AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20–F
(Mark One)
or
for the fiscal year ended December 31, 2017
for the transition period from to
Date of event requiring this Shell Company Report
Commission File Number 000-30852
GRUPO FINANCIERO GALICIA S.A.
(Exact name of Registrant as specified in its charter)
GALICIA FINANCIAL GROUP
(Translation of Registrant’s name into English)
REPUBLIC OF ARGENTINA
(Jurisdiction of incorporation or organization)
Grupo Financiero Galicia S.A.
Tte. Gral. Juan D. Perón 430, 25th floor
C1038 AAJ-Buenos Aires, Argentina
(Address of principal executive offices)
Pedro A. Richards, Chief Executive Officer
Tel: 54 11 4 343 7528 / Fax: 54 11 4 331 9183, prichards@gfgsa.com
Perón 430, 25° Piso C1038AAJ Buenos Aires ARGENTINA
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
American Depositary Shares, each representing ten Class B ordinary Shares
Name of each exchange on which registered
Title of each class
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Class A Ordinary Shares, Ps.1.00 par value
Class B Ordinary Shares, Ps.1.00 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐
International Financial Reporting Standards
As issued by the International Accounting Standards Board ☐
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☒
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
PRESENTATION OF FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 3.A. Selected Financial Data
Exchange Rate Information
Item 3.B. Capitalization and Indebtedness
Item 3.C. Reasons for the Offer and Use of Proceeds
Item 3.D. Risk Factors
Item 4. Information on the Company
History and Development of the Company
Organizational Structure
History
Business
Competition
Sales and Marketing
Property
Capital Investments and Divestitures
Selected Statistical Information
Government Regulation
Argentine Banking Regulation
Credit Cards Regulation
Concealment and Laundering of Assets of a Criminal Origin
Item 4.A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
Overview
The Argentine Economy
The Argentine Financial System
The Argentine Insurance Industry
Inflation
Currency Composition of Our Balance Sheet
Results of Operations for the Fiscal Years Ended December 31, 2017 December 31, 2016 and December 31, 2015
U.S. GAAP and Argentine Banking GAAP Reconciliation
Results by Segments
Consolidated Assets
Exposure to the Argentine Public Sector
Funding
Contractual Obligations
Off-Balance Sheet Arrangements
Critical Accounting Policies
U.S. GAAP—Critical Accounting Policies
Principal Trends
Item 5.B. Liquidity and Capital Resources
Liquidity—Holding Company on an Individual Basis
Consolidated Cash Flows
Banco Galicia’s Liquidity Management
Capital
Capital Expenditures
Item 5.E. Off-Balance Sheet Arrangements
Item 5.F. Contractual Obligations
i
(continued)
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Our Board of Directors
Our Audit Committee
Our Supervisory Committee
Compensation of Our Directors
Management of Grupo Financiero Galicia
Board of Directors of Banco Galicia
Functions of the Board of Directors of Banco Galicia
Banco Galicia’s Executive Officers
Banco Galicia’s Supervisory Committee
Compensation of Banco Galicia’s Directors and Officers
Employees
Nasdaq Corporate Governance Standards
Share Ownership
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
Related Party Transactions
Item 8. Financial Information
Legal Proceedings
Dividend Policy and Dividends
Significant Changes
Item 9. The Offer and Listing Market Regulations
Shares and ADSs
Argentine Securities Market
Market Regulations
Item 10. Additional Information
Description of Our Bylaws
Exchange Controls
Taxation
Argentine Taxes
Material Contracts
Documents on Display
Item 11. Quantitative and Qualitative Disclosures About Market Risk
General
Interest Rate Risk
Foreign Exchange Rate Risk
Currency Mismatches
Market Risk
Cross-Border Risk
Overseas Foreign Currency Transfer Risk
Risk Exposures in the Non-financial Public Sector
Operational Risk and Technological Risk
Item 12. Description of Securities Other Than Equity Securities
Item 12.D. American Depositary Shares
Fees and Charges Applicable to ADS Holders
Fees and Direct and Indirect Payments Made by the Depositary to Us
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16.A. Audit Committee Financial Expert
Item 16.B. Code of Ethics
Item 16.C. Principal Accountants’ Fees and Services
ii
Item 16.D. Exemptions from the Listing Standards for Audit Committees
Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16.F. Change in Registrant’s Certifying Accountant.
Item 16.G. Corporate Governance
Item 16.H. Mine Safety Disclosure
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
iii
Grupo Financiero Galicia S.A. (“Grupo Financiero Galicia” or “Grupo Galicia”) is a financial services holding company incorporated in Argentina and is one of Argentina’s largest financial services groups. In this annual report, references to “we”, “our”, and “us” are to Grupo Financiero Galicia and its consolidated subsidiaries, except where otherwise noted. Our consolidated financial statements consolidate the accounts of the following companies:
We maintain our financial books and records in Argentine Pesos and prepare our financial statements in conformity with the accounting rules of the Argentine Central Bank, which entity prescribes the generally accepted accounting principles for all financial institutions in Argentina. This annual report refers to those accounting principles as “Argentine Banking GAAP”. Argentine Banking GAAP differs in certain relevant respects from generally accepted accounting principles in Argentina, which we refer to as “Argentine GAAP”. Argentine Banking GAAP also differs in certain significant respects from the generally accepted accounting principles in the United States, which we refer to as “U.S. GAAP”. See Note 31 to our audited consolidated financial statements included in this annual report for a description of the differences between Argentine GAAP and Argentine Banking GAAP, and Note 34 to our audited consolidated financial statements included in this annual report for a discussion of the principal differences between Argentine Banking GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of our net income for the three fiscal years ended December 31, 2017 and total shareholders’ equity as of December 31, 2017 and 2016, and Item 5. “Operating and Financial Review and Prospects”—Item 5.A. “Operating Results-U.S. GAAP and Argentine Banking GAAP Reconciliation”.
In this annual report, references to “US$” and “Dollars” are to United States Dollars and references to “Ps.” or “Pesos” are to Argentine Pesos. The exchange rate used in translating Pesos into Dollars and used in calculating the convenience translations included in the following tables is the “Reference Exchange Rate” which is published by the Argentine Central Bank and which was Ps.18.7742, Ps.15.8502 and Ps.13.0050 per U.S. $1.00 as of December 31, 2017, December 31, 2016 and December 31, 2015, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or at any other rate.
Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the twelve-month period ended December 31 of such year.
Unless otherwise indicated, all information regarding deposit and loan market shares and other financial industry information has been derived from information published by the Argentine Central Bank.
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We have expressed all amounts in millions of Pesos, except percentages, ratios, multiples and per-share data.
Certain figures included in this annual report have been rounded for purposes of presentation. Percentage figures included in this annual report have not been calculated on the basis of such rounded figures but rather on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in the financial statements. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them due to rounding.
This annual report contains forward-looking statements that involve substantial risks and uncertainties, including, in particular, statements about our plans, strategies and prospects under the captions Item 4. “Information on the Company-Capital Investments and Divestitures,” Item 5. “Operating and Financial Review and Prospects”-Item 5.A. “Operating Results-Principal Trends” and Item 5.B. “Liquidity and Capital Resources.” All statements other than statements of historical facts contained in this annual report (including statements regarding our future financial position, business strategy, budgets, projected costs and management’s plans and objectives for future operations) are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of such words as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue” or other similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, no assurance can be provided with respect to these statements. Because these statements are subject to risks and uncertainties, actual results may differ materially and adversely from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially and adversely from those contemplated in such forward-looking statements include but are not limited to:
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You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. Moreover, you should consider these cautionary statements in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements after completion of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.
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Not applicable.
The following table presents summary historical financial and other information about us as of the dates and for the periods indicated.
Our financial statements do not include any effect for inflation accounting other than the adjustments to non-monetary assets through February 28, 2003.
The selected consolidated financial information as of December 31, 2017, and December 31, 2016, and for the fiscal years ended December 31, 2017, December 31, 2016 and December 31, 2015 has been derived from our audited consolidated financial statements included in this annual report. The selected consolidated financial information as of December 31, 2015, December 31, 2014, and December 31, 2013, and for the fiscal years ended December 31, 2014, and December 31, 2013, has been derived from our audited consolidated financial statements not included in this annual report.
You should read this data in conjunction with Item 5. “Operating and Financial Review and Prospects” and our audited consolidated financial statements included in this annual report.
(in millionsof Dollars,except asnoted)(1)
Unaudited
Consolidated Income Statement in Accordance with Argentine Banking GAAP
Financial Income
Financial Expenses
Gross Brokerage Margin (2)
Provision for Losses on Loans and Other Receivables
Income before Taxes
Income Tax
Net Income
Basic Earnings per Share (in Pesos)
Diluted Earnings per Share (in Pesos)
Cash Dividends per Share (in Pesos)
Book Value per Share (in Pesos)
Amounts in Accordance with U.S. GAAP
Basic and Diluted Earnings per Share (in Pesos)
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Gross Brokerage Margin
Consolidated Balance Sheet in Accordance with Argentine Banking GAAP
Cash and Due from Banks
Government Securities, Net
Loans, Net
Total Assets
Deposits
Other Funds (3)
Total Shareholders’ Equity
Average Total Assets (4)
Percentage of Period-end Balance Sheet Items
Denominated in Dollars:
Loans, Net of Allowances
Total Liabilities
Trading Securities
Available-for-SaleSecurities
Shareholders’ Equity
Selected Ratios in Accordance with Argentine Banking GAAP
Profitability and Efficiency
Net Yield on Interest Earning Assets(5)
Financial Margin (6)
Return on Average Assets (7)
Return on Average Shareholders’ Equity(8)
Net Income from Services as a Percentage of Operating Income (9)
Efficiency ratio (10)
Shareholders’ Equity as a Percentage of Total Assets
Total Liabilities as a Multiple of Shareholders’ Equity
Total Capital Ratio
Liquidity
Cash and Due from Banks(11) as a Percentage of Total Deposits
Loans, Net as a Percentage of Total Assets
Credit Quality
Past Due Loans (12) as a Percentage of Total Loans
Non-Accrual Loans (13) as a Percentage of Total Loans
Allowance for Loan Losses as a Percentage of Non-accrualLoans(13)
Net Charge-Offs (14) as a Percentage of Average Loans
Ratios in Accordance with U.S. GAAP
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Total Liabilities as a Multiple of Total Shareholders’ Equity
Allowance for Loan Losses as a Percentage of Non-AccrualLoans
Inflation and Exchange Rate
Wholesale Inflation (15)
Consumer Inflation (16)
Exchange Rate Variation (17) (%)
CER (18)
UVA (19)
All of the ratios disclosed above are included because they are considered significant by the management of Grupo Financiero Galicia despite the fact that their disclosure is a specific GAAP requirement.
The following table sets forth the annual high, low, average and period-end exchange rates for Dollars for the periods indicated, expressed in Pesos per Dollar and not adjusted for inflation.
2013
2014
2015
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2016
2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018
As of April 16, 2018, the exchange rate was Ps.20.2163 for U.S. $1.00.
You should carefully consider the risks described below in addition to the other information contained in this annual report. In addition, most, if not all, of the risks described below must be evaluated bearing in mind that our most important asset is our equity interest in Banco Galicia. Thus, a material change in Banco Galicia’s shareholders’ equity or income statement would also adversely affect our businesses and results of operations. We may also face risks and uncertainties that are not presently known to us or that we currently deem immaterial, which may impair our business. Our operations, property and customers are located in Argentina. Accordingly, the quality of our customer portfolio, loan portfolio, financial condition and results of operations depend, to a significant extent, on the macroeconomic and political conditions prevailing in Argentina. In general, the risk assumed when investing in the securities of issuers from countries such as Argentina, is higher than when investing in the securities of issuers from developed countries.
Risk Factors Relating to Argentina
The current state of the Argentine economy, together with uncertainty regarding the new government, may adversely affect our business and prospects.
Grupo Galicia’s results of operations may be affected by inflation, fluctuations in the exchange rate, modifications in interest rates, changes in the Argentine government’s policies and other political or economic developments either internationally or in Argentina that affect the country.
During the course of the last few decades, Argentina’s economy has been marked by a high degree of instability and volatility, periods of low or negative economic growth and high, fluctuating levels of inflation and devaluation. Grupo Galicia’s results of operations, the rights of holders of securities issued by Grupo Galicia and the value of such securities could be materially and adversely affected by a number of possible factors, some of which include Argentina’s inability to sustain economic growth, the effects of inflation, Argentina’s ability to obtain financing, a decline in the international prices for Argentina’s main commodity exports, fluctuations in the exchange rates of other countries against which Argentina competes and the vulnerability of the Argentine economy to external shocks.
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Since 2012, Argentina has gone through a period of stagflation. Figures of economic activity reflected a slowdown in domestic production, together with an increasing inflation rate at a higher pace than that noted in previous years. After the Peso devaluation with respect to the U.S. Dollar that took place in January 2014, the exchange rate between those two currencies remained relatively steady until the end of the former government’s term of office. During that period, low activity growth levels continued coexisting with a high inflation rate.
In December 2015, Mauricio Macri took office as the new president of Argentina. Since becoming president, Mr. Macri has implemented several measures, such as exchange and regulatory measures that reversed policies that had been in place prior to his administration, such as regulations related to exchange controls and other currency regulations. The impact of these measures, such as a devaluation of the Peso with respect to the U.S. Dollar of approximately 50%, as well as the impact of any measures that the Macri administration may implement in the future, is unknown and could have a material and adverse impact on the results of Grupo Galicia’s operations.
No assurance can be given that additional events in the future, such as the enactment of new regulations by the Argentine government or authorities, will not occur. As a result of the foregoing, the financial position and results of operations of private sector companies in Argentina, including Grupo Galicia, the rights of the holders of securities issued by such institutions and the value thereof may be negatively and adversely impacted.
Economic conditions in Argentina may deteriorate, which may adversely impact Grupo Galicia’s business and financial condition.
A less favorable international context, a decrease in the competitiveness of the Peso as compared to foreign currencies, the low consumer confidence and low confidence from both local and foreign investors and a higher inflation rate, among other factors, may affect the development and growth of the Argentine economy and cause volatility in the local capital markets. Such events may adversely impact Grupo Galicia’s business and financial condition. Pursuant to the National Institute of Statistics and Census (the “INDEC”), the gross domestic product (the “GDP”) in Argentina, in real terms, increased 2.4% in 2013; decreased 2.5% in 2014; increased 2.6% in 2015; decreased 2.3% in 2016; and increased by 3% in 2017. Likewise, the INDEC carried out a review of the economic growth data corresponding to the periods from 2005 to 2015. This review exhibited a 20% difference between current measurements and those conducted by the prior administration.
In particular, the Argentine economy continues to be vulnerable to several factors, including:
No assurance can be provided that a decline in economic growth or certain economic instability will not occur. Any such stagnation or slowdown or increased economic and political instability could have a significant adverse effect on Grupo Galicia’s business, financial position and results of operations and the trading price for its ADSs.
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The ability of the current administration to implement proposed economic policy reforms, and the impact that these measures and any future measures taken by a new administration will have on the Argentine economy, remains uncertain.
As the date of this annual report, the impact that the reforms adopted by the Macri administration will have on the Argentine economy as a whole, and the financial sector in particular, cannot be predicted. In addition, the Macri administration’s ability to implement all of its proposed policies and corresponding measures cannot be assured. Since assuming office, the Macri administration has announced and implemented several significant economic policy reforms, including reforms related to the INDEC, the foreign exchange market (see “Foreign Exchange Rates and Exchange Controls”), foreign trade, fiscal deficit reduction, the correction of certain monetary imbalances, energy crisis, corporate criminal liability, the social security system, and the tax code. In 2016, Macri’s administration also was able to reach an agreement with the holdout creditors of Argentina’s outstanding debt.
In the congressional elections held on October 22, 2017, Macri’s governing coalition obtained the largest percentage of votes. His coalition, however, does not have a majority of seats in Congress, and therefore, it may be difficult to implement some of the aforementioned measures unless President Macri obtains support from the opposition party. This creates further uncertainty as to whether the Macri administration will be able to pass further reform measures. The political uncertainty surrounding potential economic reform could lead to volatility in the market prices of securities of Argentine companies.
The fiscal, monetary and currency adjustments undertaken by the Macri administration may result in slower short-term economic growth while seeking to guide the economy toward a sustained path for growth in the medium-term. Immediately after the foreign exchange controls were lifted on December 16, 2015, the dismantling of the multiple exchange regime resulted in the official Peso exchange rate (available only for certain types of transactions) falling in value by 40.1%, and the Peso-U.S. Dollar exchange rate fell to Ps.13.76 to US$1.00 on December 17, 2015. The Argentine Central Bank has since allowed the Peso to float with limited intervention intended to ensure the orderly operation of the foreign exchange market. On April 16, 2018, the Peso-U.S. Dollar exchange rate was Ps.20.2163 to US$1.00. There can be no assurance as to the short- or long-term effects of these policies on the exchange rate or the Argentine economy as a whole.
The impact that these measures, and any future measures taken by a new administration, will have on the Argentine economy as a whole and the financial sector in particular cannot be predicted. Economic liberalization may be disruptive to the economy and may fail to benefit, or may harm, our business. In particular, Grupo Galicia has no control over the implementation of the reforms to the regulatory framework that governs its operations and cannot guarantee that these reforms will be implemented or that they will be implemented in a manner that will benefit its business. The failure of these measures to achieve their intended goals could adversely affect the Argentine economy and Grupo Galicia’s business, financial position and results of operations and the trading price for its ADSs.
If the high levels of inflation continue, the Argentine economy and Grupo Galicia’s financial position and business could be adversely affected.
Since 2007, the Argentine economy has experienced high levels of inflation. According to private estimates, as figures published by the INDEC were not reliable, inflation rates increased from levels of around 10% in 2005 and 2006 to a level above 20% during the following years, and reached a rate of 42.3% in 2014, decreasing to 27.2% in 2015, mainly due to the slowdown in economic activity in Argentina and to the overvaluation of the Peso, and increasing again to around 40% in 2016 and 25% in 2017, primarily as a consequence of the adjustments made by the government to fix certain macroeconomic imbalances, such as the dismantling of the multiple exchange regime and eliminating certain subsidies. Additional measures implemented by the Macri administration with respect to increases in the rates for public services are expected result in a further reduction of inflation rates in 2018. The new official inflation index reflects an increase in the rate of the devaluation of the Peso in 2016 and 2017. According to the BCRA, the annual inflation reduction goals, are 17% for the 2018, 10% for 2019 and of 5% for 2020.
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In the past, inflation has materially undermined the Argentine economy and the Argentine government’s ability to generate conditions that fostered economic growth. In addition, high inflation or a high level of volatility with respect to the same may materially and adversely affect the business volume of the financial system and prevent the growth of financial intermediation activity. This, in turn, could adversely affect economic activity and employment.
In addition to the above, the accuracy of INDEC’s calculation of the CPI in Greater Buenos Aires (IPC-GBA), according to which inflation was calculated, has been questioned. In particular, concerns were historically voiced that the actual consumer and wholesale price indices may be significantly higher than those that were indicated by INDEC. In order to address these concerns, the Macri administration has implemented various personnel changes at the INDEC. The new individuals in charge have discontinued use of most previously-used indices in order to review the same and, potentially, to establish new, more accurate and reliable indices. There is currently uncertainty regarding what other future measures the INDEC may adopt and the impact that such measures may have on the relationship between Argentina and the IMF and the results of operations of Grupo Galicia.
A high inflation rate also affects Argentina’s competitiveness abroad, as well as real salaries, employment rates, consumption rates and interest rates. A high level of uncertainty with regard to these economic variables, and lack of stability in terms of inflation, could lead to shortened contractual terms and affect the ability to plan and make decisions. This may have a negative impact on economic activity and on the income of consumers and their purchasing power, all of which could materially and adversely affect Grupo Galicia’s financial position, results of operations and business and the trading price for its ADSs.
If the Peso qualifies as a currency of a hyperinflationary economy under IAS 29, our audited consolidated financial statements and other financial information may need to be restated.
As of January 1, 2018, Grupo Financiero Galicia adopted IFRS. IAS 29 (Financial Reporting in Hyperinflationary Economies) requires that financial statements of any entity whose functional currency is the currency of a hyperinflationary economy, whether based on the historical cost method or on the current cost method, be stated in terms of the measuring unit current at the end of the reporting period. IAS 29 does not establish a set inflation rate beyond which an economy is deemed to be experiencing hyperinflation. However, hyperinflation is commonly understood to occur when changes in price levels are close to or exceed 100% on a cumulative basis over the prior three years, along with the presence of several other macroeconomic-related qualitative factors. Despite the high inflation rates in Argentina in recent years, we conducted an analysis pursuant to the criteria set forth in IAS 29, and based solely on such internal review we do not currently believe that Argentina qualifies as a hyperinflationary economy for any of the years included in this annual report.
In formulating such belief, we considered the lack of objective data available regarding the Consumer Price Index (“CPI”); the existence of other qualitative and quantitative indicators, such as the program established by the Argentine Central Bank to foster monetary stability that aims to induce a systematic and sustainable low inflation rate and the alternative WPI, according to which the inflation rate was below 100% in the three-year cumulative period ended December 31, 2017. We also noted a strong downward trend in inflation rates in December 2017. We believe that our analysis and current belief is consistent with that of most public entities in Argentina. We reassess inflation data periodically to determine whether this belief continues to be applicable.
However, certain macroeconomic variables that affect our business, such as salary costs and the prices of supplies, have experienced a significant annual variation, a circumstance that must be taken into account when evaluating and interpreting our results of operations and financial condition as reflected in our audited consolidated financial statements included elsewhere in this annual report. Although we do not currently believe that the current rate of inflation rises to the level required for Argentina to be considered a hyperinflationary economy under IAS 29, if inflation rates continue to escalate in the future, the Peso may qualify as a currency of a hyperinflationary economy. In such case, our audited consolidated financial statements and other financial information may need to be adjusted by applying a general price index and be expressed in the measuring unit (the hyperinflationary currency) current at the end of each reporting period. We cannot determine at this time the impact such a restatement would have on our business, results of operations, financial condition or the trading price for our ADSs.
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Argentina’s and Argentine companies’ ability to obtain financing and to attract direct foreign investment is limited and may adversely affect Grupo Galicia’s financial position, results of operations and business.
Argentina and Argentine companies have had limited access to foreign financing in recent years, primarily as a result of a default in December 2001 by Argentina on its debt to foreign bondholders, multilateral financial institutions and other financial institutions. Argentina settled all of its outstanding debt with the IMF in 2006, carried out a variety of debt swaps with certain bondholders between 2004 and 2010, and reached an agreement with the Paris Club in 2014. After several years of litigation, on March 1, 2016, an agreement was reached between the Argentine government and certain creditors to which the Argentine government was previously in default. This agreement consisted of a payment in cash of approximately US$ 4.7 billion to the NML, Aurelius, Barcebridge and Davidson Kempner funds, and was approved by the Argentine Congress pursuant to law No. 27,249.
On April 18, 2016, in order to make the payment to said funds and to other bondholders in similar conditions, Argentina issued bonds in an amount of US$16.5 billion, with interest rates between 6.25% and 8% and maturities of 3, 5, 10 and 30 years. The payment of approximately U.S. $9.3 billion to the bondholders was made on April 22, 2016, thus reaching a final solution to the Argentine debt in default.
Despite this settlement, the government may still have or could again have limited access to financing that it would use to stimulate growth and implement reforms, and the financing that is available may only be available with onerous terms (such as high interest rates and shortened availability periods), which could have a significant adverse effect on Argentina’s economy and on Argentine companies or Grupo Galicia’s ability to obtain international financing, and could also adversely affect local credit conditions.
A decline in the international prices of Argentina’s main commodity exports and an additional real appreciation of the Peso against the U.S. Dollar could affect the Argentine economy and create new pressures on the foreign exchange market, and have a material adverse effect on Grupo Galicia’s financial condition, prospects and operating results.
The reliance on the export of certain commodities, such as soy, has made the country more vulnerable to fluctuations in their prices. A decrease in commodity prices may adversely affect the Argentine government’s fiscal revenues and the Argentine economy as a whole.
A significant increase in the real appreciation of the Peso could affect Argentina’s competitiveness, substantially affecting exports, and this in turn could prompt new recessionary pressures on the country’s economy and a new imbalance in the foreign exchange market, which could lead to a high degree of volatility in the exchange rate. More importantly, in the short term, a significant appreciation of the real exchange rate could substantially reduce Argentine public sector’s tax revenues in real terms, given the strong reliance on taxes on exports (withholdings). The occurrence of the foregoing could lead to higher inflation and potentially materially and adversely affect the Argentine economy, as well as Grupo Galicia’s financial condition and operating results and, thus, the trading prices for its ADSs.
Volatility in the regulatory framework could have a material and adverse effect on Argentina’s economy in general, and on Grupo Galicia’s financial position, specifically.
From time to time the Argentine government has enacted several laws amending the regulatory framework governing a number of different activities as a measure to stimulate the economy, some of which have had adverse effects on Grupo Galicia’s business. Although the current administration has eliminated some of these regulations, political and social pressures could inhibit the Argentine government’s implementation of policies designed to generate growth and enhance consumer and investor confidence.
No assurance can be provided that future regulations, and especially those related to the financial system, will not materially and adversely affect the assets, revenues and operating income of private sector companies, including Grupo Galicia, the rights of holders of securities issued by those entities, or the value of those securities. The lack of regulatory foresight could impose significant limitations on activities of the financial system and Grupo Galicia’s business, and would generate uncertainty regarding its future financial position and result of operations and trading price for its ADSs.
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The Argentine economy and its goods, financial services and securities markets remain vulnerable to external factors, which could affect Argentina’s economic growth and Grupo Galicia’s prospects.
The financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other countries. Although such conditions may vary from country to country, investor reactions to events occurring in one country may affect capital flows to issuers in other countries, and consequently affect the trading prices of their securities. Decreased capital inflows and lower prices in the securities market of a country may have a material adverse effect on the real economy of those countries in the form of higher interest rates and foreign exchange volatility.
During periods of uncertainty in international markets, investors generally choose to invest in high-quality assets (“flight to quality”) over emerging market assets. This has caused and could continue to cause an adverse impact on the Argentine economy and could continue to adversely affect the country’s economy in the near future.
The problems faced by the European Union’s periphery countries, resulting from a combination of factors such as low growth, fiscal woes and financial pressures, are particularly acute. Reestablishing financial and fiscal stability to offset the low or zero growth continues to pose a challenge. As a result, the leading economies of the European Union imposed emergency economic plans in such countries, which plans are still in place. During 2014, the U.S. Federal Reserve reduced its asset purchase and its monetary easing programs. Such changes started to strengthen the U.S. Dollar globally, affecting the evolution of commodity prices and lowering capital inflows to countries such as Argentina; which impacts were observed in 2015 and 2016.
Brazil, which is Argentina’s main trade partner, has experienced a decrease in GDP (which declined by 3.8% in 2015 and 3.6% in 2016) in recent years. Although Brazil’s economic outlook seems to be improving, a further deterioration of activity, a delay in Brazil’s expected economic recovery or a slower pace of economic improvement in Brazil may have a negative impact on Argentine exports and on the overall level of economic and industrial activity in Argentina, particularly with respect to the automotive industry. In 2017, Brazil experienced a slight increase in its GDP, increasing by 1.9%. If the Brazilian economy’s current recovery stalls or once again deteriorates, the demand for Argentine exports may be adversely impacted.
China, which is the main importer of Argentine raw materials, experienced an economic slowdown in 2017 as compared to recent years. The prices for Argentine commodities, in particular oilseeds, decreased, which, if such trend continues, could in the long term, affect the inflow of foreign currency in Argentina from exports. The slowdown of the Chinese economy and increased volatility of its financial markets could impact financial markets worldwide, which, in turn, could increase the cost and availability of financing both domestically and internationally for Argentine companies.
The international financial environment may also result in a devaluation of regional currencies and exchange rates, including the Peso, which would likely also cause volatility in Argentina.
A new global economic and/or financial crisis or the effects of deterioration in the current international context, could affect the Argentine economy and, consequently, Grupo Galicia’s results of operations, financial condition and the trading price for its ADSs.
A potential additional devaluation of the Peso may hinder or potentially prevent Grupo Galicia from being able to honor its foreign currency denominated obligations.
If the Peso depreciated significantly against the U.S. Dollar, as has recently occurred and which could occur again in the future, it could have an adverse effect on the ability of Argentine companies to make timely payments on their debts denominated in or indexed or otherwise connected to a foreign currency, generate very high inflation rates, reduce real salaries significantly, and have an adverse effect on companies focused on the domestic market, such as public utilities and the financial industry. Such a potential devaluation could also adversely affect the Argentine government’s capacity to honor its foreign debt, with adverse consequences for Grupo Galicia’s and Banco Galicia’s businesses, which could affect Grupo Galicia’s capacity to meet obligations denominated in a foreign currency which, in turn, could have a material adverse effect on the trading prices for Grupo Galicia’s ADSs.
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In 2015, the Dollar to Peso exchange rate increased 53% as compared to 2014. In 2016, the Dollar to Peso exchange rate increased 22% as compared to 2015. In 2017, the Dollar to Peso exchange rate increased 18% as compared to 2016. This trend continued in the first few months of 2018, with an increase of 7% from December 31, 2017 to March 31, 2018. Any further depreciation of the Peso may have an adverse impact on the business of Grupo Galicia and on the trading prices for its ADSs.
Changes or new regulations in the Argentine foreign exchange market may adversely affect the ability and the manner in which Grupo Galicia repays its obligations denominated in, indexed to or otherwise connected to a foreign currency.
Since December 2001, different government administrations have established and implemented various restrictions on foreign currency transfers (both in respect of transfer into and out of Argentina). Although the Macri administration eliminated such restrictions, Grupo Galicia cannot assure that such measures will not be implemented again in the future.
The impact that the new measures will have on the Argentine economy and Grupo Galicia’s is uncertain. No assurance can be provided that the regulations will not be amended, or that no new regulations will be enacted in the future imposing greater limitations on funds flowing into and out of the Argentine foreign exchange market. Any such new measures, as well as any additional controls and/or restrictions, could materially affect Grupo Galicia’s ability to access the international capital markets and, may undermine its ability to make payments of principal and/or interest on its obligations denominated in a foreign currency or transfer funds abroad (in total or in part) to make payments on its obligations (which could affect Grupo Galicia’s financial condition and results of operations). Therefore, Argentine resident or non-resident investors should take special notice of these regulations (and their amendments) that limit access to the foreign exchange market. In the future Grupo Galicia may be prevented from making payments in U.S. Dollars and/or making payments outside of Argentina due to the restrictions in place at that time in the foreign exchange market and/or due to the restrictions on the ability of companies to transfer funds abroad.
It may be difficult to effect service of process against Grupo Galicia’s executive officers and directors, and foreign judgments may be difficult to enforce or may be unenforceable.
Service of process upon individuals or entities which are not resident in the United States may be difficult to obtain in the United States. Grupo Galicia and substantially all of its subsidiaries are companies incorporated under the laws of Argentina. Most of their shareholders, directors, members of the Supervisory Syndics’ Committee, officers, and some specialists named herein are domiciled in Argentina and the most significant part of their assets is located in Argentina. Although Grupo Galicia has an agent to receive service of process in any action against it in the United States with respect to its ADSs, none of its executive officers or directors has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult to effect service of process against Grupo Galicia’s executive officers and directors. Additionally, under Argentine law, the enforcement of foreign judgments will only be allowed if the requirements in sections 517 to 519 of the National Code of Civil and Commercial Procedures are met or, if it is one of the powers governed by provincial law, the requirements in the applicable local code of procedure, and provided that the foreign judgment does not infringe on concepts of public policy in Argentine law, as determined by the competent courts of Argentina. An Argentine court may consider the enforcement of foreign judgments which order payments to be made pursuant to a foreign-currency denominated security, to holders outside of Argentina as contrary to the public policy of Argentina if for instance at such time there are legal restrictions in place prohibiting Argentine debtors from transferring foreign currency abroad to pay off debts.
The intervention of the Argentine government in the electric power sector could have a material adverse impact on the Argentine economy, which may have a material adverse impact on Grupo Galicia’s results of operations.
Historically, the Argentine government has played an active role in the electric power sector through the ownership and management of state-owned companies engaged in the generation, transmission and distribution of electric power. To address the Argentine economic crisis of 2001 and 2002, the Argentine government adopted Law No. 25,561 and other regulations, which made a number of material changes to the regulatory framework applicable to the electric power sector and have significantly distorted supply and demand in the sector. These changes
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included the freezing of distribution margins, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electric power distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market, all of which had a significant impact on electric power generators and caused substantial price differences within the market.
Since the Macri administration assumed office, the Argentine government has initiated significant reforms in the electric power sector. As part of such reforms, the Argentine government has taken actions designed to guarantee the supply of electric power in Argentina, such as instructing the Ministry of Energy and Mining to develop and implement a coordinated program to guarantee the quality of the electric power system and ration individuals’ and public entities’ consumption of energy by increasing tariffs. In addition, the Argentine government and certain provincial governments have approved significant price adjustments and tariff increases applicable to certain generation and distribution companies, resulting in an increase in cost of energy prices for consumers.
On March 31, 2017, the Ministry of Energy and Mining released a new tariff schedule that increased the price consumers pay for electricity and natural gas by 36% with the goal of reducing government subsidies for energy consumption as part of efforts to reduce the Argentine government’s fiscal deficit. Following a public hearing, the Minister of Energy and Mining released a revised tariff schedule in December 2017, which further increased rates between 34% and 57% (depending on the province) for natural gas and approximately 34% for other electricity.
As a result, there has been a significant increase in the cost of energy in Argentina, which could have a material adverse effect on consumers’ disposable income, and therefore, Grupo Galicia’s financial condition and results of operations and the trading price of our ADSs.
The measures adopted by the Argentine government and the claims filed by workers on an individual basis or as part of a labor union action may lead to pressures to increase salaries or additional benefits, which would increase companies’, including Grupo Galicia’s, operating costs. Additionally, labor union activity could lead to strikes or work stoppages, which may materially and adversely affect Grupo Galicia’s results of operations.
In the past, the Argentine government has passed laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional work-related benefits. Furthermore, employers, both in the public sector and in the private sector, have been experiencing intense pressure from their personnel, or from the labor unions representing such personnel, demanding salary increases and certain benefits for the workers, given the prevailing high inflation rates. Labor pressure can also potentially lead to strikes or work stoppages if demands are not satisfied, which could have a material and adverse effect on Grupo Galicia’s operations.
There can be no assurance that the Argentine government will not adopt measures in the future mandating salary increases or the provision of additional employee benefits, or that employees or their unions will not exert pressure on companies, such as Grupo Galicia, in demanding the implementation of such measures. The implementation of any such measures could have a material and adverse effect on Grupo Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.
Risk Factors Relating to the Argentine Financial System
The stability of the Argentine financial system is dependent upon the ability of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia, to maintain and increase the confidence of depositors.
The measures implemented by the Argentine government in late 2001 and early 2002, in particular the restrictions imposed on depositors to withdraw money freely from banks and the pesification and restructuring of their deposits, were strongly opposed by depositors due to the losses on their savings and undermined their confidence in the Argentine financial system and in all financial institutions operating in Argentina.
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If depositors once again withdraw their money from banks in the future, there may be a substantial negative impact on the manner in which financial institutions, including Banco Galicia, conduct their business, and on their ability to operate as financial intermediaries. Loss of confidence in the international financial markets may also adversely affect the confidence of Argentine depositors in local banks.
An adverse economic situation, even if it is not related to the financial system, could trigger a massive withdrawal of capital from local banks by depositors, as an alternative to protect their assets from potential crises. Any massive withdrawal of deposits could cause liquidity issues in the financial sector and, consequently, a contraction in credit supply.
The occurrence of any of the above could have a material and adverse effect on Grupo Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.
If financial intermediation activity volumes relative to GDP are not restored to significant levels, the capacity of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia, to generate profits may be negatively affected.
As a result of the 2001-2002 financial crisis, the volume of financial intermediation activity dropped dramatically: private sector credit plummeted from 24% of GDP in December 2000 to 7.7% in June 2004 and total deposits as a percentage of GDP fell from 31% to 23.2% during the same period. The depth of the crisis and the effect it had on depositors’ confidence in the financial system created uncertainty as to its ability to act as an intermediary between savings and credit. Further, the ratio of total financial system’s private-sector deposits and loans to GDP remains low when compared to international levels and continues to be lower than the periods prior to the crisis, especially in the case of private-sector deposits and loans, which represented approximately 17.3% and 14.7% of GDP, respectively, at the end of 2017.
There is no assurance that financial intermediation activities will continue in a manner sufficient to reach the necessary volumes to provide financial institutions, including Banco Galicia, with sufficient capacity to generate income, or that those actions will be sufficient to prevent Argentine financial institutions, such as Banco Galicia, from having to assume excessive risks in terms of maturity mismatches. Under these circumstances, for an undetermined period of time, the scale of operations of Argentine-based financial institutions, including Banco Galicia, their business volume, the size of their assets and liabilities or their income-generation capacity could be much lower than before the crisis which may, in turn, impact the results of operations of Banco Galicia and, potentially, the trading price for Grupo Galicia’s ADSs.
The Argentine financial system’s growth and income, including that of Banco Galicia, the main subsidiary of Grupo Galicia, depend in part on the development of medium- and long-term funding sources.
In spite of the fact that the financial system’s and Banco Galicia’s deposits continue to grow, they are mostly demand or short-term time deposits and the sources of medium- and long-term funding for financial institutions are currently limited. If Argentine financial institutions, such as Banco Galicia, are unable to access adequate sources of medium and long-term funding or if they are required to pay high costs in order to obtain the same and/or if they cannot generate profits and/or maintain their current volume and/or scale of their business, this may adversely affect Grupo Galicia’s ability to honor its debts.
Argentine financial institutions (including Banco Galicia) continue to have exposure to public sector debt (including securities issued by the Argentine Central Bank) and its repayment capacity, which in periods of economic recession, may negatively affect their results of operations.
Argentine financial institutions continue to be exposed, to some extent, to the public sector debt and its repayment capacity. The Argentine government’s ability to honor its financial obligations is dependent on, among other things, its ability to establish economic policies that succeed in fostering sustainable growth and development in the long term, generating tax revenues and controlling public expenditures, which could, either partially or totally, fail to take place.
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Banco Galicia’s exposure to the public sector as of December 31, 2017 was Ps.27,028 million, representing approximately 8% of its total consolidated assets and 75% of its shareholders’ equity. Of this total, Ps.17,284 million were Argentine Central Bank debt instruments, Ps.9,309 million corresponded to Argentine government securities, while the remaining Ps.435 million corresponded to other receivables resulting from financial brokerage. As a result, Grupo Galicia’s income-generating capacity may be materially impacted, or may be particularly affected by the Argentine public sector’s repayment capacity and the performance of public sector bonds, which, in turn, is dependent on the factors referred to above. Banco Galicia’s ability to honor its financial obligations may be adversely affected by the Argentine government’s repayment capacity or its failure to meet its obligations in respect of Argentine government obligations owed to Banco Galicia.
The Consumer Protection Law may limit some of the rights afforded to Grupo Galicia and its subsidiaries.
Argentine Law No. 24,240 (the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Galicia’s customers. The Consumer Protection Law was amended by Law No. 26,361 on March 12, 2008 to expand its applicability and the penalties associated with violations thereof. Additionally, Law No. 25,065 (as amended by Law No. 26,010 and Law No. 26,361, the “Credit Card Law”) also sets forth public policy regulations designed to protect credit card holders. On October 1, 2014, a new Civil and Commercial Code was sanctioned, which captured the principles of Consumer Protection Law and established their application to banking agreements.
On September 17, 2014, Law No. 26,993 was enacted, which created a “System to Solve Disputes in Consumer Relationships”, introducing new administrative and legal procedures within the framework of the Consumer Protection Law; namely, an administrative and a judicial regime for such matters.
The application of both the Consumer Protection Law and the Credit Card Law by administrative authorities and courts at the federal, provincial and municipal levels has increased. This trend has led to an increase in general consumer protection levels. In the event that Grupo Galicia and its subsidiaries are found to be liable for violations of any of the provisions of the Consumer Protection Law or the Credit Card Law, the potential penalties could limit some of Grupo Galicia and its subsidiaries’ rights, for example, with respect to their ability to collect payments due from services and financing provided by Grupo Galicia or its subsidiaries, and adversely affect their financial results of operations. There can be no assurance that court and administrative rulings based on the newly enacted regulation or measures adopted by the enforcement authorities will not increase the degree of protection given to its debtors and other customers in the future, or that they will not favor the claims brought by consumer groups or associations. This may prevent or hinder the collection of payments resulting from services rendered and financing granted by Grupo Galicia’s subsidiaries, which may have an adverse effect on their results and operations.
Class actions against financial institutions for an indeterminate amount may adversely affect the profitability of the financial system and of Banco Galicia, specifically.
Certain public and private organizations have initiated class actions against financial institutions in Argentina, including Banco Galicia. Class actions are contemplated in the Argentine National Constitution and the Consumer Protection Law, but their use is not regulated. The courts, however, have admitted class actions in spite of lacking specific regulations, providing some guidance with respect to the procedures for the same. These courts have admitted several complaints filed against financial institutions to defend collective interests, based on arguments that object to charges applied to certain products, applicable interest rates and the advisory services rendered in the sale of government securities, among others.
Final judgments entered against financial institutions under these class actions may affect the profitability of financial institutions in general and of Banco Galicia specifically in relation to class actions filed against Banco Galicia. For further information regarding class actions brought against Banco Galicia, please refer to the Item 8. “Accounting Information—Legal Proceedings—Banco Galicia”.
Administrative procedures filed by the tax authorities of certain provinces against financial institutions, such as Banco Galicia (the primary subsidiary of Grupo Galicia) and amendments to tax laws applicable to Grupo Galicia could generate losses for Grupo Galicia.
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Buenos Aires City tax authorities, as well as certain provincial tax authorities, have initiated administrative proceedings against financial institutions in order to collect higher gross income taxes from such financial institutions beginning in 2002 and onward. Such tax authorities are alleging that the Compensatory Bond (as defined below) should be subject to taxation. The purpose of the Compensatory Bond was to compensate financial institutions for the losses they would otherwise have incurred as a result of the measures implemented to confront the 2001-2002 economic crisis, in particular, the asymmetric pesification of assets and liabilities. The final decision regarding these proceedings remains uncertain and substantial losses may be sustained by financial institutions, including Banco Galicia.
Although Banco Galicia believes it has met its tax obligations regarding current regulations and has properly recorded provisions for those risks based on the opinions and advice of its external legal advisors and pursuant to the applicable accounting standards, certain risks may render those provisions inadequate. Tax authorities may not agree with Grupo Galicia’s tax treatment, possibly leading to an increase in its tax liabilities.
Moreover, amendments to existing regulations may increase Grupo Galicia’s tax rate and a material increase in the tax burden could adversely affect its financial results.
Risk Factors Relating to Us
Grupo Galicia may be unable to repay its financial obligations due to a lack of liquidity it may suffer because of being a holding company.
Grupo Galicia, as a holding company, conducts its operations through its subsidiaries. Consequently, it does not operate or hold substantial assets, except for equity investments in its subsidiaries. Except for such assets, Grupo Galicia’s ability to invest in its business development and/or to repay obligations is subject to the funds generated by its subsidiaries and their ability to pay cash dividends. In the absence of such funds, Grupo Galicia may be forced to resort to financing options at unappealing prices, rates and conditions. Additionally, such financing could be unavailable when Grupo Galicia may need it.
Grupo Galicia’s subsidiaries are under no obligation to pay any amount to enable Grupo Galicia to carry out investment activities and/or to cancel its liabilities or to give Grupo Galicia funds for such purposes. Each of the subsidiaries is a legal entity separate from Grupo Galicia, and due to certain circumstances, legal or contractual restrictions, as well as to the subsidiaries’ financial condition and operating requirements, Grupo Galicia’s ability to receive dividends and its ability to develop its business and/or to comply with payment obligations could be limited. Under certain regulations, Banco Galicia has restrictions relating to dividend distributions.
Notwithstanding the fact that the repayment of such obligations could be afforded by Grupo Galicia through other means, such as bank loans or new issues in the capital market, investors should take notice of the above, prior to deciding on their investment in equity in Grupo Galicia. For further information on dividend distribution restrictions, see Item 5.B. “Financial Review and Prospects—Liquidity and Capital Resources”.
Corporate governance standards and disclosure policies that govern companies listing their shares pursuant to the public offering system in Argentina may differ from those regulating highly developed capital markets, such as the U.S. As a foreign private issuer, Grupo Galicia applies disclosure policies and requirements that differ from those governing U.S. domestic registrants.
Argentine disclosure requirements are more limited than those in the United States and differ in important respects. As a foreign private issuer, Grupo Galicia is subject to different disclosure policies and other requirements than a domestic U.S. registrant. For example, as a foreign private issuer in the U.S., Grupo Galicia is not subject to the same requirements and disclosure policies as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue financial statements, report on significant events and the standards applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants.
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In addition, although Argentine laws provide for certain requirements that are similar to those prevailing in the U.S. in relation to publicly listed companies (including, for example, those related to price manipulation), in general, applicable Argentine laws are different to those in the U.S. and in certain aspects may provide different or fewer protections or remedies as compared to U.S. laws. Further, Grupo Galicia relies on exemptions from certain Nasdaq rules that are applicable to domestic companies. Accordingly, the corporate information available about Grupo Galicia is not the same as, and may be more limited than, the information available to shareholders of a U.S. company.
Adverse conditions in the credit, capital and foreign exchange markets may have a material adverse effect on Grupo Galicia’s financial position and results of operations and adversely impact it by limiting its ability to access funding sources.
Grupo Galicia may sustain losses relating to its investments in fixed- or variable-income securities on the exchange market and its monetary position due to, among other reasons, changes in market prices, defaults and fluctuations in interest rates and in exchange rates. A deterioration in the capital markets may cause Grupo Galicia to record net losses due to a decrease in the value of its investment portfolios, in addition to losses caused by the volatility in financial market prices, even if the economy overall is not affected. Any of these losses could have an adverse effect on Grupo Galicia’s results of operations.
Grupo Galicia’s subsidiaries estimate and establish reserves for potential credit risk or future credit losses, which may be inadequate or insufficient, and which may, in turn, materially and adversely affect its financial position and results of operations.
Grupo Galicia’s subsidiaries estimate and establish reserves for potential credit risk and losses related to changes in the levels of income of debtors/borrowers, increased rates of inflation, increased levels ofnon-performing loans or an increase in interest rates. This process requires a complex and subjective analysis, including economic projections and assumptions regarding the ability of debtors to repay their loans.
Therefore, if in the future Grupo Galicia’s subsidiaries are unable to effectively control the level of quality of their loan portfolio, if loan loss reserves are inadequate to cover future losses, or if they are required to increase their loan loss reserves due to an increase in the amount of their non-performing loans, the financial position and the results of operations of Grupo Galicia’s subsidiaries may be materially and adversely affected.
If Grupo Galicia’s subsidiaries should fail to detect money laundering and other illegal or inappropriate activities in a comprehensive or timely manner, the business interests and reputation of Grupo Galicia may be harmed.
Grupo Galicia’s subsidiaries must be in compliance with all applicable laws against money laundering, funding of terrorist activities and other regulations. These laws and regulations require, among other things, that Grupo Galicia’s subsidiaries adopt and implement control policies and procedures which involve “know your customer” principles that comply with the applicable regulations, and reporting suspicious or unusual transactions to the applicable regulatory authorities. While Grupo Galicia’s subsidiaries have adopted policies and procedures intended to detect and prevent the use of their networks for money laundering activities and by terrorists, terrorist organizations and other types of organizations, those policies and procedures may fail to fully eliminate the risk that Grupo Galicia’s subsidiaries have been or are currently being used by other parties, without their knowledge, to engage in activities related to money laundering or other illegal activities. To the extent that Grupo Galicia’s subsidiaries have not detected or do not detect those illegal activities, the relevant governmental agencies to which they report have the power and authority to impose fines and other penalties on Grupo Galicia’s subsidiaries. In addition, their business and reputation could be adversely affected if customers use it for money laundering activities or other illegal activities.
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A disruption or failure in Grupo Galicia’s information technology system could adversely affect its operations and financial position.
The success of Grupo Galicia’s subsidiaries is dependent upon the efficient and uninterrupted operation of their communications and computer hardware systems, including those systems related to the operation of their ATM networks. Grupo Galicia’s communications, systems or transactions could be harmed or disrupted by fire, floods, power failures, defective telecommunications, computer viruses, electronic or physical theft and similar events or disruptions. Any of the foregoing events may cause disruptions in Grupo Galicia’s systems, delays and the loss of critical data, and could prevent it from operating at optimal levels. In addition, the contingency plans in place may not be sufficient to cover all those events and, therefore, this may mean that the applicable insurance coverage is limited or inadequate, preventing Banco Galicia from receiving full compensation for the losses sustained as a result of such a global disruption. If any of these events occur, it could damage the reputation, entail serious costs and affect Grupo Galicia’s transactions, as well as its results of operations and financial position.
An increase in cybersecurity breaches or fraudulent and other illegal activity involving Grupo Galicia or its subsidiaries could lead to reputational damage to Grupo Galicia’s (or its subsidiaries’) brands and could reduce the use and acceptance of its and its subsidiaries’ products.
The business of many of Grupo Galicia’s subsidiaries depends on the efficient and uninterrupted operation of its data processing systems, its platforms for the exchange of information and its digital networks. Many of Grupo Galicia’s subsidiaries have has access to a large amount of confidential information about their respective clients. Therefore, cybersecurity breaches represent a potential risk for Grupo Galicia. Cybersecurity breaches that result in, for example, identity theft, phishing schemes or the theft of personal and confidential information could negatively affect the security of information that is stored and transmitted through the information systems and network infrastructure of Grupo Galicia and could cause existing and potential clients to refrain from conducting business with the subsidiaries of Grupo Galicia. Grupo Galicia cannot provide any assurance that the systems are invulnerable to cybersecurity breaches or that its existing security measures will be successful in protecting against any such breach. If any of the above described events were to occur, it could lead to reputational damage to Grupo Galicia’s brands, which could reduce the use and acceptance of its products, or to greater regulation, which could increase its compliance costs, all of which could materially adversely affect its business and results of operation and the trading price for its ADSs.
Fluctuations in the value of the Peso could adversely affect Argentine economic growth and Argentina’s international reserves and the financial situation of the Grupo Galicia and its subsidiaries.
The devaluation of the Peso could have a negative impact on the ability of certain Argentine businesses to make timely payments on their foreign currency-denominated debt, could cause inflation, could cause a significant reduction in salaries in real terms, could put at risk the financial stability of companies, such as certain subsidiaries of Grupo Galicia, whose success depends on internal market demand and could also adversely affect the ability of the Argentine government to pay its foreign currency-denominated debt. The Peso depreciatedvis-à-vis the Dollar by almost 30% in 2013 and 2014. In 2015, the Peso depreciated approximately 52% as compared to the Dollar, which included a 10% depreciation between January 1, 2015 and September 30, 2015 and a 38% devaluation during the final quarter of the year, the majority of which was concentrated in the period after December 16, 2015 once the government of Macri assumed control of the exchange rate put in place by the prior government. In 2016, the Peso lost approximately 21% of its value as compared to the Dollar. In 2017, the Peso lost approximately 17% of its value as compared to the Dollar. The selling exchange rate published by Banco Nación as of April 16, 2018 was Ps.20.45 per US$1.00.
From time to time, the Central Bank may intervene in the foreign exchange market to influence exchange rates. Purchases of Pesos by the Central Bank could cause a decrease in the international reserves of the Central Bank. A significant decrease in the Central Bank’s international reserves may have an adverse impact on Argentina’s ability to withstand external shocks to the economy, and any adverse effects to the Argentine economy could, in turn, adversely affect the financial position and business of Grupo Galicia and its subsidiaries.
Further, a significant depreciation of the Peso would, among other things, increase the cost of servicing certain of Grupo Galicia’s subsidiaries’ foreign currency-denominated debt. Either a significant depreciation or appreciation could have a material adverse effect on the Argentine economy and Grupo Galicia’s financial condition and results of operations.
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Shortages in the availability of energy in Argentina could adversely affect the Argentine economy and hence the operation and business of Grupo Galicia and its subsidiaries.
The various economic crisis in the past in Argentina and the fixing of the tariff rates in the electricity sector, have provoked a significant lack of infrastructure and business investment for the supply and transportation of natural gas and electricity. At the same time, the demand for the natural gas and electricity in Argentina has increased considerably due to the improving economic conditions in the country and the low cost of such services. To address such increase in demand, Argentina has needed to import natural gas from other countries. The Central Bank’s reserves have been frequently used by the government to pay for such imports. If the government is unable to pay to import natural gas to cover the energy deficit, the Argentine economy may suffer and Argentine businesses may be adversely affected.
Several measures have been adopted by the government in order to lessen the short term impact of the lack of energy for residential and industrial users. If these measures are not sufficient, or if the relevant investments are not timely made, the Argentine economy could be seriously affected, producing a negative impact on local business.
Since 2015, as a first step, tariff increases were implemented and subsidies to industries and to high income consumers were reduced. In February 2016, the government implemented various increases in tariffs and reductions in subsidies for gas and electricity users.
On August 18, 2016, the Supreme Court suspended the gas tariff increases for residential users and ordered public hearings in respect of such increases. The Argentine government, complying with this ruling, conducted public hearings on the matter in September 2016. During such hearings, the Secretary of Energy ratified the government’s plan to maintain such increases and to further increase the same. In October 2016, resolution No. 212 – E/2016 established the new gas tariffs with an average increase of 200% for residential consumers and of 277% for most merchants, small and medium companies.
On September 27, 2016, Federal Judge No. 3 of the Province of Cordoba suspended for the whole country the increase of gas tariffs for merchants, small and medium companies and ordered the imposition of the tariff regime in place on March 31, 2016 until December 27, 2016. Such resolution was appealed by the Argentine government. On September 6, 2016, the Supreme Court ruled in favor of increasing the electricity tariffs in the Province of Buenos Aires.
As a consequence of the above, the cost of energy has increased significantly in recent years, which increase may have an adverse effect on the Argentine economy and Grupo Galicia’s financial condition and results of operations.
The high levels of public spending in Argentina could generate long lasting adverse consequences for the Argentine economy.
During recent years, the Argentine government has substantially increased the levels of its public spending. In 2015, the spending of the public sector increased by 34.5% as compared to the prior year, and the government announced a primary fiscal deficit equal to 5.5% of GDP. In 2016, the spending of the public sector increased by 38.2% as compared to the prior year, and the government announced a primary fiscal deficit equal to 4.6% of GDP. In 2017, the spending of the public sector increased by 3% as compared to the prior year, and the government announced a primary fiscal deficit equal to 6% of GDP. If spending continues to outpace revenue, the fiscal deficit is likely to increase and past sources to address such deficit, such as the Central Bank and the National Administrator of Pensions may be utilized.
Any such increasing deficit could have a negative effect on the government’s ability to access to the long term financial markets, and in turn, could limit the access to such markets for Argentine companies, such as Grupo Galicia and its subsidiaries. The same may have a material and adverse effect on Grupo Galicia’s financial condition and results of operations.
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Failure to adequately address actual and perceived risks arising from institutional deterioration and corruption could adversely affect Argentina’s economy and financial position and the ability of Argentine companies to attract foreign investment.
The lack of a solid institutional framework and corruption have been identified as serious problems for Argentina, and may continue to be. In the Transparency International’s Corruption Perceptions Index 2016, which measures corruption in 176 countries, Argentina ranked No. 95. In the World Bank’s “Doing Business” report in 2017, Argentina Ranked No.117 among 189 countries, having ranked No. 121 among 189 countries in 2016. The failure to address these issues could increase the risk of political instability, distort the decision-making process, adversely affect Argentina’s international reputation and its ability and the ability of its companies to attract foreign investment. Although the Macri administration has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption, the Argentine government’s ability to implement these initiatives is uncertain as it would require the involvement of the judiciary branch, which is independent, as well as legislative support from opposition parties and there can be no assurances that the implementation of such measures will be successful. A deterioration in the Argentine economy could have a material and adverse effect on Grupo Galicia’s financial condition and results of operations.
Our legal name is Grupo Financiero Galicia S.A. We are a financial services holding company that was incorporated on September 14, 1999, as a sociedad anónima (which is a stock corporation) under the laws of Argentina. As a holding company we do not have operations of our own and conduct our business through our subsidiaries. Banco Galicia is our main subsidiary and one of Argentina’s largest full-service banks.
Through the operating subsidiaries of Tarjetas Regionales, in which Grupo Financiero Galicia has an 83% ownership interest as of March 31, 2018, and CFA, in which Banco Galicia has a 97% ownership interest and Grupo Financiero Galicia has a 3% ownership interest through December 31, 2017 (as the sale of CFA was completed during the first quarter of 2018), we provide proprietary brand credit cards throughout the “Interior” of the country and consumer finance services throughout Argentina. Argentines refer to the Interior as all of Argentina except for the Buenos Aires, the federal capital, and the areas surrounding the city of Buenos Aires (“Greater Buenos Aires”), i.e., the provinces, including the Buenos Aires Province but excluding the city of Buenos Aires and its surroundings. Through Sudamericana and its subsidiaries we provide insurance products in Argentina. We directly or indirectly own other companies providing financial related products as explained herein. We are one of Argentina’s largest financial services groups with consolidated assets of Ps.341,013 million as of December 31, 2017. For more information regarding the corporate reorganization of Tarjetas Regionales and CFA sale, please see “–History”.
Our goal is to consolidate our position as one of Argentina’s leading comprehensive financial services providers while continuing to strengthen Banco Galicia’s position as one of Argentina’s leading banks. We seek to broaden and complement the operations and businesses of Banco Galicia, through holdings in companies and undertakings whose objectives are related to and/or can produce synergies with financial activities. Our non-banking subsidiaries operate in financial and related activities in which Banco Galicia either cannot participate or in which it can participate only on a limited basis due to restrictive banking regulations.
We are domiciled in Buenos Aires, Argentina. Under our bylaws, our corporate duration is until June 30, 2100. Our duration may be extended by a resolution passed at the extraordinary shareholders’ meeting. Our principal executive offices are located at Teniente General Juan D. Perón 430, 25th Floor, (C1038AAJ), Buenos Aires, Argentina. Our telephone number is (54-11) 4343-7528.
Our agent for service of process in the United States is CT Corporation System, presently located at 111 8th Avenue, New York, New York 10011.
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The following table illustrates our organizational structure as of December 31, 2017. Percentages indicate the ownership interests held.
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The following table illustrates our new organizational structure after the sale of CFA and the corporate reorganization of Tarjetas Regionales. Percentages indicate the ownership interests held.
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Grupo Financiero Galicia
Grupo Financiero Galicia was formed on September 14, 1999 as a financial services holding company to hold all the shares of the capital stock of Banco Galicia held by members of the Escasany, Ayerza and Braun families. Its initial nominal capital amounted to 24,000 common shares, 12,516 of which were designated as class A ordinary (common) shares (the “class A shares”) and 11,484 of which were designated as class B ordinary (common) shares (the “class B shares”).
Following Grupo Financiero Galicia’s formation, the holding companies that held the shares in Banco Galicia on behalf of the Escasany, Ayerza and Braun families were merged into Grupo Financiero Galicia. Following the merger, Grupo Financiero Galicia held 46.34% of the outstanding shares of Banco Galicia. In addition, and due to the merger, Grupo Financiero Galicia’s capital increased from 24,000 to 543,000,000 common shares, 281,221,650 of which were designated as class A shares and 261,778,350 of which were designated as class B shares. Following this capital increase, all of our class A shares were held by EBA Holding S.A., an Argentine corporation that is 100% owned by our controlling shareholders, and our class B shares were held directly by our controlling shareholders in an amount equal to their ownership interests in the holding companies that were merged into Grupo Financiero Galicia.
On May 16, 2000, our shareholders held an extraordinary shareholders’ meeting during which they unanimously approved a capital increase of up to Ps.628,704,540 and the public offering and listings of our class B shares. All of the new common shares were designated as class B shares, with a par value of Ps.1. During this extraordinary shareholders’ meeting, all of our existing shareholders waived their preemptive rights. In addition, the shareholders determined that the exchange ratio for the exchange offer would be one class B share of Banco Galicia for 2.5 of our class B shares and one ADS of Banco Galicia for one of our ADSs. The exchange offer was completed in July 2000 and the resulting capital increase was of Ps.549,407,017. Upon the completion of the exchange offer, our only significant asset was our 93.23% interest in Banco Galicia.
On January 2, 2004, our shareholders held an extraordinary shareholders’ meeting during which they approved a capital increase of up to 149,000,000 preferred shares, each of them mandatorily convertible into one of our class B shares on the first anniversary of the date of issuance, to be subscribed for in up to U.S. $100 million of face value of subordinated notes to be issued by Banco Galicia to its creditors in the restructuring of the foreign debt of its head office in Argentina (the “Head Office”) and its Cayman Branch, or cash. This capital increase was carried out in connection with the restructuring of Banco Galicia’s foreign debt. On May 13, 2004, we issued 149,000,000 preferred non-voting shares, with preference over the ordinary shares in the event of liquidation, each with a face value of Ps.1. The preferred shares were converted into class B shares on May 13, 2005. With this capital increase, our capital increased to Ps.1,241,407,017.
In August 2007, Grupo Financiero Galicia exercised its preemptive rights in Banco Galicia’s share issuance and subscribed for 93.6 million shares of Banco Galicia. The consideration paid for such shares consisted of: (i) U.S. $102.2 million face value of notes due 2014 issued by Banco Galicia in May 2004, and (ii) cash. After the capital increase, Grupo Financiero Galicia held 94.66% of Banco Galicia’s shares, an increase from 93.60%.
In September 2013, Grupo Financiero Galicia announced that it had reached an agreement to merge Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia. The consolidated financial statements prepared specifically for this merger were issued as of June 30, 2013 and the effective date of such merger was September 1, 2013.
This merger resulted in an increased ownership interest by Grupo Financiero Galicia in its principal subsidiary Banco Galicia of 25,454,193 class B shares of Banco Galicia representing 4.526585% of the total capital stock of Banco Galicia previously owned by Lagarcué S.A. and Theseus S.A.
Consequently, Grupo Financiero Galicia agreed to increase its capital stock by issuing 58,857,580 new class B shares representing 4.526585% of the outstanding capital stock of Grupo Financiero Galicia to be delivered to the shareholders of Lagarcué S.A. and Theseus S.A.
Additionally, Grupo Financiero Galicia, together with Banco Galicia and the shareholders of Lagarcué S.A. and Theseus S.A., signed a supplemental agreement governing operational issues and providing for the settlement and mutual withdrawal of any pending claims.
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All documentation related to the merger of Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia was approved at the extraordinary shareholders’ meeting of Grupo Financiero Galicia held on November 21, 2013, including the exchange ratio and the above mentioned capital increase of Ps.58,857,580 through the issuance of 58,857,580 class B shares, with a face value of Ps.1, one vote per share, entitled to participate in the profits of the financial year beginning on January 1, 2013.
On December 18, 2013, the definitive merger agreement contemplating the merger of Lagarcué S.A. and Theseus S.A. into Grupo Galicia was registered in a public deed pursuant to the terms of paragraph 4 of article 83 of the Ley General de Sociedades (Law No. 19,550, as amended, the General Corporations Law or “Corporations Law”), and effective as of September 1, 2013. Therefore, 25,454,193 class B shares of Banco Galicia, representing 4.526585 % of its capital stock previously owned by Lagarcué S.A. and Theseus and S.A. were transferred to Grupo Financiero Galicia. As a result, Grupo Financiero Galicia owns 560,199,603 shares of Banco Galicia, representing 99.621742% of its capital stock and voting rights.
On February 25, 2014, the Board of Directors of Grupo Financiero Galicia resolved to offer to acquire all remaining shares of Banco Galicia owned by third parties, amounting to 2,123,962 shares, at an amount of Ps.23.22 per share, which was approved by the Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”) on April 24, 2014.
On February 27, 2014, by Resolution No. 17,300, the Board of the CNV consented to the merger of Lagarcué S.A. and Theseus S.A into Grupo Financiero Galicia and to the above mentioned increase in capital of Grupo Financiero Galicia.
In compliance with Argentine regulations, Grupo Financiero Galicia made all required communications and paid the amounts corresponding to the remaining shares of Banco Galicia held by third parties. On August 4, 2014, Grupo Financiero Galicia became the owner of 100% of the outstanding capital stock of Banco Galicia when the relevant unilateral declaration to acquire the remaining shares of Banco Galicia held by third parties recorded as a public deed pursuant to Article 95 of the Law No. 26,831 (the “Capital Markets Law”, in Spanish “Ley de Mercado de Capitales”).
On April 15, 2014, the Board of Directors approved the purchase of 95% of the capital stock of Galicia Administradora de Fondos from Banco Galicia for an amount of Ps.39 million.
On January 12, 2017, Grupo Financiero Galicia and Banco Galicia accepted an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of CFA, a subsidiary of Banco Galicia. On December 4, 2017, pursuant to Resolution No. 414, the Argentine Central Bank authorized such transaction, which was completed on February 2, 2018. As a result of such sale, Grupo Financiero Galicia received a total of Ps.1,047.3 million for its ownership interest.
On May 16, 2017, the Board of Directors of Grupo Financiero Galicia accepted an offer to acquire 10,000 book-entry shares with a nominal value of Ps.1 per share, representing 1% of the share capital of Galicia Valores S.A. owned by CFA for Ps.906,524.15.
During August 2017, Grupo Financiero Galicia accepted a series of irrevocable sales offers for the acquisition of 6% of the issued and outstanding share capital of its subsidiary, Tarjetas Regionales. On January 5, 2018, a total sales price of U.S. $49,000,000 was paid by Grupo Financiero Galicia and the transaction was completed on January 8, 2018 with the transfer of 22,633,260 Class A common shares, book-entry, with a par value of Ps.1 per share and five votes per share, and 42,033,196 Class B common shares, book-entry, with a par value of Ps.1 per share and one vote per share.
On October 12, 2017, the Board of Directors of the Company approved the corporate reorganization of Grupo Financiero Galicia and Banco Galicia. Such reorganization consisted of the divestiture of Banco Galicia’s shares in Tarjetas Regionales (77% of its share capital), and the incorporation of such shares into the assets of Grupo Financiero Galicia effective January 1, 2018. On January 19, 2018, the Argentine Central Bank issued Note No. /04/2018, thereby confirming that it did not object to the reorganization. As a result, Grupo Financiero Galicia maintains an 83% ownership interest in Tarjetas Regionales.
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On August 15, 2017, the shareholders of Grupo Financiero Galicia approved an increase of its share capital by issuing up to a maximum of 150,000,000 of new Class B shares, book-entry, with a right to one vote and a face value of Ps.1 per share.
On September 26, 2017, the global primary follow-on offering period ended and 109,999,996 Class B shares were subscribed for a price of U.S. $5 per share. Such shares were issued on September 29, 2017. The Company granted the underwriters the option to purchase additional Class B ordinary shares at the offering price, and on October 2, 2017, the underwriters exercised such option and 16,500,004 additional Class B shares at U.S. $5 per share were issued on October 4, 2017.
As a result of the foregoing offering, a total of 126,500,000 ordinary Class B shares, book-entry, with a right to one vote and a face value of Ps.1 per share were issued. Issued and outstanding capital of Grupo Financiero Galicia was therefore Ps.1,426,764,597, represented by 281,221,650 ordinary Class A shares, book-entry, entitled to five votes per share and a face value of Ps.1 per share and 1,145,542,947 ordinary Class B shares, book-entry, entitled to one vote and a face value of Ps.1 per share.
On December 27, 2017, Grupo Financiero Galicia made a capital contribution to Banco Galicia of Ps.10,000,000,000.
Banco Galicia
Banco Galicia is a banking corporation organized as a stock corporation under Argentine law and supervised and licensed to operate as a commercial bank by the Superintendencia de Entidades Financieras y Cambiarias (Superintendency of Financial Institutions and Exchange Bureaus or, the “Superintendency”).
Banco Galicia was founded in September 1905 by a group of businessmen in Argentina and began operations in November 1905. Two years later, in 1907, Banco Galicia’s stock was listed on the Buenos Aires Stock Exchange (the “BASE”). Banco Galicia’s business and branch network increased significantly by the late 1950s and continued expanding in the following decades, after regulatory changes allowed Banco Galicia to exercise its potential and gain a reputation for innovation, thereby achieving a leading role within the domestic banking industry.
In the late 1950s, Banco Galicia launched the equity mutual fund FIMA Acciones and founded the predecessor of the asset manager Galicia Administradora de Fondos. Beginning in the late 1960s, Banco Galicia began to establish an international network mainly comprised of branches in New York and in the Cayman Islands, a bank in Uruguay and several representative offices.
In order to develop automated banking in Argentina and avoid bank disintermediation (i.e., when consumers access information or goods directly rather than through intermediaries) in the provision of electronic information and fund transfer services, in 1985, Banco Galicia established, together with four other private- sector banks operating in Argentina, Banelco S.A. to operate a nationwide automated teller system, which became the largest in the country. During the same year, Banco Galicia also acquired an interest in VISA Argentina S.A., and is currently one of the largest issuers of such cards in Argentina.
During the 1990s, Banco Galicia implemented a growth and modernization strategy directed at achieving economies of scale and increasing productivity and, therefore, heavily invested in developing new businesses, acquiring new customers, widening its product offering, developing its IT and human resources capabilities, and expanding its distribution capacity. This was comprised of traditional channels (branches) and, especially, alternative channels, including new types of branches (e.g., in-store), ATMs, banking centers, phone banking and internet banking.
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As part of its growth strategy, Banco Galicia began expanding into rural areas in theInterior, where there was believed to be a high potential for growth. Historically, the Interior was underserved relative to Buenos Aires and its surroundings with respect to access to financial services, and its population tends to use fewer banking services. Between 1995 and 1999, Banco Galicia acquired equity interests in entities and formed several non-banking companies providing financial services to individuals in theInterior through the issuance of proprietary brand credit cards. See “—Regional Credit Card Companies” below. In addition, in 1997, Banco Galicia acquired a regional bank that was merged into it, with branches located mainly in Santa Fe and Córdoba, two of the wealthiest and most populous provinces.
In order to fund its strategy, during the 1990s, Banco Galicia tapped the international capital markets for both equity and debt. In June 1993, Banco Galicia carried out its initial international public offering in the United States and Europe and, as a result, listed its American Depositary Receipts (“ADRs”) on the Nasdaq Stock Market until 2000, when Banco Galicia’s shares were exchanged for our shares. In 1991, it was the first Argentine bank to issue debt in the European capital markets and, in 1994, it was the first Latin American issuer of a convertible bond. In 1996, Banco Galicia raised equity again through a local and international public offering.
In 1996, Banco Galicia entered the bank insurance business through an agreement with ITT Hartford Life Insurance Co. for the joint development of initiatives in the life insurance business. In the same year, Banco Galicia initiated its internet presence, which evolved into a full e-banking service for both companies and individuals.
At the end of 2000, Banco Galicia was the largest private-sector bank in the Argentine market with a 9.8% deposit market share.
In 2001 and 2002, Argentina experienced a severe political and financial crisis, which had a material adverse effect on the financial system and on financial businesses as a whole, including Banco Galicia, but especially on financial intermediation activity. However, during the crisis, the provision of transactional banking services was maintained. With the normalization of the Argentine economy and the subsequent period of growth, financial activities began to increase, translating into significant growth for the financial system as a whole, including Banco Galicia. The provision of services continued to develop, surpassing their development pre-crisis, and financial intermediation activity resumed progressively.
Beginning in May 2002, Banco Galicia began to implement a series of initiatives to deal with the liquidity shortage caused by the systemic deposit run, the unavailability of funding and other adverse effects of the 2001-2002 financial crisis. Banco Galicia significantly streamlined its operations and reduced its administrative expenses and, immediately after launching such initiatives, restored its liquidity. Also, in late 2002 and early 2003, Banco Galicia closed all of its operating units abroad or began to wind them down. In addition, Banco Galicia: (i) restructured most of its commercial loan portfolio, a process that was substantially completed in 2005, (ii) restructured its foreign debt, a process that began in 2002 and that was completed in May 2004, and resulted in an increase in its capitalization, and (iii) in February 2004, finalized the restructuring of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 financial crisis.
Together with the launching of the above-mentioned initiatives, Banco Galicia began to normalize its activities, progressively restoring its customer relations and growing its business with the private sector. In 2007, Banco Galicia finalized the full repayment of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 financial crisis. In addition, in August 2007, Banco Galicia repaid in full the notes that it had issued to restructure the debt of its New York Branch and undertook a share offering to increase its capitalization, in order to be able to support the increase in regulatory capital requirements on a bank’s exposure to the public sector and the growth of its business with the private sector.
On June 1, 2009, Banco Galicia entered into a stock purchase agreement with AIG and with AIG Consumer Finance Group Inc. for the purchase of the shares of CFA, Cobranzas y Servicios S.A. and Procesadora Regional S.A. (collectively the “CFA Group”), Argentine companies that are involved in financial and related activities.
Pursuant to Resolution No. 124, dated June 7, 2010, the Argentine Central Bank authorized the purchase of the shares of the CFA Group by Banco Galicia and Tarjetas Regionales and on August 31, 2010, through Resolution No. 299, the National Commission for the Defense of Competition (Comisión Nacional de Defensa de la
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Competencia) approved the transaction. The purchase of the shares of the CFA Group was completed by Banco Galicia (95%) and Tarjetas Regionales (5%) on June 24, 2010. The price to acquire the shares of these companies was Ps.334 million. This purchase was financed with Banco Galicia’s available cash, within its ordinary course of business. During the fiscal year ended December 31, 2011, the 5% interest held by Tarjetas Regionales was acquired by Grupo Financiero Galicia and Banco Galicia, which acquired 3% and 2% of such interest, respectively. Following such acquisition, Banco Galicia held a 97% interest in CFA.
On February 25, 2014, Grupo Financiero Galicia, which controlled 99.62% of the shares of Banco Galicia, resolved to issue an offer to acquire the 2,123,962 shares of Banco Galicia owned by third parties. On April 24, 2014, said transaction was approved by the CNV and on July 14, 2014, it was incorporated by the Argentine Superintendency of Corporations. Currently, 100% of the outstanding capital stock of Banco Galicia is owned by Grupo Financiero Galicia. See “—Grupo Financiero Galicia” above.
In addition, Banco Galicia requested to delist its shares from the BYMA to become a privately held company. Banco Galicia’s quotation was suspended on April 30, 2014. On August 21, 2014, the CNV approved Banco Galicia’s request to delist its shares from the BASE.
On April 15, 2014, Banco Galicia sold its interest in Galicia Administradora de Fondos to Grupo Financiero Galicia for Ps.39 million.
During the third quarter of fiscal year 2014, Banco Galicia sold to VISA Argentina S.A., a company in which the Bank had a 15.9% equity interest, its equity investment in Banelco S.A., for Ps.40 million.
In September 2014, the Bank entered into a preliminary agreement to merge Galicia Cayman into the Bank, effective as of October 1, 2014. The Bank controlled 99.989% of the shares of Galicia Cayman and had an option to purchase the remaining 0.011%, which was owned by Cobranzas y Servicios S.A. In November 2014, the Bank’s shareholders’, through an extraordinary shareholders’ meeting, exercised the above mentioned option and approved the merger and incorporation of Galicia Cayman into the Bank, effective on October 1, 2014. This transaction resulted in the dissolution without liquidation of Galicia Cayman.
On January 12, 2017, Grupo Financiero Galicia and Banco Galicia accepted an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of CFA, a subsidiary of Banco Galicia. On December 4, 2017, pursuant to Resolution No. 414, the Argentine Central Bank authorized such transaction, which was completed on February 2, 2018.
On December 27, 2017, Grupo Financiero Galicia, in its capacity as sole shareholder and holder of 100% of the capital of Banco Galicia, integrated a capital contribution of Ps.10,000 million through Lebacs. The Argentine Central Bank, through its Resolution No.35 dated January 11, 2018, approved the capital contribution and its consideration as computable capital.
In a survey conducted in 2017 by Great Place to Work®, which involved more than 76,000 employees from 121 different companies, Banco Galicia was ranked first among the best companies to work for with more than 1,000 employees.
Restructuring of the Foreign Debt of Banco Galicia’s Head Office in Argentina and its Cayman Branch
On May 18, 2004, Banco Galicia successfully completed the restructuring of US$1,321 million of the debt of Banco Galicia’s Head Office and its Cayman Branch, consisting of bank debt (including debt with multilateral credit agencies) and bonds. This amount represented 98% of the foreign debt eligible for restructuring. As of December 31, 2014, the principal amount of old debt, the holders of which did not participate in the exchange offer was U.S. $1 million.
Banco Galicia paid creditors who elected to participate in the cash offer and the Boden offer and issued (i) U.S. $649 million of long-term U.S. Dollar-denominated debt instruments, of which U.S. $465 million were Dollar-denominated notes due 2014 (referred to as the “2014 Notes”), (ii) U.S. $400 million of medium-term Dollar-
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denominated debt instruments, of which U.S. $353 million were Dollar-denominated notes due 2010 (referred to as the “2010 Notes”) and (iii) U.S. $230 million of subordinated Dollar-denominated debt instruments, of which U.S. $218.2 million were Dollar-denominated notes due 2019 (referred to as the “Subordinated Notes Due 2019” or the “2019 Notes”).
In January 2010, Banco Galicia paid the last amortization installment of its 2010 Notes, for a principal amount of U.S. $34 million and in November 2010, Banco Galicia redeemed all of its 2014 Notes, for an outstanding principal amount of U.S. $102 million.
During February 2011, Banco Galicia partially redeemed capitalized interest on its Subordinated Notes Due 2019 for U.S. $90 million (and accrued interest thereof for U.S. $1.4 million), which amount was capitalized between January 1, 2004 and December 31, 2010, and was originally scheduled to be paid on January 1, 2014.
In addition, in December 2011, with respect to such notes, Banco Galicia made an advance payment of interest, including both interests that capitalized from January 1, 2011 to June 30, 2011, of U.S. $6 million, and accrued interest thereof for U.S. $0.3 million. Such payment was originally scheduled to be made on January 1, 2014.
In January 2014, Banco Galicia paid cumulative interest accrued on these notes from July 1, 2011 to December 31, 2013 for U.S. $29 million.
Grupo Financiero Galicia previously held a credit against Banco Galicia for a face value of U.S. $10 million, as a result of the acquisition from third parties of subordinated loans maturing in 2019. During fiscal year 2016, Banco Galicia prepaid its Subordinated Notes due 2019 and the subordinated loans that were to mature in 2019.
Banco Galicia Uruguay S.A. and Galicia (Cayman) Ltd.
In 1983, Galicia Uruguay was established as a “Casa Bancaria”, a license that granted an offshore status, as an alternative service location for Banco Galicia’s customers. In September and October 1999, the Uruguayan government’s executive branch and the Uruguayan Central Bank, respectively, approved Galicia Uruguay’s status as a full service domestic bank.
Due to the effects of the 2001-2002 financial crisis on Galicia Uruguay, in early 2002, the Central Bank of Uruguay suspended its activities and assumed control and management of Galicia Uruguay. In December 2002, Galicia Uruguay restructured its deposits into debt maturing in 2011. On June 1, 2004, Galicia Uruguay’s license to operate as a domestic commercial bank was revoked by the Central Bank of Uruguay, but it retained the license from the Uruguayan government’s executive branch. Control and management of Galicia Uruguay by the Central Bank of Uruguay ended on February 22, 2007. On May 15, 2009, Galicia Uruguay made available to its clients in advance U.S. $27 million, corresponding to the remaining balance of its restructured debt, which was initially due in September 2011. Having fulfilled its obligations, Galicia Uruguay’s shareholders resolved at a shareholders’ meeting held on June 30, 2010, to voluntarily dissolve and liquidate the company.
Furthermore, taking into consideration the financial condition and the evolution estimated in the liquidation process, shareholders decided to reduce the company’s computable capital in an amount equal to U.S. $2.1 million through the voluntary redemption of shares, which was carried out on October 18, 2010. During 2013 and 2014, shareholders decided to carry out two new voluntary share redemptions. These redemptions were carried out for a value equal to U.S. $2 million and U.S. $3 million, on November 18, 2013 and September 10, 2014, respectively.
As of the date of this annual report, Galicia Uruguay was in the process of finalizing its dissolution process with the appropriate Uruguayan authorities.
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Regional Credit Card Companies
In the mid-1990s, Banco Galicia made the strategic decision to target the “non-account holding” individuals market, which, in Argentina, typically includes the low and medium-low income segments of the population who live in theInterior of the country, in addition to certain parts of Greater Buenos Aires. To implement this strategic decision, in 1995 Banco Galicia began investing in non-bank companies (the “Regional Credit Card Companies”) operating in certain regions of the Interior, providing financial services to individuals through the issuance of credit cards with proprietary brands and extending credit to its customers through such cards.
In 1995, Banco Galicia made the first investment in this business by acquiring a minority stake in Tarjeta Naranja S.A. (“Tarjeta Naranja”) and in 1997 increased its ownership to 80%. This company had begun operations in 1985 in the city of Córdoba, where it marketed “Tarjeta Naranja”, its proprietary brand credit card, and had enjoyed local growth.
