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GGAL Grupo Financiero Galicia

Table of Contents

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 2020


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20–F

(Mark One)

[   ]              Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 or

[X]              Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019 or

[   ]              Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or

[   ]              Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

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

Nasdaq Capital Market

Title of each class

Class B Ordinary Shares, Ps.1.00 par value, (not for trading but only in connection with the listing of the American Depositary Shares on the Nasdaq Capital Market)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing the

right to receive ten ordinary shares, par value

Ps.1.00 per share New York Stock Exchange

 

GGAL

 

NASDAQ

Ordinary shares, par value Ps.1.00 per share*

 

GGAL

 

NASDAQ

* Not for trading, but only in connection with the registration of the American Depositary Shares representing such ordinary shares on the NASDAQ.

 

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:

None

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             

 

281.221.650

Class B Ordinary Shares, Ps.1.00 par value             

 

1.145.542.947

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X]   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 [X]

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 [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [X]

 

Accelerated filer [  ]

 

Non-accelerated filer [  ]             

 

 

 

 

Emerging growth company [  ]

 

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  [X]

Other  [ ]

 

If “Other” has been checked in response to the previous question, 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 [X]   





 ​

CONTENIDO

PRESENTATION OF FINANCIAL INFORMATION2


FORWARD LOOKING STATEMENTS3


PART I5


Item 1. Identity of Directors, Senior Management and Advisers
5
Item 2. Offer Statistics and Expected Timetable
5
Item 3. Key Information
5
A. Selected Financial Data
5
B. Capitalization and Indebtedness
9
C. Reasons for the Offer and Use of Proceeds
10
D. Risk Factors
10
Item 4. Information on the Company
26
A. History and Development of the Company
26
B. Business Overview
34
C. Organizational Structure
98
D. Property, Plants and Equipment
99
Item 4A. Unresolved Staff Comments
99
Item 5. Operating and Financial Review and Prospects
99
A. Operating Results
99
B. Liquidity and Capital Resources
136
Item 6. Directors, Senior Management and Employees
143
Item 7. Major Shareholders and Related Party Transactions
161
A. Major Shareholders
161
B. Related Party Transactions
162
Item 8. Financial Information
163
A. Consolidated Statements and Other Financial Information
164
B. Significant Changes
167
Item 9. The Offer and Listing
169
Item 10. Additional Information
171
B. Memorandum and Articles of Association
171
C. Material Contracts
178
D. Exchange Controls
179
E. Taxation
179
H. Documents on Display
187
Item 11. Quantitative and Qualitative Disclosures About Market Risk
187
Item 12. Description of Securities Other Than Equity Securities
195
D. American Depositary Shares
195
PART II197


Item 13. Defaults, Dividend Arrearages and Delinquencies
197
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
197
Item 15. Controls and Procedures
197
Item 16A. Audit Committee Financial Expert
198
Item 16B. Code of Ethics
198
Item 16C. Principal Accountants’ Fees and Services
198
Item 16D. Exemptions from the Listing Standards for Audit Committees
199
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
199
Item 16F. Change in Registrant’s Certifying Accountant.
199
Item 16G. Corporate Governance
199
Item 16H. Mine Safety Disclosure
199
Item 17. Financial Statements
200
Item 18. Financial Statements
200
Item 19. Exhibits
201


PRESENTATION OF FINANCIAL INFORMATION

 

Grupo Financiero Galicia S.A. (“Grupo Financiero Galicia”, “Grupo Galicia”, “GFG” or the “Company”) 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:

 

  • Grupo Financiero Galicia;
  • Banco de Galicia y Buenos Aires S.A.U. (“Banco Galicia” or the Bank”), our largest subsidiary, consolidated with (i) Tarjetas Regionales S.A. and its operating subsidiaries, until December 31, 2017 (effective January 1, 2018, Tarjetas Regionales S.A. was transferred to be an operating subsidiary of Grupo Financiero Galicia), (ii) Tarjetas del Mar S.A. (“Tarjetas del Mar”) until March 31, 2017 (effective April 1, 2017 Tarjetas del Mar was sold), (iii) Galicia Valores S.A.U. (“Galicia Valores”) until August 31, 2019 (effective September 1, 2019, Galicia Valores was sold to Grupo Financiero Galicia and transferred to IGAM LLC), (iv) Fideicomiso Financiero Galtrust I until December 31, 2017 and (v) Fideicomiso Saturno Créditos until December 31, 2018;
  • Tarjetas Regionales S.A. (“Tarjetas Regionales”) and its subsidiaries (which has been reported on a consolidated basis with Grupo Financiero Galicia since January 1, 2018);
  • Sudamericana Holding S.A. (“Sudamericana”) and its subsidiaries;
  • Galicia Warrants S.A. (“Galicia Warrants”);
  • Net Investment S.A. (“Net Investment”) (liquidated as of December 31, 2017);
  • Galicia Administradora de Fondos S.A. (“Galicia Administradora de Fondos”); and
  • IGAM LLC (“IGAM”) and its subsidiaries.

 

These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (“IFRS”) issued by the International Financial Reporting Standards Board (“IASB”) and the interpretations of the International Financial Reporting Interpretations Committee. IFRS in force as of the date of preparation of these consolidated financial statements for the fiscal years ended December 31, 2019, 2018 and 2017 have been applied. We maintain our financial books and records in Argentine Pesos and prepare our financial statements in conformity with IFRS, as issued by the IASB, effective as of the fiscal year beginning on January 1, 2018. Grupo Galicia has also adjusted its financial statements for the year ended December 31, 2017 in accordance with IFRS to serve as a comparative basis for the financial statements for the year ended December 31, 2019 and December 31, 2018.

 

As of July 1, 2018, Argentina qualified as a hyperinflationary economy for accounting purposes. Grupo Galicia’s functional currency is the Argentine peso and its financial statements have been prepared in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies as if the Argentine economy had always been hyperinflationary. The financial position and results of operations as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 are reflected in terms of current purchasing power using the Consumer Price Index (“CPI”) as of December 31, 2019.

 

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” that is published by


 

the Argentine Central Bank and that was Ps.59.8950, Ps.37.8083 and Ps.18.7742 per US$1.00 as of December 31, 2019, December 31, 2018 and December 31, 2017, 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, which is not adjusted according to the IAS 29.

 

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 been calculated on the basis of such rounded figures. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them due to rounding.

FORWARD LOOKING STATEMENTS

 

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”-A.”History and Development of the Company”-“Capital Investments and Divestitures,” Item 5. “Operating and Financial Review and Prospects”-A.“Operating Results-Principal Trends” and 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:

  • changes in general political, legal, social or other conditions in Argentina, Latin America or other countries or regions;
  • changes in the macroeconomic situation at the regional, national or international levels, and the influence of these changes on the microeconomic conditions of the financial markets in Argentina;
  • changes in capital markets in general that may affect policies or attitudes toward lending to Argentina or Argentine companies, including expected or unexpected turbulence or volatility in domestic or international financial markets;
  • financial difficulties of the Argentine government and its ability (or inability) to reach to an agreement to restructure its outstanding debt that is held by international credit entities and private sector bondholders;
  • changes in Argentine government regulations applicable to financial institutions, including tax regulations and changes in or failures to comply with banking or other regulations;
  • volatility of the Peso and the exchange rates between the Peso and foreign currencies;

  

  • fluctuations in the Argentine rate of inflation, including hyperinflation;
  • increased competition in the banking, financial services, credit card services, insurance, asset management, mutual funds and related industries;
  • Grupo Financiero Galicia’s subsidiaries’ inability to sustain or improve their performance;
  • a loss of market share by any of Grupo Financiero Galicia’s main businesses;
  • a change in the credit cycle, increased borrower defaults and/or a decrease in the fees charged to clients;
  • changes in the saving and consumption habits of its customers and other structural changes in the general demand for financial products, such as those offered by Banco Galicia;
  • changes in interest rates which may, among other things, adversely affect margins;
  • Banco Galicia’s inability to obtain additional debt or equity financing on attractive conditions or at all, which may limit its ability to fund existing operations and to finance new activities;
  • technological changes and changes in Banco Galicia’s ability to implement new technologies;
  • impact of COVID-19 (or other future outbreaks, epidemics or pandemics) on the global, regional and national economy, on financial activity on global trade -both in terms of volumes and prices-, and on the Company’s ability to recover from the negative effects of the pandemic (or other future outbreak);
  • other factors discussed under Item 3. “Key Information” - D.“Risk Factors” in this annual report.

 

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.


PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data

 

The following table presents summary historical financial and other information about us as of the dates and for the periods indicated.

 

The selected consolidated financial information as of December 31, 2019 and December 31, 2018, and for the fiscal years ended December 31, 2019, December 31, 2018 and December 31, 2017 has been derived from our audited consolidated financial statements 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.

 

The tables included below have been prepared in accordance with IFRS.






Year Ended December  31,



2019


2018


2017


(in millions of Pesos, except as noted)

Consolidated Statement of Income in Accordance with IFRS

 

 

 

 

 

 

 

 

 

 

 

 

Net Income from Interest

 

 

34,830

 

 

 

51,324

 

 

 

45,956

 

Net Fee Income

 

 

28,083

 

 

 

32,875

 

 

 

32,563

 

Net Income from Financial Instruments

 

 

72,830

 

 

 

26,694

 

 

 

13,016

 

Loan and Other Receivables Loss Provisions

 

 

(22,203

)

 

 

(25,074

)

 

 

(11,220

)

Net Operating Income

 

 

147,256

 

 

 

112,443

 

 

 

106,110

 

Loss on Net Monetary Position

 

 

(30,798

)

 

 

(27,788

)

 

 

(10,496

)

Operating Income

 

 

36,858

 

 

 

5,191

 

 

 

22,456

 

Income Tax from Continuing Operations

 

 

(13,038

)

 

 

(10,634

)

 

 

(11,259

)

Income (Loss) for the Year Attributable to GFG

 

 

23,708

 

 

 

(5,332

)

 

 

10,451

 

Other Comprehensive Income

 

 

403

 

 

 

(135

)

 

 

(669

)

Total Comprehensive Income (Loss) Attributable to GFG

 

 

24,111

 

 

 

(5,467

)

 

 

9,782

 

Ordinary Shares Outstanding for the year

 

 

1,427

 

 

 

1,427

 

 

 

1,427

 

Basic Earnings per Share (in Pesos)

 

 

16.62

 

 

 

(3.74

)

 

 

7.32

 

Diluted Earnings per Share (in Pesos)

 

 

16.62

 

 

 

(3.74

)

 

 

7.32

 

Cash Dividends per Share (in Pesos)

 

(1)

 

 

 

1.86

 

 

 

1.74

 

Book Value per Share (*) (in Pesos)

 

 

79.85

 

 

 

64.82

 

 

 

69.56

 

(1) The cash dividend distribution for the fiscal year ended at December 31, 2019, is pending approval. For more information see Item 8. “Financial Information”-A.“Consolidated Statements and Other Financial Information”-“Dividend Policy and Dividends”-“Dividends” -“Grupo Financiero Galicia”.

(2 ) Total Shreholders´ Equity attributable to GFG divided Ordinary Shares Outstanding for the year.

 

 

 


For the Year Ended December 31,

 

 

 


2019

 

 

2018

 

 

2017

 

 

 

(in millions of Pesos, except as noted)

 

Consolidated Statement of Financial Position in Accordance with IFRS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

130,649

 

 

 

220,456

 

 

 

133,903

 

Debt Securities at Fair Value Through Profit or Loss

 

 

65,690

 

 

 

116,813

 

 

 

65,760

 

Loans and Other Financing

 

 

358,559

 

 

 

434,900

 

 

 

437,430

 

Total Assets

 

 

685,519

 

 

 

876,371

 

 

 

753,227

 

Deposits

 

 

393,735

 

 

 

553,946

 

 

 

455,909

 

Other Liabilities

 

 

174,949

 

 

 

227,283

 

 

 

193,514

 

Shareholders’ Equity attributable to GFG

 

 

113,942

 

 

 

92,492

 

 

 

99,260

 

Percentage of Period-end Balance Sheet Items Denominated in Dollars:

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Other Financing

 

 

39

%

 

 

35

%

 

 

21

%

Total Assets

 

 

45

%

 

 

39

%

 

 

26

%

Deposits

 

 

52

%

 

 

45

%

 

 

35

%

Total Liabilities

 

 

49

%

 

 

34

%

 

 

30

%



 

 

For the Year Ended December 31,

 

 


 

2019

 

 

 

2018

 

 

2017

 

 

Selected Ratios (*)

 

 

 

 

 

 

 

 

 

 

 

Profitability and Efficiency

 

 

 

 

 

 

 

 

 

 

 

Net Yield on Interest Earning Assets (1)

 

 

19.93

 

%

 

 

13.99

 

%

 

10.71

 

%

Financial Margin (2)

 

 

21.07

 

%

 

 

12.49

 

%

 

13.11

 

%

Return on Assets (3)

 

 

3.46

 

%

 

 

(0.61

)

%

 

1.39

 

%

Return on Shareholders’ Equity (4)

 

 

20.81

 

%

 

 

(5.76

)

%

 

10.53

 

%

Efficiency ratio (5)

 

 

50.72

 

%

 

 

64.13

 

%

 

58.24

 

%

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

 

16.62

 

%

 

 

10.55

 

%

 

13.18

 

%

Total Liabilities as a Multiple of Shareholders’ Equity

 

 

4.99

 

x

 

 

8.45

 

x

 

6.54

 

x

Total Capital Ratio

 

 

17.53

 

%

 

 

15.11

 

%

 

10.69

 

%

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks as a Percentage of Total Deposits

 

 

33.18

 

%

 

 

39.80

 

%

 

29.37

 

%

Loans and other financing, Net as a Percentage of Total Assets

 

 

52.30

 

%

 

 

49.63

 

%

 

58.07

 

%

Credit Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Instruments (6) as a Percentage of Total Financial Instruments Portfolio

 

 

4.63

 

%

 

 

3.51

 

%

 

2.20

 

%

Allowance for Financial Instruments as a Percentage of Non-accrual Financial Instruments (6)

 

 

130.34

 

%

 

 

137.40

 

%

 

129.75

 

%

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

 

 

5.12

 

%

 

 

4.98

 

%

 

2.24

 

%

Inflation and Exchange Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale Price Index

 

58.49

 

%

 

73.50

 

%

18.80

 

%

Consumer Price Index

 

53.83

 

%

 

47.65

 

%

24.80

 

%

Exchange Rate Variation (7)

 

 

58.42

 

%

 

 

101.44

 

%

 

18.42

 

%

CER (8)

 

 

18.70

 

 

 

 

12.34

 

 

 

8.38

 

 

UVA (9)

 

 

47.16

 

 

 

 

31.06

 

 

21.15

 

 

(*) All of the ratios disclosed above are included because they are considered significant by the management of Grupo Financiero Galicia.

(1) Net interest earned divided by interest-earning assets. For a description of net interest earned, see Item 4. “Information on the Company”-A.“Business Overview”-“Selected Statistical Information”-“Average Balance Sheet and Income from Interest-Earning Assets and Expenses from Interest-Bearing Liabilities”.

(2) Financial margin represents net interest income plus net result from financial instruments plus foreign currency quotation differences plus insurance premiums earned plus certain items included in other operating income and expenses, divided by the average balance of interest-earning assets.

(3) Net income attributable to GFG as a percentage of total assets.

(4) Net income attributable to GFG as a percentage of shareholders’ equity.

(5) Personnel expenses plus administrative expenses plus depreciation and devaluations of assets, divided by net interest income plus net fee income plus net result from financial instruments plus foreign currency quotation differences plus insurance premiums earned plus certain items included in other operating income and expenses plus loss on net monetary position.

(6) Non-Accrual Financial Instruments are defined as those Financial Instruments in Stage 3. Assets categorized in Stage 3 are impaired financial assets and/or assets subject to a serious risk of impairment.

(7) Annual change in the end-of-period exchange rate expressed in Pesos per Dollar.

(8) The “CER” is the “Coeficiente de Estabilización de Referencia”, an adjustment coefficient based on changes in CPI.

(9) The “UVA” is the “Unidad de Valor Adquisitivo”, an adjustment coefficient based on changes in the CER.



The tables below reflecting Grupo Galicia’s financial results for the fiscal years ended December 31, 2016 and 2015, are not adjusted for inflation, and were prepared in accordance with Argentine Banking GAAP (“Previous GAAP”). The information based on Previous GAAP included below and elsewhere is this annual report is not comparable to information prepared in accordance with IFRS.

 

 

 


Fiscal Year Ended December 31,

 

 

 


2016

 

 

2015

 

 

 

(in millions of Pesos, except as noted)

 

Consolidated Income Statement in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

Financial Income

 

 

36,608

 

 

 

25,844

 

Financial Expenses

 

 

20,239

 

 

 

13,402

 

Gross Brokerage Margin (1)

 

 

16,369

 

 

 

12,442

 

Provision for Losses on Loans and Other Receivables

 

 

3,533

 

 

 

2,214

 

Income before Taxes

 

 

9,371

 

 

 

7,139

 

Income Tax

 

 

(3,353

)

 

 

(2,801

)

Net Income

 

 

6,018

 

 

 

4,338

 

Basic Earnings per Share (in Pesos)

 

4.63

 

 

3.34

 

Diluted Earnings per Share (in Pesos)

 

4.63

 

 

3.34

 

Cash Dividends per Share (in Pesos)

 

0.18

 

 

0.12

 

Book Value per Share (in Pesos)

 

15.66

 

 

11.14

 

Amounts in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

Net Income

 

 

6,037

 

 

 

4,336

 

Basic and Diluted Earnings per Share (in Pesos)

 

4.64

 

 

3.33

 

Book Value per Share (in Pesos)

 

15.45

 

 

11.06

 

Financial Income

 

 

34,549

 

 

 

24,252

 

Financial Expenses

 

 

19,410

 

 

 

12,826

 

Gross Brokerage Margin

 

 

15,139

 

 

 

11,426

 

Provision for Losses on Loans and Other Receivables

 

 

3,192

 

 

 

1,985

 

Income Tax

 

 

3,195

 

 

 

2,644

 

Consolidated Balance Sheet in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

61,166

 

 

 

30,835

 

Government Securities, Net

 

 

13,701

 

 

 

15,525

 

Loans, Net

 

 

137,452

 

 

 

98,345

 

Total Assets

 

 

242,251

 

 

 

161,748

 

Deposits

 

 

151,688

 

 

 

100,039

 

Other Funds (2)

 

 

70,210

 

 

 

47,224

 

Total Shareholders’ Equity

 

 

20,353

 

 

 

14,485

 

Average Total Assets (3)

 

 

184,395

 

 

 

122,684

 

Percentage of Period-end Balance Sheet Items

 

 

 

 

 

 

 

 

Denominated in Dollars:

 

 

 

 

 

 

 

 

Loans, Net of Allowances

 

12.77

 

 

3.26

 

Total Assets

 

27.56

 

 

16.88

 

Deposits

 

33.63

 

 

14.37

 

Total Liabilities

 

30.82

 

 

18.86

 

Amounts in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

Trading Securities

 

 

17,196

 

 

 

16,148

 

Available-for-Sale Securities

 

 

5,423

 

 

 

4,385

 

Total Assets

 

 

260,403

 

 

 

180,142

 

Total Liabilities

 

 

240,316

 

 

 

165,759

 

Shareholders’ Equity

 

 

20,087

 

 

 

14,383

 

(1) Gross Brokerage Margin primarily represents income from interest on loans and other receivables resulting from financial brokerage plus net income earned from government and corporate debt securities holdings, minus interest on deposits and other liabilities from financial intermediation. It also includes the CER/UVA adjustment.

(2) Primarily includes debt securities, loans with other banks and international entities and amounts payable for spot and forward purchases to be settled.

