OPERATING RESULTS

Introduction

The following discussion should be read together with our audited consolidated financial statements and the section entitled “Item 4. Information on the Company—Selected Statistical Information.” Certain amounts (including percentage amounts) that appear in this annual report may not total due to rounding.

We prepare our audited consolidated financial statements in accordance with Chilean GAAP (including the rules of the Chilean Superintendency of Banks relating thereto), which differ in certain significant respects from U.S. GAAP. Note 28 to our audited consolidated financial statements provides a description of the material differences between Chilean GAAP and U.S. GAAP as they relate to us. It also includes a reconciliation to U.S. GAAP of net income for the years ended December 31, 2002, 2003 and 2004 and shareholders’ equity at December 31, 2003 and 2004.

Pursuant to Chilean GAAP, the financial data presented in this section for all full-year periods are restated in constant pesos of December 31, 2004. See “Presentation of Financial Information” and note 1 to our audited consolidated financial statements.

Overview

We are a leading bank in Chile providing a broad range of financial products and services to individual and corporate customers that are primarily located in Chile. Accordingly, and as described below, our financial condition and results of operations are largely dependent upon economic and political factors affecting Chile, as well as changes in interest rates and inflation rates. We also face a number of other risks, such as increased competition and changes in market conditions that could impact our ability to achieve our goals. See “Item 4. Information on the Company—Selected Statistical Information” for a description of risk characteristics associated with each type of loan in our loan portfolio and “Item 3. Risk Factors” for a more detailed description of the specific risks which we believe to be material to our business operations.

Despite growth in the 1980s and 1990s, Chile’s economy has remained smaller than the economies of neighboring countries such as Argentina and Brazil. Although Chile’s economy has continued to grow in recent years, the Chilean economy’s growth slowed in each of the years between 2000 and 2003. Unemployment has also remained high, averaging 9.2% in 2001, 9.0% in 2002 and 8.5% in 2003. During 2004, GDP grew 6.1%, but unemployment remained high, averaging 8.8% for the year.

Future developments in the Chilean economy may impair our ability to proceed with our strategic plan or our business, financial condition or results of operations. Our financial condition and results of operations could also be adversely affected by changes in economic or other policies of the Chilean government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector, or other political or economic developments in Chile, as well as regulatory changes or administrative practices of Chilean authorities, over which we have no control. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Our growth and profitability depend on the level of economic activity in Chile” and “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Inflation could adversely affect the value of our ADSs and financial condition and results of operations.”

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Inflation

Historically, Chile has experienced high levels of inflation which have significantly affected our financial condition and results of operations. Inflation has remained relatively stable in recent years; however, the inflation rate was 2.4% in 2004, 1.1% in 2003 and 2.8% in 2002. Our results of operations reflect the effect of inflation in the following ways:

UF-denominated Assets and Liabilities . The UF is revalued in monthly cycles. On every day in the period beginning the tenth day of the current month through the ninth day of the next month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect each day a pro rata amount of the prior calendar month’s change in the Consumer Price Index. One UF was equal to Ch$16,744.12 at December 31, 2002, Ch$16,920.00 at December 31, 2003 and Ch$17,317.05 at December 31, 2004. The effect of any changes in the nominal peso value of our UF-denominated assets and liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest revenue and expense. Our net interest revenue will be positively affected by inflation (and negatively affected by deflation) to the extent that our average UF-denominated assets exceed our average UF-denominated liabilities, while net interest revenue will be negatively affected by inflation (and positively affected by deflation) when average UF-denominated liabilities exceed average UF-denominated assets. Our average UF-denominated assets exceeded our average UF-denominated liabilities by Ch$1,348,156 million during the year ended December 31, 2002, Ch$1,124,677 million during the year ended December 31, 2003 and Ch$1,291,520 million during the year ended December 31, 2004. See “Item 4. Information on the Company—Selected Statistical Information.”

Peso-denominated Assets and Liabilities . Interest rates in Chile tend to reflect the rate of inflation during the period and expectations regarding future inflation. The sensitivity of our peso-denominated interest earning assets and interest bearing liabilities to the inflation rate varies. See “—Interest Rates.” We maintain a substantial amount of non-interest bearing peso-denominated demand deposits. The ratio of such deposits to average interest bearing peso-denominated liabilities was 57% during 2002, 66% during 2003 and 64% during 2004. Because a large part of such deposits are not sensitive to inflation, even a slight decline in the rate of inflation may adversely affect our net interest margin on assets funded with such deposits and even a slight increase in the rate of inflation may increase the net interest margin on such assets. See “Item 4. Selected Statistical Information—Interest Earning Assets and Net Interest Margin.”

