Commercial Managementwith Social Impact

Fernando Ochoa Castillo

Quito, EcuadorMarch 2012

BancoEstado

2

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III. BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategic guidelines 2012 -2014

V. Final Conclusion

3,7%

-1,7%

5,2%

6,2%

4,0% - 4,5%

2008 2009 2010 2011 2012 E

7,1%

-1,4%

3,0%

4,4%

3,2%

2008 2009 2010 2011 2012 E

7,9%

11,0%

8,3%

7,2% 7,0%

2008 2009 2010 2011 2012 E

7,7%8,2%

4,3%

-4,5%

-0,4%

1,4%

2006 2007 2008 2009 2010 2011 Q3

3

Chilean Economy: Fundamentals (I)

GDP Growth Fiscal Surplus (% of GDP)

Unemployment rate (average)Anual inflation rate

4

19 1011

2026273033343636373940424344

50525261616667

7475818688

97109

148

184

ES

TO

NIA

CH

ILE

LUX

EM

BO

UR

GA

US

TR

ALI

AS

WIT

ZE

RLA

ND

NO

RW

AY

ME

XIC

ON

EW

ZE

ALA

ND

KO

RE

AS

WE

DE

NS

LOV

EN

IAC

AN

AD

AC

ZE

CH

RE

P.

SLO

VA

K

RE

P.

DE

NM

AR

KF

INLA

ND

TU

RK

EY

GE

RM

AN

YP

OLA

ND

SP

AIN

NE

TH

ER

LAN

DS

IRE

LAN

DU

SA

AU

ST

RIA

FR

AN

CE

HU

NG

AR

YIS

RA

EL

ICE

LAN

DU

.K.

PO

RT

UG

AL

BE

LGIU

MIT

ALY

GR

EE

CE

JAP

AN

3,7%

-1,7%

5,2%

6,2%

3,75%-5,25%

2008 2009 2010 2011 2012 E

Gross Debt Central Government (% of GDP)

Countries selected from lOECD, (dec. 2010)

Current Account (% of GDP)

INR and Sovereign Funds (US$ Billions) International Financial Position (% of GDP)

-1,9%

1,6%1,9%

-1,5%

-3,3%

2008 2009 2010 2011 2012 E

Chilean Economy: Fundamentals (II)

5

Financial Development

Appropriated level of financial development, although

there are still sectors of the population without access

(as % GDP) 1990 2000 2010

Bank Credits 52 69 72

Bank Productive Assets 78 87 87

Pension Fund Assets 25 48 67

Equity Securities 57 88 154

Insurance Company Assets 7 16 19

Company Bonds Stock 5 7 15

6

Number of Institutions 1974 - 2011

Competitive local banking industry, with high participation of foreign banks

Bank Industry: Competition

7

Positive institutional conditions that contribute to the resilience of local banks

Pro-Market financial regulation and risk based supervision

Diversified financial system, highly integrated to global markets

Leveled play field public banks operate under the same rules as private, except taxation

Efficient corporate governance with  professional management

Prevalence of  "traditional“ banking business  Solvent Banks with adequate liquidity

Bank Industry: Institutionality and Resilience

1,8%

2,4%2,5% 2,4%

2008 2009 2010 2011

8

18,9%

21,9% 21,8%

20,8%

2008 2009 2010 2011

12,2% 12,2%

14,3% 14,1%13,7%

2007 2008 2009 2010 2011

49,9%

44,6%

46,0%

48,0%

2008 2009 2010 2011

Risk Index Operative Efficiency

Basilea Index ROE

Bank Industry: Positive Results

9

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III.BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategic guidelines 2012 -2014

V. Final Conclusion

10

Central Features of BE

International Risk Classification: A +

Independence to set policies and allocate credit

Market lider in deposits, saving and microfinance

Social responsibility without granting subsidies  "efficiently banking”

Unique state commercial bank, with almost 160 years of history

Ranked third in total bank credit, with the most extensive coverage in the country

Profitable and high potential for sustained growth of assets and profits

11

Mision, Vision and Positioning

12

Ranking Category Level (US$)

#1 Savings MM 5.247

#2 Mortgage Credits MM 10.000

#3 Total Assets MM 43.203

#3 Total Allocations MM 26.041

#4 Effective Equity MM 3.308

#4 Profit before taxes MM 338

Ranking Category Level

#1

Geographical coverage:- Offices- Special service centers- Remote service centers- ATMs

341 867.1301.981

#1 Clients Base MM 8,5

#1

Service supplier to:- Goverrnment sector- Low income sector- Middle income sector

BancoEstado is a lider institution in Chile...