In 1996, Banco Galicia formed Tarjetas Cuyanas S.A. (“Tarjetas Cuyanas”), to operate in the Cuyo Region (the provinces of Mendoza, San Juan and San Luis) in partnership with local businessmen. This company launched the “Nevada Card” in May 1996 in the city of Mendoza. Also in 1996, Banco Galicia formed a new company, Tarjetas del Mar, to operate in the city of Mar del Plata and its area of influence. Tarjetas del Mar began marketing the “Mira” card in March 1997.
In early 1997, Banco Galicia purchased an interest in Comfiar S.A., a consumer finance company operating in the provinces of Santa Fe and Entre Ríos, which was merged into Tarjeta Naranja in January 2004.
In 1999, Banco Galicia reorganized its participation in this business through Tarjetas Regionales, a holding company wholly owned by Banco Galicia and Galicia Cayman, which owns the shares of Tarjeta Naranja, Comfiar S.A., Tarjetas Cuyanas, and Tarjetas del Mar. In addition, between 1999 and 2000, Tarjetas Regionales acquired Tarjetas del Sur S.A., a credit card company operating in southern Argentina. In March 2001, Tarjetas del Sur S.A. merged into Tarjeta Naranja.
During 2012, the ownership interests in Tarjetas Regionales and its operating subsidiaries were modified due to the following events:
During May 2014, an extraordinary shareholders’ meeting of Tarjetas del Mar approved a capital increase of Ps.32 million, which was fully subscribed for by Sociedad Anónima Importadora y Exportadora de la Patagonia. As a consequence, the Bank currently holds a 58.8% equity interest in Tarjetas del Mar, while CFA holds a 1.2% equity interest and Sociedad Anónima Importadora y Exportadora de la Patagonia holds the remaining 40%.
On March 31, 2017, Banco Galicia’s Board of Directors approved the sale of its stake (58.8% of the issued and oustanding shares) in its subsidiary Tarjetas del Mar to Sociedad Anónima Importadora y Exportadora de la Patagonia(which already owned 40% of the total shares of Tarjetas del Mar). CFA also sold its stake (1.2% of the issued and outstanding shares) in Tarjetas del Mar to Federico Braun.The consideration received for such sale was approximately U.S. $5 million.
As of December 31, 2016, Banco Galicia held a 77% ownership interest in Tarjetas Regionales. Tarjetas Regionales directly and indirectly held 100% of Tarjeta Naranja and 100% of Tarjetas Cuyanas.
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These companies have experienced a significant expansion of their customer bases, in absolute terms and with respect to the range of customers served, number of cards issued, distribution networks and size of operations, as well as a technological upgrade and general modernization. By mid 1995, Tarjeta Naranja had approximately 200,000 cards outstanding. As of December 31, 2017, the Regional Credit Card Companies, on a consolidated basis, had approximately 10 million issued cards and were the largest proprietary brand credit card operation in Argentina.
In terms of funding, the Regional Credit Card Companies have historically used one or more of the following third party sources of financing: merchants, bond issuances, bank loans and other credit lines, financial leases and securitizations using financial trust vehicles. This diversification has allowed the Regional Credit Card Companies to maintain and expand their business without depending excessively on one single source or provider.
The business operations of the Regional Credit Card Companies are exposed to foreign exchange rate fluctuations and interest rate fluctuations; however, they mitigate the foreign exchange rate risk in respect of their business and operation through hedging transactions and try to offset their interest rate exposure with assets that bear interest at similar floating rates. In addition, the Regional Credit Card Companies have an overall liquidity policy requiring them to maintain sufficient liquidity to cover at least three months of future operations and to formulate a cash flow projection for each upcoming year. These internal policies and practices ensure adequate working capital through which the Regional Credit Card Companies protect their operations against short-term cash shortages, allowing them to focus on expanding their business and continuously better serving their clients.
On August 10, 2017, the Board of Directors of each of Tarjeta Naranja and Tarjetas Cuyanas approved the merger of such subsidiaries, by which Tarjetas Cuyanas would merge into Tarjeta Naranja. On September 5, 2017, Tarjetas Naranja and Tarjetas Cuyanas executed a supplemental merger agreement pursuant to which Tarjeta Naranja acquired the assets and liabilities of Tarjetas Cuyanas effective as of October 1, 2017. Such merger was approved by the shareholders of each subsidiary at Extraordinary General Shareholders’ Meetings in October 2017.
Additionally, in October 2017, Grupo Financiero Galicia publicly announced its plan to undertake a corporate reorganization between Grupo Financiero Galicia and Banco Galicia as discussed above in “History and Development of the Company”.
Compañía Financiera Argentina
CFA is a financial company which operates under the Financial Institutions’ Law and other regulations set forth by the Argentine Central Bank.
CFA is a leading financial company in Argentina in the personal loans business, providing consumer personal loans through different products. Within this framework, CFA grants unsecured personal loans within the Argentine territory, mainly through its “Efectivo Sí” offices, intermediary entities (mutuals, unions, cooperatives, etc.) and the financing of purchases through its affiliated merchants. It also issues credit cards on a limited scale.
CFA had different names before adopting its current name. It was originally formed under the name “Río de la Plata Sociedad Anónima Comercial y de Financiaciones” on August 16, 1960, and in 1977 the name was changed to “Burofinanz S.A. Compañía Financiera” (authorized by Resolution No. 424 of the Argentine Central Bank, dated December 29, 1977).
In 1992, CFA carried out its commercial activities under the name “Interbonos Compañía Financiera S.A.” (authorized by Resolution No. 284 of the Argentine Central Bank, dated June 17, 1992), as agent of the Mercado Abierto (fixed income brokerage), and later shifted its activities to personal financing, providing small loans through retail merchants for the acquisition of different consumer goods. In 1994, it created “Efectivo Sí”, which is a product aimed at satisfying the financial needs of the segment of the population characterized by limited interaction with traditional banks.
In 1995, Banco de Crédito Argentino acquired an interest in the company’s capital stock and later Banco de Crédito Argentino was acquired by BBVA Banco Francés S.A., which became the major shareholder of CFA. Subsequently, the “División Convenios” (Agreements Division) was created, which allowed CFA to enter the market of agreements with mutuals, unions, cooperatives and other intermediary organizations, and grant loans to its associates.
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The Argentine Central Bank, through its Resolution No. 85 dated February 7, 1996, registered CFA’s legal name change to “Compañía Financiera Argentina S.A.” and authorized it to operate as a financial company under the Financial Institutions’ Law, thus allowing CFA to initiate its activities on February 27, 1996.
In 1998, most of CFA’s capital stock was acquired by AIG Consumer Finance Group Inc., a company controlled by American International Group Inc. (AIG). Six years later, in 2004, the “Cuota Sí” product, aimed at financing purchases through affiliated merchants, was designed.
In June 2010, Compañía Financiera Argentina was acquired by Banco Galicia and Tarjetas Regionales, with an interest in CFA’s capital stock of 95% and 5%, respectively.
During fiscal year 2011, the 5% interest held by Tarjetas Regionales was acquired by Grupo Financiero Galicia and Banco Galicia, which acquired 3% and 2% of such interest, respectively. Following such acquisition, Banco Galicia held a 97% interest in CFA.
Sudamericana Holding
In 1996, Banco Galicia entered the bank insurance business, through the establishment of a joint venture with Hartford Life International to sell life insurance and annuities, in which it had a 12.5% interest. In December 2000, Banco Galicia sold its interest in this company and purchased 12.5% of Sudamericana, a subsidiary of Hartford Life International. As a result of various acquisitions, Grupo Financiero Galicia owns 87.5% of Sudamericana (with the remaining 12.5% being held by Banco Galicia) which offers life, retirement, property and casualty insurance products in Argentina through its subsidiaries Galicia Seguros S.A. (“Galicia Seguros”), which provides property, casualty and life insurance, Galicia Retiro Compañía de Seguros S.A., which provides retirement insurance and Galicia Broker Asesores de Seguros S.A., an insurance broker
In addition, during fiscal year 2012 Galicia Seguros, together with three other insurance companies, created Nova Re Compañía Argentina de Reaseguros S.A., the goal of which is to increase the scope of offerings of reinsurance products in Argentina. In September 2017, Galicia Seguros sold its ownership interest in such entity.
Galicia Administradora de Fondos
Incorporated in 1958, Galicia Administradora de Fondos manages the FIMA family mutual funds that are distributed by Banco Galicia through its multiple channels (network of branches and home banking and investment centers, among others). The company’s team is comprised of asset management professionals whose goal is to manage the FIMA family funds in order to meet the demand of individuals, companies and institutions. The assets of each fund are distributed across a variety of assets, such as bonds, negotiable obligations, trusts, shares and deposits, among others, in line with the fund’s investment objective.
On April 15, 2014, Banco Galicia sold its 95% interest in Galicia Administradora de Fondos to Grupo Financiero Galicia.
Its shareholders are Grupo Financiero Galicia, with a 95% stake, and Galicia Valores, with the remaining 5%.
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Net Investment (Liquidated)
Net Investment was established in February 2000 as a holding company (87.5% owned by Grupo Financiero Galicia and 12.5% owned by Banco Galicia).
On May 16, 2017, the General Ordinary Shareholders’ Meeting of Net Investment unanimously approved the early dissolution and subsequent liquidation of the company. At such meeting, the shareholders appointed a liquidating committee that took all required actions leading to such entity’s actual liquidation, with the financial statements as of December 31, 2017 corresponding to its final liquidation. The final distribution of capital was made on January 9, 2018.
Galicia Warrants
Galicia Warrants was founded in April 1993, when it obtained the authorization from the relevant authorities to store goods and issue certificates of deposits of goods and warrants under the provisions of Law No. 9,643.
Galicia Warrants is a leading company in the deposit certificates and warrants issuance market and its main customers belong to the agricultural, industrial and agro-industrial sectors and it also serves exporters and retailers. Its main objective is to enable its customers to access credit and financing, which are secured by the property kept under its custody. Its shareholders are Grupo Financiero Galicia, with an 87.5% stake, and Banco Galicia, with the remaining 12.5%.
Banking
Banco Galicia, our largest subsidiary, operates in Argentina and substantially all of its customers, operations and assets are located in Argentina. Banco Galicia is a bank that provides, directly or through its subsidiaries, a wide variety of financial products and services to large corporations, SMEs, and individuals.
Banco Galicia is one of Argentina’s largest full-service banks and is a leading provider of financial services in Argentina. According to information published by the Argentine Central Bank, as of October 31, 2017, Banco Galicia ranked second in terms of assets, deposits and loan portfolio within private-sector banks in Argentina. As of the same date, Banco Galicia also ranked second among private-sector domestic banks in terms of assets, loans and deposits. Its market share of private sector deposits and of loans to the private sector was 10.29% and 10.11% respectively, as of the end of 2017. On a consolidated basis, as of the end of fiscal year 2017, Banco Galicia had total assets of Ps.336,384 million, total loans of Ps.197,330 million, total deposits of Ps.203,504 million, and its shareholders’ equity amounted to Ps.35,821 million.
Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms amongst private-sector financial institutions in Argentina. This distribution platform, as of December 31, 2017, was comprised of 306 full service banking branches, located throughout the country, 1,982 ATMs and self-service terminals owned by Banco Galicia, phone banking and e-banking facilities. Banco Galicia’s customer base, on an unconsolidated basis, was comprised of 3.9 million customers, who were comprised of mostly individuals but who also included more than 104,000 companies. Banco Galicia has a strong competitive position in retail banking, both with respect to individuals and SMEs. Specifically, based on internal studies undertaken by Banco Galicia, it is estimated that Banco Galicia is one of the primary providers of financial services to individuals, one of the largest providers of credit cards, one of the primary private-sector institutions serving SMEs, and has traditionally maintained a leading position in the agriculture and livestock sectors. Banco Galicia’s primary clients are classified into three categories, Wholesale Banking, Retail Banking, and Financial Banking.
For a breakdown of Banco Galicia’s revenues by category of activity for the last three financial years, see Item 5.A. “Operating Results-Results by Segments-Banking.”
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Wholesale Banking
Banco Galicia’s Wholesale Banking division is organized into the following three segments: (i) Corporate, Investment Banking and Capital Markets; (ii) Wholesale Banking Customer Base; and (iii) Agricultural Sector.
Corporate, Investment Banking and Capital Markets
In 2017, Banco Galicia consolidated its leading position in the Corporate segment, both with respect to domestic and international companies, through the implementation of a business model focused on providing loan and other credit product offerings and by providing detailed and tailored advice to its customers. In addition, as the demand for longer term credit increased, the volume of major market transactions increased, contributing to a 70% increase in the Bank’s lending portfolio, as the majority of domestic companies use Banco Galicia´s financing and credit services for their transactions.
In the Investment Banking and Capital Markets segment, the Bank structured a variety of tailor-made financing products for corporate, SMEs, and agricultural businesses. In this segment, the Bank completed more than 91 transactions, 21 syndicated and structured loans, and 70 capital markets offerings, including notes, short-term securities, bills and financial trusts.
The most important categories of Peso-denominated transactions in 2017 in which Banco Galicia was involved were issuances of securities by (i) automotive companies (such as Fiat, Toyota and Mercedes Benz) in an aggregate principal amount of over Ps.1,600 million, (ii) companies affiliated with Grupo Financiero Galicia (such as Tarjeta Naranja, Tarjetas Cuyanas and CFA) in an aggregate principal amount of over Ps.3,200 million and by Banco Galicia in its capacity as an issuer in an aggregate principal amount of Ps.4,300 million, (iii) the City of Buenos Aires and the provinces of Buenos Aires, Neuquén and Río Negro in an aggregate principal amount of over Ps.39,400 million, and (iv) the financial sector in an aggregate principal amount of over Ps.19,100 million.
With respect to U.S. Dollar-denominated transactions, the most important transaction in which Banco Galicia was involved in 2017 was the repurchase by the City of Buenos Aires of notes it had previously issued and the subsequent offering by the City of Buenos Aires of new notes in a principal aggregate amount of over U.S. $400 million.
In addition, in 2017 the Bank acted as a local placement agent in foreign debt offerings by Banco Galicia and Tarjeta Naranja.
The Bank also participated in syndicated transactions in 2017 in an aggregate amount of over Ps.2,800 million and U.S. $290 million.
Wholesale Banking Customer Base
The Bank’s corporate customer base is comprised of companies from all over Argentina, with annual revenues ranging from Ps.200 million to Ps.1,500 million. The Bank works with all business sectors, except primary agricultural production. The Bank provide companies with dedicated and customized service tailored-made to their individual needs. Corporate banking services are provided by business executives and specialists in foreign trade and treasury services located in the Bank’s 20 corporate banking centers located throughout Argentina. These centers allow the Bank to specialize in regional economies and leverage synergies with local branches to meet companies’ needs.
In 2017, the Bank offered the following services to its corporate banking clients:
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In addition, the Bank continued to enhance its online banking platform. The Bank shifted 70% of time deposits and 17% of check purchases to its electronic Office Banking platform, in addition to processing foreign trade operations, payments to suppliers and payroll.
With respect to customer recognition, the Bank organized more than 70 events throughout Argentina to interact with its customers and provide them with political, trade and economic updates, product training and human resources.
Agricultural Sector
The agricultural sector is Banco Galicia´s Wholesale Banking segment focused on providing products, services and attention to its various agricultural-sector clients. Banco Galicia provides such clients with a variety of services and product offerings, including credit and debit cards, loans, and financing advice from in-house financial experts.
The Bank expects that the agricultural sector will increase its corporate activity and revenues in 2018 as a result of favorable tax and business regulations passed in 2017 and it plans to attempt to maximize its offering of products and services to agricultural companies. In 2017, Tarjeta Galicia Rural maintained its leading position in this sector with a market share of approximately 53% of credit cards issued by private banks and a sales volume above Ps.9,600 million.
In 2017, more than 80 revolving credit agreements and other extensions of credit remained in force with leading companies in this sector. The Bank provided financing to several agricultural companies, including extending loans to farmers and providing other forms of financing for capital expenditures, such as financing for the acquisition of agricultural machinery, vehicles and other production goods, as well as financing for the purchase and maintenance of female breeding stock.
During the 2017 fiscal year, foreign currency-denominated financing for crop purchases further contributed to growth. The Bank continued to develop products to help regional businesses adapt to new market conditions. Improved economic conditions in Argentina led to an increase in the demand for long-term financing for investment projects, with an emphasis on renewable energy and energy efficiency, in addition to the option of settling leasing and collateral loan transactions in U.S. Dollars.
During the 2017 fiscal year, the fifteenth edition of the Excelencia Agropecuaria La Nación Award (La Nación’s Agricultural Excellence Award), was awarded to Banco Galicia, and the Revista Chacra a la Gestión Solidaria del Campo Award (Chacra Magazine’s Rural Solidarity Award) and the CAPA Award for agricultural journalism were also both awarded to Banco Galicia.
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Similar to prior years, the Bank supported the research and outreach activities of Universidad Austral, actively participating in receiving delegations and developing the “3° Encuesta Sobre las Necesidades del Productor Agropecuario Argentino” (Third Survey of Argentine Agricultural Sector Needs) in partnership with Purdue University. The Bank also continued supporting the activities of the Fundación Producir Conservando, the activities of the Agronomy School of the University of Buenos Aires, and the work of Asociación Argentina de Productores en Siembra Directa (Argentine Association of No Till Farming) with the goal of spreading certified agricultural practices in Argentina. The Bank also continued supporting activities promoted by Consorcios Regionales de Experimentación Agrícola (Agricultural Experimentation Regional Consortiums) and the Líderes (Leaders) training program. The Bank also continued to actively support and participate in the advisory council of Confederaciones Rurales Argentinas (Argentine Rural Confederations) and the Sociedad Rural Argentina, in addition to other regional and rural organizations throughout Argentina. The Bank also provided support to the Centro de Estudios e Investigación para la Dirigencia Agroindustrial (Study and Research Center for Agricultural Management), which provides training to agricultural leaders. The Bank maintained an active presence on the board of the Asociación Argentina del Girasol (Sunflower Argentine Association) and other associations for Argentina’s main agricultural products.
Building on synergies with Grupo Financiero Galicia-affiliated companies, the Bank achieved a new record of insurance underwriting for an agricultural area by insuring an agricultural area of 200,000 hectares against hail. The Bank also had representatives attend 190 events, solidifying Grupo Financiero Galicia’s image as a universal brand.
Products and Marketing
Foreign Trade
The foreign trade sector focuses on providing the Banco Galicia’s clients with financial support with respect to foreign trade transactions. Banco Galicia provides such clients with a variety of products and customer services including, but not limited to, financing, payment orders, collections and guarantees.
The foreign trade volume (imports + exports) amounted to U.S. $17,501 million in 2017, which accounts for 13% of the Argentine trade exchange. Out of 134,904 foreign trade transactions, 70% were conducted through the Bank’s Office Banking platform.
As a result of the deregulation of the Argentine exchange market, there was a shift in the macroeconomic business context in Argentina, with a new focus on electronic transactions and on different forms of financial products and transactions that are better suited to take advantage of such deregulated market. The Bank focused on meeting these demands while taking into account market requirements and customer needs. The Bank conducted workshops for customers with the goal of providing them information with respect to these economic developments, focusing on discussing foreign trade and lending transactions and providing such discussions through an economist.
In addition, the Bank continued providing training to the Bank’s Foreign Trade Officers in the form of monthly meetings and semi-annual training sessions, with the goal of introducing these new financial instruments. The Bank’s participation at the school of Managers, Corporate Officers, ÉMINENT and Private Banking Officers continued during the year.
In April 2017, the Bank deployed a new Foreign Trade Service Model, seeking to simplify internal processes in order to streamline operations and improve the customer experience.
Galicia Comex, the Bank’s Foreign Trade specialized site, was relaunched in 2017 to include additional and updated content and functionalities, providing a valuable resource to customers. The Bank also introduced the Consumer Banking portal to encourage self-service, which provides information to simplify foreign trade transactions.
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The Bank made progress on the Comex Project, which is expected to be complete in the first quarter of 2019. The goal of this project is to replace the systems currently used by Banco Galicia to better channel, process and manage foreign trade transactions. The Bank is also in the process of implementing a comprehensive project to manage import-related letters of credit.
Transactional Products, Investments and Insurance
In 2017, the Wholesale Banking Division focused on simplifying its client’s transactional activity seeking to reduce the number of requests by directing operations to the Bank’s electronic platform, and to streamline treasury management for all companies served by this Division.
The following transactions increased on the Bank’s electronic platform:
With respect to checking accounts, the implementation of the Bank’s new clearing system optimized operations with checks in general, minimizing the associated claims.
With respect to payroll accounts, the Bank successfully implemented the first stage of its “Payroll – Massive Addition Project”, which significantly streamlined the process of setting up new payroll accounts and led to a 33% decrease in company claims associated with this process.
The Bank opened two new “Container Banks” at YPF, Luján de Cayo and Coca Cola, Córdoba. Container Banks are small branches located inside corporate offices or headquarters of Argentine companies. Furthermore, in order to streamline and facilitate customers’ treasury management and to enhance internal efficiency, the Bank focused on (i) migrating a portion of Cobranza Integrada Galicia (Galicia Integrated Collection) services to smart self-service terminals, increasing operations using these terminals from 5% to 18%; and (ii) implementing collection centers in Córdoba and General Pacheco (in northern Greater Buenos Aires) to improve cash collection.
Finally, considerable efforts were made to address discounts and price deviations in connection with collections, payments and checking accounts, attaining a 44% increase in income from services derived from these products vis-a-vis 2016, with approximately Ps.2,200 million in annual revenues in 2017.
e-platform
The Bank’s e-platform segment is focused on providing online services and products to its Wholesale Banking Division clients through three platforms – Office Banking, Interbanking and Swift. Office Banking is the Bank’s online platform for its wholesale banking clients. Interbanking and Swift are private platforms through which the Bank’s wholesale clients are able to undertake transactions with domestic and foreign counterparties. During 2017, the Bank completed improvements in Office Banking, focusing on usability, interface, and financing. The Bank also launched its Galicia Office Banking app, which provides users with the ability to authorize all online operations on their smartphone, including remote check deposit, in a secure online environment as the Bank is the first wholesale bank to implement facial recognition technology. The Bank worked on the migration of all products with digital signatures to Office Express, including Foreign Trade, and focused on the migration of customers to this platform, as well as on communication and promotion efforts. The Bank made available self-service tools to its customers, including foreign currency exchange, opening of brokerage accounts, upgrade of the FIMA model, and Stopdebit (an automatic credit stop system) of service payments.
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The Bank conformed to regulatory changes by implementing the operation of “DEBIN I” and “CBU Alias”. DEBIN I is the Argentine Central Bank’s mechanism which provides for immediate debit between financial institutions. CBU Alias is a new reference banking system that clients can select to identify their bank accounts, in lieu of the reference number automatically assigned by a client’s respective bank. The Bank also improved the usability and design of Galicia Rural and Galicia Comex products.
The Bank made progress on the following opportunities: Posición Consolidada (Consolidated Position), Préstamo Inmediato (Immediate Loan), Mis Pagos (My Payments), electronic payment vouchers, service electronic payment, Cobranza Integrada (Integrated Collection), and automatic addition of customers at the time of the account opening.
There was a 34% increase in transactions in 2017 as compared to 2016. With respect to electronic transactions, there was a 22% increase in the use of the Bank’s three platforms (Office Banking, Interbanking and Swift) in 2017 as compared to 2016.
With respect to Interbanking, in 2017 the Bank migrated a large portion of the Bank’s core system, which handles payments to the SAP “Payment Engine”, to an online platform, which will provide benefits in payment optimization and will allow us to communicate directly with companies’ SAP teams.
With respect to Swift, the Bank continued increasing the number of companies operating in a fully automated environment and are working to comply with CSP security standards.
Retail Banking
The Retail Banking Division manages Banco Galicia’s business with individuals from all income brackets and with businesses, retailers and professionals. Retail Banking provides a wide range of financial products and services related to transactions, loans, and investments. On the transactions side, Banco Galicia offers its customers checking and savings accounts, credit and debit cards, and payroll direct deposit, among other services. Banco Galicia’s customers have access to its services through its branch network as well as through its electronic distribution channels. The Bank’s Retail Banking Division offers various types of loans (i.e., personal loans and mortgages) and time deposits (in Pesos or foreign currencies). See “—Sales and Marketing.”
In 2017, Retail Banking continued to focus on implementing its commercial strategy, focusing on offering products tailored to the unique needs of each of the following segments: Business and SMEs, ÉMINENT, Private Banking and Mass Market. The following are the major challenges that the Bank believes this division will face in implementing this strategy for the period from 2017-2020:
With a focus on the customer, Retail Banking has incorporated the Customer Contact Center with the goal of increasing customer satisfaction and loyalty.
The Retail Banking Division’s customer base grew 9% in 2017, reaching 2.8 million customers.
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Segments
Business and SMEs
The Business and SMEs segment is focused on providing financing and other financial products and services to businesses not serviced by the wholesale banking division, and small- to medium-sized companies. Banco Galicia provides such clients with a variety of services and product offerings, including financial products, payroll services, discount checks and foreign trade transaction support. In 2017, the Bank continued to develop and implement value-generating proposals for Galicia Business and SME customers, in addition to providing attentive, tailored-customer service. According to private surveys, in 2017 this segment had a leading position in Argentina in terms of overall customer satisfaction, increasing the gap between the Bank and its competitors.
The customer base of the Business and SMEs segment recorded an increase of 5,000 customers in 2017 and maintained its leadership position among Argentine financial institutions in the sector, with a market share of 34%. The most important business achievements were a 15% increase in payroll accounts, the placement of loans for over Ps.15,000 million in the SMEs segment, and the market leadership in terms of consumer purchases made using the Galicia Visa Business. During the last quarter of 2017, the Bank executed an action plan aimed at attracting new retailers and resulting in a doubling in the number of applications by retailers for brand credit cards. In 2017, the Bank introduced the ability for simplified stock companies (which can be incorporated online in less than 24 hours and have less stringent initial capital requirements) to apply for an account with the Bank online through a streamlined system.
In 2017, four “Buenos Negocios” (Good Business) meetings were held and the Bank continued to add content generated by experts in SMEs to the buenosnegocios.com portal to provide customers with information regarding good business practices.
The Bank also participated in twelve trade fairs, in order to have direct interaction with certain corporate clients and promote “Préstamo Eslabón”, a 12-month credit facility with an immediate 0% interest rate, which offers a long-term payment option at a 15% interest rate. Such facility is aimed at financing machinery, software, consulting services or booths at such trade fairs.
In 2017, the Bank held the first edition of the SMEs Awards of Banco Galicia and Clarín. The awards were split into four categories: Family, High Global Impact, Innovation, and High Social and/or Environmental Impact.
Galicia ÉMINENT
Galicia ÉMINENT is a segment of the Bank which is a service aimed at high-income customers.
As of December 31, 2017, Galicia ÉMINENT grew 28% as compared to December 31, 2016 as a result of an in increase new customers. Investments, such as time deposits, FIMA mutual fund investments and Lebacs, increased 110% year-over-year as the Bank continued to pursue its strategy to position itself as an investment bank. With respect to its customer service model, it has continued leading the Net Promoter Score (“NPS”) by 41%, with outstanding performance in the promotion attributes: Channels, Customer Service, Problems, Product and Reputation. NPS is a private online survey conducted by the Bank that gauges overall customer satisfaction and loyalty based on customers’ willingness to recommend a brand to others.
Galicia Conecta, the Bank’s exclusive service for Galicia ÉMINENT clients through which a Bank employee has direct contact with clients on WhatsApp, had over 17,000 customers as of December 31, 2017 and maintains a competitive advantage in Argentina by focusing on the customer experience and offering simple and dynamic processes. In addition to positioning the Galicia ÉMINENT brand as a premium and distinct service, the Bank opened “La Isla” (The Island) with the goal of providing clients with branches that provide additional amenities. The Bank also continued to market the brand through the “Quiero! Viajes (I Want! Travel)”, “Conecta”, and “Investments” campaigns to continue to attract customers from a variety of backgrounds and age groups through its diversified offerings and brand recognition.
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Mass Market
Mass Market is a segment of the Bank which primarily is focusing in upper middle-class customers, lower middle-class and entry level customers. In 2017, as the Bank continued to build a customer-oriented culture, the General Income segment prioritized the development of customers’ eligibility for additional credit lines and products.
With respect to self-service, the Bank undertook several initiatives in 2017, such initiatives primarily focusing on the migration to electronic statements for customers served by this segment, up from 67% to over 75%. Several campaigns were also held to move the exchange of Dollars to Pesos, deposits, transfers and withdrawals to the online banking platform. The growth of customers interannually was 8.8%, improving the customer portfolio structure as a result of indirect and online sales channels.
The Bank also worked to improve the sales of products and services from other segments to customer of its General Income segment. In addition, the Bank was able to increase the sales of its insurance products to the General Income segment, thereby contributing to an increase in its insurance market share and income from such services. The Bank developed the capacity to make upgrades through its Online Banking platform, thus allowing for the extension of personal loans online, which such activity increased from 17% to 40% in 2017. The credit and debit cards business grew during 2017, with a 37% increase in purchases, as compared to 2016, and over 248 million transactions.
The Bank continued to monitor its NPS results and take steps to continue to improve the same during 2017. As of December 31 2017, the Bank ranked first among financial institutions in Argentina based on the NPS results at such time, with an increase of 12 points as compared to the NPS results for the year ended December 31, 2016.
Galicia MOVE continued to focus on increasing the number of young customers served by this segment through digital marketing efforts. Early in the year, the Bank focused on customer activation and development, delivering more relevant communications through new communications channels like Instagram, where the account experienced a fivefold increase in the number of followers. During the second stage, the Bank started to devise the strategy to transform Galicia MOVE into a digital proposal, which was officially launched in the market in November, consolidating the concept of a “bank without branches, 100% online” as a differentiating brand attribute. The Bank currently has over 110,000 Galicia MOVE customers.
Private Banking
Private Banking offers distinctive and professional financial services to high-net worth individuals through the management of their investments and the provision of financial advisory services. Private Banking offers its customers a wide range of domestic financial investment alternatives, such as deposits, FIMA mutual funds, government and corporate securities, shares and trusts where the Bank acts as a dealer.
One of the Private Banking premises, in line with the Bank’s strategy to differentiate itself from competitors through service quality, is the preferential treatment of its customers. In order to maintain high service quality, the service has highly-trained officers, an investment center that operates from 8 a.m. to 6 p.m., a wide network of ÉMINENT officers, and exclusive customer service areas at the Bank’s branches and its headquarters, located Reconquista 228 in Buenos Aires.
Products
Certain of the key products offered by the Retail Banking Division to its client are the following:
Agreements and Payroll
Agreements and Payroll are comprised of product offerings to businesses to conduct their payroll transactions and account services for their employees.
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In 2017, the Bank increased the number of payroll customers by 2% and the credited salaries by 34% as compared to 2016. The Bank also generated an increase in the average salary earned by employers at the business representing these new accounts, with such increase being 16% above inflation. As in other sectors, the Bank focused on improving the customer service experience and improving efficiency.
The Bank strengthened partnerships with several businesses, including but not limited to, the Bar Association of the City of Buenos Aires, the Argentine Dental Association, and the Argentine Neurosurgery Association. Furthermore, the Bank continued supporting the educational community and providing benefits to families in more than 130 schools that use Banco Galicia for their transactions.
Claims declined 41% during 2017 as a result of efforts focused on customer contact, improved advice, and immediate response to customer questions or issues.
Investments
Investments is comprised of products tailored to clients seeking to maximize returns on their deposits and provides clients with the ability to invest in mutual funds, bonds and stocks.
In 2017, the Bank achieved significant growth in diversifying its retail customers’ investments, notably in the following products:
Retail Banking experienced 51% inter-annual growth in Investments or Ps.72,300 million. Such amount is composed with the following mix: Peso-Denominated Deposits 38%, Dollar-Denominated Deposits 26%, FIMA 18%, and Bonds and Shares 18%.
The Bank improved its self-service product offerings and platforms for customers to make their investments in a secure and fast manner, including:
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Personal Loans
The Bank’s personal loan portfolio is focused on providing personal loans to its existing clients. During 2017, Banco Galicia increased its personal loan portfolio 88%, as compared to 2016, to Ps.17,629 billion (as of December 2017), accounting for a 59 basis point (hereinafter, “b.p.”) increase in its market share in this sector. During 2017, the Bank provided personal loans to 9.08% of its existing clients. As part of its retail banking commercial strategy, the Bank began offering UVA-adjusted personal loans not tied to a specific use. The Bank also implemented a new sales strategy pursuant to which the Bank offered customers tailored loan products and increased hours of banking operation. The main point of execution for such personal loans was the Bank’s online banking platform, whereas historically most personal loans were obtained in its branches.
Insurance
The Bank’s insurance business is focused on offering a varierty of insurance products to businesses and individuals that provide coverage to protect business property, people and assets, as applicable. Banco Galicia continues consolidating its position as one of the leading banks in the marketing of insurance products through its wide variety of insurance policy offerings and its reputation for good customer service through its branches, telephone customer service and online platforms.
The Bank’s insurance business continued to grow in 2017, with more than 400,000 new insurance policies and an increase in income of more than Ps.105 million as compared to 2016. The Bank currently provides over 1.65 million of coverage with respect to property and personal insurance policies. In 2017, the Bank successfully launched sales of insurance policies through its Online Banking platform, which was primarily used by customers in the purchase of automobile insurance.
With respect to product development, Banco Galicia increased the number of policies outstanding for unemployment insurance (with 59,000 policies outstanding as of the end of 2017) and for theft insurance, with the growth in its theft insurance sector being driven by the issuance of over 80,000 policies in 2017 for mobile phone theft protection. Insurance products for individuals also grew significantly in 2017, in particular life insurance policies, with over 64,000 life insurance policies issued by the Bank outstanding as of the date hereof.
Credit Cards and Promotions
The Bank’s credit cards and promotions business is focused on developing effective promotions and marketing strategies to increase customers and customers’ use of the Bank’s credit card products. The Bank’s credit and debit card business continued to grow during 2017, with a 37% increase in purchases, as compared to 2016, and over 248 million transactions conducted during the year. For 2017, the Bank had a 12.3% market share in the use of credit card and debit card purchases in Argentina.
During the year, Banco Galicia issued over 406,000 basic credit cards and 269,000 additional credit cards, totaling approximately 4.1 million authorized credit cards. With 6,600 business agreements, the Bank provides benefits to its customers at 12,000 stores across various industries throughout the country.
Consumption amounting to Ps.8,500 million was financed through the “Ahora 12” (Now 12 Installments) program, including the “Ahora 3, 6, 12 and 18” (Now 3, 6, 12 and 18 Installments) plans.
Quiero! Fidelity Program (“I Want! Loyalty Program”)
Quiero!, is a program that rewards customers for using the Bank’s payment methods for purchasing products. This benefits/loyalty program continued to grow in 2017 and has received positive feedback from customers in terms of satisfaction and value. According to market research, Quiero! was considered one of the best benefits programs in Argentina in 2017, particularly among customers who have redeemed points in exchange for rewards.
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Out of the over 1.1 million customers subscribed to Quiero!, 44% redeemed points at least once in 2017. More than half such redemptions were in exchange for discounts in respect of the 1,500 brands available in the catalog, 350,000 redemptions were in exchange for experiences, 70,000 redemptions were in exchange for catalog products and 70,000 redemptions were exchanged on the Bank’s Quiero! Viajes (I Want! Travel).
A significant number of the Bank’s high-income customers (84% of such customers the redemption program) use their accumulated awards points to purchase high-priced items in the catalog. The Bank’s medium and low-income customers, however, also use their awards points to obtain discounts on products or travel and to purchase products and services for sale through the Bank’s loyalty program.
During 2017, the Bank expanded the benefit offerings in the Quiero! program, including:
While the Quiero! program continues to grow, the Bank is working to improve efficiency in the point redemption program, have a lower impact on its income statement, and allocate its resources to customers based on their use of its products.
Digital
This area of the Bank focuses on its digital services for its Retail Banking Division clients. In 2017, Banco Galicia continued strengthening its digital strategy, which focused on improving the Bank’s digital capacity and product offerings. The use of the Bank’s mobile platform has increased since its launch in late 2016, with 7 million monthly interactions during 2017, as compared to 9 million interactions through its Online Banking platform. The Bank’s mobile platform ranked first in client use for certain of its product offerings, including currency trading and investments. In 2017, 53% of total personal loans were entered into through either the Bank’s mobile or Online Banking platform, an over 100% increase as compared to the 2016. The Bank consolidated digital operations and multidisciplinary teams, which allowed the Bank to implement its digital strategy noted above.
The Bank launched a new and fully redesigned online banking platform, emphasizing user-friendliness and interface. The Bank’s customers conduct most of their transactions through this platform, with more than 1.2 million customers logging onto the site annually to undertake a variety of transactions.
The Bank developed new functionalities for both mobile banking and online banking platforms in order to reduce the need for customers to physically visit its branches or call the Bank’s call centers. Some of the new functionalities include extended hours for certain transactions, such as transfers and Dollar exchange transactions. The Bank launched a “token” product within its mobile banking app to gradually and securely eliminate the need for physical debit cards. The Bank also implemented the ability for customers to make appointments at branches from the mobile banking app. The Bank’s mobile banking app currently has a four-star rating at the online app store, which leads the financial industry in Argentina in terms of digital product offerings.
The Bank is also working to streamline its messaging interface with customers, use data modeling to leverage its business, and employ its cognitive intelligence platform (known as Watson) to generate automated interactions with its customers, increasing contact efficiency and delivering a better customer experience.
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With respect to digital innovation, the Digital Innovation Lab continued working on (i) communicating trends both internally and externally; (ii) developing prototypes (such as checking account balances through devices like Amazon Alexa, among others); and (iii) working on an application programming interface (“API”) platform to support interactions with third parties in a simple manner to serve the Bank’s customers’ financial needs. This initiative was put in place by holding a new “hackathon”, at which the Bank opened its doors to encourage collective innovation. This was a 36-hour long event, at which 20 teams developed customer solutions within the Bank’s open API platform.
Furthermore, the Bank relaunched Galicia MOVE as part of its digital strategy in order to remain competitive as an innovative bank and compete with new digital competitors. A distinctive aspect of this initiative was the development of a new and fully digital customer activation channel, featuring biometric validation and digital files. Customers may open accounts by populating their basic data and taking a selfie and a photo of their IDs, thus eliminating the need for signatures and paperwork.
In 2017, the Bank finalized its digital transformation plan for the next three years, which involves implementing additional strategies to improve the customer experience, efficiency, and management efforts. The plan entails asix-pronged approach, which includes: Digital Marketing, Process Optimization, Advanced Analytics, IT Road Map, Dynamic Methodologies; and Culture, Organization and Talent.
Branch Network
Branches
The Bank has an extensive branch network in Argentina. In 2017, the Bank continued working to transform its physical network to a multi-format network in order to continue expanding and increasing its customer base. The Bank created new layouts to within its branches to improve customers’ experience and efficiency and developed new, simplified service models. By year end, 27 new business units were added to the Banco Galicia branch network, each featuring different formats.
The Bank implemented the Comprehensive Management System across its network of branches. The Bank’s main goals with this system were to develop business, increase its customer base, improve efficiency, and improve customers’ experiences. With a view towards such goals, the Bank provided additional training to area supervisors, network managers, and officers. The Bank also implemented a new employee incentive plan to encourage employees to develop business and increase its customer base.
Red Galicia 24 and Self-Service Terminals
Banco Galicia also has one of the most extensive self-service networks in Argentina. At the end of 2017, the Bank had 1,956 self-service stations (992 ATMs and 964 terminals), distributed throughout branches, banks and other locations, such as gas stations, hypermarkets and shopping malls.
The number of transactions at ATMs and self-service terminals increased 13%, as compared to 2016, and almost 135 million transactions were performed through ATMs and self-service terminals. The average amounts per withdrawal increased by 16% in 2017. The Bank also added 240 pieces of equipment to its ATMs and terminals with the ability to sort banknotes according to their fitness for use, selecting the best quality notes for ATMs. In December 2017, the Bank added the capacity for ATMs to dispense Ps.1,000 notes. At the end of 2017, Banco Galicia had the best ratio in “Cash Availability at ATMs”, as compared to the rest of the banks within the Banelco network.
Indirect Channels Division
In 2017, the Indirect Channels Division, whose mission is to develop internal and external channels to attract new customers, efficiently marketed Consumer Banking products and improve customers’ experience, adding more customers.
This division is composed of (i) the Retail Sales Unit, a sales force focused on cross-selling, attracting of customers with direct payroll deposit, attracting SMEs accounts; (ii) the Indirect Sales Channel, focused on attracting customers through agreements with third parties; and (iii) the Commercial Planning of Telephone Banking, focused on attracting customers and cross-selling through internal and external call centers.
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Public Relations
With respect to public relations and communications, the development of digital media had a significant impact in 2017.
Mass Media Campaigns
2017 marked the ninth anniversary of “Marcos” and “Claudia” as spokespersons in commercials, including those to promote the benefits of ¡Vamos los Jueves! (Let’s Go on Thursdays), personal and mortgage loans, and Quiero! Viajes, the goal of which is to improve brand awareness.
In 2017, the Bank also launched the “Quiero! Points” advertising campaign, the focus of which was to increase awareness and knowledge of the benefits for customers with respect to travel, products, or discounts available under the Bank’s loyalty rewards programs. This campaign yielded outstanding outcomes both in top of mind and brand awareness, leading YouTube’s “Brand Lift” five times during 2017, a monthly ranking of the ten most-viewed Argentine commercials on YouTube.
As discussed above, as part of its digital strategy, the Bank relaunched Galicia MOVE under the motto of “Muevete para todo menos para ir al banco” (Move for Everything but to Go to the Bank). With a young, fresh and dynamic message targeted at the digital native audience and early adopters, the Bank communicated the ease of which one can become a customer of the Bank (which can be done even with just a selfie) and to undertake transactions. Galicia MOVE is the Bank’s digital proposal; it is simple and embraces a service model based on mobile devices, eliminating the need for stopping by at a branch.
Digital Communication
Throughout 2017, the Banks continued to improve its digital marketing through a variety of comprehensive initiatives, prioritizing matching digital marketing efforts to the correct target audience based on interest and relevance with customized messages. In order to target customers with customized messages, the Bank generates content, such as banners and advertising on its website and online banking platforms, using real time decision information.
The Bank also emphasized digital communication to provide customers with information regarding self-service features, such as its mobile banking app and online banking platform, as well as third party banking channels such as the Todo Pago app. The Bank also employed digital communication to improve the customer onboarding experience (the first 120 days with the Bank) and to follow-up on use of its products. Furthermore, the Bank simplified its communications as to how to generate the passwords required to transact across channels: ATMs, self-service terminals, Fonobanco and digital channels.
With respect to the buenosnegocios.com site, the Bank generated content on financial literacy, economic issues, financial success cases, and training targeted at SMEs and entrepreneurship. The Bank also continued to promote its brand through social network platforms, including the promotion of Experiencia Galicia (Galicia Experience), internal job postings, young professionals programming, the opening of new branches and employee benefits.
With respect to remodeling existing branches and opening new branches, the Bank prioritized self-service offerings in order to streamline transactions and improve efficiency for customers visiting its branches. The Bank introduced “self-service islands” at new branches for customers to efficiently carry out transactions and improve the network’s NPS.
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In order to continue to improve the Bank’s brand image with a view towards customer experience, the Bank reviews its service models and how a customer would use a branch. This Bank’s public relations team works together with its engineering and customer service departments in order to make any adjustments.
Loyalty and Relationship Events for Retail and Wholesale Banking
The Bank launched the SMEs Awards in association with Clarín newspaper (which has significant recognition in the SMEs segment). The goal of the SMEs Awards are to recognize Argentine SMEs with outstanding performance in the following categories: Innovation, Family-Run SMEs, High Global Impact, Golden SME Award and Track Record. The awards were held in Galicia Square in order to introduce its recently opened corporate headquarters.
In 2017, the Bank held four “Good Businesses” meetings in Rosario, Salta, Buenos Aires and Neuquén, at which over 2,700 individuals (both customers and prospective customers) convened to learn about marketing tools, management, networking and innovation. These meetings received significant coverage from each city’s local media thereby contributing to increasing the profile and positioning of the Bank’s brand in the SMEs community.
The Bank sponsored the Expoagro exhibition in San Nicolás, reaffirming its commitment to the agriculture and livestock sector, and held the Excelencia Agropecuaria La Nación—Banco Galicia Award (La Nación-Banco Galicia’s Agricultural Excellence Award), an award and reception that convenes the main participants of the agriculture and livestock sector. The Bank and its Galicia Rural brand had a strong presence at the Exposición de Ganadería, Agricultura e Industria Internacional (International Livestock, Agriculture and Industry Exhibition), strengthening its position as a bank supportive of the agriculture and livestock sector.
Financial Banking
The Financial Banking Division includes the Commercial, Financial Entities, Public Sector, Products, Information Management, and Support areas. Additionally, it is also responsible for the mutual funds business as it is the main distribution channel for mutual funds.
Commercial Division
The Commercial Division is responsible for consolidating the Bank’s position in the Institutional Customer segment (Insurance Companies and Mutual Funds), and acting as the investment channel for its corporate clients.
Certain of the Commercial Division’s responsibilities include reinforcing the cross-sale of financial products, developing new segments, and encouraging the use of transactional products to promote the development of new customers. As a result of such efforts in 2017, Banco Galicia led NPS indicators (Banco Galicia 46%, HSBC 17%, and ICBC -6%) and the eligibility indicators, in each case in Argentina.
Within the Commercial Division, Lebacs were the most important asset in 2017, as trading volumes in respect of the same grew significantly. Ps.339,038 million Lebacs and Ps.1,373,708 million Lebacs were traded in the primary and secondary market, respectively. Transactions within the Commercial Division increased by 73%, with 1,070 monthly transactions in January 2017 and 1,852 monthly transactions by December 2017, with a total of 17,800 transactions for 2017.
Financial Institutions
The Financial Institutions Division is responsible, at an international level, for managing the Bank’s business relationships with partner banks, international credit agencies, official credit banks and export credit insurance companies, and, at a domestic level, with banks, financial companies, exchange houses, and other entities that carry out related activities.
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Similar to prior years, bilateral meetings were held in 2017 with the most active international partner banks, through which the Bank obtained the different products and services offered to its customers. The credit lines obtained by the Bank from partner banks, the IFC, IDB Invest and the Andean Development Corporation helped the Bank to have the capacity to meet the increasing number of applications for letters of credit and standby letters of credit from customers, as well as its customers’ financing needs.
In light of recent economic deregulation in Argentina, Banco Galicia was able to strengthen its relationships and take advantage of business opportunities with multilateral agencies and official credit banks, such as the IFC, IDB Invest, the Andean Development Corporation, the FMO, Proparco, the National Economic and Social Development Bank, the DEG, the KFW and the OFID, among others, with the goal of broadening its offerings of mid- and long-term credit lines to finance investment projects in the agricultural, energy and renewables sectors.
Furthermore, in line with Argentina’s renewed access to the international markets, the Bank was the exclusive sponsor of “2017 IIF Argentina Financial Summit”, a business forum held in March 2017 in Buenos Aires organized by the Institute of International Finance, which brought together influential figures from international and local economic and financial sectors. The Bank also reestablished business relationships with leading European export credit insurance companies (such as Hermes, COFACE, SACE, and Cesce, among others), with the goal of offering medium- and long-term credit lines to its customers for the import of capital goods.
Domestically, the Bank continued to identify business opportunities with financial institutions, emphasizing repeat interactions and business, reciprocal relationships and long-term partnerships.
Public Sector
The Public Sector Division seeks to position Banco Galicia as the leading bank used by the public sector for obtaining transactional, investment and financing products. The Bank continued to build its business relationships with the public sector in 2017 through regional expansion and implementation of a new service protocol to increase its presence in this sector. As a result of political changes, there was a high level of turnover in the leaders of public sector agencies and governmental officers at the federal, provincial and municipal level. Many of the new officers came from the private sector, thus leading the Bank to adjust its strategy in this division. As a result of the foregoing, the Bank’s managed portfolio of public sector loans increased 70% as compared to 2016.
Product Division
The Product Division is primarily responsible for the management and administration of foreign currency positions, derivatives instruments and government and corporate securities for both proprietary trading or investments. The Bank also provides brokerage services to institutional and international corporate or individual customers. Furthermore, the Product Division is also responsible for developing and applying investment strategies based on the risk parameters determined by the Board of Directors. By providing comprehensive financial strategic advice, Banco Galicia was able to maintain a leadership position in the Argentine capital markets offerings based on debt origination and structuring for local issuers.
The Bank’s investor base grew significantly in 2017, in particular with respect to banks, brokers, investment funds, private banks, as a result of the favorable economic conditions. The increase in fixed income trading volumes contributed to Banco Galicia’s rise to second place MAE ranking for government securities held by third parties in 2017, with a significant number of such investors also interested in primary offerings going forward.
In the foreign exchange market, the total foreign exchange volume traded among banks in the MAE increased 76% from U.S. $120,925 million in 2016 to U.S. $212,294 million in 2017, while the volume traded by the Bank rose by 54%, from U.S. $16,925 million in 2016 to U.S. $26,023 million in 2017, thus occupying the second place in the ranking. In 2017, Banco Galicia also maintained its second position in the MAE’s ranking in the futures market with a total volume of U.S. $2,854 million in 2017, and ranked fourth in ROFEX’s ranking. The foreign trade volume transacted amounted to U.S. $17,501 million, a 15% increase as compared to 2016. In addition, Dollar trading performed well, increasing to U.S. $5,799 million in 2017 from U.S. $3,098 million in 2016.
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The total volume traded in fixed income through the MAE increased 97%, from U.S. $279,949 million in 2016 to U.S. $573,756 million in 2017. Banco Galicia ranked first in total fixed income trading for the sixth consecutive year, increasing 94% to U.S. $83,201 million in 2017, as compared to 2016, in total volume traded and a 15.5% market share. It should also be noted that Banco Galicia maintains the first place in the MAE’s Market Makers ranking with 23.1% of the market share.
With respect to primary issuances, the Bank had an 86% increase as compared to 2016 in placements with Ps.32,754 million placed in 2017, contributing to its first place in the MAE’s consolidated ranking of placement agents (notes, trusts and sub-sovereign securities in the aggregate), a 16.3% market share in Argentina.
Customer Experience
In order to improve customers’ experience and prioritize projects focused on customer experience and efficiency, the Organization Division merged into the Bank’s Customer Experience sector. With a view towards this goal, the Bank implemented projects to increase revenues and improve the customer experience and efficiency through fraud prevention tools, the addition of self-service features, the strengthening of control processes, the addition of foreign trade products, and the rollout of a new investment platform.
The Bank also implemented a new, simpler approach to corporate PMO management. In 2017, the Bank carried out three major projects aimed at improving customers’ experience:
Consumption
Through its regional credit-card companies (including Tarjeta Naranja S.A., which acquired Tarjetas Cuyanas assets and liabilities effective October 1, 2017) and CFA (which was sold in February 2018), Banco Galicia offers financing to low- and medium-income customer segments.
Regional Credit Card Companies (“Tarjetas Regionales”)
Tarjeta Naranja and Tarjeta Nevada continued consolidating their leading position in the regional credit cards market in 2017. According to official data and private market studies, the Bank is the primary issuer of credit cards domestically and is ranked as the leading credit card brand in rural areas of Argentina.
In December 2017, Tarjeta Naranja and Tarjeta Nevada collectively issued 3.4 million account statements, 1% more than in 2016. Authorized cards totaled 9.1 million, including Naranja Clásica, Naranja Visa, Naranja MasterCard, Naranja American Express, Nevada and Nevada Visa. In addition, purchase transactions at stores increased 5% as compared to 2016.
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Our managed credit portfolio reached Ps.51,288 by December 31, 2017, a 21% increase year-over-year. Accumulated turnover at stores amounted to Ps.131,340 million, a 29% increase year-over-year. As of December 31, 2017, Tarjetas Regionales’ net income was equal to Ps.2,745 million, a 92% increase as compared to 2016. During 2017, the Regional Credit Card companies had a 8.79% average return on assets with respect to fixed income investments and a 42.70% average return on shareholders’ equity as compared to 5.81% and 29.45% in 2016, respectively.
Net operating income for 2017 was equal to Ps.12,662 million, a 41% as compared to 2016, with a 51% increase in gross brokerage margin and a 34% increase in net income from services. In 2017, the provision for loan losses was equal to Ps.2,018 million, a 31% increase as compared to 2016. At December 31, 2017, following the merger between Tarjetas Cuyanas and Tarjetas Naranjas effective October 1, 2017, Tarjeta Naranja’s payroll employees totaled 3,829, a 12% decrease as compared to 2016.
Tarjeta Naranja, Tarjetas Regionales’ main subsidiary, will continue to rely on its strategic pillar of “Organizational Culture and Customer Experience” to grow its customer base and business. For a breakdown of the Regional Credit Card Companies’ revenues for the last three fiscal years, see Item 5.A. “Operating Results—Results by Segments—Regional Credit Cards”.
CFA, a leader in consumer personal loans to low- and medium-income customer segment, is a non-banking financial institution regulated by the Argentine Central Bank. CFA competes with government-owned and privately-owned banks. As of December 31, 2017, CFA had approximately 480,000 customers. CFA had 1,117 employees in 94 branches throughout Argentina. CFA’s net income was equal to Ps.274 million as of December 31, 2017, a 20% decrease as compared to 2016. CFA’s shareholder’s equity was equal to Ps.1,240 million in 2017. The ratios of return on average equity and on average assets in 2017 were 22.53% and 3.86%, respectively.
Net operating income for 2017 was equal to Ps.2,426 million, a 43% increase as compared to 2016, with a 47% increase in gross brokerage margin and a 16% increase in net income from services. In 2017, the provision for loan losses was equal to Ps.602 million, a 74% increase as compared to 2016. As of December 31, 2017, the loan portfolio, net of allowances for loan losses, was equal to Ps.6,952 million, a 41% increase, as compared to 2016.
On January 12, 2017, Grupo Financiero Galicia and Banco Galicia, as controlling shareholders of CFA, accepted an offer from Mr. Julio Alfredo Fraomeni and Galeno Capital S.A.U. to purchase 100% of their shares in CFA. The Argentine Central Bank approved such sale on December 4, 2017 through Resolution No. 414. For additional detail regarding CFA’s revenues for the year ended December 31, 2017, please see Item 5.A. (“Operating Results—Results by Segments—CFA”).
Galicia Seguros
Galicia Seguros provides property and casualty and life insurance to customers. Its most significant business is group life insurance, including employee benefit plans and credit-related insurance. With respect to property and casualty insurance products, Galicia Seguros primarily underwrites home and ATM theft insurance. Galicia Retiro provides annuity products and Galicia Broker is an insurance broker. All such subsidiaries operate exclusively in Argentina and total insurance underwriting for these three subsidiaries was equal to Ps.3,254 million in 2017.
In 2017, the insurance subsidiaries continued to focus on increasing sales across these three brands. In 2017 annualized premiums increased to Ps.1,662 million, a 57% increase as compared to 2016.
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In 2017, Law No. 26,425, which created the Argentine Social Security Integrated System(Sistema Integrado Previsional Argentino), also ended pension-linked life annuities, the main product marketed by Galicia Retiro. As a result, Galicia Retiro’s business plan is now aimed at maintaining its current business and analyzing market conditions in order to assess whether to re-launch voluntary retirement products (for both individuals and groups). Through Galicia Seguros, the insurance subsidiaries intend to develop alternative sales channels by launching new products and using new points of contact and sales to increase the Bank’s insurance customer base. Additionally, it will continue maintaining the following goals:
Other Businesses
This company manages the FIMA mutual funds which are distributed through Banco Galicia (as the custodial agent for collective investment products corresponding to mutual funds) using a broad distribution network (branches, electronic banking, telephone banking) to target different customer segments (institutions, companies and individuals). The mutual funds’ assets are invested in a variety of assets depending on the different investment purposes, including government and corporate securities and shares or time deposits.
The FIMA funds’ equity increased 82% in 2017, as compared to 2016, reaching Ps.67,973 million, which accounts for a 12.4% market share in Argentina. Such substantial increase was attributable to several customer segments, with noteworthy growth coming from the increase in the number of individuals’ investment accounts. In terms of volume, Fima Renta Dólares I and Fima Renta Dólares II were the preferred funds among these customers, with U.S. $881 million in assets under management as of December 31, 2017.
Through General Resolution No. 705, the CNV introduced changes to the Supervision and Control Rates and Authorization Fees system, shifting to a scheme based on a percentage of the assets under management, with fund managers being liable for an annual 0.02 % fee in such assets under management starting in the fourth quarter of 2017.
The enactment of the Productive Financing Law, and the subsequent implementation of regulations associated therewith, is expected to establish a new framework for Argentine capital markets. Following implementation of the same, we are planning to launch a new retirement savings fund for investors and funds that will invest in international markets. The company believes that in 2018 it will see an increase in the volume of business with mutual funds and the development of business related to that activity within the framework of the new law and its implementing regulations.
During 2017, Galicia Administradora de Fondos optimized the financial performance of its liquid assets with investments in a variety of assets, including FIMA mutual funds.
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Galicia Warrants is a leading company in the Argentine deposit certificates and warrants issuance market. This company has been conducting transactions since 1994, supporting medium and large companies with respect to the custody of stocks. Its main purpose is to enable its customers access to credit and financing, which are secured by the property kept under custody. Galicia Warrants’ main customers belong to the agricultural, industrial and agro-industrial sectors, as well as exporters and retailers.
In 2017, the volume of transactions related to the issuance of deposit certificates and warrants was similar to the volume of such transactions in 2016, mainly as a result of market conditions. These services were primarily popular with regional businesses, including those related to the agricultural and agro-industrial sectors. Income from such services for 2017 was equal to Ps.91.9 million, while net income was equal to Ps.31.5 million.
Galicia Warrants will continue focusing on providing customers with good customer service and tailored products to enable sustained growth and aggressive development in the coming years. For a breakdown of the other businesses’ revenues for the last three financial years, see Item 5.A. “Operating Results—Results by Segments—Other Grupo Galicia Businesses”.
Due to our financial holding structure, competition is experienced at the level of our operating subsidiaries. We face strong competition in most of the areas in which our subsidiaries are active. For a breakdown of our total revenues, for each of the past three fiscal years, for the activities discussed below (i.e., banking, regional credit cards, CFA personal loans and insurance), see Item 5.A. “Operating Results-Results by Segments.”
Banco Galicia faces significant competition in all of its principal areas of operation from foreign banks operating in Argentina (mainly large retail banks which are subsidiaries or branches of banks with global operations), Argentine national and provincial government-owned banks, private-sector domestic banks and cooperative banks, as well asnon-bank financial institutions.
Regarding private-sector customers, Banco Galicia’s main competitors are large foreign banks and certain domestically-owned private-sector banks. Banco Galicia also faces competition from government-owned banks.
Banco Galicia’s estimated market share of private-sector deposits in the Argentine financial system was 10.29% as of December 31, 2017, as compared to 9.96% as of December 31, 2016 and 9.40% as of December 31, 2015.
With respect to loans to the private sector, Banco Galicia’s Argentine market share was 10.11% as of December 31, 2017, as compared to 10.12% and 9.68% as of December 31, 2016 and December 31, 2015, respectively.
According to the information published by the Argentine Central Bank, as of December 31, 2017, Banco Galicia was the second largest private-sector bank as measured by its assets, deposits, loan portfolio and net worth.
Banco Galicia believes that it has a strong competitive position in retail banking, both with respect to individuals and SMEs. Specifically, Banco Galicia believes it is one of the primary providers of financial services to individuals, the primary private-sector institution serving SMEs, and has traditionally maintained a leading position in the agriculture and livestock sector.
Argentine Banking System
As of December 31, 2017, the Argentine financial system consisted of 77 financial institutions, of which 62 were banks and 15 were financial non-bank institutions (including finance companies, credit unions and savings and loans associations). Of the 62 banks, 13 were Argentine national and provincial government-owned or related banks. Of the 49 private-sector banks, 33 were private-sector domestically-owned banks and 16 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).
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As of December 31, 2017, the top 10 banks, in terms of total deposits (excluding Argentine national and provincial government-owned banks), were: Banco Santander Río, Banco Galicia, BBVA Banco Francés, Banco Macro, Credicoop, HSBC Bank and Patagonia. Banco Galicia, Banco Macro and Credicoop are domestically-owned banks and the others are foreign-owned banks. According to information published by the Argentine Central Bank as of December 31, 2017, private-sector banks accounted for 56.2% of total deposits and 63.4% of total net loans in the Argentine financial system. As of the same date, financial institutions (other than banks) accounted for approximately 0.3% of deposits and 3.5% of net loans in the Argentine financial system.
As of December 31, 2017, the largest Argentine national and provincial government-owned or related banks, in terms of total deposits, were Banco Nación, Banco de la Provincia de Buenos Aires and Banco Ciudad de Buenos Aires. Under the provisions of the Financial Institutions’ Law, public-sector banks have comparable rights and obligations to private banks, except that public-sector banks are usually chosen as depositaries for public-sector revenues and promote regional development and certain public-sector banks have preferential tax treatment. The bylaws of some public-sector banks provide that the governments that own them (both national and provincial governments) must guarantee their commitments. According to information published by the Argentine Central Bank, as of December 31, 2017, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 43.5% of deposits and 33.1% of loans in the Argentine financial system.
Consolidation has been a dominant theme in the Argentine banking sector since the 1990s, with the total number of financial institutions declining from 214 in 1991 to 77 as of December 31, 2017, with the ten largest banks holding 77.4% of the system’s deposits from the private sector and 72.5% of the system’s loans to the private sector as of December 31, 2017.
Foreign banks continue to have a significant presence in Argentina, despite the fact that the number of these financial institutions decreased from 39 at the end of 2001 to 16 as of December 2017, and the fact that their share of total deposits has decreased since the 2001-2002 financial crisis while the share of domestic private-sector banks has increased.
The Argentine banking sector focuses on transactional business, and lacks a robust supply of medium and long-term lending. Local financial system deposits and loans are equivalent to 23% and 16% of the Gross Domestic Product (GDP) respectively, well below those same ratios for other countries in the region.
To promote the growth of the financial system, the Argentine Central Bank (BCRA) aims to achieve low and stable inflation by reducing the money supply together with other measures. In addition to this goal, the BCRA is implementing an agenda that focuses on emphasizing full banking service use (through the offer of free savings accounts and money transfers), effective communication of the cost of all services by banks to customers and fostering innovation and increased competition among banks. To boost savings in domestic currency and long-term lending (mortgage loans in particular), the monetary authority has introduced instruments denominated in Housing Units (Unidades de Vivienda – UVAs), an instrument to adjust deposits and loans by inflation.
Regional Credit Cards
In the consumer loan market, the Regional Credit Card Companies compete with Argentine banks and other financial institutions that target similar economic segments. The main players in this segment include Banco Supervielle, Banco Columbia, Banco Comafi, Banco Credicoop, Banco Macro, Banco MasVentas, Banco Municipal de Rosario, Banco Nación (Nativa card), Banco de Córdoba (Cordobesa card), Cabal card, tarjeta shopping card and CFA (Efectivo Si). Historically, certain international banks with a presence in Argentina have attempted to target consumers in these economic segments and have been, to date and for the most part, unsuccessful.
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In order to compete effectively at a national and regional level, the Regional Credit Card Companies target low- to middle-income clients by offering personalized services in each region, focusing their commercial efforts mainly on such segments. While other Argentine credit card issuers and consumer loan providers focus on earning interest on outstanding personal loans and credit card balances, the Regional Credit Card Companies also focus on and have access to additional sources of revenues including merchant fees and commissions, which allow them to offer competitive pricing and financing terms. Furthermore, unlike other credit card issuers in Argentina, approximately 60% of the Regional Credit Card Companies’ clients pay their credit card bill through their branch network. The broad geographical reach of their distribution network, which is the second largest in Argentina, has allowed the Regional Credit Card Companies to establish a local presence in all the provinces of Argentina.
The Regional Credit Card Companies believe that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with over 250,000 merchants and the brand recognition they enjoy provide them with a competitive edge to consolidate and expand their market share in their target market segment, making it difficult for new players to effectively compete in this market segment on a national scale.
CFA markets all of its financial products mainly to medium- and low-income segments. CFA’s main competitors are: Banco Cetelem, Banco Columbia, Banco de Servicios y Transacciones, Cooperativa la Capital del Plata, Caja de Crédito Cuenca, Banco de Servicios Financieros, Banco Supervielle and Banco Sáenz (Frávega Group).
CFA also faces competition from certain entities which rendernon-regulated services, or small chains, located in less populated cities. Some big chains of retailers also offer their own financing, such as Garbarino, Frávega, Megatone and Riveiro, which are financed through the issuance of certificates in financial trusts.
Sudamericana’s subsidiaries face significant competition since, as of December 2017, the Argentine insurance industry was comprised of approximately 186 insurance companies, 16 of which were dedicated exclusively to annuities. Subsidiaries of foreign insurance companies and the world’s largest insurance companies with global operations are among these companies.
During 2017, the insurance industry continued growing. Production amounted to Ps.272 billion, 29% higher than the level recorded for the prior year. Out of the total insurance production in 2017, 82% related to property insurance, 16% related to life and personal insurance, and 2% related to retirement insurance.
Within the 82% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 43%, followed by the workers’ compensation segment, representing 35%. Within the life insurance segment, the group life insurance segment was the most significant, representing 65%, followed by individual life insurance, representing 15%, and personal accident insurance, representing 14%.
As of December 31, 2017, based on internal studies undertaken by Galicia Seguros, it is estimated that Galicia Seguros ranked third in terms of net premiums for personal accident insurance policies underwritten and first in terms of net premiums for home insurance policies underwritten and in terms of net premiums for theft insurance policies underwritten, in each case in Argentina.
Banco Galicia markets all of its financial products and services to high-, medium- and medium- tolow-income individuals, including loans, insurance and the FIMA family of mutual funds, among other products, through its branch network, which operates online in real time. Within the Bank’s branches, the sales force is specialized by type of customer and by customer segment. Banco Galicia’s sales policy encourages tellers to perform sales functions as well. Wealthy individuals who are private banking customers are served by specialized officers and a specialized network of service centers, including a head office facility.
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Branches (number)
Bank Branches
Regional Credit Card Cos. Branches
CFA Branches
Business Centers and In-House Facilities
Eminent’s space with Private-Banking
Electronic Banking Terminals (number)
ATMs
Self-Service Terminals
Electronic Banking Transactions (thousands per month)
ATMs + Self-Service Terminals
Phone-Banking
e-banking
Commercial and investment banking services for large corporations and other entities are provided in a centralized manner. Branch officers are responsible for Banco Galicia’s relationship with middle-market and small businesses and most of its agriculture and livestock sector customers. Banco Galicia has also established specialized centers that concentrate on providing service to businesses, which are distributed across the country and located in main cities of the Interior and certain customer companies’ facilities.
All of Banco Galicia’s individual and corporate customers have access to Banco Galicia’s electronic distribution channels, including its ATM and self-service terminals network, a multifunction call center, an e-banking website (www.bancogalicia.com) and a mobile banking service platform (Galicia Móvil).
Banco Galicia also maintains a presence on many relevant social networks. Customers use social networks as a means to talk to Banco Galicia quickly, effectively and openly. Banco Galicia consistently focuses on adapting to the variety of situations that result from the use of social media, using these opportunities as a chance to improve its relationship with its customers. Through its work through the digital platform, Banco Galicia believes it has established an excellent reputation regarding its online services, providing not only traditional services, but also involving the use of social networks, cellular phones and transactional, informative and communicative services, with the purpose of promoting the Bank’s business and establishing effective channels of communication with its current and potential customers. Banco Galicia strives to be customer service-oriented and assigns great importance to its customer service model, constantly seeking to improve its customer service.
Banco Galicia has a segmented marketing approach and designs marketing campaigns focused on specific segments of Banco Galicia’s customer base. Banco Galicia’s marketing strategy is also focused on the development of long-term relationships with customers based on a deep and increasing knowledge of those customers. As part of this client-oriented strategy, Banco Galicia implemented a customer relationship management technology.
Banco Galicia believes that the quality of its products and services, as well as providing differentiating experiences to its clients, are the main elements capable of distinguishing it from competitors. In order to measure these indicators, Banco Galicia periodically performs surveys, with positive results in recent years, showing high customer satisfaction and recognition.
The Regional Credit Cards market their products and services through a network of branches and service centers, the size of which depends on the size of the locations in which they operate. The Regional Credit Cards’ culture is strongly client service-oriented and assigns great importance to quality of customer service. Sales officials receive intensive training in personalized sale of the companies’ products and quality of service, given that the bulk of sales is conducted on a one-on-one basis. Quality of service at the branches is permanently monitored by third parties and availability is enhanced through extended business hours. Each of the companies has a website through which they conduct sales, receive customers’ requests (such as requests for statements, loans or increases in the credit limits assigned and new cards, among others), and provide information on and promote products. These sites include a link that allows payments to be made. In addition, Tarjeta Naranja has a website aimed at selling products associated with its primary merchants. Similarly, Tarjeta Nevada also has a website. Each company has a call center, through which sales, post-sales and collection functions are performed.
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CFA markets its products through a network of 63 branches and 31 points of sale, located throughout Argentina. The company leads the personal loan business among financial institutions in Argentina and offers its products to customers who belong, in general, to thelow-to-medium income segments, characterized by limited interaction with traditional banks. As such, CFA offers its product “Efectivo Si Consumer Loans” in approximately 400 active merchants, while the agreements are offered out of the branches through different channels. Such customers often seek a more simplified and quick processing regime for their loans and other banking products.
Sudamericana’s subsidiaries mainly use Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s distribution networks to market their products. They also use Galicia Broker sales officers, and Sudamericana has its own telemarketing center.
The following are our main property assets, as of December 31, 2017:
Address
Main Uses
Banco de Galicia y Buenos Aires S.A.
Tarjeta Naranja S.A.
Galicia Warrants S.A.
Galicia Seguros S.A.
*This were rented for Tarjetas Cuyanas before the merger with Tarjeta Naranja.
As of December 31, 2017, our distribution network consisted of:
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During 2017, our capital expenditures amounted to Ps.3,107 million, distributed as follows:
During 2016, our capital expenditures amounted to Ps.2,827 million, distributed as follows:
During 2015, our capital expenditures amounted to Ps.1,987 million, distributed as follows:
These capital expenditures were made mainly in Argentina.
In October 2013, Galicia Seguros approved the sale of its 4% ownership interest in Nova Re Compañía Argentina de Reaseguro S.A. to Reaseguradora Patria S.A., a Mexican reassurance company. This transaction was finalized in January 2016 and Galicia Seguros continued to own 35% of Nova Re following the consummation of the sale.
As a result of a number of acquisitions of shares in the market, since December 16, 2013, Grupo Financiero Galicia increased its ownership of outstanding shares in and voting rights for its subsidiary Banco Galicia to 95%, reaching a position of nearly total control according to Argentine regulations. On December 19, 2013, Grupo Financiero Galicia announced that it had finalized the merger of Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia, further increasing its ownership interest in Banco Galicia by 4.5% (which was previously owned by Lagarcué S.A. and Theseus S.A). As a result of the foregoing transactions, as of the year ended December 31, 2013, Grupo Financiero Galicia controlled 99.6% of the capital stock of Banco Galicia.
On February 25, 2014, Grupo Financiero Galicia resolved to issue an offer to acquire the 2,123,962 shares of Banco Galicia owned by third parties at a price of Ps.23.22 per share. On April 24, 2014, said transaction was approved by the CNV and on July 14, 2014, it was incorporated by the Argentine Superintendency of Corporations. On August 4, 2014, the above approval in respect of such acquisition was made part of the public record, and, as a consequence of this acquisition, Grupo Financiero Galicia currently owns 100% of the shares of the Bank.
On April 15, 2014, Banco Galicia sold its interest in Galicia Administradora de Fondos to Grupo Financiero Galicia, for Ps.39 million.
During May 2014, the shareholders of Tarjetas del Mar approved a capital increase of Ps.32 million, which was fully subscribed for by Sociedad Anónima Importadora y Exportadora de la Patagonia. As a result, the Bank has a 58.8% equity interest in Tarjetas del Mar, while CFA holds a 1.2% equity interest and Sociedad Anónima Importadora y Exportadora de la Patagonia holds the remaining 40%.
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During the third quarter of fiscal year 2014, the Bank transferred to Visa Argentina S.A. its equity investment in Banelco S.A., for Ps.40 million.
On October 14, 2014, Tarjeta Naranja executed the final agreement to sell its equity interest in Tarjeta Naranja Perú, equivalent to 24% of the capital stock, to Grupo Crédito S.A. for U.S. $900,000. The shares were sold as of December 31, 2014.
Investment planning
We have budgeted capital expenditures for the fiscal year ending December 31, 2018, for the following purposes and amounts:
Infrastructure of Corporate Buildings, Tower and Branches (construction, furniture, equipment, phones and other fixed assets)
Organizational and IT System Development
Total
These capital expenditures will be made mainly in Argentina. Management considers that internal funds will be sufficient to finance its fiscal year ended December 31, 2018 capital expenditures.
You should read this information in conjunction with the other information provided in this annual report, including our audited consolidated financial statements and Item 5. “Operating and Financial Review and Prospects”. We prepared this information from our financial records, which are maintained under accounting methods established by the Argentine Central Bank under Argentine Banking GAAP, and do not reflect adjustments necessary to reflect the information in accordance with U.S. GAAP.
The exchange rate used in translating Pesos into Dollars, which is used in calculating the convenience translations included in the following tables is the Reference Exchange Rate published by the Argentine Central Bank, which was Ps.18.7742, Ps.15.8502 and Ps.13.0050 per U.S. $1.00 as of December 31, 2017, December 31, 2016 and December 31, 2015, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or any other rate. See Item 3. “Key Information-Exchange Rate Information”.
Average Balance Sheet and Income from Interest-Earning Assets and Expenses from Interest-Bearing Liabilities
The average balances of interest-earning assets and interest-bearing liabilities, including the related interest that is receivable and payable, are calculated on a daily basis for Banco Galicia, Galicia Uruguay, Tarjetas Regionales and CFA on a consolidated basis. The average balances of interest-earning assets and interest bearing liabilities are calculated on a monthly basis for Grupo Financiero Galicia and its other non-banking subsidiaries.
Average balances have been separated between those denominated in Pesos and those denominated in Dollars. The average yield/rate is the amount of interest earned or paid during the period divided by the related average balance.
Net gains/losses on government securities and related differences in quoted market prices are included in interest earned. We manage our trading activities in government securities as an integral part of our business. We do not distinguish between interest income and market gains or losses on our government securities portfolio. The non-accrualloans balance is included in the average loan balance calculation.
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The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2017.
Assets
Government Securities
Loans
Private Sector
Total Loans (1)
Other
Total Interest-Earning Assets
Cash and Gold
Equity in Other Companies
Other Assets
Allowances
Liabilities and Equity
Checking Accounts
Savings Accounts
Time Deposits
Total Interest-Bearing Deposits
Debt Securities
Total Interest-Bearing Liabilities
Demand Deposits
Other Liabilities
Non-Controlling Interests
Total Liabilities and Equity
Spread and Net Yield
Interest Rate Spread
Cost of Funds Supporting Interest-Earning Assets
Net Yield on Interest-Earning Assets
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The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2016.
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The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2015.
Changes in Net Interest Income-Volume and Rate Analysis
The following table allocates, by currency of the underlying asset or liability, changes in our consolidated interest income and interest expenses between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective average yield/rate for (i) the fiscal year ended December 31, 2017 compared with the fiscal year ended December 31, 2016; and (ii) the fiscal year ended December 31, 2016, compared with the fiscal year ended December 31, 2015. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.
Interest Earning Assets
Pesos
Foreign Currency
Loans(1)
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Interest Bearing Liabilities
Savings Account
Notes
Other liabilities
Total Interest Bearing Liabilities
The increase of Ps.7,390 million in interest income for the fiscal year ended December 31, 2017, as compared to the previous year, can be explained by the Ps.9,618 million increase in the volume of interest-earning assets, which increase was partially offset by a decrease of Ps.2,228 million in interest income due to a decrease in interest rates.
In particular, Ps.6,802 million of the increase was due to an increase in interest income from Peso-denominated assets. This increase was due to an increase in volume, mainly as a result of the increase in Peso-denominated loans to the private sector (representing 87.9% of the increase). The average volume of private sector Peso-denominated loans amounted to Ps.129,923 million for fiscal year 2017, as compared to Ps.99,817 million for the previous fiscal year. This increase was partially offset by a decrease of Ps.2,277 million in interest income from Peso-denominated assets, which resulted from a decrease in interest rates earned from Peso-denominated assets due to a 196 b.p. decrease in the average interest rate for loans to the private sector, from 29.03% in 2016 to 27.07% in 2017. The Ps.247 million increase in interest from government securities was due to an increase in volume equal to Ps.541 million, partially offset by a decrease in interest rates (accounting for Ps.294 million), mainly as a result of the lower average rate earned on provincial treasury bills and debt securities.
In terms of interest expenses, the Ps.798 million decrease for the fiscal year ended December 31, 2017, as compared to the fiscal year ended December 31, 2016, is primarily a result of a decrease in the interest rate payable on time deposits denominated in Pesos of Ps.3,617 million (which decreased from 27.23% in 2016 to 21.33% in 2017). This decrease was partially offset by an increase of Ps.3,303 million in the volume of time deposits (which increased from Ps.47,953 million in 2016 to Ps.51,850 million in 2017). In line with the increase in volume of time deposits, the amount of notes outstanding increased as compared to 2016 to Ps.1,373 million, primarily attributable to the issuance of notes by each of Tarjeta Naranja, Tarjetas Cuyanas and CFA. Such issuances were partially offset by the amortization of certain outstanding notes. The Bank recorded a Ps.445 million decrease in the interest payable outstanding notes.
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Interest-Earning Assets-Net Yield on Interest-Earning Assets
The following table analyzes, by currency of denomination, the levels of our average interest-earning assets and net interest earned, and illustrates the net yields and spreads obtained, for each of the periods indicated.
Total Average Interest-Earning Assets
Net Interest Earned (1)
Net Yield on Interest-Earning Assets (2)(%)
Weighted-Average Yield
Interest Spread, Nominal Basis (3)(%)
Credit Related Fees Included in Net Interest Earned
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Government and Corporate Securities
The following table shows our holdings of government and corporate securities at the balance sheet dates stated below, and the breakdown of the portfolio in accordance with the Argentine Central Bank classification system and by the currency of denomination of the relevant securities. Our holdings of government securities represent mainly holdings of Banco Galicia.
Recorded at Cost plus Yield
Debt securities of provinces
Others
Recorded at Fair Value
Bonar Bonds
Bonac Bonds
Issued by Argentine Central Bank
Lebac Unquoted
Lebac Quoted
Nobac Unquoted
Nobac Quoted
Lebac Repurchase Agreement Transactions
Nobac Repurchase Agreement Transactions
Total Government Securities in Pesos
Government Bonds
Total Government Securities in Foreign Currency
Total Government Securities
Corporate Securities
Corporate Equity Securities (Quoted) in Pesos
Corporate Equity Securities (Quoted) in Foreign Currency
Total Government and Corporate Securities
As of December 31, 2017, the growth in our public securities denominated in Pesos was mainly a result of an increase in the volume of Lebacs issued by the Argentine Central Bank and the corresponding purchase of the same. Our government securities issued by the Argentine Central Bank increased from Ps. 8,550 million as of December 31, 2016 to Ps.28,991 million as of December 31, 2017.
Our government securities denominated in Pesos as of December 31, 2017, recorded at cost plus yield, for Ps.2,304 million, corresponded to our holdings of debt securities and treasury bills, mainly issued by the provinces of Neuquén (for Ps.871 million), Buenos Aires (for Ps.610 million), Entre Ríos (for Ps.294 million), Buenos Aires City (for Ps.271 million) and Río Negro ( for Ps.164 million).
The amount of government securities denominated in Pesos, recorded at fair value as of December 31, 2017, for Ps.1,570 million, corresponded mainly to our holdings in debt securities issued by the provinces of Buenos Aires (Ps.515 million) and Buenos Aires City, (Ps.470 million); Argentine Bonds due 2022, for Ps.128 million; and Discount Bonds maturing in 2033 and 2034, for Ps.195 million.
At December 31, 2017, the holding of public securities denominated in Dollars was composed mainly of U.S. Treasury bills maturing in 2018 for Ps.3.808 million, recorded at fair value.
As of December 31, 2016, the amount of government securities denominated in Pesos, recorded at cost plus yield, for Ps.1,772 million, corresponded to our holdings of debt securities and treasury bills, mainly issued by the provinces of Buenos Aires (for Ps.791 million), Neuquén (for Ps.737 million) and Entre Ríos (for Ps.144 million).
The amount of government securities denominated in Pesos, recorded at fair value as of the same date, for Ps.2,026 million, corresponded mainly to our holdings in Argentine Bonds due 2017 and 2019, for Ps.62 million and Ps.39 million, respectively; National Treasury Bonds for Ps.930 million and Discount Bonds maturing in 2033 for Ps. 875 million.
