Estudios y Planificacin CHILEAN BANKING INDUSTRY Arturo Tagle
March 19, 2002
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Estudios y Planificacin Financial System Financial System
Financial System Banking Industry US$45 Billion of loans Banking
Industry US$45 Billion of loans Pension Funds US$36 Billion of
funds under management Pension Funds US$36 Billion of funds under
management Insurance Companies US$12 Billion of financial
investments Insurance Companies US$12 Billion of financial
investments
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Estudios y Planificacin Total Loans / GDP
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Estudios y Planificacin Total Loans / GDP (e) (As of December
31,2001)
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Estudios y Planificacin Number of Participants Loans (1) Net
Income (1) Net of Interbank Loans Source: Superintendency of Banks.
Chilean Financial System (As of December 31,2001)
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Estudios y Planificacin December 2001 December 1995 Share of
Loans (1) held by Top five Private Banks December 2001 December
1995 Share of Loans (1) held by foreign Banks Source:
Superintendency of Banks. (1) Exclude interbank loans. Industrys
Structural Change Banking Consolidation Underway...
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Estudios y Planificacin Loans Evolution (In Million of Nominal
Ch$) CAGR: 9,1%
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Estudios y Planificacin Source: Superintendency of Banks. (1)
Net of interbank loans. Loan Market Share (1) (As of December
31,2001)
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Estudios y Planificacin Deposits Evolution (1) (In Million of
Nominal Ch$) CAGR: 10,4% (1) Time Deposits and Saving Account.
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Estudios y Planificacin Checking Account (In Million of Nominal
Ch$) Source: Superintendency of Banks. CAGR: 9,1%
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Estudios y Planificacin Systems Loan Mix & Main Liabilities
(As of December 31,2001) Source: Superintendency of Banks. (1)
Exclude interbank loans. Systems Loan Mix (1) Main Liabilities
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Estudios y Planificacin Main Products and Services Loans
Consumer Commercial Credit Lines Credit Cards Mortgage Lease
Contracts Factoring Foreign trade Contingent Liabilities Time
Deposits Saving Accounts Checking Accounts Retirement Saving Acc
Bonds Services Stock Brokerage Mutual Fund Financial Advisory
Investment Fund Previsional Fund Insurance Brockerage Automatic
Bill Payments Collections Payroll Payments Financial Currency
Forwards Swaps Interest rate Futures Currency trading Investments
under agreements to resell or repurchase. Others Debit Cards
On-Line Funds Transfers 24 hrs. Selfservice Sites ATMs
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Estudios y Planificacin Credit Quality
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Estudios y Planificacin Basles Indicators 2001 (In Million of
Ch$, except for percentages)
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Estudios y Planificacin Income Diversification &
Efficiency
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Estudios y Planificacin Average interest rate spread (Interest
rate charged - Interest rate paid) (1) (1) In terms of 90-365 day
real rates.
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Estudios y Planificacin Profitability Evolution
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Estudios y Planificacin Source: Superintendency of Banks.
Unconsolidated data. (1) In US$ Millions as of December 31, 2001
(2) Data under 2001 correspond to June 2001. Chilean Financial
System (3) Net Interes Revenue over Average Interest Earning Assets
(4) Operating Expenses over Operating Revenues
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Estudios y Planificacin Banco de Chile: after the merger with
Banco Edwards The largest bank in Chile
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Estudios y Planificacin The Chile Edwards transaction May -June
01: Studies were conducted by both banks. End of June 01: formal
negotiations started. Each bank retained an investment bank as its
advisor. August 01: -Boards of Directors announced they had reached
an agreement. - Authorizations requests were presented (Central
Bank, Superintendency of Banks and the SEC). - A team of executives
and employees of both banks were appointed to establish the Merger
Planning Office. October 01: Central Bank and Superintendency gave
their approval December 01: after the approval by the SEC, the
Shareholders Meetings of both banks voted in favor of the merger.