...with an unparalleled distribution network nationalwide

Activos y Canales

13

Products Clients Base Main competitors

Cash management, treasury services,

payments (salaries, pensions, suppliers)

Full matrix of public companies

•Large banks•Middle size foreign banks

Credit, treasury services, commerce financing,

payments

750 Corporative clients

•Large banks•Middle size foreign banks

Commercial credits, commerce financing

2.700 middle size company clients

•Large banks•Middle size local banks

Personal Banking, consumer credits,

insurances, mortgage credits, TCR and TD,

student credits, microcredits, mutual funds,

accounts payment

• MM 8,5 people• 428.000 microbusiness clients

• 25.700 small company clients

• 473.000 mortgage debtors

•Large banks•Middle size foreign and local banks

Comprehensive platform of services for all sizes of business and people

Ban

coE

stad

o s

ervi

ce d

eliv

ery

to f

ollo

win

g s

egm

ents

Government

Corporate

Middle size companies

Retail

Segments, products and client base

14

Provide financial services that complement the extensive menu offered by the bank

Subsidiaries

15

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III.BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategic guidelines 2012 -2014

V. Final Conclusion

16

Saving accounts (aug.2011)

We promote the family saving

Number of active clients: 7.6 millons

Inclusive Strategy: Family Saving

19

612

1.236

2.262

2.881

4.204

5.000

2006 2007 2008 2009 2010 2011 2012 *

17

Caja Vecina Accounts (thousands)

Active Rut Accounts (thousands)

We provide modern payment systems for all the chileans and small companies

1.003

2.000

3.327

4.564

7.130

10.000

2007 2008 2009 2010 2011 2012 *

Inclusive Strategy: Payment Systems

18

Amounts distribution (dec. 2011) Debtors distribution (dec.2011)

Average Debt:

Subsidized : US$ 10.700 Non Subsidized : US$ 42.500

We finance the purchase of popular houses

Debtors BE: 526.611 Stock: MM US$ 10.000

Inclusive Strategy: Family Assets Accumulation

19

We support the investment in human capital for low income families

Amounts Distribution (jun.2011) Clients Distribution (jun.2011)

Market: 400.000 clients Stock: MM US$ 2.850

Inclusive Strategy: Human Capital Accumulation

20

Credits to Small Companies Credits to Micro Companies

We promote entrepreneurshipment and business development

Inclusive Strategy: Business Development

21

We provide convenient insurance for families to transfer their principal risks

3.0883.328

3.739

4.1864.532

4.998

2006 2007 2008 2009 2010 2011

Number of current insurance policies (thousands)

Inclusive Strategy: Risk Transfer

22

Access to Bank Offices (% of districts total country)

We serve markets without alternative private suppliers

Inclusive Strategy: Complementing Markets

23

We promote competition through continuous 

promotional campaigns widely publicized

10

20

30

40

sep-08 nov-08 ene-09 mar-09 may-09 jul-09 ago-09

BANCOESTADO

SANTANDER

CHILE

BCI

Consume Credit Rate

Inclusive Strategy: Competition

24

(In MMUS$)

We make significant transfers to fund the Social Security Budget

Inclusive Strategy: Transfers to the Treasury

7.6 mm with savings accounts 4.2 mm with Rut accounts (debit) 2.1 mm in internet 1.6 mm receive their salary payments, pensions and

scholarships 828 m current credit cards 527 m with housing credits 464 m micro and small companies 450 m with consume or university credits 320 m with current account 108 m in mobile site 675 Public Institutions

Inclusive Strategy: Impact Synthesis

In short, millions of customers served, with diverse products, accessible to all families and businesses of all sizes

26

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III.BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategical guidelines 2012 -2014

V. Final reflexion

27

The “sudden stop” of private offer of credit

Net Total Credit Flow Private Banking and BE (in MMUS$)

Counter-Cyclic Strategy: Base Diagnosis

28Source: SBIF

Monthly real growth in bank credit and Basel Index

During capital constraint BE contributed to unlock the credit channel, while Private Banking increased capital gaps

Counter-Cyclic Strategy: Capital Constraint

29

BE also acted in line with the regional public banks to keep lending channel transmission

Counter-Cyclic Strategy: Relative Momentum (I)

30

Financiamiento Empresas(flujos netos en millones de US$ a mayo 2009)

A) Includes private and public companies debt

Other internal and external credit suppliers validated the credit risk strategy of BE

0

1.000

2.000

3.000

4.000

1.242 1.918 3.639

2007 2008 2009

Corporative Bonds traded in Chile

(in Billion $)

Counter-Cyclic Strategy: Relative Momentum (II)

B) Includes short-term and long-term debt of non-financial companies plus accrued interest to April 2009

31

Attractive credit offer at very competitive prices, anticipating even the Monetary Policy Rate reductions;

Unique focus in loan growth;

We provide financial support to viable businesses of all sizes and people of all levels;

We work closely with customers by establishing alliances with real estate agents (72 hours) and unions;

We use all available state guarantees, and

We carry out campaigns, fairs and open on Saturdays

We design and apply an innovative strategy to address the uncertain economic situation