(3) Average Total Assets, including the related interest that is due thereon is calculated on a daily basis for Banco Galicia and for Galicia Uruguay, as well as for Tarjetas Regionales consolidated with its operating subsidiaries, and on a monthly basis for Grupo Financiero Galicia and its non-banking subsidiaries.



 

 

Fiscal Year Ended December 31,

 

 

2016

 

 

2015

 

Selected Ratios in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

Profitability and Efficiency

 

 

 

 

 

 

 

 

Net Yield on Interest Earning Assets (1)

 

 

13.26

%

 

 

14.18

%

Financial Margin (2)

 

 

12.10

 

 

13.12

 

Return on Average Assets (3)

 

3.48

 

 

3.83

 

Return on Average Shareholders’ Equity (4)

 

35.03

 

 

35.54

 

Net Income from Services as a Percentage of Operating Income (5)

 

39.63

 

 

38.65

 

Efficiency ratio (6)

 

64.98

 

 

63.64

 

Capital

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

 

8.40

%

 

 

8.96

%

Total Liabilities as a Multiple of Shareholders’ Equity

 

10.9x

 

 

10.17x

 

Total Capital Ratio

 

 

15.04

%

 

 

13.38

%

Liquidity

 

 

 

 

 

 

 

 

Cash and Due from Banks(7) as a Percentage of Total Deposits

 

 

47.18

%

 

 

42.93

%

Loans, Net as a Percentage of Total Assets

 

56.74

 

 

 

60.80

 

Credit Quality

 

 

 

 

 

 

 

 

Past Due Loans (8) as a Percentage of Total Loans

 

 

2.43

%

 

 

2.46

%

Non-Accrual Loans (9) as a Percentage of Total Loans

 

3.31

 

 

3.11

 

Allowance for Loan Losses as a Percentage of Non-accrual Loans(9)

 

100.06

 

 

112.41

 

Net Charge-Offs (10) as a Percentage of Average Loans

 

1.67

 

 

1.26

 

Ratios in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

7.71

 

 

7.98

 

Total Liabilities as a Multiple of Total Shareholders’ Equity

 

11.96x

 

 

11.52x

 

Liquidity

 

 

 

 

 

 

 

 

Loans, Net as a Percentage of Total Assets

 

 

52.76

%

 

 

54.55

%

Credit Quality

 

 

 

 

 

 

 

 

Allowance for Loan Losses as a Percentage of Non-Accrual Loans

 

128.53

 

 

135.35

 

Inflation and Exchange Rate

 

 

 

 

 

 

 

 

Wholesale Inflation (11)

 

 

34.59

%

 

 

12.65

%

Consumer Inflation (12)

 

 

41.05

%

 

 

26.90

%

Exchange Rate Variation (13) (%)

 

21.88

 

 

52.07

 

CER (14)

 

6.84

 

 

5.04

 

UVA (15)

 

17.26

 

 

-

 

(1) Net interest earned divided by interest-earning assets.

(2) Financial margin represents gross brokerage margin divided by average interest-earning assets.

(3) Net income excluding non-controlling interest as a percentage of average total assets.

(4) Net income as a percentage of average shareholders’ equity.

(5) Operating income is defined as gross brokerage margin plus net income from services.

(6) Administrative expenses as a percentage of operating income as defined above.

(7) Liquid assets of Banco Galicia include cash and receivables, Lebacs, net call money, short-term loans to other Argentine financial institutions, special guarantee accounts at the Argentine Central Bank, and repurchase and reverse repurchase transactions in the Argentine financial market.

(8) Past-due loans are defined as the aggregate principal amount of a loan plus any accrued interest that is due and payable for which either the principal or any interest payment is 91 days or more past due.

(9) Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk”, “High Risk”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”, and (b) Commercial portfolio: “With problems”, “High Risk of Insolvency”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”.

(10) Direct charge-offs minus amounts recovered.

(11) As of December 31, 2015, as measured by the interannual change between the October 2014 and the October 2015 Wholesale Price Index (“WPI”), published by INDEC (as defined herein), because the measurement of this index was discontinued for the remainder of 2015. In 2016 the measure was reinstated.

(12) In 2015, annual variation of the Consumer Price Index (“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.

(13) Annual change in the end-of-period exchange rate expressed in Pesos per Dollar.

(14) The “CER” is the “Coeficiente de Estabilización de Referencia”, an adjustment coefficient based on changes in the CPI.

(15) The “UVA” is the “Unidad de Valor Adquisitivo”, an adjustment coefficient based on changes in the CER.

 

B. Capitalization and Indebtedness

 

Not applicable.



C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

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 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 resume a sustainable economic growth path, 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.

 

Since 2012, Argentina has experienced a period of stagflation. Figures of economic activity reflect a slowdown in domestic production, together with an increasing inflation rate at a higher pace than that noted in previous years. In the past decade, the economy has been characterized by a lack of institutional transparency, the absence of long-term economic policies and a systematically expansive fiscal policy, which resulted in a lack of investment and a lax monetary policy. This has, in turn, led to low economic growth and high inflation. At the end of 2015, when the former government took office, it implemented monetary policies that maintained a certain laxity in their fiscal policy while strongly restricting its monetary policy, resulting in high interest rates, a marked growth in public debt and an overvaluation of the Peso. However, at the beginning of 2018, international investors began withdrawing from emerging markets, including Argentina. The country’s loss of access to the international debts markets resulted in a considerable devaluation of the Argentine Peso. This resulted in an acceleration of inflation and a new contraction in economic activity during the second half of 2018 and most of 2019. During 2019, the political uncertainty stemming from the presidential election race worsened the economic outlook. The impact of the measures implemented by the previous Administration in order to cope with the situation -such as a devaluation of the Peso with respect to the Dollar- as well as the impact of any measures that the current Government 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.

 

In particular, the Argentine economy continues to be vulnerable to several factors, including:

 

  • volatility in the growth rate of the economy;
  • a high rate of government expenditures;
  • high inflation rates;
  • regulatory uncertainty for certain economic activities and sectors;
  • decreases in the prices for commodities as the economic recovery has depended on high prices for commodities, which prices are volatile and beyond the control of the government;
  • the effects of a restrictive U.S. monetary policy, which could generate an increase in financial costs for Argentina;
  • fluctuations in the Argentine Central Bank’s international reserves; and
  • uncertainty with respect to exchange and capital controls.

 

No assurance can be provided that a decline in economic growth or certain economic instability will not occur. In particular, the Argentine economy contracted in 2018 and 2019 and may continue to decrease in the future due to international and domestic conditions. Any such stagnation, 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.

 

The ability of the current administration to implement 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 Fernández administration will have on the Argentine economy as a whole, and the financial sector in particular, cannot be predicted. In addition, it is currently unclear what additional measures the Fernández administration may implement in the future and what the effects of the same may be on the Argentine economy.

 

Since taking office, the Fernández administration has announced and implemented several significant economic measures. In particular, on December 20, 2019, the Argentine National Congress passed Law No. 27,541 aimed at Social Solidarity and Productive Reactivation. Such law declared a public emergency in economic, financial, fiscal, administrative, pension, energy, health and social matters. It also delegated to the National Executive Branch, broad authority and power to take actions designed to, among other things, ensure the sustainability of the level of public debt, restructure the rate the energy system through a renegotiation of the current comprehensive tariff regime and restructure the regulatory entities for the energy system. In addition, the Fernández administration is beginning a debt restructuring process. The FX market restrictions imposed by the Fernández administration, in combination with a relatively moderate monetary and fiscal policy, additional restrictions on foreign trade and the impacts of changes to the social security policy could result in lower economic growth rates in Argentina for the coming years. An adverse result in the debt restructuring that the Government is carrying out could affect access to the capital market, and may affect the growth of the country, provinces and private companies. It is impossible to predict the impact of these measures, as well as any future measures that may be adopted, on the Argentine economy overall and the financial sector in particular.


 

In particular, economic intervention by current measures or future measures 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, since 2007: inflation in Argentina has been systematically above 20% and reached a maximum of 53.8 % in 2019. Moreover, between 2007 and 2015 official figures became unreliable and private estimates of inflation had to be used (as further described below). Combined with such high inflation rates. Argentina has also displayed high volatility in its prices during the same period, as a consequence of alternating periods in which inflation was controlled by pegging the Peso to other currencies in combination with expansive monetary and fiscal policies—which lead to an over appreciation of the peso—and periods in which the Peso appreciation was adjusted, leading to the consequent acceleration of inflation.

 

As noted above, between 2007 and 2015, official inflation figures became unreliable. Specifically, INDEC (Índice Nacional de Estadísticas y Censos “INDEC” for its acronym in Spanish), is the only institution in Argentina with legal power to produce official national statistics. During such time period, INDEC, went through a process of major institutional and methodological reforms that led to controversies related to the reliability of the information it produces. In the month of January 2016, the Government of Mauricio Macri declared an administrative emergency regarding the national statistical system and INDEC that lasted, until December 31, 2016. During such emergency time, period INDEC stopped publishing certain statistical data until it had completed a reorganization of its technical and administrative structure to recover its ability to produce relevant and sufficient information.

 

Despite the fact that, due to the reforms implemented in recent years, the inflation rates calculated by INDEC are generally accepted, the possibility that they may be manipulated in the future cannot be ruled out. Any such future manipulation could affect the Argentine economy in general and the financial sector in particular.

.

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.

 

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.

 

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.



On April 18, 2016, in order to make the payment to 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 three, five, ten and thirty years. The payment of approximately US$9.3 billion to the bondholders was made on April 22, 2016, thus reaching a final solution to the Argentine debt in default.

 

During the remainder of 2016, 2017 and the first four months of 2018, the Argentine government continued to seek financing from international markets. Following the exchange rate crisis beginning in April 2018, however, Argentina has not been able to access the international capital markets, resulting in the Argentine government requesting a loan from the IMF (pursuant to a Stand-By Agreement for a total of US$57 billion).

 

In the short term, Argentina must restructure its debt with its current bondholders and the IMF, which may require a commitment to implement restrictive monetary and fiscal policies, 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. If Argentina is not be able to reach an agreement with its bondholders or the IMF Argentina may default on such debt and would likely again lose access to the international financial markets. This would also have an adverse effect on the Argentine economy, including Grupo Galicia., and would likely negative impact the ability of companies, including Grupo Galicia, to obtain foreign financing.

 

A decline in the international prices of Argentina’s main commodities exports and a real appreciation of the Peso against the 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, (particularly soybeans and its by products, corn and wheat), 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. Given its reliance on such agricultural commodities, the country is also vulnerable to weather events—such as 2018’s drought—that may negatively affect the production of such commodities, reducing fiscal revenues and the inflow of US dollars.

 

In order to counterbalance and diversify its reliance on the above noted agricultural commodities as well as to add an additional source of revenue, Argentina has been focused on increasing its oil and gas exports. A long-term decrease in the international price of oil would negatively impact such oil and gas prospects and result in a decrease in foreign investment in such sectors.

 

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 Argentina’s economy and a new imbalance in the foreign exchange market, which could exacerbate exchange rate volatility. Given the strong reliance on revenues from taxes on exports, a significant appreciation of the real exchange rate could substantially reduce Argentine public sector’s tax revenues in real terms. The occurrence of the foregoing could exacerbate the existing inflationary environment 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 former 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.

 

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 stock 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 countries, resulting from a combination of factors such as low growth, fiscal woes and financial pressures, were particularly acute. Reestablishing financial and fiscal stability to offset such 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 2018, the U.S. Federal Reserve increased the Federal Funds rate by 100 basis points and continued to cut its asset purchase and its monetary easing programs. Such changes continued to strengthen the Dollar globally, affecting commodity prices and reducing the inflow of capital to emerging market countries, including Argentina. However, during 2019 the U.S. Federal Reserve implemented several haircuts on the Federal Funds rate (1.75%-1.50% range), a preemptive measure amidst a trade war with China and the European Union, even though the U.S. economy displayed strong fundamentals—record-high employment levels, a strong economy and low inflation rates. During March 2020, the U.S. Federal Reserve decide to implement two aggressive interest-rate cuts during two unscheduled meetings: a 0.5 percentage point cut on March 3rd and a 1 percentage point cut on March 15th. This decision was made in order to help mitigate the economic consequences from the COVID-19 pandemic.

 

Brazil, Argentina’s main trade partner, has experienced a slight increase in GDP in recent years, increasing 1.3% in 2017 and 2018 and 1.1% in 2019. Although Brazil’s economic outlook may 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 addition, the inauguration of Jair Bolsonaro as the president of Brazil has contributed to geopolitical volatility in this region as a result of his polarizing ideologies.

 

China, which is the main importer of Argentine raw materials, experienced an economic slowdown in 2018 and 2019 when compared to recent years. The prices for Argentine commodities, in particular oilseeds, have displayed a falling trend in recent years. If this trend continues, it could affect the inflow of foreign currency into 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.



The Argentine Peso depreciated 15.6% as compared to the U.S. Dollar in 2017, 50.3% in 2018 and 36.9% in 2019 according to the official quotation of the Central Bank. If the Peso further depreciates against the U.S. Dollar, as has recently occurred and which could occur again in the future, this 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.

 

Additionally, the Central Bank may intervene in the foreign exchange market to influence exchange rates. Purchases of Pesos by the Central Bank could result in a decrease of its international reserves. 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.

 

In order to control the depreciation of the Peso, on September 1, 2019 the Executive Branch introduced capital controls through decree No. 609/2019, whose validity was extended indefinitely by the government of Fernández through Decree No. 91/2019 and Communication "A" 6854 and 6856 of the Central Bank. These controls include the need to obtain authorization from the Central Bank to purchase foreign currency in excess of US$200 per month per person, and the mandatory liquidation of exporters’ foreign exchange earnings in the local market within five days, among other measures. This allows the Central Bank to exercise control over the Peso and therefore to prevent the Argentine currency from depreciating.

 

A depreciation of the Peso could adversely affect the Argentine economy and Grupo Financiero Galicia’s financial condition, its business and its ability to service its existing debt obligations. Moreover, an acceleration of inflation caused by an exchange rate crisis would raise the costs associated with Grupo Galicia’s subsidiaries servicing their foreign currency-denominated, which could increase Grupo Galicia’s costs and therefore have a material adverse effect on Grupo Galicia’s financial condition and results of operations.

 

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). Such is the case of the current measures that limit the ability of residents to purchase foreign currency for saving purposes and by capping the amount that can be purchased by the general public at US$200 per month and imposing a 30% tax on all such foreign currency purchases, as well as on any purchases in foreign currency made with debit or credit cards and on the purchase of international flights, hotels or tourism packages.

 

The impact that these measures or potential future measures will have on the Argentine economy and Grupo Galicia 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 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 or the applicable local code of procedures are met, 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. As such, an Argentine court may find that the enforcement in Argentina of a foreign judgment (including a U.S. court) that requires payment be made by an Argentine individual to holders of its foreign currency-denominated securities outside of Argentina is contrary to the public policy if, for instance, 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 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.

 

The former administration initiated significant reforms in the electric power sector. As part of such reforms, such administration took 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 the past, 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. On December 28, 2018, the government further increased gas and electricity tariffs to 40% and 55%, respectively, which were implemented during 2019.

 

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. Specifically, during the early months of 2019 the Argentine union that represents employees in the banking sector declared general strikes. These strikes did not have a direct effect on banks but did impact the clients of banks who were not able to access to banks’ branches. Strikes similar to the one that took place in 2019, however, can deteriorate the perception the public has of banks, which could have a reputational cost for us. Labor pressure is active in Argentina and can potentially lead to further 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.

 

High levels of government expenditures in Argentina could generate long lasting adverse consequences for the Argentine economy.

 

Since 2007, Argentina increased its spending to GDP to reach a maximum of 24% in 2015, quite above the ratio of the rest of the countries in the region. Since then, a decreasing trend in expenditures was observed until the year 2019.

 

Despite the trend of recent years, if government expenditures increases to an extent that outpaces Argentina’s revenues, the country’s fiscal deficit is likely to increase, and the Argentine government may be forced to seek assistance from the Central Bank and/or the National Administrator of Pensions.

 

Any such increase in Argentina’s 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.

 

The novel coronavirus could have an adverse effect on our business operations.

 

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Several measures were undertaken by the Chinese government and other countries to control the coronavirus, including the use of quarantine (with approximately 60 million people affected in China), travel restrictions to and from China by certain air carriers and foreign governments. Since such initial outbreak, COVID-19 has been declared a pandemic and the virus spread and continues to spread globally, as of the date of this annual report, affecting more than 148 countries and territories around the world, including Argentina. To date, COVID-19s has caused significant social and market disruption.

 

The long-term effects to the global economy and to Grupo Galicia of epidemics, pandemics and other public health crises, such as COVID-19, are difficult to assess or predict, and may include risks to employee’s health and safety, and reduce our business operations. Any prolonged restrictive measures put in place to control an outbreak of a contagious disease or virus or other adverse public health development in any of our targeted markets may have a material and adverse effect on our business operations. We may also be affected by a decline in the demand of our services, or the need to implement policies limiting the efficiency and effectiveness of our operations, including the implementation of work from home policies. The impact epidemics, pandemics and other health crises, such as COVID-19 may have on the methods we use to sell and distribute our products and services, on our human capital resources productivity, and on the ability of our suppliers and consultants to provide goods and services and other resources in a timely manner to support our business, are also impossible to assess or predict at this moment.



Furthermore, certain measures imposed by the local administration, such as travel restrictions, border closures and lock-down measures which have forced us to set in place work from home arrangements for our employees, may also have a material impact on our ability to operate and achieve our business goals.

 

Considering the current health crisis, and the related halt in economy the world is facing, we may also experience higher default rates on the financings granted to our clients, liquidity deficiencies, difficulties in our ability to service our debts and other financial obligations. We may also face difficulties in trying to access to debt and capital markets and be forced to refinance preexisting financing arrangements. Although the actual impact is impossible to assess, the occurrence of any of such events could have a material adverse effect on our operations.

 

Finally, it is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Neither can we predict how the disease will evolve (and potentially, spread) in Argentina, nor anticipate future restrictions the Argentine government may impose.

 

The Argentine economy could be negatively affected by external factors that have an impact in the whole world, such as COVID-19’s spread and the consequent implementation of measures destined to deal with the mentioned pandemic, and its economic impact both on a local and an international level.

 

The Argentine economy is vulnerable to external factors. In this sense, most economies in the world (including Argentina and its main trade partners) are being affected by the spread of COVID-19. The virus’ progression, which has been declared a pandemic by the World Health Organization, has led to the application of measures that have a severe economic impact.

 

In Argentina, these measures include the implementation of a generalized quarantine with the intention of hindering the virus’ advancement and to avoid the collapse of the local health system. This entails a halt in most economic activities (excluding essential ones, such as healthcare services, manufacturing of food products, medical equipment or pharmaceuticals, supermarkets and pharmacies, security forces) and the suspension of road and air travels, among others. These measures, and any others the Argentine government might implement in the future, have a negative and direct impact on the country’s economy, by reducing both aggregate supply and demand.

 

Additionally, the progression of the virus and the consequent measures destined to fight the virus could entail a reduction in the economic growth in any of Argentina’s trade partners (such as Brazil, the European Union, China and the United States). The contraction of the economies of our trade partners could have a sizeable and adverse impact on Argentina’s trade balance and economy through a fall in the demand for Argentine exports or a decline in the prices of agricultural commodities.

 

On the other hand, higher uncertainty levels associated with the progress of a global pandemic implies the strengthening of the U.S. Dollar and the devaluation of the currencies of emerging countries, Argentina’s trade partners included. This could increase the financial pressure on the Argentine peso and lead to a devaluation of the local exchange rate, or cause the loss of competitiveness against our trade partners.

 

Any of these potential risks to the Argentine economy could have a significant and negative effect on the business, financial situation and operational results of the Company.

 

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 2019, which measures corruption in 180 countries, Argentina ranked No.66. In the World Bank’s “Doing Business” report in 2019, Argentina Ranked No.119 out of 190 countries. 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.



