Annual Report BancoEstado 2005 · Luis Alberto Soto Illanes Director Pablo Silva Manríquez Labor...

02 Annual Report BancoEstado 2005

MissionTo be a company that is a source of pride to Chileans for the

quality and coverage of its services; the warmth of its attention;

and its contribution to the country’s growth, financial system

modernization, and social integration, by giving priority to

ensuring broad access to banking services.

BackgroundA bank with a long history, BancoEstado’s story goes back

to 1855, with the creation of the Caja de Crédito Hipotecario

(a mortgage institution), just a few decades after Chile’s

Declaration of Independence. In 2005, the bank celebrated

its 150th anniversary, with the presence of Ricardo Lagos,

the President of Chile.

The merger of the Caja de Crédito Hipotecario with the

Caja Nacional de Ahorros (a savings bank, 1910), the Caja

de Crédito Agrario (a farm-oriented bank, 1925) and the

Instituto de Crédito Industrial (a manufacturing-oriented

bank, 1928) gave rise to the Banco del Estado de Chile

(Chile’s state bank) on 12 June 1953.

Letter from the Chairman

Banco del Estado de Chile (BancoEstado) achieved solid

and promising commercial and financial results in 2005, a

source of pride to employees and management alike.

Modernization, an integral part of the Bank’s growth strategy,

has made BancoEstado highly competitive, as revealed by

different financial and commercial indicators where it has

outperformed the system overall and its peer competition.

It is also a sector leader in providing access to financial

services to low-income people traditionally excluded from the

banking system, thus contributing to social integration.

In terms of its financial results, the Bank’s return on equity

(before-tax profits over capital and reserves) reached 24.4%,

outperforming its own record in the previous five years and

the financial system average. Profits for this fiscal year

reached 39.5 billion pesos, with before-tax net income

reaching 99.1 billion pesos (US$ 192.7 million).

BancoEstado’s risk indicators are lower than the system

average, while its international credit risk rating ranks it the

best financial institution in Chile and Latin America.

In 2005, BancoEstado saw its net interbank loans rise 14.4%.

Its commercial loans rose 15.3%, again outperforming the

system, while consumer loans were up 14.0% and mortgages

rose 15.4%. The Bank’s market share in total loans reached

13.3%, maintaining its ranking as the third largest bank in

the domestic market.


It also signed new or expanded existing agreements with

retailers such as Líder, Hyundai, La Polar, Deca and others,

generating synergies and new strengths, to provide more

integral services to Bank clients.

All this progress has been based on steady advances in the

bank’s efficiency, which was reflected in the improvement

shown by the cost-income ratio from 65.8% in 2004 to

62.4% in 2005.

The Bank also opened a New York branch, the first of its

kind in this city in recent years, in order to accompany its

customers as the economy internationalizes and to add

value to the Bank’s business.

Along with these good results, the Bank plays an important

social role, as per its mission as a public body, which consists

of providing major financial instruments to the population,

especially to those earning low incomes, thus helping to

improve their welfare.

The BancoEstado’s active participation and leadership in

expanding access to financial markets favors competition

and contributes to correcting currently insufficient banking

coverage.

In fact, the Bank is a national leader in terms of family

savings, with around 8 million customers. It also has the

largest branch network, with 312 branches and 42 special

access points (Puntos de Atención de Cercanía). It is the only

bank in 41% of Chile’s 346 municipal areas (comunas).

It is also the leader in the housing loans market, serving mainly

low-income borrowers. Two of every three families with bank

mortgages have obtained them through BancoEstado.

The Bank supports the investment in human capital in the

country. Around 45% of the students with bank loans for

higher education have got them from BancoEstado.

In the insurance banking, we are offering general and life

insurance to a much broader public, to ensure that this

coverage is available to middle- and low-income people.

In 2005, the stock of insurance policies reached over 2.7

million, held by 1.3 million customers.

The Bank’s share in the financing of microbusinesses is

close to 50%, with a 170,000-client portfolio. In 2005, it helped

to organize a regional summit on microcredit, the Latin

America/Caribbean Region Microcredit Summit Meeting,

the most important international meeting ever held on this

subject in Chile.

Moreover, 1.2 million Chileans receive regular payments of

their wages, pensions and scholarships through the Bank.

This integral progress by the BancoEstado is appreciated

by its customers and society as a whole, as the many

external awards received this fiscal year attest. This was

also recognized in the speech given by Ricardo Lagos, the

President of Chile, during the ceremony celebrating our

150th anniversary since the creation of the Caja de Crédito

Hipotecario, one of the financial institutions that gave rise

to this bank.

As for the future, the Bank must continue to modernize to

fulfi ll its mission of providing bank services to simultaneously

serve excluded sectors and maintain its positive fi nancial

and commercial results. This means it must continue to

increase effi ciency and apply new technologies, so that it

can offer more and better services, above all to Chileans

who do not yet have access to fi nancial products.

Our aspiration is to be a company that makes Chileans

proud of its quality and the coverage of its services, of its

contribution to the country’s growth and the modernization

of the fi nancial system, giving priority to social integration

through serving everyone.

During this fi scal year, we developed the Bank’s Strategic

Development Plan through 2010. Its main objectives include

increasing our clients from 8 million to 12 million and boosting

the value of services provided to them by 50%.

In this sense, BancoEstado started in 2005 with the preparation

and implementation of major projects offering banking

services to still unbanked populations: the Neighborhood

Teller (Caja Vecina), a new form of service complementing

existing ones, to expand coverage in distant or isolated

areas; the RUT Account (Cuenta RUT), a new, electronic and

massive means of payment; and the future issue of several

million electronic cards for users of Santiago’s new public

transport system, Transantiago.

Although the magnitude of the challenges is enormous, the

results obtained so far and BancoEstado employees’ profound

compromise to their clients allow us to be optimistic about

the task of banking the still unbanked and thus contributing

to social cohesion and national progress. In short, the year

2005 has brought signifi cant progress in terms of building

a modern, effi cient and socially committed BancoEstado,

which promotes Chile’s development.

Javier Etcheberry CelhayChairman


Senior Officers

BOaRD OF DIRECTORS


Jorge Marshall RiveraVice Chairman

Vivianne Blanlot SozaDirector

José Pablo Arellano MarínDirector

Genaro Arriagada HerreraDirector

Luis Alberto Soto IllanesDirector

Pablo Silva ManríquezLabor Director

Manuel Soza HuertaAlternate Labor Director



Vivianne Blanlot SozaDirector

Luis alberto Soto IllanesDirector

Genaro arriagada HerreraDirector

José Manuel Mena ValenciaChief Executive Officer

José Pablo arellano MarínDirector

0� Annual Report BancoEstado 2005

auDIT COMMITTEE

José Pablo Arellano MarínPresident

Genaro Arriagada Herrera

Javier Etcheberry Celhay

Juan Carlos Méndez González

ExECuTIVE COMMITTEE, GEnERaL

COunSEL, COnTROLLER



José Manuel Mena ValenciaChief Executive Officer

Alberto Chacón OyanedelGeneral Counsel

Jessica López SaffieController

Pablo Silva ManríquezLabor Director

Manuel Soza Huertaalternate Labor Director

alberto Chacón OyanedelGeneral Counsel

Jessica López SaffieController

Management

SuBSIDIaRY GEnERaL ManaGERS

Edgardo Cabañas CardemilBancoEstado S.A. Corredores de Bolsa

Mario Duque ArredondoBancoEstado S.A. Administradora General de Fondos

Humberto Gómez CisternasBancoEstado Centro de Servicios S.A.

