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Fair Value of Financial Assets and Liabilities
 12 Months Ended
Dec. 31, 2023
Fair Value of Financial Assets and Liabilities [Abstract]  
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

NOTE 36 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The measurement of fair value assumes the sale transaction of an asset or the transference of the liability happens within the main asset or liability market, or the most advantageous market for the asset or liability.

 

For financial instruments with no available market prices, fair values have been estimated by using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community. In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

These techniques are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations. Hence, the fair value estimated for an asset or liability may not coincide exactly with the price at which that asset or liability could be delivered or settled on the date of its valuation and may not be justified in comparison with independent markets.

 

Except as detailed in the following table, management considers that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

 

Determination of fair value of financial instruments

 

Below is a comparison between the value at which the Bank’s financial assets and liabilities are recorded and their fair value as of December 31, 2023 and 2022:

 

   As of December 31,
   2023  2022
   Book value  Fair value  Book value  Fair value
   MCh$  MCh$  MCh$  MCh$
Assets            
Financial assets for trading at FVTPL            
Financial derivative contracts   10,119,486    10,119,486    11,672,960    11,672,960 
Debt financial instruments   98,308    98,308    154,046    154,046 
Financial assets at FVOCI                    
Debt financial instrument   4,536,025    4,536,025    5,880,733    5,880,733 
Other financial instruments   105,257    105,257    142,306    142,306 
Financial derivative contracts for hedge accounting   605,529    605,529    477,762    477,762 
Financial assets at amortised cost                    
Debt financial instruments   8,176,895    7,927,729    4,867,591    4,496,503 
Interbank loans   68,438    68,438    32,991    32,918 
Loans and account receivable from customers   39,593,457    39,134,700    38,696,410    39,181,962 
Guarantee deposits (margin accounts)   2,338,900    2,338,900    2,442,325    2,442,325 
                     
Liabilities                    
Financial liabilities for trading at FVTPL                    
Financial derivative contracts   9,521,575    9,521,575    11,319,320    11,319,320 
Financial derivative contracts for accounting hedges   2,466,767    2,466,767    2,788,794    2,788,794 
Financial liabilities at amortised cost                    
Deposits and other demand liabilities   13,537,826    13,537,826    14,086,226    14,086,226 
Time deposits and other time liabilities   16,137,942    16,326,525    12,978,790    13,117,554 
Interbank borrowings   10,366,499    10,190,640    8,864,765    8,223,783 
Issued debt instruments   8,001,045    7,751,672    7,165,893    6,871,028 
Other financial liabilities   296,273    296,273    292,995    292,995 
Regulatory capital financial instruments   1,813,938    1,825,819    1,733,869    2,459,632 
Guarantees received (margin accounts)   1,081,226    1,081,226    1,017,968    1,017,968 

 

The fair value approximates the carrying amount of the following line items due to their short-term nature: cash and deposits-banks, cash items in process of collection and investments under resale or repurchase agreements.

 

In addition, the fair value estimates presented above do not attempt to estimate the value of the Bank’s profits generated by its business activity, nor its future activities, and accordingly, they do not represent the Bank’s value as a going concern. Below is a detail of the methods used to estimate the financial instruments’ fair value.

 

a.Financial assets held for trading and Debt instruments at FVOCI

 

The estimated fair value of these financial instruments was established using market values or estimates from an available dealer, or quoted market prices of similar financial instruments. Investments are evaluated at recorded value since they are considered as having a fair value not significantly different from their recorded value. To estimate the fair value of debt investments or representative values in these lines of businesses, we take into consideration additional variables and elements, as long as they apply, including the estimate of prepayment rates and credit risk of issuers.

 

b.Loans and accounts receivable at amortised cost

 

Fair value of commercial, mortgage and consumer loans and credit cards are measured through a discounted cash flow (DCF) analysis. We use current market interest rates considering product, term, amount and similar loan quality. Fair value of loans with 90 days or more of delinquency are measured by means of the market value of the associated guarantee, minus the rate and term of expected payment. For variable rate loans whose interest rates change frequently (monthly or quarterly) and that are not subjected to any significant credit risk change, the estimated fair value is based on their book value.

 

c.Deposits

 

Disclosed fair value of deposits that do not bear interest and saving accounts is the amount payable at the reporting date and, therefore, equals the recorded amount. Fair value of time deposits is calculated through a discounted cash flow calculation that applies current interest rates from a monthly calendar of scheduled maturities in the market.

 

d.Short and long term issued debt instruments

 

The fair value of these financial instruments is calculated by using a discounted cash flow analysis based on the current incremental lending rates for similar types of loans having similar maturities.