A deterioration in the Argentine reputation could have a material and adverse effect on Grupo Galicia’s financial condition and results of operations.


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.

 

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 1999-2002 financial crisis (in which the Argentine economy fell 18.4%), 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 regarding its ability to act as an intermediary between savings and credit. Furthermore, the ratio of the 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 amounted to 12.8% and 8.6% of GDP, respectively, as of December 31, 2019.

 

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 1999-2002 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.

 

Banco Galicia’s exposure to the public sector as of December 31, 2019 was Ps.110,957 million, representing approximately 19% of its total assets and 142% of its shareholders’ equity. Of this total, Ps.58,141 million were Argentine Central Bank debt instruments, Ps.22,759 million corresponded to Argentine government securities, while the remaining Ps.30,057 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 (as amended by Law No. 26,361, Law No. 27,250, Law No. 27,265 and Law No. 27,266, the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Galicia’s customers. 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. “Financial Information”─A. “Consolidated Statements and Other Financial 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.

 

City of Buenos Aires 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.

 

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 or dividends 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 Central Bank 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. “Operating and Financial Review and Prospects”─B. “Liquidity and Capital Resources”.

 

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Notwithstanding the foregoing, due to the regulations recently passed by the Argentine Central Bank within the framework of the measures taken by the government to respond to the COVID-19, the capacity of the Argentine financial system to pay cash dividends has been suspended until June 30, 2020.

 

In the context of the COVID-19 outbreak, the Argentine Central Bank restricted the ability of Argentine financial institutions to distribute dividends

 

In the context of the ongoing COVID-19 pandemic, the Argentine Central Bank issued on March 19, 2020, Communication “A” 6939, which suspended the ability of Argentine financial institutions to distribute dividends until June 30, 2020, in order to maintain the lending capacity of the financial institutions.

 

As the measures taken by the administration to control the fallout from COVID-19 are recent, uncertain and changing rapidly, it is difficult to predict the full impact of full measures on Grupo Financiero Galicia and its subsidiaries, nor can we predict whether Grupo Financiero Galicia would be able to make contributions to its subsidiaries as a consequence of this measure. The ongoing evolution of this pandemic could result in a material adverse effect on our business, financial condition and results of operations.

 

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.

 

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.

 

The price of Grupo Financiero Galicia’s ordinary shares may fluctuate significantly, and your investment may decline in value.

 

The price of Grupo Financiero Galicia´s ordinary shares may fluctuate significantly in response to several factors, many of which are beyond our control, including those described in this annual report under “Risk Factors Relating to Argentina” and “Risk Factors Relating to the Argentine Financial System”.

 

The stock markets in general, and the shares of emerging market in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. Grupo Financiero cannot assure that any trading price or valuation will be sustained. These factors may materially and adversely affect the market price of our ordinary shares, which may limit or prevent investors from readily selling Grupo Financiero’s ordinary shares and may otherwise affect liquidity, regardless of Grupo Financiero Galicia’s operating performance.

 

 

Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recessions or currency exchange rate fluctuations, may also adversely affect the market price of Grupo Financiero Galicia’s ordinary shares.

 

Adverse conditions in the credit, capital and foreign exchange markets may have a material adverse effect on Grupo Galicia’s business, 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.

 

The occurrence of an operational risk impacting any of Grupo Galicia’s businesses, could disrupt its business functions and have a negative impact on its results of operations.

 

As with other financial institutions, operational risks could arise in any of Grupo Galicia’s businesses. These risks may include losses resulting from inadequate or failed internal and external processes, systems or human error, fraud, the effects of natural or man-made catastrophic events (such as natural disasters or pandemics) or from other external events. Exposure to such events could disrupt Grupo Galicia’s systems and operations significantly, which may result in financial losses and reputational damage.

 

Pandemics and other material public health problems could result in social, economic or labor instability in the world and domestically and disrupt the operations of our business. For example, the COVID-19 pandemic has resulted in travel restrictions and extended shutdowns of certain businesses in many regions.

 

Mass employee absences and/or absences of certain key personnel could strain our ability to continue to operate seamlessly.

 

The main risk factors identified in the last risk assessment undertaken by our Risk Management Division were system failures, adverse legal decisions and economic losses generated by fraud. Although we have implemented numerous controls to avoid the occurrence of inefficient or fraudulent operations, errors can occur and compound even before being detected and corrected. In addition, some of our transactions are not fully automatic, which may increase the risk of human error or manipulation, and it may be difficult to detect losses quickly. The occurrence of any one or more of the above events could have a material adverse impact on our business, financial condition and results of operations.

 

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, therefore adversely affecting its business and results of operations.

 

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 access to a large amount of confidential information about their respective clients. Therefore, cybersecurity breaches represent a potential risk for Grupo Galicia.

 

Cybersecurity breaches can result in, for example, identity fraud, phishing, ransomware, information leaks, APT (Advanced Persistent Threat), DDoS Attacks (Distributed Denial of Service) or the theft of sensitive and confidential information, and may affect negatively the security of information that is stored and transmitted through the information systems and network infrastructure of Grupo Galicia and negatively affect the reputation of Grupo Galicia’s brands, thereby causing existing and potential clients to refrain from conducting business with Grupo Galicia’s subsidiaries.


 

In spite of all existing security measures, Grupo Galicia cannot provide any assurance that the systems are invulnerable to cybersecurity breaches or that the mentioned measures will be successful in protecting against any such breach. In addition, any of the aforementioned events could lead to an increase in compliance costs for Grupo Galicia’s subsidiaries. If any of the above described events were to occur, it could lead to monetary losses and reputational damage to Grupo Galicia’s brands, which could reduce the use and acceptance of its products, greater regulation, and increased compliance costs, therefore adversely affect its business and results of operation and the trading price for its ADSs.

 

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.

 

Pursuant to the implementation of IFRS 9, Grupo Galicia’s subsidiaries 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 of non-performing loans or an increase in interest rates. This process requires a complex methodology mixing probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), 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 meet regulatory standards or expectations or detect money laundering and other illegal or inappropriate activities in a comprehensive or timely manner. Grupo Financiero Galicia´s subsidiaries may incur fines, penalties, reputational harm and other negative consequences.

 

Grupo Financiero 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. As such, Grupo Galicia’s subsidiaries maintain systems and procedures designed to ensure that they comply with applicable laws and regulations. However, Grupo Galicia’s subsidiaries are subject to heightened compliance and regulatory oversight and expectations, particularly due to the evolving and increasing regulatory landscape that they operate in. Further, Grupo Galicia’s subsidiaries could become subject to future regulatory requirements beyond those currently proposed, adopted or contemplated. The cumulative effect of all of the legislation and regulations on their business, operations and profitability remains uncertain. This uncertainty necessitates that Grupo Galicia’s subsidiaries make certain assumptions with respect to the scope and requirements of the proposed rules in their business planning. If these assumptions prove incorrect, Grupo Galicia’s subsidiaries could be subject to increased regulatory and compliance risks and costs as well as potential reputational harm.

 

In addition, a single event or issue may give rise to numerous and overlapping investigations and proceedings in different jurisdictions. Also, the laws and regulations in jurisdictions in which Grupo Galicia’s subsidiaries operate may be different or even conflict with each other as to the products and services offered by Grupo Galicia’s subsidiaries or other business activities Grupo Galicia’s subsidiaries may engage in, which can lead to compliance difficulties or issues. Furthermore, many legal and regulatory regimes require Grupo Galicia’s subsidiaries to report transactions and other information to regulators and other governmental authorities’ self-regulatory organizations, exchanges, clearing houses and customers. Grupo Financiero Galicia´s subsidiaries may be subject to fines, penalties, restrictions on our business, or other negative consequences if they do not timely, completely, or accurately provide regulatory reports, customer notices or disclosures, or make tax-related withholdings or payments, on behalf of themselves or their customers.

 

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. Moreover, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time, systems and procedures designed to ensure compliance. For example, Grupo Galicia’s subsidiaries are subject to regulations issued by the Office of Foreign Assets Control (“OFAC”) that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties or restrictions on certain activities for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. Any violation of the applicable laws or regulatory requirements, even if inadvertent or unintentional, or any failure to meet regulatory standards or expectations, including any failure to satisfy the conditions of any consent orders, could result in fees, penalties, restrictions on Grupo Galicia’s subsidiaries. ability to engage in certain business activities, reputational harm, loss of customers or other negative consequences.

 

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 and digital channels. Grupo Galicia’s communications, systems or transactions could be harmed or disrupted by power failures, data breach, cyber-attacks, acts of terrorism, physical theft, reputation incidents 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.

 

As of July 1, 2018, the Peso qualifies as a currency of a hyperinflationary economy, and Grupo Galicia is required to apply inflationary adjustments to its financial statements, which adjustments could adversely affect its financial statements, results of operations and financial condition.

Pursuant to IAS 29 (Financial Reporting in Hyperinflationary Economies), the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated in a suitable general price index to control for the effects of changes. IAS 29 does not prescribe when hyperinflation arises, but rather provides for several characteristics indicating hyperinflation in an economy. In addition, the IASB does not identify specific hyperinflationary jurisdictions. In June 2018, the International Practices Task Force of the Centre for Quality, which monitors “highly inflationary countries”, categorized Argentina as a country with a projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present. Argentine companies applying IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018. In addition, certain regulatory authorities, such as the Argentine Securities Commission (Comisión Nacional de Valores) (“CNV”), have required that financial statements submitted to the CNV for the periods ended on and after December 31, 2018 to be restated for inflation in accordance with IAS 29.

For purposes of the determination of the indexation for tax purposes, Law No.27,468, enacted on December 4, 2018, substituted the Wholesale Price Index for CPI and modified the standards triggering tax indexation procedures. For the three fiscal years beginning January 1, 2018, such tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. The tax indexation determined during any such year will be allocated as follows: 1/6 in that same year, and the remaining 5/6 in equal parts in the following five years. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29.

Grupo Galicia cannot predict the full impact of the application of such tax indexation procedures and the related adjustments on its financial statements or the effects of such tax indexation procedures on its business, results of operations and financial condition.

 

25


Small spreads in interest rates between loans and deposits, could harm our financial position and results of operations.

 

We carry out our operations in a country that is subject to frequent regulatory changes, high inflation and frequent currency devaluations. As a result, interest rates fluctuate frequently with direct impacts on the main source of income for the business of our subsidiaries.

 

These fluctuations may generate losses based on the type of financing granted, the value of the interest rate for the financing and the other terms of the loans extended. For example, in such a volatile country, the granting of long-term loans with fixed rates can result in severe monetary losses if the interest rate earned on the loans extended does not exceed the interest that we (or our subsidiaries) pay on deposits we or they hold.

 

In addition to this, the increasing competition we face from digital banks has forced us to offer lower interest rates than we otherwise would in order to remain competitive in the market. If we are not able to maintain profitable spreads between interest that we earn on the loans that we and our subsidiaries grant and the interest that we pay on the deposits that we and our subsidiaries hold, our results of operations and financial condition may be materially adversely impacted.

 

Problems in operations due to failures in services contracted from external suppliers.

 

Due to the nature of the business and the size of our business, many of our computer systems and operations depend on services contracted from external suppliers. This prevents us from controlling, in depth, the operation and provision of such services. Performance or operational failures of outsourced services may result in operational losses or system failures, with subsequent negative impacts on our reputation, financial condition and results of operations.

 

Item 4. Information on the Company

A. History and Development of the Company

 

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 owns 83% ownership interest, 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 city of Buenos Aires 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 Holdings 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.685,519 million as of December 31, 2019. For more information regarding Prisma Medios de Pago divestiture, the corporate reorganization of the broker services and mutual funds companies, the corporate reorganization of Tarjetas Regionales and the sale of Compañia Financiera Argentina S.A. (“CFA”), 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, Twenty-Fifth floor, (C1038AAJ), Buenos Aires, Argentina. Our telephone number is (54-11) 4343-7528 and our website is www.gfgsa.com.

 

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.

 

History

 

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 issued as a result of such capital increase 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. Such shares were to be subscribed for in up to US$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 in 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 issuance of shares and subscribed for 93.6 million shares of Banco Galicia. The consideration paid for such shares consisted of: (i) US$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 increased Banco Galicia’s shares from 93.60% to 94.66%.

 

In September 2013, Grupo Financiero Galicia announced that it had reached an agreement to absorb Lagarcué S.A. and Theseus S.A. (entities that were shareholders of Banco Galicia at the moment of the merger). 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 increase of the ownership interest Grupo Financiero Galicia had in its principal subsidiary Banco Galicia in the amount of 25,454,193 class B shares, which also represented all of the total capital stock (4.526585%) Lagarcué S.A. and Theseus S.A. had in Banco Galicia.

 

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 of and providing for the settlement and mutual withdrawal of any pending claims.

 

All documentation related to the merger by absorption of Lagarcué S.A. and Theseus S.A. by 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, entitling its owners to participate in the profits of the financial year beginning on January 1, 2013.

 

On December 18, 2013, the definitive merger agreement contemplating the absorption of Lagarcué S.A. and Theseus S.A. 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 27, 2014, by Resolution No. 17,300, the Board of the Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”) consented to the absorption of Lagarcué S.A. and Theseus S.A and to the above mentioned increase in capital of Grupo Financiero Galicia.

 

On February 25, 2014, the Board of Directors of Grupo Financiero Galicia resolved to offer to acquire all of the 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 CNV on April 24, 2014.

 

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 was 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 January 12, 2017, Grupo Financiero Galicia together with its main subsidiary, Banco Galicia, decided to accept an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of Banco Galicia’s subsidiary, Compañía Financiera Argentina S.A. On December 4, 2017, through Resolution No. 414, the Argentine Central Bank authorized the sale of Compañía Financiera Argentina S.A. During the first quarter of fiscal year 2018, payments were completed, so Grupo Financiero Galicia received a total amount of Ps.30,771,146 (which, as adjusted for inflation, was equal to Ps.65,831,636 as of December 31, 2019) for its 3% of participation in Compañia Financiera Argentina S.A.

 

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 owned by Compañía Financiera Argentina S.A. for Ps.906,524.15 (which, as adjusted for inflation, was equal to Ps.2,324,697 as of December 31, 2019).

 

 

During August 2017, Grupo Financiero Galicia accepted a series of irrevocable sales offers for the acquisition of a 6% of the issued and outstanding share capital of the subsidiary Tarjetas Regionales S.A. On January 5, 2018, a total price of US$49,000,000 was paid 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 5 votes per share, and 42,033,196 Class B common shares, book-entry, with a par value of Ps.1 per share and 1 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, through Note No. 312/04/2018, confirmed that it did not object the corporate reorganization. Consecuently, Grupo Financiero Galicia holds an 83% ownership interest in Tarjetas Regionales S.A.

 

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 US$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 US$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, (which, as adjusted for inflation, was equal to Ps.22,712,675,768 as of December 31, 2019).

 

On May 28, 2019, the Board of Directors of Grupo Financiero Galicia approved a capital contribution to Tarjetas Regionales S.A. for Ps.500,000,000 (which, as adjusted for inflation, was equal to Ps.645,455,576 as of December 31, 2019) to fund the creation of a new digital financial company, denominated “Naranja Digital Compañía Financiera S.A.U.” meant to reach the unbanked population of Argentina. Said capital contribution was effective in two payments of Ps.250,000,000 each, the first one made in June 2019 and the second one made in December 2019. The formation of said company was approved on September 16, 2019, by resolution number 205 of the Argentine Central Bank. The commencement of activities of Naranja Digital Compañía Financiera S.A.U. are subject to prior compliance with the provisions required by the Argentine Central Bank within the first year anniversary of the aforementioned resolution number 205

 

On July 2, 2019, the Board of Directors of Grupo Financiero Galicia accepted an offer made by Galicia Valores, to acquire 5% of the stock of Galicia Administradora de Fondos S.A. for US$920,000. Such acquisition made Grupo Financiero Galicia the sole shareholder of Galicia Administradora de Fondos S.A. Likewise, on the same date, the Board of Directors of Grupo Financiero Galicia approved the creation of a new company denominated IGAM LLC, to be registered in the state of Delaware, United States of America, to provide brokerage, investing and other financial services in Argentina and in other countries. The registration of IGAM LLC took place on July 3, 2019.

 

On August 15, 2019, the Board of Directors of Grupo Financiero Galicia accepted a purchase offer made by Banco Galicia to sell 10,000 shares, representing 1% of the capital stock of Galicia Valores, for Ps.695,308.54 (which, as adjusted for inflation, was equal to Ps.822,516.02 as of December 31, 2019). With this share purchase, Galicia Valores is 100% owned by our subsidiary Banco Galicia.

 

 

On September 20, 2019, the Board of Directors of Grupo Financiero Galicia approved a capital contribution to IGAM LLC for Ps.71,000,000, (which, as adjusted for inflation, was equal to Ps.79,320,966 as of December 31, 2019), to be applied to the purchase of the total stake in Galicia Valores owned by Banco Galicia. Said operation was closed at a total price of Ps.69,530,854 (which, as adjusted for inflation, was equal to Ps.77,679,641 as of December 31, 2019).

 

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. 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.

 

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 online banking.

 

As part of its growth strategy, Banco Galicia began expanding into rural areas in the Interior, 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 the Interior through the issuance of proprietary brand credit cards. See “—Tarjetas Regionales” below.

 

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 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. Banco Galicia received approximately US$5,000,000 in respect of such sale.

 

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 (which, as adjusted for inflation, was equal to Ps.14,765 million as of December 31, 2018). The Argentine Central Bank, through its Resolution No.35 dated January 11, 2018, approved the capital contribution and its consideration as computable capital.

 

On January 21, 2019 Banco Galicia, sold to AI Zenith (Netherlands) B.V. 3,182,444 book-entry common shares, with face value of Ps.1 each and one vote per share, representing 7.7007% of Prisma Medios de Pago S.A. (“Prisma”) capital stock. Banco Galicia continues to hold 3,057,642 shares in Prisma, which represents 7.3988% of its capital stock.

 

 

In August 2019, the Bank accepted an offer to acquire 100% of the shareholding in Galicia Valores made by IGAM. The price of the operation amounted to Ps.70 million. See “—Grupo Financiero Galicia”.

 

Tarjetas Regionales

 

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 the Interior 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. These companies provided financial services to individuals through the issuance of credit cards with proprietary brands and extended 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 by forming Tarjetas Regionales S.A (“Tarjetas Regionales”). Tarjetas Regionales became the holding company, 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:

 

  • Tarjeta Naranja’s board of directors approved the merger of Tarjeta Mira S.A. (merged company) into Tarjeta Naranja (merging company).

 

  • Tarjetas Regionales carried out a capital increase that was mainly paid by the contribution of the minority shareholders’ holdings in its subsidiaries Tarjeta Naranja and Tarjetas Cuyanas. Therefore, Banco Galicia’s direct and indirect interest decreased to 77% of the capital stock and the remaining 23% is held by the shareholders who, by means of the above-mentioned contribution, became Tarjetas Regionales’ minority shareholders.

 

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.

 

On March 31, 2017, Banco Galicia’s Board of Directors approved the sale of its stake (58.8% of the issued and outstanding 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. Banco Galicia received approximately US$5,000,000 in respect of such sale.

 

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”.

 

Tarjeta Naranja has experienced a significant expansion of its customer base, 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. As of December 31, 2019, Tarjeta Naranja, had approximately 8.5 million issued cards and was the largest proprietary brand credit card operation in Argentina.

 

In terms of funding, Tarjeta Naranja, has 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 Tarjeta Naranja to maintain and expand their business without depending excessively on one single source or provider.

 

The business operation of Tarjeta Naranja is exposed to foreign exchange rate fluctuations and interest rate fluctuations; however, Tarjeta Naranja mitigates the foreign exchange rate risk in respect of its business and operations through hedging transactions and tries to offset its interest rate exposure with assets that bear interest at similar floating rates. In addition, Tarjeta Naranja has an overall liquidity policy requiring it 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 Tarjeta Naranja protects its operations against short-term cash shortages, allowing Tarjeta Naranja to focus on expanding its business and continuously better serving their clients.