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Price-Level Restatements . Chilean GAAP requires that the effect of inflation on a bank’s net monetary asset position (monetary assets less monetary liabilities) be reflected in its results of operations as a gain (or loss) from price-level restatement. A bank’s net monetary asset position is determined by subtracting its net nonmonetary asset position (nonmonetary assets less nonmonetary liabilities) from shareholders’ equity. As such, under Chilean GAAP, the gain (or loss) from price-level restatement in results of operations is determined by subtracting the price-level restatement adjustment of net nonmonetary assets from the price-level restatement adjustment of shareholders’ equity. The inflation rate used for purposes of such adjustments is the change in the Consumer Price Index during the 12 months ended November 30 of the reported year. The change in the Consumer Price Index used for price-level restatement purposes was 3.0% in 2002, 1.0% in 2003 and 2.5% in 2004. See note 1(b) to our audited consolidated financial statements. The actual change in the Consumer Price Index was 2.8% in the year ended December 31, 2002, 1.1% in the year ended December 31, 2003 and 2.4% in the year ended December 31, 2004.

Interest Rates

Interest rates earned and paid on our assets and liabilities to some degree reflect inflation and expectations regarding future inflation as well as shifts in short-term interest rates related to the Central Bank’s monetary policies. The Central Bank manages short-term interest rates based on its stated objectives of achieving low inflation and stable exchange rates. Because our liabilities generally re-price faster than our assets, changes in the rate of inflation or short-term interest rates are reflected in the rates of interest we pay on our liabilities before they are reflected in the interest rates we earn on our assets. Accordingly, our net interest margin on assets and liabilities is usually adversely affected in the short-term by increases in inflation or short-term interest rates and benefits in the short-term from decreases in inflation or short-term interest rates, although the existence of non-interest bearing peso-denominated demand deposits tends to mitigate both effects. See “—Inflation—Peso-denominated Assets and Liabilities.” In addition, because our peso-denominated liabilities have relatively short re-pricing periods, those liabilities generally are more responsive to changes in inflation or short-term interest rates than our UF-denominated liabilities.

The average real annual short-term interest rate based on the rate paid by Chilean financial institutions for 90 to 360 day Chilean peso denominated deposits was 1.94% in 2002, 1.76% in 2003 and 1.07% in 2004. The average annual real long-term interest rate based on the Chilean Central Bank’s eight-year duration Chilean peso denominated bonds was 4.54% in 2002, 3.96% in 2003 and 3.52% in 2004.

Foreign Currency Exchange Rates

A significant portion of our assets and liabilities are denominated in foreign currencies, principally U.S. dollars, and we historically have maintained and may continue to maintain gaps between the balances of such assets and liabilities. The gap between foreign currency-denominated assets and foreign currency-denominated liabilities was a net asset position of Ch$75,396 million at December 31, 2002, Ch$23,274 million at December 31, 2003 and Ch$36,541 at December 31, 2004. See note 20 to our audited consolidated financial statements. This gap includes assets and liabilities denominated in foreign currencies and assets and liabilities denominated in Chilean pesos that contain repayment terms linked to changes in foreign currency exchange rates. Because foreign currency-denominated assets and liabilities, as well as interest earned or paid on such assets and liabilities and gains (losses) realized upon the sale of such assets, are translated into pesos in preparing our audited consolidated financial statements, our reported income is affected by changes in the value of the peso with respect to foreign currencies, primarily the U.S. dollar. For their part, adjustments to U.S. dollar-indexed assets are reflected as adjustments in net interest earnings and offset results in the foreign exchange position. The exchange rate variation over capital and reserves of our foreign branches is adjusted against equity and not against net income.

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Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with Chilean GAAP and the specific accounting rules of the Chilean Superintendency of Banks. The notes to our audited consolidated financial statements contain a summary of the accounting policies that are significant to us, as well as a description of the significant differences between these policies and U.S. GAAP. The notes include additional disclosures required under U.S. GAAP, a reconciliation between shareholders’ equity and net income to the corresponding amounts that would be reported in accordance with U.S. GAAP and a discussion of recently issued accounting pronouncements.

Both Chilean and U.S. GAAP require management to make certain estimates and assumptions, as some of the amounts reported in the financial statements are related to matters that are inherently uncertain. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations.