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At December 31, 2016, the holding of public securities denominated in Dollars was composed mainly of Argentine Nation Bonds maturing in 2017 for Ps.845 million, recorded at fair value.
As of December 31, 2015, the increase in our holdings of Argentine government securities denominated in Pesos was mainly due to our holdings recorded at cost plus yield of debt securities issued by the provinces of Buenos Aires, Neuquén and Entre Rios, among others, for Ps.1,313 million and our holdings recorded at fair value of Bonac 2016 bonds for Ps.609 million.
Regarding our holdings of government securities denominated in dollars as of December 31, 2015, the increase was attributable to our holdings of Lebac unquoted for Ps.4,835 million.
All government securities, except for the Lebac and Nobac, which are issued by the Argentine Central Bank, were issued by the Argentine government.
Government Securities - Net Position
The following table shows our net position in government and corporate securities at the balance sheet date, and the breakdown of the portfolio in accordance with the Argentine Central Bank classification system and by the securities’ currency of denomination. The net position is defined as holdings plus forward purchases and spot purchases pending settlement, minus forward sales and spot sales pending settlement.
Holdings Recorded at Cost plus Yield
Holdings Recorded at Fair Value
Securities issued by the Argentine Central Bank
Corporate Equity Securities (Quoted)
As of December 31, 2017, the Company’s net position in government and corporate securities amounted to Ps.28,964 million.
The amount of government securities at cost plus yield issued in Pesos, for Ps.2,300 million, corresponded to debt securities and treasury bills, primarily issued by the provinces of Buenos Aires, Neuquén, Entre Ríos and the City of Buenos Aires. The amount of such position in foreign currency was equal to Ps.1,526 million, primarily comprised of of U.S. treasury bills maturing in 2018.
The net position of government securities measured at fair market value in Pesos, in the amount of Ps.1,587 million, mainly corresponds to Banco Galicia’s holdings of debt securities of the province of Buenos Aires due in 2022 and the City of Buenos Aires due in 2024, Argentine Government Bonds due in 2022 and National Treasury Bonds due in 2020. The amount of such position in foreign currency was equal to Ps.4,100 million, primarily comprised of U.S. treasury bills maturing in 2018.
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Securities issued by the Argentine Central Bank includes Peso-denominated Lebacs in an amount equal to Ps.19,440 million.
Remaining Maturity and Weighted-Average Yield
The following table analyzes the remaining maturity and weighted-average yield of our holdings of government and corporate securities as of December 31, 2017. Our government securities portfolio yields do not contain any tax equivalency adjustments.
Maturity Yield
Instruments Issued by the Argentine Central Bank
Securities Without Quotation
Corporate Debt Securities
Total Portfolio
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Loan Portfolio
Our total loans reflect Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s loan portfolios including past due principal amounts. Personal loans and credit-card loans are typically loans to individuals granted by Banco Galicia, the Regional Credit Card Companies or CFA. The Regional Credit Card Companies’ loans are included under “Credit card loans”, while most of CFA’s loans are included under “Personal loans”. Also, certain amounts related to advances, promissory notes, mortgage loans and pledge loans are extended to individuals. However, advances and promissory notes mostly represent loans to companies. The following table analyzes our loan portfolio, i.e., Banco Galicia’s loan portfolio consolidated with the Regional Credit Card Companies’ and CFA’s loan portfolio, by type of loan and total loans with guarantees.
Principal and Interest
Non-Financial Public Sector
Local Financial Sector
Non-Financial Private Sector and Residents Abroad (1)
Advances
Promissory Notes
Mortgage Loans
Pledge Loans
Credit Card Loans
Placements in Banks Abroad
Other Loans
Accrued Interest, Adjustment and Quotation Differences Receivable
Documented Interest
Total Non-Financial Private-Sector and Residents Abroad
Total Gross Loans
Allowance for Loan Losses
Total Loans
Loans with Guarantees
With Preferred Guarantees (2)
Other Guarantees
Total Loans with Guarantees
As of December 31, 2017, Banco Galicia’s loan portfolio before allowances for loan losses amounted to Ps.204,000 million, a 44% increase when compared to the previous fiscal year-end.
For the fiscal year ended December 31, 2016, Banco Galicia’s loan portfolio before allowances for loan losses amounted to Ps.142,158 million, a 40% increase as compared to the fiscal year ended December 31, 2015.
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Loans by Type of Borrower
The following table shows the breakdown of our total loan portfolio, by type of borrower at December 31, 2017, 2016 and 2015. The middle-market companies’ category includes Banco Galicia’s loans to SMEs and the agricultural and livestock sectors while the individuals’ category includes loans granted by Banco Galicia, the Regional Credit Card Companies and CFA. Loans to individuals comprise both consumer loans and commercial loans extended to individuals with a commercial activity.
Commercial Loans
Corporate
Middle-Market Companies
Agribusiness
Small and medium-sized companies
Individuals
Bank
CFA
Financial Sector (1)
Total (2)
Loans to the private sector before allowances increased by 44%, as compared to the prior fiscal year-end, as a result of an increase both in large corporations (75%), individuals (35%) and SMEs (46%). These increases were generally in line with the overall increase in economic activity in Argentina.
Loans by Economic Activity
The following table sets forth as of the dates indicated an analysis of our loan portfolio according to the borrower’s main economic activity. Figures include principal and interest.
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Services
Communications, Transportation Health and Others
Electricity, Gas, Water Supply and Sewage
Other Financial Services
Total Services
Primary Products
Agriculture and Livestock
Fishing, Forestry and Mining
Total Primary Products
Consumer
Retail Trade
Wholesale Trade
Construction
Manufacturing
Foodstuffs
Transportation Materials
Chemicals and Oil
Other Manufacturing Industries
Total Manufacturing
Consumer loans account for the majority of the loan portfolio, which as of the fiscal year-end represented 54.1% of the total loan portfolio.
As for business activities, the most significant sectors were manufacturing, primary production and retail and wholesale trade, with a total portfolio share of 14.8%, 11.0% and 9.8%, respectively.
The most significant growth occurred in the manufacturing industry and consumer loans, with increases of 56% and 33%, respectively.
Maturity Composition of the Loan Portfolio
The following table sets forth an analysis by type of loan and time remaining to maturity of our loan portfolio as of December 31, 2017.
Non-Financial Public Sector (1)
Private Sector and Residents Abroad
- Advances
- Promissory Notes
- Mortgage Loans
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- Pledge Loans
- Personal Loans
- Credit-Card Loans
- Other Loans
- Accrued Interest and Quotation
Differences Receivable (1)
- (Documented Interest)
- (Unallocated Collections)
Allowance for Loan Losses (2)
Total Loans, Net
Interest Rate Sensitivity of Outstanding Loans
The following table presents the interest rate sensitivity of our outstanding loans due after one year by denomination as of December 31, 2017.
Variable Rate (1)(2)
Fixed Rate (2)(3)
Credit Review Process
Credit risk is the potential for financial loss resulting from the failure of a borrower to honor its financial contractual obligations. Our credit risk arises mainly from Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s lending activities, and from the fact that, in the normal course of business, these subsidiaries are parties to certain transactions with off-balance sheet treatment and associated risk, mainly commitments to extend credit and guarantees granted. See also Item 5.A. “Operating Results-Off-Balance Sheet Arrangements”.
Our credit approval and credit risk analysis is a centralized process based balancing a variety of factors. In undertaking credit approval and credit risk analyses, the Bank’s risk management, credit and origination divisions, both with respect to retail and wholesale businesses, efficiently work together to management asset quality, proactively management problem loans, aggressive charge-offs for uncollectible loans, and adequate loan loss provisioning. These processes also include the update of financial models to measure portfolio risk at operational and customer levels, facilitating the detection of defaulting, or potentially defaulting, loans and losses associated therewith, which allows for the proactive management of the same in order to prevent portfolio deterioration, enabling appropriate protection of our assets.
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The Risk Division is responsible for the overall risk management of the Bank and its subsidiaries, in accordance with international best practices and handles solvency, financial, operational, credit, reputational and strategic risks. The Risk Division is independent from the business areas of the Bank and its subsidiaries and it reports directly to the Bank’s General Division. The Risk Division works with the functional support of the Compliance and Money Laundering Prevention Division, a division that also reports to the Board of Directors, and whose purpose is to prevent the execution of financial operations with funds derived from illegal activities, and the use of the Bank as a vehicle for laundering money and funding terrorist activities. In addition, the Risk Division monitors compliance with the laws, regulations and internal policies in order to prevent financial and/or criminal penalties and to minimize any reputational impact. It is an independent role that coordinates and assists in identifying, providing advice on, monitoring, reporting and warning management regarding compliance risks.
In addition, in order to have timely information and a flexible structure in place to efficiently respond and adjust to macro and microeconomic variables, the Risk Division is responsible for credit extension and recovery functions for companies and individuals.
The mission of the Risk Division is comprised of the following activities:
The Risk Division’s responsibilities include:
Banco Galicia complies with all regulatory requirements set forth by Law No. 25246, as amended, Resolution No. 121/2011, as amended, issued by the Financial Information Unit (the “UIF”) and Argentine Central Bank’s Communiqué “A” 5218, as supplemented and/or amended.
The Bank has policies, procedures and control structures in place related to the features of the various products offered, which help monitor transactions in order to identify unusual or suspicious transactions and report them to the UIF. The Compliance and Money Laundering Prevention Division is responsible for managing this risk, through the implementation of control and prevention procedures as well as the communication thereof to the rest of the organization through the drafting of the corresponding handbooks and the training of all employees.
Banco Galicia has appointed a Director responsible for the management of this risk, and has created a Committee in charge of planning, coordinating and enforcing the compliance with the policies set by the Board of Directors (see “Aspects related to Corporate Organization, Decision Making, Internal Control, and Compensation Policy for Directors and Officers”). The basic principle on which the regulations regarding prevention and control of money laundering are based is in line with the “know your customer” policy in force worldwide. Such risks are regularly reviewed through internal and external audits.
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The following subdivisions depend on support from the Risk Division: Wholesale Credit, Retail Credit and Consumer Credit Recovery. They are responsible for developing and proposing strategies for credit and credit-granting policies, as well as managing and monitoring credit origination processes,follow-up and control thereof, and the recovery of past-due loans. The goal of these divisions is to ensure the quality of the loan portfolio, minimize costs while maximizing efficiency, and recovery optimization, thus minimizing loan losses and optimizing efficiency in the credit extension process.
The Retail Credit Division is responsible for ensuring that the fraud screening and prevention process is effective, thus assuring the quality of the retail portfolio. This Division designs and manages complex credit decision-taking models and tools, directs the alignment efforts to implement retail business strategies, and works together with the business team to suggest business opportunities.
The Wholesale Credit Division is responsible for the corporate rating process, thus assuring the quality of the wholesale portfolio. This Division directs alignment efforts to implement business strategies based on the customer service model, working together with the business team to suggest business opportunities. This Division deals specifically with complex businesses such as banks, public companies, capital markets transactions and investment projects.
Before approving a loan, Banco Galicia performs an assessment of the potential borrower and his/her financial condition. Approvals of loans exceeding certain amounts are analyzed based on the credit line and the customer.
Banco Galicia performs its risk assessment based on the following factors:
Loans are generally approved pursuant to pre-set authorization levels, except loans exceeding certain amounts, which are approved by the Credit Committee.
The Recovery Management Division is responsible for administering and managing both the Bank’s performing and under-performing credit portfolio, seeking to minimize the deterioration thereof and establishing recovery of such credit portfolios. Management models and specific strategies are applied to each type of portfolio, segments and tranches in arrears, from early defaults to out-of-court and judicial proceedings.
Each of the Regional Credit Card Companies maintains its own credit products and limits; however their credit approval and credit risk analysis procedures are basically the same. The credit risk of each applicant is assessed by evaluating certain required information solicited in the applicable Regional Credit Card Company’s application, including the applicant’s monthly income, together with a review of the applicant’s credit history obtained from credit bureaus. If the applicant was a customer in the past and has ceased to be a customer for any reason, its payment history with the applicable Regional Credit Card Company is reviewed. Such information is verified for accuracy by the applicable Regional Credit Card Company, both in person and over the telephone. Once the information has been verified and, to the extent the customer meets all applicable requirements, the credit card is issued and delivered at the applicant’s address, or the applicant may arrange for picking it up at any of the applicable Regional Credit Card Company’s branches.
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Customer’s credit limits are determined on the basis of an assessment of each customer’s specific financial situation. Based on such assessment, customers are assigned one of five risk levels: A, B, C, D or E, with A being the lowest risk segment and E being the highest risk segment. In making such assignment, the Regional Credit Card Company considers a variety of factors, including, but not limited to, monthly income, number of family members, geographic location and occupation. The customer is then assigned a credit limit based on his or her risk level, which is shared among all credit cards associated with such customer, whether as a primary or additional cardholder. The credit limit assigned to each customer includes: (i) the monthly balance limit; (ii) the long-term purchase limit, which is the maximum amount for a customer to purchase in six or more installments using the credit card; (iii) the total credit limit, which is the maximum amount that may be owed to the applicable Regional Credit Card Company; (iv) the maximum balance limit for cash advances, which represents 50% of the long-term purchase limit in a maximum amount of Ps.50,000, which is the maximum amount for cash withdrawals, and (v) the limit for loans to be repaid in up to 50 months.
Below is a detail of the percentage limits and nominal caps assigned to each risk segment.
A (Lowest)
B
C
D
E (Highest)
The monthly limit assigned to any customer is periodically reviewed by the applicable Regional Credit Card Company and may be automatically increased for eligible cardholders that meet certain requirements, including good payment history. In addition, each Regional Credit Card Company reviews cardholders’ applications for increases in the monthly limit and may, in its sole discretion, increase such limits based on the individual customer’s payment history and total income level.
Each Regional Credit Card Company assesses and maintains the provision for loan losses, and at eachyear-end, analyzes whether there is objective evidence exists of a risk of default. The loss on impairment of financial assets is recognized when there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the financial asset, and such event impacts estimated cash flows for such financial asset or group of financial assets.
The Regional Credit Card Companies’ provisions for loan losses and other accounts receivable are directly related to the default rate in respect of outstanding personal loan portfolios and credit card balances. Tarjeta Naranja, for example, prepares its financial statements in accordance with IFRS and, in particular, under IAS 39 with respect to the treatment of financial assets. According to IFRS, in calculating the provision for loan losses, Tarjeta Naranja carries out a historical analysis of such losses to estimate portfolio-related losses incurred as of the date of the financial statements, but which were not previously identified under IAS 39.
In addition, such historical payment information is supplemented with recent financial data to the extent available, including such customer’s behavior, spending trends and any other piece of information that may affect the calculation of the loan loss. Management considers several factors in estimating the provision for loan losses, including the volatility of expected losses, changes and the potential severity of losses.
For example, Tarjeta Naranja’s portfolio in arrears is comprised by balances more than 30 days overdue and loans, installment plans and any other outstanding amount not subject to an installment plan. Once a loan or credit card balance becomes overdue, the entire balance is deemed past-due. As a credit card issuer, the provisions for loan losses are subject to the BCRA regulations. At present, Tarjeta Naranja complies with and, in fact, exceeds all such requirements as a result of the application of IAS 39.
The book value of the asset is reduced through the account “Provision for Loan Losses” and the amount of loss or recovery, as the case may be, is recognized in the statement of profit or loss.
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Prevention of Financial Crimes
Since 2014, Tarjeta Naranja has been employing tools that help it to monitor customers and to timely detect unusual and irregular transactions. Tarjeta Naranja monitors customers by reviewing supporting documentation and maintain effective internal control procedures. The Compliance Program currently being implemented by Tarjeta Naranja includes policies, measures, procedures and other activities related to the “Prevention of Money Laundering and Funding of Terrorist Activities” in Argentina, in addition to:
Risk Management and Recovery
With respect to credit risk management, Tarjeta Naranja is continuing to work on improving its ability to monitor customers by applying predictive models that help it to originate new customers and set optimal credit limits.
With respect to the collection of amounts in arrears, Tarjeta Naranja improved its early default management strategies by identifying the most effective collection procedures, offering better financing products, and adding products that respond to the new needs of its clients. Tarjeta Naranja’s improved collection strategy was related to an increase in the speed of recovery of loans in arrears by allocating such accounts to collection agents with best performance record in bothin-court and out-of-court portfolio management. In addition, Tarjeta Naranja assigned out-of-court portfolios to collection agents through private auctions.
Such actions have contributed to the significant savings in loan losses and an increase in the efficiency of Tarjeta Naranja’s procedures. Tarjeta Naranja continues to search for new solutions to further improve such results.
CFA maintains its own credit products and limits. Assessment of the credit risk of each customer is based on certain required information, provided by the customer, and verified by the company, as well as on information on customers’ credit records obtained from credit bureaus and other entities.
Credit risk assessment, credit approval and classification (in accordance with the current loan classification criteria defined by the Argentine Central Bank regulations) of the loan portfolio are managed by the company on a centralized basis by an unit that is separate from the sales units.
Argentine Central Bank Rules on Loan Classification and Loan Loss Provisions
Regardless of the internal policies and procedures designed to minimize risks undertaken, Banco Galicia complies with the Argentine Central Bank regulations.
In 1994, the Argentine Central Bank introduced the current loan classification system and the corresponding minimum loan-loss provision requirements applicable to loans and other types of credit (together referred to as “loans” in this section) to private sector borrowers.
The current loan classification system applies certain criteria to classify loans in a bank’s “consumer” portfolio, and another set of criteria to classify loans in its “commercial” portfolio. The classification system is independent of the currency in which the loan is denominated.
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The loan classification criteria applied to loans in the consumer portfolio is based on objective guidelines related to the borrower’s degree of fulfillment of its obligations or its legal status, the information provided by the Financial System’s Debtors System-whenever debtors reflect lower quality levels than the rating assigned by the Bank, by the Non-Performing Debtors’ database from former financial institutions and the status resulting from the enforcement of the refinance guidelines. In the event of any disagreement, the guidelines indicating the greater risk level of loan losses should be considered.
For the purposes of the Argentine Central Bank’s regulations, consumer loans are defined as mortgage loans, pledge loans, credit card loans and other types of loans in installments granted to individuals. All other loans are considered commercial loans. In addition, in accordance with an option set forth in these regulations, Banco Galicia prospectively applies the consumer portfolio classification criteria to commercial loans of up to Ps.2.5 million. This classification is based on the level of fulfillment and the situation thereof.
The main classification criterion for loans in the commercial portfolio is each borrower’s ability to pay, mainly in terms of such borrower’s future cash flows. If a customer has both commercial and consumer loans, all these loans will be considered as a whole to determine eligibility for classification in the corresponding portfolio. Loans backed with preferred guarantees will be considered at 50% of their face value.
By applying the Argentine Central Bank’s classification to commercial loans, banks must assess the following factors: the current and projected financial situation of the borrower, the customer’s exposure to currency risk, the customer’s managerial and operating background, the borrower’s ability to provide accurate and timely financial information, as well as the overall risk of the sector in which the borrower operates and the borrower’s relative position within that sector.
The Argentine Central Bank’s regulations also establish that a team independent from the departments responsible for credit origination must carry out a periodic review of the commercial portfolio. Banco Galicia’s Credit Division, which is independent from the business units that generate transactions, is responsible for these reviews.
The review must be carried out on each borrower with debt pending payment equal to the lesser of the following amounts: Ps.12.5 million or 1% of the bank’s computable capital (the “RPC”) but, in any case, the review shall cover at least 20% of the total loan portfolio. The frequency of the review of each borrower depends on the bank’s exposure to that borrower. The Argentine Central Bank requires that the larger the exposure is, the more frequent the review should be. This review must be conducted every calendar quarter when credit exposure to that borrower is equal to or in excess of 5% of the bank’s RPC, or every six months when exposure equals or exceeds the lesser of the following amounts: Ps.12.5 million or 1% of the bank’s RPC. In all cases, at least 50% of Banco Galicia’s commercial portfolio must be reviewed once every six months; and all other borrowers in Banco Galicia’s commercial portfolio must be reviewed during the fiscal year, so that the entire commercial portfolio is reviewed every fiscal year.
In addition, only one level of discrepancy is permitted between the classification assigned by a bank and the lowest classification assigned by at least two other banks whose combined credit to the borrower represents 40% or more of the total credit of the borrower, considering all banks. If Banco Galicia’s classification was different by more than one level from the lowest classification granted, Banco Galicia must immediately downgrade its classification of the debtor to the same classification level, or else within one classification level.
Loan Classification
The following tables contain the six loan classification categories corresponding to the different risk levels set forth by the Argentine Central Bank. Banco Galicia’s total exposure to a private sector customer must be classified according to the riskier classification corresponding to any part of such exposure.
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Commercial Portfolio.
Description
Cash flow analysis reflects that the debt may be repaid even though it is possible that the customer’s future payment ability may deteriorate without a proper follow-up.
This category is divided into two subcategories:
(2.a). Under Observation;
(2.b). Under Negotiation or Refinancing Agreements.
Loans to borrowers indicated by the Argentine Central Bank to be in non-accrual status with financial institutions that have been liquidated or are being liquidated, or whose authorization to operate has been revoked. It also includes loans to foreign banks and other institutions that are not:
(i) classified as “normal”;
(ii) subject to the supervision of the Argentine Central Bank or other similar authority of the country of origin;
(iii) classified as “investment grade” by any of the rating agencies admitted pursuant to Communiqué “A” 2729 of the Argentine Central Bank.
Consumer Portfolio.
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High Risk
Uncollectible
Uncollectible due to Technical Reasons
Loan Loss Provision Requirements
Allocated Provisions. Minimum allowances for loan losses are required for the different categories in which loans are classified. The rates vary by classification and by whether the loans are secured. The percentages apply to total customer obligations, both principal and interest. The allowance for loan losses on the performing portfolio is unallocated, while the allowances for the other classifications are individually allocated. Regulations provide for the suspension of interest accrual or the requirement of allowances equivalent to 100% of the interests for customers classified as “With Problems” and “Medium Risk”, or lower. The allowances are set forth as follows:
Minimum Allowances for Loan Losses
Category
1. Normal Situation
2. (a) “Under Observation” and “Low Risk”
2. (b) “Under Negotiation or Refinancing Agreements”
3. “With Problems” and “Medium Risk”
4. “High Risk of Insolvency” and “High Risk”
5. “Uncollectible”
6. “Uncollectible Due to Technical Reasons”
Loans backed with preferred guarantees “A” (loans assigned or pledged in such a way that a financial institution may be assured of its full repayment due to the existence of a solvent third party or secondary markets available for the sale of the assets) require a 1% provision independently of the customer category.
General Provisions. In addition to the specific loan loss allowances described above, the Argentine Central Bank requires the establishment of a general allowance of 1% for all loans in its “Normal Situation” category. This general allowance is not required for interbank financial transactions of less than 30 days, or loans to thenon-financial public sector or to financial institutions majority-owned by the Argentine national, provincial or city governments with governmental guarantees. Besides these general provisions, Banco Galicia may establish additional provisions, determined based on Banco Galicia’s judgment of the entire loan portfolio risk at each reporting period.
As of December 31, 2017, 2016 and 2015, we maintained a general loan loss allowance of Ps.3,026 million, Ps.2,272 million and Ps.1,455 million, respectively, which exceeded by Ps.766 million, Ps.677 million and Ps.294 million, respectively, the 1% minimum general allowance required by the Argentine Central Bank. The increase in these amounts was related to the growth and maturing of individuals’ loan portfolios and the impact of the worsening of certain macroeconomic variables.
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Classification of the Loan Portfolio based on Argentine Central Bank Regulations
The following tables set forth the amounts of our loans past due and the amounts not yet due of the loan portfolio, including the loan portfolios of Banco Galicia, the Regional Credit Card Companies and CFA, applying the Argentine Central Bank’s loan classification criteria in effect at the dates indicated.
Loan Portfolio Classification
1. Normal and Normal Performance
2. With Special Follow-up - Under observation and Low Risk
3. With Problems and Medium Risk
4. High Risk of Insolvency and High Risk
5. Uncollectible
6. Uncollectible Due to Technical Reasons
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Amounts Past Due and Non-Accrual Loans
The following table analyzes amounts past due by 90 days or more in our loan portfolio, by type of loan and by type of guarantee as of the dates indicated, as well as our non-accrual loan portfolio, by type of guarantee, our allowance for loan losses and the main asset quality ratios as of the dates indicated.
Non-Accrual Loans (2)
With Preferred Guarantees
With Other Guarantees
Without Guarantees
Total Non-Accrual Loans (2)
Past Due Loan Portfolio
Non-Financial Private Sector and Residents Abroad
Credit-Card Loans
Total Past Due Loans
Past Due Loans
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Ratios (%)
As a % of Total Loans:
Past Due Loans with Preferred Guarantees
Past Due Loans with Other Guarantees
Past Due Unsecured Amounts
Non-Accrual Loans (2) (Excluding Interbank Loans)
Non-Accrual Loans (2) as a Percentage of Loans to the Private Sector
Allowance for Loan Losses as a % of:
Total Loans Excluding Interbank Loans
Non-Accrual Loans with Guarantees as a Percentage of Non-Accrual Loans (2)
Non-Accrual Loans as a Percentage of Total Past Due Loans
As of December 31, 2017, the non-accrual loan portfolio amounted to Ps.6,852 million, or 3.36% of total loans, a decrease of 5% as compared to 3.31% for the fiscal year ended December 31, 2016.
The coverage of the non-accrual loan portfolio fell to 97.34% atyear-end, compared to 100.06% for the fiscal year ended December 31, 2016.
Our non-accrual loans to the private sector improved 5%, increasing from 3.31% in the fiscal year ended 2016 to 3.36% in the fiscal year ended 2017.
Banco Galicia has entered into certain debt renegotiation agreements with customers. Banco Galicia has eliminated any differences between the principal and accrued interest due under the original loan and the new loan amount through a charge against the allowance for loan losses. Loans under such agreements are included within past due and accruing loans, which amounted to Ps.131 million, Ps.61 million and Ps.90 million as of December 31, 2017, 2016 and 2015, respectively.
For the past three fiscal years, Banco Galicia’s coverage of non-accrual loans with allowances for loan losses has exceeded 100%.
Under Argentine Central Bank rules, we are required to cease the accrual of interest or to establish provisions equal to 100% of the interest accrued on all loans pertaining to the non-accrual loan portfolio, that is, all loans to borrowers in the categories of:
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The table below shows the interest income that would have been recorded on non-accrual loans on which the accrual of interest was discontinued and the recoveries of interest on loans classified as non-accrual on which the accrual of interest had been discontinued:
Interest Income that Would Have Been Recorded onNon-Accrual Loans on which the Accrual of Interest was Discontinued
Recoveries of Interest on Loans Classified as Non-Accrualon which the Accrual of Interest had been Discontinued (1)
Loan Loss Experience
The following table presents an analysis of our allowance for loan losses and of our credit losses as of and for the periods indicated. Certain loans are charged off directly from the income statement (such charge offs are immaterial amounts charged to income before any allowances for loan losses are recorded) and therefore are not reflected in the allowance.
Total Loans, Average (1)
Allowance for Loan Losses at Beginning of Period (2)
Changes in the Allowance for Loan Losses During the Period (2)
Provisions Charged to Income
Prior Allowances Reversed
Charge-Offs (A)
Inflation and Foreign Exchange Effect and Other Adjustments
Allowance for Loan Losses at End of Period
Charge to the Income Statement during the Period
Provisions Charged to Income (2)
Direct Charge-Offs, Net of Recoveries (B)
Recoveries of Provisions
Net Charge (Benefit) to the Income Statement
Charge-Offs Net of Recoveries (A+B) to Average Loans(3)
Net Charge to the Income Statement to Average Loans(3)
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During 2017, the Bank established allowances for loan losses in an amount of Ps.4,811 million.
Direct charges to the income statement, net of recoveries, increased by Ps.66 million as compared to 2016. The net charge to the income statement was Ps.4,745 million, representing 2.98% of the average loan portfolio for the fiscal year.
Charge-offs against allowances for loan losses were equal to Ps.2,848 million.
Allocation of the Allowance for Loan Losses
The following table presents the allocation of our allowance for loan losses among the various loan categories and shows such allowances as a percentage of our total loan portfolio before deducting the allowance for loan losses, in each case for the periods indicated. The table also shows each loan category as a percentage of our total loan portfolio before deducting the allowance for loan losses at the dates indicated.
Placements in Correspondent Banks
Unallocated(1)
Unallocated (1)
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Charge-Offs
The following table sets forth the allocation of the main charge-offs made by Banco Galicia, the Regional Credit Card Companies and CFA during the years ended December 31, 2017, 2016 and 2015.
Charge-offs by Type
Total(1)
During fiscal year 2017, Ps.2,848 million was charged off against the allowance for loan losses, including the Regional Credit Card Companies’ and CFA’s loan portfolios, while in fiscal year 2016 it amounted to Ps.2,125 million. For both fiscal years, the increases as compared to the prior years were attributable to the maturing of the individuals’ loan portfolio.
Foreign Outstandings
Cross-border or foreign outstandings for a particular country are defined as the sum of all claims against third parties domiciled in that country and comprise loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets that are denominated in foreign currency. The following were our foreign outstandings as of the dates indicated.
United States
Overnight Placements
Germany
As of December 31, 2017, we had the following foreign outstandings:
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The following table sets out the composition of our deposits as of December 31, 2017, 2016 and 2015. Our deposits represent deposits with Banco Galicia and CFA.
Checking Accounts and Other Demand Deposits
Other Deposits (1)
Plus: Accrued Interest, Quotation Differences and UVA Adjustment
Total Deposits
In 2017, our consolidated deposits increased 34% mainly as a result of a Ps.47,476 million increase in deposits in saving accounts and a Ps.16,144 increase in time deposits. These increase were mainly due to deposits received by Banco Galicia.
In 2016, our consolidated deposits increased 52% mainly as a result of a Ps.26,260 million increase in deposits in saving accounts and a Ps.18,100 million increase in other deposits mainly due to the increase of deposits related to the Tax Amnesty Law. These increase were mainly due to deposits received by Banco Galicia.
In 2015, our consolidated deposits increased 55% primarily as a result of a Ps.20,388 million increase in time deposits and a Ps.14,304 million increase in deposits in checking and savings accounts. These increases were mainly due to deposits received by Banco Galicia.
For more information, see Item 5.A. “Operating Results-Funding”.
The following table provides a breakdown of our consolidated deposits as of December 31, 2017, by contractual term and currency of denomination.
Checking Accounts and Demand Deposits
Maturing Within 30 Days
Maturing After 31 Days but Within 59 Days
Maturing After 60 Days but Within 89 Days
Maturing After 90 Days but Within 179 Days
Maturing After 180 Days but Within 365 Days
Maturing After 365 Days
Other Deposits
Total Deposits (1)
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The categories with the highest concentration of maturities per their original term are those within the segments “within 30 Days” and “after 31 days but within 59 days” (Pesos and foreign currency), which accounted for 18.8% of the total and corresponded mainly to Peso-denominated time deposits. The rest of the terms represent a lower percentage of the total portfolio and have a homogeneous participation. As of December 31, 2017, the average original term for non-adjusted Peso-denominated time deposits was 54 days, for adjusted-Peso-denominated time deposits it was 251 and for foreign currency-denominated deposits it was approximately 44 days. Foreign currency-denominated deposits, equal to Ps.70,382 million (only principal), represented 34.9% of total deposits.
The following table provides information about the maturity of our outstanding time deposits exceeding U.S. $100,000, as of December 31, 2017.
Within 30 Days
After 31 Days but Within 59 Days
After 60 Days but Within 89 Days
After 90 Days but Within 179 Days
After 180 Days but Within 365 Days
After 365 Days
Total Outstanding Time Deposits Exceeding US$100.000 (1)
Return on Equity and Assets
The following table presents certain selected financial information and ratios for the periods indicated.
Average Total Assets
Average Shareholders’ Equity
Shareholders’ Equity at End of the Period
Net Income as a Percentage of:
Declared Cash Dividends
Dividend Payout Ratio
Average Shareholders’ Equity as a Percentage of Average Total Assets
Shareholders’ Equity at the End of the Period as a Percentage of Average Total Assets
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Short-term Borrowings
Our short-term borrowings include all of our borrowings (including repurchase agreement transactions, debt securities and notes) with a contractual maturity of less than one year, owed to foreign or domestic financial institutions or holders of notes.
Short-Term Borrowings
Argentine Central Bank
Other Banks and International Entities
Credit Lines from Domestic Banks
Credit Lines from Foreign Banks
Repos
As of the end of fiscal year 2017, our short-term borrowings consisted of credit lines from foreign banks, which represented 68% of our short term borrowings, credit lines from domestic banks, which represented 13% of our short term borrowings and repurchase agreements with local banks, which represented 19% of our short term borrowings.
We also borrow funds under different credit arrangements from local and foreign banks and international lending agencies as follows:
Banks and International Entities
Contractual Short-term Liabilities
Other Lines from Foreign Banks
Total Banks and International Entities
Domestic and Financial Institutions
Other Lines from Credit from Domestic Banks
Total Domestic and Financial Institutions
The outstanding amounts and the terms corresponding to the outstanding notes as of the dates indicated below are as follows:
The following table sets forth the items listed below for our significant short-term borrowings for the fiscal years ended December 31, 2017, 2016 and 2015:
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Weighted-average Interest Rate at End of Period
Maximum Balance Recorded at the Monthly Closing Dates
Average Balances for Each Period
Weighted-average Interest Rate for the Period
Repurchases with Domestic Banks
Regulatory Capital
Grupo Financiero Galicia and its subsidiaries are regulated by the General Corporations Law. Section 186 of the General Corporations Law establishes the minimum capital amount of a corporation at Ps.100,000.
Regarding regulatory capital, Banco Galicia must comply with the regulations set forth by the Argentine Central Bank. These regulations are based on the Basel Committee methodology, which provides the minimum capital requirements for financial institutions to cover the various risks inherent to its business activity and assets, such as credit risk (generated both by exposure to the private sector and to the public sector); operational risk (generated by the losses resulting from thenon-adjustment or failures of internal processes); and market risk (generated by positions in securities and in foreign currency).
The computable capital is divided as follows:
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The following percentages apply in determining minimum capital requirements:
The capital required for credit risk is calculated based on the balances as of the last day of each month. Computable capital is calculated as of the same month as the minimum capital requirement.
Minimum capital requirements must be met by the Bank, not only on an individual basis, but also on a consolidated basis with its significant subsidiaries.
In the table below, Banco Galicia’s information on regulatory capital and compliance with minimum capital requirements regulations is consolidated with Tarjetas Regionales and its subsidiaries, CFA and Galicia Uruguay.
Minimum capital required (A)
Allocated to Credit Risk
Allocated to Market Risk
Allocated to Operational Risk
Computable Capital (B)
Tier I
Tier II
Additional Capital- Market Variation
Excess over Required Capital (B)-(A)(1)
Total Capital Ratio (%)(2)
Ratio Basel (%)(3)
In accordance with Argentine Central Bank rules applicable at each date.
As of December 31, 2017, the Bank’s computable capital exceeded the minimum capital requirement (Ps.22,610 million) by Ps.6,920 million (or 31%). This excess amount was Ps.6,752 million (44%) as of December 31, 2016.
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The minimum capital requirement increased by Ps.7,352 million, when compared to December 31, 2016, mainly due to (i) the increase in the balances of financing to the private sector in an amount of Ps.5,752 million, and (ii) operational risk in an amount of Ps.1,030 million.
Computable capital increased by Ps.7,520 million when compared to December 31, 2016, due to an increase of Ps.6,111 million in Tier 1 Common Capital, primarily as a result of the higher results recorded and partially offset by higher deductions as a consequence of organization and development expenses. Tier 2 Common Capital increased by Ps.1,409 million primarily as a result of: (i) the inclusion of 100% of the balance of Subordinated Notes for a face value of U.S. $250 million issued on July 19, 2016 and (ii) the increase in the calculable balance of the allowance for loan losses for the portfolio in normal situation. Argentine Central Bank regulations require that capitalization in kind be calculated as of the date of its authorization, rather than as of the date of its contribution. In this case, such capitalization was authorized in January 2018. If capitalization for this contribution had been calculated as of the date of its contribution, the capitalization ratio would have been 14.32%.
Since the Regional Credit Card Companies are not financial institutions, their capital adequacy is not regulated by the Argentine Central Bank. The Regional Credit Card Companies have to comply with the minimum capital requirement established by the Corporations Law, which was required to be Ps.100,000. However, as noted above, Banco Galicia has to comply with the Argentine Central Bank’s capital adequacy rules on a consolidated basis, which includes the Regional Credit Card Companies.
Since CFA is a financial institution, its capital adequacy is subject to rules of the Argentine Central Bank, the same as Banco Galicia. In addition, as noted above, Banco Galicia has to comply with the Argentine Central Bank’s capital adequacy rules on a consolidated basis, which includes CFA.
Minimum Capital Requirements of Insurance Companies
The insurance companies controlled by Sudamericana must meet the minimum capital requirements set by General Resolution No. 39,957 of the National Insurance Superintendency. This resolution requires insurance companies to maintain a minimum capital level equivalent to the highest of the amounts calculated as follows:
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The minimum required capital must then be compared to computable capital, defined as shareholders’ equity less non-computable assets. Non-computable assets consist mainly of deferred charges, pending capital contributions, proposed distributions and excess investments in authorized instruments.
As of December 31, 2017, the computable capital of the companies controlled by Sudamericana exceeded the minimum requirement of Ps.548 million by Ps.115 million.
Sudamericana also owns Galicia Broker, a company dedicated to brokerage in different lines of insurance that is regulated by the guidelines of the Corporations Law, which provided for a minimum capital requirement of Ps.100,000.
All companies operating in Argentina must be registered with the Argentine Public Registry of Commerce. In addition, any company with publicly issued equity or debt securities is subject to the rules and regulation of the CNV. Further, financial institutions, such as Grupo Financiero Galicia and Banco Galicia, are subject to BCRA regulations. All companies operating in Argentina are also regulated by the Corporations Law.
As companies listed in Argentina, Grupo Financiero Galicia and Banco Galicia must comply with the disclosure, reporting, governance and other rules applicable to such companies in the markets in which they are listed and those of regulators in the countries in which they are listed, including the Capital Markets Law (including Decree No. 1023/13), Law No. 20,643, the Decrees No. 659/74 and No. 2,220/80, as well as Decree No. 677/01, the Decree for Transparency in the Public Offering (“Régimen de la Transparencia de la Oferta Pública”) including to the CNV’s General Resolution No. 622/2013 (as amended and/or supplemented, the “CNV Rules”).
In their capacity as public issuers of securities, Grupo Financiero Galicia and Banco Galicia are subject to the aforementioned rules. Since Grupo Financiero Galicia has publicly listed American Depository Shares (or “ADSs”) in the United States, it is also subject to the reporting requirements of the United States Securities and Exchange Act of 1934 (the “Exchange Act”) for foreign private issuers and to the provisions applicable to foreign private issuers under the Sarbanes Oxley Act. See Item 9 “The Offer and Listing Market Regulations”.
Banco Galicia’s operating subsidiaries are also subject to the following laws: Law No. 25,156, as amended (the Competition Defense Law or, in Spanish “Ley de Defensa de la Competencia”), Law No. 22,820, as amended (Fair Business Practice Law, in Spanish “Ley de Lealtad Comercial”) and Law No. 24,240, as amended (the Consumer Protection Law or, in Spanish “Ley de Defensa del Consumidor”).
As a financial services holding company, we do not have a specific institution that regulates our activities. Our banking and insurance subsidiaries are regulated by different regulatory entities. The Argentine Central Bank is the main regulatory and supervising entity for Banco Galicia.
The banking industry is highly regulated in Argentina. Banking activities in Argentina are regulated by Law No. 21,526, as amended (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the Argentine Central Bank. The Argentine Central Bank regulates all aspects of financial activity. See “Argentine Banking Regulation” below.
Banco Galicia and our insurance subsidiaries are subject to Law No. 25,246 which was passed on April 13, 2000 (as amended, among others, by Laws No. 26,087, 26,119, 26,683 and 26,734, together to which we refer to as the Anti-Money Laundering Law), which provides for an anti-money laundering framework in Argentina, including Laws No. 26,268 and 27,304, which amend Law No. 25,246 to include activities associated with terrorism and its financing within the scope of criminal activities. Furthermore, the Anti-Money Laundering Law created the Financial Information, which established an administrative criminal system.
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Sudamericana’s insurance subsidiaries are regulated by the National Insurance Superintendency and Laws No. 17,418, as amended and No. 20,091. Galicia Broker is regulated by the National Insurance Superintendency, through Law No. 22,400.
The Regional Credit Card Companies and the credit card activities of Banco Galicia are regulated by Law No. 25,065, as amended (the “Credit Card Law”). Both the Argentine Central Bank and the Undersecretary of Domestic Trade have issued regulations to, among other things, enforce public disclosure of companies’ pricing (fees, interest rates, and advertising) in order to ensure consumer awareness of such pricing. See “Credit Cards Regulation”.
Net Investment is regulated by the Corporations Law, as previously noted, and is not regulated by any specific regulatory agency. Galicia Warrants is regulated by Law No. 9,643.
On January 6, 2002, the Argentine Congress enacted Law No. 25,561 (the “Public Emergency Law” as amended and supplemented), which, together with various decrees and Argentine Central Bank rules, provided for the principal measures with which to manage the 2001-2002 financial crisis, including Asymmetric Pesification and eliminating the requirement that the Central Bank’s reserves in gold, foreign currency and foreign currency denominated debt be at all times equivalent to 100% of the monetary base, among others. Recently the Argentine Government decided not to extend the term of the Public Emergency Law that had previously been extended annually.
Foreign Exchange Market
In January 2002, through the Public Emergency Law, Argentina declared a public emergency situation in respect of its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine Executive Branch to establish a system to determine the foreign exchange rate between the Argentine Peso and foreign currencies and to issue foreign exchange-related rules and regulations. Within this context, on February 8, 2002, through Decree No. 260/2002, the Argentine Executive Branch established (i) a single and free-floating foreign exchange market (a “MULC”, or “Mercado Único y Libre de Cambios”) through which all foreign exchange transactions in a foreign currency must be conducted, and (ii) that foreign exchange transactions in a foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among the contracting parties, subject to the requirements and regulations imposed by the Argentine Central Bank.
On June 9, 2005, through Decree No. 616/2005, the Argentine Executive Branch mandated that inflows of funds into the MULC arising from foreign debt incurred by residents (subject to certain exceptions) and all inflows of funds of non-residents channeled through the MULC for certain concepts were required to be credited into a local account and maintained for a “Minimum Stay Period”, requiring a mandatory deposit for 30% of the amount of the transaction for a period of 365 calendar days. Such requirements were eliminated by the Macri administration.
As a result of the new policies, on December 28, 2015 the Argentine Central Bank issued Communication “A” 5861 and Communication “A” 5864 which specifically abrogated both Communication “A” 4864 and Communication “A” 4882. On December 29, 2015, the CNV issued Resolution No. 651, which abrogated the prior CNV regulations that complemented the restrictions issued by Communication “A” 4864 and “A” 4882.
In February 2017, the Ministry of Economy and Public Finance (Ministerio de Hacienda y Finanzas Públicas) issued Resolution No. 1/2017, which reduced the “Minimum Stay Period” described above to zero days.
As of July 1, 2017, with the issuance of Communication “A” 6244, the foreign exchange rules and regulations described above were reversed. The main provisions which currently govern the foreign exchange market, as amended by Communication “A” 6312, are summarized below:
Access to the Foreign Exchange Market
Access to the MULC is now available to all individuals and corporations for use with respect to incoming and outgoing funds to or from Argentina, irrespective of the individual’s or corporation’s domicile. Consequently, individuals and corporations may access the MULC without limitation and without the need to request prior authorization from the Argentine Central Bank in order to, among other things, make payments of principal and interest on foreign debt or for the prepayment of any debt, drawing on foreign credit facilities, making foreign investments, paying for imports of goods, paying for services abroad or entering into service contracts, making collections and payments between residents, making distributions or paying dividends abroad, and effecting the purchase or sale of non-performing financial assets.
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Investments of residents abroad
Currently there are no restrictions, nor are prior authorizations required, for the purpose of making investments abroad. Residents (and non-residents) can freely access, without amount (or any other) limitations, the exchange market in order to make transfers abroad for investments.
Investments of non-residents and repatriation of funds abroad
Since current regulations no longer distinguish between foreign exchange transactions that can be made by residents and by non-residents, the latter can also freely access the foreign exchange market. As such, non-residents may make investments in Argentina and may also repatriate such funds at any time and without requesting prior authorization from the Argentine Central Bank.
Financial Indebtedness
Currently there are no restrictions or deadlines for the purpose of accessing the MULC to enter into or to repay financial loans provided by non-residents. There is no obligation to deposit in Argentina proceeds received from loans entered into outside of Argentina, not even as a condition to accessing the MULC in order to make payments on such loan.
In addition, there is no longer a prescribed “Minimum Stay Period” during which funds deposited in Argentina must remain in the country.
Argentine Central Bank Reporting Regime
In light of the foregoing, the Argentine Central Bank’s reporting regime has been updated as described below. Effective December 31, 2017, Communication “A” 6401 brought reporting requirements with respect to debt securities and external liabilities of the financial and private non-financial sector and direct investments of companies in such sector under one regime for “Assets and External Liabilities”. The reporting regime is divided into the following five subsections: (i) capital and mutual fund participations;(ii) non-negotiable debt instruments; (iii) negotiable debt instruments; (iv) financial derivatives; and (v) land, structures and real estate.
The completion and validation of the information corresponding to foregoing must be done electronically through the Federal Public Revenue Administration website. Such information must be reported within 180 calendar days of fiscal year end for annual statements, and within 45 calendar days as of fiscal quarter end for quarterly statements.
Taking into account the above, as of December 31, 2017, an Argentine resident investor must comply with this reporting regime only if the value of its investments abroad reaches or exceeds the equivalent of U.S. $1,000,000 (based on the net value of its total external assets and liabilities during the previous calendar year or the balance of holdings of external assets and liabilities at the end of the previous calendar year). If the value of such resident investor’s investments is less than the equivalent of U.S. $1,000,000, compliance with such reporting regime is optional. Further, if the value of such resident investor’s investments abroad reaches or exceeds the equivalent of U.S. $1,000,000, but does not exceed the equivalent of U.S. $50,000,000, the reporting regime must only be complied with on an annual basis.
Foreign Exchange Criminal Regime
Exchange operations can only be carried out through the entities authorized for such purposes by the Argentine Central Bank. As such, any exchange operation that does not comply with the provisions of the applicable regulations will be subject to the Foreign Exchange Criminal Regime, which provides sanctions such as the imposition of fines of up to ten times the amount of the operation in breach and imprisonment in certain instances. The Criminal Exchange Regime is regulated by Law 19,359 and Argentine Central Bank regulations.
These rules do not prevent the application of any other applicable law for the prevention of money laundering, terrorist financing and other illegal activities.
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Compensation to Financial Institutions
For the Asymmetric Pesification and its Consequences
Decree No. 214/02 provided for compensation to financial institutions, for (i) losses caused by the mandatory conversion into Pesos of most of their liabilities at the Ps.1.40 per U.S. $1.00 exchange rate (which was greater than the Ps.1 per U.S. $1.00 exchange rate established for the conversion into Pesos of their Foreign currency-denominated assets), through the delivery of a Peso-denominated Compensatory Bond issued by the Argentine government; and (ii) the currency mismatch left on financial institutions’ balance sheets after the compulsory pesification (conversion into pesos) of certain assets and liabilities, through the conversion of the abovementioned Peso-denominated Compensatory Bond into a Foreign currency-denominated Compensatory Bond, which was achieved by the purchase of a Foreign currency-denominated Hedge Bond. For such purpose, the Argentine government established the issuance of a Foreign currency-denominated bond bearing Libor and maturing in 2012 (Boden 2012 Bonds).
The compensation procedure applicable to Banco Galicia, under the terms of Decree No. 214/02, was completed in April 2007.
For Differences Related to Amparo Claims
As a result of the provisions of Decree No. 1,570/01, the Public Emergency Law, Decree No. 214/02 and concurrent regulations, and as a result of the restrictions on cash withdrawals and of the issuance of measures that established the pesification and restructuring of foreign-currency deposits since December 2001, a significant number of claims have been filed against the Argentine government and/or financial institutions, formally challenging the emergency regulations and requesting prompt payment of deposits in their original currency. Most courts have declared the emergency regulations unconstitutional.
Through Communication “A” 3916, dated April 3, 2003, the Argentine Central Bank allowed for the recording of an intangible asset on account of the difference between the amount paid by financial institutions pursuant to legal actions, and the amount resulting from the conversion into Pesos of the balance of the foreign currency deposits reimbursed, at the exchange rate of 1.4 Pesos per Dollar (adjusted by the CER plus accrued interest as of the payment date). In addition, it established that the corresponding amount must be amortized in 60 monthly equal and consecutive installments beginning in April 2003.
On November 17, 2005, through Communication “A” 4439, the Argentine Central Bank established that, beginning in December 2005, from the date of such regulation forward, financial institutions providing new commercial loans with an average maturity of greater than two years could defer the losses related to the amortization of amparo claims. The maximum deferrable amount was 10% of a financial institution’s RPC or 50% of the new commercial loans. Likewise, financial institutions were not able to reduce the remainder of their commercial loan portfolio. This methodology was applied until December 2008, when the balances recorded as of that date began to be amortized in up to 36 monthly equal and consecutive installments.
With respect to judicial deposits that have been subject to pesification, the Argentine Central Bank established that, beginning in July 2007, financial institutions must establish provisions in an amount equal to the difference that results from comparing such deposits’ balances at each month’s end, as measured in their original currency, and the corresponding Peso balances actually recorded on their books. Such provision, established as of December 31, 2015 and charged to income, amounted to Ps.8 million in fiscal year 2016.
During fiscal year 2010, Banco Galicia amortized the total remaining balance of the deferred losses from amparo claims for Ps.281 million.
Banco Galicia has complied with Argentine Central Bank regulations concerning the amortization of amparo claims. However, Banco Galicia reserves the right to make claims in view of the negative effect on its financial condition caused by compliance with court orders, in excess of the provisions of the above-mentioned regulations. On December 30, 2003, Banco Galicia formally requested from the executive branch of the Government, with a copy of such request sent to the Argentine Ministry of Economy and to the Argentine Central Bank, the payment of due compensation for the losses incurred in connection with Asymmetric Pesification.
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In June 2014, through Resolution No. 365, the Ministry of the Economy and Public Finance rejected an administrative claim filed by Banco Galicia. Before the due date set for said action, the Bank’s Board of Directors decided not to pursue further legal action with respect to such claim.
The following is a summary of certain matters relating to the Argentine banking system, including provisions of Argentine law and regulations applicable to financial institutions in Argentina. This summary is not intended to constitute a complete analysis of all laws and regulations applicable to financial institutions in Argentina.
Since 1977, banking activities in Argentina have been regulated by the Argentine Financial Institutions Law (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the autonomous Argentine Central Bank, the principal monetary and financial authority in Argentina that operates independently from the Argentine government. The Argentine Central Bank enforces the FIL and grants authorization to banks to operate in Argentina. The FIL confers numerous powers to the Argentine Central Bank, including the ability to grant and revoke bank licenses, authorize the establishment of branches of Argentine banks outside of Argentina, approve bank mergers, capital increases and certain transfers of stock, set minimum capital, liquidity and solvency requirements and lending limits, grant certain credit facilities to financial institutions in cases of temporary liquidity problems and to promulgate other regulations and to enforce the FIL. The Argentine Central Bank has vested the Superintendency with most of the Argentine Central Bank’s supervisory powers. Such entity is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial institutions and establishing rules for participation of financial institutions in the foreign exchange market and the issuance of bonds and other securities, among other functions. In this section, unless otherwise stated, references to the Argentine Central Bank should be understood to be references to the Argentine Central Bank acting through the Superintendency. FIL grants the Argentine Central Bank broad access to the accounting systems, books, correspondence, and other documents belonging to banking institutions. The Argentine Central Bank regulates the supply of credit and monitors the liquidity, and generally supervises the operation, of the Argentine banking system.
Current regulations equally regulate Argentine and foreign owned banks.
Principal Regulatory Changes since 2002
On January 6, 2002, the Argentine government enacted the Public Emergency Law, as amended and supplemented, (Ley de Emergencia Pública) to address the 2001-2002 economic crisis in its social, economic, administrative, financial and foreign exchange matters. The principal measures taken by the Argentine government during 2002, both through the enactment of the Public Emergency Law and a series of decrees and other regulations, include the following: (i) the ratification of the suspension of payments on most public debt, with the exception of debts owed to multilateral lending agencies; (ii) the repeal of sections of the Convertibility Law (Ley de Convertibilidad) that established, since 1991, a 1 to 1 parity between the Peso and the Dollar, the devaluation of the Peso, and an exchange rate fluctuation regime, which domestically resulted in a decrease in the value of the Peso against the Dollar of around 240% during 2002; (iii) the amplification of exchange controls and restrictions on transfers abroad, which measures began to be eased towards the end of 2002; (iv) the ratification and extension of the restrictions on cash withdrawals from bank deposits that were established in December 2001 (the “corralito”), and later lifted in December 2002; (v) Asymmetric Pesification, the specific details of which are as follows: (a) Foreign currency-denominated debts of individuals and companies with financial institutions were converted into debt denominated in Pesos at an exchange rate of Ps.1.00 per U.S. $1.00 (1:1), (b) Foreign currency-denominated public sector debt to the financial sector were converted into Peso-denominated debt instruments at an exchange rate of Ps.1.40 per U.S. $1.00 (1.40:1), and (c) Foreign currency-denominated bank deposits were converted into Peso-denominated bank deposits at an exchange rate of Ps.1.40 per U.S. $1.00 (1.40:1), while foreign regulated public sector debt held by banks and companies remained Foreign currency-denominated; (vi) the modification of the return on assets and cost of liabilities “pesified” at the rate of Ps.1.40 per U.S. $1.00 through the establishment of maximum and minimum interest rates and capital adjustments in accordance with retail price or wage change indices; (vii) the extension of the maturities of Peso-denominated time deposits and deposits originally denominated in foreign currency, above a certain amount, which established a payment schedule with maturities in 2003 or 2005, depending on whether the deposits were originally made in Pesos or Dollars (the “corralón”); (viii) the voluntary
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exchange of corralito or corralón deposits for Argentine government bonds (through Decree No. 739/03, dated April 1, 2003, the corralón was eliminated); (ix) the amendment of the charter of the Argentine Central Bank (see “General” above); and (x) the compensation to financial institutions, through bonds issued by the Argentine government for the losses caused by asymmetric pesification. The executive branch of the Argentine government and the Argentine Central Bank have provided a set of rules for determining the amount of compensation for losses related to asymmetric pesification, although certain financial entities claim that the compensation established by such rules is not adequate to cover the losses that they have experienced.
The application of this law was extended annually until November 4, 2015, when the Argentine Congress extended the validity of the Public Emergency Law until December 31, 2017. Such law has not been further extended since such date.
Supervision
As the regulator of the Argentine financial system, the Argentine Central Bank requires financial institutions to submit information on a daily, monthly, quarterly, semiannual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, portfolio quality (including details on debtors and any established loan loss provisions) and other pertinent information, allow the Argentine Central Bank to monitor financial institutions financial condition and business practices.
The Argentine Central Bank periodically carries out formal inspections of all banking institutions in order to monitor compliance by banks with legal and regulatory requirements and confirm the accuracy of the information provided to the Argentine Central Bank. If Argentine Central Bank rules are breached, it may impose various sanctions depending on the magnitude of the infringement. These sanctions range from warning calls up to the imposition of fines, or even the revocation of the financial institution’s operating license. Moreover,non-compliance with certain rules may result in the obligatory presentation to the Argentine Central Bank of specific adequacy or regularization plans. The Argentine Central Bank must approve these plans in order for the financial institution to remain operational.
Financial institutions operating in Argentina have been subject to the supervision of the Argentine Central Bank on a consolidated basis since 1994. Information regarding “Limitations on Types of Business,” “Capital Adequacy Requirements,” “Lending Limits,” and “Loan Classification System and Loan Loss Provisions”, related to a bank’s loan portfolio, is calculated on a consolidated basis. However, regulations relating to a bank’s deposits are not based on consolidated information, but on such bank’s deposits in Argentina (for example, liquidity requirements and contributions to the deposit insurance system).
Examination by the Argentine Central Bank
The Argentine Central Bank began to rate financial institutions based on the “CAMEL” quality rating system in 1994. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with: “C” standing for capital, “A” for assets, “M” for management, “E” for earnings, and “L” for liquidity. Each factor is evaluated and rated on a scale from 1 to 5, with 1 being the highest rating an entity can receive. The Argentine Central Bank modified the supervision system in September of 2000. The objectives and basic methodology of the new system, referred to as “CAMELBIG,” do not differ substantially from the CAMEL system. The components were redefined in order to evaluate business risks separately from management risks. The components used to rate the business risks are: capital, assets, market, earnings, liquidity and business. The components to rate management risks are: internal control and the quality of management. By combining the individual factors under evaluation, a combined index can be populated that represents the final rating for the financial institution.
After temporarily halting such examinations as a result of the 2001-2002 financial and economic crisis, the Argentine Central Bank resumed the examination process, which remains in effect as of the date of this filing. In Banco Galicia’s case, the first examination after the 2001-2002 financial crisis was based on the information as of June 30, 2005. New examinations were conducted, the last one of which was based on information as of April 30, 2013.
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Regulatory capital (Minimum Capital Requirements)
Financial entities are subject to the capital adequacy rules of the Argentine Central Bank, consequently Banco Galicia, as a commercial bank, must maintain a minimum capital amount measured as of each month’s closing. Argentine Central Bank regulations establish that financial institutions legal capital should be equal to the greater value resulting from the comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those determined by credit and market risk, as well as operational risk.
The minimum basic capital requirement for a commercial bank located in the City of Buenos Aires, such as Banco Galicia, is a capital reserve of at least Ps.26 million. The minimum capital requirements related to credit risk, which are calculated according to a formula created by the Argentine Central Bank, are designed to establish the minimum capital necessary to offset the risk that the counterparty does not comply with its obligation in a transaction related to the assets that are being reviewed. The minimum capital requirements related to market risks are designed to offset the eventual losses generated by a change of market rates or of credit quality, which would affect the assets and liabilities of the bank. Such market risk includes (among other risks) liquidity risk and interest rate risk. Operational risk includes the possibility of incurring a failure or deficiency in losses as a result of external events or as a result of a failure or deficiency in internal processes, human error or internal systems.
In order to verify compliance with the minimum capital requirements, the Argentine Central Bank considers the computable regulatory capital (“RPC”) of a particular entity (i.e. capital that the entities actually have). Pursuant to the Argentine Central Bank’s regulations, a bank’s RPC is the sum of the minimum core capital (Tier 1 capital) and supplementary capital (Tier 2 capital), minus certain deductible concepts. The Argentine Central Bank considered Basel III requirements in order to regulate the RPC (and listed the assets included in each Tier as well the deductible concepts in accordance with such rules).
According to the Argentine Central Bank’s regulations, any financial institution operating with an RPC under the minimum capital requirements must: (i) pay-in the correspondent amount within the following two months from the month in which it fails to comply with the requirement, or (ii) submit to the Superintendency a regularization and reorganization plan within the following 30 calendar days counted as from the last day of the month in which it fails to comply with the requirement. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions, when non-compliance with the RPC requirements occurs.
In addition, any financial institution operating under the daily integration of the minimum capital requirement related to market risk (when such failure is caused by the requirements established to guard against interest rate risk, foreign exchange risk or equity price risk), must pay-in the corresponding amount necessary to comply with the requirements and/or reduce its asset position until the applicable requirement is complied with, within a term of 10 business days counted from the first failure to comply with the requirements. In case thenon-compliance situation remains after such term has elapsed, the entity must submit to the Superintendency a regularization and reorganization plan within the following 5 days.
Legal Reserve
The Argentine Central Bank and FIL rules, requires that every year banks allocate to a legal reserve a percentage of their net profits established by the Argentine Central Bank, which currently amounts to no more than 20% and no less than 10% of their yearly income. Such reserve may only be used during periods in which such financial institution has incurred losses and has exhausted all other reserves. Distribution of dividends will not be allowed if the legal reserve is not met.
Profit Distribution
In accordance with Communications “A” 5827,“A” 6013 and “A” 6304, financial institutions profit distribution (the concept under which a payment of dividends is included) must be authorized by the Superintendency.
The Argentine Central Bank states that at least one month prior to the filing of an application for the Superintendency’s approval for a profit distribution, it must be verified that the financial institution requesting such approval: (i) is not subject to the provisions of Sections 34, “Regularization and sanitation” (“Regularización y saneamiento”) and 35 of the FIL, “Restructuring of the entity in receipt of credit and bank deposits” (“Reestructuración de la entidad en resguardo del crédito y los depósitos bancarios”), (ii) did not receive financial
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assistance related to illiquidity from the Argentine Central Bank, (iii) completes in a timely manner all reporting requirements established by the Argentine Central Bank, and (iv) has no deficiencies related to minimum capital integration, on both an individual and consolidated basis, or related to the minimum cash requirements (on average), whether in Pesos, foreign currency or securities issued by the public sector).
Additionally, Communication “A” 3785 requires that if a given financial institution holds securities issued by the Argentine government under Decree 905/02 as compensation for losses related to asymmetric pesification, that are recorded at their “technical value,” such entity may not distribute profits unless the amount of such distribution exceeds the difference between the registration and listing values of the aforementioned government securities.
However, a profit distribution cannot be made in any of the following circumstances:
• if the average minimum cash reserve is lower than the amount of cash required by the latest reported position or the pro-forma position after making the profit distribution; and/or
• if the financial institution did not comply with the applicable Additional Capital Margins.
In addition, for financial institutions that are branches of foreign financial institutions, the Superintendency will consider the liquidity and solvency of their headquarters and the markets in which they operate in order to allow for the profit distribution.
Legal Reserve Requirements for Liquidity Purposes
The deposit amount minus the minimum cash requirement determines the “lending capacity” of a particular deposit.
The Argentine Central Bank modifies the applicable minimum cash requirement from time to time depending on monetary policy considerations.
The then-applicable minimum cash requirement will be applied to the monthly average of the daily balances of the assets, calculated at the close of each business day during the applicable calendar month, taken into account for the purpose of calculating “lending capacity”.
The averages will be obtained by dividing the sum of the daily balances by the total amount of days of each month. For days in which no movement is recorded, the balance corresponding to the immediately preceding day. Compliance with minimum cash requirements must be made in the same debt currency and/or instrument that corresponds to the requirement (with certain exceptions), and might be completed through (i) checking accounts, denominated in Pesos, opened by financial entities in the Argentine Central Bank; (ii) “Minimum Cash Accounts”, denominated in dollars or other foreign currencies, opened by financial entities in the Argentine Central Bank; (iii) special guarantee accounts in favor of clearing houses and for coverage of credit cards, vouchers and ATM operations and for transfer settlement of immediate funds;(iv) non-bank financial entities checking accounts opened in commercial banks for the requirement of minimum cash integration; (v) special accounts opened in the Argentine Central Bank linked for the provision of social security benefits in charge of National Social Security Administration (“Administración Nacional de la Seguridad Social” or ANSES) and (vi) “sub-accounts60” minimum cash of public securities and debt instruments issued by the Argentine Central Bank, at market value.
According to Communication “A” 6341 (as modified and complemented), the percentages of minimum cash requirements applicable in accordance with Argentine Central Bank rules, are as follows:
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Deficiencies of minimum cash and daily integrations in pesos are subject to a fine equivalent to twice the BADLAR rate of private banks for pesos deposits, informed for the last business day of relevant period (according to Communication “A” 5356 and modifications).
Deficiencies of minimum cash and daily integrations in foreign currency are subject to a fine equivalent to twice the private banks BADLAR rate in dollars or twice the 30-day LIBOR rate for operations in that currency, informed for the last business day of relevant period or last available, whichever is higher (according to Communication “A” 5356 and modifications).
As of December 31, 2017, Banco Galicia was in compliance with its legal reserve requirements and continued to be in compliance as of the date of this annual report.
Limitations on Types of Business
In accordance with the provisions of the FIL, commercial banks are authorized to carry out all activities and operations which are not strictly prohibited by law or by the Argentine Central Bank regulations. Permitted activities include the capacity to: grant and receive loans; receive deposits from the general public in local and foreign currency; secure its customers’ debts; acquire, place and trade with shares and debt securities in the Argentine over-the-counter market, subject to the prior approval of the CNV; carry out operations in foreign currencies; act as trustee; and issue credit cards.
In order to calculate the legal reserves requirements for liquidity purposes described above, it is not necessary to deduct the capital stock allocated to foreign branches from a bank’s shareholders’ equity.
Pursuant to the Argentine Central Bank’s regulations, financial institutions are not allowed to hold more than a 12.5% interest (or more than a specific percentage of the financial institution’s adjusted shareholders’ equity) in the outstanding capital of a company which does not provide services complementary to those offered by financial institutions. The Argentine Central Bank determines which services are complementary to those provided by financial institutions. To date has been determined that such services include those offered in connection with stock brokerage, the issuance of credit, debit or similar cards, financial intermediation in leasing and factoring transactions.
Non-banking financial institutions are not allowed to provide certain services and activities, such as opening checking accounts, , among other activities.
Capitalization of Debt Instruments
Communication “A” 6304 of the Argentine Central Bank provides that all regulations related to capital increases must be cash contributions. However, the regulation establishes that subject to the prior authorization of the Superintendency, the following instruments are allowed as capital contributions: (i) securities issued by the Argentine government, (ii) debt instruments issued by the Argentine Central Bank, and (iii) a financial institution’s deposits and other liabilities resulting from its financial brokerage activities, including subordinated obligations. With respect to instruments (i) and (ii), the contributions must be recorded at their market value. It is understood that an instrument has a market value when it is regularly listed on regulated local or foreign stock markets and traded on such markets in such amounts that the liquidation of such instruments does not significantly affect the listing price of such instruments. With respect to clause (iii) above, contributions must be recorded at their market value, as defined in the previous sentence or, in the case of financial institutions that publicly offer their stock, at the price determined by the applicable regulatory authority. If the aforementioned conditions are not met, the instruments in question will not be contributable as capital.
Deposits and other liabilities resulting from a given financial institution’s financial brokerage activities, including subordinated obligations that are not permitted to be traded in local or foreign regulated secondary markets, will be allowed to be contributed as capital at their accounting value, pursuant to Argentine Central Bank rules.
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Lending Limits
The total equity stake and credit amounts, including collateral, that a bank is allowed to grant to a customer at any time is based on the bank’s adjusted shareholders’ equity as of the last day of the immediately preceding month and on the customer’s shareholders’ equity.
In accordance with the Argentine Central Bank’s regulations, a commercial bank shall not lend or provide credit (“financial assistance”) in favor of, nor hold shares in the capital stock of, a single unaffiliated customer (together with its affiliates) for amounts higher than 15% of the bank’s adjusted shareholders’ equity or 100% of the customer’s shareholders’ equity. Nevertheless, a bank may provide additional financial assistance to such customer up to a sum equivalent to 10% of the bank’s adjusted shareholders’ equity, if the additional financial assistance is secured by certain liquid assets, including government or private debt securities.
The total amount of financial assistance a bank is authorized to provide to a borrower and its affiliates is also limited based on the borrower’s shareholders’ equity. The total amount of financial assistance granted to a borrower and its affiliates shall not be higher than, in the aggregate, 100% of such borrower’s shareholders’ equity, although such limit may be increased an additional 200% of the borrower’s shareholders’ equity if the sum does not exceed 2.5% of the bank’s adjusted shareholders’ equity.
Global exposure to the public sector (national, provincial and municipal public sector) shall not be higher than 75% of an institution’s adjusted shareholders’ equity. Additionally, Section 12 of Communiqué “A” 3911, as amended, establishes that the average monthly financial assistance to non-financial public sector, in the aggregate, shall not be higher than 35% of the bank’s total assets as of the end of the previous month.
The Argentine Central Bank also regulates the level of “total financial exposure” (defined as financial assistance or credit plus equity participations) of a bank to a “related party”. Until August 2013 a related party was defined as bank’s affiliates and related individuals, “affiliate” meaning any entity over which a bank, directly or indirectly, has control, is controlled by, or is under common control with, or any entity over which a bank has, directly or indirectly, significant influence with respect to such entity’s corporate decisions, and “related individuals” meaning bank’s directors, senior management, syndics (síndicos) and such persons’ direct relatives. On August 9, 2013, the Argentine Central Bank issued the Communiqué “A” 5472, through which the definition of related parties was modified and broadened.
The Argentine Central Bank limits the level of total financial exposure that a bank can have outstanding to related parties, depending on the rating granted to each bank by the Superintendency. Banks rated 4 or 5 are forbidden to extend financial assistance to related parties. For banks ranked between 1 and 3, the financial assistance without guarantees to related parties cannot exceed, together with any equity participation held by the bank in its affiliates, 5% of such bank’s RPC. The bank may increase its financing to such related parties up to an amount equal to 10% of such bank’s RPC if the financial assistance is secured.
However, a bank may grant additional financial assistance to such related parties up to the following limits:
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In addition, the aggregate amount of a bank’s total financial exposure to its related parties, except for the ones subject to individual maximum limits higher than 10% (complementary services companies), may not exceed 20% of such bank’s RPC.
Notwithstanding the limitations described above, financial assistance is also limited in order to prevent risk concentration. To that end, a bank’s aggregate amount of non-exempt total financial exposure (including equity interests) independently of whether customers qualify as such bank’s related parties or not, in the case in which such exposure exceeds 10% of such bank’s RPC, may not exceed three times the bank’s RPC excluding total financial exposure to domestic financial institutions, or five times the bank’s RPC, including such exposure.
For a second grade financial institution (i.e. a financial institution that provides financial products to other banks and not to retail customers), the latter limit is ten times such financial institution’s RPC.
Banco Galicia has historically complied with such rules.
Loan Classification System and Loan Loss Provisions
For a description of the Argentine Central Bank’s loan classification system and the Argentine Central Bank’s minimum loan loss provisions requirements, see “—Selected Statistical Information—Main Argentine Central Bank’s Rules on Loan Classification and Loan Loss Provisions”.
Limitation on Fees and Other Substantial Elements
The Argentine Central Bank has issued regulations limiting amounts that entities can charge as credit card fees, as well as fees that can be charged for financial services rendered by financial entities, credit card issuers (and other similar entities). Such regulations provide that such fees must be duly justified from a technical and economic point of view and must be in relation to the total financial costs incurred by any such financial institution. Further, such Laws provide that applicable interest rates must be set forth.
In addition, such regulations provide that in order to modify fees and other conditions established in agreements executed by and between financial entities and consumers, the following requirements must be met (i) reasons for fees increases must be established in the agreements and must be duly justified; (ii) modifications cannot change the core or fundamental provisions of the agreement; (iii) the consumer must be duly informed of any such changes; and (iv) for the imposition of new fees, the consumer’s consent must be obtained.
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Foreign Currency Position
The Foreign Currency Global Position of a financial institution (defined as the assets and liabilities arising from financial intermediation and securities denominated in foreign currency) used to be limited by the Argentine Central Bank regulations. Currently, since the enactment of Communication “A” 6244 financial entities may determine their own Foreign Currency Global Position.
Deposit Insurance System
In 1995, Law No. 24,485 and Decree No. 540/95, as amended, created a mandatory deposit insurance system for bank deposits and delegated to the Argentine Central Bank the organization and start-up of the deposit insurance system. The deposit insurance system was implemented through the creation of a fund named Fondo de Garantía de los Depósitos (“FGD”), which is administered by Seguros de Depósitos S.A. (“Sedesa”). The shareholders of Sedesa are the Argentine government, through the Argentine Central Bank, which holds at least one share, and a trust constituted by the financial institutions which participate in the fund.
The Argentine Central Bank establishes the extent of participation by each institution in proportion to the resources contributed by each such institution to the FGD. Banks must contribute to the FGD on a monthly basis in an amount that is currently equal to 0.015% of the monthly average of daily balances of such institution’s deposits (both Peso- and foreign currency-denominated).
In addition, when the contributions to the FGD reach the greater of Ps.2 billion or 5.0% of total deposits, the Central Bank may suspend or reduce the monthly contributions and reinstate the same when contributions fall below such required level.
The deposit insurance system covers all Peso and foreign currency deposits held in demand deposit accounts, savings accounts and time deposits for an amount up to Ps.450,000 per person, account and deposit. Certain deposits are not covered by the guarantee of the deposit insurance system, such as deposits received at rates higher than the reference rate in accordance with the limits established by the Argentine Central Bank, deposits acquired by endorsement, and those made by persons related to the financial institution (as defined by Argentine Central Bank regulations). The guarantee provided by the deposit insurance system must be made effective within 30 days from the revocation of the license of a financial institution, subject to the outcome of the exercise by depositors of their priority rights described under “—Priority Rights of Depositors” below. The Argentine Central Bank may modify, at any time, and with general scope, the amount of the mandatory deposit guarantee insurance.
Decree No. 1292/96 enhanced Sedesa’s functions by allowing it to provide equity capital or make loans to Argentine financial institutions experiencing difficulties and to institutions that buy such financial institutions or their deposits. As a result of such decree, Sedesa has the flexibility to intervene in the restructuring of a financial institution experiencing difficulties prior to bankruptcy.
Debt securities issued by banks are not covered by the deposit insurance system.
Priority Rights of Depositors
According to section 49(e) of the FIL, in the event of a judicial liquidation or the bankruptcy of a financial entity, the holders of deposits in Pesos and foreign currency benefit from a general priority right to obtain repayment of their deposits up to the amount set forth below, with priority over all other creditors, with the exception of the following: (i) deposits secured by a mortgage or pledge, (ii) rediscounts and overdrafts provided to financial entities by the Argentine Central Bank, according to section 17 subsections (b), (c) and (f) of the Argentine Central Bank Charter, (iii) credits provided by the Banking Liquidity Fund, which was created by Decree No. 32, dated December 26, 2001, secured by a mortgage and pledge and (iv) certain labor credits, including accrued interest until the date of their total repayment.
The holders of the following deposits are entitled to the general preferential right established by the FIL (following this order of preference):
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According to the FIL, the preferences set forth in previous paragraphs (i) and (ii) above are not applicable to deposits held by persons who are affiliates of the financial entity, either directly or indirectly as determined by the Argentine Central Bank.
In addition, pursuant to Section 53 of the FIL, the Argentine Central Bank has an absolute priority over all other creditors of the entity, except as provided by the FIL.
Deposit and Loans in Housing Units
In order to facilitate access to mortgage loans, though Communication “A” 5945, dated April 8, 2016, and complementary regulations, the Argentine Central Bank established a new type of loan denominated in housing units. The value of such housing units will be updated using the Reference Stabilization Coefficient.
Financing Loans for Economic Development
The Argentine Central Bank has implemented several policies in order to promote economic development and productivity in Argentina, pursuant to which certain financial institutions are required to allocate a certain percentage of funds for specific investments, such as providing financing to SMEs and investment projects. The Argetine Central Bank established new requirements with respect to such requirements for 2018 in Communication “A” 6352, dated November 3, 2017.
Financial Institutions with Economic Difficulties
The FIL establishes that financial institutions, including commercial banks such as Banco Galicia, which evidence a deficiency in their cash reserves, have not complied with certain required technical standards, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the Argentine Central Bank, must submit a restructuring plan to the Argentine Central Bank. Such restructuring plan must be presented to the Argentine Central Bank on the date specified by the Argentine Central Bank, which should not be later than 30 calendar days from the date on which the request is made by the Argentine Central Bank. In order to facilitate the implementation of a restructuring plan, the Argentine Central Bank is authorized to provide a temporary exemption from compliance with technical regulations and/or the payment of charges and fines that arise from such non-compliance.
The Argentine Central Bank may also, in relation to a restructuring plan presented by a financial institution, require such financial institution to provide guarantees or limit the distribution of profits, and appoint a supervisor, to oversee such financial institutions’ management, with the power to veto decisions taken by the financial institution’s corporate authorities.
In addition, the Argentine Central Bank’s charter authorizes the Superintendency, subject only to the prior approval of the president of the Argentine Central Bank, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency have been adversely affected. Notice of this decision must be given to the board of directors of the Argentine Central Bank. If at the end of such suspension period the Superintendency considers renewal necessary, such renewal can only be authorized by the board of directors of the Argentine Central Bank for an additional period not to exceed 90 days. During the suspension period: (i) there is an automatic stay of claims, enforcement actions and precautionary measures; (ii) any commitment increasing the financial institution’s liabilities is void, and (iii) acceleration of indebtedness and interest accrual is suspended.
If, in the judgment of the Argentine Central Bank, a financial institution is in a situation which, under the FIL, would authorize the Argentine Central Bank to revoke the financial institution’s license to operate as such, the Argentine Central Bank may, prior to considering such revocation, order a variety of measures, including (1) taking
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steps to reduce, increase or sell the financial institution’s capital; (2) revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares; (3) excluding and transferring assets and liabilities; (4) constituting trusts with part or all the financial institution’s assets; (5) granting of temporary exemptions to comply with technical regulations and/or pay charges and fines arising from such defective compliance; or (6) appointing a bankruptcy trustee and removing statutory authorities.
Furthermore, any actions authorized, commissioned or decided by the Argentine Central Bank under Section 35 of the FIL involving the transfer of assets and liabilities, or complementing such transfers, or that are necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of equity, are not subject to any court authorization and cannot be deemed inefficient in respect of the creditors of the financial institution which was the owner of the excluded assets, even though its insolvency preceded any such actions.
Dissolution and Liquidation of Financial Institutions
The Argentine Central Bank must be notified of any decision to dissolve a financial institution pursuant to the FIL. The Argentine Central Bank, in turn, must then notify a court of competent jurisdiction, which will determine who will liquidate the entity (the corporate authorities or an appointed, independent liquidator). This determination is based on whether or not sufficient assurances exist regarding the ability of such corporate authorities to carry out the liquidation properly.
Pursuant to the FIL, the Argentine Central Bank no longer acts as liquidator of financial institutions. However, when a restructuring plan has failed or is not considered viable, local and regulatory violations exist, or substantial changes have occurred in the financial institution’s condition since the original authorization was granted, the Argentine Central Bank may decide to revoke the license of the financial institution to operate as such. In this case, the law allows judicial or extrajudicial liquidation as in the case of voluntary liquidation described in the preceding paragraph.
The bankruptcy of a financial institution cannot be adjudicated until the license is revoked by the Argentine Central Bank. No creditor, with the exception of the Argentine Central Bank, may request the bankruptcy of the former financial institution before 60 days have elapsed since the revocation of its license.
The Credit Cards Law establishes the general framework for credit card activities. Among other regulations, this law:
The Argentine Central Bank has issued regulations to enforce public disclosure of companies’ pricing (fees and interest rates) to ensure consumer awareness of such pricing.
In addition, during 2014 the Argentine Central Bank issued a series of regulations in order to establish caps on interest rates on personal loans, pledge loans and credit card loans, as well as to establish a requirement for an authorization to increase fees.
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Through its Communiqué “A” 5853, dated December 17, 2015, the Argentine Central Bank rescinded regulations related to limits on interest rates in respect of lending transactions.
Law 25,246 (as amended in July 2011 by Law No. 26,683) incorporates money laundering as a crime under the Argentine Criminal Code. Additionally, with the goal of preventing money laundering, the UIF was created under the jurisdiction of the Argentine Ministry of Justice, Security and Human Rights. As a result of such modification, money laundering is now classified as a separate offense.
In addition to the above, Law No. 26,683 punishes “self-laundering”, which punishes money laundering tied to a crime the individual in question committed his or herself. It also includes certain tax offenses described in Article 303 of the Argentine Penal Code as punishable laundering behavior. The new standard falls under Article 303 of the Argentine Penal Code in the chapter titled “Crimes against economic and financial order.”
The minimum and maximum of the criminal scale will be doubled when (i) the foregoing acts were crimes that are particularly serious, meaning those crimes with a punishment that is greater than three years of imprisonment; (ii) the perpetrator committed the crime for profit; and (iii) the perpetrator regularly performs concealment activities.
The criminal scale can only be increased once, even when more than one of the above-mentioned acts occurs. In such case, the court may take into consideration the multiple acts when determining the original punishment.
In addition, the regulations establish that:
(i) within the framework of a review of reported suspicious activity, the person required by the UIF to provide information may not withhold it, claiming such information is a banking, stock market or professional secret, nor because it is legally or contractually confidential;
(ii) if after completing its analysis of the reported activity, the UIF finds sufficient elements to suspect that the activity is a money laundering operation pursuant to the law, then the UIF shall notify the Public Ministry in order to determine if a criminal prosecution should begin; and
(iii) people who have acted for their spouse, any relative that is related by blood up to the fourth degree or by marriage up to the second degree, or a close friend or person to whom they owe special gratitude, shall be exempted from criminal responsibility.