 

Finally, in February 2019 and December 2019, Cobranzas Regionales S.A. received capital contributions from its shareholders, Tarjeta Naranja and Tarjetas Regionales, with the main purpose of maximize the growth of the "NPOS"(a new service of Tarjeta Naranja mainly used by merchants to accept payments made from clients with any debit or credit card through a wireless device) business and the subsequent launch of the virtual wallet "NaranjaX". As a result of such capital contributions, Cobranzas Regionales S.A. capital stock increased from Ps.1 million to Ps.391 million, represented by 391,000,000 shares of face value of Ps.1 each.

 

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). Galicia Administradora de Fondos’ 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.

 

On July 2, 2019, Banco Galicia sold its 5% interest in Galicia Administración de Fondos to Grupo Financiero Galicia.

 

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 Net Investment. 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

 

Incorporated in 1993, Galicia Warrants provides financing services, secured by property in its custody, to the agricultural, industrial and agri-industrial sectors, as well as exporters and retailers. Its main objective is to provide access to credit to such sectors and customers. Its shareholders are Grupo Financiero Galicia, which holds 87.5% of the outstanding equity interests of Galicia Warrants, and Banco Galicia, which holds the remaining 12.5% outstanding equity interests.

 

While the corporate headquarters of Galicia Warrants is located in Buenos Aires, its office in San Miguel de Tucumán carries out transactions in the warrants market, as well as other financing services related to its main sectors and customers it services as described above, throughout Argentina.

 

IGAM / Galicia Valores

 

Incorporated in 2019, IGAM is the holding company of Galicia Valores and Nargelon S.A. IGAM is registered in Delaware, USA.

 

Galicia Valores operates in the investment management industry. Its purpose is to provide broker and financial advisory services while working to build trustworthy and long-term relationships with its clients and prospects. Galicia Valores scope of business is mostly local.

 

As of 2019, Galicia Valores became a Mercado Abierto Electrónico (MAE) Agent. MAE is one of Argentina’s electronic markets and its main trading parties are institutional investors such as banks, insurance companies, investment brokers and mutual funds. As a MAE Agent, Galicia Valores can trade bonds, currency, futures and other derivatives within MAE. MAE’s.



Capital Investments and Divestitures

 

During 2019, our capital expenditures amounted to Ps.7,897 million, allocated as follows:

 

  • Ps.3,546 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

  • Ps.4,351 million in licenses and other intangible assets.

 

During 2018, our capital expenditures amounted to Ps.5,673 million, allocated as follows:

 

  • Ps.3,595 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and
  • Ps.2,078 million in licenses and other intangible assets.

During 2017, our capital expenditures amounted to Ps.5,015 million, allocated as follows:

 

  • Ps.4,187 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and
  • Ps.828 million in licenses and other intangible assets.

These capital expenditures were primarily made in Argentina.

 

For a description of our divestitures in 2019, 2018 and 2017, please see “─History” ─ “Grupo Financiero Galicia”, “Banco Galicia” and “Tarjetas Regionales”.

 

Investment Planning

 

We have budgeted capital expenditures for the fiscal year ending December 31, 2020, for the following purposes and amounts:

 

 

 

December 31, 2020

 

 

 

(in millions of Pesos)

 

Infrastructure of Corporate Buildings, Tower and Branches (construction, furniture, equipment, phones and other fixed assets)

 

 

1,539

 

Organizational and IT System Development

 

 

5,219

 

Total Investment Planning

 

 

6,758

 

 

These capital expenditures will primarily be made in Argentina. Management considers that internal funds will be sufficient to finance capital expenditures for the year ending December 31, 2020.

 

B. Business Overview

 

Business

 

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 Grupo Financiero Galicia 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 December 31, 2019, Banco Galicia ranked first in terms of loan portfolio and second in terms of assets and deposits within private-sector banks in Argentina. As of the same date, Banco Galicia also ranked first 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 9.92% and 11.57%, respectively, as of December 31, 2019. As of December 31, 2019, Banco Galicia had total assets of Ps.616,356 million, total loans and other financing of Ps.309,329 million, total deposits of Ps.397,840 million, and its shareholders’ equity amounted to Ps.96,297 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, 2019, was comprised of 326 full service banking branches, located throughout the country, 2,054 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 approximately 2.7 million customers, who were comprised of mostly individuals but who also included 104,010 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.

 

Wholesale Banking

 

Banco Galicia’s Wholesale Banking division is organized into the following three departments based on their client’ segment: (i) Corporate, Investment Banking and Capital Markets; (ii) Middle-Market Banking and (iii) Agricultural Sector.

 

Corporate, Investment Banking and Capital Markets

 

This department provides services to clients whose annual invoices start at Ps.3,000 million or which due to complexity of their businesses and / or their profile as a multinational corporation, require special treatment in terms of financial advice and structuring. The active portfolio of this segment showed an annual growth of 20% and 73% in deposits as compared to December 2018, and as of December 2019, this segment serviced over 950 companies from 300 different economic groups.

 

Corporate, Investment Banking and Capital Markets’ service model is based on developing long-term, strategic and commercial relationships with customers. Considering the needs of each business, the economic activity involved and the markets where its customers operate, the Bank has designed suitable solutions in terms of requirements and response times, leveraged in digital transaction banking.

 

The Corporate, Investment Banking and Capital Markets division focuses on providing advice to wholesale banking clients on the issuance of new public and private debt as well as refinancing their existing debt. In 2019, Banco Galicia consolidated its leadership as one of the main banks operating in the local capital market and in structuring tailored financings for corporate, SME and agribusiness companies. The Bank was involved in more than 50 transactions, including 16 syndicated and structured loans, 6 restructurings and 28 public issuances in the capital market, offering a wide variety of products which included, among others, debt securities, short-term securities, sovereign and sub sovereign notes and financial trusts.

 

Among the transactions denominated in Argentine pesos, noteworthy issuances included (i) government securities issued by the City of Buenos Aires and of the Province of Buenos Aires, for Ps.7,044 million, (ii) securities issued by affiliates, such as Tarjeta Naranja S.A., for Ps.1,584 million, and (iii) securities issued by banks, financial and automotive entities for more than Ps.6,405 million in the aggregate.

 

Among the transactions denominated in US dollars, we can highlight (i) Banco Galicia's own issuance of bonds for US$82.7 million, (ii) securities issued by local financial institutions for US$488 million, and (ii) the participation of Banco Galicia as local placement agent for Pampa Energía’s international bond issuance for US$300 million.


 

The Bank participated in syndicated loans amounting to more than Ps.850 million and US$560 million, governed by both local and international law, covering different sectors but mainly focused in the energy, oil & gas and agriculture areas. In terms of liability management, this department managed to restructure transactions for over Ps.2,000 million and US$6 million.

 

In line with Banco Galicia's initiative to finance sustainable investment projects, the Bank granted financing for approximately US$50 million, among which it would highlight the bilateral loan granted to Grupo Insud to generate energy from forest biomass, awarded under the RenovAR 2.0 Program.

 

Middle-Market Banking

 

This segment services all business sectors and companies, except for those that are serviced by the agricultural sector described below, whose annual revenues range from Ps.400 million to Ps.3,000 million. As compared to 2018, the volume of active portfolio for this segment in 2019 stagnated, but still managed to achieve with a 10% growth in the average cash balance.

 

Agricultural Sector

 

The Agricultural Sector is the only segment defined by its customers’ industry, regardless of its profile and size. Banco Galicia tailors its product and service offerings to serve its customers in this segment, understanding that the development of digital solutions that more closely connect and communicate with customers in this segment are key to the growth of the business.

 

In 2019, Galicia Rural Card remained one of the most valued products for covering the financial needs of customers in this segment, with such card being the leading credit card offered by private banks to clients in this sector in Argentina, with a 63% market share. Our inter-annual growth in loan volume was approximately 70%, making Banco Galicia the leading bank for providing financing in this sector.

 

Retail Banking

 

In 2019, 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 Small and Medium Enterprises (“SMEs”), Galicia ÉMINENT, Private Banking and Individuals Segment. The following are the major challenges that the Bank believes this division will face in implementing this strategy for the period from 2017-2020:

 

  • To build, along with all the Bank’s sectors, a customer-oriented culture.
  • To lead the digital transformation in the financial market, keeping ahead of new competitors.
  • To further elaborate the Bank’s multichannel product platforms in order to deliver the best customer experience.
  • To reinforce strategies by segment in order to maintain the leadership position.
  • To develop innovative products and services.

Regarding transactions, 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.”



Business, professionals and SMEs

 

The Business, professionals 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. Through the products offered by this segment, Banco Galicia aimed to encourage the growth of the 255,900 businesses, professionals and companies it serviced in 2019 by offering differentiated products and services designed to assist the day-to-day management of these businesses and companies. The Bank provides such clients with knowledge, services, products and tools that expedite their operations and promote the exchange of experiences among businesses served by this segment.

 

This year, the Bank discontinued the delivery of physical statements to companies, generating savings of 1.4 million sheets of paper, and enabled the use of electronic checks, where its customers 48% of such clients being SMEs issued 4,800 e-checks. The Bank became the main platform to undertake transactions using electronic checks in the country, with a market share of 75% of electronic checks issued.

 

Additionally, during 2019, Banco Galicia launched the first Minimum Viable Product (“MVP”) for this segment, to facilitate, and expedite customers’ registration as clients of the Bank. The registration process for clients of this segment was drastically simplified, going from 59-page long bank forms to none, from 14 signatures to a token, and by reducing the customer’s time to obtain its client number from 7 days to 10 minutes.

 

Likewise, the Bank eliminated charges for overdraft, streamline and clarified charges for SMEs, and added an automatic rating for SMEs based on their prior transaction behavior (with no need to submit additional documentation).

 

In terms of loans, together with Garantizar, a Reciprocal Guarantee Company (Sociedad de Garantía Recíproca or “SGR”), the Bank implemented the credit engine named “Garantizar para Galicia”. Thus, it has simplified application submittals by handling them at only one place and 100% immediately, and started to pre-qualify prospects, which enables it to improve its credit offer to potential customers.

 

Galicia ÉMINENT

 

Galicia Éminent is the premium service of Banco Galicia that provides services targeted towards its high net worth customers. Its mission is that its clients always receive differential and exclusive attention, through 3 pillars of service: personalized relationship, exclusive benefits and experiences, and agile and simple processes.

 

With the objective of establishing long-term trust relationships with customers, the Bank has a face-to-face, customized service system carried out by Éminent officers, and digitally with “Éminent Conecta Advisors” that customers may consult via WhatsApp, email or video conference. This differentiating service enabled the Bank to maintain its leadership in the Net Promoter Score (“NPS”) at a 30% and to continue to grow in terms of number of new customers by 4%. 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.

 

Additionally, the services provided by Galicia Éminent aim to continue positioning the Bank as a leading investment bank and to improve key processes, such as the implementation of FCR to address certain claims.

 

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 by trained officers. 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.

 

Individuals Segment


 

Banco Galicia serves more than 2,700,000 customers, 77% of which are individuals –ranging from low income to high income– who make personal use of the products and services offered by the Bank based on their needs.

 

Financial Banking

 

The Financial Banking Division includes the commercial department, financial institutions, public sector, trading and global markets, and investment products and global custody divisions. Additionally, it is also responsible for the mutual funds business, as the Bank is the main distribution channel for mutual funds.

 

Commercial Department

 

The Commercial Department is responsible for consolidating the Bank’s position in the Institutional Customers segment (funds, ANSES’ sustainability escrow fund (known as “FGS”), and insurance companies), and to channel investments from other segments serviced by the Bank (Corporate, Companies, Public Sector and Financial Institutions).

 

The Department seeks to deepen the cross-selling of financial products and to promote the use of transactional products (collections and payment) and custody of assets, promoting the integral development of the entire range of products.

 

During 2019, the behavior of institutional customers was characterized by what the Bank viewed as sound judgment in asset management, generally prioritizing liquidity and short-term investments.

 

2019 was marked by a high level of volatility in the volume of assets traded by customers, with significant trading in the first part of the year, followed by a sharp decrease later in 2019 as a result of the restructuring (known locally as “reperfilamiento”) of public debt, the lack of private issuances and restrictions on the ability of Argentine investors to access the foreign exchange market.


In terms of deposits by entities serviced by this department, the Bank saw an increase in the first quarter of 2019 in the volume of deposits made, followed by a decrease resulting from the replacement of deposits with 1-day Repo transactions directly made by the Mutual Funds in the Argentine Central Bank (during the fourth quarter, Repo transactions became the most important asset in the mutual fund industry portfolio).

 

However, the income generated by this segment continue to increase, increasing by approximately 60% as compared to 2018.

 

In qualitative measurements, the Bank continued to lead this segment in 2019. Market penetration, measured by the presence indicator (which measures the number of clients in the market that have chosen the Bank as its principal bank or alternative bank), was 88%, and the Bank's leading position indicator (which measures the number of operations performed by clients who have chosen the Bank as its principal bank) was 51%.

 

Financial Institutions

 

The Financial Institutions Department is responsible, at the 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 the local level, with banks, financial companies, exchange bureaus, and other entities that carry out related activities.

 

As in previous years, during 2019 bilateral meetings were held with the most active foreign partner banks in the foreign trade business, through which the Bank channeled the different products and services offered to its customers. Despite Argentina’s unfavorable macroeconomic situation, the number of credit lines given to customers did not decrease and represented a stable source for providing foreign trade financing to its clients. The Bank also continued to provide letters of credit and confirm stand-by letters of credit for its customers.


 

As a core aspect of Banco Galicia’s strategy in terms of sustainable financing, it continued to strengthen ties and analyze additional business opportunities with multilateral organizations and official credit banks, such as the IFC, IDB Invest, Proparco, FMO, BNDES, Andean Development Corporation (Corporación Andina de Fomento), DEG, KFW OFID and OPIC, among others, with the purpose of expanding its offer of credit lines in the medium and long -term to finance investment projects mainly oriented to the agro-industrial sector, and in the areas of energy efficiency and renewable energy.

 

Likewise, the Bank continued to develop commercial relationships with the main export credit insurance companies, such as Hermes, COFACE, SACE, Cesce, and the Export-Import Bank of the United States (or “EXIM”), among others, in order to offer medium- and long-term financing to its customers for the import of capital goods.

 

At the local level, the analysis and detection of business opportunities with financial institutions continued, with an emphasis on improving customer’ experience and consolidating the Bank’s leading position, in an environment of reciprocity and creating stable and long-term relationships.

 

Public Sector

 

The Public Sector Department is responsible for commercially interacting with the various state agencies at three main levels: National, Provincial and Municipal, providing financial solutions. Throughout 2019, this department continued to strengthen its presence throughout the country.

 

In 2019, the Bank participated in different Corporate Social Responsibility programs, whose common objective was to encourage cooperation between the public and private sectors. In this regard, we worked on two essential issues: financial inclusion and health.

 

Despite having gone through an electoral year mainly characterized by great volatility and uncertainty, this Department achieved significant positive results based on the proximity and trust it has with its customers. In the last quarter of 2019, the Bank started to dialogue with the new elected authorities in the different agencies.

 

Finally, as a result of the Bank’s commercial management, the customer portfolio of this segment reached 690 agencies, which allowed, as compared to 2018, an approximately 85% increase in deposit balances, and an approximately 150% increase in income earned.

 

Investment Products and Global Custody Department

 

During 2019, the Investment Products and Global Custody Department continued with the development of new investment products and the re-launching of the Bank’s Global Custody service, by which it holds funds in custody for clients and invests such funds on behalf of its clients.


As regards the Global Custody service, during 2019 the Bank continued increasing the product, positioning it, mainly with a focus on offering such service to insurance companies and other corporate entities.

 

In 2019, this department experienced a growth of 123% as measured by assets under custody (AUC) as compared to the previous year, and a 65% increase in the number of insurance companies served (measured in number of customers), as compared to 2018.

 

In addition to the above projects, the Investment Products and Global Custody Department is also responsible for defining, prioritizing and managing different technological projects for the Financial Banking and Investment Products department of the Bank. Within the framework of the Bank’s digital transformation, in 2019 the investment process continued to go ahead with the replacement of the core system of Investment and Custody Products.

 

During 2019, the FIMA Funds Subscription and Redemptions module was implemented, which enabled the implementation of new functionalities for our customers, such as enabling the placement of FIMA Funds through new underwriting agents. A new solution was also designed for brokerage and custody of securities, which will allow incorporating new self-management tools and providing a better experience for customers in 2020.


 

Trading and Global Markets Department

 

One of the main responsibilities of the Trading and Global Markets Department is the management and operation of foreign currency positions, financial derivatives and private securities, either for the Bank’s own portfolio or for brokerage with counterparts, institutional and international customers, companies or individuals. Likewise, this department is also responsible for developing and implementing the Bank’s investment strategies based on the risk parameters defined by the Board of Directors. By providing comprehensive financial advice, Banco Galicia was able to maintain, even in a year of few issuances, a leading position in the Argentine capital markets based on debt origination and structuring for local issuers.

 

In the international segment, following a favorable context during the first quarter of the year, a strong outflow of funds from Argentine assets was observed with the consequent impact on prices and the currency value. Despite high volatility and risk perception prevailing in the market, the Bank’s commercial management of this division resulted in an increase in the number of non-resident investors, mainly from the United States, England, Brazil and Chile). After the implementation of the new Central Bank monetary policy from October 1 onward, the Bank started to position its investment in local currency assets, which allowed the Bank to take advantage of the exchange rate stability and the high interest rates.

 

In the foreign exchange market, Banco Galicia maintained its first position in the Mercado Abierto Eletrónico S.A. (MAE) rankings, having traded US$ 27,832 million out of the total US$223,324 traded in the MAE in 2019, increasing its participation in the trading market from 11.85%. in 2018 to 12.46% in 2019. As regards the futures market, Banco Galicia achieved the first-place ranking in the MAE in 2019, with a total volume of US$1,301 million, increasing its participation from 23.6% in 2018 to 32.14% in 2019. In ROFEX’s ranking, Galicia ranked fourth again (third among financial institutions). The foreign trade volume transactions amounted to US$13,435 million, a 47% increase as compared to 2018. In addition, the number of trading transactions in banknotes expressed in US dollars increased slightly, from US$6,521 million in 2018 to US$6,657 million in 2019.

 

From January 2019 to December 2019, Banco Galicia went from the third position to the second position in the fixed income ranking prepared by Bolsas y Mercados Argentina in 2019 with a total of Ps.292,210 million traded in the Argentine market, representing 5.82% of the Argentine market share and making it the market leader in terms of market share. In turn, from January 2019 to December 2019, Banco Galicia went from second to third place in the total fixed income ranking prepared by the MAE with a total of US$ 25,683 million representing 10.83% of the Argentine market share

 

Digital transformation

 

On the road to transformation

 

The Bank’s customers and new competitors challenge the Bank to continuously evolve and offer experience enhancing services that are straightforward and agile. For this reason, during 2019 Banco Galicia accelerated its digital transformation, understanding it as an essential means to achieve efficiency and growth, while maintaining its culture, and its values of trust and transparency.

 

With the purpose of developing these new technologies, the Bank organized open courses for employees on Introduction to Agility, UX (“User Experience”), Design, Design Thinking and Digital Mindset, and implemented training activities for employees who are part of the teams where an initial and general vision of the agile methodology was addressed.

 

First Tribes

 

Banco Galicia is taking steps to develop a new organizational design based on agile methodologies to enhance its customer experience. Offering the best customer experience in Argentina continues to be the Bank’s main challenge and goal, while focusing on achieving efficiency that enhances growth.



