AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 202023, 2021
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 |
[ ] 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
☒ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2019 or2020
[ ] 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
☐ | 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,Bruno Folino, Chief ExecutiveFinancial Officer
Tel: 54 11 4 343 7528 / Fax: 54 11 4 331 9183, prichards@gfgsa.combfolino@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)
Securitiesregisteredor toberegisteredpursuanttoSection12(b) of theAct.
Title | Trading Symbol(s) |
| Name of each exchange |
| |
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 |
| |
Class B Ordinary Shares, Ps.1.00 par value |
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [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 | ☒ | 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. [ ]☐
† |
|
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the Financial Accounting Standards Board toregistered public accounting firm that prepared or issued its Accounting Standards Codification after April 5, 2012.
audit report. ☒
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 | Other ☐ | ||||||
As issued by the International Accounting Standards Board |
|
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 [ ]
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]☒
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Item 1. Identity of Directors, Senior Management and Advisers | 6 | |||
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Item 11. Quantitative and Qualitative Disclosures About Market Risk | 189 | |||
Item 12. Description of Securities Other Than Equity Securities | 196 | |||
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Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds | 198 | |||
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Item 16D. Exemptions from the Listing Standards for Audit Committees | 200 | |||
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 200 | |||
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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”“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.Inviu S.A.U. (“Tarjetas del Mar”) until March 31, 2017 (effective April 1, 2017 Tarjetas del Mar was sold), (iii)Inviu” formerly known as Galicia Valores S.A.U. (“Galicia Valores”) until August 31, 2019 (effective September 1, 2019, Galicia ValoresInviu was sold to Grupo Financiero Galicia and transferred to IGAM LLC), (iv) Fideicomiso Financiero Galtrust I until December 31, 2017 and (v)(iii) 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”);
Galicia Administradora de Fondos S.A. (“Galicia Administradora de Fondos” or “Fima”); and
IGAM LLC (“IGAM”) and its subsidiaries.subsidiaries; and
Galicia Securities S.A. (“Galicia Securities”).
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, 2020, 2019 2018 and 20172018 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, 20192020 and 20182019 and for the years ended December 31, 2020, 2019 2018 and 20172018 are reflected in terms of current purchasing power using the Consumer Price Index (“CPI”) as of December 31, 2019.
2020.
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 (commonly referred to as “BCRA” based on its Spanish acronym) and that was Ps.84.1450, Ps.59.8950 Ps.37.8083 and Ps.18.7742Ps.37.8083 per US$1.00 as of December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, 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,BCRA, 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.
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 (“Government”) and its ability (or inability) to reach to an agreement to restructure or rollover its outstanding debt that is held by international credit entities and private sector bondholders;
changes in Argentine governmentGovernment 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.
Not applicable.
Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
Item 3. | Key Information |
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 regarding statement of financial position as of December 31, 2020 and December 31, 2019, and the financial information regarding the statement of income for the fiscal years ended December 31, 2020, 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.report.
The selected consolidated financial information regarding statement of financial position as of December 31, 2018, as of December 31, 2017 and as of December 31, 2016 and the financial information regarding the statement of income for the fiscal years ended December 31, 2017 and December 31, 2016 has been derived from our audited consolidated financial statements not included in this annual report.
You should read this data in conjunction with Item 5. “Operating and Financial Review and Prospects” and our audited consolidated financial statements included in this annual report.
The tables included below have been prepared in accordance with IFRS.
Year Ended December 31, | ||||||||||||||||
2020 | 2019 | 2018 | 2017 | |||||||||||||
(in millions of Pesos, except as noted) | ||||||||||||||||
Consolidated Statement of Income in Accordance with IFRS | ||||||||||||||||
Net Income from Interest | 76,632 | 47,417 | 69,873 | 62,565 | ||||||||||||
Net Fee Income | 36,558 | 38,233 | 44,756 | 44,332 | ||||||||||||
Net Income from Financial Instruments | 69,332 | 99,151 | 36,342 | 17,720 | ||||||||||||
Loan and Other Receivables Loss Provisions | (34,680 | ) | (30,228 | ) | (34,136 | ) | (15,275 | ) | ||||||||
Net Operating Income | 182,711 | 200,475 | 153,081 | 144,459 | ||||||||||||
Loss on Net Monetary Position | (36,963 | ) | (41,929 | ) | (37,831 | ) | (14,290 | ) | ||||||||
Operating Income | 43,503 | 50,178 | 7,067 | 30,571 | ||||||||||||
Income Tax from Continuing Operations | (17,845 | ) | (17,751 | ) | (14,477 | ) | (15,328 | ) | ||||||||
Income (Loss) for the Year Attributable to GFG | 25,192 | 32,276 | (7,258 | ) | 14,228 | |||||||||||
Other Comprehensive Income | (210 | ) | 548 | (183 | ) | (911 | ) | |||||||||
Total Comprehensive Income (Loss) Attributable to GFG | 24,982 | 32,824 | (7,442 | ) | 13,317 | |||||||||||
Ordinary Shares Outstanding for the year | 1,443 | 1,427 | 1,427 | 1,427 | ||||||||||||
Basic Earnings per Share (in Pesos) | 17.46 | 22.62 | (5.09 | ) | 9.97 | |||||||||||
Diluted Earnings per Share (in Pesos) | 17.46 | 22.62 | (5.09 | ) | 9.97 | |||||||||||
Cash Dividends per Share (in Pesos) | (1 | ) | 1.33 | 2.54 | 2.37 | |||||||||||
Book Value per Share (*) (in Pesos) | 126.36 | 108.70 | 88.24 | 94.70 |
(1) | The cash dividend distribution for the fiscal year ended at December 31, 2020, is pending approval. For more information see Item 8. “Financial |
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in millions of Pesos, except as noted) | ||||||||||||
Consolidated Statement of Income in Accordance with IFRS |
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Net Income from Interest |
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| 34,830 |
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| 51,324 |
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| 45,956 |
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Net Fee Income |
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| 28,083 |
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| 32,875 |
|
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| 32,563 |
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Net Income from Financial Instruments |
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| 72,830 |
|
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| 26,694 |
|
|
| 13,016 |
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Loan and Other Receivables Loss Provisions |
|
| (22,203 | ) |
|
| (25,074 | ) |
|
| (11,220 | ) |
Net Operating Income |
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| 147,256 |
|
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| 112,443 |
|
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| 106,110 |
|
Loss on Net Monetary Position |
|
| (30,798 | ) |
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| (27,788 | ) |
|
| (10,496 | ) |
Operating Income |
|
| 36,858 |
|
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| 5,191 |
|
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| 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 |
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|
| 1,427 |
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|
| 1,427 |
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Basic Earnings per Share (in Pesos) |
|
| 16.62 |
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| (3.74 | ) |
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| 7.32 |
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Diluted Earnings per Share (in Pesos) |
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| 16.62 |
|
|
| (3.74 | ) |
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| 7.32 |
|
Cash Dividends per Share (in Pesos) |
| (1) |
|
|
| 1.86 |
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|
| 1.74 |
| |
Book Value per Share (*) (in Pesos) |
|
| 79.85 |
|
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| 64.82 |
|
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| 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´
(2) | Total Shareholders’ Equity attributable to GFG divided Ordinary Shares Outstanding for the year. |
|
| For the Year Ended December 31, |
| For the Year Ended December 31, | ||||||||||||||||||||||||
|
| 2019 |
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| 2018 |
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| 2017 |
| 2020 | 2019 | 2018 | 2017 | |||||||||||||||
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| (in millions of Pesos, except as noted) |
| (in millions of Pesos, except as noted) | ||||||||||||||||||||||||
Consolidated Statement of Financial Position in Accordance with IFRS |
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Cash and Due from Banks |
| 130,649 |
|
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| 220,456 |
|
|
| 133,903 |
| 175,423 | 177,866 | 300,131 | 182,297 | |||||||||||||
Debt Securities at Fair Value Through Profit or Loss |
| 65,690 |
|
|
| 116,813 |
|
|
| 65,760 |
| 155,420 | 89,431 | 159,030 | 89,526 | |||||||||||||
Loans and Other Financing |
| 358,559 |
|
|
| 434,900 |
|
|
| 437,430 |
| 526,434 | 488,144 | 592,075 | 595,519 | |||||||||||||
Total Assets |
|
| 685,519 |
|
|
| 876,371 |
|
|
| 753,227 |
| 1,055,279 | 933,270 | 1,193,096 | 1,025,447 | ||||||||||||
Deposits |
| 393,735 |
|
|
| 553,946 |
|
|
| 455,909 |
| 676,396 | 536,034 | 754,146 | 620,677 | |||||||||||||
Other Liabilities |
| 174,949 |
|
|
| 227,283 |
|
|
| 193,514 |
| 97,472 | 97,153 | 132,432 | 263,451 | |||||||||||||
Shareholders’ Equity attributable to GFG |
| 113,942 |
|
|
| 92,492 |
|
|
| 99,260 |
| 182,334 | 155,121 | 125,919 | 135,133 | |||||||||||||
Percentage of Period-end Balance Sheet Items Denominated in Dollars: |
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| ||||||||||||||||
Loans and Other Financing |
| 39 | % |
|
| 35 | % |
|
| 21 | % | 18 | % | 23 | % | 35 | % | 21 | % | |||||||||
Total Assets |
| 45 | % |
|
| 39 | % |
|
| 26 | % | 20 | % | 25 | % | 39 | % | 26 | % | |||||||||
Deposits |
| 52 | % |
|
| 45 | % |
|
| 35 | % | 22 | % | 26 | % | 45 | % | 35 | % | |||||||||
Total Liabilities |
| 49 | % |
|
| 34 | % |
|
| 30 | % | 9 | % | 22 | % | 34 | % | 30 | % |
For the Year Ended December 31, | ||||||||||||||||
2020 | 2019 | 2018 | 2017 | |||||||||||||
Selected Ratios (*) | ||||||||||||||||
Profitability and Efficiency | ||||||||||||||||
Net Yield on Interest Earning Assets (1) | 19.80 | % | 16.84 | % | 13.33 | % | 10.71 | % | ||||||||
Financial Margin (2) | 14.68 | % | 11.87 | % | 8.43 | % | 11.48 | % | ||||||||
Return on Assets (3) | 2.39 | % | 3.46 | % | (0.61 | )% | 1.39 | % | ||||||||
Return on Shareholders’ Equity (4) | 13.82 | % | 20.81 | % | (5.76 | )% | 10.53 | % | ||||||||
Efficiency ratio (5) | 47.39 | % | 50.55 | % | 63.99 | % | 63.62 | % | ||||||||
Capital | ||||||||||||||||
Shareholders’ Equity as a Percentage of Total Assets | 17.28 | % | 16.62 | % | 10.55 | % | 13.18 | % | ||||||||
Total Liabilities as a Multiple of Shareholders’ Equity | 4.79 | x | 4.99 | x | 8.45 | x | 6.54 | x | ||||||||
Total Capital Ratio | 22.16 | % | 17.53 | % | 15.11 | % | 10.69 | % | ||||||||
Liquidity | ||||||||||||||||
Cash and Due from Banks as a Percentage of Total Deposits | 25.93 | % | 33.18 | % | 39.80 | % | 29.37 | % | ||||||||
Loans and other financing, Net as a Percentage of Total Assets | 49.89 | % | 52.30 | % | 49.63 | % | 58.07 | % | ||||||||
Credit Quality | ||||||||||||||||
Non-Accrual Instruments (6) as a Percentage of Total Financial Instruments Portfolio | 1.43 | % | 3.96 | % | 3.51 | % | 2.20 | % | ||||||||
Allowance for Financial Instruments as a Percentage of Non-accrual Financial Instruments (6) | 392.36 | % | 152.21 | % | 137.46 | % | 129.77 | % | ||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 5.19 | % | 5.12 | % | 4.98 | % | 2.24 | % | ||||||||
Inflation and Exchange Rate | ||||||||||||||||
Wholesale Price Index | 35.38 | % | 58.49 | % | 73.50 | % | 18.80 | % | ||||||||
Consumer Price Index | 36.14 | % | 53.83 | % | 47.65 | % | 24.80 | % | ||||||||
Exchange Rate Variation (7) | 40.49 | % | 58.42 | % | 101.38 | % | 18.42 | % | ||||||||
CER (8) | 25.49 | 18.70 | 12.34 | 8.38 | ||||||||||||
UVA (9) | 64.32 | 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. |
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| For the Year Ended December 31, |
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| 2019 |
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| 2018 |
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| 2017 |
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Selected Ratios (*) |
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Profitability and Efficiency |
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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.
(1) | Net interest earned divided by interest-earning assets. For a description of net interest earned, see Item 4. “Information on the |
(2) | Financial margin represents net interest income plus net result from financial instruments plus income from derecognition of assets measured at amortized cost plus foreign currency quotation differences 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 income from derecognition of assets measured at amortized cost plus foreign currency quotation differences plus income from insurance business 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 default. For a definition and description of default, see Item 4. “Information on the Company”-A.“Business Overview”-“Selected Statistical Information”-“Financial Instruments Classification and Loss Provisions”- “Definition of Default”. |
(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 reflectingreflect Grupo Galicia’s financial results for the fiscal yearsyear ended December 31, 2016, and 2015, arewere 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 |
|
Fiscal Year Ended December 31, | ||||
2016 | ||||
(in millions of Pesos, except as noted) | ||||
Consolidated Income Statement in Accordance with Argentine Banking GAAP | ||||
Financial Income | 36,608 | |||
Financial Expenses | 20,239 | |||
Gross Brokerage Margin (1) | 16,369 | |||
Provision for Losses on Loans and Other Receivables | 3,533 | |||
Income before Taxes | 9,371 | |||
Income Tax | (3,353 | ) | ||
Net Income | 6,018 | |||
Basic Earnings per Share (in Pesos) | 4.63 | |||
Diluted Earnings per Share (in Pesos) | 4.63 | |||
Cash Dividends per Share (in Pesos) | 0.18 | |||
Book Value per Share (in Pesos) | 15.66 | |||
Amounts in Accordance with U.S. GAAP | ||||
Net Income | 6,037 | |||
Basic and Diluted Earnings per Share (in Pesos) | 4.64 | |||
Book Value per Share (in Pesos) | 15.45 | |||
Financial Income | 34,549 | |||
Financial Expenses | 19,410 | |||
Gross Brokerage Margin | 15,139 | |||
Provision for Losses on Loans and Other Receivables | 3,192 | |||
Income Tax | 3,195 | |||
Consolidated Balance Sheet in Accordance with Argentine Banking GAAP | ||||
Cash and Due from Banks | 61,166 | |||
Government Securities, Net | 13,701 | |||
Loans, Net | 137,452 | |||
Total Assets | 242,251 | |||
Deposits | 151,688 | |||
Other Funds (2) | 70,210 | |||
Total Shareholders’ Equity | 20,353 | |||
Average Total Assets (3) | 184,395 | |||
Percentage of Period-end Balance Sheet Items | ||||
Denominated in Dollars: | ||||
Loans, Net of Allowances | 12.77 | |||
Total Assets | 27.56 | |||
Deposits | 33.63 | |||
Total Liabilities | 30.82 | |||
Amounts in Accordance with U.S. GAAP | ||||
Trading Securities | 17,196 | |||
Available-for-Sale Securities | 5,423 | |||
Total Assets | 260,403 | |||
Total Liabilities | 240,316 | |||
Shareholders’ Equity | 20,087 |
(1)
(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. |
(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 | ||||
Selected Ratios in Accordance with Argentine Banking GAAP | ||||
Profitability and Efficiency | ||||
Net Yield on Interest Earning Assets (4) | 13.26 | % | ||
Financial Margin (5) | 12.10 | |||
Return on Average Assets (6) | 3.48 | |||
Return on Average Shareholders’ Equity (7) | 35.03 | |||
Net Income from Services as a Percentage of Operating Income (9) | 39.63 | |||
Efficiency ratio (9) | 64.98 | |||
Capital | ||||
Shareholders’ Equity as a Percentage of Total Assets | 8.40 | % | ||
Total Liabilities as a Multiple of Shareholders’ Equity | 10.9x | |||
Total Capital Ratio | 15.04 | % | ||
Liquidity | ||||
Cash and Due from Banks(10) as a Percentage of Total Deposits | 47.18 | % | ||
Loans, Net as a Percentage of Total Assets | 56.74 | |||
Credit Quality | ||||
Past Due Loans (11) as a Percentage of Total Loans | 2.43 | % | ||
Non-Accrual Loans (12) as a Percentage of Total Loans | 3.31 | |||
Allowance for Loan Losses as a Percentage of | 100.06 | |||
Net Charge-Offs (13) as a Percentage of Average Loans | 1.67 | |||
Ratios in Accordance with U.S. GAAP | ||||
Capital | ||||
Shareholders’ Equity as a Percentage of Total Assets | 7.71 | |||
Total Liabilities as a Multiple of Total Shareholders’ Equity | 11.96x | |||
Liquidity | ||||
Loans, Net as a Percentage of Total Assets | 52.76 | % | ||
Credit Quality | ||||
Allowance for Loan Losses as a Percentage of Non-Accrual Loans | 128.53 | |||
Inflation and Exchange Rate | ||||
Wholesale Inflation (14) | 34.59 | % | ||
Consumer Inflation (15) | 41.05 | % | ||
Exchange Rate Variation (16) (%) | 21.88 | |||
CER (17) | 35.79 | |||
UVA (18) | 17.26 |
|
| 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.
(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 BCRA, 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.
Not applicable.
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,Government, may adversely affect our business and prospects.
Grupo Financiero 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.
Argentina.
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 currency devaluation. Grupo Financiero Galicia’s results of operations, the rights of holders of securities issued by Grupo Financiero Galicia and the value of such securities could be materially and adversely affected by a number of possible factors, somefactors. Some of whichthese factors include Argentina’s inability to resumeachieve a sustainable economic growth path, the effects ofhigh inflation rates, 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(which affects local commercial competitiveness) 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. InDuring the past decade the economy has been characterized byArgentina experienced economic stagnation as a result of unstable monetary, fiscal and economic regulatory policies. This, combined with a lack of institutional transparency,, the absence of long-term economic policies and a systematically expansive fiscal policy, which resulted in a led to increasing inflation rates, lack of economic growth, currency instability and low investment and a lax monetary policy. This has,levels, among others. As there will be Congressional elections in turn, led to low economic growth and high inflation. At the end of 2015, when the former government took office, it implemented monetary2021, additional risks may arise if new 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 measuresare implemented by the previous Administration in ordernewly elected Congress that further exacerbate the existing macroeconomic imbalances. In addition to cope with the situation -such as a devaluation of the Peso with respect to the Dollar- as wellsuch possible new Congressional policies, no assurance can be provided regarding other events, such as the impactenactment of any measuresother governmental policies, that the current Government may implementoccur in the future is unknown and could have a materialtheir impact on the Argentina economy and adverse impact on the results of Grupo Financiero 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,current state of the Argentine economy as described above and herein and the uncertainty regarding the Government and policies it may enact, the financial position and results of operations of private sector companies in Argentina, including Grupo Financiero 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 Financiero Galicia’s business and financial condition.
AEconomic conditions in Argentina may deteriorate. In particular, a less favorable international context,economic environment, 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 highertogether with high inflation rate,rates, 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 Financiero Galicia’s business and financial condition.
In particular, the Argentine economy has proven to be and continues to be vulnerable to several factors, including:
economic growth rate of the economy;
high inflation rates;
regulatory uncertainty for certain economic activities and sectors;
volatility 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;
external financial costs for Argentina;
fluctuations in the Argentine Central Bank’sBCRA’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 Financiero 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 administrationGovernment 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 Fernándezcurrent administration may implement in the future and what the effects of the same may be on the Argentine economy.economy.
Since taking office, the Fernández administration has announced and implemented several significant economic measures. In particular,measures and policy reforms, the impact of which are uncertain at this time. For example, on December 20, 2019, the Argentine National Congress passed Law No. 27,541, aimed at Social Solidarity and Productive Reactivation. Such lawwhich declared a public emergency in economic, financial, fiscal, administrative, pension, energy, health and social matters.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 charges its customers through a renegotiation of the current comprehensive tariff regime and restructure the regulatory entities for the energy system. In addition,Throughout 2020, other important Laws were passed, such as Law 27,609, in which the Fernández administration is beginningpension-adjustment formula was modified, and Law 27,605, that imposed a debt restructuring process. The one-offFX market restrictions imposed by tax on high net worth individuals.
Further, beyond the Fernández administration,above noted reforms and policies, foreign exchange market (the “FX market”) restrictions, in combination with a relatively moderateloose monetary and fiscal policy
In particular, economic interventioninterventionist measures adopted by current measuresthe Government or future measures implemented may be disruptive to the economy and may fail to benefit, or may harm, our business. In particular, Grupo Financiero 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 Financiero Galicia’s business, financial position and results of operations and the trading price for its ADSs.
If the high levels of inflation continue or if inflation figures are not trusted, the Argentine economy and Grupo Financiero Galicia’s financial position and business could be adversely affected.
Since 2007, the Argentine economyArgentina has experienced high levels of inflation.inflation. According to private estimates, since 2007: inflation in Argentina has been systematically above 20% and reachedsince 2007, reaching a maximum of 53.8 % in 2019. Accumulated inflation during 2020 was 36.1%. Moreover, between 2007 and 2015 official figures became unreliable and private estimates of inflation had to bewere more frequently 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 wascontrolled 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, the national statistics agency INDEC (Índice(Instituto Nacional de Estadísticasstica y CensosCensos; “INDEC” for its acronym in Spanish), is the only institution in Argentina with legal power to produce official national statistics.statistics. During suchthe referenced time period, INDEC, went through a process of major institutional and methodological reforms that led to controversiesconcerns related to the reliability of the information it produces.produced by INDEC. In the month of January 2016, the Government of Mauricio Macri declared an administrative emergency regarding the national statistical system was declared and INDEC that lasted, until December 31, 2016. During such emergency time, period INDEC stopped publishing certain statistical data until it had completed a complete reorganization of its technical and administrative structure was undertaken in order to recoverreestablish its ability to produce relevant, sufficient and sufficienttrustworthy 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.out. Any such future manipulation could affect the Argentine economy in general and the financial sector in particular.
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In addition to concerns related to the trustworthiness of inflation figures, in the past, inflation has materially undermined the Argentine economy and the Argentine government’sGovernment’s ability to generate conditions that fostered economic growth. In addition,particular, high inflation rates 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.
ACombined with high inflation rates, Argentina has also displayed high volatility in its currency, as a consequence of local imbalances and external shocks. Both high inflation rates and high levels of volatility in the inflation rate also affectsaffect 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, allpower. All of whichthe above could materially and adversely affect Grupo Financiero 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 Financiero 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 thea payment owed to similarly situated 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 haswas not been able to access the international capital markets, resulting in the Argentine government requesting a loan from the IMF (pursuant(pursuant to a Stand-By Agreement for a total of US$57 billion).
In 2019, Argentina’s bonds plummeted and the short term,country risk soared after the Primary Presidential Elections that took place on August 11, in which the Fernandez-Fernandez platform won by a landslide, making the country unable to refinance its existing debt with the private sector. As a result, the Macri administration decided to unilaterally restructure the maturity dates on short-term debt issued by the Argentine Government and denominated both in Argentine pesos and in Dollars. When President Fernandez took office, his administration commenced debt-restructuring negotiations for debt held by the Government that was held by foreign creditors. This restructuring was completed in September 2020. Argentina mustis also seeking to restructure its debtIMF loan in 2021, as principal payments from the 2018’s Stand-By Agreement begin to fall due in October 2021. A new agreement with its current bondholders and the IMF which may require a commitment to implement restrictive monetaryreforms and fiscal policies,changes to economic policy, which could have a significant adverse effect on Argentina’s economy and on Argentine companies orincluding Grupo Financiero 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, Argentinathe country may default on such debt. Any such default on the IMF debt or other current outstanding debt would likely inhibit or prevent access by the Government and would likely again lose accessArgentine companies to the international financial markets. and may also compromise the ability of such entities to obtain bilateral financing. This would also have an adverse effect on the Argentine economy, including Grupo Financiero Galicia,., and would likely cause a negative impact the ability of companies, including Grupo Financiero Galicia, to obtain foreign financing.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 Financiero 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)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.Dollars.
In order to counterbalance and diversify its reliance on the above noted agricultural commodities as well as to add an additionalanother source of revenue, Argentina has been focused on increasing its oil and gas exports. ANevertheless, 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.
AAdditionally, a significant increase in the real appreciation of the Peso could affect Argentina’s competitiveness, substantially affecting exports, and this in turn could promptprompting new recessionary pressures on Argentina’s economy and a new imbalance in the foreign exchange market, which could exacerbateexacerbating exchange rate volatility. Given the strong reliance on revenues from taxes on exports, aA significant appreciation of the real exchange rate could substantially reduceadversely affect the Argentine public sector’s tax revenues in real terms.terms, since around 7% of the country’s total revenues depend on export taxes. The occurrence of the foregoing could exacerbateintensify the existing inflationary environment and potentially materially and adversely affect the Argentine economy, as well as Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 facedmonetary and fiscal policies implemented by the European Union’s countries, resulting from a combination of factorsworld’s leading economies, 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 withUS, China and the European Union even thoughhave an affect on the U.S.Argentine economy displayed strong fundamentals—record-high employmentthrough interest rates, commodity prices and economic growth rates. The COVID-19 pandemic has had a negative effect on economic growth worldwide, negatively impacting Argentine exports due to a contraction of foreign demand for the same. Current lower interest rates in leading economies favor emerging markets such as Argentina; however, high levels a strong economy and low inflationof overall economic uncertainty may result in factors that offset any positive impact from such lower interest 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
The economic consequences from the COVID-19 pandemic.
activity of Brazil, one of Argentina’s main trade partner,partners, also 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 negativean impact on Argentina’s economy. A depreciation of the Brazilian Real against the Dollar has in the past and would again in the future put additional pressure on the exchange rate for the Argentine Peso against the Dollar. Likewise, a weak economic performance from Brazil would affect Argentine exports, particularly in the case of industrial goods, many of which Argentina exports to Brazil.
Adverse climate conditions and onevents may also affect Argentina’s economy, either by negatively impacting the overall level of economiclocal harvest 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,thus reducing export volumes or by impacting other competing countries and affecting international commodities’ prices, which is the main importer ofdetermine 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.
agricultural exports’ value.
The international financial environment may also result in a devaluation of regional currencies and exchange rates, including the Peso, which would likely also cause economic volatility in Argentina. A new global economic and/or financial crisis or the effects of deterioration in the current international context, could negatively affect the Argentine economy and, consequently, Grupo Financiero Galicia’s results of operations, financial conditionconditions and the trading price for its ADSs.
A potential additional devaluation of the Peso may hinder or potentially prevent Grupo Financiero 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, 36.9% in 2019 and 36.9% 28.8% in 2019 2020, according to the official quotation of the Central Bank.BCRA. 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 Financiero Galicia’s and Banco Galicia’s businesses, which could affect Grupo Financiero 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 Financiero Galicia’s ADSs.
Additionally, the Central BankBCRA may intervene in the foreign exchange market to influence exchange rates. Purchases of Pesos by the Central BankBCRA could result in a decrease of its international reserves. A significant decrease in the Central Bank’sBCRA’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 Financiero 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"“A” 6854 and 6856 of the Central Bank.BCRA. These controls include the need to obtain authorization from the Central BankBCRA 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 BankBCRA to exercise control over the Peso and therefore to prevent the Argentine currency from depreciating.
Throughout 2020, the capital controls initially imposed in 2019 were bolstered. Additionally, restrictions limited personal and corporate access to foreign currencies in the official market. Despite the imposition of such controls, the BCRA continued to lose monetary reserves throughout most of 2020, ending 2020 with a US$5.37 billion contraction in international reserves. A depreciation of the Peso could adversely affect the Argentine economy and Grupo Financiero Galicia’sGalicia’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 Financiero Galicia’s subsidiaries servicing their foreign currency-denominated, which could increase Grupo Financiero Galicia’s costs and therefore have a material adverse effect on Grupo Financiero 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 Financiero 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. Moreover, as of September 15, 2020, a 35% tax has been imposed on foreign currency that is purchased in order to be saved and on credit card expenses incurred in a foreign currency. This tax is structured to be a credit in advance for income and property taxes be paid.
The impact that these measures or potential future measures will have on the Argentine economy and Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero Galicia’s results of operations.
Historically, the Argentine government has played an active role in the electric power sector through the ownershipholding 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 governmentGovernment adopted Law No.25,561 and other regulations which made a number ofseveral 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 revocationreversal 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 initiatedbegan significant reformsin the electric power sector. As part of such reforms, suchthe 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.
As of the past,date hereof, the Argentine government and certain provincial governmentstariffs that electrical power companies can charge have approved significant price adjustments and tariffnot been “modified” for more than two years. As such, the increasing costs incurred by these electrical power companies that are not covered by the current tariffs have been paid for using governmental subsidies. This use of governmental subsidies instead of increases applicablein tariffs has led to certain generation and distribution companies, resulting in an increase in costthe level of energy prices for consumers.
On March 31, 2017,public spending by the Ministry of Energy and Mining released a new tariff schedule that increasedGovernment. Looking ahead, any reduction by the price consumers pay for electricity and natural gas by 36% with the goal of reducing governmentGovernment in such public 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(and corresponding increase in the cost of energy in Argentina, whichelectrical power tariffs charged) could have a material adverse effect on inflation and, thus, on Argentine consumers’ disposable income and therefore,the financial and operating performance of Argentine companies. As a result, it could affect Grupo Financiero Galicia’s financial condition and results of operations and the trading price of our ADSs.ADSs as well.
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 Financiero Galicia’s, operating costs. Additionally, labor union activity could lead to strikes or work stoppages, which may materially and adversely affect Grupo Financiero 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,
For example, during the early months of 2019 the Argentine union that represents employees in the banking sector employees declared general strikes. These strikes did not have a direct effect on banks but did impact thebanks’ clients of banks who were not able to access to banks’ branches. Strikes similar tosuch as the one that took place in 2019 however, can deterioratealso lower the perception the public has of banks, which could have a reputational cost for us. Labor pressure ismovements are active in Argentina and canpotentially lead to further strikes or work stoppages if demands are not satisfied, which could have a material and adverse effect on Grupo Financiero Galicia’s operations.operations and operating costs.
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 Financiero Galicia, in demanding the implementation of such measures. The implementation of any such measures could have a material and adverse effect on Grupo Financiero 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 GDPGross Domestic Product (“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. However, in 2020 the spending-to-GDP ratio increased again, as the fiscal stimulus package implemented to deal with COVID-19 and the mobility restrictions put pressure on the fiscal balance resulted in increased expenditures. In 2020, the primary deficit amounted to 6.5% of GDP, and was mainly financed by assistance from the BCRA.
DespiteIf 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,not reduced and debt financing is insufficient, the Argentine government Government may be forced to seek assistance from the Central Bank and/or the National Administrator of Pensions.continue its reliance on BCRA financing.
Any such increase in Argentina’s deficit could have a negative effect on the government’sGovernment’s ability to access to the long termlong-term financial markets, and in turn, could limit the access to such markets for Argentine companies, such as Grupo Financiero Galicia and its subsidiaries. The same may have a material and adverse effect on Grupo Financiero Galicia’s financial condition and results of operations.operations and the trading price for its ADSs.
Exposure to multiple provincial and municipal tax legislation and regulations could adversely affect Grupo Financiero Galicia’s business or results of operations.
Argentina has a federal system of government with 23 provinces and the Autonomous City of Buenos Aires. Each of these, under the Argentine national constitution, has full power to enact legislation concerning taxes. Likewise, within each province, municipal governments have broad powers to regulate said matters. Given that the bank branches of our subsidiary, Banco Galicia, are located in multiple provinces, we are subject to various provincial and municipal legislation and regulations that may vary from time to time. Future developments in provincial and municipal legislation concerning taxes, provincial regulations or other matters could have a material and adverse effect on Grupo Financiero Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.
The novel coronavirus has had and could continue to have an adverse effect on our business operations.
In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19,(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), travellockdown and severe restrictions to and from Chinaon the movement of their respective populations 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. ToAlso, new variants of COVID-19 were reported during 2020 and 2021. Particularly, variants from the United Kingdom, South Africa and Brazil appear to be spreading more quickly and easily, which has led to an increase in COVID-19 cases. In addition, as of the date COVID-19sof this report, some vaccines have been granted emergency use authorizations worldwide. In Argentina, up to the date of this report, 4 vaccines have been approved for distribution (Sputnik V, Russia; Covishield, India; Sinpharm, China; and AstraZeneca, UK) and 1.8% of the national population has been vaccinated with two doses, according to the Argentine Ministry of Health.
COVID-19 has caused and may continue to cause significant social and market disruption.
The long-term effects to the global economy and to Grupo Financiero Galicia of epidemics,, pandemics and other public health crises, such asCOVID-19, are difficult to assess or predict, and may include risks to employee’semployee’s health and safety, and reduce our business operations. Any prolonged restrictive measures put in placeto 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
In addition to the foregoing, in 2020, the general macroeconomic conditions worsened as a result of the COVID-19 pandemic. According to INDEC, during the fourth quarter of 2020, GDP declined by 4.3% year over year. Further, during the fourth quarter of 2020, economic activity declined by 9.9% year over year. These conditions also led to an increase in poverty, which, according to INDEC, as of second half of 2020 had affected more than 42% of the population.
Additionally, 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.
COVID-19 on the industry during 2020, it is estimated that the economic/financial situation will worsen in the short term and could slightly improve on 2021. Likewise, according to Moody’s Argentina2 in its report issued on April, 2021 despite the stress scenario due to the pandemic, the Argentine financial system has shown a high resilience to the decrease in the level of activity, maintaining default ratios in line with what has been reported historically and high levels of capitalization and liquidity.
Furthermore, certain measures imposed by the local administration,Government, 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)and spread in Argentina, nor forecast the impact of the new variants of the virus. We are not able to anticipate whether Argentina can successfully and widely distribute COVID-19future restrictions vaccines in 2021. Finally, the Argentine government may imposemeasures implemented by the Government since March 2020 to address the COVID-19 pandemic have resulted in a slowdown in economic activity that adversely affected economic growth in 2020 and will continue to do so in 2021, to a degree that we cannot quantify as of the date of this report. The prior and ongoing impact of .COVID-19 could have a material and adverse effect on Grupo Financiero Galicia’s business, results of operations and financial condition and, thus, on the trading prices for its ADSs.
The Argentine economy could be negatively affected by external factors that have an impact in the wholeentire world, such as COVID-19’s spread and the consequentsubsequent implementation of measures destineddesigned 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 throughout 2020 that have had a severe economic impact.
1 | https://www.pwc.com.ar/es/servicios/consultoria/infografia-sondeo-covid-entidades-financieras.pdf |
2 | https://www.moodyslocal.com/c086ca95-c9ec-4147-9846-ba1027ac4f5c |
In Argentina, these measures includeincluded the implementation of a generalized quarantine with the intention of hindering the virus’ advancementspread and to avoid the collapse of the local health system. This entailsentailed a halt in most economic activities (excluding essential ones,, such as healthcare services, manufacturing of food products, medical equipment or pharmaceuticals, supermarkets and pharmacies, and the provision of security forces)forces) and the suspension of road and air travels,travel, among others.
These measures, and any others the Argentine government might implement in the future, have had 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 consequentresulting measures destined to fight the virus affected and could entail a reduction in thecontinue to affect economic growth in any of Argentina’s trade partners (such as Brazil, the European Union, China, and the United States). TheIn 2020, the contraction of the economies of our trade partners could havehad a sizeable and adverse impact on Argentina’s trade balance and economy through a fall in the demand for Argentine exports or a decline inof 15.7% as compared to the prices of agricultural commodities.previous year.
On the other hand, higher uncertainty levels associated with the progress of a global pandemic implies the strengthening of the U.S. Dollarcould exacerbate financial conditions’ volatility, particularly in emerging markets, which could pose a threat to Argentina’s currency 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.
financing availability.
Any of these potential risks to the Argentine economy could have a significantmaterial and negativeadverse effect on theGrupo Financiero Galicia’s business, financial situation and operational results of operations and financial condition and, thus, on the Company.trading prices for its ADSs.
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 2019,2020, which measures corruption in 180 countries, Argentina ranked No.66.No. 78. In the World Bank’s “Doing Business” report in 2019,2020, which measures the regulations that enhance business activity and those that constrain it, Argentina Ranked No.119No.126 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 Financiero Galicia’s financial condition and results of operations.operations and, thus, on the trading price for the its ADSs.
Risk Factors Relating to the Argentine Financial System
The stability of the Argentine financial system is dependent upon the ability of financial institutions, including Banco Galicia, the main subsidiary of Grupo Financiero 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 Financiero 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 Financiero 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-sectorlevels. Private-sector deposits and loans, which amounted to 12.8%19.1% and 8.6%10.3% of GDP, respectively, as of December 31, 2019.
2020.
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 Financiero Galicia’s ADSs.
The Argentine financial system’s growth and income, including that of Banco Galicia, the main subsidiary of Grupo Financiero 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 Financiero 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)BCRA) 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, 20192020 was Ps.110,957Ps.238,654 million, representing approximately 19%25% of its total assets and 142%160% of its shareholders’ equity. Of this total, Ps.58,141 million were Argentine Central BankBCRA debt instruments, Ps.22,759Ps.128,325 million corresponded to Argentine government securities, while the remaining Ps.30,057Ps.60,996 million corresponded to other receivables resulting from financial brokerage. As a result, Grupo Financiero 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 Financiero 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 newAdditionally, the 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.
Additionally, the BCRA issued Communication “A” 6072, as supplemented and amended, granting broad protection to financial services customers, limiting fees and charges that financial institutions may validly collect from their clients.
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 Financiero 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 Financiero Galicia and its subsidiaries’ rights, for example, with respect to their ability to collect payments due from services and financing provided by Grupo Financiero 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.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. Finally, in October 2020, a committee of the Argentine Senate started to debate a draft law intended to fully modify the Consumer Protection Law, the outcome of which is currently uncertain.
ThisThe above changes as well as potential future changes may prevent or hinder the collection of payments resulting from services rendered and financing granted by Grupo Financiero Galicia’s subsidiaries, which may have an adverse effect on their results and operations.operations and, in turn, on the trading price for the ADSs.
The maintenance or implementation of measures regarding the charging of fees and regulated rates could materially and adversely affect Grupo Financiero Galicia’s consolidated financial condition and results of operations
The BCRA has various regulations regarding the fees and interest rates that entities can charge in the banking business. One of Grupo Financiero Galicia’s primary subsidiaries, Banco Galicia, is required to comply with the applicable regulations. Interest rates and regulated fees (e.g. setting caps on the rates and fees that an entity can charge its customers) could affect the interest rates and fees earned by Banco Galicia, which could result in a reduction in Grupo Financiero Galicia’s consolidated income or a decrease in customer demand for Banco Galicia’s loan or deposit products. In addition, if Banco Galicia were permitted to (and actually did) increase the interest rates and fees it charged (or if the same were otherwise raised by the BCRA or otherwise), such increases could result in higher debt service obligations for Banco Galicia’s customers; which could, in turn, result in higher levels of delinquent loans or discourage customers from borrowing. Interest rates and regulated fees are highly sensitive to many factors beyond Banco Galicia’s control, such as regulation of the financial sector in Argentina, domestic and international economic and political conditions, among other factors. Changes in the demand for our subsidiaries services and/or increases in the levels of delinquency of their customers could have a material and adverse effect on their businesses and, in turn, on Grupo Financiero Galicia’s business, results of operations and financial condition and on the trading price for it ADSs.
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”. To the extent that the profitability of Banco Galicia is impacted by the foregoing, the same could have a material and adverse effect on Grupo Financiero Galicia’s business, results of operations and financial condition and on the trading price for it ADSs.
Administrative procedures filed by the tax authorities of certain provinces against financial institutions, such as Banco Galicia (the primary subsidiary of Grupo Financiero Galicia) and amendments to tax laws applicable to Grupo Financiero Galicia could generate losses for Grupo Financiero Galicia.
In the last years, 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.
institutions.
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 Financiero Galicia’s tax treatment, possibly leading to an increase in its tax liabilities.
Moreover, amendments to existing regulations may increase Grupo Financiero Galicia’s tax rate and a material increase in the tax burden could adversely affect its financial results.
results, results of operations and the trading price for its ADSs.
Risk Factors Relating to Us
Grupo Financiero 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 Financiero 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 Financiero 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 Financiero Galicia may be forced to resort to financing options at unappealing prices, rates and conditions. Additionally, such financing could be unavailable when Grupo Financiero Galicia may need it.
Grupo Financiero Galicia’s subsidiaries are under no obligation to pay any amount to enable Grupo Financiero Galicia to carry out investment activities and/or to cancel its liabilities or to give Grupo Financiero Galicia funds for such purposes. Each of the subsidiaries is a legal entity separate from Grupo Financiero Galicia, and due to certain circumstances, legal or contractual restrictions, as well as to the subsidiaries’ financial condition and operating requirements, Grupo Financiero 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 In addition, 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”.
Notwithstanding the foregoing,date hereof, due to the regulations recently passed
by the Argentine Central BankBCRA 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, 2020.2021. As such, no dividends will be paid to Grupo Financiero Galicia prior to such date and such prohibition could be extended.
Investors should take notice of the above, prior to deciding on their investment in equity in Grupo Financiero Galicia as a failure to receive the noted dividends may materially and adversely impact the ability of Grupo Financiero Galicia to pay any amounts in respect of the ADSs. For further information on dividend distribution restrictions, see Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”.
In the context of the COVID-19 outbreak, the Argentine Central BankBCRA restricted the ability of Argentine financial institutions to distribute dividends
In the context of the ongoing COVID-19 pandemic, the Argentine Central BankBCRA 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.
This suspension was later extended by communication “A” 7035 until December 31, 2020, and then by communication “A” 7181 until June 30, 2021.
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 evolutionInvestors should take notice of this pandemicthe above, prior to deciding on their investment in equity in Grupo Financiero Galicia as a failure to receive the noted dividends may materially and adversely impact the ability of Grupo Financiero Galicia to pay any amounts in respect of the ADSs. For further information on the effects of COVID-19, see Item 3. “Key Information” – D. “Risk Factors” - “The novel coronavirus could result in a materialhave an adverse effect on our business financial conditionoperations”. For further information on dividend distribution restrictions, see Item 5. “Operating and results of operations.Financial Review and Prospects”—B. “Liquidity and Capital Resources”.
Corporate governance standards and disclosure policies that govern companies listing their shares pursuant to the public offering system in Argentina may differ from those regulating highly developed capital markets, such as the U.S. As a foreign private issuer, Grupo Financiero 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 Financiero 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 Financiero 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 Financiero Galicia relies on exemptions from certain Nasdaq rules that are applicable to domestic companies.
Accordingly, the corporate information available about Grupo Financiero 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 ordinaryshares 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 Galicia 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’sFinanciero Galicia’s ordinary shares and may otherwise affect liquidity, regardless of Grupo Financiero Galicia’sGalicia’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.shares and the ADSs.
Adverse conditions in the credit, capital and foreign exchange markets may have a material adverse effect on Grupo Financiero Galicia’s business, financial position and results of operations and adversely impact it by limiting its ability to access funding sources.
Grupo Financiero 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 Financiero 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 Financiero Galicia’s results of operations.operations, business and financial condition and, in turn, on the trading price for the ADSs.
The occurrence of an operational risk impacting any of Grupo Financiero 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 Financiero 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 Financiero 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.operations and, in turn, on the trading price for the ADSs.
An increase in cybersecurity breaches or fraudulent and other illegal activity involving Grupo Financiero Galicia or its subsidiaries could lead to reputational damage to Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero Galicia and negatively affect the reputation of Grupo Financiero Galicia’s brands, thereby causing existing and potential clients to refrain from conducting business with Grupo Financiero Galicia’s subsidiaries.
In spite of all existing security measures, Grupo Financiero 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 Financiero Galicia’s subsidiaries. If any of the above described events were to occur, it could lead to monetary losses and reputational damage to Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero Galicia’s subsidiaries may be materially and adversely affected.affected and, in turn, the trading prices for the ADSs.
If Grupo Financiero 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 Financiero 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 Financiero Galicia’s subsidiaries maintain systems and procedures designed to ensure that they comply with applicable laws and regulations. However, Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero Galicia’s subsidiaries operate may be different or even conflict with each other as to the products and services
offered by Grupo Financiero Galicia’s subsidiaries or other business activities Grupo Financiero Galicia’s subsidiaries may engage in, which can lead to compliance difficulties or issues. Furthermore, many legal and regulatory regimes require Grupo Financiero 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 Financiero 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 Financiero 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 Financiero 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 Financiero Galicia’s subsidiaries.subsidiaries ability to engage in certain business activities, reputational harm, loss of customers or other negative consequences.consequences all of which could have a material and adverse effect on Grupo Financiero Galicia’s business, financial condition and operations and, in turn, on the trading price for the ADSs.
A disruption or failure in Grupo Financiero Galicia’s information technology system could adversely affect its operations and financial position.
The success of Grupo Financiero 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 Financiero Galicia’s communications, systems or transactions could be harmed or disrupted by power failures, data breach,breaches, cyber-attacks, acts of terrorism, physical theft, reputation incidentsreputational damage and similar events or disruptions. Any of the foregoing events may cause disruptions in Grupo Financiero Galicia’s systems, delays andin the provision of and/or 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 BancoGrupo Financiero Galicia (or its subsidiaries) 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 Financiero Galicia’s transactions, as well as its results of operations, business and financial position.position and, in turn, the trading price for the ADSs.
As of July 1, 2018, theThe Argentine Peso qualifies as a currency of a hyperinflationary economy, and Grupo Financiero 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 inusing 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 hyperinflationFurther, such regulation requires that the financial statements of an entity whose functional currency is one of a hyperinflationary economy be measured in an economy. In addition,terms of the IASB does not identify specific hyperinflationary jurisdictions.current unit of measurement at the closing date of the reporting period. 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 thatthrough Resolution No. 777/18 established the method to restate financial statements submitted to the CNV for the periods ended on and after December 31, 2018in constant currency to be restated for inflationapplied by issuers subject to oversight of the CNV, in accordance with IAS 29.
For
Law No. 27,468 delegated to the BCRA, in the case of financial entities, the entry into force of new regulations. Likewise, 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 During the first three fiscal years beginningafter January 1, 2018, suchthe 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 Financiero 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.condition (or on the trading price for its ADSs).
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.impacted and, in turn, the trading price for our ADSs.
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.operations and, in turn, on the trading price for our ADSs.
Payments on class B shares or ADSs may be subject to FATCA withholding.
Pursuant to certain provisions of the U.S. Internal Revenue Code of 1986, as amended, commonly known as FATCA, a “foreign financial institution” may be required to withhold on certain payments it makes (“foreign pass thru payments”) to persons that fail to meet certain certification, reporting, or related requirements. We are a foreign financial institution for these purposes. A number of jurisdictions have entered into, or have agreed in substance to, intergovernmental agreements with the United States to implement FATCA (“IGAs”), which modify the way in which FATCA applies in their jurisdictions. Certain aspects of the application of the FATCA provisions to instruments such as the class B shares and the ADSs, including whether withholding would ever be required pursuant to FATCA with respect to payments on instruments such as the class B shares or the ADSs, are uncertain and may be subject to change.
Even if withholding would be required pursuant to FATCA with respect to payments on instruments such as the class B shares and the ADSs, proposed regulations have been issued that provide that such withholding would
not apply prior to the date that is two years after the date on which final regulations defining “foreign passthru payments” are published in the U.S. Federal Register. In the preamble to the proposed regulations, the U.S. Treasury Department indicated that taxpayers may rely on these proposed regulations until the issuance of final regulations. Holders should consult their own tax advisors regarding how these rules may apply to their investment in the class B shares and the ADSs.
Item 4. | Information on the Company |
Item 4. Information on the CompanyA. History and Development of the Company
Our legal name is Grupo Financiero Galicia S.A. Our commercial name is Grupo Financiero Galicia or Grupo Galicia. 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.
ThroughEcosistema NaranjaX is a commercial umbrella that is comprised of the operating subsidiaries of Tarjetas Regionales in which Grupo Financiero Galicia owns 83% ownership interest,Regionales. Through it we provide proprietary brand credit cards, throughout the “Interior” of the country and consumer finance and digital banking services throughout Argentina. Argentines refer to the Interior as allunderbanked population of Argentina except forArgentina. For further information, see Item 4. Information on 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.
Company – B. History – iii) Ecosistema NaranajaX below.
Through Sudamericana Holdings and its subsidiaries, we provide insurance products in Argentina. We directly or indirectly own other companies providing
Through Galicia Securities and Inviu we provide financial and brokerage related products as explained herein.
We are one of Argentina’s largest financial services groups with consolidated assets of Ps.685,519Ps.1,055,279 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”.
2020.
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.
A.1 History
i) 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 BankBCRA 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, wasis equal to Ps.65,831,636Ps.89,623,576 as of December 31, 2019)2020) 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 ValoresInviu owned by Compañía Financiera Argentina S.A. for Ps.906,524.15 (which, as adjusted for inflation, wasis equal to Ps.2,324,697Ps.3,164,856 as of December 31, 2019)2020).
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.Regionales. 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,BCRA, through Note No. 312/04/2018, confirmed that it did not object theto such corporate reorganization. Consecuently,Following such reorganization, Grupo Financiero Galicia holdsheld an 83% ownership interest in Tarjetas Regionales S.A.
Regionales.
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 for Grupo Financiero Galicia’s new Class B shares 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. IssuedThe new 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, wasis equal to Ps.22,712,675,768Ps.30,921,170,298 as of December 31, 2019)2020).
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, wasis equal to Ps.645,455,576Ps.878,727,016 as of December 31, 2019)2020) to fund the creation of a new digital financial company, denominatedcalled “Naranja Digital Compañía Financiera S.A.U.” meantdesigned to reach and offer digital banking services to the unbankedunderbanked 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 numberResolution 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
BCRA.
On July 2, 2019, the Board of Directors of Grupo Financiero Galicia accepted an offer made by Galicia Valores,Inviu, 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.Fondos. 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,Inviu , for Ps.695,308.54 (which, as adjusted for inflation, wasis equal to Ps.822,516.02Ps.1,119,778 as of December 31, 2019)2020). With this share purchase, Galicia ValoresInviu 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, wasis equal to Ps.79,320,966Ps.107,988,030 as of December 31, 2019)2020), to be applied to the purchase of the total stake in Galicia ValoresInviu owned by Banco Galicia. Said operation was closed at a total price of Ps.69,530,854 (which, as adjusted for inflation, wasis equal to Ps.77,679,641Ps.105,753,520 as of December 31, 2019)2020).
On May 5, 2020, the Board of Directors of Grupo Financiero Galicia, with the goal of strengthening its brokerage service offerings approved a sale offer to purchase the entire capital stock of a brokerage company (an ALYC company -Agente de Liquidación y Compensación- meaning those Argentine entities with a broker-dealer license given by the Argentine Market Regulator) called 34 Grados Sur Securities S.A. Said operation was closed for a total price of US$441,230 and the company was re named Galicia Securities S.A.
On May 28, 2020, the Board of Directors of Grupo Financiero Galicia S.A. agreed with the minority shareholders of Tarjetas Regionales to proceed with a corporate reorganization process. Through this corporate reorganization, the minority shareholders of Tarjetas Regionales, Fedler S.A. and Dusner S.A., holders of 17% of Tarjetas Regionales’s shares spun- off its shares in Tarjetas Regionales and they were absorbed, through a merger by Grupo Financiero Galicia. On September 14, 2020, Grupo Financiero Galicia and the companies Dusner S.A. and Fedler S.A. signed the Preliminary Spin off - Merger Agreement and on December 15, 2020 the definitive Spin off - Merger Agreement was executed. As a result of said corporate reorganization, the shareholders of Fedler S.A. and Dusner S.A received GFG’s 47,927,494 Class B common shares, book-entry, with a par value of Ps.1 per share and 1 vote per share, representing their equity interest in Tarjetas Regionales and Grupo Financiero Galicia acquired the control of the 100% equity of Tarjetas Regionales.
ii) 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”Ecosistema NaranjaX” 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 BankBCRA 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 oustandingoutstanding shares) in its subsidiary Tarjetas del Mar S.A. (“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 millionPs.10,000,000,000 (which, as adjusted for inflation, wasis equal to Ps.14,765 millionPs.30,921,170,298 as of December 31, 2018)2020). The Argentine Central Bank,BCRA, 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 AugustSeptember 2019, the BankBanco Galicia accepted an offer to acquire 100% of the shareholding in Galicia ValoresInviu made by IGAM. The price of the operation amounted to Ps.70 million.Ps.69,530,854 (which as adjusted for inflation, is equal to Ps.105,753,520 as of December 31,2020). See “—Grupo Financiero Galicia”.
During the fiscal year 2020, Banco Galicia, together with other financial institutions, formed a company named Play Digital S.A. (“Play Digital”) with the corporate purpose of developing and marketing a payment solution linked to the bank accounts of the financial system users, which will significantly enhance their payment experience. As of the date hereof, Banco Galicia held 12.976% of Play Digital.
Tarjetas Regionales
iii) Ecosistema NaranjaX
In the mid-1990s, Banco Galicia made the strategic decision to target the “non-account“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”“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:
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
Finally, in February 2019 and December 2019, Cobranzas Regionales S.A. received capital contributions from its shareholders, Naranja has experienced and Tarjetas Regionales, with the main purpose of maximize the growth of the “NPOS”(a significant expansionnew service of its customer base, in absolute termsNaranja mainly used by merchants to accept payments made from clients with any debit or credit card through a wireless device) business and with respectthe 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.
In 2019, Tarjetas Regionales, created a new digital financial company, called “Naranja Digital Compañía Financiera S.A.U.” designed to reach and offer digital banking services to the rangeunderbanked population of customers served, numberArgentina. The formation of cards issued, distribution networkssaid company was approved by the BCRA on September 16, 2019, by Resolution 205 of the BCRA. Naranja Digital Compañía Financiera obtain the license to commenced operations from BCRA. For further information see “Item 4. “Information on the Company” – A. “History and sizeDevelopment of operations,the Company” – A.1 “History” -Grupo Financiero Galicia”.
On May 28, 2020, the Board of Directors of Grupo Financiero Galicia S.A. agreed with the minority shareholders of Tarjetas Regionales to proceed with a corporate reorganization process. Through this corporate reorganization, the minority shareholders of Tarjetas Regionales, Fedler S.A. and Dusner S.A., holders of 17% of Tarjetas Regionales’s shares, spun-off their shares and were absorbed, through a merger by Grupo Financiero Galicia. On September 14, 2020, Grupo Financiero Galicia and the companies Dusner S.A. and Fedler S.A. executed the Preliminary Spin off - Merger Agreement and on December 15, 2020 took place the definitive spin off - Merger Agreement. For further information see “Item 4. “Information on the Company” – A. “History and Development of the Company” – A.1 “History” - “—Grupo Financiero Galicia”.
In September 2020 and October 2020, Cobranzas Regionales S.A. received from its shareholders, Naranja and Tarjetas Regionales, irrevocable equity contributions that were designed to absorb losses in a total amount of Ps.368,421,052.64 (which, as welladjusted for inflation, is equal to Ps.402,719,002 as a technological upgrade and general modernization. As of December 31, 2019, Tarjeta2020). At the same time Cobranzas Regionales launched “toque” a new service of Naranja had approximately 8.5 million issued cards and was the largest proprietary brandmainly used by merchants to accept payments made from clients with any debit or credit card operationthrough a wireless device and totally integrated with the electronic wallet, Naranja X.
On September 15, 2020, Tarjetas Regionales signed an irrevocable equity contribution agreement with Grupo Financiero Galicia for a total amount of Ps.1,000,000,000 (which as adjusted for inflation is equal to Ps.1,113,270,500 as of December 31, 2020) to be paid in Argentina.two tranches. On the aforementioned date, Tarjetas Regionales received the first tranche of the irrevocable contribution in a total amount of Ps.175,000,000 (which as adjusted for inflation is equal to Ps.194,822,338 as of December 31, 2020). Tarjetas Regionales received the second tranche on October 30, 2020, in a total amount of Ps.825,000,000 (which as adjusted for inflation is equal to Ps.885,157,650 as of December 31, 2020).
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. During 2020, Naranja continued to experience 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, 2020, Naranja, had approximately 8.6 million issued cards and was the largest proprietary brand credit card operation in Argentina.
Finally, in February 2019 and December 2019, Cobranzas Regionales S.A. received capital contributions from its shareholders, Tarjeta Naranja andwith all the businesses that Tarjetas Regionales withoversees, during 2020 and going forward, the main purpose of maximizegoal is to become the growth ofpreferred technological and financial platform by Argentines. In order to work towards this goal, during 2020 Tarjetas Regionales redefined its purpose. It is now focused on meeting the "NPOS"(noted goal, which it believes will allow it to offer new products and services in a streamlined and straightforward manner that will result in mass appeal and facilities an efficient customer and best-in-class customer experience. Related to this new approach, during 2020 Tarjetas Regionales launched a new service of Tarjeta Naranja mainly used by merchants to accept payments made from clients with any debit orumbrella brand for the entire business called Ecosistema NaranjaX, which includes all the businesses such as credit card, through a wireless device) businessmerchants 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.financial services.
iv) 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.
v) 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 Financierovi) 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.
vii) IGAM / Galicia Valores
Inviu
Incorporated in 2019, IGAM is the holding company of GaliciaInviu and IGAM Uruguay Agente de Valores andS.A. (formerly known as Nargelon S.A.). IGAM is registered in Delaware, USA.
Galicia Valores
Inviu 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 ValoresInviu scope of business is mostly local.
As of 2019, Galicia ValoresInviu 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 ValoresInviu can trade bonds, currency, futures and other derivatives within MAE. MAE’s.
viii) Galicia Securities
On May 6, 2020, during an Extraordinary Shareholders’ Meeting of Galicia Securities, the shareholders of Galicia Securities approved a name change to Galicia Securities S.A.
Galicia Securities is authorized to act as a settlement and compensation agent and placement and distribution agent of mutual funds in Argentine. The stated purpose of Galicia Securities is to conduct on its own behalf, on behalf of third parties, or through agents, agencies or branches, the operations which are typically performed by settlement and compensation agents and distribution agents and those authorized by current Argentine laws.
Galicia Securities is a member of the Argentine Stock Exchange Market (“BYMA”) and the Argentine Electronic Open Market.
A.2 Capital Investments and Divestitures
During 2019,2020, our capital expenditures amounted to Ps.7,897Ps.7,124 million, allocated as follows:
Ps.3,716 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and
Ps.3,408 million in licenses and other intangible assets.
During 2018,2019, our capital expenditures amounted to Ps.5,673Ps.10,752 million, allocated as follows:
Ps.4.828 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and
Ps.5,924 million in licenses and other intangible assets.
During 2017,2018, our capital expenditures amounted to Ps.5,015Ps.8,581 million, allocated as follows:
Ps.4,894 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and
Ps.3,687 million in licenses and other intangible assets.
These capital expenditures were primarily made in Argentina.
For a description of our divestitures in 2020, 2019 2018 and 2017,2018, please see “─“—History” ─— “Grupo Financiero Galicia”, “Banco Galicia” and “Tarjetas Regionales”.
A.3 Investment Planning
We have budgeted capital expenditures for the fiscal year ending December 31, 2020,2021, for the following purposes and amounts:
December 31, | |||||
(in millions of Pesos) | |||||
Infrastructure of Corporate Buildings, Tower and Branches (construction, furniture, equipment, phones and other fixed assets) |
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Organizational and IT System Development | 8,315 | ||||
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Total Investment Planning | 10,147 | ||||
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These capital expenditures will primarily be made in Argentina. Management considersbelieves that internal funds will be sufficient to finance capital expenditures for the year ending December 31, 2020.2021.
B.1 Business
i) Banking
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. It is also our largest subsidiary. According to information publishedprovided by the Argentine Central Bank,BCRA, as of December 31, 2019,November 30, 2020, 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%10.07% and 11.57%13.03%, respectively, as of December 31, 2019.2020. As of December 31, 2019,2020, Banco Galicia had total assets of Ps.616,356Ps.946,019 million, total loans and other financing of Ps.309,329Ps.439,306 million, total deposits of Ps.397,840Ps.678,103 million, and its shareholders’ equity amounted to Ps.96,297Ps.151,821 million.
Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms amongst private-sector financial institutions in Argentina. This distribution platform, as of December 31, 2019,2020, 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 2.73 million customers, who were comprised of mostly individuals but who also included 104,01025,092 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 threetwo categories Wholesale Banking,or segments, Empresas (Companies) and Retail, Banking, and Financial Banking.as explained further below in the Segment Tribes subsection.
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 DecemberIn 2018, and as a result of its strategy focused on growth, customer experience and efficiency, Banco Galicia began to transform its operating model with the aim of enhancing its operational flexibility and ability to adapt to changes. In 2020, Banco Galicia believes that it achieved this transformation, ending with an agile organization that is both able to adapt to changes on a dynamic basis while maintaining its organizational stability. The traditional bank departments were replaced by new organizational departments and Banco Galicia’s organizational structure now includes various multidisciplinary teams that seek to constantly adapt and evolve to better meet their customer’s needs, adjust to market demands and allocate and reallocate resources in order to provide comprehensive customer solutions while also focusing on business continuity. These teams are organized in so-called “tribes”, expertise centers, back-end services and support areas, according to the type of value that each team adds to Banco Galicia and to the organizational services and tasks that they provide, all of which seeks to enhance the financial results of Banco Galicia. “Segment Tribes”
a) Segment Tribes
Segment tribes are multidisciplinary teams that are organized around one single objective: to offer clients a value proposition that meets their needs and behavior. Segment tribes are focused on Banco Galicia’s clients everyday operations and focus on, ensuring an agile and simple relationship between Banco Galicia and its clients that is designed to result in sustained customer growth. In order to best tailor its everyday client support and offerings, Banco Galicia has divided its clients in two “tribes” as described below.
a.i) Retail tribe
As of December 2019,31,2020, the “retail tribe” was comprised of 3,037,104 clients. Clients forming part of this segment serviced over 950 companies from 300 different economic groups.tribe can be either individuals or corporate entities, both, with annual sales of up to Ps.600 million.
The retail tribe works to achieve the following matters:
Corporate, Investment BankingThe acquisition and Capital Markets’ service model is based on developing long-term, strategic and commercial relationships with customers. Consideringretention of new clients, pursuing the needsachievement of eachthe highest recognition as a financial platform.
Offering end-to-end 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 adviceorder to wholesale banking clients onprovide the issuance of new public and private debt as well as refinancing their existing debt. In 2019, Banco Galicia consolidated its leadership asbest market experience for each one of the main banks operating in the local capital marketcluster indicated below 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.through differentiated value propositions.
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 amountingUnderstanding Banco Galicia’s customer lifecycle, by identifying and understanding their needs and providing customized offers when it comes to more than Ps.850 millionproduct and US$560 million, governed by both local and international law, covering different sectors but mainly focusedfinancial services.
Clients in the energy, oil & gas and agriculture areas. In termsRetail tribe are divided according to the type of liability management, this department managed to restructure transactions for over Ps.2,000 million and US$6 million.services that they are given in the following clusters as described below:
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.Personas (Individuals)
Middle-Market BankingMOVE
This segment services all business sectorsPrefer
EMINENT
Banca Privada (Private Banking)
Negocios & Profesionales (Business 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.Professionals)
Agricultural SectorPyMEs (Small and Medium Enterprisess “SMEs”)
1. | Personas, MOVE and Prefer Cluster: Banco Galicia serves more than 3 million clients, and 78% of those clients belong to this cluster. All of the clients not included in the other clusters are considered to be included within these 3 clusters. For the universe of Personas, MOVE and Prefer, during 2020, Banco Galicia decided to focus on its digital client strategy. In particular, during such year, Banco Galicia grew its ability to over 7 days per week, 24 hours service by offering digital initiatives that focused on the entire lifecycle of these clients, starting with digital registration and welcome steps through biometric processes that protect the clients’ identity, to digital access to solve their after-sales needs and requests. |
2. | EMINENT Cluster:Banco Galicia seeks to satisfy the needs of its most demanding and outstanding clients through three pillars of service: exclusive attention, personalized benefits and experiences, and agile and simple processes. With the aim of establishing long-term and trustworthy relationships, Banco Galicia offers the Galicia ÉMINENT premium service, which provides differential and exclusive attention to its clients through ÉMINENT Executives in the branch network and also digitally through Galicia Conecta, using personal WhatsApp messages or e-mails, no matter the location. |
3. | Banca Privada Cluster: Banca Privada (Private Banking) provides professional financial service to people with high net worth/equity through the administration of their investments and financial advice |
provided by highly trained officers. It offers its clients an assorted portfolio for investment comprised of domestic financial investments, such as Fima mutual funds (for further information about Fima, please see “Sales and Marketing” – “Fima Funds”, below) and deposits, public and private securities, and shares and trusts in which the Bank acts as underwriter. |
4. | Business & Professionals (“NyPs”) and SMEs Cluster: For Business & Professionals and SMEs, Banco Galicia’s digital strategy is focused on providing a “One Stop Shop” service. It is aimed at satisfying clients’ needs from one single place, using one single platform, to enhance the client’s experience of self-management through digital channels, something that has helped achieve greater efficiency in both the service and the results of Banco Galicia. Banco Galicia believes that these clients are focused on self-financing growth and simplifying their day-to-day operations. Banco Galicia encourages and supports the growth of SMEs, businesses and, professionals with products and services that accompany the continued growth and training of such entity’s management, and it does so by offering funding, professional advice and tools that will expedite their operations, and also by promoting the exchange of experiences among the business owners that work along with strategic partners. In 2020, Banco Galicia was recognized by IDB Invest for its support to SMEs in the Southern Cone region. Within the service circles of “Business and Professionals” and “SMEs”, Banco Galicia further divides these clients into merchants and asset-based clients. For asset-based clients, during 2020 Banco Galicia focused on providing services to these clients taking into account two objectives: achieving greater coverage in terms of using Banco Galicia’s payroll services for more of these clients and helping those SMEs that already had a product to grow their business through cross-selling. A total of 28,828 SMEs began to use Banco Galicia’s pay roll services in 2020. As a consequence of the cross-selling of pay roll services, those SMEs that pay salaries through Banco Galicia had an increase in the number of products they hired with Banco Galicia, which went from 3.31 average products sold at the end of September to 3.37 by the end of November. This difference in the number of average cross-selling is equivalent to the placement of 2,832 new products for the universe of SMEs that have hired the pay roll services. During 2020 there was an increase in the volume of purchase transactions and the total amount of such purchases that the Bank pays to its merchant clients after the final costumer has made a purchase from the merchants with a credit card from the Bank, both for SMEs and NyPs, achieving an average monthly volume of Ps.11,125 million and $2,900 million respectively (representing a growth of 25% as compared to 2019). Lastly, together with allies such as the ASEA (“Asociacion de Emprendedores e Argentina”, the entrepreneurs association), ADIRAS (“Asociacion de Directorios Asociados” a civil non-profit group, formed by business men, business leaders and board members of SMEs.) and Grupo Set (an Argentine development group), Banco Galicia has been working with more than 10,000 entrepreneurs from all over the country to facilities training and provide business management tools, providing more than 30 online talks and more than 20 webinars through which hundreds of entrepreneurs were able to train and acquire some specific management and business tools that they can use to grow their own businesses. |
b.i) Companies tribe
The Agricultural Sector is the only segment defined by its customers’ industry, regardless“companies tribe” was comprised of its profile25,092 customers as of December 31,2020 (both individuals 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 communicatelegal entities) 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:
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
an annual turnover higher than Ps.600 million.
The Business, professionals and SMEs segmentcompany’s tribe is focused on providing financingits client with a business platform that offers specialized financial and other financial productsbusiness advise. This tribe works to provide a flexible and servicesstraightforward experience to businesses not serviced by the wholesale banking division and small- to medium-sized companies. Through the products offered by this segment,its clients. Banco Galicia aimedhopes that the provision of these services helps to encourageform lasting bonds with its clients and yield recurring usage by clients and growing financial results.
As described above, the companies tribe focuses on three core areas: customer experience, efficiency and business growth, and, based on these three areas, the following objectives were determined:
To maximize our clients’ profitability through an enhanced offerings and cross-selling, improving the length of the 255,900 businesses, professionalscustomer’s relationship with Banco Galicia.
To provide the best experience by anticipating and companies it serviced in 2019responding to customer relevant events through digital and self-management channels.
To optimize the digital relationship cycle by offering differentiated productsfacilitating 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 enabledencouraging 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 usingelectronic checksdigital products as well as generating a digital journey design for these companies.
Clients in the country, with a market sharecompanies tribe are divided by the type of 75% of electronic checks issued.services that they are given in the following clusters as described below:
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.Companies
Likewise, the Bank eliminatedcharges 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.Agrobusiness
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 accessthe 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.Corporate banking
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.Finance banking
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.
1. | Companies Cluster: Clients in this category are those clients whose annual total sales are between Ps.600 million and Ps.4.5 billion. This category of the companies tribe includes companies across all industries except for companies engaged in agricultural activity, which receives specific attention from the agrobusiness category due to its particular characteristics. According to companies within this category, there was a marked change in their needs during 2020. In response to the to these needs within the context of a global pandemic and with the objective of offering the best and most comprehensive customer service, the customer service model for companies in this category was based on business banking centers that were led by specialized executives, that were strategically distributed throughout the country and that were organized or grouped in five different regions. The customer service offered in-person at these business banking centers was complemented with additional customer service offered online through Banco Galicia’s digital channels, with the goal of making clients’ transactions easy and agile. |
Public Sector
2. | Agrobusiness Cluster: This category within the companies tribe is the only one that is determined by the activity of the clients it serves. Given the characteristics of every company, for companies that focus on agriculture and, in particular, the production of agricultural goods, it is crucial to offer a service model that will respond to their needs and complexity in a personalized way. Banco Galicia’s clients’ satisfaction is one of the strategic focuses on which this segment works hard and stands out, allowing it to maintain its leading position in the sector in Argentina. After the success of the Galicia Rural Conecta service model which was launched in 2018 for agricultural clients with accounts in the Greater Buenos Aires and City of Buenos Aires (“AMBA”) region, during 2020 this service was offered by Banco Galicia in three new areas: the cities of Rosario, Mar del Plata, and Córdoba. The inter-annual growth in loan volume for loans granted by Banco Galicia to companies in this category surpassed 80% by October 2020, and Banco Galicia became the leading provider of financing to companies in this category in Argentina. In terms of volume in treasury securities, there was an increase of more than 50% in 2020 as compared to 2019. |
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.
3. | Corporate Cluster: Banca Corporativa features a service model that is based on developing commercial, strategic and close, long-term relationships. This category is comprised of 300 economic groups with annual sales that start at Ps.4,500 million or that -given the complexity of their businesses or their multinational profile- might require very specific attention in terms of financial advice and structuring. After considering the particularities of the businesses within this category, the economic sectors in which they operate and the markets that companies in this category access (or hope to access), the Bank has designed solutions that are adapted to the particular demands of these companies with swift response times. Such solutions are also leveraged using digital transactional banking. |
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.
4. | Financial Cluster: Financial cluster includes (i) institutional financial clients and (ii) public sector, which are described below. |
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.
(i) | Financial institutions: At an international level, Banco Galicia’s clients in the financial banking cluster within the companies tribe are comprised of correspondent banks, international credit agencies, official credit banks, and export credit insurance companies; whereas at a domestic level, Banco Galicia includes banks, financial companies, exchange bureaus, and other entities that carry out related financial activities. During 2020, given the particular context, virtual |
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 CustodyDepartment 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.
meetings were held with the most active foreign correspondent banks in the foreign trade business, and it was through these virtual meetings that the Bank offered the different products and services offered to its clients. Despite the unfavorable macroeconomic situation in Argentina, and even though the supply of credit lines did not increase during 2020, said supply represented a stable source for offering foreign trade financing strategies to clients as well as for responding to requests regarding confirmation of letters of credit and |
(ii) | Public Sector: The public sector category of the financial cluster within companies tribe is comprised of more than 300 companies. 2020 was a challenging year for companies within this category. After general elections, a new Government took office with resulting in changes of governmental contacts, requiring these companies to form new relationships and bonds with new governmental personnel. Banco Galicia believes in the public-private partnership model as a way of developing business, something that should allow everyone to work on several agendas for political-economic dialogue and generate long-term relationships. Regarding customer positioning -which is measured through the Net Promoter Score (“NPS”) methodology- Banco Galicia achieved a high percentage (48%) for 20202 (its second year of measurement). Last but not least, and within the framework of the COVID-19 pandemic, Banco Galicia implemented a program to help municipalities throughout the country, providing supplies and equipment that helped face and fight the pandemic, thus reinforcing their commitment as relevant community actors. |
b) Trading and& Global Markets Department
One of the main responsibilities of the Office of Trading and& Global Markets Department is the managementadministration and operation of the positions in foreign currency, positions, financial derivatives, liquidity position and securities, public or private, securities, either for the Bank’sits own portfolio or intermediation, in the primary or secondary market, with counterparties or clients.
With the latest information available in 2020 regarding the secondary market 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,fixed income products, Banco Galicia was able to maintain, even in a year of few issuances, a leading positionranked the fifth place in the Argentine capital markets basedtotal ranking in MAE in the last twelve months, with a 5.62% market share, being the second bank on debt originationthe list and structuring for local issuers.
In the international segment, following a favorable context during the first quarter ofone with national capital.
In relation to the year, a strong outflow of fundsprimary market for fixed income, and according to the latest information available from Argentine assets was observed with the consequent impact on prices and the currency value. Despite high volatility and risk perception prevailingMAE, Banco Galicia continues to be ranked in the market,first place for the Bank’s commercial management of this division resulted in an increaseeighth consecutive year in the numberconsolidated ranking (Trusts, Corporations and Subsovereigns) of non-resident investors, mainly fromamounts awarded with a market share of 13.9%. Likewise, the United States, England, Brazil and Chile). Afterprovision of comprehensive advice to its clients has allowed Banco Galicia to stand out especially in the implementationplacement of corporate securities, also occupying the new Central Bank monetary policy from October 1 onward,first place in the Bank started to position its investment in local currency assets, which allowed the Bank to take advantageranking but with a market share of the exchange rate stability and the high interest rates.19.1%.
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 tradedgot second place in the MAE Ranking, after having operated US$6,836 million of the US$63,438 during 2020. The volume traded was reduced by 75% in 2019, increasing its participationline with the market decline due to the new regulatory context.
Regarding the bilateral market of futures, Banco Galicia got second place in the trading market from 11.85%. in 2018 to 12.46% in 2019. As regardsMAE Ranking, operating a total volume of US$648 million. Regarding the guaranteed MAE futures market, Banco Galicia achieved the first-place rankinggot third place, trading US$1,939 million with a 14% share, whereas in the MAEROFEX Ranking it ended 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). Theforeign tradevolume 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$6,657 million in 2019.
From January 2019 to December 2019, Banco Galicia went from the third position to the second position in the fixed income ranking prepared by Bolsas y Mercados Argentina in 2019 with a total of Ps.292,210 million traded in the Argentine market, representing 5.82% of the Argentine market share and making it the market leader in terms of market share. In turn, from January 2019 to December 2019, Banco Galicia went from second to thirdfifth place, falling one place in the total fixed income ranking prepared by the MAE with a total of US$ 25,683 million representing 10.83% of the Argentine market sharerelation to 2020.
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.
ii) Consumption
Through Tarjeta Naranja,the commercial platform of Ecosistema NaranjaX, Grupo Financiero Galicia offers financing and digital services to low- and medium-income customer segments.segments in Argentina. In addition, through Banco Galicia, Grupo Financiero Galicia also offers credit cards to customers in Argentina.
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.
2020.
In December 2019, Tarjeta2020, Naranja issued 3.02.9 million account statements, 6%5% less than in 2018.2019. 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%12% as compared to 2018.2019.
Tarjeta Naranja, Tarjetas Regionales’Ecosistema NaranjaX’ main subsidiary,company, will continue to rely on its strategic pillar of “Organizational Culture and Customer Experience” to grow its customer base and business.
business during 2021.
In connectionparallel with the Bank’s Digital Transformation, Tarjeta Naranja created two Tribes the:(i) Assisted Channels Tribe and (ii) Credit Cards Tribe.
Tarjeta Naranja also adaptedBanco Galicia seeking to optimize its operational flexibility as described above, during 2020 Ecosistema NaranjaX sought to operate in a more agile way of operatingflexible manner by creating both multidisciplinary and autonomous businessindependent intelligence teams.teams, similarly organized into tribes, centers of excellence and squads. These teams operate underbased on the guidelinestenets of collaborative workcollaboration and agilityflexibility 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 inIn terms of consumption, one of the highlights in 2019, 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”-“NarajaNaranja X”.
During 2020, Naranja launched Tarjeta Virtual Naranja, available in Naranja App and Naranja Online (“NOL”), to better assist clients in the context of the pandemic. This card allows customers to make purchases online in a more secure way.
iii) Insurance
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 premiums and surcharges earned was equal to Ps.7.789 million in 2020.
iv) Other Business
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.
For more information please see “Sales and Marketing” – “Fima Funds”, below.
B.2 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, credit cards and insurance), see Item 5. “Operating and Financial Review and Prospects”-A. “Operating Results”.
i) 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 10.07% as of December 31, 2020, as compared to 9.92% as of December 31, 2019 and 11.09% as of December 31, 2018.
With respect to loans extended to the private sector, Banco Galicia’s Argentine market share was 13.03% as of December 31, 2020, as compared to 11.50% and 10.51% as of December 31, 2019 and December 31, 2018, respectively, according to the information published by the BCRA.
According to the information published by the BCRA, as of November 30, 2020, 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.
ii) Argentine Banking System
As of November 30, 2020, the Argentine financial system consisted of 79 financial institutions, of which 64 were banks and 15 were financial non-bank institutions (i.e., finance companies). Of the 64 banks, 13 were Argentine national and provincial government-owned or related banks. Of the 51 private-sector banks, 35 were private-sector domestically owned banks and 16 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).
As of November 30, 2020, the top 10 banks, in terms of total deposits (excluding Argentine national and provincial government-owned banks), were: Banco Santander Río, Banco Galicia, Banco Macro, Banco BBVA Argentina, HSBC, Credicoop ICBC and Banco Patagonia. Banco Galicia, Banco Macro and Credicoop are domestically owned banks and the others are foreign-owned banks. According to information published by the BCRA as of November 30, 2020, private-sector banks accounted for 65.8% of total deposits and 62.1% of total net loans in the Argentine financial system. As of the same date, financial institutions (other than banks) accounted for approximately 0.4% of deposits and 2.9% of net loans in the Argentine financial system.
As of November 30, 2020, 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 BCRA, as of November 30, 2020, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 33.7% of deposits and 35% 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 November, 2020, with the ten largest banks holding 75.8% of the system’s deposits from the private sector and 75.6% of the system’s loans to the private sector as of November 30, 2020.
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 November 2020, 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 27.8% and 12% of the GDP respectively, well below those same ratios for other countries in the region.
iii) Credit Cards
In the consumer loan market, Naranja competes with Argentine banks and other financial institutions that target similar economic segments within the credit cards market. 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, Cencosud, CMR Falabella 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, 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, 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 13.4% of Naranja’s 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 Naranja to establish a local presence in all the provinces of Argentina.
Naranja believes that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with 310,000 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.
iv) Insurance
Sudamericana’s subsidiaries face significant competition since, as of December 31, 2020, the Argentine insurance industry was comprised of approximately 181 insurance companies, 15 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 2020, the insurance industry continued to grow. Production amounted to Ps.840,557 million, 35% higher than the level recorded for the prior year. Out of the total insurance production in 2020, 84% related to property insurance, 15% related to life and personal insurance, and 1% related to retirement insurance.
Within the 84% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 37%, followed by the workers’ compensation segment, representing 23.5%. Within the life insurance segment, the group life insurance segment was the most significant, representing 51%, followed by individual life insurance, representing 28%, and personal accident insurance, representing 14%.
As of December 31, 2020, based on internal studies undertaken by Galicia Seguros, it is estimated that GaliciaSeguros 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.
B.3. Sales and Marketing
i) 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.
The strategy of the customer service model of Grupo Financiero Galicia is aimed at allowing its customers to access Grupo Financiero Galicia’s companies services (e.g. Banco Galicia, Ecosistema NaranjaX and Galicia Seguros, among others) through all the service channels provided, which allows customers to operate in different assisted channels, both digital and self-managed, and automatic banking, too.
During 2020, Grupo Financiero Galicia continued promoting the use of digital platforms and apps and worked on the development of the infrastructure for new online channels in order to replace in-person cashier services for ATM services. Additionally, it increased the limits on money withdrawals on ATMs. With this, online orders placed by the different business sectors can be safely covered and the clients’ demand can be easily satisfied.
In addition, during 2020, Banco Galicia sought to maintain a close relationship with its clients, and with that goal in mind it implemented the following digital and self-managed channels:
Chat conversations through its virtual assistant Gala on its online banking and office banking settings.
Providing contact information for the officers assigned to clients on the office banking platform in order to improve communication.
Online access to account statements, credit accounts, cards and purchases; providing reports on tax investments; and offering self-management instructions and tools for investments.
Providing email messages with notifications and other relevant information.
Foreign Trade follow-up consultations for clients on the office banking settings.
The chart below sets forth Grupo Financiero Galicia’s sales network as of December 31,2020.
As of December 31, 2020 | ||||
Branches (number) | ||||
Banco Galicia | 326 | |||
Naranja | 180 | |||
Electronic banking terminals (number) | ||||
ATMs | 1,013 | |||
Self-Service Terminals | 1,095 | |||
toque | 22,041 | |||
Digital banking transactions (thousands per month) | ||||
Galicia Mobile App | 52,737,180 | |||
Online Banking | 48,038,820 | |||
Office Banking | 18,612,657 | |||
Clients (thousands) | ||||
Banco Galicia | 3,062,196 | |||
Naranja | 2,877,565 | |||
Naranja X | 154,316 | |||
Galicia Seguros | 2,040,906 | |||
Galicia Adminitradora de Fondos | 90,764 |
a) Digital and Self-Management Channels
In order to take care of our clients and to provide them with ongoing service and assistance, Grupo Financiero Galicia is working to respond to the new COVID-19 reality by using updated digital channels and promoting self-management.
During 2020, the particular context that the world was facing led to a sudden increase in the amount of times people accessed their information through virtual channels. The actions taken by our subsidiaries to respond to this are described below.
By promoting self-management, Banco Galicia carried out the following actions in order to increase digital access for its clients:
Extending the time window for when customers can invest in the “Fima Common Investment Funds” in order to provide 24/7 access for investing.
Enabling the possibility of swapping sovereign debt securities using online banking so long as 98% of the holders of the debt to be swapped consent.
• | Updating product offerings for undertaken transfers of funds to third parties and AFIP Payments (meaning, payments to the Argentine Customs and Tax Authority, “Administración Federal de Ingresos Públicos”) in order to make conducting these transactions online more efficient and flexible. |
Allowing the digital registration, connection and disassociation of the overdraft agreements.
Digitalizing statements and reports, which eliminated the process of printing, shipping and even reduced the use of paper.
Enabling the deposit of paychecks in custody through the Bank’s self-service terminals (referred to as ITAS) and allowing for the recipient of a paycheck in custody to deposit the paycheck before its maturity date and to further request the redemption of the same without the need of an in-person cashier service.
Likewise, Naranja continued working on the digitalization of its platforms and updated its features, adding new technologies and processes while also further refining existing channels in order to improve the overall customer experience. The developments implemented focused on three main objectives:
Developing digital platforms with the best customer experience in the market.
Enlarging the portfolio of fully digital clients by offering products and allowing consultations in all of its platforms.
Enabling Naranja’s businesses to function through technological innovation.
Galicia Seguros accelerated the implementation of new communication channels to facilitate the customer experience. Also, a chat room was added on the corporate website and the call center received a new tool called COLLAB, which allows Galicia Seguros to manage all customer service channels (telephone, WhatsApp, Chat, E-mail and Facebook Messenger) at the same time. All these assets were added to the traditional sales and service channels. Galicia Seguros is making progress in the automation of processes and using robotization tools that allow it to capture improvements in recurring procedures within the sales and after-sales processes. In order to achieve this, they have worked jointly and collaboratively with their business partners: Banco Galicia and Naranja. Accordingly, they developed new functionalities for the contracting process and after-sales management within the digital platforms of Online Banking, Naranja Online and their respective applications. One of them is the possibility of consulting and downloading the acquired policy, the contract for new coverage, the details regarding the assistance services, and the monitoring and follow-up of claims and complaints.
As of the date hereof, these are some of the Grupo Financiero Galicia’s (or its subsidiaries) digital and self-management channels:
1. | Galicia App: this is the mobile online banking app for Banco Galicia. In 2020, this app experienced exponential growth in features offered and their use by clients. Among other functions, the ability to make an appointment at a branch office in advance online, withdraw funds from an ATM with no card, and access ATMs with a fingerprint were incorporated. Likewise, the main screen of the app was redesigned for an enhanced experience, and the option of sending or requesting money to someone registered on the mobile phone’s contact list was added. In order to guarantee the security of the users and their operations, Banco Galicia added the option of biometric fingerprint access, updated the process of connection to Token Galicia (Token Galicia is a numeric code that allows Banco Galicia’s customers to do banking transactions) to a 100% online process, and implemented on Online Banking an intelligence system for the recovery of credentials. |
2. | Online Banking: Banco Galicia added the option to self-manage credit card payments as well as an option to pre-settle debt refinancing. The Bank worked to update services and streamline operations for its “Personas” (or individual) clients. Galicia Seguros
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3. | Office Banking: this is a web-based online platform that Banco Galicia offers to clients in its “companies tribe”. Banco Galicia has encouraged self-management, and companies are now able to carry out a credit assessment of themselves with just one click. During 2020, 95% of loans for companies and 75% of cash advances were carried out digitally |
4. | Gala: this is the name of Banco Galicia’s virtual assistant. It is featured in five different channels and it functions 24x7. Gala was designed to answer customer and non-customer inquiries, providing information on more than 200 topics related to products, services, password management and Quiero! Points, among other things. It also allows you to know the status of the shipment of products, and Banco Galicia is currently working on the pilot stage of checking balances and movements of accounts and cards through the WhatsApp channel. This virtual assistant is prepared to transfer clients to a bank official at the digital call center whenever it fails to understand what the person is trying to ask. The Bank continues to work on the evolution of its virtual assistant to provide solutions that will allow this self-management area to grow. During 2020, it increased its monthly average conversations by 350% as compared to 2019. |
5. | Web Naranja: Naranja improved the website’s user help center search function, achieving a 96% success rate for users finding the answers they were seeking in comparison to that of 55% prior to this change. |
6. | Naranja Online (NOL): this is Naranja’s web platform. During 2020, Naranja incorporated all of its products and services into Naranja Online, favoring users’ online operations; and it also allowed for non-digital clients to access digital products by providing payment links for the |
7. | Tienda Naranja: the Tienda Naranja platform was relaunched, and its launching included an expansion in the range of |
8. | Naranja en tu Celular (Naranja on your phone): this is a service of notifications by |
9. | WhatsApp: Naranja X (previously mentioned) developed an automated service bot via WhatsApp in order to also be available app. This automated service bot was well-received by customers. By encouraging online payments, online downloads of products and online credit card purchases, the |
10. | Social Networks: due to the context of the COVID-19 pandemic, users turned to social networks in |
b) Assisted Channels
Officers and executives at Grupo Financiero Galicia offer clients assisted support. Banco Galicia and Naranja feature a large network of branch offices throughout the country, help centers for clients, and remote customer service.
In order to take care of both clients and employees, Banco Galicia paid particular attention to safety features for the reopening of its branch offices, established a system of appointments, and implemented various security protocols.
Also, Banco Galicia transferred simple paperwork to Galicia POINT: a phone channel through which representatives who work remotely can answer inquiries.
Additionally, during 2020, Banco Galicia developed a new channel for its clients: supplementary financial services agents, also known as non-banking correspondents. Through this new channel, clients can carry out transaction operations, such as the payment of statement balances, receipt of ANSES subsidies (subsidies granted by the Argentine Government Department that administers the funds of the country’s state-run pension system –“Administración Nacional de la Seguridad Social”-), and make cash withdrawals, in stores or collecting companies, such as Pago Fácil (“easy pay”). In this way, Banco Galicia expanded its geographic coverage and further grew its network of face-to-face service channels, resulting in an improved customer experience.
Plus, by moving a variety of transactions to non-banking correspondents, Banco Galicia was able to provide more efficient and better service at its various branches and through its online product offerings. By December 2020, an average of 150,000 monthly operations were performed at Banco Galicia’s non-banking correspondents, totalling Ps.1,200 million. Services were offered by non-banking correspondents at almost 300 points throughout the country in 2020. In addition, these non-banking correspondent, points were authorized and able to disburse ANSES social assistance benefits to Banco Galicia’s clients; such as, for example, the IFE plan -which stands for emergency family income and which was implemented as a way of social assistance during the COVID-19 pandemic.
During 2020, Naranja went ahead with the general deployment of its strategy called Sucursales del Futuro (Branches of the Future), a project that is focused on providing a better experience to clients, moving from spaces for transactions to places for relationships, advice and training. To implement the new model, branch offices in the provinces of Mendoza, San Juan, Córdoba, San Luis, Santa Fe, Buenos Aires, Chubut, Santiago del Estero and Río Negro had to undergo some restoration, remodeling and relocation works. In 2020, the new service model reached 30 different branch offices, which were added to the nine already existing before December 31, 2019, making this service tool available to 28% of all clients throughout the country. For the fiscal year of 2021, the deployment is expected to reach another 31 branch offices, reaching 76% of the clients.
Also, Naranja’s telephone channel became a 24x7 assistance channel.
c) Automatic Banking
Automatic banking comprises self-service terminals (TAS) and ATMs, all of them located at Banco Galicia and Naranja branch offices and other spots in the country.
During 2020, Banco Galicia worked on the following initiatives, in order to offer clients more comfort while operating transactions:
New withdrawal order functionalities in the self-service terminals and ATMs, with the aim of allowing clients to send money even to third parties that do not have a savings account or a Galicia debit card and a Banelco PIN (Personal Identification Number. This 4-digit number allows customers to operate through ATMs with a Galicia Debit Card).
Increase in withdrawal limits.
Deposit of paychecks in custody and sale of paychecks.
The ability to use paychecks under custody to make pending payments.
Withdrawal order for companies through Office Banking for an amount of up to Ps.100,000.
During 2020, Naranja increased the number of digital service spots in 23 branch offices, installing 41 TAS and setting up 9 24-hour service areas. Not only was interrelation with clients made easier, but also Naranja began to offer safer and more agile channels and technology support tools.
ii) Products and Services
With a strategic vision to become a financial platform, Grupo Galicia provides products and services tailored for each customer, individual or company, that are designed to satisfy their unique needs. Through products and services tribes, Grupo Galicia creates and manages these products and services, including financing, E-checks, insurance, credit cards, investments, foreign trade operations, among others.
a) Financing
The application and registration processes in 2020 were 100% digital and adapted to the COVID-19 context, with the goal of allowing everyone to proceed with no difficulties or obstacles whatsoever. The average end-to-end interaction time during 2020 was 72 hours.
Regarding the evolution of loans, interest rates remained relatively stable during the first semester of 2020, and that led to an average of approximately Ps.2,000 million per month of new loans extended to clients. As of April 2020, there was a drop in demand, and then this began to change during the second half of the year as a result of the slow but steady reactivation of certain activities.
Among Banco Galicia’s financing products and services, the following stand out for 2020:
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3. | FOGAR Assistance: Banco Galicia was the largest underwriter within the FOGAR Assistance Line with a total amount of Ps.3,700 million. The Argentine guarantee fund (FoGar) is a public trust which helps Micro, Small and Medium companies (MiPyMEs) to obtain credit. The Government provides partial or total guarantees to companies which are used to help them receive loans through this fund. |
4. | Discount of documents: 12,500 customers discounted checks. |
5. | Préstamos Express (Express Loans): through Online Banking, Banco
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6. | Agro Lines: Financiamiento Galicia Rural, which evolved from Tarjeta Galicia Rural, was launched in 2020, and it featured an integrated platform that included the main brands in the financing of working capital sectors related to |
7. | Mortgage Loans: the placement of mortgage loans in general and of mortgage loans adjusted by UVA, had already been affected during 2019 as a result of the |
prevailing at that time. In 2020, due to the increase in the price of UVA and the adverse effect that the pandemic had on the economy, the product was not offered by the Bank. In addition to the risk of affecting the fee / income ratio of our clients, the product continued to be subject to strong regulations by the Government. During the last months of 2019 and in the first months of 2020, with the purpose of unfreezing the mortgage loan value adjustments, the Government implemented a model whereby the value of UVA will be progressively incremented and updated until it reaches its fair market value. In March 2020, a national decree established a new freezing of the UVA value adjustment and consequently a freezing in the value adjustment of the mortgage loan, together with the suspension of foreclosure executions and the impossibility of reporting arrears due to non-payment, among other measures that were established within the framework of public emergency. As of January 31st,2021, the Government is carrying out a new model to increment the value of UVA again which foresees the unfreezing of UVA adjustment in 17 installments, the last one to be paid in June 2022. |
8. | Impact financing: Banco Galicia promotes a triple impact business model through which it enhances its role in sustainable development, which begins with the design and implementation of |
PRODUCT | DESCRIPTION | IMPACT | ||
+B Line | Special financing for triple impact companies, with a special focus on B Companies. | Ps.38.8 million placed to 12 financed projects | ||
Certified Agriculture Line - AAPRESID | For SME producers with a certification in Certified Sustainable Agriculture. | Ps.12.7 million placed to 4 | ||
Line for Essential Supplies for Containment of | Financing line for the working capital of SMEs that produce and provide essential sanitation and health supplies. | Ps.1,236 million placed 705 credits granted | ||
Green Bond | With the | US$58 million 18 liquidated projects |
b) E-Checks
Banco Galicia developed an electronic check, an instrument which allows companies to make collections and payments online and which has now become a key tool. In 2020, Banco Galicia launched a new product called “Payment to Suppliers with Electronic Checks” (Pago a Proveedores con Cheques Electrónicos), which has enabled the migration of all operations to digital options that can be self-managed by the client. It also launched the “Discount Simulation (Simulación de descuento) feature. This helps the client see the actual offer before depositing the check in custody.
A total of 1,387,514 electronic checks were issued during 2020.
c) 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 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 2020, Galicia Seguros updated its coverage by launching a new product for pets and a technical insurance with multi-risk coverage for companies, and it also added new telemedicine services and nutritional and psychological assistance to its home and life insurance product offerings.
As part of the group of newly launched products, together with an insurtech company, WeCover, a 100% digital on-demand bicycle insurance was offered starting in June 2020. This insurance may be easily activated and deactivated in accordance with the client’s needs and desires at a given moment.
A new product for pets was also presented: a complete insurance policy for dogs and cats which does not only cover accidents, illnesses, loss or death of the animal, but it also provides day-to-day services and assistance. Some of these services are: veterinary consultations, transfers needed due to an accident or a health issue, vaccinations, oral hygiene and daycare service, so that families can go on vacation knowing that their dog or cat is safe and being taken care of. This product can be acquired by Banco Galicia clients through Online Banking.
Likewise, other services were incorporated into the home and life insurance offerings for a limited time and were particularly designed to accompany clients during the mandatory isolation period. This is how clients were able to make use of the telemedicine service and nutritional and psychological assistance. In this case, the possibility of contracting services through Naranja Online or through the Naranja and Banco Galicia applications was also incorporated.
Finally, for clients in the companies tribe, Galicia Seguros launched Seguro Técnico (Technical Insurance), a multi-risk coverage that covers machinery and electronic equipment.
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 in Argentina. 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.
In 2020, the online retirement insurance product “Fondo Futuro” had an increase of 124% in the number of policies in force reaching a total of 824 insured clients, where 85% of them represents contributions in Ps. and the remainder corresponds to contributions in US$. By 2020, the total billing of Fondo Futuro was Ps.18.1 million with a monthly average of Ps.1.5 million.
d) 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.
Banco Galicia responds to the needs of its clients with an outstanding offer of services and benefits provided through its Galicia Credit and Debit Cards. Banco Galicia offers Visa, Mastercard and American Express cards, and they are offered to clients of all tribes. Some of the products offered are the International, Gold, Platinum, Black/Signature cards, which feature different consumer financing options and exclusive promotions for all their clients.
As of December 31, 2020, Banco Galicia has a stock of active cards of more than 5 million, while Naranja surpasses 8.5 million cards.
In alliance with Garmin (a watch manufacturer and company), Banco Galicia has launched contactless payments that can easily be made through a Garmin watch for Galicia Mastercard cards. The Bank also implemented tokenization in order to improve the safety of the transactions through ecommerce, subscriptions and face-to-face purchases. Over 300,000 token-based transactions were made in 2020.
For its part, in 2020 Naranja launched the Naranja Virtual Card, which is available at Naranja and through the Naranja Online App and was designed to assist clients in the context of the current pandemic. This card allows clients to make purchases online in a more secure way. It has a CVV (Verification Code) that is generated every time the client needs to use it. The Naranja Virtual Card does not replace the actual plastic credit card, as it has a different OCR (Optical Character Recognition.) This card is available to be requested by more than 2.5 million clients, including account owners and their additional cardholders. Total purchases using this product since the product was launched in 2020 is, to date, higher than Ps.450 million, with an average purchase of Ps.8,000.
Additionally, and as of the second quarter of 2020, clients can also use Ajnaran (Naranja spelled backwards), a credit card that is printed at the very moment the account owner wishes to make a purchase (rather than having to wait for a new credit card to be delivered to the client’s house) and which has a validity of three years. In 2020, and thanks to special home delivery services, delivery times for physical credit cards were also improved, achieving a significant reduction in the SLA (Service Level Agreement) for card delivery: 25% of clients now receive their cards in less than 48 hours, and 60% in 10 business days. In 2020, more than 58,000 Ajnaran cards were delivered throughout the country.
e) Investments
Banco Galicia has a wide range of investment products that meet the needs and the profile of every client. Before making an investment, all clients are surveyed in order to see their aversion to risk and to find the products that best suit their objectives. This survey is renewed every year.
Additionally, the client receives personal advice coming from the branch network and through the Investment and Private Banking Center for clients in said cluster.
In 2020, Banco Galicia continued to deepen its digital transformation by improving the value proposition of investment products, offering new functionalities and technological solutions in the different channels and also by strengthening its main system of investment and custody of products.
f) Global Custody
With regards to the Global Custody service in 2020, Banco Galicia has continued to increase the positioning of the product, mainly by focusing on the Insurance Companies and Corporate companies.
When compared to 2019, this product has experienced a 45% growth in assets under custody (“AUC”), a 25% growth of Insurance Companies (measured in the number of clients), and 9% growth for the corporate cluster.
g) Fima Funds
Galicia Administradora de Fondos 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. The market share of common investment funds was 9.97% as of December 31, 2020, increasing 37 basis points (“bp”) as compared to December 31, 2019. The following is a list of the Fima funds offered:
1. | Fima Premium: this is a fund that provides immediate-online liquidity with a yield close to a fixed-term deposit. It invests mainly in remunerated sight accounts and fixed-term certificates. For very short-term investments in pesos |
2. | Fima Ahorro Pesos: it seeks to obtain yield from a portfolio of
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3. | Fima Ahorro Plus: is an investment portfolio includes short/medium term bonds denominated in Argentine pesos with low volatility and high liquidity. This is an alternative for those investors looking for a balance of risk and return. Its investment portfolio includes treasury bills in pesos, negotiable liabilities of first-line companies, provincial Government debt securities, fixed terms, bonds and remunerated (interest generating) accounts, among others. The investor profile in this case is conservative/moderate and the recommended horizon is 90 to 120 days. |
4. | Fima income in Argentine pesos: the aim of the fund is to maximize the yield of a portfolio of assets in pesos at a fixed and variable rate over a medium term. Its portfolio composition includes sovereign bonds, treasury bills denominated in Argentine pesos, negotiable liabilities and financial trusts, among others. Recommended for moderate investments that may last between 1 and 2 years. |
5. | Fima renta plus:it invests mainly in a |
6. | Open Fima SMEs: the aim of the fund is to obtain returns from a portfolio comprised of instruments of fixed income or variable income that are issued by SMEs or companies with low market capitalization, with a long-term investment horizon. |
7. | Fima Capital plus: its aim is to maximize the yield of a portfolio composed of dollar linked bonds and synthetic assets that replicate the evolution of the exchange rate, with liquidity in 48 hours. |
8. | Fima international fixed income: this alternative seeks to obtain profitability from a portfolio of medium-term dollar bonds, mainly coming from Latin American markets and up to 25% in American treasury bonds. The design of the investment portfolio does not include local bonds, |
9. | Fima mix I:fund in pesos composed of local assets that seek to monitor the evolution of the “official dollar,” combined with a lower participation in variable income of shares that are listed on the New York Stock |
10. | Fima shares: the aim of the fund is |
11. | Fima PB shares:fund composed of |
12. | Fima |
In 2020, Galicia Administradora de Fondos got the first place in the FCI Money market category with its Fima Premium fund, same place in the T + 1 category with its Fima Ahorro Pesos and Fima Ahorro Plus funds, and also got the first place in the dollar linked category with its Fima fund Capital Plus.
Banco Galicia and La Nación co-created the podcast called “Los números también hablan” (Numbers Speak, Too) in which they talk about all the benefits and advantages of the Fima Funds. They also created a series of videos on YouTube and educational digital talks to stay close to their clients.
h) Inviu
It is through Inviu that Grupo Financiero Galicia has developed a digital investment platform that allows users, both investors and financial advisors, to manage their portfolios in an efficient, simple and user-friendly way. This platform was launched on the market in October 2020.
i) Galicia Securities
Galicia Securities offers financial and stock market services to individuals, companies and financial institutions. It is an agent of BYMA, MAE, MAV and performs CIDA services. This new company is already occupying leading positions in the Fixed Income market, given the fact that it ranked second in the BYMA ranking with 3.6% market share in the last quarter of 2020.
j) 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. Banco Galicia continues to accompany its clients in their international businesses through a personalized electronic platform and differentiated funding lines.
In 2020, the volume of foreign trade transactions undertaken by Banco Galicia was equal to US$16,153 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.
Galicia Seguros has surety policies for every need: Temporary importation or exportation, differences in law, value or lack of documentation, land transit and replacement of precautionary measures. It also offers surety insurance coverage when this is required to guarantee liabilities before the AFIP. - Tax and Customs Administration . Through its Comex Tribe, Banco Galicia works to guarantee quality in end-to-end foreign trade operations and safety in the application of current regulations. In order to do this, the Bank implements a Call & Ops service model in which the service circle contacts clients directly and answers their questions, provides advice and resolves any difficulties during the preparation of the corresponding documentation.
k) Capital Market & Investment Banking
Banco Galicia consolidated its position in the Capital Market and Investment Banking by structuring various financial products that are tailored for corporate, SME and agricultural companies. In this regard, the Bank has organized more than 50 transactions in the capital market, with a wide variety of products that included, among others, debt securities, short-term securities, letters and financial trusts.
The issuance of public securities by the City of Buenos Aires for $21,001 million and the ones made by the energy sector for $41,239 million are two of the most important operations that were placed in pesos. In addition to that, the appetite in the market for dollar linked bonds re-emerged during 2020. In that sense, in 2020, the Bank participated in 37 issuances for more than US$1,222 million, mainly from the energy industry and companies linked to the agricultural sector chain. Among the operations placed in Dollars, it is also worth highlighting the issuances for more than US$137 million made by the energy sector and the participation as local Underwriters in the exchanges abroad for both AA 2000 and CGC for US$502 million.
From Investment Banking, and as a consequence of the difficulties faced by many companies as a result of the COVID-19 health crisis and the adverse macroeconomic context, the Bank focused on accompanying its clients by restructuring their liabilities with financing methods according to their needs and in the most sustainable way possible, thus completing more than 10 operations for more than $2,800 million.
l) Benefits
EMINENT benefits
In order to provide a commensurate experience for EMINENT clients, we develop targeted proposals that are in line with the pillars of the EMINENT proposal. This is a value proposition focused on art, sports, fashion, gastronomy, women and family. Besides, this proposal adds a series of experiences related to personal well-being, through the concept of Wellness Life.
Quiero! program
Banco Galicia continues to offer more discounts and benefits, with a catalog of more than 1,500 options in different categories such as: savings, post-purchase, physical products, vouchers, and travel and tourism. The site of Quiero! shows clients relevant offers according to their profile and consumption patterns. This leads to a better experience regarding the redemption of points and makes the program simpler and more assertive. During 2020, 330,000 clients used at least one of the benefits.
