,763

)

(863,347

)

Net interest income

 

223,290

 

 

223,290

 

459,705

 

179,470

 

639,175

 

537,540

 

245,442

 

782,982

 

 

The business units presented in this Annual Report correspond to the business units used by the bank after the Merger. Information for 2015, referring to former Banco Itaú Chile’s historical information, is presented using the same segmenting criteria. However, the results for the year ended December 31, 2015 are not comparable to the results for the years ended December 31, 2016 and 2017 because of the Merger. See “Item 3. Key Information—Presentation of Financial and Other Information.”

 

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The following table provides information on the composition of our loan portfolio net of allowances as of December 31, 2015 and 2016

 

 

 

As of December 31,

 

 

 

2015

 

2016

 

Variation

 

Variation

 

 

 

(in millions of constant Ch$)

 

(%)

 

Commercial loans

 

 

 

 

 

 

 

 

 

Commercial loans

 

3,568,144

 

11,625,087

 

8,056,943

 

225.8%

 

Foreign trade loans

 

414,953

 

720,792

 

305,839

 

73.7%

 

Current account debtors

 

37,115

 

125,996

 

88,881

 

239.5%

 

Factoring operations

 

56,144

 

74,433

 

18,289

 

32.6%

 

Student loans

 

173,254

 

597,946

 

424,692

 

245.1%

 

Leasing transactions

 

244,627

 

1,043,046

 

798,419

 

326.4%

 

Other loans and receivables

 

10,234

 

28,243

 

18,009

 

176.0%

 

Subtotals

 

4,504,471

 

14,215,543

 

9,711,072

 

215.6%

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

 

 

 

 

 

 

 

 

Letters of credit loans

 

16,482

 

57,589

 

41,107

 

249.4%

 

Endorsable mutual mortgage loans

 

8,720

 

151,167

 

142,447

 

1,633.6%

 

Other mutual mortgage loans

 

1,502,395

 

3,344,285

 

1,841,890

 

122.6%

 

Leasing transactions

 

 

283,084

 

283,084

 

 

Other loans and receivables

 

 

28,920

 

28,920

 

 

Subtotal

 

1,527,597

 

3,865,045

 

2,337,448

 

153.0%

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Consumer loans

 

370,612

 

1,703,973

 

1,333,361

 

359.8%

 

Current account debtors

 

109,913

 

172,938

 

63,025

 

57.3%

 

Credit card debtors

 

192,591

 

396,514

 

203,923

 

105.9%

 

Consumer leasing transactions

 

308

 

16,519

 

16,211

 

5,263.3%

 

Other loans and receivables

 

 

74,116

 

74,116

 

 

Subtotal

 

673,424

 

2,364,060

 

1,690,636

 

251.1%

 

Total

 

6,705,492

 

20,444,648

 

13,739,156

 

204.9%

 

 

The following table provides information on the composition of our loan portfolio net of allowances as of December 31, 2016 and 2017

 

 

 

As of December 31,

 

 

 

2016

 

2017

 

Variation

 

Variation

 

 

 

(in millions of constant Ch$)

 

(%)

 

Commercial loans

 

 

 

 

 

 

 

 

 

Commercial loans

 

11,625,087

 

10,734,858

 

(890,229

)

(7.7)%

 

Foreign trade loans

 

720,792

 

671,478

 

(49,314

)

(6.8)%

 

Current account debtors

 

125,996

 

134,597

 

8,601

 

6.8%

 

Factoring operations

 

74,433

 

140,375

 

65,942

 

88.6%

 

Student loans

 

597,946

 

640,209

 

42,263

 

7.1%

 

Leasing transactions

 

1,043,046

 

923,507

 

(119,539

)

(11.5)%

 

Other loans and receivables

 

28,243

 

24,608

 

(3,635

)

(12.9)%

 

Subtotals

 

14,215,543

 

13,269,632

 

(945,911

)

(6.7)%

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

 

 

 

 

 

 

 

 

Letters of credit loans

 

57,589

 

47,260

 

(10,329

)

(17.9)%

 

Endorsable mutual mortgage loans

 

151,167

 

134,103

 

(17,064

)

(11.3)%

 

Other mutual mortgage loans

 

3,344,285

 

3,637,164

 

292,879

 

8.8%

 

Leasing transactions

 

283,084

 

273,175

 

(9,909

)

(3.5)%

 

Other loans and receivables

 

28,920

 