Allowances for loan losses

Chilean banks are required to maintain loan loss allowances in amounts determined in accordance with the regulations issued by the Chilean Superintendency of Banks. Under these regulations, we must classify our portfolio based on payment capability. The minimum amount of required loan loss allowances are determined based on fixed percentages of estimated loan losses assigned to each category.

Under U.S. GAAP, allowances for loan losses are made to account for estimated losses in outstanding loans for which there is doubt about the borrower’s capacity to repay the principal.

The classification of our loan portfolio for Chilean GAAP purposes and for allowances for loan losses under U.S. GAAP is determined through statistical modeling and estimates. Informed judgments must be made when identifying deteriorating loans, the probability of default, the expected loss, the value of collateral and current economic conditions. Even though we consider our allowances for loan losses to be adequate, the use of different estimates and assumptions could produce different allowances for loan losses, and amendments to the allowances may be required in the future due to changes in the value of collateral, the amount of cash to be received or other economic events.

On January 1, 2004, in accordance with Circular No. 3,246 issued by the Chilean Superintendency of Banks, we adopted a new methodology to determine our loan loss allowances. This new regulation did not adversely affect our financial position or results of operations. A detailed description of this accounting policy is discussed in “Item 4. Information on the Company—Regulation and Supervision—Allowances for Loan Losses” and in notes 1 and 28 to our audited consolidated financial statements.

Fair value accounting

A portion of our assets and liabilities are carried at fair value. Under both Chilean GAAP and U.S. GAAP financial instruments are stated at fair value, except for those classified as “held-to-maturity” under U.S. GAAP, which are carried at amortized cost. Under U.S. GAAP, derivative financial instruments are recorded at fair value and assets received in lieu of payment are recorded at fair value less their estimated cost of sale. Fair values are based on quoted market prices or, if not available, on internally developed pricing models informed by independently obtained market information. If market information is limited or in some instances not available, management applies its professional judgment. Other factors that may also affect estimates are incorrect model assumptions, market dislocations and unexpected correlations. Notwithstanding the level of subjectivity inherent in determining fair value, we believe our estimates of fair value are adequate. The use of different models or assumptions could lead to changes in our reported results.

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Price-level restatement

Chilean GAAP requires that financial statements be restated to reflect the full effects of loss in the purchasing power of the Chilean peso on the financial position and results of operations of reporting entities. The method prescribes that the historical cost of all non-monetary accounts be restated for general price-level changes between the date of origin of each item and the year-end.

Our audited consolidated financial statements have been price-level restated in order to reflect the effects of the changes in the purchasing power of the Chilean peso during each year. All non-monetary assets and liabilities and all equity accounts have been restated to reflect the changes in the Consumer Price Index from the date they were acquired or incurred to year-end. Consistent with general banking practices in Chile, no specific purchasing power adjustments of income statement amounts are made. The purchasing power gain or loss included in net income reflects the effects of Chilean inflation on the monetary assets and liabilities held by us.

For comparative purposes, the historical December 31, 2002 and 2003 audited consolidated financial statements and their accompanying notes have been presented in constant Chilean pesos as of December 31, 2004. As described in note 1(s) of our audited consolidated financial statements, certain balances of previous years’ financial statements have been reclassified to conform with the present year presentation.

The price-level adjusted audited consolidated financial statements do not purport to represent appraised values, replacement cost, or any other current value of assets at which transactions would take place currently. Instead, they are intended to restate all nonmonetary consolidated financial statement components in terms of local currency of a single purchasing power and to include in the net result for each year the gain or loss in purchasing power arising from the holding of monetary assets and liabilities exposed to the effects of inflation. See the discussion of price-level restatement in note 1(b) to our audited consolidated financial statements.

Goodwill

Under U.S. GAAP, we have significant intangible assets related to goodwill. We record all assets and liabilities acquired in purchase acquisitions, including goodwill and other acquired intangibles, at fair value as required by SFAS No. 141, published by FASB. These include amounts pushed down from our parent Quiñenco S.A.

Under SFAS No. 142, goodwill must be allocated to reporting units and tested for impairment. We test goodwill for impairment annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level, which is generally one level below the six major business segments identified in note 28 (x) to our audited consolidated financial statements. The first part of the test is a comparison at the reporting unit level of the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value is less than the carrying value, then the second part of the test is conducted to measure the amount of potential goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared to the carrying amount of goodwill recorded in our financial records. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, then we would recognize an impairment loss in the amount of the difference, which would be recorded as a charge against net income.