Counter-Cyclic Strategy: Specific Actions

32

Strategic Priorities

• Increase credits in 11% additional offer of US$ 2.000 millons respect to 2008

• Increase our market share in 1%

• Maintain the level of credit risk under control via intensive relievers

Counter-Cyclic Strategy: Overall goals

33

The “FOGAPE” Fund (Small business guarantee fund) grew at record level, led by BE

Participation in number of operations, december 2009

Rebate in fees: 50%

Counter-Cyclic Strategy: Credit guarantees for companies

34

Largest percentage of guarantees, grants offer, and lower prices resulted in an increase of demand for these

loans, concentrating supply in small size ones

Participation by debt segment(%)

Counter-Cyclic Strategy: Home credit guarantees

35

We were aggressive in the supply of credit to SMEs and send clear signals to the competence

Counter-Cyclic Strategy: Signals to the market

Counter-Cyclic supply in all the products……

Counter-Cyclic Strategy: Supply growth (I)

37

We met the growth targets in all segments

Counter-Cyclic Strategy: Supply growth (II)

38

14,9%

21,2%

15,2%

10,4%

20,4%

23,7%

16,6%

13,7%

8%

13%

18%

23%

28%

Jun08 Dic08 Jun09 Dic09 Jun10 Dic10 Jun11 Dic11

ESTADO

SISTEMA

Loan loss provisions / Operational Income (%)

The maintenance of standards and use of guarantees keep risk under control

Source: SBIF and BancoEstado

Counter-Cyclic Strategy: Credit Risk

39

17,7%20,3%

24,4% 23,2%

28,0%

11,2%

14,8%15,9%

5%

15%

25%

Jun08 Dic08 Jun09 Dic09 Jun10 Dic10 Jun11 Dic11

BANCOESTADO

SISTEMA

ROE (results / capital plus reservs)

Source: SBIF and BancoEstado

Limited profitability sacrifice with high growth

Counter-Cyclic Strategy: Profitability

40

The Capital injection in BE helped ensure its solvency and boost lending channel

Actualizar 2010 y 2011

11,1%10,8% 10,9%

12,4%12,1%

12,6%12,5%12,2%

12,5%

14,3% 14,1%13,7%

Dic-06 Dic-07 Dic-08 Dic-09 Dic-10 Dic-11

BancoEstadoSistema

Basel Index

Counter-Cyclic Strategy: Solvency

41

Credit Distribution by Economic Activity(stocks in %)

High historical importance of housing and the recent increase of Agriculture in BancoEstado portfolio

Counter-Cyclic Strategy

42

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III.BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategic guidelines 2012 -2014

V. Final Conclusion

Extending and deepening bankarization

Keep long term relationships with clients

Increase efficiency and keep risk controlled

Improve continuously critical internal processes

Increase transparency to our clients

2012 Challenges

44

Strategic Map focused in commercial management with high social impact

Strategic Map 2012-2014

45

AGENDA

I. Institutional and macroeconomic framework

II. Institutional design

III.BancoEstado: its financial inclusion strategy

IV. BancoEstado: its counter-cyclic strategy

V. Strategical guidelines 2012 -2014

V. Final Conclusion

46

• To promote the financial inclusion of the people

• To play a counter-cyclical role and introduce more competition in the industry

• To support public policies and contribute to the modernization of the State

• To promote entrepreneurship and business development

• To mobilize family savings

• To improve the financial education of the population

¿Why a Public Bank is necessary?

Final Conclusion

47

BancoEstado experience in Chile, as well as other public banks, shows that these institutions can play an important role in times of crisis, ensuring the credit transmission channel, and helping to minimize the socio-economic impact resulting from these recurring events

Risk perception and strategies implemented by BE in the global financial crisis was validated by other internal and external suppliers of credit and, most importantly, its management strengthened the public confidence in general, and clients in particular in BE and the local banking system as a whole.

In the future, to be effective in its role in the process of "credit easing", a public bank solvent (well capitalized) is a must, with market relevance, managed efficiently (profitable) and able to keep the risk controlled

Final Conclusion

THANKS

ANNEX

50

“CajaVecina”: A small electronic channel operating in isolated locations or stores suburbs

Electronic Device

• On line operations• Receipts delivery• Effective control on line

Is our direct supplier of financial services

Advantages• Commissions• Increase of sales• Local differentiation• Client fidelization

Operations• Deposits• Transfers• Balance information• Payment of credits• Payment of services

Advantages• Time saving• Extended hours service• Increased security

CLIENT STORE BANK

POS

51

Ejxecutive

Cajsh

0

20

40

60

80

1s t Qtr 2nd Qtr

Internet

Electronic Channels *85% (47.307.531 tx/month)

Attendance Channels15% (7.201.057 tx/month)

Table

The Client choose where, how and

when served

Caja Vecina

Specialized Platforms

Mail

KioscoWeb

Information Dispenser

Buzoneras

Assisted Phone

Automatic Phone (IVR)

POS

ServiEstado

Attendance Models

Value offer

In BancoEstado 85% transaction is effected through Electronic Channels

SMSSMS

FAXFAX

* Canales soportados en tecnología