Guillermo González CuetoBancoEstado Servicios de Cobranza S.A.

Iván León AvilaGlobalnet Comunicaciones Financieras S.A.

Soledad Ovando GreenBancoEstado Microempresas S.A. Asesorías Financieras

Enrique Schaub WeidlinBancoEstado Contacto 24 horas S.A.

Fernando Silva SegoviaBancoEstado Corredores de Seguros S.A.

SEnIOR ManaGEMEnT

Arnoldo Courard BullGeneral Manager of Credit Carlos Martabit ScaffGeneral Manager of Finance

María Magdalena Aninat SalasGeneral Manager of Administration

Fernando León SadeOperations and Systems Division Manager

Victoria Martínez OcamicaBranches and Electronic Banking Division Manager

Francisco Mobarec AsfuraCorporate Risk Manager


ManaGERS

Eugenia aguilar Rozasnorthern Branches

Cristián aylwin Jolfre Financial Control

Hernán Baeza JaraCustomer Service

arturo Barrios almarzaMass Banking Processes

antonio Bertrand HermosillaFinancial Resources

alexander Best SepúlvedaFactoring

Humberto Cipriano ZamoranoSouthern Branches

Víctor Coddou BragaCorporate Banking

Rodrigo Collado LizamaInformation and Technology

Camilo Concha BurgosBusiness Banking

Sebastián Del Campo EdwardsPersonal Banking

Eduardo De Las Heras ValPersonal, Micro- and Small Business Risk

Jorge Fernández CorreaCommunications

Emiliano Figueroa SandovalCredit normalization and Institutional Banking

Oscar González narbonaPlanning and Studies

Pedro González ReyesWelfare

Marcos Gaínza aragonés accounting and Management

Darko Homan Varljen Logistics

Pablo Mayorga VásquezInternational Business

Pedro Peña BarrachinaProjects

Jaime Pizarro TapiaSmall Business

andrés Prieto Del RíoLegal

aldo Raglianti López Corporate Processes

José antonio Rojas Bustosadmission Company Risk

Juan José Ruiz GonzálezSales and Service Model

Hernán Saavedra ParraDistance Banking

Juan Pablo Silva PradoDirector of Compliance and Operating Security

Jorge Stuardo LuengoMetropolitan Region

Gastón Suárez CrothersMarketing

Pablo uribe TapiaHuman Resources

Highlights


FIRST SEMESTER

• ServiEstado, a BancoEstado subsidiary to facilitate payment of bills, services, credits, collections under agreements and taxes, and deposits and withdrawals from any account, started up. By December there were 10 branches.

• Almost 1,200 delegates from 38 countries came to Santiago to participate in the Latin America/Caribbean Region Microcredit Summit Meeting, organized by BancoEstado, Caja de Compensación Los Andes, Desafío and the Microcredit Summit Campaign. Speakers at the meeting included Queen Sofía of Spain and the President of Chile, Ricardo Lagos.

• The Muhammad Yunus Award to the Micro-Entrepreneur of the Year was established, in honor of the economist who founded the Grameen Bank in Bangladesh. • Together with the World Savings Banks Institute (WSBI) and as part of the International Year of Microcredit, 2005, BancoEstado organized the WSBI’s 11th Annual Latin America and the Caribbean Regional Group Meeting in Santiago, which culminated in a savings mobilization resolution for the region. • With demand almost doubling supply, BancoEstado S.A. Corredores de Bolsa (BancoEstado’s stock brokerage) successfully placed a subordinate bond worth US$ 140 million in the domestic financial market, which received an “AA” rating from the Feller Rate agency.

• The Bank expanded financing to artesanal fishing in the Third and Fourth regions, which covered replacement of working materials, electronic check books with life insurance, financing for organizations, mortgages and higher education loans, all channeled through an agreement with the regional fishing federation, the Federación de Pescadores y Mariscadores.

• The 3rd BancoEstado real estate fair, Feria Inmobiliaria BancoEstado, brought together Chile’s main real estate and building firms in Santiago in a major exposition highlight the supply in this sector.

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SECOnD SEMESTER

• The Administrador Financiero de Transantiago (AFT), which is the body responsible for the financial aspects of Santiago’s new public transportation system, Transantiago, and the Ministry of Transport and Telecommunications, signed a contract covering Plan Transantiago. BancoEstado, the Bank of Chile, the Santander Bank, BCI, CMR Falabella and Sonda all participate in the AFT.

• An agreement between BancoEstado and Presto Red (Líder supermarkets) on interconnecting automatic telling machines (ATMs) started up, adding 64 ATMs in high-use areas to the Bank’s network.

• The Bank signed an agreement with the La Polar department store to benefit several million customers. The first stage will involve providing them with access to ATMs.

• Marketing of mutual funds throughout the BancoEstado branch network began, thereby increasing our customers’ alternatives for investment, through a wide range of financial products offering greater benefits.

• The Bank signed an agreement with the National Sports Institute (Instituto Nacional del Deporte) to make available headquarters, multi-use playing fields and gymnasiums.

• It signed an agreement with the Deca supermarket chain in the Third and Fourth Regions, creating the Deca-BancoEstado credit card.

• It sponsored the United Nations Development Programme (UNDP) Global Microentrepreneurialship Award, granted to ten firms in northern and southern Chile, all of which will receive financial advisory from BancoEstado.

• It inaugurated its first branch in New York, at 400 Park Avenue, to attend public institutions and firms and serve as a link between Bank management and customers normally operating abroad.

• BancoEstado Chairman, Javier Etcheberry, announced the creation of the Cuenta RUT (RUT account), which provides all Chileans and foreign residents in Chile access to a bank account.

• In El Carmen (Eighth Region), the Bank opened its first Neighborhood Teller (Caja Vecina), allowing customers in isolated areas to make cash deposits and withdrawals. • It formed a strategic alliance with Asexma Chile to extend the supply of financial services to small and medium-sized firms.

• The Small Business Guarantee Fund (Fondo de Garantía para el Pequeño Empresario, FOGAPE), administered by BancoEstado, carried out its fifth auction of funds, for a total of US$ 390 million in the year 2005.

• It announced the launching, in January 2006, of the Maximum Savings Account, Cuenta de Ahorro Máxima, to reward long-term family savings with an additional rate of 0.7% annually. Interest rates on other nominal accounts were also raised, particularly electronic ones.

Highlights


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BanCOESTaDO CELEBRaTED 150 YEaRS OF SERVICE TO CHILE

During a ceremony held on 31 August, in the presence of the President of Chile, Ricardo Lagos, BancoEstado celebrated the 150th anniversary of the creation of the Caja de Crédito Hipotecario, one of the institutions that initially merged to create the Bank. Bank Chairman, Javier Etcheberry, announced that the Bank would work to expand its customer base to 12 million and increase the value of services provided by 50% for the year 2010.

In his speech, President Lagos said that along with the powers of the State, BancoEstado and the institutions on which it was founded, “have contributed to forge the foundations of the State of Chile and its economic institutions.” He emphasized that “one of every two Chileans is or has been a customer of BancoEstado at some point in their lives, because this Bank belongs to all Chileans and they trust it.” He also underlined the importance of BancoEstado’s modernization, to keep up with the times, compete in a globalized world, remain profitable and fulfill its mission as a public bank. He ended his speech saying that “we are making an effort to ensure we have a State capable of responding to the challenges the country will face in the 21st century. It is examples like the BancoEstado, which make us certain that this is possible.”