The fair values of the reporting units are determined using discounted cash flow models based on each reporting unit’s internal forecasts.

Goodwill was not impaired as of December 31, 2003 or 2004, nor was any goodwill written-off during the years ended December 31, 2002, 2003 and 2004.

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The initial goodwill and intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future using a discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine. Events and factors that may significantly affect the estimates include competitive forces, customer behavior and attrition, changes in revenue growth trends, cost structures and technology and changes in interest rates and specific industry or market sector conditions. Impairment is recognized earlier whenever warranted. For a further discussion of accounting practices for goodwill under U.S. GAAP, see note 28 to our audited consolidated financial statements.

Changes in Accounting Principles

On January 1, 2004, in accordance with Circular No 3,246 of the Chilean Superintendency of Banks, the new standards for determining loan loss provisions established in Chapter 7-10 of the Superintendency’s accounting rules became effective. The application of these new criteria for determining provisions did not have a significant effect on the financial situation of our subsidiaries presented in the consolidated financial statements or us. To comply with the amended regulations, we redesignated the voluntary provisions recorded as of December 31, 2003 to the additional provisions category in conformity with the amended regulations.

In accordance with Circular No. 3,196, issued by the Chilean Superintendency of Banks, effective October 31, 2002, we modified our accounting treatment of financial investments in mortgage finance bonds issued by us. This change consisted of subtracting the amount recorded for mortgage finance bonds issued by us from assets, and subtracting the respective mortgage finance bonds obligation from liabilities. Similarly, the difference between the amount deducted from related assets and liabilities was recognized under other assets and is amortized using the straight-line method based on the term of the obligation. As of December 31, 2003 and 2004, we recorded a net amount of Ch$2,138 million and Ch$2,152 million, respectively, under “Other assets”.

Differences between Chilean and United States Generally Accepted Accounting Principles

Chilean GAAP varies in certain important respects from U.S. GAAP, including some of the methods that are used to measure the amounts shown in the audited consolidated financial statements, additional disclosures required by U.S. GAAP and the accounting treatment of the merger. Those differences, as well as other significant differences between Chilean GAAP and U.S. GAAP, are described in greater detail in note 28 to our audited consolidated financial statements.

Results of Operations for the Years Ended December 31, 2002, 2003 and 2004

The following section discusses the results of operations for the years ended December 31, 2002, 2003 and 2004. To the extent that it is available and is useful in analyzing our results, we have included information based on the business areas that we use for internal reporting. We also present our results on a consolidated basis.

We use a business area-based profitability system to manage our business. This system allows us to extract income and expense information by client and also allows us to view information by office, branch or business area. The profitability system uses the accounting balances and the interest rates as agreed upon with the client. In order to assess the income per transaction, the system compares the interest rate agreed upon with the client with our own cost of funds. We use internal cost of funds tables for various transactions which are updated daily. From these tables we are able to determine operating costs per transaction or per client and these costs are then allocated to our various business areas. The system has been developed in recent years, and has been subject of continued improvement resulting in cost allocation changes.

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Our business is organized into the following areas:

The accounting policies used for the business areas are those used for our consolidated management reports. Corporate and personal customers are assigned to account executives who work exclusively within one business area. Some costs are allocated to the business areas and others are split between two or more business areas based on a single transaction. Thereafter, any unallocated costs are included as “other” in order to arrive at the consolidated balance sheet and income statement.

The business area information is subject to general internal auditing procedures to ensure the integrity of the information used in the management decision making purposes. The business area information presented has also been adjusted in order to tie results to the income statement, as presented in accordance with Chilean GAAP in our audited consolidated financial statements. The most significant differences in classification are as follows:

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Net Income Before Tax by Business Area

The following table sets forth net income before tax for each business area for each of the years ended December 31, 2002, 2003 and 2004. The line item “Other” includes the effect of conforming internal accounting policies to Chilean GAAP and a number of non-allocated costs, such as human resources related expenses, additional provisions (previously referred to as “voluntary provisions”) and depreciation costs. For internal reporting purposes, we control and monitor these costs separately and do not include them in the determination of business area profitability. Also included within “Other” are specific portions of income such as rental income.

2003 and 2004 . The 15.5% increase in net income before taxes in 2004 as compared to 2003 was primarily attributable to a 42.8% increase in net interest revenue, a 29.1% increase in fees and a 29.6% increase in recovery of loans that had previously been charged off. These increases were mainly due to the growth of the Chilean economy, an improvement in our asset mix and the further integration of our subsidiaries’ businesses with our core business.