Notwithstanding the foregoing, pursuant to the Argentine Criminal Code, the exemption described in clause (iii) above shall not be effective in the following cases:
(i) with respect to a person who secures or helps the perpetrator of or a participant in a crime to secure the product or profit of the crime;
(ii) with respect to a perpetrator that committed the crime for profit;
(iii) with respect to a perpetrator that regularly performs concealment activities; or
(iv) with respect to any person who converts, transfers, administers, sells, encumbers, or uses money or any asset derived from any crime he was not involved in, with the possible result of giving the original or secondary assets the appearance of having a legal origin, and as long as their value is greater than Ps.50,000, through a single or series of related acts.
Finally, the law lists the parties that are obligated to report to the UIF, which include among others:
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- Financial institutions, agents and stock companies, and insurance companies,
- Public notaries and registered professionals whose activities are governed by the Consejo Profesional de Ciencias Económicas(Economic Sciences Professional Council), companies that receive donations or capital contribution for over Ps.70,000 and companies that organize and regulate professional sport events.
Banco Galicia formed the “Committee for the Control and Prevention of Money Laundering”, the name of which was changed in 2005 to the “Committee for the Control and Prevention of Money Laundering and Funding of Terrorist Activities”, which is responsible for establishing and maintaining the general guidelines for Banco Galicia’s strategy to control and prevent money laundering and the financing of terrorism.
For more information, see “Item 6. Directors, Senior Management and Employees-Functions of the Board of Directors of Banco Galicia”.
Banco Galicia has also appointed two directors to fulfill the roles of Compliance Officer and Substitute Compliance Officer. In addition, a unit specializing in this subject was created, the Anti-Money Laundering Unit; responsible for the execution of the policies passed by the committee and for the monitoring of control systems and procedures in order to ensure that they are adequate.
The “Guide for unusual or suspicious transactions within the scope of the financial and foreign exchange system” (passed by Resolution No. 121/2011 of the UIF) establishes the obligation to report, among others, the following investment related transactions: (i) investments related to purchases of government or corporate securities given in custody to the financial institution if such securities’ value appears to be inappropriate due to the type of business of the client; (ii) deposits or “back to back” loan transactions with branches, subsidiaries or affiliates of the bank in places known to be “tax havens” or countries or territories considered by the Financial Action Task Force as non-cooperative;(iii) client requests for investment management services (whether in foreign currency, shares or trusts) where the source of the funds is not clear or is not consistent with its business; (iv) significant and unusual movements in custodial accounts, (v) frequent use by infrequent clients of special investment accounts whose owner is the financial entity; and (vi) regular security transactions, through purchases and sales on the same day and for identical volumes and nominal values, taking advantage of quotation differences, when such transactions are not consistent with the client’s profile and regular activity.
Such reporting obligation generally consists of performing due diligence in order to get to know the client and understand the corresponding transaction and also, if applicable, to report any irregular or suspicious activity to the UIF, pursuant to the terms and conditions established by the regulation applicable to such obligated party.
Law No. 26,734 enacted on December 22, 2011, incorporated terrorism financing and the financing of terrorism as an aggravating circumstance to all criminal conduct in the Argentine Criminal Code.
Such law punishes any individual who directly or indirectly collects or provides goods or money with the intention of being used, or knowing that they will be used, in whole or in part (i) to finance a crime with the purpose established in Section 41.5; (ii) for an organization who commits or attempts to commit crimes with the purpose established in Section 41.5; and (iii) for a person who commits or attempts to commit or participates in any way in committing crimes with the purpose established in Section 41.5.
The new legislation also punishes terrorism as an aggravating factor in other punishable crimes when any such offense was committed in order to terrorize the population.
None.
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The following discussion and analysis is intended to help you understand and assess the significant changes and trends in our historical results of operations and the factors affecting our resources. You should read this section in conjunction with our audited consolidated financial statements and their related notes included elsewhere in this annual report.
In recent years, we have undertaken to expand the volume of our business with the private sector in order to increase our reoccurring earnings generation capacity. We have increased our customer base and our fee-based business and financial intermediation activities with the private sector, strengthening our position as a leading domestic private-sector financial institution. In addition, our total deposits and loan origination have increased.
We have increased our regulatory capital through the issuance of subordinated bonds (most recently in July 2016) and through internal origination of profits. The increase in our overall level of activity, which led to the above-mentioned increase in the volume of our fee based business and financial intermediation with the private sector, has had a positive impact on our gross brokerage margin and on our net income from services. Loan loss provisions increased due to additional consumer loan portfolios in arrears and to increased regulation of such credit portfolios. Administrative expenses increased primarily as a consequence of higher personnel expenses as a result of salary increase agreements with unions and of other expenses related to services provided to Banco Galicia.
Despite the volatility of the Argentine economy, though our main subsidiary, Banco Galicia, we have managed to expand our business with the private sector and to improve its income generation, while strengthening our financial condition, maintaining an adequate coverage of its credit risks and maintaining a healthy asset quality.
In summary, in recent years, our operating profitability was positively impacted by the growth of our financial intermediation and fee-based businesses with the private sector in the context of a low credit risk, yet inflationary environment. Fiscal year 2018 is expected to be a challenging year of transition at the local level as there are still certain macroeconomic imbalances to be solved, such as a significant fiscal deficit, high levels of inflation and the uncertainty of access to the international capital market on attractive conditions, together with a more volatile world economy, all of which could negatively impact the Argentine economy.
The Argentine economy was affected by international political and economic factors in 2017, including the first year of the Trump administration in the United States and its policies (in particular tax reforms), and the actions of central banks worldwide, including the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.
In 2017, the Dollar depreciated against the currencies of its main business partners, declining 10.3% in 2017, as compared to the U.S. Dollar Index (a basket comprised of the currencies of certain U.S. trading partners), as a result of the appreciation of the Euro (+14%). A sustained improvement in several indicators of Eurozone countries translated into the strength of the Euro vis-à-vis the Dollar. According to the “World Economic Outlook” prepared by the IMF, global output increased to 3.7% in 2017 from 3.2% in 2016. The output of developed economies was 2.3%, reflecting an average of 2.4% in the Eurozone, 2.3% in the United States and 1.8% in Japan. The output of emerging markets was 4.7%, with China at 6.8% and India at 6.7%. In addition, the economic recovery of Latin America in 2017 is noteworthy, the output of which changed from a 0.7% decline in 2016, as compared to 2015, to a 1.3% increase in 2017, as compared to 2016, with a positive outlook for 2018 (+1.9%) and 2019 (+2.6%).
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Correspondingly, equity performed well in 2017. In the United States, the Nasdaq increased 27% as compared to 2016, the Dow Jones Industrial Average increased 24% as compared to 2016, and the S&P 500 increased 19% as compared to 2016, whereas Japan’s Nikkei 225 index increased 19% as compared to 2016 and the Euro Stoxx 50 index increased 7% as compared to 2016. Equity markets in emerging economies also performed well in 2017 as compared to 2016, with Argentina’s MERVAL increasing 47%, Chile’s Santiago Stock Exchange General Index increasing 46%, Peru’s Bolsa de Valores increasing 34%, Brazil’s B3 increasing 25%, Colombia’s Stock Exchange increasing 14%, and Mexico’s Bolsa Mexicana de Valores increasing 12%.
As result of the Dollar’s depreciation, commodities increased .5% in 2017 as compared to 2016. Among the several commodity sectors, changes varied. For example, increases in industrials were comprised of aluminum (+35%), copper (+32%), nickel (+26%), and gold (+12.5%). Reflecting the effects of an agreement to reduce oil production between Russia and OPEC, the cost of oil increased 12% in 2017 as compared to 2016, with the cost of WTI crude as of December 31, 2017 at $60.40 per barrel. In contrast, the cost of corn and soy decreased 9.7% and 5.1%, respectively, whereas the cost of wheat increased 5.5%, in each case in 2017 as compared to 2016.
Argentina continued on a path of economic growth in 2017, with private estimates reflecting a growth of the economic activity of about 2.9%, whereas GDP data prepared by the National Institute of Statistics and Census (INDEC) reflected a growth rate of about 2.8%. Relatedly, the unemployment rate decreased from 8.5% of the economically active population for the third quarter of 2016 to 8.3% for the third quarter of 2017.
In the monetary sphere, the main monetary aggregates decelerated their pace, standing below the nominal growth of the economy. By fiscal year-end, the monetary base recorded a 21.8% annual expansion, 9.9% below the growth recorded in 2016. Particularly, this monetary aggregate increased by Ps.179,450 million, primarily as a result of currencies purchased by the Argentine Central Bank from the National Treasury in an amount of Ps.271,708 million, and the increase in financing to the National Treasury in an amount of Ps.150,000 million. This expansion was partially offset by the placement of Argentine Central Bank Bills and Notes for Ps.225,364 million and a Ps.25,043 million increase in repurchase transactions. This trend was not reflected in the performance of the private-sector M2 (money in circulation and deposits in savings and checking accounts that belong to the private sector), which grew 37.0% in 2017, as compared to the 32.2% growth in 2016. On the other hand, total M2 (including deposits from the public sector) increased 25.7% in 2017, after increasing by 30.3% in 2016.
Domestic interest rates shifted with changes to expectations in prices and the foreign exchange market. During the first half of 2017, with high inflation levels that the Argentine Central Bank sought to contain under the framework of a contractive monetary policy, domestic interest rates remained high. This resulted in a downward pressure on the exchange rate, which remained relatively steady during the first six months of 2017 (depreciating by +4.7%), whereas in the last part of the year depreciation accelerated (+12.1%). Particularly, the Badlar rate ended the year at 23.3%, compared to 19.9% in December 2016.
The reference exchange rate established by the Argentine Central Bank increased from Ps.15.850 to Ps.18.774 per Dollar between December 30, 2016 and December 29, 2017 (equivalent to a 18.4% depreciation); while the average exchange rate increased from Ps.14.94 in 2016 to Ps.16.76 per Dollar in 2017.
According to private estimates, inflation in 2017 was about 26.6% inter-annually, considerably below the 2016 levels (37.7% inter-annually). Particularly, in 2017, the national CPI published by INDEC showed a 24.8% growth inter-annually, whereas the CPI of the City of Buenos Aires decreased to 26.1% inter-annually from 41.0% inter-annually shown last year.
In the fiscal area, tax revenues, including social security, recorded a growth of 22.6% inter-annually compared to a 36.3% growth inter-annually in 2016. In turn, primary expenditures increased by 21.8%, at least 16.4% less than in 2016. Thus, the Argentine public sector achieved a primary deficit of Ps.404,142 million, equivalent to 3.9% of GDP. This figure entailed an improvement, as compared to the primary deficit in the same period of 2016 (4.5% of GDP), amounting to Ps.359,382 million. After interest payments for Ps.224,907 million, the financial deficit amounted to Ps.629,050 million, equivalent to 6.1% of GDP.
Regarding the external sector, during 2017 the foreign exchange balance current account published by the Argentine Central Bank (cash basis) reached a deficit amounting to U.S. $17,052 million, higher than the deficit registered in 2016, which amounted to U.S. $15,574 million. The current account deficit, measured in terms of GDP, stood at about 3% in 2017, remaining relatively steady as compared to that shown in 2016. The deterioration noted in nominal terms basically resulted from lower net income from assets (U.S. $4,028 in 2017, as compared to U.S. $8,093 million in 2016) and higher net expenses from services (U.S. $10,847 in 2017, as compared to U.S. $9,004 million in 2016).
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Particularly, revenues for collections of exports of goods amounted to U.S. $58,600 million in 2017, which showed a 0.9% increase, as compared to the level noted in the prior year, although still below those recorded prior to 2015. This poor performance was related to the decline in the oil seeds, oils and cereals sector, which showed collections for exports amounting to U.S. $26,635 million, 3% lower than that recorded in the previous year. Additionally, we noted lower income from foreign advances and pre-financing, which totaled U.S. $8,540, showing an inter-annual drop of 36%.
Payments for imported goods amounted to U.S. $54,572 million, resulting in an inter-annual increase of 9.2% (about U.S. $4,584 million). The increase in payments for imports resulted from the manufacturing and the automotive sector.
The non-financial private sector capital account recorded a net foreign currency outflow of U.S. $4,617 million, as compared to a net foreign currency inflow of U.S. $3,160 million in 2016. As of December 29, 2017, the Argentine Central Bank’s international reserves amounted to U.S. $55,055 million, U.S. $15,747 million higher as compared to December 31, 2016.
Total loans to the private sector in the financial system amounted to Ps.1,602,851 million as of December 31, 2017, a 51.5% increase as compared to December 31, 2016. Mortgage loans had the most significant increase, amounting to Ps.133,826 million as of December 31, 2017, a 110.9% increase compared to the same date of the previous year. As of December 31, 2017, secured loans amounted to Ps.93,670 million, increasing 69.7% as compared to December 31, 2016. Commercial loans, comprised of overdrafts for checking account and notes (promissory notes and purchased/discounted notes), increased 53.2% in 2017 as compared to 2016, amounting to Ps 639,148 million as of December 31, 2017. Consumer credit lines, comprised of loans through credit cards and personal loans, increased 40.5% in 2017 as compared to 2016, amounting to Ps.653,630 million as of December 31, 2017.
Total deposits in the financial system increased 27.7% in 2017 as compared to 2016, amounting to Ps.2,424,746 million as of December 31, 2017. Deposits from the non-financial private sector increased 29.0% in 2017 as compared to 2016, amounting to Ps.1,947,269 million as of December 31, 2017. Within deposits from the private sector, transactional deposits increased 32.1% in 2017 as compared to 2016, amounting to Ps.1,164,522 million as of December 31, 2017, while time deposits increased 23.2% in 2017 as compared to 2016, amounting to Ps.720,603 million as of December 31, 2017. Deposits from the public sector increased 22.7% in 2017 as compared to 2016, amounting to Ps.477,477 million as of December 31, 2017.
The average interest rate paid by private banks in December 2017 for time deposits in Pesos of 30 to 44 days was 21.5%, an increase of 270 b.p. inter-annually. In the case of lending rates, the average interest rate applicable to checking account overdrafts was 34.2%, an increase of 316 b.p. inter-annually, and applicable to promissory notes was 25.3%, an increase of 177 b.p. inter-annually. Including data as of December 2017, financial institutions decreased their liquidity levels (in relation to total deposits) as compared to December 2016, a ratio that stood at 25.2%, representing a decrease of 650 b.p. for such period. When taking Lebacs into account, liquidity decreased to 42.6% in December 2017, as compared to 49.0% in December 2016. The net worth of the Argentine financial system increased by Ps.112,075 million during 2017, amounting to Ps.409,282 million as of December 31, 2017, an increase of 37.7% in 2017 as compared to 2016. As of December 2017, the Argentine financial system’s profitability was equal to 3.0% of total assets, a 62 b.p. decrease as compared to December 2016, while return on shareholders’ equity was equal to 25.8%, a 383 b.p. decrease as compared to December 2016.
As of December 2017, income from interest and income from services amounted to 5.0% and 3.4% of total assets, respectively. In 2017, administrative expenses decreased to 7.4% of total assets (a 56 b.p. decrease as compared to 2016), while provisions for loan losses increased to 1.2% of total assets (a 23 b.p. increase as compared to 2016).
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The non-accrual loan portfolio to the non-financial private sector reached 1.82% in December 2017, a 1 b.p. decrease as compared to December 2016. The coverage of the private-sector non-accrual loan portfolio with allowances reached 139%, a 200 b.p. increase from 2016.
As of December 31, 2017, the financial system was comprised of 77 financial institutions: 62 banks, 49 of which were private (33 domestically-owned and 16 foreign-owned) and 13 government-owned banks, in addition to 15 non-banking financial institutions. The concentration of the financial system, measured by the market share of private sector deposits of the ten leading banks, reached 77.4% as of December 31, 2017, 35 b.p. higher than the percentage recorded as of December 31, 2016.
Based on information as of December 31, 2017, the Argentine financial sector employed 109,654 people, a 0.4% decrease as compared to December 31, 2016.
The insurance industry continued to grow during 2017. Production amounted to Ps.272,217 million, 29% higher than in 2016. Out of total insurance production, 82% related to property insurance, 16% related to life and personal insurance and 2% related to retirement insurance. Within the 82% corresponding to property insurance, the automotive insurance segment comprised the most significant portion, with 43% of property insurance, followed by the workers’ compensation segment with 35%.
Within the life insurance business, group life insurance represented 65% of the segment, followed by individual life insurance, representing 15%, and personal accident insurance, representing 14%.
Historically, inflation in Argentina has played a significant role in influencing, often negatively, the economic conditions in Argentina and, in turn, the operations and financial results of companies operating in Argentina, such as Grupo Financiero Galicia.
In fiscal year 2015, due to changes in the authorities at the Institute of Statistics, the WPI and CPI series were discontinued beginning in October 2015. The WPI index was republished beginning January 2016. A new CPI series was launched in May 2016, but did not contain historical information.
The chart below presents a comparison of inflation rates published by INDEC, measured by the WPI and the CPI, for the fiscal years 2017, 2016 and 2015. In 2016, annual variation of the CPI was calculated using the Consumer Price Index of the City of Buenos Aires, an alternative measure of inflation proposed by INDEC after it discontinued its index.
In addition, the chart below presents the evolution of the CER and UVA indexes, published by the Argentine Central Bank and used to adjust the principal of certain of our assets and liabilities for the specified periods.
Price Indices (1) (2)
WPI
CPI
Adjustment Indices
CER
UVA(3)
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In the first two months of 2018, the CPI published by INDEC reflected a 4.2% increase, while the CER and UVA indexes went up 4.7% during the same period.
The following table sets forth our assets and liabilities denominated in foreign currency, in Pesos and adjustable by the CER/UVA, as of the dates indicated.
In Pesos, Unadjusted
In Pesos, Adjusted by the CER/UVA
In Foreign Currency (1)
Liabilities and Shareholders’ Equity
In Pesos, Unadjusted, Including Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Funding of Banco Galicia’s long position in CER/UVA-adjusted assets through Peso-denominated liabilities bearing a market interest rate (and no principal adjustment linked to inflation) exposes Banco Galicia to differential fluctuations in the inflation rate and in market interest rates, with a significant increase in market interest rates vis-à-vis the inflation rate (which is reflected in the CER/UVA variation), which has a negative impact on our gross brokerage margin.
Two other currencies have been defined apart from the Argentine Peso: assets and liabilities adjusted by CER/UVA and foreign currency. Banco Galicia’s policy in force establishes limits in terms of maximum “net asset positions” (assets denominated in a currency which are higher than the liabilities denominated in such currency) and “net liability positions” (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis.
An adequate balance between assets and liabilities denominated in foreign currency characterizes the management strategy for this risk factor, seeking to achieve full coverage of long-term asset-liability mismatches and allowing a short-term mismatch management margin that contributes to the possibility of improving certain market situations. Short- and long-term goals are attained by appropriately managing assets and liabilities and by using the financial products available in our market, particularly “dollar futures” both in institutionalized markets (MAE and ROFEX) and in forward transactions performed with customers.
Transactions in foreign currency futures (specifically, Dollar futures) are subject to limits that take into consideration the particular characteristics of each trading environment.
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We discuss below our results of operations for the fiscal year ended December 31, 2017 as compared with our results of operations for the fiscal year ended December 31, 2016, and our results of operations for the fiscal year ended December 31, 2016 as compared with our results of operations for the fiscal year ended December 31, 2015.
Consolidated Income Statement
Net income from Services
Income from Insurance Activities
Administrative Expenses
Non-Controlling Interest
Income from Equity Investments
Miscellaneous Income, Net
Net income
Return on Average Assets (1)
Return on Average Shareholders’ Equity
Net income for the fiscal year ended December 31, 2017 was Ps.8,329 million, as compared to Ps.6,018 million for the fiscal year ended December 31, 2016 and Ps.4,338 million for the fiscal year ended December 31, 2015.
Net earnings per share for the fiscal year ended December 31, 2017 were Ps.6.25, as compared to Ps.4.63 for the fiscal year ended December 31, 2016 and Ps.3.34 for the fiscal year ended December 31, 2015.
The return on average assets and the return on average shareholders’ equity for the fiscal year ended December 31, 2017 were 3.52% and 30.91%, respectively, as compared to 3.48% and 35.03%, respectively, for the fiscal year ended December 31, 2016 and to 3.83% and 35.54%, respectively, for the fiscal year ended December 31, 2015.
Fiscal Year 2017 compared to Fiscal Year 2016
Net income for the fiscal year ended December 31, 2017 was Ps.8,329 million, as compared to Ps.6,018 million for the fiscal year ended December 31, 2016, representing a Ps.2,311 million, or a 38%, increase. Such increase was primarily attributable to:
Such changes were partially offset by:
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The growth in income as compared to the year ended December 31, 2017, was mainly the result of an increase in net operating income, supported by the higher volume of financial intermediation with the private sector. Net operating income for the fiscal year ended December 31, 2017 amounted to Ps.39,350 million, a 45% increase as compared to the fiscal year ended December 31, 2016. This increase was primarily a result of an increase in gross brokerage margin of Ps.8,506 million (or, a 52% increase), as well as an increase in 2017 in net income from services of Ps.3,729 million (or, a 35% increase), in each case in 2017 as compared to 2016. Such increase, however, was partially offset by a 47% increase in provisions for loan losses and a 30% increase in administrative expenses attributable to higher activity levels and the increase of costs associated with loan administration.
Fiscal Year 2016 compared to Fiscal Year 2015
Net income for the fiscal year ended December 31, 2016 was Ps.6,018 million, as compared to Ps.4,338 million for the fiscal year ended December 31, 2015, representing a Ps.1,680 million, or a 39% increase. Such increase was primarily attributable to:
The growth in income as compared to the year ended December 31, 2015, was mainly the result of an increase in net operating income, supported by the higher volume of financial intermediation with the private sector, together with a 36% increase in income from insurance activities. Net operating income for the fiscal year ended December 31, 2016 amounted to Ps.27,115 million, a 34% increase as compared to the fiscal year ended December 31, 2015. This increase was primarily a result of an increase in gross brokerage margin of Ps.3,927 million (or, a 32% increase), as well as an increase in 2016 in net income from services of Ps.2,909 million (or, a 37% increase), in each case in 2016 as compared to 2015. Such increase, however, was offset by a 60% increase in provisions for loan losses due to consumer loans in default and costs associated with compliance with increased regulations in respect of loan portfolio management, and a 37% increase in administrative expenses attributable to higher activity levels and the increase of costs associated with loan administration.
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Our financial income was composed of the following:
Income on Loans and Other Receivables Resulting from Financial Brokerage and Premiums Earned on Reverse Repurchases
Income from Government and Corporate Securities, Net
Other (1)
The following table shows our yields on interest-earning assets and cost of funds:
Interest-Earning Assets
Interest-Bearing Liabilities
Other Interest-bearing Liabilities
Interest Spread, Nominal Basis (1)
Net Yield on Interest-earning Assets(2)
Financial Margin (3)
Financial income for the fiscal year ended December 31, 2017 was Ps.45,220 million, as compared to Ps.36,608 million for the fiscal year 2016, representing a 24% increase. Such increase was the result of a higher average volume of interest-earning assets and higher average yields thereon.
The average of interest-earning assets increased Ps.51,635 million, from Ps.135,286 million for the fiscal year ended December 31, 2016 to Ps.186,921 million for the fiscal year ended December 31, 2017, representing a 38% increase. Of this increase, Ps.48,051 million was due to an increase in the average size of the loan portfolio to the public and private sectors. The average yield on interest-earning assets was 22.68% in 2017, as compared to 25.88% in 2016, a 320 b.p. decrease that was primarily attributable to a decrease in the average interest rate obtained from loans to the private sector and a decrease in the average interest rate on Other Interest-Earnings Assets.
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The average amount of loans to the private sector for the fiscal year ended December 31, 2017, amounted to Ps.159,151 million, a 43% increase as compared to the Ps.111,100 million for the fiscal year ended December 31, 2016. This increase was primarily attributable to the increase in Credit Cards and Personal Loans.
According to Argentine Central Bank information, as of December 31, 2017, Banco Galicia’s estimated market share of loans to the private sector, excluding loans granted by Regional Credit Card Companies, was 10.11% as of December 31, 2017, as compared to 10.12% as of December 31, 2016.
The average interest rate on total loans was 22.68% for the fiscal year ended December 31, 2017, as compared to 26.44% for the fiscal year ended December 31, 2016.
The average interest rate on Peso-denominated loans to the private sector was 27.07% for the fiscal year ended December 31, 2017, as compared to an average interest rate of 29.03% for the fiscal year ended December 31, 2016, representing a 196 b.p. decrease year-over-year. The interest rate was influenced by, among other things, loans that were extended to businesses, SMEs and Wholesale clients pursuant to the Credit Line for the Productive Investment (with nominal annual fixed interest rates of 16.5% beginning on November 1, 2017, 17% from November 1, 2016 to October 31, 2017 and 22% from January 1, 2016 to October 31, 2016).
The average position in government securities for the fiscal year ended December 31, 2017 was Ps.22,815 million, reflecting an increase of 6%, as compared to Ps.21,520 million for the fiscal year ended December 31, 2016, as a consequence of the increase of Ps.3,617 million in the average position in Peso-denominated government securities, which, in turn, was partially offset by a decrease of Ps.2,322 million in the average position in foreign currency-denominated government securities.
The average position in Peso-denominated government securities for the fiscal year ended December 31, 2017 was Ps.19,727 million, reflecting an increase of 22%, as compared to Ps.16,110 million for the fiscal year ended December 31, 2016, which was primarily attributable to higher balances of securities issued by the Argentine Central Bank (Lebacs) and to investments in treasury bills and debt securities issued by Argentine provinces. The average position in foreign currency-denominated government securities for the fiscal year ended December 31, 2017 was Ps.3,088 million, reflecting a decrease of 57%, as compared to Ps.5,410 million for the fiscal year ended December 31, 2016, which was primarily attributable to holding lower balances of securities (Lebacs) issued by the Argentine Central Bank.
The average yield on government securities for the fiscal year ended December 31, 2017 was 22.14%, as compared to 22.33% for fiscal year ended December 31, 2016, a 19 b.p. decrease as a consequence of a lower average yield with respect to Peso-denominated government securities, offset by a higher average yield with respect to foreign currency-denominate government securities.
The average interest rate on Peso-denominated government securities for the fiscal year ended December 31, 2017 was 24.50%, as compared to 28.84% for the fiscal year ended December 31, 2016, a 434 b.p. decrease, mainly due to lower interest rates on securities (Lebacs) issued by the Argentine Central Bank. The average interest rate of foreign currency-denominated government securities for the fiscal year ended December 31, 2017 was 7.09%, as compared to 2.96% for fiscal year ended December 31, 2016, a 413 b.p. increase mainly due to changes in the investment portfolio.
The average “Other Interest-Earning Assets” for the fiscal year ended December 31, 2017 was Ps.4,955 million, as compared to Ps.2,666 million for the fiscal year ended December 31, 2016, representing an increase of 86%. The average rate on this item for the fiscal year ended December 31, 2017 was 25.41%, 580 b.p. lower as compared to 31.21% for the previous fiscal year. This decrease was mainly attributable to the 553 b.p. decrease in the average rate of other Peso-denominated assets, which decreased to 26.84% for the fiscal year ended December 31, 2017 from 32.37% for the fiscal year ended December 31, 2016.
The line item “Other Financial Income” recorded an increase of Ps.1,352 million (or 99%), from Ps.1,353 million for the fiscal year ended December 31, 2016 to Ps.2,705 million for the fiscal year ended December 31, 2017, mainly due to the higher income from currency quotation differences (Ps.2,141 million) and which is disclosed in “Other Financial Income”.
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The following table indicates our market share in the segments listed below:
Private-Sector Deposits
Total Deposits in Checking and Savings Accounts and Time Deposits
Private-Sector Loans
Exclusively Banco Galicia and CFA within the Argentine market, based on daily information on deposits and loans prepared by the Argentine Central Bank. End-of-month balances are used. Deposits and loans include only principal. The Regional Credit Card Companies’ data is not included.
Financial income for the fiscal year ended December 31, 2016 was Ps.36,608 million, as compared to Ps.25,844 million for the fiscal year ended December 31, 2015, representing a 42% increase. Such increase was the result of a higher average volume of interest-earning assets and of higher average yields.
The average of interest-earning assets increased Ps.40,481 million, from Ps.94,805 million for the fiscal year ended December 31, 2015 to Ps.135,286 million for the fiscal year ended December 31, 2016, representing a 43% increase. Of this increase, Ps.33,293 million was due to an increase in the average size of the loan portfolio and Ps.6,904 million was due to an increase in holdings of government securities.
The average yield on interest-earning assets for the fiscal year ended December 31, 2016 was 25.88%, as compared to 25.78% for the fiscal year ended December 31, 2015, a 10 b.p. increase that was a result of the 31 b.p. increase in the average interest rate obtained from loans to the private sector, which increase was partially offset by a 174 b.p. decrease in the average yields obtained from government securities.
The average amount of loans to the private sector for the fiscal year ended December 31, 2016, amounted to Ps.111,100 million, a 43% increase as compared to the Ps.77,807 million for the fiscal year ended December 31, 2015. This increase was primarily attributable to a Ps.16,506 million (or 29%) increase in credit cards, a Ps.6,053 million (or 65%) increase in personal loans and a Ps.2,546 million (or 11%) increase in promissory notes.
Credit growth was influenced by projects that were undertaken pursuant to the Credit Line for Productive Investment set forth by the Argentine Central Bank with the goal of financing investment projects and providing working capital for specific purposes and with certain characteristics. As of the end of fiscal year 2016, the outstanding amount of loans related to this credit line reached Ps.13,829 million, reflecting an increase of Ps.4,102 million or 42% as compared to fiscal year 2015. The increased growth under this credit line was recorded in check purchases for Ps.5,359 million.
According to Argentine Central Bank information, as of December 31, 2016, Banco Galicia’s estimated market share of loans to the private sector, excluding loans granted by the Regional Credit Card Companies, was 10.12% as of December 31, 2016, as compared to 9.68% as of December 31, 2015.
The average interest rate on total loans was 26.44% for the fiscal year ended December 31, 2016, as compared to 26.13% for the fiscal year ended December 31, 2015.
The average interest rate earned on Peso-denominated loans to the private sector was 29.03% for the fiscal year ended December 31, 2016, as compared to 27.23% for the fiscal year ended December 31, 2015, representing a 180 b.p. increase year-over-year. This interest rate was influenced by, among other things, loans that were undertaken pursuant to the Credit Line for Productive Investment (with nominal annual fixed rates of 17.00% beginning in November 1, 2016 and 19.00% and 18.00% for the first and second part of the 2015 quota, respectively), and by the regulation issued by the Argentine Central Bank in June 2014 in order to establish caps on interest rates on loans. On December 17, 2015, through its Communiqué “A” 5853, the Argentine Central Bank removed such limits.
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The average position in government securities for the fiscal year ended December 31, 2016 was Ps.21,520 million, reflecting an increase of 47% as compared to Ps.14,616 million for the fiscal year ended December 31, 2015, as a consequence of the increase of Ps.4,364 million in the average position on Peso-denominated government securities and of Ps.2,540 million in the average position on Foreign Currency denominated government bonds.
The increase in the average position in Pesos was due to higher balances in securities issued by the Argentine Central Bank (Lebacs) and, to a lesser extent, in debt securities and treasury bills issued by different provinces.
The increase in the average position in Foreign currency-denominated government securities was mainly due to the holdings of Foreign currency denominated treasury bills.
The average yield on government securities for the fiscal year ended December 31, 2016 was 22.33%, as compared to 24.07% for the fiscal year ended December 31, 2015, a 174 b.p. decrease, as a consequence of a lower average yield in Foreign currency. Thus, the average interest rate on government securities denominated in Pesos for the fiscal year ended December 31, 2016 was 28.84%, as compared to 27.88% for the fiscal year ended December 31, 2015, a 96 b.p. increase, mainly due to the higher average rate accrued on provincial treasury bills and debt securities, while the average interest rate on government securities denominated in foreign currency decreased 551 b.p. from 8.47% for fiscal year ended December 31, 2015 to 2.96% for the fiscal year ended December 31, 2016.
The average “Other Interest-Earning Assets” for the fiscal year ended December 31, 2016 was Ps.2,666 million, as compared to Ps.2,382 million for the fiscal year ended December 31, 2015, representing an increase of 12%. The average rate on this item for the fiscal year ended December 31, 2016 was 31.21%, 631 b.p. higher as compared to 24.90% for the previous fiscal year. This increase was mainly attributable to the variation in the average rate of other Peso-denominated assets, which increased to 32.37% for the fiscal year ended December 31, 2016 from 25.97% for the fiscal year ended December 31, 2015.
The line item “Other Financial Income” recorded an increase of Ps.101 million, mainly due to the higher income from currency quotation differences, which was Ps.1,025 million profit in fiscal year ended December 31, 2016. For the fiscal year ended December 31, 2015, such line item included Ps.917 million profit from foreign currency futures transactions. For the fiscal year ended December 31, 2015 the result from currency quotation differences was negative and was disclosed under the item “Other” in the Financial Expenses table.
Our financial expenses were composed of the following:
Interest on Deposits
Contributions and Taxes
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Financial expenses for the fiscal year ended December 31, 2017 were Ps.20,345 million, as compared to Ps.20,239 million for the fiscal year ended December 31, 2016, a 1% increase. Such increase was primarily attributable to a 42% increase in the average balance of interest-bearing liabilities.
The average interest-bearing liabilities for the fiscal year ended December 31, 2017 were Ps.144,209 million, as compared to Ps.101,319 million for the fiscal year ended December 31, 2016. Such increase was attributable to a Ps.35,620 million increase in total interest-bearing deposits (savings accounts, checking accounts and time deposits), which increased to Ps.117,092 million as of the fiscal year ended December 31, 2017 from Ps.81,472 million as of the fiscal year ended December 31, 2016, and a Ps.3,562 million increase in the average balance of debt securities, which increased to Ps.19,112 million as of the fiscal year ended December 31, 2017 from Ps.15,550 million as of the fiscal year ended December 31, 2016.
With respect to the total average interest-bearing deposits for the fiscal year ended December 31, 2017, Ps.78,079 million were Peso-denominated deposits and Ps.39,013 million were foreign currency-denominated deposits, as compared to Ps.64,080 million and Ps.17,392 million, respectively, for the fiscal year ended December 31, 2016. Average Peso-denominated deposits recorded an increase of 22%, with an increase of 63% in savings and checking account deposits and an 8% increase in time deposits. Average foreign currency-denominated deposits increased 124% during fiscal year 2017, with increases of 180% and 18% in savings accounts and time deposits, respectively. The increase in savings accounts deposit during fiscal year 2017 was primarily attributable to the impact of the Tax Amnesty Law and the weakening of the Dollar.
Using Argentine Central Bank information, considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share increased from 7.94% as of December 31, 2016 to 8.32% as of December 31, 2017.
Out of total interest-bearing time deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2017, the average interest rate of time deposits was 18.85%, as compared to 24.33% for the fiscal year ended December 31, 2016, a 548 b.p. decrease.
Peso-denominated deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2017 accrued interest at an average rate of 14.23%, as compared to an average rate of 20.44% for the fiscal year ended December 31, 2016, a 621 b.p decrease. The rate of foreign currency-denominated deposits for the fiscal year ended December 31, 2017 was 0.15%, as compared to 0.44% for the fiscal year ended December 31, 2016, a 29 b.p. decrease.
The average balance of debt securities for the fiscal year ended December 31, 2017 was Ps.19,112 million, an increase of Ps.3,562 million, or 23%, as compared to Ps.15,550 million for the fiscal year ended December 31, 2016. This increase was primarily attributable to the issuance of additional notes issued by Tarjeta Naranja, Tarjetas Cuyanas (which has subsequently merged into Tarjetas Naranjas) and CFA and was partially offset by amortizations of outstanding notes and the devaluation of the Dollar, in each case during fiscal year 2017.
The average interest rate for debt securities for the fiscal year ended December 31, 2017 was 20.02%, as compared to 18.64% for the fiscal year ended December 31, 2016, a 138 b.p. increase.
The average balance of “Other Interest-Bearing Liabilities” for the fiscal year ended December 31, 2017 was Ps.8,005 million, with an average rate of 16.01%, representing an increase of 86% as compared to Ps.4,297 million for the fiscal year ended December 31, 2016, with an average rate was 23.34%. This item includes mainly Peso- and foreign currency-denominated debt with local and international banks and credit entities, and Peso and foreign-currency-denominated notes in connection with repurchase agreement transaction for government securities.
The item “Other Financial Expenses” for the fiscal year ended December 21, 2017 was Ps.1,867 million, representing an increase of Ps.609 million, or 48%, as compared to the Ps.1,258 million for the fiscal year ended December 31, 2016. As of December 31, 2017, financial expenses included Ps.1,000 million from interest on other loans and a loss of Ps.390 million from foreign exchange forward transactions.
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Financial expenses for the fiscal year ended December 31, 2016 were Ps.20,239 million, as compared to Ps.13,402 million for the fiscal year ended December 31, 2015, a 51% increase. Such growth was attributable to a 53% increase in the average balance of interest-bearing liabilities.
The average interest-bearing liabilities for the fiscal year ended December 31, 2016 were Ps.101,319 million, as compared to Ps.66,071 million for the fiscal year ended December 31, 2015. Such growth was attributable to a Ps.28,511 million increase in total interest-bearing deposits (saving accounts and time deposits), which increased from Ps.52,961 million to Ps.81,472 million, and to the Ps.5,090 million increase in the average balance of debt securities, from Ps.10,460 million to Ps.15,550 million.
With respect to the total average interest-bearing deposits for the fiscal year ended December 31, 2016, Ps.64,080 million were Peso-denominated deposits and Ps.17,392 million were foreign currency-denominated deposits, as compared to Ps.48,130 million and Ps.4,831 million, respectively, for the fiscal year ended December 31, 2015. Average Peso-denominated deposits recorded an increase of 33%, with a growth of 35% in savings accounts and 32% in time deposits. Average deposits foreign currency-denominated deposits increased 260% during fiscal year 2016, with increases of 355% and 158% in savings accounts and time deposits, respectively; a portion of such growth is attributable to Tax Amnesty Law and an improved economic outlook as a result of macroeconomic factors.
Using Argentine Central Bank information, considering only deposits from the private sector in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share was 10.17% for the fiscal year ended December 31, 2016, as compared to 9.64% for the fiscal year ended December 31, 2015.
Out of the total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2016, the average interest rate on time deposits was 24.33% as compared to 22.28% for the fiscal year ended December 31, 2015, a 205 b.p. increase.
Peso-denominated deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2016 accrued at a 20.44% average interest rate, a 267 b.p. increase as compared to 17.77% for the fiscal year ended December 31, 2015. The rate of foreign currency-denominated deposits for the fiscal year ended December 31, 2016 was 0.44%, as compared to 1.24% for the fiscal year ended December 31, 2015, a 80 b.p. decrease.
The average balance of debt securities for the fiscal year ended December 31, 2016 was Ps.15,550 million, an increase of Ps.5,090 million or 49% as compared to Ps.10,460 million for the fiscal year ended December 31, 2015. This growth was mainly attributable to the issuance of notes by Tarjeta Naranja, Tarjetas Cuyanas, CFA and Banco Galicia and to the variation in the quotation of the Dollar during the period and was partially offset by amortizations of outstanding notes during the fiscal year 2016.
The average interest rate for debt securities for the fiscal year ended December 31, 2016 was 18.64%, as compared to 17.65% for the fiscal year ended December 31, 2015.
The average balance of “Other Interest-Bearing Liabilities” for the fiscal year ended December 31, 2016 was Ps.4,297 million, with an average rate of 23.34%, representing an increase of 62% as compared to Ps.2,650 million for the fiscal year ended December 31, 2015, with an average rate of 20.34%. This item includes mainly Peso and foreign currency-denominated debt with local and international banks and credit entities, and Peso and foreign currency-denominated obligations in connection with repurchase agreement transactions for government securities.
The item “Other Financial Expenses” for the fiscal year ended December 31, 2016 was Ps.1,258 million, representing an increase of Ps.507 million or 68% as compared to Ps.751 million for the fiscal year ended December 31, 2015. As of December 31, 2016, financial expenses included Ps.877 million from interest on other financing and Ps.196 million from foreign-currency forward transactions.
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Gross brokerage margin for the fiscal year ended December 31, 2017 was Ps.24,875 million, with a corresponding financial margin of 13.31%, as compared to Ps.16,369 million for the fiscal year ended December 31, 2016, with a corresponding financial margin of 12.10%, representing a 52% and 121 b.p. increase, respectively.
Gross brokerage margin for the fiscal year ended December 31, 2017 (excluding the results from currency quotation differences and the results from foreign-currency forward transactions) amounted to Ps.23,124 million, as compared to Ps.15,536 million for the fiscal year ended December 31, 2016, representing a 49% increase, with a corresponding financial margin of 12.37% and 11.48%, respectively. This increase was attributable to an increase in the spread (defined as the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities) from 9.03% for fiscal year 2016 to 11.39% for fiscal year 2017 and an increase in the volume of transactions. This increase was partially offset by the lower interest rate on foreign currency-denominated debt securities and time deposits.
Gross brokerage margin for the fiscal year ended December 31, 2016 was Ps.16,369 million, with a corresponding financial margin of 12.10%, as compared to Ps.12,442 million for the fiscal year ended December 31, 2015, with a corresponding financial margin of 13.12%, representing a 32% increase and 102 b.p. decrease, respectively.
Gross brokerage margin for the fiscal year ended December 31, 2016 (excluding the results from currency quotation differences and the results from foreign-currency forward transactions) amounted to Ps.15,536 million as compared to Ps.11,712 million income for the fiscal year ended December 31, 2015, representing a 33% increase, with a corresponding financial margin of 11.48% and 12.35%, respectively. This increase was attributable to a higher volume of financial intermediation. This increase was partially offset by a decrease in the spread (defined as the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities) from 9.13% for the fiscal year ended December 31, 2015 to 9.03% for the fiscal year ended December 31, 2016 and a lower interest rate on government securities.
Provisions for loan losses on loans and other receivables for the fiscal year ended December 31, 2017 were Ps.5,205 million, as compared to Ps. 3,533 for the fiscal year ended December 31, 2016, a Ps.1,672 million increase (or 47%), which was primarily attributable to an increase in the amount of consumer portfolios in arrears and by higher regulatory provisions on current portfolios as a consequence of the increase in the size of the credit portfolio.
Provisions for losses on loans and other receivables for the fiscal year ended December 31, 2016 were Ps.3,533 million, as compared to Ps.2,214 million for the fiscal year ended December 31, 2015, a Ps.1,319 million increase (60%), which was primarily attributable to an increase in the amount of consumer portfolios in arrears and by higher regulatory provisions on current portfolios as a consequence of the increase in the size of the credit portfolio.
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Net Income from Services
Our net income from services consisted of:
Income From
Credit and Debit Cards
Deposit Accounts
Credit-related Fees
Check Collection
International Trade
Safe Deposit Box
Collection Services (Taxes and Utility Bills)
Financial Fees
Cash Management
Services for Shipments
Total Income
Total Expenses
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Net income from services for the fiscal year ended December 31, 2017 was Ps.14,475 million, as compared to Ps.10,746 million for the fiscal year ended December 31, 2016, a 35% increase. The evolution of business activity and the rise in prices (in compliance with the procedures established by the regulations of the Argentine Central Bank related to individuals) account for the increases in all of the items noted in the chart above.
The most noteworthy increases in fees were to those related to (i) national and regional credit cards, which increased by 23%; (ii) deposit accounts, which increased 41%; and (iii) loans, which increased 75%, in each case as compared to the fees charged in fiscal year 2016.
Total deposit accounts for the fiscal year ended December 31, 2017 were 4.6 million, as compared to 4.0 million for the fiscal year ended December 31, 2016, a 13% increase.
Banco Galicia’s income from credit and debit card transactions, on an individual basis, for the fiscal year ended December 31, 2017 was Ps 5,256 million, as compared to Ps.4,543 million for the fiscal year ended December 31, 2016, a 16% increase. Such increase was mainly attributable to both the higher number of credit cards managed and the higher average amount of purchases made with each card during fiscal year 2017. The total number of credit cards managed by Banco Galicia (excluding such credit cards managed by the Regional Credit Card Companies and CFA) for the fiscal year ended December 31, 2017 was 4.1 million, as compared to 3.7 million as of December 31, 2016, an 11% increase.
Income from services corresponding to the Regional Credit Card Companies for the fiscal year ended December 31, 2017 was Ps.7,316 million, as compared to Ps.5,651 million for the fiscal year ended December 31, 2016, a 29% increase. This increase was due to the increase in purchases during fiscal year 2017. This increase was partially offset by a decrease in the number of issued credit cards, mainly due to the sale of Tarjetas del Mar on March 31, 2017. The Regional Credit Card Companies managed 9 million credit cards as of December 31, 2017, as compared to 10.2 million as of December 31, 2016, a 12% decrease.
Expenses from services for the fiscal year ended December 31, 2017 were Ps.6,628 million, as compared to Ps.5,099 million for the fiscal year ended December 31, 2016, representing a 30% increase. Such increase was mainly attributable to growth in expenses related to credit and debit card transactions and to the total benefits program, together with higher gross income taxes.
Net income from services for the fiscal year ended December 31, 2016 was Ps.10,746 million, as compared to Ps.7,837 million for the fiscal year ended December 31, 2015, a 37% increase. The evolution in the business volume and the rise in prices (in compliance with the procedures established by the regulations of the Argentine Central Bank related to individuals), account for the increases in most of the items noted in the chart above.
The most noteworthy increases in fees were those related to (i) national and regional credit cards, which increased 40%; (ii) deposit accounts, which increased 32%; and (iii) international trade, which increased 67%, in each case as compared to fiscal year 2015.
Total deposit accounts for the fiscal year ended December 31, 2016 were 4.0 million, as compared to 3.6 million for the fiscal year ended December 31, 2015, representing a 12% increase.
Banco Galicia’s income from credit and debit card transactions, on an individual basis, for the fiscal year ended December 31, 2016 was Ps.4,543 million, as compared to Ps.3,214 million for the fiscal year ended December 31, 2015, a 41% increase. Such increase was mainly attributable to both the greater number of credit cards managed and to the greater average amount of purchases made with each card during fiscal year 2016. The total number of cards managed by Banco Galicia (excluding those issued by the Regional Credit Card Companies and CFA), for the fiscal year ended December 31, 2016 was 3.7 million, as compared to 3.4 million for the fiscal year ended December 31, 2015, a 7% increase.
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Income from services corresponding to the Regional Credit Card Companies for the fiscal year ended December 31, 2016 was Ps.5,651 million, as compared to Ps.4,049 million for the fiscal year ended December 31, 2015, a 40% increase. Such increase was mainly attributable to an increase in the amount of purchases made during the fiscal year together with a greater number of issued credit cards. The Regional Credit Card Companies had issued 11 million credit cards as of December 31, 2016, as compared to 10 million credit cards as of December 31, 2015, a 5% increase.
Consequently, income generated from credit card transactions amounted to Ps.10,194 million in 2016, Ps.2,931 million higher from the Ps.7,263 million generated in 2015.
Expenses from services for the fiscal year ended December 31, 2016 were Ps.5,099 million, as compared to Ps.3,634 million for the fiscal year ended December 31, 2015, representing a 40% increase. Such increase was mainly attributable to the growth in expenses related to credit and debit card transactions and to the total benefits program, together with a higher turnover tax.
The following table sets forth the number of credit cards outstanding as of the dates indicated:
Credit Cards
Visa
“Gold”
International
Domestic
“Business”
“Corporate”
“Platinum”
Galicia Rural
American Express
Platinum
MasterCard
Argencard
“Black”
Local Brands (1)
Total Amount of Purchases (in millions of Pesos)
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The following table sets forth the components of our administrative expenses:
Salaries and Social Security Contributions
Personnel Services
Amount Accrued in Relation to Directors’ and Syndics’ Compensation
Advertising and Publicity
Electricity and Communications
Property-related Expenses
Taxes
Administrative expenses for the fiscal year ended December 31, 2017 were Ps.22,991 million, as compared to Ps.17,618 million for the fiscal year ended December 31, 2016, a 30% increase.
Salaries, social security contributions and expenses related to personnel services for the fiscal year ended December 31, 2017 were Ps.11,293 million, as compared to Ps.8,619 million for the fiscal year ended December 31, 2016, a 31% increase. Such increase was primarily attributable to the salary increase agreement with the unions. For the fiscal year ended December 31, 2017, the staff of Grupo Financiero Galicia and its subsidiaries was composed of 11,649 employees, while for the fiscal year ended December 31, 2016 the same staff was composed of 11,956 employees.
The remaining administrative expenses for the fiscal year ended December 31, 2017 was Ps.11,698 million, as compared to Ps.8,999 million for the fiscal year ended December 31, 2016, a 30% increase. Such increase was mainly attributable to the increase in amounts payable due to the different services provided by Grupo Financiero Galicia to the Bank.
Administrative expenses for the fiscal year ended December 31, 2016 were Ps.17,618 million, as compared to Ps.12,905 million for the fiscal year ended December 31, 2015, a 37% increase.
Salaries, social security contributions and expenses related to personnel services for the fiscal year ended December 31, 2016 were Ps.8,619 million, as compared to Ps.6,412 million for the fiscal year ended December 31, 2015, a 34% increase. Such increase was mainly attributable to the salary increase agreement with the unions. For the fiscal year ended December 31, 2016, the staff of Grupo Financiero Galicia and its subsidiaries was composed of 11,956 employees, while for the fiscal year ended December 31, 2015 the same staff was composed of 12,131 employees.
The remaining administrative expenses for the fiscal year ended December 31, 2016 were Ps.8,999 million, as compared to Ps.6,493 million for the fiscal year ended December 31, 2015, a 39% increase. Such increase was mainly attributable to the increase in amounts payable due to the different services provided.
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The following table shows the results generated on insurance activities:
Earned premiums and surcharges accrued
Claims accrued
Surrenders
Annuities
Underwriting, claims related and running expenses
Other income
Income from insurance activities (excluding administrative expenses and taxes, net of eliminations related to related-party transactions) totaled Ps.2,117 million as of December 31, 2017, a 14% decrease as compared to the Ps.2,452 million of income recorded for the fiscal year ended December 31, 2016. This decrease was mainly due to the implementation of a new regulatory framework in respect of checking account insurance. During fiscal year 2017, Galicia Seguros S.A. earned Ps.3,262 million from premiums and surcharges accrued during the period, representing a decrease of approximately 4% as compared to fiscal year 2016.
In fiscal year 2017, the claims ratio remained at similar levels to those presented in the previous year.
With respect to sales, as of the end of fiscal year 2017, annualized premiums equaled Ps.1,677 million, representing an increase of approximately 58%, as compared to Ps.1,059 million as of the end of fiscal year 2016.
Income from insurance activities (excluding administrative expenses and taxes, net of eliminations related to related-party transactions) totaled Ps.2,452 million as of December 31, 2016, a 36% increase as compared to the Ps.1,801 million of income recorded for the fiscal year ended December 31, 2015. This increase was mainly due to the increase in the volume of premiums written, primarily due to the evolution of the commercialization of property and life insurance products sold. During fiscal year 2016, Galicia Seguros S.A. earned Ps.3,413 million from premiums and surcharges accrued during the period, representing an increase of approximately 36% as compared to fiscal year 2015.
In fiscal year 2016, the claims ratio remained at similar levels to those presented in the previous year.
With respect to sales, as of the end of fiscal year 2016, annualized premiums equaled Ps.1,059 million, an increase of approximately 49%, as compared to Ps.709 million as of the end of fiscal year 2015.
Income from equity investments for the fiscal year ended December 31, 2017 was Ps.221 million, as compared to Ps.80 million for the fiscal year ended December 31, 2016, a 176% increase. Such increase was mainly attributable to the sale of shares held in Aguas Cordobesas S.A. and higher dividends from Prisma Medios de Pago S.A. and Interbanking S.A.
Income from equity investments for the fiscal year ended December 31, 2016 was Ps.80 million, as compared to Ps.100 million for the fiscal year ended December 31, 2015, a 20% decrease. Such decrease was mainly attributable to lower dividends from VISA Argentina S.A. in fiscal year 2016. This decrease was partially offset by a higher dividend from Interbanking S.A.
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Miscellaneous net income for the fiscal year ended December 31, 2017 was Ps.418 million, as compared to Ps.1,278 million for the fiscal year ended December 31, 2016, a 67% decrease. Such decrease was mainly due to higher net charges for other allowances. This decrease was partially offset by an increase in profits from loans recovered and default interest.
Miscellaneous net income for the fiscal year ended December 31, 2016 was Ps.1,278 million, as compared to Ps.443 million for the fiscal year ended December 31, 2015, a 188% increase. Such increase was mainly due to the sale of a property owned by Banco Galicia, an increase in profits from loans recovered and default interest.
The income tax charge for the fiscal year ended December 31, 2017 was Ps.4,955 million, as compared to Ps.3,353 million for the fiscal year ended December 31, 2016, a Ps.1,602 million, or 48%, increase.
The effective income tax rate for fiscal year 2017 was 37.3%, higher than the 35.8% recorded in 2016.
The income tax charge for the fiscal year ended December 31, 2016 was Ps.3,353 million, as compared to Ps.2,801 million for the fiscal year ended December 31, 2015, a Ps.552 million, or 20%, increase.
The effective income tax rate for fiscal year 2016 was 35.8%, lower than the 39.2% recorded in 2015.
We prepare our financial statements in accordance with Argentine Banking GAAP. The more significant differences between Argentine Banking GAAP and U.S. GAAP relate to the determination of the allowance for loan losses, the carrying value of certain government securities and receivables for government securities, the accounting of Banco Galicia’s foreign debt restructuring, goodwill, securitization and recognition of deferred income taxes. For more detail on differences in accounting treatment between Argentine Banking GAAP and U.S. GAAP as of December 31, 2017, 2016 and 2015, see Note 34 to our Consolidated Financial Statements.
Allowances for Loan Losses
With respect to the determination of the allowance for loan losses, we follow the rules of the Argentine Central Bank. Under these rules, reserves are based on minimum reserve requirements established by the Argentine Central Bank. U.S. GAAP requires that an impaired loan be generally valued at the present value of expected future cash flows discounted at the loan’s effective rate or at the fair value of the collateral if the loan is collateral dependent. For the purposes of analyzing our loan loss reserve under U.S. GAAP, we divide our loan portfolio into performing and non-performing commercial and consumer loans.
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The following table shows the allowance for loan losses for the periods indicated under Argentine Banking GAAP and U.S. GAAP and the corresponding shareholders’ equity adjustment under U.S. GAAP:
Argentine Banking GAAP
U.S. GAAP
ASC 310
ASC 450
U.S. GAAP Shareholders’ Equity Adjustment(1)
ASC 310 Analysis
The non-performing commercial loan portfolio is comprised of loans falling into the following classifications of the Argentine Central Bank:
The following table shows our loan loss reserve under ASC 310 for our non-performing commercial loan portfolio as of the dates indicated.
Loan Loss Reserve Under U.S. GAAP – ASC 310 Analysis
For such non-performing commercial loans, we applied the procedures required by ASC 310. For loans that were not collateral dependent, the expected future cash flows to be received from the loans were discounted using the interest rate at each balance sheet date for variable loans. Loans that were collateral dependent, and for which there was an expectation that the loan balance would be recovered via the exercise of collateral, were valued using the fair value of the collateral. In addition, in order to assess the fair value of collateral, we discounted collateral valuations due to the extended period of time that it can take to foreclose on assets in Argentina.
ASC 450 Analysis
To calculate the allowance required for smaller-balance impaired loans and unimpaired loans, we perform an analysis of historical losses from our consumer and performing commercial loan portfolios in order to estimate losses for U.S. GAAP purposes resulting from loan losses that had been incurred in such loan portfolios at the balance sheet date but which had not been individually identified.
Loss estimates are analyzed by loan type and thus for homogeneous groups of clients. Such historical ratios are updated to incorporate the most recent data reflecting current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information that may affect the estimation of the allowance for loan losses. Many factors can affect Banco Galicia’s estimates of allowance for loan losses, including volatility of default probability, migrations and estimated loss severity.
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We estimate that, on average, it takes a period of up to one year between the trigger of an impairment event and identification of a loan as being a probable loss for consumer and performing commercial loans.
The increase in the allowances recorded under ASC 450 is mostly due to a higher volume of credit card transactions and personal loans granted during 2017 and 2016 and the worsening of macroeconomic factors, such as the inflation and unemployment rates for 2017 and 2016. The table below shows our loan loss reserve under ASC 450 for consumer and performing commercial loans as of the dates indicated.
Loan Loss Reserve Under U.S. GAAP – ASC 450 Analysis
In addition to assessing the reasonableness of the loan loss reserve as described above, Grupo Financiero Galicia makes an overall determination of the adequacy of each period’s reserve based on such ratios as:
The table below shows the above-mentioned ratios as of the dates indicated.
Loan Loss Reserves as a Percentage of Non-accrualLoans
Loan Loss Reserves as a Percentage of Total Amounts Past Due
Loan Loss Reserves as a Percentage of Past-due Unsecured Amounts
The allowance for loan losses has increased approximately 23% during 2017 under U.S. GAAP. This variation is due to an increase in the portfolio of loans to the private sector and to the qualitative approach reflecting current economic conditions, industry performance trends, geographic or obligor concentrations, within each portfolio segment required for smaller-balance impaired and unimpaired.
Government Securities and Securities Issued by the Argentine Central Bank
As of December 31, 2017 and 2016, under Argentine Banking GAAP, Grupo Financiero Galicia holds government securities which are classified under the caption “Holdings Recorded at their Acquisition Cost plus I.R.R.” Grupo Financiero Galicia also holds government securities issued by the Argentine Central Bank, classified under the caption “Securities issued by the Argentine Central Bank”, which are recorded at the closing price of each class of security in the corresponding market or at their present value, plus the value of amortization and/or interest due and payable.
For U.S. GAAP purposes, these securities were classified as trading and accounted for at its fair value with changes recorded in the income statement, and cetain securities were classified as available for sale and measured at fair value with changes recorded in other comprenhensive income (see Note 34(e) to our financial statements).
Foreign Debt Restructuring
On May 18, 2004, Grupo Financiero Galicia completed the restructuring of its foreign debt. As a result of this restructuring, Grupo Financiero Galicia recorded a Ps.142.5 million gain under Argentine Banking GAAP.
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For U.S. GAAP purposes, the restructuring is accounted for in each of two steps. The first step of the restructuring required the holders of our debt to exchange its old debt for new debt in two tranches. Pursuant to “Determining Whether a Debtor’s Modification or Exchange of Debt Instruments” is within the scope of ASC 470 (ASC 820), we did not receive any concession from the holders of the debt and therefore, the first step of the restructuring was not considered a trouble debt restructuring. Pursuant to “Debtors Accounting for a Modification or Exchange of Debt Instruments” ASC 470-50, the first step of the restructuring was accounted for as a modification of the old debt and therefore we did not recognize any gain or loss. The second step of the restructuring offers the holders of our debt issued in the first step explained above the option to exchange it for new securities including cash, Boden 2012 Bonds and our equity shares. Pursuant to U.S. GAAP, this second step of the restructuring was accounted for in accordance with “Accounting by Debtors and Creditors for Trouble Debt Restructurings” ASC 310-40, as a partial settlement of the debt through the transfer of certain assets and equity at its fair value. After deducting the considerations used to repay the debt, ASC 310-40 requires the comparison of the future cash outflows of the restructured debt and the carrying of the debt at the restructuring date.
Gain on troubled debt restructuring is only recognized when the remaining carrying value of the debt at the date of the restructuring exceeds the total future cash payments of the restructured debt reduced by the fair value of the assets and equity given as payment of the debt. Since the total future cash outflows of the restructured debt exceeds the carrying value of the old debt, no gain on restructuring was recorded under U.S. GAAP.
As a result, under U.S. GAAP, the carrying amount of the restructured debt is greater than the amount recorded under Argentine Banking GAAP. Therefore, under U.S. GAAP, a new effective interest rate was determined to reflect the present value of the future cash payments of the restructured debt.
Furthermore, under U.S. GAAP, expenses incurred in a trouble debt restructuring are expensed as incurred. Expenses related to the issuance of equity were deducted directly from the shareholders’ equity.
During 2016, Grupo Galicia prepaid certain subordinated negotiable obligations, which were originally scheduled to be paid in 2019. Consequently, no shareholders’equity adjustment was recorded as of December 31, 2016 and 2017. Shareholders’ equity adjustments between Argentine Banking GAAP and U.S. GAAP as of December 31, 2015, amounted to a decrease of Ps.69 million.
The income statement adjustment as of December 31, 2016 and 2015, amounted to Ps.69 and Ps.(13), respectively.
Securitizations
The following table summarizes the adjustment for U.S. GAAP purposes related to securitization transactions as of December 31, 2017 and 2016:
Galtrust I (1)
Saturno Trust (2)
(1) Financial Trust “Galtrust I”
The financial trust “Galtrust I” was created in October 2000 in connection with the securitization of provincial loans for a total amount of Ps.1,102 million. The securitized loans were from the portfolio of loans granted to provincial governments, guaranteed by the federal tax revenues shared with the provincial governments.
During 2002, the portfolio of loans and the related retained interest payments in Galtrust I were subject to the pesification. As a result, the retained interest in the trust was converted into Pesos at an exchange rate of Ps.1.40 to U.S. $1.00 and the interest rate for their debt securities changed to CER plus 10%. During 2003, Galtrust I had swapped its provincial loans for Bogar Bonds.
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Under Argentine Banking GAAP, this transaction was accounted for as sales and the participation certificates retained by the Bank are recorded at the present value of cash flows discounted by the I.R.R. of instruments with similar characteristics and duration and with volatility. When the book value exceeds the present value, the monthly accrual is recorded in an asset offset account.
The retained interest in the trust was recorded under Argentine Central Bank rules in the “Other Receivables from Financial Brokerage”, and its balance as of December 31, 2017 and 2016, was Ps.96 million and Ps.505 million, respectively.
In accordance with ASC 810, Grupo Financiero Galicia was deemed to be the primary beneficiary of this trust and, therefore, the Bank reconsolidated the assets and liabilities of the mentioned trust. Upon consolidation, the Bogar Bonds were classified as available-for-sale securities and measured at fair value with changes recorded in other comprehensive income. The profit and loss impact is generated by the reclassification of Other comprehensive income to the net income as a consequence of the amortization of the Bogar Bonds 2018.
(2) Saturno Trust
Under Argentine Banking GAAP, certain loans that Grupo Financiero Galicia had in its portfolio were transferred to Saturno Trust. In exchange for the loans transferred, Grupo Financiero Galicia received all the participation certificates, which were accounted for at cost. According to the foregoing, as of December 31, 2017 and 2016, Saturno Trust was recorded under the caption “Other Receivable from Financial Brokerage” for an amount of Ps.17 million and Ps.23 million, respectively.
In accordance with ASC 810, Grupo Financiero Galicia was deemed to be the primary beneficiary of this trust and, therefore, the Bank reconsolidated the assets and liabilities of the mentioned trust. Upon consolidation, the loans have been measured at amortized cost with its corresponding allowance for loan losses measured in accordance with ASC 310.
Software Costs
ASC 350-40 under U.S. GAAP defines three stages for the costs of computer software developed or obtained for internal use: the preliminary project stage, the application development stage and the post-implementation operation stage, and provides that only the second stage costs should be capitalized. Under Argentine Banking GAAP, the Bank capitalized costs relating to all three of the stages of software development.
Under U.S. GAAP, the costs related to the first and third stages are expensed as incurred. In addition, the amortization of capitalized expenses related to the first and third stages recorded under Argentine Banking GAAP are reversed.
As a result, the Shareholders’ Equity adjustment between Argentine Banking GAAP and U.S. GAAP as of December 31, 2017 was Ps.844 million, as compared to an adjustment of Ps.926 million as of December 31, 2016.
Liability from the Extinguishment of Non-Controlling Interests
As of December 31, 2017, the Bank recognized a financial liability for a commitment to purchase a 6% interest in Tarjetas Regionales in the amount of Ps.919,935. ASC 480 sets forth that a commitment to purchase non-controlling interest should be accounted for as a financial liability at fair value. Thenon-controlling interest is derecognized and the differences with the carrying value is recognized as additional paid in capital.
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Commissions on Loans
Under Argentine Banking GAAP, the Bank does not defer loan origination fees and costs. In accordance with ASC 310 under U.S. GAAP, loan origination fees net of certain direct loan origination costs should be recognized over the life of the related loan as an adjustment of yield.
As a result, the Shareholders’ Equity adjustment between Argentine Banking GAAP and U.S. GAAP as of December 31, 2017 was Ps.(179,264), as compared to an adjustment of Ps.(81,904) as of December 31, 2016.
Additional information required by U.S. GAAP
The table below presents the aggregated assets and liabilities of the financial trusts which have been consolidated for U.S. GAAP purposes:
Government Securities and Promissory Notes
Investment
Certificates of Participation
Our maximum loss exposure, which amounted to Ps.116 million and Ps.530 million as of December 31, 2017 and 2016, respectively, is based on the unlikely events that all the assets in the VIE’s become worthless and incorporates potential losses associated with assets recorded on our balance sheet.
Argentine Central Bank regulations do not require the recognition of deferred tax assets and liabilities and, therefore, income taxes for Banco Galicia and CFA are recognized on the basis of amounts due in accordance with Argentine tax regulations. Grupo Financiero Galicia and its non-bank subsidiaries, however, apply the deferred income tax method. As a result, Grupo Financiero Galicia and its non-banking subsidiaries have recognized a net deferred income tax asset of Ps.330,290 as of December 31, 2017, as compared to Ps.701,021 as of December 31, 2016.
In addition, Grupo Financiero Galicia recorded as an asset the credit related to Minimum Presumed Income Tax (MPIT) in an amount of Ps.8,912 as of December 31, 2017, as compared to Ps.9,424 as of December 31, 2016. The MPIT credit will be computable as a down payment of any income tax excess over minimum notional income tax through the next ten years.
For the purposes of U.S. GAAP reporting, we applied ASC 740-10 “Accounting for Income Taxes”. Under this method, income tax is recognized based on the assets and liabilities method whereby deferred tax assets and liabilities are established for temporary differences between the financial reporting and tax basis of our assets and liabilities. Deferred tax assets are recognized if it is more likely than not those assets will be realized.
According to the taxable income projections, Grupo Financiero Galicia estimates that is more likely than not that it will recover the temporary differences and the presumed minimum income tax with future taxable income and the presumed minimum income tax will be utilized. Therefore, no valuation allowance was provided against presumed minimum income tax and temporary differences.
“Accounting for Uncertainty in Income Taxes”, ASC 740-10 was issued in July 2006 and interprets FASB Statement of Financial Accounting Standards ASC 740-10. ASC 740-10 became effective for us on January 1, 2007 and prescribes a comprehensive model for the recognition, measurement, financial statement presentation and disclosure of uncertain tax positions taken or expected to be taken in a tax return. ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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We classify income tax-related interest and penalties as income taxes in the financial statements. The adoption of this pronouncement had no effect on our overall financial position or results of operations.
Summary
As a result of the above and other differences, our net income attributable to parent and shareholders’ equity under Argentine Banking GAAP and U.S. GAAP for the periods indicated were as follows:
Fiscal Year 2017
Fiscal Year 2016
Fiscal Year 2015
The significant differences that result between shareholders’ equity under U.S. GAAP and shareholders’ equity under Argentine Banking GAAP primarily reflect that:
The presentation of our segment disclosures for the years ended December 31, 2017, 2016 and 2015 corresponds with our internal reporting structure, under which the banking business is considered a single segment evaluated regularly by our management in deciding how to allocate resources and in assessing the performance of our business.
We measure the performance of each of our business segments primarily in terms of “Net income”, in accordance with the regulatory reporting requirements of the Argentine Central Bank. Net income and other information by segment are based on Argentine Banking GAAP and are consistent with the presentation of our consolidated financial statements.
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Our disclosure segments are as follows:
Our results by segment are shown in Note 30 to our audited consolidated financial statements. Below is a discussion of our results of operations by segment for the years ended December 31, 2017, December 31, 2016 and December 31, 2015.
The table below shows the results of our banking business segment.
Net Operating Revenue
Provisions for Loan Losses
Net Operating Income
Tarjetas Regionales SA
Sudamericana
Other Income (Loss)
Pre-tax Income
Income Tax Provision
Net Income as a % of Grupo Financiero Galicia’s Net Income
Average Loans
Average Deposits
Net income for this segment amounted to Ps.6,915 million for the fiscal year ended December 31, 2017, a Ps.1,821 million or 36% increase as compared to Ps.5,094 million for the fiscal year ended December 31, 2016, which in turn was Ps.1.181 million higher than the Ps.3,913 million for the fiscal year ended December 31, 2015. The Ps.1,821 million increase in net income was primarily a result of an increase of Ps.6,846 million in net operating revenues, partially offset by higher administrative expenses in an amount of Ps.3,543 million, higher provisions for loans losses of Ps.1,059 million and higher income tax in an amount of Ps.762 million.
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The increase in net operating revenue for the fiscal year ended December 31, 2017 was due to the 49% increase in gross brokerage margin from Ps.10,511 million to Ps.15,625 million and to the 29% increase in net income from services from Ps.6,010 million to Ps.7,742 million, in each case for the fiscal year ended December 31, 2017 as compared to the fiscal year ended December 31, 2016.
The average of interest-earning assets for the fiscal year ended December 31, 2017 increased to Ps.48,819 million, as compared to Ps.134,433 million for fiscal year ended December 31, 2016, primarily as a result of an increase in loans to the private sector. Such increase in loans was comprised of an increase of (i) Ps.11,254 million, or 26%, in credit cards; (ii) Ps.10,118 million, or 40%, in advances; (iii) Ps.8,241 million, or 82%, in personal loans; (iv) Ps.400 million, or 59%, in pledge loans.
According to information provided by the Argentine Central Bank, as of December 31, 2017, Banco Galicia’s estimated market share of loans to the private sector was 9.64%, as compared to 9.63% as of December 31, 2016 and 9.26% as of December 31, 2015.
Financial expenses for the fiscal year ended December 31, 2017 was Ps.16,272 million, as compared to Ps.16,890 million for the fiscal year ended December 31, 2016, a 4% decrease, which was primarily attributable to a decrease in the average balance of interest-bearing liabilities.
With respect to total interest-bearing liabilities, transactional deposits were Ps.57,473 million, as compared to Ps.27,117 million, a 112% increase, and time deposits were Ps.57,779 million, as compared to Ps.53,581 million, an 8% increase, in each case for the fiscal year ended December 31, 2017 as compared to the fiscal year ended December 31, 2016. In addition, the decrease in the average rate on interest-bearing deposits (checking accounts, savings accounts and time deposits) from 9.49% for the fiscal year ended December 31, 2017, as compared to 16.19% for the fiscal year ended December 31, 2016, was mainly attributable to the decrease of the interest rate on time deposits, which was consistent with overall macroeconomic trends.
According to information provided by the Argentine Central Bank, as of December 31, 2017, Banco Galicia’s estimated market share of deposits from the private sector was 10.18%, as compared to 9.86% as of December 31, 2016 and 9.35% as of December 31, 2015.
Net income for the fiscal year ended December 31, 2017 included a Ps.1,725 million gain from currency quotation differences and a Ps.1,851 million gain from foreign exchange brokerage activities. This increase was partially offset by a Ps.127 million in connection with the valuation of the foreign currency net position and from foreign currency futures transactions. Net income for the fiscal year ended December 31, 2016 included a Ps.974 million gain from currency quotation differences, a Ps.1,153 million gain from foreign exchange brokerage activities, a Ps.179 million gain from the valuation of the foreign currency net position and from foreign currency futures transactions.
Net income from services for the fiscal year ended December 31, 2017 was Ps.7,742 million, as compared to Ps.6,010 million for the fiscal year ended December 31, 2016, a 29% increase. Such increase was mainly due to an increase in business volume and the rise in prices (in compliance with the procedures established by the regulations of the Argentine Central Bank related to individuals).
The main components of income from services are fees related to deposit accounts, credit and debit card transactions, which is the important component of the Bank’s income from services, check collections and credit-related fees. With respect to credit cards, revenue from such segment for the fiscal year ended December 31, 2017 was Ps.5,253 million, as compared to Ps.4,543 million for the fiscal year ended December 31, 2016, a 16% increase. For the fiscal year ended December 31, 2017, credit cards managed were 4.1 million, as compared to 3.7 million for the fiscal year ended December 31, 2016, an 11% increase. Such growth was primarily attributable to an increase in consumption during the same period.
Provisions for loan losses and other receivables for the fiscal year ended December 31, 2017 were Ps.2,585 million, as compared to Ps.1,526 million for the fiscal year ended December 31, 2016, a 69% increase, which was primarily attributable to an increase in the amount of consumer portfolios in arrears and by higher regulatory provisions on current portfolios as a consequence of the increase in the size of the credit portfolio.
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Administrative expenses for the fiscal year ended December 31, 2017 were Ps.13,689 million, as compared to Ps.10,146 million for the fiscal year ended December 31, 2016, a 35% increase. Such increase was primarily attributable to higher personnel and other administrative expenses. The increase in personnel expenses, which includes salaries, social security contributions and expenses related to personnel services, for the fiscal year ended December 31, 2017 was mainly due to the salary increase agreement with the unions.
As of the fiscal year ended December 31, 2017, the Bank had 6,214 employees, as compared to 5,799 employees as of the fiscal year ended December 31, 2016, a 7% increase. The increase in other administrative expenses for the fiscal year ended December 31, 2017 was mainly due to the increase of expenses related to services provided by the Bank.
Income from equity investments for the fiscal year ended December 31, 2017 was Ps.2,462 million, as compared to Ps.1,689 million for the fiscal year ended December 31, 2016, a 46% increase. Such increase was mainly attributable to an increase in the profits of Tarjetas Regionales, from Ps.1,098 million for the fiscal year ended December 31, 2016 to Ps.2,114 million for the fiscal year ended December 31, 2017. Such increase was partially offset by a decrease in the profits of CFA from Ps.345 million for the fiscal year ended December 31, 2016 to Ps.0 million for the fiscal year ended December 31, 2017 as a result of the sale of such company, and a decrease in the profits of Sudamericana from Ps.90 million for the fiscal year ended December 31, 2016 to Ps.57 million for the fiscal year ended December 31, 2017. For more information, see “—Regional Credit Cards”, “—CFA” and “—Insurance”.
Other net income (loss) for the fiscal year ended December 31, 2017 was a loss of Ps.24 million, as compared to an income of Ps.409 million for the fiscal year ended December 31, 2016, which was higher than the Ps.67 million loss for the fiscal year ended December 31, 2015. Such decrease was attributable to an increase in other losses in an amount of Ps.740 million for the fiscal year ended December 31, 2017, as compared to Ps.363 million for the fiscal year ended December 31, 2016.
The income tax charge for the fiscal year ended December 31, 2017 was Ps.2,616 million, as compared to Ps.1,854 million for fiscal year ended December 31, 2016, a 41% increase.
The table below shows the results of our regional credit cards business segment.
In millions of Pesos, except percentages
Other Income
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For the fiscal year ended December 31, 2017, the Regional Credit Card Companies recorded net income of Ps.2,745 million, as compared to Ps.1,457 million for the fiscal year ended December 31, 2016, representing a Ps.1,288 million, or 88%, increase.
The increase in income corresponding to the Regional Credit Card Companies for the fiscal year ended December 31, 2017 was mainly attributable to an increase in net operating revenues of Ps.3,377 million. Such increase was partially offset by increases of provisions for loan losses of Ps.357 million, administrative expenses of Ps.1,263 million and income tax of Ps.522 million.
Net operating revenues for the fiscal year ended December 31, 2017 were Ps.12,663 million, as compared to Ps.9,286 million for fiscal year ended December 31, 2016, a 36% increase. Such increase was a result of a Ps.1,898 million, or 47%, increase in gross brokerage margin and a Ps.1,479 million, or 28%, increase in net income from services. Net operating income for the fiscal year ended December 31, 2017 was Ps.3,706 million, as compared to Ps.1,949 million for the fiscal year ended December 31, 2016, a 90% increase, mainly due to an increase in the average amount of purchases and loans, as well as an increase in the volume of transactions.
As of December 31, 2017, provisions for loan losses were Ps.2,018 million, as compared to Ps.1,661 million as of December 31, 2016, a 21% increase, mainly due to increased levels of default by customers of the Regional Credit Card Companies.
Administrative expenses for the fiscal year ended December 31, 2017 were Ps.6,939 million, as compared to Ps.5,676 million for the fiscal year ended December 31, 2016, a 22% increase, mainly due to the salary increase agreement with the unions and increased economic activity and costs related to costs associated with employee compensation.
Other net income for the fiscal year ended December 31, 2017 was Ps.679 million, as compared to Ps.626 million for the fiscal year ended December 31, 2016, an 8% increase. Such increase was mainly due to an increase in loans recovered.
The income tax charge during fiscal year 2017 was Ps.1,640 million, Ps.522 million higher than in fiscal year 2016.
The Regional Credit Card Companies grew in the following key segments during fiscal year 2017, as compared to fiscal year 2016, such increases primarily corresponding to the businesses of Tarjeta Naranja and Tarjetas Cuyanas:
With respect to the distribution network, service centers decreased to 257 as of December 31, 2017, as compared to 262 as of December 31, 2016. The openings of branches in Buenos Aires and the greater metropolitan area were offset by the closing of branches in other locations.
As of December 31, 2017, the Regional Credit Card Companies had 3,916 employees, as compared to 4,575 employees as of December 31, 2016.
For the fiscal year ended December 31, 2016, the Regional Credit Card Companies recorded net income of Ps.1,457 million, as compared to Ps.1,549 million for the fiscal year ended December 31, 2015, representing a Ps.92 million, or 6%, decrease.
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The decrease in income corresponding to the Regional Credit Card Companies for the fiscal year ended December 31, 2016 was mainly attributable to an increase in customer payment defaults.
Net operating revenues for the fiscal year ended December 31, 2016 were Ps.9,286 million, as compared to Ps.6,906 million for the fiscal year ended December 31, 2015, a 34% increase. Such increase was a result of a Ps.1,334 million, or 50%, increase in gross brokerage margin and a Ps.1,046 million, or 25%, increase in net income from services. Net operating income for the fiscal year ended December 31, 2016 was Ps.1,949 million, as compared to Ps.1,985 million for the fiscal year ended December 31, 2015, a 2% decrease, mainly due to an increase in provisions for loan losses and an increase in payments related to taxes and fees.
As of December 31, 2016, provisions for loan losses were Ps.1,661 million, as compared to Ps.753 for the fiscal year ended December 31, 2015, a 121% increase, mainly due to increased levels of default by customers of the Regional Credit Card Companies.
Administrative expenses for the fiscal year ended December 31, 2016 were Ps.5,676 million, as compared to Ps.4,168 million for the fiscal year ended December 31, 2015, a 36% increase, mainly due to the salary increase agreement with the unions and increased economic activity and costs related to an increase in payments related to taxes and fees.
Other net income for the fiscal year ended December 31, 2016 was Ps.626 million, as compared to Ps.427 million for the fiscal year ended December 31, 2015, a 47% increase. Such increase was mainly due to an increase in loans recovered.
The income tax charge during fiscal year 2016 was Ps.1,118 million, Ps.255 million higher than in fiscal year 2015.
The Regional Credit Card Companies grew in the following key segments during fiscal year 2016, as compared to fiscal year 2015, such increases primarily corresponding to the businesses of Tarjeta Naranja and Tarjetas Cuyanas:
With respect to the distribution network, there were 260 service centers for both the fiscal years December 31, 2016 and 2015. The openings of branches in Buenos Aires, the province of Corrientes and the province of Formosa were offset by the closing of branches in other locations.
As of December 31, 2016, the Regional Credit Card Companies had 4,575 employees, as compared to 5,040 employees as of December 31, 2015.
The table below sets forth the results of operations of CFA’s business segment:
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Net income for the fiscal year ended December 31, 2017 was Ps.276 million, as compared to Ps.342 million for the fiscal year ended December 31, 2016, a 19% decrease, which was primarily attributable to an increase in the provisions for loan losses and an increase in administrative expenses.
Net operating revenue for the fiscal year ended December 31, 2017 was Ps.2,502 million, as compared to the Ps.1,769 million for the fiscal year ended December 31, 2016, a 41% increase. This increase was due to an increase in gross brokerage margin and net income from services as compared to the fiscal year ended December 31, 2016.
Gross brokerage margin for the fiscal year ended December 31, 2017 was Ps.2,142 million, as compared to Ps.1,469 million for the fiscal year ended December 31, 2016, a 46% increase. Such increase was mainly due to an increase in earnings of the credit card portfolio, a higher rate of return on outstanding loans and the elimination of the cap on the interest rates by the Argentine Central Bank.
Net income from services for the fiscal year ended December 31, 2017 was Ps.360 million, as compared to Ps.300 million for the fiscal year ended December 31, 2016, a 20% increase. Such increase was mainly due to higher fees related to credit cards, insurance and income related to benefits accounts for retired individuals.
Provisions for loan losses for the fiscal year ended December 31, 2017 were Ps.602 million, as compared to Ps.346 million for the fiscal year ended December 31, 2016, a 74% increase. Such increase was a result of as increase in the number of loans in default.