BanCOESTaDO: CuSTOMER - FOCuSED ManaGEMEnT

ECOnOMIC OuTLOOK

Chilean Economy: Consolidating Growth

The Banking Industry in 2005 and the Forecast for 2006

BanCOESTaDO ManaGEMEnT

Commercial Management and Social Responsibility

Financial Management

Risk Management

a BanK OPEn TO THE FuTuRE

Strategic alliance with Workers

Business alliances

new Projects

SuBSIDIaRIES

IN gROwTh

OvER ThE yEARS, BANCOESTADO, A MODERN AND OPEN FINANCIAL INSTITUTION,

hAS DEvELOPED INTO A STRONg COMPETITOR IN ALL OF ThE NATION’S

MARkETS.

CHILEan ECOnOMY:

COnSOLIDaTInG GROWTH

For the second consecutive year, the Chilean economy grew more than 6% in 2005, driven by domestic demand, which rose around 11%, and favorable external conditions which also generated new jobs. Chile grew more than the world economy and its main trading partners.

Economic Outlook

The high international copper price and liquidity contributed to peso appreciation against the dollar, with the exchange rate reaching from 510-520 pesos per dollar by the end of 2005. In real terms this rate was similar to 2000. This trend should turn around somewhat when international conditions return to normal.

In Chile, increased spending and the higher international oil price caused inflation to rise slightly, leading the Central Bank to tighten monetary policy to safeguard the main objective of economic policy: growth with stability, amidst balanced external prices and fiscal budget restraint. From the second quarter of 2005 onward, the Central Bank increased the monetary policy rate more swiftly, taking it to 4.5% by year’s end, an increase of 225 basis points for the year.

Fiscal policy remained within the structural surplus rule of 1% of GDP. The high international copper price and domestic activity increased general government revenues, with the accounting surplus reaching more than 4% of GDP; a substantial part of these resources were allocated to debt prepayment.

One important driver of domestic demand was real investment, encouraged by good economic prospects and low financing costs, which took the investment rate to a record 29% of GDP, measured in 1996 pesos.

Strong growth of manufacturing countries, such as China and India, drove commodity prices up to record levels in international markets. This improved Chile’s terms of trade. In this context, external accounts again posted a significant trade surplus, which reached US$ 9.2 billion, and a balanced current account. Exports soared to over US$ 39.5 billion, while imports rose to US$ 30.3 billion, led by capital goods, which rose 53%.

TradingPartners**

Chile

world*

Chile, Trading Partners’ and World GDP, Past and Projected, 2003-2006 (annual growth, %)

Source: Banco Central

(*) Represents �7% of world GDP. (**) Countries included: 91% of total exports.


These solid economic results were also reflected in international perception of Chile. The World Economic Forum’s 2005 competitiveness index ranked Chile first in Latin America, fourth among emerging economies and 23rd of a total 117 countries surveyed. Moreover, it ranked Chile first in macroeconomic policy management. The trade agreement with China, plus previous agreements with the European Union, the United States, South Korea and the European Free Trade Association also contributed to improving Chile’s position internationally.

The favorable external scenario of 2005 is expected to continue this year. A slowdown forecast for China has not materialized, the United States continues to perform well, and Japan’s prospects are looking up. In the copper market, the lack of major projects and considerable world demand also counsel optimism.

Some risks do exist, within this promising outlook, which could hamper world economic growth. The imbalance in the US and China’s external accounts and possible propagation of avian flu from Asia throughout the world, must be considered. Despite their persistence, these threats have become less relevant over time and it is thought that if they occur, their impact will be minor.

In short, the solid and skillful management of Chile’s economy combined with favorable external conditions have allowed growth to consolidate and approach trend growth. Along with business confidence, expressed in record increases in investment, this opens the way for strong development in 2006 and beyond.

(*) Gross Fixed Capital Formation (GFCF) / GDP Source: Banco Central

Domestic Demand and Investment, 2000-2005

Investment Rate*

Domestic Demand

annual Change,%Investment Rate

TRANSCENDINg IN REALIzINg DREAMS

BANCOESTADO PROvIDES ONgOINg SUPPORT TO ALL OF ITS CUSTOMERS,

ESPECIALLy ThOSE wITh LIMITED RESOURCES, IN kEEPINg wITh ITS STEADFAST

COMMITMENT TO ASSISTINg ThE ADvANCEMENT OF ALL ChILEANS.

BancoEstado Management

During the 2005 fiscal year, BancoEstado achieved favorable management results that made it possible to meet the main commercial and financial objectives set for the year.

Through management with excellence, the Bank improved its efficiency and increased its competitiveness, which led to greater customer access to financial services.

The efficiency index, measured using the industry standard, operational and administrative expenses over the gross margin, improved by 3.4 percentage points, dropping from 65.8% in 2004 to 62.4% in 2005. This completed a 12.1 percentage points improvement for the six years between 2000-2005, reducing the gap with other institutions in this sector.

This progress has made it possible to improve the Bank’s market share and consolidate its ranking as Chile’s third largest bank.

The foundations for BancoEstado’s progress lie in its relationship with its own clients, which has been essential to overcoming the effect of falling revenues from the fiscal account (Cuenta Única Fiscal) in recent years. To date, Bank results depend primarily on the quality of its customer management.

The search for excellent service quality has brought significant progress in terms of reduced costs and response times, along with better standards. This has been confirmed by a wide range of independent indicators, which have confirmed the public’s positive views about BancoEstado.

These achievements were the result of an integrated modernization process, applied through many different initiatives and projects. These included implementation in 2005 of a new model for sales and customer service (Modelo de Atención y Ventas, MAV) at the Metropolitan Region level and as a pilot program in other regions.

* not consolidated. Source: SBIF

BancoEstado Efficiency Index*(administrative expenditures / gross margin)


THE nEW SERVICE anD SaLES MODEL (MaV)

In its 2006-2010 Strategic Plan, BancoEstado set itself the goal of becoming one of the best banks in the world in terms of efficiency, service excellence and employee quality of life. To do so, the new sales and service model (Modelo de Atención y Ventas, MAV) is fundamental.

MAV should bring a qualitative leap in service to individual customers. It requires more knowledge about them, combined with profound and simultaneous changes in many areas. It is essential to offer new value-added products to customers, with the commercial area providing branch management with strong support.

Strengthening branches’ role as sales centers, by increasing time going to generating business and transferring operating tasks, is also essential. The third pillar of MAV is creating or strengthening central areas that can absorb operating tasks, achieving benefits through centralization and specialization.

This fiscal year, the MAV was implemented in 86 branches in Metropolitan Santiago and through three pilot programs in regions, generating higher sales and better results on the transference of transactions. Credit to individuals rose 29% (in offices without this model, 7%), the number of checking accounts 57% (without the model, 15%), lines of credit 89% (without the model, 50%) and credit cards 167% (without the model, 25%). Similarly, the migration of deposits from traditional tellers to self-service rose 230%.

The next challenge in 2006 will be applying MAV in the other 213 branches in Chile.

COMMERCIaL ManaGEMEnT anD SOCIaL

RESPOnSIBILITY

Several indicators reflect BancoEstado’s solid commercial management in 2005. In numerous cases the Bank outperformed its own targets. During the fiscal year, the Bank’s total loans, led by mortgages, consumer and commercial loans, grew strongly over 2004, in some cases outdoing the system’s average.