 

e.Financial derivative contracts for trading and hedge accounting

 

The estimated fair value of financial derivative contracts is calculated using the prices quoted on the market for financial instruments having similar characteristics.

 

The fair value of interest rate swaps represents the estimated amount that the Bank determines as exit price in accordance with IFRS 13. If there are no quoted prices from the market (either direct or indirect) for any derivative instrument, the respective fair value estimates have been calculated by using models and valuation techniques such as Black-Scholes, Hull, and Monte Carlo simulations, taking into consideration the relevant inputs/outputs such as volatility of options, observable correlations between underlying assets, counterparty credit risk, implicit price volatility, the velocity with which the volatility reverts to its average value, and the straight-line relationship (correlation) between the value of a market variable and its volatility, among others.

 

Measurement of fair value and hierarchy

 

IFRS 13 - Fair Value Measurement, provides a hierarchy of reasonable values which separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments. The hierarchy reflects the significance of the inputs used in making the measurement. The three levels of the hierarchy of fair values are the following:

 

●Level 1: the inputs are quoted prices (unadjusted) on active markets for identical assets and liabilities that the Bank can access on the measurement date

 

●Level 2: inputs other than the quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

 

●Level 3: inputs are unobservable inputs for the asset or liability i.e. they are not based on observable market data

 

The hierarchy level within which the fair value measurement is categorized in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.

 

The best evidence of a financial instrument’s fair value at the initial time is the transaction price.

 

In cases where quoted market prices cannot be observed, Management makes its best estimate of the price that the market would set using its own internal models which in most cases use data based on observable market parameters as a significant input (Level 2) and, in very specific cases, significant inputs not observable in market data (Level 3), various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

Financial instruments at fair value and determined by quotations published in active markets (Level 1) include:

 

-Chilean Government and Department of Treasury bonds

 

-Foreign instruments

 

-Mutual funds

 

Instruments which cannot be 100% observable in the market are valued according to other inputs observable in the market (Level 2).

 

The following financial instruments are classified under Level 2:

 

Type of
financial instrument		   Model
used in valuation		   Description of unobservable inputs
● Mortgage and private bonds   Present Value of Cash Flows Model  

Internal Rates of Return (“IRRs”) are provided by RiskAmerica, according to the following criterion:

 

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given nemotechnic, the reported rate is the weighted average amount of the observed rates.

 

In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on historical spread for the same item or similar ones.

         
● Time deposits   Present Value of Cash Flows Model  

IRRs are provided by RiskAmerica, according to the following criterion:

 

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given mnemonic, the reported rate is the weighted average amount of the observed rates.

 

In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on issuer curves.

         
● Constant Maturity Swaps (CMS), FX and Inflation Forward (Fwd) , Cross Currency Swaps (CCS), Interest Rate Swap (IRS)   Present Value of Cash Flows Model  

IRRs are provided by ICAP, GFI, Tradition, and Bloomberg according to this criterion:

 

With published market prices, a valuation curve is created by the bootstrapping method and is then used to value different derivative instruments.

         
● FX Options   Black-Scholes  

Formula adjusted by the volatility simile (implicit volatility), Prices (volatility) are provided by BGC Partners, according to this criterion:

 

With published market prices, a volatility parameter is created by interpolation and then these volatilities are used to value options.

         
● Guarantee deposits, guarantee received (Threshold)   Present Value of Cash Flows Model   Collateral associated to derivatives financial contracts: Average trading swap (CMS), FX and inflation Forward, Cross Currency Swap (CCS), Interest Rate Swap (IRS) y FX options.

 

In limited occasions significant inputs not observable in market data are used (Level 3). Several techniques are used to perform these estimates, including extrapolation of observable market data or a mix of observable data.

 

The following financial instruments are classified under Level 3:

 

Type of

financial instrument

  

Model

used in valuation

   Description of  unobservable inputs
● Caps/Floors/Swaptions   Black Normal model for Cap/Floors and Swaptions   There is unobservable input of implied volatility.
         
    Black – Scholes   There is unobservable input of implied volatility.
         
    Hull-White   Hybrid HW model for rates and Brownian motion for FX. There is unobservable volatility input
         
    FRA Implicit   Start FW not supported by Murex (platform) due to UF FW estimation
         
● CCS, IRS, CMS at TAB rates   Present Value of Cash Flows Model  

- Valuation obtained using interest curve interpolating to maturity of flows, however, TAB is not a directly observable variable nor correlated to any market input.

 

- Valuation using prices of instruments with similar characteristics plus a liquidity penalty rate.