Benefits in Plan Z
Naranja has assisted its clients with benefits in Plan Zeta (offering 3, 6, 9 and 12 payment installments), discounts, and special plans and deferred payment offers for the purchase of essential items such as those made in supermarkets, pharmacies, door-to-door services, and gas stations. As restrictions became more flexible, the Bank added other categories to the value proposition and encouraged online consumption through discounts and special payment plans. Benefits were activated for special dates such as Friendship Day, Father’s Day, Children’s Day, Mother’s Day and end-of-year parties in specific categories such as clothing, sports, construction and electro. This year, following the growth of online commerce, Naranja became an official sponsor of Cyber Monday for the first time, introducing itself as a means of payment. This participation had a positive impact on consumption, the negotiation of promotions aimed at online sales, and the positioning of the brand. Naranja communicated over 40 promotions every month, using the strategies of 360° communication approach and considering all types of media, especially the Internet. The Smartes (benefits given on Tuesdays) benefit helped clients obtain a 20% discount and then another discount for another 5% through the seniority promotion at Plan Z. At the end of the fiscal year, 30% of Naranja’s turnover was driven by more than monthly 2,500 promotions that were distributed in 9,500 different points throughout the country.
Quiero! in Naranja
The registration for the Naranja customer loyalty program was launched in May 2020. Some of the most outstanding events included the chance to access Quiero! through the NOL (Naranja Online) and App Naranja channels, the redemption points for discounts on certain items and businesses when using Naranja, the registration of 70% of the most important businesses in the country for the redemption points deal with Naranja, and login/registration functionality at quiero.com.ar through Naranja credentials. At the end of the fiscal year, there were 50,000 Naranja clients and 180,000 clients shared with Banco Galicia.
Naranja X
Since the launch of its prepaid card, Naranja X has been offering specific promotions for new customers and only on particular dates such as HotSale and CyberMonday. In addition, it has fixed discounts for all its customers in the payment of services and purchase of products.
m) MODO
MODO is the new digital payment solution, launched jointly by over thirty public and private banks in the country. This tool allows banked users to make transfers and payments in stores easily and from their cell phones. This virtual wallet allows the user to have an all-in-one app to check balances and transfer and receive money from other users from their bank accounts in other banks.
From the Galicia app, you can access MODO and use the QR code to make payments to affiliated stores. Another feature is the possibility of transferring money to people registered as a contact on your cell phone, without the need to request a Unique Banking Key (Clave Bancaria Uniforme, “CBU”) or an Alias. This alliance is a great step for our clients because they will no longer need their physical wallet and they will have the chance to migrate to digital channels to make their daily transactions as secure, agile, and effective as always.
n) Naranja X
At the end of 2019 Grupo Financiero Galicia launched Naranja X, Naranja’s Fintech arm that is currently part of the Ecosistema NaranjaX.
Naranja X developed an app with an account in Argentine pesos and a prepaid Naranja X Visa card, free of charge, with contactless technology and a vertical design which is new in this country. With this card, it is possible to make purchases and payments at any store or digital platform in the world, add your automatic debits, or withdraw cash through ATMs. Additionally, the app offers the possibility of transferring money immediately between virtual and bank accounts; buying top-ups for your cell phone lines; loading the public transportation card in every Argentine province; paying over 5,000 services; and paying the Naranja account’s statement.
B.4 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.
i) 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, 2020, December 31, 2019 and December 31, 2018.
For the Fiscal Year Ended December 31, 2020 | For the Fiscal Year Ended December 31, 2019 | For the Fiscal Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||||||
Average Balance | Accrued Interest | Average Yield / Rate | Average Balance | Accrued Interest | Average Yield / Rate | Average Balance | Accrued Interest | Average Yield / Rate | ||||||||||||||||||||||||||||
(in millions of Pesos, except otherwise noted) | ||||||||||||||||||||||||||||||||||||
Interest-Earning Assets | ||||||||||||||||||||||||||||||||||||
Debt Securities at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||
Government Securities | 155,630 | 62,430 | 40.11 | 166,505 | 84,883 | 50.98 | 93,353 | 28,708 | 30.75 | |||||||||||||||||||||||||||
Others Debt Securities | 1,385 | 1,015 | 73.29 | 1,838 | 888 | 48.31 | 3,541 | 799 | 22.56 | |||||||||||||||||||||||||||
Total Debt Securities at fair value through profit or loss | 157,015 | 63,445 | 40.41 | 168,343 | 85,771 | 50.95 | 96,894 | 29,507 | 30.45 | |||||||||||||||||||||||||||
Repurchase Transactions | 35,871 | 8,968 | 25.00 | 18,170 | 9,713 | 53.46 | 16,479 | 1,553 | 9.42 | |||||||||||||||||||||||||||
Loans and Other Financing | ||||||||||||||||||||||||||||||||||||
Loans | 491,386 | 148,539 | 30.23 | 587,663 | 159,351 | 27.12 | 631,995 | 156,764 | 24.80 | |||||||||||||||||||||||||||
Financial Leases | 2,324 | 352 | 15.15 | 3,857 | 761 | 19.73 | 5,059 | 1,227 | 24.25 | |||||||||||||||||||||||||||
Other Loans and Other Financing | 2,265 | 313 | 13.82 | 3,317 | 670 | 20.20 | 1,244 | 589 | 47.35 | |||||||||||||||||||||||||||
Total Loans and Other Financing | 495,975 | 149,204 | 30.08 | 594,837 | 160,782 | 27.03 | 638,298 | 158,580 | 24.84 | |||||||||||||||||||||||||||
Other Interest-Earning Assets | 44,279 | 13,455 | 30.39 | 54,603 | 13,517 | 24.76 | 43,578 | 7,087 | 16.26 | |||||||||||||||||||||||||||
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Total Interest-Earning Assets | 733,140 | 235,072 | 32.06 | 835,953 | 269,783 | 32.27 | 795,249 | 196,727 | 24.74 | |||||||||||||||||||||||||||
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Interest-Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||
Savings Accounts | 252,515 | 14,559 | 5.77 | 264,364 | 11,214 | 4.24 | 279,693 | 6,932 | 2.48 | |||||||||||||||||||||||||||
Time Deposits | 243,255 | 64,910 | 26.68 | 234,214 | 91,922 | 39.25 | 228,217 | 60,042 | 26.31 | |||||||||||||||||||||||||||
Total Interest-Bearing Deposits | 495,770 | 79,469 | 16.03 | 498,578 | 103,136 | 20.69 | 507,910 | 66,974 | 13.19 | |||||||||||||||||||||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 19,815 | 2,505 | 12.64 | 38,319 | 5,054 | 13.19 | 42,944 | 5,498 | 12.80 | |||||||||||||||||||||||||||
Debt Securities and Subordinated Debt Securities | 43,921 | 7,653 | 17.42 | 88,146 | 19,866 | 22.54 | 70,300 | 17,856 | 25.40 | |||||||||||||||||||||||||||
Other Interest-Bearing Liabilities | 1,916 | 293 | 15.29 | 13,315 | 952 | 7.15 | 3,393 | 406 | 11.97 | |||||||||||||||||||||||||||
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Total Interest-Bearing Liabilities | 561,422 | 89,920 | 16.02 | 638,358 | 129,008 | 20.21 | 624,547 | 90,734 | 14.53 | |||||||||||||||||||||||||||
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Spread and Net Yield | ||||||||||||||||||||||||||||||||||||
Interest Rate Spread | 16.05 | 12.06 | 10.21 | |||||||||||||||||||||||||||||||||
Cost of Funds Supporting Interest-Earning Assets | 12.27 | 15.43 | 11.41 | |||||||||||||||||||||||||||||||||
Net Yield on Interest-Earning Assets | 19.80 | 16.84 | 13.33 |
(*) |
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ii) Changes in Net Interest Income-Volume and Rate Analysis
The following table allocates, 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, 2020 compared with the fiscal year ended December 31, 2019 and (ii) the fiscal year ended December 31, 2019, compared with the fiscal year ended December 31, 2018. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.
Fiscal Year Ended December 31, 2020 / Fiscal Year Ended December 31, 2019 Increase (Decrease) due to changes in | Fiscal Year Ended December 31, 2019 / Fiscal Year Ended December 31, 2018 Increase (Decrease) due to changes in | |||||||||||||||||||||||
Volume | Rate | Net Change | Volume | Rate | Net Change | |||||||||||||||||||
(in millions of Pesos) | ||||||||||||||||||||||||
Interest Earning Assets | ||||||||||||||||||||||||
Debt Securities at fair value through profit or loss | ||||||||||||||||||||||||
Government Securities | (5,267 | ) | (17,186 | ) | (22,453 | ) | 30,540 | 25,635 | 56,175 | |||||||||||||||
Others | (116 | ) | 243 | 127 | (65 | ) | 154 | 89 | ||||||||||||||||
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Total Debt Securities at fair value through profit or loss | (5,383 | ) | (16,943 | ) | (22,326 | ) | 30,475 | 25,789 | 56,264 | |||||||||||||||
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Repurchase Transactions | (1,642 | ) | 897 | (745 | ) | 175 | 7,985 | 8,160 | ||||||||||||||||
Loans and Other Financing | ||||||||||||||||||||||||
Loans | (36,117 | ) | 25,305 | (10,812 | ) | (7,877 | ) | 10,464 | 2,587 | |||||||||||||||
Financial Leases | (258 | ) | (151 | ) | (409 | ) | (261 | ) | (205 | ) | (466 | ) | ||||||||||||
Other Loans and Other Financing | (179 | ) | (178 | ) | (357 | ) | 123 | (42 | ) | 81 | ||||||||||||||
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Total Loans and Other Financing | (36,554 | ) | 24,976 | (11,578 | ) | (8,015 | ) | 10,217 | 2,202 | |||||||||||||||
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Other Interest-Earning Assets | 305 | (367 | ) | (62 | ) | 2,099 | 4,331 | 6,430 | ||||||||||||||||
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Total Interest-Earning Assets | (43,274 | ) | 8,563 | (34,711 | ) | 24,734 | 48,322 | 73,056 | ||||||||||||||||
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Interest Bearing Liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
Savings Account | (477 | ) | 3,822 | 3,345 | (357 | ) | 4,639 | 4,282 | ||||||||||||||||
Time Deposits | 3,704 | (30,716 | ) | (27,012 | ) | 1,617 | 30,263 | 31,880 | ||||||||||||||||
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Total Interest-Bearing Deposits | 3,227 | (26,894 | ) | (23,667 | ) | 1,260 | 34,902 | 36,162 | ||||||||||||||||
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Financing Received from the Argentine Central Bank and Other Financial Institutions | (2,347 | ) | (202 | ) | (2,549 | ) | (617 | ) | 173 | (444 | ) | |||||||||||||
Debt Securities and Subordinated Debt Securities | (8,410 | ) | (3,803 | ) | (12,213 | ) | 3,614 | (1,604 | ) | 2,010 | ||||||||||||||
Other Interest-Bearing Liabilities | 1,995 | (2,654 | ) | (659 | ) | 633 | (87 | ) | 546 | |||||||||||||||
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Total Interest-Earning Assets | (5,535 | ) | (33,553 | ) | (39,088 | ) | 4,890 | 33,384 | 38,274 | |||||||||||||||
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The decrease of Ps.34,711 million in interest income for the fiscal year ended December 31, 2020, as compared to the previous year, is primarily attributable to a Ps.43,274 million decrease in the volume of interest-earning assets, partially offset by an increase of Ps.8,563 million in interest income due to an increase in interest rates.
In particular, Ps.22,326 million of the decrease in interest income was due to a decrease in interest income from debt securities measured at fair value through profit or loss. This decrease primarily resulted from a decrease in interest rates earned from Government securities due to a 1,087 basis point (“bps”) decrease in the average interest rate for debts securities, from 50.98% in 2019 to 40.11% in 2020. The average volume of Government securities held by us amounted to Ps.155,630 million for fiscal year 2020, as compared to Ps.166,505 million for the previous fiscal year.
The Ps.11,578 million decrease in interest from loans and other financing was due to a decrease in volume equal to Ps.36,554 million, mainly as a consequence of a decrease in the average volume of loans granted to the private sector. This decrease was partially offset by an increase in interest rates (accounting for Ps.24,976 million), mainly as a result of an increase in the average rate earned by us on loans and other financing provided.
In terms of interest expenses, the Ps.39,088 million decrease for the fiscal year ended December 31, 2020, as compared to the fiscal year ended December 31, 2019, is primarily a result of an increase in the interest rate payable on time deposits of Ps.27,012 million (which increased from 39.25% in 2019 to 26.68% in 2020).
iii) 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, | ||||||||
2020 | 2019 | |||||||
(in millions of Pesos) | ||||||||
Debt Securities at FV through profit or loss | 155,420 | 89,431 | ||||||
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Argentine Government Securities | 24,283 | 9,122 | ||||||
Government Bonds | 6,487 | 472 | ||||||
Provincial Bonds | 740 | — | ||||||
City of Buenos Aires Bonds | 91 | 164 | ||||||
Treasury Bills | 16,965 | 8,486 | ||||||
Argentine Central Bank´s Bill | 128,325 | 79,153 | ||||||
Leliq (liquidity Bills) | 128,325 | 79,153 | ||||||
Corporate Securities | 2,812 | 1,156 | ||||||
Debt Securities | 2,742 | 1,028 | ||||||
Debt Securities of Financial Trust | 70 | 128 | ||||||
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Other Debt Securities | 23,070 | 25,894 | ||||||
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Measured at FV through OCI | 4,185 | 21,669 | ||||||
Argentine Government Securities | 4,011 | 21,669 | ||||||
Government Bonds | 3,934 | 21,573 | ||||||
Treasury Bills | 77 | — | ||||||
City of Buenos Aires Bonds | — | 96 | ||||||
Argentine Central Bank´s Bill | 174 | — | ||||||
Leliq (liquidity Bills) | 174 | — | ||||||
Measured at Amortized Cost | 18,885 | 4,225 | ||||||
Argentine Government Securities | 17,887 | (37 | ) | |||||
Government Bonds | 17,931 | 2 | ||||||
Treasury Bills | — | — | ||||||
Allowance | (44 | ) | (39 | ) | ||||
Corporate Securities | 994 | 1,083 | ||||||
Debt Securities | 940 | 582 | ||||||
Debt Securities of Financial Trusts | 36 | 692 | ||||||
Others | 18 | 19 | ||||||
Allowance | — | (210 | ) | |||||
International Government Securities | 4 | 3,179 | ||||||
Treasury Bills | 4 | 3,179 | ||||||
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Investments in Equity Instruments | 5,712 | 6,201 | ||||||
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Domestic | 5,655 | 6,143 | ||||||
International | 57 | 58 | ||||||
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Total Debt and Equity Securities | 184,202 | 121,526 | ||||||
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As of December 31, 2020, the increase in our holdings of debt and equity securities was mainly a result of an increase in the volume of Government bonds issued by the BCRA that we held. Our government securities issued by the BCRA increased Ps.49,172 million from Ps.79,153 million as of December 31, 2019 to Ps.128,325 million as of December 31, 2020.
The amount of Argentine government securities recorded at fair value as of December 31, 2020 in an amount of Ps.24,283 million corresponded to securities issued by the National Treasury Bills (for Ps.16,965 million), the Government (for Ps.6,487 million), provincial governments (for Ps.740 million) and the City of Buenos Aires (for Ps.91 million).
As of December 31, 2020, our holding of government securities denominated in Dollars was composed of Government bonds recorded at their fair value (for Ps.4,183 million), Government bonds recorded at their amortized cost (for Ps.1 million) and U.S. Treasury Bonds recorded at their amortized cost (for Ps.4 million).
As of December 31, 2019, the amount of Argentine government securities, recorded at fair value amounted to Ps.9,122 million and corresponded to our holdings of debt securities mainly issued by the National Treasury Bills (for Ps.8,486 million), Government bonds (for Ps.472 million) and the City of Buenos Aires (for Ps.164 million).
As of December 31, 2019, the holding of public securities denominated in Dollars was composed mainly of Government bonds recorded at fair value (for Ps.7,090 million), of National Treasury (for Ps.13 million), of Government bonds recorded at their amortized cost (for Ps.2 million) and U.S. Treasury Bonds recorded at their amortized cost (for Ps.4 million) .
All local Government securities, except for the Leliq, which are issued by the BCRA, were issued by the Government, provincial governments or the City of Buenos Aires.
Remaining Maturity and Weighted-Average Yield
The following table analyzes the remaining maturity and weighted-average yield of our holdings of debt securities recorded at amortized cost as of December 31, 2020. Our debt securities portfolio yields do not contain any tax equivalency adjustments.
Fiscal Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||
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) | ||||||||||||||||||||||||||||||||||||
Other Debt Securities | ||||||||||||||||||||||||||||||||||||
Measured at Amortized Cost | ||||||||||||||||||||||||||||||||||||
Argentine Government Securities | 17,931 | — | — | % | 17,912 | 28.40 | % | 1 | 16.30 | % | 18 | 10.50 | % | |||||||||||||||||||||||
Corporate Securities | 976 | 715 | 47.30 | % | 261 | 49.80 | % | — | — | % | — | — | % | |||||||||||||||||||||||
Debt Securities | 940 | 707 | 47.40 | % | 233 | 50.30 | % | — | — | % | — | — | % | |||||||||||||||||||||||
Debt Securities of Financial Trust | 36 | 8 | 40.00 | % | 28 | 45.00 | % | — | — | % | — | — | % | |||||||||||||||||||||||
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Total Other Debt Securities Measured at Amortized Cost | 18,907 | 715 | 18,173 | 1 | 18 | |||||||||||||||||||||||||||||||
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(1) | Effective yield based on December 31, 2020 quoted market values. |
iv) 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 Naranja. Most of the Naranja’s 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, | ||||||||
2020 | 2019 | |||||||
(in millions of Pesos) | ||||||||
Principal and Interest | ||||||||
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Non-Financial Public Sector | — | 9 | ||||||
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Argentine Central Bank | 13 | 30 | ||||||
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Financial Institutions | 14,701 | 14,697 | ||||||
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Non-Financial Private Sector and Residents Abroad (1) | ||||||||
Loans | 537,207 | 492,932 | ||||||
Advances | 29,219 | 21,636 | ||||||
Overdrafts | 143,769 | 102,215 | ||||||
Mortgage Loans | 16,486 | 20,493 | ||||||
Pledge Loans | 11,587 | 4,368 | ||||||
Personal Loans | 36,504 | 37,637 | ||||||
Credit Card Loans | 241,793 | 203,476 | ||||||
Placements in Banks Abroad | 1,662 | 10,721 | ||||||
Pre-financing and financing of exports | 29,487 | 73,430 | ||||||
Other Loans | 5,283 | (40 | ) | |||||
Accrued Interest, Adjustment and Quotation Differences Receivable | 23,650 | 20,755 | ||||||
Documented Interest | (2,233 | ) | (1,759 | ) | ||||
Financial Leases | 1,855 | 3,030 | ||||||
Other Financing | 9,892 | 12,630 | ||||||
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Non-financial Private Sector and Residents Abroad | 548,954 | 508,592 | ||||||
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Total Gross Loans and Other Financing | 563,668 | 523,328 | ||||||
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Allowance | ||||||||
Loans Allowance | (36,707 | ) | (34,891 | ) | ||||
Financial Leases Allowance | (35 | ) | (60 | ) | ||||
Other Financing Allowance | (492 | ) | (233 | ) | ||||
Less: Allowances | (37,234 | ) | (35,184 | ) | ||||
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Total | 526,434 | 488,144 | ||||||
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(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. |
• | Pre-financing and financing of exports: loans for exports. |
• | Other Loans: loans not included in other categories. |
• | Documented Interest: discount on notes and bills. |
As of December 31, 2020, Grupo Financiero Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.563,668 million, an 8% increase as compared to the year ended December 31, 2019.
In line with the Government’s measures in order to address the impact of COVID-19, the BCRA issued some regulations related to financing, including loans with reduced rates and for production lines (for further information please see “Argentine Banking Regulations” – “Financing Loans for Economic Development”, below). Out of total loans, there are Ps.11.739 million that corresponded to financing lines for productive investment of small and medium companies. As of December 31, 2020, there are Ps.19,689 million that corresponded to loans with reduced rate (between 0% and 24%).
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, 2020.
As of December 31, 2020 | ||||||||||||||||||||
In 1 year or less | After 1 year through 5 years | After 5 years through 15 years | After 15 years | Total at December 31, 2020 | ||||||||||||||||
(in millions of Pesos) | ||||||||||||||||||||
Variable Rates | ||||||||||||||||||||
Non-Financial Private Sector and Residents Abroad | 22,215 | 15,979 | 282 | — | 38,476 | |||||||||||||||
Loans | 22,215 | 15,979 | 282 | — | 38,476 | |||||||||||||||
Advances | 1,100 | — | — | — | 1,100 | |||||||||||||||
Overdrafts | 15,808 | 11,468 | 136 | — | 27,412 | |||||||||||||||
Mortgage Loans | 2,896 | 3,435 | 146 | — | 6,477 | |||||||||||||||
Pledge Loans | 77 | 166 | — | — | 243 | |||||||||||||||
Personal Loans | 2,290 | 910 | — | — | 3,200 | |||||||||||||||
Pre-financing and financing of exports | 44 | — | — | — | 44 | |||||||||||||||
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Total Variable Rate | 22,215 | 15,979 | 282 | — | 38,476 | |||||||||||||||
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Fixed Rates | ||||||||||||||||||||
Financial Institutions | 13,488 | 627 | 14,115 | |||||||||||||||||
Non-Financial Private Sector and Residents Abroad | 420,502 | 45,289 | 481 | 14 | 466,286 | |||||||||||||||
Loans | 420,502 | 45,289 | 481 | 14 | 466,286 | |||||||||||||||
Advances | 28,116 | 3 | — | — | 28,119 | |||||||||||||||
Overdrafts | 108,486 | 7,864 | 7 | — | 116,357 | |||||||||||||||
Mortgage Loans | 1,112 | 1,468 | 37 | 11 | 2,628 | |||||||||||||||
Pledge Loans | 8,394 | 2,947 | — | 3 | 11,344 | |||||||||||||||
Personal Loans | 14,121 | 15,099 | 437 | — | 29,657 | |||||||||||||||
Credit Card Loans | 239,738 | 2,055 | — | — | 241,793 | |||||||||||||||
Placements in Banks Abroad | 1,662 | — | — | — | 1,662 | |||||||||||||||
Pre-financing and financing of exports | 13,590 | 15,853 | — | — | 29,443 | |||||||||||||||
Other Loans | 5,283 | — | — | — | 5,283 | |||||||||||||||
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Total Fixed Rate | 433,990 | 45,916 | 481 | 14 | 480,401 | |||||||||||||||
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|
| |||||||||||
Adjustable Rate | ||||||||||||||||||||
Financial Institutions | 586 | — | — | — | 586 | |||||||||||||||
Non-Financial Private Sector and Residents Abroad | 4,362 | 6,309 | 357 | — | 11,028 | |||||||||||||||
Loans | 4,362 | 6,309 | 357 | — | 11,028 | |||||||||||||||
Mortgage Loans | 1,615 | 5,409 | 357 | — | 7,381 | |||||||||||||||
Personal Loans | 2,747 | 900 | — | — | 3,647 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Adjustable Rate | 4,948 | 6,309 | 357 | — | 11,614 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Loan | 461,153 | 68,204 | 1,120 | 14 | 530,491 | |||||||||||||||
Accrued Interest, Adjustment and Quotation Differences Receivable | 23,650 | — | — | — | 23,650 | |||||||||||||||
Documented Interest | (2,233 | ) | — | — | — | (2,233 | ) | |||||||||||||
Allowance | (36,707 | ) | — | — | — | (36,707 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL | 445,863 | 68,204 | 1,120 | 14 | 515,201 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Interest and the UVA/CER adjustment were assigned to the first month. |
v) 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 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 on 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 BCRA’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:
Due to our financial holding structure, competition is experienced at the level of our operating subsidiaries. We face strong competition in mostQualitative Analysis Assessment of the areascorporate borrower’s creditworthiness performed by the officer in which our subsidiaries are active. For a breakdown of our total revenues, for eachcharge of the past two fiscal years,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 the activities discussed below (i.e., banking, Tarjetas Regionalesall 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.
Naranja
Credit Risk
Credit risk for Naranja arises from a variety of factors, including credit risk related to failures to pay by entities that Naranja lends money to and failures to pay outstanding credit card balances by individual clients that hold credit cards with Naranja.
With respect to investments, 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
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 | 14,000 | 75,000 | 160 | 5,000 | 180,000 | 200 | 5,000 | 210,000 | |||||||||||||||||||||||||||
B | 90 | 11,000 | 55,000 | 150 | 4,500 | 12,000 | 180 | 4,500 | 150,000 | |||||||||||||||||||||||||||
C | 80 | 9,000 | 44,000 | 140 | 4,000 | 75,000 | 170 | 4,000 | 95,000 | |||||||||||||||||||||||||||
D | 70 | 7,000 | 31,000 | 120 | 3,500 | 50,000 | 150 | 3,500 | 60,000 | |||||||||||||||||||||||||||
E (Highest) | 60 | 6,000 | 15,000 | 100 | 3,000 | 35,000 | 120 | 3,000 | 40,000 |
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, 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.
vi) 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) 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 BCRA 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 BCRA situation indicates a serious risk of bankruptcy (ratings C, D, E). 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 (“PD”): 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).
Post-model adjustments
Since March 2020, the BCRA implemented a series of measures to reduce the economic consequences of COVID-19 pandemic, among which are the deferral of payments and suspension of the collection of punitive interest in case of default in payments of loan installments, being the credit cards loans excluded from this benefit.
Thus, considering the adverse economic context that the country is going through, borrower credit uncertainty and measures issued by the BCRA, the management recognized an additional credit loss allowance to that obtained through the statistical model of ECL on the deferred loan portfolio amounts, which shows the potential impairment due to the macroeconomic context, once the implemented measures are lifted for the BCRA.
The management measured the additional impact on the allowance from the estimation of the expected credit loss of loan portfolios which have deferred payments, based on new PD estimated depending on actual past due date (without deferrals) and the projected performance of the affected products, modifying the staging classification through a “Lifetime Adjustment”.
vii) 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, 2020 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month ECL | Lifetime ECL | Lifetime ECL | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 115,541 | 47,518 | — | 163,059 | ||||||||||||
1-30 | 1,378 | 1,165 | 1,509 | 4,052 | ||||||||||||
31-60 | — | 998 | 49 | 1,047 | ||||||||||||
61-90 | — | 561 | 95 | 656 | ||||||||||||
Default | — | — | 5,557 | 5,557 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 116,919 | 50,242 | 7,210 | 174,371 | ||||||||||||
Loss allowance | (4,954 | ) | (12,628 | ) | (5,894 | ) | (23,476 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 111,965 | 37,614 | 1,316 | 150,895 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 3.19 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 422.46 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 11.98 | % |
Retail like Portfolio | ||||||||||||||||
December 31, 2020 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month ECL | Lifetime ECL | Lifetime ECL | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 104,800 | 12,160 | 962 | 117,922 | ||||||||||||
1-30 | 969 | 542 | 218 | 1,729 | ||||||||||||
31-60 | — | 210 | 6 | 216 | ||||||||||||
61-90 | — | 45 | 16 | 61 | ||||||||||||
Default | — | — | 1,187 | 1,187 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 105,769 | 12,957 | 2,389 | 121,115 | ||||||||||||
Loss allowance | (559 | ) | (2,131 | ) | (1,832 | ) | (4,522 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 105,210 | 10,826 | 557 | 116,593 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 0.98 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 380.96 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 4.03 | % |
Wholesale Portfolio | ||||||||||||||||
December 31, 2020 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month ECL | Lifetime ECL | Lifetime ECL | Total | |||||||||||||
Days past due | ||||||||||||||||
A | 263,742 | 12,557 | — | 276,299 | ||||||||||||
B1 | — | 1,002 | — | 1,002 | ||||||||||||
Default | — | — | 796 | 796 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 263,742 | 13,559 | 796 | 278,097 | ||||||||||||
Loss allowance | (1,960 | ) | (623 | ) | (607 | ) | (3,190 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 261,782 | 12,936 | 189 | 274,907 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 0.29 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 400.75 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 1.50 | % |
Naranja | ||||||||||||||||
December 31, 2020 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month ECL | Lifetime ECL | Lifetime ECL | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 85,989 | 1,004 | 263 | 87,256 | ||||||||||||
1-30 | 3,232 | 226 | 56 | 3,514 | ||||||||||||
31-60 | — | 853 | 48 | 901 | ||||||||||||
61-90 | — | 373 | 30 | 403 | ||||||||||||
Default | — | — | 1,975 | 1,975 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 89,221 | 2,456 | 2,372 | 94,049 | ||||||||||||
Loss allowance | (3,708 | ) | (589 | ) | (1,848 | ) | (6,145 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 85,513 | 1,867 | 524 | 87,904 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 2.10 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 311.14 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 5.02 | % |
Retail Portfolio | ||||||||||||||||
December 31, 2019 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month | Lifetime | Lifetime | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 106,961 | 39,205 | 1,242 | 147,408 | ||||||||||||
1-30 | 2,127 | 2,070 | 252 | 4,449 | ||||||||||||
31-60 | — | 1,718 | 222 | 1,940 | ||||||||||||
61-90 | — | 719 | 375 | 1,094 | ||||||||||||
Default | — | — | 5,829 | 5,829 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 109,088 | 43,712 | 7,920 | 160,720 | ||||||||||||
Loss allowance | (5,514 | ) | (2,555 | ) | (6,230 | ) | (14,299 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 103,574 | 41,157 | 1,690 | 146,421 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 3.63 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 245.31 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 6.06 | % |
Retail like Portfolio | ||||||||||||||||
December 31, 2019 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month | Lifetime | Lifetime | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 44,985 | 5,851 | 677 | 51,513 | ||||||||||||
1-30 | 1,779 | 725 | 225 | 2,729 | ||||||||||||
31-60 | — | 218 | 87 | 305 | ||||||||||||
61-90 | — | 234 | 202 | 436 | ||||||||||||
Default | — | — | 3,318 | 3,318 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 46,764 | 7,028 | 4,509 | 58,301 | ||||||||||||
Loss allowance | (480 | ) | (199 | ) | (3,424 | ) | (4,103 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 46,284 | 6,829 | 1,085 | 54,198 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 5.69 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 123.66 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 8.14 | % |
Wholesale Portfolio | ||||||||||||||||
December 31, 2019 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month | Lifetime | Lifetime | Total | |||||||||||||
Days past due | ||||||||||||||||
A | 280,598 | 7,743 | — | 288,341 | ||||||||||||
B1 | — | 514 | — | 514 | ||||||||||||
Default | — | — | 6,639 | 6,639 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross Carrying amount | 280,598 | 8,257 | 6,639 | 295,494 | ||||||||||||
Loss allowance | (679 | ) | (302 | ) | (6,116 | ) | (7,097 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net Carrying amount | 279,919 | 7,955 | 523 | 288,397 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 2.25 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 106.90 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 2.64 | % |
Naranja | ||||||||||||||||
December 31, 2019 | ||||||||||||||||
ECL Staging | ||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||
12-month | Lifetime | Lifetime | Total | |||||||||||||
Days past due | ||||||||||||||||
0 | 60,763 | 724 | 356 | 61,843 | ||||||||||||
1-30 | 3,314 | 217 | 122 | 3,653 | ||||||||||||
31-60 | — | 1,656 | 104 | 1,760 | ||||||||||||
61-90 | — | 856 | 63 | 919 | ||||||||||||
Default | — | — | 7,597 | 7,597 | ||||||||||||
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Gross Carrying amount | 64,077 | 3,453 | 8,242 | 75,772 | ||||||||||||
Loss allowance | (2,755 | ) | (958 | ) | (6,379 | ) | (10,092 | ) | ||||||||
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Net Carrying amount | 61,322 | 2,495 | 1,863 | 65,680 | ||||||||||||
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Credit Quality | ||||||||||||||||
Default as a Percentage of Total Financial Instruments Portfolio | 10.03 | % | ||||||||||||||
Allowance for Financial Instruments as a Percentage of Default | 132.84 | % | ||||||||||||||
Net Charge-Offs as a Percentage of Financial Instruments Portfolio | 10.49 | % |
Under BCRA 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, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(in millions of Pesos) | ||||||||||||
Interest Income that Would Have Been Recorded on Non-Accrual Loans on which the Accrual of Interest was Discontinued | 2,235 | 4,036 | 1,248 | |||||||||
Recoveries of Interest on Loans Classified as Non-Accrual on which the Accrual of Interest had been Discontinued (1) | 112 | 202 | 63 |
(1) | Recorded under “Other operating income”. |
viii) Loss Experience
The following tables present the changes in the loss allowance between December 31, 2019 and December 31, 2020 and the changes in the loss allowance between December 31, 2018 and December 31, 2019.
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||
12-month | Lifetime | Lifetime | Purchased credit- impaired | Total | ||||||||||||||||
Loss Allowance as of December 31, 2019 | 9,428 | 4,014 | 22,149 | — | 35,591 | |||||||||||||||
Inflation effect | (4,039 | ) | (3,267 | ) | (7,276 | ) | — | (14,582 | ) | |||||||||||
Movements with P&L Impact | — | — | — | — | — | |||||||||||||||
Transfer from Stage 1 to Stage 2 | (667 | ) | 667 | — | — | — | ||||||||||||||
Transfer from Stage 1 to Stage 3 | (267 | ) | — | 267 | — | — | ||||||||||||||
Transfer from Stage 2 to Stage 1 | 422 | (577 | ) | 155 | — | — | ||||||||||||||
Transfer from Stage 2 to Stage 3 | 174 | (536 | ) | 362 | — | — | ||||||||||||||
Transfer from Stage 3 to Stage 1 | 290 | — | (290 | ) | — | — | ||||||||||||||
Transfer from Stage 3 to Stage 2 | — | 447 | (447 | ) | — | — | ||||||||||||||
New Financial Assets Originated or Purchased | 4,487 | 1,097 | 3,099 | — | 8,683 | |||||||||||||||
Changes in PDs/LGDs/EADs | 1,467 | 1,557 | 1,273 | — | 4,297 | |||||||||||||||
Changes to model assumptions and methodologies | 1,340 | 11,186 | 3,686 | — | 16,212 | |||||||||||||||
Foreign exchange and other movements | 1,985 | 2,357 | 1,146 | — | 5,488 | |||||||||||||||
Other movements with no P&L impact | — | — | — | — | — | |||||||||||||||
Write-offs and other movements | (3,439 | ) | (974 | ) | (13,943 | ) | — | (18,356 | ) | |||||||||||
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Loss allowance as of December 31, 2020 | 11,181 | 15,971 | 10,181 | — | 37,333 | |||||||||||||||
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Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||
12-month | Lifetime | Lifetime | Purchased credit- impaired | Total | ||||||||||||||||
Loss Allowance as of December 31, 2018 | 9,989 | 9,461 | 13,603 | — | 33,053 | |||||||||||||||
Inflation effect | (4,872 | ) | (3,846 | ) | (8,172 | ) | — | (16,890 | ) | |||||||||||
Movements with P&L Impact | — | — | — | — | — | |||||||||||||||
Transfer from Stage 1 to Stage 2 | (879 | ) | 879 | — | — | — | ||||||||||||||
Transfer from Stage 1 to Stage 3 | (224 | ) | — | 224 | — | — | ||||||||||||||
Transfer from Stage 2 to Stage 1 | 1,664 | (1,664 | ) | — | — | — | ||||||||||||||
Transfer from Stage 2 to Stage 3 | — | (1,422 | ) | 1,422 | — | — | ||||||||||||||
Transfer from Stage 3 to Stage 2 | — | 120 | (120 | ) | — | — | ||||||||||||||
Transfer from Stage 3 to Stage 1 | 43 | — | (43 | ) | — | — | ||||||||||||||
New Financial Assets Originated or Purchased | 2,323 | 2,287 | 10,603 | — | 15,213 | |||||||||||||||
Changes in PDs/LGDs/EADs | 1,635 | 119 | 5,822 | — | 7,576 | |||||||||||||||
Changes to model assumptions and methodologies | (745 | ) | 261 | 647 | — | 163 | ||||||||||||||
Foreign exchange and other movements | 2,043 | 364 | 4,300 | — | 6,707 | |||||||||||||||
Other movements with no P&L impact | — | — | — | — | — | |||||||||||||||
Write-offs and other movements | (1,549 | ) | (2,545 | ) | (6,137 | ) | — | (10,231 | ) | |||||||||||
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Loss allowance as of December 31, 2019 | 9,428 | 4,014 | 22,149 | — | 35,591 | |||||||||||||||
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ix) Deposits
The following table sets out the composition of our deposits as of December 31, 2020 and December 31, 2019.
As of December 31, | ||||||||
2020 | 2019 | |||||||
(in millions of Pesos) | ||||||||
Deposits in pesos | ||||||||
Checking Accounts | 105,028 | 91,984 | ||||||
Savings Accounts | 182,972 | 80,995 | ||||||
Time Deposits | 208,713 | 157,928 | ||||||
Time Deposits UVA | 5,565 | 1,021 | ||||||
Other Deposits (1) | 1,980 | 2,311 | ||||||
Plus: Accrued Interest, Quotation Differences Adjustment | 5,877 | 6,845 | ||||||
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Total Deposits in pesos | 510,135 | 341,084 | ||||||
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Deposits in foreign currency | ||||||||
Savings Accounts | 182,972 | 160,464 | ||||||
Time Deposits | 208,713 | 33,122 | ||||||
Other Deposits (1) | 1,980 | 1,277 | ||||||
Plus: Accrued Interest, Quotation Differences Adjustment | 5,877 | 86 | ||||||
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Total Deposits in foreign currency | 399,542 | 194,949 | ||||||
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Total Deposits | 909,677 | 536,033 | ||||||
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(1) | Includes other deposits originated by Decree No.616/05, reprogrammed deposits under judicial proceedings and |
As of December 31, 2020, our consolidated deposits increased 26% as compared to December 31 2019, mainly as a result of a Ps.101,977 million increase in deposits in peso denominated savings accounts and a Ps.50,785 million increase in deposits in time deposits denominated in pesos. These increases were mainly due to deposits received by Banco Galicia.
For more information, see Item 5. “Operating and Financial Review and Prospects” – A.“Operating Results”- “Funding”.
The following table provides a breakdown of our consolidated deposits by contractual term and currency of denomination as of December 31, 2020.
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
Within 3 Months | After 3 Months but Within 3 Months | After 6 Months but Within 12 Months | 1 year | After 1 but Within 5 years | Total | |||||||||||||||||||||||||||||||||||||||
(in millions of Pesos, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||
Deposits in pesos | ||||||||||||||||||||||||||||||||||||||||||||
Savings Accounts | 180,178 | — | — | 180,178 | — | 180,178 | ||||||||||||||||||||||||||||||||||||||
Checking Accounts | 108,279 | — | — | 108,279 | — | 108,279 | ||||||||||||||||||||||||||||||||||||||
Time Deposits | 207,438 | 873 | 387 | 208,698 | 14 | 208,712 | ||||||||||||||||||||||||||||||||||||||
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Total deposits in pesos | 495,895 | 873 | 387 | 497,155 | 14 | 497,169 | ||||||||||||||||||||||||||||||||||||||
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Deposits in pesos + UVA adjustment | — | |||||||||||||||||||||||||||||||||||||||||||
Savings Accounts | 1,437 | — | — | 1,437 | — | 1,437 | ||||||||||||||||||||||||||||||||||||||
Time Deposits | 5,286 | 274 | 78 | 5,638 | 14 | 5,652 | ||||||||||||||||||||||||||||||||||||||
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Total deposits in pesos + UVA adjustment | 6,723 | 274 | 78 | 7,075 | 14 | 7,089 | ||||||||||||||||||||||||||||||||||||||
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Deposits in foreign currency | — | |||||||||||||||||||||||||||||||||||||||||||
Savings Accounts | 98,580 | — | — | 98,580 | — | 98,580 | ||||||||||||||||||||||||||||||||||||||
Checking Accounts | 36,460 | — | — | 36,460 | — | 36,460 | ||||||||||||||||||||||||||||||||||||||
Time Deposits | 27,128 | 2,023 | 1,915 | 31,066 | 63 | 31,129 | ||||||||||||||||||||||||||||||||||||||
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Total deposits in foreign currency | 162,168 | 2,023 | 1,915 | 166,106 | 63 | 166,169 | ||||||||||||||||||||||||||||||||||||||
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Total deposits | 664,786 | 3,170 | 2,380 | 670,336 | 91 | 670,427 | ||||||||||||||||||||||||||||||||||||||
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Savings Accounts | 280,195 | — | — | 280,195 | — | 280,195 | ||||||||||||||||||||||||||||||||||||||
Checking Accounts | 144,739 | — | — | 144,739 | — | 144,739 | ||||||||||||||||||||||||||||||||||||||
Time Deposits | 239,852 | 3,170 | 2,380 | 245,402 | 91 | 245,493 |
(1) | Only principal. Includes the UVA adjustment. |
The chart above shows that the highest concentration of maturities for time deposits was in the period of up to 89 days, representing 97,7% of total time deposits. As of December 31, 2020, the average term for the raising of non-adjusted Peso-denominated time deposits was 41 days, for UVA-adjusted deposits the average term was 195 days and for those in foreign currency the term was about 54 days. Foreign currency-denominated deposits, equal to Ps.166,106 million, represented 24,8% of total deposits.
x) Regulatory Capital
Grupo Financiero Galicia
Grupo Financiero Galicia and some of its subsidiaries are regulated by the Argentine General Corporations Law. Section 186 of the General Corporations Law.
Grupo Financiero Galicia’s capital adequacy is not regulated by the BCRA, however Grupo Financiero Galicia is required to comply with the minimum capital requirement established by the General Corporations Law. On October 8, 2012, through Decree No.1331/12, such amount was established as Ps.100,000.
Banco Galicia
With respect to regulatory capital, Banco Galicia must comply with the regulations set forth by the BCRA. These regulations are based on the Basel Committee methodology, which provides the minimum capital requirements for financial institutions to cover the different risks inherent to its business activity and assets, such as credit risk, generated both by exposure to the private sector and to the public sector; operational risk (generated by the losses resulting from the non-adjustment or failures of internal processes) and market risk (generated by positions in securities and in foreign currency).
Computable capital is divided as follows:
Computable regulatory capital is divided into Basic Shareholders’ Equity (Tier I Capital) and Supplementary Shareholders’ Equity (Tier II Capital). Deductible items generally fall within Basic Shareholders’ Equity.
Intangible assets and deferred tax asset credit balances should be deducted from the calculation of computable capital.
Results for a given period are part of Basic Shareholders’ Equity (Income: 100% of audited results, 50% of unaudited results; Losses: 100%).
Supplementary Shareholders’ Equity includes 100% of the allowance for the portfolio in normal situation (up to the limit of 1.25%) and for subordinated notes, with respect to which, as from each of the last five years of each issuance term, the computable amount shall be reduced by 20% of the face value issued.
The following percentages apply in determining minimum capital requirements:
Loans in Pesos to the Non-financial Public Sector: 0%.
Property, Plant and Equipment and Miscellaneous Assets: 8%.
Family Mortgage Loans: 35% over 8%, if the amount does not exceed 75% of the asset value.
Retail Portfolio: 75% over 8%.
The following table sets forth the capital required in accordance with the BCRA regulations in force for each period indicated below.
December 31, | ||||||||
2020 | 2019 | |||||||
(in millions of Pesos, except percentages) | ||||||||
Minimum capital required (A) | ||||||||
Allocated to Credit Risk | 42,458 | 29,149 | ||||||
Allocated to Market Risk | 1,419 | 905 | ||||||
Allocated to Operational Risk | 12,192 | 7,608 | ||||||
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Total minimum capital required (A) | 56,069 | 37,662 | ||||||
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Computable Capital (B) | ||||||||
Tier I | 129,584 | 61,393 | ||||||
Tier II | 27,477 | 19,392 | ||||||
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Total computable capital (B) | 157,061 | 80,785 | ||||||
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Excess over Required Capital (B)-(A) | 100,992 | 43,123 | ||||||
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Risk assets | 685,407 | 459,900 | ||||||
Ratios (%) | ||||||||
Equity / Total assets | 15.76 | 13.07 | ||||||
Excess / Minimum capital required | 180.12 | 114.50 | ||||||
Total Capital Ratio(1) | 22.92 | 17.57 | ||||||
Tier I Capital Ratio | 18.91 | 13.35 |
(1) | Total computable capital / risk weighted assets credit, market and operational risks. |
As of December 31, 2020, the Bank’s computable capital amounted to Ps.157,061 million, Ps.100,992 million which was 180% higher than the Ps.56,069 million minimum capital requirement. As of December 31, 2019, this excess amounted to Ps.43,123 million which was 115% higher than the minimum capital requirement.
As of December 31, 2020, the minimum capital requirement increased by Ps.18,407 million as compared to December 31, 2019, mainly because the value of risk weighted assets are now being adjusted to inflation. Computable capital increased by Ps.76,276 million as of December 31, 2020 as compared to December 31, 2019, primarily as consequence of the increase in the results generated during the fiscal year by Banco Galicia and to an increase in the Banco Galicia’s shareholders’ equity, all of these as a result of the inflation adjustment to both values. Banco Galicia’s total capital ratio was 22.92%, increasing 535 bps as of December 31, 2020 as compared to 17.57% as of December 31, 2019.
Ecosistema NaranjaX
Since the companies from Ecosistema NaranjaXare not financial institutions, their capital adequacy is not regulated by the BCRA. Tarjetas Regionales and its subsidiaries have to comply with the minimum capital requirement established by the Corporations Law, which was Ps.100,000 for 2020.
Naranja Digital is a financial institution class “C” and for that condition is regulated by the BCRA and has to comply with the minimum capital requirement establish by the BCRA.
Minimum Capital Requirements of Insurance Companies
The insurance companies controlled by Sudamericana must meet the minimum capital requirements set by General Resolution No.39,957 of the National Insurance Superintendency. This resolution requires insurance companies to maintain a minimum capital level equivalent to the highest of the amounts calculated as follows:
(a) | By line of insurance: this method establishes a fixed amount by line of insurance. |
For vehicle insurance: Ps.80 million.
For motorcycle insurance: Ps.48 million.
Joint operation for vehicles and motorcycles insurance: Ps.96 million
Civil liability for public transportation vehicles / Labor insurance / retirement insurance: Ps.80 million
Civil and air navigation liability insurance / warranty and credit default insurances /general damage insurance / personal insurances including life insurance (individual and joint policies, which do not require a technical reserve), burial insurance, personal accident insurance, health insurance: Ps.24 million
Environmental insurance: Ps.16 million
Joint operation of Vehicles and motorcycles insurance, Civil and air navigation liability insurances, Warranty and credit default insurance and damage insurance: Ps.120 million
Burial insurance: Ps.12 million
Life insurance (Individual and Collective, which requires a technical reserve: Ps.24 million
(b) | By premiums and additional fees: to use this method, Sudamericana must calculate the sum of the premiums issued and additional fees earned in the last 12 months. Based on the total, Sudamericana must calculate 16% of such amount. Finally, it must adjust the total by the ratio of net paid claims to gross paid claims for the last 36 months. This ratio must not be lower than minimum capital requirements required for a particular line of insurance as set forth above in (a). |
(c) | By claims: to use this method, Sudamericana must calculate the sum of gross claims paid during the 36 months prior to the end of the period under analysis. To that amount, it must add the difference between the balance of unpaid claims as of the end of the period under analysis and the balance of unpaid claims as of the 36th month prior to the end of the period under analysis. The resulting figure must be divided by three. Then Sudamericana must calculate 23%. The resulting figure must be adjusted by the ratio of net paid claims to gross paid claims for the last 36 months. This ratio must be at least 50%. |
(d) | For life insurance companies that offer policies with an investment component, the figures obtained in b) and c) must be increased by an amount equal to 4% of the technical reserves adjusted by the ratio of net technical reserves to gross technical reserves (at least 85%), plus 0.3% of at-risk capital adjusted by the ratio of retained at-risk capital to total at-risk capital (at least 50%). |
The minimum required capital must then be compared to computable capital, defined as shareholders’ equity less non-computable assets. Non-computable assets consist mainly of deferred charges, pending capital contributions, proposed distributions and excess investments in authorized instruments.
As of December 31, 2020, the computable capital of the companies controlled by Sudamericana exceeded the minimum requirement of Ps.1,067 million by Ps.167 million.
Sudamericana also owns Galicia Broker, a company dedicated to brokerage in different lines of insurance that is regulated by the guidelines of the Corporations Law, which provided for a minimum capital requirement of Ps.100,000.
B.5 Government Regulation
i) General
All companies operating in Argentina must be registered with the Argentine Public Registry of Commerce. In addition, any company with publicly issued equity or debt securities is subject to the rules and regulation of the CNV. Further, financial entities, such as Grupo Financiero Galicia and Banco Galicia, are subject to BCRA regulations. As public issuers of securities in Argentina, Grupo Financiero Galicia and Banco Galicia must comply
with the disclosure, reporting, governance and other rules applicable to such companies in the markets in which they are listed and those of regulators in the countries in which they are listed, including the Capital Markets Law (as amended by the Productive Financing Law No. 27,440 and including Decree No. 471/2018), Law No.20,643, the Decrees No.659/1974 and No.2220/1980 (as amended by Decree No. 572/1996), and CNV’s General Resolution No.622/2013 (as amended and/or supplemented, the “CNV Rules”).
In their capacity as public issuers of securities, Grupo Financiero Galicia and Banco Galicia are subject to the aforementioned rules. Since Grupo Financiero Galicia has publicly listed American Depository Shares (or “ADSs”) in the United States, it is also subject to the reporting requirements of the United States Securities and Exchange Act of 1934 (the “Exchange Act”) for foreign private issuers and to the provisions applicable to foreign private issuers under the Sarbanes Oxley Act. See Item 9. “The Offer and Listing”.
Banco Galicia’s operating subsidiaries are also subject to the following laws: Law No.27,442 (the Competition Defense Law or, in Spanish “Ley de Defensa de la Competencia”), Decree No. 274/2019 that repeals the Fair Business Practice Law (No. 22,802) and the Consumer Protection Law No. 24,240, as amended (or, in Spanish “Ley de Protección del Consumidor”).
As a financial service holding company, we do not have a specific institution that regulates our activities. Our banking and insurance subsidiaries are regulated by different regulatory entities. The BCRA is the main regulatory and supervising entity for Banco Galicia.
The banking industry is highly regulated in Argentina. Banking activities in Argentina are regulated by Law No.21,526, as amended (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the BCRA. The BCRA regulates all aspects of financial activity. See “Argentine Banking Regulation” below.
Banco Galicia and our insurance subsidiaries are subject to Law No.25,246 which was passed on April 13, 2000 (as amended, among others, by Laws No.26,087, 26,119, 26,683, 26,734, and 27,446 together to which we refer to as the Anti-Money Laundering Law), which provides for an anti-money laundering framework in Argentina, including Laws No.26,268 and 27,304, which amend Law No.25,246 to include activities associated with terrorism and Law No. 27,401, which provides for the criminal liability of corporate entities upon their direct or indirect execution of prohibited activities. Furthermore, the Anti-Money Laundering Law created the Financial Information Unit (Unidad de Información Financiera), which established an administrative criminal system, compliance monitoring and the ability to impose sanctions.
Sudamericana’s insurance subsidiaries are regulated by the National Insurance Superintendency and Laws No.17,418, as amended and modified by Law No.20,091. Galicia Broker is regulated by the National Insurance Superintendency, through Law No.22,400, as amended.
Naranja and the credit card activities of Banco Galicia are regulated by the Credit Card Law No. 25,065, as amended. Both the BCRA and the Secretary of Domestic Trade have issued regulations to, among other things, enforce public disclosure of companies’ pricing (fees, interest rates, and advertising) in order to ensure consumer awareness of such pricing. See “Credit Cards Regulation”.
On January 6, 2002, the Argentine Congress enacted Law No.25,561 (as amended and supplemented, the “Public Emergency Law” or in Spanish “Ley de Emergencia Pública”), which, together with various decrees and BCRA rules, provided for the principal measures with which to manage the 2001-2002 financial crisis, including Asymmetric Pesification and eliminating the requirement that the BCRA’s reserves in gold, foreign currency and foreign currency denominated debt be at all times equivalent to 100% of the monetary base, among others. The Argentine Government did not extend the term of the Public Emergency Law that was previously extended on an annual basis. However, on December 14, 2016, the Argentine Congress enacted Law No. 27,345, which extended the state of emergency on social matters until December 31, 2019. Additionally, on September 30th ,2019, the Argentine Congress enacted Law No. 27,519, which extends the state of national nutrition emergency until December 31, 2022, whereby the Government must ensure the nutrition of its population with state funds.
On December 23, 2019, the Argentine Congress enacted Law No.27,541 (the “Social Solidarity and Productive Reactivation Law” or, in Spanish “Ley de Solidaridad Social y Reactivación Productiva”), which declared yet again a public emergency in relation to certain economic, financial, fiscal, and social matters, among others. The goal of this law is to manage Argentina’s public debt and public spending in a sustainable manner. During 2020, due to the coronavirus pandemic (COVID – 19), many of the provisions of the Social Solidarity and Productive Reactivation Law were amended in order to address the economic and social consequences on Argentine citizens of the Country’s strictly enforced quarantines (such as, for example, providing tax benefits to certain sectors especially affected by the COVID – 19 pandemic and the extension of the health emergency, among others).
On February 12, 2020, the Argentine Congress enacted Law No. 27,544 (the “Law on the Restoration of the Sustainability of Public Debt Issued under Foreign Law” or, in Spanish “Ley de Restauración de la Sostenibilidad de la Deuda Pública”), which granted the Argentine Executive Branch broad powers to negotiate and to restructure public debt issued currently held by the Government and governed by laws other than the laws of Argentina.
ii)Foreign Exchange Market
In January 2002, through the Public Emergency Law, Argentina declared a public emergency situation in respect of its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine Executive Branch to establish a system to determine the foreign exchange rate between the Argentine Peso and foreign currencies and to issue foreign exchange-related rules and regulations.
Within this context, on February 8, 2002, through Decree No. 260/2002, as amended by Decree No. 27/2018, the Argentine Executive Branch established (i) a single and free-floating foreign exchange market (a “MULC”, or “Mercado Único y Libre de Cambios”) through which all foreign exchange transactions in a foreign currency must be conducted, and (ii) that foreign exchange transactions in a foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among the contracting parties, subject to the requirements and regulations imposed by the BCRA.
On June 9, 2005, through Decree No.616/2005, the Argentine Executive Branch mandated that inflows of funds into the MULC arising from foreign debt incurred by residents (subject to certain exceptions) and all inflows of funds of non-residents channeled through the MULC for certain concepts were required to be credited into a local account and maintained for a “Minimum Stay Period”, requiring a mandatory deposit for 30% of the amount of the transaction for a period of 365 calendar days. Such requirements were eliminated by the former administration.
In February 2017, the former Ministry of Economy and Public Finance issued Resolution No. 1/2017, which reduced the “Minimum Stay Period” described above to zero days. As of July 1, 2017, with the issuance of Communication “A” 6244, the foreign exchange rules and regulations described above were reversed. In the same sense, the Government issued Decree 27/2018 by which it modified the denomination of the “MULC”, or “Mercado Único y Libre de Cambios” to “MLC” or “Mercado Libre de Cambios” (the “MLC”)
On September 1, 2019, the Government issued Decree No. 609/19 (as later amended by Decree No. 91/19 on December 28, 2019), setting forth certain controls and restrictions on the acquisition, sale, and transfer of foreign currency, applicable to both individual persons and legal entities in Argentina. This decree also enabled the BCRA to establish, through regulations, the necessary measures to avoid “practices and operations aimed at avoiding, through public titles or other instruments” the restrictions set forth by the decree. In furtherance of such decree, since its date of implementation the BCRA has adopted a series of measures that regulate the MLC, which are all included in the Amended and Restated Text on Foreign Exchange (the “FX Regulatory Framework”).
Inflow of Funds:
Export of goods, provision of services, and sales of non-financial, non-locally produced assets: Funds entering into Argentina from (i) the export of Argentine goods, (ii) the provisions of services to a non-resident by a resident and (iii) payments received from the sale of non-financial, non-locally produced assets are required to enter through the MLC, be converted into Pesos, and be deposited into a local bank account, all within specifically prescribed periods
Payments received from outstanding loans, payment of amounts earned from term deposits or payments received from the sale of any type of asset that is granted, set up or acquired after May 28, 2020: Furthermore, by means of Communication “A” 7030 (as amended), the BCRA set forth that, in order to grant their clients access to the MLC, financial entities must first request from such clients an affidavit stating, among others, that such client will agree to transfer into Argentina and convert into local currency through the MLC within five business days, any funds received abroad arising from payments received from outstanding loans, payments of amounts earned from term deposits held outside of Argentina or payments received from the sale of any type of asset (e.g. shares, securities, goods, etc.) outside of Argentina in case such loans, deposits or assets were granted, set up or acquired after May 28, 2020.
Offshore financial indebtedness: Regarding offshore financial debts, the Argentine borrower receiving the foreign funds must convert such funds into Argentine Pesos in order to be able to access the MLC in the future for the payment of principal and interest payments when due on the foreign debt.
Outflow of Funds:
General Requirements: By means of Communication “A” 7030 (as amended from time to time) effective as of May 28, 2020, the BCRA introduced additional controls, limitations, and restrictions on foreign exchange operations. In this sense, in addition to the specific requirements that a foreign exchange transaction must meet in order for the payee to access the MLC, this law set forth broad new requirements of general application to most foreign exchange transactions, with some minor exceptions. In particular, in order to grant their clients access to the MLC, Argentine financial entities must first request from their clients an affidavit stating that: (i) all of its foreign currency holdings in Argentina are deposited in local financial entities; (ii) at the beginning of the day on which the affidavit is provided, the client does not have more than US$100,000 as “available foreign liquid assets” unless it is allowed to have more based on certain exceptions; (iii) it agrees that it will transfer into Argentina and convert into local currency in the MLC within 5 business days, any funds received abroad arising from payments received on outstanding loans, amounts earned on term deposits, or amounts received from sales of any type of assets; in each case, if such loans, deposits or assets were granted, constituted or acquired after May 28, 2020; and (iv) it has not sold securities with settlement in foreign currency or transferred them to international depository agencies abroad during the prior 90 calendar days, and will not engage in such activity on the date of the affidavit and within the same period or within 90 days following the date thereof.
Additionally, through Communication “A” 7200, the BCRA created the “Registry on foreign exchange information of exporters and importers of goods”, in which certain import and export companies that are specifically included in the list published under Communication “C” 89476 must be registered no later than April 30, 2021 as a condition to access the MLC for the outflow of funds as of May 1, 2021.
Import of Goods. The FX Regulatory Framework establishes the possibility for Argentine residents to access the MLC in order to pay amounts that they owe for the import of goods. Two different scenarios are contemplated. First, in most cases and where the cases are specifically covered in the FX Regulatory Framework, financial entities may grant their clients access to the MLC in order to pay for the import of goods if such goods have already been registered with the customs office and so long as certain requirements set forth in the FX Regulatory Framework are met (cases that are not specifically covered in the FX Regulatory Framework require the BCRA’s prior approval and registration with the customs office is not sufficient). In addition various quantitative and other limitations for the payment of various imports of goods and repayment of the principal of debt incurred in order to pay for certain imports of goods were set under Communication “A” 7030, as amended from time to time (these limitations are set to expire on June 30. 2021 unless such deadline is extended). Second, in respect of payments for imports of goods whose customs registration is pending as well as for payments in advance of receipt of the imported good, payments upon demand against review of the shipping documents and for the cancellation of commercial guarantees for imports of goods granted by local financial entities, access to the MLC can still be achieved so long as certain requirements are met. In addition, entities gaining access to the MLC in this manner must file supporting documentation proving they meet the requirements at the time that they make the payment to
the foreign supplier of the import. Further, if a payment is made in advance of actual receipt of the imported goods, the payor must file certain custom documents showing the actual import of the good within 90 days of the advance payments being made. Finally, entities may also grant their clients access to the MLC for the payment of interest payments on outstanding debts so long as the transaction is declared in the “Foreign assets and liability informative regime”.
The BCRA’s prior authorization is required for the payment of commercial debts when importing goods into the country or purchasing foreign goods (i.e. at least 3 business day in advance of the necessary authorization). Moreover, certain special regimes that are applicable to special products, or financings of purchase facilities are established (i.e., leasing agreements, companies responsible for the purchase of medicine for patients, local governments for infrastructure works, supplies and goods for certain industries, etc.).
Offshore Services. Financial entities may grant their clients access to the MLC for the payment of services provided that such provision of services was previously reported, if applicable, in the last presentation of the “Foreign assets and liability informative regime”. With certain exceptions, the BCRA’s prior authorization is required to make payments prior to their scheduled due date, or to make payments to offshore related companies. Financial entities may also grant access to the MLC for the making of interest payments on offshore debt as long as the transaction was reported in the “Foreign assets and liability informative regime”. Again, the BCRA’s prior authorization is required for early interest payments as described above.
Dividends and Earnings. No authorization from the BCRA is required to carry out foreign exchange transactions to pay dividends and earnings to “non-residents”, provided that the following requirements are met: (i) the dividends and earnings arise from closed and audited financial statements, (ii) the payment is made in accordance with the relevant corporate documents, (iii) the total amount of transfers for this reason made as of January 17, 2020 and onward, does not exceed 30% of the value of new contributions of foreign direct investment in resident companies, entered and settled through the MLC as of the mentioned date, (iv) access to the MLC for the payment of dividends cannot occur sooner than 30 calendar days following the settlement of the last contribution (v) the payor submits sufficient documentation that evidences the final capitalization of the contributions, and (vi) the payment obligation is reported to the BCRA through the “Foreign assets and liability informative regime”.
Offshore Financial Indebtedness. Regarding offshore financial indebtedness, financial entities may only grant access to the MLC when: (i) the funds disbursed as of September 1, 2019 entered Argentina through the MLC, were converted into argentine pesos, and deposited into a local bank account(s); (ii) the transaction has been reported, if applicable, before the BCRA pursuant to the “Foreign assets and liability informative regime”; and (iii) the payment is not made to an affiliated offshore company. Access to the MLC by Argentine residents for the prepayment of debt (principal and interest) more than 3 business days to its maturity date for principal or payment date for interest requires the prior authorization of the BCRA. However, this prior approval will not be required in certain specific cases. In particular, in certain circumstances, an amount of the outstanding principal of indebtedness issued by non-Argentine entities may be prepaid in advance. Specifically, by means of Communication “A” 7106 dated September 15, 2020, the BCRA has established that Argentine residents that have to make debt payments on debt issued by non-Argentine companies (including foreign financial indebtedness granted by non-financial non-related third parties, foreign financial indebtedness that required for the operation of the company, or the issuance of bonds in a foreign country with the public registration of such bonds in Argentina) with payments scheduled to fall between October 15, 2020 and March 31, 2021, must file a refinancing plan with the BCRA whereby (i) only 40% of the principal shall be paid during such timeframe; and (ii) the remaining principal shall be refinanced with new indebtedness with a minimum average duration of two years. This plan must be submitted to the BCRA within certain periods. In line with this requirement, Argentine residents may access the MLC to prepay the noted percentage of principal, subject to meeting certain criteria. The requirement to submit a refinancing plan to access the MLC does not apply to international organizations or related agencies or with official credit agencies or in respect of debt secured by such organizations or agencies and when the amount to pay for the principal of these type of indebtedness does not exceed the equivalent to US$1 million per calendar month.
Furthermore, by means of Communication “A” 7230, dated February 25, 2020, the BCRA extended the obligation to submit the above described refinancing plan for payments with maturity dates between April 1, 2021 and December 31, 2021. Such refinancing plan will not be necessary when the payment does not exceed the equivalent of US$2 million per calendar month, and neither when the maturities represent: (i) indebtedness incurred
as of January 1, 2020 and the funds received from such incurrence have been transferred and sold in the MLC; (ii) indebtedness incurred as of January 1, 2020 in order to refinance principal amounts falling due after that date; and or (iii) the remaining portion of maturities already refinanced in accordance with the parameters of Comunication “A” 7106.
Collateral trusts. Collateral trusts established by Argentine resident entities with the purpose of guaranteeing principal and interest payments for their obligations have access to the MLC in order to make such payments, as long as it is verified that the debtor would have also had access to make such payments on its own behalf because of its compliance with the applicable regulations, and that the payment abroad by the collateral trust is the only available option set forth in the transaction documents. Collateral trusts are able to access to the MLC to either transfer or purchase of foreign currency to comply with guarantee deposits of this type of indebtedness, as long as some requirements are met. However, this possibility is provided up to the equivalent payable amount in the relevant contract or the “value to be paid at the next maturity date of services”.
Investment Instruments. The BCRA‘s prior authorization is required to access the MLC for the making of foreign investments, including the purchase of foreign currency for portfolio investments (“atesoramiento”) and the purchase of securities, (i) by legal entities, and non-Argentine residents (with certain exceptions -such as multilateral agencies, embassies, etc.-), for any amount; (ii) by individual residents, when the monthly sum of US$200 is exceeded; and (iii) for non- resident individual persons (for example, tourists), when the monthly sum of US$100 is exceeded.
Application of collections from exports of goods and services: By means of Communication “A” 7123, the BCRA ruled that collection in foreign currencies from exports of goods and services may be used for (i) payments of principal and interest on financial indebtedness granted by a non-Argentine entity with an average maturity of no less than one year; and (ii) repatriation of direct investments by non-residents in companies that are not controlled by local financial entities -to the extent that said repatriation occurs after the conclusion and implementation of a direct investment project and at least one year after the transfer and settling of the capital contribution in the FX Market.
For this purposes, the disbursed funds must have been (a) used to finance certain investment projects in Argentina that generate an increase in the production of goods that will be exported, and/or will enable the substitution of imports of goods; and/or will result in an increase in the transport capacity for the exportation of goods and services through the construction of infrastructure works in ports, airports and land terminals for international transport; and (b) transferred into Argentina and converted into local currency after October 2, 2020.
Prior BCRA approval will be required for those cases where these requirements are not fulfilled. However it will not be required (either for the payment of offshore financial indebtedness with a foreign counterparty or for the repatriation of direct investment) when the funds received as of October 2, 2020 were transferred and converted into Argentine pesos through the MLC, and the repatriation takes place at least two years after such condition.
Furthermore, on April 7, 2021, Decree No. 234/2021 created an “Investment Promotion Regime for Exports”. This regime provides companies with the option of submitting an “Export Investment Project” for approval. The project must be for a direct investment in Argentina in a foreign currency, in an amount equal to at least US$100 million and it must be in order to increase the production for the exportation of certain goods. If approved, the company that submitted the “Export Investment Project” for approval is entitled to receive up to 20% of the foreign exchange received from the export of goods that were part of the direct investment project, subject to an annual cap of -25% of the gross amount initially cleared through the FX Market in order to finance the project. In addition, such amounts may be applied once a calendar-year has elapsed since the direct investment was made. Once the company receives the above described amount of foreign current from the export of the noted goods, the company may use such funds - (i) for the payment of principal and interest on commercial liabilities or financial transactions abroad; (ii) for the payment of profits and dividends that correspond to closed and audited balance sheets; and/or (iii) for the repatriation of direct investments by non-residents. In the event that export proceeds are not applied immediately, such funds must be deposited in local financial entities until its application. The BCRA adopted these measures through Communication “A” 7259, dated April 9, 2021.
iii)BCRA Reporting Regime
The BCRA’s reporting regime has been updated as described below. Communication “A” 6401 introduced reporting requirements with respect to debt securities and external liabilities for the financial and private non-financial sector and direct investments of companies in such sector under the “Foreign assets and liability informative regime”.
The completion and validation of the information corresponding to the foregoing must be done electronically through the Federal Public Revenue Administration’s website. Such information, must be reported as of the first quarter of 2020, as follows: (i) at the end of any calendar quarter, by all individuals and legal entities who have outstanding offshore financial indebtedness (or if cancelled during that period, when filing the Foreign assets and liability informative regime); and (ii) in an annual presentation, by those individuals or legal entities for whom the balance of external assets and liabilities at the end of each year reaches or exceeds the equivalent of US$50 million.
iv)Foreign Exchange Criminal Regime
Exchange operations can only be carried out through the entities authorized for such purposes by the BCRA. As such, any exchangeoperation that does not comply with the provisions of the applicable regulations will be subject to the Law No. 19,359, as regulated by Decree 480/95, and BCRA regulations (“Foreign Exchange Criminal Regime”), pursuant to which the following constitute offenses: (i) any foreign exchange transaction not performed before an authorized institution; (ii) the completion of foreign exchange transactions without the applicable authorization; (iii) any misrepresentation related to foreign exchange transactions; (iv) the failure to make accurate representations or to complete the necessary procedures in cases where the actual transactions are different than those declared; (v) any foreign exchange transaction executed without fulfilling the conditions established by applicable regulations, regarding quantity, foreign currency exchange rate, dates, etc.; and (vi) any other omission or act performed in violation of the Foreign Exchange Criminal Regime.
Violations to the Foreign Exchange Criminal Regime may be subject to fines of up to ten times the amount of the operation in breach and imprisonment in certain instances.
B.6 Argentine Banking Regulation
The following is a summary of certain matters relating to the Argentine banking system, including provisions of Argentine law and regulations applicable to financial entities in Argentina. This summary is not intended to constitute a complete analysis of all laws and regulations applicable to financial entities in Argentina.
i) General
Since 1977, banking activities in Argentina have been regulated by the Argentine Financial Institutions Law No. 21.526 (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the autonomous BCRA, the principal monetary and financial authority in Argentina that operates independently from the Argentine government. The BCRA enforces the FIL and grants authorization to banks to operate in Argentina. The FIL confers numerous powers to the BCRA, including the ability to grant and revoke bank licenses, authorize the establishment of branches of Argentine banks outside of Argentina, approve bank mergers, capital increases and certain transfers of stock, set minimum capital, liquidity and solvency requirements and lending limits, grant certain credit facilities to financial entities in cases of temporary liquidity problems and to promulgate other regulations and to enforce the FIL. The BCRA has vested the Superintendency with most of the BCRA’s supervisory powers. Such entity is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial entities and establishing rules for participation of financial entities in the MLC and the issuance of bonds and other securities, among other functions. In this section, unless otherwise stated, references to the BCRA should be understood to be references to the BCRA acting through the Superintendency. FIL grants the BCRA broad access to the accounting systems, books, correspondence, and other documents belonging to banking institutions. The BCRA regulates the supply of credit and monitors the liquidity, and generally supervises the operation, of the Argentine banking system.
Current regulations equally regulate Argentine and foreign-owned banks.
ii) Supervision
As the regulator of the Argentine financial system, the BCRA requires financial entities to submit information on a daily, monthly, quarterly, semiannual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, portfolio quality (including details on debtors and any established loan loss provisions) and other pertinent information, allow the BCRA to monitor financial entities financial condition and business practices.
The BCRA periodically carries out formal inspections of all banking institutions in order to monitor compliance by banks with legal and regulatory requirements and confirm the accuracy of the information provided to the BCRA. If BCRA rules are breached, it may impose various sanctions depending on the magnitude of the infringement. These sanctions range from warning calls up to the imposition of fines, or even the revocation of the financial institution’s operating license. Moreover, non-compliance with certain rules may result in the obligatory presentation to the BCRA of specific adequacy or regularization plans. The BCRA must approve these plans in order for the financial institution to remain operational.
Financial institutions operating in Argentina have been subject to the supervision of the BCRA on a consolidated basis since 1994. Information regarding “Limitations on Types of Business”, “Capital Adequacy Requirements”, “Lending Limits”, and “Loan Classification System and Loan Loss Provisions” related to a bank’s loan portfolio is calculated on a consolidated basis. However, regulations relating to a bank’s deposits are not based on consolidated information, but on such bank’s deposits in Argentina (for example, liquidity requirements and contributions to the deposit insurance system).
Examination by the BCRA
The BCRA began to rate financial institutions based on the “CAMEL” quality rating system in 1994. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with: “C” standing for capital, “A” for assets, “M” for management, “E” for earnings, and “L” for liquidity. Each factor is evaluated and rated on a scale from one to five, with one being the highest rating an entity can receive. The BCRA modified the supervision system in September of 2000. The objectives and basic methodology of the new system, referred to as “CAMELBIG,” do not differ substantially from the CAMEL system. The components were redefined in order to evaluate business risks separately from management risks. The components used to rate the business risks are capital, assets, market, earnings, liquidity and business. The components to rate management risks are internal control and the quality of management. By combining the individual factors under evaluation, a combined index can be populated that represents the final rating for the financial institution.
After temporarily halting such examinations as a result of the 2001-2002 financial and economic crisis, the BCRA resumed the examination process, which remains in effect as of the date of this filing. In Banco Galicia’s case, the first examination after the 2001-2002 financial crisis was on March 2017, and currently there is an ongoing examination as of December 2019.
Regulatory Capital (Minimum Capital Requirements)
Financial entities are subject to the capital adequacy rules of the BCRA, consequently Banco Galicia, as a commercial bank, must maintain a minimum capital amount measured as of each month’s closing. BCRA regulations establish that financial institutions legal capital should be equal to the greater value resulting from the comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those determined by credit and market risk, as well as operational risk.
The minimum basic capital requirement for a commercial bank located in the City of Buenos Aires, such as Banco Galicia, is a capital reserve of at least Ps.26 million. The minimum capital requirements related to credit risk, which are calculated according to a formula established by the BCRA, are designed to establish the minimum capital necessary to offset the risk that the counterparty does not comply with its obligation in a transaction related to the assets that are being reviewed. The minimum capital requirements related to market risks are designed to offset the
eventual losses generated by a change of market rates or of credit quality, which would affect the assets and liabilities of the bank. Such market risk includes (among other risks) liquidity risk and interest rate risk. Operational risk includes the possibility of incurring a failure or deficiency in losses as a result of external events or as a result of a failure or deficiency in internal processes, human error or internal systems.
In order to verify compliance with the minimum capital requirements, the BCRA considers the computable regulatory capital (“RPC”) of a particular entity (i.e., capital that the entities actually have). Pursuant to the BCRA’s regulations, a bank’s RPC is the sum of the minimum core capital (Tier I capital) and supplementary capital (Tier II capital), minus certain deductible concepts. The BCRA considered Basel III requirements in order to regulate the RPC (and listed the assets included in each Tier as well the deductible concepts in accordance with such rules).
According to the BCRA’s regulations, any financial entity operating with an RPC under the minimum capital requirements must: (i) pay-in the correspondent amount within the following two months from the month in which it fails to comply with the requirement, or (ii) submit to the Superintendency a regularization and reorganization plan within the following 30 calendar days counted as from the last day of the month in which it fails to comply with the requirement. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions, when non-compliance with the RPC requirements occurs or any warning from the Superintendency is received.
In addition, any financial entity operating under the daily integration of the minimum capital requirement related to market risk (when such failure is caused by the requirements established to guard against interest rate risk, foreign exchange risk or equity price risk), must pay-in the corresponding amount necessary to comply with the requirements and/or reduce its asset position until the applicable requirement is complied with, within a term of ten business days counted from the first failure to comply with the requirements. In case the non-compliance situation remains after such term has elapsed, the entity must submit to the Superintendency a regularization and reorganization plan within the following five days.
iii) Legal Reserve
The BCRA and FIL rules requires that every year banks allocate to a legal reserve a percentage of their net profits established by the BCRA, which currently amounts to 20% of their yearly income. Such reserve may only be used during periods in which such financial institution has incurred losses and has exhausted all other reserves. Distribution of dividends will not be allowed if the legal reserve is not met.
iv) Profit Distribution
Profit distribution of financial institutions (the concept pursuant to which a payment of dividends is included) must be authorized by the Superintendency. Financial institutions may distribute profits without exceeding the limits set forth in the “Distribution of Profits” rules established by the BCRA. The amount to be distributed must not compromise the entity’s liquidity and solvency. The Superintendency is entitled to intervene to verify the correct application of the procedures and regulations with respect to dividends approved and to be distributed by financial institutions. Nevertheless, as explained above, dividends to be paid in a foreign currency to international investors, may be subject to foreign exchange restrictions.
The BCRA sets rules for the conditions under which financial institutions can make distributions of profits. BCRA regulations require that 20% of a company’s profits, subject to certain adjustments, be allocated to legal reserves. This requirement applies regardless of the company’s ratio of legal reserves to capital stock.
In addition to the foregoing, BCRA regulations regarding profit distributions provide that profits can be distributed so long as a company’s results of operations are positive after deducting for required legal reserves, the difference between the carrying amount and the fair market value of public sector assets and/or debt instruments issued by the BCRA not valued at fair market price, and the amounts capitalized for legal proceedings related to deposits and any unrecorded adjustments required by external auditors or the BCRA. Furthermore, companies must also comply with capital adequacy rules, which set forth minimum capital requirements and required regulatory capital.
Effective as of January 2016, all Argentine financial institutions are also required to maintain capital in an additional capital reserve equal to 2.5% of risk-weighted assets and 3.5% for financial institutions classified as systemically important, which must be comprised of only Tier I Common Capital, net of deductible items. Profit distributions of financial institutions will not be authorized if failing to meet with the required computable regulatory capital set forth above. In certain cases, that margin may be modified by the BCRA, as established in the “Distribution of Profits” rules.
Profits, if any, resulting from the first-time application of IFRS may not be distributed. Any such profits will be allocated to a special reserve recorded under equity, which may only be released for capitalization purposes, or to otherwise offset potential losses.
Despite the above-mentioned existing limitations, in the context of the ongoing COVID-19 pandemic, the BCRA 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. This suspension was later extended by Communication “A” 7035 until December 31, 2020, and then by Communication “A” 7181 until June 30, 2021 (with the possibility of future extensions).
v) Legal Reserve Requirements for Liquidity Purposes
The deposit amount minus the minimum cash requirement determines the “lending capacity” of a particular deposit.
The BCRA modifies the applicable minimum cash requirement from time to time depending on monetary policy considerations.
The then-applicable minimum cash requirement is determined on the basis of the average daily balances of the obligations: (i) recorded at the end of each day, during the period prior to their integration for Argentine Pesos; and (ii) at the end of each day during each calendar month, for foreign currency and securities.
The averages will be obtained by dividing the sum of the daily balances by the total amount of days of each month. For days in which no movement is recorded, the balance corresponding to the immediately preceding day. Compliance with minimum cash requirements must be made in the same debt currency and/or instrument that corresponds to the requirement (with certain exceptions), and might be completed through (i) checking accounts, denominated in Pesos, opened by financial entities in the BCRA; (ii) “Minimum Cash Accounts”, denominated in Dollars or other foreign currencies, opened by financial entities in the BCRA; (iii) special guarantee accounts in favor of clearing houses and for coverage of credit cards, vouchers and ATM operations and for transfer settlement of immediate funds; (iv) non-bank financial entities checking accounts opened in commercial banks for the requirement of minimum cash integration; (v) special accounts opened in the BCRA linked for the provision of social security benefits administered by National Social Security Administration (“Administración Nacional de la Seguridad Social” or ANSES) and (vi) “sub-accounts 60” which are accounts that contain a minimum amount of cash received from investments in public securities and debt instruments issued by the BCRA, at market value.
According to “Minimum Cash” rule of the BCRA (as modified and complemented), the percentages of minimum cash requirements are as follows:
Demand deposits:
Peso-denominated checking accounts and savings accounts: 45%.
Savings accounts denominated in foreign currency: 25%.
Fixed term deposits:
Peso-denominated: (i) up to 29 days, 32%; (ii) 30 to 59 days, 22%; (iii) 60 to 89 days, 4%; (iv) 90 days or more, 0%.
Foreign currency-denominated: (i) up to 29 days, 23%; (ii) 30 to 59 days, 17%; (iii) 60 to 89 days, 11%; (iv) 90 to 179 days, 5%; (v) 180 to 365 days, 2% and (vi) more than 365 days, 0%.
Fixed term deposits adjusted by UVA/UVI (by remaining maturity):
(i) up to 29 days, 7%; (ii) from 30 to 59 days, 5%; (iii) from 60 to 89 days, 3%; (iv) 90 days or more, 0%.
Please bear in mind that the above-mentioned peso-denominated rates may vary depending on certain circumstances set forth by the BCRA (e.g., locality, term deposits transactions arranged remotely).
As of December 31, 2020, Banco Galicia was in compliance with its legal reserve requirements and continued to be in compliance as of the date of this annual report.
vi) Limitations on Types of Business
In accordance with the provisions of the FIL, commercial banks are authorized to carry out all activities and operations which are not strictly prohibited by law or by the BCRA regulations. Permitted activities include the capacity to: grant and receive loans; receive deposits from the general public in local and foreign currency; secure its customers’ debts; acquire, place and trade with shares and debt securities in the Argentine over-the-counter market (subject to prior approval of the CNV, if applicable); carry out operations in foreign currencies; act as trustee in financial trusts; and issue credit cards.
In order to calculate the legal reserves requirements for liquidity purposes described above, it is not necessary to deduct the capital stock allocated to foreign branches from a bank’s shareholders’ equity.
Pursuant to the BCRA’s regulations, financial institutions are not allowed to hold more than a 12.5% interest (or more than a specific percentage of the financial institution’s adjusted shareholders’ equity) in the outstanding capital of a company which does not provide services complementary to those offered by financial institutions, as established in the “Complementary services of financial activities” rules. The BCRA determines which services are complementary to those provided by financial institutions. To date has been determined that such services mainly include those offered in connection with stock brokerage, the issuance of credit, debit or similar cards, financial intermediation in leasing and factoring transactions.
Non-banking financial institutions are not allowed to provide certain services and activities, such as opening checking accounts, among other activities.
vii) Capitalization of Debt Instruments
Communication “A” 6304 (as amended) of the BCRA provides that all regulations related to capital increases must be cash contributions. However, the regulation establishes that subject to the prior authorization of the Superintendency, the following instruments are allowed as capital contributions: (i) securities issued by the Argentine government, (ii) debt instruments issued by the BCRA, and (iii) a financial institution’s deposits and other liabilities resulting from its financial brokerage activities, including subordinated obligations. With respect to instruments (i) and (ii), the contributions must be recorded at their market value. It is understood that an instrument has a market value when it is regularly listed on regulated local or foreign stock markets and traded on such markets in such amounts that the liquidation of such instruments does not significantly affect the listing price of such instruments. With respect to clause (iii) above, contributions must be recorded at their market value, as defined in
the previous sentence or, in the case of financial institutions that publicly offer their stock, at the price determined by the applicable regulatory authority. If the aforementioned conditions are not met, the instruments in question will not be contributable as capital.
Deposits and other liabilities resulting from a given financial institution’s financial brokerage activities, including subordinated obligations that are not permitted to be traded in local or foreign regulated secondary markets, will be allowed to be contributed as capital at their accounting value, pursuant to BCRA rules.
viii) Lending Limits
According to the “large exposures to credit risk” and “minimum capital for financial institutions” rules, the total amount of all credit risk exposure values of a financial entity to a single counterparty or, where appropriate, a group of related counterparties, may not exceed at any time the limits established for level capital one (Tier 1) by the BCRA.
In accordance with the BCRA’s regulations, the exposure limit to a counterpart or connected counterpart group of the non-financial private sector will be 15% of the Bank’s level one capital. However, this limit may be increased by 10% for exposures that are secured with preferred guarantees.
The total amount of financial assistance a bank is authorized to provide to a borrower and its affiliates is also limited based on the borrower’s shareholders’ equity. The total amount of financial assistance granted to a borrower and its affiliates shall not be higher than, in the aggregate, 100% of such borrower’s shareholders’ equity, although such limit may be increased an additional 200% of the borrower’s shareholders’ equity if the sum does not exceed 2.5% of the bank’s adjusted shareholders’ equity.
Global exposure to the public sector (national, provincial and municipal public sector) shall not be higher than 75% of an institution’s adjusted shareholders’ equity. Additionally, Section 12 of Communication “A” 3911, as amended, establishes that the average monthly financial assistance to non-financial public sector, in the aggregate, shall not be higher than 35% of the bank’s total assets as of the end of the previous month.
The BCRA also regulates the level of “total financial exposure” a bank has to related parties. A party may be a “related party” by: a) control, when a human or legal person directly or indirectly exercises control over the bank or is controlled directly or indirectly by the bank; or b) personal relationship, regarding individuals (including their families and any other entity which they control) who serve as directors, trustees, general managers, or managers with credit attributions.
The BCRA limits the level of total financial exposure that a bank can have outstanding to related parties, depending on the rating granted to each bank by the Superintendency. Banks rated 4 or 5 are forbidden to extend financial assistance to related parties. For banks ranked between 1 and 3, the financial assistance offered to related parties based on a relationship of control and without a guarantee, may not exceed 5% of the bank’s level one capital. The bank may increase this limit to 10% if the financial assistance is secured.
Financial assistance to related parties based on a “personal relationship” have a 5% limit of Level 1 capital of the entity providing the financing (the limit is unique for all cases and includes operations with and without guarantees).
However, a bank may grant additional financial assistance to such related parties up to the following limits:
a) | Individual maximum limits for customers over which a bank has control: |
Domestic financial entities:
✓ | Financial institutions rated 1, 2 or 3, subject to consolidation with the lender and its controller or the borrower: |
If the affiliate is a financial institution rated 1, the amount of total financial exposure can reach 100% of a bank’s TIER 1, and 50% for additional financial assistance
If the receiving affiliate financial institution is rated 2, the amount of total financial exposure can reach 20% and an additional 105% can be included
If the affiliate is a financial institution rated 3, the amount of total financial exposure can reach 10%, and additional financial assistance can reach 40%
✓ | Financial institutions that do not meet the above conditions with the lender or the borrower: 10% |
Domestic companies with complementary services:
✓ | Domestic companies with complementary services associated with brokerage activities, financial brokerage in leasing and factoring operations, and temporary acquisition of shares in companies to facilitate their development in order to sell such shares afterwards |
Controlling company rated 1: General assistance 100%
Controlling company rated 2: General assistance 10% / Additional assistance 90%
✓ | Domestic companies with complementary services related to the issuance of credit cards, debit cards or other cards: |
Controlling company rated 1: General assistance 100% / Additional assistance 50%
Controlling company rated 2: General assistance 20% / Additional assistance 105%
Controlling company rated 3: General assistance 10% / Additional assistance 40%
✓ | Domestic companies with complementary services, not subject to consolidation with the lender or the borrower: 10% |
Foreign financial entities:
✓ | Investment grade 10% |
✓ | No Investment grade: Unsecured 5%; with and without warrants 10% |
Other counterparties related by control
✓ | Unsecured 5%; with and without warrants 10% |
b) | Individual maximum limits for customers over which there is a personal relationship |
Lender is ranked from 1 to 3: 5% of its TIER 1
In addition, the aggregate amount of a bank’s total financial exposure to its related parties, except for the ones subject to individual maximum limits higher than 10% (complementary services companies), may not exceed 20% of such bank’s TIER 1.
Notwithstanding the limitations described above, the sum of computable exposure is also limited in order to prevent risk concentration. To that end, the total exposure independently of whether customers qualify as such bank’s related parties or not, in the case in which such exposure exceeds 10% of such bank’s TIER 1, may not exceed three times the bank’s TIER 1 excluding total financial exposure to domestic financial institutions, or five times the bank’s TIER 1, including such exposure.
For a second-grade financial institution (i.e., a financial institution that provides financial products to other banks and not to retail customers), the latter limit is ten times such financial institution’s TIER 1.
Banco Galicia has historically complied with such rules.
ix) Loan Classification System
General
Banco Galicia is required to comply with the BCRA regulations. In 1994, the BCRA introduced the current loan classification system and the corresponding minimum loan-loss provision requirements applicable to loans and other types of credit (together, referred to as “loans”) to private sector borrowers.
The current loan classification system applies certain criteria to classify loans in a bank’s “consumer” portfolio, and another set of criteria to classify loans in its “commercial” portfolio. The classification system is independent of the currency in which the loan is denominated.
The loan classification criteria applied to loans in the consumer portfolio is based on objective guidelines related to the borrower’s credit score, legal status, and other information provided by credit rating agencies. However, if a borrower has defaulted in the past or is non-current on obligations, a lower rating is assigned by the Bank. In the event of any discrepancy, the guidelines indicating the higher risk level should be considered.
For the purposes of the BCRA’s regulations, consumer loans are defined as mortgage loans, pledge loans, credit card loans and other types of loans in installments granted to individuals. All other loans are considered commercial loans. In addition, in accordance with an option set forth in these regulations, Banco Galicia prospectively applies the consumer portfolio classification criteria to commercial loans of up to Ps.72,64 million. This classification is based on the level of fulfillment and the situation thereof.
The main classification criterion for loans in the commercial portfolio is each borrower’s ability to pay, mainly in terms of such borrower’s future cash flows. If a customer has both commercial and consumer loans, all of these loans will be considered as a whole to determine eligibility for classification in the corresponding portfolio. Loans backed with preferred guarantees will be considered at 50% of their face value.
By applying the BCRA’s classification to commercial loans, banks must assess the following factors: the current and projected financial situation of the borrower, the customer’s exposure to currency risk, the customer’s managerial and operating background, the borrower’s ability to provide accurate and timely financial information, as well as the overall risk of the sector in which the borrower operates and the borrower’s relative position within that sector.
The BCRA’s regulations also establish that a team independent from the departments responsible for credit origination must carry out a periodic review of the commercial portfolio. Banco Galicia’s Credit Division, which is independent from the business units that generate transactions, is responsible for these reviews.
The review must be carried out on each borrower with debt pending payment equal to the lesser of the following amounts: Ps.72,64 million or 1% of the bank’s computable capital (the “RPC”). The frequency of the review of each borrower depends on the bank’s exposure to that borrower. The BCRA requires that the larger the exposure is, the more frequent the review should be. This review must be conducted every calendar quarter when credit exposure to that borrower is equal to or in excess of 5% of the bank’s RPC, or every six months when exposure equals or exceeds the lesser of the following amounts: Ps.72.64 million or 1% of the bank’s RPC. In all cases, at least 50% of Banco Galicia’s commercial portfolio must be reviewed once every six months; and all other borrowers in Banco Galicia’s commercial portfolio must be reviewed during the fiscal year, so that the entire commercial portfolio is reviewed every fiscal year.
In addition, only one level of discrepancy is permitted between the classification assigned by a bank and the lowest classification assigned by at least two other banks whose combined credit to the borrower represents 40%
or more of the total credit of the borrower, considering all banks. If Banco Galicia’s classification was different by more than one level from the lowest classification granted, Banco Galicia must immediately downgrade its classification of the debtor to the same classification level, or else within one classification level.
Loan Classification
The following tables contain the six loan classification categories corresponding to the different risk levels set forth by the BCRA. Banco Galicia’s total exposure to a private sector customer must be classified according to the riskier classification corresponding to any part of such exposure.
Commercial Portfolio
Loan Classification | Description | |
A. Normal Situation | The debtor is widely able to meet its financial obligations, demonstrating significant cash flows, a liquid financial situation, an adequate financial structure, a timely payment record, competent management, available information in a timely, accurate manner and satisfactory internal controls. The debtor belongs to a sector of economic activity that records an acceptable future trend with good prospects and the debtor is competitive within such economic activity. | |
B. With Special Follow-up | Cash flow analysis reflects that the debt may be repaid even though it is possible that the customer’s future payment ability may deteriorate without a proper follow-up. | |
This category is divided into two subcategories: | ||
B1. Under Observation; | ||
B2. Under Negotiation or Refinancing Agreements. | ||
C. With Problems | Cash flow analysis evidences problems to repay the debt, and therefore, if these problems are not solved, there may be some losses. It also includes customers that maintain payment agreements resulting from judicial or extrajudicial agreements approved by the relevant insolvency court. | |
D. High Risk of Insolvency | Cash flow analysis evidences that repayment of the full debt is highly unlikely. It also includes customers who have been sued by the creditor financial institution for the payment of amounts due or that have requested the preventive tender or concluded, and extrajudicial preventive agreement not yet approved by the relevant insolvency court. | |
E. Uncollectible | The amounts in this category are deemed total losses. Even though these assets may be recovered under certain future circumstances, inability to make payments is evident at the date of the analysis. It includes loans to insolvent or bankrupt borrowers. | |
Additionally, this category includes loans to borrowers indicated by the BCRA to be in non-accrual status with financial institutions that have been liquidated or are being liquidated, or whose authorization to operate has been revoked. It also includes loans to foreign banks and other institutions that are not: | ||
(i) classified as “normal”; | ||
(ii) subject to the supervision of the BCRA or other similar authority of the country of origin; | ||
(iii) classified as “investment grade” by any of the rating agencies admitted pursuant to Communication “A” 2729 of the BCRA. |
Consumer Portfolio
Loan Classification | Description | |
A. Normal Situation | Loans with timely repayment or arrears not exceeding 31 days, both of principal and interest. A customer classified in “Normal” situation that has been refinanced more than twice in the last twelve months in this category, must be re-classified in “Low-Risk”. | |
B. Low Risk | Occasional late payments, with a payment in arrears of more than 32 days and up to 90 days. A customer classified as “Low Risk” having been refinanced may be recategorized to “Normal”, as long as he amortizes one principal installment (whether monthly or bimonthly) or repays 5% of principal. | |
C. Medium Risk | Some inability to make payments, with arrears of more than 91 days and up to 180 days. A customer classified as “Medium Risk” having been refinanced may be recategorized to “Low Risk” within this category, as long as he amortizes two principal installments (whether monthly or bimonthly) or repays 5% of principal. | |
D. High Risk | Judicial proceedings demanding payment have been initiated or arrears of more than 180 days and up to one year. A customer classified as “High Risk” having been refinanced may be recategorized to “Medium Risk” within this category, as long as he amortizes three principal installments (whether monthly or bimonthly) or repays 10% of principal. | |
E. Uncollectible | Loans to insolvent or bankrupt borrowers, or subject to judicial proceedings, with little or no possibility of collection, or with arrears in excess of one year. A customer classified as “Uncollectible” having been refinanced in this category, may be recategorized to “High Risk”, as long as he amortizes three principal installments (whether monthly or bimonthly) or repays 15% of the principal. Additionally, this category includes loans to borrowers indicated by the BCRA to be in non-accrual status with financial institutions that have been liquidated or are being liquidated, or whose authorization to operate has been revoked. |
On March 2020, the BCRA issued Communication “A” 6938, which provided for the addition of 60 days to the terms of arrears allowed for levels A, B and C for both the Commercial and Consumer Portfolio. These provisions were extended by complementary Communications until March 31, 2021.
x) Limitation on Fees and Other Substantial Elements
The BCRA has issued regulations limiting amounts that entities can charge as credit card fees, as well as fees that can be charged for financial services rendered by financial entities, credit card issuers (and other similar entities). Such regulations provide that such fees must be duly justified from a technical and economic point of view and must be in relation to the total financial costs incurred by any such financial institution. Further, such Laws provide that applicable interest rates must be set forth.
In addition, such regulations provide that in order to modify fees and other conditions established in agreements executed by and between financial entities and consumers, the following requirements must be met (i) reasons for fees increases must be established in the agreements and must be duly justified; (ii) modifications cannot change the core or fundamental provisions of the agreement; (iii) the consumer must be duly informed of any such changes; and (iv) for the imposition of new fees, the consumer’s consent must be obtained.
In the context of the COVID-19 outbreak, the BCRA issued Communication “A” 6945, as amended (the most recent amendment was under Communication “A” 7181), which suspended the ability of banks to charge fees for the use of automatic teller machines (“ATMs”) until March 31, 2021. Also, as part of the protective measures taken, the BCRA has imposed an injunction on the payment of loans granted to the private sector, as per
Communications “A” 6949 and “A” 6964, among other regulations, as amended from time to time. The BCRA has also mandated that (i) any payments due between April and March 2021 for loans previously granted by financial entities are deferred until the month following the loan’s maturity date; and (ii) credit card debts due between March 20 and April 30 of 2020 and not paid by the credit card holder will be automatically refinanced for at least a one-year term, pursuant to the following terms and conditions: (a) a 3-month grace period must be given to the debtor; (ii) the amount owed must be repaid in 9 equal and consecutive installments, and (iii) the maximum annual interest rate the creditor may charge is of 43%. The same condition applies to credit card debt due between September 1, and September 30, 2020, but with a maximum annual interest rate of 40%.
xi) Foreign Currency General Position
Pursuant to the FX Regulatory Framework, financial entities may determine their own Foreign Currency General Position, with certain limitations.
xii) Deposit Insurance System
In 1995, Law No.24,485 and Decree No.540/95, as amended, created a mandatory deposit insurance system for bank deposits and delegated to the BCRA the organization and start-up of the deposit insurance system. The deposit insurance system was implemented through the creation of a fund named Fondo de Garantía de los Depósitos (“FGD”), which is administered by Seguros de Depósitos S.A. (“Sedesa”). The shareholders of Sedesa are the Argentine government, through the BCRA, which holds at least one share, and a trust constituted by the financial institutions which participate in the fund. The BCRA establishes the extent of participation by each institution in proportion to the resources contributed by each such institution to the FGD. Banks must contribute to the FGD on a monthly basis in an amount that is currently equal to 0.015% of the monthly average of daily balances of such institution’s deposits (both Peso- and foreign currency-denominated).
In addition, when the contributions to the FGD reach the greater of Ps.2 billion or 5.0% of total deposits, the Central Bank may suspend or reduce the monthly contributions and reinstate the same when contributions fall below such required level.
The deposit insurance system covers all Peso and foreign currency deposits held in demand deposit accounts, savings accounts and time deposits for an amount up to Ps.1,500,000 per person, account and deposit. Certain deposits are not covered by the guarantee of the deposit insurance system, such as deposits received at rates higher than the reference rate in accordance with the limits established by the BCRA, deposits acquired by endorsement, and those made by persons related to the financial institution (as defined by BCRA regulations).
The guarantee provided by the deposit insurance system must be made effective within 30 days from the revocation of the license of a financial institution, subject to the outcome of the exercise by depositors of their priority rights described under “—Priority Rights of Depositors” below. The BCRA may modify, at any time, and with general scope, the amount of the mandatory deposit guarantee insurance.
Decree No.1292/96 enhanced Sedesa’s functions by allowing it to provide equity capital or make loans to Argentine financial institutions experiencing difficulties and to institutions that buy such financial institutions or their deposits. As a result of such decree, Sedesa has the flexibility to intervene in the restructuring of a financial institution experiencing difficulties prior to bankruptcy.
Debt securities issued by banks are not covered by the deposit insurance system.
xiii) Priority Rights of Depositors
According to section 49(e) of the FIL, in the event of a judicial liquidation or the bankruptcy of a financial entity, the holders of deposits in Pesos and foreign currency benefit from a general priority right to obtain repayment of their deposits up to the amount set forth below, with priority over all other creditors, with the exception of the following: (i) deposits secured by a mortgage or pledge, (ii) rediscounts and overdrafts provided to financial entities by the BCRA, according to section 17 subsections (b), (c) and (f) of the BCRA Charter, (iii) credits provided by the Banking Liquidity Fund, which was created by Decree No.32, dated December 26, 2001, secured by a mortgage and pledge and (iv) certain labor credits, including accrued interest until the date of their total repayment.
The holders of the following deposits are entitled to the general preferential right established by the FIL (following this order of preference):
deposits of individuals or entities up to Ps.50,000, or the equivalent thereof in foreign currency, with only one person per deposit being able to use this preference. For the determination of this preference, all deposits of the same person registered by the entity are computed;
deposits in excess of Ps.50,000, or the equivalent thereof in foreign currency, referred to above;
liabilities originated on commercial credit lines provided to the financial entity, which are directly related to international trade.
According to the FIL, the preferences set forth in previous paragraphs (i) and (ii) above are not applicable to deposits held by persons who are affiliates of the financial entity, either directly or indirectly as determined by the BCRA.
In addition, pursuant to Section 53 of the FIL, the BCRA has an absolute priority over all other creditors of the entity, except as provided by the FIL.
xiv) Deposit and Loans in Housing Units
In order to facilitate access to mortgage loans, through Communication “A” 5945, dated as of April 8, 2016, and complementary regulations, the BCRA established a new type of loan denominated in Acquisition Value Units (Unidad de Valor Adquisitivo or “UVAs”). The value of such units will be updated using the Reference Stabilization Coefficient. The initial value of the UVA was Ps.47.16, and as of December 31, 2020, it was Ps.64.32.
xv) Financing Loans for Economic Development
The BCRA enacted several communications, by means of which it implemented several policies to promote economic development and productivity in Argentina. As from March 1, 2020, the required minimum cash to be held by financial institutions was reduced in an amount equivalent to 30% of the sum of outstanding financing granted in local currency to small and medium companies (PyME), provided such financing is granted at a maximum annual interest rate of (i) 40% until February 16, 2020, and (ii) 35% February 17, 2020 onwards.
The required minimum cash to be held by financial institutions might also be reduced in the following cases:
an amount equivalent to 35 % of the sum of credit card financings granted in local currency under the program “Ahora 12” (a government program that allows users to make payments in 12 monthly installments) until September 30, 2019, and an amount equivalent to 50% for financings granted under such program on and after October 1, 2020. (Communication “A” 6916, as amended from time to time);
an amount equivalent to 40% of the amount of a financing provided that is denominated in Argentine pesos and granted with an annual nominal interest rate of up to 24% for: (i) small and medium companies, where at least 50% of such amount is used for working capital lines; (ii) providers of human health services within the framework of the declared health emergency in Argentina, provided that the funds are destined to the purchase of medical supplies and equipment; and (iii) non-small and medium companies, to the extent that the funds are destined to the purchase of machinery and equipment produced by local medium and small companies. This amount may include financing granted to other financial institutions and non-financial credit providers where within 3 business days from the date on which they receive the assistance, those entities allocate the funds to grant financing to small and mediums companies, among other requirements (Communication “A” 6937, as amended from time to time);
• | an amount that is the equivalent of: (i) 60% of the sum of the “Creditos a tasa cero” (i.e. zero rates loan) , “Créditos a tasa subsidiada para empresas” (i.e. subsidized rate loans for companies) and “Créditos a tasa cero cultura” (i.e. zero rate culture loans) agreed under Decree No. 332/2020 (as amended from time to time) and disbursed until November 5, 2020; (ii) 24% of the “Créditos a tasa subsidiada para empresas” disbursed as from November 6, 2020 at an annual nominal rate of 27%; and (iii) 7% of the “Créditos a tasa subsidiada para empresas” disbursed as from November 6, 2020 at an annual nominal rate of 33%. (Communication “A” 6993, as amended from time to time); |
an amount equivalent to 40% of a financing provided that is denominated in Argentine pesos to small and medium companies and that are granted at an annual nominal interest rate of up to 24%, measured as a monthly average of daily balances of the previous month, provided that such companies are not reported in the “Central of debtors of the financial system” of the BCRA (Communication “A” 7006, as amended from time to time);
an amount equivalent to 14 % of a financing foreseen under section 4.1. of Communication “A” 7161 for the “Financing line for productive investment of small and medium companies” that are provided at an annual nominal interest rate of up to 30 %, and that are measured on a monthly average of daily balances of the previous month (Communication “A” 7161). In this regard, by means of Communication “A” 7240, the BCRA established the extension of the term of such Financing line for productive investment of small and medium companies’ program.
xvi) Financial Institutions with Economic Difficulties
The FIL establishes that financial institutions, including commercial banks such as Banco Galicia, which do not meet certain minimum cash reserve requirements , have not complied with certain required technical standards, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the BCRA, must submit a restructuring plan to the BCRA. Such restructuring plan must be presented to the BCRA on the date specified by the BCRA, which should not be later than 30 calendar days from the date on which the request is made by the BCRA. In order to facilitate the implementation of a restructuring plan, the BCRA is authorized to provide a temporary exemption from compliance with technical regulations and/or the payment of charges and fines that arise from such non-compliance.
The BCRA may also, in relation to a restructuring plan presented by a financial institution, require such financial institution to provide guarantees or limit the distribution of profits, and appoint a supervisor, to oversee such financial institutions’ management, with the power to veto decisions taken by the financial institution’s corporate authorities.
In addition, the BCRA’s charter authorizes the Superintendency, subject only to the prior approval of the president of the BCRA, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency have been adversely affected. Notice of this decision must be given to the board of directors of the BCRA. If at the end of such suspension period the Superintendency considers renewal necessary, such renewal can only be authorized by the board of directors of the BCRA for an additional period not to exceed 90 days. During the suspension period: (i) there is an automatic stay of claims, enforcement actions and precautionary measures; (ii) any commitment increasing the financial institution’s liabilities is void; and (iii) acceleration of indebtedness and interest accrual is suspended.
If, in the judgment of the BCRA, a financial institution is in a situation which, under the FIL, would authorize the BCRA to revoke the financial institution’s license to operate as such, the BCRA may, prior to considering such revocation, order a variety of measures, including (i) taking steps to reduce, increase or sell the financial institution’s capital; (ii) revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares; (iii) excluding and transferring assets and liabilities; (iv) constituting trusts with part or all the financial institution’s assets; (v) granting of temporary exemptions to comply with technical regulations and/or pay charges and fines arising from such defective compliance; or (vi) appointing a bankruptcy trustee and removing statutory authorities.