After a year of positive results in its digital transformation, in 2019 Banco Galicia decided to modernize its operating structure with the aim of becoming a fully agile organization, that is flexible, and efficient in adapting to its clients’ changing needs and more sophisticated requirements.

 

Thus, the Bank reorganized its current teams and encouraged the internal mobility of its employees. In 2019, multidisciplinary teams, named “Squads”, were created. Squads are formed by employees of different backgrounds (coming from technical and commercial areas). The Squads take on smaller challenges, which allows them to deliver faster and continues solutions to our customers.

 

Each Squad works as a specialized, autonomy body part of a larger group, named “Tribe”. The Tribes are in charge of assigning tasks to the Squads and give them autonomy to develop new ideas of services and products (or to improve or adapt the existing ones to the current needs of our clients) to achieve greater customer satisfaction, from a commercial and digital standpoints.

 

During 2019, the Bank created the following Tribes:

 

Collections and Payments: Created to transform the Bank’s collections and payments area and revolutionize the market with products and services that enable the Bank to digitalize the entire flow of collections and payments of the different aspects of customers lifes. The goals of this Tribe are to; (i) transform the Bank´s services for collections and payments, and be chosen as the customer’s first option for both current and new collection and payment products, (ii) develop new products that revolutionize the collection and payment market; and (iii) offer customers digital management tools and paperless interactions.

 

Everyday Banking: Created to revolutionize customers' daily life, by providing a simple, but differentiated experiences for checking and savings accounts related products, and related services. The goals of this Tribe are: (i) provide the best market experience for everyday bank products for individual customers, with the goal of obtaining NPS of 33 in 2020; (ii) become the customers’ first choice for checking and savings accounts and related services, with the goal of reaching a 6.7% market share in transaction deposits by 2020; and (iii) improve checking and savings accounts and related services.

 

Lending: Created to enhance business development and growth for Corporate, Companies, Agricultural, SMEs and Public Sector customers, offering simpler and timely financing to maximize their profitability and ensure a differentiated experience in the market.

 

Segments: Created with the challenge of accompanying each customer in their daily activities, generating the best value and relationship proposal in the market, ensuring sustained growth of retail business and retail SMEs.

 

Customer Trips: Created to increase the efficiency of the customer’s critical travels.

 

Omni-channel: Created to develop and maintain an enabling omni-channel platform, providing autonomy and to reduce the Bank’s time-to-market through the granting of autonomy for channel squads and the building of accelerators.

 

Consumption

 

Through Tarjeta Naranja, Grupo Financiero Galicia offers financing to low- and medium-income customer segments.

 

Tarjeta Naranja continued consolidating its leading position in the regional credit cards market in 2019. 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 2019, Tarjeta Naranja issued 3.0 million account statements, 6% less than in 2018. Authorized cards totaled 8.6 million, including Naranja Clásica, Naranja Visa, Naranja MasterCard and Naranja American Express. In addition, purchase transactions at stores decreased 5% as compared to 2018.


 

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.

 

In connection with the Bank’s Digital Transformation, Tarjeta Naranja created two Tribes the:(i) Assisted Channels Tribe and (ii) Credit Cards Tribe.

 

Tarjeta Naranja also adapted to a more agile way of operating by creating multidisciplinary and autonomous business intelligence teams. These teams operate under the guidelines of collaborative work and agility and focus on creating and testing the MVPs (products and services in an initial stage of development). Technological improvements were also incorporated into a new app offered by Tarjeta Naranja and a redesign of Naranja Online (“NOL”).

 

Another highlight during 2019 in terms of consumption was the launching of Naranja X, the virtual wallet from Tarjeta Naranja, which focused on technology and digital channels. For more information see “Sales and Marketing”-“Service Channels”-“Digital Channels”-“Naraja X”.

 

Galicia Seguros

 

Galicia Seguros provides life, property and casualty insurance to customers. With respect to property and casualty insurance products, Galicia Seguros primarily underwrites home and ATM theft insurance. With respect to life insurance, group life and personal accident insurance are its most significant source of revenues. Galicia Retiro offers annuity products and Galicia Broker is an insurance broker.

 

Galicia Seguros, Galicia Retiro and Galicia Broker are subsidiaries that operate exclusively in Argentina and their total insurance underwriting was equal to Ps.4,857 million in 2019.

 

Galicia Retiro was the first company in launching a retirement insurance with 100% digital procurement during 2019.

 

In line with the Bank’s digital transformation, during 2019, Galicia Seguros and Naranja X worked together by adding specific products to the Naranja X app such as offering a digitally managed free insurance to users for the protection of their mobile phone screens. While the amount of screen damage covered by this insurance increases as the user performs more operations through the App, the insurance continues to be free. Also, in line with the Digital Transformation, Galicia Seguros launched the first retirement insurance in Argentina that could be fully subscribed for online (the Futuro Mutual Fund).

 

Other Businesses

 

Galicia Administradora de Fondos

 

Since 1960, Galicia Administradora de Fondos has been dedicated to the administration of the FIMA Common Investment Funds that are distributed through the different commercial channels of Banco Galicia. It has a wide range of investment funds designed for each investor profile, which allows all types of investors to easily access the capital market through the various Fima funds.

 

During 2019, the following initiatives stood out:

 

  • “Hacete Cliente” Landing: We allowed any user who enters our website fondosfima.com.ar, to become, by using digital tools, a customer of Banco Galicia and Fima. With a few easy steps, individuals can become customers without having to physically go to one of the Bank’s branches.

 

  • Start of Transactions Expansion from 4 a.m.: We provided digital tools so that subscription and redemption operations can be carried out during all hours that the market is open, from 4 a.m. to 4 p.m., through any of our digital channels: Galicia Online Banking, Office Banking and the Galicia App.

 

 

  • Customer Account and Scheduled Transactions Registration in the App from 4 p.m. to 8 p.m.: Since 2019, the Galicia App allows customers to schedule transactions up to 60 days in advance and manage their account registration.

 

  • New Fima Mix I portfolio composition: We relaunched the Fima Mix I with the goal of adapting to market requirements and providing a new alternative that operates in Argentine pesos but in a mixed portfolio of Latin American bonds and ETFs of shares listed on the New York Stock Exchange. With this fund, a new category is inaugurated in FIMA for year 2019: international mixed income funds that enable operations in Argentine pesos in foreign markets.

 

  • Composition Change of Fima Capital Plus: This fund was originally aimed at mitigating the impacts of inflation. During 2019, its asset manager changed the fund asset allocation to dollar-denominated assets, allowing local currency investors to partially hedge their foreign exchange exposure.

 

  • Fima Placement Agents: This distribution channel that began in 2018 ends 2019 with eight placement agents, that market the Bank´s Fima Funds throughout the country.

 

Competition

 

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 two fiscal years, for the activities discussed below (i.e., banking, Tarjetas Regionales and insurance), see Item 5. “Operating and Financial Review and Prospects”-A. “Operating Results”.

 

Banking

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 as non-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 9.92% as of December 31, 2019, as compared to 11.09% as of December 31, 2018 and 10.20% as of December 31, 2017.

With respect to loans extended to the private sector, Banco Galicia’s Argentine market share was 11.57% as of December 31, 2019, as compared to 10.51% and 9.65% as of December 31, 2018 and December 31, 2017, respectively, according to the information published by the Argentine Central Bank.


According to the information published by the Argentine Central Bank, as of November 30, 2019, Banco Galicia was the largest private-sector bank as measured by its loan portfolio and second as measured by its net worth and deposits.

 

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, 2019, the Argentine financial system consisted of 78 financial institutions, of which 63 were banks and 15 were financial non-bank institutions (i.e., finance companies). Of the 62 banks, 13 were Argentine national and provincial government-owned or related banks. Of the 50 private-sector banks, 34 were private-sector domestically owned banks and 16 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).

As of December 31, 2019, the top 10 banks, in terms of total deposits (excluding Argentine national and provincial government-owned banks), were: Banco Santander Río, Banco Galicia, Banco BBVA Argentina, Banco Macro, HSBC, Credicoop Bank and ICBC. 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, 2019, private-sector banks accounted for 57.1% of total deposits and 60.5% 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 3.1% of net loans in the Argentine financial system.

As of December 31, 2019, 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, 2019, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 42.6% of deposits and 36.4% 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 78 as of December 31, 2019, with the ten largest banks holding 77.8% of the system’s deposits from the private sector and 75.4% of the system’s loans to the private sector as of December 31, 2019.

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 2019, 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 17.1% and 11.3% of the GDP respectively, well below those same ratios for other countries in the region.



Credit Cards

In the consumer loan market, Tarjeta Naranja competes 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.

In order to compete effectively at a national and regional level, Tarjeta Naranja targets 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, Tarjeta Naranja also focus on and has access to additional sources of revenues including merchant fees and commissions, which allows it to offer competitive pricing and financing terms. Furthermore, unlike other credit card issuers in Argentina, approximately 26% of Tarjetas Regionales’ 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 Tarjetas Regionales to establish a local presence in all the provinces of Argentina.

Tarjeta Naranja believes that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with 273,000 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.

Insurance

Sudamericana’s subsidiaries face significant competition since, as of December 31, 2019, the Argentine insurance industry was comprised of approximately 190 insurance companies, 13 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 2019, the insurance industry continue to grow. Production amounted to Ps.534.6 million, 36% higher than the level recorded for the prior year. Out of the total insurance production in 2019, 83% related to property insurance, 15% related to life and personal insurance, and 2% related to retirement insurance.

Within the 83% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 45%, followed by the workers’ compensation segment, representing 30%. Within the life insurance segment, the group life insurance segment was the most significant, representing 52%, followed by individual life insurance, representing 23%, and personal accident insurance, representing 17%.

 

As of December 31, 2019, based on internal studies undertaken by Galicia Seguros, it is estimated that Galicia Seguros ranked fourth in terms of net premiums for personal accident insurance underwritten and first in terms of net premiums for home and theft insurance underwritten.

 

Sales and Marketing



Service Channels

 

Grupo Galicia’s subsidiaries interact with their customers through a variety of marketing channels, which include digital tools and physical branches, tailored to meet specific customer needs.

 

 

 

As of December 31, 2019

 

Branches (number)

 

 

 

 

Bank Branches

 

 

326

 

Tarjeta Naranja Branches

 

 

202

 

Electronic banking terminals (number)

 

 

 

 

ATMs

 

 

1,034

 

Self-Service Terminals

 

 

1,020

 

Digital banking transactions

 

 

 

 

Mobile APP

 

 

26,991,340

 

Online Banking

 

 

42,347,847

 

Office Banking

 

 

14,440,338

 

Phone Banking

 

 

73,133

 

 

Digital Channels

 

Grupo Galicia undertook the strategic commitment to transform into a comprehensive financial platform, that provides agile and efficient services to make life easier for its customers. Thus, during 2019 Grupo Galicia continued to work to innovate and provide digital channels that were tailored to the different needs of its customers.

 

Banco Galicia, Tarjeta Naranja and Galicia Seguros have websites that have been updated and that and allow customers to operate and use the various services and benefits offered by Grupo Galicia. Grupo Galicia offers cutting-edge apps for its customers, and phone assistance, as well as personalized support by WhatsApp and virtual assistants to solve inquiries presented by customers.

 

Banco Galicia

 

During 2019, Banco Galicia provided solutions and responded to inquiries from more than 1,400,000 customers who communicated with the Bank through digital channels designed for different ages and customer profiles. In 2019, Banco Galicia’s digital channels included the (i) “Éminent Conecta Advisors” for high-income individuals, (ii) “Galicia Rural Conecta” for companies in the agricultural sector, (iii) Galicia App for other individuals and companies, (iv) the online banking platform and (v) customized telephone service provided by WhatsApp, for which it conducts customers' training and awareness so that customers are able to use such phone service in an agile and efficient manner.

 

Additionally, Banco Galicia promotes the customers’ self-management in branches so that they can use the digital channels therein. Branches have posters with GALA’s (Banco Galicia's Virtual Assistant) QR code, to assist customers to solve inquiries about passwords or other procedures. Once the client scans the QR code with its phone, it can access GALA’s platform and solve their password problems by themselves.

 

During 2019, Banco Galicia continued to expand its business strategy and presence through social media, joining Instagram with different accounts for each of Banco Galicia, Galicia MOVE, Talentos Galicia and Galicia Éminent. Galicia MOVE shows Galicia's digital proposal in a more unstructured way, communicates promotions and provides customer service. Talentos Galicia is an account devoted to generating an internal facing company brand, which seeks to spread the Bank's culture and working methodologies within the organization in order to attract individuals interested in working in the Bank.

 

Tarjeta Naranja

 

Tarjeta Naranja’s website is the starting point for accessing all of its products and services. Tarjeta Naranja is a company characterized by its strong culture. Through Naranja.com, it is constantly working to be able to position itself and convey the brand identity hand in hand with institutional information, as well as advancing its entire cultural agenda.


 

Thus, Naranja redesigned its sales-oriented Naranja.com website agile, dynamic and useful content - by using cutting-edge tools for the financial industry, which, in 2019, contributed to improved performance and management response times. At the closing of the 2019 fiscal year, Naranja Online recorded an average of 4 million visits per month, which represented a 23% increase in visits per month as compared to fiscal year 2018. Tarjeta Naranja also launched the new Naranja APP with enhanced technology, enabling to grow by 221% in the number of active users, as compared to 2018.

 

Through its corporate page, Tarjeta Naranja aims to offer its customers accessible web content that can be accessed from their mobile phones, with better loading speed, as well as agile, dynamic and useful content. Users of Naranja.com can now obtain their cards online, in less than 5 minutes.

 

In order to fulfill the aforementioned objectives, the following technologies are Tarjeta Naranja allies to provide the best experience:

  • Progressive Web App (PWA): To optimize loading speed, mobile performance and offline navigation. Naranja is the first site of the Argentine financial sector to use this technology.
  • Angular 6: This front-end technology positions Tarjeta Naranja at the forefront, as it makes it easy to create advanced and easy-to-maintain web applications.

 

In 2019 Tarjeta Naranja redesigned its digital platform to obtain greater performance, availability and solid foundations to be able to scale up to the demand of current and future customers, considering NOL (Naranja Online) an essential part of Tarjeta Naranja’s products and services ecosystem. The new NOL was fully implemented in the Amazon Web Services (“AWS”) cloud, using a micro-services architecture enabling us to access customers'’ information, thus ensuring consistency with all the information accessed coming from the same data source. In terms of customer experience, the new design and the information architecture of NOL are based on the technology of Angular + PWA, front-end systems, which provides a better customer experience, and offers the possibility to adapt the site to the devices through which customers access the platform, enhancing the experience of information use and access.

.

Finally, Tarjeta Naranja provides customers with different channels for accessing products and services wherever the customer is located, 24/7. Such digital channels include:

  • Naranja Services in your Mobile Phone: It allows receiving text messages with information related to transactions, purchases, due dates, payments made, withdrawals, transfer notices and balance inquiries. It also provide the opportunity to recharge mobile credit via SMS.
  • Mobile Phone Recharge: Through NOL, Naranja APP and the self-inquiries terminals (terminales de autoconsulta or“TAC”) of Casas Naranja, customers can recharge credit on their own or any other mobile phone, without need for cash, to be paid in the statement of account of the following month.
  • Tienda Naranja, Naranja Marketplace: 2019 was focused on building a platform centered on customer experience, which was launched by the end of the year. The objective was to be able to offer customers a greater variety of products and services through this channel.

 

Naranja X

 

In the framework of the strategy and synergies proposed for the companies controlled by Tarjetas Regionales S.A. for the development and evolution of the technology-based ecosystem of products and services, during the first quarter of 2019, the digital wallet called “Naranja Cuenta” or “NCuenta” launched a pilot app in Córdoba, which later was rolled out nationwide, for Android and iOS users. Through an online registration and a validation process, this app enables the use of the mobile phone to pay for services, send or receive money between accounts, pay with a QR code in shops, and recharge the local transport card.

 

Subsequently, in order to address the need to contain the digital services ecosystem in one a specialized company, Cobranzas Regionales S.A. became involved in the development and use of this product. In this regard, Tarjeta Naranja entered into license contracts for the use of brands and their respective logos with Cobranzas Regionales  S.A., with the purpose of linking its trademark with new products that incorporate technology and participate in the digital universe.



Galicia Seguros

 

During 2019, Galicia Seguros updated its website in order to allow customers to access to their insurance information from their mobile phones. Additionally, it developed an exclusive service channel for Integral SMEs customers, which includes customized advising, prevention tips, and greater agility. Galicia Seguros digital channels include:

.

  • Corporate Web (www.galiciaseguros.com.ar): in 2019, Galicia Seguros re-launched its website with a more user friendly and updated design for customers.
  • E-mailing: Communications are sent to customers through automatic processes, informing them of the status of their inquiries, claims or requests. A digital welcome pack, which is received after the insurance is subscribed for, was designed, with simple and user-friendly information on the insurance coverage. The package includes a summary of the coverage and services contracted for, risk prevention tips and information on how to report a claim.
  • Email Marketing: Galicia Seguros uses this tool to conduct promotional campaigns on new products, new coverages, product enhancement, etc. In turn, it also emails relevant information to customers, strengthening the bond with the brand.
  • Sales Call Center: Customers can receive advice on the different products by contacting a 1-800 line.
  • Customer Service Center: Galicia Seguros has an exclusive 1-800 line for individuals and companies, and an email box (infogalicia@galiciaseguros.com.ar) through which customers can receive information about their coverage and manage their need.

 

Finally, during 2019 Galicia Seguros implemented the following measures through digital channels:

 

  • Availability of policy applications for automated calls and channels such as Banco Galicia Online Banking, with an impact on efficiency, channels and customer experience.
  • Internal exclusive telephone hotline and WhatsApp for Grupo Financiero Galicia's employees to assist them on how to manage claims or process another type of inquiries.
  • Streamlined processing of claims related to homeowner policies.
  • Extension of service hours in Social Media from 8:00 a.m. to 8:00 p.m (which are the same as the phone service hours), aiming at omni-channel homogeneity.

 

Physical Channels

 

Banco Galicia and Tarjeta Naranja have a network of branches throughout Argentina, providing face-to-face services, and bringing services close to customers. Galicia Seguros also promotes personalized attention through Banco Galicia branches.

 

With the focus on improving customers’ experience, Banco Galicia has transformed face-to-face services and has migrated to automatic or digital channels, with self-service terminals located in branches with extended hours and providing exclusive money withdrawal channels for customers in a simpler way, without using a debit card. In all branches, 100% of market transactions can be made through automatic banking.

 

Tarjeta Naranja designed a new service model in its branches, called Casas del Futuro”. These are spaces that allow Tarjeta Naranja to provide face-to-face services, resolution of problems at the first contact and personalized training on how to use the available digital tools. The strategy of this model is to use cutting-edge technology that is simple and intuitive. In 2019, the Casas del Futuro were opened in strategic locations of the City of Buenos Aires, and the provinces of Buenos Aires and Cordoba.



Products and Services

 

With a strategic vision to become a financial platform, we provide products and services tailored for each customer, individual or company, including personal and mortgage loans, insurance, credit cards, foreign trade operations, business financing, investment, and the Fondos Fima.

 

Personal Loans

 

During the first semester of 2019, Banco Galicia‘s interest rates were stable, which allowed loans to be placed at levels of, on average, Ps. 1,300 million per month. Beginning in August 2019, the average monthly value of loans granted was affected due to a significant increase in interest rates, falling to Ps.850 million per month, and, in turn, the acquisition of the UVA modality stopped. Subsequently in November, interest rates decreased again and the average monthly value of loans granted was similar to those seen at the beginning of 2018 (period dominated by low interest rates), with the average monthly value of loans granted being Ps.1,450 million per month.

 

Banco Galicia created a loan product exclusively designed for salaried customers, aimed at enabling them to better manage their finances. The type of loan is tailored to each person's salary and can be obtained in an immediate manner through Online Banking. The repayment term for the loan is between 2 to 45 days, with the customer selecting the term, and no commission is charged for prepayments.