         
● CCS (maturity> 30 years)   Present Value of Cash Flows Model  

The rates are provided by ICAP, GFI, Tradition and Bloomberg according following criteria:

 

Using the published market prices, the valuation curve is constructed using the bootstrapping method and this curve is then used to value the different derivatives.

         
● Debt instruments (in our case, low liquidity bonds)   Risk-free spread Model   Stochastic dynamic model to obtain discount rate.
         
● Loans and account receivable at FVOCI   Present Value of Cash Flows Model   Measured by discounting estimated cash flow using the interest rate of new contracts.

 

The Bank does not believe that any change in unobservable inputs with respect to level 3 instruments would result in a significantly different fair value measurement.

 

The following table presents the assets and liabilities that are measured at fair value on a recurrent basis:

 

   Fair value measurement 
As of December 31,  2023   Level 1   Level 2   Level 3 
   MCh$   MCh$   MCh$   MCh$ 
Assets                
Financial assets for trading at FVTPL                
Financial derivative contracts   10,119,486    
-
    10,119,486    
-
 
Debt financial instruments   98,308    98,308    
-
    
-
 
Financial assets at FVOCI                    
Debt financial instrument   4,536,025    4,528,915    6,656    454 
Other financial instruments   105,257    
 
    
 
    105,257 
Financial derivative contracts for hedge accounting   605,529    
-
    605,529    
-
 
Guarantee deposits (margin accounts)   2,238,900    
-
    2,238,900    
-
 
Total   17,703,505    4,627,223    12,970,571    105,711 
Liabilities                    
Financial liabilities for trading at FVTPL                    
Financial derivative contracts   9,521,575    
-
    9,521,575    
-
 
Financial derivative contracts for accounting hedges   2,466,767    
-
    2,466,767    
-
 
Guarantees received (margin accounts)   1,081,226    
-
    1,081,226    
-
 
Total   13,069,568    
-
    13,069,568    
-
 

 

   Fair value measurement 
As of December 31,  2022   Level 1   Level 2   Level 3 
   MCh$   MCh$   MCh$   MCh$ 
Assets                
Financial assets for trading at FVTPL                
Financial derivative contracts   11,672,960    
-
    11,672,922    38 
Debt financial instruments   154,046    154,046    
-
    
-
 
Financial assets at FVOCI                    
Debt financial instrument   5,880,733    5,870,407    9,894    432 
Other financial instruments   142,306    
-
    
-
    142,306 
Financial derivative contracts for hedge accounting   477,762    
-
    477,762    
-
 
Guarantee deposits (margin accounts)   2,442,327    
 
    2,442,327    
-
 
Total   20,770,134    6,024,453    14,602,905    142,776 
Liabilities                    
Financial liabilities for trading at FVTPL                    
Financial derivative contracts   11,319,320    
-
    11,319,320    
-
 
Financial derivative contracts for accounting hedges   2,788,794    
-
    2,788,794    
-
 
Guarantees received (margin accounts)   1,017,968    
-
    1,017,968    
-
 
Total   15,126,082    
-
    15,126,082    
-
 

 

The following table presents assets or liabilities which are not measured at fair value in the statements of financial position but for which the fair value is disclosed:

 

   Fair value measurement 
As of December 31,  2023   Level 1   Level 2   Level 3 
   MCh$   MCh$   MCh$   MCh$ 
Assets                
Financial assets at amortised cost                
Debt financial instruments   7,927,729    7,927,729    
-
    
 
 
Interbank loans   68,438    
-
    
-
    68,438 
Loans and account receivable from customers   39,134,700    
-
    
-
    39,134,700 
Total   47,132,078    7,927,729    
-
    39,204,349 
Liabilities                    
Financial liabilities at amortised cost                    
Deposits and other demand liabilities   13,537,826    
-
    
 
    13,537,826 
Time deposits and other time liabilities   16,326,525    
-
    16,326,525    
-
 
Interbank borrowings   10,190,640    
-
    10,190,640    
-
 
Issued debt instruments   7,751,672    
-
    7,751,672    
-
 
Other financial liabilities   296,273    
-
    296,273    
-
 
Regulatory capital financial instruments   1,825,819    
-
    1,825,819    
-
 
Total   49,928,755    
-
    36,390,929    13,537,826 

 

   Fair value measurement 
As of December 31,  2022   Level 1   Level 2   Level 3 
   MCh$   MCh$   MCh$   MCh$ 
Assets                
Financial assets at amortised cost                
Debt financial instruments   4,496,503    4,496,503    
-
    