Furthermore, any actions authorized, commissioned or decided by the BCRA under Section 35 of the FIL involving the transfer of assets and liabilities, or complementing such transfers, or that are necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of equity, are not subject to any court authorization and cannot be deemed inefficient in respect of the creditors of the financial institution which was the owner of the excluded assets, even though its insolvency preceded any such actions.
xvii) Dissolution and Liquidation of Financial Institutions
The BCRA must be notified of any decision to dissolve a financial institution pursuant to the FIL. The BCRA, in turn, must then notify a court of competent jurisdiction, which will determine who will liquidate the entity: the corporate authorities (extrajudicial liquidation) or an appointed independent liquidator (judicial liquidation). This determination is based on whether or not sufficient assurances exist regarding the ability of such corporate authorities to carry out the liquidation properly.
Pursuant to the FIL, the BCRA no longer acts as liquidator of financial institutions. However, when a restructuring plan has failed or is not considered viable, local and regulatory violations exist, or substantial changes have occurred in the financial institution’s condition since the original authorization was granted, the BCRA may decide to revoke the license of the financial institution to operate as such. In this case, the law allows judicial or extrajudicial liquidation as in the case of voluntary liquidation described in the preceding paragraph.
The bankruptcy of a financial institution cannot be adjudicated until the license is revoked by the BCRA. No creditor, with the exception of the BCRA, may request the bankruptcy of the former financial institution before 60 calendar days have elapsed since the revocation of its license.
B.7 Credit Cards Regulation
The Credit Cards Law establishes the general framework for credit card activities. Among other regulations, this law:
sets a 2.00% cap on the rate a credit card company can charge merchants for processing customer card holders’ transactions with such merchants, calculated as a percentage of the customers’ purchases. With respect to debit cards, the cap is set at 1.0% and the amounts relating to the customers’ purchases should be processed in a maximum of three business days;
establishes that credit card companies must provide the BCRA with the information on their loan portfolio that such entity requires; and
sets a cap on the interest rate a credit card company can charge a card holder, which cannot exceed the average interest rate charged by the issuer on personal loans by more than 25%; for non-bank issuers, such amount cannot exceed the financial system’s average interest rate on personal loans (published by the BCRA) by more than 25%.
The BCRA has issued regulations to enforce public disclosure of companies’ pricing (fees and interest rates) to ensure consumer awareness of such pricing. In addition, during 2014 the BCRA issued a series of regulations in order to establish caps on interest rates on personal loans, pledge loans and credit card loans, as well as to establish a requirement for an authorization to increase fees. Through its Communication “A” 5853, dated December 17, 2015, the BCRA rescinded regulations related to limits on interest rates in respect of lending transactions.
B.8 Concealment and Laundering of Assets of a Criminal Origin
Law No.25,246 (as amended in July 2011 by Law No.26,683) incorporates money laundering as a crime under the Argentine Criminal Code. Additionally, with the goal of preventing money laundering, the UIF was created under the jurisdiction of the Argentine Ministry of Justice, Security and Human Rights. As a result of such modification, money laundering is now classified as a separate offense.
In addition to the above, Law No.26,683 sanctions “self-laundering”, which sanctions money laundering tied to a crime the individual in question committed his or herself. It also includes certain tax offenses described in Article 303 of the Argentine Penal Code as punishable laundering behavior. The new standard falls under Article 303 of the Argentine Penal Code in the chapter titled “Crimes against economic and financial order”.
The minimum and maximum of the criminal scale will be doubled when (i) the foregoing acts were crimes that are particularly serious, meaning those crimes with a punishment that is greater than three years of imprisonment; (ii) the perpetrator committed the crime for profit; and (iii) the perpetrator regularly performs concealment activities.
The criminal scale can only be increased once, even when more than one of the above-mentioned acts occurs. In such case, the court may take into consideration the multiple acts when determining the original punishment.
The “Committee for the Control and Prevention of Money Laundering and the Financing of Terrorist Activities” was formed in 2005 and is responsible for establishing and maintaining the general guidelines related to the Bank’s strategy to control and prevent money laundering and the financing of terrorism. For more information, see “Item 6. Directors, Senior Management and Employees—Functions of the Board of Directors of Banco Galicia”.
Banco Galicia has also appointed two directors to fulfill the roles of Compliance Officer and Substitute Compliance Officer. In addition, a specialized management unit was created in this area that is responsible for the execution of the policies approved by the committee and for the monitoring of the control systems and procedures to ensure that they are adequate.
Law No.26,734 enacted on December 22, 2011, incorporated terrorism financing and the financing of terrorism as an aggravating circumstance to all criminal conduct in the Argentine Criminal Code.
Such law punishes any individual who directly or indirectly collects or provides goods or money with the intention of being used, or knowing that they will be used, in whole or in part (i) to finance a crime with the purpose established in Section 41.5; (ii) for an organization who commits or attempts to commit crimes with the purpose established in Section 41.5; and (iii) for a person who commits or attempts to commit or participates in any way in committing crimes with the purpose established in Section 41.5.
The new legislation also punishes terrorism as an aggravating factor in other punishable crimes when any such offense was committed in order to terrorize the population.
The Bank has implemented measures to combat the use of the international financial system by criminal organizations. The Bank has policies, procedures and control structures in place to monitor operations based on client profiles and risk assessments based on the information and documentation related to the economic, patrimonial and financial situation of each client to detect clients that could be considered unusual, and eventual reporting to the UIF as appropriate. The Asset Laundering Prevention Management program is charged with the implementation of such control and prevention procedures, as well as communication of such procedures and measures within the Bank, drafting of compliance manuals and employee training. Such management program is also periodically reviewed by senior management.
The Bank has appointed a Director as Compliance Officer, in accordance with Resolution 30/2017 of the UIF, who is responsible for ensuring the observance and implementation of procedures and obligations in the matter. The Compliance Officer contributes to the prevention and mitigation of the risks of criminal transactions and is involved in the establishment of internal policies and measures to monitor and prevent the same.
The following table illustrates our organizational structure as of December 31, 2020. Percentages indicate the ownership interests held by each entity.
(*) | The percentage of total votes is 54.1% . |
(**) | IGAM Uruguay Agente de Valores S.A. its incorporated in Uruguay while IGAM LLC its registered in the state of Delaware, United States of America. |
D. Property, Plants and Equipment
The following are our main property assets, as of December 31, 2020:
Property | Address | Square meters (approx.) | Main uses | |||||
Grupo Financiero Galicia | ||||||||
Rented | Tte. Gral. Juan D. Perón 430, 25th floor, Buenos Aires, Argentina | 568 | Administrative activities | |||||
Banco Galicia | ||||||||
Owned | Tte. Gral. Juan D. Perón 407, Buenos Aires, Argentina | 18,815 | Administrative activities | |||||
Tte. Gral. Juan D. Perón 430, Buenos Aires, Argentina | 41,547 | Administrative activities | ||||||
Corrientes 6287, Buenos Aires, Argentina | 34,000 | Administrative activities | ||||||
Ecosistema NaranjaX | ||||||||
Owned | Sucre 152, 154 and 541, Córdoba, Argentina | 6,300 | Administrative activities | |||||
La Tablada 451, Humberto Primo 450 y 454, Córdoba, Argentina | 14,080 | Administrative activities | ||||||
Jujuy 542, Córdoba, Argentina | 853 | Administrative activities | ||||||
Ruta Nacional 36, km. 8, Córdoba, Argentina | 7,715 | Storage | ||||||
Río Grande, Tierra del Fuego, Argentina | 309 | Administrative and commercial activities | ||||||
San Jerónimo 2348 and 2350, Santa Fe, Argentina | 1,475 | Administrative and commercial activities | ||||||
Rented | Sucre 145/151, La Rioja 359, 364 and 375, Córdoba, Argentina | 3,564 | Administrative activities | |||||
Av. Corrientes 3135, CABA, Argentina | 1,271 | Administrative activities | ||||||
Tte. Gral. Juan D. Perón 430, 19th floor, Buenos Aires, Argentina | 173 | Administrative activities | ||||||
Galicia Administradora de Fondos | ||||||||
Rented | Tte. Gral. Juan D. Perón 430, 22nd floor, Buenos Aires, Argentina | 220 | Administrative activities | |||||
Galicia Warrants | ||||||||
Owned | Tte. Gral. Juan D. Perón 456, 6th floor, Buenos Aires, Argentina | 118 | Administrative activities | |||||
Alsina 3396/3510, San Miguel de Tucumán, Tucumán, Argentina | 12,800 | Storage (Investment Property) | ||||||
Galicia Seguros | ||||||||
Owned | Maipú 241, Buenos Aires, Argentina | 215,628 | Administrative activities | |||||
Inviu | ||||||||
Rented | Corrientes 6287, Torre Leiva, 7th floor, Buenos Aires, Argentina | 926 | Administrative activities | |||||
Galicia Securities | ||||||||
Rented | Tte. Gral. Juan D. Perón 430, 22nd floor, Buenos Aires, Argentina | 28 | Administrative activities |
As of December 31, 2020, our distribution network consisted of:
Banco Galicia: 326 branches, located throughout Argentina’s 23 provinces, 149 of which were owned and 177 of which were leased by Banco Galicia.
Naranja: 180 branches and 20 points of sale, located in 21 of the 23 Argentine provinces, 178 of which were leased by Naranja.
Item 4A. | Unresolved Staff Comments |
None.
Item 5. | Operating and Financial Review and |
The following discussion and analysis are intended to help you understand and assess the significant changes and trends in our historical results of operations and the factors affecting our resources. You should read this section in conjunction with our audited consolidated financial statements and their related notes included elsewhere in this annual report.
A.1 Overview
In recent years, we have strengthened our position as a leading domestic private-sector financial institution, increasing our market share of loans and deposits and strengthening Banco Galicia’s regulatory capital reserves through the issuance of subordinated bonds and follow-on equity offerings, the sale of CFA and internal profit origination.
Despite the deterioration of the Argentine economy, reduction in Argentine GDP, high levels of inflation and the devaluation of the Peso, in 2020 we were able to maintain our asset quality and adequately cover credit risks and maintain liquidity and profitability metrics at reasonable levels.
With the development of the COVID-19 outbreak, which was first alerted by the Chinese government in December 2019, many countries have suspended the business operations of many sectors of their economies, implemented travel restrictions and quarantine measures. Argentina has not been an exception to this rule. The Government implemented a series of measures to reduce the spread of COVID-19, providing for preventative and mandatory social isolation or distancing, with variations depending on the region of the country. As of the date of this report, commercial activities are gradually reopening, in compliance with the protocols established by the Government. Additionally, in response to the pandemic and the ensuing policies implemented by the Government, regulatory agencies established rules whose objectives were to provide assistance to the economic sectors whose operations were adversely affected by the pandemic and for providing health care for the community in general. In particular, the BCRA established many regulations, among which are the suspension of the ability of banks to charge fees for the use of automatic teller machines , the refinancing of certain credit card debts that were not paid by the credit card holder for a one-year term and relaxed the delinquency days and default terms for the benefit of the borrowers. In addition, with the purpose of increasing the financial resources available in the economy, the BCRA has suspended banks’ ability to distribute dividends until June 30, 2021.
Accordingly, the Board of Directors of Grupo Financiero Galicia has been continually analyzing the evolution of the pandemic and its effect and taking all measures within its reach to safeguard it business continuity, to protect the health and safety of its employees, customers, and other stakeholders. Among the actions carried out to collaborate and comply with the regulations of the Government and of the BCRA, the following stand out: the subsidiaries of Group Financiero Galicia created interdisciplinary committees responsible for designing and executing various protocols and procedures for the provision of services; work from home policies were implemented, except for those employees who have activities that require their physical presence e.g. cash management logistics and customer service; appointments were required to conduct transactions at branch locations; various lines of credit were made available to clients with certain benefits such as reduction of interest rates, grace periods and the extension of payment terms; subsidies granted by the Government were credited to customer accounts and through the Banelco ATM network; new free-accounts were opened for retirement and subsidy beneficiaries; processes were modified so that they can be done 100% online through websites and / or mobile applications, without having to go to branches; new customer features and options were designed, such as the possibility of withdrawing money from ATMs and self-service terminals without a debit card; donations were made to various health centers, municipalities and families in vulnerable situations; solidarity campaigns were launched to promote customer collaboration and additional contribution from Grupo’s subsidiaries.
Our business and prospects are subject to risks associated with and arising from the outbreak of COVID-19, and the uncertainty of the impacts, duration, and severity of the outbreak. This global pandemic creates substantial uncertainty as to our ability to achieve our financial projects and how it may affect our business operations.
On another note but connected to the impact COVID-19 may have on how we operate our business, we have conducted a business impact analysis as part of our Business Continuity Program. The results of this analysis show that critical business functions will remain operative upon the occurrence of a disruptive event. In cases of mass absenteeism events, the analysis conducted identified the minimum quantity of personnel and positions needed to remain operative, the outcome being the leader of the relevant sector responsible for assigning personnel to such critical positions. New employees will be hired, and current employees will be relocated to guarantee that critical functions remain operative, if and where needed.
Even though up to the date of this report, Grupo Financiero Galicia and its subsidiaries have suffered a limited impact on their results as a consequence of the pandemic, the impact of a lower level of economic activity and a higher level of unemployment could have a significant impact on Grupo Financiero Galicia’s results of operations in the future.
Taking into account the above, fiscal year 2021 is expected to be a challenging year as a result of the uncertainty related to the impact of COVID-19, the evolution of the sovereign debt restructuring process with the IMF, and the path to the normalization of certain macroeconomic imbalances in a volatile global economy, all of which could negatively impact the Argentine economy and Grupo Financiero Galicia’s results of operations.
A.2 The Argentine Economy
The first weeks of 2020 continued to reflect the favorable trend observed in the last months of the previous year, driven mainly by the optimism generated by the progress in the U.S.-China trade negotiations, diverting investors’ focus to other events such as the U.S. presidential elections, which took place at the beginning of November 2020. However, the economic-financial dynamics in the world were completely altered by the outbreak of COVID-19, a virus categorized by the World Health Organization (“WHO”) as a global pandemic. An almost complete shutdown in global activity led to recessions with unprecedented economic and social costs across the world. As a reference, in the United States the unemployment rate peaked at 14.7% in 2020 (it was 6.7% in December 2020) and 21.4 million jobs were lost between March and April 2020 (almost 11.8 million were created by the end of the year), and the GDP fell 31.4% quarter over quarter in the second quarter ( it increased 33.4% in the third quarter and 4.3% in the fourth quarter ending with a year over year decrease of 2.4% in 2020).
Confronted with this global context, both monetary entities and governments responded with important monetary and fiscal measures to ensure the correct functioning of the markets and to mitigate the negative economic and health effects generated by the virus.
In the United States, fiscal measures reached a total of approximately US$3.9 trillion (~20% of GDP) in 2020, while the victory of the Democratic party boosted expectancy for further fiscal stimulus in the short-term. Likewise, the U.S. Federal Reserve reduced its interest rate range by 150 bps to 0%-0.25% and increased its balance sheet through various asset-buyback programs aimed at providing liquidity, amounting to 76.8% or US$3.2 trillion to almost US$7.4 trillion in 2020, representing about 37.8% of GDP, which is a level not observed since World War II. Additionally, the U.S. Federal Reserve updated its monetary policy framework, stating among the main changes that the level of rates consistent with full employment and long-term price stability had been reduced compared to its historical average, that higher risks to employment and inflation are expected, and that they will target full employment and an average inflation of 2%, hoping to see levels above such benchmark consistently. In the Eurozone, fiscal measures taken jointly in 2020 by country members reached € 1.4 trillion (around 10.1% of the aggregate GDP), while during 2020 the European Central Bank (ECB) maintained its interest rate range at -0.5% to 0.0% and expanded its balance sheet by 48.7% or € 2.3 trillion to € 7.0 trillion, representing around 16.9% of GDP. In addition, there were significant incremental fiscal measures implemented in Germany, the United Kingdom and France. Finally, in 2020 China announced fiscal measures for RMB 4.8 trillion (~4.7% of GDP), while the country’s Central Bank (PBC) cut its interest rate by 30 bps to 3.85% and introduced financing facilities for RMB 2.6 trillion. On the other hand, there is still significant uncertainty regarding whether the measures introduced so far are enough to mitigate the effects of the Coronavirus or if additional efforts will be required from the relevant governmental authorities.
The number of positive cases of coronavirus reached 83.9 million by the end of 2020, including a mortality rate of 2.9%, mainly focused in the United States (20.5 million), India (10.3 million) and Brazil (7.7 million). Moreover, different stages of the virus propagation and social distancing measures have been seen worldwide. In general, the first wave of propagation was followed by a second wave, and the spread of the virus was accelerating by the end of the year, reducing short and medium-term perspectives for economic recovery. On the other hand, several vaccines were approved for use by various governments in the last months of the year, although it was still unknown when approved vaccines would be available for widespread distribution with the goal of obtaining global herd immunity.
Following the strike of COVID-19, stock indexes reflected a substantial correction between February and March of 2020, including maximum declines compared to the end of 2019 of 30.7% in the S&P 500 index in the United States ( it was up 16.3% in 2020 as compared to 2019 by the end of 2020), 36.3% in the SX5E in the Eurozone ( it was down 5.1% as compared to 2019 by the end of 2020) and 12.8% in the Shanghai Composite in China ( it was up 21.5% by the end of 2020 as compared to 2019). Among other relevant variables, the VIX volatility index peaked at 82.6 points to close 2020 at 22.75 points, a level still well above the average of approximately 15 points prior to the impact of the Coronavirus. Also, the DXY US dollar index rose to almost 103 points at the peak to decline up to around 90 points. For emerging markets, this meant an outflow of up to US$96.9 billion by the end of September 2020 resulting in a marked depreciation of related currencies against the Dollar, compared to inflows for US$62.2 billion in the last three months of 2020. The problem of the spread of the Coronavirus was compounded by the conflict between Saudi Arabia and Russia over oil. After both countries failed to reach an agreement to limit barrel production, Saudi Arabia decided to increase its production output, causing a price correction in the crude oil price (WTI) of up to 81% to US$11.6 per barrel in March 2020, although its price ended the year at US$48.5, boosted by global economic recovery.
At the local level, the Argentine economy began 2020 unable to recover dynamism after ending 2019 with its second consecutive annual decline. In 2019, activity had fallen 2.1% (following the 2.6% contraction in 2018), a consequence of high political uncertainty, exchange rate volatility and accelerating inflation. The lack of confidence prevented the country from refinancing its debt maturities, and the new Government had to handle an external debt restructuring process during the first months in office. The outbreak of COVID-19 added to this situation, a pandemic that forced the Government to implement a number of restrictive measures regarding movement by the public and social distancing and isolation policies starting in mid-March, which negatively impacted production and trade. Therefore, according to the National Institute of Statistics and Censuses (INDEC), the Argentine GDP plunged an annual 9.9% in 2020 as compared to 2019.
The labor market reflected the historical slump in economic activity, as the latest available data shows that the unemployment rate rose to 11.0% of the economically active population during the fourth quarter of 2020. These figures are compared to an unemployment rate of 8.9% in the same quarter of 2019. Moreover, the activity and employment rates reached 45.0% and 40.1%, respectively, in the fourth quarter of 2020. In both cases, this is below the 47.2% and 43.0% of the same quarter of the previous year.
On the monetary front, the main aggregates accelerated their expansion pace during most of 2020, rising several points above inflation (+60.4% year-on-year in October as compared to 2019). Up to November 5, the latest data available at the time of writing this annual report, the monetary base increased by Ps.464,844 million, due mainly to the monetary entity’s provision of financing to the Argentine Treasury. The BCRA issued Ps.407,720 million in “temporary advances” to the Argentine Treasury and Ps.1,2020,000 million as a consequence of transferring all of 2019’s profits to the Argentine Treasury. This amounted to 6.0% of the GDP. The impact of these issuances was neutralized via the placement of repo transactions and LELIQ (Ps.646,072 million, net of interest), combined with the absorption of Argentine pesos resulting from the sale of foreign currency to the private sector (Ps.331,866 million) and to the public sector (Ps.126,391 million).
Meanwhile, private M2 (comprised of currency held by the public, savings accounts and checking accounts of the private sector) also showed strong dynamism, registering an expansion of 79.3% as of December 30, 2020 with respect to the same period of 2019. Total M2 (which also includes public sector deposits) recorded a similar expansion (+80.9%) in the same period.
During the first months of the year, domestic interest rates showed a downward trend. The BADLAR rate started at 36.2% in 2020, and by April it was at an average of 20%. However, exchange rate pressures and the growing liquidity in Argentine pesos led the BCRA to set a minimum interest rate level for term deposits of less than Ps.1 million equivalent to 70% of the LELIQ rate (nominal annual rate “TNA” of 26.6%). The minimum rate was later extended to fixed term deposits of up to $4 million, and subsequently to all time deposits. In June, the interest rate floor for all fixed-term deposits was raised to 79% of the LELIQ rate (TNA of 30.02%) and in August, it was raised to 87% (TNA of 33.06%), although this was only for retail deposits. At the beginning of October, the BCRA initiated a rate harmonization process, consisting of an increase in liability repurchase transactions rates (from 19% to 31% in four different segments) and a reduction in the LELIQ rate (from 38% to 36%). The rate floor for fixed-term deposits was also adjusted upwards, bringing fixed-term deposits of less than Ps.1 million currently yielding a minimum of 34% and those of more than Ps.1 million to 32%.
The reference exchange rate of the BCRA went from Ps.59.90 to Ps.84.15 per dollar, between December 30, 2019 and December 30, 2020 (equivalent to an increase in the exchange rate of 40.5%). The average exchange rate went from Ps.59.88 per dollar in December 2019 to Ps.82.72 per dollar in December 2020.
The National Consumer Price Index data published by INDEC showed a year-on-year variation of 36.1% in December 2020, 17.7 percentage points below the 53.8% variation of December 2019. This slowdown was partly due to the stabilization of the exchange rate, the implementation of capital controls, and the freezing of rates for public utilities and certain regulated goods and services. Additionally, it may be partially attributed to the statistical effect that the paralysis of activity had on price surveys during the months in which the strictest restrictions on mobility and production prevailed, in some cases, it was not possible to obtain measurements. The increase in the precautionary demand for money and the erosion of the purchasing power (a consequence of the increase in layoffs and salary cuts and of the fall in employment) also helped to contain the evolution of prices.
On a fiscal level, during 2020, tax resources (grew 23.0% compared to the interannual expansion of 51.4% in 2019. Likewise, primary expenditures expanded 63.5% in 2020, above the 37.2% of the previous year. Thus, the national private sector registered a primary deficit of Ps.1,749,957 million, equivalent to —6.5% of the GDP. This figure indicated an impairment compared to the 2019 primary deficit of Ps.95,122 million (-0.4 p.p. of the GDP). After the payment of interest for Ps.542,873 million, the financial deficit for 2020 amounted to Ps.2,292,830 million, equivalent to -8.5% of GDP.
In relation to the external sector, in 2020 the foreign exchange current account published by the BCRA (cash base) recorded a surplus of US$322 million, a drop of 94.9% compared to the surplus of US$6,277 million registered in 2019. Measured in relation to GDP, the surplus of the checking account was about 0.1%, showing a drop compared to the surplus of 1.4% of the previous year.
The impairment observed in nominal terms was the result of lower net income from goods (US$8,492 million in 2020 as compared to US$23,444 million in 2019), an effect offset by a lower outflow of foreign currency via the balance of services (US$1,595 million up to September 2020) and by lower interest payments (US$6,528 million). In particular, income from the collections of goods exports totaled US$50,357 million in 2020, a 12.89% drop compared to the level observed in the previous year. Likewise, the import payments of the exchange balance sheet totaled US$41,865 million, registering an interannual growth of 22.0%
In this context, the foreign exchange capital and financial account recorded a net currency outflow of US$8,048 million in 2020, compared to a net outflow of US$32,384 million in 2019. Likewise, the International Reserves of the BCRA amounted to US$39,387 million year-end, which is US$5,394 million below the figure of a previous year.
A.3 The Argentine Financial System
Total loans provided to the private sector by the financial system climbed to Ps.3,355,603 million in December 2020, reflecting a 29.6% increase over the same month of 2020. Consumer loans, consisting of loans granted through credit cards and personal loans, presented the greatest growth, a 39.2% increase as compared to December 31, 2019, totaling Ps.1,372,301 million as of December 31, 2020. On the other hand, commercial loans, consisting of current account overdrafts and drafts/bills (signature and purchased/discounted loans), finally totaled Ps.1,227,705 million, registering an increase of 25.2% year-on-year (YoY).
Total deposits in the financial system climbed to Ps.7,977,812 million as of the end of December 2020, up by 67.0% as compared to December 31, 2019. Deposits from the non-financial private sector increased 64.0% annually, climbing to Ps.6,453,993 million, while public sector deposits totaled Ps.1,432,927 million, increase by 89.2% YoY. Within private sector deposits, transaction deposits ended at Ps 3,707,372 million, a 62.5% hike YoY, and time deposits at Ps.2,603,540million, a 68.9% annual growth.
In December 2020, the average interest rate for 30-35-day term deposits in Argentine pesos from private banks (over Ps.1 million) was 34.2%, registering an interannual drop of 7.5 p.p. Regarding active rates, the one corresponding to advances in current account was 39.7% (-26.7 p.p. YoY).
With data as of December 2020, financial institutions increased liquidity levels (in relation to total deposits) compared to the same month of the previous year, a ratio that stood at 65.0%, +4.9 p.p. (considering repurchase transactions and instruments of the BCRA).
In terms of solvency, the equity of the financial system showed an interannual increase of Ps.777,586 million, finally totaling Ps.1,685,318 million, which implies an 85.7% increase. The profitability of the system accumulating 12 months as of December 2020 (Comprehensive Income adjusted by inflation) was equivalent to 2.3% of assets, while the return on Shareholders’ Equity was 15.8%.
The nonperforming portfolio of loans to the non-financial private sector amounted to 3.9% in December 2020, minor than the 5.7% of the previous year. Hedging with allowances for private sector nonperforming loans was 151%, 53 p.p. higher than the measurement reported in the same month of 2019.
As for the composition of the financial system, as of November 30, 2020, there were 79 financial institutions: 64 banks, of which 51 were private (35 of domestic capital and 16 foreigners) and 13 were public, and 15 non-banking financial institutions.
With data as of September 2020, the latest information available, the financial system employed 104,657 people, which represented a 2.1% drop since September 30, 2019.
A.4 The Argentine Insurance Industry
According to the information published by the Superintencia de Seguros de la Nación, the insurance industry continued to grow throughout 2020. The total gross premiums in respect of property, life, and retirement insurance for such period was equal to Ps.840,557 million, an increase of 35% as compared to 2019.
During 2020, the automotive and workers’ compensation insurance sectors were affected by high inflation and an increase in the filing of claims for compensation. Although inflation is not decreasing as expected, financial income is expected to cover any increased costs as a result of the foregoing.
Home, life and personal accident insurance policies increased by 35% year-over-year. It is expected that this segment will continue to increase as the Argentine economy stabilizes. During this period, Galicia Seguros has maintained positive financial results. As of December 31, 2020, Sudamericana Holding, primarily through its main subsidiary Galicia Seguros reported a net income equal to Ps.1,318 million. This result includes Ps.7,789 million of insurance premiums and surcharges (related to both direct insurance and reinsurance).
A.5 Inflation
Historically, inflation in Argentina has played a significant role in influencing, often negatively, the economic conditions and, in turn, the operations and financial results of companies operating in Argentina, such as Grupo Financiero Galicia.
In fiscal year 2015, due to changes in the authorities at the Institute of Statistics, the Wholesale Price Index and CPI series were discontinued beginning in October 2015. The Wholesale Price Index was republished beginning January 2016. A new CPI series was launched in May 2016 but did not contain historical information.
The chart below presents a comparison of inflation rates published by INDEC, measured by the Whole Price Index and the CPI, for the fiscal years 2020, 2019 and 2018.
In addition, the chart below presents the evolution of the CER and UVA indexes, published by the BCRA and used to adjust the principal of certain of our assets and liabilities for the specified periods.
For the Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(in percentages) | ||||||||||||
Price Indices (1) | ||||||||||||
WPI | 35.38 | 58.49 | 73.50 | |||||||||
CPI | 36.14 | 53.83 | 47.65 | |||||||||
Adjustment Indices | ||||||||||||
CER | 25.49 | 18,70 | 12,34 | |||||||||
UVA(2) | 64.32 | 47,16 | 31,06 |
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In 2020, the CPI published by INDEC reflected a 36.1% increase, while the CER and UVA indexes went up 25.5% and 64.32% during the same period, respectively.
In the first two months of 2021, the CPI published by INDEC reflected a 7.8% increase, while the CER and UVA indexes increased by 7.54% and 7.34% respectively, during the same period.
A.6 Currency Composition of Our Balance Sheet
The following table sets forth our assets and liabilities denominated in foreign currency, in Pesos and adjustable by the CER/UVA, as of the dates indicated.
As of December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(In millions of Pesos) | ||||||||||||
Assets | ||||||||||||
In Pesos, Unadjusted | 805,797 | 620,363 | 731,530 | |||||||||
In Pesos, Adjusted by the CER/UVA | 32,321 | 39,809 | 38,635 | |||||||||
In Foreign Currency (1) | 217,161 | 275,182 | 422,931 | |||||||||
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Total Assets | 1,055,279 | 935,354 | 1,193,096 | |||||||||
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Liabilities and Shareholders’ Equity | ||||||||||||
In Pesos, Unadjusted, Including Shareholders’ Equity | 831,019 | 657,516 | 764,365 | |||||||||
In Pesos, Adjusted by the CER/UVA | 7,099 | 2,656 | 5,800 | |||||||||
In Foreign Currency (1) | 217,161 | 275,182 | 422,931 | |||||||||
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Total Liabilities and Shareholders’ Equity | 1,055,279 | 935,354 | 1,193,096 | |||||||||
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(1) | If adjusted to reflect forward sales and purchases of foreign exchange made by Grupo Financiero Galicia
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Funding of Banco Galicia’s long position in CER/UVA-adjusted assets through Peso-denominated liabilities bearing a market interest rate (and no principal adjustment linked to inflation) exposes Banco Galicia to differential fluctuations in the inflation rate and in market interest rates, with a significant increase in market interest rates vis-à-vis the inflation rate (which is reflected in the CER/UVA variation), which has a negative impact on our gross brokerage margin.
Two other currencies have been defined apart from the Argentine Peso: assets and liabilities adjusted by CER/UVA and foreign currency. Banco Galicia’s policy in force establishes limits in terms of maximum “net asset positions” (assets denominated in a currency which are higher than the liabilities denominated in such currency) and “net liability positions” (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis.
An adequate balance between assets and liabilities denominated in foreign currency characterizes the management strategy for this risk factor, seeking to achieve full coverage of long-term asset-liability mismatches and allowing a short-term mismatch management margin that contributes to the possibility of improving certain market situations. Short- and long-term goals are attained by appropriately managing assets and liabilities and by using the financial products available in our market, particularly “dollar futures” both in institutionalized markets (MAE and ROFEX) and in forward transactions performed with customers.
Transactions in foreign currency futures (specifically, dollar futures) are subject to limits that take into consideration the particular characteristics of each trading environment.
A.7 Results of Operations for the Fiscal Years Ended December 31, 2020 and December 31, 2019 and December 31, 2018.
We discuss below our results of operations for the fiscal year ended December 31, 2020 as compared with our results of operations for the fiscal year ended December 31, 2019 and our results of operations for the fiscal year ended December 31, 2019 as compared with our results of operations for the fiscal year ended December 31, 2018.
i) Consolidated Income Statement
For the Year Ended December 31, | Change (%) | |||||||||||||||||||
2020 | 2019 | 2018 | 2020/2019 | 2019/2018 | ||||||||||||||||
(in millions of Pesos, except otherwise noted) | ||||||||||||||||||||
Consolidated Income Statement | ||||||||||||||||||||
Net Income from Interest | 76,632 | 47,417 | 69,873 | 62 | (32 | ) | ||||||||||||||
Interest Income | 166,807 | 177,671 | 163,928 | (6 | ) | 8 | ||||||||||||||
Interest Expenses | (90,175 | ) | (130,254 | ) | (94,055 | ) | (31 | ) | 38 | |||||||||||
Net Fee Income | 36,558 | 38,233 | 44,756 | (4 | ) | (15 | ) | |||||||||||||
Fee Income | 46,476 | 47,847 | 51,094 | (3 | ) | (6 | ) | |||||||||||||
Fee Related Expenses | (9,918 | ) | (9,614 | ) | (6,338 | ) | 3 | 52 | ||||||||||||
Net Income from Financial Instruments | 69,332 | 99,151 | 36,342 | (30 | ) | 173 | ||||||||||||||
Income from Derecognition of Assets Measured at Amortized Cost | (3 | ) | 299 | 464 | (101 | ) | (36 | ) | ||||||||||||
Exchange Rate Differences on Gold and Foreign Currency | 7,047 | 11,832 | 7,910 | (40 | ) | 50 | ||||||||||||||
Other Operating Income | 22,323 | 28,770 | 21,863 | (22 | ) | 32 | ||||||||||||||
Income from Insurance Business | 5,502 | 5,001 | 6,009 | 10 | (17 | ) | ||||||||||||||
Loan and Other Receivables Loss Provisions | (34,680 | ) | (30,228 | ) | (34,136 | ) | 15 | (11 | ) | |||||||||||
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Net Operating Income | 182,711 | 200,475 | 153,081 | (9 | ) | 31 | ||||||||||||||
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Personnel expenses | (31,825 | ) | (33,285 | ) | (35,658 | ) | (4 | ) | (7 | ) | ||||||||||
Administrative Expenses | (31,372 | ) | (33,105 | ) | (33,674 | ) | (5 | ) | (2 | ) | ||||||||||
Depreciations and Impairment of Assets | (8,284 | ) | (6,895 | ) | (3,460 | ) | 20 | 99 | ||||||||||||
Other Operating Expenses | (30,764 | ) | (35,083 | ) | (35,391 | ) | (12 | ) | (1 | ) | ||||||||||
Loss on Net Monetary Position | (36,963 | ) | (41,929 | ) | (37,831 | ) | (12 | ) | 11 | |||||||||||
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Operating Income | 43,503 | 50,178 | 7,067 | (13 | ) | 610 | ||||||||||||||
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Share of Profit from Associates and Joint Ventures | (125 | ) | — | — | — | — | ||||||||||||||
Income Tax from Continuing Operations | (17,845 | ) | (17,751 | ) | (14,477 | ) | 1 | 23 | ||||||||||||
Loss from Discontinued Operations | — | — | (544 | ) | — | (100 | ) | |||||||||||||
Income Tax from Discontinued Operations | — | — | (66 | ) | — | 100 | ||||||||||||||
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Net Income (Loss) for the Year | 25,533 | 32,427 | (8,020 | ) | (21 | ) | 504 | |||||||||||||
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Net Income (Loss) for the Year Attributable to Parent Company’s Owner | 25,192 | 32,276 | (7,258 | ) | (22 | ) | 545 | |||||||||||||
Net Income (Loss) for the Year Attributable to Non-controlling Interests | 341 | 151 | (762 | ) | 126 | 120 | ||||||||||||||
Other Comprehensive Income (Loss) | (210 | ) | 548 | (183 | ) | (138 | ) | 399 | ||||||||||||
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Total Comprehensive Income (Loss) | 25,323 | 32,975 | (8,203 | ) | (23 | ) | 502 | |||||||||||||
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Total Comprehensive Income (Loss) Attributable to Parent Company’s Owners | 24,982 | 32,824 | (7,442 | ) | (24 | ) | 541 | |||||||||||||
Total Comprehensive Income (Loss) Loss Attributable to Non-controlling Interests | 341 | 151 | (761 | ) | 126 | 120 | ||||||||||||||
Ratios (%) | Change (pbs) | |||||||||||||||||||
Return on Assets | 2.39 | 3.46 | (0.61 | ) | (107 | ) | 407 | |||||||||||||
Return on Shareholders’ Equity | 13.82 | 20.81 | (5.76 | ) | (699 | ) | 2,657 | |||||||||||||
Change (%) | ||||||||||||||||||||
Basic Earnings per Share (in Pesos) | 17.46 | 22.62 | (5.09 | ) | (23 | ) | 545 |
Fiscal Year 2020 compared to Fiscal Year 2019
Net income for the fiscal year ended December 31, 2020 was equal to Ps.25,533 million, as compared to net income equal to Ps.32,427 million for the fiscal year ended December 31, 2019, a Ps.6,894 million or 21% decrease. This result was mainly due to net income from: (i) banking activities (Banco Galicia) for Ps.20,928 million, (ii) Ecosistema NaranjaX for Ps.2,159 million and (iii) insurance services (Sudamerica Holding) for Ps.1,318 million.
Net earnings per share for the fiscal year ended December 31, 2020 was equal to a Ps.17.46 per share, as compared to a Ps.22.62 per share for the fiscal year ended December 31, 2019.
The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2020 was equal to a 2.39% and 13.82%, respectively, as compared to a 3.46% and 20.81%, respectively, for the fiscal year ended December 31, 2019.
The decrease in net income for the year ended December 31, 2020 was primarily attributable to a lower net operating income, decreasing from Ps.200,475 million to Ps.182,711 million (a 9% decrease as compared to December 31, 2019) and was partially offset by (i) a Ps.4,966 million decrease in the loss on net monetary position, decreasing from Ps.41,929 million in 2019 to Ps.36,963 million in 2020 and (ii) a Ps.1,733 million decrease in administrative expenses, decreasing from Ps.33,105 million in 2019 to Ps.31,372 million in 2020.
The decrease in net operating income from the year ended December 31, 2020 was mainly attributable to: (i) a Ps.29,819 million decrease in net income from financial instruments, from Ps.99,151 million in 2019 to Ps.69,332 million in 2020, (ii) a Ps.6,447 million decrease in other operating income from Ps.28,770 million in 2019 to Ps.22,323 million in 2020 and (iii) a Ps.4,785 million decrease in exchange rate differences on gold and foreign currency from Ps.11,832 million in 2019 to Ps.7,047 million in 2020. Such decrease was partially offset by a Ps.29,215 increase in net income from interest from Ps.47,417 million in 2019 to Ps.76,632 million in 2020.
Fiscal Year 2019 compared to Fiscal Year 2018
Net income for the fiscal year ended December 31, 2019 was equal to Ps.32,427 million, as compared to net loss equal to Ps.8,020 million for the fiscal year ended December 31, 2018, a Ps.40,447 million or 504% increase. This result was mainly due to net income (i) from banking activities (Banco Galicia) for Ps.30,336 million, (ii) from Ecosistema NaranjaX for Ps.889 million and (iii) from activities related to insurance services (Sudamerica Holding) for Ps.863 million.
Net gain per share for the fiscal year ended December 31, 2019 was equal to a Ps.22.62 per share gain, as compared to a Ps.5.09 per share loss for the fiscal year ended December 31, 2018.
The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2019 was equal to a 3.46% and 20.81 %, respectively, as compared to a 0.61% loss and 5.76% loss, respectively, for the fiscal year ended December 31, 2018.
This result was attributable to (i) a growth of net operating income (31% increase compared to previous year) and (ii) a 7% decrease in personnel expenses.
The increase in net income for the year ended December 31, 2019 was primarily attributable to a higher net operating income from Ps.153,081 million to Ps.200,475 million (a 31% increase as compared to December 31, 2018) and was partially offset by (i) a Ps.4,098 million increase loss on net monetary position, increasing from Ps.37,831 million in 2018 to Ps.41,929 million in 2019 and (ii) a Ps.3,435 million increase in depreciation and impairment of assets, increasing from Ps.3,460 million in 2018 to Ps.6,895 million in 2019.
The Ps.47,394 million increase in net operating income was mainly attributable to (i) a Ps.62,809 million increase in net income from financial instruments from Ps.36,342 million in 2018 to Ps.99,151 million in 2019, (ii) a Ps.6,907 million increase in other operating income from Ps.21,863 million in 2018 to Ps.28,770 million in 2019 and (iii) a Ps.3,922 million increase in exchange rate differences on gold and foreign currency from Ps.7,910 million in 2018 to Ps.11,832 million in 2019. This increase was offset by (i) a Ps.36,199 million increase in interest expenses from Ps.94,055 million in 2018 to Ps.130,254 million in 2019, and (ii) a Ps.6,523 million decrease in net fee income from Ps.44,756 million in 2018 to Ps.38,233 million in 2019.
ii) Interest-Earning Assets
The following table shows our yields on interest-earning assets:
As of December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||
Average Balance | Average Yield / Rate | Average Balance | Average Yield / Rate | Average Balance | Average Yield / Rate | |||||||||||||||||||
(in millions of Pesos, except rates) | ||||||||||||||||||||||||
Interest-Earning Assets | ||||||||||||||||||||||||
Debt Securities at fair value through profit or loss | ||||||||||||||||||||||||
Government Securities | 155,630 | 40.11 | 166,505 | 50.98 | 93,353 | 30.75 | ||||||||||||||||||
Others Debt Securities | 1,385 | 73.29 | 1,838 | 48.31 | 3,541 | 22.56 | ||||||||||||||||||
Total Debt Securities at fair value through profit or loss | 157,015 | 40.41 | 168,343 | 50.95 | 96,894 | 30.45 | ||||||||||||||||||
Repurchase Transactions | 35,871 | 25.00 | 18,170 | 53.46 | 16,479 | 9.42 | ||||||||||||||||||
Loans and Other Financing | ||||||||||||||||||||||||
Loans | 491,386 | 30.23 | 587,663 | 27.12 | 631,995 | 24.80 | ||||||||||||||||||
Financial Leases | 2,324 | 15.15 | 3,857 | 19.73 | 5,059 | 24.25 | ||||||||||||||||||
Other Loans and Other Financing | 2,265 | 13.82 | 3,317 | 20.20 | 1,244 | 47.35 | ||||||||||||||||||
Total Loans and Other Financing | 495,975 | 30.08 | 594,837 | 27.03 | 638,298 | 24.84 | ||||||||||||||||||
Other Interest-Earning Assets | 44,279 | 30.39 | 54,603 | 24.76 | 43,578 | 16.26 | ||||||||||||||||||
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Total Interest-Earning Assets | 733,140 | 32.06 | 835,953 | 32.27 | 795,249 | 24.74 | ||||||||||||||||||
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Spread and Net Yield | ||||||||||||||||||||||||
Interest Spread, Nominal Basis (1) | 16.05 | 12.06 | 10.21 | |||||||||||||||||||||
Cost of Funds Supporting Interest-Earning Assets | 12.27 | 15.43 | 11.41 | |||||||||||||||||||||
Net Yield on Interest-Earning Assets (2) | 19.80 | 16.84 | 13.33 |
(1) | Reflects the difference between the average nominal interest rate on interest-earning assets and
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(2) | Net interest earned divided by average interest-earning assets. Interest rates include the CER/UVA adjustment. |
Fiscal Year 2020 compared to Fiscal Year 2019
The average of interest-earning assets decreased Ps.102,813 million, from Ps.835,953 million for the fiscal year ended December 31, 2019 to Ps.733,140 million for the fiscal year ended December 31, 2020, representing a 12% decrease. Of this decrease, Ps.96,277 million was due to a decrease in the average size of the loan portfolio. The average yield on interest-earning assets was 32.06% in 2020, as compared to 32.27% in 2019, a 21 bps decrease, mainly attributable to a decrease in the average interest rate earned on repurchase transactions (decreasing 2,846 bps as compared to 2019) and government securities ( decreasing 1,087 bps as compared to 2019).
Fiscal Year 2019 compared to Fiscal Year 2018
The average of interest-earning assets increased Ps.40,704 million, from Ps.795,249 million for the fiscal year ended December 31, 2018 to Ps.835,953 million for the fiscal year ended December 31, 2019, representing a 5% increase. Of this increase, Ps.73,152 million was due to an increase in the average size of the government securities holdings, offset by Ps.44,332 million in the average size of loans. The average yield on interest-earning assets was 32.27% in 2019, as compared to 24.74% in 2018, a 753 bps, that was primarily attributable to an increase in the average interest rate earned on repurchase transactions and an increase in the average interest rate earned Government securities.
iii) Interest-Bearing Liabilities
The following table shows our yields on cost of funds:
As of December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||
Average Balance | Average Yield / Rate | Average Balance | Average Yield / Rate | Average Balance | Average Yield / Rate | |||||||||||||||||||
(in millions of Pesos, except rates) | ||||||||||||||||||||||||
Interest-Bearing Liabilities | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
Savings Accounts | 252,515 | 5.77 | 264,364 | 4.24 | 279,693 | 2.48 | ||||||||||||||||||
Time Deposits | 243,255 | 26.68 | 234,214 | 39.25 | 228,217 | 26.31 | ||||||||||||||||||
Total Interest-Bearing Deposits | 495,770 | 16.03 | 498,578 | 20.69 | 507,910 | 13.19 | ||||||||||||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 19,815 | 12.64 | 38,319 | 13.19 | 42,944 | 12.80 | ||||||||||||||||||
Debt Securities and Subordinated Debt Securities | 43,921 | 17.42 | 88,146 | 22.54 | 70,300 | 25.40 | ||||||||||||||||||
Other Interest-Bearing Liabilities | 1,916 | 15.29 | 13,315 | 7.15 | 3,393 | 11.97 | ||||||||||||||||||
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Total Interest-Bearing Liabilities | 561,422 | 16.02 | 638,358 | 20.21 | 624,547 | 14.53 | ||||||||||||||||||
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Fiscal Year 2020 compared to Fiscal Year 2019
The average interest-bearing liabilities for the fiscal year ended December 31, 2020 were equal to Ps.561,422 million, as compared to Ps.638,358 million for the fiscal year ended December 31, 2019, a 12% decrease. Such decrease was primarily attributable to (i) a Ps.44,225 million decrease in the average balance of debt securities and subordinated debt securities, which decreased to Ps.43,921 million as of the fiscal year ended December 31, 2020 from Ps.88,146 million as of the fiscal year ended December 31, 2019, (ii) a Ps.18,504 million decrease in the average balance of financing received from the BCRA and other financial institutions, which decreased to Ps.19,815 million as of the fiscal year ended December 31, 2020 from Ps.38,319 million as of the fiscal year ended December 31, 2019 and (iii) a Ps.2,808 million decrease in total interest-bearing deposits (savings accounts and time deposits), which decreased to Ps.495,770 million as of the fiscal year ended December 31, 2020 from Ps.498,578 million as of the fiscal year ended December 31, 2019.
Fiscal Year 2019 compared to Fiscal Year 2018
The average interest-bearing liabilities for the fiscal year ended December 31, 2019 were equal to Ps.638,358 million, as compared to Ps.624,547 million for the fiscal year ended December 31, 2018, an increase of 2%. Such increase was primarily attributable to a Ps.17,846 million increase in debt securities, which increased to Ps.88,146 million as of the fiscal year ended December 31, 2019 from Ps.70,300 million as of the fiscal year ended December 31, 2018. This increase was offset by a decrease in the average balance of savings accounts deposits, which decreased to Ps.264,364 million as of the fiscal year ended December 31, 2019 from Ps.279,693 million as of the fiscal year ended December 31, 2018.
iv) Interest Income
Consolidated interest income was composed of the following:
For the Year Ended December 31, | Change (%) | |||||||||||||||||||
2020 | 2019 | 2018 | 2020/2019 | 2019/2018 | ||||||||||||||||
(in millions of Pesos, except percentages) | ||||||||||||||||||||
Cash and due from banks | 3 | 11 | 2 | (73 | ) | 450 | ||||||||||||||
Corporate debt securities | 312 | 531 | 691 | (41 | ) | (23 | ) | |||||||||||||
Government debt securities | 9,183 | 6,405 | 2,908 | 43 | 120 | |||||||||||||||
On Loans and Other Financing Activities | 148,447 | 161,010 | 158,764 | (8 | ) | 1 | ||||||||||||||
Non-financial Public Sector | — | — | 1 | — | (100 | ) | ||||||||||||||
Financial Sector | 3,126 | 4,300 | 4,406 | (27 | ) | (2 | ) | |||||||||||||
Non-financial Private Sector | 145,321 | 156,710 | 154,357 | (7 | ) | 2 | ||||||||||||||
Advances | 11,887 | 17,145 | 20,605 | (31 | ) | (17 | ) | |||||||||||||
Mortgage loans | 13,076 | 17,497 | 12,463 | (25 | ) | 40 | ||||||||||||||
Pledge loans | 1,422 | 956 | 891 | 49 | 7 | |||||||||||||||
Personal Loans | 16,299 | 16,636 | 19,160 | (2 | ) | (13 | ) | |||||||||||||
Credit Card Loans | 47,207 | 64,903 | 61,486 | (27 | ) | 6 | ||||||||||||||
Financial Leases | 352 | 761 | 1,266 | (54 | ) | (40 | ) | |||||||||||||
Others | 55,078 | 38,812 | 38,486 | 42 | 1 | |||||||||||||||
On Repurchase Transactions | 8,862 | 9,714 | 1,563 | (9 | ) | 521 | ||||||||||||||
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Total Income from Interest | 166,807 | 177,671 | 163,928 | (6 | ) | 8 | ||||||||||||||
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Fiscal Year 2020 compared to Fiscal Year 2019
Interest income for the fiscal year ended December 31, 2020 was equal to Ps.166,807 million, as compared to Ps.177,671 million for the fiscal year ended December 31, 2019, a 6% decrease. Such decrease was the result of a Ps.12,563 million or 8% decrease in interest from loans and other financing and was partially offset by a Ps.2,778 million increase in interest income from government debt securities measured at amortized cost.
The average amount of loans granted for the fiscal year ended December 31, 2020 was equal to Ps.491,386 million, a 16% decrease as compared to the Ps.587,663 million for the fiscal year ended December 31, 2019. The average interest rate on total loans was 30.23% for the fiscal year ended December 31, 2020, as compared to 27.12% for the fiscal year ended December 31, 2019, representing a 311 bps increase year-over-year.
The decrease in interest earnings from loans and other financing was primarily a consequence of a Ps.17,696 million decrease in credit card loans. This decrease was due to the maximum annual interest rate imposed by the BCRA as a measure to reduce negative economic the consequences of COVID-19. For more information see – Item 4. Information on the Company –A. Business Overview – Argentine Banking Regulations – Limitations on Fees and Other Substantial Elements.
Additionally, the decrease in interest from loans and other financing was due to a Ps.5,258 million decrease in interest from advances and a Ps.4,421 million decrease in interest from mortgage loans, offset by a Ps.16,266 million increase in others loans (mostly comprised of overdrafts and loans for the pre-financing and financing of exports).
Interest income from banking activity amounted to Ps.144,685 million, a 4% decrease as compared to the Ps.150,712 million recorded in the fiscal year ended December 31, 2019.
According to BCRA information, as of December 31, 2020, Banco Galicia’s estimated market share of loans to the private sector was 13.03% as of December 31, 2020, as compared to 11.50% as of December 31, 2019.
The following table indicates Banco Galicia market share in the segments listed below:
For the Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(in percentages) | ||||||||||||
Total Loans | 12.95 | 11.52 | 10.60 | |||||||||
Private-Sector Loans | 13.03 | 11.50 | 10.51 |
(*) | Exclusively Banco Galicia within the Argentine market, |
Interest income related to Ecosistema NaranjaX amounted to Ps.21,990 million for the year ended December 31, 2020, a 17% decrease as compared to the Ps.26,500 million recorded for the fiscal year ended December 31, 2019.
Interest income related to insurance activity amounted to Ps.727 million for the year ended December 31, 2020, a 37% decrease as compared to the Ps.1,145 million recorded for the fiscal year ended December 31, 2019. This decrease was related to interest from debt securities recorded at amortized cost.
Fiscal Year 2019 compared to Fiscal Year 2018
Interest income for the fiscal year ended December 31, 2019 was Ps.177,671 million, as compared to Ps.163,928 million for the fiscal year ended December 31, 2018, an 8% increase. Such increase was mainly the result of: (i) Ps.8,151 million in interest from repurchase transactions, (ii) Ps.3,497 million in interest from government debt securities measured at amortized cost and (iii) Ps.2,246 million in interest from loans and other financing.
The average amount of repurchase transactions for the fiscal year ended December 31, 2019 was equal to Ps.18,170 million, a 10% increase as compared to Ps.16,479 million for the fiscal year ended December 31, 2018. The average interest rate on repurchase transactions was 53.46%, a 4,404 bps increase as compared to 9.46% as of December 31, 2018.
The average amount of loans for the fiscal year ended December 31, 2019 was equal to Ps.587,663 million, a 7 % increase as compared to the Ps.631,995 million for the fiscal year ended December 31, 2018.This decrease was primarily attributable to the increase in overdraft, mortgage and credit card loans extended as part of the portfolio. The average interest rate on total loans was 27.12% for the fiscal year ended December 31, 2019, as compared to 24.80% for the fiscal year ended December 31, 2018, representing a 232 bps increase year-over-year.
Interest income from banking activity for the fiscal year ended December 31, 2019 amounted to Ps.150,712 million, a 25% increase as compared to the Ps.120,773 million recorded in the fiscal year ended December 31, 2018.
According to BCRA information, as of December 31, 2019 Banco Galicia’s estimated market share of loans to the private sector was 11.50%, a 99 pbs increase when compared with the 10.51% for fiscal year ended December 31, 2018.
Interest income related to Ecosistema NaranjaX amounted to Ps.26,500 million for the year ended December 31, 2019, a 16% decrease as compared to the Ps.31,707 million recorded for the fiscal year ended December 31, 2018.
Interest income related to insurance services amounted to Ps.1,145 million for the year ended December 31, 2019, a 31% increase as compared to the Ps.875 million recorded for the fiscal year ended December 31, 2018.
v) Interest Expenses
Consolidated interest expenses were comprised of the following:
For the Year Ended December 31, | Change (%) | |||||||||||||||||||
2020 | 2019 | 2018 | 2020/2019 | 2019/2018 | ||||||||||||||||
(in millions of Pesos, except percentages) | ||||||||||||||||||||
On Deposits | 79,483 | 103,158 | 68,499 | (23 | ) | 51 | ||||||||||||||
Non-financial Private Sector | 79,483 | 103,158 | 68,499 | (23 | ) | 51 | ||||||||||||||
Checking Accounts | — | — | — | — | — | |||||||||||||||
Savings Accounts | 11 | 9 | 11 | 22 | (18 | ) | ||||||||||||||
Time Deposit and Term Investments | 62,824 | 90,832 | 59,909 | (31 | ) | 52 | ||||||||||||||
Others | 16,648 | 12,317 | 8,579 | 35 | 44 | |||||||||||||||
On Financing Received from the Argentine Central Bank and Other Financial Institutions | 1,744 | 3,340 | 4,526 | (48 | ) | (26 | ) | |||||||||||||
On Repurchase Transactions | 304 | 921 | 463 | (67 | ) | 99 | ||||||||||||||
On Other Financial Liabilities | 953 | 1,778 | 1,629 | (46 | ) | 9 | ||||||||||||||
On Debt Securities | 6,097 | 19,389 | 17,407 | (69 | ) | 11 | ||||||||||||||
On Subordinated Debt Securities | 1,594 | 1,668 | 1,531 | (4 | ) | 9 | ||||||||||||||
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Total Interest Expenses | 90,175 | 130,254 | 94,055 | (31 | ) | 38 | ||||||||||||||
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Fiscal Year 2020 compared to Fiscal Year 2019
Interest expenses for the fiscal year ended December 31, 2020 were equal to Ps.90,175 million, as compared to Ps.130,254 million for the fiscal year ended December 31, 2019, representing a 31% decrease. Such decrease was primarily attributable to a 23% decrease in interest paid on deposits, as consequence of low rate yields.
Interest expenses from deposits amounted to Ps.79,483 million for the fiscal year ended December 31, 2020, as compared to Ps.103,158 million for the fiscal year ended December 31, 2019, a Ps.23,675 million decrease. This decrease was primarily due to increased interest expenses related to time deposits and term investments, which was equal to Ps.62,824 million for the fiscal year ended December 31, 2020, representing a 31% decrease as compared to Ps.90,832 million for the fiscal year ended December 31, 2019. Such lower interest paid on time deposits was due to lower rates as compare to the rates of 2019, as consequence the regulated rates product of the monetary regulation.
The total average interest-bearing deposits for the fiscal year ended December 31, 2020 amounted to Ps.495,770 million, registering a decrease of 1%. Of this decrease, Ps.11,849 million were saving accounts deposits. This decrease was offset by an increase in time deposits for Ps.9,041 million.
Out of total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2020, the average interest rate of time deposits was 16.03%, as compared to 20.69% for the fiscal year ended December 31, 2019, a 466 bps decrease.
Savings accounts deposits for the fiscal year ended December 31, 2020 accrued interest at an average rate of 5.77%, as compared to an average rate of 4.24% for the fiscal year ended December 31, 2019, a 153 bps increase. The rate of time deposits for the fiscal year ended December 31, 2020 was 26.68%, as compared to 39.25% for the fiscal year ended December 31, 2019, a 1,257 bps decrease.
Interest expenses related to banking activity amounted to Ps.85,854 million for the fiscal year ended December 31, 2020, as compared to Ps.118,269 million for the fiscal year ended December 31, 2019, representing a 27% decrease.
According BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share increased from 10.17% as of December 31, 2019 to 10.28% as of December 31, 2020.
The following table indicates Banco Galicia´s market share in the segments listed below:
For the Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(in percentages) | ||||||||||||
Total Deposits | 8.42 | 8.23 | 8.85 | |||||||||
Total Deposits in Checking and Savings Accounts and Time Deposits | 10.28 | 10.17 | 11.33 | |||||||||
Private-Sector Deposits | 10.07 | 9.92 | 11.09 |
(*) | Exclusively Banco Galicia within the Argentine
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Interest expenses related to Ecosistema NaranjaX amounted to Ps.5,150 million for the fiscal year ended December 31, 2019, as compared to Ps.13,232 million for the fiscal year ended December 31, 2019, representing a 58% decrease. This decrease was primarily a result of a decrease in interest expenses on debt securities issued by Naranja.
Fiscal Year 2019 compared to Fiscal Year 2018
Interest expenses for the fiscal year ended December 31, 2019 were equal to Ps.130,254 million, as compared to Ps.94,055 million for the fiscal year ended December 31, 2018, representing a 38% increase. Such increase was primarily attributable to an 51% increase in interest paid on deposits.
Interest expenses from deposits amounted to Ps.103,158 million for the fiscal year ended December 31, 2019 as compared to Ps.68,499 million for the fiscal year ended December 31, 2018 a Ps.34,659 million increase. This increase was primarily due to increased interest expenses related to time deposits and term investments, which was equal to Ps.90,832 million for the fiscal year ended December 31, 2019, representing a 52% increase as compared to Ps.59,909 million for the fiscal year ended December 31, 2018.
Average deposits recorded a decrease of 2% as compared to the fiscal year ended December 31, 2018, with a decrease of 5% in savings account deposits and a 3% increase in time deposits.
Out of total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2019 the average interest rate of time deposits was 20,69%, as compared to 13,19% for the fiscal year ended December 31, 2018, a 750 bps increase.
Interest expenses related to banking activity amounted Ps.118,269 million for the fiscal year ended December 31, 2019 as compared to Ps.79,349 million for the fiscal year ended December 31, 2018, representing a 49% increase.
Using BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share decreased from 11.09% as of December 31, 2018 to 9.92% as of December 31, 2019.
Interest expenses related to Ecosistema NaranjaX amounted to Ps.13,232 million for the fiscal year ended December 31, 2019 as compared to Ps.12,485 million for the fiscal year ended December 31, 2018, representing a 6% increase. This increase was primarily the result of an increase in interest expenses on debt securities issued by Naranja.
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.
vi) Net Fee Income
Consolidated net fee income consisted of:
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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:
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.
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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 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:
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Finally, during 2019 Galicia Seguros implemented the following measures through digital channels:
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, withoutusing 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. Therepayment 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 subsidizedgovernmental program.
E-Checks
Banco Galicia implemented transactions using electronic checks, which resulted in a saving of 1.4 million sheets of paperby 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
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Determination of Credit 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
Below is a detail of the percentage limits and nominal caps assigned to each risk segment.
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, 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. vi) 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) 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 BCRA 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 BCRA situation indicates a serious risk of bankruptcy (ratings C, D, E). 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 Probability of Default (“PD”): 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 Post-model adjustments Since March 2020, the BCRA implemented a series of Thus, considering the adverse economic context that the country is going through, borrower credit uncertainty and measures issued by the BCRA, the management recognized an additional credit loss allowance to that obtained through the statistical model of ECL on the deferred loan portfolio amounts, which shows the potential impairment due to the macroeconomic context, once the implemented measures are lifted for the BCRA. The management measured the additional impact on the allowance from the estimation of the expected credit loss of loan portfolios which have deferred payments, based on new PD estimated depending on actual past due date (without deferrals) and the projected performance of the affected products, modifying the staging classification through a “Lifetime Adjustment”. vii) Credit Risk Exposure of Financial Instruments The following table sets forth the credit risk exposure of financial
Under BCRA 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:
viii) Loss Experience The
ix) Deposits The following table sets out the composition of our deposits as of December 31, 2020 and
As of December 31, 2020, our consolidated deposits increased 26% as compared to December 31 2019, mainly as a
The following table provides a breakdown of our
The chart above shows that the highest concentration of maturities for time deposits was in the period of up to 89 days, representing 97,7% of total time deposits. As of December 31, 2020, the average term for the raising of non-adjusted Peso-denominated time deposits was 41 days, for UVA-adjusted deposits the average term was 195 days and x) Regulatory Capital Grupo Financiero Galicia Grupo Financiero Galicia and some of its subsidiaries are regulated by the Argentine General Corporations Law. Section 186 of the General Corporations Law. Grupo Financiero Galicia’s capital adequacy is not regulated by the BCRA, however Grupo Financiero Galicia is required to comply with the minimum capital requirement established by the General Corporations Law. On October 8, 2012, through Decree No.1331/12, such amount was established as Ps.100,000. Banco Galicia With respect to regulatory capital, Banco Galicia must comply with the regulations set forth by the BCRA. These regulations are based on the Basel Committee methodology, which provides the minimum capital requirements for financial institutions to cover the different risks inherent to its business activity and assets, such as credit risk, generated both by exposure to the private sector and to the public sector; operational risk (generated by the losses resulting from Computable capital is divided as follows:
Computable regulatory capital is divided into Basic Shareholders’ Equity (Tier I Capital) and Supplementary Shareholders’ Equity (Tier II Capital). Deductible items generally fall within Basic Shareholders’ Equity. Intangible assets and deferred tax asset credit balances should be deducted from the calculation of computable capital. Results for a given period are part of Basic Shareholders’ Equity (Income: 100% of audited results, 50% of unaudited results; Losses: 100%). Supplementary Shareholders’ Equity includes 100% of the allowance for the portfolio in normal situation (up to the limit of 1.25%) and for subordinated notes, with respect to which, as from each of the last five years of each issuance term, the computable amount shall be reduced by 20% of the face value issued. The following percentages apply in determining minimum capital requirements: Loans in Pesos to the Non-financial Public Sector: 0%. Property, Plant and Equipment and Miscellaneous Assets: 8%. Family Mortgage Loans: 35% over 8%, if the amount does not exceed 75% of the asset value. Retail Portfolio: 75% over 8%. The following table sets forth the capital required in accordance with the BCRA regulations in force for each period indicated below.
As of December 31, 2020, the Bank’s computable capital amounted to Ps.157,061 million, Ps.100,992 million which was 180% higher than the Ps.56,069 million minimum capital requirement. As of December 31, 2019, this excess amounted to Ps.43,123 million which was 115% higher than the minimum capital requirement. As of December 31, 2020, the minimum capital requirement increased by Ps.18,407 million as compared to December 31, 2019, mainly because the value of risk weighted assets are now being adjusted to inflation. Computable capital increased by Ps.76,276 million as of December 31, 2020 as compared to December 31, 2019, primarily as consequence of the increase in the results generated during the fiscal year by Banco Galicia and to an increase in the Banco Galicia’s shareholders’ equity, all of these as a result of the inflation adjustment to both values. Banco Galicia’s total capital ratio was 22.92%, increasing 535 bps as of December 31, 2020 as compared to 17.57% as of December 31, 2019. Ecosistema NaranjaX Since the companies from Ecosistema NaranjaXare not financial institutions, their capital adequacy is not regulated by the BCRA. Tarjetas Regionales and its subsidiaries have to comply with the minimum capital requirement established by the Corporations Law, which was Ps.100,000 for 2020. Naranja Digital is a financial institution class “C” and for that condition is regulated by the BCRA and has to comply with the minimum capital requirement establish by the BCRA. Minimum Capital Requirements of Insurance Companies The insurance companies controlled by Sudamericana must meet the minimum capital requirements set by General Resolution No.39,957 of the National Insurance Superintendency. This resolution requires insurance companies to maintain a minimum capital level equivalent to the highest of the amounts calculated as follows:
For vehicle insurance: Ps.80 million. For motorcycle insurance: Ps.48 million. Joint operation for vehicles and motorcycles insurance: Ps.96 million Civil liability for public transportation vehicles / Labor insurance / retirement insurance: Ps.80 million Civil and air navigation liability insurance / warranty and credit default insurances /general damage insurance / personal insurances including life insurance (individual and joint policies, which do not require a technical reserve), burial insurance, personal accident insurance, health insurance: Ps.24 million Environmental insurance: Ps.16 million Joint operation of Vehicles and motorcycles insurance, Civil and air navigation liability insurances, Warranty and credit default insurance and damage insurance: Ps.120 million Burial insurance: Ps.12 million Life insurance (Individual and Collective, which requires a technical reserve: Ps.24 million
The minimum required capital must then be compared to computable capital, defined as shareholders’ equity less non-computable assets. Non-computable assets consist mainly of deferred charges, pending capital contributions, proposed distributions and excess investments in authorized instruments. As of December 31, 2020, the computable capital of the companies controlled by Sudamericana exceeded the minimum requirement of Ps.1,067 million by Ps.167 million. Sudamericana also owns Galicia Broker, a company dedicated to brokerage in different lines of insurance that is regulated by the guidelines of the Corporations Law, which provided for a minimum capital requirement of Ps.100,000. B.5 Government Regulation i) General All companies operating in Argentina must be registered with the Argentine Public Registry of Commerce. In addition, any company with publicly issued equity or debt securities is subject to the rules and regulation of the CNV. Further, financial entities, such as Grupo Financiero Galicia and Banco Galicia, are subject to BCRA regulations. As public issuers of securities in Argentina, Grupo Financiero Galicia and Banco Galicia must comply with the disclosure, reporting, governance and other rules applicable to such companies in the markets in which they are listed and those of regulators in the countries in which they are listed, including the Capital Markets Law (as amended by the Productive Financing Law No. 27,440 and including Decree No. 471/2018), Law No.20,643, the Decrees No.659/1974 and No.2220/1980 (as amended by Decree No. 572/1996), and CNV’s General Resolution No.622/2013 (as amended and/or supplemented, the “CNV Rules”). In their capacity as public issuers of securities, Grupo Financiero Galicia and Banco Galicia are subject to the aforementioned rules. Since Grupo Financiero Galicia has publicly listed American Depository Shares (or “ADSs”) in the United States, it is also subject to the reporting requirements of the United States Securities and Exchange Act of 1934 (the “Exchange Act”) for foreign private issuers and to the provisions applicable to foreign private issuers under the Sarbanes Oxley Act. See Item 9. “The Offer and Listing”. Banco Galicia’s operating subsidiaries are also subject to the following laws: Law No.27,442 (the Competition Defense Law or, in Spanish “Ley de Defensa de la Competencia”), Decree No. 274/2019 that repeals the Fair Business Practice Law (No. 22,802) and the Consumer Protection Law No. 24,240, as amended (or, in Spanish “Ley de Protección del Consumidor”). As a financial service holding company, we do not have a specific institution that regulates our activities. Our banking and insurance subsidiaries are regulated by different regulatory entities. The BCRA is the main regulatory and supervising entity for Banco Galicia. The banking industry is highly regulated in Argentina. Banking activities in Argentina are regulated by Law No.21,526, as amended (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the BCRA. The BCRA regulates all aspects of financial activity. See “Argentine Banking Regulation” below. Banco Galicia and our insurance subsidiaries are subject to Law No.25,246 which was passed on April 13, 2000 (as amended, among others, by Laws No.26,087, 26,119, 26,683, 26,734, and 27,446 together to which we refer to as the Anti-Money Laundering Law), which provides for an anti-money laundering framework in Argentina, including Laws No.26,268 and 27,304, which amend Law No.25,246 to include activities associated with terrorism and Law No. 27,401, which provides for the criminal liability of corporate entities upon their direct or indirect execution of prohibited activities. Furthermore, the Anti-Money Laundering Law created the Financial Information Unit (Unidad de Información Financiera), which established an administrative criminal system, compliance monitoring and the ability to impose sanctions. Sudamericana’s insurance subsidiaries are regulated by the National Insurance Superintendency and Laws No.17,418, as amended and modified by Law No.20,091. Galicia Broker is regulated by the National Insurance Superintendency, through Law No.22,400, as amended. Naranja and the credit card activities of Banco Galicia are regulated by the Credit Card Law No. 25,065, as amended. Both the BCRA and the Secretary of Domestic Trade have issued regulations to, among other things, enforce public disclosure of companies’ pricing (fees, interest rates, and advertising) in order to ensure consumer awareness of such pricing. See “Credit Cards Regulation”. On January 6, 2002, the Argentine Congress enacted Law No.25,561 (as amended and supplemented, the “Public Emergency Law” or in Spanish “Ley de Emergencia Pública”), which, together with various decrees and BCRA rules, provided for the principal measures with which to manage the 2001-2002 financial crisis, including Asymmetric Pesification and eliminating the requirement that the BCRA’s reserves in gold, foreign currency and foreign currency denominated debt be at all times equivalent to 100% of the monetary base, among others. The Argentine Government did not extend the term of the Public Emergency Law that was previously extended on an annual basis. However, on December 14, 2016, the Argentine Congress enacted Law No. 27,345, which extended the state of emergency on social matters until December 31, 2019. Additionally, on September 30th ,2019, the Argentine Congress enacted Law No. 27,519, which extends the state of national nutrition emergency until December 31, 2022, whereby the Government must ensure the nutrition of its population with state funds. On December 23, 2019, the Argentine Congress enacted Law No.27,541 (the “Social Solidarity and Productive Reactivation Law” or, in Spanish “Ley de Solidaridad Social y Reactivación Productiva”), which declared yet again a public emergency in relation to certain economic, financial, fiscal, and social matters, among others. The goal of this law is to manage Argentina’s public debt and public spending in a sustainable manner. During 2020, due to the coronavirus pandemic (COVID – 19), many of the provisions of the Social Solidarity and Productive Reactivation Law were amended in order to address the economic and social consequences on Argentine citizens of the Country’s strictly enforced quarantines (such as, for example, providing tax benefits to certain sectors especially affected by the COVID – 19 pandemic and the extension of the health emergency, among others). On February 12, 2020, the Argentine Congress enacted Law No. 27,544 (the “Law on the Restoration of the Sustainability of Public Debt Issued under Foreign Law” or, in Spanish “Ley de Restauración de la Sostenibilidad de la Deuda Pública”), which granted the Argentine Executive Branch broad powers to negotiate and to restructure public debt issued currently held by the Government and governed by laws other than the laws of Argentina. ii)Foreign Exchange Market In January 2002, through the Public Emergency Law, Argentina declared a public emergency situation in respect of its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine Executive Branch to establish a system to determine the foreign exchange rate between the Argentine Peso and foreign currencies and to issue foreign exchange-related rules and regulations. Within this context, on February 8, 2002, through Decree No. 260/2002, as amended by Decree No. 27/2018, the Argentine Executive Branch established (i) a single and free-floating foreign exchange market (a “MULC”, or “Mercado Único y Libre de Cambios”) through which all foreign exchange transactions in a foreign currency must be conducted, and (ii) that foreign exchange transactions in a foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among the contracting parties, subject to the requirements and regulations imposed by the BCRA. On June 9, 2005, through Decree No.616/2005, the Argentine Executive Branch mandated that inflows of funds into the MULC arising from foreign debt incurred by residents (subject to certain exceptions) and all inflows of funds of non-residents channeled through the MULC for certain concepts were required to be credited into a local account and maintained for a “Minimum Stay Period”, requiring a mandatory deposit for 30% of the amount of the transaction for a period of 365 calendar days. Such requirements were eliminated by the former administration. In February 2017, the former Ministry of Economy and Public Finance issued Resolution No. 1/2017, which reduced the “Minimum Stay Period” described above to zero days. As of July 1, 2017, with the issuance of Communication “A” 6244, the foreign exchange rules and regulations described above were reversed. In the same sense, the Government issued Decree 27/2018 by which it modified the denomination of the “MULC”, or “Mercado Único y Libre de Cambios” to “MLC” or “Mercado Libre de Cambios” (the “MLC”) On September 1, 2019, the Government issued Decree No. 609/19 (as later amended by Decree No. 91/19 on December 28, 2019), setting forth certain controls and restrictions on the acquisition, sale, and transfer of foreign currency, applicable to both individual persons and legal entities in Argentina. This decree also enabled the BCRA to establish, through regulations, the necessary measures to avoid “practices and operations aimed at avoiding, through public titles or other instruments” the restrictions set forth by the decree. In furtherance of such decree, since its date of implementation the BCRA has adopted a series of measures that regulate the MLC, which are all included in the Amended and Restated Text on Foreign Exchange (the “FX Regulatory Framework”). Inflow of Funds: Export of goods, provision of services, and sales of non-financial, non-locally produced assets: Funds entering into Argentina from (i) the export of Argentine goods, (ii) the provisions of services to a non-resident by a resident and (iii) payments received from the sale of non-financial, non-locally produced assets are required to enter through the MLC, be converted into Pesos, and be deposited into a local bank account, all within specifically prescribed periods Payments received from outstanding loans, payment of amounts earned from term deposits or payments received from the sale of any type of asset that is granted, set up or acquired after May 28, 2020: Furthermore, by means of Communication “A” 7030 (as amended), the BCRA set forth that, in order to grant their clients access to the MLC, financial entities must first request from such clients an affidavit stating, among others, that such client will agree to transfer into Argentina and convert into local currency through the MLC within five business days, any funds received abroad arising from payments received from outstanding loans, payments of amounts earned from term deposits held outside of Argentina or payments received from the sale of any type of asset (e.g. shares, securities, goods, etc.) outside of Argentina in case such loans, deposits or assets were granted, set up or acquired after May 28, 2020. Offshore financial indebtedness: Regarding offshore financial debts, the Argentine borrower receiving the foreign funds must convert such funds into Argentine Pesos in order to be able to access the MLC in the future for the payment of principal and interest payments when due on the foreign debt. Outflow of Funds: General Requirements: By means of Communication “A” 7030 (as amended from time to time) effective as of May 28, 2020, the BCRA introduced additional controls, limitations, and restrictions on foreign exchange operations. In this sense, in addition to the specific requirements that a foreign exchange transaction must meet in order for the payee to access the MLC, this law set forth broad new requirements of general application to most foreign exchange transactions, with some minor exceptions. In particular, in order to grant their clients access to the MLC, Argentine financial entities must first request from their clients an affidavit stating that: (i) all of its foreign currency holdings in Argentina are deposited in local financial entities; (ii) at the beginning of the day on which the affidavit is provided, the client does not have more than US$100,000 as “available foreign liquid assets” unless it is allowed to have more based on certain exceptions; (iii) it agrees that it will transfer into Argentina and convert into local currency in the MLC within 5 business days, any funds received abroad arising from payments received on outstanding loans, amounts earned on term deposits, or amounts received from sales of any type of assets; in each case, if such loans, deposits or assets were granted, constituted or acquired after May 28, 2020; and (iv) it has not sold securities with settlement in foreign currency or transferred them to international depository agencies abroad during the prior 90 calendar days, and will not engage in such activity on the date of the affidavit and within the same period or within 90 days following the date thereof. Additionally, through Communication “A” 7200, the BCRA created the “Registry on foreign exchange information of exporters and importers of goods”, in which certain import and export companies that are specifically included in the list published under Communication “C” 89476 must be registered no later than April 30, 2021 as a condition to access the MLC for the outflow of funds as of May 1, 2021. Import of Goods. The FX Regulatory Framework establishes the possibility for Argentine residents to access the MLC in order to pay amounts that they owe for the import of goods. Two different scenarios are contemplated. First, in most cases and where the cases are specifically covered in the FX Regulatory Framework, financial entities may grant their clients access to the MLC in order to pay for the import of goods if such goods have already been registered with the customs office and so long as certain requirements set forth in the FX Regulatory Framework are met (cases that are not specifically covered in the FX Regulatory Framework require the BCRA’s prior approval and registration with the customs office is not sufficient). In addition various quantitative and other limitations for the payment of various imports of goods and repayment of the principal of debt incurred in order to pay for certain imports of goods were set under Communication “A” 7030, as amended from time to time (these limitations are set to expire on June 30. 2021 unless such deadline is extended). Second, in respect of payments for imports of goods whose customs registration is pending as well as for payments in advance of receipt of the imported good, payments upon demand against review of the shipping documents and for the cancellation of commercial guarantees for imports of goods granted by local financial entities, access to the MLC can still be achieved so long as certain requirements are met. In addition, entities gaining access to the MLC in this manner must file supporting documentation proving they meet the requirements at the time that they make the payment to the foreign supplier of the import. Further, if a payment is made in advance of actual receipt of the imported goods, the payor must file certain custom documents showing the actual import of the good within 90 days of the advance payments being made. Finally, entities may also grant their clients access to the MLC for the payment of interest payments on outstanding debts so long as the transaction is declared in the “Foreign assets and liability informative regime”. The BCRA’s prior authorization is required for the payment of commercial debts when importing goods into the country or purchasing foreign goods (i.e. at least 3 business day in advance of the necessary authorization). Moreover, certain special regimes that are applicable to special products, or financings of purchase facilities are established (i.e., leasing agreements, companies responsible for the purchase of medicine for patients, local governments for infrastructure works, supplies and goods for certain industries, etc.). Offshore Services. Financial entities may grant their clients access to the MLC for the payment of services provided that such provision of services was previously reported, if applicable, in the last presentation of the “Foreign assets and liability informative regime”. With certain exceptions, the BCRA’s prior authorization is required to make payments prior to their scheduled due date, or to make payments to offshore related companies. Financial entities may also grant access to the MLC for the making of interest payments on offshore debt as long as the transaction was reported in the “Foreign assets and liability informative regime”. Again, the BCRA’s prior authorization is required for early interest payments as described above. Dividends and Earnings. No authorization from the BCRA is required to carry out foreign exchange transactions to pay dividends and earnings to “non-residents”, provided that the following requirements are met: (i) the dividends and earnings arise from closed and audited financial statements, (ii) the payment is made in accordance with the relevant corporate documents, (iii) the total amount of transfers for this reason made as of January 17, 2020 and onward, does not exceed 30% of the value of new contributions of foreign direct investment in resident companies, entered and settled through the MLC as of the mentioned date, (iv) access to the MLC for the payment of dividends cannot occur sooner than 30 calendar days following the settlement of the last contribution (v) the payor submits sufficient documentation that evidences the final capitalization of the contributions, and (vi) the payment obligation is reported to the BCRA through the “Foreign assets and liability informative regime”. Offshore Financial Indebtedness. Regarding offshore financial indebtedness, financial entities may only grant access to the MLC when: (i) the funds disbursed as of September 1, 2019 entered Argentina through the MLC, were converted into argentine pesos, and deposited into a local bank account(s); (ii) the transaction has been reported, if applicable, before the BCRA pursuant to the “Foreign assets and liability informative regime”; and (iii) the payment is not made to an affiliated offshore company. Access to the MLC by Argentine residents for the prepayment of debt (principal and interest) more than 3 business days to its maturity date for principal or payment date for interest requires the prior authorization of the BCRA. However, this prior approval will not be required in certain specific cases. In particular, in certain circumstances, an amount of the outstanding principal of indebtedness issued by non-Argentine entities may be prepaid in advance. Specifically, by means of Communication “A” 7106 dated September 15, 2020, the BCRA has established that Argentine residents that have to make debt payments on debt issued by non-Argentine companies (including foreign financial indebtedness granted by non-financial non-related third parties, foreign financial indebtedness that required for the operation of the company, or the issuance of bonds in a foreign country with the public registration of such bonds in Argentina) with payments scheduled to fall between October 15, 2020 and March 31, 2021, must file a refinancing plan with the BCRA whereby (i) only 40% of the principal shall be paid during such timeframe; and (ii) the remaining principal shall be refinanced with new indebtedness with a minimum average duration of two years. This plan must be submitted to the BCRA within certain periods. In line with this requirement, Argentine residents may access the MLC to prepay the noted percentage of principal, subject to meeting certain criteria. The requirement to submit a refinancing plan to access the MLC does not apply to international organizations or related agencies or with official credit agencies or in respect of debt secured by such organizations or agencies and when the amount to pay for the principal of these type of indebtedness does not exceed the equivalent to US$1 million per calendar month. Furthermore, by means of Communication “A” 7230, dated February 25, 2020, the BCRA extended the obligation to submit the above described refinancing plan for payments with maturity dates between April 1, 2021 and December 31, 2021. Such refinancing plan will not be necessary when the payment does not exceed the equivalent of US$2 million per calendar month, and neither when the maturities represent: (i) indebtedness incurred as of January 1, 2020 and the funds received from such incurrence have been transferred and sold in the MLC; (ii) indebtedness incurred as of January 1, 2020 in order to refinance principal amounts falling due after that date; and or (iii) the remaining portion of maturities already refinanced in accordance with the parameters of Comunication “A” 7106. Collateral trusts. Collateral trusts established by Argentine resident entities with the purpose of guaranteeing principal and interest payments for their obligations have access to the MLC in order to make such payments, as long as it is verified that the debtor would have also had access to make such payments on its own behalf because of its compliance with the applicable regulations, and that the payment abroad by the collateral trust is the only available option set forth in the transaction documents. Collateral trusts are able to access to the MLC to either transfer or purchase of foreign currency to comply with guarantee deposits of this type of indebtedness, as long as some requirements are met. However, this possibility is provided up to the equivalent payable amount in the relevant contract or the “value to be paid at the next maturity date of services”. Investment Instruments. The BCRA‘s prior authorization is required to access the MLC for the making of foreign investments, including the purchase of foreign currency for portfolio investments (“atesoramiento”) and the purchase of securities, (i) by legal entities, and non-Argentine residents (with certain exceptions -such as multilateral agencies, embassies, etc.-), for any amount; (ii) by individual residents, when the monthly sum of US$200 is exceeded; and (iii) for non- resident individual persons (for example, tourists), when the monthly sum of US$100 is exceeded. Application of collections from exports of goods and services: By means of Communication “A” 7123, the BCRA ruled that collection in foreign currencies from exports of goods and services may be used for (i) payments of principal and interest on financial indebtedness granted by a non-Argentine entity with an average maturity of no less than one year; and (ii) repatriation of direct investments by non-residents in companies that are not controlled by local financial entities -to the extent that said repatriation occurs after the conclusion and implementation of a direct investment project and at least one year after the transfer and settling of the capital contribution in the FX Market. For this purposes, the disbursed funds must have been (a) used to finance certain investment projects in Argentina that generate an increase in the production of goods that will be exported, and/or will enable the substitution of imports of goods; and/or will result in an increase in the transport capacity for the exportation of goods and services through the construction of infrastructure works in ports, airports and land terminals for international transport; and (b) transferred into Argentina and converted into local currency after October 2, 2020. Prior BCRA approval will be required for those cases where these requirements are not fulfilled. However it will not be required (either for the payment of offshore financial indebtedness with a foreign counterparty or for the repatriation of direct investment) when the funds received as of October 2, 2020 were transferred and converted into Argentine pesos through the MLC, and the repatriation takes place at least two years after such condition. Furthermore, on April 7, 2021, Decree No. 234/2021 created an “Investment Promotion Regime for Exports”. This regime provides companies with the option of submitting an “Export Investment Project” for approval. The project must be for a direct investment in Argentina in a foreign currency, in an amount equal to at least US$100 million and it must be in order to increase the production for the exportation of certain goods. If approved, the company that submitted the “Export Investment Project” for approval is entitled to receive up to 20% of the foreign exchange received from the export of goods that were part of the direct investment project, subject to an annual cap of -25% of the gross amount initially cleared through the FX Market in order to finance the project. In addition, such amounts may be applied once a calendar-year has elapsed since the direct investment was made. Once the company receives the above described amount of foreign current from the export of the noted goods, the company may use such funds - (i) for the payment of principal and interest on commercial liabilities or financial transactions abroad; (ii) for the payment of profits and dividends that correspond to closed and audited balance sheets; and/or (iii) for the repatriation of direct investments by non-residents. In the event that export proceeds are not applied immediately, such funds must be deposited in local financial entities until its application. The BCRA adopted these measures through Communication “A” 7259, dated April 9, 2021. iii)BCRA Reporting Regime The BCRA’s reporting regime has been updated as described below. Communication “A” 6401 introduced reporting requirements with respect to debt securities and external liabilities for the financial and private non-financial sector and direct investments of companies in such sector under the “Foreign assets and liability informative regime”. The completion and validation of the information corresponding to the foregoing must be done electronically through the Federal Public Revenue Administration’s website. Such information, must be reported as of the first quarter of 2020, as follows: (i) at the end of any calendar quarter, by all individuals and legal entities who have outstanding offshore financial indebtedness (or if cancelled during that period, when filing the Foreign assets and liability informative regime); and (ii) in an annual presentation, by those individuals or legal entities for whom the balance of external assets and liabilities at the end of each year reaches or exceeds the equivalent of US$50 million. iv)Foreign Exchange Criminal Regime Exchange operations can only be carried out through the entities authorized for such purposes by the BCRA. As such, any exchangeoperation that does not comply with the provisions of the applicable regulations will be subject to the Law No. 19,359, as regulated by Decree 480/95, and BCRA regulations (“Foreign Exchange Criminal Regime”), pursuant to which the following constitute offenses: (i) any foreign exchange transaction not performed before an authorized institution; (ii) the completion of foreign exchange transactions without the applicable authorization; (iii) any misrepresentation related to foreign exchange transactions; (iv) the failure to make accurate representations or to complete the necessary procedures in cases where the actual transactions are different than those declared; (v) any foreign exchange transaction executed without fulfilling the conditions established by applicable regulations, regarding quantity, foreign currency exchange rate, dates, etc.; and (vi) any other omission or act performed in violation of the Foreign Exchange Criminal Regime. Violations to the Foreign Exchange Criminal Regime may be subject to fines of up to ten times the amount of the operation in breach and imprisonment in certain instances. B.6 Argentine Banking Regulation The following is a summary of certain matters relating to the Argentine banking system, including provisions of Argentine law and regulations applicable to financial entities in Argentina. This summary is not intended to constitute a complete analysis of all laws and regulations applicable to financial entities in Argentina. i) General Since 1977, banking activities in Argentina have been regulated by the Argentine Financial Institutions Law No. 21.526 (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the autonomous BCRA, the principal monetary and financial authority in Argentina that operates independently from the Argentine government. The BCRA enforces the FIL and grants authorization to banks to operate in Argentina. The FIL confers numerous powers to the BCRA, including the ability to grant and revoke bank licenses, authorize the establishment of branches of Argentine banks outside of Argentina, approve bank mergers, capital increases and certain transfers of stock, set minimum capital, liquidity and solvency requirements and lending limits, grant certain credit facilities to financial entities in cases of temporary liquidity problems and to promulgate other regulations and to enforce the FIL. The BCRA has vested the Superintendency with most of the BCRA’s supervisory powers. Such entity is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial entities and establishing rules for participation of financial entities in the MLC and the issuance of bonds and other securities, among other functions. In this section, unless otherwise stated, references to the BCRA should be understood to be references to the BCRA acting through the Superintendency. FIL grants the BCRA broad access to the accounting systems, books, correspondence, and other documents belonging to banking institutions. The BCRA regulates the supply of credit and monitors the liquidity, and generally supervises the operation, of the Argentine banking system. Current regulations equally regulate Argentine and foreign-owned banks. ii) Supervision As the regulator of the Argentine financial system, the BCRA requires financial entities to submit information on a daily, monthly, quarterly, semiannual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, portfolio quality (including details on debtors and any established loan loss provisions) and other pertinent information, allow the BCRA to monitor financial entities financial condition and business practices. The BCRA periodically carries out formal inspections of all banking institutions in order to monitor compliance by banks with legal and regulatory requirements and confirm the accuracy of the information provided to the BCRA. If BCRA rules are breached, it may impose various sanctions depending on the magnitude of the infringement. These sanctions range from warning calls up to the imposition of fines, or even the revocation of the financial institution’s operating license. Moreover, non-compliance with certain rules may result in the obligatory presentation to the BCRA of specific adequacy or regularization plans. The BCRA must approve these plans in order for the financial institution to remain operational. Financial institutions operating in Argentina have been subject to the supervision of the BCRA on a consolidated basis since 1994. Information regarding “Limitations on Types of Business”, “Capital Adequacy Requirements”, “Lending Limits”, and “Loan Classification System and Loan Loss Provisions” related to a bank’s loan portfolio is calculated on a consolidated basis. However, regulations relating to a bank’s deposits are not based on consolidated information, but on such bank’s deposits in Argentina (for example, liquidity requirements and contributions to the deposit insurance system). Examination by the BCRA The BCRA began to rate financial institutions based on the “CAMEL” quality rating system in 1994. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with: “C” standing for capital, “A” for assets, “M” for management, “E” for earnings, and “L” for liquidity. Each factor is evaluated and rated on a scale from one to five, with one being the highest rating an entity can receive. The BCRA modified the supervision system in September of 2000. The objectives and basic methodology of the new system, referred to as “CAMELBIG,” do not differ substantially from the CAMEL system. The components were redefined in order to evaluate business risks separately from management risks. The components used to rate the business risks are capital, assets, market, earnings, liquidity and business. The components to rate management risks are internal control and the quality of management. By combining the individual factors under evaluation, a combined index can be populated that represents the final rating for the financial institution. After temporarily halting such examinations as a result of the 2001-2002 financial and economic crisis, the BCRA resumed the examination process, which remains in effect as of the date of this filing. In Banco Galicia’s case, the first examination after the 2001-2002 financial crisis was on March 2017, and currently there is an ongoing examination as of December 2019. Regulatory Capital (Minimum Capital Requirements) Financial entities are subject to the capital adequacy rules of the BCRA, consequently Banco Galicia, as a commercial bank, must maintain a minimum capital amount measured as of each month’s closing. BCRA regulations establish that financial institutions legal capital should be equal to the greater value resulting from the comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those determined by credit and market risk, as well as operational risk. The minimum basic capital requirement for a commercial bank located in the City of Buenos Aires, such as Banco Galicia, is a capital reserve of at least Ps.26 million. The minimum capital requirements related to credit risk, which are calculated according to a formula established by the BCRA, are designed to establish the minimum capital necessary to offset the risk that the counterparty does not comply with its obligation in a transaction related to the assets that are being reviewed. The minimum capital requirements related to market risks are designed to offset the eventual losses generated by a change of market rates or of credit quality, which would affect the assets and liabilities of the bank. Such market risk includes (among other risks) liquidity risk and interest rate risk. Operational risk includes the possibility of incurring a failure or deficiency in losses as a result of external events or as a result of a failure or deficiency in internal processes, human error or internal systems. In order to verify compliance with the minimum capital requirements, the BCRA considers the computable regulatory capital (“RPC”) of a particular entity (i.e., capital that the entities actually have). Pursuant to the BCRA’s regulations, a bank’s RPC is the sum of the minimum core capital (Tier I capital) and supplementary capital (Tier II capital), minus certain deductible concepts. The BCRA considered Basel III requirements in order to regulate the RPC (and listed the assets included in each Tier as well the deductible concepts in accordance with such rules). According to the BCRA’s regulations, any financial entity operating with an RPC under the minimum capital requirements must: (i) pay-in the correspondent amount within the following two months from the month in which it fails to comply with the requirement, or (ii) submit to the Superintendency a regularization and reorganization plan within the following 30 calendar days counted as from the last day of the month in which it fails to comply with the requirement. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions, when non-compliance with the RPC requirements occurs or any warning from the Superintendency is received. In addition, any financial entity operating under the daily integration of the minimum capital requirement related to market risk (when such failure is caused by the requirements established to guard against interest rate risk, foreign exchange risk or equity price risk), must pay-in the corresponding amount necessary to comply with the requirements and/or reduce its asset position until the applicable requirement is complied with, within a term of ten business days counted from the first failure to comply with the requirements. In case the non-compliance situation remains after such term has elapsed, the entity must submit to the Superintendency a regularization and reorganization plan within the following five days. iii) Legal Reserve The BCRA and FIL rules requires that every year banks allocate to a legal reserve a percentage of their net profits established by the BCRA, which currently amounts to 20% of their yearly income. Such reserve may only be used during periods in which such financial institution has incurred losses and has exhausted all other reserves. Distribution of dividends will not be allowed if the legal reserve is not met. iv) Profit Distribution Profit distribution of financial institutions (the concept pursuant to which a payment of dividends is included) must be authorized by the Superintendency. Financial institutions may distribute profits without exceeding the limits set forth in the “Distribution of Profits” rules established by the BCRA. The amount to be distributed must not compromise the entity’s liquidity and solvency. The Superintendency is entitled to intervene to verify the correct application of the procedures and regulations with respect to dividends approved and to be distributed by financial institutions. Nevertheless, as explained above, dividends to be paid in a foreign currency to international investors, may be subject to foreign exchange restrictions. The BCRA sets rules for the conditions under which financial institutions can make distributions of profits. BCRA regulations require that 20% of a company’s profits, subject to certain adjustments, be allocated to legal reserves. This requirement applies regardless of the company’s ratio of legal reserves to capital stock. In addition to the foregoing, BCRA regulations regarding profit distributions provide that profits can be distributed so long as a company’s results of operations are positive after deducting for required legal reserves, the difference between the carrying amount and the fair market value of public sector assets and/or debt instruments issued by the BCRA not valued at fair market price, and the amounts capitalized for legal proceedings related to deposits and any unrecorded adjustments required by external auditors or the BCRA. Furthermore, companies must also comply with capital adequacy rules, which set forth minimum capital requirements and required regulatory capital. Effective as of January 2016, all Argentine financial institutions are also required to maintain capital in an additional capital reserve equal to 2.5% of risk-weighted assets and 3.5% for financial institutions classified as systemically important, which must be comprised of only Tier I Common Capital, net of deductible items. Profit distributions of financial institutions will not be authorized if failing to meet with the required computable regulatory capital set forth above. In certain cases, that margin may be modified by the BCRA, as established in the “Distribution of Profits” rules. Profits, if any, resulting from the first-time application of IFRS may not be distributed. Any such profits will be allocated to a special reserve recorded under equity, which may only be released for capitalization purposes, or to otherwise offset potential losses. Despite the above-mentioned existing limitations, in the context of the ongoing COVID-19 pandemic, the BCRA 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. This suspension was later extended by Communication “A” 7035 until December 31, 2020, and then by Communication “A” 7181 until June 30, 2021 (with the possibility of future extensions). v) Legal Reserve Requirements for Liquidity Purposes The deposit amount minus the minimum cash requirement determines the “lending capacity” of a particular deposit. The BCRA modifies the applicable minimum cash requirement from time to time depending on monetary policy considerations. The then-applicable minimum cash requirement is determined on the basis of the average daily balances of The averages will be obtained by dividing the sum of the daily balances by the total amount of days of each month. For days in which no movement is recorded, the balance corresponding to the immediately preceding day. Compliance with minimum cash requirements must be made in the same debt currency and/or instrument that corresponds to the requirement (with certain exceptions), and might be completed through (i) checking accounts, denominated in Pesos, opened by financial entities in the BCRA; (ii) “Minimum Cash Accounts”, denominated in Dollars or other foreign currencies, opened by financial entities in the BCRA; (iii) special guarantee accounts in favor of clearing houses and for coverage of credit cards, vouchers and ATM operations and for transfer settlement of immediate funds; (iv) non-bank financial entities checking accounts opened in commercial banks for the requirement of minimum cash integration; (v) special accounts opened in the BCRA linked for the provision of social security benefits administered by National Social Security Administration (“Administración Nacional de la Seguridad Social” or ANSES) and (vi) “sub-accounts 60” which are accounts that contain a minimum amount of cash received from investments in public securities and debt instruments issued by the BCRA, at market value. According to “Minimum Cash” rule of the BCRA (as modified and complemented), the percentages of minimum cash requirements are as follows: Demand deposits: Peso-denominated checking accounts and savings accounts: 45%. Savings accounts denominated in foreign currency: 25%. Fixed term deposits: Peso-denominated: (i) up to 29 days, 32%; (ii) 30 to 59 days, 22%; (iii) 60 to 89 days, 4%; (iv) 90 days or more, 0%. Foreign currency-denominated: (i) up to 29 days, 23%; (ii) 30 to 59 days, 17%; (iii) 60 to 89 days, 11%; (iv) 90 to 179 days, 5%; (v) 180 to 365 days, 2% and (vi) more than 365 days, 0%. Fixed term deposits adjusted by UVA/UVI (by remaining maturity): (i) up to 29 days, 7%; (ii) from 30 to 59 days, 5%; (iii) from 60 to 89 days, 3%; (iv) 90 days or more, 0%. Please bear in mind that the above-mentioned peso-denominated rates may vary depending on certain circumstances set forth by the BCRA (e.g., locality, term deposits transactions arranged remotely). As of December 31, 2020, Banco Galicia was in compliance with its legal reserve requirements and continued to be in compliance as of the date of this annual report. vi) Limitations on Types of Business In accordance with the provisions of the FIL, commercial banks are authorized to carry out all activities and operations which are not strictly prohibited by law or by the BCRA regulations. Permitted activities include the capacity to: grant and receive loans; receive deposits from the general public in local and foreign currency; secure its customers’ debts; acquire, place and trade with shares and debt securities in the Argentine over-the-counter market (subject to prior approval of the CNV, if applicable); carry out operations in foreign currencies; act as trustee in financial trusts; and issue credit cards. In order to calculate the legal reserves requirements for liquidity purposes described above, it is not necessary to deduct the capital stock allocated to foreign branches from a bank’s shareholders’ equity. Pursuant to the BCRA’s regulations, financial institutions are not allowed to hold more than a 12.5% interest (or more than a specific percentage of the financial institution’s adjusted shareholders’ equity) in the outstanding capital of a company which does not provide services complementary to those offered by financial institutions, as established in the “Complementary services of financial activities” rules. The BCRA determines which services are complementary to those provided by financial institutions. To date has been determined that such services mainly include those offered in connection with stock brokerage, the issuance of credit, debit or similar cards, financial intermediation in leasing and factoring transactions. Non-banking financial institutions are not allowed to provide certain services and activities, such as opening checking accounts, among other activities. vii) Capitalization of Debt Instruments Communication “A” 6304 (as amended) of the BCRA provides that all regulations related to capital increases must be cash contributions. However, the regulation establishes that subject to the prior authorization of the Superintendency, the following instruments are allowed as capital contributions: (i) securities issued by the Argentine government, (ii) debt instruments issued by the BCRA, and (iii) a financial institution’s deposits and other liabilities resulting from its financial brokerage activities, including subordinated obligations. With respect to instruments (i) and (ii), the contributions must be recorded at their market value. It is understood that an instrument has a market value when it is regularly listed on regulated local or foreign stock markets and traded on such markets in such amounts that the liquidation of such instruments does not significantly affect the listing price of such instruments. With respect to clause (iii) above, contributions must be recorded at their market value, as defined in the previous sentence or, in the case of financial institutions that publicly offer their stock, at the price determined by the applicable regulatory authority. If the aforementioned conditions are not met, the instruments in question will not be contributable as capital. Deposits and other liabilities resulting from a given financial institution’s financial brokerage activities, including subordinated obligations that are not permitted to be traded in local or foreign regulated secondary markets, will be allowed to be contributed as capital at their accounting value, pursuant to BCRA rules. viii) Lending Limits According to the “large exposures to credit risk” and “minimum capital for financial institutions” rules, the total amount of all credit risk exposure values of a financial entity to a single counterparty or, where appropriate, a group of related counterparties, may not exceed at any time the limits established for level capital one (Tier 1) by the BCRA. In accordance with the BCRA’s regulations, the exposure limit to a counterpart or connected counterpart group of the non-financial private sector will be 15% of the Bank’s level one capital. However, this limit may be increased by 10% for exposures that are secured with preferred guarantees. The total amount of financial assistance a bank is authorized to provide to a borrower and its affiliates is also limited based on the borrower’s shareholders’ equity. The total amount of financial assistance granted to a borrower and its affiliates shall not be higher than, in the aggregate, 100% of such borrower’s shareholders’ equity, although such limit may be increased an additional 200% of the borrower’s shareholders’ equity if the sum does not exceed 2.5% of the bank’s adjusted shareholders’ equity. Global exposure to the public sector (national, provincial and municipal public sector) shall not be higher than 75% of an institution’s adjusted shareholders’ equity. Additionally, Section 12 of Communication “A” 3911, as amended, establishes that the average monthly financial assistance to non-financial public sector, in the aggregate, shall not be higher than 35% of the bank’s total assets as of the end of the previous month. The BCRA also regulates the level of “total financial exposure” a bank has to related parties. A party may be a “related party” by: a) control, when a human or legal person directly or indirectly exercises control over the bank or is controlled directly or indirectly by the bank; or b) personal relationship, regarding individuals (including their families and The BCRA limits the level of total financial exposure that a bank can have outstanding to related parties, depending on the rating granted to each bank by the Superintendency. Banks rated 4 or 5 are forbidden to extend financial assistance to related parties. For banks ranked between 1 and 3, the financial assistance offered to related parties based on a relationship of control and without a guarantee, may not exceed 5% of the bank’s level one capital. The bank may increase this limit to 10% if the financial assistance is secured. Financial assistance to related parties based on a “personal relationship” have a 5% limit of Level 1 capital of the entity providing the financing (the limit is unique for all cases and includes operations with and without guarantees). However, a bank may grant additional financial assistance to such related parties up to the following limits:
Domestic financial entities:
If the affiliate is a financial institution rated 1, the amount of total financial exposure can reach 100% of a bank’s TIER 1, and 50% for additional financial assistance If the receiving affiliate financial institution is rated 2, the amount of total financial exposure can reach 20% and an additional 105% can be included If the affiliate is a financial institution rated 3, the amount of total financial exposure can reach 10%, and additional financial assistance can reach 40%
Domestic companies with complementary services:
Controlling company rated 1: General assistance 100% Controlling company rated 2: General assistance 10% / Additional assistance 90%
Controlling company rated 1: General assistance 100% / Additional assistance 50% Controlling company rated 2: General assistance 20% / Additional assistance 105% Controlling company rated 3: General assistance 10% / Additional assistance 40%
Foreign financial entities:
Other counterparties related by control
Lender is ranked from 1 to 3: 5% of its TIER 1 In addition, the aggregate amount of a bank’s total financial exposure to its related parties, except for the ones subject to individual maximum limits higher than 10% (complementary services companies), may not exceed 20% of such bank’s TIER 1. Notwithstanding the limitations described above, the sum of computable exposure is also limited in order to prevent risk concentration. To that end, the total exposure independently of whether customers qualify as such bank’s related parties or not, in the case in which such exposure exceeds 10% of such bank’s TIER 1, may not exceed three times the bank’s TIER 1 excluding total financial exposure to domestic financial institutions, or five times the bank’s TIER 1, including such exposure. For a second-grade financial institution (i.e., a financial institution that provides financial products to other banks and not to retail customers), the latter limit is ten times such financial institution’s TIER 1. Banco Galicia has historically complied with such rules. ix) Loan Classification System General Banco Galicia is required to comply with the BCRA regulations. In 1994, the BCRA introduced the current loan classification system and the corresponding minimum loan-loss provision requirements applicable to loans and other types of credit (together, referred to as “loans”) to private sector borrowers. The current loan classification system applies certain criteria to classify loans in a bank’s “consumer” portfolio, and another set of criteria to classify loans in its “commercial” portfolio. The classification system is independent of the currency in which the loan is denominated. The loan classification criteria applied to loans in the consumer portfolio is based on objective guidelines related to the borrower’s credit score, legal status, and other information provided by credit rating agencies. However, if a borrower has defaulted in the past or is non-current on obligations, a lower rating is assigned by the Bank. In the event of any discrepancy, the guidelines indicating the higher risk level should be considered. For the purposes of the BCRA’s regulations, consumer loans are defined as mortgage loans, pledge loans, credit card loans and other types of loans in installments granted to individuals. All other loans are considered commercial loans. In addition, in accordance with an option set forth in these regulations, Banco Galicia prospectively applies the consumer portfolio classification criteria to commercial loans of up to Ps.72,64 million. This classification is based on the level of fulfillment and the situation thereof. The main classification criterion for loans in the commercial portfolio is each borrower’s ability to pay, mainly in terms of such borrower’s future cash flows. If a customer has both commercial and consumer loans, all of these loans will be considered as a whole to determine eligibility for classification in the corresponding portfolio. Loans backed with preferred guarantees will be considered at 50% of their face value. By applying the BCRA’s classification to commercial loans, banks must assess the following factors: the current and projected financial situation of the borrower, the customer’s exposure to currency risk, the customer’s managerial and operating background, the borrower’s ability to provide accurate and timely financial information, as well as the overall risk of the sector in which the borrower operates and the borrower’s relative position within that sector. The BCRA’s regulations also establish that a team independent from the departments responsible for credit origination must carry out a periodic review of the commercial portfolio. Banco Galicia’s Credit Division, which is independent from the business units that generate transactions, is responsible for these reviews. The review must be carried out on each borrower with debt pending payment equal to the lesser of the following amounts: Ps.72,64 million or 1% of the bank’s computable capital (the “RPC”). The frequency of the review of each borrower depends on the bank’s exposure to that borrower. The BCRA requires that the larger the exposure is, the more frequent the review should be. This review must be conducted every calendar quarter when credit exposure to that borrower is equal to or in excess of 5% of the bank’s RPC, or every six months when exposure equals or exceeds the lesser of the following amounts: Ps.72.64 million or 1% of the bank’s RPC. In all cases, at least 50% of Banco Galicia’s commercial portfolio must be reviewed once every six months; and all other borrowers in Banco Galicia’s commercial portfolio must be reviewed during the fiscal year, so that the entire commercial portfolio is reviewed every fiscal year. In addition, only one level of discrepancy is permitted between the classification assigned by a bank and the lowest classification assigned by at least two other banks whose combined credit to the borrower represents 40% or more of the total credit of the borrower, considering all banks. If Banco Galicia’s classification was different by more than one level from the lowest classification granted, Banco Galicia must immediately downgrade its classification of the debtor to the same classification level, or else within one classification level. Loan Classification The following tables contain the six loan classification categories corresponding to the different risk levels set forth by the BCRA. Banco Galicia’s total exposure to a private sector customer must be classified according to the riskier classification corresponding to any part of such exposure. Commercial Portfolio
Consumer Portfolio
On March 2020, the BCRA issued Communication “A” 6938, which provided for the addition of 60 days to the terms of arrears allowed for levels A, B and C for both the Commercial and Consumer Portfolio. These provisions were extended by complementary Communications until March 31, 2021. x) Limitation on Fees and Other Substantial Elements The BCRA has issued regulations limiting amounts that entities can charge as credit card fees, as well as fees that can be charged for financial services rendered by financial entities, credit card issuers (and other similar entities). Such regulations provide that such fees must be duly justified from a technical and economic point of view and must be in relation to the total financial costs incurred by any such financial institution. Further, such Laws provide that applicable interest rates must be set forth. In addition, such regulations provide that in order to modify fees and other conditions established in agreements executed by and between financial entities and consumers, the following requirements must be met (i) reasons for fees increases must be established in the agreements and must be duly justified; (ii) modifications cannot change the core or fundamental provisions of the agreement; (iii) the consumer must be duly informed of any such changes; and (iv) for the imposition of new fees, the consumer’s consent must be obtained. In the context of the COVID-19 outbreak, the BCRA issued Communication “A” 6945, as amended (the most recent amendment was under Communication “A” 7181), which suspended the ability of banks to charge fees for the use of automatic teller machines (“ATMs”) until March 31, 2021. Also, as part of the protective measures taken, the BCRA has imposed an injunction on the payment of loans granted to the private sector, as per Communications “A” 6949 and “A” 6964, among other regulations, as amended from time to time. The BCRA has also mandated that (i) any payments due between April and March 2021 for loans previously granted by financial entities are deferred until the month following the loan’s maturity date; and (ii) credit card debts due between March 20 and April 30 of 2020 and not paid by the credit card holder will be automatically refinanced for at least a one-year term, pursuant to the following terms and conditions: (a) a 3-month grace period must be given to the debtor; (ii) the amount owed must be repaid in 9 equal and consecutive installments, and (iii) the maximum annual interest rate the creditor may charge is xi) Foreign Currency General Position Pursuant to the FX Regulatory Framework, financial entities may determine their own Foreign Currency General Position, with certain limitations. xii) Deposit Insurance System In 1995, Law No.24,485 and Decree No.540/95, as amended, created a mandatory deposit insurance system for bank deposits and delegated to the BCRA the organization and start-up of the deposit insurance system. The deposit insurance system was implemented through the creation of a fund named Fondo de Garantía de los Depósitos (“FGD”), which is administered by Seguros de Depósitos S.A. (“Sedesa”). The shareholders of Sedesa are In addition, when the contributions to the FGD reach the greater of Ps.2 billion or 5.0% of total deposits, the Central Bank may suspend or reduce the monthly contributions and reinstate the same when contributions fall below such required level. The deposit insurance system covers all Peso and foreign currency deposits held in demand deposit accounts, savings accounts and time deposits for an amount up to Ps.1,500,000 per person, account and deposit. Certain deposits are not covered by the guarantee of the deposit insurance system, such as deposits received at rates higher than the reference rate in accordance with the limits established by the BCRA, deposits acquired by endorsement, and those made by persons related to the financial institution (as defined by BCRA regulations). The guarantee provided by the deposit insurance system must be made effective within 30 days from the revocation of the license of a financial institution, subject to the outcome of the exercise by depositors of their priority rights described under “—Priority Rights of Depositors” below. The BCRA may modify, at any time, and with general scope, the amount of the mandatory deposit guarantee insurance. Decree No.1292/96 enhanced Sedesa’s functions by allowing it to provide equity capital or make loans to Argentine financial institutions experiencing difficulties and to institutions that buy such financial institutions or their deposits. As a result of such decree, Sedesa has the flexibility to intervene in the restructuring of a financial institution experiencing difficulties prior to bankruptcy. Debt securities issued by banks are not covered by the deposit insurance system. xiii) Priority Rights of Depositors According to section 49(e) of the FIL, in the event of a judicial liquidation or the bankruptcy of a financial entity, the holders of deposits in Pesos and foreign currency benefit from a general priority right to obtain repayment of their deposits up to the amount set forth below, with priority over all other creditors, with the exception of the following: (i) deposits secured by a mortgage or pledge, (ii) rediscounts and overdrafts provided to financial entities by the BCRA, according to section 17 subsections (b), (c) and (f) of the BCRA Charter, (iii) credits provided by the Banking Liquidity Fund, which was created by Decree No.32, dated December 26, 2001, secured by a mortgage and pledge and (iv) certain labor credits, including accrued interest until the date of their total repayment. The holders of the following deposits are entitled to the general preferential right established by the FIL (following this order of preference): deposits of individuals or entities up to Ps.50,000, or the equivalent thereof in foreign currency, with only one person per deposit being able to use this preference. For the determination of this preference, all deposits of the same person registered by the entity are computed; deposits in excess of Ps.50,000, or the equivalent thereof in foreign currency, referred to above; liabilities originated on commercial credit lines provided to the financial entity, which are directly related to international trade. According to the FIL, the preferences set forth in previous paragraphs (i) and (ii) above are not applicable to deposits held by persons who are affiliates of the financial entity, either directly or indirectly as determined by the BCRA. In addition, pursuant to Section 53 of the FIL, the BCRA has an absolute priority over all other creditors of the entity, except as provided by the FIL. xiv) Deposit and Loans in Housing Units In order to facilitate access to mortgage loans, through Communication “A” 5945, dated as of April 8, 2016, and complementary regulations, the BCRA established a new type of loan denominated in Acquisition Value Units (Unidad de Valor Adquisitivo or “UVAs”). The value of such units will be updated using the Reference Stabilization Coefficient. The initial value of the UVA was Ps.47.16, and as of December 31, 2020, it was Ps.64.32. xv) Financing Loans for Economic Development The BCRA enacted several communications, by means of which it implemented several policies to promote economic development and productivity in Argentina. As from March 1, 2020, the required minimum cash to be held by financial institutions was reduced in an amount equivalent to 30% of the sum of outstanding financing granted in local currency to small and medium companies (PyME), provided such financing is granted at a maximum annual interest rate of (i) 40% until February 16, 2020, and (ii) 35% February 17, 2020 onwards. The required minimum cash to be held by financial institutions might also be reduced in the following cases: an amount equivalent to 35 % of the sum of credit card financings granted in local currency under the program “Ahora 12” (a government program that allows users to make payments in 12 monthly installments) until September 30, 2019, and an amount equivalent to 50% for financings granted under such program on and after October 1, 2020. (Communication “A” 6916, as amended from time to time); an amount equivalent to 40% of the amount of a financing provided that is denominated in Argentine pesos and granted with an annual nominal interest rate of up to 24% for: (i) small and medium companies, where at least 50% of such amount is used for working capital lines; (ii) providers of human health services within the framework of the declared health emergency in Argentina, provided that the funds are destined to the purchase of medical supplies and equipment; and (iii) non-small and medium companies, to the extent that the funds are destined to the purchase of machinery and equipment produced by local medium and small companies. This amount may include financing granted to other financial institutions and non-financial credit providers where within 3 business days from the date on which they receive the assistance, those entities allocate the funds to grant financing to small and mediums companies, among other requirements (Communication “A” 6937, as amended from time to time);
an amount equivalent to 40% of a financing provided that is denominated in Argentine pesos to small and medium companies and that are granted at an annual nominal interest rate of up to 24%, measured as a monthly average of daily balances of the previous month, provided that such companies are not reported in the “Central of debtors of the financial system” of the BCRA (Communication “A” 7006, as amended from time to time); an amount equivalent to 14 % of a financing foreseen under section 4.1. of Communication “A” 7161 for the “Financing line for productive investment of small and medium companies” that are provided at an annual nominal interest rate of up to 30 %, and that are measured on a monthly average of daily balances of the previous month (Communication “A” 7161). In this regard, by means of Communication “A” 7240, the BCRA established the extension of the term of such Financing line for productive investment of small and medium companies’ program. xvi) Financial Institutions with Economic Difficulties The FIL establishes that financial institutions, including commercial banks such as Banco Galicia, which do not meet certain minimum cash reserve requirements , have not complied with certain required technical standards, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the BCRA, must submit a restructuring plan to the BCRA. Such restructuring plan must be presented to the BCRA on the date specified by the BCRA, which should not be later than 30 calendar days from the date on which the request is made by the BCRA. In order to facilitate the implementation of a restructuring plan, the BCRA is authorized to provide a temporary exemption from compliance with technical regulations and/or the payment of charges and The BCRA may also, in relation to a In addition, the BCRA’s charter authorizes the Superintendency, subject only to the prior approval of the president of the BCRA, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency have been adversely affected. Notice of this decision must be given to the board of directors of the BCRA. If at the end of such suspension period the Superintendency considers renewal necessary, such renewal can only be authorized by the board of directors of the BCRA for an additional period not to exceed 90 days. During the suspension period: (i) there is an automatic stay of claims, enforcement actions and precautionary measures; (ii) any commitment increasing the financial institution’s liabilities is void; and (iii) acceleration of indebtedness and interest accrual is suspended. If, in the judgment of the BCRA, a financial institution is in a situation which, under the FIL, would authorize the BCRA to revoke the financial institution’s license to operate as such, the BCRA may, prior to considering such revocation, order a variety of measures, including (i) taking steps to reduce, increase or sell the financial institution’s capital; (ii) revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares; (iii) excluding and transferring assets and Furthermore, any actions authorized, commissioned or decided by the BCRA under Section 35 of the FIL involving the transfer of assets and liabilities, or complementing such transfers, or that are necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of equity, are not subject to any court authorization and cannot be deemed inefficient in respect of the creditors of the financial institution which was the owner of the excluded assets, even though its insolvency preceded any such actions. xvii) Dissolution and Liquidation of Financial Institutions The BCRA must be notified of any decision to dissolve a financial institution pursuant to the FIL. The BCRA, in turn, must then notify a court of competent jurisdiction, which will determine who will liquidate the entity: the corporate authorities (extrajudicial liquidation) or an appointed independent liquidator (judicial liquidation). This determination is based on whether or not sufficient assurances exist regarding the ability of such corporate authorities to carry out the liquidation properly. Pursuant to the FIL, the BCRA no longer acts as liquidator of financial institutions. However, when a restructuring plan has failed or is not considered viable, local and regulatory violations exist, or substantial changes have occurred in the financial institution’s condition since the original authorization was granted, the BCRA may decide to revoke the license of the financial institution to operate as such. In this case, the law allows judicial or extrajudicial liquidation as in the case of voluntary liquidation described in the preceding paragraph. The bankruptcy of a financial institution cannot be adjudicated until the license is revoked by the BCRA. No creditor, with the exception of the BCRA, may request the bankruptcy of the former financial institution before 60 calendar days have elapsed since the revocation of its license. B.7 Credit Cards Regulation The Credit Cards Law establishes the general framework for credit card activities. Among other regulations, this law: sets a 2.00% cap on the rate a credit card company can charge merchants for processing customer card holders’ transactions with such merchants, calculated as a percentage of the customers’ purchases. With respect to debit cards, the cap is set at 1.0% and the amounts relating to the customers’ purchases should be processed in a maximum of three business days; establishes that credit card companies must provide the BCRA with the information on their loan portfolio that such entity requires; and sets a The BCRA has issued regulations to enforce public disclosure of companies’ pricing (fees and interest rates) to ensure consumer awareness of such pricing. In addition, during 2014 the BCRA issued a series of regulations in order to establish caps on interest rates on personal loans, pledge loans and credit card loans, as well as to establish a requirement for an authorization to increase fees. Through its Communication “A” 5853, dated December 17, 2015, the BCRA rescinded regulations related to limits on interest rates in respect of lending transactions. B.8 Concealment and Laundering of Assets of a Criminal Origin Law No.25,246 (as amended in July 2011 by Law No.26,683) incorporates money laundering as a crime under the Argentine Criminal Code. Additionally, with the goal of preventing money laundering, the UIF was created under the jurisdiction of the Argentine Ministry of Justice, Security and Human Rights. As a result of such modification, money laundering is now classified as a separate offense. In addition to the above, Law No.26,683 sanctions “self-laundering”, which sanctions money laundering tied to a crime the individual in question committed his or herself. It also includes certain tax offenses described in Article 303 of the Argentine Penal Code as punishable laundering behavior. The new standard falls under Article 303 of the Argentine Penal Code in the chapter titled “Crimes against economic and financial order”. The minimum and maximum of the criminal scale will be doubled when (i) the foregoing acts were crimes that are particularly serious, meaning those crimes with a punishment that is greater than three years of imprisonment; (ii) the perpetrator committed the crime for profit; and (iii) the perpetrator regularly performs concealment activities. The criminal scale can only be increased once, even when more than one of the above-mentioned acts occurs. In such case, the court may take into consideration the multiple acts when determining the original punishment. The “Committee for the Control and Prevention of Money Laundering and the Financing of Terrorist Activities” was formed in 2005 and is responsible for establishing and maintaining the general guidelines related to the Bank’s strategy to control and prevent money laundering and the financing of terrorism. For more information, see “Item 6. Directors, Senior Management and Employees—Functions of the Board of Directors of Banco Galicia”. Banco Galicia has also appointed two directors to fulfill the roles of Compliance Officer and Substitute Compliance Officer. In addition, a specialized management unit was created in this area that is responsible for the execution of the policies approved by the committee and for the monitoring of the control systems and procedures to ensure that they are adequate. Law No.26,734 enacted on December 22, 2011, incorporated terrorism financing and the financing of terrorism as an aggravating circumstance to all criminal conduct in the Argentine Criminal Code. Such law punishes any individual who directly or indirectly collects or provides goods or money with the intention of being used, or knowing that they will be used, in whole or in part (i) to finance a crime with the purpose established in Section 41.5; (ii) for an organization who commits or attempts to commit crimes with the purpose established in Section 41.5; and (iii) for a person who commits or attempts to commit or participates in any way in committing crimes with the purpose established in Section 41.5. The new legislation also punishes terrorism as an aggravating factor in other punishable crimes when any such offense was committed in order to terrorize the population. The Bank has implemented measures to combat the use of the international financial system by criminal organizations. The Bank has policies, procedures and control structures in place to monitor operations based on client profiles and risk assessments based on the information and documentation related to the economic, patrimonial and financial situation of each client to detect clients that could be considered unusual, and eventual reporting to the UIF as appropriate. The Asset Laundering Prevention Management program is charged with the implementation of such control and prevention procedures, as well as communication of such procedures and measures within the Bank, drafting of compliance manuals and employee training. Such management program is also periodically reviewed by senior management. The Bank has appointed a Director as Compliance Officer, in accordance with Resolution 30/2017 of the UIF, who is responsible for ensuring the observance and implementation of procedures and obligations in the matter. The Compliance Officer contributes to the prevention and mitigation of the risks of criminal transactions and is involved in the establishment of internal policies and measures to monitor and prevent the same. The following table illustrates our organizational structure as of December 31, 2020. Percentages indicate the ownership interests held by each entity.