Administrative expenses for the fiscal year ended December 31, 2017 were Ps.1,579 million, as compared to Ps1,232 million for the fiscal year ended December 31, 2016, a 28% increase. Such increase was mainly due to increases in (i) expenses related to personnel in an amount of Ps.128 million in connection with salary increase agreements and an increased number of employees, (ii) expenses related to security services in an amount of Ps.48 million, (iii) expenses related to taxes in an amount of Ps.36 million, (iv) expenses related to administrative services in an amount of Ps.29 million, and (v) expenses related to leasing in an amount of Ps.29 million as a result of the devaluation of the Dollar, which affected Dollar-denominated contracts.
As of December 31, 2017, CFA had approximately 80,000 customers, 1,117 employees, 63 branches and 31 points of sale throughout Argentina, as compared to 517,000 customers, 1,164 employees, 57 branches and 37 points of sale throughout Argentina as of December 31, 2016.
Net loans to the private sector for the year ended December 31, 2017 were Ps.6,952 million, as compared to Ps.2,929 million for the year ended December 31, 2016, a 137% increase. Shareholders’ equity as of December 31, 2017 was Ps.1,240 million, as compared to Ps.1,324 million for the fiscal year ended December 31, 2016, a 6% decrease.
Net income for the fiscal year ended December 31, 2016 was Ps.342 million, as compared to Ps.159 million for the fiscal year ended December 31, 2015, a 115% increase, which was primarily attributable to a decrease in provisions for loan losses and an increase in other income.
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Net operating revenue for the fiscal year ended December 31, 2016 was Ps.1,769 million, as compared to the Ps.1,525 million for the fiscal year ended December 31, 2015, a 16% increase. This increase was due to an increase in gross brokerage margin and net income from services as compared to the fiscal year ended December 31, 2015.
Gross brokerage margin for the fiscal year ended December 31, 2016 was Ps.1,469 million, as compared to Ps.1,255 million for the fiscal year ended December 31, 2015, a 17% increase. Such increase was mainly due to an increase in earnings of the credit card portfolio, a higher rate of return on outstanding loans and the elimination of the cap on the interest rates by the Argentine Central Bank.
Net income from services was Ps.300 million for the fiscal year ended December 31, 2016, as compared to Ps.270 million for the fiscal year ended December 31, 2015, an 11% increase. Such increase was mainly due to higher fees related to credit cards, insurance and income related to benefits accounts for retired individuals.
Provisions for loan losses for the fiscal year ended December 31, 2016 were Ps.346 million, as compared to Ps.400 million for the fiscal year ended December 31, 2015, a 14% decrease. Such decrease was a result of a decrease in the number of loans in default.
Administrative expenses for the fiscal year ended December 31, 2016 were Ps.1,232 million, as compared to Ps.930 million for the fiscal year ended December 31, 2015, a 32% increase. Such increase was mainly due to increases in (i) expenses related to personnel in an amount of Ps.117 million in connection with salary increase agreements and an increased number of employees, (ii) expenses related to security services in an amount of Ps.16 million, (iii) expenses related to taxes in an amount of Ps.24 million, (iv) expenses related to administrative services in an amount of Ps.35 million, (v) expenses related to maintenance and capital expenditures of Ps.16 million, and (vi) expenses related to leasing in an amount of Ps.35 million as a result of the devaluation of the Dollar, which affected Dollar-denominated contracts.
As of December 31, 2016, CFA had approximately 517,000 customers, 1,164 employees, 57 branches and 37 points of sale throughout Argentina, as compared to 454,000 customers, 158 employees, 58 branches and 36 points of sale throughout Argentina as of December 31, 2015.
Net loans to the private sector for the year ended December 31, 2016 were Ps.4,916 million, as compared to Ps.2,929 million for the year ended December 31, 2015, a 68% increase. Shareholders’ equity as of December 31, 2016 was Ps.1,221 million, as compared to Ps.1,324 million for the fiscal year ended December 31, 2015, an 8% decrease.
The table below shows the results of our insurance business segment.
Income from Insurance Activity
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The operating results of segments of Sudamericana (such as earned premiums, claims, acquisition costs, etc.) are included under “Income from Insurance Activities”. Further, the results of this segment mainly represent the operating results of Galicia Seguros.
Net income as of December 31, 2017 was Ps.458 million, as compared to Ps.724 million as of December 31, 2016, a 37% decrease. Such decrease was mainly due to increased regulations implemented with respect to credit-related life insurance business. Sales of insurance policies, however, increased 57% year-over-year. Sales of other insurance products increased during fiscal year 2017, including sales of homeowners insurance, theft insurance and life insurance.
Administrative expenses as of December 31, 2017 were Ps.651 million, as compared to Ps.516 million as of December 31, 2016, a 26% increase, mainly as a result of increases in expenses related to the issuance of insurance policies and expenses related to increases in employee salaries.
As of December 31, 2017, the insurance segment had more than 6 million outstanding insurance contracts under all of its lines of business.
Net income as of December 31, 2016 was Ps.724 million, as compared to Ps.409 million as of December 31, 2015, a 77% increase. Such increase was mainly due to the increase of premiums earned in connection with the operating results of Galicia Seguros. Sales of other insurance products increased during fiscal year 2017, including sales of homeowners insurance, theft insurance and life insurance.
Administrative expenses as of December 31, 2016 were Ps.516 million, as compared to Ps.378 million as of December 31, 2015, a 37% increase, mainly as a result of increases in expenses related to the issuance of insurance policies and expenses related to increases in employee salaries.
As of December 31, 2016 and 2015, the insurance segment had more than 6.5 million outstanding insurance contracts under all of its lines of business.
During the fiscal years ended December 31, 2017, 2016 and 2015, the claims ratio has remained at the same or similar level.
Other Grupo Galicia Businesses
In fiscal year 2017, this segment recorded a Ps.551 million profit, mainly generated by net revenues from Galicia Administradora de Fondos equal to Ps.450 million. The remaining profit corresponded to Galicia Warrants, Galicia Valores and Net Investment.
In fiscal year 2016, this segment recorded a Ps.249 million profit, mainly generated by net revenues from Galicia Administradora de Fondos equal to Ps.197 million. The remaining profit corresponded to Galicia Warrants, Galicia Valores and Net Investment.
In fiscal year 2015, this segment recorded a Ps.147 million profit, mainly generated by net revenues from Galicia Administradora de Fondos equal to Ps.110 million and Galicia Warrants equal to Ps.27 million.
The structure and main components of our consolidated assets as of the dates indicated were as follows:
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Of our Ps.341,013 million total assets as of December 31, 2017, Ps.336,384 million, or 98.6%, corresponded to Banco Galicia on a consolidated basis. The remaining Ps.4,629 million, or 1.4%, were primarily attributable to Sudamericana on a consolidated basis. The composition of our assets demonstrates an increase in the amounts of all line items.
The item “Cash and Due from Banks” included cash for Ps.8,979 million, balances held at the Argentine Central Bank for Ps.46,951 million and balances held in correspondent banks for Ps.729 million. The balance held at the Argentine Central Bank is used for meeting the minimum cash requirements set by the Argentine Central Bank.
Our holdings of government and corporate securities as of December 31, 2017 was Ps.38,771 million. Our holdings of government and corporate securities are shown in more detail in Item 4. “Information on the Company—Selected Statistical Information—Government and Corporate Securities”.
Our total net loans were Ps.197,335 million as of December 31, 2017, of which Ps.197,330 million corresponded to Banco Galicia (including the Regional Credit Card Companies’ portfolios) and the remaining amount to secured loans held by Sudamericana. For more information on Banco Galicia’s and CFA’s respective loan portfolios, see Item 4. “Information on the Company—Selected Statistical Information—Loan Portfolio”.
The “Other Assets” line item mainly includes the following items recorded in our balance sheet under “Other Receivables Resulting from Financial Brokerage”, unless otherwise noted:
Other Receivables Resulting from Financial Brokerage
Balances at the Argentine Central Bank as guarantees in favor of clearing houses
Securities Receivable under Spot and Forward Purchases to be Settled
Participation certificates in, and debt securities of, different financial trusts, created by Banco Galicia or by third parties
Galtrust I(1)
Government securities and guarantees of forward sales and purchase of foreign exchange in favor of MAE and ROFEX
Other Financing
Receivables from Financial Leases
Equity Investments
Miscellaneous Receivables
Bank Premises and Equipment, Miscellaneous Assets and Intangible Assets
Others(2)
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The following table shows our total net exposure, primarily related to Banco Galicia, to the Argentine public sector as of December 31, 2017, 2016 and 2015.
Net Position in Government Securities
Trading
Lebac And Nobac
Trusts’ Certificates of Participation and Securities
Total Assets (1)
Exposure to the public sector was Ps.29,395 million for the year ended December 31, 2017, as compared to Ps.17,320 million for the year ended December 31, 2016, a 70% increase.
Excluding the holding of debt securities issued by the Argentine Central Bank for the year ended December 31, 2017 in an amount of Ps.19,440 million, as compared to Ps.11,240 million for the year December 31, 2016, the net exposure to the non-financial public sector amounted to Ps 9,955 million in 2017, representing 2.9% of total assets. Such exposure was Ps.6,080 million in 2016, representing 2.5% of total assets. The Ps.12,075 million increase in exposure to the public sector during 2017 was mainly due to an increase in the balance of treasury bills and Lebacs held by the Bank.
Exposure to the public sector was Ps.17,320 million as of December 31, 2016, as compared to Ps.17,859 million as of December 31, 2015, a 3% decrease.
Excluding the holding of debt securities issued by the Argentine Central Bank for the year ended December 31, 2016 in an amount of Ps.11,240 million, as compared to Ps.12,937 million for the year ended December 31, 2015, the net exposure to the non-financial public sector increased by Ps.1,158 million in fiscal year 2016. The decrease in the exposure to the public sector during 2016 was mainly due to the lower balance of treasury bills held by the Bank.
Banco Galicia’s and the Regional Credit Card Companies’ and CFA’s lending activities are our main asset-generating businesses. Accordingly, most of our borrowing and liquidity needs are associated with these activities. We also have liquidity needs at the level of our holding company, which are discussed in Item 5. “Operating and Financial Review and Prospects—Item 5.B. “Liquidity and Capital Resources—Liquidity—Holding Company on an Individual Basis”. Our objective is to maintain cost-effective and well diversified funding to support current and future asset growth in our businesses. For this, we rely on diverse sources of funding. The use and availability of funding sources depends on market conditions, both local and foreign, and prevailing interest rates. Market conditions in Argentina include a structurally limited availability of domestic long-term funding.
Our funding activities and liquidity planning are integrated into our asset and liability management and our financial risks management and policies. The liquidity policy of Banco Galicia is described in Item 5. “Operating and Financial Review and Prospects—Item 5.B. “Liquidity and Capital Resources—Banco Galicia’s Liquidity Management” and our other financial risk policies, including interest rate, currency and market risks are described in Item 11. “Quantitative and Qualitative Disclosures about Market Risk”. Our funding sources are discussed below.
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Traditionally, our primary source of funding has been Banco Galicia’s deposit taking activity. Although Banco Galicia has access to Argentine Central Bank financing, management does not view this as a primary source of funding in line with our overall strategies discussed herein. Other important sources of funding have traditionally included issuing foreign currency-denominated medium and long-term debt securities issued in foreign capital markets and borrowing from international banks and multilateral credit agencies. Banco Galicia entered into a master loan agreements with the IFC in 2016, for U.S. $130 million, divided into two parts, one of them with the purpose of funding long-term loans to SMEs and the other part with the purpose of funding renewable energy project and efficiency energy power project.
Selling government securities under repurchase agreement transactions has been a recurrent source of funding for Banco Galicia. Although not presently a key source of funding, repurchase agreement transactions are part of the liquidity policy of the Bank. Within its liquidity policy, Banco Galicia considers its unencumbered liquid government securities holdings as part of its available excess liquidity. See Item 5. “Operating and Financial Review and Prospects” —Item 5.B. “Liquidity and Capital Resources—Banco Galicia’s Liquidity Management”.
The Regional Credit Card Companies fund their business through the issuance of notes in the local and international capital markets, borrowing from local financial institutions and debt with merchants generated in the ordinary course of business of any credit card issuing company. In 2017, the Regional Credit Card Companies issued notes in an amount equal to Ps.5,307 million and received loans for Ps.130 million.
CFA funds its business through the issuance of debt securities in the local market, borrowing from financial institutions and time deposits from institutional investors (insurance companies and mutual funds).
Below is a breakdown of our funding as of the dates indicated:
Other Interest, Exchange Rate Differences Payable and UVA Adjustment
Debt with Financial Institutions(1)
Domestic Financial Institutions
International Banks and Credit Agencies
Repurchases
Notes (Unsubordinated and Subordinated)(1)
Other obligations (2)
Total Funding
The main sources of funds are deposits from the private sector, lines of credit extended by local banks and entities, international banks and multilateral credit agencies, repurchase transactions mainly related to government securities, mid- and long-term debt securities placed in the local and international capital market and debts with stores due to credit card transactions.
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As of December 31, 2017, deposits represented 59.7% of our funding, up from 62.6% as of December 31, 2016 and 61.8% for the year ended December 31, 2015. Our deposit base increased 34% in 2017 as compared to 2016 and 52% in 2016 as compared to 2015. During fiscal year 2017, the Ps.51,763 million increase in deposits was due to an increase in transactional deposits (deposits in checking and savings accounts, with increases of 18% and 88%, respectively). For more information on deposits, see Item 4. “Information on the Company—Selected Statistical Information—Deposits”.
As of December 31, 2017, credit lines from international banks and credit agencies representing foreign currency-denominated debt subject to foreign law amounted to Ps.5,055 million. Of this total, Ps.3,881 million corresponded to prefinancing and foreign trade transactions; Ps.847 million corresponded to amounts received from the IFC pursuant to a loan agreement; Ps.307 million corresponded to amounts received from the IDB pursuant to a loan agreement; and Ps.20 million corresponded to amounts received from Proparco pursuant to a loan agreement.
As of December 31, 2016, credit lines from international banks and credit agencies representing foreign currency-denominated debt subject to foreign law amounted to Ps.2,233 million. Of this total, Ps.2,085 million corresponded to trade loans; Ps.79 million corresponded to amounts received from the IFC pursuant to a loan agreement; Ps.50 million corresponded amounts received from Proparco pursuant to a loan agreement; and Ps.19 million corresponded to amounts received from the FMO pursuant to a long-term loan agreement. The increase of Ps.960 million as compared to December 31, 2015 was mainly due to an increase of Ps.984 million in trade loans.
Our debt securities outstanding (only principal) were Ps.20,116 million as of December 31, 2017, as compared to Ps.16,562 million as of December 31, 2016, and Ps.12,318 million as of December 31, 2015.
Of the total debt securities outstanding as of December 31, 2017, Ps.15,462 million corresponded to Peso-denominated debt, of which Ps.4,353 million corresponded to notes issued by Banco Galicia and Ps.8,900 million corresponded to notes issued by Tarjeta Naranja (which includes notes issued by Tarjetas Cuyanas). The remaining Ps.4,654 million of outstanding debt securities corresponded to foreign currency-denominated debt in respect of subordinated notes due in 2026 issued by Banco Galicia.
As of December 31, 2017, the balance of Peso-denominated increased Ps.8,512 million as compared to fiscal year ended December 31, 2016 and the balance of foreign currency-denominated debt increased Ps.4,961 million as compared to fiscal year ended December 31, 2016.
As of December 31, 2017, the breakdown of our foreign currency-denominated debt was as follows:
Subordinated Notes (1)
As of December 31, 2017, the breakdown of our Peso-denominated debt was as follows:
Annual
Interest Rate
Notes Class III Simple Notes(1)
Notes IV Simple Notes(1)
Tarjeta Naranja
Notes Class XXIV Series II Notes(**)
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Notes Class XXV Notes(**)
Notes Class XXVI Series I Notes(**)
Notes Class XXVI Series II Notes(**)
Notes Class XXVII Series II Notes(**)
Notes Class XXVIII Series I Notes(**)
Notes Class XXVIII Series II Notes(**)
Notes Class XXXIII Series II Notes
Notes Class XXXIV Series II Notes
Notes Class XXXV Series I Notes
Notes Class XXXV Series II Notes
Notes Class XXXVI Series I Notes
Notes Class XXXVI Series II Notes
Notes Class XXXVII Notes
Notes Class XXXVIII Notes
Notes Class XVII Series II Notes
Min. Rate 36% up to the 6th month after
Badlar + 498 b.p.
Notes Class XVIII Notes
Notes Class XIX Series I Notes
Notes Class XIX Series II Notes
Notes Class XX Series I Notes
Notes Class XX Series II Notes
Notes Class XXI Series I Notes
Notes Class XXI Series II Notes
The increase in our debt securities outstanding as of December 31, 2017 as compared to December 31, 2016 was mainly a result of: (i) the issuance by Banco Galicia of senior notes in an aggregate principal amount of Ps.4,353 (ii) the issuance by Tarjeta Naranja of senior notes in an aggregate principal amount of Ps.4,305 million, (iii) the issuance by Tarjetas Cuyanas of senior notes in an aggregate principal amount of Ps.930 million and (iv) the issuance by CFA of senior notes in an aggregate principal amount of Ps.1,626 million.
The increase in our debt securities outstanding as of December 31, 2016 as compared to December 31, 2015 was mainly a result of: (i) the issuance by Tarjeta Naranja of senior notes in an aggregate principal amount of Ps.2,912 million, (ii) the issuance by Tarjetas Cuyanas of senior notes in an aggregate principal amount of Ps.1,099 million, (iii) the issuance by CFA of senior notes in an aggregate principal amount of Ps.939 million and (iv) the issuance by Tarjeta del Mar of senior notes in an aggregate principal amount of Ps.119 million.
The increase in our debt securities outstanding as of December 31, 2015 as compared to December 31, 2014 was mainly a result of: (i) the issuance by Tarjeta Naranja of senior notes in an aggregate principal amount of Ps.1,046 million, (ii) the issuance by Tarjeta Cuyanas of senior notes in an aggregate principal amount of Ps.787 million, (iii) the issuance by CFA of senior notes in an aggregate principal amount of Ps.421 million and (iv) the issuance by Grupo Financiero Galicia of senior notes in an aggregate principal amount of Ps.160 million.
For more information see “—Contractual Obligations” below.
The category “other obligations” includes Ps.26,565 million of debt with merchants in connection with credit-card transactions of Banco Galicia and the Regional Credit Card Companies, Ps.8,571 million in “miscellaneous liabilities”, Ps 4,720 million of amounts payable for spot and forward purchases to be settled Ps.3,151 million in connection with collections on account of third parties and non-controlling interest for Ps.1,935 million.
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Ratings
The following are our ratings as of the date of this annual report:
Fitch Argentina
Moody’s
LOCAL RATINGS
Rating of Shares
Counterparty Rating
Debt (Long-Term / Short Term)
Subordinated Debt
Deposits (Long Term / Short Term)
Deposits (Local Currency / Foreign Currency)
Trustee
Medium-/Long-Term Debt
Tarjetas Cuyanas S.A.
Long-Term Debt
INTERNATIONAL RATINGS
Debt Programs
On March 9, 2009, Grupo Financiero Galicia’s shareholders, during an ordinary shareholders’ meeting, and the Board of Directors created a global short-, medium- and long-term notes program, for a maximum outstanding amount of U.S. $60 million. This program was authorized by the CNV pursuant to Resolution No.16,113 of April 29, 2009.
In August 2012, during an extraordinary shareholders’ meeting, it was decided to ratify the decision made at the ordinary and extraordinary shareholders’ meeting held in April 2010 with regard to the approval of the U.S. $40 million increase in the amount of Grupo Financiero Galicia’s global notes program. Therefore, once approved by the CNV, the amount was for up to U.S. $100 million or its equivalent in other currencies. On May 8, 2014, the CNV, pursuant to Resolution No. 17,343, granted an extension of the debt program for another five year period.
On January 30, 2014, Grupo Financiero Galicia issued its Class V notes, in two series, in an aggregate principal amount of Ps.180 million with the following terms and conditions: (i) Ps.102 million of Series I notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 4.25%, with an 18 month maturity and (ii) Ps.78 million of Series II notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 5.25%, with a 36 month maturity. Both series pay interest on a quarterly basis. In addition, certain of the Class V notes were subscribed for with Class III notes for a face value of Ps.20,622,455.
During February 2014, Grupo Financiero Galicia cancelled, upon maturity, all of the outstanding Class III notes.
In October 2014, Grupo Financiero Galicia issued its Class VI notes, in two series, in an aggregate principal amount of Ps.250.0 million with the following terms and conditions: (i) Ps.140.2 million of Series I notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 3.25%, with an 18 month maturity and (ii) Ps.109.8 million of Series II notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 4.25%, with a 36 month maturity. Both series pay interest on a quarterly basis. In addition, certain of the Class VI notes were subscribed with Class IV notes for a face value of Ps.30,997,382.
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On November 10, 2014 Grupo Financiero Galicia cancelled, upon maturity, all of the outstanding Class IV notes.
In July 2015, Grupo Financiero Galicia issued its Class VII notes for an aggregate principal amount of Ps.160 million. Such notes mature on the date that is 24 months after the date of their issuance and accrue interest at a fixed rate equal to 27% from the date of their issuance through the ninth month after their issuance and at a floating rate equal to Badlar plus 4.25% from the tenth month of their issuance through their maturity date. The Class VII notes pay interest on a quarterly basis. The aggregate principal amount of such notes will be repaid upon maturity.
On July 31, 2015 Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class V Series I notes.
On April 23, 2016, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VI Series I notes.
On January 31, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class V Series II notes.
On July 27, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VII notes.
On October 23, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VI Series II notes. Following this repayment, Grupo Financiero Galicia no longer has any outstanding debt under its notes program that was put into place in 2009.
Banco Galicia has a program in place for the issuance and re-issuance of non-convertible notes, subordinated or non-subordinated, floating or fixed-rate, secured or unsecured, with a term from 30 days to up to 30 years, for a maximum outstanding principal amount of up to U.S. $342.5 million. This program was originally approved by the CNV on November 4, 2005 and was mostly recently extended on January 26, 2017 by the CNV until January 26, 2022 pursuant to Resolution Resolution No.18,480. In this most recent extension, the CNV also approved an increase of the maximum outstanding principal amount under the program to U.S. $1,100 million. On May 4, 2011, Banco Galicia issued Class I notes due 2018 in an aggregate principal amount of U.S. $300 million under this program. Such notes were fully repaid on May 4, 2017.
During the 2016 fiscal year, Banco Galicia issued certain subordinated Class II notes due 2026 for a nominal value of U.S. $250 million. The proceeds of this issuance were used to redeem the Bank’s outstanding subordinated notes due 2019.
During the 2017 fiscal year, Banco Galicia issued Class III notes in an aggregate principal amount of US$150.5 million due 2020 and Class IV notes in an aggregate principal amount of Ps. 2,000 million due 2020.
Tarjeta Naranja has a program outstanding for the issuance and re-issuance of non-convertible notes, subordinated or non-subordinated, adjustable or non-adjustable, secured or unsecured, with a term from 30 days to up to the current permitted maximum (30 years), for a maximum outstanding face value during the period of such program of up to U.S. $650 million. The program was approved by the CNV on May 23, 2012. As of December 31, 2017, debt for a principal amount outstanding of Ps.9,173 million (approximately U.S. $489 million) had been issued under the program. Tarjeta Naranja’s program contains certain restrictions on liens, subject to the provisions established in the applicable pricing supplement with respect to each class and/or series of notes, so long as any note issued under such program remains outstanding. Certain notes issued under Tarjeta Naranja’s program are subject to covenants that limit the ability of Tarjeta Naranja and certain of its subsidiaries, subject to important qualifications and exceptions, to pay dividends on its capital stock or redeem, repurchase or retire its capital stock or subordinated indebtedness, make certain restricted payments, and consolidate, merge or transfer assets, among others.
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As a result of the merger with Tarjetas Cuyanas, as of October 1, 2017, Tarjeta Naranja incorporated into its assets Tarjetas Cuyanas’ outstanding debt. Beginning on October 1, 2017, Tarjeta Naranja made principal and interest payments in respect of such debt.
CFA has a program outstanding for the issuance of ordinary short, medium or long term, secured or unsecured, subordinated or non-subordinated notes, for a maximum outstanding face value during the period of such program of up to Ps.200 million. The CNV approved this program on August 3, 2006, and approved an increase of its maximum outstanding face value to up to Ps.500 million on March 19, 2008.
On January 27, 2011, the CNV approved an extension of the program and the increase of its maximum outstanding face value to up to U.S. $250 million. On January 8, 2016, the CNV approved an extension of the program and the increase of its maximum outstanding face value to up to U.S. $250 million. During 2017, CFA issued debt in the aggregate principal amount of Ps.500 million on May 8, 2017, Ps.750 million on July 25, 2017, and Ps.529 million on November 7, 2017. As of December 31, 2017, debt equal to an aggregate principal amount outstanding of Ps.2,417 million had been issued under CFA’s debt program.
The table below identifies the total amounts (principal and interest) of our main on balance-sheet contractual obligations, their currency of denomination, remaining maturity and interest rate and the breakdown of payments due as of December 31, 2017.
Time Deposits (Pesos/US$)
Bonds
Notes Class III Due 2020 ($)(1)
Notes Class IV Due 2020 ($)(2)
2026 Subordinated Notes (US$) (3)
PROPARCO Financial Loans (US$)
IFC Financial Loans (US$)
Other Financial Loans (US$) (4)
IDB Financial Loans (Pesos)
IDB Financial Loans (US$)
Fontar Financial Loans (Pesos)
BICE Financial Loans (Pesos)
BICE Financial Loans (US$)
Short-term Intrebank Loans (Pesos)
Tarjetas Regionales
Financial Loans with Local Banks (Pesos)
Notes (Pesos)
Local Financing (Pesos)
Sudamerica Holding and other
Principal and interest. Includes the UVA adjustment, where applicable.
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Off- Balance Sheet Contractual Obligations
Operating Leases
As of December 31, 2017, we also had off-balance sheet contractual obligations arising from the leasing of certain properties used as a part of our distribution network. The estimated future lease payments in connection with these properties are as follows:
2018
2019
2020
2021
2012
2023 and after
Our off-balance sheet risks mainly arise from Banco Galicia’s activities.
In the normal course of its business, Banco Galicia is a party to financial instruments withoff-balance sheet risk which are entered into in order to meet the financing needs of its customers. These instruments expose us to credit risk in addition to the amounts recognized on our consolidated balance sheets. These financial instruments include commitments to extend credit, standby letters of credit, guarantees granted and acceptances.
Commitments to Extend Credit, Stand-By Letters of Credit and Guarantees Granted
Commitments to extend credit are agreements to lend to a customer at a future date, subject to meeting certain contractual terms. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent actual future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
We use the same credit policies in making commitments, conditional obligations and guarantees as we do for granting loans. In the opinion of management, our outstanding commitments and guarantees do not represent unusual credit risk.
Standby letters of credit and guarantees granted are conditional commitments issued by Banco Galicia to guarantee the performance of a customer to a third party. Guarantees granted are surety guarantees in connection with transactions between two parties. Acceptances are conditional commitments for foreign trade transactions.
Our exposure to credit loss in the event ofnon-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, guarantees granted and acceptances is represented by the contractual notional amount of those investments.
Our credit exposure related to these items as of December 31, 2017, is summarized below:
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Commitments to Extend Credit
Standby Letters of Credit
Guarantees Granted
Acceptances
In addition to the above commitments, as of December 31, 2017, purchase limits available for credit-card holders amounted to Ps.259,576 million.
As of December 31, 2017, the primary fees related to the above-mentioned commitments were Ps.41 million corresponding to standby letters of credit, Ps.45 million from guarantees provided and Ps.19 million from commitments to extend credit.
The credit risk involved in issuing letters of credit and granting guarantees is essentially the same as that involved in extending loan facilities to customers. In order to grant guarantees to our customers, we may require counter guarantees. As of December 31, 2017, these counter guarantees, classified by type, were as follows:
Preferred Counter Guarantees
Other Counter Guarantees
For more detailed information about off-balance sheet financial instruments, see Note 25 to our audited consolidated financial statements.
We account for checks drawn on us and other financial institutions, as well as other items in the process of collection, such as notes, bills and miscellaneous items, in memorandum accounts until the related item clears or is accepted. In management’s opinion, the risk of loss on these clearing transactions is not significant. The amounts of clearing items in process as of December 31, 2017, were as follows:
Checks Drawn on Banco Galicia
Checks Drawn on Other Banks
Bills and Other Items for Collection
With respect to fiduciary risk, we act as a trustee under trust agreements to guarantee obligations arising from various contracts between parties. As of December 31, 2017, amounts held in trust were equal to Ps.8,917 million.
In addition, as of December 31, 2017 securities held in custody were equal to Ps.374,811 million.
We believe that the following are our critical accounting policies under Argentine Banking GAAP, as they are important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgment and the need to make estimates about the effect of matters that are inherently uncertain.
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Our allowance for loan losses including the allowance for loan losses of Banco Galicia and CFA is maintained in accordance with Argentine Central Bank rules. Under such rules, a minimum allowance for loan losses is calculated primarily based upon the classification of Banco Galicia’s commercial loan borrowers and upon delinquency aging (or the number of days the loan is past due) for individual loan borrowers of both Banco Galicia and CFA and for Banco Galicia’s commercial loans of less than Ps.5 million. Although we are required to follow the methodology and guidelines for determining the minimum loan loss allowance as set forth by the Argentine Central Bank, we are allowed to establish additional allowances for loan losses. The determination of the allowance for loan losses requires a significant degree of judgment. The credit card companies follow the IFRS guidelines to record the allowances for loan losses, which include the minimum requirements of Argentine Central Bank rules.
For commercial loans, we are required to classify all of our commercial loan borrowers. In order to perform the classification, we must consider the management and operating history of the borrower, the present and projected financial situation of the borrower, the borrower’s payment history and ability to service the debt, the capability of the borrower’s internal information and control systems and the risk in the sector in which the borrower operates. We apply the minimum loss percentages required by the Argentine Central Bank to our commercial loan borrowers based on the loan classification and the nature of the collateral, or guarantee in respect of the loan. In addition, based on the overall risk of the portfolio, we consider whether or not additional loan loss reserves in excess of the minimum required are warranted.
For our consumer loan portfolio, including the loan portfolios of Banco Galicia, the Regional Credit Card Companies and CFA, we classify loans based upon delinquency aging, consistent with the requirements of the Argentine Central Bank. Minimum loss percentages required by the Argentine Central Bank are also applied to the totals in each loan classification.
Other Receivables Resulting from Financial Brokerage and Miscellaneous Receivables
We carry other receivables resulting from financial brokerage and miscellaneous receivables net of allowances for uncollectible amounts. Our judgment regarding the ultimate collectability is performed on an account-by-account basis and considers our assessment of the borrower’s ability to pay based on factors such as the borrower’s financial condition, past payment history, guarantees and past-due status.
Additional information in connection with critical accounting policies for U.S. GAAP purposes is described as follows.
Under U.S. GAAP, Banco Galicia considers loans to be impaired when it is probable that all amounts of principal and interest will not be collected according to the contractual terms of the loan agreement. The allowance for significant impaired loans are assessed based on the present value of estimated future cash flows discounted at the current effective loan rate or the fair value of the collateral in the case where the loan is considered collateral-dependent. An allowance for impaired loans is provided when discounted future cash flows or collateral fair value is lower than book value.
In addition, if necessary, a specific allowance for loan losses is established for individual loans, based on regular reviews of individual loans, recent loss experience, credit scores, the risk characteristics of the various classifications of loans and other factors directly influencing the potential collectability and affecting the quality of the loan portfolio.
To calculate the allowance required for smaller-balance impaired loans and unimpaired loans, we perform an analysis of historical losses from our consumer and performing commercial loan portfolios in order to estimate losses for U.S. GAAP purposes resulting from loan losses that had been incurred in such loan portfolios at the
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balance sheet date but which had not been individually identified. Loss estimates are analyzed by loan type and thus for homogeneous groups of clients. Such historical ratios are updated to incorporate the most recent data reflecting current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information that may affect the estimation of the allowance for loan losses.
Many factors can affect Banco Galicia’s estimates of allowance for loan losses, including volatility of default probability, migrations and estimated loss severity.
A 10% decrease in the expected cash flows of significant impaired loans individually analyzed, could result in an additional impairment of approximately Ps.3 million.
A 10% increase in the historical loss ratios for loans collectively analyzed could result in an additional impairment of approximately Ps.569 million.
These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan and lease losses to changes in key inputs. We believe the risk ratings and loss severities currently in use are appropriate and represent management’s expectations about the credit risk inherent in its loan portfolio.
Determining the allowance for loan losses requires significant management judgments and estimates including, among others, identifying impaired loans, determining customers’ ability to pay and estimating the fair value of underlying collateral or the expected future cash flows to be received. Actual events are likely to differ from the estimates and assumptions used in determining the allowance for loan losses.
Fair Value Estimates
A portion of our assets is carried at fair value, including trading andavailable-for-sale securities, retained interests in assets transferred to financial trusts, futures and forward transactions.
ASC 820-10 defines fair value as 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. ASC 820-10, among other things, requires Grupo Financiero Galicia to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair Value Hierarchy
ASC 820-10 defines fair value as 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.
ASC820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Inputs include the following:
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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Determination of Fair Value
Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, Banco Galicia’s creditworthiness, liquidity and unobservable parameters that are applied consistently over time.
Grupo Financiero Galicia believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Impairment of Assets Other Than Loans
Certain assets, such as goodwill and equity investments are subject to an impairment review. Asset impairment charges require considerable judgment and are recorded when market value declines below the carrying value, for declines other-than-temporary, or where the cost of the asset is deemed to not be recoverable.
Goodwill impairment exists when the fair value of the reporting unit to which the goodwill is allocated is not enough to cover the book value of its assets and liabilities and the goodwill. The fair value of the reporting units is estimated using discounted cash flow techniques. The sustained value of the majority of the goodwill is supported ultimately by revenue from our banking and credit-card businesses. A decline in earnings as a result of a lack of growth, or our inability to deliver cost-effective services over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary, recorded as a write-down in our consolidated income statement. On an annual basis, or as circumstances dictate, management reviews goodwill and evaluates events or other developments that may indicate impairment in the carrying amount. The evaluation methodology for potential impairment is inherently complex and involves significant management judgment in the use of estimates and assumptions. These estimates involve many assumptions, including the expected results of the reporting unit, an assumed discount rate and an assumed growth rate for the reporting unit.
As of December 31, 2017 and 2016, no impairment was recorded.
The fair value of equity investments is determined using discounted cash flow techniques. This technique involves complex management judgment in terms of estimating the future cash flows of the companies and in defining the applicable interest rate to discount those cash flows.
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Deferred Tax Asset Valuation Allowance
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the carrying amounts of assets and liabilities recorded for accounting and tax reporting purposes and for the future tax effects of net operating loss carryforwards. Recognition of those deferred tax assets is subject to management’s judgment based on available evidence that realization is more likely than not and they are reduced, if necessary, by a valuation reserve. Management’s judgment on the likelihood that deferred tax assets can be realized is subjective and involves estimates and assumptions about matters that are inherently uncertain. This judgment involves estimating future taxable income and the timing at which the temporary differences between book and taxable income will be reversed. Underlying estimates and assumptions can change over time, influencing our overall tax positions, as a result of unanticipated events or circumstances.
According to taxable income projections, Grupo Financiero Galicia believes that is more likely than not that it will recover the temporary differences and the presumed minimum income tax. Therefore, no valuation allowance was provided against presumed minimum income tax and temporary differences.
Under U.S. GAAP, prior to January 1, 2010, Grupo Financiero Galicia adopted SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, as amended by SFAS 156, both of them codified under the topic ASC No. 860 “Transfers and Servicing” (“ASC No. 860”). ASC No. 860 required an entity to recognize the financial and servicing assets it controls and the liabilities it had incurred and to derecognize financial assets when control has been surrendered.
Effective January 1, 2010, Grupo Financiero Galicia implemented new accounting guidance provided by SFAS 166 and 167 (ASU 2009-16 and ASU 2009-17, respectively, under the new codification), which amend the accounting for the transfers of financial assets and the consolidation of VIEs.
The new guidance eliminates the concept of QSPEs that were previously exempt from consolidation and introduces a new framework for determining the primary beneficiary of a VIE. The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. Therefore, Grupo Financiero Galicia must evaluate all existing securitization trusts that qualify as QSPEs to determine whether they must be consolidated in accordance with ASU 2009-17. An entity is considered a VIE if it possesses one of the following characteristics:
Under the new guidance, the primary beneficiary is the part that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
To assess whether Grupo Financiero Galicia has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, Grupo Financiero Galicia considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities.
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Under ASC810-10-65, Banco Galicia should measure the components of the newly consolidated financial trusts at their carrying amounts as of the adoption date. Grupo Financiero Galicia must determine the amounts of the assets, liabilities, and non-controlling interests of the newly consolidated financial trusts, that would have been recorded in Grupo Financiero Galicia’s financial statements as of January 1, 2010, as if ASU 2009-17 had been effective as of the date of Grupo Financiero Galicia’s initial involvement with the financial trusts. Any difference between the net amount added (assets less liabilities of each financial trusts where Grupo Financiero Galicia is primary beneficiary) from Grupo Financiero Galicia’s balance sheet and the amount of any previously recognized retained interest is recognized as a cumulative-effect adjustment to retained earnings.
Based on the mentioned evaluation as of December 31, 2017 and 2016 Grupo Financiero Galicia consolidated the financial trust Galtrust I in which Grupo Financiero Galicia had a controlling financial interest and for which it is the primary beneficiary.
Other-than-temporary impairment
Under U.S. GAAP Galtrust I was classified as anavailable-for-sale security, and therefore, carried at fair value with changes in the fair value reflected in other comprehensive income for the years ended December 31, 2017 and 2016.
“Recognition and Presentation of Other-Than-Temporary Impairments” ASC 320 establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities. Impairment is now considered to be other than temporary if an entity:
1. intends to sell the security;
2. is more likely than not to be required to sell the security before recovering its cost; or
3. does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell)–that is, a ‘credit loss’.
This credit loss is based on the present value of cash flows expected to be collected from the debt security. If a credit loss exists but an entity does not intend to sell the impaired debt security and it is more likely than not to be required to sell before recovery, the impairment is other than temporary. It should therefore be separated into:
1. the estimated amount relating to the credit loss, and
2. all other changes in fair value.
Only the estimated credit loss amount is recognized in profit or loss; the remaining change in fair value is recognized in ‘other comprehensive income’. This approach more closely aligns the impairment models for debt securities and loans by reflecting only credit losses as impairment in profit and loss.
As of December 31, 2017 and 2016 the fair value of Galtrust I exceeded its amortized cost. Therefore for U.S. GAAP purposes the Bank concluded that there was no recognition of impairment.
Related to Argentina
In early 2018, Argentina was able to obtain one third of its financing needs for 2018, after regaining access to the international markets in 2017.
With respect to the foreign exchange market, proceeds from foreign currency-denominated debt issuances represented the main source of foreign currency. Foreign currency exchange rates remained relatively stable through the first half of 2017. An increase in the supply of Dollars and the cash settlement of the majority of agricultural
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export contracts, however, contributed to more volatile foreign currency exchange rates in the second half of 2017. With respect to monetary policy, following a difficult 2017 (especially with respect to interest rates) contractionary trends may continue until the market’s inflationary expectations are brought in line with Argentine Central Bank objectives.
As the financing goals for 2017 set by the Argentine Treasury were surpassed, we expect that during 2018 the Argentine Treasury will continue to focus on gradually stabilizing the Argentine government’s budget balance. Improvements in employment, together with a moderate increase in real salaries and an improved outlook for exports, are expected to contribute to continued economic growth in Argentina in 2018.
Related to the Financial System
We believe that the financial system will continue to increase its interaction with the private sector. We believe that this growth will be driven by mortgage loans and by amendments to current regulations the government is implementing that are expected to result in a more deregulated financial system and create the basis for increased competition and efficiency in the Argentine financial market. It is believed that the low leverage levels of corporations and individuals in the region as well as low levels of use of banking services in Argentina provide sources of potential growth for Argentine financial institutions.
In terms of the financial reputation of the Argentine Financial System, it is expected that the positive net results of the system in 2017 will enable the system overall to meet minimum capitalization requirements set forth in the Basel Committee regulations. Current macroeconomic policies have led to an increase in the valuation of assets held by the Argentine Financial System and banks have begun increasing their capitalization by undertaking equity offerings, which is expected to continue in 2018. Income from services is expected to be a continued source of operating income in 2018 and it is also expected that banks will continue to improve their operating efficiency.
Portfolio quality indicators have been strong over the last few years despite the modest economic growth and both the non-accrual loan portfolio and related loan loss allowances have remained at similar levels. The market projects a 3.2% economic growth for 2018, which level of growth is expected to help maintain low levels for the non-accrual loan portfolio and cost of credits.
We believe that the financial system, which has strong fundamental indicators, will have positive returns in 2018, with a mid- and long-term macroeconomic environment with renewed and promising expectations.
Related to Us
It is expected that the level of activity of all the subsidiaries of Grupo Financiero Galicia will be consistent with the overall expectations for the Argentine economy and the Argentine Financial System. Given that Banco Galicia is the most significant asset of Grupo Financiero Galicia, we refer to the trends related to Banco Galicia.
In 2018, Banco Galicia expects to continue its strategy of providing distinguishing experiences to its clients and offering high-quality products and services to satisfy the needs of each segment of customers, working to increase its volume of financial intermediation activities with the private sector and to improve its recurring operating results, controlling administrative expenses in an effort to improve operational efficiency and maintaining an adequate diversification and risk coverage.
The analysis of these trends should be read in conjunction with the discussion in Item 3. “Key Information— Risk Factors”, and with consideration that the Argentine economy has been historically volatile, which has negatively affected the volume and growth of the financial system.
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Liquidity - Holding Company on an Individual Basis
We generate our net earnings/losses from our operating subsidiaries, specifically Banco Galicia, our main operating subsidiary. Banco Galicia’s dividend-paying ability has been affected since late 2001 by the effects of the 2001-2002 liquidity crisis and its impact on Banco Galicia’s income-generation capacity. In addition, there were other restrictions on Banco Galicia’s ability to pay dividends resulting from applicable Argentine Central Bank rules and the loan agreements entered into by Banco Galicia as part of its foreign debt restructuring. See Item 8. “Financial Information-Dividend Policy and Dividends.”
From 2002 to 2010 we did not receive any dividends from Banco Galicia, which is the primary source of funds available to us. On April 27, 2011, during Banco Galicia’s shareholders’ meeting, a distribution of cash dividends for a total amount of Ps.100 million was approved. Since that date, Banco Galicia’s ability to pay dividends was again affected due to regulations issued by the Argentine Central Bank.
The extent to which a banking subsidiary may extend credit or otherwise provide funds to a holding company is limited by Argentine Central Bank rules. For a description of these rules, see Item 4. “Information on the Company-Argentine Banking Regulation-Lending Limits.”
During fiscal year 2015, Grupo Financiero Galicia received dividends in an amount equal to Ps.190 million. Similarly, during fiscal years 2016 and 2017, Grupo Financiero Galicia received from its subsidiaries dividends of Ps.431 million and Ps.658 million, respectively. During March 2018, Grupo Financiero Galicia received a dividend payment of Ps.416 million.
According to Grupo Financiero Galicia’s policy for the distribution of dividends and due to Grupo Financiero Galicia’s financial condition for the fiscal year ended December 2017 and the fact that most of the profits for fiscal years 2015, 2016 and 2017 corresponded to income from holdings (with just a fraction corresponding to the realized and liquid profits meeting the requirements to be distributed as per Section 68 of the Corporations Law), a cash distribution of dividends of Ps.1,200 million is expected to be approved at the shareholders’ meeting to be held on April 24, 2018. This amount represents 84.11% with regard to 1,426,764,597 class A and B ordinary shares with a face value of Ps.1 each.
For fiscal year 2015, the shareholders’ meeting held on April 26, 2016 approved the distribution of cash dividends in an amount of Ps.150 million, which represents a dividend of 11.54% with respect to 1,300,264,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each. Similarly, for fiscal year 2016, the shareholders’ meeting held on April 25, 2017 approved the distribution of cash dividends for Ps.240 million, which represents a dividend of 18.46% with respect to 1,300,264,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each.
For fiscal year 2015, pursuant to the section incorporated by Act No. 25,585 after Section 25 of Act No. 23,966, Grupo Financiero Galicia received a reimbursement for tax withholdings related to the taxes paid on behalf of the shareholders that were subject to a tax on their personal assets, likewise, pursuant to Section 4 of Act No. 26.893, Grupo Financiero Galicia withheld 10% for income tax from those shareholders subject to such tax.
Due to Act. No. 27,260, Grupo Financiero Galicia did not reimburse or withhold any amount for taxes related to the dividends paid for fiscal year 2016 and proposed to be paid for fiscal year 2017.
As of December 31, 2017, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount of Ps.0.4 million and short-term investments made up of special checking account deposits, mutual funds, government securities and shares sold pending payment in an amount of Ps.1,663 million.
As of December 31, 2016, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount of Ps.0.3 million and short-term investments made up of special checking account deposits, mutual funds, government securities and shares sold pending payment in an amount of Ps.166 million.
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As of December 31, 2015, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount of Ps.0.8 million and short-term investments made up of special checking account deposits, mutual funds and time deposits in an amount of Ps.22 million.
For a description of the notes issued by Grupo Financiero Galicia, see “-Item 5.A. “Operating Results”-”Debt Programs”.
Each of our subsidiaries is responsible for their own liquidity management. For a discussion of Banco Galicia’s liquidity management, see “-Banco Galicia’s Liquidity Management-Banco Galicia (Unconsolidated) Liquidity Management”.
Our consolidated statements of cash flows were prepared using the measurement methods and the presentation requirements prescribed by the Argentine Central Bank. See our consolidated cash flow statements as of and for the fiscal years ended December 31, 2017, December 31, 2016 and December 31, 2015, included in this annual report.
As of December 31, 2017, on a consolidated basis, we had Ps.86,317 million in available cash (defined as total cash and cash equivalents), representing a Ps.13,229 million increase as compared to the end of December 31, 2016. As of December 31, 2016, we had Ps.73,088 million in available cash, representing a Ps.30,113 million increase from the Ps.42,975 million as of December 31, 2015.
Effective May 14, 2007, and in accordance with the provisions of Argentine Central Bank’s Communiqué “A” 4667, cash equivalents are comprised of the following: Argentine Central Bank debt instruments (Nobac and Lebac) having a remaining maturity that does not exceed 90 days, securities in connection with reverse repurchase agreement transactions with the Argentine Central Bank, local interbank loans and overnight placements in correspondent banks abroad. Cash equivalents also comprise, in the case of the Regional Credit Card Companies, time deposit certificates and mutual fund shares.
The table below summarizes the information from our consolidated statements of cash flows for the three fiscal years ended December 31, 2017, 2016 and 2015, which is also discussed in more detail below.
Funds (1) at the Beginning of the Fiscal Year
Funds (Used)/Provided by Operating Activities
- Net (Decrease)/Increase in Government and Private Securities
- Net Decrease in Loans
- Net Increase in Deposits
- Other
Funds Used by Investing Activities
- Payments for bank premises, equipment and miscellaneous assets, net
- Payments for equity investments
Funds Provided/(Used) by Financing Activities
- Net Decrease in notes
- Net Increase in banks and international entities
- Net (Decrease)/Increase in loans from local financial institutions
- Capital Increase
Effect of Exchange Rate on Cash and Cash Equivalents
Funds at the End of the Fiscal Year
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Under Argentine Banking GAAP, our operating activities include the operating results, the origination of loans and other credits extended to the private sector, as well as raising customer deposits and entering into sales of government securities under repurchase agreement transactions. Our financing activities include issuing bonds in the local and foreign capital markets and borrowing from foreign and local banks and international credit agencies. Our investing activities primarily consist of the acquisition of equity investments and purchasing of bank premises and equipment.
Management believes that cash flows from operations and available cash and cash equivalent balances, will be sufficient to fund our financial commitments and capital expenditures for fiscal year 2018.
Cash Flows from Operating Activities
In fiscal year 2017, net cash used in operating activities amounted to Ps.884 million, mainly due to: (i) a Ps.25,364 million net decrease in transactions related to the extension of loans, especially to the non-financial private sector and residents abroad and related to credit cards, advances and promissory notes, (ii) a Ps.7,081 million net decrease of other assets and liabilities and (iii) a Ps.47 million net decrease in attributable to the portfolio of government and private securities. Such amount was partially offset by net cash provided by operating activities in an amount of Ps.31,608 related to an increase in deposits, primarily corresponding to an increase of deposits from the non-financial private sector and residents abroad.
In fiscal year 2016, net cash provided by operating activities amounted to Ps. 25,013 million, mainly due to: (i) a Ps.34,427 million increase in deposits, mostly corresponding to an increase of Ps. 33,727 million in deposits from non-financial private sector and residents abroad and (ii) a Ps.10,040 million decrease in transactions related to loans, mainly related to credit cards, advances and promissory notes, an effect that was offset by amortizations and payments of interests. Likewise, Ps.3,518 million due to the decrease of net other assets and liabilities were provided by operating activities. In addition, Ps.4,144 million of net cash was provided by operating activities attributable to the portfolio of government and private securities.
In fiscal year 2015, net cash provided by operating activities amounted to Ps.15,625 million, mainly due to: (i) a Ps.22,576 million increase in deposits, mostly corresponding to an increase of Ps.23,628 million in deposits from non-financial private sector and residents abroad, a decrease of Ps.1,044 million in deposits from non-financial public sector. (ii) Ps.12,868 million decrease in transactions related to loans, mainly related to credit cards, advances and promissory notes. Likewise, Ps.3,518 million due to the increase of net other assets and liabilities were provided by operating activities. In addition, Ps.2,399 million of net cash was provided by operating activities attributable to the portfolio of government and private securities.
Cash Flows from Investing Activities
In fiscal year 2017, net cash used by investing activities amounted to Ps.1,748 million mainly attributable to the acquisition of bank premises and equipment for Ps.930 million and miscellaneous assets for Ps.555 million and other payments for investment activities for Ps 444 million, such amounts were partially offset by funds provided by payments on equity investments of Ps.181 million.
In fiscal year 2016, net cash used by investing activities amounted to Ps.1,479 million mainly attributable to the acquisition of bank premises and equipment for Ps.900 million and miscellaneous assets for Ps.579 million.
In fiscal year 2015, net cash used by investing activities amounted to Ps.1,123 million mainly attributable to the acquisition of bank premises and equipment for Ps.740 million and miscellaneous assets for Ps.393 million.
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Cash Flows from Financing Activities
In fiscal year 2017, financing activities provided cash in the amount of Ps.10,712 million due to: (i) Ps.2,173 million of increase in foreign credit facilities and (ii) a capital increase for Ps.11,004. Such amount was partially offset by financing activities which used cash due to: (i) a net decrease of Ps.554 million as a consequence of the payment or cancellation of principal and interest on notes for approximately Ps.12,000 million, partially offset by issuances of notes for approximately Ps.11,446 during the same period, (ii) a decrease in loans from local financial institutions for Ps.1,581 million and (iii) a net decrease in others fluctuations of Ps.330 million corresponding to other financing activities, mainly related to the payment of dividends.
In fiscal year 2016, financing activities provided cash in the amount of Ps.2,664 million due to: (i) a net decrease of Ps.100 million as a consequence of the payment or cancellation of principal and interest on notes for approximately Ps.8,912 million, partially offset by issuances of notes for approximately Ps.8,812 million during the same period, (ii) Ps.483 million as a consequence of the increase in foreign credit facilities, (iii) an increase in loans from local financial institutions for Ps.2,479 million and (iv) a net decrease in others fluctuations of Ps.198 million corresponding to other financing activities, mainly related to the payment of dividends.
In fiscal year 2015, financing activities used cash in the amount of Ps.1,529 million due to: (i) Ps.1,562 million as a consequence of the payment or cancellation of principal and interest on notes for approximately Ps.4,611 million, partially offset by the issuances of notes for approximately Ps.3,042 million during the same period, (ii) Ps.77 million as a consequence of the increase in foreign credit facilities, (iii) an increase in loans from local financial institutions for Ps.93 million and (iv) a net decrease in others fluctuations of Ps.137 million corresponding to other financing activities, mainly related to the payment of dividends.
In fiscal year 2017, the effect of the exchange rate on consolidated cash flow, amounted to Ps. 5,149 million, an increase of Ps. 1,234 million as compared to fiscal year 2016. The exchange rate as of December 31, 2017 was Ps.18.774 per U.S. $1.
In fiscal year 2016, the effect of the exchange rate on consolidated cash flow, amounted to Ps.3,915 million, a decrease of Ps.3,033 million as compared to fiscal year 2015. The exchange rate as of December 31, 2016 was Ps.15.850 per U.S. $1.
For a description of the types of financial interests we use and the maturity profile of our debt, currency and interest rate structure, see Item 5. “Operating and Financial Review and Prospects”-Item 5.A. “Operating Results”.
Banco Galicia Consolidated Liquidity Gaps
Liquidity risk is the risk that liquid assets are not available for Banco Galicia to meet financial commitments at contractual maturity, take advantage of potential investment opportunities and meet demand for credit. To monitor and control liquidity risk, Banco Galicia monitors and systematically calculates the gaps between financial assets and liabilities maturing within set time intervals based on contractual remaining maturity, on a consolidated basis with the Regional Credit Card Companies and CFA. All the deposits in checking accounts and other demand deposits and deposits in savings accounts are included in the first time interval. These figures are used to simulate different liquidity crisis scenarios based on assumptions stemming from historical experience.
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As of December 31, 2017, the consolidated gaps between maturities of Banco Galicia’s financial assets and liabilities based on contractual remaining maturity were as follows:
Argentine Central Bank – Escrow Accounts
Loans – Public Sector
Loans – Private Sector
Notes and Corporate Securities
Financial Trusts
Liabilities
Domestic Banks
Other Liabilities (1)
Asset / Liability Gap
Cumulative Gap
Ratio of Cumulative Gap to Cumulative Liabilities
Ratio of Cumulative Gap to Total Liabilities
Principal plus UVA adjustment. Does not include interest.
(1) Includes, mainly, debt with retailers due to credit card operations, liabilities in connection with repurchase transactions, debt with domestic credit agencies and collections for third parties.
The table above is prepared taking into account contractual maturity. Therefore, all financial assets and liabilities with no maturity date are included in the “Less than One Year” category.
Banco Galicia must comply with a maximum limit set by its board of directors for liquidity mismatches. This limit has been established at -25% (minus 25%) for the ratio of cumulative gap to total liabilities within the first year. As shown in the table above, Banco Galicia complies with the established policy, since such gap was 12.8 % as of December 31, 2017.
Banco Galicia (Unconsolidated) Liquidity Management
The following is a discussion of Banco Galicia’s liquidity management, excluding the consolidated companies.
Banco Galicia’s policy is to maintain a level of liquid assets that allows it to meet financial commitments at contractual maturity, take advantage of potential investment opportunities, and meet customer’s credit demand. To set the appropriate level, forecasts are made based on historical experience and on an analysis of possible scenarios. This enables management to project funding needs and alternative funding sources, as well as excess liquidity and placement strategies for such funds. As of December 31, 2017, Banco Galicia’s unconsolidated liquidity structure was as follows:
Legal Requirement
Management Liquidity
Total Liquidity (1)
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The legal liquidity requirements in the table above correspond to the minimum cash requirements for Peso- and Foreign currency-denominated liabilities determined by Argentine Central Bank regulations. For more information on the Argentine Central Bank regulations regarding reserve requirements for liquidity purposes, see Item 4. “Information on the Company-Argentine Banking Regulation-Legal Reserve Requirements for Liquidity Purposes”.
The assets included in this calculation are the balances of Peso- and Foreign currency-denominated deposit accounts at the Argentine Central Bank and escrow accounts held at the Argentine Central Bank in favor of clearing houses.
Management liquidity consists of the following items: (i) 100% of the balance of overnight placements in banks abroad, (ii) 90% of the Lebac balance, (iii) 90% of the Letes in foreign currency, (iv) net short-term interbank loans (call loans), and (v) 100% of the balance at the Argentine Central Bank, including escrow accounts in favor of clearing houses, in excess of the amounts necessary to cover the minimum cash requirements.
Our capital management policy is designed to ensure prudent levels of capital. The following table analyzes our capital resources as of the dates indicated.
Tangible Shareholders’ Equity(1) as a Percentage of Total Assets
For information on our capital adequacy and that of our operating subsidiaries, see Item 4. “Information on the Company-Selected Statistical Information-Regulatory Capital”.
In the course of our business, our capital expenditures are mainly related to fixed assets, construction and organizational and IT system development. In general terms, our capital expenditures are not significant when compared to our total assets.
For a more detailed description of our capital expenditures in 2017 and our capital commitments for 2018, see Item 4. “Information on the Company-Capital Investments and Divestitures”. For a description of financing of our capital expenditures, see “-Consolidated Cash Flows”.
See Item 5.A. “Operating Results-Off-Balance Sheet Arrangements” and “Operating Results-Off-Balance Sheet Contractual Obligations.”
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See Item 5.A. “Operating Results—Contractual Obligations.”
These matters are discussed under “Forward-Looking Statements.”
Our ordinary shareholders’ meeting took place on April 25, 2017. The following table sets out the members of our Board of Directors as of that date (all of whom reside in Buenos Aires, Argentina), the positions they hold within Grupo Financiero Galicia, their dates of birth, their principal occupations and the dates of their appointment and on which their current terms will expire. Terms expire when the annual shareholders’ meeting takes place.
Name
Eduardo J. Escasany
Pablo Gutierrez
Abel Ayerza
Federico Braun
Antonio R. Garcés
C. Enrique Martin
Pedro A. Richards
Silvestre Vila Moret
Daniel A. Llambías
Sergio Grinenco
Alejandro Rojas Lagarde
Augusto Rodolfo Zapiola Macnab
The following is a summary of the biographies of the members of our Board of Directors:
Eduardo J. Escasany: Mr. Escasany obtained a degree in economics at the Universidad Católica Argentina. He was associated with Banco Galicia from 1973 to 2002. He was appointed to Banco Galicia’s board of directors in 1975. In 1979, he was elected as the vice chairman and from 1989 to March 21, 2002 he served as the chairman of Banco Galicia’s board of directors and its chief executive officer. He served as the vice chairman of the Argentine Bankers Association from 1989 to 1993 and the chairman of such association from 1993 to 2002. He was chairman of the Board of Directors from April 2002 to June 2002. In April 2005, he was re-elected as member of the Board of Directors and appointed as chairman in 2010. He is also a lifetime trustee and vice chairman of the Fundación Banco de Galicia y Buenos Aires. He is the chairman of Helena Emprendimientos Inmobiliarios S.A. and regular director in Sociedad Argentina de Energía S.A. and at RMPE Asociados S.A. and an alternate director for Central Puerto S.A. and RPE Distribución S.A. Mr. Escasany is Mr. Silvestre Vila Moret’s uncle.
Pablo Gutierrez: Mr. Gutierrez obtained a degree in business administration at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1985, where he served in different positions. In April 2005, he was appointed to the board of directors of Banco Galicia. Mr. Gutierrez is chairman of Tarjetas Regionales, vice president of Sudamericana Holding, regular director of Tarjeta Naranja S.A. and an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. He was an alternate director of Grupo Financiero Galicia from April 2003 to April 2010 when he was appointed as vice chairman. In April 2012, he was appointed as the vice chairman of Banco Galicia. Mr. Gutierrez is Mr. Abel Ayerza’s nephew.
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Abel Ayerza: Mr. Ayerza obtained a degree in business administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1966 to 2002. Mr. Ayerza is also the chairman of Aygalpla S.A., a lifetime trustee and second vice chairman of the Fundación Banco de Galicia y Buenos Aires and the managing partner of Cribelco S.R.L., Crisabe S.R.L. and Huinca Cereales S.R.L. He has been a member of the Board of Directors since September, 1999. Mr. Ayerza is the uncle of Mr. Pablo Gutierrez.
Federico Braun: Mr. Braun obtained a degree in industrial engineering at the Universidad de Buenos Aires. He was associated with Banco Galicia from 1984 to 2002. Mr. Braun is also the chairman of Patagonia Logística S.A., Campos de la Patagonia S.A., Estancia Anita S.A., Club de Polo Los Pingüinos S.A., Tarjeta del Mar and S.A. Importadora y Exportadora de la Patagonia; the vice chairman of Club de Campo Los Pingüinos S.A., Pampa Natural S.A. and Asociación de Supermercados Unidos. He is a director of Inmobiliaria y Financiera “La Josefina” S.A. and an alternate director of Martseb S.A. He is a member of Asociación Empresaria Argentina and a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires. He has been a member of the Board of Directors since September, 1999.
Antonio Roberto Garcés: Mr. Garcés obtained a degree in national public accounting at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1959 and with Grupo Financiero Galicia since 2002. In April 1985, he was appointed as an alternate director of Banco Galicia. Subsequently, he was appointed as the vice chairman of Banco Galicia in September 2001, the chairman of the board of directors of Banco Galicia from March 2002 until August 2002, and then the vice chairman from August 2002 until April 2003, when he was elected as the chairman of Banco Galicia’s board of directors until 2011. From 2003 to 2010 he was the chairman of Grupo Financiero Galicia. In April 2012, Mr. Garcés was appointed as a director of Grupo Financiero Galicia. He is a trustee of the Fundación Banco de Galicia y Buenos Aires S.A.
C. Enrique Martin: Mr. Martin obtained a degree in law at the Universidad de Buenos Aires. He was a professor at the Universidad de Buenos Aires for more than 20 years and has a post-graduate certificate in international economics from the University of London. He was associated with Banco Galicia from 1977 until 2002 and was responsible for the International Banking Relations Department. Mr. Martin is a senior Advisor to ZEIG S.A. He is also a director of the Argentine-Chilean Chamber of Commerce and an advisor to the Canadian-Argentine Chamber of Commerce. In 2012, he was appointed as an alternate director of Banco Galicia.
Pedro Alberto Richards: obtained a degree in economics from the Universidad Católica Argentina. He holds a Master of Science in Management from the Sloan School of Management at the Massachusetts Institute of Technology. He was the director of the National Development Bank (BANADE). He has been associated with Banco Galicia since 1990. He was a member of the board of directors of Galicia Capital Markets S.A. between 1992 and 1994 and vice chairman of Net Investment between September 2001 and May 2007. Since August 2000, he served as Grupo Financiero Galicia’s managing director and from 2010 as our CEO. Mr. Richards is also Director of Galicia Warrants, and director of Galicia Administradora de Fondos S.A. Mr. Richards was an alternate director of Grupo Financiero Galicia from April 2003 until April 2005, after which he served as a director until April 14, 2010. He was appointed as a director of Grupo Financiero Galicia in April 2017.
Silvestre Vila Moret: Mr. Vila Moret obtained a degree in banking administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1997 until May 2002. Mr. Vila Moret is also vice chairman of El Benteveo S.A. and Santa Ofelia S.A. He has served as on the Board of Directors since June 2002. Mr. Vila Moret is the nephew of Mr. Eduardo J. Escasany.
Daniel Antonio Llambías: Mr. Llambías was born on February 8, 1947. He obtained a degree in national public accounting at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1964. He was elected as an alternate director of Banco Galicia in September 1997 and as a director in September 2001 until August 2009, when he was appointed CEO. Mr. Llambías is also a director of Tarjeta Naranja and Tarjetas Regionales and an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. He served as the chairman of ADEBA from April 2016 to April 2017. Mr. Llambías was appointed as a director of Grupo Financiero Galicia in April 2017.
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Sergio Grinenco: Mr. Grinenco obtained a degree in economics at the Universidad Católica Argentina and a master’s degree in business administration from Babson College in Wellesley, Massachusetts. He has been associated with Banco Galicia since 1977. He was elected as an alternate director of Banco Galicia in September 2001 and as the vice chairman in April 2003, a position he held until 2011. He is an alternate director of Grupo Galicia since April 2003. Mr. Grinenco is also an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. In 2012, he was appointed as the chairman of Banco Galicia.
Alejandro María Rojas Lagarde:Mr. Rojas obtained a degree in law at the Universidad de Buenos Aires. He has held a variety of positions at Banco Galicia since 1963. From 1965 to January 2000, he was responsible for the general counsel office of Banco Galicia. He has been an alternate director on the Board of Directors since 2000. He is also a manager of Rojas Lagarde S.R.L., alternate director of Santiago Salud S.A. and lifetime trustee of the Fundación Banco de Galicia y Buenos Aires.
Augusto Rodolfo Zapiola Macnab: Mr. Zapiola Macnab obtained a degree in economics from the Pontificia Universidad Catolica Argentina. He has been associated with Banco Galicia from June 1978 until September 2002. In April 2013, he was elected as an alternate director of Banco Galicia. In April 2015, he was elected as an alternate director on the Board of Directors of Grupo Galicia.
Our Board of Directors may consist of between three and nine permanent members. Currently our Board of Directors has nine members. In addition, the number of alternate directors-individuals who act in the temporary or permanent absence of a director-has been set at three. The directors and alternate directors are elected by the shareholders at our annual general shareholders’ meeting. Directors and alternate directors are elected for a maximum term of three years.
Mr. Sergio Grinenco is also a director of Banco Galicia and Mr. Augusto Rodolfo Zapiola Macnab is also an alternate director of Banco Galicia. In addition, some members of our Board of Directors may serve on the board of directors of any subsidiary.
Five of our directors are members of the families that are the controlling shareholders of Grupo Financiero Galicia.
Grupo Financiero Galicia complies with the provisions set forth by the Capital Markets Law and the regulations set forth by the CNV, which require that companies which make a public offering of shares should form an Audit Committee, and develop a charter with regulations for its operation.
Accordingly, the Board of Directors established an Audit Committee with three members. During fiscal year 2017, Messrs. Antonio R. Garcés, C. Enrique Martin and Silvestre Vila Moret were the members of the Audit Committee, with Antonio R. Garcés and C. Enrique Martin being considered independent pursuant to CNV and Nasdaq requirements. Mr. Silvestre Vila Moret is not considered independent under such rules. All three members of the Audit Committee are financially literate and have extensive managerial experience. Mr. Antonio Garcés is the financial expert serving on our Audit Committee.
According to the CNV rules, the Audit Committee is primarily responsible for (i) issuing a report on the Board of Directors’ proposals for the appointment of the independent auditors and the compensation for the Directors, (ii) issuing a report detailing the activities performed according to the CNV requirements, (iii) issuing the Audit Committee’s annual plan and implementing it each fiscal year, (iv) evaluating the external auditors’ independence, work plans and performance, (v) evaluating the plans and performance of the internal auditors, (vi) supervising the reliability of our internal control systems, including the accounting system, and of external reporting of financial or other information, (vii) following-up on the use of information policies on risk management at Grupo Financiero Galicia’s main subsidiaries, (viii) evaluating the reliability of the financial information to be filed with the CNV and the SEC, (ix) verifying compliance with the applicable conduct rules, and (x) issuing a report on related party transactions and disclosing any transaction where a conflict of interest exists with corporate governance bodies and controlling shareholders. The Audit Committee has access to all information and documentation that it requires and is broadly empowered to fulfill its duties. During 2017, the Audit Committee held ten meetings.
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Our bylaws provide for a Supervisory Committee consisting of three members who are referred to as syndics (“syndics”) and three alternate members who are referred to as alternate syndics (“alternate syndics”). In accordance with the Corporations Law and our bylaws, the syndics and alternate syndics are responsible for ensuring that all of our actions are in accordance with applicable Argentine law. Syndics and alternate syndics are elected by the shareholders at the annual general shareholders’ meeting. Syndics and alternate syndics do not have management functions. Syndics are responsible for, among other things, preparing a report to shareholders analyzing our financial statements for each year and recommending to the shareholders whether to approve such financial statements. Alternate syndics act in the temporary or permanent absence of a syndic. Currently, there are three syndics and three alternate syndics. Syndics and alternate syndics are elected for a one-year term.
The following table shows the members of our Supervisory Committee. Each of our syndics was appointed at the ordinary shareholders’ meeting held on April 25, 2017. Terms expire when the annual shareholders’ meeting takes place or as set forth below.
Position
Principal
Occupation
Current
Term Ends
The following is a summary of the biographies of the members of our Supervisory Committee:
Norberto Corizzo: Mr. Corizzo obtained a degree in national public accounting at the Universidad de Buenos Aires. He has developed taxes activities in companies such as López González Raimondi y Asoc., Noel y Cía and Price Waterhouse. He has been syndic at Grupo Financiero Galicia since April 2003. He has been associated with Banco Galicia since 1977 up to June 2002 performing positions related to tax and internal audit. Mr. Corizzo is also a syndic of Banco Galicia, EBA Holding, Tarjetas Regionales, Cobranzas Regionales S.A. and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia.
José Luis Gentile: Mr. Gentile obtained a degree in national public accounting at the Universidad de Buenos Aires. He has provided services to Grupo Financiero Galicia since 1999 up to March 2017, when he was Chief Financial Officer. He was elected as a syndic of Banco Galicia and Grupo Financiero Galicia since the shareholders’ meetings held on April 25, 2017. Additionally, he is a syndic of Galicia Valores and Galicia Warrants, and an alternate syndic of Cobranzas Regionales and Tarjeta Naranja, and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia.
Enrique M. Garda Olaciregui: Mr. Garda Olaciregui obtained a degree in law at the Universidad del Salvador. He has a master in Finances at Universidad del CEMA and a degree in Corporate Law at Universidad Austral. He has been associated with Banco Galicia since 1970. He served as legal advisor to Banco Galicia between September 2001 and April 2003. He has provided services as a Secretary Director between April 2003 and April 2010, when he was designated as regular syndic of Banco Galicia. Additionally, he is a regular syndic at Tarjetas Regionales, Galicia Seguros, Galicia Valores, Galicia Warrants, Sudamericana Holding and other subsidiaries of Banco Galicia and Grupo Financiero Galicia.
Miguel Armando: Mr. Armando obtained a degree in law at the Universidad de Buenos Aires. He was first elected as an alternate syndic of Banco Galicia in 1986. He also acted as an alternate syndic of Grupo Financiero Galicia between 1999 and January 2009 at which point he became a regular syndic until April 2009, at which time
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he was reelected as an alternate syndic of Grupo Financiero Galicia. He is the vice chairman of Arnoar S.A. and a member of the board of directors of Santiago de Compostela Promotora de Seguros S.A. Mr. Armando is also a syndic of EBA Holding S.A. and an alternate syndic of Banco Galicia, Galicia Valores, Tarjetas Regionales, Tarjeta Naranja, among others.
Fernando Noetinger: Mr. Noetinger obtained a degree in law at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1987. He was and has been an alternate syndic of Grupo Financiero Galicia from September 1999 to June 2002 and from April 2006 to date. Mr. Noetinger is also chairman of Arnoar S.A. and Doña Ines S.A., and an alternate syndic of EBA Holding S.A., Electrigal S.A., Tarjetas Regionales, Galicia Warrants, Galicia Valores, Banco Galicia, Galicia Retiro, Galicia Seguros, Sudamericana and Net Investment, among others.
Horacio Tedín: Mr. Tedín obtained a degree in law at the Universidad de Buenos Aires. In 1981 he founded his own law firm, which has actively worked for Banco Galicia and other big corporate clients. Mr. Tedín has been an alternate syndic of Grupo Financiero Galicia since 2006. He is also a syndic of Teruel Mandataria S.A., Santiago de Compostela Promotora de Seguros S.A. and Electrigal S.A. and an alternate syndic of EBA Holding S.A., among others.
Compensation for the members of the Board of Directors is considered by the shareholders at the shareholders’ meeting once the fiscal year has ended. Directors are paid an annual fee based on the functions they carry out and they may receive partial advance payments during the year. At the ordinary shareholders’ meeting held on April 25, 2017 the compensation for the Board of Directors was set at Ps.20,093,234 for the fiscal year ending on December 31, 2016. For a description of the amounts to be paid to the board of directors of Banco Galicia, see “-Compensation of Banco Galicia’s Directors and Officers” below.
We do not maintain a stock-option, profit-sharing or pension plan for the benefit of our directors.
We do not have a policy establishing any termination benefits for our directors.
Our organizational structure consists of a chief executive officer (“CEO”) who reports to the Board of Directors, and the Chief Financial Officer (“CFO”) who reports to the CEO and is in charge of the Financial and Accounting Division.
The CEO’s primary responsibilities consist of implementing the policies defined by the Board of Directors, as well as making recommendation to the Board of Directors regarding future plans, and budgetary and organizational matters. He is also responsible for supervising the Financial and Accounting Division and assessing the attainment of performance goals of Grupo Financiero Galicia. The CEO also participates in meetings of the Board of Directors of the Company and certain subsidiaries.
Our CEO is Mr. Pedro A. Richards. For a biography, please see –Our Board of Directors—Pedro A. Richards.
Our CFO is Mr. José Luis Ronsini, who was born on November 29, 1971. He obtained a degree in national public accounting from the Universidad Católica Argentina. He holds a Master in Finance from the University of CEMA, and attended the Senior Management Program at the Universidad de San Andrés. He has been associated with Banco Galicia since 2001. He previously served as the Chief Credit Risk auditor, responsible for our subsidiaries, Tarjetas Regionales, and Galicia Administradora de Fondos S.A. Mr. Ronsini has served as the General Accountant of Banco Galicia since 2012.
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The Financial and Accounting Division is mainly responsible for the assessment of investment alternatives, thus suggesting whether to invest or withdraw Grupo Financiero Galicia’s positions in different companies or businesses. It also plans and coordinates Grupo Financiero Galicia’s administrative services and financial resources in order to guarantee its proper management. This division also aims at meeting requirements set by several controlling authorities, complying with information and internal control needs and budgeting purposes. Furthermore, it includes functions aimed at planning, preparing, coordinating, controlling and providing financial information to the stock exchanges where Grupo Financiero Galicia’s shares are listed, regulatory bodies and both domestic and international investors and analysts. It facilitates the provision of materials and responses to questions sent by shareholders and investors in general through a specifically designed “contact us”, located in our web page.
Our compensation policy, which is essentially the same as the policy followed by the companies that we control, consists of arranging salary levels in order of importance based on a system that describes and assesses job positions based on objective factors (the Hay System). The purpose of such system is to pay compensation that is similar to the compensation that is paid for a similar position in the domestic market. Managers who are our employees or our controlled companies’ employees receive a fixed salary and may receive a bonus based on individual performance. This policy for compensation includes the possibility of having access to retirement insurance. We do not maintain stock-option, profit-sharing or pension plans or any other retirement plans for the benefit of our managers.
We have established a Disclosure Committee in response to the U.S. Sarbanes-Oxley Act of 2002. The main responsibility of this committee is to review and approve controls over the public disclosure of financial and related information, and other procedures necessary to enable our chief financial officer and CEO to provide their certifications of our annual report that is filed with the SEC. The members are Messrs. Pedro A. Richards, José Luis Ronsini, Adrián Enrique Pedemonte and Ms. Mariana Saavedra. In addition, at least one of the members of this committee attends all the meetings of our principal subsidiaries’ disclosure committees.
At the ordinary shareholders’ meeting held on April 27, 2017, the size of Banco Galicia’s board of directors was set at seven members and three alternate directors. The following table sets forth the members of Banco Galicia’s board of directors as of April 27, 2017, all of whom are residents of Buenos Aires, Argentina, the position currently held by each of them, their dates of birth, their principal occupations, the dates of their appointment and the year in which their current terms will expire. The business address of the members of the Banco Galicia’s board of directors is Tte. General J. D. Perón 430, 24th floor (C1038AAI) Buenos Aires, Argentina.
Raúl Héctor Seoane
Guillermo J. Pando
María Elena Casasnovas
Juan Carlos L’Afflitto
Pablo M. Garat (1)
Ignacio A. González (1)
Enrique García Pinto (2)
Augusto R. Zapiola Macnab
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The following are the biographies of the members of the board of directors of Banco Galicia:
Sergio Grinenco: See “-Our Board of Directors”.
Raúl Héctor Seoane: Mr. Seoane obtained a degree in economics from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1988. Mr. Seoane was first elected as an alternate director of Banco Galicia from 2005 until December 2011, and in April 2012 was elected as a director. He is also a vice chairman of Distrocuyo S.A. and an alternate trustee of Fundación Banco de Galicia y Buenos Aires.
Guillermo Juan Pando: Mr. Pando has been associated with Banco Galicia since 1969. He was first elected as an alternate director of Banco Galicia from September 2001 until June 2002, and in April 2003 he was elected as a director. He is also the chairman of Santiago Salud S.A. and Distrocuyo S.A., vice chairman of Electrigal S.A., and an alternate trustee of Fundación Banco de Galicia y Buenos Aires.
María Elena Casasnovas: Mrs. Casasnovas was born on May 10, 1951. She obtained a degree in law from the Universidad Católica Argentina. She completed the Program for High Management at Universidad Torcuato Di Tella and the Senior Management Program at Universidad San Andrés. She has been associated with Banco Galicia since 1972. In April 2016 she was elected as a director.
Juan Carlos L’Afflitto: Mr. L’Afflito was born on September 15, 1958. He has an accounting degree from the Universidad de Buenos Aires. He worked as advisor and accountant at Morgan, Benedit y Asociados and until 1990 he was a professor at the Universidad Católica Argentina. He has been associated with Banco Galicia since 1986. In April 2016 he was elected as a director.
Pablo María Garat: Mr. Garat obtained a degree in law at the Universidad de Buenos Aires. He has been associated with Banco Galicia as an independent director since April 2004. Mr. Garat has been an official representative of the Province of Tierra del Fuego and an advisor to the Argentine Senate, and he currently develops its professional independent activity at his own law firm and is a professor at the University of Constitutional Law and Constitutional Tributary Law.
Ignacio Abel González: Mr. González obtained a degree in national public accounting at the Universidad de Buenos Aires and a master in Auditing at Drew University, New Jersey. Previously, he served as a Member of the International Committee of Finance & Value Sharing, PricewaterhouseCoopers. He was appointed as director of Banco Galicia at the shareholders’ meeting held on April 14, 2010. He is also syndic of Sociedad Anónima La Nación, La Nación Nuevos Medios, Publirevistas S.A., Pampa Natural S.A., Sociedad Anónima Importadora y Exportadora de la Patagonia, Banelsip S.A. and Banelco S.A. and the founder and president of P.O.D.E.R (Polo de Desarrollo Educativo Renovador).
Enrique García Pinto: Mr. García Pinto has been associated with Banco Galicia since 1970. Previous to such time he served at Nobleza Piccardo SAYCYF and Saturno Agropecuaria SCA. Mr. García Pinto was appointed as an alternate director of Banco Galicia at the shareholders’ meeting held on April 28, 2009. He is also vice chairman of Teruel Mandataria S.A. and director of Distrocuyo S.A.
C. Enrique Martin: See “-Our Board of Directors”.
Augusto Rodolfo Zapiola Macnab: See “-Our Board of Directors”.
Banco Galicia’s board of directors may consist of three to nine permanent members. In addition, there can be one or more alternate directors who can act during the temporary or permanent absence of a director. As of the date of this annual report, none of the directors were also employees.
The Board of Directors formally meets at least twice a week and informally every day, and is in charge of Banco Galicia’s general management and takes all the necessary decisions to fulfill said task.
Members of the Bank’s Board of Directors serve in the following committees:
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Human Resources and Governance Committee: It is composed of two Directors, the Chief Executive Officer, and the Organizational Development and Human Resources Division Manager. This Committee is responsible for presenting a succession plan for the Chief Executive Officer and the Division Manager positions, analyzing and establishing the compensation for the Chief Executive Officer and Division Managers, and monitoring the performance matrix of Division Managers and Department Managers. The Committee meets every two months or whenever there are issues that require urgent consideration. Its resolutions are summarized in writing in minutes.
Strategy and New Businesses Committee: This Committee is composed of three Directors, the Chief Executive Officer, the Planning and Risk Management Division Managers. It is in charge of analyzing new businesses. The Committee meets at least once every two months. It can hold extraordinary meetings in case there is any issue that requires urgent consideration. Its resolutions are summarized in writing in minutes.
Risk and Capital Allocation Committee: This Committee is composed of five Directors, the Chief Executive Officer, the Risk Management and Planning Division Managers. It is in charge of analyzing and approving capital allocations, establishing risk policies and monitoring the Bank’s risks. The Committee meets at least once every two months. Its resolutions are summarized in writing in minutes.
Liquidity Crisis Committee: This Committee is composed of three Directors and the Chief Executive Officer. The Committee may call those officers whose participation is deemed relevant. It is in charge of evaluating the situation upon facing a liquidity crisis and deciding the steps to be implemented to tackle it. The Committee shall meet when convened by the Board of Directors and shall hold sessions as may be required until the liquidity crisis ends. Its resolutions are summarized in writing in minutes.
Asset and Liability Management Committee (ALCO): Three Directors, the Chief Executive Officer, the Retail Banking, the Wholesale Banking, the Financial Banking, the Risk and Planning Division Managers are members of this Committee. It is in charge of fund raising and different asset allocations. Moreover, this Committee is in charge of the follow-up and control of liquidity, interest-rate and currency gaps. The Committee meets at least once a month. Its resolutions are summarized in writing in minutes.