 

Mortgage Loans

 

The Bank’s UVA denominated mortgage-backed loans were directly affected by the economic context of the country.

 

In the first months of 2019, prior to the escalation of the value of the U.S. Dollar as compared to the Peso, the monthly average placement of UVA denominated mortgage-backed loans was of Ps.17 million. By August, however, the average placement had fell to an average monthly placement of Ps.11 million. Nonetheless, the biggest impact on the placement values occurred following the enactment of the new foreign exchange restriction in November, which led to a decrease of average monthly placements to Ps.2 million in December.

 

During 2019, Ps. 246 million were granted in UVA denominated mortgage-backed loans, of which approximately 80% corresponds to UVA modality, while 20% were provided through Procrear, a subsidized governmental program.

 

E-Checks

 

Banco Galicia implemented transactions using electronic checks, which resulted in a saving of 1.4 million sheets of paper by customers (48% SMEs). In 2019, Banco Galicia issued 4,800 E-Checks, making the Bank the largest provider of electronic checks in Argentina for such year, with a market share of 75% of electronic checks issued.

 

Individual and Corporate Insurance

 

Galicia Seguros has a wide range of products that, in turn, provide a large number of different insurance coverages, fully covering the different needs of customers, based on their occupation, age or income level.

 

Insurance is sold to customers of Banco Galicia as well as of Tarjeta Naranja, so that Galicia Seguros scope of business includes the entire country and every economic segment. Galicia Seguros offers specific coverage through its broker, so that each customer feels protected and has support in everything it needs.

 

In 2019, Galicia Seguros launched Fondo Futuro, a new 100% online retirement insurance product. Fondo Futuro is the first retirement insurance with 100% digital procurement. It is a low-risk medium or long term savings and individual pension system. It works as a retirement supplement, to carry out an individual’s desired retirement plan. The individual insured may partially or totally withdraw the funds, as well as increase, decrease or suspend the contributions made, without generating any debt with Galicia Seguros. The launching of Fondo Futuro made Galicia Seguros the first Argentine  entity to be able to issue a 100% online policy with this type of insurance.


 

Along with the launch of Fondo Futuro, Galicia Seguros updated the coverage of Family Protection (life) insurance in order to adapt it to the current needs of customers. If a customer procures both the Fondo Future and the Family Protection insurances, they were entitled to deduct up to Ps.24,000 from the income tax base (Ps.12,000 are deducted for each insurance) for 2019.  This amount increases to Ps.38,000 for year 2020. Finally, Galicia Seguros retained the leadership in the combined family and robbery coverage sector

 

Credit Cards

 

The companies of Grupo Financiero Galicia respond to the needs of their customers with an outstanding offer of services and benefits of credit and debit cards.

 

For six years, Tarjeta Naranja has been the main issuer of credit cards nationwide, and the leading brand in the interior of the country. The new technologies implemented by Tarjeta Naranja allow for contactless payment operations, which are faster and safer for customers.

 

Banco Galicia responds to its customers' needs with a specialized and feature offering for services and benefits provided through its Galicia credit and debit cards. The Bank also offers Visa, MasterCard and American Express cards, covering all segments. The product range includes International, Gold, Platinum, Black/Signature cards, and they have different consumer financing options and exclusive promotions for all customers.

 

In 2019, Banco Galicia implemented the additional debit card, positioning itself as the first bank to launch it in our country. This product allows the account holder to request a physical card for any individual above the age of 14, without having to be a co-account holder but still being able to access the same features the account holder has. The account holder has the option of setting withdrawal and purchase limits. The aim of this product is to reduce the use of cash and increase financial education and inclusion.

 

Investments

 

The Bank offers fixed term deposits denominated in Argentine pesos or U.S. dollars, with the possibility of periodic interest payments, and adjustable by UVA with an additional interest rate. It provides preferential rates in digital channels for all different segments, and campaigns are periodically carried out to attract new investors. In 2019, the Bank extended the service hours of its digital channels from 6:00 a. m. to 10:00 p. m.

 

Banco Galicia provides tailored product offerings to its customers based on such customers needs and profile. Before making an investment, a survey is provided to its customers to better understand their risk aversion and understand the products that best suit their objectives. This survey is annually refreshed.

 

Additionally, Banco Galicia provides advice on a face-to-face basis, throughout its entire branch network, through the investments and private banking center for customers of each segment. Within the Campus Galicia framework, the Bank has created the “Investments Academy” to provide training to the Bank’s officials. Likewise, it provides information on each product on the Bank's websites, information that is constantly updated on the websites so that customers can self-manage.

 

Foreign Trade

 

Through the office banking electronic platform, customers can make payments and manage their collections abroad. Likewise, the Galicia Comex department offers product and service options that are tailored to export and import operations, in addition to keeping customers continuously informed of the developments in this area.

 

In 2019, the volume of foreign trade transactions undertaken by Banco Galicia was equal to US$11,125 million, representing 12.0% of the Argentine foreign trade market share. Of such amount, US$3,043 million was attributable to exports and imports of goods, representing 12.8% of the market share for such transaction. In terms of


 

volume, in 2019, based on the above statistics, the Bank ranked third in Argentine for volume of foreign trade transactions. Through office banking, the Bank’s customers have access to special lines of financing: leasing of imported products, financing of imports and exports, guarantees (“avales”) and Stand By.

 

In addition, Galicia Seguros offers surety policies for different customer needs related to foreign trade, including: temporary import or export policies, related to claims from differences in law, value or lack of documentation and policies covering damage during land transit.

 

Financing Granted to Companies

 

Banco Galicia offers short-, mid- and long-term financing to companies, provides transactional services, and undertakes foreign trade operations for their clients. The Bank supports companies covering a broad spectrum of economic activities and sectors, such as industrial, agriculture, services, and marketing. Products and services in 2019 included the following:

 

  • Loans with SGR (mutual guarantee associations): The Bank provided financing to micro and small business across economic sectors by providing loans with SRG warranties. In 2019, Ps. 3,500 million of loans were granted to this sector providing financing for more than 1,000 companies.

 

  • Green bond: During 2019, we supported renewable energy projects by financing green bonds worth more than US$44.09 million.

 

Promotions and Benefits

 

Banco Galicia

 

Éminent Benefits

 

The Éminent segment, aimed at high-income customers, offers different kinds of benefits to its customers, including discounts and promotions to go to restaurants, sports and arts events, house décor and fashion, among others.

 

Quiero! Program

 

Banco Galicia’s Quiero! Program continued to offer more than 1,500 options in different categories and 362 brands that allow customers to benefit from discounts and redemptions.

 

New Frequent-Flyer Program

 

As of 2020, all customers registered with Quiero! can redeem the points accrued in Quiero! and use them to purchase flight tickets through the Smiles miles program. The alliance with Smiles Argentina, enables the Bank to continue strengthening its loyalty program, generating new options and benefits for its customers.

 

Tarjeta Naranja

 

Financing of Single Purchases

 

Tarjetas Naranja offers financing in three and six month fixed installments denominated in Argentine pesos for single purchases made with any Tarjeta Naranja card.

 

Advance Funds Transfer

 

Any person can send funds to the primary or additional cardholders who can then use such funds from anywhere in Argentina (such amounts appear as a credit to the recipient’s card).

 


HBO GO

 

On Demand content for Tarjeta Naranja customers, who can subscribe digitally or from Casas Naranja, and enjoy more than 3,000 high-quality movies and series.

 

Movieclub

 

Tarjeta Naranja customers can enjoy the Village Cinemas Program with significant benefits and discount.

 

QUIERO! Launching in Naranja

 

On July 2019, Tarjeta Naranja announced it would add Quiero! as its customers’ loyalty program. As of August 31, 2019, over 230,000 customers had started to accrue points in Quiero! to redeem them for products or other benefits.

 

Selected Statistical Information

 

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 in conformity with IFRS.

 

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 monthly basis for Banco Galicia and Tarjetas Regionales on a consolidated basis. The average balances of interest-earning assets and interest-bearing liabilities are calculated on a quarterly basis for Grupo Financiero Galicia and its other non-banking subsidiaries.

 

The following table shows our consolidated average balances, accrued interest and average yield for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2019, December 31, 2018 and December 31, 2017.


 

 

 

For the Fiscal Year Ended December 31, 2019

 

 

For the Fiscal Year Ended December 31, 2018

 

 

For the Fiscal Year Ended December 31, 2017

 

 

 

Total

 

 

Total

 

 

Total

 




Average Balance


Accrued Interest


Average Yield / Rate


Average Balance


Accrued Interest


Average Yield / Rate


Average Balance


Accrued Interest


Average Yield / Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Securities

 

 

130,598

 

 

 

66,324

 

 

 

50.78

 

 

 

81,012

 

 

 

23,533

 

 

 

29.05

 

 

 

63,438

 

 

 

10,596

 

 

 

16.70

 

Loans

 

 

375,272

 

 

 

117,084

 

 

 

31.20

 

 

 

464,013

 

 

 

114,258

 

 

 

24.62

 

 

 

406,404

 

 

 

71,623

 

 

 

17.62

 

Other

 

 

24,567

 

 

 

18,756

 

 

 

76.35

 

 

 

25,292

 

 

 

5,161

 

 

 

20.41

 

 

 

27,230

 

 

 

4,939

 

 

 

18.14

 

Total Interest-Earning Assets

 

 

530,437

 

 

 

202,164

 

 

 

38.11

 

 

 

570,317

 

 

 

142,952

 

 

 

25.07

 

 

 

497,072

 

 

 

87,158

 

 

 

17.53

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings Accounts

 

 

171,701

 

 

 

504

 

 

 

0.29

 

 

 

178,696

 

 

 

346

 

 

 

0.19

 

 

 

152,318

 

 

 

110

 

 

 

0.07

 

Time Deposits

 

 

196,846

 

 

 

76,386

 

 

 

38.80

 

 

 

196,269

 

 

 

43,149

 

 

 

21.98

 

 

 

155,546

 

 

 

24,739

 

 

 

15.90

 

Total Interest-Bearing Deposits

 

 

368,547

 

 

 

76,890

 

 

 

20.86

 

 

 

374,965

 

 

 

43,495

 

 

 

11.60

 

 

 

307,864

 

 

 

24,849

 

 

 

8.07

 

Debt Securities

 

 

52,092

 

 

 

14,874

 

 

 

28.55

 

 

 

53,144

 

 

 

13,307

 

 

 

25.04

 

 

 

43,040

 

 

 

6,457

 

 

 

15.00

 

Other

 

 

29,481

 

 

 

4,668

 

 

 

15.83

 

 

 

34,277

 

 

 

6,390

 

 

 

18.64

 

 

 

16,973

 

 

 

2,609

 

 

 

15.37

 

Total Interest-Bearing Liabilities

 

 

450,120

 

 

 

96,432

 

 

 

21.42

 

 

 

462,386

 

 

 

63,192

 

 

 

13.67

 

 

 

367,877

 

 

 

33,915

 

 

 

9.22

 

Spread and Net Yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

 

 

 

 

16.69

 

 

 

 

 

 

 

 

 

 

 

11.40

 

 

 

 

 

 

 

 

 

 

 

8.32

 

Cost of Funds Supporting Interest-Earning Assets

 

 

 

 

 

 

 

 

 

 

18.18

 

 

 

 

 

 

 

 

 

 

 

11.08

 

 

 

 

 

 

 

 

 

 

 

6.82

 

Net Yield on Interest-Earning Assets

 

 

 

 

 

 

 

 

 

 

19.93

 

 

 

 

 

 

 

 

 

 

 

13.99

 

 

 

 

 

 

 

 

 

 

 

10.71

 

(*) Rates include the CER/UVA adjustment.

(1) Non-accruing loans have been included in average loans.

 

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, 2019 compared with the fiscal year ended December 31, 2018 and (ii) the fiscal year ended December 31, 2018, compared with the fiscal year ended December 31, 2017. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.

 

 

 

Fiscal Year Ended December 31, 2019 / Fiscal Year Ended December 31, 2018

 

 

Fiscal Year Ended December 31, 2018 / Fiscal Year Ended December 31, 2017

 

 

 

Increase (Decrease) due to changes in

 

 

Increase (Decrease) due to changes in

 




Volume


Rate


Net Change


Volume



Rate



Net Change


(in millions of Pesos)

(in millions of Pesos)

Interest Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Securities

 

 

22,111

 

 

 

20,680

 

 

 

42,791

 

 

 

2,569

 

 

 

10,368

 

 

 

12,936

 

Loans(1)

 

 

(312

)

 

 

3,138

 

 

 

2,826

 

 

 

3,574

 

 

 

39,061

 

 

 

42,635

 

Other

 

 

5

 

 

 

13,590

 

 

 

13,595

 

 

 

(175

)

 

 

397

 

 

 

223

 

Total Interest-Earning Assets

 

 

21,804

 

 

 

37,408

 

 

 

59,212

 

 

 

5,968

 

 

 

49,826

 

 

 

55,794

 

Interest Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings Account

 

 

(58

)

 

 

216

 

 

 

158

 

 

 

(13

)

 

 

249

 

 

 

236

 

Time Deposits

 

 

2,899

 

 

 

30,338

 

 

 

33,237

 

 

 

3,454

 

 

 

14,956

 

 

 

18,410

 

Debt Securities

 

 

(753

)

 

 

2,320

 

 

 

1,567

 

 

 

1,626

 

 

 

5,224

 

 

 

6,850

 

Other Liabilities

 

 

(2,025

)

 

 

303

 

 

 

(1,722

)

 

 

1,117

 

 

 

2,664

 

 

 

3,781

 

Total Interest-Earning Assets

 

 

63

 

 

 

33,177

 

 

 

33,240

 

 

 

6,184

 

 

 

23,093

 

 

 

29,277

 

(1) Non-accruing loans have been included in average loans.

 

The increase of Ps.59,212 million in interest income for the fiscal year ended December 31, 2019, as compared to the previous year, is primarily attributable to a Ps.21,804 million increase in the volume of interest-earning assets, together with an increase of Ps.37,558 million in interest income due to an increase in interest rates.

 

 

In particular, Ps.42,791 million of the increase was due to an increase in interest income from debt securities. The average volume of debt securities amounted to Ps.130,598 million for fiscal year 2019, as compared to Ps.81,012 million for the previous fiscal year. This increase was due to Ps.42,791 million increase in interest income from debt securities, which resulted from an increase in interest rates earned from debt securities due to a 2,173 basis point (“bps”) increase in the average interest rate for loans, from 29.05% in 2018 to 50.78% in 2019.

 

The Ps.13,595 million increase in interest from other assets was due to an increase in volume equal to Ps.5 million, and an increase in interest rates (accounting for Ps.13,590 million), mainly as a result of an increase in the average rate earned on other assets. This increase was mainly as consequence of (i) an increase in the average volume and rate on repurchase transaction with the Central Bank, and (ii) a higher result from change in valuation criteria of the Bank’s interest in Prisma Medios de Pago S.A.

Interest income from loans increased Ps.2,826 million from Ps.114,258 for the fiscal year ended December 31, 2018 to Ps.117,084 for the fiscal year ended December 31, 2019. This increase was due to a decrease in volume equal to Ps.312 million, and an increase in interest rates equal to Ps.3,138 million.

 

In terms of interest expenses, the Ps.32,240 million increase for the fiscal year ended December 31, 2019, as compared to the fiscal year ended December 31, 2018, is primarily a result of an increase in the interest rate payable on time deposits of Ps.30,338 million (which increased from 21.98% in 2018 to 38.80% in 2019).

 

Debt and Equity Securities

 

The following table shows our holdings of debt and equity securities at the balance sheet dates stated below. Our holdings of government securities represent mainly holdings of Banco Galicia.

 

 

 


As of December 31,

 




2019


2018


2017


(in  millions of Pesos)

Debt Securities at FV through profit or loss

 

 

65,690

 

 

 

116,813

 

 

 

65,760

 

Argentine Government Securities

 

 

6,700

 

 

 

7,230

 

 

 

21,418

 

Government Bonds

 

 

347

 

 

 

2,285

 

 

 

1,927

 

Provincial Bonds

 

 

-

 

 

 

1,514

 

 

 

5,676

 

City of Buenos Aires Bonds

 

 

120

 

 

 

65

 

 

 

1,741

 

Treasury Bills

 

 

6,233

 

 

 

3,366

 

 

 

12,074

 

Argentine Central Bank´s Bill

 

 

58,141

 

 

 

107,833

 

 

 

40,562

 

Lebacs

 

 

 

 

 

 

 

 

40,562

 

Leliq

 

 

58,141

 

 

 

107,833

 

 

 

 

Corporate Securities

 

 

849

 

 

 

1,750

 

 

 

3,780

 

Debt Securities

 

 

755

 

 

 

1,060

 

 

 

2,899

 

Debt Securities of Financial Trust

 

 

94

 

 

 

157

 

 

 

555

 

Participation Certificates in Financial Trust

 

 

-

 

 

 

533

 

 

 

326

 

Other Debt Securities

 

 

19,020

 

 

 

22,189

 

 

 

6,434

 

Measured at FV through OCI

 

 

15,917

 

 

 

14,017

 

 

 

219

 

Government Securities

 

 

15,917

 

 

 

14,017

 

 

 

219

 

Measured at Amortized Cost

 

 

3,103

 

 

 

8,172

 

 

 

6,215

 

Argentine Government Securities

 

 

2

 

 

 

5

 

 

 

53

 

Treasury Bills

 

 

-

 

 

 

3

 

 

 

116

 

Argentine Central Bank's Bill and Bonds

 

 

2,335

 

 

 

337

 

 

 

256

 

Corporate Securities

 

 

795

 

 

 

7,827

 

 

 

5,790

 

Allowance

 

 

(29

)

 

 

 

 

 

 

Investments in Equity Instruments

 

 

4,554

 

 

 

248

 

 

 

172

 

Domestic

 

 

4,512

 

 

 

205

 

 

 

125

 

Internacional

 

 

42

 

 

 

43

 

 

 

47

 

Total Debt and Equity Securities

 

 

89,264

 

 

 

139,250

 

 

 

72,366

 

 

As of December 31, 2019, the decrease in our debt and equity securities was mainly a result of a decrease in the volume of Government Bonds issued by the Argentine Central Bank and the corresponding purchase of the same. Our government securities issued by the Argentine Central Bank decreased Ps.49,692 million from Ps.107,833 million as of December 31, 2018 to Ps.58,141 million as of December 31, 2019.

 


The amount of Argentine government securities recorded at fair value as of December 31, 2019 for Ps.6,700 million corresponded to securities issued by the City of Buenos Aires (for Ps.120 million) Argentine bonds (for Ps.347 million); and Treasury Bills (for Ps.6,233 million).

 

As of December 31, 2019, the holding of public securities denominated in Dollars was composed mainly of Government Bonds (for Ps.4,982 million), recorded at fair value, and of Government Bonds (for Ps.11 million) and U.S. Treasury Bonds (for Ps.3 million) recorded at cost plus yield.

 

As of December 31, 2018, the amount of Argentine government securities, recorded at fair value for Ps.7,230 million, corresponded to our holdings of debt securities mainly issued by the provinces of Buenos Aires (for Ps.822 million), Neuquén (for Ps.410 million), Río Negro (for Ps.268 million), Mendoza (for Ps.14 million) and City of Buenos Aires (for Ps.65 million); and Government Bonds (for Ps.2,285 million) and treasury bills (for Ps.3,366 million).

As of December 31, 2018, the holding of public securities denominated in Dollars was composed mainly of Argentine Treasury Bills (Letes) (for Ps.283 million) and Government Bonds (for Ps.26 million), recorded at fair value and Argentine Treasury Bills (Letes) (for Ps.5 million) U.S. Treasury Bonds due in 2022 (for Ps.2 million), recorded at cost plus yield.