At the same time, sales campaigns attracted targeted segments and achieved positive results. All campaigns met expectations and outdid the established targets: 82% in the case of mortgages (Hipotecazo), 37% for independence celebration credits (Creditazo Dieciochero), 26% for accidental death insurance (Seguro por Muerte Accidental), 13% for start-of-year loans (Creditazo Marzo), 12% for end-of-year loans (Creditazo Fin de Año) and 6% for general insurance (Campaña General de Seguros).

Thanks to the diversification and segmentation of services and products offered by BancoEstado, which better fits the specific needs of different sectors, and suitable management of prices and commissions, the Bank attracted new customers, in line with its policy of providing banking services to low-income sectors.

At the same time, the relationship with older clients became closer and their loyalty rose thanks to the supply of new products and services or new combinations of older products. In addition, the Bank improved service to Chileans living abroad, with more than 10,000 now being among its customers.

All this brought higher customer satisfaction and a series of awards and prizes from independent bodies (see box).



aWaRDS anD PRIZES

PROCALIDAD 2005 AWARDGranted by Capital magazine, Adolfo Ibáñez University, Adimark and Chile Capital, to BancoEstado as the company with the second highest approval rating among its customers.

CORPORATE REPUTATIONThe Bank won a Gold medal and was ranked 18 among 25 of the most prestigious Chilean firms, according to the corporate reputation ranking prepared by the consulting firm, Hill & Knowlton Captiva and La Tercera, a daily newspaper.

BEST ORGANIZATIONS TO WORK FORThe Great Place to Work Institute awarded BancoEstado Microempresas this prize for being one of the 35 best places to work in Chile.

EFFIE CHILE 2005For the third consecutive year, the Bank received this award for the effectiveness of its marketing and publicity. BancoEstado received a Gold in the sustained success category for its “Ducks” campaign and Silver in the service category, for its independence celebration loans campaign 2004, “Military Parade”.

GOLD IN BIG 2005 AWARDSFor the best relational marketing campaign, BancoEstado’s “Plan Inmobiliario” received a Gold in the BIG 2005 awards, organized by Conep Marketing S.A..

ANNUAL REPORT 2004 AWARDPricewaterhouse Coppers and Gestión magazine awarded BancoEstado with a special prize for the best 2004 annual report from a non-private firm.

BEST IMAGE AND PUBLICITY El Diario Financiero, a financial newspaper, gave BancoEstado first prize for Best Image and Publicity.

MOST AMOUNT TRADING ON THE STOCK EXCHANGEThe Santiago Stock Exchange gave BancoEstado Corredores de Bolsa S.A. an award for “Most amount traded in 2004” in the financial intermediation market.

BARÓMETRO DE LA INFORMACIÓNThe study “II Barómetro de Acceso a la Información”, by the journalism school at the Diego Portales University and the Fundación de la Prensa, ranked BancoEstado second, after Carabineros de Chile in providing access to information.

NATIONAL QUALITY PRIZE 2005A public distinction granted by the national center for productivity and quality (Centro Nacional de Productividad y Calidad, ChileCalidad) to BancoEstado Microempresas, in the Large Company category. This rewards companies that have shown excellent management at the international level.

The Bank’s commercial strategy brought substantial growth in BancoEstado’s net loans, which rose 14.4% in the year 2005, to US$ 11.4 billion, a larger increase than the rest of the system. This took the Bank’s share of the system’s total net loans to 13.3%.

In terms of commercial loans (43% of the Bank’s loans) in 2005 these rose 15.3%, more than the average for the rest of the financial system (13.7%).


net Loans,* 2000-2005

* In 2005, the SBIF definition changed to include factoring, leasing and non-performing loans. Therefore, 2005 is not strictly comparable to previous years.

Commercial Loans 2000-2005

* Total loans less interbank. Source: SBIF

Source: SBIF

(annual change, %)

Rest of System Rest of System

(annual change, %)


Consumer loans, meanwhile, rose 14.0% in 2005. For the five-year period from 2000-2005, BancoEstado’s loans more than tripled, while the rest of the system saw them rise 74%.

The Bank’s mortgages rose 15.4% over 2004. Thus, its market share by value reached 26.3% of the total balance outstanding in 2005, similar to its performance in 2004. By number of operations, the Bank’s share of mortgages is substantially higher. In fact, BancoEstado holds 66% of the total, double the rest of the system (34%).

Both the number of operations and the lower average amount involved in BancoEstado mortgages, US$ 8,770 compared to the rest of the system (US$ 46,730), reflect the Bank’s social priorities, particularly in terms of providing banking services to low-income sectors with little access to private banks.

Consumer Loans, 2000-2005(balances, index 100 = December 2000)

Mortgages, 2005

Mortgages, 2005

* mortgages, mutuals and bills of credit. Source: SBIF

* mortgages and mutuals. Source: SBIF

Rest of System

Source: SBIF

share by balances outstanding* (%)

Rest of System 73.3%

share by n˚ of operations* (%)

Rest of System 34%

BancoEstado 26.3%

BancoEstado 66%

A BANK THAT BELONGS TO EVERYONE AND SERVES EVERYONEIn 2005, BancoEstado remained the financial institution serving the most Chileans, with more locations countrywide, and a network composed of 312 branches, 42 special access points (Puntos de Atención de Cercanía, PAC), and 1,050 automated teller machines, complemented by another 3,700 private ATMs (Redbanc) and 1,081 delivery boxes and providers of balances.

For 41% (141) of the country’s municipal areas (comunas), BancoEstado is the only banking institution present, with 106 branches, 34 PAC and 1 auxiliary service. These are some of Chile’s poorest and most isolated locations. As the President of Chile himself indicated in his speech during the Bank’s 150th anniversary: “No one could cash a check in Putre or make a deposit in Villa O’Higgins, request a loan on Easter Island or operate an ATM in Chonchi, for example. Today, the people living in these towns have a bank thanks to BancoEstado. This is what it means to build the country today.”

BanCOESTaDO CuSTOMERS

• 8 million customers with savings accounts.• 191,000 customers with checking accounts.• 580,000 customers with electronic checkbooks or credit cards.• 500,000 customers with mortgages.• 1.3 million customers insured. • 450,000 customers with consumer and university credits. • 190,000 customers in small and micro businesses.• 1.2 million people receiving monthly wages, pensions and grants.• 550 public institutions as customers.

In terms of family savings, one of every two Chileans has a savings account in the BancoEstado. The Bank holds an 88% market share by number of accounts. Most have balances under 50,000 pesos.

Moreover, the Bank provides long distance service (Call Center, Internet) and direct promotion, suited to its different target segments. During the fiscal year, its New York branch started up after obtaining a license from American authorities and fulfilling rigorous requirements. Fourteen staff members work at this branch, in the heart of Manhattan, on the 22nd floor of 400 Park Avenue. By the end of 2006 they should be managing some US$ 200 million.

CLOSE TO FAMILIES, HELPING THEM TO PROGRESSThanks to the diversity of the mass products it offers, adapted to its clients’ needs, BancoEstado helps Chileans to make their dreams come true.

It is a financial system leader in terms of family savings, personal loans, mortgages, insurance and means of payment.

With more than 10 million term savings accounts, BancoEstado’s market share is almost 90% of all system accounts and around 80% of balances, a reflection of how much Chileans trust the Bank, its solvency and its services.



The Bank’s savings clients are concentrated in the lowest income sectors of the population, C2, C3 and D. In fact, 77% of total savings accounts contain less than 54,000 pesos, while the average balance in Bank accounts is 160,000 pesos versus 360,000 in the rest of the system.