2002 and 2003 . The 177.8% increase in net income before taxes in 2003 as compared to 2002 was primarily attributable to a significant decrease in provisions for loan losses, a significant increase in fees and income from services, a decrease in operating expenses and an increase in recoveries of loans that had previously been charged-off. These results were primarily attributable to the recovery of the Chilean economy, which positively impacted the financial conditions of our clients and the quality of our overall loan portfolio and the merger, which resulted in costs efficiencies and higher business volumes.

Large Corporations . 2003 and 2004 . The 25.2% decrease in the large corporations business area’s net income before taxes in 2004 was primarily attributable to an 11.9% decrease in operating revenues, which was primarily attributable to a decrease in lending spreads and losses from the sale of corporate loans. The decrease in net income before taxes was also explained by a 12.4% increase in operating expenses primarily due to marketing and technological costs and an 11.8% increase in provisions for loan losses.

2002 and 2003 . The almost five-fold increase in the large corporations business area’s net income before taxes in 2003 was primarily attributable to a 73.6% decrease in provisions for loan losses. To a lesser extent, the increase in net income before taxes was also attributable to a decrease in charge-offs on assets received in lieu of payments and an increase in fee income from financial services. These factors more than offset a small decrease in net interest revenue, which was primarily attributable to a decrease in inflation in 2003.

Middle Market Companies . 2003 and 2004. The 6.6% decrease in the middle market companies business area’s income before taxes in 2004 was primarily attributable to a 28.8% increase in provisions for loan losses, from Ch$17,601 million in 2003 to Ch$22,669 million in 2004, which was primarily due to increased growth, an increase in the risk index of the loan portfolio and a 4% increase in operating expenses during 2004.

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2002 and 2003. The 59.4% increase in the middle market companies business area’s net income before taxes in 2003 was primarily attributable to a decrease in provisions for loan losses and, to a lesser extent, lower charge offs on assets received in lieu of payment.

International Banking . 2003 and 2004 . The 46% decrease in the international banking business area’s net income before taxes in 2004 as compared to 2003 was primarily attributable to the non-recurring earnings generated in 2003 from the sale of Latin American investment securities held at our New York branch. This decrease was partially offset by lower operating expenses during 2004.

2002 and 2003 . In 2003, the international banking business area recorded net income before taxes of Ch$12,507 million, as compared to a net loss of Ch$6,900 million recorded in 2002. The change from a net loss to net income was primarily attributable to earnings obtained from the sale of Latin American investment securities held at our New York branch that had been previously written-off. The change from a net loss to net income was also attributable to a decrease in operating expenses.

Retail Banking . 2003 and 2004. The 30.8% increase in the retail banking business area’s net income before taxes for in 2004 was primarily attributable to an 18.6% increase in operating revenues from Ch$140,725 million in 2003 to Ch$166,877 million in 2004, which was primarily attributable to a 16.2% growth in the retail banking business area’s loan portfolio and, to a lesser extent, higher fee income. These factors were partially offset by higher operating expenses.

2002 and 2003. The 45.4% increase in the retail banking business area’s net income before taxes in 2003 was primarily attributable to lower provisions for loan losses and an increase in recoveries of loans that had previously been charged-off. Additionally, increased loan volumes and a decrease in operating expenses more than offset a reduction in spreads on our loans and the negative effect of the decrease in the inflation rate.

Treasury and Money Market Operations . 2003 and 2004. The 27.9% increase in the treasury and money market operations business area’s net income before taxes in 2004 was primarily attributable to increased income from our investment portfolio, which was primarily attributable to an increase in the value of our UF-denominated assets as a result of increased inflation and a decrease in Chilean-peso denominated costs of funds resulting from a decrease in the short term reference rate from 2.73% in 2003 to 1.87% in 2004.

2002 and 2003. The 17.8% decrease in the treasury and money market operations business area’s net income before taxes in 2003 was primarily attributable to a slight increase in long-term interest rates and decreased interest rate volatility, which reduced our earnings from our Chilean investment portfolio as compared to 2002.

