Banco Estado Commercial Management with Social Impact Fernando

Banco. Estado Commercial Management with Social Impact Fernando Ochoa Castillo Quito, Ecuador March 2012

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategic guidelines 2012 -2014 V. Final Conclusion 2

Chilean Economy: Fundamentals (I) GDP Growth Anual inflation rate Fiscal Surplus (% of GDP) Unemployment rate (average) 3

Chilean Economy: Fundamentals (II) Gross Debt Central Government (% of GDP) Current Account (% of GDP) Countries selected from l. OECD, (dec. 2010) INR and Sovereign Funds (US$ Billions) International Financial Position (% of GDP) 4

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 5

Bank Industry: Competition Competitive local banking industry, with high participation of foreign banks Number of Institutions 1974 - 2011 6

Bank Industry: Institutionality and Resilience Positive institutional conditions that contribute to the resilience of local banks Ø Pro-Market financial regulation and risk based supervision Ø Diversified financial system, highly integrated to global markets Ø Leveled play field public banks operate under the same rules as private, except taxation Ø Efficient corporate governance with professional management Ø Prevalence of "traditional“ banking business Ø Solvent Banks with adequate liquidity 7

Bank Industry: Positive Results Risk Index Basilea Index Operative Efficiency ROE 8

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategic guidelines 2012 -2014 V. Final Conclusion 9

Central Features of BE Unique state commercial bank, with almost 160 years of history Social responsibility without granting subsidies "efficiently banking” Ranked third in total bank credit, with the most extensive coverage in the country Market lider in deposits, saving and microfinance Independence to set policies and allocate credit International Risk Classification: A + Profitable and high potential for sustained growth of assets and profits 10

Mision, Vision and Positioning 11

Activos y Canales Banco. Estado is a lider institution in Chile. . . 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 . . . with an unparalleled distribution network nationalwide Ranking Category #1 Geographical coverage: - Offices - Special service centers - Remote service centers - ATMs #1 Clients Base #1 Service supplier to: - Goverrnment sector - Low income sector - Middle income sector Level 341 86 7. 130 1. 981 MM 8, 5 12

Segments, products and client base Comprehensive platform of services for all sizes of business and people Banco. Estado service delivery to following segments Products Government Cash management, treasury services, payments (salaries, pensions, suppliers) Corporate Credit, treasury services, commerce financing, payments Middle size companies Retail Commercial credits, commerce financing Personal Banking, consumer credits, insurances, mortgage credits, TCR and TD, student credits, microcredits, mutual funds, accounts payment Clients Base Main competitors Full matrix of public companies • Large banks • Middle size foreign banks 750 Corporative clients • Large banks • Middle size foreign banks 2. 700 middle size company clients • Large banks • Middle size local banks • 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 13

Subsidiaries Provide financial services that complement the extensive menu offered by the bank 14

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategic guidelines 2012 -2014 V. Final Conclusion 15

Inclusive Strategy: Family Saving We promote the family saving Saving accounts (aug. 2011) Number of active clients: 7. 6 millons 16

Inclusive Strategy: Payment Systems We provide modern payment systems for all the chileans and small companies Active Rut Accounts (thousands) Caja Vecina Accounts (thousands) 17

Inclusive Strategy: Family Assets Accumulation We finance the purchase of popular houses Debtors distribution (dec. 2011) Debtors BE: 526. 611 Amounts distribution (dec. 2011) Stock: MM US$ 10. 000 Average Debt: Subsidized : US$ 10. 700 Non Subsidized : US$ 42. 500 18

Inclusive Strategy: Human Capital Accumulation We support the investment in human capital for low income families Clients Distribution (jun. 2011) Market: 400. 000 clients Amounts Distribution (jun. 2011) Stock: MM US$ 2. 850 19

Inclusive Strategy: Business Development We promote entrepreneurshipment and business development Credits to Small Companies Credits to Micro Companies 20

Inclusive Strategy: Risk Transfer We provide convenient insurance for families to transfer their principal risks Number of current insurance policies (thousands) 21

Inclusive Strategy: Complementing Markets We serve markets without alternative private suppliers Access to Bank Offices (% of districts total country) 22

Inclusive Strategy: Competition We promote competition through continuous promotional campaigns widely publicized Consume Credit Rate 23

Inclusive Strategy: Transfers to the Treasury We make significant transfers to fund the Social Security Budget (In MMUS$) 24