 

All local government securities, except for the Lebac and Leliq, which are issued by the Argentine Central Bank, were issued by the Argentine government.

 

Remaining Maturity and Weighted-Average Yield

 

The following table analyzes the remaining maturity and weighted-average yield of our holdings of debt securities at fair value through profit or loss as of December 31, 2019. Our government securities portfolio yields do not contain any tax equivalency adjustments.

 


 

 

Fiscal Year Ended December 31, 2019

 

 

 

 

 

 

 

 

Maturing within 1 year

 

 

Maturing after 1 year but within 5 years

 

 

Maturing after 5 years but within 10 years

 

 

Maturing after 10 years

 

 




Total Book Value


Book Value


Yield  (1)


Book Value

Yield 



Book Value


Yield  (1)


Book Value


Yield  (1)



(in millions of Pesos, except percentages)

Debt Securities at FV through Profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Argentine Government Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pesos

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Bonds

 

 

108

 

 

 

38

 

 

 

277.27

 

%

 

62

 

 

 

49.64

 

%

 

 

 

 

 

 

 

8

 

 

 

11.70

 

%

Provincial Bonds

 

 

-

 

 

 

-

 

 

 

-

 

%

 

-

 

 

 

 

%

 

 

 

 

 

 

 

 

 

 

 

%

City of Buenos Aires Bonds

 

 

120

 

 

 

-

 

 

 

-

 

%

 

116

 

 

 

66.85

 

%

 

4

 

 

 

64.69

 

%

 

-

 

 

 

 

%

Treasury Bills

 

 

1,049

 

 

 

1,049

 

 

 

50.00

 

%

 

-

 

 

 

 

%

 

-

 

 

 

 

%

 

-

 

 

 

 

%

  Foreign Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Bonds

 

 

239

 

 

 

116

 

 

 

175.63

 

%

 

123

 

 

 

65.56

 

%

 

-

 

 

 

 

%

 

-

 

 

 

 

%

Treasury Bills

 

 

5,184

 

 

 

5,184

 

 

 

4.25

 

%

 

-

 

 

 

 

%

 

-

 

 

 

 

%

 

-

 

 

 

 

%

Argentine Central Bank´s Bill and Bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pesos

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leliq

 

 

58,141

 

 

 

58,141

 

 

 

52.30

 

%

 

-

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

%

Corporate Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pesos

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

657

 

 

 

653

 

 

 

45.63

 

%

 

4

 

 

 

51.71

 

%

 

 

 

 

 

%

 

 

 

 

 

%

Debt Securities of Financial Trust

 

 

52

 

 

 

-

 

 

 

47.95

 

%

 

52

 

 

 

51.00

 

%

 

 

 

 

 

%

 

 

 

 

 

%

Participation Certificates in Financial Trust

 

 

-

 

 

 

-

 

 

 

-

 

%

 

-

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

%

  Foreign Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

98

 

 

 

14

 

 

 

8.08

 

%

 

79

 

 

 

6.52

 

%

 

5

 

 

 

6.75

 

%

 

 

 

 

 

%

Debt Securities of Financial Trust

 

 

42

 

 

 

14

 

 

 

-

 

%

 

28

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

%

Participation Certificates in Financial Trust

 

 

-

 

 

 

-

 

 

 

-

 

%

 

-

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

%

Debt Securities at FV through Profit or loss

 

 

65,690

 

 

 

65,209

 

 

 

 

 

 

 

464

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

8

 

 

 

 

 

 

(1) Effective yield based on December 31, 2019 quoted market values.

 

Loan and Other Financing Portfolio

 

Our total loans and other financing reflect Banco Galicia’s and Tarjetas Regionales’ loan and other financing portfolios including past due principal amounts. Personal loans and credit-card loans are typically loans to individuals granted by Banco Galicia or Tarjetas Regionales. Most of the Tarjetas Regionales’ loans are included under “credit card 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 consolidated loan and other financing activities portfolio.

 


 

 

As of December 31,

 

 




2019


2018



2017


 

(in  millions of Pesos)

 

 

Principal and Interest











Non- Financial Public Sector

 


7

 

 

18

 

 

13

 

 

Financial Institutions

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

10,796

 

 

 

12,218

 

 

 

10,674

 

 

Other financing

 

 

22

 

 

 

1

 

 

 

6

 

 

Total Financial Institutions

 

 

10,818

 

 

 

12,219

 

 

 

10,680

 

 

Non-Financial Private Sector and Residents Abroad (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

362,076

 

 

 

436,182

 

 

 

432,070

 

 

Advances

 

 

15,892

 

 

 

22,199

 

 

 

25,661

 

 

Overdrafts

 

 

75,080

 

 

 

55,411

 

 

 

80,693

 

 

Mortgage Loans

 

 

15,053

 

 

 

18,141

 

 

 

12,976

 

 

Pledge Loans

 

 

3,209

 

 

 

1,535

 

 

 

2,448

 

 

Personal Loans

 

 

27,646

 

 

 

44,834

 

 

 

53,276

 

 

Credit Card Loans

 

 

149,460

 

 

 

174,439

 

 

 

192,561

 

 

Placements in Banks Abroad

 

 

7,875

 

 

 

8,155

 

 

 

656

 

 

Other Loans

 

 

53,908

 

 

 

106,902

 

 

 

68,511

 

 

Accrued Interest, Adjustment and Quotation Differences Receivable

 

 

15,245

 

 

 

8,289

 

 

 

516

 

 

Documented Interest

 

 

(1,292

)

 

 

(3,723

)

 

 

(5,228

)

 

Financial Leases

 

 

2,225

 

 

 

3,381

 

 

 

3,809

 

 

Other Financing

 

 

9,277

 

 

 

7,186

 

 

 

5,065

 

 

Total Non-Financial Private Sector and Residents Abroad

 

 

373,578

 

 

 

446,749

 

 

 

440,944

 

 

Total Gross Loans and Other Financing

 

 

384,403

 

 

 

458,986

 

 

 

451,637

 

 

Allowance for Loan and Other Financing Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

(25,629

)

 

 

(23,921

)

 

 

(14,043

)

 

Financial Leases

 

 

(44

)

 

 

(45

)

 

 

(51

)

 

Others Financing

 

 

(171

)

 

 

(120

)

 

 

(113

)

 

Total Allowance

 

 

(25,844

)

 

 

(24,086

)

 

 

(14,207

)

 

Total Loans and Other Financing

 

 

358,559

 

 

 

434,900

 

 

 

437,430

 

 

(1) Categories of loans include:

  • Advances: short-term obligations drawn on by customers through overdrafts.
  • Overdrafts: endorsed promissory notes, notes and other promises to pay signed by one borrower or group of borrowers and factored loans.
  • Mortgage Loans: loans granted to purchase or improve real estate and collateralized by such real estate and commercial loans secured by a real estate mortgage.
  • Pledge Loans: loans secured by collateral (such as cars or machinery) other than real estate, where such collateral is an integral part of the loan documents.
  • Personal Loans: loans to individuals.
  • Credit-Card Loans: loans granted through credit cards to credit card holders.
  • Placements in Banks Abroad: short-term loans to banks abroad.
  • Other Loans: loans not included in other categories.
  • Documented Interest: discount on notes and bills.

 

As of December 31, 2019, Grupo Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.384,403 million, a 16% decrease as compared to the year ended December 31, 2018.

 

For the fiscal year ended December 31, 2018, Grupo Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.458,986 million, a 2% increase year-over-year.

 

The table below showing such information for the fiscal years ended December 31, 2016 and 2015 is not adjusted for inflation, and was prepared in accordance with Argentine Banking GAAP.

 

 

 

As of December 31,

 

 

 

 

2016

 

 

2015

 

 

(in millions of Pesos)

 

Principal and Interest

 

 

 

 

 

 

 

 

 

Non-Financial Public Sector

 

 

-

 

 

-

 

Local Financial Sector

 

 

 

2,098

 

 

 

762

 

Non-Financial Private Sector and Residents Abroad (1)

 

 

 

 

 

 

 

 

 

Advances

 

 

 

10,063

 

 

 

8,549

 

Promissory Notes

 

 

 

25,298

 

 

 

22,752

 

Mortgage Loans

 

 

 

2,178

 

 

 

2,099

 

Pledge Loans

 

 

 

678

 

 

 

487

 

Personal Loans

 

 

 

15,312

 

 

 

9,259

 

Credit Card Loans

 

 

 

72,766

 

 

56,260

 

Placements in Banks Abroad

 

 

 

1,227

 

 

 

232

 

Other Loans

 

 

 

11,405

 

 

 

692

 

Accrued Interest, Adjustment and Quotation Differences

 

 

 

1,775

 

 

 

1,407

 

Receivable

 

 

 

 

 

 

 

 

 

Documented Interest

 

 

 

(642

)

 

 

(597

)

Total Non-Financial Private-Sector and Residents Abroad

 

 

 

140,060

 

 

101,140

 

Total Gross Loans

 

 

 

142,158

 

 

 

101,902

 

Allowance for Loan Losses

 

 

 

(4,707

)

 

 

(3,560

)

Total Loans

 

 

 

137,451

 

 

 

98,342

 

Loans with Guarantees

 

 

 

 

 

 

 

 

 

With Preferred Guarantees (2)

 

 

 

3,322

 

 

 

2,988

 

Other Guarantees

 

 

 

18,984

 

 

 

13,508

 

Total Loans with Guarantees

 

 

 

22,306

 

 

 

16,496

 

(1) Includes local and international financial sectors.

(2) Before the allowance for loan losses.

 

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, 2019.

 

 

 

As of December 31, 2019

 




Within 1 Year


After 1 Year but within 5 Years


After 5 Years


Total at December 31, 2019


(in millions of Pesos)

Non-Financial Public Sector (1)

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Financial Sector (1)

 

 

8,027

 

 

 

2,769

 

 

 

 

 

 

10,796

 

Private Sector and Residents Abroad

 

 

288,669

 

 

 

69,712

 

 

 

10,216

 

 

 

368,597

 

Advances

 

 

14,363

 

 

 

1,529

 

 

 

 

 

 

15,892

 

Overdrafts

 

 

51,885

 

 

 

22,603

 

 

 

592

 

 

 

75,080

 

Mortgage Loans

 

 

3,619

 

 

 

8,981

 

 

 

2,453

 

 

 

15,053

 

Pledge Loans

 

 

1,057

 

 

 

1,934

 

 

 

218

 

 

 

3,209

 

Personal Loans

 

 

14,703

 

 

 

12,569

 

 

 

376

 

 

 

27,648

 

Credit-Card Loans

 

 

146,825

 

 

 

2,635

 

 

 

 

 

 

149,460

 

Other Loans

 

 

35,804

 

 

 

19,461

 

 

 

6,577

 

 

 

61,842

 

Accrued Interest and Quotation

 

 

20,471

 

 

 

 

 

 

 

 

 

20,471

 

Documented Interest

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Total Loans

 

 

296,703

 

 

 

72,481

 

 

 

10,216

 

 

 

379,400

 

(1) Interest and the UVA/CER adjustment were assigned to the first month.

 

 

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, 2019.

 

 

 

As of December 31, 2019

 

 

 

In millions of Pesos

 

 

As a % of Total Loans

 

Variable Rate (1)(2)

 

 

 

 

 

 

 

 

Pesos

 

 

3,558

 

 

 

4.30

 

Foreign Currency

 

 

4,727

 

 

 

5.72

 

Total

 

 

8,285

 

 

 

10.02

 

Fixed Rate (2)(3)

 

 

 

 

 

 

 

 

Pesos

 

 

44,480

 

 

 

53.79

 

Foreign Currency

 

 

29,932

 

 

 

36.19

 

Total

 

 

74,412

 

 

 

89.98

 

(1) Includes overdraft loans.

(2) Includes past due loans and excludes interest receivable, differences in quotations and the UVA/CER adjustment.

(3) Includes short-term and long-term loans whose rates are determined at the beginning of the loans’ life.

 

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 and Tarjeta Naranja’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. “Operating and Financial Review and Prospects”─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.

 

Banco Galicia

 

The Risk Division is responsible for the overall risk management of the Bank in accordance with international best practices and handles solvency, financial, operational, credit, technological, 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.

Moreover, 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:

 

  • actively and comprehensively managing and monitoring the risks taken by Banco Galicia and its subsidiaries, ensuring compliance with internal policies and regulations in force;
  • keeping the Board of Directors informed of the risks faced by the Bank, proposing how to deal with such risks;
  • helping to strengthen a risk management culture;
  • establishing the risks, the Bank is willing to take and designing policies and procedures to monitor, control and mitigate the same;
  • escalating deviations from internal policies to the Bank’s General Division; and
  • managing the evaluation process of available financing capabilities and required capital resources to maintain an appropriate risk profile.

The Risk Division’s responsibilities include:

  • ensuring action and contingency plans are in place to address any deviations from acceptable thresholds for risks posing a threat to business continuity;
  • recommending the most suitable methodologies for the Bank to measure identified risks;
  • guaranteeing that the launching of any new product includes a previous assessment of potential risks involved;
  • providing technical support and assisting the Management Division regarding risk management;
  • developing and proposing the strategies for credit and credit-granting policies; and
  • managing and monitoring the credit origination processes, follow-up and control thereof, and the recovery of past-due loans.

Banco Galicia complies with all regulatory requirements set forth by Law No.25,246, as amended, Resolution No.30/2017, as amended, issued by the Financial Information Unit (the “UIF”) and Argentine Central Bank’s Communication “A” 6399, 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. 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.

The following subdivisions depend on support from the Risk Division: Wholesale Credit, Retail Credit and 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, thereby 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:

 

 

Qualitative Analysis

Assessment of the corporate borrower’s creditworthiness performed by the officer in charge of the account based on personal knowledge.

Economic and Financial Risk

Quantitative analysis of the borrower’s balance sheet amounts.

Economic Risk of the Sector

Measurement of the general risk of the financial sector where the borrower operates (based on statistical information, internal and external).

Environmental Risk

Environmental impact analysis (required for all investment projects of significant amounts).

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.

 


Tarjeta Naranja

 

Credit Risk

Credit risk for Tarjeta Naranja arises from a variety of factors, including credit risk related to failures to pay by entities that Tarjeta Naranja lends money to and failures to pay outstanding credit card balances by individual clients that hold credit cards with Tarjeta Naranja.

With respect to investments, Tarjeta Naranja evaluates its credit risk or exposure pursuant to an investment and credit evaluation policy. In accordance with this policy, the Company (i) has certain internal credit risk rating requirements that any company in which it invests must meet, (ii) requires certain debt to equity ratios be maintained by any company to which it lends money and (iii) has upper limits on the amount that it will invest in any given company.

The Company actively monitors the creditworthiness of its clients to minimize its overall exposure to their credit risk. The Company uses the following tools to evaluate and manage the creditworthiness of its clients:

  • statistical models that determine the amount of credit that Tarjeta Naranja is comfortable extending to a client based on the client’s specific financial situation;
  • guidelines for providing credit cards and loans based on the client’s specific financial situation (i.e., verification of the applicant’s identity, monthly income, number of family members, geographic location and occupation);
  • case-by-case evaluation of appropriate credit limits for each applicant; and
  • ongoing monitoring of each client’s credit position and payment history.

Procedure for Credit Card Application

The credit risk associated with a credit card applicant is evaluated by reviewing the information with respect to each applicant set forth above. The Risk Committee establishes the guidelines and requirements for credit card applicants. Such guidelines are based on statistical models and objective criteria in order for internal credit analysts to efficiently approve or reject each credit card application.

In addition to reviewing each applicant’s credit record, the Company also verifies the credit score and payment history of each applicant. 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 to pick it up at any of the Company’s branches.

Determination of Credit Limits

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, certain factors are considered, 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 (the maximum amount for a customer to purchase in six or more installments using the credit card); (iii) the total credit limit (the maximum amount that may be owed to the Company); (iv) the maximum balance limit for cash advances, which is determined based on risk segmentation, monthly income, and internal indebtedness as well as in the financial system, not being able to exceed the LCPL (long-term purchase limit plan).

 

Below is a detail of the percentage limits and nominal caps assigned to each risk segment.


 

 

 

Monthly Balance Limit

 

 

Long-term Purchase Limit

 

 

Total Credit Limit

 

Risk Segment

 

Income %

 

 

Floor in Ps.

 

 

Top

 

 

Income %

 

 

Floor in Ps.

 

 

Top

 

 

Income %

 

 

Floor in Ps.

 

 

Top

 

A (Lowest)

 

 

100

 

 

 

5,000

 

 

 

50,000

 

 

 

160

 

 

 

5,000

 

 

 

120,000

 

 

 

200

 

 

 

5,000

 

 

 

140,000

 

B

 

 

90

 

 

 

4,500

 

 

 

35,000

 

 

 

150

 

 

 

4,500

 

 

 

80,000

 

 

 

180

 

 

 

4,500

 

 

 

100,000

 

C

 

 

80

 

 

 

4,000

 

 

 

22,000

 

 

 

140

 

 

 

4,000

 

 

 

50,000

 

 

 

170

 

 

 

4,000

 

 

 

60,000

 

D

 

 

70

 

 

 

3,500

 

 

 

15,000

 

 

 

120

 

 

 

3,500

 

 

 

35,000

 

 

 

150

 

 

 

3,500

 

 

 

40,000

 

E (Highest)

 

 

60

 

 

 

3,000

 

 

 

10,000

 

 

 

100

 

 

 

3,000

 

 

 

25,000

 

 

 

120

 

 

 

3,000

 

 

 

30,000

 

 

Tarjeta Naranja reviews such credit limits on a daily basis and a credit limit may be automatically increased for eligible cardholders meeting certain requirements, including payment history. In addition, Tarjeta Naranja 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.

 

Credit cards are extended to clients active in a wide range of business sectors. As such, the Company maintains a diversified portfolio of risk exposure based on economic fluctuations.

 

Financial Instruments Classification and Loss Provisions

 

General

 

The “Expected Credit Loss” (“ECL”) model applies to financial assets which are valued at both amortized cost and fair value through other comprehensive income (“OCI”). The standard establishes three categories to classify financial instruments, primarily taking into account the credit risk evolution over time. Stage 1 includes financial assets with normal or no significant risk associated; Stage 2 includes financial assets for which a significant increase in credit risk has been identified but they are not yet deemed to be credit-impaired and Stage 3 comprises financial assets which are impaired and/or subject to serious risk of impairment. To calculate the provisions for credit impairment risk, IFRS 9 differentiates among these three stages by applying the following concepts:

 

  • 12- Month Expected Credit Losses: Possible events of default within the 12 months following the date of the presentation of financial statements. Assets included in Stage 1 have their ECL measured at 12-month ECL.
  • Lifetime Expected Credit Losses: ECL during the active period of the financial asset, which results of calculating the probability of impairment of an asset throughout its duration, up until its maturity. Instruments in Stage 2 or 3 have their ECL measured based on lifetime ECL.

The measurement of ECL in accordance with IFRS 9 should consider forward looking information. To estimate ECL, Grupo Galicia has applied the following definitions and parameters, in accordance with IFRS 9.

 

Financial Instruments Classification

 

Grupo Galicia classifies its financial instruments into the following groups: (i) retail loans, (ii) retail-like loans, (iii) wholesale loans and (iv) Tarjeta Naranja.

 

Each subsidiary of Grupo Galicia classifies financial instruments subject to impairment under IFRS 9 in stages, as follows:

 

  • Stage 1: With respect to retail portfolios, Stage 1 includes every financial instrument up to 31 days past due. With respect to wholesale portfolios, Stage 1 includes every client whose Argentine Central Bank situation indicates a normal status (rating A) (i.e. low risk of bankruptcy).

 

  • Stage 2: This stage includes financial assets for which a significant increase in credit risk has been identified. This stage considers two groups:

 


  • For retail and retail like Portfolios between 31 and 90 days past due. For wholesale it considers credit ratings for which the risk of default has increased significantly.
  • Probability of Default or Score with impairment risk.