D. Property, Plants and Equipment The following are our main property assets, as of December 31, 2020:
As of December 31, 2020, our distribution network consisted of: Banco Galicia: 326 branches, located throughout Argentina’s 23 provinces, 149 of which were owned and 177 of which were leased by Banco Galicia. Naranja: 180 branches and 20 points of sale, located in 21 of the 23 Argentine provinces, 178 of which were leased by Naranja.
None.
The following discussion and analysis are intended to help you understand and assess the significant changes and trends in our historical results of operations and the factors affecting our resources. You should read this section in conjunction with our audited consolidated financial statements and their related notes included elsewhere in this annual report. A.1 Overview In recent years, we have strengthened our position as a leading domestic private-sector financial institution, increasing our market share of loans and deposits and strengthening Banco Galicia’s regulatory capital reserves through the issuance of subordinated bonds and follow-on equity offerings, the sale of CFA and internal profit origination. Despite the deterioration of the Argentine economy, reduction in Argentine GDP, high levels of inflation and the devaluation of the Peso, in 2020 we were able to maintain our asset quality and adequately cover credit risks and maintain liquidity and profitability metrics at reasonable levels. With the development of the COVID-19 outbreak, which was first alerted by the Chinese government in December 2019, many countries have suspended the business operations of many sectors of their economies, implemented travel restrictions and quarantine measures. Argentina has not been an exception to this rule. The Government implemented a series of measures to reduce the spread of COVID-19, providing for preventative and mandatory social isolation or distancing, with variations depending on the region of the country. As of the date of this report, commercial activities are gradually reopening, in compliance with the protocols established by the Government. Additionally, in response to the pandemic and the ensuing policies implemented by the Government, regulatory agencies established rules whose objectives were to provide assistance to the economic sectors whose operations were adversely affected by the pandemic and for providing health care for the community in general. In particular, the BCRA established many regulations, among which are the suspension of the ability of banks to charge fees for the use of automatic teller machines , the refinancing of certain credit card debts that were not paid by the credit card holder for a one-year term and relaxed the delinquency days and default terms for the benefit of the borrowers. In addition, with the purpose of increasing the financial resources available in the economy, the BCRA has suspended banks’ ability to distribute dividends until June 30, 2021. Accordingly, the Board of Directors of Grupo Financiero Galicia has been continually analyzing the evolution of the pandemic and its effect and taking all measures within its reach to safeguard it business continuity, to protect the health and safety of its employees, customers, and other stakeholders. Among the actions carried out to collaborate and comply with the regulations of the Government and of the BCRA, the following stand out: the subsidiaries of Group Financiero Galicia created interdisciplinary committees responsible for designing and executing various protocols and procedures for the provision of services; work from home policies were implemented, except for those employees who have activities that require their physical presence e.g. cash management logistics and customer service; appointments were required to conduct transactions at branch locations; various lines of credit were made available to clients with certain benefits such as reduction of interest rates, grace periods and the extension of payment terms; subsidies granted by the Government were credited to customer accounts and through the Banelco ATM network; new free-accounts were opened for retirement and subsidy beneficiaries; processes were modified so that they can be done 100% online through websites and / or mobile applications, without having to go to branches; new customer features and options were designed, such as the possibility of withdrawing money from ATMs and self-service terminals without a debit card; donations were made to various health centers, municipalities and families in vulnerable situations; solidarity campaigns were launched to promote customer collaboration and additional contribution from Grupo’s subsidiaries. Our business and prospects are subject to risks associated with and arising from the outbreak of COVID-19, and the uncertainty of the impacts, duration, and severity of the outbreak. This global pandemic creates substantial uncertainty as to our ability to achieve our financial projects and how it may affect our business operations. On another note but connected to the impact COVID-19 may have on how we operate our business, we have conducted a business impact analysis as part of our Business Continuity Program. The results of this analysis show that critical business functions will remain operative upon the occurrence of a disruptive event. In cases of mass absenteeism events, the analysis conducted identified the minimum quantity of personnel and positions needed to remain operative, the outcome being the leader of the relevant sector responsible for assigning personnel to such critical positions. New employees will be hired, and current employees will be relocated to guarantee that critical functions remain operative, if and where needed. Even though up to the date of this report, Grupo Financiero Galicia and its subsidiaries have suffered a limited impact on their results as a consequence of the pandemic, the impact of a lower level of economic activity and a higher level of unemployment could have a significant impact on Grupo Financiero Galicia’s results of operations in the future. Taking into account the above, fiscal year 2021 is expected to be a challenging year as a result of the uncertainty related to the impact of COVID-19, the evolution of the sovereign debt restructuring process with the IMF, and the path to the normalization of certain macroeconomic imbalances in a volatile global economy, all of which could negatively impact the Argentine economy and Grupo Financiero Galicia’s results of operations. A.2 The Argentine Economy The first weeks of 2020 continued to reflect the favorable trend observed in the last months of the previous year, driven mainly by the optimism generated by the progress in the U.S.-China trade negotiations, diverting investors’ focus to other events such as the U.S. presidential elections, which took place at the beginning of November 2020. However, the economic-financial dynamics in the world were completely altered by the outbreak of COVID-19, a virus categorized by the World Health Organization (“WHO”) as a global pandemic. An almost complete shutdown in global activity led to recessions with unprecedented economic and social costs across the world. As a reference, in the United States the unemployment rate peaked at 14.7% in 2020 (it was 6.7% in December 2020) and 21.4 million jobs were lost between March and April 2020 (almost 11.8 million were created by the end of the year), and the GDP fell 31.4% quarter over quarter in the second quarter ( it increased 33.4% in the third quarter and 4.3% in the fourth quarter ending with a year over year decrease of 2.4% in 2020). Confronted with this global context, both monetary entities and governments responded with important monetary and fiscal measures to ensure the correct functioning of the markets and to mitigate the negative economic and health effects generated by the virus. In the United States, fiscal measures reached a total of approximately US$3.9 trillion (~20% of GDP) in 2020, while the victory of the Democratic party boosted expectancy for further fiscal stimulus in the short-term. Likewise, the U.S. Federal Reserve reduced its interest rate range by 150 bps to 0%-0.25% and increased its balance sheet through various asset-buyback programs aimed at providing liquidity, amounting to 76.8% or US$3.2 trillion to almost US$7.4 trillion in 2020, representing about 37.8% of GDP, which is a level not observed since World War II. Additionally, the U.S. Federal Reserve updated its monetary policy framework, stating among the main changes that the level of rates consistent with full employment and long-term price stability had been reduced compared to its historical average, that higher risks to employment and inflation are expected, and that they will target full employment and an average inflation of 2%, hoping to see levels above such benchmark consistently. In the Eurozone, fiscal measures taken jointly in 2020 by country members reached € 1.4 trillion (around 10.1% of the aggregate GDP), while during 2020 the European Central Bank (ECB) maintained its interest rate range at -0.5% to 0.0% and expanded its balance sheet by 48.7% or € 2.3 trillion to € 7.0 trillion, representing around 16.9% of GDP. In addition, there were significant incremental fiscal measures implemented in Germany, the United Kingdom and France. Finally, in 2020 China announced fiscal measures for RMB 4.8 trillion (~4.7% of GDP), while the country’s Central Bank (PBC) cut its interest rate by 30 bps to 3.85% and introduced financing facilities for RMB 2.6 trillion. On the other hand, there is still significant uncertainty regarding whether the measures introduced so far are enough to mitigate the effects of the Coronavirus or if additional efforts will be required from the relevant governmental authorities. The number of positive cases of coronavirus reached 83.9 million by the end of 2020, including a mortality rate of 2.9%, mainly focused in the United States (20.5 million), India (10.3 million) and Brazil (7.7 million). Moreover, different stages of the virus propagation and social distancing measures have been seen worldwide. In general, the first wave of propagation was followed by a second wave, and the spread of the virus was accelerating by the end of the year, reducing short and medium-term perspectives for economic recovery. On the other hand, several vaccines were approved for use by various governments in the last months of the year, although it was still unknown when approved vaccines would be available for widespread distribution with the goal of obtaining global herd immunity. Following the strike of COVID-19, stock indexes reflected a substantial correction between February and March of 2020, including maximum declines compared to the end of 2019 of 30.7% in the S&P 500 index in the United States ( it was up 16.3% in 2020 as compared to 2019 by the end of 2020), 36.3% in the SX5E in the Eurozone ( it was down 5.1% as compared to 2019 by the end of 2020) and 12.8% in the Shanghai Composite in China ( it was up 21.5% by the end of 2020 as compared to 2019). Among other relevant variables, the VIX volatility index peaked at 82.6 points to close 2020 at 22.75 points, a level still well above the average of approximately 15 points prior to the impact of the Coronavirus. Also, the DXY US dollar index rose to almost 103 points at the peak to decline up to around 90 points. For emerging markets, this meant an outflow of up to US$96.9 billion by the end of September 2020 resulting in a marked depreciation of related currencies against the Dollar, compared to inflows for US$62.2 billion in the last three months of 2020. The problem of the spread of the Coronavirus was compounded by the conflict between Saudi Arabia and Russia over oil. After both countries failed to reach an agreement to limit barrel production, Saudi Arabia decided to increase its production output, causing a price correction in the crude oil price (WTI) of up to 81% to US$11.6 per barrel in March 2020, although its price ended the year at US$48.5, boosted by global economic recovery. At the local level, the Argentine economy began 2020 unable to recover dynamism after ending 2019 with its second consecutive annual decline. In 2019, activity had fallen 2.1% (following the 2.6% contraction in 2018), a consequence of high political uncertainty, exchange rate volatility and accelerating inflation. The lack of confidence prevented the country from refinancing its debt maturities, and the new Government had to handle an external debt restructuring process during the first months in office. The outbreak of COVID-19 added to this situation, a pandemic that forced the Government to implement a number of restrictive measures regarding movement by the public and social distancing and isolation policies starting in mid-March, which negatively impacted production and trade. Therefore, according to the National Institute of Statistics and Censuses (INDEC), the Argentine GDP plunged an annual 9.9% in 2020 as compared to 2019. The labor market reflected the historical slump in economic activity, as the latest available data shows that the unemployment rate rose to 11.0% of the economically active population during the fourth quarter of 2020. These figures are compared to an unemployment rate of 8.9% in the same quarter of 2019. Moreover, the activity and employment rates reached 45.0% and 40.1%, respectively, in the fourth quarter of 2020. In both cases, this is below the 47.2% and 43.0% of the same quarter of the previous year. On the monetary front, the main aggregates accelerated their expansion pace during most of 2020, rising several points above inflation (+60.4% year-on-year in October as compared to 2019). Up to November 5, the latest data available at the time of writing this annual report, the monetary base increased by Ps.464,844 million, due mainly to the monetary entity’s provision of financing to the Argentine Treasury. The BCRA issued Ps.407,720 million in “temporary advances” to the Argentine Treasury and Ps.1,2020,000 million as a consequence of transferring all of 2019’s profits to the Argentine Treasury. This amounted to 6.0% of the GDP. The impact of these issuances was neutralized via the placement of repo transactions and LELIQ (Ps.646,072 million, net of interest), combined with the absorption of Argentine pesos resulting from the sale of foreign currency to the private sector (Ps.331,866 million) and to the public sector (Ps.126,391 million). Meanwhile, private M2 (comprised of currency held by the public, savings accounts and checking accounts of the private sector) also showed strong dynamism, registering an expansion of 79.3% as of December 30, 2020 with respect to the same period of 2019. Total M2 (which also includes public sector deposits) recorded a similar expansion (+80.9%) in the same period. During the first months of the year, domestic interest rates showed a downward trend. The BADLAR rate started at 36.2% in 2020, and by April it was at an average of 20%. However, exchange rate pressures and the growing liquidity in Argentine pesos led the BCRA to set a minimum interest rate level for term deposits of less than Ps.1 million equivalent to 70% of the LELIQ rate (nominal annual rate “TNA” of 26.6%). The minimum rate was later extended to fixed term deposits of up to $4 million, and subsequently to all time deposits. In June, the interest rate floor for all fixed-term deposits was raised to 79% of the LELIQ rate (TNA of 30.02%) and in August, it was raised to 87% (TNA of 33.06%), although this was only for retail deposits. At the beginning of October, the BCRA initiated a rate harmonization process, consisting of an increase in liability repurchase transactions rates (from 19% to 31% in four different segments) and a reduction in the LELIQ rate (from 38% to 36%). The rate floor for fixed-term deposits was also adjusted upwards, bringing fixed-term deposits of less than Ps.1 million currently yielding a minimum of 34% and those of more than Ps.1 million to 32%. The reference exchange rate of the BCRA went from Ps.59.90 to Ps.84.15 per dollar, between December 30, 2019 and December 30, 2020 (equivalent to an increase in the exchange rate of 40.5%). The average exchange rate went from Ps.59.88 per dollar in December 2019 to Ps.82.72 per dollar in December 2020. The National Consumer Price Index data published by INDEC showed a year-on-year variation of 36.1% in December 2020, 17.7 percentage points below the 53.8% variation of December 2019. This slowdown was partly due to the stabilization of the exchange rate, the implementation of capital controls, and the freezing of rates for public utilities and certain regulated goods and services. Additionally, it may be partially attributed to the statistical effect that the paralysis of activity had on price surveys during the months in which the strictest restrictions on mobility and production prevailed, in some cases, it was not possible to obtain measurements. The increase in the precautionary demand for money and the erosion of the purchasing power (a consequence of the increase in layoffs and salary cuts and of the fall in employment) also helped to contain the evolution of prices. On a fiscal level, during 2020, tax resources (grew 23.0% compared to the interannual expansion of 51.4% in 2019. Likewise, primary expenditures expanded 63.5% in 2020, above the 37.2% of the previous year. Thus, the national private sector registered a primary deficit of Ps.1,749,957 million, equivalent to —6.5% of the GDP. This figure indicated an impairment compared to the 2019 primary deficit of Ps.95,122 million (-0.4 p.p. of the GDP). After the payment of interest for Ps.542,873 million, the financial deficit for 2020 amounted to Ps.2,292,830 million, equivalent to -8.5% of GDP. In relation to the external sector, in 2020 the foreign exchange current account published by the BCRA (cash base) recorded a surplus of US$322 million, a drop of 94.9% compared to the surplus of US$6,277 million registered in 2019. Measured in relation to GDP, the surplus of the checking account was about 0.1%, showing a drop compared to the surplus of 1.4% of the previous year. The impairment observed in nominal terms was the result of lower net income from goods (US$8,492 million in 2020 as compared to US$23,444 million in 2019), an effect offset by a lower outflow of foreign currency via the balance of services (US$1,595 million up to September 2020) and by lower interest payments (US$6,528 million). In particular, income from the collections of goods exports totaled US$50,357 million in 2020, a 12.89% drop compared to the level observed in the previous year. Likewise, the import payments of the exchange balance sheet totaled US$41,865 million, registering an interannual growth of 22.0% In this context, the foreign exchange capital and financial account recorded a net currency outflow of US$8,048 million in 2020, compared to a net outflow of US$32,384 million in 2019. Likewise, the International Reserves of the BCRA amounted to US$39,387 million year-end, which is US$5,394 million below the figure of a previous year. A.3 The Argentine Financial System Total loans provided to the private sector by the financial system climbed to Ps.3,355,603 million in December 2020, reflecting a 29.6% increase over the same month of 2020. Consumer loans, consisting of loans granted through credit cards and personal loans, presented the greatest growth, a 39.2% increase as compared to December 31, 2019, totaling Ps.1,372,301 million as of December 31, 2020. On the other hand, commercial loans, consisting of current account overdrafts and drafts/bills (signature and purchased/discounted loans), finally totaled Ps.1,227,705 million, registering an increase of 25.2% year-on-year (YoY). Total deposits in the financial system climbed to Ps.7,977,812 million as of the end of December 2020, up by 67.0% as compared to December 31, 2019. Deposits from the non-financial private sector increased 64.0% annually, climbing to Ps.6,453,993 million, while public sector deposits totaled Ps.1,432,927 million, increase by 89.2% YoY. Within private sector deposits, transaction deposits ended at Ps 3,707,372 million, a 62.5% hike YoY, and time deposits at Ps.2,603,540million, a 68.9% annual growth. In December 2020, the average interest rate for 30-35-day term deposits in Argentine pesos from private banks (over Ps.1 million) was 34.2%, registering an interannual drop of 7.5 p.p. Regarding active rates, the one corresponding to advances in current account was 39.7% (-26.7 p.p. YoY). With data as of December 2020, financial institutions increased liquidity levels (in relation to total deposits) compared to the same month of the previous year, a ratio that stood at 65.0%, +4.9 p.p. (considering repurchase transactions and instruments of the BCRA). In terms of solvency, the equity of the financial system showed an interannual increase of Ps.777,586 million, finally totaling Ps.1,685,318 million, which implies an 85.7% increase. The profitability of the system accumulating 12 months as of December 2020 (Comprehensive Income adjusted by inflation) was equivalent to 2.3% of assets, while the return on Shareholders’ Equity was 15.8%. The nonperforming portfolio of loans to the non-financial private sector amounted to 3.9% in December 2020, minor than the 5.7% of the previous year. Hedging with allowances for private sector nonperforming loans was 151%, 53 p.p. higher than the measurement reported in the same month of 2019. As for the composition of the financial system, as of November 30, 2020, there were 79 financial institutions: 64 banks, of which 51 were private (35 of domestic capital and 16 foreigners) and 13 were public, and 15 non-banking With data as of September 2020, the latest information available, the financial system employed 104,657 people, which represented a 2.1% drop since September 30, 2019. A.4 The Argentine Insurance Industry According to the information published by the Superintencia de Seguros de la Nación, the insurance industry continued to grow throughout 2020. The total gross premiums in respect of property, life, and retirement insurance for such period was equal to Ps.840,557 million, an increase of 35% as compared to 2019. During 2020, the automotive and workers’ compensation insurance sectors were affected by high inflation and an increase in the filing of claims for compensation. Although inflation is not decreasing as expected, financial income is expected to cover any increased costs as a result of the foregoing. Home, life and personal accident insurance policies increased by 35% year-over-year. It is expected that this segment will continue to increase as the Argentine economy stabilizes. During this period, Galicia Seguros has maintained positive financial results. As of December 31, 2020, Sudamericana Holding, primarily through its main subsidiary Galicia Seguros reported a net income equal to Ps.1,318 million. This result includes Ps.7,789 million of insurance premiums and surcharges (related to both direct insurance and reinsurance). A.5 Inflation Historically, inflation in Argentina has played a significant role in influencing, often negatively, the economic conditions and, in turn, the operations and financial results of companies operating in Argentina, such as Grupo Financiero Galicia. In fiscal year 2015, due to changes in the authorities at the Institute of Statistics, the Wholesale Price Index and CPI series were discontinued beginning in October 2015. The Wholesale Price Index was republished beginning January 2016. A new CPI series was launched in May 2016 but did not contain historical information. The chart below presents a comparison of inflation rates published by INDEC, measured by the Whole Price Index and the CPI, for the fiscal years 2020, 2019 and 2018. In addition, the chart below presents the evolution of the CER and UVA indexes, published by the BCRA and used to adjust the principal of certain of our assets and liabilities for the specified periods.
In 2020, the CPI published by INDEC reflected a 36.1% increase, while the CER and UVA indexes went up 25.5% and 64.32% during the same period, respectively. In the first two months of 2021, the CPI published by INDEC reflected a 7.8% increase, while the CER and UVA indexes increased by 7.54% and 7.34% respectively, during the same period. A.6 Currency Composition of Our Balance Sheet The following table sets forth our assets and liabilities denominated in foreign currency, in Pesos and adjustable by the CER/UVA, as of the dates indicated.
Funding of Banco Galicia’s long position in CER/UVA-adjusted assets through Peso-denominated liabilities bearing a market interest rate (and no principal adjustment linked to inflation) exposes Banco Galicia to differential fluctuations in the inflation rate and in market interest rates, with a significant increase in market interest rates vis-à-vis the inflation rate (which is reflected in the CER/UVA variation), which has a negative impact on our gross brokerage margin. Two other currencies have been defined apart from the Argentine Peso: assets and liabilities adjusted by CER/UVA and foreign currency. Banco Galicia’s policy in force establishes limits in terms of maximum “net asset positions” (assets denominated in a currency which are higher than the liabilities denominated in such currency) and “net liability positions” (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis. An adequate balance between assets and liabilities denominated in foreign currency characterizes the management strategy for this risk factor, seeking to achieve full coverage of long-term asset-liability mismatches and allowing a short-term mismatch management margin that contributes to the possibility of improving certain market situations. Short- and long-term goals are attained by appropriately managing assets and liabilities and by using the financial products available in our market, particularly “dollar futures” both in institutionalized markets (MAE and ROFEX) and in forward transactions performed with customers. Transactions in foreign currency futures (specifically, dollar futures) are subject to limits that take into consideration the particular characteristics of each trading environment. A.7 Results of Operations for the Fiscal Years Ended December 31, 2020 and December 31, 2019 and December 31, 2018. We discuss below our results of operations for the fiscal year ended December 31, 2020 as compared with our results of operations for the fiscal year ended December 31, 2019 and our results of operations for the fiscal year ended December 31, 2019 as compared with our results of operations for the fiscal year ended December 31, 2018. i) Consolidated Income Statement
Fiscal Year 2020 compared to Fiscal Year 2019 Net income for the fiscal year ended December 31, 2020 was equal to Ps.25,533 million, as compared to net income equal to Ps.32,427 million for the fiscal year ended December 31, 2019, a Ps.6,894 million or 21% decrease. This result was mainly due to net income from: (i) banking activities (Banco Galicia) for Ps.20,928 million, (ii) Ecosistema NaranjaX for Ps.2,159 million and (iii) insurance services (Sudamerica Holding) for Ps.1,318 million. Net earnings per share for the fiscal year ended December 31, 2020 was equal to a Ps.17.46 per share, as compared to a Ps.22.62 per share for the fiscal year ended December 31, 2019. The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2020 was equal to a 2.39% and 13.82%, respectively, as compared to a 3.46% and 20.81%, respectively, for the fiscal year ended December 31, 2019. The decrease in net income for the year ended December 31, 2020 was primarily attributable to a lower net operating income, decreasing from Ps.200,475 million to Ps.182,711 million (a 9% decrease as compared to December 31, 2019) and was partially offset by (i) a Ps.4,966 million decrease in the loss on net monetary position, decreasing from Ps.41,929 million in 2019 to Ps.36,963 million in 2020 and (ii) a Ps.1,733 million decrease in administrative expenses, decreasing from Ps.33,105 million in 2019 to Ps.31,372 million in 2020. The decrease in net operating income from the year ended December 31, 2020 was mainly attributable to: (i) a Ps.29,819 million decrease in net income from financial instruments, from Ps.99,151 million in 2019 to Ps.69,332 million in 2020, (ii) a Ps.6,447 million decrease in other operating income from Ps.28,770 million in 2019 to Ps.22,323 million in 2020 and (iii) a Ps.4,785 million decrease in exchange rate differences on gold and foreign currency from Ps.11,832 million in 2019 to Ps.7,047 million in 2020. Such decrease was partially offset by a Ps.29,215 increase in net income from interest from Ps.47,417 million in 2019 to Ps.76,632 million in 2020. Fiscal Year 2019 compared to Fiscal Year 2018 Net income for the fiscal year ended December 31, 2019 was equal to Ps.32,427 million, as compared to net loss equal to Ps.8,020 million for the fiscal year ended December 31, 2018, a Ps.40,447 million or 504% increase. This result was mainly due to net income (i) from banking activities (Banco Galicia) for Ps.30,336 million, (ii) from Ecosistema NaranjaX for Ps.889 million and (iii) from activities related to insurance services (Sudamerica Holding) for Ps.863 million. Net gain per share for the fiscal year ended December 31, 2019 was equal to a Ps.22.62 per share gain, as compared to a Ps.5.09 per share loss for the fiscal year ended December 31, 2018. The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2019 was equal to a 3.46% and 20.81 %, respectively, as compared to a 0.61% loss and 5.76% loss, respectively, for the fiscal year ended December 31, 2018. This result was attributable to (i) a growth of net operating income (31% increase compared to previous year) and (ii) a 7% decrease in personnel expenses. The increase in net income for the year ended December 31, 2019 was primarily attributable to a higher net operating income from Ps.153,081 million to Ps.200,475 million (a 31% increase as compared to December 31, 2018) and was partially offset by (i) a Ps.4,098 million increase loss on net monetary position, increasing from Ps.37,831 million in 2018 to Ps.41,929 million in 2019 and (ii) a Ps.3,435 million increase in depreciation and impairment of assets, increasing from Ps.3,460 million in 2018 to Ps.6,895 million in 2019. The Ps.47,394 million increase in net operating income was mainly attributable to (i) a Ps.62,809 million increase in net income from financial instruments from Ps.36,342 million in 2018 to Ps.99,151 million in 2019, (ii) a Ps.6,907 million increase in other operating income from Ps.21,863 million in 2018 to Ps.28,770 million in 2019 and (iii) a Ps.3,922 million increase in exchange rate differences on gold and foreign currency from Ps.7,910 million in 2018 to Ps.11,832 million in 2019. This increase was offset by (i) a Ps.36,199 million increase in interest expenses from Ps.94,055 million in 2018 to Ps.130,254 million in 2019, and (ii) a Ps.6,523 million decrease in net fee income from Ps.44,756 million in 2018 to Ps.38,233 million in 2019. ii) Interest-Earning Assets The following table shows our
Fiscal Year 2020 compared to Fiscal Year 2019 The average Fiscal Year 2019 compared to Fiscal Year 2018 The average of interest-earning assets increased Ps.40,704 million, from Ps.795,249 million for the fiscal year ended December 31, 2018 to Ps.835,953 million for the fiscal year ended December 31, 2019, representing a 5% increase. Of this increase, Ps.73,152 million was due to an increase in the average size of the government securities holdings, offset by Ps.44,332 million in the average size of loans. The average yield on interest-earning assets was 32.27% in 2019, as compared to 24.74% in 2018, a 753 bps, that was primarily attributable to an increase in the average interest rate earned on repurchase transactions and an increase in the average interest rate earned Government securities. iii) Interest-Bearing Liabilities The following table shows our yields on cost of funds:
Fiscal Year 2020 compared to Fiscal Year 2019 The average interest-bearing liabilities for the fiscal year ended December 31, 2020 were equal to Ps.561,422 million, as compared to Ps.638,358 million for the fiscal year ended December 31, 2019, a 12% decrease. Such decrease was primarily attributable to (i) a Ps.44,225 million decrease in the average balance of debt securities and subordinated debt securities, which decreased to Ps.43,921 million as of the fiscal year ended December 31, 2020 from Ps.88,146 million as of the fiscal year ended December 31, 2019, (ii) a Ps.18,504 million decrease in the average balance of financing received from the BCRA and other financial institutions, which decreased to Ps.19,815 million as of the fiscal year ended December 31, 2020 from Ps.38,319 million as of the fiscal year ended December 31, 2019 and (iii) a Ps.2,808 million decrease in total interest-bearing deposits (savings accounts and time deposits), which decreased to Ps.495,770 million as of the fiscal year ended December 31, 2020 from Ps.498,578 million as of the fiscal year ended December 31, 2019. Fiscal Year 2019 compared to Fiscal Year 2018 The average interest-bearing liabilities for the fiscal year ended December 31, 2019 were equal to Ps.638,358 million, as compared to Ps.624,547 million for the fiscal year ended December 31, 2018,
iv) Interest Income Consolidated interest income was composed of the following:
Fiscal Year 2020 compared Interest income for the fiscal year ended December 31, 2020 was equal to Ps.166,807 million, as compared to Ps.177,671 million for the fiscal year ended December 31, 2019, a 6% decrease. Such decrease was the result of a Ps.12,563 million or 8% decrease in interest from loans and other financing and was partially offset by a Ps.2,778 million increase in interest income from government debt securities measured at amortized cost. The average amount of loans granted for the fiscal year ended December 31, 2020 was equal to Ps.491,386 million, a 16% decrease as compared to the Ps.587,663 million for the fiscal year ended December 31, 2019. The average interest rate on total loans was 30.23% for the fiscal year ended December 31, 2020, as compared to 27.12% for the fiscal year ended December 31, 2019, representing a 311 bps increase year-over-year. The decrease in interest earnings from loans and other financing was primarily a consequence of a Ps.17,696 million decrease in credit card loans. This decrease was due to the maximum annual interest rate imposed by the BCRA as a measure to reduce negative economic the consequences of COVID-19. For more information see – Item 4. Information on the Company –A. Business Overview – Argentine Banking Regulations – Limitations on Fees and Other Substantial Elements. Additionally, the decrease in interest from loans and other financing was due to a Ps.5,258 million decrease in interest from advances and a Ps.4,421 million decrease in interest from mortgage loans, offset by a Ps.16,266 million increase in others loans (mostly comprised of overdrafts and loans for the pre-financing and financing of exports). Interest income from banking activity amounted to Ps.144,685 million, a 4% decrease as compared to the Ps.150,712 million recorded in the fiscal year ended December 31, 2019. According to BCRA information, as of December 31, 2020, Banco Galicia’s estimated market share of loans to the private sector was 13.03% as of December 31, 2020, as compared to 11.50% as of December 31, 2019. The following table indicates Banco Galicia market share in the segments listed below:
Interest income related to Ecosistema NaranjaX amounted to Ps.21,990 million for the year ended December 31, 2020, a 17% decrease as compared to the Ps.26,500 million recorded for the fiscal year ended December 31, 2019. Interest income related to insurance activity amounted to Ps.727 million for the year ended December 31, 2020, a 37% decrease as compared to the Ps.1,145 million recorded for the fiscal year ended December 31, 2019. This decrease was related to interest from debt securities recorded at amortized cost. Fiscal Year 2019 compared to Fiscal Year 2018 Interest income for the fiscal year ended December 31, 2019 was Ps.177,671 million, as compared to Ps.163,928 million for the fiscal year ended December 31, 2018, an 8% increase. Such increase was mainly the result of: (i) Ps.8,151 million in interest from repurchase transactions, (ii) Ps.3,497 million in interest from government debt securities measured at amortized cost and The average amount of repurchase transactions for the fiscal year ended December 31, The average amount of loans for the fiscal year ended December 31, 2019 was equal to Ps.587,663 million, a 7 % increase as compared to the Ps.631,995 million for the fiscal year ended December 31, 2018.This decrease was primarily attributable to the increase in overdraft, mortgage and credit card loans extended as part of the portfolio. The average interest rate
Interest income from banking activity for the fiscal year ended December 31, 2019 amounted to According to BCRA information, as of December 31, 2019 Banco Galicia’s estimated market share of loans to the private sector was 11.50%, a 99 pbs increase when compared with the 10.51% for fiscal year ended December 31, 2018. Interest income related to Ecosistema NaranjaX amounted to Ps.26,500 million for the year ended December 31, 2019, a 16% decrease as compared to the Ps.31,707 million recorded for the fiscal year ended December 31, 2018. Interest income related to insurance services amounted to Ps.1,145 million for the year ended December 31, 2019, a 31% increase as compared to the Ps.875 million recorded for the fiscal year ended December 31, 2018. v) Interest Expenses Consolidated interest expenses were comprised of the following:
Fiscal Year 2020 compared to Fiscal Year 2019 Interest expenses for the fiscal year ended December 31, 2020 were equal to Ps.90,175 million, as compared to Ps.130,254 million for the fiscal year ended December 31, 2019, representing a 31% decrease. Such decrease was primarily attributable to a 23% decrease in interest paid on deposits, as consequence of low rate yields. Interest expenses from deposits amounted to Ps.79,483 million for the fiscal year ended December 31, 2020, as compared to Ps.103,158 million for the fiscal year ended December 31, 2019, a Ps.23,675 million decrease. This decrease was primarily due to increased interest expenses related to time deposits and term investments, which was equal to Ps.62,824 million for the fiscal year ended December 31, 2020, representing a 31% decrease as compared to Ps.90,832 million for the fiscal year ended December 31, 2019. The total average interest-bearing deposits for the fiscal year ended December 31, 2020 amounted to Ps.495,770 million, registering a decrease Out of total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2020, the average interest rate of time deposits was 16.03%, as compared to 20.69% for the fiscal year ended December 31, 2019, a 466 bps decrease.
Interest expenses related to banking activity amounted to Ps.85,854 million for the According BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share increased from 10.17% as of December 31, 2019 to 10.28% as of December 31, 2020. The following table indicates Banco Galicia´s market share in the segments listed below:
Interest expenses related to Ecosistema NaranjaX amounted to Ps.5,150 million for the fiscal year ended December 31, 2019, as compared to Ps.13,232 million for the fiscal year ended December 31, 2019, representing a 58% decrease. This decrease was primarily a result of a decrease in interest expenses on debt securities issued by Naranja. Fiscal Year 2019 compared to Fiscal Year 2018 Interest expenses for the fiscal year ended December 31, 2019 were equal to Ps.130,254 million, as compared to Ps.94,055 million for the fiscal year ended December 31, 2018, Interest expenses from deposits
Average deposits recorded a decrease of 2% as compared to the fiscal year ended December 31, 2018, with a decrease of 5% in savings account deposits and
Interest expenses related to banking activity amounted Ps.118,269 million for the fiscal year ended December 31, 2019 as compared to Ps.79,349 million for the fiscal year ended December 31, 2018, representing a 49% increase. Using BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share decreased from 11.09% as of
vi) Net Fee Income
None.
The following discussion and analysis are intended to help you understand and assess the significant changes and trends in our historical results of operations and the factors affecting our resources. You should read this section in conjunction with our audited consolidated financial statements and their related notes included elsewhere in this annual report. A.1 Overview In recent years, we have strengthened our position as a leading domestic private-sector financial institution, increasing our market share of loans and deposits and strengthening Banco Galicia’s regulatory capital reserves through the issuance of subordinated bonds and follow-on equity offerings, the sale of CFA and internal profit origination. Despite the deterioration of the Argentine economy, reduction in Argentine GDP, high levels of inflation and the devaluation of the Peso, in With the development of the COVID-19 outbreak, which was first alerted by the Chinese government in December 2019, many countries have suspended the business operations of many sectors of their economies, implemented travel restrictions and quarantine measures. Argentina has not been an
Accordingly, the Board of Directors of Grupo Financiero Galicia has been continually analyzing the evolution of the pandemic and its effect and taking all measures within its reach to safeguard it business continuity, to protect the health and safety of its employees, customers, and other stakeholders. Among the actions carried out to collaborate and comply with the regulations of the Government and of the BCRA, the following stand out: the subsidiaries of Group Financiero Galicia created interdisciplinary committees responsible for designing and executing various protocols and procedures for the provision of services; work from home policies were implemented, except for those employees who have activities that require their physical presence e.g. cash management logistics and customer service; appointments were required to conduct transactions at branch locations; various lines of credit were made available to clients with certain benefits such as reduction of interest rates, grace periods and the extension of payment terms; subsidies granted by the Government were credited to customer accounts and through the Banelco ATM network; new free-accounts were opened for retirement and subsidy beneficiaries; processes were modified so that they can be done 100% online through websites and / or mobile applications, without having to go to branches; new customer features and options were designed, such as the possibility of withdrawing money from ATMs and self-service terminals without a debit card; donations were made to various health centers, municipalities and families in vulnerable situations; solidarity campaigns were launched to promote customer collaboration and additional contribution from Grupo’s subsidiaries. Our business and prospects are subject to risks associated with and arising from the outbreak of COVID-19, and the uncertainty of the impacts, duration, and severity of the outbreak. This global pandemic creates substantial uncertainty as to On another note but connected to the impact COVID-19 may have on how we operate our business, we have conducted a business impact analysis as part of our Business Continuity Program. The results of this analysis show that critical business functions will remain operative upon the occurrence of a disruptive event. In cases of mass absenteeism events, the analysis conducted identified the minimum quantity of personnel and positions needed to remain operative, the outcome being the leader of the relevant sector responsible for assigning personnel to such critical positions. New employees will be hired, and current employees will be relocated to guarantee that critical functions remain operative, if and where needed. Even though up to the date of this report, Grupo Financiero Galicia and its subsidiaries have suffered a limited impact on their results as a consequence of the pandemic, the impact of a lower level of economic activity and a higher level of unemployment could have a significant impact on Grupo Financiero Galicia’s results of operations in the future.
A.2 The Argentine Economy
Confronted with this global context, both monetary entities and governments responded with important monetary and fiscal measures to ensure the correct functioning of the markets and to mitigate the negative economic and health effects generated by the In the United States, The number of positive cases of coronavirus reached 83.9 million by the end of 2020, including a mortality rate of 2.9%, mainly focused in the United States
Following the strike of COVID-19, stock indexes reflected a substantial correction between February and March of 2020, including maximum declines compared to the end of 2019 of 30.7% in the S&P 500 index in the United States
at US$48.5, boosted by global economic recovery. At the
The labor market reflected the 2019. Moreover, the activity and employment rates reached 45.0% and 40.1%, respectively, in the fourth quarter of 2020. In both cases, this is below the 47.2% and 43.0% of the same quarter of the previous year. On the monetary Meanwhile, private M2 (comprised of During the first months of
34% and those of more than Ps.1 million to 32%. The reference exchange rate of 2020. The National Consumer Price Index data published by INDEC showed a year-on-year variation of 36.1% in December 2020, 17.7 percentage points below the purchasing power (a consequence of the increase in layoffs and salary cuts and of the fall in employment) also helped to contain the evolution of prices. On a fiscal level, during In relation to the external sector, in The 22.0% In this context, the A.3 The Argentine Financial System Total loans provided to the private sector by the financial system climbed to Total deposits in the financial system climbed to 64.0% annually, climbing to In December With data as of December In terms of solvency, the equity of the financial system showed an interannual increase of The nonperforming portfolio of loans to the non-financial private sector amounted to 2019. As for the composition of the financial system, as of
With data as of A.4 The Argentine Insurance Industry According to the information published by the Superintencia de Seguros de la Nación, the insurance industry continued to grow throughout 2019. During Home, life and personal accident insurance policies increased by A.5 Inflation Historically, inflation in Argentina has played a significant role in influencing, often negatively, the economic conditions In fiscal year 2015, due to changes in the authorities at the Institute of Statistics, the Wholesale Price Index and CPI series were discontinued beginning in October 2015. The Wholesale Price Index was republished beginning January 2016. A new CPI series was launched in May 2016 but did not contain historical information. The chart below presents a comparison of inflation rates published by INDEC, measured by the Whole Price Index and the CPI, for the fiscal years 2020, 2019 In addition, the chart below presents the evolution of the CER and UVA indexes, published by the
In In the first A.6 Currency Composition of Our Balance Sheet The following table sets forth our assets and liabilities denominated in foreign currency, in Pesos and adjustable by the CER/UVA, as of the dates indicated.
Funding of Banco Galicia’s long position in CER/UVA-adjusted assets through Peso-denominated liabilities bearing a market interest rate (and no principal adjustment linked to inflation) exposes Banco Galicia to differential fluctuations in the inflation rate and in market interest rates, with a significant increase in market interest rates vis-à-vis the inflation rate (which is reflected in the CER/UVA variation), which has a negative impact on our gross brokerage margin. Two other currencies have been defined apart from the Argentine Peso: assets and liabilities adjusted by CER/UVA and foreign currency. Banco Galicia’s policy in force establishes limits in terms of maximum “net asset positions” (assets denominated in a currency which are higher than the liabilities denominated in such currency) and “net liability positions” (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis. An adequate balance between assets and liabilities denominated in foreign currency characterizes the management strategy for this risk factor, seeking to achieve full coverage of long-term asset-liability mismatches and allowing a short-term mismatch management margin that contributes to the possibility of improving certain market situations. Short- and long-term goals are attained by appropriately managing assets and liabilities and by using the financial products available in our market, particularly “dollar futures” both in institutionalized markets (MAE and ROFEX) and in forward transactions performed with customers. Transactions in foreign currency futures (specifically, dollar futures) are subject to limits that take into consideration the particular characteristics of each trading environment. A.7 Results of Operations for the Fiscal Years Ended December 31, 2020 and December 31, 2019 and December 31, 2018. We discuss below our results of operations for the fiscal year ended December 31, 2020 as compared with our results of operations for the fiscal year ended December 31, 2019 and our results of operations for the fiscal year ended December 31, 2019 as compared with our results of operations for the fiscal year ended December 31, i) Consolidated Income Statement
Fiscal Year 2020 compared to Fiscal Year 2019 Net income for the fiscal year ended December 31, 2020 was equal to Ps.25,533 million, as compared to net income equal to Ps.32,427 million for the fiscal year ended December 31, 2019, a Ps.6,894 million or 21% decrease. This result was mainly due to net income from: (i) banking activities (Banco Galicia) for Ps.20,928 million, (ii) Ecosistema NaranjaX for Ps.2,159 million and (iii) insurance services (Sudamerica Holding) for Ps.1,318 million. Net earnings per share for the fiscal year ended December 31, 2020 was equal to a Ps.17.46 per share, as compared to a Ps.22.62 per share for the fiscal year ended December 31, 2019. The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2020 was equal to a 2.39% and 13.82%, respectively, as compared to a 3.46% and 20.81%, respectively, for the fiscal year ended December 31, 2019. The decrease in net income for the year ended December 31, 2020 was primarily attributable to a lower net operating income, decreasing from Ps.200,475 million to Ps.182,711 million (a 9% decrease as compared to December 31, 2019) and was partially offset by (i) a Ps.4,966 million decrease in the loss on net monetary position, decreasing from Ps.41,929 million in 2019 to Ps.36,963 million in 2020 and (ii) a Ps.1,733 million decrease in administrative expenses, decreasing from Ps.33,105 million in 2019 to Ps.31,372 million in 2020. The decrease in net operating income from the year ended December 31, 2020 was mainly attributable to: (i) a Ps.29,819 million decrease in net income from financial instruments, from Ps.99,151 million in 2019 to Ps.69,332 million in 2020, (ii) a Ps.6,447 million decrease in other operating income from Ps.28,770 million in 2019 to Ps.22,323 million in 2020 and (iii) a Ps.4,785 million decrease in exchange rate differences on gold and foreign currency from Ps.11,832 million in 2019 to Ps.7,047 million in 2020. Such decrease was partially offset by a Ps.29,215 increase in net income from interest from Ps.47,417 million in 2019 to Ps.76,632 million in 2020. Fiscal Year 2019 compared to Fiscal Year 2018 Net income for the fiscal year ended December 31, 2019 was equal to Ps.32,427 million, as compared to net loss equal to Ps.8,020 million for the fiscal year ended December 31, 2018, a Ps.40,447 million or 504% increase. This result was mainly due to net income (i) from banking activities (Banco Galicia) for Ps.30,336 million, (ii) from Ecosistema NaranjaX for Ps.889 million and (iii) from activities related to insurance services (Sudamerica Holding) for Ps.863 million. Net gain per share for the fiscal year ended December 31, 2019 was equal to a Ps.22.62 per share gain, as compared to a Ps.5.09 per share loss for the fiscal year ended December 31, 2018. The return on assets and the return on shareholders’ equity for the fiscal year ended December 31, 2019 was equal to a 3.46% and 20.81 %, respectively, as compared to a 0.61% loss and 5.76% loss, respectively, for the fiscal year ended December 31, 2018. This result was attributable to (i) a growth of net operating income (31% increase compared to previous year) and (ii) a 7% decrease in personnel expenses. The increase in net income for the year ended December 31, 2019 was primarily attributable to a higher net operating income from Ps.153,081 million to Ps.200,475 million (a 31% increase as compared to December 31, 2018) and was partially offset by (i) a Ps.4,098 million increase loss on net monetary position, increasing from Ps.37,831 million in 2018 to Ps.41,929 million in 2019 and (ii) a Ps.3,435 million increase in depreciation and impairment of assets, increasing from Ps.3,460 million in 2018 to Ps.6,895 million in 2019. The Ps.47,394 million increase in net operating income was mainly attributable to (i) a Ps.62,809 million increase in net income from financial instruments from Ps.36,342 million in 2018 to Ps.99,151 million in 2019, (ii) a Ps.6,907 million increase in other operating income from Ps.21,863 million in 2018 to Ps.28,770 million in 2019 and (iii) a Ps.3,922 million increase in exchange rate differences on gold and foreign currency from Ps.7,910 million in 2018 to Ps.11,832 million in 2019. This increase was offset by (i) a Ps.36,199 million increase in interest expenses from Ps.94,055 million in 2018 to Ps.130,254 million in 2019, and (ii) a Ps.6,523 million decrease in net fee income from Ps.44,756 million in 2018 to Ps.38,233 million in 2019. ii) Interest-Earning Assets The following table shows our yields on interest-earning assets:
Fiscal Year 2020 compared to Fiscal Year 2019 The average of interest-earning assets decreased Ps.102,813 million, from Ps.835,953 million for the fiscal year ended December 31, 2019 to Ps.733,140 million for the fiscal year ended December 31, 2020, representing a 12% decrease. Of this decrease, Ps.96,277 million was due to a decrease in the average size of the loan portfolio. The average yield on interest-earning assets was 32.06% in 2020, as compared to 32.27% in 2019, a 21 bps decrease, mainly attributable to a decrease in the average interest rate earned on repurchase transactions (decreasing 2,846 bps as compared to 2019) and government securities ( decreasing 1,087 bps as compared to 2019). Fiscal Year 2019 compared to Fiscal Year 2018 The average of interest-earning assets increased Ps.40,704 million, from Ps.795,249 million for the fiscal year ended December 31, 2018 to Ps.835,953 million for the fiscal year ended December 31, 2019, representing a 5% increase. Of this increase, Ps.73,152 million was due to an increase in the average size of the government securities holdings, offset by Ps.44,332 million in the average size of loans. The average yield on interest-earning assets was 32.27% in 2019, as compared to 24.74% in 2018, a 753 bps, that was primarily attributable to an increase in the average interest rate earned on repurchase transactions and an increase in the average interest rate earned Government securities. iii) Interest-Bearing Liabilities The following table shows our yields on cost of funds:
Fiscal Year 2020 compared to Fiscal Year 2019 The average interest-bearing liabilities for the fiscal year ended December 31, 2020 were equal to Ps.561,422 million, as compared to Ps.638,358 million for the fiscal year ended December 31, 2019, a 12% decrease. Such decrease was primarily attributable to (i) a Ps.44,225 million decrease in the average balance of debt securities and subordinated debt securities, which decreased to Ps.43,921 million as of the fiscal year ended December 31, 2020 from Ps.88,146 million as of the fiscal year ended December 31, 2019, (ii) a Ps.18,504 million decrease in the average balance of financing received from the BCRA and other financial institutions, which decreased to Ps.19,815 million as of the fiscal year ended December 31, 2020 from Ps.38,319 million as of the fiscal year ended December 31, 2019 and (iii) a Ps.2,808 million decrease in total interest-bearing deposits (savings accounts and time deposits), which decreased to Ps.495,770 million as of the fiscal year ended December 31, 2020 from Ps.498,578 million as of the fiscal year ended December 31, 2019. Fiscal Year 2019 compared to Fiscal Year 2018 The average interest-bearing liabilities for the fiscal year ended December 31, 2019 were equal to Ps.638,358 million, as compared to Ps.624,547 million for the fiscal year ended December 31, 2018, an increase of 2%. Such increase was primarily attributable to a Ps.17,846 million increase in debt securities, which increased to Ps.88,146 million as of the fiscal year ended December 31, 2019 from Ps.70,300 million as of the fiscal year ended December 31, 2018. This increase was offset by a decrease in the average balance of savings accounts deposits, which decreased to Ps.264,364 million as of the fiscal year ended December 31, 2019 from Ps.279,693 million as of the fiscal year ended December 31, 2018. iv) Interest Income Consolidated interest income was composed of the following:
Fiscal Year 2020 compared to Fiscal Year 2019 Interest income for the fiscal year ended December 31, 2020 was equal to Ps.166,807 million, as compared to Ps.177,671 million for the fiscal year ended December 31, 2019, a 6% decrease. Such decrease was the result of a Ps.12,563 million or 8% decrease in interest from loans and other financing and was partially offset by a Ps.2,778 million increase in interest income from government debt securities measured at amortized cost. The average amount of loans granted for the fiscal year ended December 31, 2020 was equal to Ps.491,386 million, a 16% decrease as compared to the Ps.587,663 million for the fiscal year ended December 31, 2019. The average interest rate on total loans was 30.23% for the fiscal year ended December 31, 2020, as compared to 27.12% for the fiscal year ended December 31, 2019, representing a 311 bps increase year-over-year. The decrease in interest earnings from loans and other financing was primarily a consequence of a Ps.17,696 million decrease in credit card loans. This decrease was due to the maximum annual interest rate imposed by the BCRA as a measure to reduce negative economic the consequences of COVID-19. For more information see – Item 4. Information on the Company –A. Business Overview – Argentine Banking Regulations – Limitations on Fees and Other Substantial Elements. Additionally, the decrease in interest from loans and other financing was due to a Ps.5,258 million decrease in interest from advances and a Ps.4,421 million decrease in interest from mortgage loans, offset by a Ps.16,266 million increase in others loans (mostly comprised of overdrafts and loans for the pre-financing and financing of exports). Interest income from banking activity amounted to Ps.144,685 million, a 4% decrease as compared to the Ps.150,712 million recorded in the fiscal year ended December 31, 2019. According to BCRA information, as of December 31, 2020, Banco Galicia’s estimated market share of loans to the private sector was 13.03% as of December 31, 2020, as compared to 11.50% as of December 31, 2019. The following table indicates Banco Galicia market share in the segments listed below:
Interest income related to Ecosistema NaranjaX amounted to Ps.21,990 million for the year ended December 31, 2020, a 17% decrease as compared to the Ps.26,500 million recorded for the fiscal year ended December 31, 2019. Interest income related to insurance activity amounted to Ps.727 million for the year ended December 31, 2020, a 37% decrease as compared to the Ps.1,145 million recorded for the fiscal year ended December 31, 2019. This decrease was related to interest from debt securities recorded at amortized cost. Fiscal Year 2019 compared to Fiscal Year 2018 Interest income for the fiscal year ended December 31, 2019 was Ps.177,671 million, as compared to Ps.163,928 million for the fiscal year ended December 31, 2018, an 8% increase. Such increase was mainly the result of: (i) Ps.8,151 million in interest from repurchase transactions, (ii) Ps.3,497 million in interest from government debt securities measured at amortized cost and (iii) Ps.2,246 million in interest from loans and other financing. The average amount of repurchase transactions for the fiscal year ended December 31, 2019 was equal to Ps.18,170 million, a 10% increase as compared to Ps.16,479 million for the fiscal year ended December 31, 2018. The average interest rate on repurchase transactions was 53.46%, a 4,404 bps increase as compared to 9.46% as of December 31, 2018. The average amount of loans for the fiscal year ended December 31, 2019 was equal to Ps.587,663 million, a 7 % increase as compared to the Ps.631,995 million for the fiscal year ended December 31, 2018.This decrease was primarily attributable to the increase in overdraft, mortgage and credit card loans extended as part of the portfolio. The average interest rate on total loans was 27.12% for the fiscal year ended December 31, 2019, as compared to 24.80% for the fiscal year ended December 31, 2018, representing a 232 bps increase year-over-year. Interest income from banking activity for the fiscal year ended December 31, 2019 amounted to Ps.150,712 million, a 25% increase as compared to the Ps.120,773 million recorded in the fiscal year ended December 31, 2018. According to BCRA information, as of December 31, 2019 Banco Galicia’s estimated market share of loans to the private sector was 11.50%, a 99 pbs increase when compared with the 10.51% for fiscal year ended December 31, 2018. Interest income related to Ecosistema NaranjaX amounted to Ps.26,500 million for the year ended December 31, 2019, a 16% decrease as compared to the Ps.31,707 million recorded for the fiscal year ended December 31, 2018. Interest income related to insurance services amounted to Ps.1,145 million for the year ended December 31, 2019, a 31% increase as compared to the Ps.875 million recorded for the fiscal year ended December 31, 2018. v) Interest Expenses Consolidated interest expenses were comprised of the following:
Fiscal Year 2020 compared to Fiscal Year 2019 Interest expenses for the fiscal year ended December 31, 2020 were equal to Ps.90,175 million, as compared to Ps.130,254 million for the fiscal year ended December 31, 2019, representing a 31% decrease. Such decrease was primarily attributable to a 23% decrease in interest paid on deposits, as consequence of low rate yields. Interest expenses from deposits amounted to Ps.79,483 million for the fiscal year ended December 31, 2020, as compared to Ps.103,158 million for the fiscal year ended December 31, 2019, a Ps.23,675 million decrease. This decrease was primarily due to increased interest expenses related to time deposits and term investments, which was equal to Ps.62,824 million for the fiscal year ended December 31, 2020, representing a 31% decrease as compared to Ps.90,832 million for the fiscal year ended December 31, 2019. Such lower interest paid on time deposits was due to lower rates as compare to the rates of 2019, as consequence the regulated rates product of the monetary regulation. The total average interest-bearing deposits for the fiscal year ended December 31, 2020 amounted to Ps.495,770 million, registering a decrease of 1%. Of this decrease, Ps.11,849 million were saving accounts deposits. This decrease was offset by an increase in time deposits for Ps.9,041 million. Out of total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2020, the average interest rate of time deposits was 16.03%, as compared to 20.69% for the fiscal year ended December 31, 2019, a 466 bps decrease. Savings accounts deposits for the fiscal year ended December 31, 2020 accrued interest at an average rate of 5.77%, as compared to an average rate of 4.24% for the fiscal year ended December 31, 2019, a 153 bps increase. The rate of time deposits for the fiscal year ended December 31, 2020 was 26.68%, as compared to 39.25% for the fiscal year ended December 31, 2019, a 1,257 bps decrease. Interest expenses related to banking activity amounted to Ps.85,854 million for the fiscal year ended December 31, 2020, as compared to Ps.118,269 million for the fiscal year ended December 31, 2019, representing a 27% decrease. According BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share increased from 10.17% as of December 31, 2019 to 10.28% as of December 31, 2020. The following table indicates Banco Galicia´s market share in the segments listed below:
Interest expenses related to Ecosistema NaranjaX amounted to Ps.5,150 million for the fiscal year ended December 31, 2019, as compared to Ps.13,232 million for the fiscal year ended December 31, 2019, representing a 58% decrease. This decrease was primarily a result of a decrease in interest expenses on debt securities issued by Naranja. Fiscal Year 2019 compared to Fiscal Year 2018 Interest expenses for the fiscal year ended December 31, 2019 were equal to Ps.130,254 million, as compared to Ps.94,055 million for the fiscal year ended December 31, 2018, representing a 38% increase. Such increase was primarily attributable to an 51% increase in interest paid on deposits. Interest expenses from deposits amounted to Ps.103,158 million for the fiscal year ended December 31, 2019 as compared to Ps.68,499 million for the fiscal year ended December 31, 2018 a Ps.34,659 million increase. This increase was primarily due to increased interest expenses related to time deposits and term investments, which was equal to Ps.90,832 million for the fiscal year ended December 31, 2019, representing a 52% increase as compared to Ps.59,909 million for the fiscal year ended December 31, 2018. Average deposits recorded a decrease of 2% as compared to the fiscal year ended December 31, 2018, with a decrease of 5% in savings account deposits and a 3% increase in time deposits. Out of total interest-bearing deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2019 the average interest rate of time deposits was 20,69%, as compared to 13,19% for the fiscal year ended December 31, 2018, a 750 bps increase. Interest expenses related to banking activity amounted Ps.118,269 million for the fiscal year ended December 31, 2019 as compared to Ps.79,349 million for the fiscal year ended December 31, 2018, representing a 49% increase. Using BCRA information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share decreased from 11.09% as of December 31, 2018 to 9.92% as of December 31, 2019. Interest expenses related to Ecosistema NaranjaX amounted to Ps.13,232 million for the fiscal year ended December 31, 2019 as compared to Ps.12,485 million for the fiscal year ended December 31, 2018, representing a 6% increase. This increase was primarily the result of an increase in interest expenses on debt securities issued by Naranja. vi) Net Fee Income Consolidated net fee income consisted of:
Fiscal Year 2020 compared to Fiscal Year 2019 Our net fee income for the fiscal year ended December 31, 2020 was equal to Ps.36,558 million, as compared to Ps.38,233 million for the fiscal year ended December 31, 2019, a 4% decrease. This decrease was mainly due to a 23% decrease in deposit accounts fees. Fees related to deposit accounts for the fiscal year ended December 31, 2020 were equal to Ps.4,638, as compared to Ps.5,994 million for the fiscal year ended December 31, 2019, a Ps.1,356 million decrease. This decrease was primarily attributable to a decrease in fees related to maintaining a checking account with us or our subsidiaries. Total deposit accounts for the fiscal year ended December 31, 2020 were 6.2 million, as compared to 5.2 million for the fiscal year ended December 31, 2019, a 17% increase. Additionally, credit- related fees, amounted to Ps.7,424 million for the fiscal year ended December 31, 2020, a Ps.1,021 million increase as compared to Ps.6,403 million for the fiscal year ended December 31, 2019. Income from credit card transactions, for the fiscal year ended December 31, 2020 was Ps.23,841 million, as compared to Ps.24,204 million for the fiscal year ended December 31, 2019, a Ps.363 million decrease. Such decrease was mainly attributable to a decrease in fees recorded by Naranja. The total number of credit cards managed for the fiscal year ended December 31, 2020 was 13,688,430, as compared to 13,545,870 for the fiscal year ended December 31, 2019, a 1% increase. The following table sets forth the number of credit cards outstanding as of the dates indicated:
Total fee expenses for the fiscal year ended December 31, 2020 were equal to Ps.9,918 million, as compared to Ps.9,614 million for the fiscal year ended December 31, 2019, a 3% increase. Such increase was mainly attributable to an increase in expenses related to credit card transactions for a 12%, as compared to the previous fiscal year. Net fee income related to banking activity for the fiscal year ended December 31, 2020 was equal to Ps.20,980 million, as compared to Ps.21,760 million for fiscal year ended December 31, 2019, a 4% decrease. This decrease was mainly attributable to a Ps.1,357 million decrease in fees related to deposit accounts, from Ps.5,994 million for the fiscal year ended December 31, 2019 to Ps.4,637 million for the fiscal year ended December 31, 2020. For the fiscal year ended December 31, 2020, fees related to deposit accounts were equal to Ps.4,638 million, as compared to Ps.5,994 million for the fiscal year ended December 31, 2019, a Ps.1,357 million decrease. This decrease was primarily attributable to a decrease in fees paid for maintaining a checking account with us or our subsidiaries. Net fee income related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 amounted to Ps.16,670 million as compared to Ps.17,674 million for the fiscal year ended December 31, 2019, a 6% decrease. For more information about fees, please see – Item 4. “Information on the Company” –A. “Business Overview” – “Argentine Banking Regulations” – “Limitations on Fees and Other Substantial Elements”. Fiscal Year 2019 compared to Fiscal Year 2018 Our net fee income for the fiscal year ended December 31, 2019 was equal to Ps.38,233 million, as compared to Ps.44,756 million for the fiscal year ended December 31, 2018, a 15% decrease. This decrease was mainly due to a 26% decrease in credit-related fees. Credit- related fees, amounted to Ps.6.403 million for the fiscal year ended December 31, 2019, a Ps.2,244 million decrease as compared to Ps.8,647 million for the fiscal year ended December 31, 2018. This decrease was a consequence of a decrease in fees charged by Ecosistema NaranjaX as a result of (i) the merger of accounts held by Naranja and Tarjetas Cuyanas and (ii) a decrease in fees overall charged due to regulatory restrictions. Income from credit card transactions, for the fiscal year ended December 31, 2019 was Ps.24,204 million, as compared to Ps.23,839 million for the fiscal year ended December 31, 2018, a Ps.365 million increase. Such increase was mainly attributable to an increase in fees recorded by Naranja, partially offset by the fees related to issuance of credit cards. The total number of credit cards managed for the fiscal year ended December 31, 2019 was 13,547,148 as compared to 13,915,580 for the fiscal year ended December 31, 2018, mainly attributable to the merger of accounts between Naranja and Tarjetas Cuyanas. Fees related to deposit accounts for the fiscal year ended December 31, 2019 were equal to Ps.5,994 million, as compared to Ps.7,290 million for the fiscal year ended December 31, 2018, a 18% decrease. This decrease was primarily attributable to a decrease in fees related to the maintenance of checking accounts. Total deposit accounts for the fiscal year ended December 31, 2019 were 5.2 million as compared to 4.7 million for the fiscal year ended December 31,2018, a 9% increase. Total fee expenses for the fiscal year ended December 31, 2019 were equal to Ps.9,614 million, as compared to Ps.6,338 million for the fiscal year ended December 31, 2018, a 52% increase. Such increase was mainly attributable to an increase in expenses related to credit card transactions. Net fee income related to banking activity for the fiscal year ended December 31, 2019 was equal to Ps.21,760 million, as compared to Ps.26,131 million for fiscal year ended December 31, 2018, a 17% decrease. This decrease was mainly attributable to a Ps.2,034 million decrease in fees related to credit cards transactions, from Ps.13,635 million for the fiscal year ended December 31, 2018 to Ps.11,601 million for the fiscal year ended December 31, 2019. This decrease was due to lower fees recorded by the issuance of credit cards. Fees related to deposit accounts for the fiscal year ended December 31, 2019 amounted to Ps.5,994 million, as compared to Ps.4,423 million for the fiscal year ended December 31, 2018, a 36% increase. This decrease was primarily attributable to smaller amounts of total fees received for the maintenance of checking accounts. Net fee income related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 amounted to Ps.17,674 million, as compared to Ps.18,702 million for the fiscal year ended December 31, 2018, a 5% decrease. This decrease was primarily the result of decrease in consumption by credit card users and a decrease in the number of credit cards issued due to the merger with Tarjeta Nevada. vii) Net Income from Financial Instruments Consolidated net income from financial instruments was comprised of:
Fiscal Year 2020 compared to Fiscal Year 2019 Net income from financial instruments for the fiscal year ended December 31, 2020 was equal to Ps.69,332 million, as compared to Ps.99,151 million for the fiscal year ended December 31, 2019, a 30% decrease. This decrease was due to a decrease in interest earnings related to Government securities for 27%, from Ps.84,885 million for the fiscal year ended December 31, 2019 to Ps.62,141 million for the fiscal year ended December 31, 2020. The average position in government securities for the fiscal year ended December 31, 2020 was Ps.155,630 million, as compared to Ps.166,505 million for the fiscal year ended December 31, 2019, a 7% decrease. This decrease was primarily attributable to lower balances of securities (LELIQS) issued by the BCRA. The average yield on government securities for the fiscal year ended December 31, 2020 was 40.11%, as compared to 50.98% for fiscal year ended December 31, 2019, a 1,087 bps increase. This increase was primarily attributable to a higher average yield with respect to Peso-denominated government securities. These variations were mainly a result of net income from financial instruments related to Banco Galicia, which represents 95% of our total consolidated net result from financial instruments. Banco Galicia’s net income from financial instruments for the fiscal year ended December 31, 2020 amounted to Ps.65,986 million, as compared to Ps.95,152 million for the fiscal year ended December 31, 2019, a 31% increase. This increase was primarily attributable to an increase in income from Government securities. Fiscal Year 2019 compared to Fiscal Year 2018 Net income from financial instruments for the fiscal year ended December 31, 2019 was equal to Ps.99,152 million, as compared to Ps.36,342 million for the fiscal year ended December 31, 2018, a 173% increase. This increase was principally due to an increase on income from Government Securities from Ps.29,127 million for the fiscal year 2018 to Ps.84,885 million for the fiscal year 2019, a 191% increase. The average position in Government securities for the fiscal year ended December 31, 2019 was Ps.166,505 million, as compared to Ps.93,353 million for the fiscal year ended December 31, 2018, a 78% increase. This increase was primarily attributable to higher balances of securities (LELIQS) issued by the BCRA. The average yield on Government securities for the fiscal year ended December 31, 2019 was 50.98%, as compared to 30.75% for fiscal year ended December 31, 2018, a 2,023 bps increase. These variations were mainly a result of net income from financial instruments related to Banco Galicia, which represents 92% of our total consolidated net result from financial instruments. Banco Galicia’s net income from financial instruments for the fiscal year ended December 31, 2019 amounted Ps.95,152 million, as compared to Ps.33,482 million for the fiscal year ended December 31, 2018, a 184% increase. This increase was primarily attributable to an increase in income from government securities. viii) Exchange Rate Differences on Gold and Foreign Currency Fiscal Year 2020 compared to Fiscal Year 2019 Exchange rate differences on gold and foreign currency for the fiscal year ended December 31, 2020 were equal to Ps.7,047 million, as compared to Ps.11,832 million for the fiscal year ended December 31, 2019, a 40% or Ps.4,785 million decrease. This decrease was primarily the result of a decrease in foreign currency brokerage at Banco Galicia for the fiscal year ended December 31, 2020 equal to Ps.5,096 million as compared to Ps.10,460 million of the fiscal year ended December 31, 2019, a 49% decrease. Such decrease in foreign currency brokerage was due to the restrictions placed on the purchase of foreign currency. For more information see – Item 4. Information on the Company –A. Business Overview – Government Regulations – Foreign Exchange Market. Fiscal Year 2019 compared to Fiscal Year 2018 Exchange rate differences on gold and foreign currency for the fiscal year ended December 31, 2019 were equal to Ps.11,832 million, as compared to Ps.7,910 million for the fiscal year ended December 31, 2018 a 50% or Ps.3,922 million increase. This was primarily the result of an increase in foreign currency brokerage at Banco Galicia for the fiscal year ended December 31, 2019 equal to Ps.10,460 million, as compared to Ps.5,042 million of the fiscal year ended December 31, 2018, a 37% increase. ix) Other Operating Income The following table sets forth the various components of other operating income.
Fiscal Year 2020 compared to Fiscal Year 2019 Other operating income for the fiscal year ended December 31, 2020 was equal to Ps.22,323 million, as compared to Ps.28,770 million for the fiscal year ended December 31, 2019, a 22% decrease. This decrease was mainly the result of a decrease in income from the sale of non-current assets held for sale for the fiscal year ended December 31, 2020, a 100% decrease. The decrease on the sale of non-current assets held for sale was due to Ps.9,676 million obtained from the sale of 51% of the stake in Prisma Medios de Pago S.A., which represented 34% of other operating income during the fiscal year 2019. Other operating income related to banking activity was equal to Ps.17,173 million, as compared to Ps.23,727 million for the fiscal year ended December 31, 2019, a 28% decrease, mainly attributable to the result of the sale of 51% of the stake on Prisma Medios de Pago S.A, during the fiscal year 2019. Other operating income related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 was equal to Ps.3,475 million, as compared to Ps.4,922 million for the fiscal year ended December 31, 2019, a 29% decrease. Other operating income related to insurance activity for the fiscal year ended December 31, 2020 was equal to Ps.505 million, as compared to Ps.539 million for the fiscal year ended December 31, 2019, a 6% decrease. Fiscal Year 2019 compared to Fiscal Year 2018 Other operating income for the fiscal year ended December 31, 2019 was equal to Ps.28,770 million, as compared to Ps.21,863 million for the fiscal year ended December 31, 2018, a 32% increase. This increase was mainly the result of an increase in income from the sale of non-current assets held for sale for the fiscal year ended December 31, 2019, which was equal to Ps.9,676 million, as compared to Ps.1,027 million for the fiscal year ended December 31, 2018, a 842% increase. The increase in the sale of non-current assets held for sale was due to Ps.9,676 million obtained from the sale of 51% of the stake in Prisma Medios de Pago S.A., which represented 34% of other operating income. Other operating income related to banking activity for the fiscal year ended December 31, 2019 was equal to Ps.23,727 million, as compared to Ps.14,554 million for the fiscal year ended December 31, 2018 a 63% increase, mainly attributable to the result of the sale of 51% of the stake on Prisma Medios de Pago S.A. Other operating income related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 was equal to Ps.4,922 million, as compared to Ps.7,711 million for the fiscal year ended December 31, 2018, a 36% decrease. Other operating income related to insurance activity for the fiscal year ended December 31, 2019 was equal to Ps.539 million, as compared to Ps.343 million for the fiscal year ended December 31, 2018, a 57% increase. x) Income from Insurance Activities The following table shows the results generated by insurance activities:
Fiscal Year 2020 compared to Fiscal Year 2019 Income from insurance activities (excluding administrative expenses and taxes, net of eliminations related to related-party transactions) for the fiscal year ended December 31, 2020 was equal to Ps.5,502 million, as compared to Ps.5,001 million for the fiscal year ended December 31, 2019, a 10% increase. This increase was mainly due to lower underwriting and operating expenses, which for the fiscal year ended December 31, 2020 were equal to Ps.1,065 million, as compared to Ps.1,515 million for the fiscal year ended December 31, 2019 a 30% decrease. Fiscal Year 2019 compared to Fiscal Year 2018 Income from insurance activities (excluding administrative expenses and taxes, net of eliminations related to related-party transactions) for the fiscal year ended December 31, 2019 was equal to Ps.5,001 million as compared to Ps.6,009 million for the fiscal year ended December 31, 2018, a 17% decrease. This decrease was mainly due to the decrease in the volume of earned premiums and surcharges as consequence of the decrease in the amount of policies providing by the products of CFA, resulting from the sale of its stake, a decrease which began in 2017. xi) Loan and Other Receivables Loss Provisions Fiscal Year 2020 compared to Fiscal Year 2019 Loan and other receivables loss provisions for the fiscal year ended December 31, 2020 were equal to Ps.34,680 million, as compared to Ps.30,228 million for the fiscal year ended December 31, 2019, a 15% increase. This increase was primarily related higher charges from banking activity, offset by lower charges from Ecosistema NaranjaX. Loan and other receivables loss provisions related to banking activity were equal to Ps.29,972 million, as compared to Ps.22,229 million for the fiscal year ended December 31, 2019, a 35% increase. This result was due to an additional loss provision due to the COVID-19. Since March 2020, the BCRA implemented a series of measures to reduce the economic consequences of COVID-19 pandemic, among which are the deferral of payments and suspension of the collection of punitive interest in the case of default in payments of loan installments credit cards loans are excluded. Thus, considering the adverse economic context that the country is going through, the borrower credit uncertainty and measures issued by the BCRA, Banco Galicia recognized an additional credit loss provision calculated using the statistical model of ECL on the deferred loan portfolio amounts, which shows the potential impairment due to the macroeconomic context, once the protective measures currently implemented are lifted for the BCRA. Banco Galicia measured the additional impact on the allowance from the estimation of the expected credit loss of loan portfolio which has deferred payments, based on new probabilities of default (PD) estimated depending on actual default (without deferrals) and the projected performance of the affected products, modifying the staging classification. Loan and other receivables loss provisions related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020, were equal to Ps.4,725 million, as compared to Ps.8,089 million for the fiscal year ended December 31, 2019, a 42% decrease. This decrease was related to a decrease in non-accrual portfolio due to an improved performance of Naranja clients. Fiscal Year 2019 compared to Fiscal Year 2018 Loan and other receivables loss provisions for the fiscal year ended December 31, 2019 were equal to Ps.30,228 million, as compared to Ps.34,136 million for the fiscal year ended December 31, 2018, an 11% decrease. This decrease was primarily related to lower charges for the evolution of used parameters for PD, EAD and LGD, partially offset by a charge generated for changes to model assumptions and methodologies, as compared to fiscal year ended December 31, 2018. Loan and other receivables loss provisions related to banking activity for the fiscal year ended December 31, 2019 were equal to Ps.22,229 million, as compared to Ps.22,771 million for the fiscal year ended December 31, 2018, a 2% decrease. This decrease was due primarily to lower charges for the evolution of used parameters for PD, EAD and LGD related to retail portfolio, partially offset by a charge generated for changes to model assumptions and methodologies, as compared to fiscal year ended December 31, 2018. Loan and other receivables loss provisions related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 were equal to Ps.8,089 million as compared to Ps.11,202 million for the fiscal year ended December 31, 2018, a 28% decrease. This decrease was related to lower charges for the change in the parameters used for PD, EAD and LGD, as compared to fiscal year ended December 31, 2018. xii) Personnel Expenses Fiscal Year 2020 compared to Fiscal Year 2019 Personnel expenses for the fiscal year ended December 31, 2020 were equal to Ps.31,825 million, as compared to Ps.33,285 million for the fiscal year ended December 31, 2019, a Ps.1,460 million decrease. This decrease was primarily attributable to a 5% decrease in the number of employees. Personnel expenses related to banking activity for the fiscal year ended December 31, 2020 were equal to Ps.22,090 million, as compared to Ps.24,304 million for the fiscal year ended December 31, 2019, a 9% decrease, due to a decrease in the number of employees. Personnel expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 were equal to Ps.8,080 million as compared to Ps.7,544 million for the fiscal year ended December 31, 2019, a 7% increase. This increase was due to hiring more employees in Naranja X. Personnel expenses related to insurance activity for the fiscal year ended December 31, 2020 were equal to Ps.1,218 million as compared to Ps.1,109 million for the fiscal year ended December 31, 2019, a 10% increase. Fiscal Year 2019 compared to Fiscal Year 2018 Personnel expenses for the fiscal year ended December 31, 2019 were equal to Ps.33,285 million, as compared to Ps.35,658 million for the fiscal year ended December 31, 2018, a Ps.2,373 million decrease. This decrease was primarily attributable to a 5% decrease in the number of employees. Personnel expenses related to banking activity for the fiscal year ended December 31, 2019 were equal to Ps.24,304 million, as compared to Ps.24,155 million for the fiscal year ended December 31, 2018, a 1% increase. Personnel expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 were equal to Ps.7,544 million as compared to Ps.10,034 million for the fiscal year ended December 31, 2018, a 25% decrease. This decrease was primarily attributable to the merger of Tarjeta Nevada with Naranja that started in 2018. Personnel expenses related to insurance activity for the fiscal year ended December 31, 2019 were equal to Ps.1,109 million, as compared to Ps.1,204 million for the fiscal year ended December 31, 2018, an 8% decrease due to a decrease in the number of employees. xiii) Administrative Expenses The following table sets forth the components of our consolidated administrative expenses:
Fiscal Year 2020 compared to Fiscal Year 2019 Administrative expenses for the fiscal year ended December 31, 2020 were equal to Ps.31,372 million as compared to Ps.33,105 million for the fiscal year ended December 31, 2019, a 5% decrease. This decrease was primarily attributable to a (i) Ps.1,257 million decrease in fees and compensation for services, (ii) Ps.1,244 million decrease in armored transportation services and (iii) Ps.1,217 million decrease in advertising and publicity. Fees and compensation for services for the fiscal year ended December 31, 2020 were equal to Ps.2,723 million, as compared to Ps.3,980 million for the fiscal year ended December 31, 2019, a 32% decrease. This decrease was due to the hiring of consultants for digital transformation projects during 2019. Armored transportation services for the fiscal year ended December 31, 2020 were equal to Ps.1,559 million, as compared to Ps.2,803 million for the fiscal year ended December 31, 2019, a 44% decrease. Such decrease was due to the fact that in 2019 there were additional expenses related to the transportation of banknotes abroad. Advertising and publicity expenses for the fiscal year ended December 31, 2020 were equal to Ps.1,743 million, as compared to Ps.2,960 million for the fiscal year ended December 31, 2019, a 41% decrease. This decrease was as a consequence of fewer advertising campaigns during 2020 due to the COVID-19 context. Administrative expenses related to banking activity for the fiscal year ended December 31, 2020 were equal to Ps.21,429 million, as compared to Ps.23,885 million for the fiscal year ended December 31, 2019, a 10% decrease. Administrative expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 were equal to Ps.8,679 million, as compared to Ps.8,248 million for the fiscal year ended December 31, 2019, a 5% increase. Administrative expenses related to insurance activity for the fiscal year ended December 31, 2020 were equal to Ps.657 million, as compared to Ps.712 million for the fiscal year ended December 31, 2019, an 8% decrease. Fiscal Year 2019 compared to Fiscal Year 2018 Administrative expenses for the fiscal year ended December 31, 2019 were equal to Ps.33,105 million, as compared to Ps.33,674 million for the fiscal year ended December 31, 2018, a 2% decrease. This decrease was attributable to (i) Ps.3,476 million decrease in other administrative expenses, primarily attributable to a drop in Ecosistema NaranjaX’ s fund transfers and (ii) Ps.1,595 million decrease in rentals, as consequence of the application of IFRS 16. This decrease was partially offset by (i) Ps.1,946 million increase in maintenance and repairs and (ii) Ps.1,432 million increase in fees and compensation for services. Maintenance and repairs for the fiscal year ended December 31, 2019 were equal to Ps.4,911 million as compared to Ps.2,965 million for the fiscal year ended December 31, 2018, a 66% increase. This increase was as consequence of higher expenses related to the maintenance of systems related to Banco Galicia. Fees and compensation for services for the fiscal year ended December 31, 2019 were equal to Ps.3,980 million, as compared to Ps.2,548 million for the fiscal year ended December 31, 2018, a 56% increase. This increase was due to the hiring of consultants for digital transformation projects. Administrative expenses related to banking activity for the fiscal year ended December 31, 2019 were equal to Ps.23,885 million, as compared to Ps.21,901 million for the fiscal year ended December 31, 2018, a 9% increase. Administrative expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 were equal to Ps.8,248 million, as compared to Ps.10,378 million for the fiscal year ended December 31, 2018, a 21% decrease. Administrative expenses related to insurance activity for the fiscal year ended December 31, 2019 were equal to Ps.712 million, as compared to Ps.856 million for the fiscal year ended December 31, 2019, a 17% decrease. xiv) Other Operating Expenses
Fiscal Year 2020 compared to Fiscal Year 2019 Other operating expenses for the fiscal year ended December 31, 2020 were equal to Ps.30,764 million, as compared to Ps.35,083 million of the fiscal year ended December 31, 2019, a 12% decrease. This decrease was primarily attributable to a 12% decrease in turnover tax on fees and an 89% decrease in other financial expenses, offset by a 24% increase in charges for other provisions. Turnover tax for the fiscal year ended December 31, 2020 was equal to Ps.15,663 million as compared to Ps.17,814 million for the fiscal year ended December 31, 2019 a 12% decrease. Other financial expenses for the fiscal year ended December 31, 2020 were equal to Ps.286 million as compared to Ps.2,499 million for the fiscal year ended December 31, 2019 an 89% decrease. Other provisions for the fiscal year ended December 31, 2020 were equal to Ps.2,869 million as compared to Ps.2,315 million for the fiscal year ended December 31, 2019 a 24% increase. Other operating expenses related to banking activity for the fiscal year ended December 31, 2020 were equal to Ps.23,844 million, as compared to Ps.28,555 million of the fiscal year ended December 31, 2019, a 16% decrease. Other operating expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 were equal to Ps.6,671 million, as compared to Ps.6,378 million for the fiscal year ended December 31, 2019, a 5% increase. Fiscal Year 2019 compared to Fiscal Year 2018 Other operating expenses for the fiscal year ended December 31, 2019 were equal to Ps.35,083 million, as compared to Ps.35,391 million of the fiscal year ended December 31, 2018, a 1% decrease. This decrease was primarily attributable to a 33% decrease in other expenses from services, offset by a 23% increase in turnover tax related to financial services and a 118% increase in other financial expenses. Other expenses from services for the fiscal year ended December 31, 2019 were equal to Ps.2,979 million as compared to Ps.4,456 million for the fiscal year ended, December 31, 2018 a 33% decrease. Other operating expenses related to banking activity for the fiscal year ended December 31, 2019 were equal to Ps.28,555 million, as compared to Ps.26,853 million of the fiscal year ended December 31, 2018, a 6% increase. Other operating expenses related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 were equal to Ps.6,378 million, as compared to Ps.8,387 million of the fiscal year ended December 31, 2018, a Ps.2,009 million or 24% decrease. xv) Loss on Net Monetary Position Fiscal Year 2020 compared to Fiscal Year 2019 Loss on net monetary position for the fiscal year ended December 31, 2020 was equal to Ps.36,963 million as compared to Ps.41,929 million for the fiscal year ended December 31, 2019, a 12% decrease. Loss on net monetary position related to banking activity for the fiscal year ended December 31, 2020 was equal to Ps.30,368 million as compared to Ps.33,702 million for the fiscal year ended December 31, 2020, a 10% decrease. Loss on net monetary position related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 was equal to Ps.4,919 million as compared to Ps.6,306 million for the fiscal year ended December 31, 2019, a 22% decrease. Loss on net monetary position related to insurance activity for the fiscal year ended December 31, 2020 was equal to Ps.815 million as compared to Ps.1,036 million for the fiscal year ended December 31, 2019, a 21% decrease. Fiscal Year 2019 compared to Fiscal Year 2018 Loss on net monetary position for the fiscal year ended December 31, 2019 was equal to Ps.41,929 million as compared to Ps.37,831 million for the fiscal year ended December 31, 2018, a 11% increase. Loss on net monetary position related to banking activity for the fiscal year ended December 31, 2019 was equal to Ps.33,702 million as compared to Ps.27,238 million for the fiscal year ended December 31, 2018 a 24% increase. Loss on net monetary position related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 was equal to Ps.6,306 million as compared to Ps.8,052 million of the fiscal year ended December 31, 2018, a 22% decrease. Loss on net monetary position related to insurance activity for the fiscal year ended December 31, 2019 was equal to Ps.1,036 million as compared to Ps.1,174 million of the fiscal year ended December 31, 2018, a 12% decrease. xvi) Income Tax from Continuing Operations Fiscal Year 2020 compared to Fiscal Year 2019 Income tax from continuing operations for the fiscal year ended December 31, 2020 was equal to Ps.17,845 million as compared to Ps.17,751 million for the fiscal year ended December 31, 2019; a 1% increase. Income tax from continuing operations related to banking activity for the fiscal year ended December 31, 2020 was equal to Ps.14,277 million as compared to Ps.16,724 million for the fiscal year ended December 31, 2019, a 15% decrease. Income tax from continuing operations related to Ecosistema NaranjaX for the fiscal year ended December 31, 2020 was equal to Ps.2,245 million as compared to Ps.523 million for the fiscal year ended December 31, 2019, a 329% increase. Income tax from continuing operations related to insurance activity for the fiscal year ended December 31, 2020 was equal to Ps.513 million as compared to Ps.467 million for the fiscal year ended December 31, 2019 , a 10% increase. Fiscal Year 2019 compared to Fiscal Year 2018 Income tax from continuing operations for the fiscal year ended December 31, 2019 was equal to Ps.17,751 million, as compared to Ps.14,477 million for the fiscal year ended December 31, 2018, a 23% increase. Income tax from continuing operations related to banking activity for the fiscal year ended December 31, 2019 was equal to Ps.16,724 million as compared to Ps.10,492 million for the fiscal year ended December 31, 2018, a 59% increase. Income tax from continuing operations related to Ecosistema NaranjaX for the fiscal year ended December 31, 2019 was equal to Ps.523 million as compared to Ps.2,693 million for the fiscal year ended December 31, 2018, an 81% decrease. Income tax from continuing operations related to insurance activity for the fiscal year ended December 31, 2019 was equal to Ps.467 million as compared to Ps.649 million for the fiscal year ended December 31, 2018, a 28% decrease. A.3 Consolidated Assets The main components of our consolidated assets as of the dates indicated below were as follows:
Of our Ps.1,055,279 million total assets as of December 31, 2020, Ps.946,019 million, or 89.6%, corresponded to Banco Galicia and Ps.103,071 million, or 9.8% corresponded to Ecosistema NaranjaX (Tarjetas Regionales on a consolidated basis). The remaining was primarily attributable to Sudamericana on a consolidated basis. The composition of our assets demonstrates an increase in the amounts of main line items. The item “Cash and Due from Banks” included cash for Ps.175,423 million, balances held at the BCRA for Ps.102,598 million and balances held in correspondent banks for Ps.108,491 million. The balance held at the BCRA is used for meeting the minimum cash requirements set by the BCRA. Our holdings of debt securities as of December 31, 2020 was Ps.155,420 million. Our holdings of government and private securities are shown in more detail in Item 4. “Information on the Company”—B. “Operating Overview” — “Selected Statistical Information”— “Debt and Equity Securities”. Our total net loans and other financing were Ps.526,434 million as of December 31, 2020, of which Ps.439,306 million corresponded to Banco Galicia’s portfolio and Ps.88,546 corresponded to Ecosistema NaranjaX’ portfolios, the remaining amount to secured loans held by Sudamericana. For more information on loan and other financing activities portfolios, see Item 4. “Information on the Company”—B. “Operating Overview” — “Selected Statistical Information”— “Loan and Other Financing Portfolio”. A.4 Exposure to the Argentine Public Sector The following table shows our total net exposure, primarily related to Banco Galicia, to the Argentine public sector as of December 31, 2020 and 2019 and 2018.
As of December 31, 2020, the exposure to the public sector amounted to Ps.243,127 million, an increase of 44% as compared to Ps.169,323 million for the year ended December 31, 2019. Excluding the debt securities issued by the BCRA, the Bank’s exposure amounted to Ps.53,806 million equal to 5% of total assets. A.5 Funding Banco Galicia’s and Ecosistema NaranjaX’ lending activities are our main asset-generating businesses. Accordingly, most of our borrowing and liquidity needs are associated with these activities. We also have liquidity needs at the level of our holding company, which are discussed in Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”—“Liquidity-Holding Company on an Individual Basis”. Our objective is to maintain cost-effective and well diversified funding to support current and future asset growth in our businesses. For this, we rely on diverse sources of funding. The use and availability of funding sources depends on market conditions, both local and foreign, and prevailing interest rates. Market conditions in Argentina include a structurally limited availability of domestic long-term funding. Our funding activities and liquidity planning are integrated into our asset and liability management and our financial risks management and policies. The liquidity policy of Grupo Financiero Galicia is described in Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”—“Liquidity Management” and our other financial risk policies, including interest rate, currency and market risks are described in Item 11. “Quantitative and Qualitative Disclosures about Market Risk”. Our funding sources are discussed below. Traditionally, our primary source of funding has been Banco Galicia’s deposit taking activity. Although Banco Galicia has access to BCRA financing, management does not view this as a primary source of funding in line with our overall strategies discussed herein. Other important sources of funding have traditionally included issuing foreign currency-denominated medium and long-term debt securities issued in foreign capital markets and borrowing from international banks and multilateral credit agencies. Banco Galicia entered into a master loan agreement with the International Finance Corporation (“IFC”) in 2016, for US$130 million, divided into two parts, one of them with the purpose of funding long-term loans to SMEs and the other part with the purpose of funding renewable energy project and efficiency energy power project. Additionally, Banco Galicia entered into master bond agreements with the IFC for US$100 million in order to expand its loan program for environmental efficiency projects. Selling government securities under repurchase agreement transactions has been a recurrent source of funding for Banco Galicia. Although not presently a key source of funding, repurchase agreement transactions are part of the liquidity policy of the Bank. Within its liquidity policy, Banco Galicia considers its unencumbered liquid government securities holdings as part of its available excess liquidity. See Item 5. “Operating and Financial Review and Prospects” —B. “Liquidity and Capital Resources”—“Liquidity Management”. Ecosistema NaranjaX fund their business through the issuance of debt securities in the local and international capital markets, borrowing from local financial institutions and debt with merchants generated in the ordinary course of business of any credit card issuing company. In 2020, Naranja issued debt securities in an amount equal to Ps.6,632 million (approximately US$78 million). Below is a breakdown of our funding as of the dates indicated:
The main sources of funds are deposits from the private sector, lines of credit extended by local banks and entities, international banks and multilateral credit agencies, repurchase transactions mainly related to government securities, mid- and long-term debt securities placed in the local and international capital market and debts with stores due to credit card transactions. As of December 31, 2020, deposits represented 64% of our funding, increase from 57% compared to December 31, 2019. Our deposit base increased 26% in 2020 as compared to 2019. During fiscal year 2020, the Ps.140,362 million increase in deposits was due to an increase in transactional deposits (deposits in savings accounts and time deposits, with increases of 31% and 26%, respectively). For more information on deposits, see Item 4. “Information on the Company”—B. “Business Overview” — “Selected Statistical Information”—“Deposits”. As of December 31, 2020, credit lines from international financial institutions amounted to Ps.4,849 million, which corresponded to amounts received from the IFC pursuant to a loan agreement. Also as of December 31,2020, correspondents amounted to Ps.1,927 million and financing from local financial institutions totaled Ps.7,036 million, of this total Ps.3,165 million corresponded to amounts received from the BICE (Argentine subsidiary of development bank called BICE “Banco de Inversion y Comercio Exterior”), pursuant to a loan agreement and Ps.3,661 million corresponded to amounts received by Naranja. Our debt securities outstanding (only principal) were Ps.38,728 million as of December 31, 2020, as compared to Ps.60,910 million as of December 31, 2019. Of the total debt securities outstanding as of December 31, 2020, Ps.12,245 million corresponded to Peso-denominated debt, of which Ps.2,988 million corresponded to debt securities issued by Banco Galicia and Ps.9,257 million corresponded to debt securities issued by Naranja (which includes debt securities issued by Tarjetas Cuyanas). The remaining Ps.26,483 million of outstanding debt securities corresponded to foreign currency-denominated debt in respect of subordinated debt securities due in 2026 issued by Banco Galicia and the green bond with the IFC. As of December 31, 2020, the breakdown of our debt was as follows:
A.7 Off-Balance Sheet Arrangements Our off-balance sheet risks mainly arise from Banco Galicia’s activities. In the normal course of its business and in order to meet customer financing needs, Grupo Galicia is a party to financial instruments with off-balance sheet risk. These instruments expose us to credit risk in addition to loans recognized on our consolidated balance sheets. These financial instruments include commitments to extend credit, standby letters of credit and guarantees. The same internal regulations and policies apply for commitments to extend credit, standby letters of credit and guarantees. Outstanding commitments and guarantees do not represent an unusually high credit risk for Grupo Galicia. i) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer at a future date, subject to meeting certain contractual terms. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent actual future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. ii) Guarantees Guarantees are agreements and/or commitments to reimburse or make payment on account of any losses or non-payments by a borrower in an event of default scenario and include surety guarantees in connection with transactions between two parties. iii) Stand-By Letters of Credit and Foreign Trade Transactions Standby letters of credit and guarantees granted are conditional commitments issued by Banco Galicia to guarantee the performance of a customer to a third party. Banco Galicia also provides conditional commitments for foreign trade transactions. Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, guarantees granted and acceptances is represented by the contractual notional amount of those investments. Our credit exposure related to these items as of December 31, 2020 is set forth below:
The credit risk of these instruments is similar as the credit risk associated with credit facilities provided to individuals and companies. To provide guarantees to our customers, we may require counter-guarantees, which are classified as follows:
In addition, checks to be debited and credited, notes, invoices and miscellaneous items subject to collection are recorded in memorandum accounts until such instruments are approved or accepted. The risk of loss in these offsetting transactions is not significant.