Operations through Subsidiaries . 2003 and 2004. The 29.3% increase in net income before taxes from our subsidiaries in 2004 was primarily attributable to the 23.8% increase in fee income from their operations from Ch$37,428 million in 2003 to Ch$46,335 million in 2004, which resulted in a 21% increase in operating revenues. The increase in our subsidiaries’ fee income was also a result of increased cross-selling of products by our subsidiaries, as well as the growth of the Chilean economy. In particular, fee income from our securities brokerage subsidiary increased 24.7% during 2004. The 80% increase in fee income from services generated by our financial advisory services subsidiary was primarily attributable to fee income from investment banking and advisory services.

2002 and 2003. The 56.0% increase in net income before taxes from our subsidiaries in 2003 was primarily attributable to significant growth in fee income from our subsidiary operations. The increase was primarily attributable to an increase in the trading volume of stocks and U.S. dollars traded by our securities brokerage subsidiary, an increase in the average amount of funds managed by our mutual fund management subsidiary and an increase in the net income of our factoring subsidiary, which was primarily the result of increased volume and a decrease in its provisions for loan losses.

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2003 and 2004 . Our net income for 2004 was Ch$152,628 million, an increase of 14.1% from Ch$133,817 million in 2003, primarily reflecting a 42.8% increase in net interest revenue, a 29.1% increase in fee income and a 29.6% increase in loan loss recoveries. These factors were partially offset by a decrease in other operating income, net, an increase in operating expenses and increased provisions for loan losses.

2002 and 2003 . Our net income for 2003 was Ch$133,817 million, an increase of 146% from Ch$54,490 million in 2002, which primarily reflected a 40.9% decrease in provisions for loan losses, a 24.8% increase in fee income, a change from other operating loss, net of Ch$31,621 million in 2002 to other operating income, net of Ch$98,801 million in 2003, an 11.4% decrease in operating expenses and an increase in the recovery of loans that had previously been charged-off. These factors were partially offset by lower net interest revenue and higher income taxes.

Net Interest Revenue

The tables included under the headings “—Interest Revenue” and “—Interest Expense” set forth information regarding our consolidated interest revenue and expenses and average interest earning assets and average interest bearing liabilities for the years ended December 31, 2002, 2003 and 2004. This information is derived from the tables included elsewhere in this annual report under “Item 4. Information on the Company—Selected Statistical Information” and is qualified in its entirety by reference to such information.

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The following table sets forth the effect on our net interest revenue of changes in the average volume of interest earning assets and interest bearing liabilities and the effect of average nominal interest rates on interest earning assets and interest bearing liabilities during the periods indicated:

2003 and 2004 . Net interest revenue increased by 42.8% from Ch$230,082 million in 2003 to Ch$328,472 million in 2004, primarily as a result of a 2.2% increase in average interest earning assets and an increase of 109 basis points (one basis point equals one one-hundredth of a percent) in net interest margin (net interest revenue divided by average interest earning assets), from 2.75% in 2003 to 3.84% in 2004. The increase in net interest margin was primarily the result of:

2002 and 2003 . Net interest revenue decreased by 39.5% from Ch$380,546 million in 2002 to Ch$230,082 million in 2003 primarily as a result of a decrease of 177 basis points (one basis point equals one one-hundredth of a percent) in our net interest margin and, to a lesser extent, a 0.5% decrease in the average volume of interest earning assets. Our net interest margin decreased from 4.52% in 2002 to 2.75% in 2003 primarily as a result of:

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The 0.5% decrease in average interest earning assets in 2003 was primarily the result of a decrease in the amount of foreign currency denominated regulatory reserves we are required to maintain, and a decrease in average financial investments. We reduced the level of such regulatory reserves and financial investments in response to the Central Bank’s reduction in May 2003 of its foreign currency denominated demand and time deposits requirements.

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The following table sets forth the effect on our interest revenue of changes in (1) the average volume of interest earning assets and (2) the average nominal interest rates on interest earning assets, during the periods presented in the preceding table:

2003 and 2004 . Interest revenue increased by 23.7% from Ch$439,422 million in 2003 to Ch$543,372 million in 2004, primarily as a result of an increase in average nominal rates earned and a 2.2% increase in average interest earning assets from Ch$8,379,084 million in 2003 to Ch$8,560,739 million in 2004, primarily as a result of higher loan balances. Average nominal interest rates earned increased from 5.24% in 2003 to 6.35% in 2004, primarily as a result of an increase in the inflation rate from 1.1% in 2003 to 2.4% in 2004 and successive increases of the Chilean Central Bank’s nominal reference rates (from 1.75% as of February 2004 to 2.25% as of December 2004).