In terms of mortgages, to date more than 520,000 operations are in effect, five times that of the next bank. Two of every three families have a mortgage from BancoEstado. Eighty eight percent involve a subsidy from the housing ministry’s social housing service (Servicio de Vivienda y Urbanismo, SERVIU), for low-income families.

The Bank is also a leader in financing higher education, holding 44% of financial system loans with a subsidy from the national development corporation (Corporación de Fomento de la Producción, CORFO) for this segment. The number of students financed by the Bank reached 53,000 in 2005, more than doubled the number in 2002.


Market share by savings balance

Market share by total savings accounts

Rest of System 19%

Source: SBIF

Source: SBIF

Rest of System 12%

BancoEstado �1%

BancoEstado ��%


Currently, 1.2 million people depend on BancoEstado to receive their wages, pensions and grants, 80% of them by electronic means.

This fiscal year, the Bank remained a leader among bank brokers selling insurance policies, by number of policies (2,725,000), with 1.3 million customers and an intermediated premium approaching US$ 100 million. In 2005, for the second year running, insurance purchased voluntarily (55.2%) outstripped mandatory insurance (44.8%).

To continue to offer insurance to a wider public, the Bank designed a new product “Incredible Insurance”, which covers the risk of accidental death for just US$ 7.8 annually. This means that at a cost of about US$ 0.6 a month, holders are eligible for coverage worth more than US$ 6,220. During the fiscal year, the Bank sold 132,000 of these policies.

Similarly, to provide pension advice to those most in need, the Bank created a Life Annuity Unit, which seeks to achieve the best pension for affiliates according to their reality and interests. It is hoped that in the near future this benefit can be provided to people living in most of the towns and villages where BancoEstado is present.

Public opinion is aware of this progress. Independent studies carried out in 2005 indicate that people consider BancoEstado to be the most valuable brand in the banking industry and note the progress made in terms of its corporate image and service. Checking account holders associate its image with improved “security and solvency”, “future prospects” and “innovative” capacity. In terms of service it is associated with overall quality of service, which is considered “agile and flexible”, with “better branches” and “more competent managers”.

As a result, the number of complaints about customer service is very low compared to the number served and the private banks.

Post-secondary Education Loans

Thousands

(n° clients and market share)

Market share by balance

Source: CORFO, BancoEstado

Source: BancoEstado

Insurance Policies (thousands)

Voluntary

Compulsory

3,000

2,500

2,000

1,500

1,000

500

1,335

1,549

2,176

2,39�

2,725

of clients

COMMITMEnT TO CuLTuRE anD EDuCaTIOn

In 2005, BancoEstado carried out several activities that reaffirm its ongoing commitment to and support for education and culture.

POETRYOne activity was an exposition, Exposición Tremolinos en el Viento, part of celebrations marking the 60th anniversary of the Nobel Prize awarded to the poet Gabriela Mistral, which received more than 9,500 visitors in the regions. This traveling exposition on the life and work of Chile’s three major poets, Pablo Neruda, Gabriela Mistral and Vicente Huidobro visited Concepción, Lota, Viña del Mar, Vicuña, Montegrande and Coquimbo between May and November.

The Argentine poet, Juan Gelman, received the Premio Iberoamericano de Poesía Pablo Neruda (Pablo Neruda Iberian Poetry Prize), provided with the Bank’s support.

THEATERMore than 80,000 people attended plays that formed part of theater festivals supported by the Bank, among them Teatro a Luca, Teatro a Mil, Centro Cultural Matucana 100 and the season of the Ictus company, with its play Sueños de la Memoria.

Popular culture was also represented, this time by the eighth version of the Cumbre Guachaca, sponsored by BancoEstado, which attracted 8,000 visitors to the Mapocho Station cultural center.

FILMFree showings of Chilean and foreign films in squares, stadiums, and public parks in some of Santiago’s lowest income neighborhoods were possible thanks to the Project Cine Barrio BancoEstado.

EDUCATIONBancoEstado contributed to reducing the digital gap through its Computadores en Comodato program, which distributed 150 computers to different non-profit institutions and public schools, and another 700 through the Fundación Todo Chile Enter.

The Bank’s savings museum (Museo del Ahorro), unique in the country, is located in downtown Santiago. It received about 6,000 visitors in 2005, mostly students and tourists, sharing with them a valuable and historic coin collection and recreations of the first branches to exist in Chile.



CONTRIBUTING TO THE COUNTRY’S DEVELOPMENTSince its creation, the Bank has been deeply committed to Chile’s development through entrepreneurial activity, providing credits, services and financial counseling to major projects, concessions, medium, small and microbusinesses.

In the past five years, the Bank has contributed to finance major projects in the areas of economic and social infrastructure, which total investment equals to US$ 1.95 billion. These include some major projects, worth more than US$ 120 million, among them sewage treatment plants (Plantas de Tratamiento de Aguas Servidas el Trebal and la Farfana); Mejillones Port, expansion of Santiago’s Metro (subway), and the southern city of Concepción’s new integrated transportation system, Biovías.

Economic and Social Project Infrastructure*Investment accumulated to date (uS$ mn)**

* With BancoEstado participation in financing** uS$ millions

1,952

1,673

1,474

1,066

Source: BancoEstado

2,000

1,�00

1,600

1,400

1,200

1,000

BancoEstado also has more than 2,000 firms in its corporate banking portfolio (sales over US$ 0.9 million) and a market share approaching 10% of outstanding loans. The Bank has consolidated its financial and service support of a wide range of companies in this segment. It signed 130 new service agreements, improved existing products and processes, and added some new ones, such as collections through ATMs, cash pooling (services to related checking accounts) and the high-value payment service.

In 2005, the Bank doubled its balance outstanding in the field of leasing, in particular to medium-sized firms involved in education, health care, mining and manufacturing.

BancoEstado also established 51 specialized platforms serving small businesses. Commercial management of this segment led to a 16.7% rise in the number of customers, representing 21,000 enterprises, and a 29.9% increase in the balance of loans outstanding, risk was down and efficiency rose.

Similarly, BancoEstado consolidated its leadership in servicing small agricultural firms and more than doubled its loans to school builders.

In terms of institutional banking, in 2005 BancoEstado won a bid to handle the account run by the Instituto de Normalización Previsional (INP) to pay benefits to people who were victims of human rights abuses. It also developed a sports-oriented savings account, which promotes savings among sporting and community organizations so they can apply for government benefits under a program to encourage sports (Fomento del Deporte).

The Bank’s participation in the competitive sector of serving municipal (local) governments allowed it to reach 73% of these, by number. In 2005, four new municipal governments became customers of BancoEstado: Alto Hospicio, Alto Bío Bío, Cholchol and Hualpén.



LEADER IN DEVELOPING MICROBUSINESSESIn the field of microbusinesses, BancoEstado consolidated its leadership in 2005, offering this segment integrated service, which includes credits and advice, all of which reflects the priority it assigns to providing banking services to those without access or receiving less attention from private banks.

BancoEstado ended 2005 with a record portfolio of 170,000 microbusiness customers and loans outstanding worth US$ 272 million, rises of 23% and 69% respectively over the previous year. Historical accumulated credit operations involving this segment reached 463,000, for a total of US$ 622 million. The Bank has 124 service platforms specializing in microbusinesses.

From a longer term perspective, between 2002 and 2005, the number of customers tripled and loans rose 3.8 times, with annual growth averaging 45% and 57%, respectively.