December 31, | (in millions of Pesos) | Checks and Drafts to be Debited 7,001 | Checks and Drafts to be Credited 10,519 | Values for Collection 85,197 | Grupo Galicia acts as trustee pursuant to trust agreements to secure obligations in connection with financing transaction undertaken by its customers. The amount of funds and securities held in trust as of December 31, 2020 is as follows:
These funds and securities are not included in Grupo Galicia’s consolidated financial statements as it does not have control over the same. For additional information regarding off-balance sheet financial instruments, see Note 48 to our audited consolidated financial statements. A.8 Principal Trends i) Related to Argentina The Argentine economy contract 9.9% in 2020 as compared to 2019. Following such contraction in 2020, a rebound in activity is expected for 2021. This rebound could be partially explained by last year’s statistical carry-over, due to the greater mobility of people in the second half of the year. The increase in exports and the partial return of private consumption are expected to be the key factors in the economy’s evolution. Any anticipated rebound is be subject to the performance and effectiveness of the COVID-19 vaccination campaigns and their effectiveness against any new strains, which will ultimately determine the need to reimplement isolation measures, with the consequent impact on economic activity. To the extent that the economy does rebound in 2021, such rebound is expected to allow for the recovery of treasury revenues, which in combination with an elimination, at least in part, of the fiscal package used to contain the pandemic during 2020, would be expected to result in a reduction of the primary deficit from the 6.5% of GDP reached in 2020. This year’s primary fiscal deficit together with the Government debt security upcoming maturity dates in the local market and with international organizations will worsen the situation in terms of national financing needs. Although the Government is hoping to refinance a portion of its outstanding debt, the evolution of the negotiations, in particular with the International Monetary Fund with whom it will negotiate for maturities of approximately US$53 million, will be crucial. In respect of the IMF debt alone, US$3.6 million are due in 2021 unless a refinancing is agreed upon. The possibility of Argentina returning to the international debt markets still seems distant, since the “Country Risk” as determined by JP Morgan’s Emerging Markets Bonds Index is above 1.500 bps. The Treasury’s requirements would be covered again through the issuance of additional money, through the BCRA’s profit sharing and “Temporary Advances”, and through the issuance of new debt in the domestic market and access to lines of credit from international organizations. After a year in which the monetization of the economy reached historically high levels as a result of the financing via money issuance of the fiscal package to contain the effects of the pandemic, more money supply could put upward pressure on domestic prices. For this reason, plus the accumulation of restrained inflation in the last months of 2020, an increase in inflation rates is expected during 2021. Monetary levels of the fiscal deficit will also define the pressure on the different dollar exchange rates and will eventually define the levels of exchange gap. In a context where the real exchange rate does not appear to be excessively appreciated, and where a trade surplus similar to that of 2020 is possible, the levels of the exchange gap will be the key to the pressure on the official exchange market, and finally on international reserves. ii) Related to the Financial System The Argentine financial system will continue interacting mainly with the private sector, with short-term financing and financial products, maintaining high liquidity levels at the same time. In the coming year, there is a risk of an adverse evolution of the pandemic at the local and international level. This could have an impact on the domestic activity level, world production and international trade. In this context, the impact on the payment capacity of Argentine families and companies could have repercussions on the profits of local financial institutions. To mitigate the possibility of massive cuts in the payment chain, in the context of health policies establishing distancing due to the pandemic, it is expected that policies of (temporary) flexibility of the parameters with which bank debtors are classified will continue in 2021. In addition, the monetary authority will continue to promote credit lines for productive activity, with interest rates below the inflation expected by the market consensus. Meanwhile, the BCRA will also continue with its policy of minimum rates for time deposits. Despite the points observed in the previous paragraphs, it is expected that banks will continue to show positive real benefits, such as those recorded in 2020, allowing capitalization levels to be maintained above the minimum capital requirements established by the Basel Committee. The institutions will continue working on expenses in order to improve efficiency indicators. Although the current situation seems very challenging, a solid systemic position is expected to continue prevailing, in a context where credit growth relative to gross domestic product is not projected for the year that has begun. High levels of irregularity hedge through allowances and excess capital are a strength in a context of high level of arrears. Low leverage in companies and families, regionally compared, evidences the potential of Argentine financial institutions. Within the above scheme, Grupo Financiero Galicia (through Banco Galicia) will further its objective of strengthening its leadership position in the market. The quality of its products and services provided to current and future customers will continue to be the central focus, in addition to continuing the process of improving operational efficiency as a key factor in generating value both for customers and shareholders. iii) Related to Us Similar to our expectations for 2020, we believe that 2021 will be a year marked with high levels of economic volatility and uncertainty. The COVID-19 pandemic appears to be far from being controlled and, therefore, we believe that the Argentine economy will continue to be impacted - possibly to a lesser extent than observed in 2020 - by the economic and social effects of the pandemic. In the same sense, we expect that at least part of the public policy measures taken during 2020 and as described herein will remain in place for 2021 in order to help spur economic activity and generate employment. In addition to this, the results of upcoming legislative elections in 2021 may lead to legislative and other changes that require a review and reevaluation of both the impacts of such new policies on Argentina’s overall macroeconomic state as well as on Grupo Galicia’s particular lines of business. In a context of weak economic recovery and pressure on prices, it is expected that the activity will continue to be regulated. On the one hand, in terms of directed credit through the different versions of financing lines for productive investments of small and medium companies -which nevertheless tend to include benefits or exemptions on reserve requirements- the presence of minimum deposit rates or maximum placement rates for certain lines and the limits on the placement of excess liquidity in economic policy instruments. On the other hand, the limits on the use of the credit lines as a source of financing for the development of the economy. In Banco Galicia, these policies affect the financial margin, both in the net interest margin and in the lower profitability resulting from the placement of liquidity in bank notes (both in terms of volume and rate). It is expected that in 2021 the exchange market will be under pressure again. Given this, another aspect to be considered in terms of the impact of regulations implemented during 2020 are the effects, already known and analyzed during 2020, on the results from foreign currency purchase and sale transactions. In addition, regulations that prevented increases in the levels of commissions charged or that restricted or prohibited the collection of certain commissions (e.g.: for the use of ATMs), may be gradually eased or relaxed as the Argentine economy improves. Finally, although a certain rebound in the level of activity and employment is currently expected which could have a positive impact on our subsidiaries non-performing loan portfolios; it should be taken into account that the waivers and sources of funding and subsidies granted by the BCRA in 2020 prevented a true analysis of the real impact on the deterioration of our subsidiaries loan portfolios. For this reason, uncollectibility continues to be a significant risk, both at Banco Galicia and Naranja. As a consequence, of the above-mentioned situation, we foresee the following impacts from COVID-19 during 2020 on Banco Galicia’s operations:
Fee income will be reduced, due to regulations limiting price increases, which could be offset by a moderate increase of volume. Financial income will be affected by: (i) a lower average lending rate as a consequence of the directed credit at maximum interest rates, and (ii) a demand driven by subsidized credit. This could be partially offset by improving the structure of liabilities, due to the less attractive placement conditions. Additionally, and compared to 2020, the profitability from investing the excess liquidity will decrease, both due to the regulatory limits to the volumes invested and the downward trend in rates. Loan and other receivables loss provisions could reflect a strong deterioration as compared to 2020. Administrative expenses will not experience significant changes with respect to our estimate for 2021, considering the containment policy and the digital transformation that the Bank is going through by generating efficient captures. As for volumes, the expansionary monetary policy with foreign exchange control imposed by the administration will probably continue generating dynamism in deposits, growing slightly above the system. As regards credit, although we do not believe that there is a very dynamic demand, considering the expected level of economic activity, credit boost policies and the need to rebuild working capital are expected to generate growth in terms of Gross Domestic Product when the economy begins to stabilize. To conclude, we estimate that the COVID-19 pandemic will have a negative impact on Banco Galicia’s income, mainly as a consequence of: (i) the negative impact on income from financings, due to the reasons stated above; (ii) restrictions imposed by governmental regulations on fees charged; (iii) still higher loan and other receivables loss provisions; and (iv) impact of inflation on the foregoing and overall results. Still, it is currently believe, based on the information known to date, that Banco Galicia’s current liquidity and solvency levels will allow it to cope with this situation in the short term, assuming it is under control by the end of 2021. With respect to Naranja, as it is a credit-and-consumption-related business, it is certainly difficult for us to make any forecast for the coming months due to the current high level of economic volatility. Based on the 2021 Argentine budget this year is expected to be marked by the aftermath of the social and health crisis triggered by the COVID-19 in 2020 and the estimated impact will be reflected in a potential drop in the volume of operations or customer transactions. Therefore, revenue obtained from services will be affected. Additionally, the Naranja access to financing through the capital market may be limited, which in turn would leave Naranja with less ability to offer financing plans or loans to its customers, with the consequent impact that would have on financial income. However, Naranja has so far been able to maintain the liquidity and solvency levels that would allow it to address the obligations incurred. Loan and other receivables loss provisions will increase as a consequence of the general impact the COVID-19 pandemic will have on the economy and expected increase in unemployment rates. In conclusion, we expect a negative impact on Naranja’s future income during 2021, mainly caused by the decrease of financial and service revenues, and higher charges for arrearage. Regarding Ecosistema NaranjaX, it is important to point out that the company Naranja Digital has recently obtained the license from the BCRA to start operating. At the same time, Naranja X will continue deploying its new service model at additional branches, reaching 76% of the customer base. Finally, it will engage in further efforts on “Futuro del Trabajo” (Future of Employment)—an initiative focused on enhancing its employees’ experience by giving priority to their care and welfare. On the other hand, Sudamericana Holding does not foresee significant consequences on their business during 2021 related to COVID-19 and derived by the new regulations, either in economic or financial terms. As for Galicia Administradora de Fondos, it is estimated that, in 2021, it will obtain a growth of close to 70% in the volume of assets under management and will maintain its leading position in the Argentine industry by leading the Argentine fund market. The current economic context suggests that investments will be concentrated primarily in money market or short-term bond funds, and to a lesser extent in the rest of the funds. In addition, this line of business plans to continue to deepen and expand the marketing of its products through the use of distribution and placement agents, a niche that is expected to continue to grow. The organizational structure within the company is expected to remain stable during the year, and this company plans to continue to focus on the automation of its services and on the roll out of technological changes being implemented across the Grupo Galicia family that are aimed at improving efficiency and their customer’s digital experience. The operational management of the Group Financiero Galicia’s subsidiaries is stable, enabling us to comply with the needs and demands of our customers and of the control and supervision bodies. The implementation of work from home policies for our employees and our technological infrastructure have become invaluable tools to remain operative. Grupo Financiero Galicia will continue with the objective of strengthening its leadership position in the market. The high quality of the products and services it (and its subsidiaries) provide to current and future customers will continue to have a central role, in addition to continuing the process of improving operational efficiency as a key factor in generating value for its customers and shareholders. Likewise, the quarantine, social distancing and restrictions on face-to-face activities were driving forces to continue promoting and accelerating our digital transformation process. We continue working on projects that are designed to enrich the experience of our customers and employees. We plan to leverage new business lines like Naranja X, INVIU investment platform and MODO’s Systematic Payments play, and we remain focused on transforming Banco Galicia into a 100% digital platform, with the purpose of growing and capturing new customers. The business growth of all the companies that make up Grupo Financiero Galicia takes place within the framework of a sustainable management. To this end, we will continue to seek new opportunities aimed at the common good and care for the environment. The Board of Directors is closely monitoring this situation and taking all the required measures within their reach to preserve human life and our operations. The analysis of these trends should be read in conjunction with the discussion in Item 3. “Key Information”— D. “Risk Factors”, and with consideration that the Argentine economy has been historically volatile, which has negatively affected the volume and growth of the financial system. B. Liquidity and Capital Resources B.1 Liquidity - Holding Company on an Individual Basis We generate our net earnings/losses from our operating subsidiaries, specifically Banco Galicia, our main operating subsidiary. Banco Galicia’s dividend-paying ability has been affected since late 2001 by the effects of the 2001-2002 liquidity crisis and its impact on Banco Galicia’s income-generation capacity. In addition, there were other restrictions on Banco Galicia’s ability to pay dividends resulting from applicable BCRA rules and the loan agreements entered into by Banco Galicia as part of its foreign debt restructuring. See Item 8. “Financial Information”—“Dividend Policy and Dividends.” From 2002 to 2010 we did not receive any dividends from Banco Galicia, which is the primary source of funds available to us. On April 27, 2011, during the shareholders’ meeting of Banco Galicia, a distribution of cash dividends for a total amount of Ps.100 million was approved and the payment of distributions resumed. Most recently, on April 2019, we received from Banco Galicia a cash dividend of Ps.1,500 million (equivalent to Ps.2,717 million as of December 2020) for fiscal year 2018. Due to the regulations recently passed by the BCRA 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, 2021 (subject to further extensions). As such, Grupo Financiero Galicia did not receive any dividends from Banco Galicia during 2020. However, Grupo Financiero Galicia did distribute dividends to its shareholders during 2020 as indicated below. The extent to which a banking subsidiary may extend credit or otherwise provide funds to a holding company is limited by BCRA rules. For a description of these rules, see Item 4. “Information on the Company-Argentine Banking Regulation-Lending Limits.” During fiscal years 2018 and 2019, Grupo Financiero Galicia received from its subsidiaries dividends for Ps.1,152 million (equivalent to Ps.3,094 million as of December 2020), and Ps.2,392 million (equivalent to Ps.4,140 as of December 2020), respectively. During fiscal year 2020, Grupo Financiero Galicia received dividends for Ps.2,367 million (equivalent to Ps.2,725 million as of December 2020) from Sudamericana Holding S.A.; Galicia Warrants S.A.; Galicia Administradora de Fondos S.A.U and Tarjetas Regionales S.A. During February 2021, Sudamericana Holding paid a cash dividend of Ps.963 million and during March 2021 the Shareholders’ meeting of Galicia Warrants, Galicia Administradora de Fondos and Galicia Securities announced dividends to be paid in cash during April 2021, for Ps.40 million, Ps.800 million and Ps.150 million respectively. According to Grupo Financiero Galicia’s policy for the distribution of dividends and due to Grupo Financiero Galicia’s financial condition for the fiscal year ended December 31, 2020 and the fact that most of the profits for fiscal years 2018 and 2019 also corresponded to income from holdings (with just a fraction corresponding to the realized and liquid profits meeting the requirements to be distributed as per Section 68 of the Corporations Law) a proposal was made by the Board of Directors, to be treated at the next Shareholders’ Meeting to be held on April 27, 2021. The proposal was to absorb the negative results generated by the application of the accounting inflation adjustment method and to distribute a cash dividend for an amount that, when inflation adjusted, pursuant to Resolution 777/2018 of the Argentine Securities Exchange Commission, results in Ps.1,500,000,000 (which represents 101,7161%) being distributed with regard to 1,474,692,091 class A and B ordinary shares, with a face value of Ps.1 each, through the partial reduction of the discretionary reserve for future dividends’ distributions created during the year 2020. For fiscal year 2018, the shareholders’ meeting held on April 25, 2019 approved the distribution of cash dividends for Ps.2,000 million, (equivalent to Ps.3,515 million as of December 2020), which represented a dividend of 140.18% with respect to 1,426,764,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each. Similarly, for fiscal year 2019, the shareholders’ meeting held on September 22, 2020 approved the distribution of cash dividends for Ps.1,700 million (equivalent to Ps.1,893 million as of December 2020), which represented a dividend of 119.1507% with respect to 1,426,764,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each. Due to Act. No. 27,260, Grupo Financiero Galicia neither reimbursed nor withheld any amount for tax purposes on the dividends paid for fiscal year 2018. For fiscal year 2019, pursuant to what is set forth in the third paragraph of the article without number incorporated after article 25 of Act No. 23,966, replaced by article 4 of Act No. 26,452, when corresponding, Grupo Financiero Galicia was reimbursed of the amounts paid for the fiscal year 2019 in its capacity as substitute taxpayer of the shareholders’ subject to the tax on personal assets. Similarly, for fiscal year 2020, Grupo Financiero Galicia will withhold, when corresponding, some amount for taxes on personal assets on the dividends to be distributed. As of December 31, 2020, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount of Ps.0.8 million, short-term investments made up of special checking account deposits, mutual funds and government securities and foreign currency in an amount of Ps.645 million. As of December 31, 2019, Grupo Financiero Galicia, on an individual basis, had cash and amounts due from banks in an amount of Ps.0.3 million, short-term investments made up of special checking account deposits, mutual funds and government securities and foreign currency in an amount of Ps.810 million (equivalent to Ps.1,103 as of December 2020). As of December 31, 2018, Grupo Financiero Galicia, on an individual basis, had cash and amounts due from banks in an amount of Ps.0.2 million and short-term investments made up of special checking account deposits, mutual funds and government securities and foreign currency in an amount of Ps.885 million, (equivalent to Ps.1,854 million as of December 2020). During fiscal year 2020, Grupo Financiero Galicia made capital contributions for a total amount of Ps.1,081 million (equivalent to Ps.1,167 million as of December 2020), Ps.1,000 million were applied to Tarjetas Regionales, Ps.4 million to IGAM and Ps.77 million to Galicia Securities. For a description of the notes issued by Grupo Financiero Galicia, see —Item 5.A. “Operating Results” —” Debt Programs”. Each of our subsidiaries is responsible for their own liquidity management. For a discussion of Banco Galicia’s liquidity management, see “Banco Galicia’s Liquidity Management-Banco Galicia Liquidity Management”. B.2 Consolidated Cash Flows Our consolidated statements of cash flows were prepared in accordance with IAS 7 (Statements of Cash Flows). See our consolidated cash flow statements as of and for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018 included in this annual report. As of December 31, 2020, on a consolidated basis, we had Ps.378,820 million in available cash (defined as total cash and cash equivalents), representing a Ps.62,812 million increase as compared to the Ps.316,008 million in available cash as of December 31, 2019. As of December 31, 2019, on a consolidated basis, we had Ps.316,008 million in available cash, representing a Ps.157,025 million decrease as compared to the Ps.473,033 million in available cash as of December 31, 2018. Cash equivalents are comprised of the following: BCRA debt instruments having a remaining maturity that does not exceed 90 days, securities in connection with reverse repurchase agreement transactions with the BCRA, local interbank loans and overnight placements in correspondent banks abroad. Cash equivalents also comprise, in the case of Tarjetas Regionales, time deposit certificates and mutual fund shares. The table below summarizes the information from our consolidated statements of cash flows for the fiscal years ended December 31, 2020, 2019 and 2018.
Net Cash (used in)/generated by Operating Activities Net Cash (used in)/generated by Investment Activities Net Cash (used in)/generated by Financing Activities Exchange income/(losses) on Cash and Cash Equivalents Net increase (decrease) in cash and cash equivalents Monetary loss related to cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year Our operating activities include the operating results, the origination of loans and other financing transactions with the private sector, as well as raising customer deposits and entering into sales of government securities under repurchase agreement transactions. Our investing activities primarily consist of the acquisition of equity investments and purchasing of bank premises and equipment. Our financing activities include issuing bonds in the local and foreign capital markets and borrowing from foreign and local banks and international credit agencies. Management believes that cash flows from operations and available cash and cash equivalent balances, will be sufficient to fund our financial commitments and capital expenditures for fiscal year 2021. i) Cash Flows from Operating Activities
Cash Flows from Operating Activities Income before Taxes from Continuing Operations Adjustment to Obtain the Operating Activities Flows: Loan and other Receivables Loss Provisions Depreciation and Impairment of Assets Loss on Net Monetary Position Other Operations Net Increases/(Decreases) from Operating Assets: Debt securities measured at fair value through profit or loss Derivative Financial Instruments Repurchase Transactions Other Financial Assets Net Loans and Other Financing - Non-financial Public Sector - Other Financial Institutions - Non-financial Private Sector and Residents Abroad Other Debt Securities Financial Assets Pledged as Collateral Investments in Equity Instruments Other Non-financial Assets Non-current Assets Held for Sale Net Increases/(Decreases) from Operating Liabilities: Deposits - Non-financial Public Sector - Financial Sector - Non-financial Private Sector and Residents Abroad Liabilities at fair value through profit or loss Derivative Financial Instruments Other Financial Liabilities Provisions Other Non-financial Liabilities Income Tax Collections/Payments Net Cash (used in)/generated by Operating Activities In fiscal year 2020, net cash generated by operating activities including the inflationary effect amounted to Ps.183,754 million, mainly due to a Ps.120,123 million net increase in net cash generated from deposits from the non-financial private sector and from residents abroad. Such amount was partially offset by net cash used of Ps.70,130 million related to an increase in net loans and other financing to the non-financial private sector and to residents abroad. In fiscal year 2019, net cash used in operating activities including the inflationary effect amounted to Ps.26,226 million, mainly due to: (i) a Ps.201,920 million net decrease in deposits to non-financial private sector and residents abroad and (ii) a Ps.40,408 million decrease in other financial liabilities. Such amount was partially offset by net cash provided by Ps.72,480 million related to a decrease in net loans and other financing to non-financial private sector and residents abroad. In fiscal year 2018, net cash generated by operating activities including the inflationary effect amounted to Ps.188,241 million, mainly due to: (i) a Ps.117,987 million increase in deposits from non-financial private sector and residents abroad, (ii) a Ps.25,023 million decrease in debt securities measured at fair value through profit or loss and (iii) a Ps.21,471 million decrease in non-current assets held for sale, partially offset due to: (i) a Ps.28,998 million increase in loans to non-financial private sector and residents abroad, (ii) a Ps.21,449 million increase in other debt securities and (iii) Ps.20,447 million decrease in other non-financial liabilities. ii) Cash Flows from Investing Activities
Cash Flows from Investment Operations Payments: Purchase of PP&E, Intangible Assets and Other Assets Interests in other companies Collections: Sale of PP&E, Intangible Assets and Other Assets Dividends earned Net Cash (used in)/generated by Investment Activities In fiscal year 2020, net cash used in investing activities amounted to Ps.6,782 million mainly attributable to the acquisition of property, plant and equipment, intangible assets and other assets for Ps.7,124 million. Such amount was partially offset by funds provided by the sale of property, plants and equipment, intangible assets and other assets for Ps.265 million and for the dividends received from investment in equity instruments for Ps.179 million. In fiscal year 2019, net cash used in investing activities amounted to Ps.7,103 million mainly attributable to the acquisition of property, plants and equipment, intangible assets and other assets for Ps.10,751 million. Such amount was partially offset by funds provided by the sale of property, plants and equipment, intangible assets and other assets for Ps.3,648 million. In fiscal year 2018, net cash used in investing activities amounted to Ps.7,510 million mainly attributable to the acquisition of property, plant and equipment, intangible assets and other assets for Ps.7,723 million. iii) Cash Flows from Financing Activities
In fiscal year 2020, net cash used in financing activities amounted to Ps.35,106 million due to: (i) Ps.35,157 million as consequence of payments of loans obtained from local financial institutions and (ii) Ps.27,839 million of payments of principal and interest on unsubordinated debt securities issued by Grupo Financiero Galicia or its subsidiaries. Such amount was partially offset by: (i) funds provided by loans from local financial institutions for Ps.19,531 million and (ii) issuances by Grupo Financiero Galicia or its subsidiaries of unsubordinated debt securities for approximately Ps.11,728 million during 2020. In fiscal year 2019, net cash used in financing activities amounted to Ps.25,098 million due to: (i) Ps.70,419 million as consequence of payments of loans obtained from local financial institutions, (ii) Ps.20,826 million of payments of principal and interest on unsubordinated debt securities issued by Grupo Financiero Galicia or its subsidiaries, (iii) Ps.3,622 million of payments of dividends and (iv) Ps.1,362 million for leases payments. Such amount was partially offset by funds provided by loans from local financial institutions for Ps.63,225 million. In fiscal year 2018, financing activities provided cash in the amount of Ps.16,409 million due to: (i) an increase in loans from local financial institutions for Ps.24,870 million,(ii) issuances by Grupo Financiero Galicia or its subsidiaries of unsubordinated debt securities for approximately Ps.23,558 million during 2018 and (iii) Ps.6,771 million of the payments of principal and interest on subordinated debt securities. Such amount was partially offset by funds provided by loans from local financial institutions for Ps.25,579 million. iv) Effect of Exchange Rate on Cash and Cash Equivalents In fiscal year 2020, the effect of the exchange rate on consolidated cash flow amounted to Ps.32,806 million, a decrease of Ps.36.729 million as compared to fiscal year 2019. The exchange rate as of December 31, 2020 was Ps.84,145 per US$1. In fiscal year 2019, the effect of the exchange rate on consolidated cash flow amounted to Ps.69,535 million, a decrease of Ps.24,623 million as compared to fiscal year 2018. The exchange rate as of December 31, 2019 was Ps.59.8950 per US$1. In fiscal year 2018, the effect of the exchange rate on consolidated cash flow amounted to Ps.94,158 million. The exchange rate as of December 31, 2018 was Ps.37.8083 per US$1. For a description of the types of financial interests we use and the maturity profile of our debt, currency and interest rate structure, see Item 5. “Operating and Financial Review and Prospects”— A.“Operating Results”. B.3 Liquidity Management i) Liquidity Gaps Liquidity risk is the risk that Grupo Financiero Galicia does not have a sufficient level of liquid assets to meet its contractual commitments and the operational needs of the business without affecting market prices. The goal of liquidity management is to maintain an adequate level of liquid assets that allows it to meet financial commitments at contractual maturity, take advantage of potential investment opportunities and meet demand for credit. To monitor and control liquidity risk, Grupo Financiero Galicia monitors and systematically calculates gaps in liquidity through the application of an internal model that is subject to periodic review. Grupo Financiero Galicia’s liquidity policy covers three areas of liquidity risk:
As of December 31, 2020, the consolidated gaps between maturities of Grupo Financiero Galicia´s financial assets and liabilities based on contractual remaining maturity were as follows:
The table above is prepared taking into account contractual maturity. Therefore, all financial assets and liabilities with no maturity date are included in the “Less than One Year” category. Banco Galicia must comply with a maximum limit set by its board of directors for liquidity mismatches. This limit has been established at -25% (minus 25%) for the ratio of cumulative gap to total liabilities within the first year. Banco Galicia complies with the established policy, since such gap was of 7% as of December 2020. ii) Banco Galicia Liquidity Management The following is a discussion of Banco Galicia’s liquidity management. Banco Galicia’s policy is to maintain a level of liquid assets that allows it to meet financial commitments at contractual maturity, take advantage of potential investment opportunities, and meet customer’s credit demand. To set the appropriate level, forecasts are made based on historical experience and on an analysis of possible scenarios. This enables management to project funding needs and alternative funding sources, as well as excess liquidity and placement strategies for such funds. As of December 31, 2020, Banco Galicia’s liquidity structure was as follows:
Legal requirements correspond to the minimum cash requirements for Peso- and foreign currency-denominated assets and liabilities as per the rules and regulations of the BCRA. The assets that can be taken into account for compliance with this requirement are the balances of the Peso- and foreign currency-denominated deposit accounts at the BCRA, the liquidity bills and Bote 2020, and the escrow accounts held at the BCRA in favor of clearing houses. Management liquidity, defined as a percentage over deposits and other liabilities, is made up of the following items: balances of checking accounts held by the BCRA exceeding minimum cash requirements, Letes, Leliq and placements held by the BCRA, overnight placements in banks abroad, net short-term interbank loans (call loans), technical cash and placements at the BCRA in excess of the amounts necessary to cover minimum cash requirements. B.4 Capital Our capital management policy is designed to ensure prudent levels of capital. The following table analyzes our capital resources as of the dates indicated.
For information on our capital adequacy and that of our operating subsidiaries, see Item 4. “Information on the Company”—B.“Business Overview”—“Selected Statistical Information”—“Regulatory Capital”. B.5 Capital Expenditures In the ordinary course of business, our capital expenditures are mainly related to fixed assets, construction and organizational and IT system development. Generally, our capital expenditures are not significant when compared to our total assets. For a more detailed description of our capital expenditures in 2020 and our capital commitments for 2021, see Item 4. “Information on the Company”— A. “History and Development of the Company”—“Capital Investments and Divestitures”. For a description of financing of our capital expenditures, see —“Consolidated Cash Flows”. C. Research and Development, Patents and Licenses Not applicable. See Item 5. “Operating and Financial Review and Prospects”-A.“Operating Results” – “Principal Trends”. E. Off-Balance Sheet Arrangements See Item 5. “Operating and Financial Review and Prospects”—A. “Operating Results”— “Off-Balance Sheet Arrangements” and “Contractual Obligations”. See Item 5. “Operating and Financial Review and Prospects”—A. “Operating Results”—“Contractual Obligations”. These matters are discussed under “Forward-Looking Statements.”
A. Directors and Senior Management Our Board of Directors Our ordinary and extraordinary shareholders’ meeting took place on April 28, 2020. The following table sets out the members of our Board of Directors as of that date (all of whom reside in Buenos Aires, Argentina), the positions they hold within Grupo Financiero Galicia, their dates of birth, their principal occupations and the dates of their appointment and on which their current terms will expire. Terms expire when the annual shareholders’ meeting takes place.
The following is a summary of the biographies of the members of our Board of Directors: Eduardo J. Escasany: Mr. Escasany obtained a degree in economics at the Universidad Católica Argentina. He was associated with Banco Galicia from 1973 to 2002. He was appointed to Banco Galicia’s board of directors in 1975. In 1979, he was elected as the vice chairman and from 1989 to March 21, 2002 he served as the chairman of Banco Galicia’s board of directors and its chief executive officer. He served as the vice chairman of the Argentine Bankers Association from 1989 to 1993 and the chairman of such association from 1993 to 2002. He was chairman of the Board of Directors from April 2002 to June 2002. In April 2005, he was re-elected as member of the Board of Directors and appointed as chairman in 2010. He is also a lifetime trustee and chairman of the Fundación Banco de Galicia y Buenos Aires. He is the chairman of Helena Emprendimientos Inmobiliarios S.A. and an alternate director for RPE Distribución S.A. and Hidro Distribución S.A. Mr. Escasany is Mr. Silvestre Vila Moret’s uncle. Pablo Gutierrez: Mr. Gutierrez obtained a degree in business administration at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1985, where he served in different positions. In April 2005, he was appointed to the board of directors of Banco Galicia. Mr. Gutierrez is regular director of Tarjetas Regionales, and Naranja and a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires. He was an alternate director of Grupo Financiero Galicia from April 2003 to April 2010 when he was appointed as principal Director. In April 2012, he was appointed as the vice chairman of Grupo Financiero Galicia. Mr. Gutierrez is Mr. Abel Ayerza’s nephew.
Abel Ayerza: Mr. Ayerza obtained a degree in business administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1966 to 2002. Mr. Ayerza is also second vice chairman of the Fundación Banco de Galicia y Buenos Aires and the managing partner of Cribelco S.R.L., Crisabe S.R.L. and Huinca Cereales S.R.L. He has been a member of the Board of Directors since September 1999. Mr. Ayerza is the uncle of Mr. Pablo Gutierrez. Federico Braun: Mr. Braun obtained a degree in industrial engineering at the Universidad de Buenos Aires. He was associated with Banco Galicia from 1984 to 2002. Mr. Braun is also the chairman of Patagonia Logística S.A., Campos de la Patagonia S.A., Estancia Anita S.A., Tarjeta del Mar and S.A. Importadora y Exportadora de la Patagonia; the vice chairman of Asociación Empresaria Argentina and Asociación de Supermercados Unidos. He is a director of Inmobiliaria Financiera “La Josefina” S.A. and an alternate director of Martseb S.A. He is a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires. He has been a member of the Board of Directors since September 1999. Silvestre Vila Moret: Mr. Vila Moret obtained a degree in banking administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1997 until May 2002. Mr. Vila Moret is also director of El Benteveo S.A. and Santa Ofelia S.A. He has served as on the Board of Directors since June 2002. He is a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires. Mr. Vila Moret is the nephew of Mr. Eduardo J. Escasany. Daniel Llambías: Mr. Llambías obtained a degree in national public accounting at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1964. He was elected as an alternate director of Banco Galicia in September 1997 and served as a director from September 2001 until August 2009, when he was appointed Chief Executive Officer. Mr. Llambías is also a director of Naranja and Tarjetas Regionales and an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. He served as the chairman of ADEBA from April 2016 to April 2017. Mr. Llambías was appointed as a director of Grupo Financiero Galicia in April 2017. Pedro Alberto Richards: Mr. Richards obtained a degree in economics from the Universidad Católica Argentina. He holds a Master of Science in Management from the Sloan School of Management at the Massachusetts Institute of Technology. He was the director of the National Development Bank. He has been associated with Banco Galicia since 1990. He was a member of the board of directors of Galicia Capital Markets S.A. between 1992 and 1994 and vice chairman of Net Investment between September 2001 and May 2007. Since August 2000, he served as Grupo Financiero Galicia’s managing director and from 2010 to 2020 as our Chief Executive Officer. Mr. Richards is also Director of Galicia Warrants, and director of Galicia Administradora de Fondos S.A. Mr. Richards was an alternate director of Grupo Financiero Galicia from April 2003 until April 2005, after which he served as a director until April 14, 2010. He was appointed as a director of Grupo Financiero Galicia in April 2017. Miguel C. Maxwell: Mr. Maxwell obtained a degree in national public accounting at the Universidad de Buenos Aires in 1979 and in 1986 he completed the High Management Program - Instituto de Altos Estudios Empresariales (IAE) - Buenos Aires (Harvard Business School - University of Navarra). He developed his professional career at Deloitte & Co. S.A., where, after being promoted to Audit Partner and leading the Audit business in Argentina, he reached the position of CEO of Argentina and LATCO (15 countries) and is a current member of the Board of Deloitte Touche Tohmatsu. Currently, he is the Chairman of the Advisory Board of Llorente & Cuenca (LLYC), Director of Grupo Financiero Galicia S.A. and José M. Alladio e Hijos S.A. and current syndic of LIAG Argentina S.A. and Importadora y Exportadora del Norte S.A. He is also current member of the Boards of Directors of the Asociación Argentina de Cultura Inglesa, Club Champagnat and the Rotary Club of Buenos Aires and Accounts Reviewer of the Harvard Club of Argentina. He was appointed as regular director of Grupo Financiero Galicia in April 2020. Claudia Raquel Estecho: Mrs. Estecho obtained a degree in accounting at the Universidad de Buenos Aires. She has also completed specialized training programs in the areas of Human Resources, Risk and Executive Management at the Universidad Austral. She held different positions at Banco Galicia since 1976 to 2016 in the areas of Finance, Planning and Risk Management. She was appointed as regular director of Grupo Financiero Galicia in April 2019. Ricardo Alberto Gonzalez: Mr. Gonzalez served in various positions at Banco Galicia between 1973 and December 2009, mainly in the retail division and the credit department. He retired as general manager of the corporate banking division. In April 2019, he was appointed as alternate director of Grupo Financiero Galicia. Sergio Grinenco: Mr. Grinenco obtained a degree in economics from the Universidad Católica Argentina and a master’s in business administration from Babson College in Wellesley, Massachusetts. He has been associated with Banco Galicia since 1977. He has served as an alternate director of Grupo Financiero Galicia since September 2001 and as the vice chairman from April 2003 to 2011. Mr. Grinenco is also an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. In 2012, he was appointed as the chairman of Banco Galicia. Alejandro María Rojas Lagarde: Mr. Rojas obtained a degree in law from the Universidad de Buenos Aires. He has held a variety of positions at Banco Galicia since 1963. From 1965 to January 2000, he served as the general counsel office of Banco Galicia. He has served as an alternate director of Grupo Financiero Galicia since 2000. He is also a manager of Rojas Lagarde S.R.L., alternate director of Santiago Salud S.A. and a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires. Ana María Bertolino: Mrs. Bertolino obtained a degree in law from Universidad de Buenos Aires. She joined Banco Galicia in 1972 and has held positions in Credit and Corporate Banking, until 2009. She was appointed as an alternate director of Grupo Financiero Galicia in April 2019. Our Board of Directors may consist of between three and nine permanent members. Currently our Board of Directors has nine members. In addition, the number of alternate directors who act in the temporary or permanent absence of a director has been set at four. The regular and alternate directors are elected by the shareholders at our annual general shareholders’ meeting. Directors and alternate directors are elected for a maximum term of three years. Mr. Sergio Grinenco is also a director of Banco Galicia. In addition, some members of our Board of Directors may serve on the board of directors of any subsidiary. Five of our directors are members of the families that are the controlling shareholders of Grupo Financiero Galicia. Our Audit Committee Grupo Financiero Galicia complies with the provisions set forth by the Capital Markets Law and the regulations set forth by the CNV, which require that companies which make a public offering of shares should form an Audit Committee and develop a charter with regulations for its operation. Accordingly, the Board of Directors established an Audit Committee with three members. For fiscal year 2020, Messrs. Claudia Estecho, Daniel Llambías and Miguel Maxwell were the members of the Audit Committee, with Claudia Estecho and Miguel Maxwell considered independent pursuant to the CNV and Nasdaq requirements. All members of the Audit Committee are financially literate and have extensive experience in management. Mr. Daniel Llambías, was the financial expert serving on our Audit Committee during fiscal year 2020. In April 2020, Mr. Miguel Maxwell replaced Mr. Ricardo Gonzalez who had presented his resignation as Regular Director. According to the CNV rules, the Audit Committee is primarily responsible for (i) issuing a report on the Board of Directors’ proposals for the appointment of the independent auditors and the compensation for the Directors, (ii) issuing a report detailing the activities performed according to the CNV requirements, (iii) issuing the Audit Committee’s annual plan and implementing it each fiscal year, (iv) evaluating the external auditors’ independence, work plans and performance, (v) evaluating the plans and performance of the internal auditors, (vi) supervising the reliability of our internal control systems, including the accounting system, and of external reporting of financial or other information, (vii) following-up on the use of information policies on risk management at Grupo Financiero Galicia’s main subsidiaries, (viii) evaluating the reliability of the financial information to be filed with the CNV and the SEC, (ix) verifying compliance with the applicable conduct rules, and (x) issuing a report on related party transactions and disclosing any transaction where a conflict of interest exists with corporate governance bodies and controlling shareholders. The Audit Committee has access to all information and documentation that it requires and is broadly empowered to fulfill its duties. During 2020, the Audit Committee held twelve meetings. Our Executive Committee The Executive Committee was created to assist with the management of the Company’s ordinary business and help the Board of Directors in fulfilling its duties. The Committee is composed of between two and five members of the Board of Directors and the President of the Board of Directors acts as its chairman. The duties of this committee include: gathering legal, economic, financial and business information on the Company’s subsidiaries and investee companies; making investment decisions; appointing the Company’s Our Ethics, Conduct and Integrity Committee The Ethics, Conduct and Integrity Committee was created as part of the Company’s Ethics and Integrity Program, in order to promote respect for norms and regulations, the principles of good conduct and our Code of Ethics. The objective of this Committee, (apart from complying with the duties required to be performed by applicable Argentine laws), is to monitor and review reports of conducts contrary to our Code of Ethics, and to decide whether the conduct under review violated our Code of Ethics; evaluate the evolution and effectiveness of our Ethics and Integrity Program; and plan, coordinate and supervise compliance with the relevant policies approved by this Committee. This committee is formed by two independent Directors, the Chief Financial Officer, the responsible for the Integrity program of the Company and is chaired by one of regular Directors. The members are the two independent directors, Messrs. Claudia Estecho and Miguel Maxwell, José Luis Ronsini and Adrián Enrique Pedemonte. Our Nomination and Compensation Committee The Nomination and Compensation Committee was created to facilitate the analysis and monitoring of several issues based on good corporate governance practices. Said Committee is composed of 5 regular Directors, two of them independent and is chaired by of one independent Director. Even though under Argentine law the appointment of new members to the Board of Directors remains within exclusive power of the shareholders, this Committee assists the Board of Directors in the preparation and design of a succession plan for its members, in particular for the Chairman of the Board and the Chairman of the Audit Committee. This committee reviews the background, training and professional experience of potential candidates to serve the Board and determines their level of compensation in accordance with market standards. The members of the committee are the two independent directors, Messrs. Claudia Estecho and Miguel Maxwell, Eduardo J. Escasany, Pablo Gutierrez and Federico Braun. Our Disclosure Committee We have established a Disclosure Committee in response to the U.S. Sarbanes-Oxley Act of 2002. The main responsibility of this committee is to review and approve controls on the public disclosure of financial and related information, and other procedures necessary that enable our Chief Executive Officer and Chief Financial Officer to provide their certifications for the annual report we file with the SEC. The members of this committee are Messrs. Fabian Kon, Bruno Folino, José Luis Ronsini, Adrián Enrique Pedemonte and Ms. Mariana Saavedra. In addition, at least one of the members of this committee attends all the meetings of our principal subsidiaries’ disclosure committees. Our Supervisory Committee Our bylaws provide for a Supervisory Committee consisting of three members who are referred to as syndics (“syndics”) and three alternate members who are referred to as alternate syndics (“alternate syndics”). In accordance with the Corporations Law and our bylaws, the syndics and alternate syndics are responsible for ensuring that all of our actions are in accordance with applicable Argentine law. Syndics and alternate syndics are elected by the shareholders at the annual general shareholders’ meeting. Syndics and alternate syndics do not have management functions. Syndics are responsible for, among other things, preparing a report to shareholders analyzing our financial statements for each year and recommending to the shareholders whether to approve such financial statements. Alternate syndics act in the temporary or permanent absence of a syndic. Currently, there are three syndics and three alternate syndics. Syndics and alternate syndics are elected for a one-year term. The following table shows the members of our Supervisory Committee. Each of our syndics was appointed at the ordinary shareholders’ meeting held on April 28, 2020. Terms expire when the annual shareholders’ meeting takes place or as set forth below.
The following is a summary of the biographies of the members of our Supervisory Committee: Antonio Roberto Garcés: Mr. Garcés obtained a degree in accounting from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1959 and with Grupo Financiero Galicia since 2002. In April 1985, he was appointed as an alternate director of Banco Galicia. Subsequently, he was appointed as the vice chairman of Banco Galicia in September 2001, as the chairman of the board of directors of Banco Galicia from March 2002 until August 2002 and then as the vice chairman from August 2002 until April 2003, when he was elected to serve as chairman of Banco Galicia’s board of directors until 2011. From 2003 to 2010 he was the chairman of Grupo Financiero Galicia. From April 2012 until April 2019, Mr. Garcés was appointed as a regular director of Grupo Financiero Galicia. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2019. Additionally, he is a regular syndic of Inviu, Galicia Warrants and Naranja. José Luis Gentile: Mr. Gentile obtained a degree in accounting from the Universidad de Buenos Aires. He has provided services to Grupo Financiero Galicia since 1999 to March 2017. He served as Chief Financial Officer from 2003 to 2017. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2017. Additionally, he is a regular syndic of Inviu and Galicia Warrants, and an alternate syndic of Cobranzas Regionales, Naranja, and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia. Omar Severini: Mr. Severini obtained a degree in accounting from the Universidad de Belgrano and a degree in finance with a concentration in capital markets from UCEMA. He has been associated with Banco Galicia since 1978 and served in positions responsible for the regular audit from 1986 to 2009. He served as Internal Auditor Manager to Banco Galicia between 2009 and 2017. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2018. Additionally, he is a regular syndic of Inviu, Galicia Warrants, Tarjetas Regionales, Naranja, and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia. Miguel Norberto Armando: Mr. Armando obtained a law degree from the Universidad de Buenos Aires. He was first elected as an alternate syndic of Banco Galicia from 1986 until 2017. He also acted as an alternate syndic of Grupo Financiero Galicia between 1999 and January 2009 at which point, he became a regular syndic until April 2009 and was reelected as an alternate syndic of Grupo Financiero Galicia until April 2018. He was elected as an alternate syndic of Banco Galicia and Grupo Financiero Galicia in April 2019. He is the chairman of Arnoar S.A. Mr. Armando is also a regular syndic of EBA Holding S.A., Electrigal S.A. and an alternate syndic of Inviu, Galicia Seguros, Sudamericana Holding, Marin and Finisterra, among others. Fernando Noetinger: Mr. Noetinger obtained a law degree from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1987. He was and has been an alternate syndic of Grupo Financiero Galicia from September 1999 to June 2002 and from April 2006 to date. Mr. Noetinger is also chairman of Villa Rosa S.A. and Doña Ines S.A., an alternate director of Arnoar S.A., and an alternate syndic of EBA Holding S.A., Electrigal S.A., Tarjetas Regionales, Galicia Warrants, Inviu, Banco Galicia, Galicia Retiro, Galicia Seguros, and Sudamericana Holding, among others. Maria Matilde Hoening: Mrs. Hoening obtained a law degree from the Universidad de Buenos Aires. She has been associated with Banco Galicia since 1971 and served in different positions until 2009. She was appointed as an alternate syndic of Banco Galicia and Grupo Financiero Galicia in 2020. Management of Grupo Financiero Galicia Our organizational structure consists of the Chief Executive Officer who reports to the Board of Directors, and the Chief Financial Officer & Compliance Officer (CFO&CO), Chief Risk Officer (CRO) and Investor Relations Officer (IRO) each of whom reports to the Chief Executive Officer. The Chief Executive Officer’s primary responsibilities consist of implementing the policies defined by the Board of Directors, as well as providing recommendations to the Executive Committee regarding future plans, budgets and company organization to be considered by the Board of Directors. He is also responsible for supervising the CFO&CO, CRO and IRO. The Chief Financial Officer & Compliance is responsible for the designing of the financial and budgeting planning to be considered by the Executive Committee, including: proposing the framework of financial policies and applicable regulatory compliance with respect to controlled and investee companies, proposing the strategy and development of new businesses for GFG; monitoring the budget of controlled and investee companies, designing and proposing to the Executive Committee the policies in relation to tax, accounting and legal advisory services of GFG and its subsidiaries and investees; supervising the regulatory compliance framework applicable to GFG and its subsidiaries and affiliates and coordinating the operation of GFG’s administrative structure. The Chief Risk Officer is responsible for advising on the design of the GFG’s Risk Management strategy and proposing the Executive Committee the Risk policies for the subsidiaries, supervising Risk management considering BCRA regulations and monitoring compliance of policies, rating process and fraud prevention. The Investor Relations Officer is responsible for coordinating the institutional and investor relations activities at GFG. Our Chief Executive Officer is Mr. Fabian Kon. Mr. Kon obtained a degree in national public accounting from the Universidad de Buenos Aires. He has worked at Pistrelli, Diaz y Asociados, Accenture, Exolgan Container Terminal and Tradecom, in managerial positions. From 2006 to February 2014, he served as Galicia Seguros’ Chief Executive Officer and was appointed as Banco Galicia’s retail banking manager in March 2014. On October 7, 2015, Mr. Fabián Enrique Kon was appointed as the Chief Executive Officer of Banco Galicia. Mr. Kon is also the chairman of Sudamericana Holding, vice chairman of Tarjetas Regionales and director of Naranja. He was appointed as the Chief Executive Officer of Grupo Financiero Galicia since July 2020. Our Chief Financial Officer is Mr. Bruno Folino. Mr. Folino obtained an accounting degree from the Universidad de Buenos Aires. He completed a post-graduate degree in Tax & Legal at the Universidad Austral and a Master in Science of Management from GSB Stanford University. He started his career as an auditor at Price Waterhouse & Co. before moving to the Tax & Legal Department. He has been associated with Banco Galicia since 1997 as Tax Manager and Planning Manager. He was appointed as the Chief Financial Officer & Compliance of Grupo Financiero since July 2020. Galicia. On March 2021, he was appointed Bank’s Risk Manager. Our Chief Risk Officer is Mr. Diego Rivas. Mr. Rivas obtained a degree in business administration from the Universidad Argentina de la Empresa. He also completed a postgraduate degree in finance at the CEMA and management development programs at IMD in Lausanne, Switzerland, as well as a postgraduate degree in Risk Management at the Wharton School at University of Pennsylvania. Mr. Rivas has been associated with Banco Galicia since 1987. In May 2016, he was appointed Risk Manager of Banco Galicia. Mr. Rivas is also vice chairman of Ondara and an alternate director of Naranja. He was appointed as the Chief Risk Officer of Grupo Financiero Galicia since July 2020. On March 2021, he was appointed Bank’s Planning Manager. Our Investor Relations Officer is Mr. Pablo Firvida. Mr. Firvida obtained a degree in Industrial Engineering at the Universidad de Buenos Aires (UBA) and a Master in Finance at the Universidad del CEMA. He also attended a course of “ Management Development Program” at the IAE Business School. From 1990 to 1992 he worked as an economic analyst at the Compañía General de Combustibles. Later, from 1992 to 1996, he was an associate in “Investment Banking” at the Banco General de Negocios. Afterwards, from 1996 to 2003, he worked at Banco Galicia Capital Markets. From 2003 to 2008 he served as the Institutional Investor Relations Manager at Grupo Financiero Galicia. Since 2008 he has been working for Banco Galicia. In 2014 he was appointed the Banco Galicia Manager of Institutional and Investor Relations. He was appointed as Investor Relations Officer of Grupo Financiero Galicia since July 2020. Board of Directors of Banco Galicia At the ordinary shareholders’ meeting held on April 28, 2020, the size of Banco Galicia’s board of directors was set at six members and three alternate directors. The following table sets forth the members of Banco Galicia’s board of directors as of April 28, 2020, all of whom are residents of Buenos Aires, Argentina, the position currently held by each of them, their dates of birth, their principal occupations, the dates of their appointment and the year in which their current terms will expire. The business address of the members of the Banco Galicia’s board of directors is Tte. General J. D. Perón 430, 24th floor (C1038AAI) Buenos Aires, Argentina.
The following are the biographies of the members of the board of directors of Banco Galicia: Sergio Grinenco: See “—Our Board of Directors”. Raúl Héctor Seoane: Mr. Seoane obtained a degree in economics from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1988. Mr. Seoane was first elected as an alternate director of Banco Galicia from 2005 until December 2011, and in April 2012 was elected as a director. He is also a vice chairman of Distrocuyo S.A. and an alternate trustee of Fundación Banco de Galicia y Buenos Aires. Guillermo Juan Pando: Mr. Pando has been associated with Banco Galicia since 1969. He was first elected as an alternate director of Banco Galicia from September 2001 until June 2002, and in April 2003 he was elected as a director. He is also the chairman of Santiago Salud S.A. and Distrocuyo S.A., vice chairman of Electrigal S.A., and an alternate trustee of Fundación Banco de Galicia y Buenos Aires. María Elena Casasnovas: Mrs. Casasnovas obtained a degree in law from the Universidad Católica Argentina. She completed the Program for High Management at Universidad Torcuato Di Tella and the Senior Management Program at Universidad San Andrés. She has been associated with Banco Galicia since 1972. In April 2016, she was elected as a director. Juan Carlos L’Afflitto: Mr. L’Afflitto obtained a degree in national public accounting at the Universidad de Buenos Aires. He worked as advisor and accountant at Morgan, Benedit y Asociados and until 1990 he was a professor at the Universidad Católica Argentina. He has been associated with Banco Galicia since 1986. In April 2016, he was elected as a director. Gastón Bourdieu: Mr. Bourdieu obtained a degree in agricultural administration from the Universidad Argentina de la Empresa. He has been associated with Banco Galicia from 1981 to 2017. He was appointed as a director of Banco Galicia in April 2018. He is also a director of Maradona S.A. Ignacio Abel González: Mr. González obtained a degree in national public accounting from the Universidad de Buenos Aires and a master in Auditing at Drew University, New Jersey. Previously, he served as a Member of the International Committee of Finance & Value Sharing, PricewaterhouseCoopers. He was appointed as director of Banco Galicia in April 2010 and he was elected as an alternate director in April 2018. He is also director of IDEA and syndic of Sociedad Anónima La Nación, Nuevos Medios La Nación, Publirevistas, Sociedad Anónima Importadora y Exportadora de la Patagonia, and the founder and president of P.O.D.E.R (Polo de Desarrollo Educativo Renovador). Enrique García Pinto: Mr. García Pinto has been associated with Banco Galicia since 1970. Before that, he served at Nobleza Piccardo SAYCYF and Saturno Agropecuaria SCA. Mr. García Pinto was appointed as an alternate director of Banco Galicia at the shareholders’ meeting held on April 28, 2009. He is also director of Distrocuyo S.A. Augusto Rodolfo Zapiola Macnab: Mr. Zapiola Macnab obtained a degree in economics from the Pontificia Universidad Catolica Argentina. He has been associated with Banco Galicia from June 1978 until September 2002. He was elected as an alternate director of Banco Galicia in April 2013. He was elected as an alternate director on the Board of Directors of Grupo Galicia in April 2015. Functions of the Board of Directors of Banco Galicia Banco Galicia’s board of directors may consist of three to nine permanent members. In addition, there can be one or more alternate directors who can act during the temporary or permanent absence of a director. As of the date of this annual report, none of the directors were also employees. The Board of Directors meets formally at least twice a week and informally every day and is responsible for the general administration of Banco Galicia, making all the decisions required for that purpose. Members of the Bank’s Board of Directors serve in the following committees: Human Resources and Governance Committee: the Committee, is subdivided into the Nominating Committee and the Compensation Committee. The Nomination Sub-Committee is responsible for nominating successors for the roles of the General Manager and Area Managers and analyzing and setting the compensation to be paid to the General Manager and Area Managers. On the other hand, the Compensation Committee is responsible for submitting, analyzing and suggesting the level of compensation to be paid to the Board of Directors, the General Manager and Area Managers, and for monitoring the performance of Department Managers and Area Managers. Risk and Capital Allocation Committee: this committee is responsible for approving and analyzing capital allocation, setting up risk policies and monitoring risks for the High Credits Committee: this committee is responsible for approving and subscribing the qualifications and awards of operations of customers and high-risk groups. It meets at least once a week. Low Credits Committee: this committee is responsible for approving and subscribing the qualifications and awards of operations of customers and high-risk groups. It meets at least biweekly. Systems Committee: this committee is responsible for supervising and approving new systems development plans and their budgets; supervising the budgetary control of developments; approving the general designs of the systems structure, the main processes, and systems to be implemented; and supervising the quality of the services, in accordance with the policies established by the Board of Directors of Banco Galicia. Audit Committee: the Committee is responsible for assisting the Board of Directors in controlling the Bank and its controlled and investee companies, in order to reasonably ensure the following objectives: effectiveness and efficiency of operations; reliability of accounting information; compliance with applicable laws and regulations; and compliance with the objectives and strategy set by the board. Money Laundering and Terrorist Financing Prevention and Control Committee: this committee is the body in charge of planning, coordinating and ensuring compliance with the policies established in this area, upon approval by the Board of Directors. Disclosure Committee: this committee was created to comply with the provisions of the US Sarbanes-Oxley Act. Asset and Liability Committee (“ALCO”): this committee is responsible for analyzing the collection of resources and placement in different assets, monitoring and controlling liquidity gaps, interest rates and currencies and managing such gaps. Strategy and New Businesses Committee: this committee is responsible for analyzing new business. Liquidity Crisis Committee: this committee is responsible for assessing situations of liquidity crisis and deciding the actions to be implemented aimed at its resolution. It will meet when the Chairman of the Board of Directors summons it and will meet permanently until the end of the liquidity crisis. Profit and Loss Report Committee: this committee is responsible for monitoring the management and the income and evaluating macroeconomic global situations. Compliance Committee: this committee is in charge of promoting respect for the rules, principles of good conduct, the Integrity Program and the Bank’s Code of Ethics, and mitigating the non-compliance risk, through the definition of policies, the establishment of controls and reports in the best interest of the Bank, its employees, shareholders and customers. Financial Services User Protection Committee: this committee is responsible for monitoring the activities carried out by managerial levels and authorities involved in the internal process of user protection, in order to properly comply with legal and regulatory standards. Information Assets Protection Committee: this committee is responsible for generating/having an agile and professional environment for the definition of and decision-making regarding strategies/policies related to the information security of the Bank. Banco Galicia’s Supervisory Committee Banco Galicia’s bylaws provide for a Supervisory Committee consisting of three syndics and three alternate syndics. According to the General Companies Act and the BCRA regulations, the responsibility of the Syndics of the Supervisory Committee, both regular and alternate, responsibility is to ensure that all of the Bank’s actions are in accordance with applicable Argentine law. The Syndic and Alternate Syndic do not participate in the business administration of the Bank, and do not have and cannot have managerial functions. They are responsible, among other things, for preparing a report to the shareholders regarding the Bank’s financial statements of each fiscal year. The Syndic and Alternate Syndic are appointed by the shareholders at their Annual Ordinary Meeting, for one-year periods, and may be reelected. The Alternate Syndics act as Regular Syndics in case of temporary or permanent absence of the Syndics. The table below shows the composition of Banco Galicia’s Supervisory Committee as they were re-elected by the annual shareholders’ meeting held on April 28, 2020.
For the biographies of Messrs., Omar Severini, José Luis Gentile, Antonio R. Garces, Fernando Noetinger and Miguel N. Armando and María Matilde Hoening, see “—Our Supervisory Committee”. Banco Galicia’s Executive Officers On October 7, 2015, Mr. Fabián Enrique Kon was appointed as the Chief Executive Officer of Banco Galicia. The Chief Executive Officer is responsible for implementing the strategic goals established by Banco Galicia’s Board of Directors and coordinating with the Managers of the Bank’s Divisions. Mr. Kon reports to the Board of Directors. Fabián Enrique Kon: please see “— Management of Grupo Financiero Galicia” As of the date of this annual report, the following divisions and department managers report to Banco Galicia’s Chief Executive Officer:
Wholesale Banking Area Management: it is responsible for obtaining a broad segment vision and, in turn, a greater alignment with the current situation and future business perspectives. Its main responsibilities are to design, plan and implement the vision, strategies, policies and objectives for the Wholesale Banking business and for each of the customers segments, as well as to define and control business objectives, with the purpose of ensuring that they are adjusted competitively to the demands of the industry and to the strategic objectives of the Bank, guaranteeing the volume, profitability, quality and customer satisfaction, within the framework of the established risk levels. The following departments report to this division: (i) Agribusinesses and Companies (ii) Corporate Banking, Investment Banking and Capital Market, (iii) Transactional Services and (iv) Companies Tribe. Retail Banking Area Management: it is responsible for facilitating the decision-making process, improving the commercial effectiveness of the Retail Banking sector and improving the customer focus. Its main responsibilities are to design, plan and implement the vision, strategies, policies and objectives for the Retail Banking business and for each of the customers segments and distribution channels, as well as to define and control business objectives, with the purpose of ensuring that they are in tune with the competitive demands of the industry and the strategic objectives of the Bank, guaranteeing volume, profitability, quality and customer satisfaction, within the framework of the established risk levels. The following departments report to this division: (i) Retail Tribe, (ii) Contactability Tribe, (iii) Branches, (iv) Loyalty Tribe, (v) Private Banking (vi) Brand experience and (vii) Retail Planning. Financial Banking Area Management: it is responsible for administering the financial position of the Bank, negotiating rates, funds, incentives and campaigns with the different areas, and promoting the regulatory, technical and informative support in the management of assets and liabilities, in order to guarantee the control of the liquidity, rate, currency and industry risks, and compliance with current policy and legal regulations. It is also responsible for planning, proposing and implementing the strategy for the development and maintenance of commercial relations with international banks, international organizations, international investment funds and binational chambers with the purpose of consolidating the bank’s image in international industries and guaranteeing the smooth development of the international business in accordance with the growth and profitability objectives set by the organization. The following departments report to this division: (i) Trading & Global Markets, (ii) Commercial, (iii) Financial Institutions, (iv) Investment Products and Global Custody and (v) Public Sector. Risks Area Management: it is responsible for maintaining an effective risk management system in compliance with the best practices developed globally and optimizing the credit process in order to provide a better service to customers. It is responsible for actively and comprehensively monitoring and managing the different risks of the Bank and its subsidiaries. It is responsible for ensuring compliance with the policies, qualification and fraud prevention processes, thus guaranteeing the quality of the retail portfolio; designing and auditing mass decision tools; making decisions on the use/development of credit scoring models; conducting alignment actions to retail commercial strategies; and accompanying the business area of the retail segment, making recommendations regarding business opportunities, according to the strategic vision and policies, both external and internal, acting as the Bank’s first line of defense for the retail banking segment. The following departments report to this division: (i) Retail Credits, (ii) Wholesale Credits, (iii) Credit Recovery, (iv) Financial Risk and Capital Management, (v) Analytical Solutions Center, (vi) Data & Analytics Tribe and (vii) Information Security. Products and Technology Area Management: it is responsible for integrating all the operations of the Bank in a single area, in order to improve the efficiency of operational processes and accelerate the development of products and new technologies. The following departments report to this division: (i) Collections and Payments Tribe, (ii) Lending Tribe, (iii) Foreign Trade Tribe, (iv) Everyday Banking Tribe, (v) Payment Acquisition Tribe, (vi) Technology and (vii) Operations. People Area Management: it is responsible for incorporating and developing new talents, fostering a framework that motivates employees and maintaining an excellent working environment. Additionally, it is responsible for all the matters related to the physical workspace of the employees and the distribution of the space used by clients. The following departments report to this division: (i) Design and Innovation, (ii) Human Resources Management and Compensation, (iii) Cultural Transformation, (iv) Persons Advice, (v) Sustainability, (vi) Customer Journey Tribe (vii) Corporate Infrastructure, (viii) Branch Offices Infrastructure and (ix) Labor Relations and Corporate Security. Planning Area Management: it is responsible for planning, coordinating and controlling the development and maintenance of budgeting, planning, accounting, tax activities, payments to suppliers, legal aspects and compliance, in order to ensure that the management has the information needed for the decision-making processes, management control, and the satisfaction of the Bank’s information requirements, as well as to ensure compliance with the information requirements that shall enable the Bank to obtain long-term, strategic sources of financing. It is also responsible for coordinating, planning and monitoring compliance with the strategy of liquidity, interest rates and currency gaps, within the limits of the established policies, making proposals to the Assets and Liabilities Committee (ALCO) regarding the management of such gaps in order to maximize income within the limits of policies. Additionally, it is in charge of institutional relationships and the objective and key results (“OKR”) and processes office. The following departments report to this division: (i) Accounting, (ii) Tax Advice and Strategic Supply, (iii) Management Control and Strategic Planning, (iv) Research, (v) Assets and Liabilities Management, (vi) Legal Advice and Compliance, (vii) Transformation Offices and (viii) Institutional Relations.
Internal Audit Departmental Management: its mission is to evaluate and monitor the efficiency, adequacy and defectiveness of the internal control systems, in order to ensure compliance with applicable laws and regulations. Money Laundering Prevention Departmental Management: it is responsible for coordinating and supervising compliance with the policies established by the Board of Directors in terms of money laundering and terrorist financing control and prevention, ensuring compliance with current regulations and international standards. The following are the biographies of Banco Galicia’s senior executive officers mentioned above: Marcelo Iraola: Mr. Iraola obtained a degree in law from the Universidad de Buenos Aires. He completed the Program for Executive Development at Instituto Argentino de Empresas and a business management program at the Universidad de San Andres. He has been associated with Banco Galicia since 1988. He is also the chairman of Galicia Warrants, a director of Sudamericana Holding S.A. and an alternate director of Tarjetas Regionales. Germán Alejandro Ghisoni: Mr. Ghisoni obtained a degree in business management from the Universidad Católica Argentina. He completed the Program for Executive Development at Instituto Argentino de Empresas, the Strategic Management in Banking Program at INSEAD and the Customer Centric Organitatios at Kellogg School of Management. He has been associated with Banco Galicia since 1995. He is also a director of Sudamericana Holding and an alternate director of Tarjetas Regionales and Naranja. Pablo Maria Leon: Mr. Leon obtained a degree in finance from the Universidad de Palermo and two executive development programs at Instituto Argentino de Empresas and IMD in Lausanne, Switzerland. He has been associated with Banco Galicia since 1987. He is also the chairman of Galicia Securities and Inviu and vicepresident of MAE. Mr. Leon is also manager of IGAM. Diego Rivas: please see “— Management of Grupo Financiero Galicia” Maria Marcela Fernie: Ms. Fernie obtained a degree in economics from the Universidad Católica Argentina. She has been associated with Banco Galicia since 2011. She is a director of COELSA and an alternate director of Tarjetas Regionales and Naranja. Rafael Pablo Bergés: Mr. Bergés obtained a degree in industrial engineering from Universidad de Buenos Aires. He has been associated with Banco Galicia since August 2010. Prior to such time, he worked at Techint and at a several multinational companies in managerial positions. From 1998 to 2009, he was vice president of the Human Resources Division of Grupo Telefónica. Bruno Folino: please see “— Management of Grupo Financiero Galicia” Claudio Scarso: Mr. Scarso obtained a degree in systems engineering from the Universidad Argentina de la Empresa. He has been associated with Banco Galicia since 1995. Teresa del Carmen Piraino: Ms. Piraino obtained a degree in accounting from the Universidad Argentina de la Empresa. She completed a post-graduate degree in Anti-Money Laundering and Financial Crime Prevention from the Universidad de Buenos Aires. She has been associated with Banco Galicia since 1992. B. Compensation Compensation of Our Directors Compensation for the members of the Board of Directors is considered by the shareholders at the shareholders’ meeting once the fiscal year has ended. Directors are paid an annual fee based on the functions they carry out and they may receive partial advance payments during the year. At the ordinary shareholders’ meeting held on April 28, 2020 the compensation for the Board of Directors was set at Ps.85,824,936 (nominal value) for the year ended December 31, 2019. For fiscal year 2020, a proposal was made to the next shareholders meeting to be held on April 27, 2021 to set compensations for the Board of Directors for the amount of Ps.185,437,620 (nominal value). For a description of the amounts to be paid to the board of directors of Banco Galicia, see “– Compensation of Banco Galicia’s Directors and Officers” below. We do not maintain a stock-option, profit-sharing or pension plan for the benefit of our directors. We do not have a policy establishing any termination benefits for our directors. Compensation of Banco Galicia’s Directors Banco Galicia’s board of directors establishes the policy for compensation of Banco Galicia’s personnel. Banco Galicia’s managers receive a fixed compensation. Six directors are not employees of Banco Galicia. These non-employee directors receive a fixed compensation, provided that payments do not exceed the standard levels of similar entities in the Argentine financial market, a provision that is applicable to managers as well. Banco Galicia does not maintain stock-option plans or pension plans or any other retirement plans for the benefit of its directors. Banco Galicia does not have a policy establishing any termination benefits for its directors. At the ordinary shareholders’ meeting held on April 28, 2020, the compensation for the directors of Banco Galicia was set for a total amount of Ps.32,643,328 (nominal value) for the year ended December 31, 2019. For fiscal year 2020, a proposal was presented to the next shareholders meeting to be held on April 27, 2021 to set compensations for the Board of Directors for the amount of Ps.41,972,024.52 (nominal value). Compensation of Banco Galicia’s Officers Banco Galicia’s board of directors establishes the compensation policy for Banco Galicia’s personnel. Banco Galicia’s officers receive a fixed compensation. The officers’ compensation regime includes the possibility of acquiring a retirement insurance policy. Banco Galicia does not maintain stock-option plans or pension plans or any other retirement plans for the benefit of its officers. C. Nasdaq Corporate Governance Standards Pursuant to Nasdaq Marketplace Rule 5615(a) (3), a foreign private issuer may follow home country corporate governance practices in lieu of the requirements of the Rule 5600 Series, provided that the foreign private issuer complies with certain sections of the Rule 5000 Series, discloses each requirement that it does not follow and describes the home relevant country practice followed in lieu of such requirement. The requirements of the Rule 5000 Series and the Argentine corporate governance practice that we follow in lieu thereof are described below:
Rule 5250 (d) – Distribution of Annual and Interim Reports. In lieu of the requirements of Rule 5250 (d), we follow Argentine law, which requires that companies make public a Spanish language annual report, including annual audited consolidated financial statements, by filing such annual report with the CNV and the BASE, within 70 calendar days of the end of the company’s fiscal year. Interim reports must be filed with the CNV and the BASE within 42 calendar days of the end of each fiscal quarter. The BASE publishes the annual reports and interim reports in the BASE bulletin and makes the bulletin available for inspection at its offices. In addition, our shareholders can receive copies of our annual reports and any interim reports upon such shareholders’ request. English language translations of our annual reports and interim reports are furnished to the SEC. We also post the English language translation of our annual reports and quarterly press releases on our website. Furthermore, under the terms of the Second Amended and Restated Deposit Agreement, dated as of June 22, 2000, among us, The Bank of New York Mellon, as depositary, and owners of ADSs issued thereunder, we are required to furnish The Bank of New York Mellon with, among other things, English language translations of our annual reports and each of our quarterly press releases. Annual reports and quarterly press releases are available for inspection by ADRs holders at the offices of The Bank of New York Mellon located at 240 Greenwich Street, New York, New York. Finally, Argentine law requires that 20 calendar days before the date of a shareholders’ meeting, the board of directors must provide to the shareholders, at the company’s executive office or through electronic means, all information relevant to the shareholders’ meeting, including copies of any documents to be considered by the shareholders (which includes the annual report), as well as proposals of the company’s board of directors. |
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For further information,
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Members of the three controlling families have owned the majority of the issued share capital of Banco Galicia since 1959. Members of the Escasany family have been on the board of directors of Banco Galicia since 1923. The Ayerza and Braun families have been represented on Banco Galicia’s board of directors since 1943 and 1947, respectively. Currently, there are five members of these families on our Board of Directors.
On September 13, 1999, the controlling shareholders of Banco Galicia formed EBA Holding S.A., an Argentine corporation, which is 100% owned by our controlling shareholders. EBA Holding holds 100% of our class A shares.
Currently, EBA Holding only has class A shares outstanding. EBA Holding’s bylaws provide for certain restrictions on the sale or transfer of its class A shares. While the class A shares of EBA Holding may be transferred to any other class A shareholder of EBA Holding, any transfer of such class A shares to third parties would automatically result in the conversion of the sold shares into class B shares of EBA Holding having one vote per share. In addition, EBA Holding’s bylaws contain rights of first refusal, buy-sell provisions and tag-along rights.
As of March 31, 2020, we had 115 identified United States record shareholders (not considering The Bank of New York), of which 21 held our class B shares and 94 held our ADSs. Such United States holders, in the aggregate, held approximately 174,9 million of our class B shares, representing approximately 12.3% of our total outstanding capital stock as of such date.
Grupo Financiero Galicia and its non-banking subsidiaries are not a party to any transactions with, and have not made any loans to any (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by Grupo Financiero Galicia or its non-banking subsidiaries, (ii) associates (i.e., an unconsolidated enterprise in which Grupo Financiero Galicia or its non-banking subsidiaries has a significant influence or which has significant influence over Grupo Financiero Galicia or its non-banking subsidiaries), (iii) individuals owning, directly or indirectly, an interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries that gives them significant influence over Grupo Financiero Galicia or its non-banking subsidiaries, as applicable, and close members of any such individual’s family (i.e., those family members that may be expected to influence, or be influenced by, that person in their dealings with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable), (iv) key management personnel (i.e., persons that have authority and responsibility for planning, directing and controlling the activities of Grupo Financiero Galicia or its non-banking subsidiaries, including directors and senior management of companies and close members of such individual’s family) or (v) enterprises in which a substantial interest is owned, directly or indirectly, by any person described in (iii) or (iv) over which such a person is able to exercise significant influence nor are there any proposed transactions with such persons. For purposes of this paragraph, this includes enterprises owned by directors or major shareholders of Grupo Financiero Galicia or its non-banking subsidiaries that have a member of key management in common with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable. In addition, “significant influence” means the power to participate in the financial and operating policy decisions of the enterprise but means less than control. Shareholders beneficially owning a 10% interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries are presumed to have a significant influence on Grupo Financiero Galicia or its non-banking subsidiaries, as applicable.
Some of our directors and the directors of Banco Galicia have been involved in certain credit transactions with Banco Galicia as permitted by Argentine law. The Corporations Law and the Argentine Central Bank’s regulations allow directors of a limited liability company to enter into a transaction with such company if such transaction follows prevailing market conditions. Additionally, a bank’s total financial exposure to related individuals or legal entities is subject to the regulations of the Argentine Central Bank. Such regulations set limits on the amount of financial exposure that can be extended by a bank to affiliates based on, among other things, a percentage of a bank’s TIER 1. See Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.
Banco Galicia is required by the Argentine Central Bank to present to its board of directors, on a monthly basis, the outstanding amounts of financial assistance granted to directors, controlling shareholders, officers and other related entities, which are transcribed in the minute books of the board of directors of Banco Galicia. The Argentine Central Bank establishes that the financial assistance granted to directors, controlling shareholders, officers and other related entities must be granted on an equal basis with respect to rates, tenor and guarantees as loans granted to the general public.
In this section “total financial exposure” comprises equity interests and financial assistance (all credit related items such as loans, holdings of corporate debt securities without quotation, guarantees granted and unused balances of loans granted, among others), as this term is defined in Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.
“Related parties” refers mainly to our directors and the directors of Banco Galicia, our senior officers and senior officers of Banco Galicia, our syndics and Banco Galicia’s syndics, our controlling shareholders as well as all individuals who are related to them by a family relationship and any entities directly or indirectly affiliated with any of these parties, not required to be consolidated.
The following table presents the aggregate amounts of total financial exposure of Banco Galicia to related parties, the number of recipients, the average amounts and the single largest exposures as of the end of the two fiscal years ended December 31, 2018 and 2019, and as of February 29, 2020, the last date for which information is available.
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Aggregate Total Financial Exposure |
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| 1,147 |
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| 1,102 |
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| 1,471 |
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Number of Recipient Related Parties |
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| 265 |
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| 283 |
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| 329 |
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Individuals |
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| 213 |
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| 229 |
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| 269 |
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Companies |
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| 52 |
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| 54 |
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| 60 |
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Average Total Financial Exposure |
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| 5 |
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| 4 |
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| 4 |
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Single Largest Exposure |
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| 431 |
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| 438 |
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| 558 |
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The financial assistance granted to our directors, officers and related parties by Banco Galicia was granted in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related parties, and did not involve more than the normal risk of collectability or present other unfavorable features.
In June 2011, Banco Galicia entered into an agreement with Galicia Seguros, a company indirectly controlled by Grupo Financiero Galicia, pursuant to which the Bank can offer insurance products on behalf of Galicia Seguros. In addition, they entered into an agreement for a one-year period pursuant to which Galicia Seguros insures the Bank for the balances of certain loans in the case of death of its clients. On July 31, 2014, Banco Galicia renewed both agreements with Galicia Seguros, for an additional year, with automatic deferral. Such agreements were considered to be “related party transactions” pursuant to Section 72 of the Capital Markets Law.
On March 11, 2015, Banco Galicia’s board of directors granted a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.230 million with a maturity date of June 30, 2016 (equivalent to Ps.1,014 million as of December 2019), which was increased on April 5, 2016 to Ps.300 million with a maturity date of June 30, 2017 (equivalent to Ps.961 million as of December 2019).
On March 14, 2017, Banco Galicia’s board of directors decided to grant a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.500 million with a maturity date of June 30, 2018 (equivalent to Ps.1,335 million as of December 2019), which was increased in September 2017 to Ps.854 million (equivalent to Ps.2,058 million as December 2019).
Consolidated Financial Statements
We have elected to provide the financial information set forth in Item 18 of this annual report.
Legal Proceedings
We are a party to the following legal proceedings:
Banco Galicia
In response to certain pending legal proceedings, Banco Galicia has recorded reserves to cover (i) various types of claims filed by customers against it (e.g., claims for thefts from safe deposit boxes, collections of checks that had been fraudulently altered, discrepancies related to deposit and payment services rendered to Banco Galicia’s customers, etc.) and (ii) estimated amounts payable under labor-related lawsuits filed against Banco Galicia by former employees.
With regard to the Autonomous City of Buenos Aires ‘claims on account of other items, Banco Galicia adhered to the System for the Settlement of Tax Liabilities in Arrears (Law No.3,461 and related regulations), which contemplated the total relief of interest and fines.
In connection with the assessments made by the tax collection authorities from the Province of Buenos Aires, under the framework of some of the processes under discussion at the Provincial Tax Court, at this stage of proceedings the judgement issued was favorable with regard to the non-taxability thereof. Therefore, Banco Galicia adhered to the System for the Regularization of Tax Debts (Regulatory Decision No.12 and related decisions), which contemplated discounts on the amounts not related to the Compensatory Bond. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities. In turn, the authorities from the Province of Buenos Aires objected to the judgment issued by the Provincial Tax Court with regard to the Compensatory Bond and requested the Court of Appeals in Administrative Matters of La Plata to reverse such decision. Banco Galicia entered an appearance and filed a motion for lack of jurisdiction, since it believed that only the Argentine Supreme Court of Justice has jurisdiction to issue a decision on such matter. On April 15, 2014, the aforementioned court sustained the motion for lack of jurisdiction and ordered the proceedings to be filed. The authorities from the Province of Buenos Aires filed an appeal before the Supreme Court of Justice of the Province of Buenos Aires, which has not issued a decision to date.
Furthermore, Banco Galicia challenged certain claims made by various jurisdictions at the corresponding administrative and/or legal proceedings. These proceedings and their possible effects are constantly being monitored by the Bank’s management. Even though Banco Galicia considers it has complied with its tax liabilities in full pursuant to current regulations, adequate reserves in respect of such proceedings have been allocated.
As of December 31, 2019, a number of claims for repayment of income tax overpaid for the 2014, 2015, 2016, 2017 and 2018 tax years for the total sum of $6,350,696,000 are based on the above-five jurisprudence establishing the unconstitutionality of rules that disenable the application of the tax inflation adjustment, which results in confiscatory situations. In the face of the delay in resolving the tax code, claims were initiated. At the close of these financial statements, the Bank does not record contingent assets derived from the above-mentioned claims.
Consumer Protection Associations, on behalf of consumers, have filed claims against Banco Galicia in connection with the collection of certain financial charges. The Bank does not believe that the resolution of these controversies will have a significant impact on its financial condition.
Tarjetas Regionales
The federal tax authority (the “AFIP”), Provincial Revenue Boards and Municipalities are in the process of conducting audits and assessments, in differing stages of completion, on the companies controlled by Tarjetas Regionales. Said agencies have served notices and made claims regarding taxes applicable to Tarjetas Regionales’s subsidiaries. Such companies are taking the corresponding administrative and legal steps in order to solve such issues. The original amount claimed for taxes totaled approximately Ps.38 million.
As of December 1, 2017, Tarjeta Naranja had filed a reimbursement claim before the AFIP regarding its income tax for the 2014-2016 fiscal years in an amount equal to Ps.580,164 (which, as adjusted for inflation, was equal to Ps 1,318 million). The claim was made considering the lack of application of the inflation adjustment standards set forth in Section VI of the Income Tax Law, which led to a substantial difference in the taxable income exceeding the reasonable limits of taxation. The same claim was presented on behalf of Tarjetas Cuyanas as of May 17, 2018, for 2014-2016, amounting Ps.145,478. Along the same lines, on September 27, 2019, the Company presented the claim pertaining to the 2017 fiscal year for the amount of Ps.326,498 in nominal value and on September 17, 2019, the one of 2018 was presented in an amount equal to Ps.973,843 in nominal value.
In the absence of a response from AFIP, on December 6, 2019, a judicial protection for default was filed with the National Tax Court for the periods 2014 and 2016 of Tarjeta Naranja S.A. On the other hand, and having elapsed the period established in the applicable regulations without obtaining AFIP’s response to the claim, on December 27, 2019, a repetition claim was filed before the Federal Justice for the 2014 and 2016 fiscal years of Tarjeta Cuyanas S.A. and fiscal year 2018 of Tarjeta Naranja S.A. The same lawsuit was filed on December 30, 2019 for the 2017 fiscal year of Tarjeta Naranja S.A. Both claims remain pending before the AFIP.
Based on the opinion of tax advisors, each of Tarjeta Naranja and Tarjetas Cuyanas believes that such claims are unfounded and that the taxes related to such claims have been correctly calculated in accordance the tax regulations then in force and Argentine case law.
Dividend Policy and Dividends
Dividend Policy
Grupo Financiero Galicia’s policy for the distribution of dividends considers, among other factors, the obligatory nature of establishing a legal reserve, the Company’s financial condition and its indebtedness, the business requirements of affiliated companies and, mainly, that the profits recorded in the financial statements are, to a great extent, income from holdings and not realized and liquid profits, a requirement of Section 68 of the Corporations Law so that it is possible to distribute them as dividends. The proposal to distribute dividends arising from such analysis has to be approved at the shareholders’ meeting that discusses the Financial Statements corresponding to each fiscal year.
We may only declare and pay dividends out of our retained earnings representing the profit realized on our operations and investments. The Corporations Law and our bylaws state that no profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per share basis. As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired until it is fully restored. The legal reserve is not available for distribution to shareholders.
Our ability to pay dividends to our shareholders principally depends on (i) our net income, (ii) cash availability, (iii) indebtedness and (iv) applicable legal requirements.
Holders of our ADSs will be entitled to receive any dividends payable in respect of our underlying class B shares. We will pay cash dividends to the ADSs depositary in Pesos, although we reserve the right to pay cash dividends in any other currency, including Dollars. The ADSs deposit agreement provides that the depositary will convert cash dividends received by the ADSs depositary in Pesos to Dollars and, after deduction or upon payment of fees and expenses of the ADSs depositary and deduction of other amounts permitted to be deducted from such cash payments in accordance with the ADSs deposit agreement (such as for unpaid taxes by the ADSs holders in connection with personal asset taxes or otherwise), will make payment to holders of our ADSs in Dollars.
Dividends
Other than as noted above, we are in full compliance with all other applicable Nasdaq corporate governance standards.
D. Employees
The following table shows the composition of our staff:
As of December 31, | |||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Grupo Financiero Galicia | 2 | 3 | 5 | ||||||||||||||||||||||||||||||||||||
| 5,764 | 6,118 | 6,294 | ||||||||||||||||||||||||||||||||||||
| 3,711 | 3,248 | 3,231 | ||||||||||||||||||||||||||||||||||||
Head Office | 2,053 | 2,870 | 3,063 | ||||||||||||||||||||||||||||||||||||
Ecosistema NaranjaX | 3,049 | 3,151 | 3,488 | ||||||||||||||||||||||||||||||||||||
Galicia
368 | 395 | 381 |
64 | 24 | 19 |
9,271 | 9,718 | 10,209 | |
Within the current legal framework, membership in an employee union is voluntary and there is only one union of bank employees with national representation. As of December 31, 2020, approximately 40% of Banco Galicia’s employees were affiliated with the national bank employee union. As of December 31, 2020, approximately 90% of Ecosistema NaranjaX’ work force was party to the merchant union’s Collective Bargaining Agreement No.130/75 applicable to trade employees and 6% of which were members of a labor union.
In general, during the first six months of 2020, the bank employees union and the national commerce employee’s union commenced negotiations on their respective collective labor agreements to establish new minimum wages. As a result of such negotiations, the minimum wage was increased for these positions. In 2020, due to the significant increases in the inflation index, the increases in the banking agreement were carried out in the months of January, March, July, October, November and December. In 2020, the Argentine union that represents employees in the banking sector declared general strikes. These strikes were not specific to any bank but affected all banks in Argentina. Certain of the Bank’s employees who are members of the union participated in the strike; however, the Bank was able to continue its operations during such time as not all employees are members of the union. While employees of Banco Galicia have participated in general strikes against the Argentine banking sector, Banco Galicia has not experienced a targeted strike by its employees since 1973 and Tarjetas Regionales Companies have never experienced a targeted employee strike. We believe that our relationship with our employees is stable and positive.
We have a human resources policy that aims at providing our employees possibilities for growth and personal and socio-economic achievement. We will continue our current policy of monitoring both wage levels and labor conditions in the financial industry in order to be competitive. Our employees receive fixed compensation and may receive variable compensation according to their level of achievement. We do not maintain any profit-sharing programs for our employees.
In a survey conducted in 2020 by Great Place to Work®, Banco Galicia ranked among the best companies to work in Argentina for the fourth consecutive year with more than 1,000 employees, while Naranja ranked among the best companies to work in Argentina for the third year consecutive with more than 1,000 employees.
The Fundación Banco de Galicia y Buenos Aires (the “Fundación”) is an Argentine non-profit organization that provides various services to Banco Galicia employees. The various activities of the Fundación include, among others, purchasing school materials for the children of Banco Galicia’s employees and making donations to hospitals and other charitable causes, including cultural events. The Fundación is managed by a Council, certain members and alternate members of which are members of our Board of Directors and supervisory committee. Members and alternate members of the Council do not receive remuneration for their services as trustees.
E. Share Ownership
For information on the share ownership of our directors and executive officers as of December 31, 2020, see Item 7. “Major Shareholders and Related Party Transactions—A. Major Shareholders”.
Item 7. |
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As of March 31, 2021, our capital structure was made up of class A shares, each of which is entitled to five votes and class B shares, each of which is entitled to one vote. As of March 31, 2021, we had 1,474,692,091 shares outstanding composed of 281,221,650 class A shares and 1,193,470,441 class B shares.
Our controlling shareholders are members of the Escasany, Ayerza and Braun families and the Fundación Banco de Galicia y Buenos Aires. As of March 31, 2021, the controlling shareholders owned 100% of our class A shares through EBA Holding (representing 19.1% of our total outstanding shares) and 9.3% of our class B shares (or 7.5% of our total outstanding shares), therefore directly and indirectly owning 26.6% of our shares and 58.4% of total votes.
Based on information that is available to us, the table below sets forth, as of March 31, 2021, the number of our class A and class B shares held by holders of more than 5% of each class of shares, the percentage of each class of shares held by such holder, and the percentage of votes that each class of shares represent as a percentage of our total possible votes.
Class A Shares
Name | Class A Shares | % of Class A Shares | % of Total Votes | |||||||||
EBA Holding S.A. | 281,221,650 | 100 | 54.1 |
Class B Shares
Name | Class A Shares | % of Class A Shares | % of Total Votes | |||||||||
The Bank of New York Mellon (1) | 498,281,860 | 41.8 | 19.2 | |||||||||
ANSES | 264,275,733 | 22.1 | 10.2 | |||||||||
EBA Holding Shareholders (2) | 110,411,743 | 9.3 | 4.3 |
(1) |
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| December 31, 2019 |
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Shares |
| Number of Shares |
|
| % of Capital Stock |
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| % of Voting Rights |
| |||
Class A Shares |
|
| 281,221,650 |
|
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| 19.71 | % |
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| 55.11 |
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Class B Shares |
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| 1,145,542,947 |
|
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| 80.29 | % |
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| 44.89 |
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Total |
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| 1,426,764,597 |
|
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| 100 | % |
| 100 |
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Registration and Transfer
The class B shares are book-entry common shares held through Caja de Valores. Caja de Valores maintains a stock registry for us and only those persons listed in such registry will be recognized as our shareholders. Caja de Valores periodically delivers to us a list of the shareholders as at a certain date.
The class B shares are transferable on the books of Caja de Valores. Caja de Valores records all transfers in our registry. Within 10 days of any such transfer, Caja de Valores is required to confirm the registration of transfer with the transferor.
Voting Rights
At shareholders’ meetings, each class A share is entitled to five votes and each class B share is entitled to one vote. However, class A shares are entitled to only one vote in certain matters, such as:
All distinctions between our class A shares and our class B shares will be eliminated upon the occurrence of any of the following change of control events:
Limited Liability of Shareholders
Shareholders are not liable for our obligations. Shareholders’ liability is limited to the payment of the shares for which they subscribe. However, shareholders who have a conflict of interest with us and do not abstain from voting may be held liable for damages to us. Also, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or our bylaws may be held liable for damages to us or to third parties, including other shareholders, resulting from such resolutions.
Directors
Our bylaws provide that the Board of Directors shall be composed by at least three and at most nine members, as decided at a general ordinary shareholders’ meeting. To be appointed to our Board of Directors, such person must have been presented as a candidate by shareholders who represent at least 10% of our voting rights, at least three business days before the date the general ordinary shareholders’ meeting is to be held. Our bylaws do not state an age limit over which the directors cannot serve on our board.
At each annual shareholders’ meeting, the term of one third of the members of our Board of Directors (no fewer than three directors) expires and their successors are elected to serve for a term of three years. The shareholders’ meeting shall have the power to fix a shorter period (one or two years) for the terms of office of one, several or all the directors. This system of electing directors is intended to help maintain the continuity of the board. Alternate directors replace directors until the following general ordinary shareholders’ meeting is held. Directors may also be replaced by alternate directors if a director will be absent from a board meeting. The Board of Directors is required to meet at least once every month and anytime any one of the directors or syndics so requests.
Our bylaws state that the Board of Directors may decide to appoint an executive committee and/or a delegate director.
Our bylaws do not provide for any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to in this annual report was selected as a director or member of senior management.
Additionally, pursuant to our bylaws, any borrowing powers on behalf of the Company are granted to our Board of Directors. Our Board of Directors has the power to delegate these borrowing powers to our directors through a power of attorney and currently certain of our directors have powers of attorney to negotiate the terms of and borrow money on behalf of the Company. Furthermore, as stated by our bylaws, the chairman of our Board of Directors is also the legal representative of the Company. Although our bylaws do not expressly address a director’s power to vote on proposals, arrangements or contracts in which the director has a material interest, pursuant to customary Argentine business practice and certain tenants of Argentine corporate law, our directors do not vote on proposals, arrangements or contracts in which the director has a material interest.
Appointment of Directors and Syndics by Cumulative Voting
The Corporations Law provides for the use of cumulative voting to enable minority shareholders to appoint members of the board of directors and syndics. Upon the completion of certain requirements, shareholders are entitled to appoint up to one third of the vacancies to be filled on the board of directors by cumulative voting. Each shareholder voting cumulatively has the number of votes resulting from multiplying the number of votes to which such shareholder would normally be entitled by the number of vacancies to be filled. Such shareholder may apportion his votes or cast all such votes for one or a number of candidates not exceeding one third of the vacancies to be filled.
Compensation of Directors
The Corporations Law and the CNV establish rules regarding the compensation of directors. The maximum amount of aggregate compensation that the members of the board of directors may receive, including salaries and other compensation for the performance of permanent technical and administrative services, may not exceed 25.0% of profits of each fiscal year. This maximum amount shall be limited to 5.0% when no dividends are distributed to the shareholders and shall be increased proportionately to the dividend distribution until the 25.0% limit is reached when all profits are distributed.
The Corporations Law provides that aggregate director compensation may exceed the maximum percentage of computable profit in any one year when the company’s profits are non-existent or too small as to allow payment of a reasonable compensation to board members which have been engaged in technical or administrative services to the company, provided that such proposal is described in the notice of the agenda for the ordinary shareholders’ meeting and is approved by a majority of shareholders present at such shareholders’ meeting.
In addition to the above, our bylaws establish that best practices and national and international market standards regarding directors with similar duties and responsibilities shall be considered when determining the compensation of board members.
Syndics
Our bylaws, in accordance with Argentine law, provide for the maintenance of a supervisory committee whose members are three permanent syndics and three alternate syndics. Syndics are elected for a one-year term and may be re-elected. Alternate syndics replace permanent syndics in case of absence. For the appointment of syndics, each of our class A shares and class B shares has only one vote. Fees for syndics are established by the shareholders at the annual ordinary shareholders’ meeting. Their function is to oversee the management of the company, to control the legality of the actions of the board of directors, to attend all board of directors’ meetings, to attend all shareholders’ meetings, to prepare reports for the shareholders on the financial statements with their opinion, and to provide information regarding the company to shareholders that represent at least 2% of the capital stock. Syndics’ liabilities are joint and several and unlimited for the non-fulfillment of their duties. They are also jointly and severally liable, together with the members of the board of directors, if the proper fulfillment of their duties as syndics would have avoided the damage or the losses caused by the members of the board of directors.
Shareholders’ Meetings
Shareholders’ meetings may be ordinary meetings or extraordinary meetings. An annual ordinary shareholders’ meeting is required to be held in each fiscal year to consider the matters outlined in Article 234 of the Corporations Law, including, among others:
Extraordinary shareholders’ meetings may be called at any time to discuss matters beyond the competence of the ordinary meeting, including but not limited to amendments to the bylaws, matters related to the liquidation of a company, limitation of the shareholders’ preemptive rights to subscribe new shares, issuance of bonds and debentures, transformation of the corporate form, a merger into another company and spin-offs, early winding-up, change of the company’s domicile to outside Argentina, total or partial repayment of capital for losses, and a substantial change in the corporate purpose set forth in the bylaws.
Shareholders’ meetings may be convened by the board of directors or by the syndics. A shareholder or group of shareholders holding at least 5.0% in the aggregate of our capital stock may request the board of directors or the syndics to convene a general shareholders’ meeting to discuss the matters indicated by the shareholder.
Once a meeting has been convened with an agenda, the agenda limits the matters to be decided upon at such meeting and no other matters may be decided upon.
Additionally, our bylaws provide that any shareholder holding at least 5% in aggregate of our capital stock may present, in writing, to the Board of Directors, before February 28 of each year, proposals of items to be included in the agenda at the annual general ordinary shareholders’ meeting. The Board of Directors is not obligated to include such items in the agenda.
Class B shares represented by ADSs will be voted or caused to be votedare owned of record by the Depositary in accordance with instructionsThe Bank of the holders of such ADSs. In the event instructions are not received from the holder, the Depositary shall give a discretionary proxyNew York, as Depositary. The address for the shares represented by such ADSs to a person designated by us.
NoticeBank of each shareholders’ meeting must be published inNew York Mellon is 101 Barclay Street, New York 10286, and the Official Gazette, and in a widely circulated newspaper incountry of organization is the country’s territory, at least twenty days prior to the meeting but notUnited States.
(2) | No member holds more than
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Based on information that is available to us, the table below sets forth, as of March 31, 2021, the shareholders that either directly or indirectly have more than 5% of our votes or shares.
Name | Shares | Class | % of Class A Shares | % of Total Votes | ||||||||||||
The Bank of New York Mellon | 498,281,860 | B | 33.8 | 19.2 | ||||||||||||
EBA Holding S.A. | 281,221,650 | A | 19.1 | 54.1 | ||||||||||||
ANSES. | 264,275,733 | B | 17.9 | 10.2 | ||||||||||||
EBA Holding Shareholders. | 110,411,743 | B | 7.5 | 4.3 |
Members of the three controlling families have owned the majority of the issued share capital of Banco Galicia since 1959. Members of the Escasany family have been on the board of directors of Banco Galicia since 1923. The Ayerza and Braun families have been represented on Banco Galicia’s board of directors since 1943 and 1947, respectively. Currently, there are five members of these families on our Board of Directors.
On September 13, 1999, the controlling shareholders of Banco Galicia formed EBA Holding S.A., an Argentine corporation, which is 100% owned by our controlling shareholders. EBA Holding holds 100% of our class A shares.
Currently, EBA Holding only has class A shares outstanding. EBA Holding’s bylaws provide for certain restrictions on the sale or transfer of its class A shares. While the class A shares of EBA Holding may be transferred to any other class A shareholder of EBA Holding, any transfer of such class A shares to third parties would automatically result in the conversion of the sold shares into class B shares of EBA Holding having one vote per share. In addition, EBA Holding’s bylaws contain rights of first refusal, buy-sell provisions and tag-along rights.
As of March 31, 2021, we had 135 identified United States record shareholders (not considering The Bank of New York), of which 22 held our class B shares and 113 held our ADSs. Such United States holders, in the aggregate, held approximately 98.4 million of our class B shares, representing approximately 6.7% of our total outstanding capital stock as of such date.
Grupo Financiero Galicia and its non-banking subsidiaries are not a party to any transactions with, and have not made any loans to any (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by Grupo Financiero Galicia or its non-banking subsidiaries, (ii) associates (i.e., an unconsolidated enterprise in which Grupo Financiero Galicia or its non-banking subsidiaries has a significant influence or which has significant influence over Grupo Financiero Galicia or its non-banking subsidiaries), (iii) individuals owning, directly or indirectly, an interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries that gives them significant influence over Grupo Financiero Galicia or its non-banking subsidiaries, as applicable, and close members of any such individual’s family (i.e., those family members that may be expected to influence, or be influenced by, that person in their dealings with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable), (iv) key management personnel (i.e., persons that have authority and responsibility for planning, directing and controlling the activities of Grupo Financiero Galicia or its non-banking subsidiaries, including directors and senior management of companies and close members of such individual’s family) or (v) enterprises in which a substantial interest is owned, directly or indirectly, by any person described in (iii) or (iv) over which such a person is able to exercise significant influence nor are there any proposed transactions with such persons. For purposes of this paragraph, this includes enterprises owned by directors or major shareholders of Grupo Financiero Galicia or its non-banking subsidiaries that have a member of key management in common with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable. In addition, “significant influence” means the power to participate in the financial and operating policy decisions of the enterprise but means less than control. Shareholders beneficially owning a 10% interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries are presumed to have a significant influence on Grupo Financiero Galicia or its non-banking subsidiaries, as applicable.
Some of our directors and the directors of Banco Galicia have been involved in certain credit transactions with Banco Galicia as permitted by Argentine law. The Corporations Law and the BCRA’s regulations allow directors of a limited liability company to enter into a transaction with such company if such transaction follows prevailing market conditions. Additionally, a bank’s total financial exposure to related individuals or legal entities is subject to the regulations of the BCRA. Such regulations set limits on the amount of financial exposure that can be extended by a bank to affiliates based on, among other things, a percentage of a bank’s TIER 1. See Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.
Banco Galicia is required by the BCRA to present to its board of directors, on a monthly basis, the outstanding amounts of financial assistance granted to directors, controlling shareholders, officers and other related entities, which are transcribed in the minute books of the board of directors of Banco Galicia. The BCRA establishes that the financial assistance granted to directors, controlling shareholders, officers and other related entities must be granted on an equal basis with respect to rates, tenor and guarantees as loans granted to the general public.
In this section “total financial exposure” comprises equity interests and financial assistance (all credit related items such as loans, holdings of corporate debt securities without quotation, guarantees granted and unused balances of loans granted, among others), as this term is defined in Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.
“Related parties” refers mainly to our directors and the directors of Banco Galicia, our senior officers and senior officers of Banco Galicia, our syndics and Banco Galicia’s syndics, our controlling shareholders as well as all individuals who are related to them by a family relationship and any entities directly or indirectly affiliated with any of these parties, not required to be consolidated.
The following table presents the aggregate amounts of total financial exposure of Grupo Financiero Galicia to related parties, the number of recipients, the average amounts and the maximum assistance as of the end of the two fiscal years ended December 31, 2019 and 2020, and as of February 28, 2021, the last date for which information is available.
February 28, | December 31, | |||||||||||
2021(1) | 2020 | 2019 | ||||||||||
(in millions of Pesos, except as noted) | ||||||||||||
Total Financial Exposure | 2,360 | 1,992 | 1,500 | |||||||||
Number of Recipient Related Parties | 268 | 269 | 283 | |||||||||
Individuals | 207 | 208 | 229 | |||||||||
Companies | 61 | 61 | 54 | |||||||||
Average Amount of Financial Exposure | 9 | 7 | 5 | |||||||||
Maximum Assistance | 401 | 509 | 596 |
(1) | In February 28, 2021 currency. |
The financial assistance granted to our directors, officers and related parties by Banco Galicia was granted in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related parties, and did not involve more than the normal risk of collectability or present other unfavorable features.
In June 2011, Banco Galicia entered into an agreement with Galicia Seguros, a company indirectly controlled by Grupo Financiero Galicia, pursuant to which the Bank can offer insurance products on behalf of Galicia Seguros. In addition, they entered into an agreement for a one-year period pursuant to which Galicia Seguros insures the Bank for the balances of certain loans in the case of death of its clients. On July 31, 2014, Banco Galicia renewed both agreements with Galicia Seguros, for an additional year, with automatic deferral. Such agreements were considered to be “related party transactions” pursuant to Section 72 of the Capital Markets Law.
Subsequently, on July 25 ,2008, Naranja concluded two new leasing operations with Banco Galicia for two properties located in the City of Córdoba, Argentina for a total of Ps.12 million, with maturity dates on August 25, 2018, and August 7, 2020. Likewise, on October 31, 2012 Naranja signed another leasing operation with Banco Galicia on a property located in the City of Córdoba, the total of the operation was Ps.15 million and with a maturity date on November 30, 2022.
In September 2015, the term for the lease operations of real estate located in the City of Córdoba was extended to 121 months from that date, and the corresponding rates were unified. The interest rate applied is the Private Banks Corrected Survey Rate plus a 6% margin.
C. Interest of Experts and Counsel.
Not applicable.
Item 8. | Financial Information |
A. Consolidated Statements and Other Financial Information
Consolidated Financial Statements
We have elected to provide the financial information set forth in Item 18 of this annual report.
Legal Proceedings
We are a party to the following legal proceedings:
Banco Galicia
In response to certain pending legal proceedings, Banco Galicia has recorded reserves to cover (i) various types of claims filed by customers against it (e.g., claims for thefts from safe deposit boxes, collections of checks that had been fraudulently altered, discrepancies related to deposit and payment services rendered to Banco Galicia’s customers, etc.) and (ii) estimated amounts payable under labor-related lawsuits filed against Banco Galicia by former employees.
Banco Galicia challenged certain claims made by various jurisdictions at the corresponding administrative and/or legal proceedings. These proceedings and their possible effects are constantly being monitored by the Bank’s management. Even though Banco Galicia considers it has complied with its tax liabilities in full pursuant to current regulations, adequate reserves in respect of such proceedings have been allocated.
As of December 31, 2020, a number of claims for repayment of income tax overpaid were filed for the 2014, 2015, 2016, 2017,2018 and 2019 tax years for the total sum of Ps.10.754 million. The claims are based on jurisprudence establishing the unconstitutionality of rules that disenable the application of the tax inflation adjustment, which results in confiscatory situations. In the face of the delay in resolving the tax code, claims were initiated. At the close of these financial statements, the Bank does not record contingent assets derived from the above-mentioned claims.
Consumer Protection Associations, on behalf of consumers, have filed claims against Banco Galicia in connection with the collection of certain financial charges. The Bank does not believe that the resolution of these controversies will have a significant impact on its financial condition.
Ecosistema NaranjaX
The national tax and customs authority (AFIP), Provincial Revenue Boards and Municipalities are in the process of conducting audits and assessments, in differing stages of completion, on the companies of Ecosistema NaranjaX. Said agencies have served notices and made claims regarding taxes applicable to Ecosistema NaranjaX’ s companies. Such companies are taking the corresponding administrative and legal steps in order to solve such issues. The original amount claimed for taxes totaled approximately Ps.38 million.
As of December 1, 2017, Naranja had filed a reimbursement claim before the AFIP regarding its income tax for the 2014-2016 fiscal years in an amount equal to Ps.580,164 in nominal value. The claim was made considering the lack of application of the inflation adjustment standards set forth in Section VI of the Income Tax Law, which led to a substantial difference in the taxable income exceeding the reasonable limits of taxation. The same claim was presented on behalf of Tarjetas Cuyanas as of May 17, 2018, for 2014-2016, amounting Ps.145,478. Along the same lines, on September 27, 2019, the Company presented the claim pertaining to the 2017 fiscal year for the amount of Ps.326,498 in nominal value and on September 17, 2019, the one of 2018 was presented in an amount equal to Ps.973,843 in nominal value.