26,032

 

(2,888

)

(10.0)%

 

Subtotal

 

3,865,045

 

4,117,734

 

252,689

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

Consumer loans

 

1,703,973

 

1,709,981

 

6,008

 

0.4%

 

Current account debtors

 

172,938

 

195,661

 

22,723

 

13.1%

 

Credit card debtors

 

396,514

 

401,505

 

4,991

 

1.3%

 

Consumer leasing transactions

 

16,519

 

10,778

 

(5,741

)

(34.8)%

 

Other loans and receivables

 

74,116

 

58,787

 

(15,329

)

(20.7)%

 

Subtotal

 

2,364,060

 

2,376,712

 

12,652

 

0.5%

 

Total

 

20,444,648

 

19,764,078

 

(680,570

)

(3.3)%

 

 

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Table of Contents

 

Business activities in Chile have been strategically aligned onto three commercial business units directly related not only to our medium term strategy but to our customers’ needs: 1) Wholesale Banking (a. Corporate, b. Large Companies and c. Real Estate); 2) Retail Banking (a. Itaú Personal Bank, b. Itaú, c. Itaú Private Bank, d. Midsize Companies, e. SMEs and f. Banco Condell, our Consumer Finance Division); and 3) Treasury.

 

A description of each of the business units in Chile and of our Colombian banking subsidiary as well as of our New York branch is presented below:

 

Wholesale Banking

 

Wholesale Banking serves large economic groups, state-owned and private companies, mining companies, utilities, energy, seaports, airports, public hospitals or any business. Wholesale Banking also serves our real estate and project finance customers. It focuses on offering clients a broad range of services tailored to fit their specific needs. These services include deposit-taking and lending in both Chilean pesos and foreign currencies, trade financing, general commercial loans, working capital loans, letters of credit, interest rate, foreign exchange derivatives (including foreign exchange options) and cash flow management.

 

Corporate Banking. This business unit specializes in institutional customers and customers with annual sales in excess of US$100 million.

 

Large Companies. This business unit includes a wide range of products and financial services to companies with annual sales between US$8 million to US$100 million.

 

Real Estate Companies. This business unit is focused on companies or economic groups in the real estate or construction industry with annual sales in excess of US$100,000.

 

Retail Banking

 

Retail Banking serves retail individuals customers in Chile across all income levels, from low-income to high-income individuals, and also targets midsize companies and SMEs, the latter two grouped under “Itaú Companies.” Retail Banking is organized into the following four business units:

 

Itaú Personal Bank. In 2017 we launched a new business unit for high-income individuals, with a monthly income in excess of Ch$2.5 million. The business model for Itaú Personal Bank is based in our relationship with the customers. This is the first high-income individuals segment in Chile with differentiated branches at ground floor to be access directly from the street, and additionally with differentiated mobile and web channels. Currently, we have 20 premium branches and 37 traditional branches with a space for Personal Bank.

 

Private Banking. Within our Private Banking Division, we provide private banking services to our high-income and high net worth customers in Chile. We consider high-income individuals to be customers with a monthly income in excess of US$1 million. Each client under our private banking or “Private Banking” program is provided with a liaison officer who oversees the client’s entire relationship with us across all product lines. In addition to the products and services we provide to private banking customers, we offer tailored lending products designed to help keep their businesses growing.

 

Itaú (Traditional Banking). Our Traditional Banking Division is mainly oriented toward individuals in Chile with medium-high income levels (focused on clients between Ch$600,000 and Ch$2.5 million monthly income). Our traditional banking services are marketed and operated under the Itaú and Corpbanca brand names. We offer our traditional and private banking clients products in Chile such as checking accounts, credit lines, credit and debit cards, personal installment loans, mortgage loans, insurance banking, time deposits and savings accounts in Chilean pesos, Euros, UF and U.S. dollars, among others. In addition, we provide mutual fund and securities brokerage services. This segment is served under 120 branches.

 

Banco Condell (Consumer Finance). Our Consumer Finance Division operates under the trade name Banco Condell and is focused on clients in Chile with an annual income between Ch$2.4 million and Ch$7.2 million. Products and services we offer focus on the traditionally underserved low-to-middle income segments of the Chilean population, where the consumer loans represent the core of the business. Banco Condell has 56 standalone branches and its own brand identity.