High Credit Committee: This Committee is composed of four Directors, the Chief Executive Officer, the Risk Division Manager and the Wholesale Banking Manager. It is in charge of approving and granting ratings and loans to high risk customers and groups. The Committee meets at least once a week. Approved operations are recorded in chronologically numbered spreadsheets.
Low Credit Committee: This Committee is composed of two Directors, the Chief Executive Officer and the Risk Division Manager. This Committee is responsible for approving and granting ratings and loans to medium risk customers and groups. The Committee meets at least twice a week. Approved operations are recorded in chronologically numbered spreadsheets.
Audit Committee: In accordance with the Argentine Central Bank’s regulations, the Bank formed an Audit Committee composed of two Directors and the Internal Audit Manager. The Committee is in charge of supervising the adequacy and conformity, as well as the effective functioning of the internal control systems so as to ensure compliance with all the Bank’s rules submitted to the Argentine Central Bank and the self-regulated entities of the capital market. The Committee meets at least once a month. Its resolutions are entered in minutes, which are transcribed in signed books.
Committee for the Control and Prevention of Money Laundering and Funding of Terrorist Activities: This Committee is composed of four Directors, the Chief Executive Officer, the Compliance and Prevention of Money Laundering Manager, the Internal Audit Manager, and the Managers of the following Divisions: Risk, Financial Banking, Wholesale Banking, Retail Banking and Comprehensive Corporate Services. The Financial Banking Division Manager is the officer in charge of financial intermediation transactions. The Syndics can be invited to attend any meeting called by this Committee. This Committee is responsible for planning, coordinating and enforcing compliance with the policies on the issue established and approved by the Board of Directors. The Committee meets at least once per quarter. Resolutions must be registered in a minutes book.
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Committee for Information Integrity: This Committee is composed of three Directors, the Chief Executive Officer and the Planning Division Manager. The Syndics can be invited to attend any meeting called by this Committee. A member of the Committee that was created for the same purpose by Grupo Financiero Galicia S.A. shall also attend the meetings held by this Committee. This Committee is in charge of promoting compliance with the provisions set forth in the Sarbanes-Oxley Act of 2002 of the United States of America. The Committee meets at least every three months or whenever there are issues that require consideration. Its resolutions are summarized in writing in minutes.
Information Technology Committee: This Committee is composed of three Directors, the Chief Executive Officer and the Comprehensive Corporate Services Division Manager. This Committee is in charge of supervising and approving the development plans of new systems and their budgets, as well as supervising these systems’ budget control. It is also responsible for approving the general design of the systems’ structure, the main processes thereof and the systems implemented, as well as monitoring the quality of the Bank’s systems, within the policies established by the Board of Directors. The Information Technology Committee meets at least once every three months. It can hold extraordinary meetings in case there is any issue that requires urgent consideration. Its resolutions are summarized in writing in minutes.
Income Statement Reporting Committee: This Committee is composed of five Directors, the Chief Executive Officer and the Planning Division Manager. It is in charge of monitoring management and income statements, along with evaluating the macroeconomic situation. The Committee meets at least once per quarter. Its resolutions are summarized in writing in minutes.
Every month, the Board of Directors learns about the decisions taken by these Committees, what is written down in minutes.
On October 7, 2015, Mr. Fabián Enrique Kon was appointed Banco de Galicia y Buenos S.A.’s CEO by the Board of Directors. The CEO is responsible for implementing the strategic goals established by Banco Galicia’s Board of Directors and coordinating with the Managers of the Bank’s Divisions. Mr. Kon reports to the Board of Directors.
Fabián Enrique Kon: Mr. Kon was born on September 25, 1958. He obtained a degree in national public accounting at the Universidad de Buenos Aires. He worked at Pistrelli, Diaz y Asociados, Accenture, Exolgan Container Terminal and Tradecom, in managerial positions. From 2006 to February 2014, he was Galicia Seguros’ CEO and in March 2014, he was appointed Banco Galicia´s retail banking manager. Mr. Kon is also the chairman of Sudamericana Holding, vice chairman of Tarjetas Regionales, and director of Tarjeta Naranja.
As of the date of this annual report, the following divisions and department managers report to Banco Galicia’s CEO:
Division
Manager
Risk Management
Comprehensive Corporate Services
Organizational Development and Human Resources
Planning
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Wholesale Banking Division This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Wholesale Banking’s businesses and for each customer segment (corporate, medium-sized and agricultural companies) and products. It is also responsible for defining and controlling this division’s business goals, ensuring that these goals meet market demands and remain aligned with the Bank’s strategic objectives, guaranteeing volume, profitability, quality and customer satisfaction, within the preset risk levels. Furthermore, this division is responsible for proposing and developing banking products for the corporate segment and a customer service model tailored to each customer segment in order to ensure that growth and profitability targets are met. The following departments report to this division: Corporate Banking, Investment Banking and Capital Market, Wholesale Products and Marketing, Agribusiness Sector and Middle-Market Banking.
Retail Banking Division: This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Retail Banking’s businesses and for each customer segment (Private Banking, Eminent, Prefer Banking, Consumer Banking, and SMEs) and the distribution channels (Branch Network and Alternative Channels). It is also responsible for defining and controlling this division’s business goals, ensuring that these goals meet market demands and remain aligned with the Bank’s strategic objectives and guaranteeing volume, profitability, quality and customer satisfaction, while managing risk levels. Furthermore, this division is responsible for proposing and developing the advertising plan, banking products for their consumer segments and a customer service model tailored to each customer segment and also ensuring that growth, profitability and customer service targets are met. The following departments report to this division: Segments, Products, Private Banking, Advertising, Branches, Digital, Customer Contact Center (CCC) and Retail Planning.
Financial Banking Division: This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Financial Banking Division, to ensure the provision of funding, compliance with mismatch policies, and the attainment of liquidity targets, while optimizing performance and ensuring the achievement of the Bank’s business goals with respect to volume and profitability. Furthermore, this division is responsible for managing the financial position of the Bank, negotiating rates, funds, incentives and campaigns with different areas, and providing regulatory, information and technical support for the management of assets and liabilities, aiming to guarantee the control of liquidity, rate, currency and market risks and the compliance with applicable legal and policy provisions. In addition, this division plans, proposes and implements the strategy for the development and maintenance of business relations with international banks, international entities, international mutual funds and bi-national clearing houses with the aim of enhancing the Bank’s image in international markets and ensuring efficient business operations based on the growth and profitability targets established by the organization. The following departments report to this division: Commercial, Financial Institutions, Public Sector and Products.
Risk Management Division: This division is responsible for elaborating, suggesting and agreeing on credit, financial and operational risk strategies and policies designed for the Bank and its affiliated companies, monitoring efficiency and compliance with control procedures with a focus on prevention and categorizing and measuring risks in order to be able to minimize or eliminate risks and/or allocate the appropriate capital to successfully prevent such risks. This division is also responsible for the monitoring and oversight of compliance with the policies on control and prevention of money laundering and funding of terrorist activities in order to minimize reputational risks, thus ensuring compliance with applicable regulations and international standards. The following departments report to this division: Financial Risk, Retail Credit, Wholesale Credit, Recovery, Strategic Risk Management, Model Factory and Information Security.
Comprehensive Corporate Services Division: This division is responsible for designing, planning and implementing the strategies and policies for the IT, Organization, Operations, and Infrastructure divisions, and the maintenance thereof, with the goal of ensuring and maintaining the administrative support for its operations and activities, by means of a functional coordination of all services, and the human and technological resources available to the Bank. Furthermore, this division is responsible for developing and proposing innovations and new solutions to business processes, and preparing the expense and investment budget. The following departments report to this division: Operations, Systems, and Engineering and Maintenance.
Organizational Development and Human Resources Division: This division is responsible for designing, planning and implementing Human Resources strategies and policies, as well as defining and controlling management goals of the Bank’s human resources with the purpose of ensuring consistent practices, availability of qualified and motivated personnel, and a proper work environment, in accordance with the applicable social security and employment legislation and with the Bank’s culture and values. Furthermore, this division is responsible for
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directing corporate social responsibility activities and the internal communication, with the goal of enhancing the Bank’s image with focus on social responsibility, promoting employee loyalty, and applying social marketing to obtain the Bank’s competitive advantage. The following departments report to this division: Human Resources Advisory, Human Resources Management, Compensation, Sustainability, Talent Management, Internal Communications and Culture, Labor Relations and Safety.
Planning Division: This division is responsible for planning, coordinating and controlling the development and maintenance of budget, planning, accounting, tax and legal activities, with the aim of providing management with information to facilitate decision-making processes, management control, and compliance with disclosure requirements, as well as guaranteeing the availability of information that may allow the Bank to obtain strategic, long-term financing. Furthermore, this division is responsible for planning and ensuring compliance with the liquidity, interest rates and currency mismatches strategies, within the limits of the policies established, formulating proposals to the Asset and Liabilities Committee related to the management of such mismatches in order to maximize income in conformity with the Bank’s policies. In addition, it provides legal advice to different sectors of Banco Galicia to conduct business in accordance with applicable regulations. The following departments report to this division: Accounting, Management Control, Tax Advice, Research and Strategic Planning, Assets and Liabilities Management, Legal Advice, Purchases and Institutional Relations.
Customer Experience: This division is responsible for defining and pursuing the Bank’s customer experience strategy to gain a competitive and differentiating edge in the financial services market. The following departments report to this division: NPS Operation, Organization, Initiatives, and Analysis and Indicators.
The following departments report to the board of directors of Banco Galicia:
Department
Internal Audit Department Division: This division is responsible for assessing and monitoring the effectiveness, conformity and efficiency of internal control systems with the goal of ensuring compliance with applicable laws and regulations.
Compliance and Prevention of Money Laundering Department Division: This division is responsible for coordinating and monitoring compliance with the policies established by Banco Galicia’s Board of Directors on control and prevention of money laundering and funding of terrorist activities in order to minimize reputational risks, thus ensuring compliance with applicable regulations and international standards. This division is responsible for encouraging compliance with Banco Galicia’s rules, good conduct principles and ethical values, and mitigating the risk ofnon-compliance by defining policies, establishing controls and reports in the best interest of the Bank, its employees, shareholders and customers.
The following are the biographies of Banco Galicia’s senior executive officers mentioned above and not provided in the sections “-Board of Directors of Banco Galicia” or “-Our Board of Directors” above.
Marcelo Iraola: Mr. Iraola was born on June 14, 1964. He obtained a degree in law at the Universidad de Buenos Aires. He completed the Program for Executive Development at IAE and a business management program at the Universidad de San Andres. He has been associated with Banco Galicia since 1988. He is also a director of Galicia Warrants.
Germán Alejandro Ghisoni: Mr. Ghisoni was born on May 6, 1967. He obtained a degree in business management at the Universidad Católica Argentina. He completed the Program for Executive Development at IAE (Instituto Argentino de Empresas), the Strategic Management in Banking Program at INSEAD and the Customer Centric Organitatios at Kellogg School of Management. He has been associated with Banco Galicia since 1995.
Pablo M. Leon: Mr. Leon was born on August 31, 1964. He obtained a degree in finance at the Universidad de Palermo and two PDF (Programs for Executive Development) at IAE (Instituto Argentino de Empresas) and IMD, Lausanne, Switzerland. He has been associated with Banco Galicia since 1987. He is also the chairman of Galicia Valores and director of Argenclear S.A.
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Diego Rivas: Mr. Rivas was born on October 20, 1969. He obtained a degree in Business Administration from the Universidad Argentina de la Empresa. He also completed a postgraduate degree in finance at the CEMA and management development programs at IMD (Switzerland), and a postgraduate degree in Risk Management at Wharton School at University of Pennsylvania. Mr. Rivas has been associated with Banco Galicia since 1987. In May 2016, he was appointed Risk Control Area Manager of Banco Galicia. Mr. Rivas is also Vice President of Procesadora Regional S.A. and Director of Tarjeta Naranja S.A.
María Marcela Fernie: Ms. Fernie was born on November 16, 1967. She obtained a degree in economics. She has been associated with Banco Galicia since 2011. She is a director of COELSA, an alternate director of Tarjetas Regionales and Tarjeta Naranja.
Rafael Pablo Bergés: Mr. Bergés was born on September 10, 1963. He obtained a degree in industrial engineering. He has been associated with Banco Galicia since August 2010. Prior to such time, he worked at Techint and at a several multinational companies in managerial positions. From 1998 to 2009, he was vice president in the Human Resources Division of Grupo Telefónica.
Bruno Folino: Mr. Folino was born on February 23, 1966. He has an accounting degree from the Universidad de Buenos Aires. He completed a post-graduate degree in Tax & Legal at the Universidad Austral and Master in Science of Management Sloan at GSB Stanford University. He started his career in Price Waterhouse & Co at the Auditing Department, and later, at the Tax & Legal Department. He has been associated with Banco Galicia since 1997 as Tax Manager and Planning Manager. In 2012, he was appointed Planning Manager.
Flavio Dogliolo: Mr. Dogliolo was born on March 13, 1965. He obtained a degree in business administration from the Universidad Católica Argentina. He received an MBA from the Universidad Austral. He was the manager of means of payments and automatic banking at Banco Bansud S.A., manager of quality and service productivity at Banco Río de la Plata S.A. and he worked in marketing database and commercial planning at Siembra AFJP S.A. He has been associated with the Bank since 1998.
Claudio Scarso: Mr. Scarso was born on October 6, 1961. He obtained a degree in systems engineering from the Universidad Argentina de la Empresa. He has been associated with Banco Galicia since 1995.
Teresa del Carmen Piraino: Ms. Piraino was born on April 6, 1971. She obtained a degree in accounting. She has been associated with Banco Galicia since 1992.
Banco Galicia’s bylaws provide for a Supervisory Committee consisting of three syndics and three alternate syndics. Pursuant to Argentine law and to the provisions of Banco Galicia’s bylaws, Banco Galicia’s syndics and alternate syndics are responsible of ensuring that all of Banco Galicia’s actions are in accordance with applicable Argentine law. Syndics and alternate syndics do not participate in business management and cannot have managerial functions of any type. Syndics are responsible for, among other things, the preparation of a report to the shareholders analyzing Banco Galicia’s financial statements for each year and the recommendation to the shareholders as to whether to approve such financial statements. Syndics and alternate syndics are elected at the ordinary shareholders’ meeting for a one-yearterm and they can be re-elected. Alternate syndics act in the temporary or permanent absence of a syndic.
The table below shows the composition of Banco Galicia’s Supervisory Committee as they werere-elected by the annual shareholders’ meeting held on April 27, 2017.
Enrique M. Garda Olaciregui
Norberto D. Corizzo
José Luis Gentile
Fernando Noetinger
Miguel N. Armando
Horacio Tedín
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For the biographies of Messrs. Enrique M. Garda Olaciregui, Norberto D. Corizzo, José Luis Gentile, Fernando Noetinger and Miguel N. Armando and Horacio Tedín, see “-Our Supervisory Committee”.
Banco Galicia’s board of directors establishes the policy for compensation of Banco Galicia’s personnel. Banco Galicia’s managers receive a fixed compensation. Seven directors are not employees of Banco Galicia. These non-employee directors, receive a fixed compensation, provided that payments do not exceed the standard levels of similar entities in the Argentine financial market, a provision that is applicable to managers as well. The officers’ compensation regime includes the possibility of acquiring a retirement insurance policy. Banco Galicia does not maintain stock-option plans or pension plans or any other retirement plans for the benefit of its directors and managers. Banco Galicia does not have a policy establishing any termination benefits for its directors.
For fiscal year 2016, Banco Galicia’s ordinary shareholders’ meeting held on April 27, 2017, approved compensation for the directors in the total amount of Ps.12.9 million.
The following table shows the composition of our staff:
Head Office
Galicia Uruguay
CFA(*)
Sudamericana Consolidated
Other Subsidiaries
Within the current legal framework, membership in an employee union is voluntary and there is only one union of bank employees with national representation. As of December 31, 2017, approximately 34% of Banco Galicia’s employees were affiliated with the national bank employee union. As of December 31, 2017, approximately 96% of the Regional Credit Card Companies’ work force was party to the merchant union’s Collective Bargaining Agreement No. 130/75 applicable to trade employees and 7% of which were members of a labor union. As of December 31, 2017, approximately 11% of CFA’s employees were affiliated with the merchant union. Usually during the first four months of the year, the bank employee union and the national commerce employee union renegotiate their respective collective labor agreements in order to establish new minimum wages. As a result of such negotiations, salary increases are granted. In 2017, the Argentine union that represents employees in the banking sector declared general strikes. These strikes were not particular to any one bank, but rather affected all banks in Argentina to the extent that some or all of the employees of any given bank were members of such union. In connection with such strikes, certain of the employees of the Bank are members of the referenced union and did participate in the strike; however, the Bank was able to continue its operations during the course of such strikes as not all of its employees participated. While employees of Banco Galicia have participated in general strikes against the Argentine banking sector, Banco Galicia has not experienced a targeted strike by its employees against the Bank in particular since 1973 and the Regional Credit Card Companies and CFA have never experienced any strike event. We believe that our relationship with our employees has developed within normal and satisfactory parameters.
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We have a human resources policy that aims at providing our employees possibilities for growth and personal and socio-economic achievement. We will continue our current policy of monitoring both wage levels and labor conditions in the financial industry in order to be competitive. Our employees receive fixed compensation and may receive variable compensation according to their level of achievement. We do not maintain any profit-sharing programs for our employees.
The Fundación Banco de Galicia y Buenos Aires (the “Fundación”) is an Argentine non-profit organization that provides various services to Banco Galicia employees. The various activities of the Fundación include, among others, purchasing school materials for the children of Banco Galicia’s employees and making donations to hospitals and other charitable causes, including cultural events. The Fundación is managed by a Council, certain members and alternate members of which are members of our Board of Directors and supervisory committee. Members and alternate members of the Council do not receive remuneration for their services as trustees.
Pursuant to Nasdaq Marketplace Rule 5615(a) (3), a foreign private issuer may follow home country corporate governance practices in lieu of the requirements of the Rule 5600 Series, provided that the foreign private issuer complies with certain sections of the Rule 5000 Series, discloses each requirement that it does not follow and describes the home relevant country practice followed in lieu of such requirement. The requirements of the Rule 5000 Series and the Argentine corporate governance practice that we follow in lieu thereof are described below:
Rule 5605 (d) – Compensation of Officers. In lieu of the requirements of Rule 5605 (d), we follow Argentine law, which does not require companies to form a compensation committee comprised solely of independent directors. It also is not required under Argentine law that the compensation of the CEO and all other executive officers be determined by either a majority of the independent directors or a compensation committee comprised solely of independent directors. Under Argentine law, the board of directors is the corporate body responsible for determining the compensation of the CEO and all other executive officers,
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Other than as noted above, we are in full compliance with all other applicable Nasdaq corporate governance standards.
For information on the share ownership of our directors and executive officers as of December 31, 2017, see Item 7. “Major Shareholders and Related Party Transactions—Major Shareholders”.
As of February 28, 2018, our capital structure was made up of class A shares, each of which is entitled to five votes and class B shares, each of which is entitled to one vote. As of February 28, 2018, we had 1,426,764,597 shares outstanding composed of 281,221,650 class A shares and 1,145,542,947 class B shares.
Our controlling shareholders are members of the Escasany, Ayerza and Braun families and the Fundación. As of February 28, 2018, the controlling shareholders owned 100% of our class A shares through EBA Holding (representing 19.7% of our total outstanding shares) and 10.2% of our class B shares (or 8.2% of our total outstanding shares), therefore directly and indirectly owning 27.9% of our shares and 59.7% of total votes.
Based on information that is available to us, the table below sets forth, as of February 28, 2018, the number of our class A and class B shares held by holders of more than 5% of each class of shares, the percentage of each class of shares held by such holder, and the percentage of votes that each class of shares represent as a percentage of our total possible votes.
Class A Shares
EBA Holding S.A.
Class B Shares
The Bank of New York Mellon (1)
ANSES
Capital World Investors (2)
EBA Holding Shareholders (3)
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Based on information that is available to us, the table below sets forth, as of February 28, 2018, the shareholders that either directly or indirectly have more than 5% of our votes or shares.
The Bank of New York Mellon
ANSES.
Capital World Investors
EBA Holding Shareholders.
Members of the three controlling families have owned the majority of the issued share capital of Banco Galicia since 1959. Members of the Escasany family have been on the board of directors of Banco Galicia since 1923. The Ayerza and Braun families have been represented on Banco Galicia’s board of directors since 1943 and 1947, respectively. Currently, there are five members of these families on our Board of Directors.
On September 13, 1999, the controlling shareholders of Banco Galicia formed EBA Holding S.A., an Argentine corporation, which is 100% owned by our controlling shareholders. EBA Holding holds 100% of our class A shares.
Currently, EBA Holding only has class A shares outstanding. EBA Holding’s bylaws provide for certain restrictions on the sale or transfer of its class A shares. While the class A shares of EBA Holding may be transferred to any other class A shareholder of EBA Holding, any transfer of such class A shares to third parties would automatically result in the conversion of the sold shares into class B shares of EBA Holding having one vote per share. In addition, EBA Holding’s bylaws contain rights of first refusal, buy-sell provisions and tag-alongrights.
As of February 28, 2018, we had 142 identified United States record shareholders (not including The Bank of New York), of which 19 held our class B shares and 123 held our ADSs. Such United States holders, in the aggregate, held approximately 359 million of our class B shares, representing approximately 25.2% of our total outstanding capital stock as of such date.
Grupo Financiero Galicia and its non-banking subsidiaries are not a party to any transactions with, and have not made any loans to any (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by Grupo Financiero Galicia or its non-banking subsidiaries, (ii) associates (i.e. an unconsolidated enterprise in which Grupo Financiero Galicia or its non-banking subsidiaries has a significant influence or which has significant influence over Grupo Financiero Galicia or its non-banking subsidiaries), (iii) individuals owning, directly or indirectly, an interest in the voting power of Grupo Financiero Galicia or itsnon-banking subsidiaries that gives them significant influence over Grupo Financiero Galicia or its non-banking subsidiaries, as applicable, and close members of any such individual’s family (i.e. those family members that may be expected to influence, or be influenced by, that person in their dealings with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable), (iv) key management personnel (i.e. persons that have authority and responsibility for planning, directing and controlling the activities of Grupo Financiero Galicia or its non-bankingsubsidiaries, including directors and senior management of companies and close members of such individual’s family) or (v) enterprises in which a substantial interest is owned, directly or indirectly, by any person described in (iii) or (iv) over which such a person is able to exercise significant influence nor are there any proposed transactions with such persons. For purposes of this paragraph, this includes enterprises owned by directors or major shareholders of Grupo Financiero Galicia or its non-banking subsidiaries that have a member of key management in common with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable. In addition, “significant influence” means the power to
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participate in the financial and operating policy decisions of the enterprise but means less than control. Shareholders beneficially owning a 10% interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries are presumed to have a significant influence on Grupo Financiero Galicia or its non-banking subsidiaries, as applicable.
Some of our directors and the directors of Banco Galicia have been involved in certain credit transactions with Banco Galicia as permitted by Argentine law. The Corporations Law and the Argentine Central Bank’s regulations allow directors of a limited liability company to enter into a transaction with such company if such transaction follows prevailing market conditions. Additionally, a bank’s total financial exposure to related individuals or legal entities is subject to the regulations of the Argentine Central Bank. Such regulations set limits on the amount of financial exposure that can be extended by a bank to affiliates based on, among other things, a percentage of a bank’s RPC. See Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.
Banco Galicia is required by the Argentine Central Bank to present to its board of directors, on a monthly basis, the outstanding amounts of financial assistance granted to directors, controlling shareholders, officers and other related entities, which are transcribed in the minute books of the board of directors of Banco Galicia. The Argentine Central Bank establishes that the financial assistance to directors, controlling shareholders, officers and other related entities must be granted on an equal basis with respect to rates, tenor and guarantees as loans granted to the general public.
In this section “total financial exposure” comprises equity interests and financial assistance (all credit related items such as loans, holdings of corporate debt securities without quotation, guarantees granted and unused balances of loans granted, among others), as this term is defined in “Item 4. Information on the Company—Argentine Banking Regulation—Lending Limits”.
“Related parties” refers mainly to our directors and the directors of Banco Galicia, our senior officers and senior officers of Banco Galicia, our syndics and Banco Galicia’s syndics, our controlling shareholders as well as all individuals who are related to them by a family relationship and any entities directly or indirectly affiliated with any of these parties, not required to be consolidated.
The following table presents the aggregate amounts of total financial exposure of Banco Galicia to related parties, the number of recipients, the average amounts and the single largest exposures as of the end of the three fiscal years ended December 31, 2017 and as of February 28, 2018, the last date for which information is available.
Aggregate Total Financial Exposure
Number of Recipient Related Parties
Companies
Average Total Financial Exposure
Single Largest Exposure
The financial assistance granted to our directors, officers and related parties by Banco Galicia was granted in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related parties, and did not involve more than the normal risk of collectability or present other unfavorable features.
In June 2011, Banco Galicia entered into an agreement with Galicia Seguros, a company indirectly controlled by Grupo Financiero Galicia, pursuant to which the Bank can offer insurance products on behalf of Galicia Seguros. In addition, they entered into an agreement for a one-year period pursuant to which Galicia Seguros insures the Bank for the balances of certain loans in the case of death of its clients. On July 31, 2014, Banco Galicia renewed both agreements with Galicia Seguros, for an additional year, with automatic deferral. Such agreements were considered to be “related party transactions” pursuant to Section 72 of the Capital Markets Law.
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The board of directors of Banco Galicia, during its meeting held on March 17, 2014, granted a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.125 million with a maturity date of June 30, 2015.
Similarly, the board of directors of Banco Galicia, during its meeting held on March 11, 2015, decided to grant a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.230 million with a maturity date of June 30, 2016. On April 5, 2016 this checking account overdraft was increased to Ps.300 million with a maturity date of June 30, 2017.
On March 14, 2017, the board of directors of Banco Galicia decided to grant a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.500 million with a maturity date of June 30, 2018.
We have elected to provide the financial information set forth in Item 18 of this annual report.
We are a party to the following legal proceedings:
In response to certain pending legal proceedings, Banco Galicia has recorded reserves to cover (i) various types of claims filed by customers against it (e.g. claims for thefts from safe deposit boxes, collections of checks that had been fraudulently altered, discrepancies related to deposit and payment services rendered to Banco Galicia’s customers, etc.) and (ii) estimated amounts payable under labor-related lawsuits filed against Banco Galicia by former employees.
As of the date of this annual report, provincial tax collection authorities, as well as tax collection authorities from the Autonomous City of Buenos Aires, are in the process (in different degrees of completion) of conducting audits and assessments mainly regarding the Compensatory Bond granted by the National Government to compensate financial institutions for the losses generated by the asymmetric pesification of loans and deposits.
Regarding the assessment of tax collection authorities from the Autonomous City of Buenos Aires, within the framework of the legal actions brought by Banco Galicia with the purpose of challenging the assessment of the tax collection authorities, a preliminary injunction was granted by the Argentine Federal Court of Appeals in Administrative Matters for the amount corresponding to the Compensatory Bond, which was ratified by the Supreme Court of Justice. Therefore, the Court ordered the Governmental Public Revenue Authority to refrain from starting tax enforcement proceedings or otherwise requesting precautionary measures for such purpose until a final judgment is issued. The proceedings are currently pending a decision by the Argentine Federal Court of Appeals in Administrative Matters with regard to the appeal filed by Banco de Galicia against the decision issued on the core issue by the Court of First Instance in November 2013. In any case, it is worth noting the decision issued by the federal prosecutor of the Court of Appeals was favorable to Banco de Galicia.
With regard to the Autonomous City of Buenos Aires’ claims on account of other items, Banco Galicia adhered to the System for the Settlement of Tax Liabilities in Arrears (Law No. 3,461 and the related regulations), which contemplated the total relief of interest and fines. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities.
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In connection with the assessments made by tax collection authorities from the Province of Buenos Aires, under the framework of some of the processes under discussion at the Provincial Tax Court, at this stage of proceedings the decision issued was: (i) unfavorable to Banco Galicia’s request regarding the items not related to the Compensatory Bond, and (ii) favorable with regard to the non-taxability thereof. Therefore, Banco Galicia adhered to the System for the Regularization of Tax Debts (Regulatory Decision No. 12 and related decisions), which contemplated discounts on the amounts not related to the Compensatory Bond. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities. In turn, the authorities from the Province of Buenos Aires objected to the judgment rendered by the Provincial Tax Court with regard to the Compensatory Bond, and requested the Court of Appeals in Administrative Matters of La Plata to set such decision aside. Banco Galicia entered an appearance and filed a motion for lack of jurisdiction, since it believes only the Argentine Supreme Court of Justice has jurisdiction to issue a decision on such matter. On April 15, 2014, the aforementioned court sustained the motion for lack of jurisdiction and ordered the proceedings to be filed. The authorities from the Province of Buenos Aires filed an appeal before the Supreme Court of Justice of the Province of Buenos Aires, which has not issued a decision to date.
Furthermore, Banco Galicia has been expressing its disagreement regarding claims made by various jurisdictions at the corresponding administrative and/or legal proceedings.
These proceedings and their possible effects are constantly being monitored by the Bank’s management. Even though Banco Galicia believes it has complied with its tax liabilities in full pursuant to current regulations, provisions deemed adequate for each proceeding have been established.
Consumer Protection Associations, on behalf of consumers, have filed claims against Banco Galicia in connection with the collection of certain financial charges.
The Bank does not believe that the resolution of these controversies will have a significant impact on its financial condition.
The AFIP, Provincial Revenue Boards and Municipalities are in the process of conducting audits and assessments, in differing stages of completion, on the companies controlled by Tarjetas Regionales. Said agencies have served notices and made claims regarding taxes applicable to Tarjetas Regionales’s subsidiaries. Such companies are taking the corresponding administrative and legal steps in order to solve such issues. The original amount claimed for taxes totaled approximately Ps.14 million.
Based on the opinions of their tax advisors, the companies believe that the abovementioned claims are both legally and technically groundless and that taxes related to the claims have been correctly calculated in accordance with tax regulations in force and existing case law.
Consumer Protection Associations, on behalf of consumers, have filed claims against CFA in connection with the collection of certain financial charges.
The company does not believe that the resolution of these controversies will have a significant impact on its financial condition.
Dividend Policy
Grupo Financiero Galicia’s policy for the distribution of dividends envisages, among other factors, the obligatory nature of establishing a legal reserve, the company’s financial condition and its indebtedness, the business requirements of affiliated companies and, mainly, that the profits recorded in the financial statements are, to a great
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extent, income from holdings and not realized and liquid profits, a requirement of Section 68 of the Corporations Law so that it is possible to distribute them as dividends. The proposal to distribute dividends arising from such analysis has to be approved at the shareholders’ meeting that discusses the Financial Statements corresponding to each fiscal year.
We may only declare and pay dividends out of our retained earnings representing the profit realized on our operations and investments. The Corporations Law and our bylaws state that no profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per share basis. As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired until it is fully restored. The legal reserve is not available for distribution to shareholders.
Our ability to pay dividends to our shareholders principally depends on (i) our net income, (ii) cash availability, (iii) indebtedness and (iv) applicable legal requirements.
Holders of our ADSs will be entitled to receive any dividends payable in respect of our underlying class B shares. We will pay cash dividends to the ADSs depositary in Pesos, although we reserve the right to pay cash dividends in any other currency, including Dollars. The ADSs deposit agreement provides that the depositary will convert cash dividends received by the ADSs depositary in Pesos to Dollars and, after deduction or upon payment of fees and expenses of the ADSs depositary and deduction of other amounts permitted to be deducted from such cash payments in accordance with the ADSs deposit agreement (such as for unpaid taxes by the ADSs holders in connection with personal asset taxes or otherwise), will make payment to holders of our ADSs in Dollars.
Dividends
As a holding company, our principal source of cash from which to pay dividends on our shares is dividends or other intercompany transfers from our subsidiaries, primarily Banco Galicia. Due to the dividend restrictions contained in Banco Galicia’s loan agreements in connection with Banco Galicia’s foreign debt restructuring-that were lifted when said debt were fully paid during fiscal year 2016 - and in some Argentine Central Bank regulations, our ability to distribute cash dividends to our shareholders has been materially and adversely affected since late 2001 until 2010, when Banco Galicia obtained the authorization to distribute its profits.
After the end of fiscal year 2011, the Argentine Central Bank modified its regulations governing the minimum capital requirements and dividend distribution and, consequently, Banco Galicia has not paid dividends to date. However, Grupo Financiero Galicia paid a cash dividend corresponding to fiscal year 2014, Ps.100 million equivalent to Ps.0.0769 per share, for fiscal year 2015, Ps.150 million equivalent to Ps.0.1154 per share, all of them subject to the deduction, when applicable, of the personal assets tax and the 10% withhold for income tax. For fiscal year 2016, Grupo Financiero Galicia paid cash dividends for Ps.240 million equivalent to Ps.0.1846 per share.
Due to the fact that most of the profits for fiscal year 2017 correspond to income by holdings and just a fraction corresponds to the realized and liquid profits meeting the requirements to be distributed as per Section 68 of the Corporations’ Law, and taking as well into consideration Grupo Financiero Galicia’s economic and financial condition, a proposal was made by the Board of Directors, that must be approved during the next shareholders’ meeting to be held on April 24, 2018 to make a payment of dividends in cash for the amount of Ps.1,200 million, which represents 84.1064% with regard to 1,426,764,597 class A and B ordinary shares with a face value of Ps.1 each.
For more information on requirements for dividend distribution, see Item 4. “Information on the Company-Argentine Banking Regulation-Profit Distributions”.
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At the close of the fiscal year ended December 31, 2017, Banco Galicia’s capital,non-capitalized contributions, profit reserves, adjustments to shareholders’ equity and retained earnings (not including the fiscal year’s net income) totaled Ps.28,906 million.
Banco Galicia’s net income for fiscal year 2017 amounted to Ps.6,915 million. Taking into consideration the Argentine Central Bank rules regarding the distribution of profits, as explained above, Banco Galicia’s board of directors is expected to propose at the shareholders’ meeting held on April 24, 2018, the allocation of Ps.1,383 million to a legal reserve and Ps.5,532 million to a discretionary reserve for the future distribution of profits.
During the ordinary and extraordinary shareholders’ meeting held on April 17, 2018, the shareholders approved the payment of a cash dividend, in the amount of Ps.423 million, corresponding to the 2017 fiscal year.
On September 1, 2017, Sudamericana held an extraordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.502 million.
During the shareholders’ meeting held on March 28, 2017, the shareholders approved the payment of a cash dividend, in the amount of Ps.250 million corresponding to the 2016 fiscal year. On June 30, 2017, the Argentine Central Bank authorized such cash dividend. CFA’s Board of Directors approved such distribution on July 5, 2017 to shareholders in accordance with their respective ownership percentage.
Divestiture of Tarjetas Regionales S.A.
On January 9, 2018, the Argentine Central Bank informed Banco Galicia of its approval of the proposed corporate reorganization regarding Grupo Financiero Galicia and Banco Galicia. This reorganization consists of the divestiture of Banco Galicia’s shares in Tarjetas Regionales, which represents 77% of Tarjetas Regionales’ share capital, and the incorporation of the same into the assets of Grupo Galicia, effective as of January 1, 2018. As a result of such divestiture, Grupo Financiero Galicia obtained an 83% ownership interest in Tarjetas Regionales. The merger agreement was executed on January 23, 2018.
Sale of CFA and C&S
During January 2018, Grupo Financiero Galicia and Banco Galicia received a payment in an amount of Ps.558,7 million with respect to the sale of their respective ownership interests in CFA and C&S. This transaction was approved by the Argentine Central Bank on December 4, 2017. As of March 26, 2018, the final sale amount for this transaction is Ps.1,047.3 million.
On January 5, 2018, Grupo Financiero Galicia paid US$49 million to acquire 6% of Tarjetas Regionales. Such acquisition was completed on January 8, 2018, with the transfer of 22,633,260 Class A common shares, book entry, with a par value of Ps.1 per share and five votes per share and 42,033,196 Class B common shares, book entry, with a par value of Ps.1 per share and one vote per share.
During March 2018, Grupo Financiero Galicia received dividends in an amount of Ps.416 million from Galicia Administradora de Fondos, a subsidiary that was acquired in 2014.
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Banco Finansur S.A. was temporarily suspended from operation by the Argentine Central Bank from November 9, 2017 to February 9, 2018. On January 12, 2018, Banco Galicia informed the Argentine Central Bank regarding its non-binding offer to acquire certain assets and liabilities of Banco Finansur S.A. The Argentine Central Bank approved such acquisition on March 9, 2018.
On March 15, 2018, pursuant to Resolution No.19,401, the CNV’s Board of Directors approved the merger between Tarjetas Cuyanas and Tarjeta Naranja, with Tarjeta Naranja as the surviving entity. Pursuant Resolution No.19,402, the CNV’s Board of Directors also approved the dissolution, without liquidation, of Tarjetas Cuyanas.
The following table sets forth Tarjeta Naranja’s notes outstanding April 10, 2018:
In million of Pesos, except for rates (%)
Class XL Series I (1)
Class XL Series II (2)
Badlar +3.69
%
Our class B shares are listed on the BYMA, MAE and the Córdoba Stock Exchange under the symbol “GGAL”. Our class B shares have started listing on MAE since October 28, 2015. Our ADSs, each representing ten class B shares, are listed on the Nasdaq Capital Market, under the symbol “GGAL”. Our ADSs have been listed on Nasdaq Capital Market since August 2002. Previously, our ADSs had been listed on the Nasdaq National Market since July 24, 2000.
The following tables present, for the periods indicated, the high and low closing prices and the average trading volume of our class B shares on the BYMA as reported by the BYMA and the high and low closing prices and the average trading volume of our ADSs on the Nasdaq as reported by the Nasdaq Capital Market. There has been low trading volume of our class B shares on the Córdoba Stock Exchange. The following prices have not been adjusted for any stock dividends and/or stock splits.
Grupo Financiero Galicia - Class B Shares - BYMA (in Pesos)
Calendar Year
Two Most Recent Fiscal Years 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
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Most Recent Six Months
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As of March 28, 2018, the closing price of our class B shares was Ps.131.30.
Grupo Financiero Galicia – ADSs - Nasdaq Capital Market (in US$)
Two Most Recent Fiscal Years
As of March 29, 2018, the closing price of our ADSs was U.S. $65.76.
The principal and oldest exchange for the Argentine securities market is the BYMA. The BYMA started operating in 1854 and handles approximately 95% of all equity trading in Argentina. Securities listed on the BYMA include corporate equity and debt securities and government securities. Debt securities listed on the BYMA may also be listed on the MAE. The MERVAL, which is affiliated with the BYMA, was founded in 1929 and is the largest stock market in Argentina. The MERVAL is a private entity, whose capital is integrated by shares admitted to public offer regime and was registered as a market by the CNV under N°16. Its capital is composed of 183 outstanding shares and there are 214 agents registered as members of the Merval market. We are member of the Merval through Galicia Valores, a subsidiary that owns one share. Additionally, the Bank, within the framework of the Capital Market Law, was authorized by the CNV to act as a settlement and clearing agent and trading agent-comprehensive, and was added as member of the MERVAL.
Trading on the BYMA is conducted mostly through the Sistema Integrado de Negociación Asistida por Computación (Integrated Computer Assisted Trading System, “SINAC”) although there are still some transactions carried out by continuous open outcry, the traditional auction system, from 11:00 a.m. to 5:00 p.m. each business day of the year. SINAC is a computer trading system that permits trading in debt and equity securities and is accessed by brokers directly from workstations located at their offices. As a result of an agreement between the MERVAL and the MAE, equity securities are traded exclusively on the BYMA and corporate and government debt securities are traded on the MAE and the BYMA. Currently, all transactions relating to listed corporate and government debt securities can be effected on SINAC. In addition, a substantial over-the-counter market exists for private trading in listed debt securities and, prior to the agreement described above, equity securities. Such trades are reported on the MAE.
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Although companies may list all of their capital stock on the BYMA, in most cases the controlling shareholders retain the majority of a company’s capital stock. This results in only a relatively small percentage of most companies’ stock being available for active trading by the public on the BYMA. Even though individuals have historically constituted the largest group of investors in Argentina’s equity markets, in recent years, banks and insurance companies have shown an interest in these markets. Argentine mutual funds, by contrast, continue to have very low participation in the market. Although 104 companies had equity securities listed on the BYMA as of December 31, 2017, the 5 most-traded companies on the exchange accounted for approximately 38.6% of total trading value during 2017, from a 48% recorded in 2016. Our shares were the first-most traded shares on the BYMA in 2017, with a 10.44% share of trading volume from a second position of 9% recorded during 2016.
The Córdoba Stock Exchange is another important stock market in Argentina. Securities listed on the Córdoba Stock Exchange include both corporate equity and debt securities and government securities. Through an agreement with the BYMA, all the securities listed on the BYMA are authorized to be listed and subsequently traded on the Córdoba Stock Exchange. Thus, many transactions that originate on the Córdoba Stock Exchange relate to companies listed on the BYMA and such trades are subsequently settled in Buenos Aires.
The MAE is a self-regulated organization that is supervised by the CNV. MAE is mainly comprised by private banks, either composed by national or foreign capital, national banks, provincial banks, municipal Banks, cooperative Banks, financial companies, exchange companies and agents.
The CNV oversees the Argentine securities markets and is responsible for authorizing public offerings of securities and supervising brokers, public companies and mutual funds. Argentine pension funds and insurance companies are regulated by separate Argentine government agencies, while financial institutions are regulated mainly by the Argentine Central Bank. The Argentine securities markets are regulated by the CNV, which was created by Law No. 17,811, as amended.
In compliance with the provisions of Law No. 20,643 and the Decrees No. 659/74 and No. 2,220/80, most debt and equity securities traded on the exchanges and the MAE must, unless otherwise instructed by the shareholders, be deposited by the shareholders in Caja de Valores, which is a corporation owned by the BYMA, the MERVAL and certain provincial exchanges. Caja de Valores is the central securities depository of Argentina, which provides depository facilities for securities and acts as a transfer and paying agent in connection therewith. It also handles settlement of securities transactions carried out on the BYMA and operates the computerized exchange information system.
The level of regulation of the market for Argentine securities and investors’ activities is relatively low as compared to the United States and certain other countries, and enforcement of existing regulatory provisions has been limited. In addition, there may be less publicly available information about Argentine companies than is regularly published by or about companies in these countries. However, the CNV has taken steps to strengthen disclosure and regulatory standards for the Argentine securities market, including the issuance of regulations prohibiting insider trading and requiring insiders to report on their ownership of securities, with associated penalties for non-compliance.
In order to improve Argentine securities market regulation, Decree No. 677/01 or “Decree for Transparency in the Public Offering”, was promulgated and took effect on June 1, 2001. This decree has come to be regarded as the financial consumer’s “bill of rights”. Its objective is to provide transparency and protection to participants in the capital markets. The decree applies to individuals and entities that participate in the public offering of securities and to stock exchanges as well. Among its key provisions, the decree broadens the definition of “security;” governs the treatment of negotiable securities; obligates publicly listed companies to form audit committees composed of three or more members of the board of the directors, the majority of whom must be independent under CNV regulations; authorizes market-stabilization transactions under certain circumstances; governs insider trading, market manipulation and securities fraud; and regulates going-private transactions and acquisitions of voting shares, including controlling stakes in public companies.
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In order to offer securities to the public in Argentina, an issuer must meet certain requirements of the CNV regarding assets, operating history, management and other matters, and only securities for which an application for a public offering has been approved by the CNV may be listed on the corresponding stock exchange. This approval does not imply any kind of certification of assurance related to the merits of the quality of the securities, or the solvency of the issuer. Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements, as well as various other periodic reports, with the CNV and the corresponding stock exchange.
Securities can be freely traded on the Argentine markets but certain restrictions exist regarding access by residents and non-residents to the local foreign exchange market and to transfers of foreign exchange abroad. See Item 4. “Information on the Company-Government Regulation-Foreign Exchange Market”.
On October 2007, the CNV passed Resolution No. 516/07 providing for the voluntary adoption of a corporate governance code. The CNV recommends adoption of such code by public companies but requires that their policy with respect to each topic described in the code be disclosed in detail in the annual report. This resolution was effective for fiscal years beginning on January 1, 2008 and after and, therefore, public companies, including us, have to report on their degree of fulfillment of each topic of such code.
In December 2012, the Argentine Congress passed the Capital Markets Law (Law No. 26,831), which became effective on January 2013, replacing Law No.17,811 and Decree No. 677/01, with the aim of regulating the capital market under the supervision of the CNV and broadening the CNV’s powers. Additionally, the law intends to enhance the growth of local markets, to develop new and simplified negotiating systems and to create new regulation standards for the Argentine stock exchange, markets and other intermediary agents.
In November 2017, President Mauricio Macri proposed new regulations to Congress with respect to Argentine capital markets. The proposal sets forth certain initiatives, including suggesting regulations that will allow SMEs better access to financial instruments and creating an electronic credit invoice for MiPyMEs that will replace the receipts from sales and existing credit invoices. It also seeks to improve the regulatory framework by suggesting the launch of new products for SMEs, including providing discounts for accessing the financial market, thus better facilitating the use of existing products, such as the issuance of notes. Such proposals have not yet been approved by Congress.
Set forth below is a brief description of certain provisions of our bylaws and Argentine law and regulations with regard to our capital stock. Your rights as a holder of our capital stock are subject to Argentine corporate law, which may differ from the corporate laws of other jurisdictions. This description is not purported to be complete and is qualified in its entirety by reference to our bylaws, Argentine law and the rules of the BYMA, the Córdoba Stock Exchange as well as the CNV. A copy of our bylaws has been filed with and can be examined at the CNV in Buenos Aires and the SEC in Washington, D.C.
We were incorporated on September 14, 1999, as a stock corporation under the laws of Argentina and registered on September 30, 1999, with the IGJ, under corporate registration number 14,519 of Book 7, Volume of Stock Corporations. Our domicile is in Buenos Aires, Argentina. Under our bylaws, our duration is until June 30, 2100 and we are exclusively a financial and investment company (as stated in “Chapter 2. Purpose. Article 3.” of our bylaws). This duration may be extended by resolution taken at an extraordinary shareholders’ meeting.
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Our bylaws do not contain any provision governing the ownership threshold above which shareholder ownership must be disclosed.
Outstanding Capital Stock
Our total subscribed and paid-in share capital as of December 31, 2017, amounted to Ps.1,426,764,947, composed of class A shares and class B shares, each with a par value of Ps.1. The following table presents the number of our shares outstanding as of December 31, 2017, and the voting interest that the shares represent.
Shares
Registration and Transfer
The class B shares are book-entry common shares held through Caja de Valores. Caja de Valores maintains a stock registry for us and only those persons listed in such registry will be recognized as our shareholders. Caja de Valores periodically delivers to us a list of the shareholders as at a certain date.
The class B shares are transferable on the books of Caja de Valores. Caja de Valores records all transfers in our registry. Within 10 days of any such transfer, Caja de Valores is required to confirm the registration of transfer with the transferor.
Voting Rights
At shareholders’ meetings, each class A share is entitled to five votes and each class B share is entitled to one vote. However, class A shares are entitled to only one vote in certain matters, such as:
All distinctions between our class A shares and our class B shares will be eliminated upon the occurrence of any of the following change of control events:
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Limited Liability of Shareholders
Shareholders are not liable for our obligations. Shareholders’ liability is limited to the payment of the shares for which they subscribe. However, shareholders who have a conflict of interest with us and do not abstain from voting may be held liable for damages to us. Also, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or our bylaws may be held liable for damages to us or to third parties, including other shareholders, resulting from such resolutions.
Directors
Our bylaws provide that the Board of Directors shall be composed by at least three and at most nine members, as decided at a general ordinary shareholders’ meeting. To be appointed to our Board of Directors, such person must have been presented as a candidate by shareholders who represent at least 10% of our voting rights, at least three business days before the date the general ordinary shareholders’ meeting is to be held. Our bylaws do not state an age limit over which the directors cannot serve on our board.
At each annual shareholders’ meeting, the term of one third of the members of our Board of Directors (no fewer than three directors) expires and their successors are elected to serve for a term of three years. The shareholders’ meeting shall have the power to fix a shorter period (one or two years) for the terms of office of one, several or all the directors. This system of electing directors is intended to help maintain the continuity of the board. Alternate directors replace directors until the following general ordinary shareholders’ meeting is held. Directors may also be replaced by alternate directors if a director will be absent from a board meeting. The Board of Directors is required to meet at least once every month and anytime any one of the directors or syndics so requests.
Our bylaws state that the Board of Directors may decide to appoint an executive committee and/or a delegate director.
Our bylaws do not provide for any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to in this annual report was selected as a director or member of senior management.
Additionally, pursuant to our bylaws, any borrowing powers on behalf of the Company are granted to our Board of Directors. Our Board of Directors has the power to delegate these borrowing powers to our directors through a power of attorney and currently certain of our directors have powers of attorney to negotiate the terms of and borrow money on behalf of the Company. Furthermore, as stated by our bylaws, the chairman of our Board of Directors is also the legal representative of the Company. Although our bylaws do not expressly address a director’s power to vote on proposals, arrangements or contracts in which the director has a material interest, pursuant to customary Argentine business practice and certain tenants of Argentine corporate law, our directors do not vote on proposals, arrangements or contracts in which the director has a material interest.
Appointment of Directors and Syndics by Cumulative Voting
The Corporations Law provides for the use of cumulative voting to enable minority shareholders to appoint members of the board of directors and syndics. Upon the completion of certain requirements, shareholders are entitled to appoint up to one third of the vacancies to be filled on the board of directors by cumulative voting. Each shareholder voting cumulatively has the number of votes resulting from multiplying the number of votes to which such shareholder would normally be entitled by the number of vacancies to be filled. Such shareholder may apportion his votes or cast all such votes for one or a number of candidates not exceeding one third of the vacancies to be filled.
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Compensation of Directors
The Corporations Law and the CNV establish rules regarding the compensation of directors. The maximum amount of aggregate compensation that the members of the board of directors may receive, including salaries and other compensation for the performance of permanent technical and administrative services, may not exceed 25.0% of profits of each fiscal year. This maximum amount shall be limited to 5.0% when no dividends are distributed to the shareholders and shall be increased proportionately to the dividend distribution until the 25.0% limit is reached when all profits are distributed.
The Corporations Law provides that aggregate director compensation may exceed the maximum percentage of computable profit in any one year when the company’s profits are non-existent or too small as to allow payment of a reasonable compensation to board members which have been engaged in technical or administrative services to the company, provided that such proposal is described in the notice of the agenda for the ordinary shareholders’ meeting and is approved by a majority of shareholders present at such shareholders’ meeting.
In addition to the above, our bylaws establish that best practices and national and international market standards regarding directors with similar duties and responsibilities shall be considered when determining the compensation of board members.
Syndics
Our bylaws, in accordance with Argentine law, provide for the maintenance of a supervisory committee whose members are three permanent syndics and three alternate syndics. Syndics are elected for a one-year term and may be re-elected. Alternate syndics replace permanent syndics in case of absence. For the appointment of syndics, each of our class A shares and class B shares has only one vote. Fees for syndics are established by the shareholders at the annual ordinary shareholders’ meeting. Their function is to oversee the management of the company, to control the legality of the actions of the board of directors, to attend all board of directors’ meetings, to attend all shareholders’ meetings, to prepare reports for the shareholders on the financial statements with their opinion, and to provide information regarding the company to shareholders that represent at least 2% of the capital stock. Syndics’ liabilities are joint and several and unlimited for the non-fulfillmentof their duties. They are also jointly and severally liable, together with the members of the board of directors, if the proper fulfillment of their duties as syndics would have avoided the damage or the losses caused by the members of the board of directors.
Shareholders’ Meetings
Shareholders’ meetings may be ordinary meetings or extraordinary meetings. An annual ordinary shareholders’ meeting is required to be held in each fiscal year to consider the matters outlined in Article 234 of the Corporations Law, including, among others:
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Extraordinary shareholders’ meetings may be called at any time to discuss matters beyond the competence of the ordinary meeting, including but not limited to amendments to the bylaws, matters related to the liquidation of a company, limitation of the shareholders’ preemptive rights to subscribe new shares, issuance of bonds and debentures, transformation of the corporate form, a merger into another company and spin-offs, early winding-up, change of the company’s domicile to outside Argentina, total or partial repayment of capital for losses, and a substantial change in the corporate purpose set forth in the bylaws.
Shareholders’ meetings may be convened by the board of directors or by the syndics. A shareholder or group of shareholders holding at least 5.0% in the aggregate of our capital stock may request the board of directors or the syndics to convene a general shareholders’ meeting to discuss the matters indicated by the shareholder.
Once a meeting has been convened with an agenda, the agenda limits the matters to be decided upon at such meeting and no other matters may be decided upon.
Additionally, our bylaws provide that any shareholder holding at least 5% in aggregate of our capital stock may present, in writing, to the Board of Directors, before February 28 of each year, proposals of items to be included in the agenda at the annual general ordinary shareholders’ meeting. The Board of Directors is not obligated to include such items in the agenda.
Class B shares represented by ADSs will be voted or caused to be voted by the Depositary in accordance with instructions of the holders of such ADSs. In the event instructions are not received from the holder, the Depositary shall give a discretionary proxy for the shares represented by such ADSs to a person designated by us.
Notice of each shareholders’ meeting must be published in the Official Gazette, and in a widely circulated newspaper in the country’s territory, at least twenty days prior to the meeting but not more than forty-five days prior to the date on which the meeting is to be held. The board of directors will determine the appropriate publication of notices outside Argentina in accordance with the requirements of the jurisdictions and exchanges on which our shares are traded. In order to attend a meeting and to be listed on the meeting registry, shareholders must submit evidence of their book-entry share account held at Caja de Valores at least three business days prior to the scheduled meeting date without counting the meeting day.
The quorum for ordinary meetings consists of a majority of stock entitled to vote, and resolutions may be adopted by the affirmative vote of 50% plus one vote (an “absolute majority”) of the votes present whether in person or participating via electronic means of communication. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting may be convened to be held one hour later on the same day as the first meeting had been called for, provided that it is an ordinary shareholders’ meeting, or within 30 days of the date for which the first ordinary meeting was called.
The quorum for extraordinary shareholders’ meetings consists of 60% of stock entitled to vote, and resolutions may be adopted by an absolute majority of the votes present. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting has to be convened to be held within 30 days of the date for which the first extraordinary meeting was called, and the notice must be published for three days, at least eight days before the date of the second meeting. Some special matters require a favorable vote of the majority of all the stock holding voting rights, the class A shares being granted the right to only one vote each. The special matters are described in “—Voting Rights” above.
Dividends may be lawfully paid and declared only out of our retained earnings representing the profit realized and liquid on our operations and investments reflected in our annual financial statements, as approved at our annual general shareholders’ meeting. No profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per-share basis.
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As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired. The legal reserve is not available for distribution to shareholders.
Our Board of Directors submits our financial statements for the previous fiscal year, together with reports prepared by our supervisory committee, to our shareholders for approval at the general ordinary shareholders’ meeting. The shareholders, upon approving the financial statements, determine the allocation of our net income.
Our Board of Directors is allowed by law and by our bylaws to decide to pay anticipated dividends on the basis of a balance sheet especially prepared for purposes of paying such dividends.
Under BYMA regulations, cash dividends must be paid to shareholders within 10 days of the shareholders’ meeting approving said dividend. Payment of dividends in shares requires authorization from the CNV, the BYMA and the Córdoba Stock Exchange, whose authorizations must be requested within 10 business days after the shareholders’ meeting approving the dividend. We must make a distribution of the shares available to shareholders not later than three months after receiving authorization to do so from the CNV.
Shareholders may no longer claim the payment of dividends from us after three years have elapsed from the date on which the relevant dividends were made available to such shareholders.
Capital Increases and Reductions
We may increase our capital upon resolution of the general ordinary shareholders’ meeting. All capital increases must be reported to the CNV, published in the Official Gazette and registered with the Public Registry of Commerce. Capital reductions may be voluntary or mandatory. A voluntary reduction of capital must be approved by an extraordinary shareholders’ meeting after the corresponding authorization by the BYMA, the Córdoba Stock Exchange and the CNV and may take place only after notice of such reduction has been published and creditors have been given an opportunity to obtain payment or guarantees for their claims or attachment. A reduction of capital is mandatory when losses have exceeded reserves and more than 50% of the share capital of the company.
Preemptive Rights
Under Argentine law, it is mandatory that a shareholder of ordinary shares of any given class have preemptive rights, proportional to the number of shares he or she owns, to subscribe for shares of capital stock of the same class or of any other class if the new subscription offer does not include all classes of shares. Shareholders may only decide to suspend or limit preemptive rights by supermajority at an extraordinary shareholders’ meeting and only in exceptional cases. Shareholders may waive their preemptive rights only on a case-by-case basis.
In the event of an increase in our capital, holders of class A shares and class B shares have a preemptive right to subscribe for any issue of class B shares in an amount sufficient to maintain the proportion of capital then held by them. Holders of class A shares are entitled to subscribe for class B shares because no further class A shares carrying five votes each are allowed to be issued in the future. Under Argentine law, companies are prohibited from issuing stock with multiple voting rights after they have been authorized to make a public offering of securities.
Preemptive rights are exercisable following the last publication of the notification to shareholders of the opportunity to exercise preemptive rights in the Official Gazette and an Argentine newspaper of wide circulation for a period of 30 days, provided that such period may be reduced to no less than 10 days if so approved by an extraordinary shareholders’ meeting.
Shareholders who have exercised their preemptive rights and indicated their intention to exercise additional preemptive rights are entitled to additional preemptive rights (“accretion rights”), on a pro rata basis, with respect to any unsubscribed shares, in accordance with the terms of the Corporations Law. Class B shares not subscribed for by shareholders through the exercise of their preemptive or accretion rights may be offered to third parties.
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Holders of ADSs may be restricted in their ability to exercise preemptive rights if a registration statement relating to such rights has not been filed or is not effective or if an exemption from registration is not available.
Appraisal Rights
Whenever our shareholders approve:
any shareholder that voted against such action or did not attend the relevant meeting may exercise its right to have its shares canceled in exchange for the book value of its shares, determined on the basis of our latest balance sheet prepared in accordance with Argentine laws and regulations, provided that such shareholder exercises its appraisal rights within the periods set forth below.
There is, however, doubt as to whether holders of ADSs, will be able to exercise appraisal rights with respect to class B shares represented by ADSs.
Appraisal rights must be exercised within five days following the adjournment of the meeting at which the resolution was adopted, in the event that the dissenting shareholder voted against such resolutions, or within 15 days following such adjournment if the dissenting shareholder did not attend such meeting and can prove that he was a shareholder on the date of such meeting. In the case of a merger or spin-off involving an entity authorized to make a public offering of its shares, appraisal rights may not be exercised if the shares to be received as a result of such transaction are listed on any stock exchange. Appraisal rights are extinguished if the resolution giving rise to such rights is overturned at another shareholders’ meeting held within 75 days of the meeting at which the resolution was adopted.
Payment of the appraisal rights must be made within one year from the date of the shareholders’ meeting at which the resolution was adopted, except if the resolution was to delist our capital stock, in which case the payment period is reduced to 60 days from the date of the related resolution.
Preferred Stock
According to the Corporations Law and our bylaws, an ordinary shareholders’ meeting may approve the issuance of preferred stock. Such preferred stock may have a fixed dividend, cumulative or not cumulative, with or without additional participation in our profits, as decided by shareholders at a shareholders’ meeting when determining the conditions of the issuance. They may also have other preferences, such as a preference in the event of our liquidation.
The holders of preferred stock shall not be entitled to voting rights. Notwithstanding the foregoing, in the event that no dividends are paid to such holders for their preferred stock, and for as long as such dividends are not paid, the holders of preferred stock shall be entitled to voting rights. Holders of preferred stock are also entitled to
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vote on certain special matters, such as the transformation of the corporate form, a merger into another company and spin-offs (when we are not the surviving entity and the surviving entity is not listed on any stock exchange), early winding-up, a change of our domicile to outside Argentina, total or partial repayment of capital for losses and a substantial change in the corporate purpose set forth in our bylaws or in the event our preferred stock is traded on stock exchanges and such trading is suspended or terminated.
Conflicts of Interest
As a protection to minority shareholders, under the Corporations Law, a shareholder is required to abstain from voting on any resolution in which its direct or indirect interests conflict with that of or are different than ours. In the event such shareholder votes on such resolution, and such resolution would not have been approved without such shareholders’ vote, the resolution may be declared void by a court and such shareholder may be liable for damages to the company as well as to any third party, including other shareholders.
Redemption or Repurchase
According to the Capital Markets Law, a stock corporation may acquire the shares issued by it, provided that the public offering and listing thereof has been authorized, subject to the following terms and conditions and those set forth by the CNV. The above-mentioned conditions are: (a) the shares to be acquired shall be fully paid up; (b) there shall be a resolution signed by the board of directors to such effect; (c) the acquisition shall be made out of net profits or free or voluntary reserves; and (d) the total amount of shares acquired by the company, including previously acquired shares, shall not exceed 10% of the capital stock or such lower percentage determined by the CNV. The shares acquired by the company in excess of such limit shall be disposed of within the term of 90 days after the date of the acquisition originating such excess.
The shares acquired by the company shall be disposed of by the company within the maximum term of three years counted as from the date of acquisition thereof. Upon disposing of the shares, the company shall make a preemptive offer thereof. Such an offer will not be obligatory if the shares are used in connection with a compensation plan or program for the company’s employees or if the shares are distributed among all shareholders pro rata their shareholdings. If shareholders do not exercise, in whole or in part, their preemptive rights, the sale shall be made at a stock exchange.
Liquidation
Upon our liquidation, one or more liquidators may be appointed to wind up our affairs. If no such appointment is made, our Board of Directors will act as liquidator. All outstanding common shares will be entitled to participate equally in any distribution upon liquidation. In the event of liquidation, in Argentina and in any other country, our assets shall first be applied to satisfy our debts and liabilities.
Other Provisions
Our bylaws are governed by Argentine law and the ownership of any kind of our shares represents acceptance of our bylaws and submission to the exclusive jurisdiction of the ordinary commercial courts of Buenos Aires for any claim or dispute related to us, our shareholders, directors and members of the supervisory committee.
For a description of the exchange controls that would affect us or the holders of our securities, see Item 4. “Information on the Company-Government Regulation-Foreign Exchange Market”.
The following is a summary of the principal Argentine and U.S. federal income tax consequences arising from the acquisition, ownership and disposition of our class B shares and ADSs. This summary is based on Argentine and U.S. federal tax laws, as well as the regulations in effect as of the date of this annual report. Further,
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this summary is subject to any subsequent changes in laws and regulations that may come into effect after this date. Any change could apply retroactively and could affect the continued validity of this summary. This summary does not constitute legal advice or a legal opinion with respect to the transactions that the holders of our class B shares or ADSs may enter into. This summary is only a brief description of certain (but not all) aspects of the Argentine and U.S. federal income tax systems, as they relate to the acquisition, ownership and disposition of our class B shares and ADSs. In addition, although the Company believes that the following summary is a reasonable interpretation of the current taxation rules and regulations, Grupo Galicia cannot assure that the applicable authorities or tribunals will agree with all, or any of the tax consequences outlined below. Currently, there is no tax treaty between the United States and Argentina.
Law No. 26893, enacted on September 12, 2013 and published in the Official Gazette on September 23, 2013, introduced several changes to Income Tax Law No. 20,628, including the derogation of Section 78 of Decree No. 2284/1991; which provides that foreign holders with no permanent establishment in Argentina are exempt from paying income tax on the capital gains arising from the sale or other disposition of shares or ADSs.
Decree No 2334/2013 has regulated Law No. 26,893. This decree provides that changes introduced by Law No. 26,893 are effective from the date of publication of such law in the Official Gazette and apply to taxable events carried out from such date onwards.
Law No. 27,430 enacted on December 27, 2017 and published in the Official Gazette on December 29, 2017, introduced several changes to Income Tax Law No. 20,628. The principal change resulting from such law is a corporate income tax rate reduction in two phases. For fiscal years beginning on or after January 1, 2018 until December 31, 2019, the government has reduced the corporate income tax rate from 35% to 30%. After December 31, 2019, the corporate tax rate will be further reduced to 25%.
This reform includes additional changes, such as the confirmation that ADRs and ADSs generate Argentine-sourced income. Non- residents, however, will be exempted from the current 15% capital gains tax on the sale of ADRs or ADSs if they reside in a jurisdiction having an exchange of information agreement with Argentina or if these invested funds come from a cooperating jurisdiction.
Taxation of Dividends
As from the effectiveness of Law No. 27,430, dividends distributions (other than stock dividends) made by local entities to individuals, undivided estates, and foreign entities are subject to a withholding tax at a rate of 7% (while the corporate income tax is 30%) and at a rate of 13% beginning January 1, 2020. Thus, the combined rate on dividend/profit distribution would remain around the current 35% rate, as Argentina has not levied a withholding tax on dividends or branch profits, since it eliminated the same in 2016.
Dividend payments on ADSs or ordinary shares, whether in cash, property, or stock, would not be subject to Argentine withholding tax or other taxes. Such changes are pending confirmation by the relevant regulatory authority.
Equalization Tax
There is a specific rule under which a 35% tax (“equalization tax”) will be imposed on certain dividends approved by the registrant’s shareholders. The equalization tax will be applied only to the extent that distributions of dividends exceed the taxable income of the company increased by non-taxable dividends received by the distributing company in prior years and reduced by Argentine income tax paid by the distributing company.
The equalization tax will be imposed as a withholding tax on the shareholder receiving the dividend. Dividend distributions made in kind (other than cash) will be subject to the same tax rules as cash dividends. Stock dividends are not subject to Argentine taxation.
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In addition, the foregoing tax reforms abolished the equalization tax for profits generated beginning January 1, 2018. Such equalization tax is a withholding tax levied at a rate of 35% on dividend distributions in excess of tax earnings that would remain applicable for the stock ofnon-distributed earnings and profits as of December 31, 2017.
Taxation of Capital Gains
In accordance with Law No. 27,430 capital gains derived by non-resident individuals or foreign companies from the sale, exchange or other disposition of ADSs or class B shares are subject to the following regulations:
Transfer Taxes
No Argentine transfer taxes are applicable on the sale or transfer of ADSs or class B shares.
Tax on Minimum Notional Income
The tax reform in force since 1999 reinstituted a tax on assets of Argentine companies. This tax is similar to the asset tax that was previously in effect in Argentina from 1990 to 1995. It applies at a general rate of 1% on a broadly defined asset base encompassing most of the taxpayer’s gross assets at the end of any fiscal year ending after December 31, 1998.
Specifically, the Law establishes that banks, other financial institutions and insurance companies will consider a taxable base equal to 20% of the value of taxable assets.
Income tax and asset tax payments for a tax year will reduce a company’s tax liability on assets for that tax year; and can be carried forward to be applied against the company’s income tax liability in any of the next ten tax years.
According to Law No. 27,260, this tax will be repealed as of 2019.
Personal Assets Tax
Individuals domiciled and undivided estates located in Argentina or abroad will be subject to an annual tax in respect of assets located in Argentina and abroad. Applicable wealth tax rates and minimum non-taxable asset values for the general taxpayer regime are reduced and replaced with effect as of fiscal year 2016 by Law No. 27,260. The following is the new scheme:
Fiscal year
2018 onwards
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Taxpayers that have been compliant with their federal tax obligations in relation to fiscal years 2014 and 2015, according to tax authority information, that do not make use of the tax amnesty or moratorium regimes (Law No. 27,260), have access to be exempt from any wealth tax filing and payment obligations for fiscal years 2016, 2017 and 2018.
Individuals domiciled abroad will pay the tax only in respect of the assets they hold in Argentina. In the case of individuals domiciled abroad, the tax will be paid by the individuals or entities domiciled in Argentina which, as of December 31 of each year, hold the joint ownership, possession, use, enjoyment, deposit, safekeeping, custody, administration or tenure of the assets located in Argentina and subject to the tax belonging to the individuals domiciled abroad. When the direct ownership of notes, government securities and certain other investments, except shares issued by companies ruled by the Corporations Law, are part of companies domiciled abroad in countries that do not enforce registration systems for private securities (with the exception of insurance companies, open-end investment funds, pension funds or banks and financial entities with head offices in countries that have adopted the international banking supervision standards laid down by the Basel Committee on Banking Supervision) or that pursuant to their bylaws, charter, documents or the applicable regulatory framework, have as their principal activity investing outside of the jurisdiction of their organization or domicile, or are generally restricted from doing business in their country of incorporation, it will be assumed, without admission of any proof to the contrary, that these assets belong ultimately to individuals and therefore the system for paying the tax for such individuals domiciled abroad applies to them.
An exception pursuant to a tax reform was published in the Official Gazette as Law No. 25,585, which went into effect on December 31, 2002. This tax reform introduced a mechanism to collect the personal assets tax on shares issued by companies ruled by the Corporations Law, which ownership belongs to individuals domiciled in Argentina or abroad; and companies or entities domiciled abroad. In the case of companies or entities domiciled abroad, it will be assumed, without admitting any proof to the contrary, that these shares ultimately belong to individuals domiciled abroad.
The tax was assessed and paid by those companies ruled by the Corporations Law at the rate of 0.5% on the value of the shares or equity interest. Since fiscal year 2016, after amendments introduced by Law No. 27,260, the tax rate applicable to participations in domestic entities has been reduced from 0.50% to 0.25%. The valuation of the shares, whether listed or not, must be made according to their proportional equity value. These companies may eventually seek reimbursement from the direct owner of the shares, in respect of any amounts paid to the Argentine tax authorities as a personal asset tax. Grupo Financiero Galicia has sought reimbursement for the amount paid corresponding to December 31, 2002. The Board of Directors submitted the decision on how to proceed with respect to fiscal year 2003 to the annual shareholders’ meeting held on April 22, 2004. At that meeting, our shareholders voted to suspend all claims on our shareholders for any amount unpaid for fiscal year 2002 and to have the Company absorb the amounts due for fiscal year 2003 onward, when not withheld from dividends.
Pursuant to Law No. 27,260, Argentine companies that have properly fulfilled their tax obligations during the two prior fiscal years to the 2016 fiscal year, and which comply with certain other requirements, may qualify for an exemption from personal asset taxes for the 2016, 2017 and 2018 fiscal years. The request for this tax exemption should be filed before March 31, 2017. Grupo Financiero Galicia filed this request. Notwithstanding, we cannot assure that in the future, Grupo Financiero Galicia can fulfill these requirements and maintain such exemption.
Other Taxes
There are no Argentine federal inheritance, succession or gift taxes applicable to the ownership, transfer or disposition of ADSs or class B shares. There are no Argentine stamps, issue, registration or similar taxes or duties payable by holders of ADSs or class B shares.
Deposit and Withdrawal of Class B Shares in Exchange for ADSs
No Argentine tax is imposed on the deposit or withdrawal of class B shares in exchange for ADSs.
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United States Federal Income Taxes
The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of class B shares and ADSs, as their terms are set forth in the documents or the forms thereof, relating to such securities as in existence on the date hereof, but it does not purport to address all the tax considerations that may be relevant to a decision to purchase, own or dispose of class B shares or ADSs. This summary assumes that the class B shares or ADSs will be held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not address tax consequences to all categories of investors, some of which (such as dealers or traders in securities or currencies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt entities, banks, insurance companies, persons that received class B shares or ADSs as compensation for the performance of services, persons owning (or deemed to own for U.S. federal income tax purposes) 10% or more (by voting power or value) of our shares, investors whose functional currency is not the Dollar and persons that hold the class B shares or ADSs as part of a position in a “straddle” or as part of a “hedging” or “conversion” transaction for U.S. federal income tax purposes) may be subject to special tax rules. Moreover, this summary does not address the U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of class B shares or ADSs.
This summary (i) is based on the Code, existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case, as in effect and available on the date hereof, and (ii) is based in part on representations of the Depository and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.
For purposes of this summary, a “U.S. Holder” is a beneficial owner of class B shares or ADSs that, for U.S. federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if such trust validly elects to be treated as a United States person for U.S. federal income tax purposes or if (a) a United States court can exercise primary supervision over its administration and (b) one or more United States persons have the authority to control all of the substantial decisions of such trust. A “Non-U.S. Holder” is a beneficial owner of class B shares or ADSs that is neither a U.S. Holder nor a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes).
If a partnership (or any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds class B shares or ADSs, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
Each prospective purchaser should consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. tax consequences of acquiring, owning and disposing of class B shares or ADSs.
Ownership of ADSs in General
In general, for U.S. federal income tax purposes, holders of ADSs will be treated as the owners of the class B shares represented by such ADSs. For purposes of the discussion below, we assume that intermediaries in the chain of ownership between the holder of an ADS and Grupo Financiero Galicia are acting consistently with the claiming of U.S. foreign tax credits by U.S. Holders.
Taxation of Distributions
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” for U.S. federal income tax purposes, the gross amount of distributions by Grupo Financiero Galicia of cash or property (other than certain distributions, if any, of class B shares or ADSs distributed pro rata to all shareholders of Grupo Financiero Galicia, including holders of ADSs) made with respect to the class B shares or ADSs before reduction for
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any Argentine taxes withheld therefrom, will constitute dividends to the extent that such distributions are paid out of Grupo Financiero Galicia’s current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, and will be included in the gross income of a U.S. Holder as dividend income. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” non-corporate U.S. Holders generally will be taxed on such distributions on ADSs (or class B shares that are readily tradable on an established securities market in the United States at the time of such distribution) at the lower rates applicable to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year). Non-corporate U.S. Holders that (i) do not meet a minimum holding period requirement with respect to such ADSs (or class B shares), (ii) elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4)(B) of the Code or (iii) receive dividends with respect to which they are obligated to make related payments for positions in substantially similar or related property will not be eligible for the reduced rates of taxation. In addition, dividends will not be eligible for the dividends received deduction generally allowed to corporations under the Code.
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” if distributions with respect to the class B shares or ADSs exceed Grupo Financiero Galicia’s current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, the excess will be treated first as a tax-free return of capital to the extent of such U.S. Holder’s adjusted tax basis in the class B shares or ADSs. Any amount in excess of such adjusted basis will be treated as capital gain from the sale or exchange of such class B shares or ADSs. Grupo Financiero Galicia does not maintain calculations of its earnings and profits under U.S. federal income tax principles.
Dividends paid in Pesos will be included in the gross income of a U.S. Holder in an amount equal to the Dollar value of the Pesos on the date of receipt, which, in the case of ADSs, is the date they are received by the Depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Any gains or losses resulting from the conversion of Pesos between the time of the receipt of dividends paid in Pesos and the time the Pesos are converted into Dollars will be treated as ordinary income or loss, as the case may be, of a U.S. Holder. Dividends received by a U.S. Holder with respect to the class B shares or ADSs will be treated as foreign source income, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Argentine tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific categories of income. For this purpose, dividend income with respect to class B shares or ADSs should generally constitute “passive category income,” or in the case of certain U.S. Holders, “general category income.” The rules governing the foreign tax credit are complex. Prospective holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Subject to the discussion below under “Backup Withholding and Information Reporting,” aNon-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on class B shares or ADSs, unless such income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes upon a sale or exchange of class B shares or ADSs in an amount equal to the difference between such U.S. Holder’s adjusted tax basis in the class B shares or ADSs and the amount realized on their disposition. In the case of a non-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate for ordinary income (other than certain dividends) if the U.S. Holder’s holding period in the class B shares or ADSs exceeds one year at the time of the sale or exchange. Gain or loss, if any, recognized by a U.S. Holder generally will be treated as United States source income or loss for U.S. foreign tax credit purposes. Consequently, a U.S. Holder may not be able to use the foreign tax credit arising from any Argentine tax imposed on the disposition of class B shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. Certain limitations apply to the deductibility of capital losses for U.S. federal income tax purposes.
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A U.S. Holder’s initial tax basis in the class B shares or ADSs is the Dollar value of the Pesos denominated purchase price determined on the date of purchase. If the class B shares or ADSs are treated as traded on an “established securities market,” a cash basis U.S. Holder (or, if it elects, an accrual basis U.S. Holder) will determine the Dollar value of the cost of such class B shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase.
With respect to the sale or exchange of class B shares or ADSs, the amount realized generally will be the Dollar value of the payment received, before reduction for any Argentine taxes withheld therefrom, determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the class B shares or ADSs are treated as traded on an “established securities market,” a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the Dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
Subject to the discussion below under “Backup Withholding and Information Reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on gain realized on the sale or exchange of class B shares or ADSs unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Considerations
A non-U.S. corporation will be classified as a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (1) at least 75 percent of its gross income is “passive income” or (2) at least 50 percent of the average value of its gross assets is attributable to assets that produce “passive income” or is held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions, other than certain income derived in the active conduct of a banking business.
The application of the PFIC rules is unclear both generally and specifically with respect to banks. The United States Internal Revenue Service (“IRS”) has issued a notice and certain proposed Treasury Regulations that exclude from passive income any income derived in the active conduct of a banking business by a qualifying foreign bank (the “Active Bank Exception”). However, the IRS notice and proposed Treasury Regulations are inconsistent in certain respects. Because final Treasury Regulations have not been issued, there can be no assurance that Grupo Financiero Galicia or its subsidiaries will satisfy the Active Bank Exception for any given taxable year.
Based on certain estimates of its gross income and gross assets (which estimates are inherently imprecise), the nature of its business, and reliance on the Active Bank Exception, Grupo Financiero Galicia believes that it should not be classified as a PFIC for the taxable year ended December 31, 2017. Grupo Financiero Galicia’s status in future years will depend on its assets and activities in those years. Grupo Financiero Galicia has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC, but there can be no assurance that Grupo Financiero Galicia will not be considered a PFIC for any taxable year. If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, the class B shares or ADSs.
If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs could make a variety of elections that may alleviate certain of the adverse tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of the class B shares or ADSs. U.S. Holders should consult their own tax advisors regarding the tax consequences that would arise if Grupo Financiero Galicia were treated as a PFIC.
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Reporting Requirements
Non-corporate U.S. Holders, including individuals, that hold “specified foreign financial assets,” as defined in the Treasury Regulations (which may include class B shares or ADSs), other than in an account at a U.S. financial institution or the U.S. branch of a non-U.S. financial institution, are required to report certain information relating to such assets. U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of this and any other reporting requirements on their ownership and disposition of class B shares or ADSs. Failure to comply with applicable reporting requirements could result in the imposition of substantial penalties.
Backup Withholding and Information Reporting
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, class B shares or ADSs made within the United States, or by a U.S. payor or U.S. middleman, to a holder of class B shares or ADSs (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification).
Payments of dividends on, or proceeds from the sale or redemption of, class B shares or ADSs within the United States, or by a U.S. payor or U.S. middleman, to a holder (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification) will be subject to backup withholding if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is currently 24%.
FATCA
Beginning on January 1, 2019 (or, if later, the date on which final Treasury Regulations are published defining the term “foreign passthru payment”), Grupo Financiero Galicia may be required, pursuant to Sections 1471 through 1474 of the Code, and the Treasury Regulations promulgated thereunder (often referred to as the “Foreign Account Tax Compliance Act” or “FATCA”) to withhold U.S. tax at a 30% rate on all or a portion of any distribution on class B shares or ADSs which is treated as a “foreign passthru payment.”
Assuming that distributions from Grupo Financiero Galicia constitute “foreign passthru payments” and that Grupo Financiero Galicia enters into an agreement with the IRS to report the information required by FATCA or, if Argentina has entered in an intergovernmental agreement with the United States (an “IGA”), Grupo Financiero Galicia complies with such IGA, then an investor considered to have a “U.S. account” maintained by Grupo Financiero Galicia may be required to provide the information described below or be subject to U.S. withholding tax on any distribution on class B shares or ADSs that is treated as a “foreign passthru payment.” Investors in class B shares or ADSs that are financial institutions, or financial institutions that receive payments on behalf of other persons, and that have not entered into an agreement with the IRS (or otherwise established an exemption from FATCA, including pursuant to an applicable IGA) would also be subject to this U.S. withholding tax.
FATCA is particularly complex and its application to Grupo Financiero Galicia is uncertain at this time. Each holder of class B shares or ADSs should consult its own tax advisor to obtain a more detailed explanation of FATCA and to learn how it might affect such holder under its particular circumstances.
Medicare Tax on Investment Income
Certain U.S. Holders that are individuals, estates or trusts are required to pay a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold. Net investment income includes, among other things, dividends and capital gains from the sale or other disposition of class B shares or ADSs.
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THE ABOVE SUMMARIES ARE NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CLASS B SHARES OR ADSs. PROSPECTIVE HOLDERS SHOULD CONSULT AN INDEPENDENT TAX ADVISOR CONCERNING THE TAX CONSEQUENCES IN THEIR PARTICULAR CIRCUMSTANCES.
On July 19, 2016, Banco Galicia issued Class II notes due July 19, 2026, in an aggregate principal amount of U.S. $250 million.
During 2017, Tarjeta Naranja issued Class XXXVII notes in an aggregate principal amount of Ps.3,845 million.