The specialized model serving microbusinesses stands out for its client-specific responses, achieved by segmenting services. In this context, work done in the fishing, wholesale and retail, transportation and agricultural sectors is highlighted. Each executive in this area worked closely with customers and their families, visiting them in their workplaces.

This support helps to develop microbusiness and improve the quality of life of the business person and family. Thus, more than 10,000 entrepreneurs have seen their dream of owning their own home come true thanks to a mortgage, at the same time as their children have managed to pursue a post-secondary education financed by loans from the Bank.

Ms. Matilde Aravena A.Micro-entrepreneur, BancoEstado customer

Thousands

BancoEstado Micro-Business Loans and number of Clients

* uS$ december 2005Source: BancoEstado

uS$ millions *

300

250

200

150

100

50

0

71

124

161

272

Loans

no clients


Microbusiness credits are good for the entrepreneur. So concludes a University of Chile study, “Evaluación de Impacto de Crédito a Microempresarios.” It notes that the entrepreneurs who commonly use BancoEstado credits have seen their sales rise 20% annually and their productive capacity increase 45%.

The level of microbusiness compliance with servicing these credits stands at 99%. Six of every ten pay off their loans in advance. Half of these customers are women.

The BancoEstado’s commitment to microbusiness is apparent in its outstanding participation in 2005 as one of the organizers of the Latin America/Caribbean Region Microcredit Summit Meeting, held in Santiago in April 2005. Some 1200 delegates from 38 countries attended and speakers included Her Majesty, Queen Sofía of Spain; Muhammad Yunus, Managing Director of the Grameen Bank, and Javier Etcheberry, President of BancoEstado. The President of Chile, Ricardo Lagos, made the closing speech at the Summit, the most important international meeting ever held on this subject in Chile.

SMALL BUSINESS GUARANTEE FUND (FONDO DE GARANTÍA PARA EL PEQUEÑO EMPRESARIO, FOGAPE)FOGAPE, managed by BancoEstado, has enjoyed strong growth, from 13,000 customers in 2000 to 44,400 in 2005. Annually it handles more than 30,000 guaranteed credits, benefiting 88,000 customers with 156,000 guaranteed credits from 2000-2005.

During the 2005 fiscal year, BancoEstado studied the impact on small business entrepreneurs, finding that the Fund added 40% to loans for the users in Metropolitan Santiago. This in turn brought more sales and higher annual profits. The social benefits of this instrument were estimated at around 700%, considered an excellent result.

FOGAPE’s management has implemented an innovative on-line system with financial institutions, in coordination with the Internal Revenue Service (Servicio de Impuestos Internos, SII), which allows bank executives to directly contact the SII to find out whether companies qualify for credits guaranteed by this Fund.

As a result of these internationally acclaimed achievements, the World Bank and the IDB are studying FOGAPE, as an example of good practices to be followed, in terms of guarantees and its administration in favor of financing small and medium-sized firms (PyMEs).

TECHNOLOGY TO SERVE CUSTOMERSIn 2005, BancoEstado has continued to update its technologies and processes, improving service quality and reducing response times through innovation in these spheres.

In December 2005, Bank customers carried out 23.5 million transactions. Of these, 16.2 million (69%) were through automatic channels, up 16.6% since December 2000.

Interconnection of BancoEstado’s ATM network with the Presto network expanded access by customers of both companies in 2005. At the same time, the Bank’s own ATMs rose from 826 to 1,050. Thus, through its own ATMs and those of the networks it belongs to (Globalnet, Redbanc and Presto), BancoEstado has become one of the financial institutions with the largest network of ATMs.

Of the electronic channels currently available, Internet experienced the highest growth in 2005, with the monthly average number of transactions rising 75%, totaling 2.6 million operations in December.


During the fiscal year, work stations throughout the branch network were updated, while data centers were reinforced to boost their power and availability. At the same time, new technological services allowed the incorporation of new businesses in the area of factoring, car insurance and mutual funds in the branch network, the New York and Neighborhood Teller.

At the same time, a new subsidiary was developed and implemented, ServiEstado, offering an innovative approach to service, processes and technology. This has given rise to initiatives that aspire to become industry standards as they consolidate. At the same time, a private virtual network started up, which allows employees to make full use of all Bank technological services within the Bank or at any remote access point.

automated Transactions

no of transactions

% of total transactions

(Through December of each year)

Millions month

Source: BancoEstado

FInanCIaL ManaGEMEnT

The Bank achieved positive results during the 2005 fiscal year, with most indicators outperforming results from 2004 and often the rest of the financial system, thanks to a joint effort by employees and management to improve BancoEstado competitiveness and efficiency.

In recent years, income from the demand deposits of public institutions have plunged from US$ 117 million in 2000 to US$ 29 million in 2005. This trend has required considerable effort to generate new income, which is reflected in the rise in before-tax revenues for this period.

PROFITaBILITYBancoEstado’s return on equity (net profit before taxes on capital and reserves) reached 24.4% in 2005, its highest level in the past five years. Calculated over total assets (ROA) the ratio amounts to 0.94.


After-tax profits rose 9.7%. The Bank, like other publicly-owned company, is subject to a 57% effective tax rate on its profits, which includes a 40% surtax over private bank taxes.

Its subsidiaries and services also continued to post positive trends of recent years, boosting their profits and contributing to BancoEstado’s final results. Their contribution to the Bank’s surplus reached US$ 17 million during the fiscal year, three times their contribution in 2000.

These results will allow the Bank to make substantial transfers to the State through taxes and dividend payments. From 2000 to 2004, through profits distribution and taxes BancoEstado transferred an average close to US$ 100 million annually to the national treasury.

FINANCIAL BUSINESSBancoEstado’s financial business developed strongly during this fiscal year, with its contribution to overall results adding up to 15% of the total gross margin.

In this sense, the Bank focused on achieving results, efficient compliance with regulations, facilitating implementation of major business agreements reached by other parts of the Bank, and boosting technical capacity to join all markets and products. The BancoEstado treasury plays an important role in financial business, and is a major actor in the marketplace, especially in the market of fixed-rate instruments and financial derivatives. Likewise, asset management, combined with suitable handling of liquidity and margins, made an important contribution to total results.

In 2005, one landmark was the issuing of a C series subordinated bond worth US$ 140 million, maturing in 22 years with a five-year grace period, acquired primarily by insurance companies and private pension fund managers (AFPs).

BancoEstado, Public Institutional accounts* Surpluses and Revenues(millions of pesos, December 2005)**

accruing current accts. pub. intitutions

Total excess before taxes

* Excluding costs associated with these accounts. ** Millions of pesos. Source: BancoEstado

100,000

90,000

�0,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0


The new high-value payment system also started up, which involved moving from physical payment methods (using printed documents) to electronic transfers. In this process, BancoEstado has played an important role both in the project implemented by the Central Bank of Chile and in the High-Value Clearing House, created by the banks.

Another achievement was the first anniversary of the alliance with Metlife, the number one US life insurance company, with very satisfactory results and the inclusion of new products among BancoEstado’s insurance portfolio.

The brokerage also participated in issuing and placing shares for Blanco y Negro S.A. (the Colo Colo soccer club).

RISK ManaGEMEnT

Prudent risk management was one of the pillars of the healthy growth of Bank business in 2005. Commercial targets were met using a strategy that focused on optimizing the risk-return on assets ratio.

BancoEstado’s risk index at the end of 2005 stood at 1.41%, below the average for the rest of the system, while non-performing loans accounted for 0.70% of total loans. This was 0.24 percentage points lower than the average for the rest of the system.