2002 and 2003 . Interest revenue decreased by 38.5% from Ch$714,018 million in 2002 to Ch$439,422 million in 2003 primarily as a result of a decrease in the average nominal interest rates earned from 8.48% in 2002 to 5.24% in 2003. The decrease in average nominal interest rates earned was primarily as a result of a decrease in the inflation rate (from 2.8% in 2002 to 1.1% in 2003) and in the interest rates on Chilean peso-denominated interest earning assets. Average interest earning assets decreased slightly from Ch$8,419,910 million in 2002 to Ch$8,379,084 million in 2003 as a result of a reduction in the Central Bank’s foreign currency-denominated demand and time deposits requirements.

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The following table sets forth the effect on our interest expense from changes in (1) average volume of interest bearing liabilities and (2) average nominal interest rates paid on interest bearing liabilities, during the periods presented:

2003 and 2004 . Interest expense increased by 2.7% from Ch$209,340 million in 2003 to Ch$214,900 million in 2004, primarily as a result of an increase in the average nominal interest rates paid from 3.42% in 2003 to 3.53% in 2004. The increase in average nominal interest rates was partially offset by the 0.4 % decrease in average interest bearing liabilities from Ch$6,112,917 million in 2003 to Ch$6,087,927 million in 2004, primarily as a result of an 11.5% increase in average non-interest bearing demand deposits denominated in Chilean pesos.

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2002 and 2003. Interest expense decreased by 37.2% from Ch$333,472 million in 2002 to Ch$209,340 million in 2003. The decrease was primarily attributable to a significant decrease in average nominal interest rates paid, from 5.25% in 2002 to 3.42% in 2003, and, to a lesser extent, by the impact of a 3.7% decrease in the average volume of interest bearing liabilities, from Ch$6,350,111 million in 2002 to Ch$6,112,917 million in 2003, primarily as a result of a decrease in mortgage finance bonds, investments sold under agreements to repurchase and time deposits. The decrease in the average nominal interest rate paid was primarily attributable to lower inflation and lower real interest rates paid on Chilean peso-denominated liabilities.

Provisions for Loan Losses

Chilean banks are required to maintain allowances to cover possible credit losses in accordance with regulations issued by the Chilean Superintendency of Banks. Effective as of January 1, 2004, the Chilean Superintendency of Banks modified the procedure used to calculate a financial institution’s required allowances. The application of such amended regulations did not result in any material increase in our allowance for loan losses. According to regulations of the Chilean Superintendency of Banks applicable to such periods, the amount of provisions charged to income in any period consists of net provisions for possible loan losses. See “Item 4. Information on the Company—Regulation and Supervision” and note 7 to our audited consolidated financial statements.

The following table sets forth information with respect to our provisions and allowances for loan losses and charge-offs for each of the years ended December 31, 2002, 2003 and 2004:

2003 and 2004 . Our overall provisions for loan losses increased by 19.3% from Ch$61,612 million in 2003 to Ch$73,512 million in 2004, primarily as a result of the 7.4% growth in the loan portfolio and the risk classification downgrade of certain corporate clients primarily concentrated in the construction sector. Provisions for loan losses represented approximately 1.11% of average loans in 2004, a small increase from the 0.96% in 2003. On a consolidated basis, our risk index decreased from 2.36% in 2003 to 2.23% in 2004.

2002 and 2003. Our overall provisions for loan losses decreased by 40.9% from Ch$104,192 million in 2002 to Ch$61,612 million in 2003, which primarily reflected the establishment of significant provisions in 2003 that were not in effect in 2002 and the growth of the Chilean economy. The decrease in our overall

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provisions for loan losses were also attributable to the 15.9% appreciation of the Chilean peso against the U.S. dollar, which resulted in a decrease in the amount of our Chilean peso-denominated provisioning for foreign currency-denominated loans. As a result, the ratio of provisions to average loans decreased to 0.96% in 2003 from 1.65% in 2002. Our consolidated risk index, changed from 3.00% at the end of 2002, to 2.36% as of December 31, 2003.

Fees and Income from Services, Net

The following table sets forth certain components of our fees and income from services (net of fees paid to third parties that provide support for those services, principally fees relating to sales force and receipts and collection services provided to us) for the years ended December 31, 2002, 2003 and 2004:

2003 and 2004 . Fees and income from services, net increased by 29.1% from Ch$98,251 million in 2003 to Ch$126,842 million in 2004, primarily as a result of an increase in fees generated from mutual funds, insurance and stock brokerage related products, credit cards, checking accounts, overdrafts, sight accounts and ATM transactions. Fee income accounted for 27.0% of operating revenues during 2004, a decrease from 23.0% in 2003, primarily as a result of the improved quality and increased quantity of fee generating products through alliances, promotions, product innovations and expanded distribution.