In the absence of a response from AFIP, on December 6, 2019, a judicial protection for default was filed with the National Tax Court for the periods 2014 and 2016 of Naranja. On the other hand, and having elapsed the period established in the applicable regulations without obtaining AFIP’s response to the claim, on December 27, 2019, a repetition claim was filed before the Federal Justice for the 2014 and 2016 fiscal years of Tarjetas Cuyanas and fiscal year 2018 of Naranja. The same lawsuit was filed on December 30, 2019 for the 2017 fiscal year of Naranja. Both claims remain pending before the AFIP.
On May 26, 2020 Naranja filed a reimbursement claim regarding its income tax for the 2019 year in an amount of Ps.1,365 million in nominal value.
Based on the opinion of tax advisors, each of Naranja and Tarjetas Cuyanas believes that such claims are unfounded and that the taxes related to such claims have been correctly calculated in accordance the tax regulations then in force and Argentine case law.
Dividend Policy and Dividends
Dividend Policy
Grupo Financiero Galicia’s policy for the distribution of dividends considers, among other factors, the obligatory nature of establishing a legal reserve, the Company’s financial condition and its indebtedness, the business requirements of affiliated companies and, mainly, that the profits recorded in the financial statements are, to a great extent, income from holdings and not realized and liquid profits, a requirement of Section 68 of the Corporations Law so that it is possible to distribute them as dividends. The proposal to distribute dividends arising from such analysis has to be approved at the shareholders’ meeting that discusses the Financial Statements corresponding to each fiscal year.
We may only declare and pay dividends out of our retained earnings representing the profit realized on our operations and investments. The Corporations Law and our bylaws state that no profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per share basis. As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired until it is fully restored. The legal reserve is not available for distribution to shareholders. Additionally, for fiscal year 2020, the application of the accounting inflation adjustment method generated negative results that will need to be absorbed.
Our ability to pay dividends to our shareholders principally depends on (i) our net income, (ii) cash availability, (iii) indebtedness and (iv) applicable legal requirements.
Holders of our ADSs will be entitled to receive any dividends payable in respect of our underlying class B shares. We will pay cash dividends to the ADSs depositary in Pesos, although we reserve the right to pay cash dividends in any other currency, including Dollars. The ADSs deposit agreement provides that the depositary will convert cash dividends received by the ADSs depositary in Pesos to Dollars and, after deduction or upon payment of fees and expenses of the ADSs depositary and deduction of other amounts permitted to be deducted from such cash payments in accordance with the ADSs deposit agreement (such as for unpaid taxes by the ADSs holders in connection with personal asset taxes or otherwise), will make payment to holders of our ADSs in Dollars.
Dividends
Grupo Financiero Galicia
As a holding company, our principal source of cash from which to pay dividends on our shares is dividends or other intercompany transfers from our subsidiaries, primarily Banco Galicia. Due to dividend restrictions contained in Banco Galicia’s loan agreements in connection with Banco Galicia’s foreign debt restructuring - that were lifted when such debt was fully paid during fiscal year 2016 - and in some BCRA regulations, our ability to distribute cash dividends to our shareholders has been materially and adversely affected since late 2001 until 2010, when Banco Galicia obtained the authorization to distribute its profits.
After the end of fiscal year 2011, the BCRA modified its regulations governing the minimum capital requirements and dividend distribution and, consequently, Banco Galicia was not able to pay dividends. However, for fiscal year 2018 the Bank had met the aforementioned regulations and its shareholders´ meeting held on April 25, 2019 approved the distribution of cash dividends for Ps.1,500 million, equivalent to Ps.2,717 million as of December 2020.
Currently, the ability to pay dividends of our subsidiary Banco Galicia and the Argentine financial system as a whole have been restricted by the Argentina Central Bank up to June 30, 2021 (subject to further extension) within the framework of the COVID-19 pandemic.
During 2019, Grupo Financiero Galicia paid cash dividends for Ps.2,000 million for fiscal year 2018, representing Ps.1.401773 per share, equivalent to Ps.3,623 million as of December 2020. During 2020, Grupo Financiero Galicia paid cash dividends for fiscal year 2019 in the amount of Ps.1,700 million, representing Ps.1,191507 per share, equivalent to Ps.1,824 million as of December 2020.
Due to the fact that most of the profits in fiscal year 2020 correspond to holdings income that does not meet the requirements for distribution set forth in Section 68 of the Corporations’ Law and given Grupo Financiero Galicia’s financial condition, a proposal was made by the Board of Directors, to be treated at the next Shareholders’ Meeting to be held on April 27, 2021. The proposal was to absorb the negative results generated by the application of the accounting inflation adjustment method and to distribute a cash dividend for an amount, that, when inflation adjusted pursuant to Resolution 777/2018 of the Argentine Securities Exchange Commission, results in Ps.1,500,000,000, (which represents 101.7161%) being distributed with regard to 1,474,692,091 class A and B ordinary shares, with a face value of Ps.1 each, through the partial reduction of the discretionary reserve for future dividends’ distribution created in the year 2020.
Pursuant Act No.27,260, Grupo Financiero Galicia neither reimbursed nor withheld any amount for tax purposes on the dividends paid for fiscal year 2018.
For fiscal year 2019, pursuant to what is set forth in the third paragraph of the article without number incorporated after article 25 of Act No. 23,966, replaced by article 4 of Act No. 26,452, when corresponding, the Company was reimbursed of the amounts paid for the fiscal year 2019 in its capacity as substitute taxpayer of the shareholders’ subject to the tax on personal assets. Similarly, for fiscal year 2020, Grupo Financiero Galicia will withhold, when corresponding, some amount for taxes on personal assets on the dividends to be distributed.
For more information on requirements for dividend distribution, see Item 4. “Information on the Company”-B.“Business Overview”— “Argentine Banking Regulation”—“Profit Distribution”.
Banco Galicia
The ability to pay dividends of Banco Galicia and the Argentine financial system as a whole have been restricted by the BCRA up to June 30, 2021 (subject to extension) within the framework of the COVID-19 pandemic restrictions. For further information see Item 3. Key Information – D. Risk Factors – Risks Factors Relating to Us.
Sudamericana Holding
During the year 2020, Sudamericana held an extraordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.1.290 million.
On February 24, 2021 Sudamericana Holding held an extraordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.1,100 million.
Galicia Administradora de Fondos
On March 29, 2021, Galicia Administradora de Fondos held an ordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.800 million.
Galicia Securities
On March 30, 2021, Galicia Securities held an ordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.150 million.
Galicia Warrants
On March 29, 2021, Galicia Warrants held an ordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.40 million.
Since the closing date of the annual financial statements (December 31st, 2020), Grupo Financiero Galicia has not experienced any significant changes other than those already indicated in this report. For further information regarding significant changes, please see Item 3. Key Information – Risk Factors – Risk Factors Relating to Argentina; Item 5. Operating Results and Item 5. Liquidity and Capital Resources.
A. Offer and Listing Details
Shares and ADSs
Our class B shares are listed on the BYMA, MAE and the Córdoba Stock Exchange under the symbol “GGAL”. Our class B shares have started listing on MAE since October 28, 2015. Our ADSs, each representing ten class B shares, are listed on the Nasdaq Capital Market, under the symbol “GGAL”. Our ADSs have been listed on Nasdaq Capital Market since August 2002. Previously, our ADSs had been listed on the Nasdaq National Market since July 24, 2000.
Argentine Securities Market
The principal and oldest exchange for the Argentine securities market is the BYMA. The BYMA started operating in 1854 and handles the largest proportion of all equity trading in Argentina. Securities listed on the BYMA include corporate equity and debt securities and government securities. Debt securities listed on the BYMA may also be listed on the MAE. The MERVAL, which is affiliated with the BYMA, was founded in 1929 and is the largest stock market in Argentina. The MERVAL is a private entity, whose capital is integrated by shares admitted to public offer regime and was registered as a market by the CNV under N°16. Its capital is composed of 103 outstanding shares and there are 248 agents registered as members of the MERVAL market. We are member of the MERVAL through INVIU S.A.U. and Galicia Securities S.A., subsidiaries that owns one share each. Additionally, the Bank, within the framework of the Capital Market Law, was authorized by the CNV to act as a settlement and clearing agent and trading agent-comprehensive and was added as member of the MERVAL.
Trading on the BYMA is conducted through a trading platform introduced during 2017 called Millenium, from 11:00 a.m. to 5:00 p.m. each business day of the year. The Millenium software is a computer trading platform system that permits trading in debt and equity securities that can be accessed by brokers directly from workstations located at their offices. As a result of an agreement between the MERVAL and the MAE, equity securities are traded exclusively on the BYMA and corporate and government debt securities are traded on the MAE and the BYMA. Currently, all transactions relating to listed corporate and government debt securities can be affected by said trading platform. In addition, a substantial over-the-counter market exists for private trading in listed debt securities and, prior to the agreement described above, equity securities. Such trades are reported on the MAE.
Although companies may list all of their capital stock on the BYMA, in most cases the controlling shareholders retain the majority of a company’s capital stock. This results in only a relatively small percentage of most companies’ stock being available for active trading by the public on the BYMA. Even though individuals have historically constituted the largest group of investors in Argentina’s equity markets, in recent years, banks and
insurance companies have shown an interest in these markets. Argentine mutual funds, by contrast, continue to have very low participation in the market. Although 103 companies had equity securities listed on the BYMA as of December 31, 2020, the 10 most-traded companies on the exchange accounted for approximately 79% of total trading value during 2020, from a 65.2% recorded in 2019. Our shares were the first-most traded shares on the BYMA in 2020, with a 32.1% share of trading volume from an also first position of 24.2% recorded during 2019.
The Córdoba Stock Exchange is another important stock market in Argentina. Securities listed on the Córdoba Stock Exchange include both corporate equity and debt securities and government securities. Through an agreement with the BYMA, all the securities listed on the BYMA are authorized to be listed and subsequently traded on the Córdoba Stock Exchange. Thus, many transactions that originate on the Córdoba Stock Exchange relate to companies listed on the BYMA and such trades are subsequently settled in Buenos Aires.
The MAE is a self-regulated organization that is supervised by the CNV. MAE is mainly comprised by private banks, either composed by national or foreign capital, national banks, provincial banks, municipal Banks, cooperative Banks, financial companies, exchange companies and agents.
B. Market Regulations
The CNV oversees the Argentine securities markets and is responsible for authorizing public offerings of securities and supervising brokers, public companies and mutual funds, among others. Argentine pension funds and insurance companies are regulated by separate Argentine government agencies, while financial institutions are regulated mainly by the BCRA. The Argentine securities markets are regulated by the CNV according with the provisions of Capital Markets Law No 26,831.
In compliance with the provisions of Law No.20,643 and the Decrees No.659/74 and No.2220/80, most debt and equity securities traded on the exchanges and the MAE must, be deposited in Caja de Valores S.A., which is the central securities depositary of Argentina, that provides deposit facilities for securities and mainly acts as a transfer and paying agent in connection therewith. It also handles settlement of securities transactions and operates the computerized exchange information system.
Pursuant to the requirements of the Argentine regulations, there may be less publicly available information about Argentine companies than is regularly published by or about companies in the U.S. and other countries. However, the CNV has taken steps to strengthen disclosure and regulatory standards for the Argentine securities market, including the issuance of regulations prohibiting insider trading and requiring insiders to report on their ownership of securities, with associated penalties for non-compliance.
In order to offer securities to the public in Argentina, an issuer must meet certain requirements of the CNV regarding assets operating history, management and other matters, and only securities for which an application for a public offering has been approved by the CNV may be listed on the corresponding stock exchange. This approval does not imply any kind of certification of assurance related to the merits of the quality of the securities, or the solvency of the issuer. Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements, as well as various other periodic reports, with the CNV and the corresponding stock exchange.
Securities can currently be freely traded on the Argentine markets, however, the Argentine government has periodically imposed certain restrictions regarding access by residents and non-residents to the local MLC and to transfers of foreign exchange abroad. See Item 4. “Information on the Company—Government Regulation—Foreign Exchange Market”.
On June 2019, the CNV passed Resolution No. 797/19 (as amended by Resolution No. 873), aimed to strengthen the good practices in corporate governance, emphasizing the principles established by the Organization for Economic Cooperation and Development (“OECD”) and requiring a stronger commitment from the listing companies regarding the compliance with corporate governance.
The Capital Markets Law (Law No. 26,831), which became effective on January 2013, replacing Law No.17,811 and Decree No. 677/01, regulates the capital markets transactions as well as the supervision, control and disciplinary and regulatory powers of the CNV. The Capital Markets Law is supplemented by the CNV Rules.
On May 9, 2018, the Argentine Congress passed Law No. 27,440 (Ley de Financiamiento Productivo) with the goal of developing the Argentine domestic capital markets. The Law No. 27,440 updates and amends the Argentine Capital Markets Law, the Mutual Funds Law and the Argentine Negotiable Obligations Law, among others. Such Law No. 27,440 sets forth certain regulations that are intended to provide SMEs with better access to financial instruments and to create an electronic credit invoice for MSMEs that replace the receipts from sales and credit invoices. Also, Law No. 27,440 improves the regulatory framework by introducing the new products for SMEs, such as discounts for access to the financial market and the amendment of certain tax provisions, regulations relating to derivatives and the promotion of a financial inclusion program.
Item 10. | Additional Information |
Not applicable.
B. Memorandum and Articles of Association
Description of Our Bylaws
General
Set forth below is a brief description of certain provisions of our bylaws and Argentine law and regulations with regard to our capital stock. Your rights as a holder of our capital stock are subject to Argentine corporate law, which may differ from the corporate laws of other jurisdictions. This description is not purported to be complete and is qualified in its entirety by reference to our bylaws, Argentine law and the rules of the BYMA, the Córdoba Stock Exchange as well as the CNV. A copy of our bylaws has been filed with and can be examined at the CNV in Buenos Aires and the SEC in Washington, D.C.
We were incorporated on September 14, 1999, as a stock corporation under the laws of Argentina and registered on September 30, 1999, with the IGJ, under corporate registration number 14,519 of Book 7, Volume of Stock Corporations. Our domicile is in Buenos Aires, Argentina. Under our bylaws, our duration is until June 30, 2100 and we are exclusively a financial and investment company (as stated in “Chapter 2. Purpose. Article 3.” of our bylaws). This duration may be extended by resolution taken at an extraordinary shareholders’ meeting.
Our bylaws do not contain any provision governing the ownership threshold above which shareholder ownership must be disclosed.
Outstanding Capital Stock
Our total subscribed and paid-in share capital as of December 31, 2020, amounted to Ps.1,474,692,091, composed of class A shares and class B shares, each with a par value of Ps.1. The following table presents the number of our shares outstanding as of December 31, 2020, and the voting interest that the shares represent.
December 31, 2020 | ||||||||||||
Shares | Number of Shares | % of Capital Stock | % of Voting Rights | |||||||||
Class A Shares | 281,221,650 | 19.07 | % | 54.09 | % | |||||||
Class B Shares | 1,193,470,441 | 80.93 | % | 45.91 | % | |||||||
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Total | 1,474,692,091 | 100 | % | 100 | % | |||||||
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Registration and Transfer
The class B shares are book-entry common shares held through Caja de Valores. Caja de Valores maintains a stock registry for us and only those persons listed in such registry will be recognized as our shareholders. Caja de Valores periodically delivers to us a list of the shareholders as at a certain date.
The class B shares are transferable on the books of Caja de Valores. Caja de Valores records all transfers in our registry. Within 10 days of any such transfer, Caja de Valores is required to confirm the registration of transfer with the transferor.
Voting Rights
At shareholders’ meetings, each class A share is entitled to five votes and each class B share is entitled to one vote. However, class A shares are entitled to only one vote in certain matters, such as:
a merger or spin-off in which we are not the surviving corporation, unless the acquirer’s shares are authorized to be publicly offered or listed on any stock exchange;
a transformation in our legal corporate form;
a fundamental change in our corporate purpose;
a change of our domicile to outside Argentina;
a voluntary termination of our public offering or listing authorization;
our continuation following a delisting or a mandatory cancellation of our public offering or listing authorization;
a total or partial recapitalization of our statutory capital following a loss; and
the appointment of syndics.
All distinctions between our class A shares and our class B shares will be eliminated upon the occurrence of any of the following change of control events:
EBA Holding sells 100% of its class A shares;
EBA Holding sells a portion of our class A shares to a third person who, when aggregating all our class A shares with our class B shares owned by such person, if any, obtains 50% plus one vote of our total votes; or
the current shareholders of EBA Holding sell shares of EBA Holding that will allow the buyer to exercise more than 50% of the voting power of EBA Holding at any general shareholders’ meeting of EBA Holding shareholders, except for transfers to other current shareholders of EBA Holding or to their heirs or their legal successors or to entities owned by any of them.
Limited Liability of Shareholders
Shareholders are not liable for our obligations. Shareholders’ liability is limited to the payment of the shares for which they subscribe. However, shareholders who have a conflict of interest with us and do not abstain from voting may be held liable for damages to us. Also, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or our bylaws may be held liable for damages to us or to third parties, including other shareholders, resulting from such resolutions.
Directors
Our bylaws provide that the Board of Directors shall be composed by at least three and at most nine members, as decided at a general ordinary shareholders’ meeting. To be appointed to our Board of Directors, such person must have been presented as a candidate by shareholders who represent at least 10% of our voting rights, at least three business days before the date the general ordinary shareholders’ meeting is to be held. Our bylaws do not state an age limit over which the directors cannot serve on our board.
At each annual shareholders’ meeting, the term of one third of the members of our Board of Directors (no fewer than three directors) expires and their successors are elected to serve for a term of three years. The shareholders’ meeting shall have the power to fix a shorter period (one or two years) for the terms of office of one, several or all the directors. This system of electing directors is intended to help maintain the continuity of the board. Alternate directors replace directors until the following general ordinary shareholders’ meeting is held. Directors may also be replaced by alternate directors if a director will be absent from a board meeting. The Board of Directors is required to meet at least once every month and anytime any one of the directors or syndics so requests.
Our bylaws state that the Board of Directors may decide to appoint an executive committee and/or a delegate director.
Our bylaws do not provide for any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to in this annual report was selected as a director or member of senior management.
Additionally, pursuant to our bylaws, any borrowing powers on behalf of the Company are granted to our Board of Directors. Our Board of Directors has the power to delegate these borrowing powers to our directors through a power of attorney and currently certain of our directors have powers of attorney to negotiate the terms of and borrow money on behalf of the Company. Furthermore, as stated by our bylaws, the chairman of our Board of Directors is also the legal representative of the Company. Although our bylaws do not expressly address a director’s power to vote on proposals, arrangements or contracts in which the director has a material interest, pursuant to customary Argentine business practice and certain tenants of Argentine corporate law, our directors do not vote on proposals, arrangements or contracts in which the director has a material interest.
Appointment of Directors and Syndics by Cumulative Voting
The Corporations Law provides for the use of cumulative voting to enable minority shareholders to appoint members of the board of directors and syndics. Upon the completion of certain requirements, shareholders are entitled to appoint up to one third of the vacancies to be filled on the board of directors by cumulative voting. Each shareholder voting cumulatively has the number of votes resulting from multiplying the number of votes to which such shareholder would normally be entitled by the number of vacancies to be filled. Such shareholder may apportion his votes or cast all such votes for one or a number of candidates not exceeding one third of the vacancies to be filled.
Compensation of Directors
The Corporations Law and the CNV establish rules regarding the compensation of directors. The maximum amount of aggregate compensation that the members of the board of directors may receive, including salaries and other compensation for the performance of permanent technical and administrative services, may not exceed 25.0% of profits of each fiscal year. This maximum amount shall be limited to 5.0% when no dividends are distributed to the shareholders and shall be increased proportionately to the dividend distribution until the 25.0% limit is reached when all profits are distributed.
The Corporations Law provides that aggregate director compensation may exceed the maximum percentage of computable profit in any one year when the company’s profits are non-existent or too small as to allow payment of a reasonable compensation to board members which have been engaged in technical or administrative services to the company, provided that such proposal is described in the notice of the agenda for the ordinary shareholders’ meeting and is approved by a majority of shareholders present at such shareholders’ meeting.
In addition to the above, our bylaws establish that best practices and national and international market standards regarding directors with similar duties and responsibilities shall be considered when determining the compensation of board members.
Syndics
Our bylaws, in accordance with Argentine law, provide for the maintenance of a supervisory committee whose members are three permanent syndics and three alternate syndics. Syndics are elected for a one-year term and may be re-elected. Alternate syndics replace permanent syndics in case of absence. For the appointment of syndics, each of our class A shares and class B shares has only one vote. Fees for syndics are established by the shareholders at the annual ordinary shareholders’ meeting. Their function is to oversee the management of the company, to control the legality of the actions of the board of directors, to attend all board of directors’ meetings, to attend all shareholders’ meetings, to prepare reports for the shareholders on the financial statements with their opinion, and to provide information regarding the company to shareholders that represent at least 2% of the capital stock. Syndics’ liabilities are joint and several and unlimited for the non-fulfillment of their duties. They are also jointly and severally liable, together with the members of the board of directors, if the proper fulfillment of their duties as syndics would have avoided the damage or the losses caused by the members of the board of directors.
Shareholders’ Meetings
Shareholders’ meetings may be ordinary meetings or extraordinary meetings. An annual ordinary shareholders’ meeting is required to be held in each fiscal year to consider the matters outlined in Article 234 of the Corporations Law, including, among others:
approval of the financial statements and general performance of the management for the preceding fiscal year;
appointment and remuneration of directors and members of the supervisory committee;
allocation of profits; and
any other matter the board of directors decides to submit to the shareholders’ meeting concerning the Company’s business administration. Matters which may be discussed at these or other ordinary meetings include resolutions regarding the responsibility of directors and members of the supervisory committee, as well as capital increases and the issuance of notes.
Extraordinary shareholders’ meetings may be called at any time to discuss matters beyond the competence of the ordinary meeting, including but not limited to amendments to the bylaws, matters related to the liquidation of a company, limitation of the shareholders’ preemptive rights to subscribe new shares, issuance of bonds and debentures, transformation of the corporate form, a merger into another company and spin-offs, early winding-up, change of the company’s domicile to outside Argentina, total or partial repayment of capital for losses, and a substantial change in the corporate purpose set forth in the bylaws.
Shareholders’ meetings may be convened by the board of directors or by the syndics. A shareholder or group of shareholders holding at least 5.0% in the aggregate of our capital stock may request the board of directors or the syndics to convene a general shareholders’ meeting to discuss the matters indicated by the shareholder.
Once a meeting has been convened with an agenda, the agenda limits the matters to be decided upon at such meeting and no other matters may be decided upon.
Additionally, our bylaws provide that any shareholder holding at least 5% in aggregate of our capital stock may present, in writing, to the Board of Directors, before February 28 of each year, proposals of items to be included in the agenda at the annual general ordinary shareholders’ meeting. The Board of Directors is not obligated to include such items in the agenda.
Class B shares represented by ADSs will be voted or caused to be voted by the Depositary in accordance with instructions of the holders of such ADSs. In the event instructions are not received from the holder, the Depositary shall give a discretionary proxy for the shares represented by such ADSs to a person designated by us.
Notice of each shareholders’ meeting must be published in the Official Gazette, and in a widely circulated newspaper in the country’s territory, at least twenty days prior to the meeting but not more than forty-five days prior to the date on which the meeting is to be held. The board of directors will determine the appropriate publication of notices outside Argentina in accordance with the requirements of the jurisdictions and exchanges on which our shares are traded. In order to attend a meeting and to be listed on the meeting registry, shareholders must submit evidence of their book-entry share account held at Caja de Valores at least three business days prior to the scheduled meeting date without counting the meeting day.
The quorum for ordinary meetings consists of a majority of stock entitled to vote, and resolutions may be adopted by the affirmative vote of 50% plus one vote (an “absolute majority”) of the votes present whether in person or participating via electronic means of communication. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting may be convened to be held one hour later on the same day as the first meeting had been called for, provided that it is an ordinary shareholders’ meeting, or within 30 days of the date for which the first ordinary meeting was called.
The quorum for extraordinary shareholders’ meetings consists of 60% of stock entitled to vote, and resolutions may be adopted by an absolute majority of the votes present. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting has to be convened to be held within 30 days of the date for which the first extraordinary meeting was called, and the notice must be published for three days, at least eight days before the date of the second meeting. Some special matters require a favorable vote of the majority of all the stock holding voting rights, the class A shares being granted the right to only one vote each. The special matters are described in “—Voting Rights” above.
Dividends
Dividends may be lawfully paid and declared only out of our retained earnings representing the profit realized and liquid on our operations and investments reflected in our annual financial statements, as approved at our annual general shareholders’ meeting. No profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per-share basis.
As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired. The legal reserve is not available for distribution to shareholders.
Our Board of Directors submits our financial statements for the previous fiscal year, together with reports prepared by our supervisory committee, to our shareholders for approval at the general ordinary shareholders’ meeting. The shareholders, upon approving the financial statements, determine the allocation of our net income.
Our Board of Directors is allowed by law and by our bylaws to decide to pay anticipated dividends on the basis of a balance sheet especially prepared for purposes of paying such dividends.
Under BYMA regulations, cash dividends must be paid to shareholders within 10 days of the shareholders’ meeting approving said dividend. Payment of dividends in shares requires authorization from the CNV, the BYMA and the Córdoba Stock Exchange, whose authorizations must be requested within 10 business days after the shareholders’ meeting approving the dividend. We must make a distribution of the shares available to shareholders not later than three months after receiving authorization to do so from the CNV.
Shareholders may no longer claim the payment of dividends from us after three years have elapsed from the date on which the relevant dividends were made available to such shareholders.
Capital Increases and Reductions
We may increase our capital upon resolution of the general ordinary shareholders’ meeting. All capital increases must be reported to the CNV, published in the Official Gazette and registered with the Public Registry of Commerce. Capital reductions may be voluntary or mandatory. A voluntary reduction of capital must be approved by an extraordinary shareholders’ meeting after the corresponding authorization by the BYMA, the Córdoba Stock Exchange and the CNV and may take place only after notice of such reduction has been published and creditors have been given an opportunity to obtain payment or guarantees for their claims or attachment. A reduction of capital is mandatory when losses have exceeded reserves and more than 50% of the share capital of the company.
Preemptive Rights
Under Argentine law, it is mandatory that a shareholder of ordinary shares of any given class have preemptive rights, proportional to the number of shares he or she owns, to subscribe for shares of capital stock of the same class or of any other class if the new subscription offer does not include all classes of shares. Shareholders may only decide to suspend or limit preemptive rights by supermajority at an extraordinary shareholders’ meeting and only in exceptional cases. Shareholders may waive their preemptive rights only on a case-by-case basis.
In the event of an increase in our capital, holders of class A shares and class B shares have a preemptive right to subscribe for any issue of class B shares in an amount sufficient to maintain the proportion of capital then held by them. Holders of class A shares are entitled to subscribe for class B shares because no further class A shares carrying five votes each are allowed to be issued in the future. Under Argentine law, companies are prohibited from issuing stock with multiple voting rights after they have been authorized to make a public offering of securities.
Preemptive rights are exercisable following the last publication of the notification to shareholders of the opportunity to exercise preemptive rights in the Official Gazette and an Argentine newspaper of wide circulation for a period of 30 days, provided that such period may be reduced to no less than 10 days if so approved by an extraordinary shareholders’ meeting.
Shareholders who have exercised their preemptive rights and indicated their intention to exercise additional preemptive rights are entitled to additional preemptive rights (“accretion rights”), on a pro rata basis, with respect to any unsubscribed shares, in accordance with the terms of the Corporations Law. Class B shares not subscribed for by shareholders through the exercise of their preemptive or accretion rights may be offered to third parties.
Holders of ADSs may be restricted in their ability to exercise preemptive rights if a registration statement relating to such rights has not been filed or is not effective or if an exemption from registration is not available.
Appraisal Rights
Whenever our shareholders approve:
a merger or spin-off in which we are not the surviving corporation, unless the acquirer’s shares are authorized to be publicly offered or listed on any stock exchange,
a transformation in our legal corporate form,
a fundamental change in our corporate purpose,
a change of our domicile to outside Argentina,
a voluntary termination of our public offering or listing authorization,
our continuation following a delisting or a mandatory cancellation of our public offering or listing authorization, or
a total or partial recapitalization of our statutory capital following a loss,
any shareholder that voted against such action or did not attend the relevant meeting may exercise its right to have its shares canceled in exchange for the book value of its shares, determined on the basis of our latest balance sheet prepared in accordance with Argentine laws and regulations, provided that such shareholder exercises its appraisal rights within the periods set forth below.
There is, however, doubt as to whether holders of ADSs, will be able to exercise appraisal rights with respect to class B shares represented by ADSs.
Appraisal rights must be exercised within five days following the adjournment of the meeting at which the resolution was adopted, in the event that the dissenting shareholder voted against such resolutions, or within 15 days following such adjournment if the dissenting shareholder did not attend such meeting and can prove that he was a shareholder on the date of such meeting. In the case of a merger or spin-off involving an entity authorized to make a public offering of its shares, appraisal rights may not be exercised if the shares to be received as a result of such transaction are listed on any stock exchange. Appraisal rights are extinguished if the resolution giving rise to such rights is overturned at another shareholders’ meeting held within 75 days of the meeting at which the resolution was adopted.
Payment of the appraisal rights must be made within one year from the date of the shareholders’ meeting at which the resolution was adopted, except if the resolution was to delist our capital stock, in which case the payment period is reduced to 60 days from the date of the related resolution.
Preferred Stock
According to the Corporations Law and our bylaws, an ordinary shareholders’ meeting may approve the issuance of preferred stock. Such preferred stock may have a fixed dividend, cumulative or not cumulative, with or without additional participation in our profits, as decided by shareholders at a shareholders’ meeting when determining the conditions of the issuance. They may also have other preferences, such as a preference in the event of our liquidation.
The holders of preferred stock shall not be entitled to voting rights. Notwithstanding the foregoing, in the event that no dividends are paid to such holders for their preferred stock, and for as long as such dividends are not paid, the holders of preferred stock shall be entitled to voting rights. Holders of preferred stock are also entitled to vote on certain special matters, such as the transformation of the corporate form, a merger into another company and spin-offs (when we are not the surviving entity and the surviving entity is not listed on any stock exchange), early winding-up, a change of our domicile to outside Argentina, total or partial repayment of capital for losses and a substantial change in the corporate purpose set forth in our bylaws or in the event our preferred stock is traded on stock exchanges and such trading is suspended or terminated.
Conflicts of Interest
As a protection to minority shareholders, under the Corporations Law, a shareholder is required to abstain from voting on any resolution in which its direct or indirect interests conflict with that of or are different than ours. In the event such shareholder votes on such resolution, and such resolution would not have been approved without such shareholders’ vote, the resolution may be declared void by a court and such shareholder may be liable for damages to the company as well as to any third party, including other shareholders.
Redemption or Repurchase
According to the Capital Markets Law, a stock corporation may acquire the shares issued by it, provided that the public offering and listing thereof has been authorized, subject to the following terms and conditions and those set forth by the CNV. The above-mentioned conditions are: (a) the shares to be acquired shall be fully paid up; (b) there shall be a resolution signed by the board of directors to such effect; (c) the acquisition shall be made out of net profits or free or voluntary reserves; and (d) the total amount of shares acquired by the company, including previously acquired shares, shall not exceed 10% of the capital stock or such lower percentage determined by the CNV. The shares acquired by the company in excess of such limit shall be disposed of within the term of 90 days after the date of the acquisition originating such excess.
The shares acquired by the company shall be disposed of by the company within the maximum term of three years counted as from the date of acquisition thereof. Upon disposing of the shares, the company shall make a preemptive offer thereof. Such an offer will not be obligatory if the shares are used in connection with a compensation plan or program for the company’s employees or if the shares are distributed among all shareholders pro rata their shareholdings. If shareholders do not exercise, in whole or in part, their preemptive rights, the sale shall be made at a stock exchange.
Liquidation
Upon our liquidation, one or more liquidators may be appointed to wind up our affairs. If no such appointment is made, our Board of Directors will act as liquidator. All outstanding common shares will be entitled to participate equally in any distribution upon liquidation. In the event of liquidation, in Argentina and in any other country, our assets shall first be applied to satisfy our debts and liabilities.
Other Provisions
Our bylaws are governed by Argentine law and the ownership of any kind of our shares represents acceptance of our bylaws and submission to the exclusive jurisdiction of the ordinary commercial courts of Buenos Aires for any claim or dispute related to us, our shareholders, directors and members of the supervisory committee.
Bonds
During the 2016 fiscal year, Banco Galicia issued subordinated Class II notes due 2026 in an aggregate principal amount of US$250 million. The proceeds of this issuance were used to redeem the Bank’s outstanding subordinated notes due 2019. During the 2018 fiscal year, Banco Galicia issued Class V Series I notes due 2020 and Series II notes due 2020 in an aggregate principal amount of Ps.4,209 million and Ps.2,032 million, respectively. During the 2020 fiscal year, Banco Galicia issued Class VIII in an aggregate principal amount of Ps.1,589 million.
The pricing supplements for the issuances described above set forth certain covenants Banco Galicia must comply with for the benefit of the holders of such notes, which include, among others, restrictions on mergers, acquisitions or dispositions (subject to certain exceptions) and restrictions on the incurrence of additional debt.
Loans
In May 2016, the IFC granted Banco Galicia a credit line in an amount of up to US$130 million. As of May 2018, Banco Galicia has drawn all of the committed amount and the loan was amortized for US$72 million.
On March 23, 2018, Banco Galicia announced the issuance of a green bond to raise US$100 million in order to expand its loan program for environmental efficiency projects. This is the first green bond issued by a private financial institution in Argentina, marking Banco Galicia’s commitment to finance projects with a positive impact on the environment. The bonds were underwritten on June 21, 2018 by the IFC. To date, loans for US$53 million were granted.
For a description of the exchange controls that would affect us or the holders of our securities, see Item 4. “Information on the Company—Government Regulation—Foreign Exchange Market”.
The following is a summary of the principal Argentine and U.S. federal income tax consequences arising from the acquisition, ownership and disposition of our class B shares and ADSs. This summary is based on Argentine and U.S. federal income tax laws, as well as the regulations in effect as of the date of this annual report. Further, this summary is subject to any subsequent changes in laws and regulations that may come into effect after
this date. Any change could apply retroactively and could affect the continued validity of this summary. This summary does not constitute legal advice or a legal opinion with respect to the transactions that the holders of our class B shares or ADSs may enter into. This summary is only a brief description of certain (but not all) aspects of the Argentine and U.S. federal income tax systems, as they relate to the acquisition, ownership and disposition of our class B shares and ADSs. In addition, although the Company believes that the following summary is a reasonable interpretation of the current taxation rules and regulations, Grupo Galicia cannot assure that the applicable authorities or tribunals will agree with all, or any of the tax consequences outlined below. Currently, there is no tax treaty between the United States and Argentina.
Argentine Taxes
Law No.26,893, enacted on September 12, 2013 and published in the Official Gazette on September 23, 2013, introduced changes to Income Tax Law No.20,628, including the derogation of Section 78 of Decree No.2284/1991; which provides that foreign holders with no permanent establishment in Argentina are exempt from paying income tax on the capital gains arising from the sale or other disposition of shares or ADSs.
Decree No.2334/2013 has regulated Law No.26,893. This decree provides that changes introduced by Law No.26,893 are effective from the date of publication of such law in the Official Gazette and apply to taxable events carried out from such date onwards.
Law No.27,430 enacted on December 27, 2017 and published in the Official Gazette on December 29, 2017, and Law No. 27,541 published in the Official Gazette on December 23,2019 introduced several changes to Income Tax Law No.20,628. The principal change resulting from such law is a corporate income tax rate reduction in two phases. For fiscal years beginning on or after January 1, 2018 until December 31, 2021, the government has reduced the corporate income tax rate from 35% to 30%. After December 31, 2021, the corporate tax rate will be further reduced to 25%.
This reform includes additional changes, such as the confirmation that ADRs and ADSs generate Argentine-sourced income. Non- residents, however, will be exempted from the current 15% capital gains tax on the sale of ADRs or ADSs if they reside in a jurisdiction having an exchange of information agreement with Argentina or if these invested funds come from a cooperating jurisdiction.
Taxation of Dividends
As from the effectiveness of Law No. 27,430 and Law No. 27,541, on December 27, 2017 and December 23, 2019 dividends and distributions (other than stock dividends) made by local entities to individuals, undivided estates, and foreign entities are subject to a withholding tax at a rate of 7% (while the corporate income tax is 30%) and at a rate of 13% beginning on January 1, 2022. Thus, the combined rate on dividend/profit distribution would remain around the current 35% rate, as Argentina has not levied a withholding tax on dividends or branch profits, since it eliminated the same in 2016.
Decree No.1170/2018 provides for further guidance on Law No.27,430. This decree provides that dividend payments on ADSs or ordinary shares, whether in cash, property, or stock, would be subject to Argentine withholding tax and the exemption referred to in the last paragraph of “Argentine Taxes” above shall not apply.
Equalization Tax
There is a specific rule under which a 35% tax (“equalization tax”) will be imposed on certain dividends approved by shareholders. The equalization tax will be applied only to the extent that distributions of dividends exceed the taxable income of the company increased by non-taxable dividends received by the distributing company in prior years and reduced by Argentine income tax paid by the distributing company.
The equalization tax will be imposed as a withholding tax on the shareholder receiving the dividend. Dividend distributions made in kind (other than cash) will be subject to the same tax rules as cash dividends. Stock dividends are not subject to Argentine taxation.
In addition, the foregoing tax reforms abolished the equalization tax for profits generated beginning January 1, 2018. Such equalization tax is a withholding tax levied at a rate of 35% on dividend distributions in excess of tax earnings that would remain applicable for the stock of non-distributed earnings and profits as of December 31, 2017.
Taxation of Capital Gains
In accordance with Law No.27,430 capital gains derived by non-resident individuals or foreign companies from the sale, exchange or other disposition of ADSs or class B shares are subject to the following regulations:
Non-residents continue to be exempted from tax on capital gains arising from the sale of shares in publicly traded companies, if the shares are traded on the BASE. In accordance with Law No.27,541 the exemption will also apply if the securities are traded in stock or securities markets authorized by the (CNV). The benefits will be applied to foreign beneficiaries as long as they do not reside in non-cooperative jurisdictions or the invested funds do not come from a non-cooperative jurisdiction.
Transfer of Argentine securities that occurred after September 23, 2013 triggered taxation on a retroactive basis, as the suspension of the rule that called for the tax was lifted. The tax will not apply to sales made through stock exchanges if the tax had not been withheld.
Indirect transfers of Argentine assets (including shares) will be taxable, if (i) the value of the Argentine assets exceed 30% of the transaction’s overall value; and (ii) the equity interest sold (in the foreign entity) exceeds 10%. The tax will also be due if any of these thresholds were met during the 12-month period prior to the sale. The indirect transfer of Argentine assets will only be subject to tax if these assets are acquired after January 1, 2018. Transactions involving indirect transfers of Argentine assets within the same economic group would also not trigger taxation, provided the requirements set by regulations have been met. Decree No.862/2019 and General Resolution No.4227/2018, provide that the seller, and not the buyer, is the party responsible for withholding the tax. The regulation has established a new mechanism regulating how non-resident sellers should pay the tax on the capital gain for transactions that have taken place on or after January 1, 2018. In summary, the non-resident seller should pay the tax directly through an international wire transfer unless there is a local withholding agent (i.e., local buyer or local custodial institution) involved in the payment.
Transfer Taxes: no Argentine transfer taxes are applicable on the sale or transfer of ADSs or class B shares.
Personal Assets Tax
Individuals domiciled and undivided estates located in Argentina or abroad will be subject to an annual tax in respect of assets located in Argentina and abroad. Applicable wealth tax rates and minimum non-taxable asset values for the general taxpayer regime are replaced with effect as of fiscal year 2019 by Law No.27,480 and Law No. 27.541. The following is the new scheme:
| Tax rate | Exempt Minimum | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019 onwards
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*Tax Rate (In pesos except percentages) Total Value of Assets Over Ps. Individuals domiciled abroad will pay the tax only in respect of the assets they hold in Argentina. In the case of individuals domiciled abroad, the tax will be paid by the individuals or entities domiciled in Argentina which, as of December 31 of each year, hold the joint ownership, possession, use, enjoyment, deposit, safekeeping, custody, administration or tenure of the assets located in Argentina and subject to the tax belonging to the individuals domiciled abroad. When the direct ownership of notes, government securities and certain other investments, except shares issued by companies ruled by the Corporations Law, are part of companies domiciled abroad in countries that do not enforce registration systems for private securities (with the exception of insurance companies, open-end investment funds, pension funds or banks and financial entities with head offices in countries that have adopted the international banking supervision standards laid down by the Basel Committee on Banking Supervision) or that pursuant to their bylaws, charter, documents or the applicable regulatory framework, have as their principal activity investing outside of the jurisdiction of their organization or domicile, or are generally restricted from doing business in their country of incorporation, it will be assumed, without admission of any proof to the contrary, that these assets belong ultimately to individuals and therefore the system for paying the tax for such individuals domiciled abroad applies to them. An exception pursuant to a tax reform was published in the Official Gazette as Law No.25,585, which went into effect on December 31, 2002. This tax reform introduced a mechanism to collect the personal assets tax on shares issued by companies ruled by the Corporations Law, which ownership belongs to individuals domiciled in Argentina or abroad, and companies or entities domiciled abroad. In the case of companies or entities domiciled abroad, it will be assumed, without admitting any proof to the contrary, that these shares ultimately belong to individuals domiciled abroad. The tax was assessed and paid by those companies ruled by the Corporations Law at the rate of 0.5% on the value of the shares or equity interest. The valuation of the shares, whether listed or not, must be made according to their proportional equity value. These companies may eventually seek reimbursement from the direct owner of the shares, in respect of any amounts paid to the Argentine tax authorities as a personal asset tax. Grupo Financiero Galicia has sought reimbursement for the amount paid corresponding to December 31, 2002. The Board of Directors submitted the decision on how to proceed with respect to fiscal year 2003 to the annual shareholders’ meeting held on April 22, 2004. At that meeting, our shareholders voted to suspend all claims on our shareholders for any amount unpaid for fiscal year 2002 and to have the Company absorb the amounts due for fiscal year 2003 onward, when not withheld from dividends. Other Taxes There are no Argentine federal inheritance, succession or gift taxes applicable to the ownership, transfer or disposition of ADSs or class B shares. There are no Argentine stamps, issue, registration or similar taxes or duties payable by holders of ADSs or class B shares. Tax measures related to Covid-19 Tax, Trade & Regulatory |
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*Taxe Rate (In pesos except percentages) |
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Total Value of Assets |
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| Flat Tax |
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| More % |
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| Taxation over the excess of the amount |
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Over Ps. |
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| Up to the amount |
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| — |
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| 3,000,000 |
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| — |
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| 0.25 |
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| — |
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| 3,000,001 |
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| 6,500,000 |
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| 15,000 |
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| 0.75 |
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| 3,000,000 |
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| 6,500,001 |
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| 18,000,000 |
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| 41,250 |
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| 1.00 |
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| 6,500,000 |
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| 18,000,000 |
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| Onward |
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| 156,250 |
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| 1.25 |
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| 18,000,000 |
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Individuals domiciled abroad will pay the tax only in respect of the assets they hold in Argentina. In the case of individuals domiciled abroad, the tax will be paid by the individuals or entities domiciled in Argentina which, as of December 31 of each year, hold the joint ownership, possession, use, enjoyment, deposit, safekeeping, custody, administration or tenure of the assets located in Argentina and subject to the tax belonging to the individuals domiciled abroad. When the direct ownership of notes, government securities and certain other investments, except shares issued by companies ruled by the Corporations Law, are part of companies domiciled abroad in countries that do not enforce registration systems for private securities (with the exception of insurance companies, open-end investment funds, pension funds or banks and financial entities with head offices in countries that have adopted the international banking supervision standards laid down by the Basel Committee on Banking Supervision) or that pursuant to their bylaws, charter, documents or the applicable regulatory framework, have as their principal activity investing outside of the jurisdiction of their organization or domicile, or are generally restricted from doing business in their country of incorporation, it will be assumed, without admission of any proof to the contrary, that these assets belong ultimately to individuals and therefore the system for paying the tax for such individuals domiciled abroad applies to them.
An exception pursuant to a tax reform was published in the Official Gazette as Law No.25,585, which went into effect on December 31, 2002. This tax reform introduced a mechanism to collect the personal assets tax on shares issued by companies ruled by the Corporations Law, which ownership belongs to individuals domiciled in Argentina or abroad, and companies or entities domiciled abroad. In the case of companies or entities domiciled abroad, it will be assumed, without admitting any proof to the contrary, that these shares ultimately belong to individuals domiciled abroad.
The tax was assessed and paid by those companies ruled by the Corporations Law at the rate of 0.5% on the value of the shares or equity interest. The valuation of the shares, whether listed or not, must be made according to their proportional equity value. These companies may eventually seek reimbursement from the direct owner of the shares, in respect of any amounts paid to the Argentine tax authorities as a personal asset tax. Grupo Financiero Galicia has sought reimbursement for the amount paid corresponding to December 31, 2002. The Board of Directors submitted the decision on how to proceed with respect to fiscal year 2003 to the annual shareholders’ meeting held on April 22, 2004. At that meeting, our shareholders voted to suspend all claims on our shareholders for any amount unpaid for fiscal year 2002 and to have the Company absorb the amounts due for fiscal year 2003 onward, when not withheld from dividends.
Pursuant to Law No.27,260, Argentine companies that have properly fulfilled their tax obligations during the two prior fiscal years to the 2016 fiscal year, and which comply with certain other requirements, may qualify for an exemption from personal asset taxes for the 2016, 2017 and 2018 fiscal years. The request for this tax exemption should be filed before March 31, 2017. Grupo Financiero Galicia filed this request. Notwithstanding, we cannot assure that in the future, Grupo Financiero Galicia can fulfill these requirements and maintain such exemption.
Other Taxes
There are no Argentine federal inheritance, succession or gift taxes applicable to the ownership, transfer or disposition of ADSs or class B shares. There are no Argentine stamps, issue, registration or similar taxes or duties payable by holders of ADSs or class B shares.
Tax measures related to Covid-19
Tax, Trade & Regulatory
General Tax Measures
On March 19, 2020, the tax authorities established that the period between March 18, 2020 and March 31, 2020 will not be considered in order to meet administrative obligations with the AFIP. This measure does not modify or postpone any due date for the tax determination or payments.
On April 2, 2020, aligned with the lockdown extension until Monday April 27, the tax authorities defined as administrative holidays days between March 19 and April 26 for procedural purposes.
Similar extensions were implemented until November 29,2020.
Indirect Tax (VAT, Customs)
(Law 25.413 -Tax on Bank Debits and Credits)
On March 19,20, 2020 the AFIPGovernment approved a reduction in the tax rate from 0.6% to 0.25%. Additionally, AFIP also approved a reduction from 1.2% to 0.5% for tax financial transactions on deposits and withdrawals from Argentine bank accounts and a reduction from 1.2% to 0.5% for other transactions; both reductions, for employers in the health care industry (i.e., diagnosis services, health insurance and pre-paid medicine companies and hospitals, among others) during a 90-day period. Currently, these measures are in effect until the end of March 2021.
Other taxes
On March 23, 2020,The tax authority determined the deadline for e-filings broadly was expanded until June 30,2020. The tax authorities established that the period between March 18, 2020 and March 31, 2020 will not be considered in order to meet administrative obligations with the Federal Tax Administration. This measure does not modify or postpone any due date for the tax determination or payments.
On April 2, 2020, aligned with the lockdown extension until Monday April 27, the tax authorities defined as administrative holidays the days between March 19 and April 26 for procedural purposes.
30, 2021.
Tax reporting
On March 31,May 15, 2020, through General Resolution 4689/4717/2020, transfer pricing filings (including complementary annual study) correspondingwere postponed to August 2020 -for fiscal years ended fromending between December 31, 2018 to September 30,November 2019- and postponed to October 2020 -for fiscal years ending between December 2019 both inclusive, was postponed fromto April 20-24 to May 2020 18-222020- (the exact due date dependingdepends on the Tax ID'sID’s last digit).
Workforce: Individual and Employment Taxes
The due date for the voluntary repatriation of funds (in(in order not to be subject to an incremental tax rate on assets located abroad)abroad) was postponed from March 31 to April 30, 2020. Also, the due date for the payment established for those not adhering to the repatriation of funds was postponed from April 1 to May 6, 2020.
On March 25, 2020, the Labor, Employment & Social Security Ministry issued Resolution No. 219, which established that employees who could not work from home during the lockdown would be relieved from paying the employer and employee contributions due to the Integrated Social Security System. The Resolution also established that employers of new hires will benefit from a 95% reduction on the contributions they have to make to the Integrated Social Security System.
On March 31, 2020, the Labor, Employment & Social Security Ministry amended Resolution No. 219, and issued Resolution No. 279, removing any relief provided from social security contributions for those employees who cannot perform their duties from their homes during the lockdown.
Deposit and Withdrawal of Class B Shares in Exchange for ADSs
No Argentine tax is imposed on the deposit or withdrawal of class B shares in exchange for ADSs.
United States Federal Income Taxes
The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of class B shares and ADSs, as their terms are set forth in the documents or the forms thereof, relating to such securities as in existence on the date hereof, but itADSs. This summary does not purport to address all the U.S. federal income tax considerations that may be relevant to a particular holder (including consequences under the alternative minimum tax) or a decision to purchase, own or dispose of class B shares or ADSs. This summary assumesapplies only to beneficial owners of class B shares or ADSs that hold the class B shares or ADSs will be held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and. This summary does not address tax consequences to all categories of investors, some of which (such as dealers or traders in securities or currencies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt entities, banks and certain other financial institutions, insurance companies, persons that received class B shares or ADSs as compensation for the performance of services, persons owning (or deemed to own for U.S. federal income tax purposes) 10% or more (by voting power or value) of our shares, U.S. Holders (as defined below) whose functional currency is not the Dollar, and persons that hold the class B shares or ADSs as part of a position in a “straddle” or as part of a “hedging” or “conversion” transaction for U.S. federal income tax purposes)purposes, and individual retirement accounts and other tax deferred accounts) may be subject to special tax rules. Moreover, thisThis summary does not address the U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of class B shares or ADSs.
Moreover, the summary below does not address the U.S. state, local or non-U.S. income or other tax consequences of an investment in class B shares or ADSs, or any aspect of U.S. federal taxation other than income taxation
This summary (i) is based on the Code, existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case, as in effect and available onof the date hereof, and (ii) is based in part on representations of the DepositoryDepositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.
For purposes of this summary, a “U.S. Holder” is a beneficial owner of class B shares or ADSs that, for U.S. federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if such trust validly elects to be treated as a United States person for U.S. federal income tax purposes or if (a) a United States court can exercise primary supervision over its administration and (b) one or more United States persons have the authority to control all of the substantial decisions of such trust. A “Non-U.S.“Non-U.S. Holder” is a beneficial owner of class B shares or ADSs that is neither a U.S. Holder nor a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes).
If a partnership (or any otheran entity or arrangement treatedclassified as a partnership for U.S. federal income tax purposes)purposes holds class B shares or ADSs, the tax treatment of the partnership and a partner in such partnership generally will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.consequences of acquiring, owning and disposing of class B shares or ADSs.
Each prospective purchaser should consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. tax consequences of acquiring, owning and disposing of class B shares or ADSs.
Ownership of ADSs in General
In general, for U.S. federal income tax purposes, holders that are beneficial owners of ADSs will be treated as the beneficial owners of the class B shares represented by such ADSs. For purposes of the discussion below, we assume
The Internal Revenue Service (the “IRS”) has expressed concern that intermediaries in the chain of ownership between the holder of an ADS and Grupo Financiero Galiciaconnection with depositary arrangements may be taking actions that are acting consistentlyinconsistent with the claiming of U.S. foreign tax credits by U.S. Holders.persons who are holders of depositary shares. Accordingly, U.S. Holders should be aware that the discussion below regarding the availability of foreign tax credits for Argentine withholding tax on dividends paid with respect to Class B shares represented by ADSs could be affected by future action taken by the IRS. The rules relating to computing foreign tax credits and deducting foreign taxes are extremely complex, and U.S. Holders are urged to consult their own tax advisors regarding the availability of foreign tax credits with respect to any Argentine income taxes withheld from a dividend on the class B shares or ADSs.
Taxation of Distributions
Subject to the discussion below under “Passive Foreign Investment Company Considerations”, for U.S. federal income tax purposes, the gross amount of distributions by Grupo Financiero Galicia of cash or property (other than certain distributions, if any, of class B shares or ADSs distributed pro rata to all shareholders of Grupo Financiero Galicia, including holders of ADSs) made with respect to the class B shares or ADSs before reduction for(including any amounts withheld in respect of Argentine taxes withheld therefrom,taxes) generally will, constitute dividends to the extent that such distributions are paid out ofmade from Grupo Financiero Galicia’s current or accumulated earnings and profits as determined under U.S. federal income tax principles, constitute dividends for U.S. federal income tax purposes,purposes. To the extent that a distribution by Grupo Financiero Galicia exceeds the amount of its earnings and profits, it will be includedtreated as a non-taxable return of capital to the extent of the U.S. Holder’s adjusted tax basis in the class B shares or ADSs, and thereafter as capital gain. However, Grupo Financiero Galicia does not maintain calculations of our earnings and profits under U.S. federal income tax principles. U.S. Holders should therefore assume that any distribution by Grupo Financiero Galicia with respect to class B shares or ADSs will be reported as ordinary dividend income for U.S. federal income tax purposes. In general, cash dividends (including amounts withheld in respect of Argentine taxes) paid with respect to:
the class B shares generally will be includible in the gross income of a U.S. Holder as dividend income. Subject toordinary income on the discussion below under “Passive Foreign Investment Company Considerations”, non-corporateday on which the dividends are received by the U.S. HoldersHolder; or
the class B shares represented by ADSs generally will be taxedincludible in the gross income of a U.S. Holder as ordinary income on such distributionsthe day on which the dividends are received by the Depositary;
and, in either case, these dividends will not be eligible for the dividends received deduction allowed to corporations.
Dividends paid by Grupo Financiero Galicia in respect of ADSs (or class B sharesgenerally will be treated as “qualified dividend income,” which is taxable to a non-corporate U.S. Holder at the reduced rate normally applicable to long-term capital gains, provided that (i) the ADSs are readily tradable on an established securities market in the United States at(such as the timeNASDAQ, on which the ADSs are currently listed), (ii) in the year prior to the year in which the dividend was paid Grupo Financiero Galicia was not, and in the year in which the dividend is paid Grupo Financiero Galicia is not, a passive foreign investment company (a “PFIC”), and (iii) certain other requirements are met. The ADSs (but not the class B shares) may qualify as readily tradable on an established securities market in the United States as long as they are listed on the NASDAQ. See “Passive Foreign Investment Companies” below for a discussion of the PFIC rules. Dividends paid by Grupo Financiero Galicia in respect of class B shares will be subject to tax as ordinary dividend income.
In addition, the U.S. Treasury Department has indicated that it continues to consider whether detailed information reporting guidance is necessary pursuant to which holders of ADSs and intermediaries through whom such distribution) at the lower rates applicablesecurities are held will be permitted to long-term capital gains (i.e., gainsrely on certifications from the sale of capital assets held for more than one year). Non-corporateissuers to establish that dividends are treated as qualified dividend income. However, no such detailed procedures have yet been issued and therefore Grupo Financiero Galicia is not certain that it will be able to comply with them. U.S. Holders that (i) do not meet a minimum holding period requirementshould consult their own tax advisors regarding the availability of the reduced rate discussed above with respect to such ADSs (or class B shares), (ii) elect to treat thequalified dividend income as “investment income” pursuant to Section 163(d)(4)(B)in light of the Code or (iii) receive dividends with respect to which they are obligated to make related payments for positions in substantially similar or related property will not be eligible for the reduced rates of taxation. In addition, dividends will not be eligible for the dividends received deduction generally allowed to corporations under the Code.
Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if distributions with respect to the class B shares or ADSs exceed Grupo Financiero Galicia’s current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, the excess will be treated first as a tax-free return of capital to the extent of such U.S. Holder’s adjusted tax basis in the class B shares or ADSs. Any amount in excess of such adjusted basis will be treated as capital gain from the sale or exchange of such class B shares or ADSs. Grupo Financiero Galicia does not maintain calculations of its earnings and profits under U.S. federal income tax principles.
their own particular circumstances.
Dividends paid in Pesos will be included in the gross income of a U.S. Holder in an amount equal to the Dollar value of the Pesos on the date of receipt which,by the U.S. Holder, in the case of class B shares, or the Depositary, in the case of ADSs, regardless of whether the payment is the date they are received by the Depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.in fact converted to Dollars. Any gains or losses resulting from the conversion of Pesoscurrency exchange fluctuations between the timedate the dividend payment is included in the gross income of the receipt of dividends paid in Pesosa U.S. Holder and the timedate the Pesos are converted into Dollars (or otherwise disposed of) will be treated as U.S. source ordinary income or loss, as the case may be, of a U.S. Holder.
Dividends received by a U.S. Holder with respect to the class B shares or ADSs will be treated as foreignnon-U.S. source income, which may be relevant in calculating such holder’sU.S. Holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Argentine tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific categories of income. For this purpose, dividend income with respect to class B shares or ADSs should generally constitute “passive category income”, or in the case of certain U.S. Holders, “general category income”. The rules governing the foreign tax credit are complex. Prospective holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Subject to the discussion below under “Backup Withholding and Information Reporting”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on class B shares or ADSs, unless such income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.
Taxation of Capital Gains
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” U.S. Holders generally will recognize capital gain or loss for U.S. federal income tax purposes upon a sale or exchangeother taxable disposition of class B shares or ADSs in an amount equal to the difference between such U.S. Holder’s adjusted tax basis in the class B shares or ADSs and the amount realized on their disposition.sale or other taxable disposition, in each case as determined in Dollars. In the case of a non-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate for ordinary income (other than certain dividends) if the U.S. Holder’s holding period in the class B shares or ADSs exceeds one year at the time of the sale or exchange. Gain or loss, if any, recognized by a U.S. Holder generally will be treated as United StatesU.S. source income or loss for U.S. foreign tax credit purposes. Consequently, a U.S. Holder may not be able to use the foreign tax credit arising from any Argentine tax imposed on the disposition of class B shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreignnon-U.S. sources. Certain limitations apply to the deductibility of capital losses for U.S. federal income tax purposes.
A U.S. Holder’s initial tax basis in the class B shares or ADSs is the Dollar value of the Pesos denominated purchase price determined on the settlement date, in the case of purchase.a cash basis U.S. Holder, or the trade date in the case of an accrual basis U.S. Holder. If the class B shares or ADSs are treated as traded on an “established securities market”, a cash basis U.S. Holder (or, if it elects, an accrual basis U.S. Holder) willHolder may elect to determine the Dollar value of the cost of such class B shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase.
With respect to the sale or exchange of class B shares or ADSs, the amount realized generally will be the Dollar value of the payment received, before reduction for any Argentine taxes withheld therefrom, determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the class B shares or ADSs are treated as traded on an “established securities market”, a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) willtaxpayer may elect to determine the Dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
The election by an accrual basis U.S. Holder discussed above to use the settlement date for purposes of determining basis and the amount realized must be applied consistently from year to year and cannot be revoked without the consent of the IRS.
Subject to the discussion below under “Backup Withholding and Information Reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on gain realized on the sale or exchange of class B shares or ADSs unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Considerations
A non-U.S. corporation will be classified as a “passive foreign investment company”, or a PFIC for U.S. federal income tax purposes in any taxable year in which, after applyingtaking into account the income and assets of the corporation and certain subsidiaries pursuant to certain look-through rules, either (1) at least 75 percent of its gross income is “passive income” or (2) at least 50 percent of the average value of its gross assets is attributable to assets that produce “passive income” or isare held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions, other than certain income derived in the active conduct of a banking business.
transactions.
The application of the PFIC rules is unclear both generally and specifically with respect to banks. The United StatesAlthough interest income generally is treated as passive income for this purpose, the Internal Revenue Service (“IRS”Service(the “IRS”) has issued a notice and certain proposed Treasury Regulations that exclude from passive income any income derived in the active conduct of a banking business by a qualifying foreign
bank (the “Active Bank Exception”). However, the IRS notice and proposed Treasury Regulations are inconsistent in certain respects. Because final Treasury Regulations have not been issued, there can be no assurance that Grupo Financiero Galicia or its subsidiaries will satisfy the Active Bank Exception for any given taxable year.
Based on certain estimates of its gross income and gross assets (which estimates are inherently imprecise), the nature of its business, and reliance on the Active Bank Exception, Grupo Financiero Galicia believes that it shouldwas not be classified as a PFIC for the taxable year ended December 31, 2019.2020. Grupo Financiero Galicia’s status in future years will depend on its assets and activities in those years. Grupo Financiero Galicia has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC, but there can be no assurance that Grupo Financiero Galicia will not be considered a PFIC for any taxable year. If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, the class B shares or ADSs.
If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs could make a variety of elections that may alleviate certain of the adverse tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of the class B shares or ADSs. U.S. Holders should consult their own tax advisors regarding the tax consequences and filing requirements that would arise if Grupo Financiero Galicia were treated as a PFIC.
Reporting Requirements
Non-corporate U.S. Holders, including individuals, that hold “specified foreign financial assets”, as defined in the Treasury Regulations (which may include class B shares or ADSs), other than in an account at a U.S. financial institution or the U.S. branch of a non-U.S. financial institution, are required to report certain information relating to such assets. U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of this and any other reporting requirements on their ownership and disposition of class B shares or ADSs. Failure to comply with applicable reporting requirements could result in the imposition of substantial penalties.
Backup Withholding and Information Reporting
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemptionother taxable disposition of, class B shares or ADSs made within the United States, or by a U.S. payor or U.S. middleman, to a holder of class B shares or ADSs (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification).
Payments of dividends on, or proceeds from the sale or redemptionother taxable disposition of, class B shares or ADSs within the United States, or by a U.S. payor or U.S. middleman, to a holderU.S. Holder (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification) will be subject to backup withholding if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements.
The amount of any backup withholding tax rate is currently 24%.
FATCA
Beginning on the date that is two years after the date on which final Treasury Regulations are published defining the term “foreign passthru payment”, Grupo Financiero Galicia mayfrom a payment to a holder will be required, pursuant to Sections 1471 through 1474 of the Code, and the Treasury Regulations promulgated thereunder (often referred to as the “Foreign Account Tax Compliance Act” or “FATCA”) to withhold U.S. tax at a 30% rate on all or a portion of any distribution on class B shares or ADSs which is treatedallowed as a “foreign passthru payment”.
Assumingcredit against the holder’s U.S. federal income tax liability, provided that distributions from Grupo Financiero Galicia constitute “foreign passthru payments”the required information is timely furnished to the IRS. Holders should consult their tax advisers about these rules and any other reporting obligations that Grupo Financiero Galicia enters into an agreement withmay apply to the IRS to report the information required by FATCAownership or if
Argentina has entered in an intergovernmental agreement with the United States (an “IGA”),that Grupo Financiero Galicia complies with such IGA, then an investor considered to have a “U.S. account” maintained by Grupo Financiero Galicia may be required to provide the information described below or be subject to U.S. withholding tax on any distribution on class B shares or ADSs that is treated as a “foreign passthru payment”. Investors in class B shares or ADSs that are financial institutions, or financial institutions that receive payments on behalf of other persons, and that have not entered into an agreement with the IRS (or otherwise established an exemption from FATCA, including pursuant to an applicable IGA) would also be subject to this U.S. withholding tax.
FATCA is particularly complex and its application to Grupo Financiero Galicia is uncertain at this time. Each holderdisposition of class B shares or ADSs should consult its own tax advisor to obtain a more detailed explanation of FATCA and to learn how it might affect such holder under its particular circumstances.ADSs.
Medicare Tax on Investment Income
Certain U.S. Holders that are individuals, estates or trusts are required to pay a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold. Net investment income includes, among other things, dividends and capital gains from the sale or other disposition of class B shares or ADSs.
THE ABOVE SUMMARIES ARE NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CLASS B SHARES OR ADSs. PROSPECTIVE HOLDERS SHOULD CONSULT AN INDEPENDENT TAX ADVISOR CONCERNING THE TAX CONSEQUENCES IN THEIR PARTICULAR CIRCUMSTANCES.
F. Dividends and Paying Agents
Not applicable.
Not applicable.
We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and its exhibits, may be inspected and printed or copied for a fee at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These materials are also available on the SEC’s website at http://www.sec.gov. Material submitted by us can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006-1506.
For a description of subsidiary information, see Item 11. Quantitative4. “Information on the Company”—A. “History and Qualitative Disclosures About Market Risk
Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
A. General
Market risks faced by us are the risks arising from the fluctuations in interest rates and in foreign exchange rates. Our market risk arises mainly from the operations of Banco Galicia in its capacity as a financial intermediary. Our subsidiaries and are also subject to market risk. However, the amount of these risks is not significant, and they are not discussed below. Policies regarding these risks are applied at the level of our operating subsidiaries.
In compliance with the Argentine Central Bank’sBCRA’s regulations, based on the best practices and international standards, Banco Galicia has a Risk Management Division responsible for identifying, monitoring and actively and integrally managing the different risks Banco Galicia and its subsidiaries are exposed to (credit, financial and operational risks). The aim of the Division is to guarantee Banco Galicia’s board of directors that it is fully aware of the risks Banco Galicia is exposed to. It also creates and proposes the policies and procedures necessary to mitigate and control such risks. The Risk Management Committee, made-up of six members of the board of directors of Banco Galicia, the Chief Executive Officer and the managers of the Risk Management Division, the Planning Division and Internal Audit, is the highest corporate body to which Banco Galicia’s board of directors delegates integral risk management and the executive responsibility to define and enforce risk management policies, procedures and controls. This Committee is also responsible for setting specific limits for the exposure to each risk and approving, when applicable, temporary excesses over such limits as well as being informed of each risk position and compliance with policies.
See Item 6. “Directors, Senior Management and Employees”—“Functions of the Board of Directors of Banco Galicia”. Liquidity management is discussed in Item 5 “Operating and Financial Review and Prospects”-.B.“Liquidity and Capital Resources”. Credit risk management is discussed in Item 4. “Information on the Company”—B.“Business Overview”- “Selected Statistical Information”—“Credit Review Process” and other sections under Item 4. “Information on the Company”—B.”Business Overview”- “Selected Statistical Information” describing Grupo Galicia’s financial instruments portfolio and financial instruments loss experience.
The following sections contain information on Banco Galicia’s sensitivity to interest-rate risk and exchange-rate risk that constitute forward lookingforward-looking statements that involve risks and uncertainties. Actual results could differ from those projected in the forward-looking statements.
B. Interest Rate Risk
A distinctive and natural characteristic of financial brokerage is the existence of interest-earning assets and interest-bearing liabilities with different maturities (or different rate repricing periods) and interest rates that can be fixed or variable. This situation leads to a gap or mismatch that arises from the balance sheet and measures the imbalance between fixed- and variable-rate assets and liabilities, and results in the so-called interest-rate risk or balance sheet structural risk. A commercial bank can face the interest rate risk on both sides of its balance sheet: with regard to the income generated by assets (loans and securities) and the expenses related to the interest-bearing liabilities (deposits and other sources of funds).
The policy currently in force defines this gap as the risk that the financial margin and the economic value of equity may vary as a consequence of fluctuations in market interest rates. The magnitude of such variation is associated with the sensitivity to interest rates of the structure of the Bank’s assets and liabilities.
Aimed at managing and limiting the sensitivity of Banco Galicia'sGalicia’s economic value and results with respect to variations in the interest rate inherent to the structure of certain assets and liabilities, the following caps have been determined:
Limit on the gross brokerage margin for the first year.
Limit on the net present value of assets and liabilities.
i) Limit on the Gross Brokerage Margin for the First Year
The effect of interest rate fluctuations on the gross brokerage margin for the first year is calculated using the methodology known as scenario simulation. On a monthly basis, gross brokerage margin for the first year is simulated in a base scenario and in a “+400 bps” scenario for peso currency and “+200 bps” scenario for dollar scenario. In order to prepare each scenario, different criteria are assumed regarding the sensitivity to interest rates of assets and liabilities, depending on the historical performance observed of the different balance sheet items. Gross brokerage margin for the first year in the “+400 bps” and “+200 bps” scenario is compared to the gross brokerage margin for the first year in the “base” scenario. The resulting difference is related to the annualized accounting gross brokerage margin for the last calendar trailing quarter available, for Banco Galicia on a consolidated basis.
The limit on a potential loss was established at 10% of the gross brokerage margin for the first year, as defined above. At fiscal year-end, the negative difference between the gross brokerage margin for the first year corresponding to the “+400/200 bps” scenario and that corresponding to the “base” scenario accounted for -4.2%-4.6% of the gross brokerage margin for the first year.
The tables below show as of December 31, 20192020 in absolute and percentage terms, the change in Banco Galicia’s gross brokerage margin (“GBM”) of the first year, as compared to the gross brokerage margin of the “base” scenario corresponding to various interest-rate scenarios in which interest rates change 50, 100, 150 and 200 bps from those in the “base” scenario. Banco Galicia’s net portfolio is broken down into trading and non-trading. The trading net portfolio represents primarily securities issued by the Argentine Government.
Net Portfolio |
| |||||||
|
| Gross Brokerage Margin (1) |
| |||||
|
| December 31, 2019 |
| |||||
|
| (In millions of Pesos, except percentages) |
| |||||
Change in Interest Rates in bps |
| Variation |
|
| % Change in the GBM |
| ||
200 |
|
| 2,812 |
|
|
| 2.54 | % |
150 |
|
| 2,106 |
|
|
| 1.91 | % |
100 |
|
| 1,403 |
|
|
| 1.27 | % |
50 |
|
| 700 |
|
|
| 0.64 | % |
Static |
|
|
|
|
|
|
|
|
(50) |
|
| (655 | ) |
|
| (0.60 | )% |
(100) |
|
| (1,310 | ) |
|
| (1.19 | )% |
(150) |
|
| (1,962 | ) |
|
| (1.78 | )% |
(200) |
|
| (2,512 | ) |
|
| (2.37 | )% |
(1) Net interest of the first year
Net Portfolio | ||||||||
Gross Brokerage Margin (1) | ||||||||
December 31, 2020 | ||||||||
(In millions of Pesos, except percentages) | ||||||||
Change in Interest Rates in bps | Variation | % Change in the GBM | ||||||
200 | 2,812 | 2.54 | % | |||||
150 | 2,106 | 1.91 | % | |||||
100 | 1,403 | 1.27 | % | |||||
50 | 700 | 0.64 | % | |||||
Static | ||||||||
(50) | (650 | ) | (0.60 | )% | ||||
(100) | (1,310 | ) | (1.19 | )% | ||||
(150) | (1,962 | ) | (1.78 | )% | ||||
(200) | (2,512 | ) | (2.37 | )% |
Net Trading Portfolio |
| |||||||
|
| Gross Brokerage Margin (1) |
| |||||
|
| December 31, 2019 |
| |||||
|
| (In millions of Pesos, except percentages) |
| |||||
Change in Interest Rates in bps |
| Variation |
|
| % Change in the GBM |
| ||
200 |
|
| 136 |
|
|
| 0.12 | % |
150 |
|
| 101 |
|
|
| 0.09 | % |
100 |
|
| 68 |
|
|
| 0.06 | % |
50 |
|
| 34 |
|
|
| 0.03 | % |
Static |
|
|
|
|
|
|
|
|
(50) |
|
| (33 | ) |
|
| (0.03 | )% |
(100) |
|
| (67 | ) |
|
| (0.06 | )% |
(150) |
|
| (100 | ) |
|
| (0.09 | )% |
(200) |
|
| (133 | ) |
|
| (0.12 | )% |
(1) Net interest of the first year
Net interest of the first year |
Net Non -Trading Portfolio |
| |||||||
|
| Gross Brokerage Margin (1) |
| |||||
|
| December 31, 2019 |
| |||||
|
| (In millions of Pesos, except percentages) |
| |||||
Change in Interest Rates in bps |
| Variation |
|
| % Change in the GBM |
| ||
200 |
|
| 2,676 |
|
|
| 2.43 | % |
150 |
|
| 2,005 |
|
|
| 1.82 | % |
100 |
|
| 1,335 |
|
|
| 1.21 | % |
50 |
|
| 666 |
|
|
| 0.61 | % |
Static |
|
|
|
|
|
|
|
|
(50) |
|
| (622 | ) |
|
| (0.57 | )% |
(100) |
|
| (1,243 | ) |
|
| (1.13 | )% |
(150) |
|
| (1,862 | ) |
|
| (1.69 | )% |
(200) |
|
| (2,479 | ) |
|
| (2.25 | )% |
(1) Net interest of the first year
Net Trading Portfolio | ||||||||
Gross Brokerage Margin (1) | ||||||||
December 31, 2020 | ||||||||
(In millions of Pesos, except percentages) | ||||||||
Change in Interest Rates in bps | Variation | % Change in the GBM | ||||||
200 | 146 | 0.10 | % | |||||
150 | 109 | 0.08 | % | |||||
100 | 72 | 0.05 | % | |||||
50 | 36 | 0.03 | % | |||||
Static | ||||||||
(50) | (18 | ) | (0.01 | )% | ||||
(100) | (66 | ) | (0.05 | )% | ||||
(150) | (115 | ) | (0.08 | )% | ||||
(200) | (164 | ) | (0.12 | )% |
(1) | Net interest of the first year |
Net Non -Trading Portfolio | ||||||||
Gross Brokerage Margin (1) | ||||||||
December 31, 2020 | ||||||||
(In millions of Pesos, except percentages) | ||||||||
Change in Interest Rates in bps | Variation | % Change in the GBM | ||||||
200 | 2,357 | 1.66 | % | |||||
150 | 1,766 | 1.24 | % | |||||
100 | 1,177 | 0.83 | % | |||||
50 | 588 | 0.41 | % | |||||
Static | ||||||||
(50) | (703 | ) | (0.49 | )% | ||||
(100) | (1,452 | ) | (1.02 | )% | ||||
(150) | (2,204 | ) | (1.55 | )% | ||||
(200) | (2,955 | ) | (2.08 | )% |
(1) | Net interest of the first year |
ii) Limit on the Net Present Value of Assets and Liabilities
The net present value of assets and liabilities is also calculated on a monthly basis and taking into account the assets and liabilities of Banco Galicia’s consolidated balance sheet. The methodology used for calculating interest rate risk is based on the net present value of the underlying asset of liability.
The net present value of the consolidated assets and liabilities, as mentioned, is calculated for a “base” scenario in which the listed securities portfolio is discounted using interest rates obtained according to yield curves determined based on the market yields of different reference bonds denominated in Pesos, foreign currency and adjusted by CER/UVA. Yield curves for unlisted assets and liabilities are also created using market interest rates. The net present value of assets and liabilities is also obtained for a second scenario called “critical”, where through a significant number of statistical simulations of the interest rate track record, a “critical” scenario is obtained as a result of the interest rate risk exposure presented by the balance sheet structure.
The economic capital is obtained from the resulting difference between the “critical” scenario and the net present value of assets and liabilities of the “base” scenario and considering a 99.5% degree of accuracy.
The limit on interest rate risk exposure, expressed as a difference between the net present value of assets and liabilities in the “base” scenario and the “critical” scenario cannot exceed 15% of the consolidated RPC. As of December 31, 2019,2020, the “Value at Risk” was -8.65%(7.73%) of the RPC.Tier 1.
C. Foreign Exchange Rate Risk
Exchange-rate sensitivity is the relationship between the fluctuations of exchange rates and Banco Galicia’s net financial income resulting from the revaluation of Banco Galicia’s assets and liabilities denominated in foreign currency. The impact of variations in the exchange rate on Banco Galicia’s net financial income depends on whether Banco Galicia has a net asset foreign currency position (the amount by which foreign currency denominated assets exceed foreign currency denominated liabilities) or a net liability foreign currency position (the amount by which foreign currency denominated liabilities exceed foreign currency denominated assets). In the first case an increase/decrease in the exchange rate results in a gain/loss, respectively. In the second case, an increase/decrease results in a loss/gain, respectively. Banco Galicia has established limits for its consolidated foreign currency mismatches for the asset and liability positions of -9 % and + 30% of Banco Galicia’s RPC. At the end of the fiscal year, Banco Galicia’s net asset position in foreign currency represented 0.6%-0.3% (minus 0.3%).
As of December 31, 2019,2020, Banco Galicia had a net assetliability foreign currency position of Ps.4,929Ps.873 million (US$8210,4 million) after adjusting its on-balance sheet net assetliability position of Ps.4,906Ps.413 million (US$824,9 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.23Ps.460 million (US$0,45,5 million), recorded off-balance sheet.
As of December 31, 2018, Banco Galicia had a net liability foreign currency position of Ps.978 million (US$26 million) after adjusting its on-balance sheet net liability position of Ps.1,079 million (US$29 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.101 million (US$3 million), recorded off-balance sheet.
As of December 31, 2017, Banco Galicia had a net liability foreign currency position of Ps.549 million (US$29 million), after adjusting its on-balance sheet net asset position of Ps.2,003million (US$107 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.2,552 million (US$136 million), recorded off-balance sheet.
The table below show the effects of changes in the exchange rate of the Peso vis-à-vis the Dollar on the value of Banco Galicia’s foreign currency net asset position as of December 31, 2019.2020. As of these dates, the breakdown of Banco Galicia’s foreign currency net asset position into trading and non-trading is not presented, as Banco Galicia’s foreign currency trading portfolio was not materialmaterial.
|
|
|
| Value of Foreign Currency Net Position |
| |||||||||
|
|
|
| As of December 31, |
| |||||||||
|
|
|
| 2019 |
| |||||||||
Percentage Change in the Value of the Peso Relative to the Dollar (1) |
|
| Amount |
|
| Absolute Variation |
|
| % Change |
| ||||
|
|
|
| (in millions of Pesos, except percentages) |
| |||||||||
40% |
|
|
| 6,896 |
|
|
| 1,967 |
|
|
| 40 |
| |
30% |
|
|
| 6,408 |
|
|
| 1,479 |
|
|
| 30 |
| |
20% |
|
|
| 5,915 |
|
|
| 986 |
|
|
| 20 |
| |
10% |
|
|
| 5,422 |
|
|
| 493 |
|
|
| 10 |
| |
Static (2) |
|
|
| 4,929 |
|
| - |
|
| - |
| |||
-10% |
|
|
| 4,436 |
|
|
| (493 | ) |
|
| (10 | ) | |
-20% |
|
|
| 3,943 |
|
|
| (986 | ) |
|
| (20 | ) | |
-30% |
|
|
| 3,450 |
|
|
| (1,479 | ) |
|
| (30 | ) | |
-40% |
|
|
| 2,962 |
|
|
| (1,967 | ) |
|
| (40 | ) |
(1) Devaluation / (Revaluation).
(2) Adjusted to reflect forward purchases and sales of foreign currency without delivery of the underlying asset, registered in memorandum accounts.
Value of Foreign Currency Net Position | ||||||||||||
As of December 31, | ||||||||||||
2020 | ||||||||||||
Percentage Change in the Value of the Peso Relative to the Dollar (1) | Amount | Absolute Variation | % Change | |||||||||
(in millions of Pesos, except percentages) | ||||||||||||
40% | (579 | ) | (165 | ) | 40 | |||||||
30% | (537 | ) | (124 | ) | 30 | |||||||
20% | (496 | ) | (83 | ) | 20 | |||||||
10% | (455 | ) | (41 | ) | 10 | |||||||
Static (2) | (413 | ) | — | — | ||||||||
-10% | (372 | ) | 41 | (10 | ) | |||||||
-20% | (331 | ) | 83 | (20 | ) | |||||||
-30% | (289 | ) | 124 | (30 | ) | |||||||
-40% | (248 | ) | 165 | (40 | ) |
(1) | Devaluation / (Revaluation). |
(2) | Adjusted to reflect forward purchases and sales of foreign currency without delivery of the underlying asset, registered in memorandum accounts. |
D. Currency Mismatches
The funding and the use of funds in loans and/or investments can be carried out in assets and liabilities denominated in different currencies. As such, there is the potential for a currency mismatch between liabilities and the use thereof on assets, generating a risk. Currency risk is defined as the risk of incurring equity losses as a result of variations in the foreign currency exchange rates in which assets and liabilities are denominated.
The management of the Bank’s currency risk mismatch involves the monitoring of foreign currency-denominated assets and liabilities that may change in the short- and or mid-term. One of the available market instruments for the management of currency mismatches of assets and liabilities are “currency futures” transactions, which are traded on the MAE (MAE – OCT) and Mercado a Término de Rosario (ROFEX).
The policy framework currently in force establishes limits in terms of maximum net asset positions (assets denominated in a currency which are higher than the liabilities denominated in such currency) and net liability positions (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of the Bank’s computable regulatory capital (“RPC”)(RPC), on a consolidated basis.
The table below shows the composition of the Grupo Financiero Galicia’s Shareholders’ Equity as of December 31, 2019,2020, by currency and type of adjustment:
|
| December 31, 2019 |
| |||||||||
|
| Assets |
|
| Liabilities |
|
| Gap |
| |||
|
| (in millions of Pesos) |
| |||||||||
Financial Assets and Liabilities |
|
| 638,334 |
|
|
| 536,814 |
|
|
| 101,520 |
|
Pesos - Adjusted by UVA |
|
| 28,335 |
|
|
| 1,950 |
|
|
| 26,385 |
|
Pesos - Unadjusted |
|
| 404,602 |
|
|
| 338,247 |
|
|
| 66,355 |
|
Foreign Currency (1) |
|
| 205,397 |
|
|
| 196,617 |
|
|
| 8,780 |
|
Other Assets and Liabilities |
|
| 47,185 |
|
|
| 31,871 |
|
|
| 15,314 |
|
Total Gap |
|
| 685,519 |
|
|
| 568,685 |
|
|
| 116,834 |
|
Adjusted for Forward Transactions Recorded in Memo Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities |
|
| 638,334 |
|
|
| 536,814 |
|
|
| 101,520 |
|
Pesos - Adjusted by the UVA |
|
| 28,335 |
|
|
| 1,950 |
|
|
| 26,385 |
|
Pesos - Unadjusted, Including Shareholders’ Equity (2) |
|
| 378,580 |
|
|
| 312,248 |
|
|
| 66,332 |
|
Foreign Currency (1) (2) |
|
| 231,419 |
|
|
| 222,616 |
|
|
| 8,803 |
|
Other Assets and Liabilities |
|
| 47,185 |
|
|
| 31,871 |
|
|
| 15,314 |
|
Total Adjusted Gap |
|
| 685,519 |
|
|
| 568,685 |
|
|
| 116,834 |
|
(1) In Pesos, at an exchange rate of Ps.59.8950 per US$1.
(2) Adjusted for forward sales and purchases of foreign exchange, without delivery of underlying assets and recorded in Memorandum Accounts.
December 31, 2020 | ||||||||||||
Assets | Liabilities | Gap | ||||||||||
(in millions of Pesos) | ||||||||||||
Financial Assets and Liabilities | 883,853 | 759,711 | 124,142 | |||||||||
Pesos - Adjusted by UVA | 32,321 | 7,099 | 25,222 | |||||||||
Pesos - Unadjusted | 637,405 | 537,612 | 99,793 | |||||||||
Foreign Currency (1) | 214,127 | 215,000 | (873 | ) | ||||||||
Other Assets and Liabilities | 62,166 | 34,487 | 27,679 | |||||||||
|
|
|
|
|
| |||||||
Total Gap | 946,019 | 794,198 | 151,821 | |||||||||
|
|
|
|
|
| |||||||
Adjusted for Forward Transactions Recorded in Memo Accounts | ||||||||||||
Financial Assets and Liabilities | 883,853 | 759,711 | 124,142 | |||||||||
Pesos - Adjusted by the UVA | 32,321 | 7,099 | 25,222 | |||||||||
Pesos - Unadjusted, Including Shareholders’ Equity (2) | 612,456 | 513,123 | 99,333 | |||||||||
Foreign Currency (1) (2) | 239,076 | 239,489 | (413 | ) | ||||||||
Other Assets and Liabilities | 62,166 | 34,487 | 27,679 | |||||||||
|
|
|
|
|
| |||||||
Total Adjusted Gap | 946,019 | 794,198 | 151,821 | |||||||||
|
|
|
|
|
|
(1) | In Pesos, at an exchange rate of Ps.84,145 per US$1. |
(2) | Adjusted for forward sales and purchases of foreign exchange, without delivery of underlying assets and recorded in Memorandum Accounts. |
As of December 31, 2019,2020, considering the adjustments from forward transactions recorded under memorandum accounts, Grupo Financiero Galicia had net asset positions in foreign currency and Pesos adjusted and non-adjusted.
The paragraphs below describe the composition of the different currency mismatches of assets and liabilities as of December 31, 2019:2020:
i) Assets and Liabilities Denominated in Foreign Currency
As of December 31, 2019,2020, the Grupo Financiero Galicia’s assets denominated in foreign currency were mainly comprised of the following: (i) Ps.91,749Ps.153.544 million of cash and balances from the Argentine Central BankBCRA and correspondent banks; (ii) Ps.98,556Ps.51.722 million for loans (principal plus interest) and other financing, including Ps.1,521Ps.1.368 million for receivables for financial leases; (iii) Ps.5,301 million for debt securities, primarily financial trusts; (iv) Ps.5,563Ps.4.378 million for government and private securities (v) Ps.2,404securities; (iv) Ps.2.580 million for other financial assets includes Ps.2.437 million for Prisma and (vi) Ps.1,753(v) Ps.1.845 million for assets pledged as collateral, including forward purchases of government securities.
The liabilities denominated in foreign currency consisted mainly of: (i) Ps.143,198Ps.166,916 million for deposits (principal, interest and quotation differences); (ii) Ps.17,991Ps.8,611 million for payables to banks and international credit entities; (iii) Ps.21,669Ps.26,482 million for subordinated and unsubordinated notes issued by Banco Galicia; and (iv) Ps.12,896Ps.12,068 million for other financial liabilities, mainly collections on behalf of third parties.
parties and leasings and (v) Ps.913 million recorded in “Other Non-financial Liabilities”.
A net asset positionliability of Ps.8,780Ps.873 million stemmed from the consolidated balance sheet. Furthermore, forward transactions in foreign currency without delivery of the underlying asset were recorded in memorandum accounts, which, in terms of their notional value, were equal to a net asset position of Ps.22Ps.460 million. Therefore, as of that date, the net position in foreign currency adjusted to reflect these transactions was a net assetliability position of Ps.8,803 million,Ps.413million, equivalent to US$1474,9 million.
BancoGrupo Financiero Galicia has set limits as regards foreign-currency mismatches at -9% of the Bank’s RPC for its net liability position and at +30% of the Bank’s RPC for its net asset position. At the fiscal year-end, Banco Galicia'sGalicia’s net asset position in foreign currency represented 9.4%- 0.3 % of its RPC.
ii) Non-Adjusted Peso-Denominated Assets and Liabilities
Grupo Financiero Galicia’s non-adjusted Peso-denominated assets at December 31, 20192020 were mainly comprised of the following: (i) Ps.233,353Ps.360.234 million for loans (principal plus interest, net of allowances) including
Ps.682 Ps.573 million for receivables from financial leases and Ps.2,544Ps.2.120 million for miscellaneous receivables; (ii) Ps.58,141Ps.128.325 million for the holding of securities issued by the Argentine Central Bank.BCRA (LELIQ); (iii) Ps.46,425Ps.30.209 million for cash and balances held at the Argentine Central BankBCRA and correspondent banks (including the balance of escrow accounts); (iv) Ps.30,075Ps.60.996 million for repurchase transactions; (v) Ps.15,705Ps.48.399 million for the holding of government and private securities, including Ps.10,949Ps.21.462 million for BOTE 2020;2022; (vi). Ps.8,511 Ps.3.353 million for “Other Financial Assets”, out of which Ps.643 million was related to mutual funds of Tarjetas Regionales;Asset; and (vii) Ps.2,272Ps.4.977 million pledged as collateral.
Grupo Financiero Galicia’s non-adjusted Peso-denominated liabilities at December 31, 20192020 were mainly comprised of the following (i) Ps.248,588Ps.504.088 million for deposits (principal plus interest); (ii) Ps.48,034Ps.20.886 million for liabilities payable to stores, credit card transactions of Banco Galicia and Tarjetas Regionales;Galicia; (iii) Ps.23,071Ps.3.075 million for notes issued by Banco Galicia and Tarjetas Regionales;Galicia; (iv) Ps.7,911Ps.6.987 million for other financial liabilities; (v) Ps.4,732Ps.1.581 million for debt incurred with local financial institutions and (vi) Ps.2,516Ps.937 million for amounts payable for future transactions and transactions pending settlement of government securities and foreign currency.
The net asset position in non-adjusted Peso-denominated assets and liabilities was Ps.66,332Ps 95.797 million at December 31, 2019.2020.
iii) Peso-Denominated Assets and Liabilities Adjusted by UVA
At December 31, 2019,2020, the net asset position amounted to Ps.26,385Ps 25,222 million, which is primarily comprised of Ps.26,515Ps.29,663 million for loans, mainly UVA mortgage loans and Ps.1,820Ps.2,658 million for miscellaneous receivables.
With respect to liabilities, Ps.1,175Ps.5,662 million was related to UVA-adjusted time deposits and Ps.775Ps.1,437 million related to balances of the unemployment fund of construction workers.
iv) Other Assets and Liabilities
As of December 31, 2019,2020, “Other Assets - Assets—Liabilities” mainly included the following: (i) property, plant and equipment, miscellaneous and intangible assets for Ps.44,134Ps.52,302 million; and (ii) miscellaneous receivables for Ps.2,807 million.
Ps.4,535 million and (iii) Ps.6.361 million recorded in “Other Non-financial assets”;
As of December 31, 2019,2020, liabilities mainly included the following: (i) Ps.16,590Ps.18.023 million recorded in “Other Non-financial Liabilities”; (ii) Ps.10,315Ps.13,031 million for current income tax liabilities; and (iii) Ps.2,747Ps.3,433 million for provisions for other contingencies.
E. Market Risk
The exposure toof portfolios consisting of listed financial instruments, whose value variesvalues vary according to the movementmovements in their market prices, is subject to a specific policy framework. This framework that regulates the risk of incurring a loss as a consequence of the variation ofin the market price of financial assets whose value isvalues are subject to negotiation.
Brokerage transactions and/or investments in government securities, currencies, notes, derivative products and debt instruments issued by the Argentine Central BankBCRA are governed by the policy that limits the maximum tolerable losses in a given fiscal year.
In order to gauge and monitor this source of risk, the model known as VaRValue at Risk (VaR) is used, among others. Banco Galicia measures risk by means of a parametric VaR model, assuming that returns follow a multivariate normal distribution. This model determines on an intra-daily basis the potential losses that could be generated for the Bank individually the possible loss that could be generated by the positions in equity securities, currencies, derivative instruments, and debt securities issued by the Argentine Central Bank and currenciesaccording to its portfolio, under certain parameters.
The parameters taken into consideration are as follows:
(i) A 99% degree of accuracy.
(i) | A 99% confidence level on the method used for the VaR model analysis. |
(ii) | Holding periods of one day and “n” days, where “n” is defined as the number of days necessary to settle the position in each security. |
(ii) VaR estimates are made for holding periods of one day and “n” days, where “n” is defined as the number of days necessary to settle the position in each security.
(iii) In the case of securities, if they are new issuances, the available trading days are taken into consideration for the calculation of volatilities; if there are not enough trading days or if there are no quotations, the volatility of bonds from domestic issuers with similar risk and characteristics is used.
(iii) | Volatilities are calculated as the standard deviation of returns in the available trading days. If there are new issuances, or if there are not enough trading days or quotations, the volatility of bonds from domestic issuers with similar risk and characteristics are used. |
Banco Galicia’s policy requires that the Risk Management and Treasury Divisions agree on the parameters under which the models work, and establishes the maximum losses authorized both for equity securities, foreign-currency, Argentine Central Bank’sBCRA’s debt instruments and derivative products in a fiscal year. Maximum losses were established in:
Risk | Policy on Limits | |||
(in millions of Pesos) | ||||
|
| |||
| 4.250 |
| ||
|
| |||
|
|
Furthermore, the policy includes the regular undertaking of stress tests, with the goal of which is to assess the risk positions and their results under adverse market conditions. Finally, “contingency plans” were designed for each transaction, which include the actions to be implemented in a critical scenario.
F. Cross-Border Risk
Cross-border risk represents the risk of incurring equity losses as a consequence of the impairment or failure to collect on foreign credit exposures (loans, securities holdings, equity investments, and cash) abroad. It includes risks generated by entering into transactions with public or private counterparties domiciled outside of Argentina.
In order to regulate risk exposures in international jurisdictions, limits were established taking into consideration the jurisdiction’s credit rating, the type of transaction and a maximum exposure acceptable for each counterparty.
The Bank defined its policy by setting maximum exposure limits measured as a percentage of its RPC and taking into account if the counterparty is considered investment grade:
Risk | Required Credit Rating | Investment Grade | Not Investment Grade | |||
-Jurisdictional Risk | -International Rating Agency | -No limit | -Maximum limit: 5% | |||
-Counterparty Risk | -International Banking Relations -Credit Division | -Maximum limit: 15% -The limit is distributed between financial and foreign trade transactions, thus absorbing local counterparty margin | -Maximum limit: 1% -Only foreign trade transactions |
G. Overseas Foreign Currency Transfer Risk
With a view towards mitigating the risk resulting from a potential change in domestic laws that may affect overseas foreign currency transfers and in order to meet incurred liabilities, a policy was devised to set a limit for liabilities transferred abroad, as a proportion to total consolidated liabilities. Such ratio was fixed at 15%.
As of December 31, 2019,2020, such exposure was 10.4%5.73% over total liabilities
H. Risk Exposures in the Non-Financial Public Sector
The Argentine Central BankBCRA imposes restrictions with respect to financing for the non-financial Public Sector and establishes limits in connection with the agencies that can be aided, the types of permitted loans and maximum amounts that can be granted. Such maximum amounts are set on the basis of the Bank’s RPC.
Banco Galicia provides two types of financial assistance to such sector: (i) assistance through the issuance of government securities; and (ii) direct assistance through loans, leasing, corporate securities, discounted notes, overdrafts, guarantees granted, foreign trade transactions, payroll loans, credit cards, etc.
Risk exposures on loans granted to such sector in national, provincial and municipal jurisdictions are governed by a specific policy, applicable to agencies within such jurisdictions, decentralized entities, companies and trust funds with underlying cash flows from the non-financial public sector.sector.
Item 12. | Description of Securities Other Than Equity Securities |
Not applicable.
Not applicable.
C. Other Than Equity Securities
Not applicable.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay |
| ||
|
| ||
| |||
| |||
US$.0.02 (or less) per ADS |
| ||
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs |
| ||
Registration or transfer fees |
| ||
Expenses of the depositary |
|
| |||
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes. |
| ||
Any charges incurred by the depositary or its agents for servicing the deposited securities |
|
Fees and Direct and Indirect Payments Made by the Depositary to Us
Past Fees and Payments
Grupo Financiero Galicia received a payment of US$ 283,948287,476 for fiscal year 2020, US$283,948for fiscal year 2019 and US$267,815 for fiscal year 2018 and US$286,530 for fiscal year 2017 in relation to continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses for filing annual and interim financial reports, relevant information reports, processing dividend distribution, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, and telephone and conference calls), accounting fees and legal fees.
Future Fees and Payments
The Bank of New York Mellon, as depositary, has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADSs program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees and certain accounting and legal fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consists of the expenses for filing annual and interim financial reports, relevant information reports, processing dividend distributions, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, and telephone and conference calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. There are limits on the amount of expenses for which the depositary will reimburse the Company and the amount of reimbursement available to the Company is subject to the amount of fees the depositary collects from investors in any given fiscal year.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
We expect to receive a similar reimbursement from the depositary for expenses for the fiscal year ending December 31, 20202021 to the one we received for the fiscal year ended December 31, 2019.2020.
Not applicable.
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable.
Item 15. | Controls and Procedures |
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as amended). We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with or submit to the SEC under the Exchange Act, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is communicated to our management, including our Chief Executive Officer and Chief Financial and Compliance Officer, as appropriate, to allow timely decisions regarding the required disclosure. Our Chief Executive Officer and Chief Financial and Compliance Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance of their reliability. Notwithstanding the effectiveness of our disclosure controls and procedures, these disclosure controls and procedures cannot provide absolute assurance of achieving their objectives because of their inherent limitations. Disclosure controls and procedures are processes that involve human diligence and compliance and are subject to error in judgment. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by our disclosure controls and procedures.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
1)Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us and our consolidated subsidiaries. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB. Internal control over financial reporting includes those policies and procedures that:
1) | Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us and our consolidated subsidiaries. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB. Internal control over financial reporting includes those policies and procedures that: |
a. | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
b. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and that receipts and expenditures of Grupo Galicia are being made only in accordance with authorizations of our management and directors; and |
c. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
2)
2) | Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework 2013 issued by the COSO. |
3) | Based on our assessment, we and our management have concluded that our internal control over financial reporting was effective as of December 31, 2020. |
4) | The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PriceWaterhouse & Co. S.R.L., an independent registered public accounting firm, as stated in their report which is included herein. |
(c) Attestation Report of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework 2013 issued by the COSO.
3)Based on our assessment, we and our management have concluded that our internal control over financial reporting was effective as of December 31, 2019.
4)The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by PriceWaterhouse & Co. S.R.L., an independent registered public accounting firm, as stated in their report which is included herein.
(c)Registered Public Accounting Firm. See Item 18. “Financial Statements–Report of the Independent Registered Public Accounting Firm” for our registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting.
(d) Changes in Internal Control over Financial Reporting During the Year Ended December 31, 2019.2020.
During the period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial re
Item 16A. | Audit Committee Financial Expert |
Mr. Daniel Llambías was the financial expert serving on our Audit Committee for fiscal year ended December 31, 2019.
Item 16B. | Code of Ethics |
We have adopted a code of ethics (for Grupo Financiero Galicia and its main subsidiaries) in accordance with the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. During fiscal year 2019, in lieu of the new corporate governance requirements introduced by the CNV, the Company adopted a new Code of Ethics. Additionally, we did not grant any waivers to our code of ethics during the fiscal year ended December 31, 2019.2020. In June 2009, we adopted a Code of Best Practices in Corporate Governance in accordance with Argentine legal requirements that received some minor modifications in 2017 andduring 2018. During fiscal year 2019, the CNV issued Rule No. 797/2019 (modifying Rule No. 606 and the previous 516) which established new standards for the filing of the
Item 16C. | Principal Accountant Fees and Services |
The following table sets forth the total amount billed to us by our independent registered public accounting firm, Price Waterhouse & Co. S.R.L., during the fiscal years ended December 31, 20192020 and 2018.2019.
|
| 2019 |
|
| 2018 |
| ||
|
| (in thousands of Pesos) |
| |||||
Audit Fees |
|
| 81,269 |
|
|
| 68,522 |
|
Audit Related Fees |
|
| 12,300 |
|
|
| 11,097 |
|
Tax Fees |
|
| 18,147 |
|
|
| 16,131 |
|
All Other Fees |
|
| 6,506 |
|
|
| 5,068 |
|
Total |
|
| 118,222 |
|
|
| 100,818 |
|
Audit Fees
Audit fees are mainly the fees billed in relation with professional services for auditing our consolidated financial statements under local and IFRS requirements for the fiscal years ended December 31, 2019 and December 31, 2018.
Audit-Related Fees
Audit-related fees are fees billed for professional services related to attestation, review and verification services with respect to our financial information and the provision of services in connection with special reports in 2019 and 2018.
2020 | 2019 | |||||||
(in thousands of Pesos) | ||||||||
Audit Fees | 147,661 | 110,640 | ||||||
Audit Related Fees | 9,375 | 16,745 | ||||||
Tax Fees
| 18,234 | 24,706 | ||||||
All Other Fees | 23,933 | 8,857 | ||||||
| ||||||||
Total | 199,203 | 160,948 | ||||||
Audit Fees
Audit fees are mainly the fees billed in relation with professional services for auditing our consolidated financial statements under local and IFRS requirements for the fiscal years ended December 31, 2020 and December 31, 2019.
Audit-Related Fees
Audit-related fees are fees billed for professional services related to attestation, review and verification services with respect to our financial information and the provision of services in connection with special reports in 2020 and 2019.
Tax Fees
Tax fees are fees billed with respect to tax compliance and advisory services related to tax liabilities.
All Other Fees
All other fees include fees paid for professional services other than the services reported above under “audit fees”, “audit related fees” and “tax fees” in each of the fiscal periods above.
Audit Committee Pre-approval
Our audit committee is required to pre-approve all audit and non-audit services to be provided by our independent registered public accounting firm. Our Audit Committee has reviewed, and approved audit and non-audit services fees proposed by our independent auditors.
Audit Committee Pre-approval
Our audit committee is required to pre-approve all audit and non-audit services to be provided by our independent registered public accounting firm. Our Audit Committee has reviewed and approved audit and non-audit services fees proposed by our independent auditors.
Item 16D. | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
Not applicable.
Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
None.
Item 16F. | Change in Registrant’s Certifying Accountant. |
Not applicable.
Not applicable.
Item 16G. | Corporate Governance |
See Item 6. “Directors, Senior Management and Employees”—“Nasdaq Corporate Governance Standards” for a summary of ways in which the Company’s corporate governance practices differ from those followed by U.S. companies.
See Item 6. “Directors, Senior Management and Employees”—“Nasdaq Corporate Governance Standards” for a summary of ways in which the Company’s corporate governance practices differ from those followed by U.S. companies.
PART III
Item 17. |
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Not applicable.
Item 18. |
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Item 19. | Exhibits |
* | Incorporated by reference from our Registration Statement on Form F-6. |
** | Incorporated by reference from our Annual Report on Form 20-F for the year ended December 31, 2009. |
*** | Incorporated by reference from our Annual Report on Form 20-F for the year ended December 31, 2016. |
**** | Incorporated by reference from our Annual Report on Form 20-F for the year ended December 31, 2017. |
***** | Incorporated by reference from our Annual Report on Form 20-F for the year ended December 31, 2018. |
****** | Incorporated by reference from our Annual Report on Form 20-F for the year ended December 31, 2019. |
SIGNATURE
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Consolidated Statements of Financial Position for the years ended December 31, 2019 and 2018.
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017.
Notes to the Consolidated Financial Statements.
You can find our audited consolidated financial statements on pages F-1 to F-106 of this annual report.
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SIGNATURE
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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Date: April 29, 2020
GRUPO FINANCIERO GALICIA S.A.
/s/ Fabian Kon
/s/ Bruno Folino
Date: April 23, 2021
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
F-1 | ||||
F-4 | ||||
F-6 | ||||
F-7 | ||||
F-8 | ||||
F-11 | ||||
F-12 | ||||
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Grupo Financiero Galicia S.A.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial position of Grupo Financiero Galicia S.A. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018 and the related consolidated statements of income, other comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 and 2019, and the related consolidated statements of income, other comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing onunder Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements, and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Fair Valuevalue of certain Levellevel 3 Financial Instrumentsfinancial instruments
As described in Notes 2.a and 4 to the consolidated financial statements, the Company carries Ps. 95,250,490172,308,916 thousands of its assets and Ps. 2,303,25657,450 thousands of its liabilities at fair value on a recurring basis.basis as of December 31, 2020. Included in these balances are Ps. 11,732,2998,452,798 thousands of financial assets which are classified as level 3, as they containits valuation involves one or more inputs to valuation which are unobservable and significant to their fair value measurement. The Company utilized internally developedused valuation models and unobservable inputs, including projected cash flows, discount rates and volatilities and correlations relating to interest rates and spreads, to estimate the fair value of the level 3 financial instruments. These valuation techniques require management to make significant estimates and judgments for complex instruments involving valuation models.judgments.
The principal considerations for our determination that performing procedures relating to the fair value of certain level 3 financial instruments is a critical audit matter areare: (i) there was significant judgment by management in evaluating the models and methodologies and determining the inputs, such as projected cash flows, discount rates and volatilities and correlations relating to interest rates and spreads, used to estimate fair value; and (ii) the audit procedures performed related to the assessment of the fair value which in turn led toof these financial instruments involved a high degree of auditor judgment, subjectivity, and effort, in performing procedures related to the fair value of these financial instruments, and (ii) the audit effort involvedas well as the use of professionals with specialized skillskills and knowledge to assist in performing procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s processes for determining fair value of level 3 financial instruments which include controls over models, inputs, and data. These procedures also included, among others, for a sample of financial instruments, the involvementuse of professionals with specialized skillskills and knowledge to assist in developing an independent estimate of fair value estimate and testing management’s process to determine the fair value of these financial instruments. Developing the independent estimate involved testing the completeness and accuracy of data provided by management, developing independent significant unobservable inputs, and comparing management’s estimate to the independently developed estimate of fair value. Testing management’s process included evaluating the reasonableness of the aforementioned significant unobservable inputs, evaluating the appropriateness of the methods used, and testing the completeness and accuracy of data provided by management to determine the fair value of these instruments.