The main risk rating agencies, among them Moody’s and Standard & Poor’s, maintained their positive ranking of BancoEstado, at levels similar to those of banks in developed countries. Moreover, according to these agencies, as in 2004 BancoEstado enjoys the best risk rating for debt in foreign currency among Chilean and Latin American banks, thanks to its solvency.

In 2005 measures were implemented to meet the requirements established in the time framework set by the Superintendency of Banks and Financial Institutions to apply the proposals contained in the new Basel II capital agreement, including participation in the Fifth Quantitative Impact Study (QIS5) being conducted by this body.

In commercial departments, counterpart risk structures were reinforced in the area of personal credit admissions, to maximize returns and minimize risk by applying scoring tools to ensure the current and future growth of this segment.

Progress in strengthening evaluations, control and follow-up of market risk also continued. Aside from the usual methodologies for measuring financial risk, such as Value at Risk and sensitivity models for interest rate changes, other complementary measures were applied to calibrate results.

Loans Portfolio RiskDecember 2005 (%)

Risk index**

non-perf./Tot. Loans

Loans prov-/non perf. Loans

BancoEstado

Rest of System

* Figures through november. * Loans provisions (excludes additional provisions) / total loans. Source: SBIF

1.411.51*

0.70

0.94

203

156*

IN PROxIMITy

ThROUgh ITS UNRIvALED NETwORk OF BRANChES, BANCOESTADO IS ABLE TO

PARTICIPATE IN ThOSE gEOgRAPhICAL AREAS AND SOCIAL SECTORS OF ThE

COUNTRy NOT SERvED By ThE REST OF ThE FINANCIAL COMMUNITy.

BancoEstado prepared a strategic development plan for 2006-2010 as part of being a public bank, known for its international level excellence and for providing banking services to the whole population.

The strategy focuses on: a more detailed knowledge of customers’ needs and demands, to offer them more valuable products; become closer to them, using a variety of channels, providing quality service and massifying the supply of means of payments; operational and service excellence, reflected in constantly improving efficiency and risk indicators; and a flexible and competitive organization, that cultivates and strengthens its labor relations and the skills of its workforce, as part of its strategic alliance with its employees.

The Strategic Plan projections for 2010 aim to increase customers from 8 million to 12 million, particularly among lower income sectors, offering them standadrized and low-cost products.

Products on offer should multiply toward decade’s end, with university loans tripling and the number of insurance policies more than doubling.

Toward 2010, integrated products and services to small and medium-sized firms should also increase, to reach 300,000 customers, doubling outstanding loan balances, and involving the opening of 80 new specialized branches. Platforms specializing in small businesses should also increase to cover 100 locations in the country.

STRaTEGIC aLLIanCE WITH WORKERS

The progress achieved by BancoEstado in recent years has required the support of all bodies within the Bank. In the 2005 fiscal year, the Bank continued to strengthen its strategic alliance signed by employees and management in 2001 and enriched in later years. This has made a consensus and a joint vision of the Bank’s development possible. During the

year, there were regular meetings between management and the national union, during which both sides jointly analyzed a series of issues, in an atmosphere of respect and trust, reaffirming the principles of the strategic alliance.

An incentives system was particularly important this year, as part of the strategic alliance, based on institutional and individual performance, with the objective of improving results and evaluating efficiency in meeting targets. During the year, 6,574 Bank employees received a corporate bonus and 6,199 the individual performance bonus.

As per the Bank’s human capital development policy, this year traditional and virtual staff training, among them the Efobech virtual system, were provided to strengthen Bank objectives, contribute to people’s employability, and develop an ongoing learning culture among employees. E-learning accounted for 51.8% of total training products and services offered by the Bank in 2005, while 48.2% required the physical presence of participants. Bank training and education involved a total of 339,340 staff hours, up 22% over 2004, for an average of 62 hours of training for each of the 5,500 employees who participated.

A corporate human capital development program was also implemented in 2005, which started with the hiring of 40 young professionals from different disciplines. This program established a new style for joining the Bank, in which newcomers receive support from different areas, for a total of 26,310 hours of training.

a Bank Open to the Future


BuSInESS aLLIanCES

Medium and long-term associations with other institutions for joint ventures performed strongly in 2005, adding value to commercial activities. This was one way the Bank sought to complement expansion and provide customers with more widely available means of payments, extending services to more people.Several landmarks were achieved in this sense during the fiscal year. The Bank became a founding member of the consortium established to manage the finances of Plan Transantiago, which will contribute to modernizing public transportation in Santiago, opening the way to interesting business opportunities.

The Bank also connected its ATM network to that of Presto, as part of an alliance signed with D&S. It obtained exclusive rights to place ATMs connected to Redbanc in Líder supermarkets. It signed an agreement with Empresas La Polar to provide ATMs to this department store’s customers throughout Chile and, together with Supermercados Deca, to develop Visa credit cards for customers in Chile’s Third and Fourth regions.

Work continued in the field of providing mortgages in preferential conditions with different real estate developers; financing for higher education at universities and other post-secondary institutes; and to develop, market and process insurance claims, in conjunction with Metlife, the world’s largest insurance firm.

nEW PROJECTS

During the 2005 fiscal year, the Bank worked to develop new projects to extend and deepen the provision of banking services to unbanked Chileans. The first new products to be offered in 2006 include the Neighborhood Teller (Caja Vecina), Cuenta RUT and Transantiago.Neighborhood Teller, which started as a pilot program in Quilleco and El Carmen in Chile’s Region Seven, will offer facilities for transactions in local stores selected by the Bank, in towns and villages currently without bank service, thereby generating additional channels for banking. These will permit withdrawals, deposits, transfers between accounts, checking balances, loan service and other basic services.

The Bank plans to install 2,500 service points in 130 municipal areas lacking in bank services, to benefit 1.2 million people, as well as in 141 municipal areas where the Bank is the only service provider, offering this alternative to another 3.5 million people; and in densely populated urban neighborhoods, where there are no banks nearby.

At the same time, the Cuenta RUT involves offering each Chilean and foreign residents in Chile or abroad with an electronic means of payment or account, with no requirements and minimal transaction costs, to receive income (wages, pensions, subsidies, service payments, grants, allowances) and make different payments (utilities, taxes, purchases through the Redcompra system, BancoEstado deposits, or cash withdrawals).

As majority partner in the financial management of Transantiago (Administrador Financiero del Transantiago, AFT), the company that will handle the electronic payment card and provide the technology for managing the bus system, which will have four million users, BancoEstado will participate actively in issuing this means of payment.

IN ACTION

wE STRIvE TO BE A COMPANy ThAT ChILEANS CAN POINT TO wITh PRIDE, ThROUgh

ThE ExCEPTIONAL COvERAgE AND qUALITy OF OUR SERvICES.

BanCOESTaDO S.a. aDMInISTRaDORa GEnERaL

DE FOnDOS (general fund manager)

This subsidiary specializes in managing third party assets. It added mutual funds to its supply of saving and investment products offered by BancoEstado. Initially, five mutual funds with investments in short, medium and long-term debt instruments were included and, since August, these products are marketed through the BancoEstado branch network, giving customers access to this modern alternative of investment.

Through December 2005, the total average capital managed reached US$ 302 million, up 28.5% over 2004, for a total of 21,993 customers. The subsidiary’s participation in supplying funds for housing and mutual funds for domestic debt reached 29.3% and 2.8%, respectively.