2002 and 2003 . Fees and income from services, net increased by 24.8% from Ch$78,733 million in 2002 to Ch$98,251 million in 2003. The increase in 2003 was primarily attributable to the improved performance of our stock brokerage subsidiary, an increase in financial advisory service fees, additional fee income from our insurance business and from Socofin S.A., our collection services subsidiary, increased fee income associated with checking accounts and sight accounts (primarily as a result of an increase in the number of these accounts), a new fee structure for overdrafts and increased credit cards fees.

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Other Operating Income (Loss), Net

Other operating income (loss), net, consists of net gains and losses from trading activities and net gains and losses from foreign exchange transactions. Trading results include gains and losses realized on the sale of financial investments as well as gains and losses arising from marking financial investments to market at period-end. Net gains and losses from foreign exchange transactions include gains and losses realized upon the sale of foreign currency and foreign exchange derivatives and gains and losses arising from the period-end translation of foreign currency-denominated assets and liabilities into pesos. Foreign exchange results do not include net adjustments on U.S. dollar-indexed domestic currency transactions, or the exchange rate variation on foreign branches’ capital and reserves. Foreign exchange results do include existing interest rate differences in currency derivatives.

The following table sets forth certain components of our other operating income (loss), net, in the years ended December 31, 2002, 2003 and 2004:

2003 and 2004 . In 2004, other operating income (loss), net contributed net income of Ch$14,509 million, a substantial decrease from Ch$98,801 million in 2003, primarily as a result of a significant decrease in income from foreign exchange transactions in 2004 and, to a lesser extent, losses on trading activities in the same year.

Gains on sales of financial instruments in 2004 accounted for a loss of Ch$3,151 million as compared to a gain of Ch$5,463 million in 2003. This loss was primarily a result of losses caused by decreases in the fair value of cross-currency swap transactions recorded during 2004 and losses associated with the sale of two loans in the manufacturing and retail sectors during 2004.

The decrease in foreign exchange transactions during 2004 as compared to 2003 was primarily attributable to a lower appreciation of the Chilean peso in 2004 of 6.6% as compared to 15.9% in 2003, which significantly reduced the income resulting from the net liability U.S. dollar-denominated position in 2004.

2002 and 2003. We recorded other operating income of Ch$98,801 million in 2003, compared to an other operating loss of Ch$31,621 million in 2002, primarily as a result of a significant increase in income from foreign exchange transactions and, to a lesser extent, increased gains on trading activities. The increase in foreign exchange transactions was primarily attributable to our decision to maintain a higher net liability position in U.S. dollars at a time when the Chilean peso was appreciating against the U.S. dollar in 2003. This effect was partially offset by our net asset position in Chilean peso-denominated assets, which were readjusted in U.S. dollars.

Total gains on trading activities in 2003 totaled Ch$5,463 million, compared to Ch$1,159 million in 2002, primarily as a result of earnings obtained from the sale of Argentine securities.

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Other Income and Expenses, Net

Other income and expenses, net consists of gains arising from the recovery of loans previously charged-off, non-operating income, non-operating expenses and income and gains arising from our affiliates accounted for by the equity method, offset by any minority interest participation in the net income of our subsidiaries. See notes 9, 17 and 19 to our audited consolidated financial statements.

The following table sets forth certain components of our “other income and expenses, net,” in the years ended December 31, 2002, 2003 and 2004:

2003 and 2004 . Other income and expenses, net increased to income of Ch$22,434 million in 2004 from Ch$14,239 million in 2003, primarily as a result of a 29.6% increase in loan loss recoveries which resulted from improved economic conditions in Chile, increased collection efforts and, to a lesser extent, losses in connection with equity investments related to an affiliate that offers e-commerce services to our corporate customers in 2003.

2002 and 2003. Other income and expenses, net changed to income of Ch$14,239 million in 2003 from an expense of Ch$3,456 million in 2002, primarily as a result of an increase in the recovery of loans that had previously been charged-off, a decrease in non-operating expenses and a decrease in provisions and charge-offs on assets received in lieu of payment. The change was also attributable to the fact that certain non-recurring expenses (such as certain provisions and charge-offs on premises) were recorded in 2002 as a result of the merger. See note 17 to our audited consolidated financial statements.

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