-
 
Interbank loans   32,918    
-
    
-
    32,918 
Loans and account receivable from customers   39,181,962    
-
    
-
    39,181,962 
Total   43,711,383    4,496,503    
-
    39,214,880 
Liabilities                    
Financial liabilities at amortised cost                    
Deposits and other demand liabilities   14,086,226    
-
    
-
    14,086,226 
Time deposits and other time liabilities   13,117,554    
-
    13,117,554    
-
 
Interbank borrowings   8,223,783    
-
    8,223,783    
-
 
Issued debt instruments   6,871,028    
-
    6,871,028    
-
 
Other financial liabilities   292,995    
-
    292,995    
-
 
Regulatory capital financial instruments   2,459,632    
-
    2,459,632    
-
 
Total   45,051,218    
-
    30,964,992    14,086,226 

 

The fair values of other assets and other liabilities approximate their carrying values.

 

The methods and assumptions to estimate the fair value are defined below:

 

-Loans and amounts due from credit institutions and from customers – Fair value are estimated for groups of loans with similar characteristics. The fair value was measured by discounting estimated cash flow using the interest rate of new contracts. That is, the future cash flow of the current loan portfolio is estimated using the contractual rates, and then the new loans spread over the risk-free interest rate are incorporated to the risk-free yield curve in order to calculate the loan portfolio fair value. In terms of behavior assumptions, it is important to underline that a prepayment rate is applied to the loan portfolio, thus a more realistic future cash flow is achieved.

 

-Deposits and interbank borrowings – The fair value of deposits was calculated by discounting the difference between the cash flows on a contractual basis and current market rates for instruments with similar maturities. For variable-rate deposits, the carrying amount was considered to approximate fair value.

 

-Issued debt instruments and other financial liabilities – The fair value of long-term loans was estimated by cash flow discounted at the interest rate offered on the market with similar terms and maturities.

 

The valuation techniques used to estimate each level are defined in Note 1,i)

 

There were no transfers between levels 1 and 2 for the year ended December 31, 2023 and 2022.

 

The table below shows the effect, at December 31, 2023 and 2022, on the fair value of the main financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation. This effect was determined by a sensitivity analysis under a 1bp scenario, detailed in the following table:

 

As of December 31, 2023
Instrument Level 3 Valuation technique Main unobservable
inputs

Impacts (in MCh$)

Sens, -1bp Unfavorable
scenario

Impacts (in MCh$)

Sens, +1bp Favorable
scenario

Financial derivatives contracts Present Value method Curves on TAB (1) - -
Debt financial instruments at FVOCI Internal rate of return method BR UF (2) (28.66) 28.66

 

As of December 31, 2022
Instrument Level 3 Valuation technique Main unobservable inputs

Impacts (in MCh$)

Sens, -1bp Unfavorable scenario

Impacts (in MCh$)

Sens, +1bp Favorable scenario

Financial derivatives contracts Present Value method Curves on TAB (1) (0.6) 0.6
Debt financial instruments at FVOCI Internal rate of return method BR UF (2) (0.07) 0.07

 

(1)TAB: “Tasa Activa Bancaria” (Active Bank Rate). Average interest rates on 30, 90, 180 and 360 day deposits published by the Chilean Association of Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for inflation (in Chilean unit of account (Unidad de Fomento - UF)).

(2)BR: “Bonos de Reconocimiento” (Recognition Bonds). The Recognition Bond is an instrument of money provided by the State of Chile to workers who joined the new pension system, which began operating since 1981.

 

The following table presents the Bank’s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant inputs (Level 3) as of December 31, 2023, 2022 and 2021:

 

   Assets   Liabilities 
   MCh$   MCh$ 
As of January 1, 2023   142,776    
      -
 
Total realized and unrealized profits (losses)          
Included in statements of income   (19)   
-
 
Included in other comprehensive income   9,352    
-
 
Purchases, issuances, and loans (net)   (46,398)   
-
 
Level transfer   
 
    
-
 
As of December 31, 2023   105,711    
-
 
           
Total profits or losses included in comprehensive income for 2022 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2023   (37,065)   
-
 

 

   Assets   Liabilities 
   MCh$   MCh$ 
As of January 1, 2022   102,426    
      -
 
Total realized and unrealized profits (losses)          
Included in statements of income   139,848    
-
 
Included in other comprehensive income   (99,498)   
-
 
Purchases, issuances, and loans (net)   
-
    
-
 
Level transfer   
-
    
-
 
As of December 31, 2022   142,776    
-
 
           
Total profits or losses included in comprehensive income for 2022 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2022   40,350    
-
 

 

   Assets   Liabilities 
   MCh$   MCh$ 
As of January 1, 2021   77,458    2,760 
Total realized and unrealized profits (losses)          
Included in statements of income   (4,711)   
-
 
Included in other comprehensive income   30,073    
-
 
Purchases, issuances, and loans (net)   
-
    
-
 
Level transfer   (394)   (2,760)
As of December 31, 2021   102,426    
-
 
           
Total profits or losses included in comprehensive income for 2021 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2021   24,968    (2,760)

 

The realized and unrealized profits (losses) included in comprehensive income for 2023 and 2022, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the Statements of Comprehensive Income.