This subsidiary received US$ 1.3 million in fees in 2005, up 13.4% over the previous year.

Subsidiaries

SERVIESTaDO

BanCOESTaDO CEnTRO DE SERVICIOS S.a. (financial service center)

In its first year, this subsidiary opened 10 new branches throughout the country, as part of its strategic focus on developing the business of transactions. These locations offer services such as deposits and withdrawals from any account, payment of all kinds of credits, and collections associated with agreements and taxes.

Using modern technology and quality service, Banco Estado Centro de Servicios S.A. seeks to position itself as a market leader, with extended hours for serving customers, including Saturdays and, in some branches, Sunday afternoons.

For June 2006, the company expects to have a total of 30 branches and to continue increasing the number of transactions.


BanCOESTaDO COnTaCTO 24 HORaS S.a. (24-hour customer service)

This subsidiary, which services the Bank’s operating channels and platforms for linking with its customers, continued a development strategy focusing on low-cost, high-quality service. In 2005 its business volume rose 36%, permitting economies of scale, which brought in profits of US$ 313,000, up 158% over 2004, thanks to progress in its efficiency index, diversification of the services offered, client-centered management, and human resources.

Effectiveness indices for telemarketing work varied enormously and toward year’s end, some 17% of the contacts who expressed an interest in going to a branch to acquire a product did so. In commercial terms, the subsidiary outperformed targets: credits pre-approved through the contact center and processed by branches reached over 4.2 billion pesos in consumer loans and $ 9 billion pesos in mortgages, while the number of contracts for automatic bill payment using credit cards doubled.

The customer service area expanded service coverage, adding orders of non-payment, credit scoring, replacement of debit cards via home delivery, insurance over the telephone (Fonoseguros, involving pre-sales, sales and post-sales service on BancoEstado insurance), agreements over the telephone (Fonoconvenios) and support to the New York branch. Its operations were optimized by improving service models and applications, and through merging some services. Help counters increased, with the inclusion of a new service to small businesses, and became more integrated into other Bank activities. Calls rose steadily, averaging 500,000 outgoing and incoming calls per month during the second semester.

BanCOESTaDO CORREDORES DE BOLSa (stockbroker)

This subsidiary offers financial services and products designed to satisfy BancoEstado customers’ needs, along with those of the brokerage itself, in managing the expansion of its customer base.

In 2005 the different business lines developed by the brokerage continued to grow, as part of a strategy to diversify operating income.

In this context, in May Chile’s electronic stock market (Bolsa Electrónica de Chile) started up and this brokerage participated in placing shares for Blanco y Negro S.A., the Colo Colo club, and payment of the Instituto de Normalización Previsional (INP) bond, among other activities. In 2005, it started to develop BancoEstado investment centers (Centros de Inversiones BancoEstado), together with the financial area and the general fund manager subsidiary (Administradora General de Fondos), which will go on to implement 20 specialized investment platforms in 2006 within the Bank network.

Return on equity has reached over 20% annually for the past four fiscal years. In 2005, profits were US$ 4.4 million, ROE 23.6%, making it one of the most profitable brokerages in the market.

BANCOESTADO CORREDORES DE SEGUROS S.A. (insurance broker)

In 2005 this subsidiary’s stock reached 2,725,000 insurance policies, for 1,321,000 customers, consolidating its reputation as one of the main players in the banking insurance market, moving the Bank into first place for insurance sold and second place in terms of intermediated premiums, with market shares over 20% and 16%, respectively.

After one year of the BancoEstado-Metlife alliance, in which the latter became a partner in BancoEstado Corredores de Seguros S.A., results are good for both firms, and new projects and products are being launched, among them life annuities, insurance for firms and institutions, insurance for accidental death, and car insurance, among others.

It has also assisted customers who have experienced damages resulting from natural disasters, such as the earthquake that shook the First Region and storms in southern Chile, with 3,200 people benefited. Successful management in 2005 brought in profits of US$ 16.8 million, up 66% over 2004.

GLOBALNET COMUNICACIONES FINANCIERAS S.A. (financial communications)

This subsidiary, whose function is to provide electronic information communications systems and other activities associated with remote banking, was marked by the termination of services to customers which in previous years had merged or been absorbed by financial institutions not operating through Globalnet Comunicaciones Financieras, which brought a decline in business and changes to the cost structure. During the 2005 fiscal year, the Redbanc S.A. communications network became linked to Globalnet, allowing the subsidiaries partners and customers to connect to the Combanc project. This improved services to partners and facilitated the inclusion of the banks Monex and JP Morgan Chase in this communications network. Globalnet’s board agreed to hold a strategic planning exercise during the first four months of 2006 to define ways of turning around these negative results.

Subsidiaries


BANCOESTADO SERVICIOS DE COBRANZAS S.A.(collections agency)

This subsidiary, responsible for handling Bank collections, met most of its financial and operating targets during the fiscal year, particularly those involved in its contribution to consolidating the sales attention model (Modelo de Atención de Ventas, MAV) in Metropolitan Santiago, and its inclusion in the BancoEstado credit cycle, thus reducing provisions. In this last sense, the recovery of late payments for BancoEstado reached US$ 10.6 million in 2005, while provisions for the year reached US$ 5.7 million. This high recovery rate in the warning and pre-trial stages of collections rendered additional savings in provisions for the Bank. MAV implementation in Metropolitan Santiago and collection management throughout the whole cycle reduced provisions by 28% over 2004. Recovery of the allowance for bad debt rose by 68%, or US$ 3.0 million.

Mr. Francisco Sepúlveda P.Micro-entrepreneur, BancoEstado customer

BANCOESTADO MICROEMPRESAS S.A. ASESORÍAS

FINANCIERAS(financial advice to microbusinesses)

By the end of 2005, BancoEstado’s program specializing in microbusinesses had provided service to 170,000 entrepreneurs, while historical loan operations rose to 463,000, with total accumulated loans coming to US$ 622 million, led by 67% growth in the agricultural and 35% in the fishery segments.

BancoEstado Microempresas is present in 124 of the Bank’s branches and is a national leader, with a market share of almost 50% and a risk rate of 1.19%. This implies that 99% of the loans provided by this body are paid back. A 2005 study by the University of Chile found that microbusiness people using BancoEstado Microempresas loans most frequently have seen average growth in annual sales of 20% and 45% in their productive capacity.

GEnERaL anTECEDEnTS

TAx NUMBER97.030.000-7

hEAD OFFICE ADDRESS Avenida Libertador Bernardo O’higgins N° 1111, Santiago de Chile

INTERNET SITE www.bancoestado.cl

POSTAL ADDRESS AND CODECorreo 21, Casilla 240 - v. Código Postal 650 11 86

CENTRAL SwITCh BOARD970 7000

FAx (56-2) 970 57 11

SwIFTBECh CL RM

SUBSIDIARy COMPANIESBancoEstado S.A. Administradora general de FondosBancoEstado Centro de Servicios S.A.BancoEstado Contacto 24 horas S.A.BancoEstado S.A. Corredores de BolsaBancoEstado Corredores de Seguros S.A.BancoEstado Servicios de Cobranzas S.A.BancoEstado Microempresas S.A. Asesorías Financierasglobalnet Comunicaciones Financieras S.A.

BANCOESTADO 24 hORAS600 200 7000

Design and Production: IMAx BRANDINg AND DESIgNPrinting: FyRMA gRAFICA

Annual Report BancoEstado 2005 · Luis Alberto Soto Illanes Director Pablo Silva Manríquez Labor...

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