According to the applicable price supplement for each issuance of the described notes, the companies agreed to certain commitments with the holders, which include, among others, the inability to merge except in certain circumstances, restrictions on incurring or guaranteeing certain indebtedness and restrictions on asset dispositions.
For a description of the notes issued during fiscal year 2017, see Note 14 to our financial statements.
In December 2010, the FMO granted Banco Galicia a U.S. $20 million loan with a six year term. The purpose of these facilities is to fund long-term loans to SMEs. In December 2011, Proparco granted Banco Galicia a U.S. $20 million loan with a six year term for the financing of investment projects of export oriented SMEs mainly active in the agribusiness sector. As of December 31, 2017, the principal amount of these facilities amounted to approximately U.S. $1,037 million.
In May 2016, the IFC granted Banco Galicia a credit line in an amount of up to U.S. $130 million. As of December 31, 2017, Banco Galicia has applied proceeds in an amount of U.S. $ 45 million towards the extension of loans to its customers.
We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and its exhibits, may be inspected and printed or copied for a fee at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These materials are also available on the SEC’s website at http://www.sec.gov. Material submitted by us can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006-1506.
Market risks faced by us are the risks arising from the fluctuations in interest rates and in foreign exchange rates. Our market risk arises mainly from the operations of Banco Galicia in its capacity as a financial intermediary. Our subsidiaries and other entities in which we have a minority equity interest are also subject to market risk. However, the amount of these risks is not significant and they are not discussed below. Policies regarding these risks are applied at the level of our operating subsidiaries.
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In compliance with the Argentine Central Bank’s regulations, based on the best practices and international standards, Banco Galicia has a Risk Management Division responsible for identifying, monitoring and actively and integrally managing the different risks Banco Galicia and its subsidiaries are exposed to (credit, financial and operational risks). The aim of the Division is to guarantee Banco Galicia’s board of directors that it is fully aware of the risks Banco Galicia is exposed to. It also creates and proposes the policies and procedures necessary to mitigate and control such risks. The Risk Management Committee, made-up of four members of the board of directors of Banco Galicia, the CEO and the managers of the Risk Management Division, the Planning Division and Internal Audit, is the highest corporate body to which Banco Galicia’s board of directors delegates integral risk management and the executive responsibility to define and enforce risk management policies, procedures and controls. This Committee is also responsible for setting specific limits for the exposure to each risk and approving, when applicable, temporary excesses over such limits as well as being informed of each risk position and compliance with policies.
See Item 6. “Directors, Senior Management and Employees-Functions of the Board of Directors of Banco Galicia”. Liquidity management is discussed in Item 5.B. “Liquidity and Capital Resources”. Credit risk management is discussed in Item 4. “Information on the Company-Selected Statistical Information-Credit Review Process” and other sections under Item 4. “Information on the Company-Selected Statistical Information” describing Banco Galicia’s loan portfolio and loan loss experience.
The following sections contain information on Banco Galicia’s sensitivity to interest-rate risk and exchange-rate risk that constitute forward-looking statements that involve risks and uncertainties. Actual results could differ from those projected in the forward-looking statements.
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A distinctive and natural characteristic of financial brokerage is the existence of interest-earning assets and interest-bearing liabilities with different maturities (or different rate repricing periods) and interest rates that can be fixed or variable. This situation leads to a gap or mismatch that arises from the balance sheet and measures the imbalance between fixed- and variable-rate assets and liabilities, and results in the so-called interest-rate risk or balance sheet structural risk. A commercial bank can face the interest rate risk on both sides of its balance sheet: with regard to the income generated by assets (loans and securities) and the expenses related to the interest-bearing liabilities (deposits and other sources of funds).
The policy currently in force defines this gap as the risk that the financial margin and the economic value of equity may vary as a consequence of fluctuations in market interest rates. The magnitude of such variation is associated with the sensitivity to interest rates of the structure of the Bank’s assets and liabilities.
Aimed at managing and limiting the sensitivity of Banco Galicia’s economic value and results with respect to variations in the interest rate inherent to the structure of certain assets and liabilities, the following caps have been determined:
Limit on the Gross Brokerage Margin for the First Year
The effect of interest rate fluctuations on the gross brokerage margin for the first year is calculated using the methodology known as scenario simulation. On a monthly basis, gross brokerage margin for the first year is simulated in a base scenario and in a “+100 b.p.” scenario. In order to prepare each scenario, different criteria are assumed regarding the sensitivity to interest rates of assets and liabilities, depending on the historical performance observed of the different balance sheet items. Gross brokerage margin for the first year in the “+100 b.p.” scenario is compared to the gross brokerage margin for the first year in the “base” scenario. The resulting difference is related to the annualized accounting gross brokerage margin for the last calendar trailing quarter available, for Banco Galicia on a consolidated basis, before quotation differences and UVA adjustment.
The limit on a potential loss in the “+100 b.p.” scenario with respect to the “base” scenario was established at 20% of the gross brokerage margin for the first year, as defined above. At fiscal year-end, the negative difference between the gross brokerage margin for the first year corresponding to the “+100 b.p.” scenario and that corresponding to the “base” scenario accounted for +0.1% of the gross brokerage margin for the first year.
The tables below show as of December 31, 2017 and December 31, 2016, in absolute and percentage terms, the change in Banco Galicia’s gross brokerage margin (“GBM”) of the first year, as compared to the gross brokerage margin of the “base” scenario corresponding to various interest-rate scenarios in which interest rates change 50, 100, 150 and 200 b.p. from those in the “base” scenario. Banco Galicia’s net portfolio is broken down into trading and non-trading. The trading net portfolio represents primarily securities issued by the Argentine Central Bank (Lebac and Nobac).
(In millions of Pesos, except percentages)
Change in Interest Rates in b.p.
200
150
100
50
Static
(50)
(100)
(150)
(200)
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Limit on the Net Present Value of Assets and Liabilities
The net present value of assets and liabilities is also calculated on a monthly basis and taking into account the assets and liabilities of Banco Galicia’s consolidated balance sheet. The methodology used for calculating interest rate risk is based on the net present value of the underlying asset of liability.
The net present value of the consolidated assets and liabilities, as mentioned, is calculated for a “base” scenario in which the listed securities portfolio is discounted using interest rates obtained according to yield curves determined based on the market yields of different reference bonds denominated in Pesos, foreign currency and adjusted by CER/UVA. Yield curves for unlisted assets and liabilities are also created using market interest rates. The net present value of assets and liabilities is also obtained for a second scenario called “critical”, where through a significant number of statistical simulations of the interest rate track record, a “critical” scenario is obtained as a result of the interest rate risk exposure presented by the balance sheet structure.
The economic capital is obtained from the resulting difference between the “critical” scenario and the net present value of assets and liabilities of the “base” scenario, and considering a 99.5% degree of accuracy.
The limit on interest rate risk exposure, expressed as a difference between the net present value of assets and liabilities in the “base” scenario and the “critical” scenario cannot exceed 15% of the consolidated RPC. As of December 31, 2017, the “Value at Risk” was -7.3% of the RPC.
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Exchange-rate sensitivity is the relationship between the fluctuations of exchange rates and Banco Galicia’s gross brokerage margin resulting from the revaluation of Banco Galicia’s assets and liabilities denominated in foreign currency. The impact of variations in the exchange rate on Banco Galicia’s gross brokerage margin depends on whether Banco Galicia has a net asset foreign currency position (the amount by which foreign currency denominated assets exceed foreign currency denominated liabilities) or a net liability foreign currency position (the amount by which foreign currency denominated liabilities exceed foreign currency denominated assets). In the first case, an increase/decrease in the exchange rate results in a gain/loss, respectively. In the second case, an increase/decrease results in a loss/gain, respectively. Banco Galicia has established limits for its consolidated foreign currency mismatches for the asset and liability positions of -9 % and + 30% of Banco Galicia’s RPC. At the end of the fiscal year, Banco Galicia’s net asset position in foreign currency represented 2.5%.
As of December 31, 2017, Banco Galicia had a net asset foreign currency position of Ps.1,817 million (equal to U.S. $97 million), after adjusting its on-balance sheet net liability position of Ps.735 million (minus U.S. $39 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.2,552 million (U.S. $136 million), recorded off-balance sheet.
As of December 31, 2016, Banco Galicia had a net asset foreign currency position of Ps.2,111 million (equal to U.S. $133 million) after adjusting its on-balance sheet net liability position of Ps.1,815 million (minus U.S. $115 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.3,926 million (U.S. $248 million), recorded off-balance sheet.
As of December 31, 2015, Banco Galicia had a net asset foreign currency position of Ps.2,023 million (equal to U.S. $156 million) after adjusting its on-balance sheet net liability position of Ps.814 million (U.S. $63 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.2,837 million (U.S. $218 million), recorded off-balance sheet.
The tables below show the effects of changes in the exchange rate of the Pesovis-à-vis the Dollar on the value of Banco Galicia’s foreign currency net asset position as of December 31, 2017, 2016 and 2015. As of these dates, the breakdown of Banco Galicia’s foreign currency net asset position into trading and non-trading is not presented, as Banco Galicia’s foreign currency trading portfolio was not material.
Percentage Change in the Value of the Peso Relative to the Dollar (1)
40%
30%
20%
10%
(10)%
(20)%
(30)%
(40)%
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Financial brokerage naturally involves the raising of funds and the subsequent use thereof. Both funding (deposits and other alternative sources of financing) and the use of the funds in loans and/or investments can be carried out in assets and liabilities denominated in different currencies. This possible currency mismatch between liabilities and the use thereof on assets generates a source of risk that arises from the variations in the different foreign currency exchange rates. This risk is inherent to the structure of assets and liabilities per currency.
Currency risk is defined as the risk of incurring equity losses as a consequence of variations in the foreign currency exchange rates in which assets and liabilities (both on and off the Balance Sheet) are denominated.
For purposes of the management and mitigation of the currency risk, two other currencies have been defined apart from the Argentine Peso: Assets and liabilities adjusted by UVA and foreign currency.
The policy framework currently in force establishes limits in terms of maximum net asset positions (assets denominated in a currency which are higher than the liabilities denominated in such currency) and net liability positions (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in Pesos adjusted by UVA and in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis.
Banco Galicia manages mismatches not only regarding assets and liabilities, but also covering mismatches through the foreign currency futures market. Transactions in foreign currency futures (Dollar futures) are carried out through the MAE, ROFEX and with customers. These transactions are subject to limits that take into consideration particular characteristics of each trading environment. A global exposure limit was set for these futures contracts, equivalent to 100% of Banco Galicia’s RPC on a consolidated basis.
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The table below shows the composition of Banco Galicia’s shareholders’ equity by currency and type of principal adjustment, that is Banco Galicia’s assets and liabilities denominated in foreign currency, in Pesos and adjustable by the UVA, as of December 31, 2017.
Financial Assets and Liabilities
Pesos - Adjusted by UVA
Pesos - Unadjusted
Foreign Currency (1)
Other Assets and Liabilities
Total Gap
Adjusted for Forward Transactions Recorded in Memo Accounts
Pesos - Adjusted by the UVA
Pesos - Unadjusted, Including Shareholders’ Equity (2)
Foreign Currency (1) (2)
Total Adjusted Gap
As of December 31, 2017, considering the adjustments from forward transactions recorded under memorandum accounts, Banco Galicia had net asset positions in Pesos Adjusted and Non-adjusted by UVA and had net liability positions in Foreign Currency.
The paragraphs below describe the composition of the different currency mismatches as of December 31, 2017.
Adjusted Peso-denominated Assets and Liabilities
At 2017 fiscal year-end, the Bank had a net asset position of Ps.3,524 million. The Bank’s adjusted assets were primarily comprised of Ps.4,060 million of loans (mainly UVA mortgage loans) and Ps.96 million from its participation certificate in Galtrust I Financial Trust, the latter adjusted by CER.
The Bank’s adjusted liabilities which partially offset its adjusted assets were primarily comprised of Ps.632 million UVA-adjusted time deposits.
Assets and Liabilities Denominated in Foreign Currency
As of December 31, 2017, the Bank’s assets denominated in foreign currency were mainly comprised the following: (i) cash and balances held at the Argentine Central Bank and correspondent banks for Ps.34,643 million; (ii) loans to the non-financial private sector and residents abroad for Ps.38,825 million (principal and interest, net of allowances); (iii) government securities for Ps.5,885 million; (iv) foreign currency forward purchases and government securities for Ps.5,588 million; and (v) corporate securities for Ps.1,687 million.
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As of December 31, 2017, the Bank’s liabilities denominated in foreign currency consisted mainly of: (i) deposits for Ps.70,412 million (principal, interest and quotation differences); (ii) debt with international banks and credit agencies for Ps.5,055 million; (iii) subordinated notes issued by Banco Galicia for Ps.4,828 million; (iv) sales of government securities and foreign currency pending settlement for Ps.3,163 million; and (v) collections for third parties for Ps.2,343 million.
As of December 31, 2017, the Bank had a net asset position equal to Ps.1,817 million. Furthermore, forward transactions in foreign currency without delivery of the underlying asset for a notional value of Ps.2,552 million were recorded in memorandum accounts. As of December 31, 2017, the Bank’s net position in foreign currency adjusted to reflect these transactions was a liability position of Ps.735 million, equivalent to U.S. $39 million.
Banco Galicia has set limits as regards foreign-currency mismatches at -9% (minus 9%) of the Bank’s RPC for its net liability position and at +30% (plus 30%) of the Bank’s RPC for its net asset position. At fiscal year-end, Banco Galicia’s liability position in foreign currency represented -2.5% (minus 2.5%) of the RPC.
Non-Adjusted Peso-Denominated Assets and Liabilities
The Bank’s non-adjusted Peso-denominated assets at December 31, 2017 were mainly comprised the following: (i) loans to the non-financial private sector for Ps.154,782 million (principal plus interest, net of allowances); (ii) holdings of securities issued by the Argentine Central Bank for Ps.26,835; (iii) cash and balances held at the Argentine Central Bank and correspondent banks for Ps.25,531 million (including the balance of escrow accounts); (iv) reverse repo transactions for Ps.9,614 million; (v) holding of government securities, mainly treasury bonds, provincial securities and others for Ps.3,690 million; (vi) mutual funds for Ps.2,122 million; and (vii) notes for Ps.1,357 million.
Banco Galicia’s non-adjusted Peso-denominated liabilities at December 31, 2017 were mainly comprised: (i) Deposits for Ps.132,459 million (principal plus interest); (ii) liabilities with stores in connection with Banco Galicia’s credit card activities and the regional credit-card companies for Ps.26,565 million; (iii) notes issued by Banco Galicia, the regional credit-card companies and CFA for Ps.16,486 million; (iv) forward sale for reverse repurchase agreements for Ps.10,687 million; (v) liabilities with local financial institutions for Ps.2,872 million; and (vi) repurchase agreement transactions for Ps.1,132 million.
The net asset position in non-adjusted Peso-denominated assets and liabilities was Ps.38,006 million at December 31, 2017.
In the category “Other Assets and Liabilities”, assets at December 31, 2017 were mainly comprised of the following: (i) bank premises and equipment, miscellaneous assets and intangible assets for Ps.8,563 million; (ii) sundry receivables for Ps.2,914 million; and (iii) amounts receivable from forward foreign currency transactions pending settlement for Ps.2,847 million.
Liabilities at December 31, 2017 were mainly comprised of the following: (i) Ps.7,877 million recorded under “Miscellaneous Liabilities”; (ii) Ps.5,832 million payable for forward transactions pending settlement; (iii) Ps.5,455 million for other liabilities resulting from financial brokerage; and (iv) Ps.1,845 million fornon-controlling interests.
The exposure to portfolios of listed financial instruments, whose value varies according to the movement in their market prices, is subject to a specific policy framework that regulates the risk of incurring a loss as a consequence of the variation of the market price of financial assets whose value is subject to negotiation.
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Brokerage transactions and/or investments in government securities, currencies, notes, derivative products and debt instruments issued by the Argentine Central Bank are governed by the policy that limits the maximum tolerable losses in a given fiscal year.
In order to gauge and monitor this source of risk, the model known as VaR is used, among others. This model determines intra-daily, for the Bank individually, the possible loss that could be generated by the positions in equity securities, currencies, derivative instruments, and debt securities issued by the Argentine Central Bank and currencies under certain parameters.
The parameters taken into consideration are as follows:
Banco Galicia’s policy requires that the Risk Management and Treasury Divisions agree on the parameters under which the models work, and establishes the maximum losses authorized both for equity securities, foreign-currency, Argentine Central Bank’s debt instruments and derivative products in a fiscal year. Maximum losses were established in:
Risk
Currency
Fixed-income instruments
Interest rate derivatives
Variable income
Furthermore, the policy includes the regular undertaking of stress tests, the goal of which is to assess the risk positions and their results, under adverse market conditions. Finally, “contingency plans” were designed for each transaction, which include the actions to be implemented in a critical scenario.
Cross-border risk represents the risk of incurring equity losses as a consequence of the impairment or failure to collect on foreign credit exposures (loans, securities holdings, equity investments, and cash) abroad. It includes risks generated by entering into transactions with public or private counterparties domiciled outside of Argentina.
In order to regulate risk exposures in international jurisdictions, limits were established taking into consideration the jurisdiction’s credit rating, the type of transaction and a maximum exposure acceptable for each counterparty.
The Bank defined its policy by setting maximum exposure limits measured as a percentage of its RPC and taking into account if the counterparty is considered investment grade:
Required Credit Rating
Investment Grade
Not Investment Grade
International Banking Relations
Maximum limit: 15%
Maximum limit: 1%
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With a view towards mitigating the risk resulting from a potential change in domestic laws that may affect overseas foreign currency transfers and in order to meet incurred liabilities, a policy was devised to set a limit for liabilities transferred abroad, as a proportion to total consolidated liabilities. Such ratio was fixed at 15%.
As of December 31, 2017, such exposure was 4.3% over total liabilities.
Risk Exposures in the Non-Financial Public Sector
The Argentine Central Bank imposes restrictions with respect to financing for the non-financial Public Sector and establishes limits in connection with the agencies that can be aided, the types of permitted loans and maximum amounts that can be granted. Such maximum amounts are set on the basis of the Bank’s RPC.
Banco Galicia provides two types of financial assistance to such sector: (i) assistance through the issuance of government securities; and (ii) direct assistance through loans, leasing, corporate securities, discounted notes, overdrafts, guarantees granted, foreign trade transactions, payroll loans, credit cards, etc.
Risk exposures on loans granted to such sector in national, provincial and municipal jurisdictions are governed by a specific policy, applicable to agencies within such jurisdictions, decentralized entities, companies and trust funds with underlying cash flows from the non-financial public sector.
Banco Galicia adopts the definition of operational and technological risk determined by the Argentine Central Bank and best international practices, which is the risk of losses due to the lack of conformity or due to a failure of internal processes, the acts of people or systems, or because of external events.
Banco Galicia defined the framework for the operational and technological risk management, which comprises the financial institution’s policies, practices, procedures and structures for its proper management.
The Risk Division, independent from the business or support units involved, includes a specific unit that is responsible for the management of such risks. The duties of this unit are, among others, to develop and monitor the operational and technological risk management model, inherent in the Bank’s products, activities, processes, systems and reporting assets, aligned with the regulations and best practices in force, organize the main necessary processes, provide advice, training and support to divisions, ensure that the Bank’s contingency, recovery and activity continuity plans are developed according to the size and complexity of its operations, as well as the respective tests thereon.
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The operational and technological risk is understood as the identification, assessment, monitoring, control and mitigation of this risk. It is an ongoing process carried out throughout the Bank, which fosters a risk management culture at all organization levels through an effective policy and a program led by Senior Management.
Identification
The starting point of operational and technological risk management is the identification of risks and their association with the controls established to mitigate them, considering internal and external factors that may affect the process development. The results of this exercise are entered into a log of risks, which acts as a central repository of the nature and status of each risk and controls thereof.
Assessment
Once risks have been identified, the size in terms of impact, frequency and likelihood of risk occurrence is determined, considering the existing controls. The combination of impact with likelihood of occurrence determines the risk exposure level. Finally, the estimated risk levels are compared to preestablished criteria, considering the balance of potential benefits and adverse results.
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Monitoring
The monitoring process allows for the detection and correction of deficiencies in the operational and technological risk management policies, processes and procedures or the update thereof, as applicable.
Risk Control and Mitigation
The control process ensures compliance with internal policies and analyzes risks and responses to avoid, accept, mitigate or share them, by aligning them with the risk tolerance defined.
The methodological approach adopted by the Bank includes several management tools.
Self-Risk Assessment
The self-risk assessment is a process to identify and assess existing risks, considering the controls established to manage and mitigate them. The self-assessment is a critical component of the operational and technological risk management framework since the vulnerability of operations and activities to risk can be verified based on this process. Assessment can be quantitative or qualitative.
Operational Risk Map
The operational and technological risk map allows viewing all the risks assessed (of a particular area or the whole entity) within a matrix of colors that, at first sight, points out those risks in a classification of high and very high (red), medium (yellow), low and very low (green), for their later analysis and for the preparation of reports or action plans.
Risk Indicators
Risk indicators, which are risk assessment mechanisms based on established thresholds, are defined by business and support area managers and offer a fair basis to estimate the likelihood and severity of one or more risk events.
Collection of Risk Events
The Risk Events Base is a tool whereby material data about risk events detected are identified and logged systematically. The collection of these events contributes to reducing incidents and the amounts of losses, as well as improving product service quality.
The Bank has defined training strategies, together with the Organizational Development and Human Resources Division, for the purpose of training and making all its employees aware of the importance of operational and technological risk and its proper management. For training programs, the Argentine Central Bank regulations and the definitions included in the Operational Risk Policy and the IT Risk Management Policy are taken into account.
The Bank has also defined policies to mitigate risks derived from service outsourcing and a code of conduct governing the relationship with suppliers.
The Bank also ensures that its operational and technological risks are appropriately assessed before launching or introducing new products, activities, processes, channels or systems.
Accordingly, the Bank has the structure and necessary resources to set the operational and technological risk profile and take the appropriate corrective actions, complying with the regulations established by the Argentine Central Bank regarding the guidelines for the operational and technological risk management at financial institutions.
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The minimum capital requirement with regard to the operational risk is determined according to the Argentine Central Bank regulations.
The appropriate management of operational and technological risks also helps to improve the quality of the customer service provided to the Bank’s clients.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay
For:
Past Fees and Payments
Grupo Financiero Galicia received a payment of U.S. $ 286,530 for fiscal year 2017, U.S. $280,601 for fiscal year 2016 and U.S. $270,898 for fiscal year 2015 in relation to continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), accounting fees and legal fees.
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Future Fees and Payments
The Bank of New York Mellon, as depositary, has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADSs program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees and certain accounting and legal fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consists of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
We expect to receive a similar reimbursement from the depositary for expenses for the fiscal year ending December 31, 2018 to the one we received for the fiscal year ended December 31, 2017.
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as amended). We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with or submit to the SEC under the Exchange Act, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is communicated to our management, including our CEO and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. Our CEO and Chief Financial Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance of their reliability. Notwithstanding the effectiveness of our disclosure controls and procedures, these disclosure controls and procedures cannot provide absolute assurance of achieving their objectives because of their inherent limitations. Disclosure controls and procedures are processes that involve human diligence and compliance and are subject to error in judgment. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by our disclosure controls and procedures.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
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1) Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us and our consolidated subsidiaries. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with applicable generally accepted accounting principles. Internal controls and procedures are processes that involve human diligence and compliance and are subject to error in judgment. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
2) Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework 2013.
3) Based on our assessment, we and our management have concluded that our internal control over financial reporting was effective as of December 31, 2017.
4) Price Waterhouse & Co. S.R.L., an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in their report to our consolidated financial statements.
(c) See Item 18. “Financial Statements-Report of the Independent Registered Public Accounting Firm” for our registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting.
(d) Changes in Internal Control over Financial Reporting During the Year Ended December 31, 2017.
During the period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Mr. Antonio R. Garcés, is the financial expert serving on our Audit Committee. Mr. Garcés is also considered independent as such term is defined under Nasdaq National Market listing requirements.
We have adopted a code of ethics (for Grupo Financiero Galicia and its main subsidiaries) in accordance with the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We did not modify our code of ethics during the fiscal year ended December 31, 2017. In addition, we did not grant any waivers to our code of ethics during the fiscal year ended December 31, 2017. In June 2009, we adopted a Code of Good Practice in Corporate Governance in accordance with Argentine legal requirements that received minor modifications in 2015, 2016 and 2017. On May 23, 2012 the CNV issued Rule No. 606 (modifying Rule No. 516) which established new standards for the filing of the Code of Good Practices in Corporate Governance. Our code of ethics and our code of corporate governance good practices are attached hereto as Exhibits 11.1 and 11.2.
The following table sets forth the total amount billed to us by our independent registered public accounting firm, Price Waterhouse & Co. S.R.L., during the fiscal years ended December 31, 2017 and 2016.
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Audit Fees
Audit Related Fees
Tax Fees
All Other Fees
Audit fees are mainly the fees billed in relation with professional services for auditing our consolidated financial statements under local and U.S. GAAP requirements for the fiscal years ended December 31, 2017 and December 31, 2016.
Audit-Related Fees
Audit-related fees are fees billed for professional services related to attestation, review and verification services with respect to our financial information and the provision of services in connection with special reports in 2017 and 2016.
Tax fees are fees billed with respect to tax compliance and advisory services related to tax liabilities.
All other fees include fees paid for professional services other than the services reported above under “audit fees”, “audit related fees” and “tax fees” in each of the fiscal periods above.
Audit Committee Pre-approval
Our audit committee is required to pre-approve all audit andnon-audit services to be provided by our independent registered public accounting firm. Our Audit Committee has reviewed and approved audit and non-audit services fees proposed by our independent auditors.
See Item 6. “-Nasdaq Corporate Governance Standards” for a summary of ways in which the Company’s corporate governance practices differ from those followed by U.S. companies.
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Report of the Independent Registered Public Accounting Firm as of and for the fiscal years ended December 31, 2017, 2016 and 2015.
You can find our audited consolidated financial statements on pages F-1 to F-115 of this annual report.
An index to exhibits has been filed as part of this annual report and is incorporated herein by reference.
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EXHIBIT INDEX
Exhibit
SIGNATURES
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
/s/ Pedro Alberto Richards
/s/ José Luis Ronsini
Date: April 19, 2018
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of the Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the fiscal years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Grupo Financiero Galicia S.A.
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Grupo Financiero Galicia S.A. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, of changes in shareholder´s equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting rules prescribed by the Banco Central de la República Argentina (the “BCRA”). Also in our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing on Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the auditing standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Emphasis of Matter
Accounting rules prescribed by the BCRA vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 34 to the consolidated financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ SANTIAGO JOSÉ MIGNONE (Partner)
We have served as the Company’s auditor since 1999.
F-3
Grupo Financiero Galicia S.A. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2017 and 2016
(Expressed in thousands of Argentine pesos (Ps.) and thousands of U.S. Dollars (US$))
A.
Cash
Financial institutions and correspondents
Argentine central bank (BCRA)
Other local financial institutions
Foreign financial institutions
B.
Holdings recorded at fair value
Holdings recorded at their acquisition cost plus the I.R.R.
Investments in listed corporate securities
C.
To the non-financial public sector
To the financial sector
Interbank loans – (call money loans granted)
Other loans to domestic financial institutions
Accrued interest, adjustments and exchange rate differences receivable
To the non-financial private sector and residents abroad
Promissory notes
Mortgage loans
Pledge loans
Personal loans
Credit card Loans
Accrued interest, adjustments and quotation differences receivable
Documented interest
Unallocated collections
D.
Other receivables resulting from financial brokerage
Amounts receivable for spot and forward sales to be settled
Securities receivable under spot and forward purchases to be settled
Negotiable obligations without quotation
Premiums from bought options
Balances from forward transactions without delivery of principal
The accompanying Notes are an integral part of these consolidated financial statements
F-4
Consolidated Balance Sheets - Continued
ASSETS (Continued)
E.
Credits for leases
Interest and adjustments
F.
Equity investments
In financial institutions
G.
Miscellaneous receivables
Receivables for assets sold
Tax on minimum presumed income – tax credit
Accrued interest and adjustments on receivables for assets Sold
Other accrued interest and adjustments receivable
H.
Bank premises and equipment
I.
Miscellaneous assets
J.
Intangible assets
Goodwill
Organization and development expenses
K.
Unallocated items
L.
F-5
LIABILITIES AND SHAREHOLDERS’ EQUITY
M.
Non-financial public sector
Financial sector
Non-financial private sector and residents abroad
Current accounts
Saving accounts
Time deposits
Investment accounts
Accrued interest and quotation differences payable
N.
Other liabilities resulting from financial brokerage
Bank and international entities
Unsubordinated negotiable obligations
Amounts payable for spot and forward purchases to be settled
Securities to be delivered under spot and forward sales to be settled
Premiums from Options Written
Loans from domestic financial institutions
Interbank loans
Other loans from domestic financial institutions
Accrued interest payable
Balances from forward transactions without delivery of underlying asset to be settled
Amounts payable to merchants
O.
Miscellaneous liabilities
Directors’ and Syndics’ fees
P.
Provisions
Q.
Subordinated negotiable obligations
R.
S.
T.
Non-controlling interest
SHAREHOLDERS’ EQUITY
F-6
Consolidated Statements of Income
For the fiscal years ended December 31, 2017, 2016 and 2015
Financial income
Interest on cash and due from banks
Interest on loans granted to the financial sector
Interest on advances
Interest on promissory notes
Interest on mortgage loans
Interest on pledge loans
Interest on credit card loans
Interest on financial leases
Interest on other loans
Interest on other receivables resulting from financial brokerage
Net income from government and corporate securities
Income from secured loans – Decree No. 1387/01
Net income from options
Consumer price index adjustment (CER)
Exchange rate differences on foreign currency
Financial expenses
Interest on current account deposits
Interest on saving account deposits
Interest on time deposits
Interest on interbank loans
Interest on financing from the financial sector
Interest on other liabilities resulting from financial brokerage
Interest on subordinated obligations
Other interest
Net expenses for options
Contributions made to Deposit Insurance Fund
Gross brokerage margin
Loan loss provisions
Income from services
In relation to lending transactions
In relation to borrowing transactions
Other commissions
Expenses for services
Commissions
F-7
Consolidated Statements of Income - Continued
Administrative expenses
Personnel expenses
Directors’ and syndics’ fees
Other fees
Advertising and publicity
Depreciation of bank premises and equipment
Amortization of organization expenses
Other operating expenses
Net Income from financial brokerage
Income from Insurance activities
Non-controlling interests result
Miscellaneous income
Net lncome from equity investments
Default interests
Loans recovered and allowances reversed
Miscellaneous losses
Default interests and charges in favor of the Argentine Central Bank
Loan loss provisions for miscellaneous receivables and other provisions
Amortization of differences arising from court resolutions
Depreciation and losses from miscellaneous assets
Amortization of goodwill
Net income before tax
Income tax
Net Income for the year
F-8
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2017, 2016 and 2015
Balance at December 31, 2014
Distribution of retained earnings by the shareholders’ meeting on April 29, 2015
Discretionary Reserve
Cash Dividends
Balance at December 31, 2015
Distribution of retained earnings by the shareholders’ meeting on April 26, 2016
Balance at December 31, 2016
Distribution of retained earnings by the shareholders’ meeting on April 25, 2017
Capital Increase (*) (**)
Balance at December 31, 2017
F-9
Consolidated Statements of Cash Flows
CHANGES IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Net increase in cash and cash equivalents
Causes of changes in cash and cash equivalents
Cash Flow from operating activities
Net (payments) / collections related to:
Government and corporate securities
To the non-financial private sector and foreign residents
Receivables from financial leases
Other liabilities from financial brokerage
Financing from the financial sector
Interbank Loans (call money loans received)
Others (except for liabilities included in Financing Activities)
Collections related to income from services
Payments related to expenses for services
Administrative expenses paid
Payment of organization and development expenses
Collection for penalty interests, net
Differences arising from court resolutions paid
Collection of dividends from other companies
Other Collections related to miscellaneous profits and losses
Net (payments) / collections for other operating activities
Other receivables and miscellaneous liabilities
Other operating activities, net
Payment of income tax / minimum presumed income tax
Net cash (used in) / provided by operating activities
Cash Flow from investing activities
Payments for bank premises and equipment
Payments for miscellaneous assets
Payments for equity investments
Other collections for investment activities
Net cash used in investing activities
F-10
Consolidated Statements of Cash Flows - Continued
Cash Flow from financing activities
Net collections / (payments) related to:
Banks and international entities
Loans from local financial institutions
Capital Increase
Distribution of dividends to non-controllingshareholders
Distribution of dividends to shareholders
Cash Flow provided by / (used in) by financing activities
Effect of exchange rate changes on cash and cash equivalents
F-11
1. Description of Business.
Grupo Financiero Galicia S.A. (“Grupo Galicia”, the “Company” or the “Group”) is a financial services holding company organized under the laws of Argentina that conducts its business through its subsidiaries, providing general banking services, proprietary brand credit card services, personal loans, insurance and other services.
The detail of subsidiaries of the Company and respective ownership interest are as follows:
Banco de Galicia y Buenos Aires S.A. (*****)
Cobranzas y Servicios S.A.(*)
Compañía Financiera Argentina S.A. (CFA) (*)
Galicia Administradora de Fondos S.A.
Galicia Valores S.A.
Net Investment S.A.(in Liquidation)
Sudamericana Holding S.A.
Procesadora Regional S.A.
Cobranzas Regionales S.A.
Tarjeta Naranja S.A. (**)
Tarjetas Regionales S.A. (****)
Tarjetas Cuyanas S.A.(**)
Tarjetas del Mar S.A.(***)
The Bank’s General Ordinary and Extraordinary Shareholders’ Meeting held on December 14, 2017 approved the spin-off/merger of the controlled company, Tarjetas Regionales S.A., with the consequent capital stock reduction of Banco de Galicia y Buenos Aires S.A. in the amount of Ps.127,425 equal to 127,424,621 ordinary book entry shares, with face value of Ps.1 each and 1 vote per share, effective as from January 1, 2018,
F-12
Grupo Financiero Galicia S.A. in its capacity as single shareholder and holder of 100% of Banco de Galicia y Buenos Aires S.A.’s capital stock, on December 27, 2017, paid the capital contribution with Lebacs (Argentine Central Bank bills), “I17E8” security, for a face value of 10,168,285,119, which were valued at market price, taking to such end the price of Ps. 0.98345 traded for the security on December 26, 2017 on M.A.E.’s session, totaling Ps.10,000,000. The Argentine Central Bank, through Resolution No. 35 dated January 11, 2018, authorized the capital contribution.
The subscription of shares is pending issuance, the appropriate legal proceedings of which have begun with the competent agencies.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Group in the preparation of the consolidated financial statements.
2.1 Basis of Presentation
The accounting policies and financial statements presentation conform to the rules of the Argentine Central Bank which prescribes the generally accepted accounting principles for all banks in Argentina (the “Argentine Banking GAAP”). This differs in certain significant respects from generally accepted accounting principles in Argentina applicable to enterprises in general (“Argentine GAAP”) (see Note 31) and from generally accepted accounting principles in the United States of America (“US GAAP”) (see Note 34).
Certain required disclosures under Argentine Banking GAAP have not been presented herein since they are not material to the accompanying financial statements. In addition, certain presentations and disclosures have been included in the accompanying financial statements to comply with the United States Securities and Exchange Commission´s regulations for foreign private issuers.
Certain reclassifications of the prior year´s information have been made to conform to the current year’s presentation. Such reclassifications do not have a significant impact on the Group´s financial statements.
2.2 Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Grupo Financiero Galicia and its subsidiaries over which the Company has effective control. Investments in companies in which the Company exercises significant influence, but not control, are accounted for under the equity method.
All significant intercompany balances and transactions have been eliminated in consolidation.
2.3 Presentation of Financial Statements in Constant Argentine Pesos.
Argentine GAAP in effect in the Autonomous City of Buenos Aires provides that financial statements shall be stated in constant currency, pursuant to the provisions of Technical Pronouncements Nos. 6 and 17 of the Argentine Federation of Professional Councils in Economic Sciences (“F.A.C.P.C.E.”), as amended by Technical Pronouncement No. 39, approved by the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires on April 16, 2014, as well as interpretation No. 8 of the F.A.C.P.C.E. These GAAP measures provide
F-13
that the adjustment for inflation shall be applied in an inflationary context, which is present when, among other considerations, there exists an accumulated rate of inflation reaching or exceeding 100% during three years, taking into consideration, for such purpose, the domestic wholesale price index published by the Argentine Institute of Statistics and Census. Financial statements reflect the effects of the changes in the purchasing power of the currency up to February 28, 2003 (the adjustment for inflation having been discontinued from such date) pursuant to the provisions of Argentine GAAP in force in the Autonomous City of Buenos Aires and the requirements of Decree No. 664/03 of the National Executive Branch, Section 268 of General Resolution No. 7/2005 of the Corporation Control Authority, Communiqué “A” 3921 of the Argentine Central Bank and General Resolution No. 441/03 of the Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”). Resolution M.D. No. 41/03 of the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires established the discontinuation of the recognition of the changes in the purchasing power of the currency, effective October 1, 2003.
At fiscal year-end, the macroeconomic environment cannot be qualified as a hyperinflationary economy considering the guidelines established by the professional accounting standards and the government’s expectation towards a lower inflation level. Even though the controlling agencies have not issued a decision in this regard, at fiscal year-end, the conditions for the application of the adjustment for inflation would not be met. However, when reading and analyzing these financial statements one should take into consideration the existence of fluctuations in significant economic variables, which took place during the past fiscal years.
2.4 Foreign Currency Assets and Liabilities.
Assets and liabilities denominated in foreign currencies are incorporated into the accounting records of the Company in Argentine Pesos at the exchange rate prevailing at the time of the transaction.
Assets and liabilities in foreign currencies at year-end are then translated into Argentine Pesos at closing exchange rates.
Assets and liabilities and income and expenses in foreign currencies generate transaction gains and losses, which are recorded within “Exchange rate differences on foreign currency” in the consolidated statements of income.
As of December 31, 2017 and 2016, the Argentine Peso/U.S. Dollar exchange rate was 18.774 and 15.850, respectively.
2.5 Government and Corporate Securities.
Government securities mainly represent obligations of the Argentine government or the Argentine Central Bank. Corporate securities included in this caption consist of listed corporate equity securities, mutual funds and listed debt securities.
Gains and losses and interest income on government and corporate securities are included as “Net Income from government and corporate securities” in the accompanying consolidated statement of income.
As of December 31, 2017 and 2016, the Bank records its holdings according to the following:
These holdings include trading securities issued by the Argentine Government which are included in the volatilities or present value lists issued by the Argentine Central Bank.
F-14
These securities are valued at their closing price for each class of securities in the corresponding markets or at their present values, plus the value of amortization and/or interest coupons due and receivable. Unrealized gains and losses are reported in earnings.
The same criterion was applied to holdings of such securities used in loans, as guarantee, transactions to be settled and repo transactions, when appropriate.
Holdings Recorded at their Acquisition Cost plus Interest Rate of Return (I.R.R.)
In this caption, the Group records holdings of government securities in pesos and foreign currency, as they are not included in the volatilities or present value lists issued by the Argentine Central Bank.
These holdings have been valued at their acquisition cost increased on an exponential basis according to their I.R.R. The monthly accrual is charged to income or an asset offset account, depending on the securities involved.
The same criterion was applied to the securities used in loans, as guarantee, transactions to be settled and repo transactions, when appropriate.
Securities Issued by the Argentine Central Bank
a) At Fair Value:
These holdings are included in the volatilities lists issued by the Argentine Central Bank, and therefore are valued at the closing price for each class of securities in the corresponding markets, plus the value of amortization and/or interest coupons due and receivable. Unrealized gains and losses are reported in earnings. The same criterion was applied to holdings of such securities used in loans, as guarantee, transactions to be settled and repo transactions, when appropriate.
b) At the Acquisition Cost plus I.R.R.:
These holdings have been valued at their acquisition cost increased on an exponential basis according to their I.R.R., as they are not included in the volatilities lists issued by the Argentine Central Bank. The same criterion was applied to holdings of such securities used in loans, as guarantee, transactions to be settled and repo transactions, when appropriate.
Investments in listed Corporate Securities
These securities are recorded at fair value, and any difference between their book value and fair value is recognized as a gain or loss in the Income Statement.
2.6 Financial Trust Debt Securities and Participation Certificates.
Debt securities that are incorporated at par have been valued at their amortized cost. The remaining holdings in debt securities are recorded at cost plus the interest rate of return. Participation certificates in financial trusts are accounted for under the equity method.
2.7 Interest Income (Expense) Recognition.
For foreign and local currency transactions with a principal adjustment clause, as well as for those in which rates have been prearranged for terms up to 92 days, the accrual has been recognized on a linear basis. For local currency transactions at rates arranged for longer periods, interest has been accrued on an exponential basis, which provides for an increasing effective rate over the life of the loan or deposit.
F-15
The Bank suspends the accrual of interest when the related loan is past due and the collection of interest and principal is in doubt. The suspension of interest corresponds to the loans classified as “with problems” and “medium risk” or below, under the Argentine Central Bank´s classification rules. Accrued interest remains on the Bank´s books and is considered to be part of the loan balance when determining the allowance for loan losses. Regarding impaired loans, interest is recognized on a cash basis after reducing the balance of accrued interest, if applicable.
2.8 Allowances for Loan Losses.
These have been established based upon the estimated default risk of Grupo Financiero Galicia’s credit assistance granted through its subsidiaries, which results from an evaluation of debtors’ compliance with their payment obligations, their economic and financial condition, and the guarantees securing their related transactions, in line with the Argentine Central Bank regulations. Specific attention is given to loans with objective evidence of impairment.
2.9 Provisions for Contingencies.
The Group has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor and other matters. The Group accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Group’s estimates of the outcomes of these matters and the Group’s lawyers’ experience in responding, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs, which could have a material effect on the Group’s future results of income and financial condition or liquidity.
2.10 Equity Investments.
Equity Investments include investments in companies where a non-controlling interest is held.
Under Argentine Banking GAAP, the equity method is used to account for investments where the company has a significant influence. Significant influence is considered to be present if at less one of the following applies:
Investments in which the Company does not have significant influence have been accounted for at the lower of cost or equity method.
2.11 Bank Premises and Equipment, Credits for Leases and Miscellaneous Assets.
Bank premises and equipment and miscellaneous assets are valued at cost adjusted for inflation (as described in Note 2.3), less accumulated depreciation.
F-16
Construction in progress is carried at cost.
Financial leases that mainly transfer risks and benefits inherent to the leased property are registered at the beginning of the lease either by the cash value of the leased property or the present value of cash flows established in the financial lease, whichever is the lowest.
Accumulated depreciation is computed under the straight-line method at rates over the estimated useful lives of the assets, which generally are estimated to be 50 years for properties, 10 years for furniture and fittings, and 5 years for others. Leasehold improvements are depreciated using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
The cost of maintenance and repairs is charged to expense as incurred. The cost of significant renewals and improvements is added to the carrying amount of the respective fixed assets. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of income.
2.12 Intangible Assets.
Intangible assets are valued at cost adjusted for inflation (as described in Note 2.3) less accumulated amortization. Intangible assets are amortized on a straight-line basis over 120 months for goodwill and over 60 months for organization and development costs. Under Argentine Banking GAAP, goodwill is no longer recognized as an asset when it is estimated that amounts of future income will not be sufficient to absorb the amortization of goodwill or when there are other reasons to presume that the amount of an investment made will not be recovered in full.
2.13 Shareholders´ Equity.
Shareholders’ Equity accounts have been adjusted for inflation following the procedure described in Note 2.3, except for the “Capital Stock” and “Paid-in Capital” accounts, which have been stated at their original values. The adjustment of these accounts was allocated to the “Inflation adjustments to capital stock and paid-in capital” account.
2.14 Minimum Presumed Income Tax and Income Tax.
Effective as of 1998, a Minimum Presumed Income Tax (“MPIT”) was established as a complementary component of income tax obligations. MPIT is a minimum taxation, which assesses at the tax rate of 1% of computable assets at fiscal year-end, according to Law No. 25063. Ultimately, the tax obligation will be the higher of MPIT or income tax. For financial entities, the taxable basis is 1% of their computable assets. If, in a fiscal year, the MPIT obligation exceeds the income tax liability, the surplus will be available as a credit against future income tax to be generated in any of the next ten fiscal years. The recognition of this right and its realization each stem from the ability to generate future taxable income sufficient to offsetting purposes.
The Bank has recognized the MPIT amount paid in the year and the accumulated amount paid in prior years as an asset for future tax deductions.
Based on the provisions set forth by the Argentine Central Bank, the Group recorded an asset related to the MPIT amounting to Ps.8,912 and Ps.9,424 as of December 31, 2017 and 2016, respectively.
Argentine Central Bank regulations do not require the recognition of deferred tax assets and liabilities; therefore income taxes for Banco Galicia are recognized on the basis of amounts due in accordance with Argentine tax regulations. However, Grupo Galicia and Grupo Galicia’s non-bank subsidiaries apply the deferred income tax method. As a result, Grupo Galicia and its non-bank subsidiaries recognized a deferred tax asset as of December 31, 2017 and 2016.
F-17
Tax Reform in Argentina
On December 29, 2017, the National Executive Branch enacted Income Tax Law No. 27430. This law has introduced several changes to the previous income tax treatment. Some of the key changes involved in the reform include:
Dividends distributed from profits earned until the fiscal year before that commenced on January 1, 2018 shall remain subject, in respect of all beneficiaries, to a withholding tax at the 35% rate on the amount in excess of tax-free distributable accumulated profits (equalization tax transition period).
2.15 Liabilities - Banco Galicia’s Customers Fidelity Program “Quiero!” (I want!).
The Bank records the points assigned to the Bank’s customers through the “Quiero!” (“I want!”) Program using a mathematical model that takes into account certain assumptions of redemption rates, the cost for the exchanged points based on the combination of available products and the preferences of the Bank’s customers, as well as the expiration term of the customers’ unredeemed points.
As of December 31, 2017 and 2016, the Bank recorded liabilities for Ps.553,621 and Ps.378,636, respectively, from its customers’ unredeemed points under the caption “Miscellaneous Liabilities”.
2.16 Statements of Cash Flows.
The consolidated statement of cash flows was prepared following the regulations prescribed by the Argentine Central Bank. Cash and cash equivalents include cash and due from banks and highly liquid investments with an original maturity of three months or less.
Cash and due from banks and assets held with the purpose of complying with the short-term commitments undertaken, with a high level of liquidity, easily converted into known amounts of cash, subject to insignificant changes in value and with a maturity less than three months from the date of the acquisition thereof, are considered to be cash and cash equivalents. The breakdown is as follows:
Cash and Due from Bank
Reverse Repo Transactions with the Argentine Central Bank
Interbank Loans
Overnight Placements in Banks Abroad
Other Cash Placements
Cash and Cash Equivalents
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2.17 Use of Estimates.
The preparation of financial statements in conformity with Argentine Banking GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Future results could differ from those estimates and evaluations made at the date of preparation of these consolidated financial statements.
3. Minimum Cash Requirements and Restricted Assets.
3.1 Pursuant to Argentine Central Bank regulations, Banco Galicia and CFA (the companys’subsidiarie) must maintain a monthly average liquidity level. Computable assets for complying with the minimum cash requirement are cash and the checking accounts opened at the Argentine Central Bank.
Banco Galicia and CFA have met the minimum cash requirement established by the Argentine Central Bank.
The minimum cash requirement at the end of each fiscal year of Banco Galicia, the main subsidiary, was as follows (as measured in average daily balances):
Peso balances
Foreign currency balances
3.2 Certain of the Group’s other assets are pledged or restricted from use under various agreements. The following assets were restricted at each balance sheet date:
Funds and securities pledged under various arrangements
Shares on equity investments (*)
Deposits in the Argentine Central Bank, restricted under Argentine Central Bank regulations
Loans granted as collateral
4. Interest-Bearing Deposits with Other Banks.
As of December 31, 2017 and 2016, the overnight foreign bank interest-bearing deposits included under the caption “Loans—Other” amounted to Ps.269,278 and Ps.1,227,101, respectively.
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5. Government and Corporate Securities.
Government and corporate securities consist of the following at the respective balance sheet dates:
- Government Bonds
Total Holdings Recorded at Fair Value
Holdings Recorded at their Acquisition Cost plus I.R.R.
Total Holdings Recorded at their Acquisition Cost plus I.R.R.
- Argentine Central Bank Bills at Fair Value
- Argentine Central Bank Bills for Repo Transactions
- Argentine Central Bank Bills at Acquisition Cost plus I.R.R.
Total Securities Issued by the Argentine Central Bank
Total Corporate Securities
As of December 31, 2016, Securities issued by Argentine Central Bank sold under repurchase agreements amounted to Ps. 1,783,342, were recorded under the caption “Other Receivables resulting from financial brokerage”.
As of December 31, 2017, Securities issued by Argentine Central Bank sold under repurchase agreements amounted to Ps.1,124,819, were recorded under the caption “Other Receivables resulting from financial brokerage”.
6. Loans.
The lending activities of the Bank consist of the following:
Advances – short-term obligations drawn on by customers through overdrafts.
Promissory Notes – endorsed promissory notes, discounted and purchased bills and factored loans.
Mortgage loans – loans to purchase or improve real estate and collateralized by such real estate or commercial loans secured by real estate.
Pledge loans – loans where collateral is pledged as an integral part of the loan document.
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Credit card loans – loans to credit card holders.
Personal loans – loans to individuals.
Others – includes mainly short-term placements in foreign banks.
Pursuant to Argentine Central Bank regulations, financial entities must disclose the breakdown of their loan portfolio between: the non-financial public sector, the financial sector and the non-financial private sector and residents abroad. In addition, financial entities must disclose the type of collateral established on the applicable loans to the non-financial private sector and the pledges granted on loans (preferred guarantees relative to a registered senior pledge).
As of December 31, 2017 and 2016, the classification of the Group´s loan portfolio was as follows:
Financial sector (Argentine)
- With preferred guarantees
- With other guarantees
- Unsecured
Subtotal
Allowance for loan losses (See Note 7)
The Bank also records its loan portfolio by industry segment. The following industry segments comprised the most significant loan concentrations as of December 31, 2017 and 2016, respectively:
Financial Sector
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7. Allowance for Loan Losses.
The activity in the allowance for loan losses for the fiscal years ended December 31, 2017, 2016 and 2015, was as follows:
Balance at beginning of year
Provision charged to income(*)
Allowances reversed
Foreign exchange effect and other adjustments
Loans charged off (*)
Balance at end of year
Certain uncollectible loans, principally small loans, are charged directly to income and are not reflected in the activity in the allowance for loan losses. The charge to “Loan loss provisions” line in the accompanying statements of income is as follows:
Provisions charged to income
Direct charge-offs
Other receivable losses
Financial leases
The Bank has entered into certain renegotiations with customers. The Bank has eliminated any differences between the principal and accrued interest due under the original loan and the new loan amount through a charge against the allowance for loan losses. Loans under such agreements amounted to Ps.130,784, Ps. 60,750 and Ps.89,906 as of December 31, 2017, 2016 and 2015, respectively.
8. Other Receivables Resulting from Financial Brokerage.
The composition of other receivables from financial brokerage, by type of guarantee, is as follows:
Preferred guarantees, including deposits with
the Argentine Central Bank
Other guarantees
Unsecured
Less: Allowance for doubtful accounts
The breakdown of the caption “other” included in the balance sheet was as follows:
Mutual funds
Galtrust I Participation Certificates
Other participation certificates and debt securities in financial trusts
Accrued commissions
Other financings
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9. Equity Investments.
Equity investments in other companies consisted of the following as of the respective balance sheet dates:
In Financial Institutions, complementary and authorized activities
Prisma Medios de Pagos S.A (Ex–VISA Argentina S.A./Banelco S.A.)
Banco Latinoamericano de Exportaciones S.A.
Mercado de Valores de Buenos Aires S.A.
Total equity investments in Financial Institutions, complementary and authorized activities
In Non-financial Institutions
Electrigal S.A.
Aguas Cordobesas S.A(*)
Distrocuyo S.A.
Nova Re Compañía Argentina de Reaseguros S.A.(**)
Total equity investments in non-financialinstitutions
Total Equity investments
(**) In September 2017, Sudamericana Holding S.A. disposed of its equity interest in Nova Re Compañía de Reaseguros S.A.
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10. Miscellaneous receivables – Others.
As of December 31, 2017 and December 31, 2016, the breakdown of “Miscellaneous Receivables—Others” was as follows:
Sundry Debtors
Deposits as Collateral(*)
Tax Advances
Payments in Advance
11. Bank Premises and Equipment, Intangible Assets and Miscellaneous Assets.
The major categories of the Company´s premises and equipment and accumulated depreciation, as of December 31, 2017 and 2016, were as follows:
Land and buildings
Furniture and fittings
Machinery and equipment
Vehicles
Accumulated depreciation
Depreciation expense recorded for the fiscal years ended December 31, 2017, 2016 and 2015, was Ps.487,208, Ps.301,387 and Ps.218,611, respectively.
The major categories of intangible assets as of December 31, 2017 and 2016 were as follows:
Goodwill, net of accumulated amortization of Ps.49,465 and Ps.43,823, respectively
Organization and development expenses, net of accumulated amortization of Ps.2,898,061 and Ps.2,333,229, respectively.
Total amortization expenses for the fiscal years ended December 31, 2017, 2016 and 2015, was Ps.667,649, Ps. 756,218 and Ps. 645,116, respectively.
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Organization and development expenses included software and the related implementation services purchased from third parties, with a net book value of Ps.2,886,620 and Ps.2,189,068 as of December 31, 2017 and 2016, respectively.
The table below shows the components of goodwill by type of activity for the periods presented:
Miscellaneous assets consisted of the following as of December 31, 2017 and 2016:
Work in Progress
Advances for Purchase of Assets
Works of Art
Assets Acquired through Foreclosures
Stationery and Office Supplies
Others Miscellaneous Assets
12. Provisions.
Allowances on assets excluding loans and reserves for contingencies were as follows:
Allowances against asset accounts:
Other receivables resulting from financial brokerage, for collection risk (a)
Credits for leases (a)
Equity investments in other companies (b)
Miscellaneous receivables, for collection risk (a)
Reserves for contingencies:
For severance payments (c)
Litigations (d)
Other contingencies (e)
Sundry liabilities arising from credit card activities (f)
Other commitments (g)
Differences arising from court deposit´s dollarization (h)
Penalties Imposed
Total reserves for contingencies
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(a) Based upon an assessment of debtors´ performance, the economic and financial situation and the guarantees collateralizing their respective transactions.
(b) Includes the estimated losses due to the excess of the cost plus dividend method over the equity method equity investments.
(c) Estimated amounts payable under labor lawsuits filed against the Bank by former employees.
(d) Litigation arising from different types of claims from customers (e.g., claims for thefts from safe deposit boxes, the cashing of checks that have been fraudulently altered, discrepancies in deposits and payments services that the Bank renders, etc). Consumer Protection Associations, on behalf of consumers, have filed claims against the Bank and Compañía Financiera Argentina with regard to the collection of some financial charges. The Bank and Compañía Financiera Argentina considers the resolution of these controversies will not have a significant impact on its financial condition.
(e) As of December 31, 2017 and 2016, provincial tax collection authorities, as well as tax collection authorities from the Autonomous City of Buenos Aires (“Buenos Aires”), are in the process (in different degrees of completion) of conducting audits and assessments mainly regarding the Compensatory Bond issued by the National Government to compensate financial institutions for the losses generated by the asymmetric pesification of loans and deposits.
As regards the assessment of tax collection authorities from Buenos Aires, within the framework of the legal actions brought by Banco de Galicia y Buenos Aires S.A. with the purpose of challenging the assessment of the tax collection authorities, a preliminary injunction was granted by the Argentine Federal Court of Appeals in Administrative Matters for the amount corresponding to the Compensatory Bond, which was ratified by the Supreme Court of Justice. Therefore, the Court ordered the A.G.I.P. (Governmental Public Revenue Authority) to refrain from starting tax enforcement proceedings or otherwise requesting precautionary measures for such purpose until a final judgment is issued. The proceedings are currently pending a decision by the Argentine Federal Court of Appeals in Administrative Matters with regard to the appeal filed by Banco de Galicia y Buenos Aires S.A. against the decision issued on the core issue by the Court of First Instance in November 2013. In any case, it is worth noting the decision issued by the federal prosecutor of the Court of Appeals was favorable to the Bank.
With regard to the city of Buenos Aires’ claims on account of other items, the Bank adhered to the System for the Settlement of Tax Liabilities in Arrears (Law No. 3461 and the related regulations), which envisaged the total relief of interest and fines. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities.
In connection with the assessments made by tax collection authorities from the Province of Buenos Aires, under the framework of some of the processes under discussion at the Provincial Tax Court’s stage, at this stage of proceedings the decision issued was: (i) unfavorable to Banco de Galicia y Buenos Aires S.A.’s request regarding the items not related to the Compensatory Bond, and (ii) favorable with regard to the non-taxability thereof. Therefore, Banco de Galicia y Buenos Aires S.A. adhered to the System for the Regularization of Tax Debts (Regulatory Decision No. 12 and related decisions), which envisages discounts on the amounts not related to the Compensatory Bond. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities. In turn, the authorities from the Province of Buenos Aires objected to the judgment rendered by the Provincial Tax Court with regard to the Compensatory Bond, and requested the Court of Appeals in Administrative Matters of La Plata to set such decision aside. Banco de Galicia y Buenos Aires S.A. entered an appearance and filed a motion for lack of jurisdiction, since it believes only the Argentine Supreme Court of Justice has jurisdiction to issue a decision on such a matter. On April 15, 2014, the aforementioned Court sustained the motion for lack of jurisdiction and ordered the proceedings to be filed. The authorities from the Province of Buenos Aires filed an appeal before the Supreme Court of Justice of the Province of Buenos Aires, which has not issued a decision to date.
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Furthermore, regarding the claims made by the different jurisdictions, the Bank has been expressing its disagreement regarding these adjustments at the corresponding administrative and/or legal proceedings.
These proceedings and their possible effects are constantly being monitored by Management. Even though the Bank considers that it has complied with its tax liabilities in full pursuant to current regulations, the provisions deemed adequate pursuant to the evolution of each proceeding have been set up.
(f) Reserves for a guarantee of credit-card receivables and for the estimated liability for the insurance of the payment of credit-card balances in the event of the death of the credit-card holders.
At the date of these consolidated financial statements, the Argentine Revenue Service (AFIP), Provincial Revenue Boards and Municipalities are in the process of conducting audits and assessments, in different degrees of completion, at the companies controlled by Tarjetas Regionales S.A. Said agencies have served notices and made claims regarding taxes applicable to Tarjetas Regionales S.A.’s subsidiaries. Therefore, the companies are taking the corresponding administrative and legal steps in order to solve such issues. The original amount claimed for taxes totals approximately Ps.12,320.
Notwithstanding the foregoing, the companies have set up the provisions deemed appropriate pursuant to the evolution of each proceeding.
(g) Represents contingent commitments in connection with customers classified in categories other than the “normal” categories under Argentine Banking GAAP.
(h) Represents the difference between the amounts of deposits subject to pesification at Ps. 1.40 and such amounts at the exchange rate as of December 31, 2017.
Penalties Imposed on Banco Galicia and Summary Proceedings commenced by the Argentine Central Bank.
Penalties Imposed on Banco Galicia existing as of December 31, 2017:
Argentine Central Bank’s Financial Summary Proceedings No. 1308. Penalty notification date: October 28, 2013. Reason for the imposition of the penalty: Alleged non-compliance with the regulations on prevention of money laundering, due to lack of files and knowledge of customer. Consequently, the members of Banco de Galicia y Buenos Aires S.A.’s Board of Directors then effective were punished with a fine amounting to Ps.1,353. Status of the pending proceedings: federal extraordinary appeal before the Argentine Supreme Court of Justice (CSJN, as per its initials in Spanish) against the judgment passed by the Argentine Federal Court of Appeals in Administrative Matters that dismissed the appeal filed by the damaged parties against the penalties applied. Accounting treatment: Fines were paid in full and charged to income for the corresponding fiscal year.
Argentine Central Bank’s Financial Summary Proceedings No. 1223 and 1226 (accumulated). Penalty notification date: November 15, 2013. Reason for the imposition of the penalty: Alleged non-compliance with Communiqué “A” 3426 and Communiqué “A” 3381 of the Argentine Central Bank, and alleged non-compliance with restrictions related to assistance to related customers. As a consequence of the aforementioned summary proceedings, Banco de
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Galicia y Buenos Aires S.A. and certain related customers received a warning and were punished with a fine in the amount of Ps.3,358. Status of the proceedings: on June 27, 2017, the CSJN dismissed the federal extraordinary appeal that had been filed and the penalties imposed became final. Accounting treatment: Fines were paid in full and charged to income for the corresponding fiscal year.
U.I.F.’s Summary Proceedings No. 68/09. Penalty notification date: February 25, 2010. Reason for the imposition of the penalty: Alleged omission to report suspicious activities, in possible infringement of Act No. 25246. As a consequence of the aforementioned summary proceedings, Banco de Galicia y Buenos Aires S.A., one of its directors and one of its officers were punished with a fine in the amount of Ps.4,483. Status of the proceedings: Division I of the Argentine Federal Court of Appeals in Administrative Matters partially revoked the penalties, releasing Eduardo A. Fanciulli from any liability and reducing the fines imposed. The U.I.F., Banco de Galicia y Buenos Aires S.A. and Mr. Enrique M. Garda Olaciregui filed federal extraordinary appeals before the CSJN. Accounting treatment: As of December 31, 2017 and December 31, 2016, a provision for Ps.4,483 has been set up.
Summary Proceedings Commenced by the Argentine Central Bank (with no Penalties) Pending as of December 31, 2017:
Summary Proceedings No. 6075: Notification date: January 26, 2015. Charges filed: Alleged infringement of Communiqué “A” 4940, “A” 4662 and “C” 51232 of the Argentine Central Bank upon carrying out eight foreign exchange transactions. Individuals subject to summary proceedings: Banco de Galicia y Buenos Aires S.A. and certain relevant officers. Status of the proceedings: a defense brief was filed and the lack of definition by the most favorable criminal law was put forward. Both are being analyzed by the Argentine Central Bank’s Management Division of Foreign Exchange Litigation Matters.
Summary Proceedings No. 6669: Notification date: December 29, 2015. Charges filed: Alleged breach of Section 1, Subsections c), e) and f) of Act No. 19359, integrated into Argentine Central Bank’s Communiqué “A” 3471, 3826 and 5264. Individuals subject to summary proceedings: Banco de Galicia y Buenos Aires S.A. and certain relevant officers. Status of the proceedings: a defense brief was filed and the lack of definition by the most favorable criminal law was put forward, which is being analyzed by the Argentine Central Bank’s Management Division of Foreign Exchange Litigation Matters.
Summary Proceedings No. 6670: Notification date: February 16, 2016. Charges filed: Alleged breach of Section 1, Subsections c), e) and f) of Act No. 19359, integrated into Argentine Central Bank’s Communiqué “A” 5377 (amending point 3 of Annex to Communiqué “A” 5264). Individuals subject to summary proceedings: Banco de Galicia y Buenos Aires S.A. and certain relevant officers. Status of the proceedings: a defense brief was filed and the lack of definition by the most favorable criminal law was put forward. Both are being analyzed by the Argentine Central Bank’s Management Division of Foreign Exchange Litigation Matters.
Summary Proceedings No. 6988: Notification date: August 25, 2016. Charges filed: Alleged breach of Section 1, Subsections c), e) and f) of Act No. 19359, integrated into Argentine Central Bank’s Communiqué “A” 3471, 3826, 5264 and 5265. Individuals subject to summary proceedings: certain relevant officers. Status of the proceedings: a defense brief was filed and the lack of definition by the most favorable criminal law was put forward. Both are being analyzed by the Argentine Central Bank’s Management Division of Foreign Exchange Litigation Matters.
13. Other Liabilities Resulting from Financial Brokerage- Banks and International Entities, and Loans from Domestic Financial Institutions.
The Bank also borrows funds under different credit arrangements from local and foreign banks and international lending agencies as follows:
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Contractual long-term Liabilities
International Finance Corporation. (I.F.C.)
Other lines from foreign banks
Total long-term liabilities
Contractual short-term liabilities:
Total short-term liabilities
Loans from Domestic Financial Institutions
Contractual long-term liabilities:
BICE (Banco de Inversión y Comercio Exterior)
Other lines from domestic banks
Other lines from credit from domestic banks
Total Domestic Financial Institutions
TOTAL
Accrued interest on the above liabilities in the amount of Ps.40,849 and Ps.41,311 as of December 31, 2017 and 2016, respectively, are included in “Others” under the caption “Other Liabilities Resulting from Financial Brokerage” in the accompanying balance sheet.
As of December 31, 2017, maturities of the above long-term liabilities for each of the following five fiscal years and thereafter were as follows:
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Thereafter
14. Other Liabilities Resulting from Financial Brokerage—Negotiable Obligations.
The amounts outstanding and the terms corresponding to outstanding negotiable obligations at the dates indicated were as follows, considering their original contractual terms:
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Company
Rate
Grupo Financiero Galicia S.A. (***)
Grupo Financiero Galicia S.A.(***)
Banco de Galicia y Bs. As. S.A.
300,000
250,000
150,537
(6)
Compañía Financiera Argentina S.A.
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200,000
Tarjeta Naranja S.A. (***)
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Tarjetas del Mar S.A.
Long-term negotiable obligations as of December 31, 2017 mature as follows:
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15. Balances in Foreign Currency.
The balances of assets and liabilities denominated in foreign currencies (principally in U.S. dollars) were as follows:
Assets:
Cash and due from banks
Credits for lease
Equity investments in other companies
Other assets
Liabilities:
Subordinated Negotiable Obligations
The Group covers its foreign currency mismatch through foreign currency futures transactions. These transactions are carried out through auto-regulated markets (MAE / ROFEX) and with customers.
16. Transactions with Related Parties.
The Group has granted loans to certain related parties including related officers, equity-method investees and consolidated companies. Total loans outstanding as of December 31, 2017 and 2016, amounted to Ps.677,235 and Ps.696,470, respectively, and the change from December 31, 2016 to December 31, 2017, reflects payments amounting to Ps.378,640 and advances of Ps.350,891. Furthermore, there were foreign exchange differences of Ps.8,514 on the above-mentioned portfolio between those dates.
Such loans were made in the ordinary course of business at normal credit terms, including interest rates and collateral requirements, and, in management’s opinion, such loans represent normal credit risk.
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17. Detail of Statement of Income Accounts.
Interest on other receivables resulting from financial brokerage:
Interest on purchased certificates of deposits
Advance payment leasing
Other:
Premiums on forward purchases of Government securities under repos
Interest on pre-export and export financing
Result from other credits by financial brokerage
Net position of forward transactions in pesos
Interest on other liabilities resulting from financial brokerage:
Interest on negotiable obligations
Interest on other liabilities resulting from financial brokerage from other banks and international entities
Other interest:
Interest for other deposits
Premiums on repo transactions
Contributions and taxes on financial income
Commissions on credit cards
Safe deposit box
Insurance premiums
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Expenses from services
Gross revenue taxes
Linked with credit cards
Other operating expenses:
Rentals
Electricity and communications
Maintenance and repair expenses
Security Services
Income from Sale of Bank Premises and Equipment
Income from Transactions with Miscellaneous Assets
Leases
Adjustments and Interest on miscellaneous receivables
Adjustment to Interest on Miscellaneous Liabilities
Donations
Turnover Tax
Claims
Administrative, disciplinary and criminal penalties
18. Income Taxes.
Income tax for the fiscal years ended December 31, 2017, 2016 and 2015, amounted to Ps.4,954,967, Ps.3,352,541 and Ps.2,801,424, respectively. The statutory income tax rate for all the fiscal years presented was 35%.
As of December 31, 2017 and 2016, the consolidated Group’s MPIT available to credit against future income tax amounts to Ps.8,912 and Ps.9,424, respectively, and is recognized as Miscellaneous Receivables in the consolidated balance sheet.
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The breakdown of outstanding tax credits and their probable expiration dates are detailed below:
Date of Generation
2006
2007
2008
2009
2010
2011
Allowances for non recoverable MPIT assets
19. Shareholders´ Equity and Restrictions Imposed on the Distribution of Dividends.
The Argentine Central Bank regulations require that 20% of the profits shown in the Income Statement at fiscalyear-end, plus (or less), the adjustments made in previous fiscal years and, less, if any, the loss accumulated at previous fiscal year-end, be allocated to the legal reserve.
This proportion applies regardless of the ratio of the Legal Reserve fund to Capital Stock. Should the Legal Reserve be used to absorb losses, earnings shall be distributed only if the value of the Legal Reserve reaches 20% of the Capital Stock plus the Capital Adjustment.
The Argentine Central Bank sets rules for the conditions under which financial institutions can make distributions of profits. According to these rules, profits can be distributed as long as results of operations are positive after deducting not only the Reserves, which may be legally and statutory required, but also the following items from Unappropriated Retained Earnings: The difference between the book value and the market value of public sector assets and/or debt instruments issued by the Argentine Central Bank not valued at market price, the amounts capitalized for lawsuits related to deposits and any unrecorded adjustments required by the external auditors or the Argentine Central Bank.
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Moreover, in order that a financial institution be able to distribute profits, said institution must comply with the capital adequacy rule, i.e. with the calculation of minimum capital requirements and the regulatory capital.
For these purposes, this shall be done by deducting from its assets and Unappropriated Retained Earnings all the items mentioned in the paragraph above.
Moreover, in such calculation, a financial institution shall not be able to compute the temporary reductions that affect minimum capital requirements, computable regulatory capital or its capital adequacy.
Since January 2016, the Argentine Central Bank determined that banks shall meet an additional capital conservation buffer apart from the minimum capital requirement equal to 3.5% of risk-weighted assets. This shall be made up only of Tier 1 Common Capital, net of deductible items. Distribution of profits shall be restricted when the Bank’s computable regulatory capital level and structure is within the range of the capital conservation buffer.
Distribution of profits shall require the prior authorization of the Argentine Central Bank’s Superintendent of Financial and Foreign Exchange Institutions, whose intervention shall have the purpose of verifying the aforementioned requirements have been fulfilled.
In addition to the aforementioned restrictions established by the Argentine Central Bank, which are applicable to Banco de Galicia y Buenos Aires S.A. and Compañía Financiera Argentina S.A., pursuant to Section 70 of the Argentine General Corporations Law, stock companies shall establish a reserve not lower than 5% of the realized and liquid profits shown in the Income Statement for the fiscal year, until 20% of the corporate capital is reached. In the event that said reserve is reduced for any reason, no profits can be distributed until its total refund.
Tarjeta Naranja S.A.’s Ordinary and Extraordinary Shareholders’ Meeting held on March 16, 2006 decided to set the maximum limit for the distribution of dividends at 25% of the realized and liquid profits of each fiscal year. This restriction shall remain in force as long as the company’s shareholders’ equity is below Ps. 300,000.
Tarjeta Naranja S.A. has agreed, pursuant to the terms and conditions of the Class XXXVII Negotiable Obligation not to distribute dividends that may exceed 50% of the company’s net income. This restriction also applies in the case there is any excess on certain indebtedness ratios.
20. Minimum Capital.
Grupo Financiero Galicia is not subject to the minimum capital requirements established by the Argentine Central Bank.
In addition, Grupo Financiero Galicia meets the minimum capital requirements established by the Corporations Law, which amount to Ps. 100.
Pursuant to Argentine Central Bank regulations, Banco Galicia is required to maintain a minimum capital, which is calculated by weighting the risks related to assets and to the balances of bank premises and equipment and miscellaneous and intangible assets.
As called for by Argentine Central Bank regulations, as of December 31, 2017 and 2016, the minimum capital requirements were as follows:
December 31, 2017
December 31, 2016
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The Argentine Central Bank decided that Banco de Galicia y Buenos Aires S.A. should be considered, for all purposes, a Domestic Systemically Important Bank (D-SIB). Consequently, since January 2016, the Bank is required to meet an additional capital conservation buffer apart from the minimum capital requirement, equal to 3.5% of risk-weighted assets. The Argentine Central Bank also provided for that, since June 2015, equity investments in companies devoted to the issuance of credit, debit and similar cards shall be deducted from the Computable Regulatory Capital (R.P.C.), progressively, reaching 100% in June 2018.
(*) On January 11, 2018, the Argentine Central Bank approved the payment of capital for an aggregate amount of Ps.10,000,000 for Banco de Galicia y Buenos Aires S.A. Therefore, its computation for regulatory purposes will be effective since the date of approval.
21. Earnings per Share.
The Company is required to present earnings per share information for all periods presented. Basic earnings per share (“basic EPS”) are computed by dividing the net income for the year by the weighted-average number of common shares outstanding during the year (1,332,617, 1,300,265 and 1,300,265 for the fiscal years ended December 31, 2017, 2016 and 2015, respectively).
Basic EPS for the fiscal years ended December 31, 2017, 2016 and 2015, were, 6.251, 4.628 and 3.337, respectively.
There are no dilutive financial instruments outstanding for any of the fiscal years presented.
22. Contribution to the Deposit Insurance System.
Law No. 24,485 and Decree No. 540/95 established the creation of the Deposit Insurance System to cover the risk attached to bank deposits, in addition to the system of privileges and safeguards envisaged in the Financial Institutions Law.
The National Executive Branch through Decree No. 1127/98 dated September 24, 1998 established the maximum amount for this insurance system to demand deposits and time deposits denominated either in Pesos and/or in foreign currency. Such amount was currently set at Ps.450.
This system does not cover deposits made by other financial institutions (including time deposit certificates acquired through a secondary transaction), deposits made by parties related to Banco Galicia, either directly or indirectly, deposits of securities, acceptances or guarantees and those deposits set up at an interest rate exceeding the one established regularly by the Argentine Central Bank based on a daily survey conducted by it. Also excluded are those deposits whose ownership has been acquired through endorsement and those placements made as a result of incentives other than the interest rate. This system has been implemented through the creation of the Deposit Insurance Fund (“FGD”), which is managed by a company called Seguros de Depósitos S.A. (SEDESA). The shareholders of SEDESA are the Argentine Central Bank and the financial institutions, in the proportion determined for each one by the Argentine Central Bank based on the contributions made to the fund.
The monthly contribution institutions had to make to the FGD was 0.015% on the monthly average of total deposits.
Effective since January 20, 2018, there was an increase in the reference rate cap for time deposits and long-term investments covered by the deposit insurance, excluding such deposits which interest rate thresholds are distorted by incentives or additional interest.
As of December 31, 2017, 2016 and 2015, the standard contribution to the Deposits Insurance System amounted to Ps.277,728, Ps.314,515 and Ps.497,258, respectively, recorded in the Consolidated Statements of Income in Financial Expenses under the caption “Contributions made to Deposit Insurance Fund”.
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23. Balance Sheet and Statement of Income.
The presentation of financial statements according to the Argentine Central Bank rules differs significantly from the format required by the Securities and Exchange Commission under Rules 210.9 to 210.9-07 of Regulation S-X (Article 9).
The following balance sheet presents Grupo Financiero Galicia’s balance sheet as of December 31, 2017 and 2016, as if they had followed Article 9 balance sheet disclosure requirements using Argentine Banking GAAP, including the assets and liabilities of the financial trust which had been consolidated.
Interest-bearing deposits in other banks
Federal funds sold and securities purchased under resale agreements or similar agreements
Trading account assets
Investment securities
Allowances for loan losses
Bank Premises and Equipment
Intangible Assets
Discontinued Operations
Total assets
Liabilities and Shareholders’ Equity:
Short-term borrowing
Long-term debt
Miscellaneous Liabilities
Contingent liabilities
Common Stock
Other reserves and retained earnings
Non-controlling Interest
Total Equity
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The statement of income presented below discloses the categories required by Article 9 using Argentine Banking GAAP:
Interest income:
Interest and fees on loans
Interest on other receivables from financial brokerage
Trading account interest
Total interest income
Interest expense
Interest on deposits
Interest on securities sold under agreements to repurchase
Interest on short-term liabilities from financial intermediation
Interest on long-term liabilities from financial intermediation
Total interest expense
Net interest income
Provision for loan losses, net of reversals
Net interest income after provision for loan losses
Non-interest income:
Income from equity in other companies
Premiums and commissions on insurance business
Total non-interest income
Non-interest expense:
Salaries and social security charges
Fees and external administrative services
Personnel services
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Amortization of organization and development expenses
Amortization of “Amparo claims”
Other Provisions and reserves
Total non-interest expense
Income before tax expense
Income tax expense
Less: Net income attributable to non-controllinginterest
Net Income attributable to Controlling interest
Basic EPS
Diluted EPS
The carrying value and market value of each classification of Investment securities in the Article 9 balance sheet were as follows:
Galtrust I
The maturities as of December 31, 2017, of the Investment securities included in the Article 9 balance sheet were as follows:
The following table presents realized gains and losses from AFS securities:
Year ended December 31,
Gross realized gains
Net unrealized gains / (losses)
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24. Operations by Geographical Segment.
The main financial information, classified by country where transactions originate, is shown below. Most of the transactions originated in the Republic of Uruguay were with Argentine citizens and enterprises, and were denominated in U.S. dollars. Transactions between different geographical segments have been eliminated for the purposes of this Note.
Total revenues:(*)
Republic of Argentina
Republic of Uruguay
Net income (loss), net of monetary effects allocable to each country:
Total assets:
Other intangible assets
Geographical segment assets as a percentage of total assets
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25. Financial Instruments with Off-Balance Sheet Risk.
The Group has been party to financial instruments with off-balance sheet risk in the normal course of its business in order to meet the financing needs of its customers. These instruments expose the Bank to credit risk above and beyond the amounts recorded in the consolidated balance sheets. These financial instruments include commitments to extend credit, standby letters of credit, guarantees granted and acceptances.
The Group uses the same credit policies in making commitments, conditional obligations and guarantees as it does for granting loans. In management´s opinion, the Group´s outstanding commitments and guarantees do not represent unusual credit risk.
The Group’s exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit, standby letters of credit, guarantees granted and acceptances is represented by the contractual notional amount of those investments.
A summary of the credit exposure related to these items is shown below:
Commitments to extend credit
Standby letters of credit
Guarantees granted
Commitments to extend credit are agreements to lend to a customer at a future date, subject to the meeting of the contractual terms. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent actual future cash requirements of the Group. The Group evaluates each customer’s creditworthiness on a case-by-case basis. In addition to the above commitments, as of December 31, 2017 and 2016, the available purchase limits for credit card holders amounted to Ps.259,575,885 and Ps.200,917,969, respectively.
Standby letters of credit and guarantees granted are conditional commitments issued by the Group to guarantee the performance of a customer to a third party.
Acceptances are conditional commitments for foreign trade transactions.
The credit risk involved in issuing letters of credit and granting guarantees is essentially the same as that involved in extending loan facilities to customers. In order to grant guarantees to its customers, the Group may require counter-guarantees. These financial customer guarantees are classified by type, as follows:
Preferred counter-guarantees
Other counter-guarantees
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The Group accounts for checks drawn on it and other banks, as well as other items in process of collection, such as notes, bills and miscellaneous items, in memorandum accounts until such time when the related item clears or is accepted. In management’s opinion, the risk of loss on these clearing transactions is not significant. The amounts of clearing items in process were as follows:
Checks drawn on the Bank
Checks drawn on the other Bank
Bills and other items for collection
As of December 31, 2017 and 2016, the trusts’ funds amounted to Ps.8,916,957 and Ps.8,182,699, respectively.
In addition, the Group had securities and other financial assets in custody, which as of December 31, 2017 and 2016, amounted to Ps.374,811,139 and Ps.258,872,060, respectively.
As of December 31, 2017, the Group also has off-balance sheet contractual obligations arising from the leasing of certain properties used as a part of its distribution network. The estimated future lease payments in connection with these properties are as follows:
2023 and After
26. Derivative Financial Instruments.
The Group’s management of financial risks is carried out within the limits of the policies approved by the Board of Directors. Under those policies, derivatives are allowed, depending on market conditions, to adjust risk exposures to the established limits, thus contributing to keep such exposures within the parameters set forth by said policies. The Group plans to continue to use these instruments in the future, as long as their use is favorably assessed, in order to limit certain risk exposures.
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The derivative instruments held by the Group as of December 31, 2017 and 2016 were as follows:
Type of Contract
FORWARDS (a)
- Purchases
- Sales
FORWARDS (b) clients
-Purchases
INTEREST RATE SWAP (c)
- Variable for fixed interest rate
REPURCHASE AGREEMENT TRANSACTION
The general settlement method for these transactions does not require delivery of the traded underlying notional, rather, settlement is carried out on a daily basis for the difference, if any, between the closing price of the underlying and the closing price or value of the underlying corresponding to the previous day, the difference in price being charged to income.
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In case accrued balances pending settlement exist, they are recorded under “Other Receivables from Financial Brokerage” and/or “Other Liabilities Resulting from Financial Brokerage”, as the case may be.