Allowance for loan losses
As described in Notes 1.11, 2.b and 45 to the consolidated financial statements, the Company’s allowance for loan losses was Ps. 26,143,10337,332,952 thousands as of December 31, 2019.2020. The Company assesses impairment by estimating the expected credit losses. Management’s models to determine the expected credit loss involve significant judgement, including aspects such aswhich includes defining what is considered to beconstitutes a significant increase in credit risk, identifying assets which are impaired or subject to serious risk of impairment, developing parameters such as the probabilities of default and the loss given default, and making assumptions about macroeconomic scenarios considering a range of possible economic outcomes, calculated on a probability-weighted basis.basis, and estimating the impact of the Covid-19 pandemic as a post-model adjustment.
The principal considerations for our determination that performing procedures relating to the estimation of the allowance for loan losses is a critical audit matter areare: (i) there was significant judgment by management to assessin assessing impairment by estimating the expected credit losses; and (ii) the audit procedures performed related to the assessment of the valuation of the allowance for loan losses which in turn led toinvolved significant auditor judgment and effort, in performing procedures to evaluate the audit evidence related to the models and assumptions used to determine the expected credit losses and (ii) the audit effort involvedas well as the use of professionals with specialized skillskills and knowledge to assist in performing procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s allowance for loan losses estimation processes, which included controls over the data, models and assumptions used in the estimation process. These procedures also included, among others,others; (i) evaluating the appropriateness of the models used by managementthe Company to estimate parameters such as the probability of default and the reasonableness of assumptions made in the allowance for loan losses estimation, and testing the completeness and accuracy of data provided by management. Professionals with specialized skill and knowledge were used to assist in testing management’s process for determining the allowance for loan losses, includingloss given default; (ii) evaluating (i) the reasonableness of the assumptions used by management, (ii) the reasonablenessCompany’s definition of management’s criteria for defining what is considered to be a significant increase in credit risk and identifying assets which are impaired or subject to serious risk of impairment,impairment; (iii) evaluating the appropriatenessreasonableness of the models utilized forprocess followed by the estimation of parameters such asCompany to develop macroeconomic scenarios and their weighting; (iv) evaluating the probabilities of default and the loss given default, and (iv) the appropriatenessreasonableness of the methodology used forprocess followed by the generationCompany to estimate the post-model adjustment and (v) testing the completeness and accuracy of macroeconomic scenarios.the data provided by management.
/s/ PRICE WATERHOUSE & Co. S.R.L. /s/ SEBASTIÁN MORAZZO (Partner) |
Sebastián Morazzo |
Buenos Aires, Argentina
April 28, 2020.23, 2021.
We have served as the Company’s auditor since 1999.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.19 | 12.31.18 | Notes | 12.31.20 | 12.31.19 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and Due from Banks | 5 | 130,649,061 | 220,456,335 | 5 | 175,423,476 | 177,866,399 | ||||||||||||||||||
Cash | 52,728,463 | 32,597,069 | 66,932,871 | 71,784,839 | ||||||||||||||||||||
Financial Institutions and Correspondents | 77,920,598 | 187,859,266 | 108,490,605 | 106,081,560 | ||||||||||||||||||||
Argentine Central Bank (BCRA) | 75,542,241 | 183,353,781 | 102,597,603 | 102,843,651 | ||||||||||||||||||||
Other, Local and Foreign Financial Institutions | 2,378,357 | 4,505,485 | 5,893,002 | 3,237,909 | ||||||||||||||||||||
Debt Securities at fair value through profit or loss | 6 | 65,690,460 | 116,812,885 | 6 | 155,419,560 | 89,431,378 | ||||||||||||||||||
Derivative Financial Instruments | 7 | 2,329,074 | 2,746,893 | 7 | 2,165,032 | 3,170,815 | ||||||||||||||||||
Repurchase Transactions | 8 | 30,075,478 | 3,181,371 | 8 | 60,995,643 | 40,944,933 | ||||||||||||||||||
Other Financial Assets | 9 | 10,915,334 | 13,918,651 | 9 | 10,093,626 | 14,860,200 | ||||||||||||||||||
Loans and Other Financing | 10 | 358,558,869 | 434,899,689 | 10 | 526,434,119 | 488,144,152 | ||||||||||||||||||
Non-financial Public Sector | 4,977 | 18,117 | 334 | 9,297 | ||||||||||||||||||||
Argentine Central Bank (BCRA) | 22,374 | 820 | 13,195 | 30,460 | ||||||||||||||||||||
Other Financial Institutions | 10,612,457 | 11,568,034 | 14,700,600 | 14,697,129 | ||||||||||||||||||||
To theNon-financial Private Sector and Residents Abroad | 347,919,061 | 423,312,718 | 548,953,562 | 508,591,528 | ||||||||||||||||||||
Allowances | (37,233,572 | ) | (35,184,262 | ) | ||||||||||||||||||||
Other Debt Securities | 11 | 19,019,630 | 22,188,992 | 11 | 23,070,377 | 25,893,436 | ||||||||||||||||||
Financial Assets Pledged as Collateral | 12 | 11,550,586 | 16,640,808 | 12 | 18,717,443 | 15,725,036 | ||||||||||||||||||
Current Income Tax Assets | 13 | 40,503 | 146,015 | 13 | 197,094 | 55,141 | ||||||||||||||||||
Investments in Equity Instruments | 14 | 4,554,453 | 247,753 | 14 | 5,711,684 | 6,200,459 | ||||||||||||||||||
Equity investments in Associates and Joint Ventures | 15 | 89,142 | — | |||||||||||||||||||||
Property, Plant and Equipment | 16 and 17 | 32,963,986 | 29,785,930 | 16 and 17 | 43,731,420 | 44,877,360 | ||||||||||||||||||
Intangible Assets | 18 | 8,692,712 | 7,056,518 | 18 | 14,468,821 | 11,834,308 | ||||||||||||||||||
Deferred Income Tax Assets | 19 | 2,806,937 | 1,496,751 | 19 | 9,212,595 | 3,821,378 | ||||||||||||||||||
Assets for Insurance Contracts | 20 | 1,181,512 | 1,511,406 | 20 | 1,885,390 | 1,608,517 | ||||||||||||||||||
OtherNon-financial Assets | 21 | 6,451,408 | 4,345,410 | 21 | 7,634,427 | 8,782,988 | ||||||||||||||||||
Non-current Assets Held for Sale | 22 | 39,008 | 935,324 | 22 | 29,328 | 53,106 | ||||||||||||||||||
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Total Assets | 685,519,011 | 876,370,731 | 1,055,279,177 | 933,269,606 | ||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-2F-4
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION (Continued)
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.19 | 12.31.18 | Notes | 12.31.20 | 12.31.19 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits | 23 | 393,735,406 | 553,946,288 | 23 | 676,395,735 | 536,033,696 | ||||||||||||||||||
Non-financial Public Sector | 1,933,141 | 13,182,488 | 21,537,481 | 2,631,790 | ||||||||||||||||||||
Financial Sector | 450,934 | 1,094,882 | 1,947,127 | 613,904 | ||||||||||||||||||||
Non-financial Private Sector and Residents Abroad | 391,351,331 | 539,668,918 | 652,911,127 | 532,788,002 | ||||||||||||||||||||
Liabilities at fair value through profit or loss | 24 | 1,422,157 | 3,299,188 | 24 | — | 1,936,133 | ||||||||||||||||||
Derivative Financial Instruments | 7 | 881,099 | 2,824,038 | 7 | 57,450 | 1,199,533 | ||||||||||||||||||
Repurchase Transactions | 8 | — | 2,997,515 | |||||||||||||||||||||
Other Financial Liabilities | 25 | 71,362,718 | 97,275,984 | 25 | 97,471,465 | 97,153,624 | ||||||||||||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 26 | 22,723,687 | 29,914,292 | 26 | 13,833,439 | 30,936,161 | ||||||||||||||||||
Debt Securities | 27 | 29,240,851 | 46,124,574 | 27 | 17,073,898 | 39,808,666 | ||||||||||||||||||
Current Income Tax Liabilities | 41 | 10,314,510 | 5,318,923 | 41 | 15,227,474 | 14,042,235 | ||||||||||||||||||
Subordinated Debt Securities | 28 | 15,499,212 | 15,026,155 | 28 | 21,653,546 | 21,100,718 | ||||||||||||||||||
Provisions | 29 | 2,746,966 | 2,229,528 | 29 | 3,776,297 | 3,739,734 | ||||||||||||||||||
Deferred Income Tax Liabilities | 19 | 2,218,701 | 2,928,424 | 19 | 136,934 | 3,020,554 | ||||||||||||||||||
Liabilities for Insurance Contracts | 20 | 1,468,635 | 1,697,110 | 20 | 2,060,976 | 1,999,408 | ||||||||||||||||||
OtherNon-financial Liabilities | 30 | 17,070,098 | 17,646,932 | 30 | 25,258,228 | 23,239,327 | ||||||||||||||||||
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Total Liabilities | 568,684,040 | 781,228,951 | 872,945,442 | 774,209,789 | ||||||||||||||||||||
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Shareholders’ Equity | 31 | 31 | ||||||||||||||||||||||
Capital Stock | 1,426,765 | 1,426,765 | 1,474,692 | 1,426,765 | ||||||||||||||||||||
Paid-in capital | 10,951,132 | 10,951,132 | 17,281,187 | 10,951,132 | ||||||||||||||||||||
Capital Adjustments | 41,243,535 | 41,243,535 | 61,548,313 | 60,622,637 | ||||||||||||||||||||
Profit Reserves | 93,468,632 | 67,191,177 | 178,751,308 | 127,248,745 | ||||||||||||||||||||
Retained Deficit | (57,261,059 | ) | (22,991,245 | ) | (102,255,270 | ) | (77,955,542 | ) | ||||||||||||||||
Other Comprehensive Income | 404,831 | 2,160 | 341,829 | 551,139 | ||||||||||||||||||||
Income / (Loss) for the Year | 43 | 23,708,123 | (5,331,559 | ) | 43 | 25,191,673 | 32,276,377 | |||||||||||||||||
Shareholders’ Equity Attributable to Parent Company’s Owners | 113,941,959 | 92,491,965 | ||||||||||||||||||||||
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Shareholders’ Equity Attributable to Parent Company´s Owners | 182,333,732 | 155,121,253 | ||||||||||||||||||||||
Shareholders’ Equity Attributable toNon-controlling Interests | 50 | 2,893,012 | 2,649,815 | 50 | 3 | 3,938,564 | ||||||||||||||||||
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Total Shareholders’ Equity | 116,834,971 | 95,141,780 | 182,333,735 | 159,059,817 | ||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 20192020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.19 | 12.31.18 | 12.31.17 | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||||||||||||
Interest Income | 32 | 130,505,867 | 120,410,448 | 84,136,666 | 32 | 166,806,678 | 177,671,454 | 163,927,492 | ||||||||||||||||||||||
Interest Expense | 32 | (95,676,156 | ) | (69,086,632 | ) | (38,180,721 | ) | 32 | (90,174,458 | ) | (130,254,081 | ) | (94,054,946 | ) | ||||||||||||||||
Net Income from Interest | 34,829,711 | 51,323,816 | 45,955,945 | 76,632,220 | 47,417,373 | 69,872,546 | ||||||||||||||||||||||||
Fee Income | 32 | 35,145,091 | 37,530,202 | 37,567,216 | 32 | 46,475,432 | 47,846,733 | 51,093,837 | ||||||||||||||||||||||
Fee related Expenses | 32 | (7,061,448 | ) | (4,655,118 | ) | (5,003,914 | ) | 32 | (9,917,873 | ) | (9,613,497 | ) | (6,337,505 | ) | ||||||||||||||||
Net Fee Income | 28,083,643 | 32,875,084 | 32,563,302 | 36,557,559 | 38,233,236 | 44,756,332 | ||||||||||||||||||||||||
Net Income from Financial Instruments Measured at Fair Value through Profit or Loss | 32 | 72,830,225 | 26,694,103 | 13,016,280 | 32 | 69,331,902 | 99,151,496 | 36,341,509 | ||||||||||||||||||||||
Income from Derecognition of Assets Measured at Amortized Cost | 219,480 | 340,953 | — | (3,129 | ) | 298,801 | 464,175 | |||||||||||||||||||||||
Exchange rate differences on gold and foreign currency | 33 | 8,690,613 | 5,810,359 | 5,351,615 | 33 | 7,047,447 | 11,831,452 | 7,910,257 | ||||||||||||||||||||||
Other Operating Income | 34 | 21,132,149 | 16,059,120 | 15,343,582 | 34 | 22,322,631 | 28,769,432 | 21,862,980 | ||||||||||||||||||||||
Income from Insurance Business | 35 | 3,673,312 | 4,413,942 | 5,099,409 | 35 | 5,501,807 | 5,000,869 | 6,009,167 | ||||||||||||||||||||||
Loan and other Receivables Loss Provisions | 36 | (22,203,274 | ) | (25,074,262 | ) | (11,220,314 | ) | 36 | (34,679,749 | ) | (30,227,668 | ) | (34,136,247 | ) | ||||||||||||||||
Net Operating Income | 147,255,859 | 112,443,115 | 106,109,819 | 182,710,688 | 200,474,991 | 153,080,719 | ||||||||||||||||||||||||
Personnel Expenses | 37 | (24,448,962 | ) | (26,191,885 | ) | (26,287,914 | ) | 37 | (31,825,101 | ) | (33,284,961 | ) | (35,657,786 | ) | ||||||||||||||||
Administrative Expenses | 38 | (24,316,921 | ) | (24,734,949 | ) | (22,188,104 | ) | 38 | (31,371,622 | ) | (33,105,199 | ) | (33,674,305 | ) | ||||||||||||||||
Depreciation and Impairment of Assets | 39 | (5,064,576 | ) | (2,541,273 | ) | (2,214,325 | ) | 39 | (8,284,286 | ) | (6,894,944 | ) | (3,459,704 | ) | ||||||||||||||||
Other Operating Expenses | 40 | (25,769,551 | ) | (25,996,238 | ) | (22,467,570 | ) | 40 | (30,763,761 | ) | (35,082,818 | ) | (35,391,431 | ) | ||||||||||||||||
Loss on net monetary position | (30,798,238 | ) | (27,787,774 | ) | (10,496,441 | ) | (36,963,213 | ) | (41,928,902 | ) | (37,830,439 | ) | ||||||||||||||||||
Operating Income | 36,857,611 | 5,190,996 | 22,455,465 | 43,502,705 | 50,178,167 | 7,067,054 | ||||||||||||||||||||||||
Share of profit from Associates and Joint Ventures | — | — | 494,082 | 15 | (125,053 | ) | — | — | ||||||||||||||||||||||
Income before Taxes from Continuing Operations | 36,857,611 | 5,190,996 | 22,949,547 | 43,377,652 | 50,178,167 | 7,067,054 | ||||||||||||||||||||||||
Income Tax from Continuing Operations | 41 | (13,038,494 | ) | (10,633,705 | ) | (11,259,035 | ) | 41 | (17,844,872 | ) | (17,750,682 | ) | (14,476,788 | ) | ||||||||||||||||
Net Income / (Loss) from Continuing Operations | 23,819,117 | (5,442,709 | ) | 11,690,512 | 25,532,780 | 32,427,485 | (7,409,734 | ) | ||||||||||||||||||||||
Loss from Discontinued Operations | 22 | — | (399,589 | ) | — | 22 | — | — | (544,003 | ) | ||||||||||||||||||||
Income Tax from Discontinued Operations | 41 | — | (48,726 | ) | (494,971 | ) | 41 | — | — | (66,336 | ) | |||||||||||||||||||
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Net Income / (Loss) for the Year | 23,819,117 | (5,891,024 | ) | 11,195,541 | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||||||||||||
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Net Income / (Loss) for the Year Attributable to parent company’s owners | 23,708,123 | (5,331,559 | ) | 10,450,740 | ||||||||||||||||||||||||||
Net Income / (Loss) for the Year Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||||||||||||||||
Net Income / (Loss) for the Year Attributable toNon-controlling Interests | 50 | 110,994 | (559,465 | ) | 744,801 | 50 | 341,107 | 151,108 | (761,659 | ) | ||||||||||||||||||||
Items | Notes | 12.31.19 | 12.31.18 | 12.31.17 | ||||||||||||||||||||||||||
Earnings per Share | 43 | |||||||||||||||||||||||||||||
Net Income / (Loss) Attributable to parent company’s owners | 23,708,123 | (5,331,559 | ) | 10,450,740 | ||||||||||||||||||||||||||
Net Income / (Loss) Attributable to parent company’s owners Adjusted by dilution effects | 23,708,123 | (5,331,559 | ) | 10,450,740 | ||||||||||||||||||||||||||
Weighted-Average of Ordinary Shares Outstanding for the Year | 1,426,765 | 1,426,765 | 1,332,617 | |||||||||||||||||||||||||||
Diluted Weighted-Average of Ordinary Shares Outstanding for the Year | 1,426,765 | 1,426,765 | 1,332,617 | |||||||||||||||||||||||||||
Basic Earnings per Share | 16.62 | (3.74 | ) | 7.84 | ||||||||||||||||||||||||||
Diluted Earnings per Share | 16.62 | (3.74 | ) | 7.84 |
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Earnings per Share | 43 | |||||||||||||||
Net Income / (Loss) Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Net Income / (Loss) Attributable to parent company´s owners Adjusted by dilution effects | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Diluted Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Basic Earnings per Share | 17.46 | 22.62 | (5.09 | ) | ||||||||||||
Diluted Earnings per Share | 17.46 | 22.62 | (5.09 | ) |
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 20192020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.19 | 12.31.18 | 12.31.17 | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||||||||||||
Net Income / (Loss) for the Year | 23,819,117 | (5,891,024 | ) | 11,195,541 | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||||||||||||
Items of Other Comprehensive Income (OCI) that may be Reclassified to Profit or Loss for the Year | ||||||||||||||||||||||||||||||
Income or Loss from Financial Instruments at Fair Value through OCI (Item 4.1.2a, IFRS 9) | ||||||||||||||||||||||||||||||
Income / (Loss) for the Year from Financial Instruments at Fair Value with Changes through OCI(*) | 32 | 402,671 | (134,580 | ) | (668,759 | ) | 32 | (203,783 | ) | 533,607 | (183,218 | ) | ||||||||||||||||||
Other Comprehensive Income(*) | (5,527 | ) | 14,591 | — | ||||||||||||||||||||||||||
Total Other Comprehensive Income (Loss) that may be Reclassified to Profit or Loss for the Year | 402,671 | (134,580 | ) | (668,759 | ) | (209,310 | ) | 548,198 | (183,218 | ) | ||||||||||||||||||||
Total Other Comprehensive Income (Loss) | 402,671 | (134,580 | ) | (668,759 | ) | (209,310 | ) | 548,198 | (183,218 | ) | ||||||||||||||||||||
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Total Comprehensive Income / (Loss) | 24,221,788 | (6,025,604 | ) | 10,526,782 | 25,323,470 | 32,975,683 | (8,203,291 | ) | ||||||||||||||||||||||
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Total Comprehensive Income / (Loss) Attributable to Parent company’s owners | 24,110,794 | (5,466,139 | ) | 9,781,981 | ||||||||||||||||||||||||||
Total Comprehensive Income / (Loss) Attributable to Parent company´s owners | 24,982,363 | 32,824,575 | (7,441,632 | ) | ||||||||||||||||||||||||||
Total Comprehensive Income / (Loss) Attributable toNon-controlling Interests | 50 | 110,994 | (559,465 | ) | 744,801 | 50 | 341,107 | 151,108 | (761,659 | ) |
(*) | Net of Income Tax. |
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 20192020 AND ENDED DECEMBER 31, 2019,2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company’s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 41,243,535 | 2,160 | — | 952,238 | 66,238,939 | (28,322,804 | ) | 92,491,965 | 2,649,815 | 95,141,780 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital Contribution from Non-controlling Interest | 50 | — | — | — | — | — | — | �� | — | — | — | 132,203 | 132,203 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | — | — | — | — | — | — | — | — | — | (143,844 | ) | (143,844 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (2,660,800 | ) | (2,660,800 | ) | — | (2,660,800 | ) | 42 | — | — | — | — | — | — | (1,892,559 | ) | — | (1,892,559 | ) | — | (1,892,559 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 26,277,455 | (26,277,455 | ) | — | — | — | — | — | — | — | — | — | 56,576,105 | (56,576,105 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Increase due to merger | 31 | 47,927 | 6,330,055 | 925,676 | — | — | — | (3,180,983 | ) | — | 4,122,675 | (4,135,824 | ) | (13,149 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 23,708,123 | 23,708,123 | 110,994 | 23,819,117 | 43 | — | — | — | — | — | — | — | 25,191,673 | 25,191,673 | 341,107 | 25,532,780 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | 402,671 | — | — | — | — | 402,671 | — | 402,671 | — | — | — | (203,783 | ) | (5,527 | ) | — | — | — | (209,310 | ) | — | (209,310 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 41,243,535 | 404,831 | — | 952,238 | 92,516,394 | (33,552,936 | ) | 113,941,959 | 2,893,012 | 116,834,971 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of 12.31.20 | 1,474,692 | 17,281,187 | 61,548,313 | 332,765 | 9,064 | 1,296,382 | 177,454,926 | (77,063,597 | ) | 182,333,732 | 3 | 182,333,735 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-6F-8
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||
Capital Contribution from Non-controlling Interest | 50 | — | — | — | — | — | — | — | — | — | 179,986 | 179,986 | ||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (3,622,432 | ) | (3,622,432 | ) | — | (3,622,432 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 35,774,283 | (35,774,283 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 32,276,377 | 32,276,377 | 151,108 | 32,427,485 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | 533,607 | 14,591 | — | — | — | 548,198 | — | 548,198 | |||||||||||||||||||||||||||||||||||
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Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-9
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 20192020 AND ENDED DECEMBER 31, 2019,2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company’s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of 12.31.17 | 1,426,765 | 10,951,132 | 41,243,535 | 136,740 | — | 894,775 | 48,918,234 | (4,311,076 | ) | 99,260,105 | 4,543,410 | 103,803,515 | 1,426,765 | 10,951,132 | 60,622,637 | 186,159 | - | 1,218,152 | 66,597,571 | (5,869,124 | ) | 135,133,292 | 6,185,425 | 141,318,717 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase ofNon-controlling Interests | 50 | — | — | — | — | — | — | 1,185,236 | 1,185,236 | (1,185,236 | ) | — | 50 | - | - | - | - | - | - | 1,613,587 | - | 1,613,587 | (1,613,587 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | — | — | — | — | — | — | — | — | — | (148,894 | ) | (148,894 | ) | 50 | - | - | - | - | - | - | - | - | - | (202,709 | ) | (202,709 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | (2,487,237 | ) | (2,487,237 | ) | — | (2,487,237 | ) | 42 | — | — | — | — | — | — | — | (3,386,137 | ) | (3,386,137 | ) | — | (3,386,137 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | 57,463 | 16,135,469 | (16,192,932 | ) | — | — | — | — | — | — | — | — | 78,230 | 21,966,922 | (22,045,152 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss for the Year | 43 | — | — | — | — | — | — | — | (5,331,559 | ) | (5,331,559 | ) | (559,465 | ) | (5,891,024 | ) | 43 | — | — | — | — | — | — | — | (7,258,414 | ) | (7,258,414 | ) | (761,659 | ) | (8,020,073 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) for the Year | — | — | — | (134,580 | ) | — | — | — | — | (134,580 | ) | — | (134,580 | ) | — | — | — | (183,218 | ) | — | — | — | — | (183,218 | ) | — | (183,218 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 41,243,535 | 2,160 | — | 952,238 | 66,238,939 | (28,322,804 | ) | 92,491,965 | 2,649,815 | 95,141,780 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements. |
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)CASH FLOWS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 20192020 AND ENDED DECEMBER 31, 2019,2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company’s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 01.01.17 | 1,300,265 | 219,596 | 278,131 | — | — | 315,679 | 12,221,152 | 6,017,877 | 20,352,700 | — | 20,352,700 | |||||||||||||||||||||||||||||||||||
Impact of first-time adoption of IFRS | — | — | 25,698,161 | 805,499 | — | 579,096 | 22,418,994 | (3,778,345 | ) | 45,723,405 | 4,183,580 | 49,906,985 | ||||||||||||||||||||||||||||||||||
Balances as of 01.01.17 | 1,300,265 | 219,596 | 25,976,292 | 805,499 | — | 894,775 | 34,640,146 | 2,239,532 | 66,076,105 | 4,183,580 | 70,259,685 | |||||||||||||||||||||||||||||||||||
Disposal of Equity Interest in Tarjeta del Mar S.A. | — | — | — | — | — | — | — | — | — | (141,327 | ) | (141,327 | ) | |||||||||||||||||||||||||||||||||
Purchase ofNon-controlling Interests | 50 | — | — | — | — | — | — | (2,098,970 | ) | — | (2,098,970 | ) | (8,750 | ) | (2,107,720 | ) | ||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | — | — | — | — | — | — | — | — | — | (234,894 | ) | (234,894 | ) | ||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (624,290 | ) | (624,290 | ) | — | (624,290 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 16,377,058 | (16,377,058 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Capital Increase | 126,500 | 10,731,536 | 15,267,243 | — | — | — | — | — | 26,125,279 | — | 26,125,279 | |||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 10,450,740 | 10,450,740 | 744,801 | 11,195,541 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) for the Year | — | — | — | (668,759 | ) | — | — | — | — | (668,759 | ) | — | (668,759 | ) | ||||||||||||||||||||||||||||||||
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Balances as of 12.31.17 | 1,426,765 | 10,951,132 | 41,243,535 | 136,740 | — | 894,775 | 48,918,234 | (4,311,076 | ) | 99,260,105 | 4,543,410 | 103,803,515 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements. |
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GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2019 AND ENDED DECEMBER 31, 2019, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.19 | 12.31.18 | 12.31.17 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Income before Taxes from Continuing Operation | 36,857,611 | 5,190,996 | 22,949,547 | |||||||||||||
Adjustment to Obtain the Operating Activities Flows: | ||||||||||||||||
Loan and other Receivables Loss Provisions | 22,203,274 | 25,074,262 | 11,220,314 | |||||||||||||
Depreciation and Impairment of Assets | 5,064,576 | 2,541,273 | 2,214,325 | |||||||||||||
Loss on Net Monetary Position | 30,798,238 | 27,787,774 | 10,496,441 | |||||||||||||
Other Operations | 42,150,670 | (27,980,614 | ) | 8,083,355 | ||||||||||||
Net Increases/(Decreases) from Operating Assets: | ||||||||||||||||
Debt securities measured at fair value through profit or loss | 1,400,612 | 18,379,932 | (5,383,338 | ) | ||||||||||||
Derivative Financial Instruments | 417,819 | (1,553,655 | ) | (840,290 | ) | |||||||||||
Repo Transactions | (3,060,443 | ) | 461,265 | (2,141,780 | ) | |||||||||||
Other Financial Assets | 2,011,201 | 2,418,304 | (6,278,465 | ) | ||||||||||||
Net Loans and Other Financing | ||||||||||||||||
-Non-financial Public Sector | 13,140 | (4,992 | ) | 37,705 | ||||||||||||
- Other Financial Institutions | (788,373 | ) | 5,570,160 | (5,895,179 | ) | |||||||||||
-Non-financial Private Sector and Residents Abroad | 53,239,351 | (21,299,981 | ) | (67,534,701 | ) | |||||||||||
Other Debt Securities | 3,169,363 | (15,754,896 | ) | (1,536,299 | ) | |||||||||||
Financial Assets Pledged as Collateral | 5,090,222 | (2,262,419 | ) | 1,151,905 | ||||||||||||
Investments in Equity Instruments | (4,306,700 | ) | (75,579 | ) | 115,701 | |||||||||||
OtherNon-financial Assets | (1,622,985 | ) | (1,736,682 | ) | (2,625,493 | ) | ||||||||||
Non-current Assets Held for Sale | 896,316 | 15,771,013 | 90,801 | |||||||||||||
Net Increases/(Decreases) from Operating Liabilities: | ||||||||||||||||
Deposits | ||||||||||||||||
-Non-financial Public Sector | (11,249,347 | ) | 10,538,444 | (1,024,969 | ) | |||||||||||
- Financial Sector | (643,948 | ) | 833,341 | 83,092 | ||||||||||||
-Non-financial Private Sector and Residents Abroad | (148,317,590 | ) | 86,665,483 | 30,615,828 | ||||||||||||
Liabilities at fair value through profit or loss | (1,877,031 | ) | 3,299,188 | — | ||||||||||||
Derivative Financial Instruments | (1,942,940 | ) | 1,522,107 | 855,225 | ||||||||||||
Other Financial Liabilities | (29,681,420 | ) | 12,128,517 | (2,682,801 | ) | |||||||||||
Provisions | 517,438 | 849,252 | 289,278 | |||||||||||||
OtherNon-financial Liabilities | (805,307 | ) | (15,019,196 | ) | 4,088,838 | |||||||||||
Income Tax Collections/Payments | (10,102,682 | ) | (11,415,284 | ) | (10,158,748 | ) | ||||||||||
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NET CASH (USED IN)/GENERATED BY OPERATING ACTIVITIES (A) | (10,568,935 | ) | 121,928,013 | (13,809,708 | ) | |||||||||||
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CASH FLOWS FROM INVESTMENT ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Purchase of PP&E, Intangible Assets and Other Assets | (7,897,101) | (5,673,271 | ) | (5,014,929 | ) | |||||||||||
Purchase ofNon-controlling Interests | 50 | — | — | (2,249,045 | ) | |||||||||||
Collections: | ||||||||||||||||
Sale of PP&E, Intangible Assets and Other Assets | 2,679,732 | 156,424 | 1,309,202 | |||||||||||||
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NET CASH USED IN INVESTMENT ACTIVITIES (B) | (5,217,369 | ) | (5,516,847 | ) | (5,954,772 | ) | ||||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Unsubordinated Debt Securities | (16,883,724 | ) | — | (2,412,654 | ) | |||||||||||
Subordinated Debt Securities | — | — | (557,008 | ) | ||||||||||||
Loans from Local Financial Institutions | (7,190,606 | ) | — | (1,691,806 | ) | |||||||||||
Dividends | 42 | (2,660,800 | ) | (2,636,131 | ) | (859,184 | ) | |||||||||
Leases payment | (1,000,344 | ) | — | — | ||||||||||||
Collections: | ||||||||||||||||
Unsubordinated Debt Securities | — | 14,928,649 | — | |||||||||||||
Loans from Local Financial Institutions | — | 12,041,577 | — | |||||||||||||
Subordinated Debt Securities | 473,057 | 4,060,434 | — | |||||||||||||
Capital increase | 50 | 132,203 | — | 26,125,279 | ||||||||||||
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NET CASH (USED IN)/GENERATED BY FINANCING ACTIVITIES (C) | (27,130,214 | ) | 28,394,529 | 20,604,627 | ||||||||||||
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EXCHANGE INCOME ON CASH AND CASH EQUIVALENTS (D) | 51,075,864 | 69,162,423 | 10,970,172 | |||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS (A+B+C+D) | 8,159,346 | 213,968,118 | 11,810,319 | |||||||||||||
MONETARY LOSS RELATED TO CASH AND CASH EQUIVALENTS | (123,499,266 | ) | (69,503,742 | ) | (29,777,542 | ) | ||||||||||
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | 5 | 347,458,867 | 202,994,491 | 220,961,714 | ||||||||||||
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CASH AND CASH EQUIVALENTS AT END OF THE YEAR | 5 | 232,118,947 | 347,458,867 | 202,994,491 | ||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Income before Taxes from Continuing Operations | 43,377,652 | 50,178,167 | 7,067,054 | |||||||||||||
Adjustment to Obtain the Operating Activities Flows: | ||||||||||||||||
Loan and other Receivables Loss Provisions | 34,679,749 | 30,227,668 | 34,136,247 | |||||||||||||
Depreciation and Impairment of Assets | 8,284,286 | 6,894,944 | 3,459,704 | |||||||||||||
Loss on Net Monetary Position | 36,963,213 | 41,928,902 | 37,830,439 | |||||||||||||
Other Operations | 33,809,461 | 45,546,783 | (15,845,824 | ) | ||||||||||||
Net Increases/(Decreases) from Operating Assets: | ||||||||||||||||
Debt securities measured at fair value through profit or loss | (16,816,890 | ) | 1,906,801 | 25,022,547 | ||||||||||||
Derivative Financial Instruments | 1,005,783 | 568,821 | (2,115,155 | ) | ||||||||||||
Repo Transactions | (45,899 | ) | (4,166,505 | ) | 627,969 | |||||||||||
Other Financial Assets | 762,783 | 2,738,061 | 3,292,293 | |||||||||||||
Net Loans and Other Financing | ||||||||||||||||
- Non-financial Public Sector | 11,292 | 17,889 | (6,796 | ) | ||||||||||||
- Other Financial Institutions | (2,768,659 | ) | (1,073,296 | ) | 7,583,249 | |||||||||||
- Non-financial Private Sector and Residents Abroad | (70,129,963 | ) | 72,480,365 | (28,997,919 | ) | |||||||||||
Other Debt Securities | 2,823,060 | 4,314,789 | (21,448,808 | ) | ||||||||||||
Financial Assets Pledged as Collateral | (2,992,408 | ) | 6,929,858 | (3,080,071 | ) | |||||||||||
Investments in Equity Instruments | 309,477 | (5,863,167 | ) | (102,894 | ) | |||||||||||
Other Non-financial Assets | 871,701 | (2,209,541 | ) | (2,364,329 | ) | |||||||||||
Non-current Assets Held for Sale | 23,778 | 1,220,250 | 21,470,750 | |||||||||||||
Net Increases/(Decreases) from Operating Liabilities: | ||||||||||||||||
Deposits | ||||||||||||||||
- Non-financial Public Sector | 18,905,690 | (15,314,927 | ) | 14,347,100 | ||||||||||||
- Financial Sector | 1,333,223 | (876,675 | ) | 1,134,515 | ||||||||||||
- Non-financial Private Sector and Residents Abroad | 120,123,123 | (201,920,439 | ) | 117,986,898 | ||||||||||||
Liabilities at fair value through profit or loss | (1,936,133 | ) | (2,555,401 | ) | 4,491,534 | |||||||||||
Derivative Financial Instruments | (1,142,083 | ) | (2,645,130 | ) | 2,072,205 | |||||||||||
Other Financial Liabilities | 1,297,568 | (40,408,460 | ) | 16,511,834 | ||||||||||||
Provisions | 36,561 | 704,443 | 1,156,177 | |||||||||||||
Other Non-financial Liabilities | 44,060 | (1,096,350 | ) | (20,447,222 | ) | |||||||||||
Income Tax Collections/Payments | (25,076,419) | (13,753,851 | ) | (15,540,835 | ) | |||||||||||
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NET CASH (USED IN)/GENERATED BY OPERATING ACTIVITIES (A) | 183,754,006 | (26,226,001 | ) | 188,240,662 | ||||||||||||
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CASH FLOWS FROM INVESTMENT ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Purchase of PP&E, Intangible Assets and Other Assets | (7,123,954) | (10,751,158 | ) | (7,723,624 | ) | |||||||||||
Interests in Associates and other companies | (102,290 | ) | — | — | ||||||||||||
Collections: | ||||||||||||||||
Sale of PP&E, Intangible Assets and Other Assets | 264,603 | 3,648,203 | 212,957 | |||||||||||||
Dividends earned | 179,298 | — | — | |||||||||||||
NET CASH USED IN INVESTMENT ACTIVITIES (B) | (6,782,343 | ) | (7,102,955 | ) | (7,510,667 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Unsubordinated Debt Securities | (27,839,122 | ) | (20,826,089 | ) | (2,851,195 | ) | ||||||||||
Subordinated Debt Securities | — | — | — | |||||||||||||
Loans from Local Financial Institutions | (35,157,119 | ) | (70,418,814 | ) | (25,579,255 | ) | ||||||||||
Dividends | 42 | (2,036,403 | ) | (3,622,432 | ) | (3,588,846 | ) | |||||||||
Leases payment | (1,333,090 | ) | (1,361,874 | ) | — | |||||||||||
Collections: | ||||||||||||||||
Unsubordinated Debt Securities | 11,728,016 | 7,726,304 | 23,558,089 | |||||||||||||
Loans from Local Financial Institutions | 19,531,578 | 63,225,074 | 24,870,537 | |||||||||||||
Capital increase | 50 | — | 179,986 | — | ||||||||||||
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NET CASH (USED IN)/GENERATED BY FINANCING ACTIVITIES (C) | (35,106,140) | (25,097,845 | ) | 16,409,330 | ||||||||||||
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EXCHANGE INCOME ON CASH AND CASH EQUIVALENTS (D) | 32,805,838 | 69,534,981 | 94,158,129 | |||||||||||||
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NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C+D) | 174,671,361 | 11,108,180 | 291,297,454 | |||||||||||||
MONETARY LOSS RELATED TO CASH AND CASH EQUIVALENTS | (111,859,585 | ) | (168,132,627 | ) | (94,622,803 | ) | ||||||||||
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CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | 5 | 316,008,097 | 473,032,544 | 276,357,893 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF THE YEAR | 5 | 378,819,873 | 316,008,097 | 473,032,544 | ||||||||||||
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GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 20192020 AND ENDED DECEMBER 31, 2019,2020, PRESENTED IN COMPARATIVE FORMAT
Figures Stated in Thousands of Pesos (Ps.) and Thousands of U.S. Dollars (USD), Except as Otherwise Stated
NOTE 1. ACCOUNTING POLICIES AND BASIS FOR PREPARATION
Grupo Financiero Galicia S.A. (hereinafter, “the Company”, and jointly with its subsidiaries, “the Group”) is a financial services holding company incorporated in September 14, 1999 under the laws of Argentina. The Company’s main asset is its interest in Banco de Galicia y Buenos Aires S.A.U. (hereinafter, “Banco Galicia” or “the Bank”) which is a private bank offering a wide range of financial services, both to individuals and companies. Likewise, the Company has a controlling interest inin: Tarjetas Regionales S.A. which maintains investments related to the issuance of, through it we provide proprietary brand credit cards, consumer finance and supplementary services;digital banking services to non-banked populations of Argentina; Sudamericana Holding S.A., a company engaged in the insurance business; Galicia Administradora de Fondos S.A., a mutual fund management company; Galicia Warrants S.A., a warrant issuing company; and IGAM LLC, a company engaged in assets management.management; and Galicia Securities S.A. a settlement and compensation agent.
These consolidated financial statements were approved and authorized for publication through Minutes of Board of Directors’ Meeting No. 608631 dated April 28, 2020.23, 2021.
1.1. BASIS FOR PREPARATION |
These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC). All the IFRSs in force as of the date of preparation of these consolidated financial statements have been applied.
In Argentina, the Group is subject to the provisions of Article 2, Section I, Chapter I of Title IV: Periodic Information Regime of the National Securities Commission (CNV) regulations and it is required to present its financial statements in accordance with the valuation and disclosure criteria set forth by the Argentine Central Bank.
The Argentine Central Bank, through Communications “A” 5541 and its amendments, established a convergence plan towards the adoption of IFRS as issued by the IASB, and the interpretations issued by the IFRIC, for the entities under its supervision, effective for fiscal years commencing January 1, 2018 with the exception of the application of item 5.5 (impairment) of IFRS 9 “Financial Instruments” and IAS 29 “Financial Reporting in Hyperinflationary Economies”, both temporarily waived until January 1, 2020.certain exceptions.
Additionally, the Superintendence of Financial Institutions has established that the shareholding in Prisma Medios de Pago SA, which is recognized at fair value under IFRS cannot exceed the proportion received in cash at the time of its sale. The Group has presented its local financial statements under these rules on February 20, 2020.March 9, 2021. Shareholders’ equity under the rules of the Argentine Central Bank is presented in Note 53.52.8.
It has been concluded that these consolidated financial statements fairly present the Group’s financial position, financial performance and cash flows, in accordance with IFRS.
The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Groups´ accounting policies.
The areas involving a greater degree of judgment or complexity, or areas where assumptions and estimates are significant for the consolidated financial statements are disclosed in Note 2.
(a) | Going Concern |
As of the date of these consolidated financial statements, there are no uncertainties related to events or conditions that may cast significant doubt upon the Group´s ability to continue as a going concern.
(b) | Measurement Unit |
IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy be restated in terms of the current measurement unit as of the reportingperiod-end, irrespective of whether they are based on the historical cost or the current cost method. Accordingly, in general terms,non-monetary items should be adjusted for inflation occurring since the acquisition date or since the revaluation date, as the case may be. These requirements are also applicable to the comparative information reported in the financial statements. According to IAS 29, monetary assets and liabilities are not required to be restated, for they are stated in the measurement unit as of the end of the reporting period. Assets and liabilities subject to adjustments based on specific agreements will be adjusted on the basis of such agreements.Non-monetary items measured at their fair values at the end of the reporting period, such as net realizable value or otherwise, will not be restated. The othernon-monetary assets and liabilities will be restated by applying a general price index. The income (loss) from the net monetary position will be charged to net income for the reporting period in a separate item.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In order to conclude whether a given economy qualifies as hyperinflationary pursuant to the terms of IAS 29, the standard sets forth certain factors that should be considered, including a three-year cumulative inflation rate reaching or exceeding 100%.
In this regard, the Argentine Federation of Professional Councils in Economic Sciences (FACPCE) through Resolution J.G.539/18 and the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires (CPCECABA) through Resolution C.D. 107/2018 have pointed out that, effective for fiscal years ending on July 1, 2018 and thereafter, entities reporting under IFRS will be required to apply IAS 29 since the conditions for such application have been satisfied. In addition, Law No. 27468 enacted in November 2018 abrogated the prohibition to present the financial statements adjusted for inflation, as established by Decree 664/2003, entrusting each regulatory agency with its application. In this regard, on December 26, 2018, the CNV issued General Resolution No. 777/2018 authorizing the issuing entities to present accounting information in constant currency for annual financial statements for interim and special periods ending on December 31, 2018 and thereafter, except for financial institutions and insurance companies.
On February 22, 2019, through Communiqué “A” 6651, the Argentine Central Bank established that entities subject to its control shall restate the financial statements into constant currency for the fiscal years commencing January 1, 2020. However, theThe Group has applied IAS 29, Financial Reporting in hyperinflationary Economy, in preparing these consolidated financial statements in order for them to comply with IFRS.all presented years.
(c) | New Accounting Standards |
Definition of “Business” - Amendment to IFRS 16 “Leases”:3: In January 2016, the IASB issued IFRS 16 “Leases”The new definition of Business includes a comprehensive set of activities and assets that establishes the new principles for recognizing, measuring, presentingcan be directed and disclosing information on leases. Under IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time, in exchange for a consideration. In that case, it requires the lessee to recognize a liabilitymanaged for the present valuepurpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Yields such as lower costs and other economic benefits are excluded from the agreed future payments, discounted at the implicit interest rate of the contract or if that rate cannot be readily determined, at the lessee’s incremental borrowing rate and an asset for the right of use of the underlying asset. above definition.
This criterion must be applied to all lease contracts, and its application is optional for agreements whose terms do not exceed 12 months and do not contain a bargain purchase option, and where the leased assets are considered of low value. For the accounting of the lessors, the classification established in IAS 17 in Operating and Finance leases is maintained. This standardamendment is effective for annual periods commencing on or after January 1, 2019.
The Group had to change its accounting policies as a consequence of adopting IFRS 16. The Group decided to adopt the new standards retrospectively from 1 January 2019 but has not restated comparatives for the 2018 reporting period, as permitted under the specific transition provisions in the standard. The cumulative effect of the initial application of the new standard are therefore recognized as of January 1, 2019 (See Note 16).
IFRIC 23 “Uncertainty over Income Tax Treatments”: this interpretation clarifies how to recognize, and measure deferred and current income tax assets and liabilities where there is uncertainty over the tax treatment. This standard was published in June 2017 and applies to financial reporting periods commencing as of January 1, 2019. Its application did2020. The Group does not have any significant impact on the Group.
Prepayments features with negative compensation – Amendments to IFRS 9:consider that this amendment to IFRS 9 enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. These assets, which include some loans and debt securities, would otherwise have to be measured at fair value through profit or loss. To qualify for amortized cost measurement, the negative compensation must be a “reasonable compensation for early termination of the contract” and the asset must be held within “held to collect”. This standard is effective for annual periods commencing on or after January 1, 2019. Its application did not have any significanthas an impact, on the Group.
Long-term interests in Associates and Joint Ventures – Amendments to IAS 28: The amendments clarify accounting for long-term interests in associates and joint ventures for which the equity accounting does not apply. The entities must account for such interests under IFRS 9 “Financial Instruments” before applying the loss allocation and impairment requirements in IAS 28 “Investments in associates and joint ventures”. This standard is effective for financial reporting periods commencing on or after January 1, 2019. Its application did not have any significant impact on the Group.
Annual Improvements to IFRS 2015–2017 Cycle:The following improvements were finalized in December 2017, being effective for financial reporting periods commencing on or after January 1, 2019.
IFRS 3: It was clarified that obtaining control of a business that is a joint operationunless there is a business combination achieved in stages.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IFRS 11: It was clarified that the party obtaining joint control of a business that is a joint operation should not remeasure its previously held interest in the joint operation.
IAS 12: It was clarified that income tax consequences of dividends on financial instruments classified as equity should be recognized according to where the past transactions or events that generated distributable profits were recognized.
IAS 23: It was clarified that, if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, it becomes part of general borrowings.
The application of this standard did not have any significant impact.
|
As indicated in Note 1.1. (c), the Group has adopted IFRS 16 “Leases” retrospectively from January 1, 2019. The new accounting policies are disclosed in Note 1.12.
Following the adoption of IFRS 16, the Group recognized lease liabilities related to leases that had previously been classified as operating leases under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to lease liabilities on January 1, 2019 was 37.94% for contracts in Argentine pesos and 8.60% for contracts in foreign currency.
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In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
the use of a single discount rate, in a lease portfolio with reasonably similar characteristics;
relying on previous assessments on whether leases are onerous as an alternative to performing, an impairment test: the Group did not have any onerous contracts as of January 1, 2019;
accounting for operating leases with a remaining lease term of less than 12 months and that do not include a bargain purchase option as of January 1, 2019, as short-term leases;
excluding initial direct costs for the measurement of theright-of-use asset as of the date of initial application; and
using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its the assessment made under IAS 17 and IFRIC 4 “Determining Whether an Arrangement Contains a Lease”.
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Right-of-use assets were measured for an amount equal to lease liabilities.
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The change in the accounting policy affected the following items in the Statement of Financial Position as of January 1, 2019:
Right-of-use Assets (include under Property, Plant & Equipment)—Increase of Ps.4,461,031.
Deferred Tax Assets – Increase of Ps.1,338,310.
Lease Liabilities – Increase of Ps.4,461,031.
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The new standards, amendments and interpretations published are detailed below; however, they have not yet come into force for financial reporting periods commenced January 1, 2019 and have not been early adopted.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IFRS 17 “Insurance Contracts”: On May 18, 2017, the IASB issued IFRS 17 “Insurance Contracts,” establishing a comprehensive accounting framework based on measurement and disclosure principles for insurance contracts. The new standard supersedes IFRS 4 “Insurance Contracts,” and requires entities to measure an insurance contract at initial recognition at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment fornon-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Entities are required to apply IFRS 17 for fiscal years commencing on or after January 1, 2021. The Group is evaluating the impact of adopting this new standard.
Definition of “Material”— - Amendments to IAS 1 and IAS 8: The IASB has amended IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates, and Errors” clarifying when information is material.
In particular, the amendments clarify:
The reference to obscuring information addresses situations where the effect is similar to omitting or misstating such information, and that an entity assesses materiality in the context of the financial statements as a whole; and
the meaning of “primary users of general-purpose Financial Statements” to whom those Financial Statements are addressed, by defining them as “existing and potential investors, lenders and other creditors”, that must rely on general purpose Financial Statements for much of the financial information they need.
This amendment is effective as of January 1, 2020 and isthe Group does not expectedconsider that this amendment has a significant impact on its financial statements.
Amendments to havethe Conceptual Framework for Financial Reporting: The IASB has issued a new Conceptual Framework. It should be noted that the aforementioned amendment will not imply changes to any significant impact.
Definition of “Business”—Amendmentthe current accounting standards. However, the Entities that use the Conceptual Framework to IFRS 3: Thedefine the accounting standards for those transactions, events or situations not contemplated in the current accounting standards must apply the new definition of Business includes a comprehensive set of activities and assets that can be directed and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Yields such as lower costs and other economic benefits are excluded from the above definition.
This amendment is effectiveConceptual Framework as of January 1, 2020, and isevaluate whether their accounting standards continue to be adequate.
The Group does not expected toconsider that these amendments have anya significant impact.impact on its financial statements.
Reform to the interest rate benchmark—benchmark - Amendments to IFRS 9, IAS 39 and IFRS 7: These amendments provide some reliefs regarding the reform to the interest rate benchmark such as LIBOR and other rates offered in the interbank market. Reliefs are related to hedge accounting and to the fact that the mentioned reform should not cause the end of hedge accounting, considering the IFRS currently in force. However, hedge ineffectiveness must continue to be recorded in the Statement of Income. These amendments are effective as of January 1, 2020. These2020 and the Group does not consider that these amendments have an impact given that the Group does not apply hedge accounting on its current financial statements.
(d) | New accounting standards and amendments issued by IASB that have not been adopted by the Group |
The new standards, amendments and interpretations published are detailed below; however, they have not yet come into force for financial reporting periods commenced January 1, 2020 and have not been early adopted.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28. The IASB made limited amendments to IFRS 10 “Consolidated Financial Institutions” and to IAS 28
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
“Investments in Associates and Joint Ventures”. The amendments clarify the accounting of sales or contributions of assets between the investor and its associates or joint ventures. This confirms that the accounting treatment depends of whether the non-monetary assets sold or contributed to the associate or joint venture are a “business” (such as defined in IFRS 3) or not. When the non-monetary assets constitute a business, the investor will recognize the profit or loss from the sale or contribution of the assets. When the assets do not constitute a business, the profit or loss is recognized by the investor only up to the amount recognized by the other investor in the associate or joint venture. The amendments are not expected to have any significant impact.be prospectively applied. The IASB has decided to defer the application date of this amendment until it concludes its research project on the equity method. The Group is evaluating the impact of adopting this new standard.
IFRS 17 “Insurance Contracts”: On May 18, 2017, the IASB issued IFRS 17 “Insurance Contracts,” establishing a comprehensive accounting framework based on measurement and disclosure principles for insurance contracts. The new standard supersedes IFRS 4 “Insurance Contracts,” and requires entities to measure an insurance contract at initial recognition at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Entities are required to apply IFRS 17 for fiscal years commencing on or after January 1, 2023.The Group is evaluating the impact of adopting this new standard.
There are no other IFRS or IFRIC interpretations that are not effective and that are expected to have a significant impact on the Group.
1.2. | CONSOLIDATION |
Subsidiaries are those entities, including structured entities, where the Group is in control because (i) it has the power to direct relevant activities of the investee, which significantly affect its returns; (ii) it has exposure, or rights, to variable returns for its interest in the investee; and (iii) it has the ability to use its power over the investee to affect the amount of the investor’s returns. The existence and effect of the substantive rights, including potential voting rights, are considered when evaluating whether the Group has control over another entity. For a right to be substantive, the holder must have the practical ability to exercise it whenever necessary to make decisions on the direction of the relevant activities of the entity. The Group may be in control of an entity even when possessing less than the majority of the voting rights.
Likewise, the protective rights of other investors, such as those related to substantive changes in the activities of the investee or applied only in exceptional circumstances, do not prevent the Group from having control over an investee. The subsidiaries are consolidated from the date the control is transferred to the Group, and they cease to be consolidated as of the date on which the control ceases.
The subsidiaries which have been consolidated in these Consolidated Financial Statements are detailed in Note 15.
For the purpose of consolidating its financial statements, the Group used the subsidiaries’ financial statements for the year ended December 31, 2019.2020. The accounting policies applied by Sudamericana Holding S.A.SA. are established by the National Insurance Superintendency and have been adjusted to those applied by the Group in preparing its consolidated financial statements.
Intercompany transactions, balances and unrealized gains on transactions between Group’s companies were eliminated. (See Note 51).
Non-controlling interest in the results and equity of consolidated subsidiaries are shown separately in the consolidated statement of income, consolidated statement of other comprehensive income, consolidated statement of changes in shareholder’s equity and consolidated statement of financial position, respectively.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the provisions of IFRS 3 “Business combinations”, the acquisition method is used to account for the acquisition of subsidiaries. The identifiable assets and liabilities acquired, and contingent liabilities assumed in a business combination are measured at their fair values on the acquisition date.
Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of anynon-controlling interest in the acquiree and, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree; over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed.
The consideration transferred in a business combination is measured at the fair value of the assets transferred by the acquirer, the liabilities assumed by the acquirer with the previous owners of the investee, and the equity instruments issued by the acquirer. The transaction costs are recognized as expenses in the periods in which the costs have been incurred and the services have been received, except for the transaction costs incurred to issue equity instruments that are deducted from equity, and the transaction costs incurred to issue debt that are deducted from their carrying amount.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.3. | TRANSACTIONS WITHNON-CONTROLLING INTEREST |
The Group treats transactions withnon-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling andnon-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment tonon-controlling interests and any consideration paid or received is recognized within equity attributable to owners of the Group.
1.4. | ASSOCIATES |
Associates are entities over which the Group has significant direct or indirect influence, but not control; generally, this implies holding between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. The carrying amount of the associates includes the goodwill identified in the acquisition less the accumulated impairment losses, if any. Dividends received from associates reduce the carrying amount of the investment. Other changes subsequent to the acquisition of the Group’s interest in the net assets of an associate are recognized as follows: (i) the Group’s interest in the profits or losses of the associates is accounted under Share of Profit from Associates and Joint Ventures in the consolidated statement of income and (ii) the Group’s interest in other comprehensive income is recognized in the consolidated statement of other comprehensive income and presented separately. However, when the Group’s share in losses in an associate equal or exceeds its interest in it, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealized profits on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of impairment in the transferred assetasset.
1.5. | SEGMENT REPORTING |
An operating segment is a component of an entity (a) that conducts business activities from which it can earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the same entity); (b) whose operating income is regularly reviewed by the Group´s CODM (chief operating decision maker) to make decisions about the resources to be allocated to the segment and assess its performance; and (c) for which confidential financial information is available.
Segment reporting is presented consistently with the internal reports submitted to the Board of Directors (CODM of the Group), which is responsible for making the Group’s strategic decisions, allocating resources and assessing the performance of the operating segments.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.6. | FOREIGN CURRENCY TRANSLATION |
(a) | Functional Currency and Presentation Currency |
The figures included in the consolidated financial statements for of the Group´s entities are stated in their functional currency, that is, the currency used in the primary economic environment where it operates. The consolidated financial statements are stated in Argentine pesos (Ps.), which is the Group’s functional and presentation currency. (See Note 1.1).
(b) | Transactions and Balances |
The transactions in foreign currency are translated into the functional currency using the exchange rate at the dates of the transactions. Profits and losses in foreign currency resulting from the settlement of these transactions and the translation of monetary assets and liabilities in foreign currency at closing exchange rate, are recognized under “Exchange rate differences on gold and foreign currency” in the statement of income, except when they are deferred in equity by transactions which qualify as cash flows hedges, if appropriate.
Assets and liabilities in foreign currency are measured at the reference exchange rate of the US dollar defined by the Argentine Central Bank at the closing of operations on the last business day of each month.
As of December 31, 2019,2020, and December 31, 2018,2019, balances in U.S. Dollars were translated at the reference exchange rate (Ps.59.895(Ps.84.145 and Ps.37.8083,Ps. 59.895, respectively) established by the Argentine Central Bank. Foreign currencies other than the US dollar have been translated into this currency using exchange rates reported by the Argentine Central Bank.
1.7. | CASH AND DUE FROM BANKS |
The item Cash and Due from Banks includes the available cash and bank deposits freely available, which are liquid short-term instruments with maturity less than three months from the origination date.
The assets disclosed under cash and due from banks are accounted for at their amortized cost which approximates its fair value.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.8. | FINANCIAL INSTRUMENTS |
Initial Recognition
The Group recognizes a financial asset or liability in its consolidated financial statements, as appropriate, when it becomes part of the contractual clauses of the financial instrument. Purchases and sales are recognized at the trading date when the Group buys or sells the instruments.
Upon initial recognition, the Group measures financial assets or liabilities at fair value, plus or less, for instruments not recognized at fair value through profit or loss, transaction costs that are directly attributable to the acquisition, such as fees and commissions.
When the fair value differs from the cost value of the initial recognition, the Group recognizes the difference as follows:
a. | When the fair value is according to the market value of the financial asset or liability or is based on a valuation technique solely using market values, the difference is recognized as profit or loss, as appropriate. |
b. | In other cases, the difference is deferred and the recognition over time of the profit and loss is individually determined. The difference is amortized over the life of the instrument until the fair value can be measured based on market values. |
Financial Assets
a. | Debt Securities |
The Group considers as debt securities those instruments considered financial liabilities for the issuer, such as loans, government and private securities, bonds and customer accounts receivable.
Classification
As established by IFRS 9, the Group classifies financial assets according to how they are subsequently measured: at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss, based on:
the Group’s business model to manage financial assets; and
the characteristics of contractual cash flows of the financial asset.
Business Model
The Business Model refers to the way in which the Group manages a set of financial assets to reach a specific business objective. It represents the way the Group manages its financial instruments to generate cash flows.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business models that the Group can follow are listed below:
Hold the instruments to collect its contractual cash flows;
Hold the instruments in the portfolio to collect contractual cash flows and, in turn, sell them when deemed convenient; or;
Hold the instruments for trading.
The Group’s Business Model does not depend on the intentions that it may have for an individual instrument. Therefore, this condition is not aninstrument-by-instrument classification approach, but it is determined from a higher level of aggregation.
The Group only reclassifies an instrument when, and only when, the business model for managing financial assets is modified. The reclassification is performed from the commencement of the period where the change takes place. Such change is not expected to be frequent, and changes have not been recorded during this fiscal year.
Characteristics of Contractual Cash Flows
The Group assesses whether the cash flow of grouped instruments is not significantly different from the flow that would receive solely for interest; otherwise, they shall be measured at fair value through profit or loss.
Based on the foregoing, there are three categories of Financial Assets:
(i) | Financial assets measured at amortized cost: |
Financial assets are measured at amortized cost when:
(a) | the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and |
(b) | the contractual conditions of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the outstanding principal amount. |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
These financial instruments are initially recognized at fair value plus the incremental and directly attributable transaction costs and are subsequently measured at amortized cost.
The amortized cost of a financial asset is equal to its acquisition cost less its accumulated amortization plus accrued interest (calculated according to the effective interest method), net of any impairment loss.
(ii) | Financial assets at fair value through other comprehensive income: |
Financial assets are measured at fair value through other comprehensive income when:
(a) | the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and |
(b) | the contractual conditions of the financial asset give rise, on specified dates, to cash flows which are solely payments of principal and interest on the outstanding principal amount. |
These instruments are initially recognized at their fair value plus the incremental and directly attributable transaction costs and are subsequently measured at fair value through other comprehensive income. Profits and losses arising from the changes in fair value are included in other comprehensive income within a separate equity component. Impairment losses or reversals, income for interest and exchange profits and losses are recognized through profit or loss. Upon its sale or disposal, the accumulated profit or loss previously recognized through other comprehensive income is reclassified to the statement of income.
(iii) | Financial assets at fair value through profit or loss: |
Financial assets at fair value through profit or loss are the following:
Instruments held for trading;
Instruments specifically designated at fair value through profit or loss; and
Instruments whose contractual terms do not represent cash flows that are solely payments of principal and interest on the outstanding principal amount.
These financial instruments are initially recognized at fair value and any fair value measurement is recognized in the statement of income.
The Group classifies a financial instrument as held for trading if it is acquired or incurred for the main purpose of selling or repurchasing it in the short term, or if it is part of a portfolio of financial instruments that are jointly managed and for which there is evidence of short-term earnings, or is a derivative financial instrument not designated as a hedging instrument. Derivative instruments andheld-for-trading securities are classified as held for trading and measured at fair value.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Additionally, financial assets can be valued at fair value through profit or loss when, by doing so, the Group eliminates or significantly reduces a measurement or recognition inconsistency.mismatch.
b. | Equity Instruments |
Equity instruments are so considered by its issuer; this means that they are instruments which do not contemplate a contractual obligation to pay cash, and which evidence a residual interest on the issuer’s asset after deducting its entire liabilities.
Such instruments are measured at fair value through profit or loss, except when, at the time of the initial recognition, the irrevocable option had been exercised to measure them at fair value through Other Comprehensive Income. This method is only applicable when the instruments are not held for trading and income shall be accounted in other comprehensive income with no reclassification to profit or loss, even when they are realized. Dividends receivable arising from such instruments shall be recognized through profit or loss solely when the Group is entitled to collect the payment.
Financial Liabilities
Classification
The Group classifies their financial liabilities at amortized cost, using the effective interest rate method, except for:
Financial liabilities measured at fair value through profit or loss, including derivative financial instruments.
Liabilities arising from the transfer of financial assets not complying with the derecognition criteria.
Financial guarantee contracts.
Loan commitments at a lower than market rate.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial liabilities measured at fair value through profit or loss: the Group may choose to use, at the beginning, the irrevocable option to designate a liability at fair value through profit or loss, if, and only if, in doing so, it reflects a better measurement of financial information because:
the Group eliminates or significantly reduces measurement or recognition inconsistency which would otherwise be exposed in the valuation;
if financial assets and liabilities or a group of financial assets or liabilities, are managed and their performance is assessed on a fair value basis, according to a documented investment or risk management strategy; or
a host contract contains one or more embedded derivative instruments, and the Group has opted for designating the entire contract at fair value through profit or loss.
Financial guarantee contracts: Financial guarantee contracts are those contracts requiring the issuer to make specific payments to reimburse the holder for the loss incurred when a specific debtor does not comply with its payment obligation on maturity, in accordance with the original or amended terms of a debt instrument.
Financial guarantee contracts are initially measured at fair value, and subsequently measured at the higher of the amount of the loss allowance and the amount initially recognized less, when appropriate, the cumulative amount of income recognized.
DerecognitionAssets for Insurance Contracts
Other Non-financial Assets
Non-current Assets Held for Sale
Total Assets
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-4
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Continued)
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | |||||||||
Liabilities | ||||||||||||
Deposits | 23 | 676,395,735 | 536,033,696 | |||||||||
Non-financial Public Sector | 21,537,481 | 2,631,790 | ||||||||||
Financial Sector | 1,947,127 | 613,904 | ||||||||||
Non-financial Private Sector and Residents Abroad | 652,911,127 | 532,788,002 | ||||||||||
Liabilities at fair value through profit or loss | 24 | — | 1,936,133 | |||||||||
Derivative Financial Instruments | 7 | 57,450 | 1,199,533 | |||||||||
Other Financial Liabilities | 25 | 97,471,465 | 97,153,624 | |||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 26 | 13,833,439 | 30,936,161 | |||||||||
Debt Securities | 27 | 17,073,898 | 39,808,666 | |||||||||
Current Income Tax Liabilities | 41 | 15,227,474 | 14,042,235 | |||||||||
Subordinated Debt Securities | 28 | 21,653,546 | 21,100,718 | |||||||||
Provisions | 29 | 3,776,297 | 3,739,734 | |||||||||
Deferred Income Tax Liabilities | 19 | 136,934 | 3,020,554 | |||||||||
Liabilities for Insurance Contracts | 20 | 2,060,976 | 1,999,408 | |||||||||
Other Non-financial Liabilities | 30 | 25,258,228 | 23,239,327 | |||||||||
|
|
|
| |||||||||
Total Liabilities | 872,945,442 | 774,209,789 | ||||||||||
|
|
|
| |||||||||
Shareholders’ Equity | 31 | |||||||||||
Capital Stock | 1,474,692 | 1,426,765 | ||||||||||
Paid-in capital | 17,281,187 | 10,951,132 | ||||||||||
Capital Adjustments | 61,548,313 | 60,622,637 | ||||||||||
Profit Reserves | 178,751,308 | 127,248,745 | ||||||||||
Retained Deficit | (102,255,270 | ) | (77,955,542 | ) | ||||||||
Other Comprehensive Income | 341,829 | 551,139 | ||||||||||
Income / (Loss) for the Year | 43 | 25,191,673 | 32,276,377 | |||||||||
|
|
|
| |||||||||
Shareholders’ Equity Attributable to Parent Company´s Owners | 182,333,732 | 155,121,253 | ||||||||||
Shareholders’ Equity Attributable to Non-controlling Interests | 50 | 3 | 3,938,564 | |||||||||
|
|
|
| |||||||||
Total Shareholders’ Equity | 182,333,735 | 159,059,817 | ||||||||||
|
|
|
|
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Interest Income | 32 | 166,806,678 | 177,671,454 | 163,927,492 | ||||||||||||
Interest Expense | 32 | (90,174,458 | ) | (130,254,081 | ) | (94,054,946 | ) | |||||||||
Net Income from Interest | 76,632,220 | 47,417,373 | 69,872,546 | |||||||||||||
Fee Income | 32 | 46,475,432 | 47,846,733 | 51,093,837 | ||||||||||||
Fee related Expenses | 32 | (9,917,873 | ) | (9,613,497 | ) | (6,337,505 | ) | |||||||||
Net Fee Income | 36,557,559 | 38,233,236 | 44,756,332 | |||||||||||||
Net Income from Financial Instruments Measured at Fair Value through Profit or Loss | 32 | 69,331,902 | 99,151,496 | 36,341,509 | ||||||||||||
Income from Derecognition of Assets Measured at Amortized Cost | (3,129 | ) | 298,801 | 464,175 | ||||||||||||
Exchange rate differences on gold and foreign currency | 33 | 7,047,447 | 11,831,452 | 7,910,257 | ||||||||||||
Other Operating Income | 34 | 22,322,631 | 28,769,432 | 21,862,980 | ||||||||||||
Income from Insurance Business | 35 | 5,501,807 | 5,000,869 | 6,009,167 | ||||||||||||
Loan and other Receivables Loss Provisions | 36 | (34,679,749 | ) | (30,227,668 | ) | (34,136,247 | ) | |||||||||
Net Operating Income | 182,710,688 | 200,474,991 | 153,080,719 | |||||||||||||
Personnel Expenses | 37 | (31,825,101 | ) | (33,284,961 | ) | (35,657,786 | ) | |||||||||
Administrative Expenses | 38 | (31,371,622 | ) | (33,105,199 | ) | (33,674,305 | ) | |||||||||
Depreciation and Impairment of Assets | 39 | (8,284,286 | ) | (6,894,944 | ) | (3,459,704 | ) | |||||||||
Other Operating Expenses | 40 | (30,763,761 | ) | (35,082,818 | ) | (35,391,431 | ) | |||||||||
Loss on net monetary position | (36,963,213 | ) | (41,928,902 | ) | (37,830,439 | ) | ||||||||||
Operating Income | 43,502,705 | 50,178,167 | 7,067,054 | |||||||||||||
Share of profit from Associates and Joint Ventures | 15 | (125,053 | ) | — | — | |||||||||||
Income before Taxes from Continuing Operations | 43,377,652 | 50,178,167 | 7,067,054 | |||||||||||||
Income Tax from Continuing Operations | 41 | (17,844,872 | ) | (17,750,682 | ) | (14,476,788 | ) | |||||||||
Net Income / (Loss) from Continuing Operations | 25,532,780 | 32,427,485 | (7,409,734 | ) | ||||||||||||
Loss from Discontinued Operations | 22 | — | — | (544,003 | ) | |||||||||||
Income Tax from Discontinued Operations | 41 | — | — | (66,336 | ) | |||||||||||
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| |||||||||||
Net Income / (Loss) for the Year | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||
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|
|
| |||||||||||
Net Income / (Loss) for the Year Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Net Income / (Loss) for the Year Attributable to Non-controlling Interests | 50 | 341,107 | 151,108 | (761,659 | ) |
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Earnings per Share | 43 | |||||||||||||||
Net Income / (Loss) Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Net Income / (Loss) Attributable to parent company´s owners Adjusted by dilution effects | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Diluted Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Basic Earnings per Share | 17.46 | 22.62 | (5.09 | ) | ||||||||||||
Diluted Earnings per Share | 17.46 | 22.62 | (5.09 | ) |
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Net Income / (Loss) for the Year | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||
Items of Other Comprehensive Income (OCI) that may be Reclassified to Profit or Loss for the Year | ||||||||||||||||
Income or Loss from Financial Instruments at Fair Value through OCI (Item 4.1.2a, IFRS 9) | ||||||||||||||||
Income / (Loss) for the Year from Financial Instruments at Fair Value with Changes through OCI (*) | 32 | (203,783 | ) | 533,607 | (183,218 | ) | ||||||||||
Other Comprehensive Income(*) | (5,527 | ) | 14,591 | — | ||||||||||||
Total Other Comprehensive Income (Loss) that may be Reclassified to Profit or Loss for the Year | (209,310 | ) | 548,198 | (183,218 | ) | |||||||||||
Total Other Comprehensive Income (Loss) | (209,310 | ) | 548,198 | (183,218 | ) | |||||||||||
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|
| |||||||||||
Total Comprehensive Income / (Loss) | 25,323,470 | 32,975,683 | (8,203,291 | ) | ||||||||||||
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|
| |||||||||||
Total Comprehensive Income / (Loss) Attributable to Parent company´s owners | 24,982,363 | 32,824,575 | (7,441,632 | ) | ||||||||||||
Total Comprehensive Income / (Loss) Attributable to Non-controlling Interests | 50 | 341,107 | 151,108 | (761,659 | ) |
(*) | Net of |
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | — | — | — | — | — | — | — | — | — | (143,844 | ) | (143,844 | ) | ||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | (1,892,559 | ) | — | (1,892,559 | ) | — | (1,892,559 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 56,576,105 | (56,576,105 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Increase due to merger | 31 | 47,927 | 6,330,055 | 925,676 | — | — | — | (3,180,983 | ) | — | 4,122,675 | (4,135,824 | ) | (13,149 | ) | |||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 25,191,673 | 25,191,673 | 341,107 | 25,532,780 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | (203,783 | ) | (5,527 | ) | — | — | — | (209,310 | ) | — | (209,310 | ) | |||||||||||||||||||||||||||||||
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Balances as of 12.31.20 | 1,474,692 | 17,281,187 | 61,548,313 | 332,765 | 9,064 | 1,296,382 | 177,454,926 | (77,063,597 | ) | 182,333,732 | 3 | 182,333,735 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-8
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||
Capital Contribution from Non-controlling Interest | 50 | — | — | — | — | — | — | — | — | — | 179,986 | 179,986 | ||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (3,622,432 | ) | (3,622,432 | ) | — | (3,622,432 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 35,774,283 | (35,774,283 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 32,276,377 | 32,276,377 | 151,108 | 32,427,485 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | 533,607 | 14,591 | — | — | — | 548,198 | — | 548,198 | |||||||||||||||||||||||||||||||||||
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Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-9
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||
Balances as of 12.31.17 | 1,426,765 | 10,951,132 | 60,622,637 | 186,159 | - | 1,218,152 | 66,597,571 | (5,869,124 | ) | 135,133,292 | 6,185,425 | 141,318,717 | ||||||||||||||||||||||||||||||||||||
Purchase of Non-controlling Interests | 50 | - | - | - | - | - | - | 1,613,587 | - | 1,613,587 | (1,613,587 | ) | - | |||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | - | - | - | - | - | - | - | - | - | (202,709 | ) | (202,709 | ) | ||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (3,386,137 | ) | (3,386,137 | ) | — | (3,386,137 | ) | |||||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | 78,230 | 21,966,922 | (22,045,152 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss for the Year | 43 | — | — | — | — | — | — | — | (7,258,414 | ) | (7,258,414 | ) | (761,659 | ) | (8,020,073 | ) | ||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) for the Year | — | — | — | (183,218 | ) | — | — | — | — | (183,218 | ) | — | (183,218 | ) | ||||||||||||||||||||||||||||||||||
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Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Income before Taxes from Continuing Operations | 43,377,652 | 50,178,167 | 7,067,054 | |||||||||||||
Adjustment to Obtain the Operating Activities Flows: | ||||||||||||||||
Loan and other Receivables Loss Provisions | 34,679,749 | 30,227,668 | 34,136,247 | |||||||||||||
Depreciation and Impairment of Assets | 8,284,286 | 6,894,944 | 3,459,704 | |||||||||||||
Loss on Net Monetary Position | 36,963,213 | 41,928,902 | 37,830,439 | |||||||||||||
Other Operations | 33,809,461 | 45,546,783 | (15,845,824 | ) | ||||||||||||
Net Increases/(Decreases) from Operating Assets: | ||||||||||||||||
Debt securities measured at fair value through profit or loss | (16,816,890 | ) | 1,906,801 | 25,022,547 | ||||||||||||
Derivative Financial Instruments | 1,005,783 | 568,821 | (2,115,155 | ) | ||||||||||||
Repo Transactions | (45,899 | ) | (4,166,505 | ) | 627,969 | |||||||||||
Other Financial Assets | 762,783 | 2,738,061 | 3,292,293 | |||||||||||||
Net Loans and Other Financing | ||||||||||||||||
- Non-financial Public Sector | 11,292 | 17,889 | (6,796 | ) | ||||||||||||
- Other Financial Institutions | (2,768,659 | ) | (1,073,296 | ) | 7,583,249 | |||||||||||
- Non-financial Private Sector and Residents Abroad | (70,129,963 | ) | 72,480,365 | (28,997,919 | ) | |||||||||||
Other Debt Securities | 2,823,060 | 4,314,789 | (21,448,808 | ) | ||||||||||||
Financial Assets Pledged as Collateral | (2,992,408 | ) | 6,929,858 | (3,080,071 | ) | |||||||||||
Investments in Equity Instruments | 309,477 | (5,863,167 | ) | (102,894 | ) | |||||||||||
Other Non-financial Assets | 871,701 | (2,209,541 | ) | (2,364,329 | ) | |||||||||||
Non-current Assets Held for Sale | 23,778 | 1,220,250 | 21,470,750 | |||||||||||||
Net Increases/(Decreases) from Operating Liabilities: | ||||||||||||||||
Deposits | ||||||||||||||||
- Non-financial Public Sector | 18,905,690 | (15,314,927 | ) | 14,347,100 | ||||||||||||
- Financial Sector | 1,333,223 | (876,675 | ) | 1,134,515 | ||||||||||||
- Non-financial Private Sector and Residents Abroad | 120,123,123 | (201,920,439 | ) | 117,986,898 | ||||||||||||
Liabilities at fair value through profit or loss | (1,936,133 | ) | (2,555,401 | ) | 4,491,534 | |||||||||||
Derivative Financial Instruments | (1,142,083 | ) | (2,645,130 | ) | 2,072,205 | |||||||||||
Other Financial Liabilities | 1,297,568 | (40,408,460 | ) | 16,511,834 | ||||||||||||
Provisions | 36,561 | 704,443 | 1,156,177 | |||||||||||||
Other Non-financial Liabilities | 44,060 | (1,096,350 | ) | (20,447,222 | ) | |||||||||||
Income Tax Collections/Payments | (25,076,419) | (13,753,851 | ) | (15,540,835 | ) | |||||||||||
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NET CASH (USED IN)/GENERATED BY OPERATING ACTIVITIES (A) | 183,754,006 | (26,226,001 | ) | 188,240,662 | ||||||||||||
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CASH FLOWS FROM INVESTMENT ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Purchase of PP&E, Intangible Assets and Other Assets | (7,123,954) | (10,751,158 | ) | (7,723,624 | ) | |||||||||||
Interests in Associates and other companies | (102,290 | ) | — | — | ||||||||||||
Collections: | ||||||||||||||||
Sale of PP&E, Intangible Assets and Other Assets | 264,603 | 3,648,203 | 212,957 | |||||||||||||
Dividends earned | 179,298 | — | — | |||||||||||||
NET CASH USED IN INVESTMENT ACTIVITIES (B) | (6,782,343 | ) | (7,102,955 | ) | (7,510,667 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Unsubordinated Debt Securities | (27,839,122 | ) | (20,826,089 | ) | (2,851,195 | ) | ||||||||||
Subordinated Debt Securities | — | — | — | |||||||||||||
Loans from Local Financial Institutions | (35,157,119 | ) | (70,418,814 | ) | (25,579,255 | ) | ||||||||||
Dividends | 42 | (2,036,403 | ) | (3,622,432 | ) | (3,588,846 | ) | |||||||||
Leases payment | (1,333,090 | ) | (1,361,874 | ) | — | |||||||||||
Collections: | ||||||||||||||||
Unsubordinated Debt Securities | 11,728,016 | 7,726,304 | 23,558,089 | |||||||||||||
Loans from Local Financial Institutions | 19,531,578 | 63,225,074 | 24,870,537 | |||||||||||||
Capital increase | 50 | — | 179,986 | — | ||||||||||||
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NET CASH (USED IN)/GENERATED BY FINANCING ACTIVITIES (C) | (35,106,140) | (25,097,845 | ) | 16,409,330 | ||||||||||||
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EXCHANGE INCOME ON CASH AND CASH EQUIVALENTS (D) | 32,805,838 | 69,534,981 | 94,158,129 | |||||||||||||
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NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C+D) | 174,671,361 | 11,108,180 | 291,297,454 | |||||||||||||
MONETARY LOSS RELATED TO CASH AND CASH EQUIVALENTS | (111,859,585 | ) | (168,132,627 | ) | (94,622,803 | ) | ||||||||||
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CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | 5 | 316,008,097 | 473,032,544 | 276,357,893 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF THE YEAR | 5 | 378,819,873 | 316,008,097 | 473,032,544 | ||||||||||||
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GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, PRESENTED IN COMPARATIVE FORMAT
Figures Stated in Thousands of Pesos (Ps.) and Thousands of U.S. Dollars (USD), Except as Otherwise Stated
NOTE 1. ACCOUNTING POLICIES AND BASIS FOR PREPARATION
Grupo Financiero Galicia S.A. (hereinafter, “the Company”, and jointly with its subsidiaries, “the Group”) is a financial services holding company incorporated in September 14, 1999 under the laws of Argentina. The Company’s main asset is its interest in Banco de Galicia y Buenos Aires S.A.U. (hereinafter, “Banco Galicia” or “the Bank”) which is a private bank offering a wide range of financial services, both to individuals and companies. Likewise, the Company has a controlling interest in: Tarjetas Regionales S.A., through it we provide proprietary brand credit cards, consumer finance and digital banking services to non-banked populations of Argentina; Sudamericana Holding S.A., a company engaged in the insurance business; Galicia Administradora de Fondos S.A., a mutual fund management company; Galicia Warrants S.A., a warrant issuing company; IGAM LLC, a company engaged in assets management; and Galicia Securities S.A. a settlement and compensation agent.
These consolidated financial statements were approved and authorized for publication through Minutes of Board of Directors’ Meeting No. 631 dated April 23, 2021.
1.1. BASIS FOR PREPARATION
These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC). All the IFRSs in force as of the date of preparation of these consolidated financial statements have been applied.
In Argentina, the Group is subject to the provisions of Article 2, Section I, Chapter I of Title IV: Periodic Information Regime of the National Securities Commission (CNV) regulations and it is required to present its financial statements in accordance with the valuation and disclosure criteria set forth by the Argentine Central Bank.
The Argentine Central Bank, through Communications “A” 5541 and its amendments, established a convergence plan towards the adoption of IFRS as issued by the IASB, and the interpretations issued by the IFRIC, for the entities under its supervision, effective for fiscal years commencing January 1, 2018 with certain exceptions.
The Group has presented its local financial statements under these rules on March 9, 2021. Shareholders’ equity under the rules of the Argentine Central Bank is presented in Note 52.8.
It has been concluded that these consolidated financial statements fairly present the Group’s financial position, financial performance and cash flows, in accordance with IFRS.
The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Groups´ accounting policies.
The areas involving a greater degree of judgment or complexity, or areas where assumptions and estimates are significant for the consolidated financial statements are disclosed in Note 2.
(a) |
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As of the date of these consolidated financial statements, there are no uncertainties related to events or conditions that may cast significant doubt upon the Group´s ability to continue as a going concern.
(b) |
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IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy be restated in terms of the current measurement unit as of the reporting period-end, irrespective of whether they are based on the historical cost or the current cost method. Accordingly, in general terms, non-monetary items should be adjusted for inflation occurring since the acquisition date or since the revaluation date, as the case may be. These requirements are also applicable to the comparative information reported in the financial statements. According to IAS 29, monetary assets and liabilities are not required to be restated, for they are stated in the measurement unit as of the end of the reporting period. Assets and liabilities subject to adjustments based on specific agreements will be adjusted on the basis of such agreements. Non-monetary items measured at their fair values at the end of the reporting period, such as net realizable value or otherwise, will not be restated. The other non-monetary assets and liabilities will be restated by applying a general price index. The income (loss) from the net monetary position will be charged to net income for the reporting period in a separate item.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In order to conclude whether a given economy qualifies as hyperinflationary pursuant to the terms of IAS 29, the standard sets forth certain factors that should be considered, including a three-year cumulative inflation rate reaching or exceeding 100%.
In this regard, the Argentine Federation of Professional Councils in Economic Sciences (FACPCE) through Resolution J.G.539/18 and the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires (CPCECABA) through Resolution C.D. 107/2018 have pointed out that, effective for fiscal years ending on July 1, 2018 and thereafter, entities reporting under IFRS will be required to apply IAS 29 since the conditions for such application have been satisfied. In addition, Law No. 27468 enacted in November 2018 abrogated the prohibition to present the financial statements adjusted for inflation, as established by Decree 664/2003, entrusting each regulatory agency with its application. In this regard, on December 26, 2018, the CNV issued General Resolution No. 777/2018 authorizing the issuing entities to present accounting information in constant currency for annual financial statements for interim and special periods ending on December 31, 2018 and thereafter, except for financial institutions and insurance companies.
The Group has applied IAS 29, Financial Reporting in hyperinflationary Economy, in preparing these consolidated financial statements for all presented years.
(c) | New Accounting Standards |
Definition of “Business” - Amendment to IFRS 3: The new definition of Business includes a comprehensive set of activities and assets that can be directed and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Yields such as lower costs and other economic benefits are excluded from the above definition.
This amendment is effective as of January 1, 2020. The Group does not consider that this amendment has an impact, unless there is a business combination.
Definition of “Material” - Amendments to IAS 1 and IAS 8: The IASB has amended IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates, and Errors” clarifying when information is material.
In particular, the amendments clarify:
The reference to obscuring information addresses situations where the effect is similar to omitting or misstating such information, and that an entity assesses materiality in the context of the financial statements as a whole; and
the meaning of “primary users of general-purpose Financial Statements” to whom those Financial Statements are addressed, by defining them as “existing and potential investors, lenders and other creditors”, that must rely on general purpose Financial Statements for much of the financial information they need.
This amendment is effective as of January 1, 2020 and the Group does not consider that this amendment has a significant impact on its financial statements.
Amendments to the Conceptual Framework for Financial Reporting: The IASB has issued a new Conceptual Framework. It should be noted that the aforementioned amendment will not imply changes to any of the current accounting standards. However, the Entities that use the Conceptual Framework to define the accounting standards for those transactions, events or situations not contemplated in the current accounting standards must apply the new Conceptual Framework as of January 1, 2020, and evaluate whether their accounting standards continue to be adequate.
The Group does not consider that these amendments have a significant impact on its financial statements.
Reform to the interest rate benchmark - Amendments to IFRS 9, IAS 39 and IFRS 7: These amendments provide some reliefs regarding the reform to the interest rate benchmark such as LIBOR and other rates offered in the interbank market. Reliefs are related to hedge accounting and to the fact that the mentioned reform should not cause the end of hedge accounting, considering the IFRS currently in force. However, hedge ineffectiveness must continue to be recorded in the Statement of Income. These amendments are effective as of January 1, 2020 and the Group does not consider that these amendments have an impact given that the Group does not apply hedge accounting on its current financial statements.
(d) | New accounting standards and
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The new standards, amendments and interpretations published are detailed below; however, they have not yet come into force for financial reporting periods commenced January 1, 2020 and have not been early adopted.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28. The IASB made limited amendments to IFRS 10 “Consolidated Financial Institutions” and to IAS 28
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
“Investments in Associates and Joint Ventures”. The amendments clarify the accounting of sales or contributions of assets between the investor and its associates or joint ventures. This confirms that the accounting treatment depends of whether the non-monetary assets sold or contributed to the associate or joint venture are a “business” (such as defined in IFRS 3) or not. When the non-monetary assets constitute a business, the investor will recognize the profit or loss from the sale or contribution of the assets. When the assets do not constitute a business, the profit or loss is recognized by the investor only up to the amount recognized by the other investor in the associate or joint venture. The amendments are to be prospectively applied. The IASB has decided to defer the application date of this amendment until it concludes its research project on the equity method. The Group is evaluating the impact of adopting this new standard.
IFRS 17 “Insurance Contracts”: On May 18, 2017, the IASB issued IFRS 17 “Insurance Contracts,” establishing a comprehensive accounting framework based on measurement and disclosure principles for insurance contracts. The new standard supersedes IFRS 4 “Insurance Contracts,” and requires entities to measure an insurance contract at initial recognition at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Entities are required to apply IFRS 17 for fiscal years commencing on or after January 1, 2023.The Group is evaluating the impact of adopting this new standard.
There are no other IFRS or IFRIC interpretations that are not effective and that are expected to have a significant impact on the Group.
1.2. |
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Subsidiaries are those entities, including structured entities, where the Group is in control because (i) it has the power to direct relevant activities of the investee, which significantly affect its returns; (ii) it has exposure, or rights, to variable returns for its interest in the investee; and (iii) it has the ability to use its power over the investee to affect the amount of the investor’s returns. The existence and effect of the substantive rights, including potential voting rights, are considered when evaluating whether the Group has control over another entity. For a right to be substantive, the holder must have the practical ability to exercise it whenever necessary to make decisions on the direction of the relevant activities of the entity. The Group may be in control of an entity even when possessing less than the majority of the voting rights.
Likewise, the protective rights of other investors, such as those related to substantive changes in the activities of the investee or applied only in exceptional circumstances, do not prevent the Group from having control over an investee. The subsidiaries are consolidated from the date the control is transferred to the Group, and they cease to be consolidated as of the date on which the control ceases.
The subsidiaries which have been consolidated in these Consolidated Financial Statements are detailed in Note 15.
For the purpose of consolidating its financial statements, the Group used the subsidiaries’ financial statements for the year ended December 31, 2020. The accounting policies applied by Sudamericana Holding SA. are established by the National Insurance Superintendency and have been adjusted to those applied by the Group in preparing its consolidated financial statements.
Intercompany transactions, balances and unrealized gains on transactions between Group’s companies were eliminated. (See Note 51).
Non-controlling interest in the results and equity of consolidated subsidiaries are shown separately in the consolidated statement of income, consolidated statement of other comprehensive income, consolidated statement of changes in shareholder’s equity and consolidated statement of financial position, respectively.
In accordance with the provisions of IFRS 3 “Business combinations”, the acquisition method is used to account for the acquisition of subsidiaries. The identifiable assets and liabilities acquired, and contingent liabilities assumed in a business combination are measured at their fair values on the acquisition date.
Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree; over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed.
The consideration transferred in a business combination is measured at the fair value of the assets transferred by the acquirer, the liabilities assumed by the acquirer with the previous owners of the investee, and the equity instruments issued by the acquirer. The transaction costs are recognized as expenses in the periods in which the costs have been incurred and the services have been received, except for the transaction costs incurred to issue equity instruments that are deducted from equity, and the transaction costs incurred to issue debt that are deducted from their carrying amount.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.3. |
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The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized within equity attributable to owners of the Group.
1.4. |
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Associates are entities over which the Group has significant direct or indirect influence, but not control; generally, this implies holding between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. The carrying amount of the associates includes the goodwill identified in the acquisition less the accumulated impairment losses, if any. Dividends received from associates reduce the carrying amount of the investment. Other changes subsequent to the acquisition of the Group’s interest in the net assets of an associate are recognized as follows: (i) the Group’s interest in the profits or losses of the associates is accounted under Share of Profit from Associates and Joint Ventures in the consolidated statement of income and (ii) the Group’s interest in other comprehensive income is recognized in the consolidated statement of other comprehensive income and presented separately. However, when the Group’s share in losses in an associate equal or exceeds its interest in it, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealized profits on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of impairment in the transferred asset.
1.5. | SEGMENT REPORTING |
An operating segment is a component of an entity (a) that conducts business activities from which it can earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the same entity); (b) whose operating income is regularly reviewed by the Group´s CODM (chief operating decision maker) to make decisions about the resources to be allocated to the segment and assess its performance; and (c) for which confidential financial information is available.
Segment reporting is presented consistently with the internal reports submitted to the Board of Directors (CODM of the Group), which is responsible for making the Group’s strategic decisions, allocating resources and assessing the performance of the operating segments.
1.6. | FOREIGN CURRENCY TRANSLATION |
(a) | Functional Currency and |
The figures included in the consolidated financial statements of the Group´s entities are stated in their functional currency, that is, the currency used in the primary economic environment where it operates. The consolidated financial statements are stated in Argentine pesos (Ps.), which is the Group’s functional and presentation currency. (See Note 1.1).
(b) |
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The transactions in foreign currency are translated into the functional currency using the exchange rate at the dates of the transactions. Profits and losses in foreign currency resulting from the settlement of these transactions and the translation of monetary assets and liabilities in foreign currency at closing exchange rate, are recognized under “Exchange rate differences on gold and foreign currency” in the statement of income, except when they are deferred in equity by transactions which qualify as cash flows hedges, if appropriate.
Assets and liabilities in foreign currency are measured at the reference exchange rate of the US dollar defined by the Argentine Central Bank at the closing of operations on the last business day of each month.
As of December 31, 2020, and December 31, 2019, balances in U.S. Dollars were translated at the reference exchange rate (Ps.84.145 and Ps. 59.895, respectively) established by the Argentine Central Bank. Foreign currencies other than the US dollar have been translated into this currency using exchange rates reported by the Argentine Central Bank.
1.7. |
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The item Cash and Due from Banks includes the available cash and bank deposits freely available, which are liquid short-term instruments with maturity less than three months from the origination date.
The assets disclosed under cash and due from banks are accounted for at their amortized cost which approximates its fair value.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.8. |
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Initial Recognition
The Group recognizes a financial asset or liability in its consolidated financial statements, as appropriate, when it becomes part of the contractual clauses of the financial instrument. Purchases and sales are recognized at the trading date when the Group buys or sells the instruments.
Upon initial recognition, the Group measures financial assets or liabilities at fair value, plus or less, for instruments not recognized at fair value through profit or loss, transaction costs that are directly attributable to the acquisition, such as fees and commissions.
When the fair value differs from the cost value of the initial recognition, the Group recognizes the difference as follows:
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b. |
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Financial Assets
a. | Debt Securities
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The Group considers as debt securities those instruments considered financial liabilities for the issuer, such as loans, government and private securities, bonds and customer accounts receivable.
Classification
As established by IFRS 9, the Group classifies financial assets according to how they are subsequently measured: at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss, based on:
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the Group’s business model to manage financial assets; and
the characteristics of contractual cash flows of the financial asset. Business Model The Business Model refers to the way in which the Group manages a set of financial assets to reach a specific business objective. It represents the way the Group manages its financial instruments to generate cash flows. Business models that the Group can follow are listed below: |
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It will be understood that the Group has an implicit obligation if (a) as a result of previous practices or public policies, the Group has assumed certain liabilities; and (b) as a result, it has created expectations that it will comply with those obligations.
The Group recognizes the following provisions:
Hold the instruments to collect its contractual cash flows;
Hold the instruments in the portfolio to collect contractual cash flows and, in turn, sell them when deemed convenient; or;
Hold the instruments for trading.
The Group’s Business Model does not depend on the intentions that it may have for an individual instrument. Therefore, this condition is not an instrument-by-instrument classification approach, but it is determined from a higher level of aggregation.
The Group only reclassifies an instrument when, and only when, the business model for managing financial assets is modified. The reclassification is performed from the commencement of the period where the change takes place. Such change is not expected to be frequent, and changes have not been recorded during this fiscal year.
Characteristics of Contractual Cash Flows
The Group assesses whether the cash flow of grouped instruments is not significantly different from the flow that would receive solely for interest; otherwise, they shall be measured at fair value through profit or loss.
Based on the foregoing, there are three categories of Financial Assets:
(i) |
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Financial assets are measured at amortized cost when:
(a) | the |
(b) | the |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
These financial instruments are initially recognized at fair value plus the incremental and directly attributable transaction costs and are subsequently measured at amortized cost.
The amortized cost of a financial asset is equal to its acquisition cost less its accumulated amortization plus accrued interest (calculated according to the effective interest method), net of any impairment loss.
(ii) | Financial assets at fair value through other comprehensive income: |
Financial assets are measured at fair value through other comprehensive income when:
(a) | the financial asset is |
(b) | the contractual conditions of the financial asset give rise, on specified dates, to cash flows which are solely payments of principal and interest on the outstanding principal amount. |
These instruments are initially recognized at their fair value plus the incremental and directly attributable transaction costs and are subsequently measured at fair value through other comprehensive income. Profits and losses arising from the changes in fair value are included in other comprehensive income within a separate equity component. Impairment losses or reversals, income for interest and exchange profits and losses are recognized through profit or loss. Upon its sale or disposal, the accumulated profit or loss previously recognized through other comprehensive income is reclassified to the statement of income.
(iii) | Financial assets at fair value through profit or |
Financial assets at fair value through profit or loss are the following:
Instruments held for trading;
Instruments specifically designated at fair value through profit or loss; and
Instruments whose contractual terms do not represent cash flows that are solely payments of principal and interest on the outstanding principal amount.
These financial instruments are initially recognized at fair value and any fair value measurement is recognized in the statement of income.
The Group classifies a financial instrument as held for trading if it is acquired or incurred for the main purpose of selling or repurchasing it in the short term, or if it is part of a portfolio of financial instruments that are jointly managed and for which there is evidence of short-term earnings, or is a derivative financial instrument not designated as a hedging instrument. Derivative instruments and held-for-trading securities are classified as held for trading and measured at fair value.
Additionally, financial assets can be valued at fair value through profit or loss when, by doing so, the Group eliminates or significantly reduces a measurement or recognition mismatch.
b. |
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Equity instruments are so considered by its issuer; this means that they are instruments which do not contemplate a contractual obligation to pay cash, and which evidence a residual interest on the issuer’s asset after deducting its entire liabilities.
Such instruments are measured at fair value through profit or loss, except when, at the time of the initial recognition, the irrevocable option had been exercised to measure them at fair value through Other Comprehensive Income. This method is only applicable when the instruments are not held for trading and income shall be accounted in other comprehensive income with no reclassification to profit or loss, even when they are realized. Dividends receivable arising from such instruments shall be recognized through profit or loss solely when the Group is entitled to collect the payment.
Financial Liabilities
Classification
The Group classifies their financial liabilities at amortized cost, using the effective interest rate method, except for:
Financial liabilities measured at fair value through profit or loss, including derivative financial instruments.
Liabilities arising from the transfer of financial assets not complying with the derecognition criteria.
Financial guarantee contracts.
Loan commitments at a lower than market rate.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial liabilities measured at fair value through profit or loss: the Group may choose to use, at the beginning, the irrevocable option to designate a liability at fair value through profit or loss, if, and only if, in doing so, it reflects a better measurement of financial information because:
the Group eliminates or significantly reduces measurement or recognition inconsistency which would otherwise be exposed in the valuation;
if financial assets and liabilities or a group of financial assets or liabilities, are managed and their performance is assessed on a fair value basis, according to a documented investment or risk management strategy; or
a host contract contains one or more embedded derivative instruments, and the Group has opted for designating the entire contract at fair value through profit or loss.
Financial guarantee contracts: Financial guarantee contracts are those contracts requiring the issuer to make specific payments to reimburse the holder for the loss incurred when a specific debtor does not comply with its payment obligation on maturity, in accordance with the original or amended terms of a debt instrument.
Financial guarantee contracts are initially measured at fair value, and subsequently measured at the higher of the amount of the loss allowance and the amount initially recognized less, when appropriate, the cumulative amount of income recognized.
Assets for Insurance Contracts
Insurance contracts are contracts where the Group (the insurer) has accepted an insurance risk from another party (the insured) by agreeing to compensate the insured if a specified uncertain future event (the insured event) adversely affects the insured.Other Non-financial Assets
Once a contract has been classified as an insurance contract, it remains an insurance contractNon-current Assets Held for the restSale
Total Assets
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-4
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Continued)
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | |||||||||
Liabilities | ||||||||||||
Deposits | 23 | 676,395,735 | 536,033,696 | |||||||||
Non-financial Public Sector | 21,537,481 | 2,631,790 | ||||||||||
Financial Sector | 1,947,127 | 613,904 | ||||||||||
Non-financial Private Sector and Residents Abroad | 652,911,127 | 532,788,002 | ||||||||||
Liabilities at fair value through profit or loss | 24 | — | 1,936,133 | |||||||||
Derivative Financial Instruments | 7 | 57,450 | 1,199,533 | |||||||||
Other Financial Liabilities | 25 | 97,471,465 | 97,153,624 | |||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 26 | 13,833,439 | 30,936,161 | |||||||||
Debt Securities | 27 | 17,073,898 | 39,808,666 | |||||||||
Current Income Tax Liabilities | 41 | 15,227,474 | 14,042,235 | |||||||||
Subordinated Debt Securities | 28 | 21,653,546 | 21,100,718 | |||||||||
Provisions | 29 | 3,776,297 | 3,739,734 | |||||||||
Deferred Income Tax Liabilities | 19 | 136,934 | 3,020,554 | |||||||||
Liabilities for Insurance Contracts | 20 | 2,060,976 | 1,999,408 | |||||||||
Other Non-financial Liabilities | 30 | 25,258,228 | 23,239,327 | |||||||||
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Total Liabilities | 872,945,442 | 774,209,789 | ||||||||||
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Shareholders’ Equity | 31 | |||||||||||
Capital Stock | 1,474,692 | 1,426,765 | ||||||||||
Paid-in capital | 17,281,187 | 10,951,132 | ||||||||||
Capital Adjustments | 61,548,313 | 60,622,637 | ||||||||||
Profit Reserves | 178,751,308 | 127,248,745 | ||||||||||
Retained Deficit | (102,255,270 | ) | (77,955,542 | ) | ||||||||
Other Comprehensive Income | 341,829 | 551,139 | ||||||||||
Income / (Loss) for the Year | 43 | 25,191,673 | 32,276,377 | |||||||||
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Shareholders’ Equity Attributable to Parent Company´s Owners | 182,333,732 | 155,121,253 | ||||||||||
Shareholders’ Equity Attributable to Non-controlling Interests | 50 | 3 | 3,938,564 | |||||||||
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Total Shareholders’ Equity | 182,333,735 | 159,059,817 | ||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Interest Income | 32 | 166,806,678 | 177,671,454 | 163,927,492 | ||||||||||||
Interest Expense | 32 | (90,174,458 | ) | (130,254,081 | ) | (94,054,946 | ) | |||||||||
Net Income from Interest | 76,632,220 | 47,417,373 | 69,872,546 | |||||||||||||
Fee Income | 32 | 46,475,432 | 47,846,733 | 51,093,837 | ||||||||||||
Fee related Expenses | 32 | (9,917,873 | ) | (9,613,497 | ) | (6,337,505 | ) | |||||||||
Net Fee Income | 36,557,559 | 38,233,236 | 44,756,332 | |||||||||||||
Net Income from Financial Instruments Measured at Fair Value through Profit or Loss | 32 | 69,331,902 | 99,151,496 | 36,341,509 | ||||||||||||
Income from Derecognition of Assets Measured at Amortized Cost | (3,129 | ) | 298,801 | 464,175 | ||||||||||||
Exchange rate differences on gold and foreign currency | 33 | 7,047,447 | 11,831,452 | 7,910,257 | ||||||||||||
Other Operating Income | 34 | 22,322,631 | 28,769,432 | 21,862,980 | ||||||||||||
Income from Insurance Business | 35 | 5,501,807 | 5,000,869 | 6,009,167 | ||||||||||||
Loan and other Receivables Loss Provisions | 36 | (34,679,749 | ) | (30,227,668 | ) | (34,136,247 | ) | |||||||||
Net Operating Income | 182,710,688 | 200,474,991 | 153,080,719 | |||||||||||||
Personnel Expenses | 37 | (31,825,101 | ) | (33,284,961 | ) | (35,657,786 | ) | |||||||||
Administrative Expenses | 38 | (31,371,622 | ) | (33,105,199 | ) | (33,674,305 | ) | |||||||||
Depreciation and Impairment of Assets | 39 | (8,284,286 | ) | (6,894,944 | ) | (3,459,704 | ) | |||||||||
Other Operating Expenses | 40 | (30,763,761 | ) | (35,082,818 | ) | (35,391,431 | ) | |||||||||
Loss on net monetary position | (36,963,213 | ) | (41,928,902 | ) | (37,830,439 | ) | ||||||||||
Operating Income | 43,502,705 | 50,178,167 | 7,067,054 | |||||||||||||
Share of profit from Associates and Joint Ventures | 15 | (125,053 | ) | — | — | |||||||||||
Income before Taxes from Continuing Operations | 43,377,652 | 50,178,167 | 7,067,054 | |||||||||||||
Income Tax from Continuing Operations | 41 | (17,844,872 | ) | (17,750,682 | ) | (14,476,788 | ) | |||||||||
Net Income / (Loss) from Continuing Operations | 25,532,780 | 32,427,485 | (7,409,734 | ) | ||||||||||||
Loss from Discontinued Operations | 22 | — | — | (544,003 | ) | |||||||||||
Income Tax from Discontinued Operations | 41 | — | — | (66,336 | ) | |||||||||||
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Net Income / (Loss) for the Year | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||
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Net Income / (Loss) for the Year Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Net Income / (Loss) for the Year Attributable to Non-controlling Interests | 50 | 341,107 | 151,108 | (761,659 | ) |
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Earnings per Share | 43 | |||||||||||||||
Net Income / (Loss) Attributable to parent company´s owners | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Net Income / (Loss) Attributable to parent company´s owners Adjusted by dilution effects | 25,191,673 | 32,276,377 | (7,258,414 | ) | ||||||||||||
Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Diluted Weighted-Average of Ordinary Shares Outstanding for the Year | 1,442,740 | 1,426,765 | 1,426,765 | |||||||||||||
Basic Earnings per Share | 17.46 | 22.62 | (5.09 | ) | ||||||||||||
Diluted Earnings per Share | 17.46 | 22.62 | (5.09 | ) |
The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2020
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
Net Income / (Loss) for the Year | 25,532,780 | 32,427,485 | (8,020,073 | ) | ||||||||||||
Items of Other Comprehensive Income (OCI) that may be Reclassified to Profit or Loss for the Year | ||||||||||||||||
Income or Loss from Financial Instruments at Fair Value through OCI (Item 4.1.2a, IFRS 9) | ||||||||||||||||
Income / (Loss) for the Year from Financial Instruments at Fair Value with Changes through OCI (*) | 32 | (203,783 | ) | 533,607 | (183,218 | ) | ||||||||||
Other Comprehensive Income(*) | (5,527 | ) | 14,591 | — | ||||||||||||
Total Other Comprehensive Income (Loss) that may be Reclassified to Profit or Loss for the Year | (209,310 | ) | 548,198 | (183,218 | ) | |||||||||||
Total Other Comprehensive Income (Loss) | (209,310 | ) | 548,198 | (183,218 | ) | |||||||||||
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Total Comprehensive Income / (Loss) | 25,323,470 | 32,975,683 | (8,203,291 | ) | ||||||||||||
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Total Comprehensive Income / (Loss) Attributable to Parent company´s owners | 24,982,363 | 32,824,575 | (7,441,632 | ) | ||||||||||||
Total Comprehensive Income / (Loss) Attributable to Non-controlling Interests | 50 | 341,107 | 151,108 | (761,659 | ) |
(*) | Net of
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | — | — | — | — | — | — | — | — | — | (143,844 | ) | (143,844 | ) | ||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | (1,892,559 | ) | — | (1,892,559 | ) | — | (1,892,559 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 56,576,105 | (56,576,105 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Increase due to merger | 31 | 47,927 | 6,330,055 | 925,676 | — | — | — | (3,180,983 | ) | — | 4,122,675 | (4,135,824 | ) | (13,149 | ) | |||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 25,191,673 | 25,191,673 | 341,107 | 25,532,780 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | (203,783 | ) | (5,527 | ) | — | — | — | (209,310 | ) | — | (209,310 | ) | |||||||||||||||||||||||||||||||
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Balances as of 12.31.20 | 1,474,692 | 17,281,187 | 61,548,313 | 332,765 | 9,064 | 1,296,382 | 177,454,926 | (77,063,597 | ) | 182,333,732 | 3 | 182,333,735 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-8
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||
Capital Contribution from Non-controlling Interest | 50 | — | — | — | — | — | — | — | — | — | 179,986 | 179,986 | ||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (3,622,432 | ) | (3,622,432 | ) | — | (3,622,432 | ) | |||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | — | 35,774,283 | (35,774,283 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income for the Year | 43 | — | — | — | — | — | — | — | 32,276,377 | 32,276,377 | 151,108 | 32,427,485 | ||||||||||||||||||||||||||||||||||
Other Comprehensive Income for the Year | — | — | — | 533,607 | 14,591 | — | — | — | 548,198 | — | 548,198 | |||||||||||||||||||||||||||||||||||
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Balances as of 12.31.19 | 1,426,765 | 10,951,132 | 60,622,637 | 536,548 | 14,591 | 1,296,382 | 125,952,363 | (45,679,165 | ) | 155,121,253 | 3,938,564 | 159,059,817 | ||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
F-9
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Capital Stock | Paid-in Capital | Other Comprehensive Income | Profit Reserves | |||||||||||||||||||||||||||||||||||||||||||||
Changes | Notes | Outstanding | Share Premium | Equity Adjustments | Accumulated Profit (Loss) from Financial Instruments at Fair Value through OCI | Other | Legal Reserve | Others Reserves | Retained Earnings | Total Shareholders’ Equity Attributable to parent company´s owners | Total Shareholders’ Equity Attributable to Non- Controlling Interests | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||
Balances as of 12.31.17 | 1,426,765 | 10,951,132 | 60,622,637 | 186,159 | - | 1,218,152 | 66,597,571 | (5,869,124 | ) | 135,133,292 | 6,185,425 | 141,318,717 | ||||||||||||||||||||||||||||||||||||
Purchase of Non-controlling Interests | 50 | - | - | - | - | - | - | 1,613,587 | - | 1,613,587 | (1,613,587 | ) | - | |||||||||||||||||||||||||||||||||||
Dividends Distribution from Tarjetas Regionales S.A. | 50 | - | - | - | - | - | - | - | - | - | (202,709 | ) | (202,709 | ) | ||||||||||||||||||||||||||||||||||
Distribution of Profits | ||||||||||||||||||||||||||||||||||||||||||||||||
- Cash Dividends | 42 | — | — | — | — | — | — | — | (3,386,137 | ) | (3,386,137 | ) | — | (3,386,137 | ) | |||||||||||||||||||||||||||||||||
- Other Reserves | — | — | — | — | — | 78,230 | 21,966,922 | (22,045,152 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||
Total Comprehensive Income for the Year | ||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss for the Year | 43 | — | — | — | — | — | — | — | (7,258,414 | ) | (7,258,414 | ) | (761,659 | ) | (8,020,073 | ) | ||||||||||||||||||||||||||||||||
Other Comprehensive Income (Loss) for the Year | — | — | — | (183,218 | ) | — | — | — | — | (183,218 | ) | — | (183,218 | ) | ||||||||||||||||||||||||||||||||||
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Balances as of 12.31.18 | 1,426,765 | 10,951,132 | 60,622,637 | 2,941 | — | 1,296,382 | 90,178,080 | (38,558,827 | ) | 125,919,110 | 3,607,470 | 129,526,580 | ||||||||||||||||||||||||||||||||||||
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The accompanying Notes and Schedules are an integral part of these consolidated financial statements.