 

Treasury

 

Our Treasury specializes in financial management and is largely responsible for our funding and liquidity as well as management of any gap on our balance sheet. In addition, through our Treasury we manage proprietary trading functions, market making and distribution and sales of flow and non-flow instruments for our corporate clients. This area is responsible for obtaining foreign currency-denominated credit lines from financial institutions outside of Chile.

 

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Table of Contents

 

As of December 31, 2017, the outstanding loans from foreign banks to Itaú Corpbanca were US$1,872 million with approximately 26 financial institutions from the U.S., Canada, Germany, France, England, Japan, Switzerland and other countries, including Latin America. The international global risk assets outstanding as of December 31, 2017 were US$2,734 million.

 

Itaú Corpbanca Colombia

 

Itaú Corpbanca Colombia provides a broad range of commercial and retail banking services to its customers in Colombia, operating principally in the cities of Bogotá, Medellín, Cali, Bucaramanga, Cartagena and Barranquilla. As of December 31, 2017, according to the Colombian Superintendency of Finance, Itaú Corpbanca Colombia was the sixth largest bank in Colombia in terms of total assets, the seventh largest bank in Colombia in terms of total loans and the seventh largest bank in Colombia, in terms of total deposits as reported under local regulatory and accounting principles.

 

As of December 31, 2017, Itaú Corpbanca Colombia had total assets of Ch$6,253,642 million (US$10,177 million), including total loans of Ch$4,479,791 million (US$7,290 million), total deposits of Ch$3,939,179 million (US$6,411 million) and total shareholders’ equity of Ch$621,428 million (US$1,011 million). As of December 31, 2017, Itaú Corpbanca Colombia had total net interest income of Ch$228,877 million (US$372.5 million) and a loss before tax of Ch$32,653 million (US$53.1 million). As of December 31, 2017, Itaú Corpbanca Colombia had 174 branches, 176 ATMs and 3,644 employees in Colombia and Panama.

 

New York Branch

 

Our New York Branch offers a wide range of credit operations and services to both Chilean and non-Chilean retail customers and large and medium-sized companies. Operating with an offshore foreign branch of a Chilean bank is especially attractive to clients abroad as it provides a sense of proximity and it allows us to accompany our customers as they operate overseas, responding to their needs and service requirements. Our target market on the liability side consists of retail customers with sophisticated financial needs, medium and large Chilean companies, Latin American companies, and Chilean and Latin American banks without offshore branch offices, among others. The New York Branch has a Yankee Certificate of Deposits program that is placed directly to clients or through U.S. dealers.

 

Our New York Branch supports the commercial needs of Chilean and Latin American companies doing business overseas. Another important service is the participation in syndicated loans, together with other international institutions, to finance a variety of investment projects. Our New York Branch also has a private banking unit to provide checking accounts and other associated services. As of December 31, 2017, the branch had US$1,703 million in assets.

 

Financial Services Offered Through Subsidiaries

 

We have made several strategic long-term investments in financial services companies in Chile (each of which are regulated and supervised by either the SBIF or the CMF), which are engaged in activities complementary to our core banking activities. Through wholly-owned subsidiaries, we intend to continue to develop a comprehensive financial services group able to meet the diverse financial needs of our current and potential clients. As of December 31, 2017, assets of our subsidiaries represented 0.8% of total consolidated. For the year ended December 31, 2017, net income of our subsidiaries totaled Ch$27,019 million (US$44.0 million).

 

The following table sets forth certain financial information with respect to our financial services subsidiaries as of December 31, 2015, 2016 and 2017, in millions of Chilean pesos. Amounts relating to inter-company transactions have not been removed for purposes of this table.

 

Financial Services Offered Through Subsidiaries

 

 

 

As of and for the Year Ended December 31,

 

 

 

2015

 

2016

 

2017

 

 

 

Assets

 

Equity

 

Net
Income

 

Assets

 

Equity

 

Net
Income

 

Assets

 

Equity

 

Net
Income

 

 

 

(in millions of Ch$)

 

Itaú Corpbanca Corredores de Bolsa S.A. (1)

 

 

 

 

56,121

 

39,482

 

365

 

118,651

 

42,567

 

(515

)

Itaú Adm. General de Fondos S.A. (2)

 

37,302

 

35,374

 

6,532

 

14,823

 

11,628

 

5,263

 

15,870

 

11,084

 

4,951

 

Itaú Asesorías Financieras S.A. (3)

 

 

 

 

4,473

 

3,207

 

3,031

 

2,865

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