 

The potential effect as of December 31, 2023 and 2022 on the valuation of assets and liabilities valued at fair value on a recurrent basis through unobservable significant inputs (level 3), generated by changes in the principal assumptions if other reasonably possible assumptions that are less or more favorable were used, is not considered by the Bank to be significant.

 

The following tables show the financial instruments subject to compensation in accordance with IAS 32, for 2023 and 2022:

 

As of December 31, 2023
   On-balance sheet amounts with netting agreements         
Financial instruments  Gross
amounts		   Compensated
in balance		   Net amount presented
in balance		   Remaining financial
instruments not linked,
nor subject to neeting
agreements		   Statements of
Financial Position
balances		 
Assets  Ch$ Million   Ch$ Million   Ch$ Million   Ch$ Million   Ch$ Million 
Financial derivative contracts and hedge accounting (1)   10,575,817    
        -
    10,575,817    149,198    10,725,015 
Loans and accounts receivable and interbank loans (2)   
-
    
-
    
-
    39,657,783    39,657,783 
Total   10,575,817    
-
    10,575,817    39,806,981    50,382,798 
Liabilities                         
Financial derivative contracts and hedge accounting   11,732,137    
-
    11,732,137    256,205    11,988,342 
Investments under resale agreements   282,584    
-
    282,584    
-
    282,584 
Deposits and interbank borrowings   
-
    
-
    
-
    40,042,267    40,042,267 
Total   12,014,721    
-
    12,014,721    40,298,472    52,313,193 

 

(1)Derivatives contract have guarantees associated for Ch$2,225,820 million and Ch$839,201, respectively.
(2)Loans and accounts receivable and interbank loans at amortised cost

 

As of December 31, 2022
   On-balance sheet amounts with netting agreements         
Financial instruments  Gross
amounts		   Compensated
in balance		   Net amount presented
in balance		   Remaining financial
instruments not  subject to neeting agreements		   Amount in
Statements of
Financial Position		 
Assets  Ch$ Million   Ch$ Million   Ch$ Million   Ch$ Million   Ch$ Million 
Financial derivative contracts and hedge accounting (1)   10,280,291    
-
    10,280,291    1,870,431    12,150,722 
Loans and accounts receivable and interbank loans (2)   
-
    
-
    
-
    37,692,840    37,692,840 
Total   10,280,291    
-
    10,280,291    39,563,271    49,843,562 
Liabilities                         
Financial derivative contracts and hedge accounting   11,365,281    
-
    11,365,281    2,742,833    14,108,114 
Investments under resale agreements   315,355    .    315,355    
-
    315,355 
Deposits and interbank borrowings (3)   
-
    
-
    
-
    35,929,781    35,929,780 
Total   11,680,636    
-
    11,680,636    38,672,614    50,353,249 

 

(1)Derivatives contract have guarantees associated for Ch$1,695,431 million and Ch$746,729, respectively.
(2)Loans and accounts receivable and interbank loans at amortised cost
(3)Include Deposits and other demand liabilities, Time deposits and other time liabilities and interbank borrowings

 

The Bank, in order to reduce its credit exposure in its financial derivative operations, has entered into collateral contracts with its counterparties, in which it establishes the terms and conditions under which they operate. In terms collateral (received/delivered) operates when the net of the fair value of the financial instruments held exceed the thresholds defined in the respective contracts.

 

   As of December 31, 2023   As of December 31, 2022 
Financial derivative contracts  Assets   Liability   Assets   Liability 
   MCh$   MCh$   MCh$   MCh$ 
Financial derivative contracts with collateral agreement threshold equal to zero   9,802,491    10,836,243    8,177,074    9,588,768 
Financial derivative contracts with non-zero threshold collateral agreement   773,325    895,894    440,091    536,318 
Financial derivative contracts without collateral agreement   149,199    256,205    3,533,557    3,983,028 
Total   10,725,015    11,988,342    12,150,722    14,108,114