Inclusive Strategy: Impact Synthesis In short, millions of customers served, with diverse products, accessible to all families and businesses of all sizes Ø Ø Ø 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

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategical guidelines 2012 -2014 V. Final reflexion 26

Counter-Cyclic Strategy: Base Diagnosis The “sudden stop” of private offer of credit Net Total Credit Flow Private Banking and BE (in MMUS$) 27

Counter-Cyclic Strategy: Capital Constraint During capital constraint BE contributed to unlock the credit channel, while Private Banking increased capital gaps Monthly real growth in bank credit and Basel Index Source: SBIF 28

Counter-Cyclic Strategy: Relative Momentum (I) BE also acted in line with the regional public banks to keep lending channel transmission 29

Counter-Cyclic Strategy: Relative Momentum (II) Other internal and external credit suppliers validated the credit risk strategy of BE Financiamiento Empresas Corporative Bonds traded in Chile (flujos netos en millones de US$ a mayo 2009) (in Billion $) A) Includes private and public companies debt B) Includes short-term and long-term debt of non-financial companies plus accrued interest to April 2009 30

Counter-Cyclic Strategy: Specific Actions We design and apply an innovative strategy to address the uncertain economic situation ØAttractive credit offer at very competitive prices, anticipating even the Monetary Policy Rate reductions; ØUnique focus in loan growth; Ø We provide financial support to viable businesses of all sizes and people of all levels; ØWe work closely with customers by establishing alliances with real estate agents (72 hours) and unions; ØWe use all available state guarantees, and Ø We carry out campaigns, fairs and open on Saturdays 31

Counter-Cyclic Strategy: Overall goals 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 32

Counter-Cyclic Strategy: Credit guarantees for companies 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% 33

Counter-Cyclic Strategy: Home credit guarantees 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(%) 34

Counter-Cyclic Strategy: Signals to the market We were aggressive in the supply of credit to SMEs and send clear signals to the competence 35

Counter-Cyclic Strategy: Supply growth (I) Counter-Cyclic supply in all the products……

Counter-Cyclic Strategy: Supply growth (II) We met the growth targets in all segments 37

Counter-Cyclic Strategy: Credit Risk The maintenance of standards and use of guarantees keep risk under control Loan loss provisions / Operational Income (%) Source: SBIF and Banco. Estado 38

Counter-Cyclic Strategy: Profitability Limited profitability sacrifice with high growth ROE (results / capital plus reservs) Source: SBIF and Banco. Estado 39

Counter-Cyclic Strategy: Solvency The Capital injection in BE helped ensure its solvency and boost lending channel Basel Index Actualizar 2010 y 2011 40

Counter-Cyclic Strategy High historical importance of housing and the recent increase of Agriculture in Banco. Estado portfolio Credit Distribution by Economic Activity (stocks in %) 41

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategic guidelines 2012 -2014 V. Final Conclusion 42

2012 Challenges Ø Extending and deepening bankarization Ø Keep long term relationships with clients Ø Increase efficiency and keep risk controlled Ø Improve continuously critical internal processes Ø Increase transparency to our clients

Strategic Map 2012 -2014 Strategic Map focused in commercial management with high social impact 44

AGENDA I. Institutional and macroeconomic framework II. Institutional design III. Banco. Estado: its financial inclusion strategy IV. Banco. Estado: its counter-cyclic strategy V. Strategical guidelines 2012 -2014 V. Final Conclusion 45

Final Conclusion ¿Why a Public Bank is necessary? • 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 46

Final Conclusion Banco. Estado 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) 47 and able to keep the risk controlled

THANKS

ANNEX

“Caja. Vecina”: A small electronic channel operating in isolated locations or stores suburbs CLIENT BANK STORE Electronic Device Operations • • • Deposits Transfers Balance information Payment of credits Payment of services Advantages • Time saving • Extended hours service • Increased security Is our direct supplier of financial services Advantages • Commissions • Increase of sales • Local differentiation • Client fidelization POS • On line operations • Receipts delivery • Effective control on line 50

In Banco. Estado 85% transaction is effected through Electronic Channels Attendance Channels 15% (7. 201. 057 tx/month) The Client choose where, how and when served Electronic Channels * 85% (47. 307. 531 tx/month) Internet Mail Cajsh Table Buzoneras Ejxecutive Specialized Platforms Attendance Models Value offer Kiosco. Web Information Dispenser Automatic Phone (IVR) Servi. Estado Assisted Phone * Canales soportados en tecnología POS Caja Vecina 51