27. Disclosure about Fair Value of Financial Instruments.
These estimates were made at the end of December 2017 and 2016. Because some of the Bank´s financial instruments do not have a ready trading market from which to determine a fair value, the disclosures are based upon estimates regarding economic and current market conditions and risk characteristics. Such estimates are subjective and involve matters of judgment and, therefore, are not precise and may not be reasonably comparable to estimates of fair value for similar instruments made by other financial institutions.
To measure fair values of financial instruments, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs.This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities, as follows:
Level 2 – inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in non-active markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means.
The estimated fair values do not include the value of assets and liabilities not considered financial instruments.
In order to determine the fair value, cash flows were discounted for each category or group of loans having similar characteristics, based on credit risk, guarantees and/or maturities, using rates offered for similar loans by the Bank as of December 31, 2017 and 2016, respectively.
Derivative activities: (see Note 26)
Non derivative activities:
Cash and due from banks (1)
Government and Corporate securities (2)
At market value
At acquisition cost plus IRR
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Loans (3)
Others (4)
Deposits (5)
Other liabilities resulting from financial Intermediation:
Banks and international entities and Loans from Domestic Financial Institutions (6) and
Negotiable obligations (7)
Others (8)
Government securities (2)
Quantitative information about Level 3 Fair Value Measurements
The following table provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a recurring basis for which we use an internal model.
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Government securities
Domestic Financial Institutions and Negotiable Obligations
The following is a description of the estimating techniques applied:
(1) Cash and due from banks: By definition, cash and due from banks are short-term and do not possess credit loss risk. The carrying values as of December 31, 2017 and 2016 are a reasonable estimate of fair value and are classified within level 1 of the valuation hierarchy.
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(2) Government and Corporate securities: As of December 31, 2017 and 2016 holdings correspond to government bonds and securities issued by Argentine Central Bank
Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities include national and government bonds, instruments issued by Argentine Central Bank and corporate securities. When no quoted prices are available in an active market, fair value is classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year.
(3) Loans: The fair values of loans are estimated for groups of similar characteristics, including type of loan, credit quality incorporating the credit risk factor. For floating- or adjustable-rate loans, which mature or are repriced within a short period of time, the carrying values are considered to be a reasonable estimate of fair values. For fixed-rate loans, market prices are not generally available and the fair values are estimated discounting the estimated future cash flows based on the contracted maturity of the loans. The discount rates are based on the current market rates corresponding to the applicable maturity. For nonperforming loans, the fair values are generally determined on an individual basis by discounting the estimated future cash flows and may be based on the appraisal value of underlying collateral as appropriate.
The fair value of “loans” is classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year.
(4) Others: Includes other receivables from financial brokerage and equity investments in other companies. This caption includes financial trusts participation certificates for which their fair value is estimated using valuation techniques to convert the future amounts to a single discounted present amount. The measurement is based on the value indicated by current market expectation about those future amounts. The estimation of the cash flows is based on the future cash flows from the securitized assets, considering the prepayments, historical loan performance, etc. Equity investments in companies where significant influence is exercised are not considered Financial Instruments, and equity investments in other companies are carried at market value less costs to sell.
Securitizations include the consolidated assets of Galtrust I. The fair value was determined by using the fair value of the underlying assets (Bogar Bonds). No changes in the valuation technique took place during the year.
Other assets were classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows based on contractual cash flows using current market rates for instruments with similar characteristics. No changes in the valuation technique took place during the year.
(5) Deposits: The fair value of deposit liabilities on demand and savings account deposits is similar to its book value. The fair value of time deposits was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities.
The fair value of “Deposits” is classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year. For floating- or adjustable-rate deposits, which mature or are repriced within a short period of time, the carrying values are considered to be a reasonable estimate of fair values. For fixed-rate deposits, market prices are not generally available and the fair values are estimated discounting the estimated future cash flows based on the contracted maturity of the deposits. The discount rates are based on the current market rates corresponding to the applicable maturity
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(6) Banks and international entities and loans from domestic financial institutions: Includes credit lines borrowed under different credit arrangements from local and foreign banks and entities. Parts of them were restructured as of May 2004. As of December 31, 2017 and 2016, when no quoted market prices were available, the estimated fair value has been calculated by discounting the contractual cash flows of these liabilities at estimated market rates.
The fair value of “Banks and international entities and loans from domestic financial institutions” is classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year.
(7) Negotiable obligations: As of December 31, 2017 and 2016, the fair value of negotiable obligations was determined based on quoted market prices and, when no quoted market prices were available, the estimated fair value has been calculated by discounting the contractual cash flows of these liabilities at estimated market rates.
Negotiable Obligations where quoted market prices are available are classified within level 1 of the valuation hierarchy.
The fair values of “Negotiable obligations” where no quoted market are available are classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year.
(8) Others: Includes other liabilities resulting from financial brokerage. Their fair value was estimated at the expected future cash flows based on contractual maturity discounted at the estimated market rates of similar liabilities at year-end.
The fair value of “Others” is classified as Level 3 of the valuation hierarchy where significant unobservable inputs were used to calculate the fair value. The valuation technique used to obtain the fair value was an income approach using discounted cash flows. No changes in the valuation technique took place during the year.
28. Situation of Banco Galicia Uruguay S.A. (in liquidation).
During 2009, Banco Galicia Uruguay S.A. (in liquidation) wholly repaid in advance the debt restructuring plan entered into with its creditors. Therefore and having fulfilled its obligations, its shareholders have resolved, at the Shareholders’ Meeting held on June 30, 2010, to voluntarily dissolve and liquidate the company.
Pursuant to current regulations, the corporate name is, as from said date, Banco Galicia Uruguay S.A. (in liquidation).
Furthermore, taking into consideration the financial condition and the evolution estimated in the liquidation process, shareholders decided to reduce the company’s computable capital for a value equal to US$2,069 through the voluntary redemption of shares, which was carried out on October 18, 2010. During 2013 and 2014, shareholders decided to conduct two new voluntary redemptions of shares. These redemptions were carried out for a value equal to US$2,127 and US$3,337, on November 18, 2013 and September 10, 2014, respectively.
As of December 31, 2015, Banco Galicia Uruguay S.A. (in liquidation)’s Shareholder’s Equity amounted to Ps.31,780.
The Extraordinary Shareholder’s Meeting of Banco Galicia Uruguay S.A. (in liquidation) held on April 30, 2016 approved the liquidation financial statements and decided starting the registration process to cancel the company before the Uruguayan authorities.
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29. Financial Trusts.
a) Financial trusts with the Bank as trustor outstanding at fiscal year-end:
due 2018 (1)
(*)
b) As of December 31, 2017 and December 31, 2016, the Bank records financial trusts in its own portfolio:
c) Trust Activities
Purpose: in order to guarantee compliance with contractual obligations, the parties to these agreements have ,agreed to deliver to the Bank, amounts as fiduciary property, to be invested according to the following detail:
Date of Contract
Trustor
12.07.10
04.17.12
04.29.13
10.21.13
12.20.13
09.12.14
09.30.15
04.14.16
06.28.17
07.19.17
08.08.17
Purpose: to administer and exercise the fiduciary ownership of the trust assets until the redemption of debt securities and participation certificates:
Trust
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Mas Cuotas Series I
d) Banco Galicia’s activities as Security Agent:
d.1) On April 8, 2011 Banco Galicia was appointed Security Agent and custodian of the National Treasury’s endorsement guarantees in favor of ENARSA (Energía Argentina S.A.) that were assigned in favor of Nación Fideicomisos S.A. in its capacity of Trustee of “ENARSA-BARRAGAN” and “ENARSA-BRIGADIER LOPEZ” financial trusts.
Said endorsement guarantees secure payment of all obligations arising from the above-mentioned trusts.
The Bank, in its capacity as Security Agent, will maintain custody of the documents regarding the National Treasury’s endorsement guarantees and will be in charge of managing all legal and notarial proceedings with respect to the enforcement thereof.
As of December 31, 2017 and 2016, the balances recorded from these transactions amount to US$1,364,097 and Ps.408, respectively.
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d.2) In April 2013, at the time of entering into the Contract for the Fiduciary Assignment and Trust for Guarantee Purposes “Profertil S.A.”, the Bank was appointed security agent with regard to the Chattel Mortgage Agreement transaction that was completed on June 18, 2013, which additionally secures all the obligations undertaken.
As of December 31, 2017 and 2016, the balance recorded from these transactions amounts to US$116,500.
30. Segment Reporting.
The Company is required to present segment information. Operating segments are defined as components of an enterprise about which separate financial information is available and which is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and assess performance. Reportable segments consist of one or more operating segments with similar economic characteristics, distribution systems and regulatory environments. The information provided for Segment Reporting is based on internal reports used by the CODM.
The Group measures the performance of each of its business segments primarily in terms of “Net income” in accordance with the regulatory reporting requirements of the Argentine Central Bank. Net income and other segment information are based on Argentine Banking GAAP and are consistent with the presentation of the Group’s consolidated financial statements.
The following summarizes the aggregation of Grupo Financiero Galicia´s operating segments into reportable segments:
Banking: corresponds to the results of our banking business and represents the accounts of Banco Galicia. As of December 31, 2015, this segment included Banco Galicia Uruguay S.A..
Banco Galicia Uruguay was no longer consolidated by Banco Galicia since the Shareholders’ Meeting held on April 30, 2016 decided to approve the final balance sheet for dissolution purposes.
Regional Credit Cards: shows the results of our regional credit card and consumer finance business and represents the accounts of Tarjetas del Mar S.A. (on March 31, 2017, Tarjetas del Mar S.A. was no longer consolidated as a result of its sale) and Tarjetas Regionales S.A. consolidated with its subsidiaries. As of December 31, 2017 and 2016, Tarjetas Regionales S.A,’s main subsidiaries were Tarjeta Naranja S.A. and Tarjetas Cuyanas S.A.
As of January 1, 2018, Tarjetas Regionales S.A. consolidates its financial statements with Grupo Financiero Galicia.
CFA Personal Loans: shows the results of Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.. These Companies were incorporated as of June 30, 2010 in the consolidated financial statements of the Bank.
Insurance: includes the results of our insurance business and represents the accounts of Sudamericana Holding S.A. and its subsidiaries, including the results of the 12.5% interest owned by the Bank. As of December 31, 2017, Grupo Financiero Galicia S.A. maintained, through Sudamericana Holding S.A., controlling interests in Galicia Seguros S.A., Galicia Retiro Compañía de Seguros S.A. and Galicia Broker Asesores de Seguros S.A.
Other Grupo Galicia Businesses: shows the results of operations of Galicia Administradora de Fondos S.A., Galicia Warrants S.A., Net Investment S.A. (in liquidation), Galicia Valores S.A. and Grupo Financiero Galicia S.A., the last two net of eliminations of the income from equity investments.
The column “Adjustments” includes consolidation adjustments, eliminations corresponding to transactions conducted between consolidated companies and non-controlling interest.
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Ps.
Provision for Loan Losses
Operating Income
Income from Insurance Companies´ Activities
Net Income before Income Tax
Net Income for the Fiscal Year
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Income from Insurance Companies’ Activities
Minority Interest
31. Differences between the Argentine Central Bank’s Regulations and Argentine GAAP in Force in the Autonomous City of Buenos Aires.
The main differences between the Argentine Central Bank’s regulations and Argentine GAAP are detailed below:
Conversion of financial statements
The conversion into Argentine pesos of the financial statements of the foreign subsidiaries for purposes of their consolidation with Banco Galicia’s financial statements, made in accordance with Argentine Central Bank regulations, differ from Argentine GAAP (Technical Pronouncement No. 18). Argentine GAAP requires that:
a) The measurements in the financial statements that are stated in fiscal year-end foreign currency (current values, recoverable values) be converted into pesos at the balance sheet date exchange rate; and
b) The measurements that are stated in foreign currency of periods predating the closing date (for example: those which represent historical costs, income, expenses) in the financial statements be converted into pesos at the pertinent historical exchange rates, restated at fiscal year-end currency due to the application of Technical Pronouncement No. 17. Quotation differences arising from conversion of the financial statements are treated as financial income or losses, as the case may be.
The application of this criterion does not have a significant impact on the Group’s financial statements.
Allowance for Loan Losses – Non-Financial Public Sector
Current Argentine Central Bank regulations on the establishment of allowances provide that receivables from the public sector are not subject to allowances for uncollectibility risk. Under Argentine GAAP, those allowances must be estimated based on the recoverability risk of those assets.
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Negative Goodwill
A negative goodwill has been recorded which corresponds to the difference between the acquisition cost paid for the companies Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. and their equity method value estimated at the moment of the purchase. Such negative goodwill is recorded under the caption “Liabilities – Provisions”.
Pursuant to the Argentine Central Bank regulations, the negative goodwill has to be charged to income with regard to the causes that have originated it, not to exceed a 60-month straight-line method amortization. Pursuant to Argentine GAAP, the negative goodwill that is not related to expense estimations or estimated future losses should be recognized as a gain at the time of the purchase.
As of December 31, 2014, the negative goodwill balance amounts to Ps. 49,562. During fiscal year 2015, it was fully amortized.
Accounting for Income Tax According to the Deferred Tax Method
The subsidiaries Banco Galicia and Compañía Financiera Argentina, both subject to the regulations of the Argentine Central Bank, determine the income tax charge by applying the statutory tax rate to the estimated taxable income, without considering the effect of any temporary differences between accounting and tax results.
Under Argentine GAAP, income tax must be recognized using the deferred tax method and, therefore, deferred tax assets or liabilities must be established based on the aforementioned temporary differences. In addition, unused tax loss carryforwards or fiscal credits that may be offset against future taxable income should be recognized as deferred assets, provided that taxable income is likely to be generated.
Valuation of Government Securities
Argentine Central Bank regulations set forth specific valuation criteria for government securities recorded at their acquisition cost plus I.R.R. Pursuant to Argentine GAAP the above-mentioned assets must be valued at their fair value.
Debt Securities and Participation Certificates in Financial Trusts
Pursuant to Argentine Central Bank regulations, participation certificates in Galtrust I Financial Trust are recorded at the present value of cash flows discounted by I.R.R. of instruments with similar characteristics and duration and with volatility. When the book value exceeds the present value, the monthly accrual is recorded in an asset offset account. According to Argentine GAAP, the above-mentioned asset must be valued at its fair value.
Restructured Loans and Liabilities
Restructured loans and financial obligations are valued based on the actually restructured principal amounts plus accrued interest and principal adjustments, when applicable, minus collections or payments made.
Pursuant to Argentine GAAP, those restructured loans and liabilities, for which modification of original conditions imply a substitution of instruments, must be recorded on the basis of the best possible estimate of the amounts receivable or payable discounted at a market rate that reflects market evaluations on the time value of money and the specific risks of such assets and liabilities at the time of restructuring.
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Consolidation of Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.
In accordance with applicable Argentine GAAP, where equity investments in controlled companies are held for sale or disposal within a year, such investments should be excluded from consolidation. Banco de Galicia y Buenos Aires S.A. and Grupo Financiero Galicia S.A. have agreed to a tender offer involving all shares in portfolio of Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. On December 4, 2017, the Argentine Central Bank approved the transaction through Resolution No. 414.
The sale of the shares in both companies was completed on February 2, 2018 for a total price of Ps.1,042,701 and Ps.21,460, respectively, with the new holders having been registered in each of these companies’books. These amounts were subject to the buyers’ consent, who are entitled to raisen objections for a term of up to 45 subsequent days to be counted as from January 29, 2018.
We consider that this transaction will not have a significant impact on Grupo Financiero Galicia S.A.’s shareholders’ equity.
As of December 31, 2017, as stated above, the book value of such equity investments does not exceed the respective recoverable values.
Pursuant to the Argentine Central Bank regulations, as a result of the maintenance of a controlling equity interest as of December 31, 2017, such companies are consolidated with the Company on aline-by-line basis.
32. Adoption of the International Financial Reporting Standards.
The Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”) established the application of Technical Pronouncement No. 26 of the Argentine Federation of Professional Councils in Economic Sciences, which adopts the International Financial Reporting Standards (“IFRS”) issued by the IASB (International Accounting Standards Board) for certain entities included within the public offering system, for financial statements corresponding to fiscal years started as from January 1, 2012.
The adoption of such standards is not applicable to the Company since the CNV, in Article 2 – Section I – Chapter I of Title IV: Periodic Reporting System of the CNV´s Pronouncements (Text amended in 2013), exempts banks, insurance companies and companies that invest in banks and insurance companies.
Due to the foregoing, and since the Company complies with the requirements described below, which are set forth in the aforementioned article, these financial statements are presented pursuant to the valuation and disclosure criteria established by the Argentine Central Bank regulations:
In February 2014, the Argentine Central Bank decided financial institutions should comply with IFRS, and established an implementation schedule for such standards, to be effective for fiscal years starting on January 1, 2018. In accordance with the foregoing, Banco de Galicia y Buenos Aires S.A.’s Board of Directors has become aware of the roadmap established by the Argentine Central Bank and has appointed a coordinator and an alternate coordinator, who shall be in charge of the compliance process. On March 20, 2015, it approved the Implementation Plan required by the regulations, which was submitted on March 27, 2015.
In compliance with the provisions of Communiqué “A” 5635, at the meeting held on September 27, 2016, Banco de Galicia y Buenos Aires S.A.’s Board of Directors approved the third report on the progress made during the six-month period from March 2016 to September 2016. On such date, Banco de Galicia y Buenos Aires S.A.’s Audit Committee approved the Special Internal Audit Report related to the Implementation Plan’s level of progress with regard to achieving compliance with IFRS. At the meeting held on January 5, 2017, Banco de Galicia y Buenos Aires S.A.’s Board of Directors became aware of the quarterly report on the level of progress with regard to the implementation of the IFRS, as established in such communiqué.
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Banco de Galicia y Buenos Aires S.A. has met the reporting requirements established by the Argentine Central Bank’s Communiqué “A” 5844, as supplemented.
Through Communiqué “A” 5541, as amended, the Argentine Central Bank has established the application of the IFRS, except for the application of point 5.5 (impairment) of IFRS 9 “Financial Instruments”, which has been temporarily waived until January 1, 2020, when the provisions on Impairment of Financial Assets will become applicable. Grupo Financiero Galicia S.A. and its subsidiaries are in the process of convergence to such standards, the application of which will be mandatory as from the fiscal year beginning January 1, 2018. The first quarterly financial statements to be presented under these standards are those as of March 31, 2018. Consequently, the date of transition to IFRS for the Company, as set forth in IFRS 1 “First-time Adoption of IFRS”, is January 1, 2017.
The consolidated financial statements have been prepared according to the valuation and disclosure standards of the Argentine Central Bank regarding the Accounting Reporting System for quarterly/annual publication, which differ from IFRS. These are measurement and disclosure differences.
As required by Communiqué “A” 6206, below is a detail of the reconciliations of balance sheet and shareholders’ equity balances determined according to Argentine Central Bank regulations and those determined according to IFRS as of December 31, 2017, and the reconciliation of the comprehensive income as of such date. In this regard, in preparing reconciliations, the Company has considered those IFRS it expects to be applicable for the preparation of its financial statements as of December 31, 2018, as well as the provisions set out in Communiqué “A” 6114. The items and figures included in this note are subject to changes and may only be considered final upon the preparation of the annual financial statements as of the fiscal year in which IFRS are applicable for the first time.
Reconciliation of Balances under the Accounting Framework for the Convergence to IFRS
A. Reconciliation of Balances and Shareholders’ Equity as of December 31, 2017
Accounts
Bank Premises and Equipment and Miscellaneous Assets
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Unallocated Items
Other Liabilities Resulting from Financial Brokerage
Subordinated Negotiable Obligation
Shareholders´ Equity Attributable to the Shareholders of the Group
Capital, Paid in Capital and Reserves
Other Comprehensive Income
Accumulated Retained Earnings
Shareholders´ Equity Attributable toNon-controlling Interests
B. Reconciliation of the Statement of Comprehensive Income as of December 31, 2017
Net Income for the Year
Income from Services
Expenses from Services
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Changes in the Revaluation Surplus of Intangibles Property, Plant and Equipment
Cumulative Actuarial Gains or Losses for Post-Employment Defined Benefit Plans
Currency Transaction Adjustment
Income or Losses from Hedge Instruments –Cash Flows Hedge
Income or Losses from Hedge Instruments –Net Investment Hedge
Income or Losses from Financial Instruments at Fair Value with Changes in OCI (Other Comprehensive Income) (items 5.7.5 and 4.1.2A) of IFRS 9
Change in the Fair Value of financial liabilities carried at fair value through profit or loss attributable to Changes in Credit Risk. (item 5.7.7A) of IFRS 9
Total Comprehensive Income for the Year
C. Explanations of the Most Significant Adjustments
(a) Change in Classification and Measurement of Financial Assets and Liabilities
The IFRS classifies all financial assets into three categories: those measured at amortized cost, those measured at fair value through other comprehensive income and those measured at fair value through profit or loss, based on the business model and the cash flow characteristics of instruments.
Grupo Financiero Galicia S.A.’s accounting policy under Argentine Central Bank regulations differs from the provisions set out by IFRS in the following aspects:
As set out by IFRS 9, a company will classify financial assets, as measured subsequently at amortized cost, at fair value with through other comprehensive income or at fair value through profit or loss, based on:
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According to the business model applied by Grupo Financiero Galicia S.A. and its subsidiaries for managing financial assets, they have been classified into the following categories:
1) Amortized Cost
The calculation of the amortized cost, as set out in IFRS 9, for Loans, Credit for Leases, Other Receivables and Liabilities related to the financial activity and Miscellaneous Receivables implies a decrease of Ps.285,497 in shareholder´s equity and an increase of Ps.14,186 in the Income Statement, respectively.
2) Fair Value through Other Comprehensive Income
The Company has classified the holding of government securities held by Financial Trust Galtrust I and Sudamericana Holding S.A. into this category. The effect represents an increase of Ps.42,781 in shareholder´s equity, an increase in the Income Statement of Ps.289,316, respectively, and a decrease of Ps.266,903 in Other Comprehensive Income.
3) Fair Value through the Profit or Loss
The Company has classified the following financial assets into this category: Holdings in government and private securities, in instruments issued by the Argentine Central Bank, in notes and certain investments in debt securities issued by financial trusts. The effect represents an increase of Ps.12,131 in shareholder´s equity and a decline of Ps.49,201 in the Income Statement.
(b) Equity Investments
As of December 31, 2017, the companies consolidated by Grupo Financiero Galicia S.A., pursuant to the framework established by the Argentine Central Bank, are as follows: Banco de Galicia y Buenos Aires S.A. and its subsidiaries, Sudamericana Holding S.A. and its subsidiaries, Galicia Administradora de Fondos S.A., Galicia Warrants S.A. and Net Investment S.A. (in liquidation). Under the application of IFRS 10, the above-mentioned companies will continue being consolidated because they continue being subject to the control concept mentioned in the international standards.
Upon using the equity method, each company’s financial statements as of December 31, 2016 and December 31, 2017 have been used. The shareholders’ equity arising from their financial statements has been adjusted for the effect the application of IFRS has had thereon. The effect of adjustments represents an increase of Ps.3,442,502 in the shareholder’s equity and an increase in the income statement of Ps.297,531.
Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. (both subsidiaries of Banco de Galicia y Buenos Aires S.A.) were no longer consolidated under IFRS 10 because such companies have been classified as held for sale in accordance with IFRS 5, as the respective transfer agreements are signed. They are measured at the lowest of book value or fair value less cost of sale. As concerns Tarjetas Regionales S.A. and its subsidiaries, as of December 31, 2017, these entities are deemed under the control of, and are hence consolidated with, Banco de Galicia y Buenos Aires S.A. However, effective since January 1, 2018, following the spin-off/merger of such company, it will no longer be under the control of Banco de Galicia y Buenos Aires S.A. and will be consolidated by Grupo Financiero Galicia S.A.
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(c) Bank Premises and Equipment and Miscellaneous Assets
By virtue of applying IFRS 1, the fair value of bank premises and equipment and investment property has been used as deemed cost as of the date of transition to IFRS, Following the date of transition to IFRS, an item of Bank Premises and Equipment and Miscellaneous Assets will be accounted for at cost, net of accumulated depreciation and accumulated impairment losses. Under Argentine Central Bank regulations, those assets are recorded at historical cost less their accumulated depreciation. The effect of these adjustments represents an increase of Ps.4,793,309 in the Shareholder’s equity and a decrease of Ps.32,468 in the Income Statement, as of December 31, 2017.
(d) Intangible Assets
According to IFRS, an intangible asset is an identifiable non-monetary asset that has no physical substance. In order to be recognized, the Bank should have control thereof and the asset should generate future economic benefits.
The effect of adjustments represents a decrease of Ps.843,972 in the Shareholder´s equity and an increase of Ps.41,381 in the Income Statement, due to the reversal of amortization charges arising from the application of the Argentine Central Bank regulations.
(e) Guarantees Granted
Under IFRS, the financial guarantees granted should be originally recognized at their fair value, which is equal to the commission earned in advance in most cases. Such amount is subsequently amortized on a straight-line basis over the life of the contract. At each year-end, the financial guarantees are measured by the highest of: (i) the value of the unaccrued commission as of fiscal year-end and (ii) the best estimate of the amount to be paid to terminate the contract discounted at its present value as of fiscal year-end.
Under Argentine Central Bank regulations, the commissions earned on financial guarantee agreements are charged to the Income Statement upon collection. The adjustment relates to the recognition of commissions for unaccrued guarantees at closing and the consequent reversal of the charge to the Income Statement made under Argentine Central Bank regulations. The effect of the adjustments related to Guarantees Granted represents an increase in assets and liabilities of Ps.163,466 and Ps.165,126, respectively.
(f) Other Adjustments
They correspond to labor, commercial and tax provisions, and the Quiero! customer loyalty program. The effect of adjustments represents an increase in liabilities and a decrease in the Income Statement of Ps.320,588 and Ps.253,423, respectively.
In addition, the balance of own debt held by the Company was adjusted by Ps.4,648 for, pursuant to IFRS 9, the liability is paid off when the issuer repurchases its own indebtedness.
(g) Repo and Reverse Repo Transactions
Reverse Repo Transactions
Under IFRS, the financial assets acquired through reverse repo transactions for which the risks and benefits have not been transferred shall be recognized as a loan granted.
Under Argentine Central Bank regulations, the instrument acquired is recognized upon making the transfer. The adjustment relates to the derecognition of the listed government security recorded in the amount of Ps.10,774,896, as well as the reversal of the liability recorded in other liabilities resulting from financial brokerage amounting to Ps.10,774,896.
(h) Consolidation
According to IFRS, an investor controls a subsidiary if it is exposed to or is entitled to variable returns due to its involvement in such entity and if it has the ability to use its power to affect the investor is return from its involvement with the investee. The adjustment related to interests in other companies relates to the consolidation of the Financial Trust Galtrust I and the Financial Trust Saturno Créditos, which are not considered subsidiaries under Argentine Central Bank regulations.
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(i) Miscellaneous Liabilities
Mainly relates to the adjustments to calculate the deferred tax. Under IFRS, the tax charge for the year includes current and deferred taxes. The current income tax is calculated based on the laws approved or substantially approved as of the balance sheet date. The deferred tax is recognized according to the liability method for the temporary differences that arise between the tax bases of assets and liabilities and their book values in the consolidated financial statements. However, the deferred tax liabilities are not recorded if they arise from the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction other than a business combination which, upon the transaction, does not affect book income or taxable income or loss. The deferred tax is determined using tax rates (and laws) approved or about to be approved as of the balance sheet date and that are expected to be applicable when the related deferred tax assets are realized or the deferred tax liabilities are settled. Under Argentine Central Bank regulations, Banco de Galicia y Buenos Aires S.A. recognizes the current tax for the fiscal year.
The tax effect of the deferred tax recognition as of December 31, 2017 gives rise to deferred assets amounting to Ps.557,871 and deferred liabilities amounting to Ps.659,495.
(j) Reclassifications
For the purposes of preparing this reconciliation, the Company has not made all reclassifications that would be required for appropriate disclosure under IFRS.
As of the reporting year-end, the main reclassifications identified in the balance sheet and the Income Statement are:
Leasehold Improvements:
According to the Argentine Central Bank regulations, leasehold improvements are disclosed under Intangible Assets. According to IFRS, leasehold improvements are part of Property, Plant and Equipment. Consequently, Ps.466,007 has been reclassified to Bank Premises and Equipment.
Commissions on Origination of Loans:
According to the Argentine Central Bank regulations, they are disclosed in Income from Services. According to IFRS 9, such commissions are part of the necessary cash flows to calculate I.R.R. on loans. Consequently, Ps.435,325 has been reclassified to Financial Income.
Equity Investments:
According to Prisma Medios de Pago S.A.’s Ordinary and Extraordinary Shareholders’ Meeting held on August 31, 2017, the shareholders wished to transfer all of the shares. Therefore, the amount of Ps.208,972 was reclassified to Miscellaneous Assets, as required by IFRS 5.
In addition, in accordance with the Argentine Central Bank regulations, Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. are disclosed in Equity Investments.The amount of Ps.943,535 was reclassified to Miscellaneous Assets, as required by IFRS 5.
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(k) Liabilities Recognized by Insurance Companies
Under IFRS, an insurance company will evaluate, at the end of the period reported whether it’s recognized liabilities are adequate using current estimates of future cash flows under its insurance contracts. If the assesment shows that the carrying amount of its liabilities for insurance contracts (less deferred acquisition costs and related intangible assets) is not adequate, considering the estimated future cash flows, the total amount of the deficiency will be recognized in the profit or loss.
Under Argentine Central Bank regulations, the accounting policies followed by the insurance company do not require performing a liability adequacy test (LAT) that meets the minimum conditions established by IFRS Pursuant to IFRS 4, in this case, the insurance company shall determine the adjustment of the carrying amount recorded according to the guidelines set out in IAS 37.
The related adjustment represents a Consolidated Financial Statements and the Income Statement increase of Ps.2,690.
(l) Liability from Purchase of Non-controlling Interests
As of December 31, 2017, the Bank recognized a financial liability for the purchase of a 6% interest in Tarjetas Regionales S.A. for an amount of Ps.919,935. IFRS 32, paragraph 23, sets forth that a commitment to buy own shares is to be accounted for as a financial liability for the present value of the redemption amount. The liability is recognized with its corresponding offsetting entry in equity, since the risks and rewards associated to the shares are retained by the non-controlling shareholders until the actual transfer of such shares.
IFRS 1
IFRS 1 allows entities that adopt IFRS for the first time to consider certain one-time exemptions from the principle of retrospective application of IFRS in force for financial statements as of December 31, 2018. Such exemptions have been established by the IASB to make the first application of those standards simpler.
Below are the optional exemptions applicable to Grupo Financiero Galicia S.A. and its subsidiaries under IFRS 1:
Mandatory Exceptions to IFRS
Below are the mandatory exceptions applicable to Grupo Financiero Galicia S.A. and its subsidiaries under IFRS 1:
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33. Subsequent events.
Spin-off/Merger Process of the Controlled Company, Tarjetas Regionales S.A., and its inclusion in Grupo Financiero Galicia S.A.
The General Extraordinary Shareholders’ Meeting of Banco de Galicia y Buenos Aires S.A. held on December 14, 2017 approved the corporate reorganization process consisting in splitting a portion of that entity’s shareholders’ equity made up of its shares held in Tarjetas Regionales S.A. representing 77% of its capital stock for its later inclusion in Grupo Financiero Galicia S.A.’s shareholders’ equity effective as from January 1, 2018.
Banco de Galicia y Buenos Aires S.A., under the provisions of Sections 7 and 15 of Financial Institutions Law No. 21526, as amended and supplemented, filed with the Argentine Central Bank the appropriate request for authorization. On January 19, 2018, such agency made a decision in this regard pointing out that no elements are noted that make such authorization necessary and there are no other considerations or objections to make, establishing that such company will continue to be under the Consolidated Supervision System.
The final spin-off/merger agreement was signed on January 23, 2018 and will not have any effect on the consolidated financial statement of Grupo Financiero Galicia.
Sale of Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.
On January 12, 2017, Grupo Financiero Galicia S.A. accepted an offer made by Mr. Julio Alfredo Fraomeni and Galeno Capital S.A.U. to buy its whole non-controlling interest in Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.. On December 4, 2017, through Resolution No. 414, the Argentine Central Bank authorized such transaction. The sale of shares took place on February 2, 2018. As of March 26, 2018, the price was agreed on Ps.1,047,277. Under US GAAP purposes, the result of the sale generated a profit which amounted to Ps.178,671.
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Banco Finansur S.A.
On January 12, 2018, the Argentine Central Bank informed Banco Galicia of its participation in the acquisition process of Banco Finansur S.A. under the terms of article 35 bis, Section II of Law N° 21526 (Restructuring of an entity in defense of bank deposits and credit). On March 9, 2018 the Argentine Central Bank confirmed the approval to the transfer of certain assets and liabilities of Banco Finansur to Banco Galicia.
Between November 9, 2017 and February 9, 2018, Banco Finansur S.A. (an Argentine private bank) was temporarily suspended to operate by the Argentine Central Bank.
Tarjeta Naranja S.A.’negotiable obligations
The following table shows the Tarjeta Naranja S.A’negotiable obligations issued as of April 10, 2018:
In thousands of Pesos, except for rates (%)
- Class XL Serie I (1)
- Class XL Serie II(2)
34. Summary of Significant Differences between Argentine Central Bank Rules and United States Accounting Principles.
The following is a description of the significant differences between Argentine Banking GAAP and US GAAP:
a. Income tax.
Argentine Central Bank regulations do not require the recognition of deferred tax assets and liabilities and, therefore, income taxes for Banco de Galicia y Buenos Aires S.A. and Compañía Financiera Argentina S.A. are recognized on the basis of amounts due in accordance with Argentine tax regulations. However, Grupo Galicia and Grupo Galicia’s non-bank subsidiaries apply the deferred income tax method. As a result, Grupo Galicia and itsnon-banking subsidiaries have recognized a deferred tax asset as of December 31, 2017 and 2016.
In addition, the Group records as an asset the credit related with Minimum Presumed Income Tax (MPIT) amounting to Ps.8,912 and Ps.9,424 as of December 31, 2017 and 2016, respectively. The MPIT credit will be computable as a down payment of any income tax excess over minimum notional income tax through the next ten years.
For the purposes of US GAAP reporting, Grupo Galicia applies ASC 740-10 “Accounting for Income Taxes”. Under this guidance, income tax is recognized based on the assets and liabilities method whereby deferred tax assets and liabilities are established for temporary differences between the financial reporting and tax basis of Grupo Galicia’s assets and liabilities. Deferred tax assets are recognized if it is more likely than not that such assets will be realized. As such, the US GAAP adjustment included: a) Deferred Income Taxes for banking companies not recorded for local purposes and; b) tax effects of the US GAAP adjustments included in the reconciliation between US GAAP and Argentine Banking GAAP.
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Deferred tax assets (liabilities) are summarized as follows:
Deferred tax assets
Allowance for loan losses – private sector
Impairment of fixed assets and foreclosed assets
Total gross deferred tax assets
Deferred tax liabilities:
Local Depreciation of fixed assets
Total gross deferred tax liabilities
Net deferred income tax asset
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The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory income tax rate in Argentina to income before income tax, calculated on the basis of US GAAP for the fiscal years ended December 31, 2017, 2016 and 2015:
Income before taxes and non-controlling interest
Tax rate in forcé
Result for the year at the tax rate
Permanent tax differences (*)
According to the taxable income projections, the Group estimates that it is more likely than not that it will recover the temporary differences and the credit recorded regarding Presumed Minimum Income Tax with future taxable income. Therefore, no valuation allowance was provided against the deferred tax assets and presumed minimum income tax.
ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for uncertain tax positions taken or expected to be taken in a tax return. As of December 31, 2017 and 2016, there were no uncertain tax positions.
The Group classifies income tax-related interest and penalties as income taxes in the financial statements.
The following table shows the tax years open for examination as of December 31, 2017, by major tax jurisdictions in which the Group operates:
Jurisdiction
Argentina
b. Commissions on loans.
Under Argentine Banking GAAP, the Bank does not defer loan origination fees and costs. In accordance with US GAAP under ASC 310, loan origination fees net of certain direct loan origination costs should be recognized over the life of the related loan as an adjustment of yield.
Therefore the Shareholders’ Equity adjustment between Argentine Banking GAAP and US GAAP as of December 31, 2017 and 2016 amounted to Ps.(179,264) and Ps.(81,904), respectively.
c. Intangible assets.
Goodwill – Recognition and amortization
The following table summarizes the US GAAP shareholders’ equity adjustments as of December 31, 2017 and 2016:
Goodwill recognition (1)
Reversal of amortizations (2)
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Software costs
Under US GAAP, ASC 350-40 defines three stages for the costs of computer software developed or obtained for internal use: the preliminary project stage, the application development stage and the post-implementation operation stage. Only the second stage costs should be capitalized. Under Argentine Banking GAAP, the Bank capitalized costs relating to all three of the stages of software development.
Under U.S GAAP, the relatives costs related to the first and third stages are expensed as incurred, and in addition, the amortization of such capitalized expenses recorded under Argentine Banking GAAP has been reversed.
Therefore the Shareholders’ Equity adjustment between Argentine Banking GAAP and US GAAP as of December 31, 2017 and 2016 is as follows:
Capitalized cost expensed for US GAAP purposes
Amortization adjustments
d. Loan loss reserves.
Loans to the non-financial private sector and residents abroad
For the purposes of analyzing our loan loss reserve under US GAAP, the Bank divides the loan portfolio into performing andnon-performing commercial and consumer loans.
The non-performingcommercial loan portfolio is comprised of loans falling into the following classifications of the Argentine Central Bank:
The Bank applies ASC 310-10 to all commercial loans classified as “With problems”, “High Risk of Insolvency” and “Uncollectible”. Additionally it is also considered in the assessment, however is not a determining factor, if commercial loans are more than 90 days past due. All non-performing commercial loans are individually assessed for impairment. Consumer loans are assessed on a collective basis.
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The allowance for non-performing commercial loans is measured based on the present value of estimated future cash flows discounted at the original effective loan rate or on the fair value of the collateral net of estimated costs to sell in the case where the loan is considered collateral-dependent. An allowance for impaired loans is provided when estimated future cash flows discounted at their original effective rate or collateral fair value is lower than book value.
To calculate the allowance required for all other commercial and consumer impaired loans and unimpaired loans, the Bank performs an analysis of historical losses from consumer and performing commercial loan portfolios in order to estimate losses for US GAAP purposes, resulting from loan losses that had been incurred in such loan portfolios at the balance sheet date but which had not been individually identified. Loss estimates are analyzed by loan type and thus for homogeneous groups of clients. Such historical ratios are updated to incorporate the most recent data reflecting current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information that may affect the estimation of the allowance for loan losses. Many factors can affect the Bank’s estimates of allowance for loan losses, including volatility of default probability, migrations and estimated loss given default.
Allowances on homogeneous loan portfolios are established based on probability of default, which is defined as the probability of the debtor within a specific loan portfolio or segment and rating, defaulting on its obligations within the next twelve (12) months. Under US GAAP, this probability of default is determined by analyzing estimated defaults or foreclosures based on portfolio trends, historical losses, and client’s payment behavior.
d.i. Allowance for Credit Losses and Recorded Investments in Financial Receivables
The following table presents the allowance for loan losses and the related carrying amount of Financial Receivables for the years ended December 31, 2017 and 2016, respectively:
Allowances for loan losses:
Beginning balance
Beginning balance without Discontinued Operations
Charge-offs
Recoveries
Foreign exchange effect
Provision
Ending balance without Discontinued Operations
Total Ending balance
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Ending balance- individually evaluated for impairment without Discontinued Operations
Ending balance- collectively evaluated for impairment without Discontinued Operations
Financing receivables:
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Foreign Exchange effect and other adjustments
Ending balance
Ending balance- individually evaluated for impairment
Ending balance-collectively evaluated for impairment
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d.ii. Loan Charge-offs and recoveries
Under Argentine Banking GAAP, recoveries on previously charged-off loans are recorded directly to income and the amount of charged-off loans in excess of amounts specifically allocated is recorded as a direct charge to the Income Statement. The Group does not partially charge off troubled loans until final disposition of the loan, rather, the allowance is maintained on a loan-by-loan basis for its estimated settlement value. Under US GAAP, all charge off and recovery activity is recorded through the allowance for loan loss account. Further, loans are generally charged to the allowance account when all or part of the loan is considered uncollectible. In connection with loans in judicial proceedings, resolution through the judicial system may span several years. Loans in judicial proceedings, greater than three years as of December 31, 2017 and December 31, 2016 amounted to Ps.7,797 and Ps.9,867, respectively.
Under US GAAP these loans were completely provisioned. The Group also classified loans, many of which are in judicial proceedings, which amounted to approximately Ps.721,242 and Ps.604,369 as of December 31, 2017 and December 31, 2016 respectively, as uncollectible, although the Group may hold preferred guarantees. Therefore, the balance of loans and allowance for loan losses would be decreased by these amounts.
d.iii. Impaired Loans
ASC 310, requires a creditor to measure impairment of a loan based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. This Statement is applicable to all loans (including those restructured in a troubled debt restructuring involving amendment of terms), except large groups of smaller-balance homogenous loans that are collectively evaluated for impairment. Loans are considered impaired when, based on Management’s evaluation, a borrower will not be able to fulfill its obligation under the original loan terms.
The following table discloses the amounts of loans considered impaired in accordance with ASC 310, as of December 31, 2017 and 2016:
With no related allowance recorded:
Commercial
Impaired Loans
With an allowance recorded:
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The average recorded investments for impaired loans were Ps.476,673 and Ps.453,284 for the years ended December 31, 2017 and 2016, respectively
The interest income recognized on impaired loans amounted to Ps.14,139, Ps.9,994 and Ps.6,576 for the years ended December 31, 2017, 2016 and 2015, respectively.
d.iv. Non-accrual Loans
Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk”, “High Risk” and “Uncollectible” and (b) Commercial portfolio: “With problems”, “High Risk of Insolvency”and “Uncollectible” or those in other categories where credit risk analysis shows that interest would not be recoverable.
The following table represents the amounts of nonaccruals, segregated by class of loans, as of December 31, 2017 and 2016, respectively:
Total Consumer
Total Commercial
Total Non-accrual loans
An aging analysis of past due loans, segregated by class of loans, as of December 31, 2017 and 2016 is as follows:
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Total Consumer Loans
Commercial:
Performing Loans
Impaired loans
Total Commercial Loans
d.v. Credit Quality Indicators
The following tables contain the loan portfolio classification by credit quality indicator set forth by the Argentine Central Bank,
Commercial Portfolio:
(2.a) Under Observation
(2.b) Under Negotiation or Refinancing Agreements.
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Credit quality indicators for the commercial portfolio are reviewed, at a minimum, on an annual basis,
Consumer Portfolio:
Credit quality indicators for the consumer portfolio are reviewed on a monthly basis.
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The following tables show the loan balances categorized by credit quality indicators for the years ended December 31, 2017 and 2016:
Performing loans
Total Financing Receivables
Loans are considered non-accrual when they are categorized by credit quality as “with problems” or “medium risk” or worse.
Loans past due 90 days or more and still accruing amounted Ps.391,898 and Ps.118,788 as of December 31, 2017 and 2016.
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As of December 31, 2017 and 2016, the total shareholders’ equity adjustment for loan impairment-private sector was as follows:
Variances
d.vi. Trouble Debt Restructuring disclosures
Restructured loan is considered a TDR if the debtor is experiencing financial difficulties and the Bank grants a concession to the debtor that would not otherwise be considered. Concessions granted could include but it not necessary limited to: reduction in interest rate to rates that are considered below market, extension of repayment schedules and maturity dates beyond original contractual terms.
In 2017 there were 4 restructuring transactions affecting commercial debtors whose financial situation had deteriorated. As of the date of issuance of these Consolidated Financial Statements, 3 of these debtors are in default of their payment obligations.
As for the consumer segment, all the restructuring transactions effected during 2017 had the following characteristics: (i) the debtor had paid, at a minimum, one installment in advance in order to qualify to the restructuring of its debt; (ii) the Bank and the Regional Cards made sure before the restructuring that the debtor’s monthly payment capacity would be able to absorb the new monthly paying obligation resulting from the restructuring; (iii) the guarantees in force were in all cases maintained or, in the case of loans without guarantees, the execution capacity for the loan was improved; and (iv) all the restructurings in force are arranged in consecutive monthly payments, with a minimum of six months and a maximum of 60 months.
The following tables present for the periods ended as of December 31, 2017 and 2016, the financing receivables modified as troubled debt restructurings in 2017 and 2016:
Credit Cards Loans
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The following tables present for the periods ended as of December 31, 2017 and 2016, the financing receivables modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the year:
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e. Government securities
The following table summarizes the US GAAP adjustment related to government securities, as of December 31, 2017 and 2016:
Securities issued by the Argentine Central Bank Recorded at their Acquisition Cost plus I.R.R
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Government securities and securities issued by the Argentine Central Bank
As of December 31, 2017 and 2016 under Argentine Banking GAAP the Group holds government securities which are classified under the caption “Holdings Recorded at their Acquisition Cost plus I.R.R”. The Group also holds some securities issued by the Argentine Central Bank, classified under the caption “Securities issued by the Argentine Central Bank”, which are recorded at their cost plus I.R.R. as they have not been included in the information about volatilities or present values issued by the Argentine Central Bank.
For US GAAP purposes, these securities were classified as trading and accounted for at its fair value with changes recorded in the Income Statement and certain securities were classified as available for sale and measured at fair value with changes recorded in Other Comprehensive Income.
f. Items in process of collection
The Bank does not give accounting recognition to checks drawn on the Bank or other banks, or other items to be collected until such time as the related item clears or is accepted. Such items are recorded by the Bank in memorandum accounts. US banks, however, account for such items through balance sheet clearing accounts at the time the items are presented to the Bank.
Grupo Galicia’s assets and liabilities would be increased by approximately Ps.28,228,662 and Ps.22,882,600 applying US GAAP at December 31, 2017 and 2016, respectively.
g. Securitizations.
The following table summarizes the adjustment for US GAAP purposes related to securitization transactions as of December 31, 2017 and 2016:
Saturno Trust
Financial trust “Galtrust I”
During 2002, the portfolio of loans included and the related retained interest in Galtrust I was subject to the pesification. As a result the retained interest in the trust was converted into pesos at an exchange rate of 1.40 to 1 and the interest rate for their debt securities changed to CER plus 10%. During 2003, Galtrust I had swapped its provincial loans for Bogar Bonds due 2018.
Under Argentine Banking GAAP, this transaction was accounted for as sales and the participation certificates retained by the Bank are recorded at the present value of cash flows discounted by the I.R.R. of instruments with similar characteristics and duration and with volatility. When the book value exceeds the present value, the monthly accrual is recorded in an asset offset account. The participation certificates are recorded under Argentine Central Bank rules in the caption “Other Receivables from Financial Brokerage”, and its balance as of December 31, 2017 and 2016, was Ps.96,481 and Ps.504,874, respectively.
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In accordance with ASC 810, the Group was deemed to be the primary beneficiary of this trust and, therefore, the Bank reconsolidated the assets and liabilities of the mentioned trust. Upon consolidation, the Bogar Bonds were classified as available-for-sale securities and measured at fair value with changes recorded in other comprehensive income. The profit and loss impact is generated by the reclassification of Other comprehensive income to the net income as a consequence of the amortization of the Bogar Bonds 2018.
Under Argentine Banking GAAP, certain loans that the Group had in its portfolio were transferred to Saturno Trust. In exchange for the loans transferred, the Group received all the participation certificates, which were accounted for at cost. According to this criterion, as of December 31, 2017 and December 31, 2016 Saturno Trust was recorded under caption “Other Receivables from Financial Brokerage” for an amount of Ps.17,360 and Ps.23,360, respectively.
In accordance with ASC 810, the Group was deemed to be the primary beneficiary of this trust and, therefore, the Bank reconsolidated the assets and liabilities of the mentioned trust. Upon consolidation, the loans have been measured at amortized cost with its corresponding allowance for loan losses measured in accordance with ASC 310.
Additional information required by US GAAP
The table below presents the aggregated assets and liabilities of the financial trusts which have been consolidated for US GAAP purposes:
Government securities and Promissory Notes
Participation Certificates
The Group’s maximum loss exposure, which amounted to Ps.164,366 and Ps.570,061 as of December 31, 2017 and 2016, respectively, is based on the unlikely event that all of the assets in the VIE’s become worthless and incorporates potential losses associated with assets recorded on the Group’s balance sheet.
h. Acceptances.
Under Argentine Banking GAAP, acceptances are accounted for in memorandum accounts. Under US GAAP, third party liability for acceptances should be included in “Other Receivables Resulting from Financial Brokerage” representing Group customers’ liabilities on outstanding drafts or bills of exchange that have been accepted by the Group.
The Group’s assets and liabilities would be increased by approximately Ps.456,567 and Ps.586,180, had US GAAP been applied as of December 31, 2017 and 2016, respectively.
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i. Impairment of real estate properties and foreclosed assets.
Under Argentine Banking GAAP, real estate properties and foreclosed assets are carried at cost adjusted by depreciation over the life of the assets. In accordance with ASC 360-10 “Impairment of Long-lived Assets”, such assets are additionally subject to: recognition of an impairment loss if the carrying amounts of those assets are not recoverable from their undiscounted cash flows and an impairment loss measured as the difference between the carrying amount and fair value of the assets.
The Group evaluates potential impairment loss relating to long-lived assets by comparing their carrying amounts with the undiscounted future expected cash flows generated by the assets over the remaining life of the assets. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the assets. Testing whether an asset is impaired and measuring the impairment loss is performed for asset groupings at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In 2002, the Group determined that the uncertainty of the Argentine economic situation had a significant impact on the recoverability of its long-lived assets and evaluated its properties for impairment. An impairment loss was recorded in 2002.
Foreclosed assets are carried at the lower of cost and fair value. In 2002, the Group recorded a valuation allowance reflecting a decrease in the market values of its foreclosed properties.
As of December 31, 2017 and 2016, no additional impairment was recorded in real estate properties and foreclosed assets.
The Argentine Banking GAAP depreciation for 2017 and 2016 of the assets impaired in 2002 has been reversed for US GAAP purposes.
Therefore, the Shareholders’ Equity adjustment between Argentine Banking GAAP and US GAAP as of December 31, 2017 and 2016 amounted to Ps. (46,230) and Ps. (47,625), respectively.
j. Equity investments in other companies
Under Argentine Banking GAAP, the equity investments in companies where significant influence exists are accounted for under the equity method. The remaining investments have been accounted for under the cost method, taking their equity method value as a limit in book value.
For US GAAP purposes, under ASC 323, Investments – Equity Method and Joint Ventures, the Group should determine if any factors are present that might indicate the fair value of the investment has been negatively impacted during the fiscal year. If it is determined that the fair value of an investment is less than the related company’s value, an impairment of the investment must be recognized.
As of December 31, 2017 and 2016, the Group concluded that the carrying amount of certain investments would not be recoverable and, therefore, an impairment loss was recorded for US GAAP purposes. In addition the Group concluded that under US GAAP, significant influence is exercised over its investment in Prisma Medios de Pago S.A. and, therefore, accounted for such investment under the equity method.
Therefore the Shareholders’ Equity adjustment between Argentine Banking GAAP and US GAAP as of December 31, 2017 and December 31, 2016 amounted to Ps.195,681 and Ps.(14,365), respectively.
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j.1 Liability from Extinguishment of non-controlling interest
As of December 31, 2017, the Bank recognized a financial liability for the commitment to purchase a 6% interest in Tarjetas Regionales S.A. in the amount of Ps.919,935. ASC 480 sets forth that a commitment to purchase non-controlling interest should be accounted for as a financial liability at fair value. Thenon-controlling interest is derecognized and the differences with the carrying value is recognized as additional paid in capital.
k. Financial Guarantees
Other Financial Guarantees.
The Bank issues financial guarantees, which are obligations to pay to a third party when a customer fails to repay its obligation.
Under Central Bank rules, guarantees issued are recognized as liabilities when it is probable that the obligation undertaken by the guarantor will be performed.
Under US GAAP, FASB ASC 460 “Guarantees” requires that at inception of a guarantee, a guarantor recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. Such liability at inception is deemed to be the fee received by the Group with an offsetting entry equal to the consideration received. Subsequent reduction of liability is based on an amortization method as the Group is decreasing its risk. As of December 31, 2017 and 2016, the fair value of the guarantees less the estimated proceeds from collateral amounted to Ps.(1,660) and Ps.(469), respectively. The Net income adjustment as of December 31, 2017 and 2016 amounted to Ps.(1,191) and Ps.826, respectively.
l.Non-controlling interest
Under Argentine Banking GAAP, thenon-controlling interest is required to be disclosed as a component of the liabilities. Under US GAAP, non-controlling interest should be reported as a separate component within equity in the consolidated financial statements. Additionally, consolidated net income and comprehensive income are reported with separate disclosure of the amounts attributable to the parent company and to the non-controlling interest. The non-controlling interest in accordance with Argentine Banking GAAP has been reclassified for US GAAP reconciliation purposes.
Also, non-controlling interest under US GAAP reflects the effect in non controlling interest of all the other US GAAP adjustments discussed.
m. Foreign Debt Restructuring
On May 18, 2004, the Group completed the restructuring of its foreign debt. As a result of this restructuring, the Group recorded a Ps.142.5 million gain under Argentine Banking GAAP.
For US GAAP purposes, the restructuring is accounted for in each of two steps. The first step of the restructuring required the holders of the Group’s debt to exchange its old debt for new debt in two tranches. Pursuant to “Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is within the scope of ASC 470), the Group did not receive any concession from the holders of the debt and therefore, the first step restructuring was not considered a trouble debt restructuring. Pursuant to “Debtors Accounting for a Modification or Exchange of Debt Instruments” ASC 470-50, the first step of the restructuring was accounted for as a modification of the old debt and therefore the Group did not recognize any gain or loss. The second step of the restructuring offers the holders of the Group’s debt issued in the first step explained above to exchange it for new securities including cash, Boden 2012 Bonds and equity shares of the Group. Pursuant to US GAAP this second step, the restructuring was accounted for in accordance with “Accounting by Debtors and Creditors for Trouble Debt Restructurings” ASC 310-40, as a partial settlement of the debt through the transfer of certain assets and equity at its fair value. After deducting the considerations used to repay the debt, ASC 310-40 requires the comparison of the future cash outflows of the restructured debt and the carrying of the debt at the restructuring date.
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A gain on troubled debt restructuring is only recognized when the remaining carrying value of the debt at the date of the restructuring exceeds the total future cash payments of the restructured debt reduced by the fair value of the assets and equity given as payment of the debt. Since the total future cash outflows of the restructured debt exceeds the carrying value of the old debt, no gain on restructuring was recorded under US GAAP.
As a result, under US GAAP, the carrying amount of the restructured debt is greater than the amount recorded under Argentine Banking GAAP. Therefore, under US GAAP, a new effective interest rate was determined to reflect the present value of the future cash payments of the restructured debt.
Furthermore, under US GAAP, expenses incurred in a troubled debt restructuring are expensed as incurred. Expenses related to the issuance of equity were deducted directly from the shareholder’s equity.
During 2010, the Group repurchased part of the debt maturing in 2010 and 2014. In addition, Negotiable Obligations were repaid in advance. For US GAAP purposes, these transactions were considered as an extinguishment of debt. Therefore, the US GAAP adjustment recorded in previous years related to the debt extinguished was reversed in 2010, generating a gain of approximately Ps. 34,462 included in 2010 US GAAP net income reconciliation.
During 2011, the Group paid in advance the interest capitalized related to the Subordinated Negotiable Obligation for an amount of approximately US$95.8 million. This amount was originally scheduled to be paid in 2014. This advance payment does not constitute a modification of terms of the Negotiable Obligation for US GAAP purposes.
During 2016, the Group have paid in advance the Subordinated Negotiable Obligation, which was originally scheduled to be paid in 2019. Consequently no shareholders’ equity adjustment was recorded as of December 31, 2017 and 2016.The Income Statement’ adjustment as of December 31, 2016 and 2015, amounted to Ps.69,216 and Ps.(13,401), respectively.
n. Repurchase Agreements and Reverse Repurchase Agreements (“Repos and Reverse Repos”).
Under Argentine Banking GAAP, the Group derecognizes the securities transferred under the repurchase agreement and records an asset related to the future repurchase of these securities. Contemporaneously, the Group records a liability related to the cash received in the transaction. As of December 31, 2017, the adjustment related to the derecognition of the securities amounted to Ps.10,774,896, as well as the reversal of the liability recorded in other liabilities resulting from financial brokerage amounted to Ps.10,774,896.
The asset related to securities to be repurchased is measured as the same criteria as the transferred securities.
Similar treatment applies to reverse repo agreements.
For US GAAP purposes these transactions have not qualified as true sales and therefore these transactions were classified as trading and recorded at fair value.
p. Fair Value Measurements Disclosures.
ASC 820-10 defines fair value, establishes a consistent framework for measuring fair value and disclosure requirements about fair-value measurements. ASC 820 -10, among other things, requires the Group to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In addition, ASC 825-10 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments not previously recorded at fair value. Under ASC 825-10, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes on fair value recognized in net income.
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In addition, ASC 820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means
Fair value is based upon quoted market prices in active markets, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, the Bank’s creditworthiness, liquidity and unobservable parameters that are applied consistently over time.
The Group believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following section describes the valuation methodologies used by the Group to measure various financial instruments at fair value, including an indication of the level in the fair-value hierarchy in which each instrument is generally classified. Where appropriate, the description includes details of the valuation models, the key inputs to those models as well as any significant assumptions.
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a) Government securities and other investments
Listed investment securities: where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities include national and province governments bonds, instruments issued by Argentine Central Bank and corporate securities.
Other investments securities: as quoted market prices are not available, then fair values are estimated by using a discounted cash flow model which includes assumptions based upon projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and contractual interest paid to third-party investors. These are classified within level 3 of the valuation hierarchy.
b) Securitizations
As of December 31, 2017 and 2016 the caption includes the consolidated assets of Galtrust I. The fair value was determined by using the fair value of the underlying assets (Bogar bonds which are traded in Buenos Aires Stock Exchange). Therefore, these are classified within level 1 of the valuation hierarchy.
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c) Derivatives Financial Instruments
Forward transactions traded in autoregulated markets are made through recognized exchange markets, such as MAE and ROFEX.
The general settlement method for these transactions does not require delivery of the traded underlying asset. Rather, settlement is carried on a daily basis for the difference, if any, between the closing price of the underlying asset and the closing price or value of the underlying asset corresponding to the previous day, the difference in price being charged to income. Therefore, they are classified in Level 2 of the fair-value hierarchy.
Forward transactions conducted directly with customers are recorded as the difference between the agreed foreign currency exchange rate and an average between such exchange rate at the end of the year according with the future prices published by ROFEX and MAE. Therefore, they are classified in Level 2 of the fair-value hierarchy.
d) Derivatives Financial Instruments
The general settlement method for these transactions does not require delivery of the traded underlying asset. Rather, settlement is carried on a daily basis for the difference, if any, between the closing price of the underlying asset and the closing price or value of the underlying asset corresponding to the previous day, the difference in price being charged to income. Therefore, they are classified in Level 21 of the fair-value hierarchy.
Items measured at fair value on a recurring basis
The following table presents the financial instruments carried at fair value as of December 31, 2017 and 2016, for US GAAP purposes by ASC 820-10 valuation hierarchy (as described above).
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Quoted
market prices
in active
markets
(Level 1)
Internal
models with
significant
observable
market
parameters
(Level 2)
unobservable
(Level 3)
ASSETS
a.1) Holdings recorded at fair value
Government Securities recorded at Fair Value
a.2) Securities issued by Argentine Central Bank
b.1) Galtrust I (*)
b.2) Other Investments (**)
c) Derivatives financial instruments
TOTAL ASSETS AT FAIR VALUE
LIABILITIES
d) Derivatives financial instruments
TOTAL LIABILITIES AT FAIR VALUE
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Balances as of December 31, 2016
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Changes in level 3 fair value measurements
The table below includes a roll forward of the balance sheet amounts as of December 31, 2017, 2016 and 2015 (including the change in fair value) for financial instruments classified by the Group within Level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.
Fair value, December 31, 2015
Included in earnings
Purchases
Settlements
Fair value, December 31, 2016
Fair value, December 31, 2017
The table below summarizes gains and losses due to changes in fair value, recorded in earnings for level 3 assets and liabilities during the period:
Balances as of December 31,
Classification of gains and losses included in earnings :
The Group records transfers between levels assuming the transfer occurs at the end of the period. The Group did not transfer any assets or liabilities between Levels 1 and 2 of the fair value hierarchy during 2017 and 2016.
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In addition, the Group is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements in accordance with GAAP. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Group records nonrecurring adjustments for including certain impairment amounts for impaired loans calculated in accordance with ASC 310-10 when establishing the allowance for loan losses. Estimates of fair value used for impaired loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. The valuation technique used to obtain the fair value was an income approach using discounted cash flows based on the contracted maturity of the loans. The discount rates are based on the current market rates corresponding to the applicable maturity. No changes in the valuation technique took place during the year. Loans subject to nonrecurring fair value measurement were Ps.251,068 and Ps.114,587 as of December 31, 2017 and 2016 classified as Level 3.
q. CFA—Discontinued Operations
The board of directors of the Bank, approved the sale of a major business line, which consists of one component under ASC 205-20-20, during the last quarter of 2016. The business line to be sold represents one of the Group’s five reportable segments “CFA Personal Loans”. The Bank announced the disposal plan to investors on January 12, 2017, however the decision was made prior to that date. The component represents a strategic shift that will have a major effect on the Group operations and financial results, as such, the component is classified as discontinued operation in accordance with the criteria in ASC 205-20-45-1C. Based on the held-for-sale criteria in ASC 360-10-45-9, the component was classified as held-for-sale at December 31, 2016 and December 31, 2017 and measured at the lower of its carrying amount and fair value less cost to sell. On December 4, 2017, through Resolution No. 414, the Argentine Central Bank authorized such transaction. As of December 31, 2017, the Group measured CFA at its carrying amount at the time of classification as held for sale which was lower than its fair value less cost to sell.
On January 12, 2017, Grupo Financiero Galicia S.A. accepted an offer made by Mr. Julio Alfredo Fraomeni and Galeno Capital S.A.U. to buy its whole non-controlling interest in Compañía Financiera Argentina S.A. On December 4, 2017, through Resolution No. 414, the Argentine Central Bank authorized such transaction. The sale of shares took place on February 2, 2018. As of March 26, 2018, the price was agreed on Ps.1,047,277. Under US GAAP purposes, the result of the sale generated a profit which amounted to Ps.178,671.
Additional disclosures required by ASC205-20-45-10 and205-20-50-5B:
“CFA Personal Loans” – Discontinued Operations:
Total liabilities
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Financial Expenditures
Net income from operations of discontinued Component CFA before Income tax
Net income on Discontinued Operations
Eliminations with the parent company and its subsidiaries
Net income after eliminations on Discontinued Operations (*)
r. Segment Reporting
As of December 31, 2017, 2016 and 2015, “CFA Personal Loans”, one of the Group’s five reportable segments, is classified as Discontinued Operations in accordance with the criteria in ASC 205-20-45-1C.
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In Pesos Thousands
Year ended December 31, 2017
Net Income from Insurance Companies Activities
Income from Equity Investment
Sudamericana Holding SA
Non-controlling interests
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Year ended December 31, 2016
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Year ended December 31, 2015
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s. New authoritative pronouncements
During 2016 and 2017, the FASB has issued Accounting Standards Updates. Those updates applicable for the Group are mentioned below:
ASU 2014-09
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. Amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and the Group plans to adopt this standard on the effective date. The Group has been assessing this ASU and the preliminary findings is that the new pronouncement will not have a significant impact on the consolidated financial statements as the majority of our business transactions will not be subject to this pronouncement.
ASU 2015-17
In November 2015, the FASB issued the Accounting Standards Update No. 2015-17 “Balance Sheet Classification of Deferred Taxes”. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update.
For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The Group considers this ASU will not have any significant effect in the US GAAP disclosures and financial information.
ASU 2016-01
In January 2016, the FASB issued the Accounting Standards Update No. 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this Update make targeted improvements to generally accepted accounting principles (GAAP) as follows: i) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; ii) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; iii) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and iv) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; among other changes.
For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
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ASU 2016-02
Accounting Standard Update 2016-02 “Leases (Topic 842)” was issued in February 2016. The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.
For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
ASU 2016-13
In June 2016, the FASB issued Accounting Standard Update 2016-13 – Financial instruments – Credit losses (Topic 326): Measurement of credit losses on financial instruments. This new accounting guidance will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded ending commitments, held-to-maturity (HTM) debt securities and other debt instruments measured at amortized cost. The impairment model for AFS debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The Group is in the process of identifying and implementing required changes to loan loss estimation models and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.
ASU 2016-15 and ASU 2016-18
In August 2016 and November 2016, the FASB issued Accounting Standard Update 2016-15 -“Statement of cash flows (Topic 230): Classification of certain cash receipts and cash payments” and Accounting Standard Update 2016-18 “Statement of cash flows (Topic 230): Restricted cash” that addresses classification of certain cash receipts and cash payments, including changes in restricted cash, in the statement of cash flows. This new accounting guidance will result in some changes in classification in the Consolidated Statement of Cash Flows, which the Group does not expect will be significant, and will not have any impact on its consolidated financial position or results of operations. The new guidance is effective on January 1, 2018, on a retrospective basis, with early adoption permitted.
ASU 2017-01
In January 2017, the FASB issued an ASU that clarifies the definition of a business, The new standard is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present (including for early stage companies that have not generated outputs). To be a business without outputs, there will now need to be an organized workforce. The Board noted that outputs are a key element of a business and included more stringent criteria for sets without outputs.
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Finally, the new guidance narrows the definition of the term “outputs” to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers. Under the final definition, an output is the result of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest.
For public companies, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
ASU 2017-04
In January 2017, the FASB issued the Accounting Standards Update No. 2017-04 “Simplifying the Test for Goodwill Impairment”. The amendments in this Update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill.
An entity should apply the amendments in this Update on a prospective basis. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
ASU 2017-05
In February 2017, the FASB issued the Accounting Standards Update No. 2017-05 “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The amendments in this Update clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset and add guidance for partial sales of nonfinancial assets. An entity may elect to apply the amendments in this Update either: a) retrospectively to each period presented in the financial statements in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10 (retrospective approach); or b) retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption (modified retrospective approach).
The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
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ASU 2017-11
In July 2017, the FASB issued the Accounting Standard Update (ASU) that simplifies the accounting for certain financial instruments with down round features—a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The amendment requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (that is, when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.
The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
ASU 2017-12
In August 2017, the FASB issued an ASU that will improve and simplify accounting rules around hedge accounting. The new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. More hedging strategies will be eligible for hedge accounting. These include hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities, hedges of the portion of a closed portfolio of prepayable assets not expected to prepay, and partial-term hedges of fixed-rate assets or liabilities (e.g., the first and second years of a five-year bond). Public business entities, publicnot-for-profit entities, and financial institutions will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge’s effectiveness. All other companies will have until their financial statements are available to be issued. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, such as a regression analysis, if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. For cash flow hedges, if the hedge is highly effective, all changes in the fair value of the derivative hedging instrument will be recorded in other comprehensive income. They will be reclassified to earnings when the hedged item impacts earnings. On the other hand, for fair value hedges, because the change in fair value of the hedged item and the derivative hedging instrument will still be recorded in current earnings, if the hedge is not perfectly effective, there will be an Income Statement impact.
The ASU is effective for public companies in 2019 and private companies in 2020. Early adoption is permitted.
ASU 2017-13
The ASU adds SEC paragraphs to the new revenue and leases sections of the Accounting Standards Codification (ASC or Codification) on the announcement the SEC Observer made at the 20 July 2017 EITF meeting. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing
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use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases. This would include entities whose financial statements are included in another entity’s SEC filing because they are significant acquirees under Rule 3-05 of Regulation S-X, significant equity method investees under Rule 3-09 of Regulation S-X and equity method investees whose summarized financial information is included in a registrant’s financial statement notes under Rule 4-08(g) of Regulation S-X.
The ASU also supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842.
ASU 2017-14
The FASB issued Accounting Standards Update (ASU) 2017-14 to supersede, amend and add SEC paragraphs to the Codification to reflect the August 2017 issuance of SEC Staff Accounting Bulletin (SAB) 116 and SEC Release No. 33-10403. The SEC staff issued SAB 116 to align its revenue guidance with Accounting Standards Codification (ASC) 606. The SEC release says vaccine manufacturers should recognize revenue and provide the disclosures required by ASC 606 when the enumerated vaccines are placed into federal government stockpile programs. Prior to adopting ASC 606, registrants should continue to refer to prior Commission and staff guidance on revenue recognition topics.
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t. Consolidated net income
Net income as stated
Loan origination fees and costs (Note 34 b.)
Intangible assets:
Goodwill recognition and amortization (Note 34 c.)
Negative goodwill (Note 34 c.)
Software cost (Note 34 c.)
Equity investments in other companies (Note 34 j.)
Loan Impaiment – Private sector (Note 34 d.e)
Securitizations (Note 34 g.)
Government Securities (Note 34 e.)
Amortization of real estate properties and foreclosed assets previously impaired under US GAAP (Note 34 i.)
Recognition for the fair value of obligations assumed under financial guarantees issued (Note 34 k.)
Foreign Debt restructuring (Note 34 m.)
Deferred Income tax (Note 34 a.)
Non-controlling interest (Note 34 l.)
Net income in accordance with US GAAP
Less Net (Income) attributable to the Non-controllingInterest (Note 34 l.)
Net Income attributable to Parent Company in accordance with US GAAP
Average number of basic shares outstanding (in thousands) (Note 21)
Basic and diluted EPS
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u. Consolidated shareholders’ equity
Shareholders’ equity as stated
Software Cost (Note 34 c.)
Extinguishment of non-controlling interest (Note 34 j.1)
Loan Impairment – Private sector (Note 34 d.e.)
Government securities (Note 34 e.)
Impairment of real estate properties and foreclosed assets (Note 34 i.)
Consolidated shareholders’ equity in accordance with US GAAP
Non-controlling Interest (Note 34 l./ 34 j.1)
Consolidated Parent Company Shareholders Equity in accordance with US GAAP
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Roll forward analysis of parent company shareholders’ equity under US GAAP at December 31, 2017, 2016 and 2015:
ConsolidatedShareholders’
Equity
(Parent
Distribution of retained earnings:
Absorption approved by the shareholders’ meeting on April 29, 2015
Unrealized gain ofavailable-for-sale securities, net of tax
Net Income in accordance with US GAAP
Absorption approved by the shareholders’ meeting on April 26, 2016
Absorption approved by the shareholders’ meeting on April 24, 2017
Capital Increase(*) (**)
Extinguishment of non-controlling interest
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v. Comprehensive income
“Reporting Comprehensive Income” ASC 220, establishes standards for reporting and the display of comprehensive income and its components (revenues, expenses, gains and losses) in the financial statements. Comprehensive income is the total of net income and all transactions, and other events and circumstances from non-owner sources.
Under Argentine Banking GAAP the Group has consolidated transactions and balances of CFA as of December 31, 2017, but has eliminated net income for the fiscal year of CFA from the consolidated net income. Under US GAAP CFA is considered a discontinued operation in accordance with ASC 205-20-45-1-C (see item p above), so net income from CFA is shown under Net Income from operations of discontinued component “CFA-PersonalLoans” in the Comprehensive Income below.
The following disclosure presents the Comprehensive Income according to ASC 220, for the fiscal years ended December 31, 2017, 2016 and 2015:
Income Statement
Expenditures from Services
Net Income from Financial Brokerage
Miscellaneous Income
Miscellaneous Losses
Net Income from continuing operations before Income tax
Net income from continuing operations
Discontinued Operations:
Net Income from operations of discontinued component“CFA-Personal Loans” before income tax
Net income from discontinued operations
Net income under US GAAP
Less Net (Income) attributable to the Non-controllingInterest
Net Income attributable to Parent Company
Other comprehensive income / (loss)
Comprehensive income
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Net Income attributable to parent Company
Other comprehensive income / (loss) attributable to parent Company
Comprehensive income attributable to parent Company
Net income under US GAAP per common share – basic and diluted Continuing operations
Discontinued operations
Net income per share
Accumulated non-owner changes in equity (accumulated other comprehensive income) as of December 31, 2017, 2016 and 2015 were as follows:
SH Government Securities—available for sale
Accumulated other comprehensive income
Less, accumulated other comprehensive income attributable to theNon-controlling interest
Net accumulated other comprehensive income attributable to Parent Company
There were no available for sale securities with a continuous loss position of 12 months or more. There are no unrealized losses on investments as of December 31, 2017 and 2016.
Additional disclosures required by ASUNo. 2013-02 are presented in the table below:
Beginning Balance
Reclassification from Other Comprenhensive Income of the year to Net Income
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OCI components
SH Government Securities - available for sale
w. Consolidated cash flows
ASC 230 “Statement of Cash Flows” provides guidance for the reporting of cash flows within Operating, Investing and Financing categories. For US GAAP purposes the Company considers as cash equivalents all highly liquid investments with original maturities of three months or less, including cash and cash equivalents corresponding to financial trusts consolidated in accordance with Note 34.G.
Cash equivalents
Cash and cash equivalents as shown in the statement of cash flows under Argentine Banking GAAP
Cash and cash equivalents corresponding to financial trusts
Cash and Cash equivalents corresponding to Discontinued operations
Cash and cash equivalents as shown in the statement of cash flows under Argentine Banking GAAP without discontinued operations
Cash and cash equivalents in the Statement of Cash Flows under US GAAP
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The following table presents the reconciliation of the condensed consolidated statements of cash flows under Argentine Banking GAAP and US GAAP:
Reconciliation of cash flows under Argentine Banking GAAP and US GAAP
Cash flow (used in) / provided by operating activities under Argentine Banking GAAP
Net Cash flow (used in) / provided by operating activities under Argentine Banking GAAP without Discontinued Operations
Loans, available for sale securities, deposits at the Argentine Central Bank and organization and development expenses reclassified to investing activities
Deposits and repo transactions reclassified to financing activities
Interest paid on debt
Financial trust consolidated under US GAAP
Cash flow provided by operating activities under US GAAP
Operations Discontinued
Net cash flow provided by operating activities under US GAAP
Cash flow (used in) investing activities under Argentine Banking GAAP
Net Cash flow (used in) investing activities under Argentine Banking GAAP without Discontinued Operations
Net increase in Loans, available for sale securities, deposits at the Argentine Central Bank and organization and development expenses
Financial trust consolidated under US GAAP—corresponding to loans and securities
Capital increase (direct costs)
Net cash flow (used in) investing activities under US GAAP
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Cash flow (used in) inveting activities under US GAAP
Cash flow provided by / (used in) financing activities under Argentine Banking GAAP
Net cash flow provided by / (used in) financing activities under Argentine Banking GAAP without Discontinued Operations
Deposits and repo transactions
Interest paid on debt reclassified to operating activities
Financial trust consolidated under US GAAP—corresponding to debt
Cash flow provided by financing activities under US GAAP
Net cash flow provided by financing activities under US GAAP
Cash and cash equivalents at the beginning of the year under US GAAP
Cash and cash equivalents at the end of the year under US GAAP
Net increase in cash and cash equivalents under US GAAP
Additionally, as required by ASC 230-10-45-26, some cash flow lines must be reported gross. The following table presents the gross inflows and outflows for the years ended December 31, 2017, 2016 and 2015:
CASH FLOW FROM FINANCING ACTIVITIES:
SUBORDINATED AND UNSUBORDINATED NEGOTIABLE OBLIGATION
Collections
Payments
BANK AND INTERNATIONAL ENTITIES
CASH FLOW FROM INVESTING ACTIVITIES:
MISCELLANEOUS ASSETS AND BANK PREMISES AND EQUIPMENT
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x. Concentration of risk – Total exposure to the public sector - Argentine government and provinces
The Group has significant exposure to the Argentine national government and provinces in the form of government securities net positions, secured loans and other debt obligations. As of December 31, 2017 and 2016, the Group had the following bonds and loans outstanding:
y. Risks and Uncertainties
As of December 31, 2017, the Group’s exposure to the Argentine public sector represented approximately 8,62% of the total Group’s assets. Although the Group’s exposure to the Argentine public sector consists of performing assets, the realization of the Group’s assets, its income and cash flow generation capacity and future financial condition is dependent on the Argentine government ability to comply with its payment obligations.
Argentine Banking GAAP states that, the total exposure of financial institutions to the non-financial public sector must not exceed 35% of their total assets.
As of December 31, 2017 and 2016, the Group was in compliance with the general limit of 35% imposed by the Argentine Central Bank.
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The high rate of economic growth in recent years, which has been fueled by Argentina’s full utilization of its installed productive capacity, along with expansive fiscal and monetary policies, has caused a high level of inflation in Argentina since 2007. According to INDEC data, the CPI grew 10.9% in 2013, 23.9% in 2014, 26.9% in 2015, 41.1% in 2016 and 24.8% in 2017; and the WPI increased 14.7% in 2013, 28.3% in 2014, 12.7% in 2015, 34.6% in 2016 and 18.8% in 2017. In the past, inflation has materially undermined the Argentine economy and the government’s ability to generate conditions that fostered economic growth. In addition, high inflation or a high level of volatility with respect to the same may materially and adversely affect the business volume of the financial system and prevent the growth of intermediation activity levels. This result, in turn, could adversely affect the level of economic activity and employment.
A high inflation rate also affects Argentina’s competitiveness abroad, real salaries, employment, consumption and interest rates. A high level of uncertainty with regard to these economic variables, and a general lack of stability in terms of inflation, could lead to shortened contractual terms and affect the ability to plan and make decisions. This may have a negative impact on economic activity and on the income of consumers and their purchasing power, all of which could materially and adversely affect Grupo Galicia’s financial position, results of operations and business.
z. Allowance for loan losses
Management believes that the current level of allowance for loan losses recorded for US GAAP purposes are sufficient to cover incurred losses of the Group’s loan portfolio as of December 31, 2017. Many factors can affect the Group’s estimates of allowance for loan losses, including expected cash flows, volatility of default probability, migrations and estimated loss severity. The process of determining the level of the allowance for credit losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
US GAAP estimates
Valuation reserves, impairment charges and estimates of market values on assets, as established by the Group for US GAAP purposes are subject to significant assumptions of future cash flows and interest rates for discounting such cash flows. Losses on retained interests in securitization trusts could be significantly affected by higher discount rates. Should the discount rates change in future years, the carrying amounts and charges to income and shareholders´ equity will also change. In addition, as estimates of future cash flows change, the carrying amounts which are dependent on such cash flows could be affected as well. It is possible that changes to the carrying amounts of loans, investments and other assets will be adjusted in the near term in amounts that are material to the Group´s financial position and results of income.
35. Parent only Financial Statements
The following are the unconsolidated balance sheets of Grupo Financiero Galicia S.A. as of December 31, 2017 and 2016 and the related unconsolidated statements of income, and cash flows for the fiscal years ended December 31, 2017, 2016 and 2015.
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Balance sheet (Parent Company only)
A. Cash and due from Banks
B. Government and corporate securities
C. Other receivables resulting from financial brokerage
Other receivables not included in the debtor classification Regulations
Other receivables included in the debtor classification Regulations
D. Equity investments
E. Miscellaneous receivables
F. Bank premises and equipment
G. Intangible assets
H. Other liabilities resulting from financial brokerage
I. Miscellaneous liabilities
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Statement of Income (Parent Company only)
A. Financial income
B. Financial expenses
Interests on other loans from financial institutions
C. Gross brokerage margin
D. Administrative expenses
E. Miscellaneous income
Net income from equity investments
F. Miscellaneous losses
Net Income before tax
G. Income tax
Net income for the fiscal year
Statement of cash flows (Parent Company only)
Net increase / (decrease) in cash and cash equivalents
Collections for Service
Payments to suppliers of goods and services
Personnel salaries and social security contributions
Payments of other taxes
Collections for Other Net Operating Activities
Net cash used in operating activities
Collections for Sales of Fixed Assets
Investments Collections
Collection of Dividends
Contribution to Controlled Companies
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Payments for Purchases of Fixed Assets
Collections for Sale of Equity Investments
Payments for Equity Investments
Net cash provided by investing activities
Payments of Interest, Net
Collection of Loans Received, Net
Financing Payment
Payments of Principal on Notes
Distribution of Dividends
Cash Flow used in financing activities
The accompanying condensed financial statements have been prepared in accordance with Argentine Banking GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Argentine Banking GAAP have been condensed or omitted. The Company’s majority-owned subsidiaries are recorded using the equity method of accounting. The footnotes’ disclosures contain supplemental information relating to the operations of Grupo Galicia; as such, these financial statements should be read in conjunction with the notes to the consolidated financial statements of the Company.
Regarding the Statement of cash flows, Cash and cash equivalents include cash and due from banks and investments and receivables held with the purpose of complying with the short-term commitments undertaken, with a high level of liquidity, easily converted into known amounts of cash, subject to insignificant risks of changes in value and with a maturity less than three months from the date of the acquisition thereof. The breakdown is as follows:
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