January 02: The merger becomes effective
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Estudios y Planificacin The Chile - Edwards transaction: The
financial merits of the merger: The transaction was considered
accretive to both banks shareholders at relative valuation agreed
34:66. An in-market combination between Banco de Chile and Banco
Edwards is also expected to generate significant strategic value
Creation of the largest bank in Chile Improve economies of scale
and extract significant cost savings Enhance access to capital by
combining pools of stock liquidity The transaction is not only an
offensive move but also defensive Blocks the ability of BBVA,
Citibank and HSBC to become serious players in Chile As in any
merger, there are risks that need to be incurred to create the
expected value
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Estudios y Planificacin Acquisition premium for Edwards was 32%
Distribution of control premiums 3 (U.S.) 1993-2000 Number of
transactions Acquisition premiums over market price 2 Chilean
transactions % U.S. acquisition premiums Median (%) Implied premium
over Edwards price 1 = 32.3% Average: 35.6% 1 Implied premium over
30 days average price based on 34:66 relative valuations 2 Market
price calculated as average of share price one month prior to
announcement 3 Premium: final offe r vs. price five days prior to
announcement Source: JP Morgan
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Estudios y Planificacin The transaction strategic value
Economies of scale Cost synergies Stock liquidity Improved
Subordinated debt servicing
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Estudios y Planificacin Scale and profitability in Latin Amrica
1 Assets value adjusted for international accounting standards 2 In
the case of Inverlat, ROE was used instead of ROAE Source:
superintendencies, JPMorgan research Brazil ROAE (%) Assets (US$MM)
Chile 1 Santander Santiago Chile BCI Edwards BHIF Security
Sudamericano BICE ROAE (%) Assets (US$MM) Argentina ROAE (%) Assets
(US$MM) Mexico 2 ROAE (%) Assets (US$MM) As of December 2000
Economies of scale
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Estudios y Planificacin Cost sinergies Cost synergies Synergies
and restructuring charges 1,2 US$MM 37% of Edwards 2001E operating
expenses 4
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Estudios y Planificacin Stock liquidity Stock liquidity 1
Calculated as average trading volume from 01/02/01 to 7/31/01
Average daily trading volume 1 US$ thousands
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Estudios y Planificacin Header (14pt Bold)27 Property structure
of the Bank (07.01.2002)
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Estudios y Planificacin Header (14pt Bold)28 52.16% 8.88%
38.96% 100.0% 52.16% 8.88% 38.96% 100.0% LQ (Luksic Group) J.Ergas
Others (Float) TOTAL 10.42% Direct Float Ownership of Banco de
Chile after the merger
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Estudios y Planificacin Header (14pt Bold)29 Learning from
previous experiences TECHNOLOGY Early option for one of the
existing platforms. Two-Step Technologic Integration:
interconnection of two platforms full integration in one platform
TECHNOLOGY Early option for one of the existing platforms. Two-Step
Technologic Integration: interconnection of two platforms full
integration in one platform CLIENT SERVICE client retention
incentives. early definition of account officer for each client.
Account officer maintained in segments of Indiv.& Middle Mkt.
Co. CLIENT SERVICE client retention incentives. early definition of
account officer for each client. Account officer maintained in
segments of Indiv.& Middle Mkt. Co.
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Estudios y Planificacin Header (14pt Bold)30 Resulting
Mainframe Loans (Net) Mill.US$ 8,84919.5% Deposits Mill.US$
10,41919.3% Allowances Mill.US$ 28025.6% Investments Mill.US$
2,28318.7% BCH+BE Mkt share ROAE15.9%15.8% ROAA 1.2% 1.2% NIM 4.2%
4.6% Efficiency (*) 54.9% 52.0% Past Due / Total Loans 2.1% 1.6%
Allowances/ PD 186% 166% BCH + BE Systems average Branches #
28120.4% ATM # 67125.9% ATM Transac. #Th. 3,62225.9% Current
Accounts #Th. 359 27.4% Credit cards #Th. 31119.7% (*) Efficiency
without depreciation & amortization. Source: Superintendency of
Banks and Financial Institutions.
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Estudios y Planificacin Header (14pt Bold)31 BANCO DE CHILE
(100%) BANCO DE CHILE (100%) Large Corporations 14% Large
Corporations 14% Other Financial Services 9% Other Financial
Services 9% International Banking 5% International Banking 5%
Treasury and Money Mkt. Oper. 14% Treasury and Money Mkt. Oper. 14%
Middle Market Banking 24% Middle Market Banking 24% Retail Banking
34% Retail Banking 34% Consolidated Gross Margin (%) Business
Structure
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Estudios y Planificacin Header (14pt Bold)32 Large Companies
Middle Mkt Companies Individuals CrediChile (Consumer) Outstanding
Loans BCH+BE By Market Segment (Jan.02) Loan Portfolio
Allocation
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Estudios y Planificacin Header (14pt Bold)33 Net Interest
Revenue Fees Oth. Op. Inc., net Total 100% 573 Mill.US$ Operating
Revenues & Expenses (BCh+BE) 51.1% 41.1% 51.1% 41.1% 7.8%
Salaries & Personnel Admin. Expenses Deprec.& Amortization
Total 100% 342 Mill.US$ Operating Revenues Operating Expenses
Efficiency Merger costs deducted (1) 82.8% 14.7% 2.5% 59.6 % 51.5%
56.2 % 54.9 %