 

  • Stage 3: For all portfolios, Stage 3 includes every client whose Argentine Central Bank situation indicates a serious risk of bankruptcy (ratings C, D, E, F). With respect to retail portfolios, Stage 3 also includes financial instruments that are 90 or more days past due.

 

See the Argentina Central Bank Classification, on ─“Argentine Banking Regulation”─ “Loan Classification System”.

 

Definition of Default

 

A financial instrument is considered to be in default whenever payment is more than 90 days past due, or if Grupo Galicia believes that the amount due will not be repaid in full. The credit analysis for wholesale loans is not the same as for retail loans and Grupo Galicia’s definition of default with respect to wholesale portfolios is based on a credit analysis of the individual borrower. The definition of default is applied consistently to produce models for the Probability of Default, Exposure at Default and Loss Given Default in Grupo Galicia’s expected loss calculations:

 

  • Probability of Default: This is the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months or during the remaining term of the obligation.
  • Exposure at Default: This is based on the amounts Grupo Galicia expects to be owed at the time of default, either over the next 12 months or over the remaining term. For example, for a revolving commitment, Grupo Galicia includes the current draw down balance plus any further amount that it is expected to be drawn up to the current contractual limit by the time of default, should it occur.
  • Loss Given Default: This represents Grupo Galicia’s expectation of the total loss it will incur in respect of an obligation in default and varies according to the counterparty, seniority of the claim and availability of collateral or other credit support. Loss Given Default is expressed as a percentage loss per Peso of exposure at the time of default and is calculated over the term of the relevant obligation or on a 12-month basis.

A financial instrument is no longer considered to be in default when it does not meet any of the above-mentioned default criteria.

 

Methodology for Expected Credit Loss Estimation

 

ECL impairment allowances recognized in the financial statements reflect the effect of a variety of possible economic outcomes (as described below) and calculated on a probability-weighted basis. ECL measurement involves the application of judgment and estimates. It is necessary to formulate multiple forward-looking economic forecasts and incorporate them into the ECL estimates. Grupo Galicia uses a standard framework to form economic scenarios to reflect assumptions about future economic conditions, supplemented with the use of management judgment, which may result in using alternative or additional economic scenarios and/or management adjustments.

 

IFRS 9 establishes the following standards regarding ECL:

 

  • An unbiased weighted probability index, determined by the evaluation of different outcomes.
  • Time value of money.
  • Reasonable and sustainable information available at no additional cost or effort that provides evidence to support forecasts, as well as present conditions and past events.


Grupo Galicia developed a forward-looking methodology to evaluate the impact of different future macroeconomic scenarios on the credit risk of the financial assets. Grupo Galicia prepared three outcomes with varying probabilities in accordance with IFRS: (i) a median scenario with a 70% probability of occurrence, (ii) a downside scenario with a 15% probability of occurrence and (iii) an upside scenario with a 15% probability of occurrence

 

In order to account for time value of money, Grupo Galicia assumes expected losses will take place proportionally over time. The ECL is determined by determining the Probability of Default, Exposure at Default and the Loss Given Default for each future month for each collective segment. These three components are multiplied and adjusted, as applicable, to take into account any forward-looking information, thus calculating ECL for each month on a forward-looking basis, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate (or an estimate thereof).

 

Credit Risk Exposure of Financial Instruments

 

The following table sets forth the credit risk exposure of financial instruments for which an ECL allowance is recognized.

 

 

Retail Portfolio

 

 

December 31, 2019

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 


12-month

ECL

 

 

Lifetime

ECL

 

 

Lifetime

ECL

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

78,567

 

 

 

28,798

 

 

 

912

 

 

 

108,277

 

1-30

 

1,696

 

 

 

1,520

 

 

 

185

 

 

 

3,401

 

31-60

 

(134

)

 

 

1,262

 

 

 

163

 

 

 

1,291

 

61-90

 

-

 

 

 

528

 

 

 

275

 

 

 

803

 

Default

 

-

 

 

 

-

 

 

 

4,282

 

 

 

4,282

 

Gross Carrying amount

 

80,129

 

 

 

32,108

 

 

 

5,817

 

 

 

118,054

 

Loss allowance

 

4,050

 

 

 

1,877

 

 

 

4,576

 

 

 

10,503

 

Carrying amount

 

76,079

 

 

 

30,231

 

 

 

1,241

 

 

 

107,551

 

 

 

Retail like Portfolio

 

 

December 31, 2019

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

ECL

 

 

Lifetime

ECL

 

 

Lifetime

ECL

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

33,043

 

 

 

4,298

 

 

 

497

 

 

 

37,838

 

1-30

 

1,307

 

 

 

533

 

 

 

165

 

 

 

2,005

 

31-60

 

-

 

 

 

160

 

 

 

64

 

 

 

224

 

61-90

 

-

 

 

 

172

 

 

 

148

 

 

 

320

 

Default

 

-

 

 

 

-

 

 

 

2,437

 

 

 

2,437

 

Gross Carrying amount

 

34,350

 

 

 

5,163

 

 

 

3,311

 

 

 

42,824

 

Loss allowance

 

353

 

 

 

147

 

 

 

2,514

 

 

 

3,014

 

Carrying amount

 

33,997

 

 

 

5,016

 

 

 

797

 

 

 

39,810

 

 


 

Wholesale Portfolio

 

 

December 31, 2019

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

ECL

 

 

Lifetime

ECL

 

 

Lifetime

ECL

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A

 

206,109

 

 

 

5,687

 

 

 

-

 

 

 

211,796

 

B1

 

-

 

 

 

378

 

 

 

-

 

 

 

378

 

Default

 

-

 

 

 

-

 

 

 

4,876

 

 

 

4,876

 

Gross Carrying amount

 

206,109

 

 

 

6,065

 

 

 

4,876

 

 

 

217,050

 

Loss allowance

 

540

 

 

 

180

 

 

 

4,493

 

 

 

5,213

 

Carrying amount

 

205,569

 

 

 

5,885

 

 

 

383

 

 

 

211,837

 

 

 

Tarjeta Naranja

 

 

December 31, 2019

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

ECL

 

 

Lifetime

ECL

 

 

Lifetime

ECL

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

44,633

 

 

 

532

 

 

 

261

 

 

 

45,426

 

1-30

 

2,434

 

 

 

159

 

 

 

90

 

 

 

2,683

 

31-60

 

-

 

 

 

1,217

 

 

 

76

 

 

 

1,293

 

61-90

 

-

 

 

 

629

 

 

 

46

 

 

 

675

 

Default

 

-

 

 

 

-

 

 

 

5,581

 

 

 

5,581

 

Gross Carrying amount

 

47,067

 

 

 

2,537

 

 

 

6,054

 

 

 

55,658

 

Loss allowance

 

2,023

 

 

 

704

 

 

 

4,686

 

 

 

7,413

 

Carrying amount

 

45,044

 

 

 

1,833

 

 

 

1,368

 

 

 

48,245

 

 

 

Retail Portfolio

 

 

December 31, 2018

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

123,255

 

 

 

15,978

 

 

 

-

 

 

 

139,233

 

1-30

 

3,416

 

 

 

1,847

 

 

 

-

 

 

 

5,263

 

31-60

 

-

 

 

 

2,343

 

 

 

-

 

 

 

2,343

 

61-90

 

-

 

 

 

1,214

 

 

 

-

 

 

 

1,214

 

Default

 

-

 

 

 

-

 

 

 

5,201

 

 

 

5,201

 

Gross Carrying amount

 

126,671

 

 

 

21,382

 

 

 

5,201

 

 

 

153,254

 

Loss allowance

 

4,000

 

 

 

3,566

 

 

 

3,937

 

 

 

11,503

 

Carrying amount

 

122,671

 

 

 

17,816

 

 

 

1,264

 

 

 

141,751

 

 

 

Retail like Portfolio

 

 

December 31, 2018

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

��

45,032

 

 

 

4,773

 

 

 

-

 

 

 

49,805

 

1-30

 

1,334

 

 

 

704

 

 

 

-

 

 

 

2,038

 

31-60

 

-

 

 

 

517

 

 

 

-

 

 

 

517

 

61-90

 

-

 

 

 

403

 

 

 

-

 

 

 

403

 

Default

 

-

 

 

 

-

 

 

 

2,765

 

 

 

2,765

 

Gross Carrying amount

 

46,366

 

 

 

6,397

 

 

 

2,765

 

 

 

55,528

 

Loss allowance

 

411

 

 

 

431

 

 

 

1,814

 

 

 

2,656

 

Carrying amount

 

45,955

 

 

 

5,966

 

 

 

951

 

 

 

52,872

 



 

Wholesale Portfolio

 

 

December 31, 2018

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A

 

208,463

 

 

 

9,304

 

 

 

8

 

 

 

217,775

 

B1

 

(3,442

)

 

 

60

 

 

 

-

 

 

 

(3,382

)

Default

 

-

 

 

 

-

 

 

 

3,870

 

 

 

3,870

 

Gross Carrying amount

 

205,021

 

 

 

9,364

 

 

 

3,878

 

 

 

218,263

 

Loss allowance

 

809

 

 

 

119

 

 

 

1,027

 

 

 

1,955

 

Carrying amount

 

204,212

 

 

 

9,245

 

 

 

2,851

 

 

 

216,308

 

 

 

Tarjeta Naranja

 

 

December 31, 2018

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

56,167

 

 

 

4,652

 

 

 

-

 

 

 

60,819

 

1-30

 

3,956

 

 

 

1,457

 

 

 

-

 

 

 

5,413

 

31-60

 

-

 

 

 

2,618

 

 

 

-

 

 

 

2,618

 

61-90

 

-

 

 

 

1,445

 

 

 

-

 

 

 

1,445

 

Default

 

-

 

 

 

-

 

 

 

5,826

 

 

 

5,826

 

Gross Carrying amount

 

60,123

 

 

 

10,172

 

 

 

5,826

 

 

 

76,121

 

Loss allowance

 

2,117

 

 

 

2,835

 

 

 

3,212

 

 

 

8,164

 

Carrying amount

 

58,006

 

 

 

7,337

 

 

 

2,614

 

 

 

67,957

 

 

 

Retail Portfolio

 

 

December 31, 2017

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

139,594

 

 

 

17,703

 

 

 

-

 

 

 

157,297

 

1-30

 

3,486

 

 

 

1,793

 

 

 

-

 

 

 

5,279

 

31-60

 

-

 

 

 

1,750

 

 

 

-

 

 

 

1,750

 

61-90

 

-

 

 

 

754

 

 

 

-

 

 

 

754

 

Default

 

-

 

 

 

-

 

 

 

4,009

 

 

 

4,009

 

Gross Carrying amount

 

143,080

 

 

 

22,000

 

 

 

4,009

 

 

 

169,089

 

Loss allowance

 

1,682

 

 

 

1,411

 

 

 

2,579

 

 

 

5,672

 

Carrying amount

 

141,398

 

 

 

20,589

 

 

 

1,430

 

 

 

163,417

 

 

 

Retail like Portfolio

 

 

December 31, 2017

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

42,502

 

 

 

4,569

 

 

 

-

 

 

 

47,071

 

1-30

 

606

 

 

 

488

 

 

 

-

 

 

 

1,094

 

31-60

 

-

 

 

 

210

 

 

 

-

 

 

 

210

 

61-90

 

-

 

 

 

151

 

 

 

-

 

 

 

151

 

Default

 

-

 

 

 

-

 

 

 

1,234

 

 

 

1,234

 

Gross Carrying amount

 

43,108

 

 

 

5,418

 

 

 

1,234

 

 

 

49,760

 

Loss allowance

 

341

 

 

 

195

 

 

 

949

 

 

 

1,485

 

Carrying amount

 

42,767

 

 

 

5,223

 

 

 

285

 

 

 

48,275

 

 


 

Wholesale Portfolio

 

 

December 31, 2017

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A

 

188,139

 

 

 

12,519

 

 

 

2

 

 

 

200,660

 

B1

 

-

 

 

 

119

 

 

 

-

 

 

 

119

 

Default

 

-

 

 

 

-

 

 

 

1,243

 

 

 

1,243

 

Gross Carrying amount

 

188,139

 

 

 

12,638

 

 

 

1,245

 

 

 

202,022

 

Loss allowance

 

326

 

 

 

69

 

 

 

759

 

 

 

1,154

 

Carrying amount

 

187,813

 

 

 

12,569

 

 

 

486

 

 

 

200,868

 

 

 

Tarjeta Naranja

 

 

December 31, 2017

 

 

ECL Staging

 

 

 

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Total

 

Days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

60,347

 

 

 

6,408

 

 

 

-

 

 

 

66,755

 

1-30

 

2,786

 

 

 

2,429

 

 

 

-

 

 

 

5,215

 

31-60

 

-

 

 

 

1,736

 

 

 

-

 

 

 

1,736

 

61-90

 

-

 

 

 

811

 

 

 

-

 

 

 

811

 

Default

 

-

 

 

 

-

 

 

 

4,515

 

 

 

4,515

 

Gross Carrying amount

 

63,133

 

 

 

11,384

 

 

 

4,515

 

 

 

79,032

 

Loss allowance

 

1,391

 

 

 

1,954

 

 

 

2,620

 

 

 

5,965

 

Carrying amount

 

61,742

 

 

 

9,430

 

 

 

1,895

 

 

 

73,067

 

 

Under Argentine Central Bank rules, we are required to cease the accrual of interest or to establish provisions equal to 100% of the interest earned on all loans pertaining to the non-accrual loan portfolio, meaning, all loans to borrowers in Stage 3.

 

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:

 

 

December 31,

 

 


2019

 

 

2018

 

 

2017

 

 

(in millions of Pesos)

 

Interest Income that Would Have Been Recorded on Non-Accrual Loans on which the Accrual of Interest was Discontinued

 

4,036

 

 

 

1,248

 

 

 

411

 

Recoveries of Interest on Loans Classified as Non-Accrual on which the Accrual of Interest had been Discontinued (1)

 

202

 

 

 

63

 

 

20

 

(1) Recorded under “Other operating income”.

 

The table below sets forth such information for the fiscal years ended December 31, 2016 and 2015, which is not adjusted for inflation and, was prepared in accordance with Argentine Banking GAAP.



 

 

As of December 31,

 

 

 

2016

 

 

2015

 

 

 

(in millions of Pesos, except ratios)

 

Total Loans (1)

 

142,158

 

 

 

101,902

 

Non-Accrual Loans (2)

 

 

 

 

 

 

 

With Preferred Guarantees

 

96

 

 

106

 

With Other Guarantees

 

88

 

 

103

 

Without Guarantees

 

4,520

 

 

 

2,958

 

Total Non-Accrual Loans (2)

 

4,704

 

 

 

3,167

 

Past Due Loan Portfolio

 

 

 

 

 

 

 

Non-Financial Public Sector

 

-

 

 

-

 

Local Financial Sector

 

-

 

 

-

 

Non-Financial Private Sector and Residents Abroad

 

 

 

 

 

 

 

Advances

 

189

 

 

188

 

Promissory Notes

 

144

 

 

192

 

Mortgage Loans

 

79

 

 

45

 

Pledge Loans

 

3

 

 

8

 

Personal Loans

 

274

 

 

304

 

Credit-Card Loans

 

2,673

 

 

 

1,693

 

Other Loans

 

93

 

 

74

 

Total Past Due Loans

 

3,455

 

 

 

2,504

 

Past Due Loans

 

 

 

 

 

 

 

With Preferred Guarantees

 

60

 

 

59

 

With Other Guarantees

 

60

 

 

97

 

Without Guarantees

 

3,335

 

 

 

2,348

 

Total Past Due Loans

 

3,455

 

 

 

2,504

 

Allowance for Loan Losses

 

4,707

 

 

3,560

 

Ratios (%)

 

 

 

 

 

 

 

As a % of Total Loans:

 

 

 

 

 

 

 

Total Past Due Loans

 

2.43

 

 

2.46

 

Past Due Loans with Preferred Guarantees

 

0.04

 

 

0.06

 

Past Due Loans with Other Guarantees

 

0.04

 

 

0.10

 

Past Due Unsecured Amounts

 

2.35

 

 

2.30

 

Non-Accrual Loans (2)

 

3.31

 

 

3.11

 

Non-Accrual Loans (2) (Excluding Interbank Loans)

 

3.36

 

 

3.12

 

Non-Accrual Loans (2) as a Percentage of Loans to the Private Sector

 

3.31

 

 

3.11

 

Allowance for Loan Losses as a % of:

 

 

 

 

 

 

 

Total Loans

 

3.31

 

 

3.49

 

Total Loans Excluding Interbank Loans

 

3.36

 

 

3.50

 

Total Non-Accrual Loans (2)

 

100.06

 

 

112.41

 

Non-Accrual Loans with Guarantees as a Percentage of Non-Accrual Loans (2)

 

3.91

 

 

 

6.60

 

Non-Accrual Loans as a Percentage of Total Past Due Loans

 

136.15

 

 

126.48

 

(1) Before the allowance for loan losses.

(2) Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk”, “High Risk”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”, and (b) Commercial portfolio: “With problems”, “High Risk of Insolvency”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”.

 

 

As of December 31,

 


2016

 

 

2015

 

 

(in millions of Pesos)

Interest Income that Would Have Been Recorded on Non-Accrual Loans on which the Accrual of Interest was Discontinued

 

173

 

 

 

159

 

Recoveries of Interest on Loans Classified as Non-Accrual on which the Accrual of Interest had been Discontinued (1)

 

9

 

 

 

8

 

(1) Recorded under “Miscellaneous Income”.


69

Loss Experience

 

The following tables present the changes in the loss allowance between December 31, 2018 and December 31, 2019, the changes in the loss allowance between December 31, 2017 and December 31, 2018, and the changes in the loss allowance between January 1, 2017 and December 31, 2017.

 

 

 

Stage 1

 

 

Stage 2

 

 

Stage 3

 

 

 

 

 

 

 

 

 

 

 

12-month

 

 

Lifetime

 

 

Lifetime

 

 

Purchased

credit-

impaired

 

 

Total

 

Loss Allowance as of December 31, 2018

 

7,336

 

 

 

6,952

 

 

 

9,990

 

 

 

-

 

 

 

24,278

 

Inflation effect

 

(2,568

)

 

 

(2,432

)

 

 

(3,496

)

 

 

-

 

 

 

(8,496

)

Movements with P&L Impact

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 1 to Stage 2

 

(646

)

 

 

646

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 1 to Stage 3

 

(165

)

 

 

-

 

 

 

165

 

 

 

-

 

 

 

-

 

Transfer from Stage 2 to Stage 1

 

1,223

 

 

 

(1,223

)

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 2 to Stage 3

 

 

-

 

 

 

(1,045

)

 

 

1,045

 

 

 

-

 

 

 

-

 

Transfer from Stage 3 to Stage 2

 

 

-

 

 

 

88

 

 

 

(88

)

 

 

-

 

 

 

-

 

Transfer from Stage 3 to Stage 1

 

 

32

 

 

 

-

 

 

 

(32

)

 

 

-

 

 

 

-

 

New Financial Assets Originated or Purchased

 

1,701

 

 

 

1,629

 

 

 

7,624

 

 

 

-

 

 

 

10,954

 

Changes in PDs/LGDs/EADs

 

2,424

 

 

 

552

 

 

 

6,982

 

 

 

-

 

 

 

9,958

 

Changes to model assumptions and methodologies

 

(507

)

 

 

151

 

 

 

1,592

 

 

 

-

 

 

 

1,236

 

Modification of contractual cash flows of financial assets

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Foreign exchange and other movements

 

237

 

 

 

(220

)

 

 

39

 

 

 

-

 

 

 

56

 

Other movements with no P&L impact

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfers:

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 1 to Stage 2

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 2 to Stage 3

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfer from Stage 3 to Stage 1

 

-

 

 

 

-

 

 

 

-

 <