GRUPO FINANCIERO GALICIA S.A.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, IN COMPARATIVE FORMAT
Figures Stated in Thousands of Argentine Pesos (Ps.), Except as Otherwise Provided
Items | Notes | 12.31.20 | 12.31.19 | 12.31.18 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Income before Taxes from Continuing Operations | 43,377,652 | 50,178,167 | 7,067,054 | |||||||||||||
Adjustment to Obtain the Operating Activities Flows: | ||||||||||||||||
Loan and other Receivables Loss Provisions | 34,679,749 | 30,227,668 | 34,136,247 | |||||||||||||
Depreciation and Impairment of Assets | 8,284,286 | 6,894,944 | 3,459,704 | |||||||||||||
Loss on Net Monetary Position | 36,963,213 | 41,928,902 | 37,830,439 | |||||||||||||
Other Operations | 33,809,461 | 45,546,783 | (15,845,824 | ) | ||||||||||||
Net Increases/(Decreases) from Operating Assets: | ||||||||||||||||
Debt securities measured at fair value through profit or loss | (16,816,890 | ) | 1,906,801 | 25,022,547 | ||||||||||||
Derivative Financial Instruments | 1,005,783 | 568,821 | (2,115,155 | ) | ||||||||||||
Repo Transactions | (45,899 | ) | (4,166,505 | ) | 627,969 | |||||||||||
Other Financial Assets | 762,783 | 2,738,061 | 3,292,293 | |||||||||||||
Net Loans and Other Financing | ||||||||||||||||
- Non-financial Public Sector | 11,292 | 17,889 | (6,796 | ) | ||||||||||||
- Other Financial Institutions | (2,768,659 | ) | (1,073,296 | ) | 7,583,249 | |||||||||||
- Non-financial Private Sector and Residents Abroad | (70,129,963 | ) | 72,480,365 | (28,997,919 | ) | |||||||||||
Other Debt Securities | 2,823,060 | 4,314,789 | (21,448,808 | ) | ||||||||||||
Financial Assets Pledged as Collateral | (2,992,408 | ) | 6,929,858 | (3,080,071 | ) | |||||||||||
Investments in Equity Instruments | 309,477 | (5,863,167 | ) | (102,894 | ) | |||||||||||
Other Non-financial Assets | 871,701 | (2,209,541 | ) | (2,364,329 | ) | |||||||||||
Non-current Assets Held for Sale | 23,778 | 1,220,250 | 21,470,750 | |||||||||||||
Net Increases/(Decreases) from Operating Liabilities: | ||||||||||||||||
Deposits | ||||||||||||||||
- Non-financial Public Sector | 18,905,690 | (15,314,927 | ) | 14,347,100 | ||||||||||||
- Financial Sector | 1,333,223 | (876,675 | ) | 1,134,515 | ||||||||||||
- Non-financial Private Sector and Residents Abroad | 120,123,123 | (201,920,439 | ) | 117,986,898 | ||||||||||||
Liabilities at fair value through profit or loss | (1,936,133 | ) | (2,555,401 | ) | 4,491,534 | |||||||||||
Derivative Financial Instruments | (1,142,083 | ) | (2,645,130 | ) | 2,072,205 | |||||||||||
Other Financial Liabilities | 1,297,568 | (40,408,460 | ) | 16,511,834 | ||||||||||||
Provisions | 36,561 | 704,443 | 1,156,177 | |||||||||||||
Other Non-financial Liabilities | 44,060 | (1,096,350 | ) | (20,447,222 | ) | |||||||||||
Income Tax Collections/Payments | (25,076,419) | (13,753,851 | ) | (15,540,835 | ) | |||||||||||
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NET CASH (USED IN)/GENERATED BY OPERATING ACTIVITIES (A) | 183,754,006 | (26,226,001 | ) | 188,240,662 | ||||||||||||
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CASH FLOWS FROM INVESTMENT ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Purchase of PP&E, Intangible Assets and Other Assets | (7,123,954) | (10,751,158 | ) | (7,723,624 | ) | |||||||||||
Interests in Associates and other companies | (102,290 | ) | — | — | ||||||||||||
Collections: | ||||||||||||||||
Sale of PP&E, Intangible Assets and Other Assets | 264,603 | 3,648,203 | 212,957 | |||||||||||||
Dividends earned | 179,298 | — | — | |||||||||||||
NET CASH USED IN INVESTMENT ACTIVITIES (B) | (6,782,343 | ) | (7,102,955 | ) | (7,510,667 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Payments: | ||||||||||||||||
Unsubordinated Debt Securities | (27,839,122 | ) | (20,826,089 | ) | (2,851,195 | ) | ||||||||||
Subordinated Debt Securities | — | — | — | |||||||||||||
Loans from Local Financial Institutions | (35,157,119 | ) | (70,418,814 | ) | (25,579,255 | ) | ||||||||||
Dividends | 42 | (2,036,403 | ) | (3,622,432 | ) | (3,588,846 | ) | |||||||||
Leases payment | (1,333,090 | ) | (1,361,874 | ) | — | |||||||||||
Collections: | ||||||||||||||||
Unsubordinated Debt Securities | 11,728,016 | 7,726,304 | 23,558,089 | |||||||||||||
Loans from Local Financial Institutions | 19,531,578 | 63,225,074 | 24,870,537 | |||||||||||||
Capital increase | 50 | — | 179,986 | — | ||||||||||||
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NET CASH (USED IN)/GENERATED BY FINANCING ACTIVITIES (C) | (35,106,140) | (25,097,845 | ) | 16,409,330 | ||||||||||||
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EXCHANGE INCOME ON CASH AND CASH EQUIVALENTS (D) | 32,805,838 | 69,534,981 | 94,158,129 | |||||||||||||
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NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C+D) | 174,671,361 | 11,108,180 | 291,297,454 | |||||||||||||
MONETARY LOSS RELATED TO CASH AND CASH EQUIVALENTS | (111,859,585 | ) | (168,132,627 | ) | (94,622,803 | ) | ||||||||||
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CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | 5 | 316,008,097 | 473,032,544 | 276,357,893 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF THE YEAR | 5 | 378,819,873 | 316,008,097 | 473,032,544 | ||||||||||||
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GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2020 AND ENDED DECEMBER 31, 2020, PRESENTED IN COMPARATIVE FORMAT
Figures Stated in Thousands of Pesos (Ps.) and Thousands of U.S. Dollars (USD), Except as Otherwise Stated
NOTE 1. ACCOUNTING POLICIES AND BASIS FOR PREPARATION
Grupo Financiero Galicia S.A. (hereinafter, “the Company”, and jointly with its subsidiaries, “the Group”) is a financial services holding company incorporated in September 14, 1999 under the laws of Argentina. The Company’s main asset is its interest in Banco de Galicia y Buenos Aires S.A.U. (hereinafter, “Banco Galicia” or “the Bank”) which is a private bank offering a wide range of financial services, both to individuals and companies. Likewise, the Company has a controlling interest in: Tarjetas Regionales S.A., through it we provide proprietary brand credit cards, consumer finance and digital banking services to non-banked populations of Argentina; Sudamericana Holding S.A., a company engaged in the insurance business; Galicia Administradora de Fondos S.A., a mutual fund management company; Galicia Warrants S.A., a warrant issuing company; IGAM LLC, a company engaged in assets management; and Galicia Securities S.A. a settlement and compensation agent.
These consolidated financial statements were approved and authorized for publication through Minutes of Board of Directors’ Meeting No. 631 dated April 23, 2021.
1.1. BASIS FOR PREPARATION
These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC). All the IFRSs in force as of the date of preparation of these consolidated financial statements have been applied.
In Argentina, the Group is subject to the provisions of Article 2, Section I, Chapter I of Title IV: Periodic Information Regime of the National Securities Commission (CNV) regulations and it is required to present its financial statements in accordance with the valuation and disclosure criteria set forth by the Argentine Central Bank.
The Argentine Central Bank, through Communications “A” 5541 and its amendments, established a convergence plan towards the adoption of IFRS as issued by the IASB, and the interpretations issued by the IFRIC, for the entities under its supervision, effective for fiscal years commencing January 1, 2018 with certain exceptions.
The Group has presented its local financial statements under these rules on March 9, 2021. Shareholders’ equity under the rules of the Argentine Central Bank is presented in Note 52.8.
It has been concluded that these consolidated financial statements fairly present the Group’s financial position, financial performance and cash flows, in accordance with IFRS.
The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Groups´ accounting policies.
The areas involving a greater degree of judgment or complexity, or areas where assumptions and estimates are significant for the consolidated financial statements are disclosed in Note 2.
(a) | Going Concern |
As of the date of these consolidated financial statements, there are no uncertainties related to events or conditions that the book value may cast significant doubt upon the Group´s ability to continue as a going concern.
(b) | Measurement Unit |
IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy be restated in terms of the current measurement unit as of the reporting period-end, irrespective of whether they are based on the historical cost or the current cost method. Accordingly, in general terms, non-monetary items should be adjusted for inflation occurring since the acquisition date or since the revaluation date, as the case may be. These requirements are also applicable to the comparative information reported in the financial statements. According to IAS 29, monetary assets and liabilities are not required to be restated, for they are stated in the measurement unit as of the end of the reporting period. Assets and liabilities subject to adjustments based on specific agreements will be adjusted on the basis of such agreements. Non-monetary items measured at their fair values at the end of the reporting period, such as net realizable value or otherwise, will not be restated. The other non-monetary assets and liabilities will be restated by applying a general price index. The income (loss) from the net monetary position will be charged to net income for the reporting period in a separate item.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In order to conclude whether a given economy qualifies as hyperinflationary pursuant to the terms of IAS 29, the standard sets forth certain factors that should be considered, including a three-year cumulative inflation rate reaching or exceeding 100%.
In this regard, the Argentine Federation of Professional Councils in Economic Sciences (FACPCE) through Resolution J.G.539/18 and the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires (CPCECABA) through Resolution C.D. 107/2018 have pointed out that, effective for fiscal years ending on July 1, 2018 and thereafter, entities reporting under IFRS will be required to apply IAS 29 since the conditions for such application have been satisfied. In addition, Law No. 27468 enacted in November 2018 abrogated the prohibition to present the financial statements adjusted for inflation, as established by Decree 664/2003, entrusting each regulatory agency with its application. In this regard, on December 26, 2018, the CNV issued General Resolution No. 777/2018 authorizing the issuing entities to present accounting information in constant currency for annual financial statements for interim and special periods ending on December 31, 2018 and thereafter, except for financial institutions and insurance companies.
The Group has applied IAS 29, Financial Reporting in hyperinflationary Economy, in preparing these consolidated financial statements for all presented years.
(c) | New Accounting Standards |
Definition of “Business” - Amendment to IFRS 3: The new definition of Business includes a comprehensive set of activities and assets that can be directed and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Yields such as lower costs and other economic benefits are excluded from the above definition.
This amendment is effective as of January 1, 2020. The Group does not consider that this amendment has an impact, unless there is a business combination.
Definition of “Material” - Amendments to IAS 1 and IAS 8: The IASB has amended IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates, and Errors” clarifying when information is material.
In particular, the amendments clarify:
The reference to obscuring information addresses situations where the effect is similar to omitting or misstating such information, and that an entity assesses materiality in the context of the financial statements as a whole; and
the meaning of “primary users of general-purpose Financial Statements” to whom those Financial Statements are addressed, by defining them as “existing and potential investors, lenders and other creditors”, that must rely on general purpose Financial Statements for much of the financial information they need.
This amendment is effective as of January 1, 2020 and the Group does not consider that this amendment has a significant impact on its financial statements.
Amendments to the Conceptual Framework for Financial Reporting: The IASB has issued a new Conceptual Framework. It should be noted that the aforementioned amendment will not imply changes to any of the current accounting standards. However, the Entities that use the Conceptual Framework to define the accounting standards for those transactions, events or situations not contemplated in the current accounting standards must apply the new Conceptual Framework as of January 1, 2020, and evaluate whether their accounting standards continue to be adequate.
The Group does not consider that these amendments have a significant impact on its financial statements.
Reform to the interest rate benchmark - Amendments to IFRS 9, IAS 39 and IFRS 7: These amendments provide some reliefs regarding the reform to the interest rate benchmark such as LIBOR and other rates offered in the interbank market. Reliefs are related to hedge accounting and to the fact that the mentioned reform should not cause the end of hedge accounting, considering the IFRS currently in force. However, hedge ineffectiveness must continue to be recoverable. Impairment loss is recorded in the Statement of Income. These amendments are effective as of January 1, 2020 and the Group does not consider that these amendments have an impact given that the Group does not apply hedge accounting on its current financial statements.
(d) | New accounting standards and amendments issued by IASB that have not been adopted by the Group |
The new standards, amendments and interpretations published are detailed below; however, they have not yet come into force for financial reporting periods commenced January 1, 2020 and have not been early adopted.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28. The IASB made limited amendments to IFRS 10 “Consolidated Financial Institutions” and to IAS 28
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
“Investments in Associates and Joint Ventures”. The amendments clarify the accounting of sales or contributions of assets between the investor and its associates or joint ventures. This confirms that the accounting treatment depends of whether the non-monetary assets sold or contributed to the associate or joint venture are a “business” (such as defined in IFRS 3) or not. When the non-monetary assets constitute a business, the investor will recognize the profit or loss from the sale or contribution of the assets. When the assets do not constitute a business, the profit or loss is recognized by the investor only up to the amount recognized by the other investor in the associate or joint venture. The amendments are to be prospectively applied. The IASB has decided to defer the application date of this amendment until it concludes its research project on the equity method. The Group is evaluating the impact of adopting this new standard.
IFRS 17 “Insurance Contracts”: On May 18, 2017, the IASB issued IFRS 17 “Insurance Contracts,” establishing a comprehensive accounting framework based on measurement and disclosure principles for insurance contracts. The new standard supersedes IFRS 4 “Insurance Contracts,” and requires entities to measure an insurance contract at initial recognition at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Entities are required to apply IFRS 17 for fiscal years commencing on or after January 1, 2023.The Group is evaluating the impact of adopting this new standard.
There are no other IFRS or IFRIC interpretations that are not effective and that are expected to have a significant impact on the Group.
1.2. | CONSOLIDATION |
Subsidiaries are those entities, including structured entities, where the Group is in control because (i) it has the power to direct relevant activities of the investee, which significantly affect its returns; (ii) it has exposure, or rights, to variable returns for its interest in the investee; and (iii) it has the ability to use its power over the investee to affect the amount of the investor’s returns. The existence and effect of the substantive rights, including potential voting rights, are considered when evaluating whether the Group has control over another entity. For a right to be substantive, the holder must have the practical ability to exercise it whenever necessary to make decisions on the direction of the relevant activities of the entity. The Group may be in control of an entity even when possessing less than the majority of the voting rights.
Likewise, the protective rights of other investors, such as those related to substantive changes in the activities of the investee or applied only in exceptional circumstances, do not prevent the Group from having control over an investee. The subsidiaries are consolidated from the date the control is transferred to the Group, and they cease to be consolidated as of the date on which the control ceases.
The subsidiaries which have been consolidated in these Consolidated Financial Statements are detailed in Note 15.
For the purpose of consolidating its financial statements, the Group used the subsidiaries’ financial statements for the year ended December 31, 2020. The accounting policies applied by Sudamericana Holding SA. are established by the National Insurance Superintendency and have been adjusted to those applied by the Group in preparing its consolidated financial statements.
Intercompany transactions, balances and unrealized gains on transactions between Group’s companies were eliminated. (See Note 51).
Non-controlling interest in the results and equity of consolidated subsidiaries are shown separately in the consolidated statement of income, consolidated statement of other comprehensive income, consolidated statement of changes in shareholder’s equity and consolidated statement of financial position, respectively.
In accordance with the provisions of IFRS 3 “Business combinations”, the acquisition method is used to account for the acquisition of subsidiaries. The identifiable assets and liabilities acquired, and contingent liabilities assumed in a business combination are measured at their fair values on the acquisition date.
Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree; over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed.
The consideration transferred in a business combination is measured at the fair value of the assets transferred by the acquirer, the liabilities assumed by the acquirer with the previous owners of the investee, and the equity instruments issued by the acquirer. The transaction costs are recognized as expenses in the periods in which the costs have been incurred and the services have been received, except for the transaction costs incurred to issue equity instruments that are deducted from equity, and the transaction costs incurred to issue debt that are deducted from their carrying amount.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.3. |
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The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized within equity attributable to owners of the Group.
1.4. |
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Associates are entities over which the Group has significant direct or indirect influence, but not control; generally, this implies holding between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. The carrying amount of the associates includes the goodwill identified in the acquisition less the accumulated impairment losses, if any. Dividends received from associates reduce the carrying amount of the investment. Other changes subsequent to the acquisition of the Group’s interest in the net assets of an associate are recognized as follows: (i) the Group’s interest in the profits or losses of the associates is accounted under Share of Profit from Associates and Joint Ventures in the consolidated statement of income and (ii) the Group’s interest in other comprehensive income is recognized in the consolidated statement of other comprehensive income and presented separately. However, when the Group’s share in losses in an associate equal or exceeds its interest in it, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealized profits on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of impairment in the transferred asset.
1.5. |
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An operating segment is a component of an entity (a) that conducts business activities from which it can earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the same entity); (b) whose operating income is regularly reviewed by the Group´s CODM (chief operating decision maker) to make decisions about the resources to be allocated to the segment and assess its performance; and (c) for which confidential financial information is available.
Segment reporting is presented consistently with the internal reports submitted to the Board of Directors (CODM of the Group), which is responsible for making the Group’s strategic decisions, allocating resources and assessing the performance of the operating segments.
1.6. | FOREIGN CURRENCY TRANSLATION |
(a) | Functional Currency and |
The figures included in the consolidated financial statements of the Group´s entities are stated in their functional currency, that is, the currency used in the primary economic environment where it operates. The consolidated financial statements are stated in Argentine pesos (Ps.), which is the Group’s functional and presentation currency. (See Note 1.1).
(b) |
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The transactions in foreign currency are translated into the functional currency using the exchange rate at the dates of the transactions. Profits and losses in foreign currency resulting from the settlement of these transactions and the translation of monetary assets and liabilities in foreign currency at closing exchange rate, are recognized under “Exchange rate differences on gold and foreign currency” in the statement of income, except when they are deferred in equity by transactions which qualify as cash flows hedges, if appropriate.
Assets and liabilities in foreign currency are measured at the reference exchange rate of the US dollar defined by the Argentine Central Bank at the closing of operations on the last business day of each month.
As of December 31, 2020, and December 31, 2019, balances in U.S. Dollars were translated at the reference exchange rate (Ps.84.145 and Ps. 59.895, respectively) established by the Argentine Central Bank. Foreign currencies other than the US dollar have been translated into this currency using exchange rates reported by the Argentine Central Bank.
1.7. |
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The item Cash and Due from Banks includes the available cash and bank deposits freely available, which are liquid short-term instruments with maturity less than three months from the origination date.
The assets disclosed under cash and due from banks are accounted for at their amortized cost which approximates its fair value. The restatement adjustment is included in “Equity Adjustments”.
Ordinary shares are classified in Shareholders’ Equity and remain recorded at their nominal value. When any company forming part of the Group buys Company shares (treasury shares in portfolio), the payment made, including any costs directly attributable to the transaction (net of taxes) is deducted from the Shareholders’ Equity until the shares are canceled or sold.
1.25. PROFIT RESERVES
According to Art. 70 of the General Companies Act, the Company and its subsidiaries, except Banco Galicia, must transfer to Legal Reserve 5% of the profit for the year, until said reserve reaches 20% of the capital stock plus the balance of the Equity Adjustment account.
Regarding Banco Galicia, in accordance with the regulations established by the Argentine Central Bank, it is appropriate to allocate to Legal Reserve 20% of the profits for the year, net of the eventual adjustments of previous fiscal years, if applicable. However, for the allocation of Other Reserves, the Financial Institutions must comply with the Argentine Central Bank provisions of the Amended Text on dividends distribution detailed in Note 53.
1.26. DIVIDENDS DISTRIBUTION
The dividends distribution to the Group’s shareholders is recognized as a liability in the consolidated financial statements in the year in which the dividends are approved by the Group’s shareholders.
1.27. REVENUE RECOGNITION
Financial income and expenses are recorded for all debt instruments according to the effective interest rate method, by which all gains and losses that are an integral part of the effective interest rate of the transaction are deferred.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.8. |
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Initial Recognition
The Group recognizes a financial asset or liability in its consolidated financial statements, as appropriate, when it becomes part of the contractual clauses of the financial instrument. Purchases and sales are recognized at the trading date when the Group buys or sells the instruments.
Upon initial recognition, the Group measures financial assets or liabilities at fair value, plus or less, for instruments not recognized at fair value through profit or loss, transaction costs that are directly attributable to the acquisition, such as fees and commissions.
When the fair value differs from the cost value of the initial recognition, the Group recognizes the difference as follows:
a. | When the |
b. | In other cases, the |
Financial Assets
a. | Debt Securities |
The Group considers as debt securities those instruments considered financial liabilities for the issuer, such as loans, government and private securities, bonds and customer accounts receivable.
Classification
As established by IFRS 9, the Group classifies financial assets according to how they are subsequently measured: at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss, based on:
the Group’s business model to manage financial assets; and
the characteristics of contractual cash flows of the financial asset.
Business Model
The Business Model refers to the way in which the Group manages a set of financial assets to reach a specific business objective. It represents the way the Group manages its financial instruments to generate cash flows.
Business models that the Group can follow are listed below:
Hold the instruments to collect its contractual cash flows;
Hold the instruments in the portfolio to collect contractual cash flows and, in turn, sell them when deemed convenient; or;
Hold the instruments for trading.
The Group’s Business Model does not depend on the intentions that it may have for an individual instrument. Therefore, this condition is not an instrument-by-instrument classification approach, but it is determined from a higher level of aggregation.
The Group only reclassifies an instrument when, and only when, the business model for managing financial assets is modified. The reclassification is performed from the commencement of the period where the change takes place. Such change is not expected to be frequent, and changes have not been recorded during this fiscal year.
Characteristics of Contractual Cash Flows
The Group assesses whether the cash flow of grouped instruments is not significantly different from the flow that would receive solely for interest; otherwise, they shall be measured at fair value through profit or loss.
Based on the foregoing, there are three categories of Financial Assets:
(i) | Financial assets measured at amortized cost: |
Financial assets are measured at amortized cost when:
(a) | the financial asset is held within a business model whose objective is to |
(b) | the |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
These financial instruments are initially recognized at fair value plus the incremental and directly attributable transaction costs and are subsequently measured at amortized cost.
The amortized cost of a financial asset is equal to its acquisition cost less its accumulated amortization plus accrued interest (calculated according to the effective interest method), net of any impairment loss.
(ii) | Financial assets at fair value through other comprehensive income: |
Financial assets are measured at fair value through other comprehensive income when:
(a) | the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and |
(b) | the |
These instruments are initially recognized at their fair value plus the incremental and directly attributable transaction costs and are subsequently measured at fair value through other comprehensive income. Profits and losses arising from the changes in fair value are included in other comprehensive income within a separate equity component. Impairment losses or reversals, income for interest and exchange profits and losses are recognized through profit or loss. Upon its sale or disposal, the accumulated profit or loss previously recognized through other comprehensive income is reclassified to the statement of income.
(iii) | Financial assets at fair value through profit or loss: |
Financial assets at fair value through profit or loss are the following:
Instruments held for trading;
Instruments specifically designated at fair value through profit or loss; and
Instruments whose contractual terms do not represent cash flows that are solely payments of principal and interest on the outstanding principal amount.
These financial instruments are initially recognized at fair value and any fair value measurement is recognized in the statement of income.
The Group classifies a financial instrument as held for trading if it is acquired or incurred for the main purpose of selling or repurchasing it in the short term, or if it is part of a portfolio of financial instruments that are jointly managed and for which there is evidence of short-term earnings, or is a derivative financial instrument not designated as a hedging instrument. Derivative instruments and held-for-trading securities are classified as held for trading and measured at fair value.
Additionally, financial assets can be valued at fair value through profit or loss when, by doing so, the Group eliminates or significantly reduces a measurement or recognition mismatch.
b. | Equity Instruments |
Equity instruments are so considered by its issuer; this means that they are instruments which do not contemplate a contractual obligation to pay cash, and which evidence a residual interest on the issuer’s asset after deducting its entire liabilities.
Such instruments are measured at fair value through profit or loss, except when, at the time of the initial recognition, the irrevocable option had been exercised to measure them at fair value through Other Comprehensive Income. This method is only applicable when the instruments are not held for trading and income shall be accounted in other comprehensive income with no reclassification to profit or loss, even when they are realized. Dividends receivable arising from such instruments shall be recognized through profit or loss solely when the Group is entitled to collect the payment.
Financial Liabilities
Classification
The Group classifies their financial liabilities at amortized cost, using the effective interest rate method, except for:
Financial liabilities measured at fair value through profit or loss, including derivative financial instruments.
Liabilities arising from the transfer of financial assets not complying with the derecognition criteria.
Financial guarantee contracts.
Loan commitments at a lower than market rate.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial liabilities measured at fair value through profit or loss: the Group may choose to use, at the beginning, the irrevocable option to designate a liability at fair value through profit or loss, if, and only if, in doing so, it reflects a better measurement of financial information because:
the Group eliminates or significantly reduces measurement or recognition inconsistency which would otherwise be exposed in the valuation;
if financial assets and liabilities or a group of financial assets or liabilities, are managed and their performance is assessed on a fair value basis, according to a documented investment or risk management strategy; or
a host contract contains one or more embedded derivative instruments, and the Group has opted for designating the entire contract at fair value through profit or loss.
Financial guarantee contracts: Financial guarantee contracts are those contracts requiring the issuer to make specific payments to reimburse the holder for the loss incurred when a specific debtor does not comply with its payment obligation on maturity, in accordance with the original or amended terms of a debt instrument.
Financial guarantee contracts are initially measured at fair value, and subsequently measured at the higher of the amount of the loss allowance and the amount initially recognized less, when appropriate, the cumulative amount of income recognized.
Derecognition of Financial Instruments
Financial Assets
A financial asset or, where applicable, a part of a financial asset or a part of a group of similar financial assets, is derecognized when: (i) the rights to receive cash flows from the asset have expired; or (ii) the Group has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay all of the cash flows received immediately to a third party under a pass-through agreement; and all the risks and rewards of the asset have also been substantially transferred, or, in case all the risks and rewards of the asset had not been substantially transferred or retained, the control of the asset has been transferred.
When the contractual rights of receiving the cash flows generated by the asset have been transferred, or a transfer agreement has been executed, the entity assesses if it has retained, and to what extent, the risks and awards inherent in asset ownership. When substantially all the risks and rewards inherent in asset ownership have not been transferred or retained, nor has control of the asset been transferred, the asset continues to be recognized to the extent of its continued involvement over it.
In this case, the related liability is also recognized. The transferred asset and the related liability are measured in such a way so as to reflect the rights and obligations that the Group had retained.
A continuing involvement that takes the form of a collateral on the transferred asset is measured as the smallest amount between (i) the original carrying amount of the asset, and (ii) the maximum amount of consideration received that would be required to be returned.
Financial Liabilities:
A financial liability is derecognized when the obligation, has been cancelled, or has expired. When an existing financial liability is exchanged by another of the same borrower under significantly different conditions, or the conditions are significantly modified, such exchange or modification is treated as a derecognition of the original liability and a new liability is recognized, the difference between the value in books of the initial financial liability and the consideration paid is recognized in the Consolidated Statement of Income. When the renegotiation conditions are not significantly different, or the conditions are not significantly modified, the flows of the modified financial liabilities are discounted at the rate of the original contract.
1.9. | DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative Financial instruments, including foreign currency contracts, futures, forward contracts, interest rate swaps, cross currency swaps, interest rate options and foreign currency options are recorder at their fair value.
All derivative financial instruments are recorder as assets when the fair value is positive and as liabilities when the fair value is negative, against the agreed price. The changes in the fair value of derivative financial instruments are recognized in profit or loss.
In these consolidated financial statements, the Group has not applied hedge accounting.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.10. REPURCHASE TRANSACTIONS
Reverse Repurchase Transactions
According to the derecognition principles in IFRS 9, these transactions are considered as secured borrowings, since the risk has not been transferred to the counterpart.
Financing granted through reverse repurchase transactions are recorded under “Repurchase Transactions” accounts, classified by counterparty and considering the asset received as collateral.
At the closing of each month, accrued interest receivable is imputed to the “Repurchase Transactions” account with offsetting entry in “Interest Income”.
The underlying assets received for the reverse repurchase transactions will be recorded in Off-Balance Sheet Items. The assets received that have been sold by the Group are not deducted, but derecognized only when the repo transaction finishes, recording a liability in kind for the obligation to deliver the security sold.
Repurchase Transactions
Financing received through repurchase transactions are recorded under “Repurchase Transactions” accounts, classified by counterparty and considering the asset pledged as collateral.
In these transactions, when the receiver of the underlying asset obtains the right to sell it or pledge it as collateral, this is reclassified to the “Financial Assets Pledged as Collateral” accounts.
At the closing of each month, accrued interest payable is imputed to the “Repurchase Transactions” account with offsetting entry in “Interest Expenses”.
1.11. ALLOWANCES FOR FINANCIAL INSTRUMENTS
The Group assesses on a forward-looking basis the expected credit loss (“ECL”) associated with its debt instruments assets carried at amortized cost and FVOCI, together with the exposure arising from loan commitments and financial guarantee contracts. The Group recognizes a loss allowance for such losses at each reporting date. The measurement of ECL reflects:
An unbiased and probability-weighted amount is determined by evaluating a range of possible outcomes,
The time value of money, and
Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
Note 45 provides more detail of how the expected credit loss allowance is measured.
1.12. LEASES
1.12.1. Lease activities of the Group
The Group is the lessee of various properties to be used in its ordinary course of business. Lease contracts are generally made for fixed periods, from 1 to 20 years, but in some cases, there may be price agreements for shorter periods with extension options. Lease terms are individually negotiated and contain a wide range of different terms and conditions.
From January 1, 2019, leases are recognized as a right-of-use asset and a corresponding liability, on the date at which the leased asset is available for use by the Group.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
fixed payments (including in-substance fixed payments), less any lease incentives receivable;
variable lease payments based on an index or a rate, initially measured using the index or rate on the initial date;
amounts expected to be payable by the lessee under residual value guarantees;
the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The lease payments are discounted using the interest rate implicit in the lease, if it can be determined; or otherwise, the Group’s incremental borrowing rate will be applied, which is the rate that the lessee would have to pay to borrow the necessary funds to obtain an asset of similar value to the right-of- use asset, in a similar economic environment with similar terms, security and conditions.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period, to produce a constant, periodic interest rate on the remaining balance of the liability for each period.
Right-of-use assets are measured at their cost, comprising the following:
the amount of the initial measurement of the lease liability;
any lease payment made on or before the initial date, less any lease incentives received;
any initial direct cost; and
restoration and dismantling costs.
Right-of-use assets are depreciated over the shorter of the asset useful life and the lease term on a straight-line method.
Payments related to short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less that do not contain a bargain purchase option. Low-value assets are defined as small physical spaces where equipment owned by the Group is kept.
1.12.2. Extension and Termination Options
The extension and termination options that are included in several Property, Plant and Equipment leases were considered to determine the term of the lease. These options are used to maximize the operational flexibility in terms of managing the assets used in our operations. Most of the extension and termination options held are exercisable only by the Group and not by the respective lessor.
1.13. PROPERTY, PLANT AND EQUIPMENT
Assets are measured at their acquisition or construction cost, net of accumulated depreciations and/or accumulated impairment losses, if any. The cost includes the expenses directly attributable to the acquisition or construction of the items.
Property, Plant and Equipment acquired through business combinations were initially valued at the estimated fair value at the acquisition date.
Subsequent costs are included in the value of the asset or are recognized as a separate asset, as appropriate, if and only if they are likely to generate future economic benefits for the Group, and its cost can be reasonably measured. When improvements are made to the asset, the carrying amount of the replaced asset is derecognized, the new asset being amortized for the remaining useful life.
Repair and maintenance costs are recognized in the consolidated statement of income for the year in which they are incurred.
The depreciation of these assets is calculated using the straight-line method to allocate their cost over, their estimated useful lives. If an asset includes significant components with different useful lives, they are recognized and depreciated as separate items.
The residual values of Property, Plant and Equipment, the useful lives and the depreciation methods are reviewed and adjusted if necessary, at the closing date of each fiscal year, or when there is evidence of impairment.
The book value of the Property, Plant and Equipment is immediately reduced to its recoverable amount when it is greater than the estimated recoverable value.
Profits and losses from the sale of Property, Plant and Equipment items are determined by comparing the proceeds from the disposal to the carrying amount of the respective asset and are charged to income.
1.14. INTANGIBLE ASSETS
1.14.1. Licenses
Licenses acquired individually are initially valued at cost, while those acquired through business combinations are recognized at their estimated fair value at the acquisition date.
At the closing date of these consolidated financial statements, intangible assets with a finite useful life are presented net of accumulated depreciation and/or accumulated impairment losses, if any. These assets are subject to impairment tests annually, or when there is evidence of impairment.
The licenses acquired by the Group have been classified as intangible assets with a finite useful life, being amortized on a straight-line basis over the period of the license.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets with an indefinite useful life are the assets arising from contracts or other legal rights, that can be renewed without significant cost, and for which, based on an analysis of all relevant factors, there is no foreseeable limit of the period along which the asset is expected to generate net cash flows for the Group. These intangible assets are not amortized, but are subject to impairment tests, annually or when there is evidence of impairment, either individually or at the level of the cash generating unit. The determination of the indefinite useful life is annually reviewed to confirm if it continues being applicable.
1.14.2. Software
The costs related to software maintenance are recognized as expense when incurred. The development, acquisition and implementation costs that are directly attributable to software design and testing, identifiable and monitored by the Group, are recognized as assets.
The costs incurred in software development, acquisition or implementation, recognized as intangible assets, are amortized by applying the straight-line method over their estimated useful lives.
1.15. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
1.15.1. Assets Held for Sale
The assets, or group of assets, classified as available for sale in accordance with the provisions of IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations,” will be disclosed separately from the rest of the assets.
Non-current assets or disposal groups (including the loss of control over a subsidiary) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. In order for an asset to be classified as held for sale, it must meet the following conditions:
it must be available for immediate sale in its current condition;
Management must be committed to a plan to sell the asset and must have initiated an active program to locate a buyer and complete the plan;
the asset must be actively marketed for sale at a reasonable price in relation to its current fair value;
the sale is expected to be completed within 12 months from its reclassification date; and
it is unlikely that the plan will be significantly changed or withdrawn.
The assets, or groups of assets, classified as held for sale in accordance with the provisions of IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, are measured at the lower of their carrying amount and fair value less costs to sell and are restated in accordance with Note 22.
Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale.
1.15.2. Discontinued Operations
A discontinued operation is a component of the Group that has been disposed of, or that has been classified as held for sale, and complies with any of the following conditions:
it represents line of business or a geographical area, which is significant and can be considered as separated from the rest;
it is part of a single coordinated plan to have a business line, or geographical area of the operations which is significant and can be considered as separated from the rest; or
it is an independent entity exclusively acquired to resell it.
Any profit or loss arising from re-measuring an asset (or group of assets for its disposal) classified as Held for Sale, which does not meet the definition of discontinued operation, will be included in the Income from continuing operations.
1.16. IMPAIRMENT OF NON-FINANCIAL ASSETS
Assets with indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or, at least, on an annual basis.
Depreciation and impairment losses are recognized when the carrying amount exceeds their recoverable value. The recoverable value of assets is the greater of the net amount that it would obtain from its sale, or its value in use. For the impairment tests, the assets are grouped at the lowest level where they generate identifiable cash flows (cash generating units). The carrying amount of non-financial assets other than goodwill over which depreciation and impairment have been recorded, are reviewed at each reporting date for verifying possible depreciation and impairment reversals.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.17. TRUST ASSETS
The assets held by the Group in its trustee role are not reported in the consolidated statement of financial position, because the Group is not in control of the trust or the risks and rewards of the underlying assets. Fees received from trust activities are recorded in Fee Income.
1.18. OFFSETTING
Financial assets and liabilities are offset by reporting the net amount in the Consolidated Statement of Financial Position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
1.19. FINANCING RECEIVED FROM THE ARGENTINE CENTRAL BANK AND OTHER FINANCIAL INSTITUTIONS
The amounts owed to other Financial Institutions are recorded at the time the principal is disbursed to the Group. Non-derivative financial liabilities are measured at amortized cost. If the Group repurchases its own debt, this is eliminated from the consolidated financial statements, and the difference between the residual value of the financial liability and the amount paid is recognized as a financial income or expense.
1.20. PROVISIONS AND CONTINGENCIES
In accordance with IFRS a provision will be recognized when:
a. | an Entity has a current obligation (either legal or implicit) as a consequence of a past event; |
b. | it is probable that an outflow of resources embodying future economic benefits will be required to settle the obligation; and |
c. | the amount can be reliably estimated. |
It will be understood that the Group has an implicit obligation if (a) as a result of previous practices or public policies, the Group has assumed certain liabilities; and (b) as a result, it has created expectations that it will comply with those obligations.
The Group recognizes the following provisions:
For labor, civil, and commercial lawsuits: provisions are determined based on the lawyers’ reports on the status of the lawsuits and the estimate made on the bankruptcy possibilities to be faced by the Group, as well as on past experience regarding this type of lawsuits.
For miscellaneous risks: provisions are set up to face contingent situations that may give rise to obligations for the Group. When estimating the amounts, the probability of their materializing is taken into account, considering the opinion of the Group’s legal advisors and professionals.
The amount recognized as provision must be the best estimate of the disbursement needed to cancel such obligation, at the end of the year being reported.
When the financial effect produced by the discount becomes important, the amount of the provision must be the present value of the disbursements that are expected to be required to cancel the obligation by using a pre-tax interest rate that reflects the current market conditions on the value of money and the specific risks for such obligation. The increase in the provision for the lapsing of time is recognized in the Net Financial Income item of the Statement of Income.
The Group will not record the positive contingencies, except those arising from deferred taxes and those which materialization is virtually certain.
At the date of issuance of these consolidated financial statements, the Group Directors understand that there have been no elements that allow determining the existence of other contingencies that may be materialized and generate a negative impact on these consolidated financial statements, as detailed in Note 29.
1.21. OTHER NON-FINANCIAL LIABILITIES
Non-financial accounts payable are accrued when the counterparty has complied its contractual obligations under the contract, and they are measured at amortized cost.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.22. DEBT SECURITIES
The Group’s Debt Securities are measured at amortized cost. If the Group purchases debt securities of their own, the obligation in Liabilities related to such debt securities is considered extinguished, and, therefore, it is derecognized. If the Group repurchases its own debt, this is eliminated from the Consolidated Financial Statements, and the difference between the residual value of the financial liability and the amount paid is recognized as a financial income or expense.
1.23. ASSETS AND LIABILITIES ARISING FROM INSURANCE CONTRACTS
The valuation and recording of assets and liabilities arising from the Group’s insurance contracts is performed pursuant to the IFRS 4 “Insurance Contracts” criteria.
Assets for Insurance Contracts
Insurance contracts are contracts where the Group (the insurer) has accepted an insurance risk from another party (the insured) by agreeing to compensate the insured if a specified uncertain future event (the insured event) adversely affects the insured.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the rest of its useful life, even if the insurance risk is significantly reduced during this period, unless all rights and obligations are extinguished or expire.
The insurance contracts offered by the Group include property insurance that covers fire, combined family insurance, theft and similar risks, property damage, personal accidents, among other risks. Life insurance and Retirement insurance contracts are also included.
Total premiums are recognized as of the policy issuance date as an account receivable. At the same time, a reserve is recorded in Liabilities for unearned premiums representing premiums for risks that have not yet expired. The unearned premiums are recognized as Income for the contract period, which is also the coverage and risk period. The book value of insurance accounts receivable is reviewed for impairment if events or circumstances indicate that the book value may not be recoverable. Impairment loss is recorded in the Statement of Income.
Liabilities Recognized for the Insurance Business
Debts with Insured Persons
Reserves for Insurance claims represent debts with insured persons for claims reported to the company, and an estimate of the claims that have already been incurred but have not yet been reported to the company. Reported claims are adjusted based on technical reports received from independent appraisers.
Debts with Reinsurers and Co-insurers
The Group mitigates the risk for some of its insurance business through coinsurance or reinsurance contracts in other companies. For coinsurance, the Company associates with another company to cover a risk, by assuming only a percentage of it and, therefore, also of the premium. For reinsurance, the risk is transferred to another insurance company both in proportional (as a risk percentage) and non-proportional form (the excess of loss above a certain limit is covered). The transferred reinsurance agreements do not exempt the Group from its obligations with the insured persons.
Coinsurance and reinsurance liabilities represent balances owed under the same conditions, and the amounts payable are estimated in a manner consistent with the contract that gave rise to them.
Debts with Producers
They represent liabilities with insurance producers and independent agents arising from the commissions for the insurance transactions they bring for the Group’s companies. The checking account balances with such entities are also included.
Technical Commitments
Technical reserves include reserves for future benefit obligations under life, annuity and accident insurance policies, and reserves for retirement insurance contracts.
The Group assesses, at the end of the reporting period, the adequacy of the insurance liabilities it has recognized, using current estimates of future cash flows from its insurance contracts. Should the evaluation show that the carrying amount of its liabilities for insurance contracts (minus deferred acquisition costs and related intangible assets) is not adequate, considering the estimated future cash flows, the total amount of the deficiency will be recognized in Income. In accordance with IFRS 4, the Group must determine the adequacy of the amount in books recorded in accordance with the guidelines established in IAS 37.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.24. SHAREHOLDERS’ EQUITY
Shareholders’ equity accounts are restated in accordance with Note 1.1.b., except for the item “Capital Stock”, which is carried at face value. The restatement adjustment is included in “Equity Adjustments”.
Ordinary shares are classified in Shareholders’ Equity and remain recorded at their nominal value. When any company forming part of the Group buys Company shares (treasury shares in portfolio), the payment made, including any costs directly attributable to the transaction (net of taxes) is deducted from the Shareholders’ Equity until the shares are canceled or sold.
1.25. PROFIT RESERVES
According to Art. 70 of the General Companies Act, the Company and its subsidiaries, except Banco Galicia, must transfer to Legal Reserve 5% of the profit for the year, until said reserve reaches 20% of the capital stock plus the balance of the Equity Adjustment account.
Regarding Banco Galicia, in accordance with the regulations established by the Argentine Central Bank, it is appropriate to allocate to Legal Reserve 20% of the profits for the year, net of the eventual adjustments of previous fiscal years, if applicable. However, for the allocation of Other Reserves, the Financial Institutions must comply with the Argentine Central Bank provisions of the Amended Text on dividends distribution detailed in Note 52.
1.26. DIVIDENDS DISTRIBUTION
The dividends distribution to the Group’s shareholders is recognized as a liability in the consolidated financial statements in the year in which the dividends are approved by the Group’s shareholders.
1.27. REVENUE RECOGNITION
Financial income and expenses are recorded for all debt instruments according to the effective interest rate method, by which all gains and losses that are an integral part of the effective interest rate of the transaction are deferred.
The income included in the effective interest rate includes disbursements or income related to the creation or acquisition of a financial asset or liability, such as, for example, the preparation and processing of the documents necessary to conclude the transaction and the compensation received by the granting of credit agreements. The Group records all its non-derivative financial liabilities at amortized cost, except those included in the item “Liabilities at Fair Value through Profit or Loss” which are measured at fair value.
Fees received by the Group for the origination of syndicated loans are not part of the effective interest rate of the product, and are recognized in the statement of income at the time the service is provided, to the extent the Group does not retain part of it, or this is maintained in the same conditions as the rest of the participants. Commissions and fees earned by the Group on negotiations in third parties’ transactions are not part of the effective interest rate either, and are recognized at the time the transactions are executed.
IFRS 15 establishes the principles that an entity shall apply to recognize revenue and cash flows from contracts with customers.
The amount that should be recognized will be the amount that reflects the consideration to which the entity expects to be entitled in exchange for the services delivered to customers.
The Group’s income from services is recognized in the statement of income to the extent the performance obligations are complied with, thus deferring those revenues related to customer loyalty programs, which are provisioned based on the fair value of each point and its redemption rate, until they are exchanged by the customer and can be recognized in the income for the year.
Retail product and service fees related to savings and checking account operations have a monthly charging frequency; safe deposit boxes fees are charged quarterly; renewal of credit cards is charged annually, and bond and shares transactions are charged at the time the transactions are executed.
Additionally, fees for wholesale products corresponding to maintenance of accounts, deposits and withdrawals between entities, are charged on a monthly basis; foreign trade transactions are charged at the time the transactions are executed.
Below is a summary of the main commissions earned by the Bank:
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1.28. INCOME TAX
The Income tax expense for the year comprises the current and the deferred taxes. Income tax is recognized in the consolidated statement of income, except when there are items that must be directly recognized in other comprehensive income. In this case, income tax liability related to such items is also recognized in this Statement.
The current income tax expense is calculated based on the tax laws enacted, or substantially enacted as of the date of the consolidated financial statements in the countries where the Group operates and generates taxable income. The Group periodically assesses the position assumed in tax returns as regards the situations in which tax laws are subject to interpretation. Likewise, when applicable, the Group sets up provisions on the amounts that it expects to be paid to tax authorities.
Deferred income tax is determined by the liability method on the temporary differences arising from the carrying amount of assets and liabilities and their tax base. However, the deferred tax that arises from the initial recognition of an asset or a liability in a transaction not corresponding to a business combination, which at the time of the transaction does not affect neither the profit nor the accounting or taxable loss, is not recorded. Deferred tax is determined using tax rates (and legislation) that have been enacted as of the date of the financial statements and are expected to be applicable when the deferred tax assets are realized, or the deferred tax liabilities are settled.
Deferred tax assets are recognized only to the extent future tax benefits are likely to arise against which the temporary differences might be offset.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Commissions | Earning Frequency | |
Retail Products and Services | ||
Savings Accounts | Monthly | |
Checking Accounts | Monthly | |
Credit-card Renewal | Annual | |
Safe Deposit Boxes | Quarterly | |
Bonds and Shares Transactions | On each transaction | |
Wholesale Products | ||
Account Maintenance | Monthly | |
Deposits and Withdrawals among Branches | Monthly | |
Foreign Trade Transactions | On each transaction |
1.28. INCOME TAX
The Income tax expense for the year comprises the current and the deferred taxes. Income tax is recognized in the consolidated statement of income, except when there are items that must be directly recognized in other comprehensive income. In this case, income tax liability related to such items is also recognized in this Statement.
The current income tax expense is calculated based on the tax laws enacted, or substantially enacted as of the date of the consolidated financial statements in the countries where the Group operates and generates taxable income. The Group periodically assesses the position assumed in tax returns as regards the situations in which tax laws are subject to interpretation. Likewise, when applicable, the Group sets up provisions on the amounts that it expects to be paid to tax authorities.
Deferred income tax is determined by the liability method on the temporary differences arising from the carrying amount of assets and liabilities and their tax base. However, the deferred tax that arises from the initial recognition of an asset or a liability in a transaction not corresponding to a business combination, which at the time of the transaction does not affect neither the profit nor the accounting or taxable loss, is not recorded. Deferred tax is determined using tax rates (and legislation) that have been enacted as of the date of the financial statements and are expected to be applicable when the deferred tax assets are realized, or the deferred tax liabilities are settled.
Deferred tax assets are recognized only to the extent future tax benefits are likely to arise against which the temporary differences might be offset.
The Group recognizes a deferred tax liability for taxable temporary differences related to investments in subsidiaries and affiliates, unless the following two conditions are met:
(i) | the Group controls the timing on which temporary differences |
(ii) | such temporary differences are not likely to |
The balances of deferred income tax assets and liabilities are offset when a legal right exists to offset current tax assets against current tax liabilities and to the extent such balances are related to the same tax authority of the Group or its subsidiaries, where tax balances are intended to be, and may be, settled on a net basis.
1.29. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the income attributable to parent company’s owners by the weighted average number of ordinary shares outstanding during the financial year.
Diluted earnings per share is calculated by adjusting the figures used in the determination of basic earnings per share assuming the conversion of all dilutive potential ordinary shares.
NOTE 2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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The preparation of consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires Directors to exercise their judgment in applying the accounting standards to define the Group’s accounting policies.
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The balances of deferred income tax assets and liabilities are offset when a legal right exists to offset current tax assets against current tax liabilities and to the extent such balances are related to the same tax authority of the Group or its subsidiaries, where tax balances are intended to be, and may be, settled on a net basis.
1.29. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the income attributable to parent company’s owners by the weighted average number of ordinary shares outstanding during the financial year.
Diluted earnings per share is calculated by adjusting the figures used in the determination of basic earnings per share assuming the conversion of all dilutive potential ordinary shares.
NOTE 2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Group has identified the following areas involving a greater degree of judgment or complexity, or areas in where the assumptions and estimates are significant for the consolidated financial statements and which are essential to understand the underlying accounting/financial reporting risks.
a. |
|
The fair value of financial instruments not listed in active markets is determined by using valuation techniques. Such techniques are periodically validated and reviewed by qualified personnel independent from the area or independent appraisers that developed them. All models are assessed and adjusted before they are used, to ensure that their results reflect the current information and comparable market prices. To the extent possible, the models rely only on observable inputs; however, certain factors such as projected cash flows, discount rates and volatilities and correlations relating to interest rates and spreads require the use of estimates. Changes in the assumptions about these factors can affect the reported fair value of the financial instruments.
|
The Group recognizes the allowance for loan losses under the expected credit losses method included in IFRS 9. The most significant judgments of the model relate to defining what is considered a significant increase in credit risk, developing parameters such as the probabilities of default and the loss given default and making assumptions about macroeconomic scenarios. A high degree of uncertainty is involved in making estimations using assumptions that are highly subjective and very sensitive to the risk factors.
|
Intangible assets with finite useful lives and property, plant and equipment are amortized or depreciated on a straight-line basis during their estimated useful life. The Group monitors the conditions related to these assets to determine whether the events and circumstances require a review of the remaining amortization or depreciation term, and whether there are factors or circumstances indicating impairment in the value of the assets that cannot be recovered.
The Group has applied judgment to identify impairment indicators for property, plant and equipment and intangible assets. The Group has concluded that there were no impairment indicators for any of the years reported in its consolidated financial statements.
|
Significant judgment is required when determining current and deferred tax assets and liabilities. The current income tax is accounted according to the amounts expected to be paid; while deferred income tax is accounted on the basis of temporary differences between carrying amount of assets and liabilities and their tax base, at the rates expected to be in force at the time of their reversal.
A deferred tax asset is recognized when future taxable income is expected to exist to offset such temporary differences, based on Management’s assumptions about the amounts and timing of such future taxable income. Then, management needs to determine whether deferred tax assets are likely to be used and offset against future taxable income. Actual results may differ from these estimates, for instance, changes in the applicable tax laws or the outcome of the final review of the tax returns by the tax authorities and tax courts.
Future taxable income and the number of tax benefits likely to be available in the future are based on a medium-term business plan prepared by management, on the basis of expectations which are deemed reasonable.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. |
|
The Group recognizes the allowance for loan losses under the expected credit losses method included in IFRS 9. The most significant judgments of the model relate to defining what is considered a significant increase in credit risk, identifying assets which are impaired or subject to serious risk of impairment, developing parameters such as the probabilities of default and the loss given default and making assumptions about macroeconomic scenarios. A high degree of uncertainty is involved in making estimations using assumptions that are highly subjective and very sensitive to the risk factors.
Furthermore, the level of estimation uncertainty and judgement has increased during 2020 as a result of the economic effects of the Covid-19 outbreak.
c. |
|
Intangible assets with finite useful lives and property, plant and equipment are amortized or depreciated on a straight-line basis during their estimated useful life. The Group monitors the conditions related to these assets to determine whether the events and circumstances require a review of the remaining amortization or depreciation term, and whether there are factors or circumstances indicating impairment in the value of the assets that cannot be recovered.
The Group has applied judgment to identify impairment indicators for property, plant and equipment and intangible assets. The Group has concluded that there were no impairment indicators for any of the years reported in its consolidated financial statements.
Portfolio of Instruments as of 12.31.2019 | Fair Value through Profit or Loss | Amortized Cost | Fair Value through OCI | |||||||||
Assets | ||||||||||||
Argentine Central Bank’s Bills and Notes | 58,141,095 | — | — | |||||||||
Government Securities | 6,700,187 | — | — | |||||||||
Corporate Securities | 849,178 | — | — | |||||||||
Derivative Financial Instruments | 2,329,074 | — | — | |||||||||
Repurchase Transactions | — | 30,075,478 | — | |||||||||
Other Financial Assets | 5,024,505 | 5,890,829 | — | |||||||||
Loans and Other Financing | — | 358,558,869 | — | |||||||||
Other Debt Securities | — | 3,103,324 | 15,916,306 | |||||||||
Financial Assets Pledged as Collateral | 1,735,692 | 9,814,894 | — | |||||||||
Investment in Equity Instruments | 4,554,453 | — | — | |||||||||
Liabilities | ||||||||||||
Deposits | — | 393,735,406 | — | |||||||||
Liabilities at fair value through profit or loss | 1,422,157 | — | — | |||||||||
Derivative Financial Instruments | 881,099 | — | — | |||||||||
Repurchase Transactions | — | — | — | |||||||||
Other Financial Liabilities | — | 71,362,718 | — | |||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | — | 22,723,687 | — | |||||||||
Debt Securities | — | 29,240,851 | — | |||||||||
Subordinated Debt Securities | — | 15,499,212 | — |
d. | INCOME TAX AND DEFERRED TAX
|
Significant judgment is required when determining current and deferred tax assets and liabilities. The current income tax is accounted according to the amounts expected to be paid; while deferred income tax is accounted on the basis of temporary differences between carrying amount of assets and liabilities and their tax base, at the rates expected to be in force at the time of their reversal.
A deferred tax asset is recognized when future taxable income is expected to exist to offset such temporary differences, based on Management’s assumptions about the amounts and timing of such future taxable income. Then, management needs to determine whether deferred tax assets are likely to be used and offset against future taxable income. Actual results may differ from these estimates, for instance, changes in the applicable tax laws or the outcome of the final review of the tax returns by the tax authorities and tax courts.
Future taxable income and the number of tax benefits likely to be available in the future are based on a medium-term business plan prepared by management, on the basis of expectations which are deemed reasonable.
NOTE 3. FINANCIAL INSTRUMENTS
Schedule P “Categories of Financial Assets and Liabilities”, discloses the measurement categories and fair value hierarchies for financial instruments.
As of the indicated dates, the Group maintains the following portfolios of financial instruments:
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Portfolio of Instruments as of 12.31.2020 | Fair Value through Profit or Loss | Amortized Cost | Fair Value through OCI | |||||||||
Assets | ||||||||||||
Cash and Due from Banks | — | 175,423,476 | — | |||||||||
Argentine Central Bank’s Bills and Notes | 128,324,920 | — | — | |||||||||
Government Securities | 24,282,643 | — | — | |||||||||
Corporate Securities | 2,811,997 | — | — | |||||||||
Derivative Financial Instruments | 2,165,032 | — | — | |||||||||
Repurchase Transactions | — | 60,995,643 | — | |||||||||
Other Financial Assets | 2,791,983 | 7,301,643 | — | |||||||||
Loans and Other Financing | — | 526,434,119 | — | |||||||||
Other Debt Securities | — | 18,885,279 | 4,185,098 | |||||||||
Financial Assets Pledged as Collateral | 2,035,559 | 16,681,884 | — | |||||||||
Investments in Equity Instruments | 5,711,684 | — | — | |||||||||
Liabilities | ||||||||||||
Deposits | — | 676,395,735 | — | |||||||||
Derivative Financial Instruments | 57,450 | — | — | |||||||||
Other Financial Liabilities | — | 97,471,465 | — | |||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | — | 13,833,439 | — | |||||||||
Debt Securities | — | 17,073,898 | — | |||||||||
Subordinated Debt Securities | — | 21,653,546 | — |
Portfolio of Instruments as of 12.31.2019 | Fair Value through Profit or Loss | Amortized Cost | Fair Value through OCI | |||||||||
Assets | ||||||||||||
Cash and Due from Banks | — | 177,866,400 | — | |||||||||
Argentine Central Bank’s Bills and Notes | 79,153,628 | — | — | |||||||||
Government Securities | 9,121,674 | — | — | |||||||||
Corporate Securities | 1,156,076 | — | — | |||||||||
Derivative Financial Instruments | 3,170,815 | — | — | |||||||||
Repurchase Transactions | — | 40,944,933 | — | |||||||||
Other Financial Assets | 6,840,391 | 8,019,809 | — | |||||||||
Loans and Other Financing | — | 488,144,152 | — | |||||||||
Other Debt Securities | — | 4,224,883 | 21,668,553 | |||||||||
Financial Assets Pledged as Collateral | 2,362,981 | 13,362,055 | — | |||||||||
Investments in Equity Instruments | 6,200,459 | — | — | |||||||||
Liabilities | ||||||||||||
Deposits | — | 536,033,696 | — | |||||||||
Liabilities at fair value through profit or loss | 1,936,133 | — | — | |||||||||
Derivative Financial Instruments | 1,199,533 | — | — | |||||||||
Other Financial Liabilities | — | 97,153,624 | — | |||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | — | 30,936,161 | — | |||||||||
Debt Securities | — | 39,808,666 | — | |||||||||
Subordinated Debt Securities | — | 21,100,718 | — |
NOTE 4. FAIR VALUES
The Group classifies the fair values of the financial instruments in 3 levels, according to the quality of the data used for their determination
Fair Value Level 1: The fair value of financial instruments traded in active markets (as publicly traded derivative instruments, debt securities or instruments available for sale) is based on the quoted market prices as of the date of the reporting period. If the quoted price is available and there is an active market for the instrument, this will be included in Level 1. Otherwise, it will be included in Level 2.
Fair Value Level 2: The fair value of financial instruments not traded in active markets, for example, over-the-counter derivatives, is determined using valuation techniques that maximize the use of observable inputs and rely to the lower extent possible in the Group’s specific estimates. If all the significant inputs required to obtain the fair value of a financial instrument are observable, the instrument is included in Level 2. If the inputs required to determine the price are not observable, the instrument will be included in Level 3.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Level 3: If one or more relevant inputs are not based on observable market data, the instrument is included in Level 3. This is the case of unlisted financial instruments.
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
When observable market prices are no longer available, the instrument will be included in Level 3. The instrument will return to Level 1 only when it has observable market price, and it will maintain that Level if it continues quoting. This is called transfer between levels.
Valuation Techniques
The valuation techniques to determine fair values include:
Market prices for similar instruments.
Determining the estimated present value of instruments.
The valuation technique to determine the fair value Level 2 is based on data other than the quoted price included in Level 1, which are directly observable for assets or liabilities (i.e., prices). For those instruments with no secondary market and which, if having to reverse positions, the Group would have to sell them to the Argentine Central Bank at the rate originally agreed in accordance with the provisions of the controlling authority, the price has been prepared based on such rate accrual.
Financial instruments classified as level 3 mainly include equity instruments for which the fair value was calculated with the assistance of independent appraisers using methods of future discounted cash flows involving a combined income and market approach. The fair value of the related put option derivative classified as level 3 was estimated using a valuation technique based on the binomial method considering different scenarios. The most relevant unobservable input data include the projected EBITDA and the discount rate (WACC—Weighted Average Cost of Capital) used in the estimations.
The valuation technique to determine the fair value of other Level 3 financial instruments is based on a method that compares the existing spread between the curve of sovereign bonds and the average yield of primary offerings, for different segments, according to the different risk ratings. If there are no representative primary offerings during the month, the following alternatives will be used:
(i) | Secondary market prices of instruments under the same conditions, which had quoted in the evaluation month. |
(ii) | prior-month bidding and/or secondary market prices, which will be taken based on their representativeness. |
(iii) | prior month spread applied to the sovereign curve. |
(iv) | A specific margin is applied, defined according to historical yields of instruments under the same conditions. |
As stated above, the rates and spreads to be used to discount future cash flows and originate the price of the instrument are determined.
All the modifications to the valuation methods are previously discussed and approved by the Group’s key personnel.
The Group’s financial instruments measured at fair value at the end of the reporting period are detailed below:
Portfolio of Instruments as of 12.31.19 | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||
Portfolio of Instruments as of 12.31.20 | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Argentine Central Bank’s Bills and Notes | — | 58,141,095 | — | — | 128,324,920 | — | ||||||||||||||||||
Government Securities | 1,507,757 | — | 5,192,430 | 23,170,495 | 911,380 | 200,768 | ||||||||||||||||||
Corporate Securities | 664,317 | — | 184,861 | 1,653,980 | — | 1,158,017 | ||||||||||||||||||
Derivative Financial Instruments | — | 1,398,539 | 930,535 | — | 547,929 | 1,617,103 | ||||||||||||||||||
Other Financial Assets | 4,987,105 | 37,400 | — | 2,760,728 | 31,255 | — | ||||||||||||||||||
Other Debt Securities (*) | 15,916,306 | — | — | |||||||||||||||||||||
Other Debt Securities (*) | 604,996 | 3,580,102 | — | |||||||||||||||||||||
Financial Assets Pledged as Collateral | 703,669 | — | 1,032,023 | 2,035,559 | — | — | ||||||||||||||||||
Investments in Equity Instruments | 162,003 | — | 4,392,450 | |||||||||||||||||||||
Investments in Equity Investments | 234,774 | — | 5,476,910 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Liabilities at fair value through profit or loss | 1,422,157 | — | — | |||||||||||||||||||||
Derivative Financial Instruments | — | 881,099 | — | — | 57,450 | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 22,519,000 | 58,695,935 | 11,732,299 | 30,460,532 | 133,338,136 | 8,452,798 | ||||||||||||||||||
|
|
|
|
|
|
(*) | It relates to Government Securities measured at fair value through other comprehensive income. |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Portfolio of Instruments as of 12.31.18 | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||
Portfolio of Instruments as of 12.31.19 | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Argentine Central Bank’s Bills and Notes | — | 107,833,074 | — | — | 79,153,628 | — | ||||||||||||||||||
Government Securities | 4,541,662 | 1,966,052 | 722,110 | 2,052,669 | — | 7,069,005 | ||||||||||||||||||
Corporate Securities | 474,965 | 55,795 | 1,219,227 | 904,405 | — | 251,671 | ||||||||||||||||||
Derivative Financial Instruments | — | 2,746,893 | — | — | 1,903,979 | 1,266,836 | ||||||||||||||||||
Other Financial Assets | 6,560,076 | 59,995 | — | 6,789,474 | 50,917 | — | ||||||||||||||||||
Other Debt Securities (*) | 14,017,361 | — | — | 21,668,553 | — | — | ||||||||||||||||||
Financial Assets Pledged as Collateral | 4,898,556 | 423,602 | — | 957,979 | — | 1,405,002 | ||||||||||||||||||
Investments in Equity Instruments | 41,219 | — | 206,534 | |||||||||||||||||||||
Equity Investments | 220,552 | — | 5,979,907 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Liabilities at fair value through profit or loss | 2,102,558 | 1,196,630 | — | 1,936,133 | — | — | ||||||||||||||||||
Derivative Financial Instruments | — | 2,824,038 | — | — | 1,199,533 | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 28,431,281 | 109,064,743 | 2,147,871 | 30,657,499 | 79,908,991 | 15,972,421 | ||||||||||||||||||
|
|
|
|
|
|
(*) | It relates to Government Securities measured at fair value through other comprehensive income. |
The evolution of instruments included in Level 3 Fair Value is detailed below:
Level 3 | 12.31.18 | Transfers(*) | Recognition | Derecognition | Income (Loss) | Inflation Effect | 12.31.19 | 12.31.19 | Transfers(*) | Recognition | Derecognition | Income (Loss) | Inflation Effect | 12.31.20 | ||||||||||||||||||||||||||||||||||||||||||
Government Securities | 722,110 | 6,629,757 | 18,222,949 | (19,385,862 | ) | (916,017 | ) | (80,507 | ) | 5,192,430 | 7,069,005 | (1,734,412 | ) | 18,522,437 | (22,946,325 | ) | 915,243 | (1,625,180 | ) | 200,768 | ||||||||||||||||||||||||||||||||||||
Corporate Securities | 1,219,227 | 21,564 | 6,504,969 | (7,274,290 | ) | 273,460 | (560,069 | ) | 184,861 | 251,671 | 123,615 | 3,850,367 | (2,996,313 | ) | 99,825 | (171,148 | ) | 1,158,017 | ||||||||||||||||||||||||||||||||||||||
Derivative Financial Instruments | — | — | 1,280,629 | — | — | (350,094 | ) | 930,535 | 1,266,836 | — | — | — | 686,568 | (336,301 | ) | 1,617,103 | ||||||||||||||||||||||||||||||||||||||||
Financial Assets Pledged as Collateral | — | 2,176,092 | 954,328 | (1,747,082 | ) | (364,877 | ) | 13,562 | 1,032,023 | 1,405,002 | (209,844 | ) | 700,459 | (1,580,566 | ) | (162,288 | ) | (152,763 | ) | — | ||||||||||||||||||||||||||||||||||||
Investments in Equity Instruments | 206,534 | (21,612 | ) | 5,287,224 | — | 322,256 | (1,401,952 | ) | 4,392,450 | 5,979,907 | — | — | — | 1,052,243 | (1,555,240 | ) | 5,476,910 | |||||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total | 2,147,871 | 8,805,801 | 32,250,099 | (28,407,234 | ) | (685,178 | ) | (2,379,060 | ) | 11,732,299 | 15,972,421 | (1,820,641 | ) | 23,073,263 | (27,523,204 | ) | 2,591,591 | (3,840,632 | ) | 8,452,798 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) | They include the movements of levels of financial instruments classified as fair value Level 3, as described above. |
Level 3 | 12.31.17 | Transfers(*) | Recognition | Derecognition | Income (Loss) | Inflation Effect | 12.31.18 | 12.31.18 | Transfers(*) | Recognition | Derecognition | Income (Loss) | Inflation Effect | 12.31.19 | ||||||||||||||||||||||||||||||||||||||||||
Government Securities | 375,245 | 1,931,447 | 15,972,335 | (17,099,270 | ) | 230,078 | (687,725 | ) | 722,110 | 983,085 | 9,025,790 | 24,808,830 | (26,392,026 | ) | (1,247,071 | ) | (109,603 | ) | 7,069,005 | |||||||||||||||||||||||||||||||||||||
Corporate Securities | 2,218,346 | 598,866 | 9,772,177 | (10,898,949 | ) | 572,780 | (1,043,993 | ) | 1,219,227 | 1,659,863 | 29,357 | 8,855,903 | (9,903,261 | ) | 372,290 | (762,481 | ) | 251,671 | ||||||||||||||||||||||||||||||||||||||
Derivative Financial Instruments | — | — | 1,743,456 | — | — | (476,620 | ) | 1,266,836 | ||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets Pledged as Collateral | — | 2,962,544 | 1,299,228 | (2,378,488 | ) | (496,746 | ) | 18,464 | 1,405,002 | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in Equity Instruments | 128,742 | — | — | — | 133,739 | (55,947 | ) | 206,534 | 281,177 | (29,423 | ) | 7,198,058 | — | 438,721 | (1,908,626 | ) | 5,979,907 | |||||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
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|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total | 2,722,333 | 2,530,313 | 25,744,512 | (27,998,219 | ) | 936,597 | (1,787,665 | ) | 2,147,871 | 2,924,125 | 11,988,268 | 43,905,475 | (38,673,775 | ) | (932,806 | ) | (3,238,866 | ) | 15,972,421 | |||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
(*) | They include the movements of levels of financial instruments classified as fair value Level 3, as described above. |
The Group’s policy is to recognize transfers between the fair value levels only at the end of the reporting period. Transfers occurred because the instruments without observable market prices were reclassified at Level 3, and the instruments with observable market prices at the end of the year were reclassified at Level 1.
The Group included below the fair value of the instruments not carried at fair value as of theyear-end.
Items of Assets/(Liabilities) as of 12.31.19 | Book Value | Fair Value | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||||||||||||||||
Items of Assets/(Liabilities) as of 12.31.20 | Book Value | Fair Value | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and Due from Banks | 130,649,061 | 130,649,061 | 130,649,061 | — | — | 175,423,476 | 175,423,476 | 175,423,476 | — | — | ||||||||||||||||||||||||||||||
Repurchase Transactions | 30,075,478 | 30,075,478 | 30,075,478 | — | — | 60,995,643 | 60,995,643 | 60,995,643 | — | — | ||||||||||||||||||||||||||||||
Loans and Other Financing | 358,558,869 | 357,853,860 | — | — | 357,853,860 | 526,434,119 | 527,834,544 | — | — | 527,834,544 | ||||||||||||||||||||||||||||||
Other Financial Assets | 5,890,829 | 6,461,047 | 6,778 | — | 6,454,269 | 7,301,643 | 7,161,885 | 4,399,582 | — | 2,762,303 | ||||||||||||||||||||||||||||||
Other Debt Securities | 3,103,324 | 3,109,828 | — | — | 3,109,828 | 18,885,279 | 18,878,854 | — | — | 18,878,854 | ||||||||||||||||||||||||||||||
Financial Assets Pledged as Collateral | 9,814,894 | 9,814,894 | 9,814,894 | — | — | 16,681,884 | 16,681,884 | 16,681,884 | — | — | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | 393,735,406 | 393,891,789 | — | — | 393,891,789 | 676,395,735 | 676,454,768 | — | — | 676,454,768 | ||||||||||||||||||||||||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 22,723,687 | 21,709,108 | — | — | 21,709,108 | 13,833,439 | 9,934,732 | — | — | 9,934,732 | ||||||||||||||||||||||||||||||
Debt Securities | 29,240,851 | 29,626,673 | 29,626,673 | — | — | 17,073,898 | 16,207,692 | 12,208,069 | — | 3,999,623 | ||||||||||||||||||||||||||||||
Subordinated Debt Securities | 15,499,212 | 14,972,940 | — | — | 14,972,940 | 21,653,546 | 18,850,289 | — | — | 18,850,289 | ||||||||||||||||||||||||||||||
Other Financial Liabilities | 71,362,718 | 70,894,505 | — | — | 70,894,505 | 97,471,465 | 97,083,349 | — | — | 97,083,349 |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Items of Assets/(Liabilities) as of 12.31.18 | Book Value | Fair Value | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||||||||||||||||
Items of Assets/(Liabilities) as of 12.31.19 | Book Value | Fair Value | Fair Value Level 1 | Fair Value Level 2 | Fair Value Level 3 | |||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and Due from Banks | 220,456,335 | 220,456,335 | 220,456,335 | — | — | 177,866,399 | 177,866,399 | 177,866,399 | — | — | ||||||||||||||||||||||||||||||
Repurchase Transactions | 3,181,371 | 3,181,371 | 3,181,371 | — | — | 40,944,933 | 40,944,933 | 40,944,933 | — | — | ||||||||||||||||||||||||||||||
Loans and Other Financing | 434,899,689 | 445,470,066 | — | — | 445,470,066 | 488,144,152 | 487,184,349 | — | — | 487,184,349 | ||||||||||||||||||||||||||||||
Other Financial Assets | 7,298,580 | 7,298,580 | 7,298,580 | — | — | 8,019,809 | 8,796,107 | 9,228 | — | 8,786,879 | ||||||||||||||||||||||||||||||
Other Debt Securities | 8,171,631 | 8,464,945 | 1,173,935 | — | 7,291,010 | 4,224,883 | 4,233,738 | — | — | 4,233,738 | ||||||||||||||||||||||||||||||
Financial Assets Pledged as Collateral | 11,318,650 | 11,318,650 | 11,318,650 | — | — | 13,362,055 | 13,362,054 | 13,362,054 | — | — | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | 553,946,288 | 553,604,395 | — | — | 553,604,395 | 536,033,696 | 536,246,597 | — | — | 536,246,597 | ||||||||||||||||||||||||||||||
Financing Received from the Argentine Central Bank and Other Financial Institutions | 29,914,292 | 27,211,986 | — | — | 27,211,986 | 30,936,161 | 29,554,907 | — | — | 29,554,907 | ||||||||||||||||||||||||||||||
Debt Securities | 46,124,574 | 45,025,338 | 45,025,338 | — | — | 39,808,666 | 40,333,927 | 40,333,927 | — | — | ||||||||||||||||||||||||||||||
Subordinated Debt Securities | 15,026,155 | 13,095,846 | — | — | 13,095,846 | 21,100,718 | 20,384,249 | — | — | 20,384,249 | ||||||||||||||||||||||||||||||
Repurchase Transactions | 2,997,515 | 2,991,986 | — | — | 2,991,986 | |||||||||||||||||||||||||||||||||||
Other Financial Liabilities | 97,275,984 | 97,276,093 | — | — | 97,276,093 | 97,153,624 | 96,516,196 | — | — | 96,516,196 |
NOTE 5. CASH AND CASH EQUIVALENTS
Cash equivalents are held to meet short-term payment commitments, rather than for investment or similar purposes. A financial asset is classified as cash equivalent, if it can be readily convertible into a certain amount of cash and its risk of changes in value is immaterial. Accordingly, an investment with original maturity of three months or less is classified as cash equivalent. Equity interests are excluded from cash equivalents.
Cash and cash equivalents break down as follows:
12.31.19 | 12.31.18 | 12.31.17 | 12.31.20 | 12.31.19 | 12.31.18 | |||||||||||||||||||
Cash and Due from Banks | 130,649,061 | 220,456,335 | 133,903,229 | 175,423,476 | 177,866,399 | 300,130,550 | ||||||||||||||||||
Argentine Central Bank’s Bills and Notes Maturing up to 90 Days | 58,141,095 | 107,862,909 | 38,430,053 | 128,324,920 | 79,153,628 | 146,845,198 | ||||||||||||||||||
Reverse repurchase Transactions Debtors | 29,996,370 | 3,165,191 | 21,927,992 | 60,842,046 | 40,837,234 | 4,309,110 | ||||||||||||||||||
Loans to Financial Institutions | — | 1,442,948 | 2,123,635 | 6,500,000 | — | 1,964,438 | ||||||||||||||||||
Overnight Placements in Foreign Banks | 7,874,718 | 8,154,165 | 656,375 | 1,661,834 | 10,720,687 | 11,101,128 | ||||||||||||||||||
Mutual Funds | 4,968,775 | 5,937,360 | 5,505,532 | 2,760,728 | 6,764,519 | 8,083,157 | ||||||||||||||||||
Time Deposits | 488,928 | 439,959 | 447,675 | 3,306,869 | 665,630 | 598,963 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Cash and Cash Equivalents | 232,118,947 | 347,458,867 | 202,994,491 | 378,819,873 | 316,008,097 | 473,032,544 | ||||||||||||||||||
|
|
|
|
|
|
The risk analysis for cash and cash equivalents is presented in Note 45. The information with related parties is disclosed in Note 51.
NOTE 6. DEBT SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
The Group’s debt securities at fair value through profit or loss are detailed in Schedule A.
The credit quality of debt securities is disclosed in Note 45.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
FORWARD EXCHANGE CONTRACT WITH NO DELIVERY OF THE UNDERLYING ASSET
The Electronic Open Market (Mercado Abierto Electrónico, MAE) and the Rosario Forward Market (ROFEX) have trading areas for the closing, recording and settlement of forward financial transactions between their Agents, including Banco Galicia. In general, the settlement of these transactions is made without delivering the underlying asset. The settlement is carried out daily in Argentine pesos for the difference, if any, between the closing price traded of the underlying asset and the closing price or value of the underlying asset of the previous day, the price difference impacting on Income.
The transactions are recorded inOff-balance Sheet Items The accrued balances pending settlement are disclosed in the “Derivative Financial Instruments” line, in Assets and/or Liabilities, as appropriate.
INTEREST RATE SWAPS
These transactions are traded within the scope of the MAE, and feature the daily or monthly settlement in Argentine pesos of the variation between the cash flows calculated at a variable rate (Private Badlar for a period of 30 to 35 days) and the cash flows calculated at a fixed rate or vice versa on the notional agreed, the price difference impacting on Income.
The amounts of transactions as of December 31, 20192020 and 20182019 are as follows:
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Underlying Asset | Type of Settlement | 12.31.19(*) | 12.31.18(*) | Underlying Asset | Type of Settlement | 12.31.20(*) | 12.31.19(*) | |||||||||||||||||||||||||
Currency Forward Transactions | ||||||||||||||||||||||||||||||||
Purchases | Foreign currency | Daily difference | 18,207,108 | 59,781,682 | Foreign currency | Daily difference | 25,716,730 | 24,787,263 | ||||||||||||||||||||||||
Sales | Foreign currency | Daily difference | 12,652,852 | 49,653,059 | Foreign currency | Daily difference | 14,328,423 | 17,225,667 | ||||||||||||||||||||||||
Customers´ Purchases | Foreign currency | Daily difference | 9,939,003 | 5,651,732 | Foreign currency | Daily difference | 1,549,356 | 13,531,017 | ||||||||||||||||||||||||
Customers´ Sales | Foreign currency | Daily difference | 15,469,476 | 15,624,173 | Foreign currency | Daily difference | 12,563,375 | 21,060,236 | ||||||||||||||||||||||||
Interest Rate Swaps | ||||||||||||||||||||||||||||||||
Swaps | Others | Other | 360,242 | 708,001 | Others | Other | 82,909 | 490,436 | ||||||||||||||||||||||||
Other Currency Swaps | Others | Other | — | 2,401 | ||||||||||||||||||||||||||||
Repurchase Transactions | ||||||||||||||||||||||||||||||||
Forward Purchases | Government Securities | | With delivery of the underlying asset | | — | 3,024,074 | ||||||||||||||||||||||||||
Forward Sales | Government Securities | | With delivery of the underlying asset | | 29,968,733 | 3,171,280 | Government Securities | | With delivery of the underlying asset |
| 61,923,889 | 40,799,609 | ||||||||||||||||||||
Call Options Bought and Written on Futures | — | — | ||||||||||||||||||||||||||||||
Call Options Written on Dollar | Dollar | — | — | |||||||||||||||||||||||||||||
Call Options Purchase on Gold | Gold | — | — | |||||||||||||||||||||||||||||
Call Options Written on Gold | Gold | — | — |
(*) | Notional values. |
For further details, refer to Schedule O.
NOTE 8. REPURCHASE TRANSACTIONS
As of the indicated dates, the Group maintains the following repurchase transactions:
12.31.19 | 12.31.18 | |||||||
Debtors for Reserve Repurchase Transactions of Government Securities | 29,996,370 | 3,165,191 | ||||||
Interest Accrued Receivable for Reserve Repurchase Transactions | 79,108 | 16,180 | ||||||
|
|
|
| |||||
Total Repurchase Transactions - Assets | 30,075,478 | 3,181,371 | ||||||
|
|
|
| |||||
12.31.19 | 12.31.18 | |||||||
Creditors for Repurchase Transactions of Government Securities | — | 2,990,202 | ||||||
Interest Accrued Payable for Repurchase Transactions | — | 7,313 | ||||||
|
|
|
| |||||
Total Repurchase Transactions - Liabilities | — | 2,997,515 | ||||||
|
|
|
|
At the closing of previous fiscal year, the Group maintained Repurchase Transactions, for which it carried out cash sales transactions of a security, agreeing upon the forward purchase transaction, thereby retaining substantially all the risks and benefits associated with the instruments, recognizing them in “Financial Assets Pledged as Collateral”, for not meeting the provisions of point 3.4.2 (Derecognition of assets), of IFRS 9 “Financial Instruments”.
12.31.20 | 12.31.19 | |||||||
Debtors for Reserve Repurchase Transactions of Government Securities | 60,842,046 | 40,837,234 | ||||||
Interest Accrued Receivable for Reserve Repurchase Transactions | 153,597 | 107,699 | ||||||
|
|
|
| |||||
Total Repurchase Transactions—Assets | 60,995,643 | 40,944,933 | ||||||
|
|
|
|
The residualnotional values of the assets transferred in repurchase transactions are presented in Note 7 and Schedule O.
12.31.19 | 12.31.18 | |||||||
Reverse Repurchase Transactions recorded inOff-Balance Sheet Items | 29,968,733 | 3,171,280 | ||||||
Repurchase Transactions recorded in Financial Assets Pledged as Collateral | — | 3,024,074 |
12.31.20 | 12.31.19 | |||||||
Reverse Repurchase Transactions recorded in Off-Balance Sheet Items | 61,923,889 | 40,799,609 |
NOTE 9. OTHER FINANCIAL ASSETS
As of the indicated dates, the balances of “Other Financial Assets” correspond to:
12.31.19 | 12.31.18 | 12.31.20 | 12.31.19 | |||||||||||||
Receivables from Spot Sales of Foreign Currency Pending Settlement | 79,227 | 2,995,400 | 107,542 | 107,860 | ||||||||||||
Receivables from Spot Sales of Government Securities Pending Settlement | 179,091 | 2,473,011 | 1,239,870 | 243,816 | ||||||||||||
Sundry Debtors | 4,624,201 | 1,247,207 | 4,819,857 | 6,295,414 | ||||||||||||
Mutual Funds | 4,987,105 | 6,560,077 | 2,760,728 | 6,789,474 | ||||||||||||
Premiums from financial guarantee contracts | 643,334 | 319,942 | 484,028 | 875,839 | ||||||||||||
Others | 518,365 | 323,014 | 737,305 | 705,705 | ||||||||||||
Minus: Allowances | (115,989 | ) | — | (55,704 | ) | (157,908 | ) | |||||||||
|
|
|
| |||||||||||||
Total | 10,915,334 | 13,918,651 | 10,093,626 | 14,860,200 | ||||||||||||
|
|
|
|
Related-party information is disclosed in Note 51.
The credit rating quality analysis of Other Financial Assets as of December 31, 20192020 was as follows:
Debtors for Sale of Foreign Currency | Debtors for Cash sale of Government Securities to be Settled | Sundry Debtors | Mutual Funds | Premiums from financial guarantee contracts | Other | |||||||||||||||||||
Not yet due | 107,542 | 1,239,870 | 4,814,695 | 2,760,728 | 484,028 | 737,305 | ||||||||||||||||||
Impaired/Uncollectible | — | — | 5,162 | — | — | — | ||||||||||||||||||
Allowances | — | — | (55,704 | ) | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 107,542 | 1,239,870 | 4,764,153 | 2,760,728 | 484,028 | 737,305 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Debtors for Sale of Foreign Currency | Debtors for Cash sale of Government Securities to be Settled | Sundry Debtors | Mutual Funds | Premiums from financial guarantee contracts | Other | |||||||||||||||||||
To de Due | 79,227 | 179,091 | 4,509,961 | 4,987,105 | 643,334 | 518,365 | ||||||||||||||||||
Past-due without Impairment | — | — | — | — | — | — | ||||||||||||||||||
Impaired/Uncollectible | — | — | 114,240 | — | — | — | ||||||||||||||||||
Allowances | — | — | (115,989 | ) | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 79,227 | 179,091 | 4,508,212 | 4,987,105 | 643,334 | 518,365 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10. LOANS AND OTHER FINANCING
The composition of the Loans and Other Financing portfolio as of the indicated dates is detailed below:
12.31.19 | 12.31.18 | 12.31.20 | 12.31.19 | |||||||||||||
Non-financial Public Sector | 6,829 | 18,117 | 334 | 9,297 | ||||||||||||
Argentine Central Bank | 22,374 | 820 | 13,195 | 30,460 | ||||||||||||
Financial Institutions | 10,795,553 | 12,217,957 | 14,700,600 | 14,697,129 | ||||||||||||
Loans | 10,795,553 | 12,217,957 | 14,700,600 | 14,697,129 | ||||||||||||
Non-financial Private Sector and Residents Abroad | 373,578,178 | 446,748,042 | 548,953,562 | 508,591,528 | ||||||||||||
Loans | 362,075,866 | 436,182,119 | 537,206,661 | 492,932,211 | ||||||||||||
Advances | 15,892,268 | 22,198,905 | 29,219,431 | 21,635,827 | ||||||||||||
Overdrafts | 75,080,343 | 55,410,836 | ||||||||||||||
Notes | 143,769,344 | 102,214,820 | ||||||||||||||
Mortgage Loans | 15,052,635 | 18,141,466 | 16,486,335 | 20,492,746 | ||||||||||||
Pledge Loans | 3,208,665 | 1,535,183 | 11,586,593 | 4,368,295 | ||||||||||||
Personal Loans | 27,645,893 | 44,834,347 | 36,504,158 | 37,637,281 | ||||||||||||
Credit Card Loans | 149,459,966 | 174,438,809 | 241,793,015 | 203,475,676 | ||||||||||||
Other Loans | 61,782,565 | 115,056,334 | 36,431,415 | 84,111,147 | ||||||||||||
Accrued Interest, Adjustments and Quotation Differences Receivable | 15,245,566 | 8,288,948 | 23,649,868 | 20,755,403 | ||||||||||||
Documented Interest | (1,292,035 | ) | (3,722,709 | ) | (2,233,498 | ) | (1,758,984 | ) | ||||||||
Financial Leases | 2,225,646 | 3,381,308 | 1,855,070 | 3,030,008 | ||||||||||||
Other Financing | 9,276,666 | 7,184,615 | 9,891,831 | 12,629,309 | ||||||||||||
Less: Allowances | (25,844,065 | ) | (24,085,247 | ) | (37,233,572 | ) | (35,184,262 | ) | ||||||||
|
|
|
| |||||||||||||
Total | 358,558,869 | 434,899,689 | 526,434,119 | 488,144,152 | ||||||||||||
|
|
|
|
Classification of Loans and Other Financing as per situation and guarantees received, is detailed in Schedule B.
The concentration of Loans and Other Financing is detailed in Schedule C.
The breakdown for term of Loans and Other Financing is detailed in Schedule D.
The risk analysis for Loans and Other Financing is presented in Note 45.
The information with related parties is disclosed in Note 51.
NOTE 11. OTHER DEBT SECURITIES
The Group’s “Other Debt Securities” are detailed in Schedule A.
The risk analysis for Other Debt Securities is presented in Note 45.
NOTE 12. FINANCIAL ASSETS PLEDGED AS COLLATERAL
The Financial Assets Pledged as Collateral valuated in accordance with their underlying asset for the years under analysis are detailed below:
12.31.19 | 12.31.18 | 12.31.20 | 12.31.19 | |||||||||||||
Deposits as Collateral | 4,025,086 | 5,635,649 | 6,899,443 | 5,479,776 | ||||||||||||
Special Accounts as Collateral—Argentine Central Bank | 7,525,500 | 7,981,085 | 11,444,550 | 10,245,260 | ||||||||||||
Forward Purchases of Monetary Regulatory Instruments | — | 82,663 | ||||||||||||||
Others | — | 2,941,411 | ||||||||||||||
Trust as Collateral | 373,450 | — | ||||||||||||||
|
|
|
| |||||||||||||
Total | 11,550,586 | 16,640,808 | 18,717,443 | 15,725,036 | ||||||||||||
|
|
|
|
The restricted availability assets are detailed in Note 53.2.52.2.
NOTE 13. CURRENT INCOME TAX ASSETS
As of the indicated dates, the balances of Current Income Tax Assets correspond to:
12.31.19 | 12.31.18 | |||||||
Tax Advances | 40,089 | 145,378 | ||||||
Minimum Notional Income Tax – Tax Credit | 414 | 637 | ||||||
|
|
|
| |||||
Total | 40,503 | 146,015 | ||||||
|
|
|
|
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12.31.20 | 12.31.19 | |||||||
Tax Advances | 197,094 | 54,577 | ||||||
Minimum Notional Income Tax – Tax Credit | — | �� | 564 | |||||
|
|
|
| |||||
Total | 197,094 | 55,141 | ||||||
|
|
|
|
NOTE 14. INVESTMENTS IN EQUITY INSTRUMENTS
The Group’s “Investments in Equity Instruments” are detailed in Schedule A.
Prisma Medios de Pago S.A.:
Under the framework of the divestment commitment assumed by Prisma Medios de Pago S.A. and its shareholders before the National Commission of Competence Defense, on February 1, 2019, the Group transferred 3,182,444 ordinary shares, representing 7.7007% capital stock of Prisma Medios de Pago SA in favor of AL ZENITH (Netherlands) B.V. (a related party of Advent International Global Private Equity).
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The total price of the transaction amounted to USD 104,469 thousand, composed of USD 63,073 thousand received on transaction date and USD 41,396 thousand will be paid during the next 5 years.
Additionally, the Group has a put option related to Banco Galicia’s right to sell its interest in Prisma Medios de Pago S.A. to AL ZENITH (Netherlands) B.V., the exercise date being 34 months from the date of the transaction.
The Group´s remaining holding in Prisma Medios de Pago S.A. has been classified as Investment in equity securities and measured at fair value through profit or loss.
NOTE 15. EQUITY INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
15.1 | Equity Investments in Subsidiaries
|
The basic information regarding Grupo Financiero Galicia’s consolidated subsidiaries is detailed as follows:
Direct and Indirect Shareholding | Equity Investment % | |||||||||||||||
Company | 12.31.20 | 12.31.19 | 12.31.20 | 12.31.19 | ||||||||||||
Banco de Galicia y Buenos Aires S.A.U. | 668,549,353 | 668,549,353 | 100.00 | % | 100.00 | % | ||||||||||
Cobranzas Regionales S.A. | 3,910,000 | 8,300 | 100.00 | % | 83.00 | % | ||||||||||
Galicia Administradora de Fondos S.A. | 20,000 | 20,000 | 100.00 | % | 100.00 | % | ||||||||||
Galicia Broker Asesores de Seguros S.A. | 71,309 | 71,310 | 99.99 | % | 99.99 | % | ||||||||||
Galicia Retiro Compañía de Seguros S.A. | 7,727,271 | 7,727,271 | 100.00 | % | 100.00 | % | ||||||||||
Galicia Securities S.A. | 95,392,000 | — | 100.00 | % | — | |||||||||||
Galicia Seguros S.A. | 1,830,883 | 1,830,883 | 100.00 | % | 100.00 | % | ||||||||||
Galicia Warrants S.A. | 1,000,000 | 1,000,000 | 100.00 | % | 100.00 | % | ||||||||||
IGAM LLC | 77,643,963 | 73,996,713 | 100.00 | % | 100.00 | % | ||||||||||
IGAM Uruguay Agente de Valores S.A. | 12,000 | 12,000 | 100.00 | % | 100.00 | % | ||||||||||
INVIU S.A.U. | 1,000,000 | 1,000,000 | 100.00 | % | 100.00 | % | ||||||||||
Naranja Digital Compañía Financiera S.A.U. | 1,012,567,500 | 541,631,025 | 100.00 | % | 83.00 | % | ||||||||||
Ondara S.A. | 25,776,101 | 12,955,140 | 100.00 | % | 83.85 | % | ||||||||||
Sudamericana Holding S.A. | 185,653 | 185,653 | 100.00 | % | 100.00 | % | ||||||||||
Tarjeta Naranja S.A. | 2,824 | 2,344 | 100.00 | % | 83.00 | % | ||||||||||
Tarjetas Regionales S.A. | 1,680,183,936 | 894,552,668 | 100.00 | % | 83.00 | % |
The following are the balances of subsidiaries, according to IFRS as of the indicated dates:
12.31.20 | ||||||||||||||||
Company | Assets | Liabilities | Shareholders’ Equity | Net Income (Loss)(*) | ||||||||||||
Banco de Galicia y Buenos Aires S.A.U. | 946,019,300 | 794,198,155 | 151,821,145 | 20,928,333 | ||||||||||||
Cobranzas Regionales S.A. | 1,484,287 | 1,263,843 | 220,444 | (567,858 | ) | |||||||||||
Galicia Administradora de Fondos S.A. | 1,382,069 | 468,718 | 913,351 | 1,121,556 | ||||||||||||
Galicia Broker Asesores de Seguros S.A. (**) | 47,231 | 20,345 | 26,886 | 40,720 | ||||||||||||
Galicia Retiro Compañía de Seguros S.A. (**) | 507,046 | 396,155 | 110,891 | 3,657 | ||||||||||||
Galicia Securities S.A. (***) | 2,566,696 | 2,225,050 | 341,646 | 230,062 | ||||||||||||
Galicia Seguros S.A. (**) | 4,717,752 | 3,052,802 | 1,664,950 | 1,211,751 | ||||||||||||
Galicia Warrants S.A. | 702,846 | 171,752 | 531,094 | (41,174 | ) | |||||||||||
IGAM LLC | 506,066 | 161,584 | 344,482 | 156,518 | ||||||||||||
IGAM Uruguay Agente de Valores S.A. | 865 | 2,800 | (1,935 | ) | (2,802 | ) | ||||||||||
INVIU S.A.U. | 433,281 | 160,078 | 273,203 | 160,450 | ||||||||||||
Naranja Digital Compañía Financiera S.A.U. | 833,786 | 54,920 | 778,866 | (431,203 | ) | |||||||||||
Ondara S.A. | 31,720 | 94 | 31,626 | (13,533 | ) | |||||||||||
Sudamericana Holding S.A. (**) | 5,916,613 | 3,329,257 | 2,587,356 | 1,318,261 | ||||||||||||
Tarjeta Naranja S.A. | 101,268 | 77,416 | 23,852 | 3,315,984 | ||||||||||||
Tarjetas Regionales S.A. | 103,071,416 | 77,507,787 | 25,563,629 | 2,160,052 |
(*) | Income attributable to the shareholders of the parent. Not including “Other Comprehensive Income”. |
(**) | Net income for the twelve-month period ended December 31, 2020. |
(***) | Net income for the period between the purchase date and December 31,2020. |
GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12.31.19 | ||||||||||||||||
Company | Assets | Liabilities | Shareholders’ Equity | Net Income (Loss)(*) | ||||||||||||
Banco de Galicia y Buenos Aires S.A.U. | 839,110,959 | 708,010,986 | 131,099,973 | 30,336,364 | ||||||||||||
Cobranzas Regionales S.A. | 702,134 | 316,551 | 385,583 | (299,779 | ) | |||||||||||
Galicia Administradora de Fondos S.A. | 612,028 | 98,149 | 513,879 | 302,238 | ||||||||||||
Galicia Broker Asesores de Seguros S.A. (**) | 68,001 | 38,917 | 29,084 | 44,140 | ||||||||||||
Galicia Retiro Compañía de Seguros S.A. (**) | 488,839 | 382,963 | 105,876 | (27,432 | ) | |||||||||||
Galicia Securities S.A. | — | — | — | — | ||||||||||||
Galicia Seguros S.A. (**) | — | 2,721,178 | (2,721,178 | ) | 795,761 | |||||||||||
Galicia Warrants S.A. | 793,298 | 170,513 | 622,785 | 171,212 | ||||||||||||
IGAM LLC | 3,061,060 | 2,877,270 | 183,790 | 71,697 | ||||||||||||
IGAM Uruguay Agente de Valores S.A. | 1,119 | — | 1,119 | (23 | ) | |||||||||||
INVIU S.A.U. | 3,056,981 | 2,875,233 | 181,748 | (19,591 | ) | |||||||||||
Naranja Digital Compañía Financiera S.A.U. | 1,195,023 | 354,860 | 840,163 | (120,719 | ) | |||||||||||
Ondara S.A. | 48,201 | 1,446 | 46,755 | (7,226 | ) | |||||||||||
Sudamericana Holding S.A. (**) | 6,064,430 | 3,356,339 | 2,708,091 | 862,867 | ||||||||||||
Tarjeta Naranja S.A. | 86,914,652 | 65,532,267 | 21,382,385 | 1,843,861 | ||||||||||||
Tarjetas Regionales S.A. | 90,010,710 | 66,840,431 | 23,170,279 | 888,870 |
(*) | Income attributable to the shareholders of the parent. Not including “Other Comprehensive Income”. |
(**) | Net income for the twelve-month period ended December 31, 2019. |
Corporate Reorganization
On September 14, 2020, a Prior Spin-off-Merger Agreement was signed, describing the terms and conditions of the merger by acquisition, by Grupo Financiero Galicia S.A. as the merging company, of the spin-off equity from Dusner S.A., Fedler S.A. and its shareholders, as spin-off companies, jointly holders of 17% of the capital stock of Tarjetas Regionales S.A.
The documents related to the Spin-off-Merger Agreement, were approved by the Boards of Directors of Dusner S.A., Fedler S.A. and Grupo Financiero Galicia S.A. on September 14, 2020.
At the Extraordinary Meeting of Grupo Financiero Galicia S.A. carried out on November 10, 2020, it was approved the aforementioned documentation, the exchange ratio and the capital increase in the amount of Ps. 47,927, through the issuance of 47,927,494 class B ordinary book-entry shares with a nominal value of Ps. 1 (figure expressed in Argentine pesos) and one vote per share, with the right to participate in the profits of the fiscal year beginning on September 1, 2020.
On December 15, 2020, the Final Spin-off-Merger Agreement was signed and registered as a public deed, in the terms of Paragraph 4 of Art. 83 of the Companies Act, through which Grupo Financiero Galicia S.A. incorporated the spin-off equity of the aforementioned companies with effect from September 1, 2020.
Consequently, Grupo Financiero Galicia S.A. now has control of 1,680,183,936 shares of Tarjetas Regionales S.A., which represent 100% of the capital stock and 100% of the votes.
As of December 31, 2020, the administrative approval procedures for the spin-off of part of the equity of each of the spin-off companies were initiated, before the Public Registry of Commerce, and for the merger by acquisition and capital increase of Grupo Financiero Galicia S.A., before the National Securities Commission.
On March 16, 2021 the merger by acquisition and capital increase of Grupo Financiero Galicia S.A. was registered with the Public Registry of Commerce. (See Note 55).
Acquisition of an AlyC-type company
On May 5, 2020, the Group acquired 100% of the capital stock of Galicia Securities S.A. for a total price of $32,158 paid in full at the acquisition date. Galicia Securities S.A. is authorized to act as a settlement and compensation agent and placement and distribution agent of mutual funds in Argentine. The net identifiable assets and goodwill recognized as of the date of acquisition are $22,956 and $9,202, respectively. The goodwill is attributable to a broker dealer license and it will be deductible for tax purposes.
15.2 | Equity Investments in Associates |
In this fiscal year, Banco Galicia, together with other financial entities, has set up Play Digital S.A. A company whose purpose is to develop and market a payment solution linked to the bank accounts of users of the financial system that will significantly improve their payment experience. The board of directors of said company is made up of key personnel of Banco Galicia, therefore, having significant influence, the investment is measured by the equity method.
Company | Equity Investment % | Place of Business | 12.31.20 | 12.31.19 | ||||||||||
Play Digital S.A. (*) | 15.58 | % | Autonomous City of Buenos Aires - Argentina | 89,142 | — |
(*) | After the closing of these financial statements, Banco Galicia has accepted an offer for the sale of VN 31,145,090 shares to another financial entity. Consequently, the shareholding was reduced to 12.976%. |
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12.31.18 | ||||||||||||||||
Company | Assets | Liabilities | Shareholders’ Equity | Net Income(*) | ||||||||||||
Banco de Galicia y Buenos Aires S.A.U. | 793,229,582 | 717,628,223 | 75,601,359 | (3,149,535 | ) | |||||||||||
Cobranzas Regionales S.A. | 169,393 | 104,221 | 65,172 | 10,594 | ||||||||||||
Galicia Administradora de Fondos S.A. | 764,532 | 80,602 | 683,930 | 592,487 | ||||||||||||
Galicia Broker Asesores de Seguros S.A.(**) | 40,727 | 20,586 | 20,141 | 38,544 | ||||||||||||
Galicia Retiro Compañía de Seguros S.A.(**) | 383,149 | 287,322 | 95,827 | 37,371 | ||||||||||||
Galicia Seguros S.A.(**) | 4,158,837 | 2,545,391 | 1,613,446 | 837,036 | ||||||||||||
Galicia Valores S.A. | 398,327 | 61,344 | 336,983 | 102,572 | ||||||||||||
Galicia Warrants S.A. | 680,711 | 349,015 | 331,696 | 175 | ||||||||||||
Ondara S.A. | 34,629 | 34 | 34,595 | 2,517 | ||||||||||||
Sudamericana Holding S.A.(**) | 4,998,084 | 3,007,467 | 1,990,617 | 310,366 | ||||||||||||
Tarjeta Naranja S.A. | 78,753,854 | 64,417,444 | 14,336,410 | 3,182,312 | ||||||||||||
Tarjetas Regionales S.A. | 81,090,411 | 65,501,337 | 15,589,074 | (3,290,972 | ) |
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GRUPO FINANCIERO GALICIA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. LEASES
This Note provides information for leases where the Grupo is the lessee:
The movements of such investment are as follows:
The basic information regarding Grupo Financiero Galicia’s associates is detailed as follows:
For more details see Schedule E. NOTE 16. LEASES This Note provides information for leases where the Grupo is the lessee: (i) Amounts recognized in the Statement of Financial Position:
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(2) | Recorded in the item Other |
Additions to the right-of-use assets during the financial year were Ps.629,385.
The maturity of lease liabilities is disclosed in Note 45.
(ii) Amounts recognized in the Statement of Income:
12.31.20 | 12.31.19 | |||||||
Charge for depreciation of right-of-use assets (1)(2) | 1,312,301 | 1,313,102 | ||||||
Interest Expenses (3) | 398,850 | 511,138 | ||||||
Expenses related to short-term leases (4) | 141,700 | 33,079 | ||||||
Expenses related to low-value assets leases (4) | 167,148 | 102,714 | ||||||
Sublease Income (5) | 9,790 | 2,146 |
(1) | Depreciation for right of use of Real Property. |
(2) | Recorded in the
The total cash flows related to leases was Ps.1,333,090. NOTE 17. PROPERTY, PLANT AND EQUIPMENT
Changes in “Property, Plant and Equipment” are detailed in Schedule F. The carrying amounts of “Property, Plant and Equipment” do not exceed their recoverable values.
GRUPO FINANCIERO GALICIA S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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